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Agenda
Fair Value - Approaches & Suitability
Asset DCF Market multiples
Premiums/ discounts
Control premium/ minority discount Strategic premium
Limitations
Fail to factor the value of intangible assets like brands, technical knowhow, distribution network etc. Impacted by accounting Assumes assets always have profit generating value Ignores Returns vs. Cost of capital
Relatively Stable
NAV - Suitability
Asset Heavy Cyclicals (Example - steel, cement, hotels) High capital cost Well established Cycles driven by high capital cost, commodity product, bunch up in capacity
Profit Multiples Generally multiples tend to be pro-cyclical vs. countercyclical. NAV method A good benchmark to other methods
Limitations
Limited applicability in service industries/ new companies Volume and complexity of assumptions Adequacy of data Extremely sensitive to small changes in assumptions.
Significant transportation cost, considering location of mines Impacted viability of greenfield/ transactions 2011
$/tonne Hard Coking Coal Prices Thermal Coal Prices 2006A 2007A 2008A 2009A 2010A 2011E 2012F 125 57 98 65 300 118 129 75 200 96 247 122 200 120
Leverage
Aggressive business plan (not ideal)
Realistic valuations as benchmarked to current valuations. Relatively simpler compared to DCF Flexible can use different valuation multiples in different cases
Very volatile
Markets may not necessarily value companies fairly at all points of time Adequate and reliable details for transaction multiples not available in most of the cases
Hotels Sector
Hotel Sector is characterized by High Operating Leverage Almost all costs are fixed in nature. High Cyclicality High Operating Margins, but low Asset Turnover. Franchisee chains have the reverse. Approaches Multiples
EV/ Room multiples will depend upon location, Star Category. EV/EBITDA multiples depending upon the near term business scenario, have ranged from 5 to 15x.
EV/Room is a proxy for replacement cost. DCF should factor in the cyclicality.
Franchisee chains will have more stable models and higher intangibles. DCF may be the best approach for them.
Hotel Valuations
In September 2005
Company Name in Rs. Mn. Asian Hotels EIH Indian Hotels Hotel Leela Venture Taj GVK Average Share price 440 497 768 269 595 Market Cap 10,034 26,040 39,950 19,793 7,461 Debt EV EBITDA EV / Rooms EBITDA 13.2 x 16.7 x 21.8 x 19.0 x 16.1 x 17.4 x 1161 2631 n.a. 835 639 EV/Room 10.88 12.97 n.a. 32.06 12.88 17.20
December 2008
Company Name in Rs. Mn. Asian Hotels EIH Indian Hotels Hotel Leela Venture Taj GVK Average Share price 233 100 38 19 39 Market Cap 5,313 39,295 27,489 6,990 2,420 Debt EV EBITDA EV / Rooms EBITDA 1.9 x 10.4 x 3.1 x 9.9 x 1.4 x 5.3 x 1161 3083 n.a. 1086 639 EV/Room 3.78 13.12 n.a. 19.56 2.75 9.80
Hotel Valuations
Now
Company Name in Rs. Mn. Asian Hotels (North) Limited Asian Hotels (West) Limited Asian Hotels (East) Limited EIH Indian Hotels Hotel Leela Venture Taj GVK Average Share price Market Cap 3,919 2,060 3,467 52,899 58,859 16,929 6,035 Debt EV EBITDA EV / Rooms EBITDA 5.5 x 7.4 x n.a. 21.2 x 17.8 x 25.7 x 6.5 x 14.0 x 624 467 233 3519 n.a. 1457 900 EV/Room 9.42 7.17 n.a. 16.33 n.a. 27.37 7.09 13.48
Approaches NAV approach is quite important, with land being fair valued. DCF is the key to unlock value, hence cannot be ignored. However, assumption on land price appreciation make a huge impact Multiples are not very reliable, as Earnings may not be captured in line with cash flows.
Approaches DCF is very suitable, as brands provide stability and visibility Because of lower risk, low capital employed and high return on capital, successful consumer goods multiples are very high. NAV is not suitable because most brands are not on books.
Banks
Key characteristics of Banks
High leverage (high risk !) Value created on both assets and liabilities side of Balance sheet
Approaches
Making business plans is difficult, as growth dependant on capital All assets are liquid, hence NAV or Price/ Book value are key multiples. Adjust NAV for loan loss provisions. Approach of Management and past track record is also key
Risk
External/Internal Price Risk Manageable/ Non manageable
Value
Management Quality
Reputation, Competence, Vision, Corporate Governance
Control Value
Value of the enterprise as a whole Control value should encompass the rights, risks and rewards of having controlling power in a business In this context controlling interests are considered to be marketable and a marketability discount is not used
Marketable
Minority Interest Value Marketability Discount Non Marketable
Global evidence USA Mean premium 44%; Median premium 31% (Factset Mergerstat Control premium study 1998-2007)
Australia - Mean premium 52%; Median premium 41% (Officer, Bishop and Dodd)
E
Discount calculation
Minority discount is reverse of control premium Thus a 40% control premium would imply a minority discount of 28.6%
DLOM For some publicly traded stocks, a shareholder can purchase a long-term put option to insure against a price drop during the term of the put The price of the put provides market evidence of what investors are willing to pay to guarantee marketability The Black-Scholes model can be used to estimate the price of a theoretical put for non-publicly traded stock. DLOM (%) = Put Option Value / Stock Price Other methodologies Pre IPO studies, Restricted Stock studies
E
Whether buyer pays for strategic premium depends upon specific situation
Competitive Bidding One on One Negotiations
Own Value
DCF Value/ Listed Multiples Value Strategic Premium
Transactions Multiple
$
E
One on One Negotiation Buyers Strategy Build own and sellers valuation Initial bid should articulate negotiation intention
To sum up
Value, being an art or an inexact science, approach changes based on timings, industry and valuers outlook
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