Quick Valuation of Espirit Holdings
Methodology
Use the Gordon’s growth model to determine the fair value of Esprit Holdings Ltd. Gordon’s growth value is chosen because it uses data that can be easily found or calculated with little chance of error.
Assumptions
1. Dividend growth rate is constant
2. Return on equity is constant and sustainable
3. Forecasted dividend is accurate
4. There is market stability
5. Historical data is reasonable predictor of future returns
Valuation
Esprit Holdings Ltd 0330.HK (Hong Kong)
All data taken from Esprit’s 2007 Annual report
Current share trading price = $92.15
Dividends per share = $3.18
Earnings per share = $4.22
Return on Equity = 48.9%
Payout Ratio = 3.18/4.22 = .754 g = (1 - .754).489 = .12029
PT = d1/(re-g)
Assume that Giordano and Esprit have the same re
Find the re for Giordano based on current share price
Giordano International Ltd 0709.HK (Hong Kong)
Dividend per share = 22 cents
Earnings per share = 19.8 cents
Return on Equity = 15.7 %
Current share trading price = $3.29
Payout Ratio = .22/.198 = 1.111 g = (1-1.111).157 = -.01743
PT= d1/(re-g)
3.29 = .22/[re- (-.017)] re = .22/3.29 +.017 = .04987
Calculate Esprit’s Pt using Giordano’s re of 5%
PT= d1/(re-g)
PT= 3.18/ (.05 - .12) = -45.43
Using the re of Giordano, Esprit should have a stock price of $-45.43
This value breaks the basic assumption that re should be greater than g therefore the assumption that Giordano shares a similar cost of capital to Esprit is invalid.
Taking a CAPM approach to calculate re
E(re) = rf + β (E(rm- rf)) β = .61 (as listed by reuters) rf = .0258 rm= .2228 (as determined in appendix A through a 2 year average)
E(re) = .0258 + .61 (.2228 - .0258) = .146
Calculate PT using re= .146
PT= 3.18/ (.146 - .12029) = 123.69
Therefore the stock price using a CAPM valuation is $123.69
Findings
The calculated value of Esprit at $123.69/share is over the market value of $92.55. The calculated value is within the 52 week high
Use the Gordon’s growth model to determine the fair value of Esprit Holdings Ltd. Gordon’s growth value is chosen because it uses data that can be easily found or calculated with little chance of error.
Assumptions
1. Dividend growth rate is constant
2. Return on equity is constant and sustainable
3. Forecasted dividend is accurate
4. There is market stability
5. Historical data is reasonable predictor of future returns
Valuation
Esprit Holdings Ltd 0330.HK (Hong Kong)
All data taken from Esprit’s 2007 Annual report
Current share trading price = $92.15
Dividends per share = $3.18
Earnings per share = $4.22
Return on Equity = 48.9%
Payout Ratio = 3.18/4.22 = .754 g = (1 - .754).489 = .12029
PT = d1/(re-g)
Assume that Giordano and Esprit have the same re
Find the re for Giordano based on current share price
Giordano International Ltd 0709.HK (Hong Kong)
Dividend per share = 22 cents
Earnings per share = 19.8 cents
Return on Equity = 15.7 %
Current share trading price = $3.29
Payout Ratio = .22/.198 = 1.111 g = (1-1.111).157 = -.01743
PT= d1/(re-g)
3.29 = .22/[re- (-.017)] re = .22/3.29 +.017 = .04987
Calculate Esprit’s Pt using Giordano’s re of 5%
PT= d1/(re-g)
PT= 3.18/ (.05 - .12) = -45.43
Using the re of Giordano, Esprit should have a stock price of $-45.43
This value breaks the basic assumption that re should be greater than g therefore the assumption that Giordano shares a similar cost of capital to Esprit is invalid.
Taking a CAPM approach to calculate re
E(re) = rf + β (E(rm- rf)) β = .61 (as listed by reuters) rf = .0258 rm= .2228 (as determined in appendix A through a 2 year average)
E(re) = .0258 + .61 (.2228 - .0258) = .146
Calculate PT using re= .146
PT= 3.18/ (.146 - .12029) = 123.69
Therefore the stock price using a CAPM valuation is $123.69
Findings
The calculated value of Esprit at $123.69/share is over the market value of $92.55. The calculated value is within the 52 week high
References: HANG SENG INDEX (^HSI). 2008. Yahoo Finance. [Internet]. Available at: http://finance.yahoo.com/q/hp?s=^HIS [Accessed 12 April 2008]. Esprit Holdings Ltd 0330.HK (Hong Kong). 2008. Reuters. [Internet]. Available at: http://stocks.us.reuters.com/stocks/ratios.asp?symbol=0330.HK [Accessed 12 April 2008]. Giordano International Ltd 0709.HK (Hong Kong). 2008 Reuters. [Internet]. Available at: http://stocks.us.reuters.com/stocks/overview.asp?symbol=0709.HK [Accessed 12 April 2008]. FY2006/2007 Annual Report. 2008. Esprit. [Online]. Available at: http://www.esprit.com/index.php?command=ItemDownload&class=Esprit_Model_IR_DocAttachment&identity=33 [Accessed 12 April 2008].