Capital Markets / Investor Relations in Two Minutes or Less
Using Creative Valuation to Change Investor Perspectives
Creative Valuation represents the idea of changing perspective and using unique valuation methods to drive change.
Peter Lynch’s One Up on Wall Street is a great source to learn about creative valuation.
Examples include unique valuation multiples think EV / Data Center or EV / Store, or current replacement versus actual balance sheet value.
Unique metrics that can easily compare assets across differing enterprise values in order to identify valuation discrepancies.
Why Are Creative Valuation Approaches Valuable?
Alternative valuation approaches help management and the IR team develop better information and narrative context and better address key debates facing the stock.
The key is that alternative valuation approach help drive changes in perspective.
Changes in perspective are what really drive re-ratings in a stock and adoption of company narrative.
A change in perspective stemming from creative valuation might:
1. Solve a Key Debate
2. Illustrate a Glaring Valuation Disconnect
3. Highlight Overlooked Value Drivers
4. Develop a clearer overview or explanation of the company
Real Life Example: Net Asset Value (NAV)
Different meanings for different industries, let us compare Shipping versus REITs.
Shipping investors look at NAV as the book value on the balance sheet, or the iron scrap value of the boats the company owns.
Very little economic value is ascribed to the income generating assets in this valuation scenario.
REITs on the other hand calculate NAV using an estimated Net Operating Income and Cap Rate to generate an asset value that ascribes an actual economic value to the asset.
Transocean $RIG – A Compelling Example
Shares currently trade around $6.
Book value on $RIG is roughly $13 per share.
Valuing $RIG with a REIT NAV approach suggests the company may be worth a lot more than book value or its current $6 share price.
REIT NAV approach $RIG is worth $23 to $32. Key variables are NOI going from $1B to $1.8B, cap rate going from 8.5% to between 5.5% and 7%, and paying down $2B in debt.
Replacement Value: $RIG is worth $20 to $30. Assume $1B cost per rig and no debt pay down.
Using these creative approaches vividly illustrates a valuation discrepancy likely exists in the shares of Transocean!
Key Learnings
Creative Valuation can turbo charge investor interest with the right information and narrative context by solving key debates, optimizing narrative, and illustrating valuation disconnects.
Relevant Information + Narrative Context = Unlocked Shareholder Value
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