Valuecruncher has valued each King Country Energy (KCE) share at $4.87, with a range of $4.31 to $5.46. The share price closed at $4.90 on the 2 March 2007. 

KCE shareholder Todd Energy has announced an intention to make a partial takeover offer for 14.72% of the ordinary shares in KCE at $5.00 per share. Todd Energy currently owns 35.38% of KCE. The independent directors of KCE commissioned Grant Samuel to provide an independent advisers report outlining the merits of a previous offer made by Todd Energy of $4.40 per share made in late 2006. The Grant Samuel report valued KCE at $4.80 to $5.26 per share.

The Valuecruncher mid-point valuation reflects the current operations of KCE. Two key value components not included that could justify a higher valuation are the proposed Mokau hydro scheme and a potential carbon charge for thermal generators.

The proposed Mokau hydro scheme is before the Environment Court and if successfully consented would provide increased operational flexibility to KCE and reduce dependence on an illiquid hedge market to cover existing retail commitments.

The implementation of a carbon charge on thermal generators would would see the cost passed through to all electricity consumers due to the marginal pricing nature of the electricity market. KCE’s portfolio of hydro generation plant would not be liable for a significant carbon charge and therefore result in KCE obtaining higher margins from generation operations.

Valuecruncher has not modelled the value of these components explicitly but believes the upside value they represent justifies KCE trading in the top half of the valuation range (i.e. $4.87 – $5.46) which is consistent with both the Grant Samuel report and the indicative offer of $5.00 per share from Todd Energy.

The uncertainty surrounding these to factors illustrates the issue of regulatory uncertainty that faces the entire electricity industry.

The WACC used for this analysis is 9%. 

Terminal growth has been set at 2%.  

King Country Energy Valuation                                                          

Last Friday Valuecruncher was featured in the “Shoeshine” column of the New Zealand National Business Review (NBR).  I would love to provide a link – but it requires a subscription (and I don’t do links to walled content).  I will put a copy of the NBR article on the blog soon.  This coverage in the NBR has resulted in a number of queries along the lines of “what is Valuecruncher?”.  This post aims to provide an answer.

The very simple answer is we value companies.  We use the same valuation methodologies as leading investment banks – discounted cash flow analysis, comparison company and acquisition analysis, and net tangible assets.  Instead of having to go to expensive experts (investment bankers and maybe accountants) we use the same frameworks as these experts but simplify the process to provide a robust indication of value.  Our valuations cost NZ$1,000 (plus GST) and are turned around in 24-48 hours – at least 10x cheaper than alternative options and 10x quicker.

Our clients provide the information in the form that we require and we do the corporate finance math.  There is a one-page input sheet that provides the key information we require (and a guide to where the input sheet information comes from).  If advisers (such as accountants) use our service we pay 15% to the adviser – the adviser completes the input sheet as they will have access to all the required information.

Valuecruncher uses the inputs and runs them through our models – and has one of the Valuecruncher team review the outputs.  The outputs are reviewed by a valuation professional – a real person.  We have not patented our processes as they are not radically new – they are what all of the leading investment banks use for valuing businesses.  We have made the frameworks used by leading professionals available at a price most people can afford.

Why do people and companies require valuations?  Investing in companies, selling stakes in companies, and fair value assessments in disputes are some of the reasons for valuations.  We regularly see business owners that simply want to see an indication of what their business could be worth.  At NZ$1,000 (plus GST) people can obtain a valuation at a cost-effective price.

We have two parts to our business:

1. Private valuations for clients – which are never in the public domain.

2. We operate a blog (which you are reading) – where we use publicly available information to complete valuations of companies (and businesses) that are topical.

We are aiming to provide a service where small business owners can get access to the same valuation techniques that leading investment banks use – at a reasonable price.

We are also aiming to improve the quality of valuation in the market generally.  We are based in New Zealand and currently focus on that market.  We don’t believe that the valuation work that comes into the public domain in New Zealand (or the wider world for that matter) is particularly good.  There are very strong valuation professionals in New Zealand (and internationally) – but they primarily provide private advice to well-paying clients.  The valuation expertise available to the media, smaller investors and the general “man in the street” is not strong.  We are aiming to improve that.

The Valuecruncher blog provides some education on valuation (i.e. what is a share price?) and a database of valuations on major New Zealand companies (i.e. Trade Me), Australian companies (i.e. Qantas), international companies (i.e. Google) and topical transactions (i.e. the sale of Telecom New Zealand’s Yellow Pages Group).

We would like to see all NZX-listed, NZAX-listed and Unlisted-listed companies in New Zealand complete a Valuecruncher valuation on a six-monthly or yearly basis and make them available on their websites.  Even doing it twice a year would only cost NZ$2,000 (plus GST) a year and provide all shareholders with a consistent valuation framework – additional transparency for all stakeholders.  We can complete valuations for any stakeholders – give us the inputs and we can do the math.  We list the assumptions that we have used – more transparency.

Our framework is what the professionals use.  The Valuecruncher model is a simplified version of what leading investment banks use in major mergers and acquisitions and other corporate transactions.  Valuecruncher provides an indicative valuation – but one using the same methods that the professionals use.

To obtain more information on Valuecruncher email your query to info@valuecruncher.com or call Mark Clare on 0800-470227.

Valuecruncher has placed a value on Blue Sky Meats (NZ) Ltd. of $2.24 per share, with a range of $1.47 to $3.05.  The current value of $2.50 lies very close to the mid-point valuation in our analysis.

The key assumptions that have been used in this analysis reflect static, but stable, market conditions for the next three years.

Revenues Growth

Due to the current dynamics of the industry at the moment, it is hard to see much improvement in revenues growth. The revenues growth for Blue Sky Meats has been 8.5%, -13.8% and 1.17% in the 03/04, 04/05, and 05/06 periods.  We have forecasted the growth to be approximately 3% for the next three years, similar to the growth seen by the comparator AFFCO Holdings (5.4% and 2.42% revenue growth for the 03/04 and 04/05 periods).

EBIT Margins

The EBIT margin of Blue Sky has been declining since 2003, with margins of 7.60%, 6.00%, 7.16% and 2.88% in 03, 04, 05, and 06, respectively. Reasons that can be attributed to this are the high New Zealand Dollar and increase in fuel prices, resulting in historically unfavourable trading conditions. The EBIT margin used in the analysis is 3%, closer to the EBIT margin of AFFCO Holdings. Due to the unusually low EBIT margin the share price is very sensitive to even the smallest changes in the EBIT margin.

Discount Rate (WACC)

The discount rate is assumed to be is 11%. The PwC Cost of Capital Report states that the WACC for AFFCO Holdings is 12.5%. The agriculture industry average is given as 9.6%. We have taken the average of these two figures.

Terminal Growth

The terminal growth is also assumed to be 3%.

Blue Sky Meats Valuation

Synergy announced their mid-year (six-months to 30 September) financial result last week (Synergy six month result 30 Sept 2006).

Synergy revenues were up 4% on the prior period a year ago at NZ$18.03 million and the operating surplus before tax (EBIT) was NZ$1.219 million – an approximate 6.8% EBIT margin.

Our valuation (Synergy Valuation) assumed 3% annual revenue growth and a 5.0% EBIT margin.

We believe this is further evidence that our valuation is about right.  We will see where Synergy is at year-end before we would look to make any changes our valuation.  5% EBIT margins should be the bare minimum that Synergy is looking to achieve.

Synergy placed a lower valuation on the shares in a release to shareholders in August (Synergy valuation notice).  We are comfortable with our analysis and still believe Synergy’s advice to shareholders at the low end of any valuation range.

As an illustration of valuation methodology we have decided to have a look at two companies that have recently listed on the Unlisted market (www.unlisted.co.nz).  Unlisted provides a platform for trading shares of companies – without the same level of compliance required, and cost, as on NZX (www.nzx.com).

In August we saw the debut of two IT services companies – Synergy (www.synergy.co.nz) and Infinity (www.infinity.co.nz) – on Unlisted.  Neither of the companies have yet had a share trade on Unlisted at 10 October 2006 – lack of liquidity in the market is a feature of Unlisted.  Synergy (Unlisted:FSG) has a sell offer at $1.75 and no buy orders – i.e. someone is willing to sell at $1.75 a share but there are no buyers.  Infinity (Unlisted:INFINITY) has buy orders at $0.40 and sell orders at $0.50.  Neither company has a lot of depth – i.e. not a lot of people looking to buy or sell shares.  If you were a shareholder in either of these companies – what might be an indication of value for the shares?

So what does Valuecruncher think the valuations for these two companies should be?  We took only information that has been released by the companies on their websites and some assumptions that we lay-out in the valuation reports in determining our values.  Copies of the valuation reports are attached to this post.

Remember that to get to the share price we start by calculating the present value of the future cash flows generated by the business – this is called the Enterprise Value.  From the Enterprise Value we remove Net Debt – long-term borrowings less cash – to obtain the value of the equity in the business.  We divide the Equity Value by the number of shares outstanding to get to the value per share or share price.

The information below summarises our analysis of the valuations of Synergy and Infinity.

Synergy – $11.1 million Enterprise Value and ($1.2) million Net Debt equals an Equity Value of $12.3 million and with 7.0 million shares outstanding gives a share price of $1.75.  

Infinity – $22.1 million Enterprise Value and ($4.6) million Net Debt equals an Equity Value of $26.7 million and with 58.7 million shares outstanding gives a share price of $0.45. 

Because both Synergy and Infinity have cash on their balance sheets and no debt – the Net Debt figures are negative and being deducted from the Enterprise Value to determine the Equity Value mean that the Equity Value is above the Enterprise Value. Our valuation reports use as comparators the comparable IT services transactions of Telecom acquiring Gen-I and Telstra acquiring Sytec.  Both the Valuecruncher valuations are just below the two comparators – but are reasonable compared with these transactions.Financial advisers that work in the IT services space generally tell clients that industry transactions occur in the 2-4x EBIT valuation range.  Using that as a guide (and 4x EBIT as the valuation) – would imply Synergy would have a share price of $0.94 and Infinity $0.33.  Synergy has had an independent valuation report commissioned that gave a share price range between $0.50 and $1.56 – and this has been communicated as guidance to shareholders (http://www.synergy.co.nz/AboutUs/News/NewsItems/2006-08-01_Notice_to_Shareholders_Synergy_International.htm).  This is below our valuation mid-point of $1.75 and the bottom end is below our NTA calculation of $0.62 per share.

Our Take

We are comfortable with our valuations of both Synergy and Infinity.  No trades have occurred for either company on Unlisted – Infinity has a buy offer at $0.40 and sell offer at $0.50 (Valuecruncher valuation $0.45) and Synergy has a sell offer at $1.75 (Valuecruncher valuation $1.75). The Synergy valuation advice to shareholders of between $0.50 and $1.56 is below what we think the shares are worth.  The 2-4x EBIT valuation range advice (for the IT services industry) also seems low to us when applying discounted cash flow techniques.  The transactions involving Telecom and Telstra in the New Zealand IT services space are slightly above the valuation levels we are getting to – there may have been some optimistic views from the acquiring parties about potential synergies available.

It is also worth noting that the EBIT margins for these businesses are in the 4-5% range – which is pretty unattractive really (Telecom NZ operates a 25-30% EBIT margin and The Warehouse currently operates at 9%).  Other IT services businesses operate with higher EBIT margins – Datacom operates in the 8-9% range (http://www.datacom.co.nz/default.asp?Content_ID=430&Category=News).  While Datacom may have more recurring revenues than Synergy or Infinity – we are surprised about the different levels of performance.  Synergy had an EBIT margin of 4.1% and Infinity 5.5% in their last financial periods.  Infinity’s Directors Report for the first half of 2006 states that while earnings are good they will be below the 5.5% EBIT level of 2005 for the 2006 year.  Valuecruncher has used 5% for the EBIT margins in our valuations.  However we are surprised at the low level of earnings in the IT services space.  We are sure that management of both Synergy and Infinity are looking to improve financial performance.

Our valuation suggests that the buy and sell orders for Infinity are in the right general area.  Our valuation of Synergy is above the guidance that the Synergy Board has given to shareholders but in line with the current sell order on Unlisted.  Our valuations are sensitive to the profitability of the companies – changes in performance (positive or negative) will impact valuation levels.

We will come back and look at these companies again later – and see if financial performance does improve.

Synergy Valuation

Infinity Valuation