7up was one of those stocks are included in my buy list as at March this year. Then it was trading for under N86 and I thought a price of N79 would be a bargain. It never dropped below N82 since then. Today the stock trades at a price of N102.5 following its impressive full year result for 2014. I actually projected a 100% increase in the company’s earnings per share even though it went on the post 125% increase.
I decided to take another look at my valuation of the company and these were the results. But firstly, the assumption
- 7up’s revenue has been growing at a 5 year Compounded Annual Growth Rate (CAGR) of 20% whilst earnings per share has been growing at a 5 year CAGR of 30%
- Adjusting the earnings per share growth to 3 years even shows a growth of 46% indicating a high growth pattern for the company.
- I used an average of 35% as CAGR in projecting my baseline valuation of the company’s shares
- PEG ratio based on the recently released results was less than 1. Another indicator of an undervalued stock
- The company’s ability to also keep up with this outstanding growth rate depends on its ability to keep operating expenses at between 70-75% of Gross Profit.
- Gross Profit margin on the other hand has to continue to be above 35% annually.
- 7up has little debts which ostensibly increases its WACC. I assumed a WACC of about 17%
- I had 5 variations to the valuations in the case that EPS growth rate falls short of my projected 35%
Based on the above, it suggests the true value of 7up should be about N207 if it continues to grow at the 35% compounded annually in the next 5 years. This is more than double the current price. But what if the growth rate falls short of expectations? So I decided to adjust the CAGR lower and this is the value I got if all other assumptions remain the same
7up’s ability to hit the lofty heights I placed on its share price (in the short term) depends on a number of other factors amongst which are the dividends it declares as well as liquidity. The stock isn’t one of those very liquid stocks that gets traded in millions daily. It paid 50% of its profits last year as dividends. If it repeats the same 50% this year, it will pay about N3.2b in dividends which will at the current price give a 5% dividend yield. If they announce a N5 or lower proposed dividend per share then expects the share price to go South (but not below N95). But if dividend per share is between N6-N7 then a rally will be almost inevitable.
Send me an email if you want the spreadsheetI used for the valuation.
Seven Up has actually released its proposed dividend of N2.50 per share. Way short of the N5 I expected. I am surprised the management decided on this amount considering the need to show a sizeable dividend growth. It would be interesting to know why this decision was taking. I still maintain the share price will go South based on this announcement