COMPANY VALUATION

Financial Modeling and Forecasting: Devine Limited Company Valuation

Financial Modeling and Forecasting:Devine Limited Company Valuation

Introduction

Devine Limited (DVN) is involved in residential property development; residential construction; real estate marketing; and medium density residential development. The company initially offered affordable medium density housing developments, and has since expanded into up-market housing development. Through its acquisition of Pioneer in 1997, the company gained exposure to the substantial Sydney, Melbourne and Adelaide markets.

DVN was formed in 1987 and listed on the ASX in 1993. In 1992, the company acquired two companies involved in hardware and timber and traded under the Mitre 10 name. In 1994, DVN sold its Timber and Hardware division to Hudson. In 1997, DVN acquired Pioneer Homes, increasing its exposure to the southern states. In 2003, DVN entered into a licensing agreement with Simonds Homes to offer up-market residential housing.

DVN is one of the largest residential property developers in Australia. The company specialises in the development of apartments and housing. It benefits from a vertically integrated structure, combining property acquisition with construction, marketing and management of its residential developments. Devine offers developments that target a variety of niches from affordable to luxury housing and apartments.

Major competitors would be other residential developers on the market that focuses on capital property growth in commercial, industrial and retail sectors. Devine markets its residential property developments direct to the public, targeting both first home buyers and second and third home buyers seeking more luxurious accommodation. Many of Devines apartment developments are targeted to property investors (DVN offers rental services).

Double Moving Averages

This is a trend model, , where we have:

and

So what does that mean?

, which is just the kth moving average

, which is just the kth moving average of the moving averages (a double moving average!)

Here is an example of it in action:

The idea is that by including both rate of change information (moving average) and the rate at which the moving average is changing (double moving average), we can make a better forecast for data that has an overall increasing or decreasing trend. Do you think that either the 2-period (MSE = 827.491) or the 3-period (MSE = 133.68) double moving averages predicts well for this data set? Why?

Holt's Method

Holt's method is the basic trend model, , combined with exponential smoothing:

and

The parameter alpha weighs the actual data from the present time period (first term) against the forecast for the previous time period (second term). The parameter beta weighs the change in estimated level (first term) against the previous time period's trend (second term). Let's see what happens on our data set if we use values of and :



We got a decent fit (MSE of 60.25) with and . On what types of data would you expect a large alpha and small beta to work well?

How can we find values of our parameters that minimize MSE? Simple, we can have Solver find them! As we've been doing this chapter, simply set the MSE as the objective function you want to minimize ...