presentation - session 12

7/27/2019 Presentation - Session 12

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Basic Company ValuationTechniques and theBusiness Case Story Board



© Copyright Coleago 2010

Learning Objectives

Equity Analysts Investment ratios and the role of equity analysts andequity analysts in valuing companies

Valuing VirginMobile

Valuing Virgin Mobile, a UK MVNO, for the purposesof setting the IPO share price

UK MobileIndustry

What happens in a maturing market: the historicperformance of the UK Mobile Industry

The Story Board Turning a business plan into a story that can be

communicated

1




Learning Objectives

Equity Analysts Investment ratios and the role of equity analysts andequity analysts in valuing companies



UK MobileIndustry



communicated

2



Financial institutions employ two types of equity analyst

Wall Street (New York) or City (London) equity analysts are employed togenerate trading volumes. There are two types:

– Fundamental analysts study the company’s business, plans, management

and accounts in the hope of identifying undiscovered information that will leadto a revaluation of the company

– Technical analysts study the past performance of the share price to identifytrends and cycles

© Copyright Coleago 2010 3



Fundamental analysts use two approaches for company valuations

Analysts use two fundamental approaches to determine the share price for a company

Estimating future Free Cash Flows and calculating how much an investor would be prepared to pay today for that future cash flow stream

– This is the technique of Discounted Cash Flow

Comparable company valuation multiples

– What would a similar company sell for?




Valuing a company using comparable company valuation multiples

It is possible to argue that dividend

policy is irrelevant

You buy a share in the hope that youwill receive dividends

Dividends are paid out of Profits After Tax or PAT

– Often referred to as “Earnings”

The level of dividends depends, allthings being equal, on the level of earnings

If you divide earnings by the number of shares in issue you get EarningsPer Share or EPS

Revenue

Less Cost of Sales

Gross Profit

Less Operating Costs

Operating Profit (EBITDA)

Less Depreciation and Amortisation

Earnings Before Interest and Tax (EBIT)

Less interest

Earnings or Profit Before Tax (PBT)

Less Taxation

Profit After Tax (PAT)

Less Dividends

Retained Profits

Profit & Loss Account




Company Valuations

You hold a share in company A

How much would you be prepared to sell your share for

– The level of earnings this year or some multiple of this year’s earnings?

The multiple you require of current earnings in order to persuade you to sell the share iscalled the Price Earnings or PE multiple – let us suppose that multiple is 10x so theprice is $1

To Infinity ->

Earning Per Share

In cents

„10

Company A

„11 „12 „13 „14 „15 „16Actual

10




Suppose you were prepared to sell company A for 10x current earnings or $1, for how much would you sell company B?

To Infinity ->

Earning Per ShareIn cents

„10

Company A

„11 „12 „13 „14 „15 „16Actual

10

To Infinity ->

Earning Per Share

In cents

„10

Company B

„11 „12 „13 „14 „15 „16Actual

8

Company B hasa faster growth inearningscompared to

company A




PE multiples are used extensively by analysts to value companies

Price Per Share

Earnings Per Share (EPS)PE Ratio=

Company A

10 x

EPS 8 cents = 96 cents

= PE Ratio$1

$0.10

=

Company B

12x

A higher multiple is applied becausecompany B has a faster growth inearnings compared to company A

= price per share




-1,000

-500

-

500

1,000

1,500

2,000

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

U S $ ' 0 0

0

Sales and Profits

Sales EBITDA Prof it Af ter Tax (PAT)

The limitations of PE multiples

PE Multiples

EV / EBITDA




EBITDA multiples are used in the same way, but

As EBITDA represents a profit from which the returns to banks (interest payments)

and shareholders (dividends) is derived, the resulting value established from using anEBITDA multiple is the Enterprise Value

– Enterprise Value is the value to both the holders of debt and the holders of equity,i.e. the value of equity plus net debt

EV / EBITDA multiples are often preferred for valuation purposes

– EBITDA is less sensitive to differences in accounting policies

– It is the best measure of the companies ability to generate cash

Enterprise Value

EBITDAEBITDA multiple=




Limitations of EBITDA multiples and alternative metrics

-1,000

-500

-

500

1,000

1,500

2,000

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

U S $ ' 0 0

0

Sales and Profits

Sales EBITDA Prof it Af ter Tax (PAT)

PE Multiples

EV / EBITDA

EV / Sales

EV / Hits

EV/ Customers





Learning Objectives

Equity Analysts

Investment ratios and the role of equity analysts andequity analysts in valuing companies



UK MobileIndustry



communicated

12



Assessing the attractiveness of the share price range for the IPO of “Virgin”, a Mobile Virtual Network Operator in the UK

Step 1 Calculate the equity value for Virgin based on theshares to be issued, the free float and the share price range

Step 2 Combine the equity value and the value of the debtto give the Enterprise Value

Step 3 Compare the Enterprise Value with EBITDA toestablish the EV / EBITDA multiple

Step 4 Compare the resulting multiple with the multiples of comparable companies

Step 5 Identify the appropriate multiple and re-work steps1 to 4 in reverse toestablish the revised share offer price

IPO = Initial Public Offering, i.e. first sale of shares to thepublic when a company is going to the stock market




Valuing Virgin for an IPO

Virgin’s accounts for the 12 months ended March 2004 revealed

– Turnover £453.3 million

– EBITDA £78.7 million

JP Morgan, Morgan Stanley and Investec Securities initially suggested the 62.5

million shares to be offered, should be offered in the price range 235p to 285p

– The 62.5 million shares represented a “free float” of 25% of the equity so that

the number of shares actually issued in the company was 250 million

This valued the equity of the company in the range

– £588 million equity value = 250 million shares x 235p

– £713 million equity value = 250 million shares x 285p




Assessing the initial pricing range

Institutional investors took the equity values and added back the debt to establish theEnterprise Values and compared these to Virgin’s EBITDA to give an EV / EBITDA

multiple

They then looked at what other mobile operators were trading at

£

E n t e

r p r i s e V a l u e

Enterprise Value

EBITDA

899

78.7= 11.4x

EBITDAmultiple=

1,024 = 13.0x78.7

The Enterprise Value was

therefore in the range£899 to £1,024 million

Net debt as at 31 March2004 from the BalanceSheet was £311 million

Equity value in the range

£588 million to £713million




Determining the final price range

The institutional investors felt that the

Virgin’s prospects did not warrant such ahigh multiple and indicated that their would be little institutional support atthese initial price ranges

Virgin had to hastily cut its price to £2 per share to reduce the EV / EBITDA multiple

to levels which fund managers felt weremore acceptable

On the 21st July 2004 the IPO took placeraising £125 million cash for Virgin andvaluing the companies equity at £500

million and giving an Enterprise Value of £811 million on an EV / EBITDA multipleof 10.3x

Enterprise Value

EBITDA

899

78.7= 11.4x

EBITDAmultiple

=

1,024= 13.0x

78.7

Original Offer - Rejected

Revised Offer - Accepted

811

78.7= 10.3x





Learning Objectives

Equity Analysts

Investment ratios and the role of equity analysts andequity analysts in valuing companies



UK MobileIndustry



communicated

17



UK mobile penetration growth followed an s-shaped growth pattern

0%

5%

10%

15%

20%

25%

30%

0%

20%

40%

60%

80%

100%

120%

140%

160%

1 9 8 6

1 9 8 7

1 9 8 8

1 9 8 9

1 9 9 0

1 9 9 1

1 9 9 2

1 9 9 3

1 9 9 4

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

I n c r em

en t al P en e t r a t i on

P e n e t r a t i o

n

UK Mobile Penetration & Growth in Penetration

Penetration Growth in Penetration


Revenue growth has followed a classic s-shaped curve and the rate of



Revenue growth has followed a classic s shaped curve and the rate of growth is now slowing dramatically as the market matures and competitionintensifies – new entry accelerates growth

0

5,000

10,000

15,000

20,000

25,000

1 9 8 6

1 9 8 7

1 9 8 8

1 9 8 9

1 9 9 0

1 9 9 1

1 9 9 2

1 9 9 3

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1 9 9 5

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1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

£ M i l l i o n s

Mobile Industry Turnover in the United Kingdom


During the growth phase profitability is constrained but then grows rapidly as



During the growth phase profitability is constrained but then grows rapidly asthe market matures and sales expenses diminish, however, increased levelsof competition are expected to erode the profit pool

-500

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

1 9 8 6

1 9 8 7

1 9 8 8

1 9 8 9

1 9 9 0

1 9 9 1

1 9 9 2

1 9 9 3

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1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

£ M i l l i o n s

UK Mobile Industry EBITDA

Vodafone O2 Orange T-Mobile Virg in Three Tesco


M i hi h t d i th h f l d d l d i



Margins are highest during the phase of monopoly and duopoly and inmore competitive markets, market share is the major driver of margins

-30%

-10%

10%

30%

50%

70%

1 9 8 6

1 9 8 7

1 9 8 8

1 9 8 9

1 9 9 0

1 9 9 1

1 9 9 2

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1 9 9 9

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2 0 0 9

E B

I T D A

UK Mobile Operator EBITDA Margin

Vodafone O2 Orange T-Mobile

Virgin Three Tesco


The asset base grew dramatically with the award of 3G licences during the



The asset base grew dramatically with the award of 3G licences during thedot com bubble

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

1 9 8 6

1 9 8 7

1 9 8 8

1 9 8 9

1 9 9 0

1 9 9 1

1 9 9 2

1 9 9 3

1 9 9 4

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

£ M i l l i o n s

UK Operators Net Book Value of Fixed Assets

Vodafone O2 Orange T-Mobile Virgin Three Tesco© Copyright Coleago 2010 22



Capital employed expanded to match the increased level of assets

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,00050,000

1 9 8 6

1 9 8 7

1 9 8 8

1 9 8 9

1 9 9 0

1 9 9 1

1 9 9 2

1 9 9 3

1 9 9 4

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1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

£ M i l l i o

n s

UK Mobile Operators Capital Employed

Vodafone O2 Orange T-Mobile Virgin Three© Copyright Coleago 2010 23

As a result of the dot com bubble returns fell dramatically with the



As a result of the dot com bubble returns fell dramatically with theincreased level of capital employed

0%

10%

20%

30%

40%

50%

60%

70%

80%90%

1 9 8 6

1 9 8 7

1 9 8 8

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1 9 9 0

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1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

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2 0 0 5

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2 0 0 8

R O

C E

Return on Capital Employed

Vodafone O2 Orange T-Mobile Virgin Three




Overall the outlook for returns in the UK are pessimistic in the short term

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

1 9 8 6

1 9 8 7

1 9 8 8

1 9 8 9

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1 9 9 1

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1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

% R

O C E

UK Mobile Industry Return on Capital Employed


L i Obj ti




Learning Objectives

Equity Analysts Investment ratios and the role of equity analysts and

equity analysts in valuing companies



UK MobileIndustry



communicated

26

Th i t t t it t b d



The investment opportunity story board

The investment opportunity is located in Country with a population of x and per capitaGDP of y. The market is worth $x with x major competitors serving the market. Theinvestment fits with our overall corporate strategy.

We would compete on the basis of [unique selling point or positioning] and obtain amarket share of x% generating x$ of revenue by year x. Our cost of sales will be x$,leaving a gross margin of x$ or x% of revenue.

The main opex items are a, b, c with total opex amounting to x$, giving an EBITDA of x$ or x% of revenue in year x. Capex consists mainly of a, b, c and amounts to x$ for the first three years and x% of revenue in the longer term.

The business will require a funding of x$ before turning cash flow positive in quarter x of year y. Payback is achieved in year x. The NPV of the opportunity is x$ and the IRR is x%, assuming an exit after 5 years based on 8 times EBITDA.

The main risks associated with the investment are a, b, c. These risks can be mitigated by x, y, z.


The investment opportunity is located in Country with a population of x andit GDP f Th k t i th $ d th t



per capita GDP of y. The market is worth $x and there are x operatorsserving the market. The investment fits with our strategy.

MarketBackground

Market Size

Competition

Strategic Fit

Geography, demographics, economy, regulation

Number or customers, total revenue, growth rates

Who are the incumbent operators, how many are there, how dothey compete

How does the opportunity fit within the overall strategy of thecompany


Within this market we would obtain a market share of x% generating x$ of O t f l ill b $ l i i f $ % f



revenue. Our cost of sales will be x$, leaving a gross margin of x$ or x% of revenue.

The Market Our MarketShare

Our Revenue

Cost of Sales

Gross Margin

These are variable costs directly driven byand variable with revenue e.g. retailer commissions, interconnect costs

Minus variablecash out

Overall cash in

Should always be positive, can bebenchmarked


The main opex items are a, b, c with total opex amounting to x$, giving anEBITDA of $ or % of re en e Cape consists mainl of a b c and amo nts



EBITDA of x$ or x% of revenue. Capex consists mainly of a, b, c and amountsto x$ and x% of revenue in the longer term.

OperationalExpenditure

EBITDA

CapitalExpenditure

(Capex)

Opex includes costs that are fixed in the short terme.g. office and site rents, leased lines, staff costs,utilities, ongoing license fees. The objective is toquickly drive up the gross margin to cover opex andthus break even.

The amounts that have to be paid for equipment

that is used to operate the network and run thebusiness e.g. radio base stations, switches,computers, buildings, vehicles as well as any up-front license fee.

Earnings Before Interest, Tax, Depreciation and Amortisation. For a new business this will initiallybe negative, but then turn positive. It can bebenchmarked with similar businesses.

Cash out tooperate the

business

Gross marginminus opex

Cash out toacquire assets


The business will require a funding of x$ before turning cash flow positive inquarter x of year y Payback is achieved in year x The NPV of the opportunity



quarter x of year y. Payback is achieved in year x. The NPV of the opportunityis x$.

EBITDAMinusCapex

This is a rough measure of cash flow. For a new business this willinitially be negative. Until it turns positive, investors have to put cashinto the business. The total amount that needs to be invested is the“peak funding” which has to be provided mainly by shareholders and

can partially be raised from banks.

Free Cash Flow

The FCF is the cash generated by the business after allowing for adjustments for working capital (cash, debtors, stock) and taxespaid. The cash is available to be distributed to banks in form of interest payments and loan repayments and secondly shareholdersin form of dividends.

Net PresentValue

The FCF is discounted back to the present in order to tell investorswhat the future cash flows are worth today. The methodology iscomplex an beyond the scope of this course.


The main risks associated with this investments are a, b, c. These risks can



be mitigated by x, y, z.

Risk

While the discounted cash flow valuation takes account of risk,investors will want to understand key risks, especially those that arecatastrophic such the loss of a licence to operate. What steps, if any,can be taken to mitigate the risks prior to the investment e.g.government guarantees or invite an influential local partner as a co-investor.

Set of FinancialStatements

Any business plan must include a full set of historic (last 3 years for an existing business) and future (5 to 10 year) financial statementsi.e. the profit & loss account, balance sheet and cash flow statement.

Appendices

The main body of the investment case presentation should be kept

simple so the story is not lost in detail. However, the detail must beavailable in appendixes.


Example of a business presentation: Project Alpine



Example of a business presentation: Project Alpine

In 2007 the shareholders of One, a mobile operator in Austria, put up the

company for sale. The shareholders includes several operators, includingOrange with a minority stake.

Coleago Consulting were the advisors for European mobile operator who soughtto acquire One. Coleago worked on the due diligence and valuation of theacquisition opportunity.

In the event, and rather late in the process, Orange decided exercise is pre-emption rights and bought out the other shareholders.

Please open the file “Project Alpine”. It shows the material presented to the

board of the European Mobile operator advised by Coleago Consulting Ltd.




Session Summary

presentation - session 12

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