The valuation is an essential part of any investment, we provided basics of thinking and calculations. It was presented in our meetup group, it can be used as referenced for future study.

1. Vienna Value Investing
Meetup #6 - Valuation

2. Why this meetup?
CREATE VALUE INVESTING HUB IN VIENNA
SHARE IDEAS AND EXPERIENCE AMONG MEMBERS
LEARNING INVESTMENT RESEARCH TOGETHER
THIS IS AN OPEN DISCUSSION MEETUP, PLEASE ASK
WHENEVER YOU LIKE

3. Who are we?
MARTIN BODOCKY
CEO OF MINT AI
AI AND FINTECH GEEK
SOFTWARE ARCHITECT
PROUD “NEWBIE” FATHER
JEAN PHILIPPE TISSOT
VALUE INVESTOR / BUSINESS ENTREPRENEUR
THE TISSOT AYRAM PARTNERSHIP
HOTPOD YOGA VIENNA
EX BNP AND J.P MORGAN

4. Disclaimer
WE ARE NOT INVESTMENT ADVISORS.
WE ARE NOT RECOMMENDING TO BUY OR SELL.
WE ARE NOT TAX ADVISORS.
ANY DECISION YOU CONCLUDED FROM THIS SESSION
IS YOURS NOT OURS, YOU ARE IN CONTROL.

5. Agenda
1. INVESTING, SPECULATION AND BIAS
2. VALUATION VS PRICING
3. VALUATION MODELS
4. DIVIDEND DISCOUNT MODEL
5. DISCOUNT CASH FLOW MODEL

6. Speculating Vs. Investing

7. INVESTOR
• ANALYSE COMPANY, ITS
UNDERLYING ASSETS
• ASPIRE “ADEQUATE”,
NOT EXTRAORDINARY
RETURNS
• JUDGE BASED ON
ESTABLISHED
STANDARDS OF VALUE
SPECULATOR
• GAMBLES WHETHER
STOCK GOES UP OR
DOWN
• DAILY QUOTES OR
RECOMMENDATIONS
ARE LIKE OXYGEN
• BASED THEIR
STANDARDS OF VALUE
UPON THE MARKET
PRICE

8. Bias
THE BIGGEST ENEMY OF A GOOD VALUATION IS BIAS.
TO MINIMIZE BIAS IN VALUATION, YOU SHOULD
• A. READ/REVIEW WHAT OTHER PEOPLE THINK
ABOUT THE VALUE OF A COMPANY
• B. MEET WITH THE MANAGEMENT OF THE
COMPANY
• C. LOOK AT THE MARKET PRICE
• D. GET PAID MORE TO DO THE VALUATION
• E. NONE OF THE ABOVE

9. Where the financial markets are located?

13. Good valuation
STORY + NUMBERS

14. The Number Cruncher
APPEAL
NUMBER PROVIDES
SENSE OF CONTROL, A
SENSE OF PRECISION
AND THE APPEARANCE
OF OBJECTIVITY.
DANGER
WITHOUT NARRATIVES
TO BACK THEM UP,
NUMBERS CAN BE EASILY
MANIPULATED, USED TO
HIDE BIAS OR TO
INTIMIDATE THOSE NOT
IN THE LOOP.

15. The Storyteller
APPEAL
STORIES ARE MORE
EASILY REMEMBERED
THAN NUMBERS AND
CONNECT WITH HUMAN
EMOTIONS.
DANGER
STORIES THAT ARE NOT
ANCHORED TO OR
CONNECTED WITH
NUMBERS CAN VEER
INTO FAIRY TALES,
LEADING TO UNREAL
VALUATIONS.

16. Approaches to valuation

17. Valuation Vs. Pricing
VALUATION
RELATES THE VALUE OF
AN ASSETS TO ITS
INTRINSIC
CHARACTERISTICS
MAINLY ITS CAPACITY
GENERATE CASH FLOWS
AND RISK OF
INVESTMENT
PRICING
ESTIMATES THE VALUE
OF AN ASSET BY
LOOKING AT THE
PRICING OF
“COMPARABLE” ASSETS

18. Drivers of market price
MOMENTUM/MOOD
GROUP THINKING
LIQUIDITY
INCREMENTAL INFORMATION

19. Drivers of value
CASH FLOW FROM EXISTING ASSETS
VALUE ADDED BY GROWTH ASSETS
WHEN THE FIRM BECOMES MATURE
RISK OF THE CASH FLOWS

20. Dividend Discount model
VALUE OF STOCK =
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑅𝑎𝑡𝑒 −𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑔𝑟𝑜𝑤𝑡ℎ 𝑟𝑎𝑡𝑒
• MATURE COMPANIES WITH STABLE DIVIDENDS
• CAN BE MODEL BY ONE GROWTH RATE, BUT MULTI-STAGE
MODEL CAN BE MORE PREFERABLE WHEN EXPECTING
BUSINESS TO CHANGE
• NOT SUITABLE FOR HIGH-GROWTH BUSINESSES
• DIVIDENDS CAN BE REPLACE BY RETAINED EARNINGS IN
SOME EXTEND (CHANGE OF LIQUID CASH)

21. Discount Rate and Dividend growth rate
DISCOUNT RATE – IS COMPANY’S COST OF EQUITY
COST OF EQUITY = RISK FREE RATE + BETA COEFFICIENT ×
MARKET RISK PREMIUM [MARKET RATE OF RETURN − RISK
FREE RATE]
DIVIDEND GROWTH RATE – THE COMPANY’S EXPECTATION
OF FUTURE DIVIDEND RATE OR YOUR ESTIMATION OF ITS
GROWTH

22. Discount Cash flow model
PHILOSOPHY – EVERY ASSET HAS AN INTRINSIC VALUE
THAT CAN BE ESTIMATED, BASED UPON CASH FLOWS,
GROWTH AND RISK.
WHAT IS NEEDED:
• ESTIMATE THE LIFE OF THE ASSET
• ESTIMATE THE CASH FLOWS DURING THAT LIFE
• ESTIMATE DISCOUNT RATE TO APPLY TO THESE CASH
FLOWS TO GET PRESENT VALUE

23. Advantages vs. Disadvantages
ADVANTAGES
• LESS VOLATILE THAN
MARKET PRICE
• BUYING BUSINESS
• FORCES YOU THINK
ABOUT UNDERLYING
BUSINESS
• LONG-TERM HORIZON
DISADVANTAGES
• COMPLEX ON ESTIMATIONS
• CAN BE MANIPULATED BY
ITS AUTHOR
• CANNOT ASSURE THAT
MARKET WILL CORRECT ITS
PRICE
• IT IS CRAFT NOT SCIENCE
• UNCERTAINTY OF THE
MAGNITUDE

24. When DCF works best
PHILOSOPHY – THIS MODEL IS DESIGNED TO USE ASSETS
THAT DERIVE THEIR VALUE FROM THEIR CAPACITY TO
GENERATE CASH FLOWS IN THE FUTURE.
INVESTOR NEEDS TO:
• HAVE A LONG TIME HORIZON, ALLOWING MARKET TO
CORRECT ITSELF
• BE CAPABLE OF PROVIDING CATALYST TO MOVE ITS
PRICE TO ITS VALUE
• BE NOT EASILY SWAYED OR AFFECTED BY MARKET
MOVEMENTS THAT ARE CONTRARY TO THEIR “VALUE”
VIEWS

25. Value of patience

26. Calculation of DCF
DCF =
𝐶𝐹1
(1+𝑟)1+
𝐶𝐹2
(1+𝑟)2 + … +
𝐶𝐹 𝑛
(1+𝑟) 𝑛 + T
R - DISCOUNT RATE – WEIGHTED AVERAGE COST OF CAPITAL
CF – FREE CASH FLOW
T – TERMINAL VALUE
FREE CASH FLOW = CASH FLOW FROM OPERATING ACTIVITIES – CAPITAL EXPENDITURE (CAPEX)

27. Weighted Average Cost of Capital
MEASURES A COMPANY COST TO BORROW MONEY
WACC =
𝐸
𝑉
∗ 𝑅 𝐸 +
𝐷
𝑉
∗ 𝑅 𝐷 ∗ (1 − 𝑇 𝐶 )
E – MARKET VALUE OF THE COMPANY’S EQUITY
D – MARKET VALUE OF THE COMPANY’S DEBT
𝑅 𝐸 - COST OF EQUITY
𝑅 𝐷 - COST OF DEBT
V = E+D
𝑇 𝐶 - CORPORATE TAX RATE

28. Correcting Accounting Earnings
• MAKE SURE THAT THERE ARE NO FINANCIAL EXPENSES MIXED IN WITH
OPERATING EXPENSES
• Financial expense: Any commitment that is tax deductible that you have to meet no
matter what your operating results: Failure to meet it leads to loss of control of the
business.
• Example: Operating Leases: While accounting convention treats operating leases as
operating expenses, they are really financial expenses and need to be reclassified as
such. This has no effect on equity earnings but does change the operating earnings
• MAKE SURE THAT THERE ARE NO CAPITAL EXPENSES MIXED IN WITH THE
OPERATING EXPENSES
• Capital expense: Any expense that is expected to generate benefits over multiple
periods.
• R & D Adjustment: Since R&D is a capital expenditure (rather than an operating
expense), the operating income has to be adjusted to reflect its treatment.

29. Valuation questioner
Item Key questions Key output
Cash flows from
existing investments
How much capital is invested in existing assets?
How much did the firm earn on these assets?
Current revenues
Current earnings
Current capital invested(Debt +
Equity – Cash)
Future growth How much growth from new investments ?
How much growth from improved efficiency?
Revenue growth
Operating margin
Quality of growth How much new capital will the firm have to invest
to deliver that growth?
Reinvestment
Return on invested capital
Operating risk What businesses does the firm operate in?
What countries does the firm operate in?
Relative risk(Beta)
Equity risk premium
Cost of capital
Financial risk How much debt does the firm have?
Are there any other contractual commitments?
Debt ratio
Cost of debt
Other assets/claims Are there any non-operating assets?
Are there other claims on the equity?
Non-operating assets
Minority interests
Options outstanding

30. Any questions?

31. What’s next?
• VIENNA VALUE INVESTING HUB
• VALUATION COURSE – STILL OPENS FOR EARLY 2018
• FINANCIAL BEHAVIOUR – JANUARY 2018
BODOCKY@GMAIL.COM
JEANPHILIPPETISSOTAYRAM@GMAIL.COM