Question

Part A) For investment perspective you are analyzing the company which is working under the Fertilizer Sector Engro Fertilizer (EFERT). A long time ago, it was considered as one of the best company by investors due to high dividend payouts though investors are always willing to invest in this company. Two years ago, position of this company’s cashflows become worst which impact the overall profitability on the company and the financial health amid ongoing situation of worst financial board of directors taken decision to cut down the dividends payments to the shareholder and share price also gradually declining in the market. After recent financial results, board of directors showed their positive expectations for revival of the company where new strategies implement to boost the sales and re-gain its market share. You are again want to investment in this company after analyzing the historical dividends payout patterns. Which are mentioned below:

	2016	2017	2018	2019	2020
EPS	6.78	7.60	12.48	13.90	14.00
Payout as per Par Value @ 10	20.00%	25.00%	30.00%	35.00%	30.00%

Further, you gathered the information pertaining to sales growth expectations and net margins which are analysis consensus for next 5 years.

	2021	2020	2023	2024	2025
Sales growth	12.00%	10.00%	8.00%	10.00%	12.00%
Net Margin	20.00%	19.50%	21.50%	23.00%	22.50%

Currently company’s sales for the year ended FY 2020 stood at 89.54mn. You will apply the dividend discount model to value the company after calculation of the dividends properly. For calculation of cost of equity you can use the CAPM model (hint: use risk free rate as a 5-years PIB yield and Risk premium upto 7% while beta can be calculated through statistical variance methodology as explained in the class). This calculated cost of equity you can input in your formula to find out the intrinsic value and use sustainable growth rate 5.5% for dividends growth). (at least 250 words write up required)

Part B) This party is linked with part A, use the data from the part A and sensitize the intrinsic value by changes in cost of equity and growth projections so how it will impact on the company’s intrinsic value.

Instructions:

You are required to calculate the intrinsic value of each part and then compared the calculated prices along with logical reason.

Answer 1

Valuation with the Capital Asset Pricing Model uses a variation of discounted cash flows; only instead of giving yourself a "margin of safety" by being conservative in your earnings estimates, you use a varying discount rate that gets bigger to compensate for your investment's riskiness. There are different ways to measure risk; the original CAPM defined risk in terms of volatility, as measured by the investment's beta coefficient. The formula is:

K_c   = R_f   +   beta x ( K_m - R_f )

where

K_c is the risk-adjusted discount rate (also known as the Cost of Capital);
R_f is the rate of a "risk-free" investment, i.e. cash;
K_m is the return rate of a market benchmark.