As we approached the end of 2020, the outlook for the coming year had been lifted by the vaccine development progress. However, a new strain of COVID-19 now threatens the build-up of end-quarter resilience. What conclusion on market impact in 2020 can be made?
In this blog edition we present the key highlights of the most actual market developments as of Q4 2020 published in our quarterly Valuation – Market Essentials Switzerland. The publication covers market multiples and cost of capital components per sector for the SPI companies, as well as relevant macro-economic data used in business valuations.
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Trading Multiples Switzerland
The early months of 2020 witnessed a sharp decline in trading EBITDA multiples as stock market crashed during February and March, triggered by the global spread of COVID-19. However, Q3 2020 experienced a significant upward turn in trading EBITDA multiples across most sectors led by improved share prices for most of the companies. A positive development in share prices might be attributable to investors’ optimistic expectations of improving market conditions and financial performance after recovery.
During Q4 2020, EBITDA multiples for five out of six sectors remained flat as the enterprise values did not experience significant movements while EBITDA numbers were still based on June 2020 financials for most of the companies.
Different from other sectors, EBITDA multiples for Media, technology & telecommunication sector increased to 11.8x during Q4 2020 as compared to 9.8x in Q3 2020 because of the increase in market capitalization of selected outperforming companies. The driving force for this sector was the anticipated increase in demand from the work-from-home and e-learning economy and significant increases in e-commerce activities around the globe.
Transactions Europe
In terms of number of deals, The European M&A market witnessed widespread recovery in the back-half of 2020, even though the total number of deals in 2020 remained lower than a year ago. The decline in the M&A activity in Q1 and Q2 2020 was mainly caused by the COVID-19 pandemic and ensuing lockdowns, with restrictions limiting international travel and using the traditional methods of conducting M&A. The total number of transactions (M&A transactions, which were announced or announced & closed in the same year and have published at least one of revenue, EBITDA or EBIT multiple) across the six sectors decreased to 751 during 2020. This compares to 859 deals in 2019, signalling a decrease of 13%
In terms of deal value, while the 751 deals in 2020 were worth USD 370 billion, 859 deals during 2019 had fetched USD 407 billion. Even though the total M&A value decreased by 9% Y-o-Y, mainly driven by the decrease in number of transactions, the average deal size (total deals value/number of deals) improved by 4% as compared to the previous year.
On a sector basis, the number of M&A deals decreased across most sectors with the exceptions of Media, technology & telecommunication and Healthcare sectors during 2020. The sectors Retail & consumer products and Chemicals, construction & materials experienced the largest decrease of about 27%. This extraordinary and more severe loss in M&A activities across the two sectors might be attributable to evaporated demand and disrupted supply chains. Strategic investors in the industrial sector focused on liquidity, cost containment and short-term portfolio protection and are now evaluating M&A as a means of securing supply chains, expanding product offerings and strengthening their competitive positions.
The top countries for 2020 in terms of target company location were UK (22.8% of transactions), followed by Sweden, Italy and Germany (8.5%-10.5% of transactions each).
For more in-depth insights on the industries and the challenges they faced in light of COVID-19, please refer to our detailed article on the EY Website.
Unlevered beta
Since the beginning of the year, the median unlevered betas across all sectors are following an upward trajectory. As a component of cost of capital, increased betas lead to increased cost of capital providing an indication of higher levels of systematic risk and therefore lowering valuations (all else equal).
Debt to total capital ratio
In Q4 2020, the median debt to total capital ratio continued the declining trend for all six sectors, driven by a very moderate positive development of market capitalizations, while the underlying debt level is still based on June 2020 financials for most of the companies.
Credit Spread
The credit spread during Q3 and Q4 2020 have continued their downward trajectory after their peak to the record levels in Q1 2020 as expectations of broader based economic recovery take hold and government programs have a stabilizing effect.
GDP growth
The COVID-19 crisis in Q1 and Q2 2020 restrained demand for goods and services locally and internationally since the lockdowns restricted activities throughout production, tourism & leisure, travel, sports and entertainment services etc. This resulted in negative projections for GDP growth in 2020 for most of the countries.
Following a slight rebound in Q3 2020 driven by the pick-up of industrial activity, tourism and consumption, the global economy continues the recovery from the pandemic-induced contraction in H1 2020. Although, the anticipated start of COVID-19 vaccination programs lifted the global long-term GDP growth prospects, the second wave of COVID-19 in Q4 in Europe still negatively impacts the short-term projections for GDP in 2021.
For Switzerland, the short-term projected GDP growth in 2021 was slightly adjusted downwards from 4.3% as of Q3 to 3.8% as of Q4 as recovery now depends on success of the vaccination program and how quickly new strains of the virus can be contained. The GDP growth projections as of Q4 2020 are higher as compared to the Q3, since 2020 with strongly negative rates is no more considered in the average.
Banking and Insurance Sector
Banking and Insurance sector witnessed upward valuation trends during Q4 2020. The median P/TB multiple for Insurance companies and Global and private banks increased from 1.0x and 0.9x as 0f Q3 2020 to 1.2x and 1.1x, respectively during Q4 2020. For the Retail and cantonal banks, the median P/TB multiple remained flat with 1.0x during the same period. The increase in banking sector multiples was mainly due to the increase in market capitalization.
Summary
In 2020 we have observed a high level of uncertainty and strong volatility in the stock market, driven by the COVID-19 pandemic. These fluctuating market conditions impacted key valuation parameters, such as multiples or cost of capital components. As a result, comparability and sustainability of the applied valuation parameters remains one of the main challenges for corporate valuations.
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