Value Investing Report: WACC, Risk, NAV, EPV, and Intrinsic Value

This report delves into a comprehensive value investing analysis, focusing on the Weighted Average Cost of Capital (WACC), various business and financial risks, and the Net Asset Value (NAV) of a company. It explores the capital structure, including operating leases and financial commitments, and assesses the company's Return on Invested Capital (ROIC) and operating cash flow. The report also examines the company's assets, liabilities, and implied equity value, along with the Earning Power Value (EPV) and normalized earnings. Furthermore, it provides insights into intrinsic value calculations, including normalized adjusted NOPLATRA and investment capital replacement value. The analysis includes an examination of market data, financial ratios, and macroeconomic factors to determine the value of a company's shares, and the impact of the company's performance and financial health on investment decisions.

Value investing

1 weighted Average cost of capital (WACC) - The WACC is derived by taking equity weights
of 61.02 percent and debt weights of 38.98 percent. Long term debt of the corporation as given in
the annual report of 2020 is 128233 Canadian dollars and the total equity is 200762 Canadian
dollars. The weights have been multiplied with the cost of debt and equity to determine the
WACC. After multiplying the cost with the weights the WACC comes to 11.13%. The
organization capital is weighted proportionately to compute the WACC. This WACC will be
used by the security analyst to assess a particular investment value (Jikia and Kharabadze, 2017,
p-193). The percentage of 11.13 means that an investor will get a minimum return of 11.13% if
he invest in any company and the company are able to yield only 11.13% of return for its
shareholders or investors.
1-1 Business Risk- There are various kinds of business risks that a business has to face
such as competitive risk, legal risk, strategic risk, compliance risk, economic risk, and
reputational risk. These are the risk which are uncontrollable and are not under the
control of the organization. The probabilities of losses are higher in case of business risk.
A businessman cannot control all these risk factors and the ultimate result will be a loss
to the enterprise. There are many strong competitors of Stuart Olson such as Kinsley
Corporation INC, Plaza Construction Corporation, Pepper Construction Company, and
Perini Corporation. The market value of the company in July 2019 was 95 million
Canadian dollars.

1-2 capital structure- It has also been noticed that in 2014 the convertible debenture was
16675000 Canadian dollars and in 2018 it decreased to 80500000 Canadian dollars. The
conversion rate from debenture to equity has fallen from 2014-2018. The investor or debenture
holders are not interested to convert their holdings into equity. The reason behind the fall is that
they are getting a high rate of interest on their investment.
1-2-1 operating lease and other commitments- The Company to carry its business smoothly
has given on lease certain office equipment, construction equipment, shop facilities and office
under the agreement of operating lease. The organization has received the above amount given in
table 8 for the equipment and offices which has been provided on operating lease. The net
payment which has been received from is decreased in 2018 when it is compared with the
financial year 2014. Under operating lease the owner of the assets only received the rent amount
and the asset is also sold to the lessee as in the case of finance lease. The depreciation amount is
borne by the lessor and is written off in the statement of profit and loss. The asset is returned to
the lessor after its use by the lessor.
1-3 financial risk- Investors such as institutional investors would like to invest in the
company but there are also various types of financial risk which investors should know
before investing. Financial risk is a risk which can hamper the revenue or profit of the
enterprise. If the government cannot control their monetary policy then there can arise
financial risk. Many times the organization cannot pay their financial debt such as loan
taken from any financial institution. This can damage their reputation in the market and

the credit rating of the company will also decrease. The financial risk which an individual
face is that they take wrong investment decision due to which suffered huge losses on
their investment. There are also many financial risk which arises due to macroeconomics
factors such as fluctuation in exchange rate, variation in interest rate, changes in policies
of government, technological changes etc. The management of Stuart Olson uses adjusted
cash flow to measure the operating performance and the cash which are left after the
purchase of capital equipment are used in repaying debts, expansion of business, payment
of dividend, and investing in various portfolio. The macroeconomics and
microeconomics elements which can result in reduction of company profits and revenues
are:
 Inadequate execution in project
 Cancellation and unexpected adjustments of projects
 Unexpected changes in the rate of commodities, natural gas, and oil.
 Errors in the cost estimates
 Guarantees given by company
 Changes in the key management
 Shortages of labor
 Fluctuation in the rate of interest and currency rates
 Different compliances related to law
 Unexpected weather condition
Return on invested capital (ROIC) - Company total actual return in 2014 was 39509000
Canadian dollars and in 2018 the actual return has been recorded at 30351000 Canadian dollars.

The percentage of actual return has shown a downward movement in comparison with the
previous years. Return has been determined after adding all the non-cash expenses and the
finance cost of the enterprise. The earning after deducting the tax amount also decreases in 2018.
This decrease in the return could be due to poor investment or due to effect of macroeconomics
factors.
1 2-1 Operating Cash flow- these are the cash flows which a company gained by its business
operation. If a company earned sufficient operating cash flows then ot can manage its
business operation efficiently.
2-2 Invested capital- In 2014 the company had sufficient capital assets to meet all its current or
short term liability/obligations but in 2018 it has been found that the current assets of the
organization is not sufficient so as to cover all its short term obligations. The goodwill which is
extra profit earned due to reputation of the enterprise has been increased when compared to
2014-2018 financial years. This increase in the goodwill may be due to high quality services
provided by the organization to its clients.
3 NET ASSETS VALUE (NAV) - NAV assist to determine the net value of any organization.
The net value is computed by deducting the total liabilities of the enterprise by the total assets.
NAV is mainly used by the asset management of mutual fund to assess the net value of the
portfolio. The per unit price of the portfolio is determined on the basis of NAV. The net
difference between the organization assets and the organization liabilities is the total net worth of
any corporation. The NAV of Stuart Olson in 2005 was 0.68 per share and in 2020 it was 27.5

per share. In 2020 it can be said that the unit or share of Stuart Olson will be traded at 27.5 per
unit.

3.1 Assets- the company has both non-current assets and current assets in its balance sheet.
The current assets are asset which will be realized within a period of 12 months and the non-
current assets such as plant and machinery, building and land will be used by the business to
carry its business operation.
3-1-1 highly liquid assets- the organization also have liquid assets such as trade receivables
which can be easily get converted into cash. Liquid assets are also known quick assets for the
business.
3-1-2 accounting to economic reality assets- a clear picture of accounting should be provided
while doing the accounting of real assets of Stuart Olson. Professional’s skills are required for
carrying out accounting process of the monetary transaction of the organization. The asset should
be classified into current and non-current and if there are any contingent assets in the company
then it should be recorded in the footnotes of the notes to accounts.
3-1.3 hidden assets- these are assets which are not mentioned in the balance sheets and are used
to decrease the value of any fixed assets which are overvalued in the balance sheet.
3-2 liabilities- company liabilities are classified into two categories such as current liabilities and
non-current liabilities. Contingent liabilities whose occurrence is dependent on the non-
occurrence or occurrence of any uncertain event will be reported in the footnotes.
3-2-1 short term liabilities- The liabilities which are payable within 12 months are classified
under liabilities of current nature. Examples of current liabilities are creditors, trade payables,
bills payables etc.

3-2-2 Long term liabilities- the obligations which will be paid by the company after 12 months
are classified under the term non-current liabilities. Examples: debenture or bonds
3-3 implied equity value- these are the value of the company which are multiplied by the total
outstanding shares of Stuart Olson with the offer price announced at the time of agreement.
4 earning power value (EPV) - the stocks of Stuart Olson has been valued by using this
technique. The cost of capital and the current earning are taken into consideration while
computing the EPV.
4-1 NOPLATRA- the operating profit OF Stuart Olson has been calculated after adjusting the
taxes amount.
4-1-1 Normalized earning- the average of the business is determined by dividing the total
earnings of the organization with its business life cycle. The revenues and non-recurring
expenditures are adjusted to arrive at the normalized earnings of the company.
4-1-2 One-time adjustment- the non-recurring items are removed from the value of Profit
before deducting taxes to calculate the normal income and this value is mostly used by the
investment bankers and financial analyst.
4-1-3 taxes and amortization- company income is reduced by applying the method of
amortization and taxes. The company who does not want to pay high amount of tax to the
government used the technique of showing high amount of amortization. Stuart Olson has not
used this method.
4-2 normalized zero growth free cash flow from operation- non-cash expenses which are
included in the income statement is excluded to determine the profitability of any company.

4-2-1 depreciation and maintenance capital expenditure- enterprise can depreciate its non-
current assets such as machinery, furniture and plant by applying depreciation method such as
straight line or reducing method. Capital expenditure is the type of expenditure which is incurred
to derive the future benefits from the assets such as expenditure incurred to increase the seat
capacity in a cinema hall.
4-2-2 income from investment and advances- activities such as purchasing securities or
building or investing in any shares of a company is called investing activities and the 8investors
derived income those activities.
4-3 implied firm value to equity value- the cash flow of any company is determined after
considering the discounting factor and the growth rate which is also the firm value. The loans,
reserves and surplus, and the shares which are included in the capital structures is the equity
value of Stuart Olson.
4-3-1 asset and liability adjustment- the liabilities of the firm and assets of the firm are
adjusted to reflect a true fair values of the organization and this values can be trusted by the
shareholders.
5-1 normalized adjusted NOPLATRA- the profit which has been generated from the core
operation of Stuart Olson has been deducted from the income tax and the tax which are paid by
the company for their normal business are added back to arrive at the correct profit.
5-2 investment capital in replacement value- the amount which is invested to replace the
company existing value is known as the replacement value.

6. Intrinsic value and entry price- according to Kiranga and MM (2017, p-63), the
intrinsic value is used in deciding whether the company stock price is under or
overvalued. All the factors and fundamental analysis of the organization are taken
consideration while computing the intrinsic value. Market value of the enterprise may
vary from the computed intrinsic value. According to Chandra et al. (2017, p-47),
different types of statistical ratios are used by the investor to calculate intrinsic value. The
intrinsic value has been computed by deducting the EPV of the enterprise with the NPV
and the catalyst probability has been assumed at 50percent. The catalyst value has been
arrived at negative 12.28 dollar. The intrinsic value of Stuart Olson Inc. comes to 15.26.
The highest value of the share price of Stuart Olson at the beginning of 2005 was 3.08
and was 1.91 at 2020 beginning. The average share price in the financial year 2005 was
2.67 Canadian dollars. The market value of the company in 2005 was 32245903.04
Canadian dollars and in 2019 it was 53433412.55 Canadian dollars. It can be seen that
the share price in 2020 is undervalued when it is compared to the share price of 2005.
The investor should purchase the shares from the open market when the stock price
computed is below the market price and then sell the shares when it is overvalued or
should hold it for further increase. Thus it can be suggested to the investor that is not a
strong buy. To compute the different values such as NPV, NAV, WACC, EPV, MOS the
data has been taken from the annual report of 2005 and 2020 of Stuart Olson.

Summary Report
Stuart Olson has been named as one of the biggest and largest company in Canada
providing construction services all over Canada. The approach of the company is unique
and different from other construction company. With the dynamic changes in its process
company is looking to expand its construction business. Company is providing its
services to different sectors such as residential development, commercial development,
health care, mining sector, hospitality, and also in the field of education sector. Company
has committed to provide innovative services to its stakeholders such as trades,
consultant, clients and communities. Stuart Olson also endorsed different brands such as
Northern, Sigma power, fuller Austin, Stuart Olson water, Laird, and Studon. Company is
also delivering industrial services in the country. The value of the company has been
created by its people and also through collaboration with different companies.
As per the computation given in the below table the percentage of cost of equity comes to 12.12
percent and it has been derived after adding a growth rate of 2 percent. The same growth rate is
also added to determine the expected dividend. This equity cost is the expected profit which an
investor expects from the company. To a company this percentage of equity cost is the
percentage of profit which a company requires or expects from a particular project. It means if an
individual invest in any company then it will gain a return of approx. 12 percent on its
investment.
It has also been seen that the long term debenture of Stuart Olson in 2014 was 3144000 Canadian
dollars and in 2018 it was increased to 47733000 Canadian dollars. This increase signifies that
the company wants to include more and more debt in its capital structure. The corporation wants
to take financial risk. The financial risk in case of including more percentage of debentures is

that the company has to pay the interest and the redemption amount to the debenture holders
even if the company is suffering losses. Debenture holders are paid in priority to preference and
equity shareholders even in case of liquidation and winding up of the company. After
considering the interest and finance cost the cost of debt is determined at 9.58 percent. This
indicates that if anyone is interested in buying the debenture of the organization then the
debenture holder will get an interest percentage of 9.58 on its total investment.