Potential investment opportunities - JSE Listed company

You have recently been contracted to an investment firm, with the aim of doing research on various companies to evaluate their relative potential as investment opportunities.

Your manager will therefore assign you a JSE Listed company for analysis. Use the historical financial statements of the firm (for the last 5 years or longer), to comment on the following aspects: (Note: the questions provide a guideline of what you should be aiming to answer, and are not exhaustive)

1. Brief business profile
? What is the major revenue-producing factor in this firm?
? What industry sector does it fall in? Who are its closest competitors?
? Does the firm have subsidiaries (local or international)? What are the relative influences on its current revenue and profitability?

2. Corporate Governance
? Who is the CEO? Board of directors? Do any of these individuals have shareholdings /share options in this company?
? What is the share voting structure of the firm?
? How does the firm interact with its various stakeholders?
? How does it align with King IV?
? What are the companyís policies with regard to Environment, Social and Governance (ESG) issues?

3. Shareholder analysis
? How many shareholders does the company have? What proportion is institutional holdings?
? Who is the average investor in this share? (Individual/Fund, domestic/foreign)
? Who are insiders in this company? (Besides manager and directors, anyone with more than a 5% holding is considered an insider)

4. Capital structure choices
? What are the different types of financing that this company has used to raise funds?
? How does the level of debt in this company relative to others in the same industry grouping? (provide recommendations if you find they are over- or under-indebted)
? Is your companyís debt rated? If so, what rating does it have?

5. Risk and return
? What is the risk profile of your company?
? How much risk is there in this firm? Where is this risk coming from? (market/firm/industry/currency/interest rates)
? What is the firmís current cost of equity, debt and capital?
? What return would you have earned investing in this companyís stock? Does the return compensate you for the risk?
? Are there any prospects planned for the future that might serve to increase either the risk or return of this company?

6. Dividend policy
? What is the dividend policy of the firm and how does it compare to its industry peers? (provide recommendation as a result of your findings)
? How much has the firm returned to its shareholders over the last few years? (both in dividends and share buybacks)

7. Valuation Ė use any five methods (relative or absolute) of assigning a value to this firmís shares, providing a justification of your method chosen.
? What type of cash flow is most preferable to discount for this firm? (FCFF/Dividends/FCFF etc). Why?
? What growth pattern would you choose for this firm? (Constant/multistage) Why?
? What is your estimate of the value of equity for this firm? How does it compare to the market value of equity?
? What is the key variable (risk/growth/leverage/profit margins) driving this value? How sustainable is this in the long-term?
? How sensitive is your estimation of value to changes in the different assumptions?

In answering these questions, you must make use of the following techniques:
? Sensitivity analysis
? Monte Carlo simulation
? Regression analysis

8. Use any 3 measures to evaluate the value added to shareholders over the 5 year period of your analysis. Analyse what this information, alongside the answers to the other 7 questions, indicates about the executive management of this firm.

Note: this is a quantitative assignment and as such you are expected to quantify all the risk factors used in the valuation techniques.
Compile your findings into a research report to be presented to a prospective client, detailing whether he should/should not invest in this company, and why. This research report should be no longer than 25 pages (excluding appendices).

Potential investment opportunities - JSE Listed company

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