Vallibel One Analysis

smallville wrote:Good work laka..
Small clarification, I've seen the below calculation of urs in investments of VOL..
From Investments in Securities - 6910*10% - 690m

But actually those cannot be taken as an investment source for EPS calculation due to it being a "non disclosed income" as you're no booking the profit by selling shares of SAMP I think..

Academic wrote:

I would like to highlight few important things to consider in valuing Vallibel One.

1. The company is a start up, with just one year old and still we do not have full year consolidated financial statements for the company. Thus any valuation based on EPS is not sound here. One would say BVPS is 20.5 and based on BVPS share is worth 20.5x (2 or 2.5) = 40-50. However note that if the company issued all most all shares at 25 (as Vallibel One did) and do no business, their book value by now is 25 which is higher than current 20.5. The difference is due to loss generated during last years. In nutshell my argument is that Vallibel One can not be valued based on EPS or BVPS. Nevertheless, as the company has established companies as subsidiaries, an analyst can analyze those companies and predict part of Vallibel One's EPS. However the prospectus says the IPO is to finance new projects. Thus what matters here is profitability of new project in the context of Valible One's total portfolio, not just the past.
   
   
2. Goodwill represent 22% 0f total assets. In other words 3.5 billion worth tangible assets have been acquired by paying 14.8 billion, that is paying 422% times of fair value!, amounting a goodwill of 11.2 billion. If this goodwill is real and will generate economic value, then investments would be fruitful. However I doubt a share/company worth 4 times of its fair-value due to two reasons.
   
   
   • Current market P/BV is around 3.1 ( this reasoning is gross, as acquirer may have synergies).
     
     
   • Fair-value of assets are based on current conditions. Normally fair-value of property plant and equipments (PPE) are higher than cost. Thus if cost is used, the acquired price would be a higher multiple than 4.2 on book value (why they paid so much, either by cash or shares?).
     

If the company has to recognize impairments on goodwill, there will be huge impact on profit. This is unseen risk factor of the Vallibel One.

Any other views?

P.S. I intended this post for members with a financial background.

Academic wrote:

I'm not motivated (demotivated) by positive (negative) reps. Anyway thanks for the appreciation.

I'm not very familiar with SLAS (I'm not an accountant, so an accountant please correct me if wrong). However, Sri Lanka follows/adopt International Financial Reporting Standards (IFRS). According to IFRS goodwill can be recognized either as full or partial. What VOL has done is partial goodwill recognition. I demonstrate partial goodwill recognition below.

Target company's

• Cost value of total tangible assets (net of liability) 5000
  
• Fair value (appraised/market) value of tangible assets (net of liability) 6000
  
• 4000 paid to acquire 60%

Goodwill is 4000 - 6000*.6 = 400

Note: Goodwill is not based on historical cost NAV.

6000 become new cost base of acquired assets and depreciation calculate based on new value.

Impairment
If latter realized recoverable value (higher of selling price of the business and NPV of future cash flows) is less than what we paid (in this case if cant recover 4000 by selling 60% ownership or continuing the business) the gap is recognize as an impairment.

Recognition of impairment is subjective. So though there are impairments, management may not recognize them in P/L.

The indication of possible impairment loss is that subsidiary is contributing less than expected (generating negative residual income) and lesser possibility of turning back. If the subsidiary is listed, we can see a permanent drop in share price of the subsidiary. A short-term price fluctuation (as now in CSE) do not trigger impairments, IMHO.

Hope I have answered two questions.

laka wrote: @Academic
You said: "Note: Goodwill is not based on historical cost NAV."

I think Goodwill ca be based on either of His. cost or Fair Value.
But if we use Fair value method, definitely there should be Revaluation surplus A/c in b.sheet.

*I couldn't see such a/c in B.sheet. so assume that they have used Historical method....

*Correct me if iam wrong

Academic wrote:

I'm not motivated (demotivated) by positive (negative) reps. Anyway thanks for the appreciation.

I'm not very familiar with SLAS (I'm not an accountant, so an accountant please correct me if wrong). However, Sri Lanka follows/adopt International Financial Reporting Standards (IFRS). According to IFRS goodwill can be recognized either as full or partial. What VOL has done is partial goodwill recognition. I demonstrate partial goodwill recognition below.

Target company's

• Cost value of total tangible assets (net of liability) 5000
  
• Fair value (appraised/market) value of tangible assets (net of liability) 6000
  
• 4000 paid to acquire 60%

Goodwill is 4000 - 6000*.6 = 400

Note: Goodwill is not based on historical cost NAV.

6000 become new cost base of acquired assets and depreciation calculate based on new value.

Impairment
If latter realized recoverable value (higher of selling price of the business and NPV of future cash flows) is less than what we paid (in this case if cant recover 4000 by selling 60% ownership or continuing the business) the gap is recognize as an impairment.

Recognition of impairment is subjective. So though there are impairments, management may not recognize them in P/L.

The indication of possible impairment loss is that subsidiary is contributing less than expected (generating negative residual income) and lesser possibility of turning back. If the subsidiary is listed, we can see a permanent drop in share price of the subsidiary. A short-term price fluctuation (as now in CSE) do not trigger impairments, IMHO.

Hope I have answered two questions.

intelstk wrote:
In this case, RCL impaired 185 mn as of now and LFIN investment value increased by 1,100 mn. therefore as a whole value increased by 915 mn which they have not accounted for.

Academic wrote:

laka wrote: @Academic
You said: "Note: Goodwill is not based on historical cost NAV."

I think Goodwill ca be based on either of His. cost or Fair Value.
But if we use Fair value method, definitely there should be Revaluation surplus A/c in b.sheet.

*I couldn't see such a/c in B.sheet. so assume that they have used Historical method....

*Correct me if iam wrong

Goodwill is based on fair-value under IFRS. No revaluation account is created when goodwill is based on fair-value! Seems you are familiar with double entry system. In my previous example, if total liability is assumed as 2000 (normally historical value of liabilities are considered as at fair-value, so historical and fair-value most of liabilities are the same). Following are the consolidation entries (note: no revaluation account created).

• Tangible Assets Dr (6000+2000) = 8000
  
• Goodwill Dr 400
  
  • Liability Cr 2000
    
  • Equity Cr 4000
    
  • Minority Interest Cr (6000*.4)=2400

Total Dr and Cr = 8400

Academic wrote:Do not agree with your J/E. Think from acquirer's point of view, then you may understand!