Carrefour SA is a France based distribution retail group

Carrefour SA is a France based distribution retail group

Carrefour SA is a France based distribution retail group and is considered as one of the largest supermarkets and hypermarkets in the world. Carrefour operates in four geographical segments: Asia, Latin America, France and the rest of Europe. The multinational company operates more than 12,000 stores and e-commerce sites in more than thirty counties across the world. The company stores come in a variety of channels and formats such as supermarkets, hypermarkets, hyper cash stores, cash and carry stores, e-commerce and drive. The company offers a wide range of products including bakery products, fresh fish, and meat prepared on-site as well as consumer products and nonfood products.

Carrefour SA stock price is trading today, 13/04/2020, at 14.22 Euro per share in the security market under the London stock exchange (Yahoo Finance, 2020). The aim of this project is to evaluate the target stock price of Carrefour SA by the end of 2020. Discounted cash flow (DCF) valuation method will be used through forecasting of the company free cash flows. The historical trend will be used to forecast future cash flows. The comparison between the target price and the present price will be used to give the conclusion and recommendations of the investment.

The discounted free cash flow (DFCC) model is used as the main technique to assess the financial performance. The available free cash flows are projected for 10 years using the terminal value. To get the present value of future cash flow we discount the projected free cash flows using the cost of capital. To forecast the long term-term performance use the company we use the historical growth of sale and other variable ratios. The discounting cash flow method assumes that the cost of capital will remain constant in the future. The cost of capital is applied as the discounting rate which is equal to the weighted average cost of debt and cost of equity. The capital pricing model is used to calculate the cost of equity while the cost of debt is issued by the credit rating agency. Enterprise value is equal to the present value of the forecasted cash flows.  The relative method/ multiple analyses will also be done to compute the market value of the company. This will involve using the price ratios of the peer companies to estimate the value of the selected company. Finally, the sensitivity analysis will be done.

The structure of this report is as follows. Part three will introduce data and variables used for the discounting cash flow model, part fou the multiple analysis and methodology for modeling and forecasting. Part five of the DCF model findings, the target price and analyze target price sensitivity to the assumption. Part six will present the conclusion and recommendations on the investment plan.

Literature review

2.1 valuation process

The valuation process is very complex and different models are used to value a company, this means that each model’s conclusion is different since each valuation model applies its own assumptions (Fernandez 2013). It is not possible to conclude which model is better than the other one however assumptions applied in some models are considered to be more realistic. Corporate valuation play fundamental role in helping the shareholders, investors and managers to make investment decision. Company valuation helps the managers to make strategic decisions.

According to Mota et al (2012) there three models are commonly used corporate valuation which includes the Discounted Cash Flow Model (DCF), relative variation method and Economic Value Added – Market Value Added (EVA-MVA). In the case of the relative model, all data gathered to make the comparison must be retrieved from the database.  In this case, Bloomberg was used as a source of financial data to support the assumption for projecting future cash flows and company valuation. Bloomberg give standardize financial statement which helps comparison between peers and sector benchmarks. The Discounted Cash Flow Model (DCF) model of valuing a company is based on the expected cash flows. In most cases5 years future cash flows are used.  More than five years create huge risk relative to the future performance, future investment and financial manager sensitivity. Such long time may not give realistic results.

Microeconomic data such as real gross domestic growth and inflation growth are used to forecast future growth of the company. To get the company return on stock price the data for share price fluctuation is downloaded from Yahoo finance. The 10- year U.S. treasuries bonds yield are used to ascertain the risk-free rate.

2.2 Discounted Cash Flow Model

2.3 Economic Value Added – Market Value Added

2.4 Relative model/ Multiples