zBSB107 - Assignment 2
zBSB107 - Assignment 2
Isabella Zucca, Krithya Krishnakumar, Olivia Fitzgerald, Aida Ibrahim, Tenzil Jaefer
Weight: 40% Due: 19th may
450 words per person.
Task: This is a group/team assignment, where you are expected to create a stock pitch that presents your analysis and recommendation on which of the two stocks offers the best long-term investment opportunity for your target investora close family member or friend. You are to focus on intrinsic value only. (32 marks)
You will communicate your groups stock recommendation via video. Your groups video must NOT exceed 10 minutes (+10% tolerance). The two stocks under consideration are the same as in Assignment A1b: KMD Brands and Premier Investments. In your stock pitch, you need to demonstrate proficiency in the following key real-world skills:
(i) Technological skills in the production of the pitch video (3 marks) and visual aids (2 marks);
(ii) Effective and professional communication skills (in oral form) in delivering the pitch (5 marks);
(iii) For each stock:
- Effective analysis - identify the value drivers and red flags (4 marks)
- Evaluation - assess (rank) the importance of the value drivers and red flags identified (2 marks)
- Synthesis skills - show three future growth scenarios (including likelihoods) (4 marks), provide active inference for one of the scenarios (5 marks), and convert the 3 scenarios to numerical inputs for the DCF modelcompute its short-term expected growth rate and the discount factor (2 marks). In doing so, a good balance is achieved between number crunching and storytelling; and
(iv) Independent judgment in deciding which of the two stocks (if any) is the preferred investment choice for your target investor (5 marks).
You must craft a valuation story comprising three (3) short- to median-term future growth scenarios (with their probabilities) which will be used to compute the probability-weighted expected growth rate of the free cash flows as well as the discount rate. After providing the necessary inputs to the model, the Excel file will automatically compute for you the present value of the stock of the two businesses using the two-stage discounted cash flow (DCF) model. The long-term growth and discount rate are provided to you in the Excel spreadsheet (you may alter these if you wish, but it is not necessary to do so. Assignment A3 will focus on the long-term discount rate).
Given the tight time constraint of the video pitch (10 minutes) whilst you must display three future growth scenarios for each stock, you are required to demonstrate your ability to perform active inference for just one of the scenarios for each stock. You do not need to justify why you have chosen the specific scenario and it does not have to be the same for each stock. A video pitch example is to be uploaded on Canvas under [Assessment A2. Valuation Pitch]. A detailed PitchDeck.ppt is also provided to assist you in your Task.
Company Overview
KMD Brands:
KMD Brands manage the brands: Kathmandu, Oboz and they have recently acquired Rip Curl. Brands like Kathmandu have a very well-established reputation in Australia as a leading outdoor lifestyle and sports company. KMD Brands is driven by their purpose, which is to inspire people to love the outdoors and vision to become the leading family of global outdoor brands.
What is the companys strategy to drive earnings growth for the next 5 years? By sharing expertise in technology, research and development and by leveraging operational excellence in sourcing, supply chain and systems, we are able to deliver the best customer experience across our brands. - push sustainable practices across all three brands.
Premier Investments:
Premier Investments manage the brands: Peter Alexander, Smiggle, Just Jeans, Jay Jays, Portmans, Dotti and Jacqui E. These brands are a part of the retail conglomerate the Just Group, which Premier Investments wholly owns. Premier Investments are well established within the retail market and have a historically strong financial performance. The Group is owned by Solomon Lew, who is the chairman and non-executive director. Premier Investments' goal is to own and operate a section of the retail business through their expertise and strong capital position.
What is the companys strategy to drive earnings growth for the next 5 years? Successfully launched a new Smiggle website in Singapore, the 15th website now operating across our global markets. Orders for all Asian customers to be fulfilled directly from the existing Singapore Distribution Centre... These investments mean the Online channel continues to deliver significantly higher EBIT margin than the retail store network providing significant operating leverage for future growth.
Value Drivers and Red Flags (need to rank these in order of importance)
KMD Brands: a red flag for KMD Brands is adaptability, being unable to adjust with the times and no scenario planning (major decrease in profits during the Covid-19 pandemic).
A potential value driver was the initial boom in global travel after restrictions put in place during the Covid-19 pandemic were lifted, hence more people are looking to travel and to buy outdoor wear/equipment. However, considering the future of tourism (global warming) becoming more local, this may be a red flag.
A value driver for KMD Brands is sustainability and the high quality of their products. Although not inherently monetarily beneficial, it creates a positive brand image that aligns with consumers' current values and ethics in the wake of global warming. This positive brand association by consumer can lead to an increase in returning customers and sales.
KMD Brands has a less diversified portfolio with their subsidiaries only catering to the outdoor wear and retail market is this a good or bad thing to be wholly focused on one area that the company has proven to be good at.
A red flag is the introduction of one company head and not letting each of the companies be separate if this company head is not competent. (Value driver is the separate CEOs)
These can be value drivers or red flags:
Premier Investments: a red flag for the fashion industry is the over-abundance of fast fashion, Premier Investments is more likely to be associated with fast fashion compared to KMD Brands (associated companies and suppliers and the micro-trend cycle).
A value driver is Premier's Investments broader target audience (affordable prices are desirable during a period of high inflation).
Premier Investments has a more diversified portfolio as they have companies under them in the retail and stationary market (monopolizing on a niche). However, this means they have a lot of different companies to manage and direct their attention and money too.
Premier Investments' move to further develop their online channels in recent years has proved effective due to the rapid growth of e-commerce, with revenue expected to continue to rise.This proved extremely effective following the events of the Covid-19 lockdown and thus demonstrates the company's ability to anticipate and account for changes in consumer preferences. (value driver)
Value Drivers:
KMD Brands:
Globalisation of RipCurls assets - 57% of KMDs total revenue,
Direct suppliers instead of third-party suppliers cutting costs, efficient and reliable shipping
High quality apparel (specialized)
Premier Investments:
Development of online channels (especially during Covid)
Broad target audience affordable prices are more desirable during a period of high inflation
Strong capital position
Red Flags:
KMD Brands:
Inability to adapt with changing times (Covid)
The introduction of one company head (not letting each of the companies be separate if this company head is not competent)
Higher prices (during a period of inflation and a decrease in global travel)
Premier Investments:
Lack of future proofing, no strong long or short-term plans
Fast Fashion (use of third-party suppliers)
Poor internal management (disputes)
Aging company head who manages all companies under Premier Investments
Future Growth Scenarios (and probabilities):
Premier Investments:
Best Case Scenario: Recover from rising interest rates and globalize assets, moving to own and operate a section of the retail business
Inflation drops, RBA eases on interest rates, people have more discreitonary spoending available Premier Inv is allowed to invest more money, and aocntinue leveragig their assets in order to continue expanding. Reference cash rate target grpah.
Majority of the Australian banks predict that the cash rate will decrease by the end of the year to early 2024 [1]. In the scenario that the RBA eases on the interest rates and they drop, people would likely have more discretionary spending available. Since, Premier Investments mainly produces elastic goods which are considered a luxury.
[1] https://www.canstar.com.au/home-loans/interest-rate-forecast-australia/.
Growth Rate: 10.00%
Probability: 30.00%
PI very elastic goods, therefore if rates keep rising people have less money to spend, therefore they will speond less money with premeir investmenrs and slaes will decrease.
Cash rates rise -> mortgages rise so good PI produces
Worst Case Scenario:
Annual CPI inflation was 7.0% in the March quarter and the RBA is continuing to lift its key interest rate (Australian Bureau of Statistics, 2023). During past periods of uncertainty and high inflation, such as the Covid-19 Pandemic, Premier was able to survive due to the high performance of Peter Alexander, shifting to online sales and the boom in sales from Smiggle after schools opened. This offset the poorer performance of the other brands and the stellar performance of Peter Alexander and Smiggle was due to demand (LaFrenz, 2022). Hence, if demand decreases over this period of high inflation, there will be nothing to offset any other potential poor performance from the other brands. Premier Investments has no strong plan to generate future growth, shown by hardly any revenue being invested back into the business. Even with their move to increase online channels and sales, the percentage of sales made in physical spaces is rising while the percentage made in online spaces are collapsing.The increase in interest rates and inflation will lead to a low-price model, without any way to remain competitive, and with no long-term plan Premier Investments will be unable to adapt.
Growth Rate: 5.00%
Probability: 13.00%
Base Case Scenario:
Despite the potential challenges posed by rising inflation and interest rates, Premier Investments is positioned to adapt and continue to grow. The success of Peter Alexander and Smiggle during past periods of uncertainty and high inflation shows that Premier has the ability to shift its focus to strong-performing brands and online sales channels. If Premier is able to maintain demand for these brands and further develop its online presence, it could potentially offset any poor performance from other brands and continue to grow its revenue. Additionally, while Premier may not currently have a strong plan for generating future growth, it has the financial flexibility to invest in new initiatives as needed.
Growth rate: 15%
DCF Model: 35%
KMD Brands:
Best Case Scenario:fully and successfully globalizing RipCurls assets and moving into different overseas markets
Worst Case Scenario:
KMD has proven to be not very adaptable with uncertain times, shown by the free cash flow margin dropping to -48.4% during the height of the Covid-19 Pandemic. This sparked a major loss in profits that KMD is still recovering from with approximately $160 million AUD in debt (Simply Wall Street Pty Ltd, 2023). If inflation and interest rates continue to rise at an alarming rate, the demand for outdoor wear will slowly decrease with the decline in global travel and lowering the price of Kathmandus apparel or keeping it high is a lose-lose situation. If this eventuates KMDs short-term assets of approximately $500 million AUD will no longer exceed its short and long-term liabilities, even with the recent acquisition of RipCurl.
Growth Rate: 2.00%
Probability: 10.00%
Base Case Scenario:
Despite the challenges posed by the Covid-19 pandemic and the potential risks of rising inflation and interest rates, KMD is positioned to capitalise on the growth potential of its newly acquired brand, RipCurl. By leveraging RipCurl's established presence in key global markets, KMD can expand its reach and diversify its revenue streams, mitigating the potential impact of any localised downturns. KMD suffered a major loss in profits during the Covid-19 pandemic, resulting in a significant amount of debt (approximately $160 million AUD). Whether KMD will be able to pay off this debt in the next five years or if it will continue to have an effect on the company's financial status is yet to be determined.
Growth rate: 8%
Probability: 35%
Active Inference for one scenario:
Premier Investments:
KMD Brands:
Estimated Intrinsic Value:
(Expected growth and discount rate)
Premier Investments:
KMD Brands:
Recommendation:
Deciding which of the two stocks is the preferred investment (comparison of estimated intrinsic value and stock price are they under or overvalued)
Intrinsic value > market (share) price undervalued
Intrinsic value < market (share) price overvalued
Possible outcomes:
Both stocks are overvalued neither is ideal to invest in, but what may be the best choice based on other factors
One is undervalued and one is overvalued chose the undervalued one
Both stocks are undervalued consider Return on Invesment or percentage difference
ROI = ((IV - SP)/SP) x 100
KMD Brands:
Market share price: $1.01 AUD (11/05/2023)
Intrinsic value: $5.01 AUD
Judgement: intrinsic value is greater than market price, therefore the stock is undervalued
Premier Investments:
Market share price: $25.37 AUD (10/05/2023)
Intrinsic value: $20.80 AUD
Judgement: intrinsic value is less than market price, therefore the stock is overvalued
Stock pitch Script: (1500 words) Overview, value drivers and red flag, Story, future growth, probability, intrinsic value, recommendation.
Good afternoon, and welcome to our stock pitch on Primer Investments and KMD brands respectively. Over the previous weeks, our team here at KTOIA Consulting has conducted extensive research into the two lucrative firms with the aim to help you make an informed decision regarding which stock to invest in. Through extensive analysis, we have identified the unique features and future opportunities of each company.
Firstly, I would like to take this opportunity to introduce you to our team of specialised data analysts, research experts, and forecasters, who have conducted this evaluation and analysis. Conducted by Isabella, Krithya, Oliva, Aida and Tenzil, this analysis aims to examine the future of Premier Investments and KMD Brands and calculate the current and future values of the companies. Overall, we have examined the financial, innovation, and trend analyses of the two companies by crunching the numbers around the value of their business. In order to explore this concept in a simpler light, KTOIA Consulting will highlight the various value drivers, red flags and future projections that establish the foundation for this pitch.
When considering alterations between the two companies, it is important to consider their extensive histories and current presence.
Premier Investments
Premier Investments is a leading Australian retail company founded in 1987 by CEO Solomon Lew. It manages a diverse range of well-known fashion brands such as Peter Alexander for sleepwear, Dotti and Portmans for womens clothing, Just Jeans for denim and casual wear, Smiggle for kids' stationery, Jay Jays for youth fashion and Jacqui E. The company has a significant retail presence in over 20 countries including Australia, Singapore, the UK, and New Zealand. In recent years, the company has focused on sustainability and encouraging ethical practices with regard to material sourcing, energy and waste reduction as well as promoting a diverse workforce.
KMD Brands
On the other hand, KMD Brands formerly known as Kathmandu holdings is global multi-channel retail company focusing on outdoor and adventure equipment, clothing and footwear. Founded in 1987 in New Zealand, the company consists of three major brands; Kathmandu, Oboz and Rip Curl. The company operates in the Unites States, Asia, Australia and New Zealand, with over 4,900 employees. The company aims to enhance outdoor experiences through providing sustainable and innovative products enabling users to form a deeper connection with nature.
Now moving on to the value drivers and red flags for both companies.
Value Drivers and Red Flags:
The value drivers for Premier Investments include their Breville Holdings, significant profit margins and broad target audience. Their investment into Breville Holdings, which comprises roughly 20% of Premier Investments market capitalization with a staggering 26.08% stake is an easily leveraged advantage as a result of Brevilles significant growth in the past few years with predictions expecting this to only increase further within in the next 5 years due to its diversified portfolio. Furthermore, their recorded profit margins in the past few years have demonstrated their commitment to rigorous cost management, which indicates that they can use it as a potential buffer when faced with unexpected events in the future.
The red flags for the company include the lack of transparency in the factory supplier list as well as their overvalued stock in the market according to our analysis. The lack of transparency in their factory supplier list contradicts their Modern Slavery statement and suggests the potential use of unethical practices by the suppliers. Also, the company is very reliant on overseas suppliers, so in the event of supply constraints, distribution channels will be disrupted, and customer satisfaction may not be maintained. Furthermore, poor internal management leading to several disputes amongst the internal team is another disadvantage for Premier Investments.
For KMD Brands, some of the value drivers include the globalization of Rip Curl which they recently acquired, choosing direct suppliers over third-party suppliers and their high quality apparel. Ripcurl is a popular surf wear brand offering wetsuits and surfing accessories and is one of Australias well-known surfing brands. Worldwide there is a demand for wetsuits and surfing gear which larger countries like the US are failing to meet demands. However, since KMD Brands plan to globalize Ripcurl, which is predicted to count towards 57% of their revenue in the coming years, they are setting themselves for success to grab a significant market position on the world stage. Furthermore, by preferring direct suppliers over third-party suppliers, KMD Brands can efficiently manage its supply chains by providing goods on time and cutting costs for the company. They can also avoid supplier chain hiccups that Premier Investments could potentially face.
As for the red flags of KMD, their high debt values are of concern as well as the inability to adapt to a crisis as seen by their losses during COVID. Also, the lack of supply to meet demands is also a potential red flag. The high debt and interest amount that KMD Brands have accrued through the years pose a risk to their stability, as they have no safety net to rely on if an economic crisis occurs. For example, observing how COVID took a negative hit on their revenue clearly shows their lack of adaptability to the market's changing conditions. KMD Brand also reports Oboz meeting with lack of supply demands which could potentially negatively impact their sales by not leveraging the raging demand for their products in the long run.
By analyzing the value drivers and red flags, we came up with 3 potential short to median term future growth scenarios for both Premier Investments and KMD brands. We used these potential scenarios and their probabilities of occurring to predict each companies expected growth rate of the free cash flows. We also considered the certainty ofeach scenario by accounting for the discount rate.
For Premier Investments, the base-case scenario has a predicted growth rate of 15% with a 50% probability. The worst-case scenario has a growth rate of 5% and a 16% probability. The best-case scenario was that even with rising interest rates, Premier can adapt and grow (as they have done in past periods of uncertainty such as the Covid-19 Pandemic) through their ability to shift their focus tobrands that are performing well due to demand, such as Peter Alexander and Smiggle, and their online sales channels. During this period of inflation, Premier Investments already existing high profit margins will function as a buffer, eliminating the need for the company to raise the prices of their goods. Thiswill give them a competitive edge over market rivals who may need to do sodue to pressure from inflation and increased production and supplier costs. Furthermore, the growth of Brevilles Holdings, which Premiers has a significant 26.08% stake in the company, is predicted to increase, and this will significantly generate profit for Premier Investments, putting them in a good market position.We predict a growth rate of 20%, but only a 34% probability of this scenario eventuating.
In comparison, for KMD Brands, the best-case scenario has a growth rate of 10% with a 10% probability and the base-case scenario has a predicted growth rate of 8% and a 65% probability. However, the worst-case scenario is that KMDs free cash flow to shareholders (per share), that has decreased from $0.43 to $0.20 over 2021 to 2022, will continue to decrease. As this decrease will be exacerbated by rising interest rates,KMD will be unable to pay off its $160 million debt, accrued by their major loss of profits during the Covid-19 Pandemic. This will offset any positive performance made by RipCurl and with the global interest in travel decreasing, Kathmandu will be unable to generate substantial profits which will significantlydownturn KMDs return on equity. This scenario has a predicted growth rate of 2% and a 25% probability.
Since we had obtained our probabilities of our scenarios and the growth rate of the cash flows, we inputted them into a 2-stage discounted cash flow model, also known as a DCF model on Excel. This generated an intrinsic value, meaning the present value of the stock of both Premier Investments and KMD Brands as predicted by the model. We compared the generated intrinsic value to the actual value of the stock to demonstrate which stock is better to invest in. If the current stock value is greater than the intrinsic value, this means the companys stock is overvalued. If it is the other way around, it indicates the companys stock is undervalued.
For KMD Brands, the intrinsic value was estimated to be $5.01. As this estimated intrinsic value is greater than their approximate market price of $1.02 (recorded earlier today), KMD brands are an undervalued stock. For Premier Investments, we estimated the intrinsic value to be $20.80; and compared to their market price of $24.94, this is an overvalued stock. Whilst Premier Investments is a low-risk investment, and as such we have associated it with a discount rate of 10%, the companyhas little potential for any substantial future growth. Hence, based on our valuation of intrinsic value for both companies, we recommend investing in KMD Brands as the undervalued stock. However, KMD Brands is a higher risk investment as it has a lot of associated uncertainty, outlined in the companys value drivers and red flags. Therefore, we have associated a higher discount factor of 20% toaccount for that uncertainty and recommend that investors proceed with caution and consider other relevant factors.
And that concludes today's stock pitch regarding the future scenarios of both Premier Investments and KMD Brands. Although KMD was ultimately selected based off of our analysis here at KOTIA consulting, it is important for all individuals toconsider the probabilities of these scenarios and any fluctuations that might happen within the market. We thank you for taking the time this evening to listen to our stock pitch and we here at KOTIA Consulting wish you the best, thank you.
Isabella: Edit the videoKrithya: The story
Tenzil: Create PowerPoint presentation
Olivi a: Finish writing up story and recommendation for the script
Aida: Assist with PowerPoint presentation
KMD has no control over the supply chain
Political problems with supply chain I.e. factories in China
Thats the problem with overseas manufacturing if there are supply chain issues you cannot deliver the product to your customers.
KMD has a high profit margin
It needs a value impact
Based on intrinsic value (dollar value)
Won't pay more than what's its worth
Assignment 2b Self-Reflection on Team Work
[8 MARKS OUT OF 100 MARKS TOTAL]
Without reflection, there is no learning (Jack Mezirow, founder of transformative learning theory)
Task: In this individual component of the assessment, you will be required to reflect on your actions in the weeks during which you worked on your Stock Pitch and suggest ways to improve your actions in the to enhance the effectiveness of your group/team in future endeavours.
Learning Outcome: Reflecting on your own participation in group or teamwork involves examining your own actions and performance within the context of the team, with the aim of you gaining new insights into how you can improve your own as well as the collective outcome of the group. This process of self-reflection is personal and thus highly subjective, as it requires careful contemplation of your own experiences and perspectives, and how these may have influenced the group's overall performance.
Engaging in self-reflection about your group/teamwork demands a high level of self-awareness, critical thinking and honesty from you, as it involves questioning your own assumptions, biases, and motivations, and how these may have impacted the team's dynamics and outcomes. It also requires your willingness to receive feedback and constructive criticism from others, as this can provide valuable insights into areas where you need improvement.
Self-reflection helps you identify your strengths and weaknesses as a team member, as well as areas where you can improve your communication, collaboration, and problem-solving skills. You can also gain a deeper understanding of the group's dynamics, including the roles and contributions of different members, and how you can help to improve the group dynamics so that better outcomes can be achieved. By engaging in this personal process, you become more effective and productive team members, and help create a more positive and collaborative working environment.
Question: Upon reflecting on your individual actions and performance as a member of the group/team in the weeks during which you worked on your Stock Pitch, suggest specific actions you could take to enhance your effectiveness when working in a group/team. You should refrain from suggesting goals, instead provide tangible actions that you could take to help improve the effectiveness of collaborative group work in the future. Please select and respond to only ONE of the following categories:
Communication and group/team relationships;Ideas and approaches/strategies;Timely task completion;Professional conduct.
Your well-supported answer to this question must be uploaded as this document (StudentName_Number_Assignment2B.docx) on Canvas by the due date. Please ensure you check the Rubric for assignment 2b to ensure you satisfy the marking criteria.
Best of luck!
Answer: Maximum 200 words (+10% Tolerance)
-952533972Selected Category (from above):
00Selected Category (from above):
