Myer Financial Analysis 2015-2016

This assignment tasks students with analyzing Myer's financial performance between 2015 and 2016. It requires calculating and interpreting key financial ratios such as the Price-to-Earnings (P/E) ratio and Weighted Average Cost of Capital (WACC). The analysis uses provided financial data, including market prices per share, EPS, and debt and equity figures, to evaluate Myer's profitability and cost of capital.

Introduction to Accounting and Finance
Assessment 2 Part B
(Financial Management Analysis)
MYER Holdings Limited (MYR)

Executive Summary:
In this report we are analysing the financial statement of Myar holding Limited on the basis
of various parameters. The report presenting opinion on whether financial position of the
company is sound or not. It also represents stability of the company in terms of financials. It
also present analysis of capital structure of the company.
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TABLE OF CONTENTS
(I) DEBT VALUATION of MYER- 3
a) Short Term and Long term debts 3
b) Consistency with Industry 3
c) Influence of industry on debt structure 3
d) Cost of debt 3
(II) SHARE VALUATION of MYER -
a) Cost of equity 4
b) Evaluation of revenue, EPS, dividends and growth expectations 5
c) Valuation of Company’s stock 6
i. Comparables Approach (P/E)
ii. Constant Growth rate model
d) Comparison of above models price with market price 7
e) Additional data for valuation of stock 7
(III) COST OF CAPITAL of MYER –
a) Weighted average cost of capital (WACC) 7
b) Tax rate 8
c) Difference between cost of debt and equity 8
d) Current Liabilities inclusion in cost of capital calculation 9
e) Value of WACC Calculation 9
f) Current projects undertaken by using WACC in decision making 9
g) Capital structure 9
h) Optimal Capital Structure 9
(IV) MARKET ANALYSIS of MYER –
a) Financial Performance 10
b) View of Financial Analysts 10
c) Other item different in MYER 11
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DEBT VALUATION of MYER-
a) Short Term and Long term debts -
The debts of the Company as at 30th July, 2016 consist of a revolving cash advance
syndicated facility of $600 million.
As at 30th July, 2016 and 25th July, 2015 the company owed the following amounts
of short-term and long-term debts:-
Nature of debt 2016 2015
$'000 $'000
Total Debt (Long term) 147,273 441,179
Less: Cash Equivalents
(deducted to know net debt) (45,207) (53,323)
Net Debt 102,066 387,856
b) Consistency with Industry
Consistent with others in the industry, the company structures capital on the basis of
various balance sheet ratios including the gearing ratio. This ratio is calculated as net
debt divided by total capital. Net debt is calculated as total borrowings less cash and
cash equivalents. Total capital is equity plus net debt. Thus, the debt structure is
consistent with the industry as the company regularly takes steps to ensure that the
capital gearing ratio is kept lower and consistent with its peers in the industry.
c) Influence of industry on debt structure
MYER group continues to put in best efforts in managing its capital structure
efficiently and to make it consistent with the industry. This is done through
monitoring the Capital gearing ratio of the company and continuously comparing it
with the peers in the industry.
To stand in the market and to compete with the competitors in the market, the
gearing ratio of the company has decreased during 2016 primarily driven by a
decrease in net debt and an increase in equity.
d) Cost of debt
Cost of debt refers to the interest rate paid by a company on its debt
obligations. It is calculated as follows:-
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SHARE VALUATION of MYER-
a) Cost of Equity
Cost of Equity refers to the return that a company pays for the risk undertaken by its
shareholders in investing their capital.
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b) Evaluation of revenue, EPS, dividends and growth expectations
(a) Revenue
Total sales of the company rose by 2.9 percent to approx. $3,289.6 million due to
steps taken for rollout of wanted brands and improved customer service as well as
continuous growth in the company’s business.
(b) EPS = Earnings after tax / No. of shares outstanding
Since the earnings of the company have increased in 2016 as compared to previous
year, there has been growth in EPS from $5.05 per share to $7.67 per share.
(c) On account of the progress made through implementation of New Myer, the
company declared a total dividend of 5 cents per share.
c) Valuation of Company’s stock
Comparables Approach (P/E):-
Under this method of stock valuation, the stock market price is divided by EPS of
the company.
Formula = Stock price per share / Earning per share (EPS)
The Valuation of stock of MYER as per P/E ratio is:-
The P/E ratio of the company has reduced to 17.46% but as compared
to the industry the ratio is good and can be better with continued
growth of the company.
Constant Dividend Growth Rate Model:-
This model considers dividend growth as a measure of stock valuation and to decide
whether or not a particular investment should be bought.
Formula = (dividend of current year x (1+growth in dividend))/(required return-dividend
growth)
The Valuation of stock of MYER as per this model is as follows:-
Particulars 2016 2015 2014 2013 2012
Dividend per share (in cents)
5.0
0
7.0
0 14.5 18 19
Dividend Growth rate
(28.5
7)
(51.7
2)
(19.4
4)
(5.2
6)
(15.5
6)
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Since the growth rate of dividends of the company is negative, therefore it is not possible to
do stock valuation.
To do stock valuation under dividend growth model, there should be continuous growth in
dividends payouts during the last five years.
Thus factors affecting stock valuation as explained above are:-
i. EPS
ii. DPS
iii. Dividend growth rate
iv. Market Price
d) Comparison of above models price with market price
With respect to MYER, P/E ratio is more suitable and effective method of stock
valuation as dividend growth rate is negative and it is not possible to make stock
valuation through dividend growth model.
e) Additional Data and information
In addition to factors mentioned above, the characteristics of stock, its compatibility
and closeness with its intrinsic value and discounted value of the future earnings of
the company should be kept in mind while doing stock valuation.
COST OF CAPITAL of MYER-
a) Weighted average cost of capital (WACC)
It is the weighted average cost of equity, preference, debt and any other capital and
the weights used for averaging are the quantum of capital supplied by respective
capital.
Formula:-
WACC = Ce x E/F + Cd x (1-Tc) x D/F
Where,
Ce = Cost of Equity
Cd= Cost of Debt
Tc= Corporate Tax Rate
E = Market Value of Company’s Equity
D = Market Value of Company’s Debt
F = Total Market Value of Company
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b) Tax rate
The Australian Tax rate is 30% on companies.
The tax rate as specified above is used in calculation of weighted cost of debt.
After debt cost of debt (1-Tc) is used as company claims tax deductions on the
interest paid by it on debt and thus net cost of debt is interest paid less tax
deductions claimed.
c) Difference between cost of debt and equity
There is difference between the cost of equity and debt as debt refers to the
borrowed funds and have to be repaid at a later date with interest payable at
regular intervals at a fixed rate called interest rate. This interest rate is the cost of
debt. Equity is the funds invested by the shareholders. Though equity is not to be
repaid, but there is a return of investment that the shareholders expect based on
performance of the company. This is known as cost of equity. Thus cost of equity
and debt will always be different.
c) Current Liabilities inclusion in cost of capital calculation
The current liabilities are not included in cost of capital calculation. The cost of
capital calculates the opportunity cost of different sources of capital employed in
the company. Opportunity cost is what a company gives up by investing some
scarce resources in one project or initiative instead of another. Capital involves all
monies invested in the business and includes all debt and equity. Although current
liabilities are not included in cost of capital calculation because it is not a capital,
but it is considered when cash flows of an internal project are calculated.
d) Value of WACC Calculation
The WACC enables a company to know minimum cost which it has to
pay for using equity and debt capital. MYER’s WACC of 6.12% indicates
the minimum rate of return that MYER has to earn to create value for
the risk undertaken by its investors.
It is very effective in estimating the cost and evaluating projects with
same risk and thus planning investments.
e) Current projects undertaken by using WACC in decision making
New Myer has been built up after calculation and evaluation with the help of
WACC. It has been estimated that the New Myer will lead to sales growth of
more than 3% in the next three years and return on funds employed to 15% from
9.1% by opening a number of new stores and better service and investment
models.
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f) Capital structure
The capital structure of Myer consists of both debt and equity as follows:-
Particulars 2016 2015
$'000 $'000
Equity
1,107,765.0
0
863,016.0
0
Debt
147,273.0
0
441,179.0
0
Total
1,255,038.0
0
1,304,195.0
0
The capital structure of Myer is consistent with the industry and debt equity ratio
is quite low as compared to the industry.
g) Optimal Capital Structure
An optimal capital structure is the perfect ratio of debt and equity for a company
that maximizes its return and minimizes its cost of capital. 2:1 is considered as an
ideal debt-equity ratio and Myer has a lower ratio which is considered positive.
The growth of economy of a country and economic balances and imbalances have a
great impact on the stock prices of any company.
When the growth of market is low, the company opts for more of debt and less
equity. And if the market is expected to grow, equity is preferred to debt.
Short-term loans from banks and other financial institutions and long-term loans by
through stocks and debentures are availed as debt. The value of money affected by
economy’s economic conditions, has a great impact when funds are raised by issue
of securities.
MARKET ANALYSIS of MYER –
a) Financial Performance
Retail industry in Australia has increased by approx. 3% during 2016 which is consistent
with the growth observed during previous year. Total sales of MYER grew by 2.9% and
is expected to rise by 3% till 2020. Myer Holdings Limited’s ROE of approx. 6% over
the past year, compared to its industry’s 17.4%, indicates that investors would have been
better off choosing the broader industry in terms of returns generated on their committed
capital.
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For a company to create value for its shareholders in the industry, it must generate an
ROE higher than the cost of equity. Myer Holding Limited plans to grow by 0.6% till
2018. (Myer Holdings Ltd 2016).
b) View of Financial Analysts
Myer Holdings Ltd. is financial stable and healthy. This is evident by its relative
increase in its ROA, ROE, profit margin as well as its increase in interest during 2016.
Although decrease in P/E ratio and dividend yield may be observed in the current year,
the company may be considered financially healthy on account of increase in new
profits during 2016. Its debt equity ratio is also less and has good financial liquidity and
solvency ratios. Therefore, Myer Holdings Ltd. Has the capability to increase its market
share and grow in the industry.Yes I agree with the views of the analysts and this is
clearly evident from the financial data of the company.
c) Other item different in MYER
Initiatives are continuously taken by Myer Holdings in the form of New Myer with new
marketing strategy and improved customer service to maintain its position and to
increase its market share. Thus the confidence Myer has in itself and continuous
development of new strategies and policies makes it different and unique from other
players in the market.
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Appendix:
1.
Cost of debt = Interest paid / Total Debt x 100
2016 2015
$’000 $’000
Interest Paid 13,146 21,808
Total Debt 147,273 441,179
Cost of Debt (in%) 8.93 4.94
2.
Cost of Equity = (Dividend per share (DPS) / Market price of Stock) + Growth rate of
Dividends
2016 2015
Dividend per share (in $) 0.05 0.07
Total Equity (in $'000) 1,107,765 863,016
Current market price of Stock 1.34 1.18
Dividend Growth Rate (in%) 0.0238 0.0163
Cost of Equity (in%) 0.0611 0.0757
or 6.11% 7.57%
*Growth rate of dividends = (1 - Payout ratio) x Return of Equity
Payout Ratio (DPS/EPS) 0.57 0.53
Return on Equity 5.51% 3.48%
DPS 0.05 0.07
EPS 0.088 0.132
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3.
(a) Revenue
Particulars 2016 2015
in $'000 in $'000
Total Sales
3,289,56
8
3,195,62
6
Less: Concessional Sales
(610,55
3)
(501,15
3)
Less: Sales amount deferred under customer loyalty program
(38,86
1)
(40,12
2)
Net Sales
2,640,15
4
2,654,35
1
Other Operating Revenue
161,68
9
131,42
3
Finance Revenue
90
6
75
3
Total Revenue/Income
2,802,74
9
2,786,52
7
4.
(b) EPS = Earnings after tax / No. of shares outstanding
Particulars 2016 2015
in $'000 in $'000
Earning after Interest, Tax & Dividend
60,54
3
29,82
6
No. of Shares Outstanding
789,06
3 590324.702
EPS (in $)
0.07
7
0.05
1
EPS (in cents)
7.6
7
5.0
5
5.
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(c) Dividends declared
Particulars 2016 2015
in $'000 in $'000
Dividend per share (in $)
0.0
5
0.0
7
Dividend per share (in cents)
5.0
0
7.0
0
6.
Particulars 2016 2015
Market price per share
1.3
4
1.1
8
EPS
0.07
7
0.05
1
P/E ratio
17.4
6
23.3
5
WACC Calculation
2016 2015
Ce 6.11 7.57
Cd 8.93 4.94
Tc 30% 30%
E
1,057,343.9
1
696,583.1
5
D
102,066.0
0
387,856.0
0
F
1,159,409.9
1
1,084,439.1
5
Weighted Equity cost (Ce x E/F) (A) 5.5721 4.8625
Weighted Debt cost (Cd x (1-Tc%)x D/F) (B) 0.5503 1.2368
Total WACC (A) + (B) 6.12 6.10
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REFERENCES
Investopedia, n.d., Cost of Debt, Viewed on 08/10/2017,
<http://www.investopedia.com/terms/c/costofdebt.asp#ixzz4uhhle1iX>
Investopedia, n.d., Cost of Equity, Viewed on 08/10/2017,
<http://www.investopedia.com/terms/c/costofequity.asp>
Dividend Monk, n.d., Stock Valuation: An Overview,
<https://www.dividendmonk.com/stock-valuation-methods/>
Investopedia, n.d., Investment Valuation Ratios: Price/Earnings Ratio,
<http://www.investopedia.com/university/ratios/investment-valuation/
ratio4.asp#ixzz4ukFvqCae>
MYER, 2016, Annual Report,
<http://investor.myer.com.au/FormBuilder/_Resource/_module/dGngnzELxUikQxL5gb1cg
A/file/Myer_Annual_Report_2016.pdf>
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