Valuation of S Kidman & Co - Case Study Example

Valuation of S. Kidman & Co

Valuation overview

The purpose for valuation of S. Kidman & Co. Ltd is to help the DomaCom’s company to come up with the estimates on the properties that is under sale. This particularly involves the cost of the entire land that is estimated to be 101,000 square kilometers, livestock and other assets. The methodology used is that of discounted cash flow (French, 2012 57). It is utilized in this valuation since it puts into account both growth and changes within the company. It is also the most theoretically correct method of evaluation. However, it is lengthy and arduous since it has complex calculations. It also requires one to have a deep knowhow on the company and that it involves several estimates.

Kidman’s company has 600000 cattle and 200000 sheep and it is one of the Australian’s largest owned private landholding companies. The enterprise comprise of 12 aggregations of property that stretches across 16 pastoral holdings in Queensland, southern, northern and western regions of Australi (French, 2013 117) a. Three of the properties are utilized for breeding, cropping and feedlot areas and the head offices. The valuation is based on a potential investor, Australian agricultural company limited that is listed in the ASX using the code AAC. The company’s product description abbreviation is ordinary and its last price is $1.230 (Graaskamp, 2001 73).

Valuation of S. Kidman & Co is based on discounted cash flow. The Kidman net present value calculated is the present value of all future cash flow hat is the CF (Fernández, n.d.). the flow of cash is discounted by the weighted average cost of capital termed as the WACC that is done annually. This can be broken down as follows WACC= debt cost* company value debt+ equity value cost of debt*company equity value+ value of debt equity+ equity.

KIDMAN'S COMPANY CASH FLOW ESTIMATES

Starting Flow of cash:

$1,000,000

Rate of growth:

10%

Discounting Rate:

20%

Outstanding shares:

10,000

Current Value of Cash Flows:

$11,000,000

Intrinsic Value:

$360,000,000.00

KIDMAN'S COMPANY CASH FLOW ESTIMATES

Cash Flow at the start:

$245,000,000

Years:

1-5

6-10

Rate of growth:

10%

5%

Rate of terminal growh:

1%

Discount Rate:

15%

Outstanding shares:

29,400,000

Margin of Safety:

30%

Level of debt:

$978,000,000

Year

Flows

Growth

Value

1

269,500,000

10%

$234,347,826

2

296,450,000

10%

$224,158,790

3

326,095,000

10%

$214,412,756

4

358,704,500

10%

$205,090,462

5

394,574,950

10%

$196,173,485

6

414,303,698

5%

$179,114,922

7

435,018,882

5%

$163,539,711

8

456,769,826

5%

$149,318,867

9

479,608,318

5%

$136,334,617

10

503,588,734

5%

$124,479,433

Maximum valuation

$508,624,621

Flow of cash on PV:

$1,826,970,869

Final Value:

$898,030,196

Total Flows of cash on PV:

$2,725,001,065

Total Shares:

29,400,000

Intrinsic Value (IV):

$3,500.00

The Safety margin IV:

$4,700.00

Percentage of IV on the final year

56%

KIDMAN'S COMPANY DISCOUNTED CASH FLOW CALCULATION

Calendar Year Ending December 31,

CAGR

2010A

2011P

2012P

2013E

2014E

2015E

2010-2015

EBIT

$120.0

$126.2

$133.2

$137.7

$142.4

$147.3

3.9%

Plus: the Non-deductible Amort.

-

-

-

-

-

-

EBITA

$120.0

$126.2

$133.2

$137.7

$142.4

$147.3

3.9%

Less: Taxes provision

(42.0)

(44.2)

(46.6)

(48.2)

(49.9)

(51.6)

Kidman’s net income

$78.0

$82.0

$86.6

$89.5

$92.6

$95.8

3.9%

Plus: D&A

15.3

15.9

16.7

16.0

15.6

15.4

Less: Expenditures on capital

(18.0)

(16.0)

(14.1)

(14.6)

(15.1)

(15.6)

Less: Increase in net Capital

(9.5)

8.3

3.1

3.2

3.3

3.4

Kidman’s Cash Flow

$65.8

$90.2

$92.3

$94.2

$96.4

$99.0

2.3%

2010-2015

discounted cash analysis

2010-2015

Total Enterprise Value

Total Equity Value

Terminal EBITDA Multiple

Terminal EBITDA Multiple

7.5x

8.0x

8.5x

7.5x

8.0x

8.5x

Discount

16%

$1,042.4

$1,088.1

$1,133.9

Discount

13.0%

$959.0

$1,004.7

$1,050.5

Rate

9%

1,003.0

1,046.7

1,090.4

Rate

17.0%

919.6

963.3

1,007.0

WACC

19%

965.5

1,007.3

1,049.1

WACC

12.0%

882.1

923.9

965.7

Implied Perpetuity Growth Rate

Total Price Per Share

Terminal EBITDA Multiple

Terminal EBITDA Multiple

7.5x

8.0x

8.5x

7.5x

8.0x

8.5x

Discount

18%

19%

16%

1.7%

Discount

18%

$27.38

$28.69

$30.00

Rate

14%

16%

5%

2.6%

Rate

13%

26.26

27.51

28.75

WACC

9%

12%

4%

4%

(WACC)

17%

25.19

26.38

27.58

DCF ANALYSIS

2010-2015

Total Enterprise Value

Total Equity Value

Terminal Perpetuity Growth Rate

Terminal Perpetuity Growth Rate

3.0%

3.5%

4.0%

3.0%

3.5%

4.0%

Discount

14%

$1,260.8

$1,335.1

$1,421.7

Discount

17%

$1,177.4

$1,251.7

$1,338.3

Rate

17%

1,103.6

1,158.0

1,220.1

Rate

18%

1,020.2

1,074.6

1,136.7

(WACC)

19%

981.4

1,022.5

1,068.8

(WACC)

11%

898.0

939.1

985.4

Implied Terminal EBITDA Multiple

Total Price Per Share

Terminal Perpetuity Growth Rate

Terminal Perpetuity Growth Rate

3.0%

3.5%

4.0%

3.0%

3.5%

4.0%

Discount

11%

9.9x

10.7x

11.6x

Discount

15%

$33.62

$35.74

$38.22

Rate

13%

8.7x

9.3x

10.0x

Rate

17%

29.13

30.68

32.46

(WACC)

15%

7.7x

8.2x

8.7x

(WACC)

17%

25.64

26.82

28.14

(1) take an assumption that the debt is 87.1%

(2) take an assumption that the outstanding shares are 37.89%

Cash Flows statements

2016

2015

Cash flow emerging from activities

Customers’ cash receipts

31,150.00

26,015.00

Amount paid to employees

(29,190.00)

(25,630.00)

Cash as a result of products

1,960.00

385.00

Interest provided

(270.00)

(280.00)

taxes on income

(300.00)

(45.00)

Dividends provided

(200.00)

-

Net cash from operating activities

1,190.00

60.00

Cash flows from investing activities

Business acquisitions, net of cash acquired

(550.00)

-

Purchase of property, plant and equipment

(350.00)

(200.00)

Proceeds from sale of equipment

70.00

-

Acquisition of portfolio investments

-

(500.00)

Investment income

400.00

350.00

Net cash used in investing activities

(430.00)

(350.00)

Cash flows from financing activities

Proceeds from issue of share capital

250.00

-

Proceeds from long-term borrowings

250.00

200.00

Payment of long-term borrowings

(190.00)

(70.00)

Net cash used in financing activities

310.00

130.00

Net increase cash equivalents

1,070.00

(160.00)

Cash at beginning

160.00

320.00

cash equivalents at end

1,230.00

160.00

Totals on cash balance

-

-

Notes on Cash Flow statements

2016

2015

Flow of cash from activities

Profit realized upon taxation

4,350.00

1,230.00

Adjustments made:

Depreciation amount

450.00

260.00

Investment income

(500.00)

(350.00)

Expense on interest

400.00

300.00

Profit or Loss on the sale of property

(50.00)

-

Working capital changes:

Decline on receivables

(500.00)

(505.00)

Increase or decline in inventories

(450.00)

(750.00)

Increase in payables of trade

(1,740.00)

200.00

Cash realized from operations

1,960.00

385.00

Analysis on the estimates

The land component in S. Kidman & Co is estimated to be approximately $160 million while the combined value both for operating business and the surrounding land is estimated to be $360 million (Janiszewski, 2011 43). Moreover the indicative returns circa is 8-9% that is derived from both capital growth and rent combination. DomaCom is seeking to establish crowdfunding campaign towards the land component only (Bond, Bugeja and Czernkowski, 2012 45). The operating business is left to other organizations. S. Kidman & Co is estimated to have realized $50 million as the net profit in the year 2015. This has been as a result of increase in the value of the equities portfolio and uplift in the sale of cattle. There is also a high expectation that that the rising value of cattle will determine the estimated prices and thus the companies involved in the bid will keep on adjusting their prices. This has been an area of focus for the buyers. As per the recent market appraisal the landholding of S. Kidman & Co is estimated to be $197 million and the herd of cattle has appreciated by $26.3 million adding to the entire value of cattle head.

S. Kidman & Co has been destocking in some in Queensland due to drought and thus the number of cattle head dropped from 190000 to 156000. The sale realized $62 million from the previous tear of $56 million (Abhayawansa, Aleksanyan and Bahtsevanoglou, 2015 113). Moreover, S. Kidman & Co sold close to $1million worth stock that was enlisted in the Australian Agricultural company; the largest beef producer in the Australian markets. I am confident that a foreign investor would use the maximum estimation and also the same cash flows and cost capital. This is because the estimates used are based on the recent valuations of the land holding and the operating business. Moreover, the estimates involve forecast of rise in capital due to the rising value of cattle head. $508,624,621 is the maximum amount that is estimated to have been the value. The recent estimate on Kidman properties is over $460 million; therefore the estimates are 90% accurate (Habib, 2010 97).

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Bibliographies

Abhayawansa, S., Aleksanyan, M. and Bahtsevanoglou, J. (2015). The use of intellectual capital information by sell-side analysts in company valuation. Accounting and Business Research, 45(3), pp.279-306.

Bond, D., Bugeja, M. and Czernkowski, R. (2012). Did Australian Firms Choose to Switch to Reporting Operating Cash Flows Using the Indirect Method?. Australian Accounting Review, 22(1), pp.18-24.

Fernández, P. (n.d.). Equivalence of the Different Discounted Cash Flow Valuation Methods. Different Alternatives for Determining the Discounted Value of Tax Shields and their Implications for the Valuation. SSRN Electronic Journal.

French, N. (2012). The discounted cash flow method for property appraisals. Journal of Property Investment & Finance, 30(3).

French, N. (2013). The discounted cash flow model for property valuations: quarterly cash flows. Journal of Property Investment & Finance, 31(2), pp.208-212.

Graaskamp, J. (2001). Investment Valuation and Forecasting Methods. Jnl of Property Val & Invest, 10(3), pp.597-602.

Habib, A. (2010). Prediction of Operating Cash Flows: Further Evidence from Australia. Australian Accounting Review, 20(2), pp.134-143.

Janiszewski, S. (2011). How to Perform Discounted Cash Flow Valuation?. Foundations of Management, 3(1).