An Introduction to Valuation
Prof. Dr. Martin Užík
What is a company valuation?
• the company valuation is a part of investment lesson (i.e. M&A´s,
IPO´s, Spin Off´s)
• you valuate by two perspectives
– Sell Side
– Buy Side
• At the beginning there is a company analysis (i.e. Due Diligence)
• Target function “Maximize the SHV”
• Total Value Sum of operating value + non operating assets
Functions of a company valuation/
For what do we need a company valuation?
Main functions:
• Decision making and consulting activities
• Mediation
• Argumentation
• forecasts of company developments and its investments
• investment of shareholders = company value
Auxiliary functions
• Information
• Tax measurement
• Contract configuration
Functions of a company valuation/
For what do we need a company valuation?
Objective of Company Valuation:
- to buy Company
- to sell Company
- to give Company away
- to bequeath the Company
- Strategy
- Price
- Risk
Challenge
Company Value ǂ Company Price
Methods of Company Valuation
Entire valuation approaches (Discounted Cash Flow
[DCF], Capitalized Earning Power Approach, Comparable
Company Analysis [CCA], Comparable Transaction Analysis
[CTA])
Single valuation approaches (Value in case of
liquidation, value of substance)
Valuation Methods - Overview
Entire approaches Single approaches
Capitalized Earning Power Appr.
DCF-Approaches
Comparison Analysis
Entity Approach Equity Approach
Weighted Average Cost of Capital (WACC)
Adjusted Present Value (APV)
Value of substance
Value in case of
liquidation
CCA
CTA
DCF (WACC) – Steps
1. Free Cash Flow-Planning
– Through CF determination, different accounting standards
become equilibrated
2. Determination of capital costs
• Estimating Beta
3. Discount FCF and Calculate Enterprise Value
4. Calculate equity Value
DCF (WACC) – Steps
1. Free Cash Flow-Planning
Overview: Cash flow calculation Receipt of payment from operative business
- Pay-outs from operative business
= Cash Flow before interest and tax (CF)
- Tax in case of complete equity financing
= Operating Cash Flow (OCF)
- Cash Flow from investment activity
= Free Cash Flow (FCF)
+ Tax Shield
= Total Cash Flow (TCF)
+ /
-
Cash Flow from financing activity (incl. interest
payments / receipts)
= Flow to Equity (FTE)
DCF (WACC) – Steps
1. Free Cash Flow-Planning
Looking to the crystal ball
DCF (WACC) – Steps
1. Free Cash Flow-Planning
Looking to the Past
DCF (WACC) – Steps
1. Free Cash Flow-Planning
Looking to the Future
DCF (WACC) – Steps
1. Free Cash Flow-Planning
Looking to the Future
DCF (WACC) – Steps
2. Determination of capital costs
weighted average cost of capital (wacc)
E = Market Value of Equity
V = Company Market Value
D = Market Value of Debt
t = Tax Rate
CAPM = Capital Asset Pricing Model (cost of equity)
rD = cost of debt
1DE Dwacc CAPM r t
V V
DCF (WACC) – Steps
2. Determination of capital costs
Capital Asset Pricing Model (CAPM)
CAPM = Capital Asset Pricing Model (cost of equity)
rM = Market Return
rf = Risk Free Rate
Beta
M
f fCAPM r r r
DCF (WACC) – Steps
2. Determination of capital costs
Beta
ri = expected share return
rM = expected market return
,
, M
i ii MM
M
COV r r
VAR r
DCF (WACC) – Steps
3. Discount FCF and Calculate Enterprise Value
Enterprise Value
If: FCF and wacc continuous in the time:
Two stage model:
1 1
t
tt t
FCFEV
wacc
1 1
t
tt t
FCF FCFEV
waccwacc
31 2
1 2 31 1 2 31 1 1 1
t T
tt Tt
FCF FCFFCF FCF FCFEV
waccwacc wacc wacc wacc
DCF (WACC) – Steps
4. Calculate Equity Value
EquityValue EV Debt Value
DCF (WACC)
Valuation of LUKOIL
WACC 11,88%
Equity-Quota 89,01%
Debt-Quota 11,81%
CRP 8,54%
riksFREE 2,89%
Market Return 11,43%
Beta 1,101
CAPM 12,29%
Tax 20,00%
rD 10,00%
Debt 7043
Today 06.04.2009
g for 2012 & 2013 1,00%
Year 31.12.2009 31.12.2010 31.12.2011 31.12.2012 31.12.2013 TV
t 0,74 1,74 2,74 3,74 4,74 4,74
FCF 10.659,94 5.910,56 7.012,71 7.082,84 7.153,67 7.153,67
PV(FCF) 9.813,36 4.863,28 5.157,33 4.655,69 4.202,84 35.370,02
EV 64.062,51
Market Value of Equity 57.019,51
Share Price 67,04
Comparable Company Analysis (CCA)
Basic - Information
• CCA want to determine an objective Enterprise Value
• CCA is a capital market – orientated concept
• CCA is influenced by expectations and valuations of the capital
market
• CCA is an important part of each research report
• CCA has historical and implicated data as its parts
Comparison Analysis
mCompVVC VOVO CC
CC
CompV
VCm
• Selection of similar companies (comparable companies CC)
• Selection of comparative values CompV (e.g. earnings, turnover, EBIT, …)
• Calculation of a multiple m (relation between the value of the comparable
company VCCC und the comparative value of this company)
• Deduction of the value of the company which is to valuate (value of the
valuation object VCVO)
• Based on experience (multiple method), stock exchange prices (Similar
Public Company Approach), proceeds of initial public offerings in the past
(IPO Approach) or realised transaction prices (Recent Acquisition
Approach).
Comparable Company Analysis (CCA)
Valuation of LUKOIL
Looking for Peers
Comparable Company Analysis (CCA)
Valuation of LUKOIL
Looking for Peers
Comparable Company Analysis (CCA)
MCAP EV Sales EBITDA EBIT Company Name
CUR_MKT_CAP CURR_ENTP_VAL SALES_REV_TURNEBITDA EBIT LONG_COMP_NAME
ROSN RU Equity 54.050.710.000,00 75.835,70 68.991,00 16.988,00 13.005,00 Rosneft Oil Co
gazp rm equity 3.268.602.000.000,00 4.437.971,00 2.390.467,00 885.355,00 701.778,00 Gazprom OAO
tnbp ru equity 14.103.660.000,00 16.238,66 25.739,00 8.684,00 7.343,00 TNK-BP Holding
nvtk ru equity 7.833.669.000,00 275.926,00 79.272,00 36.798,00 32.217,00 NovaTek OAO
EV/Sales 1,77
EV/EBITDA 4,71
EV/EBIT 5,73
Multiples
Comparable Company Analysis (CCA)
Number of Shares Sales 2010 EBITDA 2010 EBIT 2010 Debt
EQY_SH_OUT BEST_ESALES_NXT_YR BEST_EST_EBITDA_NXT_YR_MEANBEST_EEBI_NXT_YR_MEANDebt
LKOH RU Equity 850,56 65.915,42 10.734,78 9.154,08 7.043,00
Lukoil
Stock Exch. 41,5 Difference to Stock Exch.
EV/Sales 128,64 87,14
EV/EBITDA 51,18 9,68
EV/EBIT 53,42 11,92
Estimated Share Price
Company Valuation
Fair Value LUKOIL
Stock Exch. 41,5 Difference to Stock Exch.
EV/Sales 128,64 87,14
EV/EBITDA 51,18 9,68
EV/EBIT 53,42 11,92
DCF 67,04 25,54
Fair Value 75,07 33,57
Estimated Share Price
Single valuation approaches:
Value of substance
• Split off the object of valuation into valuable parts.
• Value of reproduction - How much is it to rebuild the company?
• Supply market based.
• Complete value of reproduction
Immaterial components are considered.
• Fractional value of reproduction:
Immaterial components aren‘t considered.
Single valuation approaches:
Value in case of liquidation
• Split off the object of valuation into valuable parts.
• Fiction of liquidation of the company.
• Value the parts with sales market prices.
• Adjustment of single values from the balance sheet (e.g. specific
liquidation costs). Debt has to be repayed.
• Value of liquidation depends on the intesity and speed of the split off
• Value of liquidation is the lower limit of the value of the company.
Single valuation approaches:
Value of substance
• Problem: How should the reproduction of a brand or the defence
against competitors be valued?
• Unnecessary components for operative business are valued by the
value in case of liquidation
• The value of substance is the upper limit of the value of the company.
Excercise
Count the Value of following Companies:
- Adidas
- Puma
- Volkswagen
Compare the Company Value with the Company Price.