Why and How to Value a Company?

Julius Ooi Izzy Hemington

Why Value a Company?

Investment Banking

o Buy-side advisory

o Sell-side advisory

o Public offering

Investing

o Finding the right price

Valuation Methods

Market Valuation

o Market Capitalisation

o Enterprise Value

Comparable Analysis

o Companies

o Transactions

Discounted Cash Flow Analysis (DCF)

Leveraged Buyout Analysis (LBO)

Valuation Methods

VALUATION

INTRINSIC

DCF

MULTIPLES

LBO CCA CTA

Commonly Used Metrics

Market Capitalisation

o No. shares outstanding price of share

o Small Cap < $2 bil

o $2 bil < Mid Cap > $10 bil

o Large cap > $10 bil

o Example:

Commonly Used Metrics

Enterprise Value

o Market Capitalisation + Net Debt

o Net Debt = Short Term Debt + Long Term Debt Cash

& Cash Equivalents

Commonly Used Metrics

EBITDA

o Earnings Before Interest, Taxes, Depreciation and Amortisation

o EBITDA = Sales Cost of Goods Selling, General

& Administrative Expenses

Commonly Used Metrics

Price to Earnings Ratio (P/E)

o Price per share Earning per share

or

o Market Cap Earnings (Net Income)

EV/EBITDA

o Enterprise value EBITDA

Net Debt/EBITDA

o Net Debt EBITDA

Comparable Companies Analysis

9

CCA

Theory

o Similar companies should be valued the same

Steps

1. Find the Comps

2. Collect data

3. Collate data

4. Value

CCA

Example:

Co. Name Rio Tinto Vale BHP Billiton High Low

P/E 7.26 5.52 9.63 9.63(BHP) 5.52(Vale)

EV/EBITDA 6.95 7.10 6.52 7.10(Vale) 6.52(BHP)

Net Debt/EBITDA

0.32 0.44 0.40 0.44(Vale) 0.32(Rio)

Comparable Transactions Analysis

12

CTA

Theory

o Similar companies should have the selling price

Example:

o Cadbury and Kraft Deal

o 48% Premium

Valuation Methods

VALUATION

INTRINSIC

DCF

MULTIPLES

LBO CCA CTA

Discounted Cash Flow

15

Discounted Cash Flow

Fundamental Valuation

A company can be valued on the basis of its

future cash flows

Discount to account for time value of money

and how a company is financed

DCF Steps

How far to forecast?

- In practice 5 -7 years

Forecast expected

revenues over the

period

Deduct anticipated

cash expenses to

get a cash flow

estimate

Discount cash flow

estimate using WACC

COMPANY

VALUATION

Weighted Average Cost of Capital (WACC)

Average rate representing cost to company of its equity and debt

DCF Pros and Cons Proven theoretical

framework based on company in question

Allows sensitivity analysis

Can incorporate business cycles and structural change

Based on assumptions o Future cash flows are

difficult to predict

Have to be frequently updated o E.g. changing credit

circumstances

Not suitable for shorter term investments

Putting It Together

19

Playing The Field

Valuation is not an exact science

The three methods will all give a different

answer

Display them graphically on a football field and

highlight a region where you expect the value

to lie

800 850 900 950 1,000 1,050 1,100 1,150 1,200 1,250

CCA

CTA

DCF

millions

Implied Valuation Range: 1,090 - 1,140

Football Field

Whats Most Important

Usually most weight given to DCF

Depends on the industry

Recommended Reading

J. Rosenbaum, J. Pearl

Investment Banking

Training The Street

Fundamentals of

Corporate Valuation

Portfolio Roundup

Sector Heads

Julius Ooi Izzy Hemington

Tom Hacker Jasan Donervan

Tech, Media & Telecoms

ETO 12%

AMZN:US 7%

OXIG 57%

AMZN:US (short) 20%

CAR 4%

Profit breakdown ROE on 25mm: 7.32%

Total Profit: 1,829,000

Greatest Gain: Oxford Instruments -

1.49mm

Greatest Loss: Research In Motion -

(0.78mm)

Cash 67%

ETO 20%

CAR 13%

Current Portfolio breakdown

Financials and FX

22000000

23000000

24000000

25000000

26000000

27000000

28000000

29000000

17-Oct-11 17-Nov-11 17-Dec-11 17-Jan-12

BIS Financials and FX Short Term Volatility

Sovereign Debt Crisis

ROI (25m): 12.9%

Profit: 3,233,900

Financials and FX

EURJPY SHORT 14th Nov at 106.03, BOUGHT 18th Dec at 98.7

Stop loss: 109 (tracking)

Profit target: 104 level

Historical Volatility

BAC LONG 20th Nov at 5.78, CURRENT PRICE at 7.35 (close at

26/01)

Strong debt resources

Strong American Economy

Warren Buffett and Hank Paulson

Strong Q4 Results

Moving Forward

EXTERNAL SHOCKS

Deleveraging

Greek Default?

Global Recession?

Metals & Mining

Rio Tinto

Strong Companies

Cheap Entry Point

Tech, Media & Telecoms Oxford Instruments (OXIG), bought 11th Oct 728p, sold 15th Nov 925p

Leading provider of high technology tools for research and industry

Consistent dividends (half yearly)

Reasonable P/E ratio ~ 14 (good investor sentiment)

Good news!

August interim statement had anticipated increased orders, sales and profits

2 recent acquisitions with funding from equity placing (investor confidence)

14 cubed strategy, 14% compound increase in revenue and trading profit by 2014

Results due 15th Nov.

Research In Motion (TSE:RIM), bought 25th Oct $22.70, sold 1st Dec $18.63

Blackberry mobile phones

Oversold from BBM outage, New tablet coming soon, OK Q2 results

Failed: Blackberry tablet flopped, tarnished reputation from outage

Consumer, Retail, Healthcare

A weak sector in the present climate

Market misery for retail sector

Sector consistently underperforms FTSE

Diversified across the three areas

Current profit: 1,422,370

Current return on 25m: 5.96%

Consumer, Retail, Healthcare

Whats Next in CRH?

Bad news continuing?

More opportunities

Thank you

Next Event: How to Invest Your Own Money