valuation 1 introduction valuation

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An Introduction to Valuation Prof. Dr. Martin Užík

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Valuation 1

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  • An Introduction to Valuation

    Prof. Dr. Martin Uk

  • What is a company valuation?

    the company valuation is a part of investment lesson (i.e. M&As, IPOs, Spin Offs)

    you valuate by two perspectives

    Sell Side

    Buy Side

    At the beginning there is a company analysis (i.e. Due Diligence)

    Target function Maximize the SHV

    Total Value Sum of operating value + non operating assets

  • Functions of a company valuation/

    For what do we need a company valuation?

    Main functions:

    Decision making and consulting activities

    Mediation

    Argumentation

    forecasts of company developments and its investments

    investment of shareholders = company value

    Auxiliary functions

    Information

    Tax measurement

    Contract configuration

  • Functions of a company valuation/

    For what do we need a company valuation?

    Objective of Company Valuation:

    - to buy Company

    - to sell Company

    - to give Company away

    - to bequeath the Company

    - Strategy

    - Price

    - Risk

  • Challenge

    Company Value Company Price

  • Methods of Company Valuation

    Entire valuation approaches (Discounted Cash Flow [DCF], Capitalized Earning Power Approach, Comparable

    Company Analysis [CCA], Comparable Transaction Analysis

    [CTA])

    Single valuation approaches (Value in case of liquidation, value of substance)

  • Valuation Methods - Overview

    Entire approaches Single approaches

    Capitalized Earning Power Appr.

    DCF-Approaches

    Comparison Analysis

    Entity Approach Equity Approach

    Weighted Average Cost of Capital (WACC)

    Adjusted Present Value (APV)

    Value of substance

    Value in case of

    liquidation

    CCA

    CTA

  • DCF (WACC) Steps

    1. Free Cash Flow-Planning

    Through CF determination, different accounting standards become equilibrated

    2. Determination of capital costs

    Estimating Beta

    3. Discount FCF and Calculate Enterprise Value

    4. Calculate equity Value

  • DCF (WACC) Steps

    1. Free Cash Flow-Planning

    Overview: Cash flow calculation Receipt of payment from operative business

    - Pay-outs from operative business

    = Cash Flow before interest and tax (CF)

    - Tax in case of complete equity financing

    = Operating Cash Flow (OCF)

    - Cash Flow from investment activity

    = Free Cash Flow (FCF)

    + Tax Shield

    = Total Cash Flow (TCF)

    + /

    -

    Cash Flow from financing activity (incl. interest

    payments / receipts)

    = Flow to Equity (FTE)

  • DCF (WACC) Steps

    1. Free Cash Flow-Planning

    Looking to the crystal ball

  • DCF (WACC) Steps

    1. Free Cash Flow-Planning

    Looking to the Past

  • DCF (WACC) Steps

    1. Free Cash Flow-Planning

    Looking to the Future

  • DCF (WACC) Steps

    1. Free Cash Flow-Planning

    Looking to the Future

  • DCF (WACC) Steps

    2. Determination of capital costs

    weighted average cost of capital (wacc)

    E = Market Value of Equity

    V = Company Market Value

    D = Market Value of Debt

    t = Tax Rate

    CAPM = Capital Asset Pricing Model (cost of equity)

    rD = cost of debt

    1DE D

    wacc CAPM r tV V

  • DCF (WACC) Steps

    2. Determination of capital costs

    Capital Asset Pricing Model (CAPM)

    CAPM = Capital Asset Pricing Model (cost of equity)

    rM = Market Return

    rf = Risk Free Rate

    Beta

    Mf fCAPM r r r

  • DCF (WACC) Steps

    2. Determination of capital costs

    Beta

    ri = expected share return

    rM = expected market return

    ,, Mi i

    i MMM

    COV r r

    VAR r

  • DCF (WACC) Steps

    3. Discount FCF and Calculate Enterprise Value

    Enterprise Value

    If: FCF and wacc continuous in the time:

    Two stage model:

    1 1t

    tt t

    FCFEV

    wacc

    1 1t

    tt t

    FCF FCFEV

    waccwacc

    31 2

    1 2 31 1 2 31 1 1 1

    t T

    tt Tt

    FCF FCFFCF FCF FCFEV

    waccwacc wacc wacc wacc

  • DCF (WACC) Steps

    4. Calculate Equity Value

    EquityValue EV Debt Value

  • DCF (WACC)

    Valuation of LUKOIL

    WACC 11,88%

    Equity-Quota 89,01%

    Debt-Quota 11,81%

    CRP 8,54%

    riksFREE 2,89%

    Market Return 11,43%

    Beta 1,101

    CAPM 12,29%

    Tax 20,00%

    rD 10,00%

    Debt 7043

    Today 06.04.2009

    g for 2012 & 2013 1,00%

    Year 31.12.2009 31.12.2010 31.12.2011 31.12.2012 31.12.2013 TV

    t 0,74 1,74 2,74 3,74 4,74 4,74

    FCF 10.659,94 5.910,56 7.012,71 7.082,84 7.153,67 7.153,67

    PV(FCF) 9.813,36 4.863,28 5.157,33 4.655,69 4.202,84 35.370,02

    EV 64.062,51

    Market Value of Equity 57.019,51

    Share Price 67,04

  • Comparable Company Analysis (CCA)

    Basic - Information

    CCA want to determine an objective Enterprise Value

    CCA is a capital market orientated concept

    CCA is influenced by expectations and valuations of the capital market

    CCA is an important part of each research report

    CCA has historical and implicated data as its parts

  • Comparison Analysis

    mCompVVC VOVO CC

    CC

    CompV

    VCm

    Selection of similar companies (comparable companies CC)

    Selection of comparative values CompV (e.g. earnings, turnover, EBIT, )

    Calculation of a multiple m (relation between the value of the comparable company VCCC und the comparative value of this company)

    Deduction of the value of the company which is to valuate (value of the valuation object VCVO)

    Based on experience (multiple method), stock exchange prices (Similar Public Company Approach), proceeds of initial public offerings in the past

    (IPO Approach) or realised transaction prices (Recent Acquisition

    Approach).

  • Comparable Company Analysis (CCA)

    Valuation of LUKOIL

    Looking for Peers

  • Comparable Company Analysis (CCA)

    Valuation of LUKOIL

    Looking for Peers

  • Comparable Company Analysis (CCA)

    MCAP EV Sales EBITDA EBIT Company Name

    CUR_MKT_CAP CURR_ENTP_VAL SALES_REV_TURNEBITDA EBIT LONG_COMP_NAME

    ROSN RU Equity 54.050.710.000,00 75.835,70 68.991,00 16.988,00 13.005,00 Rosneft Oil Co

    gazp rm equity 3.268.602.000.000,00 4.437.971,00 2.390.467,00 885.355,00 701.778,00 Gazprom OAO

    tnbp ru equity 14.103.660.000,00 16.238,66 25.739,00 8.684,00 7.343,00 TNK-BP Holding

    nvtk ru equity 7.833.669.000,00 275.926,00 79.272,00 36.798,00 32.217,00 NovaTek OAO

    EV/Sales 1,77

    EV/EBITDA 4,71

    EV/EBIT 5,73

    Multiples

  • Comparable Company Analysis (CCA)

    Number of Shares Sales 2010 EBITDA 2010 EBIT 2010 Debt

    EQY_SH_OUT BEST_ESALES_NXT_YR BEST_EST_EBITDA_NXT_YR_MEANBEST_EEBI_NXT_YR_MEANDebt

    LKOH RU Equity 850,56 65.915,42 10.734,78 9.154,08 7.043,00

    Lukoil

    Stock Exch. 41,5 Difference to Stock Exch.

    EV/Sales 128,64 87,14

    EV/EBITDA 51,18 9,68

    EV/EBIT 53,42 11,92

    Estimated Share Price

  • Company Valuation

    Fair Value LUKOIL

    Stock Exch. 41,5 Difference to Stock Exch.

    EV/Sales 128,64 87,14

    EV/EBITDA 51,18 9,68

    EV/EBIT 53,42 11,92

    DCF 67,04 25,54

    Fair Value 75,07 33,57

    Estimated Share Price

  • Single valuation approaches:

    Value of substance

    Split off the object of valuation into valuable parts.

    Value of reproduction - How much is it to rebuild the company?

    Supply market based.

    Complete value of reproduction Immaterial components are considered.

    Fractional value of reproduction: Immaterial components arent considered.

  • Single valuation approaches:

    Value in case of liquidation

    Split off the object of valuation into valuable parts.

    Fiction of liquidation of the company.

    Value the parts with sales market prices.

    Adjustment of single values from the balance sheet (e.g. specific liquidation costs). Debt has to be repayed.

    Value of liquidation depends on the intesity and speed of the split off

    Value of liquidation is the lower limit of the value of the company.

  • Single valuation approaches:

    Value of substance

    Problem: How should the reproduction of a brand or the defence against competitors be valued?

    Unnecessary components for operative business are valued by the value in case of liquidation

    The value of substance is the upper limit of the value of the company.

  • Excercise

    Count the Value of following Companies:

    - Adidas

    - Puma

    - Volkswagen

    Compare the Company Value with the Company Price.