How to perform a DCF analysis
Education

How to perform a DCF? The Italian Sea Group & Sanlorenzo models

Today, we are going to carry out an educational exercise to assess, using the Discounted Cash Flows method (which we typically use almost always and is probably the most common in the industry) for two companies whose theses we have shared this year. We will go through the exercise step by step so that anyone, regardless of their level, can follow it. However, the exercise is not at a basic level, and we delve into quite a bit of detail in some points. In fact, to make it useful for all our subscribers, our goal today is twofold:

  • From an educational standpoint, we aim to go through the valuation process of a company (in this case, two) step by step so that anyone can replicate it on their own in the future.

  • Publish our analysis model of both companies and our target valuations

It is important to remember that, like any model, the accuracy of the final result depends on the quality of the assumptions made. Therefore, it is essential to dedicate a considerable amount of time to understand the company, the industry, and the economic environment before starting the company analysis.

To achieve this, we will follow the following steps:

  • Enter the financial statements from the last fiscal years and formulate assumptions based on the notes and the knowledge acquired about the company and the industry

  • Conduct future projections of the financial statements over a period that makes sense based on the characteristics of the company/industry.

  • Calculation of Free Cash Flow.

  • Calculation of the Weighted Average Cost of Capital (WACC), detailing the equity and debt components.

  • Calculation of the Terminal Value and present value

  • Target Price (Sensitivity analysis, adjustment, considerations..)

 

1) Projection of financial statements and assumptions for the exercise 

The initial step, assuming we are starting from scratch to analyze a company, is to seek information from its financial statements. This data is frequently available on the company’s website. In the case of U.S.-based companies, SEC filings usually offer the option to download the .xls file, facilitating the process. Simultaneously, we read the annual and quarterly reports and listen to the latest conference calls to comprehend the company’s situation, its business, and other relevant aspects.

We usually organise our Spreadsheet into several tabs:

  • Last years and quarters of the Profit and Loss

  • Last years and quarters of the Balance Sheet

  • Detail of the company’s debt (maturities, collaterals, interest rates, …)

  • Notes from previous Conference Calls or meetings with the company

  • Q&A: All the questions that arise during the process, to be sent to the company if we cannot answer them later ourselves

  • Misc: All “varied” information about the company that may be interesting but does not fit into any of the previous sections

In the case of TISG, which is the focus today (along with Sanlorenzo that will follow), it is crucial to understand the characteristics of its different models, its competition and their margins, expansion and growth options, which types of boats in their pipeline have higher or lower margins (in the case of TISG, contrary to what may initially seem, this is not so much related to their brands or the length of the boats). Their actual manufacturing capacity…

Similarly, in the case of TISG, since we have matched their pipeline of boats with their respective values and when revenue recognition is expected (our estimate published a few weeks ago and revisited for this exercise), we have used it to calculate the evolution of EBITDA margin in the coming years and the revenue for each brand (as well as the replacement rate based on the forecasted industry situation). This has allowed us to make the assumptions more realistic for the model, both in terms of EBITDA margin and revenues coming from each brand.

The Italian Sea Group

Before projecting the P&L & BS for the upcoming years, it is necessary to make a series of assumptions:

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