Project: Valuation by Scott Beber

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1 Project: Valuation by Scott Beber TABLE OF CONTENTS ` Background Exhibits: Valuation Approaches Four methods to calculate Market Value 1 Comparison of Methodologies Which methodology is most appropriate?... 2 Discounted Cash Flow Valuation How to determine a company's NPV... 3 Selected Approach Two methodologies for Company Valuation Weighted Average Cost of Capital Company's WACC Market Comparables Company's Market Comps Valuation 6 Discounted Cash Flows Company's DCF Valuation 7 Results & Illustrations Conclusion Company is Undervalued by the Market 8 Summary of Findings Composition of Enterprise Values... 9 Operating Leverage 10 Operating Performance Percent Returns Net Working Capital

2 Valuation Approaches Four Approachs to measuring Market Value Approach Methodology Formula: Data Sources: Used Primarily By: Income Discounted Cash Flow Period cash flows Company financials, Companies with stable Ʃ (1+WACC) ^ Period Management estimates or estimable growth Market Market capitalization $ Share Price x WSJ, Yahoo! Finance Public companies # Shares outstanding Earnings multiple of Average of peers' P/E ratios WSJ, Yahoo! Finance Privately-held cos. comparable "peer group" x Company Earnings and Company financials Individual business units Ʃ Asset Liquidation value, Market prices of Auctions, Indexes, Companies in distress Acquisition value individual assets Historical transactions Sum of parts > whole Other Option pricing models Various WSJ, Yahoo! Finance Companies whose assets Economic Value Added Company financials, are valued like options Contingent claim models Management estimates 1

3 Comparison of Methodologies Which is most appropriate? Methodology Advantages Drawbacks Discounted Cash Flow Most theoretically correct Ignores market moods and perceptions Takes growth and change into account Can be long and arduous to calculate Entails deep understanding of company Requires deep understanding of company Fundamentals-driven Requires many estimates (WACC, beta, sales) Market capitalization Easily to obtain; "quick & dirty" Does not capture true intrinsic value Easy to relate to Markets can be inefficient and slow to equalize Requires fewer assumptions Trading can be emotional, momentum-based Earnings multiple of In reality, the most commonly-used method Precise comparables rarely exist comparable peer group Easily to obtain; "quick & dirty" Does not account for growth, strategy, change Market has final say in what something's worth Easy to manipulate and misuse Liquidation value, Accurate in short term Does not account for growth, strategy, change Acquisition value Easy to relate to Whole may be more valuable than sum of parts Easy to support with data May leave money on the table in short sales 2 Option models Allow for management to quickly assimilate, Can easily lead to overvaluation when options react to, and learn from real-time data argument does not hold up Some assets' values derive entirely from their Bad for long-term options on non-traded assets option-like characteristics (e.g. biotech patent)

4 Discounted Cash Flow Valuation How to determine a company's Net Present Value In a DCF valuation, a company's value (V) is deemed to be the present value of all future cash flows (CF) Cash flows are 'discounted' by the company's Weighted Average Cost of Capital (WACC) each year (t) out they occur A terminal year (n+1) and a cash flow growth rate (g) are chosen, to represent the company's cash flow in perpetuity n V = Ʃ + t=0 CF in period t CF / (WACC-g) (1+WACC) ^ t (1+WACC) ^ n+1 Factors that affect V: The higher a company's cost of capital, the lower the present value of a period's cash flows Given constant cash flows, the further out the period, the less its cash flow contributes to V The higher the terminal growth rate, the higher perpetuity component will be. However The termianl growth rate cannot exceed the growth rate of the economy as a whole 3

5 Selected Approach Two methodologies chosen: Methodology Rationale Requirements Discounted Cash Flow Appropriate for Company's steady growth Income Statements and Balance Sheets of all and estimability of future sales & earnings Business Units plus Corporate Overhead unit Ideal for "sum of the parts" valuation involving Historical "Actuals" data from FY separate valuations of 5 business units, a Business drivers to generate forecasts for corporate overhead unit, and an additive rollup FY Availability of data and deep understanding Terminal year values and terminal growth % of company input, output, and dynamics A single corporate-wide Debt Schedule Estimates of Beta and Costs of Capital Earnings multiple of Provides powerful check on DCF method Peer groups for each Business Unit comparable peer group Greater accuracy than typical P/E approach Market cap, debt, cash, and EBITDA of each by using different peer groups for each B.U. company in peer groups Includes market sentiment as component of EV/EBITDA multiples of peer groups to apply end-product Valuation to Company's Business Units' EBITDA Company EBITDA by Business Unit Market Capitalization Basis of comparison for both Valuations Determine market Over/Under Valuation 4

6 Company Weighted Average Cost of Capital Cost of Equity (using CAPM) Cost of Debt (from Company financials) Company Beta 3.35 $ million: (F) 3 yr avg Risk Free Rate Principal Balance 324, , , , year Treasury Bond 2.00% Total Interest Expense 23,382 20,969 20,214 21,521 Equity Risk Premium * 3.99% Average annual cost 7.20% 9.18% 8.59% 8.19% Company Cost of Equity 15.37% Company Cost of Debt 8.19% Weighted Average Cost of Capital $ mil Pct. Cost Market Value of Equity % 15.37% Value of Debt, % 8.19% % 13.12% Weighted Avg Cost of Capital (WACC) 13.12% * Estimates of Equity Risk Premium (ERP) for the United States in 2012: (Aswath Damodaran Approach ERP Source Survey: CFOs 3.07% Campbell and Harvey (2010); Avg. estimate. Median = 2.7% Survey: Global Fund Managers 4.08% Merrill Lynch (Jan., 2012) Historical US 4.10% Geometric avg Stocks over T.Bonds: Average Implied premium 3.99% Avg. of implied equity risk premium: Selected estimate Implied premium adj. for T.Bond rate and term 3.50% Using regression of implied premium on T.Bond rate 5

7 Company Market Comparables Valuation Public Comparable sym Multiple Calculation Company Bus. Units Apply multiple in $ mil Ent Val ($ mil) EBITDA (ttm) EV/EBITDA Operations EBITDA Ent Val Comp1 COMP1 $462.7 $ Biz1 $45,621 $337.4 Comp2 COMP2 $4,740.0 $ Biz2 $1,429 $10.6 Comp3 COMP3 $122.3 $ Weighted Avg. Multiple: 7.40 Total Operations $47,050 $348.0 Corporate Overhead ($30,313) $0.0 Enterprise Value is equal to: Enterprise Value Market Comp Enterprise Value: $ Value of Equity Discounted Cash Flow Valuation: ($12.4) + Value of Debt Debt (3 yr avg) Company financials: $ Cash Cash Yahoo! Finance: $40.7 hence Equity Value is equal to: Equity Value Market Comparables model: $125.9 Enterprise Value - Debt + Cash Discounted Cash Flow model: ($234.5) Note: Market data from Yahoo! Finance 6

8 Company DCF Valuation By Business Unit Discounted Cash Flows ($ mil): Forecasted Fiscal Years: Terminal Years Business Unit WACC 2012* Stage 1 Stage 2 Valuation Operations Biz1 13.1% 35.7 (20.6) Biz2 13.1% 2.8 (5.1) (0.3) (1.6) (0.8) (2.6) 0 Total, Operations 38.5 (25.7) ### Corporate Overhead 13.1% (2.2) (12.9) (12.9) (12.6) (13.3) (11.7) (69.4) (34.4) (169.4) Total, Company 36.3 (38.6) (4.9) (27.3) (10.4) ($12.4) ### *Forecast of remainder of fiscal year (0) ### 0 0 7

9 Conclusion Company is Undervalued by the Market Company's Equity Value ($ mil), per: Market Comparables model $125.9 Discounted Cash Flow model ($234.5) Book (Shareholders Equity) $213.7 Company's Market Value of Common Equity: Share Price $18.75 Shares Outstanding (mil) Market Capitalization ($ mil) $500.0 Common Stock Over / (Under) Valuation: Overall Dollars ($ mil) per share Δ Market Comparables model $374 $ % Discounted Cash Flow model $734 $ % Book (Shareholders Equity) $286 $ % 8

10 Summary of Findings (pt. 1) Business Unit contribution to Enterprise Value ($ mil) $400 $300 Market Comparables Discounted Cash Flow Market CoDiscounted Cash Flow Biz1 $337 Biz2, $11 $160 97% $337 (1292%) $160 Biz2 $11 ($3) 3% $11 21% ($3) Corp. Overhead $0 ($169) 0% $0 1370% ($169) $200 Biz1, $337 $100 Biz1, $160 $0 Corp. Overhead, $0 Biz2, ($3) ($100) Corp. Overhead, ($169) ($200) Enterprise Value ($ mil): $348.0 ($12.4) 9

11 Summary of Findings (pt. 2) Business Unit Operating Leverage 8.0x 7.0x 6.9x 6.0x 5.0x 4.0x 30x 3.0x Biz1 2.5x 5.3x1.7x 1.8x Biz2 5.3x 6.9x 4.3x 2.5x 4.3x Biz1 Biz2 2.0x 1.7x 1.8x 1.0x 0.0x Note: Operating Leverage measures the effect on EBIT of a change in Revenue

12 Summary of Findings (pt. 3) Business Unit performance (historical & forecasted) 15% 0% (15%) Operating (EBITDA) Margin (F) 2014 (F) 2015 (F) 2016 (F) 2017 (F) Biz1-5% -14% -7% 3% 5% 4% 5% 5% 5% 4% Biz2 1% 4% 5% 2% 1% 2% 2% 2% 2% 2% (F) 2014 (F) 2015 (F) 2016 (F) 2017 (F) Biz1 Biz2 (30%) $20 Economic Profit ($ mil) $0 ($20) (F) 2014 (F) 2015 (F) 2016 (F) 2017 (F) Biz1 (49) (57) (39) (19) (6) (14) (13) (16) (23) (38) Biz2 (0) 6 2 (1) (2) (1) (1) (2) (2) (2) Biz1 Biz2 ($40) ($60) 11 Note: Economic Profit measures the dollar amount returned in excess of the Required Return (per the Cost of Capital)

13 Summary of Findings (pt. 4) Business Unit return, % Biz1 Biz2 Corporate Overhead 40.0% 20.0% 0.0% EBITDA FCF N.I. Mkt CompDCF Biz % Biz (0.9) % (2.6) Corporate 7.9% (30.3) (1.7) (30.3) 0.0 (169.4) 3.8% 0% 0% 1% 7.9% 35.8% 28.6% 18% 18% (20.0%) (9.0%) (40.0%) (60.0%) Return on Mkt Comp Valn Return on DCF Valn Free Cash FloNet IncomFree Cash Net IncomEBITDA Biz1 7.9% 3.8% 16.7% 7.9% 28.6% Biz2 19.9% (9.0%) (79.4%) 35.8% (54.0%) Corporate #DIV/0! #DIV/0! 1% 18% 18% (54.0%) (80.0%) (79.4%) (100.0%) Free Cash Flow Net Income Free Cash Flow Net Income EBITDA Return on Market Comps Value Return on Discounted Cash Flow Value 12 Note: Return on Enterprise Value (i.e. Return on Market Value) is an imperfect measure, since it lacks a hard baseline, such as invested capital Growth opportunities are already priced into market value, making RoEV somewhat subjective. Nevertheless, it is useful for BU comparisons.

14 Summary of Findings (pt. 5) Net Working Capital- Historical & Forecasted ($000's) 600,000 Current Assets less Current Liabilities 500,000 Fiscal Years: (F) 2014 (F) 2015 (F) 2016 (F) 2017 (F) Biz1 39,502 7,810 (4,615) 13,455 2,314 58,230 91, , , , ,000 Biz2 (1,736) 2,257 8,667 5,550 9,269 12,249 13,858 15,588 17,415 19, , ,000 Total Mfg 37,767 10,066 4,052 19,005 11,583 70, , , , ,292 Biz1 Biz2 COR 100,000 COR 522, , , , , , , ,135 98,387 61,639 Total 560, , , , , , , , , , (F) 2014 (F) 2015 (F) 2016 (F) 2017 (F) (100,000) 13 Current Assets: Cash Current Liabilities: Accounts payable Accounts receivable Other accrued current Inventory Deferred revenue Assets held for sale Other current

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