F&N to pass on higher cost if sugar prices go up
By Jeeva ArulampalamPublished: 2009/11/11
FRASER & Neave Holdings Bhd (F&N) (3689) will increase the prices of its food and beverage (F&B) products should the government decide to remove the sugar subsidy locally.
F&N chief executive officer Tan Ang Meng said that the cost of higher sugar prices will have to be passed on to consumers as F&B producers will not be able to absorb the cost impact.
"Whatever you eat or drink, like the prices of roti canai or teh tarik, will go up," Tan said at F&N's financial year 2008/09 results briefing in KL yesterday.
Although the quantum of the price increase for F&N products will depend on the hike in sugar prices, it will take less than a month for the cost to be factored into the F&B products.
"So the government has to balance between how much (sugar subsidy) they plan to withdraw and its subsequent impact on inflation," said Tan.
The government is said to be spending some RM720 million on sugar subsidy this year.
For its financial year ended September 30 2009, F&N saw its net profit increase 35 per cent to RM224.4 million while revenue grew 2 per cent to RM3.74 billion.
Despite the deep regional economic recession, the group posted higher revenue driven by strong volume growths for its soft drinks, mainly the 100Plus and Seasons brands.
Tan said that the dairies division operating profit improved by 59 per cent over the last year to RM140 million and is now on par with the soft drinks as a key contributor to the group's profits.
The group is planning a bonus dividend of 5 sen per share on top of a final dividend of 24 sen. This will make its total net dividend for the year at 41.75 sen.
Meanwhile, F&N will look to launch 50 new products, including tea, coffee and energy drinks, within the next two to three years, once its "exclusivity clause" with Coca-Cola expires on January 26 2010.
The new products will help cushion the loss of revenue once F&N stops selling Coca-Cola from September 2011, which accounted for 33 per cent of F&N's total soft drinks volume for the financial year just ended.
http://www.btimes.com.my/Current_News/BTIMES/articles/jfn10/Article/
Friday 13 November 2009
Wilmar delays China IPO, to invest in Africa
Wilmar delays China IPO, to invest in Africa
Published: 2009/11/13
SINGAPORE: Wilmar International, the world's largest listed palm oil firm, signalled a promising outlook for its earnings but said the US$3.5 billion (US$1 = RM3.38) listing of its China unit is on hold due to its concern over valuations.
The palm oil giant's listing plan was the recent trigger for a rally in its shares, which retreated yesterday despite a quarterly profit that beat expectations.
"We will shelve it for the time being and wait for market conditions to improve," Wilmar's chairman and CEO Kuok Khoon Hong said after a media and analysts' briefing for its third-quarter results.
"We only will list the China operation if it commands better price than what Wilmar is commanding right now in the stock market," he added.
Analysts have estimated that Wilmar's China unit could be valued as by much as 20 times earnings, matching the parent company's current price-to-earnings multiple.
With more than 30 firms eyeing listings in either Hong Kong or India over the next few months, leading to more than US$10 billion in share sales, companies wanting to list have had to keep their hopes for high prices in check.
Analysts have said Wilmar, which has a market value of US$30 billion, has no immediate need for funds.
The company said it was optimistic about prospects for the rest of this year after a one-off gain helped it post a better-than-expected 35 per cent rise in its third quarter profit.
Analysts were less impressed. "Excluding exceptional and one-off items, Wilmar's operating performance in its third quarter 2009 was not as strong as we would expect from normal seasonality," Goldman Sachs analyst Patrick Tiah said in a research note.
"Notwithstanding, given the market's low expectations we believe consensus earnings could rise following the results," he added.
Wilmar's Kuok said the company plans to invest at least US$1 billion in China, Indonesia and Africa to expand its plantations and plants.
The company has raised profits in the last few quarters thanks to its processing and refining capabilities, outperforming rival palm oil firms that depend primarily on plantations.
Wilmar's shares have more than doubled this year, but some analysts cut their ratings after the company delayed plans in late September to float its China unit due to volatile markets.
The listing would have raised around US$3.5 billion.
CEO Kuok said earlier in a statement that he was optimistic about the firm's prospects for the rest of the financial year given the diversity of its business segments.
Wilmar, derives about half of its total sales from China, and owns oil palm plantations and runs crushing and refining plants in Indonesia and Malaysia.
The company, the second-largest on the Singapore Exchange after Singapore Telecommunications, earned US$653 million in July-September, up from US $483 million a year ago. - Reuters
Published: 2009/11/13
SINGAPORE: Wilmar International, the world's largest listed palm oil firm, signalled a promising outlook for its earnings but said the US$3.5 billion (US$1 = RM3.38) listing of its China unit is on hold due to its concern over valuations.
The palm oil giant's listing plan was the recent trigger for a rally in its shares, which retreated yesterday despite a quarterly profit that beat expectations.
"We will shelve it for the time being and wait for market conditions to improve," Wilmar's chairman and CEO Kuok Khoon Hong said after a media and analysts' briefing for its third-quarter results.
"We only will list the China operation if it commands better price than what Wilmar is commanding right now in the stock market," he added.
Analysts have estimated that Wilmar's China unit could be valued as by much as 20 times earnings, matching the parent company's current price-to-earnings multiple.
With more than 30 firms eyeing listings in either Hong Kong or India over the next few months, leading to more than US$10 billion in share sales, companies wanting to list have had to keep their hopes for high prices in check.
Analysts have said Wilmar, which has a market value of US$30 billion, has no immediate need for funds.
The company said it was optimistic about prospects for the rest of this year after a one-off gain helped it post a better-than-expected 35 per cent rise in its third quarter profit.
Analysts were less impressed. "Excluding exceptional and one-off items, Wilmar's operating performance in its third quarter 2009 was not as strong as we would expect from normal seasonality," Goldman Sachs analyst Patrick Tiah said in a research note.
"Notwithstanding, given the market's low expectations we believe consensus earnings could rise following the results," he added.
Wilmar's Kuok said the company plans to invest at least US$1 billion in China, Indonesia and Africa to expand its plantations and plants.
The company has raised profits in the last few quarters thanks to its processing and refining capabilities, outperforming rival palm oil firms that depend primarily on plantations.
Wilmar's shares have more than doubled this year, but some analysts cut their ratings after the company delayed plans in late September to float its China unit due to volatile markets.
The listing would have raised around US$3.5 billion.
CEO Kuok said earlier in a statement that he was optimistic about the firm's prospects for the rest of the financial year given the diversity of its business segments.
Wilmar, derives about half of its total sales from China, and owns oil palm plantations and runs crushing and refining plants in Indonesia and Malaysia.
The company, the second-largest on the Singapore Exchange after Singapore Telecommunications, earned US$653 million in July-September, up from US $483 million a year ago. - Reuters
Green Packet - behind the headline figures
Green Packet sets ambitious profit target
By Goh Thean EuPublished: 2009/09/24
GREEN Packet Bhd (0082), a telecommunications and broadband service provider, has set a net profit target of RM1 billion for 2013, driven by a maturing broadband and solutions business.
The company posted a net loss of RM54.98 million for the financial year ended December 31 2008.
"It's an ambitious goal. That's why we are really working hard on that. We believe both our business pillars of solutions and service provider will grow. By then, we will have more than one million subscribers on broadband space," group managing director Puan Chan Cheong told Business Times in an interview.
The company expects to sign up 200,000 subscribers by year-end, from 35,000 in the first quarter of 2009.
"By end of the third quarter, we should have more than 100,000 subscribers. We believe that we can sign up over 30,000 subscribers per month for the final quarter," he said.
Green Packet expects revenue to increase more than threefold to RM300 million this year, from RM88.43 million in 2008.
"Our first-half 2009 revenue was already 11 per cent more than what we had in the entire 2008. We expect the momentum growth to be bigger in the second half and we believe we can comfortably achieve RM300 million this year and RM1 billion two years later," he said.
The company offers broadband services to homes and offices using the WiMAX (Worldwide Interoperability for Microwave Access) technology.
To achieve its subscriber target, the company would need to expand its broadband coverage area, so that more people will have the opportunity to subscribe it.
"In terms of sites, we are also on track to hit 700 sites, or 2,100 base stations by year-end," he said.
Over the next two years, the company will be aggressively expanding its coverage and acquiring broadband customers. When its subscriber base hits the critical mass, it is expected to launch its new service - mobile voice.
"We are looking to launch mobile voice service in 2011. We can do it by ourselves, but initially, we will be looking at domestic roaming. On areas we don't have coverage, then we will fall back to existing operator's network," said Puan, who expects to sign up more than two million mobile voice customers by 2013.
It also develops WiMAX customer-premises equipment (CPE), such as the WiMAX modems. For the first half, it has delivered over 150,000 WiMAX CPEs to 35 operators worldwide.
"The estimation for WiMAX product shipment world is going to be about 1.6 million to 1.7 million this year. We aim to capture 20 per cent of the world's market shipment, or to ship some 350,000 units of CPEs this year," he said.
Besides developing CPEs and offering broadband services, it also develops telecommunications software - such as its InTouch connection management software - for operators.
The InTouch connection management solution, allows the user to integrate multiple wireless network.
Developing the solutions pillar is critical for Green Packet's bottomline growth, as it commands higher margins than some of its other businesses and it helps the company to strike a balance.
"Moving forward, we see half of our revenue coming from our service provider (WiMAX broadband) business and the other half from solutions.
"In terms of topline for our solution business, 30 per cent will come from software and 70 per cent will come from CPEs. However, for bottomline, software will contribute 50 per cent of the profit for the solution business," he said
http://www.btimes.com.my/Current_News/BTIMES/articles/gpkt21/Article/index_html
----
Green Packet: RM500m more needed to widen 4G coverage
By Zuraimi AbdullahPublished: 2009/11/13
GREEN Packet Bhd (0082), which announced its third quarter results yesterday, will need up to RM500 million in capital expenditure (capex) in the next 12-18 months to increase its 4G Wimax coverage nationwide to 65 per cent.
This does not include a RM155 million capex it plans to spend first over the next three quarters to raise the high-speed broadband service coverage to 45 per cent.
Green Packet managing director C.C. Puan said it had so far invested RM337 million to roll out the 4G service.
The company's 4G service, known as P1 and run by subsidiary Packet One Networks (Malaysia) Sdn Bhd, now covers 25 per cent of the peninsular.
Puan said about RM400 million of the RM500 million capex would be raised from vendor financing and borrowings.
The remaining RM100 million should come from equity and convertible debts, he told reporters at a briefing on Green Packet's interim results in Petaling Jaya yesterday.
The company has group cash and cash equivalents of RM174 million as of end-September. With another RM65 million from bank and vendor facilities, it has total funding of RM239 million, more than the RM155 million required for the next nine months.
Meanwhile, Green Packet's revenue for the third quarter to September 30 this year rose 11.5 per cent to RM63 million from RM56.5 million in the preceeding quarter.
But it made a net loss of RM32.9 million mainly due to the investments in P1's deployment and activities.
A turnaround is possible starting from the middle of next year as he said P1 should break even in the first quarter on 2010, which could push Green Packet into the black as early as first half of next year.
Green Packet's 4G subscribers have increased to 100,000 in 14 months and the company plans to double it to 200,000 in the next two months.
The company plans to extend its 4G service to Sabah, Sarawak and Singapore and increase exports of its 4G devices by several fold next year, Puan said.
http://www.btimes.com.my/Current_News/BTIMES/articles/ket/Article/index_html
----
Green Packet suffers bigger loss
Published: 2009/11/12
Green Packet Bhd's pre-tax loss for its third quarter ended Sept 30, 2009, rose by 200 per cent to RM32.377 million from RM10.784 million in the same quarter last year.
This was due to its investment in subsidiary Packet One Networks (M) Sdn Bhd (P1)'s deployment plan and activities, Green Packet said in a statement today.
However, its revenue increased by 246.9 per cent during the third quarter to RM63.035 million from RM18.172 previously.
Green Packet said P1's subscriber growth increased by 44 per cent in the third quarter as compared to the second quarter.
"In line with the group's business strategy, we are investing heavily in our 4G WiMAX operator, P1, which is rapidly expanding across Malaysia and gaining momentum in terms of subscribers," said Green Packet's group managing director and chief executive officer Puan Chan Cheong.
Puan said Green Packet's advertising and promotion activities had increased substantially, with the company moving to mainstream broadcast media to introduce its service packages to the masses.
"The quantum of subscriber increase is exciting, and we target for P1 to be EBITDA (earnings before interest, taxes, depreciation, and amortisation) breakeven by first quarter 2010," he said.
P1, now the only nationwide 4G WiMAX operator in the country, plans to extend its network to East Malaysia and Singapore next year.
Green Packet said it has healthy cash reserves, having recently conducted a rights issue and announced a proposed private placement expected to be completed by the end of this financial year.
The proposed private placement is expected to contribute positively to the group's future earnings and should result in an increase in the company's total issued and paid-up share capital.
"Our fund raising is part of our business strategy, which requires working capital for capital expenditure and operating expenses, including the deployment of 4G WiMAX infrastructure in Malaysia and other overseas markets," Puan said.
Green Packet said its products and solutions have increased their shipments in recent months and were profitable since the second quarter.
The group is also expected to announce contracts with East European and American operators, and launch new products before the year-end. -- Bernama
http://www.btimes.com.my/Current_News/BTIMES/articles/20091112211908/Article/index_html
By Goh Thean EuPublished: 2009/09/24
GREEN Packet Bhd (0082), a telecommunications and broadband service provider, has set a net profit target of RM1 billion for 2013, driven by a maturing broadband and solutions business.
The company posted a net loss of RM54.98 million for the financial year ended December 31 2008.
"It's an ambitious goal. That's why we are really working hard on that. We believe both our business pillars of solutions and service provider will grow. By then, we will have more than one million subscribers on broadband space," group managing director Puan Chan Cheong told Business Times in an interview.
The company expects to sign up 200,000 subscribers by year-end, from 35,000 in the first quarter of 2009.
"By end of the third quarter, we should have more than 100,000 subscribers. We believe that we can sign up over 30,000 subscribers per month for the final quarter," he said.
Green Packet expects revenue to increase more than threefold to RM300 million this year, from RM88.43 million in 2008.
"Our first-half 2009 revenue was already 11 per cent more than what we had in the entire 2008. We expect the momentum growth to be bigger in the second half and we believe we can comfortably achieve RM300 million this year and RM1 billion two years later," he said.
The company offers broadband services to homes and offices using the WiMAX (Worldwide Interoperability for Microwave Access) technology.
To achieve its subscriber target, the company would need to expand its broadband coverage area, so that more people will have the opportunity to subscribe it.
"In terms of sites, we are also on track to hit 700 sites, or 2,100 base stations by year-end," he said.
Over the next two years, the company will be aggressively expanding its coverage and acquiring broadband customers. When its subscriber base hits the critical mass, it is expected to launch its new service - mobile voice.
"We are looking to launch mobile voice service in 2011. We can do it by ourselves, but initially, we will be looking at domestic roaming. On areas we don't have coverage, then we will fall back to existing operator's network," said Puan, who expects to sign up more than two million mobile voice customers by 2013.
It also develops WiMAX customer-premises equipment (CPE), such as the WiMAX modems. For the first half, it has delivered over 150,000 WiMAX CPEs to 35 operators worldwide.
"The estimation for WiMAX product shipment world is going to be about 1.6 million to 1.7 million this year. We aim to capture 20 per cent of the world's market shipment, or to ship some 350,000 units of CPEs this year," he said.
Besides developing CPEs and offering broadband services, it also develops telecommunications software - such as its InTouch connection management software - for operators.
The InTouch connection management solution, allows the user to integrate multiple wireless network.
Developing the solutions pillar is critical for Green Packet's bottomline growth, as it commands higher margins than some of its other businesses and it helps the company to strike a balance.
"Moving forward, we see half of our revenue coming from our service provider (WiMAX broadband) business and the other half from solutions.
"In terms of topline for our solution business, 30 per cent will come from software and 70 per cent will come from CPEs. However, for bottomline, software will contribute 50 per cent of the profit for the solution business," he said
http://www.btimes.com.my/Current_News/BTIMES/articles/gpkt21/Article/index_html
----
Green Packet: RM500m more needed to widen 4G coverage
By Zuraimi AbdullahPublished: 2009/11/13
GREEN Packet Bhd (0082), which announced its third quarter results yesterday, will need up to RM500 million in capital expenditure (capex) in the next 12-18 months to increase its 4G Wimax coverage nationwide to 65 per cent.
This does not include a RM155 million capex it plans to spend first over the next three quarters to raise the high-speed broadband service coverage to 45 per cent.
Green Packet managing director C.C. Puan said it had so far invested RM337 million to roll out the 4G service.
The company's 4G service, known as P1 and run by subsidiary Packet One Networks (Malaysia) Sdn Bhd, now covers 25 per cent of the peninsular.
Puan said about RM400 million of the RM500 million capex would be raised from vendor financing and borrowings.
The remaining RM100 million should come from equity and convertible debts, he told reporters at a briefing on Green Packet's interim results in Petaling Jaya yesterday.
The company has group cash and cash equivalents of RM174 million as of end-September. With another RM65 million from bank and vendor facilities, it has total funding of RM239 million, more than the RM155 million required for the next nine months.
Meanwhile, Green Packet's revenue for the third quarter to September 30 this year rose 11.5 per cent to RM63 million from RM56.5 million in the preceeding quarter.
But it made a net loss of RM32.9 million mainly due to the investments in P1's deployment and activities.
A turnaround is possible starting from the middle of next year as he said P1 should break even in the first quarter on 2010, which could push Green Packet into the black as early as first half of next year.
Green Packet's 4G subscribers have increased to 100,000 in 14 months and the company plans to double it to 200,000 in the next two months.
The company plans to extend its 4G service to Sabah, Sarawak and Singapore and increase exports of its 4G devices by several fold next year, Puan said.
http://www.btimes.com.my/Current_News/BTIMES/articles/ket/Article/index_html
----
Green Packet suffers bigger loss
Published: 2009/11/12
Green Packet Bhd's pre-tax loss for its third quarter ended Sept 30, 2009, rose by 200 per cent to RM32.377 million from RM10.784 million in the same quarter last year.
This was due to its investment in subsidiary Packet One Networks (M) Sdn Bhd (P1)'s deployment plan and activities, Green Packet said in a statement today.
However, its revenue increased by 246.9 per cent during the third quarter to RM63.035 million from RM18.172 previously.
Green Packet said P1's subscriber growth increased by 44 per cent in the third quarter as compared to the second quarter.
"In line with the group's business strategy, we are investing heavily in our 4G WiMAX operator, P1, which is rapidly expanding across Malaysia and gaining momentum in terms of subscribers," said Green Packet's group managing director and chief executive officer Puan Chan Cheong.
Puan said Green Packet's advertising and promotion activities had increased substantially, with the company moving to mainstream broadcast media to introduce its service packages to the masses.
"The quantum of subscriber increase is exciting, and we target for P1 to be EBITDA (earnings before interest, taxes, depreciation, and amortisation) breakeven by first quarter 2010," he said.
P1, now the only nationwide 4G WiMAX operator in the country, plans to extend its network to East Malaysia and Singapore next year.
Green Packet said it has healthy cash reserves, having recently conducted a rights issue and announced a proposed private placement expected to be completed by the end of this financial year.
The proposed private placement is expected to contribute positively to the group's future earnings and should result in an increase in the company's total issued and paid-up share capital.
"Our fund raising is part of our business strategy, which requires working capital for capital expenditure and operating expenses, including the deployment of 4G WiMAX infrastructure in Malaysia and other overseas markets," Puan said.
Green Packet said its products and solutions have increased their shipments in recent months and were profitable since the second quarter.
The group is also expected to announce contracts with East European and American operators, and launch new products before the year-end. -- Bernama
http://www.btimes.com.my/Current_News/BTIMES/articles/20091112211908/Article/index_html
Media Prima revises upwards offer for NSTP
Media Prima revises upwards offer for NSTP
Published: 2009/11/13
Media Prima says it proposes to increase the offer price of each NSTP share to RM2.40 from RM2 previously offered.
Media Prima Bhd (MPB) (4502) yesterday revised upwards its takeover offer for The New Straits Times Press (M) Bhd (NSTP).
MPB, which holds a 43 per cent interest in NSTP's equity, wants to buy all shares not owned by it in the newspaper company and later take it private. The takeover will be done through a share exchange.
Through CIMB Investment Bank Bhd yesterday, MPB announced its proposal to increase the offer price of each NSTP share to RM2.40 from RM2 previously offered.
Consequently, it proposed to revise the exchange ratio to six new MPB shares for every five offer shares accepted and one new MPB warrant free for every five offer shares accepted.
(6 new MPB share + 1 new MPB free warrant = 5 NSTP shares)
In its earlier offer, MPB offered an exchange ratio of one new MPB share for every one offer share and one new MPB warrant for every five offer shares.
(5 new MPB share + 1 new MPB warrant = 5 NSTP share)
MPB said its board thinks the higher exchange ratio is justified to improve attractiveness of the offer while not detrimental to interest of its existing shareholders. It said the revision was done after considering views of various stakeholders of NSTP and the prevailing market sentiment.
"The revised offer is attractive and fair as the revised exchange ratio represents a 10 per cent premium over the average market price of NSTP shares for the last month and a 33 per cent premium over the average market price in the same period based on absolute price.
"This revised offer reinforces MPB's belief of the greater benefits to be gained and synergies that can be crystallised by the enlarged group post completion of the transaction," MPB's group managing director Datuk Amrin Awaluddin said.
Separately, NSTP yesterday declared a special tax-exempt special dividend of 40 sen for every share held as at November 26 2009.
"We view positively NSTP's declaration of the special dividend as it is consistent with MPB's practice of returning excess capital to its shareholders.
"Our intention of returning the entire proceeds from the special dividend received from NSTP reiterates our commitment to continually enhance our shareholders' returns on their investment in the group," Amrin added.
The announcement will see NSTP paying out some RM86.9 million in dividends to shareholders. Its board said that the company has a substantial amount of retained earnings which can be rewarded to shareholders.
MPB said as an existing shareholder, it will be entitled to its portion of the special dividend amounting to around RM37.6 million.
It added that it intends to distribute to its own shareholders the entire amount of NSTP special dividend it will receive but said NSTP shareholders who accept its revised offer will not be entitled to the MPB special dividend.
NSTP shareholders who have accepted the original offer on November 5 2009 will however be entitled to receive the revised offer and also the NSTP special dividend.
http://www.btimes.com.my/Current_News/BTIMES/articles/mpb12-2/Article/index_html
Published: 2009/11/13
Media Prima says it proposes to increase the offer price of each NSTP share to RM2.40 from RM2 previously offered.
Media Prima Bhd (MPB) (4502) yesterday revised upwards its takeover offer for The New Straits Times Press (M) Bhd (NSTP).
MPB, which holds a 43 per cent interest in NSTP's equity, wants to buy all shares not owned by it in the newspaper company and later take it private. The takeover will be done through a share exchange.
Through CIMB Investment Bank Bhd yesterday, MPB announced its proposal to increase the offer price of each NSTP share to RM2.40 from RM2 previously offered.
Consequently, it proposed to revise the exchange ratio to six new MPB shares for every five offer shares accepted and one new MPB warrant free for every five offer shares accepted.
(6 new MPB share + 1 new MPB free warrant = 5 NSTP shares)
In its earlier offer, MPB offered an exchange ratio of one new MPB share for every one offer share and one new MPB warrant for every five offer shares.
(5 new MPB share + 1 new MPB warrant = 5 NSTP share)
MPB said its board thinks the higher exchange ratio is justified to improve attractiveness of the offer while not detrimental to interest of its existing shareholders. It said the revision was done after considering views of various stakeholders of NSTP and the prevailing market sentiment.
"The revised offer is attractive and fair as the revised exchange ratio represents a 10 per cent premium over the average market price of NSTP shares for the last month and a 33 per cent premium over the average market price in the same period based on absolute price.
"This revised offer reinforces MPB's belief of the greater benefits to be gained and synergies that can be crystallised by the enlarged group post completion of the transaction," MPB's group managing director Datuk Amrin Awaluddin said.
Separately, NSTP yesterday declared a special tax-exempt special dividend of 40 sen for every share held as at November 26 2009.
"We view positively NSTP's declaration of the special dividend as it is consistent with MPB's practice of returning excess capital to its shareholders.
"Our intention of returning the entire proceeds from the special dividend received from NSTP reiterates our commitment to continually enhance our shareholders' returns on their investment in the group," Amrin added.
The announcement will see NSTP paying out some RM86.9 million in dividends to shareholders. Its board said that the company has a substantial amount of retained earnings which can be rewarded to shareholders.
MPB said as an existing shareholder, it will be entitled to its portion of the special dividend amounting to around RM37.6 million.
It added that it intends to distribute to its own shareholders the entire amount of NSTP special dividend it will receive but said NSTP shareholders who accept its revised offer will not be entitled to the MPB special dividend.
NSTP shareholders who have accepted the original offer on November 5 2009 will however be entitled to receive the revised offer and also the NSTP special dividend.
http://www.btimes.com.my/Current_News/BTIMES/articles/mpb12-2/Article/index_html
Maybank Q1 net profit jumps 54pc to RM881.8m
Maybank Q1 net profit jumps 54pc to RM881.8m
Published: 2009/11/13
Malayan Banking Bhd's (Maybank) (1155) first quarter net profit jumped 54 per cent, on account of strong performances of its treasury operations, international business, investment banking and insurance and takaful.
Results for the quarter to September 2009 were also boosted by the absence of one-off items of impairment charge recorded in the same period in 2008.
Maybank yesterday reported a net profit of RM881.8 million for the latest quarter, compared with RM572 million in the previous comparable period.
Maybank said its core commercial banking operations are expected to perform better with positive but modest loan growth although recovery in the small- and medium-sized enterprise segment, which has been adversely impacted by the downturn in the external sector, will be uncertain.
"Whilst seeking to expand and regain market share in selected business segments, the group will continue to be vigilant in ensuring that asset quality is preserved. Prudent risk management practices and stringent asset quality management should contain the risk of deterioration in asset quality," Maybank said in an announcement to Bursa Malaysia yesterday.
The group's net interest income for the first financial quarter ended September 30 2009 increased by RM362.6 million or 28.7 per cent over that of the corresponding period in 2008 to RM1,627.6 million.
The higher net interest income is mainly attributed by the income contribution from PT Bank Internasional Indonesia Tbk (BII), a 97.5 per cent subsidiary, which was only taken into account this year.
Non interest income was higher by RM647 million or 130.7 per cent compared to that of the previous corresponding period.
The higher non interest income was contributed by foreign exchange profit, fee income and other income, which were higher by RM232.9 million, RM79.4 million and RM137.9 million respectively.
Allowance for losses on loans, advances and financing was higher by RM232.3 million or 125.3 per cent due mainly to the specific allowance made at BII, whilst there was no consolidation of BII's specific allowance made in the corresponding period.
"We are confident of sustaining the current momentum for growth and we look to sustained business growth in our key markets across the region," Maybank president and chief executive officer Datuk Seri Abdul Wahid Omar said in a statement released to the press.
http://www.btimes.com.my/Current_News/BTIMES/articles/mayb12/Article/index_html
Date Dividends
10/7/2008 0.2
3/24/2008 0.15
12/31/2007 0.175
10/30/2007 0.4
4/10/2007 0.4
10/30/2006 0.35
12/23/2005 0.5
10/12/2004 0.25
3/11/2004 0.25
10/15/2003 0.17
4/14/2003 0.1
Published: 2009/11/13
Malayan Banking Bhd's (Maybank) (1155) first quarter net profit jumped 54 per cent, on account of strong performances of its treasury operations, international business, investment banking and insurance and takaful.
Results for the quarter to September 2009 were also boosted by the absence of one-off items of impairment charge recorded in the same period in 2008.
Maybank yesterday reported a net profit of RM881.8 million for the latest quarter, compared with RM572 million in the previous comparable period.
Maybank said its core commercial banking operations are expected to perform better with positive but modest loan growth although recovery in the small- and medium-sized enterprise segment, which has been adversely impacted by the downturn in the external sector, will be uncertain.
"Whilst seeking to expand and regain market share in selected business segments, the group will continue to be vigilant in ensuring that asset quality is preserved. Prudent risk management practices and stringent asset quality management should contain the risk of deterioration in asset quality," Maybank said in an announcement to Bursa Malaysia yesterday.
The group's net interest income for the first financial quarter ended September 30 2009 increased by RM362.6 million or 28.7 per cent over that of the corresponding period in 2008 to RM1,627.6 million.
The higher net interest income is mainly attributed by the income contribution from PT Bank Internasional Indonesia Tbk (BII), a 97.5 per cent subsidiary, which was only taken into account this year.
Non interest income was higher by RM647 million or 130.7 per cent compared to that of the previous corresponding period.
The higher non interest income was contributed by foreign exchange profit, fee income and other income, which were higher by RM232.9 million, RM79.4 million and RM137.9 million respectively.
Allowance for losses on loans, advances and financing was higher by RM232.3 million or 125.3 per cent due mainly to the specific allowance made at BII, whilst there was no consolidation of BII's specific allowance made in the corresponding period.
"We are confident of sustaining the current momentum for growth and we look to sustained business growth in our key markets across the region," Maybank president and chief executive officer Datuk Seri Abdul Wahid Omar said in a statement released to the press.
http://www.btimes.com.my/Current_News/BTIMES/articles/mayb12/Article/index_html
Date Dividends
10/7/2008 0.2
3/24/2008 0.15
12/31/2007 0.175
10/30/2007 0.4
4/10/2007 0.4
10/30/2006 0.35
12/23/2005 0.5
10/12/2004 0.25
3/11/2004 0.25
10/15/2003 0.17
4/14/2003 0.1
Thursday 12 November 2009
Bank of England's Mervyn King says UK only just started on recovery road
Bank of England projections for GDP based on market interest rate expectations and £200bn of asset purchases. The fan chart depicts the probability of various outcomes for GDP growth. Bank of England's projection for CPI inflation based on market interest rate expectations and £200bn of asset purchases. The fan chart depicts the probability of various outcomes for CPI inflation in the future.
Bank of England's Mervyn King says UK only just started on recovery road
Bank of England Governor Mervyn King said he has an open mind on whether to inject more money into the economy, as the UK has only 'just started' along the road to recovery.
Mr King said today that the Bank's Monetary Policy Committee has an 'open mind' on whether to add to the £200bn of new money pumped into the economy, as its latest quarterly Inflation Report delivered higher forecasts for growth and inflation.
"We have a completely open mind as to whether to do more," Mr King told a press conference where he outlined the new forecasts, which see the economy returning to growth by the beginning of next year and then expanding at a 3.75pc pace by the end of 2011 - faster than its projection in August.
The Bank also expects inflation to rise above its 2pc target in the next few months before heading back down to 1.6pc within two years.
The higher growth and inflation forecasts come amid signs that Britain is emerging from its deepest recession since the 1930s. The Bank said today that it expects figures from the Office for National Statistics that last month showed the economy was still mired in recession in the third quarter to be revised upwards.
Economists reckon that the Bank's new forecasts don't signal that interest rates will be raised from their record low level of 0.5pc anytime soon. The Bank slashed rates to historic lows at the depth of the financial crisis last autumn, and has also pumped in £200bn of new money into the economy in an unprecedented policy known as quantitative easing (QE).
Mr King told a press conference that commentators had been mistaken in assuming that the policy of QE is now over.
“Any monetary stimulus is likely to face headwinds," said Mr King. "That is not to say quantitative easing is not working - it is - but it means we’ve had to put more in than would have been necessary if the banking sector was stronger.”
Sterling fell almost a cent against the dollar to $1.6650 and weakned against the euro too. Prices for government bonds rose.
"In short, it’s too soon to rule out further monetary policy action," said Jonathan Loynes, an economist at Capital Economics. "At the very least, any tightening looks a long way off."
http://www.telegraph.co.uk/finance/financetopics/recession/6544674/Bank-of-Englands-Mervyn-King-says-UK-only-just-started-on-recovery-road.html
Assets to invest in.
Here are some assets to invest in.
1. A residence.
This is often the first property acquired. Choose a great property to make a good home.
2. A premise for own business.
With so many commercial buildings available, renting is also an option. Location and suitability to the business are important.
3. Commercial property(ies) for rental income.
Location. Location. Location. But be prepared for the problems of being a landlord. Capital appreciation the last 10 years and rental income have been poor in those locations where the supplies exceed demands for rental properties.
4. Land for residential, industrial or commercial use.
Needs a large initial capital. No income or minimal income yield for many years until the full potential of the land is realised. However, capital appreciations over many years are often huge.
5. Plantations for income.
For those with the enthusiasm to manage an oil palm plantation, this is still a great investment. Equally, acquiring stocks of plantation counters serve the same purpose.
6. Cash in FDs or fixed income investment products.
Worth keeping some cash for emergency use. However, the buying power of cash is eroded by inflation over many years.
7. Shares in the local bourse.
Probably the better investments for those with the necessary financial education. But be prepared for the market price fluctuations (volatilites). Take advantage of market volatility and make it your friend. Do not fall folly to it.
8. Shares in the overseas bourses.
This is part of diversifying your assets overseas.
9. Own business.
A challenge for those who has the zeal of an enterpreneur. Higher risk but the rewards can be hugely substantial.
10. Buying whole or part of new businesses.
For those with the enterpreneur spirit. But be prepared to manage the business.
1. A residence.
This is often the first property acquired. Choose a great property to make a good home.
2. A premise for own business.
With so many commercial buildings available, renting is also an option. Location and suitability to the business are important.
3. Commercial property(ies) for rental income.
Location. Location. Location. But be prepared for the problems of being a landlord. Capital appreciation the last 10 years and rental income have been poor in those locations where the supplies exceed demands for rental properties.
4. Land for residential, industrial or commercial use.
Needs a large initial capital. No income or minimal income yield for many years until the full potential of the land is realised. However, capital appreciations over many years are often huge.
5. Plantations for income.
For those with the enthusiasm to manage an oil palm plantation, this is still a great investment. Equally, acquiring stocks of plantation counters serve the same purpose.
6. Cash in FDs or fixed income investment products.
Worth keeping some cash for emergency use. However, the buying power of cash is eroded by inflation over many years.
7. Shares in the local bourse.
Probably the better investments for those with the necessary financial education. But be prepared for the market price fluctuations (volatilites). Take advantage of market volatility and make it your friend. Do not fall folly to it.
8. Shares in the overseas bourses.
This is part of diversifying your assets overseas.
9. Own business.
A challenge for those who has the zeal of an enterpreneur. Higher risk but the rewards can be hugely substantial.
10. Buying whole or part of new businesses.
For those with the enterpreneur spirit. But be prepared to manage the business.
How is a P/E multiple used?
The Price/Earnings Multiple Enigma
If the Price to Earnings Multiple (P/E) were to be judged by usage, it wins hands down compared to any other valuation metric. It is easy to compute, can be applied across companies and across sectors, with a few exceptions. What is this ratio, how is it computed, and how to use it are questions to which you will find answers in this section.
What is a P/E multiple?
The P/E multiple is the premium that the market is willing to pay on the earnings per share of a company, based on its future growth. The ratio is most often used to conclude whether a stock is undervalued or overvalued. The P/E is calculated by dividing the current market price of a company's stock by the last reported full-year earnings per share (EPS). In effect, the ratio uses the company's earnings as a guide to value it. The P/E thus computed is also known as the trailing or historical P/E since it uses the trailing (historical) EPS in its calculations. With the advent of quarterly results, it is also possible to compute P/E, based on the earnings of the latest four quarters’ EPS. This is known as trailing twelve months P/E.
A variant of the P/E - called the forward P/E - has also been developed wherein the current market price of the stock is divided by the expected future EPS. The attempt to study P/E ratios in this manner reflects the effort to factor in the expected growth of a company.
Since stock market valuations factor in the future expectations of the market, a P/E multiple computed using historical earnings can at best be of academic value since it does not factor in the future growth in earnings. It fails to capture events that may have happened after the earnings date. For example, suppose a merger happens after the earnings have been declared, a P/E multiple based on the historical P/E will fail to capture this event in the EPS whereas the price would reflect it, creating a distortion.
The forward P/E is popularly used to find out if the premium the market is willing to pay on the earnings is line with the growth expectations. For example, the market price of Stock A is Rs 1,000, with a P/E multiple of 30 based on historical earnings. Assuming an earnings growth of 50%, the one year forward P/E changes to 20, which means the market is willing to pay 30 times its historical earnings and 20 times its one-year forward earnings.
For an investor it makes much more sense to look at the forward P/E for taking an investment decision. Each investor would have his or her own expectations regarding the future earnings growth. To that extent the forward P/E for a particular stock will vary from investor to investor.
How is a P/E multiple used?
P/E multiples reflect collective investor perception regarding a company's future. This perception is a function of various factors, like industry growth prospects, company’s position in industry, its growth plans, quantum change expected in sales or profit growth, quality of management, and other macroeconomic factors like interest rates and inflation.
Is a stock trading at a P/E of 30 more expensive than a stock trading at a P/E of 60? Such a wide variation in P/E multiples can be owing to a few reasons. If the companies are in the same industry, it could be that the company with a high P/E may be one with superior size and financials, with better prospects or even better management. The market expects this stock to outperform its peers. If they are from different industries, it could also be due to different growth prospects. For example, an energy utility will have a more sedate earnings profile than say a software company.
Besides different expectations regarding future earnings growth, some of the difference in P/E can also be attributed to the disclosures made by the management to their shareholders. Hence, qualitative factors like transparency, quality of management also impact a stock's P/E.
Stock prices, in isolation do not give any indication whether the stock is undervalued or overvalued. They have to be viewed along with the company's future prospects to arrive at any conclusion. Generally, higher the expected growth in a company's earnings, higher is the P/E multiple that it attracts in the market. The time period used for P/E calculations depends on the investment horizon of the investor and would be different for each investor. However, P/E multiples cannot be applied to loss making companies since they do not have any earnings.
Price to Earnings Growth Multiple (PEG)
The PEG multiple takes the P/E analysis to the next stage. Since P/E ratios are computed based on historic earnings, they project an inaccurate picture of the future. The PEG multiple uses expected growth in earnings, to give investors additional information. The PEG divides the historical P/E ratio by the compounded annual growth rate of future earnings. Generally, the compounded earnings growth is calculated using the forecasted earnings for the next two-three years.
For example, if a company is quoting at a P/E of 60 based on historic earnings and the compounded annual growth rate of its earnings for the next three years is 20 per cent, then its PEG is 3.
The lower the PEG, the more attractive the stock becomes as an investment proposition. It is obviously more appealing to buy a stock on a P/E of 20 whose earnings are growing at 50 per cent than to buy a stock on a multiple of 50 whose earnings are growing at 20 per cent. As a thumb rule, stocks quoting at a PEG multiple below 0.5 are considered to be undervalued, 1 to be fairly valued, and 2 to be overvalued.
http://www.hdfcsec.com/KnowledgeCenter/Story.aspx?ArticleID=8153321b-8faa-4429-abba-bbfe5f29e77d
If the Price to Earnings Multiple (P/E) were to be judged by usage, it wins hands down compared to any other valuation metric. It is easy to compute, can be applied across companies and across sectors, with a few exceptions. What is this ratio, how is it computed, and how to use it are questions to which you will find answers in this section.
What is a P/E multiple?
The P/E multiple is the premium that the market is willing to pay on the earnings per share of a company, based on its future growth. The ratio is most often used to conclude whether a stock is undervalued or overvalued. The P/E is calculated by dividing the current market price of a company's stock by the last reported full-year earnings per share (EPS). In effect, the ratio uses the company's earnings as a guide to value it. The P/E thus computed is also known as the trailing or historical P/E since it uses the trailing (historical) EPS in its calculations. With the advent of quarterly results, it is also possible to compute P/E, based on the earnings of the latest four quarters’ EPS. This is known as trailing twelve months P/E.
A variant of the P/E - called the forward P/E - has also been developed wherein the current market price of the stock is divided by the expected future EPS. The attempt to study P/E ratios in this manner reflects the effort to factor in the expected growth of a company.
Since stock market valuations factor in the future expectations of the market, a P/E multiple computed using historical earnings can at best be of academic value since it does not factor in the future growth in earnings. It fails to capture events that may have happened after the earnings date. For example, suppose a merger happens after the earnings have been declared, a P/E multiple based on the historical P/E will fail to capture this event in the EPS whereas the price would reflect it, creating a distortion.
The forward P/E is popularly used to find out if the premium the market is willing to pay on the earnings is line with the growth expectations. For example, the market price of Stock A is Rs 1,000, with a P/E multiple of 30 based on historical earnings. Assuming an earnings growth of 50%, the one year forward P/E changes to 20, which means the market is willing to pay 30 times its historical earnings and 20 times its one-year forward earnings.
For an investor it makes much more sense to look at the forward P/E for taking an investment decision. Each investor would have his or her own expectations regarding the future earnings growth. To that extent the forward P/E for a particular stock will vary from investor to investor.
How is a P/E multiple used?
P/E multiples reflect collective investor perception regarding a company's future. This perception is a function of various factors, like industry growth prospects, company’s position in industry, its growth plans, quantum change expected in sales or profit growth, quality of management, and other macroeconomic factors like interest rates and inflation.
Is a stock trading at a P/E of 30 more expensive than a stock trading at a P/E of 60? Such a wide variation in P/E multiples can be owing to a few reasons. If the companies are in the same industry, it could be that the company with a high P/E may be one with superior size and financials, with better prospects or even better management. The market expects this stock to outperform its peers. If they are from different industries, it could also be due to different growth prospects. For example, an energy utility will have a more sedate earnings profile than say a software company.
Besides different expectations regarding future earnings growth, some of the difference in P/E can also be attributed to the disclosures made by the management to their shareholders. Hence, qualitative factors like transparency, quality of management also impact a stock's P/E.
Stock prices, in isolation do not give any indication whether the stock is undervalued or overvalued. They have to be viewed along with the company's future prospects to arrive at any conclusion. Generally, higher the expected growth in a company's earnings, higher is the P/E multiple that it attracts in the market. The time period used for P/E calculations depends on the investment horizon of the investor and would be different for each investor. However, P/E multiples cannot be applied to loss making companies since they do not have any earnings.
Price to Earnings Growth Multiple (PEG)
The PEG multiple takes the P/E analysis to the next stage. Since P/E ratios are computed based on historic earnings, they project an inaccurate picture of the future. The PEG multiple uses expected growth in earnings, to give investors additional information. The PEG divides the historical P/E ratio by the compounded annual growth rate of future earnings. Generally, the compounded earnings growth is calculated using the forecasted earnings for the next two-three years.
For example, if a company is quoting at a P/E of 60 based on historic earnings and the compounded annual growth rate of its earnings for the next three years is 20 per cent, then its PEG is 3.
The lower the PEG, the more attractive the stock becomes as an investment proposition. It is obviously more appealing to buy a stock on a P/E of 20 whose earnings are growing at 50 per cent than to buy a stock on a multiple of 50 whose earnings are growing at 20 per cent. As a thumb rule, stocks quoting at a PEG multiple below 0.5 are considered to be undervalued, 1 to be fairly valued, and 2 to be overvalued.
http://www.hdfcsec.com/KnowledgeCenter/Story.aspx?ArticleID=8153321b-8faa-4429-abba-bbfe5f29e77d
Business valuation with price earnings multiples
Business valuation with price earnings multiples
Tuesday, 12 December 2006 02:45 Anton Joseph
E-mail | Print | Tags: valuation | business sale/purchase | ip revenue | strategy
When it comes to selling or buying a business the sale price is the greatest obstacle and point of disagreement in many transactions. If there is a reasonable and easily understandable way of determining the value of the business the parties can quickly progress more than half way through the sale process. Although it is said that the right tools must be used to value businesses, no simple method suits all types of businesses. Instead, there are several financial and non-financial performance indicators that are commonly used by businesses to monitor their progress. Some are used to measure profitability whilst others are used to test liquidity.
Financial indicators are normally measured by using ratios calculated using numerical values appearing in the profit and loss account or the balance sheet. Since the indicators are snapshot calculations based on historical figures (figures for the past year), there is an understandable reluctance to always rely on them. This is especially so when a small business is examined for its value for sale.
A prudent business seller or buyer can use financial indicators (such as industry conventions, multiples and ratios) as part of a toolkit to negotiate an acceptable business sale price. One indicator is a price earnings multiple. Elsewhere we have examined business valuation with EBIT multiples.
PE multiple or PE ratio definition
A price earning multiple (PE multiple) is used mostly to estimate the performance of companies whose shares are traded in public and therefore reflect market expectation to a credible extent. The PE multiple of a share is also commonly called its "PE ratio", "earnings multiple", "multiple", "P/E", or "PE").
The PE multiple method, while unorthodox for small and medium-sized businesses, may provide a useful indicator of the value of a business for sale purposes.
Examples of use of PE multiples in Australian business
You can achieve better outcomes as a seller or buyer if you properly prepare for and anticipate positions that various interested parties might hold during the negotiation dance that takes place for a business sale, purchase, takeover, merger or acquisition. It is useful to study prior transactions and to keep a close watch on market developments. Here are recent examples illustrating the use of PE multiples in media commentary, research reports and takeover documents.
Wealth Creator Magazine in its Sep/Oct 2006 issue reviews "hot" stocks in the 2006-07 financial year. In its commentary it says John Fairfax Holdings Ltd (ASX code: FXJ) "...is currently trading on a price earnings of 16 x and provides a yield of 4.5% fully franked..." and Fosters Group Ltd (ASX code: FGL) "...is trading at a price earnings multiple of 15.6 x 2006 earnings, which we believe is reasonable earnings, reduced gearing and upside potential as the cycle improves."
Intersuisse Ltd in an investment research statement dated 24 August 2006 makes a buy recommendation about BHP Billiton (ASX code: BHP) concluding: "We believe the depth and quality of the company's earnings are such that the stock deserved to be placed on a higher price/earnings (p/e) multiple than the prospective p/e of 10.4 times for FY07 and 9.8 times for FY08 and that multiples of at least 12 to 14 times would be more appropriate."
In an Independent Expert's Report Grant Samuel & Associates Pty Ltd assesses the takeover bid by Rank Group Australia Pty Ltd for Burns, Philp & Company Ltd. Grant Samuel states (at its page 18):
"Capitalisation of earnings or cash flows is the most commonly used method for valuation of industrial businesses. This methodology is most appropriate for industrial businesses with a substantial operating history and a consistent earnings trend that is sufficiently stable to be indicative of ongoing earnings potential. This methodology is not particularly suitable for start-up businesses, businesses with an erratic earnings pattern or businesses that have unusual capital expenditure requirements. This methodology involves capitalising the earnings or cash flows of a business at a multiple that reflects the risks of the business and the stream of income that it generates. These multiples can be applied to a number of different earnings or cash flow measures including EBITDA, EBIT or net profit after tax. These are referred to respectively as EBITDA multiples, EBIT multiples and price earnings multiples. Price earnings multiples are commonly used in the context of the sharemarket. EBITDA and EBIT multiples are more commonly used in valuing whole businesses for acquisition purposes where gearing is in the control of the acquirer."
How to calculate the PE multiple for your business
The PE multiple method is the most commonly used earnings capitalisation methodology. It appears in the following two equations:
1.Total value of business = PE multiple x net profit after tax (NPAT)
2.Value per share = PE multiple x earnings per share
The above two equations can be used to provide some indication of the value of a business. First, using the second equation, dividing the market price of a share by the earnings per share you will be able to calculate the PE multiple for the business. Then by multiplying the PE multiple by NPAT a value for the business can be determined.
With a public company, assume the market value of a share of the company is $35 and the earnings per share is $5, then the PE multiple is 25 divided by 5 which is 7. If the NPAT is $110,000 then the value of the business is $110,000 multiplied by 7, which is $770,000.
As a first step in using the above method, one needs to find a listed company carrying on a business similar to the business of the company to be valued. Next, obtain a copy of the most recent financial statements published by the company, from which the NPAT and EPS of the company can be obtained. Now obtain the recent price quoted for the shares in the company from its Website or the ASX Website.
EPS is a measure of the amount of profit that can be attributed to ordinary shares in the company. If the financial statements of the company do not provide the EPS, it can be calculated by dividing NPAT (after deducting NPAT attributable to any outside equity interests, such as preference shares and any payments made to such outside equity interests) by the total number of ordinary shares on issue. The total number of shares on issue can be got from the balance sheet of the company.
If the PE multiple of the company selected is high it can mean that the shares of the company are overpriced and yet the market is expecting a high return in the future. This could be for several reasons, such as potential for growth in the overseas market or even a change of the CEO. Similarly the PE multiple could be low and the shares underpriced because the company selected is about to be brought under a strict regulatory regime by the Government or it has lost a crucial licence. What is suggested here is that the PE multiple calculated using a typical company in the industry may not totally reflect the situation of the business under review.
PE multiple caution
Since the PE multiple method of valuation is dependent on factors that are approximations, consideration of other relevant performance ratios is recommended, eg dividend per share, dividend yield, dividend cover, net tangible assets per share and cash flow per share.
Ultimately working out the PE multiple is a job for a specialist or professional. It is not a job for a lawyer. It is also not a job for a non-financial business executive who is not properly briefed. But it is useful for everyone to be aware of how the numbers are derived.
http://www.dilanchian.com.au/index.php?option=com_content&task=view&id=166&Itemid=148
Tuesday, 12 December 2006 02:45 Anton Joseph
E-mail | Print | Tags: valuation | business sale/purchase | ip revenue | strategy
When it comes to selling or buying a business the sale price is the greatest obstacle and point of disagreement in many transactions. If there is a reasonable and easily understandable way of determining the value of the business the parties can quickly progress more than half way through the sale process. Although it is said that the right tools must be used to value businesses, no simple method suits all types of businesses. Instead, there are several financial and non-financial performance indicators that are commonly used by businesses to monitor their progress. Some are used to measure profitability whilst others are used to test liquidity.
Financial indicators are normally measured by using ratios calculated using numerical values appearing in the profit and loss account or the balance sheet. Since the indicators are snapshot calculations based on historical figures (figures for the past year), there is an understandable reluctance to always rely on them. This is especially so when a small business is examined for its value for sale.
A prudent business seller or buyer can use financial indicators (such as industry conventions, multiples and ratios) as part of a toolkit to negotiate an acceptable business sale price. One indicator is a price earnings multiple. Elsewhere we have examined business valuation with EBIT multiples.
PE multiple or PE ratio definition
A price earning multiple (PE multiple) is used mostly to estimate the performance of companies whose shares are traded in public and therefore reflect market expectation to a credible extent. The PE multiple of a share is also commonly called its "PE ratio", "earnings multiple", "multiple", "P/E", or "PE").
The PE multiple method, while unorthodox for small and medium-sized businesses, may provide a useful indicator of the value of a business for sale purposes.
Examples of use of PE multiples in Australian business
You can achieve better outcomes as a seller or buyer if you properly prepare for and anticipate positions that various interested parties might hold during the negotiation dance that takes place for a business sale, purchase, takeover, merger or acquisition. It is useful to study prior transactions and to keep a close watch on market developments. Here are recent examples illustrating the use of PE multiples in media commentary, research reports and takeover documents.
Wealth Creator Magazine in its Sep/Oct 2006 issue reviews "hot" stocks in the 2006-07 financial year. In its commentary it says John Fairfax Holdings Ltd (ASX code: FXJ) "...is currently trading on a price earnings of 16 x and provides a yield of 4.5% fully franked..." and Fosters Group Ltd (ASX code: FGL) "...is trading at a price earnings multiple of 15.6 x 2006 earnings, which we believe is reasonable earnings, reduced gearing and upside potential as the cycle improves."
Intersuisse Ltd in an investment research statement dated 24 August 2006 makes a buy recommendation about BHP Billiton (ASX code: BHP) concluding: "We believe the depth and quality of the company's earnings are such that the stock deserved to be placed on a higher price/earnings (p/e) multiple than the prospective p/e of 10.4 times for FY07 and 9.8 times for FY08 and that multiples of at least 12 to 14 times would be more appropriate."
In an Independent Expert's Report Grant Samuel & Associates Pty Ltd assesses the takeover bid by Rank Group Australia Pty Ltd for Burns, Philp & Company Ltd. Grant Samuel states (at its page 18):
"Capitalisation of earnings or cash flows is the most commonly used method for valuation of industrial businesses. This methodology is most appropriate for industrial businesses with a substantial operating history and a consistent earnings trend that is sufficiently stable to be indicative of ongoing earnings potential. This methodology is not particularly suitable for start-up businesses, businesses with an erratic earnings pattern or businesses that have unusual capital expenditure requirements. This methodology involves capitalising the earnings or cash flows of a business at a multiple that reflects the risks of the business and the stream of income that it generates. These multiples can be applied to a number of different earnings or cash flow measures including EBITDA, EBIT or net profit after tax. These are referred to respectively as EBITDA multiples, EBIT multiples and price earnings multiples. Price earnings multiples are commonly used in the context of the sharemarket. EBITDA and EBIT multiples are more commonly used in valuing whole businesses for acquisition purposes where gearing is in the control of the acquirer."
How to calculate the PE multiple for your business
The PE multiple method is the most commonly used earnings capitalisation methodology. It appears in the following two equations:
1.Total value of business = PE multiple x net profit after tax (NPAT)
2.Value per share = PE multiple x earnings per share
The above two equations can be used to provide some indication of the value of a business. First, using the second equation, dividing the market price of a share by the earnings per share you will be able to calculate the PE multiple for the business. Then by multiplying the PE multiple by NPAT a value for the business can be determined.
With a public company, assume the market value of a share of the company is $35 and the earnings per share is $5, then the PE multiple is 25 divided by 5 which is 7. If the NPAT is $110,000 then the value of the business is $110,000 multiplied by 7, which is $770,000.
As a first step in using the above method, one needs to find a listed company carrying on a business similar to the business of the company to be valued. Next, obtain a copy of the most recent financial statements published by the company, from which the NPAT and EPS of the company can be obtained. Now obtain the recent price quoted for the shares in the company from its Website or the ASX Website.
EPS is a measure of the amount of profit that can be attributed to ordinary shares in the company. If the financial statements of the company do not provide the EPS, it can be calculated by dividing NPAT (after deducting NPAT attributable to any outside equity interests, such as preference shares and any payments made to such outside equity interests) by the total number of ordinary shares on issue. The total number of shares on issue can be got from the balance sheet of the company.
If the PE multiple of the company selected is high it can mean that the shares of the company are overpriced and yet the market is expecting a high return in the future. This could be for several reasons, such as potential for growth in the overseas market or even a change of the CEO. Similarly the PE multiple could be low and the shares underpriced because the company selected is about to be brought under a strict regulatory regime by the Government or it has lost a crucial licence. What is suggested here is that the PE multiple calculated using a typical company in the industry may not totally reflect the situation of the business under review.
PE multiple caution
Since the PE multiple method of valuation is dependent on factors that are approximations, consideration of other relevant performance ratios is recommended, eg dividend per share, dividend yield, dividend cover, net tangible assets per share and cash flow per share.
Ultimately working out the PE multiple is a job for a specialist or professional. It is not a job for a lawyer. It is also not a job for a non-financial business executive who is not properly briefed. But it is useful for everyone to be aware of how the numbers are derived.
http://www.dilanchian.com.au/index.php?option=com_content&task=view&id=166&Itemid=148
Modern trading making earnings multiples obsolete
Modern trading making earnings multiples obsolete
by Grace Chen on May 19, 2008
Price to earnings multiples were once the basis of investment decisions. The analysis was simple: the return divided by the stock price should properly valuate a certain company. But with many companies all over the map in both PE and PEG ratios, investors are looking for other guidelines for evaluating an investment. Technical trading has all but taken over the short term trader, and it looks ready to conquer the long term as well.
Old value investors
Warren Buffett dominates the field of value investing. Rather than following the world’s hottest stocks, he looks for companies that are considerably undervalued, both by assets and what he believes the company is really worth. While he’s made a large fortune from his studies on value investing, the markets are seemingly turning out of his favor. Valuing a company is no longer as easy as looking for cheap assets, as many companies have little assets to back their valuations. Others trade at huge multiples of their earnings, while their competitors enjoy smaller ratios, and even others are destined to stay cheap forever due only to the nature of the business.
Case in point
It seems that many companies are selling for high premiums, even with little to back up their valuations. Take for example the internet stocks. Google sells for a PE ratio of 41 but a PEG of 1.02. While Google does sell for an extreme premium over its earnings, adjusted for growth Google is still in the buy range. Compare these statistics to the lesser rival Yahoo, which trades for a PE of 33 and a PEG of 2.8. Even prior to the failed Microsoft bid, Yahoo traded at a similar PE and PEG ratio; for the most part, it’s horribly overvalued.
Traditionally, you would think that the two valuations would come to meet each other in the middle. Google’s price would ultimately rise while Yahoo would shed a few points to come back to earth. Though this is what the rational person would think, it seems like Yahoo will forever enjoy being overpriced and Google will always be under priced. In fact, Google has never traded for a PEG ratio higher than 2. Yahoo has traded for both extremely high PE ratios and PEGs, though its data is somewhat skewed by the y2k internet bubble fiasco.
Has technical analysis beat out fundamentals?
It appears as though technical traders have finally won over the market. By looking at today’s measurements, Yahoo’s stock is kept afloat largely by technical support and resistance, while Google is much the same. The difference in trading techniques even from just 2004 to today would suggest that stocks are now traded more independently than ever. Rarely are stocks compared to reasonable value to their competitors by investors. The new age of trading is systematically making investors “one stock” types, those only willing to trade the ups and downs and day to day of a specific stock, rather than comparing it to its competition.
Investing at its roots has been crippled. The sustainability or profitability of future results are rarely calculated in many investors algorithms. Technical analysis has instead brought trading to a whole new level, where stocks are nearly as good as any other commodity. The earnings of a company no longer matter, nor do its assets, nor its valuation. The digits in the stock price are the few things that matter to most modern day traders; forget the business behind the ticker.
http://www.investortrip.com/modern-trading-making-earnings-multiples-obsolete/
Comment: Ohhhh!!!!!
by Grace Chen on May 19, 2008
Price to earnings multiples were once the basis of investment decisions. The analysis was simple: the return divided by the stock price should properly valuate a certain company. But with many companies all over the map in both PE and PEG ratios, investors are looking for other guidelines for evaluating an investment. Technical trading has all but taken over the short term trader, and it looks ready to conquer the long term as well.
Old value investors
Warren Buffett dominates the field of value investing. Rather than following the world’s hottest stocks, he looks for companies that are considerably undervalued, both by assets and what he believes the company is really worth. While he’s made a large fortune from his studies on value investing, the markets are seemingly turning out of his favor. Valuing a company is no longer as easy as looking for cheap assets, as many companies have little assets to back their valuations. Others trade at huge multiples of their earnings, while their competitors enjoy smaller ratios, and even others are destined to stay cheap forever due only to the nature of the business.
Case in point
It seems that many companies are selling for high premiums, even with little to back up their valuations. Take for example the internet stocks. Google sells for a PE ratio of 41 but a PEG of 1.02. While Google does sell for an extreme premium over its earnings, adjusted for growth Google is still in the buy range. Compare these statistics to the lesser rival Yahoo, which trades for a PE of 33 and a PEG of 2.8. Even prior to the failed Microsoft bid, Yahoo traded at a similar PE and PEG ratio; for the most part, it’s horribly overvalued.
Traditionally, you would think that the two valuations would come to meet each other in the middle. Google’s price would ultimately rise while Yahoo would shed a few points to come back to earth. Though this is what the rational person would think, it seems like Yahoo will forever enjoy being overpriced and Google will always be under priced. In fact, Google has never traded for a PEG ratio higher than 2. Yahoo has traded for both extremely high PE ratios and PEGs, though its data is somewhat skewed by the y2k internet bubble fiasco.
Has technical analysis beat out fundamentals?
It appears as though technical traders have finally won over the market. By looking at today’s measurements, Yahoo’s stock is kept afloat largely by technical support and resistance, while Google is much the same. The difference in trading techniques even from just 2004 to today would suggest that stocks are now traded more independently than ever. Rarely are stocks compared to reasonable value to their competitors by investors. The new age of trading is systematically making investors “one stock” types, those only willing to trade the ups and downs and day to day of a specific stock, rather than comparing it to its competition.
Investing at its roots has been crippled. The sustainability or profitability of future results are rarely calculated in many investors algorithms. Technical analysis has instead brought trading to a whole new level, where stocks are nearly as good as any other commodity. The earnings of a company no longer matter, nor do its assets, nor its valuation. The digits in the stock price are the few things that matter to most modern day traders; forget the business behind the ticker.
http://www.investortrip.com/modern-trading-making-earnings-multiples-obsolete/
Comment: Ohhhh!!!!!
A Crash Course on Earnings Multiples
A Crash Course on Earnings Multiples
As a trusted business advisor you’ve probably heard former business owners telling people that they sold their business for “six times earnings.” As investment bankers, the first question we hear from prospective clients is “Can I get the same multiple if I sell my business?” The answer is an unequivocal "it depends." It depends on a number of things, but first and foremost, it depends on how you define “earnings”.
As all investment bankers and sellers know, “Cash is King.” After all, cash removes the seller’s risk in the transaction. However, when a buyer pays cash for a business, that buyer wants to know exactly how much the business is earning.
Let’s start with what seems to be a pretty basic concept: earnings.
The Definitions of Earnings
There are several definitions of earnings; each is potentially different from the other depending on the type of company and the way its owner runs the company. Typical measures of earnings include:
§ Net Operating Income: This is sales less the cost of goods sold and operating expenses.
§ Pre-tax Income: This is net operating income plus non-operating income (like interest on notes, etc.) less non-operating expenses (like one-time, non-recurring expenses).
§ After-tax Income: Pre-tax income, less all company (but not individual) taxes.
§ EBIT: This stands for earnings before interest and taxes.
§ EBITDA: This stands for earnings before interest, taxes, depreciation and amortization
Add to these measures, the need to “adjust" earnings by deducting capital expenditures, and adding back excess rents, excessive salary and bonuses paid to the owner and his or her family. The result is something called:
Owner’s Discretionary Cash Flow or True Cash Flow: This is the amount of pre-tax money distributed to owners via salary, bonus, distributions from the company such as S-distributions, and rental payments in excess of fair market rental value of the equipment or building used in the business. This provides buyers with the most accurate indicator of how much “cash” a company can actually produce and is often the most meaningful indicator of value.
Which brings us back to our original question: Is it realistic for a business owner to expect a six times multiple when he sells his business? There is no one right or wrong answer to this question.
To show you how tricky this can be, let’s look at a former client of ours. His business was not doing well. He had revenues of approximately $7 million but, even using the most generous definition of earnings, the company was not earning more that about $100,000 per year. We ultimately sold the company to a buyer of distressed companies who paid book value for its assets or about $2 million. Despite this low value, our client was extremely happy because his business sold for 20 times earnings! In this case the buyer was buying assets, not earnings, so an earning multiple wasn’t even appropriate.
To determine which measure of earnings is appropriate for a business, you need to look first at how the seller’s industry defines “earnings”. This "earnings" measure reflects how much a buyer can afford to pay for the business. The actual multiple applied will be based on:
§ which definition of cash flow is being used,
§ what is appropriate for a given industry,
§ what the company’s specific growth prospects are,
§ how the company’s earnings compare with similar companies in the same industry, and finally
§ how the company’s earnings compare with the company’s asset value.
Richard E. Jackim, JD, MBA, CEPA is the author of the critically acclaimed book, “The $10 Trillion Opportunity: Designing Successful Exit Strategies for Middle Market Business Owners”, available at http://www.exit-planning-institute.org/
http://www.imakenews.com/epi_hfco/e_article001197834.cfm?x=bdnqbsy,w
As a trusted business advisor you’ve probably heard former business owners telling people that they sold their business for “six times earnings.” As investment bankers, the first question we hear from prospective clients is “Can I get the same multiple if I sell my business?” The answer is an unequivocal "it depends." It depends on a number of things, but first and foremost, it depends on how you define “earnings”.
As all investment bankers and sellers know, “Cash is King.” After all, cash removes the seller’s risk in the transaction. However, when a buyer pays cash for a business, that buyer wants to know exactly how much the business is earning.
Let’s start with what seems to be a pretty basic concept: earnings.
The Definitions of Earnings
There are several definitions of earnings; each is potentially different from the other depending on the type of company and the way its owner runs the company. Typical measures of earnings include:
§ Net Operating Income: This is sales less the cost of goods sold and operating expenses.
§ Pre-tax Income: This is net operating income plus non-operating income (like interest on notes, etc.) less non-operating expenses (like one-time, non-recurring expenses).
§ After-tax Income: Pre-tax income, less all company (but not individual) taxes.
§ EBIT: This stands for earnings before interest and taxes.
§ EBITDA: This stands for earnings before interest, taxes, depreciation and amortization
Add to these measures, the need to “adjust" earnings by deducting capital expenditures, and adding back excess rents, excessive salary and bonuses paid to the owner and his or her family. The result is something called:
Owner’s Discretionary Cash Flow or True Cash Flow: This is the amount of pre-tax money distributed to owners via salary, bonus, distributions from the company such as S-distributions, and rental payments in excess of fair market rental value of the equipment or building used in the business. This provides buyers with the most accurate indicator of how much “cash” a company can actually produce and is often the most meaningful indicator of value.
Which brings us back to our original question: Is it realistic for a business owner to expect a six times multiple when he sells his business? There is no one right or wrong answer to this question.
To show you how tricky this can be, let’s look at a former client of ours. His business was not doing well. He had revenues of approximately $7 million but, even using the most generous definition of earnings, the company was not earning more that about $100,000 per year. We ultimately sold the company to a buyer of distressed companies who paid book value for its assets or about $2 million. Despite this low value, our client was extremely happy because his business sold for 20 times earnings! In this case the buyer was buying assets, not earnings, so an earning multiple wasn’t even appropriate.
To determine which measure of earnings is appropriate for a business, you need to look first at how the seller’s industry defines “earnings”. This "earnings" measure reflects how much a buyer can afford to pay for the business. The actual multiple applied will be based on:
§ which definition of cash flow is being used,
§ what is appropriate for a given industry,
§ what the company’s specific growth prospects are,
§ how the company’s earnings compare with similar companies in the same industry, and finally
§ how the company’s earnings compare with the company’s asset value.
Richard E. Jackim, JD, MBA, CEPA is the author of the critically acclaimed book, “The $10 Trillion Opportunity: Designing Successful Exit Strategies for Middle Market Business Owners”, available at http://www.exit-planning-institute.org/
http://www.imakenews.com/epi_hfco/e_article001197834.cfm?x=bdnqbsy,w
New Approach to Uncertainty in Business Valuations
- applying a premium or discount to a capitalization rate, or
- adjusting future revenue and
- adjusting future expense projections.
Thomas E. McKee, CMA, CIA, PhD, CPA, is a visiting professor in the department of accounting and legal studies at the College of Charleston, Charleston, S.C.
The earnings multiple valuation method
The earnings multiple valuation method
The earnings multiple valuation method is the preferred valuation method for most situations. It represents what someone would pay if you tried to sell under normal conditions, which is arguably the most appropriate valuation method for private equity investments.
In the broad strokes, this method entails applying an industry-based multiple to the earnings of a business to arrive at an implied enterprise value. From this enterprise value, subtracting net debt gives the equity value. In simple scenarios (involving only ordinary equity), a private equity firm’s relevant investment value is equal to their proportional stake in the investee’s equity.
The subjectivity of this method comes in the following forms:
•Do you use last year’s actual earnings number? Do you use a forecast? If so, whose forecast do you use? And what earnings are we talking about: NPBT, NPAT, EBIT, EBITDA? What about the effect of non-recurring costs, contributions from discontinued business units, forecast acquisition synergies, etc?
•What is an appropriate multiple? Are transactions from six months ago reasonable comparisons? Should I only use transactions from the same industry as comparables? What about company size: should I only compare those of similar size? What if there haven’t been any transactions for 12 months (this is especially applicable now)? Should I use the mean, mode or median of comparable transactions?
There are a lot of questions there and not many answers; it really depends on how honest you want to be with yourself and the limited partners. Here are my suggestions:
•Earnings - You should use the earnings number that you expect at the time of reporting. For example, this may be the current year’s EBIT forecast adjusted for the latest actual earnings figures (that is, if you were below budget, adjust the forecast months accordingly). If the trend is towards using the previous year’s earnings, then you should follow suit.
•Multiple - In the current climate, you may need to look outside your industry for trends, but also make sure to look for similar sized transactions. There’s no perfect multiple to use, but there’s certainly a range that will seem reasonable. I’d say in the current environment that anything over 8-10x would be unreasonable. For mid-market deals, I wouldn’t expect to see multiples over 6-7x, unless there is a strong case for exceptional growth. It may surprise you, but I’m seeing some interesting deals go for 3x now.
You’ll know in your own mind whether you’re being fair with your analysis. Try not to cheat yourself because there’s a real danger that it could come back to haunt you. There’s always the argument that if things really do get better, investors will be glad to see a significant uptick in your next report. If you’re too optimistic now, disappointing them twice will hardly be fun. Also, investors won’t be surprised with value losses now; they’re probably expecting them. So take this opportunity to take an honest look at your portfolio and move on to planning for the upturn (now there’s some positive thinking).
http://www.theprivateequiteer.com/the-earnings-multiple-valuation-method/
The earnings multiple valuation method is the preferred valuation method for most situations. It represents what someone would pay if you tried to sell under normal conditions, which is arguably the most appropriate valuation method for private equity investments.
In the broad strokes, this method entails applying an industry-based multiple to the earnings of a business to arrive at an implied enterprise value. From this enterprise value, subtracting net debt gives the equity value. In simple scenarios (involving only ordinary equity), a private equity firm’s relevant investment value is equal to their proportional stake in the investee’s equity.
The subjectivity of this method comes in the following forms:
•Do you use last year’s actual earnings number? Do you use a forecast? If so, whose forecast do you use? And what earnings are we talking about: NPBT, NPAT, EBIT, EBITDA? What about the effect of non-recurring costs, contributions from discontinued business units, forecast acquisition synergies, etc?
•What is an appropriate multiple? Are transactions from six months ago reasonable comparisons? Should I only use transactions from the same industry as comparables? What about company size: should I only compare those of similar size? What if there haven’t been any transactions for 12 months (this is especially applicable now)? Should I use the mean, mode or median of comparable transactions?
There are a lot of questions there and not many answers; it really depends on how honest you want to be with yourself and the limited partners. Here are my suggestions:
•Earnings - You should use the earnings number that you expect at the time of reporting. For example, this may be the current year’s EBIT forecast adjusted for the latest actual earnings figures (that is, if you were below budget, adjust the forecast months accordingly). If the trend is towards using the previous year’s earnings, then you should follow suit.
•Multiple - In the current climate, you may need to look outside your industry for trends, but also make sure to look for similar sized transactions. There’s no perfect multiple to use, but there’s certainly a range that will seem reasonable. I’d say in the current environment that anything over 8-10x would be unreasonable. For mid-market deals, I wouldn’t expect to see multiples over 6-7x, unless there is a strong case for exceptional growth. It may surprise you, but I’m seeing some interesting deals go for 3x now.
You’ll know in your own mind whether you’re being fair with your analysis. Try not to cheat yourself because there’s a real danger that it could come back to haunt you. There’s always the argument that if things really do get better, investors will be glad to see a significant uptick in your next report. If you’re too optimistic now, disappointing them twice will hardly be fun. Also, investors won’t be surprised with value losses now; they’re probably expecting them. So take this opportunity to take an honest look at your portfolio and move on to planning for the upturn (now there’s some positive thinking).
http://www.theprivateequiteer.com/the-earnings-multiple-valuation-method/
Earnings Multiple: A Valuation Method
Among various methods for determining the value of a small business, the "earnings multiple" approach is almost universally considered to be the most acceptable and useful.
- on the one hand--a manufacturing company in a troubled industry with several hundred thousands in hard assets, but less than $3,500 per month in owner earnings, and
- on the other hand, a distributorship generating more than $20,000 per month in owner earnings, and operated successfully with little in the way of assets--perhaps just a fax-capable telephone and an address book.
http://www.usabizmart.com/blog/earnings-multiple-business-valuation-120508.php
Price to Future Earnings
Price to Future Earnings
The price earnings ratio cannot be estimated for firms with negative earnings per share. While there are other multiples, such as the price to sales ratio, that can still be estimated for these firms, there are analysts who prefer the familiar ground of PE ratios.
One way in which the price earnings ratio can be modified for use in these firms is to use expected earnings per share in a future year in computing the PE ratio.
For instance, assume that a firm has earnings per share currently of -$2.00 but is expected to report earnings per share in 5 years of $1.50 per share. You could divide the price today by the expected earnings per share in five years to obtain a PE ratio.
How would such a PE ratio be used? The PE ratio for all of the comparable firms would also have to be estimated using expected earnings per share in 5 years and the resulting values can be compared across firms. Assuming that all of the firms in the sample share the same risk, growth and payout characteristics after year 5, firms with low price to future earnings ratios will be considered undervalued.
An alternative approach is to estimate a target price for the negative earnings firm in five years, divide that price by earnings in that year and compare this PE ratio to the PE ratio of comparable firms today.
While this modified version of the PE ratio increases the reach of PE ratios to cover many firms that have negative earnings today, it is difficult to control for differences between the firm being valued and the comparable firms, since you are comparing firms at different points in time.
Illustration: Analyzing Amazon using Price to Future Earnings per share Amazon.com has negative earnings per share in 2000. Based upon consensus estimates, analysts expect it to lose $0.63 per share in 2001 but is expected to earn $1.50 per share in 2004. At its current price of $49 per share, this would translate into a price/future earnings per share of 32.67.
In the first approach, this multiple of earnings can be compared to the price/future earnings ratios of comparable firms. If you define comparable firms to be e-tailers, Amazon looks reasonably attractive since the average price/future earnings per share of etailers
is 65. If, on the other hand, you compared Amazon’s price to future earnings per share to the average price to future earnings per share (in 2004) of specialty retailers, the picture is bleaker. The average price to future earnings for these firms is 12, which would lead to a conclusion that Amazon is over valued. Implicit in both these comparisons is the assumption that Amazon will have similar risk, growth and cash flow characteristics as the comparable firms in five years. You could argue that Amazon will still have much higher growth potential than other specialty retailers after 2004 and that this could explain the difference in multiples. You could even use differences in expected growth after 2004 to adjust for the differences, but estimates of these growth rates are usually not made by analysts.
In the second approach, the current price to earnings ratio for specialty retailers, which is estimated to be 20.31, and the expected earnings per share of Amazon in 2004, which is estimated to be $1.50. This would yield a target price of $30.46. Discounting this price back to the present using Amazon’s cost of equity of 12.94% results in a value per share.
= Target price in five years / (1+ Cost of equity)^5
Value per share
= 30.46 / (1.1294^5)
= $16.58
At its current price of $49, this would again suggest an over valued stock. Here again, though, you are assuming that Amazon in five years will resemble a specialty retailer today in terms of risk, growth and cash flow characteristics.
http://zonecours.hec.ca/documents/A2009-1-1877347.ch18-earning-multiple(1).pdf
The price earnings ratio cannot be estimated for firms with negative earnings per share. While there are other multiples, such as the price to sales ratio, that can still be estimated for these firms, there are analysts who prefer the familiar ground of PE ratios.
One way in which the price earnings ratio can be modified for use in these firms is to use expected earnings per share in a future year in computing the PE ratio.
For instance, assume that a firm has earnings per share currently of -$2.00 but is expected to report earnings per share in 5 years of $1.50 per share. You could divide the price today by the expected earnings per share in five years to obtain a PE ratio.
How would such a PE ratio be used? The PE ratio for all of the comparable firms would also have to be estimated using expected earnings per share in 5 years and the resulting values can be compared across firms. Assuming that all of the firms in the sample share the same risk, growth and payout characteristics after year 5, firms with low price to future earnings ratios will be considered undervalued.
An alternative approach is to estimate a target price for the negative earnings firm in five years, divide that price by earnings in that year and compare this PE ratio to the PE ratio of comparable firms today.
While this modified version of the PE ratio increases the reach of PE ratios to cover many firms that have negative earnings today, it is difficult to control for differences between the firm being valued and the comparable firms, since you are comparing firms at different points in time.
Illustration: Analyzing Amazon using Price to Future Earnings per share Amazon.com has negative earnings per share in 2000. Based upon consensus estimates, analysts expect it to lose $0.63 per share in 2001 but is expected to earn $1.50 per share in 2004. At its current price of $49 per share, this would translate into a price/future earnings per share of 32.67.
In the first approach, this multiple of earnings can be compared to the price/future earnings ratios of comparable firms. If you define comparable firms to be e-tailers, Amazon looks reasonably attractive since the average price/future earnings per share of etailers
is 65. If, on the other hand, you compared Amazon’s price to future earnings per share to the average price to future earnings per share (in 2004) of specialty retailers, the picture is bleaker. The average price to future earnings for these firms is 12, which would lead to a conclusion that Amazon is over valued. Implicit in both these comparisons is the assumption that Amazon will have similar risk, growth and cash flow characteristics as the comparable firms in five years. You could argue that Amazon will still have much higher growth potential than other specialty retailers after 2004 and that this could explain the difference in multiples. You could even use differences in expected growth after 2004 to adjust for the differences, but estimates of these growth rates are usually not made by analysts.
In the second approach, the current price to earnings ratio for specialty retailers, which is estimated to be 20.31, and the expected earnings per share of Amazon in 2004, which is estimated to be $1.50. This would yield a target price of $30.46. Discounting this price back to the present using Amazon’s cost of equity of 12.94% results in a value per share.
= Target price in five years / (1+ Cost of equity)^5
Value per share
= 30.46 / (1.1294^5)
= $16.58
At its current price of $49, this would again suggest an over valued stock. Here again, though, you are assuming that Amazon in five years will resemble a specialty retailer today in terms of risk, growth and cash flow characteristics.
http://zonecours.hec.ca/documents/A2009-1-1877347.ch18-earning-multiple(1).pdf
Relative PE Ratios and Market Growth
Relative PE Ratios and Market Growth
As the expected growth rate on the market increases, the divergence in PE ratios increases, resulting in a bigger range for relative PE ratios.
This can be illustrated very simply, if you consider the relative PE for a company that grows at half the rate as the market.
When the market growth rate is 4%, this firm will trade at a PE that is roughly 80% of the market PE. When the market growth rate increases to 10%, the firm will trade at a PE that is 60% of the market PE.
This has consequences for analysts who use relative PE ratios. Stocks of firms whose earnings grow at a rate much lower than the market growth rate, will often look cheap on a relative PE basis when the market growth rate is high, and expensive when the market growth rate is low.
http://zonecours.hec.ca/documents/A2009-1-1877347.ch18-earning-multiple(1).pdf
As the expected growth rate on the market increases, the divergence in PE ratios increases, resulting in a bigger range for relative PE ratios.
This can be illustrated very simply, if you consider the relative PE for a company that grows at half the rate as the market.
When the market growth rate is 4%, this firm will trade at a PE that is roughly 80% of the market PE. When the market growth rate increases to 10%, the firm will trade at a PE that is 60% of the market PE.
This has consequences for analysts who use relative PE ratios. Stocks of firms whose earnings grow at a rate much lower than the market growth rate, will often look cheap on a relative PE basis when the market growth rate is high, and expensive when the market growth rate is low.
http://zonecours.hec.ca/documents/A2009-1-1877347.ch18-earning-multiple(1).pdf
Relative PE Ratios
Note that the relative PE ratio is a function of all of the variables that determine the PE ratio – the expected growth rate, the risk of the firm and the payout ratio – but stated in terms relative to the market. Thus, a firm’s relative PE ratio is a function of its relative growth rate in earnings per share (Growth Ratefirm/Growth Ratemarket), its relative cost of equity (Cost of Equityfirm/Cost of Equitymarket) and its relative return on equity (ROEfirm/ROEmarket). Firms with higher relative growth, lower relative costs of equity and higher relative returns on equity should trade at higher relative PE ratios.
There are two ways in which they are used in valuation.
- One is to compare a firm’s relative PE ratio to its historical norms; Ford, for instance, may be viewed as under valued because its relative PE ratio of 0.24 today is lower than the relative PE that it has historically traded at.
- The other is to compare relative PE ratios of firms in different markets; this allows comparisons when PE ratios in different markets vary significantly.
Illustration:
Comparing Relative PE ratios for automobile stock – December 2000
In December 2000, the S&P 500 was trading at a multiple of 29.09 times earnings. At the same time, Ford, Chrysler and GM were trading at 7.05, 8.95 and 6.93 times earnings, respectively. Their relative PE ratios are reported.
Relative PE for Ford = 7.05 / 29.09 = 0.24
Relative PE for Chrysler = 8.95 / 29.09 = 0.30
Relative PE for GM = 6.93 / 29.09 = 0.24
Does this mean that GM and Ford are more under valued than Chrysler? Not necessarily, since there are differences in growth and risk across these firms. In fact, Figure 18.13 graphs the relative PE ratios of the three firms going back to the early 1990s. In 1993, GM traded at a significantly higher relative PE ratio than the other two firms. In fact, the conventional wisdom until that point in time was that GM was less risky than the other two firms because of its dominance of the auto market and should trade at a higher multiple of earnings. During the 1990s, the premium paid for GM largely disappeared and the three automobile firms traded at roughly the same relative PE ratios.
http://zonecours.hec.ca/documents/A2009-1-1877347.ch18-earning-multiple(1).pdf
Whose Growth rate to use in PEG calculations?
Whose Growth rate?
In computing PEG ratios, we are often faced with the question of whose growth rate we will use in estimating the PEG ratios.
If the number of firms in the sample is small, you could estimate expected growth for each firm yourself.
If the number of firms increases, you will have no choice but to use analyst estimates of expected growth for the firms. Will this expose your analyses to all of the biases in these estimates? Not necessarily. If the bias is uniform – for instance, analysts over estimate growth for all of the firms in the sector – you will still be able to make comparisons of PEG ratios across firms and draw reasonable conclusions.
http://zonecours.hec.ca/documents/A2009-1-1877347.ch18-earning-multiple(1).pdf
In computing PEG ratios, we are often faced with the question of whose growth rate we will use in estimating the PEG ratios.
If the number of firms in the sample is small, you could estimate expected growth for each firm yourself.
If the number of firms increases, you will have no choice but to use analyst estimates of expected growth for the firms. Will this expose your analyses to all of the biases in these estimates? Not necessarily. If the bias is uniform – for instance, analysts over estimate growth for all of the firms in the sector – you will still be able to make comparisons of PEG ratios across firms and draw reasonable conclusions.
http://zonecours.hec.ca/documents/A2009-1-1877347.ch18-earning-multiple(1).pdf
Using the PEG Ratio for Comparisons
- the risk,
- growth potential and
- the payout ratio of a firm.
In this section, you look at ways of using the PEG ratio and examine some of the problems in comparing PEG ratios across firms.
Direct Comparisons
PEG Ratios and Retention Ratios
Most analysts who use PEG ratios compute them for firms within a business (or comparable firm group) and compare these ratios.
Firms with lower PEG ratios are usually viewed as undervalued, even if growth rates are different across the firms being compared.
This approach is based upon the incorrect perception that PEG ratios control for differences in growth. In fact, direct comparisons of PEG ratios work only if firms are similar in terms of growth potential, risk and payout ratios (or returns on equity). If this were the case, however, you could just as easily compare PE ratios across firms.
When PEG ratios are compared across firms with different risk, growth and payout characteristics and judgments are made about valuations based on this comparison, you will tend to find that:
· Lower growth firms will have higher PEG ratios and look more over valued than higher growth firms, because PEG ratios tend to decrease as the growth rate decreases, at least initially.
· Higher risk firms will have lower PEG ratios and look more under valued than higher risk firms, because PEG ratios tend to decrease as a firm’s risk increases.
· Firms with lower returns on equity (or lower payout ratios) will have lower PEG ratios and look more under valued than firms with higher returns on equity and higher payout ratios.
In short, firms that look under valued based upon direct comparison of the PEG ratios may in fact be firms with higher risk, higher growth or lower returns on equity that are, in fact, correctly valued.
Controlled Comparisons
When comparing PEG ratios across firms, then, it is important that you control for differences in risk, growth and payout ratios when making the comparison. While you can attempt to do this subjectively, the complicated relationship between PEG ratios and these fundamentals can pose a challenge. A far more promising route is to use the regression approach suggested for PE ratios and to relate the PEG ratios of the firms being compared to measures of risk, growth potential and the payout ratio.
As with the PE ratio, the comparable firms in this analysis can be defined narrowly (as other firms in the same business), more expansively as firms in the same sector or as all firms in the market. In running these regressions, all the caveats that were presented for the PE regression continue to apply. The independent variables continue to be correlated with each other and the relationship is both unstable and likely to be nonlinear.
A scatter plot of PEG ratios against growth rates, for all U.S. stocks in July 2000, indicates the degree of non-linearity.
In running the regression, especially when the sample contains firms with very different levels of growth, you should transform the growth rate to make the relationship more linear. A scatter plot of PEG ratios against the natural log of the expected growth rate, for
instance, yields a much more linear relationship.
http://zonecours.hec.ca/documents/A2009-1-1877347.ch18-earning-multiple(1).pdf
Using PEG ratio: Not all growth is created equal.
As the risk increases, the PEG ratio of a firm decreases. When comparing the PEG ratios of firms with different risk levels, even within the same sector, the riskier firms should have lower PEG ratios than safer firms.
Not all growth is created equal. A firm that is able to grow at 20% a year, while paying out 50% of its earnings to stockholders, has higher quality growth than another firm with the same growth rate that reinvests all of its earnings back. Thus, the PEG ratio should increase as the payout ratio increases, for any given growth rate.
As with the PE ratio, the PEG ratio is used to compare the valuations of firms that are in the same business. The PEG ratio is a function of:
As with the PE ratio, the PEG ratio is used to compare the valuations of firms that are in the same business. The PEG ratio is a function of:
- the risk,
- growth potential and
- the payout ratio of a firm.
The PEG Ratio
The PEG Ratio
Portfolio managers and analysts sometimes compare PE ratios to the expected growth rate to identify undervalued and overvalued stocks. In the simplest form of this approach, firms with PE ratios less than their expected growth rate are viewed as undervalued. In its more general form, the ratio of PE ratio to growth is used as a measure of relative value, with a lower value believed to indicate that a firm is under valued.
For many analysts, especially those tracking firms in high-growth sectors, these approaches offer the promise of a way of controlling for differences in growth across firms, while preserving the inherent simplicity of a multiple.
Definition of the PEG Ratio
The PEG ratio is defined to be the price earnings ratio divided by the expected growth rate in earnings per share:
PEG ratio = PE ratio /Expected Growth Rate
For instance, a firm with a PE ratio of 20 and a growth rate of 10% is estimated to have a PEG ratio of 2.
Consistency requires the growth rate used in this estimate be the growth rate in earnings per share, rather than operating income, because this is an equity multiple.
Given the many definitions of the PE ratio, which one should you use to estimate the PEG ratio? The answer depends upon the base on which the expected growth rate is computed. If the expected growth rate in earnings per share is based upon earnings in the most recent year (current earnings), the PE ratio that should be used is the current PE ratio. If it based upon trailing earnings, the PE ratio used should be the trailing PE ratio.
The forward PE ratio should never be used in this computation, since it may result in a double counting of growth. To see why, assume that you have a firm with a current price of $30 and current earnings per share of $1.50. The firm is expected to double its earnings per share over the next year (forward earnings per share will be $3.00) and then have earnings growth of 5% a year for the following four years. An analyst estimating growth in earnings per share for this firm, with the current earnings per share as a base, will estimate a growth rate of 19.44%.
A consistent estimate of the PEG ratio would require using a current PE and the expected growth rate over the next 5 years.
Building upon the theme of uniformity, the PEG ratio should be estimated using the same growth estimates for all firms in the sample. You should not, for instance, use 5-year growth rates for some firms and 1-year growth rates for others. One way of ensuring uniformity is to use the same source for earnings growth estimates for all the firms in the group.
For instance, both I/B/E/S and Zacks provide consensus estimates from analysts of earnings per share growth over the next 5 years for most U.S. firms.
As the risk increases, the PEG ratio of a firm decreases. When comparing the PEG ratios of firms with different risk levels, even within the same sector, the riskier firms should have lower PEG ratios than safer firms.
Not all growth is created equal. A firm that is able to grow at 20% a year, while paying out 50% of its earnings to stockholders, has higher quality growth than another firm with the same growth rate that reinvests all of its earnings back. Thus, the PEG ratio should increase as the payout ratio increases, for any given growth rate.
http://zonecours.hec.ca/documents/A2009-1-1877347.ch18-earning-multiple(1).pdf
Portfolio managers and analysts sometimes compare PE ratios to the expected growth rate to identify undervalued and overvalued stocks. In the simplest form of this approach, firms with PE ratios less than their expected growth rate are viewed as undervalued. In its more general form, the ratio of PE ratio to growth is used as a measure of relative value, with a lower value believed to indicate that a firm is under valued.
For many analysts, especially those tracking firms in high-growth sectors, these approaches offer the promise of a way of controlling for differences in growth across firms, while preserving the inherent simplicity of a multiple.
Definition of the PEG Ratio
The PEG ratio is defined to be the price earnings ratio divided by the expected growth rate in earnings per share:
PEG ratio = PE ratio /Expected Growth Rate
For instance, a firm with a PE ratio of 20 and a growth rate of 10% is estimated to have a PEG ratio of 2.
Consistency requires the growth rate used in this estimate be the growth rate in earnings per share, rather than operating income, because this is an equity multiple.
Given the many definitions of the PE ratio, which one should you use to estimate the PEG ratio? The answer depends upon the base on which the expected growth rate is computed. If the expected growth rate in earnings per share is based upon earnings in the most recent year (current earnings), the PE ratio that should be used is the current PE ratio. If it based upon trailing earnings, the PE ratio used should be the trailing PE ratio.
The forward PE ratio should never be used in this computation, since it may result in a double counting of growth. To see why, assume that you have a firm with a current price of $30 and current earnings per share of $1.50. The firm is expected to double its earnings per share over the next year (forward earnings per share will be $3.00) and then have earnings growth of 5% a year for the following four years. An analyst estimating growth in earnings per share for this firm, with the current earnings per share as a base, will estimate a growth rate of 19.44%.
A consistent estimate of the PEG ratio would require using a current PE and the expected growth rate over the next 5 years.
Building upon the theme of uniformity, the PEG ratio should be estimated using the same growth estimates for all firms in the sample. You should not, for instance, use 5-year growth rates for some firms and 1-year growth rates for others. One way of ensuring uniformity is to use the same source for earnings growth estimates for all the firms in the group.
For instance, both I/B/E/S and Zacks provide consensus estimates from analysts of earnings per share growth over the next 5 years for most U.S. firms.
As the risk increases, the PEG ratio of a firm decreases. When comparing the PEG ratios of firms with different risk levels, even within the same sector, the riskier firms should have lower PEG ratios than safer firms.
Not all growth is created equal. A firm that is able to grow at 20% a year, while paying out 50% of its earnings to stockholders, has higher quality growth than another firm with the same growth rate that reinvests all of its earnings back. Thus, the PEG ratio should increase as the payout ratio increases, for any given growth rate.
http://zonecours.hec.ca/documents/A2009-1-1877347.ch18-earning-multiple(1).pdf
Normalizing Earnings for PE ratios
Normalizing Earnings for PE ratios
The dependence of PE ratios on current earnings makes them particularly vulnerable to the year-to-year swings that often characterize reported earnings.
In making comparisons, therefore, it may make much more sense to use normalized earnings.
The process used to normalize earnings varies widely but the most common approach is a simple averaging of earnings across time.
For a cyclical firm, for instance, you would average the earnings per share across a cycle. In doing so, you should adjust for inflation.
If you do decide to normalize earnings for the firm you are valuing, consistency demands that you normalize it for the comparable firms in the sample as well.
http://zonecours.hec.ca/documents/A2009-1-1877347.ch18-earning-multiple(1).pdf
The dependence of PE ratios on current earnings makes them particularly vulnerable to the year-to-year swings that often characterize reported earnings.
In making comparisons, therefore, it may make much more sense to use normalized earnings.
The process used to normalize earnings varies widely but the most common approach is a simple averaging of earnings across time.
For a cyclical firm, for instance, you would average the earnings per share across a cycle. In doing so, you should adjust for inflation.
If you do decide to normalize earnings for the firm you are valuing, consistency demands that you normalize it for the comparable firms in the sample as well.
http://zonecours.hec.ca/documents/A2009-1-1877347.ch18-earning-multiple(1).pdf
Comparing PE Ratios across firms in a sector
Comparing PE Ratios across firms in a sector
The most common approach to estimating the PE ratio for a firm is to choose a group of comparable firms, to calculate the average PE ratio for this group and to subjectively adjust this average for differences between the firm being valued and the comparable firms. There are several problems with this approach.
First, the definition of a comparable' firm is essentially a subjective one. The use of other firms in the industry as the control group is often not the solution because firms within the same industry can have very different business mixes and risk and growth profiles. There is also plenty of potential for bias. One clear example of this is in takeovers, where a high PE ratio for the target firm is justified, using the price-earnings ratios of a control group of other firms that have been taken over. This group is designed to give an upward biased estimate of the PE ratio and other multiples.
Second, even when a legitimate group of comparable firms can be constructed, differences will continue to persist in fundamentals between the firm being valued and this group. It is very difficult to subjectively adjust for differences across firms. Thus, knowing that a firm has much higher growth potential than other firms in the comparable firm list would lead you to estimate a higher PE ratio for that firm, but how much higher is an open question.
The alternative to subjective adjustments is to control explicitly for the one or two variables that you believe account for the bulk of the differences in PE ratios across companies in the sector in a regression. The regression equation can then be used to estimate predicted PE ratios for each firm in the sector and these predicted values can be compared to the actual PE ratios to make judgments on whether stocks are under or over priced.
http://zonecours.hec.ca/documents/A2009-1-1877347.ch18-earning-multiple(1).pdf
The most common approach to estimating the PE ratio for a firm is to choose a group of comparable firms, to calculate the average PE ratio for this group and to subjectively adjust this average for differences between the firm being valued and the comparable firms. There are several problems with this approach.
First, the definition of a comparable' firm is essentially a subjective one. The use of other firms in the industry as the control group is often not the solution because firms within the same industry can have very different business mixes and risk and growth profiles. There is also plenty of potential for bias. One clear example of this is in takeovers, where a high PE ratio for the target firm is justified, using the price-earnings ratios of a control group of other firms that have been taken over. This group is designed to give an upward biased estimate of the PE ratio and other multiples.
Second, even when a legitimate group of comparable firms can be constructed, differences will continue to persist in fundamentals between the firm being valued and this group. It is very difficult to subjectively adjust for differences across firms. Thus, knowing that a firm has much higher growth potential than other firms in the comparable firm list would lead you to estimate a higher PE ratio for that firm, but how much higher is an open question.
The alternative to subjective adjustments is to control explicitly for the one or two variables that you believe account for the bulk of the differences in PE ratios across companies in the sector in a regression. The regression equation can then be used to estimate predicted PE ratios for each firm in the sector and these predicted values can be compared to the actual PE ratios to make judgments on whether stocks are under or over priced.
http://zonecours.hec.ca/documents/A2009-1-1877347.ch18-earning-multiple(1).pdf
Subscribe to:
Posts (Atom)