Case Studies: During this course, we analyse and reference a wide range of case studies including Bayer Monsanto, PORR, SA Airways, Sainsburys, Capita, Carillon, Balfour Beatty, Air France KLM, Marks & Spencers, Vodafone and Arcelor Mittal.
Topic 1 - Multiple valuations
1.1 Background to multiple valuations
- Defining equity value and enterprise value
- Issued shares versus the fully diluted number of shares
- What are the key factors that drive valuations?
- The Gordon Growth Model and other summary valuation formulae
- Selecting a peer group
Case studies: Practicing the summary valuation formulae
1.2 Equity multiples
- Understanding which equity multiple to use for different situations
- The direct and in-direct influences over equity multiples, including WACC, ROIC, growth, tax, leverage
- Computing PE and PEG ratios
- Interpreting high and low PE ratios
- Understanding how the PE of cash and leverage can distort PE ratios
- Understanding NAV multiples
- Refining the equity valuation analysis of net derivatives, provisions, off balance sheet and other items
- Dividend yield valuations.
- Are dividends progressive and sustainable?
- How are they being funded?
- Could dividends be cut?
Case studies: Calculating the underlying PE ratios for the peer group; applying the peer group adjusted average PE ratio to another company; making adjustments to derive equity value and value per share.
1.3 Enterprise Value (EV) multiples
- The key influences over EV multiples inclluding WACC, ROIC, growth and tax
- When is it helpful to use an EV multiple?
- Why EV multiples differ across industries
- Understanding the main EV multiples
- EV/EBITDA(R), EV/EBIT, EV/revenues, EV/operating variables
- Adjustments to bridge operating EV and Group EV
- Adjusting the Group EV for NCI, non-operating assets, excess cash, leases to derive the correct operating EV multiple
Case studies: Calculating the peer group EV multiples and applying these to the valuation of another company; making adjustments to establish the correct underlying multiple.
Topic 2 - Discounted cashflow valuations
2.1 Forecasting unlevered FCF/free cashflow to firm
- The rationale for using unlevered FCF for the DCF valuation
- Calculating OPAT and unlevered FCF
- Making non-cash adjustments
- Estimating a reasonable level of NWC changes and capex
- What about the use of leases (IFRS 16)?
- What not to include in unlevered FCF – common errors
- Dealing with joint ventures, associates and non-operating assets
Case studies: Working out unlevered FCF for firms with complex cashflow statements
2.2 Terminal value
- TV using the perpetuity method
- Which WACC should be used?
- Backing the TV into a multiple, if possible, to test if it is reasonable
- TV using exit multiples and liquidation value
- Should the exit multiple be the same as the current multiple?
- Generating final year forecasts that give rise to a stable ROIC
- Limitations in trying to compare ROIC and WACC
- Testing scenarios based on the terminal growth rate, WACC and the exit multiple
2.3 Calculating the risk rate for discounting the cashflows – the WACC
- Background to WACC
- The historic and implied equity risk premium
- Calculating the ERP for firms with international, multi-currency operations
- How do sovereign and corporate credit ratings affect the WACC?
- Sovereign risk premia - CDS spreads and standard deviations
- Examining beta; calculating betas for private firms
- Calculating the cost of debt and hybrid capital; multi-currency considerations
- Is it possible to estimate an optimal capital structure?
Case studies: Working out the ke and WACC for firms with multi-currency operations; working out the beta
Topic 3 - Alternative DCF methods
- When leverage or the tax shield are changing significantly
- Adjusted present value DCF
- Compressed DCF
- Recursive DCF
- When growth will not stabilise in the near term – using a 3 phase DCF
- Forecasting declining growth in phase 2
- Problems that arise if we change the WACC every year when doing a DCF
- Analysis of existing company valuations – reversing into the terminal growth rate
Case studies: working out DCF valuations using some of the above methods; Calculating the terminal growth rate embedded in a corporate valuation.
Topic 4 - The impact on the valuation of issuance and redemption of equity and hybrids
- Different classes of equity shares (eg. voting and non-voting)
- The importance or not of the book value of equity to valuation
- How changes in the equity base may alter valuations
- Capital redemptions
- Equity offerings
- Hybrid debt/equity offerings (convertible and exchangeable hybrids)
Case studies: practicising valuation changes caused by equity issuance; understanding how capital redemptions can alter the eps and PE ratio
Topic 5 - Corporate Financial analysis - forecasting key valuation variables
5.1 Key income statement variables that impact valuation
- Historic and forecast revenues
- Sources of revenues
- Growth outlook: impact of disposals and M&A
- Currency and inflation factors
- Volatility and seasonality of revenues
- The impact of IFRS 15
- Historic and forecast operating costs
- What are the most important costs?
- Are the costs predictable or volatile – the impact of commodity prices
- Operating leverage and trying to forecast its impact on profitability
- Capitalisation of costs
- Operating earnings
- Sources of operating earnings
- Growth outlook
- What is the earnings quality?
- What is the trend in margins?
- Gross and net finance expense
- What should be included?
- Including lease expense (IFRS 16)
- Adjusting for capitalised interest, provision discounts, fair value (FV) of financial assets and liabilities
- What is the trend in interest coverage?
- Calculating underlying EBITDA(R) and net income
- Adjusting earnings for exceptional, non-recurring items, discontinued items, joint venture earnings, operating leases, movements in fair valuations and other items
Case studies: working out underlying earnings for firms with significant non-core and exceptional operating and financing items
5.2 Key balance sheet and cashflow variables that impact business valuation
The assets side of the balance sheet
- Is the business capital intensive or does it have a low asset base?
- Non-current assets – what is the valuation basis?
- Understanding asset lives
- Maintenance/replacement CAPEX
- Expansionary CAPEX – is it sufficient to fund forecast growth?
- Project risk
- Impairment of assets (fixed, intangible, deferred tax assets)
- Do impairments affect the valuation?
- Dealing with intangible assets
- Review of Kraft-Heinz valuation decline, March 2019
- Components of cash and non-cash net working capital
- Calculating financial assets, including cash and equivalents
- Excluding certain financial assets from net debt
- Pledged/escrow cash
- Cash blocked overseas
- Cash subject to repatriation tax and currency risk
The liabilities side of the balance sheet
- Calculating debt and equivalents
- Term loans, revolvers, NWC facilities, supplier financing, private placements, leases, (IFRS 16), bonds, notes, debentures, hybrid commodity-linked debt, project finance debt, green/sustainable debt, recourse and non-recourse debt
- The impact of the debt maturity profile, non-consolidated holding company debt, the debt structure and subordination
- Dealing with excessive trade payables and unpaid tax
- Derivative liabilities and hedging (IFRS 9)
- The different types of provisions and their accounting treatment
- Dealing with retirement liabilities
- The impact of accrued income, bad debts, retentions and deferred revenues
- Calculating gross and net debt and equivalents to bridge the difference between equity value and enterprise value
- Adjusting for off balance sheet liabilities eg. contingent liabilities, receivables funding, certain leases, vendor funding, recourse financing, letters of credit, performance guarantees etc.
- Is the firm over-levered?
- Assessing liquidity
- What is the impact of poor or declining liquidity?
- Calculating ROIC
- Is the firm generating ROIC above WACC?
- Limitations in calculating ROIC
Case studies: Calculating gross and net debt, including adjustments for the above factors; Adjusting valuations for the above-mentioned topics
5.3 How non-consolidated businesses impact the valuation
- Joint ventures, associates, investments
- Do these assets improve or reduce the group valuation?
- Can JVs be used to hide losses and bad debts?
- Forecasting the earnings and cashflow from investments and equity accounted assets
Topic 6 - Additional valuation topics
- Discounts to apply to non-controlling stakes
- Valuing a private company versus a public company
- Testing a valuation – backing into the implied terminal growth rate
- EV to equity value for firms with complex accounts
Case study: Calculating the terminal growth rate embedded in a company valuation; working out EV and equity value for firms with complex accounts
Topic 7 - Financial modelling for valuation
7.1 Overview of financial forecasting model
- Forecasting key valuation variables (revenues, earnings, cashflows, CAPEX, NWC changes, asset disposals, currencies, provisions, impairments, revaluations, dividends, fixed and variable costs)
- Ratio analysis – key corporate financial ratios including margins, ROIC, interest cover, dividend cover, leverage, debt service coverage, reliance on external funding, liquidity
- Short-cut method to forecasting JVs and NCI
- Testing covenant compliance
- Linking the valuations to the forecasts
- Developing flexible scenarios with Excel – what are the key variables?
- Building data tables
7.2 Calculating returns on different investments
- How can we calculate a return on our investment?
- Calculating the internal rate of return, the modified internal rate of return, money multipliers and net present values
- Calculating returns on warrants attached to debt instruments
Case studies: working with an Excel forecasting model to flex financial forecasts to assess the impacts on EV and equity values; modelling data tables; calculating a range of returns on investments