A 5,000 words report plus a 250 words executive summary. A report based on very detailed research into company accounts. Analyse company’s business activities – Use your own explanation of how company’s business model works
Identify key drivers of business model and competitiveness – Use independent data on company’s markets – Assess future prospects for these markets • Compile financial ratios for performance, efficiency, liquidity and solvency for company and at least three competitors – Ratio analysis over the past five years – Comparing these ratios – draw your own conclusions, NOT just descriptions Structure of the Project REPORT SUMMARY: – equity data, company fundamentals, prospects, valuation & recommendation • Show key data on share price & performance, valuation price & ratios and investor recommendation • Two to three statements which explain your forecasts for the company’s revenue, income and cash flow • Key economic and market forces driving company’s prospects • How this translates into valuation, target price & recommendation
1) INTRODUCTION: • Summarise company’s activities and business model – What does it sell? Where? To whom? With what competitive advantage? • Main markets served by company – by region, product, customer type •Typical features which MIGHT affect your company: – Demographics, social trends, consumer behaviour, fashion, changes in global trading patterns, environmental issues • Avoid lengthy history and descriptions • Use short, sharp summary of what drives this business) – Company’s business model – which markets drive its revenue and profit?
2) SECTOR REVIEW: – the market forces driving demand, supply, competition, prices, costs & margins in the sectors which contribute most of the company’s revenue and profits • Sector comments must be relevant to company’s operations • Identify two to four key market forces driving demand • Understand how competition works in sector • Reach clear conclusion on likely future directions • Reach clear conclusions about specific market forces • Support those conclusions with statistical evidence • Do NOT simply download economic and sector data without explaining how it affects sector prospects
3) COMPANY ASSESSMENT: – company’s competitive position in sector, past performance relative to peers (using financial ratio analysis), key drivers of future trading, conclusion on their likely direction and impact on financial forecasts • Assess historic performance and future prospects • Analyse 5-year trends in financial ratios: – Has it improved or deteriorated in recent years? –
Have there been any volatile movements – what may have caused them? – Is the company reliable in delivering sustained earnings growth? – Or is it poised for recovery from a low point? Or unlikely to recover? • Compare company’s performance with sector peers – Has it performed better or worse than its peers? – Are its finances stronger or weaker than its peers? – Has it been operated more efficient than its peers?
4) FORECASTING: – translate trading assumptions into sales, costs, income & cash flow forecasts FORECASTS FOR: • Revenue from demand, price & competitor analysis • Expenses from assessment of supplier pressures and movement in operating overheads • Net income & earnings from tax, debt & interest rates • Dividend from earnings and payout ratios • Cash flow from working capital and depreciation accruals • Balance sheet from accruals, retained earnings and cash flow
5) VALUATION: – translate forecasts into DCF & DDM valuations relative to share price, and Price Multiples relative to peers Absolute Valuation Methods / Intrinsic Value • Convert dividend forecast into DDM • Convert free cash flow forecast into DCF Relative Valuation Methods / Price Multiples • First-year forecast of sales, earnings & book value of equity • Calculate ratios of: – P/E – P/Sales – P/Book • Compare with peer company ratios
6) RECOMENDATION AND CONCLUSION: • If wide variations (>15%) between these valuations, check assumptions – does cash flow over/understate by using too high/low depreciation charge? – does dividends over/understate by using too high/low payout ratio? • If after re-examination values still widely divergent, explain why • Compare each valuation with current share price to identify Buy (valuation > share price) or a Sell (share price > valuation) Criteria for marking the reports USE OF DATA • How well have you used data to compile an INDEPENDENT view of company prospects, accessing websites of: – Company & its competitors – Industry bodies – Government statistics and reports – Financial and economic reports LOGIC, ARGUMENT & FINANCIAL FORECASTS • Logical argument to support assessment of company prospects • Accuracy and clear exposition of company’s financial forecasts • Independent thinking to link research data to conclusion • Presentation of argument, financial forecasts and valuation 1-4 added materials is past 5 years statements of BT group 5-9 is reading list for this report