Methods of fundamental analysis in agricultural sector shares valuation

With the strengthening of globalization and integration processes the demand for the proper shares valuation for the decision making purpose increases. Russian stock market capitalization surge steadily after the sharp drop for 70% in 2008 and equals 38 443 billion rubles for the 9th of December 2016.

Evaluation of the shares investment attractiveness may be performed in two different ways: using fundamental or technical analysis, that differ in their purposes and forecasting period.

Fundamental analysis includes the following stages:

• •    interpretation of macroeconomic indicators

• •    industry analysis, involving profound interpretation of the industry situation and prospects of its development

• •    interpretation of internal factors connected with the results of the company activity¹

While evaluating the company fundamentals it is necessary to look through the basic factors using for the comparison of the various enterprises market performance, namely EBITDA, EV/EBITDA; price multiples - P/E, P/Cash Flow, P/BV, P/S; and those reflecting the profitability – ROA, ROE.

Using a market-based approach, the significant detail to remember is the denominators comparability for the guideline and target companies’ chosen multiples, which should be in the range of up to 30% of the target company values.

Consequently, the formula for calculating the share price of the company with three guideline companies using the P/CF, P/BV and P/S multiples looks like:

P1       P1     P1 | ВГ1 * BV + S1* S + CF1 * CF j.

P2       P2     P2          P3       P3     P3 h / BV2 * BV + S2* S + CF2* CF fl BV3 * BV + S3* S + CF3* CF j 3 *^

, where the 1,2,3 multiples are counted for the guideline companies, BV, S, CF – basic figures for the target enterprise,

N – quantity of market shares

Income-based approach is even more widespread way in estimating the fair value of the company share price, within which the discounting of forecasting dividends take place. The calculation formula is as follows:

п-1

Z D i   .     S t

(i+Ty + (1+7) П 1=1

• ,    where D _t - dividends supposed to be paid in the i-period ; S i - selling price in

t_n point of time, i = 1, 2, ^, n - quantity of discounting periods; r - discount rate

Before the internal factors interpretation, macroeconomic analysis is performed. In Russia in 2015 there was a decrease in GDP by more than 3.8%, real wages - by 8% and continuous high inflation. Product market inflationary effect was caused mainly by the exchange rate dynamics. After the devaluation of the ruble in the end of 2014 prices rose by 10.4%, however the subsequent national currency strengthening and inflation slowdown did not lead to price decrease.

At the same time the demand for the food industry products had a positive trend especially sanction goods internal equivalent. A high grain harvest and cattle farming development supplied agricultural production growth at 1.4% by the end of 2015.

Ruble devaluation, sanctions pressure, import restriction as well as government support for the agricultural complex (subsidies for large enterprises, reimbursement of the loan interest, income tax exemption for agricultural producers) have become a push for the productivity of domestic agro industry to replace import and grow export capacity.

■ 2013/14  ■ 2014/15  ■ 2015/16

For the purpose of crop and cattle farming development as well as for the production effectiveness and competitiveness in both domestic and foreign markets increasing it is expected to invest budgetary funds in the amount of 555 391 mln rubles (crop production) and 346 447 mln rubles2 (cattle farming) by the end of 2020.

According to the forecast of social-economic development presented by the Ministry of Economic Development of the Russian Federation, the production of agricultural products will continue growing at a stable rates of about 2% each year amounting by 2018 to 107.9% of the 2014 level (Table 1).

Table 1. The dynamic of the key agroindustry goods production (% to the previous year)3

	2014	2015	2016	2017	2018	2018/2014,%
			прогноз
Index of agroindustry production	103,7	101,4	101,9	102,3	102,2	107,9
Grain	114	95	103	102	102	101,6
Sunflower	85,6	103,3	103,8	96,9	101,8	105,8
Cattle, pork, chicken	104,2	104	102,6	102,5	102,4	112,1
Meet and byproducts	109,6	105,7	102,6	102,1	101,9	112,7

To sum up, fundamental analysis is used for the evaluation of external and internal factors (macroeconomic indicators, key industry characteristics and so on). Moreover, the results of the special enterprise activity may be evaluated using market or income-based approach.