Jefferies: Session 6 exercise – DCF value analysis

The total enterprise value derived using DCF is often split between the value in the explicit forecast period and terminal value. However, this focus on the timing of cash flows does not provide insight into the sources of value creation. We provide an alternative approach that analyses the value based on the timing of the value created rather than the timing of the cash flows generated.

We would like you to use our DCF value analysis model to produce a quick ‘back of the envelope’ analysis of value for your sector.

Instructions

  • Download the DCF value analysis model here.
  • Set the year 1 (2021) NOPAT to 100 (we are not interested in the absolute valuation and so do not need the absolute sector aggregate figures).
  • Enter NOPAT amounts for years 2 to 5 to reflect your growth expectations for the sector for the next 5 years (i.e. if you forecast 20% profit growth for 2022 enter 120 for year 2).
  • Rather than enter separate amounts for depreciation, capex and working capital changes we are going to combine these into a single figure. Therefore (1) Enter zeros for the depreciation and net working capital change; and (2) Enter amounts in the capital expenditure row that represent your estimates of the level of net new investment (i.e. capex less depreciation) relative to NOPAT.
  • Enter a cost of capital.
  • Enter value drivers for both terminal value periods. If you wish to have a single period, enter zero for the length of stage 1 and only enter values for stage 2.
  • After entering the above, observe the resulting DCF enterprise value and the implied EV/NOPAT multiple. Adjust your DCF model inputs to obtain a multiple that approximates the current market (1e) EV/NOPAT multiple for your sector.

NOTE: If you do not use EV-based analysis in your sector, apply the model to equity flows instead. This means you should use earnings in place of NOPAT, cost of equity in place of WACC and ROE in place of ROIC. The implied valuation is therefore an equity value and the multiple a PE ratio.

Entering your answer in Zoom

Once you are happy with your figures, please enter your answer into the Zoom chat. We are looking for something like this …

Sector name: 57%, 32%, 8%, 3%

Where the percentages represent the 4 stages of value analysis starting with current profitability value and ending with the long-term franchise value.

Clearly there is no right answer. However, for ‘value’ sectors we would expect a greater portion of value to be represented by current profitability (the first percentage) with the opposite effect for ‘growth’ sectors.

LINKS

DCF value analysis model