Coming Home Funeral services seems to be a company which has potential for growth and this is demonstrated in its financial figures. However this growth appears to be very conservative according to peer reviewed estimates which show that this is more likely to be 1.5 per cent than what the company’s directors are projecting. The revenue was flat for three years at 111,000 the rising moderately to 114,000 after the third year and to 117,446 after the sixth year. This shows that the sales figures are showing slow growth and this could be due to a number of factors which are the bad press the company received on certain health issues and investigations. The decision to undergo strategic price reductions was also an effective policy which protected the business from collapsing as well as the expansion into the European market has also had a positive effect. Other external factors which impacted the business’ operations include the reduction in salaries and wages which definitely positively impacted turnover figures and increased profitability. The competition across the UK is quite fierce with at least 65 per cent of market share taken up by competitors although the market in funeral services continues to grow.
Internal analysis:
The company’s turnover figures have been impacted by a great increase in wages and salaries which have skyrocketed over the period under question. The fact that these have now been addressed through a restructuring programme have helped the business although the price increases have also made it slightly uncompetitive.
Considering company’s historical revenue growth of less than 1%, the management’s sales projections were found unjustifiable. Thus, revenues are forecasted to grow with 1.5% rate for the next 5 years.Operating costs forecast were made based on historical operating margin of approximately 68%.
As no information regarding Depreciation and amortization were provided, the calculations were made based on conducted from peer analysis average rate of 7% to total sales (companies considered for the analysis are as follows: Alderwoods Group, Loewen Group, Carriage Services and Service Corporation International).
The tax rate of 30% was used to simplify the calculations. The other information needed (CAPEX and Change NWC) to estimate Free Cash Flow were provided by the company.
E (R) = Rf + BETA*(Rm- Rf), where:
Rf – the risk free rate of 0.04 (equal to the USA 5-years Treasury bond);
Beta = 1.12 (industry average beta);
(Rm- Rf) – Market risk premium is 0,053;
2005 UK GDP growth rate of 2% .
Thus, the discount rate was estimated as 6.15% the company’s present value is GBP 278 million, that is more than the price suggested (GBP 240 ml).
This means that the external factors which have affected the company include the introduction of the Coming Home brand which has not been at all successful. The aggressive moves by other competitors especially in the cremation business have also had a considerable effect on the company’s prospects which although showing a steady growth are not all that rosy. The situation appears to be initially quite good at the moment but a lot of work needs to be done to maintain investment and growth patterns.
This business seems to be the most attractive of the three on offer for various reasons. First of all it is a funeral service and this line of business is always in demand. But apart from the certainty of the business type the financials of the company seem to be extremely healthy and the profit generated is already very substantial although it could benefit from a reduction in costs. Also the bad publicity regarding the lax financial performance and operation of the company needs to be addressed.
The calculations are made based on the data provided by the company. However, considering management’s unwillingness to share information the industry averages were used and appropriate assumptions were also made.
The external factors which seem to be affecting the company include the following:
A burgeoning market for fragrances
Considerable customer base
Healthy turnover figures and financials.
Compliance costs for the fragrance industry are also very low so this enables it to gain a larger share of profits from its sales. The current situation in the company shows a healthy financial situation and which includes a considerable value if it were to be sold.
Internal analysis:
The company seems to be in strong shape with a healthy turnover and profit margin. Total revenue has grown substantially over the past seven years from 2002 to 2007 and the inner workings of the company seem to be in place. The total sales figures and diversification of product lines has assisted the company to be in a healthy state and this will assist it move forward.
Given the Fragrances’ sales of $ 650 million as 55% of total company’s revenues in 2004 the total revenues were estimated and the sales forecast were made using the average growth rate of 1.5% per year (provided by the company). Assuming company’s average margin of 10% net profits were calculated. EBITDA and EBIT were found accordingly and projected with a historical growth rate of 5.3% and 7.2% respectively. The difference between these two values was considered to be equal to Depreciation and Amortization. The tax rate of 30% was used to simplify the calculations. Net working capital was estimated approximately using the industry average of 22.73% for NWC/Sales ratio, the change in NWC was calculated accordingly. CAPEX was also found as 9% of sales (industry average data). After the Free Cash Flow was conducted the Discounted CF was calculated using CAPM model, where:
- average beta = 1.37 (Chemical industry),
- risk free rate of 4% (5 year US Treasury Bond in 2005),
- 2005 Germany GDP growth rate of 1%
- average market risk premium as 5.3.
According to the calculations above the Present Value of the company is $us1.6 billion, which is within the range provided {$850 ml to 2.2 bl}.
Thus one can conclude that the internal factors affecting this investment include the way in which amortization will be carried out. The large amount of stocks and sales indicate that the company’s cash flow is in a healthy position and it looks like an excellent investment opportunity on all counts.
The company seems to be in a very healthy financial position but it is also spread very widely across the globe with very high operational costs. The EBTDA and expected growth figures are also rather low, with sales figures expected to increase by just 1.5 per cent year on year. The valuation which is on the lower end of the scale is correct and although the business probably has potential, there are stills substantial risks in the investment.
Internal analysis
Yellowstone Cattle Bank (YCB)
YCB is a private company headquartered in Milwaukee, Wisconsin, which provides payment-processing services to small- and medium-sized regional businesses that accept credit, charge, and debit cards, as well as checks. The company was founded in May 1998 and by 2005 has become the 44th largest payment-processing company by volume and 24th by number of customers.
Today it is a strong company with constantly growing customer base – from 12.000 to 40.500 over the last five years. Thus, the company value is expected to achieve $75mln this year, which is half of the comparable public market valuation (public companies – 30.1xLTM net income; YCB – 12.6x).
Besides the company is already investigating business-outsourcing opportunities in India, which will enable YCB to move its back-office work to a lower cost country and thus increase its margins.
However the YCB’s available stock accounts for only 40% of the total equity, which means Empire’s power would be limited by what it was able to negotiate in shareholder’s agreement, thus depriving Empire of any extra influence. Though management and shareholders express their readiness to enter into this agreement.
The deal seems to be attractively priced: Empire would have to pay $30 million for 40% of the assets. Moreover, given the fragmented nature of the market the ownership can be increased through later acquisitions.
It should be noted, however, that YCB’s CEO is famous for being strong willed, which may become a barrier while deciding on the future company’s solutions. Nevertheless he has impeccable record of growth, while the YCB’s management is known to be strong and efficient.
External industry analysis
The overall industry is expanding steadily. In the past five years credit card dollar volume has increased more than 74%, with credit card use accounting for 20% of all transactions. The industry has become even more attractive as developing countries adopted noncash methods of payment, which provides new opportunities for YCB business.
The industry is becoming more and more fragmented and consolidated. In the past six years the market share of the ten largest banks processing cards grew from 45% to 70%, which means that soon the industry entry barriers will become very high. YCB can be deemed as attractive investment for larger market players that try to capture a bigger market share.
- EBIT with an average growth rate not less than 20% per year was provided in the presentation;
- Given the company’s EBIT the industry average EBIT/revenues figure of 61.83% was used to determine total sales;
- the NWC/sales industry average of 18.08% were used to calculate the NWC; change in NWC were estimated accordingly;
- Tax rate was considered to be 30%;
- CAPEX to Revenues average industry figure of 5.13% was adopted to calculate CAPEX;
- Depreciation&Amortization rate as 3% of total revenues was assumed as Financial Services industry specific (based on the average);
The discount rate 7.6%.was calculated using CAPM, where:
Risk free rate is 0.04 (USA Treasure Bond);
Industry average beta is 1.34;
The USA market risk premium of 0,055.
US GDP growth is 3% was used to calculate DCF.
Therefore, the company’s present value is estimated as $ 253 million (42x LTM net income), while 75 million (12.6x) represents the initial enterprise value. However, comparable public companies recently were sold for 30.1x LTM net income.
