Assume it is now March 2021. You are working in an investment banking company called XYZ as an equity research analyst. A customer approached you and asked you to give her a recommendation regarding ALS Limited (ALQ.AX). The customer’s investment horizon is March 2025.
The website of this firm is in the following link:
On the bottom panel, you will find a heading called “Investors”, where details on the latest news, share price, financial reports, governance, etc can be found.
Besides, analysts’ forecasts and other important details about this firm can be found in the following links on yahoo finance and ASX:
Moreover, expected growth rates for the next 5 years is available on the yahoo finance link; just click on “Analysis” and you will get a table having the expected growth rate of EPS over the next 5 years “13% p.a”. Use this 5-year estimated growth rate reported in the table and the EPS for March 2020 to forecast EPS for March 2021, 2022, 2023, 2024 and 2025.
Do not forget to calculate the CV in March 2025 using the long-run average growth rate of the GDP. The long-run average growth rate of Australia’s GDP is around 3.50%.
Prepare an equity research report for this firm. In the valuation section, please use the P/E multiple, dividend discount model and the residual income method (anchoring on book value of equity), then calculate the average value.
You need to calculate the value as in March 2021, compare it with the market price at that time ($9.75) and give your recommendation.
You need to calculate the required rate of return on ALS Limited. To calculate it, you need to find the risk-free rate of return on 5-year government bonds from the reserve bank of Australia website:
From the above link, the risk-free rate on 5-year government bonds in February 2021 was 0.48%.
Second, you need to find out the beta of the stock. The beta is available on yahoo finance (0.90) so you can use it straightforward. For those who are interested in knowing how to calculate it, Beta is calculated as follows: first, download the historical monthly stock prices of ALQ during the past 3-5 years and calculate the monthly returns on the stock. On Yahoo! Finance links above, you will find historical prices available on the menu under the heading titled “Historical Data”. Open it to get the monthly stock prices for the period you choose.
Next, you have to do the same for the market index (use S&P/ASX 200 index) by downloading the monthly prices of the index for the past 3-5 years and calculate the return on the index. The link you need is as follows:
Finally, regress the monthly stock returns on the monthly index returns using the following regression:
𝑅𝑖 = 𝛼 + 𝛽. 𝑅𝑚 + 𝜀
The coefficient you obtain from the above regression 𝛽 is the stock’s beta.
Use the stock’s beta, the risk free rate of return and the long-run average stock return of 11.5% to calculate the required return according to the CAPM model. For ALQ’s stock, the required return = 0.48% + 0.90(11.5%-0.48%) = 10.4%
Your report should include not only the valuation, but also all-important details about the firm. However, because the structure of equity valuation reports may vary from one firm to another, although the content is usually the same, you should follow the following “Road Map” when you prepare your report:
Section Mark Allocation
Basic information and Investment Summary 3
Business Description 3
Industry Overview and Competitive position 3
Financial analysis: historical 4
Valuation : forecasts 6
Investment Risk (internal and external) 3
Management and Governance 3
What to include under each section can be found in the following link:
The link above tells what to include in each section, but when you prepare the report follow the structure I mentioned in the above table.
Finally, please do not forget to cite the source of any external information you borrow
according to the University’s citation style.