Company Valuation Under IFRS : Interpreting and Forecasting ...

Chapter Five – Valuing a company
Below the tax line on page three of the model there are two lines for potential
deductions before we get to profit attributable to ordinary shareholders. The first
is the deduction for minority shareholders’ interests in group profits. The second
is for the deduction of dividends payable to preference shareholders.
Whereas profits from associates accrue from businesses outside the group, and
should be forecast independently, profits attributable to minorities are clearly a
part of profits generated by group companies. There is an important distinction
here, between groups in which the minorities represent third party interests in
large numbers of subsidiaries, and groups in which there are a few large third
party interests in a few large subsidiaries. In the former case it is clearly sensible
to escalate the profit from minority interests in line with group profit before
minorities, assuming a constant proportion of group profit is attributable to third
parties. In the second case the issue is one of materiality. If the minorities matter
and the number of subsidiaries is small, then it may be worth trying to model
them separately. We shall adopt the constant percentage interest approach here.
The dividends on preference shares are usually fixed as a percentage of par value,
though this may not be in the currency of the company, so there may be some
translation effects in the reporting currency of the group. German companies
represent an exception, in that preference shares often receive a variable dividend
in excess of the dividend to ordinary shares, and this is the situation with Metro.
Finally, we come to the calculation of the per share statistics. Earnings per share
are calculated using the weighted average number of shares issued and
outstanding (net of treasury stock) during the year, whereas the dividend will be
paid to the shares outstanding on a specific date. We have handled this by
forecasting the number of shares in issue at the year end (to be discussed below)
and then using the average of the opening and closing shares in issue to derive a
weighted average. For most companies, the relevant earnings figure would be
after preference dividends, which are treated as being akin to interest. Because
Metro’s preference shares receive variable dividends, they are treated as akin to
equity, and the earnings per share calculation is based on income after minority
interests and the weighted average total number of shares (preferred and
ordinary) that are outstanding for the year.
Finally, we have to forecast the dividend per share. For a non-cyclical company,
a constant payout ratio may be appropriate. For a cyclical it would not be, as the
company would be forever halving and doubling its dividends, which few
companies set out to do. In our case we shall set what looks like a sensible payout
ratio and then use share issues and buy-backs to manage the balance sheet
structure, which is exactly what most companies are now doing. We have
maintained a constant premium of preference over ordinary dividends in our
forecasts.
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