Valuation Of A Listed Company Using The Dcf Model: A Case Study Of Anglo American Plc

ABSTRACT

Anglo American Plc (“Anglo”) is one of the world’s largest mining companies. In

addition to the London Stock Exchange, it is listed on the Johannesburg Stock

Exchange with operations that span the globe. At the date of valuation, 30 September

2014, Anglo’s shares constituted a significant portion of the investment portfolio of

the researcher’s employer and was one of the primary drivers of portfolio performance.

Incorporated in 1917, Anglo’s maturity was further evidenced in decreased trading

volumes of its shares despite price volatility due to its dependence on global

commodity prices and GDP cycles. Its trading volumes declined, indicating that

investors opted to hold onto the shares for longer thus exhibiting both equity and bondlike

characteristics. As a case study, the research sets out to establish Anglo’s

investment case and ascertain whether it warranted a buy/hold/sell recommendation.

By employing the Discounted Cash Flow (DCF) method and limiting cash flow to

potential dividends referred to as Free Cash Flow to Equity (FCFE), the study derived

DCF model inputs using the company’s financial statements and market data to build

an excel based model. Amongst others, model inputs include expected cash flows,

expected growth in those cash flows, Terminal Values and discount rates or cost of

financing. Using a five-year growth period, the expected cash flows inclusive of the

terminal value were discounted using the cost of financing specifically the cost of

equity to determine the total present value of those cash flows at valuation date and

subsequently an estimate of the intrinsic value per share. It was found that Anglo’s

market price per share was significantly higher than the estimated intrinsic value per

share that resulted from the DCF model. Relative Valuation was also undertaken as a

complement to DCF model and found that the share was overpriced albeit to a lesser

extent than DCF model results. This lead to the conclusion that as at valuation date,

the shares were overpriced with limited upside potential and warranted a sell

recommendation. Limitations of the study include the fact that the analysis did not take

account of qualitative factors of the company, no access to management to better

inform model inputs, not fully exploring the impact of cyclicality of the company as it

is influenced by commodity prices giving rise to the need to normalise cash flows, no

undertaking of sensitivity analysis and controlling for differences in the comparables.

It is thus recommended that additional research should take account of these

limitations.