How to value unlisted equity

  • Trading comparable method: In the current uncertain environment amid increased stock-market volatility and forecasting risk, and a reduction in revenue and EBITDA levels, the following adjustments may be made to derive a fair value:
  • Solutions: In most cases, the last reported financials are used for valuation. These, therefore, do not capture the impact of the pandemic on profitability. In this event, we could use forward multiples based on forecast financials, factoring in the new economic environment
  • A control premium over and above market value could be applied in the event of a majority stake
  • Precedent transaction comparable method: “It may no longer be appropriate for recent transaction prices, especially those from before the expansion of the pandemic to receive significant, if any, weight in determining fair value” — IPEV Guidelines, March 2020
  • Solutions: Adjustments in terms of projected financials, capitalstructure, and future cash flow of the target company can be made during the valuation process
  • Since the number of transactions in the market has dropped significantly, pre-COVID-19 transaction multiples would need to be adjusted accordingly
  • Income approach: This uses the discounted cash flow (DCF) method to derive a fair value. This appears to be the most appropriate method at present, as we can incorporate the impact of uncertainty, although quantifying the impact of the pandemic on future cash flow is a challenge.
  • Solutions: Avoid a double dip — adjusting for increased discount rates due to a higher risk premium and for a higher cost of debt — in the current environment. A carefully balanced lower profitability forecast could be used
  • Adjusting for target company-specific risk, e.g., geographical presence, product segmentation, and leverage profile
  • Regular update of key drivers used for financial projections, based on recent economic developments and government policies
  • It is advisable to use the results of one method in conjunction with one or more methods discussed above
  • Any change in assumption/drivers of projected financials should be backed by documentation
  • Prepare different scenarios to arrive at a valuation range — pre-COVID-19, stressed case, base case and upside case — as the magnitude of the impact and time to recovery may differ by, for example, industry and geography
  • Frequently update business drivers in the financial model based on industry/government policies (such as fiscal stimulus, industry-specific financial packages and changes in central-bank lending rate policies)



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Acuity Knowledge Partners

Acuity Knowledge Partners

We write about financial industry trends, the impact of regulatory changes and opinions on industry inflection points.