QUESTION 3 (20 marks)

WellTech Ltd is a Johannesburg Stock Exchange (JSE) listed company that specialises in wellness products. The companys directors are considering making an offer to purchase an unlisted company, Health Bar (Pty) Ltd, that manufactures nutrient supplement products. Health Bar (Pty) Ltd will continue operating as a going concern, as it currently is, should WellTech Ltd succeed with the purchase.

An extract of the 2022 financial statements as at 31 December are as follows:

Balance sheet (Statement of Financial Position) information Health Bar (Pty) Ltd
ASSETS	R000
Property, plant and equipment	9 042
Receivables	1 914
Cash	184
Inventory	1 590
Total assets	12 730
EQUITY AND LIABILITIES
Share capital	10
Retained profit	3 762
Bank loan	5 548
Current liabilities	3 410
Equity and liabilities	12 730

Profit and dividend information Health Bar (Pty) Ltd

Year

R000

2018

2019

2020

2021

2022

Additional information:

Health Bar (Pty) Ltd has R10 (nominal value) ordinary shares. Health Bar (Pty) Ltd has a number of private individual shareholders that own all the shares.

The chief executive officer (CEO) of Health Bar (Pty) Ltd, is paid a salary that is at least R 400 000 more per year for him when compared to market-related salaries for other CEOs in the market. Should the shares of Health Bar (Pty) Ltd be purchased, his salary will be adjusted to be market-related.

Included in the property, plant and equipment of Health Bar (Pty) Ltd is property that is overvalued by R 1 200 000.

Also included in property, plant and equipment is plant and equipment (which is currently operational and in use) that are worth R 1 000 000 less than its current book value if it were to be sold as scrap metal.

R 350 000 of Health Bar (Pty) Ltds inventory is old obsolete stock and could be sold as scrap for R 70 000.

WellTech Ltd's has 40 million ordinary shares in issue, where these shares are currently trading at 1 300 cents per share ex-div. WellTech Ltd's net profit for 2022 was R 65 million. A suitable cost of equity for Health Bar (Pty) Ltd has been estimated at 15%.

The directors of WellTech Ltd indicated that the P/E ratio of WellTech Ltd should be used as the proxy P/E ratio when valuing Health Bar (Pty) Ltd.

Assume an income tax rate of 27%.

Required:

3.1 Calculate the range of possible values that WellTech Ltd could place on Health Bar (Pty) Ltd, using the following valuation methods:

(a) net assets valuation; (3 marks)

(b) dividend valuation (based on the compound annual growth rate - per the profit and dividend information provided); (4 marks)

(c) earnings valuation. (4 marks)

Show all calculations.

3.2 Briefly discuss the valuation methods used above to calculate the range of possible values that WellTech Ltd could place on Health Bar (Pty) Ltd, and comment on their suitability for providing an appropriate valuation for Health Bar (Pty) Ltd. (9 marks