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INDEPENDENT EXPERT’S REPORT Australasian Wealth Investments Limited 14 October 2014
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BDO Corporate Finance (East Coast) Pty Ltd ABN 70 050 038 170 AFS Licence No. 247420 is a member of a national association of independent entities which are all members of BDO (Australia) Ltd ABN 77 050 110 275, an Australian company limited by guarantee. BDO Corporate Finance (East Coast) Pty Ltd and BDO (Australia) Ltd are members of BDO International Ltd, a UK company limited by guarantee, and form part of the international BDO network of independent member firms. Liability limited by a scheme approved under Professional Standards Legislation (other than for the acts or omissions of financial services licensees) in each State or Territory other than Tasmania.
Tel: +61 2 9251 4100 Fax: +61 2 9240 9821 www.bdo.com.au
Level 11, 1 Margaret St SYDNEY NSW 2000 Australia
FINANCIAL SERVICES GUIDE
This Financial Services Guide is issued in relation to an independent expert’s report (Report or IER) prepared by BDO Corporate Finance (East Coast) Pty Ltd (ABN 70 050 038 170) (BDO) at the request of the directors of Australasian Wealth Investments Limited (AWK or the Company) to opine on whether the internalisation of the investment management contract (Management Contract) of the Company in exchange for payment of $900,000 cash (Proposed Transaction) is fair and reasonable to AWK’s non-associated shareholders (Non-associated Shareholders) under the Corporations Act 2001 (Cth) (Act). The Report is intended to accompany the notice of meeting and accompanying explanatory memorandum (Documents) that are to be provided by the directors (Directors) of AWK.
Financial Services Guide
BDO holds an Australian Financial Services Licence (License No: 247420) (Licence). As a result of our Report being provided to you BDO are required to issue to you, as a retail client, a Financial Services Guide (FSG). The FSG includes information on the use of general financial product advice and is issued so as to comply with our obligations as holder of an Australian Financial Services Licence.
Financial services BDO is licensed to provide
The Licence authorises BDO to provide reports for the purposes of acting for and on behalf of clients in relation to proposed or actual mergers, acquisitions, takeovers, corporate restructures or share issues, to carry on a financial services business to provide general financial product advice for securities and certain derivatives (limited to old law securities, options contracts and warrants) to retail and wholesale clients.
BDO provides financial product advice by virtue of an engagement to issue the Report in connection with the issue of securities of another person.
Our Report includes a description of the circumstances of our engagement and identifies the party who has engaged us. You have not engaged us directly but will be provided with a copy of our Report (as a retail client) because of your connection with the matters on which our Report has been issued.
Our Report is provided on our own behalf as an Australian Financial Services Licensee authorised to provide the financial product advice contained in the Report.
General financial product advice
Our Report provides general financial product advice only, and does not provide personal financial product advice, because it has been prepared without taking into account your particular personal circumstances or objectives (either financial or otherwise), your financial position or your needs.
Some individuals may place a different emphasis on various aspects of potential investments.
An individual’s decision in relation to the Proposed Transaction described in the Documents may be influenced by their particular circumstances and, therefore, individuals should seek independent advice.
Benefits that BDO may receive
BDO has charged fees for providing our Report. The basis on which our fees will be determined has been agreed with, and our fees will be paid by the person who engaged us to provide the Report. Our fees have been agreed on either a fixed fee or time cost basis.
BDO will receive a fee based on the time spent in the preparation of this Report in the amount of approximately $27,500 (plus GST and disbursements). BDO will not receive any fee contingent upon the outcome of the Proposed Transaction, and accordingly, does not have any pecuniary or other interests that could reasonably be regarded as being capable of affecting its ability to give an unbiased opinion in relation to the Proposed Transaction.
Remuneration or other benefits received by our employees
All our employees receive a salary. Employees may be eligible for bonuses based on overall productivity and contribution to the operation of BDO or related entities but any bonuses are not directly connected with any assignment and in particular are not directly related to the engagement for which our Report was provided.
Referrals
BDO does not pay commissions or provide any other benefits to any parties or person for referring customers to us in connection with the reports that BDO is licensed to provide.
Associations and relationships
BDO is the licensed corporate advisory arm of BDO East Coast Partnership, Chartered Accountants and Business Advisers. The directors of BDO may also be partners in BDO East Coast Partnership, Chartered Accountants and Business Advisers.
BDO East Coast Partnership, Chartered Accountants and Business Advisers are comprised of a number of related entities that provide audit, accounting, tax and financial advisory services to a wide range of clients.
BDO’s contact details are as set out on our letterhead.
BDO is unaware of any matter or circumstance that would preclude it from preparing the Report on the grounds of independence under regulatory or professional requirements. In particular, BDO has had regard to the provisions of applicable pronouncements and other guidance statements relating to professional independence issued by Australian professional accounting bodies and Australian Securities and Investments Commission (ASIC).
Complaints resolution
As the holder of an Australian Financial Services Licence, we are required to have a system for handling complaints from persons to whom we provide financial product advice. All complaints must be in writing, addressed to The Complaints Officer, BDO Corporate Finance (East Coast) Pty Ltd, Level 11, 1 Margaret Street, Sydney NSW 2000.
On receipt of a written complaint we will record the complaint, acknowledge receipt of the complaint and seek to resolve the complaint as soon as practical. If we cannot reach a satisfactory resolution, you can raise your concerns with the Financial Ombudsman Service Limited (FOS). FOS is an independent body established to provide advice and assistance in helping resolve complaints relating to the financial services industry. BDO is a member of FOS. FOS may be contacted directly via the details set out below.
Financial Ombudsman Service Limited
GPO Box 3
Melbourne VIC 3001
Toll free: 1300 78 08 08
Email: info@fos.org.au
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BDO Corporate Finance (East Coast) Pty Ltd ABN 70 050 038 170 AFS Licence No. 247420 is a member of a national association of independent entities which are all members of BDO (Australia) Ltd ABN 77 050 110 275, an Australian company limited by guarantee. BDO Corporate Finance (East Coast) Pty Ltd and BDO (Australia) Ltd are members of BDO International Ltd, a UK company limited by guarantee, and form part of the international BDO network of independent member firms. Liability limited by a scheme approved under Professional Standards Legislation (other than for the acts or omissions of financial services licensees) in each State or Territory other than Tasmania.
Tel: +61 2 9251 4100 Fax: +61 2 9240 9821 www.bdo.com.au
Level 11, 1 Margaret St SYDNEY NSW 2000 Australia
14 October 2013 The Directors Australasian Wealth Investments Limited Level 4 1 Alfred Street SYDNEY NSW 2000 Dear Directors
INDEPENDENT EXPERT'S REPORT
Introduction
The directors (Directors) of Australasian Wealth Investments Limited (AWK or the Company) have appointed BDO Corporate Finance (East Coast) Pty Ltd (BDO, we, us or our) to prepare an independent expert’s report (Report or IER) setting out our opinion as to whether the internalisation of the investment management contract (Management Contract) of the Company in exchange for payment of $900,000 cash (Proposed Transaction) is fair and reasonable to AWK’s non-associated shareholders (Non-associated Shareholders).
AWK is listed on the Australian Securities Exchange (ASX) and invests in public and private Australian companies. Andrew Barnes is a director of AWK and currently holds 9.9% of the Company’s equity. He is also the sub-manager of AWK, appointed on behalf of Aurora Funds Management Limited (Aurora).
On 15 August 2013, the Directors of AWK announced that agreement has been reached on terms to internalise the management of AWK from Aurora in exchange for the payment of $900,000 cash. If the Proposed Transaction is approved AWK will no longer be externally managed.
Full details of the Proposed Transaction are set out in the notice of meeting and explanatory statement (Documents) to be sent to the shareholders of AWK (Shareholders) in respect of a general meeting to be convened (Meeting).
Purpose and Approach
The Directors have engaged us to prepare this Report to opine on whether the Proposed Transaction is fair and reasonable to Non-associated Shareholders for the purposes of ASX Listing Rule 10.1 (LR 10.1). An IER is required in relation to the Proposed Transaction as:
- the cash consideration of $900,000 comprises more than 5% of the net assets of AWK, and
- Aurora and its associates are deemed a substantial holder in AWK.
All amounts in this Report are in Australian dollars ($) unless otherwise stated.
Summary of opinion
In our opinion the Proposed Transaction in accordance with the Documents is fair and reasonable to the Non-associated Shareholders.
Fairness assessment
We have formed our opinion in relation to fairness by comparing our assessed value of:
- The amount paid to Aurora, being $900,000 cash, to
- The fair market value of the Management Contract.
The Proposed Transaction will be fair if the value of the amount paid to Aurora (being the financial benefit provided to the related party) is equal to or less than the value of the Management Contract (being the consideration provided to the entity).
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The result of our fairness analysis is summarised below.
Table 1: Fairness analysis
$’000s unless stated otherwise Ref Low High Mid
Amount paid to Aurora 4.4 900 900 900
Fair market value of the Management Contract 5.2 1,131 1,933 1,532
Source: BDO analysis
As the value of the amount paid to Aurora is less than the fair market value of the Management Contract, we have concluded that the Proposed Transaction is fair to the Non-associated Shareholders.
Certain assumptions have been made regarding the value of the Management Contract, as disclosed in Section 4.2.1 and Section 5. The value of the Management Contract:
includes expected growth from the return on investment on existing funds
excludes future capital raisings or acquisitions that may lead to an increase in net tangible assets (NTA) and a
corresponding increase in management fee income
excludes any performance management fees as these are not capable of estimation.
Reasonableness assessment
In accordance with the Australian Securities and Investments Commission’s (ASIC) Regulatory Guide 111 ‘Content of expert reports’ (RG 111), an offer is reasonable if it is fair. It might also be reasonable if, despite being not fair, the expert believes that there are sufficient reasons for Non-associated Shareholders to accept the offer in the absence of a superior offer.
We have considered various factors that we believe Non-associated Shareholders should consider when deciding whether or not to approve the Proposed Transaction. The factors that we have considered are set out in Section 8 and are summarised below:
AWK will be able to proceed with its change in strategy from an Listed Investment Company (LIC) to an
operating business
The Management Contract was previously acquired by Aurora from Merricks in March 2013. We understand
that this was an arms length transaction
The value of the Management Contract does not include performance fees that are potentially payable under
the Management Contract, nor does it include the value of management fees payable on additional capital
raised (except for the Placement)
The management of AWK will be not be reliant on the terms of the Management Contract
Aurora will not remain the Manager of AWK, management fees will not be payable and Andrew Barnes will
provide management services if the Proposed Transaction is approved
AWK will incur transaction costs regardless of whether the Proposed Transaction is approved or not.
Shareholders’ individual circumstances
Our analysis has been undertaken, and our conclusions are expressed, at an aggregate level. Accordingly, we have not considered the effect of the Proposed Transaction on the particular circumstances of individual shareholders of AWK. Some individual Shareholders may place a different emphasis on various aspects of the Proposed Transaction from that adopted in this Report. Accordingly, individual Shareholders may reach different conclusions as to whether or not the Proposed Transaction is fair and reasonable in their individual circumstances. As the decision of an individual Shareholder in relation to the Proposed Transaction may be influenced by their particular circumstances (including their taxation position), Shareholders are advised to seek their own independent advice.
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Approval or rejection of the Proposed Transaction is a matter for individual Shareholders based on their expectations as to the expected value, future prospects, market conditions and their particular circumstances, including risk profile, liquidity preference, portfolio strategy and tax position. Shareholders should carefully consider the Documents. Shareholders who are in doubt as to the action they should take in relation to the Proposed Transaction should consult their professional adviser.
Summary
This summary should be read in conjunction with the attached Report that sets out in full the purpose, scope, basis of evaluation, limitations, information relied upon, analysis and our findings.
Glossary
Capitalised terms used in this Report have the meanings set out in the glossary.
Sources of information
Appendix 1 identifies the information referred to, and relied upon by us during the course of preparing this Report and forming our opinion.
Financial services guide
BDO holds an Australian Financial Services Licence (Licence) which authorises us to provide reports for the purposes of acting for and on behalf of clients in relation to proposed or actual mergers, acquisitions, takeovers, corporate restructures or share issues. A financial services guide is attached at the start of this Report.
Yours faithfully BDO CORPORATE FINANCE (EAST COAST) PTY LTD
David McCourt Director
Sebastian Stevens Director
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TABLE OF
SC1.1.1.1.1.1.1.1.
PR2.2.2.2.2.2.2.
TH3.3.
VA4.4.4.4.4.
VA5.5.5.5.5.5.5.
VA6.6.6.
FA7.7.
RE8.8.8.
QU9.9.9.9.
APPENDIX
APPENDIX
APPENDIX
APPENDIX
APPENDIX
orate Finance (E
F CONTENTS
COPE AND LIMIT1. Terms of 2. ASX Listin3. Scope ....4. Basis of A5. Limitatio6. APES 225 7. Assumptio
ROFILE OF AWK1. Overview2. Board of 3. Net Tang4. Historical5. Capital St6. Share Pric
HE MANAGEMEN1. Managem
ALUATION MET1. Overview2. Selected 3. Valuation4. Valuation
ALUATION OF T1. Overview2. Valuation3. Managem4. Marginal 5. Discount 6. Taxation
ALUATION CRO1. Comparab2. Previous
AIRNESS ASSESS1. Fairness .
EASONABLENES1. Factors ..2. Reasonab
UALIFICATIONS1. Qualificat2. Independ3. Disclaime
X 1 : SOURCES O
X 2 : GLOSSARY
X 3 : VALUATIO
X 4 : DISCOUNT
X 5 : COMPARAB
East Coast) Pty
TATIONS ....... the Proposed Tng Rule 10.1 .....................
Assessment .....ns ............... ..................ons ..............
K .................w .................
Directors and Kible Asset Backl Financial Infortructure and Owce Analysis ....
NT CONTRACT ment Contract Te
HODOLOGY ...w ................. Valuation Methn Cross-Check ..n of the Conside
THE MANAGEMEw .................n Summary .....
ment Fees .......Costs of Managi Rate ............ ..................
SS-CHECK .....ble InternalisatSale of Manage
SMENT ............................
SS ..................................
bleness Conclusi
S AND DECLARAtions ............
dence ............er ................
OF INFORMATIO
Y .................
N METHODS ...
RATE ..........
BLE COMPANY
Ltd
...................Transaction .......................................................................................................................
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ENT CONTRACT.........................................................ing AWK as an L......................................
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SCOPE A1.
1.1. Terms o
On 28 Mof AWKterms tessenceterms a
The Dirrequire
1.2. ASX Lis
Listing
LR 10.1without(the MasubstancomprisNon-ass
1.3. Scope
The proorder toconstituaccorda
The ass‘fair ma
For the
“Thbut
1.4. Basis of
In deterthe foll
RG 1
Reg
In parti
RG 111
Is it
e Finance (East
AND LIMITAT
of the Propos
March 2013, A. On 15 Auguso internalise t
e, AWK will noare:
The Manage
The paymenManagemen
Following th$50,000 p.aMeeting. Anof AWK, app
Details of ke
ectors have ements of LR 1
sting Rule 10.
Rule 10 applie
prohibits an t the approvalanagement Contial holders oses approximasociated Share
ocedures we ho form our opute an audit inance with Aud
sessment of warket value’ o
purposes of o
e price that w not anxious p
f Assessment
rmining whethowing ASIC gu
111
ulatory Guide
cular, RG 111
establishes tw
t ‘fair’; and
Coast) Pty Ltd
TIONS
sed Transacti
urora purchasst 2013, the dithe managemo longer be ex
ement Contrac
nt is subject tot Contract at
he acquisition., and issue h
ndrew Barnes hpointed on be
ey Managemen
engaged us to 0.1.
.1
es to transact
entity from acl of non assocntract) for $9
of AWK for theately 6.5% of teholders is req
have undertakinion. Our pron accordance
diting Standard
hether the Prof various secu
our opinion, th
would be negopurchaser and
her the Propouidelines:
e 112 ‘Indepen
establishes g
wo distinct cri
on
sed the Managirectors of AWent of AWK in
xternally mana
ct will be tran
o a majority o the Meeting
of the Managim with optioholds 9.9% of half of Aurora
nt Contract te
prepare a Rep
ions between
cquiring an asiated shareho
900,000 from Ae purposes of Lthe net assetsquired.
en have beenocedures in th with Australiads applicable
oposed Transaurities, assets
he term ‘fair
otiated in an od a knowledgea
sed Transactio
ndence of exp
guidelines in re
iteria for an e
gement ContraWK (Directorsn exchange foaged but will
nsferred to AW
of Non-associa
gement Contraons, to be agre AWK and is a a
erms are deta
port in relatio
an entity and
sset worth moolders. Under Aurora. AurorLR 10.1. The s of AWK as at
n limited to thhe preparationan Auditing St to review eng
action is fair a and interests
market value
open and unreable, willing,
on is fair and
perts’ (RG 112
respect of inde
expert analysi
act and becam) announced tr the paymentinstead emplo
WK in return fo
ated Sharehold
act, AWK will eed by the No director of th
ailed in Sectio
on to the Prop
d persons in a
ore than 5% ofthe Proposed a and its assopayment of $9t 30 June 2013
ose proceduren of the Reportandards, nor gagements.
and reasonabls.
’ is defined as
estricted mark but not anxio
reasonable to
2).
ependent exp
ng a transacti
me the investmthat agreement of $900,000 oy its own ma
or a payment
ders voting fo
retain Andrewn-associated S
he Company. H
n 3.1.
osed Transact
position to in
f its net assets Transaction, ciates (includ900,000 for th3. Therefore,
es that we bert do not inclu do they const
le necessarily
s:
ket between aous vendor, ac
o Shareholders
ert reports un
ion. The tests
ment managernt had been re cash to Auror
anagement tea
of $900,000 t
or the acquisit
w Barnes on aShareholders He is also the
tion to satisfy
nfluence the e
s from a subst AWK will acq
ding Andrew Bhe Managemen approval of th
elieve were reude verificatiotitute a review
y involves dete
a knowledgeacting at arm’s
rs, we have ha
nder the Act.
s are:
1
r (Manager) eached on ra. In am. The key
to Aurora
tion of the
fee of at the sub-manager
y the
entity.
tantial holder uire assets arnes) are nt Contract he
quired in on work nor w in
ermining the
able, willing, s length.”
ad regard to
r
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Is it ‘reasonable’?
That is, the terms fair and reasonable are regarded as separate elements and are not regarded as a compound phrase.
Fair
RG 111.57 indicates that an offer is ‘fair’ if the value of the financial benefit to be provided by the entity to the related party is equal to or less than the value of the consideration being provided to the entity. The comparison should be made assuming a knowledgeable and willing, but not anxious, buyer and a knowledgeable and willing, but not anxious, seller acting at arm’s length.
In our opinion, the Proposed Transaction will be fair to the Non-associated Shareholders if the payment of $900,000 cash to Aurora (being the financial benefit provided to the related party) is equal to or less than the value of the Management Contract (being the consideration provided to the entity).
Reasonable
RG 111.60 indicates that an offer is ‘reasonable’ if it is 'fair'. It might also be ‘reasonable’ if, despite being ‘not fair’, the expert believes that there are sufficient reasons for security holders to vote for the proposal.
1.5. Limitations
General
In preparing the Report, ASIC requires the independent expert, when deciding on the form of analysis for a report, to bear in mind that the main purpose of the report is to adequately deal with the concerns that could reasonably be anticipated by those persons affected by the Proposed Transaction. In preparing the Report we considered the necessary legal requirements and guidance of the Act, ASIC Regulatory Guides and commercial practice.
The Report also includes the following information and disclosures:
Particulars of any relationship, pecuniary or otherwise, whether existing presently or at any time within the
last two years, between BDO East Coast Partnership or BDO (or antecedent firms) and any of the parties to
the Proposed Transaction
The nature of any fee or pecuniary interest or benefit, whether direct or indirect, that we have received or
will or may receive for or in connection with the preparation of the Report
We have been appointed as independent expert for the purposes of providing a Report for the Documents
That we have relied on information provided by the Directors and management of AWK (Management) and
that we have not carried out any form of audit or independent verification of the information provided
That we have received representations from the Directors in relation to the completeness and accuracy of
the information provided to us for the purpose of our Report.
Current Market Conditions
Our opinion is based on economic, market and other conditions prevailing at the date of this Report. Such conditions can change significantly over relatively short periods of time. Changes in those conditions may result in any opinion becoming quickly out dated and in need of revision. We reserve the right to revise any opinion, in the light of material information existing at the Report date that subsequently becomes known to us.
Reliance on Information
This Report is based upon financial and other information provided by AWK, its Directors and Management. We have considered and relied upon this information. We believe the information provided to be reliable, complete and not misleading, and we have no reason to believe that any material facts have been withheld.
Our procedures in the preparation of the Report involved an analysis of financial information and accounting records. This did not include verification work nor constitute an audit or review in accordance with Australian Auditing and Assurance Standards and consequently does not enable us to become aware of all significant matters that might be identified in an audit or review. Accordingly we do not express an audit or review opinion.
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It was not our role to undertake, and we have not undertaken, any commercial, technical, financial, legal, taxation or other due diligence, other similar investigative activities or valuations in respect of the Proposed Transaction. We understand that the Directors have been advised by legal, accounting and other appropriate advisors in relation to such matters, as necessary. We do not provide any warranty or guarantee as to the existence, extent, adequacy, effectiveness and/or completeness of any due diligence or other similar investigative activities by the Directors and/or their advisors.
We do not provide any warranty or guarantee that our inquiries have identified or verified all of the matters which an audit, extensive examination or ‘due diligence’ investigation might disclose. An opinion as to whether a corporate transaction is ‘fair and reasonable’ is in the nature of an overall opinion, rather than an audit or detailed investigation and it is in this context that we advise that we are not in a position, nor is it practical for us, to undertake such an extensive verification exercise.
It is understood that except where noted, the accounting information provided to us was prepared in accordance with generally accepted accounting principles (including adoption of Australian Equivalents to International Financial Reporting Standards) and prepared in a manner consistent with the method of accounting used by AWK in previous accounting periods.
1.6. APES 225
This engagement has been conducted in accordance with professional standard APES 225 Valuation Services, as issued by the Australian Professional and Ethical Standards Board.
1.7. Assumptions
In forming our opinion, we have made certain assumptions as outlined below:
Assumptions addressed in the valuation section.
Matters such as compliance with laws and regulations and contracts in place are in good standing, and will
remain so. There are no material legal proceedings, other than as publicly disclosed.
Information in relation to the Proposed Transaction that is distributed to Shareholders, or any information
issued by a statutory body is complete, accurate and fairly presented in all material respects.
Any publicly available information relied on by us is accurate, up to date and not misleading.
If the Proposed Transaction is implemented, it will be implemented in accordance with the publicly stated
terms.
The legal mechanisms to implement the Proposed Transaction are valid and effective.
There are no undue changes to the terms and conditions of the Proposed Transaction or complex issues
unknown to us from the date of issue of this Report.
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PROFIL2.
2.1. Overvie
AWK is 21 AprilAustrali
AWK’s eProphetProphet
On 28 MAndrewAurora.
On 8 Ap$13.3 mLimitedoffers infinanciahad set
On 20 Mto AWKcompansectors.sharehoNTA bas
On 13 Aconsidefinanciainforma
On 15 Aapproxisophistimeetingfrom thvEGH.
On 20 Sfor everproceedcomplerenouncassociat
On 25 SextensivDirectofuture i
e Finance (East
E OF AWK
ew
a Sydney basel 2005. AWK isia, with an em
existing manats Funds Manats to Merricks
March 2013 thew Barnes acqui
Andrew Barn
pril 2013, AWKmillion in staged (van Eyk). Vnvestment maal advisers. Vatled the purch
May 2013 AWK’s operating sny to become . AWK will owolders. Managesis.
August AWK aneration of $7.0al services poration and prod
August 2013 AWimately $10 micated investog (EGM) held
he Placement
September 201ry three existds of the Placete the Proposceable. The Dted with the E
September 201ve financial ser of UBS Globinvestment in
Coast) Pty Ltd
ed company ins an LIC and h
mphasis on sm
agement agreeagement Austr Capital Pty L
e managemenired an equitynes and Alasta
K entered intoed payments.
Van Eyk is a suanagement anan Eyk also prhase of 50% of
K held an extrastrategy. The a wealth man
wn operating bement anticip
nnounced deta0 million. The rtal in Australducts.
WK announcedmillion via a plors (Placemenon 19 Septemwill be used t
13 AWK annouing Shares at ement and Ened Transactio
Directors have Entitlement O
13 AWK annouervices experial Asset Mana the wealth m
ncorporated ohistorically hasall to mid-cap
ement was imralia Pty Limitimited (Merri
nt rights to AWy stake of 19.9ir Davidson, a
o an agreemen vEGH’s sole applier of inve
nd asset consurovides fee-forf vEGH and in
aordinary genCompany is an
nagement holdbusinesses witpate that AWK
ails of the pur acquisition wlia, providing
d details of thacement of 2
nt). The Placeber 2013, and
to fund the ac
unced details $0.35 per Sha
ntitlement Offon. The Entitle discretion to
Offer are expe
unced the appience in Austr
agement in Aumanagement in
on 12 Novembs invested in tp Australian li
plemented onted (Fat Propicks) on 29 Ju
WK were trans9% of AWK anda director of A
nt to acquire1asset is a 49.6estment reseaulting servicesr-service finan
n July 2013 set
eral meeting nticipating a cdings companyh the aim of g
K will be value
rchase of Invewas settled on self-directed
he Proposed T8.6 million Sh
ement was appd the Shares wcquisition of In
of an entitlemare to raise apfer will be useement Offer is place the sho
ected to total
pointment of Bralia and the Ustralasia. His ndustry.
er 2004 and sthe public equisted compani
n 8 February 2hets), and waly 2010.
sferred from Md was appointAurora, joined
100% van Eyk G6% interest in rch to the Auss, model portfncial advice tottled a furthe
which providechange in stray, with investgenerating dived on a price t
estSMART from 30 Septembe investors with
Transaction. Ahares at $0.35proved by Shawere issued onnvestSMART a
ment offer to pproximately $ed to provide s not underwrortfall at a pri$0.7 million
Ben Heap as CUnited States, appointment
ubsequently liuity and fixedes.
2005 between as subsequent
Merricks to Aued sub-manag
d AWK as direc
Group Holdingthe equity of stralian and Nfolios and profo retail investr 35% tranche
ed an overviewategy from bements across vidends from tto earnings m
m Fairfax Medier 2013. Investh low-cost acc
Additionally, th per Share to reholders at a
n 25 Septembend the acquisi
eligible share$13.3 million additional woritten, and theice of not less
CEO and Manag, and was mos to AWK positi
isted on the Ad income mark
the Companytly transferred
urora. Furtherger of AWK onctors.
gs Pty Limited van Eyk Rese
New Zealand mfessional devetors. At 30 June of vEGH.
w of the propeing an investm all wealth mathese businessultiple rather
ia Limited fortSMART is an ocess to financ
he Company h domestic proan extraordinaer 2013. Capitition of furthe
eholders of tw (Entitlementorking capital e rights are nos than $0.35.
ging Director.st recently theions the Comp
4
ASX on kets of
y and Fat d from Fat
more, n behalf of
d (vEGH) for arch Pty
market. It elopment for ne 2013, AWK
osed changes ment holding anagement ses for r than on an
r cash online
cial
has raised fessional and ary general tal raised er shares in
wo new Shares Offer). The and on-Expenses
Mr Heap has e Managing pany for
K
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A summary of key corporate events is provided below.
Table 2: Key corporate events
Date Key event
12 November 2004 Australasian Wealth Investments Limited is incorporated.
21 April 2004 AWK lists on the ASX.
8 February 2005 AWK’s existing management agreement was implemented between the Fat Prophets Australia Fund Limited (the original name of AWK) as the company and Fat Prophets as the fund manager.
29 July 2010 The management rights to the Fund were authorised by the Directors of AWK to be transferred from Fat Prophets to Merricks.
2 September 2010 The company announced that the majority of previously held equity instruments had been liquidated, with 97% of the portfolio in cash following the change in investment manager.
1 October 2010 The Fund announced its new investment mandate following the change in investment manager to Merricks.
31 May 2011 AWK provided $6.1 million of mezzanine funding to Digital Harbour Holdings for the construction of the new headquarters of Melbourne Water Corporation. The facility was provided for 15 months.
27 August 2012 AWK received the balance of the Digital Harbour loan repayment totaling $7.57 million, achieving a 17% p.a. effective interest rate.
28 March 2013 The Management Contract was transferred from Merricks to Aurora.
28 March 2013 Andrew Barnes acquired 19.9% of AWK, and was appointed a sub-manager of AWK on behalf of Aurora.
8 April 2013 AWK acquired a 49.6% stake in van Eyk for $13.3 million.
20 May 2013 EGM held, with AWK’s change in operating strategy released to Shareholders.
14 June 2013 The company name changed from ‘Merricks Capital Special Opportunity Fund Limited’ to ‘Australasian Wealth Investments Limited’.
13 August 2013 AWK announced details of the purchase of InvestSMART from Fairfax Media Limited for cash consideration of $7.0 million. AWK also entered into a trading halt prior to announcement of the Proposed Transaction.
15 August 2013 AWK announced details of a capital raising of approximately $10 million via a placement of 28.6 million shares at $0.35 per Share, as well as a subsequent Entitlement Offer at $0.35 per Share to raise approximately $6.7 million. AWK also announced details of the Proposed Transaction
28 August 2013 Annual report for FY13 released
19 September 2013 Shareholders approved the Placement.
20 September 2013 AWK altered the Entitlement Offer to increase the number of Shares available for subscription to two new Shares for every three existing Shares held. The subscription price remaining at $0.35 per Share.
25 September 2013 AWK announces the appointment of Ben Heap as CEO and Managing Director of the Company.
30 September 2013 AWK settled its acquisition of InvestSMART from Fairfax Media Limited.
Source: ASX announcements
2.2. Board of Directors and Key Management Personnel
AWK’s Directors and key management personnel are as follows:
Andrew Brown – Chairman, Non-Executive Director
John Reynolds – Non-Executive Director
Andrew Barnes - Executive Director
Alastair Davidson – Executive Director
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2.3. Net Tangible Asset Backing
As an LIC, AWK is required to report NTA backing on a monthly basis. We have compared AWK’s NTA against its ASX pricing between August 2011 and August 2013, as depicted below.
Table 3: ASX pricing against NTA pricing – August 2011 to August 2013
Source: Management
AWK has consistently traded at a discount to NTA over the two years preceding the announcement of the Proposed Transaction. The discount to NTA has ranged between 51% and 8% and was 27% as at 14 August 2013. Following the announcement of the Proposed Transaction, the discount to NTA has decreased and was 2.5% as at 30 September 2013.
We also note that AWK has underperformed the S&P/ASX 200 Index over the two years preceding the announcement of the Proposed Transaction. The S&P/ASX 200 Index increased by 24% over that period, whereas AWK’s ASX Share price declined by 59%.
The fall in both ASX pricing and NTA per Share in 2012 can be primarily attributed to the decline in value of one of AWK’s largest investments, being Straits Resources Limited. The share price of Straits Resources Limited fell from $0.78 per share as at 30 April 2012 to $0.12 per share as at 31 August 2012.
-
0.20
0.40
0.60
0.80
1.00
1.20
Share Price $
AWK ASX Pricing S&P/ASX 200 Index AWK NTA per Share
A
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2.4. Historical Financial Information
2.4.1. Financial performance
AWK’s statements of comprehensive income for the years ended 30 June 2011 (FY2011), 30 June 2012 (FY2012) and 30 June 2013 (FY2013) are set out below:
Table 4: Statements of Comprehensive Income
$ FY11 Audited
FY12 Audited
FY13 Audited
Dividends received 200,890 - -
Trust distributions 12,800 - -
Interest received 740,799 1,272,546 332,841
Other income 250 - -
Total revenue 954,739 1,272,546 332,841
Administrative expense (63,934) (63,345) (56,210)
Management fees (400,226) (350,146) (201,310)
Audit fees (31,604) (72,486) (48,019)
Share registry fees (33,874) (20,567) (31,659)
Directors' fees (73,700) (73,700) (79,500)
Company secretarial fees (21,833) (22,000) (21,756)
ASX listing fees (24,236) (24,624) (23,999)
Legal fees (7,584) (4,253) (7,965)
Tax fees (14,300) (14,299) (10,421)
Other (59,933) (48,441) (45,973)
Total expenditure (731,224) (693,861) (526,812)
Change in fair value of financial assets at fair value through profit or loss
2,403,282 (11,364,791) (6,569,635)
Operating (loss)/profit before income tax expense 2,626,797 (10,786,106) (6,763,606)
Income tax expense (1,124,850) (313,203) (241,910)
Operating (loss)/profit after income tax expense 1,501,947 (11,099,309) (7,005,516)
Basic and diluted profit/(loss) in cents per share 5.25 (38.90) (24.57)
Source: AWK Annual Report 2012, AWK Annual Report 2013
We note the following:
AWK’s revenue in FY12 and FY13 was limited to interest income, derived primarily from the Digital Harbour
loan which was repaid on 27 August 2012. Funds from this loan were reinvested in AWK’s acquisition of 49.6%
of the equity in van Eyk on 8 April 2013.
AWK paid management fees of $0.40 million in FY11, $0.35 million in FY12 and $0.20 million in FY13. The
declining figure paid is a result of decreasing net assets as at each balance date over the period. Management
fees are charged at the rate of 1.25% p.a. of net assets payable monthly.
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2.4.2. Financial position
AWK’s statements of financial position as at 30 June 2011, 30 June 2012 and 30 June 2013 are set out below:
Table 5: Consolidated Statements of Financial Position
$ As at 30 Jun 2011 Audited
As at 30 Jun 2012 Audited
As at 30 Jun 2013 Audited
Current assets
Cash and cash equivalents 3,205,861 11,427 2,875,399
Trade and other receivables 142,585 11,223 3,126,124
Prepayments 9,677 9,680 10,670
Financial assets at fair value through profit or loss
21,781,218 13,437,798 7,833,442
Loans - 7,375,965 -
Total current assets 25,139,341 20,846,093 13,845,635
Non current assets
Deferred tax assets 708,094 241,910 -
Loans 6,230,139 - -
Total non current assets 6,938,233 241,910 -
Total assets 32,077,574 21,088,003 13,852,049
Current liabilities
Bank overdraft - 201,833 -
Trade and other payables 80,309 96,369 73,665
Total current liabilities 80,309 298,202 73,665
Non current liabilities
Deferred tax liabilities 108,155 - -
Total non current liabilities 108,155 - -
Total liabilities 188,464 298,202 73,665
Net assets 31,889,110 20,789,801 13,771,970
Equity
Share capital 28,629,952 28,629,952 28,617,637
Retained earnings 3,259,158 (7,840,151) (14,845,667)
Total equity 31,889,110 20,789,801 13,771,970
Source: AWK Annual Report 2012, AWK Annual Report 2013
We note the following:
The asset ‘loans’ relates to a secured loan over Digital Harbour, a construction project at 990 LaTrobe Street, Melbourne. The facility was provided for a period of 14 months, accrued interest at a rate of 17% p.a. and was repaid on 27 August 2012. On repayment, net cash and cash equivalents increased by $4.1 million.
The value of AWK’s financial assets declined by $11.4 million in FY12 and $6.6 million in FY13. The large decline in FY12 is predominantly attributed to AWK’s exposure to an investment in Straits Resources Limited, a mid-sized gold-copper company listed on the ASX. Between 30 April 2012 and 30 June 2012 the value of Straits Resources Limited fell by 85% due to the “cash consumptive Mt. Muro operation”, amongst other reasons.
As such, the net assets of the Company have fallen from $31.9 million as at 30 June 2011 to $13.8 million as at 30 June 2013. Subsequent to 30 June 2013, AWK raised approximately $9.5 million net proceeds through the Placement which was approved by Shareholders on 19 September 2013, increasing the net assets of AWK by 69% to approximately $23.3 million (excluding movements in other assets and liabilities).
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2.4.3. Portfolio and sector allocation as at 30 June 2013
A breakdown of AWK’s investment portfolio by value following the Placement, but prior to the Entitlement Offer and the Proposed Transaction, is provided below.
Table 6: Consolidated Statements of Financial Position
Asset class 30 June 2013 Receipt of trade
payables
Placement (Net
proceeds)
Purchase of van Eyk,
InvestSMART
Disposal of listed
securities
Pro forma 30 Sep 2013
Cash 2,875 3,126 9,510 (11,712) 464 4,263
Trade and other receivables 3,126 (3,126) -
Prepayments 11 11
Financial assets at fair value through profit/(loss)
Lantern Hotel Group 464 (464) -
Straits Resources Limited 710 710
Van Eyk Group Holdings (unlisted)
6,658 4,660 11,318
InvestSMART - 7,052 7,052
Company issued options 2 2
Total asset value 13,846 - 9,510 - - 23,356
Source: AWK Annual Report 2013, Management
We note that subsequent to 30 June 2013, AWK has fully divested its shareholding in Lantern Hotel Group in line with AWK’s stated change in strategy. Cash was increased by the collection of trade receivables and the receipt of funds form the Placement. AWK acquired a further 35% of vEGH in July 2013 for $4.7 million. This was funded by cash and receivables held at 30 June 2013. The Company is looking to divest its remaining interests in Straits Resources Limited in order to pursue further acquisitions in the wealth management industry.
2.5. Capital Structure and Ownership
As at 1 October 2013 AWK had 57,106,255 ordinary Shares on issue. The top 10 shareholders of AWK as at 1 October 2013 are summarised in the table below:
Table 7: Top 10 Shareholders as at 16 August 2013
Shareholder Number of Ordinary Shares held
Percentage of Total Ordinary Shares held
Andrew Barnes 5,672,744 9.9%
J P Morgan Nominees Australia Limited 3,709,580 6.5%
RBC Investor Services Australia Nominees Pty Limited <BKcust A/C> 3,636,426 6.4%
UBS Nominees Pty Ltd 3,085,978 5.4%
Bond Street Custodians Limited <van Eyk Blueprint Bal A/C> 2,998,189 5.3%
National Nominees Limited 2,543,089 4.5%
BNP Paribas Noms Pty Ltd <DRP> 885,482 1.6%
Sandhurst Trustees Ltd <TBF Small Cap Val Growth A/C> 857,142 1.5%
Demeta Pty Ltd 714,286 1.3%
Farnworth House Pty Ltd 714,286 1.3%
Top 10 Shareholders 24,817,202 43.5%
Other Shareholders 32,289,053 56.6%
Total 57,106,255 100.0%
Source: AWK Annual Report 2013
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AWK will provide an Entitlement Offer for Shareholders to subscribe for two new AWK Shares for every three AWK Shares held, to be put to the Shareholders at the Meeting. If the full Entitlement Offer is subscribed, funds of $13.3 million will be raised. The resulting pro forma capital structure of AWK (assuming full subscription) is shown below:
Table 8: Capital Structure following the Entitlement Offer (full subscription)
Shareholder Number of
Ordinary Shares held
Entitlement Offer Shares
subscribed for
Shareholding following
Entitlement Offer
Percentage of Total Ordinary Shares
held
Andrew Barnes 5,672,744 3,781,829 9,454,573 9.9%
Other existing Shareholders 22,833,511 15,222,340 38,055,851 40.0%
Placement Shareholders 28,600,000 19,066,667 47,666,667 50.1%
Total 57,106,255 38,070,836 95,177,091 100.0%
Source: AWK Placement & Entitlement Offer term sheet
Management advise that Placement Shareholders and Andrew Barnes both intend to take up their allocation of Entitlement Offer Shares. If the Non-associated Shareholders do not take up their allocation of the Entitlement Offer rights, the minimum amount of funds raised will be $8.0 million. The resulting pro forma capital structure of AWK (assuming Non-associated Shareholders do not subscribe) is shown below:
Table 9: Capital Structure following the Entitlement Offer (partial subscription)
Shareholder Number of
Ordinary Shares held
Entitlement Offer Shares
subscribed for
Shareholding following
Entitlement Offer
Percentage of Total Ordinary Shares
held
Andrew Barnes 5,672,744 3,781,829 9,454,573 11.8%
Other existing Shareholders 22,833,511 - 22,833,511 28.6%
Placement Shareholders 28,600,000 19,066,667 47,666,667 59.6%
Total 57,106,255 22,848,496 79,954,751 100.0%
Source: AWK Placement & Entitlement Offer term sheet
We note that the Directors have discretion to place the shortfall at a price of not less than $0.35 per Share.
2.6. Share Price Analysis
We have considered the trading activity and the ASX market price for AWK in the period leading up to 14 August 2013 (being one day prior to the date of preliminary announcement of the Proposed Transaction on 15 August 2013). The table below summarises trades over the year up to 14 August 2013:
Table 10: Volume Weighted Average Share Price of Daily Trades
High
($) Low ($)
VWAP ($)
Total Volume Traded (‘000s)
Annualised Turnover (%)
Average Bid/Ask Spread (%)
As at 14 August 2013 - - - - - -
1 month to 14 August 2013 0.36 0.33 0.35 99 3.8% 2.11%
3 months to 14 August 2013 0.45 0.28 0.36 519 7.1% 2.55%
6 months to 14 August 2013 0.53 0.28 0.44 1,758 12.5% 2.88%
12 months to 14 August 2013 0.53 0.28 0.43 3,141 11.0% 2.80%
Sources: Capital IQ, BDO analysis Legend: VWAP denotes volume weighted average share price.
We note the following with respect to the share trading of AWK over the trading period:
The last closing price in the above trading period was $0.35 per share on 31 July 2013.
The Shares traded between $0.28 per share and $0.53 per share in the year to 14 August 2013.
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VWAP prices are observed to be on a downward trend.
There is low trading volume over the period, as the total traded volume of shares over the 12 months to 14 August 2013 was approximately 11.0% of the total weighted average number of Shares on issue over the period.
Over the year analysed, there were 126 days of trading activity out of a total of 253 trading days.
The average bid-ask spread over each period ranged from 2.11% to 2.88% which typically indicates a moderate level of liquidity.
The ASX value of AWK per Share since the announcement of the Proposed Transaction has ranged between $0.39 and $0.54 per Share.
Table 11: AWK Share price movement over the year to 14 August 2013
Source: Management
We note that AWK has traded at a discount to NTA backing (excluding deferred revenue tax assets) over the entire trading period, at a discount that ranged between 8% and 44%. Following the announcement of the Proposed Transaction, the discount to NTA has decreased and was 2.5% as at 30 September 2013.
A brief description of key events over the trading period is provided below:
Table 12: Key corporate events
Event Date Key event
A 27 Aug 12 Portfolio update stating that the Digital Harbor loan has been repaid.
B 22 Nov 12 Annual general meeting held.
C 26 Feb 13 Release of FY13 half year accounts.
D 12 Jun 13 Change of Company name and ASX ticker
Source: ASX announcements
-
0.1
0.1
0.2
0.2
0.3
0.3
0.4
0.4
0.5
-
0.10
0.20
0.30
0.40
0.50
0.60
0.70
Volume (millions)Share Price $
Volume AWK ASX Pricing S&P/ASX 200 Index AWK NTA
A
C
D
B
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THE MA3.
3.1. Manage
The Manreasona
The ManAWK is where t
AWK is or otheto the p
The Manlease co
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ANAGEMENT
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nager holds thable administr
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ays the Manage
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T CONTRACT
act Terms
he duties of mrative support
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the ASX with
ASIC with res
the share reg
n of informat
equired to proor payment ofdoes not have
or the paymenbody and AWKall accounting
ated to bear t research cos
er the followi
agement fee day of each mo.
nce fee – calcthe previous mtion Index sinc
d to a further
e replaced as f
olvency event
ger is in defau
ger’s Australia
change in con
ger persistentment strategy
underperformriod, AWK may of AWK’s Sha
managing and t services requ
orate and stat
respect to co
spect to comp
gistrar of AWK
ion necessary
ovide or procuf fees. This lim professional e
nt for companK’s share registg and audit co
the cost of itsts, travel and
ng fees for se
– calculated aonth is payabl
culated as 15%month, payablce the commeperformance
follows:
ult or breach o
an Financial Se
ntrol of the M
tly fails to ensy
ms the S&P/ASy immediatelyareholders.
supervising aluired by AWK
tutory records
ompliance wit
pliance with th
K
y for the maint
ure any servicmitation extenexpertise, hol
ny expenses reter and the ap
osts of AWK.
s internal costd accommodat
ervices provide
as 0.1035746%le monthly in
% of any outpele monthly. Aencement dat fee.
of its obligatio
ervices Licenc
Manager and A
sure that inves
SX 300 Accumuy remove the
ll investments to conduct its
s of AWK
h ASX Listing
he Corporation
tenance of fin
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elating to feepproved value
ts such as wagtion.
ed:
% of the value arrears, whic
erformance agAny negative pte of the fund
ons under the
ce is suspende
AWK has not pr
stments made
ulation Index Manager and
s, as well as ps business. Th
Rules
ns Act
nancial accoun
he engagemervices to be p
or be contract
es payable to aer as well as o
ges and salarie
of the portfoch equates to a
gainst the S&Performance a must be reco
Management
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reviously gran
e on behalf of
by more than terminate the
providing or prhese services i
nts of AWK to
ent of a third pprovided by a tually restricte
any licensed mother outgoing
es, rent and e
olio calculatedan effective r
P/ASX 300 Accagainst the S&ouped before t
t Agreement
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nted its prior w
f AWK are con
15% over thee Agreement b
12
rocuring include:
be
party unless third party ed.
market, ASIC gs in relation
equipment
d on the last rate of
cumulation &P/ASX 300 the Manager
written
sistent with
preceding by special
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Valuati
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es of that s considered.
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4.4. Valuati
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5.2. Valuati
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Table 14
$’000s
AWK an
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Source: Note:
Based orange $
e Finance (East
Discounted
e valued the Med cash flows
Managemen
Base manag
No performa
NTA increas
Portfolio div
There are no
r analysis of th
on Cross-Che
r to provide aered the multius transactions
e also conside
on of the Con
amount to be ts fair market
TION OF THE
ew
ermine the fai
e forecast cash
e expected ma
on Summary
essment of th
4: Valuation su
s unless stated
nnual return on
ax discount rate
esent value of t
esent value of t
arket value of
BDO analysiThe above m
on the above, $1.1 million to
Coast) Pty Ltd
cash flow va
Management C for the Manag
t Contract ex
ement fee of
ance fees are
ses at 9.50% p
vidend yield p
o additional c
he key underly
eck
dditional evidple of the cons as a seconda
ered a previou
nsideration
paid by AWK value.
E MANAGEM
ir market valu
h inflows deriv
arginal costs a
he fair market
ummary of the M
otherwise
n FUM
e
the managemen
the marginal co
the Manageme
is may include rou
we have estimo $1.9 million.
luation
Contract usinggement Contra
piry date of 2
1.25% p.a.
generated
.a.
paid is 4.25% o
capital raisings
ying assumpti
dence of the fnsideration paary valuation m
us transaction
is $900,000 in
MENT CONTR
ue of the Mana
ved from man
an external fun
t value of the
Management C
nt fees
st of managing
ent Contract
unding differen
mated the fai
g the discountact with the f
20 April 2030
of NTA as at p
s.
ons is contain
fair market vaaid for managemethodology,
n in the Manag
n cash to Auro
RACT
agement Cont
naging the asse
nd manager w
Management
Contract
AWK
nces
r market valu
ted cash flow following key
eriod end
ned at Section
alue of the Maement rights t as detailed in
gement Contra
ora, we consid
tract we have
ets of AWK
would incur in
Contract is s
Ref
5.3
5.5
5.3
5.4
e of the Mana
methodologyassumptions:
n 5 of our Rep
nagement Conto the base mn Section 6.
act in March 2
der the face va
considered th
managing AW
et out below:
f Low
3 9.50%
5 13.0%
3 2,346
4 (1,216)
1,131
agement Contr
y. Managemen
port.
ntract, we hamanagement fe
2013.
alue of the co
he following:
WK.
High
11.0%
12.0%
3,224
(1,291)
1,933
ract to be wit
14
t have
ve ee from
onsideration
Mid
10.3%
12.5%
2,785
(1,253)
1,532
thin the
For
per
sona
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BDO Corporate Finance (East Coast) Pty Ltd 15
5.3. Management Fees
The key assumptions adopted by BDO in estimating the forecast base management fees which would be avoided assuming the continuation of the Management Contract include the following:
The starting funds under management (FUM) figure comprises:
- the total asset value of AWK as at 30 June 2013 of $13.8 million
- the net funds raised under the Placement of $9.5 million (as per Section 2.4.3).
- the funds raised under the Entitlement Offer. In the high case we assume that all Shareholders take up their rights with gross funds raised of approximately $6.7 million. In the low case we assume that of all the eligible Shareholders, only Andrew Barnes and the Placement Shareholders take up the rights issue, raising approximately $4.9 million in gross funds. In either case, net capital raised is determined by deducting expenses of $0.7 million from the gross proceeds.
FUM is assumed to grow at the long term market rate over the period. We have taken the market rate to range between 9.5% (provided by Management) and 11.0%, comprising the 10 year average of 10 year government bonds plus the long term market risk premium.
The portfolio dividend yield is 4.25% p.a. of the NTA each period, given by Management.
The base management fee is calculated as 1.25% p.a. of FUM as per the Management Contract. As per Section 4.2.1 we have not considered performance fees.
The discount rate and tax rate are discussed in Section 5.5 and Section 5.6 respectively.
The base management fees calculated for Year 1 and over the term of the contract are shown below.
Table 15: Valuation summary of the Management Contract
$’000s unless stated otherwise Low High Mid
Funds under management (Beginning of Year 1) 30,619 35,947 33,283
Base management fee payable (Year 1) 392 463 428
Present value base management fee payable (Term of contract) 2,346 3,224 2,785
Source: BDO analysis
We have calculated the net present value of the management fees over the life of the Management Contract to range between $2.3 million and $3.2 million.
5.4. Marginal Costs of Managing AWK as an LIC
We note that Andrew Barnes has agreed to provide management services to AWK for $50,000 p.a. plus options to be issued for the next two years. However, as Andrew Barnes holds a 9.9% equity stake in AWK, this transaction is between related parties.
Furthermore, we note that Ben Heap has been appointed the CEO and Managing Director of AWK with an expected commencement date of 12 December 2013. Mr Heap’s appointment will facilitate AWK’s change in strategy from an LIC to an operating business in the wealth management industry. The total remuneration arrangement for this role is $475,000 in addition to discretionary annual short term incentives. Management advise that this role requires greater involvement than if AWK were to operate as an LIC investing predominantly in ASX-listed companies. We have not considered this salary to be indicative of the marginal cost of managing AWK as an LIC.
As such, we have considered what the marginal cost to AWK would be for the services of an investment manager if AWK were to continue operating as an LIC at an arm’s length for the full duration of the Management Contract.
From discussions with Management, the marginal cost of managing AWK as an LIC on an arm’s length is estimated to be $225,000 in the first year. The cost of $225,000 includes 50% of the time for a senior employee and 100% of the time for a junior employee and associated on-costs, together with administrative costs of $25,000. These costs are expected to increase by 2.5% p.a. It is assumed that the acquirer of the Management Contract has sufficient infrastructure to manage the contract and that other marginal costs would be immaterial.
For
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sona
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BDO Corporate
The ma
Table 16
$’000s
Margina
Presen
Source:
We havManagediscusse
5.5. Discoun
For the compon
5.6. Taxatio
For the discoun
VALUAT6.
6.1. Compar
In orderthe conmanage
Table 1
Date
Sep 20
Oct 201
Jun 201
Apr 201
Feb 20
Source:
The marange frmore resignificacover e
6.2. Previou
We noteAurora
e Finance (East
arginal costs o
6: Marginal cos
s unless stated
al costs of man
t value margina
BDO analysi
e calculated tement Contraced in Section
nt Rate
purpose of ounents that com
on
purpose of ounted cash flow
TION CROSS
rable Interna
r to provide ansideration froement fees as
17: Valuation c
Entity
13 AWK
12 DUET G
12 Australia
11 Spark In
11 Qube Lo
BDO analysi
anagement rigrom 4.3x to 5epresentative antly less thanxpected fixed
us Sale of Man
e that the Maon 28 March 2
Coast) Pty Ltd
f managing AW
sts of managing
otherwise
aging AWK (Yea
al costs of mana
is
the net presenct to range be 5.5 and Secti
ur analysis wemprise this dis
ur analysis wews are on a pos
-CHECK
alisation of Ma
dditional evidom previous m a secondary v
cross check – C
Group
an Infrastructur
frastructure
ogistics Holdings
is
ht considerati.9x, with the of the fair man that of the cd costs associa
nagement Co
nagement Con2013.
WK calculated
g AWK
ar 1)
aging AWK (Term
nt value of thetween $(1.2) ion 5.6 respe
e have estimatscount rate ar
e have assumest-tax basis us
anagement Co
dence of the fmanagement rivaluation met
onsideration as
re Fund
s
ion to base m Proposed Traarket value ofcomparable trated with the
ntract
ntract was pre
d for Year 1 an
m of contract)
e marginal co million and $ctively.
ted a post-taxre discussed in
ed that AWK psing a post-tax
ontract Trans
fair market vaight internalisthodology.
s a proportion
anagement fensaction fallinf the managemransactions. T Management
eviously excha
nd over the te
osts of managi(1.3) million.
x discount ratn Appendix 4
pays tax at thex discount rat
sactions
alue of the Masation transac
of FUM
Consid($ m
ee multiples (eng below this ment fee righThis smaller ba Contract.
anged on an a
erm of the con
Low
(225)
(1,216)
ng AWK over The discount
e for AWK of .
e marginal taxte.
nagement Conctions since 20
derationmillions) Ma
0.9
95.6
55.0
49.0
40.0
excluding the range. We cots as AWK’s baase managem
arms-length ba
ntract are sho
High
(225)
(1,291)
the life of thet rate and tax
12.0% to 13.0
x rate of 30%.
ntract, we ha011 to their hi
Base anagement
Fees
M
0.4
19.2
12.8
8.3
7.3
e Proposed Traonsider the DCase managem
ment fee has le
asis between
16
own below.
Mid
(225)
(1,253)
e rate are
%. The
As such, the
ve compared istorical base
Multiple of BaseManagementFees (times
2.1
5.0
4.3
5.9
5.5
ansaction) CF valuation ment fee is ess scope to
Merricks and
e t )
1
0
3
9
5
For
per
sona
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BDO Corporate
FAIRNE7.
7.1. Fairnes
In orderAurora w
The res
Table 1
$’000s
Amoun
Fair ma
Source:
From thManageShareho
REASON8.
In accormay be
The fac
8.1. Factors
8.1.1.
The Promanage
Total fuOffer) aaddition(approx69% to $
We notepremiumone) traNTA ovethat on industryannouncas at 30
8.1.2.
We note28 Marc
e Finance (East
ESS ASSESSM
ss
r to determinewith our asses
sult of our fair
18: Fairness an
s unless stated
t paid to Aurora
arket value of t
BDO analysi
he above, the ement Contracolders.
NABLENESS
rdance with R reasonable if
ctors that we h
s
Movement f
oposed Transaement industry
unds raised froare required tnal working caximately $9.5 $23.3 million.
e that LIC’s inms/discounts ade at an averer the full yea implementaty, the businescement of the0 September 2
Previous ar
e that the Mach 2013.
Coast) Pty Ltd
ENT
e whether thessed value of
rness analysis
nalysis
otherwise
a
the Managemen
is
value of the act. Therefore,
RG 111, an offf there are suf
have consider
from an LIC to
action would fy.
om the Placemto fund the acapital and fun million) have .
n general trad to NTA each mrage discount ar to 14 Augustion of AWK’s ss will be conse Proposed Tr2013.
m’s length tr
nagement Con
e Proposed Tra the Managem
is summarised
t Contract
amount payab in our opinio
fer is considerfficient reason
red are set ou
o an operatin
facilitate AWK
ment of $10.0quisition of In
nd the Propose increased the
e at a discounmonth. As at J to NTA of 7.2st 2013. This dnew strategy sidered by invransaction AW
ansaction
ntract was pre
ransaction is "fment Contract.
d below.
Ref
4.4
5.2
ble to Aurora on, the Propos
red to be reasns for the sha
t below:
ng business
K’s transition f
0 million (and nvestSMART, ced Transactioe pro forma n
nt to NTA. TheJuly 2013, LIC2%. As discussdiscount has r to become an
vestors on an eWK’s discount t
eviously excha
fair", we have.
is less than thsed Transactio
onable, if it isareholders to a
from an LIC to
up to $13.3 mcomplete the n. The net funet assets of A
e ASX publisheCs that focus oed in Section
ranged between operating buearnings multito NTA has lar
anged on an a
e compared th
Low
900
1,131
he range of faon is fair for th
s fair. Howeveaccept the off
o an operating
million from thpartial acquisnds raised fro
AWK from the
es a databaseon Australian 2.6, AWK hasen 8% and 44%usiness in the iple rather thargely been red
arms-length ba
he amount pay
High
900
1,933
air values of thhe Non-associ
er, even if it ifer.
g business in t
he related Entsition of van Eom the Placem 30 June 2013
e of LIC shares (of whs traded at a %. Managemen wealth manaan by NTA. Siduced, decrea
asis for $900,0
17
yable to
Mid
900
1,532
he iated
is not fair it
the wealth
titlement Eyk, provide ment balance by
ich AWK is discount to nt expect gement nce the asing to 2.5%
000 on
d
0
2
For
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sona
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BDO Corporate Finance (East Coast) Pty Ltd 18
8.1.3. Additional management fee savings for AWK
Our fairness assessment calculations assume that AWK would not raise any additional capital over the remaining period in the Management Contract. Any funds that would have been raised over the remainder of the Management Contract would generate additional management fees which would not be payable if the Proposed Transaction is approved by Non-associated Shareholders.
Furthermore, we have not attributed any value to the Performance Fees saved that may have become payable under the Management Contract over the remaining period. Any outperformance greater than 15% above the S&P/ASX 300 Accumulation Index over a 3 year period would generate additional management fees that the internalisation of the Management Contract would negate.
8.1.4. Choice of Manager will not be reliant on the terms of the Management Contract
As detailed in Section 3.1, the Management Contract contains several clauses whereby AWK could instigate a change in investment manager for cause which includes breach of contract, non-performance of reporting or other duties or poor investment results. Management advise that it is difficult to instigate a change in investment manager without cause.
If the Proposed Transaction is implemented then this management agreement will not apply to future performance as the management team will be an internal function of AWK. Management advise that AWK will have greater autonomy over the make-up of the management team if the Proposed Transaction is approved.
8.1.5. Change in Manager from Aurora to internally provided services
By implementing an internalised management model, AWK will no longer have access to the support provided by Aurora’s investment management team. However, this loss of experience is mitigated as Andrew Barnes has been appointed the sub-manager of AWK on behalf of Aurora. He is expected to be retained by AWK in an investment advisory role following the Proposed Transaction for $50,000 p.a. plus options to be issued over the next two years.
We note that AWK are already implementing their strategy of moving away from being an LIC and becoming an operating business in the wealth management industry through their appointment of Ben Heap as CEO from December 2013, in addition to the acquisitions of van Eyk and InvestSMART.
8.1.6. Transaction costs
AWK will incur additional transaction costs (legal fees, independent expert and others) regardless of whether the Proposed Transaction is approved or not.
8.2. Reasonableness Conclusion
We have concluded in Section 7.1 that the Proposed Transaction is fair to the Non-associated Shareholders. In accordance with RG 111 an offer is considered to be reasonable, if it is fair.
If the Proposed Transaction is approved, it will enable AWK to pursue its stated change in strategy from being an LIC to an operating business in the wealth management industry. This change in operations has already begun with the acquisition of 49.6% of van Eyk in April 2013, a further 35% of van Eyk in July 2013 and the acquisition of InvestSMART in August 2013.
We conclude that the Proposed Transaction in accordance with the Documents is fair and reasonable to the Non-associated Shareholders. F
or p
erso
nal u
se o
nly
BDO Corporate
QUALIF9.
9.1. Qualific
BDO hasmergersreports
Mr DaviCoast P
Mr McCocompanadvisingconside
Mr SebaBDO Eas
Mr Stevvaluatiocross-boto have
9.2. Indepen
We are groundsto the pindepen
We werto the Pdate of capableWe con
We will$27,500Transacas being
We relethat thefurther PlacemeManage
9.3. Disclaim
This Rethat staSharehoother thresponsThe staconside
e Finance (East
FICATIONS A
cations
s extensive exs and acquisit pursuant to t
d McCourt, BBartnership. M
ourt has over ny valuations, g on mergers aered to have t
astian Stevensst Coast Partn
vens has over 2ons and transaorder services
e the appropri
ndence
not aware of s of independeprovisions of andence issued
re not involvedProposed Tran this Report, de of affecting sider ourselve
receive a fee0 (plus GST anction, and accg capable of a
eased a draft re Proposed Tr discussions went is not sub
ement Contrac
mer
port has beenated in this Reolders. Accordhan the Directsibility to any tements and o
eration and ass
Coast) Pty Ltd
ND DECLARA
xperience in ttions. BDO holthe Listing Rul
Bus, CA, is a dMr McCourt is t
14 years expe financial modand acquisitiohe appropriat
s, BBus, CPA anership. Mr Ste
20 years expeaction advisors including intate experienc
any matter oence either unapplicable prod by Australian
d in advising onsaction, othedo not hold an our ability to es to be indep
e based on thend disbursemecordingly, we affecting our a
report to AWKransaction waswith AWK regabject to the Shct following th
n prepared at eport. This Redingly, this Retors and Non- person other opinions contasessment of in
ATIONS
he provision olds an Australiles of the ASX
director of BDthe director re
erience in a ndelling, prepaons and advisite experience
and ACA, is a devens has bee
erience all aspry services. Heternational coce and profess
r circumstancnder regulatoonouncementsn professional
on, negotiatiner than the preny shareholdin provide an un
pendent in ter
e time spent ients). We will do not have aability to give
K for review os ‘not fair butrding the timihareholders aphe approval of
the request oport has been
eport and the associated Sh than the Direained in this Rnformation pr
of corporate fian Financial S
X and the Act.
DO Corporate Fesponsible for
umber of specaration and reng on indepen and professio
director of BDen responsible
pects of corpoe also has signoordination of sional qualific
ce that would ry or professios and other gu accounting b
ng, setting, oreparation of tng in, or othenbiased opiniorms of RG 112
in the prepara not receive aany pecuniary e an unbiased
of factual accut reasonable’.ing of the Placpproving the Pf the Placeme
of the Directorn prepared for information careholders wi
ectors, and NoReport are givrovided by the
finance adviceServices Licen
Finance. Mr Mr the review o
cialist corporaview of businendent expert ronal qualificat
DO Corporate Fe for the revie
rate advisory nificant exper assignments. cations to prov
preclude us fonal requirem
uidance statemodies and ASI
r otherwise acthis Report. Fur relationshipon in relation .
ation of this Rany fee contin or other inter opinion in rel
uracy on 2 Sep Subsequent tcement. FromProposed Tranent by Shareho
rs and was notr the sole bencontained hereithout our wrion-associated ven in good fae Directors, ex
e, particularlynce, issued by
McCourt is alsof this Report.
ate advisory aess feasibilityreports. Accortions to provid
Finance. Mr Stew of this IER.
including merience in provi Accordingly, vide the advic
from preparingments. In partiments relatingC.
cting in any caurther, we ha with AWK tha to the Propos
eport in the agent upon therests that couation to the P
ptember 2013to issuing this
m these discusnsaction. We holders on 19 S
t prepared forefit of the Direin may not btten consent.Shareholders ith and are baxecutives and
y in respect ofy ASIC, for givi
o a partner of
activities incluy studies, accordingly, Mr Mcde the advice
tevens is also .
rgers and acqiding internat Mr Stevens isce offered.
g this Report icular, we havg to profession
apacity for AWave not held aat could be resed Transactio
amount of appe outcome of uld reasonablyProposed Tran
. This report cs report we hassions we notehave now valuSeptember 201
r any purposerectors and N
be relied upon We accept n in relation toased upon our Management
19
f takeovers, ing expert
BDO East
uding ounting, cCourt is offered.
a partner of
uisitions, ional and considered
on the ve had regard nal
WK in relation nd, at the
egarded as on.
proximately the Proposed
y be regarded nsaction.
concluded ave had e that the ued the 13.
e other than on-associated by anyone o
o this Report. r of AWK.
d
For
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BDO Corporate Finance (East Coast) Pty Ltd 20
APPENDIX 1 : SOURCES OF INFORMATION
In preparing this Report, we have had access to and relied upon the following principal sources of information:
AWK Annual Report 2012, 2013
AWK ASX announcements
Discussions with AWK management
Information and research sourced from Capital IQ and Bloomberg
Other publically available information
For
per
sona
l use
onl
y
BDO Corporate Finance (East Coast) Pty Ltd 21
APPENDIX 2 : GLOSSARY
Act Corporations Act 2001 (Cth)
AWK or the Company Australasian Wealth Investments Limited
ASIC Australian Securities and Investments Commission
ASX Australian Securities Exchange
Aurora Aurora Funds Management Limited
BDO, we, us or our BDO Corporate Finance (East Coast) Pty Ltd (ABN 70 050 038 170)
CAPM Capital asset pricing model
Placement A capital raise of approximately $10 million via a placement of 28.6 million Shares at $0.35 per Share to domestic professional and sophisticated investors
DCF Discounted cash flow
Directors Directors of AWK
Documents Notice of Meeting and accompanying Explanatory Memorandum that are to be provided by the Directors in relation to the Proposed Transaction
Entitlement Offer 1 for 3 Share offer to Shareholders at $0.35 per Share to raise approximately $6.7 million
EGM Extraordinary general meeting
Fat Prophets Fat Prophets Funds Management Australia Pty Limited
FOS Financial Ombudsman Service Limited
FSG Financial Services Guide
FUM Funds under management
FY20XX Financial year ended/ing 30 June 20XX
LIC Listed investment company
Licence Australian Financial Services Licence (License No: 247420)
LR10.1 ASX Listing Rule 10.1
Management AWK management
Management Contract AWK’s investment management contract
Manager The investment manager of AWK as set out in the Management Contract
Meeting A general meeting of Shareholders to be convened
Non-associated Shareholders Shareholders other than those directly involved in the Proposed Transaction or associated with such persons
Merricks Merricks Capital Pty Limited
NTA Net tangible assets
Proposed Transaction The internalisation of AWK’s Management Contract in exchange for payment of $900,000 cash to Aurora
Report or IER This independent expert’s report
RG 111 ASIC Regulatory Guide 111 Content of expert reports
RG 112 ASIC Regulatory Guide 112 Independence of experts
Shareholders All shareholders of AWK
Van Eyk van Eyk Research Pty Limited
vEGH van Eyk Group Holdings Pty Limited
VWAP Volume weighted average trading prices
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BDO Corporate Finance (East Coast) Pty Ltd 22
APPENDIX 3 : VALUATION METHODS
In conducting our assessment of the fair market valuation, the following commonly used business valuation methods have been considered:
Discounted cash flow
The DCF method is based on the premise that the value of a business or any asset is represented by the present value of its future cash flows. It requires two essential elements:
The forecast of future cash flows of the business asset for a number of years (usually five to ten years)
The discount rate that reflects the riskiness of those cash flows used to discount the forecast cash flows
back to net present value
DCF is appropriate where:
The businesses’ earnings are capable of being forecast for a reasonable period (preferably five to ten
years) with reasonable accuracy
Earnings or cash flows are expected to fluctuate significantly from year to year
The business or asset has a finite life
The business is in a 'start up' or in early stages of development, or
The business has irregular capital expenditure requirements
The business involves infrastructure projects with major capital expenditure requirements
The business is currently making losses but is expected to recover
Capitalisation of earnings
This method involves the capitalisation of estimated normalised earnings by an appropriate multiple. Normalised earnings are the assessed sustainable earnings that can be derived by the business and excludes any one off profits or losses. An appropriate earnings multiple is assessed by reference to market evidence as to the earnings multiples of comparable companies or transactions.
This method is suitable for the valuation of businesses with indefinite trading lives and where earnings are relatively stable or a reliable trend in earnings is evident.
Net realisable value of assets
Asset based valuations involve the determination of the market value of a business based on the net realisable value of the assets used in the business.
The net realisable value of assets involves:
Separating the business or entity into components which can be readily sold, such as individual business
units or collections of individual items of plant and equipment and other assets
Ascribing a value to each based on the net amount that could be obtained for this asset if sold.
Share market trading history
The application of the price that a company’s shares trade on the ASX is an appropriate basis for valuation where:
The shares trade in an efficient market place where ‘willing’ buyers and sellers readily trade the
company’s shares
The market for the company’s shares is active and liquid.
For
per
sona
l use
onl
y
BDO Corpo
APPEND
When appdiscountewell as th
The apprby the prreturn is
The stand
Where:
Ke
Kd
tc
E
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Cost of e
The cost theoreticmodel (CThe CAPMreturn is
Where:
Ke
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Rm
Risk free
The risk fover the being disused and
We have regard toproxy for
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orate Finance (E
DIX 4 : DISCO
plying the dised to their prehe time value
ropriate risk aroportion of d known as the
dard formula
= cost
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= D+E
equity (Ke)
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free rate com investment pscounted. In p accepted pro
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East Coast) Pty
OUNT RATE
counted cash esent value by
e of money.
djusted discoebt and equit
e WACC.
used to calcu
of equity cap
of debt
porate tax rate
market value
market value
a company is teturn models amost widely ac the assumptiorisk free rate
uired return on
risk free rate
expected retu
a, the systema
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mpensates the eriod. The rispractice, for goxy for the ris
o the yield on yield on infla free rate. W
ur adopted risred in conjunc
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unt rate is anty that should
late a nomina
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e
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the rate of retavailable to caccepted and uon that a ratio of return plus
n equity
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urn on the ma
atic risk of a s
stematic risk
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, the cash flowount rate that
n average of th be represent
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turn requiredalculate the cused methodoonal investor s a premium f
rket portfolio
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the time valuehould match, companies, tThis rate is a
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s summarised her inputs and
ws expected tt reflects the
he cost of debted in the cap
ACC under a c
by equity invcost of equity.logy for deterwill value an for the riskine
o
to the market
ctors specific t
e of money, in as far as possthe 10-year Gonominal rate
Implementatiobonds over a
flation to deriv
in the table bd the overall d
to be generate relative risk o
bt and the cosital of the bus
lassical tax sy
vestors. There Of these, th
rmining the coasset such tha
ess of the asse
t portfolio
to the asset b
ncluding the esible, the termovernment Boand therefore
on Date. Spec10-year periove the nomina
below. Importdiscount rate.
ed by an assetof the investm
st of equity wesiness. This r
ystem is given
e are a numbehe capital asseost of equity cat the expecteet.
being valued
expected inflam of the cash ond rate is a we includes infl
cifically, we hod, which proval risk free ra
tantly, the ris
23
t are ment, as
eighted ate of
by:
er of et pricing capital. ed rate of
ation rate flows widely lation.
have had vides a te.
sk free
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BDO Corpo
Table 19:
Go
Au
Source:
Notes: The
CPI assump
equation,
Equity m
Australiaclassical market ri
Beta
The betathe mark
The beta
The expeexpectedreturns o
There aresuch statconsidera
The betaAccordingfirms it isleverage.
The betabelow:
The ungethe valuathe above
The beta
orate Finance (E
Selected Risk
overnment Bon
ustralia 10-year
Bloomberg, Cap
e average real
ption is based
being (1 + real
market risk pr
n studies have tax system. Hisk premium o
a coefficient isket portfolio.
a of a stock is
the nature of
operating lev
financial leve
ected beta cand beta. A betaof the index re
e significant mtistics. Even mable degree o
a is measured gly, a firm’s bs generally er. Accordingly
as can all be d
eared or ‘asseation, and it ce equation, w
a for AWK and
East Coast) Pty
Free Rate
d Gov
A
r
pital IQ, BDO an
yield is based o
on long term C
yield) x (1 + in
remium
e shown histoHaving consideof 6.0% to be a
s a measure o
determined b
f revenue and
erage; and
erage.
nnot be obsera can be estimepresenting th
measurement measurement f judgement.
on the cash flbeta also reflerroneous to may, the compan
egeared (or ‘d
t’ betas can tcan be regearewe have:
listed compa
Ltd
vernment BondAverage Real Y
2.26%
nalysis
on the daily clo
CPI projection f
nflation) - 1.
rical risk premered the varioappropriate.
f the expecte
by the charact
the extent to
rved, thereformated by regrhe market por
issues with be of historical b
lows returnedects its capitaake comparisony’s target de
delevered’) to
then be analysed (or ‘releve
nies that may
d Term Yield
osing yield over
for Australia. T
miums of 6% tous approache
ed volatility an
teristics of the
o which it is cy
re the historicressing the excrtfolio.
eta, which mebetas is subje
d to equity holal structure. Son of betas beebt and equity
o remove the
sed to determred’) to reflec
y be considere
CPI
2.5%
the term of th
The adjusted no
o 8% calculatees and their lim
nd therefore r
e firm and is g
yclical;
cal beta is usucess returns o
eans that onlyect to consider
lders and is thSince financiaetween firms wy mix is releva
impact of lev
mine an appropct the approp
ed broadly com
e Government b
ominal yield is
ed largely usinmitations, we
risk of a comp
generally base
ally used as aof the stock ag
y limited reliarable variation
herefore afterl leverage is lwithout regar
ant.
verage. The m
priate asset beriate capital s
mparable to A
AdjusteNominal Y
4.81%
bond to 30 Sep
calculated usi
ng data under consider an e
pany’s stock re
ed on three fa
a proxy for thegainst the exc
ance can be pln. It requires
r interest. likely to alter rd to each firm
method is set
eta for the sustructure. Re
AWK are set ou
24
ed Yield
%
tember 2013.
ng the Fisher
r a equity
elative to
actors:
e cess
laced on s a
between m’s
out
ubject of earranging
ut below:
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BDO Corporate Finance (East Coast) Pty Ltd 25
Table 20: Comparable company beta data as at 30 September 2013
Company Market
Cap ($million)
Enterprise Value
($million)
Debt to Equity (%)
Equity Beta Asset Beta
R-squared
Australasian Wealth Investments Limited 27 16 0% 0.55 0.55 0.03
Australian Foundation Investment Company Limited
5,985 6,001 0% 0.78 0.77 0.46
Aurora Global Income Trust 8 (0) 0% 0.39 0.39 0.01
Australian Leaders Fund Limited 296 (153) 0% 0.58 0.58 0.15
Aberdeen Leaders Limited 81 110 35% 0.65 0.51 0.16
Amcil Limited 192 173 0% 0.71 0.71 0.23
Argo Investments Limited 4,463 4,268 0% 0.81 0.81 0.49
Australian United Investment Co. Ltd. 823 892 11% 0.71 0.66 0.27
Bentley Capital Limited 11 (7) 0% 0.53 0.53 0.02
BKI Investment Company Limited 746 710 0% 0.82 0.82 0.44
Clime Capital Limited 90 5 0% 0.62 0.62 0.14
Cadence Capital Limited 165 99 0% 0.55 0.55 0.04
Carlton Investments Ltd. 630 600 0% 0.48 0.48 0.08
Continuation Investments Ltd 1 (1) 0% 0.67 0.67 0.02
Contango MicroCap Limited 155 6 0% 1.13 1.13 0.47
Century Australia Investments Ltd. 67 66 0% 0.84 0.84 0.33
Djerriwarrh Investments Limited 964 944 2% 0.84 0.82 0.36
Diversified United Investment Limited 562 616 11% 0.72 0.66 0.30
Emerging Leaders Investment Limited 45 0 0% 0.76 0.76 0.21
Gowing Bros Ltd. 131 174 8% 0.58 0.55 0.18
Ironbark Capital Limited 84 (1) 0% 0.57 0.57 0.16
Mirrabooka Investments Limited 350 315 0% 0.69 0.69 0.18
Milton Corporation Limited 2,401 2,272 0% 0.80 0.80 0.47
Mercantile Investment Company Ltd. 33 29 0% 0.73 0.73 0.03
Orion Equities Limited 4 2 0% 0.75 0.75 0.05
Ozgrowth Limited 67 39 0% 0.88 0.88 0.16
WAM Capital Limited 615 396 0% 0.68 0.68 0.25
WAM Research Limited 141 20 0% 0.80 0.80 0.32
Whitefield Ltd. 297 322 0% 0.71 0.71 0.24
Average (excluding outliers) 3% 0.72 0.72 n/a
Median (excluding outliers) 0% 0.73 0.71 n/a
Source: BDO analysis Note 1: Betas exhibiting an R-Squared less than 0.05 are considered not to have significant correlation for the results to be reliable, and have
been excluded from the data set (highlighted in grey). Note 2: The impact of different capital structures is removed in the calculation of unlevered betas (Asset Betas). The Equity and Asset betas
shown above are based on 5 years monthly data. The debt to value above is also based on a 5 year average.
We have selected AWK and other LICs as the base set of companies to calculate the discount rate applicable to the Management Contract for the following reasons:
The net assets/ equity of AWK and other LICs are affected by the performance of their investments and the wider movements of the market in general
The Management Contract derives base management fees as a proportion of the net assets of AWK
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As such, the risk of cashflows generated by the Management Contract is subject to similar risks experienced by the underlying LICs.
We note that whilst AWK has an equity beta of 0.55, the correlation to the results is not considered significant (as shown through the R-squared result). After considered the field of Australian-share focussed LICs, we have selected an asset beta range of 0.70 to 0.75 for AWK.
Debt and equity mix
As the Management Contract is an ungeared asset we have adopted a gearing ratio of 0%.
Relevered beta adopted
The relevered beta range equals the asset beta range of between 0.70 and 0.75 for AWK.
Specific company risk factor, Alpha
The specific company risk premium adjusts the cost of equity for company specific factors. The CAPM assumes, amongst other things, that rational investors seek to hold efficient portfolios, that is, portfolios that are fully diversified. One of the major conclusions of the CAPM is that investors do not have regard to specific company risks (often referred to as unsystematic risk).
There are several empirical studies that demonstrate that the investment market does not ignore specific company risks. In particular, studies show that on average, smaller companies have higher rates of return than larger companies (often referred to as the size premium). We note that the management income derived by the Management Contract is significantly less than the comparable transactions at Section 6.1.
Based on the above we have selected a specific risk premium of 3.0% to 4.0% for AWK.
Cost of Debt Capital
The rate of return required by providers of debt capital is the rate a prudent debt investor would require on interest bearing debt. This rate should reflect the long term rate of interest required by a debt provider to a business such as the business subject to valuation.
As the debt-to-equity ratio is 0%, we have not included a cost of debt capital.
Summary of WACC parameters
Substituting the above parameters into the WACC and CAPM formulae noted results in the following indicative range.
Table 21: WACC Calculation
Low High
Risk free rate 4.8% 4.8%
MRP 6.0% 6.0%
Beta (unlevered or asset) 0.70 0.75
Beta (relevered equity) 0.70 0.75
Alpha (size, additional risk) 3.0% 4.0%
Cost of equity (post tax) 12.0% 13.3%
Gearing (D/V) 0% 0%
Cost of debt (post tax) n/a n/a
WACC (post tax) 12.0% 13.3%
Management Contract discount rate (say) 12% 13%
Source: ASX announcements
As above, we have taken a discount range of 12.0% to 13.0% in our valuation of the Management Contract.
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APPENDIX 5 : COMPARABLE COMPANY DESCRIPTIONS
The following companies are ASX-listed LICs which predominantly focus on Australian listed equities. A description of their business activities is provided below.
Table 22: Comparable company beta data
Company Company description
Australian Foundation Investment Company Limited Australian Foundation Investment Company Limited is a self managed investment company providing its services to individuals. It invests in the public equity markets of Australia.
Aurora Global Income Trust Aurora Global Income Trust engages in the business of investment management in Australia. It invests in equities, index derivatives, and fixed interest securities.
Australian Leaders Fund Limited Australian Leaders Fund Limited is an equity hedge fund launched and managed by Braitling Investments Pty Ltd. It invests in the public equity markets of Australia. The fund invests in stocks of companies operating across diversified sectors
Aberdeen Leaders Limited Aberdeen Leaders Limited is a closed-ended equity mutual fund launched and managed by Aberdeen Asset Management Limited. The fund invests in the public equity markets of Australia.
Amcil Limited Amcil Limited is a publicly owned investment manager. The firm primarily manages separate client focused equity portfolios for its clients.
Argo Investments Limited Argo Investments Limited is a publicly owned investment manager. The firm manages separate client focused equity portfolios for its clients.
Australian United Investment Co. Ltd. Australian United Investment Co. Ltd. is a self management investment trust. The firm invests in the public equity markets of Australia.
Bentley Capital Limited Bentley International Limited, an investment company, invests primarily in equity securities listed on the world's major stock markets. It also invests in fixed interest securities and money market instruments denominated in various currencies.
BKI Investment Company Limited Brickworks Investment Company Limited is a self management investment trust. The firm invests in the public equity markets. It invests in a diversified portfolio of companies, shares, trusts, and interest bearing securities with a focus on Australian entities.
Clime Capital Limited Clime Capital Limited is a publically owned investment manager. The firm manages separate client focused equity portfolios. It also manages mutual funds for its clients.
Cadence Capital Limited Cadence Capital Limited is a close ended equity mutual fund launched and managed by Cadence Asset Management. The fund invests in the public equity markets of Australia.
Carlton Investments Ltd. Carlton Investments Limited engages in the acquisition, and long term holding of shares and units in entities listed on the Australian Securities Exchange.
Continuation Investments Ltd Continuation Investments Ltd. is a self managed open-ended mutual fund. The fund primarily invests in the public equity markets of Australia.
Contango MicroCap Limited Contango MicroCap Limited is an open-ended equity mutual fund launched and managed by Contango Asset Management Ltd. It invests in the public equity markets of Australia.
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Company Company description
Century Australia Investments Ltd. Century Australia Investments Limited is an equity mutual fund launched and managed by 452 Capital Pty Limited. It invests in the public equity markets of Australia. The fund spreads its investments across diversified sectors.
Djerriwarrh Investments Limited Djerriwarrh Investments Limited is a self managed investment trust. The firm invests in public equity markets of Australia. It employs a combination of in-house and external research to make its investments.
Diversified United Investment Limited Diversified United Investment Limited is a publicly owned investment manager. The firm manages separate client focused equity and fixed income portfolios. It invests in public equity and fixed income markets across the globe.
Emerging Leaders Investment Limited Emerging Leaders Investment Limited is a closed-ended equity fund launched and managed by Ausbil Dexia Ltd. The fund invests in the public equity markets of Australia. It makes its investments in stocks of companies operating across diversified sectors.
Gowing Bros Ltd. Gowing Bros. Limited operates as an investment and wealth management company in Australia. It operates through two divisions, Investment Management and Property Management.
Ironbark Capital Limited Ironbark Capital Limited is an open-ended balanced mutual fund launched and advised by Kaplan Funds Management Pty Ltd. The fund primarily invests in the public equity markets of Australia.
Mirrabooka Investments Limited Mirrabooka Investments Limited is a self managed investment company. It invests in the public equity markets of Australia and New Zealand. The firm primarily invests in value stocks of small-cap and mid-cap companies.
Milton Corporation Limited Milton Corporation Limited is a publicly owned investment manager. The firm manages separate client-focused portfolios. It invests in the public equity and fixed income markets of Australia.
Orion Equities Limited Orion Equities Limited is a publicly owned self managed investment trust. The firm provides its services to individuals and institutional investors. It invests in public equity markets of Australia.
Ozgrowth Limited Ozgrowth Limited is a publicly owned investment manager. The firm manages launches and manages equity mutual funds for its clients.
WAM Capital Limited WAM Capital Limited is a close-ended equity mutual fund launched and managed by Wilson Asset Management (International) Pty Limited. It invests in the public equity markets of Australia. The fund also invests in unlisted companies. It makes its investments across diversified sectors.
WAM Research Limited WAM Research Limited is a close ended equity mutual fund launched by Wilson Asset Management Pty Ltd. The fund is managed by MAM Pty Limited. It invests in the public equity markets of Australia. The fund makes its investments in companies primarily engaged in the industrial sector.
Whitefield Ltd. Whitefield Limited, an investment company, engages in making investments, and deriving revenue and investment income from listed securities and unit trusts in Australia. It provides shareholders with a diversified exposure to the industrial segment of the Australian share market.
Source: Capital IQ
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