valuation report

Author: Patrick DaltonPrepared for Charlene Sullivan

Valuation Report: Beccle’s H.C.C. Limited; Boot’s Store

Objective: Develop a detailed report creating a Fair Market Value for a single store, Beccle’s H.C.C. Limited, until year-end, 30 September 2015 from year end, 30 September 2006.

Company Description: Boots is a subsidiary of Walgreens with stores located across the United Kingdom as well as Ireland. Some years back, Boots merged with Alliance Unicom to become Boots Alliance in 2006. In 2012, Walgreens purchased 45% of Boots Alliance and then exercised their right to purchase the remaining 55% in 2014. Walgreens Boots Alliance in the U.K. and Ireland provide health and beauty products to consumers.

Purpose: The purpose of the valuation is to explore a potential acquisition of a single Boot’s retail store. The report is being prepared for Dr. Charlene Sullivan dated 10/24/2016.

Scope of Work: The analysis considers facts and data presented to me. The analytical opinions and assumptions would most likely be different if another valuation date or method were used. No hypothetical assumptions were made in this valuation analysis.

Valuation Procedure:

Examined all financial documents leading back to January 2006 Constructed cash flows statement

o Calculated EBIAT (Earnings Before Interest, Amortization, and Tax)o Found Unlevered Cash Flows, or Cash flows from Operations (CFO), by subtracting the

change in Net Working Capital and adding back Deferred Tax Assets and Depreciationo Forecasted 2016 cash flows using the assumed 0% growth rate

Estimated WACC for Boots using company comparables: Walgreens Boots Alliance and CVS Pharmacy

o Included additional country risk factor (U.K.)o Utilized unlevered betas to eliminate capital structure bias

Calculated the terminal value portion of company valuation using WACC, growth rate, and 2016 cash flows

Discounted all cash flows back to the beginning of 2016/end of 2015 Enterprise Value was calculated using Cash Flow from operation. Both the perpetuity approach

and multiple approach were used to come up with a range of values. The multiple used was EV/EBITDA from industry comparables.

Further comparable analysis was completed using multiples: P/E, Price/Sales, and Price/Book. Sensitivity Analysis was performed in order to show the change in enterprise and terminal

values based on our assumptions.

Balance Sheet


2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 £ £ £ £ £ £ £ £ £ £

Fixed assets Tangible assets 105220 110594 122401 12635 7649 10737 13028 17797 13045 4177Current assets Stocks 103834 110453 105672 100940 112964 114651 113874 109818 102245 91889Debtors 336147 357579 360441 380451 271712 477329 432036 390338 416416 270601Cash (bank and in hand) 229869 198012 151823 143879 295089 64513 126182 82628 235059 491227 Total Current Assets 669850 666044 617936 625270 679765 656493 672092 582784 753720 853717Current Liabilities 513100 535323 520811 453342 561159 580210 587043 594615 760799 851928Net Current Assets 156750 130721 97125 171928 118606 76283 85049 -11831 -7079 1789Total Assets less Current Liabilities 261970 241315 219526 184563 126255 87020 98077 5966 5966 5966Provisions for LiabilitiesDeferred taxation 7934 10642 11186 1614 403 775 887 0

254036 230673 208340 182949 125852 86245 97190 5966 5966 5966Capital and ReservesCalled up equity share capital 150 150 150 150 150 150 150 150 150 150Profit and Loss Account 253886 230523 208190 182799 125702 86095 97040 5816 5816 5816Shareholders' funds 254036 230673 208340 182949 125852 86245 97190 5966 5966 5966

Key Takeaways:

Original Balance sheet contained higher cash and current liabilities due to current liability accrual of rent payments

o This balance sheet excludes that accrual in order to provide a more accurate valuationo Starting in 2013, ₤50,000 each year (accumulating) was taken out each year to eliminate

bias from a lack of rent payments Total asset growth higher than total liability growth resulting in increased book value

Profit and Loss Statement

Key Takeaways:

Profits for Boot’s store reached maximum during 2009 Profits have gradually declined since then

Profit and Loss Summary - Boot's2015 2014 2013 2012 2011 2010 2009 2008 2007 2006

Turnover 1,820,319£ 1,857,836£ 1,835,199£ 1,985,860£ 2,246,117£ 2,233,859£ 2,218,167£ 2,025,380£ 2,197,734£ 2,294,960£ Cost of Sales 1,270,323£ 1,321,200£ 1,308,994£ 1,415,631£ 1,694,454£ 1,628,968£ 1,603,052£ 1,535,753£ 1,561,759£ 1,633,079£ Gross profit 549,996£ 536,636£ 526,205£ 570,229£ 551,663£ 604,891£ 615,115£ 489,627£ 635,975£ 661,881£ Administrative expenses 526,864£ 510,739£ 493,352£ 498,933£ 501,944£ 504,629£ 502,010£ 496,091£ 641,043£ 665,115£ Total Operating Profit 23,132£ 25,897£ 32,853£ 71,296£ 49,719£ 100,264£ 113,105£ 6,364-£ 4,918-£ 2,734-£ Profit on ordinary activities 25,423£ 28,045£ 32,963£ 71,371£ 49,784£ 100,327£ 114,185£ -£ -£ 77£ Tax on profit from normal activities 2,060£ 5,712£ 7,572£ 14,274£ 10,177£ 21,068£ 22,961£ -£ 77£ Profit for the financial year 23,363£ 22,333£ 25,391£ 57,097£ 39,607£ 79,259£ 91,224£ -£ -£ -£

(Gross Profit Margin) 30.51% 29.24% 29.09% 29.17% 24.86% 27.08% 27.73% 24.17% 28.94% 28.84%


In 2015, Boot’s realized a gross profit margin of over 30% for the first time which allowed them to increase their profits from 2014

o Sales/Turnover decreased from 2014 to 2015 but decreased Cost of Sales allowed for higher profits

o Please note gross profit margin shown at bottom of table

Statement of Cash Flows

Assumptions and Limiting Constraints throughout Valuation:

Tax Rate = 20% (Given in Financial Documents) WACC = 8.18% (discussed later in report) Growth Rate = 1.5% (description below)

The future growth rate used throughout this analysis was decided at 1.5% for various reasons. First, as I studied financial documents from previous years, the sales had gradually been declining. Boot’s was experiencing significantly higher sales in 5-6 years ago. Although the sales have been gradually declining, we believe the data is showing a plateau effect. In combination with the plateau of declining sales, Boot’s is starting to experience greater efficiencies in Gross profit metrics. Even if sales continue to decline, enhanced gross profit percentages could offset the decline. With the combination of inflation into this mix, we believe the declining sales and gross profit efficiencies will cancel one another out but we expect to see a growth rate mirroring the inflation rate.

In addition, I researched the political factors in play in the England market for Pharmacies and retail drug stores. Similar to the United States, there is a lot of downward pressure on the price of drugs from the media and consumers. A decrease in the prices of drugs sold will ultimately impact revenue which will lead to worsened gross profit metrics. Reacting to the media, the government in England has imposed regulations to keep drug prices low. Through further analysis, I found that, on average, drug prices in

Year 2016 (Est.) 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006₤ ₤ ₤ ₤ ₤ ₤ ₤ ₤ ₤ ₤ ₤

Turnover (Rev.) 1,847,624 1,820,319 1,857,836 1,835,199 1,985,860 2,246,117 2,233,859 2,218,167 2,025,380 2,197,734 2,294,960 Cost of Sales 1,289,378 1,270,323 1,321,200 1,308,994 1,415,631 1,694,454 1,628,968 1,603,052 1,535,753 1,561,759 1,633,079 Gross Profit 558,246 549,996 536,636 526,205 570,229 551,663 604,891 615,115 489,627 635,975 661,881 Administrative Expenses (Less Depreciation) 524,427 516,677 498,932 483,897 494,738 498,856 499,886 497,025 490,120 638,767 662,821 EBITDA 33,819 33,319 37,704 42,308 75,491 52,807 105,005 118,090 (493) (2,792) (940) Less Depreciation 10,340 10,187 11,807 9,455 4,195 3,088 4,743 4,985 5,971 2,276 2,294 EBIT 23,479 23,132 25,897 32,853 71,296 49,719 100,262 113,105 (6,464) (5,068) (3,234) Taxes 4,696 2,060 5,712 7,572 14,274 10,177 21,068 22,961 - - 77 EBIAT (NOPAT) 18,783 21,072 20,185 25,281 57,022 39,542 79,194 90,144 (6,464) (5,068) (3,311) Depreciation and Amortization 10,340 10,187 11,807 9,455 4,195 3,088 4,743 4,985 5,971 2,276 2,294 Deferred Tax Assets 8,053 7,934 10,642 11,186 1,614 403 775 887 - - - Change in Net Working Capital (20,965) (20,655) (21,789) (34,963) (58,308) (39,235) 11,057 (92,111) - - (5,966) Unlevered CFO (Operations) 16,211 18,538 20,845 10,959 4,523 3,798 95,769 3,905 (493) (2,792) (6,983) Less: Capital Expenditures* - - - - - - - - - - - Less: Purchases of intangible assets - - - - - - - - - - - Unlevered FCF 16,211 18,538 20,845 10,959 4,523 3,798 95,769 3,905 (493) (2,792) (6,983) Present Value 14,985 18,538 20,845 10,959 4,523 3,798 95,769 3,905 (493) (2,792) (6,983)


England are lower than those of the United States. As our analyzed store is in England, the profitability potential is not as high which contributes to the 1.5% future growth rate assumption which is slightly lower than average GDP growth.

Range of Valuation:

Boot’s Alliance is worth between 240₤ ,000 – ₤707,000 according to my analysis.

The range given above was found through the perpetuity approach through discounting cash flows, the EBITDA multiple approach, and using various financial multiples from similar companies in the industry.

The following show the calculations for each of the valuations:

Unlevered FCF in last forecast period (2016) 16,211£ FCF(t+1) 16,211£ Long term growth rate 1.5%Terminal Value 242,583£ PV of Terminal Value 224,235£ Present value of stage 1 cash flows 14,985€ Enterprise Value 239,220£

Perpetuity Approach

Primarily, the perpetuity approach returns the smallest valuation but it is my recommendation to understand it to be the most accurate. Using past financial documents to forecast cash flows, I believe the perpetuity approach through finding the terminal value is the most precise valuation. Additionally, I want to point out that this valuation is similar in value to the book value. Boot’s book value in 2015 was about ₤260,000 which shows the market and book value of this store are very similar.

Terminal year EBITDA 33,319€ Terminal value EBITDA multiple 11.35Present value of terminal value 378,170.65€ Present value of stage 1 cash flows 14,764€ Enterprise Value 392,934.19€

Exit EBITDA Multiple Approach

The EBITDA multiple approach uses the same cash flows as the valuation above but is almost double the value of the perpetuity approach. Due to a large difference in EBITDA and EBIT, Boot’s multiple approach valuation using EBITDA could be overstated. Through further research, I found that Boot’s depreciation as a percentage of EBIT was more significant than the majority of the competitors in the industry which is a reason for seeing a significant increase in the enterprise value through the EBITDA multiple approach.


Comparable Multiple: Boot's Value (2016 Forecasted) Valuation Range

EV/EBITDA 11.63 33,319£ 387,500£

P/E Ratio 19.70 18,506£ 364,560£

Price/Book 2.70 261,970£ 707,319£

See below a description of the similar companies used in this analysis. Using various financial metrics, I found multiples to show comparable valuations. The multiple approach can be very beneficial as it takes similar companies operating in the same industry and applying their financial metrics to your cash flow analysis. One drawback of this valuation technique is that assumptions such as growth rate are left out. Especially in our case where the growth rate is 1.5%, comparable company analysis is not always precise because companies typically have growth rate assumptions slightly higher than this. In addition, another drawback is that the Boot’s valuation is looking at one store’s cash flows and metrics and the comparables are full corporations. Furthermore, the EV/EBITDA is a review of the previous table. P/E metric is a common multiple used in company valuations. The valuation is still higher than the perpetuity approach that was touched on earlier. One reason for this difference could be the conservative 1.5% growth assumption that is significantly impacting the valuation given by the perpetuity approach. Next, the price/book metric returns a valuation even greater than P/E. At ₤707,319, the Price/Book valuation is the largest out of all valuation methods. Through further analysis, a potential cause for this outlier valuation is that assets have grown at a much faster rate than liabilities over the past 4-5 years. The change in assets is almost a complete result of cash increases over the past 4 years while liabilities are growing minutely. Since Boot’s hasn’t been billed for their rent in about 3 years yet they are still accruing the liability, assets and liabilities should be moving in tandem. The book value multiple is overstating Boot’s value due to the excess cash Boot’s has on their balance sheet. Multiples retrieved from Morningstar analysis. Other financial information retrieved from YahooFinance.

Industry Overview and Analysis

Industry Overview (retrieved from IBIS World)

Boot’s is a member of the Retail Drug and Pharmacy Industry. Since 2011, this industry has experienced 2.7% growth year over year. The market size is currently right under $300 billion which is equivalent to approximately ₤245 billion. Over the past few years, this industry has gained a lot of interest as Big Pharma companies have come under fire for charging outrageous prices for the drugs. Although companies in the Retail Drug industry have little impact on the selling price of the drugs they sell, the media is upset with them because they are the face of the drug manufacturing companies. The retail drug companies are the ones directly selling to consumers. On the other hand, innovation has soared in the Pharmaceutical industry over the past 10 years. With more competition, retail drug stores are better off because they have leverage with pharmaceutical companies. Pharma companies must offer the retail side discounts and rebates so that the retail store will hold their product in stores. Additionally, on the political side, healthcare reform in the United States is providing many consumers with health insurance. More consumers on health insurance will ultimately lead to an increase in the volume of


pharmaceutical sales. Over the next 5 years, the industry is expected to grow at least at the same rate of experienced growth since 2011.

The main competitors in this industry consist of CVS Pharmacy, Walgreens Boot’s Alliance and RiteAid Corporation. In my analysis of these companies, I decided to use only CVS and Walgreens as comparable companies. RiteAid fell to a fraudulent case some years back and their unethical actions are still effecting their financials to this day ultimately effecting all of their financial metrics and multiples. Another reason I decided RiteAid didn’t pose as an accurate comparable was because of their significant debt leverage. RiteAid is leveraging their company with debt at much higher levels than the rest of the industry. Lastly, the competitive landscape is made up of a small number of companies. These 3 companies listed above make up for about 65% of the total market revenue. It is difficult for small competitors to spring up due to economies of scale and the inability to negotiate contracts with Big Pharma companies. Information about financials and operations from both CVS and Walgreens were retrieved from their company websites, YahooFinance, and YCharts.com.

Comparable Companies:

Walgreens Boot’s Alliance (WBA): Our Boot’s store is a member of Walgreens Boot’s Alliance. In addition to the store we analyzed, Walgreens boasts over 13,000 stores worldwide. With a market cap of $85 billion, Walgreen’s is the second largest company in the industry. The overall corporation was used in my valuation because the Boot’s store is a member of this corporation. I wanted to analyze how the single store related to the corporation as a whole. Additionally, as a member of Walgreen’s, Boot’s financial metrics should closely reflect those of WBA. Lastly, Walgreen’s has seen inconsistent growth over the past few years. Although on average, Walgreens has grown at approximately 3% year over year since 2010.

CVS Pharmacy (CVS) – CVS has a market cap of $92B which makes them the largest corporation in the industry. With similar metrics all around to Walgreens, CVS was used as a comparable to show a company that Boot’s was not a part of. Earnings for CVS have grown at a little bit faster rate than its main competitor, Walgreens. CVS has realized 4-6% growth since 2010. Later on in the valuation report, I use multiples from these two comparables to value Boot’s. Please note that the growth rates for these two organizations are higher than the assumed growth rate for Boot’s which may lead to overstatements in valuation.

WACC Calculation:

Adjusted Risk-Free Rate:

Walgreens Boots Alliance CVS Pharmacy Comparable AverageCredit Rating BBB BBB+

Respective Cost of Debt 2.25% 2% 2.13%

2.625%Adjusted Risk Free Rate (Risk Free Rate + Country Risk Premium of 0.5%)


Weighted Average Cost of Capital:

Walgreens Boots Alliance CVS Pharmacy Comparable AverageTicker WBA CVS

Total Debt (Book Value) 13,530,000,000$ 28,640,000,000$ Market Cap (Equity) 85,120,000,000$ 99,500,000,000$

Debt/Equity 0.4319 0.8237 0.628Debt Percentage 13.72% 22.35% 18.03%

Equity Percentage 86.28% 77.65% 81.97%Beta (levered) 1.12 0.88 1.00

Beta (Unlevered) 0.832 0.530 0.681ROE (CAPM) 9.35% 7.91% 8.63%

WACC 8.9% 7.5% 8.18%

The WACC (weighted average cost of capital) I am assuming throughout my analysis is 8.18% and the calculations on how arrived at that value are shown above. Primarily, using the cost of debt associated with the credit ratings of our comparables, Walgreens Boots Alliance and CVS Pharmacy, the risk free rate was found. In addition, as the Boot’s store is located in England, there is a country risk premium of 0.5% to account for the risk associated with international investments.

Furthermore, in the next table we see various metrics including Debt/Equity and betas. In order to eliminate the leverage bias, we unlevered the beta in our analysis. Using CAPM, Return on Equity was calculated and then the average was taken between CVS and Walgreens. Lastly, the WACC for each comparable was calculated using the capital structure of their companies and our 8.18% WACC assumption is the average of the two comparables. Refer to the table on the right which shows assumptions made throughout these calculations. Return on Debt assumption was made by analyzing the balance sheets of comparables and our analysis kept consistent the 20% tax rate from our single Boot’s store. The Market Risk Premium of 6% is a historical value.

Return on Debt: 7.50%AfterTax Debt Return: 6.00%Tax Rate: 20%Risk Free Rate: 2.63%Market Risk Premium: 6.0%

Assumptions:


Sensitivity Analysis

Growth Rate and WACC:

The WACC that I used was 8.18%, which was found through comparable company calculations. Throughout my analysis, I am assuming a 1.5% growth rate in future cash flows. Through sensitivity analysis, I can show how the Terminal Value of the undiscounted 2016 cash flow is affected. Please note, the outputs above refer to the undiscounted terminal value of the forecasted 2016 cash flow and do not represent enterprise value for this Boot’s store. Enterprise Value is composed using this terminal value but for analysis purposes, I wanted to see the direct effect on the terminal value when changing these two variables. From the analysis above, the growth rate has the most significant effect on the terminal value. Although our WACC has an influence, the terminal value can change up to a factor of 4-times what we see with a growth rate of -1% compared to 3%. Additionally, growth rate has a larger effect on the terminal value when the WACC is smaller. A lower WACC outputs a larger terminal value which will ultimately create more variance with changes in our growth rate assumption.

Growth Rate and PV of Final Forecasted Cash Flow:

In my valuation analysis, I assumed a constant growth rate of 0% and the Present Value of the last year’s (2016) cash flow was ₤14,985. With potential variance in the forecasted cash flow as well as the future growth rate, I have provided a sensitivity analysis for these two variables. The outputs above reflect the Enterprise Values of the store. Please note, similar to above, the change in growth rate significantly

Terminal Value (Undiscounted): 242,583.29€ -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0%5.00% 270,186$ 294,749$ 324,223$ 360,248$ 405,279$ 463,176$ 540,372$ 648,447$ 810,559$ 5.50% 249,403$ 270,186$ 294,749$ 324,223$ 360,248$ 405,279$ 463,176$ 540,372$ 648,447$ 6.00% 231,588$ 249,403$ 270,186$ 294,749$ 324,223$ 360,248$ 405,279$ 463,176$ 540,372$ 6.50% 216,149$ 231,588$ 249,403$ 270,186$ 294,749$ 324,223$ 360,248$ 405,279$ 463,176$ 7.00% 202,640$ 216,149$ 231,588$ 249,403$ 270,186$ 294,749$ 324,223$ 360,248$ 405,279$ 7.50% 190,720$ 202,640$ 216,149$ 231,588$ 249,403$ 270,186$ 294,749$ 324,223$ 360,248$ 8.00% 180,124$ 190,720$ 202,640$ 216,149$ 231,588$ 249,403$ 270,186$ 294,749$ 324,223$ 8.18% 176,592$ 186,765$ 198,181$ 211,083$ 225,782$ 242,682$ 262,317$ 285,408$ 312,957$ 9.00% 162,112$ 170,644$ 180,124$ 190,720$ 202,640$ 216,149$ 231,588$ 249,403$ 270,186$ 9.50% 154,392$ 162,112$ 170,644$ 180,124$ 190,720$ 202,640$ 216,149$ 231,588$ 249,403$

Growth Rate

WACC

Enterprise Value (Perpetuity) 239,219.77£ -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0%12,000£ 142,680$ 150,205$ 158,650$ 168,195$ 179,068$ 191,567$ 206,089$ 223,166$ 243,538$ 15,000£ 178,350$ 187,757$ 198,313$ 210,243$ 223,834$ 239,459$ 257,611$ 278,958$ 304,423$ 18,000£ 214,020$ 225,308$ 237,976$ 252,292$ 268,601$ 287,351$ 309,134$ 334,749$ 365,308$ 21,000£ 249,690$ 262,860$ 277,638$ 294,341$ 313,368$ 335,243$ 360,656$ 390,541$ 426,192$ 24,000£ 285,360$ 300,411$ 317,301$ 336,389$ 358,135$ 383,135$ 412,178$ 446,333$ 487,077$ 27,000£ 321,030$ 337,962$ 356,963$ 378,438$ 402,902$ 431,027$ 463,701$ 502,124$ 547,961$ 30,000£ 356,700$ 375,514$ 396,626$ 420,486$ 447,669$ 478,919$ 515,223$ 557,916$ 608,846$ 33,000£ 392,370$ 413,065$ 436,289$ 462,535$ 492,436$ 526,811$ 566,745$ 613,707$ 669,731$ 36,000£ 428,040$ 450,616$ 475,951$ 504,584$ 537,203$ 574,702$ 618,268$ 669,499$ 730,615$ 39,000£ 463,711$ 488,168$ 515,614$ 546,632$ 581,969$ 622,594$ 669,790$ 725,290$ 791,500$

Final PV Forecast Cash Flow (2016)

Growth Rate


impacts the enterprise value. The difference between a -1% and 3% growth rate changes the Enterprise Value by a multiple of between 4 and 5. Additionally, our forecasted cash flow falls on the lower end of the sensitivity spectrum. If this Boot’s store experiences better than expected sales or enhances efficiencies, it could see much higher valuations even with the assumed future growth rate of 1.5%. Currently, like mentioned earlier, this valuation with the assumptions of a 1.5% growth rate and a cash flow of ₤14,985 represents a value very similar to Boot’s book value.

Sources of Information (External):

Yahoo.com/finance Financials.morningstar.com Stock-analysis-on.net Ycharts.com Apple DCF Valuation Booklet IBIS World