Share Valuation Mark Fielding-Pritchard

Share Valuation  Share valuation is an art not a science  You are valuing shares in unquoted companies  Prepare a valuation report with a range of values  Choose the value that best fits what you are valuing  Then adjust to get a negotiation value (increase of selling/ reduce if buying)  Most valuations are carried out for tax purposes

Share Valuation  Four main methods  Assets  Dividends  Profits  Cash flows  Usually calculate the first 3 to get a range of values then pick the most appropriate  For exam you should know 1. How to calculate 2. When each is most appropriate 3. Advantages & disadvantages

Asset Valuation  To calculate we restate the balance sheet at realisable value  Add in any assets not shown ie intangibles at net realisable value. Include extra liabilities ie tax  Assumption is company ceases to trade so assets sold at break up value Advantages In practice easy to calculate Easy to understand Quick Disadvantages Ignores goodwill Gives artificially low value Only relevant if the business is not a going concern When Used? Will be the most appropriate valuation when the value of the assets is the value of the company A farming company makes $3k a month profit but the land could be sold for housing development for $5m The value of the company is the land

Dividend Model

Advantages In exams easy to calculate Easy to understand Quick When Used? When the only real benefit is to share in dividends, usually small holdings of shares Pointless if the shareholder can control dividend policy Gordon growth is not used in real life

Dividend Model

Profits  We take the profit from the income statement (as for EPS)  P= P/E ratio x profit  P/E includes share price so we take P/E of quoted company and adjust for known differences  Start with that P/E  Usually for lack of quote 50%  For majority stake 30%  Adjust for any other differences

Profits  Gail, an ecologically clean burger manufacturing company has EPS for 2015 of 150c  The P/E of Sashsca which is a quoted company is 18. Sashcha is considered riskier than average because it sources its food products from non ecological sources P/e of Sashsca18 Reduction for non quote(9)Gail is smaller, les access to capital, less broad customer base 9 Ecology (10% x 9)0.9Bonus to goodwill for ecology 9.9 Increase for control (30%)3Standard increase for controlling packet of shares P/E of Gail12.9

Profits  The adjustment for lack of a quote is a standard that has built up over time. The same for the 30% for control which comes from te KPMG study for takeovers in the UK during the 1980s. After the study it became a standard.  Everything else is an estimate

Profits Advantages Very widely used so well understood Based on comparative information Profits equal cash flows over time P/E of quoted company includes growth and risk Disadvantages Theoretically weak Very subjective Difficult to find a comparable company When Used For any valuation where significant influence is held

Discounted Cash flows  Prepare a cash flow and discount it  Adjust the cash flow for one off items  Discount rate = WACC

Discounted Cash flow Advantages Technically the best method Based on cash Risk adjusted Disadvantages How many years? Which discount rate? Which cash flows? When Used Only used in practice for companies where we can clearly identify cash flows ie leasing companies