Discount rate for calculating Enterprise Value

[Lorne]

Hopefully some financially knowledgeable person can help with this:

Offshore construction project currently 5 years until completion and revenue, all activities financed until major EPCs in 2 years time. EPCs will use commercial project finance at which time project will also switch to this.

What discount rate should I use to assess the Enterprise Value? I'd like to assess now and at the switch over in 2 years time, so should I use different discount rates for these assessments?

[walm]

I spend most of my life stuck in various different DCFs.
Sadly O&G is not my area but the main question would be how solid your revenue and cost projections are?
Because obviously for highly speculative projects (which also rely on the price of oil, say) you are going to have a huge WACC.
But if you are just building something for a NOC, or major, with limited bad debt risk and have a solid detailed opex plan then you could go for something more reasonable with a beta closer to 1.

Perhaps more importantly why do you want to make this calculation?
Is it for a serious co-investment or just to take a punt on a micro-cap stock?

[Lorne]

offshore, but not oil & gas, or renewables. Revenue has a guaranteed minimum level so there is no risk on that side.

[walm]

Sorry - I am really not sure I can help.

You more detail:
- What's the source of funding? Split debt vs. equity.
- What's the cost of debt?
- Tax rate.
- Likely long term growth.
- Which country you are in.
- What currency.
- More on the risk - sure revenue minimums but what about upside?

also for these things I would rarely rely on just a DCF but look at peer multiples if possible.
What EV do you see other similar projects going for?
What's their EV/EBITDA, EV/EBIT, FCF yield?

These things are so sensitive (DCFs in particular) that just using a blanket 10% WACC say, isn't really possible.

Just my opinion! Sorry.

[Lorne]

Blimey!

How about a stab at a reasonable discount rate assuming everything is bog standard and typical of any UK infrastructure project. Actually upper bound and lower bound most likely discount rates to use so I can envelope the EV.

Percentage ownership for work done and just looking to get a feel for how much it'll pay back.

Edited by Lorne on Thursday 6th October 17:06

[walm]

10-12% (post tax) maybe for a truly solid one.

But honestly it's how long is a piece of string.
A 50 year toll road concession will be down at something like 5% but a power generation asset could be up at 14%!

Sorry - I am really not helping.

[Lorne]

That's good, many thanks! Gives me a decent feel for which discount rates might be applicable.