Introduction
Navitas Limited is a public limited company that trades its shares on the Australian Stock Exchange. The multinational corporation specializes in providing educational services at various levels, including workforce training, university programs and student recruitment. These services are provided at universities and colleges in various parts of the world, particularly in Singapore, the US, Canada, Australia and the UK.
Financial overview and strategies
Navitas Limited is currently entering into a partnership with various universities and colleges to ensure its recognition is widely spread, as well as increase its level of revenue. The partner universities welcome the issue of collaboration as it helps them tap more revenues from the partnership. It also helps partner universities to expand their number of foreign students in their certificate, diploma and degree courses.
Navitas normally enters into a contract of five years with the partner universities, which enables NVT to establish a strong presence in various localities. Navita Limited will benefit from a moderation of processes in various universities, which will ensure that academic standards are maintained and are similar to those of all universities worldwide (Liu & Wang 2010, p. 84). NVT is currently employing the expansion strategy to expand to other English-speaking countries such as Canada, the US and the UK. These countries are said to have attracted both English and non-English speaking students.
An annual report released by the corporation indicated that the firm realized an increase of 20.5% in its Net Profit after Tax at the end of June 30, 2011. Navitas Limited recorded an NPAT of $77.39 million at the end of June 2011, which was a representation of a 20.5% increase relative to last year’s performance. Revenues attributed to ordinary activities increased by 15.6% from the last year’s performance. The revenue for the month ended June 2011 amounted to $643.81 million. The 2010 diluted Earnings per Share were 18.8 cents as compared to 21.7 cents for the year 2011. However, the NOCF (net operating cash flow) decreased by great margin given that the company had NOCF of $69.46 million in 2011 as compared to $77.39 million realized in the year 2010. The company will take advantage of the favourable economic and social factors to expand its presence in various parts of the world (Oster 1994, p. 89).
Current Price Data
Free Cash Flow to Equity
Free Cash Flow to Equity is a technique that is used to evaluate how much cash can be paid to the equity shareholders after reinvestment activities, debt payment and expenses. This will normally indicate the financial strength of the company. A positive value is an indication that a firm can give out a certain level of dividend or repurchased stocks without interfering with the operations of the company. This means that a firm can issue a certain amount as dividends without affecting its future growth. Nevertheless, a negative value will indicate that a firm should issue new equities to raise an adequate amount of cash for various activities that the firm is involved in.
FCFE = Net Income-Change in Net Working Capital- Net Capital Expenditure + New Debt – Debt Repayment.
FCFE = EBIT * (1-Tax rate) + Depreciation – Capital expenditure – Change in Working Capital + New debt – Debt repayment.
Earnings before Interest & Taxes (EBIT) = Net Sales – Total Variable Costs – Total Fixed Costs – Depreciation
Net income = EBIT – Taxes
Projected Free Cash Flows ($ ‘000’)
Terminal Value of Equity = Final Year Cash Flow * (1+Growth rate of Cash Flow after projection horizon) / (WACC Discount Rate – A growth rate of Cash Flow after projection horizon)
Value of Operating Assets = Net Present Value of Cash Flows + Discounted Terminal Value
Equity Value = Value of Operating Assets + Value of Non-Operating Assets
Firm Value = S Operating Free Cash Flows
(1+WACC) t
Equity Valuation
The share per capital of the company, as indicated by the Free Cash Flow to Equity was $3.53 per share. This price is above what is indicated by the Australian Stock Exchange. There is a possibility that the market is not sufficient to value the market shares since the $3.53 value means the price is underpriced. The recent outstanding performance resulting from the expansion strategy of the company in various foreign countries has led to an increase in its revenue, as well as expansion of its capital base. The company expects to continue expanding into both speaking and non-speaking English countries.
Calculating the value of the firm using the Dividend-Discounting model
Current stock price, P = Next year’s Dividend, D1 / (cost of equity, r- dividend growth rate, g)
Assuming a WACC of 8.98% and the dividends grows at the rate of 25%:
Navitas Limited value, P = 0.23 / (0.0898 – 0.025) = price $3.549 per share
The dividend-discounting model also indicates that the Navitas Limited shares are underpriced in the market. This model indicates that Navitas Limited shares are valued at $3.549, which is above the market price of $3.500. These shares are expected to rise soon due to several partnerships the company is focusing on. This will enhance Navitas Limited shares in the market as students from diverse localities continue to embrace education (Porter 1990, p. 67).
Dividends Policy
The company has a special dividends policy that distinguishes it from other companies. Unlike other companies, which consider paying dividends in form of stocks, Navitas Limited has resolved to stick to cash. Navitas Limited understands that paying stocks as dividends will most likely dilute the shares of the company. The dividends of the company are expected to increase from 20.7 cents to 22 cents in the year 2012, and finally reach 23 in the year 2013. This improvement is expected in the next 5 years. The expected increase is attributed to the projected increase in the share value of the firm shortly. The firm pays its dividends quarterly. The last ex-date was on 02/9/12 and will subsequently be made after March. The dividends are normally paid from the profits made by the company (Das, Markowitz & Scheid 2010, p. 321). Navitas Limited realized that delaying dividends payment will negatively affect the image of the company. This may lead to a fall in its share value. In this regard, the company always pays dividends in time.
Growth in the Education sector
The education sector is growing at a fast pace hence attracting many investors in this sector. Unlike in the past, education is now perceived as the driver of economic components. Many developed and developing nations are embracing modernized and standardized educational systems in their countries to improve the level of literacy. Professor Milbourne, who is currently the vice-chancellor of the University of Technology of Sydney, indicated that Australia has to embrace technology if it needs to compete effectually with other developed nations. He claimed that currently, the country could no longer rely on the traditional approaches to sustain its economy.
The professor called for improvement in the educational system as regards technology as this will help the mining industry flourish in future. Concerning the issue of technology, it is clear that diversification of education will enable Navitas to take advantage of such opportunities in the market (Bodie & Marcus 2008, p. 12).
The other English speaking nations are also embracing the need to diversify their educational system as regards higher education. For instance, the Canadian government indicated that it would continue collaborating with other foreign institutions to enhance its education system. The corporation is also benefiting from the rate of emigration realized in the UK, the US, Canada and Australia. Most foreigners fly to these countries for purposes of seeking higher education in various learning institutions (Wittner 2003, p. 11).
However, with the recession that was experienced in the year 2008, the US economy has not yet revived from its effects. This has seen the rate of unemployment remain high. As a result, the economy still faces difficulties in various sectors including education. Nevertheless, Navitas Limited is expecting the economy to return to its normality in the next 4 years. This will ensure that its revenues are sustained at optimal levels (Elton & Gruber 2006, p. 31).
Investor decision making concerning shares
The best decision that any investor should make about Navitas’ shares is to hold them. Holding becomes a fundamental step as the education sector is expected to grow at a higher rate concerning other sectors of the economy, such as agriculture and banking. This is because the modern world is becoming more competitive and education is perceived as the only means of ensuring one maintains a competitive edge (Porter 1980, p. 56). This is true as most people realize that information has become a key factor in making various economic decisions. With the company expanding to new regions such as the US and Canada, its shareholders will likely benefit from capital gains associated with its stocks (Peteraf 1993, p. 190). It is also important to hold the shares since they are underpriced in the market. Selling them at 3.500 will simply generate losses. Shareholders should hold the shares in anticipation of higher prices in the market.
List of References
Bodie, Z & Marcus, A 2008, Investments, McGraw-Hill Irwin, New York.
Das, S, Markowitz, H & Scheid, J 2010, “Portfolio Optimization with Mental Accounts”, Journal of Financial and Quantitative Analysis, Vol. 45, no. 1, pp 311-334.
Elton, E & Gruber, M 2006, Modern Portfolio Theory and Investment Analysis, John Wiley, New York.
Liu, Z & Wang, J 2010, “Value, Growth, and Style Rotation strategies in the long- run”, Journal of Financial Service Professional, Vol. 4, no. 1, pp 67-90.
Oster, SM 1994, Modern Competitive Analysis, Oxford University Press, Nueva.
Peteraf, MA 1993, “The Cornerstone of Competitive Advantage: A Resource-Based View”, Strategic Management Journal, Issue.14, no.1, pp 179-191.
Porter, ME 1980, Competitive Strategy: Techniques for Analyzing Industries and Competitors, The Free Press, London.
Porter, ME 1990, The Competitive Advantage of Nations, London, MacMillan Press.
Wittner, P 2003, The European Generics Outlook: A Country-by-Country Analysis of Developing Market Opportunities and Revenue Defense Strategies, Datamonitor, London.