Bottcamp #3:

Valuation & Modeling

Marina Karapetyan
October 5, 2018
Table of Contents

 Modeling Financial Statements

 Valuation
 Public Comparables
 DCF
 Sum of the Parts
Modeling Financial Statements
 The purpose of creating a “3-statement projection model” for a company is
to estimate its Cash Flow, Cash, and Debt balances over the years.*
 Cash Flow Maters!!!!
 Simple steps to project companies statements:
1. Revenue
2. Expenses and / or Margins
3. Operational Balance Sheet Items (Accounts Receivables, Inventory, Accounts
Payable)
4. Remainder of Cash Flow Items (Capex, Depreciation and Amortization)
5. Interest expense
6. Financial analysis / Ratios
7. Multiples

*Breaking the Wall Street

Modeling Financial Statements
Income statement Year 1 Year 2 Year 2
Sales 1000.00 1200.00 1445.00
COGS 145.00 234.00 213.00
Salary expense 400.00 498.00 712.00
Insurance expense 257.00 289.00 324.00
Depreciation expense 134.00 110.00 89.00
= Operating income and EBT [No interest expense] 64.00 69.00 107.00
Current tax expense [No deferred taxes] 25.60 27.60 42.80
= Net income 38.40 41.40 64.20
Ending balance sheet
Cash 158.00 235.00 141.00
Gross receivables [No allowance or deferred revenues] 30.00 160.00 315.00
Inventories [No accounts payable] 55.00 31.00 108.00
Prepaid insurance 93.00 74.00 117.00
Net PPE 266.00 256.00 277.00
Accrued salary expense 70.00 166.00 278.00
Tax payable 3.60 6.20 9.00
Contributed capital 500.00 525.00 560.00
Retained earnings 28.40 58.80 111.00
Cash-flow statement
Cash received from customers 970.00 1070.00 1290.00
Cash (paid) to suppliers of inventory [= (Purchases)] -200.00 -210.00 -290.00
Cash (paid) for salaries -330.00 -402.00 -600.00
Cash (paid) for insurance -350.00 -270.00 -367.00
Taxes (paid) -22.00 -25.00 -40.00
=Operating cash flow 68.00 163.00 -7.00
(Purchase of PP&E or capital expenditures) -400.00 -100.00 -110.00
= Investing cash flow -400.00 -100.00 -110.00
Stock issued 500.00 25.00 35.00
(Dividends) paid -10.00 -11.00 -12.00
= Financing cash flow 490.00 14.00 23.00
= Net cash flow 158.00 77.00 -94.00

Sourse: Modeling Financial Statement , Prof. Gode

Valuation Methodologies

 Public Comparable Analysis

 Acquisition Comparable Analysis

 Discounted Cash Flow Analysis

 Merger Analysis

 Leveraged Buyout Analysis

Sample Valuation Summary

Public Comps (LTM)

Public Comps (NTM)

Precedent Trasactions (LTM)

Precedent Trasactions (NTM)

LBO

DCF (AVP)

- 2,000.0 4,000.0 6,000.0 8,000.0 10,000.0 12,000.0 14,000.0 16,000.0 18,000.0

Why do we need to value assets?

 Determining the price of an assets

 How much an investor is willing to pay

 Interpreting the results of valuation

 Assumption used for valuation – usually subjective

 Various uses for valuation

Concepts used in the lecture

 Enterprise Value =

Equity + Debt – Cash + Preferred Stock +Minority Interest

 EBITDA is a close approximation to Cash Flow from Operation

 Operating income ~ EBIT

Public Comparables

 Public Comparable Analysis

 Acquisition Comparable Analysis

 Discounted Cash Flow Analysis

 Merger Analysis

 Leveraged Buyout Analysis

Why do we do Comparable Analysis?

 Peer group comparison

 Based on market data

 Show the value of the company at specific point in time

 Current vs. Implied Valuation

 Public Comps Example
Oil&Gas Comp Sheet

Market
Ticker Company Name Country Price Return, % Turnover 3m Market Cap EV P/E EV/EBITDA
avg

Emerging Markets $ 1D YTD $ mn $ mn $ mn 2018E 2019E 2020E 2018E 2019E 2020E

PETR3 BZ Equity Petroleo Brasileiro SA BRAZIL 6.1 1.1% 20.6% 223 75,791 150,608 7.9x 6.7x 7.9x 4.6x 3.9x 3.5x
857 HK Equity PetroChina Co Ltd CHINA 0.8 1.8% 19.7% 85 233,247 308,155 17.3x 15.1x 14.8x 5.9x 5.5x 5.3x
386 HK Equity China Petroleum & Chemical Corp CHINA 1.0 2.0% 49.5% 97 124,606 140,502 10.4x 10.3x 10.3x 4.2x 4.0x 3.8x
ECOPETL CB Equity Ecopetrol SA COLOMBIA 1.3 1.5% 90.2% 22 55,441 68,083 12.7x 12.8x 13.4x 6.2x 5.9x 6.1x
MOL HB Equity MOL Hungarian Oil & Gas PLC HUNGARY 10.8 0.3% 4.3% 6 8,824 11,988 8.1x 8.0x 6.9x 4.4x 4.0x 3.7x
ONGC IN Equity Oil & Natural Gas Corp Ltd INDIA 2.4 0.8% -7.4% 17 31,345 48,526 9.3x 7.3x 6.9x 4.5x 4.2x 4.0x
IOCL IN Equity Indian Oil Corp Ltd INDIA 2.1 0.5% -16.1% 18 20,528 29,606 6.8x 7.7x 7.0x 5.2x 5.8x 5.4x
YPFD AR Equity YPF SA ARGENTINA 15.6 -3.2% -32.2% 21 6,153 13,708 14.9x 12.7x 6.4x 3.4x 2.7x 2.3x
ROSN RX Equity Rosneft Oil Co PJSC RUSSIA 7.5 4.6% 53.0% 21 79,780 142,141 8.2x 7.2x 6.4x 5.1x 4.8x 4.4x
GAZP RX Equity Gazprom PJSC RUSSIA 2.5 1.8% 19.6% 32 58,780 90,351 3.1x 3.1x 3.1x 3.0x 3.1x 2.8x
LKOH RX Equity LUKOIL PJSC RUSSIA 76.8 1.4% 55.1% 43 65,223 68,112 5.8x 6.0x 6.0x 3.9x 3.7x 3.6x
NVTK RX Equity Novatek PJSC RUSSIA 17.9 1.8% 74.2% 21 54,160 56,125 16.0x 13.2x 12.5x 13.3x 12.7x 11.8x
Average 27.5% 10.1x 9.2x 8.5x 5.3x 5.0x 4.7x

Source: Artisan Partner, Bloomberg

Why do we do Comparable Analysis?

 Peer group comparison

 Based on market data

 Show the value of the company at specific point in time

 Current vs. Implied Valuation

How to choose comparable firms

 Size

 Geography

 Similar operations

 Market performance indicators, etc……

Multiples
Equity – Based Multiples Enterprise Value –Base Multiples

 Multiples applicable to equity  Multiples applicable to all

shareholders shareholders
 Equity Value = Value to Equity  Enterprise Value = Value to Equity
Investors Investors + Value to Debt
Investors + Value to Preferred
Investors (and possibly others)

Source: Breaking the Wall Street

Multiples
Equity – Based Multiples Enterprise Value –Base Multiples

 P / E – Equity Value / Net  EV / Revenue – Enterprise Value /

Income or Price per Share / Revenue
Earnings per Share  EV / EBIT – Enterprise Value /
 PE / Growth Rate (PEG Ratio) EBIT
 EV / EBITDA – Enterprise Value /
EBITDA

 What multiples measure?

 How do we interpret them?

Sector Specific Multiples
Oil & Gas Financials
 EV / EBITDAX (EBITDA +  P/E
Exploration Expense)  P/B, B – Book Value
 EV / Proved Reserves  P/TB, TB – Tangible Book
 EV / Production Value

Real Estate
 Equity Value / FFO (Net Income to Common + Real Estate-Related
Depreciation & Amortization – Gain / (Loss) on Sale of Depreciable Real
Estate
 Equity Value / AFFO (AFFO = FFO – Maintenance CapEx – Gain / (Loss)
on Sale of Land + Other Non-Cash Charges)
 Price per Share / FFO per Share
 Price per Share / AFFO per Share
Discounted Cash Flow

 Measures intrinsic value of the company

 Company Value = Cash Flow / (Discount Rate – Cash Flow Growth Rate)

 Independent of capital structure / available to all shareholders

 Applies fundamentally flexible and adaptable analysis (theoretical)

DCF – Terminal Value

 What is a Value of a Firm after the forecasted FCF period?

 Gordon Growth Model

Terminal Value =
Unlevered FCF / (WACC – Terminal Unlevered FCF Growth Rate)
Or
Final Year FCF * (1 + Terminal FCF Growth Rate) / (Discount Rate – Terminal
FCF Growth Rate)

 Exit Multiple Method

Terminal Value =
EBITDA in final year * Multiple
DCF – Discount Factor

 The Discount Rate measures the opportunity cost for the investor

 WACC = Cost of Equity * % Equity + Cost of Debt * (1 – Tax Rate) * % Debt

* + Cost of Preferred Stock * % Preferred Stock

 Cost of Equity = Risk-Free Rate + Equity Risk Premium * Levered Beta.

 DCF(1)
DCF Valuation

RUB mn 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
Revenues 12,500 20,033 28,767 39,502 50,767 55,251 63,038 76,582 89,152 99,688 110,596
- % growth, y-o-y 60% 44% 37% 29% 9% 14% 21% 16% 12% 11%
EBITDA 6,164 9,237 12,784 17,308 20,796 16,979 23,597 28,635 32,907 36,510 40,062
- % growth, y-o-y 50% 38% 35% 20% -18% 39% 21% 15% 11% 10%
- % margin 49% 46% 44% 44% 41% 31% 37% 37% 37% 37% 36%
Operating income (EBIT) 4,983 7,363 9,833 13,613 15,470 9,264 13,816 17,510 20,686 23,836 26,334
- % growth, y-o-y n/a 48% 34% 38% 14% -40% 49% 27% 18% 15% 10%
- % margin 40% 37% 34% 34% 30% 17% 22% 23% 23% 24% 24%
Tax rate 0% 0% 22% 20% 25% 22% 21% 21% 21% 21% 22%
Taxes 0 0 2,186 2,713 3,942 2,072 2,957 3,747 4,432 5,115 5,665
NOPAT 4,983 7,363 12,019 16,326 19,412 11,336 16,772 21,258 25,118 28,950 31,999
Depreciation and amortization 1,181 1,874 2,951 3,695 5,326 7,715 9,781 11,124 12,221 12,675 13,728
- % growth, y-o-y n/a 59% 57% 25% 44% 45% 27% 14% 10% 4% 8%
Changes in WC 846 223 -1,076 892 -4,016 3,109 323 476 536 554 615
Operating Cash Flow 5,318 9,014 16,046 19,129 28,754 15,942 26,230 31,906 36,804 41,071 45,112
CAPEX 2,166 5,820 3,690 5,516 9,500 13,500 11,000 11,500 12,000 13,000 14,000
- CAPEX/D&A 1.8x 3.1x 1.3x 1.5x 1.8x 1.7x 1.1x 1.0x 1.0x 1.0x 1.0x
- % of sales 17% 29% 13% 14% 19% 24% 17% 15% 13% 13% 13%
Unlevered FCF 3,152 3,194 12,356 13,613 19,254 2,442 15,230 20,406 24,804 28,071 31,112
Projection year 0.7 1.7 2.7 3.7 4.7 5.7
Discount rate (WACC) 11.5% 11.5% 11.5% 11.5% 11.5% 11.5% 11.5% 11.5% 11.5% 11.5% 11.5%
Discount factor 1.00 1.00 1.00 1.00 1.00 0.93 0.83 0.75 0.67 0.60 0.54
Present value of FCF 3,152 3,194 12,356 13,613 19,254 2,271 12,703 15,265 16,641 16,891 16,790
- % change y-o-y n/a 1% 287% 10% 41% -88% 459% 20% 9% 2% -1%
 DCF(2)
WACC Calculation Terminal Value Calculation
Cost of debt Company-specific adjustments Assumed perpetual growth rate 5.0%
Risk-free rate 4.0% Terminal year cash flow 31,112
Corporate debt spread 0.0% Corporate governance risk 0.0% Discount rate 11.5%
Debt rate implied 1.3% Operational risk 0.5% Terminal value 502,619
Statutory tax rate 20.0% Balance sheet risk 0.0% PV of Terminal value 271,243
After-tax cost of debt 1.0% Government risk 1.0% as % of total value 77%
Liquidity 0.0%
Company-
Cost of equity specific risk 0.4% Fair Value Calculation
M&A risk
(Market
Risk-free rate 4.0% growth) 0.5% Sum of PV of FCF 80,562
Base equity risk premium 4.5% Total Company-specific premium 2.4% PV of Terminal value 271,243
Company-specific adjustments 2.4% Total EV 351,805
Adjusted equity risk premium 6.9% Net debt -8,966
Beta 1.1x Minority interest -
Equity investments -
Cost of equity 11.5% Fair equity value 400,441
# of shares: 317,969,806
Share of equity: E/(D+E) 100% common 317,969,806
Share of debt: D/(D+E) 0% Fair value per share, RUB/share 1,213.74
WACC 11.5% 12M TP, RUB/GDR 1,356.65
Ex. Rate RUB/$ 55.00
12M TP, $/GDR 24.70
Current price 15.19
Upside 19.3%
Sum of the Parts
 Valuation that measures each division of a company separately

 Valuation can be based on estimated multiples or DCF for each

company division

Disadvantages of using SotP valuation include:

 Lack of information

 Time consuming
Sum of the Parts
2018 2019
EBITDA EBITDA Value Value
SoTP Valuation ($MM) ($MM) Multiple ($MM) (/Shr)

Refining & Marketing 4,072 6,335 5.50x 28,620 62.08

Midstream (ex-MPLX) 46 44 10.0x 452 0.98
Speedway 934 1,047 10.0x 9,902 21.48

Other Assets/Liabilities (2,199) (4.77)

Net Debt (ex-Subsidiaries) (400) (0.87)

Corporate Value 5,053 7,425 5.8x 36,375 78.90

MLP-able
EBITDA
MLP Drop-down Uplift 0 0 0.00

Units Owned Price

MPLX LP Value 505.0 42.00 21,210 46.01

MLP Value 21,210 46.01

Implied SoTP Value 57,585 124.91

Source: MS Research