Valuation Of Shares Blackmores Limited

1.Examine the share price history and history of traded volumes over the past five years, identifying the main causes of changes in the share price during this period. Based on its stock price, do you think the company has performed well over the past five years?

 

2.Calculate the market capitalisation of the company as of the end of fiscal year of 2016. Do you think the stock is under-priced or over-priced? Answer this question with reference to the capital asset pricing model (CAPM), and justify your answer. How do you estimate the future price of the stock? Is this the best time to buy or sell the company’s shares,Why?

 

 

1. Blackmores is Australia's driving common wellbeing organization. In light of the vision of naturopath and organizer Maurice Blackmore (1906-1977), Company is enthusiastic about regular wellbeing and moving individuals to take control of and put resources into their prosperity. Organization create items and administrations that convey a more common way to deal with wellbeing, in light of their aptitude in vitamins, minerals, herbs and supplements.

Blackmores Limited is occupied with creating, offering and showcasing normal wellbeing items for people and creatures in Australia, New Zealand, and Asia. It offers distinctive vitamins, minerals, home grown items, and mineral nutritious supplements. The organization gives naturopathic consultative administrations. The organization offers its items to various conveyance channels, for example, drug stores, mass merchandisers, basic supplies, wellbeing sustenance stores, experts, vets, and wholesalers, and in addition through on the web.

The following are quarterly share price history and traded volumes over the past five years of Black mores Limited (ASX Code: BKL):

DATE	OPEN PRICE	CLOSE PRICE	ADJ PRICE	VOLUME	DIVIDEND
01 May 2012	26.45	25.91	25.91	157601
01 July 2012	26.31	29.2	29.2	321213
25 September 2012					1.18571
01 October 2012	31.3	29.7	29.7	193599
31 December 2012	33.65	33.85	33.85	107594
07 March 2013					0.628571
31 March 2013	30.35	28.3	28.3	269544
01 July 2013	26.94	26.13	26.13	200947
24 September 2013					1.18571
01 October 2013	27.81	22.65	22.65	620874
31 December 2013	20.85	21.83	21.83	154852
05 March 2014					0.628571
31 March 2014	26.05	26.9	26.9	226269
01 July 2014	27.3	28.39	28.39	225798
10 September 2014					1.18571
01 October 2014	32.25	32.96	32.96	144853
31 December 2014	35.19	40.36	40.36	240238
23 March 2015					0.971428
31 March 2015	54.55	63.62	63.62	427618
30 June 2015	75	88.5	88.5	772663
04 September 2015					1.92857
01 October 2015	146	167.67	167.67	2750560
31 December 2015	217.98	190.57	190.57	2278724
09 March 2016					2.8571
31 March 2016	177.16	161	161	3616599
01 July 2016	131.5	157.14	157.14	2095602
06 September 2016					3.000
01 October 2016	117.3	112.08	112.08	3198577
31 December 2016	103.36	115.5	115.5	1249817
07 March 2017					1.85714
31 March 2017	112.95	112.54	112.54	29099

From the above price history of Blackmores Limited, we can see that the price of shares increased from AUD 25.91 (01 May 2012) to AUD 112.54 (31 March 2012). Total increment in five years in share price = AUD 112.54 – AUD 25.91 = AUD 86.63. Blackmore Limited has also declared and paid dividend in these five years for 10 times which has been depicted in the above table. Total dividend distributed by company in these five years is AUD 15.42851. Total increment in shareholder’s wealth in 5 years = AUD 86.63 + AUD 15.42851 = AUD 102.05851.

Rate of return in 5 years = Total increment in 5 years/Opening Price of share * 100

= AUD 102.05851/AUD 25.91 *100 = 393.90%

We must say that company has provided tremendous rate of return in these five years. So far as volume of shares traded is concerned, mixed pattern of trading volume has been shown in these five years.

Following are the reasons behind increment in share price of Blackmores Limited in these 4 to 5 years:

• Increment in Revenue by 52% to $717 million

• Earnings before interest and tax (EBIT) increased by 101% to $145 million
• Net profit after tax surged 114% to $100 million
• Earnings per share increased from 1.16 to 5.75 in 5 years
• Earnings growth from operating margin improvements as well as one-time items.

• Acquisition of Global Therapeutics (GT) for $23 million which is an Australian market leader in Chinese herbal medicine.
• Launching of 117 new products
• Tremendous response on newly released Blackmores branded infant formulas which have already achieved sales of $9 million.
• Growth in Asia region especially

Company has given very good performance in terms of shareholder’s wealth creation in 5 years. If we look at the rate of return provided by company in 5 years is 393.90% which is approximately 400%. It means shareholders have increased their wealth by 4 times in investing the shares of Blackmores limited in 5 years.

2. Current Market Price of share = AUD 109.70

Current Market Capitalization = AUD 1890000000

Number of shares outstanding as per current market capitalization =

AUD 1890000000/ AUD 109.70 = 17228806

Share price of Blackmores Limited as on 30 June 2016 = AUD 131.39

Market Capitalization as on 30 June 2016 = 17228806 * AUD 131.39 = AUD 2.263 BillionCAPM is the most used model in capital budgeting in estimating the cost of shareholders equity.This model as a formula requires three pieces of data information which includes the rate of return for the general market, the beta value of the stock in question and the risk-free rate. The CAPM formula is as follows:

Cost of Equity = Risk-Free Rate + Beta * (Market Rate of Return - Risk-Free Rate)

The beta of the stock refers to change in the return on stock with respect to change in market. A beta value of 1 indicates the stock moves in tandem with the market.

Cost of equity is calculated using Capital Asset Pricing Model (CAPM) which considers risk free rate and market risk premium associated with an asset (equity capital) when such asset is compared with the market returns which have risk associated with them.

Calculation of Cost of Equity of Blackmores limited:

Risk free rate is taken as 5-year yield on Commonwealth Government bonds which is 1.63% (Bloomberg L. P., n. d.).

Beta of Blackmores is taken to be as 0.38(Reuters, 2016).

Market risk premium is the difference between S&P ASX 200 index compounded annual growth rate in 5 years which is 1.03 % and risk free rate of return taken as 1.63%.

Market risk premium = Market rate of return – Risk free rate = 1.63% - 1.03% = 0.60%

Cost of Equity = Risk-Free Rate + Beta * (Market Rate of Return - Risk-Free Rate) i.e.Cost of Equity = Risk-Free Rate + (Beta * Market Risk premium) = 1.63% + (0.38*0.60%)

= 1.63% + 0.228% = 1.858%

We will determine the value of share of Blackmores Limited with the help of Dividend discount model because Blackmores Limited is a dividend distribution company which pays dividend ti its shareholders regularly. The following table shows the amount of dividend distributed by company and growth in dividend in 5 years:

DATE	ANNUAL DIVIDEND (AUD)
1 JULY 2013 – 30 JUNE 2014	1.814281
1 JULY 2014 – 30 JUNE 2015	2.157138
1 JULY 2015 – 30 JUNE 2016	4.78567

Average Dividend in 3 years =

(1.814281 + 2.157138 + 4.78567)/3 = 8.757089/3 = 2.919

Cost of Equity = 1.858%

Price of share of Blackmores Limited = 2.919/1.858% = AUD157.10

As per dividend discount model, price of share should be 157.10 and current price of share is 109.70. Intrinsic Value of share is less than Current market price of share which means that share is underpriced and investor must go long in the stock of Blackshores Limited.

Valuation of Blackshores Limited as per EPS approach:

Earnings per share at the end of 2016 = AUD 5.76

Price Earnings Ratio = 23.78

Price of Blackshores Limited = Earnings per share * Price Earnings ratio =AUD 5.76*23.78 = AUD 136.97

As per EPS approach, price of share should be 136.97 and current price of share is 109.70. Intrinsic Value of share is less than Current market price of share which means that share is underpriced and investor must go long in the stock of Blackshores Limited.

The organization's income development was impacted by year-on-year change in gross edges from 47.31% to 50.33% and better cost controls. Subsequently, working edges (EBITDA edges) ascended from 16.78% to 21.43% contrasted with a similar period a year ago. For correlation, net edges were 47.31% and EBITDA edges were 16.78% in the last detailing time frame. The future cost of organization ought to be around AUD 150 to AUD 160 and it is the best time to purchase organization shares to make long haul riches.