Equity Valuation Report: Aerospace and Defence Industry Analysis

This report provides a comprehensive equity valuation analysis of four companies within the aerospace and defence industry: Rolls Royce Holdings, Cobham, Avon Rubber, and Cohort plc. It explores the financial reporting practices of these companies, referencing IFRS and IAS guidelines, and defines key terminologies such as net asset value, market value, discount cash flow, and dividend pay-out and growth. The report examines the current state of the aerospace and defence industry, noting the impact of Brexit and the increasing government spending on military wares. It discusses various methods of company valuation, including book value, settlement value, multiple of sales, value of profits (PER), and value of dividends, highlighting the strengths and weaknesses of each approach. The report concludes by emphasizing the importance of selecting the appropriate valuation method based on the investor's objectives, particularly in the context of fluctuating market conditions and the performance of mutual funds. The report uses historical and current figures to illustrate the financial performance of the companies.

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Equity Valuation
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Introduction
This paper seeks to provide comprehensive analysis of four companies that are aerospace and
defence industry. The paper also aims to show how how the companies report their financial
staments using IFRS nad IAS guidelines. The companies in focus are; Rolls Royce
holdings,Cobham, Avon Rubber and Cohort plc. The following are some of the terminologies
that they use when preparing the financial statements.
net asset value :, the net asset value is used by their shareholders (of the four companies) to
know at the time of publication the price at which the companies can be liquidated or acquired.
Usually the fund manager publishes it every day, after the closing of the markets or at a specific
time if it includes stocks of markets from different continents (A Basic Guide for Valuing a
Company, 2002). For Rools roysce holding the net asset value is 16,5 pounds/share , Cobham is
12.93punds /share.Market value-This is the price that the asset would fetch in the Bourse, it is
also known as market capitalization and is obtained by multiplying the number of ordinary
shares by the share price currently(Britton and Waterston, 2013). The investor will calculate the
return on his investment by the difference between the net asset value at the time of purchase and
the net asset value at the time of his redemption, having to tax for the capital gains obtained
(Cragg and Malkiel, 2009). The market value for each of the four companies under review is
different.Discount cash flow- The investment managers at the four companies use the following
valuation method that helps the investor to estimate the attractiveness of an investment

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opportunity. This method uses future cashflow projections and then discounts them toarrive at an
estimated present value, which is consequently used to evaluate the potential of an investment. If
the present value is greater than the current cost then the investment opportunity is a good
one(Damodaran, 2013).
Dividend pay- This is a distribution of the earnings that a company receives in a particular year
to its shareholders. Dividend pay is dicided by the board of directors and is paid as either interim
or final at the year end. The dividend for the four companies vary depending on the performance
and companies policies and also industry’s performace.Dividend growth- This is the rate of
growth in perentage that a stock’s dividend undergoes over a period of time.
That is to say, since the net asset value represents the evolution of the value of the investment
fund, it will be a relevant indicator to know the performance that this product provides during the
period between the moment of its purchase and the moment of its sale or liquidation, as well as
the withholding that will be applied on the same from the tax point of view (ELLIOTT, 2017).
Analysis of the aerospace and defense industry
Britains aerospace industry is the second largest in the world. Failure to secure a good brexit deal
has hurt the industry and it is expected that aerospace companies turnover could decrease in the
near future. This means that dividends paid out, earnings per share and price of the share may
fall in companies in this industry. On the other hand, the defence industry is on a positive
trajectory, with many governments increasing their military wares, companies in this industry
have improved dividend growth as well as share price for their shareholders.
Methods of valuing a company

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The valuation of a company, whether we are talking about a company own or others, is a delicate
and crucial exercise in the world of investment. Calculating the value of your business is not
easy, just as it is not easy to determine the economic value of any tangible asset or service
(Fernández López, 2002) .
If we let ourselves be led by our intuitive knowledge and by framing any economic activity
within a market economy, we could conclude that any material good or any service has the exact
value that a hypothetical buyer is willing to pay for it
What is the value of a company?
It is true that any quantification of an economic value always entails some subjective component.
Everything will depend on what the good situation we are valuing and our intentions with that
good.
In the case of a company, it is not the same valuing it with intentions in mind or others. We can
value a company of our own because we want to get rid of it and put it up for sale. But also to
seek financing using its value as collateral, or because we want to take to market shares of our
company.In an opposite situation, we may want to value an outside company to acquire it, to
obtain part of its shares, to invest in it through other type of formulas, etc (Kimmel, Kieso and
Weygandt, n.d.). In this sense, our intention as investors is fundamental in determining the
procedure that we must use to value a company. And this procedure, in turn will drastically
change the outcome of our assessment.
Accounting valuation vs market valuation, market value per C/S

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The market value on many occasions with the price and is that this is not only what is really
worth, but what some people are willing to pay for that company at any time of the timeline.
It is very interesting therefore in these moments, in which the company faces temporarily in a
moment of serious economic recession and crisis of values of many markets, considering an
extra differentiation between two concepts that are more different and at the same time diffuse of
what appear, market value and book value but with a clear objective point of view (Lin and
Wang, 2017).
The book value is an undeniable price, a so-called theoretical price that has both the company as
a whole and each of its parts in the so-called shares that correspond to its own owners,
shareholders. The book value or theoretical price is basically knowing the assets, liabilities and
net that the company counts as well as the synergies by know how and positioning of the
company in the market.
The book value may vary over time, but in a more measured and safe manner than the market
value. The market value is an very explosive value and depends directly on what happens along a
certain time line. If the company, for example, gives good news, although it is at that moment its
theoretical price has not risen, its market value because many people will start to buy shares of
said company and appreciate it will rise.
Under these conditions it is inevitable therefore that many oscillators indicate that we must buy
shares of companies, since we can buy them for a much cheaper price than what these shares
really are worth and also can contribute each year in the form of dividends. It is therefore very
significant the current situation of the markets in terms of market value and accounting value that

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certainly give meaning to the famous phrase that is always run between analysts(Koller,
Goedhart and Wessels, 2015).
Hitorical and Current figures
In financial accounting historical price of shares are important because they are used to show the
growth of the share in terms of both dividend growth and share price. On the other hand, current
figures are the ones that show the shares current price (Kurokawa, 2010).
Diffent methods of market valuation
These are methods developed by experts in business and finance, so that their implementation
involves a certain degree of complexity. But we can do a simplified approach to understand what
factors related to the company takes into account each one of them and which may be more
appropriate depending on what situations.
1. The book value
It is a valuation method based on the balance of accounts of the company and is one of the
simplest to calculate. It only takes into account the net worth of the company.
In this method, the assets of the company are taken, that is, the assets that it has at that moment
(contributions from different partners, movable and immovable property, retained earnings over
time of the company activity, etc. .) and then you subtract the liabilities (what the company owes
its debts) (Madden, 2003).As is assumed, this type of valuation method will be especially

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favorable in the case of companies with high assets (real estate, machinery, vehicles, furniture,
etc.) and not for other types of companies that base their business on other non-tangible factors
(Market capitalisation, 2009). The settlement value Through calculation of the settlement value,
what is done is an estimate of the value of the company at a specific time, if all its assets were
sold at market price. In this case, the cost prices of the assets are not taken into account, but their
value in a possible current sale, adjusting the prices of the goods to what the market dictates.
The multiple of sales
The multiple sales method is a valuation method that is often used with technology companies. It
is based on a guideline calculation that is obtained by multiplying the money contributed by the
sales of a company by a coefficient. This coefficient will be determined by a series of analyzes of
the activity of the company in a previous period, as well as to analyze other companies of similar
activity, so that the value obtained can be extrapolated at the time of valuation.
The value of profits (PER)
This method, also known as PER: Price-to-Earnings Ratio (Ratio) is often particularly useful for
valuing listed companies. It is a question of determining the relationship between what is paid for
each share of the company and the profit it brings annually.
The value of dividends
Through this method the company's value is calculated according to the dividends per share
expected to be obtained. To do this, we must calculate the dividend that each share of the
company contributes and divide it by the profitability demanded by the shareholder. For
example, let's say the case of a certain shareholder who has 50 shares of a company, at a value of

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10 pounds per share and dividends of 1 euro per share. Suppose that this shareholder demands a
return of 3% for their shares: The required 3% of profitability would mean minimum dividends
of 0.30 pounds per share. To calculate the present value of each share: formula-per-value Once
the value is calculated of each share based on the dividends it reports, we can calculate the total
value of the company multiplying it by the number of total shares (Dennis and Rendleman,
2003).
What method to use to value the four companies
As we have seen, there is no better or worse method that other. Everything will depend on the
purpose that we have in mind when valuing the company. What we should know is how the
different methods give us one type of information or another about the company, so that this
information will help us decide on our investments.
When we invest a part of our money in, say, a certain company, we acquire a part of it in the
form of shares, whose price fluctuates according to the evolution of the market. In this case, our
gains or losses will be given depending on the number of shares we have and the evolution of
their price. That is, if the value of them is less than when we buy them, we will have lost money,
and vice versa.
This obvious statement is not so obvious when what we are talking about is mutual funds. In this
case, since the results of the fund depend on the weighted evolution of the values that compose
it, the fact that it increases or decreases one or more of them does not necessarily imply that the
value of the fund will necessarily go up or down.

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To know, therefore, what is the evolution of the profitability of an investment fund, it is
necessary to have an indicator that values the assets of the same at a certain time of the time.
This indicator is known as the net asset value and gives us an idea of how the fund is behaving.
From a technical point of view, the net asset value is the price that is valid for each share of the
collective investment product. At first sight, the net asset value is very similar to the share price,
since the first represents the amount of a small part of the fund while the second represents the
value of a small part of the company.
Calculation of net asset value
The calculation of the net asset value of an investment fund is simple. It is calculated by
summing the value of all the assets that comprise it (including liquidity among them), subtracting
the expenses related to its management and dividing the result by the total number of shares.
Mathematically:
Net asset value = Value of the investment fund / Number of units
The value includes not only the amount of the portfolio but also the net returns obtained by the
same, that is, after deducting the Corporation Tax.

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With regard to the denominator, the number of shares of any investment fund is not fixed, but
depends on the manager's policy and the subscriptions or reimbursements made. Each person
will acquire a certain number of shares depending on the money he wants to invest and the net
asset value of the fund.
Company 1
Avon Rubber
Avon rubber is a company that deals with manufacture of rubber based products. The company is
a constituent of FTSE and its largest division. It has a division that produces equipment and
components for the UK armed forces which is known as Avon protection and Milk Rite. Some of
the products they produce include CBRN(chemical,biological,nuclear and radiological).
Net worth/ Net Asset Value 45 million pounds
Net Asset Value =(Assets-Liabilities)/total number of common shares
Assets and liabilities should be reported at fair market value
=(45,111,000-36,641,000)/770,000million shares=$11/share
Market value=$12.20/share as at 30/6/.2017
Source of data: http://www.marketwatch.com/investing/stock/avnbf/financials/balance-sheet
Company 2

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Cohorts Plc
Cohort is a parent company of four agile, innovative and responsive businesses that provide
defence and army products to countries like British, Portugal and other European Countries. The
company’s objective like any other company is to create wealth and deliver value to its
customers.
Net worth=15million pounds
(Assets-liabilities)/total number of common shares
=(53,145,000-40,120,000)/40.96million share=0.32p per share
Source of Data: https://www.google.com/search?
publisherid=51778&st=ds&combofeed=google&u_ip=154.76.19.200&q=Cohort+Plc+balance+s
heet
Net asset value
Cobham PLC
This is English /a British manufacturing company that is listed in the London Stock Exchange
and also a constituent member of the FTSE 250 Index. It is a defense company and the fifth
largest defense company in the UK.Its share price 136.5 pounds.
Net Asset Value (NAV) = (Assets- Liabilities)/ Total number of Common shares
Assets and liabilities should be reported at fair value (millions)
= (2,793- 2216.1)/44.6

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=12.93 pounds/ share
Source; http://www.cobhaminvestors.com/key-financials.aspx
Rolls Royce Holding
It is a British multinational company that designs, manufactures and distributes aviation power
systems and motor vehicles. It is also listed in the London stock exchange another markets in the
world.
Net Asset Value (NAV) = (Assets- Liabilities)/ Total number of Common shares
While its market capitalization stands at over 22 billion pounds, rolls Royce holdings includes
= (3,293- 1866.23)/ 86.42
= 16.50 pounds/ shares
Source; https://www.rolls-royce.com/investors/annual-report-2016.aspx
It means capturing what is happening, transmitting it, comparing it with what must happen,
deciding what is going to be done, converting that decision into information and transmitting it to
the executing agencies, ie financial reporting Information systems (O'Neill, 2014).
Starting from what Financial reporting can be defined as: The set of elements, rules, procedures,
that are interrelated with each other, with a logical and ordered sequence of steps to achieve a
result, they can issue particular criterion of Information Financial reportings, after having
reviewed a set of bibliography, and this is: entity, which after being processed, analyzed and
compared with what must happen, become information to be used internally or externally,