Free tools to value a company
Valuing a holding, such as Kering, Richemont, or Prosus, can be done in different ways. We are going to explain it to you, so you can do it yourself!
If there is only one key point you should take away from this article, it’s this:
Valuing a holding company can be done in several ways. We use a scenario analysis or a sum-of-the-parts approach. They are quite different, but very useful in their own right. We provide you with a free tool to get started!
Want to know more? Keep reading, then. It will be short and concise.
What’s a ‘holding’ company?
A holding company is a company that controls more than one company. You can own it completely or as a big part owner. For example:
Kering is the parent company of Gucci, Balenciaga, Yves Saint Laurent, and more.
Richemont owns Cartier, Lange & Söhne, Piaget, and Baume & Mercier.
Prosus holds stakes in Tencent, Bux, AutoTrader, Delivery Hero, and Ifood.
Berkshire Hathaway owns GEICO, Dairy Queen, and See's Candies.
Why it’s important! There can be a lot of hidden value in a holding company because some companies don't just earn money from core activities.
It's your job as an investor to figure out the value. But no worries, we will guide you.
Valuation method 1 — Scenario analysis
A scenario analysis is a simplified, reverse DCF model that focuses on three key value drivers: revenue, profit margin, and exit multiple. Unlike a DCF, which can become abstract due to reliance on discount rates, scenario analysis requires deep thinking about these drivers.
A scenario analysis provides a clearer view of potential annual returns. While it's not perfect, it doesn't rely too much on complex models and encourages critical thinking about assumptions.
Keep in mind:
Potential returns must outpace inflation.
A scenario analysis doesn't account for dividends or share buybacks.
Incorrect assumptions will cause significant fluctuations in returns.
It’s a simple way to value a business without having to do complicated DCF calculations.
We are going to use Swiss luxury holding Richemont as an example.
Richemont valuation
You’ve done your fundamental analysis, and you’re ready to value your business! After your analysis, you need to come up with a reasonable (revenue) growth rate, profit margin and exit multiple (P/E-ratio).
We will use Richemont as an example. All YOU need to do is fill in the BLUE cells.
So, assuming our (conservative) assumptions are right, we can assume an annual return of 4.4%. This includes 1.9% in dividends. Not good at all.
Scenario analysis can overlook hidden value within a holding company. It can make a holding company look very expensive. Take Richemont. They own over 25 brands across different markets. Treating them all the same might cause you to miss a gem.
This is where the sum-of-the-parts approach comes in.
Valuation method 2 — Sum of the parts
Understanding the individual value drivers within a holding company is essential for figuring out what the business is really worth.
Below you can see our sum of the parts for French luxury holding Kering.
The sum of the parts is not perfect, but it gives you an idea of a company's total value.
In investing, the goal is for the true value of a company to eventually become apparent. This happens eventually through a rising stock price, dividend payments, or share buybacks.
Pros and cons of the sum of the parts
Pro: It makes it easier to figure out how much a business is worth by considering its unique qualities.
Pro: Helps identify which segments are the primary value drivers.
Pro: Is pretty easy to use and learn.
Pro: You can find (significant) undervalued firms and beat the market if you do your SOTP right.
Con: Limited availability of detailed financial data for each segment.
Con: Wrong assumptions can lead to significant errors, particularly if they are overly optimistic or pessimistic.
Con: The more segments and inputs involved, the higher the risk of making mistakes.
Con: SOTP doesn't easily account for synergies between different segments, such as cost savings or revenue increases, that come from operating as a single entity.
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Thank you for taking the time to read. Until the next one.