1. Vietnam Master in Management – HCMC 2003 Valuation Creation of value Valuation of a stock listed company Valuation of a non listed company Net Asset Price-earning Ratio Present Value of Dividends Present Value of Free Cash flow

2. Vietnam Master in Management – HCMC 2003 Valuation Creation of value The goal of any company : to create value w This means : increase the value of the company for the shareholders w With full respect for the legal framework social, fiscal, environmental regulations w And for all the other stakeholders employees customers suppliers neighbors

3. Vietnam Master in Management – HCMC 2003 Valuation Creation of value How can the value be increased ? w by buying assets at a price lower than their economic value real estate : buying during a depression (crisis) w by selling assets at a price higher than their economic value real estate : selling during a boom

4. Vietnam Master in Management – HCMC 2003 Valuation Creation of value The best way to create value : Innovation w introducing new products Microsoft Cellular phones w introducing new production processes Car manufacturers w improving the productivity of labor w improving the quality of products w etc.

5. Vietnam Master in Management – HCMC 2003 Valuation Market capitalization of a stock listed company For listed companies the share price is known daily w the value of the company is equal to the price share multiplied by the number of shares w V = p share.n shares w V = Market capitalization (“market cap”) If the market is efficient the Market Cap is always the true value of the company w Efficient market means that at any time all the market has all the information on the company

6. Vietnam Master in Management – HCMC 2003 Valuation Fair value of a stock listed company There is often a difference between the share price and the true value w unequal distribution of the information good or bad news for the future not known by the market w from inside information … w to... inside trading w booming or bubble effect (psychology) w misinterpretation of the facts by the market

7. Vietnam Master in Management – HCMC 2003 Valuation Fair value of a stock listed company Even for a stock listed company it is useful to calculate a “fair value” based on : w All the information available on the company w Comparison of the share price and of the financial ratios with similar listed companies It is interesting to buy w When the share price is lower than the fair value It is interesting to sell w When the share price is higher than the fair value

8. Vietnam Master in Management – HCMC 2003 Valuation Valuation of a non listed company A valuation of a non listed company can only be known when : w Shares of the company are sold w The sale price is known But it is possible to estimate the value of a non-listed company by using different methods w Based on the book value w Based on comparison with similar listed companies w Based on the present value of the future financial flows of the company

9. Vietnam Master in Management – HCMC 2003 Valuation Net Asset Is the book-value of the equity a correct valuation of a company ? w No : difference between book-value and market price of the assets & liabilities It is possible to replace in the Balance Sheet all the book-values by the market prices and to calculate a revised value of the equity w Net Asset = Assets (at market prices) - Liabilities (at market prices) The Net Asset is a valuation of the company

10. Vietnam Master in Management – HCMC 2003 Valuation Saigon Hotel - Net Asset (000 US$)

11. Vietnam Master in Management – HCMC 2003 Valuation Saigon Hotel - Net Asset Additional information w The company owns the hotel building The book-value is 6.045 and the market price estimation 9.055 w The director is an art collector and the company owns art pieces The book value is 125 and the market price 850 w There are bad receivables for a book-value of 45 w In the cash placement the company owns Microsoft shares bought in 1992 for 10 and whose present stock price is 100 w The tax rate on all profits is 40% What is the Net Asset of the Saigon Hotel ?

12. Vietnam Master in Management – HCMC 2003 Valuation Price-earning Ratio A second valuation method for a company is the Price- Earning Ratio (PER) The Price-earning Ratio is equal to the value of the company divided by the net result w PER  V / EAT For listed companies it can be calculated directly by dividing the share price by the net result per share w eps = EAT / n shares w PER = p share / eps

13. Vietnam Master in Management – HCMC 2003 Valuation Price-earning Ratio The PER is higher for a company w with higher growth prospects for the earnings the risks being equal w with lower risks the growth prospects being equal The PER is published daily w in the financial papers w on the financial Websites (cfr bourses)

14. Vietnam Master in Management – HCMC 2003 Valuation Price-earning ratios Examples (Oct 30, 2001)

15. Vietnam Master in Management – HCMC 2003 Valuation Price-earning ratios Examples (Oct 30, 2001)

16. Vietnam Master in Management – HCMC 2003 Valuation Price-earning ratios Historic (Nov 2, 2000)

17. Vietnam Master in Management – HCMC 2003 Valuation Price-earning ratios - exercises What is the value of the Saigon Hotel in 2002 w EAT = 432.000 $ w PER = 15 High level due to excellent location and future prospects Explain the difference between the PER w Coca-cola & Pepsico w Compaq & IBM Which industry should have the higher PER w electricity or telecom w classical telecom or cellular companies

18. Vietnam Master in Management – HCMC 2003 Valuation Present Value of Dividends Let us start from a very simple approach Suppose that we know w that the expected value of the share of a company one year from now is v 1 w that a dividend div 1 will be paid at that time w that the Cost of the Capital for this company is r Then we can write the equation for the Present Value of the share v 0 = (div 1 + v 1 ) / (1+r)

19. Vietnam Master in Management – HCMC 2003 Valuation Present Value of Dividends We can repeat this calculation by writing the value of the share at time 1 based upon the value and dividend at time 2 w v 1 = (div 2 + v 2 ) / (1+r) and so on... w v 2 = (div 3 + v 3 ) / (1+r) We can then write w v 0 = (div 1 + (div 2 + v 2 ) / (1+r))/(1+r) w v 0 = div 1 /(1+r) + div 2 /(1+r) 2 +…+ p T /(1+r) T

20. Vietnam Master in Management – HCMC 2003 Valuation Present Value of Dividends If we consider that the company lives in perpetuity we can write w v 0 = div 1 /(1+r) + div 2 /(1+r) 2 +…+ div t /(1+r) t + … w V 0 = DIV 1 /(1+r) + DIV 2 /(1+r) 2 +…+ DIV t /(1+r) t + … Or w v 0 =  t=1  div t /(1+r) t w V 0 =  t=1  DIV t /(1+r) t

21. Vietnam Master in Management – HCMC 2003 Valuation Present Value of Dividends If we consider that : w the company will live in perpetuity w the growth rate of the dividend is constant and equal to g Then w div t = div 1.(1+g) t-1 Gordon & Shapiro proved mathematically that w v 0 = div 1 / (r-g) w V 0 = DIV 1 / (r-g) w of course one must have r>g The lower the Cost of Capital the higher the value The higher the growth rate the higher the value

22. Vietnam Master in Management – HCMC 2003 Valuation PV of Dividends - Examples What is the Present Value of the Quiz Company ? w the next dividend will be 12.000.000 $ w the Cost of Capital is 14% w the growth rate of dividend (perpetual) is 2% What is the Cost of capital of company B ? w the next dividend will be 100.000 $ w the present value is 1.000.000 $ w the growth rate of dividend (perpetual) is 4%

23. Vietnam Master in Management – HCMC 2003 Valuation DCF model Present Value of Free Cash Flow An improved approach is to use the prospected Cash Flows from the Business Plan to estimate the value The Total Entreprise Value is equal to the PV of all FCF w Entreprise Value = Equity + Financial Debt w Free Cash Flow before Interest FCF = Net Operating Earning After Tax + Depreciation Net Operating Earning After Tax (NOPAT) = EBIT.(1 - T c ) EV 0 =  t=1  FCF t /(1+r) t The Enterprise Value is equal to the PV of all Free Cash Flows « Discounted Cash Flow Model »

24. Vietnam Master in Management – HCMC 2003 Valuation DCF Model How to use it ? Using the Business Plan one can calculate the EV w Calculating the NOPAT and the FCF Problem : The Business Plan is made for a limited period of time w 5, 10 or 20 years We need to estimate the value of the Cash Flows after the Business Plan period

25. Vietnam Master in Management – HCMC 2003 Valuation DCF Model Terminal Value  The Terminal Value represents the EV for the perpetuity after the end of the Business Plan period Based on the Gordon-Shapiro formula w V T = DIV T+1 / (r-g) or w EV T = FCF T+1 / (r-g) T = last year of the Financial Plan w « Normalized » FCF for the perpetuity FCF T+1 = NOPAT T+1 Future capex = Future depreciation (keep the production capacity) w g = perpetual growth rate To be estimated cautiously (2% to 4%) Total Enterprise Value is then EV 0 =  t=1 T FCF t /(1+r) t + (NOPAT T+1 /(r-g))/(1+r) T

26. Vietnam Master in Management – HCMC 2003 Valuation DCF model Equity Value The Value of the Equity is equal to w The Enterprise Value (EV) Less w The Financial Debt (D fin ) All interest bearing debts –Long term –Short term –Eventually others (if bearing interest) –Less Financial placement V 0 = EV 0 - D fin,0

27. Vietnam Master in Management – HCMC 2003 Valuation DCF - The Quiz Company

28. Vietnam Master in Management – HCMC 2003 Valuation DCF - The Quiz Company Calculate the best estimation of the present value of company C w if the Cost of capital is 14% w if the Cost of capital is 12%

29. Vietnam Master in Management – HCMC 2003 Valuation Saigon Hotel – DCF valuation We will apply the DCF model to the Base Case Using a set of assumptions w Cost of Capital (r) From 8% to 12% w Perpetual growth From2% to 4% Example : The Base Case BPcons.xls - VALO!A2

30. Vietnam Master in Management – HCMC 2003 Valuation Saigon Hotel – Valuation Sensibilities Studies

31. Vietnam Master in Management – HCMC 2003 Valuation DCF – Decision tool In order to choose the best scenario Maximize the value

32. Vietnam Master in Management – HCMC 2003 Valuation Summary The Values of Saigon Hotel

33. Vietnam Master in Management – HCMC 2003 Valuation Conclusions of the lesson Creation of value is the goal of any company For a stock listed company the market value can be observed through the stock price w the fair value can differ from the market value For non listed companies there are different methods to estimate the value w Net Asset w PER w PV of Dividends w DCF Model (PV of FCF) The different methods can give different values

34. Vietnam Master in Management – HCMC 2003 Valuation Synthesis of the course Begin with the strategy Build a Business Plan based on the strategy w With different strategic scenarios w … and sensibilities studies The Financial Plan must be balanced w Measure and improve the financial structure Optimize the investments decisions w Net Present Value maximization In order to create value w Valuation methods w Optimize your Business Plan