SSRN Id1854309

EQUITY VALUATION OF SHIPPING
COMPANIES
As part of “A Short Course in Ship Finance”
Nanyang Technological University
April 2, 2011
by: Teddy Tsai
Managing Director at Markis & Company (Asia) Ltd
AGENDA
Basics of Financial Statements
What is Valuation?
Valuation Ratios
Cash-flow based valuations
Asset-based valuations
Other Issues / Metrics

2
Teddy Tsai (teddy.tsai@markis.asia)

COURSE GOAL
 By the end of the talk, participants should have a basic
understanding of how analysts value shipping equities,
and what metrics can be used to benchmark the market
performance of shipping equities.

WHAT EQUITY ANALYSTS DO
Financial Publish
• Obtain company Forecasts • Compare with peers report
data • Compare historically
• Create models • Draft report
• Talk to experts • Perform valuations
• Forecast financial • Explain assumptions
analysis
statements • Communicate views
• Perform financial
analysis Value the
Gather Data
stock

BASICS OF FINANCIAL STATEMENTS
5
THE BASICS
Cash Flow
Income Statement Balance Sheet
Statement
• Captures • Captures • A snapshot of
sources of sources and uses the assets,
profitability of CASH within liabilities, and
within a specified a specified equity of a
period of time. period of time. company.
• Sales, costs, • Shows changes • A single point in

margins, & in cash from time, capturing
profits operating, the company’s
investing, and financial
financial conditions.
activities.
6

INCOME STATEMENT
Income Statement FY1 2008 FY1 2009 FY1 2010
Revenues 9285.125 6515.578 9422.092
- Cost of Revenue 8328.979 6535.951 8152.909
Gross Profit 956.146 -20.373 1269.183
- Selling, General & Admin Expense 819.029 657.697 722.415
Operating Income 148.606 -668.032 565.673
- Interest Expense 27.946 59.265 34.638
- Foreign Exchange Losses (Gains) 24.674 -11.293 -8.418
- Net Non-Operating Losses (Gains) -41.203 -15.877 9.631
Pretax Income 137.189 -700.127 529.822
- Income Tax Expense 48.926 38.977 65.799
Income Before XO Items 88.263 -739.104 464.023
- Extraordinary Loss Net of Tax 0.000 0.000 0.000
- Minority Interests 5.149 1.705 3.087
Net Income 83.114 -740.809 460.936
- Total Cash Preferred Dividends 0.000 0.000 0.000
Net Inc Avail to Common Shareholders 83.114 -740.809 460.936
Abnormal Loss -30.526 -149.048 -5.258
Tax Effect on Abnormal Items 5.495 26.829 0.653
Normalized Income 58.083 -863.028 456.331
Comprehensive Income - -594.923 422.563
Comprehensive Income per Share - -0.290 0.164 7

Source: Bloomberg
INCOME STATEMENT -
PER SHARE DATA, REFERENCE ITEMS
Per Share Data FY1 2008 FY1 2009 FY1 2010

Basic EPS Before Abnormal Items 0.0357 -0.4208 0.177
Basic EPS Before XO Items 0.0511 -0.3612 0.1788
Basic EPS 0.0511 -0.3612 0.1788
Basic Weighted Avg Shares 1627.3814 2051.035 2577.94
Diluted EPS Before Abnormal Items 0.0355 -0.4208 0.1765
Diluted EPS Before XO Items 0.0508 -0.3612 0.1783
Diluted EPS 0.0508 -0.3612 0.1783
Diluted Weighted Avg Shares 1635.9899 2051.035 2585.17
Reference Items
EBITDA 411.628 -381.816 850.902
Gross Margin 10.2976 -0.3127 13.4703
Operating Margin 1.6005 -10.2528 6.0037
Profit Margin 0.8951 -11.3698 4.8921
Sales Growth 13.7886 -29.8278 44.6087
Basic EPS Before XO Growth -84.1545 - -
Interest Income 9.019 7.189 4.277
8

Source: Bloomberg
CASH FLOW STATEMENT
Cash Flow FY1 2008 FY1 2009 FY1 2010
+ Net Income 83.114 -740.809 460.936
+ Depreciation & Amortization 263.022 286.216 285.229
+ Other Non-Cash Adjustments 106.398 125.859 77.239
+ Changes in Non-Cash Capital 49.064 -221.236 -130.072
Cash From Operating Activities 501.598 -549.97 693.332
+ Disposal of Fixed Assets 49.351 26.755 27.594
+ Capital Expenditures -879.049 -89.051 -471.046
+ Increase in Investments 0 0 0
+ Decrease in Investments 4.374 0 0
+ Other Investing Activities -19.566 -11.281 -6.612
Cash From Investing Activities -844.89 -73.577 -450.064
+ Dividends Paid -151.277 -39.246 0
+ Change in Short-Term Borrowings 0 0 0
+ Increase in Long-Term Borrowings 779.323 563.4 506.67
+ Decrease in Long-term Borrowings -356.526 -951.29 -99.779
+ Increase in Capital Stocks 1.76 957.505 1.39
+ Decrease in Capital Stocks -0.621 0 0
+ Other Financing Activities -4.513 -2.993 -7.385
Cash from Financing Activities 268.146 527.376 400.896
Net Changes in Cash -75.146 -96.171 644.164
9

Source: Bloomberg
CASH FLOW STATEMENT –
REFERENCE ITEMS
Cash Flow FY1 2008 FY1 2009 FY1 2010

Reference Items
EBITDA 411.628 -381.816 850.902
Net Cash Paid for Acquisitions -
Free Cash Flow -377.451 -639.021 222.286
Free Cash Flow To Firm -359.4714 - 252.6223
Free Cash Flow to Equity 94.697 -1000.156 656.771
Free Cash Flow per Basic Share -0.2319 -0.3116 0.0862
Price to Free Cash Flow - - 19.698
Cash Flow to Net Income 6.0351 - 1.5042
10

Source: Bloomberg
BALANCE Balance Sheet
Assets
FY1 2008 FY1 2009 FY1 2010
SHEET
+ Cash & Near Cash Items 429.219 333.048 977.212
+ Accounts & Notes Receivable 720.977 737.752 1082.005
+ Inventories 159.015 197.208 243.626
+ Other Current Assets 181.318 236.115 99.61
Total Current Assets 1490.529 1504.123 2402.453
+ Long-Term Investments 0 0.031 0.068
+ Gross Fixed Assets 5642.156 5707.121 -
- Accumulated Depreciation 1990.473 2188.625 -
+ Net Fixed Assets 3651.683 3518.496 3705.515
+ Other Long-Term Assets 302.379 317.9 343.021
Total Long-Term Assets 3954.062 3836.427 4048.604
Total Assets 5444.591 5340.55 6451.057
Liabilities & Shareholders' Equity

+ Accounts Payable 162.982 242.069 1174.158
+ Short-Term Borrowings 471.752 20.975 21.023
+ Other Short-Term Liabilities 1300.423 1095.146 420.899
Total Current Liabilities 1935.157 1358.19 1616.08
+ Long-Term Borrowings 777.682 918.831 1338.177
+ Other Long-Term Liabilities 227.161 223.339 230.989
Total Long-Term Liabilities 1004.843 1142.17 1569.166
Total Liabilities 2940 2500.36 3185.246
+ Minority Interest 44.047 43.571 43.407
+ Share Capital & APIC 845.379 1815.479 1820.019
+ Retained Earnings & Other Equity 1615.165 981.14 1402.385
Total Shareholders' Equity 2504.591 2840.19 3265.811 11
Total Liabilities & Equity 5444.591 5340.55 6451.057
Source: Bloomberg
BASICS OF FINANCIAL ANALYSIS
 Purpose – The assessment of the profitability, solvency,
liquidity, and stability of a business.
 Use of financial ratios to make use of financial statement

data.
 Methods – Past performance, future performance, and

comparative performance
12

Ratio Analysis FY1 2008 FY1 2009 FY1 2010
RATIOS
Gross Margin 10.2976 -0.3127 13.4703
Operating Margin 1.6005 -10.2528 6.0037
Pretax Margin 1.4775 -10.7454 5.6232
ANALYSIS Profit Margin

Return on Assets
0.8951
1.5902
-11.3698
-13.7376
4.8921
7.818
Return on Common Equity 3.2451 -28.1828 15.316
Enterprise Value FY1 2008 FY1 2009 FY1 2010

Historical Market Cap 1146.963 2912.8707 4384.8634
+ Minority Interest 44.047 43.571 43.407
+ Total Debt (ST & LT Debt) 1249.434 939.806 1359.2
- Cash & Equivalents 429.219 333.048 977.212
Enterprise Value 2011.225 3563.1997 4810.2584
Price Ratio Analysis FY1 2008 FY1 2009 FY1 2010

Price/T12M Sales per Share 0.1234 0.3556 0.4647
Price/T12M EBITDA per Share 2.7838 - 5.1458
Price/T12M Earnings per Share 13.7761 - 9.4993
Price/Book Value per Share 0.4661 1.0416 1.3607
Price/T12M Cash Flow per Share 2.2845 - 6.3153
Dividend 12 Month Yld - Gross 12.5 2.2719 1.6198
Earnings Yield 7.2589 -31.9787 10.5271

Price/T12M Earnings per Share 13.7761 - 9.4993
Price/Net Tangible Assets per Share 0.4982 1.104 1.4292
Net Tangible Assets per Share 1.4134 1.0231 1.1884
Price/T12M Free Cash Flow per Share - - 19.698
Trailing 12M Free Cash Flow Per Share -0.2319 -0.3116 0.0862
EBIT Yield 12.9684 -28.8361 12.9191

Dividend Yield 10.26 0 2.1192 13
Price/Tangible Book Value per Share 0.4982 1.104 1.4292
Free Cash Flow Yield -32.9391 -27.5839 5.0767
Source: Bloomberg
DUPONT ANALYSIS
300.0 Return on Common Equity Tax Burden

250.0 Interest Burden EBIT Margin
200.0 Asset Turnover Financial Leverage
150.0
100.0
50.0 46.1 54.1

33.6 21.9
20.6 15.4 15.3
- (6.1) 3.2
(28.2)
(50.0) (45.8)
(100.0)
FY 2000 FY 2001 FY 2002 FY 2003 FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010
14

Source: Bloomberg, Wikipedia
WHAT IS VALUATION?
15
EQUITY VALUATION
In finance, valuation is the process of estimating
what something is worth. Items that are usually
valued are a financial asset or liability.
– Wikipedia
16

EQUITY VALUATION
 What is it used for?
 Quantifying how much a company (or new business) is worth.
 Can be used in investment analysis, capital budgeting, M&A
transactions, financial reporting, taxable events, litigation, etc.
 How is it done?
 Assessing future cash flows, profits, and investments
 Assessing risk involved in generating cash flows and profits.
 Compare risk-reward potential versus other peers and projects.
 And any other reason that can add value, or worth to a buyer.
 What it is NOT –
 Valuations is not a market price. It is an estimated worth.
 Stock valuation is not a prediction. It is a convention, for the
purpose of stability and liquidity of investments. 17

VALUATION MYTHS
 Valuations is a long-term fair value and stable over time.
 The best valuation is where the most precise estimate can

be calculated
 The more complex and quantitative the model, the better
18

TECHNICAL VS. FUNDAMENTAL ANALYSIS
 Chartist approach  Intrinsic value approach
19

Source: Bloomberg
RELATIVE VS. ABSOLUTE VALUATIONS
 Relative Valuations  Absolute Valuations
20

Source: Bloomberg
DIRECT VS. INDIRECT VALUATIONS
 Direct Valuations  Indirect Valuations
 DCF  Equity IRR from LBO
 Multiples approach
 … using metrics to arrive  Accretion/dilution in EPS
at an “intrinsic value” of from merger analysis
the stock.  IRR from capital
budgeting projects.
 IRR or break even rate
based on purchase price,
debt capacity, etc.
 ….assuming a range of
assumptions in a model
to arrive at an estimated
return. 21

EQUITY VS. SHIP VALUATION METHODS
 Equity/Stock Valuations  Ship Valuations
 Price Multiples  Market valuation
 DCF  Demolition value
 NAV  Historical value
 SOTP  Damaged value
 ….etc.  Replacement values
22

COMMON EQUITY VALUATION METHODS
 Comparative Valuations
 Valuations using ratios, multiples, etc.
 Cash Flow Based Methods

 Valuations using forward estimates of cash flows, growth, and
cost of capital.
 Asset Based Methods

 Valuations based on current market value of assets, sum of
the parts, net asset values.
23

VALUATION RATIOS
24
UNDERSTANDING VALUATION MULTIPLES
 Multiples are the simplest to understand, but also can be
the most theoretically rigorous approach.
 A relative valuation approach, because valuation is
compared to another benchmark.
 Issues: Source of data and comparables, what metric to
use, what discount/premium to apply?
 Common valuation multiples

 Price / Earnings
 Price / Book
 Dividend Yield
 EV/EBITDA
25

THE BASICS: P/E RATIO
 P/E Ratio
 Current share price / EPS
 Market Cap / Net Income
Price  Pros:
P/E  Accessible, easy to

understand, easy to apply
Ratio 
(pick a number).
Cons:
EPS  Not as relevant for
cyclical sectors.
 No standard definition
for EPS
26

THE BASICS: P/E RATIO
 Low P/E doesn’t necessarily mean “cheap”. Cyclical sectors
would have low P/Es when earnings are very high.
Probably peak of the cycle and worst time to buy the
stock.
 Related Metrics:
 Earnings Yield
 PEG Ratio
27

P/E RATIO VALUATION GRAPH
28

Source: Bloomberg
EARNINGS SUMMARY
29

Source: Bloomberg
P/E BAND
30

Source: Bloomberg
THE BASICS: P/B RATIO
 P/B Ratio
 Market Cap / Total Equity
 Current share price / book
Market
value per share
Cap
P/B  Pros:
 Accessible, easy to
Ratio understand, easy to apply.
 Complements to P/E & ROE.
Total
Equity  Cons:
 BV is a historical cost
number; can vary from
market value.
31

THE BASICS: P/B RATIO
 P/B Ratio is a favorite metric for asset-intensive industries
such as shipping.
 P/B used with ROE can indicate periods where returns
generated were higher than market expectations.
 Total Equity is less “adjustable” versus net income, but may
also be distorted by historical costs,
 Similar Metrics:
 Price / NAV
32

PRICE / BOOK VS. ROE
33

Source: Bloomberg
P/B BAND
34

Source: Bloomberg
THE BASICS: DIVIDEND YIELD
 Dividend Yield
 Annualized cash dividend
per share / share price
Dividend
per
 Pros:
Share  Tangible rate of return
metric.
Dividend  Represents actual cash
Yield payments.
 Cons:
Share  Tax issues involved
Price
 May be distorted by
special dividends, no set
dividend policies.
35

THE BASICS: DIVIDEND YIELD
 Annualized dividend per share = Annualized in terms of
the year in which the dividend was earned rather than
paid. Combine interim and final to annualize, or “current
indicated annual rate” or quarterly div x 4.
 Dividends set by Board of Directors. This may be in

accordance to a set dividend policy, vary in terms of
payments from year to year, or vary in terms of payouts.
Higher payout, lesser retained earnings for investments in
new projects.
 Similar Metrics:
 Free Cash Flow Yield 36

DIVIDEND HISTORY
37

Source: Bloomberg
DIVIDEND FORECASTS
38

Source: Bloomberg
THE BASICS: EV/EBITDA
 EV / EBITDA
 Enterprise value / Earnings
before interest, taxes,
depreciation, and
Enterprise
Value amortization.
 Pros:
EV/  Capital structure neutral.
EBITDA  Takes out distortions due to
accounting differences, taxes
EBITDA
 Cons:
 Ignores capital intensity
 Difficult to adjust value
drivers
39

THE BASICS: EV/EBITDA
 Enterprise value: The value of all claims on the assets and
cash flows of a company
Other
Market Net Minority non- Enterprise
Cap Debt Equity Current Value
Liabilities
 EBITDA = Operating income + Depreciation & Amortization
 Related Metrics:
 EV / Sales
40

THE BASICS: EV/EBITDA ISSUES
 Net debt + market capitalization reverses the impact of
capital structure during the current period.
 EV and EBITDA can be adjusted to take into account the

impact of operating leases, or chartered-in vessels. This would
make for a fairer comparison between ship-owners and ship
owner-operators.
 EV/EBITDA can be used to value companies, with the

intention to take on debt to acquire strategic targets.
41

EV/EBITDA VALUATION GRAPH
42

Source: Bloomberg
OTHER VALUATION RATIOS
 Basically most financial statement line-items can be used
to generate a valuation ratio.
 Price / Cash Flow

 Free Cash Flow Yield
 EV / Sales, Price / Sales
 Price / Cash Earnings
 EV / dwt
 …. etc.
43

TRICKS OF THE TRADE
 Aggregate P/E vs. Weighted average P/E
 Peer group selection
 Consistent application of “EPS adjustments”
 Application of time-weighted shares outstanding,

historical adjustment factors, diluted vs. basic shares
outstanding.
 Use of year-end price versus average price.
 Forward P/E vs. trailing (historical) P/E
44

SUMMARY – VALUATION RATIOS
Forecast financial metrics of company to be
analyzed
Identify the most relevant peer group
Calculate aggregate and weighted average peer

comparison valuation ratios
Calculate various historical valuation ratios and

select time period that is most appropriate
Compare valuation ratios over time, identify

where we are in the cycle 45

CASH-FLOW BASED VALUATIONS
46
CASH FLOW BASED METHODS
 Valuations using forward estimates of cash flows, growth, and
cost of capital.
 Free Cash Flow to the Firm (FCFF) – The sum of cash flows to all
claim holders, including debt, preferred, and common shareholders.
 Free Cash Flow to Equity (FEFC) – residual cash flows after meeting
debt payments, preferred dividends, and providing for capex for
existing and new assets.
 Dividend discount model (DDM) – based on the idea that the value of
equity is all future dividends discounted back to today.
 Residual Income model (RIM) – Value is derived from current book

value of equity and the present value of expected future residual
income (ROE in excess of Cost of Equity) 47

PROS & CONS
FOR CASH FLOW MODELS
Advantages Disadvantages
 Absolute valuation based  Not standardized, or easily

upon expected cash flows obtainable
 Captures cyclical  Sensitivity to cost of capital
variation in cash flows and terminal growth.
 Captures the impact of  High variation in risk
future capex plans premium estimates.
 Effective for modeling  Theoretical approach may
operating companies be difficult for non-financial
managers to understand.
48

KEY INPUTS
Change
change Free
in minority
EBITDA in
working
Capex
interest Cash
provision Flow
capital
Terminal
Value
Weighted average
Cost of Capital

AN EXAMPLE
DCF Valuation Calculation of WACC
Value of free cashflow 2011-2018 (USDm) 399 Market value equity (2011)- USDm 1,186
Terminal value 1,150 - in % 56%
Value of firm (USDm) 1,549 Interest bearing debt (2011E) - USDm 917
LESS: Net debt 2011E (USDm) -239 - in % 44%
Value of equity (USDm) 1,310
Risk premium 6.2%
Beta 1.5
Equity value per share (USD) 0.68 Risk free rate 3.0%
Equity value per share (HKD) 5.28 Interest rate 5.6%
Tax-rate 5.0%
Cost of equity 12.0%
Terminal Growth Assumptions Cost of debt 5.3%
Nominal growth year 2018+ 2.5% Net WACC 9.1%
50

USDm FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018
EBIT 93 65 160 165 171 176 182 188
EBIT (1-tax rate) 88 61 152 157 162 167 173 179
+ Depreciation and amortization 62 68 74 76 78 81 84 86
Changes in working capital 4.6 (1.3) (3.8) (3.9) (4.1) (4.2) (4.3) (4.5)
- Capital expenditure (159) (112) (120) (118) (116) (114) (112) (110)
Free cash flow (4.1) 16.7 101.3 110.8 120.6 130.6 140.7 151.1
Period (n=year) 1 2 3 4 5 6 7 8
Discount factor 0.917 0.841 0.771 0.707 0.648 0.594 0.545 0.500
PV of Free Cash Flow -4 14 78 78 78 78 77 75
Sum of PV of FCF 399

PV of terminal value 1,150
Total firm value 1,549
LESS: Net debt 2011E (239)
Equity value 1,310
No. of shares (mn) 1,927

Equity value per share (USD) 0.68
USDHKD rate 7.77
Equity value per share (HKD) 5.28
Current share price 4.78
premium/discount % 10.5%
Assumptions
Risk free rate 3.0%
Beta 1.45
Market risk premium 6.2%
Cost of equity capital 12.0%
Average cost of debt 5.6%
Tax shield = (1- tax rate) 0.95
Cost of debt capital 5.3%
Total Debt/capital ratio 0.44
WACC 9.06% 51
Terminal growth 2.50%

DIVIDEND DISCOUNT MODEL
52

Source: Bloomberg
TRICKS OF THE TRADE
 Compromise between rigor and a pragmatic approach
 Forecast in three stages: 1) near-term detailed forecasts,

2) intermediate growth period, 3) assumed steady state.
 Tweaks
 Forecast period – How long will growth last?
 Fade period – time it takes to reach long-term growth
 Cost of equity, risk premium, which risk free rate?
 Raw beta or adjusted beta
 Best practices – Run sensitivity analysis on key drivers.

53

ASSET-BASED VALUATIONS
54
ASSET-BASED VALUATIONS
 This is probably the most familiar way to value companies for
ship owners.
 What would it cost if I buy all the vessels from the secondhand
sale & purchase market?
 No standard definition, but valuations can be based on current

market value of assets, value of contracts, newbuilding
contracts, and adjusting for non-operating items.
55

SHIP VALUES
56

PROS & CONS
FOR AN ASSET-BASED APPROACH
Advantages Disadvantages
 Familiar to ship owners  No standardized

 Sector-specific metric
definition of NAV
 Based upon secondhand
 Links equity value to
prices, which are not
industry metrics always readily available
 Adjustments can be made for all ship types
for value of contracts,  No premium given to
newbuilding contracts management capabilities
 Tends to over-estimate
during exuberant markets
57

AN EXAMPLE –
MARKET ADJUSTMENT VS. BOOK VALUE
NAV valuation (USDm) Book Market
Owned fleet 897 1,557
Other non-current assets 903 903
Current assets 842 842
Current liabilities -240 -240

Non-current liabilities -827 -827
Minority interest 0 0
Value of orderbook 762 762

Outstanding capex -300 -300
Total 2,038 2,698
No. of shares (mil) 1,927 1,927

NAV/share (USD) 1.06 1.40
NAV/share (HKD) 8.2 10.9
58

AN EXAMPLE –
NEWBUILDING PRICE APPROACH
Company Name
# of Ships 107 Salvage value / Ship 5.0 $ mn
Total fleet scrap value ($ mn) 535.0 Newbuilding cost 120.0 $ mn
Depreciated market value (avg) 11,880.2 Depreciation period 25.0 yrs
Book value (local currency) 18,156
Cash (local currency) 3,426 Average age of fleet 10.0 yrs
LC/US$ exchange rate 3.03
Cash balance (US$) 1,132 Share Price 8.00 local currency
Interest bearing debt (local curr) 6,608 Shares 3,720 mn
Interest bearing debt (US$) 2,183 Market Cap (local currency) 29,758.6 mn
Market Cap US$ 9,831.1 US$ mn
US$ salvage value & net debt (516.1) Enterprise value (US$) 10,882.2 US$ mn
Market adj. net book value
US$ net book value 4,947.0 per share 8.81
Market value adj. net book value
(US$ mn) 10,829.0 % premium/discount 10.2%
59

TRICKS OF THE TRADE
 Should you including chartered-in vessels? Value of charter
contracts? Include financial & operating lease obligations?
 What “market price” do you use?

 “Average” price? What time frame is “recent transactions”?
 Secondhand, newbuilding, and/or scrap prices?
 Extrapolate for age and size? What about quality?
 Can combine this with a sum of the parts (SOTP)

valuation. Appropriate for holding company structures, or
companies with different business lines.
60

OTHER ISSUES / METRICS
61
VALUING TRANSACTIONS
 Back into the value of the company based on transactions:
 Leveraged Buyouts – Entry & exit multiples, debt capacity, and
EBITDA growth assumptions. To be used to see how much you can
pay and finance, to obtain an acceptable equity rate of return.
 Value of Contracts approach – contracted rates, cash flow
generated, and debt capacity assumptions in a capital budgeting
model. Generates NPV and IRR estimates.
 Merger Integration – financing and accounting adjustment
assumptions. To be used to see how much you can afford to pay and
achieve accretion in earnings.
 Venture Capital approach – Investment, IPO terminal value, and
discount rate assumptions. Percent of ownership and high discount
rate is needed, due to the risky nature of these investments.
62

OTHER VALUATION APPROACHES/TECHNIQUES
 Contingent claims – Capital structure arbitrage
 Economic Value Added
 Option pricing
 Sum of the Parts (SOTP)
63

FURTHER STUDIES
 Economic value added – EVA, ROIC, etc.
 Financial Analysis – DuPont analysis, free cash flow

analysis, capital intensity, margins, ratios analysis
 Strategic Analysis – SWOT, five forces, etc.
 Capital structure – bonds, preferred shares, convertible

bonds, voting rights, options, dual listings, etc.
64

SUMMARY
 Valuation is the process of estimating what something is worth.
 Fundamental analysts approach valuations in three major
methods
1. Comparative methods, using valuation ratios.
2. Cash flow-based methods, estimating future growth, cash flows, and
cost of capital.
3. Asset-based methods, estimating current market values of assets,
and adding it up.
 There are many tricks of the trade, and care needs to be
taken when reviewing other people’s estimates.
 At the end of the day, this is only a tool, and should reflect
your views on the sector, management, company strategies,
and opportunities.
65

COPYRIGHT & DISCLAIMER
 Copyright
 Equity Valuation of Shipping Companies by Teddy Tsai is licensed under a
Creative Commons Attribution-NoDerivs 3.0 Unported License.
 http://creativecommons.org/licenses/by-nd/3.0/
 Disclaimer
 This presentation is provided for information purposes only. It is not a complete
analysis of every material fact respecting any company, industry, security or
investment. Opinions expressed are subject to change without notice.
 While every effort has been made to ensure that the information contained in
this presentation is correct with no errors and omissions, no responsibility can
be nor is accepted as to the accuracy or completeness of the statements, facts,
and examples included herein. No liability is accepted whatsoever on the part of
Markis & Company (Asia) Ltd., or of any other parties whose material is
contained in the presentation for any loss of profit or damange or any liability to
third party whatsoever arising from the use of this presentation.
 Neither this report, nor any opinion expressed herein, should be construed as
an offer to sell or a solicitation of an offer to acquire any securities or other
investments mentioned herein. The company accepts no liability whatsoever for
any direct or consequential loss arising from the use of this report or its
contents. 66

Markis & Company (Asia) Ltd
Teddy Tsai
Managing Director
+852 8127-7587
teddy.tsai@markis.asia
67

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EQUITY VALUATION OF SHIPPING

Cash-flow based valuations

Other Issues / Metrics

Teddy Tsai (teddy.tsai@markis.asia)

Teddy Tsai (teddy.tsai@markis.asia)

Teddy Tsai (teddy.tsai@markis.asia)

• Sales, costs, • Shows changes • A single point in

Teddy Tsai (teddy.tsai@markis.asia)

Teddy Tsai (teddy.tsai@markis.asia)

Per Share Data FY1 2008 FY1 2009 FY1 2010

Teddy Tsai (teddy.tsai@markis.asia)

Teddy Tsai (teddy.tsai@markis.asia)

Cash Flow FY1 2008 FY1 2009 FY1 2010

Teddy Tsai (teddy.tsai@markis.asia)

Liabilities & Shareholders' Equity

 Use of financial ratios to make use of financial statement

 Methods – Past performance, future performance, and

Teddy Tsai (teddy.tsai@markis.asia)

ANALYSIS Profit Margin

Enterprise Value FY1 2008 FY1 2009 FY1 2010

Price Ratio Analysis FY1 2008 FY1 2009 FY1 2010

Earnings Yield 7.2589 -31.9787 10.5271

EBIT Yield 12.9684 -28.8361 12.9191

300.0 Return on Common Equity Tax Burden

50.0 46.1 54.1

Teddy Tsai (teddy.tsai@markis.asia)

Teddy Tsai (teddy.tsai@markis.asia)

Teddy Tsai (teddy.tsai@markis.asia)

 The best valuation is where the most precise estimate can

 The more complex and quantitative the model, the better

Teddy Tsai (teddy.tsai@markis.asia)

Teddy Tsai (teddy.tsai@markis.asia)

Teddy Tsai (teddy.tsai@markis.asia)

Teddy Tsai (teddy.tsai@markis.asia)

Teddy Tsai (teddy.tsai@markis.asia)

 Cash Flow Based Methods

 Asset Based Methods

Teddy Tsai (teddy.tsai@markis.asia)

 Common valuation multiples

Teddy Tsai (teddy.tsai@markis.asia)

P/E  Accessible, easy to

Teddy Tsai (teddy.tsai@markis.asia)

Teddy Tsai (teddy.tsai@markis.asia)

Teddy Tsai (teddy.tsai@markis.asia)

Teddy Tsai (teddy.tsai@markis.asia)

Teddy Tsai (teddy.tsai@markis.asia)

Teddy Tsai (teddy.tsai@markis.asia)

Teddy Tsai (teddy.tsai@markis.asia)

Teddy Tsai (teddy.tsai@markis.asia)

Teddy Tsai (teddy.tsai@markis.asia)

Teddy Tsai (teddy.tsai@markis.asia)

 Dividends set by Board of Directors. This may be in

Teddy Tsai (teddy.tsai@markis.asia)

Teddy Tsai (teddy.tsai@markis.asia)

Teddy Tsai (teddy.tsai@markis.asia)

Teddy Tsai (teddy.tsai@markis.asia)

 EBITDA = Operating income + Depreciation & Amortization

Teddy Tsai (teddy.tsai@markis.asia)

 EV and EBITDA can be adjusted to take into account the

 EV/EBITDA can be used to value companies, with the

Teddy Tsai (teddy.tsai@markis.asia)

Teddy Tsai (teddy.tsai@markis.asia)