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Construction company valuation in economic downturn

Wikstedt, Olli (2025-03-21)

 
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Wikstedt, Olli
O. Wikstedt
21.03.2025
© 2025, Olli Wikstedt. Tämä Kohde on tekijänoikeuden ja/tai lähioikeuksien suojaama. Voit käyttää Kohdetta käyttöösi sovellettavan tekijänoikeutta ja lähioikeuksia koskevan lainsäädännön sallimilla tavoilla. Muunlaista käyttöä varten tarvitset oikeudenhaltijoiden luvan.
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Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi:oulu-202503212154
Tiivistelmä
The accuracy of company valuation is an essential prerequisite for many successful business decisions. Therefore, it is necessary to understand how to accurately value companies in periods of financial distress. Recent changes in the economic landscape have posed challenges for companies operating in the Finnish construction market significantly impacting their financial performance and market values.

This thesis examines the valuation of YIT, a Finnish construction company, in the context of an economic downturn. The primary objective of this thesis is to determine the equity value of YIT by three different methods: discounted cash flow method, residual income method, and multiple-based valuation using four different valuation multiples. The second objective is to determine the most suitable valuation approach for construction companies during periods of economic distress and to identify the most impactful assumptions affecting valuation results in each valuation method. The foundation for the valuations is formed in the theoretical section presented after the introduction. The theoretical section goes through the valuation process, utilized valuation methods and the special features related to valuing cyclical companies. The thesis proceeds with the valuations, and the results and related discussion are presented in a separate section, followed by conclusions.

The results between valuation methods diverge substantially. Compared to the current market capitalization of 558 million euros, the DCF model produced the closest value of 502 million euros, implying it best reflects current expectations of the market. The residual income model yielded a lower valuation – 388 million euros – for YIT driven by high cost of equity compared to the company profitability. The P/B multiple produced the highest valuation – 870 million euros – due to YIT’s low P/B ratio compared to peers, while the EV/EBIT suggested an equity value of – 120 million euros heavily impacted by the temporary drop in profitability. The results indicate that DCF based methods are the most reliable way to value a construction company in economic downturns as the granularity of the model incorporates company-specific factors, future earnings potential, and the capital structure of the company, best reflecting the available market information. The multiple-based valuation is highly sensitive to peer group selection and short-term financial fluctuations. Further, the lack of comparable companies in the Finnish market decreases the method’s applicability in situations of financial distress.

The most critical assumption regarding the DCF model is the terminal EBIT margin, while the terminal growth rate emerged as the least influential parameter of all four, partly due to the small variation range in the sensitivity analysis. Regarding the residual income model, the more critical assumption turned out to be the terminal ROE whereas the cost of equity was of less importance. These findings emphasize the importance of accurately assessing the normalized profitability levels of the company. The generalizability of the results is partly limited due to the focus on a single case company.
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