Established trading company
A company has been trading for around 10 years and wishes to incentivise its employees by granting them a pool of up to 5% of the company’s enlarged share capital. The company is not currently in the process of a sale or flotation. The company’s most recent performance is:
|Full audited accounts to Nov 2010||Full audited accounts to Nov 2011||Management accounts to Nov 2012|
|Post tax profit||£525k||£600k||£600k|
|Dividends paid||£1 per share||£1 per share||£1 per share|
The fully diluted share capital would be 200,000 £1 ordinary shares.
The management accounts for 2012 have been utilised as it is considered that the last published accounts (to Nov 2011) are now stale at the valuation and it is reasonable to take into account more up to date information.
Based on this record of profits, maintainable earnings are taken as £600k per annum, which equates to earnings per share (eps) of £3, on the basis of the fully diluted share capital.
Dividends are maintainable at £1 per share and are well covered.
A quoted company (on full London Stock Exchange) that operates in the same market as this company, shows a price earnings (p/e) ratio of 12.03. Applying a discount of around 60% to 65% to the quoted p/e – to reflect the differences between a minority holding in this company and the quoted company – indicates a final p/e ratio of 4.5*
Applying a p/e of 4.5 to eps of £3 then indicates an AMV of £13.50 per share for a minority holding in this company.
Looking at the dividends, the same quoted company had a dividend yield of 3.40%. Increasing this by a multiple of say two – once again to reflect the differences between the quoted company and this company – indicates a revised yield % of 7.4%.
Applying this yield to the maintainable dividend of £1 per share (equal to 100%) then indicates an AMV of £13.50 per share, ie the same as the valuation on an earnings basis.
The UMV can then be taken at around a 20% premium to the AMV, ie at £16.20 per share, to reflect the fact that the Articles of Association for the company give the Board full veto on any share transfers and this and other restrictions are to be ignored when considering the UMV.
* A suitable multiple (of profits) may also be arrived at by reference to data on the sales of companies – both private and quoted – in similar markets to the company under consideration. Careful research of the terms of such company sales should be undertaken by the valuer before such transactional multiples are utilised, to ensure that the implied multiples are, so far as possible, reliable and comparable. If the company has a high level of debt on its balance sheet, which reduces any post tax profits substantially, the value of its shares can be arrived at by reference to an Enterprise Valuation (EV) looking at its maintainable Earnings Before Interest Depreciation and Amortisation (EBITDA). It is then possible to apply an EBITDA multiple from a comparable quoted company. Deducting the company’s debt from the resulting EV will then leave the Equity Value, from which the minority share value can then be assessed, utilising appropriate discounts.
Whilst EBITDA multiples for quoted companies are not available in publications such as the Financial Times, these can be calculated by the valuer, usually by adding a particular quoted company’s Market Capitalisation to its long term debt, to arrive at its EV. The EBITDA for the quoted company can then be calculated by reference to its accounts and dividing the EV by the EBITDA, to give the multiple. It can then be appropriate to discount the quoted company’s EBITDA multiple to reflect the differences between the quoted company and the unquoted company which is being valued.