Vermat banka Afkomuspr o fl Haraldur Yngvi Ptursson

Verðmat banka - Afkomuspár o. fl. Haraldur Yngvi Pétursson Framkvæmdastjóri L. S. B. Í. Sérfræðingur í eignastýringu Arion banka

Introduction

Haraldur's Personal Introduction Academic: University of Iceland – Cand. Oecon Professional Deloitte – Accounting – 3 years Preparations of financial accounts Auditing of financial accounts Kaupthing Bank – Equity Research – 4 years Focus on the Icelandic market Part of Kaupthing Scandinavian equity research from 2006 IFS Research – Equity Research – 1 year Focus on Icelandic equities Selected Scandinavian companies S&P 500 selected sectors Arion banki – Asset Management – Since September 2009 MD of L. S. B. Í. Pension Fund

Goal of Presentation Discuss company valuation generally and main obstacles Review in some detail the main currently employed valuation methods Don't worry if you don't fully understand everything said To most ordinary humans this is entirely foreign material Valuation and Equity Research is very much "on site training" Hopefully you'll enjoy picking up some of the terminology and the next valuation presentation you sit through should be slightly more bearable

Reasons for Valuing Companies Key to successful trading in (and managing) corporations Ability to estimate their value Understanding the sources of their value Investors do not buy corporations for aesthetic or emotional reasons – but for their expected future cashflows Inherent value of a company based on forward-looking estimates and judgements Valuation is fundamental for any decision & negotiations relating to e. g. Company investments Mergers IPO / rights issues Management project evaluation Portfolio valuation

Valuation – Basics Valuation a science or an art? A bit of both Science: Certain methods are based on solid mathematical pillars. Has (and is) being researched by entire university departments, thousand's of professors/Ph. D's/market practitioners Foundation of the world's financial system Art: Modelling and forecasting of the future (? !? ) • management/key employees, tastes/fashion/sentiment, disruptive technologies… Material role of fickle (and difficult to model) behavioural issues and biases overconfidence, overreaction, loss aversion, herding, regret, misestimating of probabilities. . Fact remains – companies need to be valued and the following methods are the best tools currently available

Valuation - Reservations Assumptions and inputs into the models are of paramount importance Garbage in -> Garbage out Several "difficult-to-model" factors hugely important Is it for sale? Is there a buyer? Sale under distressed circumstances? is funding available? Output from valuation models ≠ current price Additionally some types of companies are tremendously difficult to value analytically Start-ups Biotech/pharmaceutical research Highly cyclical companies Companies with large "real options" Rights to unexplored oil-fields / mining Online companies (social networking, search engine. . )

Valuation Methodologies Discounted Cash-flow (DCF) Free Cash Flow to Firm (FCFF), FCF to Equity, Adjusted Present Value (APV) Multiples / Comparables P/E, EV/EBITDA, EV/Sales etc. Other methods Invested capital, VC Capital Method, Option Pricing, Last round of financing, Break-up value and Dividend Models . . and then the more "sketchy" methods e. g. Technical Analysis Balance between model relevance, complexity and number of assumptions Usually at least two methods used in any valuation exercise

Valuation Method: Multiples / Comparables

Multiples / Comparables (comps) - Introduction The idea is to approximate a company's value by comparing it to companies with known value Source of figures Comparable public company multiples Recent private company transactions Important to only compare relative value of similar companies (apples with apples) Similar Industry Scope Similar Growth Similar Risk Similar Results (ROE)

Multiples / Comparables (comps) - Introduction Many benchmarks can be used (usually industry specific) Enterprise Value / EBITDA Enterprise Value / Sales Price / Earnings (I: V/H) – (Often used for banks) Price / Book (I: Q-hlutfall) – (Often used for banks) Price / Net Asset Value (NAV) – (Often used for banks) Monthly Rent Multiple Funds under management – (. . . for e. g. asset management) # subscribers, # patents, # employees, #website hits / Enterprise Value etc.

Multiples / Comparables (comps) – Introduction cont. Positives Quicker and easier than analytical methods (DCF) Reflects current market conditions (investor sentiment, bargaining power. . ) Helpful in "reality-checking" DCF valuations Disadvantages Are the comparable companies similar enough? E. g. public vs. private, future prospects, sector, management quality, market position, capital structure, tax-scheme… Doesn't capture value of different scenarios/"what-ifs" E. g. post acquisition cost-cutting is successful, synergies are achieved, pending lawsuit goes one way or the other. . Disconnect between a multiple and inherent firm value. Hence does not capture systemic under -/overvaluation of companies by the market

Price / Earnings (PER or P/E) Price Earnings (I: V/H) ratio shows how much accounting profit its owners are entitled to Example: Stock price = 20, EPS= 2 => PER= 20/2 = 10 Compared to companies similar in risk and prospects PER is an indicator of whether a particular stock is under or overpriced Several variants Trailing PER or forward PER (using forecasted earnings) Primary shares outstanding or diluted number of shares Average price over period Generally: High PER (>16) indicates that the market believes significant growth is on horizon Low PER (<8) indicates that the market believes current profit levels are unsustainable

Price/Book (P/B) and Net Asset Value (NAV) Price / Book = Value of Equity / Book Value of Equity (I: Q-hlutfall) Purpose of ratio is to show the market premium to the accounting equity P/B is used for valuing investments whose value is derived primarily from the underlying value of their tangible assets Holding companies Real estate companies Banks Companies up for liquidation (solvency value) Net Asset Value (NAV) is a significantly better measure than book equity Calculated by correcting the value of assets & liabilities in the accounts Book value of associates Book value of fishing quota Goodwill justified? Deferred tax liability going to be paid in the near future (Real Estate)? etc.

Some examples from the “real world” Dn. B NOR report - Feb 2010

Some examples from the “real world” Historical development (short term though) PB ratio 3 2. 5 2 1. 5 1 0. 5 DNBNOR Svenska Handelsbanken Danske Bank SEB SWEDBANK Nordea 0 FQ 3 FQ 4 FQ 1 FQ 2 FQ 3 FQ 4 FQ 1 FQ 2 FQ 3 FQ 4 200220032003200420042005200520062006200720072008200820092009

Some examples from the “real world” Interesting to take a closer look at the Dn. B NOR report For further view on the DDM To see different methods of valuation, in use on the market To better get the “feel” for professional valuation. . . and many other things

Questions and Answers Q&A