An admittedly lofty price target for Tanzania Breweries comes in spite of a restrictive cost of capital estimated using a somewhat convoluted approach that borrows concepts from valuation wonk and professor Aswath Damodaran, professor Vivian Okere’s 2007 paper on WACC and frontier markets as well as more unsystematic, within firm or “project risk” mitigating factors derived from the Erb-Harvey-Viskanta Cost of Capital Model.  As Okere notes, however, this “is not science”–a point reiterated by the relative illiquidity and concentration of frontier equity markets that makes gauging country risk premiums among other inputs so subjective.  To this latter question a 2011 IESE market risk premium survey conducted via practitioners within 56 different countries added increased color, though the self-reinforcing nature of herds is of little comfort. In any event it’s best to err on the side of caution, we feel, given that an overly zealous WACC can at worst be thought of as an implicit margin of safety if nothing else and there are plenty of other avenues within the valuation model to express optimism.

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