Evaluation Of Woolworth's Holding Essay

5340 words - 21 pages

MBL922N - Strategic Financial Management Assignment 2
Table of Contents41 Executive Summary 52 Purpose of the report 53 Woolworths Holdings Performance Overview 53.1 Company and Strategy Overview 63.2 Financial Information Overview 63.3 Historical Performance Analysis 63.3.1 Share Price 73.3.2 Dividends Growth 73.3.3 Earnings 83.3.4 Sales Growth 93.3.5 Return on Equity 103.3.6 Financial Health 103.3.7 Economic Conditions 114 Historic risk assessment 125 Forecasting the Value and Risk of Woolworths Holdings Limited 135.1 Factors affecting growth rate and risk over next 7 years. 135.1.1 Interest rate rise increases risk of bad debts 135.1.2 Increasing interest rate and inflationary pressure on discretionary spending 145.1.3 Factors affecting Terminal Growth Rate of Woolworths Market 155.1.4 Estimating the period of Super-Growth 165.2 Summary of forecast variables 175.3 WHL Share Valuation by means of Monte Carlo Simulation 186 Recommendations for Managing Risk 227 References "A good company is not necessarily a good investment, because the share of a good company may be priced too high. Likewise, the share of a bad company may be overpriced"- Johan Marx.Executive SummaryThe basic principle of investing is that the investor should be rewarded for the risk that is taken when investing into financial instruments. There are many definitions for the term "risk"; Holton (2004) defines risk as the uncertainty of a negative event occurring coupled with an exposure to the event. Therefore the probability of a loss and exposure to the loss are characteristics that are prerequisites for risk to be present. Efficient financial markets display all the relevant public market information within the price of a financial instrument and therefore investors believe that all relevant risks are discounted for within the price of the instrument.The report focuses on the Woolworths Holdings (WHL) share that is listed on the Johannesburg Stock Exchange (JSE). The purpose is to determine whether the share price provides a true reflection of all the risks that the company is exposed to within the South African Retail segment.The financial overview of the company indicates: growth in earnings per share above inflation, dividend cover remained at around 1.7 times and the turnover increased by more than the overall growth rate of the economy since 2000. The gearing of the company increased from the lows of 10% in 2000 to above 38% during 2007. WHL's increased gearing was aimed at facilitating the company's stores footprint, this lead to the debt ratio increasing to more than 36 times since 2005. WHL underperformed the retail sector since 2006 as a result of increased interest rates, lower consumer spending and inflationary pressures. Other factors that affected performance are also highlighted within the report.The historical dividend and earnings yield of WHL were used to assess the historic risk of the company for the last 7 years. The risk forecast indicated that the...

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