1.
Peer Group Selection
In this valuation exercise, we have selected Peer A, Peer B, Peer C and Peer E
as the similar companies. We selected them as they operate similar business
models and their sources of revenue are similar and their operating margins
are prevented from falling within the same range as that of TargetCo. Not to
mention that their size and financial profiles are good points of reference
when calculating the multiplication of valuation.
Peer D was not included in the analysis since it is so large compared to other
companies. Peer D reflects a significant greater revenue, EBITDA and equity
value, which would bias the peer group as an outlier. Had we added Peer D
the valuation multiples would be overstated and would not be as comparable
to TargetCo. To maintain consistency and ensure that the derived multiples
are in fact representative of companies of comparable size and operating
characteristics, we removed Peer D.
2. EBITDA Normalization
Only the peer companies that were selected (Peer A, B, C, and E) underwent
EBITDA normality after the criteria of the adjustments. One-off and non-
recurring items have been eliminated to ensure that sustainable operating
performance of each peer will be reflected better.
The EBITDA of TargetCo has remained the same as it is being valued. Based
on typical similar company analysis, we cleanse the peers to obtain clean
valuation multiples, and then we insert the multiples into the financial
statements of TargetCo. This strategy does not include discretionary
assumptions regarding the earnings of the target, and this strategy
maintains the valuation based on the actual operating performance of
TargetCo.
3. Enterprise Value and Trading Multiples
Each company worked out as Enterprise Value (EV) by summing up market
capitalization and net debt. We have calculated EV/EBITDA and P/E multiples
using the adjusted EBITDA of the peers and the reported net income.
Based on Peer A, B, C, and E, the following peer multiples were obtained:
Mean EV/EBITDA: 14.33x
Median EV/EBITDA: 14.22x
Mean P/E: 26.70x
Median P/E: 26.55x
TargetCo was excluded from the peer multiple calculations.
4. Valuation of TargetCo
We used the median EV/EBITDA multiple of 14.22x and used it to calculate
the implied Enterprise Value of TargetCo. We then determined the implied
equity value after net debt subtraction and then divided it by the outstanding
shares to obtain an implied share price.
This resulted in:
Implied Enterprise Value: 12,726.8
Implied Equity Value: 11,786.8
Implied Share Price: 43.65
This represents the estimated fair value of TargetCo based on trading
comparables.
5. Interpretation Questions
(i) Which multiple is more reliable and why?
I believe that EV/EBITDA would be more appropriate in the context of such an
analysis as it is not dependent on the company financing sources and
narrows the focus on the basic operations of the company. It is also not
skewed by various debt or tax rates like P/E and hence it is very helpful in
the comparison of different firms with different financing structures.
(ii) Why might the implied price differ from TargetCo’s current
market price?
The implied price could be different due to market sentiment, expectations of
investors, as well as company-specific risks that are not reflected in peer
multiples. In addition, the trade of comparables are mere averages and
might not be a true representation of unique growth opportunities and
competitive advantages of TargetCo. The price may also be out of an intrinsic
value due to short-term market inefficiencies.