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The impact of the Covid-19 pandemic on company valuations

A lot more consideration will need to be applied to these.
Image: Waldo Swiegers/Bloomberg

The Covid-19 pandemic has had a substantial impact on virtually all companies, and in so many divergent ways, that at this early stage there is no, or very little, visibility as to what the new normal is. Furthermore, the economic recovery profile will very likely differ by country and by industry sector. The recovery profile can possibly take the form of a “V” (a sharp decrease and recovery), a “W” (waves of ups and downs), a “U” (a more gradual recovery) or a “L” (a permanent rebasing). Although the equity capital markets reflect that the share prices in certain sectors have decreased substantially (cruise liners, movie theatres), whereas others have benefitted (e-commerce, video conferencing),  the jury is still out as to the shape of the recovery, if any, for certain sectors. What all of this translates into is uncertainty in the market, and traditionally, uncertainty has a negative impact on the valuations of companies.

When valuing companies in these times of Covid-19, valuation practitioners need to consider the impact of the pandemic on a number of the elements of traditional company valuation methodologies. Typically companies are valued using the Income Approach (based on the value of the cash flows that the business can be expected to generate in the future) or the Market Approach (based on a comparison of the company to comparable publicly traded companies in its industry). The Income Approach or the Market Approach could be the primary valuation approach which would be benchmarked against the other approach as well as the Net Asset Value (NAV) of the company (NAV Approach).

The Income approach

The Income Approach will be influenced in a number of ways by the pandemic. Cash flows could be very different for the last twelve months before Covid-19, the period during Covid-19 and the short-, medium-, and long-term periods after Covid-19. The impact of second and even third waves needs to be considered. The first wave may have been cushioned by various government support initiatives but whether these will also be available for future waves, is questionable. All this means that forecasts and projections will need to assess the drivers of growth and one would need to critically and carefully consider market conditions, trends, and the impact of any government support programmes. In this time of uncertainty, scenario and sensitivity analyses will need to be utilised more extensively.

Normalised working capital levels may be difficult to ascertain and capital expenditure programmes may have been deferred. Careful consideration of these two elements are required in assessing the impact on the company’s future cash flows.

Besides the increased risk associated with the prediction of cash flows, other elements of the Income Approach are impacted and need consideration. There has been a marked impact on the potential discount rate to be applied to the cash flows, whether one uses the weighted average cost of capital (WACC), or the cost of equity, as a discount rate.

Government bond yields, which serve as the risk-free rate component of the cost of equity, are  noticeably more volatile. Government bond yields in the US have come down substantially since the onset of the pandemic, which is likely as a result of the safe haven status of US treasuries. However in South Africa, yields have increased, which is potentially as a result of less demand for South African bonds, as well as the downgrading of South African bonds of late. One therefore needs to pay careful attention to the risk-free rate used in calculating the cost of equity. The unsystematic risk premium element of the cost of equity calculation would also need to be amended in instances where the beta used in the valuation does not adequately address or take into consideration the additional risk caused by the onset of Covid-19. Furthermore, the Covid-19 period may have resulted in more borrowings (higher gearing), coupled with changes in interest rates on the back of government interventions. This needs to be considered when calculating the WACC to be used in discounting cash flows.

The Market approach

The impact of Covid-19 on the Market Approach is also profound. Determining maintainable earnings will not be simple given possible fluctuations in company results before, during and possibly after Covid-19. Furthermore, comparable company valuation multiples, such as EV/EBITDA, and P/E multiples have potentially changed substantially. The share prices in certain industry sectors (such as the property and hospitality industries) have been decimated while others (such as IT) reflect increased valuations.

The NAV approach

The NAV Approach may intuitively seem to be the least affected valuation method. However, assessing the impact of Covid-19 on asset values may be equally difficult. Questions will need to be asked about the recoverability of debtors and the valuations of investments, properties and other assets of companies. Buyers will pay a lot more attention to the warranties in respect of asset values. In some situations, companies may no longer even be going concerns and liquidation values may be more appropriate in valuing these companies.

In summary, a lot more consideration will need to be applied to valuations at this time. Forecasting cash flows is even more complex. Valuers will need to perform significantly more scenario and sensitivity analyses and buyers will need to use mechanisms like earn-outs to reduce the risks around the volatility of earnings and cash flows.

Robbie Gonsalves, managing director and Sholto Piek, principal, Mergence Corporate Solutions.


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The ANC has a huge selection of Achilles heels. The most obvious is the lack of character of most of their political Apparatchiks. Second to this is the inability to do their jobs and the third problem is their sticky fingers when it comes to handling tax money. This will not be solved by the current players.

The impact of the government decision to implemented lockdowns upon the valuation of businesses will be to reduce their value if they are not totally wrecked. Those that need finance will probably be unable to afford it due to no forgiveness for any of the debt burden that they already have to bear. Such businesses will be available for the vulture sector to acquire for next to nothing from the liquidator at auction.
The government is morally and probably legally responsible for forcing this scenario of ownership transfer and no member of the government nor any connected persons should be allowed to benefit from it.

Determining the value of a company is like playing with a set of Matryoshka dolls. Within one set of variables, you find another set and another set. The company-specific valuation metrics forms part of a larger, encompassing set of microeconomic, then macroeconomic, and then monetary action variables.

Contrary to common belief, deteriorating circumstances in the bigger picture (macroeconomy) lead to higher valuations in the smaller picture (nominal share prices). This counterintuitive phenomenon is driven by the changes in monetary policy. Worsening economic realities puts pressure on Central Banks to lower interest rates. The lower risk-free rate increases the value of future cash flow. When economic circumstances are horrendous, forcing interest rates towards zero, the value of future cash flow reaches escape velocity to launch the share price into orbit. Under these circumstances, if you are waiting to buy value, you will never buy anything. You will be sitting on your front porch, crying, watching the price of your favourite share orbiting Mars.

If you invest in a country that has the power to print the reserve currency of the world, then bad economic circumstances are good for share prices. The spectacular, and unexpected, rise in the NASDAQ over the last decade proves this statement. Ridiculously expensive stocks are getting more ridiculously expensive by the day. It is obvious that the valuation metrics are not acclimatised to the real world.

“I also learned that the value of assets is the reciprocal of the value of money and credit (i.e., the cheaper money and credit are, the more expensive asset prices are) and the value of money is the reciprocal of the quantity of it in existence, so when central banks are producing a lot of money and credit and making it cheaper, it is wise to be more aggressive in owning assets.” – Ray Dalio

Essentially the Dollar has lost its real world value and has caused fake evolutions of assets whilst Inflation has not been priced in. The reality of this would cause inflation to spiral like a tornado when it makes landfall.

So the only other true yardstick would be physical gold.

My simple research has indicated that the Dollar is worth about US$0.1346c, (Gold = $1,788.69 divide by $20.69 per ounce – 100).

Any there everyone is worried about EWC of Land… what about the EWC of your hard work and saved rands.

What would the S&P be at without a virtually zero % risk-free rate in US Treasuries? Maybe low 2000’s if US Treasuries were at 5%

Somebody needs to educate the analysts about cashflow

In Zim the dual listed stocks boomed esp Old Mutual. High denomination notes eg USD100 and Euro500 are worth more than their face value . That trickles down into a collapsing
countrys economics eg hierarchy of value : physical items (booze , cigarettes), USD,Old mutual shares,even ZAR . So the flow of freshly printed toilet paper money will be into these. Property ? Unlikely. Gold? Possibly but you could be robbed and cant take it trans-border with comfort.Bitcoin? More and more popular. America can basically keep printing USD and as long as everybody wants USD, it will remain at least stable. USD thrives on fear and volatilty

29 NOVEMBER 2020 @ 5:48 PM
The bias toward the minority view is most certainly the preference of this website..

29 NOVEMBER 2020 @ 7:55 AM
Moneyweb is evidently employing the new advanced style of censorship? Comments that are too difficult for the admin bot to categorize are simply held indefinitely?
28 NOVEMBER 2020 @ 5:36 PM
Agree about the biggest issue being further pandemic reactions. Dems want lockdowns until vaccinations completed = success for economic suicide and vaccine merchants. But now there is a truth leak that must surely sprag the vaccine merchants and scuttle the prospective bargain business acquisition targets. A high level analysis of the US Covid-19 deaths reveals errors that reduce these numbers into non-existence.
All hands on deck to fix the leak and PR it into river? You bet.
The acceptance of this analysis will have global repercussions.
Comment on story: How Biden might stimulate the sputtering US economy

Comment on story: How Biden might stimulate the sputtering US economy

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