Latest update for Price/Earnings Multiples for the Engineering Sector

One of our Valuers has just advised that the FTSE Engineering Industry Sector P/E Ratio at close of business on Friday 21 April 2017 was 33.43.  So applying a 50% discount for an privately owned (unquoted) business provides a ratio of 16.7.  But, before anyone reaches for the bubbly, an element of actual or perceived risk needs to be built into the final figure used.  Conversely, if the business is a low risk, highly profitable and stable business with excellent future prospects, then the consideration could be given to reducing the discount.

The Investors Chronicle recently carried an article indicating that with the dramatic rise in the P/E ratios over the last 12 months, care should be taken when these higher ratios are used in business valuations, a view which we would fully endorse.  A year to 18 months or so ago we were looking at similar FTSE P/E ratios in the low 20’s giving typically adjusted ratios for valuing engineering businesses at around 12.  The reason for the large rise has been more to do with the continuing fall in interest rates and also the fall in the £ than to do with improved business earnings.  With falling interest rates, investors are seeing and more importantly accepting lower yields as the norm.  Over the last 1 to 2 years, yields appear to have generally fallen by as much as 2% to 3%.  Industry with export business has benefited from the fall in the £ which is seen by the market as potentially boosting net earnings, hence the rise in the market price of the share.  As a consequence, the P/E Ratio rise for the Industrial Engineering Sector has been boosted by those companies with export markets.  It does rather cloud the position with those businesses that have predominantly UK related business, with little or no overseas sales. Here the P/E ratios would not have seen such an increase. Unfortunately, the FTSE figures are based on a basket of around 20 large quoted companies.

If you decide to rely on an EBITDA valuation basis for a business the same problem will arise on the multiple applied.  At the end of the day, price is normally determined by the risk factors, affected by items such as spread of turnover/customer base, niche products & services, repeat business with on-going contracts, reputation, strength of second tier management, not to mention financial return on the investment.

Of course, when selling a business, a broker should aim to create a competitive bidding environment amongst interested parties, focusing on all the USP’s  – which then becomes less about price and more about value.

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