Comments on: Discounted Cash Flow (DCF) Valuation for Predictable Companies

By: larry

larry — Tue, 09 Nov 2010 08:31:00 +0000

The Warren Buffett 1988 refers to a statement he made in Berkshire Hathaway’s Annual Meeting in 1998, as quoted in Kilpatrick, Of Permanent Value (2004), 1330.

By: shen

shen — Sat, 06 Nov 2010 23:50:32 +0000

Is it possible if I could have the reference for the Warren Buffett (1988), please? Thank you very much.

By: larry

larry — Sun, 02 Aug 2009 13:57:08 +0000

Hi Fatin, equity valuations for listed companies are usually done by Investment Banks such as AmInvestment and CIMB Investment Bank. You can try to contact them directly and get more info about their services.

By: fatin

fatin — Mon, 27 Jul 2009 12:59:48 +0000

hi, im the new girl in this field…
now, i need to do my assignment about valuation which is have to find about private valuation firm… like what services they offered..their brochure
i am so happy if tou can give me some ways or advice about this..
TQ.

By: larry

larry — Thu, 26 Mar 2009 03:34:36 +0000

Thanks for your insights Nur. Personally I’m happpy with the historical cost approach where estates are valued at cost plus all the capital expenditure that has been invested in it. Somehow I feel IAS41 tries too hard to arrive at a so- called “fair value” which is only ascertainable by a willing buyer & willing seller on an arms length basis. I recall an essay topic in my uni days whether the main function of accounting and consolidation was to provide a value of firm’s assets and my answer was a flat-out no. I guess I would still take this view today. Valuation can be left to the valuers and investors, I don’t think they need too much help from accountants on this.

Coming back to the Australian mining companies, they would actually have a value on their mines to the extent of the capital expenditure less depreciation. So it doesn’t mean that the mines are valued at zero, just that they don’t try to do a DCF Valuation on the future cash flows for balance sheet purposes. I’m interested to know why you feel capital maintenance is not a good option?

By: nur

nur — Thu, 26 Mar 2009 01:41:06 +0000

Hi Larry, true enough IAS41 has the rebuttal clause to retain historical cost when fair value is not possible. However, the current practice of PLC is Malaysia is capital maintenance method which allows the historical cost recording despite the fact that the historical cost has been there for the past 50 years.This method do not promote the real valuation of pantation assets though. Should the companies adopt the same approach as the mining companies in Australia, the plantation cost should not appear in the balance sheet at all.

IAS 41 is adopted in most major economies including Singapore. However, the standard has been resisted by companies in Malaysia.Understandably, fair valuation for oil palm and rubber plantation is not easy. However, capital maintenance is not a good choice either.
Perhaps, if the mechanism (“DCF” probably) is available to assist corporations in valuing their plantation assets, they would be more receptive of the fair valuation principle.

By: larry

larry — Wed, 25 Mar 2009 09:22:19 +0000

Hi Nur, from my limited knowledge, IAS41 suggests that biological assets (or living plants in the case of palm oil companies) should be measured at fair value less estimated point-of-sale costs, unless fair value cannot be reliably measured. I’m not sure if I agree on the principle behind the standard. If you look at major mining companies in Australia for example, they do not recognize the value of their operating mines in their Balance Sheet other than what is invested in property plant and equipment. It is different if they are valuing a mining project for the purposes of obtaining project finance, in this case it is common to use a DCF approach but the implied value is seldom found in the balance sheet of successful companies, usually only the unsuccessful ones that go bust. I believe IAS41 also has a rebuttal clause saying that where fair value cannot be determined, the biological asset can be measured at cost less accumulated depreciation?

Back to whether we should use DCF to value IOI Corporation, KL Kepong, United Plantations etc, I do not believe so. Palm oil prices are highly unpredictable and affects the bottom line for these companies. If you try to run a sensitivity on earnings based on CPO price of $3000, 2000 and $1500, you will see that share price valuation will be a wide gap, rendering the valuation quite useless. Dunno whether u agree..?

By: nur

nur — Wed, 25 Mar 2009 00:33:10 +0000

Hi,

I am interested to discuss further on your opinion in the last paragraph. The recent IAS 41 on agriculture issues by accounting standard board suggested that DCF method is used to fair value agriculture (bilogical asstes) . This is also applicable to oil plam plantations owned by PLC such as IOI and KLK…what say you?

By: fark.my

fark.my — Tue, 10 Mar 2009 06:02:52 +0000

Discounted Cash Flow (DCF) Valuation for Predictable Companies : Horizon.my…

Everywhere you turn, companies are saying that we are in uncertain times. It’s hard to know what earnings will look like over the next two years….