ACFI3008 Financial Analysis and Valuation

ACFI3008 Financial Analysis and Valuation

Trimester 2, 2024

1. Below is an article published on The Motley Fool, August 7, 10:39 am AEST

Why is the ResMed share price sinking again on Monday?

ResMed shares are having a very tough time this month.

The Motley Fool, Published August 7, 10:39 am AEST

The ResMed Inc. (ASX: RMD) share price is having another disappointing session on Monday.

In morning trade, the sleep treatment company's shares are down 6.5% to a 52-week low of $28.70.

This means that its shares are now down 15% over the last two trading sessions following the release of aweaker-than-expected quarterly update.

Why is the ResMed share price sinking again?

Investors have been hitting the sell button today after the company's NYSE-listed shares fell more than expected on Friday night.

Each ResMed share on the NYSE represents 10 on the ASX. This means they are inextricably linked and will usually move intow with one another.

On Friday night, the ResMed share price fell 18% to US$179.88 (including after-hours trade). This equates to A$273.28 at current exchange rates, which suggests that fair value for its locally listed shares is now $27.33.

Is this a buying opportunity?

The team at Goldman Sachs believes investors should be snapping up shares following this selloff.

While the broker was disappointed with ResMed's update, it believes that the margin weakness, which caused the earnings miss, will soon improve. Goldman said:

FY23 gross margin of 56.5% remains -330bps below FY20 levels, with a sequential deterioration of 30bps from 3Q to 4Q the primary driver of a (5)% earnings miss today (sales growth of +23% was approximately double the 10-year average).

However, in the context of various unprecedented market dynamics, the factors suppressing GM are generally understandable and likely to improve: 1) ongoing competitor challenges skewing sales mix heavily to devices over masks/consumables; 2) elevated freight costs tapering down but more slowly than anticipated; 3) component/other input cost inflation proving stubborn.

In light of this, its analysts have retained their buy rating with a $38.40 price target.

Based on the current ResMed share price, this implies a potential upside of approximately

33% for investors over the next 12 months.

2. Stock price movement of ResMed - 1Y data (collected on 19/09/23)

Requirements

•   You need to write a comprehensive valuation  report that involves financial analysis and uses tools developed in the course about the following firms.

•   The project should be done in groups of maximum five people. The project report must be original material or material duly referenced.

•   Your report must contain investment advice based on the current stock price and your valuation results.

•   Conduct financial statement analysis using historical data. It will give you an idea for the key performance drivers and whether there has been a major change in the direction of the business.

•    For historical financial statement analysis, you must select one peer company as a benchmark. Choose a firm which you think is the most comparable for ResMed  Inc.  You  will  be  graded  on  your  judgement  and  justification  in identifying the right benchmark. Companies and their annual reports can be searched by using:

-          Company websites (usually under “investor relations”)

-          Yahoo financehttp://au.finance.yahoo.com/(company profile, downloadable share price data)

-          Australian Securities Exchange www.asx.com.au (Company profile, ASX announcements)

-          Reserve Bank of Australiawww.rba.gov.au(Government bonds and interest rates)

-          AFR market tools http://afr.com/markettools/ (share market data including dividend information)

-          IBIS Worldwww.ibisworld.com.au (industry, market and company research)

-          Other databases available at UON library (DatAnalysis).

•   Your report should be structured along the following lines:

-     Executive summary (should be one stand-alone page and has no page number)

-    Table of contents

-     Introduction

-    Strategy analysis (including  industry, competitive strategy and corporate strategy analysis  -  you may keep these section concise), accounting analysis (including standardization of reported financial statements) and financial analysis followed by forecasting and valuation.

-    Conclusion/recommendation

-    Appendices (if any)

-     Bibliography

•   The general steps involved in financial statement analysis are as follows:

The steps:

1.  Download financial statements (contained in annual reports) for the full financial years 2019-2023* from the ASX (or the company’s website and others) for ResMed Inc and the selected benchmark company.

2.   Conduct strategy analysis for the two companies (Refer to Ch. 2).

3.   Conduct accounting analysis and recast financial statements in years 2019-

2023 for the two companies (see Ch. 3-4).

4.  Conduct financial analysis based on the standardized financial statements in Step 3 for the two companies  (as in Ch. 5). **

5.   Forecasting  and valuation  (as in Ch. 6-8) for ResMed Inc only. *** You are required to use both the discounted abnormal earnings valuation model AND the discounted cash flow model for valuation.

6.   Sensitivity analysis for ResMed Inc only (as in Ch. 6 LO5).

* Note: if the data range is not available, use 2018-2022

** Note: You will be able to produce ratios for 2020 to 2022 only as average figures of B/S items are used to calculate ratios.

*** Note: Assume a 6% cost of equity for the valuation models. Conduct a sensitivity analysis under different scenarios (refer to Ch. 8).

•    Please use the excel template provided by the textbook for analysis and valuation. Please find the template called “Palepu 3edValuation Excel Template.xlsx ” under the “Assessment 3 Group Assignment Report” folder on Canvas.

• The most  important  point is to write  a  persuasive  report that  leads to a credible conclusion and investment recommendations. The reader wants to see that you know what you are talking about and that you are a thorough and insightful  analyst. You should  demonstrate  that you have the necessary understanding and are using the appropriate tools.

• Format - Keep it short and to the point. Move detail to the appendix and use the main part of the report for persuasion.