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1SHARHOLDER VALUE ANALYSISOF TULLOW OIL PLC
2Table of ContentsIntroduction3Assumptions and Explanations4Justification of the Variables6Employment of the SVA Model7Comparative Analysis8Sensitivity Analysis9Corporate Financial Event10References14
3Introduction:A company is an artificial entity of which the shareholders are the owners. Owner of abusiness entity shall analyse the benefits and risks associated by making any investmentbefore actually investing into it. Prospective shareholders also make such analysis as theywould will to invest in a company which yields maximum benefit. Such analysis can be doneby various methods like Discounted Cash Flow Method, Net Assets Value Method, NetPresent Value Method, Price Multiples Method, Earnings Multiple Method etc.Amongst other methods, Shareholder Value Analysis is also one such method which might beadopted by the prospective shareholders to arrive at the valuation of shares or the businessentity. The premise on which the Shareholder Value Analysis (SVA) Method is built is tomaximize the net worth/wealth of the shareholders. The value of a company is computedbased on the returns it can generate for its shareholders.An investor may be of two categories. The first category of investor is one who invests into acompany purely to attain short term income like dividends, short term gains. Such investorshave an objective to materialise the benefits shortly without any plans of holding it for longterm. The second category of investors are the one who does not invest just for the sake ofinvesting. Such investors want to park their excess money lying with them so that it can yieldmaximum benefit in long term. Before investing, they look into each and every aspect of theproposed investment, the risks associated with it and the returns that it can generate in longrun. The investor may be from finance or non-finance background. When the investor is fromnon-finance background, he generally opts for a valuation report to be assured that theinvestment is just not made. Then arises the need of valuation analysis.For valuation, the method to be adopted should be chosen wisely. The purpose of valuation isnot just that how much returns can the investment generate but it also serves the purpose ofinvestors as to whether the investment can meet the expectations of the investor.SVA is a modern approach of valuing the business of an entity. As the name suggests, SVAmethod measures the company’s ability to maximize the shareholder’s return on investmentby creating wealth. The owners of a business would always want to maximise their return oninvestment. SVA is an appropriate method as its objective meets with that of the investor.Few advantages of SVA Method are:The strategic decisions are taken that are generally spread over long period.
4It has a universal approach, that is the methodology remains the same for differentcompanies in different regions across the globe which shall also attract investors fromforeign.Its findings help the company to focus on its objective of maximising wealth byincreasing the future cash flowsAssumptions and Explanations while valuing the company under SVA Method:The audited financial reports available on the website of the company has been takenfor making various calculations to arrive at the value of the company.Sales Growth is taken as average of sales growth for the last 5 years.Operating Profit is the Net Operating Profit achieved from operations of the company.Associate Company’s share of profit is taken the percentage of minority shareholdersin the equity capital of the company.Tax Rate is taken at 20% which is the standard rate prescribed under tax laws forcompanies in United Kingdom.Increase in Capital Investment is taken as percentage of difference in the presentyear’s fixed assets over the previous year’s fixed assets. In present case, fixed assetstaken are goodwill, intangible exploration and evaluation assets, property plant andequipment.Increase in Working Capital is taken as percentage of difference in present year’s networking capital over the previous year’s net working capital. In present case,Inventories, Trade receivables, other current assets, current tax assets, trade and otherpayables, provisions and current tax liabilities are taken as components of net workingcapital. Cash and cash equivalents has been excluded from the calculations.The calculations has been computed keeping the forecast period for 5 years.The required rate of return is the same as the Weighted Average Cost of Capital(WACC). WACC is calculate using the weights of equity and debt in respectiveproportion and multiplied with equity and debt cost of capital respectively. The cost ofdebt is arrived at by dividing the total finance cost with the total debt value for the yearended 2015 which includes long term and short term debt.Cost of Equity is calculate using the Capital Asset Pricing Model (CAPM) Method.The Beta factor, which is the sensitivity factor is taken at 1.28 which is the existing betafactor for the company. The Market Returns is at 7.2%.