Wednesday, 31 May 2017

Valuing companies in Emerging Markets

Valuation is usually difficult in emerging markets.

There are unique risks and obstacles not present in developed markets.

Additional considerations include

  • macroeconomic uncertainty, 
  • illiquid capital markets, 
  • controls on the flow of capital into and out of the country, 
  • less rigorous standards of accounting and 
  • disclosure, and high levels of political risk.

To estimate value, three different methods are used:

  1. a discounted cash flow (DCF) approach with probability-weighted scenarios that model the risks the business faces,
  2. a DCF valuation with a country risk premium built into the cost of capital, and 
  3. a valuation based on comparable trading and transaction multiples.

For developed nations, the analyst must:

  • develop consistent economic assumptions,
  • forecast cash flows, and 
  • compute a WACC.

Computing cash flows, however, may require extra work because of accounting differences.

If done correctly, the two DCF methods (1 and 2 above) should give the same estimate of value.

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