SECURITY ANALYSIS & VALUATION (FINS3641)

Akshay Hingorani
Z3255035
Tute: Tue 4-5 PM

In this assignment, I chose to value Wesfarmers Limited (WES) and Burleson Energy
Limited (BUR). In Week 3, I expected that WES was overvalued. According to my analysis,
this was true. I also expected that BUR was undervalued, and according to my analysis, this
was found to be undervalued.

Wesfarmers Limited (WES):

The model I chose to value WES is the Dividend Discount Model. I chose this model as
WES has had a stable leverage ratio in the past 10 years and also the its DPS has been
nearly the same or above it EPS, thus indicating the transition from the Maturity to Decline
stage in the Business Life Cycle. Further, analysis of Growth Rates yields a geometric
average of -1.19% as the growth rate for the past 10 years (see Appendix 1).

WES had a stable D/E ratio in the past 10 years, averaging at around 14% (see Appendix
2). However, to obtain this value, I did not include the D/E ratio of the years 2007 & 2008
due to very high levels of debt during this period while WES acquired Coles Supermarkets
Australia Pty Ltd on 23 November 2007.

The average D/E ratio was used to calculate the levered beta of WES from the 2011
financial year onwards. An assumption that WES will have a stable D/E ratio of 14% was
made in order to calculate the levered beta.

Also, the Risk Free Rate was obtained to be 5.11% as the yield on 10 year Australian
Government Bonds and the market risk premium was 4.5%. Hence the Cost of Equity was
found to be 8.16% (see Appendix 2).

Using the values, and a current dividend of $1.25 per share for the year ended 2010, Single
Stage Dividend Discount Model yielded a value of $13.22 per share. The current value of
WES is $34.73 (closing price as of 27/09/2010). This indicates that WES is overvalued by
$21.51.

Burleson Energy Limited (BUR):

For the valuation of BUR, I chose the method of relative valuation by comparing the trading
price of other companies in the same industry and with similar adjusted Earnings Per Share
ratios (see appendix 3).

As BUR was listed in 2006 and did not make any revenue till 2008 along with the fact that it
had losses over the years, the most suitable method for valuation was through relative
valuation.
The comparison showed that the average price in the Energy Industy was $0.20. BUR’s
current price was $0.08 (closing pri price as of 27/09/2010). This indicates that it is trading
by $0.12 below industry average, thus implying that it is undervalued as compared to other
companies in the same industry.