What Is Value? · Backdating Versus Forward Dating · Expiry Dates of RSA Bonds

Charles Hattingh valuation buzzValuation Buzz series is written and published by Charles Hattingh CA (SA)...

What is Value?

Mr X bought a business in Cape Town in 2002. The arrangement was that R1m would be paid as a deposit and a value established after an audit was conducted.

The auditor found that the business was insolvent. The matter went to arbitration. The seller's expert was of the opinion that the value was between R1,8m and R3,2m. The buyer's expert was of the opinion that there was no value in the business.

The parties agreed to appoint an independent expert from a big four auditing firm, who arrived at a ”value“ of R1,370,000. The buyer asked another expert from another big four auditing firm to give his opinion and he came up with R0.

A third referee was then appointed from another big four auditing firm who came up with R94,586 – why no cents??

What struck me when reading this article in Noseweek was that the CAs who did the valuations would not disclose how they came to their conclusions. When valuing a business there is no such thing as an exact value. Any valuation arrived at must be accompanied by the views taken about the future. As the future is unpredictable, so is any valuation that tries to crystallise the future. We need to educate investors that a piece of paper purporting to reflect a valuation without any predictions and explanations is not worth the paper it is written on.

The lesson to learn from this mess is that before paying cash for a business it is essential to do a thorough due diligence exercise.

Backdating Versus Forward Dating

Mr X bought a business in Cape Town in 2002. The arrangement was that R1m would be paid as a deposit and a value established after an audit was conducted.

I was recently involved in a valuation where management had a choice of finalising a sale of products prior to the year end or after the year end. Management wanted to know how the valuation would be affected if the transaction was recognised before the year-end v after the year–end.

Clearly if the valuer uses a pathetic EBIDA or PE approach, the manner in which the deal is accounted for makes a big difference. However, if one asks: ”What am I valuing“ and if one uses the discounted cash flow approach to valuations, it make no difference whether the deal is accounted for one day before the year end v one day after. If the deal is a done deal, value has already been created. Journal entries are irrelevant to the valuation.

Expiry Dates of RSA Bonds

When arriving at a fair rate of return in a valuation one starts with the RSA bond rate for the window period used in the valuation. RSA bond rates are published in Business Day each day of the week (not weekends) for the previous working day. However, the maturity dates are not given by Business Day so here they are:

South Africa Matures Matures South Africa
206 15 Jun 2014 186 24 Feb 2020
201 21 Dec 2014 208 31 Mar 2021
157 15 Sep 2015 213 28 Feb 2031
203 15 Sep 2017 209 31 Mar 2036
204 21 Dec 2018 214 28 Feb 2041
207 20 Jan 2020