MS Overview of Valuation Methodologies

Overview of Valuation Methodologies
Table of Contents
Section 1 Valuation Fundamentals 3

Section 2 Modelling Best Practices 42
Section 3 Q&A and Open Discussion 45
MORGAN STANLEY SINGAPORE INVESTMENT 2

BANKING TECHNICAL SKILLS WORKSHOP
SECTION 1
Valuation Fundamentals
3
Com parable Precedent Discounted Leveraged
Basics
Com panies Transactions Cash Flow Buyout
Valuation Basics (1/2)

Glossary of Terms
Enterprise Value Equity Value
• Total value of company, belonging to all providers of capital • Value belonging to holders of ordinary equity after net debt and
preferred claims have been serviced
• Represents value available to service claims of all investors, including
holders of both debt and equity securities • Market value of a company’s ordinary equity
• Also known as aggregate value, asset value, total value and firm value • Represents flows available to holders of equity after debt and preferred
claims have been serviced
Unlevered Free Cash Flow Discounted Cash Flows (DCF)
• Unlevered free cash flows (or free cash flows to the firm, “FCFF”) • Calculate the present value of the unlevered free cash flows and of
represent the normalised cash flows available to all providers of the terminal value using an appropriate cost of capital
capital to the firm
Weighted Average Cost of Capital (WACC) LBO Value
• The weighted average cost of capital (WACC) represents a firm's • Determines the range of prices that a financial buyer would be
average cost of capital from all sources, including common stock, willing to pay for an asset assuming a range of target rates of
preferred stock, bonds, and other forms of debt return
MORGAN STANLEY SINGAPORE INVESTMENT VALUATION FUNDAMENTALS 4

Basics
Valuation Basics (2/2)

Equity Value vs. Aggregate Value
Equity Value Equity Value Aggregate Value

• Value belonging to holders
of ordinary equity after net • Market value of a company’s ordinary equity • Represents value available to service claims of all
debt and preferred claims investors, including holders of both debt and equity
have been serviced • Represents flows available to holders of equity after securities
debt and preferred claims have been serviced
• Also known as enterprise value, asset value, total
• Typical equity value multiples value and firm value
Aggregate value
• Total value of company, – Price/Earnings (P/E) • Typical aggregate value multiples
belonging to all providers of – Price/Book Value of Equity (P/BV) – Aggregate Value/Revenue
capital
– Price/Earnings / Long-Term EPS Growth (PEG) – Aggregate Value/EBITDA
– Aggregate Value/EBIT
Equity Value = Total Shares Outstanding (TSO) x Share Price
+ Net Debt = Short-Term Debt + Long-Term Debt - Cash & Cash equivalents
+ Other Debt Adjustments = Preferred Stock + Capitalised Leases + Unfunded Pension Liabilities, etc
+ Minority Interests
= Aggregate Value

Basics
Valuation Methodologies Can Be Regrouped In Two Main Categories
Relative Valuation Fundamental / Intrinsic Valuation
Relative or market-based valuation relies on the market price of Intrinsic or absolute valuation is a method of valuing a business based
comparable companies operating in a similar industry as the basis of on the present value of its future cash flows
its valuation
It relies on the valuer’s expectations of how the business will evolve,
including its growth rate, margins, and investment levels
There are 2 main relative valuation methodologies: There are 2 main fundamental / intrinsic valuation methodologies:
A• Comparable Companies C• Discounted Cash Flows
B• Precedent Transactions D• Leverage Buy-Out (LBO) [refer Appendix]

Basics
Bringing It All Together: The Football Field
• The football field allows to Valuation Benchmarks

summarize the ranges of Enterprise Value (US$m)
valuation implied by each Enterprise Value

methodology
FY+1 EV/EBITDA
Trading
Com ps
FY+1 EV/EBIT
LTM EV/EBITDA
Transaction
Com ps
LTM EV/EBIT
DCF Valuation
x – y% WACC
Valuation
DCF
DCF Valuation
x – y% Terminal Grow th
Valuation
LBO
LBO
20% - 25% IRR

Basics
Overview of Comparable Companies Analysis
• Comparable companies • Provides company’s implied value in the public equity markets through analysis of
analysis implies a comparable companies’ trading and operating statistics
company’s value based on • Does not include control premium
public company
• Apply multiples derived from similar or “comparable” publicly traded companies to
benchmarks through the
Description company’s operating statistics
analysis of comparable
companies’ trading and • Reliability depends on the level of comparability of other publicly traded companies
operating statistics – Factors include industry of operation, range of products, revenue base (size),
geographical presence, profitability and growth
• A change of control premium may be applied to estimate private market value
• Key concepts include
– Selection of comparable
 Based on public information
companies
 Market efficiency implies that, in theory, trading valuation should reflect all available
– Matching of correct information including trends, business risk, growth characteristics, etc
earnings type to relevant Advantages
 Values obtained can be reliable indicator of the value of the company for a minority
multiples
investment
– Collection and calculation
of key financial inputs
– Calendarisation of  Difficult to find large sample of truly comparable companies; it is difficult/impossible to
earnings adjust for differences in the underlying business of comparable companies
– Despite “market efficiency” arguments, sometimes difficult to explain different valuations
and trading levels for apparently similar companies
Disadvantages  Trading valuation of a company may be affected by thin trading activity, small
capitalization, poor research coverage, and small public float
 Stock prices may be impacted by outside variables such as M&A activity in the sector,
regulatory scrutiny, etc
 Does not take into account control premiums

Basics
Application of Comparable Companies Analysis
1 Select a Set of Comparable Companies
2 Identify Relevant Valuation Multiples
3 Calculate and Apply Valuation Multiples to the Financial Metrics of the Company being Valued

Basics
Step 1: Selecting a Set of Comparable Companies
• Comparable companies are selected based on their business and financial characteristics
• Business characteristics to consider include
– Products
– Product mix
– Geographical markets
– Customers
• Financial characteristics to consider include
– Size (revenue, operating income)
– Profitability (operating margins)
– Leverage
Notes:

Basics
Step 2: Identifying Relevant Valuation Multiples (1/2)
• Certain valuation multiples are relevant across most industries
– AV/EBITDA
– AV/EBIT
– P/E
– Dividend yield (while not a “multiple” dividend yield is a commonly used valuation benchmark)
• However, some industries will have specific valuation benchmarks
– Utilities: AV/Capacity
– FIG: Price/Book
– Oil & Gas: AV/2P Reserves
• Most trading comparables sets will also include leverage multiples
– Useful for explaining variations in trading multiples and for determining an appropriate level of leverage for a similar, publically listed company
– Common leverage multiples include Debt/EBITDA, Net Debt/EBITDA, EBITDA/Interest Expense
Notes:

Basics
Step 2: Identifying Relevant Valuation Multiples (2/2)
• It is important to ensure Matching Earnings “Type” to Relevant Multiples

that you are matching the
correct “type” of earnings
with the correct “type” of
multiple Revenue
Aggregate value
multiples
• Aggregate value multiples
should be applied to AV/Revenue Available to all
EBITDA
earnings items “above” the providers of capital
interest expense line as AV/EBITDA
these earnings are
available to all providers of AV/EBIT
capital EBIT
– Aggregate
Value/Revenue
– Aggregate Value/EBITDA Available to debt
Interest Expense
– Aggregate Value/EBIT holders
• Equity value multiples

should be applied to PBT
earnings items “below” the Equity value
interest expense line multiples:
– Price/Earnings (1) Price/Earnings Available to
– Price/Book Value Tax
government
– Price/Long-Term EPS Price/Book Value
Growth
Price/EPS Growth Available to
Net Income
shareholders
Notes:
1. Net Income is the most common, though you may also use PBT, particularly If there are differences in tax rates across the companies you are reviewing

Basics
Step 3: Collection of Historical and Forecast Financials (1/3)

Definitions for Key Financial Statistics
Key Financial Statistics and Relevant Sources
Statistic Definition Source in Financial Statements
Sales (Revenue) • Receipts from the sale of goods and services (excludes other income and • Income statement in latest financial report
interest income) • Often disclosed in results or other investor presentations
• Ideally based on continuing operations
EBITDA • Earnings before interest, taxes, depreciation and amortisation • Income statement in latest financial report
• EBIT + depreciation and amortisation, or Revenue – operatingexpenses before • May need to go to notes to find individual items (e.g. depreciation/amortisation)
depreciation and amortisation if not disclosed in income statement
• Should exclude one-off and non-core items, and should ideally be based on • Often disclosed in results or other investor presentations and should be on a
continuing operations normalised basis
EBIT • Earnings before interest expense/income and taxes • Income statement in latest financial report
• Pre-tax income + net interest expense, or EBITDA – depreciation and • May need to go to notes to find individual items if not disclosed in income
amortisation statement
• Should exclude one-off and non-core items, and should ideally be based on • Often disclosed in results or other investor presentations and should be on a
continuing operations normalised basis
Net Incom e (“NPAT”) • Consists of after-tax income from continuing operations, after preferred • Income statement in latest financial report
dividends • Often disclosed in results or other investor presentations and should be on a
• Should exclude one-off items and ideally be based on continuing operations normalised basis
Earnings per Share • Net income / w eighted average shares outstanding • Income statement in latest financial report
(EPS) • Often disclosed in results or other investor presentations and should be on a
normalised basis
Minority Interests • Book value of the equity in the company’s subsidiaries not ow ned by the • Balance sheet in latest financial report
company itself
Net Debt • Calculated as short term debt + long term debt -cash & cash equivalents • Balance sheet in latest financial report
• May make adjustments for preferred equity, finance leases (may even • May need to go to notes for adjustments
capitalise operating leases w here significant, although w ill then need to add-
back operating lease expense to EBITDA and EBIT) and unfunded pension
liabilities
Capital Expenditure • Expenditure on capital goods (i.e. property, plant and equipment) • Cash flow statement in latest financial report
(“Capex”) • May include expenditure on intangibles for some businesses (e.g. software
development)

Basics
Step 3: Collection of Historical and Forecast Financials (2/3)

Make a Commercial Judgment About the Appropriate Source for Inputs
Input Data and Relevant Sources
Data Required Use Sources
Share Price • Used to calculate market capitalisation, w hich also forms an input into • Financial databases (e.g. CapIQ, Bloomberg)
aggregate value
• Last tw elve months trading range is also relevant to provide a sense for how
the stock has performed recently
Total Shares • Used to calculate market capitalisation, w hich also forms an input into • Ideally, found from the most recent relevant company filing
Outstanding aggregate value
• Theoretically, should include dilution for in-the-money options outstanding
Net Debt, Other Debt • Used to calculate aggregate value and relevant leverage metrics • Ideally, found from the most recent relevant company filings (i.e. latest annual,
Adjustments and • Most common adjustments are finance leases and preference shares/hybrids. semi-annual or quarterly for US companies)
Minorities US companies w ill also have unfunded pension liabilities • How ever, this can be time consuming and may not add much value w here the
• Some industries w ill also require other adjustments comparables set is large and the use is for business development. Use
financial databases w here more practical, but be sure to check reasonableness
Financial Year End • Used to “calendarise” historical and forecast financials to a common year end • Historical financials: Financial statements adjusted to a corresponding time
for comparability period / financial databases
• Forecast financials: Financial databases
Historical Financials • Used to calculate last tw elve months (“LTM”) trading multiples, forward trading • Ideally, found from company filings. Most relevant metrics (revenue, EBITDA,
multiples w here calendarising to an earlier financial year end, and historical EBIT, NPAT, etc) are often disclosed directly in results/investor presentations
operating metrics • Again, this can be time consuming and may not add much value. Use financial
databases w here more practical, but be sure to check reasonableness
Forecast Financials • Used to calculate forward trading multiples and projected operating metrics • Based on broker consensus estimates w hich can be pulled from financial
databases, but check to make sure that estimates are reasonable

Basics
Step 3: Calendarisation of Earnings
• Companies within a trading Overview of Calendarisation

comparables set may have • Companies w ithin a trading comparables set may have different financial year-ends
different financial year-ends – For example, the financial year-end for Myer and David Jones is 31 July, but the financial year-end for The Reject Shop is 30 June
– This creates a – This creates a comparability issue as earnings w ill be “closer” or “further away” depending on the financial year-end
comparability issue that – Necessary to “calendarise” all earnings to a common year-end (typically the year end of the company for w hich the trading comparables set is
requires “calendarisation” being prepared)
of all earnings to a
common year-end
Worked Example
• David Jones financial year-end is 31 July, w hile The Reject Shop is 30 June
• This means that the David Jones financal year-end is one month “ahead” of The Reject Shop year-end
• To calendarise David Jones to 30 June, one month of its prior year earnings w ill need to be used
– For example, assume FY2012 revenue w as A$1,868MM and FY2013 revenue is forecast to be A$1,902MM
– FY2013 revenue calendarised to 30 June 2013 is (1/12) x A$1,868MM + (11/12) x A$1,902MM = A$1,899MM
TRS 30 June 30 June 30 June

Financial 2012 2013 2014
Year-End
DJS
Financial 31 July 31 July 31 July
Year-End 2012 2013 2014
1 Month 11 Months
of FY2012 of FY2013
Months Used to Calendarise to 30 June 2013

Basics
Do’s and Don’ts of Comparables Analysis
• A good cross-check is to go Do Don’t

to Capital IQ’s “key
statistics” tab for a
 Back out extraordinary items  Forget to convert numbers reported in different
company and check the currencies
multiples you have  Tax-effect extraordinary items where necessary
calculated against those  Forget to calendarize inputs
– These multiples do not  Footnote all adjustments
take into account  Forget to “NM” (“Not Meaningful”) any irrelevant
calendarisation and any  Double check the numbers statistics (e.g. negative multiples)
adjustments that have
 Do a “do the numbers make sense” review of output  Overlook the effect of outliers on mean and median
been made to AV or EV. pages multiples
They do, however,
provide somewhat of a  Always include mean and median values  Assume “inherited” comps are correct
sanity check in most
cases  Use consistent formatting
 Make industry specified adjustments
 Understand which multiples are most relevant for a

given industry

Basics
Example Trading Comparables Output
Trading Comparables(1)
Calendarised to June Year End
Current Price Market Cap Agg Value AV / EBITDA (x) AV / EBITA (x) AV / EBIT (x) P / E (x) Net Debt / EBITDA (x)
Company (lcl/share) (NZ$MM) (NZ$MM) FY12 FY13 FY14 FY12 FY13 FY14 FY12 FY13 FY14 FY12 FY13 FY14 FY12 FY13 FY14
Australian Waste Peers
Transpacific 0.85 1,680 3,314 6.0x 5.8x 5.5x 9.9x 9.1x 8.5x 10.5x 9.7x 9.0x 18.0x 13.9x 11.0x 2 .4x 2.3x 2.2x
Tox Free 2.77 400 460 7.1x 6.5x 5.9x 10.6x 9.6x 8.7x 10.9x 9.9x 8.9x 17.0x 14.2x 12.6x 0 .9x 0.8x 0.8x
Mean 6.6x 6.1x 5.7x 10.2x 9.4x 8.6x 10.7x 9.8x 8.9x 17.5x 14.1x 11.8x 1.7x 1.6x 1.5x
Median 6.6x 6.1x 5.7x 10.2x 9.4x 8.6x 10.7x 9.8x 8.9x 17.5x 14.1x 11.8x 1.7x 1.6x 1.5x
International Waste Peers
Lassila & Tikanoja 10.50 643 821 5.7x 5.3x 5.0x 9.1x 8.2x 7.6x 11.3x 9.9x 9.0x 16.8x 12.0x 10.9x 1.2x 1.1x 1.1x
Seche Environnement 27.00 366 668 4.7x 4.6x 4.3x 8.1x 8.5x 7.9x 8.1x 8.6x 8.0x 16.4x 16.8x 13.3x 2.1x 2.1x 2.0x
Shanks Group 0.79 615 1,044 5.1x 5.1x 4.7x 9.9x 9.6x 8.6x 10.8x 10.5x 9.3x 12.1x 12.8x 11.0x 2.1x 2.1x 1.9x
Suez 8.42 6,753 22,525 6.3x 5.7x 5.4x 10.2x 9.5x 8.9x 12.9x 11.9x 10.9x 13.4x 12.3x 10.7x 3.5x 3.2x 3.0x
Veolia 8.12 6,527 34,362 7.5x 7.5x 7.2x 11.3x 11.1x 10.4x 15.3x 14.9x 13.7x NM 13.8x 10.3x 5.1x 5.1x 4.9x
Casella Waste Systems 4.54 216 812 7.3x 6.7x 6.6x 21.4x 21.0x NA 21.8x 21.5x NA NM NM NA 5.4x 4.9x 4.8x
Republic Services 28.03 12,515 21,128 7.0x 7.0x 6.6x 10.2x 10.2x 9.5x 11.2x 11.2x 10.4x 15.8x 14.2x 13.2x 2.9x 2.8x 2.7x
Waste Connections 30.61 4,610 5,679 9.3x 8.8x 8.0x 13.5x 12.9x 12.2x 14.3x 13.7x 12.9x 22.5x 21.3x 19.7x 1.7x 1.6x 1.5x
Waste Mangement 32.32 18,313 30,546 7.5x 7.3x 7.0x 11.7x 11.4x 10.8x 12.0x 11.7x 11.0x 15.4x 14.5x 13.4x 2.9x 2.8x 2.7x
Progressive Waste Solutions 19.78 2,841 4,497 6.9x 6.7x 6.5x 11.3x 11.2x 10.7x 13.6x 13.5x 12.7x NM 17.7x 15.9x 2.5x 2.5x 2.4x
Mean 6.7x 6.4x 6.1x 11.7x 11.4x 9.5x 13.1x 12.6x 10.6x 16.1x 14.7x 12.8x 3.0x 2.9x 2.7x
Median 7.0x 6.7x 6.6x 10.2x 10.2x 9.2x 12.0x 11.7x 10.7x 15.8x 14.0x 12.1x 2.9x 2.8x 2.7x
Notes:
1. Market data as at 15 October 2012

Basics
Overview of Precedent Transactions Analysis
• Precedent transactions • Provides private market benchmark in a “change of control” scenario

analysis provides a
• Does include control premium
valuation benchmark in a
“change of control” • Apply multiples derived from similar or “comparable” precedent M&A transactions to
company’s operating data
scenario by applying Description
valuation multiples paid for • Reliability depends on number of recent precedent transactions and their degree of
similar businesses in past comparability, the market landscape at the time of the referenced transaction, as well as
acquisitions the relative supply and demand for a certain type of asset at the time of the transaction
• Key concepts include  Based on public information

– Premiums paid vs.  Realistic in the sense that past transactions were successfully completed at certain
valuation multiples premiums. The analysis therefore indicates a range of plausibility for offered premiums
– Sourcing relevant  May show trends such as consolidation, foreign acquirors, financial acquirors, etc
Advantages
precedent transactions  Provides guidance to assess likely interlopers and their willingness and ability to pay
 Public data on past transactions can be limited and misleading

 Precedent transactions are rarely directly comparable
 Not all aspects of a transaction can be captured in multiple valuation (e.g., commercial
agreements, governance issues)
Disadvantages
 Values obtained often vary over a wide range and therefore can be of limited use
 Market conditions at the time of a transaction can have substantial influence on valuation

Basics
Application of Precedent Transactions Analysis
1 Select a Set of Comparable Transactions
2 Identify Relevant Valuation Metrics
3 Calculate and Apply Valuation Metrics to the Financial Metrics of the Company being Valued

Basics
Step 1: Select a Set of Comparable Transactions
• Two key steps in compiling Identifying Relevant Deals

a precedent transactions
set • Useful databases include: Mergermarket, Thomson, Bloomberg or Capital IQ databases
• Identify relevant deals

• Source relevant data
Sourcing Relevant Data
• Level of detail depends on purpose of precedent transactions

– For a live execution, best approach is to compile the input data yourself using company filings for public market
transactions and press articles for private market transactions
– Where time is limited, Mergermarket often provides transaction multiples. However, necessary to check for
reasonableness

Basics
Step 2: Identify Relevant Valuation Metrics

Premiums Paid vs. Valuation Multiples
• Two broad metrics considered Premiums Paid

when compiling precedent • Represents the premium of the offer price per share to the target’s stock price before the transaction w as announced or rumored in the market
transaction multiples
– Only relevant for public market acquisitions
– Premiums paid
– Valuation multiples • Unaffected share prices can be calculated at the date prior to announcement or over a period of time
– Common time periods are 1 day, 30 days and 90 days
• Premiums paid only relevant – 30 day and 90 day share prices calculated as a volume-w eighted average (“VWAP”)
for public market acquisitions
• Best source VWAP data is Bloomberg
– Represents the percentage
paid above an “unaffected”
share price
– Unaffected share price
calculated prior to
announcement of the
transaction or when it was
rumoured in the market Valuation Multiples
• Represents price paid as a multiple of a given earnings metric
• Valuation multiples relevant – Relevant for both public and private market transactions
for both public and private
market transactions • Typical multiples include
– Typical multiples include – AV/EBITDA
AV/EBITDA, AV/EBIT and – AV/EBIT
P/E – P/E
– Industry-specific metrics
may be relevant (e.g. AV/2P • Methodology is the same as trading comparables
reserves for oil & gas)
• May also consider pre and post-synergies multiples

Basics
Example Precedent Transactions Output (1/3)
P/LTM Earnings
x
60
Median P/Es
Pre 2007 20.9x
2007 16.8x
2008 8.6x
40.2 2009-11 16.1x
40
27.7
25.0 24.0 Mean: 17.7x
23.5
21.2 21.2 20.7 20.1 Median: 16.7x
19.5 18.6
20 17.8 17.6 16.8 16.6 16.2 16.1 16.0 15.9 14.9 14.6 13.8
11.0 11.0 9.9 9.8 8.6 7.7
0
Date 10/06 1/06 9/00 4/02 3/00 12/07 3/06 4/00 4/02 12/09 12/09 7/07 3/00 5/07 8/06 11/04 6/09 11/10 6/11 6/08 8/11 6/07 5/08 9/09 11/03 12/07 11/08 7/08
(1)
(1)
(2)
Platinum IPO
Colonial (Life) / CBA
AWM / IOOF
Perennial / IOOF
Colonial (Funds Mgmt) / CBA

Select / AWM
AXA AP / AMP (Revised)

Oasis / ING
Aviva / NAB
AustChoice / Deakin
Ord Minett / AWM
Sthn Cross / Bell Financial

Rothschild AM / Westpac
DKN / IOOF
Western Pacific / Snowball
Wilson HTM IPO
Bell Financial Group IPO

ING JV / ANZ
ING JV / ANZ
Count / CBA
MLC / NAB
AXA AP / NAB
Bridges / Tower
Genesys / AXA AP
AXA AP / AMP
Plan B IPO
BT IM IPO
AWM / Tower Demerger
Source: Company Announcements
Notes:
1. Based on FY10E NPAT for AXA’s Australian and NZ business; NAB bid since terminated (included for reference)
2. Revised proposal, based on FY11E NPAT for AXA’s Australian and NZ business

Basics
Mean/Median Premia Paid

1 Day Prior 30 Days Prior 90 Days Prior
Unsolicited
All 48% / 54% 49% / 36% 57% / 49%
Cross Border 61% / 55% 61% / 58% 74% / 57%
Domestic 38% / 36% 41% / 35% 45% / 43%
Friendly
All 38% / 29% 50% / 37% 52% / 37%
Cross Border 45% / 36% 64% / 41% 70% / 41%
Domestic 32% / 24% 37% / 32% 35% / 33%
Source: Bloomberg, IRESS, FactSet
Mean/Median Premia Paid

1 Day Prior 30 Days Prior 90 Days Prior
Unsolicited
Cash 52% / 54% 53% / 42% 57% / 49%
Stock 33% / 33% 42% / 42% 90% / 90%
Cash & Stock 21% / 21% 18% / 18% (8)% / (8)%
Friendly
Cash 44% / 37% 58% / 38% 63% / 44%
Stock 37% / 23% 43% / 31% 43% / 24%
Cash & Stock 22% / 21% 35% / 37% 29% / 32%
Source: Bloomberg, IRESS, FactSet
Notes:

Basics

Australia Life Insurance Sector
• Life insurance precedent Australia Life Precedent Transactions

transactions have occurred
at around 20x forward Acquired Size P/E P/Bk P/EV
earnings and 1.4x EV Date Target Acquirer (%) (A$MM) (x) (x) (x) Comments
29-Dec-10 Tower Australia Dai-ichi Life 71% 1 ,760 21.5x 2.9x 1 .4x Life insurer acquisition
15-Nov-10 AXA AP Aust & NZ AMP 100% 4 ,154 16.0x 2.6x 1 .2x Life insurer acquisition
17-Dec-09 AXA AP Aust & NZ NAB 100% 4 ,610 19.5x n.a. 1.4x Major bank acquisition
25-Sep-09 ING Australia ANZ 51% 1 ,760 11.8x 1.7x 1 .2x Exit by parent (in JV with ANZ)
22-Jun-09 Aviva Australia NAB 100% 9 25 16.1x 0.9x 1 .1x Exit by parent
8-Aug-08 Tower Australia Dai-ichi Life 30% 3 76 23.2x 2.3x 1 .6x Strategic investment by Dai-ichi
30-Jan-06 PrefSure Life Tower Group 100% 1 45 20.7x 1.3x 1 .1x Exit by parent
26-Aug-02 BT Financial Group Westpac 100% 9 00 n.a. n.a. n.a. Major bank acquisition
30-Apr-02 ANZ (49% JV) ING (51% JV) 49% 3 ,753 20.1x 1.9x n.a. Major bank JV
23-Apr-02 Rothschild Australia Westpac 100% 3 23 24.0x n.a. n.a. Major bank acquisition
10-Apr-00 MLC NAB 100% 4 ,610 20.7x 5.3x 2 .0x Major bank acquisition
9-Mar-00 Colonial (Life Business) CBA 100% 5 ,456 17.6x n.a. 1.5x Major bank acquisition
9-Mar-00 Colonial (FM Business) CBA 100% 2 ,235 23.5x 2.0x n.a. Major bank acquisition
Mean 19.6x 2.3x 1 .4x
Median 20.4x 2.0x 1 .4x
Source: Company Filings, Company Announcements

Basics
Overview of Discounted Cash Flow Analysis
• Discounted cash flow • Theoretical valuation / Intrinsic valuation

analysis discounts a
• Project the company’s future operating cash flows for five years or more
company’s future operating
cash flows at an • Calculate the present value of those cash flows and the terminal value using an
appropriate cost of capital and terminal value methodology
appropriate cost of capital Description
• Key concepts include

– Unlevered free cash
flows
– WACC  Theoretically, the most sound valuation method
 Forward looking analysis, based on cash flow (less affected by accounting rules than net
– Mid-year convention
income); incorporates expected operating strategy into the model
– Terminal growth rate vs.  Less influenced by volatile public market conditions
terminal value multiple Advantages
 Allows a valuation of the separate components of a business or synergies separately from
the business
 Valuation is highly sensitive to underlying assumptions for cash flows (i.e., validity of
projections), terminal value calculation and discount rate
 Terminal value often represents significant portion of total value
 Impervious to market dynamics and associated control premia, theoretical valuation may
Disadvantages misrepresent what would actually be paid for a business

Basics
Application of DCF Analysis
1 Forecast Unlevered Free Cash Flows / Terminal Value
2 Calculate an Appropriate Discount Rate (WACC)
3 Discount Cash Flows / Terminal Value and Summate at Date of Valuation

Basics
Step 1: What is Unlevered Free Cash Flow?
• Unlevered free cash flows Unlevered Free Cash Flow

(or free cash flows to the
firm, “FCFF”) represent the • Unlevered free cash flow (or free cash flows to the firm, “FCFF”) represents the normalised cash flow available to all
providers of capital to the firm
normalised cash flows
available to all providers of – The sum of a company’s discounted FCFF represents the intrinsic aggregate value of the company
capital to the firm
Calculating Unlevered Free Cash Flow
Change in
EBITDA - Unlevered Tax - Capex - Working Capital = FCFF
Where
• EBITDA = Earnings before interest, taxes, depreciation and amortisation
• Unlevered tax = EBIT x tax rate
• Capex = expenditure on capital goods/non-current intangibles
• Working capital = short term operational assets (receivables, inventories, other current assets excluding cash) –
short term operational liabilities (payables, income taxes payable, other current liabilities excluding debt)

Basics
Step 1: Forecasting Unlevered Free Cash Flow
• Cash flows will be forecast for Option 1: Broker Consensus Forecasts

individual years over a defined
forecast period
• The most simple method of forecasting the unlevered free cash flow of a company is to take an average/median of
what brokers are forecasting
– The length of this forecast
period is determined by the • Approach is simple to apply and has the advantage of combining the analysis of multiple brokers into a single
degree of visibility in the forecast
company’s earnings
• Most appropriate when analysis needs to be done relatively quickly/there is insufficient data available to build a full
– A mature, stable company operational model for the given company in the circumstances
for example will have more
visibility in its earnings than
a rapidly growing
technology start-up
• There are two primary
methods for forecasting
individual cash flows – using
broker forecasts or building an
operational model Option 2: Building an Operational Model
• A more involved method of forecasting cash flows is to build an operational model for the company being valued
• Involves making assumptions about key earnings drivers, operational costs, capital expenditure requirements etc
– Modeller will need to take a view on factors such as volume growth and pricing growth in the business
• Approach allows individual assumptions underlying forecasts to be assessed and sensitised internally – can provide
greater confidence in forecasts
• Most appropriate when detailed valuation is required for live executions

• Remember, outputs are only as good as the inputs. An operational model is most reliable with substantial input from
management

Basics
Step 1: Calculating a Terminal Value
• Once cash flow forecasts Terminal Value Overview

have been generated for n • When performing a DCF analysis w e project cash flows for n years and then estimate a terminal value for the ongoing value of the business
periods, a terminal value beyond year n
needs to be calculated for – Alternatively, the terminal value can be view ed as the sale price of the business in year n
the business • There are tw o basic methodologies to calculate a terminal value
– This effectively – Apply a multiple to a specified financial statistic (Revenue, EBITDA, EBIT, Net Income) in the terminal year (“m ultiple m ethod”)
represents the value of – Assume a grow ing perpetuity based on the terminal year’s cash flow (“perpetual growth m ethod”)
the ongoing business
beyond year n
Multiple Method
• Assumes the business is sold at the end of the projection period
• Two basic methodologies • Use the most appropriate multiple or range of multiples for the company’s industry
to calculate a terminal
value Tip
– Multiple applied to There are two schools of thought: 1) It is common practice to assume an exit multiple that is largely in-line with trading comparables and
terminal year earnings account for potential variations with sensitivity tables; and 2) It is also common practice to assume an exit multiple that implies a perpetual
– Discount FCFF post the growth rate in-line with reasonable long-term growth estimates (2-3%)
terminal year assuming
they grow at a certain
Perpetual Growth Method
rate into perpetuity
• Assumes FCFF continues in perpetuity, grow ing at some constant rate
• Terminal grow th rate should not exceed the long term nominal grow th rate of the economy
• Important to cross-check with multiple method and to normalise terminal year projections
Tip
Theoretically, it is appropriate to assume a perpetual growth rate that is in line with the annual growth rate of the economy. Typical to assume
2-3%

Basics
Step 2: Weighted Average Cost of Capital (1/2)
• The appropriate discount Calculating WACC

rate to be applied to FCFF
reflects the blended cost of After-tax Cost of
capital for both debt and Cost of Debt x 1 – Tax Rate = Debt
equity investors, commonly
known as the weighted Where
average cost of capital • Cost of debt = interest rate that w ould be applied to a new debt issue by the company (often calculated assuming a base rate, such as the A$ 5
(“WACC”) year sw ap rate, plus a margin based on the credit profile of the company)
• Tax rate = marginal tax rate
• The cost of debt is

determined based on a
relevant base rate plus a Equity Risk
Risk-Free Rate + Barra Beta x Premium = Cost of Equity
credit spread
Where
• The cost of equity should • Risk-free rate = relevant government bond yield (e.g. US Government 10-year government bond)
reflect both compensation • Beta = company’s equity beta, a measure of risk of the particular company vs. the overall market portfolio (Bloomberg or CIQ)
for the time value of money • Equity risk premium = Excess return of the market portfolio over the risk-free rate (depending on Bank’s guidance)
and the riskiness of the
stock (volatility of returns
around the mean)
After-tax Cost of Debt / Capital 1 –Debt / Capital
Debt x Ratio + Cost of Equity x Ratio = WACC
Where
• Debt/capital ratio = target or current long term debt / (debt + market value of equity ratio)

Basics
Step 2: Weighted Average Cost of Capital (2/2)

Cost of Equity
• Theoretical cost of equity • Rate at which an investment may earn interest without incurring any risk with respect to
requires estimation of amount or timing of cash flows
– Risk-free rate Risk-Free Rate • Typically based on the yield on a government security with a tenor equal to that of the
– Beta investment being valued
• Common to use the current yield on 10-year Australian government bonds
– Equity risk premium
• Measure of the risk of the particular company vs. the overall market portfolio
• Where the company being valued is listed, there are a number of methods for calculating
beta
– Bloomberg adjusted beta (go to the <BETA> screen on a Bloomberg terminal). Calculate
over 3+ years (if possible) and on a monthly returns basis (1)
Beta – Calculate directly using historical stock and index returns
– Average of broker estimates
• Where the company being value is not listed
– Select a set of comparable, listed companies and calculate an average unlevered
beta(2). Re-lever the beta for the capital structure of the company being valued
Equity Risk • Excess return of the market portfolio over the risk-free rate
Premium • Dependent on Bank’s guidance
Notes:
1. Bloomberg adjusted betas are calculated as (1/3) + (2/3) x unadjusted beta. This adjustment assumes that all company betas should approach 1 over time
2. Unlevered beta = levered beta / [1 + (D/E)*(1-t)]

Basics
Step 3: Discounting Cash Flows – the Mid-Year Convention
• When discounting cash

CF1 PV2 + PV3 + PV4
flows, it is common and PV1 = PVTOTAL = PV1 +
more realistic to assume (1+r)6/12 (1+r)6/12
that cash flows occur
throughout the year CF1
12/31/05 6/30/06 12/31/06
– e.g. 31 December year-
end FCFF are assumed 6/12
to occur on 30 June CF2
– e.g. 30 June year-end PV2 =
FCFF are assumed to (1+r)1
occur on 31 December CF2
12/31/05 6/30/06 12/31/06 6/30/07 12/31/07
1
Valuation Date CF3
PV3 =
(1+r)2
CF3
12/31/05 6/30/06 12/31/06 6/30/07 12/31/07 6/30/08 12/31/08
1 2
CF4
PV4 =
(1+r)3
CF4
12/31/05 6/30/06 12/31/06 6/30/07 12/31/07 6/30/08 12/31/08 6/30/09 12/31/09
1 2 3

Basics
Step 3: Discounting Terminal Value – the Mid-Year Convention
• The appropriate method to Option # 1 – Multiple Method

use to discount terminal
value depends on whether
• The multiple method assumes terminal value occurs at the end of the final period
the multiple or perpetual
growth method has been • This means that the mid-year convention does not apply to discounting the terminal value to the present value
used to calculate it
Option # 2 – Perpetual Growth Method
• The mid-year convention does apply to discounting the terminal value to the present value when the perpetual
growth method has been used

Basics
Example DCF Output
Projected Cash Flows

FY2009A – FY2020E
A$MM, June Year End FY09A FY10A FY11A FY12E FY13E FY14E FY15E FY16E FY17E FY18E FY19E FY20E
EBITDA 29 29 36 36 40 44 44 45 46 47 48 49
D&A (14) (17) (16) (16) (16) (17) (18) (18) (19) (20) (20) (21)
EBIT 15 11 19 20 23 26 26 27 27 27 28 28
Less: Tax at 30% (4) (3) (6) (6) (7) (8) (8) (8) (8) (8) (8) (8)
EBIT (1-T) 10 8 14 14 16 18 19 19 19 19 19 20
Less: Maintenance Capex (6) (6) (6) (6) (6) (6) (6) (6) (6)
Less: Expansionary Capex (1) 0 (2) 0 0 0 0 0 0
Less: Remedial Capex (0) (2) 0 0 0 0 0 0 0
Less: Change in WC 1 1 1 1 1 1 1 1 1
Plus: D&A 16 16 17 18 18 19 20 20 21
FCFF 24 26 28 31 32 33 34 35 35
WACC Calculation DCF Valuation

Target D / D + E 65% A$MM
Risk-Free Rate 4.1% Terminal Growth Rate (%) 2.0%
ERP 6.0% Terminal Value 447
Beta 1.30 PV Terminal Value 198
Cost of Equity 11.9% PV of FCFF 181
A$MM Base Rate Margin Kd PV of Firm 379
Senior Facility 46 4.0% 1.5% 5.5% Less: Gross Debt (134)
Mezzanine A 26 4.0% 7.0% 11.0% Plus: Cash 29
Mezzanine B 44 4.0% 7.0% 11.0% Less: Minorities (1)
Mezzanine C 18 4.0% 7.0% 11.0% PV of Equity 272
Other 2 4.0% 7.0% 11.0% TSO (MM) 2,726
Cost of Debt 134 9.1% PV of Equity per Share (A$ / Share) 0.10
WACC 10.1% Premium to Current Share Price (%) 284.4%

Basics
Overview of Leveraged Buyout Analysis
• Leveraged buyout analysis • Determines the range of prices that a financial buyer would be willing to pay for an asset
determines what price a assuming a range of target rates of return
financial sponsor would be • Analysis is heavily dependent on the cash flow profile of the asset, leverage and exit value
willing to pay for an asset assumptions
assuming a certain rate of Description
return
• This is not a “valuation
methodology” per se, but
an ability to pay analysis
based on a financial
 Reflects methodology used by financial sponsors and hence represents a theoretically
sponsor’s desired equity
sound view of what private equity might be willing to pay for an asset
return and the
leveragability of a business
• Often viewed as a floor Advantages
valuation and typically
yields lower values than an
traditional discounted cash
flow valuation
 May not be appropriate for all businesses – will depend on ability for the business to
sustain leverage and for a financial sponsor to exit its investment in 3 – 5 years
– Only a relevant benchmark where potential bidder field includes private equity
 Requires additional assumptions around leverage and exit multiples
Disadvantages
 IRR can be sensitive to leverage and exit multiple assumptions

Basics
Key Concepts of Leveraged Buyout Analysis
1 How an LBO Creates Value
2 Suitable Assets for Private Equity
3 Leverage
4 LBO Analysis as a Valuation Tool

Basics
1: How an LBO Creates Value
• Value is generated in a Increase in Value through Operations

leveraged buyout in two Exit
Value
primary ways
Market Value LBO Assets Debt $15
– Operational before LBO LBO Value $30
improvements –acquirers Assets Debt $6 Assets Debt $15
Value of asset increases
often restructure the through grow th as w ell as
$20 $20 Equity
Equity improvements in
operations of a business $14 operations. Assumes no $15
to increase the value of debt paydow n
Equity $5
its assets
– Improvements in capital
+
structure – through the Increase in Value through Financial Engineering
Market Value LBO Exit
use of financial leverage, LBO
before LBO Value Value
acquirers can reduce the
cost of capital of the Assets Debt $6 Assets Debt $15 Assets Debt $5
business and increase $20 $20 $20
Debt is paid dow n with
Equity Equity
the rate of return on cash flow generated by
$14 $15
assets. Assumes no
equity increase in asset value
Equity $5
=
Total Increase in Value
Exit
Value
Market Value LBO Assets Debt $5

before LBO LBO Value Value of assets increases $30
Equity
Assets Debt $6 Assets Debt $15 through grow th as w ell as $25
$20 $20 improvement in
Equity operations, and cash flow
$14 generated by the assets
pays dow n debt
Equity $5

Basics
2: Suitable Assets for Private Equity
• Common characteristics of Characteristics of Private Equity Assets

LBOs are
– Ability to exit, have a Typical Characteristics Drivers of Value
story that still appeals to Grow th Plays • Young grow ing companies • Value creation through EBITDA/cash flow expansion
future buyers (i.e., need
• Operating in grow ing industries • Better access to capital
to have value left in
business, especially for
IPOs)
– Cash flow generation Operational • Mature companies in stable industries or neglected • Operational improvement
Im provement Plays industries (non-core division of conglomerates)
(low capex, high margins, – Balance Sheet optimisation
low volatility in working – Margin expansion
capital swings) • Potential multiple expansion
– Stability of cash flows Roll-Up Plays • Small/medium companies in fragmented markets • Value creation through bolt-on acquisitions and
through the cycle to synergy extraction
sustain high leverage • Potential multiple expansion
– Asset base that can be
used as security for debt
holders
– Ability to motivate
management through
better incentive structure
– High growth

Basics
3: Leverage Available to Financial Sponsors

Typical Financing Instruments
Liabilities &
Shareholders’ Priority in cash
Equity Typical Characteristics/Comments “waterfall”
Assets
Senior
• Priority claim on the assets
• Imposes restrictive maintenance covenants on company
• Pricing: Floating rate LIBOR + 200–325 bps (N.B. swaps)
Bank Debt
40% • Maturity: 5–9 years
• A, B, C tranches
• Repayment: A amortizes over life of loan, B and C in bullet
• “Junk” Bonds
High Yield • 10-year, 5-year non-callable
20% • Pricing: Benchmark bond + 400–700 bps
Quasi • Also known as “mezzanine” financing

Equity
15% • Characteristics of debt and equity
• Riskiest security in capital structure

Pure
• Full upside potential / No protection on downside
Equity
25% • Financial Sponsors have historically required returns on investment of
Junior approximately 20%

Basics
4: LBO Analysis as a Valuation Tool
• LBO valuation evaluates Overview of LBO Valuation

what a financial sponsor
can afford to pay, given
• LBO valuation analysis is based on cash flow projections and takes a company’s leveraged capital structure into
specific target returns
consideration
• Methodology is similar to a • From a technical perspective, it is therefore similar to a levered DCF analysis
levered DCF valuation • However, LBO analysis approaches valuation from the specific perspective of LBO Sponsors; the key valuation
drivers therefore are:
• IRR is the primary output
– Debt capacity: maximizing leverage, within standard market parameters, will allow the financial sponsor to
that is used to guide
investment decisions maximize purchase price, given desire to contribute as little equity as possible
– Essentially the discount – Equity returns: once debt capacity has been ascertained, equity commitment will be determined by target
rate which, when applied assumed exit proceeds and equity returns, typically in the range of 20 – 25% historically
to the cash flows and
price paid for the – The interaction of these two factors will determine the LBO valuation
company under analysis,
• While financial sponsors consider many methodologies to calculate a “take-out” valuation, the most important pricing
gives a present value of
zero consideration is the projected return generated by the investment
– An IRR of 20% is – Basic question is “what price could be paid for the asset assuming a certain capital structure and a target return?”
typically considered to be
the rate of return on
equity to attract interest
from private equity
buyers

Basics
Example LBO Outputs
Sources and Uses Projected Cash Flows and Credit Metrics

Sources Commit Funded % Total x EBITDA A$MM, Dec YE LTM CY13E CY14E CY15E CY16E
Term Loan A 53 53 19% 1.5x Term Loan A 53 32 18 5 -
Term Loan B 80 80 28% 2.3x
Capex Facility 35 - - - Term Loan B 80 71 63 56 56
Revolver 35 - - -
Capex Facility - 11 30 35 3
Total Senior Debt 203 133 47% 3.8x
Mezzanine - - - - Revolver - - - - -
Total Debt 203 133 47% 3.8x
Shareholder Loan - 66 24% 1.9x Total Senior Debt 133 115 111 96 59
Common Equity - 82 29% 2.3x
Mezzanine - - - - -
Total Equity - 148 53% 4.2x
Total Sources - 281 100% 7.9x Total Debt 133 115 111 96 59
Cash 2 5 6 10 2
Uses A$MM % Total x EBITDA
Acquisition Price 266 95% 7.5x Total Net Debt 131 110 105 86 57
Transaction Costs 13 5% 0.4x
Mezzanine Upfront Fee - - - EBITDA 37 40 42 43 49
Minimum Cash Balance 2 1% 0.1x
Add: Non-Cash Items 2 2 2 3 2
Total Uses 281 100% 7.9x
Joint Venture Adj. (1) (1) 1 1 1
IRR Sensitivity Inc in Working Cap. 5 (0) (1) (0) 0
Less Growth Capex (5) (10) (19) (12) (8)

Entry AV ($MM) / AV/EBITDA (x)
Less Maint. Capex (7) (4) (5) (4) (4)
248 266 284 301 319
Capex Facility Drawdown - 10 19 5 -
7.0x 7.5x 8.0x 8.5x 9.0x
Less Cash Tax - - - - -
12.1x 6.0x 14% 11% 8% 5% 3% Less Withholding Tax (1) (1) (1) (2) (2)
AV/EBITDA (x)
Exit P/E (x) /
13.4x 6.5x 17% 13% 10% 8% 5% FCF 31 35 37 34 38
14.7x 7.0x 19% 16% 13% 10% 8%

DSCR 2.1x 1.4x 1.6x 1.6x 1.5x
16.1x 7.5x 21% 18% 15% 12% 10%
Senior Debt / EBITDA 3.6x 2.8x 2.7x 2.2x 1.2x
17.4x 8.0x 23% 20% 17% 14% 12%
Total Net Debt / EBITDA 3.6x 2.7x 2.5x 2.0x 1.2x
Interest Coverage 2.5x 2.9x 3.3x 4.0x 5.1x
Notes:

Bringing It All Together: The Football Field
• The football field allows to Valuation Benchmarks

summarize the ranges of Enterprise Value (US$m)
valuation implied by each Enterprise Value

methodology
FY+1 EV/EBITDA
Trading
Com ps
FY+1 EV/EBIT
LTM EV/EBITDA
Transaction
Com ps
LTM EV/EBIT
DCF Valuation
x – y% WACC
Valuation
DCF
DCF Valuation
x – y% Terminal Grow th
Valuation
LBO
LBO
20% - 25% IRR

SECTION 2
Modelling Best Practices
43
Modelling Best Practices (1/2)
• A good model is • Use colours/formats, but not for aesthetics

– Simple and easy to – Simple colour codes go a long way towards ensuring that your formulae are not over-written:
understand
blue for inputs, black for calculations, red for unusual items, green for Capital IQ formulae and
– Formatted cleanly links to other sheets, italic for percentages (growth, margins etc.)
– Has as few sheets as
possible
– Easily printed
• Make sure your model is clean and easy to understand
– People will be inherently sceptical of a messy/confusing model, but are more likely to trust a
model with a clean layout
• Avoid changing column widths and row heights

– Put your model outputs on a separate sheet where you change column widths and row
heights—avoid doing so in the actual model
• Always do all calculations in your model (and in cells) - do not use your calculator. This makes it
easier for someone else to reconcile the model
• Don’t scatter your assumptions and inputs. Make sure your inputs and assumptions are where
they should logically be
• Avoid having numbers and formulae in the same cell. Reference formulae to input cells
MORGAN STANLEY SINGAPORE INVESTMENT MODELLING BEST PRACTICES 44

Modelling Best Practices (2/2)
• A good model is • A model should always be able to be checked with a calculator and the print-out
– Simple and easy to – Make sure your model is set up so that it is easy to quickly print out a version for a senior to
understand
review
– Formatted cleanly
– Has as few sheets as
possible • Note data and sources of inputs (use “comments” function)
– Easily printed
• Use consistent line and column headings
• Format as you create the model
• Never enter the same number or assumption twice. If it makes sense to show the assumption
again, link it to the original input
• Use logical names for different versions of the model and don’t forget to save regularly a new
version
• Don’t use macros if you don’t really need them. You will very rarely need macros
• Keep formulae simple—if you have a complicated formula, break it down. This will make it easier
for yourself and anybody else to review the logic
• Don’t hide anything. If really necessary, group
MORGAN STANLEY SINGAPORE INVESTMENT MODELLING BEST PRACTICES 45

SECTION 3
Q&A and Open Discussion
46
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MORGAN STANLEY SINGAPORE INVESTMENT 47


MS Overview of Valuation Methodologies

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Overview of Valuation Methodologies

Section 1 Valuation Fundamentals 3

MORGAN STANLEY SINGAPORE INVESTMENT 2

Valuation Basics (1/2)

Enterprise Value Equity Value

Unlevered Free Cash Flow Discounted Cash Flows (DCF)

Weighted Average Cost of Capital (WACC) LBO Value

MORGAN STANLEY SINGAPORE INVESTMENT VALUATION FUNDAMENTALS 4

Valuation Basics (2/2)

Equity Value Equity Value Aggregate Value

Equity Value = Total Shares Outstanding (TSO) x Share Price

MORGAN STANLEY SINGAPORE INVESTMENT VALUATION FUNDAMENTALS 5

Valuation Methodologies Can Be Regrouped In Two Main Categories

Relative Valuation Fundamental / Intrinsic Valuation

A• Comparable Companies C• Discounted Cash Flows

B• Precedent Transactions D• Leverage Buy-Out (LBO) [refer Appendix]

MORGAN STANLEY SINGAPORE INVESTMENT VALUATION FUNDAMENTALS 6

Bringing It All Together: The Football Field

• The football field allows to Valuation Benchmarks

valuation implied by each Enterprise Value

20% - 25% IRR

MORGAN STANLEY SINGAPORE INVESTMENT VALUATION FUNDAMENTALS 7

Overview of Comparable Companies Analysis

MORGAN STANLEY SINGAPORE INVESTMENT VALUATION FUNDAMENTALS 8

Application of Comparable Companies Analysis

1 Select a Set of Comparable Companies

2 Identify Relevant Valuation Multiples

MORGAN STANLEY SINGAPORE INVESTMENT VALUATION FUNDAMENTALS 9

Step 1: Selecting a Set of Comparable Companies

• Business characteristics to consider include

• Financial characteristics to consider include

– Size (revenue, operating income)

– Profitability (operating margins)

MORGAN STANLEY SINGAPORE INVESTMENT VALUATION FUNDAMENTALS 10

Step 2: Identifying Relevant Valuation Multiples (1/2)

• Certain valuation multiples are relevant across most industries

• However, some industries will have specific valuation benchmarks

– Oil & Gas: AV/2P Reserves

• Most trading comparables sets will also include leverage multiples

– Common leverage multiples include Debt/EBITDA, Net Debt/EBITDA, EBITDA/Interest Expense

MORGAN STANLEY SINGAPORE INVESTMENT VALUATION FUNDAMENTALS 11

Step 2: Identifying Relevant Valuation Multiples (2/2)

• It is important to ensure Matching Earnings “Type” to Relevant Multiples

• Equity value multiples

MORGAN STANLEY SINGAPORE INVESTMENT VALUATION FUNDAMENTALS 12

Step 3: Collection of Historical and Forecast Financials (1/3)

Key Financial Statistics and Relevant Sources

Statistic Definition Source in Financial Statements

MORGAN STANLEY SINGAPORE INVESTMENT VALUATION FUNDAMENTALS 13

Step 3: Collection of Historical and Forecast Financials (2/3)

Input Data and Relevant Sources

Data Required Use Sources

MORGAN STANLEY SINGAPORE INVESTMENT VALUATION FUNDAMENTALS 14

Step 3: Calendarisation of Earnings

• Companies within a trading Overview of Calendarisation

TRS 30 June 30 June 30 June

Months Used to Calendarise to 30 June 2013

MORGAN STANLEY SINGAPORE INVESTMENT VALUATION FUNDAMENTALS 15

Do’s and Don’ts of Comparables Analysis