Presentation - Large Cap Multiples 1

8/3/2019 Presentation - Large Cap Multiples 1

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Valuation multiples,

large/listed capsDamien Perpetua

Fernando Prieto


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What is the multiples valuation method?

Method using ratios comparisons between thetarget and a group of similar firms, called the peergroup, to estimate the value of the aimed firm.

Process based on three principles :

- global valuation of the firm

- Value = multiple of the profitability capabilities

- Balanced market

Depends on anticipated growth, risk, interestrates.

Source :http://wise.fau.edu/~ppeter/fin4422/multiples.pdf


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How to define a Peer group?

A peer group is a bunch of companies which are similar to thetarget. Multiples are the average ratios of the peer group.

There are several variables used to identify the similar firms : Business line

Revenue

Asset size

Location

Growth in revenue

Cash Flow


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What a peer group looks like?


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Can we have different peer groups?


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Ratios generally used to value a target

Price Earning Ratio (PER): Market price per share/ Earning per share

PER based on the latest data is called trailing PER; PER based onforecast is called leading PER.

It represents the time, in year, an investor might have to wait to bepaid back thanks to the earnings. (This is very theoretical)

The higher the PER, the lower the perceived risk

This ratio is linked to the plowback ratio, expected growth rate,required rate of return.

Only use if the peer group shows the same growth of earning pershare and risk on asset and financial structure


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Compared valorisation


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Is P/E Ratio a consistent proxy to value

large caps? (ex: CAC40)


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What is the most expensive market?


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How much is the P/E Ratio volatile?


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Is there any correlation between P/E

Ratio and interest rate?


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Not that obvious


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NOPAT Multiple : The Economic PER

NOPAT Multiple= Firm value/NOPAT

With : Firm value = equity value + net deb

Very used because there is no distortions due to differencesin the financial structure.

Contrary to the PER multiple, NOPAT multiple is designed toasses the economic asset value.


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Price to Book Ratio (PBR) : Market price

per share/ Book value per share

It is meaningful only if the book value represents the marketprice of the assets.

This ratio is linked to theROE

, expected growth rate,required rate of return and the plowback ratio.

PBR>1 If ROE> cost of shareholders equity


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Price to Sales Ratio (PSR)

Market price per share/ Revenue per share

Used to value non-profitable firm. When it is used to value

profitable businesses it leads to over-valuation. Linked with the net profit margin, , expected growth rate,

required rate of return and the plowback ratio.

Generally meaningless for large business valuation.


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Q&A

Presentation - Large Cap Multiples 1

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