Valuation Insights

Industry analysis tool to estimate the market value of companies

The industry analysis tool provides estimates on the cost of capital evolution, but also on the relative value for 10 sectors.

The return on each sector was estimated by determining the cost of equity (for the financial services sector) and the weighted average cost of capital – WACC (for the other analyzed sectors).

The relative value of each analyzed sector was estimated by quantifying the financial multiples, which are valuation indicators widely used for business valuation.
 

Conclusions and results of the Valuation Insights analysis, available for the second quarter of 2023:

Cost of capital: Expected returns for the analyzed industries recorded a mixed evolution in the second quarter of the current year compared to the first three months of the year, with increasing volatility observed.

Most of the analyzed industries continue to register a decrease in the cost of capital, a trend observed since the second part of 2021. However, there are also different developments in the case of certain sectors, according to the sectoral analysis of EY Romania.

At the end of the first half of 2023, the Telecommunications and Information technology sectors were once again recording the lowest yields, while the Healthcare and Financials sectors are leading the top of the highest yields. The Financials sector recorded the most significant quarter-to-quarter fluctuation in the first part of the year.

Compared to the same period of last year, the largest decreases in the cost of capital were recorded at the level of the Materials (-3.5 p.p.) and Consumer staples sectors (-3.1 p.p.). For the second quarter of 2023, the Real estate sector was also on a downward trend, with a decrease of 1.9 p.p., respectively the energy sector, which recorded a decrease of 1.2 p.p.

On the other hand, there were also significant increases in the cost of capital, both compared to the same period last year and compared to the previous analyzed quarter. The biggest increases were recorded in the Financials sector (+6.3 p.p. compared to the first quarter and +1.8 p.p. compared to the second quarter of 2022) and that of Consumer discretionary (+2.3 p.p. compared to the first quarter and +3.2 p.p. compared to the same period of the previous year).

The evolution of yields was based on trends recorded by the component parts / constituents of the cost of capital. Compared to the previous quarter, there is a decrease in the risk-free rate and implicitly in the country risk premium, but also in the cost of debt, which has caused, for most sectors, the cost of capital to maintain its downward trend compared to the previous period. In contrast, the beta coefficient has increased, which contributed to the increase in the cost of capital, compared to the previous quarter, for several industries.

The current macroeconomic volatility, with positive signs on the supply side, but with geopolitical outlook still uncertain and a potential slowdown in economic growth, has caused the yields expected by investors to evolve differently, with declines for most sectors, but also significant increases for certain sectors, such as the Financials or the Consumer discretionary sectors. Against the background of the current macroeconomic and geopolitical context, we expect the cautious approach of investors to continue and this will be reflected in the future developments of yields.

The analysis is based on processed data generated by the S&P Capital IQ database and considers a sample of representative listed companies in Europe (including Romania), related to each sector analyzed, as they are classified by source.