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We offer clients access to various informative materials and reports.

Analysis and Research is a service linked to the brokerage activity. The dedicated Analysis and Research team offers to brokerage services clients access to daily informative materials, investment analysis reports covering the main companies listed on the Bucharest Stock Exchange (“BSE”) and reports on quarterly financial statements.

The Analysis and Research team constantly monitors BSE listed companies to identify investment opportunities. The activity is supported by continuous monitoring of the macroeconomic environment and the evolution of various sectors of the economy.

 

The products and services offered:

 

  • Daily Notes (“Daily Perspectives”): Provides daily information on the evolution of the local stock market as well as macroeconomic and legislative developments.
  • Market Screen: Overview of the main financial and valuation indicators of listed companies.
  • Company Reports (“Company Update”): Provides an in-depth analysis of the company’s fundamentals as well as estimates regarding potential development, main drivers and risks to consider, financial evolution estimates. A company update report provides investment recommendations and target price estimates of shares.
  • Earnings Review: Analysis of companies’ quarterly financial results.
  • Flash Notes reports: This type of product provides an analysis of the impact of major events affecting the companies included in the coverage universe.

 

Concepts and methods which are used in the valuation process

 

Target price of a security is the fair price usually expected to be met within a 12-month investment horizon (if not state otherwise) derived by employing either absolute valuation tools & methods such as Discounted Cash-Flow model (DCF), Discounted Dividend model (DDM), Residual income (RI), sum-of-parts method or relative models such as peer group multiples.

All valuation methods are based on either top-down or bottom-up integrated models for every stock included in the coverage universe and imply a minimum 5-year period of detailed forecasts (Income Statement, Balance Sheet, Cash Flow Statement) constructed based on a comprehensive analysis of all relevant publicly available information and analyst’s best judgment at the date of the report. Frequently used assumptions refer to (and are by no means exhaustive) earnings KPIs (prices/tariffs, volumes, market positioning, sector evolution, investment plans, working capital needs etc.) which may differ depending on the companies’ specifics. However, by using Excel standardised modelling tools we ensure consistency and comparability within our coverage and peer group. Valuation conclusions are not disclosed prior to the public issuance of research reports. 

Most commonly used valuation methods

 

 Discounted Cash-flow Model (DCF)

DCF valuation tool is used to derive the value of a firm and asses the attractiveness of the investment. The tool takes into consideration time value of money and, thus, discounts future cash flow projections using an appropriate discount factor – usually the weighted average cost of capital (WACC)- to arrive at a present value, frequently compared to the cost of an immediate investment. Should fair value of the firm be higher than current cost of the investment, it may prove to be a good investment opportunity.

As a standard model, we use a Free Cash Flow to Firm (FCFF) model. FCFFs are modelled based on financial theoretical guidelines:

  • Free Cash Flow = NOPLAT + Depreciation & Amortisation - gross investment in PPE & Intangibles +/- change in Working Capital +/- change in long-term provisions
  • Net operating profit less adjusted taxes (NOPLAT) is a financial metric that refers to total operating profits generated by the company's core operations after adjusting for income taxes related to those operations.

We compute terminal value as:

  • Terminal value (TV) = Last explicitly forecast FCFF*(1+sustainable earnings growth)/(WACC – sustainable earnings growth).

The discount factor is based on the cost of capital, most specifically on the cost of each component weighted by its relative market value (Weighted Average Cost of Capital – WACC). Please note that the company may choose to finance its operations via either own capital or a mix of equity and debt. 

For modelling the company’s cost of debt, we usually consider the market price of long-term debt, if available, or a market premium vs the risk-free rate.   

Cost of equity, on the other hand, is based on the Capital Asset Pricing Model (CAPM), a model that describes the relationship between systematic risk (Beta) and expected returns of the stocks. Based on CAPM guidelines, we add to our risk-free rate assumption an equity market premium adjusted with the company’s levered Beta. Risk free rates used usually reflect Romanian benchmark government bond yield curve at the time of the report. Furthermore, we base our beta (β) assumption on a Blume-adjusted two-year weekly benchmarked-to-BET assessment. Levered Beta is adjusted for the company’s specific financing structure. 

An alternative to Free Cash Flow to the Firm model is Free Cash Flow to Equity. This version discounts all future cash flow projections available to equity holders at the cost of equity (not the weighted average cost of capital).

 Dividend Discounted Model (DDM)

DDM is a valuation tool based on the general principle that the value of the stock should be the present value of expected dividends. The model requires two basic inputs – expected dividends and cost of equity used as discount factor. Projected dividends rely on assumptions of future earnings’ growth rates and payout ratios whereas the cost of equity is based on CAPM model. Furthermore, we estimate terminal values (after our explicitly forecast period) based on Gordon Growth Model: 

Terminal value (TV) = Last explicitly forecast DPS*(1+ sustainable earnings growth) / (cost of equity – sustainable earnings growth).

 

 Sum-of-parts valuation method

The sum-of-parts valuation method is the process of valuing the company by aggregating the standalone value of its business units/divisions/lines in order to determine a single total enterprise value (EV) which is afterwards adjusted for net debt, other non-operating assets and minorities. Each division can be separately valued using a different valuation model/method. The method is recommended for conglomerates comprised of business units in different industries or performing different core operations. It can be used as a defense tool against a hostile takeover by highlighting that the company’s value exceeds its sum-of-parts value due to presence of synergies and economies of scale. 

 

 Relative valuation 

Relative valuation method uses current valuation ratios of comparable companies (in terms of size, financing structure, operations etc.) to derive a fair value estimate for a company. Most frequently, valuation ratios refer to trading multiples which are compared with those of the peer group. Peer group companies are listed companies which analysts see as a comparable proxy of the company under review. Usually, companies from the same industry are seen as peers although there can be a wide range of criteria used in the selection process: size, growth prospects, financing structure, similar end-customer markets etc. 

 

 Price multiples

Price multiples refer to any ratio that uses the share price of the company in conjunction with any other per-share financial metric. Most frequently used price multiples are P/E (Price-to-earnings), P/B (Price-to-book), P/S (Price-to-sales), P/CF (Price-to-CashFlow).

Price-to-Earnings (P/E) is a valuation ratio comparing the stock price of a company to its earnings per share, underscoring how much investors are willing to pay for the company’s earnings. The fair value per share is derived by multiplying the estimated earnings per share by the peer group P/E (average peers’ P/E). 

Price-to-Book (P/B) is a valuation ratio comparing the price stock of a company to its book value per share, indicating how much investors are willing to pay for the book value of a company. The fair value per share is derived by multiplying the estimated book value per share by the peer group P/B. 

Enterprise Value (EV) multiples

Enterprise Value multiples consider the impact of a company’s financing structure (leverage). Most frequently used Enterprise Value (EV) multiples are EV/Sales (Enterprise Value-to-Sales), EV/EBITDA (Enterprise value-to-Earnings before Interest, Tax, Depreciation and Amortisation) or EV/EBIT (Enterprise Value-to- Earnings before Interest and Tax). The multiples are computed by dividing Enterprise Value by the respective Sales, EBIDTA and EBIT figures and indicate how many times an investor are willing to pay for the company’s sales, EBITDA and EBIT. In any of the three cases, the fair value per share is derived by multiplying the estimated Sales, EBITDA or EBIT 

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