NEXT PLC
Introduction:
This Report explains and calculates NEXT Plc’s shareholder valuation using excel model. In this report we have done forecasting for the next 4 years shareholder valuation based on historical value, current market information and annual report of the Next Plc. Forecasting shareholder valuation is based on some key assumption and we explained those valuations step by step. Mainly we have done the forecast for the next 4 years shareholder value by using sensitivity analysis.
Background:
We made some key assumption that for forecasting next 4 years share valuation. The data for this report consists of the annual reports of Next Plc’s over the period and the related information from the London Stock Exchange. Data for the analysis of the General retailers were collected from their respective official websites. For sensitivity analysis we took into consideration the seven value drivers of Alfred Rappaport (1986) the key value drivers for shareholder valuation.
Justification of the value drivers:
Value drives are leading indicator of financial performance that used for valuing shareholder value (Rappaport, 1986). Alfred Rappaport provided seven value drivers which changes organization's total shareholder value. Next Plc efficient management policy, directory policy, strong HR department, internal control and good supplier relation also influenced key value drivers which increase shareholder wealth enormously. Next plc capture the necessary value drivers which measure corporate performance perfectly. There are some factor like inflation, recession, employment, market competition, fluctuate share price, interest also influence the value drive of Next plc. Considering the statements of regulatory body can influence shareholder value as well.
Sales Growth: According to the trend analysis we found that Next Plc’s sales growth has dramatically decreases after 2003 and it went negative during the recession period. At the beginning of the year 2009 next plc faced an unbalanced economy due to recession, decreasing sales and Sterling weakness against both the US Dollar and the Euro. But next plc consumer economy has been relatively stable. Their buying team efforts and supplier efficiency sharply increase revenue at the end of the year 2009. Also in 2009 to present their management team doing outperformed work that help to maintain cost, increase quality of product and continuously reinvest their business to take better position. After 2010 Next Plc sales growth sharply increases 5.8%. So we determined Next Plc forecasting sale growth 6% based on financial performance last 6 years and market information.
Operating Profit Margin: From the year ending January 2008 to beginning of the year January 2011 Next plc’s operating profit has increased by unstable financial retail environment. This operating profit increased because of better performance of Next directory, strong management group and consistent cost control. Based on the previous 7 years financial performance we determined the operating profit margin to be 15%. If we see the trend analysis of Next Plc last 7 years financial performance it always fluctuate 14%-15%.
Tax Rate: From April 2011, the UK corporate income tax rate applied to large companies is 27%. In next 4 years shareholder valuation we use tax rate 27%
Incremental Capital Investment: According to the last 5 years trend analysis we figure out the incremental fixed capital investment as a percentage of sale is 5%. Incremental capital investment also depends on the management decision; reinvest capital and any store expansion of next plc company.
Incremental Working Capital Investment: According to the last several years trend analysis we determined the incremental working capital investment as a percentage of sale is 7%.We calculated historical working capital trends and figure out Next plc future working capital needs.
Year: This report has been prepared for next 4 years valuation.
Required Rate of Return: We calculated the weighted average cost of capital (WACC) which is approximately 8%. This is also known as required rate of return.
Debt: We analyzed last 7 years long term debt and figure out forecasting debt £350 million. This figure is quoted from annual report 2003-2010.
Marketable Securities: we analyzed last several years short-term financial instrument and figure out forecasting marketable securities. This figure is quoted from Next Plc Balance Sheet 2003-2010.
Sensitivity Analysis: It determined different independent variable changes particular dependent variable change under some key assumption. We use one-way sensitivity analysis that means only one parameter is changed at one time. We can use various approach under one-way sensitivity analysis and this method is useful for shareholder valuation.
Relationship between sales growth and shareholder value :
Shareholder value
£3,709
Sales Growth
4%
3679
5%
3694
6%
3709
7%
3724
8%
3740
According to the data analysis we figure out, Next Plc sales growth is positively correlated with shareholder value. We determined forecasted sales growth 6% which gives shareholder value £3709. If Next Plc sales growth increased by l% then the shareholder value will be increased by £15 million. Next plc sales growth increase because Next Plc well organized management, consistent product price and supplier availability.
Shareholder value
£3,709
Operating profit margin
13%
3542
14%
3625
15%
3709
16%
3792
17%
3876
Relationship between operating profit margin and shareholder value:
We observed from the above data table and graph, operating profit margin is positively correlated with the shareholder value. As operating profit margin increased by 1% then shareholder value increased by £83 million. After 2009 Next Plc operating profit margin increased because of better performance in unstable retail environment.
Shareholder value
£3,709
Incremental fixed capital investment
3%
3722
4%
3715
5%
3709
6%
3702
7%
3696
Relationship between incremental fixed capital investment and shareholder value:
The effect of incremental fixed capital on shareholder value is negatively correlated to each other. As incremental capital investment increased by 1% shareholder value will be decreased by approximately £7 million.
Relationship between incremental working capital investment and shareholder value:
Shareholder value
£3,709
Incemental Working capital investment
5%
3722
6%
3715
7%
3709
8%
3702
9%
3696
According to the data and graph analysis, incremental working capital investment and shareholder value are negatively related and vice-versa. As 1% increase working capital shareholder value will be decreased by £7 million.
Relationship between required rate of return and shareholder value:
Shareholder value
£3,709
Required rate of return
7%
4380
8%
3709
9%
3197
10%
2796
11%
2475
From the above analysis Next Plc required rate of return are negatively correlated with share holder value. As required rate of return increased by 1% shareholder value will be decreased by £512 million.
From our above analysis we recommend that if Next Plc maintains their product price and control cost perfectly then sales and the operating profit margin may increase in future. On the other hand, they need to look after short term securities and required rate of return which may decrease their shareholder value.
Conclusion: From the above analysis we are forecasting that Next Plc’s 4 year’s financial valuation and we estimated shareholder value £3709 million. We also determined that Next Plc sales, operating profit margin and required rate of return will grow in next 4 years and it will directly influence shareholder value. If those factor increases or decrease by 1% then the companies share value will increase or decrease a lot over the years. Although we considered some other factor that also influenced shareholder value such as business planning, mergers and acquisitions, competition in existing market. The most important thing is that we tried to relate company’s internal information and decretory body statement for forecasting accurate shareholder value.
Reference
Next plc, http://www.next.co.uk/ (Online), [Accessed on: 20th February, 2011]
Next Plc, Annual Report, 2010
Next Plc, Annual Report, 2009
Next Plc, Annual Report, 2008
Next Plc, Annual Report, 2007
Next Plc, Annual Report, 2006
Next Plc, Annual Report, 2005
Next Plc, Annual Report, 2004
[Accessed 25th February, 2010]
Rappaport, A. (1998), Creating Shareholder Value, Simon & Schuster, 2nd edition
Benninga S. (2000), Financial Modelling, MIT Press, 2nd edition
Appendix
Incremental fixed capital investment
Years 2010 2009 2008 2007 2006
Sales 3406 3271 3329 3284 3106
Fixed capital Investment 99 121 180 140 179
Percentage of Sales 3% 4% 5% 4% 6%
Those values quoted from Annual Report 2006-2010.
Incremental fixed working investment
Years 2010 2009 2008 2007
Sales 3406 3271 3329 3284
Current Asset 1041.2 1073.6 963.6 982.4
Current Liability (758.1) (713.5) (863.4) (738.5)
NWC 283.1 360.1 100.2 243.9
Percentage of Sales 8% 11% 3% 6%
Those values quoted from Annual Report 2007-2010.
Required Rate of Return (WACC)
WACC= Ke*E/V + Kd (l-T)*D/V
Where Ke: D/Po +g
Po is the current share price 1189p on February 28th, 2010
g= dividend growth rate
D=current dividend payment (52.22) which is quoted from Annual Report, 2010
Do= dividend (31.11) of the year 2005
D10: Do (1+g) ^5
Or, (1+g) = (52.22/31.11)^0.2
Or, 1+g= 1.1092
Or, g= 0.1092
So, g= 10.92%
Now, Ke= D/Po +g
= (52.22/1189) + 0.1092
= 0.1532
= 15.32%
E= we forecasted equity value (£300) which based on last 6 years equity calculation
D= we forecasted equity value (£550) which based on last 6 years Debt calculation
V= D+E
= (300 + 550)
= 850
Kd = 5% which is quoted from Next plc web site (http://www.nextplc.co.uk/nextplc/financialinfo/reportsresults/2009/2010-03-25/2010-03-25apr/?t=pressrelease) [accessed on: 2nd March, 2011]
T= From April 2011, the UK corporate income tax rate applied to large companies is 27%.
WACC= Ke*E/V + Kd (l-T)*D/V
= (0.1532)*(300/850) + (.05) * (1- 0.27) * (550/850)
= 0.077688
= 7.77% is approximately 8%
Forecasted calculation:
Year
Sales (£m)
Sales growth
Operating Profit
Operating Profit Margin
Debt
(£ m)
Marketable Securities (£ m)
2001
1,588
2002
1,872
17.9%
2003
2,203
17.7%
301.5
13.7%
318.1
234.9
2004
2,516
14.2%
375.5
14.9%
378.5
263.5
2005
2,858
13.6%
441.1
15.4%
436
295.7
2006
3,106
8.7%
470.7
15.2%
519
324
2007
3,284
5.7%
507.5
15.5%
581
282
2008
3,329
1.4%
537.1
16.1%
605
319
2009
3,271
-1.7%
478
14.6%
750
319
2010
3,406
4.1%
503
14.8%
500
309
Average
2,743
9.1%
15.0%
510.95
293.3875
Forecast
3,000
6%
15%
550
300
Those values quoted from Annual Report 2001-2010.