25575 Investment Banking

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You have recently joined the advisory division in a major investment bank and as the rookie junior analyst on the team you have been asked to take a first go in assessing the value of company your bank is looking at as a possible candidate for an acquisition.

Your boss, a brilliant banker is obsessed with research-oriented Australian companies. He has recently expressed interest in Cochlear Ltd., an Australian company founded in 1981 and headquartered in Sydney.

Cochlear Ltd. (COH-AU) engages in the provision of implantable hearing solutions. The firm operates through the following geographic segments: Americas, Europe and Asia Pacific. Its products include cochlear, bone conduction and acoustic implants. The company’s revenue accounts for more than 60% of the global market share (according to the company).

Your job is to apply comparable companies and DCF valuation to this target and provide:

  • A reasonable valuation
  • A final investment advice (i.e. whether the company is, at the current trading price, a good acquisition target). By convention we will consider "current trading price"

$233.29 as of 8th March 2023.

Just like in any R&D intensive sector, intellectual property (IP) protection is key. Both to protect the company’s own research and to not infringe other research institutions’ patents. In recent years Cochlear Ltd. has been negatively affected by a patent infringement case and your boss is interested in knowing your thoughts on how and if some sort of provision for patent infringement should be included in your valuations.

The output for this assignment will be one Excel file with the result of your valuation. The file Assignment 1_XXXXX.xlsx provided in Canvas will be the shell in which you will do your valuation. Prior to submitting the file, you should change the XXXXX in the file name with your student ID number.

In performing this valuation, you are not allowed to use any information outside of what can be found in FactSet. It is ok if you get some idea from a newspaper article and then you apply it with FactSet numbers, it is not ok that you say that your expected growth is 5% because you read Warren Buffet said so.

1.  Comparable Companies

For CCA you should use at least 6 comparable companies. You should also choose a variety of multiples (at least two) calculated on different time horizons (LTM and forward multiples).

You should divide your comps in two groups. The first group should be based on financial similarity (similarly to what we have seen in class) and the second group more focused on firms with very similar business model (in this second group you are willing to accept firms with different growth, profitability, size etc. if they have a very similar business model).

Please notice that:

  • While group 1 is based on financial similarity, firms should still be in the same industry/sector.
  • There is no limit on the size of the One group could be made by a single comp, as long as the total number of comps is at least 6.

In the Benchmarking worksheet. You should report relevant business and financial information on your comps. From this table the reader should understand that your comparables are similar enough to your target to provide useful valuation insight.

In the Valuation worksheet you need to estimate the valuation range of the company based on each of the multiples you have chosen.

You will then select only the multiples that you think offer a better estimation of the value and report these in the Football Field.

In the worksheet Questions, you should explain your choice of comps, multiples and valuation ranges in Questions 1, 2 and 3.

2.  Discounted Cash Flows

For DCF you should provide three scenarios

  • A Baseline or “normal”
  • An Optimistic
  • A Pessimistic

The optimistic and pessimistic scenario should capture the idea of a particularly good/bad period for the company, but not exceptionally so. For example, the pessimistic scenario should capture the idea of “few tough years” and not a major crisis.

The two alternative scenarios (optimistic and pessimistic) should affect multiple assumptions (at least 3), and not only the sales growth.

In the worksheet Questions, you should explain your assumptions and DCF valuation range in Questions 4, 5, 6 and 7.

3.  Football Field Chart

The chart should contain:

  • A valuation range based on each of the “best” multiples that you have selected among all the ones that you have built (In this case with the word “multiple” we refer to one multiple and one time period, for example “FY2 EV/SALES” or “LTM P/E”).
  • A valuation range based on the DCF
  • The 52-weeks trading range of the company
  • A vertical line with the current market price of the company of $233.29 (as of 08/03/2023).
  • A vertical band representing the final valuation range you will recommend to your

Both the vertical line and band can be drawn (with Insert Shape in Excel) on top of the graph and do not have to automatically created by the graph.

You should also report your final valuation range manually in the cells B20:C20 of the Chart Worksheet.

In the worksheet Questions, you should explain your final valuation range and your investment advice in Questions 8 and 9.

4.  Data and Timeline

Financial data can be found in FactSet. Instruction on how to access the data can be found in the videos of the guided valuation exercises.

The knowledge necessary to complete the assignment will be covered in the subject, with the theoretical aspects analysed in class and the technical components (including how to use the excel models and how to access information in FactSet) explored in the valuation exercises.

Specifically:

Component Covered in
Valuation on Comparables Weeks 2 and 3
DCF Valuation Week 4

You could start working on the assignment as soon as possible.

5.  Submission

You will submit:

  1. A modified version of the provided Excel file Assignment 1_XXXXX.xlsx

Where XXXXX is replaced with your Student ID. Files with wrong names or wrong format will attract 5% penalty.

Your Excel files should not contain links to any external spreadsheet. So be careful with your cut and paste.

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