MCC Valuation Competition Tutorial

Contents

1. Overview
2. Competition Format
3. Rules
4. Entry Fees
5. Concluding Thoughts
6. Handover for Technical Tutorial

Overview

Our Aim:

How?

Presenting
to

To create a real-world experience of an analyst

at an investment bank

A short case on an NZX-listed company

Panels of industry judges

Competition Format
40 Hours
Preparation
Friday
23rd
Case Distributed

Teams of 2-4
People
Saturday
24th

10 Minute
Presentation

10 Minute
Q&A
Sunday
25th

Preliminary Rounds
Final Rounds
Networking Function

Competition Format

Division A

Division B

Division C

Division D

Winner of Division

Winner of Division

Winner of Division

Winner of Division

$750 for
1st Place

Final Round
4 Teams

$250 for
2nd Place

Technical Tutorial

Contents

1.Introduction

2.Forecasting cash flows

3.Discount cash flow valuation

4.Multiples valuation

5.Sum of the parts valuation

Different perspectives
Your job is to convince investors to buy or sell based on your analysis of the case
company
Research Analyst

Corporate Finance Analyst

Fund Analyst

Review announcements

Game changer acquisition

Operational implications

Update valuation models

Capital restructuring opportunity Strategic implications

Prepare research report

Prepare roadshow materials

Own view on valuation

Make a call buy/hold/sell

Lots of work behind the scenes

Bid into bookbuild

Market to institutions

Market to institutions

Reweight post-transaction

Post-transaction implications
60%

10%

30%

Indicatively,
35%

25%

30%

Business analysis

Industry analysis

Financial analysis

10%

Key catalysts

The company
A strong understanding of the business drivers is core to a robust valuation

Sources of
revenue
Business
insights

Value chain

Places to look:
Annual report
Management presentations
Newspaper articles
Other reports and
presentations

Customers

Business analysis

Industry analysis

Financial analysis

Key catalysts
9

The industry
Company pedigrees how does the company fare?

Supply and
demand

Places to look:
Industry
specific
factors

Regulation

Statistics NZ
RBNZ
Treasury
News articles
Industry expert reports

Industry
trends

Business analysis

Competitor
activity

Industry analysis

Financial analysis

Key catalysts
10

Valuation at a glance
Industry drivers

Business drivers

Financial performance
Valuation methods
Multiples

Discount cash flow

Sum of the parts

Intrinsic value

Business analysis

Industry analysis

Financial analysis

Key catalysts
11

Some key concepts

Present Value (PV) the value of future cash flows now
Weight Average Cost of Capital (WACC) the average return that equity and debt
holders expect from the company
Free Cash Flow (FCF) cash available for distribution to stakeholders after paying
for new investments and working capital
Enterprise Value the total value of a company (calculated as market cap + net debt
+ minority interest - associates)
Net Debt long term + short term debt cash & cash equivalents

Business analysis

Industry analysis

Financial analysis

Key catalysts
12

Valuation EBITDA
Earnings Before Interest, Taxation, Depreciation and Amortisation measures the current
operational profitability of the business

Average sales per

segment

Growth in same
segment sales

Size of segment

Revenue

Expenses

Less
Gross profit
margin per
segment

Other operating
expenses per
segment

Size of segment
Equals

Segmental EBITDAs
Less
Group overheads
Call centre, director and executive salaries, audit fees, etc.
Equals
Group EBITDA

Business analysis

Industry analysis

Financial analysis

Key catalysts
13

Valuation NOPAT
Net Operating Profit After Tax (NOPAT) is a companys after-tax operating profit for ALL
investors

Group EBITDA

As per above

Less
D&A

Depreciation and Amortisation

Equals
EBIT

EBIT represents earnings after operating leverage but before financing leverage

x(1-tax rate) =
NOPAT1

No interest expenses have been deducted represents profits to all investors

(1) To calculate the NPAT, a measure of after tax equity returns, deduct interest expense before deducting tax

Business analysis

Industry analysis

Financial analysis

Key catalysts
14

Valuation working capital

Increases in net working capital (WC) represent an investment in shorter term operating
assets and is therefore a cash outflow

Current operating
assets

Receivables
Inventories

Business analysis

Current operating
liabilities

Accounts payables

Industry analysis

Financial analysis

Net working capital

NWC = cash
outflow
NWC = cash inflow

Key catalysts
15

Valuation FCF
Free cash flows represent cash available for distribution to stakeholders after paying for
new investments (capex) and investing in operating assets (WC)
NOPAT

As per above

Less
Capex

As per above

Less
Changes in WC

As per above

Equals
FCFF

Business analysis

Free cash flows to the firm are available to all investors (debt and equity)

Industry analysis

Financial analysis

Key catalysts
16

Valuation discounted cash flow

Discount cash flows back to present value using appropriate discount rate

FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY22

FY23

FY24

FY25

FY26

FCFs

FCFs

FCFs

FCFs

FCFs

FCFs

FCFs

FCFs

FCFs

FCFs

FCFs

FCFs

+
Free cash flows to the firm discounted by WACC

Termina
l value

Equals
EV

Total value of the company (to all investors)

Less
Net debt

As explained above

Less
Minorities

Shareholders in subsidiaries where the case company does not own 100%

Equals
Total market equity

Business analysis

Market value of shareholders equity divide by outstanding shares for share

price

Industry analysis

Financial analysis

Key catalysts
17

Valuation WACC

Business analysis

Industry analysis

Financial analysis

Key catalysts
18

Valuation equity beta

Significant time should be invested into this measure

1. Regression

2. Re-levering asset beta

Regress company stock price returns against market

returns (use index e.g. NZX50)

Un-levering betas allows for comparison across

companies

= /1+(1)/

Beta is the slope of the regression

Regress comparable companies equity betas

Data can be obtained from Yahoo!

Business analysis

Betas are affected by firm leverage

Re-lever for subject company

Industry analysis

Financial analysis

Key catalysts
19

Valuation WACC
Estimating WACC is always going to require estimation ensure you can justify what you
have used
Asset Beta

0.80

Target Gearing

30%

Risk Free Rate

6% Risk free rate of 6% assumed

Market Risk Premium

7% Assumption of 7%

Equity Beta

1.00

Cost of Equity

13%
1% Assumption of 1%

Debt Premium
Corporate Tax Rate

28% Use 28% as the corporate tax rate

Cost of Debt

5.04%

WACC

10.6%

Business analysis

Industry analysis

Financial analysis

Key catalysts
20

Valuation terminal value

Using a normalised FCF, we calculate a perpetuity value in a future period

WACC
g
Final cash flow

Same WACC as before

Depends on the LT growth rate of the industry
Frequently, inflation rate is used as a proxy
The final years FCF

Or
A multiple1

Business analysis

EV/EBITDA, EV/EBIT, EV/BV

Industry analysis

Financial analysis

Key catalysts
21

Valuation comparable companies

Comparable multiples are an important metric for gauging market attitudes

Choose normalised earnings base (EPS, EBITDA, EBIT) and multiple

Choose time period (FY11, FY12)

Find implied multiples from comparable companies

Apply multiple to earnings

Business analysis

Industry analysis

Financial analysis

Key catalysts
22

Valuation comparable companies

Choose comparable companies that are closely matched with the case company not
always easy
Expected earnings growth
Underlying mix of assets generating earnings
Margins
Geographical spread
Product mix
Company size

Business analysis

Industry analysis

Financial analysis

Key catalysts
23

Valuation comparable companies

Always use normalised earnings when comparing companies

PE

Share price/(diluted) EPS

EV/EBITDA

Enterprise value/EBITDA

EV/EBIT

Enterprise value/EBIT

EV/Sales

Enterprise value/Sales

Dividend Yield

Business analysis

(Div / share) / Share price

Industry analysis

Financial analysis

Key catalysts
24

Valuation comparable companies

Transaction comps require much more research to gather data (not suitable for this
competition due to limited time and limited access to resources)

Trading

Transaction

Used more for investment purposes

Used more for transaction/deal purposes

Valuation using current market

information

Based on previous transactions of similar

companies in the industry

More relevant in this context

e.g. IPO and takeovers of previous

companies

Business analysis

Industry analysis

Financial analysis

Key catalysts
25

Valuation Sum of the parts (SOTP)

Value each divisional or geographic segment separately

For each segment, forecast segmented revenues, earnings and/or FCF

Use appropriate models to value each segment (DCF, multiples)

Add together the EV of each segment then add back net debt and
minorities

Business analysis

Industry analysis

Financial analysis

Key catalysts
26

Valuation sensitivity / scenario analysis

Sensitivities allow you to test the robustness of your valuation

Terminal growth

DCF

Revenue and expense growth assumptions

Commodity price and FX changes
Projects and investments

Multiples

Business analysis

Multiples adopted
Choice of companies

Industry analysis

Financial analysis

Key catalysts
27

Valuation making a call

+15%

Buy

-15%<re <15%

Hold
Sell

-15%

Business analysis

Industry analysis

Financial analysis

Key catalysts
28

Valuation presentation
You may put more weighting on certain valuation methods depending on your justification
Target Price $4.10

Assumptions:

EV/Revenue

2.0x 3.0x

EV/EBITDA

8.0x 9.0x

DCF

WACC 12%, TGR 2%

Trading Range

6 month trading range

$3.00

Business analysis

$3.50

$4.00

Industry analysis

$4.50

Financial analysis

Key catalysts
29

Valuation - recommendation

Good company
Strong cash flows
Low regulatory risk
Company
governance
Growth
opportunities

Business analysis

Industry analysis

Good stock
Undervalued
Investor position
Risk in valuation

Financial analysis

Key catalysts
30

Valuation - recommendation

Valuation price now

12 month target price

Equity value divided by number of shares

Ignore next 12 months cash flows

Value as of now

Price as of 12 months from now do not

discount back to now

Business analysis

Industry analysis

Financial analysis

Key catalysts
31

Key catalysts
Some of this information ties back to industry. Best place to look is management
presentations and annual reports

Risks and Opportunities can be priced into the

company valuation through scenario analysis

High barriers to
entry

Lack of suitable
growth
opportunites

Business analysis

Balancing
margin vs
volume

Industry analysis

Competition

Financial analysis

Changing
consumer tastes

Key catalysts
32

Tips for the competition

Have someone not involved in building the model sense check

Determine subgroups and speaking roles beforehand
Create master slide template beforehand
Look up general economic data between now and Friday
Calculate most components of WACC between now and Friday
When looking for specific info in an annual report CTRL + F

33

Recommended presentation time

Introduction & business analysis

20%

Industry analysis

20%

Valuation & key drivers

40%

Opportunities, risks & conclusion

20%

Total

10 min

34

Where possible, reduce key person risk

Role

Overall project management

Read case and company reports

Conduct business analysis

Conduct industry analysis

Gathering industry data

Gathering segmental data
In-depth financial analysis

Compiling forecast assumptions

Key risks and opportunities analysis

Sensitivity and scenario analysis

Pull together presentation slides

Practice presenting

35

Closing thoughts

You will feel time pressure

Very similar to RFP response processes (corporate advisory)
Business and industry analysis more important than the numbers
Can do well with a simple, well researched valuation
Back your assumptions the best you can
When answering questions, share the love
Have fun

36