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QuestionsCategory: Valuation QuadrantSetting projection growth rate for negative CAGR
Jun Song Lim asked 2 years ago

Hi Victor,
Recently I calculate CAGR(Earning per share)for silverlake axis (from FY 2014 to 2018) and it turns out to be negative . With that I would like to check how do I actually set a projection growth rate for company with negative CAGR?
Is it ok to set projection growth rate above the  CAGR if let say the current “negative CAGR” is due to increase in outstanding share and slight decrease in company earning during FY18(assuming EPS throughout FY2014 to FY2017 is more of less steady or has increase).

1 Answers
Victor Chng answered 2 years ago

Hi Jun Song,
 
You can;t project growth when the company is having negative CAGR. Do note that Silverlake business consist of one volatile and the other recurring. The volatile segment is the one that cause the negative growth when banks pull back on the spending. The best way to value Silverlake is to use their average PE range on the recurring business. 

Jun Song Lim replied 2 years ago

Hi Victor,

So does it mean I can used the PEG growth ratio to do valuation for silverlake axis but based on the recurring business profit divided by total number of outstanding shares?

Victor Chng replied 2 years ago

Hi Jun Song,

The maintenance business is a stable and growing segment but it is not growing very fast. Hence, PEG ratio may not be applicable. I think the average PE valuation method may be more applicable. Usually recurring and growing business at trade between 15-25x PE range.

Jun Song Lim replied 2 years ago

Ok thanks for the info

Victor Chng replied 2 years ago

welcome :)