Cimic Group Case Study

712 Words 3 Pages
The theory behind this approach is that similar corporations should have similar valuations. Firstly, for the purpose of this report, it is important to select a few companies that have similar operational performance and financial status as CIMIC Group, in detail, companies selected should be of the same size, bear similar risks and have the same capital structure as CIMIC group. Secondly, choose appropriate multiples and pros and cons of each multiple should be weighted (Meitner 2006).

Key competitors and peers are selected as follows:
• Downer EDI Limited (Ticker: DOW)
• Lend Lease Limited (Ticker: LLC)
• Brambles Limited (Ticker: BXB)
• Smartgroup Corporation Limited (Ticker: SIQ)

Market multiples are chosen and discussed here:
3.1 Price per share / Earnings per share (EPS)
Almost all companies have earnings per share and this data is relatively stable over time unless the company is in financial distress,
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CIMIC Group’s stock price is calculated by multiplying its EPS by the peer group average P/E ratio, EPS is equal to 1.53 (figure 5), peer group average P/E ratio is obtained from the table above and is equal to 19.13.

Thus, price of common stock = 19.13*1.53 = $29.26

Stock price obtained from method of comparables is closer to the actual stock price than the stock price calculated under DCF model.

Interpretations of the result is to be included in stock recommendation part. For the purpose of this report, the defects of this method is discussed here. Firstly, Yee (2004) pointed out that the accuracy of this market approach is heavily based on a reliable peer group of efficiently priced comparable companies, however, in reality, equity market is not perfectly efficient thus selecting two identical companies is hardly possible. This model is a static investment approach and it lacks future orientation, which is a key principle in valuation (Meitner 2006).


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