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samdaman
28-01-2014, 08:52 AM
Hi guys!

Recently I've been pondering through valuing methods of companies and it seems that DCF has a lot of advantages when it comes to finding a "fair value" of a company. I've been wanting to get my head around it but I'm still getting confused as to what values I should be pulling from the annual reports and how to correctly apply them.

http://i.investopedia.com/inv/pdf/tutorials/dcfa.pdf

I've been following that link and trying with a couple companies to try get values that seem correct but can't help feeling like I'm not going in the right direction without a ballpark figure to be able to match it up to.

Was just wondering if someone would be willing to go through a practise report with me and help me pull together a value?

Any help is appreciated greatly :D

Thanks
Sam

winner69
28-01-2014, 09:52 AM
Instead of trying to decipher investopedia why don't you use the Cash Flow Statements in the company accounts you have.

As to changes in working capital etc (which seems confuse many) just follow the numbers on the reconciliation between npat (the trading account) and the cash flow statement

Sort of saying why invent the wheel when most of the work has been done

Which company you tried doing

samdaman
28-01-2014, 10:12 AM
Instead of trying to decipher investopedia why don't you use the Cash Flow Statements in the company accounts you have.

As to changes in working capital etc (which seems confuse many) just follow the numbers on the reconciliation between npat (the trading account) and the cash flow statement

Sort of saying why invent the wheel when most of the work has been done

Which company you tried doing

I have been looking at CCV on the ASX as an example. I have looked at the consolidated cash flows from the reports however I thought it would be more accurate in forecasting growth figures if I broke it down alike the investopedia example, would I be wrong in saying that growth figures on each component of the FCF would give a better estimate of future values?

winner69
28-01-2014, 10:56 AM
CCV website has a link to these analyst reports

http://www.cashconverters.com/Files/Download/1002

http://www.cashconverters.com/Files/Download/980

Why don't you set something up like how they do the numbers. A summary P&lL / balancevwith ebitda leading into the Cash Flow Statement etc etc - take it out a few more years to get your npv and valuation

I see that even with these 2 there is a 10% variance in F14 opex cash flow. No doubt you will get another number?

Ccv is a challenging example to practice on

samdaman
28-01-2014, 11:35 AM
ok I see now, this report shows all the values really nicely. Is that because a company with a negative free cashflow would have to be forecasted relatively far into the future to get a reasonable EV? I'm looking at fig.2 of the Hartleys report, I'm assuming the EFCF is the summed value you were referring to rather than calculating my own. Also how would this fit into the DCF process opposed to FCFF?

samdaman
29-01-2014, 07:15 AM
anything further on this topic? Sorry to bump if thats a no no but I'm still rather confused on the subject

winner69
29-01-2014, 07:19 AM
Disc...I know little about the CCV business model but it looks rather complex

Q1 yes .... Negative at the present because of buying loan books which no doubt will generate future income (over many years)

I would be using the table on the right. As such FCF for say 6/15F is Net Operating Cash Flow of 63.3m less Net Investing Cash Flow of 107.0m.

You could not have picked a more complicated company to learn to do this sort of stuff. A mixture of different business structures, loan book purchases, different countries etc etc all add complexity.

Why not have a look at a less complex type of business to try and understand how these things work. What else you interested in?

samdaman
29-01-2014, 07:25 AM
actually couldn't agree more, it was a bit of a pick out of a hat sorta company. How about ARP on the asx?

winner69
29-01-2014, 08:17 AM
ARP a great company

Nice clean financials and good company to try your skills out on Reasonably detailed Income Statement for you to get the main items you need. No debt and so interest helps a bit.

You will find Note 18 really helpful when you come to track the movements in Working Capital. One of the more detailed ones in Annual Reports I have seen

Yes give ARB analysis a go

Let us know how you get on

samdaman
29-01-2014, 08:36 AM
ok so I'm looking at the 2012 report because that seems to be what I have in my download folder,

I get an:

NPAT of 38.50m
CAPEX of (11.03m)
and change in working cap of (15.19m)

so these items summed together would be our FCF? for that year which would be 12.28m? if this is correct would this be FCFE or FCFF?

winner69
29-01-2014, 08:47 AM
ok so I'm looking at the 2012 report because that seems to be what I have in my download folder,

I get an:

NPAT of 38.50m
CAPEX of (11.03m)
and change in working cap of (15.19m)

so these items summed together would be our FCF? for that year which would be 12.28m? if this is correct would this be FCFE or FCFF?

Almost there - except depreciation is non cash and has to added back to profit

Here's the 2013 report

http://www.arb.com.au/media/investors/2013/ARB-Annual-Report-2013.pdf

Look at that NOTE 18 --- to see the non cash adjustments and movement in working capital

What you calculated is what I would call Free Cash Flow (FCF) and be the basis of DCF analysis (ie Operating less Investing Cash Flows)

Keep at it

samdaman
29-01-2014, 09:12 AM
Depreciation and ammortisation or just depreciation?

would I just add the whole non cash column back onto my NPAT after the deduction of tax? or just the depreciation and ammortisation figure?

I just added those figures back on.

With that I get

2012 2013
FCF 18.65m 22.12m

which is an 18.57% increase

Just for the sake of this practise DCF I'll just say that it continues to grow at 18% for 5 years (just being rough for practise sake)

which gives:



1
2
3
4
5


26.1016
30.79989
36.34387
42.88576
50.60520158



the next step is to calculate the discount rate, with the first step in that being to calculate an appropriate cost of equity which would be done with the capital asset pricing model if I'm not mistaken?

This is another step where I run into a hiccup, how do I get values such as beta, risk free rate for NZ and a risk premium?

samdaman
29-01-2014, 01:01 PM
Since I didn't know how to calculate WACC I went with 12% just to show my calcs.

I used a long term rate of 6% and with those I got a terminal value of 894m.

Then I discounted the cashflows added them up and divided by outstanding ordinary shares to get a share price of $8.78

Anything you can see wrong? and any light for calculating the long term rate and WACC more accurately? those were just guesses

winner69
29-01-2014, 01:51 PM
I reckon 2012 FCF should be about 20.5m and 2013 about 29.6m

A bit higher than yours Sam

I have a look at your workings later

winner69
29-01-2014, 01:53 PM
Maybe take the 13 annual report to drink ids with moosie and work on it together !!!
,

samdaman
29-01-2014, 01:54 PM
okey dokey, lemme know how you got those values when you get the chance :) I'm itchn to get this right :D

samdaman
29-01-2014, 01:58 PM
Maybe take the 13 annual report to drink ids with moosie and work on it together !!!
,

haha I'll take it along, whether he wants to spend some of his down time running some numbers with a newbie is his choice though :D

winner69
29-01-2014, 03:13 PM
Sam

For what it is worth here are my numbers taken from 2013 Annual Accounts

winner69
31-01-2014, 02:25 PM
Samdaman the bits in yellow is change in working capital