The role of an analyst is as much about arts as it is about science. They scour through company reports, market research, and local market information to form a view on what they believe a company will do over the coming months and years.
They then build a financial model to predict future cash flows for the business and then discount these cash flows back to today’s value to create a valuation for the business. One of the key elements in any DCF (discounted future cash flow model) is the tax rate that a company has to pay.
On Thursday 18th February the iProperty share price was trading around of AUD 3.05. One analyst released a report with a price target of AUD 2.75 causing an immediate sell off in the stock with the immediate outcome a greater than 13% price decrease.
However, the analyst made a simple mistake, he applied the Australian tax rate to a business that operates in Sth East Asia and therefore pays an effective tax rate of around 10%.
This simple mistake, if corrected, probably means the price target should have been nearer AUD 4.00. Suffice to say, management at iProperty were less than amused that the impact of this simple error.