How Much is Your Company Worth? - bmg
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“How Much is Your Company Worth?” Presented by BMG Financial Advisors 1 December 2005 How Much is Your Company Worth? Perspective of the corporate vs. the market Market Corporate Meeting Point Optimistic by Necessity Market: Price determination Skeptical by Nature Factors Affecting Profitability… Drivers of Profitability 1. Understanding the Industry 2. Operations 3. Management Market price is set by how all these factors translate into profits 1.Understanding the Industry SUPPLIER POWER Supplier concentration Importance of volume to supplier Differentiation of inputs Impact of inputs on cost or differentiation Switching costs of firms in the industry Presence of substitute inputs Threat of forward integration Cost relative to total purchases in industry BARRIERS TO ENTRY Absolute cost advantages Proprietary learning curve Access to inputs Government policy Economies of scale Capital requirements Brand identity Switching costs Access to distribution Expected retaliation Proprietary products BUYER POWER Bargaining leverage Buyer volume, information and incentives Brand identity Price sensitivity Threat of backward integration Product differentiation Buyer concentration vs. industry Substitutes available INDUSTRY ANALYSIS THREAT OF SUBSTITUTES Switching costs Buyer inclination to substitute Price-performance trade-off of substitutes DEGREE OF RIVALRY Exit barriers Industry concentration Fixed costs/Value added Industry growth Intermittent overcapacity Product differences Switching costs Brand identity Diversity of rivals Corporate stakes 2.Operations… Business Structure Internal business structure Institutionalization of operations enhancing efficiency Work flow Human Resource Skill set Motivation Organizational structure Growth Geographical growth Local market growth Demographics Expansion plans Value creation A solid strategy and performance in its implementation translates into profits 3.Management… Leadership qualities Ability to adapt to changing environments Ability to organize and prioritize allocation of resources Valuation Models Forecasting company financial performance Selecting the appropriate valuation model 1 Discounted Cash Flow (DCF) Model 2 Dividend Discount Model (DDM) 3 Relative Valuation Models 4 Other Industry Specific Techniques Converting forecasts to a valuation 1 Valuation Models-Discounted Cash Flow Model Free cash flow to firm: Cash flow from operations minus capital expenditures and increases in working capital needed to maintain the company as a going concern Discounting: Accounting for the time value of money Weighted Average Cost of Capital (WACC) Using DCF model is most suitable when: The company does not pay dividends The company pays little or too much dividends compared to what it can afford to pay out Drawback of the DCF model: Sensitivity to WACC Sensitivity to perpetual growth rate 2 Valuation Models-Dividend Discount Model Using DDM is suitable when: The company pays dividends The dividend payout ratio is relatively stable Drawback of the DDM : Sensitivity to cost of equity Sensitivity to perpetual growth rate Not suitable for growth companies with relatively low payout ratios 3 Valuation Models-Relative Valuation Models Choosing the most comparable companies Problems may arise due to lack of comparable companies in the local market Multiples in other comparable markets can be used Use of forecast rather than trailing multiples More accurate if forecast multiples for company and its peer group are extended for several years into the future 3 Valuation Models-Relative Valuation Models P/E multiple: Not suitable for companies with negative earnings EPS must be adjusted for non-recurring gains/losses Market Value Per Share Earnings Per Share (EPS) 3 Valuation Models-Relative Valuation Models P/BV multiple: A measure of net asset value per share Suitable even if the company is making losses, unlike P/E multiples More suitable for companies composed mostly of liquid assets (e.g. banks and investment companies) Drawbacks of P/BV include: Ignores human capital Book value does not reflect the current market value of assets May be misleading when significant differences exist among the level of assets used by the companies under examination Market Value Per Share Book Value Per Share 3 Valuation Models-Relative Valuation Models P/Sales multiple: Sales is less subject to distortion by accounting standards Suitable for companies generating losses Drawbacks of P/Sales include: Does not reflect difference in cost structures among different companies Does not reflect the company’s ability to generate earnings or cash Market Value Per Share Revenues Per Share 4 Valuation Models-Industry Specific Techniques Other industry-specific valuation multiples: EV/ton in cement P/selling space in retailing EV/sub in telecom Secondary Considerations… The secondary considerations affecting the market price will be covered later in the session “Research Coverage and Investor Relations”: predicated on how management communicates with the business environment; research analysts and sophisticated investors. Market Element… Understanding the Business How attractive is the industry The company’s competitive position in the industry The company’s competitive Strategy Efficiency of institutionalization How the market will perceive the “health” of the business The Valuation Process Major Steps … Understanding the business How ‘sexy’ is the industry? What is the company’s competitive position within the industry? What is the company’s competitive strategy? How well is the company executing its strategy? Forecasting company financial performance Selecting the appropriate valuation model Discounted Cash Flow (DCF) model Dividend Discounting Model (DDM) Relative Valuation Models (e.g. P/E, P/BV, P/sales) Other industry-specific valuation techniques Converting forecasts to a valuation The IPO Discount
