valcomp tutorial 2014 (unlocked)
TRANSCRIPT
MCC Valuation Competition Tutorial
Contents
1. Overview
2. Competition Format
3. Rules
4. Entry Fees
5. Concluding Thoughts
6. Handover for Technical Tutorial
Overview
To create a real-world experience of an analyst at an investment bank
A short case on an NZX-listed company
Our Aim:
How?
Presenting
to Panels of industry judges
Competition Format
40 Hours Preparation
Teams of 2-4 People
10 Minute Presentation
10 Minute Q&A
Case Distributed Preliminary Rounds
Networking Function
Friday 23rd
Sunday 25th
Final Rounds
Saturday 24th
Competition Format
Final Round 4 Teams
Division A Division B Division C Division D
Winner of Division Winner of Division Winner of Division Winner of Division
$750 for 1st Place
$250 for 2nd Place
Technical Tutorial
7
Contents
1. Introduction
2. Forecasting cash flows
3. Discount cash flow valuation
4. Multiples valuation
5. Sum of the parts valuation
8
Different perspectives Your job is to convince investors to buy or sell based on your analysis of the case company
Research Analyst Corporate Finance Analyst Fund Analyst
§ Review announcements
§ Update valuation models
§ Prepare research report
§ Make a call – buy/hold/sell
§ Market to institutions
§ Game changer acquisition
§ Capital restructuring opportunity
§ Prepare roadshow materials
§ Lots of work behind the scenes
§ Market to institutions
§ Post-transaction implications
§ Operational implications
§ Strategic implications
§ Own view on valuation
§ Bid into bookbuild
§ Reweight post-transaction
60% 10% 30%
Indicatively,
Business analysis Industry analysis Financial analysis Key catalysts 35% 25% 30% 10%
9
The company A strong understanding of the business drivers is core to a robust valuation
Places to look: ‒ Annual report ‒ Management presentations ‒ Newspaper articles ‒ Other reports and
presentations
Business analysis Industry analysis Financial analysis Key catalysts
Sources of revenue
Business insights
Value chain
Customers
10
The industry Company pedigrees – how does the company fare?
Places to look: ‒ Statistics NZ ‒ RBNZ ‒ Treasury ‒ News articles ‒ Industry expert reports
Business analysis Industry analysis Financial analysis Key catalysts
Supply and demand
Regulation
Competitor activity
Industry trends
Industry specific factors
11
Valuation at a glance
Business analysis Industry analysis Financial analysis Key catalysts
Financial performance
Business drivers Industry drivers
Sum of the parts Discount cash flow Multiples
Valuation methods
Intrinsic value
12
Some key concepts
Business analysis Industry analysis Financial analysis Key catalysts
‒ Present Value (PV) – the value of future cash flows now
‒ Weight Average Cost of Capital (WACC) – the average return that equity and debt holders expect from the company
‒ Free Cash Flow (FCF) – cash available for distribution to stakeholders after paying for new investments and working capital
‒ Enterprise Value – the total value of a company (calculated as market cap + net debt + minority interest - associates)
‒ Net Debt – long term + short term debt – cash & cash equivalents
13
Valuation – EBITDA Earnings Before Interest, Taxation, Depreciation and Amortisation measures the current operational profitability of the business
Business analysis Industry analysis Financial analysis Key catalysts
Average sales per segment
Growth in same segment sales Size of segment = Revenue
Gross profit margin per segment
Other operating expenses per
segment Size of segment = Expenses
Less
Equals
Segmental EBITDAs
Less
Group overheads
Equals
Group EBITDA
Call centre, director and executive salaries, audit fees, etc.
14
Valuation – NOPAT Net Operating Profit After Tax (NOPAT) is a company’s after-tax operating profit for ALL investors
Business analysis Industry analysis Financial analysis Key catalysts
Group EBITDA Less D&A
Equals EBIT
x(1-tax rate) =
NOPAT1
As per above
Depreciation and Amortisation
EBIT represents earnings after operating leverage but before financing leverage
No interest expenses have been deducted – represents profits to all investors
(1) To calculate the NPAT, a measure of after tax equity returns, deduct interest expense before deducting tax
15
Valuation – working capital Increases in net working capital (WC) represent an “investment” in shorter term operating assets and is therefore a cash outflow
Business analysis Industry analysis Financial analysis Key catalysts
Current operating assets
• Receivables • Inventories
- Current operating liabilities
• Accounts payables
= Net working capital
• ▲NWC = cash outflow
• ▼NWC = cash inflow
16
Valuation – FCF Free cash flows represent cash available for distribution to stakeholders after paying for new investments (capex) and investing in operating assets (WC)
Business analysis Industry analysis Financial analysis Key catalysts
NOPAT Less Capex
Less Changes in WC
Equals
FCFF
As per above
As per above
As per above
Free cash flows to the firm are available to all investors (debt and equity)
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Valuation – discounted cash flow Discount cash flows back to present value using appropriate discount rate
Business analysis Industry analysis Financial analysis Key catalysts
FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25 FY26
FCFs FCFs FCFs FCFs FCFs FCFs FCFs FCFs FCFs FCFs FCFs FCFs
+
Terminal value
Free cash flows to the firm discounted by WACC
Equals
EV Total value of the company (to all investors)
Less Net debt
Less Minorities
As explained above
Shareholders in subsidiaries where the case company does not own 100%
Equals
Total market equity Market value of shareholders’ equity – divide by outstanding shares for share price
18
Valuation – WACC
Business analysis Industry analysis Financial analysis Key catalysts
19
Valuation – equity beta Significant time should be invested into this measure
Business analysis Industry analysis Financial analysis Key catalysts
1. Regression
• Regress company stock price returns against market
returns (use index e.g. NZX50)
• Beta is the slope of the regression
• Data can be obtained from Yahoo!
2. Re-levering asset beta
• Betas are affected by firm leverage • Un-levering betas allows for comparison across
companies
• 𝐵↓𝑢 = 𝐵↓𝑙 /1+(1− 𝑇↓𝑐 )× 𝐷/𝐸 • Regress comparable companies equity betas • Re-lever for subject company
20
Valuation – WACC Estimating WACC is always going to require estimation – ensure you can justify what you have used
Business analysis Industry analysis Financial analysis Key catalysts
Asset Beta 0.80
Target Gearing 30%
Risk Free Rate 6%
Market Risk Premium 7%
Equity Beta 1.00
Cost of Equity 13%
Debt Premium 1%
Corporate Tax Rate 28%
Cost of Debt 5.04%
WACC 10.6%
Assumption of 1%
Use 28% as the corporate tax rate
Assumption of 7%
Risk free rate of 6% assumed
21
Valuation – terminal value Using a normalised FCF, we calculate a perpetuity value in a future period
Business analysis Industry analysis Financial analysis Key catalysts
• Same WACC as before WACC
• Depends on the LT growth rate of the industry • Frequently, inflation rate is used as a proxy g
• The final year’s FCF Final cash flow
Or
A multiple1 EV/EBITDA, EV/EBIT, EV/BV
22
Valuation – comparable companies Comparable multiples are an important metric for gauging market attitudes
Business analysis Industry analysis Financial analysis Key catalysts
1 • Choose normalised earnings base (EPS, EBITDA, EBIT) and multiple
2 • Choose time period (FY11, FY12)
3 • Find implied multiples from comparable companies
4 • Apply multiple to earnings
23
Valuation – comparable companies Choose comparable companies that are closely matched with the case company – not always easy…
Business analysis Industry analysis Financial analysis Key catalysts
Expected earnings growth
Underlying mix of assets generating earnings
Margins
Geographical spread
Product mix
Company size
24
Valuation – comparable companies Always use normalised earnings when comparing companies
Business analysis Industry analysis Financial analysis Key catalysts
• Share price/(diluted) EPS PE
• Enterprise value/EBITDA EV/EBITDA
• Enterprise value/EBIT EV/EBIT
• Enterprise value/Sales EV/Sales
• (Div / share) / Share price Dividend Yield
25
Valuation – comparable companies Transaction comps require much more research to gather data (not suitable for this competition due to limited time and limited access to resources)
Business analysis Industry analysis Financial analysis Key catalysts
Trading
• Used more for investment purposes
• Valuation using current market information
• More relevant in this context
Transaction
• Used more for transaction/deal purposes
• Based on previous transactions of similar companies in the industry
• e.g. IPO and takeovers of previous companies
26
Valuation – Sum of the parts (SOTP)
Business analysis Industry analysis Financial analysis Key catalysts
Value each divisional or geographic segment separately
For each segment, forecast segmented revenues, earnings and/or FCF
Use appropriate models to value each segment (DCF, multiples)
Add together the EV of each segment then add back net debt and minorities
27
Valuation – sensitivity / scenario analysis Sensitivities allow you to test the robustness of your valuation
Business analysis Industry analysis Financial analysis Key catalysts
• Terminal growth
• Revenue and expense growth assumptions
• Commodity price and FX changes
• Projects and investments
DCF
• Multiples adopted
• Choice of companies Multiples
28
Valuation – making a call
Business analysis Industry analysis Financial analysis Key catalysts
Buy
Sell
Hold
+15%
-15%<re <15%
-15%
29
Valuation – presentation You may put more weighting on certain valuation methods depending on your justification
Business analysis Industry analysis Financial analysis Key catalysts
$3.00 $3.50 $4.00 $4.50
Trading Range
DCF
EV/EBITDA
EV/Revenue
Target Price $4.10 Assumptions:
2.0x – 3.0x
8.0x – 9.0x
WACC 12%, TGR 2%
6 month trading range
30
Valuation - recommendation
Business analysis Industry analysis Financial analysis Key catalysts
Good company • Strong cash flows • Low regulatory risk • Company
governance • Growth
opportunities
Good stock • Undervalued • Investor position • Risk in valuation
31
Valuation - recommendation
Business analysis Industry analysis Financial analysis Key catalysts
Valuation price now
• Equity value divided by number of shares
• Value as of now
12 month target price
• Ignore next 12 month’s cash flows
• Price as of 12 months from now – do not discount back to now
32
Key catalysts Some of this information ties back to industry. Best place to look is management presentations and annual reports
Business analysis Industry analysis Financial analysis Key catalysts
Risks and Opportunities can be priced into the company valuation through scenario analysis
Lack of suitable growth
opportunites
Changing consumer tastes
High barriers to entry
Balancing margin vs volume
Competition
33
Tips for the competition
‒ Have someone not involved in building the model sense check
‒ Determine subgroups and speaking roles beforehand
‒ Create master slide template beforehand
‒ Look up general economic data between now and Friday
‒ Calculate most components of WACC between now and Friday
‒ When looking for specific info in an annual report – CTRL + F
34
Recommended presentation time
Introduction & business analysis 20%
Industry analysis 20%
Valuation & key drivers 40%
Opportunities, risks & conclusion 20%
Total 10 min
1
2
3
4
35
Where possible, reduce key person risk
Role 1 2 3 4
Overall project management √√√
Read case and company reports √ √ √ √
Conduct business analysis √ √√√ √ √
Conduct industry analysis √ √ √√√ √
Gathering industry data √√
Gathering segmental data √ √√
In-depth financial analysis √√√ √
Compiling forecast assumptions √√ √√
Key risks and opportunities analysis √ √√√
Sensitivity and scenario analysis √√√ √
Pull together presentation slides √ √√ √√ √√
Practice presenting √ √ √ √
36
Closing thoughts
‒ You will feel time pressure
‒ Very similar to RFP response processes (corporate advisory)
‒ Business and industry analysis more important than the numbers
‒ Can do well with a simple, well researched valuation
‒ Back your assumptions the best you can
‒ When answering questions, share the love
‒ Have fun