Valuation corner documentation

Selection and classification of industry groups

The industry groups have been selected based on company size, sector characteristics and geographical segmentation. We have excluded companies with small market capitalisation due to the possible distortion effect of low trading volumes and to a possible size premium related to these stocks.

Each peer group consists of between seven and 23 companies primarily listed on OMX Helsinki. For sectors that would have been too small to alone deliver reliable results, additional companies from the Swedish and Danish markets have been included. The bigger peer groups have been created to avoid future problems due to delistings. We have excluded some companies due to unavailable data or singular or extreme values.

WACC derivation

The discount rate is calculated as a weighted average cost of equity and debt capital, commonly called Weighted Average Cost of Capital (WACC).  The method takes into consideration the capital structure of the company by weighting the relative proportion of debt to equity.

The cost of capital is derived on a euro basis. Also, please note that no separate country risk premium, small stock premiums or inflation differential is included in this calculation.

The data is updated on the last Tuesday of the month to avoid day-of the week effects on WACC.

The equity component

Cost of equity reflects the expected return on an alternative equity investment with identical risk factors.  The equity component is derived using the capital asset pricing formula.

Risk-free rate

Due to the currently low interest rate environment in Europe, we have used the 30-year Finnish government bond as the risk-free rate in the calculations. As mentioned above, we have not included a separate country risk premium but the risk free rate based on Finnish government bond yields can be assumed to include any country risk for the Finnish market.

Beta factor

The beta factor has been derived using the median asset beta (raw) of the selected peer group. We have used the weekly returns over a three year time period (157 data points) calculated from the last price of the day. The asset beta has then been converted into an equity beta using the median debt/equity ratio of the same peer companies. As a relative index for beta, we have used the price data of the MSCI AC World Local index, also converted into euros.

Equity market risk premium

The future anticipated equity market risk premium describes the average excess return that investors require over the risk-free rate to invest in the stock market. We have used an equity market risk premium of 5,7% based on our own latest analysis.

The debt component

Cost of debt is presented as post-tax figures. In this component, the potential tax advantages of debt capital are taken into consideration. 

• Risk-free rate
  Please see above.
• Credit Spread/debt margin
  We have decided to use sector specific investment grade long-term indexes as trackers for the debt margin.
• Tax shield
  We have accounted for the tax relief on debt interest in the above calculations at the marginal corporation tax rate of 20% in Finland.
• Debt/equity ratio
  The debt/equity (D/E) ratio has been selected based on the median indebtedness of the chosen peer group. The ratio is calculated by dividing the net debt with the current market capitalization of the company. From this we have derived the target gearing for each industry (D/(D+E)).

Multiples derivation

Additionally, we present industry specific median trading multiples (EV/EBITDA and EV/EBIT) on a quarterly basis using the same peer groups as for the WACCs. The figures represent the last twelve months to minimize the effect of the time of the year. The multiples are calculated by dividing the currency adjusted current enterprise value by the EBITDA or operating income trailing 12 months.

For the banking sector we present the Price to Book- and Price to Earnings-ratios. EV/EBITDA and EV/EBIT are not applicable due to the different capital structure of financial companies.