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
VAL U AT ION
INTRINSIC

DCF

LBO

M U LT I P L E S

CCA

C TA

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

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/EBITD
A

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
VAL U AT ION
INTRINSIC

DCF

LBO

M U LT I P L E S

CCA

C TA

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

Weighted Average
Cost of Capital
(WACC)
Average rate
representing cost
to company of its
equity and debt

Forecast expected
revenues over the
period

Deduct anticipated
cash expenses to
get a cash flow
estimate

Discount cash flow

estimate using WACC

COMPANY
VALUATION

DCF Pros and Cons

Proven theoretical
framework based on
company in question

Based on assumptions

Allows sensitivity
analysis

Have to be frequently
updated

Can incorporate
business cycles and
structural change

o Future cash flows are

difficult to predict

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

Football Field
DCF

CTA

CCA

800

850

900

950

1,000 1,050 1,100 1,150 1,200 1,250

millions

Implied Valuation Range: 1,090 - 1,140

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
Tom Hacker

Jasan Donervan

Julius Ooi

Izzy Hemington

Tech, Media & Telecoms

ROE on 25mm: 7.32%
Total Profit: 1,829,000

CAR
4%

Profit breakdown

AMZN:US
(short)
20%

ETO
12%

Greatest Gain: Oxford Instruments 1.49mm

Greatest Loss: Research In Motion (0.78mm)

AMZN:US
7%

OXIG
57%

Current Portfolio breakdown

CAR
13%
ETO
20%
Cash
67%

Financials and FX
BIS Financials and FX

Short Term Volatility

Sovereign Debt Crisis

29000000
28000000

ROI (25m): 12.9%

Profit: 3,233,900

27000000
26000000
25000000
24000000

23000000
22000000
17-Oct-11

17-Nov-11

17-Dec-11

17-Jan-12

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

Consumer, Retail, Healthcare

Diversified across the three areas

Current profit: 1,422,370
Current return on 25m: 5.96%

Whats Next in CRH?

Bad news continuing?
More opportunities

Thank you
Next Event: How to Invest Your Own Money