Intrinsic Value Forecasting

General Comments
A lot of students stress over the measurement and forecast of individual items from the income statement and balance sheet. Please keep in my mind that what is important is the process rather than the actual output. For example, when you are conducting a regression, what I consider important is your judgement of whether the results are reliable enough to use rather than the numbers themselves. You should be able to interpret the regression outputs and decide whether they should be included in the valuation or not. Similarly, I do not have in mind a $value of what the intrinsic value of any of the firms being analysed should be, however I have a good idea of the methodology you should be using, and it is the methodology that is most important.
Purpose
The purpose of this assignment is to conduct a fundamental analysis of a company and derive an intrinsic value for its shares. This will require students to identify whether stocks are under or over valued in accordance with the valuation models and techniques used in this course. This assignment is to be done in groups of 5 students. Please read the following carefully.
The assignment due date is Friday, October 23rd, by 5 pm, and is worth 20% of the total assessment for this subject. The marks for this assessment piece is not redeemable. You are required to submit 1 word file (a maximum of 1200 words) and an excel file electronically to ‘MyUni’.
There are 2 sections to this assignment. In Section A you are required to perform a valuation of BHP Group Limited (ASX Issuer code: BHP) using the discounted cash flow methodology and in Section B you are required to perform a smaller valuation by multiples. The majority of the work required from you is in Section A and the marking reflects this (see next page). You are required to submit both an Excel file and a Word document electronically and each will be marked separately.
Section A
You are required to perform a valuation of BHP Group Limited (ASX Issuer code: BHP) employing the discounted cash flow methodology to determine whether the share price of BHP on the 1st of July of the year in your analysis period (see below) is fair. The definition of cash flows to be forecast is free cash flows to equity and free cash flows to the firm. Before performing the valuation, you are required to conduct preliminary research.
Year selection is based on the sum of each group member’s student id:
2019: sum ends in ‘0’, ‘1’ or ‘2’
2018: sum ends in ‘3’ or ‘4’
2017 sum ends in ‘5’, ‘6’ or ‘7’
2016: sum ends in ‘8’ or ‘9’
Required
You have been asked by your manager to perform a valuation of shares in BHP by addressing the following tasks.
1. Provide an overview of the current operations of BHP and the industry sector to which BHP belongs. This should include a discussion of the type of goods or services that are produced by BHP, its recent performance and the key challenges faced by it and the industry sector to which it belongs. For comparison, compare the performance of BHP with a listed company operating in the same or very similar industry. This step must be completed in word document only.
2. Produce pro-forma financial statements and perform a DCF valuation using free cash flows to equity and the firm. See DCF Valuation Instructions below. This step must be completed in excel spreadsheet only. Please follow the presentation/format guidelines otherwise you may lose marks or some of your work may not be marked.
3. Provide a recommendation to Buy/ Sell or Hold shares in BHP at the valuation date. This step must be completed in Word document only.
Section B
Determine whether each of the following stocks (based on the sum of each group member’s student id) is currently under or overvalued (as of January 15th, 2020) using the trailing P/E ratio or trailing P/B ratio (including fundamental measures of these ratios) and an appropriate peer group. You should select two peer firms for your comparative analysis. Show relevant calculations and discuss the choice of multiple and the selection of the peer group. This step must be completed in Word document only.
Commonwealth Bank of Australia (ASX Issuer code: CBA): sum of each group member’s student id ending in ‘0’, ‘1’ or ‘2’
Woolworths Group Limited (ASX Issuer code: WOW): sum of each group member’s student id ending in ‘3’, ‘4’, ‘5’, or ‘6’
Origin Energy Limited: (ASX Issuer code: ORG): sum of each group member’s student id ending in ‘7’, ‘8’ or ‘9’

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