GALSTON FINANCIAL SERVICES LIMITED VALUATION 2012

Size: px

Start display at page:

Download "GALSTON FINANCIAL SERVICES LIMITED VALUATION 2012"

Erica Tyler
5 years ago
Views:

1 GALSTON FINANCIAL SERVICES LIMITED VALUATION 2012

2 Table of Contents 1. SUMMARY LIMITATIONS AND RELIANCE ON INFORMATION PROFILE OF COMPANY SOURCES OF INFORMATION APES 225 INFORMATION FINANCIAL RESULTS Statement of Comprehensive Income Statement of Financial Position Capital Structure and Ownership VALUATION METHODS DISCOUNT CASH FLOW ANALYSIS CAPITALISATION OF EARNINGS INDUSTRY RULE OF THUMB REALISATION OF ASSETS CONCLUSION

3 1. SUMMARY Based on our assessment below we have valued Galston Financial Services Limited ( the Company ) between 1.18 million to 1.63 million as at With the current shares on issue being 816,800 this is a range of 1.45 to 2.00 per share. In assessing current market value, market value is considered to be: The price in an open, unrestricted market between a knowledgeable, willing and not anxious buyer and a knowledgeable, willing and not anxious seller acting at arms length. 2. LIMITATIONS AND RELIANCE ON INFORMATION This report has been prepared for the Directors to assist in assessing the current market value of the Company. As such, this report should only be used for this purpose. ( RSD ) believe that this report should be considered as a whole and that selecting portions of this report, without considering all sections of this report, could create a misleading view of the opinion. The report has been prepared after relying on information referred to in section 4 below. It is important to note that information used to prepare this report can vary significantly in short periods of time. If some of the information referred to in section 4 below, did change significantly it could impact the opinion in this report. We do not in any way warrant the accuracy of any forecasts used as part of this report. In the event of additional information being provided to us after the date of this report or any variation in the information already provided, we reserve the right to review and amend any calculations or opinions provided in this report as we consider necessary. 3. PROFILE OF COMPANY Galston Financial Services Limited is a public company that was incorporated on 23 July The Company entered into a franchise agreement with Bendigo Bank Limited in 2002 to operate a Bendigo Bank branch at 348 Galston Road, Galston. The franchise agreement operates for a 15 year period in the form of an initial 5 year term and options for 2 additional 5 year terms. The Company exercised the first option in 2007 and its second option in Galston is a suburb of northern Sydney and is located 36 kilometres north west of the Sydney CBD. 3

4 4. SOURCES OF INFORMATION In completing this assessment information that was reviewed and relied upon includes: Audited Financial Statements of the Company as at 2010; Audited Financial Statements of the Company as at 2011; Audited Financial Statements for the Company as at 2012; The budget of the Company for the year ended 2013; The Constitution of the Company; The Franchise Agreement between the Company and Bendigo and Adelaide Bank Limited; and Discussion with Kevin Cook, director of the Company. 5. APES 225 INFORMATION In completing this valuation we have complied with the requirements of APES 225 issued by the Accounting Professional and Ethical Standards Board. This valuation has been prepared by Warren Sinnott who is a member of the Institute of in Australia. In completing the valuation we have acted independently of the Company and the compensation to be paid for the valuation is not contingent on the conclusion, content or future use of the valuation report. 4

5 6. FINANCIAL RESULTS 6.1 Statement of Comprehensive Income Actual 2010 Actual 2011 Actual 2012 Budget 2013 Revenue 1,139,289 1,326,353 1,330,503 1,334,164 Expenses Employee benefits (319,670) (391,960) (387,397) (463,400) Depreciation & amortization (26,183) (27,918) (31,053) (26,600) Sponsorship & donations (133,583) (167,708) (322,455) (300,000) Other expenses (192,433) (184,750) (204,154) (220,400) Total expenses (671,869) (772,336) (945,059) (1,010,400) Profit before tax 467, , , ,764 Income tax expense 147, , ,033 97,129* Net profit / (loss) 319, , , ,635 Net profit ex D&A 345, , , ,235 Net profit ex S, D&A 479, , , ,235 Net profit ex D & A = net profit excluding depreciation and amortisation Net profit ex S, D & A = net profit excluding sponsorship, depreciation and amortisation * Estimate based on a simple 30% of profit before tax 5

6 6.2 Statement of Financial Position Actual 2010 Actual 2011 Actual 2012 Budget 2013^ Current assets 953,052 1,204,072 1,319,222 1,466,273 Non current assets 766, , , ,447 Total assets 1,719,779 1,995,347 2,167,269 2,287,720 Current liabilities 188, , , ,899 Non current liabilities Total liabilities 188, , , ,899 Net assets 1,531,619 1,815,484 1,996,370 2,116,821 Share capital 816, , , ,800 Retained earnings 714, ,684 1,157,911 1,278,362 Reserves ,659 21,659 Total equity 1,531,619 1,815,484 1,996,370 2,116,821 ^ Budget assumes no change in liabilities from 2012 and all profits (after allowing for depreciation) are allocated to current assets. An allowance for a dividend of 13 cents per share to be paid in 2012/13 has been made. 6.3 Capital Structure and Ownership The share capital of the Company as at 2012 comprises 816,800 fully paid 1.00 shares. There has been no change in the share capital of the Company since the original shares were issued. 7. VALUATION METHODS There are various valuations methods that can be used. Generally, the valuation method is chosen to reflect the type of company or asset being valued. For the purpose of this report we have considered the following 4 common valuations methods: Discount projected cash flows ( DCF ); Capitalisation of earnings of cash flows; Industry rule of thumb; and Estimation of proceeds from orderly realisation of assets. When considering the term valuation various definitions exist but factors such as quality, desirability, cost of replacement, price, condition of asset and future benefits are often considered. The valuation methods mentioned above have been considered in combination with these factors. 6

7 8. DISCOUNT CASH FLOW ANALYSIS When considering the DCF valuation method it is effectively a calculation of the current value of future cash flows. It should be noted that this valuation method is extremely sensitive to changes in assumptions. Given the strong growth in revenue of the Company in recent years the DCF valuation method is in theory well suited. However, as the Company has only prepared a budget for one year in advance (i.e. to 2013) this method is limited. There are also various uncertainties in future earnings with the possibility of changes to the commission payments for certain banking products which may impact future results. You could also argue that you should adjust the excess cash flow for dividends and / or return of capital payments. Noting the numerous assumptions that need to be made under this valuation approach we have applied the following factors: Excess cash flow / profit after tax plus depreciation as above in year 0 of 253,235 (226, ,600) as above; Growth in excess cash flow of 5% per annum. This is below the level of increases experienced in the 2011/12 year, but in our view is more reflective of the maturing nature of the Company; Discount factors of 10% under option 1 and 12% under option 2. These discount factors have been based on our assessment of the relatively higher risk of the Company compared to the average long term Australian Government 10 year bond rate of around 4.45%; We have applied the discounted cash flow for the next 10 years to approximate the end of the franchise period; No residual value has been applied after this 10 year period. Based on the above our estimated valuations are: High Valuation: Low Valuation: 1,879,500 or 2.30 a share using 10% discount 1,682,000 or 2.06 a share using 12% discount Due to the numerous assumptions and uncertainties under the DCF valuation method this is not our preferred method, but is useful for comparison. 7

8 9. CAPITALISATION OF EARNINGS Earnings multiples are a common valuation method and in our view one that suits Community Banks. When considering this valuation method the following matters need to be considered: Future Maintainable Earnings ( FME ); A multiple of earnings; and Value of other non core assets or liabilities. Firstly in assessing FME for the Company factors such as the level of profitability to date and any abnormal items need to be considered. In our opinion FME is appropriately based on net profit after tax and for the year ended 2012 which was 265,411. Some would argue that charitable donations and sponsorship should also be excluded, but we feel this is an expense the community expect from a Community Bank and as such have not excluded this. We actually expect that the level of sponsorship will increase in future years as assets are fully amortised / depreciated and profits are increased and therefore feel it is appropriate not to adjust net profit after tax for amortisation or depreciation also. We believe the franchise agreement should be referred to where it is stipulated that dividends are to be paid in accordance with the franchise agreement for the Company. This has an impact on FME from a shareholder valuation perspective. In particular clause 11.3 Distribution Limit needs to be considered: (a) The Franchisee and the Directors agree that, in any 12 month period, the aggregate of the profits or funds of the Franchisee distributed to its shareholders (whether by way of dividends, bonus shares or otherwise) must not, except in the case of winding up, exceed the Distribution Limit and the Directors must not declare any dividend or pass any resolution the effect of which would contravene this Clause (b) For the purposes of this Clause 11.3: (i) the Distribution Limit is the greater of: (A) 20% of the profit or funds of the Franchisee otherwise available for distribution to shareholders in that 12 month period; and (B) Subject to the availability of distributable profits, the Relevant Rate of Return multiplied by the average level of share capital of the Franchisee over that 12 month period (as determined by Bendigo in consultation with the Franchisee); and (ii) the Relevant Rate of Return is equal to the weighted average interest rate on 90 day bank bills over that 12 month period (as determined by Bendigo) plus 5%. 8

9 The relevant rate of return for the last 12 months would be around 30%. Considering this and the strong growth in profits we have initially estimated FME for valuation purposes to be around 245,000 (based on 30% of share capital, which exceeds the 20% of profit or funds otherwise available limit {20% of profit before tax plus donations and sponsorship). We have allowed a buffer on top of the maximum distributable profits (as per franchise agreement) as based on recent history and discussion with Kevin Cook, a director of the company, a significant portion of profits will be retained by the Company for future investment. For the purpose of the valuation we will use 245,000 (based on 30% of capital) for FME. When considering a multiple of earnings we have reviewed smaller listed banks and they have a multiple of around 10. However, due to the lack of trading in Community Bank shares and general marketability we believe this should be discounted further for the Company to a multiple of between 8 (low valuation) and 10 (high valuation). Finally, we have not attributed a value to other non core assets. Based on the above our estimated valuations are: High Valuation: 2,450,000 or 1.00 a share using a multiple of 10 Low Valuation: 1,960,000 or 0.80 a share using a multiple of 8 As shown under section 11 below we believe an appropriate value for net tangible assets of the company is 1,148,323. This results in the remainder of the valuation being attributable to goodwill. 9

10 10. INDUSTRY RULE OF THUMB When considering the Community Bank industry as you are aware most shares are bought and sold at the initial 1 cost. The majority of Community Bank s are not listed entities and there is normally a list maintained by the relevant Board to record willing parties to buy and sell shares. Several Community Banks have listed on the National Stock Exchange of Australia (NSX) (which now incorporates the Bendigo Stock Exchange) and this is an appropriate reference for us. In assessing this valuation we have reviewed the trade history for various Community Bank s listed on the NSX as shown below: Mt Evelyn & District Financial Services Ltd Date of Trade Quantity Price - 30 May , January , June , June , March , to , to to , to 1.15 * Bonus issue of 2 for 1 made as at 30 November 2009 Valley Community Financial Services Ltd Date of Trade Quantity Price - 14 May , October , August , June , April , April , April , January , , to to , to 1.15 * Bonus issue of 3 for 1 made as at 31 July 2009 Sandringham Community Financial Services Ltd Date of Trade Quantity Price - 12 August , March , , to to , to

11 Rye & District Community Financial Services Ltd Date of Trade Quantity Price - 21 June , April January , to , to , to , to , , to , * Bonus issue of 3 for 1 made as at 15 December 2006 Sunshine Coast Community Financial Services Ltd Date of Trade Quantity Price - 22 June , June June , June , April , March , March , February , February , February February , , to , to , to , to , to , to , to 0.95 East Gosford & Districts Financial Services Ltd Date of Trade Quantity Price - 4 June , March , March , February , , to , to , to , to , to , , to

12 North Ryde Community Finance Ltd Date of Trade Quantity Price , , to , to , , to , to 0.90 * No share trades in 2012 As can be seen from the above trades a high price of 2.05 and a low price of 0.30 resulted. As noted above, Rye & District Community Financial Services Ltd issued bonus shares at the rate of three bonus shares for every one share held in December 2006 (the trade of 2.05 was for Rye before the issue of bonus shares). Most companies share price is in a narrow band around the 1 initial cost, although all companies who have issued bonus shares have seen a significant fall in share price after these issues. It can also be clearly seen that there is a low level of trading in all shares. Those Community Banks that have traded below the 1 issue price have been either recording losses / making minimal profits or have issued bonus shares. East Gosford had a significant decrease in share price in 2009 when losses were incurred, but despite returning to small profits in 2010, 2011 and 2012 the share price has not recovered. Using this method of valuation we would expect the valuation to be between 0.50 and 1 per share (prices well above 1 were pre initial bonus shares being issued). Based on the above our estimated valuations are: High Valuation: Low Valuation: 816,800 or 1.00 a share 408,400 or 0.50 a share 12

13 11. REALISATION OF ASSETS This approach effectively does not consider future earnings potential and is based on current net assets. The following formulae can be used: Net tangible assets / Shares As at 2012 this would result in the following valuation: (1,319, ,899) / 816,800 1,148,323 / 816,800 = 1.40 per share We have taken the conservative approach in the above valuation of not allowing for any of the non current assets as in our opinion in a forced sale situation minimal value would be obtained from these assets. As the Company is successfully operating on a going concern basis in our opinion the net tangible asset valuation approach is not appropriate. As such, we do not recommend this approach, but the result is worth noting by the Directors. 12. CONCLUSION In our view to assess the valuation of the Company we believe an average of relevant valuation methods should be used. If all valuation methods are considered this would result in the following: Valuation Method High Value Low Value DCF 1,879,500 1,682,000 Capitalisation of earnings 2,450,000 1,960,000 Industry rule of thumb 816, ,400 Realisation of assets 1,148,323 1,148,323 Average total value 1,573,656 1,299,681 Average per share

14 In our opinion the realisation of assets method is only appropriate for companies not trading profitably or are about to cease trading. As mentioned above we also believe there are too many uncertainties and estimations required to use the DCF method. Hence, we believe the following 2 valuation methods are appropriate for the purpose of determining this average: Valuation Method High Value Low Value Capitalisation of earnings 2,450,000 1,960,000 Industry rule of thumb 816, ,400 Average total value 1,633,400 1,184,200 Average per share Based on the above we estimate the value of the Company to be in the range of 1.18 million to 1.63 million or 1.45 to 2.00 per share. If the Board resolved to use the capitalisation of earnings method only this would result in a valuation in the range of 1.96 million to 2.45 million or 2.40 to 3.00 per share. 14

Palerang Financial Services Limited ABN annualreport

Palerang Financial Services Limited ABN 83 097 801 100 2008 annualreport 2008 Contents Chairman s report 2-3 Manager s report 4 Directors report 5-8 Financial statements 9-12 Notes to the financial statements