Company Valuation: City Development Limited
Introduction
City Developments is a multinational company. This multinational company is involved in property and hotel business activities. City Developments Limited has its head office in Singapore. This group of companies was formed in the year 1963. Currently, City developments Limited have about 350 subsidiaries across the world. The company is known to have strong presence in North America, Europe and Asia among other places in the world. This conglomerate of companies is known to be focused on hospitality, facility management, hotel proprietorship, hotel management, real estate investment and development business. This group of companies has created a name for itself for being a good solution provider in the areas of operation.
Financial analysis
The financial analysis of the company involves the evaluation of the financial information for the years 2008, 2009, 2010, 2011 and 2012. In the financial analysis, the underlying assumption is that the financial statements gave a true reflection of the state of affairs for City Developments Limited as at 31st December 2012. The financial statements for the company are shown as part of the Appendix.
The mostly used financial ratios are also used in the analysis.
: • Liquidity ratios
Ratio analysis is one of the ways of making the process of company valuation complete. Liquidity ratios are used to measure the extent to which an organization is capable of meeting its short term obligations. Some of the liquidity ratios include
Current ratio
This liquidity ratio measures the capability of a company to meet its short-term financial obligations. It is known to factor in the contribution of inventory in its analysis.
Current ratio=Current Assets/ Current Liabilities
The current ratio for City developments limited stands at 3.77, 1.67, 2.48 and 2.43 for the year 2009, 2010, 2011 and 2012 respectively. This shows that the company is capable of taking care of its short-term financial obligations. However, the decline in the level of current ratio should be investigated and fixed. This means that the company will not look beyond its current assets in handling the financial needs which arise in the short-run.
Quick Ratio
This is a liquidity ratio which measures the capability of an organization to meet short-term obligations without considering the inventory in the organization.
Quick Ratio= (Current Assets-Inventory)/ Current Liabilities
The quick ratio of City Developments Limited stands at 3.68, 1.64, 2.41 and 2.65 for the year 2009, 2010, 2011 and 2012 respectively. This shows that the company is capable of paying its short-term financial obligations comfortably even without relying on inventory. This means that the company will not be in trouble whenever a short-term financial need arises. This is because it will be able to convert most of its current assets into cash and handle it.
- Asset management Ratios
These are used in measuring the extent to which the assets of the company are being used in generation of income for the company. Receivables turnover is one of these ratios. It measures the extent to which the company is collecting its accounts receivable.
The higher the receivables turnover for a company, the better since it shows that a company is gaining and collecting well on accounts receivable. This means in the market, the company will continue to be respected since this will grow its balance sheet. In the process, it will be easy to beat competitors in the market (Porter 2008)
For City Developments Limited, the receivables turnovers stand at;
| 2009 | 2010 | 2011 | 2012 | |
| Sales | 3,272,825 | 3,103,416 | 3,280,465 | 3,353,727 |
| Receivables | 709800 | 764500 | 1139500 | 1129500 |
| Receivables Turnover | 0.216876857 | 0.246341 | 0.347359 | 0.336789 |
This shows growth in the receivables turnover of the City Developments Limited. This shows that the company is faring well in terms of use and management of its receivables.
The fact that the receivables turn over for the last two financial years was stable above 33% is encouraging to the company.
- Profitability ratios
These ratios are used in measuring the overall performance of an organization.
Gross profit margin
It is used in measuring the level of profitability in an organization. It is used without the consideration of the indirect costs in an organization (Monks & Lajoux 2011, p.92). This ratio is usually arrived at by dividing the gross profit of the organization by the total sales in the given period. The gross profit margin of City Developments Limited stands at 57, 50, 53, 54 and 50 percent in the year 2008, 2009, 2010, 2011 and 2012 respectively. This is a good overall performance of the company. This means that the company is safe in terms of operations since the gross profit in the company is adequate. This is because a company should always try to have adequate level of gross profit margin (Mautz & Angell 2006, p.78). This helps in being able to cover the organization’s operating and other incurred expenses.
Valuation of City Developments Limited
Valuation of organizations is one thing that takes place on various occasions. It may be carried out as a company policy or for the purpose of sale among others. However, it is always important for companies to carry out valuation so as to understand where they stand. Valuation of a company is very important since it determines the type of decisions to be carried out in the organization.
There are several valuation methods available for use by business people. It is important for an organization to look at the need for the valuation while selecting the most appropriate valuation method. This is because it will assist in giving the information required at a given point in time. It is worth noting the use of more than one valuation method is advisable. This is because it gives a good opportunity for decision making based on solid results.
For the valuation of City Developments Limited, the Discounted Cash Flow (DFC) method and the Dividend Discount Model are useful. The Dividend Discount Method is one of the commonly used basic methods of carrying out company valuation. This method is known to be good in giving the true value of a business entity (Muralidhar, Mungikar & Nayak 2013). This model gives the value of an organization on the basis of the dividends it pays to the shareholders. As a result of using the dividends paid to shareholders as the backbone of this valuation model, it is worth noting that this model cannot be used in a company which does not pay dividends. Therefore, using this valuation model in the case of City Developments Limited is appropriate since the company pays dividends to its shareholders and it is expected to continue making the payments in future.
The suitability of the Dividend Discount Model in the valuation of City Developments Limited can be emphasized by looking at the advantages of using this method. One of them is the fact that it is simple to use. It does not involve a lot of technical processes associated with other methods of company valuation. This makes it easy t get the value of City Developments Limited without complex processes being used. The other benefit emphasizing suitability is that it is easy to understand. This means that the shareholders will be able to understand the process of arriving at the value of the company.
To get the value for an organization using this valuation model, the future dividends payable are discounted to present value. The discounting uses a rate which has been adjusted appropriately with the possible risk.
The formula below is used to carry out the discounting.
P0=Div/r
Whereby;
P0=Represents the value of the firm at time 0
Div=Projected annual dividend
r= Risk adjusted rate
In the case of City Developments Ltd we need to determine the projected dividends and the risk adjusted rate.
As for the risk adjusted rate we shall use Capital Asset Pricing Model (CAPM model) as follows;
Ks = Krf + B (Km – Krf)
Whereby;
Ks=represents the Risk Adjusted rate, the Required Rate of Return
Krf=represents the risk free rate (which in this case will be the Australian 10 year government bonds)
B=Estimated Beta
Km= the overall market expected return or the market risk premium.
The risk free rate used will be based on the Singapore Bond 10 Year Yield, which is 3.95.
The determined beta as per attached Excel worksheet is 0.03%.
The GDP of Singapore grew by 15.5% in 2013. This is believed to be the expected market return for City Development Limited.
Market risk premium =15.5%-3.95%=11.55%.
Therefore Ks=3.95%+0.03 %( 11.55%) =4.3%.
Po=d/r=10.04/4.3%=233.5
Dividend Forecast
From appendix 1, the dividend of the company has been paid in all the years under analysis. The dividend to be paid in future is expected to be almost the same as the one for the year 2012. This is because the growth rate of the company’s dividend payment has experienced a slight decrease.
Discounted Cash flow method
The other method of valuation for City developments Limited is the Discount Cash flow method. The suitability of this method lies in several factors. One of them is that it is believed to be a sound valuation method. This is because the e method depends more on future expectations than the other methods of valuation. It is worth noting that this company valuation method is less troubled by external factors affecting the company. It is also not affected by the kind of accounting policies or procedures in an organization. The strategies and plans of the company in future are usually factored in the model. With a discounted Cash Flow Growth rate of 124.71% in 2012, the company is able to move higher in terms of its stock price in the market. This is an indicator of good things to come for the company. This should be put as a basis of seeking more financing from financial institutions. This is because there is an indicator of growing capability to pay the borrowed money.
Conclusions and Recommendations
On completion of the valuation of City Developments Limited, it is dividend the value of the company shows that it is worth investing in. The valuation of the company shows that the company is meant to grow further from the current form.
With the company’s stock price being 233.5 as per the dividend Discount Method shows good position in the market. This means investors are going to get attracted by the company’s impressive form. With potential customers coming on board, the company is going to experience tremendous growth in the market. The shareholders will realize more returns from their investment in the company.
With the discounted cash flow method showing a reasonable growth, the company stands at a good position in the market. This means that the shareholders will be able to earn more in future from the investment in the company. This makes the shareholders more committed in building the company so that they may gain more.
It is important for the management of the company to come up with a policy regarding the valuation of the company. This will be able to make company valuation a priority since it helps in shaping the road towards success of the company. It is also important for those involved in valuation process to be very careful when making assumptions. In valuation of companies, there are assumptions which have to be carried out. This is important in making the models used in valuation become well applicable. This is because whenever irrelevant or wrong assumptions are done, the results obtained through the valuation models will be completely misleading to the organization.
The ratios and values obtained through the valuation methods should be carefully analyzed and managed. This is because each level of the values obtained indicates a certain aspect of the business. Whenever unfavorable levels are indicated, it is important for the company to be coming up with suitable solution. All negative aspects should be improved to ensure that the company stays on the right tract. This is also important since it ensures that the stakeholders get hope of earning more from their investment in the organization.
References
Monks, A & Lajoux, R 2011. Corporate Valuation for Portfolio Investment: Analyzing Assets, Earnings, John Wiley & Sons.
Porter, M 2008, Competitive Advantage: Creating and Sustaining Superior Performance, Simon & Schuster.
Mautz, RD & Angell, R.J 2006, Understanding the Basics of Financial Statement Analysis. Commercial Lending Review, 21(5), pp. 27-34.
Muralidhar, KSV, Mungikar, V & Nayak, RP 2013, Application of the Free Cash Flow to Equity Valuation Model to Infosys. Asia Pacific Journal of Management & Entrepreneurship Research, 2(3), pp. 132-141.
