As Coronation Capital Provides Insights into Business Valuation

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By Hamid Ayodeji

Coronation Capital for about two weeks brought together investment bankers and other operators in the financial services sector to participate in its second Corporate Finance and Business Valuation Masterclass with Professor Aswath Damodaran, of the Stern School of Business, New York University as the facilitator.

The Masterclass was conceived as an opportunity to share deep insights on business valuation with industry stakeholders and enhance capacity in the nation’s capital market.

The event which was a virtual three-hour sessions took place over four days between 3pm and 6pm on July 20th to 21st and July 28th to 29th.

The programme featured four sessions with broad topics including: Discounted cash flow model; Risk premiums and betas; Loose ends in valuation and the dark side of valuation; the dark-side of valuation (continued) and relative valuation.

Each of these topics was treated in an engaging manner by Damodaran and participants were able to ask questions and obtain clarity on general corporate finance and business valuation 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 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 response to a question on changes in the investment world after 40 years, Damodaran stated that 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.

According to him, passive investors have taken market share from mutual funds resulting in pressure on money managers to justify management fees; and that corporations have also witnessed some change as in the past, the local markets were protected. But, with globalisation, he said corporations are now 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.

“There are 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 added.

Furthermore, Damodaran said market bubbles are a common, necessary feature of markets and are corrections that change the way things are done.

In fact, every forward movement for mankind comes from people overreaching, pushing the margins on what can be done, he added.

On possible distinction in valuation methods applied in Nigeria, the expert stressed that the method of valuing companies is the same globally. He, however, argued that some Nigerian companies are opaque in that relevant information are 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 added.

In response to a question on key considerations when valuing companies in emerging markets, 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.

He argued that accountants are incorrect to consider a balance sheet as a true reflection of the worth of a business, saying balance sheet is actually a reflection of the past in view of the nature of modern companies such as Jumia for instance.

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, he said.

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.

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.

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.

Speaking at the opening session, the founder/Chairman of Coronation Capital Limited, Mr. Aigboje Aig-Imoukhuede, said the company remains committed to building a continuous learning environment that empowers its employees.
He said: “At Coronation Capital, we are strong believers in continuous learning, developing intellectual abilities. That is why whenever there is an opportunity to bring renowned academics, we seize it.”
He said the company decided to invite Damodaran, who headlined the first edition again to handle this year’s edition, because, “there is no better person that will teach you how to value assets.”
In his remarks, Managing Partner of Coronation Capital, John Opubor thanked the Professor and participants for a successful event.
Opubor had noted that, “The world has entered uncharted territory. History teaches that a return to fundamentals espoused by Professor Aswath Damodaran is crucial to thriving in times like this.”