for all it’s worth · for all it’s worth kpmg valuation practices survey 2017 july 2017...

For all it’s worthKPMG Valuation Practices Survey 2017

July 2017

KPMG.com.au

http://www.kpmg.com.au

© 2017 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

Contents

Introduction 4

About the survey 5

The survey results 6

General market environment 6

Impairment 8

Risk-free rate and market risk premium 10

Beta and gearing 12

Company specific risk premium 13

Country risk premium 13

Small stock premium (SSP) 14

Imputation credits 15

Income approach 16

Discounts/premiums 17

Valuation methodology 18


4 For all it’s worth | KPMG Valuation Practices Survey 2017

Introduction

In this report, KPMG presents the key findings of its 2017 Valuation Practices Survey. Slightly deviating from our previous two surveys (2013 and 2015), the 2017 survey takes a deeper look at the assumptions being applied by those who are currently issuing valuation opinions.

We believe the results provide insight into the thinking behind the valuers’ opinions. This can only help build consistency in valuation practices and enhance trust in the accuracy and independence of our valuations.

Many thanks to those who completed the survey. Your input is, as always, invaluable.

Please feel free to discuss the results of the survey with us.

Sean Collins Partner in Charge, Valuation Services Deal Advisory

Welcome to KPMG’s Valuation Practices Survey 2017


5For all it’s worth | KPMG Valuation Practices Survey 2017

About the surveyWhy this survey matters Who was surveyed

Valuation plays a significant role within many areas of finance.

Understanding what an asset is worth, and what drives that value, is essential when management and stakeholders need to make informed, and effective, business and investment decisions. This requires decision makers to trust the valuer’s opinion.

Valuation, however, is not objective. Value is always influenced by a variety of factors: the preconceptions and bias of the asset’s owner, the valuer’s understanding of the market, the methodology that is being used, and the complexity of the underlying business. These influences impact the assumptions being made by valuers.

Decision makers must be confident that the assumptions applied are appropriate, and that they are not overly optimistic or needlessly pessimistic. This is why it is essential to know, and understand, the basis of the assumptions made by a valuer.

We believe the information gathered by this survey highlights the key assumptions being made by those who are currently issuing valuation opinions – and provides a strong reference point in understanding the basis of those assumptions.

We captured the views of 45 valuation practitioners from a variety of core valuation organisations across Australia, including Australia’s Big 4 accounting firms, prominent boutique firms, second-tier accounting firms and smaller practitioners.

The survey was circulated to various practitioners, and responses were received, in late 2016.



The survey resultsGeneral market environment

In 2016, Australia recorded its 25th consecutive year of economic growth. Combined with a low unemployment rate, this would normally be an indicator of a strong economy, but concerns in some sectors tempers the belief that the Australian economy will sustain a steady rate of growth.

We asked respondents for their opinion as to current level of value for certain key asset classes in Australia:

Real Estate: was considered to be overvalued. Will the south-east Australian property boom continue or will the housing market finally cool during 2017 and into 2018?

Infrastructure: was seen as ‘highly valued’ reflecting a significant level of new investment flowing into the sector during the past decade chasing a limited supply of quality assets.

Listed equities: the perception is that listed equities are slightly overvalued. The low interest rate environment continues to drive the equities market, despite a global environment that is struggling with broad demand and GDP growth.

Bonds: uncertainty in the bond market is being fuelled by the underlying interest rate environment.

Agriculture: a sector that is quickly rising in prominence with an increase in foreign investment driving transaction activity. This has resulted in prices being driven up, but respondents view the sector as fairly valued.

Resources: low commodity prices have impacted valuations in the resources sector, however, respondents view the sector as slightly undervalued.

Although the regulatory environment is a critical factor in assessing value, most respondents did not believe that the government intervention in the sale of AusGrid would negatively impact prices achieved in the infrastructure sector.

What is your opinion as to the current levels of value for the following asset classes?

0 = Undervalued 1 = About right 2 = Overvalued

Real Estate

1

0 2

Resources

1

0 2

Agricultural

1

0 2

Bonds

1

0 2

Listed Equities

1

0 2

Infrastructure

1

0 2



44%said increase

30%said steady

How do you expect the S&P/ASX200 index to move in 2017?

How do you think the yield on 10-year Australian government bonds will move in the next 12 months?

68% said increase20%

said steady

While 68% of respondents were expecting an increase in the yield, 50% of respondents thought the increase would be less than 1%.

In late 2016, the US Federal Reserve increased benchmark rates – causing a re-evaluation of growth and inflationary expectations.

Is this the start of a return to historic interest rate levels?

While 44% of respondents expect the ASX200 index to increase in 2017, the impact of Brexit and an emerging anti-globalisation sentiment in the global economy may temper equity market expectations.


For all it’s worth | KPMG Valuation Practices Survey 20178 For all it’s worth | KPMG Valuation Practices Survey 2017

Impairment

The past 12 to 24 months have seen numerous impairment challenges for companies. The broad consensus is that impairment has increased slightly in the past 12 months.

In the next 12 months there is, on balance, a slight increase in the expectation of impairment, with the key ‘at risk’ sectors noted on the following page.

What has been your experience of the incidences of impairment over the past 12 months?

Increased

Steady

Decreased

2017 2015

33%

25%

51%

63%

16%

12%

What are your expectations of impairment over the next 12 months?

Increase

Steady

Decrease

26%

19%

67%

81%

7%0%

2017 2015

The ‘Value in Use’ approach is considered when assessing impairment in 80% of situations and the ‘Fair Value Less Cost to Sell’ approach is considered in 23%.



The sector viewed to be most at risk in the next 12 months is construction, a direct result of an expected slowdown in housing activity and the end of large-scale investment into the oil and gas sector.

The Australian retail sector is currently experiencing a difficult trading environment, with online activity and other disruptive behaviour (such as Amazon Grocery’s unique delivery approach) seeing traditional bricks and mortar retail businesses struggle. Retail is also viewed as an at-risk sector from an impairment perspective.

Which of the following sectors do you expect to face impairment challenges over the next 12 months?

3%

Agriculture,Forestry, Fishing

15%

Mining

24%

Construction

18%

Manufacturing

2%

Transportation & Public Utilities

2%

Wholesale Trade

11%

Finance, Insurance, Real Estate

3%

Services Public Administration

3%

Retail Trade

20%



Risk-free rate and market risk premium

Valuers continue to take different approaches in setting the risk-free rate, as reflected in the relatively wide range of risk-free rates being adopted.

10-year gov. bond yield without adjustment

10-year gov. bond yield with adjustment

Cash rate

House view

0 20 40 60 80 100

Which of the following do you mostly use as a benchmark for the risk-free rate in Australia?

Other

2017

2015

The range of risk-free rates last applied by respondents is 1.8% to 4.5%, reflecting the split between valuers using a spot rate and those using an adjusted rate.

The 10-year government bond yield remains the most common source for the Australian risk-free rate.

What was the most recent risk-free rate adopted?

Frequency

4.0% to <4.5%

3.5% to <4.0%

3.0% to <3.5%

2.5% to <3.0%

2.0% to <2.5%

<2.0%

4.5%+

0 2 4 6 8 10



Longer-term yield expectation

Historical yield averages

Other

0 20 40 60 80 100

Where you adjust the government bond yield, what is your adjustment based on?

Yes No

0 20 40 60 80 100

If you have an asset with a finite life, do you adjust the risk-free rate to reflect the life of the asset?

Respondents are using differing approaches to modify the risk-free rate, giving rise to the wide range of risk-free rates.

What was the most recent market risk premium?

Frequency

0 5 10 15 20 25 30

7.5%+

7.0%

6.5%

6.0%

Australia’s current low-interest environment has resulted in some valuers adjusting the market risk premium upwards by either 0.5% or 1.0%. However, 6% remains the most commonly adopted market risk premium for Australia.

To get the right discount rate, most respondents agree the risk-free rate should be adjusted to a duration that matches the life of the asset.



Beta and gearing

Market volatility continues to drive valuers to a longer reference period when assessing beta, with the majority of respondents preferring a 5-year monthly or 4-year monthly period over the shorter 2-year weekly measurement.

When selecting the beta, generally what period and frequency do you deem to be most appropriate?

Harris Pringle

Hamada

0 20 40 60 80 100

If you unlever and relever the Beta, which formula do you use?

When selecting your gearing level, what do you base your gearing level on?

The average gearing level of the comparable companies

Other

Optimal gearing level

The actual gearing level of the subject company

0 20 40 60 80 100

What tax rate do you use in calculating notional tax cash flows or in re-levering Beta?

Marginal corporate tax rate

Effective corporate tax rate of subject entity

Other

0 20 40 60 80 100

The Hamada formula is the preferred choice for valuers in unlevering and relevering the beta.

5-yearmonthly

2-yearweekly

4-yearmonthly

Other

54%

30%

14%

2%



Company specific risk premium

Ideally, all of an asset’s risk is reflected in the forecast cash flows. The reality is that cash flows are often not prepared on a risk-adjusted basis and therefore, as the respondents have indicated, valuers include an adjustment in the calculation of the cost of equity to account for the risk that’s not reflected in the cash flows.

Country risk premium

A premium is added to the assessed discount rate when the discount rate is built by using base inputs from a country different to that of the subject entity.

How often do you consider an alpha?

Always

Often

Sometimes

Rarely

Never42%

7%

7%4%

40%

When applying an Alpha, how do you determine the quantum of the Alpha?

Sensitivity analysis

Valuers judgement

Other

Reference to the implied multiples

Empirical research

0 20 40 60 80 100

If a country risk premium is applied, what is the source of the premium?

Premium based on bond yield spreads

Other

Premium based on credit rating

Premium based on Credit Default Swap spreads

0 20 40 60 80 100

A valuer’s judgement remains the most common source for determining the quantum of an ‘alpha’ adjustment.

The common factors leading to an ‘alpha’ adjustment include the assessment of forecasting risk, start-up risk, construction risk and/or refinancing risk.



Small stock premium (SSP)

Small companies tend to be more exposed to risk than large companies, which typically means that an adjustment needs to be made to reflect the inherent risk of smaller companies, as the respondents have indicated.

What premium is added to the discount rate to account for the size of the entity being valued?

Median

Equity value: <$50 million

Equity value: $51 – $100 million



Equity value: $501 – $1,000 million

Equity value: >$1,001 million

20%5%1%

10%3%0%

6%1.4%0%

4%0.9%0%

3%0%

0.5%0%

Mode

2015

2017

An SSP is explicitly included in the CAPM formula disclosed

Beta

MRP

Alpha

0 20 40 60 80 100

In applying an SSP, which factor is adjusted?

For entities valued at less than $50 million, the most commonly applied adjustment is 5%.



Imputation credits

If a company franks its dividends, shareholders receive a franked dividend, which means they get an imputation credit for the tax that a company has already paid. For valuation purposes, a decision must be made whether to include or ignore the franking benefit (credit).

Discounted cash flow (DCF) for a general business

Yes, through a cash flow adjustment

Yes, by adding a Gamma factor in the discount rate

No

0 20 40 60 80 100

Multiple approach for a general business

Yes, through an earnings adjustment

No

Yes, by an adjustment to the multiple

Yes, by valuing separately on an NPV basis and adding to capitalised value

0 20 40 60 80 100

Discounted cash flow for an infrastructure asset

Yes, through a cash flow adjustment

Yes, by adding a Gamma factor in the discount rate

No

0 20 40 60 80 100

Do you include a value for future imputation benefits in the following situations:

When used, most valuers use between 70% and 80% as their franking utilisation rate.



What do you consider to be an appropriate minimum cash flow period?

1-3 years 4-5 years 6-10 years 10+ years

0 20 40 60 80 100

When calculating the Terminal Value in a Discounted Cash Flow valuation what method(s) are considered?

0 20 40 60 80 100

Gordon growth model (perpetuity method)

Exit multiple model

Other

2017

2017

2015

Consumer Price Index/Inflation

Long-term bond yields

Gross Domestic Product growth

House view

Long-term asset specific growth periods

Other

0 20 40 60 80 100

If the Gordon Growth method is employed, how do you usually determine the perpetuity (residual) growth rate?

The Gordon Growth (or perpetual model) remains the preferred methodology for assessing terminal value.

The alternative adopted by 34% of respondents is an Exit Multiple model, which eliminates some of the issues associated with the influence of financing and capital expenditure cash flows in the later years of the forecast period.

Modern financial reporting guidelines have dictated a 5-year cash flow period, which has facilitated a general acceptance of shorter forecast periods over the traditional longer cash flow periods.

Income approach

An income approach, typically in the form of a DCF, continues to be a widely applied methodology. However, the application of the approach continues to evolve.




Discounts/premiums

After determining the value of an entity, the application of a discount to account for minority or marketability issues can have a material impact on the final outcome.

What premium do you apply to reflect the level of control offered by the size of the stake being valued?

30%15%10%0%

20% 33%0%

25% 33%30%0%

Size of stake: 51% – 74%


Size of stake: 100%

Median Mode

When a marketability discount is required, what sized discount do you apply?

15%0%

50%30%0%

45%20%0%

40%15%10%0%

35%10%0%

3.8% 30%0%


Size of stake: 100%



Size of stake: 50%


Median Mode

What discount do you apply in valuing a minority interest?

50%25% 30%0%

15% 30%0%

5% 30%0%



Size of stake 50:50 JV

Median Mode

Most respondents apply a higher premium for higher levels of control above 50%, reflecting the increased benefits obtained as ownership levels increase.

60% of respondents apply a discount to an interest in a 50:50 joint venture.

Where a 100% interest is valued, valuers typically do not include a marketability discount, highlighting the possibility of running an unhindered sales process to realise the value of the asset.



Valuation methodology

Over time, valuation methodologies can go in or out of favour. The Price/Earnings methodology, once a valuers’ staple, is rarely used today with pre-financing earnings the preferred option.

Industry rules of thumb and revenue multiples are typically reserved for cross-check purposes. Together with Regulated Asset Base type multiples, they provide a useful sense check but lack the robustness required to be a primary determinant of value.

A market-based approach continues to be the preferred methodology, regularly used by 90% of respondents.

Which of the following methodologies do you only use as a cross-check approach?

EV/Rev EV/EBIT EV/EBIT EV/RAB

EV/Resource EV/CFO

Industry rule of thumb P/BV P/BV

P/E(pre-tax) P/E(post-tax)

0 20 40 60 80 100

Others

Asset based methodology

Market approach (Earnings or asset base multiple)

Enterprise value/Earnings before interest & tax (EBIT)

Income approach (DCF)

Always Often Sometimes Rarely Never

0 20 40 60 80 100

How often do you use the following valuation approaches assuming a going concern?



Price/Earnings post-tax

Price/Earnings pre-tax

Enterprise value/Regulated Asset Base

Enterprise value/Earnings before interest & tax (EBIT)

Enterprise value/Earnings before interest & tax, depreciation & amortisation (EBITDA)

Always Often Sometimes Rarely Never

When using the market approach as a primary approach, how often are the following valuation multiples used?

Price/Book value of equity

Industry rule of thumb

Enterprise value/Operations cash flow

Enterprise value/Resource

Enterprise value/Revenue

0 20 40 60 80 100


KPMG.com.au

Contact us

The information contained in this document is of a general nature and is not intended to address the objectives, financial situation or needs of any particular individual or entity. It is provided for information purposes only and does not constitute, nor should it be regarded in any manner whatsoever, as advice and is not intended to influence a person in making a decision, including, if applicable, in relation to any financial product or an interest in a financial product. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

To the extent permissible by law, KPMG and its associated entities shall not be liable for any errors, omissions, defects or misrepresentations in the information or for any loss or damage suffered by persons who use or rely on such information (including for reasons of negligence, negligent misstatement or otherwise).

© 2017 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The KPMG name and logo are registered trademarks or trademarks of KPMG International.

Liability limited by a scheme approved under Professional Standards Legislation.

June 2017. NSW N15451ADV

Sydney

Sean CollinsPartner in ChargeValuation Services, Deal Advisory

+61 2 9335 [email protected]

Jo LuptonPartnerValuation Services, Deal Advisory


Ian JedlinPartnerValuation Services, Deal Advisory


Melbourne

Adele ThomasPartnerValuation Services, Deal Advisory


Brisbane

Bill AllenPartnerValuation Services, Deal Advisory


Perth

Jason HughesPartnerValuation Services, Deal Advisory


https://www.linkedin.com/company/kpmg-australia

https://www.facebook.com/kpmginaustraliagraduatesandstudents

https://twitter.com/kpmgaustralia

https://www.youtube.com/user/kpmgaustralia

http://www.instagram.com/kpmgaustralia

for all it’s worth · for all it’s worth kpmg valuation practices survey 2017 july 2017...

Documents