Valuation for high growth companies

[Ruben]

Hello, I'm new here, but I have been watching videos of Bionic Turtle and it has helped me a lot in my studies, I'm just a finance student by the way.

Just recently, I seem to be at a lost, I have some unanswered questions in mind I tried exhausting all resources and searching about this but no luck, so come to seek help here

My questions are:
1. What forecasting models or techniques that can be used to forecast the revenues of a high growth company, specifically in a real estate company? High growth company I mean that it is not yet mature and stabilized and exceeds the sales growth of the industry.
2. Is tbe FCFE for highly leveraged companies or companies with high debt?

 

[ShaktiRathore]

Revenues can be determined of a real estate based on several factors as what would be the future income levels, population demographics, and the urban trend and overall economy. Firstly lets ask the question what determines real estate development, that is what drives the real estate demand usually more apartments, more malls, more theaters what drives these to happen. Naturally people who have high income levels and young crowd would want malls, theaters, new buildings, apartments. based on economy growth and high job levels more people have high incomes to invest in such things and want such things as real estate. So firstly we require future projections of demographics(% young people), per capita income, future economic growth. Considering all the growth rates of all the above parameters we can justify the future revenue from real estate.
What the real estate company is into for e.g. it is in apartment/office developments than know the growth in apartment constructions by city or total in general and project future growth Than project from the revenues from apartments in future based on apartment growth. Than go for office spaces development growth then project revenues growth from offices based on these growth. In this way go for all sub real estate sub businesses the business is into and project future revenues based on the sub units growth.
Determining sub units growth is not difficult and what you need is proper understanding of factors that sub units derive its revenues. e.g. office development is driven by economic growth of an area, apartment developments is determined by the income levels and young population growth.
Generally the revenues in any sector can be determined using the factors that affect the sub units the company is into. I would approach this way only.
Regarding second Question,
FCFE=FCFF+net borrwing, for a high growing company growing with large debt the capex are very large so that FCFF can be negative because revenues are still low but growing due to more investments in capex. FCFE can be positive based on the amount of debt taken which makes FCFE positive. I cant understand what you mean by highly leveraged/ large debt companies, because highly leverage company is one which is growing with very high debt so they use FCFE and companies which have taken high debt but not growing with than whats the sense of taking high debt(avoid financial distress). Highly leverage companies are ones that use high debt.
I hope this helps...
PS: just my personal understanding above
thanks

 

[Ruben]

Hello and thank you for the reply,
It was very helpful
but I'm still wondering what forecasting tool should I use (like moving average, geometric mean, or regression, etc.)
Because the company I'm currently researching on has grown at an average of 75% for the past three years higher than the growth of the economy (GDP) at 10%.

 

[ShaktiRathore]

Hi there,
If you are valuing the company than while calculating Terminal value you can use the raw multiple(P/E,P/B,FCF/EBITDA etc.) an industry multiple in which the company is in. For that you need to just forecast the industry average multiple and company's earning in terminal year.I mean if you are getting negative values due to high growth. I dont know which forecasting tool you should use but i would had used regression in your place.

thanks

 

[Ruben]

I have sucessfully forecasted the sales but because of the high capex in 2012, actually it is already stated in their annual reports how much capex they are planning to have in 2012 but it is actually really high, too high, and it said that they will finance it with long term loans
So taking into account that in my forecasts my Capex and borrowings bloated and my debt ratio became 60%.
Yes, it did result in a negative value in the FCFF
but the FCFE gave out a really low intrinsic value, 50% lower than its current market price.
I can't utilize a relative valuation because I am required to come up with an intrinsic value for this stock.
What should I do, to lower my capex? if I make it dependent on sales it will still be high, well higher than the EBIT and net income also resulting in a negative FCFF also low FCFE, again.
I'm lost again, please help.

 

[ShaktiRathore]

Hi there,
This is extraordinary capex and happens once in many time if it is an extraordinary capex that they are having (see if the capex value departs very greatly from the previous capexes) then it would not be wise to include the entire capex in that year only what you can do is 1. capitalise the capex over a long time or say the term of the loan(you can take a suitable time period for capitalizing the capex say 10 yrs long term loan!!) 2.or continue with the capex margins trends as was seen in earlier years so that continuing cash flow from operations do not get affected. But you should see that the capitalized amount in current year shows the trend in capex in the previous years. in this way you should get positive FCFE/FCFF and should be able to work out through. This is the best solution to the problem you faced that i can give.

thanks

 

[Ruben]

^I thank you for that, yes what I did was to take the high capex in 2012 and distributed it over my forecast period from 2012-2016 with the last year (2016) having the highest capex, and of course I had to include some educated guessess. We all sometimes have to make assumptions as long as there is somewhat a basis, right?
I mean it did give me a positve FCFE and F, with only 15%-20% lower than the market price, so it's a sell.

 

[ShaktiRathore]

Yes Ruben you have taken the capex distribution over the forecast period but have you tried to see as what is the capex is like and over what period it will earn me returns is lie , i mean have you tried to research or anything given like this. If the capex is a fixed investment then it would reap me benefits over a longer horizon than you should capitalize the expenses over that horizon say 10 yrs. And if its of some shorter horizon investment that would yield me returns over shorter period as you have taken as 5 years then you would underestimate the FCFFs and thus underestimate the true value. Thus knowing the nature of investment and its future returns horizon is important before capitalizing. you would have taken straight line capitalizing that's fine but over what horizon you are capitalizing the investment is the important question here.please do check your calculations by adjusting for horizon.

thanks

 

[Ruben]

^their capex was composed of land acquisitions and construction of residential units (condominiums) they will sell, it's a real estate company after all.
I'm not so sure whether there are similar real estate companies that have historically high capex like this.