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 …show more content…
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).
Stock …show more content…
A higher P/E ratio than peer group average generally suggests that stock price may be overpriced, which is further confirmed by the significant price difference between actual stock price and stock price calculated using DCF model in this report. Additionally, CIMIC Group beta value is 1.6, which is higher than 1; It implies that CIMIC share is 60% more volatile than overall market movements. With current and forecasted negative outlook of construction industry considered, risk averse investors are advised to sell the stock. However, CIMIC Group is a market leader and has strengths such as economies of scale and its increasing ability to take orders, as such, It is likely that CIMIC Group will continue to secure market opportunities, besides, CIMIC Group’s high dividend payout ratio indicates the company is performing well in the market and receives profitable revenue each year. Furthermore, beta higher than 1 implies that investors is expected to receive higher returns than market returns, therefore, for risk seeking investors, CIMIC group share might be a good investment
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 …show more content…
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).
Stock …show more content…
A higher P/E ratio than peer group average generally suggests that stock price may be overpriced, which is further confirmed by the significant price difference between actual stock price and stock price calculated using DCF model in this report. Additionally, CIMIC Group beta value is 1.6, which is higher than 1; It implies that CIMIC share is 60% more volatile than overall market movements. With current and forecasted negative outlook of construction industry considered, risk averse investors are advised to sell the stock. However, CIMIC Group is a market leader and has strengths such as economies of scale and its increasing ability to take orders, as such, It is likely that CIMIC Group will continue to secure market opportunities, besides, CIMIC Group’s high dividend payout ratio indicates the company is performing well in the market and receives profitable revenue each year. Furthermore, beta higher than 1 implies that investors is expected to receive higher returns than market returns, therefore, for risk seeking investors, CIMIC group share might be a good investment