Help with Valuing

[dagdaniel1]

Hey, currently doing a Finance course at uni (FINA 202), and we have to value a stock, using what we've learnt in class. I've just chosen AIR (Air New Zealand) but finding it very hard to find the discount rate and the growth rate. We were told to try find the discount rate using CAPM - but I don't know what to plug in for the E(Rm). Also, he mentioned that to calculate the growth rate we could use g=retention ratio x Return on retained Earnings. Wondering if return on retained earnings is just ROE, which means I come up with a growth rate of around 7-8% (using retention ratio of 0.45).
He also suggested using DDM to find that R=D1/P0 + g. With D1/P0 being the Dividend yield, and g being the capital yield. Using this, I get a discount rate of around 19%, which I think is very high.
According to Reuters, next years divie (using 0.55 payout ratio) is around 24 cents.
This means I get a price of P=24/(0.19-0.08)=$218. This just doesn't seem right, as most are saying that the share is undervalued at $2.52.
Can anyone help me out?

[macduffy]

No help, I'm afraid, Daniel.

Unfortunately, you've chosen what is probably NZ's most difficult company to value - in the most unpredictable industry!

Personally, I'd look for something a bit more staid, less sexy, for the exercise.

:cool:

[dagdaniel1]

Any suggestions? I was thinking of doing WBC or ANZ, but I couldn't find their Betas.

[macduffy]

Any suggestions? I was thinking of doing WBC or ANZ, but I couldn't find their Betas.

How about something more straightforward such as Briscoes or Nuplex. Banks - and insurance companies - have their own valuation "peculiarities".

[Harvey Specter]

Why not to kathmandu. Very topical at the moment and you may also get some validation one the takeover report is released (which I assume will have some valuation data in it).

[Harvey Specter]

This might also be of interest (esp the back pages): http://www.pwc.co.nz/PWC.NZ/media/pdf-documents/appreciating-value/pwc-appreciating-value-nz-edition-6-march-2015-deal-activity-ipo-listed-share-price-performance.pdf

[dagdaniel1]

This might also be of interest (esp the back pages): http://www.pwc.co.nz/PWC.NZ/media/pdf-documents/appreciating-value/pwc-appreciating-value-nz-edition-6-march-2015-deal-activity-ipo-listed-share-price-performance.pdf

Cheers, that should be incredibly helpful, will look into Briscoes and Kathmandu. It's a group assignment so I'll ask my group as well, thanks for the help guys.

[Harvey Specter]

Briscoes and Kathmandu are a good combo given the bid offer for Kathmandu is mainly in shares. So even if you think the valuations are out, as long as they are relative, it could still be a 'accept recommendation'

[dagdaniel1]

In the end we decided to go with SPK. Pretty much done now, just wondering, if they pay a 22 cent dividend, fully imputed, how much does the shareholder get (how much tax do they pay).

[Harvey Specter]

In the end we decided to go with SPK. Pretty much done now, just wondering, if they pay a 22 cent dividend, fully imputed, how much does the shareholder get (how much tax do they pay).


Net dividend
22.00


Imputation credited
8.56


Gross dividend
30.56






Impuation credits
- 8.56


RWT
- 1.53



- 10.08






Cash Dividend
20.47