Valuation of Emerging Market Enterprises: A Comparative Valuation Analysis
Independent thesis Advanced level (degree of Master (One Year)), 10 credits / 15 HE creditsStudent thesis
Recent year’s improvements in the economic fundamentals of several Eastern European emerging markets have drawn the attention of investors to the emerging economy of Turkey. A favourable macroeconomic setting in the country, together with a high global liquidity glut, has resulted in fund and capital flows facilitating into Turkish stocks. Moreover, over the past 15 months, the amount of M&A deals in several Turkish sectors has reached levels never seen before. As with all emerging market companies, Turkish stocks are considered to be relatively cheap, they are moreover identified as strong candidates for acquisition by large internationals. On back of these developments, valuation is gaining importance in Turkey. In this study, we attempt to value three listed Turkish firms, each from different sectors (oil & gas, banking and telecoms), using a multiples comparative valuation analysis. We also examine the valuation properties of key value drivers for our emerging market firms, and investigate whether they are consistent with valuation theory. Our comparative valuation approach generates mixed results for the firms in different sectors. We find that Turkey’s largest oil refinery to be overvalued relative its peer group despite a lack in growth potential. In contrast, the banking sectors top M&A candidate is undervalued compared to its valuation reference group given the expectation in margins drop in the domestic market. Similarly, the Turkish wireless company is also undervalued; however, accounting for the systematic risk justifies the current market based value. We should emphasize here that the valuations are motivated by the firms’ economic variables, such as growth, ROE, margins and risk. Multiple regression models on different valuation ratios against their determinants support our findings in most of the cases, although problems are sometimes experienced in the statistical validation of the models across sectors. Consistent with valuation theory in general, it is found that; (1) P/E is positively significantly related to growth in earnings; (2) P/BV is significantly positively related to return on equity; and (3) P/S is positively significantly related to the net profit margin. Almost all of the multiples are negatively related to the risk.
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IdentifiersURN: urn:nbn:se:su:diva-6391OAI: oai:DiVA.org:su-6391DiVA: diva2:196427