Aswath Provides Insights into Corporate Valuation at Coronation Capital's 4-Day Masterclass


Monday, August 03, 2020 / 07:00AM / Proshare Research & WebTV / Header Image Credit: Coronation Capital

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In a period of a global pandemic, corporate valuations can be tricky affairs. Not only are corporate cash flows difficult to estimate but also discount rates to be applied to these cash flows must incorporate risk factors that may not have been necessary at a less troubled time. In a series of lectures delivered by Professor Aswath Damodaran between July 20th and 28th 2020 under the auspices of Coronation Capital's second edition of its Corporate Finance and Business Valuation online masterclasses, Damodaran, pointed out that running away from uncertainty does not fix the analysts difficulties. He argued that the best approach was to confront the problem by modelling uncertainty and incorporating the model outcome in the analyst's valuation formula.    


The Masterclass which held on the 20th, 21st and 27th and 28th, July 2020 was moderated by Molade Elodimuor, a Coronation Capital Private Equity Analyst. The class was an opportunity for participants to gain insights into best practices for the valuation of companies under situations of widespread economic uncertainty.


Damodaran, a three-decade veteran of corporate finance, corporate valuation methodology and financial statement analysis has carried out valuations for notable global brands like Amazon, Apple and Facebook and has consulted for leading global corporations and institutions.


Day One- Getting Acquainted

Day one commenced with a welcome address by the Chairman of Coronation Capital Mr. Aigboje Aig-Imoukhuede who described the second edition of the masterclass, as another critical learning point for stakeholders in corporate finance and valuation. Having been a student of Professor Aswath Damodaran, he believed it was going to be an enriching session for all the participants.


Professor Aswath Damodaran in his first-day session gave some key perspectives on Valuation while taking a look at the discounted cash flow model, the process of setting the same up and various case studies. He further addressed some misconceptions around valuation and gave an insight into what valuation entails for the financial market and the economy. The 10 key takeaways from the NYU Finance Professor's Day one lecture were:

  1. Valuation Is not a Science or Art, but a Craft.
  2. Valuing an Asset is not the same as Pricing an Asset
  3. A Good Valuation comes with a Story and Numbers
  4. All Valuations are biased. The only question is how much and in which direction
  5. Fixing Uncertainty in the Area of Policy stability is key to addressing issues of Valuation.
  6. For the Discounted Cash Flow Model, the Choices are between the Equity Valuation and Firm Valuation
  7. There are no precise valuations
  8. The payoff to Valuation is greatest when  it is least precise
  9. One's understanding of a valuation model is inversely proportional to the number of inputs required for the model.
  10. Simpler Valuation models do much better than complex ones.


Besides, speaking on macro-economic issues Prof. Damodaran said that half of all global Sovereign defaults in the last 50 years have been in local currencies.


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The Fireside Chat

The first day ended with a fireside chat between Professor Damodaran and Wole Famurewa (CNBC Anchor). According to the Chairman of Coronation Capital, Mr. Aigboje Aig-Imoukhuede the fireside chat was an opportunity to listen and learn from the academics background and personal experience and analytical principles.  


Speaking about his background and journey to becoming the renowned Dean of Valuation, Damodaran noted that he was a teacher and he was aware of what he wanted to do early. According to him, it is important to be aware of moments of grace when God is telling you what to do. He further explained that he was attracted to corporate valuation because he has always been good with numbers and telling stories.


On his thoughts about the various assumptions made in valuation reports, Professor asserted that he asks questions such as: Who paid to get the valuation done? and What did they get out of the valuation? adding that this plays out in how companies are valued. He further added that a forward and dynamic way to approach problems is required.


Speaking on the most significant learnings over the years, he stated that changes in corporate behaviour and active investing reflects a much flatter world where we have to worry about competition. "With globalization, everyone is exposed", he said. He further stated that "every bubble that bursts create permanent changes in how we live", adding that the principles of valuation are the same though data and tools used now are richer than what they were in the past.


On adjusting for liquidity, Damodaran stated that liquidity dries up when trust is lost, adding that investors price companies that are transparent and open more because it is believed that trading on the same reflects reality.


Advising financial professionals, he emphasized the need to value companies based on where they are located not where they are incorporated, adding that valuation needs to be forward-looking and dynamic. For corporates like Coronation Capital, the iconic professor explained that with a culture of learning people should not be punished based on outcomes but on processes, because processes matter more.


In his closing remarks, John Opubor, Managing Partner, Coronation Capital asserted that there is a consistent and clear theme in Professor's thinking, which further emphasizes the need to return to the real fundamentals in challenging times like we are in at the moment.


Day Two- Understanding Risk and Betas

On July 21, 2020, which was the second day. Damodaran featured discussions around risk premiums and the determinants of betas, the cost of debt, and the downside to globalization and ways to estimate a company's growth rates, patterns and country risk exposure. According to Damodaran, there are no traded long-term Government bonds in some currencies. Hence, the need to improvise. One simple technique is to use differential inflation and the US dollar risk-free rate. "This is also a good way to check government bond rates you do not trust. For instance, the Venezuelan government bond rate of 19% on January 1, 2019, is pure fiction, since no rational person would have bought the bonds with the interest rate (given that inflation was about 5000%)". He further asserted that it is critical to think of inflation and currencies in making valuations, adding that valuations are subject to game playing.


 On the "Downside to Globalization" he stated that emerging markets offer growth opportunities but they are also riskier, adding that if the growth is taken into account, the risk must also be considered. "Two ways of estimating the country risk premium include Sovereign default speed and adjusting for equity risk", he said


Explaining the concept of company exposure to risk, the finance expert aid that the danger of focusing just on revenues is that it misses other exposures to risk (production and operations), adding that the default approach in valuation has been to assign country risk based upon your country of incorporation. "As companies globalize and look for revenues in foreign markets this practice will underestimate the costs of equity of developed market companies with significant emerging market exposure and overestimate the costs of equity of emerging market companies with significant developed market risk exposure", he said.


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Day Three- Getting Friendly with Financial Service Valuation and More

The Masterclass continued for two more days the following week (July 27 & 28, 2020) and was an opportunity for participants to get deeper insights into the application of valuation methods, dealing with decline and distress of companies, valuation for financial service companies, valuing undeveloped reserves, valuing companies across the ownership cycle, total versus market risk and Illiquidity. Some of the points to note are:

  • Growth can be negative, as firm sheds assets and shrinks. As less profitable assets are shed, the firm's remaining assets may improve in quality.
  • The book value of assets and equity is mostly irrelevant when valuing non-financial service companies.
  • From a valuation perspective, it, therefore, makes sense to pay heed to book value.
  • Every valuation starts with a narrative and a story
  • In private company valuation, illiquidity is a constant theme.
  • Liquidity is worth more when the economy is doing badly and credit is tough to come by than when markets are booming.
  • Liquidity is worth more to buyers who have shorter time horizons and greater cash needs than for longer-term investors, who don't need the cash and are willing to hold the investment. 


Day Four- Closing on A High, Modifying The Valuation Narrative

On the Fourth day, July 28th, 2020 which was the last day of the Masterclass, the finance teacher gave additional perspectives on Valuation and Pricing. The major takeaways on the final day were the following:

  • The valuation process must consider story and numbers
  • In carrying out valuations you must be ready to modify the narrative as events unfold.
  • Valuation is a craft. You can never master a craft. Just keep working on it.
  • The game of pricing is to always pushback
  • Consistency in storytelling has enabled companies like Amazon to be rated amongst the most valuable companies in the globe.
  • Carrying out valuations for private businesses can be more tasking than for publicly traded companies.


In all, the Masterclass which had in attendance investment and finance teams within the Coronation ecosystem, representatives from the finance teams of key stakeholders including regulators (PENCOM, SEC, NAICOM), Pension Funds (Stanbic IBTC, ARM, Sigma), top Accounting firms (Deloitte, KPMG, PwC, EY), DFIs (NSIA, AFD/Proparco, DEG, IFC, AFC) as well as the Proshare team, was an opportunity for all to improve their skill and understanding of finance and valuation.


This initiative further emphasizes the position of Coronation Capital and the Coronation ecosystem as a thought leader and advocate for change, growth, and development within the Nigerian financial services industry.


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