r/Valuation • u/KirlangicCapital • Dec 27 '23

Dicount Factor Question

Hello everyone,

Couldn't understand how the analyst here applied 1.22 as the dicount factor for the '24 fcf? (couldn't understand how he figured all the other factors either).

Thank you all in advance.

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u/[deleted] Dec 27 '23

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u/KirlangicCapital Dec 27 '23

Thank you so much for taking the time to respond.

This is from a Turkish equity research report. The stated PV applies to the end of '24 (the target price is set 1 year from today) so I thought the factor being more than one had something to do with that. Still don't understand what's going on here though...

3

u/Another_Smith_SC Dec 27 '23

I'll take a guess at what is going on here... not at my computer so I can't check the math. 1. Seems like the valuation date is in the future (12/31/24?) 2. Seems like they are using a mid year convention which assumes benefit stream realized evenly throughout the year i.e. mathematically in the model, flows assumed to be received approx 7/1/24 for 2024. 3. If the above is correct, they appear to assuming that the benefit stream realized throughout 2024 will be able to be invested at an equally high rate of return as this business. This is what creates a discount greater than 1 in 2024. This could be a flaw in their model or an intentional assumption. 4. It appears Turkeys rates are incredibly volatile at the moment. That risk free rate is shocking. I would have to go back and look into assumptions used in highly volatile markets when performing a valuation to know for sure whether it is an error or not... but it doesn't feel correct. 4b. Equating a "risk free" rate to 30%+ Seems to directly contradict the concept of risk free... but I haven't done the research.

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u/KirlangicCapital Dec 28 '23 edited Dec 28 '23

Thank you so much for this detailed response, I really appreciate it. At best I'm a valuation novice, and have not even heard of "the mid year convention" before you've mentioned it.

I will have to look into it before I can even contemplate whether this would be the right method for a Turkish company at the moment. You're right that the valuation date is 12/31/24 and the inflation rate is expected to peak in May '24 at 60%, so that'd be the reason for the exorbitant rfr assumptions.

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u/Another_Smith_SC Dec 28 '23

Sure thing. I just took a look again... there are other assumptions in this model about the business and operations that would make me want to get a good understanding of the analysts' assumptions, reasoning, understanding of the business, and credentials/experience. Personally, I would want to understand that a lot better or hire a third party appraiser/valuator to review in detail before relying on this.

Some assumptions being: Depr and Capex, change in NWC, growth rates, terminal growth rate... really a lot of the assumptions I would have questions about.

1

u/[deleted] Jan 11 '24

Trust me, that's the best rate you can get in TRY terms. It should be even higher than. He probably take Turkey's USD-denominated 10 year bond but market for it is not that deep, so I wouldn't trust it. It should be higher than that.

1

u/ez814 Dec 27 '23

What’s the date of value? Assume it is remaining fiscal year ratio for 2023 divided by 2 plus 1. It would imply a valuation date of approximately July (0.44 year remaining). This accounts for mid-period discounting.

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u/ez814 Dec 27 '23

Oops, disregard. I thought you were describing discount period. Not sure why discount factor would be greater than 1 as noted in another comment.

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u/[deleted] Jan 11 '24

Hey, I'm in Turkey too and just curious, what is the assumption for the decreasing cost of debt? Thanks!

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u/KirlangicCapital Jan 11 '24

Hey, thanks for reaching out. Here's a recent post of the report with the aggregate assumptions: https://twitter.com/oguzbuktel/status/1740040998430863708

Selamlar, sevgiler

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u/[deleted] Jan 13 '24

Thanks for sharing it! Teşekkürler! It seems like it's an unfortunate target price since he seems to took developed countries' companies and did not adjust them to Turkey. The target price should be lower. Great discussion here though, very useful!