An Introduction to Valuation - Technical University of Košice · Weighted Average Cost of Capital (WACC) Adjusted Present Value (APV) Value of substance ... Valuation of LUKOIL WACC

An Introduction to Valuation

Prof. Dr. Martin Užík

What is a company valuation?

• the company valuation is a part of investment lesson (i.e. M&A´s,

IPO´s, Spin Off´s)

• you valuate by two perspectives

– Sell Side

– Buy Side

• At the beginning there is a company analysis (i.e. Due Diligence)

• Target function “Maximize the SHV”

• Total Value Sum of operating value + non operating assets

Functions of a company valuation/

For what do we need a company valuation?

Main functions:

• Decision making and consulting activities

• Mediation

• Argumentation

• forecasts of company developments and its investments

• investment of shareholders = company value

Auxiliary functions

• Information

• Tax measurement

• Contract configuration

Functions of a company valuation/

For what do we need a company valuation?

Objective of Company Valuation:

- to buy Company

- to sell Company

- to give Company away

- to bequeath the Company

- Strategy

- Price

- Risk

Challenge

Company Value ǂ Company Price

Methods of Company Valuation

Entire valuation approaches (Discounted Cash Flow

[DCF], Capitalized Earning Power Approach, Comparable

Company Analysis [CCA], Comparable Transaction Analysis

[CTA])

Single valuation approaches (Value in case of

liquidation, value of substance)

Valuation Methods - Overview

Entire approaches Single approaches

Capitalized Earning Power Appr.

DCF-Approaches

Comparison Analysis

Entity Approach Equity Approach

Weighted Average Cost of Capital (WACC)

Adjusted Present Value (APV)

Value of substance

Value in case of

liquidation

CCA

CTA

DCF (WACC) – Steps

1. Free Cash Flow-Planning

– Through CF determination, different accounting standards

become equilibrated

2. Determination of capital costs

• Estimating Beta

3. Discount FCF and Calculate Enterprise Value

4. Calculate equity Value



Overview: Cash flow calculation Receipt of payment from operative business

- Pay-outs from operative business

= Cash Flow before interest and tax (CF)

- Tax in case of complete equity financing

= Operating Cash Flow (OCF)

- Cash Flow from investment activity

= Free Cash Flow (FCF)

+ Tax Shield

= Total Cash Flow (TCF)

+ /

-

Cash Flow from financing activity (incl. interest

payments / receipts)

= Flow to Equity (FTE)



Looking to the crystal ball



Looking to the Past



Looking to the Future



Looking to the Future



weighted average cost of capital (wacc)

E = Market Value of Equity

V = Company Market Value

D = Market Value of Debt

t = Tax Rate

CAPM = Capital Asset Pricing Model (cost of equity)

rD = cost of debt

1DE Dwacc CAPM r t

V V



Capital Asset Pricing Model (CAPM)

CAPM = Capital Asset Pricing Model (cost of equity)

rM = Market Return

rf = Risk Free Rate

Beta

M

f fCAPM r r r



Beta

ri = expected share return

rM = expected market return

,

, M

i ii MM

M

COV r r

VAR r


3. Discount FCF and Calculate Enterprise Value

Enterprise Value

If: FCF and wacc continuous in the time:

Two stage model:

1 1

t

tt t

FCFEV

wacc

1 1

t

tt t

FCF FCFEV

waccwacc

31 2

1 2 31 1 2 31 1 1 1

t T

tt Tt

FCF FCFFCF FCF FCFEV

waccwacc wacc wacc wacc


4. Calculate Equity Value

EquityValue EV Debt Value

DCF (WACC)

Valuation of LUKOIL

WACC 11,88%

Equity-Quota 89,01%

Debt-Quota 11,81%

CRP 8,54%

riksFREE 2,89%

Market Return 11,43%

Beta 1,101

CAPM 12,29%

Tax 20,00%

rD 10,00%

Debt 7043

Today 06.04.2009

g for 2012 & 2013 1,00%

Year 31.12.2009 31.12.2010 31.12.2011 31.12.2012 31.12.2013 TV

t 0,74 1,74 2,74 3,74 4,74 4,74

FCF 10.659,94 5.910,56 7.012,71 7.082,84 7.153,67 7.153,67

PV(FCF) 9.813,36 4.863,28 5.157,33 4.655,69 4.202,84 35.370,02

EV 64.062,51

Market Value of Equity 57.019,51

Share Price 67,04

Comparable Company Analysis (CCA)

Basic - Information

• CCA want to determine an objective Enterprise Value

• CCA is a capital market – orientated concept

• CCA is influenced by expectations and valuations of the capital

market

• CCA is an important part of each research report

• CCA has historical and implicated data as its parts

Comparison Analysis

mCompVVC VOVO CC

CC

CompV

VCm

• Selection of similar companies (comparable companies CC)

• Selection of comparative values CompV (e.g. earnings, turnover, EBIT, …)

• Calculation of a multiple m (relation between the value of the comparable

company VCCC und the comparative value of this company)

• Deduction of the value of the company which is to valuate (value of the

valuation object VCVO)

• Based on experience (multiple method), stock exchange prices (Similar

Public Company Approach), proceeds of initial public offerings in the past

(IPO Approach) or realised transaction prices (Recent Acquisition

Approach).


Valuation of LUKOIL

Looking for Peers


Valuation of LUKOIL

Looking for Peers


MCAP EV Sales EBITDA EBIT Company Name

CUR_MKT_CAP CURR_ENTP_VAL SALES_REV_TURNEBITDA EBIT LONG_COMP_NAME

ROSN RU Equity 54.050.710.000,00 75.835,70 68.991,00 16.988,00 13.005,00 Rosneft Oil Co

gazp rm equity 3.268.602.000.000,00 4.437.971,00 2.390.467,00 885.355,00 701.778,00 Gazprom OAO

tnbp ru equity 14.103.660.000,00 16.238,66 25.739,00 8.684,00 7.343,00 TNK-BP Holding

nvtk ru equity 7.833.669.000,00 275.926,00 79.272,00 36.798,00 32.217,00 NovaTek OAO

EV/Sales 1,77

EV/EBITDA 4,71

EV/EBIT 5,73

Multiples


Number of Shares Sales 2010 EBITDA 2010 EBIT 2010 Debt

EQY_SH_OUT BEST_ESALES_NXT_YR BEST_EST_EBITDA_NXT_YR_MEANBEST_EEBI_NXT_YR_MEANDebt

LKOH RU Equity 850,56 65.915,42 10.734,78 9.154,08 7.043,00

Lukoil

Stock Exch. 41,5 Difference to Stock Exch.

EV/Sales 128,64 87,14

EV/EBITDA 51,18 9,68

EV/EBIT 53,42 11,92

Estimated Share Price

Company Valuation

Fair Value LUKOIL

Stock Exch. 41,5 Difference to Stock Exch.

EV/Sales 128,64 87,14

EV/EBITDA 51,18 9,68

EV/EBIT 53,42 11,92

DCF 67,04 25,54

Fair Value 75,07 33,57

Estimated Share Price

Single valuation approaches:

Value of substance

• Split off the object of valuation into valuable parts.

• Value of reproduction - How much is it to rebuild the company?

• Supply market based.

• Complete value of reproduction

Immaterial components are considered.

• Fractional value of reproduction:

Immaterial components aren‘t considered.


Value in case of liquidation

• Split off the object of valuation into valuable parts.

• Fiction of liquidation of the company.

• Value the parts with sales market prices.

• Adjustment of single values from the balance sheet (e.g. specific

liquidation costs). Debt has to be repayed.

• Value of liquidation depends on the intesity and speed of the split off

• Value of liquidation is the lower limit of the value of the company.


Value of substance

• Problem: How should the reproduction of a brand or the defence

against competitors be valued?

• Unnecessary components for operative business are valued by the

value in case of liquidation

• The value of substance is the upper limit of the value of the company.

Excercise

Count the Value of following Companies:

- Adidas

- Puma

- Volkswagen

Compare the Company Value with the Company Price.

Documents

An Introduction to Valuation - Technical University of Košice · Weighted Average Cost of Capital (WACC) Adjusted Present Value (APV) Value of substance ... Valuation of LUKOIL WACC