Question

SAFE PLC is an unlisted company that provides a range of services to the medical and healthcare industry. Last year, it made a profit of £500,000 and had a dividend payout ratio of 80%. The average P/E ratio for this sector is 9. The company’s balance sheet shows Shareholder funds of £2.25m for 1m shares, but the buildings are worth £1m more than their balance sheet value and stocks would be worth £250,000 less in a break-up of the company. Dividend growth in the sector is expected to be 4% per annum; the risk free rate is 6%; the market return is 11%; and the Beta for similar companies is estimated as 1.2. The average dividend yield for the sector is 6%.

2. Assume that you are an independent consultant employed by SAFE PLC to advise on the valuation of the company. Comment on the suitability of the methods you have used, and the difficulties of valuing unlisted and service companies. Conclude by saying which valuation method you recommend in this case.

Answer 1

SAFE PLC
Details	Amt Pound
Net Profit last year	500,000
No of shares outstanding	1,000,000
EPS =500000/1000000=	0.500
Dividend Payout =	80%
Dividend paid out in pounds	400,000
Dividend /Share=400000/1000000=	0.40
Valuation by P/E Ratio
P/E ratio of the sector companies =9
Price per share /Earning Per share= 9
Price per share =9*EPS=9*0.50=4.5
So derived Price per share= 4.5
No of shares outstanding	1,000,000
Value of 1M share =	4,500,000
Assuming SAFE Plc all equity and no debt
So value oif SAFE PLC=	4,500,000
However , this is based on the assumption that P/E ratio is 9 which
is not a reliable measure for the unlisted company.
So the valuation is totally based on P/E assumption which may be wrong.
Valuation by Balance sheet
Shareholders Fund=Net asset=	2,250,000
Add additional valued adjustment for buildings	1,000,000
Less adjustment for less stock worth=	(250,000)
Net Asset value =	3,000,000
So valuation by BS numbers is 3 Miliion pound.
If we take the book values and adjustments are close to market
reality, this market value should be close and may be used.
Valuation by Dividend Yield
Expected return from Equity=Rf+Beta *(Rm-Rf)
Rf=6%, Rm=11% , Beta =1.2
Re =6%+1.2*(11%-6%)=12%
Now dividend growth =g= 4% /annum
Last dividend /share =P0=0.40
Share value=P0=d0(1+g)/(Re-g) =0.40*(1+0.04)/(0.12-0.04)
Share value =5.2
So share value of 1M shares =	5,200,000
Assuming all equity structure, Value of SAFE Plc=	5,200,000
However, like the P/E model, this valuation has the limitation of getting
the exact dividend growth % and exact betal calculation.
Considering all the approached , Balance sheet number based
valuation approach should be most preferable considering
the presence of scope of validation and adjustment .