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QuestionsCategory: Valuation QuadrantHow to values companies which does not have at least 5 year record
Darren Seah asked 3 months ago

Hi Victor,
How do you value a company which just IPO-ed and only have data for the past 1-3 years to evaluate on?
Thanks
-Darren 

1 Answers
Victor Chng answered 3 months ago

Hi Darren,
 
So far, we have not bought into any IPO companies. Usually for such companies with limited track record. You can value them based on how their competitors are trading at. You can take the average of all their competitors average PE.

Darren Seah replied 3 months ago

Hi Victor, thanks for the advice.

Is there a reliable source which already calculates the average PE by sector?

Victor Chng replied 3 months ago

Hi Darren,

I do not have any source for that. I usually go to the individual companies to find out their average PE by plotting the PE chart.

Darren Seah replied 3 months ago

Hi Victor,

Ok understand. What do you reckon is a good sample size of the competitors to make it a rough representation of the sector (ie Average PE from the top 5 competitors?)

Victor Chng replied 3 months ago

Hi Darren,

I will say 2-3 is a good enough sample size.

Darren Seah replied 3 months ago

Hi Victor,

Thanks for this.

As these growth companies tend to have negative earnings in the first few years of the IPO, will it be advisable to calculate the intrinsic value by using the average PCF?

Victor Chng replied 3 months ago

Yes, if the company have negative earnings then you can use cash flow (assume it is positive) to calculate their IV.