INTRODUCTION TO COMPANY S VALUE AND VALUATION TECNIQUES

Transcription

1 INTRODUCTION TO COMPANY S VALUE AND VALUATION TECNIQUES Lesson 10 Castellanza, 26 th November 2014

2 SUMMARY Introduction to company s valuation Why valuation can be subjective Company s valuation techniques Adjusted net asset method Income method Mixed approach Cash flow approach Market approach 2

3 SUMMARY FROM THE PREVIOUS LECTURES: In the previous lecture it has been explained the meaning of investment, its objective and the key information needed to make a consistent valuation. We also went through some of the methods to valuate and to compare investment s opportunities, such as: The Net Present Value (NPV) The Internal Rate of Return (IRR) The Pay-Back Period (PBP) 3

4 INTRODUCTION TO COMPANY S VALUATION What about if the investment decision involves the acquisition of a company? Which is the value of the company? How can the company s value be determined? Generally, a company s valuation is performed in order to determine the value of its shares or of its equity capital. The value should not be confused with the price, that is the quantity agreed between the seller and the buyer in the sell of a company. 4

5 INTRODUCTION TO COMPANY S VALUATION In general, there are two different methods for valuing the equity value of a company (E Q ): The direct approach direct valuation of equity capital The indirect approach the equity value results from the deduction/sum of the Net Financial Position from the enterprise value (E V ), that is the value of the firm as a whole. Among both methods there are several techniques/methods that can be applied to obtain the value of the company. 5

6 INTRODUCTION TO COMPANY S VALUATION ENTERPRISE VALUE NET FINANCIAL POSITION EQUITY VALUE Indirect approach Direct approach 6

7 WHY VALUATION CAN BE SUBJECTIVE However, a company s value can be subjective mainly depending on: The method (following slides) The point of view SELL SIDE Focus on the maximization of value for the seller Emotional content BUY SIDE Focus on the risk/return profile of the investment Emotional content 7

8 COMPANY S VALUATION TECNIQUES DIRECT APPROACH Adjusted net asset method Income method Levered discounted cash flow Market approach: multiple X net income Mixed approach INDIRECT APPROACH Unlevered discounted cash flow (DCF) Market approach: multiple X EBIT or EBITDA 8

9 ADJUSTED NET ASSET METHODS In these methods, a valutation analysis is performed for a company s identified FIXED, FINANCIAL and other TANGIBLE and INTANGIBLE ASSETS. The derived aggregate fair market value of these assets is equivalent to the value of the subject company. These methods do not explicitly consider the earning potential of the business. 9

10 INCOME METHOD In the income method the value of a company s business is based on its ability to earn positive net incomes. In particular, the value of a company is equal to the present value of the future net incomes which will be produced for a limited, or unlimited, period. The income method is frequently applied to trading or service businesses, or where economic aspects prevail over invested capital as the basis of the value of the business. 10

11 MIXED APPROACH In this method, a valuation analysis is performed for a company s identified fixed, financial and other tangible and intangible assets, net of liabilities. The net current assets thus identified are adjusted to account for the excess profits of the company relative to the expected normal return of similar companies. 11

12 CASH FLOW APPROACH In the cash flow methods the value of a company s business is based on its ability to produce positive cash flows to equity or to investors. In particular, the value is equal to the present value of the future cash flows which will be produced for a limited, or unlimited, period. The cash flow methods are often applied when medium-long term business plan for the business are available. 12

13 GENERAL FORMULA FOR CASH FLOW DISCOUNTING n W = t = 1 F t (1 + k) t + TV + SA W F t k n TV SA company s value Cash Flows discount rate number of periods considered terminal value of the company surplus assets 13

14 CASH FLOWS (F T ) Cash Flows to Firm Cash Flows Cash Flows to Equity 14

15 CASH FLOW TO FIRM: UNLEVERED DCF The free cash flow to firm is the operating cash flow, that is, the cash flow generated by operations, without taking into account the flows deriving from the financial position, after tax. It is the money that would be avaiable in the company after covering fixed asset investment and working capital requirements. The appropriate discount rate (K) for the free cash flow to firm is the Weighted average cost of capital (WACC). 15

16 CASH FLOW TO FIRM: UNLEVERED DCF EBIT -/+ Change in Net Working Capital + Depreciation, amortization - Investments + Divestments - Taxes Free Cash Flow to Firm 16

17 CASH FLOW TO EQUITY: LEVERED DCF The cash flow to equity is calculated by netting the free cash flow to firm from the interest and principal payment (after tax) made in each period to the debt holders and adding the new debt provided. The appropriate discount rate (K) for the free cash flow to equity is the required return to equity (K e). 17

18 CASH FLOW TO EQUITY: LEVERED DCF EBIT +/- Change in Net Working Capital + Depreciation, amortization - Investments + Divestments - Interests Expenses - Principal payments - Taxes Free Cash Flows to Equity 18

19 TERMINAL VALUE n W = t = 1 F t (1 + k) t + TV + SA TV = F n / (k-g) (1 + k) n+1 g = sustainable growth rate (usually: long-term expected rate of inflation) 19

20 DCF Cash Flow To Firm Cash Flow To Equity Unlevered discounted cash flow Levered discounted cash flow Enterprise value Equity value Enterprise value +/- NFP = Equity value NFP: company s overall debt situation net by cash and cash equivalents (liquid assets). NFP=-(Short Term Debt + Long Term Debt Cash & Cash Equivalents). 20

21 CASH FLOW APPROACH DCF capitalizes the cash flows the firm is expected to generate. Strenght: reflects actual benefits that investors care about better than other methods. Weakness: relies heavily on projections. Valuations are only as good as these projections. 21

22 MARKET APPROACH Value estimates are established thorough an analysis of metrics of similar businesses. Application of MULTIPLES deriving from similar or comparable publicly traded companies (peer group). Multiples (most frequently used): P/E ratio: current stock price / (net profit / n shares) EQUITY VALUE Enterprise value (EV) based multiples: EV / most important element to value (EBIT, EBITDA, Sales) ENTERPRISE VALUE 22

23 MARKET APPROACH Compute the average of the multiple of the companies of the peer group, and Multiply the average multiple obtained for EBIT, EBITDA, Sales or Net Profit of your company. Reliability depends on the level of comparability of the selected publicly traded companies 23

24 EXAMPLE MARKET APPROACH In Private Equity, the most frequently used multiple is the EBITDA MULTIPLE. Why? It normalizes the differences in capital structure, taxation, fixed asset accounting and exatraordinary flows. Let s assume that the Ebitda Multiple is 5 Enterprise value: 5 X Ebitda target company Enterprise value +/- PFN = Equity value 24

25 EXERCISE 1 Compute the Equity Value of the firm according to the Unlevered Discounted Cash Flow approach. The WACC calculation must be performed on the basis of 2010 figures. k(e) 7% k(d) 4% g 1% 25

26 THE WEIGHTED-AVERAGE COST OF CAPITAL A company can decide to finance itself with either debt or equity. The WACC is the average rate of return demanded by investors in the company s debt and equity securities: WACC = [Ke E / (E + D)] + [Kd D / (E + D)] Where: E = Equity D = Debt Ke > WACC > Kd 26

27 P&L Profit & Loss Reveneus Operating Costs EBITDA Deprec. Technical assets EBIT Financial expenses EBT Taxes Net Income

28 BALANCE SHEET Assets Technical assets Accounts receivable Inventories Cash&cash equivalents Total Liabilities Long term financial loan Accounts payable ETP fund Equity Profit Total

29 CASH FLOW STATEMENT AND VALUATION Cash Flow Statement EBIT WorkingCapital Free cash flow PFN WACC 0,057 TV ,03 Enterprice Value ,54 Equity Value ,25 29

30 EXERCISE 2 AT HOME Compute the Equity Value of the firm according to the Unlevered Discounted Cash Flow approach. The WACC calculation must be performed on the basis of 2012 figures. k(e) 7% k(d) 4% g 1% 30

31 BALANCE SHEET Assets Intangible assets Tangible assets Inventories Account receivables Other receivables Deffered charges Cash & cash equivalents ( ) Total Liabilities Mortgages Long term debts Account payables Other payables ETP fund Equity & reserves Profit ( ) ( ) (82.332) (17.544) Total

32 PROFIT & LOSS Profit & Loss Revenues Operating costs ( ) ( ) ( ) ( ) Personell ( ) ( ) ( ) ( ) Other costs ( ) ( ) ( ) ( ) Ebitda Depreciation intangibe assets ( ) ( ) ( ) ( ) Depreciation tangibe assets (65.235) ( ) ( ) ( ) Ebit ( ) ( ) Financial expeses (74.699) (54.023) (28.025) (29.707) Extraordinary expenses (54.998) Taxes (25.465) (58.889) (72.233) ( ) Net income / (loss) ( ) ( ) (82.332) (17.544) 32