Valuecruncher places a value of $6.70 for each Michael Hill share with a range between $3.98 and $9.66. This is very close to the current share price of $6.82.
Revenue Growth has been fairly unstable in the last few periods with growths of 15.56%, 5.15%, and 12.16% in the 03/04, 04/05, and 05/06 periods. We have forecasted revenue growth at 10%, 8% and 6% for the next three periods.
In 2004 and 2005 EBIT margins were 9.16% and 9.48%, respectively. EBIT margins have suffered this year dropping to 7.95%. This can be attributed to high gold (and other metals) prices, with record highs seen during the early-to-mid parts of 2006. It is impossible to predict what will happen to metal prices, so we have forecasted EBIT margins of 8% for the next three years. The wide range of values seen in this valuation is due to the price being extremely sensitive to EBIT margins. A change of EBIT margin by 2% will affect the share price by 30% to 40%.
Terminal growth is expected to be lower than the historical long-term growth rate. We expect 2%.
Discount Rate (WACC)
The discount rate used in this analysis is 8%, which is adjusted up from PwC’s estimation of 7.6% (sourced from their cost of capital report).