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ADCORP AUSTRALIA
LIMITED COMPANY
VALUATION REPORT
Prepared by: Andrew Farrugia,
Yangsi Zhao and Guillaume Tsao Yee Kwai Pun
BAF I 10 42 -
Inve st ment
AAU Company Valuation Report Page 1
Executive Summary
Adcorp Australia Limited (AAU) was founded in 1981 in NSW and listed on the Australian Security
Exchange in 1999. Today, AAU is one of the leading locally owned companies in the media industry
in Australia and New-Zealand. Their main operations include advertising agency services, website
design and development and digital marketing services. They have segmented their activities into
retail, motor vehicles, real estate, government and employment.
The financial analysis has shown that AAU’s performance has highly fluctuated over the 5 year
period (2007-2011). However, they were not performing poorly. Rather, they had more expenses
due to restructures and acquisitions. Furthermore, the 2008 Global financial crisis deeply impacted
all their target markets thus reducing their sales. The Dupont analysis has shown that AAU best
performed financially in 2008 and that in the recent year 2010 incurred a loss due to strategic
repositioning. They saw a growth in all their ratios in 2011.
The valuation analysis consisted of the application of five models, namely: Dividend Discount Model,
Free cash flow model, Price earnings ratio, Price over book value ratio and Net tangible asset backing
model. We found that the latter model was more appropriate for this situation although the
outcomes were similar. Overall, our findings have shown that AAU stock is undervalued.
AAU Company Valuation Report Page 2
Table of Contents Executive Summary ............................................................................................................................. 1
1. Company Analysis ........................................................................................................................... 5
1.1 Overview ................................................................................................................................. 5
1.2 History ..................................................................................................................................... 5
1.3 Share Price Performance ........................................................................................................ 6
1.4 Products and Services ............................................................................................................. 8
1.4.1 Advertising Agency Services ............................................................................................ 8
1.4.2 Website Design and Development ................................................................................. 8
1.4.3 Digital marketing Services ............................................................................................... 8
2. Financial Analysis ............................................................................................................................ 9
2.2 Dupont Analysis .................................................................................................................... 10
5 Year Extended DuPont Analysis ................................................................................................. 11
2.2.1 EBIT/Sales ...................................................................................................................... 12
2.2.2 Sales/Total Assets ......................................................................................................... 12
2.2.3 EBIT/Total Assets........................................................................................................... 12
2.2.4 Interest Expense/Total Assets ....................................................................................... 12
2.2.5 Net Before Tax/Total Assets ......................................................................................... 13
2.2.6 Total Assets/Common Equity ........................................................................................ 13
2.2.7 Net Before Tax/Common Equity ................................................................................... 13
2.2.8 Tax Retention ................................................................................................................ 13
2.2.9 Return on Equity (ROE) ................................................................................................. 14
3. The Economic Environment .................................................................................................. 14
3.2 Overview ............................................................................................................................... 14
3.3 Macroeconomic indicators ................................................................................................... 15
3.3.1 Inflation ......................................................................................................................... 16
3.3.2 Interest Rates .................................................................................................................... 17
3.3.3 Consumer Confidence ....................................................................................................... 18
3.3.4 Economic Outlook ............................................................................................................. 19
3.4 The Australian media industry .................................................................................................. 20
3.4.1 Overview ........................................................................................................................... 20
3.4.2 Market Segmentation ....................................................................................................... 21
3.4.3 Level of Debt ..................................................................................................................... 21
3.4.4 Organizational Goals ......................................................................................................... 22
AAU Company Valuation Report Page 3
3.4.5 Key Competitors ................................................................................................................ 23
4. Valuation Assumptions ............................................................................................................. 24
Required rate of Return(CAPM) ........................................................................................................ 24
Risk-free rate (Rf) .......................................................................................................................... 24
Market returns (Rm) ..................................................................................................................... 24
Market risk premium (Rm-Rf) ....................................................................................................... 24
Beta (β) .......................................................................................................................................... 24
Required Rate of Return (CAPM) Calculation: .............................................................................. 25
4.2 Valuation Analysis ............................................................................................................. 25
4.2.1 Dividend Discount Model (DDM) .................................................................................. 25
4.2.2 Dividend Forecast ......................................................................................................... 26
4.2.3 Intrinsic Share Price ...................................................................................................... 28
4.2.4 Sensitivity Analysis ........................................................................................................ 28
4.3 Free cash Flow to Equity Model ............................................................................................. 30
4.3.1 Cash Flow Forecast............................................................................................................... 30
4.3.2 Sensitivity Analysis ........................................................................................................ 32
4.4 Price earnings ratio ........................................................................................................... 33
4.4.1 Sensitivity analysis ............................................................................................................... 34
4.5 Price/Book Value ratio (P/B) ............................................................................................. 34
5. Evaluation of value/price of the company ............................................................................ 36
6. References ............................................................................................................................ 37
7. Appendices .................................................................................................................................... 39
Appendix 1: Beta calculation of AAU with ASX 200 index ................................................................ 39
Appendix 2: Dividend forecast (DDM) .............................................................................................. 45
Appendix 3: DDM Beta and Risk Premium Sensitivity ...................................................................... 46
Appendix 4: Dividend Growth Rate Sensitivity ................................................................................ 46
Appendix 5: Historical FCFE Growth rate .......................................................................................... 46
Appendix 6: Operating expenses history .......................................................................................... 47
Appendix 7: AAU’ share price FCFE model ....................................................................................... 47
Appendix 8: discount sensitivity ....................................................................................................... 47
Appendix 9: FCFE growth rate sensitivity ......................................................................................... 48
Appendix 10: P/E Ratio forecast 2013 .............................................................................................. 48
Appendix 11: AAU book share value 2007-2011 .............................................................................. 48
Appendix 12: STW book share value 2007-2011 .............................................................................. 48
AAU Company Valuation Report Page 4
Appendix 13: DIG book share value 2007-2011................................................................................ 49
Appendix 14: AAU NTA Backing Model history ................................................................................ 49
Appendix 15: STW NTA backing Model history ................................................................................ 49
Appendix 16: DIG NTA Backing Model history .................................................................................. 49
AAU Company Valuation Report Page 5
1. Company Analysis
1.1 Overview
Adcorp Australia Limited (AAU) is an Australasian company competing in the media industry. Their
headquarters are based in Sydney and they have offices across Australia and New Zealand. They are
the leading locally owned communications group as well as the largest supplier of non-campaign
advertisement to local, state and federal government (AAU Annual Report 2011)
AAU provides tailored marketing solutions to various organisations through specialized entities.
Their services encompass, but are not limited to, advertising, branding, PR, consultancy, marketing
research, marketing strategy and management. These are divided into three broad categories:
advertising agency services, web design and supplier of web-based products. AAU specialises in
employment marketing, government advertising, real estate, retail and motor vehicles.
1.2 History Adcorp Australia Limited was founded in Sydney, New South Wales, in 1981 initially as Pabiko Pty Ltd,
later the same year they changed the company’s name to Adcorp Australia. They commenced
operating in the recruitment sector through the development of an advertising website in 1995.
Three years later, in 1998, AAU expanded its operations to Auckland, New Zealand. Finally in 1999,
the company, along with the acquisitions of Employment Opportunities from Australia Pty Ltd,
Meniscus Technology Pty Ltd and 50% interest in CareerMatch Pty Limited, was listed in the
Australian Security Exchange as Adcorp Australia Limited (IBIS World 2011).
In 2000, AAU saw its net profit after tax increase by 9.8% to $5.724 million (AAU AR 2000). It also
obtained an exclusive license and minority equity from the American based company Recruitment
Solutions International Corp. (AAU AR 2000). This allowed AAU to use the software in Australia and
New Zealand and also allowed them to buy more equity in the licenser company in the future (AAU
AR 2000). During that same year, they purchased the remaining 50% interest in CareerMatch Pty
Limited and acquired Lewis Advertising Limited- New Zealand’s second largest specialist recruitment
advertising agency (IBIS World 2011).
AAU Company Valuation Report Page 6
Adcorp Australia Limited’s company history is filled with acquisitions. In 2001, the company acquired
Raisin & Lines Advertising Pty Ltd and expanded its activities to South Australia through the
acquisition of Iceberg Media a print advertising client base agency (AAU AR 2001). AAU undergoes
further diversification by acquiring leading retail motor vehicle advertising agency Donald & Donald
and boutique creative design company Green Advertising in 2002 (AAU AR 2002). Furthermore, AAU
successfully obtains a license agreement with News Interactive for the management of the
recruitment website CareerOne (AAU AR 2002). Despite an increase in profits between financial
years 2002 and 2003, Adcorp kept a low profile in terms of mergers and acquisitions in order to
better manage the several companies already acquired in the past few years (AAU AR 2003).
In 2005, the company resumed its acquisition strategy- after two years of internal growth and
increasing profits- lead by new CEO Peter James (AAU AR 2005). These acquisitions consisted of
dmark, Streetwise and Cuttriss Dye which complemented their existing portfolio (AAU AR 2005; AAU
AR 2006). In 2006, although their financial performance proved poorer, the company still added
Andrews Advertising to their portfolio (AAU AR 2006). In the following years Adcorp Australia
Limited took over Quadrant Creative Pty Ltd and founded Kelly Street Digital Pty Ltd in 2007 and
increased its ownership in Andrews Advertising Pty Ltd to 75% in 2008 (IBISWorld 2011).
In 2009, following the Global Financial crisis, AAU sold off Kelly Street Digital Pty Ltd and incurred an
operating loss during the financial year 2010/2011 (IBISWorld 2011; AAU AR 2011). The event that
marked 2010 the most was the expansion of their activities in the Northern Territory, obtaining the
NT government as a new client (IBISWorld 2011). Despite new customers, the crisis severely
impacted Adcorp Australia Limited reducing their profits and causing the loss of their clients in 2011
(AAU AR 2011). The new market conditions have caused Adcorp Australia Limited to now review its
strategy and plan a repositioning of the company (AAU AR 2011).
1.3 Share Price Performance
The following charts show the fluctuations of Adcorp Australia Limited’s share prices against all
ordinaries in the ASX. The first chart (figure 1) shows the historical share price performance over 10
years- from September 2002 to September 2012- so as to observe the company’s share price
performance prior to and after the GFC. It can be seen that prior to early 2005, AAU’s share price
performance was well above the all ordinaries index, with a share price estimated at $1.2. From
2005 onwards, the share price drastically depreciates and sustains a downward trend against market
expectations as seen in Figure 1. The most significant drop occurs in the first half of 2005, the
disparity between the all ordinaries index and AAU’s share price performance can especially be
observed in the period January 2006 to December 2007. In that period the All Ordinaries Index
AAU Company Valuation Report Page 7
indicate very favourable market conditions, however, AAU’s share price performance depreciates
instead. The performance of AAU’s share price follows the All Ordinaries Index with peaks and
troughs but not to the same extent (e.g. early and mid 2008). Following the GFC in the second half of
2008, AAU’s share price experiences another significant drop in early 2009, however not as much as
the All Ordinaries Index in that same time frame.
Figure 2 is a chart representing the recent share price performance of Adcorp Australia Limited over
the past year between September 2011 and September 2012. As can be observed, AAU’s share price
has highly fluctuated over the past year with a lowest price of $0.150 in September 2012 and a peak
of $0.215. It has somewhat followed the market trend as the prices appreciations and depreciations
coincide with the All Ordinaries index. It is also observed that the share price experience some
stability during the period December 2011 and August 2012, with the prices not falling below $0.166
and following a minor upward trend.
AAU Company Valuation Report Page 8
1.4 Products and Services
1.4.1 Advertising Agency Services AAU’s advertising agency services are one of their main activities and represent the majority of their
revenue. They specialise in human resources, government, retail, motor vehicle and education (AAU
AR 2011). Adcorp Australia Limited has first started as a human resources advertising company, it is
safe to say they are they are experts in that field managing websites such as CareerOne. Between
2001 and 2005, they began diversifying into other sectors as employment in Australia was facing
slower growth (AAU AR 2005). The very recent obtention of the Northern Territory as a customer
completes their customer portfolio in the governmental sector. Website Design and Development
1.4.2 Website Design and Development They developed their first website for recruitment advertising in 1995. Since then they have
obtained licenses from external companies to operate similar websites locally -CareerOne and
Recruitment Solutions International Corp (IBISWorld 2011). These services include the development
and maintenance of websites and database support. An example of integrated capacities is the
development of a recruitment website aiming to rebuild Christchurch, New Zealand following the
earthquake in February 2011 (AAU AR 2011). This combined their expertise in recruitment
advertising, website design and marketing strategy consultancy.
1.4.3 Digital marketing Services These services comprise consulting on digital marketing, the supply of web-based products and
strategic employment solutions (AAU AR 2011). Through this service they aim to educate their
clients about how new digital technologies will affect their business (AAU AR 2010). They inform
clients about arsing opportunities in the digital world and advise on how these new technologies can
be adopted and adapted to strategies (AAU AR 2010).
AAU Company Valuation Report Page 9
2. Financial Analysis
Below are the financial statements and 5 year company analysis which has been prepared the
purposes of AAU’s company valuation. (Figure 6- 5 year financial snapshot)
Source: Morningstar Data Analysis 2012
AAU Company Valuation Report Page 10
2.2 Dupont Analysis
DuPont analysis essentially examines a given organizations ROE, return on equity. Under this model,
ROE is broken into three parts- profit margin, total asset turnover and financial leverage. These 3 key
areas will be examined as part of the AAU financial analysis.
AAU Company Valuation Report Page 11
5 Year Extended DuPont Analysis
AAU Company Valuation Report Page 12
Below, the five components which make up the extended DuPont system/model are detailed.
2.2.1 EBIT/Sales
This illustrates the company’s profitability. It is calculated by deducting expenses from revenue
(revenue – expenses), excluding tax and interest.
- For AAU, the EBIT margin was quite low in 2007 as seen in the extended DuPont analysis. In saying
this, it positively increased between 2008 and 2009. Despite a decline in 2010, it is clear that as of
2011, AAU has managed to perform extremely well in comparison to previous years.
2.2.2 Sales/Total Assets
The total asset turnover ratio basically is used to measure a given company’s ability to use its assets
efficiently to generate sales.
- Between 2007 and 2009, AAU was not as successful as its competitors in terms of asset turnover
which undoubtedly affected profitability. However, since 2010 AAU has done well in outperforming
both SGN and DIG when it’s come to using its assets to generate profit.
2.2.3 EBIT/Total Assets
With a focus on the Return on Assets (ROA) calculation/ratio, the result will show how profitable a
company is relative to its total assets.
- A higher ratio in this area would suggest that an organization has done well financially given its
resources. Despite negative growth in ROA in 2007 and 2010, AAU was able to improve its ROA in
2011 which surely must be a positive sign to investors. It should be noted that during the five year
period, SGN has been able to outperform AAU in the return on assets area. This is an area in which
AAU can uplift and improve on looking forward.
2.2.4 Interest Expense/Total Assets This ratio reflects the interest rate that a company will have to pay on any debt that it is servicing or
has outstanding.
AAU Company Valuation Report Page 13
- This is definitely an area in which AAU has improved in when examining the 5 year results/analysis.
AAU has been able to achieve an interest expense ratio of 3.6% as of 2011 which has dropped
significantly since 2007 when it peaked at 9.67%.
2.2.5 Net Before Tax/Total Assets The level of return made on a company’s assets prior to tax can be calculated by using this ratio.
- AAU’s return on assets before tax appears to have stabilized at the end of the 5 year period. The
2010 result of negative 15% is a concern which suggests a poor return on assets before tax and thus
profit. However, the 2011 result is an improvement with the company lifting its return on assets
before tax to over 4% at the end of the financial year.
2.2.6 Total Assets/Common Equity This particular ratio will determine the level to which a company has decided to use debt in order to
finance its assets.
- A decrease in this ratio would suggest an improvement in that AAU is relying on less debt and more
equity to fund assets. The analysis shows that over the five year period, the organizations ratio has
actually increased from 2.2% in 2007 to 5.3% in 2010. This is seen as a weakening in equity and
means that AAU has unfortunately had to use more debt than historically to finance asset purchases
in recent years.
2.2.7 Net Before Tax/Common Equity The Net Before Tax/Common Equity calculation and ratio shows what equity holders will receive in
return prior to tax.
- The analysis suggests that AAU have been unable to consistently deliver to its equity holders when it
has come to return before tax. The 2011 year closed on a high however with AAU improving it return
to equity holder some 26%. A concern nonetheless as for two of the five years there was a
reduction/negative result in return to shareholders before taxation.
2.2.8 Tax Retention This particular retention ratio, the proportion of income before tax that is not paid is measured. In
addition, with this ratio, the higher a given company’s tax retention, the better it is for that company
as they are paying less tax.
AAU Company Valuation Report Page 14
- AAU has been fairly consistent across the five years in tax retention compared to SGN and DIG. For
2010, AAU was able to outperform both of this reports selected competitors with a tax retention
ratio of 1.4%. The company achieved an even more favourable result in 2009 when it retained 1.5%
of income before tax . Tax retention appears to be strength of AAU’s based on the analysis.
2.2.9 Return on Equity (ROE) ROE basically measures the amount of net income that has been earned as a result of using the
funds that the company’s shareholders invested. ROE is expressed as a percentage.
- Solely focusing on AAU’s ROE performance over the five year period, the organization has had an
ROE that has fluctuated up and down during this time. Comparing the 2007 ratio of 48% to that of
2010 which was 18%, AAU has a ROE challenge on its hands beyond this five year timeframe and this
is an area which should be addressed by management.
3. The Economic Environment 3.2 Overview
Since the beginning of the 2008 global financial downturn, the rising concerns of sovereign debt and
the debt crises experienced in Europe have negatively impacted on global economic sentiment
(Reserve Bank of Australia 2012). In saying this, for those in developed economies that are less
connected with the Euro region, growth is expected to rise by 1.4% through 2012 (IMF 2012).
In light of the fact that both the domestic Australian economy and global economy have been struck
by the onset of recent financial crisis’ (GFC of 2008 and ongoing euro debt crisis), there have been
positive signs of recovery. For the March quarter of 2012, data suggests that household
consumption increased 1.6% and 4.2% over the year (Reserve Bank of Australia 2012). In saying this,
strong business conditions have remained for those operating in the mining sector as evidenced in
Figure 1, but the news is not as promising for non-mining businesses. Based on the Reserve Bank of
Australia’s (2012) findings, the outlook for non-mining investment is forecasted to be weak for
2012/13 according to the ABS Capex survey.
Figure 1: Forecasted mining projects until 2016-17
AAU Company Valuation Report Page 15
The core of AAU’s business continues to exist in the property advertising and employment areas
specifically in mineral rich states, Western Australia and Queensland (AAU Annual Report 2011). This
has shaped the strategy that AAU’s management have implemented which specifically hones in on
furthering business Australia wide as well as reducing overall company costs for the purposes of
improving company profitability. It is very important that AAU keeps to their strategy as domestic
consumer and business sentiment will remain a key challenge to maintaining sales and margins.
Management at AAU see future business conditions as challenging, but according to the AAU Annual
Report (2011), will present a good opportunity at the same time for the company to improve.
3.3 Macroeconomic indicators
It is important to recognize the key macroeconomic indicators or factors that have an impact on
organizations that are operating in the Australian media and advertising industry. In this report, the
impact that inflation, interest rates and consumer confidence have on AAU will be discussed.
AAU Company Valuation Report Page 16
3.3.1 Inflation In a financial sense, the concept of inflation refers to a general change in the cost of goods and
services over a period of time (Reserve Bank of Australia 2012). In Australia, the consumer price
index (CPI) measures inflation in Australia and each month the RBA provides an updated figure to
the public.
Something of interest to those in finance and economics is that the Australian CPI figure for the
second quarter of 2012 was 1.2% (Trading Economics 2012). As illustrated in Figure 2 pictured below,
in comparison to the past 4 years, the Australian CPI is at an all-time low and is well below the RBA’s
CPI target range of 2-3%. Whilst inflation in Australia is low, in contradiction, cost of living pressures
are at all time high and have become a significant political issue in recent months (Financial Review
2012).
Figure 2: Inflation rate of Australia over the past four years
AAU Company Valuation Report Page 17
3.3.2 Interest Rates
As part of this macroeconomic indicator analysis, the impact that interest rates can have on
businesses in Australia needs to be examined. Fluctuations in interest rates bring about the idea of
‘interest rate risk’ and are a major cost for many businesses (NAB 2012). The most recent decision of
the RBA regarding interest rates was to leave the rate at 3.50% which was announced on the 4th of
September 2012 by Glenn Stevens (RBA 2012). According to the RBA (2012), decisions made on
interest rates and monetary policy are made following important considerations- maintaining full
employment, ensuring economic prosperity for Australians and maintaining the stability of the
Australian dollar. The below diagram, Figure 3, clearly shows a trend in the RBA’s decision to reduce
interest rates in recent years. Traditionally, one might say that when interest rates are higher, the
economy is doing well and performing and when they are lowered, the RBA is attempting to lift
economic activity and spending. In comparing the macroeconomic indicators, there is definitely a
strong correlation between interest rates and consumer confidence.
Figure 3: Interest rates in Australia since 2011
AAU Company Valuation Report Page 18
3.3.3 Consumer Confidence
The level of sentiment/confidence that an organizations target consumers have will undoubtedly
affect a company’s sales, business performance as well as the broader economy overall. The idea of
consumer confidence concerns the degree of sureness that consumers have towards the overall
state of the economy (Trading Economics 2012). After examining Figure 4 which focuses on
Australian consumer confidence since January 2011, our group has recognized that sentiment in
Australia has dipped within the last 12 months and is only starting to recover. There are a number of
reasons behind decreasing consumer confidence. A highly publicised event that has affected the
global economy has been the European debt crisis which has the potential to cause a spill over effect
on Australian banks’ borrowing costs and stability (SMH BusinessDay 2011). Prior to the euro crisis,
the turmoil that the global financial crisis of 2008 caused most certainly had an impact on consumer
confidence not only in Australia, but globally. It is safe to say that the confidence of consumers has
been put to the test during the past five years.
Figure 4: Australian consumer confidence since 2011
AAU Company Valuation Report Page 19
3.3.4 Economic Outlook
Despite recent financial turmoil externally, Australia is well positioned to continue growing at a
faster rate than most developed countries. Some of the main areas of concern for the Australian
economy will continue to be low consumer and investor confidence, the high Australian dollar and
changed consumer patterns (IMF 2012). Looking forward into the future, investment in resources
and commodities is forecasted to continue and eventually peak sometime during 2013/2014 (RBA
2012). As seen below in Figure 5, Australia’s growth has fluctuated less than larger countries like
China and the United States in part due to the positive effects of the mining boom. Whilst this has
provided positive affects to Australia, a key challenge for AAU will be to ensure resources and funds
from the boom filter across the Australian economy (IMF 2012).
Figure 5: GDP Comparison between Australia and world
AAU Company Valuation Report Page 20
3.4 The Australian media industry
3.4.1 Overview
AAU operates primarily in the Australian media and advertising industry. The industry’s coverage
expands across a number of different media types including but not limited to television, radio, print,
internet, mobiles and cinema (Australia On Net 2007).
The industry as a whole is said to generate some $8 billion annually as local organizations look to
position themselves competitively by focusing on selecting their customers efficiently. Many
Australian organizations are able to reach their target consumer by engaging the service sand
expertise of organizations like AAU (Australia On Net 2007).
It is important to at the very least recognize that there are authorities that closely work alongside
and monitor organizations like AAU that are operating in media and advertising. A key body in this
industry is the Australian Communications and Media Authority. The ACMA is a government
department that is responsible for monitoring spam, broadcasting, internet content and
telecommunications throughout Australia (ACMA 2012).
AAU Company Valuation Report Page 21
3.4.2 Market Segmentation
Gaining an understanding into what drives AAU’s business and the areas in which it is highly
profitable is a key element of this report which should not be overlooked. In the below illustration,
Figure 5, we can clearly see which industries source AAU’s services and expertise and ultimately
generate revenue for AAU.
Figure 5: Financial Year 2011- performance highlights
3.4.3 Level of Debt
Something which separates AAU apart from many other organizations and particularly its
competitors is the fact that the company bears no debt. A proud declaration made by the then Chief
Executive Officer in 2008, Peter James, was that a ‘key priority is a continued focus on working
capital management, generating positive cash flows for the year’ (AAU Annual Report 2008). This
stance has not changed in 2012 and is a faucet of the AAU business model which will hopefully
support the organization as it continues to circumnavigate trying domestic economic conditions.
With regards to debt, the closest debt associated with AAU’s business dealings is bad debt. This
relates to funds owed by debtors which aren’t paid or recovered by AAU. Provisioning is made
AAU Company Valuation Report Page 22
annually by management to ensure that amounts not expected to be collected are factored into
business plans and financial targets.
We believe the all-important concept of ‘leverage’ should be examined given that AAU has no debt
to speak of. According to Investopedia (2012), this concept is defined as ‘the use of financial
instruments or borrowed capital, such as margin, to increase the potential return of an investment’.
By not leveraging their firm, our group’s belief is that AAU is missing out on opportunities to grow
their business to a certain extent which is not a great scenario for company growth in the longer
term. On face value, no debt is seen as a fantastic ideal for any organization as you have fewer
liabilities to service each financial year, but with a view to the future, this can stifle company growth
and even result in lost business opportunities.
3.4.4 Organizational Goals
Many leading and successful organizations and their respective management teams put in place
goals that promote organizational development and growth. In this report, our group has explored
three of AAU’s focuses (AAU Annual Report 2011).
• The first area in which AAU wishes to improve is to continue in reducing overall cost structure. The
New Zealand arm of the business took a hit following the earthquake natural disaster in Christchurch
which came at a significant cost to AAU financially (AAU Annual Report 2011).
• Increasing profit margins in existing business areas where AAU is highly profitable is the second
focus area and goal. Government accounts which apportion for 37% of billings is most certainly an
area that management have clearly outlined they wish to further extend. Building upon already
established relationships with key personnel working in state and federal governments is seen as the
best way of achieving this (AAU Annual Report 2011).
• Winning new business is the third all important organizational goal that management have identified
in the AAU Annual Report (2011). Constantly sourcing new business opportunities is what will drive
company expansion and is a key focus that the business has adopted.
AAU Company Valuation Report Page 23
3.4.5 Key Competitors
The Australian media and advertising space is very much a dynamic and competitive environment.
This industry has a wide array of competitors that compete with AAU for market share throughout
each financial year. The organizations competing against AAU in the Australian media industry which
this report compares and contrasts are as follows.
STW Communications Group Limited (STW Group)
A key player in the media industry, this organization claims itself to be
‘Australasia’s leading marketing content and communications service group,
comprising over 75 operating companies’ (STW Group 2012). According to
the company’s Australian stock exchange profile, STW Group has been listed on the stock exchange
for five years longer than AAU. The date they officially listed on the ASX was the 14th of January
1994 (ASX 2012).
Digital Performance Group Limited (DPG Limited)
The company focuses its efforts on selling online marketing and advertising
campaigns to businesses with a key objective being to increase its client’s
sales and well as brand awareness. With the head office in Melbourne, one
of DPG’s companies, Empowered Communications, currently boasts a media
network with an active member base of over 504,000 users in Australia (DPG 2012).
AAU Company Valuation Report Page 24
4. Valuation Assumptions In order to estimate AAU’s intrinsic share price value, the CAPM model has been selected to
calculate the required rate of return. The data that will be used for calculation are the firm’s and the
S&P/ASX 200 Return Index.
Required rate of Return(CAPM)
Based on this model, there are three components used to determine the required rate of return
(risk-free rate; market return rate and Beta). Other components include the market risk premium
calculated by using market return rate (Rm) minus risk-free rate (Rf).
CAPM equation: E(Ri)= Rf + βi (Rm-Rf)
Risk-free rate (Rf)
The risk-free rate is the theoretical rate of return of an investment with no risk of financial loss. The
yield for a 10 year government bond is currently 3.14 % as of the 13th September 2012 (Reserve
Bank of Australia 2012). This will be used as the risk-free rate for the valuation model.
Market returns (Rm)
Based on the economic outlook assumption and calculation, 4.75% was the market return (the full
calculation for the expected market return is in section , table )
Market risk premium (Rm-Rf)
Market risk premium is the difference between the expect market return and the risk-free rate. The
expected market return (4.75%) minus the free-risk rate (3.14%) is equal to (1.61%) which is the
market risk premium.
Beta (β)
Beta represents the systematic risk of the risky asset relative to the diversified market portfolio. It is
important to note that this method ignores the diversifiable or market risk. As Beta is unknown and
cannot be observed directly, it has to be estimated based on the S&P/ASX200 proxy. The beta
formula is shown below:
Figure 1 below shows AAU’s weekly return for the last 4 years compared with the S&P/ASX200. As
seen in this graph, there is a positive linear relationship between the market and stock returns.
Table 1.1: Beta for AAU with the S&P/ASX200
AAU Company Valuation Report Page 25
The raw Beta figure that has been calculated is 0.67 (full calculation shown on appendix A, excel) and
the adjusted beta figure was 0.75009. As the Beta is less than 1, the systematic risk of AAU is less
than the market risk. The adjustment beta will be used to calculate the required rate of return.
Formula of beta adjustment: Adj βi=Raw Beta(0.67)+1.00(0.33)
=0.627*(0.67)+0.33
=0.75009
Required Rate of Return (CAPM) Calculation:
The investor’s required rate of return can be derived as follows:
E(Ri)=Rf + βi (Rm-Rf)
E(Ri)=0.0314+0.75009(0.0475-0.0314)
E(Ri)= 0.043476449
The required rate of return for AAU’s stock is 4.435% and this figure will be used as part of the
following valuation analysis.
4.2 Valuation Analysis
4.2.1 Dividend Discount Model (DDM) The Dividend discount model is used to evaluate the company’s stock price based on the net present
value of future dividends. This model requires an estimation the company’s future dividends growth
rates for more valid results.
y = 0.627x + 0.0015
R² = 0.0579
-0.3
-0.2
-0.1
0
0.1
0.2
0.3
0.4
0.5
-0.2 -0.15 -0.1 -0.05 0 0.05 0.1 0.15
AAU
Weekly Returns
for lat 4 Years
S&P Weekly returns for lat 4 years
Beta for AAU with the s&P/ASX200
AAU Company Valuation Report Page 26
There are two models, the Gordon model also called the stable growth rate model and the multi-
stage dividend growth rate model. Both need to be considered when evaluating the company’s stock
price.
The equation of the Gordon Model is shown below. While P is the share price; D is the dividend paid;
(r) is required rate of return and (g) is the dividend growth rate. With this model, the assumption
made is that required rate (r) of return must be greater than the dividend growth rate (g). Note: The
dividend’s growth rate (g) is constant.
D1 =D0 (1+g)
The second model is the multi-stage dividend growth rate model. With this model, the required rate
of return (r) can be less than the dividend growth rate (g) in the short term. This model which has
different stages of growth rates is considered with both business cycle and the future economic
outlook. The formula for the multi-stage dividend growth rate model is pictured below.
The two above models rely on the assumption that a company is paying out dividends to its
shareholders. However, in the real world many growth companies may decide not to pay dividends
at all for a given period. Instead of paying out dividends, the company may reinvest its capital in
more profitable projects rather than paying out dividends to shareholders. This can make it difficult
to estimate whether the firm will initiate a dividend in all cases; therefore the dividend discount
model may not always be applicable.
4.2.2 Dividend Forecast AAU’s dividend to shareholders for 2012 was 1.78 cents per share. This is the sum of the interim
dividend paid on 31 March 2012 and the declared final dividend for the financial year ended 30 June
2012. Based on company data, the amount of 0.75 cents per share will be paid on the 27th
September 2012.
AAU Company Valuation Report Page 27
Table 4.2.1: Dividend history of AAU
dividend
history per share cent
total
$000
earnings
per
share dividend earning per share
2007 interim dividend for 2007 1.5 910 -12.03 1.5
2008 interim dividend for 2008 2.5 1517
2008 paid on 28 Sept 2009 2.5 1517 6.47 5
2009 interim dividend for 2009 1 607 0.45 1
2010 net loss per share 0 0 -11.76 0
2011 interim dividend for 2011 1 607
2011 paid on 28 Sep 2011 1 607 2.29 2
2012 interim dividend for 2012 1 607
2012 paid on 28 Sep 2012 0.78 473 2.57 1.78
Sources: AAU Annual financial report 2011
Table 4.2.2 Dividend growth rate history
Year 2007 2008 2009 2010 2011 2012
DPS (cents) 1.5 5 1 0 2 1.78
%
change/Growth n/a 233% -80% -100% n/a -11%
Over the past 5 years, AAU‘s dividend payment figure has significantly fluctuated. The company
experienced a loss of 12.03 per share during 2007. The reason for this loss can be attributed to the
fact that AAU incurred $10.357 million in restructure and impairment expenses in the year 2007
(AAU Annual Report 2007). This contributed to the net loss of $7.298 M for this year. Comparing
2007 to 2008, AAU saw a dividend growth rate of 233% in 2008. Following a booming period in 2008,
the GFC was one of the prime reasons for AAU’s poorer performance in 2009. A dramatic decline of
80% in dividend payments indicates that the company was not very profitable during this operating
period. AAU did not pay any dividends during 2010 due to a net loss result of $7.13M. The dividend
growth rate was negative 100% thus mathematically affecting the calculation of dividend growth
rate for 2011. Nonetheless, AAU paid 2 cents per share to ordinary shareholders. Between 2011 and
2012 , the share growth rate was -11%, a change from 2 cents per share to 1.78 cents per share
respectively. Looking at the 5 year period, AAU has put a lot of effort into reducing expenditure
meanwhile focusing on continually growing company revenue.
During the 2011 period, AAU implemented a number of important initiatives. This includes
completing the formation of their core Digital team and implementing the findings of the 2011
review of this area, changing the way they operate in line with changing consumer media habits,
expanding television and video production capabilities as well as launching the company and social
media websites in August 2012. (AAU Annual Report 2012, AAU FY12 Final Results Market section)
AAU Company Valuation Report Page 28
AAU has responded to the changes in customer behaviour in the media industry by completing the
formation of their core digital team. This should be an opportunity for better growth rates and
ultimately a better return to shareholders. Taking this into consideration, we have estimated the
following forecasted data. (AAU Annual Report 2012)
Table 4.2.2.1: Forecasted Dividend Growth Rates
Phase 1: Slow-
Moderate Growth Stage
Phase 2: High Growth Stage Phase 3: Stable Growth Stage
2013-2015 2016-2018 2019-Onwards
6% 13% 3%
4.2.3 Intrinsic Share Price According to the ASX (2012), AAU’s current share price is $0.155 as of the 28th of September 2012.
Based the forecasted dividend growth rate above, AAU’s stock price should be of $2.01. If these
calculation and assumptions are correct, then AAU shares are trading at a discount rate of 1100%.
Table 4.2.3: AAU Intrinsic Share Price (full calculation on appendix excels calculation)
Actual
2012 2013 2014 2015 2016 2017 2018 2019
Dividend Growth
rate 6% 6% 6% 13% 13% 13% 3%
DPS (cent) 1.78 1.86 1.97 2.08 2.36 2.66 3.01 3.10
Annuity 243.78
Time period 0 1 2 3 4 5 6 7
require rate of
return 0.0435 0.0435 0.0435 0.043 0.0435 0.043 0.0435 0.043476
Discount factor 1 0.9583 0.9184 0.88 0.8435 0.808 0.7746
Discount DPS 1.778 1.8059 1.834 1.9866 2.151 2.3297
Discount Annuity 188.85
Total 200.7
NPV ($) 2.01
4.2.4 Sensitivity Analysis The calculation of AAU’s intrinsic value in the dividend discount model shows the strength in AAU’s
share price, currently $0.155 compared to the forecasted NPV of $2.01. This makes the share price
approximately undervalued by 1100%. Please note, the accuracy of this valuation strongly relies on
the forecast of the dividend growth rate.
With the discount sensitivity analysis, the market risk premium and AAU’s beta will be used to
calculate the present value. The consistent growth rate assumes 3.431%. With this model, it will
show the change in market risk premium and the beta which both affect AAU’s share price.
AAU Company Valuation Report Page 29
Table 4.2.4: DDM Beta and Risk Premium Sensitivity (Gordon model)
AAU
beta
market risk premium 0.55009 0.65009 0.75009 0.85009 0.95009 1.05009
0.0161 3.0909 2.4332 2.0063 1.7068 1.4852 1.3144
0.0261 1.6069 1.3088 1.1039 0.9545 0.8408 0.7512
0.0361 1.0856 0.8951 0.7615 0.6625 0.5864 0.5259
0.0461 0.8197 0.6801 0.5812 0.5073 0.4501 0.4045
0.0561 0.6585 0.5484 0.4699 0.411 0.3653 0.3287
0.0661 0.5502 0.4595 0.3944 0.3455 0.3074 0.2768
With a brief overview of the economic environment, the economy is slowly recovering. According to
Barberis (2001), investors become more risk averse during harsh economic times. The data in Table
4.2.4 shows that an increased market risk premium and beta would affect the share price. In other
words, investors would offer to pay a higher price on lower risk level stocks. This is especially true
when investors prefer taking on a risk averse approach. They would invest their money on low risk
assets and settle for moderate to lower returns rather than invest on an asset which offers a higher
return.
Dividend growth rate sensitivity is considered the phase growth rate which affects the share price.
This sensitivity analysis is used to compare and contrast growths rate and the subsequent impact on
the share price.
Table 4.2.5 Dividend Growth Rate Sensitivity
phase
2
growth
rate
phase 1 growth rate 0.1 0.11 0.12 0.13 0.14 0.15 0.16 0.17
0.03 1.639 1.682 1.726 1.771 1.817 1.863 1.910 1.958
0.04 1.687 1.731 1.777 1.823 1.870 1.917 1.966 2.015
0.05 1.735 1.781 1.828 1.875 1.924 1.973 2.023 2.074
0.06 1.785 1.832 1.880 1.929 1.978 2.029 2.080 2.133
0.07 1.835 1.884 1.933 1.983 2.035 2.087 2.139 2.193
0.08 1.887 1.937 1.987 2.039 2.092 2.145 2.199 2.255
0.09 1.939 1.990 2.043 2.096 2.150 2.205 2.261 2.317
0.1 1.993 2.045 2.099 2.153 2.209 2.265 2.323 2.381
The above table illustrates that as required rate of return remains constant, investors are willing to
pay a higher price for the share as the growth rate increases.
The sensitivity analysis above demonstrates that the accuracy of share price present value data is
highly dependent on the forecasted growth rate. Where the company has not paid dividends or the
dividend amount was too small, they may have made a loss or decided to reinvest the profit into a
more valuable project. Therefore, the DDM model would not be an appropriate tool to calculate the
intrinsic value of the share price. In this case, the free cash Flow to Equity Model will be used to
calculate the intrinsic value of the company’s share price.
AAU Company Valuation Report Page 30
4.3 Free cash Flow to Equity Model
The FCFE model is used to measure a firm’s ability to pay out shareholder dividends. The FCFE model
takes into consideration calculating the intrinsic share price where the company has not paid
dividends or dividend amount paid is very small. This model shows the ability of the company to pay
its shareholders using equity cash flows once expenses have been paid. With this model, stable
growth FCFE and multi-stage FCFE growth need to be considered.
The first model to be examined is the stable FCFE growth model. This model assumes that the
company has enjoyed a constant growth rate and required rate of return for the following period.
This model is appropriate when the growth rate (Ri) not greater than the required rate of return (g)
and the beta of the stock is close to one or below one.
Formula of constant FCFE growth model:
The second model is the multi-stage growth rate model. This model assumes that the company has a
multi-phase growth rate for the short term which allows for the growth rate (g) to be greater than
require rate of return (Ri).
Formula of multi-stage FCFE growth model
In order to calculate the intrinsic value of the company’s share price, a phase growth rate need to be
forecasted. FCFE is often used to evaluate the intrinsic value of the share price of the company. The
equation of FCEF is below:
FCFE=Net Earnings-[(Capital Exp – Depreciation)* (1-Debt Ratio)]-[(Chg in Working Capital)*(1-Debt
Ratio)]
4.3.1 Cash Flow Forecast
Free cash flow to equity for 2011 was $1,222,673. Table 4.4.1 below shows that over the past 5
years, AAU historical FCFE growth rate has proven to be extremely volatile. The negative growth rate
AAU Company Valuation Report Page 31
of 326% for 2009 indicates that the company had to come to terms with a crisis during this particular
year. During this time, the global economy was weak and this posed a challenge for the whole
industry. From 2010 the growth rate was recovering and until 2011 it was able to improve its growth
rate from negative to positive 3%.
Table 4.3.1 Historical FCFE Growth Rate
2006 2007 2008 2009 2010 2011
NPAT -7298 3926 271 -7138 1392 1562
capital expenditure 3927 2383 2294 590 1006 2002
depreciation 664 625 665 595 349 585
current asset 37635 42126 28708 40271 39063 27686
current liability 34352 38004 36490 37506 35841 24558
working capital 3283 4122 -7782 2765 3222 3128
chg in working capital 0 839 -11904 10547 457 -94
total liability 34829 38354 26979 37933 36468 25203
total total assets 50776 55590 42140 45822 44850 33897
Debt ratio 69% 69% 64% 83% 81% 74%
FCFE 0 3120.785 3967.708 -8952.98 1183.805 1222.673
share outstanding 60677 60677 60677 60677 60677 60677
FCFE per share 0 0.051433 0.065391 -0.14755 0.01951 0.020151
FCFE growth rate 0 0 27% -326% -113% 3%
To forecast the future FCFE growth rate, the assumption of dividend growth rate forecast in table
4.3.1 needs to be taken into consideration. A continued reduction in operating expenses shows that
the company has put significant efforts into minimising its expenditure and trying to maximise its
profitability thus needs to be considered as well.
Table 4.3.2 operating expenses history
2006 2007 2008 2009 2010 2011
operating expenses 39850 32297 31624 37104 26504 25547
decreasing rate 0 23% 2% -15% 40% 4%
As seen in the above table, AAU has had a very positive decreasing rate of expenditure over the past
5 years. Considering the company has completed several initiatives, previously analysed on dividend
forecast, we may assume there is no significant investment for the future. Consequently, FCFE
growth rates must be greater than the dividend growth rate.
Table 4.3.3 Forecasted FCFE Growth Rates
Phase 1: Slow-
Moderate Growth Stage
Phase 2: High Growth Stage Phase 3: Stable Growth Stage
2013-2015 2016-2018 2019-Onwards
20% 30% 3%
Based on the forecasted FCFE growth rate, the intrinsic share price of AAU can be calculated.
Currently the share price of AAU is $0.155 compared to the estimated NPV of $2.28; AAU shares sold
at a discount of 1371%. If the above forecasting is correct, then the figure indicates to investors that
AAU’s stock is a sound investment.
AAU Company Valuation Report Page 32
Table 4.3.4 AAU share price (fully calculation on appendix excel)
Actual
2011 2012 2013 2014 2015 2016 2017 2018
FCFE growth rate 20% 20% 20% 30% 30% 30% 3%
FCFE pre share 0.02 0.024 0.029 0.035 0.045 0.058 0.076 0.078
Annuity 2.657
time period 0 1 2 3 4 5 6 7
discount factor 1 0.9583 0.9184 0.88 0.8435 0.808 0.7746
discount FCFE
p/s 0.023 0.0264 0.03041 0.0379 0.0472 0.05881
discount annuity 2.05811
lNPV ($) 2.2819
4.3.2 Sensitivity Analysis FCFE sensitivity analysis is used to test the uncertainty of the inputs and how they will affect to
outcome when different values are used. The accuracy of the intrinsic value of AAU share price
depends on the accuracy of forecast of the growth rate; require rate of return and the beta.
The first sensitivity test assumes constant growth at 3.41% in order to investigate how a change in
market risk premium and beta will affect the intrinsic share price value.
Table 4.3.5 Discount FCFE Market risk premium and Beta Sensitivity (discount sensitivity)
discount
sensitivity
market risk AAU
Beta
Premium 0.55009 0.65009 0.75009 0.85009 0.95009 1.05009
0.0161 4.036 3.1761 2.6182 2.22708 1.9376 1.7147
0.0261 2.0966 1.7073 1.4399 1.24498 1.09652 0.9797
0.0361 1.4161 1.1674 0.993 0.86399 0.76462 0.6857
0.0461 1.0691 0.8869 0.7578 0.66154 0.58695 0.5275
0.0561 0.8587 0.7151 0.6127 0.53595 0.47628 0.4286
0.0661 0.7175 0.5991 0.5142 0.45044 0.40073 0.3609
Table 2.4.5.1 shows that when beta or risk premium increases, the share price decreases and vice-
versa. As can be seen in the above table, investors will prefer to pay more for the less risky asset or
will be looking to pay less if the market premium increases.
The second sensitivity test assumes constant beta, market risk premium and required rate of return
to observe the effects of changes in future growth phases on the intrinsic share price value.
AAU Company Valuation Report Page 33
Table 4.3.6 FCFE Growth Rate Sensitivity
phase
2
growth
rate
phase 1 growth
rate 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8
0.1 2.6866 2.7575 2.8298 2.90336 2.97822 3.0544 3.1319 3.2107
0.2 3.4797 3.5719 3.6657 3.76122 3.85841 3.9573 4.05793 4.1603
0.3 4.4159 4.5331 4.6523 4.77376 4.89733 5.0231 5.15101 5.2812
0.4 5.5069 5.6532 5.8022 5.95385 6.10819 6.2652 6.42502 6.5876
0.5 6.7646 6.9446 7.1278 7.31433 7.50415 7.6973 7.89384 8.0938
0.6 8.2009 8.4193 8.6417 8.86805 9.09843 9.3329 9.57137 9.814
0.7 9.8276 10.09 10.356 10.6279 10.9042 11.185 11.4715 11.763
0.8 11.657 11.968 12.284 12.6067 12.9347 13.268 13.6081 13.954
The analysis demonstrates that there is a positive relationship between the share price and the
growth rate. As the forecast growth rate increases, investors are prepared to pay higher prices on
the share to gather greater benefit.
Similarly to the DDM model sensitivity analysis, the accuracy of intrinsic value of the share price is
highly depend on the accuracy on the forecast of growth rate and required rate of return.
4.4 Price earnings ratio The P/E ratio values the stock based on expected annual earnings. This model allows investors to
compare and contrast the intrinsic value of stock of several companies in the same industry and with
similar risk (About.com Stocks 2012). It enables investors to select more valuable stock and obtain
larger future returns.
Earning Multiplier Model: Price/Earnings Ratio
Since:
Therefore:
This model is determined by
-Expected dividend payout ratio
-Required rate of Return (k)
-expected growth rate of dividend (g)
EarningsMonth -12 Expected
PriceMarket Current =
gk
ED
E
Pi −
= 11 1
/
AAU Company Valuation Report Page 34
Table 4.4.1 AAU P/E Ratio forecast 2013
2012 2013
current price 0.155 2
dividend growth
rate 0.06
earnings per
share 0.178 0.1887
estimated P/E
ratio 0.8708 10.6
The ratio indicates that investors would be willing to pay $10.6 for every $1 the company generates
in the future. To evaluate AAU value, comparison with AAU’s competitors is necessary and will help
investors to understand and select more appropriate portfolios. Considering the similarities in risk
and business cycle in the media industry, STW Communications Group Limited and Digital
Performance Group Limited have been elected.
Table 4.4.2 Peer Comparison
Company Forecast P/E ratio Share price beta
AAU 10.6 0.155 0.755
STW 8.89 1.02 1.11
DIG N/A 0.01 1.32
Source:
From the above table, 4.4.2, AAU has a higher P/E ratio of 10.6 than rival STW, which have P/E ratio
of 8.89. Beta is an indicator that shows the systematic risk of the asset. Lower beta means lower risk
and vice versa. Investors will accept a lower return with lower risk during a weak economic period.
Investors of AAU will pay 20% more than STW stock to the company to gather $1. However from the
beta analysis, investing on AAU stock will have 30% less systematic risk then investing in STW stock.
Just focusing on the P/E ratio and not taking into account other factors, AAU’s share price must be
under-priced.
4.4.1 Sensitivity analysis
The result of P/E ratio is influenced by different forecasted dividend growth rates.
Table 4.4.2 P/E Growth Rate Sensitivity
Growth
rate
0.03 0.04 0.05 0.06 0.07 0.08 0.09
P/E Ratio 10.9 10.8 10.7 10.6 10.5 10.4 10.3
The sensitivity analysis indicates that the P/E ratio is minimally affected by the change in dividend
growth rate.
4.5 Price/Book Value ratio (P/B) This ratio enables investors to compare the stock’s per-share price to its book value. The purpose of
this model is to determine whether or not the stock is undervalued. Low P/B ratio conveys that the
stock is undervalued- an opportunity to buy if the company has no issues with its internal control or
operations.
AAU Company Valuation Report Page 35
Formula:
Table 4.5.1 AAU history P/B ratio
('000 in $) 2007 2008 2009 2010 2011
book equity 17240 15160 7890 8380 8690
share outstanding 60677 60677 60677 60677 60677
book value per share 0.284127 0.249848 0.130033 0.138108 0.143217
share price 0.35 0.25 0.2 0.17 0.16
P/B ratio 1.23 1.00 1.54 1.23 1.12
Source: FinAnalysis
Table 4.5.1 shows the fluctuations in AAU’s P/B ratio between 2007 and 2011. In order to determine
whether the share price was undervalued or overvalued, AAU’s P/B ratio needs be compared with
that of its peers.
Table4.5.2 comparison of P/B of AAU with its competitor
Year 2007 2008 2009 2010 2011
AAU 1.23 1.00 1.54 1.23 1.12
STW 1.39 0.41 1.73 0.99 0.75
DIG 4.48 8.2 5.8 7.43 25.01
Source: excel calculation
Table 4.5.2 above shows that STW has the lowest P/B ratio and DIG has the highest P/B ratios. As
we can see in the P/E table above , the assumption is that where STW’s stock was under-priced, AAU
stock was under-priced too. Based on the above P/B ratio analysis, STW would be more valuable to
invest in than AAU or DIG. DIG has the highest P/B ratio; this may indicate the share of DIG was
overpriced.
AAU Company Valuation Report Page 36
5. Evaluation of value/price of the company
The share price of AAU can be impacted by both micro and macro factors which have been discussed
in section 2 of this report. Investors’ confidence levels for instance are impacted by things that are
often out of their control. The level of risk appetite that an investor has is also a determinant of the
amount of their money that they will invest in a given company, whether that investment is with
AAU, STW or DIG. The reality of investment is that not every investor will be able to analyse the
market in depth and many will make their decisions based on inner feelings. This ultimately means
that share prices will fluctuate both upwards and also downwards without warning. The presence of
large investment companies also cause the value of the company to differ from current and recent
share prices because they have a large impact on share prices causing the prices to go up and down.
Each of the models discussed in this report rely on certain assumptions which is a key reason for the
value of a company being different each time you use a different model. Forecasting criteria with
each of the models is different as well. For instance, betas, required rate of return, market premium
are criteria that are used in some of these models, but not all of these models. Some of the criteria
we have used with the forecasting perhaps are more accurate than the other criteria used in
calculations as well.
The next question to be considered is which model is the most appropriate out the four that have
been discussed in this valuation report. Following company analysis and use of each of these models,
our group has recognized the Net Tangible Asset Backing Model (NTA) as the most appropriate
model for evaluation of the company. The other models look at forecasting future returns whilst
arguably being less concerned about safe risk levels. If the investors wish to pursue higher return
investments, then the other models would be more appropriate. With the current economic
environment which is volatile, investors will be more risk averse. With risk aversion, investors are
concerned about finding assets that have low risk primarily. The NTA model studies the ability of
firms to pay investors if their organization is liquidated. If this model is positive, this means the
company’s stock is safer to invest in as they will receive equity back from the company even when
the company goes into financial hardship.
AAU Company Valuation Report Page 37
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September 2012,
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International Monetary Fund, 2012, World economic outlook update- New setbacks, further policy
action needed, 16 July, IMF, viewed 15 September 2012,
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‘Sadif Analytics releases new summary due diligence reports for Australian stocks’, 2012, Pr-
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‘Low inflation hides problem’, 2012, The Australian Financial Review, 26 April, viewed 29 August
2012,
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Conversations, Interest rate management (IRRM), Interest rate risk, National Australia Bank, viewed
29 August 2012,
<http://www.nab.com.au/wps/wcm/connect/0471d300422c19ce82b3d71ef60654e8/QAIRRM.pdf?
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‘Europe’s debt crisis will hurt Australia: RBA’, 2011, Sydney Morning Herald, BusinessDay, 14
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1ou52.html>
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Fund, Sydney, September 20, viewed 29 September 2012,
<http://www.imf.org/external/np/ms/2012/092012.htm>
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viewed 29 September 2012,
<http://www.rba.gov.au/publications/smp/2012/aug/pdf/eco-outlook.pdf>
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<http://www.investopedia.com/terms/l/leverage.asp#axzz27pJ07VYF>
AAU Company Valuation Report Page 39
7. Appendices
Appendix 1: Beta calculation of AAU with ASX 200 index
Start 27/07/2007
End 27/07/2012
Frequency W
beta
Name
S&P/ASX 200 - TOT RETURN
IND
ADCORP AUSTRALIA - TOT RETURN
IND S&P Weekly returns
WFMI Weekly Returns
Code ASX200I(RI) A:AAUX(RI) for lat 4 years for lat 4 Years
CURRENCY A$ A$
27/07/2007 37922.45 45.2 Weekly Return S&P Weekly Return AAU
3/08/2007 37537.22 45.2 -0.010158363 0
10/08/2007 37042.76 41.63 -0.013172526 -0.078982301
17/08/2007 35390.93 38.06 -0.04459252 -0.085755465
24/08/2007 38136.65 42.82 0.07758259 0.125065686
31/08/2007 39240.53 36.87 0.028945385 -0.13895376
7/09/2007 39472.91 36.28 0.005921938 -0.01600217
14/09/2007 39727.5 36.28 0.00644974 0
21/09/2007 40067.73 35.09 0.008564093 -0.032800441
28/09/2007 41424.1 35.09 0.03385193 0
5/10/2007 41662.56 36.28 0.005756552 0.033912796
12/10/2007 42570.98 34.5 0.021804229 -0.049062845
19/10/2007 42306.01 33.31 -0.006224193 -0.034492754
26/10/2007 42270.07 32.71 -0.000849525 -0.018012609
2/11/2007 42261.55 32.71 -0.000201561 0
9/11/2007 41413.28 33.9 -0.020071909 0.036380312
16/11/2007 40939.91 34.5 -0.011430391 0.017699115
23/11/2007 40126.28 32.71 -0.019873761 -0.051884058
30/11/2007 41416.73 46.99 0.032159722 0.436563742
7/12/2007 42191.17 44.61 0.018698724 -0.050649074
14/12/2007 41160.38 47.58 -0.024431415 0.066577001
21/12/2007 39700.73 45.2 -0.035462501 -0.050021017
28/12/2007 40291.79 46.99 0.014887887 0.03960177
4/01/2008 40094.12 48.77 -0.004905962 0.0378804
11/01/2008 38026.75 44.61 -0.051562922 -0.085298339
18/01/2008 36536.8 44.01 -0.039181629 -0.013449899
25/01/2008 37255.63 41.04 0.019674137 -0.067484663
1/02/2008 37145.15 41.04 -0.002965458 0
8/02/2008 35969.5 45.2 -0.031650162 0.101364522
15/02/2008 35675.71 47.58 -0.008167753 0.052654867
22/02/2008 35449.84 47.58 -0.006331198 0
29/02/2008 35673.6 51.74 0.006312017 0.087431694
AAU Company Valuation Report Page 40
7/03/2008 33835.06 54.12 -0.051537832 0.045999227
14/03/2008 33493.67 48.46 -0.01008983 -0.104582409
21/03/2008 33006.7 47.83 -0.014539165 -0.013000413
28/03/2008 34461.6 47.83 0.044078929 0
4/04/2008 36202.18 47.83 0.050507812 0
11/04/2008 35046 46.57 -0.031936751 -0.026343299
18/04/2008 34985.34 45.31 -0.001730868 -0.027056045
25/04/2008 36001.23 47.2 0.029037591 0.041712646
2/05/2008 36731.52 45.94 0.02028514 -0.026694915
9/05/2008 37241.36 46.57 0.013880177 0.013713539
16/05/2008 38268.63 45.31 0.027584116 -0.027056045
23/05/2008 37262.05 44.05 -0.026303006 -0.027808431
30/05/2008 36604.8 45.94 -0.017638589 0.042905789
6/06/2008 36223.05 44.68 -0.01042896 -0.027427079
13/06/2008 34837.81 46.57 -0.038241948 0.042300806
20/06/2008 34255.73 44.68 -0.016708283 -0.040584067
27/06/2008 34015.75 46.57 -0.007005543 0.042300806
4/07/2008 33009.99 44.05 -0.02956748 -0.054112089
11/07/2008 32346.32 47.2 -0.020105126 0.071509648
18/07/2008 31439.92 44.05 -0.028021735 -0.066737288
25/07/2008 32285.47 46.57 0.026894152 0.057207719
1/08/2008 31854.31 54.12 -0.013354614 0.162121537
8/08/2008 32387.98 52.86 0.016753463 -0.023281596
15/08/2008 32390.54 58.53 7.90417E-05 0.107264472
22/08/2008 32143.35 57.9 -0.007631549 -0.010763711
29/08/2008 33652.13 58.53 0.046939102 0.010880829
5/09/2008 32074.32 59.79 -0.046885888 0.021527422
12/09/2008 32274.75 60.42 0.006248924 0.010536879
19/09/2008 31655.94 53.11 -0.019173193 -0.120986428
26/09/2008 32342.71 54.44 0.021694823 0.025042365
3/10/2008 30976.52 53.11 -0.042241049 -0.024430566
10/10/2008 26130.31 50.46 -0.156447851 -0.049896441
17/10/2008 26198.23 51.12 0.00259928 0.013079667
24/10/2008 25530.3 43.15 -0.025495234 -0.155907668
31/10/2008 26514.52 41.16 0.038551055 -0.046118192
7/11/2008 26883.41 45.15 0.013912754 0.096938776
14/11/2008 24879.73 41.16 -0.074532212 -0.088372093
21/11/2008 22685.76 40.5 -0.088183031 -0.016034985
28/11/2008 24869.93 39.83 0.09627934 -0.01654321
5/12/2008 23191.26 42.49 -0.067497978 0.066783831
12/12/2008 23330.47 42.49 0.006002692 0
19/12/2008 24033.05 45.81 0.030114267 0.078136032
26/12/2008 23867.85 45.81 -0.006873867 0
2/01/2009 24744.55 41.16 0.036731419 -0.101506221
9/01/2009 24890.82 43.15 0.005911201 0.048347911
AAU Company Valuation Report Page 41
16/01/2009 23659.81 40.5 -0.049456386 -0.061413673
23/01/2009 22272.27 39.17 -0.058645441 -0.032839506
30/01/2009 23591.64 39.17 0.059238237 0
6/02/2009 23148.85 38.51 -0.018768937 -0.01684963
13/02/2009 23750.93 30.54 0.026009067 -0.206959231
20/02/2009 22767.7 30.54 -0.041397537 0
27/02/2009 22512.84 25.23 -0.011193928 -0.173870334
6/03/2009 21298.05 23.9 -0.053959874 -0.052715022
13/03/2009 22666.2 28.03 0.064238275 0.172803347
20/03/2009 23492.56 28.03 0.036457809 0
27/03/2009 24916.9 32.24 0.060629408 0.150196218
3/04/2009 25354.57 29.43 0.017565187 -0.087158809
10/04/2009 24922.8 29.43 -0.017029277 0
17/04/2009 25636.72 35.04 0.028645257 0.190621814
24/04/2009 25199.41 34.34 -0.017057954 -0.019977169
1/05/2009 25589.93 30.84 0.015497188 -0.101921957
8/05/2009 26792.75 36.44 0.047003646 0.181582361
15/05/2009 25651.75 30.84 -0.042586147 -0.153677278
22/05/2009 25627.7 31.54 -0.000937558 0.022697795
29/05/2009 26011.84 30.84 0.01498925 -0.022194039
5/06/2009 27101.64 32.94 0.041896306 0.068093385
12/06/2009 27727.97 37.14 0.02311041 0.127504554
19/06/2009 26621.11 34.34 -0.039918537 -0.075390415
26/06/2009 26704.43 32.94 0.003129847 -0.040768783
3/07/2009 26187.03 32.24 -0.019375062 -0.021250759
10/07/2009 25953.82 32.24 -0.008905554 0
17/07/2009 27367.67 33.64 0.054475603 0.043424318
24/07/2009 27976.47 33.64 0.022245226 0
31/07/2009 29032.28 36.44 0.037739214 0.083234245
7/08/2009 29411.7 40.65 0.013068901 0.115532382
14/08/2009 30554.2 40.65 0.038845085 0
21/08/2009 29447.01 36.44 -0.036236917 -0.103567036
28/08/2009 30955.77 36.44 0.051236441 0
4/09/2009 30661.52 37.14 -0.009505498 0.01920966
11/09/2009 31817.84 33.64 0.037712416 -0.094238018
18/09/2009 32508 35.04 0.021690976 0.041617122
25/09/2009 32654.23 39.95 0.004498277 0.140125571
2/10/2009 31890.13 36.44 -0.023399725 -0.087859825
9/10/2009 32942.4 37.84 0.03299673 0.038419319
16/10/2009 33523.62 36.44 0.017643523 -0.036997886
23/10/2009 33682.75 39.24 0.004746802 0.076838639
30/10/2009 32185.68 42.75 -0.044446193 0.089449541
6/11/2009 31892.53 41.35 -0.009108088 -0.032748538
13/11/2009 32788.64 39.95 0.028097802 -0.033857316
20/11/2009 32649.53 37.84 -0.004242628 -0.05281602
AAU Company Valuation Report Page 42
27/11/2009 31858.5 36.44 -0.024227914 -0.036997886
4/12/2009 32765.77 34.34 0.028478114 -0.057628979
11/12/2009 32301.54 34.34 -0.014168139 0
18/12/2009 32408.83 33.64 0.003321513 -0.020384391
25/12/2009 33429.11 35.04 0.031481544 0.041617122
1/01/2010 33985.86 33.64 0.016654646 -0.039954338
8/01/2010 34276.24 36.44 0.008544142 0.083234245
15/01/2010 34188.74 32.94 -0.002552789 -0.096048299
22/01/2010 33149.19 32.24 -0.03040621 -0.021250759
29/01/2010 31886.24 28.73 -0.03809897 -0.108870968
5/02/2010 31528.42 29.43 -0.011221768 0.024364775
12/02/2010 31872.57 28.03 0.010915549 -0.047570506
19/02/2010 32444.34 31.54 0.01793925 0.125222975
26/02/2010 32576.06 25.23 0.004059876 -0.200063412
5/03/2010 33630.74 25.93 0.032375923 0.027744748
12/03/2010 34004.17 27.33 0.011103829 0.053991516
19/03/2010 34394.66 27.33 0.011483592 0
26/03/2010 34597.77 27.33 0.005905277 0
2/04/2010 34678.82 27.33 0.002342637 0
9/04/2010 34963.98 28.03 0.008222886 0.02561288
16/04/2010 35223.57 28.03 0.007424498 0
23/04/2010 34495.42 30.84 -0.020672237 0.100249732
30/04/2010 33973.06 25.23 -0.01514288 -0.181906615
7/05/2010 31706.14 25.23 -0.066726989 0
14/05/2010 32639.88 28.03 0.029449816 0.110978993
21/05/2010 30535.25 23.83 -0.064480323 -0.149839458
28/05/2010 31619.72 23.83 0.035515347 0
4/06/2010 31609.67 25.23 -0.00031784 0.058749475
11/06/2010 32011.06 24.53 0.012698329 -0.027744748
18/06/2010 32345.3 22.43 0.010441391 -0.085609458
25/06/2010 31403.4 21.72 -0.02912015 -0.031654035
2/07/2010 30163.22 21.02 -0.039491902 -0.032228361
9/07/2010 31285.31 28.03 0.037200604 0.333491912
16/07/2010 31473.36 23.83 0.006010808 -0.149839458
23/07/2010 31727.08 23.13 0.008061421 -0.029374738
30/07/2010 31977.25 26.63 0.007885062 0.151318634
6/08/2010 32494.63 25.93 0.016179628 -0.026286143
13/08/2010 31770.55 25.93 -0.022283066 0
20/08/2010 31656.11 25.93 -0.003602078 0
27/08/2010 31337.65 24.53 -0.010059985 -0.053991516
3/09/2010 32618.94 27.33 0.040886601 0.114145944
10/09/2010 32840.69 26.63 0.006798198 -0.02561288
17/09/2010 33449.3 26.63 0.018532193 0
24/09/2010 33196.02 28.03 -0.007572057 0.052572287
1/10/2010 33045.21 26.63 -0.004543014 -0.049946486
AAU Company Valuation Report Page 43
8/10/2010 33787.99 29.43 0.02247769 0.105144574
15/10/2010 33842.82 28.03 0.001622766 -0.047570506
22/10/2010 33548.88 28.73 -0.008685446 0.024973243
29/10/2010 33659.48 28.73 0.003296682 0
5/11/2010 34722.4 28.03 0.031578622 -0.024364775
12/11/2010 34078.3 30.13 -0.018549985 0.074919729
19/11/2010 33621.84 27.33 -0.013394447 -0.092930634
26/11/2010 33399.21 30.13 -0.006621589 0.102451518
3/12/2010 34096.74 29.43 0.020884626 -0.023232658
10/12/2010 34475 27.33 0.011093729 -0.071355759
17/12/2010 34600.26 29.43 0.003633358 0.076838639
24/12/2010 34751.48 28.03 0.004370487 -0.047570506
31/12/2010 34518.53 28.03 -0.006703312 0
7/01/2011 34226.09 30.84 -0.008471971 0.100249732
14/01/2011 34928.27 29.43 0.020515928 -0.045719844
21/01/2011 34594.88 28.03 -0.00954499 -0.047570506
28/01/2011 34734.82 32.24 0.004045107 0.150196218
4/02/2011 35373.71 32.24 0.018393359 0
11/02/2011 35534.51 32.24 0.004545749 0
18/02/2011 36016.64 33.64 0.013567937 0.043424318
25/02/2011 35386.79 31.54 -0.01748775 -0.062425684
4/03/2011 35706.2 33.64 0.00902625 0.066582118
11/03/2011 34170.04 35.04 -0.04302222 0.041617122
18/03/2011 34040.56 36.44 -0.003789284 0.039954338
25/03/2011 34926.74 36.44 0.026033062 0
1/04/2011 35808.44 32.07 0.025244268 -0.119923161
8/04/2011 36390.68 27.7 0.016259854 -0.136264422
15/04/2011 35740.79 24.05 -0.017858693 -0.131768953
22/04/2011 36194.98 24.05 0.012707889 0
29/04/2011 35527.91 24.05 -0.018429904 0
6/05/2011 34942.26 23.32 -0.016484223 -0.03035343
13/05/2011 34772.72 23.32 -0.004852004 0
20/05/2011 34999.19 23.32 0.006512864 0
27/05/2011 34649.2 22.59 -0.009999946 -0.031303602
3/06/2011 33959.18 21.86 -0.019914457 -0.032315184
10/06/2011 33804.79 21.86 -0.004546341 0
17/06/2011 33232.86 20.41 -0.016918608 -0.066331199
24/06/2011 33459.54 20.41 0.00682096 0
1/07/2011 34077.1 19.68 0.018456918 -0.035766781
8/07/2011 34549.4 20.41 0.013859747 0.037093496
15/07/2011 33204.34 18.95 -0.038931501 -0.071533562
22/07/2011 34164.3 20.41 0.028910679 0.077044855
29/07/2011 32841.59 18.95 -0.038716145 -0.071533562
5/08/2011 30472.6 19.68 -0.07213384 0.038522427
12/08/2011 31005.98 18.95 0.017503593 -0.037093496
AAU Company Valuation Report Page 44
19/08/2011 30578.23 18.22 -0.013795726 -0.038522427
26/08/2011 31445.24 21.86 0.028353832 0.199780461
2/09/2011 31846.26 23.32 0.012752964 0.066788655
9/09/2011 31567.35 26.24 -0.008758014 0.125214408
16/09/2011 31270.96 25.43 -0.009389131 -0.030868902
23/09/2011 29426.26 27.74 -0.058990834 0.090837593
30/09/2011 30239.41 29.28 0.027633481 0.055515501
7/10/2011 31405.66 27.74 0.038567221 -0.052595628
14/10/2011 31729.47 27.74 0.010310562 0
21/10/2011 31248.43 26.97 -0.015160669 -0.027757751
28/10/2011 32846.67 26.2 0.05114625 -0.028550241
4/11/2011 32302.32 26.2 -0.016572456 0
11/11/2011 32631.34 26.97 0.010185646 0.029389313
18/11/2011 31733.38 27.74 -0.027518331 0.028550241
25/11/2011 30273.18 27.74 -0.046014638 0
2/12/2011 32581.36 25.43 0.076245046 -0.083273252
9/12/2011 31940.43 25.43 -0.019671677 0
16/12/2011 31608.67 26.2 -0.010386836 0.030279198
23/12/2011 31517.42 26.2 -0.002886866 0
30/12/2011 30879.11 26.2 -0.02025261 0
6/01/2012 31274.64 26.2 0.012808983 0
13/01/2012 31939.71 26.2 0.021265473 0
20/01/2012 32273.36 26.2 0.010446244 0
27/01/2012 32644.34 26.2 0.01149493 0
3/02/2012 32361.19 26.2 -0.008673785 0
10/02/2012 32341.05 26.97 -0.00062235 0.029389313
17/02/2012 31970.98 26.97 -0.011442733 0
24/02/2012 32993.59 26.2 0.031985569 -0.028550241
2/03/2012 32887.44 28.51 -0.003217292 0.088167939
9/03/2012 32471.95 30.05 -0.012633698 0.054016135
16/03/2012 32974.64 29.28 0.015480746 -0.02562396
23/03/2012 32960.69 29.28 -0.000423052 0
30/03/2012 33472.32 29.28 0.01552243 0
6/04/2012 33356.08 29.28 -0.00347272 0
13/04/2012 33383.59 29.28 0.000824737 0
20/04/2012 33717.12 30.9 0.009990837 0.055327869
27/04/2012 33682.74 31.72 -0.00101966 0.026537217
4/05/2012 33949.2 30.9 0.007910877 -0.025851198
11/05/2012 33160.2 30.9 -0.023240607 0
18/05/2012 31391.84 26.84 -0.053327785 -0.131391586
25/05/2012 31260.98 28.46 -0.004168599 0.060357675
1/06/2012 31599.36 28.46 0.010824357 0
8/06/2012 31601.95 28.46 8.19637E-05 0
15/06/2012 31552.48 29.28 -0.00156541 0.028812368
22/06/2012 31481.55 29.28 -0.002248001 0
AAU Company Valuation Report Page 45
29/06/2012 31904.52 27.65 0.013435488 -0.055669399
6/07/2012 32402.63 30.09 0.015612521 0.088245931
13/07/2012 31813.76 26.84 -0.018173525 -0.108009305
20/07/2012 32724.61 29.28 0.028630693 0.090909091
27/07/2012 32807.59 30.9 0.002535706 0.055327869
Appendix 2: Dividend forecast (DDM)
Actual
2012 2013 2014 2015 2016 2017 2018 2019
Dividend Growth rate 6% 6% 6% 13% 13% 13% 3%
DPS (cent) 1.78 1.86 1.97 2.08 2.36 2.66 3.01 3.1
Annuity 243.78
Time period 0 1 2 3 4 5 6 7
require rate of
return
0.0435 0.0435 0.0435 0.043 0.0435 0.043 0.0435 0.04348
Discount factor 1 0.9583 0.9184 0.88 0.8435 0.808 0.7746
Discount DPS 1.778 1.8059 1.834 1.9866 2.151 2.3297
Discount Annuity 188.85
Total 200.7
NPV ($) 2.01
y = 0.627x + 0.0015
R² = 0.0579
-0.3
-0.2
-0.1
0
0.1
0.2
0.3
0.4
0.5
-0.2 -0.15 -0.1 -0.05 0 0.05 0.1 0.15
AAU
Weekly
Returns for lat
4 Years
S&P Weekly returns for lat 4 years
Beta for AAU with the s&P/ASX200
AAU Company Valuation Report Page 46
Appendix 3: DDM Beta and Risk Premium
Sensitivity
market risk premium 0.5501 0.6501 0.7501 0.8501 0.9501 1.05
0.0161 3.091 2.433 2.006 1.707 1.485 1.31
0.0261 1.607 1.309 1.104 0.955 0.841 0.75
0.0361 1.086 0.895 0.761 0.663 0.586 0.53
0.0461 0.82 0.68 0.581 0.507 0.45 0.4
0.0561 0.658 0.548 0.47 0.411 0.365 0.33
0.0661 0.55 0.459 0.394 0.345 0.307 0.28
Rf 0.031 0.031 0.031 0.031 0.031 0.03
E(Ri) 0.04 0.048 0.059 0.071 0.085 0.1
growth rate 0.034 0.034 0.034 0.034 0.034 0.03
dividend 0.018 0.018 0.018 0.018 0.018 0.02
Appendix 4: Dividend Growth Rate Sensitivity
phase
2
growth
rate
phase 1 growth rate 0.1 0.11 0.12 0.13 0.14 0.15 0.16 0.17
0.03 1.639 1.682 1.726 1.771 1.817 1.863 1.910 1.958
0.04 1.687 1.731 1.777 1.823 1.870 1.917 1.966 2.015
0.05 1.735 1.781 1.828 1.875 1.924 1.973 2.023 2.074
0.06 1.785 1.832 1.880 1.929 1.978 2.029 2.080 2.133
0.07 1.835 1.884 1.933 1.983 2.035 2.087 2.139 2.193
0.08 1.887 1.937 1.987 2.039 2.092 2.145 2.199 2.255
0.09 1.939 1.990 2.043 2.096 2.150 2.205 2.261 2.317
0.1 1.993 2.045 2.099 2.153 2.209 2.265 2.323 2.381
Appendix 5: Historical FCFE Growth rate 2006 2007 2008 2009 2010 2011
NPAT -7298 3926 271 -7138 1392 1562
capital expenditure 3927 2383 2294 590 1006 2002
depreciation 664 625 665 595 349 585
current asset 37635 42126 28708 40271 39063 27686
AAU Company Valuation Report Page 47
current liability 34352 38004 36490 37506 35841 24558
working capital 3283 4122 -7782 2765 3222 3128
chg in working capital 0 839 -11904 10547 457 -94
total liablilty 34829 38354 26979 37933 36468 25203
total total assets 50776 55590 42140 45822 44850 33897
Debt ratio 69% 69% 64% 83% 81% 74%
FCFE 0 3120.785 3967.708 -
8952.98 1183.805 1222.673
share outstanding 60677 60677 60677 60677 60677 60677
FCFE per share 0 0.051433 0.065391 -
0.14755 0.01951 0.020151
FCFE growth rate 0 0 27% -326% -113% 3%
Appendix 6: Operating expenses history
2006 2007 2008 2009 2010 2011
operating expenses 39850 32297 31624 37104 26504 25547
decreasing rate 0 23% 2% -15% 40% 4%
Appendix 7: AAU’ share price FCFE model
Actual
2011 2012 2013 2014 2015 2016 2017 2018
FCFE growth rate 20% 20% 20% 30% 30% 30% 3%
FCFE pre share 0.02 0.024 0.029 0.035 0.045 0.058 0.076 0.078
Annuity 2.657
time period 0 1 2 3 4 5 6 7
discount factor 1 0.9583 0.9184 0.88 0.8435 0.808 0.7746
discount FCFE p/s 0.0229992 0.02644992 0.0304128 0.0379 0.0472 0.05881
discount annuity 2.05811
lNPV ($) 2.2819
Appendix 8: discount sensitivity
market risk AAU
Beta
Premium 0.55009 0.65009 0.75009 0.85009 0.95009 1.05009
0.0161 4.036 3.17609501 2.61824399 2.227078697 1.9376 1.7147
0.0261 2.0966 1.70729204 1.439941049 1.244984463 1.09652 0.9797
0.0361 1.4161 1.1674146 0.993038428 0.863985343 0.76462 0.6857
0.0461 1.0691 0.88694585 0.757835331 0.661537017 0.58695 0.5275
0.0561 0.8587 0.71513602 0.612713045 0.535952964 0.47628 0.4286
0.0661 0.7175 0.59908716 0.514238526 0.450442427 0.40073 0.3609
AAU Company Valuation Report Page 48
Appendix 9: FCFE growth rate sensitivity
phase
2
growth
rate
phase 1 growth
rate 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8
0.1 2.6866 2.75753773 2.829802692 2.903360383 2.97822 3.0544 3.1319 3.2107
0.2 3.4797 3.57190221 3.665721778 3.761219667 3.85841 3.9573 4.05793 4.1603
0.3 4.4159 4.53306427 4.6523476 4.773764765 4.89733 5.0231 5.15101 5.2812
0.4 5.5069 5.65322031 5.802202315 5.953849426 6.10819 6.2652 6.42502 6.5876
0.5 6.7646 6.94456673 7.127808084 7.314327398 7.50415 7.6973 7.89384 8.0938
0.6 8.2009 8.41929993 8.641687063 8.868052429 9.09843 9.3329 9.57137 9.814
0.7 9.8276 10.0896163 10.35636141 10.62787827 10.9042 11.185 11.4715 11.763
0.8 11.657 11.9677122 12.28435329 12.60665866 12.9347 13.268 13.6081 13.954
Appendix 10: P/E Ratio forecast 2013
2012 2013
current price 0.155 2
dividend growth rate 0.06
earings per share 0.178 0.18868
estimated P/E
ratio 0.8708 10.5999576
Appendix 11: AAU book share value 2007-2011
('000 in $) 2007 2008 2009 2010 2011
book equity 17240 15160 7890 8380 8690
share oustanding 60677 60677 60677 60677 60677
book value pre share 0.284127 0.249848 0.130033 0.138108 0.143217
share price 0.35 0.25 0.2 0.17 0.16
P/B ratio 1.23 1.00 1.54 1.23 1.12
Appendix 12: STW book share value 2007-2011
('000 in $) 2007 2008 2009 2010 2011
book equity 293930 280690 367750 384440 396300
share oustanding 192900 190500 357600 357700 356100
book value pre share 1.523743 1.473438 1.028384 1.074755 1.11289
share price 2.12 0.61 0.75 1.06 0.84
P/B ratio 1.39 0.41 0.73 0.99 0.75
AAU Company Valuation Report Page 49
Appendix 13: DIG book share value 2007-2011
('000 in $) 2007 2008 2009 2010 2011
book equity 11840 16740 15760 22870 6700
share oustanding 132600 457400 457400 849500 837700
book value pre share 0.089291 0.036598 0.034456 0.026922 0.007998
share price 0.4 0.3 0.2 0.2 0.2
P/B ratio 4.48 8.20 5.80 7.43 25.01
Appendix 14: AAU NTA Backing Model history
('000 in $) 2007 2008 2009 2010 2011
book equity 17240 15160 7890 8380 8690
intangile asset 10220 10550 3330 3160 3230
share oustanding 60677 60677 60677 60677 60677
NTA 0.12 0.08 0.08 0.09 0.09
Appendix 15: STW NTA backing Model history
('000 in $) 2007 2008 2009 2010 2011
book equity 293930 280690 367750 384440 396300
intangile asset 279020 341320 381640 382850 409910
share oustanding 192900 190500 357600 357700 356100
NAT 0.08 (0.32) (0.04) 0.0044 (0.04)
Appendix 16: DIG NTA Backing Model history
('000 in $) 2007 2008 2009 2010 2011
book equity 11840 16740 15760 22870 6700
intangile asset 24390 25300 15020 23400 8450
share oustanding 132600 457400 457400 849500 837700
NAT (0.09) (0.02) 0.0016 (0.0006) (0.0021)
