Present Value of Future Cash Flows

[craft]

I'm not sure my question is relevant to the thread but I thought people in this thread would have a thoughtful answer.

In Graham's book, he suggested looking at long term debt to working capital and total debt to net book value (NTA? Are those synonymous?). Net Book Value includes intangibles NTA doesn't.
I'm unsure how to take these metrics into my analyses. The obvious is that low debt is better but what about when the two metrics are very different?

What would having low long term debt to working capital but having high total debt to net assets mean in terms of interpretation? Not sure how this could happen - might be misinterpreting what you mean - got an example?

From my newbie guess, would it mean that they are highly leveraged but are able to manage their debts?

...

 

[craft]

The distinction you need to make is between growth expenditure and "existing business maintenance" expenditure.

Existing business maintence expenditure is not discretionary - you either spend it or economically liquidate the existing business. Growth expenditure is discretionary - it could be returned to shareholders if it wasn't used to build the business.


I have no time before heading away for awhile - If it hasn't twigged or someone else hasn't helped out I'll take it up when I get back.

Cheers

Galumay

Have you made any progress on this topic? I'm a bit reluctant to post on TGR at the Moment.

 

[galumay]

Galumay

Have you made any progress on this topic? I'm a bit reluctant to post on TGR at the Moment.

I havent craft, I have been busy with other research, but the quick look I had at the annual report I couldnt see those numbers broken down.

I guess thats something I am struggling with in general, how do you know when and how to break down elements of a FCFE model? I suspect its easier with US companies where the reporting is more detailed.

 

[Ves]

Without looking at Tassal right now, I'll give you a hint. It takes 3-4 years from birth until Salmon are ready to be prepared for sale. I'm fairly sure, if my memory serves me correctly, that this all goes through the OCF. For that reason when they are really expanding their production output there is a massive drag on cash flow for the first few years.

Problem is, that the previous production cycle will overlap the new one, which may smooth out cashflow a bit. It's up to you to fill in those gaps with the numbers provided.

Also need to look at cost of plant (which goes in capex) over the entire life cycle.

It's easier with Tassal and similar companies to thinking outside of a single year basis. Look at multi year periods.

 

[VSntchr]

I havent craft, I have been busy with other research, but the quick look I had at the annual report I couldnt see those numbers broken down.

Pg 8 Annual report might help.

I guess thats something I am struggling with in general, how do you know when and how to break down elements of a FCFE model?

I link it with growth. If you are estimating revenue growth, then (depending on the business model) you will need to budget for this growth. Upon reaching maturity will allow you to find your sustainable level of maintenance capex.

 

[galumay]

It's easier with Tassal and similar companies to thinking outside of a single year basis. Look at multi year periods.

I am starting to think that TGR is just overvalued! Looking back over the last 4 years there is not a lot of variation in the metrics, change in working capital and capex are both fairly smooth over that time period. My simple FCF model has them over priced, my FCFE model has them very overpriced.

The thing that has me in two minds is the earnings, they are higher and more consistently higher, than I would expect if my FCFE/FCF valuations are correct. Also a number of the other metrics are pretty good, EV/E, P/S, M/B.

Its not even so much about TGR but getting to the point where I have sufficient confidence in the numbers that my DCF models generate!

 

[Ves]

I'm not so sure about that. Biological assets have almost doubled (ie. they're breeding a lot more fish than they're selling), debt has decreased and I'm sure they have spent a fair bit on new infrastructure assets over this period. Yet they've not needed to tap shareholders for this once during the period. If you want to understand the nature of the cash flow you'd need to figure out how this happened.

Return on assets increased from 9% to 12.5% over the same period.

I recall their investor presentations being pretty helpful. Other than that I could only suggest that you'd need to understand how the industry works (what they need to spend funds on, and when it occurs in the cycle, also when the cash is received and what determines how much they receive).

 

[galumay]

If you want to understand the nature of the cash flow you'd need to figure out how this happened.

I recall their investor presentations being pretty helpful. Other than that I could only suggest that you'd need to understand how the industry works (what they need to spend funds on, and when it occurs in the cycle, also when the cash is received and what determines how much they receive).

Thanks for the input, Ves, I guess I am not good enough.......yet! More homework required.

 

[craft]

I'm not so sure about that. Biological assets have almost doubled (ie. they're breeding a lot more fish than they're selling), debt has decreased and I'm sure they have spent a fair bit on new infrastructure assets over this period. Yet they've not needed to tap shareholders for this once during the period. If you want to understand the nature of the cash flow you'd need to figure out how this happened.

Return on assets increased from 9% to 12.5% over the same period.

I recall their investor presentations being pretty helpful. Other than that I could only suggest that you'd need to understand how the industry works (what they need to spend funds on, and when it occurs in the cycle, also when the cash is received and what determines how much they receive).

I hoped you would show up with some thoughts for Galumay.

For what its worth I have TGR on an almost 10% normalised discretionary free cash flow return at current prices. In addition to that I think their growth expenditure is adding value and the real kicker for me is the improving return metrics following previous round of growth expenditure. The companies LTI has a hurdle rate of 15% ROA before anything vests - so its a fair indication of where things are heading.

De Costi acquisition and perhaps associated cap raising; Senate Inquiry; people taking queues from the medium term down trend and lack of familiarity with AASB141 all helping with price at the moment.

TGR isn't the screaming buy of a couple of years ago but this pull back in the longer term picture has put it back in the ball park of potential opportunity. Its an interesting point in time where I feel I need to be listening more then reinforcing my biases by talking. So that's it for me on them for a while.

 

[Tooth Faerie]

Net Book Value includes intangibles NTA doesn't.

Thanks craft. I finally have a but more clarity when reading analyses now.

I've been calculating debt/NTA because it makes logical sense to me since intangible assets won't help in repaying debt.

Not sure how this could happen - might be misinterpreting what you mean - got an example?

When looking at MND's latest half year report. My calculations show:

• Liabilities/NTA = 126%
• Long-term liabilities/WC = 7%

Am I doing something wrong?

 

[luutzu]

Thanks craft. I finally have a but more clarity when reading analyses now.

I've been calculating debt/NTA because it makes logical sense to me since intangible assets won't help in repaying debt.


When looking at MND's latest half year report. My calculations show:

• Liabilities/NTA = 126%
• Long-term liabilities/WC = 7%

Am I doing something wrong?

I own a handful of MND so take my calculations with possible biases.


From 2014 annual report, Total Debt to NTA is 1.079, or 108% by the sound of what you're doing.
Might look bad but since NTA takes out all the Goodwill and Intangibles, which might make sense as you say since intangibles aren't real... BUT... depends on what those tangibles are... what the Goodwill are made up of.

Say MND bought a few companies, pay at price higher than the acquired asset's various assets' bookvalue... that is added to Goodwill right? So if the intangibles were to have a lot of goodwill, while it may really be as assume and be worth nothing but payment in excess of book... if the assets acquired were land or something that actually appreciates in value etc. etc.

So if you're looking to see if it were liquidated then could it pay off its debt... maybe use the Liquidating value instead of this.

My opinion.


---

With regards to MND financial position - it's very strong.
Current Ratio = 1.67 (2014 AR), that is, for every dollar of current liability it has $1.67, or $0.67 to spare.

Look at that in relation to its Debt Ratio and Interests.Bearing Debt Ratio... Debt ratio of 0.52 means 52% of its assets are financed by debt... however, the int.only debt ratio is an amazing 0.09, or 9%. This mean MND was able to tell his subcontractors to lend it services and goods for free... also mean only 9% of its debt are bank borrowings or financial debt so it could theoretically borrow a lot more to finance further adventures.

And that is why its share price has been halved since my first purchase, haha
Never let reality ruin a beautiful dream I'd say.

 

[craft]

When looking at MND's latest half year report. My calculations show:

• Liabilities/NTA = 126%
• Long-term liabilities/WC = 7%

Am I doing something wrong?

Hi TF

Your original question asked about long term debt which you now refer to as liabilities – first clarification I need is whether you are talking about interest bearing debt or ALL liabilities whether they incur interest or not?

Second clarification is about whether you are including cash balance (all, surplus or none) in working Capital.

 

[craft]

Say MND bought a few companies, pay at price higher than the acquired asset's various assets' bookvalue... that is added to Goodwill right? So if the intangibles were to have a lot of goodwill, while it may really be as assume and be worth nothing but payment in excess of book... if the assets acquired were land or something that actually appreciates in value etc. etc.

???

Am I misreading your post or are you suggesting land can make up part of goodwill?

 

[luutzu]

???

Am I misreading your post or are you suggesting land can make up part of goodwill?

land is written at book value - the costs of purchase.

Was referring to when a company acquire another company. My understanding is that when the buyer, say MND, bought corp.X and pays above book value... that overpayment is classified as Goodwill. While on paper it may appear that MND new Goodwill is just intangible, it may be the case that MND, when valuing Corp.X, appraise the assets, say land, at the current value and that current value is above the bookvalue as appear on Corp.X's account.

So it could be the case that what is technically Goodwill and hence intangibles may not be so.

Say my company were to buy Xcorp. The land bank it has is $10M on its book. If it's reappraised now those land are now $20M say.

If I were to buy the land only and not the company, on my book value it'd be $20M; but if I buy the company, the land is $10 at book and $10 as goodwill.

Pretty sure that's how accounting define these, unless I'm wrong.

 

[craft]

land is written at book value - the costs of purchase.

Was referring to when a company acquire another company. My understanding is that when the buyer, say MND, bought corp.X and pays above book value... that overpayment is classified as Goodwill. While on paper it may appear that MND new Goodwill is just intangible, it may be the case that MND, when valuing Corp.X, appraise the assets, say land, at the current value and that current value is above the bookvalue as appear on Corp.X's account.

So it could be the case that what is technically Goodwill and hence intangibles may not be so.

Say my company were to buy Xcorp. The land bank it has is $10M on its book. If it's reappraised now those land are now $20M say.

If I were to buy the land only and not the company, on my book value it'd be $20M; but if I buy the company, the land is $10 at book and $10 as goodwill.

Pretty sure that's how accounting define these, unless I'm wrong.

You're wrong.

 

[luutzu]

You're wrong.

Mind to elaborate to help me (us) out?


Another example to show what my take on Goodwill regarding acquisition is.


Say Xcorp is a timber company, and on its books are land it first purchased and the seeds it planted. All up, costs for land and seed was $10M. That was 100 years ago, since then Xcorp does nothing but water those seedlings into fine trees now. Assumes it has no other assets or liabilities, or whatever and so its net book value is $10M.

If my Ycorp bought Xcorp for $20M... How does Ycorp record this acquisition on its books? Additional $20M bookvalue or only $10M into book and the excess above book paid for Xcorp (another $10) is define as Goodwill?


I always thought that if you were to just buy the asset, then the bookvalue is $20M, but if you buy the company, then you must be conservative and either record bookvalue at cost or the lower of market, but never revise it up.


oh, by bookvalue above I mean the bookvalue of the land/property.

 

[McLovin]

Mind to elaborate to help me (us) out?


Another example to show what my take on Goodwill regarding acquisition is.


Say Xcorp is a timber company, and on its books are land it first purchased and the seeds it planted. All up, costs for land and seed was $10M. That was 100 years ago, since then Xcorp does nothing but water those seedlings into fine trees now. Assumes it has no other assets or liabilities, or whatever and so its net book value is $10M.

If my Ycorp bought Xcorp for $20M... How does Ycorp record this acquisition on its books? Additional $20M bookvalue or only $10M into book and the excess above book paid for Xcorp (another $10) is define as Goodwill?


I always thought that if you were to just buy the asset, then the bookvalue is $20M, but if you buy the company, then you must be conservative and either record bookvalue at cost or the lower of market, but never revise it up.


oh, by bookvalue above I mean the bookvalue of the land/property.

When you buy a company you get the tangible assets valued. This is the value that you transfer over to your balance sheet. The amount paid for the company over this valuation is goodwill. Internally generated intangibles will be carried over at cost *I think*.

 

[luutzu]

When you buy a company you get the real assets valued. This is the value that you transfer over to your balance sheet. The amount paid for the company over this valuation is goodwill.

So if the $10M original costs for land/seedling is now valued at $20M, and I pay $20M. Is there any goodwill for my Ycorp's book?

It would make sense if the new book value for land/trees is now $20M, not $10M... But I remember this point being stressed because it was repeated a couple times as to how accounting can be misleading.

But yea, personally, if I'm interested in the stock as a bookvalue/NTA play I would go and make adjustments anyway.

Thanks

 

[craft]

Mind to elaborate to help me (us) out?


Another example to show what my take on Goodwill regarding acquisition is.


Say Xcorp is a timber company, and on its books are land it first purchased and the seeds it planted. All up, costs for land and seed was $10M. That was 100 years ago, since then Xcorp does nothing but water those seedlings into fine trees now. Assumes it has no other assets or liabilities, or whatever and so its net book value is $10M.

If my Ycorp bought Xcorp for $20M... How does Ycorp record this acquisition on its books? Additional $20M bookvalue or only $10M into book and the excess above book paid for Xcorp (another $10) is define as Goodwill?


I always thought that if you were to just buy the asset, then the bookvalue is $20M, but if you buy the company, then you must be conservative and either record bookvalue at cost or the lower of market, but never revise it up.


oh, by bookvalue above I mean the bookvalue of the land/property.

Business combination accounting requires all identifiable assets to be revaluated at current fair value as of the purchase date.

Refer AASB 3

 

[McLovin]

Business combination accounting requires all identifiable assets to be revaluated at current fair value as of the purchase date.

Refer AASB 3

Identifiable! That was the word I was looking for!

In fairness, I did have ten beers tonight watching the AFL (largely to overcome the boredom).