Disclosures
This note provides an overview of the wide range of methodologies employed by Davy analysts when valuing shares.
One approach used is to apply average valuation multiples derived over multi-year periods, primarily with a view to smoothing cyclical effects.
Share-based multiples include:
Enterprise-based valuation multiples include:
As enterprise values include net financial liabilities and minority interests, these are then deducted to arrive at the residual equity value.
In the case of average earnings multiples, cognisance is given to the stage of the relevant industry cycle as it may not be appropriate to apply average multiples towards the peak or trough of a cycle. In such cases, earnings multiples prevailing at the corresponding stages of previous cycles may be used.
In the case of asset-based valuations, reported net assets generally provide a floor to a company's valuation. In many cases, however, company accounts can understate the underlying economic value of a company's assets, and a ratio such as return on invested capital to weighted average cost of capital (ROIC/WACC) may provide a more appropriate indicator of the book value multiple.
The ratings of similar companies may be taken into account in valuing shares, as indeed may average ratings for particular industry sectors. Such ratings are commonly used in analysts' sum-of-the-parts (SOTP) valuations.
In discounted cash-flow (DCF) models, a company's forecast future free cash-flows are discounted by its weighted WACC. Due to the uncertainties involved in forecasting long-term cash-flows, analysts use a number of different DCF models.
In some instances, other valuation metrics may be used. For instance, enterprise value per tonne of installed capacity may be used in capital-intensive sectors or in the earlier stages of a company's development.
