Baltic Valuation Conference 2013
MARKET ASSESSMENT ASSETS OF EMERGING
MARKET - FEATURES OF THEIR INFORMATION
SECURITY
Violeta Kasarova PhD (Bulgaria),
Rumi Chuknyisky, PhD, Peter Chuknyisky, PhD, Dari Dobrovidel (USA)
2013
Purpose of this report is to demonstrate the specifics at usage of the
comparative approach for market assessment of assets at various types of
markets and the necessary for the purpose information.
The focus falls on :
emerging market in Bulgaria in relation with the market assessment of
companies as unique investment assets;
developed market of the USA in relation with the market valuation of
estates.
All of the examples which are stated in the report are taken from the practice
of the authors.
2
General terms
The economies in the world, in general are divided into:
Developed
Emerging.
Respectively the markets are also divided into developed and emerging.
According to the World Bank, an economy is considered as emerging
economy, whenever its wealth creation level, measured by the gross domestic
product per capita, is below that of the developed economies. Following this
criterion, the World Bank classified in 2007, the economies of 209 countries as
follows - 65 as developed and 144 as emerging.
These data are presented in the following table.
3
Classification of the economies in the world
Classification of the economies
as per the income
Developing economies
Low income ($935 and less)
Income from low to moderate
($936-$3705)
Income from moderate to high
($3706-$11455)
Developed economies
High income ($11456 and more)
World
Number
of
countries
Gross
domestic
product,
trillion $
Population,
million
people
Gross domestic
product per
capita
144
49
54
12 984
1
6
5555,7
1295,7
3437,1
2337
578
1887
41
5750
822,9
6987
65
39682
1056
37566
65
39682
1056
37566
209
52621
6612
7958
World Development Indicators Database, July 2008.World Bank
4
Classification of the markets
5
Classification of the markets
Developed
Developed
Markets
markets
Emerging
Emerging
Markets
markets
Americas
Europe&Middle East
Pacific
Americas
Europe, Middle
East&Africa
Asia
Frontier
Frontier
Markets
markets
Americas
Europe&CIS
Africa
Middle East
Asia
6
Australia
Hong Kong
Japan
New
Zeland
Singapore
Europe&Middle East
Canada,
United States
Pacific
Americas
Developed markets
Austria, Belgium,
Denmark, France,
Finland, Germany
Greece, Ireland,
Israel, Italy,
Norway, Spain,
Netherands,
Portugal, Sweden,
Switzerland,
United Kingdom
7
Czech
Republic,
Egyipt,
Hungary,
Morocco,
Poland,
Russia,
South Africa,
Turkry
Asia
Brazil,
Chile,
Colombia,
Mexico,
Peru
Europe, Middle
East&Africa
Americas
Emerging markets
China,
India,
Indonesia,
Korea,
Malaysia,
Philippines,
Taiwan,
Thailand
8
Frontier markets
Americas
Europe&CIS
• Argentina,
• Jamaica,
• Trinidad&
• Tobago
• Bosnia
• Herzegovina
• Bulgaria,
• Croatia,
• Estonia,
• Lithuoania,
• Kazakhstan,
• Romania,
• Serbia,
• Slovenia,
• Ukraine
Africa
• Botswana,
• Ghana,
• Kenya,
• Mauritius,
• Nigeria,
• Tunisia,
• Zimbabwe
Middle East
• Bahrain,
• Jordan,
• Kuwait,
• Lebanon,
• Oman,
• Qatar,
• Saudi
Arabia,
• United Arab
Emirates,
• Palestine
Asia
• Bangladesh,
• Pakistan,
• Sri Lanka,
• Vietnam
Many analysts consider the emerging markets as a whole, without formation of a
subgroup of the frontier markets. We have adopted the same approach.
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Specific features of the market assessment of the emerging markets
The assessors of the emerging markets have to do more complex and responsible job,
because they are:
• Deprived from historical data for the stock market, which makes them to
face, as per Pereiro (2010), the beta dilemma for calculation of the price of
the equity (САРМ - Capital Asset PricingModel);
• Restricted in use of the comparative approach in its classic way due to
availability of country and specific risks, which do not allow to be build in
a correct way, using market data, multiples for the branches of the
economy, as well as to choose companies analogues. This process gets
deeper also because of lack of sufficient market evidences for realized
deals of the relevant market, which makes difficult the direct comparison.
• Charged with an uneasy task to integrate the specific conditions of the
emerging markets in the models of the discounted cash flows.
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Specific features of the market assessments of the emerging markets
According to a study of Bulgarian analysts, in the assessments of the Bulgarian
experts:
dominates the expenses approach,
followed by the income apprоach and
the comparative approach takes the third place.
Every of the three above stated apprоaches, as per Damodaran (2002), has its
advantages and disadvantages and its application is related with many
limitations and difficulties, which influence the final results of the assessment.
The comparative approach is very suitable for assessment of emerging markets,
but there are some problems for its usage.
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THE COMPARATIVE APPROACH IN THE PRACTICE OF THE BULGARIAN
ASSESSORS
The restricted usage of the comparative approach in evaluation of enterprises (business) is hidden
in the problems, related with the access to relevant market data. In the meantime this approach is
largely used for evaluation of estates in Bulgaria, precisely because of the availability of
information for sufficient number of market analogues, with prices that are result of accomplished
deals.
12
THE COMPARATIVE APPROACH IN THE PRACTICE OF THE BULGARIAN
ASSESSORS
The comparative approach is based on:
• Principle of substitution – a fundamental principle in the market
evaluation, which suggests that no rational buyer will pay for the object
more than the value of analogous object that has already changed its
ownership on the functioning market and there is direct price information
for it.
• The law of one price (LOP), according to which the price of two identical
assets should not differ in conditions of well functioning market and
rational behavior of the investors.
The main advantage is that encounters the circumstances of the market and the
real priorities of the investors, while its application requires a presence of
active market and accessible financial information for evaluated asset and its
analogues. However, these two prerequisites, make in principle the
comparative approach to be fast and easy for application, but hard for usage
under conditions of emerging market, such as Bulgaria due to the low volumes
of sales and transactions (mergers and acquisitions of companies), which limits
the opportunities for choice of analogues. The solution of this situation is to
use foreign analogues, which requires however, a series of additional
adjustments to be done in order to achieve unified measures of the information.
13
Algorithm of the comparative approach in the market valuation
Good results after using the comparative approach in the market assessments of
the emerging markets can be achieved if:
An information is used for analogues from the developed markets, as for
instance the Аmerican market
There are sufficient market evidences (realized sales) in specific emerging
economy.
Searching of
objects that are
comparable
with the
valuated one
Identification
of the
differences in
the main
quantitative
and quality
features
Introducing
adjustments
aiming to
ignore the
differences
between the
analogue and
valuated object
Weighing of
derived results
Determining of
market value of
the object
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EXAMPLE 1. Market evaluation with usage of analogues of the Bulgarian economy
OBJECT OF THE ASSESSMENT – Bulgarian- American Credit Bank AD (ВАСВ) , owner of
12 624 725 tradable shares
DATE OF THE ASSESSMENT - 30.09.2011
BANKS ANALOGUES:
Used in the assessment market multiple Р/В and
•Corporate Commercial Bank AD (6C9/CORP),
market multiple Р/S. Adjustments for leveling the
•Central Cooperative Bank AD(4CF /CCB),
differences in the effectiveness of the evaluated object
•First Investment Bank AD (5F4/FIB)
and its analogues.
№
1
2
3
4
5
6
7
8
9
10
Parameters of BACB AD
Number of shares in circulation (numbers)
Equity (thousands leva)
Equity per single share (r.2/r.1) (leva)
Market multiple Р/В (adjusted)
Value of a single share (r.4*r.3)
Number of shares in circulation (number)
Net income of interest (thousands leva)
Net income of interest per single share (leva)
(r.7/r.6)
Market multiple Р/S (adjusted)
Value of a single share (r.9*r.8)
Value (at share price as
per 30.09.2011)
12 624 725
170 137
13.476
0.156
2.102
12 624 725
14 433
1.143
Fair market value per single share is =
(2.102 + 0.681)/2 = 1.392 leva
0.596
0.681
Information sources for the assessment – Bulgarian stock exchange (http://www.bse-sofia.bg/), Bulgarian national
Bulgarian National Bank (http://www.bnb.bg/), sites of the banks analogues http://www.corpbank.bg/investor_relations.html; http://www.ccbank.bg/bg/about-us/annual-reports/;
http://www.fibank.bg/bg/za-nas/page/698
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Example 2. Market assessment with use of analogues of the developed American market
OBJECT OF THE ASSESSMENT – Bulgarian enterprise
DATE OF THE EVALUATION – 31.12.2011.
ANALGOUES – two enterprises from USA
Information sources for the assessment:
Bloomberg - URL: http://www.bloomberg.com/
Yahoo! Finance - URL: http://finance.yahoo.com/
Moody’s - URL: https://www.moodys.com/
Value Line - URL: http://www.valueline.com/
Bulgarian Stock Exchange – URL: http://www.bse-sofia.bg/
Index of Economic Freedom - http://www.heritage.org/index/pdf/2011/index2011_highlights.pdf
Main parameters of the assessed object and its analogues
as per 31.12.2011 (thousands leva)
Assets total
Parameters
Equity
Net profit
Net
income
75 157
6 544
16 920
ROE
%
12.15
ROA
%
0.88
Assessed enterprise
- Bulgaria
Analogue 1 – USA
1 005 566
1 112 651
87 818
7 864
41 491
9.00
0.71
Analogue 2 - USA
1 121 390
76 167
5 694
25 311
7.25
0.53
ROS
%
21.1
5
15.9
2
15.1
1
16
Example 2. Market assessment with use of analogues of the developed American market
Market multiples
№
Market multiples
1 Price/Earnings P/E
2 Price/Book value of equity P/B
3 Price/Sales revenue P/S

Analogue 1
19.69
1.76
3.08
Analogue 2
14.71
1.10
2.31
Estimating the country risk
An adjustment coefficient is calculated for the purpose (Cac) using a selected method.
In the current assessment for determining the adjustment coefficient (Ca) for the country
specific risk is used the method of Index of EconomicFreedom for 2011. The value of this
index for USA is 77.8 points, which means that the country is in the area „dominating
freedom”, and the value for Bulgaria is 64.9, i.e. the country falls within the borders of the
„moderate freedom”. Concerning these data, Ca for the country risk (Cac ) is calculated using
the following formula:
Cac = Country risk for Bulgaria / Country risk for USA = 64.9/77.8 = 0.83
Every of the market multiples is multiplied with the derived Cac.
 Eliminating the differences in the return
The coefficient of adjustment for return (Car) is calculated for each and every pair
„assessed enterprise – foreign analogue”, after which an average value of the adjustment
coefficient is calculated for the relevant analogue.
Caranalogue 1= ROEassessed /ROEanalogue 1 = 12,15 / 9,00 = 1,35
Caranalogue 1= ROАassessed /ROАanalogue 1 = 0,88/0,71 = 1,24
Caranalogue 1= ROSassessed / ROSanalogue 1 = 21.15/15,92 = 1,33
Average meaning of Caranalogue 1 = (1,35+1,24+1,33)/3 = 1,31
Caranalogue 2= ROE assessed /ROEanalogue 2 = 12,15/7,25 =1,68
Caranalogue 2= ROА assessed /ROАanalogue 2= 0,88/0,53 =1,66
Caranalogue 2= ROS assessed / ROSanalogue 2 = 21,15/15,11 = 1,40
Average value of Caranalogue 2 = (1,68+1,66+1,40)/3 = 1,58
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Example 2. Market assessment with use of analogues of the developed American market
Market multiples adjusted with the country risk and with adjustment for effectiveness
№
1
2
3
4
5
6
7
8
9
10
11
Analogue 1 Analogue 2
Parameters
14,71
19,69
Price/Earnings P/E
1,10
1,76
Price/Book value of the equity P/B
2,31
3,08
Price/Sales revenue P/S
0,83
0,83
Coefficient for adjustment for country risk Cac
Market multiple "Price/Net earnings ", adjusted for
12,21
16,34
country risk (r.1*r.4)
Market multiple "Price/Book value of the equity ",
0,91
1,46
adjusted for country risk (r.2*r.4)
Market multiple "Price/Net income ", adjusted for
1,92
2,56
country risk (r.3*r.4)
Average value of the coefficient for adjustment for the
1,58
1,31
difference in the return Car
Market multiple "Price/Net earnings ", adjusted for the
18,32
21,41
difference in the return (r.5*r.8)
Market multiple "Price/Book value of the equity",
1,44
1,91
adjusted for the difference in the return (r.6*r.8)
Market multiple "Price/Net earnings", adjusted for the
difference in the return (r.7*r.8)
3,35
3,03
Evaluation of Bulgarian company using analogues U.S.
№
1
2
3
4
5
Parameters
Equity (thousands leva)
Net profit (thousands leva)
Net sales revenue (thousands leva)
Market multiple "Price/Net profit " – adjusted
Market multiple "Price/Equity " – adjusted
Value Analogue 1 Analogue 2
75 157 X
X
6 544 X
X
16 920 X
X
X
21,41
18,32
X
1,91
1,44
6 Market multiple "Price/Net earnings" – adjusted
X
3,35
3,03
Average Value of Value of
value of analogue 1 analogue 2
both
analogues
125 888
143 550 108 226
129 997
140 107 119 886
53 975
56 682
51 268
103 287
7
8
9
10
Market value by equity
Market value by net profit
Market value by net sales revenue
Weighted market value (thousands leva)
18
Example 3. Market value using the comparative approach for assessment of
estates on a developed market (following the example of the market of the
USA)
Examples of Search Engines in Business
Evaluation of Commercial and Residential Real
Estate Properties in the USA Developed Market
19