VALUATION REPORT

JD Sports
Introduction
JD Sports Fashion plc, more commonly known as JD Sports or JD, is a British sports-fashion retail company
based in Bury, Greater Manchester, England with shops throughout the United Kingdom, Europe, the
United States, Asia and Australia. It is listed on the London Stock Exchange and is a constituent of the FTSE
100 Index. It is a subsidiary of the Pentland Group.

JD has dominated most of the EU, primarily in Germany, Ireland, France, Netherlands and Spain. At this
moment in time, JD was already regarded as the most innovative visual merchandiser of sportswear with
the best and most exclusive stylish range.

Key Highlights:
JD Sports has been developing rapidly as a giant in the sports industry with rising revenue each year. JD’s
Revenue has been increased by 30% in year 2020 as compared to year 2019. Taking in to the affect of
increased revenue of JD in year 2020, Profit Before Tax has also exhibited a massive increase for the year
2020 with 31% increase than the previous year.

Following are the key highlights of the current running operations of JD:

Description Value in £

Total Revenue for Year 2020 6110.8 million

Increase in Revenue for Year 2020 30%

Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) Value 623.6 million

Increase in Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) 28%

Profit Before tax for Year 2020 465.6 million

Increase in Profit Before Tax for Year 2020 31%

Net Assets 1289.2 million

Total Dividend Payable Per Ordinary Share 0.28

Decrease in Dividend Per Share (COVID-19 Impact) 1.43

Basic Earnings Per Share (EPS) for Year 2020 36.41

Increase in Basic EPS for Year 2020 7.97

Below are the highlights extracted from performance of the valuation of JD Sports using assumptions
prevailing in the market:

Description Value Range Over 5 Years in £

Revenue 7,944 - 17,160 million

Profit Before Tax 524 - 1,826 million

Basic Earnings Per Share (EPS) 0.4 - 1.41

Discount Rate/ WACC 1%

EV/EBITDA Multiple 16x

Equity Market Value Per Share 867.40

Equity Intrinsic Value Per Share 564.47

Internal Rate of Return -10%

Assumptions Used in the Valuation of JD Sports:

Assumptions 2021 2022 2023 2024 2025

Revenue Growth (%) 30% 25% 20% 20% 20%

Cost of Sales (% of Revenue) 48% 48% 48% 48% 48%

Gross Profit Margin 53% 53% 53% 53% 53%

SG&A (% of Revenue) 39% 39% 39% 39% 39%

Operating Margin 7% 9% 10% 10% 11%

Interest Expense (% of Total Debt) 4% 4% 4% 4% 4%

Tax Expense (% of EBT) 25% 25% 25% 25% 25%

Net Margin 5% 6% 7% 8% 8%

Depreciation (% of PPE) 18% 18% 18% 18% 18%

Amortization (% of Intangible
20% 20% 20% 20% 20%
Assets)

Debtors Days 12 12 12 12 12

Inventory Days 110 110 110 110 110

Creditors Days 55 55 55 55 55

Capex -238 -298 -357 -429 -515

Capex (% of Revenue) 3% 3% 3% 3% 3%

Dividends (% of Revenue) 0.30% 0.30% 0.30% 0.30% 0.30%

Comment on the Earnings/ Free Cash Flows of the JD Sports:
Revenue is the income generated from normal course of business operations and includes discounts and
deductions for returned merchandise. It is the top line or gross income figure from which costs are
subtracted to determine net income.

Revenue of the company is one of the key factors for any organization and the assumption to be used in in
calculating such valuation shall be in accordance with the prevailing market condition where the company
is located.

Earnings of JD Sports has been increasing over the last period of 5 years of its operations. It has expanded
its operation not just throughout the country but also expanded throughout the Europe and it is
continuingly expanding to the remaining regions of the continent. Taking into the effect of rising trend of
earnings of JD Sports, revenue has been increased over the next 5 years with 30% increase in 2021 and
25% increase in 2022 and 20% for remaining period of 3 years of valuation.

Growth rate used in the valuation for each year is as per the rate currently prevailing in the market. Due to
the nature of industry and JD’s way of running the operations, it is evaluated using the basis share above
that JD Sports will be able to generate handsome earnings over the period of next five years.

Also, it is analyzed critically that how JD Sports will be able to generate such earning over the valuation
period and results were quite promising in the favor of the company as they have been planning to run
their operation more effectively in UK as well as European region and expanding their operations to the
countries in Asian region.

Expansion in Asian region can boost their sales to even higher numbers than it is currently expecting or
planning. Increasing in earning will not only boost their revenue but also cause the heinous rise in EBITDA
and Profit Before Tax of the company. It will also create a positive impact on the company’s ability to survive
in the long run by managing its working capital in all the regions as well as causing rise in earning per share
and share price of the company.

Apart from the revenue, costs used in this valuation are taken as closer as prevailing in the organization as
well as in the market. While evaluating the costs, all the factors pertaining to the determination of the costs
were considered appropriately in circumstances which are presented below:

▪ Regions
▪ Nature of the operations of the company
▪ Economic factors in UK as well as European region
▪ Demographic factors in UK as well as European region
▪ Current and expected direct and indirect costs of the company
▪ Accounting consideration
▪ Legal matters
▪ Structural changes
▪ CAPEX requirements
 ▪ Non-operational activities
▪ Financial Costs of capital
▪ Other factors necessary for determination of the costs of the company

Comment on Dividend Payout pattern of the Company:

A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit
or surplus, it is able to pay a proportion of the profit as a dividend to shareholders. Any amount not
distributed is taken to be re-invested in the business.

The Dividend Payout Ratio (DPR) is the amount of dividend paid to shareholders in relation to the total
amount of net income the company generates. In other words, the dividend payout ratio measures the
percentage of net income that is distributed to shareholders in the form of dividends.

Company’s DPR is currently showing a declining rate over the years. Previous trend of the company
regarding paying the dividend has been appropriate as per its earnings during the year of 2016 to 2020.
However, in the coming years under valuation, organization is expected to payout less than what it has
been paying to its shareholders.

Dividend Payout Ratio

16%

14%

12%

10%

8%

6%

4%

2%

0%
1 2 3 4 5 6 7 8 9 10

As the chart above presented showing that pattern of paying out the return to the shareholder is reducing
over the period from 14% in 2016 to 7% in 2020 which is almost the half of what the organization has been
paying to the shareholders.

In comparison to the period of years under valuation, Dividend Payout Ratio is further declining as evidently
exhibiting in the chart from 7% in 2020 to 4% in 2025.
 Historic Forecast
Particulars
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Dividends (%
0.77% 0.63% 0.47% 0.34% 0.28% 0.30% 0.30% 0.30% 0.30% 0.30%
of Revenue)
Total Revenue
1,822 2,379 3,161 4,718 6,111 7,944 9,930 11,916 14,300 17,160
('000')
Basic Shares
Outstanding 973 973 973 973 973 973 973 973 973 973
('000')

EPS (Basic) 0.1 0.18 0.24 0.27 0.25 0.404 0.642 0.866 1.118 1.407

DPS 0.014 0.015 0.015 0.016 0.017 0.024 0.031 0.037 0.044 0.053

Dividend
14% 9% 6% 6% 7% 6% 5% 4% 4% 4%
Payout Ratio

Reasons for variation in DPR can be caused by multiple factors prevailing within and outside the
organization. Earnings are presenting positive prospects of the company and causing increase in EPS of the
company over the year subject to valuation. Rise in EPS can cause fall in DPR if the dividend rate remains
same or is not increased with the same ratio. Other possible reason of falling DPR is environmental factors,
e.g. currently whole world is facing the impact of COVID-19 virus including the corporation operating in the
world.

Impact of COVID-19 on companies in UK is quite high as the virus has been spreading exponentially during
the year 2020 and it is till increasing among the population impacting the corporate world to its worst.
Further, with the dentification of new variant of the virus, it may also cause further fall in DPR to secure the
funds for future operations of the company which is of prime importance for the survival of the company.

Dividend Payout Ratio appearing in the table and chart although is not inappropriate in current
circumstances but it is still paying out to its shareholders in such critical times. Impact of virus may cause
less or more damage to the company in future years due to its uncertain nature and other environmental
factors and after effects of such environment.
 Findings of the Valuation:
❖ Intrinsic Value of the company as per the Free Cash Flow technique turns out to be $564.47 per share

with total intrinsic value of the company $5,374,542,096.

❖ Market Value of the company is $867.4 per share.

❖ Total Market Value of the company is $8,222,859,758.

❖ Current market price of the company is 35% ($303 per share) is higher than its intrinsic value calculates

using the free cash flow technique.

❖ Internal Rate of Return comes out to be -10% for years subject to valuation.

❖ Net cash flow position of the company will improvise over the years as compare to the current situation.

❖ Earnings Per Share (EPS) will pick up the rising trend in the coming years.

❖ Costs/ Expenses will rise in the next years but with not the same ratio as the revenue will show its growth

in the coming years. Total costs will be less in comparison to rise in revenue of the company.

❖ Liquidity position of the company will be much stronger than it is currently having due to positive cash

flow movement in the organization.

❖ Leverage ratio of the company is quite high currently in year 2020 with 59% as compare to 0 in 2016.

Risk Profile of the Company:

A risk profile identifies the acceptable level of risk an individual is prepared and able to accept. A
corporation's risk profile attempts to determine how a willingness to take on risk (or an aversion to risk)
will affect an overall decision-making strategy. The risk profile for an individual should determine that
person's willingness and ability to take on risk. Risk in this sense refers to portfolio risk.

Broadly, the risk profile is distributed to three distinctive categories. These three categories further
constitute various subtypes based on variation in the factors e.g. financial condition of the company, D/E
ratio of the company, Interest coverage ratio of the company, operational and financial leverage of the
company, nature of the operations of the company and some other critical factors.

The three broad types of risk profile are:

▪ Conservative
▪ Moderate
▪ Aggressive
Conservative
Conservative risk profile refers to a significantly low-risk aptitude. Investors of the company with this risk
profile will lean towards investment options that provide the safety of the corpus more than anything. The
scale of returns is a secondary factor to conservative investors as long as it is not negative. Typically, a
conservative risk profile accounts for a short period horizon.

Investment options most suited for conservative or low risk-takers are treasury bills, corporate bonds,
sovereign bonds, debt-based mutual funds, etc. These are the options that JD Sports can use if it chose to
be Conservative as its risk profile.

Moderate
Moderate risk-takers usually strive to strike a balance between returns and risk. Such types of investors will
go for high returns scaled to an agreeable level of risk. Therefore, a moderate risk-taker’s portfolio will
constitute a moderate share of equities with debt instruments for adequate risk dilution. Such risk-takers
can also singularly invest in equity-based mutual funds. JD Sports may use equity based mutual funds or
equity instrument or debt instrument to collect capital from investors against the comparative high return
for such category of risk profile.

Aggressive
This risk-profile exhibits the most willingness for weathering market volatilities in the expectation of earning
exponential returns. Usually, these investors are experienced and well conversant in the ways of stock
markets. Apart from that, such investors also have a long-term investment horizon; which is why they can
stomach the short-term volatilities.

These investors predominantly go for equities and usually have a healthy asset-liability balance, and
sometimes young individuals with sufficient disposable income also fit this investment risk profile. For such
category of risk profile, JD Sports might have to take a lot of risk to earn huge reward.

Estimation of Risk Parameters and Calculation of WACC:

Risk parameters are used to provide common and consistent criteria for comparing risks to be managed.
Without these parameters, it is difficult to gauge the severity of an unwanted change caused by a risk and
to prioritize the actions required for risk mitigation planning.

JD Sports faces different risks and the level or severity of each risk can be determined by various methods.
Risk dashboard can be developed or risk appetite can be determined or risk and control matrix can be
developed to evaluate the risks faced by the company and its possible impact on the company in terms of
financial or non-financial impact.

For the purpose of the calculation of cost of debt (Kd(1-T)), all the long-term debts of the company are
considered covering the aspect of financial risk of the company. Tax rate is also used to net of the savings
arising from the interest expense connected to the debt raised by the company. Cost of debt after tax is
determined to be 3% for which working is shown in the excel workbook.

For calculating cost of equity (Ke), risk free rate of return, risk premium, unsystematic risk (equity beta) has
been determined from the reliable sources. Such risks impact the organization value in the market as these
are directly related to financial parameters of the company as well as its operations and perception of the
shareholders and potential investors of the company. Cost of equity is determined to be 0.73% for which
working is shown in the excel workbook.

Systematic Risks and Related Factors Affecting the Company:

Systematic risk refers to the risk inherent to the entire market or market segment. Systematic risk, also
known as “undiversifiable risk,” “volatility” or “market risk,” affects the overall market, not just a particular
stock or industry. This type of risk is both unpredictable and impossible to completely avoid. It cannot be
mitigated through diversification, only through hedging or by using the correct asset allocation strategy.

Company has obtained long term debt in the current year with other short-term liabilities affecting the
company’s Gearing (Leverage) ratio. Currently, leverage ration of the company is 59% in year 2020 which
is way higher than previous years (0 in year 2016 and 6% in 2019).

Due to increase in debt of the company, this might hurt the company’ financial position to convince the
investors or obtain more loan in coming years. The main reason of such higher leverage ration in the
company is outburst of COVID-19 virus in the whole world. This has impacted the company’s financial
position at back foot in this year.

Historic Forecast
Particulars
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Long-Term Debt -
3 11 62 1,723 1,723 1,723 1,723 1,723 1,723

Total Equity 5,353

383 552 805 1,045 1,220 1,589 2,184 2,991 4,036
Total of Debt and
Equity 383 555 816 1,107 2,943 3,312 3,907 4,714 5,759 7,076
Leverage/
0% 1% 1% 6% 59% 52% 44% 37% 30% 24%
Gearing Ratio

However, as the table above exhibits, company’s prospects sounds to be good because company is
expected to raise more equity and less distribution of profits to shareholders for the survival of the
company in the future years. JD Sports is expected to have 24% of leverage ratio by year 2025.

(THE END)