Coronation Capital has concluded a virtual Corporate Finance & Business Valuation Masterclass during which Aswath Damodaran, Professor at the Stern School of Business, New York University educated participants on gains of valuation and corporate finance. For him, business valuation promotes improved participation and capacity building in the capital markets and boosts economic growth adding that companies should provide needed information for transparent valuation of their operations. Coronation Capital Chairman, Aigboje Aig-Imoukhuede described the event as a critical learning point for stakeholders in corporate finance and valuation business.
Coronation Capital has reiterated the gains of building a financial system where stakeholders have deep knowledge of corporate finance and valuation principles to guide their investment decisions.
In a series of lectures under the auspices of Coronation Capital’s second edition of its Corporate Finance and Business Valuation online masterclasses, Aswath Damodaran, Professor at the Stern School of Business, New York University 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 modeling uncertainty and incorporating the model outcome in the analyst’s valuation formula.
Speaking on the most significant learnings over the years, Damodaran stated that changes in corporate behaviour and active investing reflects a much flatter world where competition has to be taken into consideration. “With globalisation, 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.
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.
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.
Explaining the concept of company exposure to risk, the finance expert said 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.
The areas of covered at the programme include discounted cash flow model, risk premiums, loose ends in valuation, the cost of debt, and the downside to globalization and ways to estimate a company’s growth rates, patterns and country risk exposure, among others.
In his welcome address, Chairman of Coronation Capital Aigboje Aig-Imoukhuede , said that for the Nigerian financial system to get the best in the investment, stakeholders should have a deep understanding of corporate finance and valuation principles.
Aig-Imoukhuede described the second edition of the masterclass, as another critical learning point for stakeholders in corporate finance and valuation.
Managing Partner, Coronation Capital, John Opubor, 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.
Continuing, Damodaran, 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. He also gave participants opportunity to ask questions and obtain clarity on general corporate finance and business valuation principles.
The breakout sessions turned into opportunities for further questions, all of which were thoroughly answered by Damodaran.
There was also fireside chat at the programme, which provided insight on Damodaran’s impressive background and principles.
Damodaran said the investment world is now much flatter resulting in more similarities than differences in output as the same tools are available to everyone in the world for a fee adding that passive investors have taken market share from mutual funds resulting in pressure on money managers to justify management fees.
He said: “Corporations have also witnessed some change as in the past, the local markets were protected but with globalization, corporations are exposed. For instance, fewer companies can count on earnings as a measure of corporate health and are therefore reluctant to pay dividends and prefer buybacks as a more flexible way to return cash to shareholders”.
Damodaran said there were no changes with valuation, however, as the intention is always to get a view on the present value of future cashflow.
“Another change in the investment world is the belief that things can be done the same way over the years with different results. The world is now too dynamic for the things to be done the same way for different, better results, a dynamic, analytical, forward-looking means of execution is now required,” he said.
Damodaran disclosed that market bubbles are common, necessary feature of markets and are corrections that change the way we do things. “In fact, every forward movement for mankind comes from people overreaching, pushing the margins on what can be done,” he said.
On possible distinction in valuation methods applied in Nigeria, he confirmed that the method of valuing companies is the same globally, however, some Nigerian companies are opaque in that relevant information is often withheld.
“Transparency is very important for financial markets. If there is no transparency, there is less liquidity. Lack of transparency and family control of companies is a recipe for individual investors exit as can be seen in the Middle East. It is best to build transparency and Nigerian companies that are transparent are priced much better that opaque companies. Liquidity can dry up in countries like Nigeria when the investors lose trust,” he said.
Damodaran suggested that companies should be assessed not only from the perspective of the jurisdiction of their incorporation but also where the business of the company is conducted. In addition, valuers should not get caught up in domestic risk factors and parameters which may be overly dismal but should always confirm the business and sector risk.
Damodaran shared his perception that accountants are incorrect to consider a balance sheet as a true reflection of the worth of a business as a balance sheet is actually a reflection of the past in view of the nature of modern companies. He stated that a balance sheet is backward looking and static while valuation is forward looking and dynamic.
“Accounting earnings are used as a basis for valuation but the mis-categorisation of values should always be noted. His view is that accounting was designed for old time manufacturing companies with assets in their books. Accounting is not ideal for modern technology companies without visible, tangible assets,” he said.
In response to the question on strategies for building human capital, Damodaran encouraged Coronation Capital to create and maintain a culture of learning by not punishing staff for outcomes as long as the right processes are followed. Where outcomes are celebrated and not processes, the learning process is undercut as staff focus more on the outcome and less on the process.
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.
