Football matches played in empty stadium. Disruption to supply chain. No pepper souping and big stouting in bars. Hotels shuttered. Flights cancelled and airport closed. Seminars and conferences delayed. Factories working below capacity. Stay at home. Social distancing. Restrictions on interstate movement. COVID-19 vaccine. The headlines sounds like one of Bob Marley’s hit songs “ Natural Mystic in the Air”
What does this mean for business valuation? COVID-19 complicates business valuation for an indeterminable period of time. Many companies are reeling from sharp reduction is sales, uncollected receivables, rising cost of production, and deteriorating margins.
When receding revenue undermines Company profit or net income slumps, cash flow will shrink. This reduction in cash flow will negatively affect the value of a business, albeit temporarily.
Business valuation determines the economic value of a business or business unit. Business valuation can be used to determine the fair value of a business for a variety of reasons, including sale value, establishing partner ownership, taxation, and even divorce proceedings.
COVID-19 shocks disrupt cash flow projections of a firm and that makes it very difficult for professional to find the intrinsic value of the entity. Cash flow is defined as the earnings stream the business expects to generate in perpetuity. Or simply put, it is the difference between revenue generated and cost incurred in a financial period.
Decrease in the future cash flow expectation for listed companies as a result of disruption to the demand and supply side of the curve have forced sophisticated investors to make downward adjustment to their forecasts.
Also, economic uncertainty exposes businesses to financial risk as they are unable to generate sizeable earnings to pay interest on loans.
The implication is that the Weighted Average Cost of Capital (WAAC) – discount rate used to evaluate an investment project- rises to a point where firms go bankrupt..
A total of 3,427 companies have filed for Chapter 11 bankruptcy in the United States (US) this year, the highest since 2013 as companies are unable to meet debt convent.
The worsening COVI-19 is having a dramatic impact on equity valuation worldwide, as a number of planned initial public offering (IPO) have been cancelled on deferred for indeterminable period of time.
Airbnb, the short term rental site based in California, which has had its business hammered by the coronavirus fallout, has lowered its internal valuation to $26 billion — a 16 per cent drop compared to its most recent funding round.
Also, planned acquisitions and mergers have been on hold, but such schemes may resume as countries are gradually easing lockdown so as to kick start commercial activities.
Global merger and acquisition deal volume nearly halved year-on-year in the first six months of 2020 to $1.1 trillion, according to Dealogic data.That is the lowest haul in at least 15 years.
The insidious virus has forced many companies, especially oil majors, to cut dividend and scale back on expansion plans.
Also, The World Bank has warned banks to put a cap on dividend so as to conserve capital and avoid a repeat of the financial crisis of 2008/2009.
Royal Dutch Shell cut its dividend for the first time since the Second World War as the coronavirus pandemic halved quarterly earnings and forced the oil major to confront a new longer-term reality for the energy industry.
As global economic macroeconomic headwinds have cast a pall over the future earnings of companies and the aviation industry being the hardest hit, careful consideration should be given into how to adjust the risk free rate and capital asset pricing model (CAPM) in line with current reality of the equity market.
There could also be adjustment to expectation of future cash flow.
Before the outbreak of the coronavirus pandemic, the Nigerian equity had been in lull as investors were dumping shares due to lack of transformation policy on the part of the Buhari led administration and poor corporate performance.
The COVID-19 just compounded the woes of a country that excited recession in 2017 after the crash in crude oil price of mid-2014 that stoked a severe dollar scarcity shattered the economy.
The Nigerian Stock Exchange (NSE) All Share Index (ASI) has a negative year to date -9.43 percent. The index has a price to earnings ratio of 8.08 times, one the lowest in sub-Saharan Africa.
To help shed more light on the issue of the impact of coronavirus pandemic on the corporate finance and valuation, leading Private Equity Firm in Nigeria, Coronation Capital, is set to host the 2nd edition of its Corporate Finance and Business Valuation online training (“Valuation Master Class”). Scheduled for the 2oth, 21st, 27th and 28th of July, 2020.
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.
The Master Class will be headlined by the globally renowned Professor Aswath Damodaran: a Professor of Finance at New York University’s (“NYU”) Stern School of Business. Over the years, he has been referred to as Wall Street’s “Dean of Valuation” and is widely respected as one of the foremost experts on corporate valuation.
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.
Commenting on the event, John Opubor, Managing Partner of Coronation Capital said, “The world has entered uncharted territory. History teaches that a return to fundamentals espoused by Professor Aswath Damodaran is crucial to thriving in times like this”. He further stated that, “Participants will, over four-days, benefit from a deep dive into corporate finance and valuation and how investments are impacted during these unprecedented times”.
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.
