Valuation Practices Survey 2013 kpmg.com.au

Transcription

1 CORPORATE FINANCE Valuation Practices Survey 203 kpmg.com.au

2 203 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG

3 Contents Section : Foreword... Insight into Australian valuation practices... Navigating a volatile environment... 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... 0-year risk-free rate dominates... 2 Section 8: Understanding beta... 3 One third of participants do not adjust for thin trading... 4 Timeframes for adjusting beta... 5 Section 9: The equity market risk premium... 6 Avoiding volatility pricing... 8 Section 0: Analysing the small stock premium... 9 Managing small stock risk Section : Adjusting for unique risks... 2 Section 2: Bringing transparency to discounts and premia Bringing transparency to discounts and premia Discount and premium data Section 3: All about imputation credits A varied approach to imputation credits Section 4: Commodities Section 5: Accounting, ESG and miscellaneous factors KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG

4 Valuation Practices Survey Section : Foreword Without a robust body of research to provide real guidance on valuation issues, many valuation practitioners are finding it difficult to navigate unchartered territory at a time when it is more important than ever to understand what the industry is doing as a whole. Insight into Australian valuation practices Welcome to KPMG s inaugural survey on Australian valuation practices. The Valuation Practices Survey will provide detailed insight into the methodologies adopted by Australian financial analysts and corporate financiers and how they are applied. It is our hope that the survey will fill a real gap in the Australian market, which currently lacks the kind of quality of research into valuation practices that larger markets often have such as those in the US and UK. Valuation work is highly subjective, so it is critical to gain a real understanding of how practice has evolved in the local market. Navigating a volatile environment The volatile economic environment is making assessments and assumptions around valuations very challenging. A recently low government bond yield creates even more challenges in the application of valuation methodologies. The challenging environment means that forecasting future growth and returns is particularly problematic. The domino effect of this uncertainty is a much more complex process for estimating the impact on the cost of capital. Textbook principles and processes are being stretched given the uncertain prospects in most sectors, it is more difficult than ever to prepare financial forecasts. We d like to thank everyone who completed the survey for their time, effort and insights. We look forward to talking with you further about our findings and welcome any feedback. Danie van Aswegen Partner, Valuations KPMG Corporate Finance Ian Jedlin Partner in Charge, Valuations KPMG Corporate Finance 203 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG

5 Valuation Practices Survey 2 Section 2: Executive summary Creating a meaningful benchmark for valuation practice KPMG s 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 current status 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 that they 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 considered only 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. Participants were 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 discounts and 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. 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. Who completed the survey? 23 Total participants Investment banks Professional services firms Infrastructure funds Other participants 203 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG

6 3 Valuation Practices Survey Denotes number of responses Section 3: Valuation methodologies The discounted cash flow approach is clearly the dominant methodology used by Australian financial analysts and corporate financiers, with all participants always or sometimes adopting this approach. Figure : How often do you use the following valuation approaches assuming a going concern? 2 Other Asset-based methodology 76% 4% 23 Market approach (e.g. Price Earnings ratio) 48% 48% 4% 23 Income approach (Discounted Cash Flow) 65% 35% Always Sometimes Never 203 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG

7 Valuation Practices Survey 4 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 0 percent of the time 4 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, longerdated 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 203 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG

8 5 Valuation Practices Survey Section 4: Market approach The widespread use of EBITDA multiples the multiple that is closest to cash indicates that most participants believe cash is the main driver of value. Figure 2: When using the market approach, how often are the following valuation multiples used? 4 22 Other Price/Book value of equity 22% 2% 57% 9% 36% 55% 22 Price/Pre-tax earnings 5% 27% 68% 22 Price/Earnings 23% 59% 8% 22 EV/EBIT 23% 73% 5% 23 EV/EBITDA 6% 39% 22 EV/Revenue 5% 5 45% Always Sometimes Never 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 multiple and 6 percent always doing so. Infrastructure funds are particularly wedded 203 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG

9 Valuation Practices Survey 6 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 7 percent of professional services and infrastructure funds. 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 203 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG

10 7 Valuation Practices Survey Section 5: Income approach: the cost of equity The Capital Asset Pricing Model is the most popular model being used to derive a cost of equity estimate, with all participants always or sometimes using this model. Figure 3: In calculating an appropriate rate of return to future cash flows to equity, how often are the following methods used? 2 Other 8% 25% 67% 22 Premium to the risk free rate 5% 64% 32% 2 Arbitrage Pricing Theory (APT) 0 22 Capital Asset Pricing Model (CAPM) 82% 8% Always Sometimes Never 203 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG

11 Valuation Practices Survey 8 Confidently using the Capital Asset Pricing Model As anticipated, when calculating the appropriate rate of return to apply to future cash 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 00 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. 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 203 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG

12 9 Valuation Practices Survey Section 6: Adjusting for country risk In Australia, cash flows are hardly ever adjusted for country risk just 4.7 percent of participants make this kind of adjustment. 2 Figure 4: How do you adjust for country risk when assessing an asset in a developing country? % 57% 4% 5% 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 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. 203 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG

13 Valuation Practices Survey 0 Adding a premium to the cost of equity Of the 57 who adjust for country risk by adding a premium to the cost of equity, professional services firms do so most frequently. 2 % 57% Total participants 5 67% Investment banks Professional services firms 203 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 KPMG International.

14 Valuation Practices Survey Section 7: Benchmarking the risk-free rate Eighty five percent of participants use the yield on the 0-year government bond as a proxy for the risk-free rate in Australia. 20 Figure 5: Which of the following do you use as a benchmark for the risk-free rate in Australia? % 2 5% 0 year government bond 5 year government bond Cash rate Other Figure 6: How do you derive the risk-free rate when using the yield on a government bond as a proxy? 29% 2 52% 5% 4% Spot Historic average Forecast A combination of the above 203 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG

15 Valuation Practices Survey 2 0-year risk-free rate dominates Eighty five percent of participants use the yield on the 0-year government bond as a proxy for the risk-free rate in Australia. However, there s 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. Spotting the risk-free rate Over 52 use spot to derive the riskfree rate, with investment banks leading the way. 2 % 83% 33% 2 Investment banks Professional services Infrastructure funds 203 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG

16 3 Valuation Practices Survey Section 8: Understanding beta It is interesting to note that close to one-third of participants do not consider an adjustment for thin trading. Figure 7: Do you adjust the beta for thin trading, or do you rely on the service provider to make such an adjustment? 36% 32% 22 32% Do not consider such an adjustment In house Service provider Figure 8: Which of the following service providers are used as a source of information? 35% 3 32% 22 25% 2 5% 2% 2 4% 8% 5% 0.0 4% Aspect Huntley Bloomberg Reuters/Factiva Other Australian Graduate School of Management Capital IQ In-house calculation/research 203 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG

17 Valuation Practices Survey 4 Figure 9: When calculating the beta, is the source data unlevered and then relevered at the optimal gearing? 4% 22 86% Yes No 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 7 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 203 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG

18 5 Valuation Practices Survey A maximum period of five years and a minimum period of two years are used by participants when calculating beta. 2 Figure 0: When calculating the beta, what period (in years) do you deem to be most appropriate? % 4% 9% 48% Period in years Figure : When calculating the beta how frequently do you make observations? % % 5% 5% Daily Weekly Monthly Quarterly Other 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. 203 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG

19 Valuation Practices Survey 6 Section 9: The equity market risk premium Figure 2: 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? % 73% 2% 32% 23% 26% Survey participants overwhelmingly are using an EMRP for Australia of 6 percent, with some bias towards 7 percent % 5% 6% 7% 8% MRP Australia United States United Kingdom Survey participants overwhelmingly are using an equity (market) risk premium (EMRP) for Australia of 6 percent, with some bias towards 7 percent. A particularly interesting 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. The average realised premium for the US market, for example was 8.4 percent over 949 to 999, but 6. percent if the period is shortened to 972 to 999. Including the last 3 years, the average has been even lower. In Australia, data for 883 to 20 show an average 6.0 percent realised premium. However, as shown in Figure 3 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 20, notwithstanding the impact of the GFC. 2 KPMG notes that use of a geometric mean, rather than an arithmetic mean, can also lower premia by as much as 2.0 per cent 2 Handley, J C, 202, An Estimate of the Historical Equity Risk Premium for the Period 883 to 20, University of Melbourne, April 203 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG

20 7 Valuation Practices Survey 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. Figure 3 Historic Equity Risk Premium, Australian All Ordinaries Accumulation Index 6.5% EMRP % 5.5% 5.5% % 4.5% % 3.5% Assumptions around the distribution of dividend imputation credits alter these results, as illustrated in Figure 4. Figure 4: Equity Risk Premium , adjusted for imputation credit distribution 6.5% % 6% 6. EMRP % 4.9% 5.2% % 3.5% 3. 35% 5 0 % 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 and incorporated 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. 203 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG

21 Valuation Practices Survey 8 Figure 5: Have you recently revised your equity market risk premium assumption to reflect the volatility in capital markets? 32% 22 Over 68 percent of participants have not recently revised their equity market risk premium assumption to reflect volatility. 68% Yes No Figure 6: What is your rationale for selecting the market risk premium? 8 7 7% Historic equity bond spread 9% Expected premium Combination Other 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 3 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. 203 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG

22 9 Valuation Practices Survey Section 0: Analysing the small stock premium There s a very clear inverse relationship between the size of the company and the size of the small stock premium. Figure 7: Do you adjust the CAPM rate of return with a premium that reflects the extra risk of an investment in a small company? 2 52% 48% Yes No Figure 8: In relation to the small stock premium, which factor is adjusted? % % Beta Equity market risk premium Overall expected rate of return on equity capital Beta Equity market risk premium Overall expected rate of return on equity capital 203 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG

23 Valuation Practices Survey 20 Figure 9: What is the benchmark small stock premium applied, given the size of the company or entity? 6% Premium range 5% 4% 3% 2% % Up to 5% Up to 3% Up to 2% 6 Estimated MVE ($m)<=250 Estimated MVE ($m) Estimated MVE ($m) Estimated MVE ($m) Estimated MVE ($m) Estimated MVE ($m) 400+ Market value of equity (MVE) Managing small stock risk The Australian market is clearly divided on pricing for small company risk. Once again we note the division among the participants, with none of the participating investment banks considering a small stock premium when determining the discount rate using the CAPM, but all of the professional services firms choosing to do so. Infrastructure firms were split 50:50 on the issue. There s a very clear inverse relationship between the size of the company and the size of the small stock premium, with the largest premium applied to the smaller companies. Consulting the experts Australian valuation practitioners use a range of sources to estimate a small stock premium. 2 % 38% 29% 24% Ibbotson Associates In-house Subjective Other 203 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG

24 2 Valuation Practices Survey Section : Adjusting for unique risks Adding alpha Most participants tend to add a premium to reflect unique risks not modelled in forecast cash flows. % 67% 24% 2 sometimes add a premium always add a premium never add a premium 203 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG

25 Valuation Practices Survey 22 Section 2: Bringing transparency to discounts and premia Figure 20: What factor is adjusted for the discount/premia? % 45% 32% 4% % 5 8% 2 24% 9% 9% Discount rate Market value of Equity Enterprise value Multiple Other 20 Minority discount 22 Control premium 7 Marketability discount 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. 203 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG

26 23 Valuation Practices Survey Figure 2: Do you apply a minority discount when valuing a minority stake using the following approaches? 9 Asset-based methodology 58% 42% 9 Market approach 47% 53% 20 Income approach 65% 35% Yes No Figure 22: What benchmark minority discount is applied given the size of the stake being valued? Discount range Median 2 3 Median Median % - 24% 25% - 49% 5 joint venture Size of stake 203 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG

27 Valuation Practices Survey 24 Figure 23: If the entity is not listed, do you apply a marketability discount when using the following approaches? Asset-based methodology 6% 84% 9 Market approach 32% 68% 9 Income approach Yes No Figure 24: What benchmark discount is applied given the size of the stake being valued (unlisted companies)? 45% 4 Discount range 3 5% Median 2 3 Median 5% 2 Median 5% Median 2.5 5% Median % - 24% 25% 49% 5 5% 74% 75% 0 8 Size of stake 203 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG

28 25 Valuation Practices Survey The minority discount is most routinely applied when practitioners use the income approach. 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? 20 Asset based methodology Market approach 85% 5% 2 Income approach 33% 67% Yes No Figure 26: What benchmark control premium is applied given the size of the stake being valued? 45% 4 2 Premium range 3 5% 3 Median 22.5 Median 3 5% - 74% 75% - 0 Size of stake 203 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG

29 Valuation Practices Survey 26 Section 3: All about imputation credits Figure 27: How do you treat imputation credits in business enterprise valuations (other than infrastructure investments)? % 4% Participants were 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. 6% 6% 7 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 203 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG

30 27 Valuation Practices Survey Figure 28: How do you treat imputation credits when valuing an infrastructure investment? % 24% 6% 6% 6% 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? 35% 3 33% 5 25% 2 5% 3% 3% 2 5% 7% 7% 7% Utilisation factor 5 4 Less than KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG

31 Valuation Practices Survey 28 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 7 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 7 percent separately determine the value thereof. Of responding infrastructure funds, 77 percent include the imputation credits attaching to dividends at an assumed utilisation rate, 7 percent separately determine the value and 7 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 using 70-8 of the benefit. 203 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG

32 29 Valuation Practices Survey Section 4: Commodities Figure 30: How do you deal with the gold premium in gold mine valuations? % 5 Apply a multiple to the income approach valuation, e.g. 2 times Discounted Cash Flow value 7% A reduced discount rate Other Figure 3: How do you determine the expected commodity prices for valuation purposes? 35% 3 3% 8 25% 2 5% 9% 24% 9% 5% 7% Spot price Forward prices Consensus of forecast prices by brokers/ economists Commodity pricing expert Other 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. 203 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG

33 Valuation Practices Survey 30 Section 5: Accounting, ESG and miscellaneous factors Accounting standards, treatment of hedge books and ESG 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? % 9 2 2% 5% Ignore Consider Critically evaluate Figure 33: How do you treat hedge books in business valuations? 5 47% % 7 2% Mark to market Included in cash flows at contracted commodity prices Other 203 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG

34 3 Valuation Practices Survey Figure 34: Do you consider Environmental, Social & Governance (ESG) factors when performing valuations? 5% 32% 9 63% Yes Quantitatively Yes Qualitatively No Employee options, use of debt and the purpose of valuation engagements Figure 35: How do you treat employee options in the valuation? % % 2% Estimate the value of the options and adjust the market value of equity As an expense in the income statement/ cash flow statement Other 203 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG

35 Valuation Practices Survey 32 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? % 8 89% Gross debt Net debt (i.e. gross debt surplus cash balance) Figure 37: What is the purpose of most of your valuation engagements? 35% 3 25% 2 5% 5% 9% 29% 7% 7% 2% 7% 9 A-IFRS (Accounting, unit prices) Transaction advisory Independent expert reports (Fairness opinions) Litigation Regulatory (including tax compliance) Investment 203 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG

36 kpmg.com.au Contact us Danie van Aswegen Partner Valuations, Corporate Finance dvanaswegen@kpmg.com.au Ian Jedlin Partner in Charge Valuations, Corporate Finance ijedlin@kpmg.com.au KPMG Corporate Finance is a division of KPMG Financial Advisory Services (Australia) Pty Ltd ABN , Australian Financial Services Licence No The information contained in this document is of a general nature. It has been prepared to provide you with information only and does not take into account your objectives, financial situation or needs. It does not constitute, nor should it be regarded in any manner whatsoever, as advice and is not intended to address the circumstances of any particular individual or entity. 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. It is not intended to take the place of professional advice and you should not take action on specific issues in reliance on the information contained in this document. Before acting or relying on any information, you should consider whether it is appropriate for your circumstances having regard to your objectives, financial situation or needs and also whether or not any financial product is appropriate for you. To the extent permissible by law, KPMG Financial Advisory Services (Australia) Pty Ltd, 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). 203 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 KPMG International. February 203. VICN0732ADV.