Valuation Report for Vocus Group Limited: Financial Analysis

This valuation report provides a comprehensive financial analysis of Vocus Group Limited, assessing its worth in the context of an acquisition offer from KKR. The report begins with an introduction and then delves into a financial analysis of Vocus Group, highlighting key performance indicators and observations. It then proceeds to calculate the intrinsic market valuation using the discounted dividend model, residual earnings model, and multiples valuation approach. The results are interpreted, and the report then focuses on the acquisition target valuation, considering the bid price and comparable deals. Finally, it presents a recommendation regarding the KKR offer, concluding that the bid should be rejected due to undervaluation based on the various valuation methods employed and the potential for improved performance in the future. The report offers a detailed overview of the company's financial health and provides valuable insights for stakeholders to make informed decisions.

VALUATION REPORT
(VOCUS GROUP LIMITED)
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Valuation Report
TABLE OF CONTENTS
Introduction................................................................................................................................2
Financial Analysis of Vocus Group Limited.............................................................................2
Intrinsic Market Valuation.........................................................................................................3
Discounted Dividend Model Approach..................................................................................3
Residual Earnings Model Approach.......................................................................................3
Multiples Valuation Approach...............................................................................................4
Interpretation of Results.........................................................................................................4
Acquisition Target Valuation.....................................................................................................5
Recommendation....................................................................................................................5
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Valuation Report
Introduction
The objective of the given report is to present a valuation report for the company based on the
information provided which would allow the board and the shareholders to decide on the
future course of action with regards to the acquisition offer floated by KKR. KKR in the offer
extended to the company has proposed to buy 100% of the outstanding shares at A$3.5 a
piece which commands a premium of approximately 4% to the current trading price of the
stock.
Financial Analysis of Vocus Group Limited
The key observations in this regards are summarised below.
Based on the above indicators of financial and operational performance, the following
observations may be drawn.
 The market valuation and performance of the company has witnessed a dip in FY2017
as the share price has plummeted to about 40% of the FY2017 value coupled with
lowering P/EPS and P/BV.
 The profitability margins are shrinking from FY2015 onwards and have become
negative in FY2017.
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Valuation Report
 However, a noticeable aspect has been the top line growth along with the asset growth
which has been exemplary.
 There has been an overall increase in the financial risk due to increased leveraging of
the balance sheet and lower liquidity ratios.
 The retained earnings for the company in FY2017 are negative owing to the losses
incurred.
Based on the above observations, the potential value from acquiring the company can be
derived by enhancing the operational efficiency as the company is witnessing robust growth
in revenue and corresponding assets owing to expansion. In the recent times, the company
has witnessed superb revenue growth at the cost of the shrinking margins. As a result, the
acquirer would focus on enhancing the profit margins at the cost of lower growth in revenue.
Considering the bid price is at a significant discount to the closing price commanded by the
stock as on June 30, 2017, it is apparent that there is significant value for a potential acquirer
if operational margins can be improved.
Intrinsic Market Valuation
The classification of the valuation methods that would be deployed for valuing the Vocus
Group Limited is carried out below. Discounted Dividend Model
 Residual Earnings Model
 Multiples Valuation Approach
Discounted Dividend Model Approach
The key inputs required to implement this are as follows.
Next year dividend, Long term growth rate of dividends, Cost of Capital
D2018 = A$ 0.1251
Subsequently, the divided would grow at a long term growth rate of 5% p.a.
Cost of capital can be computed using CAPM approach based on given inputs.
Cost of equity = Rf + β (Rm - Rf) = 2.675 + 0.61(9.976 – 2.675) = 7.13% p.a.
Intrinsic price of stock = (0.125/1.0713) + (0.125*1.05/[(0.0713-0.05)*1.0713] = A$ 5.87
Residual Earnings Model Approach
Book value of equity (FY 2017) = A$ 2.303 billion
Residual Earnings2018 = (0.250*0.67) – (2.303*0.0713) = A$ 3.2961 million
1 Assuming a 50% payout ratio on a FY2018 estimated EPS of A$0.25
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Valuation Report
It is assumed that post 2018, the retained earnings would grow at a long term constant growth
rate of 4% p.a.
Value of the company = 2303.124 + (3.2961/1.0713) + (3.2961*1.04/(0.0713-0.004) =
A$2,416.07 million
Price of share = 2416.07/619.9819 = A$ 3.90
Multiples Valuation Approach
The multiple calculation based on the given peer group data is indicated below.
Fair value of Vocus as on June 30, 2017 (P/E Multiple)2 = (0.250*20.68/1.0713) = A$4.83
Fair value of Vocus as on June 30, 2017 (P/EV Multiple)3 = 0.80[(2089.339+1065.816-
50.194)/619.9819] = A$4.00
Fair value of Vocus as on June 30, 2017 (P/S Multiple) = 1.89*(1820.577/619.9819) =
A$5.55
Fair value of Vocus as on June 30, 2017 (P/BV Multiple) = 5.14(2303.124/619.9819) =
A$19.09
Fair value of Vocus as on June 30, 2017 (P/EBITDA Multiple) = 7.94[(300/670)/1.0713] =
A$3.32
Interpretation of Results
The price obtained through various valuation techniques is summarised in the table below.
Valuation Technique Price per share (A$)
Discounted Dividend Approach 5.87
Residual Earning Approach 3.9
P/E Multiple Approach 4.83
P/EV Multiple Approach 4
P/S Multiple Approach 5.55
P/BV of equity Multiple Approach 19.09
P/EBITDA Multiple Approach 3.32
2 Since FY2017 EPS is negative, hence FY2018 EPS has been used and discounted using cost of capital to determine the
current fair price
3 Enterprise Value (EV) = (Market Capitalisation + Debt – Cash Equivalent)
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Valuation Report
Excluding the P/BV approach which leads to a unrealistic value, the other approaches are
leading to a share price valuation for the company between A$ 3.32 and A$ 5.87.
Average valuation (excluding P/BV price) = A$ 4.58
Hence, the current stock price of the company at A$ 3.37 seems to be grossly undervalued
with an approximate 25% discount to the fair value.
Acquisition Target Valuation
Considering the bid by KKR for acquisition of the company, it is worthwhile to compute a
fair price for acquisition keeping in mind the deals which have been executed in this sector.
The computation of average indicators is highlighted in the table indicated below.
Considering the above valuation matrix, the corresponding prices for the company are
computed below.
Offer Price (Based on Book Value) = 2.098*(3.370/0.9072) = A$ 7.79
Offer Price (Based on EPS)4 = 17.7475*(0.25/1.0713) = A$ 4.14
Offer Price (Based on premium offered) = 3.37*(1.2564) = A$ 4.23
Recommendation
Based on the multiple valuation approach based on peer acquisitions, the estimated per share
price should lie between A$ 4.14 and A$ 7.79. Clearly, the offered price by KKR at A$ 3.50
seems to be unfair and unreasonable. Also, taking into account the average bid premium
valuation approach, the offer price comes out at A$4.23 which is significantly higher than the
current offer made by KKR. Considering the above along with the intrinsic valuation
approach results, it may be recommended that the current bid by KKR should be rejected as
the company has been significant undervalued. Also, the current share price of the company
also seems undervalued which would gradually approach a higher value as performance
improves in FY2018.
4 Since FY2017 EPS is negative, hence FY2018 EPS has been used and discounted using cost of capital to determine the fair
offer price
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