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Shoprite Holdings Limited
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== Valuation == === Unlevered Free Cash Flows === [[File:Screenshot 2023-08-07 at 20.19.51.png|center|thumb|880x880px]] Some key assumptions were made for forecasting these line items from 2023 onwards. Revenue was grown at the 3-year historical average growth rate (8.90%). COGS (74.25%), EBITDA (8.56%), depreciation (3.05%) and capital expenditure (2.21%), were all forecasted at a 3-year average percentage of revenue. Tax was estimated as a percentage of EBIT and was thereafter forecasted at 28%, being the prevailing effective tax rate in South Africa. [[File:Screenshot 2023-08-07 at 20.21.46.png|center|thumb|880x880px]] With respect to calculating Net Working Capital (NWC), Accounts Receivables was forecasted at a 4-year average percentage of Days Sales Outstanding (9.3). Inventory was forecasted at a 4-year average percentage of Days Inventory Outstanding (57.9). Accounts Payable was forecasted at a 4-year average percentage of Days Payable Outstanding (58.5). Other Current Assets (1.47%) as well as Other Current Liabilities (4.52%) were all forecasted at a 4-year average percentage of revenue. Thereafter, Current Assets and Current Liabilities were determined for each year, with their difference representing the NWC for each year. These NWC figures were then used to determine the Change in NWC from year to year. === Discounted Free Cash Flows === [[File:WACC .png|center|thumb|423x423px]] The weighted average cost of capital (WACC) is used as the discount rate in the DCF model, as free cash flows to the firm (FCFF) are used to calculate the enterprise value of the firm. The cost of equity (9.38%) was calculated using the capital asset pricing model (CAPM). The risk-free rate (8.885%) was assumed to be the 10-year treasury bond rate as it is considered to carry less risk than South African bonds. The beta (0.16) is the 5-year monthly historical beta of Shoprite. The market return (12%) is taken to be the 10-year average return of the JSE, where Shoprite is listed. The cost of debt (8.08%) is estimated as interest expense divided by total debt, as actual cost of debt was not found to be explicitly stated in the company’s report. [[File:DCF.png|center|thumb|880x880px]] Having completed a forecast and calculated the WACC, the DCF method was implemented to arrive at an enterprise value of 235 465 000 000 ZAR. The terminal value was calculated using a perpetual growth rate of 2%, which is estimated to be in line with South Africa’s future GDP growth rate. After discounting the cash flows using the WACC and arriving at an enterprise value, an equity value of 209 330 000 000 ZAR was then estimated. Thereafter, an implied share price of 381.99 ZAR was calculated by dividing the equity value by the number of shares outstanding (548 million shares). Based on this valuation and relative to the actual share price of 258.68 ZAR, Shoprite would be viewed as being undervalued and a buy recommendation would be issued.
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