Advanced Equity Valuation Techniques

Course Overview:

This advanced valuation and modelling course looks at the valuation approaches to be taken to enable participants to value sectors which may be at differing stages of development and growth profiles.

Traditional valuation techniques assume a simple two or three stage growth profile and a terminal value or basic multiple based valuation tools. This course looks at some of the more difficult companies to value based on the underlying fundamentals of the sector in which the company operates.

The course firstly covers companies at the early growth and start up stage, which would cover sectors such as technology, biotechnology and any early funding stage business. The key challenges associated with such companies are discussed and the best valuation approach considered. Secondly more mature but rapidly growing companies are discussed, which, depending on the geographic location, may cover media, telecoms and pharmaceutical sectors.

Thirdly cyclical and commodity companies are analysed to identify the issues with sectors such as resources, energy and chemicals companies and finally declining companies are considered where traditional valuation approaches become less relevant and a “wind down” approach may be applicable.

As well as discussed some of the current issues with traditional cash flow and multiple based valuation approaches the course will cover more advanced valuation approaches such as decisions trees, simulations, scenario analysis and real option valuation.

The course will also consider the role of risk assessment in the valuation process and how macro-economic analysis can affect the valuation approach taken.

Examples are provided to illustrate each issue.

Participants will be required to bring a laptop to the course.

Course Content:

Overview of valuation approaches

• Intrinsic valuation – traditional cash flow techniques
• Relative valuation – multiple based analysis
• Probabilistic valuation – scenario analysis, decision trees and simulations
• Real options valuation – additional value created through optionality

Other valuation issues

• Assessing risk – the risky risk free rate and other current valuation issues
• The economic cycle – incorporating macro-economic factors into a valuation

Valuing early stage and start-up companies and sectors

• A life cycle view of start-up companies
  • Start-up companies in context
• Characteristics of young companies and sectors
  • The key challenges with start-up companies
  • Visibility – a key valuation challenge
• Valuation issues – intrinsic value
  • Existing assets
    • How to value existing assets in a start-up
    • Cash burn and the effect on existing assets
  • Growth assets
    • The future of the business – high growth and growth phases
    • Assessing growth rates – the key component of value
  • Discount rates
    • Adjusting risk for small fats growing businesses
    • Discount rates for pure equity financed businesses
  • Terminal value
    • When to calculate terminal value
    • Reducing the dependence on terminal value
  • Value of equity claims
    • Assessing equity claims in a early stage business
• Valuation issues – relative valuation
  • Peer groups
    • Dealing with a lack of peers
    • Private vs public peer groups
  • Risk measures
• Valuing a start-up or early stage business in practice
  • Main errors made in valuing early stage businesses
  • Top down approach to a valuation
    • Macro vs micro analysis
    • Product success and market share
  • Bottom up approach to a valuation
    • Capacity capability
• • Estimating and using different discount rates
  • The use of phased discount rates
  • Discount rates as maturity approaches
  • Ensuring consistency in a valuation
  • Private and public multiples
  • Option to expand valuation
    • How optionality affects valuation

Valuing rapid growth companies and sectors

• A life cycle view of rapid growth companies
  • The rapid growth company in context
• Characteristics of growth companies and sectors
  • How are growth companies different?
• Valuation issues – intrinsic value
  • Existing assets
    • How asset life may develop in the high growth phase
    • How existing assets differ in a rapid growth business
  • Growth assets
    • Capital intensity and the rapid growth business
  • Discount rates
    • The development of risk during the growth phase
  • Terminal value
    • The stage at which a terminal value should be calculated for a rapid growth business
  • Value of equity claims
    • The differing equity claims in a rapid growth business
• Valuation issues – relative valuation
  • Peer groups
    • Finding similar growth businesses – different sectors?
  • Risk measures
• Valuing a growth business in practice
  • Main errors made in valuing growth businesses
  • Top down approach to a valuation
    • Dealing with immature markets
    • Assessing product cycles
  • Bottom up approach to a valuation
    • Ability to execute – the key driver
  • Valuing the operating assets
    • How operating asset lives develop in the high growth phase
  • Ensuring consistency in a valuation
  • Reinvestment and growth
    • Assessing investment requirements – the returns and reinvestment equation

Valuing cyclical companies and sectors

• Characteristics of cyclical and commodity sectors
  • The impact of global pricing – companies as price takers
• Valuation issues
  • Base year fixation
    • Where do I start from and why?
    • Determining the cycle starting point
  • The macro point of view
    • The demand and supply fundamentals
  • Selective normalisation
    • How do I get to mid cycle?
    • Some key errors in cycle assessment
• Valuing a cyclical business in practice
  • Normalised valuations
    • Taking the cycle out of the equation
  • The adaptive growth approach
  • Probabilistic approaches
    • Using probabilities to reduce forecasting limitations
  • Normalised earnings multiples
    • Back to mid cycle…..
  • Adaptive fundamentals
  • Real options for underdeveloped resources
    • The extraction/development decision and its value
  • Valuing a natural resource firm

Valuing declining companies and sectors

• A life cycle view of declining companies
  • The graveyard shift – is there still value available?
• Characteristics of declining companies and sectors
  • Terminal vs temporary decline – will the patient get better?
• Valuation issues – intrinsic value
  • Existing assets
    • The key driver of value
    • Is it possible to extract – going concern vs fire sale
  • Growth assets
    • Positive and negative growth and its effect on valuation
  • Discount rates
    • Incorporating credit risk into a discount rate
  • Terminal value
    • The importance of terminal value in a declining business
    • The approach to wind up valuation
    • The approach to a cost of exit
• Valuation issues – relative valuation
  • Peer groups
    • Walking with zombies
  • Incorporating distress
• Valuing a declining business in practice
  • Autopilot optimism
    • Forecasting for the worst
    • Avoiding the hockey stick
  • Discount rate contortions
    • The impact of distress of the discount rate
  • Dealing with distress
  • The treatment of debt and an APV approach to valuation
    • Determining the components of value in distressed companies
    • The value of unleveraged assets
    • The value of the tax shield – taxable profits?
  • Valuing equity as an option
    • Using option techniques as an option on recovery
    • The value of closure
• The probability of default – Techniques used in assessing default – the world of the credit analyst