# Fundamental Valuation

We analyze the short term (one year) drivers of fundamental valuation based on the changes in (in order of importance):

• Valuation multiples
• Operating profit (EBIT) margins
• Tax rates, interest and other income
• Revenue growth
• Dividends

We calculate the fundamental valuation of companies by estimating the potential return that may be expected according to the following formula:

Return   =   Dividends   +   Δ Share Price

and on a per share basis:

Return   =   DPS  +  ( Δ PE  *  Δ EPS )

Return   =   DPS  +  ( Δ PE  *  ( ( Δ EBIT  +  Δ Interest  +  Δ Other Income )  *  Δ Tax Rate % )  *  Δ Shares

Return  =   DPS  +  ( Δ PE  *  ( ( ( Δ Sales  *  Δ EBIT Margin %  +  Δ Interest )  +  Δ Other Income )

*  Δ Tax Rate % )  *  Δ Shares

Where:   DPS  =  Dividends Per Share;      Δ  =  Change (in)

Explanation: Potential Returns are calculated based on the change in the share price and dividends received.  The change in the share price is estimated by multiplying the forecast change in PE and EPS. In turn, the forecast EPS is estimated based on the assumed changes in revenue, EBIT margin, net interest, other income & tax rates; and adjusting EPS for share repurchases (ie. the Δ Shares part).

However, if a company lacks sufficient earnings make this approach possible, so Book Value, P/EBIT & EV/Sales based valuation multiples are used instead.

The potential investment returns to shareholders under the three different scenarios (Bear, Base, Bull Cases) is calculated to illustrate the potential range of returns under the different assumptions made.

This approach highlights the fundamental drivers for any potential return; based on the different key financial drivers.