So the aim of today is to have a look at trading comps.

Okay? Now what I don't wanna do is just run through the slides because I feel like you could probably go to, for that we'll do something a little bit different.

And what we'll do is we'll use the framework of building trading comps and we'll use Felix, okay? And we'll use that to build the trading comps for a company.

Okay? And I've recently been doing a case study on gaming, okay? Computer games. And so I've been looking quite a lot at EA Electronic Arts.

Okay? So what we'll do is we'll use Felix and we'll use regulatory filings, which you can find here, and we'll build up set trading comps as much as we can within the hour.

All right? So let's talk and let's talk basics.

So what are we up to here? Okay, so let's imagine I've got a lot open.

Let's imagine we've got a target in mind, right? So I'll zoom in a bit and the target is not EA, just to be clear.

Okay? So the target is some unlisted computer games company and let's give a names. So I don't know, I'm just looking out my window for inspiration.

Well I can see something with grass. So go, there we go.

I'm just making something up.

Now the reason I'm making something up is because it's quite difficult to find out about limited companies, private companies.

So we often just have to make one up.

Now, grass co limited, we want to value them, okay? And if you think about it, the reason we might wanna value them is maybe for an IPO.

Um, maybe we want to uh, advise them, okay? Um, maybe, uh, it's just some kind of analysis's gonna close the door here.

We need to do some drilling outside. Here we go.

The point is we wanna value them and we've got a problem because they don't have a quoted share price because they're a limited company.

So if we try and find Grassco, you know, in Felix it will just, I mean it's a made up company so it never work.

But if you type in a limited company in Felix, you might get some stuff because we've recently upgraded it, but you won't get a share price and that means we can't build our bridge work.

Because what we want to do is we wanna say, okay, how much cash has Grassco got? What is the value of operations? How much debt does it have? And given it's an unlisted company, it's probably not very much.

And critically, what is this equity worth? Okay? That's what we really want to know.

And to get there, what we're gonna do is we're gonna use one of a number of valuation methods that we could use and we are gonna zoom in on the EV and then cross the bridge to equity.

Okay? Now that relies on you understanding what the bridge is and it relies on you understanding what EV is.

And it relies on you understanding what an IPO is.

And it relies on your understanding what unlisted means.

So there's a lot of stuff I've just said, which you may have questions about.

So feel free to ask, I'll pause for a second before moving on.

Okay? I can't see anything on the chat.

If you're typing something out and you want me to slow down, just put your hand up or something, give me an icon, otherwise I'll assume you're okay and I'm gonna move on.

Okay? So let's imagine that we do know about the target i.e. grass code that they have EBITDA and just to keep things simple, they've got EBITDA of 100.

Right? Now what we could do is we could go and find multiples from other companies, say EA, okay? And we could say the relationship that EA has of its EV and EBITDA is 14.7, okay? So EA has an EV EBITDA of 14.7.

And then the basic theory is if target is like EA, then predicted EV is, and we can say, well if they share the same qualities, then the predicted EV would be 1,470.

Now that relies on a lot of assumptions.

It relies on the fact that the relationship between EAs and electronic arts, the big public company, it's a big computer game manufacturer in America, it's very successful, it's old, it's mature, it's doing very well.

And if we think that Grassco is like EA, then Glassco should share the same ratio of EV to EBITDA.

And so we would predict that Grassco has an EV of 1,470.

The thing is that is full of problems.

Okay? Can anybody think of any problems of dropping EAs, EV EBITDA onto Grassco maybe in the chat or just unmute yourself.

I'm just interested what sort of problems can we see there? Note takers. Ah, that's disappointing.

Okay, well if you're still typing, just gimme a hands up or something.

Stop me. Otherwise I'll assume that you're sort of zoning in and out. You may be busy in the background or something or you don't know the answer.

The question was what's the problem of using EAs EV EBITDA and dropping it onto the EBITDA of the target I.e. Grassco.

Okay, I can't see anything so I'll go for it.

So what problems have we got? Well, EA is not Grassco, okay? It's much bigger, older, more trusted, okay? It's got lots of things that are different.

And so trading comps are only as good as the selected trading comp. And there are measures we can take to improve the compatibility between these two companies. But it's always a problem. We ideally would take a company that's just listed, okay? And so maybe a better training cop would be something like roblox.

You might be aware of Roblox.

Roblox is a platform upon which you can create games.

It's got much higher growth than EA it listed in 2021.

So it's much more comparable to Grassco in terms of life cycle.

But Roblox has a different problem, which is that Roblox doesn't make games, it makes a platform upon which games are made.

So the thing about trading comps is you've often got problems with your comps and it's, it's kind of exercise and negotiate, in compromise really.

So you've just gotta grab the best comp you can.

Now we're gonna stick with EA and we are gonna say, okay, what about if we don't really trust our data provider? What about if we wanna go back to basics and we wanna make the EBITDA? Okay, so we don't wanna trust Felix, we want to create the EBITDA to drop on to the targets ebitda, okay? So we're gonna do EA comps, okay? And these are specifically EA trading comps, okay? Because we wanna make them distinct from transaction comps.

Now what do we need to make a trading comp? Let's have a look at the notes. They're quite good at this.

Okay? What we need is, we need value.

And that means a lot of the time EV okay? Because we are building an EV over EBITDA multiple, there are other multiples out there, but we'll build EV EBITDA today and then we need a value driver and that'll be EBITDA.

And that's matched quite nicely because EV is operations and EBITDA is the income from operations.

Now it's stripped out depreciation amortization.

And we'll go into why that is. If you're curious, ask.

And that means that for ea we need an EV and an EBITDA.

So let's get going with it, okay? The first job is to grab the EV.

So what we've gotta do is we've got to dig out EAs information and I don't wanna trust this bridge work.

I wanna do my own bridge work. Okay? So sometimes it's good to go back to basics and really understand how this stuff works.

I want the most recent financial statements.

Now I'm not the best with dates, but looking at it, it looks like that K is the most recent financial statement, which is useful, I would then click on it, okay? And I'll just open the abridged. Now I'll do this one.

Okay, so I'm gonna open it and now I'm gonna look for the balance sheet.

And what I'm gonna do is some bridge work now.

Yeah. Amanda, have you got access to Felix? Well I, I imagine you have because you're on Felix webinar.

yes, I do have Felix assessed.

Great. And when you go to Felix and you type in EA here and then go to categorized, Okay, so I go to data.

How many analytics? Oh, data's more market stuff.

So the, if you go to Felix, you'll end up in a like landing page that looks like, ooh, that's weird.

Okay, no, no, that's not what you're supposed to be looking at.

Okay. You come to landing page like this, right? Yeah, type in EA.

Ah, okay. And this is your, your data provider.

This is your learning platform, Right? Right.

Okay. And then it drop me straight into categorize. You may have to click that, Okay? And then click here into the 10 K.

Ah, okay. Financial year 2024. Ah, okay.

Yeah, Right? Good.

Okay, let's go to the balance sheet now and I'm gonna do some bridge work now.

Okay, so what I'm gonna do is you classic bridge would be made like this.

Okay? So I want to build EV.

So I would do equity, okay? And I'm thinking about this bridge here.

Then I would do debt, then I would do cash and then I would get to EV.

Now each one of those may end up being a lot more complicated, but that's the basics.

Now looking at it, can you see we've got equity down here, but this is nonsense, okay? Wherever possible, I want to grab market value of equity.

So what I need to do is say actually for equity, the financial statements aren't the best.

Let's jump back out again.

Let's go to, oh, excuse me, actually let's do this, actually this is nicer stick in the financial statements and then we're gonna go to the cover page and we're gonna find the number of shares outstanding, which is very normal on SEC filings to have the number of shares outstanding.

Now you can see I've done this before, but if I was doing this for the first time, I would double click on that hit safe, then I would go here.

I would say, okay, I'm not actually doing the market value equity.

So let me put that out the way.

And I would say basic shares outstanding and then it drops in, it looks like nonsense.

But once we divide that by a million, let me just check.

Yeah. Then we get the number of shares outstanding and that's a clickable link, which is nice for audit purposes.

Okay? Now I'm nearly there with the value of equity.

The problem I've got is that these shares are not all of the equity that we should be valuing, okay? We should also be valuing the equity that's not in existence today but will be in existence say on an IPO or in the future.

So we need what's called dilution.

Now dilution is quite a tricky concept.

The basic idea is that we're looking for say options.

There's gonna be a number of options they're gonna have.

Why are you circular D18 strange? Can you see my Excel's got annoyed about D18, it's probably another spreadsheet that's open.

Okay? So I've got a number of options.

They'll have something called a strike or exercise price and it's the users of those options decide to exercise.

It will dilute the basic shares outstanding.

And dilution means you know, additional, let's say future shares to be considered.

And if you've done an interim course with us, we don't generally talk about dilution.

So there's might be a step higher than Europe used to.

So feel free to ask questions now let's go and find the information about the options, then we'll do dilution and I'll show you how.

Okay, so we're in the K and I wanna find out about options.

So I'm gonna hit options in the sections and it's not a guarantee, but well tagged.

Good financial statements will often have good section headings and so you can search them within the sections.

And that's true here. So we've got stock based compensation, brilliant.

Now look, here's the stock options.

This is an employee equity plan.

It's quite common in tech companies to pay not in cash, but in stock options.

It's good for the company because they may be a bit cash poor tech companies, that's maybe not the case with the A, but younger companies may struggle to put together cash.

It also creates an alignment of goals between employees and the company because if employees are stockholders, they'll probably work harder to get more valuable stock when they exercise their options.

So it's kind of win-win really.

Okay, now I'm gonna grab the number of options outstanding.

Just gonna be careful with the number of units.

You see this in thousands and I'm gonna run this whole calculation in millions.

So that means I need to divide that 5,000.

And so arguably these are so small that maybe we don't need to worry about them, but we'll do the calculation anyway just so you can see how they work.

Okay, now I'm gonna go back to the K and I'm gonna say okay, what is the strike? You can see exercise is another bit of jargon that they use instead of strike, okay, I'm gonna drop in the exercise price and I'm happy for that to be in dollars.

I don't need that to be millions.

And now what I need to do is I need to do net dilution.

Now if all of those option holders use their options and we would end up with 12,000 new shares.

So if we were super pessimistic, we could dilute the shares outstanding by 12,000.

The thing is that would fail to recognize that the company will bring in $64 per share option exercised.

The logic of what we're about to do is as follows, it's called the treasury method, okay? Step one, option holders exercise, okay? What that does is you add shares, but you also add cash.

Step two, assumed stock buyback, okay? So what we're gonna do is we're gonna assume that the cash collected by the company is used to buy back stock i.e. shares from other shareholders.

Now this will subtract shares so the option holders will end up with extra shares, but we will use their money to buy back other shares.

And so the third step is net out the add and subtract and then we get our net dilution.

If you've never seen that logic before, it's quite tricky.

So I wouldn't be surprised if you've got questions and I'm happy to answer them.

Okay? Now treasury method is one of those equations that you'll use quite a lot if this is part of your day job and it's here.

So what I'll do is I'll snip that one If it will let me, okay, then I'll go back to my work here, I'll drop in the snip, make it a bit smaller, make it a lot smaller, okay? And then what I'm gonna do is I'm going to use the treasury method here.

So I'm gonna say I'm just gonna follow it.

Number of options outstanding times max 0.

Now what this does is it picks up if the shares are what's called outta the money are e not worth using, the max will pick that up and prevent the shares from doing something weird by being negative, okay? These are options so the holders don't have to use them, okay? And then what we've got is we've got price.

Ah, we need the current share price. Okay? So let's put a placeholder here, we'll have to drop the current share price in there, but for the moment, let's just keep going.

Minus strike over share price, which again we don't have yet, but we will do hit enter.

Ooh, doesn't like it.

That's because remember this is a placeholder for the current share price.

So let's go and get, actually it's not current share price.

Let's say 18/7/24 closing share price. That's probably better practice.

Go the EA, go the valuation and you can see they're trading at 146.52.

Okay? And then dropping that in has made treasury method work.

It's only a tiny number but it is working.

And if I show my formula here, that might make things a bit clearer.

Okay? So the basic idea is we've just used treasury method to predict the dilution from options so that we can find the diluted shares outstanding so that we can find the market value of equity.

And this just to be clear, is the fully diluted market value of equity, which is the version of equity value that is the most accurate.

All right? So that was a major step towards our comp.

There's also a lot to take in, especially if you're trying to work along with me.

So I'm happy to take feedback if I'm going too fast or too slow or if there's anything you would like to see again or if you have any questions about anything I've done, yeah, I can't see anything or hear anything.

Just put your hand up or something if you want me to slow down, otherwise I'll keep going in about 10 seconds or so.

Alright, so we've got the fully donated market value of equity.

Let's just remind ourselves of what we're actually up to.

So we've just created that block there.

Now if we can create debt and cash, then we'll be able to move to the EV, which remember is one part of the comp that we are trying to create.

So we can drop it on toco.

So let's go and find EAs debt.

So to do that I'm gonna open their pay back up, I wanna go to the balance sheet and I'm kind of looking up and down.

You can see liabilities I'm after.

So here's some senior notes.

I'm gonna grab those. They look like debt to me.

Yeah, and if you're wondering what that is, it's Excel is moaning about circularity in another spreadsheet. I've got open, oh and now I've hit the help button without meaning to, okay, what else have we got? I can't see any short term liabilities, which I don't like very much.

It could be that there are debt, so things that we would call debt hidden in some of these others.

And I think if we were doing a very rigorous job, we'd want to go looking.

So just to give you a sneaky peek about what I mean, okay, if we go and look at other current liabilities and I'm just control fing it and what I want is really the breakdown of other current liabilities.

There we go. Okay, can you see that there's a lease in there? 66 and that lease is arguably debt.

So what we should do is we should pull it out and I'm just gonna check what it is.

Yeah, it's an operating lease.

So we should say operating lease i.e., that's debt as well paint out.

We probably want to do a bigger job on that.

But in the interest of time, I'm gonna stop there in case you're wondering why I didn't reflect some of the other liabilities.

So for example, you may be wondering why I didn't take payables or why I didn't take income tax.

They would be seen as ev, they're operating in nature and we are going to value those indirectly by building all the other blocks.

And the reason that approach is superior is because most of the operating items in the balance sheet are in the balance sheet at a pretty bad estimation of market value.

So we would prefer not to build up the EV from for example, the receivables here.

Who knows whether they're market value.

I mean we know for example, goodwill is definitely not market value because it's a kind of crazy accounting thing, right? So we're gonna ignore everything that's operational, including operational liabilities.

Okay? So we've got debt. Now let's go ahead and grab cash.

So we've got a lot of cash and then what we could do is in cash we could also include anything that's non call.

For example, immediately I can see short term investments.

They are not operating, they are not part of the EV they should be outside the EV.

And so I'm gonna drop them in and do bridge work on them.

Okay? Anything else? Let's do a look.

I'm kind of looking for like associates, NCI, that kind of thing.

I can't see anything else. So I feel like my bridge work is complete.

I'm now gonna conceptually cross the bridge, okay? What I'm gonna do is mathematically I'm gonna start equity, I'm gonna add debt, I'm gonna deduct cash and non-core and move down to EV.

And the basic idea of the bridge is that this is where all the funds are coming from and this is where all the funds are used.

So they should be in balance.

And we are interested in the use of funds which is operational, the value of operations.

Okay? So we're gonna go to EV and we're gonna say bridge work equity plus debt minus cash minus non-core.

Okay? So we would predict that the value of operations of EA is $37 billion.

And that is a major step in our treasury excuse me in our trading comp, pausing that, see if there's questions.

Again, I'm just seeing if there are any hands up or anything. Otherwise I'll keep going in about 10 seconds.

Okay? So next I need EBITDA. Okay, so EBITDA calculations.

Now I need that because remember it's an EV EBITDA that I'm after.

Now there's several ways that I could do this.

Probably the easiest way is to trust the data provider, okay? So I could go and I could see what the data provider thinks EBITDA is gonna be.

Okay? Here's LTM last 12 months, okay? That's also last year end because the last year end is the closest thing we've got.

Now these are from the filings above and then we've got predicted EBITDA.

And this is from something called consensus.

You could see it called research or broker reports or something like that.

Lots of jargon really. These are predictions from analysts whose job it is to follow EA and maybe, you know, sit in on earnings calls and go to presentations and read the news carefully and update a model daily and try and figure out you know, what's gonna happen with EA.

And then companies like the data provider that we buy our data from would buy their predictions and then they would end up here.

Okay? This is called consensus.

The problem with consensus is that it doesn't often, it doesn't always agree with the way that we would calculate EBITDA.

Okay? So if you were in a hurry, you would just grab these numbers and go with it.

If this was an important piece of work, you would probably want to clean the EBITDA yourself or at least check it.

The reason we've gotta clean the EBITDA is because if we look back at their statements now wise, we could just grab I where I the operating income.

So that looks like EBIT to me.

And then we could add on the depreciation and amortization, which we could find from the cashflow statement.

That's not a bad way of doing it, it's just can you see we were immediately confronted by that word there impairment.

Now impairments are unexpected reductions in value and they're one of an assortment of things in EA, which arguably won't happen again next year.

If we let the impairment into our EBITDA and then let the impairment into our EV EBITDA and then drop the EV EBITDA onto the earnings of braco, then it's like saying that Grassco is gonna suffer the same impairments that EA did every year.

And that's nonsense. So what we need is we need cleaned EBITDA.

Oh, oh dear, I pressed F1.

Sorry, my excel's playing up a little bit, Right? And so what we need to do is cleaning ebitda.

The basics are that we were probably, ah, really this is getting pretty annoying.

We should grab the EBIT, add depreciation amortization and then make any adjustments for non-recurring items and non-recurring items.

There's loads of them and you need to show judgment.

So I can't just give you an exhaustive list, but things like impairments, restructuring certain legal fees, certain M&A expenses, okay? And many more.

Now if we were gonna do a really good job, what we'd do is we'd actually read the financial statements and we would go through them and try and figure out what that impairment is because they will declare it somewhere in here.

What's easier and certainly more compatible with the time we've got available to us in this session.

We can grab EAs pr.

Now EA knows that we are doing this work.

EAs a sophisticated company that wants to present a good face to analysts.

And what it's gonna do is it's gonna present something like this.

It's not gonna present it in its K because that's regulated and this needs to be loosely regulated for them to present it this way, but so they'll present it in the pr.

They're not presenting this as you know, highly controlled K accounts.

They're saying this is in our pr, we are, we are telling you it's in our pr, this is our version of EBITDA and analysts, we'd like you to use this.

And so qc, we've got operating income and then they're saying that's my EBIT.

And then I'd like you to consider adding these one-off acquisition related expenses.

And I would like you to consider adding the change in deferred net revenue because it's not cash.

And I would like you to add the restructuring charges because they won't happen again.

And I would like you to add stock-based compensation because that's not cash.

And what we can do is we can look at this and we can say certain of these we agree with and certain we don't.

Okay, so let's go for it.

We've got the PR reported EBIT.

Next we've got the acquisition related expenses.

Now I'm happy with those because they are a one-off and so we should add them onto the EBIT because they're contained within the EBIT and we want to clean the ebit.

And so we want to strip out any non-recurring items.

Now I'm not so happy in change in deferred net revenue.

I don't want to go into why now, just go with it.

I'm happy with the restructuring being one-offs because that's like, you know, I don't know, redundancy packages and things like that.

Okay? I'm not happy with the stock-based compensation tech companies quite often declare that analysts should strip out SBC as it's often shortened to from EBIT.

We generally wouldn't be happy with that.

And the reason is that this value is pay.

So you are paying these people in equity, but it stands to reason that glassco would also be paying their people maybe in cash, maybe in equity, but paying them one way or another.

So we would see this as recurring.

And so if companies do certain adjustments, we might disallow them, you know, or say no to those adjustments.

Okay, so now we can say depreciation amortization.

Now I'd like to grab the depreciation amortization.

Okay, I need the K back. Here we go. Okay, yeah, this is gonna be tricky.

We'd have to actually troll the um, income statement to get accurate depreciation and amortization.

Can you see the reason that I'm not so happy with that is because, okay, if we do the normal thing, which is going to the statement cash flows and grab the depreciation from there, which would be by far the easiest thing, then we're containing an impairment.

Oh no. Now the interest of time, that is what I'm gonna do, but I'll make a note of it, okay with me to fix this.

And that's because we can't let impairment in here because that's non-recurring. That's one of the things we should be stripping out.

Alright, let's go ahead and create ebitda.

Okay, so we've got 2,204, let's see how that compares to the data provider.

No, they've got much higher EBITDA and that's probably because they've gone with that whole SBC thing without thinking about it.

So if you're doing this work, you've gotta be a bit careful with your data providers. They may do this slightly differently to how you would like to do it.

And depending on where you end up equity or credit, you know this, this is an entirely different approach for each, so you've gotta be a bit careful.

All right, we're nearly there. So we've got ebitda, we've got EV, let's grab the EV over EBITDA, boom, there we go.

17.1. Now that's quite different from the 14.7 that we initially thought and that could be because we've prepared it on a different basis or it could be that we've grabbed different timing.

Okay, it gets a bit complicated when you start looking at this in detail, but the idea is that's our trading comp with work that we trust and have done good kind of digging into and we've created a target EV and that then could be turned into a target equity to support something like an IPO.

And that basically in a nutshell is trading comps.

So hopefully that's been useful. That's all I'll do.

If it's helpful I can upload this.

Obviously it comes without health warning, but I've just done it so, you know, there may be little errors in there or something, but sometimes people quite like having it.

So let me know if you want me to upload it and yeah.

Great. So Amanda, I'll upload it and then we've got 10 minutes left, so if people had questions, I'd be very happy to answer.

I will busy myself uploading this thing and it's all work I was doing before.

There we go. So that's uploaded into the chats.

Okay. And now I'm just factory. Oh, there's Q&A Sorry, I didn't spot that.

Ah, okay.

So some feedback about learning about it. Yep.

So, take if you have any questions about anything I've done, then I'm very happy to answer them.

Somebody's asked where we can access all the data.

So remember that is Felix.

So you go to Felix do fe.training, same where you access the webinar, okay? And then on the right you can type in tickers and you can get any company you like.

So you know, say we wanted to do the same thing with Tesla, you could say, okay, let's have a look at Tesla and you can see they've got a nice valuation.

We could create our own version of trading comps, pretty much any big limited, excuse me, listed company is in here and increasingly unlisted companies as well.

So I'm just thinking about unlisted company, a big what about Porsche? Porsche is unlisted.

I'm completely sure it's unlisted anyway.

No, apparently not.

Anyway, we've got some unlisted companies in here as well.

So, you find all sorts and it keeps on expanding, which is useful.

Okay. Just seeing if there's any other questions in the chat or the Q&A.

Yeah, Amanda if you're on this webinar, then presumably you've got access to Felix and so you should have access to all that data.

I think the different, different package though.

Oh really? Yeah.

How does it work? I've lost track.

I should definitely know that, but I've lost, I thought once you had access then you, you, you add access to a whole lot.

So can you buy access just to these webinars then without the data? Then the I buy for learning part, not for the data.

So they are two tier.

If you want the land for analysis and they getting all the data, then that might be different. Well Say you don't have access to Felix then I tend to find that people who just can't get access for some reason.

Yahoo Finance is pretty good. Mm-Hmm.

Google Finance isn't bad either.

You can find much of the same stuff on Yahoo Finance.

It's not maybe quite as easy to use, I don't think.

But you know, let's say we always do EA same kind of idea, electronic arts, okay? And then we could say, financials, I think they do have consensus in here somewhere.

So you've got the old income segment, the old balance sheet, the old cash flow.

You, I think there's a link to PDFs somewhere here as well.

And I think they do have forecasts and things somewhere, maybe not for everyone.

And so you can achieve the same thing with this, I reckon.

All right, cool. So I think I've answered everybody's questions.

Happy to hang around and, and ask, answer more questions if you've got them. Otherwise, we'll start thinking about finishing up.

Okay, you will finish up then.

So have a nice rest of the day, wherever you are.

And hope you have a nice weekend as well.

And who knows, we may meet each other in a future webinar.

If not, all the best with everything.

Okay, Bye-Bye everybody.