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.
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 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.
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 is assumed to be 3%.