Latest Industry Multiples with Valuation Affairs May 2019
Helping SME business owners have a wealthier affair with the value of their business
A regular review of the market and economic trends that will have an impact on industry multiples and SME business valuations.
Exit Value Advisers create wealthier affairs between business owners and the value of their SME using in-depth business valuations and innovative exit strategies. We deliver clear and defendable valuations that support transactions, exit strategies, restructuring, investment, dispute resolution and succession planning.
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SME Industry Valuation Multiples
We have expanded the transaction data we have collated and removed some of the obvious strategic transactions from the data so there is less extremes in the data.
The strategic transaction EBITDA multiples are shown at the bottom of this newsletter.
The single recent transaction in the less than $1m Enterprise Value (EV) range relates to the sale of a physiotherapy clinic to a larger player looking to aggregate market share. With an EV of $450k this transaction could equally be classified as a strategic transaction.
We continue to note that a lot of the small businesses tend to transact for not much of a premium over asset value. Small business owners typically find it hard to build features that reduce the reliance on key person risk and hence the EBITDA multiples tend to follow this trend.
Some of the key trends from the first half of 2019 include:
EBITDA multiples in the $1m - $5m EV range 3.6x - 6.0x, with higher EBITDA multiples attached to primarily IT and services related businesses
Medium sixed manufacturing businesses with revenue between $10m - $15m have recently sold for 3.1 - 3.7x EBITDA.
Larger manufacturing companies in the $20m+ EV range attract much higher EBITDA multiples of 5.0x - 6.5x.
The sale of Globulus Group (flexible packaging) to Viscofan attracted a 9.5x EBITDA mutliple for $13.3m transaction being the outstanding transaction reported recently.
We are continuing to see an increased appetite for acquisitions by mid-sized companies this calendar year.
We have continued our correlation between EBITDA multiples and EBITDA and as more data is collected we will extend the categorisation to identify more meaningful correlations. The data continues to emphasise the philosophy that size counts.
ASX EBITDA Multiples
The ASX 200 defied most market commentators over the past few months and climbed back above 2018 end of year lows to hover around 6250 - 6300 points and report a 10% rolling 12 month return when combining capital growth with dividend payouts. This has translated into a lower implied cost of ASX 200 equity, with April PE ratio exceeding 16.0x.
What is surprising is to match this with un-impressive half year financial reporting results. Only half of the ASX 200 companies that reported in February 2019 were able to increase profits from the previous 12 months. Commsec has reported that "aggregate statutory profits rose by 15.3 per cent on a year ago" however excluding heavyweights such as Wesfarmers and BHP, profits fell by 5.5 per cent.
With low global and domestic growth projected over the next 1 - 2 years it is difficult to see how increasing EV:EBITDA multiples can be justified with falling earnings. It highlights that the focus for many SME's should be to cut costs to preserve profits.
EBITDA Mutiples for $1bn+ stocks have increased in line with ASX200 trends, with the manufacturing and infrastructure at 21x - 23x on a control basis, with large retail stock EBITDA Multiples also increasing 2% to 11.1x.
The sub $200m market cap groups have seen a number of stocks disappear as a result of mergers or acquisitions with the median EBITDA multiples still approx 11.0x - 12.0x. GBT (specialist financial technology company which provides administration and transaction processing software) has increased its EBITDA multiple by 40% on the back of a takeover offer from Bravura. EOL (Energy One Ltd) has also increased its EBITDA multiple by 16% on the back of increased results and a recent acquisition.
Trends in Cost of Capital By Sector
Enterprise Value EBITDA Multiples for increased for selected large infrastructure and manufacturing stocks ($1b EV).
The mid market SME sector has seen increases in all sectors in the Interfinancial results except the Business Services sector.
As expected, SME EV EBITDA Multiples have largely remained the same.
Overall SMEs with EV less than $20m are attracting an implied cost of equity of 28% - 34% and the mid-market is slightly lower at 13.5% - 15.0%%.
Whilst cost of equity is remaining positive for most market segments, we expect that any economic or geo-political shocks may result in some significant correction, especially where profits are expected to decrease in the near term.
A low growth economy for the next 1-2 years will impact strategies of many SME businesses.
Trends in Economic Stats
It is now un-deniable - we are in a low growth economy for the near term, with both global and domest
The key factors driving this discussion are:
Growth in the OECD region down to 2.5% over the next twelve months.
RBA forecast for GDP growth was reduced recently to 2.75% over 2019 and 2020.
December quarter GDP growth rate declined to 2.3%.
Australian unemployment increased marginally to 5.2%.
CPI remaining low at 1.3% pa.
Wages growth is at least exceeding CPI at 2.3% pa.
Regardless of the outcome of the election the economy will benefit from increased levels of government investment spending on infrastructure and an strong positive balance of trade position thanks to lower AU/US exchange rates and higher iron ore prices than expected.
Our view of the next twelve months remains that of a low growth market where the focus must be on improving or protecting profit margins and market share, whilst using well planned acquisitions and mergers to drive increased earnings. It is likely that the costs of business debt will continue to remain low.
We have talked about a strategic transaction before - but in essence any transaction where a particular buyer is prepared to pay more than market value is considered strategic value or a strategic transaction. It is the holy grail for most business owners to be paid a bucket load of cash and able to retire.
We have isolated at least eight transactions from our database overt the past 18 months that we consider are indicative of strategic value.
The charts highlight EBITDA multiples of 5.0x - 23.5x, with enterprise values of $2.8m - $86.0m. Excluding the endpoints of the EV range, the average strategic transaction price was just less than $30m.
Attracting a strategic value opportunity is not achieved overnight and typically takes a 2 - 3 year period. We have explained more in our blog article How to build the strategic value of your business.
Our Business Valuation Experience
We have completed business valuations in all areas of Australia, either conducted remotely or we are happy to come to you. Our project locations include:
We have the resources to complete projects in any location and have a deep awareness of the issues and trends in both metropolitan and regional areas.
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