You will build a comparable companies table and write a two-page memo that brings modules 6 to 9 together.
A one-page valuation note from lesson 8.8, Value your modelled company with a DCF, tells you what one method says. An investment memo tells a reader what you think, why, and what would change your mind, using every tool from modules 6 to 9. Fund analysts write one before a position goes into a portfolio, and portfolio managers read the last section first. This exercise builds the comps tab behind the memo, then the memo itself.
Allow about forty-five minutes if your peer data is ready. You'll need your model and valuation tab, your reading log from lesson 6.8, Build an annual report reading log for one company, and the peer list and classification from lessons 9.3 and 9.7.
Create a tab called Comps. One row for your company and one for each of at least five peers. The columns are the date and source of the prices, market value, net debt, enterprise value, P/E, EV/EBITDA, P/B, free cash flow yield, revenue growth over five years, operating margin, and the three classification labels from lesson 9.7, Classify a stock before you judge its multiple.
Take every figure on the same basis: the same kind of earnings, leases treated the same way, and financial years calendarised where they differ, as lesson 9.3, Choose a peer group that is really comparable, showed. Below the peers, add a median row, and below that a row showing your company's figures for comparison.
Marcus's tab, with made-up figures, has peer medians of 13 times earnings, 7.5 times EBITDA, 1.9 times book and a 5.0% free cash flow yield, with median growth of 9% a year and a median margin of 13%. Larkspur sits at 11.4, 6.25, 1.7 and 5.8%, growing about 7.5% a year at a 14% margin.
Apply each median multiple to your company's own figures and work back to a value per share. For enterprise value multiples, subtract net debt before dividing by the share count.
For Larkspur: 13 times underlying earnings of 14 cents is about S$1.82. 7.5 times EBITDA of S$80 million gives an enterprise value of S$600 million, and after net debt of S$20 million that's about S$1.93 a share. 1.9 times book equity of S$285 million is about S$1.81. A 5.0% yield on free cash flow of S$28 million implies equity worth S$560 million, about S$1.87 a share. The four come to a range of about S$1.81 to S$1.93.
Put them in one block beside your DCF results: the central DCF range, the bear and bull scenarios, the reverse DCF's implied growth and today's price. Marcus's block reads: comps S$1.81 to S$1.93; DCF central range S$1.58 to S$2.08; bear S$1.05, bull S$2.40; price S$1.60, implying about 1% growth against 7.5% in the past. The methods agree that the price sits at the low end of reasonable values, and they also agree that a downturn would take value well below it.
Valuation tells you what a business is worth if your forecast holds. The quality section tells a reader how much to trust the forecast. Cover three things.
The moat, from lesson 9.4, Competitive position: Five Forces and moats, tested against the numbers. Capital allocation, from lesson 9.5, Capital allocation: dividends, buybacks, acquisitions and reinvestment. And management incentives and ownership, from lesson 6.5, Management incentives, ownership and related-party deals.
Marcus wrote: "The moat is real but narrow. Return on capital was 15.6% in FY5 against a 9% cost of capital and stayed above it, at about 11%, in the FY4 downturn. The parts business earns about 19%; coatings earns almost nothing. Reinvestment has created value, but the coatings purchase lost about S$18 million of value even on its best year. Pay rewards revenue and EBITDA, which would not stop another such deal. The family owns 55% and the chief executive 2%, so they feel the share price, and the one related-party lease is small."
Two pages, in this order, under plain headings.
Start with the view: the value range, today's price and one sentence on what the price assumes. Then the business in two sentences, from your reading log. Then valuation, with the DCF and comps side by side. Then quality. Then the risks, ranked by how much value each would destroy. End with what would prove you wrong.
The last section is the one that makes a memo useful, so make each item observable. Each should be something a future results announcement, filing or price could show, with a threshold. "Things get worse" isn't evidence. "The top two customers fall below 50% of revenue with no new customer replacing them" is.
Here is the core of Marcus's memo. "Larkspur Precision trades at S$1.60. My DCF puts its value at about S$1.60 to S$2.10, and peer medians at about S$1.81 to S$1.93. The price assumes revenue growth of about 1% a year, against 7.5% over the last cycle, so the market is pricing either a downturn or the loss of customer volume. Quality is decent: a narrow moat in the parts business, one poor acquisition, and incentives that reward size. My bear case, a downturn starting next year, is worth about S$1.05, so there is no margin of safety against that outcome. I would be wrong if the top two customers fell below 50% of revenue with no replacement, if operating margin fell below 12% in a year revenue held up, or if the board spent its growing cash on another acquisition outside the parts business."
The memo doesn't say buy, sell or hold. How much of a portfolio a holding like this deserves is a sizing question, and module 11 answers it with written rules.
A Comps tab with at least five peers on four multiples, growth and margin, with sources and dates, a median row, and values implied by each median beside your DCF range. A memo of no more than two pages with a value range, the price's implied assumptions, a quality section covering moat, capital allocation and incentives, ranked risks and at least three observable signs you're wrong. If your comps and DCF disagree by more than about a third, check your peers and your terminal value before you write a word, because one of them is probably wrong.
Now build the tab and write the memo for your own company.
Build the comps tab and write a two-page memo stating your value range, how it compares with today's price and the evidence that would prove you wrong.
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