27-03-2014, 11:26 PM

(27-03-2014, 05:30 PM)GPD Wrote: [ -> ](27-03-2014, 04:52 PM)cif5000 Wrote: [ -> ](27-03-2014, 04:40 PM)GPD Wrote: [ -> ]Hi Guys, I have a question on how to evaluate a company after divestment of some of its businesses.

Say Coy A has:

EPS = 4 cents

NAV = 40 cents

and prices normally trade @ PE of 8 so about 32cents and price-to-book is then 0.8

It divested one of its biz which contributes EPS of 2 cents @ 20 cents so:

new EPS = 2 cents

new NAV = 60 cents

Say it is normally valuated using PE so based on PE of 8, its price becomes 16cents after divestment and ROE also dropped from 10% to 3%.

However PE is looking at further potential but with this divestment, it realized that potential now rather than over 8 years. So how do one value the Coy after the divestment given that its future EPS and ROE becomes lower but it has already got the other half fully realized EPS (earning) in its pocket?

I hope this doesn't sounded like a stupid question.

The NAV after transaction is wrong. It should be 40ct because you are selling NAV 20ct for 20ct.

Ok if it is a case of turning 20cts of assets into cold hard cash without earning ability, then it may be worse off.

However , say if the disposal resulted in a net gain of 20cts (say they divest 30 cents worth of NAV at 50 cents ie the part of the biz that has a lower ROE), how then do we value the Coy?

Here's the theory which I believe should work. However, do note that the market is a living organism and it will behave on its own.

Divestment Scenario 1: Selling NAV of 20ct / EPS of 2ct for 20ct

After the sale, assuming the PE of the remaining business remains at 8, the value of the remaining business will simply be 16ct. We will have to add the cash to the calculation. However, the cash will have to be discounted based on the market's experience with the company treats cash. If the 20ct cash will be distributed to shareholders, I will give minimal discount only on *when* it will be distributed. If the company has track records of squandering the cash away, a heavier discount is needed. In formula, it is:

New share price = PE (existing business) + cash x discount factor

Divestment Scenario 2: Selling NAV of 30ct / EPS of 2ct for 50ct

This is obviously a better deal than Scenario 1 because you are selling the business at a PE of 25 and a PB of 1.67 compared to 10 and 1.0 previously. It also means that the remaining business is one with a higher ROE / requiring less capital (EPS of 2cts with NAV of 10ct).

If we assign a cash discount factor of 0.9, then the new share prices will be

Scenario 1: 16ct + (20ct x 0.9) = 34ct

Scenario 2: 16ct + (50ct x 0.9) = 61ct

Remember, it's theory.