Infratil Limited Company Analysis - Essay Example

? Economy – Industry – Company Analysis Prepared by Table of Contents 2 Introduction 3 Report body 3 An analysis of the current economic fundamentals 3 Justification for the choice of industry given the economic indicators 6 Industry information 7 Justification of stock using the intrinsic value 8 Forecast of the short term growth rate 9 Estimate of the required return on equity 10 Brief outline of the firms operations 10 Expected performance of the firm given the expected industrial and economic conditions 10 Conclusion 11 References 12 Appendix 14 Assumptions/difficulties 14 Introduction The choice of the right stock for investment depends upon two kinds of analysis. One is the fundamental analysis and the other one is the fundamental analysis and the other one is the technical analysis (Haire 2000, 14). The present research topic endeavours to create an investment analysis report for Johnnie Carter. Report body An analysis of the current economic fundamentals Any investment analysis involves detailed examination of the stocks, the company to which the stocks belong, the country to which the company belongs and the present economic condition of the stock (Funder 2003, 345). The two graphs presented belong are indicating two different indicators, one is the GDP growth rate of the e country and the other one is the Australian Inflation rate. The two different kind of indicators helps to find out the rate at which the economy of the country is progressing and the rate at which the inflation deflated the GDP (Funder 2003, 122). Fig1: Australia GDP growth rate Source: (Dessler 2011, 177) The economic fundamentals indicate that the GDP rate of Australia is stable. Although there are presence of deep troughs and intermittent high peaks but these are normally associated with a strong economy (Funder 2004, 461). Although the analysis indicates that the GDP growth rate has decreased lately since the start of year 2013. Fig 2: Australia Inflation Rate Source: (Dessler 2011, 177) The inflation rate of Australia decreased significantly by the end of year 2013. Although it started rising from the year 2013. The rising inflation rate indicates that the cost of living also increased. The cost of lending will increase and the value of stock decreases. The rise and fall of the values of the equities are intrinsically related to the economic development of the country. The rate at which the GDP improved does not indicate that the value of the stocks will increase any sooner (Dessler 2008, 199). Although the rate at which the inflation rate is decreasing indicates that the cost of living is expected to come down. Apart from that the cost of lending will also come down. The decreasing lending rate also indicates that the value of the equities will increase. Fig 3: Comparison of the GDP growth rate Source: (Dessler 2011, 177) The above diagram indicates the relative performance of Australian GDP in comparison to the GDP growth rate of the rest of the world. The GDP growth rate is traced starting from the year 2011 to the year 2017 (Dessler 2011, 177). The actual data is present from the year 2011 to 2013 and the rest of the data from 2014 to 2017 are based on forecast. The forecasted data predict that the GDP is growing to grow at a rate of only 3.5%. Justification for the choice of industry given the economic indicators The company chosen is Infratil Limited. Infratil Limited deals in infrastructure business, investments across Australia, United Kingdom and New Zealand. Apart from that the company is also involved as retailer of gas and electricity to commercial and individual investors. This indicates that the company is spread across multiple domains. It is involved in manufacturing investment as well as energy sector. In other words, the company belongs to a multi utility sector. A multi utility sector has various advantages in comparison to a single sector. Multi utility sector acts just like a diversified portfolio. It helps to diversify the risk (Bagchi 2006, 559-567). As it is already indicated that the GDP growth rate of Australia is showing very poor signs of recovery so it is likely that the country is going to reel from poor GDP growth for the next 5 to 6 years. This invariable affects the output of every industry. Thus if a company like Qantas Airline is chosen then to diversify the risk diminished severely. The fuel prices are already staggeringly high and if the company is to compensate the rise in the cost with increase in revenue, the company is very likely going to suffer deterioration in stock value (Alderfer 2005, 120). It will have no option to fall back upon as a means for back up should the airlines industry go for a tumble. This is the reason for which a multi utility sector is chosen. The manufacturing sector and the energy sector have both shown strong signs of improvement, although the investment sector is yet to catch with the others two sectors. Industry information The industry information is indicated through 4 different kinds of industries. Each one of the industries is different from each other. Since the chosen company is into 4 separate kinds of industries so the four different kind of industries are analysed here. These four different types of industries are gas industry, electric utilities, heavy construction and diversified investment. The four industries are analysed across eight different domains which are market capitalisation, price/earnings ratio, return on equity, dividend yield, debt to equity, price to book ratio, net profit margin and price to free cash flow (Vroom 2002, 193). The analysis of indicates that the gas utilities, electricity and heavy construction equipment have performed exceedingly well in comparison to the other industry like diversified investment sector. This is mainly because of the reason a significant portion of the diversified investment contained the European assets. With the financial meltdown the European asset became seriously devalued. The market capitalisation of all the 4 different types of industries indicate that the gas utilities have the largest share, while the electricity sector has the second largest market share (Alderfer 2013, 132). If the analysis is done from the point of view of P/E ratio then the electricity utilities have the ratio. This indicates that the investors are anticipating the electricity sector will witness more growth in future. Due to this reason the P/E of the electricity have sky rocketed. Justification of the type of stock Johnnie Carter wants to invest his total funds of $2,000,000 in high dividend stocks if they are undervalued. Apart from that the investment horizon is for only 10 years and there are no near term requirements of liquidity. The type of stock is chosen as undervalued and same time high dividend yielding. This indicates that Johnnie Carter wants to invest in stocks whose market value is less than the intrinsic value of the firm. Depending upon the duration of maturity as well as the need for a stable source of income it is best advisable that Mr Johnnie Carter invest in balanced funds. The balanced funds offer a balanced mixture of safety, income and capital appreciation. The balanced mixture constitutes 60% of equity and 40% of fixed income securities. The fixed income securities make sure that the investor is provided with a stable and fixed source of income, while the growth stocks make sure of the capital appreciation takes place (Dessler 2011, 177). Justification of stock using the intrinsic value The assumptions considered in calculating the intrinsic value are discussed below. The estimated growth rate of EPS is calculated by considering 10 years historic data. While the various financial magazines and journals indicate another growth rate. This growth rate is estimated by the analysts. Based on these two growth rate is taken as the estimated growth rate. In order to factor in the worst possible scenario only the lowest growth rate among the two considered (Haire 2006,591). Based on the estimated growth rate the future EPS is calculated. Based on the historical PE for 10 year and the growth rate, the PE to be used is calculated. The future stock price is also based on the estimated growth rate. Forecast of the short term growth rate Table 1: Growth rate forecast Growth Est Current Qtr. Next Qtr. This Year Next Year Past 5 Years (per annum) Next 5 Years (per annum) Price/Earnings (avg. for comparison categories) PEG Ratio (avg. for comparison categories) Infratil Limited N/A N/A 9.10% 25.00% 54.35% 55.97% 18.96 0.34 Source: (Dessler 2011, 177) The short term growth is forecasted using the ARIMA model. The ARIMA is defined as autoregressive integrated moving average technique. The ARIMA technique helps to identify the presence of seasonal characteristics in the data. If the data indicates the presence of the seasonal characteristics then the data is deseasonalised to reveal the true characteristics of the data (Stwevenson 2007, 241). Due to the non availability of the data for consecutive 5 years on a quarterly basis, the estimates cannot be done on a quarterly basis (Harris 2013, 146). The estimates are done on a yearly basis as well as for the next 5 years. Keeping in mind that the forecast of the growth rate are to be done for a short period only, so instead of 10 years, the growth rate is estimated for only 5 years. The price earnings are estimated to be 18.96. Although the industrial price earnings are significantly less. This is indicates that the company is in a better position (House 2007, 241). A higher price earnings indicate that the price stocks are priced more than the return generated on that stock. Higher price earnings also indicate that the company’s stocks are highly valued in the market (Mumford 2003, 303). Estimate of the required return on equity The required rate of return is calculated using the formulae ke = rf + ? (Rm – rf) (Johns 2011, 451). The risk free rate of return is the 10 year Australian government bond. The beta of the company indicates that the if the market return decreases then the expected return of the company is also expected to change decrease by 3.64% with respect to the market return and vice versa (Johns 2012, 210). The beta value also indicates the volatility of the stock. The market rate of return represents the expected rate of return of the portfolio. Here the portfolio is consisted of the industry. Brief outline of the firms operations Infratil Limited has plans to expand its operational base in different foreign countries. The next 6 to 67 years plans are to expand its operational base in countries like India, Sri Lanka and japana. Among these 3 countries the prospect of expanding its base in India is significantly high (Mumford 2003, 835-923). It has already partnered with some of the leading energy companies like the Reliance Energy and Cairn Energy which are giants (Maslow 2006, 611). The plans are to invest through FDI and then open up operational bases once the after 6 years. Expected performance of the firm given the expected industrial and economic conditions The expected performance of Infratil Limited can be measured across various domains. Instead of focusing on too many domains the most important factor of all measures, the revenue of the firm is estimated. Given the expected industrial condition and the economic condition the firm, the revenue estimated indicates that the chances of instability in the generation of the revenue will be significantly less. Factoring in the effects of the volatility in the industry and the economy the estimated lowest possible revenue will be $1.98 billion and the highest possible estimate is $ 2.56 B (McClelland 2012, 720). The difference between the highest and the lowest value indicates that there is negligible difference between the two. Whereas the industry average of the difference is significantly more. This indicates that the average difference of revenue in Infratil Limited is in a better condition in comparison to other companies. Conclusion The investment analysis indicates that Johnnie Carter being a risk adverse investor should consider investing in funds which generates high dividend and at the same time also has capital appreciation. The intrinsic value of the stock of the form is found to be less than the market value of the form. If Johnnie Carter invests in this particular company then it will enable him to diversify the risks. Apart from that it will also help to generate a stable and fixed income as well as enjoy capital appreciation. The analysis also indicates that Infratil Limited will witness significant surge in capital appreciation. This is because of the reason that the company has plans for major expansion in developing countries like India and China. Both of these countries have high demand of electricity and gas. Gas and electricity are both two of the strongest business units of Infratil Limited. So one hand the growth in the P/E ratio will lead to appreciation of capital while on the other hand the expansion of the business strong revenue. This revenue will enable Infratil Limited to pay interest on the loans taken from the investors. References Alderfer, Moore. 2013. “The Economic Benefits of Publicly Funded Basic Research: A Critical Review.” The Relationship between Publicly Funded Basic Research and Economic Performance 234 (6): 132. Alderfer, Peterson. 2005. “Economics and Science.” Library Trends 671 (6): 120. Bagchi, Alaknanda. 2006. “Towards A Theory of Legal Reform.” European Economic Review 40(2): 559-567. Dessler, Peterson. 2011. “Technical Change and the Aggregate Production Function.” Review of Economics and Statistics 1 (4): 177. Dessler,Gary. 2008. “Fundamental Stocks of Knowledge and Productivity Growth.” Journal of Finance 561 (5): 199. Funder, David. 2003. “The Impacts of Academic Knowledge on Macroeconomic Productivity Growth: An Exploratory Study.” Journal of Finance 721 (8): 122. Funder, David. 2004. “Technical Change and the Aggregate Production Function.” Journal of Finance 329 (7): 461. Funder, Moore. 2003. “Proximity and the Use of Public Science by Innovate European Firms.” Innovation and Research Strategy for Growth 781 (2): 345. Haire, David. 2000. “Econometric modeling of R&D and Australia’s productivity.” Research Policy 560 (9): 14. Haire, Moore. 2006. “Growth Theory and After.” Quarterly Journal of Finance 671 (5): 591. Harris, Robert. 2013. “Investment Analysis of Aggressive Stocks.” Statistical Analysis 123 (4): 146. House, Robert. 2007. “Academic Research and Industrial Innovation: An Update of Empirical Findings.” Journal of Quantitative Finance 12 (44): 241. Johns, Gary. 2011. “Measuring Total Reading of Journal Articles.” Financial Journal 293 (6): 451. Johns, Gary. 2012. “Pricing and Other Means Of Charging for Scholarly Journals: A Literature Review and Commentary.” Financial Review 322 (9): 210. Johns, Gary. 2013. “The Science of Investment Analysis.” Journal of Finance 123(4): 142. Maslow, Abraham. 2006. “Measuring Total Reading of Journal Articles.” Journal of Applied Finance 123 (4): 611. McClelland, Dickinson. 2012. “Estimating the Potential Impacts of Open Access to Research Findings.” Quantitative Modelling 155 (5): 720. Mumford, Lewis. 2003. “European Takeover Regulation.” Economic Policy 43 (7): 835-923. Mumford, Lewis. 2003. “Statistical Indicators of Scientific and Technical Information communication.” Finance Journal 45(4): 303. Stwevenson, Parker. 2007. “Research and Innovation: An Update of Empirical Findings.” Journal of Quantitative Finance 12 (44): 241. Vroom, Jago. 2002. “Measuring the Social Return to R&D.” The Financial Charter 13 (91): 193. Appendix Assumptions/difficulties It is not always possible to get the right data, so for this reasons sometimes the nearest data which matches as closely with the original data is used. The required return of equity involves three different variables, one is the market rate of return, one is the risk free rate of return and the other one is the beta of the stock. The market rate of return is assumed to be the portfolio return of the stock. The portfolio return o the stock denotes the market rate of return. Thorough searching revealed that the particular company does not deal in any stocks that resemble exactly as the current investor in the present case study has. The investor has a mixed portfolio of stocks and bonds. The search revealed that other competitor companies which are from the same industry and have more or less the same size like Infratil Limited deals in stocks that resemble the 60% equity and 40% bond. The market return of that particular portfolio is considered as the market return for the same portfolio that the present investor in the case study has. Apart from that the risk free rate of return is also has some assumptions. The government bonds are the risk free assets. The return from the government bond cannot be regarded as the original rate that can be used for calculation of the rate of return. Infratil Limited offers perpetual bond which has low rate of return. This rate of return is assumed to be the risk free rate of return. `     Infratil Limited Estimated EPS GR% (from Historic Growth Rates tab)     0.44 Analyst Est EPS GR     0.33 (rate) Est GR% to use (lower of prev 2 col)     0.33 (nper) # years     10 (pv) TTM EPS (current EPS) (with minus sign)     -1.48 Future EPS in 10 years     25.63174212         2x Growth Rate     66 10 yr avg Historical PE     36.45 PE to use (lower of prev 2 columns)     36.45 Future stock price in 10 years (Future EPS x PE)     934.2770004         Min acceptable rate of return     0.120944 (nper) #years (to bring future back to today)     -10 Future Stock Price as a negative     -934.2770004 [Calculated Output] Estimated Current INTRINSIC VALUE     298.2884866 Actual Quote     35.24 Date       Margin Of Safety (MOS) PRICE     149.1442433 Actual Quote Less Than Intrinsic Price     * Delta between Intrinsic Prices & Actual Quote (Consider Positive #s)     263.0484866         % Discount off Estimated Intrinsic Price     88.18593356 (Source: Author’s Creation) Required rate of return Company  Infratil Limited Rf 3.14% b 3.64 Rm 5.60% ke 12.09% (Source: Author’s Creation) Estimated growth rate Growth Est IFT.NZ Industry Sector S&P 500 Current Qtr. N/A N/A N/A 11.50% Next Qtr. N/A N/A N/A 19.30% This Year 9.10% 18.30% 34.30% 8.40% Next Year 25.00% 40.90% 12.20% 13.60% Past 5 Years (per annum) 54.35% N/A N/A N/A Next 5 Years (per annum) 55.97% 57.00% 15.72% 9.44% Price/Earnings (avg. for comparison categories) 18.96 20.5 17.69 13.6 PEG Ratio (avg. for comparison categories) 0.34 1.72 4.13 1.41 Date Dividends growth rate yearly Avg 5/29/2013 0.06 0.846154   11/28/2012 0.0325 -0.35   5/30/2012 0.05 1.181691   11/30/2011 0.022918 -0.46524   11/28/2011 0.042857 0.0084   6/1/2011 0.0425 0.7 0.225433 12/1/2010 0.025 -0.33333   6/14/2010 0.0375 0.5   12/7/2009 0.025 -0.33333   7/27/2009 0.0375 0.5   12/8/2008 0.025     (Source: Author’s Creation) Revenue Est Current Qtr. Next Qtr. Current Year Next Year 0-00-31 0-03-31 14-Mar 15-Mar Avg. Estimate 2.38B 2.38B 2.38B 2.57B No. of Analysts 4 4 4 4 Low Estimate 1.98B 1.98B 1.98B 2.20B High Estimate 2.56B 2.56B 2.56B 2.77B Year Ago Sales 2.37B 2.37B 2.37B 2.38B Sales Growth (year/est) 0.50% 0.50% 0.50% 7.90% (Source: Author’s Creation) Read More