Market Value of equity (E) = Share Price * Number of Shares
For our calculations we have used the closing price as at 24 January 2011, which was $ 1.79 and confirmed the number of shares on issue with the Company Secretary of APN News & Media.
Step 4. Calculating the total value of the firm
The total value of the firm is given by the sum of its debt and equity.
Value of the Firm (V) = Value of debt (D) +Value of Equity (E), thus:
Step 5. Calculating WACC
WACC is determined by using the following formula:
WACC = D/V * Rd * (1 – tc) + E/V * Re
Where,
D = Value of Debt
E = Market Value of Equity
Rd = Cost of Debt
Re = Cost of Equity
Tc = Tax rate
ESTIMATION OF SHARE PRICE
The share price of APN can be estimated by discounting the future cash flows with the WACC to obtain the present value. The estimation of revenues, operating expenses, depreciation and future cash flows involves calculation of the expected growth rate. We have determined the growth rate by using the double moving average method (refer Appendix A – for the relevant tables) on historical values from 1999 to 2009 to forecast future values from 2010 to 2014. Similarly, the unlevered cash flows are calculated using double moving average method which can be seen in appendix A. The snapshot of historical values is as follows:
Based on the above forecasts, the unlevered cash flows for APN are forecasted as follows:
The above table illustrates the growth of UCF over the years 2010-14. An average of these values gives us the growth rate of 2.21%. Using this approximated growth rate and the WACC as the discount rate, we have calculated the present value of the future cash flows. For this purpose we have discounted the cash flows to 2014 and taken the cash flow as perpetuity from 2014 onwards. The terminal value of the future cash flows from 2015 onwards is given as:
Terminal Value = Unlevered Cash Flow (UCF 2014) *(1 + Growth rate)
WACC – Growth rate
Solving the above equation = $250,576 * (1+ 2.21%) / (11.55% - 2.21%) = $ 2,742,993,307
Discounting all the cash flows along with the terminal value from above gives us the following:
The unlevered cash flow discounted by WACC provides the present value for both debt and equity, then we need to subtract the debt figures from the present value to get the present value of the equity of the firm and divide this figure by the number of shares on issue will give us the share price.
Share price = Present Value – Total Debt / Number of shares on issue
= 2,742,993,307 – 782,980,000 / 606,145,251
= $3.23
SENSITIVITY ANALYSIS
In sensitivity analysis, we calculated the sensitivity of the share price to changes in various factors such as growth rate and the WACC. This analysis is performed to check how susceptible the company is to the changes in key factors in the future.
Share price sensitivity to change in the growth rate
The growth rate and share price are positively correlated as they move in the same direction.
As the growth rate decreases by 75%, the share price drops by 23%. However when the share price increases to 75%, there is a positive change of almost 33% in the share price.
The line graph below shows the sensitivity of the share price of the company to changes in
the growth rate.
Share price sensitivity to change in WACC
The following table shows that changes in the WACC and the change in the share price of APN are inversely related. A decrease of 50 % in the WACC results in a 226% change in the share price, whereas an increase of 50% change in the WACC results in a -54% change in the share price.
The graph below shows the sensitivity of the company share price to changes in the WACC.
Comparison between the calculated and actual share price
Our valuation shows that APN is trading at a discount. We took the closing share price as 24th January 2011 which was $1.79 and compared this to our result which we determined to be $3.23. We have outlined below the possible reasons for the differences:
- We used sales revenue for forecasting the growth rate.
- For our forecasting, we used data from 1999 but did not include 2010 figures. During the GFC, a number of companies suffered significant financial losses and in our forecasting data, we adjusted for this effect. The actual share price of APN is not adjusted for the GFC effect and may still be in recovery mode.
- We have made assumptions in the estimation of WACC such as the market premium of 8% which is commonly used, however we did not calculate the actual figure.
- We used 2009 accounts but later figures up to 2010 (half year accounts) were available but did not represent the full year accounting information.
- In determining the company beta, we used monthly data covering 5 years. Data covering a wider period might have provided a better or more accurate result.
- The growth rate we have used, 2.21%, is calculated using double moving average method, whereas the actual growth rate might differ.
- The calculation does not include the behavioural theories, for example fluctuating movements in the market and irrational behaviour.
Investment Decision
The closing share price for APN as at 24th January 2011 was $1.79; this is significantly lower than the share price determined using the WACC method which was $3.23. This indicates that the share price is undervalued. Based on this information alone, we should increase our holding in APN. However to derive an accurate recommendation we had to consider several other factors which are discussed below.
It can be seen from the sensitivity analysis of the growth rate and the WACC that changes in these two factors impact the share price valuation. If any of the underlying inputs in determining the growth rate or the WACC were to increase or decrease, then this would alter the share price valuation. For example, had 2010 year end results been available, this may have altered the inputs in the WACC formula. For example, an increase in WACC of 50% would result in a decrease in the present value of future cash flows. From the sensitivity analysis, it can be seen that 50% increase in WACC will result in a share price of $1.50 which is in fact lower than the current trading price of $ 1.79, thus altering our initial argument to increase our holding.
In addition we have compared APN to its peers, specifically on the grounds of the riskiness, diversification and 52 week trading range.
Fairfax (FXJ) is a diversified media company. Similar to APN, FXJ has an Australian and New Zealand presence, operates radio stations with major business publications. Fairfax differs to APN in that it does not have an outdoor advertising or security printing business.
FXJ has a beta of 1.577 which makes it a slightly more riskier stock than APN. The current share price of FXJ as at 25th January 2011 is 1.375 and its 52 week trading range is 1.26 – 1.88, which indicates that FXJ is trading mid-range.
West Australian Newspapers Holdings Limited (WAN) is a Western Australian based news and media group. WAN’s activities are similar to APN which include printing and publishing newspapers, digital media, commercial printing and radio communications.
WAN has a beta of 1.412 which is in a similar range to FXJ and APN. WAN is currently trading at the bottom of its range, which means that it has some time to go before it realises its peak. The closing price for WAN as at 25th January 2011 was 6.25, the 52 week range is 6.24 – 8.44.
Austereo Group Limited (AEO) is a leading Australian commercial radio broadcaster. AEO is not as diversified as APN, FXJ or WAN but has a larger market share in radio broadcasting than the other companies.
AEO has a beta of 0.9442 which is less risky than APN. Also, AEO is currently trading at the higher end of its range, the closing price as at 25th January 2011 was 1.92 and the 52 week range is 1.49 – 2.
Conclusion
A comparison of APN to its peers shows that it is more diversified. In addition, APN’s beta is lower than WAN and FXJ which makes it a less risky company, this may be due to the diversification. AEO has a lower beta than the other companies which makes it the least risky company however it is not as diversified.
Lastly in considering whether or not to increase an investment, the economic environment should be considered. The recent flooding in Australia has caused significant damage to property and the damage bill has escalated to $15B. The effect has detracted on the economic growth however growth will rebound once re-building commences. In our view, APN is a defensive stock which indicates that it should not be impacted as much as aggressive stocks by bad economic conditions. In addition, given that we expect the economy to rebound in the next quarter as re-building commences and government subsidies and talk of potential government fiscal policy, (eg raising medicare levy), the economy should be on the rise. In this environment, defensive stocks would not be a wise choice.
Research analysts (Yahoo Finance) provide recommendations to hold the stock.
We also note that the current share price of APN as at 25th January 2011 is 1.77, the 52 week range is 1.68 – 2.54, APN is trading at the lower end of this range.
Although our valuation is slightly above this range, we strongly recommend to keep our substantial holding in APN News & Media unchanged.
Appendix A
Regression analysis - APN
Double Moving Averages
Operating Expenses
Calculation of Depreciation