Valuation Practices Survey 2013 v3

CORPORATE FINANCE
Valuation
Practices Survey
2013

kpmg.com.au
2013 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.
Liability limited by a scheme approved under Professional Standards Legislation.
Contents
Section 1: Foreword ....................................................................................... 1
Insight into Australian valuation practices .......................................................... 1
Navigating a volatile environment ........................................................................ 1
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 .............................................................................. 11
10-year risk-free rate dominates ..................................................................................................... 12
Section 8: Understanding beta ...................................................................................................... 13
One third of participants do not adjust for thin trading ....................................................................... 14
Timeframes for adjusting beta .............................................................................................................. 15
Section 9: The equity market risk premium ................................................................................................. 16
Avoiding volatility pricing ........................................................................................................................... 18
Section 10: Analysing the small stock premium .................................................................................... 19
Managing small stock risk .............................................................................................................................. 20
Section 11: Adjusting for unique risks ......................................................................................................... 21
Section 12: Bringing transparency to discounts and premia ........................................................................ 22
Bringing transparency to discounts and premia .................................................................................................... 22
Discount and premium data .................................................................................................................................... 25
Section 13: All about imputation credits ............................................................................................................... 26
A varied approach to imputation credits ...................................................................................................................... 28
Section 14: Commodities ............................................................................................................................................ 29
Section 15: Accounting, ESG and miscellaneous factors ............................................................................................ 30
1 Valuation Practices Survey
Section 1:
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 KPMGs inaugural survey on Australian valuation practices.
TheValuation Practices Survey will provide detailed insight into the
methodologies adopted by Australian financial analysts and corporate financiers
and how they areapplied.
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.
Wed 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 Ian Jedlin
Partner, Valuations Partner in Charge, Valuations
KPMG Corporate Finance KPMG Corporate Finance
Valuation Practices Survey 2
Section 2:
Executive summary
Creating a meaningful benchmark for valuation practice
KPMGs 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.
Thismay reflect the more flexible nature of this approach, which enables
multiple scenarios around growth expectations to be considered, providing a
farmore 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.
06 06 06 05
Investment banks
Professional services
rms
Infrastructure funds Other participants
23
Total participants
Who completed the survey?
The survey results are a
meaningful benchmark
for current practice and,
hopefully, a platform
wecan build on to shape
our application of the
methodologies into the
future.
1
23
Section 3:
Valuation
methodologies
Figure 1: How often do you use the following valuation approaches assuming a
going concern?
0% 20% 40% 60% 80% 100%
65%
76% 14%
35%
10%
50% 50%
Always Sometimes Never
Other
% of participants
Asset-based
methodology
48% 4% 48%
Market approach
(e.g. Price
Earnings ratio)
Income approach
(Discounted
Cash Flow)
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.
1
12
1
21
1
23
1
D
E
N
O
T
E
S

N
U
M
B
E
R

O
F

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P
O
N
S
E
S
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 10 percent of the time 14
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, longer-
dated 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
1
14
1
22
Section 4:
Market approach
Figure 2: When using the market approach, how often are the following valuation
multiples used?
0%
20% 40% 60% 80% 100%
22% 21% 57%
9% 36% 55%
5% 27% 68%
23% 59% 18%
23% 73% 5%
61% 39%
5% 50% 45%
Other
Price/Book value
of equity
Price/Pre-tax
earnings
Price/Earnings
EV/EBIT
EV/EBITDA
EV/Revenue
% of participants
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 61 percent always doing so. Infrastructure funds are particularly wedded
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.
1
22
1
22
1
22
1
22
1
23
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
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 17 percent of professional services and
infrastructure funds.
1
12
1
22
1
21
1
22
Section 5:
Income approach: the
cost of equity
Figure 3: In calculating an appropriate rate of return to future cash flows to equity,
how often are the following methods used?
0% 20% 40% 60% 80% 100%
Other
Premium to
the risk
free rate
Arbitrage
Pricing
Theory (APT)
Capital
Asset
Pricing Model
(CAPM)
8% 25% 67%
5% 64% 32%
100%
82% 18%
% of participants
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.
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
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 100 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.
Section 6:
Adjusting for
countryrisk
Figure 4: How do you adjust for country risk when assessing an asset in a
developing country?
0%
10%
20%
30%
40%
50%
60%
0% 5%
24%
57%
14%
Adjusting the cash ows
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
%

o
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p
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i
p
a
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t
s
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.
In Australia, cash flows
are hardly ever adjusted
for country risk just
4.7percent of participants
make this kind of
adjustment.
%
1
21
Adding a premium to the cost of equity
Of the 57% of participants who adjust for country
risk by adding a premium to the cost of equity,
professional services rms do so most frequently.
%
50% 67%
Investment banks
Professional services
rms
57%
Total participants
1
21
2013 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. Liability limited by a scheme approved under Professional Standards Legislation.
Section 7:
Benchmarking the
risk-free rate
Eighty five percent of
participants use the yield
on the 10-year government
bond as a proxy for the
risk-free rate in Australia.
Figure 5: Which of the following do you use as a benchmark for the risk-free
rate in Australia?
0%
20%
40%
60%
80%
100%
85%
10% 0%
5%
10 year government bond
5 year government bond
Cash rate
Other
%

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p
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Figure 6: How do you derive the risk-free rate when using the yield on a government
bond as a proxy?
Spot
Historic average
Forecast
A combination of the above
52%
14%
5%
29%
%
1
20
1
21
Spotting the risk-free rate
Over 52% of participants use spot to derive the risk-
free rate, with investment banks leading the way.
%
33% 20%
Professional services Infrastructure funds
83%
Investment banks
10-year risk-free rate dominates
Eighty five percent of participants use the yield on the 10-year government bond as
a proxy for the risk-free rate in Australia. However, theres 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.
1
21
It is interesting to note
that close to one-third
of participants do not
consider an adjustment
for thin trading.
Section 8:
Understanding beta
Figure 7: Do you adjust the beta for thin trading, or do you rely on the service
provider to make such an adjustment?
Do not consider such an adjustment
In house
Service provider
32%
32%
36%
Figure 8: Which of the following service providers are used as a source of information?
Aspect Huntley Australian Graduate School of Management
Bloomberg Capital IQ
Reuters/Factiva In-house calculation/research
Other
0%
5%
10%
15%
20%
25%
30%
35%
18%
4%
14%
20%
32%
12%
0.00%
%

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f

p
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i
p
a
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t
s
1
22
1
22
Figure 9: When calculating the beta, is the source data unlevered and then relevered
at the optimal gearing?
Yes
No
86%
14%
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 17 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
1
22
A maximum period of
five years and a minimum
period of two years are
used by participants
when calculating beta.
Figure 10: When calculating the beta, what period (in years) do you deem to be
most appropriate?
0%
10%
20%
30%
40%
50%
0% 0% 0% 0% 0% 0%
Period in years
%

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p
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p
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t
s
19%
14%
19%
48%
1 2 3 4 5 6 7 8 9
Figure 11: When calculating the beta how frequently do you make observations?
0%
10%
20%
30%
40%
50%
60%
5%
30%
55%
5% 5%
Daily Weekly Monthly Quarterly Other
%

o
f

p
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i
p
a
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t
s
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.
1
21
1
20
Survey participants
overwhelmingly are using
an EMRP for Australia of
6 percent, with some bias
towards 7 percent.
Figure 12: 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?
0%
10%
20%
30%
40%
50%
60%
70%
80%
Australia
United States
United Kingdom
4
5
%
7
3
%
2
1
%
3
2
%
2
3
%2
6
%
4% 5% 6% 7% 8%
%

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p
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s
MRP
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.
1
The average
realised premium for the US market, for example was 8.4 percent over 1949 to
1999, but 6.1 percent if the period is shortened to 1972 to 1999. Including the
last 13 years, the average has been even lower. In Australia, data for 1883 to 2011
show an average 6.0 percent realised premium. However, as shown in Figure 13
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
2011, notwithstanding the impact of the GFC.
2
Section 9:
The equity market
riskpremium
1
19
1
12
1
13
1
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, 2012, An Estimate of the Historical Equity
Risk Premium for the Period 1883 to 2011, University of
Melbourne, April
Figure 13 Historic Equity Risk Premium, Australian All Ordinaries Accumulation Index
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
6.0%
6.5%
6.0%
5.5%
5.8%
5.2%
4.3%
1883 2011 1937 2011 1958 2011 1980 2011 1988 2011
E
M
R
P

Assumptions around the distribution of dividend imputation credits alter these
results, as illustrated in Figure 14.
Figure 14: Equity Risk Premium 1988 - 2011, adjusted for imputation credit distribution
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
6.0%
6.5%
4.3%
4.9%
6%
5.2%
6.0%
0% 35% 50% 100%
E
M
R
P
% 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.
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.
Over 68 percent of
participants have not
recently revised their
equity market risk premium
assumption to reflect
volatility.
Figure 15: Have you recently revised your equity market risk premium assumption to
reflect the volatility in capital markets?
Yes
No
68%
32%
Figure 16: What is your rationale for selecting the market risk premium?
0%
10%
20%
30%
40%
50%
60%
70%
80%
10%
19%
71%
0%
Historic equity
bond spread
Expected
premium
Combination Other
%

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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 31 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.
1
22
1
21
%
Figure 17: Do you adjust the CAPM rate of return with a premium that reflects the
extra risk of an investment in a small company?
Yes
No
52%
48%
Figure 18: In relation to the small stock premium, which factor is adjusted?
0
20
40
60
80
100
6%
94%
0%
Beta Equity market
risk premium
Overall expected
rate of return on
equity capital
%

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p
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s
Beta
Equity market risk premium
Overall expected rate of return
on equity capital
Section 10:
Analysing the small
stock premium
Theres a very clear
inverse relationship
between the size of the
company and the size of
the small stock premium.
1
21
1
16
Figure 19: What is the benchmark small stock premium applied, given the size of the
company or entity?
0%
1%
2%
3%
4%
5%
6%
0% 0%
5%
Up to
Up to
Up to
2%
3%
0%
Estimated
MVE
($m)<=250
Estimated
MVE ($m)
251-500
Estimated
MVE ($m)
501-1000
Estimated
MVE ($m)
1001-2000
Estimated
MVE ($m)
2001-4000
Estimated
MVE ($m)
4001+
P
r
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m
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e
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.
Theres 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.
%
In-house
38% 29%
Ibbotson Associates
24% 10%
Subjective Other
1
12
1
6
Section 11:
Adjusting for
uniquerisks
Adding alpha
Most participants tend to add a premium to reflect unique risks not modelled in
forecast cash flows.
%
24% 10%
always add a
premium
never add a premium
67%
sometimes add a
premium
1
21
Section 12:
Bringing transparency
to discounts and premia
Figure 20: What factor is adjusted for the discount/premia?
0%
10%
20%
30%
40%
50%
60%
Minority discount
Control premium
Marketability discount
55.00%
10% 9%
18%
45%
32%
41%
0% 0% 0%
25%
50%
18%
20%
9%
24%
Discount rate Market
value of
Equity
Enterprise
value
Multiple Other
%

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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.
1
20
1
22
1
17
1
19
1
19
1
20
1
9
Figure 21: Do you apply a minority discount when valuing a minority stake using the
following approaches?
0% 20% 40% 60% 80% 100%
65%
53%
35%
47%
58% 42%

Yes

No
Asset-based
methodology
Market
approach
Income
approach
% of participants
Figure 22: What benchmark minority discount is applied given the size of the stake
being valued?
0%
10%
20%
30%
40%
50%
60%
50%
20%
10%
30%
1% - 24% 25% - 49% 50% joint venture
Median
10%
Median
0%
Median
Size of stake
D
i
s
c
o
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r
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g
e
1
19
1
19
1
20
1
8
Figure 23: If the entity is not listed, do you apply a marketability discount when using
the following approaches?
0% 20% 40% 60% 80% 100%
30%
68%
70%
32%
16% 84%
Yes No
Asset-based
methodology
Market approach
Income approach
% of participants
Figure 24: What benchmark discount is applied given the size of the stake being
valued (unlisted companies)?
0%
15%
30%
45%
40%
30%
20%
10%
5%
1% - 24% 25% 49% 50% 51% 74% 75% 100%
20%
Median
15%
Median
5%
Median
2.50%
Median
0%
Median
Size of stake
D
i
s
c
o
u
n
t

r
a
n
g
e
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
85percent 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?
0% 20% 40% 60% 80% 100%
33%
15%
67%
85%
30% 70%

Yes No
Asset based
methodology
Market
approach
Income
approach
% of participants
Figure 26: What benchmark control premium is applied given the size of the stake being valued?
0%
15%
30%
45%
30%
40%
51% - 74% 75% - 100%
22.50%
Median
30%
Median
P
r
e
m
i
u
m

r
a
n
g
e
Size of stake
The minority
discount is most
routinely applied when
practitioners use the
income approach.
1
20
1
20
1
21
1
12
Figure 27: How do you treat imputation credits in business enterprise valuations
(other than infrastructure investments)?
0%
10%
20%
30%
40%
50%
47%
0%
41%
6% 6%
%

o
f

p
a
r
t
i
c
i
p
a
n
t
s
Ignore
Adjust the equity market risk premium
Separately determine the market value of the
benet and add to estimate of value
Adjust cost of equity for gamma

Other
Section 13:
All about 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.
1
17
Figure 28: How do you treat imputation credits when valuing an infrastructure
investment?
0%
10%
20%
30%
40%
50%
60%
70%
59%
24%
6% 6% 6%
%

o
f

p
a
r
t
i
c
i
p
a
n
t
s
Ignore
Adjust the equity market risk premium
Include imputation credits attaching to dividends
in the cashows at an assumed utilisation rate
Separately determine the market value of the benet
and add to estimate of value
Other
Figure 29: Where imputation credits are included in the cash flows, what utilisation
factor do you assume?
0%
5%
10%
15%
20%
25%
30%
35%
7%
0%
7% 7%
20%
33%
13% 13%
40% 50% 60% 70% 80% 90% 100%
%

o
f

p
a
r
t
i
c
i
p
a
n
t
s
Utilisation factor
Less
than
40%
1
17
1
15
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
33percent ignore imputation credits. The rate of bypassing imputation credits is
much higher among professional services firms, with 83 percent ignoring them
only 17 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 17 percent separately determine the value
thereof. Of responding infrastructure funds, 77 percent include the imputation
credits attaching to dividends at an assumed utilisation rate, 17 percent separately
determine the value and 17 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% of participants using 70-80%
of the benet.
Figure 30: How do you deal with the gold premium in gold mine valuations?
0%
10%
20%
30%
40%
50%
60%
43%
50%
7%
Apply a multiple
to the income
approach valuation,
e.g. 2 times
Discounted Cash
Flow value
A reduced
discount rate
Other
%

o
f

p
a
r
t
i
c
i
p
a
n
t
s
Figure 31: How do you determine the expected commodity prices for valuation purposes?
0%
5%
10%
15%
20%
25%
30%
35%
19%
24%
31%
19%
7%
Spot
price
Forward
prices
Commodity
pricing
expert
Other Consensus
of forecast
prices by
brokers/
economists
%

o
f

p
a
r
t
i
c
i
p
a
n
t
s
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.
Section 14:
Commodities
1
14
1
18
Accounting standards, treatment of hedge books and
ESGfactors
Figure 32: To what extent do you consider the impact of accounting standards on
future financial statements when evaluating or advising on a deal?
0%
10%
20%
30%
40%
50%
60%
70%
80%
5%
21%
74%
Ignore Consider Critically evaluate
%

o
f

p
a
r
t
i
c
i
p
a
n
t
s
Figure 33: How do you treat hedge books in business valuations?
0%
10%
20%
30%
40%
50%
41%
12%
47%
Mark to
market
Included in
cash ows
at contracted
commodity
prices
Other
%

o
f

p
a
r
t
i
c
i
p
a
n
t
s
Section 15:
Accounting, ESG and
miscellaneous factors
1
19
1
17
Figure 34: Do you consider Environmental, Social & Governance (ESG) factors when
performing valuations?
Yes Quantitatively
Yes Qualitatively
No
5%
63%
32%
Employee options, use of debt and the purpose of valuation
engagements
Figure 35: How do you treat employee options in the valuation?
0%
10%
20%
30%
40%
50%
60%
53%
21%
26%
Estimate the value of the options and
adjust the market value of equity
As an expense in the income statement/
cash ow statement
Other
%

o
f

p
a
r
t
i
c
i
p
a
n
t
s
1
19
1
19
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?
Gross debt
Net debt (i.e. gross debt surplus cash balance)
11%
89%
Figure 37: What is the purpose of most of your valuation engagements?
0%
5%
10%
15%
20%
25%
30%
35%
17%
12%
7%
17%
29%
19%
A-IFRS (Accounting, unit prices)
Transaction advisory
Independent expert reports (Fairness opinions)
Litigation
Regulatory (including tax compliance)
Investment
%

o
f

p
a
r
t
i
c
i
p
a
n
t
s
1
18
1
19
kpmg.com.au
KPMG Corporate Finance is a division of KPMG Financial Advisory Services (Australia) Pty Ltd ABN 43 007 363 215, Australian Financial Services Licence
No.246901.
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
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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
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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 2013. VICN10732ADV.
Danie van Aswegen
Partner
Valuations, Corporate Finance
+61 3 9838 4614
dvanaswegen@kpmg.com.au
Ian Jedlin
Partner in Charge
Valuations, Corporate Finance
+61 2 9335 8207
ijedlin@kpmg.com.au
Contact us

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