Forecasting and Valuation
Background
Now that I have taken the time to look further into what the amounts on the financial statements have actually been saying by looking at ratios, accounting drivers, economic drivers and business drivers, I came across some realisations and explanations that enabled me to make some predictions about the future movements in the organisation to arrive at an Enterprise Value.
This step could quite possibly be the hardest in the whole assessment. I prefer the black and white clarity of the past, and struggle to make predictions that could be wrong, in fact almost certainly will be.
Financial Highlights
The revenue itself for SEEK Limited over the four year period has shown an ongoing trend upwards, however, behind the scenes the bottom line was affected by a few factors. These were largely the amortisation of intangibles, and changes in debt leverage for new projects. Investing in new projects internationally has meant some times of higher risk, highly dependent on overseas markets and exchange rates. The addition of various arms of the business model, such as online education, has meant investing in new enterprises that may not become established and viable for a few years.
Key Aspects of Forecasts
· Sales Growth
- Initially for the 2020 financial year SEEK experienced excellent sales growth for the period up to 31 December 2019, however due to the COVID-19 globally effected pandemic, there has been a period of time of significant downturn from many areas, including Australian markets.
- Sales growth tends to increase dramatically after such times of economic downturn due to the jobs market being essential during times of economic recovery
- I am forecasting an initial downturn for 2020 of 10% then with a drastic recover of 20% in 2021 followed by a conservative 15% ongoing
· Profit Margin
- As normal operating income is not highly affected by overheads due to the online presence of SEEK Limited I have forecast a rate of 15% initially, moving to 25 when economies settle and open up opportunities
· Asset Turnover
- Initially in 2020 while the company experiences a downturn in income, the ATO will decrease, however as things settle I have forecast it to increase, but only slightly due to the predicted investment in further intangibles
· Growth Rate
- I wanted to ensure my predictions are conservative in nature. If the figures can show positively given conservative estimates then the margin of safety will be even greater if I was to decide to invest
- The growth rate has been set at 2.5%
· Return on Incremental Net Operating Assets
- I forecast the RINOA to be 15%. I felt that any additional capital investment would likely be in the area of intangibles which would contribute the current position in line with other RNOA
Valuation
Enterprise Value
$8,729,218,421.88
Number of Ordinary Shares
352,250,000
Valuation Share Price
$24.78
Market Share Price 22 May 2020
$19.11
By using conservative markers in my valuation I feel I can be confident that I have arrived at an accurate representation of the current valuation of SEEK Limited.
I found the Discounted Cash Flow Valuation and Economic Profit Valuations to be quite confusing in the process, however when these two models arrived at an actual dollar amount for my company’s Enterprise Value it began to become clearer. I could see how changing my forecasts would alter the outcome depending on how generous or conservative I made them.
Recommendation
As a potential investor I believe I would actually buy SEEK Limited shares. However I consider that that may possibly only be because they are currently (at the time of writing in a slump) that can be explained by external forces. I do believe they show potential as a long term investment as they have paid reasonable dividends, and show promising growth into the future.
Reflections
Now as I come to the end of this capstone unit I can reflect that I honestly did not comprehend the volume of information I would learn. My initial thoughts were that I might sail through easily since I have 20 years of experience dealing with financial statements for Small & Medium Enterprises. That was not the case. I struggled to write KCQ’s and put my thoughts to paper. However I can appreciate the progress I made doing so, after all getting out of our comfort zone can result in tremendous growth.
I found that there is quite a lot of value in interacting with my peers. We all have differing learning styles and may have different ways of gleaning knowledge from the coursework that we can then share with others. After all in a real life work environment there will be others we will need to learn from and interact with that have different perspectives.
I have learned to not look at financial statements at face value. We need to read between the lines and work out what the drivers of the information are - what is being said, or not being said. We need to be able to exercise our intuition to make sure we understand the full story.
As far as what future students should know about how to survive and flourish in this unit, I would suggest:
· Stay on top of your weekly readings. I found that I would read the chapters, make notes, and then use those notes as a guide to writing my KCQ’s
· Be active in discussions on Moodle, FaceBook and over emails
· Have an enquiring mind
