Transcript Valuation & Pricing – GDRs/Main Market Introductory overview

Investment Banking
Financing real estate through IPO
Valuation and pricing Main Market / GDRs
18 February 2008
Michael Boardman
Managing Director
Equity Capital Markets
Nomura International
© Nomura International plc
Good deal announced – bad deal delivered?
VTB GDR price
The IPO of Vneshtorgbank (VTB) last week showed the wall of demand
that is flooding into Russian IPOs despite a massive level of supply. Even
bankers last week were surprised at the success of the issue, which
raised US$8bn.
rebased to 100
140
12 May 2007
130
120
110
100
90
80
70
Jun 2007
Aug 2007
Oct 2007
Dec 2007
Russia RTS
VTB Bank
Feb 2008
Source: Factset
The book was full of quality
names, and it became apparent
that there was demand at a
price above the range.
A deal that had looked strong
with a price-insensitive book
that was multiple-times
covered, ended up with an
8.6% one-day loss [...].
5 May 2007
5 May 2007
rebased to 100
AFI Development GDR price
100
95
90
85
80
75
70
65
60
55
May 2007
Jul 2007
Sep 2007
Nov 2007
Jan 2008
AFI Development PLC
MSCI Europe / Real Estate -IG
Source: Factset
Corporates should not focus on maximum IPO valuation only – long-term valuation is key
Page 1
Struggling deals outperform the markets?
The IPO of PIK Group was always going to be a challenge, coming in the
wake of AFI Development's IPO and its over 20% fall since then. [...] The
main drag on the story is the continuing poor performance of AFI
Development following its IPO and the presence of the two bookrunners
of that deal, Deutsche Bank and Morgan Stanley, alongside Nomura in
this case. The challenge is for the sales teams at those banks that sold
AFI to convince investors they should now trust them on PIK.
rebased to 100
PIK GDR price
120
110
100
90
80
70
60
Jun 2007
19 May 2007
Aug 2007
Oct 2007
MSCI Europe / Real Estate -IG
Dec 2007
PIK Group
Feb 2008
Oct 2007
Dec 2007
MSCI Europe / Retailing -IG
Feb 2008
Source: Factset
Russia will have more
“unsuccessful“ initial public
offerings after OAO Dixy
Group and PIK Group sold
shares at lower prices [...]
06 June 2007
Russian discount retailer Dixy
Retail was still struggling to
market last Friday as investors
sought a significant discount to
its peers for the local listing [...]
The move from the original price
range was dramatic, with the top
of the new range being a 4%
discount to the bottom of the
original one.
19 May 2007
rebased to 100
Dixy share price
110
100
90
80
70
60
Jun 2007
Aug 2007
Dixy Group
Source: Factset
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Current market conditions remain challenging...
European RE indices performance – last twelve months

US subprime crisis which started in July 2007 resulted in continued large
writedowns for major global banks

Turbulence in global markets sparked fears of a possible downturn in the
global economy which continued into 2008 and led to emergency interest
rate cuts by the US to try to prevent global recession
Last 6 months
120
100
80
Selected postponed / cancelled offerings
60
Feb 07 Mar 07 Apr 07 May 07 Jun 07
Jul 07
Aug 07 Sep 07 Oct 07 Nov 07 Dec 07 Jan 08
FTSE All Cap Emerging Europe / Real Estate - SEC
MSCI Europe
Name
MSCI Europe / Real Estate -IG
Nitol Solar
RE equity issuance in Europe – 2004 to date
UCP Chemicals
20.8
18.9
20
4.6
18.9
EUR'bn
15
32%
9.3
10
4.6
5
3.2
0.2
68%
2.4
0.5
0
2004
2005
CEE RE
2006
W. Europe RE
Source: Dealogic, Company press releases
2007
H1 2007
H2 2007
Nationality
Date cancelled/
postponed
US$300m
IPO
Utilities
Russia
Feb 2008
Chemicals
Russia
Jan 2008
Oil & Gas Kazakhstan
Dec 2007
IPO
IPO
Teorema Holding
US$500m
IPO
Real Estate
Russia
Dec 2007
RCS&RDS
EUR500M
IPO
Media
Romania
Nov 2007
ZM Herman
PLN 13.5m
IPO
Food
Poland
Nov 2007
PLN 30m
IPO
Real Estate
Poland
Nov 2007
Russian Timber Group
GBP125m
IPO
Forestry
Russia
Nov 2007
New Russian Generation
US$550m
IPO
Energy Fund
Russia
Nov 2007
Pol-Mot Warfama
76%
Industry
n/a
Reinhold Polska
24%
Deal type
US$736m
Zhaikmunai
25
Approx. deal
size
n/a
IPO
Machinery
Poland
Nov 2007
GBP100m
Block Trade
Mining
Ukraine
Oct 2007
CTP Property
n/a
IPO
Real Estate
Czech
Oct 2007
Vysochaishy
n/a
IPO
Gold
Russia
Sep 2007
US$7.5bn
IPO
Aluminium
Russia
Sep 2007
n/a
IPO
Insurance
Russia
June 2007
Ferrexpo
Rusal
Reso-Garantia
Page 3
...however Russian markets are still viewed as attractive
...and European EM new issue market remains at historical highs
60
300
120.
115.
50
250
110.
40
200
30
150
20
100
10
50
US$bn
125.
105.
100.
+17%
95.
90.
85.
0
Jul 2007
Sep 2007
Nov 2007
MSCI Europe
MSCI EM Eastern Europe
Source: Factset
Despite
recent
market
turbulence,
2007 was a
record year
for
European
EM new
issues
0
2000
Jan 2008
Russia RTS
Number
Russian markets have been less affected by recent market volatility...
2001
2002
2003
Size
2004
2005
2006
2007
Number
Source: Dealogic
Russian markets remain open for good quality stories
US$300m IPO
US$772m IPO
US$955m IPO
US$783m IPO
Dec ‘07
Nov ‘07
Nov ‘07
Nov ‘07

The Russian and CIS markets are still perceived as an attractive
investment opportunity by investors

Robust growth, sustained demand / supply imbalances and controlled
inflation will remain key themes for 2008
“As the Russian market has grown, the deal pipeline has become
more crowded, with some companies struggling to gain attention
against other deals in the market at the same time. [...]”
US$274m IPO
US$365m IPO
US$1.93bn IPO
US$952m IPO
Nov ‘07
Nov ‘07
Jun ‘07
May ‘07
Source: Dealogic
Page 4
Determining the intrinsic value of a company
Management
team
Growth story
Historical
financial
performance
Quality of assets
Intrinsic value
Macro
environment and
appeal of the
market
Corporate
governance
Competition and
barriers to entry
The main complexity of company valuation is to find a suitable valuation range,
which reflects all aspects of company value
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Final valuation = intrinsic value + market view
Specific company
appeal
Overall market
conditions
Company
valuation
at IPO
=
Intrinsic value

Level and quality of
demand
Management
performance on
roadshow
Valuation of
comparable
companies
Competing
offerings
Company value is not only what you think your company is worth
Page 6
Fundamental valuation vs. Market view
Fundamental valuation

Discounted Cash Flow (“DCF”)
Method

Net Asset Value (“NAV”) of Projects
(Third party appraiser)
Market based valuation

Earnings multiples
 EV / Sales
 EV / EBITDA
 P/E

Sector specific multiples
 P / NAV
 P / FFO(1)
 EPS(2)
 Dividend yield

Generally, investors have used P/NAV to value emerging market RE companies, which have irregular
earnings

As RE companies begin generating regular cashflows the valuation metrics will shift to focus on EV/EBITDA,
P/FFO, EPS and Dividend yield

If the fundamental valuation of the company is too far from the market valuation of the company, this needs to
be carefully communicated and explained to investors
Source: EPRA (European Public Real Estate Association)
Notes: (1) FFO (Free Funds from Operations (2) EPS (excluding revaluation gains)
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How does the pricing process work?





Research
analysts’ valuation
Pre-marketing
feedback
Setting a
price range
Book of
demand
Final
pricing
Research
analysts

Used as guidance
for investors when
submitting their
orders

Normally the
bookbuilding period
is concurrent with the
roadshow

Can be set
 either when the
Preliminary
Prospectus is
published;
 or during the
roadshow

Summary of investor
orders with
indications of
 size of the order
 maximum price
In case of multiple
bookrunners, all
orders are compiled
into one book
Sales team


If investor demand is
greater than the deal,
it is
“oversubscribed”

Healthy
oversubscription level
is at least 3x

Ensure some
discount to fully
distributed value is
granted to
compensate for lack
of liquidity / primary
market risk
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Setting a price range
approx. 20% price range
Top of the price range
+10%
 Pricing target
 Sufficient uproom not to underprice
too much in case of strong markets
and soaring demand
Price range considerations
Middle of the price range
 Indicative valuation based on the
fundamental valuation of the
company and pre-marketing
feedback
 Width of the price range
 Time of the price range
announcement
0%
 Roadshow schedule
Bottom of the price range
?
 Anchor price
Revising the price range
 Sufficient safety margin for
unexpected market movements
 Attractive to the majority of investors
-10%
Page 9
Key IPO structuring issues to increase the valuation
Examples
Raising capital rather than selling-off in the IPO
Introducing investor(s) in a pre-IPO phase
Generating market awareness of the
stock at an early stage
Improving corporate governance before
accessing international markets
Page 10
Do’s and dont’s in a pricing / valuation context
Do’s
Dont’s

Leave money on the table

Assume market view can be easily pushed

Listen to the market

Be at a mercy of one bookrunner

Get a third party adviser

Target as wide as possible investor universe –
geographically and by type


Put highest price on the basis of
oversubscription only
Go for price at costs of investor quality
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