Forecast Financial Statements

In this assignment you will prepare and provide a report of a fundamental analysis based on the ASX 200 Company allocated to your team. The objective is to provide a recommendation in regards to JBH shares to your potential client as at 30/06/2013: BUY (undervalued), SELL (overvalued) or HOLD.

Due: Sunday 14 September 2014, midnight.

Due to the timing of this assignment, there will be no extensions granted. Please submit the work you have completed by the due date and part marks will be allocated.

Length: maximum 10 A4 pages (excluding any Appendix)

Weighting: 30%

Details:

This is a group assignment and work must be completed in your allocated team. In this final report you need to include the analysis provided in your oral presentation (taking into account any feedback received from assignment 1).

You will prepare forecast financial statements for your allocated company, showing the forecast assumptions (including the discount rate) and the basis for making those assumptions. The detailed forecast performance should be based on the research performed in assignment 1 (macroeconomic, industry, company strategy, accounting issues and adjustments, and initial financial statement analysis) that will produce JBH’s pro-forma (condensed/recast) financial statements. In particular draw on your conclusions derived through the top down analysis in the context of the company’s operational environment, such as:

· Economic environment and outlook

· Industry competitive environment and outlook

· Historical performance

The key assumptions to support the forecast include, but are not limited to:

· Time period of forecast (growth should be stabilised towards end of explicit forecast period)

· Growth in revenues and expenses (must be consistent)

· Profit margins (realistic and stabilised margins)

· Terminal value assumptions (reasonableness)

The key assumptions required to achieve growth include, but are not limited to:

· Capital (Debt or/and Equity)

· Net working capital

· Capital expenditure (operating assets/capacity)

· People

Note: consistency amongst variables is paramount.

The analysis should be combined with any other relevant assumptions considered by the group. The assumptions should be connected to JBH’s key value drivers and strategy, particularly but not limited to forecasting sales growth, operating costs, S&G expenses, changes in book value of operating assets (working capital need, capital expenditures – new fixed assets/maintenance, and depreciation expenses), changes in book value of debt (if applicable, depending on underlying assumptions provided), and terminal year financial statements (balance sheet, P&L, Cash Flows, any “normalised” items). Applicable questions e.g.: How many years of explicit forecast? Why? What is the proposed treatment for abnormal earnings, unusual and non recurring items during the forecast period?

Assumptions related to growth of operations should be based on research and analysis performed during assignment 1. E.g. economic and industry outlook research combined with financial analysis to support growth rate estimates for the forecast period.

To estimate the discount rate (WACC) for JB-Hi Fi (JBH), you will need to collect some financial data as at 30/06/2013 or immediately prior to that date (valuation date). Amongst other sources, you should consider the Bulletin Statistical Tables F2 (daily) and F3 available through the RBA website, Bloomberg and Yahoo Finance. JB-Hi Fi uses a number of sources of debt and equity. You can choose to make the following assumptions:

- Borrowings on the Balance Sheet (in their annual report) reflect market value.

- Consider that an appropriate credit rating for JBH is BBB and use an average yield on corporate bonds – Yield 10 years with similar credit rating (see RBA Table F3).

- JBH has no preference shares issued.

- The CAPM is used to estimate the cost of ordinary equity (as per topic 8).

- The 10-year Commonwealth Government bond rate is an appropriate proxy for the risk-free rate (see RBA Table F2 – Daily).

- The beta for JBH can be sourced from organisations such as S&P, Value Line, DataStream, Aspect Huntley, Bloomberg and Reuters. You may wish to use a current beta for the purposes of the assignment, assuming it has not changed much since the valuation date.

- The market risk premium (also called equity risk premium) is 7%.

- JBH is assumed to calculate its WACC based on the classical tax system (no dividend imputation).

- The company’s tax rate is 30%.

You will then estimate the JBH market value as at valuation date (30/06/2013) based on the forecasts as per material covered in topics 5, 6 and 8. From the enterprise value, you will need to calculate JBH’s intrinsic equity value and share price in order to compare to the market historical JBH close share price as at 30/06/2013 (see historical prices on the DatAnalysis database through the SCU library or consider ASX/Yahoo Finance).

In addition, you should calculate the alternative value of the stock based on price multiples as per material covered in topic 7. Are the multiples valuations resulting in different values? Why? What assumptions were considered for the multiple valuations? Are they in line with the DCF assumptions?

Finally, compare each of your calculations to the stock price at the close of business on 30 June 2013 and provide a recommendation (BUY/SELL/HOLD) and explain the differences encountered.

Ensure that you set out full workings in a clear and logical fashion. Label all input figures, state any relevant assumptions necessary for their use, and reference their source.

Marking criteria

Marks for this assignment will be awarded as follows:

· Demonstrated understanding of the issues (4 marks)

· Application of top down valuation approach (4 marks)

· Application of appropriate valuation techniques (4 marks)

· Quality of underlying forecast assumptions (4 marks)

· Accuracy of calculations and answers (4 marks)

· Critical thinking and analysis; and (4 marks)

· Clarity and professionalism of communication, including referencing (3 marks)

The assignment should include all necessary supporting calculations. Table format for presenting numerical analyses is preferable; however graphs can also be employed. If you use a spreadsheet it should be embedded into your assignment document at the place where it is discussed. Ensure that readers will be able to easily follow what you have done and state any underlying assumptions. Be succinct however provide an in-depth analysis.

Group blog contributions (2 marks)

Group blogs have been created and you will be gradually working towards completion of A2 through weekly blog posts. Blog contributions for A2 start in week 6 (topic 5) and finish in week 10 (topic 8). The quality of the one short individual post is essential to attain 0.5 marks per weekly post. Posting similar discussion/content to a group member’s previous blog will not be considered a quality contribution.

Teamwork survey – Blackboard test (1 mark)

One mark will be assigned to a completed individual teamwork survey. The teamwork survey is a confidential assessment of group members and self-performance. Particularly questions 6 and 7 will be used to estimate a weighted individual contribution towards the final assignment. The group’s overall grade (based on marks given to content plus oral presentation above) will be adjusted to the weighted individual contribution, hence impacting on individual grades as a fairness allowance.