Why and How to Value a Company?
Julius Ooi
Izzy Hemington
Why Value a Company?
Investment Banking
o Buy-side advisory
o Sell-side advisory
o Public offering
Investing
o Finding the right price
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)
Valuation Methods
VAL U AT ION
INTRINSIC
DCF
LBO
M U LT I P L E S
CCA
C TA
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:
Commonly Used Metrics
Enterprise Value
o Market Capitalisation + Net Debt
o Net Debt = Short Term Debt + Long Term Debt Cash
& Cash Equivalents
Commonly Used Metrics
EBITDA
o Earnings Before Interest, Taxes, Depreciation and Amortisation
o EBITDA = Sales Cost of Goods Selling, General
& Administrative Expenses
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
Comparable Companies Analysis
CCA
Theory
o Similar companies should be valued the same
Steps
1.
Find the Comps
2.
Collect data
3.
Collate data
4.
Value
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/EBITD
A
0.32
0.44
0.40
0.44(Vale)
0.32(Rio)
Comparable Transactions Analysis
12
CTA
Theory
o Similar companies should have the selling price
Example:
o Cadbury and Kraft Deal
o 48% Premium
Valuation Methods
VAL U AT ION
INTRINSIC
DCF
LBO
M U LT I P L E S
CCA
C TA
Discounted Cash Flow
15
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
DCF Steps
How far to forecast?
- In practice 5 -7 years
Weighted Average
Cost of Capital
(WACC)
Average rate
representing cost
to company of its
equity and debt
Forecast expected
revenues over the
period
Deduct anticipated
cash expenses to
get a cash flow
estimate
Discount cash flow
estimate using WACC
COMPANY
VALUATION
DCF Pros and Cons
Proven theoretical
framework based on
company in question
Based on assumptions
Allows sensitivity
analysis
Have to be frequently
updated
Can incorporate
business cycles and
structural change
o Future cash flows are
difficult to predict
o E.g. changing credit
circumstances
Not suitable for shorter
term investments
Putting It Together
19
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
Football Field
DCF
CTA
CCA
800
850
900
950
1,000 1,050 1,100 1,150 1,200 1,250
millions
Implied Valuation Range: 1,090 - 1,140
Whats Most Important
Usually most weight given to DCF
Depends on the industry
Recommended Reading
J. Rosenbaum, J. Pearl
Investment Banking
Training The Street
Fundamentals of
Corporate Valuation
Portfolio Roundup
Sector Heads
Tom Hacker
Jasan Donervan
Julius Ooi
Izzy Hemington
Tech, Media & Telecoms
ROE on 25mm: 7.32%
Total Profit: 1,829,000
CAR
4%
Profit breakdown
AMZN:US
(short)
20%
ETO
12%
Greatest Gain: Oxford Instruments 1.49mm
Greatest Loss: Research In Motion (0.78mm)
AMZN:US
7%
OXIG
57%
Current Portfolio breakdown
CAR
13%
ETO
20%
Cash
67%
Financials and FX
BIS Financials and FX
Short Term Volatility
Sovereign Debt Crisis
29000000
28000000
ROI (25m): 12.9%
Profit: 3,233,900
27000000
26000000
25000000
24000000
23000000
22000000
17-Oct-11
17-Nov-11
17-Dec-11
17-Jan-12
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
Moving Forward
EXTERNAL SHOCKS
Deleveraging
Greek Default?
Global Recession?
Metals & Mining
Rio Tinto
Strong Companies
Cheap Entry Point
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
Consumer, Retail, Healthcare
A weak sector in the present climate
Market misery for retail sector
Sector consistently underperforms FTSE
Consumer, Retail, Healthcare
Diversified across the three areas
Current profit: 1,422,370
Current return on 25m: 5.96%
Whats Next in CRH?
Bad news continuing?
More opportunities
Thank you
Next Event: How to Invest Your Own Money
