Tabcorp Holdings Ltd: The main purpose of this project is to let you apply the valuation principle learned in this subject to conduct the fundamental analysis on the share value.

Tabcorp Holding Ltd (TAH)

Opinion Data (as 30/June/2004)

Recommendation Strong Buy

Current share price $14.24

Valuation $18.43

Market capitalisation $5,920 m

Intrinsic Share Value

The Tabcorp Holding (TAH) share price was calculated using a financial calculator - Valuepro.xls. It uses a two-stage discounted cash flow model to determine the intrinsic share price.

In the first stage of the model, the company is assumed to grow at a fixed rate. The growth rate is assumed by using historical information about the company obtained from its annual reports (1995 - 2004). In addition to growth rate, assumptions were made on the profit margin, tax rate, investment rate and depreciation rate for the company. These values then contributed to the first stage calculation of the cash flow during periods 1 -8. In addition, the cash flow for a year is calculated as profit after tax - net investment - change in working capital.

Tah Ching and his MTB

In the second stage of the model, the company is assumed to have reached maturity (thus has 0% growth going forward). Therefore, profit after tax remains constant for perpetuity and there is no net investment or change in working capital. The future cash flows are calculated by using the perpetuity formula on the profit after tax figure. All cash flows calculated during the two stages are then discounted to present value to give the NPV of the company. Dividing the NPV figure by the number of shareholders provides the intrinsic share price.

The model uses a Weighted Average Cost of Capital calculated based on the formula:

WACC = Wd.rf + We.b.(rm - rf)

where Wd is the weighting of debt,

We is the weighting of equity,

rf is the risk free rate,

b is the company beta , and

rm is the return of the market portfolio.

Assumptions

The following...