Valuation Practices Survey 2013 v3 PDF

CORPORATE FINANCE
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
1 Valuation Practices Survey
Section 1:
Foreword
“Without a robust body Insight into Australian valuation practices

of research to provide real Welcome to KPMG’s inaugural survey on Australian valuation practices.
The Valuation Practices Survey will provide detailed insight into the
guidance on valuation methodologies adopted by Australian financial analysts and corporate financiers
issues, many valuation and how they are applied.
practitioners are finding It is our hope that the survey will fill a real gap in the Australian market, which
currently lacks the kind of quality of research into valuation practices that larger
it difficult to navigate
markets often have – such as those in the US and UK. Valuation work is highly
unchartered territory at subjective, so it is critical to gain a real understanding of how practice has
a time when it is more evolved in the local market.
important than ever to Navigating a volatile environment

understand what the The volatile economic environment is making assessments and assumptions
industry is doing as a around valuations very challenging. A recently low government bond yield creates
even more challenges in the application of valuation methodologies.
whole.”
The challenging environment means that forecasting future growth and returns
is particularly problematic. The domino effect of this uncertainty is a much more
complex process for estimating the impact on the cost of capital. Textbook
principles and processes are being stretched – given the uncertain prospects in
most sectors, it is more difficult than ever to prepare financial forecasts.
We’d like to thank everyone who completed the survey for their time, effort
and insights.
We look forward to talking with you further about our findings and welcome
any feedback.
Danie van Aswegen Ian Jedlin

Partner, Valuations Partner in Charge, Valuations
KPMG Corporate Finance KPMG Corporate Finance
Valuation Practices Survey 2
Section 2:
Executive summary
Creating a meaningful benchmark for valuation practice “The survey results are a
KPMG’s first Valuations Practices Survey provides a unique reference point for meaningful benchmark
corporate financiers, infrastructure funds and consultants performing valuations in the
Australian market. With 23 market leading participants across a range of industries, for current practice and,
the feedback we have received captures some significant views, reflecting the current hopefully, a platform
status quo around valuation methodology in the Australian market.
we can build on to shape
This means the survey results are a meaningful benchmark for current practice
our application of the
and, hopefully, a platform we can build on to shape our application of the
methodologies into the future. methodologies into the
future.”
Key findings and interesting observations
• Cash is still king. The discounted cash flow approach is the dominant
methodology used by Australian financial analysts and corporate financiers.
This may reflect the more flexible nature of this approach, which enables
multiple scenarios around growth expectations to be considered, providing a
far more 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.
Who completed the survey?
23 06 06 06 05
Total participants Investment banks
Professional services
firms
Infrastructure funds Other participants
ot
es
Section 3:
Valuation
n
De
1
of
e r
mb
nu es
methodologies
o ns
sp
re
The discounted cash flow Figure 1: H

“ ow often do you use the following valuation approaches assuming a
going concern?
approach is clearly the
dominant methodology
used by Australian
financial analysts and
Other
corporate financiers, with 12
1
50% 50%
all participants always or

sometimes adopting this
approach.”
Asset-based
21 methodology
10% 76% 14%
1
Market approach
23 (e.g. Price 48% 48% 4%
Earnings ratio)
Income approach
23
1
(Discounted 65% 35%

Cash Flow)
0% 20% 40% 60% 80% 100%
% of participants
Always Sometimes Never
Depending on discounted cash flow

Of the three major valuation methodologies, the discounted cash flow (DCF)
approach is clearly the dominant primary methodology used by Australian
financial analysts and corporate financiers, with all participants always or
sometimes adopting this approach. The market approach was also very popular
– with 96 percent of participants always or sometimes using this methodology.
Asset-based approaches are only always used 10 percent of the time – 14
percent of participants never use this approach.
The popularity of the DCF model may reflect its more flexible nature – the
approach allows multiple scenarios regarding growth expectations to be
considered, providing a far more insightful valuation result.
We do note variation in uses of the approaches – infrastructure funds exclusively

use the DCF approach given their investments are often regulated, longer-
dated assets are easier to analyse using this approach. Investment banks
and professional services firms are much more likely to only use the DCF
methodology occasionally.
Other methodologies used by participants
Of the six participants who sometimes use

methodologies outside the key approaches, the
following are also considered:
• Industry rules of thumb

• Resource multiples
• Premium to market price
• Leveraged buy-out analysis assuming target returns
Section 4:
Market approach
The widespread use of

“ Figure 2: W
hen using the market approach, how often are the following valuation
multiples used?
EBITDA multiples – the
multiple that is closest to
cash – indicates that most 14
1
Other 22% 21% 57%

participants believe cash is
the main driver of value.”
1
Price/Book value
22 of equity
9% 36% 55%
Price/Pre-tax
22 earnings
5% 27% 68%
22
1
Price/Earnings 23% 59% 18%
22
1
EV/EBIT 23% 73% 5%
23
1
EV/EBITDA 61% 39%
EV/Revenue
22 5% 50% 45%
20% 40% 60% 80% 100%

0%
% of participants
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
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.
Other methodologies used by participants
Six participants use other valuation approaches,

including:
• Enterprise value/capacity (generation assets)

• Enterprise value/JORC resources and reserves
• Enterprise value/targeted and actual production
• Enterprise value/regulated asset base
Section 5:
Income approach: the
cost of equity
“The Capital Asset Pricing Figure 3: In calculating an appropriate rate of return to future cash flows to equity,
how often are the following methods used?
Model is the most
popular model being
used to derive a cost of
equity estimate, with 12
1
Other
8% 25% 67%
all participants always
or sometimes using this
model.”
22
1
Premium to
5% 64% 32%
the risk
free rate
21 Arbitrage
Pricing 100%
Theory (APT)
Capital
22
1
Asset 82% 18%

Pricing Model
(CAPM)
0% 20% 40% 60% 80% 100%
% of participants
Confidently using the Capital Asset Pricing Model

As anticipated, when calculating the appropriate rate of return to apply to future
cash flows to equity, the Capital Asset Pricing Model (CAPM) is the most popular
model being used to derive a cost of equity estimate, with all participants
always or sometimes using this model. However, investment banks are the least
devoted to CAPM, with 67 percent of participants in this category using the
model compared with 100 percent of professional services firms and 83 percent
of infrastructure funds.
The Arbitrage Pricing Theory has clearly not taken off in Australia; no participants
use this method.
However, 68 percent of participants always or sometimes use a premium to the

risk-free rate.
Other models used in Australia
Four participants use other models or provided

additional feedback:
• Internal company guidance

• Estimates of required returns from equity investors
based on experience in transactions
Section 6:
Adjusting for
country risk
“In Australia, cash flows Figure 4: H

ow do you adjust for country risk when assessing an asset in a
developing country?
are hardly ever adjusted
for country risk – just 60%
4.7 percent of participants 57%
50%
make this kind of
% of participants
adjustment.” 1
40%
21
30%
20% 24%
10% 14%
5% 0%
0%
Adjusting the cash flows

Determining an appropriate risk free rate with reference to
default yield spreads on USD denominated sovereign Eurodollar bonds
Determining an appropriate risk free rate with reference to implied
premiums using country credit ratings
Add an appropriate premium to the cost of equity and cost of debt
Other
Few participants adjusting cash flows for country risk

The survey makes it clear that cash flows are hardly ever adjusted for country risk
– just 4.7 percent of participants make this kind of adjustment. Participants tend
to adjust the discount rate by adding a premium to the cost of equity – 57 percent
make this adjustment – and sometimes by calculating an appropriate risk-free rate
using country credit ratings. This result is not surprising, given it is far more difficult
to make an adjustment to the cash flows than to the discount rate.
Adjusting for country risk does not appear to be as significant an issue in Australia
as it is in other parts of the world, simply because most valuation practitioners
are not valuing businesses in emerging countries, which often do not have an
appropriate instrument to use as a starting point.
Adding a premium to the cost of equity
Of the 57% of participants who adjust for country

risk by adding a premium to the cost of equity,
professional services firms do so most frequently.
1
21
%
57% 50% 67%

Professional services
Total participants Investment banks
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
“Eighty five percent of Figure 5: W

hich of the following do you use as a benchmark for the risk-free
rate in Australia?
participants use the yield
on the 10-year government 100%
bond as a proxy for the

80% 85%
risk-free rate in Australia.”
% of participants
1
60%
20
40%
20%
5%
10% 0%
0%
10 year government bond

5 year government bond
Cash rate
Other
Figure 6: H
ow do you derive the risk-free rate when using the yield on a government
bond as a proxy?
29%
21
1
52%
5%
14%
Spot
Historic average
Forecast
A combination of the above
10-year risk-free rate dominates

Eighty five percent of participants use the yield on the 10-year government bond as
a proxy for the risk-free rate in Australia. However, there’s more variation in how the
risk-free rate is derived. While just over half of participants use the spot government
bond yield as a proxy for the risk-free rate, well over one-quarter use a combination
of spot, historic averages and forecasts.
Notably, most investment banks only use spot – much higher than their professional
services and infrastructure fund counterparts.
Spotting the risk-free rate
Over 52% of participants use spot to derive the risk-

free rate, with investment banks leading the way. 1
21
%
83% 33% 20%

Investment banks Professional services Infrastructure funds
Section 8:
Understanding beta
“It is interesting to note Figure 7: D

o you adjust the beta for thin trading, or do you rely on the service
provider to make such an adjustment?
that close to one-third
of participants do not
consider an adjustment
for thin trading.”
36% 32%
1
22
32%
Do not consider such an adjustment

In house
Service provider
Figure 8: Which of the following service providers are used as a source of information?
35%
30% 32%
25%
% of participants
22
1
20%
20%
18%
15%
14%
10% 12%
5%
4%
0.00%
0%
Aspect Huntley Australian Graduate School of Management

Bloomberg Capital IQ
Reuters/Factiva In-house calculation/research
Other
Figure 9: W
hen calculating the beta, is the source data unlevered and then relevered
at the optimal gearing?
14%
22
1
86%
Yes
No
One third of participants do not adjust for thin trading

When adjusting for thin trading, participants either perform the adjustment
in-house or use a service provider. It is interesting to note that close to one-third
of participants do not consider such an adjustment. Investment banks are the
least likely to consider this adjustment, with 50 percent stating they do not do
so, compared with 33 percent of professional services firms and 17 percent of
infrastructure funds.
Fact favourites
Of the participants who use a service provider, there

are some clear favourites depending on sector.
• Investment banks prefer Bloomberg

• Professional services firms prefer Capital IQ
and Reuters
• Infrastructure funds prefer Bloomberg and Reuters
“A maximum period of Figure 10: W

hen calculating the beta, what period (in years) do you deem to be
most appropriate?
five years and a minimum
period of two years are 50%
48%
used by participants
40%
when calculating beta.”
% of participants
30%
1
21
20%
19% 19%
14%
10%
0% 0% 0% 0% 0%
0%
1 2 3 4 5 6 7 8 9
Period in years
Figure 11: W
hen calculating the beta how frequently do you make observations?
60%
55%
50%
% of participants
40%
1
20 30%
30%
20%
10%
5% 5% 5%
0%
Daily Weekly Monthly Quarterly Other
Timeframes for adjusting beta

The survey indicates that there is a maximum period of five years and a minimum
period of two years used by participants when calculating beta. There is some
variation in approach between the three major classes of participants:
• all infrastructure funds use five years

• professional services firms use five, four and two years
• investment banks use five, three and two years.
A majority of participants (55 percent) use monthly observations, but weekly
observations are also quite popular, with 30 percent of firms using weekly
observations. Investment banks are most likely to use weekly observations, with
60 percent of these firms doing so, compared with 33 percent of professional
services and 25 percent of infrastructure funds.
Section 9:
The equity market
risk premium
Figure 12: What equity market risk premium do you use when making use of the “Survey participants
Capital Asset Pricing Model in percentage terms when valuing assets in
the following countries? overwhelmingly are using
an EMRP for Australia of
80%
6 percent, with some bias
70%
73%
towards 7 percent.”
60%
% of participants
50%
45%
40%
30%
32%
26%
20%
23%
21%
10%
0%
4% 5% 6% 7% 8%
MRP
19
1
Australia
12
1
United States
United Kingdom
13
1
Survey participants overwhelmingly are using an equity (market) risk premium

(EMRP) for Australia of 6 percent, with some bias towards 7 percent. A particularly
interesting aspect of these results is the concentration of the Australian premium
around 6 percent compared to a wider range for the US and UK markets, and
against evidence that the rate which prevailed through the first half of the
twentieth century is no longer relevant in the twenty-first.
Even prior to the recent severe global financial market dislocation, there has been
frequent disagreement, among industry and academia alike, over determination
of an appropriate value for equity risk premia. This disagreement, which occurs
both in Australia and overseas, arises because there is no one universally
accepted way of determining a premium. The most common approach is to look
at the historical average of equity returns over bonds (or bills) but, most critically,
outcomes will vary significantly according to the time period chosen.1 The average
realised premium for the US market, for example was 8.4 percent over 1949 to
1999, but 6.1 percent if the period is shortened to 1972 to 1999. Including the
last 13 years, the average has been even lower. In Australia, data for 1883 to 2011
show an average 6.0 percent realised premium. However, as shown in Figure 13 1
KPMG notes that use of a geometric mean, rather than an
arithmetic mean, can also lower premia by as much as 2.0
below, over time the observed average risk premium for the domestic market per cent
has declined significantly and averaged just 4.3 percent over the two decades to 2
Handley, J C, 2012, An Estimate of the Historical Equity
Risk Premium for the Period 1883 to 2011, University of
2011, notwithstanding the impact of the GFC.2 Melbourne, April
“It may be too early to Figure 13 Historic Equity Risk Premium, Australian All Ordinaries Accumulation Index
decide whether most 6.5%

recent equity market
6.0%
performance – and the 6.0%
5.8%
5.5%
implied risk premia – 5.5%
should be considered 5.0%
EMRP
5.2%
the ‘new normal’ and
4.5%
incorporated into future
4.0% 4.3%
valuations.”
3.5%
3.0%
1883 – 2011 1937 – 2011 1958 – 2011 1980 – 2011 1988 – 2011
Assumptions around the distribution of dividend imputation credits alter these

results, as illustrated in Figure 14.
Figure 14: Equity Risk Premium 1988 - 2011, adjusted for imputation credit distribution
6.5%
6.0%
6% 6.0%
5.5%
5.0%
EMRP
5.2%
4.9%
4.5%
4.3%
4.0%
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.
Figure 15: H
ave you recently revised your equity market risk premium assumption to “Over 68 percent of
reflect the volatility in capital markets?
participants have not
recently revised their
equity market risk premium
32% assumption to reflect
volatility.”
22
1
68%
Yes
No
Figure 16: W
hat is your rationale for selecting the market risk premium?
80%
70% 71%
60%
% of participants
50%
1
40% 21
30%
20%
19%
10%
10%
0%
0%
Historic equity Expected Combination Other
bond spread premium
Avoiding volatility pricing

Selecting CAPM inputs, particularly the EMRP, during times of short term volatility in
capital markets can be notoriously difficult. Our survey results indicate that over 68
percent of participants have not recently revised their EMRP to reflect such volatility.
This indicates that these participants regard the EMRP as a long term measure.
Of the 31 percent of participants who have adjusted for volatility, most use a
combination of the historic equity bond spread and expected EMRP to justify their
assumptions.
Section 10:
Analysing the small
stock premium
“There’s a very clear 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?
inverse relationship
between the size of the
company and the size of
the small stock premium.” 1
21
48%
52%
Yes
No
Figure 18: In relation to the small stock premium, which factor is adjusted?
100
94%
80
% of participants
16 60
40
20
6% 0%
0
Beta Equity market Overall expected
risk premium rate of return on
equity capital
Beta
Equity market risk premium
Overall expected rate of return
on equity capital
Figure 19: W
hat is the benchmark small stock premium applied, given the size of the
company or entity?
6%
5%
Up to
5%
Premium range
4% 1
6
3%
Up to
3%
2%
Up to
2%
1%
0% 0% 0%
0%
Estimated Estimated Estimated Estimated Estimated Estimated
MVE MVE ($m) MVE ($m) MVE ($m) MVE ($m) MVE ($m)
($m)<=250 251-500 501-1000 1001-2000 2001-4000 4001+
Market value of equity (MVE)
Managing small stock risk

The Australian market is clearly divided on pricing for small company risk. Once
again we note the division among the participants, with none of the participating
investment banks considering a small stock premium when determining the
discount rate using the CAPM, but all of the professional services firms choosing to
do so. Infrastructure firms were split 50:50 on the issue.
There’s a very clear inverse relationship between the size of the company and the
size of the small stock premium, with the largest premium applied to the smaller
companies.
Consulting the experts
Australian valuation practitioners use a range of

12
1
sources to estimate a small stock premium.

%
38% 29% 24% 10%

Ibbotson Associates In-house Subjective Other
Section 11:
Adjusting for
unique risks
Adding alpha
Most participants tend to add a premium to reflect unique risks not modelled in
forecast cash flows.
%
1
67% 24% 10%
21
sometimes add a always add a
never add a premium
premium premium
Section 12:
Bringing transparency
to discounts and premia
Figure 20: W
hat factor is adjusted for the discount/premia?
60%
55.00% 50%
50%
45%
% of participants
41%
40%
32%
30%
25%
24%
20%
20% 18% 18%
10% 9% 9%
10%
0% 0% 0%
0%
Discount rate Market Enterprise Multiple Other
value of value
Equity
20
1
Minority discount
22
1
Control premium
Marketability discount
17
1
Bringing transparency to discounts and premia

The Australian market is distinctly lacking in research on discounts and premia.
In any valuation these are often the most debated factors, and there are diverse
opinions about how and when discounts and premia are applied.
Overall, most adjustments appear to be made to the market value of equity. However,
the highest adjustment is made to the multiple in a control premium scenario.
Figure 21: D
o you apply a minority discount when valuing a minority stake using the
following approaches?
19
1
Asset-based
methodology 58% 42%
19 Market 47% 53%

approach
20 Income 65% 35%

approach
0% 20% 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%
50%
50%
Discount range
1
40%
9 Median
30% 20% 30%
20% Median
10% 10%
10% Median
0%
0%
1% - 24% 25% - 49% 50% joint venture
Size of stake
Figure 23: If the entity is not listed, do you apply a marketability discount when using
the following approaches?
Asset-based 16% 84% 19

methodology
19
1
Market approach 32% 68%
Income approach 30% 70% 20
0% 20% 40% 60% 80% 100%
% of participants
Yes No
Figure 24: W
hat benchmark discount is applied given the size of the stake being
valued (unlisted companies)?
45%
40%
Discount range
30%
Median 30% 1
20% 8
Median
15% 20%
15%
10%
Median
5% Median 5%
2.50% Median
0%
0%
1% - 24% 25% – 49% 50% 51% – 74% 75% – 100%
Size of stake
“The minority Discount and premium data

discount is most With only seven participants for this section of the survey, it is difficult to make any definitive
statements, however even the limited number of responses demonstrate that the minority
routinely applied when discount is most routinely applied when practitioners use the income approach. It is equally
practitioners use the clear that the discount decreases as the size of the minority stake valued increases.
income approach.” Likewise, with unlisted companies the marketability discount decreases as the size of
the stake increases. However, discounts are less prevalent on these kinds of valuations
across all approaches.
As you would expect, the reverse principle prevails with the control premium (see
section below): the premium increases as the size of the stake increases. Participants
are far clearer about applying a premium when a controlling stake is involved, with
85 percent of those using the market approach opting to do so.
Figure 25: D
o you apply a control premium when valuing a controlling stake using any of
the following approaches?
20
Asset based 30% 70%
methodology
Market 85% 15%

20
1
approach
Income 33% 67%

21 approach
0% 20% 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%
40%
Premium range
30%
30% Median
12
1
30%
Median
15% 22.50%
0%
51% - 74% 75% - 100%
Size of stake
Section 13:
All about imputation
credits
Figure 27: H
ow do you treat imputation credits in business enterprise valuations “Participants were divided
(other than infrastructure investments)?
as to whether value should
50% be ascribed to imputation
47% credits when valuing a
40% 41% non-infrastructure related
% of participants
business… In terms of
30%
infrastructure-related
investments, the approach
20%
is significantly different.”
10%
6% 6%
17
1
0%
0%
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
Figure 28: How do you treat imputation credits when valuing an infrastructure
investment?
70%
60%
59%
% of participants
50%
1
17 40%
30%
20% 24%
10%
6% 6% 6%
0%
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%
30%
25%
% of participants
15 20%
1
20%
15%
13% 13%
10%
5% 7% 7% 7%
0%
0%
100% 90% 80% 70% 60% 50% 40% Less
than
40%
Utilisation factor
A varied approach to imputation credits

Participants were divided as to whether value should be ascribed to imputation
credits when valuing a non infrastructure-related business. Some 66 percent of
investment banks separately determine the market value of the benefit, while
33 percent ignore imputation credits. The rate of bypassing imputation credits is
much higher among professional services firms, with 83 percent ignoring them –
only 17 percent separately determine the market value of the benefit.
In terms of infrastructure-related investments, the approach is significantly different.

Most participants appear to ascribe value to imputation credits – no investment
banks ignore the benefits associated with imputation credits. Eighty three percent
of the professional services firms include imputation credits attaching to dividends
at an assumed utilisation rate and 17 percent separately determine the value
thereof. Of responding infrastructure funds, 77 percent include the imputation
credits attaching to dividends at an assumed utilisation rate, 17 percent separately
determine the value and 17 percent ignore the imputation credits.
Utilising franking credits
There was a wide spread of responses on the

utilisation rate of franking credits, but ultimately a clear
concentration, with 53% of participants using 70-80%
of the benefit.
Section 14:
Commodities
Figure 30: How do you deal with the gold premium in gold mine valuations?
60%
50%
50%
% of participants
40%
43%
14
1
30%
20%
10%
7%
0%
Apply a multiple A reduced Other
to the income discount rate
approach valuation,
e.g. 2 times
Discounted Cash
Flow value
Figure 31: H
ow do you determine the expected commodity prices for valuation purposes?
35%
30% 31%
% of participants
25%
24%
20%
19% 19%
18
1
15%
10%
5% 7%
0%
Spot Forward Consensus Commodity Other
price prices of forecast pricing
prices by expert
brokers/
economists
Dealing with commodities

Survey results are inconclusive on how participants deal with the ‘gold premium’.
While 43 percent apply a multiple to the income approach valuation, at least half
of participants use methods other than those covered in the survey, including the
‘Grant Samuel’ method and a discounted cash flow using reasonable gold forecasts
and a discount rate that reflects the risk of the company.
The participants are also quite divided in terms of estimating expected commodity
prices for a valuation. This is the case even within the participants’ sectors –
investment banks, infrastructure funds and professional services firms all have
different ways of estimating commodity prices.
Section 15:
Accounting, ESG and
miscellaneous factors
Accounting standards, treatment of hedge books and
ESG factors
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%
70% 74% 1
19
60%
% of participants
50%
40%
30%
20%
21%
10%
5%
0%
Ignore Consider Critically evaluate
Figure 33: How do you treat hedge books in business valuations?
50%
47%
40% 41%
% of participants
30%
17
1
20%
10% 12%
0%
Mark to Included in Other
market cash flows
at contracted
commodity
prices
Figure 34: D
o you consider Environmental, Social & Governance (ESG) factors when
performing valuations?
5%
32%
1
19
63%
Yes – Quantitatively
Yes – Qualitatively
No
Employee options, use of debt and the purpose of valuation

engagements
Figure 35: H
ow do you treat employee options in the valuation?
60%
50% 53%
% of participants
1
40%
19
30%
26%
20% 21%
10%
0%
Estimate the value of the options and

adjust the market value of equity
As an expense in the income statement/
cash flow statement
Other
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
1
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%
30%
29%
% of participants
25%
20%
19%
15% 17% 17%
10% 12%
19
1
5% 7%
0%
A-IFRS (Accounting, unit prices)

Transaction advisory
Independent expert reports (Fairness opinions)
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Regulatory (including tax compliance)
Investment
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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February 2013. VICN10732ADV.

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CORPORATE FINANCE

Section 2: Executive summary............................................................................. 2

Section 3: Valuation methodologies......................................................................... 3

Section 4: Market approach............................................................................................ 5

Section 5: Income approach: the cost of equity................................................................ 7

Section 6: Adjusting for country risk...................................................................................... 9

Section 7: Benchmarking the risk-free rate............................................................................... 11

Section 8: Understanding beta....................................................................................................... 13

Section 9: The equity market risk premium.................................................................................................. 16

Section 10: Analysing the small stock premium..................................................................................... 19

Section 11: Adjusting for unique risks.......................................................................................................... 21

Section 12: Bringing transparency to discounts and premia......................................................................... 22

Section 13: All about imputation credits................................................................................................................ 26

Section 14: Commodities............................................................................................................................................. 29

Section 15: Accounting, ESG and miscellaneous factors............................................................................................. 30

“Without a robust body Insight into Australian valuation practices

important than ever to Navigating a volatile environment

Danie van Aswegen Ian Jedlin

Who completed the survey?

 The discounted cash flow Figure 1: H

all participants always or

(Discounted 65% 35%

0% 20% 40% 60% 80% 100%

Depending on discounted cash flow

We do note variation in uses of the approaches – infrastructure funds exclusively

Other methodologies used by participants

Of the six participants who sometimes use

• Industry rules of thumb

 The widespread use of

Other 22% 21% 57%

Price/Earnings 23% 59% 18%

EV/EBIT 23% 73% 5%

EV/EBITDA 61% 39%

20% 40% 60% 80% 100%

Always Sometimes Never

Other methodologies used by participants

Six participants use other valuation approaches,

• Enterprise value/capacity (generation assets)

Asset 82% 18%

0% 20% 40% 60% 80% 100%

Always Sometimes Never

Confidently using the Capital Asset Pricing Model

However, 68 percent of participants always or sometimes use a premium to the

Other models used in Australia

Four participants use other models or provided

• Internal company guidance

“In Australia, cash flows Figure 4: H

Adjusting the cash flows

Few participants adjusting cash flows for country risk

Adding a premium to the cost of equity

Of the 57% of participants who adjust for country

57% 50% 67%

“Eighty five percent of Figure 5: W

bond as a proxy for the

10 year government bond

10-year risk-free rate dominates

Spotting the risk-free rate

Over 52% of participants use spot to derive the risk-

83% 33% 20%

“It is interesting to note Figure 7: D

Do not consider such an adjustment

Aspect Huntley Australian Graduate School of Management

One third of participants do not adjust for thin trading

The discounted cash flow Figure 1: H

The widespread use of

“In Australia, cash flows Figure 4: H