Corporate Valuation Lecture 1 Introduction PDF

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Corporate Valuation

Lecture 1 Introduction Lecturer: Nhan Le ANU Research School of Finance, Actuarial Studies and Statistics

Agenda for Today’s Lecture

 Overview of this course (and what is needed to survive it)  Valuation in context – the basics

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Introductions

 About me . . .

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Course Overview – General Comments  Largely a ‘learning by doing’ approach to valuation  Teams will prepare a comprehensive valuation and investment assessment of a real public company  There will also be course content aimed at leaving students with a rounded appreciation of related concepts  An impossible course if tasks (and studying) are left to the last minute  You will be pointed in the right direction and given assistance, but you have to do the work YOURSELF!  This course expects you to work towards broad objectives using limited resources. There are no set solutions to the assignments. It is much like the life of an equity research analyst . . .

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Learning Objectives and Benefit  Students completing this course should be able to:  Evaluate companies as investment prospects using a variety of valuation techniques  Have an improved capacity for teamwork  This course will hone some other very useful skills:  Handling accounting information  Working with Microsoft Excel  Working to objectives rather than answers  You will be learning skills that are used widely within investment banking, fund management, management consulting, corporate finance and corporate strategy  It may help with your personal investments and retirement (superannuation) investment strategies 5

Teaching Structure  Lectures – Broad outline of key concepts and methods with examples – Outline of assignment tasks to be completed  Workshops – Starting in week 2 – First topic: Tips on using the KGW model / Excel – All students should attend – Purpose: Discuss methods; address any issues of broader interest; answer questions with respect to assignments - PREPARE!!! – Do NOT email assignment questions to the lecturer – bring them to the workshop! – Ends when questions run out

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Teaching Structure (continued)  Weekly tutorials – Prepare answers to weekly tutorial questions from the textbook – Tutorials follow the textbook, NOT the lectures. Hence, doing the assigned textbook readings prior to attempting the tutorial questions is critical – You will not be able to complete the tutorials without the required readings! – Tutorial questions and answers are examinable!

 Consultations – Concept: Supplement the information provided in workshops and make final checks of Excel models – Do NOT bring a list of assignment questions to the consultations – ask all assignment questions in the lectures and workshops – Two weeks prior to the assignment due date, each team will have a (short) allocated time slot they can use to ask final questions and conduct excel model checks. The time slots will be strictly followed! – Bring your model / laptop to the consults

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Course Overview – Phases 1. Company model and DCF valuation of firm (due 26/4/2019)  Build company model, including all forecasts and assumptions  Deliver a DCF valuation of the company

2. Final DCF valuation and multiples (due 24/5/2019)  Finalise the DCF model, forecasts and valuation. Make corrections to the assignment one model  Add relative (ratio-based) valuations such as PEs, EVMs, EBITs, P/BVs etc. to the Excel file

3. Online Exam (due in week 5)  

Lecture, workshop, tutorial material examined (week 1 – 5 material) 1-hour exam consisting of numerical MCQs only

4. Final Exam (due in the final exam period)  Lecture, workshop, tutorial material examined  3-hour closed-book exam, one A4 sheet of paper with notes on both sides  Final exam will consist of MCQs and short answer questions  Practice exam already available on Wattle

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Assessment  Course will be graded as follows:  Two assignments (25%, 15%)

=> raw team assignment mark

 Online exam (20%)

=> raw individual mark

 Technical / computer issues are your responsibility!

 Final exam (40%)

=> raw individual mark

 Possible course scaling

=> final individual mark

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Forming Assignment Teams  Teams MUST be of 5 – 6 students  Teams WILL BE ASSIGNED  If you are going to drop the course, PLEASE decide early!

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What Would Make an Ideal Team?  Think about diversity as well as friendships  An ideal team for the task would have a mix of people with something to contribute in these areas: – Finance theory, Accounting, Management / corporate strategy, Financial markets and investing, Excel modeling, Writing, Organisational (running meetings, delegation of tasks, etc)  A handful of the top teams will be given opportunity to try-out for representing ANU in the CFA Research Challenge  Your responsibility to solve any team issues − Freeriding can be avoided if you plan ahead and communicate

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CFA Global Investment Research Challenge  The CFA Challenge involves:  Writing an investment report on an assigned company, mentored by a practicing analyst or portfolio manager  Presenting the report to a panel of experts in competition with other local universities  Winner to compete in Asia-Pacific Regional Final  Regional winners proceed to Global Final  ANU try-outs will involve presentation of a report of your company valuation (from this course) to a panel who will select a winner  Participation would be a great learning experience, and look very good on the CV

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Approaching This Course  Get to work quickly. Attack the task at hand, so that issues and problems are identified early in the analysis process  Plan ahead, and work persistently. Finish each assignment well before date due so all can review it. Hurried analysis won’t work!  Use teamwork to best effect. In particular identify, prioritise and designate responsibilities and tasks:  Model building  Investigating the company, industry and competitors  Project manager for the assignments  Reviewer of the team’s work  etc…

 Keep a watch for alerts via Wattle 13

Information Resources  Wattle - some resources will be provided by lecturer – Selected broker reports (already posted) – Selected data (e.g. historical series for returns and valuation multiples)

 Company data and information – DatAnalysis (Access via library http://anulib.anu.edu.au/online/eresources) – DataStream (Access via the RSFAS data room – bookings via the RSFAS admin desk)

 Company news and announcements – Company websites – Factiva (Access via library http://anulib.anu.edu.au/online/eresources) – ASX website (http://www.asx.com.au/) – DatAnalysis (Access via library http://anulib.anu.edu.au/online/eresources)

 Economic and market data – Bloomberg, Yahoo Finance, ASX (access via internet, all are limited) – Australia: ABS (http://www.abs.gov.au/), RBA (http://www.rba.gov.au/) – International: central banks, statistic bureaus, OECD, IMF, World Bank 14

Valuation in Context – What is “Value”? VALUE ≠ PRICE!!! Rule 1 Value = net present value of future cash flows

Rule 2 All valuation methods ultimately come back to Rule 1

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Valuation Approaches Three broad approaches: 1. Net present value (or discounted cash flow) techniques 2. Capitalisation of steady state earnings or cash flow (e.g. P/E  price paid by investors for each unit of income) 3. Asset valuations (e.g. adding up individual company assets) General comments:  Each approach has strengths and weaknesses  This creates an argument for a composite of valuation metrics – this is what this course is all about  Why does the course start with DCF? (Rule 2) 16

A Way of Thinking About Company Value 1. A company generates an (uncertain) stream of cash flows from its existing operations. The value of such operations is the NPV of these cash flows  If a company can get more net cash flow out of its existing operations, the company will be worth more (↑ value)  The equity analyst needs to account for cash reinvested to maintain operations as well as the opportunity cost (cost of capital) for shareholders given the level of risk present in the business or industry  All else being constant, if the cost of capital (risk) falls, the business is worth more (↑ value)

2. Additional value is created if the company can invest in new projects earning above the cost of capital  ‘True’ growth stocks have access to such opportunities  Investments that earn below cost of capital will destroy value, regardless of what happens to top-line sales growth

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Basic Calculation Steps of a DCF Model 1. Estimate NPV of CFs from operations, discounting at WACC. Consider: a. FCFs over the forecast horizon, where FCFs = NOPLAT + non-cash items (e.g. depreciation) – investments in capital (e.g. capex, working capital) b. Continuing Value via a perpetuity…CV = [NOPLATt+1(1-g/ROIC)]/[WACC-g] 2. Value non-operating (not part of the company’s core operations) assets whose CFs are not included in FCF estimates  hence, valued separately  examples: -

Excess cash and marketable securities

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Non-consolidated subsidiaries and equity investments

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Excess real estate and other unutilised assets

3. Enterprise value = value of operations + non-operating assets 4. Identify and value all non-equity claims  examples: -

Debt and debt equivalents (leases)

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Preference shares

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Hybrids (options, warrants, convertibles)

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Minority interest

5. Equity value = enterprise value – value of non-equity claims 6. Value of shares = equity value / # of fully-paid ordinary shares 18

DCF Analysis (An Example)

=1,602/0.12

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Wrap-up  Going forward: – Next week’s topic: “Building a Company Model” – Readings: KGW Ch 9 – Workshops next week: KGW model intro and Excel hints – This week’s readings: KGW Ch 1, Ch 2, Ch 3 – Tutorial questions (for next week) are from these KGW chapters – read them!  What you should be working on: – Deciding if you really want to do this course – Looking at the materials on Wattle – Team meetings!  Any comments or questions? 20...