Advanced Corporate Valuation, Financial Statements Analysis and Forecasting

Case Studies: During this course, we analyse and reference a wide range of case studies, including Bayer Monsanto, PORR, SA Airways, Sainsburys, Capita, Carillon, Balfour Beatty, Air France KLM, Marks & Spencers, Vodafone and Arcelor Mittal .

Day One

Topic 1 - Multiple valuations

1.1 Background to multiple valuations

• Defining equity value and enterprise value

• Issued shares versus the fully diluted number of shares

• What are the key factors that drive valuations?

• The Gordon Growth Model and other summary valuation formulae

• Selecting a peer group

Case studies: Practising the summary valuation formulae

1.2 Equity multiples

• Understanding which equity multiple to use for different situations

• The direct and indirect influences over equity multiples, including WACC, ROIC, growth, tax, leverage

• Computing PE and PEG ratios

• Interpreting high and low PE ratios

• Understanding how the PE of cash and leverage can distort PE ratios

• Understanding NAV multiples

• Refining the equity valuation analysis of net derivatives, provisions, off balance sheet and other items

• Dividend yield valuations. Are dividends progressive and sustainable?

• How are they being funded?

• Could dividends be cut?

Case studies:  Calculating the underlying PE ratios for the peer group; applying the peer group adjusted average PE ratio to another company; making adjustments to derive equity value and value per share.

1.3 Enterprise Value (EV) multiples

• The key influences over EV multiples including WACC, ROIC, growth and tax

• When is it helpful to use an EV multiple?

• Why EV multiples differ across industries

• Understanding the main EV multiples EV/EBITDA(R), EV/EBIT, EV/revenues, EV/operating variables

Adjustments to bridge operating EV and Group EV

Adjusting the Group EV for NCI, non-operating assets, excess cash, leases to derive the correct operating EV multiple

Case studies:  Calculating the peer group EV multiples and applying these to the valuation of another company; making adjustments to establish the correct underlying multiple.

Topic 2 - Discounted cashflow valuations

2.1 Forecasting unlevered FCF/free cashflow to firm

• The rationale for using unlevered FCF for the DCF valuation

• Calculating OPAT and unlevered FCF Making non-cash adjustments

• Estimating a reasonable level of NWC changes and capex

• What about the use of leases (IFRS 16)?

• What not to include in unlevered FCF – common errors

Dealing with joint ventures, associates and non-operating assets

Case studies:  Working out unlevered FCF for firms with complex cashflow statements

2.2 Terminal value

• TV using the perpetuity method Which WACC should be used?

• Backing the TV into a multiple, if possible, to test if it is reasonable

TV using exit multiples and liquidation value

• Should the exit multiple be the same as the current multiple?

Generating final year forecasts that give rise to a stable ROIC

Limitations in trying to compare ROIC and WACC

Testing scenarios based on the terminal growth rate, WACC and the exit multiple

2.3 Calculating the risk rate for discounting the cashflows – the WACC

• Background to WACC

• The historic and implied equity risk premium

• Calculating the ERP for firms with international, multi-currency operations

• How do sovereign and corporate credit ratings affect the WACC?

• Sovereign risk premia - CDS spreads and standard deviations

• Examining beta; calculating betas for private firms

• Calculating the cost of debt and hybrid capital; multi-currency considerations

• Is it possible to estimate an optimal capital structure?

Case studies:  Working out the required return on equity and WACC for firms with multi-currency operations; working out the beta

Day Two

Topic 3 - Alternative DCF methods

• When leverage or the tax shield are changing significantly Adjusted present value DCF

• Compressed DCF

• Recursive DCF

When growth will not stabilise in the near term – using a 3-phase DCF

• Forecasting declining growth in phase 2

Problems that arise if we change the WACC every year when doing a DCF

Analysis of existing company valuations – reversing into the terminal growth rate

Case studies:  working out DCF valuations using some of the above methods; Calculating the terminal growth rate embedded in a corporate valuation.

Topic 4 - The impact on the valuation of issuance and redemption of equity and hybrids

• Different classes of equity shares (eg., voting and non-voting)

• The importance or non-importance of the book value of equity to valuation

• How changes in the equity base may alter valuations Capital redemptions

• Equity offerings

• Hybrid debt/equity offerings (convertible and exchangeable hybrids)

Case studies:  practising valuation changes caused by equity issuance; understanding how capital redemptions can alter the eps and PE ratio

Topic 5 - Corporate Financial analysis - forecasting key valuation variables

5.1 Key income statement variables that impact valuation

• Historic and forecast revenues Sources of revenues

• Growth outlook: impact of disposals and M&A

• Currency and inflation factors

• Volatility and seasonality of revenues

• The impact of IFRS 15

Historic and forecast operating costs

• What are the most important costs?

• Are the costs predictable or volatile – the impact of commodity prices

• Operating leverage and trying to forecast its impact on profitability

• Capitalisation of costs

Operating earnings

• Sources of operating earnings

• Growth outlook

• What is the earnings quality?

• What is the trend in margins?

Gross and net finance expense

• What should be included?

• Including lease expense (IFRS 16)

• Adjusting for capitalised interest, provision discounts, fair value (FV) of financial assets and liabilities

• What is the trend in interest coverage?

Taxation

Calculating underlying EBITDA(R) and net income

Adjusting earnings for exceptional, non-recurring items, discontinued items, joint venture earnings, operating leases, movements in fair valuations and other items

Case studies:  working out underlying earnings for firms with significant non-core and exceptional operating and financing items

Day Three

5.2  Key balance sheet and cashflow variables that impact business valuation The assets side of the balance sheet

• Is the business capital-intensive or does it have a low asset base?

• Non-current assets – what is the valuation basis?

• Understanding asset lives Maintenance/replacement CAPEX

• Expansionary CAPEX – is it sufficient to fund forecast growth?

• Project risk

Impairment of assets (fixed, intangible, deferred tax assets)

• Do impairments affect the valuation?

Dealing with intangible assets

Review of Kraft-Heinz valuation decline, March 2019

Components of cash and non-cash net working capital

Calculating financial assets, including cash and equivalents

Excluding certain financial assets from net debt

• Pledged/escrow cash

• Cash blocked overseas

• Cash subject to repatriation tax and currency risk

The liabilities side of the balance sheet

• Calculating debt and equivalents Term loans, revolvers, NWC facilities, supplier financing, private placements, leases (IFRS 16), bonds, notes, debentures, hybrid commodity-linked debt, project finance debt, green/sustainable debt, recourse and non-recourse debt

The impact of the debt maturity profile, non-consolidated holding company debt, the debt structure and subordination

Dealing with excessive trade payables and unpaid tax

Derivative liabilities and hedging (IFRS 9)

The different types of provisions and their accounting treatment

Dealing with retirement liabilities

The impact of accrued income, bad debts, retentions and deferred revenues

Calculating gross and net debt and equivalents to bridge the difference between equity value and enterprise value

Adjusting for off balance sheet liabilities eg., contingent liabilities, receivables funding, certain leases, vendor funding, recourse financing, letters of credit, performance guarantees, etc.

Is the firm over-levered?

Assessing liquidity

• What is the impact of poor or declining liquidity?

Calculating ROIC

• Is the firm generating ROIC above WACC?

• Limitations in calculating ROIC

Case studies:  Calculating gross and net debt, including adjustments for the above factors; Adjusting valuations for the above-mentioned topics

5.3 How non-consolidated businesses impact the valuation

• Joint ventures, associates, investments

• Do these assets improve or reduce the group valuation?

• Can JVs be used to hide losses and bad debts?

• Forecasting the earnings and cashflow from investments and equity accounted assets

Topic 6 - Additional valuation topics

• Discounts to apply to non-controlling stakes

• Valuing a private company versus a public company

• Testing a valuation – backing into the implied terminal growth rate

• EV to equity value for firms with complex accounts

Case study:  Calculating the terminal growth rate embedded in a company valuation; working out EV and equity value for firms with complex accounts

Topic 7 - Financial modelling for valuation

7.1 Overview of financial forecasting model

• Forecasting key valuation variables (revenues, earnings, cashflows, CAPEX, NWC changes, asset disposals, currencies, provisions, impairments, revaluations, dividends, fixed and variable costs)

• Ratio analysis – key corporate financial ratios including margins, ROIC, interest cover, dividend cover, leverage, debt service coverage, reliance on external funding, liquidity

• Short-cut method to forecasting JVs and NCI

• Testing covenant compliance

• Linking the valuations to the forecasts

• Developing flexible scenarios with Excel – what are the key variables?

• Building data tables

7.2 Calculating returns on different investments

• How can we calculate a return on our investment?

• Calculating the internal rate of return, the modified internal rate of return, money multipliers and net present values

• Calculating returns on warrants attached to debt instruments

Case studies:  working with an Excel forecasting model to flex financial forecasts to assess the impacts on EV and equity values; modelling data tables; calculating a range of returns on investments

Training Objectives

Our corporate valuation course will teach delegates:

• How the analysis of certain line items in the 3 main financial statements, which are often overlooked, can impact valuations.

• How to undertake multiple and DCF valuations, including some more advanced DCF methods.

• How making changes to the capital structure can improve a valuation.

• How to create and use a 3-statement financial forecasting model to calculate a valuation range.

Training Course Summary

Our financial statement analysis training course starts with valuation fundamentals and multiple analyses, including equity multiples (PE ratios, dividend yields, NAV) and EV multiples (EBITDA, EBIT, revenues). We also cover DCF valuations, including more advanced concepts around WACC, as well as more advanced DCF methods. We also consider the impact of different types of debt and equity financing on valuation, as well as how changes in the capital structure impact valuation.

Our corporate valuation course then considers a detailed analysis of financial statements - many valuation errors are made when analysts and investors misread the accounts and notes. We particularly focus on establishing real underlying earnings levels and trends as well as on cash flow generation, dividend potential, ROIC, true leverage levels, asset quality and balance sheet strength.

Finally, we will also review a forecasting model that incorporates scenario analysis, return calculations, valuations and data tables.