Present Value of Future Cash Flows

[luutzu]

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

Refer AASB 3

Cool... thanks.

 

[craft]

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

I've been helping my daughter with some high school math homework - I could really have done with some of your beers, at least then I would have an excuse for just how much I have forgotten

 

[Tooth Faerie]

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.

Just opportunity to make even more money

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.

I am sorry for any confusion. I come from a non-finance background. I'm slowly self-educating myself and sometimes I still confuse terms.

Firstly, to make it easier for myself at the moment, I use debt and liabilities synonymously.

For working capital, I'm using the difference between current assets and current liabilities.

Thanks for taking time to help me out!

 

[luutzu]

Just opportunity to make even more money

Yea, bought some more at $10.70 or so, then it goes to around $7 and $8 - see the pattern?
Then thought of buying more at around $8.40 but it shot up to $13 so bought Santos instead...

Who knows, MND might use its recent water infrastructure acquisition and head to California and Brazil to give a hand with their water problem. Either way, there's going to be a lesson or two for me with this one - so I'll profit either way

Positive thinking they say

 

[craft]

Firstly, to make it easier for myself at the moment, I use debt and liabilities synonymously.

Figures are for MND 2014 Full year all figures $,000


I think of debt as interest bearing and generally preferentially secured obligation to the lender. MND has 20,001 short term, 17,030 Long term for total of 37,031.

Liabilities are every thing the company owes, interest bearing or not. MND has 362,561 short term (current), 24,931 long term (Non-Current) for total of 387,492

For working capital, I'm using the difference between current assets and current liabilities.

I think working capital is conventional defined as all current assets except for surplus cash less all current liabilities except for short term debt .


Assuming None of MND's cash of 217,859 is surplus then calculation would be Current Assets of 606,272 less Current liabilities of 362,561 plus short term debt of 20,001 = 263,712.

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 (also known as Net Assets or Equity) = 362,665
Net Tangible assets = Net Book Value less intangibles = 362,665 – 3,791 = 358,874. Not a big difference in MND’s case but for some companies it can be huge.

Long term debt to working capital

17,030 / 263,712 = 6.4%

Total debt to net book value

37,031 / 362,665 = 10.2%

Or substituting liabilities for debt the numbers are very different.

24,931 / 263,712 = 9.4%
387,492 / 362,665 = 106.8%

Not sure what Graham was suggesting – but defining his definitions would be necessary before we can guess as to what it was.

But blanket rules are dangerous in any case.

MND is pretty conservatively leveraged on any ratio based approach – but a contracting company can still go bankrupt without any interest bearing debt at all. The devil is in the contractual details of their projects. If they have fixed revenue from a contract and have mis-calculated the expense of meeting their contractually enforceable obligations they can incur big losses (and seeming out of nowhere unless you have very good industry knowledge).

 

[galumay]

I think working capital is conventional defined as all current assets except for surplus cash less all current liabilities except for short term debt .

Interesting, I have always used CA-CL=WC for my FCFE calculations.

 

[luutzu]

Net Book Value (also known as Net Assets or Equity) = 362,665

Pretty sure Graham define BookValue as also excluding senior securities like preference shares. Most companies might not have any, but if they do it ought to be taken out.

I would also remove minority interests.


In terms of interest bearing or non-interest liabilities. It's technically correct that both are debt to be paid... so that's fine if we're only interested in knowing how much debt it owes.

But if we're interested in its borrowing capacity, or examine its competitive advantage... this is one of the few places you could see that.

Money that are owe to suppliers or customers, if inventory turnover are good, if position is strong, and if these liabilities are consistently acceptable and part of the business... it's like a float - using other people's money for practically nothing.

It's nice to have people lend you money for free - you owe them for sure, and you've got to pay it every 4 or 5 weeks, but if it's consistently like that month on month. question is, can MND get that month after month... unlikely to be at that level given current condition, but it's another indication of capable management.

 

[craft]

Interesting, I have always used CA-CL=WC for my FCFE calculations.

IN FCFE calculations you are interested in change in WC (defined as CA-CL) + Net Borrowings. Washes out the same. Its just when you are analysing working capital in isolation you need to bring the net debt back inside the WC definition.

 

[galumay]

IN FCFE calculations you are interested in change in WC (defined as CA-CL) + Net Borrowings. Washes out the same. Its just when you are analysing working capital in isolation you need to bring the net debt back inside the WC definition.

Thanks craft, i realised that when i went back and looked at my spreadsheet again, i use Damodaran's method of calculating Debt to Capital ratio and inputing that into the FCFE formula - so as you say debt is already factored into the equation.

 

[galumay]

While I am laid up with a squashed foot I have revisted TGR to see if I could learn from what various posters have written in this thread about my analysis, and DCF IV based on FCFE.

When I look back at my calculations, there are two possible explanations for the very low FCFE number, either my number for Capex is too high or my calculation for change in working capital is too high. Another possibility is Depreciation & Amortisation is incorrect.

Checking back through the annual report, the only value for Capex I can discern is the line in Cash Flow for "Payment for Property Plant & Equipment", given that there is no explanatory notes or breakdown, I have to accept this as proxy for Capex.

The change in working capital I have relied on the usual, CA-CL for the current reporting period, minus CA-CL for the previous reporting period.

I suspect somehow this is where I have to break out at least part of the biological assets to adjust the numbers.

My interest here is not specifically in investing in TGR, its about understanding why my DCF model is breaking down with this particular company, and what the specific reason for that is. Its difficult to have confidence in my anaysis for other companies I I dont understand what I am doing wrong here!

Sorry for my labouring about this analysis, but I have no formal economics or finance training so I have had to learn all of this from scratch.

 

[craft]

but I have no formal economics or finance training so I have had to learn all of this from scratch.

Ditto, and it appears I can't even do high school math anymore. So consider yourself warned before you consider anything I post.

But I think the first thing you have to do is decipher how much is being spent on business maintenance and how much is being spent to fund growth.

Can't really progress until you have an estimate on this.

 

[Tooth Faerie]

Yea, bought some more at $10.70 or so, then it goes to around $7 and $8 - see the pattern?
Then thought of buying more at around $8.40 but it shot up to $13 so bought Santos instead...

Who knows, MND might use its recent water infrastructure acquisition and head to California and Brazil to give a hand with their water problem. Either way, there's going to be a lesson or two for me with this one - so I'll profit either way

Positive thinking they say

I have yet to "average down" but after doing my so-called "analysis", MND does appear to be an outstanding company and I'm am tempted every time it goes sub-$9.

Sorry for my labouring about this analysis, but I have no formal economics or finance training so I have had to learn all of this from scratch.

That's what makes ASF such an amazing place. We are all on a self-learning journey and it's great to learna and bounce ideas off people. At the moment, I'm mostly learning.

Been slowly going through business and finance textbooks.

Figures are for MND 2014 Full year all figures $,000


I think of debt as interest bearing and generally preferentially secured obligation to the lender. MND has 20,001 short term, 17,030 Long term for total of 37,031.

Liabilities are every thing the company owes, interest bearing or not. MND has 362,561 short term (current), 24,931 long term (Non-Current) for total of 387,492

Thank you for clearing up what debt is, rather than all liabilities.

I think working capital is conventional defined as all current assets except for surplus cash less all current liabilities except for short term debt .


Assuming None of MND's cash of 217,859 is surplus then calculation would be Current Assets of 606,272 less Current liabilities of 362,561 plus short term debt of 20,001 = 263,712.

I have been using the wrong definition for working capital. The figure I arrived at is close and seems to slightly underestimate WC.

Net Book Value (also known as Net Assets or Equity) = 362,665
Net Tangible assets = Net Book Value less intangibles = 362,665 – 3,791 = 358,874. Not a big difference in MND’s case but for some companies it can be huge.

Long term debt to working capital

17,030 / 263,712 = 6.4%

Total debt to net book value

37,031 / 362,665 = 10.2%

Or substituting liabilities for debt the numbers are very different.

24,931 / 263,712 = 9.4%
387,492 / 362,665 = 106.8%

As I used all liabilities, I arrived at the strange latter figures. The former figures make much more sense.

Ditto, and it appears I can't even do high school math anymore. So consider yourself warned before you consider anything I post.

I would never have guessed. Your posts on fundamental anaylsis on the forum are an inspiration.

 

[craft]

While I am laid up with a squashed foot I have revisted TGR to see if I could learn from what various posters have written in this thread about my analysis, and DCF IV based on FCFE.

When I look back at my calculations, there are two possible explanations for the very low FCFE number, either my number for Capex is too high or my calculation for change in working capital is too high. Another possibility is Depreciation & Amortisation is incorrect.

How's the foot G?

A little kick along on for you.

Over the last 10 years TGR has spent 315 Million Capex yet depreciation charges have been 83 Million. So how much capex is required to maintain the current status quo and how much is growth related?


As a side not - because its important in this case - how quickly does profitability on new capex increase to full clip. What's the profile of future capex as a lot of the infrastructure is now done.

Since DEC 10 when I first started recording the number TGR has made fair value adjustments to Biological assets of 64 Million. This increase is included in Working Capital - but does it impact cash spent?

My question on TGR - Will the buy De Costi? How will they fund it? I like what Mark Ryan has done so far but my big test for him is to see how he spends TGR script if the transaction goes ahead. Feasibly they could debt fund it but I don't think its in the companies nature to run anywhere close to the line since it was reborn out of bankruptcy and lessons have been noted.

Another question - how much do you think Mark Ryan is dreading facing a senate enquiry to tell a story of worlds' best sustainability practices for salmon production endorsed by the WWF? Yes there is an argument against salmon production - but the same argument can be made against all protein production/extraction and the ones making the noise have vested interests in other fisheries or would have us all be mainly vegetarian with maybe a few sardines. Unlike wood chipping and some other environmental issues TGR is not lacking a social licence with main stream Tasmanians.

Wait there - I wasn't going to talk about TGR because I have a positive bias but the cheaper it gets the happier I will be - and people don't usually understand that.

 

[galumay]

How's the foot G?

Bloody sore! Deep lacerations to the heel and badly sprained, still cant walk.

Over the last 10 years TGR has spent 315 Million Capex yet depreciation charges have been 83 Million. So how much capex is required to maintain the current status quo and how much is growth related?

So I presume that implies a lot of the capex is for future growth?

As a side not - because its important in this case - how quickly does profitability on new capex increase to full clip. What's the profile of future capex as a lot of the infrastructure is now done.

I have no idea! Is it related to the life cycle of the fish? Presumably the future capex should drop as less infrastructure spending required so the gap between capex and depreciation will narrow.

Since DEC 10 when I first started recording the number TGR has made fair value adjustments to Biological assets of 64 Million. This increase is included in Working Capital - but does it impact cash spent?

I tried to unwrap those fair value adjustments, as I could see the impact on WC, but i wasnt confident to discount them.

Wait there - I wasn't going to talk about TGR because I have a positive bias but the cheaper it gets the happier I will be - and people don't usually understand that.

Well just consider it as an expample to help me unwrap the mystery of DCF models! I am not looking to buy TGR as it stands, just understand why my valuation is so wide of the mark. I do uderstand the attraction of companies getting cheaper!

I will go back and work thru the numbers and the report again and see if I can make any progress!

Thanks for your time & effort, craft.

 

[Ves]

What about the interaction between operating leverage and cashflow as their scale of operations / salmon volume increases? They hinted at this in presentations as early as 2010 and 2011 where they had target metrics of 16% ROA and 25% ROIC by 2016 FY. The target date is next year, do you think they will make it? Looks achievable so far.

I also think you will find that the reason that OCF (excl. finance costs and tax) is generally less than EBITDA is because they are funding growth in their biological assets through this line item rather than investing cash flows.

By my estimates, discretionary free cash flow is much closer to about $50m than the $25m or so you get from in the 2013 and 2014 cash flow statement. It's not like in a steady state business you would be expanding your future harvest volumes or the infrastructure at your harbour (see comments by company re Macquarie Harbour!).

As an exercise to help.... what quantity of salmon did they have in their assets in 2010 compared to 2014?

Note to self: need to investigate the deferred tax liabilities and tax accounts...

 

[craft]

What about the interaction between operating leverage and cashflow as their scale of operations / salmon volume increases? They hinted at this in presentations as early as 2010 and 2011 where they had target metrics of 16% ROA and 25% ROIC by 2016 FY. The target date is next year, do you think they will make it? Looks achievable so far. G this is what I meant by 'how quickly does profitability on new capex increase to full clip' Excecutive hurdle rates for bonuses are 15/17% statutory ROA so I suspect they think they will make it.
I also think you will find that the reason that OCF (excl. finance costs and tax) is generally less than EBITDA is because they are funding growth in their biological assets through this line item rather than investing cash flows. Totally correct as well s the non-cash AASB141 adjustment their is also cash spent at the OCF level for growth.
By my estimates, discretionary free cash flow is much closer to about $50m than the $25m or so you get from in the 2013 and 2014 cash flow statement. It's not like in a steady state business you would be expanding your future harvest volumes or the infrastructure at your harbour (see comments by company re Macquarie Harbour!).

As an exercise to help.... what quantity of salmon did they have in their assets in 2010 compared to 2014?

Note to self: need to investigate the deferred tax liabilities and tax accounts...Deferred tax liabilities are large because tax accounting and AASB differ. TGR included the statutory tax in their reported profit but don't have to fork out the cash until much later. That's why the Div is only part franked so far - but it will go to FF as biological growth slows

Nice work Ves

 

[galumay]

Nice work Ves

Indeed, looks like its head down, bums up for me! Lots of work to get to the point where I can pull together the info from reports with the sort of understanding you guys have.

Thanks to both of you, again.

 

[craft]

but the cheaper it gets the happier I will be

Could some one please tell TGR to take some notice of HUO announcement this morning.

 

[galumay]

Could some one please tell TGR to take some notice of HUO announcement this morning.

What amazes me is that an announcement of missing a profit guidance by a small amount, for a clear reason, should make some holders believe their shares were worth 15% less! People still promote the efficient market theory.

 

[craft]

What amazes me is that an announcement of missing a profit guidance by a small amount, for a clear reason, should make some holders believe their shares were worth 15% less! People still promote the efficient market theory.

Pretty Unknown company missing prospect guidance - reaction probably not so surprising. If you gain some knowledge from the digging around you are doing at the moment and Huon sets into a bit of a post float funk here it may just at some stage afford you that intersection of knowledge and opportunity that offers decent risk/reward.