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FNCE 6006

Equity Analysis and Portfolio Management

Question 1

You work as an equity analyst for a Singapore stockbroking firm. Your firm's economist team recently published a global economic outlook for the coming year. Key points in their Report are:

· The inflation challenge varies across economies. For example, consumer price inflation has remained low in China even though producer price inflation has been rising. Central banks in Europe and Japan still see the recent pick-up in inflation as transitory, while inflation seems to be more of a challenge in the US. Overall, headline inflation worldwide is likely to come off the highs of 2022, but the undercurrent of firmer inflation could continue.

· However, given the strong recovery momentum and some supply-side and labor market distortions, core inflation could remain above the Federal Reserve's (Fed) target of 2% for much of 2023. Rising inflation could pressure the Fed to continue raising interest rates until the end of 2023.

· Due to inflationary pressures, Global economic growth has been revised to 1 to 2% for 2023. The economy has recovered strongly from the covid-19 pandemic, with GDP growth of 7.6% in 2021. Projected growth for globally  is 2 to 3% range for 2022.

Using the information provided, appraise the outlook for interest rates in Singapore for the coming year. You must include a discussion of how the Singapore central bank manages inflation and how it affects domestic interest rates. (20 marks)

Question 2

a. You are required to analyse Singapore Airlines that is listed on the Singapore Stock Exchange (SGX). Examine the likely impact of a rising interest rate environment with moderating economic growth on the airline sector. (10 marks)

b. Appraise Singapore Airline’s revenue and profit outlook over the next five years considering economic, industry and company factors. State one of each key strength and weakness of SIA and one of each opportunity and threat that the company is facing. (20 marks)

c. Estimate Singapore Airline’s average revenue growth using the company’s data over the past ten years (See Excel File) (10 marks) (Total = 10 + 20 + 10 = 40 marks)

Question 3

Starting with your outlook of SIA’s revenue growth (in Question 2), use a dividend discount model to compute SIA’s intrinsic share price. You may assume that SIA resume paying dividends for FY2024 (year ending 31 Mar 2024) and grow at the historical average rate for the next five years. Assume at cost of equity of 12% and a WACC of 10% for SIA. Use a corporate tax rate of 18%. Also assume a terminal growth rate of 2% after the five years. 

Submit your workings by embedding the excel spreadsheet in your word document.

What is your investment recommendation for SIA (as of the date you finalized your valuation of SIA’s shares)?

Carry out sensitivity analysis by allowing the estimated earnings growth rate to increase and decrease by one percent. Similarly, allow the discount rate to increase and decrease by one percent. Explain how this information is used to improve your confidence in your recommendation. (Total = 40 marks) (Total = 20+40+40 = 100 marks)