Take a trial of UK to unlock this pageFind out more

Value any Stock

1. Pick a Company


Gulf Keystone Petroleum as valued by the Earnings Power Value Technique


Current Price
72.75p
Mkt Cap: £ 626.7m
Implied Valuation*


Earnings Power Value is a zero-growth valuation technique popularised by Bruce Greenwald of Columbia University.



Assumptions

The company's sustainable level of sales is: $m.
Sustainable Sales

To determine sustainable earnings, it is necessary first to determine a sustainable sales level. This may be the most recent annual sales or an average of, say, the last three years' sales if this year was unusual, or potentially even forecast sales (although this arguably violates the no-growth condition). To be prudent, we take an average of all three, if available.

Gulf Keystone Petroleum Hints
Latest Annual Sales $25.4m
Average Sales (Last 3 Yrs) $15.3m
12m Rolling Forecast Sales $226.7m
Across the economic cycle, the operating margin is: %.
Cyclically Adjusted Operating Margin

To normalise margins and eliminate the effects on profitability of valuing the firm at different points in the business cycle, it is usually best to take a long-term average of operating margins. Ideally this would be as long as 10 years and include at least one economic downturn but 5-7 years may suffice. To smooth out unusual years but reflect recent developments, we take an average of the 5 year margin and the TTM margin.

Gulf Keystone Petroleum Hints
5yr Avg Operating Margin -1,956%
Trailing 12m Operating Margin -91.1%
On average, the company sees "exceptionals" of $m.
Special Charges

The next step is to deduct the long term average of non-recurring charges (or normalize them to reflect their true economic nature) to strip out the distortive effect of those companies that mis-classify ongoing business expenses as exceptionals.

Gulf Keystone Petroleum Hints
5yr Avg. Special Items % of Sales 0.000%
% of historic SG&A expense has funded growth.
Maintenance SG&A Expenses

EPV analysis recognises that part of SG&A expenditure is made to maintain and replace the existing assets, while part is made to grow sales. Since EPV is only interested in what it costs a going concern to maintain its existing asset base, it adds back a percentage of SG&A (between 15% and 50% - this is a matter of judgment and industry knowledge) to make up for the fact that some of this expenditure went to fund growth and shouldn't be accounted for. To start off, we assume 15% for the sake of prudence.

Gulf Keystone Petroleum Hints
SGA % of Sales, Trailing 12m 79.1%
SG&A Expense, Trailing 12m 20.1m
SGA % of Sales, 5yr Average 1,339%
SG&A Expense at LT Average 339.9m
Each year, the company spends $m on maintenance capex.
Maintenance Capital Expenditures

As accounting depreciation may not reflect the true economic cost, EPV adds it back, after-tax, and deducts maintenance capex instead. Maintenance capex can be calculated by deducting growth capex from total capex. Growth capex can in turn be calculated by multiplying the long-term average Gross PPE / sales ratio by the current year's increase in sales. Where this exceeds total capex, maintenance capex is assumed to be zero.

Gulf Keystone Petroleum Hints
Total Capex (TTM) (a) -210.4m
Change in Sales(b) 8.68m
5yr Avg. Net PPE/Sales (c) 1,138%
Implied Growth Capex (d) = (b) * (c) -98.8m
Implied Maintenance Capex (e) = (a) - (d) -111.7m
Depreciation (TTM) 9.14m
Investors require a return of % for the risk they are taking.
Discount Rate

The Discount Rate can be thought of as the interest rate demanded for taking on the risk of owning the stock. The lower the discount rate, the more confidence shown in future cashflows. While theoretically it is possible to use Beta to estimate the discount rate, growing empirical evidence suggest that this is a fundamentally flawed approach. Instead, as a general rule of thumb, blue chip discount rates might be up to 9-10%, Mid Caps 11-12% and small caps or volatile stocks 13-15%+.




Description

Earnings Power Value is a valuation technique popularised by Bruce Greenwald of Columbia University. EPV uses a basic equation, namely Sustainable Adjusted Earnings / Cost of Capital. As it does not factor in growth, it may undervalue certain stocks but is arguably better than DCF analysis which tend to rely on highly speculative assumptions about the future.

You can read more about the EPV methodology here.



Breakdown

Sustainable Sales: $20.4m
Cyclically Adjusted Margin: * $-1,024%
Cyclically Adjusted Operating Profit: = $-208.6m
Maintenance SG&A Adjustment: + $51.0m
No Growth Operating Profit: = $-157.6m
Special Charge Adjustment: + $0.000m
Fully Adjusted Operating Profit, post Special Charges Adjustment: = $-157.6m
Taxed Operating Profit (at 28% corporate tax rate): = $-113.5m
Economic Depreciation Adjustment: + $-73.8m
Distributable Cashflow: = $-187.3m
Earnings Power Value (Value of Firm): = $-1,441m
Net Debt / Cash: - $296.1m
Earnings Power Value (Value of Equity): = $0.000m
Implied Market Cap (Currency Adjusted) = GBP0.000m
Implied Share Price: p0.000
Premium/(Discount) to Current Share Price: -100.0%


* Disclaimer: These valuation tools are provided solely for informational & educational purposes so that users can easily run their own valuations. The pre-defined values are simply a starting point based on global assumptions that we have applied across the entire market – users should amend them as they see fit and not regard them as a substitute for their own judgment. Any resulting valuation outputs are necessarily generic and are not endorsed for a given stock by Stockopedia.