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What is the value of Kathmandu Holdings Ltd.?

An analysis based on DCF Model and Multiple Analysis

Seminararbeit 2018 20 Seiten

BWL - Unternehmensforschung, Operations Research

Leseprobe

Inhaltsverzeichnis

1. Introduction

2. Background

2.1 Company profile

2.2 Attempted Takeover by Briscoe

3. Historical Financial Performance

4. Company valuation

4.1 Forecast Future Performance and Valuation

4.2 Industry Benchmarking

5 Conclusion

Executive Summary:

Determining the value of a company is a complex procedure which cannot be automated by any algorithm (Beranová, 2013). This report investigated the intrinsic value and the relative value of Kathmandu Holdings Ltd., a New Zealand based company operating in the retail speciality industry. The valuation was based on the discounted cash flow model (DCF model) and a market multiple analysis. In this light, this report used assumptions such as future growth rate, EBIT growth, working capital, PPE and intangible asset turnover, all of which were largely affected by micro- and macroeconomic factors. Based on our calculation of a value per share of $2.72 using the DCF model, Kathmandu has been slightly over-priced in 2018 (+13 per cent). This result was supported by the current share price of Kathmandu of $2.50 as of 1 March 2019. The selection of the company used for the market multiple analysis was based on the industry, comparable size, leverage, profitability and growth potential. Due to the size of the New Zealand economy and the nature of the Kathmandu business, the options to choose from were limited. We compared Kathmandu to The Super Retail Group, a retailer of automotive, outdoor equipment and clothing, operating in Australia, New Zealand and China. The NOA multiple of $2.74 suggested that Kathmandu was slightly over-priced, which was in line with our findings from the DCF model.

1. Introduction

The valuation of a business entity is a complex technical process, but the actual value-adding activity for an investor is developing an understanding of the business and its value drivers by interpreting its financial statements (Schmidlin, 2014). This report focusses on the company valuation of Kathmandu Holdings Ltd. for the purpose of determining the company’s net worth. After a short company profile and background to the previous takeover by Briscoe is given, we will proceed to an overview of the historical financial performance. The company valuation is based on the discounted cash flow model (DCF model) and a market multiple analysis. The valuation will include the assumptions used for the forecasting model, including future growth rate, EBIT growth, working capital and PPE turnover – assumptions that are highly influenced by micro- and macroeconomic factors. The industry benchmarking will further investigate the latter, by comparing the current value of similar businesses to Kathmandu Holdings Limited, with a strong emphasis on price to book (PB) and price to earnings (PE) multiples.

2. Background

2.1 Company profile

Kathmandu Holdings Ltd. is a New Zealand based company operating in the retail specialty industry. It offers a range of apparel as well as travel and camping equipment and is a leading retailer in Australasia (Kathmandu, 2019A). As at 31 July 2018, Kathmandu operates 167 retail stores across New Zealand, Australia, and the UK. In addition, the premium outdoor brand is operating through online channels, currently predominantly targeting the US (Kathmandu, 2019A). The main competitors of Kathmandu within the specialty retail industry include outdoor stores for fishing and camping, and big retailers, such as Macpac, Icebreaker or Torpedo 7, which are all vying for similar segments in the market. Due to the low start-up costs, the industry is also facing fierce competitions from online-only stores, where customers can shop around the clock from the comfort of their homes.

2.2 Attempted Takeover by Briscoe

The year 2015 was a challenging time for Kathmandu, as the company delivered unsatisfactory results, including sales growth of 4.2 per cent, a decrease in EBIT of 48.4 per cent from NZ$64.3m in FY14 to NZ$33.2m in FY15, accompanied by a decrease in earnings per share of 10.1 per cent (Kathmandu, 2015A). In June 2015, Kathmandu shareholders received an offer to sell their shares to the Briscoe Group that intended to take over the company. At that time, Briscoe had already acquired a 19.9 per cent stake in Kathmandu. The conditions outlined by the offer included the implied value of 1.80 per share and a minimum acceptance of 90 per cent among shareholders (Kathmandu, 2015). In early August that year, Kathmandu issued a statement to the NZSC and ASX, encouraging shareholders to reject the offer by ignoring all documents sent by Briscoe. The reasons for the recommendation included that the offer was below a third party adviser’s valuation of the company, as illustrated in Figure 1. Furthermore, the offer did not reflect the underlying value of the company and failed to recognize the strengths of the business and its future growth opportunities. Moreover, Briscoe was assumedly able to afford a far higher price per share (Kathmandu, 2015).

Figure 1: Implied value of Briscoe offer vs Independent valuation

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Source: Kathmandu, 2015

To Briscoe’s disappointment, the takeover offer was rejected by the vast majority of Kathmandu’s shareholders in early 2016. This was a strong indicator of shareholders’ confidence in Kathmandu’s published forecast and expected growth potential (Kathmandu, 2016A). The performance in the following years improved significantly and demonstrated the board’s ability to turn the company around.

3. Historical Financial Performance

The year 2018 has been Kathmandu’s most successful to date. Sales increased by 11.7 per cent to $497.4m, while same-store sales increased by 4.4 per cent measured at constant exchange rates. Alongside that, the company’s profit after tax now sits at $50.5 million, up by 32.9 per cent (Kathmandu, 2019A). A major event in 2018 has been the acquisition of Oboz Footwear for an initial sum of USD60m, a wholesale business with over ten years of experience as a distributor for Kathmandu. The US company shares similar values of sustainability and product innovation (Kathmandu, 2019A).

Figure 2: Historical Earnings per Share (EPS) growth

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Figure 2 illustrates the historical earnings per share growth for Kathmandu, the speciality retail industry and the overall market for the past five years and last year. EPS is widely used to measure the absolute profit that a company earns on a per share basis and is calculated by dividing Net profit by the average number of shares on issue during the year. As this metric uses a common base, EPS can be used as a tool for the comparison of different companies and industries (Simply Wall Street, 2019). Kathmandu’s year on year EPS growth rate has been positive over the past 5 years; on average 0.8 per cent. In 2017, Kathmandu’s EPS growth of 32.8 per cent exceeded the NZ speciality retail industry average of 22.6 per cent, which indicates that Kathmandu grows stronger than its competitors (Reuters, 2019).

Figure 3: Revenue and Net Profit after Tax of KMD 2011-2018

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As shown in Figure 3, the generated revenue of Kathmandu increased gradually over the past eight years, from NZ$306,143m in 2011 to NZ$497,437m in 2018. In 2015, a rise in operating expenses (excl. depreciation, amortisation and financing costs) of 17 per cent resulted in a decline of Net Profit after tax. The increase of operating expenses was attributable to a rise in retail and online operating costs including the impact of opening 15 retail locations in the FY14 and ten further stores during the FY15. From 2016 onwards, Kathmandu improved its operating cost efficiency resulting in an upwards trend of Net Profit after tax (Kathmandu, 2015A).

4. Company valuation

The valuation of a business entity requires a complex set of processes which are mutually connected and of different importance based on the value category inquired (Beranová, 2013). Popular valuation methods used for valuing a company as a going concern include the discounted cash flow model (DCF) and the market multiple analysis. The DCF model is used as an intrinsic value approach, where the firm’s free cash flow is forecasted to a certain point in time and discounted back to today at the company’s weighted average cost of capital (WACC). The market multiple analysis is seeking the relative value of a company by comparing the current value of a company to other similar companies in the industry. While the purpose of both approaches is to determine whether the share price is currently under-priced or over-priced, the DCF model produces more accurate results through increased complexity in the model, despite using a high number of assumptions (Easton, McAnally, Sommers, & Zhang, 2018).

4.1 Forecast Future Performance and Valuation

The valuation through the DCF model requires the use of assumptions based on the audited financial statements of Kathmandu as well as macroeconomic factors that impact the value of the company. The DCF is used to determine the intrinsic value, rather than the share price provided by the market, and therefore can be significantly affected by certain market behaviours (Beranová, 2013). The horizon period selected for the model is eight years, from 2011 to 2018. As illustrated in Figure 4, the forecast performance indicators used as assumptions include the future growth rate, EBIT growth, working capital and PPE and intangible asset turnover.

Figure 4: Forecast performance indicators

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Future Growth Rate

The historical performance of Kathmandu suggests that sales increased from NZ$425,593m in 2016 to NZ$445,348m in 2017, at a growth rate of 4.64 per cent. In 2018, sales skyrocketed to NZ$497,437m which equates to growth in sales of 11.70 per cent. This development was supported by the launch of new innovative products and a stronger focus on customer experience. However, the primary driver in revenue was the acquisition of Oboz, a US-based footwear brand with a strong presence in the North American market. Kathmandu’s strategy is now focussed on continuously improving its core market in Australasia, and implementing international growth strategies targeting new markets (Kathmandu, 2018). In this process, the acquisition of Oboz may create new opportunities for Kathmandu to access the North American market. Thus, we anticipate the growth in sales to start off strong in 2019 (see Figure 4). However, these periods of rapid growth cannot continue indefinitely (Brealey, Myers & Marcus, 2018). With a forecasted decrease in GDP growth in the core market in New Zealand and Australia, there will be a decline of average national income and customer spending (Trading Economics, 2019A; B). Thus, we anticipate the growth of sales to decline over the next five years. The terminal growth rate in 2024 is based on a conservative assumption considering the current inflationary environment of approximately 1 per cent (Kathmandu, 2018A).

Figure 5: Historic and Future Sales Growth of KMD 2011-2024 (incl. Trendline)

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Details

Seiten
20
Jahr
2018
ISBN (eBook)
9783668963986
ISBN (Buch)
9783668963993
Sprache
Englisch
Katalognummer
v483032
Institution / Hochschule
University of Auckland – Graduate School of Management
Note
2,0
Schlagworte
Valuation Discounted Cash Flow Industry Benchmarking Finance Guide to valuation

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Titel: What is the value of Kathmandu Holdings Ltd.?