We are now releasing the next preview of a chapter of our free valuation e-book, which can be downloaded here. Continuing with the company valuation theme, Chapter 3 focuses on describing how to estimate Free Cash Flows and the Final Value, answering the following questions:
How are Free Cash Flows calculated?
How is the EBITDA Determined?
What are a Company’s Key Performance Indicators?
Relation between a sector’s cycle, the valuation period and projected value.
We look forward to hearing from you, so do let us know your comments.
Portuguese companies have suffered a downturn in their financial stability ever since start of the crisis in 2008. Company insolvencies have now reached a number of around 15,000 since the beginning of 2012, which accounts for 50 new insolvencies per day, as reported in newspaper Público. Looking at the historic company insolvencies in Portugal below, 2008 was the most dramatic period with 41,245 insolvencies. This statistic (total insolvencies) is not directly comparable with the 50 insolvencies per day figure for a number of reasons. It is likely that the total number of insolvencies in 2012 will show an increase on the previous year.
Source: PorData
Consultants Euler-Hermes expect a 50% increase in insolvencies in Portugal this year, as shown below. This is well above other European countries, including Spain and Greece.
Source: Euler-Hermes August 2012 Report
According to the August 2012 Report by Euler-Hermes, in Portugal “there is a time gap between the economic policy decision and its impact on the real economy. The industrial fabric is in danger and rebuilding it will take some time”.
This recent wave of company insolvencies is but a symptom of the adverse financial conditions that most Portuguese companies are facing. Between the Government’s austerity measures and the slowdown in Spain, one of the country’s major trading partners, companies are facing major headwinds.
In our view, the answer is to invest in innovative projects. Companies facing financial difficulties are less likely to take on new projects however we believe that this is exactly what the economy needs. Below is a chart of the percentage of GDP invested in R&D for Portugal and other European countries. Germany is an example of economic development. In Germany, R&D spend represents almost 3% of GDP. While Portugal has increased its share from 0.7% in 2005 to 1.6% in 2010 and is well above countries such as Greece or Spain, that trend is reversing. R&D spend is just a proxy for innovation however, a reduction of R&D spend does not bode well for a future economic recovery.
Reactions to withdrawal of the proposed changes in social security contributions
We think it is relevant to do a quick analysis on the aftermath of the initial announcement of proposed changes to social security contributions and the corresponding investors’ reactions. The Portuguese government bond yields (10 year maturity) reacted negatively to the announcement and subsequent withdrawal of proposed changes to social security contributions. Yields have been increasing almost continuously since 7 September, the date of the initial announcement of the proposed changes by the Prime Minister.
The yields in 10-year Government bonds react to a number of factors, aside from internal policy developments. Investors may be reacting to events taking place in Spain. However, investors have almost certainly detected that the current Government has lost momentum as it announced proposed changes to the social security contributions and then had to pull back in haste following a widespread negative reaction to the proposal.
Portuguese Government Bond Yield (10 Y)
Source: Bloomberg as at 1 October 2012
These themes were discussed in ETV’s “Closing Bell” programme on 2 October (in Portuguese):
Innovation Models 