Hi Te Whetu
Thanks for your comments, and time looking at the valuation, suspect you might be the first person to do so!
So thanks for the effort. Apologies if I come across as an 'expert', I thought I had made it pretty clear that I'm a guy interested in valuations, rather than an expert. I'm really trying this stuff out to have a straw man up for others to critique, and hopefully learn from. But apologies if that was not clear.
Quote:
NOMINAL WACC OF 7.7%:
This seems too low, would be happy to be directed to the KPMG document which says otherwise but a search on Google for “WACC KPMG 7.7%” resulted in two items by you and no KPMG source...
Ah yes... hmm. Mea culpa here. KPMG... I actually meant PWC. The reference is: http://www.pwc.com/en_NZ/nz/cost-of-...ember-2010.pdf
Quote:
I had more comments around WACC but removed them. Quick question I’ve got due to your comment around the “safety margin”. Would you buy a stock with zero "safety margin"? If not then I strongly suspect it's not worth what you claim it is and you need a higher WACC.
No, I wouldn't buy a stock with zero safety margin, but I wouldnt use the WACC to encapsulate a safety margin for a specific company either. I'm not an expert, but I'd rather use the difference in the resulting prices to indicate a safety margin.
Quote:
1. EBITDA in the KFC financials is before G&A. Therefore you are going to need to adjust for this if you want to use EBITDA for anything meaningful. I note that you used EBIT so this should not impact your valuation, just something to be careful of.
Thanks, will make a note.
Quote:
2. You have included the non-trading line in your EBIT figure. Within non-trading is a portion associated with refurbishment, including this should be ok if you think RBD might keep having items like this pop up regularly. However of the non-trading item, $396k is an impairment (i.e. non-cash). You should adjust for this. I recommend reading the notes to accounts when valuing a business, in this case it is having a $7.0 million impact on your valuation.
Excellent point, thanks! I did forget about the non-trading items, so thanks for the heads-up.
Quote:
3. Took me a little while to figure what you were doing with the reinvestment + reinvestment rate, finally got it. Not the way I would do things but whatever; I wonder if you understand what you are implying with this, you're basically saying RBD will spend circa $21 million on capex, changes in working capital and tax each year into perpetuity (growing at inflation). I like basing a valuation on FCFF or FCFE but you need to understand all the items you’re putting into it and what it means. If you assume unleavered tax of circa $9.6 million (based on 33% tax rate back in FY2010 and EBIT of $29.2 million) then this would mean capital expenditure of circa $12 million per annum. Not saying this is right or wrong, just suspect this has not been thought through as the 30% has been labelled reinvestment rate but largely needs to cover tax. Possible this is the tax and it's just an incorrect label.
I think I made a mistake here which I think is what you're pointing out. The reinvestment rate was calculated as the terminal growth/av ROC with a bit of adjustment (which might be a bit dangerous given RBDs history). However, the terminal free cash flow to equity figure was based on EBIT, not EBIT(1-t) which it should have been.
I think this is what you were pointing out? Obviously going tax-free makes RBD a lot more valuable! So that brings the terminal value down to around $286 million, which brings the share price target to around <b>$2.90</b>...
Quote:
4. Your historical figures for FCFF are wrong. Not sure how you calculated them, but either way wrong. For FY2010 assuming 33% marginal tax rate on interest FCFF seems to be around $25.6 million. I've calculated this from the statement of cash flows. You could argue a small difference based on what to include in FCFF... but even so, your figure of circa $16 million is WAY off.
I calculated FCFF as follows (as per Damodarans example):
2010 ebit *(1-taxrate of 30%)+
2010 depn-
2010 cap exp +
2010 change in working capital
Did I screw something up here? I thought I had looked at it pretty closely, but that doesn't guarantee success! Happy to correct, although just looking at it now, it looks about right? - which almost certainly indicates it is wrong… ;-)
Quote:
5. You mention that you capitalised the operating lease. There are often good arguments for this, however I see while you did capitalise it you did not let this change your valuation (which is fine as many would not bother making the adjustment in the first place). If you ever do wish to remove the operating lease for the purpose of your valuation you will need to do more than just capitalise the future payments and add them to debt, you will also need to: 1) add the same amount to assets, 2) remove lease payments from operating expenditure, 3) apportion some of the operating expenditure to interest, 4) apportion some of the operating expenditure to repayments of the debt, and 5) depreciate the asset you created.
Good points. I was playing with this, first time, and obviously didn't do it properly. Thanks for the clarification, and the education. Which after all was the point of putting up the analysis in the first place!
Quote:
6. Looks like you have an error in the capital structure box up the top. This is not flowing through to the valuation.
I'll have a look at the underlying spreadsheet and see whats going on.
Quote:
Hope this helps, also I’m not promising I’ll go over future valuations.
What? Why not? ;-) It would be great if you could comment on the valuations when they come out. I'm super busy at the moment, but I put them up to learn from and maybe help others as well.
Quote:
EDIT: Note my commentary was originally a lot harsher, tried to soften it up a bit when read "Part-time stock analyst" and "so simple I probably got it all wrong" around your MHI valuation on your blog. Originally thought you were holding yourself out to be an expert in valuation.
[/QUOTE]
Yes, apologies if I came across as an 'expert' (whatever that means in valuation terms!). I think previously I have mentioned that I'm a beginner in valuations, but thought my attempts might reach a 'correct' valuation through crowd-sourcing. And each note like this makes me a little bit better, so after a few years of such feedback, I might be ok!
Thanks again for your comments.
cheers
Greg
ps. will update the valuation when a) 2010 report is out and b) I have some time!