Question #33

The weighted harmonic mean of the two PE ratios is a harmonic mean which is weighted by the portfolio weights. 1/[(0.60 × 1/10) + (0.40 × 1/15)] = 11.54 (Module 22.4, LOS 22.r) Beyan Bautista, CFA, is a sell-side research analyst for a boutique UK investment house. One of the companies she is currently covering is Yantra Plc, a manufacturer of mid-range motorboats, primarily for river use. The company's shares closed at £44.56 on 15 January 20x4. Beyan uses the Treasury bond yield of 2.5% and an assumed market risk premium of 5% when calculating justified ratios based on forecasted fundamentals. She would first like to calculate Yantra's normalized price-to-earnings ratio over the period 20x0 to 20x3 via the following two methods: Method 1 – historical average EPS Method 2 – average return on equity The following table summarizes selected historical data for Yantra Plc. All GBP figures are quoted on a per- share basis: 20x0 20x1 20x2 20x3 Sales £32.44 Earnings £1.57 £2.16 £3.24 £1.89 Dividends £0.76 FCFE £1.05 Book value £10.56 £11.88 £14.21 £15.69 ROE 14.9% 18.2% 22.8% 12.0% Beta 1.40 Beyan would like to value Yantra using justified trailing price-to-sales and price-to-book ratios based on forecasted fundamentals. She bases the inputs on the most recent data (i.e., 20x3). Finally, she would like to conclude her valuation by analyzing the justified trailing price- to-cash flow and justified trailing dividend yield metrics. As above, where needed, 20x3 data is used to develop the inputs. Beyan assumes cash flows are growing at a constant rate. Given the recent lukewarm reception of a new product line at Yantra geared at ocean use, Beyan is considering increasing the cost of equity and reducing the growth rate in her models. She is considering what impact this might have on justified ratios based on forecasted fundamentals such as P/E, P/B, P/S, P/CF, D/P. Beyan would also like to apply multiples analysis to three of Yantra's closest competitors—Arda, Struma, and Tundzha. Having read the MD&A of the annual reports of each company, she has highlighted the following points: Arda: "is in financial hardship due to a recent downturn in its sector" Struma: "operates in extremely cyclical industry" Tundzha: "has very different cost structure to the rest of its peers" Based on the highlighted points, she is deciding on the most appropriate candidate ratio for each of the above companies: Arda: price-to-earnings or price-to-book Struma: normalized price-to-earnings or trailing price-to-sales Tundzha: price-to-earnings or price-to-sales Beyan has also been recently tasked with covering Nanuk Plc and Nunca Plc, two close competitors developing innovative solutions for marine navigation. She has collected the following information on the two companies (the trailing cash flow per share is calculated as net income per share plus non-cash charges per share): Nanuk Nunca Share price 38.00 64.00 Trailing CF per share 4.52 9.11 P/CF 8.41 7.03 Trailing FCFE per share 3.11 3.85 P/FCFE 12.22 16.62 5-year growth rate 14% 19% Beta 1.4 1.4