Cost of Capital Study 2019

Total Page:16

File Type:pdf, Size:1020Kb

Cost of Capital Study 2019 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
Recommended publications
  • Energy & Power Industry Update
    Energy & Power Industry Update February 2012 Member FINRA/SIPC www.harriswilliams.com Energy & Power Industry Update February 2012 What We’ve Been Reading • Despite a warm embrace of the natural gas industry from President Obama in his 2012 State of the Union Address, January has been a tough month for fuel. An unusually mild winter has dampened demand, sent prices to new lows, and accelerated rig count shifts towards liquids-rich plays. Most notably, Chesapeake Energy, self-proclaimed as “America’s Champion of Natural Gas,” announced that it would divert approximately $2 billion of capital slated for natural gas drilling to more profitable oil-directed drilling. The net effect on North American drilling activity from this shift is expected to be minimal. In fact, many of the oilfield services majors offered bullish commentary on North American activity despite some pricing headwinds in dry gas basins. We’ve included some of that commentary on the following pages for reference. • While natural gas may be encountering some near-term hurdles, the long-term view is certainly positive. This is made particularly clear in Black & Veatch’s (“B&V”) Energy Market Perspective 2011 Fall Forecast Overview: Adapting to the “New Normal,” which deserves mention for the length of its title alone. The report notes that approximately 300,000 MW of natural gas capacity could be added over the next 25 years. Part of this growth is due to the fact that more than 61,500 MW of coal capacity in the continental U.S. may be retired by 2020 (28,000 MW of coal plant retirements have already been announced).
    [Show full text]
  • Video Games and Financial Literacy
    Video Games and Financial Literacy The following games can be used to enhance 86 percent. Less than half of players financial literacy. Background on using real understood finance charges before playing, games in financial learning from recent while 82 percent did so afterward. And literature on the topic follows the game list. women said they felt more confident about handling finances after playing EverFi. www.everfi.com Practical Money Skills EverFi is a web-based simulation game http://www.practicalmoneyskills.com/games/ designed for individuals ages 16-24 that trainingcamp/. covers a wide range of financial topics. This This website contains seven free games that link: can be embedded at no cost in other http://www.everfi.com/images/screenShots/EverFi websites. The most widely used is Financial LifeMap.jpg provides a screenshot. EverFi Football, a joint venture between Visa and contains many “virtual worlds” and the NFL. The game is accompanied by a interactive activities including a tour of the classroom curriculum designed for high NY Stock Exchange and a used-car school students. Teams compete by dealership. EverFi offers a five-hour series of answering multiple-choice questions to earn Web tutorials. This is a SimCity-style game in yardage and score touchdowns. Financial which they control characters‟ spending Football has been distributed by 23 state habits, rewarding good choices and suffering governments to every public high school in the consequences of bad ones. those states. Building on the success of Financial Football, Visa recently released Doorways to Dream’s (D2D’s) Celebrity Financial Soccer (Financial Football outside of the US), an interactive FIFA-themed video Calamity game that tests users‟ knowledge of personal www.celebritycalamity.com.
    [Show full text]
  • Next-Gen Technology Transformation in Financial Services
    April 2020 Next-gen Technology transformation in Financial Services Introduction Financial Services technology is currently in the midst of a profound transformation, as CIOs and their teams prepare to embrace the next major phase of digital transformation. The challenge they face is significant: in a competitive environment of rising cost pressures, where rapid action and response is imperative, financial institutions must modernize their technology function to support expanded digitization of both the front and back ends of their businesses. Furthermore, the current COVID-19 situation is putting immense pressure on technology capabilities (e.g., remote working, new cyber-security threats) and requires CIOs to anticipate and prepare for the “next normal” (e.g., accelerated shift to digital channels). Most major financial institutions are well aware of the imperative for action and have embarked on the necessary transformation. However, it is early days—based on our experience, most are only at the beginning of their journey. And in addition to the pressures mentioned above, many are facing challenges in terms of funding, complexity, and talent availability. This collection of articles—gathered from our recent publishing on the theme of financial services technology—is intended to serve as a roadmap for executives tasked with ramping up technology innovation, increasing tech productivity, and modernizing their platforms. The articles are organized into three major themes: 1. Reimagine the role of technology to be a business and innovation partner 2. Reinvent technology delivery to drive a step change in productivity and speed 3. Future-proof the foundation by building flexible and secure platforms The pace of change in financial services technology—as with technology more broadly—leaves very little time for leaders to respond.
    [Show full text]
  • Argus Research (July 2020)
    EQUITY RESEARCH REPORT July 13, 2020 MOLECULAR DATA INC. (NCM: MKD) Founded in 2013, China-based Molecular Data operates an e-commerce platform that KEY STATISTICS connects and serves participants of the Chinese chemicals industry across the value chain. Key Stock Statistics COMPANY HIGHLIGHTS Recent price (7/7/20) $2.40 * MKD: Connecting China’s Chemical Industry Value Chain 52 week high/low $11.80/$0.57 ADS Outstanding (M) 115 * In our view, Molecular Data has assembled a comprehensive network that can capture value across multiple previous pain points in China’s fragmented chemicals industry. Market cap (M) $276.0 Dividend Nil * After several years of organically building platform capabilities to include financial services, warehousing, logistics and software as a service (SaaS) offerings, Molecular Yield Nil Data should now be able to diversify its revenue stream beyond its core chemical direct e-commerce sales. This should lead to enhanced profit margins and, ultimately, sustainable Sector Overview profitability. Sector Materials * At the end of 2019, Molecular Data completed an initial public offering that yielded net Sector % of S&P 500 2.5% proceeds of approximately $55 million. As a result, we view the company as well posi- tioned to invest in its integrated e-commerce platform with new higher-margin services, and to pursue the acquisition of new capabilities and services globally. Financials ($M) * Although we expect near-term financial results to be impacted by the COVID-19 outbreak, Cash & Mkt Securities 8.3 which forced many customers and suppliers to halt operations throughout the first half of Debt 2.0 2020, we are encouraged by continued robust traffic on the Molbase platform.
    [Show full text]
  • Financial Services Capabilities Brochure
    WE GET FINANCIAL SERVICES See how we can help you orchestrate an IT strategy to mitigate risk, transform the customer experience and drive data insights. DEPOSITORY INSTITUTIONS | CAPITAL MARKETS | INSURANCE 2 EMBRACING THE NEW FINANCIAL SERVICES DISRUPTION The financial services industry is being challenged with the need to innovate the way services are delivered, embrace analytics to drive more personalized experiences and protect against unprecedented security challenges. Not to mention navigating complex merger and acquisition (M&A) opportunities that increase business value and growth, without disrupting the customer experience. All the while operating within an evolving regulatory environment. That’s why we offer you the solutions and support you need to embrace the latest industry trends and technology initiatives, including transforming the customer experience, addressing data privacy compliance and improving data management with AI. We can advise you on how to select the best partners, solutions and services to help you reach your business goals. CDW.com/finance | 888.706.4239 3 CDW WORKS WITH MORE THAN 12,700 WHAT ARE THE TOP STRATEGIC PRIORITIES DEPOSITORY INSTITUTIONS, CAPITAL MARKETS FOR FINANCIAL INSTITUTIONS? FIRMS AND SPECIALTY SERVICE COMPANIES: 84% improve digital experience for customers • Supports 99% of the top U.S. banks enhance data analytics capabilities • Supports 55% of the top U.S. credit unions 42% • Supports more than 7,500 U.S. capital markets firms reduce operating costs • 75+ dedicated CDW Financial Services account managers 32% 31% improve innovation culture 28% digitize back-office operations Source: thefinancialbrand.com, Top 10 Retail Banking Trends for 2019, January 7, 2019 COMPREHENSIVE FINANCIAL SERVICES EXPERTISE Whether you’re looking to upgrade your security framework to address new data privacy regulations, break down data silos with the power of AI and machine learning tools, improve the customer experience in the branch or assess IT compatibility during a merger or acquisition, CDW Financial Services can help.
    [Show full text]
  • Financial Services Integration Worldwide: Promises and Pitfalls
    FINANCIAL SERVICES INTEGRATION WORLDWIDE: PROMISES AND PITFALLS Harold D. Skipper, Jr. Thomas P. Bowles Chair of Actuarial Science C.V. Starr Chair of International Insurance Georgia State University Atlanta, GA/USA 1 Table of Contents INTRODUCTION.........................................................................................................................................3 THE MULTIPLE MEANINGS AND FORMS OF FINANCIAL SERVICES INTEGRATION................3 The Meaning of Financial Services Integration.........................................................................................3 Structures for Delivering Integrated Financial Services............................................................................5 THE ECONOMICS OF FINANCIAL SERVICES INTEGRATION..........................................................8 Cost Effects ...............................................................................................................................................8 Revenue Effects.......................................................................................................................................10 Relationship between Effects and Operational Structure ........................................................................11 MANAGEMENT ISSUES IN INTEGRATION ........................................................................................11 Group Structure .......................................................................................................................................11
    [Show full text]
  • Electricity Subsector Coordinating Council Initiatives
    JUNE 2017 The CEO-led Electricity Subsector Coordinating Council (ESCC) serves as the principal liaison between the federal govern- ment and the electric power industry, with the mission of coordinating efforts to prepare for, and respond to, national-level disasters or threats to critical infrastructure. The National Infrastructure Advisory Council called the ESCC a model for how critical infrastructure sectors can more effectively partner with government. The ESCC has been a catalyst for major initiatives that are improving the security posture of the industry and, by extension, the nation. The ESCC is taking action on issues in three main areas: facilitating coordination with the government and other crit- ical infrastructure sectors; improving information sharing capabilities, tools, and technologies; and enhancing resilience, response, and recovery efforts. Industry-Government and Cross-Sector Coordination The ESCC works across the electric power industry, with the government, and with other interdependent critical infrastruc- ture sectors to improve planning for and response to major incidents. This includes conducting joint exercises, fostering a better understanding and protection of our mutual dependencies, and sharing information more effectively. ESCC Playbook R&D Alignment The ESCC Playbook provides a framework for senior The industry is collaborating with the government, industry and government executives to coordinate response the national labs, and the investment community on resil- and recovery efforts and communications
    [Show full text]
  • Fintech and Market Structure in Financial Services
    FinTech and market structure in financial services: Market developments and potential financial stability implications 14 February 2019 The Financial Stability Board (FSB) is established to coordinate at the international level the work of national financial authorities and international standard-setting bodies in order to develop and promote the implementation of effective regulatory, supervisory and other financial sector policies. Its mandate is set out in the FSB Charter, which governs the policymaking and related activities of the FSB. These activities, including any decisions reached in their context, shall not be binding or give rise to any legal rights or obligations under the FSB’s Articles of Association. Contacting the Financial Stability Board Sign up for e-mail alerts: www.fsb.org/emailalert Follow the FSB on Twitter: @FinStbBoard E-mail the FSB at: [email protected] Copyright © 2019 Financial Stability Board. Please refer to: www.fsb.org/terms_conditions/ Table of Contents Page Executive summary .................................................................................................................... 1 1. Background and definitions ............................................................................................... 3 2. Financial innovation and links to market structure ............................................................ 5 2.1 Supply factors – technological developments ............................................................ 6 2.2 Supply factors – regulation .......................................................................................
    [Show full text]
  • The Importance of Financial Education
    JULY 2006 Policy Brief ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT The Importance of Financial Education Why is financial Introduction education Financial education is increasingly important, and not just for investors. important? It is becoming essential for the average family trying to decide how to balance its budget, buy a home, fund the children’s education and ensure How can it be achieved? an income when the parents retire. Of course people have always been responsible for managing their own How financially finances on a day to day basis – spend on a holiday or save for new literate are we? furniture; how much to put aside for a child’s education or to set them Is financial up in life – but recent developments have made financial education and education effective? awareness increasingly important for financial well-being. For one thing, the growing sophistication of financial markets means What more should consumers are not just choosing between interest rates on two different be done? bank loans or savings plans, but are rather being offered a variety of For more complex financial instruments for borrowing and saving, with a large information range of options. At the same time, the responsibility and risk for financial decisions that will have a major impact on an individual’s future For further reading life, notably pensions, are being shifted increasingly to workers and away from government and employers. As life expectancy is increasing, the Where to contact us? pension question is particularly important as individuals will be enjoying longer periods of retirement. Individuals will not be able to choose the right savings or investments for themselves, and may be at risk of fraud, if they are not financially literate.
    [Show full text]
  • Oracle Financial Services Retail Customer Analytics
    ORACLE DATA SHEET Oracle Financial Services Retail Customer Analytics Gone are the days when consumers were significantly loyal to just one bank. Nowadays, it is customary for consumers to engage with multiple banks for their mortgage, checking/savings accounts, lines of credit, and so on. This new modern way of banking challenges the financial institution’s marketing team to ensure they are delivering the correct message to the right audience through the right channel. With acquisition costs spiraling, retaining existing customers has taken center-stage; trust and loyalty have to be earned. Without timely and relevant data and knowledge about customer preferences, informed marketing decisions cannot be made. Oracle Financial Services Retail Customer Analytics helps retail banking institutions ensure that marketing dollars are invested wisely and the customers with the most potential to be profitable are targeted through the right channels. K EY FEATURES Drive Marketing Efficiency and Optimization • Understand customer trends across key focus areas such as Chief Marketing Officers are faced with the daily challenge of ensuring the marketing sales, balances, and mix is distributed efficiently and they are recognizing a return on their investments. The engagement trick is to know which consumers respond to what channels and in what ways, while • Optimize campaigns with metrics ensuring brand awareness is maintained. Traditionally, this decision is based more on including responses, opt-outs, and customer distribution across judgment and opinion and less on analytics. With Oracle Financial Services Retail target segments Customer Analytics, marketers can leverage list scoring and customer segmentation to • Utilize sophisticated predictive present relevant products to the customer at the right time and through the right models enhanced with Big Data channel.
    [Show full text]
  • Financial Services
    CHAPTER 17 FINANCIAL SERVICES Article 17.1: Definitions For the purposes of this Chapter: computing facility means a computer server or storage device for the processing or storage of information for the conduct of business within the scope of the license, authorization, or registration of a covered person, but does not include a computer server or storage device of or those used to access: (a) financial market infrastructures; (b) exchanges or markets for securities or for derivatives such as futures, options, and swaps; or (c) non-governmental bodies that exercise regulatory or supervisory authority over covered persons; covered person means (a) a financial institution of another Party; or (b) a cross-border financial service supplier of another Party that is subject to regulation, supervision, and licensing, authorization, or registration by a financial regulatory authority of the Party;1 cross-border financial service supplier of a Party means a person of a Party that is engaged in the business of supplying a financial service within the territory of the Party and that seeks to supply or supplies a financial service through the cross-border supply of that service; cross-border trade in financial services or cross-border supply of financial services means the supply of a financial service: (a) from the territory of a Party into the territory of another Party; 1 For greater certainty, whenever a cross-border financial service supplier of another Party is subject to regulation, supervision, and licensing, authorization, or registration by a financial regulatory authority of the Party, that supplier is a covered person for the purposes of this Chapter.
    [Show full text]
  • Consumers and Mobile Financial Services 2014
    Consumers and Mobile Financial Services 2014 March 2014 B OARDOF G OVERNORSOFTHE F EDERAL R ESERVE S YSTEM Consumers and Mobile Financial Services 2014 March 2014 B OARDOF G OVERNORSOFTHE F EDERAL R ESERVE S YSTEM This and other Federal Reserve Board reports and publications are available online at www.federalreserve.gov/publications/default.htm. To order copies of Federal Reserve Board publications offered in print, see the Board’s Publication Order Form (www.federalreserve.gov/pubs/orderform.pdf) or contact: Publications Fulfillment Mail Stop N-127 Board of Governors of the Federal Reserve System Washington, DC 20551 (ph) 202-452-3245 (fax) 202-728-5886 (e-mail) [email protected] iii Preface The survey and report were prepared by the Con- R. Gerdes, Linda Healey, Bob Hunt, Chris Olson, sumer and Community Development Research Sec- Samantha J. Pelosi, Anjana Ravi, Aaron Rosenbaum, tion of the Federal Reserve Board’s Division of Con- Scott Schuh, and Dick Todd provided valuable com- sumer and Community Affairs (DCCA). ments and feedback on the design of the survey and drafting of this report. Comments and feedback were DCCA directs consumer-related functions performed also provided by Federal Deposit Insurance Corpora- by the Board, including conducting research on tion staff, including Karyen Chu, Keith Ernst, and financial services policies and practices and their Yazmin Osaki. Finally, several members of the implications for consumer financial stability, commu- Mobile Payments Industry Workgroup provided nity development, and neighborhood stabilization. valuable input, including Mehul Desai, Dee O’Malley, and Ginger Schmeltzer. DCCA staff members Maximilian D. Schmeiser, Matthew B.
    [Show full text]