VALUATION OF TELIA LIETUVA, AB 1 VALUATION OF TELIA LIETUVA, AB A Thesis Presented to the Faculty of Finance Programme at ISM University of Management and Economics in Partial Fulfilment of the Requirements for the Degree of Bachelor of Finance by Agnė Žigaitė Advised by Doc. Dr. Asta Klimavičienė May 2017 Vilnius VALUATION OF TELIA LIETUVA, AB 2 Abstract Žigaitė, A., Valuation of Telia Lietuva, AB. [Manuscript]: bachelor thesis, finance. Vilnius, ISM University of Management and Economics, 2017. The aim of this thesis is to determine the value of the Lithuanian telecommunications market leader Telia Lietuva, AB using appropriate valuation methods. In order to determine the value of the company, first the environment and the industry were analyzed which results provided that telecommunications industry is approaching a maturity stage of the business cycle and the growth of the industry is expected to slow down. What is more, for determining the value of the company the valuation methods were chosen to be Discounted cash flow (DCF) method and Relative valuation using EV/EBITDA and EV/Sales multiples. After performing the valuation, the results provided that the value of Telia Lietuva using DCF method is EUR 597 908 million. Using relative valuation method the value of the company is EUR 762 644 million using EV/EBITDA multiple and EUR 601 638 million using EV/Sales multiple. Keywords: DCF valuation, Telia Lietuva, AB, Telecommunications industry VALUATION OF TELIA LIETUVA, AB 3 Santrauka Žigaitė, A., Telia Lietuva, AB vertės nustatymas. [Rankraštis]: bakalauro baigiamasis darbas: finansai, Vilnius, ISM Vadybos ir Ekonomikos Universitetas, 2017. Šio bakalaurinio darbo tikslas – nustatyti vienos didžiausių telekomunikacijų kompanijos Lietuvoje Telia Lietuva, AB vertę naudojant tinkamai pasirinktus vertinimo metodus. Tam, kad šis tikslas būtų pasiektas, pirmiausia aplinka, kurioje veikia kompanija bei telekomunikacijų industrija buvo atidžiai išnagrinėta. Rezultatai atskleidė, jog telekomunikacijų rinka pasiekė brandos lygį ir jos pajamų augimas lėtėja. Taip pat, įmonės vertei nustatyti buvo naudojami diskontuotų pinigų srautų metodas bei palyginamųjų daugiklių metodas naudojant vertės/EBITDA ir vertės/pajamų daugiklius. Galiausiai, rezultatai atskleidė jog Telia Lietuva, AB vertė naudojant diskontuotų pinigų srautų metodą yra EUR 597 908 mln., o naudojant palyginamųjų daugiklių metodą įmonės vertė sudaro EUR 762 644 mln naudojant įmonės vertės/EBITDA daugiklį ir EUR 601 638 mln naudojant įmonės vertės/pajamų daugiklį. Raktažodžiai: Telekomunikacijų industrija, Telia Lietuva, AB, Vertės nustatymas, diskontuotų pinigų srautų metodas VALUATION OF TELIA LIETUVA, AB 4 Table of Contents List of Figures ............................................................................................................................ 6 List of Tables ............................................................................................................................. 7 Introduction ................................................................................................................................ 9 1 Situation analysis ............................................................................................................. 11 1.1 General information about the company .................................................................. 11 1.2 Global telecommunications industry analysis ......................................................... 12 1.3 European telecommunications industry analysis ..................................................... 13 1.4 Lithuanian Electronic communications market analysis ......................................... 14 1.5 External environment analysis of telecommunications industry ............................. 17 1.6 Competitive position of telecommunications industry ............................................ 20 1.7 Main figures of the company ................................................................................... 23 1.8 Financial risk assessment of Telia Lietuva AB ........................................................ 25 1.9 Share price history ................................................................................................... 29 2 Theoretical justification and Research methodology ....................................................... 31 2.1 Valuation approach and purpose .............................................................................. 31 2.2 Valuation methods ................................................................................................... 32 2.3 Valuation methods specification for Telia Lietuva, AB .......................................... 35 2.4 Discounted Cash Flow Valuation ............................................................................ 36 2.5 Relative valuation method ....................................................................................... 42 2.6 Sensitivity analysis................................................................................................... 43 3 Valuation of Telia Lietuva, AB ....................................................................................... 44 3.1 Discounted cash flows method ................................................................................ 44 3.2 Sensitivity analysis................................................................................................... 54 VALUATION OF TELIA LIETUVA, AB 5 3.3 Relative valuation method ....................................................................................... 57 Conclusion ............................................................................................................................... 59 References ................................................................................................................................ 61 Appendices ............................................................................................................................... 65 VALUATION OF TELIA LIETUVA, AB 6 List of Figures Figure 1. Telecom service revenues in Europe Figure 2. Telecom services revenue growth .......................................................................................................................................... 14 Figure 3 Revenue distribution change through the years, million EUR, 2010-2015 in Lithuania .......................................................................................................................... 15 Figure 4. Investments into electronic communications market, 2010-2015 ............................ 17 Figure 5. Market share distribution among Lithuanian telecom companies, 2016 .................. 17 Figure 6. Revenue breakdown by services of Telia Lietuva AB ............................................. 24 Figure 7. Main broadband communications operating figures of Telia Lietuva, 2014-2016 .. 24 Figure 8. Telia Lietuva market share in terms of revenues ...................................................... 25 Figure 9. Share price history of Telia Lietuva, AB for three years ......................................... 30 VALUATION OF TELIA LIETUVA, AB 7 List of Tables Table 1. Number of electronic communications service users 2010-2015 (thousands) .......... 16 Table 2. Research & Development as % of GDP .................................................................... 20 Table 3. Porter’s 5 forces analysis of the telecommunications industry .................................. 21 Table 4. Profitability ratios of telecommunications companies 2014-2016 ............................ 26 Table 5. Activity ratios of telecommunications companies 2014-2016 .................................. 27 Table 6. Leverage ratios of telecommunications companies 2014-2016 ................................. 27 Table 7. Cash flow management ratios of telecommunications companies 2014-2016 .......... 28 Table 8. Unlevered beta calculations for Telia Lietuva AB .................................................... 45 Table 9. WACC inputs ............................................................................................................. 46 Table 10. FCFF of Telia Lietuva, AB 2014 – 2016 ................................................................. 47 Table 11. Revenue growth rates of Telia Lietuva, AB for the period 2017-2020 ................... 49 Table 12. Revenue growth of Telia Lietuva, AB for the period 2017-2020 ............................ 49 Table 13. Cost of goods sold forecast for Telia Lietuva, AB 2017-2020 ................................ 50 Table 14. Operating expenses forecast for Telia Lietuva 2017-2020 ...................................... 50 Table 15. Other income forecast for Telia Lietuva, AB 2017-2020 ........................................ 51 Table 16. Deprecitaion & Amortization forecast for Telia Lietuva, AB 2017-2020 ............... 51 Table 17. EBIT forecast for Telia Lietuva, AB 2017-2020 ..................................................... 52 Table 18. Capital Expenditure forecast for Telia Lietuva, AB 2017-2020 .............................. 52 Table 19. Working capital change forecast for Telia Lietuva, AB 2017-2020 ........................ 52 Table 20. Free cash flows to the firm forecast of Telia Lietuva, AB 2017-2020 .................... 53 Table 21. Value of Telia Lietuva, AB ...................................................................................... 54 Table 22. Beta sensitivity analysis ........................................................................................... 55 Table 23. Steady growth rate sensitivity analysis .................................................................... 56 Table 24. Pessimistic scenario results ...................................................................................... 56 VALUATION OF TELIA LIETUVA, AB 8 Table 25. Optimistic scenario results ....................................................................................... 57 Table 26. Comparable companies for relative valuation ......................................................... 58 Table 27. EV/EBITDA, EV/Sales multiples for relative valuation ......................................... 58 VALUATION OF TELIA LIETUVA, AB 9 Introduction Relevance of this paper. Many analysts’ reports state that the telecommunications industry is approaching a maturity stage of the business life cycle. The maturity stage brings the lower growth of the revenues and lower profitability. Therefore, most of the telecom companies dealing with saturation are in search of the most effective growth strategies. M&A is considered to be one of the most often used growth strategy by businesses, especially by telecom companies. Acquisition of Omnitel by Teo was one of the most significant and most discussed events in Lithuanian market in 2016 also called the deal of the year. Two market leaders Teo and Omnitel has finished their first year of operating together and its seems to be quite a successful one. Lithuanian IT and telecommunications market leader Teo AB acquired a 100 per cent stake in one of the biggest Lithuanian mobile telecommunications players Omnitel UAB. By completing this integration Teo and Omnitel changed its name to Telia Lietuva and created a unique telecommunications company which will be the first one in Lithuania providing mobile and fixed telecommunications, IT and Television services from a single source. Even globally, there are not many companies similar to that. Therefore, it brings the need to determine what is the value of such unique business in Lithuania. The acquisition of Omnitel was one of the growth strategies for Teo which was already approaching a maturity stage of its business cycle. From the recently published information it can be seen that this acquisition brought goods results for the company which may increased the value of the organization. Problem. What is the value of Telia Lietuva, AB. The aim of the thesis. To determine the value of Telia Lietuva, AB. Objectives: 1. To perform an analysis of the company and its performance. VALUATION OF TELIA LIETUVA, AB 10 2. To examine Lithuanian and external telecommunications markets. 3. Compare the possible valuation methods and choose the most appropriate one. 4. To determine the value of Telia Lietuva AB using the most suitable valuation methods. 5. To provide overall conclusions on company’s value. Research methods. In order to get the most accurate and unbiased value of Telia Lietuva two valuation methods will be used. These methods include the discounted cash flows method and relative valuation using most suitable multiples for such company and its industry. Moreover, for external market analysis and competitive position determination PEST analysis, Porters 5 forces models will be applied. Practical value of this paper. This work provides a comprehensive analysis of Lithuanian and global telecommunications industry. The key trends of the industry defined and financial performance overview of telecom companies is a valuable information for analysts and potential investors. What is more, after performing the valuation using the several methods the management will know what is the value of newly launched company Telia Lietuva AB.