Sample FIN2SEV Investment Securities Assignment

FIN2SEV Investment Securities Assignment Sample

Assessment Brief

Guidelines:

You are to prepare a written research report on Cochlear Ltd (COH).

The report must:

• be no longer than 10 pages (not including the front over and contents page, if any). You may also include an appendix no longer than 10 pages. There is no minimum font size because that will depend on the font, but if the font size is too small you may lose marks

• be your team’s original work.
• be properly cited when applicable.
• include in the first page’s header the following information:
• Company name
• Ticker symbol, and exchange
• Sector/industry
• Current price (as of .......date)
• Recommendation (Buy/Hold/Sell)
• Target Price

Suggested structure for the report (you may also add additional headings if necessary):

• Investment Summary
• Business description
• Industry analysis and competitive positioning
• Financial analysis
• Valuation
• Investment risks

Investment summary

This section should include a brief description of the company, projected earnings estimates, valuation summary and the rationale for the recommended investment action.

There should be a clear and succinct explanation as to why the security should be bought, sold, or holds.

Business description - This section should detail the company’s products and markets. It should also provide a clear understanding of the company’s operations and its key drivers of revenues and expenses.

Industry analysis and competitive positioning - This section should include a competitive analysis of the industry. Key economic drivers, external factors and competitive forces should be addressed when relevant.

This section should also provide a group of peers operating in the same industry for the purpose of competitive analysis. Some insights regarding company’s competitive positioning should be included in this section.

Financial analysis - This section should include a thorough analysis of the company’s historical financial performance, and a forecast of future performance. The assumptions for forecasted figures should be clearly explained and strongly supported.

Valuation - This section should include a detailed valuation analysis using appropriate model and application. Absolute valuation (Discounted Dividend Model, Free Cash Flow Model or Residual Income Model) can be used in combination with Relative Valuation (P/E ratio, EV/EBITDA, etc.) as a way to check the validity of the final output.

Investment risks - This section should address potential adverse events that may affect industry’s and company’s performance. Risks can stem from operations or external factors such as regulation or environment.

Solution

Investment summary

Cochlear Limited delivers and manufactures cochlear implants to approximately more than twenty countries throughout Middle East, Africa, America, Asia Pacific, and Europe. The company provides three primary products that are Cochlear accessories that are wireless, implants of Baha bone conduction, and cochlear implants (Cochlear Ltd 2020).

Valuation date: 06/05/2022
Ticker: COH
Sector: Biotechnology
Stock exchange: ASX
Headquarters: Melbourne
Current price $190.22
Target price $222.27
Recommendation: BUY

Cochlear has established its products and surgeries after immense R&D and the current valuation of the share stands at $190.22 per share. However, with the optimized balance sheet and performance the recommended rating is $222.27. This is due to the fact that balance sheet is intact and total assets are sufficient to honour the liabilities. There is no shortage of cash and the company will not face any shortage of resources. The profit scenario of the company changed in 2020 followed by the aggregate investment of the company that increased at a positive rate from 2014-2020 signifying the company is vouching towards capturing of more market share. Thereby, a BUY recommendation has been allotted for Cochlear Ltd.

This recommendation is significantly driven for assignment help

Business description

Marketing situated at NSW (Macquarie University), the company every year expends around $180 million towards research and development initiatives. Apart from this, they are also indulged in around hundred collaborative segments. Further, the company is regarded as an international leader in ear implantations, and selling products in more than hundred nations and pursing offices throughout the globe with the usage of just 4000 employees (Cochlear Ltd 2020). The product is supplied to more than 100 countries. Over the past ten years growth has been significantly effective owing to enhanced awareness by people of older people who are basically the target audience, because they are likely to be encountering hearing loss. The company is trying hard to focus towards markets that are undeveloped.

Business summary

(Cochlear 2020)

This aforesaid chart highlights how cochlear firmly believe that they can continuously develop through penetration of increased nature of such underdeveloped markets especially children. Additionally, attempt to raise extra awareness in older markets of seniors, the company is focusing to look further into such markets providing sigfiying markets and develop as they only pursue a penetration of three percent. Grow share of markets towards children that have a present penetration of sixty percent and children emerging markets only pursue a penetration rate of ten percent.

With respect to Cochlear products, the company continues to bring newer products owing to its huge investments towards research and development every year. Moreover, this permits the company for going ahead of the curve whilst designing innovative items for consumers and attracting new consumers. Since, the company was first listed in the year 1996, around 1.9 billion has already been invested towards research and development and the same has been increased more than 10% from the financial year 2018-2020 (Cochlear 2020). The primary products of the company and around 88% of their revenues are the implants of cochlear and the remaining 12% of their revenues are from the acoustic implants.

Key drivers of Revenue

With respect to growth and revenues, the company has significantly increased its revenue up by seven percent sales every year with sales revenue of just 1.4 billion. Owing to their enhancing consumer base every year, the revenue from sales from servicing their items is enhancing. Moving up twenty percent betwixt financial year 2018 and financial year 2019, this is forecasted to keep enhancing due to their focus on additional penetration in the market. For the financial year 2020, the company provided a reported net profit of $290 million that is a nine to thirteen percent increment of underlying profits for financial year 2019 mainly due to growth and expansion of freshly released items at the end of financial year 2019. Moreover, capital expenditure is anticipated to enhance up to 180 million, including the regular establishment of the facility of China, bigger Denver office together with investments towards platforms in Information Technology to strengthen digital, connected health, and cyber security abilities (Cochlear 2020). Additionally, capital expenses are forecasted to decline by around million dollars in the financial year 2021. Targeting China appears as the primary goal of their relative population for other international powerhouse nations being targeted.

In relation to risk, the company presently attains supplies for its goods from third parties. Due to the influence of Covid-19 throughout the world, this has resulted in few suppliers closing and resulting in a significant influence of not being capable of pursuing crucial materials required for the goods. This is an issue as the company states that few materials that are only prevalent from particular sources and hence, are not substitutable in nature. Cochlear also comprises of five manufacturing abilities internationally and if any material disturbance to one of them, it would result deterioration of supply of goods to that particular locality as it is problematic to establish new plants. Further, there is a major risk in the segment of medical that a third party shall produce innovative item that can overpower coming to the overall market hence leading to the loss of market share (Yahoo finance 2021).

Marketing Strategy

When it comes to market analysis, the cochlear implant market is anticipated to enhance by 10.5% every year until 2026. The growth is linked with favourable scenarios of reimbursement, enhanced adoption of implants, and increasing awareness about hearing aids (Cohlear 2020). Recently, unilateral instruments have influenced the market but due to the enhanced knowledge and prevalence of markets for hearing, there is expected to be a transition towards devices of bilateral nature because there are most cost-effective when implanted in children and has the capability to enhance performance on a whole.

(Cochlear Ltd 2020)

Industry Analysis & Competitive positioning

In relation to competitive positioning and industry evaluation, the company is leading the market of health care and equipment. This can be proved by the fact that the international cochlear size of implant market reported at 1.5 billion USD in the year 2020 and is expected to rise at a CAGR of approximately 10.5% with due course of time. The top rivals of Cochlear Ltd include Pentax medical, Hearing Life, and Australian hearing. Revenue wise, the company has been outperforming its rivals with expected annual revenue of $1 billion in comparison to other players (Cochlear Ltd 2020). Further, entry restrictions in this industry are regarded maximum because there are various companies with same solutions and objectives like that of Cochlear (Yahoo finance 2021). However, as mentioned before, the company was founded in 1967 and have been significantly outperforming the rivals since then. Besides, the company is also listed on the Australian Stock Exchange that allows it to gain a strong base of consumers, which the other players like Hearing Life do not possess.

When it comes to external factors, these are such factors which influence the performance of business. Such factors comprise of government, technology, foreign, social, and demographic (Cazier et al 2015). However, not every external factor may influence the business and in various scenarios, few may impact the business more than the others. Technology is Cochlear’s largest external factor because as it is performing efficiently owing to its innovative new items, which have been introduced and developed since, the company was introduced in the year 1967. Nonetheless, the accessibility of the company’s items and traits are far more innovative than other companies (Cochlear Ltd 2020). Another external factor is the company’s demographic that is targeted towards any individual having a hearing issue. This implies that old people, children and other people with damaged hearing owing to an accident has been targeted in their demographic. Even though the company has been founded in Australia, it has been leading in other nations as well. In a recent survey, Europe was held accountable as the largest share of all other nations in the year 2018. The reason behind this was high number of implants, population, and instrumental medical techniques.

Social external factors comprise of what lifestyle variations may emerge in the upcoming years. In the present scenario companies are struggling to survive the market due to pandemic and people are not ready to obtain any implant. Such a scenario is a major hurdle to the company and this has led to the drop in sales and the price of stock. Moreover, pandemic has snatched people of their jobs which imply that people cannot afford to pay for this implant that is expensive and this allows them to switch to regular hearing aids temporarily. In addition to these, the company has another major issue in their books and that is how to depict to consumers the amount of sanitization and cleaning that is being done at many centres (Cochlear Ltd 2020). A change in lifestyle has been seen during the time of pandemic where people are cautious and resort to hygiene to curb the spread of pandemic.

In order to tackle such shift in lifestyle, the company has been accommodating for every consumer by putting more people in consumer services, thereby allowing them to be present to any consumer with questions, queries, or any other issues. This can even be related with the laws of government. New laws in terms of social distancing are introduced which has been introduced internationally and almost every nation is distinct with their rules and regulations (Cochlear Ltd 2020).

Bargaining power of suppliers

The company ensures reduced capacity through the process of enhanced operations. Moreover, the overall cost from the supplier enhanced. The substitutes are negligible that enhance the strong bargaining power of supplier. The operations of the company is highly influenced by the bargaining power of the supplier that is in link to materials, labour and energy cost.

Bargaining Power of Buyers

The buyer’s power of the company is moderate to low as the company is in a position to sustain any price increment due to the high demand and limited supply of the market natural resources. Moreover, the availability of lower substitutes leads to reduction of the buyer’s bargaining power

New entry of threat

The entry of new threat remains relatively low because of deficit of natural resources and limited capacity of resources when it comes to global market (Deegan 2016) Moreover, it contains higher infrastructure and latest technology thereby the threat from the new entrant is less. Since the availability of the substitutes are lower and Cochlear has a diversified portfolio, the substitute threat is encountered easily. The rivalry is high between the competing sellers and the natural resource companies are into cut throat competition for access to the natural resources

The operations of the company are even affected by the following:

Financial evaluation

Cochlear has reported a loss of -1.9 from 2015 to the year 2020 ($238.3m) and it has recorded an increasing profit that is ten time in the year 2020 when compared to 2016. This development depicts that the company will be profitable with due course of time and can be utilized in forecasting and other plans associated with its affairs. The second measure utilized is average equity that is computed by adding ownership of two scenarios and dividing the value by two.

The aggregate investment of the company has been increasing at a positive rate from 2014-2020 (Baristow 2020). Such increase can be a direct result of the company providing more equity shares to finance its affairs. Further, an additional enhancement in aggregate equity shares depict that the company has been attaining profits, thereby attracting the investors to invest more (Pucheta-Martiinez & Garcia-Meca 2019). This surge in aggregate equity depicts the investors’ forecasting of maximum income in future and higher dividends as a direct outcome. Another technique utilized is the return on equity, and return on investment that also witnessed a positive movement from 2016 to 2018. This is a signal that the company is attaining profits and will do more in the future.

Average assets of the company also witnessed an increment from 2014-2020 and such depiction shows that the company made a profit, and investors were keen on investing in more shares. The other technique utilized is the return on assets wherein the company reported an increasing return on assets from 2016-2020, which indicates that the company was utilizing its assets to generate additional income.

(Cochlear 2020)

Valuation

• Valuation of share using Dividend Discount Model

Calculation of value of equity by Dividend discount method in which we calculate we calculated value of share price as per Capital Asset Pricing Model(CAPM)

Value of equity share of BHP = Expected Dividend per share
Required rate of return- Growth

Going by the Capital Asset Pricing Model,
Rate of Return (expected)= Re
Risk-free rate of Return= Rf
Market Return= Rm
Beta= B

Expected Rate of Return (Re) = Risk-Free rate of return + (Market rate of return- Risk-free rate of Return) * Beta

Therefore, Re= Rf + (Rm-Rf) * B

a) Obtaining an estimation of Risk-free rate of return

risk-free interest Rate projected at 2.5% in year 2021
For DDM we have Rf at 2.5%

Step 2: Computation of Market rate of Return and market risk premium

Avg return in last 6 years = 11.94+18.73-8.95+25.51+6.99
5
=54.22/5=10.84%
(Rm)=10.84%

Market Risk premium= Rm-Rf
= 10.84%-2.5%
= 8.34%

Step 3: Beta
Beta of Cochlear= 0.92 (NYSE)

Step 4: calculation of Required rate of return
(Re)= Rf + Market risk premium *Beta
= 2.5 + 8.34 * 0.92
= 10.18%

Step 5: Computation of Intrinsic Value
Calculation of growth
Dividend in year 2020= $1.75 Dividend paid in 2021= $1.40.
assumption of Growth rate 6%

Dividend for next year= Dividend for current year * growth

Dividend for current year= USD 1.40

Dividend next year= 1.56*1.40
= 2.18

Intrinsic Value of share of Cochlear Ltd = Expected Dividend for next year
Required rate of return-Growth

=2.18
10.18%-1.40%

Intrinsic Value of share of Cochlear Company USD 0.24

• Valuation of equity share by Price to Earnings method

Cochlear is listed in the NYSE hence the closing price is undertaken that is $ 228.97 per share dated 6 May 2022

The EPS (basic) of $ 1.29 per share has been derived from the annual report of the company

Therefore, the value of Equity share is:

Value of share as per Price to Earning method= Market price per share = $228.97
Earnings per share= 1.29

Equity value per share = $ 177 per share

Value of Equity by both method comparisons

On the application of both these method, the valuation is different because of the assumption used in the valuation process. Both these valuation method is used but DDM mechanism is used because the company is paying the dividend to shareholder and PE method is used because the company earns profit (Anton 2015)

Cochlear PEER analysis

The competitors of Cochlear all around the world are compared. It is seen that market capitalization of Smith & Nehew plc remains the highest and a beta of less than 1. On the other hand the second best competitor is Cochlear with market capitalization of $9404 million and a beta of 0.92. With a beta of 0.92 it is more responsive to the market as compared to its peer (Morecroft 2015)..

Investment risk

With respect to operational risks, the company did not expend any dividend to its investors. However, the issue of not paying the bonus is that the investors must see value in their investments, and in this scenario, investors will more likely not invest. Such risk is called the risk of dividend payment.

As per Carlon (2019), market risks are the risks that are related with the factors influencing the market. First is the equity risk wherein the company is not able to perform and the prices of shares decline. The other market risk is the risk of interest rate. If Cochlear opts for investment in the alternate investment channel when the rate of interest is less, the company will lose resources. Lastly, currency risk is also related to the exchange rates. For instance, the company invests in various treasury bonds that are provided by the government of UK (Baristow 2020). Hence, if the value of pound shall increase, the bonds market value shall decline and vice-versa.

Liquidity risk is another risk that arises due to the incapability to sell investments at market prevailing rates in order to realize the initial expenses (Davydov 2016). Hence, when the company shall purchase bonds and when the offer for sale is lesser than the invested price, there arises the emergence of liquidity risk.

Credit risk is that risk wherein a government or firm issuing bonds will be incapable of paying interest or principal after their maturity (Ang & Weaver 2010). Hence, the company must focus while investing in bonds because some of them pursue high credit risk in comparison to others.

Concentration risk is the risk related to investment in one type of investment (Sherman 2015). Therefore, Cochlear must try to diversify its investment in various ways in order to prevent the failure associated to one stake. Besides, the company can also invest in both financial and commodity markets.

Foreign investment risk is the risk related to investment in varied geographical areas. Hence, the company must focus on economies that have stable rules and regulations so that risks are decreased on a whole (Laux 2014).

Inflation risk is directly related with the buying power of a currency and the company must try to invest in government bonds wherein inflation remains stable. Moreover, in the case of investment in economies with high rise in prices, it can result in losses to the company.

Overall, the analytic measures or strategies utilized are average equity, profitability ratio, current rate, return on assets, return on equity, debt to equity ratio, and sales evaluation. Further, investment risks like market risk, operation risk, foreign investment risks, credit risks, concentration risk, and inflation risk plays a key role in the generation of issues or dangers that are encountered by Cochlear Ltd.

References