Vocus Group Limited Valuation Report: Financial Analysis and Offer

This valuation report analyzes Vocus Group Limited in response to KKR's acquisition offer of A$3.5 per share. The report begins with a performance analysis, highlighting declining profit margins and increasing debt levels. It then employs three valuation techniques: the Discounted Dividend Model, the Residual Earnings Model, and Multiples Valuation, using peer group data. The report interprets these valuations, concluding with a recommendation based on both fundamental and acquisition-related valuations. It determines the KKR offer is not fair or reasonable to shareholders and recommends its rejection. The report provides detailed calculations and assumptions for each valuation method, including the use of required returns and book value for equity. The report also considers acquisition targets and comparable transactions, including the fair offer price derived on account of book value, EPS and bid premium.

VALUATION REPORT
(VOCUS GROUP LIMITED)
STUDENT ID:
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Valuation Report
TABLE OF CONTENTS
Background................................................................................................................................2
Performance Analysis................................................................................................................2
Valuation Techniques.................................................................................................................3
Approach 1 (Discounted Dividend Model)............................................................................3
Approach 2 (Residual Earnings Model).................................................................................3
Approach 3 (Multiples Valuation)..........................................................................................4
Valuation Interpretation..........................................................................................................4
Acquisition Target......................................................................................................................5
Recommendation....................................................................................................................5
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Valuation Report
Background
KKR has proposed to acquire all the equity shares of Vocus Group Limited at A$3.5 a share.
This offer was unsolicited and made on June 7, 2017. In order to deliberate on this offer, an
independent committee has been appointed which wants a valuation report in order to
consider whether the given offer by KRR is “fair and reasonable”. The given valuation report
aims to assist the commit in evaluating the offer considering the peer group companies and
the recent performance of the company.
Performance Analysis
The significant parameters which summarise the company’s performance in the recent times
are tabled below.
Certain trends and significant observations with regards to performance and stability are
outlined as follows.
 FY2017 seems to the worst year in the recent history in terms of profitability and
market performance. The stock of the company has taken a plunge and before the
offer, the price was quoting below $ 3.
 A bright spot in an otherwise lacklustre profitability performance for the company has
been the stupendous growth in revenue. But it seems from the above indicators, that
margins are being sacrificed for market share or revenue growth.
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Valuation Report
 The overall risk associated with the business has been on the increase in the recent
years as the debt levels have increased and also the liquidity has comes under some
constraint.
 The profitability concerns are visible not only in 2017 but in the last three years as
profit margins are decreasing and have led to a loss in FY2017. Also, as on June 30,
2017, the retained earnings are negative.
On the basis of the above discussion, it seems apparent that the sore spot in the performance
of the company is the dwindling profit margins. In order to create value from the purchase of
the company, efficiency gains along with rejigging of the portfolio would be required so that
the profit margins are enhanced and the company comes into profits. Also, a key aspect
related to value unlocking is the underlying share price which does not seem to sufficiently
reflect the value of the business. Hence, improvement in profit margins and low valuation
seem to be two factors that could lead to potential gains for the acquirer.
Valuation Techniques
In order to determine the fundamental value of the stock of the company, various approaches
have been applied which is apparent below.
Approach 1 (Discounted Dividend Model)
The given method aims to compute the present value of the future dividends which
essentially should be the appropriate share price. One assumption which has been made is
that after 2018, the growth rate in dividend would be 5% p.a. Also, since in FY2017,
dividend was lesser owing to loss, hence it cannot be taken as a suitable base.
Thus, FY2018 divided = $0.2501*(50/100)2 = $ 0.125 per share
Required returns3= Rf + β (Rm - Rf) = 2.675 + 0.61(9.976 – 2.675) = 7.13% p.a.
Hence, Vocus Limited (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 underlying formula used for the residual earnings computation is summarised below.
Book value for equity (Date: 30th June 2017) = A$ 2,303. 124 million
Hence, RE2018 = (0.250*670) – (0.0713* 2303.124) = A$ 3.296 million
Hence, Vocus Limited Valuation = 2303.124 + (3.2961/1.0713) + (3.2961*1.04/(0.0713-
0.004) = A$2,416.07 million
1 Given estimate of FY2018 EPS
2 Assumed dividend payout ratio of 50%
3 CAPM Approach
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Valuation Report
Estimated price per share (Date: June 30, 2017) = 2416.07/619.98194 = A$ 3.90
Approach 3 (Multiples Valuation)
The various multiples for price on account of different criteria has been already determined
considering the peer group companies data provided and is presented below.
P/E based share price= (0.250*20.68/1.0713)5 = A$4.83
P/EV based share price = 0.80[(2089.339+1065.816-50.194)/619.9819] = A$4.00
P/S based share price = 1.89*(1820.577/619.9819) = A$5.55
P/BV based share price = 5.14(2303.124/619.9819) = A$19.09
P/EBITDA based share price = 7.94[(300/670)/1.0713]6 = A$3.32
Valuation Interpretation
A summary table has been outlined which tends to outline the various price derived from the
multiple valuation techniques employed in the previous section.
There is only one value which stands apart in the above computation and i.e. is 19.09 and
hence the same is ignored. From the remaining value, it seems difficult to choose one
technique over the other considering the relative merits and demerits of each and hence an
average is taken which comes out as A$ 4.58.
4 Total outstanding shares in million as on June 30, 2017
5 Instead of taking the current year EPS since it is negative, EPS for the next year has been taken for
computation
6 Instead of taking the current year EBITDA since it is negative, EBITDA for the next year has been taken for
computation
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Valuation Report
It is given that as on June 30, 2017 the company share was trading at A$ 3.37 which implies
availability of stock at discount to the estimated intrinsic value.
Acquisition Target
While the previous section aimed at fundamental evaluation without considering an
acquisition bid, the same needs to be considered in this case and hence various industry
transactions have been summarised to derive some valuation parameters.
Fair offer price derived on account of book value = 2.098*(3.370/0.9072) = A$ 7.79
Fair offer price derived on account of EPS= 17.7475*(0.25/1.0713)7 = A$ 4.14
Fair offer price derived on account of bid premium = 2.878(1+ 0.2564) = A$ 3.60
Recommendation
Hence, based on the acquisition target consideration, the price range which may be deemed
fair and reasonable lies between A$3.60 and A$7.79. However, KKR in the offer is willing to
give A$ 3.5 per share. The only approach that provides some credibility to the offer is the bid
premium approach. However, a tacit assumption would be that the stock price before the bid
was reflecting the true value of business. In the given case, this is not the case and decision
making on bid premium would not be recommended. Based on the fundamental valuation and
also acquisition related valuation, the given price offer does not seem to be fair or reasonable.
Hence, the interest of the shareholders would be better served if this bid is rejected.
7 Instead of taking the current year EPS since it is negative, EPS for the next year has been taken for
computation
8 Price on the date of the offer i.e. June 7, 2017
5