Valuation Report: Analysis of Vocus Group Limited's Financials

This valuation report provides a comprehensive financial analysis of Vocus Group Limited, examining its performance from FY2014 to FY2017. The report employs three primary valuation approaches: the Discounted Dividend Model, the Residual Earnings Model, and Multiples Valuation, to determine the intrinsic value of the company's stock. It calculates the estimated dividend in FY2018 using an EPS of $0.25 and a payout ratio of 50%, and also computes equity cost and residual earnings. The analysis considers factors like market valuation, revenue growth, profitability, and financial risk. Furthermore, it evaluates the acquisition proposal from KKR at A$3.5 per share, comparing it to the derived intrinsic values and similar sector deals. The report concludes that the acquisition offer is not fair and reasonable based on the valuation analysis and recommends rejecting the offer, suggesting the board wait for a more opportune time for acquisition proposals.

VALUATION REPORT
(VOCUS GROUP LIMITED)
STUDENT ID:
[Pick the date]

Valuation Report
TABLE OF CONTENTS
Overview....................................................................................................................................2
Vocus Group Limited – Financial Analysis...............................................................................2
Fundamental Valuation..............................................................................................................3
Approach1 - Discounted Dividend Model.............................................................................3
Approach 2- Residual Earnings Model..................................................................................3
Approach 3- Multiples Valuation...........................................................................................4
Valuation Interpretation..........................................................................................................4
Valuation as Acquisition Target.................................................................................................5
Recommendation....................................................................................................................5
1

Valuation Report
Overview
The given valuation period aims to highlight the intrinsic value of the stock of the company
using a myriad of technique based on the information provided. Further, in wake of the same,
the acquisition proposal given by KKR whereby they propose to pay A$3.5 per share for
acquiring the company. Through the analysis, it needs to be highlighted as to whether the
acquisition proposal forwarded by KKR to the board of Vocus is a fair and reasonable one or
not.
Vocus Group Limited – Financial Analysis
The performance summary of the company for the recent period i.e. FY2014-FY2017 has
been illustrated in the following table.
The above performance, efficiency and structural indicators enable the derivation of the
conclusions enlisted below.
 The deterioration in the market valuation and financial performance is apparent which
is why the stock price has dipped significantly from the peak of 2016. The P/BV has
shown a lowering trend while P/E ratio has dipped in 2017.
2

Valuation Report
 An impressive growth is apparent in the revenue but the same cannot be said about
the profitability which seems to be a victim of overaggressive growth that the
company is indicating in revenue.
 The balance sheet leveraging has gone up while short term liquidity has been
adversely impact which collectively hints at rising financial risk.
 Owing to losses in the year ending on June 30, 2017, the retained earnings are
negative which is why Share Capital/Total Equity is greater than one.
The above performance parameters clearly reflect dip in performance in 2017 which is only
because of falling profit margins. For value creation, there needs to be margin expansion
through cost rationalisation along with product & service portfolio restructuring. While,
increasing the market share is imperative but the same makes sense if in the medium to long
term, profits can be generated. The opportunity for value unlocking seems attractive for the
acquirer considering the fall in stock price in 2017 and the stock appears to be available at
very attractive valuation considering the expected future performance of the company.
Fundamental Valuation
There are various techniques that may be utilised for the intrinsic valuation of the company
and the stock price but for the purposes of this report, the following three approaches have
been deployed.
Approach 1 - Discounted Dividend Model
This computes the intrinsic value considering the expected dividend flow in the future. It is
assumed that from 2019 onwards, the dividend growth rate would equal a growth rate which
mirrors the long term growth rate of 5% pa. Further, considering the loss in FY2017, the
dividend or EPS are not reflective.
Hence, estimated dividend in FY2018 per share = EPS * Payout Ratio = 0.25*50% = $0.125
Equity Cost1= Rf + β (Rm - Rf) = 2.675 + 0.61(9.976 – 2.675) = 7.13% p.a.
Prevent value of dividends (Intrinsic price) = (0.125/1.0713) + (0.125*1.05/[(0.0713-
0.05)*1.0713] = A$ 5.87
Approach 2- Residual Earnings Model
The basic formula is indicated below.
Residual Earnings (RE) = (EPS * Outstanding Shares) – (Equity Cost* Equity book value the
previous year)
Equity book value (June 30, 2017) = $ 2,303. 124 million
RE2018 = (0.250*670) – (0.0713* 2303.124) = A$ 3.296 million
1 CAPM Approach
3

Valuation Report
Company valuation based on residual earnings = 2303.124 + (3.2961/1.0713) +
(3.2961*1.04/(0.0713-0.004) = A$2,416.07 million
Per share valuation (June 30, 2017) = Company Valuation/Current Outstanding Shares =
2416.07/619.9819 = A$ 3.90
Approach 3- Multiples Valuation
On the basis of the existing valuation of the peer group companies, the price multiple based
on different parameters have been accomplished as follows.
P/E Multiple based valuation = (0.250*20.68/1.0713)2 = A$4.83
P/EV Multiple based valuation = 0.80[(2089.339+1065.816-50.194)/619.9819] = A$4.00
P/S Multiple based valuation = 1.89*(1820.577/619.9819) = A$5.55
P/BV Multiple based valuation = 5.14(2303.124/619.9819) = A$19.09
P/EBITDA Multiple based valuation = 7.94[(300/670)/1.0713]3 = A$3.32
Valuation Interpretation
A multiple methods have been deployed above to narrow down to the precise valuation of the
stock. The various price estimates have been summarised below.
It is apparent that with the noticeable exception of P/BE, the others tend to fit in a narrow
valuation range which seems realistic. It would be inappropriate to narrow down on the
2 Taking FY2018 estimates of EPS and discounting as FY2017 EPS is negative
3 Taking FY2018 estimates of EBITDS and discounting as FY2017 EBITDA is negative
4

Valuation Report
intrinsic price by favouring one of the above while ignoring the other. Hence, after ignoring
the obvious outlier, the average of estimates has been taken which yields A$ 4.58.
An obvious conclusion that comes to light on account of the above analysis is the
undervaluation of stock price at the existing price of A$ 3.37.
Valuation as Acquisition Target
The fair and reasonable price for the company can be considered by evaluating other deals
which have taken place in the same sector so as to judge the respective valuations given to
the target. In this context, the following table is found useful.
The fair and reasonable price can be estimated for Vocus as the target company based on the
above data.
Book value multiple offer price = 2.098*(3.370/0.9072) = A$ 7.79
EPS multiple offer price = 17.7475*(0.25/1.0713)4 = A$ 4.14
Premium on share based offer price = 3.37*(1+ 0.2564) = A$ 4.23
Recommendation
The above acquisition based approaches hint to a fair and reasonable price range of 4.14 -
7.79. But the price that KKR has offered to acquire Vocus is A$ 3.50. This does not seem fair
or reasonable as the same is neither justified by any of the approaches. The bid fails to
consider the inherent discount to fair value with regards to the current share price. Also, the
premium accorded otherwise seems way too less in comparison to other transactions in the
sector. Hence, it would be appropriate to reject the offer as the intrinsic valuation of the
company is significantly higher. Probably it would be advisable for the board to wait for a
more opportune time in terms of stock valuation so as to consider any acquisition proposals.
4 Taking FY2018 estimates of EPS and discounting as FY2017 EPS is negative
5