vietnam master in management – hcmc 2003 valuation creation of value valuation of a stock listed...

Vietnam Master in Management – HCMC 2003Valuation

Valuation

• Creation of value• Valuation of a stock listed company• Valuation of a non listed company• Net Asset• Price-earning Ratio• Present Value of Dividends• Present Value of Free Cash flow


Creation of value

• The goal of any company : to create value This means : increase the value of the company for

the shareholders With full respect for the legal framework

• social, fiscal, environmental regulations

And for all the other stakeholders• employees• customers• suppliers• neighbors


Creation of value

• How can the value be increased ? by buying assets at a price lower than their economic

value• real estate : buying during a depression (crisis)

by selling assets at a price higher than their economic value

• real estate : selling during a boom


Creation of value

• The best way to create value : Innovation introducing new products

• Microsoft• Cellular phones

introducing new production processes• Car manufacturers

improving the productivity of labor improving the quality of products etc.


Market capitalization of a stock listed company

• For listed companies the share price is known daily the value of the company is equal to the price share

multiplied by the number of shares V = pshare.nshares

V = Market capitalization (“market cap”)

• If the market is efficient the Market Cap is always the true value of the company Efficient market means that at any time all the market

has all the information on the company


Fair value of a stock listed company

• There is often a difference between the share price and the true value unequal distribution of the information

• good or bad news for the future not known by the market from inside information … to ... inside trading booming or bubble effect (psychology) misinterpretation of the facts by the market


Fair value of a stock listed company

• Even for a stock listed company it is useful to calculate a “fair value” based on : All the information available on the company Comparison of the share price and of the financial ratios

with similar listed companies

• It is interesting to buy When the share price is lower than the fair value

• It is interesting to sell When the share price is higher than the fair value


Valuation of a non listed company

• A valuation of a non listed company can only be known when : Shares of the company are sold The sale price is known

• But it is possible to estimate the value of a non-listed company by using different methods Based on the book value Based on comparison with similar listed companies Based on the present value of the future financial

flows of the company


Net Asset

• Is the book-value of the equity a correct valuation of a company ? No : difference between book-value and market price

of the assets & liabilities• It is possible to replace in the Balance Sheet all

the book-values by the market prices• and to calculate a revised value of the equity

Net Asset = Assets (at market prices) - Liabilities (at market prices)

• The Net Asset is a valuation of the company


Saigon Hotel - Net Asset (000 US$)

ASSETS LIABILITIES Fixed assets Inventories Receivables Cash

10.391

22 251 55

Equity Provision Long term debt ST oper debt ST fin debt Other debt

4.998

91 4.091

409 1.128

0

TOTAL 10.717 10.717


Saigon Hotel - Net Asset

• Additional information The company owns the hotel building

• The book-value is 6.045 and the market price estimation 9.055

The director is an art collector and the company owns art pieces

• The book value is 125 and the market price 850 There are bad receivables for a book-value of 45 In the cash placement the company owns Microsoft

shares bought in 1992 for 10 and whose present stock price is 100

The tax rate on all profits is 40%

• What is the Net Asset of the Saigon Hotel ?


Price-earning Ratio

• A second valuation method for a company is the Price-Earning Ratio (PER)

• The Price-earning Ratio is equal to the value of the company divided by the net result PER V / EAT

• For listed companies it can be calculated directly by dividing the share price by the net result per share eps = EAT / nshares

PER = pshare / eps


Price-earning Ratio

• The PER is higher for a company with higher growth prospects for the earnings

• the risks being equal with lower risks

• the growth prospects being equal

• The PER is published daily in the financial papers on the financial Websites (cfr bourses)


Price-earning ratios Examples (Oct 30, 2001)

Company pshare eps PER

Vodafone (GBP) 157,8 3,48 45,3

Telecom Ita Mob 5,9 0,29 ?

British Telecom 3,4 0,13 ?

France Telecom 40,0 ? 28,3 Volkswagen 41,7 5,87 7,1

Renault 32,8 4,49 ?

LVMH 38,2 ? 25,7


Price-earning ratios Examples (Oct 30, 2001)


Vodafone (GBP) 157,8 3,48 45,3

Telecom Ita Mob 5,9 0,29 20,5

British Telecom 3,4 0,13 26,2

France Telecom 40,0 1,41 28,3 Volkswagen 41,7 5,87 7,1

Renault 32,8 4,49 7,3

LVMH 38,2 1,49 25,7


Price-earning ratios Historic (Nov 2, 2000)


Vodafone (GBP) 35,3 1,73 20,4

Telecom Ita Mob 10,1 0,23 43,3

British Telecom 7,6 0,32 24,1France Telecom 121,9 2,71 45,0

Volkswagen 59,3 2,93 20,2

Renault 56,5 2,23 25,3LVMH 85,4 7,17 11,9


Price-earning ratios - exercises

• What is the value of the Saigon Hotel in 2002 EAT = 432.000 $ PER = 15

• High level due to excellent location and future prospects

• Explain the difference between the PER Coca-cola & Pepsico Compaq & IBM

• Which industry should have the higher PER electricity or telecom classical telecom or cellular companies


Present Value of Dividends

• Let us start from a very simple approach• Suppose that we know

that the expected value of the share of a company one year from now is v1

that a dividend div1 will be paid at that time that the Cost of the Capital for this company is r

• Then we can write the equation for the Present Value of the share

v0 = (div1 + v1) / (1+r)



• We can repeat this calculation by writing the value of the share at time 1 based upon the value and dividend at time 2 v1 = (div2 + v2) / (1+r)

• and so on . . . v2 = (div3 + v3) / (1+r)

• We can then write v0 = (div1 + (div2 + v2) / (1+r))/(1+r) v0 = div1/(1+r) + div2/(1+r)2 +…+ pT/(1+r)T



• If we consider that the company lives in perpetuity we can write v0 = div1/(1+r) + div2/(1+r)2 +…+ divt/(1+r)t + … V0= DIV1/(1+r) + DIV2/(1+r)2 +…+ DIVt/(1+r)t + …

• Or v0 = t=1

divt/(1+r)t

V0 = t=1 DIVt/(1+r)t



• If we consider that : the company will live in perpetuity the growth rate of the dividend is constant and equal

to g

• Then divt = div1.(1+g)t-1

• Gordon & Shapiro proved mathematically that v0 = div1 / (r-g) V0 = DIV1 / (r-g) of course one must have r>g

• The lower the Cost of Capital the higher the value

• The higher the growth rate the higher the value


PV of Dividends - Examples

• What is the Present Value of the Quiz Company ? the next dividend will be 12.000.000 $ the Cost of Capital is 14% the growth rate of dividend (perpetual) is 2%

• What is the Cost of capital of company B ? the next dividend will be 100.000 $ the present value is 1.000.000 $ the growth rate of dividend (perpetual) is 4%


DCF modelPresent Value of Free Cash Flow

• An improved approach is to use the prospected Cash Flows from the Business Plan to estimate the value

• The Total Entreprise Value is equal to the PV of all FCF Entreprise Value = Equity + Financial Debt Free Cash Flow before Interest

• FCF = Net Operating Earning After Tax + Depreciation• Net Operating Earning After Tax (NOPAT) = EBIT.(1 - Tc)

EV0 = t=1 FCFt/(1+r)t

The Enterprise Value is equal to the PV of all Free Cash Flows

« Discounted Cash Flow Model »


DCF ModelHow to use it ?

• Using the Business Plan one can calculate the EV Calculating the NOPAT and the FCF

• Problem : The Business Plan is made for a limited period of time 5, 10 or 20 years

• We need to estimate the value of the Cash Flows after the Business Plan period


DCF ModelTerminal Value

The Terminal Value represents the EV for the perpetuity after the end of the Business Plan period

• Based on the Gordon-Shapiro formula VT = DIVT+1 / (r-g) or EVT = FCFT+1 / (r-g)

• T = last year of the Financial Plan « Normalized » FCF for the perpetuity FCFT+1 = NOPATT+1

• Future capex = Future depreciation (keep the production capacity)

g = perpetual growth rate• To be estimated cautiously (2% to 4%)

• Total Enterprise Value is then

EV0 = t=1T FCFt/(1+r)t + (NOPATT+1/(r-g))/(1+r)T


DCF modelEquity Value

• The Value of the Equity is equal to The Enterprise Value (EV)Less The Financial Debt (Dfin)

• All interest bearing debts– Long term– Short term– Eventually others (if bearing interest)– Less Financial placement

V0 = EV0 - Dfin,0


DCF - The Quiz Company

Year FCF (MUS$) 1 11 2 15 3 16 4 19 5 15 6 15 7 15 8 15 9 15 10 15


DCF - The Quiz Company

• Calculate the best estimation of the present value of company C if the Cost of capital is 14% if the Cost of capital is 12%


Saigon Hotel – DCF valuation

• We will apply the DCF model to the Base Case• Using a set of assumptions

Cost of Capital (r)• From 8% to 12%

Perpetual growth• From2% to 4%

• Example : The Base Case

BPcons.xls - VALO!A2


Saigon Hotel – ValuationSensibilities Studies

Assumptions Base Case Extension Chain

r = 8% g = 2%

5.499 8.330 10.624

r = 9% g = 2%

4.576 7.028 8.967

r = 9% g = 3%

5.189 7.912 10.114

r = 9% g = 4%

6.048 9.150 11.720

r = 10% g = 3%

4.308 6.670 8.532

r = 11% g = 3%

3.633 5.724 7.333


DCF – Decision tool

• In order to choose the best scenario• Maximize the value


SummaryThe Values of Saigon Hotel

Method Assumptions Value ($)

Net asset

PER PER = 15 6.480

PV of dividend n.a.

PV of FCF Base Case Extension Case Chain Case

r=9% g=3%

5.189 7.912

10.114


Conclusions of the lesson

• Creation of value is the goal of any company• For a stock listed company the market value can

be observed through the stock price the fair value can differ from the market value

• For non listed companies there are different methods to estimate the value Net Asset PER PV of Dividends DCF Model (PV of FCF)

• The different methods can give different values


Synthesis of the course

• Begin with the strategy• Build a Business Plan based on the strategy

With different strategic scenarios … and sensibilities studies

• The Financial Plan must be balanced Measure and improve the financial structure

• Optimize the investments decisions Net Present Value maximization

• In order to create value Valuation methods Optimize your Business Plan

vietnam master in management – hcmc 2003 valuation creation of value valuation of a stock listed...

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