New Zealand discount retailer The Warehouse (WHS.NZ) is retreating from an expansion into food retailing in New Zealand.  This retreat opens up the opportunity for the two major supermarket chains in New Zealand (both have a 10% stake in WHS.NZ) to move to acquire WHS.NZ.  The New Zealand Commerce Commission had prevented an acquisition by either party on anti-competitive grounds.  With the retreat from food retailing this should now be no longer an issue.  We decided to have a look at WHS.NZ with the Valuecruncher interactive tool to place an estimate on the intrinsic value of the company using a discounted cash flow valuation.

Valuecruncher valuation model of WHS.NZ with interactive assumptions

Valuecruncher produces a valuation of NZ$4.11 for WHS.NZ.  This is a current valuation (an estimate of intrinsic value) not a target price.  This valuation is 16.1% above the current share price of NZ$3.54.

Assumptions

In 2008 (July balance date) WHS.NZ had revenues of NZ$1.735 billion and an EBITDA margin (profits) of 9.25%.  Reuters aggregates eight analysts covering WHS.NZ and these have mean estimates of 2009 and 2010 revenues of NZ$1.744 and NZ$1.799 billion respectively.  For this analysis we have used revenues of NZ$1.75 billion in 2009, NZ$1.8 billion in 2010 and NZ$1.835 billion in 2011.  We have forecast EBITDA margins rising from 9.5% in 2009 to 10.5% in 2011.  We have estimated capital expenditure in the NZ$55-60 million range.  All of these assumptions can be amended in the Valuecruncher on-line valuation model to adjust the valuation.

Other Model Assumptions:

Discount Rate: 9.0%.  PwC in their New Zealand cost of capital report calculates WHS.NZ WACC at 8.4%.

Terminal Growth Rate: 3.0%.  The New Zealand economy has grown at an average rate of 2.6% over the last five-years.

Our analysis incorporates the cash and debt on the WHS.NZ balance sheet – Valuecruncher calculates a net debt number.

Based on our analysis and assumptions the current share price looks a discount to intrinsic value.  If any of the anticipated potential acquirers of WHS.NZ do make an offer for the company – we would expect it will have to be above of our valuation of NZ$4.11 to have a chance of succeeding.  Our analysis is a standalone valuation of WHS.NZ – it does not address any potential synergies from any potential acquirer.

Play with our assumptions – what does your analysis say?

Disclosure: None

Valuecruncher has a database of over 1,000 companies on major international exchanges. You can explore, create and share valuations for any of these companies.

The Warehouse Group (WHS) is a New Zealand’s largest listed retailer. The company has been the subject of takeover speculation. Last week the company downgraded its profit guidance. We decided to have a look at the company using the Valuecruncher interactive tool.

WHS Valuation

Our assumptions of revenues for the next three years are NZ$1.745 billion in 2008 increasing to NZ$1.825 billion in 2010 – a compound annual growth rate of 2.3% (2008-10). We have projected flat EBITDA margins of 10% to 2010.

We have used a terminal growth rate of 3%. This is based on a New Zealand long-run economy growth rate. If you have a more optimistic or pessimistic view of the growth for WHS this will impact the valuation.

We have used a WACC (discount rate) of 8.5 %. The WACC (discount rate) has a material impact on a discounted cash flow valuation (as does the terminal growth rate). PricewaterhouseCoopers December 2007 cost of capital report gives WHS a calculated WACC of 8.2%.

We used a terminal capital expenditure number of NZ$60 million. In our opinion capital expenditure should stabilise around this number.

WHS Valuation

Our analysis incorporates the cash and debt on the WHS balance sheet – Valuecruncher calculates a net debt number.

Our analysis gives a valuation of NZ$4.13 which is very close to the current share price of NZ$4.10.

Based on our analysis, WHS shares look about right. Our key assumptions are around terminal growth and WACC (discount rate). Play with our assumptions – what does your analysis say?

Valuecruncher has a database of over 1,000 companies on major international exchanges. You can explore, create and share valuations for any of these companies.