ENTERPRISE VALUE (EV)

EV = Market Cap + value of debt + minority interest + preferred shares - cash (cash equivalent) 

EARNINGS BEFORE INTEREST, TAXATION, DEPRECIATION AND AMORTISATION (EBITDA)

More like an operating cash flow disregard "capital structure - interest", "countries - taxation" and "depreciaiton - non cash flow or sunk cost".

It is not FCF, but more of an operating cash flow disregarding tax (country) and interest (capital structure), so we can compare across country and not bother about capital structure (proportion of equity and debt).

ENTERPRISE MULTIPLE

Enterprise Multiple = EV/EBITDA

Besides EV/EBITDA valuation formula, there are other methodology such as

1.  Price Earning Ratio

2.  Price to FCF

3.  EBIT/ROIC

4.  Price/Book Value

Many mores.  Certain method is suitable for certain circumstances.  Just like palm oil, we use FFB yield, OER yield, or EV/mature ha (in USD), etc.  Each sector has different parameters and indicators.

WHEN DO WE USE ENTERPRISE MULTIPLE METHOD?

EV/EBITDA method is more suitable with telco or telco tower operator with high upfront capex.

• Telco operator
• Telco tower operator
• Toll roads
• IPP
• Water Concessions

MOST COMMON METHODS FOR RETAILERS

• PER

TELCO TOWERS VALUATION - USING ENTERPRISE MULTIPLE

Basically this is based on research on sector valuation:

Indonesia            14 - 16x

USA                    18 - 20x

WHAT IS OCK GROUP's ENTERPRISE MULTIPLE

OCK Existing   10X

OCK                  Myanmar       6-7X

                          Vietnam         8X

WHAT ABOUT DCF/SHARE?

OCK                  RM1.00 (Tenancy Ratio of 1.0x for Myanmar)

OCK                  RM1.30 (Tenancy Ratio of 1.15x for Myanmar)

CASH & CASH EQUIVALENT

Cash equivalent - cash with maturity less than 3 months.  

OCK Group has net trade debts of about RM120m (trade receivable less trade payable).  In the Annual Report and based on analysts view is all collectable.  Even if we assumed 90% collectable, you will realise, it will lower the Enterprise Multiple significantly.  The trade receivable is mainly telco operators, recoverabiity is good, however, may be a bit slow.

PROSPECTIVE ENTERPRISE MULTIPLE

Likely to be below about 8x, having consider Myanmar and Vietnam deals.  Hence, the upside is good, perhaps to 12x?  Emerging market telco tower operators and advance countries is different.  Size also play a role besides tenancy ratio growth rate.

SO WHAT?

Knowledge isn't power until it is applied - Dale Carnegie

I AGREE WITH WHAT Warren Buffett SAID ON EBITDA (updated 3 Feb 2017)

Whenever you see the word EBITDA, replace it with "BS".  Yes, there are definitely weaknesses in the EBITDA multiple.  Every method has its pros and cons, similarly, DCF.  Because, there are assumptions to be made.  Even PE method has its disadvantages, although it is easy to use.

Just used them as a reference.  Most important, identify the INCOME GENERATOR/ENGINE.  Estimates conservatively, for long term (if it is a long term contract) return from this GENERATOR.  Estimates the long term FCF generated from this GENERATOR, if it is strong (<10X) and has potential of growth, the price will follow the value of the company eventually.

Eg.  If a company get a contract of RM1.0bil to build and operate an IPP for say 30 years, the initial years profit will be much lower if the company get a 70% loan for the project, and pay down gradually.  Hence, using PE method, it will be very high at the initial years, similarly like a toll road concessionaire.  Most of the profit will be reduced by the interest expense in the initial years.  So, DCF (Equity) would be a better method to calculate the value of the project.

So, again, don't split hairs over the methodology.  Use it as a reference.  Like plantation, normally it is calculated based on USD/mature ha.  If we think the formula is inaccurate, adjust it accordingly to be more reflective, intead of complaining that this method is pure BS.