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Valuation Practices Survey 2013 v3
Valuation Practices Survey 2013 v3
Valuation
Practices Survey
2013
kpmg.com.au
2013 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG
International), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.
Liability limited by a scheme approved under Professional Standards Legislation.
Contents
Section 1: Foreword........................................................................................ 1
Insight into Australian valuation practices........................................................... 1
Navigating a volatile environment......................................................................... 1
Section 2: Executive summary............................................................................. 2
Creating a meaningful benchmark for valuation practice.......................................... 2
Key findings and interesting observations.................................................................. 2
Section 3: Valuation methodologies......................................................................... 3
Depending on discounted cash flow............................................................................... 4
Section 4: Market approach............................................................................................ 5
Elevated EBITDA.................................................................................................................. 5
Section 5: Income approach: the cost of equity................................................................ 7
Confidently using the Capital Asset Pricing Model.................................................................. 8
Section 6: Adjusting for country risk...................................................................................... 9
Few participants adjusting cash flows for country risk................................................................. 9
Section 7: Benchmarking the risk-free rate............................................................................... 11
10-year risk-free rate dominates...................................................................................................... 12
Section 8: Understanding beta....................................................................................................... 13
One third of participants do not adjust for thin trading........................................................................ 14
Timeframes for adjusting beta............................................................................................................... 15
Section 9: The equity market risk premium.................................................................................................. 16
Avoiding volatility pricing............................................................................................................................ 18
Section 10: Analysing the small stock premium..................................................................................... 19
Managing small stock risk............................................................................................................................... 20
Section 11: Adjusting for unique risks.......................................................................................................... 21
Section 12: Bringing transparency to discounts and premia......................................................................... 22
Bringing transparency to discounts and premia..................................................................................................... 22
Discount and premium data..................................................................................................................................... 25
Section 13: All about imputation credits................................................................................................................ 26
A varied approach to imputation credits....................................................................................................................... 28
Section 14: Commodities............................................................................................................................................. 29
Section 15: Accounting, ESG and miscellaneous factors............................................................................................. 30
2013 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG
International), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.
Liability limited by a scheme approved under Professional Standards Legislation.
Section 1:
Foreword
Ian Jedlin
Partner in Charge, Valuations
KPMG Corporate Finance
2013 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG
International), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.
Liability limited by a scheme approved under Professional Standards Legislation.
Section 2:
Executive summary
Cash is still king. The discounted cash flow approach is the dominant
methodology used by Australian financial analysts and corporate financiers.
Thismay reflect the more flexible nature of this approach, which enables
multiple scenarios around growth expectations to be considered, providing a
farmore insightful valuation result.
Lack of reaction to volatility. Sixty eight percent of participants indicated that
they do not revise their equity market risk premium assumptions to reflect the
recent developments in capital markets.
Advisers take note of accounting standards. Twenty one percent of the
participants critically evaluate and 74 percent consider the impact of accounting
standards on future financial statements when advising on a deal.
Environmental, Social & Governance (ESG) factors are at best considered
only qualitatively. Only 5 percent of the participants consider these factors
quantitatively and 32 percent ignore ESG factors all together.
Still no conclusive evidence on the value of imputation credits. Participants
were divided as to whether value should be ascribed to imputation credits when
valuing a non-infrastructure related business. In terms of infrastructure-related
investments, the approach is significantly different.
Focusing in on discounts and premia. Observing and understanding discounts
and premia is one of the most challenging and subjective tasks we face. While it
was difficult to gather feedback on this issue, we have enough data to note that
there is an inverse relationship between:
the size of the small stock premium and the size of the subject company
the size of the minority discount and the size of the equity stake being valued
the size of the marketability discount and the size of the stake being valued.
23 06 06 06 05
Total participants
Investment banks
Professional services
firms
Infrastructure funds
Other participants
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International), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.
Liability limited by a scheme approved under Professional Standards Legislation.
Section 3:
Valuation
methodologies
es
ot
n
De
of
r
e
mb
es
nu
ns
o
sp
re
going concern?
approach is clearly the
dominant methodology
used by Australian
financial analysts and
Other
50%
50%
corporate financiers, with 12
all participants always or
sometimes adopting this
approach.
1
21
23
23
Asset-based
10%
methodology
Market approach
(e.g. Price
Earnings ratio)
76%
14%
48%
Income approach
(Discounted
Cash Flow)
48%
65%
20%
0%
4%
35%
40%
60%
80%
100%
% of participants
Always
Sometimes
Never
2013 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG
International), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.
Liability limited by a scheme approved under Professional Standards Legislation.
2013 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG
International), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.
Liability limited by a scheme approved under Professional Standards Legislation.
Section 4:
Market approach
Figure 2: W
hen using the market approach, how often are the following valuation
multiples used?
14
22
22
Other
Price/Book value
of equity
22%
21%
9%
57%
36%
Price/Pre-tax
5%
earnings
55%
27%
22
Price/Earnings
23%
22
EV/EBIT
23%
23
EV/EBITDA
68%
18%
59%
73%
5%
22
EV/Revenue
61%
5%
50%
20%
0%
39%
45%
40%
60%
80%
100%
% of participants
Always
Sometimes
Never
Elevated EBITDA
When using the market approach, the Enterprise Value (EV)/ Earnings Before
Interest, Tax, Depreciation & Amortisation (EBITDA) valuation multiple is by far the
most popular used, with all participants always or sometimes using this multiple
and 61 percent always doing so. Infrastructure funds are particularly wedded
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International), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.
Liability limited by a scheme approved under Professional Standards Legislation.
to this multiple, with 83 percent always using it, compared with 67 percent of
investment banks and 33 percent of professional services firms.
The widespread use of EBITDA the multiple that is closest to operating cash
flow indicates that most participants believe cash is the main driver of value.
Earnings Before Interest & Tax (EBIT) and Price to Earnings (PE) multiples are
also used regularly, but it is interesting to note who is using these multiples.
Thirty three percent of investment banks and infrastructure funds always use
PE, while no professional services firms were willing to say they always used it.
Likewise, investment banks were the most prolific users of EBIT, with 33 percent
always using this multiple compared with 17 percent of professional services and
infrastructure funds.
2013 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG
International), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.
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Section 5:
Income approach: the
cost of equity
Figure 3: In calculating an appropriate rate of return to future cash flows to equity,
how often are the following methods used?
12
1
Other
8%
25%
67%
22
21
22
Premium to
5%
the risk
free rate
64%
Arbitrage
Pricing
Theory (APT)
32%
100%
Capital
Asset
Pricing Model
(CAPM)
82%
0%
20%
40%
18%
60%
80%
100%
% of participants
Always
Sometimes
Never
2013 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG
International), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.
Liability limited by a scheme approved under Professional Standards Legislation.
2013 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG
International), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.
Liability limited by a scheme approved under Professional Standards Legislation.
Section 6:
Adjusting for
countryrisk
Figure 4: H
ow do you adjust for country risk when assessing an asset in a
developing country?
60%
57%
50%
% of participants
40%
30%
24%
20%
14%
10%
0%
5%
0%
2013 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG
International), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.
Liability limited by a scheme approved under Professional Standards Legislation.
21
Investment banks
Professional services
firms
2013 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(KPMG International), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG
International. Liability limited by a scheme approved under Professional Standards Legislation.
Section 7:
Benchmarking the
risk-free rate
20
Figure 5: W
hich of the following do you use as a benchmark for the risk-free
rate in Australia?
100%
80%
% of participants
85%
60%
40%
20%
0%
10%
0%
5%
Figure 6: H
ow do you derive the risk-free rate when using the yield on a government
bond as a proxy?
29%
21
52%
5%
14%
Spot
Historic average
Forecast
A combination of the above
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21
Over 52% of participants use spot to derive the riskfree rate, with investment banks leading the way.
Professional services
Infrastructure funds
2013 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG
International), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.
Liability limited by a scheme approved under Professional Standards Legislation.
Section 8:
Understanding beta
It is interesting to note
that close to one-third
of participants do not
consider an adjustment
for thin trading.
Figure 7: D
o you adjust the beta for thin trading, or do you rely on the service
provider to make such an adjustment?
32%
36%
1
22
32%
Figure 8: Which of the following service providers are used as a source of information?
35%
32%
22
% of participants
30%
25%
20%
20%
15%
12%
10%
18%
14%
5%
0%
4%
0.00%
Aspect Huntley
Bloomberg
Capital IQ
Reuters/Factiva
In-house calculation/research
Other
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International), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.
Liability limited by a scheme approved under Professional Standards Legislation.
Figure 9: W
hen calculating the beta, is the source data unlevered and then relevered
at the optimal gearing?
14%
22
86%
Yes
No
Fact favourites
Of the participants who use a service provider, there
are some clear favourites depending on sector.
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21
Figure 10: W
hen calculating the beta, what period (in years) do you deem to be
most appropriate?
50%
48%
40%
% of participants
A maximum period of
five years and a minimum
period of two years are
used by participants
when calculating beta.
30%
20%
19%
10%
0%
19%
14%
0%
0%
0%
0%
0%
Period in years
Figure 11: W
hen calculating the beta how frequently do you make observations?
60%
55%
20
% of participants
50%
40%
30%
30%
20%
10%
0%
5%
Daily
Weekly
Monthly
5%
5%
Quarterly
Other
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International), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.
Liability limited by a scheme approved under Professional Standards Legislation.
Section 9:
The equity market
riskpremium
Figure 12: What equity market risk premium do you use when making use of the
Capital Asset Pricing Model in percentage terms when valuing assets in
the following countries?
80%
73%
60%
50%
40%
32%
30%
21%
20%
23%
26%
45%
% of participants
70%
Survey participants
overwhelmingly are using
an EMRP for Australia of
6 percent, with some bias
towards 7 percent.
10%
0%
4%
5%
6%
Australia
12
United States
13
United Kingdom
8%
MRP
19
1
7%
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International), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.
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Figure 13 Historic Equity Risk Premium, Australian All Ordinaries Accumulation Index
6.5%
6.0%
6.0%
5.5%
EMRP
5.8%
5.5%
5.0%
5.2%
4.5%
4.3%
4.0%
3.5%
3.0%
1883 2011 1937 2011 1958 2011 1980 2011 1988 2011
6.5%
6.0%
EMRP
5.0%
5.2%
4.9%
4.5%
4.0%
6.0%
6%
5.5%
4.3%
3.5%
3.0%
0%
35%
50%
100%
% of dividend franked
It may be too early to decide whether most recent equity market performance
and the implied risk premia should be considered the new normal and
incorporated into future valuations. Nevertheless, there is good reason to believe
that a more appropriate figure for Australia looking forward would be closer
to 5 percent. While 6 percent is currently the preferred risk premium adopted
by Australian regulators, this is currently under review. Should the regulators
decide to lower the risk premium, it is likely that we will see market practitioners
following suit and the Australian risk premium more closely aligned to premia
used in the US and UK.
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Figure 15: H
ave you recently revised your equity market risk premium assumption to
reflect the volatility in capital markets?
32%
Over 68 percent of
participants have not
recently revised their
equity market risk premium
assumption to reflect
volatility.
22
68%
Yes
No
Figure 16: W
hat is your rationale for selecting the market risk premium?
80%
% of participants
70%
71%
60%
50%
1
40%
21
30%
20%
10%
0%
19%
10%
Historic equity
bond spread
0%
Expected
premium
Combination
Other
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Section 10:
Analysing the small
stock premium
Figure 17: D
o you adjust the CAPM rate of return with a premium that reflects the
extra risk of an investment in a small company?
21
48%
52%
Yes
No
Figure 18: In relation to the small stock premium, which factor is adjusted?
100
16
% of participants
94%
80
60
40
20
0
6%
0%
Beta
Equity market
risk premium
Overall expected
rate of return on
equity capital
Beta
Equity market risk premium
Overall expected rate of return
on equity capital
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Figure 19: W
hat is the benchmark small stock premium applied, given the size of the
company or entity?
6%
Premium range
5%
4%
Up to
5%
1
3%
Up to
3%
2%
Up to
2%
1%
0%
0%
Estimated Estimated
MVE ($m)
MVE
($m)<=250 251-500
Estimated
MVE ($m)
501-1000
0%
0%
Estimated Estimated
MVE ($m) MVE ($m)
1001-2000 2001-4000
Estimated
MVE ($m)
4001+
12
38%
29%
24%
10%
Ibbotson Associates
In-house
Subjective
Other
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Section 11:
Adjusting for
uniquerisks
Adding alpha
Most participants tend to add a premium to reflect unique risks not modelled in
forecast cash flows.
21
67%
24%
10%
sometimes add a
premium
always add a
premium
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International), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.
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Section 12:
Bringing transparency
to discounts and premia
Figure 20: W
hat factor is adjusted for the discount/premia?
60%
% of participants
50%
55.00%
50%
45%
41%
40%
32%
30%
25%
20%
10%
0%
20
18%
18%
10%
24%
20%
9%
9%
0%
Discount rate
Market
value of
Equity
0%
0%
Enterprise
value
Multiple
Other
22
Minority discount
17
1
Control premium
Marketability discount
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Figure 21: D
o you apply a minority discount when valuing a minority stake using the
following approaches?
19
Asset-based
methodology
19
Market
approach
20
Income
approach
58%
42%
47%
53%
65%
20%
0%
35%
40%
60%
80%
100%
% of participants
Yes
No
Figure 22: W
hat benchmark minority discount is applied given the size of the stake
being valued?
60%
Discount range
50%
50%
40%
30%
Median
20%
20%
30%
Median
10%
10%
0%
1% - 24%
25% - 49%
10%
Median
0%
50% joint venture
Size of stake
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Figure 23: If the entity is not listed, do you apply a marketability discount when using
the following approaches?
Asset-based
methodology
16%
19
84%
Market approach
32%
19
68%
Income approach
30%
70%
20%
0%
40%
60%
80%
20
100%
% of participants
Yes
No
Figure 24: W
hat benchmark discount is applied given the size of the stake being
valued (unlisted companies)?
45%
Discount range
40%
30%
Median
20%
30%
Median
15%
15%
20%
Median
5%
0%
1% - 24%
25% 49%
50%
10%
Median
2.50%
51% 74%
5%
Median
0%
75% 100%
Size of stake
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The minority
discount is most
routinely applied when
practitioners use the
income approach.
20
Asset based
methodology
20
21
30%
70%
Market
approach
Income
approach
85%
15%
33%
67%
20%
0%
40%
60%
80%
100%
% of participants
Yes
No
Figure 26: What benchmark control premium is applied given the size of the stake being valued?
45%
12
Premium range
40%
30%
15%
0%
30%
Median
30%
Median
22.50%
51% - 74%
75% - 100%
Size of stake
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Section 13:
All about imputation
credits
Figure 27: H
ow do you treat imputation credits in business enterprise valuations
(other than infrastructure investments)?
50%
% of participants
47%
40%
41%
30%
20%
10%
0%
0%
6%
6%
17
Ignore
Adjust the equity market risk premium
Separately determine the market value of the
benefit and add to estimate of value
Adjust cost of equity for gamma
Other
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Figure 28: How do you treat imputation credits when valuing an infrastructure
investment?
70%
17
% of participants
60%
59%
50%
40%
30%
24%
20%
10%
6%
0%
6%
6%
Ignore
Adjust the equity market risk premium
Include imputation credits attaching to dividends
in the cashflows at an assumed utilisation rate
Separately determine the market value of the benefit
and add to estimate of value
Other
Figure 29: W
here imputation credits are included in the cash flows, what utilisation
factor do you assume?
35%
33%
15
% of participants
30%
25%
20%
20%
15%
10%
13%
13%
5%
0%
7%
7%
7%
0%
100%
90%
80%
70%
60%
50%
40%
Less
than
40%
Utilisation factor
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Liability limited by a scheme approved under Professional Standards Legislation.
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International), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.
Liability limited by a scheme approved under Professional Standards Legislation.
Section 14:
Commodities
Figure 30: How do you deal with the gold premium in gold mine valuations?
60%
14
% of participants
50%
50%
40%
43%
30%
20%
10%
7%
0%
Apply a multiple
to the income
approach valuation,
e.g. 2 times
Discounted Cash
Flow value
A reduced
discount rate
Other
Figure 31: H
ow do you determine the expected commodity prices for valuation purposes?
35%
18
% of participants
30%
31%
25%
20%
24%
19%
19%
15%
10%
7%
5%
0%
Spot
price
Forward
prices
Consensus
of forecast
prices by
brokers/
economists
Commodity
pricing
expert
Other
Section 15:
Accounting, ESG and
miscellaneous factors
Accounting standards, treatment of hedge books and
ESGfactors
Figure 32: T
o what extent do you consider the impact of accounting standards on
future financial statements when evaluating or advising on a deal?
80%
% of participants
70%
74%
60%
19
50%
40%
30%
20%
21%
10%
0%
5%
Ignore
Consider
Critically evaluate
50%
% of participants
47%
40%
41%
30%
17
20%
10%
0%
12%
Mark to
market
Included in
cash flows
at contracted
commodity
prices
Other
2013 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG
International), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.
Liability limited by a scheme approved under Professional Standards Legislation.
Figure 34: D
o you consider Environmental, Social & Governance (ESG) factors when
performing valuations?
5%
32%
1
19
63%
Yes Quantitatively
Yes Qualitatively
No
60%
19
% of participants
50%
53%
40%
30%
20%
26%
21%
10%
0%
2013 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG
International), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.
Liability limited by a scheme approved under Professional Standards Legislation.
Figure 36: W
hat definition of debt do you use when considering debt for purposes
of debt: equity ratio calculations of the weighted average cost of capital or
when calculating equity value?
11%
18
89%
Gross debt
Net debt (i.e. gross debt surplus cash balance)
Figure 37: W
hat is the purpose of most of your valuation engagements?
35%
% of participants
30%
29%
25%
20%
19%
15%
17%
17%
12%
10%
19
7%
5%
0%
A-IFRS (Accounting, unit prices)
Transaction advisory
2013 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG
International), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.
Liability limited by a scheme approved under Professional Standards Legislation.
kpmg.com.au
Contact us
Danie van Aswegen
Partner
Valuations, Corporate Finance
+61 3 9838 4614
dvanaswegen@kpmg.com.au
Ian Jedlin
Partner in Charge
Valuations, Corporate Finance
+61 2 9335 8207
ijedlin@kpmg.com.au
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No.246901.
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2013 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (KPMG International), a Swiss entity. All rights reserved.
The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.
Liability limited by a scheme approved under Professional Standards Legislation.
February 2013. VICN10732ADV.