Metal, Mining and the Consumer Industry: A Top -Down Valuation Process
Contents
Abstract
The report uses a top-down valuation process to examine the Australian economy, the metal and mining and consumer industries and analyses BHP Billiton Limited and Woolworths Limited. Variables affecting the Australian economy are inflation and interest rates; the gross domestic product; the exchange rate; and economic risks. The metal and mining industry is the largest sector in Australia and the consumer industry is the third largest sector. The present value of the dividend model and the present value of the operating free cash flow were used to evaluate BHP Billiton Limited and Woolworths Limited. Based on the dividend model and the present value of the operating free cash flows, BHP’s intrinsic value was calculated to be higher than the market price for each, showing that the shares were undervalued. Woolworths Limited’s intrinsic value was calculated using the same two methods and both also were calculated to be higher than the market price, also presenting that the shares are undervalued. The consumer industry is suitable for investors seeking constant dividends and the metal and mining industry is suitable for investors seeking above average returns. Although, a higher percentage should be invested in BHP Billiton Limited shares due to the industry demonstrating stronger progressive growth.
1.0 Introduction
This report will use a top-down valuation process to analyse investment in two Australian listed companies which are BHP Billiton Limited and Woolworths Limited. Firstly, we will examine the Australian economy, then evaluate the metal and mining industry and the consumer industry, and lastly an estimate of the two companies based on Dividend Model approach and Operating Free Cash Flow approach.
2.0 Australian Economy
2.1 Inflation and Interest rates
The year-end percentage change of Australia’s inflation rate increased from 2.2% to 2.5% in the last quarter (RBA,
Abstract
The report uses a top-down valuation process to examine the Australian economy, the metal and mining and consumer industries and analyses BHP Billiton Limited and Woolworths Limited. Variables affecting the Australian economy are inflation and interest rates; the gross domestic product; the exchange rate; and economic risks. The metal and mining industry is the largest sector in Australia and the consumer industry is the third largest sector. The present value of the dividend model and the present value of the operating free cash flow were used to evaluate BHP Billiton Limited and Woolworths Limited. Based on the dividend model and the present value of the operating free cash flows, BHP’s intrinsic value was calculated to be higher than the market price for each, showing that the shares were undervalued. Woolworths Limited’s intrinsic value was calculated using the same two methods and both also were calculated to be higher than the market price, also presenting that the shares are undervalued. The consumer industry is suitable for investors seeking constant dividends and the metal and mining industry is suitable for investors seeking above average returns. Although, a higher percentage should be invested in BHP Billiton Limited shares due to the industry demonstrating stronger progressive growth.
1.0 Introduction
This report will use a top-down valuation process to analyse investment in two Australian listed companies which are BHP Billiton Limited and Woolworths Limited. Firstly, we will examine the Australian economy, then evaluate the metal and mining industry and the consumer industry, and lastly an estimate of the two companies based on Dividend Model approach and Operating Free Cash Flow approach.
2.0 Australian Economy
2.1 Inflation and Interest rates
The year-end percentage change of Australia’s inflation rate increased from 2.2% to 2.5% in the last quarter (RBA,