Cost of Capital Study 2019
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Cost of Capital Study 2019 The Calm Before the Storm – Rising Profits and Deflated Values? This study is an empirical investigation with the aim of analyzing management practices. Information provided and explanations offered by the study do not offer a complete picture for deriving financial forecasts or costs of capital nor for proper actions or interpretation of the requirements for impairment tests, other accounting-related questions or business valuations. When considering the following analyses, it should be noted that the company data presented here stems from companies from different countries, partially with different currencies and at varying points in time. Furthermore, it should be noted that not all participants of the study have answered all questions. © 2019 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of theKPMG KPMG International network of independent Cooperative member (“KPMG firms affiliated International”), with a Swiss entity. KPMGtrademarks of International. All rights reserved. The name KPMG and the logo are registered Summary Introduction Cash Flows Cost of Capital Company Online Industry Industry Parameters Values Analyses Specialists Preface Dear Readers, – Changing markets and industries?! We hope that this year’s Cost of Capital Study also – A changing landscape for the automotive industry meets your expectations and serves as interesting It is our pleasure to present you with the results of – Data driven omnichannel models reading. We will gladly discuss the results with you the fourteenth edition of our Cost of Capital Study. – Chemical industry and the challenge of climate within the framework of a personal appointment This year’s number of participants increased to 312 change and are, of course, available for any questions and (previous year: 276) and therefore attained, once – Finding the balance in industry 4.0 comments you may wish to offer. again, a new record level. We would like to express our heartfelt gratitude to all those companies which As a reference point, the collection of empirical With best regards, took part. The large, annually increasing number of data is based on the IFRS (International Financial participants demonstrates once more that the study Reporting Standards) impairment test, as this test is a fixed component in your practical valuation itself and its related valuations are mandatory for all work. We therefore hope that this year’s study and IFRS users. the key topics contained therein will be of particular interest to you. Supplementary to the current study, we would like to direct you to the interactive opportunities In the current issue, we examine the impact of for analysis of the data on our website at regulatory interventions, scarcity of resources, www.kpmg.de/cost-of-capital. There you can digitalization as well as economic risks after a long- compile the parameters relevant for your company Dr. Marc Castedello Stefan Schöniger term upswing in financial forecasts and cost of and/or industry and use them to perform your own, Partner Partner capital. tailor-made assessment. Deal Advisory, Valuation Deal Advisory, Valuation KPMG AG Wirtschafts- KPMG AG Wirtschafts- Consequently, we have chosen the motto “The Furthermore, we collate the relevant cost of capital prüfungsgesellschaft prüfungsgesellschaft Calm Before the Storm – Rising Profits and Deflated parameters in an interactive dashboard for you on a Values?” for this year’s Cost of Capital Study. Based monthly basis. With KPMG Valuation Data Source on this theme, we focus on the following subjects: (www.kpmg.de/kpmg-valuation-data-source) you have access to reliable parameters on the cost of capital for more than 150 countries – anywhere and anytime. © 2019 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of theKPMG KPMG International network of independent Cooperative member (“KPMG firms affiliated International”), with a Swiss entity. KPMGtrademarks of International. All rights reserved. The name KPMG and the logo are registered Summary Introduction Cash Flows Cost of Capital Company Online Industry Industry Parameters Values Analyses Specialists ’15 ’16 ’17 ’18 ’19 Editions of the Cost of DEAL ADVISORY, VALUATION Cost of Capital Study 2016 Cost of Capital Study 2017 Cost of Capital Cost of Capital Cost of Capital Study 2015 Value measurement – quo vadis ? Diverging markets – converging business models Value enhancement in the interplay Study 2018 Study 2019 of risks and returns New Business Models – The Calm before the Storm – Capital Study Risks and Rewards Rising Profits or Deflated Values? by KPMG Highlighted – Corporate Economic Decision – New methods for value – Macroeconomic – Innovative business models – – Changing markets and Assessment measurement?! uncertainties – part of opportunity and risk at the industries?! subjects – Consideration of performance – Big Data and business financial forecasts same time – A changing landscape for the and risk drivers analytics tools – Microeconomic change – – Disruptive business models – automotive industry of the study – Stress testing in times of – Risk transparency and risk predictability of disruptive one person’s joy, another’s – Data driven omnichannel higher volatility management business models suffering models – Quantification of operative – Value-based man age ment – Cost of capital – the – Internationalization – Chemical industry and the risks systems 2.0 challenges of low interest of business models – challenge of climate change – Effects of the low-interest rates, populism, and new opportunity and risk at the – Finding the balance in phase technologies same time industry 4.0 – Paradigm shift in the deter- – Cost of capital – comparative – The optimal company mination of the market risk measures in a world that portfolio – premium increasingly defies necessity of quantifying comparison strategies – Value enhancement as a decision-making metric – New valuation methods in disruptive times? © 2019 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of theKPMG KPMG International network of independent Cooperative member (“KPMG firms affiliated International”), with a Swiss entity. KPMGtrademarks of International. All rights reserved. The name KPMG and the logo are registered Summary Introduction Cash Flows Cost of Capital Company Online Industry Industry Parameters Values Analyses Specialists Summary of Findings Growth expectations WACC Beta factors Investment decision In the industries under The average WACC across industries The highest unlevered beta factors Investment decisions continued consideration, different was at 6.9 percent and therefore on the were applied by the Automotive and to be made by the majority expected growth rates were same level as in the previous four years. Technology sectors; the lowest for this of participants based on both forecasted for EBIT and sales. The highest WACCs were applied in the survey period was measured in the strategic as well as value-based The highest EBIT growth is Automotive sector with 8.2 percent and in Real Estate as well as in the Energy & objectives. expected in the Chemicals & the Technology sector with 8.1 percent. Natural Resources sectors, followed by Page 37 Pharmaceuticals and Technol- the Media & Telecommunications and The lowest WACC was observed in the ogy sectors and the lowest Transport & Leisure sectors. Energy & Natural Resources sector with EBIT growth in the Energy & 5.2 percent and in the Real Estate sector Page 26 Natural Resources sector. with 5.4 percent. Page 13 Page 19 Monitoring Most participants continued to consider value-based Planning uncertainty Risk-free rate Cost of debt monitoring of investment decisions as important and Planning uncertainty at the After last year’s increase, the average The average cost of debt stayed almost observed in particular the macroeconomic level continues risk-free rate remains nearly constant at constant with a slight increase of 0.1 per- change in performance more to increase. 1.2 percent. centage points to 2.9 percent. The implied than the change in risk (cost In addition to risks resulting However, in recent months the average credit spread – defined as the of capital). from disruptive digitalization risk-free rate declined significantly to difference between the cost of debt and Page 40 developments and innovative 0.2 percent in the Euro zone and to the risk-free rate – amounts to 1.7 percent business models, political risks -0.2 percent in Switzerland. according to this year’s study results. such as the ongoing trade war Page 22 Page 31 between USA and China are on the rise. To date, economic risks and Market risk premium Capital market communication customer risks have been in particular given consideration The average market risk premium applied remained stable at The cost of capital was, as in the previous years, less in financial forecasts. 6.5 percent. By contrast, the market risk premium in Germany relevant in capital market communication and was primarily Page 17 and Austria increased compared to the previous year. used only for accounting and reporting purposes. Page 23 Page 41 © 2019 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of theKPMG KPMG International network of independent Cooperative member (“KPMG firms affiliated International”), with a Swiss entity. KPMGtrademarks of International. All rights reserved. The name KPMG and the logo are registered Summary Introduction Cash Flows Cost of Capital Company Online Industry Industry Parameters Values Analyses Specialists 1 Introduction