In this valuation report, we will analyze the performance of Metcash and Woolworths (Australia) in the past six years from 2007 to 2012 and make some forecasts in order to aid investors in making decisions about investments between these two companies. Two methods of DCF valuation and relative valuation are used during the analysis. Firstly, we estimate FCFF with calculated WACC to determine the two companies’ stock price, comparing their actual current stock price. Secondly, we analyze P/E Ratio, P/S Ratio and EV/EITDA Ratio to make a comparison between the two companies and average industry. Our estimation will show that both Metcash and Woolworth are undervalued and suitable for ...view middle of the document...
The group employs approximately 5,700 employees and is administered from its head office in Macquarie Park, New South Wales. It leads wholesale distribution and marketing company specializing in grocery, fresh produce, liquor, hardware, automotive parts and other fast moving consumer goods. The company has four main business pillars: Metcash Food & Grocery (IGA), Australian Liquor Marketers (ALM), Hardware Distribution (Mitre 10) and Automotive Brands Group. Among these segments, food distribution is the main growth driver, realizing solid growth and margin improvement through scale efficiencies.
1.2 Woolworths Limited
Woolworths Limited (WOW) is a retailer with primary activities in supermarket that is ranked number of 4 out of the top 2000 companies in Australia. Its operations include: food and liquor (Woolworth supermarkets, Thomas grocery stores, BWS, Dan Murphy’s, Woolworths Liquor and so on), petrol (Woolworths/Caltex alliance), consumer electronics (Dick Smith, Powerhouse and Tandy) and general merchandise retailer (Big W), and it also engage in the hospitality and gaming sector. Supermarkets are also operated in New Zealand. “Fresh Food Price” and “Everyday Low Prices” are the company’s business strategy, achieving well above average earnings growth successfully.
2. Metcash DCF valuation within FCFF approach:
2.1 Weighted average cost of capital:
The WACC is computed as follows:
It is an important tool when we try to obtain the present value of FCFF.
2.1.1 Cost of equity:
1. Beta of Metcash limited (MTS) =0.11
2. Risk free rate =2.733%, which is the Australia 1-year bond yield at 20 April 2013.
3. Expected market return rate=12.2%. The ASX 200 index increased from 4396.60 at 2 April 2012 to 4931.90 at 2 April 2 2013. The increasing rate the ASX 200 index for the most recent year should be assumed as market return rate currently.
According to CAPM model and all the assumptions above:
E (RMTS) = RF + β MTS [E (RM) – RF]
= 2.733% + 0.13 *[12.2% – 2.733%]
2.1.2 Cost of debt:
Based on annual balance sheets and income statements as reported from 2007 to 2012, annual costs of debt are shown in the following table.
Table1. Cost of debt from 2007 to 2012.
|($millions) |2007 |2008 |2009 |2010 |2011 |2012 |
|L/T Debt |605.73 |610.62 |638.20 |749.40 |826.70 |974.00 |
|Cost of debt |10.58% |10.05% |10.88% |9.47% |9.28% |8.10% |
|Total Liabilities |1964.0 |1954.5 |2007.1 |2261.4 |2357.1 |2702.9 |
|D/D+E ratio |62.8% |61.2% |61.1% |62.1% |62% |66.9% |
(Data Source: Metcash Annual Reports; www.aspectfinancial.com.au)