Valuation of listed company using the DCF model: A case study of Anglo American PLC
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Date
2019
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Publisher
University of Namibia
Abstract
Anglo American Plc (“Anglo”) is one of the world’s largest mining companies. In
addition to the London Stock Exchange, it is listed on the Johannesburg Stock
Exchange with operations that span the globe. At the date of valuation, 30 September
2014, Anglo’s shares constituted a significant portion of the investment portfolio of
the researcher’s employer and was one of the primary drivers of portfolio performance.
Incorporated in 1917, Anglo’s maturity was further evidenced in decreased trading
volumes of its shares despite price volatility due to its dependence on global
commodity prices and GDP cycles. Its trading volumes declined, indicating that
investors opted to hold onto the shares for longer thus exhibiting both equity and bonelike characteristics. As a case study, the research sets out to establish Anglo’s
investment case and ascertain whether it warranted a buy/hold/sell recommendation.
By employing the Discounted Cash Flow (DCF) method and limiting cash flow to
potential dividends referred to as Free Cash Flow to Equity (FCFE), the study derived
DCF model inputs using the company’s financial statements and market data to build
an excel based model. Amongst others, model inputs include expected cash flows,
expected growth in those cash flows, Terminal Values and discount rates or cost of
financing. Using a five-year growth period, the expected cash flows inclusive of the
terminal value were discounted using the cost of financing specifically the cost of
equity to determine the total present value of those cash flows at valuation date and
subsequently an estimate of the intrinsic value per share. It was found that Anglo’s
market price per share was significantly higher than the estimated intrinsic value per
share that resulted from the DCF model. Relative Valuation was also undertaken as a
complement to DCF model and found that the share was overpriced albeit to a lesser
extent than DCF model results. This lead to the conclusion that as at valuation date,
the shares were overpriced with limited upside potential and warranted a sell
recommendation. Limitations of the study include the fact that the analysis did not take
account of qualitative factors of the company, no access to management to better
inform model inputs, not fully exploring the impact of cyclicality of the company as it
is influenced by commodity prices giving rise to the need to normalise cash flows, no
undertaking of sensitivity analysis and controlling for differences in the comparables.
It is thus recommended that additional research should take account of these
limitations.
Description
A thesis submitted in partial fulfilment of the requirements for the Degree of Master of Business Administration-Finance
Keywords
DCF model