ABV as a Proxy for Detailed Valuation: Insights and Considerations

Valuation Valuation - - 01 01

Topics to be covered Is doing a valuation essential? Can ABV (asset-based valuation) be a good proxy for a detailed valuation? Features of a good valuation technique Valuation dimensions

Can ABV (asset-based valuation) be a good proxy for a detailed valuation? ABV (asset based valuation) is a straightway approach to valuation. General rule: Buy a stock if MV is less than BV and sell or short-sell a stock if MV is more than BV. BV = Balance sheet based asset value balance sheet based value of liability So, provided that assets and liabilities of firm is represented at its fair value, ABV is a handy tool towards valuing a security and one can avoid detailed valuation

Can ABV (asset-based valuation) be a good proxy for a detailed valuation? (Continued) Cash & cash equivalents are represented at its fair value. Accounts receivables are at best at its quasi-equity value. PPE is represented in its carrying value, unless PPE numbers are revised. Inventory is represented at lower of the cost or market value. Intangibles are not a part of the Balance sheet. Short-term equity investments : classified as trading, held-to-maturity and available for sale. Among these equity investments, investments framed under trading and available for sale segments are it its fair value. Long-term strategic equity investments: Never reflected at its fair value. Short-term debt investments: classified as trading, held-to-maturity and available for sale. Among these debt investments, investments framed under trading and available for sale segments are it its fair value.

Can ABV (asset-based valuation) be a good proxy for a detailed valuation? (Continued) Long-term equity investment This is not represented at its fair value. But interest rates are regulated macro-economic variable. That is why book-value of these investments does not vary significantly from its market-value. Accounts payables are at best at its quasi-equity value. Other operating payables are defined through contracts and under a stable interest rate regime book value of these payables will not differ too much from the market value. Bond, debentures, bank loans Long-term financial obligations stemming from these sources are defined through contracts and under a stable interest rate regime book value of these obligations will not differ too much from the market value. Contingent claims Often these are not part of the balance sheet. But contingent claims can result in huge hidden dirty surpluses and income statement based losses in future.

Can ABV (asset-based valuation) be a good proxy for a detailed valuation? (Continued) So, asset side of the balance sheet is not generally reflected in its fair- value. There are intangibles which are not in fact part of the balance sheet. Quoted prices may not be the most fair price. Synergy and erosion should also be considered while implementing ABV. Focus should be on an asset s capability to churn utility not the price paid for acquiring the asset. So, ABV will not be a good proxy for a detailed valuation (exception applies).

Features of a good valuation technique A good valuation technique will use data in a parsimonious way. A good equity-analyst should opt out for a 5-data metrics led valuation template to a 15-data metrics led valuation template. A good valuation technique is verifiable. EPS forecast, target price are verifiable. Choices will get preference over conditions in a good valuation technique. It will work within a finite time-frame.

Valuation dimensions Asset based valuation model: Liquidation value, replacement value, adjusted book-value approaches. Discounted cash flow based valuation model: DDM, FCFF, FCFE, RE, AEG, REOI approaches. Relative valuation model: Equity value and enterprise value approaches. Contingent claim based model: Option to expand, option to abandon, option to defer etc. approaches