• Friday, March 29, 2024
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Experts see COVID-19 disrupts business valuation

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The worsening coronavirus is having a dramatic impact on world equity markets, with world listed equity values on a downward spiral, a crisis that is more severe than the 2008/2009 financial crisis and the Second World War.

Analysts and investors have a divergence of views on the impact of COVID-19 on the business valuation, but they concur that valuators will have to readjust their future earnings forecast.

During an economic downturn, companies’ revenues recede and profit slumps, and that results in a reduction in cash flow; a reduction in expected future cash flow undermines the value of a firm.

The economic devastation caused by COVID-19 has been so severe on some businesses that valuators will have to reassess the going concern premise in valuing companies in the coming months.

Interestingly, the industry that requires human contacts and interactions-bars, theatres, restaurants, cinemas, fitness house- are more susceptible to extreme volatility.

Wale Olusi, Head of Research at United Capital Limited said COVID-19 is a risk to the economy and the cost of equity will rise and that valuation will fall.

He added this crisis is coming with yields rising and that it is an anomaly that will force valuators to use the inflation rate instead of the conventional risk free rate of returns in the calculation of the cost of equity.

The United States’ (US) 20-year Treasury bond nominal yield rate has fallen due to measures taken by the Federal Reserve to aid the economy as investors pile into save haven assets to avoid the equity rout.

As a result of extreme volatility and uncertainties caused by coronavirus and crash in crude oil price, the International Monetary Fund (IMF) slashed its forecast for global economy and warned of spiraling debt.

It now estimates a contraction of 4.9 percent in global gross domestic product in 2020, lower than the 3 percent fall it predicted in April.

The Fund expects the United States economy to contract by 8 percent this year as it had estimated a contraction of 5.90 percent in April, but there are growing concerns that a second wave of attack by the virus in some cities that had reopened for business could damp slow economic recovery.

Similarly, the fund also downgraded its forecasts for the euro zone, with the economy now seen shrinking by 10.2 percent in 2020.

The Washington based institution estimated Nigeria’s GDP would contract by 5.4 percent and not the 3.4 percent it projected in April 2020; a double whammy for a country that exited its first recession in 25 years in 2017.

According to the Q1-2020 GDP report published by the National Bureau of Statistics (NBS) on 24 May 2020, Nigeria’s economic growth slowed to a nine-quarter low of 1.87 percent year on year (YOY) from 2.55 percent (yoy) in Q4-2019 and 2.12 percent yoy in Q2-2019.

Abiola Gbemisola, analyst at Chapel Hill Denham Limited is of the view that the current crisis will impact on banks’ valuation because of their loan assets will deteriorate on the back of regulator pressures that are eating up yields.

The impact of the COVID-19 pandemic and the control measures put in place does not favour loan disbursement, therefore, loan growth is expected to be muted.

Earnings of lenders will be most under pressure as they were forced to lower interest rates in order to meet the Loan to Deposit Ratio requirement (LDR). Also, impairment s on loss will spike due to the need to meet the IFRS 9 requirement.

In a bid to revive pandemic stricken economies, governments across the globe have lowered interest rate and accelerated bond buying stimulus package.

The European Central Bank (ECB) has spent €1.35 trillion (pandemic emergency purchase programme) on fixing the balance sheet of member countries reeling from the devastating impact of the virus.

The Executive Board of the IMF has approved Nigeria’s request for emergency financial assistance of $3.4 billion under the Rapid Financing Instrument (RFI) to meet the urgent balance of payment needs stemming from the outbreak of the COVID-19 pandemic.

The current gyrations in the stock market and battered earnings brought on by COVID-19 pandemic and crash in crude oil price has cast a pall on future expected cash flow.

Consequently, market participants and the general public need to be sensitised on the the extent of disruption to business valuations in corporate finance world.

As a part of its Education, Development & Impact Series, leading Private Equity Firm, Coronation Capital is organizing an online master class on July 20 – 21 and 27 – 28, 2020 with Aswath Damodaran, a renowned Professor of Finance at New York University’s (“NYU”) Stern School of Business.

The four-day event is designed to provide participants with a deeper understanding of corporate finance, valuation methodology and financial statement analysis with a key focus on appraising the business impact of financial decisions on the organizational performance.

Damodaran has published several books and articles on equity valuation and corporate finance and has been featured in the Journal of Finance, the Journal of Financial Economics, and the Review of Financial Studies. Professor Damodaran has been voted ‘Professor of the Year’ by Stern’s graduating MBA class five times and has been awarded NYU’s Excellence in Teaching and Distinguished Teaching award; Coronation is delighted to bring him to Nigeria for a second time.

The Valuation Master Class is a thought leadership and capacity building initiative of Coronation Capital. Lecture sessions will be hosted virtually and will also feature an engaging one-on-one fire side chat with Professor Damodaran on various topics including his views on the current global business environment and the Nigerian economy – opportunities for growth and investment. The Finance guru will train employees of Coronation Capital as well as related companies in the Coronation ecosystem which covers insurance, investment banking, asset management, technology and venture capital. Given that there is limited space, participation will be extended, by invitation only, to finance practitioners in the media and public sector as well as Coronation counterparties.

Coronation Capital’s Opubor has argued that amid the COVID-19 challenge a new light has shone on businesses and their models for financial and operational sustainability. Opubor says, “the opportunities for growth and investment in Nigeria and the need to focus on improving internal capabilities, understanding fundamental analysis to take advantage of market opportunities when perceived has become critical at present”.

Coronation Capital is a private equity fund manager with a culture built on promoting innovation, good corporate citizenship and delivering strong returns to our investors. Coronation Capital aims to build well-positioned, well-run, cash-generative, and sustainable businesses that become significant employers and sources of growth in West Africa and across the continent. A core pillar of good corporate citizenship for Coronation Capital is utilizing education and development to positively transform our immediate environment.