Introduction
This report is business valuation of EBET Limited. The report attempts to estimate the value of the firm based on the current performance and forecast the future performance of the company.
This report is mainly consisted of 6 parts, which are Business & Industry Analysis, Acquisition, Corporate governance analysis, Accounting analysis, Financial analysis and Forecasting & Valuation. The time period chose here is from 2006 to 2009.
This report uses various sources of information such as annual reports, electronic sources and online databases related to the company.
The result of this report would be limited to the amount and quality of available information and the given time frame. Relevant assumptions would be made in the case of inadequate information. Bias may arise due to data has been collected from various database which may have different sources.
Section A- Business and Industry Analysis
Economic Analysis
Current and future economic conditions need to be discussed to conclude EBET's business activities. The International Monetary Fund (IMF) in its latest World Economic Outlook released is forecasting a strengthening global economy from 2010, but cautions that the recovery remains fragile in many parts of the world and is being supported by policy stimulus and temporary cyclical factors. (Treasure of the Commonwealth of Australia, 2010)
The IMF now forecasts that Australia will grow by 2½ per cent in 2010 and 3 per cent in 2011. This is considerably stronger than the recovery forecast for other advanced economies, which are expected to grow by 2.1 per cent in 2010 and 2.4 per cent in 2011. (Treasure of the Commonwealth of Australia, 2010)
Domestic forecast by Reserve bank of Australia reported a similar outlook on May 2010. (Reserve bank of Australia, 2010)
| | Dec 2009 | June 2010 | Dec 2010 | June 2011 | Dec 2011 | June 2012 | Dec 2012 |
| GDP growth | 2.7% | 2.5% | 3.25% | 3.75% | 3.75% | 3.75% | 4% |
| Non- farm GDP growth | 2.5% | 2.5% | 3.25% | 3.75% | 3.75% | 3.75% | 4% |
| CPI inflation | 2.1% | 3.25% | 3.25% | 3% | 2.75% | 3% | 3% |
| Underlying Inflation | 3.25% | 2.75% | 2.75% | 2.75% | 5.75% | 3% | 3% |
Table 1 Output Growth and Inflation Forecasts[1]
Source: ABS; RBA
Recent Greek debt crisis have affected global equity markets and exchange rates. Australia's economy could be buffeted by global fallout from Europe's debt turmoil, the central bank said (Reserve Bank of Australia, 2010). The Reserve Bank of Australia released its minutes decided to raise interest rates by a quarter bases points. The bank said it weighs Europe's debt crises against inflation risks (Reserve Bank of Australia, 2010). In additional, Australian government bond yields had also fallen slightly and the exchange rates have fallen from 0.93 to 0.84 to US dollars on May. (Reserve Bank of Australia, May, 2010) These could lead to an increase in the investment of multinational companies.
According to EBET's Annual Report 2009, its overall revenue decrease 13%, directly attribute to the impact of the external financial environment, which has had a negative impact on the gaming industry. And International sales revenue decreased to $1.582 millions compared to $1.912 millions in 2008, under the reflection of the global financial crisis. (EBET, 2009, p5)
However, EBET believes that demand for the Group's products in international markets is expected to be significantly stronger in FY 2010, and the Group is well placed to increase revenues from this area. At the same time, EBET is reviewing the potential of opening a regional office in Asia to drive its international sales growth. (EBET, 2009, p6)
Business Strategy Analysis
During FY 2010, the Group plans to continue to develop its unique Tikit+™ ticket-based solution for older style poker machines, which has been approved by the NSW Office of Liquor, Gaming and Racing (OLGR) in 3Q FY 2009. (EBET, 2010)
This product enables venues to offer a ticket-based (as opposed to cash) solution across their entire gaming floor, thereby enhancing player appeal and reducing venue operating costs. This product is expected to make a significant contribution to sales in FY 2010. (EBET, 2009, p6)
As IBISWorld reported, technology and systems are used widely in casino industry. (IBISWorld, 2010, p18) To develop current technology and systems and introduce new games is one of the key success factors of casino industry (IBISWorld, 2010, p21).
Industry Analysis
Industry analysis aims to evaluate the profitability of the industry in which EBIT belongs to in order to analyse the sustainability of its current performance and future prospect. Industry analysis is conducted based on "Porter's Five Forces" model.
As the profitability is directly affected by the nature of rivalry among existing firms in the industry, many factors are analysed and discussed in the Figure 1. To summarised, the overall rivalry among existing firms is relatively high and increase over time mainly on the basis of price wars. And the online gaming is no national boundaries, some other countries' websites are very popular in Australia. For example, one of the tough competitors - SpinPalace Casino (multinational company), it has hundreds of types of online pokies available, as well as countless other games.
It is not recommendable for new market entrants to gain market share because Australia has truly emerged as a hot spot for the online gaming industry. There are nearly 480 existing players in the whole of Oceania and of them a sizable chunk operates from Australia (BBC, 2001). Also, some of the existing players are already having a defensive market position such as SpinPalace Casino. Thus, the threat of new entrants is low.
In this industry, there is a low level of substitute products' availability. As there is limited products that serves similar functions. For example, although network games can make people exciting, it is usually not a money maker. However, due to numerous online gambling, customers are easy to switch to another gambling game with the similar functionality but much easier to earn money. Thus, the threat of substitute products is low to medium.
The consumers of this industry consists a lot of people who wants make more money. People may not focus on one particular game and they always seek for the lowest price but highest return. That is, price sensitivity is evaluated at a high level. Also, due to low differentiating ability of products, the switching cost is low. Hence, the bargaining power of buyers is high.
There is huge number of software providers such as MicroGaming, Parlay Entertainment and Real Time Gaming. And EBET also develops software and gaming system itself. So the suppliers are considered not to be very powerful in this industry and give buyers a strong bargaining position.
Rivalry among Existing Firms Assess Level: High Reasons: -Industry growth rate for this market is expected to be growing -low degree of differentiation and low switching cost -Industry has enough capacity to meet its customers' demand Threat of New Entrants Assess Level: Low Reasons: -It's difficult for new entrants to gain market share, because existing players have a defensive market position. -Legal barriers, according to Interactive Gambling Act some of the online game are illegal Bargaining Power of Buyer Assess Level: High Reasons: -Price sensitivity of industry products is at a high level due to low differentiating ability -Low switching cost due to low degree of differentiation Bargaining Power of Suppliers Assess Level: Low Reason: -Huge number of software providers EBET Thread of Substitute Products Assess Level: Low- Medium Reasons: -Limited products that serves similar function available -Customers are easy to switch to another product
Figure 1: Porter's Five Forces
Section B- Acquisition
Because of the regulation, there are not many companies engage in the gambling industry. There are only 14 casinos in Australia (IBIS, 2010). And table 2 is summarised the selected 11 companies' market cap in this industry on 19th April 2010.
| Company | Market Cap (Million) |
| Ainsworth Game Technology Limited | 35 |
| Aristocrat Leisure Limited | 2,347 |
| Centrebet International Limited | 142 |
| Crown Limited | 6,149 |
| eBet Limited | 18 |
| National Leisure & Gaming Limited | 9 |
| Sky City Entertainment Group Limited | 1,432 |
| Sino Strategic International Limited | 27 |
| Tabcorp Holdings Limited | 4,282 |
| Tatts Group Limited | 3,128 |
Table 2: Market cap
Source: Fin Analysis
From this table, it shows that Crown's market cap is 6,149 million. But EBET's marker cap is only 18 million. Compared with Crown, EBET is a very small company in this market. So, at least crown has the ability to acquire EBT.
Crown now operates in Melbourne, Perth and Macau. Its business made up of three parts- gambling, hotels and conferences, restaurants and bars. In these three places, Crown has 5,600 gaming machines and 1,040 table games (Crown, 2009).
So, in the gambling part, gambling machines and table gaming is one of major cost of Crown. And EBET develops and markets a range of networked solutions for gaming machines, including loyalty and tracking systems, cashless gaming solutions and machine management software.
At June 2008, EBET acquired all issued share capital of Bounty Limited, which was engaged in the development and distribution of software products to the gaming industry (EBET, 2009). If Crown acquires EBET, EBET can be treated as the supplier of Crown, so Crown can reduce cost. Also, Crown can introduce a new product or service- online gaming, so that it can increase its business scale. The Online division of EBET develops and operates online gaming and wagering system, and produces.
On the other hand, EBET also can get benefit from this acquisition. The most important one is increasing the profit. The gaming system division is the largest and core contributing division to EBET's revenues in EBET (EBET, 2009). The current distribution territories are NSW (including Star City Casino), ACT and the Burswood Casino in WA (EBET, 2009). If Crown acquires EBT, and uses EBT's system and machines, EBET's sales will increased sharply.
Another benefit EBET can get is increasing the markets. EBET now reviews the potential of opening a regional office in Asia to drive its international sales growth (EBET, 2009). And Crown has some market share in Macau. If acquisition is succussed, EBET's plan maybe launched quicker than it's expected.
Section C- Corporate governance analysis
As a central reference point for companies to understand stakeholder expectations, in order to promote and restore investor confidence, ASX convened the ASX Corporate Governance Council in August 2002. Its purpose is to develop recommendations which reflect international best practice (ASX, p4). According to the EBET annual report 2009, there are four directors in the board. And there are some problems exist in its corporate governance.
1. Recommendation 2.4 - The Board should establish a nomination committee. But due in EBET, due to the size of the board and company, it does not have nomination committee.
2. Recommendation 4.2 - The Audit Committee should be structured so that it:
i. consists only of non-executive directors;
ii. consists of a majority of independent directors;
iii. is chaired by an independent chair, who is not chair of the board; and
iv. has at least three members.
But Due to the current size of the Board and Company, the Audit Committee has only two members, of which one is independent.
Except these two problems, EBET performs well in corporate government, such as the majority of board is independent directors, and it established code of conduct, makes timely and balanced disclosure. And the four directors are all experienced.
In the external part, PKF is the external auditor of EBET from 2005 to 2009. PKF is a leading group of specialist Chartered Accounting and business advisory firms offering a comprehensive suite of up-to-date specialist advice and services, including audit and assurance, corporate advisory, corporate recovery, enterprise advisers and tax consulting services (PKF, 2010). EBET paid PKF $380,000 in 2009, and $368,000 in 2008.
Overall, EBET has sound corporate governance. Its shortcomings are mainly due to the size of board.
Section D- Accounting Analysis
The purpose of this section is to evaluate EBET's accounting quality and the degree that the company's accounting captures its underlying economic business.
The accounting analysis involves examining the company's accounting system through analyses of EBET's accounting policies and estimates, corporate governance, and quality of disclosure. Time series analysis of operating revenue and account receivables is the main tool used to look for potential red flags in EBET's financial statements from 2005 to 2009. Then, the financial statements are restated to 'undo' the distortions so that it can represent EBET's nature of business.
Key Accounting Policies
EBET's operations are involved with developing gambling system and software, and running online gaming. Outlined below are some key relevant accounting policies EBET uses:
² Inventories are measured at the lower of cost or net realisable value. Costs have been assigned to inventory quantities on-hand at balance date using the first-in, first-out basis
² Property, plant and equipment are carried at cost or at independent or Directors' valuation, less, where applicable, any accumulated depreciation or amortisation and impairment losses.
² The depreciation rates used for each class of depreciable assets on a diminishing value basis are:
| Fixed Assets Class | Depreciation Rate |
| Plant and equipment | 10%- 33% |
| Leasehold improvements | 20% |
Table 3: Depreciation Rate
Source: EBET Annual Report
² Intellectual Property, Software Development and Other Intangibles: Intellectual property and other intangibles are carried at cost and are amortised on a straight-line basis over 10 years.
Assessing Accounting Flexibility
Some firms are constrained to accounting methods strictly; however, EBET has some flexibility in choosing from different methods. The first concern here is the depreciation methods. For the fixed asset, EBET simply classifies two types, but the details of how to depreciation are not disclosed in the annual report. For this one, EBET has great flexibility regarding the useful life and residual value of the depreciated assets in order to increase revenue, since they are reassessed annually. Second, the property, plant and equipment is revalued every year by independent valuer the directors. That gives a chance to managers to cook the accounts.
Accounting Strategy
Although EBET has some degree of accounting flexibilities, however, EBET believed to have employed sound accounting policies that fairly reflect its business characteristics. After penetrating into annual reports throughout five years, the firm's policies and estimates are considered to be realistic and consistently applied throughout the years. But in the remuneration reports, it states that EBET pays share to directors as compensation. So the incentives and opportunity still exist for managers to manage earnings.
Quality of Disclosure
Disclosure quality is quite important regarding the whole quality of the financial reports. Several questions should be asked below in order to assess the disclosure quality:
² Does the company provide adequate disclosure to assess its business strategy and its economic consequences? – Yes, Median
² Does the firm adequately explain its current performance? –Yes, Median
² Do the notes explain key accounting policies adequately? – Yes, but not enough
² What is the quality of its multiple business segment disclosure? – Median level
² Does the company disclosure and explain the reasons for bad news? – Yes. Median
From the above questions, it can be concluded that AMO has disclosed relevant and important information in their annual report but lack of some adequacies. For example, some accounting policies are not disclosed in annual report, such as how to measure the bad debt, the details of depreciation methods, and how to measure the tax provision.
Earnings Quality Assessment
As mentioned above, EBET employs a sound corporate government. The majority of directors are independent, and four directors are all experienced. But the shortcomings are also obviously. Due to the size of the board, EBET does not have nomination committee, and only two members of Audit committee. And as EBET states in 2009 annual report, the Board, as a whole, is responsible for monitoring the ongoing development of the Board, consistent with the Company's growth and development prospects, making recommendations for the appointment and removal of Directors to the Board and so on (EBET, 2009). But let the board chose the members of the board is confused. And last year, one director left from the board, but in the annual report, the reason for that is not disclosed in the annual report.
Regarding earnings management, persistency of the number is the primary concern. Firstly, to assess the persistency of earnings, earnings persistence model is used and the followings are the output.
| Coefficients | Standard Error | t Stat | P-value | |
| Intercept | 0.009842226 | 0.033987683 | 0.289582129 | 0.780525325 |
| X Variable 1 | 0.716405858 | 0.257721387 | 2.779768752 | 0.027307337 |
Table 4 Earnings persistence analysis (EBET)
From the above table, it is clear that EBET's earnings is persistent over time since it got the high coefficients (higher than 0.5) and low P-value (less than 0.05).
Compared with the top company in this industry (Crown holds the most market share in Casino industry, but it listed in ASX from 2007, so not suitable for earnings persistence analysis. Consequently, Tabcorp Holdings Limited is chosen for the earnings persistent analysis). The outcome of earnings persistent analysis is shown below.
| | Coefficients | Standard Error | t Stat | P-value |
| Intercept | 0.08661105 | 0.054825587 | 1.579756004 | 0.165243 |
| X Variable 1 | 0.396024192 | 0.375055356 | 1.055908644 | 0.33166 |
Table 5 Earnings persistence analysis (TAH)
From Table 4 and Table 5, it indicates that EBET does better than TAH in earnings persistence perspective.
The discretionary accrual analysis is conducted, the result of EBET is shown below:
| EBT | 0.0498924 |
And the results for the competitors are shown in Table 6:
| Company code | Company Name | DISC ACC |
| AGI | Ainsworth Game Technology Limited | 0.0751637 |
| ALL | Aristocrat Leisure Limited | 0.0493668 |
| CIL | Centrebet International Limited | 0.0551907 |
| CWN | Crown Limited | 0.0698222 |
| LAS | Lasseters Corporation Limited | 0.0671706 |
| NLG | National Leisure & Gaming Limited | 0.126043 |
| SKC | Sky City Entertainment Group Limited | 0.0560666 |
| SSI | Sino Strategic International Limited | 0.0076567 |
| TAH | Tabcorp Holdings Limited | 0.0783345 |
| TTS | Tatts Group Limited | 0.0875614 |
| MEAN | | 0.06723762 |
| MEDIAN | | 0.0684964 |
Table 6: discretionary accrual results
From the table above, it is clear that the earnings quality of EBET is better than top three companies (CWN, SKC, TAH) in this industry, and also better than the average of this industry[2].
To sum up, although some potential corporate governance problems exist in EBET, from the data above, the earnings quality of EBET is high.
Red Flags and Accounting Analysis Implementation
To implement accounting analysis, a comparison between firm's accounting profit and its Cash Flow from Operating
The relationship between NPAT and CFFO is affected by the current assets such inventory and receivable as well as current liabilities such as account payable (Palepu, 2008, p5-26). However,
CFF&NPAT of EBT (Source: EBT annual reports 2005-2008)
| 2005 | 2006 | 2007 | 2008 | 2009 | |
| CFFO | 329,000 | 1,934,000 | 1,361,000 | 2,262,000 | 6,939,000 |
| NPAT | -606,000 | 1,747,000 | 857,000 | -158,000 | 1,526,000 |
Table 7: CFFO vs. NPAT of EBET
Figure2. CFF&NPAT of EBT from 2005 to 2008
Source: Fin Analysis
From Figure 2, it is clear that the relationship between CFFO and NPAT is unusual. The CFFO is much higher than NPAT from 2008, especially 2009. Because some details are not disclosed in the Annual Reports, it is hard to find out why this happen in EBET. However, in the Profit & Loss statement of EBET (2009), it states that, the EBITDA is $5.06 million, but the Depression and Amortisation is $3.02 million. That implies the Depression and Amortisation part may contain some accounting distortions. So next, the tests will be conducted to find the potential problems in Depreciation and Amortisation.
Depreciation/ Gross Property, Plant and Equipement (PP& E)
Some data are collected from Fin Analysis, and the results are shown below.
Figure 3 shows that the Depreciation/ PPE rate of EBET and its competitors in 2009. From Figrue 3, it is clear that the Depreciation/ PP& E rate of EBET is significant higher than the other competitors.
Figure 3: Depreciation/PP&E in 2009 [3]
Source: Fin Analysis
In Figure 4, the average Depreciation/PP& E rates from 2005 to 2009 of these companies are calculated. Obviously, the rate of EBET is higher than the others. The Figure 5 shows the Depression/ PP& E rate of EBET from 2005 to 2009. From Figure 5, it indicates that the Depression/ PP& E rate of EBET was abnormal from 2007.
Figure 4: Average Depreciation/PP&E from 2005 to 2009
Source: Fin Analysis
Figure 5: EBT Depreciation/PP&E from 2005 to 2009
Source: Fin Analysis
Considering the sales of EBET from 2005 to 2009, EBET increased the rate Depression/ PP & E may because the managers want the numbers on the Financial Reports look stable. When the sales were increased, EBET chose increase depression. So when the external environment is bad, the sales is decreased, but at that time the Accumulated Depression is high, so the ROA and some other ratio will stay in the same range as in the good economic environment.
On the other part, the Amortisation expense of EBET is very high too. But consider the nature of EBET, it develops the software of gambling, so its D & R may high than the other competitors. Although few details of its intangible assets, but in this report, it assumes the record of amortisation expense is correct.
Restatement of Depreciation and related elements
As mentioned above, the Depreciation/ PP & E rate needs to be changed. And compared with its competitors, Aristocrat Leisure Limited's (ALL) activities are most similar as EBET. So in the re-statement report, the Depression/ PP& E should be 15%. As in 2005 and 2006, this rate is lower than 15%, it doesn't need any change in these two years. Table 8 is the re-statement of EBET from 2007 to 2009.
| | Adjustment | ||
| $,000 | 2007 | 2008 | 2009 |
| Balance Sheet | |||
| PP&E | +205 | +215 | +215 |
| Deferred Tax Liability | +61 | +65 | +65 |
| Equity | +144 | +150 | +150 |
| Income Statement | |||
| Depreciation Expense | -205 | -215 | -215 |
| Tax Expense | +61 | +65 | +61 |
| NPAT | +144 | +150 | +144 |
| $,000 | 2007 | 2008 | 2009 |
| Balance Sheet | |||
| PP&E | 3.905 | 4.515 | 4.515 |
| Total Assets | 33,526 | 34,645 | 30,418 |
| Deferred Tax Liability | 61 | 65 | 65 |
| Contributed Equity | 50,219 | 50384 | 50,384 |
| Total Equity | 17,150 | 17,338 | 18,901 |
| Income Statement | |||
| Depreciation and Amortisation | (1,643) | (2,364) | (2,801) |
| Income Tax Benefit/(Expense) | (408) | (335) | (127) |
| NPAT | 1,001 | (8) | 1,676 |
Table 8: The Re-statement of EBET (2007 to 2009)
Section E- Financial Analysis
In this section, it includes calculation of cost of equity and WACC, ratio analysis, and cash flow analysis. For the ratio analysis, time line analysis and cross section analysis will be both used for measure the performance of EBET. Time line analysis will use four year as estimating period. For the cross section analysis, the industry leader company (TAH) will be chosen to represent as industry benchmark.
To calculate cost of equity, beta, risk free rate, and market return have to be determined. The risk free rate is the same as 10 years government bond rate (From RBA). The market return period is between Jun 2006 and Jun 2009.
For getting beta, a regression model has been run. As the process of calculation of beta (Table 9) includes the financial crisis effects, the beta for that period is 1.1 which higher than the figure 1.03 on Fin analysis. So in order to reflect the really situation of EBET, beta on Fin analysis has been chosen.
| SUMMARY OUTPUT | ||||||||
| Regression Statistics | ||||||||
| Multiple R | 0.307424 | |||||||
| R Square | 0.09451 | |||||||
| Adjusted R Square | 0.07834 | |||||||
| Standard Error | 0.160873 | |||||||
| Observations | 58 | |||||||
| ANOVA | ||||||||
| | df | SS | MS | F | Significance F | |||
| Regression | 1 | 0.151268 | 0.151268 | 5.844943 | 0.018902 | |||
| Residual | 56 | 1.449289 | 0.02588 | |||||
| Total | 57 | 1.600557 | | | | |||
| | Coefficients | Standard Error | t Stat | P-value | Lower 95% | Upper 95% | Lower 95.0% | Upper 95.0% |
| Intercept | 0.049927 | 0.03172 | 1.573993 | 0.121122 | -0.01362 | 0.113469 | -0.01362 | 0.113469 |
| X Variable 1 | 1.107644 | 0.458153 | 2.417632 | 0.018902 | 0.189854 | 2.025434 | 0.189854 | 2.025434 |
Table 9: beta of EBET
In addition, the market return for 2008 and 2009 are not representative because during these years, EBIT did really well and got increase in sales. Thus, it is assumed that the risk premium is 5% in these 2 years. Also, there will be a comparison between ROE and Cost of equity in the Profitability analysis.
re = rf +β [E (rm) – rf]
| | 2006 | 2007 | 2008 | 2009 |
| rf (10 Year Government Bonds rate) | 5.04% | 5.82% | 5.99% | 5.59% |
| β | 1.03 | 1.03 | 1.03 | 1.03 |
| rm | 19.22% | 20.50% | -20.80% | -16.10% |
| re (cost of equity) | 19.46% | 19.97% | 11.14% | 10.74% |
Table 10: cost of equity of EBET
To calculate the WACC, cost of debt has to be determined. The formula is as follows:
Cost of debt= Interest Expense / (Short-term Debt + Long-term Debt).
| ($millions) | 2006 | 2007 | 2008 | 2009 |
| Net Interest Expense | 0.47 | 0.42 | 1.09 | 0.45 |
| Short-term Debt | 5.14 | 7.21 | 9.01 | 3.40 |
| Long-term Debt | 0.00 | 3.23 | 3.02 | 3.09 |
| Cost of debt | 9.14% | 4.02% | 9.06% | 6.93% |
Table 11: Cost of debt
To calculate WACC, the following formular is required:
| EBET | 2006 | (E)Adjusted 2007 | (E)Adjusted 2008 | (E)Adjusted 2009 |
| Re (cost of equity) | 19.46% | 19.97% | 11.14% | 10.74% |
| Kd (cost of debt) | 9.14% | 4.02% | 9.06% | 6.93% |
| E/V | 75.82% | 62.16% | 59.04% | 74.44% |
| D/V | 24.18% | 37.84% | 40.96% | 25.39% |
| Tax Rate | 30% | 30% | 30% | 30% |
| WACC | 16.30% | 13.47% | 9.18% | 9.22% |
Table 12: WACC of EBET
From the above table, it is easy to find out EBET mainly use shareholders' equity as their major funds source, so the cost of equity influences WACC more than cost of debt. There will be a comparison between ROA and WACC latter.
Comparison between EBET and industry leader company-TAH
-Decomposition of ROE
ROE = ROA * Financial leverage
= Net income Ave. Assets
Ave. Assets * Ave. Shareholders' equity
ROA = Profit Margin x Asset Turnover
= Net income Sales
Sales * Ave. Assets
| EBET | 2006 | Adjusted 2007 | Adjusted 2008 | Adjusted 2009 |
| Net Profit Margin | 9.03% | 4.71% | 5.78% | 6.71% |
| Asset Turnover | 74.01% | 62.69% | 81.23% | 83.39% |
| ROA | 6.68% | 2.95% | 4.82% | 5.45% |
| Financial Leverage | 160.27% | 195.48% | 199.82% | 160.93% |
| ROE | 10.71% | 5.76% | 9.63% | 8.77% |
| TAH | | |||
| Net Profit Margin | 14.31% | 11.62% | 12.95% | 12.41% |
| Asset Turnover | 56.63% | 57.61% | 65.22% | 66.43% |
| ROA | 9.83% | 8.50% | 10.37% | 10.02% |
| Financial Leverage | 200.88% | 198.76% | 220.94% | 193.46% |
| ROE | 16.29% | 13.34% | 18.66% | 15.95% |
Table 13: ROA and ROA (EBET vs TAH)
Figure 6: Net profit margin (EBET vs TAH)
Net Profit Margin is an indication of how effective a company is at cost control. The lower the net profit margin, the less effective the company is at converting revenue into actual profit. When comparing to industry leader TAH, EBET got lower net profit margin. But after the decrease in 2007, the net profit margin was in an increasing trend as the company's sales increased rapidly in 2008 and 2009. This current positive profit margin may translate into positive investment quality.
Figure 7: ROE (EBET vs TAH) Figure 8: ROA (EBET vs TAH)
By decomposing the components of ROE, it can be concluded that the low ROA of EBET is initiated by the low in Net Income contributing to low Net Profit Margin. Although EBET's sales increase 9.1% from a 2006 to 2007, the total asset increase far outweigh of the sales. Thus, the ROA was still decreasing. During the recession period, EBIT did really well in the online gaming segment and the operating revenue increased sharply so that ROA of EBIT was picking up. But overall, comparing with TAH, EBET is still less efficient with its use of equipment in producing goods and services.
From the above table, ROE of EBET are under the 'mean reverting' and decline from 2006 to 2009. But in 2008, due to the large increase of sales, EBET got a little increase in ROE. And in 2009, despite of drop in finance leverage, the expansion of asset turnover had offset the drop and led ROE slightly decrease. The decreasing trend of ROE of EBET and TAH reflects that this industry became more and more competitive, and it has been discussed in industry analysis.
Comparing ROE and Cost of Equity
| EBET | 2006 | 2007 | 2008 | 2009 |
| ROE | 10.71% | 5.76% | 9.63% | 8.77% |
| Cost of equity | 19.46% | 19.97% | 11.14% | 10.74% |
Table 14: ROE vs. Cost of equity (EBET)
Figure 9: ROE vs. Cost of equity (EBET)
The return on equity (ROE) can be compared with the Cost of equity to determine whether company managers have worked for the best interest of shareholders by investing in value creating investment projects. In the above table, it is easy to find out that ROE of EBIT is relatively lower than cost of equity, especially during 2006 and 2007. That's indicated the managers didn't manage the shareholders' funds efficiently and the shareholders' funds have not generated high return in the period. But in 2008 and 2009, as the sales of EBET increase sharply it indicates that the managers became more capable to manage the funds.
| EBET | 2006 | 2007 | 2008 | 2009 |
| ROA | 6.68% | 2.95% | 4.82% | 5.45% |
| WACC | 16.30% | 13.47% | 9.18% | 9.22% |
Table 15: ROA vs. WACC (EBET)
Figure 10: ROA vs. WACC (EBET)
This figure indicates that EBET's return on their assets was higher than their cost of capital in 2006 to 2009. That is, EBET's ability and efficiency in using its assets to generate returns did not reach at the minimum level that EBET must earn on existing asset base. Therefore, EBET should be concerned with recovering the level of ROA against cost of capital. In conclusion, EBET couldn't cover their shareholders and debt holders' cost very well.
Evaluating Investment management
Working capital management ratios and long term asset ratios are used to assess the degree of utilization of assets of the companies.
- Operating working capital ratio and Operating working capital turnover
| 2006 | 2007 | 2008 | 2009 | ||
| Operating working capital /sales | EBET | 3.45% | 7.32% | 4.31% | 6% |
| TAH | -11.35% | -11.21% | -11.40% | -13.96% | |
| Operating working capital turnover | EBET | 28.96 | 13.74 | 23.39 | 16.70 |
| TAH | -8.81 | -8.92 | -8.77 | -7.16 |
Table 16: Operating working capital/ sales (EBET vs. TAH)
Figure 11: Operating working capital/ sales
Figure 12: Operating working capital turnover
EBET's working capital turnover has not been stable from 2006-2009, and it continuing decreasing. But when comparing with TAH it seems EBET's position is not bad. In a general sense, the higher the working capital turnover, the better - it means the company is generating a lot of sales compared to the money it uses to fund the sales. This may due to its successful online gaming system.
By further discussing the elements of working capital, table 17 shows the day's inventory, day's accounts receivables and Days' account payable.
| Days inventory | EBET | 25.2 | 36.0 | 26.8 | 23.3 |
| TAH | 1.43 | 1.42 | 1.22 | 1.24 | |
| Days accounts receivables | EBET | 69.8 | 59.7 | 55.5 | 49.1 |
| TAH | 6.64 | 9.08 | 4.6 | 13.78 | |
| Days' account payable | EBET | 58.4 | 77.8 | 32.2 | 32.8 |
| TAH | 33.0 | 35.8 | 37.2 | 42.7 |
Table 17: Day inventory and days accounts receivables/ payable (EBET vs. TAH)
Figure 13: Days inventory (EBET vs. TAH)
Figure 14: Days Accounts payables (EBET vs. TAH)
Figure 15: Days Receivable (EBET vs. TAH)
Figure 16: Days accounts payables & Days' accounts receivables (EBET vs. TAH)
- Days inventory shows the inventory management efficiency of the company. The inventory holding period of EBET is much higher than TAH, it is to say they holding inventory for a long time and may have difficulty selling.
- Day's receivables are relative higher than TAH. That is, EBIT uses more time to get their cash back and they may have less opportunity to invest funds efficiently. Actually, it is because EBET using credit card to collect online gaming receivables, so the receivables seems very large. Also, from 2006-2009, the day's receivables are in increasing trend. It indicates that EBET gets better of managing account receivables and the credit policy becomes more efficient. Also the credit risk will be lower in the company and reduces financial cost. EBET is making improvement in this regards.
- Generally, there is one way to manage the working capital better is to decrease periods of receivables while increase the payables time. For EBIT, during 2006-2009, their payables are almost over their receivables. Only in 2007, day's payables are over day's receivables. Thus, they usually cannot use funds flexibility.
In conclusion, working capital management of EBET is not too bad.
Net long asset turnover and Property plant and equipment turnover show how the firms have utilized their long term assets.
| Net Long-Term Asset Turnover | EBET | 1.13 | 1.18 | 1.42 | 1.09 |
| TAH | 0.59 | 0.60 | 0.68 | 0.71 | |
| PP&E Turnover | EBET | 7.80 | 9.25 | 13.43 | 14.45 |
| TAH | 2.54 | 2.65 | 2.66 | 2.69 |
Table 18: Net long-term asset turnover and PP & E turnover (EBET vs. TAH)
EBET has relatively higher PP&E turnover rate and net long-term asset turnover than TAH. It indicates EBET is more efficient at generating revenue by investing in property, plant and equipment and long-term assets. However, EBET is the company makes gambling software and operating online gambling, so its business activities do not rely on long term asset as much as TAH. Because TAH is an operating casino they need to invest more money on their PPE and long term asset. Overall, EBET utilizes their long term assets well.
Evaluating Financial Management
Generally, optimizing the use of debt in an organization's capital structure can help it to boost the ROE. Also, it is cheaper than equity and interest expense is tax deductible. Actually, too much reliance on debt financing is potentially costly to the firm's shareholder and will increase the company risk.
Analysing the financial leverage will help gauge level of financial risk of the organization and to know its position to meet the short term obligation and long term obligation.
Current ratio = Current assets / Current liabilities
Quick ratio = (Cash + Short-term investments + AR)/ Current liabilities
Operating cash flow ratio = (Cash flows from operations)/ Current liabilities
| | 2006 | 2007 | 2008 | 2009 | |
| Current ratio | EBET | 0.93 | 1.20 | 1.00 | 0.93 |
| TAH | 0.80 | 1.04 | 0.85 | 0.73 | |
| Quick ratio | EBET | 0.83 | 1.01 | 0.85 | 0.73 |
| TAH | 0.29 | 0.30 | 0.47 | 0.56 | |
| Operating cash flow ratio | EBET | 0.21 | -0.11 | 0.16 | 0.85 |
| TAH | 0.79 | 0.67 | 1.16 | 0.96 |
Table 19: Current ratio, Quick ratio and operating cash flow ratio (EBET vs. TAH)
Figure 17: Current ratio (EBET vs. TAH) Figure 18: Quick ratio (EBET vs. TAH)
EBET has a greater cushion than TAH when looking at its current ratio and quick ratio. Both of the ratios are quite stable during 2006-2009 which indicates that EBET has more capability than TAH when paying for its debt in the short-term. In fact, as EBET is a small company, the total debt is obviously lower than TAH. Also, as mentioned above, they holding inventory for a long time and have less capital to pay their short-term debt. So, it cannot easily conclude EBET has a better position.
Figure 18: Operating cash flow ratio (EBET vs. TAH)
In addition, the above figure (operating cash flow ratio) put EBET in a lower position. The ratios are lower than 1 and even negative operating ratio in 2007, which shows that EBET may not have enough money or exchangeable securities. Because of the low level of operating cash flow ratio, EBET has lower potential to generate cash and they will have lower probability to expand their business range comparing with TAH.
Solvency Analysis
Liabilities-to-equity ratio = Total liabilities/ Shareholders' equity
Debt-to-equity ratio = Short-term debt + Long-term debt/ Shareholders' equity
Debt-to-capital ratio = (Short-term debt + Long-term debt) / (Short-term debt + Long-term debt + Shareholders' equity)
Interest coverage ratio (earnings basis) = (Net income + Interest expense + Tax expense)/ Interest expense
Interest coverage ratio (cash flow basis) = (Cash flow from operations + Interest expense + Taxes paid) /Interest expense
| 2006 | 2007 | 2008 | 2009 | ||
| Liability/Equity ratio | EBET | 60.29% | 95.10% | 98.42% | 60.58% |
| TAH | 100.24% | 98.76% | 120.94% | 92.89% | |
| Debt/Equity ratio | EBET | 31.92% | 60.87% | 69.38% | 34.35% |
| TAH | 71.95% | 69.16% | 81.91% | 62.56% | |
| Debt /Capital ratio | EBET | 24.18% | 37.84% | 40.96% | 25.56% |
| TAH | 40.11% | 40.89% | 45.03% | 38.48% | |
| Interest coverage ratio (earning basis) | EBET | 5.32 | 4.21 | 1.25 | 2.85 |
| TAH | 5.98 | 4.91 | 2.82 | 5.84 | |
| Interest coverage ratio (cash flow basis) | EBET | 5.11 | -2.24 | 3.70 | 8.51 |
| TAH | 6.9 | 5.9 | 8.1 | 6.75 |
Table 20: Solvency Analysis (EBET vs. TAH)
Figure 19: Liability/ Equity ratio (EBET vs. TAH) Figure 20: Debt/ Equity ratio (EBET vs. TAH)
-Liabilities to equity and Debt to equity ratios
Both of the liability to equity ratio and debt to equity ratio of TAH are higher than EBET throughout the period. It seems that EBET is using less leverage and has a better equity position. In fact as a small company, these ratios are still too high for EBET. Especially in 2008, due to the additional debt taken EBET got 98.42% in liabilities to equity ratio. However, TAH, as a well-established company can push the liability component of their balance sheet structure to higher percentages without getting into trouble.
Figure 21: Debt/ Capital ratio (EBET vs. TAH)
-Debt to capital ratio
The debt-to-capital ratio gives users an idea of a company's financial structure, or how it is financing its operations, along with some insight into its financial strength. The higher the debt-to-capital ratio, the more debt the company has compared to its equity. The above indicates TAH has using more debt financing their company. But as a well established company, this didn't show the weak financial strength as they can pay off the debt.
-Interest coverage ratio
Figure 22: Liability/ Equity ratio (EBET vs. TAH) Figure 23: Debt/ Equity ratio (EBET vs. TAH)
Interest coverage ratio shows the capacity of the firm to pay for the interest. Higher the interest coverage ratios lower the possibility of the company to face financial distress. Lower the ratio, the more the company is burdened by debt expense. Generally, a company's interest coverage ratio is only 1.5 or lower, its ability to meet interest expenses may be questionable. In 2007, the interest coverage ratio (cash flow basis) of EBET is only -2.24, that means they are incapable to pay for the interest. But after 2007, it began to increase due to the increase in operating cash flows.
In contrast, TAH has higher interest coverage ratios than EBET. It is possibly one of the reasons why TAH has such large borrowings - because in a word, they can. Creditors have a high comfort level with companies that can easily service debt interest payments.
| EBET | 2006 | 2007 | 2008 | 2009 |
| Receipts from Customers | 18.60 | 19.04 | 29.79 | 28.63 |
| Payments to Suppliers | -16.19 | -19.99 | -25.95 | -21.22 |
| Dividends Received | 0.00 | 0.00 | 0.00 | 0.00 |
| Interest Received | 0.09 | 0.07 | 0.18 | 0.29 |
| Interest Paid | -0.56 | -0.49 | -1.08 | -0.72 |
| Taxes Paid | 0.00 | 0.00 | -0.68 | -0.04 |
| Other Operating Cash Flow | 0.00 | 0.00 | 0.00 | 0.00 |
| Net Operating Cash flows | 1.93 | -1.36 | 2.26 | 6.94 |
| Add Back Interest paid | 0.56 | 0.49 | 1.08 | 0.72 |
| Add Back Dividends paid | 0.00 | 0.00 | 0.00 | 0.00 |
| Deduct Interest Received | -0.09 | -0.07 | -0.18 | -0.29 |
| Deduct Dividends Received | 0.00 | 0.00 | 0.00 | 0.00 |
| Cash Flow from operation | 2.4 | -0.94 | 3.16 | 7.37 |
Table 21: Cash flow from operation
From the above table, it is easy to find out the cash flow from operation is not stable throughout this period. In 2006 and 2007, it is difficult to cover their financing purposes. In 2007, the interest they needed to pay was 0.49 million, but the cash flow from operation was negative. However, from 2008, the cash received from customers which increased at a slightly greater degree than the cash paid to suppliers. More explicitly, this higher level of cash received from customers can mitigate the impact from the cash outflow for interest and tax payments. Thus, operating cash flow got a gradual increase.
| | 2006 | 2007 | 2008 | 2009 |
| NPAT | 1.75 | 0.86 | -0.16 | 1.68 |
| Dep & Amor | 1.57 | 1.64 | 2.3 | 2.8 |
| Current Asset | 8.94 | 15.59 | 14.07 | 7.59 |
| Current Liability | 9.59 | 13 | 14.04 | 8.18 |
| Working Cap. | -0.65 | 2.59 | 0.03 | -0.59 |
| Change W.C | -4.13 | 3.24 | -2.56 | -0.62 |
| Capital Expense | 1.73 | 3.55 | 3.5 | 5.53 |
| Free Cash Flow | 5.72 | -4.29 | 1.2 | -0.43 |
Table 22: Free Cash flow
Figure 23: Free Cash flow
Free cash flow represents the cash that EBET could generate after laying out the money required to maintain or expand its asset base. Free cash flow is vital as it allows EBET to pursue opportunities such as new product development and acquisitions to maximise shareholder value, and reduce the amount of debt.
Free cash flow has been decreasing from 2006 to 2009. Especially, in 2007 and 2009, EBET saw a negative free cash flow. In 2007, the negative free cash flow which was mainly derived from the purchase of subsidiaries. And in 2009, they spent lot of money on property, plant and equipment investment. Actually, it should be noted that the negative free cash flow does not necessarily mean a negative sign as it implies that EBET has made large investments. These investments may pay off EBET later in the long term.
Section F- Forecasting and Valuation
Forecasting with assumptions including sensitivity analysis
Expected
| Year | 2010 | 2011 | 2012 | 2013 | 2014 |
| Sales Growth | 2.10% | 5.11% | 7.50% | 6.70% | 4.20% |
Historical
| Year | 2006 | 2007 | 2008 | 2009 |
| Sales growth rates | 15.37% | 9.81% | 35.93% | -13.56% |
Table 23: sales of EBET
EBET engages in developing the gaming system and online gambling in Australian market and other countries, hence its performance has a high correlation with what happens in the market. It is also an industry which is affected by a lot of factors both internal and external to the industry performance.
² Taking a look at historical analysis of sales growth, EBET's sales are not stable, especially in 2008 and 2009. But the sales of 2009 ($24.98 million) is still higher than 2007 ($21.26 million).
² A snap short analysis above can same be applied to the future performance noting that miracles can happen in sales growth figures. After 2009 it is expected sales growth to improve to 2.16% and reach a peak point in 2012 before cooling off to a terminal growth of 4.20% in 2014.
There are a number of factors that support the predicted sales growths under the forecasting part, being a variation from internal and external factors as pretty much as indicated in the Porter's Five analysis. An analysis will be done as below year by year.
2010 [2.10%]
The company's fundamentals haven't change that much, only improving for the better in anticipation of a good year ahead.
Significantly affecting EBET sales in 2009 was the market downturn caused by the sub-prime crisis in the USA, and as in 2009 everything has been improving on a positive note, with markets returning to normalise and GDP of various countries especially Australia and US EBET's main markets showing a greater improvement hence an upsurge in the sales growth is expected.
But at the beginning of 2010, the European Debit Crisis happened, and the effect to the Australian market is not clear. But as current situation, the effect to EBET will be limited.
2011 [5.11%]
2011 is the transition period for EBET. The sales growth rate is expected go up to 5.11%, and there are few reasons for that. First, the GDP growth of Australia and US are 3.25% and 4.2% in 2011 (MFC Global, 2010). Second, EBET still seek the opportunities to enter the Asia Market. Third, the new segment of EBET- Media Department will be in the final stage of setup. And it will operate in 2012.
2012 [7.50%]
It is predicted that 2012 is going to be the most exciting year in EBET's future analysis with the sales growth expected to be on their peak during the 2012 financial year, same applies with the economic turnaround which is expected to be back to normal around end of 2011 implying it will affect the 2012 financial period, hence the predicted peak of the sales growth in 2012.
The GDP growth of EBET's two main markets- Australia and US will reach the peak on 2012. Both these two countries will reach 4% GDP growth in 2012. It is good for EBET's further development. Also, EBET will finally enter the Asian Market in 2012.
EBET Ltd is also involved in a number of acquisitions and expansion of a number of products that it offer in its product mix, hence by 2012 it is expected to have acquired at least 2 products which will be reflected into the sales growth. It is expected to increase the market share by revamping the marketing strategy and be more aggressive throughout the year 2012. The new department of EBET- media will start to make profit for the company.
2013 [6.70%]
After reaching the peak in 2012, it is anticipated the sales growth to start cooling down in line with GDP which is expected to be now increasing at a constant rate. After a revamp in EBET's marketing strategies in 2012, it is expected EBET's market to be near saturation in 2013 hence the penetration rate will have slowed down giving an overall growth rate of 6.70% in 2013.
2014 [4.20%]
It is expected that the growth rate for the company to follow the predicted GPD growth rate for Australia, and this is mainly because Australia is where the main market for EBET. Hence, the expected growth rate is expected to fall to a level of 4.20%. The main contributors are the saturation of the products in the market, slowing down economic growth rates and exhaustion of the product mix. And some new techniques may come to the market, competitive in this market will be increased, the market share may drop.
Assumptions for forecasting purpose:
For the purpose of forecasting the financial statements for EBET, some of reasonable assumptions will apply into the operations of the entity in the future. These include:
² Australian tax regime with not change the corporate tax which will stand at 30% into the future. But in the financial statement of EBET, the income tax (note 4) part is quite unclear. EBET makes tax provision every year, but cannot find out the amount of the provision. From the table below, it is clear that it is hard to predict the tax expense for EBET.
| Year | 05 | 06 | 07 | 08 | 09 |
| EBIT | (0.61) | 1.00 | 1.20 | 1.79 | 1.59 |
| Tax Exp. | 0 | 0.75 | -0.41 | -0.34 | -0.13 |
Table 24: tax expense of EBET
In this report, it assumes the tax expense and EBIT are changing in the same way.
² Operating Expense (COGS and SG&A) to Sales ratio will remain at a constant of 80% from now on into the future as a going concern operation, this is reasonable because 80% is the average level for EBET as well as its competitors. Although sometimes SG & A may not be directly related to sales, EBET's COGS contributes most part of its Operating Expense.
² EBIT to Sales ratio will remain at 9.00% into the future, because this is the current level of EBET.
² Current Assets to sales ratio will increase from 30% to 40% into the future because of the economic recovery and business expansion. The working capital will increase slowly in the future, and will be positive in 2011.
² Net Fixed Assets will also grow with sales at a ratio of 4% to sales into the future.
² Net Debt will fluctuate around 1.5 Millions according to the historical data of EBET. Also the equity will increase slightly.
² The Profit Margin will retain around 6%. And NOPAT margin is increased as its sales growth.
| Reported Year | Reported Year | Forecasted Years | ||||
| 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | |
| Sales Revenue | 24.98 | 25.50 | 26.80 | 28.81 | 30.74 | 32.03 |
| Sales Growth | 2.10% | 5.11% | 7.50% | 6.70% | 4.20% | |
| Expense | -19.92 | -20.4 | -21.44 | -23.05 | -24.60 | -25.62 |
| EBITDTA | 5.06 | 5.1 | 5.36 | 5.76 | 6.15 | 6.4 |
| Dep & Amor | -2.80 | -2.8 | -2.95 | -3.17 | -3.39 | -3.52 |
| EBIT | 2.26 | 2.30 | 2.41 | 2.59 | 2.76 | 2.88 |
| Net Interest Expense | -0.45 | -0.40 | -0.30 | -0.55 | -0.50 | -0.47 |
| EBT | 1.81 | 1.9 | 2.11 | 2.04 | 2.26 | 2.41 |
| Tax | -0.13 | -0.25 | -0.40 | -0.33 | -0.45 | -0.52 |
| NOPAT | 1.582 | 1.61 | 1.687 | 1.813 | 1.932 | 2.016 |
| Net Profit | 1.68 | 1.65 | 1.71 | 1.71 | 1.81 | 1.89 |
| Consolidate Balance Sheet | ||||||
| Current Assets | 7.59 | 7.65 | 8.55 | 8.98 | 9.50 | 10.05 |
| Current Liabilities | 8.18 | 7.9 | 8.45 | 8.76 | 8.95 | 9.55 |
| Working Capital | -0.59 | -0.25 | 0.10 | 0.22 | 0.55 | 0.50 |
| Net Fixed Assets | 3.72 | 3.83 | 3.95 | 4.06 | 4.19 | 4.31 |
| Net Debt | 1.55 | 1.50 | 1.30 | 1.59 | 1.70 | 1.30 |
| Equity | 18.90 | 20.55 | 22.26 | 23.97 | 25.78 | 27.67 |
| Free Cash Flow | -0.43 | 1.14 | 0.53 | 0.71 | 1.25 | 0.94 |
Table 25: financial reports 2010-2014 (forecast)
Sensitivity analysis
An addition analysis is made under different scenario.
The sales growth is not as predicted, and in the part, the growth rates are 2% and 10%.
² The sales growth rate=2%
| (millions) | 2010 | 2011 | 2012 | 2013 | 2014 |
| Sales | 25.48 | 25.59 | 26.51 | 27.04 | 27.58 |
| NPAT | 1.53 | 1.56 | 1.60 | 1.62 | 1.65 |
Table 26: Sales and NPAT 2010-2014 (forecast)
² The Sales growth rate=10%
| (millions) | 2010 | 2011 | 2012 | 2013 | 2014 |
| Sales | 27.48 | 30.22 | 33.29 | 36.57 | 40.23 |
| NPAT | 1.65 | 1.81 | 1.93 | 2.19 | 2.41 |
Table 27: Sales and NPAT 2010-2014 (forecast)
Valuation: Free Cash Flow Model and Abnormal Earning Model
Useful data calculated in former sections:
| Year | 2010 | 2011 | 2012 | 2013 | 2014 |
| Sales Growth | 2.10% | 5.11% | 7.50% | 6.70% | 4.20% |
² NOA is expected growing with the same growth rate as sales.
² Net Financial presented as long-term debt.
| Reported Year | Forecasted Years | |||||
| 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | |
| Income Statement | ||||||
| Sales Revenue | 24.98 | 25.50 | 26.80 | 28.81 | 30.74 | 32.03 |
| NOPAT | 1.59 | 1.61 | 1.69 | 1.81 | 1.93 | 2.02 |
| Net Profit | 1.68 | 1.65 | 1.71 | 1.71 | 1.81 | 1.89 |
| Consolidate Balance Sheet | ||||||
| Net Operating Assets | 22.17 | 22.64 | 23.80 | 24.90 | 25.58 | 26.66 |
| Net Financial Assets | -3.27 | -2.09 | -1.54 | -0.93 | 0.20 | 1.01 |
| Equity | 18.90 | 20.55 | 22.26 | 23.97 | 25.78 | 27.67 |
| Cash Flow Statement | ||||||
| NOPAT | 1.59 | 1.61 | 1.69 | 1.81 | 1.93 | 2.02 |
| Change in NOA | 0.47 | 1.16 | 1.10 | 0.68 | 1.08 | |
| Free Cash Flow | 1.14 | 0.53 | 0.71 | 1.25 | 0.94 | |
² Net income accrues to equity holders and is used to cover dividend and increase shareholders equity; here, dividend is 0 as former recorded in EBET's reports. So, change in equity equals to net profit.
² FCF by indirect method=NOPAT+/-ΔNOA
² WACC=9.22% (calculated in former sections)
Y1=FCF1/ (1+WACC)1=1.14/(1+0.0922)1=1.0438
Y2=FCF2/ (1+WACC)2=0.53/(1+0.0922)2=0.4443
Y3=FCF3/ (1+WACC)3=0.71/(1+0.0922)3=0.5449
Y4=FCF4/ (1+WACC)4=1.25/(1+0.0922)4=0.8783
Σ=2.9113
Y5=0.94/ (0.0922-0.05)ⅹ1/(1+0.0922)4=15.6533
Value of firm=18.5646
Less: Market value of debt 3.27
Value of Equity= 15.2946
No. of shares=217.8061
Share price=0.07
In conclusion, with FCF model, the value pre share of eBet is $0.07, which is a little bit lower than the current market price of $0.08. It can be concluded that eBet current share price is overvalued.
Abnomal Earnings Valuation
| Reported Year | Forecasted Years | |||||
| 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | |
| Income Statement | ||||||
| Sales Revenue | 24.98 | 25.50 | 26.80 | 28.81 | 30.74 | 32.03 |
| NOPAT | 1.59 | 1.61 | 1.69 | 1.81 | 1.93 | 2.02 |
| Net Profit | 1.68 | 1.65 | 1.71 | 1.71 | 1.81 | 1.89 |
| Consolidate Balance Sheet | ||||||
| Net Operating Assets | 22.17 | 22.64 | 23.80 | 24.90 | 25.58 | 26.66 |
| Net Financial Assets | -3.27 | -2.09 | -1.54 | -0.93 | 0.20 | 1.01 |
| Equity | 18.90 | 20.55 | 22.26 | 23.97 | 25.78 | 27.67 |
| Abnomal Earnings | -0.0926 | -0.1847 | -0.3424 | -0.4000 | -0.4869 | |
² Abnomal Earnings=NPt-(rⅹEt+1), r presents cost of equity, equals to 0.0922;
Y1=1.65-(0.0922ⅹ18.90)=-0.0926
Y2=1.71-(0.0922ⅹ20.55)=-0.1847
Y3=1.71-(0.0922ⅹ22.26)=-0.3424
Y4=1.81-(0.0922ⅹ23.97)=-0.4000
Y5=1.89-(0.0922ⅹ25.78)=-0.4869
² Existing Book Value: B0=18.90
Y1=1.65-(0.0922ⅹ18.90)/(1+0.0922)1=-0.0848
Y2=1.71-(0.0922ⅹ20.55) /(1+0.0922)2=-0.1548
Y3=1.71-(0.0922ⅹ22.26) /(1+0.0922)3=-0.2628
Y4=1.81-(0.0922ⅹ23.97) /(1+0.0922)4=-0.2811
Σ=-0.7835
Y5=-0.4869/(0.0922-0.05) /(1+0.0922)4=-8.1081
Value of Equity=18.90-0.7835-8.1081=10.0084
No. of shares=217.8061
Share price=0.05
In conclusion, with FCF model, the value pre share of eBet is $0.05, which is lower than the current market price of $0.08. It can be concluded that eBet current share price is overvalued.
Sensitive Analysis
Different scenarios are applied in conducting sensitivity analysis, which includes most favorable and least favorable conditions. These conditions affect sales growth rate and eventually impact the value of eBet.
| Sales Growth Rate | Share Price under FCF Model | Share Price under Abnormal Earning Model |
| 10% | 1.08 | 0.91 |
| 2% | 0.48 | 0.32 |
In best case scenario, with better economic environment and expansion strategy such as offer new product, eBet has a higher sales growth rate 10%. The estimated share price would be $1.08 (FCF model) and $0.91 (Abnormal Earning Model).
For the worst case scenario, the economic keep getting worst, which reduces SRH's sales growth rate to 2%. The estimated share price would be $0.48 (FCF model) and $0.32 (Abnormal Earning Model).
Conclusion
Based on strategy analysis, accounting analysis and financial analysis, the report evaluates that the equity value of EBET showing an application and linkage between financial accounting analysis and business valuation.
The industry analysis shows that the profitability of casino industry is highly competitive as a result of price wars. The profitability of EBET is at moderate level as it highly driven by buyers' and suppliers' bargaining power.
On that basis, accounting analysis was carried out to assure the quality of EBET's financial reports. Potential red flags were identified due to lack of adequate explanations and information disclosures from EBET's reports. And it finds that the depreciation rate is significant higher than its competitors. Thus, adjustments have been carried out to reflect the true situation of EBET.
Based on the above analyses, a forecast has been produced on EBET's condensed financial statements for the next five years. The valuation based on Free Cash Flow Model and Abnormal Earning Model came to the conclusion that EBET's share value should be $0.07 (from FCF Model) or $0.05 (from Abnormal Earning Model), while its current share price on 20th May 2010 is at $0.08. Thus, EBET's share price is currently a little bit overvalued. From the investment perspective, EBET may be not a good choice for investing.
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Reserve bank of Australia, May 2010, Economic Outlook, http://www.rba.gov.au/publications/smp/2010/may/pdf/eco-outlook.pdf
PKF (2010) PKF Australia, from http://www.pkf.com.au/Pages/Home.aspx
Reserve Bank of Australia, May, 2010, Minutes of the Monetary Policy Meeting of the Reserve Bank Board, http://www.rba.gov.au/monetary-policy/rba-board-minutes/2010/04052010.html
TAH annual report (2009) from Fin analysis
TAH annual report (2008) from Fin analysis
TAH annual report (2007) from Fin analysis
TAH annual report (2006) from Fin analysis
TAH annual report (2005) from Fin analysis
Treasure of the Commonwealth of Australia, (27 January 2010), IMF World Economic Outlook Update, from http://www.treasurer.gov.au/DisplayDocs.aspx?doc=pressreleases/2010/004.htm&pageID=003&min=wms&Year=&DocType
[1] Technical assumptions include A$ at US$0.91, TWI crude oil price at US$87 per barrel and Tapis crude oil price at US $90 per barrel
[2] Few companies listed in Australia engage in gambling, we only find 11 companies in this industry, so we assume the average of these 11 companies is the average of this industry.
[3] LAS is Suspended in 2009.
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