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Why and How to Value a Company?
Julius Ooi Izzy Hemington
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Why Value a Company?
Investment Banking
o Buy-side advisory
o Sell-side advisory
o Public offering
Investing
o Finding the right price
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Valuation Methods
Market Valuation
o Market Capitalisation
o Enterprise Value
Comparable Analysis
o Companies
o Transactions
Discounted Cash Flow Analysis (DCF)
Leveraged Buyout Analysis (LBO)
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Valuation Methods
VALUATION
INTRINSIC
DCF
MULTIPLES
LBO CCA CTA
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Commonly Used Metrics
Market Capitalisation
o No. shares outstanding price of share
o Small Cap < $2 bil
o $2 bil < Mid Cap > $10 bil
o Large cap > $10 bil
o Example:
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Commonly Used Metrics
Enterprise Value
o Market Capitalisation + Net Debt
o Net Debt = Short Term Debt + Long Term Debt Cash
& Cash Equivalents
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Commonly Used Metrics
EBITDA
o Earnings Before Interest, Taxes, Depreciation and Amortisation
o EBITDA = Sales Cost of Goods Selling, General
& Administrative Expenses
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Commonly Used Metrics
Price to Earnings Ratio (P/E)
o Price per share Earning per share
or
o Market Cap Earnings (Net Income)
EV/EBITDA
o Enterprise value EBITDA
Net Debt/EBITDA
o Net Debt EBITDA
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Comparable Companies Analysis
9
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CCA
Theory
o Similar companies should be valued the same
Steps
1. Find the Comps
2. Collect data
3. Collate data
4. Value
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CCA
Example:
Co. Name Rio Tinto Vale BHP Billiton High Low
P/E 7.26 5.52 9.63 9.63(BHP) 5.52(Vale)
EV/EBITDA 6.95 7.10 6.52 7.10(Vale) 6.52(BHP)
Net Debt/EBITDA
0.32 0.44 0.40 0.44(Vale) 0.32(Rio)
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Comparable Transactions Analysis
12
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CTA
Theory
o Similar companies should have the selling price
Example:
o Cadbury and Kraft Deal
o 48% Premium
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Valuation Methods
VALUATION
INTRINSIC
DCF
MULTIPLES
LBO CCA CTA
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Discounted Cash Flow
15
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Discounted Cash Flow
Fundamental Valuation
A company can be valued on the basis of its
future cash flows
Discount to account for time value of money
and how a company is financed
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DCF Steps
How far to forecast?
- In practice 5 -7 years
Forecast expected
revenues over the
period
Deduct anticipated
cash expenses to
get a cash flow
estimate
Discount cash flow
estimate using WACC
COMPANY
VALUATION
Weighted Average Cost of Capital (WACC)
Average rate representing cost to company of its equity and debt
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DCF Pros and Cons Proven theoretical
framework based on company in question
Allows sensitivity analysis
Can incorporate business cycles and structural change
Based on assumptions o Future cash flows are
difficult to predict
Have to be frequently updated o E.g. changing credit
circumstances
Not suitable for shorter term investments
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Putting It Together
19
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Playing The Field
Valuation is not an exact science
The three methods will all give a different
answer
Display them graphically on a football field and
highlight a region where you expect the value
to lie
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800 850 900 950 1,000 1,050 1,100 1,150 1,200 1,250
CCA
CTA
DCF
millions
Implied Valuation Range: 1,090 - 1,140
Football Field
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Whats Most Important
Usually most weight given to DCF
Depends on the industry
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Recommended Reading
J. Rosenbaum, J. Pearl
Investment Banking
Training The Street
Fundamentals of
Corporate Valuation
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Portfolio Roundup
Sector Heads
Julius Ooi Izzy Hemington
Tom Hacker Jasan Donervan
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Tech, Media & Telecoms
ETO 12%
AMZN:US 7%
OXIG 57%
AMZN:US (short) 20%
CAR 4%
Profit breakdown ROE on 25mm: 7.32%
Total Profit: 1,829,000
Greatest Gain: Oxford Instruments -
1.49mm
Greatest Loss: Research In Motion -
(0.78mm)
Cash 67%
ETO 20%
CAR 13%
Current Portfolio breakdown
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Financials and FX
22000000
23000000
24000000
25000000
26000000
27000000
28000000
29000000
17-Oct-11 17-Nov-11 17-Dec-11 17-Jan-12
BIS Financials and FX Short Term Volatility
Sovereign Debt Crisis
ROI (25m): 12.9%
Profit: 3,233,900
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Financials and FX
EURJPY SHORT 14th Nov at 106.03, BOUGHT 18th Dec at 98.7
Stop loss: 109 (tracking)
Profit target: 104 level
Historical Volatility
BAC LONG 20th Nov at 5.78, CURRENT PRICE at 7.35 (close at
26/01)
Strong debt resources
Strong American Economy
Warren Buffett and Hank Paulson
Strong Q4 Results
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Moving Forward
EXTERNAL SHOCKS
Deleveraging
Greek Default?
Global Recession?
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Metals & Mining
Rio Tinto
Strong Companies
Cheap Entry Point
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Tech, Media & Telecoms Oxford Instruments (OXIG), bought 11th Oct 728p, sold 15th Nov 925p
Leading provider of high technology tools for research and industry
Consistent dividends (half yearly)
Reasonable P/E ratio ~ 14 (good investor sentiment)
Good news!
August interim statement had anticipated increased orders, sales and profits
2 recent acquisitions with funding from equity placing (investor confidence)
14 cubed strategy, 14% compound increase in revenue and trading profit by 2014
Results due 15th Nov.
Research In Motion (TSE:RIM), bought 25th Oct $22.70, sold 1st Dec $18.63
Blackberry mobile phones
Oversold from BBM outage, New tablet coming soon, OK Q2 results
Failed: Blackberry tablet flopped, tarnished reputation from outage
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Consumer, Retail, Healthcare
A weak sector in the present climate
Market misery for retail sector
Sector consistently underperforms FTSE
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Diversified across the three areas
Current profit: 1,422,370
Current return on 25m: 5.96%
Consumer, Retail, Healthcare
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Whats Next in CRH?
Bad news continuing?
More opportunities
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Thank you
Next Event: How to Invest Your Own Money