business valuation p3

VALUATION

www.antonioalcocer.com@antonioalcocer

BUSINESS

WHAT IS THE

VALUE OF A COMPANY?

www.antonioalcocer.com

THIS ONE MUST BE INFINITE


THIS ONE…


∞

^∞

∞Infinite=


HEY!!!!WHAT IS THEVALUE OF ACOMPANY?

= Enteprise value [EV]


“But

in company’s valuation

we need

to calculate

the “intrinsic” or “fair value”

of the company’s equity

“updated”

based on its

future performance=

cashflows”www.antonioalcocer.com

But before we start remember the 2nd GOLDEN RULE:

PRICE IS WHAT YOU PAY

[demmand falls in love with supply]


VALUE IS WHAT YOU GET www.antonioalcocer.com

PERSalesEBITDAOthers

Free-cashflows (FCFF)Equity cashflows (FCFE)DividendsOther cash-flows

DISCOUNTING CASH-FLOWS

(*) I will not cover other valuation methods based: book value, adjusted book value, etc.PER = Price Earning Ratio = Share Price in stock market / earnings per share

[VALUATION METHODS USED]

MULTIPLES

1. fast 2. right

gross fine tunepast future


MULTIPLES VALUATION

1. It is wrong2. Does not consider time value of money3. Based in “static” data: P&L4. Based in past performance5. Does not consider future cash-flows6. Assumes future = present7. But it is fast8. And it is widely used by investors9. Get a “rough” company value estimate

DISCOUNTING CASH-FLOWS

1. It is the right one method2. Does consider time value of money3. It is based in “dinamic” data:4. Does consider future cash-flows5. But it is a lot of work6. Used to fine-tune the multiples valuation

5 minutes time 2 weeks timewww.antonioalcocer.com

I was captured by the dark side, and although I know it is WRONG…

…explain me the MULTIPLES VALUATION methodwww.antonioalcocer.com

[MULTIPLES VALUATION]

2. Company’s EBITDA = $1 million

3. Company in the food & beverage industry (F&B)

4. Comparable purchasing transactions in F&B industry: 5-9 times

Industry comparable multiple x Company’s metric

1. Choose a metric: EBITDA

EV=ENTERPRISE VALUE [$5-9 millions]


[DISCOUNTING CASH-FLOWS VALUATION METHOD]

WHAT IS THE VALUE OF A COMPANY?


HOW much would you pay for a cow?

Depends on the future milkthat it can provide[& not the milk that provided in the past]


What is the value of a company?

Depends on the future cash-flows it can generate[you decide using either FCFF or FCFE_it’s up to you]


& the annual growing rate “g”(%)of these future cash-flows

[Should not be greater than a economy’s GDP in the long run <3%][In the short term cash-flows growth can exceed long term trend]


Assuming the company will last forever [=infinite]


& the company’s financing structure: WACC

%L banking debt [59%]

%E equity [41%]Ke(%) profit expectations: 9.7%

Kd(%) cost of debt 6.3%


How do I calculate Ke=shareholders’ profit expectations?

RF: Money invested at no risk (RF=10-years german bonds yield considered a risk free investment)B*(RM-RF): Upside return/premium for investing in a company with specific riskRM=Return of the stock market benchmarked = CAGR Ibex 35 in the 1995-2008 period = 10.72%B=Company beta = sistematic risk of the company versus the market = Let’s assume 0,83. Beta calculation is biased and depends on the time period analysed

4.54%

Ke=RF+B*(RM-RF)6.18%

0.839.7%


WACC= %L*(1-t)*Kd + %E*Ke

WACC= 6,62%

g=2,5% (*)

(*) GDP for the European Union in the 1996-2008 period according to Central European Bank (2,2%). We will asume a g=2.5%T=Effective corporate tax rate paid by the company. It is less than 30% due to fiscal benefits awarded from previous years%L=proportion of banking debt %E=Proportion of equity

WACC & g calculations

59% 41%28.2% 6.3% 9.7%


[DISCOUNTED CASH-FLOW METHOD SUMMARY]

2. [Determine company’s 5-years future cash-flows (*)]

3. [From year “n+5”, future cash-flows grows at “g” rate (**)]

4. [Calculate the NPV today of the infinite cash-flows]

[Enteprise value= NPV of all infinite future cashflows @ WACC]

@Ke if FCFE

1. [Determine which cash-flows you want to use]

@WACC if FCFF

FCFFFCFE

<3%

(*) The number of years range from 5 to 10, in terms of estimating the future P&L, balance sheet and company cash-flows.More adecuate calculation should range 10 years.(**) Future cash-flows from year n+5 growth as an infinite geometric progression with a “g” growing rate. This geometric progression with infinite terms is called RESIDUAL VALUE


87

102123

149

181

2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E ………. INFINITE

5-YEARS CASH-FLOWS ESTIMATION

X (1+g)X (1+g) X (1+g)

X (1+g)^(n-3)

185 190 195

CASH-FLOWS GEOMETRIC PROGRESSION

2011

g=2,5%

EXAMPLE: Company free cash-flows [FCFF]

Data in millions of $Please note that we assume the company will last forever, so from year 2017 onwards we have infinite cash-flowsThe 5-years cashflows estimation must be done according to the mid-range business plan & investment/capex plan; and using the P&L & balance sheet & cashflow statementsAfter the 5th year, in 2017, we calculate cash-flows as a geometric progression increasing in a “g%”=2,5% every year the latest cash-flow. CFn=CFn-1*(1+g)It can be demonstrated that the geometric progression with infinite cash-flows starting at 2017, equal a single cash-flow locatedlocated in 2016 year and value=Cf2017/(WACC-g)The infinite cash-flows from 2017 onwards are called RESIDUAL VALUE

RESIDUAL VALUE

TODAY


87

102123

149

181

2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E ………. INFINITE

5-YEARS CASH-FLOWS ESTIMATION

X (1+g)X (1+g) X (1+g)

X (1+g)^(n-3)

185 190 195

CASH-FLOWS GEOMETRIC PROGRESSION

2011

G=2,5%

EXAMPLE: Free cash-flows [FCFF] are discounted @ WACC

RESIDUAL VALUE

TODAY

NPV=EV=$3780=87

+(1+6.6%)^1

102+

(1+6.6%)^2

123+

(1+6.6%)^3

149+

(1+6.6%)^4

181+

(1+6.6%)^5

181*(1+2.5%)

6.6%-2.5%

(1+6.6%)^5

RESIDUAL VALUE


COMPANY’S EV$3780 millions

Have I done this?


COMPANY’S ENTERPRISE VALUE=

What is the meaning?


“STATIC”BALANCE SHEET

TODAY - 2011

41%

59%

E

L

“DYNAMIC”BALANCE SHEET

“UPDATED”DUE TO IMPACT OF

FUTURE CASH-FLOWS

EO

E: EquityL: Liability (net financial debt) = short term debt + long term debt – cash($)EO = Company’s Estimated “fair value” of equity

??

EV$3780mill.


BALANCE SHEET“UPDATED”

EO

??

EV$3780mill.

- Net Financial Debt

- Long-term pension liability

- Minority interests

+Shareholders’ right in other companies

-$400 mill.

+$150 mill.

-$50 mill.

-$200 mill.

[EO= fair value of company’s equities = 3780-400+150-50-200=$3280 mill.]

EO=Intrinsic value or fair value of the company’s equityShareholders’ rights in other companies are real cash inflows into the company due to ownership of other companies as minority stakeNet financial debt is the net financial liability position with banks. It is a cash-outflow assuming all the debt is paid.Minority interests: It is a portion of the value of a company that it is own by “external” minority shareholders and it does not belongs to the company. Cash out-flowLong term pension liability & other liabilities correspond to future cash-outflows to be paid by the company.


Fair value>market value

Fair value<market value

BUY?

SELL?


PRICE IS WHAT YOU PAY

[demmand falls in love with supply]

MARKET CAP = $6000 mill.# shares = 10 mill.

Market share price paid = $600www.antonioalcocer.com

VALUE IS WHAT YOU GET

EO=$3280 mill.

# shares = 10 mill.

Equity fair/intrinsic value = $328www.antonioalcocer.com

[CONCLUSION 1]

Fair value<market value$328 $600

I shouldn’t have bought new shares!!!or

I better sell the ones I already own@$150


[CONCLUSION 2]

The fair value EO does not changeunless new inputs/info impact

the company’s future cashflowsoverall picture & therefore EV


[95% of time_estimating 5-10 years cash-flows]

[5% estimating WACC & “g” rate (=residual value)]

[CONCLUSION 3]

…but

[Discounting cash-flows model is highly sensible to:]

WACC & “g”


SENSIBILITY ANALYSIS

[WACC]

5% 6,62% 8%

486,7

[g]

2%

2,5%

3%

Fair value per share in $

291,9 209,2

586

735

328,7 229,4

375,7 253,5


[CONCLUSION 4]

In company valuation, the most important issues to understand are:

1. Assumptions_How future cash-flows are calculated2. Understand the risks associated to them in order they do not occur3. Assume than in valuation we always obtain a price range4. Company valuations can be highly manipulated by small changes in WACC & g5. Use multiples valuation for a “rough” number & 5 minutes valuation6. Use discounted cashflow for a “fine tuned” number & right calculation method


Thank you very much for you time!Any comment, suggestion is more than welcome:

www.antonioalcocer.com@antonioalcocer

business valuation p3

Business