Valuation Techniques

of unquoted 未上市 equity instruments

 valuation techniques can be used when measuring the fair value of unquoted equity
instruments.
 Net asset model

 Earning/market approach

 Dividend growth model

 Discounted cash flow model

 Expected cash flow model

 Judgement is involved not only when applying a valuation technique, but also in its
selection of the valuation technique.

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 Net Asset Model

• involves deriving the fair value of an investee’s equity

instruments by reference to the fair value of its assets and
liabilities (recognised and unrecognised)
• requires an investor to measure the fair value of the individual
assets and liabilities recognised in an investee’s statement of
financial position as well as the fair value of any unrecognised
assets and liabilities at the measurement date.
 Net Asset Model
EXAMPLE 1:
An investor has a ten per cent non-controlling equity interest in Entity QRS, a private company. The investor
needs to measure the fair value of its non-controlling equity interest in Entity QRS as of 31 December 2019
(ie the measurement date).
The summarized financial position for QRS at 31 Dec 2019 is as follows:
Assets (000)
Non current assets RM23,600
Current assets 8,400
32,000
Equity and Liabilities
RM1 Ordinary shares RM 8,000
Retained earnings 11,200
19,200
Non current liabilities
6% unsecured loanRM 8,000
Current liabilities 4,800
32,000
Calculate the value of one ordinary share in QRS using the net asset method. 3
 Net Asset Model…cont

• Answer:
Assuming the financial position figures are realistic:
(000)
Noncurrent asset RM23,600
Current assets 8,400
Less: 6% unsecured loan (8,000)
Current liabilities (4,800)
19,200
Value per share =19,200K
8,000K
=RM2.4 per unit

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 Net Asset Model
EXAMPLE 2:
Ray Sdn Bhd is considering a takeover bid for AMD Sdn Bhd. AMD has been making
losses in the last 2 years, so it is considering that an asset based valuation method
would be appropriate to value the business.

Extract from AMD Statement of Financial Position is as follows:

(000)
Non current assets (note 1) 1,207
Current asset(note 2) 564
1,771
RM1 Ordinary shares 100
Retained Earnings 553
5% Bond payable 600
Current Liabilities 518
1,771 5
 Net Asset Model…cont

• Note 1: This assets comprised specialised manufacturing equipment. To

replace it will requires additional cost of RM1.5 mill, but if AMD to be
closed down the assets would sell for no more than 1 mill.
• Note 2: Receivables contain an amount of RM120,000 from large
customer which has just gone into liquidation. 减 A contract for the same
customer included in WIP inventory at a value of RM30,000 will now have
to be scrapped.

REQUIRED
Calculate the expected fair value of AMD, using net asset value.

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 Net Asset Model…cont

Answer:

(000) Justification

Non current assets 1,500 Need to buy from scratch-

specialised machine
Current asset 414 (564 – 120 - 30)
Less: Liabilities(600+518) 1,118
796

Fair value per share = 796,000

100,000
= 7.96 per share
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 Earnings /Market Approach

• assuming that the value of an asset (or line of business or company etc) can be
measured by comparing it to similar assets (or lines of businesses or companies etc)
for which a market price is available
• For the purposes of measuring the fair value of the equity instruments of an
investee, an investor can consider the fair value of the equity instruments of similar
entities (ie comparable company peers) for which a market price is available.
• the fair value measurement of unquoted equity instruments consists of the following
steps:
1. Identify comparable company peers.
2. Select the performance measure that is most relevant to assessing the value for
the investee (ie the performance measure that market participants would use to
price the investee).
3. Apply the appropriate valuation multiple to the relevant performance measure of
the investee to obtain an indicated fair value of the investee’s equity value
 Earnings /Market Approach…cont

PE multiple
• Value of a company = Earnings x PE (proxy co)
• For unlisted company, the value usually lesser, 2/3 of PE listed proxy company.

Example 3:
PQR is a successful unlisted games software development firm. An asset-based
valuation is not appropriate as the value of its key assets (its games and its
development team) are not reflected on the balance sheet. A similar listed
company has recently floated on the stock market. It has earnings per share of
RM0.50 and a current share price of RM10. PQR earns profits of RM1.2m per
annum.
Calculate the value of PQR based on the information given.

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 Earnings /Market Approach…cont
Answer:
PE of proxy company = 10/0.5
= 20

Fair Value of PQR = 20 x 1.2 mil x 2/3*

= RM16 mil

*For unlisted company, the value is usually lesser, 2/3 of PE listed proxy
(judgement)
2/3 =fixed

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 Income Approach:
Dividend Growth Model
• Gordon growth model
• Assuming either constant or growth dividends
• Formula:
Constant dividends Constant Growth
P0 = d0 P0 = d0(1+g)
ke ke- g

Where • Dividend growth rate (g)

g = forecast future growth rate in dividends
P0= Value of company, when d0 is total dividends (1/∑year -1)
P0= value per share when d0= Dividends per share = Ending Dividend Value -1
ke = rate of return Beginning Dividend Value

It is possible to have an uneven div growth rate**

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 Dividend Growth Model…cont
Example 4:
MNO has just paid a dividend of EUR250,000. It has 2,000,000
shares in issue. The current return to shareholders in the same
industry as MNO is 12% although it is expected that an additional
risks premium of 2% will be applicable to MNO, being a smaller and
unlisted company.

Calculate the expected FV if

a) dividend is expected to be constant
b) dividend is expected to grow at 4% per annum

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 Dividend Growth Model…cont

Answer:
a) Constant dividends
P 0 = d0
ke
= 250000/0.14
= EUR1.786 mil @ = EUR 0.893 per share (ie, 1.786M / 2M)

b) Constant Growth
P0 = d0(1+g)
ke- g
= 250000 x 1.04
0.14-0.04
= EUR 2.6 mil @ EUR 1.30 per share (ie, 2.6M / 2M)

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 Discounted Cash Flow Model
 A value of company equity is derived by estimating future annual after tax
cash flows of the entity and, discounting these cash flows at an appropriate
cost of capital (discount rate).
Example 5:
The expected after-tax cash flows of XYZ, and all-equity financed company with 2
million shares in issue is as follows:
Year GBP
1 120,000
2 100,000
3 140,000
4 50,000
5 onwards 130,000

A suitable cost of capital for XYZ is 12% ( 通常题目会给）

Calculate the value of XYZ equity using DCF valuation.

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 Discounted Cash Flow Model…cont

Answer:
YearGBP Disc factor(12%) PV
1 120,000 0.893 107,160
2 100,000 0.797 79,700
3 140,000 0.712 99,680
4 50,000 0.636 31,800
5 onwards 130,000 0.567 73,710
NPV392,050
Assuming after year 5 the cash flow is infinity, the PV of the cash flow will be 130,000/0.12 =GBP
1,083,333
 So, the PV = 1,083,33 x 0.567 = GBP614,250
The total PV = 392,050 + 614,250 = GBP 1,006,300
Therefore the value per share = GBP1,006,300/2mill
= GBP 0.50 per share. 15
 Expected Cash Flow Model
 Uses a range of cash flows and incorporates the probabilities of those cash flows to
provide a more relevant measurement of FV. Cash flows estimates may be based on
own experience or of professional & independent assessor.

Example 6:
Assume that the expected cash flows & its probability of a remodeled machine are as follow:
RM100,000 30%
RM200,000 50%
RM300,000 20%

Traditional model will estimate the FV based on the cash flow with the highest probability :
RM200,000
The expected cash flow model will estimate the FV based on the following calculation:
= (100,000x0.3)+(200,000x0.5)+(300,000x0.2)
= RM190,000

The expected FV is RM190,000

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