Primates,
How would you best value a power utility IPO? would you go for DCF or multiples? or a mix of both? What key drivers would you consider?
All views are welcome
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i'm no expert but seeing how the utility industry is more of a dividend play sector i'd probably have to say DCF since they disperse a lot of the FCF to dividends.
you are right, this company mentioned in its prospectus that it planned on paying dividends worth 50% of their earnings starting with next year. On a whole how much of a premium would attach to the price of a company on account of its monopoly power( this company is the only power utility in the country)
its a DCF and most utility companies are legal monopolies from my limited understanding. They pay high dividends because utility company growth are limited, they can't just go out and expand since its all regulated and the governments are ALLOWING them to have the monopoly. I never modeled anything in this sector so just to be safe i'd use a band of rates for your risk rate with your mid point being the countries average. Also if its not the US I don't know how much political risk you'd have to give given that in certain countries the government goes ape shit and nationalize or fucks with companies to flex their power.
Like everything, both valuation methods (DCF, and comps) will make sense, remember that multiples take into account the high dividend low growth long term contract factor wich utilities are know for.
We have a PE investment in a water utility company I have done most of the valuation work on it, assuming that growth will be stable multiples tend to trade fairly high (10-15x EBITDA) this is due to the businesses earnings nature. I believe both are correct in the end, its good to look at both so you make sure you are getting the pricing right and not over or under shooting it.
DCF and multiples. Comps it with a few companies with similar FCF and make line graphs of it to make a sanity check. I say that because most of them can look flat. As far as drivers go, is it coal ignited or nat gas ignited. Correlate its operating costs to its commodity price, estimate the # customers, and determine its throughput and output capacity rates based on a watt kwh base. I'm guessing its going to be Nat gas since it is a new IPO.
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