Stock Valuations: the Strength and Weakness of a Business Investment Report

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Introduction

Stock valuations reveal the strength and weakness of a business investment. As a result, the investor, shareholder, or agent can determine the best-selling point using stock valuation (Fernandez, 2007). Consequently, stock valuation facilitates the decision-making process. As a result, an investor can decide when to buy, sell, or hold a particular stock. Stock values can be determined with different valuation methods. However, the components of each stock make it difficult to choose one approach for its valuation. Investors use ratio and intrinsic valuation to value stocks (Miller, 2013). Ratio valuation includes price-to-earnings, price to book, price to sales, and other comparable. The paper will determine the stock valuation for Zain Bahrain. Thus, the aim of stock valuation facilitates the decision-making process of the investor (Schweser, 2013). As a result, we will use forecasted financial statements to recommend positive or negative business investment.

Valuation methods for Zain Bahrain

The stock valuation of Zain Bahrain will be calculated with three approaches. Thus, the valuation methods include discounted cash flow model (DCF), dividend-discounted model (DDM), and the comparative method. The assumptions used in the valuation will be summarized below. Zain Bahrain’s forecasted share price is 0.19 DH (Bahraini Dinars). The debt to equity ratio is 0.2. Expected return on investments is 9%.

Risk free rate = 5%. Zain Bahrain forecasted beta is 1 and growth rate is 1.2% (ZAIN BAHRAIN, 2014). The assumptions are based on the premise that economic growth, interest rate, stability bandwagon effect and related market will facilitate the growth rate of Zain Bahrain.

Table 1: Figures for the valuation

Risk free rate (rf)5%
Risk premium7.5%
Zain beta1
Growth (g)1.2%
D/A20%
Marginal tax rate0%

The assumption in Table 1 was based on historical figures and the company’s financial statement. I used the figures to estimate the figures in table 1.

Table 2: Basic assumptions

Valuation methodPrice( BHA)Weight
DFCF0.3923%
DDM0.4519%
Comparable0.6358%
Weighted priceBahraini Dinars 0.49

Table 3: Discounted cash flow model summarized

2011A2012A2013A2014A2015E2016E2017E
EBIAT27,94127,28329,32229,56028,60927, 67828, 667
Plus: Depr/ Amort.15,77020,87724,32024,65624,34024,34025,690
Less: Net Captital exp.27,70928,98833,50834,56035,79036,45036,450
Total CAPEX89,00092,02095,06778,06875,08978,08979,089
Depreciation22,00023,00022,02025,03027,00028,33028,304
Net CAPEX6,6505,6707,6878,78915,07815,56015,560
Working capital7,5676,5657,5678,76812,45612,45612,456
DCFC29,34522,67823,45623,67032,09838,09838,098
PV0.9870.9850.4530.5640.7900.8900.890
DCF97,45699,07969,79095,68794,90795,79095,790
NPV of DCFC118,456

Table 4: Dividend-discounted model summarized

BHD 00020112012201320142015E2016E2017E
Div/share0.190.190.190.190.450.460.46
PVDF0.9540.9870.9870.9870.9880.9880.988
PV of Div/share0.450.450.450.45
Price per share 0.45 Dinars

Table 5: Comparable ratio valuation

Multiple valueImplied value
P/E12.30.6
EV/EBITDA3.40.856
P/B6.80.434
Average 0.63

Valuation analysis for Zain Bahrain

The result of the analysis revealed that investors must buy at 0.49 Dinars. The risk free rate of 5% for Zain Bahrain was forecasted for 3 years. As a result, the average bond rate was calculated for the organization. The risk of premium was pegged at 7.5%. The prevailing market pressure and inflation rate influenced the risk premium value (Telecommunication Regulatory Authority, 2013). The beta of 1 was assigned for the firm’s volatility. The firm’s marginal tax rate was adjusted to 0%.

Figures for the valuation

We allocated revenues based on the projections for 3 years. As a result, revenue projections for 2015 slipped by 1.5%. The forecasted values for 2016 and 2017 follows similar trend. However, the profit margins for the next 3 years will be influenced by the estimated values. Thus, the methods of valuation revealed the stock’s share value.

Discounted cash flow model: Stock value = 0.39

The variables that affect the share price were factored into the decision-making process. As a result, we assumed positive ratings for the next 3 years with the DFCF model. Consequently, we fixed the WACC, terminal growth, and share weight with the forecasted financial statements. As a result, the CAPEX index cannot influence the stock value. Thus the weight was pegged at 23%.

Dividend discounted model: Stock value = 0.45

The stock valuation was pegged at 0.45. However, the forecasted projections for 3 years were estimated by the DDM. Thus, the weight of the DDM is 19%. The projections for 2015, 2016, and 2017 will influence stakeholders and investors.

Comparable valuation: Stock value = 0.63

The comparable valuation for three organizations was used to calculate the share price for Zain Bahrain. The organizations include Mobily KSA, Qtel Qatar, and Wataniya Kuwait. As a result, the share ratios for price earnings and price-sales were estimated. Thus, the weight of the comparable valuation is 58%.

Risk assessment

We used different elements of stock valuation to determine the price index for Zain Bahrain. As a result, tax EBIT facilitated the stock valuation. Thus, terminal growth and CAPEX index will affect the stock valuation for the next 3 years. As a result, the projection for 2015, 2016, and 2017 will influence shareholders and stock analysts.

References

Fernandez, P. (2007). Company valuation methods: The most common errors in valuation. Web.

Miller, H. (2013). Behavioral rationality in Finance: The case of dividends, Journal of Business, 75(9), 451-468.

Schweser, K. (2013). Equity investment. Web.

Telecommunication Regulatory Authority: Cost of capital. (2013). Web.

ZAIN BAHRAIN: Prospectus. (2014). Web.

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