VALUATION OF TELIA LIETUVA, AB FROM AN INVESTOR’S PERSPECTIVE 1 VALUATION OF TELIA LIETUVA, AB FROM AN INVESTOR’S PERSPECTIVE A Thesis Presented to the Faculty of Finance Programme at ISM University of Management and Economics in Partial Fulfilment of the Requirements for the Degree of Bachelor of Finance by Matas Ramanauskas Advised by Doc. Dr. Ieva Augutytė - Kvedaravičienė December 2020 Vilnius VALUATION OF TELIA LIETUVA, AB FROM AN INVESTOR’S PERSPECTIVE 2 Summary Ramanauskas, A., Valuation of Telia Lietuva, AB from an Investor’s Perspective [Manuscript]: bachelor thesis, finance. Vilnius, ISM University of Management and Economics, 2020. The topic of the thesis is Valuation of Telia Lietuva, AB from an Investor’s Perspective. This work aims to determine the enterprise value of the company and issue recommendations for investors after deriving the company’s stock price. To get the most accurate results, the analysis of the telecommunication industry and the company is prepared, the best-fit methods applied, namely market method, including financial and transactions multiples (EV/Sales and EV/EBITDA), and for income method discounted cash flow valuation model was performed. In the end, both methods provide enterprise value and after subtracting the net debt, it arrived at the equity value and the corresponding stock price derived. The enterprise value for Telia Lietuva using the market method resulted in EUR 985-1002 million with a EUR 1.45-1.48 stock price for financial multiples and EUR 1066- 1096 million with a EUR 1.59-1.64 stock price for transactions multiples, which is usually higher because of the priced-in synergies. Discounted cash flow resulted in EUR 1126 enterprise value and a corresponding EUR 1.69 stock price. The stock price of Telia Lietuva was priced at EUR 1.56 on September 30th, 2020 (valuation date), creating a possible 8.3% upward move to reach the price derived from the DCF method. In the end, the final recommendations were issued for prospective investors willing to invest in Telia Lietuva, AB. Giving more weight to the DCF method, the final recommendation is to BUY with a long-term investing strategy. Keywords: Telia Lietuva, telecommunication, relative valuation, discounted cash flow, enterprise value. Number of words: 13995 VALUATION OF TELIA LIETUVA, AB FROM AN INVESTOR’S PERSPECTIVE 3 Table of Contents Introduction ................................................................................................................................ 9 1. Situation analysis ................................................................................................................. 11 1.1 General information about Telia Lietuva, AB ............................................................... 11 1.2 The History of Telia Lietuva, AB .................................................................................. 11 1.3 Size and operations ........................................................................................................ 11 1.4 Shareholder structure ..................................................................................................... 13 1.5 Business risk assessment................................................................................................ 13 1.6 Global industry environment ......................................................................................... 13 1.7 European industry environment ..................................................................................... 14 1.8 Lithuanian industry environment ................................................................................... 15 1.9 Growth trends................................................................................................................. 17 1.10 Local competition and external factors ........................................................................ 19 1.11 Financial situation ........................................................................................................ 22 2. Theory and research methods .............................................................................................. 27 2.1 Defining valuation ......................................................................................................... 27 2.2 Review of valuation methods......................................................................................... 28 2.2.1 Income method........................................................................................................ 29 2.2.2 Market method ........................................................................................................ 30 2.3 Discounted Cash Flow Method ...................................................................................... 30 2.3.1 Discount rates.......................................................................................................... 32 2.3.2 Cost of equity .......................................................................................................... 33 VALUATION OF TELIA LIETUVA, AB FROM AN INVESTOR’S PERSPECTIVE 4 2.3.3 Risk-free rate ........................................................................................................... 33 2.3.4 Equity beta .............................................................................................................. 34 2.3.5 Market risk premium............................................................................................... 34 2.3.6 Income tax rate ........................................................................................................ 34 2.3.7 Cost of debt ............................................................................................................. 35 2.3.8 Terminal value ........................................................................................................ 35 2.3.9 Sensitivity analysis.................................................................................................. 35 2.4 Relative valuation .......................................................................................................... 35 2.4.1 Valuation multiples ................................................................................................. 36 2.4.2 Transaction multiples .............................................................................................. 36 2.5 Relevant information for an investor ............................................................................. 37 3 Empirical research ................................................................................................................ 41 3.1 Discounted Cash Flow (DCF) ........................................................................................ 41 3.1.1 Cost of equity (CAPM) ........................................................................................... 41 3.1.2 Risk-free rate ........................................................................................................... 41 3.1.3 Beta coefficient ....................................................................................................... 42 3.1.4 Equity risk premium ............................................................................................... 42 3.1.5 CAPM ..................................................................................................................... 43 3.1.6 Discount rate ........................................................................................................... 43 3.1.7 Cost of debt ............................................................................................................. 43 3.1.8 Revenue forecast ..................................................................................................... 44 3.1.9 Cost of goods sold forecast ..................................................................................... 47 3.1.10 Operating expenses forecast ................................................................................. 47 3.1.11 Other income, gain/loss forecast ........................................................................... 48 VALUATION OF TELIA LIETUVA, AB FROM AN INVESTOR’S PERSPECTIVE 5 3.1.12 Depreciation, amortization, and CapEx forecast .................................................. 49 3.1.13 EBIT forecast ........................................................................................................ 50 3.1.14 Change in net working capital forecast ................................................................. 51 3.1.15 FCFF calculation ................................................................................................... 52 3.1.16 Terminal value ...................................................................................................... 52 3.1.17 Enterprise value of Telia Lietuva .......................................................................... 52 3.1.18 Sensitivity analysis................................................................................................ 53 3.1.19 Scenario analysis ................................................................................................... 54 3.2 Relative valuation .......................................................................................................... 54 3.2.1 Financial multiples .................................................................................................. 55 3.2.2 Transactions multiples ...........................................................................................