Good post. I'd move away from trying to arithmetically calculate a WACC as a 6.5% one for BVXP is definitely too low, and that's stemming from a beta of 0.5, which doesn't intuitively make too much sense. If the UK 10-year is 4.7% then I'd definitely want to be paid a risk premium well above 180bps to own a business like BVXP.
Betas can be very variable depending on time frame, frequency and index matched against. I'd shift more to an approach of "what sort of discount rate do I want to use for BVXP", and I'd probably struggle to give you an answer of less than 8% for that, particularly given it's a small cap. If we're using a WACC of 6.5% for BVXP, then imagine what rate we might be using for something like Microsoft - 3.5%? (which of course would give enormous upside there)
I'm glad you enjoyed it Eric, one of my favourite aspects of equity research is finding companies in markets you didn't know existed.
On the valuations, I find it is a constant evolution and refinement of your execution, I must add I believe that you're right as I've recently been deriving the expected market return component of the CAPM from summing the equity risk premium, country risk premium and the 10-year yield. Recalculating using this method I get a WACC of 7.71% which could have an additional small cap premium attached to be more palatable.
To attain the country/equity risk premium I've been using the link below:
Good post. I'd move away from trying to arithmetically calculate a WACC as a 6.5% one for BVXP is definitely too low, and that's stemming from a beta of 0.5, which doesn't intuitively make too much sense. If the UK 10-year is 4.7% then I'd definitely want to be paid a risk premium well above 180bps to own a business like BVXP.
Betas can be very variable depending on time frame, frequency and index matched against. I'd shift more to an approach of "what sort of discount rate do I want to use for BVXP", and I'd probably struggle to give you an answer of less than 8% for that, particularly given it's a small cap. If we're using a WACC of 6.5% for BVXP, then imagine what rate we might be using for something like Microsoft - 3.5%? (which of course would give enormous upside there)
Eric
I'm glad you enjoyed it Eric, one of my favourite aspects of equity research is finding companies in markets you didn't know existed.
On the valuations, I find it is a constant evolution and refinement of your execution, I must add I believe that you're right as I've recently been deriving the expected market return component of the CAPM from summing the equity risk premium, country risk premium and the 10-year yield. Recalculating using this method I get a WACC of 7.71% which could have an additional small cap premium attached to be more palatable.
To attain the country/equity risk premium I've been using the link below:
https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html