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Team Valuation Report: Semester 1, 2020 The company selected for this report is: Telstra Corporation Limited Ticker code: TLS.AX Your team (comprising 2-5 students) is requested to advise a...

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Team Valuation Report: Semester 1, 2020
The company selected for this report is:
Telstra Corporation Limited
Ticker code: TLS.AX
Your team (comprising 2-5 students) is requested to advise a well-diversified high net-worth in-
dividual who is interested in investing in shares with a fundamental value greater than the share
price. As a financial analyst, you are required to write a detailed recommendation report on
whether to invest in the selected company.
The report shall be structured in 5 Sections (preceded by a
ief executive summary) to address the
following questions of your client:
1. What are the competitive forces behind the industry’s structure? How does competition affect the
margins of the industry and the company? How does the company’s profitability compare rela-
tively to its peers (you should select between 3 and 5 industry peers)? What is the firm’s business
strategy? Please highlight potential investment risks the company could face in the future (please
efer to Lectures 1 and 2);
2. Analyse how the market is pricing the firm using different relative (or market) valuation tech-
niques. Please use the same group of industry peers identified in the previous section (please re-
fer to Lectures 3 and 4);
3. Estimate carefully the cost of debt, cost of equity and cost of capital for this company (please re-
fer to Lectures 6 and 7);
4. Estimate the free cash flows of the company (please refer to Lectures 8 to 10);
5. Estimate the target price of the company, issue a buy/hold/sell recommendation to your client,
and draw your conclusion. (please refer to Lectures 11 and 12).
Your report is expected to be submitted by 11:59 pm Sunday 31 May 2020 AEST (please refer
to the unit guide for more information about late submissions). Your submission should contain
all of the following:
(i) A 7 to 10 page recommendation report (in font Times New Roman – font size 11) in Word o
PDF, discussing the scope of the work, your justified assumptions, findings and recommen-
dation. Please refer to examples of professional analyst reports (available on iLearn) when
formatting your team report;
(ii) A cover page indicating: (a) your team name; (b) members’ name, student number, email
address, and allocated section of the assignment; and (c) class time. Failure to indicate the stu-
dents’ allocated section of the assignment on the cover page will result in significant deductions.
Please also identify the team leader for email co
espondence. Your cover page should be the first
page of your assignment, and is not counted in the limit of 10 pages;
(iii) A spreadsheet model (in Excel), showing all your numerical assumptions, steps of the esti-
mation, and company’s valuation.
The team leader ONLY should submit the equity report to the Turnitin class-link that will be activat-
ed on iLearn. The team leader should also submit the Excel file containing all the calculations in a
separate folder that will also be available on iLearn. Please give both these files your team name (e.g.,
BestTeamEver01.xls, and BestTeamEver01.doc or BestTeamEver01.pdf). More information on the
submission process will be provided in class in Week 10 or 11.
The marking criteria will be as follows:
Criteria Marks
Assumptions and bases 10
Numerical accuracy 5
Interpretations and Recommendation 10
Overall quality of the report (format and language) 5
Total 30
Note:
-Use sub-headings that contain the question number as a title. Answer the questions in the orde
they're asked.
-Write in a 'front focused' manner. State the most important things up front. For example in ques-
tion 5, state your buy, hold or sell recommendation, fair value estimated stock price and actual
market price in the very first sentence.
-Extra evidence such as graphs and tables is highly desirable. They must be placed in-text. Figures
or tables should be placed directly above or wrapped in the paragraph that they are discussed in.
Do not put figures in the appendix; they will not be marked. Also note that your written test file
will usually be the only thing that we read and examine. The spreadsheet will only be used to
check for inconsistencies.
-Use in-text referencing of sources. For example: "...the equity premium relative to long-term gov-
ernment bonds was an annualized 3.8%. The expected equity premium is lower, around 3% to
3½% on an annualized basis." (Dimson et al XXXXXXXXXXPut a bibliography at the end of your assign-
ment: Dimson, Elroy and Marsh, Paul and Staunton, Mike, Equity Premia Around the World (Oc-
tober 7, XXXXXXXXXXAvailable at
SSRN: https:
ssrn.com/abstract= XXXXXXXXXXor http:
dx.doi.org/10.2139/ssrn XXXXXXXXXX
https:
protect-au.mimecast.com/s/P8UaCRONg6sgNGrms9Cbtr?domain=ssrn.com
https:
protect-au.mimecast.com/s/D8XuCVARmOHPM2lwIzs4__?domain=dx.doi.org

Competitive Forces behind the Industry’s Structure
Australian Telecommunication industry faces intense competition. Entry of the new entrants is regulated by ACCC. The type of competition in the Australian Telecommunication market is like an Oligopoly market.
Supplier’s Powe
In the industry the suppliers power is low, because the regulations ae governed by ACC, so that no company charge high prices. Therefore, the industry is highly regulated and controlled by ACCC.
Buyer’s Powe
Buyer’s Bargaining power is also low because they are very price sensitive and buy in small quantities and not in bulk. Because the market is oligopoly market, therefore the consumers are price takers. There are only few firms like Telstra, Optus and VHA
Threat of Substitutes
Since there are only few firms, therefore the threat of the substitutes is low. These firms only control the product offerings in the market. Therefore, there is very little threat of substitutes.
Threat of New Entrants
The entry into the Australian Telecommunication sector is governed by ACCC. ACCC encourages the entry of new entrants, but still the threat of new entrants is low because the cost involved is high.
Rivalry
The rivalry between the existing firms is very high. There are huge ba
iers on exit. The reason behind this is the large amount of fixed cost involved in telecommunications business. Firms always compete to gain the largest market share and thus the rivalry is intense among the few firms.
Effect of competition margins on the industry margins and the company
The Industry margin on an average is 9.55%. Out of this the maximum margin is of Rodgers communication with the margin of 13.45%. However in Australia two main companies in telecom sector are Telstra and Optus who have margin of 8.29% and 9.90%.
Profitability of Telstra Vs Profitability of Peers
To compare the profitability we have taken four peers – Optus, Rogers Communication, AT&T and T.SW. Looking at the profitability of the four companies we noticed that Rogers communication had the maximum profitability of 13.45% compared to other peers. Telstra has profitability of 8.29% and AT&T and T.SW has lower profitability of 8.05% each. The profitability of the industry comes out to be 9.55%. Therefore the profitability of Telstra is lower than that of industry but is still the third most profitable among its peers.
    Company
    Profitability
    Telstra
    8.29%
    Rogers Comm
    13.45%
    AT&T
    8.05%
    T.SW
    8.05%
    Optus
    9.90%
Business Strategy employed by Telstra
Creating Simplified Product offerings and creating a digital experience
There would be more focus on the transparency of the process and customer satisfaction. There will a change in product design, customer support and selling services. The company might remove the huge bundle of 1800 plans for consumers and convert them only into 20 plans for simplification purpose. Company is focussing on digitalisation to provide a simplified experience to the customers by 2021.
Setting up an infrastructural unit so that performance can be improved
Company is planning on building the infrastructure which will include the data centres, cables, pipes etc. It will help in providing the transparency and flexibility to the system. The infrastructure will also focus on the technological innovations and improvements.
Simplifying the structure and empowering the people
The structure of the company will be simplified along with the ways of working. The company might also resort to consolidation. This will also result in reduction of employees and the focus would be on more employee skill development and training
Reducing the cost and improving the financial performance
The company would focus on improving the financial strength by reducing the cost and strengthening the balance sheet. The cost can be reduced by improving the productivity and using better technology.
Potential Future Investment Risk
· Regular interventions by ACC to regulate the price can cu
the profitability of the company.
· The cost and the budget is rising posing risk to the profitability of the company.
· With the emergence of 5G there is a trade-off going between the lower prices or the better technology.
Cost of Debt, Cost of Equity and Cost of Capital
    Cost of Equity
    Risk free rate
    0.95%
    Beta
    0.65
    Market Return
    5.44%
    Cost of Equity
    3.88%
    
    
    Cost of Debt
    Interest
    $8,68,000
    Long Term Debt
    $1,48,18,000
    Cost of Debt
    5.86%
    
    
    Cost of Capital
    Tax
    $9,23,000
    Income Before Tax
    $30,72,000
    Tax Rate
    30%
    Debt
    $1,48,18,000
    Equity
    $1,45,49,000
    Cost of Capital
    3.99%
Cost of Equity
To compute the cost of Equity we used the CAPM Model (Capital Asset Pricing Model).
CAPM Model:
Ke = Rf + * ( Rm – Rf)
Where,
Ke = Cost of Equity
Rf = Risk Free Rate
= Beta
Rm = Market Return
Rm – Rf is known as Market Risk Premium
Risk Free rate was obtained from 10 Year Treasury Rate of the Australian Bond. Risk free rate is equal to 0.95%. Market Return was computed on the adjusted closing price of ASX index ( 5 year monthly data). To compute Beta, regression analysis was used. Market Returns were regressed over Stock returns for the period of 5 years. According to regression result, Beta
is equal to 0.65.
Now, Using all the three parameters and the CAPM Model
Cost of Equity = 0.95% + 0.65 * XXXXXXXXXX% - 0.95% ) = 3.99%
Therefore the cost of Equity is 3.93%
Cost of Debt
Interest payment and Long Term debt of the company were obtained. After that interest rate was computed which gives the cost of debt before the tax. Cost of debt was obtained by dividing Interest payment by Long term debt.
Cost of Debt = 5.86%
Cost of Capital
To compute the Tax rate, Income Tax for the year 2019 was taken from the income statement of the company. This comes out to be $ XXXXXXXXXXThe Income before tax in which interest was charged is $ XXXXXXXXXXTherefore Tax rate could be computed as Tax paid divided by Income Before Tax.
The Tax rate is equal to 30%.
Cost of Capital or also known as
Answered Same Day May 31, 2021

Solution

Neenisha answered on May 31 2021
134 Votes
Competitive Forces behind the Industry’s Structure
Australian Telecommunication industry faces intense competition. Entry of the new entrants is regulated by ACCC. The type of competition in the Australian Telecommunication market is like an Oligopoly market.
Supplier’s Powe
In the industry the suppliers power is low, because the regulations ae governed by ACC, so that no company charge high prices. Therefore, the industry is highly regulated and controlled by ACCC.
Buyer’s Powe
Buyer’s Bargaining power is also low because they are very price sensitive and buy in small quantities and not in bulk. Because the market is oligopoly market, therefore the consumers are price takers. There are only few firms like Telstra, Optus and VHA
Threat of Substitutes
Since there are only few firms, therefore the threat of the substitutes is low. These firms only control the product offerings in the market. Therefore, there is very little threat of substitutes.
Threat of New Entrants
The entry into the Australian Telecommunication sector is governed by ACCC. ACCC encourages the entry of new entrants, but still the threat of new entrants is low because the cost involved is high.
Rivalry
The rivalry between the existing firms is very high. There are huge ba
iers on exit. The reason behind this is the large amount of fixed cost involved in telecommunications business. Firms always compete to gain the largest market share and thus the rivalry is intense among the few firms.
Effect of competition margins on the industry margins and the company
The Industry margin on an average is 9.55%. Out of this the maximum margin is of Rodgers communication with the margin of 13.45%. However in Australia two main companies in telecom sector are Telstra and Optus who have margin of 8.29% and 9.90%.
Profitability of Telstra Vs Profitability of Peers
To compare the profitability we have taken four peers – Optus, Rogers Communication, AT&T and T.SW. Looking at the profitability of the four companies we noticed that Rogers communication had the maximum profitability of 13.45% compared to other peers. Telstra has profitability of 8.29% and AT&T and T.SW has lower profitability of 8.05% each. The profitability of the industry comes out to be 9.55%. Therefore the profitability of Telstra is lower than that of industry but is still the third most profitable among its peers.
    Company
    Profitability
    Telstra
    8.29%
    Rogers Comm
    13.45%
    AT&T
    8.05%
    T.SW
    8.05%
    Optus
    9.90%
Business Strategy employed by Telstra
Creating Simplified Product offerings and creating a digital experience
There would be more focus on the transparency of the process and customer satisfaction. There will a change in product design, customer support and selling services. The company might remove the huge bundle of 1800 plans for consumers and convert them only into 20 plans for simplification purpose. Company is focussing on digitalisation to provide a simplified experience to the customers by 2021.
Setting up an infrastructural unit so that performance can be improved
Company is planning on building the infrastructure which will include the data centres, cables, pipes etc. It will help in providing the transparency and flexibility to the system. The infrastructure will also focus on the technological innovations and improvements.
Simplifying the structure and empowering the people
The structure of the company will be simplified along with the ways of working. The company might also resort to consolidation. This will also result in reduction of employees and the focus would be on more employee skill development and training
Reducing the cost and improving the financial performance
The company would focus on improving the financial strength by reducing the cost and strengthening the balance sheet. The cost can...
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