Sum-of-Parts (“SOP”) valuation is commonly used to value company with a diverse group of businesses. One good example would be QL Resources Bhd (“QL”). Table 6 summarises the business exposures of QL and their performances.
|Table 6: QL’s Segmental Financial Highlights (in RM million)|
|(year ended 31 Mar)||2014||2015||2016||2017|
|Palm oil & biomass energy||334.7||345.1||308.1||351.9|
|Integrated livestock farming||1,503.9||1,630.1||1,705.0||1,783.1|
|Profit before tax|
|Palm oil & biomass energy||9.5||14.8||11.6||25.0|
|Integrated livestock farming||85.0||104.0||71.0||89.0|
In QL’s annual report, the group describes its business segment as follows:
- Marine-products manufacturing: Deep-sea fishing, manufacture and sale of fishmeal, surimi, and surimi-based products.
- Palm oil & biomass energy: Plantation, crude palm oil milling and downstream palm biomass technology.
- Integrated livestock farming: Distribution of animal feed raw materials, food related products livestock farming and operation of convenient stores.
For one to value QL, one would need to determine the value of each business division, and add the value of all the three businesses together to derive the total valuation of QL.
However, in most cases, analysts in the market will tend to take the profit in total and subscribe a single PE valuation to companies.
Another common SOP valuation is valuation on conglomerates with multiple businesses. Take DRB-HICOM Bhd (“DRB”). The group has multiple businesses, ranging from car distribution, property development, defense vehicles, etc. The SOP valuations involved values each of the division and adds up all the values to derive the total value of the company. However, in reality, very seldom will a company trade at the full value of its SOP. In most cases, the company will trade at a discount. Why? This is because SOP in such cases is more applicable if the company is breaking up or entering liquidation. If the company is an ongoing entity, the SOP will remain a theoretical value.
Next week, we will look at the fourth commonly used valuation method, which is the Price-to-Book methodology.