Valuecruncher has placed a mid-point estimate for Apple at $77.98 per share with a range between $63.15 and $94.00.The current share price is $85.94.

Key Assumptions

Revenue Growth

Apple has experienced rapid revenue growth in the last three years, growing by 33.38%, 68.27% and 38.65% in the last three financial periods. The underlying factor behind the growth of Apple is their continuing innovation, with products such as the iPod, iPhone and OS X. With Apple continuing to develop innovative technologies it is likely that revenues will continue to grow. We have forecasted revenues to grow by 35%, 30% and 25% for the next three periods.

EBIT Margins

Apple’s EBIT margins have also been on the rise from a low of 1.48% in 2004 to a high of 14.59% in 2006. We have forecasted margins to be 17% for 2007 (due, in part, to the release of the iPhone, which has gross margins of around 50%). Apple’s long term EBIT margin is assumed to be 15%. It is not surprising that Apple has higher margins than its comparators (Dell and HP: EBIT margins around 8.5%) as they are moving into small consumer electronics as well as remaining in the lower margin personal computer sector.

Terminal Growth

The terminal growth rate used in this analysis is 4%.

Discount Rate (WACC)

The discount rate applied is 11%.

Apple Inc. Valuation

Valuecruncher’s mid-point valuation of Telstra Corporation is $4.03 per share with a range between $3.18 and $4.95. The current share price is $4.24.

Key Assumptions

Revenue Growth

Revenue growth has been fluctuating for Telstra due to a 5-year restructuring plan that is currently taking place. Growth rates for the last three periods have been -1.55% (03/04 period), 5.46% (04/05 period) and 2.93% (05/06 period). Telstra expects revenue to grow by 2-2.5% in the next financial period. We have forecasted growth rates of 2%, 2.5%, and 3% for the next three periods, slowly climbing towards terminal growth of 3%.

EBIT Margin

Telstra’s EBIT margins have recently declined from 31% in 2004 and 2005 to 24% in 2006. This is attributed to the movement of the business into newer low-margin products as a result in technological development. Telstra have forecasted EBIT to rise by 2-4% in 2007, corresponding to EBIT margins between 23.8-24.3%. We have forecasted margins to remain at 24% in 2007 and to further decrease to 22% and 20% in 2008 and 2009.

Discount Rate

The discount rate applied is 10% (following the discount rate presented in the ‘Financial Performance & Performance Analysis’ document that Telstra have released.

Terminal Growth

Terminal growth is assumed to be 3%.

Telstra Corporation Valuation

Valuecruncher’s mid-point estimate of BT Group is £3.06 with a value range between £2.49 and £3.65. The current share price of £3.11 is 1.60% higher than our mid-point estimate.

Key Assumptions

Revenue Growth

BT Group has been undergoing considerable changes in its business strategy since 2001. It has since seen poor revenue growth that has only recently picked up. Revenue growth has been improving since 2003, rising from a low of -1.11% in the 03/04 period to a high of 5.89% in the 05/06 period. From looking at the first half results of FY07 it is likely that revenues will rise to around £21 billion, corresponding to a 7% growth in revenues. Much of this rapid growth is attributed to the company’s “new wave” services, which include revenues from ICT, broadband and mobile products. It is unlikely that this magnitude of growth will be sustainable in the long-term so we have forecasted revenue growth at 7%, 5% and 3% for the 06/07, 07/08, and 08/09 periods, respectively.

EBIT Margins

BT’s EBIT margins have ranged between 13-15% in the past four years (13.50% in 2006). These margins are much lower than the margins experienced by BT’s competitors such as Telstra, which have EBIT margins in the range of 23-30%. The company’s “new wave” services are also likely to increase the EBIT margins experienced by BT. We have forecasted margins to increase to be 14% in 2007, 15% in 2008 and 16% in 2009.

Terminal Growth

Terminal growth is assumed to be 3%.

Discount Rate (WACC)

The discount rate applied is 11.5% (the discount rate that was used in a 2006 regulatory financial report).

BT Group Valuation

Rakon represents an interesting case for Valuecruncher. It is hard to say where Rakon will position itself in its respective market in the next few years. From what can be taken from the 2007 interim report, it seems that at least in the short-term, Rakon will concentrate on it’s current product lines (in quartz crystal technologies with emphasis on GPS systems), rather than branch out into completely new products.

Valuecruncher values each Rakon share at $2.59 with a range between $1.85 and $3.44. The current share price stands at $3.66, outside of Valuecruncher’s valuation range.

Key Assumptions

Revenue Growth

Revenue growth for Rakon was 41.98% in the 04/05 period and 4.13% in the 05/06 period, which represented unusually low growth. From the figures presented in the 2007 interim report, it can be assumed that revenues for 2007 will be around $100 million, representing a growth rate of 40% in the 06/07 periods. We have also assumed revenue growth to be 30% in the 07/08 period and 20% in the 08/09 period, following the trend that revenue growth will remain high but continually decrease over the next few periods.

EBIT Margin

EBIT margins have grown steadily from 6.03% in 2004 to 11.61% in 2006. If we assume that Rakon will continue to concentrate on the development of their existing products, it is likely that EBIT margins will continue to rise. We have forecasted these to continue to grow to 15%, 20% and 25% in the next three years.

Terminal Growth

Terminal growth is expected to be 3%

Discount Rate (WACC)

The discount rate used in this analysis is 13%.

Commentary

It comes as no surprise that the value we have come up with is under the current share price. The assumptions we have put in place restrict Rakon to expand only in their current product lines. Since the release of Rakon onto the stock exchange there has been much hype about this stock, with most of it being justified by possible growths in the industry that the company belongs to. However, we have valued Rakon on its current core business. Perhaps the market is valuing Rakon with more growth opportunities than we are? Based on our valuation and the current market price, the value that the market places on these ‘extra’ growth opportunities is $114 million (the difference between the market cap and our valuation). It will be interesting to see what happens to the share price in the next six months.

Rakon Valuation

Last Friday Valuecruncher was featured in the “Shoeshine” column of the New Zealand National Business Review (NBR).  I would love to provide a link – but it requires a subscription (and I don’t do links to walled content).  I will put a copy of the NBR article on the blog soon.  This coverage in the NBR has resulted in a number of queries along the lines of “what is Valuecruncher?”.  This post aims to provide an answer.

The very simple answer is we value companies.  We use the same valuation methodologies as leading investment banks – discounted cash flow analysis, comparison company and acquisition analysis, and net tangible assets.  Instead of having to go to expensive experts (investment bankers and maybe accountants) we use the same frameworks as these experts but simplify the process to provide a robust indication of value.  Our valuations cost NZ$1,000 (plus GST) and are turned around in 24-48 hours – at least 10x cheaper than alternative options and 10x quicker.

Our clients provide the information in the form that we require and we do the corporate finance math.  There is a one-page input sheet that provides the key information we require (and a guide to where the input sheet information comes from).  If advisers (such as accountants) use our service we pay 15% to the adviser – the adviser completes the input sheet as they will have access to all the required information.

Valuecruncher uses the inputs and runs them through our models – and has one of the Valuecruncher team review the outputs.  The outputs are reviewed by a valuation professional – a real person.  We have not patented our processes as they are not radically new – they are what all of the leading investment banks use for valuing businesses.  We have made the frameworks used by leading professionals available at a price most people can afford.

Why do people and companies require valuations?  Investing in companies, selling stakes in companies, and fair value assessments in disputes are some of the reasons for valuations.  We regularly see business owners that simply want to see an indication of what their business could be worth.  At NZ$1,000 (plus GST) people can obtain a valuation at a cost-effective price.

We have two parts to our business:

1. Private valuations for clients – which are never in the public domain.

2. We operate a blog (which you are reading) – where we use publicly available information to complete valuations of companies (and businesses) that are topical.

We are aiming to provide a service where small business owners can get access to the same valuation techniques that leading investment banks use – at a reasonable price.

We are also aiming to improve the quality of valuation in the market generally.  We are based in New Zealand and currently focus on that market.  We don’t believe that the valuation work that comes into the public domain in New Zealand (or the wider world for that matter) is particularly good.  There are very strong valuation professionals in New Zealand (and internationally) – but they primarily provide private advice to well-paying clients.  The valuation expertise available to the media, smaller investors and the general “man in the street” is not strong.  We are aiming to improve that.

The Valuecruncher blog provides some education on valuation (i.e. what is a share price?) and a database of valuations on major New Zealand companies (i.e. Trade Me), Australian companies (i.e. Qantas), international companies (i.e. Google) and topical transactions (i.e. the sale of Telecom New Zealand’s Yellow Pages Group).

We would like to see all NZX-listed, NZAX-listed and Unlisted-listed companies in New Zealand complete a Valuecruncher valuation on a six-monthly or yearly basis and make them available on their websites.  Even doing it twice a year would only cost NZ$2,000 (plus GST) a year and provide all shareholders with a consistent valuation framework – additional transparency for all stakeholders.  We can complete valuations for any stakeholders – give us the inputs and we can do the math.  We list the assumptions that we have used – more transparency.

Our framework is what the professionals use.  The Valuecruncher model is a simplified version of what leading investment banks use in major mergers and acquisitions and other corporate transactions.  Valuecruncher provides an indicative valuation – but one using the same methods that the professionals use.

To obtain more information on Valuecruncher email your query to info@valuecruncher.com or call Mark Clare on 0800-470227.

Valuecruncher places a mid-point value of $17.29 on each Rinker share. The current share price of $18.24 is close to the mid-point valuation and is well within the valuation range of $13.78 to $21.06.

Key Assumptions

Revenue Growth

Rinker has experienced very strong revenue growth in the 05/06 period with a growth rate of 17%. This is higher than the growth rates seen in the previous two periods of 9.43% and 14.09%. We have forecasted growth rates of 17%, 14% and 10% for the next three periods, following trends and forecasts that have been stated in the company’s 2006 annual report.

EBIT Margins

EBIT margins have increased from 13.36% in 2004 to 22.43% in 2006 but it is unlikely that these margins will remain high due to increasing raw material, energy and freight costs. We have forecasted EBIT margins at 20%, 17% and 14% in the next three years.

Discount Rate (WACC)

The discount rate applied is 9%.

Terminal Growth

Terminal growth is expected to be 3%.

Rinker Group Valuation

Valuecruncher has valued each David Jones share at $3.92 with a range between $2.77 and $5.12. The current share price $4.31.

Key Assumptions 

Revenue Growth

David Jones has been slowly rebuilding since the company was in dire straits in 2003. Although revenue growth has been slowing, EBIT margins have been on the rise and the profitability of the company has been improving since the implementation of their new business strategy in 2003. Revenue growth has decreased since the 03/04 period from 3.41% to 1.15% in the 05/06 period. We have forecasted growth to be 2% for the next three periods, which is the company’s average historical growth rate, and also the same growth that has been applied to the Kirkcaldie and Stains valuation.

EBIT Margins

EBIT margins have grown from -1.04% in 2003 to 8.02% in 2006. The annual report states that growth in profit after tax will be between 5-10% in 2007, corresponding to an average forecasted EBIT margin of 9% in 2007. We have forecasted margins to be 9% for 2007 and 10% for 2008 and 2009.

Discount Rate (WACC)

The discount rate applied is 11%.

Terminal Growth

Terminal growth is assumed to be 2%.

David Jones Valuation

Valuecruncher has valued each Kirkcaldies share at $2.75 with a range between $1.85 and $3.70. The current share price is $2.80.

Key Assumptions

Revenue Growth

Revenue growth has been very unstable in the 03/04, 04/05, and 05/06 periods with growth rates of -1.15%, 4.78% and 0.37%, respectively. The company has recently had a change of management (as of April 2006) and for this reason, along with recent unfavourable trading conditions, it is difficult to predict how revenues will grow in the next three years. We have forecasted growth to be flat for the next year and 2% for the next two periods, in line with terminal growth, which is also assumed to be 2%.

EBIT Margins

EBIT margins have been sliding since 2004, decreasing from 7.96% to 5.13%. With new management in place, it is likely that these margins will improve slowly over time. We have forecasted margins to be 5%, 5.5% and 6% for the next three years.

Discount Rate (WACC)

The discount rate applied is 8%, adjusted upwards from the PwC estimate of 7.5%. Although the discount rate has been adjusted upwards, it is still very low due to Kirkcaldie and Stains’ high debt-to-equity ratio)

Kirkcaldies Valuation

Valuecruncher has placed a value of $21.60 on each Woolworths share, with a range between $13.56 and $30.07. The current share price is $22.89, 6.0% higher than our mid-point valuation.

Key Assumptions

Revenue Growth

Woolworths have been experiencing very rapid revenue growth in the past three periods with growth rates rising from 6.13% in the 03/04 period to 20.36% in the 05/06 period. The 2006 director’s report states that, “…the best is yet to come,” so in following this, we have forecasted revenue growth to increase to 25% in the 06/07 period but then decline to 20% and 15% in the 07/08 and 08/09 periods.

EBIT Margin

EBIT margins have been rising slowly over the past three years, from 3.81% in 2004 to 4.56% in 2006. We believe that these will continue to rise as the hotel and electronics section of the business becomes a major part of Woolworths’ growth strategy. We have forecasted margins to be 5%, 6% and 7% for the next three years.

Discount Rate

The discount rate applied is 11%. This is higher than the average discount rate in the consumables section of the PwC Cost of Capital Report but is within the range of the discount rates indicated in the Woolworths’ 2006 annual report.

Terminal Growth

Terminal growth is assumed to be 3%.

Woolworths Valuation

Valuecruncher has placed a value of $0.36 on each AFFCO share, with a range between $0.21 and $0.52. The current share price is $0.37.

Key Assumptions 

Revenue Growth

With progressively tougher trading conditions and the restructuring of AFFCO over the last few years, revenue growth has continued to slide, decreasing from 5.35% in the 03/04 period to -1.05% in the 05/06 period. For these reasons, it is hard to see any significant improvement in revenue growth over the next few years. Due to the current stagnant nature of the industry, we have forecasted growth to be 1% for the 06/07 period, and 2% for the 07/08 and 08/09 periods.

EBIT Margin

EBIT margins have been fairly unstable over the past few years at 2.62%, 6.40%, 2.48% and 1.89% from 2003 to 2006, respectively. We have assumed EBIT margins to be 2.5%, in line with the margins seen in 2003 and 2005 where ‘normal’ trading conditions occurred.

Terminal Growth

Terminal growth is projected to be 3%. We expect that AFFCO will improve its growth once the major restructuring has completed even though revenue growth at the moment is lower than the projected long-term growth.

Discount Rate (WACC)

The discount rate has been set at 12.5% (as stated in the PwC Cost of Capital Report).

AFFCO Holdings Valuation