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COVID-19 - Valuation & Capital Markets Impact Monitor

Update November 2020

Equity markets have recovered most of the lost ground from the very sharp decline in March 2020 following the outbreak of the COVID-19 pandemic. The EV/EBITDA 2020 trading multiples are currently even above their levels observed per year-end 2019. The volatility in market inputs and uncertainty surrounding the impact of COVID-19 require care for consistency and more professional judgement in valuations than before. A bigger variance in valuation ranges also increases the likelihood of a discrepancy in value perception between buyers and sellers in transactions. Despite these challenges, the need for and relevance of valuations often increase in economic crises (for example in relation to financial restructurings, goodwill impairment tests, complex / distressed M&A and shareholder disputes).

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Capital Markets
Economic outlook and analyst expectations
Key implications for valuation analyses
COVID-19 - Valuation & Capital Markets Impact Monitor

Capital Markets

Equity markets have recovered most of the lost ground from the very sharp decline in March 2020 following the outbreak of the COVID-19 pandemic. The decline in market prices in October 2020 (driven by the surge in number of COVID-19 cases) has been more than offset by the recent stock market increase following the news that several vaccines are expected to successfully enter the market in early 2021.

Looking at returns per segment, quite some variance is observed, with winners particularly in the Information Technology segment, as these companies have been able to adapt quickly to the shift to home-working and benefit from the accelerated digitalisation of economies following COVID-19. The long-term impact of the (partial) lockdowns remains uncertain, but all sectors and businesses will be forced to adapt and change as economies recover.

COVID-19 Valuation & Capital Markets Impact Monitor - November

Economic outlook and analyst expectations

The economic fallout following COVID-19 has led to a substantial decrease in GDP projections for 2020. Due to the high uncertainty surrounding the development of the COVID-19 crisis, there is a great variation in economic scenarios developed by economists. Despite the surge in number of cases in many European countries, a ‘V-shaped’ economic recovery seems to have become more likely - or implicitly assumed by markets - with the recent news of the expected availability of vaccines.

Contrary to the increase in stock markets, projections of equity analysts have further dropped compared to April 2020. They currently assume a 5.9% decline in 2020 revenues for the companies in the MSCI Europe Index (1.9% as per April 2020). Equity analysts have decreased their EBITDA 2020 estimates for companies in the MSCI Europe Index by 11.5% (compared to the estimate per 1 January 2020).

We observe quite some variation between segments, with the large caps in Health Care and Information Technology even expected to experience growth in 2020 (on average). Also, more variation exists in the expected EBITDA estimates by different analysts for the same company. This variation corresponds to the uncertainty surrounding the impact of COVID-19 on the (recovery of the) economy and even more so on individual companies.

Key implications for valuation analyses

In March 2020, EV/EBITDA 2020 trading multiples declined sharply after the decrease in stock prices (whilst 2020 EBITDA estimates were relatively unchanged). Due to the recovery in stock markets and the drop in EBITDA 2020 estimates, EV/EBITDA 2020 trading multiples are currently above their observed levels per year-end 2019.

In these times of market and economic volatility, the use of multiples becomes more challenging and often yields less meaningful or inconclusive results. Therefore, extra care is required and consistency in reporting periods and normalisations become even more important. Also, forward-looking multiples (if based on consistent ‘post-crisis’ EBITDA estimates for 2021 or 2022) likely yield more meaningful results.

As the earnings estimates have gradually decreased, whilst share prices recovered, the sharp initial increase in ERMP has normalised. Although a company WACC might have changed, a DCF analysis also requires the financial forecasts to reflect the new economic reality. Due to the ability to model the uncertainty surrounding the impact of COVID-19 on a company’s performance in financial scenarios, DCF analyses have become even more important.

The variation and volatility in financial forecasts and market inputs require care for consistency and more professional judgement. A bigger variance in valuation ranges also increases the likelihood of a discrepancy in value perception between buyers and sellers in transactions, or between current market pricing and results obtained in fair (market) value analyses (based on a long-term ‘value in use’ perspective).

Despite these challenges, the need for and relevance of valuations often increase in economic crises (for example in relation to financial restructurings, goodwill impairment tests, complex / distressed M&A and shareholder disputes).