Valuation practices survey KPMG 2017 PDF

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For all it’s worth KPMG Valuation Practices Survey 2017

July 2017

KPMG.com.au

© 2017 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 and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

Contents Introduction

4

About the survey

5

The survey results

6

General market environment

6

Impairment

8

Risk-free rate and market risk premium

10

Beta and gearing

12

Company specific risk premium

13

Country risk premium

13

Small stock premium (SSP)

14

Imputation credits

15

Income approach

16

Discounts/premiums

17

Valuation methodology

18

© 2017 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 and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

Introduction Welcome to KPMG’s Valuation Practices Survey 2017

In this report, KPMG presents the key findings of its 2017 Valuation Practices Survey. Slightly deviating from our previous two surveys (2013 and 2015), the 2017 survey takes a deeper look at the assumptions being applied by those who are currently issuing valuation opinions. We believe the results provide insight into the thinking behind the valuers’ opinions. This can only help build consistency in valuation practices and enhance trust in the accuracy and independence of our valuations. Many thanks to those who completed the survey. Your input is, as always, invaluable. Please feel free to discuss the results of the survey with us.

Sean Collins Partner in Charge, Valuation Services Deal Advisory

© 2017 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 and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

For all it’s worth | KPMG Valuation Practices Survey 2017

5

About the survey Why this survey matters

Who was surveyed

Valuation plays a significant role within many areas of finance.

We captured the views of 45 valuation practitioners from a variety of core valuation organisations across Australia, including Australia’s Big 4 accounting firms, prominent boutique firms, second-tier accounting firms and smaller practitioners.

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.

The survey was circulated to various practitioners, and responses were received, in late 2016.

Valuation, however, is not objective. Value is always influenced by a variety of factors: the preconceptions and bias of the asset’s owner, the valuer’s understanding of the market, the methodology that is being used, and the complexity of the underlying business. These influences impact the assumptions being made by valuers. Decision makers must be confident that the assumptions applied are appropriate, and that they are not overly optimistic or needlessly pessimistic. This is why it is essential to know, and understand, the basis of the assumptions made by a valuer. We believe the information gathered by this survey highlights the key assumptions being made by those who are currently issuing valuation opinions – and provides a strong reference point in understanding the basis of those assumptions.

© 2017 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 and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

6

For all it’s worth | KPMG Valuation Practices Survey 2017

The survey results General market environment

In 2016, Australia recorded its 25th consecutive year of economic growth. Combined with a low unemployment rate, this would normally be an indicator of a strong economy, but concerns in some sectors tempers the belief that the Australian economy will sustain a steady rate of growth.

What is your opinion as to the current levels of value for the following asset classes? 0 = Undervalued

We asked respondents for their opinion as to current level of value for certain key asset classes in Australia: Real Estate: was considered to be overvalued. Will the south-east Australian property boom continue or will the housing market finally cool during 2017 and into 2018? Infrastructure: was seen as ‘highly valued’ reflecting a significant level of new investment flowing into the sector during the past decade chasing a limited supply of quality assets. Listed equities: the perception is that listed equities are slightly overvalued. The low interest rate environment continues to drive the equities market, despite a global environment that is struggling with broad demand and GDP growth.

1 = About right

1 0

2 = Overvalued

1 2

0

2

Real Estate

Infrastructure

1

1

0

2

2

0

Bonds: uncertainty in the bond market is being fuelled by the underlying interest rate environment.

Listed Equities

Bonds

Agriculture: a sector that is quickly rising in prominence with an increase in foreign investment driving transaction activity. This has resulted in prices being driven up, but respondents view the sector as fairly valued.

1

1

0

2

0

2

Resources: low commodity prices have impacted valuations in the resources sector, however, respondents view the sector as slightly undervalued.

Agricultural

Resources

Although 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.

© 2017 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 and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

For all it’s worth | KPMG Valuation Practices Survey 2017

While 44% of respondents expect the ASX200 index to increase in 2017, the impact of Brexit and an emerging antiglobalisation sentiment in the global economy may temper equity market expectations.

In late 2016, the US Federal Reserve increased benchmark rates – causing a re-evaluation of growth and inflationary expectations.

7

How do you expect the S&P/ASX200 index to move in 2017?

30 %

said steady

44%

said increase

How do you think the yield on 10-year Australian government bonds will move in the next 12 months?

Is this the start of a return to historic interest rate levels?

While 68% of respondents were expecting an increase in the yield, 50% of respondents thought the increase would be less than 1%.

20%

68%

said increase

said steady

© 2017 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 and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

8

For all it’s worth | KPMG Valuation Practices Survey 2017

Impairment The past 12 to 24 months have seen numerous impairment challenges for companies. The broad consensus is that impairment has increased slightly in the past 12 months. In the next 12 months there is, on balance, a slight increase in the expectation of impairment, with the key ‘at risk’ sectors noted on the following page.

What has been your experience of the incidences of impairment over the past 12 months? Increased 33% 25% Steady 51% 63% Decreased 16% 12% 2017

2015

What are your expectations of impairment over the next 12 months? Increase 26% 19% Steady 67% 81% Decrease 7% 0% 2017

2015

The ‘Value in Use’ approach is considered when assessing impairment in 80% of situations and the ‘Fair Value Less Cost to Sell’ approach is considered in 23%.

© 2017 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 and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

For all it’s worth | KPMG Valuation Practices Survey 2017

Which of the following sectors do you expect to face impairment challenges over the next 12 months?

24% Construction

20% Retail Trade

18% Manufacturing

11% Finance, Insurance, Real Estate

3% Services

9

The sector viewed to be most at risk in the next 12 months 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. The Australian retail sector is currently experiencing a difficult trading environment, with online activity and other disruptive behaviour (such as Amazon Grocery’s unique delivery approach) seeing traditional bricks and mortar retail businesses struggle. Retail is also viewed as an at-risk sector from an impairment perspective.

15% Mining

3% Agriculture, Forestry, Fishing

3% Public Administration

2% Transportation & Public Utilities

2% Wholesale Trade

© 2017 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 and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

10

For all it’s worth | KPMG Valuation Practices Survey 2017

Risk-free rate and market risk premium Valuers continue to take different approaches in setting the risk-free rate, as reflected in the relatively wide range of risk-free rates being adopted.

Which of the following do you mostly use as a benchmark for the risk-free rate in Australia? 2017

2015

The 10-year government bond yield remains the most common source for the Australian risk-free rate.

0

20

40

60

80

100

10-year gov. bond yield without adjustment Cash rate 10-year gov. bond yield with adjustment House view Other

What was the most recent risk-free rate adopted? 4.5%+ 4.0% to...