This paper is about the company valuation with salmon in Norway.
Norway is the world leading supplier of Atlantic salmon. The country supplies approximately twice as much as Chile, which is the second largest supplier. From 2018 to 2019, Norwegian export increased by 7% due to the stable price of salmon. Europe, as the most important export destination accounted for 74% of the export in 2019. Poland, Denmark, and Sweden were the most significant single markets along the 56 countries SalMar exports to. In addition, Asia is another important market for SalMar. The imports in the region grew by 29% between 2018 and 2019.
Table of Contents
Company Overview
Market conditions
Competition & Growth Rates
SWOT
Correcting accounting earnings
Weighted average cost of capital
Risk free rate (rf)
Capital-Structure
Beta
Unlevered Beta
Levered Beta
Market Risk Premium
Country Risk Premium
Cost of Equity
Cost of Debt (rd)
Interest Coverage Ratio
Default Spread
WACC
Free cash flow to the firm (FCFF)
Forecasting free cash flow
Growth Rate
Reinvestment Rate
Return on Capital (ROC)
Fundamental Growth Rate
Discounted cash flow
Relative Valuation
P/E:
EV/EBITDA:
Conclusion
Research Objectives and Themes
The primary objective of this study is to perform a comprehensive fair value estimation of SalMar ASA as of April 24, 2020. The research explores the firm's financial position within the Norwegian aquaculture industry, employing fundamental valuation techniques to determine the intrinsic value of the company and evaluating its market position through peer comparison.
- Financial performance analysis and accounting adjustments.
- Estimation of the Weighted Average Cost of Capital (WACC).
- Forecasting of future Free Cash Flows to the Firm (FCFF).
- Comparative industry valuation using P/E and EV/EBITDA multiples.
Excerpt from the Book
Correcting accounting earnings
In order to enable a credible forecasting of future cash flows, it is essential to develop a throughout understanding of SalMar’s historical financial performance. The historical financial statements do not separate “operations” and “investments in operations” from “financing activities”, so it is necessary to adjust the financial statements to make it better suited for valuation purposes (Peterson & Plenborg, 2012). SalMar continues to pursue its stated aim of cost leadership, which reflects their small investments in R&D. These expenses are therefore not considered to be of significant importance. Consequently, the R&D expenses are not capitalized in the adjusted financial statements.
For the case of SalMar, the most crucial adjustment is related to operating leases. Apart from 2019, operating leases is treated as operating expenses, but according to Damodaran (2012), these expenses should in reality represent financing expenses. Consequently, operating leases are capitalized and thus adjusted in the balance sheet. The value of the operating leases is included as debt in the balance sheet.
Summary of Chapters
Company Overview: Provides a profile of SalMar ASA, highlighting its operational scope in the Norwegian fish farming industry, its competitive strategy, and market conditions.
Correcting accounting earnings: Details the necessary adjustments to financial statements, specifically regarding R&D and operating leases, to align accounting data with valuation requirements.
Weighted average cost of capital: Calculates the WACC by determining the risk-free rate, the company's capital structure, and estimating beta and cost of equity.
Free cash flow to the firm (FCFF): Explains the derivation of FCFF, including calculations for net capital expenditures and investments in non-cash working capital.
Growth Rate: Analyzes historical trends and analyst projections to establish a realistic future growth rate for SalMar ASA.
Discounted cash flow: Applies a two-stage growth model to forecast enterprise value and arrive at an implied share price.
Relative Valuation: Compares SalMar ASA against a peer group of major aquaculture companies using P/E and EV/EBITDA multiples to check for market valuation alignment.
Conclusion: Summarizes the valuation findings and reconciles the results from the DCF and relative valuation methods.
Keywords
Company Valuation, SalMar ASA, Aquaculture, DCF-model, WACC, Free Cash Flow, Cost of Equity, Relative Valuation, P/E Ratio, EV/EBITDA, Financial Statement Analysis, Market Risk Premium, Salmon Farming, Enterprise Value, Equity Value.
Frequently Asked Questions
What is the core focus of this publication?
This work focuses on the systematic valuation of SalMar ASA, a major player in the global salmon farming industry, as of April 2020.
What are the primary thematic areas covered?
The analysis covers accounting adjustments, capital structure, cost of capital estimation, cash flow forecasting, and comparative market-based valuation.
What is the primary objective of this research?
The primary objective is to calculate the fair value of SalMar ASA shares through both intrinsic (DCF) and relative valuation methods.
Which scientific methods are utilized?
The paper utilizes the Discounted Cash Flow (DCF) method, including adjustments for operating leases, and a comparative Peer Group Multiples analysis.
What content is discussed in the main body?
The main body details the methodology for adjusting financial statements, calculating WACC, forecasting free cash flows based on 5-year averages, and applying multiples for cross-industry comparison.
What are the defining keywords for this research?
The research is characterized by terms such as Company Valuation, DCF-model, WACC, Aquaculture, and SalMar ASA.
Why was a two-stage growth model chosen for the DCF?
A two-stage model was selected due to the high barriers to entry in the salmon farming industry and the specific operational limitations of the firm.
How does the COVID-19 situation impact the valuation?
The authors adjust the growth rate for 2020 downwards by 5% to account for pandemic-related market uncertainties before assuming a strong recovery in subsequent years.
What conclusion is drawn regarding the share price?
The valuation estimates a fair value of NOK 402.93, suggesting that the stock was appropriately valued or potentially undervalued relative to certain metrics at the time.
- Quote paper
- Anonym (Author), 2020, Company valuation of a fish farm company. SWOT analysis, growth rate, and forecast, Munich, GRIN Verlag, https://www.grin.com/document/1030204
