Agenda

• Price vs.value
• Sharemarket fashions – growth vs.value
• What are the valuation and the pricing techniques – strengths and weaknesses of each
• Perspective of techniques
• Why markets are not perfect
• The central importance of ‘risk’
• Company dynamics – cashflow volatility
• Free Cash Flow
• The relationship of FCF. ROC and IRR
• Limitations of accounting-based data
• Return on Capital vs. Cost of Capita

In discounting cashflow methodologies, the derivation of discount rates is laden with theory. This is an area where an analyst needs to beware of mechanically applying steps, but adapt the approach as necessary with a solid understanding of the issues those theoretical concepts are seeking to apply.

• Cost of debt and the implications of tax and currency issues
• Minimum required return to shareholders – derivation
• The complications of a multiplicity of theoretical approaches – which of these make sense?
• Cashflow volatility, avoiding betas – rationalising the approach
• The mathematics of cashflow discounting – the ‘problems’ with IRR and NPV functions
• The correct calculation of IRR and NPV
• The alternative methodologies
• Sensitivity analysis - to determine the Value Range
• The interface of the valuation and practical decision-making
• Presentation of a valuation model for a CCGT plant

The analyst must avoid being too mechanical in applying the principles of valuation. Experience reveals that many valuation models produce erroneous valuation outputs because of rigidity in the approach.

• The misuse of proxies
• Consistency of time horizons in the Modelling and the discounting
• The modelling of currencies, inflation and capex
• Deriving the correct risk free rate
• The risk premia
• The blended discount rate

Participants will implement a DCF valuation of a listed company

All management decisions are price versus value assessment – so the understanding of a market’s appetite is equally as important an understanding of the valuation of the asset. Valuation is what the price should be. Price is what the price actually is. How do we gauge the market appetite? To do pricing badly is easy – simply apply the market multiples to our situation. To do it well requires considerable skill and care.

• Hazards in cross-border comparative analysis
• Enterprise value
• The multiples – EBIT, EBITDA, earnings, assets, sales, cash, etc
• Dealing with accounting inconsistencies
• Normalising the data
• Adjusting the source data and deriving the sectoral benchmarks
• Relating the comparative data for the Sector to the prospects for the Company being analysed
• Presentation of a pricing mode

A controversial area of asset valuation is the influence that the financing decision can have on the value of an acquisition or investment to the company controlling the asset. One of the main controversies is the clash of academic theory and the actual behaviour of markets. • The theoretical position – if only markets were perfect – the effect of leverage on value – contrasting schools of thought – the fallacy of optimal capital structure

• How markets are influenced by financing decisions in practice
• The “investment rule”
• How project financing is an exception to the investment rule
• The valuation approach for limited recourse financed investments
• Project IRR vs. Sponsor IRR

Valuation in the earlier sessions did not deal with complexities that are commonly encountered in reality.

• Private Equity and LBOs
  • why PE do not use DCF
  • why PE can commonly outbid trade buyers
• Project Appraisal
  • differential cashflows
  • decision-making framework
• Emerging Markets and Private Companies
  • the adjustments to valuation approach required
• Joint Ventures
  • why DCF does not work effectively
  • alternative valuation approach
• Acquisitions
  • The 10 step analytical process
• Other
  • Adjusted Present Value methodology
  • The role for real options in project and investment appraisa

The creation of value. The weakness of equity markets is that they prioritise growth and the analysis of financial statements (e.g. EPS). Growth without value is not worth having. This session introduces a different way at looking at the drivers of value, and how it can be used to identify the required strategy to reposition a company’s business (as opposed to vetting investments for value-creation in isolation).

• Evaluation of managerial performance
• The calculations for Economic Value Added
• The analytical approach
• How EVATM aids strategy formation
• Market Value Added

One of the worst taught areas in the whole of finance. 95% of models received by the writer calculate IRR incorrectly.

• A reminder of what IRR is
• What is wrong with the IRR, MIRR and the XIRR functions in excel
• Illustration of the correct calculational method
• What is wrong with the NPV function in excel
• The correct use of the EXP and XNPV functions
• Practical exercises

Valuation models differ greatly from financing models. This session captures the differences.

• The 4 types of financial modelling
• The architecture of a valuation model
• Modelling supply-side businesses vs. demand-side businesses
• The design of the Analysis worksheet

Throughout the course, various models will be presented:

• DCF
• Dividend valuation
• APV
• Pricing
• LBO
• Acquisition consolidation
• Project financing

These models together with the practical exercises and additional reading materials – totalling some 800MB of content - will be supplied to participants by means of a USB thumb drive.