Valuing Cyclical Companies and Sectors

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 covers cyclical and commodity companies, identifying the issues with sectors such as resources, energy and chemicals companies. 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. 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 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