Notions essentielles de valorisation d entreprise Claude COSTA Financial Services Manager Group Wealth Planning and Structuring Claude Costa
Principles of Business Valuation 2 Value of a business depends on its Return on Invested Capital (ROIC) and on Growth The higher a company can raise its ROIC and the longer it can sustain a rate greater than its cost of capital -> The more value it will create Focus on the main drivers used for valuing a company The ROIC is a better ratio to use rather than the Return on Equity RoE because the ROIC is not impacted bythe capital structure WACC: Cost of Capital -> Rate of Return that investors expect to earn from investing in the company Growth rate (g) is the annual growth rate of the NOPLAT (Operating result after tax) The Free Cash Flow (FCF) -> Estimation of the CF generated by the core operations of the business after deducting the investments Value of Operating units + Value of Non Operating Assets = Enterprise Value Enterprise Value - Value of Debt = Value of Equity
Core Valuation Techniques 3 The most used and reliable methodology of company valuation: the DCF (Discounted Cash Flow) because it relies solely on the flow of cash in and out of the company The use of Multiples -> EBITA multiples according to the sector activity and the underlying growth of the company Balance Sheet Valuation -> Net Asset Value of the company -> (ROIC / WACC) * NAV
Core Valuation Factors 4 Value Creation IF ROIC > Cost of Capital (WACC), FCF and ROIC provide the basis for a company DCF Valuation FCF = NOPLAT Net Investment ROIC = NOPLAT / Invested Capital NOPLAT = Operating Income after Tax = Price Per Unit Cost Per Unit * (1 Tax ) Invested Capital = Operating Working Capital + Fixed Assets + Intangible Assets + Net Other Long Term Operating Assets Documents to require Current Balance Sheet and history over recent years Current Profit and Loss Statement and history over recent years
Core Valuation Factors 5 Definition of Invested Capital: (in the Balance Sheet) Operating Working Capital ( All Current Assets necessary for the operations of the business) Cash + Cash Equivalents Trade accounts receivables Inventory & prepaid expenses Fixed Assets Book Value of Net Property, Plants and Equipments Intangible Assets Goodwill & Acquired Intangible ( ROIC with Goodwill & acquired intangible measures a company ability to create value after paying acquisition premium Net Other Operating Assets Other long term assets included if they are small (ex:otherassets undisclosed) Operating Leases (off BalanceSheetdebt) Net Investment = Investment Capital (t+1) Investment Capital (t)
Enterprise Valuation of a Single Business Company 6 Valuing a company equity using DCF is a four part process: 1. Value the company s operations by discounting free cash flow at the weighted average cost of capital 2. Identify and value nonoperating assets, such as excess marketable securities, etc Summing the value of operations and nonoperating assets gives Enterprise Value. 3. Identify and value all debt and other nonequity claims against the Enterprise Value. Debt and other nonequity claims included (as well unfunded pension liabilities, employee options and preferred stocks) 4. Subtract the Value of nonequity claims from Enterprise Value to determine the value of a company equity
Enterprise Valuation of a Single Business Company 7 Estimating the Cost of Capital WACC (Weighted Average Cost of Capital) 1. WACC blendsthe rate of return required bydebtholder Kd and equity holders Ke. WACC = D / (D + E) * Kd ( 1 Tax ) + E / (D+E) * Ke *Kd = Risk Free Rate 10 Years + Credit Spread of the corresponding rating *Ke = Risk Free Rate 10 Years + Equity Risk Premium Equity Risk Premium = Beta * ( Excess Market Return) *Leverage measure as D / (D+E) -> the higher the ratio the riskier the company *Benefitsof Tax Shieldsarising from debtfinancing *Crucial point in calculating the WACC
Enterprise Valuation of a Single Business Company 8 Notion of Perpetual Value: Estimation of Perpetual Value based on Projected FCF : FCF * (1 + g) / ( WACC g ) Present Value of FCF -> Sum of PV of FCFs + PV of Perpetual Value FCF
Enterprise Valuation of a Single Business Company 9 Equity Value = PV of FCF ( Value of Operations ) + Value of excesscash Value of long term Investments Value of Tax loss carry forward - Value of Debt
Enterprise Valuation of a Single Business Company ( Practice ) 10 Valuation of a Company, the various steps: 1.FCF calculations based on NOPLAT 2. Cost of Capital calculations 3.Growth Rate estimations 4. FCF Present value calculations 5. ROIC calculations 6. Valuations through EBITA Multiples
Enterprise Valuation of a Single Business Company ( Practice ) 11 Valuation of a Company : 1. FCF calculations NOPLAT calculations: NOPLAT is the after tax profit generated from core operations available to all investors Net Income is the profit available to equity holders only FCF = NOPLAT Investments in Invested Capital