Verðmat banka - Afkomuspár o.fl.

1. Verðmat banka- Afkomuspár o.fl. Haraldur Yngvi Pétursson Framkvæmdastjóri L.S.B.Í. Sérfræðingur í eignastýringu Arion banka

2. Introduction

3. Haraldur's Personal Introduction • Academic: • University of Iceland – Cand. Oecon • Professional • Deloitte – Accounting – 3 years • Preparations of financial accounts • Auditing of financial accounts • Kaupthing Bank – Equity Research – 4 years • Focus on the Icelandic market • Part of Kaupthing Scandinavian equity research from 2006 • IFS Research – Equity Research – 1 year • Focus on Icelandic equities • Selected Scandinavian companies • S&P 500 selected sectors • Arion banki – Asset Management – Since September 2009 • MD of L.S.B.Í. Pension Fund

4. Goal of Presentation • Discuss company valuation generally and main obstacles (focus on banks) • Review in some detail the main currently employed valuation methods • Don't worry if you don't fully understand everything said • To most ordinary humans this is entirely foreign material • Valuation and Equity Research is very much "on site training" • Hopefully you'll enjoy picking up some of the terminology and the next valuation presentation you sit through should be slightly more bearable

5. Reasons for Valuing Companies • Key to successful trading in (and managing) corporations • Ability to estimate their value • Understanding the sources of their value • Investors do not buy corporations for aesthetic or emotional reasons – but for their expected future cashflows • Inherent value of a company based on forward-looking estimates and judgements • Valuation is fundamental for any decision & negotiations relating to e.g. • Company investments • Mergers • IPO / rights issues • Management project evaluation • Portfolio valuation

6. Valuation – Basics • Valuation a science or an art? A bit of both Science: Certain methods are based on solid mathematical pillars. Has (and is) being researched by entire university departments, thousand's of professors/PhD's/market practitioners Foundation of the world's financial system Art: Modelling and forecasting of the future (?!?) • management/key employees, tastes/fashion/sentiment, disruptive technologies… Material role of fickle (and difficult to model) behavioural issues and biases • overconfidence, overreaction, loss aversion, herding, regret, misestimating of probabilities.. Fact remains – companies need to be valued and the following methods are the best tools currently available

7. Valuation - Reservations • Assumptions and inputs into the models are of paramount importance • Garbage in -> Garbage out • Several "difficult-to-model" factors hugely important • Is it for sale? Is there a buyer? Sale under distressed circumstances? is funding available? • Output from valuation models ≠ current price • Additionally some types of companies are tremendously difficult to value analytically • Start-ups • Biotech/pharmaceutical research • Highly cyclical companies • Companies with large "real options" • Rights to unexplored oil-fields / mining • Online companies (social networking, search engine..)

8. Valuation Methodologies • Discounted Cash-flow (DCF) • Free Cash Flow to Firm (FCFF), FCF to Equity, Adjusted Present Value (APV) • Multiples / Comparables • P/E, EV/EBITDA, EV/Sales etc. • Other methods • Invested capital, VC Capital Method, Option Pricing, Last round of financing, Break-up value and Dividend Models • ..and then the more "sketchy" methods • e.g. Technical Analysis • Balance between model relevance, complexity and number of assumptions • Usually at least two methods used in any valuation exercise

9. Valuation Method: Multiples / Comparables

10. Multiples / Comparables (comps) - Introduction • The idea is to approximate a company's value by comparing it to companies with known value • Source of figures • Comparable public company multiples • Recent private company transactions • Important to only compare relative value of similar companies (apples with apples) • Similar Industry Scope • Similar Growth • Similar Risk • Similar Results (ROE)

11. Multiples / Comparables (comps) - Introduction • Many benchmarks can be used (usually industry specific) • Enterprise Value / EBITDA • Enterprise Value / Sales • Price / Earnings (I: V/H) – (Often used for banks) • Price / Book (I: Q-hlutfall) – (Often used for banks) • Price / Net Asset Value (NAV) – (Often used for banks) • Monthly Rent Multiple • Funds under management – (... for e.g. asset management) • # subscribers, # patents, # employees, #website hits / Enterprise Value • etc.

12. Multiples / Comparables (comps) – Introduction cont. • Positives • Quicker and easier than analytical methods (DCF) • Reflects current market conditions (investor sentiment, bargaining power..) • Helpful in "reality-checking" DCF valuations • Disadvantages • Are the comparable companies similar enough? • E.g. public vs. private, future prospects, sector, management quality, market position, capital structure, tax-scheme… • Doesn't capture value of different scenarios/"what-ifs" • E.g. post acquisition cost-cutting is successful, synergies are achieved, pending lawsuit goes one way or the other.. • Disconnect between a multiple and inherent firm value. Hence does not capture systemic under-/overvaluation of companies by the market

13. Price / Earnings (PER or P/E) • Price Earnings (I: V/H) ratio shows how much accounting profit its owners are entitled to • Example: Stock price = 20, EPS= 2 => PER= 20/2 = 10 • Compared to companies similar in risk and prospects PER is an indicator of whether a particular stock is under or overpriced • Several variants • Trailing PER or forward PER (using forecasted earnings) • Primary shares outstanding or diluted number of shares • Average price over period • Generally: • High PER (>16) indicates that the market believes significant growth is on horizon • Low PER (<8) indicates that the market believes current profit levels are unsustainable

14. Price/Book (P/B) and Net Asset Value (NAV) • Price / Book = Value of Equity / Book Value of Equity (I: Q-hlutfall) • Purpose of ratio is to show the market premium to the accounting equity • P/B is used for valuing investments whose value is derived primarily from the underlying value of their tangible assets • Holding companies • Real estate companies • Banks • Companies up for liquidation (solvency value) • Net Asset Value (NAV) is a significantly better measure than book equity • Calculated by correcting the value of assets & liabilities in the accounts • Book value of associates • Book value of fishing quota • Goodwill justified? • Deferred tax liability going to be paid in the near future (Real Estate)? etc.

15. Some examples from the “real world” • DnB NOR report - Feb 2010

16. Some examples from the “real world” • Historical development (short term though)

17. Some examples from the “real world” • Interesting to take a closer look at the DnB NOR report • For further view on the DDM • To see different methods of valuation, in use on the market • To better get the “feel” for professional valuation • ... and many other things

18. Questions and Answers Q & A