Verðmat banka - Afkomuspár o.fl.
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Transcript of Verðmat banka - Afkomuspár o.fl.
Verðmat banka- Afkomuspár o.fl.
Haraldur Yngvi Pétursson
Framkvæmdastjóri L.S.B.Í.
Sérfræðingur í eignastýringu Arion banka
Introduction
Haraldur's Personal Introduction
Academic:
University of Iceland – Cand. Oecon
Professional
Deloitte – Accounting – 3 years
Preparations of financial accounts
Auditing of financial accounts
Kaupthing Bank – Equity Research – 4 years
Focus on the Icelandic market
Part of Kaupthing Scandinavian equity research from 2006
IFS Research – Equity Research – 1 year
Focus on Icelandic equities
Selected Scandinavian companies
S&P 500 selected sectors
Arion banki – Asset Management – Since September 2009
MD of L.S.B.Í. Pension Fund
Goal of Presentation
Discuss company valuation generally and main obstacles (focus on banks)
Review in some detail the main currently employed valuation methods
Don't worry if you don't fully understand everything said
To most ordinary humans this is entirely foreign material
Valuation and Equity Research is very much "on site training"
Hopefully you'll enjoy picking up some of the terminology
and the next valuation presentation you sit through should be slightly more bearable
Reasons for Valuing Companies
Key to successful trading in (and managing) corporations
Ability to estimate their value
Understanding the sources of their value
Investors do not buy corporations for aesthetic or emotional reasons – but for their expected future cashflows
Inherent value of a company based on forward-looking estimates and judgements
Valuation is fundamental for any decision & negotiations relating to e.g.
Company investments
Mergers
IPO / rights issues
Management project evaluation
Portfolio valuation
Valuation – Basics
Valuation a science or an art? A bit of both
Science:
Certain methods are based on solid mathematical pillars. Has (and is) being researched by
entire university departments, thousand's of professors/PhD's/market practitioners
Foundation of the world's financial system
Art:
Modelling and forecasting of the future (?!?)
• management/key employees, tastes/fashion/sentiment, disruptive technologies…
Material role of fickle (and difficult to model) behavioural issues and biases
overconfidence, overreaction, loss aversion, herding, regret, misestimating of
probabilities..
Fact remains – companies need to be valued and the following
methods are the best tools currently available
Valuation - Reservations
Assumptions and inputs into the models are of paramount importance
Garbage in -> Garbage out
Several "difficult-to-model" factors hugely important
Is it for sale? Is there a buyer? Sale under distressed circumstances? is funding available?
Output from valuation models ≠ current price
Additionally some types of companies are tremendously difficult to value analytically
Start-ups
Biotech/pharmaceutical research
Highly cyclical companies
Companies with large "real options"
Rights to unexplored oil-fields / mining
Online companies (social networking, search engine..)
Valuation Methodologies
Discounted Cash-flow (DCF)
Free Cash Flow to Firm (FCFF), FCF to Equity, Adjusted Present Value (APV)
Multiples / Comparables
P/E, EV/EBITDA, EV/Sales etc.
Other methods
Invested capital, VC Capital Method, Option Pricing, Last round of financing, Break-up value and Dividend Models
..and then the more "sketchy" methods
e.g. Technical Analysis
Balance between model relevance, complexity and number of assumptions
Usually at least two methods used in any valuation exercise
Valuation Method:
Multiples / Comparables
Multiples / Comparables (comps) - Introduction
The idea is to approximate a company's value by comparing it to companies with known
value
Source of figures
Comparable public company multiples
Recent private company transactions
Important to only compare relative value of similar companies (apples with apples)
Similar Industry Scope
Similar Growth
Similar Risk
Similar Results (ROE)
Multiples / Comparables (comps) - Introduction
Many benchmarks can be used (usually industry specific)
Enterprise Value / EBITDA
Enterprise Value / Sales
Price / Earnings (I: V/H) – (Often used for banks)
Price / Book (I: Q-hlutfall) – (Often used for banks)
Price / Net Asset Value (NAV) – (Often used for banks)
Monthly Rent Multiple
Funds under management – (... for e.g. asset management)
# subscribers, # patents, # employees, #website hits / Enterprise Value
etc.
Multiples / Comparables (comps) – Introduction cont.
Positives
Quicker and easier than analytical methods (DCF)
Reflects current market conditions (investor sentiment, bargaining power..)
Helpful in "reality-checking" DCF valuations
Disadvantages
Are the comparable companies similar enough?
E.g. public vs. private, future prospects, sector, management quality, market position, capital structure, tax-scheme…
Doesn't capture value of different scenarios/"what-ifs"
E.g. post acquisition cost-cutting is successful, synergies are achieved, pending lawsuit goes one way or the other..
Disconnect between a multiple and inherent firm value. Hence does not capture systemic under-/overvaluation of companies by the market
Price / Earnings (PER or P/E)
Price Earnings (I: V/H) ratio shows how much accounting profit its owners are entitled to
Example: Stock price = 20, EPS= 2 => PER= 20/2 = 10
Compared to companies similar in risk and prospects PER is an indicator of whether a particular stock is under or overpriced
Several variants
Trailing PER or forward PER (using forecasted earnings)
Primary shares outstanding or diluted number of shares
Average price over period
Generally:
High PER (>16) indicates that the market believes significant growth is on horizon
Low PER (<8) indicates that the market believes current profit levels are unsustainable
IncomeNet
ValueEquity
Shareper Earnings
Price ShareEarnings Price
Price/Book (P/B) and Net Asset Value (NAV)
Price / Book = Value of Equity / Book Value of Equity (I: Q-hlutfall)
Purpose of ratio is to show the market premium to the accounting equity
P/B is used for valuing investments whose value is derived primarily from the underlying value of their tangible assets
Holding companies
Real estate companies
Banks
Companies up for liquidation (solvency value)
Net Asset Value (NAV) is a significantly better measure than book equity
Calculated by correcting the value of assets & liabilities in the accounts
Book value of associates
Book value of fishing quota
Goodwill justified?
Deferred tax liability going to be paid in the near future (Real Estate)? etc.
Some examples from the “real world”
DnB NOR report - Feb 2010
Some examples from the “real world”
Historical development (short term though)
Some examples from the “real world”
Interesting to take a closer look at the DnB NOR report
For further view on the DDM
To see different methods of valuation, in use on the market
To better get the “feel” for professional valuation
... and many other things
Questions and Answers
Q & A