advanced private equity valuations
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Introduction to
Advanced Private EquityValuations
Services for:
Investment Professionalsand Equity Analysts
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Stox.vn: One Stop Financial Portal is a trademark of StoxPlusFinancial Media Corporation offering a complete suite of
comprehensive real-time market data, fundamentalinformation, powerful analytics, most relevant stories and upto date financial news for private investors and marketprofessionals and in Vietnam via our user friendly andcustomisable web-based portal. We help investors madeinformed and potentially profitable investing decisions.
We have created standardised and reliable and very costeffective market data solutions for securities firms andinvestment management firms in Vietnam.
Our senior management team in combination, have over 35years of extensive and diverse experience in Investment andTechnology, Banking, Corporate Finance with top Wall Street
investment bank and assets managers and financial consultingfirms in the United Kingdom, Switzerland, Australia andVietnam. They hold two MBAs, one CFA and two ACCAqualifications.
www.stox.vn
About Stox.vn
Stox.vn: One Stop Financial Portal l mt thng hiu caHng Truyn thng Ti chnh StoxPlus, thng qua cng stox.vn
chuyn cung cp cc sn phm thng tin a chiu v chuynsu v tnh hnh ti chnh doanh nghip, d liu th trng,bo co phn tch chng khon chuyn su, cng c qun lu t ti u, cng cc s kin v tin tc v cng quan trngcho nh u t c nhn v cc chuyn gia ti Vit nam. Snphm em n cho qu v thng qua web based portal, c giaodin thn thin, d s dng v hon ton c th iu chnh
theo mong mun ca qu v.
Vi cc cng ty chng khon v hng qun l qu, StoxPluscung cp gii php thng tin c chun ha cao, ng tincy, kp thi v hiu qu.
Ban lnh o ca StoxPlus l cc chuyn gia c bng CFA,
ACCA, MBA v c b dy trn 35 nm kinh nghim su tronglnh vc u t, Ngn hng, Phn tch Ti chnh v Cng nght Trung tm Ti chnh Lun n, Anh Quc, Thy S, c vng Nam .
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Overview
SummaryOther valuation techniques
Discounted cash flow approach
Earnings multiple approachKey concepts
Introduction & Objectives
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Introduction & Objectives
At the end of this presentation you will be able to:
Understand key valuation concepts (eg enterprise vs equity value)
Understand the main valuation techniques Earnings multiple approach
Discounted cash flow
Perform a simple valuation
Understand the link between the revised BVCA guidelines and IFRS
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Key Concepts
Oxford dictionary definition
amount of money or goods for which a thing can be exchanged in an openmarket
Interpretation
the value of the right to receive the future cash flows, having regard for therisks surrounding the receipt of those cash flows
Valuation is this process of estimating this amount of money or goods
Valuation is subjective
What is value?
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Equity value vs enterprise value
Extract from a Balance Sheet
Net assets x
Shareholders funds x
Add back: Net debt x
Equity (or company) value
Enterprise (or business) value
Key Concepts
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What is net debt?
Example calculationShort-term borrowings (x)
Long-term borrowings (x)
Convertible notes (x)Cash and deposits x
Net (Debt) / Cash (x)
Ensure rolled-up
interest is included
Watch out forseasonal debt
Key Concepts
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Summary of equity value and enterprise value
Enterprise value (or business value) is the value of the entire business operationsand is based on the cash flows attributable to both the debt providers and equityproviders (shareholders)
Equity value (or market capitalisation for a public company) is the value of theprofits and cash flows attributable to the ordinary shareholders
Enterprise value = equity value + net debt
Similarly
Equity value = enterprise value net debt
Key Concepts
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We tend to value on a market value basis
The price which equity might reasonably be expected to obtain in money or moneysworth, in a sale between a willing buyer and a willing seller, each of whom is
deemed to be acting for self interest and gain and both of whom are equally wellinformed about the market in which the company operates
Other valuation bases include
Fair value
Book value
Liquidation value
Economic value
Replacement value
Key Concepts
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Price does not necessarily equal value
Price someone is prepared to pay reflects among other things
Value to them (ie why are they buying?) Their resources
Their attitudes/desires
Presence of other bidders
Negotiating skills of the parties involved
Key Concepts
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Earnings multiple approach
Earnings MultipleApproach
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What are the different multiples?
Earnings multiple approach
Earnings multiple Derived value
PAT (PE multiple)
EBITDAEBIT
Historic vs prospective multiples
Enterprise value
Equity value
Also turnover multiple
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What are the key issues?
Selection of an appropriate multiple
Estimation of maintainable earnings Selection of a reasonable (comparable company) multiple
Earnings multiple approach
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Selection of an appropriate multiple
Different multiples eliminate the impact of
Different capital structures Different taxation regimes
Different accounting policies (eg unusual depreciation rates)
Also profitability no profits likely to use turnover multiple
Earnings multiple approach
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Estimation of maintainable earnings
Normalised base from which a companys profits are expected to vary and grow inthe future
Look at the historical track record
Over last 3 to 5 years
Adjust for exceptional / non recurring items
Exclude income / costs relating to surplus assets Consistency in accounting policies
Consider related party issues
Past can only be a guide for the future What are future prospects?
Earnings multiple approach
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Criteria for choosing comparable companies
Same industry/product/revenue stream Similar profit record
Close in terms of size, turnover, dividend cover etc
Not be in a special situation Have similar prospects
Selection of a reasonable (comparable company) multiple
Comparable companies do not need to be identical but should have anumber of strong similarities
Issue with EVCA averaging always try and select the mostcomparable company
Ideally select around 4-5 companies
Earnings multiple approach
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Sources of multiples
Listed companies vs transactions
Date of valuation
Availability of information
Minority value
Impact of synergies
Earnings multiple approach
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What sources of information can we use?
Data required Possible source
Financial information
Broker forecast
Acquisitions data
Comparable companyselection
Industry sector
Consider the reliability of the source that you use and try to useconsistent sources for all multiples
Annual accounts from company web site, EdgarScan (US)Barra Global Estimates, Broker Reports
M&A database, Factiva, Press Search
Bloomberg, Datastream, Hoovers web site
FTSE Share Index
Earnings multiple approach
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Adjustments to earnings multiples
Adjustments are often required to reflect the following:
Premium for controlling shareholding Growth
Lack of size and diversification
Lack of stock market quote
Transfer restrictions
Earnings multiple approach
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Industry valuation benchmarks
Industry/Business Valuation rule of thumb
European mobile phone
Fund managers
Agency business
Hotels
Undertakers
Internet
Underlying assumption that the profile of company being valuedequals the industry norm
Value per subscriber (eg 2,000 - 2,500)Percentage of funds under management (eg 1% - 5%)
Percentage of commission earnings
Value per room (eg 50,000 - 250,000)
Value per funeral
Value per hit
Use as a cross-check to a primary method of valuation
Earnings multiple approach
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Earnings multiple approach
Earnings multiple approach
Case study
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Exercise 1: Calculate the comparable company multiple
Objective - calculate the historic market multiples for XZY Ltd
Specifically - calculate using the template provided and XZY Ltds fullyear results
turnover multiple
EBITDA multiple
EBIT multiple
PE multiple
Earnings multiple approach
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Exercise 2: Extract summary financial information on ABC Ltd
Objective - Estimate maintainable earnings for the year ended30th June 2003
Specifically - calculate using the accounts provided
turnover
EBITDA
EBIT
profit after tax
Earnings multiple approach
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Exercise 3: Select a multiple for ABC Ltd and estimate the equity value
Objective - Estimate the value of ABC Ltd with reference to the marketmultiples
Step 1 - Select a turnover, EBITDA, EBIT and PE multiple with reference tothe other comparable companies
Step 2 - Based on the financial information provided for ABC Ltd calculatednet debt
Step 3 - Use the multiples selected to calculated the equity value for ABCLtd
Earnings multiple approach
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Discounted cash flow approach
Discounted Cashflow Approach
(DCF)
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The DCF approach is based on the economic definition of value
The value of an asset is the present value of its future earningsstream
DCF gives the net present value of expected cash flows
Therefore its important to
Define the asset
Assess the future earnings stream
Discount future earnings at an appropriate rate
The earnings multiple is a short cut to the DCF approach
In theory both should produce the same result
Discounted cash flow approach
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Define the asset to be valued
Ensure cash flow stream matches the asset to be valued
Whole business valuation Subsidiary/business unit valuation
Discounted cash flow approach
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Assess the future earnings stream
What type of cash flows should we assess
How long into the future should we assess the earnings stream What should we consider when modelling cash flows
Discounted cash flow approach
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What type of cash flows should we assess
There are two types of cash flow
Cash flow before debt servicing (free cash flow) Cash flow after debt servicing (cash flow to equity investors)
Generally
Business values are assessed using pre-debt servicing cash flows (freecash flows)
Discounted cash flow approach
Di d h fl h
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Free cash flow vs cash flow to equity investors (equity cash flow)
Free cash flows Equity cash flows
Profit before interest and tax xx xx
Add: depreciation and amortisation Yes Yes
other non cash expenses Yes Yes
decreases in working capital Yes Yes
Less: capital expenditure Yes Yes
increases in wo rking capital Yes Yes
interest costs No Yes
tax charge Yes (unlevered) Yes (levered)
principal debt repayments No Yes
Add: new debt issues No Yes
xx xx
Discounted cash flow approach
Di t d h fl h
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How long into the future should we assess the earnings stream
It is impossible to forecast earnings into perpetuity
Forecast period should last until the business has reached a steady stateof operations
Typical indicators of steady state of operations include
Constant profit margins
Constant growth (in line with inflation)
The terminal value
Typically use a cash flow perpetuity basis (Gordon Growth)
Discounted cash flow approach
Di t d h fl h
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What should we consider when modelling cash flows
Key issues to consider include
Reasonableness of cash flow forecasts/assumptions
Key sensitivities
Discounted cash flow approach
Di t d h fl h
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Discount future earnings at an appropriate rate
Discount rate is defined as:the required rate of return which an investor would apply to the cash flows toascertain the value of the operation/project taking account of the risk of specificinvestment
Discount rates- Cost of equity
- Weighted average cost of
capital (WACC)
Discounted cash flow approach
Discounted cash flow approach
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Selection of the discount rates
Depends on the definition of the cash flows being discounted
Cash flow Free cash flow
Discount rate WACCValue Enterprise value
Less debt = Equity value
Cash flow Equity cash flow
Discount rate Cost of equityValue Equity value
Discounted cash flow approach
Discounted cash flow approach
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Discounted cash flow approach
Discounted cash flow approach
Case study
DCF Case Study
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Exercise: review the DCF report
Objective - Identify issues / errors within the attached DCFreport
Specifically - Look through the report and
highlight any errors within the commentary
identify areas of concern / issues with the model and
assumptions
DCF Case Study
Discounted cash flow approach
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Discounted cash flow calculation
Company Name: Target Valuation Date 30-Sep-01
Weighted Average Cost of capital (WACC) 8% 2002 2003 2004 2005 2006 Terminal Year
Perpetual growth rate (g) 2.5% m m m m m m
Forecast Forecast Forecast Forecast Forecast
EBIT 90 95 102 109 118 125
Add: Depreciation 50 60 70 70 70 70
Less: Capex (100) (120) (110) (90) (80) (75)
Tax (22) (23) (24) (26) (28) (30)
Adjust:(increase)/decrease inworking capital (5) (7) (11) (12) (12) (15)
Free Cash Flow 13 5 27 51 68 75
Mid Point Factor (n) 0.5 1.5 2.5 3.5 4.5
Discount Factor (R) 0.962 0.891 0.825 0.764 0.707
PV of Free Cash Flows 13 5 22 39 48
Terminal Cash Flow PV of total explicit cashflows 126.1
A Terminal Year Cash Flow 75 Plus:PV of terminal cash flow 964
B Terminal Multiple (1/WACC-g) 18.2x Equals: Enterprise Value 1,091
C Terminal Value (A * B) 1,364
D Terminal Year PV Factor 0.707 Less: (Net Debt)/ cash (169)
Present Value of terminal cashflow (C * D) 964
Equals: Equity Value 922
Year ended 30 September
Discount factor formula
R = 1/(1+WACC)n
Discounted cash flow approach
Other Valuation Techniques
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Other Valuation Techniques
Other ValuationTechniques
Other Valuation Techniques
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Price of recent investment
Best indication of value
Question over the length of time for recentNet assets approach
Value is a function of net assets
Appropriate for businesses where value is driven by the assets Banks (multiple of book)
Investment Trusts (NAV)
Property companies (NAV) Also appropriate for private equity fund of funds
Other Valuation Techniques
Summary
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In this session we have covered the following topics:
The key valuation concepts (eg enterprise vs equity value)
The main valuation techniques Earnings multiple approach
Discounted cash flow
Summary
www.stox.vn
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Stox.vn: One Stop Financial Portal is a trademark of StoxPlusFinancial Media Corporation offering a complete suite of
comprehensive real-time market data, fundamentalinformation, powerful analytics, most relevant stories and upto date financial news for private investors and marketprofessionals and in Vietnam via our user friendly andcustomisable web-based portal. We help investors madeinformed and potentially profitable investing decisions.
We have created standardised and reliable and very cost
effective market data solutions for securities firms andinvestment management firms in Vietnam.
Our senior management team in combination, have over 35years of extensive and diverse experience in Investment andTechnology, Banking, Corporate Finance with top Wall Streetinvestment bank and assets managers and financial consulting
firms in the United Kingdom, Switzerland, Australia andVietnam. They hold two MBAs, one CFA and two ACCAqualifications.
About Stox.vn
Stox.vn: One Stop Financial Portal l mt thng hiu caHng Truyn thng Ti chnh StoxPlus, thng qua cng stox.vn
chuyn cung cp cc sn phm thng tin a chiu v chuynsu v tnh hnh ti chnh doanh nghip, d liu th trng,bo co phn tch chng khon chuyn su, cng c qun lu t ti u, cng cc s kin v tin tc v cng quan trngcho nh u t c nhn v cc chuyn gia ti Vit nam. Snphm em n cho qu v thng qua web based portal, c giaodin thn thin, d s dng v hon ton c th iu chnhtheo mong mun ca qu v.
Vi cc cng ty chng khon v hng qun l qu, StoxPluscung cp gii php thng tin c chun ha cao, ng tincy, kp thi v hiu qu.
Ban lnh o ca StoxPlus l cc chuyn gia c bng CFA,ACCA, MBA v c b dy trn 35 nm kinh nghim su trong
lnh vc u t, Ngn hng, Phn tch Ti chnh v Cng nght Trung tm Ti chnh Lun n, Anh Quc, Thy S, c vng Nam .
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