valuation practices survey 2013 v3

8/12/2019 Valuation Practices Survey 2013 v3

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2013 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMGInternational), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.Liability limited by a scheme approved under Professional Standards Legislation.


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Contents

Section 1: Foreword....................................................................................... 1

Insight into Australian valuation practices.......................................................... 1

Navigating a volatile environment........................................................................ 1

Section 2: Executive summary............................................................................ 2

Creating a meaningful benchmark for valuation practice......................................... 2

Key findings and interesting observations................................................................. 2

Section 3: Valuation methodologies........................................................................ 3

Depending on discounted cash flow.............................................................................. 4

Section 4: Market approach........................................................................................... 5

Elevated EBITDA................................................................................................................. 5

Section 5: Income approach: the cost of equity............................................................... 7

Confidently using the Capital Asset Pricing Model................................................................. 8

Section 6: Adjusting for country risk..................................................................................... 9

Few participants adjusting cash flows for country risk................................................................ 9

Section 7: Benchmarking the risk-free rate.............................................................................. 11

10-year risk-free rate dominates..................................................................................................... 12

Section 8: Understanding beta...................................................................................................... 13

One third of participants do not adjust for thin trading....................................................................... 14

Timeframes for adjusting beta.............................................................................................................. 15

Section 9: The equity market risk premium .................................................................................................16

Avoiding volatility pricing........................................................................................................................... 18

Section 10: Analysing the small stock premium.................................................................................... 19

Managing small stock risk..............................................................................................................................20

Section 11: Adjusting for unique risks......................................................................................................... 21

Section 12: Bringing transparency to discounts and premia........................................................................ 22

Bringing transparency to discounts and premia.................................................................................................... 22

Discount and premium data....................................................................................................................................25

Section 13: All about imputation credits............................................................................................................... 26

A varied approach to imputation credits...................................................................................................................... 28

Section 14: Commodities............................................................................................................................................ 29

Section 15: Accounting, ESG and miscellaneous factors............................................................................................ 30



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Valuation Practices Survey 2


Section 2:Executive summary

Creating a meaningful benchmark for valuation practice

KPMGs first Valuations Practices Survey provides a unique reference point for

corporate financiers, infrastructure funds and consultants performing valuations in the

Australian market. With 23 market leading participants across a range of industries,

the feedback we have received captures some significant views, reflecting the currentstatus quo around valuation methodology in the Australian market.

This means the survey results are a meaningful benchmark for current practice

and, hopefully, a platform we can build on to shape our application of the

methodologies into the future.

Key findings and interesting observations

Cash is still king. The discounted cash flow approach is the dominant

methodology used by Australian financial analysts and corporate financiers.

This may reflect the more flexible nature of this approach, which enables

multiple scenarios around growth expectations to be considered, providing a

far more insightful valuation result.

Lack of reaction to volatility.Sixty eight percent of participants indicated thatthey do not revise their equity market risk premium assumptions to reflect the

recent developments in capital markets.

Advisers take note of accounting standards.Twenty one percent of the

participants critically evaluate and 74 percent consider the impact of accounting

standards on future financial statements when advising on a deal.

Environmental, Social & Governance (ESG) factors are at best consideredonly qualitatively. Only 5 percent of the participants consider these factors

quantitatively and 32 percent ignore ESG factors all together.

Still no conclusive evidence on the value of imputation credits. Participantswere divided as to whether value should be ascribed to imputation credits when

valuing a non-infrastructure related business. In terms of infrastructure-related

investments, the approach is significantly different.

Focusing in on discounts and premia.Observing and understanding discountsand premia is one of the most challenging and subjective tasks we face. While it

was difficult to gather feedback on this issue, we have enough data to note that

there is an inverse relationship between:

the size of the small stock premium and the size of the subject company

the size of the minority discount and the size of the equity stake being valued

the size of the marketability discount and the size of the stake being valued.

06 06 06 05Investment banks Professional servicesfirms

Infrastructure funds Other participants23Total participants

Who completed the survey?

The survey results are a

meaningful benchmark

for current practice and,

hopefully, a platformwe can build on to shape

our application of the

methodologies into the

future.



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3 Valuation Practices Survey


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Section 3:Valuation

methodologies

Figure 1: How often do you use the following valuation approaches assuming a

going concern?

0% 20% 40% 60% 80% 100%

65%

76% 14%

35%

10%

50% 50%

Always Sometimes Never

Other

% of participants

Asset-based

methodology

48% 4%48%

Market approach

(e.g. Price

Earnings ratio)

Income approach(Discounted

Cash Flow)

The discounted cash flow

approach is clearly thedominant methodology

used by Australian

financial analysts and

corporate financiers, with

all participants always or

sometimes adopting this

approach.

1

12

1

21

1

23

1

DENO

TES

NUM

BERO

F

RESPONSE

S


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Depending on discounted cash flow

Of the three major valuation methodologies, the discounted cash flow (DCF)approach is clearly the dominant primary methodology used by Australian

financial analysts and corporate financiers, with all participants always or

sometimes adopting this approach. The market approach was also very popular

with 96 percent of participants always or sometimes using this methodology.

Asset-based approaches are only always used 10 percent of the time 14

percent of participants never use this approach.

The popularity of the DCF model may reflect its more flexible nature the

approach allows multiple scenarios regarding growth expectations to be

considered, providing a far more insightful valuation result.

We do note variation in uses of the approaches infrastructure funds exclusively

use the DCF approach given their investments are often regulated, longer-

dated assets are easier to analyse using this approach. Investment banks

and professional services firms are much more likely to only use the DCF

methodology occasionally.

Other methodologies used by participants

Of the six participants who sometimes use

methodologies outside the key approaches, the

following are also considered:

Industry rules of thumb

Resource multiples

Premium to market price

Leveraged buy-out analysis assuming target returns


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14

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22

Section 4:Market approach

Figure 2: When using the market approach, how often are the following valuation

multiples used?

0%20% 40% 60% 80% 100%


22% 21% 57%

9% 36% 55%

5% 27% 68%

23% 59% 18%

23% 73% 5

61% 39%

5% 50% 45%

Other

Price/Book value

of equity

Price/Pre-tax

earnings

Price/Earnings

EV/EBIT

EV/EBITDA

EV/Revenue

% of participants

Elevated EBITDA

When using the market approach, the Enterprise Value (EV)/ Earnings Before

Interest, Tax, Depreciation & Amortisation (EBITDA) valuation multiple is by far the

most popular used, with all participants always or sometimes using this multipleand 61 percent always doing so. Infrastructure funds are particularly wedded

The widespread use of

EBITDA multiples the

multiple that is closest to

cash indicates that mostparticipants believe cash is

the main driver of value.

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22

1

22

1

22

1

22

1

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Other methodologies used by participants

Six participants use other valuation approaches,

including:

Enterprise value/capacity (generation assets)

Enterprise value/JORC resources and reserves

Enterprise value/targeted and actual production

Enterprise value/regulated asset base

to this multiple, with 83 percent always using it, compared with 67 percent of

investment banks and 33 percent of professional services firms.

The widespread use of EBITDA the multiple that is closest to operating cash

flow indicates that most participants believe cash is the main driver of value.

Earnings Before Interest & Tax (EBIT) and Price to Earnings (PE) multiples are

also used regularly, but it is interesting to note who is using these multiples.

Thirty three percent of investment banks and infrastructure funds always use

PE, while no professional services firms were willing to say they always used it.

Likewise, investment banks were the most prolific users of EBIT, with 33 percent

always using this multiple compared with 17 percent of professional services and

infrastructure funds.


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12

1

22

1

21

1

22

Section 5:Income approach: the

cost of equity

Figure 3: In calculating an appropriate rate of return to future cash flows to equity,

how often are the following methods used?

0% 20% 40% 60% 80% 100%

Other

Premium to

the riskfree rate

Arbitrage

Pricing

Theory (APT)

Capital

Asset

Pricing Model

(CAPM)

8% 25% 67%

5% 64% 32%

100%

82% 18%


% of participants

The Capital Asset Pricing

Model is the mostpopular model being

used to derive a cost of

equity estimate, with

all participants always

or sometimes using this

model.


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Other models used in Australia

Four participants use other models or provided

additional feedback:

Internal company guidance

Estimates of required returns from equity investors

based on experience in transactions

Confidently using the Capital Asset Pricing Model

As anticipated, when calculating the appropriate rate of return to apply to futurecash flows to equity, the Capital Asset Pricing Model (CAPM) is the most popular

model being used to derive a cost of equity estimate, with all participants

always or sometimes using this model. However, investment banks are the least

devoted to CAPM, with 67 percent of participants in this category using the

model compared with 100 percent of professional services firms and 83 percent

of infrastructure funds.

The Arbitrage Pricing Theory has clearly not taken off in Australia; no participants

use this method.

However, 68 percent of participants always or sometimes use a premium to the

risk-free rate.


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Section 6:Adjusting forcountry risk

Figure 4: How do you adjust for country risk when assessing an asset in a

developing country?

0%

10%

20%

30%

40%

50%

60%

0%5%

24%

57%

14%

Adjusting the cash flows

Determining an appropriate risk free rate with reference to

default yield spreads on USD denominated sovereign Eurodollar bonds

Determining an appropriate risk free rate with reference to implied

premiums using country credit ratings

Add an appropriate premium to the cost of equity and cost of debt

Other

%o

fparticipants

Few participants adjusting cash flows for country risk

The survey makes it clear that cash flows are hardly ever adjusted for country risk

just 4.7 percent of participants make this kind of adjustment. Participants tend

to adjust the discount rate by adding a premium to the cost of equity 57 percent

make this adjustment and sometimes by calculating an appropriate risk-free rate

using country credit ratings. This result is not surprising, given it is far more difficult

to make an adjustment to the cash flows than to the discount rate.

Adjusting for country risk does not appear to be as significant an issue in Australia

as it is in other parts of the world, simply because most valuation practitioners

are not valuing businesses in emerging countries, which often do not have an

appropriate instrument to use as a starting point.

In Australia, cash flows

are hardly ever adjustedfor country risk just

4.7 percent of participants

make this kind of

adjustment.1

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Adding a premium to the cost of equity

Of the 57% of participants who adjust for country

risk by adding a premium to the cost of equity,

professional services firms do so most frequently.

%

50% 67%Investment banks

Professional services

firms

57%Total participants

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2013 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, logo and cutting through complexity are registered trademarks or trademarks of KPMGInternational. Liability limited by a scheme approved under Professional Standards Legislation.


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Section 7:Benchmarking the

risk-free rate

Eighty five percent of

participants use the yieldon the 10-year government

bond as a proxy for the

risk-free rate in Australia.

Figure 5: Which of the following do you use as a benchmark for the risk-free

rate in Australia?

0%

20%

40%

60%

80%

100%

10 year government bond 5 year government bond Cash rate Other

%o

fparticipants

Figure 6: How do you derive the risk-free rate when using the yield on a government

bond as a proxy?

Spot

Historic average

Forecast

A combination of the above

52%

14%

5%

29%

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20

1

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Spotting the risk-free rate

Over 52% of participants use spot to derive the risk-free rate, with investment banks leading the way.

%

33% 20%Professional services Infrastructure funds

83%Investment banks

10-year risk-free rate dominates

Eighty five percent of participants use the yield on the 10-year government bond asa proxy for the risk-free rate in Australia. However, theres more variation in how the

risk-free rate is derived. While just over half of participants use the spot government

bond yield as a proxy for the risk-free rate, well over one-quarter use a combination

of spot, historic averages and forecasts.

Notably, most investment banks only use spot much higher than their professional

services and infrastructure fund counterparts.

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It is interesting to note

that close to one-third

of participants do not

consider an adjustmentfor thin trading.

Section 8:Understanding beta

Figure 7: Do you adjust the beta for thin trading, or do you rely on the service

provider to make such an adjustment?

Do not consider such an adjustment

In house

Service provider

32%

32%

36%

Figure 8: Which of the following service providers are used as a source of information?

Aspect Huntley Australian Graduate School of Management

Bloomberg Capital IQ

Reuters/Factiva In-house calculation/research

Other

0%

5%

10%

15%

20%

25%

30%

35%

18%

4%

14%

20%

32%

12%

0.00%

%o

fparticip

ants

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22

1

22


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Figure 9: When calculating the beta, is the source data unlevered and then relevered

at the optimal gearing?

Yes

No

86%

14%

One third of participants do not adjust for thin trading

When adjusting for thin trading, participants either perform the adjustment

in-house or use a service provider. It is interesting to note that close to one-third

of participants do not consider such an adjustment. Investment banks are the

least likely to consider this adjustment, with 50 percent stating they do not do

so, compared with 33 percent of professional services firms and 17 percent of

infrastructure funds.

Fact favourites

Of the participants who use a service provider, there

are some clear favourites depending on sector.

Investment banks prefer Bloomberg

Professional services firms prefer Capital IQ

and Reuters

Infrastructure funds prefer Bloomberg and Reuters

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22


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A maximum period of

five years and a minimum

period of two years are

used by participants

when calculating beta.

Figure 10: When calculating the beta, what period (in years) do you deem to be

most appropriate?

0%

10%

20%

30%

40%

50%

0%0% 0% 0% 0% 0%

Period in years

%o

fparticipants

19%

14%

19%

48%

1 2 3 4 5 6 7 8 9

Figure 11: When calculating the beta how frequently do you make observations?

0%

10%

20%

30%

40%

50%

60%

5%

30%

55%

5% 5%

Daily Weekly Monthly Quarterly Other

%o

fparticipants

Timeframes for adjusting beta

The survey indicates that there is a maximum period of five years and a minimum

period of two years used by participants when calculating beta. There is some

variation in approach between the three major classes of participants:

all infrastructure funds use five years

professional services firms use five, four and two years investment banks use five, three and two years.

A majority of participants (55 percent) use monthly observations, but weekly

observations are also quite popular, with 30 percent of firms using weekly

observations. Investment banks are most likely to use weekly observations, with

60 percent of these firms doing so, compared with 33 percent of professional

services and 25 percent of infrastructure funds.

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21

1

20


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Survey participants

overwhelmingly are using

an EMRP for Australia of6 percent, with some bias

towards 7 percent.

Figure 12: What equity market risk premium do you use when making use of the

Capital Asset Pricing Model in percentage terms when valuing assets in

the following countries?

0%

10%

20%

30%

40%

50%

60%

70%

80%

Australia

United States

United Kingdom

45%

73%

21%

32%

23%2

6%

4% 5% 6% 7% 8%

%o

fparticipants

MRP

Survey participants overwhelmingly are using an equity (market) risk premium

(EMRP) for Australia of 6 percent, with some bias towards 7 percent. A particularlyinteresting aspect of these results is the concentration of the Australian premium

around 6 percent compared to a wider range for the US and UK markets, and

against evidence that the rate which prevailed through the first half of the

twentieth century is no longer relevant in the twenty-first.

Even prior to the recent severe global financial market dislocation, there has been

frequent disagreement, among industry and academia alike, over determination

of an appropriate value for equity risk premia. This disagreement, which occurs

both in Australia and overseas, arises because there is no one universally

accepted way of determining a premium. The most common approach is to look

at the historical average of equity returns over bonds (or bills) but, most critically,

outcomes will vary significantly according to the time period chosen.1 The average

realised premium for the US market, for example was 8.4 percent over 1949 to

1999, but 6.1 percent if the period is shortened to 1972 to 1999. Including thelast 13 years, the average has been even lower. In Australia, data for 1883 to 2011

show an average 6.0 percent realised premium. However, as shown in Figure 13

below, over time the observed average risk premium for the domestic market

has declined significantly and averaged just 4.3 percent over the two decades to

2011, notwithstanding the impact of the GFC.2

Section 9:The equity marketrisk premium

1

19

1

12

1

13

1 KPMG notes that use of a geometric mean, rather than an

arithmetic mean, can also lower premia by as much as 2.0

per cent2 Handley, J C, 2012, An Estimate of the Historical Equity

Risk Premium for the Period 1883 to 2011, University of

Melbourne, April


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Figure 13 Historic Equity Risk Premium, Australian All Ordinaries Accumulation Index

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

6.0%

5.5%

5.8%

5.2%

4.3%

1883 2011 1937 2011 1958 2011 1980 2011 1988 2011

EMRP

Assumptions around the distribution of dividend imputation credits alter these

results, as illustrated in Figure 14.

Figure 14: Equity Risk Premium 1988 - 2011, adjusted for imputation credit distribution

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

4.3%

4.9%

6%

5.2%

6.0%

0% 35% 50% 100%

E

MRP

% of dividend franked

It may be too early to decide whether most recent equity market performance

and the implied risk premia should be considered the new normal andincorporated into future valuations. Nevertheless, there is good reason to believe

that a more appropriate figure for Australia looking forward would be closer

to 5 percent. While 6 percent is currently the preferred risk premium adopted

by Australian regulators, this is currently under review. Should the regulators

decide to lower the risk premium, it is likely that we will see market practitioners

following suit and the Australian risk premium more closely aligned to premia

used in the US and UK.

It may be too early to

decide whether most

recent equity market

performance and the

implied risk premia

should be considered

the new normal and

incorporated into future

valuations.


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Over 68 percent of

participants have not

recently revised their

equity market risk premium

assumption to reflectvolatility.

Figure 15: Have you recently revised your equity market risk premium assumption to

reflect the volatility in capital markets?

Yes

No

68%

32%

Figure 16: What is your rationale for selecting the market risk premium?

0%

10%

20%

30%

40%

50%

60%

70%

80%

10%

19%

71%

0%

Historic equity

bond spread

Expected

premium

Combination Other

%of

participants

Avoiding volatility pricing

Selecting CAPM inputs, particularly the EMRP, during times of short term volatility in

capital markets can be notoriously difficult. Our survey results indicate that over 68

percent of participants have not recently revised their EMRP to reflect such volatility.

This indicates that these participants regard the EMRP as a long term measure.

Of the 31 percent of participants who have adjusted for volatility, most use a

combination of the historic equity bond spread and expected EMRP to justify their

assumptions.

1

22

1

21


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Figure 17: Do you adjust the CAPM rate of return with a premium that reflects the

extra risk of an investment in a small company?

Yes

No

52%

48%

Figure 18: In relation to the small stock premium, which factor is adjusted?

0

20

40

60

80

100

6%

94%

0%

Beta Equity market

risk premium

Overall expected

rate of return on

equity capital

%o

fparticipants

Section 10:Analysing the small

stock premium

Theres a very clear

inverse relationship

between the size of thecompany and the size of

the small stock premium.1

21

1

16


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Figure 19: What is the benchmark small stock premium applied, given the size of the

company or entity?

0%

1%

2%

3%

4%

5%

6%

0% 0%

5%Up to

Up to

Up to

2%

3%

0%

Estimated

MVE

($m)


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Section 11:Adjusting forunique risks

Adding alpha

Most participants tend to add a premium to reflect unique risks not modelled in

forecast cash flows.

%

24% 10%always add a

premiumnever add a premium

67%sometimes add a

premium

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21



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Section 12:Bringing transparencyto discounts and premia

Figure 20: What factor is adjusted for the discount/premia?

0%

10%

20%

30%

40%

50%

60%

Minority discount

Control premium

Marketability discount

55.00%

10% 9%

18%

45%

32%

41%

0% 0% 0%

25%

50%

18%20%

9%

24%

Discount rate Market

value of

Equity

Enterprise

value

Multiple Other

%o

fparticipants

Bringing transparency to discounts and premia

The Australian market is distinctly lacking in research on discounts and premia.

In any valuation these are often the most debated factors, and there are diverse

opinions about how and when discounts and premia are applied.

Overall, most adjustments appear to be made to the market value of equity. However,

the highest adjustment is made to the multiple in a control premium scenario.

1

20

1

22

1

17


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1

19

1

19

1

20

1

9

Figure 21: Do you apply a minority discount when valuing a minority stake using the

following approaches?

0% 20% 40% 60% 80% 100%

65%

53%

35%

47%

58% 42%

Yes No

Asset-based

methodology

Market

approach

Income

approach

% of participants

Figure 22: What benchmark minority discount is applied given the size of the stake

being valued?

0%

10%

20%

30%

40%

50%

60%

50%

20%

10%

30%

1% - 24% 25% - 49% 50% joint venture

Median

10%

Median

0%

Median

Size of stake

Discountrange


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1

19

1

19

1

20

1

8

Figure 23: If the entity is not listed, do you apply a marketability discount when using

the following approaches?

0% 20% 40% 60% 80% 100%

30%

68%

70%

32%

16% 84%

Yes No

Asset-based

methodology

Market approach

Income approach

% of participants

Figure 24: What benchmark discount is applied given the size of the stake being

valued (unlisted companies)?

0%

15%

30%

45%

40%

30%

20%

10%

5%

1% - 24% 25% 49% 50% 51% 74% 75% 100%

20%

Median

15%

Median

5%

Median

2.50%

Median

0%

Median

Size of stake

Discountrange


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Discount and premium data

With only seven participants for this section of the survey, it is difficult to make any definitive

statements, however even the limited number of responses demonstrate that the minority

discount is most routinely applied when practitioners use the income approach. It is equally

clear that the discount decreases as the size of the minority stake valued increases.

Likewise, with unlisted companies the marketability discount decreases as the size of

the stake increases. However, discounts are less prevalent on these kinds of valuations

across all approaches.

As you would expect, the reverse principle prevails with the control premium (see

section below): the premium increases as the size of the stake increases. Participants

are far clearer about applying a premium when a controlling stake is involved, with

85 percent of those using the market approach opting to do so.

Figure 25: Do you apply a control premium when valuing a controlling stake using any of

the following approaches?

0% 20% 40% 60% 80% 100%

33%

15%

67%

85%

30% 70%

Yes No

Asset based

methodology

Market

approach

Income

approach

% of participants

Figure 26: What benchmark control premium is applied given the size of the stake being valued?

0%

15%

30%

30%

40%

51% - 74% 75% - 100%

22.50%

Median

30%

Median

Premiumr

ange

Size of stake

The minority

discount is most

routinely applied when

practitioners use the

income approach.

1

20

1

20

1

21

1

12


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Figure 27: How do you treat imputation credits in business enterprise valuations

(other than infrastructure investments)?

0%

10%

20%

30%

40%

50%

47%

0%

41%

6% 6%

%o

fparticipants

Ignore

Adjust the equity market risk premium

Separately determine the market value of the

benefit and add to estimate of value

Adjust cost of equity for gamma

Other

Section 13:All about imputationcredits

Participants were divided

as to whether value should

be ascribed to imputationcredits when valuing a

non-infrastructure related

business In terms of

infrastructure-related

investments, the approach

is significantly different.

1

17


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Figure 28: How do you treat imputation credits when valuing an infrastructure

investment?

0%

10%

20%

30%

40%

50%

60%

70%

59%

24%

6%6%6%

%o

fparticipants

Ignore

Adjust the equity market risk premium

Include imputation credits attaching to dividends

in the cashflows at an assumed utilisation rate

Separately determine the market value of the benefit

and add to estimate of value

Other

Figure 29: Where imputation credits are included in the cash flows, what utilisation

factor do you assume?

0%

5%

10%

15%

20%

25%

30%

35%

7%

0%

7%7%

20%

33%

13%13%

40%50%60%70%80%90%100%

%o

fparticipants

Utilisation factor

Less

than

40%

1

17

1

15


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A varied approach to imputation credits

Participants were divided as to whether value should be ascribed to imputation

credits when valuing a non infrastructure-related business. Some 66 percent of

investment banks separately determine the market value of the benefit, while

33 percent ignore imputation credits. The rate of bypassing imputation credits is

much higher among professional services firms, with 83 percent ignoring them only 17 percent separately determine the market value of the benefit.

In terms of infrastructure-related investments, the approach is significantly different.

Most participants appear to ascribe value to imputation credits no investment

banks ignore the benefits associated with imputation credits. Eighty three percent

of the professional services firms include imputation credits attaching to dividends

at an assumed utilisation rate and 17 percent separately determine the value

thereof. Of responding infrastructure funds, 77 percent include the imputation

credits attaching to dividends at an assumed utilisation rate, 17 percent separately

determine the value and 17 percent ignore the imputation credits.

Utilising franking credits

There was a wide spread of responses on the

utilisation rate of franking credits, but ultimately a clear

concentration, with 53% of participants using 70-80%

of the benefit.



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Figure 30: How do you deal with the gold premium in gold mine valuations?

0%

10%

20%

30%

40%

50%

60%

43%

50%

7%

Apply a multiple

to the income

approach valuation,

e.g. 2 times

Discounted Cash

Flow value

A reduced

discount rate

Other

%of

participants

Figure 31: How do you determine the expected commodity prices for valuation purposes?

0%

5%

10%

15%

20%

25%

30%

35%

19%

24%

31%

19%

7%

Spot

price

Forward

prices

Commodity

pricing

expert

OtherConsensus

of forecast

prices by

brokers/

economists

%o

fparticipants

Dealing with commodities

Survey results are inconclusive on how participants deal with the gold premium.

While 43 percent apply a multiple to the income approach valuation, at least half

of participants use methods other than those covered in the survey, including the

Grant Samuel method and a discounted cash flow using reasonable gold forecasts

and a discount rate that reflects the risk of the company.

The participants are also quite divided in terms of estimating expected commodity

prices for a valuation. This is the case even within the participants sectors

investment banks, infrastructure funds and professional services firms all have

different ways of estimating commodity prices.

Section 14:Commodities

1

14

1

18


33/36



Accounting standards, treatment of hedge books andESG factors

Figure 32: To what extent do you consider the impact of accounting standards on

future financial statements when evaluating or advising on a deal?

0%

10%

20%

30%

40%

50%

60%

70%

80%

5%

21%

74%

Ignore Consider Critically evaluate

%o

fparticipants

Figure 33: How do you treat hedge books in business valuations?

0%

10%

20%

30%

40%

50%

41%

12%

47%

Mark to

market

Included in

cash flows

at contracted

commodity

prices

Other

%o

fparticipants

Section 15:Accounting, ESG andmiscellaneous factors

1

19

1

17


34/36



Figure 34: Do you consider Environmental, Social & Governance (ESG) factors when

performing valuations?

Yes Quantitatively

Yes Qualitatively

No

5%

63%

32%

Employee options, use of debt and the purpose of valuationengagements

Figure 35: How do you treat employee options in the valuation?

0%

10%

20%

30%

40%

50%

60%

53%

21%

26%

Estimate the value of the options and

adjust the market value of equity

As an expense in the income statement/

cash flow statement Other

%o

fparticipants

1

19

1

19


35/36



Figure 36: What definition of debt do you use when considering debt for purposes

of debt: equity ratio calculations of the weighted average cost of capital or

when calculating equity value?

Gross debt

Net debt (i.e. gross debt surplus cash balance)

11%

89%

Figure 37: What is the purpose of most of your valuation engagements?

0%

5%

10%

15%

20%

25%

30%

35%

17%

12%

7%

17%

29%

19%

A-IFRS (Accounting, unit prices)

Transaction advisory

Independent expert reports (Fairness opinions)

Litigation

Regulatory (including tax compliance)

Investment

%o

fparticipants

1

18

1

19


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Danie van AswegenPartner

Valuations, Corporate Finance

+61 3 9838 4614

[email protected]

Ian JedlinPartner in Charge

Valuations, Corporate Finance

+61 2 9335 8207

[email protected]

Contact us
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valuation practices survey 2013 v3

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