5. Forecasting
5.4 Budget Control
89 Adjusting Forecasted Financial Statements for Cash Target
The final step of the forecast is to make sure that total liabilities + equity equals total assets. Excess cash is in this case calculated the following way:
Excess cash = Total liabilities & Equity – Total assets
This difference exists, since a cash target of 11% is used in forecasting “Cash and cash equivalents”.
Easton et al. (2010) suggests three possibilities on how to invest the excess cash, “invest in marketable securities”, “retire short-term debt” or “acquire treasury stocks”.
The excess cash is illustrated in appendix A.30 and as seen it is does fluctuate to a certain extent. It is assumed that if excess cash is negative, then new debts are issued to cover the difference and if excess cash is positive it is used to retire short-term debt. However, for 2022 the excess cash is used to pay of all the short-term debt, and the remaining excess cash is invested in marketable securities, which in this case would mean short-term financial assets. All these adjustments are illustrated in appendix A.30.
90 A comparison with historical key indicators does in general not really suggest any unrealistic budget expectations, except for the net borrowing cost. However, as mentioned in the profitability section, there are some limitations in relation to the specific formula used and the NBC will be discussed more in detail later in this section.
Furthermore it is clearly evident from table 1.19 that there is a drop in the expected revenue growth in comparison to the previous to two years (2010 and 2011). The revenue forecasts are already discussed more in detail above, but it is in general believed that the double digit growth from the last two years were mainly due to the recovery after the financial crisis and a very high growth rate in the Asia/Oceania region, which is not predicted to continue at the same pace for the future. The forecasted ROIC for both the historical and budgeted period is illustrated in Figure 1.20 below.
Figure 1.20 – Historical and budgeted ROIC for the BMW Group
(Source: Own creation)
It is clear from figure 1.20 that the budgeted ROIC, although smooth is expected to be slightly lower than it was in 2011. Moreover, figure 1.20 does clearly suggest that the Group is able maintain ROIC of around 20% throughout the budgeted period, which is seen as a likely scenario as it was argued that rivalry appears to be lower in premium car segment than the general automotive market. Additionally, the forecasted ROIC is still well below the historical average of the Audi Group. Furthermore, both the Profit Margin and Turnover rate of invested capital are illustrated in figure 1.21 and figure 1.22 respectively, to analyze the effect these two drivers have on the ROIC.
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2008A 2009A 2010A 2011A 2012F 2013F 2014F 2015F 2016F 2017F 2018F 2019F 2020F 2021F 2022F
ROIC
91 Figure 1.21 – Historical and budgeted Profit Margin for the BMW Group
(Source: Own creation)
Figure 1.22 – Historical and budgeted Turnover rate of invested capital for the BMW Group
(Source: Own creation)
It is clear from the figure 1.21 and figure 1.22 above that both the forecasted profit margin and turnover rate does slightly affect the ROIC negatively in comparison to the value from year 2011. The Profit margin is in this case mainly affected by forecasted increase in R&D costs as mentioned in section 5.2.
The R&D costs are forecasted to increase by 0.5 percent of revenue each year until 2015. This is also illustrated in figure 1.21, as the profit margin is clearly affected negatively each year until 2015, then to
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Profit Margin
0,00 0,50 1,00 1,50 2,00 2,50 3,00 3,50
Turnover Rate
92 slightly increase each year throughout the budgeted period. The forecasted increase in the R&D costs each year does also affect the EBITDA and EBIT margin negatively until 2015, as illustrated in table 1.19.
The turnover rate is also slightly affected negatively in the beginning of the forecasted period due to the forecasted decrease in “other liabilities” for non-current liabilities in comparison to the value in year 2011. However, the turnover rate does slightly increase over the budgeted period, as the revenue grows more than the invested capital over the budgeted period.
Another important factor, as mentioned in the profitability analysis that possibly could affect the ROIC is the capital expenditure (CAPEX). The CAPEX as a percentage of revenue for the Industrial Business for both the historical and forecasted period is therefore illustrated in figure 1.23.
Figure 1.23 – Historical and forecasted CAPEX of the BMW Group
(Source: Own creation)
The CAPEX was calculated using the following formula suggested by Koller et al. (2010):
Net PP&E for the year – Net PP&E for the previous year + Depreciation for the year
The forecasted CAPEX margins do clearly seem to follow the trend of the historical margins, and does as such support the possibility of a ROIC trend of around 20 percent for the budgeted period. Furthermore, table 1.20 illustrates the ROIC, NBC, Spread and Financial Leverage of the BMW Group for the budgeted period.
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2007 2008 2009 2010 2011 2012F 2013F 2014F 2015F 2016F 2017F 2018F 2019F 2020F 2021F 2022F
CAPEX Margin
93 Table 1.20 – Financial gearing of the BMW Group
BMW Group - Financial Gearing
2012F 2013F 2014F 2015F 2016F 2017F 2018F 2019F 2020F 2021F 2022F
ROIC 21.07% 19.88% 19.34% 18.77% 19.04% 19.41% 19.71% 20.01% 20.29% 20.57% 20.34%
Net borrowing cost 6.83% 8.07% 11.87% 21.60% 59.49% 515.32% 3549.83% -505.92% -205.95% -119.30% -17.58%
Spread 14% 12% 7% -3% -40% -496% -3530% 526% 226% 140% 38%
Financial leverage 0.16 0.13 0.07 0.03 0.01 0.00 0.00 0.00 0.00 0.00 -0.02
(Source: Own creation)
It is clearly evident from table 1.20 that the net borrowing costs are increasing significantly over the budgeted period until 2018 and then becomes negative throughout the forecast. This is due to the decrease in net-interest bearing debt, as most of the excess cash is positive and as such used to pay down short-term debt and invested in marketable securities, which leads to a decrease and even negative net-interest bearing debt as illustrated in appendix A.30. However, it was already discussed in the profitability section that the NBC rate is interpreted with care. Additionally, the NBC rate has no affect on the valuation or the return on equity (ROE) as financial leverage is almost zero during these years, which is due to the low net-interest bearing debt over the budgeted period. Both the historical and forecasted ROE is illustrated in figure 1.24.
Figure 1.24 – Historical and forecasted ROE of the BMW Group
(Source: Own creation) -5,00%
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2008A 2009A 2010A 2011A 2012F 2013F 2014F 2015F 2016F 2017F 2018F 2019F 2020F 2021F 2022F
ROE
94 It is clearly evident from figure 1.24 that the ROE is following a similar trend to the ROIC. This is mainly due to the significant impact ROIC has on the ROE due to the low financial leverage. Thus, the budgeted ROE is consistent with the historical ROE, just as in the case with ROIC.
6 Valuation
This section proceeds on the previous section, which forecasted the future performance of the BMW Group. This allows estimating the enterprise and equity value of the firm and as such the share price based on the fundamental approach used. This section starts with a discussion of the different valuation approaches and the models used. This is followed by a discussion of the WACC, the inputs to the WACC and the calculation of the WACC in regards to the BMW Group. The final part of the section estimates the value of the Group and examines how sensitive this value may be to certain inputs.