Valuecruncher has placed a value on Blue Sky Meats (NZ) Ltd. of $2.24 per share, with a range of $1.47 to $3.05. The current value of $2.50 lies very close to the mid-point valuation in our analysis.
The key assumptions that have been used in this analysis reflect static, but stable, market conditions for the next three years.
Due to the current dynamics of the industry at the moment, it is hard to see much improvement in revenues growth. The revenues growth for Blue Sky Meats has been 8.5%, -13.8% and 1.17% in the 03/04, 04/05, and 05/06 periods. We have forecasted the growth to be approximately 3% for the next three years, similar to the growth seen by the comparator AFFCO Holdings (5.4% and 2.42% revenue growth for the 03/04 and 04/05 periods).
The EBIT margin of Blue Sky has been declining since 2003, with margins of 7.60%, 6.00%, 7.16% and 2.88% in 03, 04, 05, and 06, respectively. Reasons that can be attributed to this are the high New Zealand Dollar and increase in fuel prices, resulting in historically unfavourable trading conditions. The EBIT margin used in the analysis is 3%, closer to the EBIT margin of AFFCO Holdings. Due to the unusually low EBIT margin the share price is very sensitive to even the smallest changes in the EBIT margin.
Discount Rate (WACC)
The discount rate is assumed to be is 11%. The PwC Cost of Capital Report states that the WACC for AFFCO Holdings is 12.5%. The agriculture industry average is given as 9.6%. We have taken the average of these two figures.
The terminal growth is also assumed to be 3%.