Valuation Practices Survey 2017 | KPMG | AU

Valuation Practices Survey 2017: For all it’s worth

Valuation Practices Survey 2017

Everything has an intrinsic value. The difficulty, however, is in finding a consensus on what that thing is worth. Everyone will have a different opinion. That is why being able to determine a fair and defensible value is extremely important.

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But it must be a fair valuation based on educated assumptions built around proven methodologies. But what are those assumptions? And can understanding those assumptions help businesses make better financial decisions?

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

We captured the views of 45 valuation practitioners from a variety of core valuation organisations across Australia, to provide key insight into the thinking behind the valuers’ opinions.

Key insights

  • The current level of value for certain key asset classes in Australia varied, with infrastructure considered as ‘highly valued’, listed equities are slightly overvalued, agriculture as fairly valued, real estate was considered to be overvalued, and respondents view the resources sector as slightly undervalued.
  • 44 percent of respondents expect the ASX200 index to increase in 2017 however, the impact of Brexit and a general anti-globalisation sentiment on the global economy may temper equity market expectations.
  • While the regulatory environment is a critical factor in assessing value, most respondents did not believe that the government intervention in the sale of AusGrid would negatively impact prices achieved in the infrastructure sector.
  • 68 percent of respondents were expecting an increase in the yield on 10-year Australian government bonds however, 50 percent of respondents thought the increase would be less than 1 percent.
  • 33 percent said that impairment has increased slightly in the past 12 months and the sector viewed to be most at risk is construction, a direct result of an expected slowdown in housing activity and the end of large-scale investment into the oil and gas sector.
  • Income approach: 73 percent of people now think that between 4 and 5 years is a sufficient forecast period, over modern financial reporting guidelines which dictate a five year cash flow period.
  • The Gordon Growth (or perpetual model) remains the preferred methodology for assessing terminal value and the alternative adopted by 34 percent of respondents is an Exit Multiple model.
  • Valuers continue to take different approaches in setting the risk free rate – the range is 1.8 percent to 4.5 percent, with the most commonly used rate being 4.5 percent.
  • Beta and gearing: Market volatility continues to drive valuers to a longer reference period when assessing beta, with a majority of respondents preferring a 5-year monthly or 4-year monthly period over the traditional 2-year weekly measurement.
  • Company specific risk premium: The common factors leading to an 'alpha' adjustment include the assessment of forecast risk, start-up risk, construction risk and/or refinancing risk.
  • Small stock premium: small companies tend to be exposed to more risk than large companies, which typically means that an adjustment needs to be made to reflect the inherent risk of smaller companies. For entities valued at less than $50 million, the most commonly applied adjustment is 5 percent.
  • Imputation credits: For existing franking account balances, only 22 percent of respondents recognise value. When used, most valuers use between 70 percent and 80 percent as their franking utilisation rate.
  • Discounts/premiums: Most respondents do not apply a discount to an interest in a 50:50 joint venture.

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