equity valuation masterclass - redcliffe training
TRANSCRIPT
The Banking and Corporate Finance Training Specialist
Equity Valuation Masterclass
A Two Day Course
This course is presented in London on:
24-25 January 2019, 28-29 October 2019
If you have 5 or more participants it may be cost effective to have
this course pesented in-house either on your premises or via live webinar
http://redcliffetraining.com [email protected]
+44 (0)20 7387 4484
Course Overview
Participants will: Be introduced to the main equity valuation methodologies Discuss the different valuation methodologies and the differences between Enterprise
Value (EV) and equity value Study Discounted Cash Flows (DCF), specifically computing the Free Cash Flows and
the Weighted Average Cost of capital (WACC). Review the trading and transaction multiples
Further enhance their understanding of Equity Valuation Review the five steps of DCF valuation and the key issues affecting terminal value,
WACC and enterprise value to equity reconciliation
Get an overview of advanced discounted cash flow valuation and fast growing companies and the use of multi-period terminal value and fade rates
Have explained to them stock options expenses including the essentials of stock based compensation accounting and the multiples adjustments (EV/EBIT)
Gain an understanding of the non-controlling interests and associates
Get to grips with the differences between operating and financing / capital leases and the fundamentals of operating and financing / capital lease accounting
Be introduced to Moody’s multiple method and present value of non-cancellable lease Get an overview of fundamentals of pension accounting and the defined benefit vs.
defined contribution plans
Understand better the finer details of weighted average cost of capital (WACC)
Day One
Session 1 - Valuation fundamentals The session lays the foundations to build a solid understanding of corporate valuation in
the context of investment banking. The most common valuation methodologies are introduced, explaining the difference between a company's fundamental value, and how
much an acquirer would pay for the business. The concepts of enterprise value and equity value are explained, using simple but rigorous exercises. Finally, the basics of multiple valuation and discounted cash flow valuation are introduced. Case studies are used
throughout the session based on real European companies.
Key topics: The importance of valuation in the investment banking industry Fundamental vs. transaction value
Overview of the major valuation methods Discounted cash flow analysis
Trading comparables analysis Transaction comparables analysis
Enterprise vs. equity value Book values vs. market values Derivation of enterprise values using market values
Derivation of enterprise values using a fundamental valuation approach
Session 2 - Discounted Cash Flows
Course Objectives
Course Content
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Participants learn how to build a discounted cash flow valuation model. The session starts with an overview of the valuation methodology, and the steps required in setting up a valuation model. We then focus on the calculation of free cash flow. A detailed ratio
analysis is used to establish the reasonableness of the forecasts and to identify when the target company reaches steady state. We analyse the weighted average cost of capital,
calculate terminal values, using both the exit multiple method and the perpetuity growth method. We discount the free cash flows to arrive at enterprise values and calculate the
implied share price. Once the valuation is complete participants perform several checks on the analysis using key ratios, and sensitivity and scenario analysis.
Key topics: Calculating unlevered free cash flows
Drivers of cash flow Ratio analysis
Weighted average cost of capital
Optimal capital structure using peer analysis Establishing the company’s forward looking cost of debt
Cost of equity: understanding the risk free rate, the equity risk premium and beta Unlevering and relevering the beta Calculating WACC for the case company
Calculating the terminal value Perpetuity growth (Gordon Growth model) method
Exit multiple method Building a discounting model
Mid-year adjustments
Calculating enterprise and equity values Sanity checks
Reinvestment rate and ROIC Implied multiples and growth rates Percentage of value in the terminal period
Session 3 - Trading Comparables
Participants are introduced to preparing multiples using real company data and a case study including a range of international companies. We focus on how to select comparables, where to find data in published financials and equity research reports, how
to clean the raw data, and how to document and check the output. The most commonly used multiples are explained and complexities such as normalizing for non-recurring
expenses / income are also covered. The session ends with practical exercises on the application of multiple analysis to value a company.
Key topics: Screening companies to identify a suitable comparable set
Calculating the company’s value Number of shares and value of share options Equity value
Net debt calculations Minority interests and equity method investments
Enterprise value Calculating the earnings numbers
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Cleaning non-recurring items from earnings and resulting tax adjustment
Calendarization issues Last-Twelve Months (LTM) analysis Calculating a range of forward looking and historical earnings multiples
Revenue EBITDA
EBIT P / E P / E / G
Industry-specific multiples Calculating and using operating and credit ratios
Troubleshooting and checking the output Applying the results
Session 4 – Transaction comparables Participants are introduced to preparing a transaction multiples matrix using LTM
earnings. The rationale and components of control premium and its impact on valuation are discussed. A comparable transaction analysis is performed on a recent transaction.
Key topics: Difference between trading multiples and multiples from precedent transactions
Selection of transactions and information gathering Change of control issues
Share capital and equity linked instruments Control premium and synergies Bottom up calculation of enterprise and equity value multiples
Practical issues with transaction comparables Analysis and summary output
Day Two
DCF and Multiple Valuation Reminder Reminder of the five steps of DCF valuation
Review of trading multiples Discussion of key issues affecting Terminal Value, WACC and Enterprise Value to
Equity reconciliation
Advanced DCF Valuation
Fast growing companies and the use of multi-period terminal value and fade rates o Two-stage terminal value (growing annuity followed by a perpetuity growth
rate)
Valuation of Net Operating Losses (NOLs) Normalised steady-state cash flows to avoid abnormal terminal value
o Use of target RoIC vs. WACC returns Effective and marginal tax rates Mid-year discounting on cash flows
Flexible valuation dates
Case study I – Modelling of two-stage terminal value
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Modelling of NOLs, flexible deal dates and mid-year discounting
Weighted Average Cost of Capital (WACC) Review of capital asset pricing mode (CAPM)
How to think about cost of equity for private companies How betas are derived – regressing company and market returns Which beta to choose for company valuation?
Why unlever betas? How do we unlever betas? Use of Damodaran industry betas
Optimal capital structure and gearing risk Case study II – Unlever and relever betas for a food manufacturing company
Enterprise Value to Equity Value Issues
Stock Options Expenses Essentials of stock based compensation accounting
o Expensing to the income statement over the vesting period Intrinsic value of stock based compensation
o Treasury method of accounting for stock based compensation Restricted stock and performance stock units
Multiples adjustments (EV/EBIT) o Fully diluted market capitalisation in EV o EBIT post stock option expense
DCF adjustments o Stock option expense to be included in FCF
o Diluted share count to compute equity Case study III – Analysing the stock options of Linkedin
Non-Controlling Interests and Associates
Accounting for NCI NCI valuation
o Book values
o Market values o P / E multiples, Price to Book multiples
Adjustments of NCI to multiples (EV/EBIT) o Include NCI at market value in EV o EBIT to include both parents and NCI earnings
Adjustments of NCI to DCF o Deduct NCI at market value from EV to reach Equity
Accounting for equity affiliates / associates Equity affiliates and core, consolidated and total EV Equity affiliate valuation
o Book values/Market values/Multiples Adjustments for equity affiliates to DCF and multiples
o Depends on definition of EV (core, consolidated or total) Case study IV – Nestlé and l’Oréal as associate
Nestlé and NCI
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Operating Leases Differences between operating and financing / capital leases
Fundamentals of operating and financing / capital lease accounting Moody’s multiple method and present value of non-cancellable lease arrangements
Operating leases adjustments to multiples o Capitalised operating leases to be added to EV o Rental expense to be allocated between interest expense and depreciation
Operating leases adjustments to DCF o Free cash flow post rental expenses
New accouting rules to abolish difference operating vs. finance leases
Case study V – Computing Easyjet adjusted EV/EBITDAR
Pensions
Fundamentals of pension accounting Defined benefit vs. defined contribution plans Funded vs. unfunded plans
Pension deficits and surpluses Pension adjustments to multiples
o Add pension deficit to enterprise value o Only service costs to remain in EBIT
Pension adjustments for DCF
o Only service cost in EBIT/free cash flow o Deduct pension deficit from EV to equity
Case study VI – Analyse the pension deficit of British Telecom
On day one of this course, participants are introduced to the main equity valuation methodologies. The participants start with the valuation fundamentals where the different
valuation methodologies are discussed and the differences between Enterprise Value (EV) and equity value is explained in detail. The participants will then look at the Discounted Cash Flows
(DCF) and specifically at computing the Free Cash Flows and the Weighted Average Cost of Capital (WACC). Finally, the participants will review the trading and transaction multiples and
compute several EV and equity multiples and get the intuition between the market view of the multiples. During the sessions participants look at case studies and financial models of real European companies.
Day two covers the more advanced areas of Equity Valuation. Participants discuss complex
issues such as a two-stage terminal value, valuation of net operating losses, WACC for private companies and issues in the reconciliation between enterprise and equity value (associates, non-controlling interests, operating leases, pension deficits).
Much of the course work involves Excel modelling and analysis, equipping
participants with the tools to further enhance their understanding of valuation issues:
Building up from partially-complete models on real case scenarios
Each participant should bring a laptop to the course to facilitate modelling work.
Course Overview
http://redcliffetraining.com [email protected]
+44 (0)20 7387 4484
09:30-17:00
London
Standard Price: £1,995 + VAT
Membership Price: £1,596 + VAT
In-House Training
Delivering this course in-house for 5 or more participants could be very cost effective.
The venue and timing can be agreed to suit the client, as well as the selection of the trainer and the
precise contents of the seminar.
Tailored Learning
All of our training courses can be tailored to suit your company’s exact training needs.
We will work closely with you to help develop a training programme with content that is unique for your organisation.
Please email us on [email protected] for more information
E-Learning This course can also be presented as a bespoke e-learning programme created by you to fit your exact
requirements.