Yesterday Tourism Holdings Limited (THL) released an independent advisor’s valuation report to the market relating to the recent takeover offer made by MFS Living and Leisure Limited (MPY) of $2.80 per share. The independent valuation report placed a valuation range of $2.67 to $3.07 with a mid-point of $2.87 per share. This valuation is higher than the recent Valuecruncher valuation and the majority of the analyst valuations prior to the takeover offer. The independent advisors discounted cash flow (dcf) valuation was based on management’s financial projections, these projections were higher than the consensus estimates of analysts so it is understandable that the valuation would be higher. The independent advisors (Ferrier Hodgson) make an interesting comment on section 2.3 of the valuation report:

“MPY’s offer of $2.80 reflects a 2.5% discount to our base case valuation. We suspect many investors would apply a discount larger than 2.5% to our base case valuation to factor in the risk that THL will not achieve it’s forecasts, or that there may be some shock event in the tourism market.”

To put this comment in context lets revisit Valuation 101, dcf valuation methodology uses expected future cash flows discounted at a rate that reflects the risk associated with these cash flows. The majority of the time the people best placed to estimate a company’s future cash flows are the management.  Making long-term financial projections is difficult in any industry and particularly in the tourism sector where so many key factors are outside the control of management, this is why it is important to remember the projections should reflect the best estimate at the time. Any risk that THL will not achieve it’s projected targets should be reflected in the discount rate. The impact of “shock events” should be handled with scenario analysis, this is often a difficult and subjective task as “shock events” by definition are difficult to quantify. Ferrier Hodgson should have incorporated the risk associated with THL not achieving its projections into the discount rate they used to arrive at their valuation of $2.87 per share.

There is a range of valuations for THL in the public domain with a summary included in Table 7.9 of the Ferrier Hodgson report. THL investors will have to consider the merits of MPY’s offer based on their expectations of THL’s performance and the risk associated with these expectations. The Ferrier Hodgson report provides the management projections, industry overview and THL valuation required to make this decision.

Valuecruncher Valuation Report - Tourism Holdings Limited 

Yesterday Australian company MFS Living and Leisure announced a $2.80 per share takeover offer for Tourism Holdings Limited. Tourism Holdings share price closed at $2.74 following the announcement, up significantly from the $2.27 closing price on Friday. Tourism Holdings operations include a number of high profile tourist attractions, a fleet of rental cars and campervans and Fullers Bay of Islands.

Valuecruncher has placed a mid-point valuation of $2.32 per share on Tourism Holdings with a range of $1.92 to $2.73. The mid point valuation is consistent with the pre-offer price of $2.27, the takeover offer and current market price are slightly higher than the upper end of the Valuecruncher valuation range. Valuecruncher’s valuation is based on EBIT growth of 21% annualised over the next 3 years, a terminal growth rate of 4.1% (reflecting the potential of New Zealand’s tourism industry) and a cost of capital of 13% (based on PWC’s December 2006 Cost of Capital Report).

The difference between the Valuecruncher mid-point and the takeover offer should not be interpreted as a premium for control. The Valuecruncher valuation is based on high level analysis and difference between the two prices could be attributed to alternative valuation assumptions relating to growth and cost of capital (WACC). The MFS Living and Leisure offer may include the value of synergies they believe they can extract from integrating Tourism Holdings with their existing operations. The calculation of the value of any synergies is very subjective and it is debatable how much of these synergies MFS Living and Leisure would be willing to pay away to the current Tourism Holdings shareholders.

Valuecruncher will observe the process with interest and looks forward to the release of the independent advisor’s valuation report.