Ricky Yeo

Point three. When you analyze the profit or cash flows of a business, you have already factor in what is inside the balance sheets, the assets and everything. Going back and add them is double counting. That is not different from saying "I have a property that generate $24K in rental income (cash flows) a year, at 20x it should worth $500K, but I have not include the land, which should worth another $250K, therefore the whole property is worth $750K!". What kind of logic is this.

2017-10-01 17:42

probability

i think this is not really as straight forward as Ricky had stated...

because the land' NPV is unchanging (usually)...it is actually separately generating value, though invisible in terms of cash flow (1) at the average cost of capital...making its NPV fixed (assumption 1)


The cash flow Ricky is saying here is only the value of the PPE , its NPV of future cash flows(2)...

As such, in my opinion you should add the values of the land with the PPE (provided my assumption 1 is true).


it becomes a little more obvious if you assume the cash generated by the PPE is reinvested by acquiring more land where the true value of their total investment is measured in terms of final land area acquired with the PPE value is depreciating to zero at the end.




As long as the Land's value appreciates as per C

Posted by Ricky Yeo > Oct 1, 2017 05:42 PM | Report Abuse

Point three. When you analyze the profit or cash flows of a business, you have already factor in what is inside the balance sheets, the assets and everything. Going back and add them is double counting. That is not different from saying "I have a property that generate $24K in rental income (cash flows) a year, at 20x it should worth $500K, but I have not include the land, which should worth another $250K, therefore the whole property is worth $750K!". What kind of logic is this.

2017-10-01 19:58

probability

however, one should not be misled in accounting the revaluation gain.

What matters is the true present value of the land (1) + the NPV of the PPE based on discounted cash flow generated by the PPE alone (2).

so (1) + (2) matters...

the revaluation is basically due to future value of the land increasing at COC as such it wont add to NPV. But it is important to know what is its present value to compare with stock price to see the bargain.

If say the land increase in future value at a higher rate than COC - due to say sudden intense demand for the area concern, its NPV does increase.

2017-10-01 20:09

myportfolio

Post removed.Why?

2017-10-01 20:13

probability

Imagine if the NPV calculated from the cash generated by the "PPE + land" as a bundle of investment to generate cash comes to a value (A) lesser than the current land value (B), does it mean the stock price should be - A only?

No right?

we have to consider the land value B too....

2017-10-01 20:29

stockraider

Probability,

Perfectly correct, there is 2 element in computing the NPV, the operating free cashflow over the years and the terminal liquidation value...u need to add this together & discount using a fair rate to determine the npv loh...!!

Thus the terminal value consist of estimating the value of the land loh...!!
Revaluation of land..is important bcos it represent actual mkt value of the land mah...!!

2017-10-01 23:27

probability

yes, the final selling price of the land is the final tsunami cash flow...he he

2017-10-01 23:37

stockraider

why the land value of hengyuan is very important leh ??

a sizeable valuable assets of hrc is land mah...!!

Today hengyuan land worth Rm 500 million...but 30 yrs from now, it is worth Rm 4 billion loh...land usually appreciate overtime mah...!!


Investor enjoy good free cashflow as well as land capital appreciation loh....!!

2017-10-01 23:45

Ricky Yeo

@ probability - You call it invisible cash flow for a reason, land does not generate cash flows that can be TAKEN OUT by the owner no matter how many times the land value appreciates.

This is a 'Either Or' Logic.
The owner of the business either liquidate the whole business NOW to unlock the land value and lump sum cash flow. Doing this will terminate all future cash flow.

Or the owner continue the business as a going concern into the future and the invisible cash flow from land appreciation will never be taken out.

Read more: https://www.wallstreetoasis.com/forums/how-dcf-accounts-for-assets-value

Keep this thread open until we come to a clear understanding. This needs to be a win-win situation where we all learn.

2017-10-02 06:17

Alex Foo

haha, actually my initial point of opening this thread is to prove that this china company has some tangible asset in our motherland la.

I pengsan when ppl keep equal xinquan with hrc. Maybe ppl got burnt too much and scare of red chip now.

on a side note, i like intelligent discussion. Like Ricky's ROA analysis. If i understand you correctly, revaluating the land will cause the "asset to go up". Assuming same return, it will show a lower ROA over time. Then it might give a picture that HRC is operating with lower efficiency.

Betui ah like that?

But leh, everything must up to date ma~ haha

2017-10-02 09:39

I LOVE HENGYUAN, sexy babe RM21

haha, alex you are good

2017-10-02 09:47

Alex Foo

tq paper bro =D

2017-10-02 10:08

NOBY

Fully agree with Ricky's explanation here. The caveat here is if those land are non-operating assets that do not generate any cashflow from operations. Then in that scenario, those value can be added on top of the DCF derived value.


Posted by Ricky Yeo > Oct 2, 2017 06:17 AM | Report Abuse

@ probability - You call it invisible cash flow for a reason, land does not generate cash flows that can be TAKEN OUT by the owner no matter how many times the land value appreciates.

This is a 'Either Or' Logic.
The owner of the business either liquidate the whole business NOW to unlock the land value and lump sum cash flow. Doing this will terminate all future cash flow.

Or the owner continue the business as a going concern into the future and the invisible cash flow from land appreciation will never be taken out.

Read more: https://www.wallstreetoasis.com/forums/how-dcf-accounts-for-assets-value

Keep this thread open until we come to a clear understanding. This needs to be a win-win situation where we all learn.

2017-10-02 11:27

stockraider

Fully agree with Ricky's explanation here. The caveat here is if those land are non-operating assets that do not generate any cashflow from operations. Then in that scenario, those value can be added on top of the DCF derived value.

NOT LOGICAL MAH....!!
IF U OWN A HOUSE IN BANDAR UTAMA WORTH RM 1.0 MILLION.
U RENT IT FOR RM 30000 PER YEAR, THUS U GOT A YIELD OF 3% PA.

DCF RATE IS SAY 6% PA.....SO EFFECTIVELY U CASHFLOW DICOUNTED NPV WILL BE RM 500K ONLY LOH ??

IS UR BANDAR UTAMA HOUSE NPV IS WORTH RM 500K OR RM 1 MILLION ?.

SHOULD IT WORTH LESS THAN RM 1 MILLION OR MORE THAN RM 1 MILLION LEH ??

2017-10-02 11:35

Halite

very funny and very misleading fact
why talk about land ?
is hengyuan going to close down her refinery business turn into property? or build a new refinery plant elsewhere ?
if not , then it is irrelevant in the investing valuation

2017-10-02 14:55

probability

its not that complicated leh...already raider explain in simple accounting terms - the terminal value.

the terminal value measured at any point of time does not change the intrinsic value of the asset.

The simple statement, NPV of any asset is the sum of the discounted cash flow to take place in future during the time frame of the cash flow analysis still holds 100% true.

Whether you decide to sell the land + the plants after 10 years or 30 years, it does not make a difference to its Valuation which must consider the sum of its parts.

2017-10-02 15:23

Ricky Yeo

@ probability I don't think I make it complicated. Plus I provide a link for more clarification in case my explanation is too complex. I never talk about terminal value either. All of these needs to be explained without COC, NPV, demands etc.

Now look at your statement "NPV of any asset is the sum of the discounted cash flow to take place in future during the time frame of the cash flow analysis still holds 100% true."

So you are right, NPV is the sum of future DCF, so when is the land generating cash flows? IF the land is worth $50 and the entire business is $100? How much is the whole business? $150? For real? If I sell the land for $50, I can't get the $100. If I keep the business at $100, I will never get the $50. This is the logic.

For everyone's reading pleasure, I will paste the comments from the link here. Keep this open. Get this until everyone is on the same page.

"You're valuing the assets in reference to their future expected cash flows. Those assets are valuable insofar as they provide a future benefit. That benefit is calculated and measured in currency. Valuing the assets + their respective cash flows, if it were possible to even do this at all (since the assets can only be valued by referring to their expected cash flows), would constitute double counting."

"The book values are irrelevant when it comes to the actual value of those assets; book values represent past economic conditions. In other words, those values no longer represent the future benefit stream of the underlying asset."

"a DCF using unlevered free cash flows will give you the enterprise value of the business, which already takes into account the value of *operational assets* - the value of a firm's core, operational assets is embedded in the cash flows that the business produces."

"The simple way to think about this - say I have a business which produces widgets and I have one machine which lasts forever, costs nothing to run, and produces $10 of widgets per year. At a 10% discount rate, using a perpetuity DCF, the business is worth $100. Suppose the machine cost $50 and I could sell it at any time for $50. That doesn't matter - the value of the business as a going concern (as an operating company) is still only $100, because we can't sell the machine and yet still collect $10 per year in cash flow. On the other hand, we could liquidate the business (sell the machine) and get $50, but in this case the business is worth more as a going concern. But the key principle is that adding the liquidation value of the firm's assets to your DCF output would be double counting those assets."

"The rule of thumb is - if you are including the income generation of the asset in your projected cash flows for the DCF, then you shouldn't add it (that would be double counting). If, on the other hand, it's an excess asset not accounted for your DCF, then it should be added to determine the value of the firm's securities."

2017-10-02 16:54

rojakmee

in accounting , assets need to be reflected to its true value either up or down and hence the requirement for revaluation, this is applicable all over the world.

2017-10-02 17:05

probability

Ricky, will sure reply until both of us are in the same page.

Just glanced through... i will reply later when i have time and gone through your posting...

From surface..what i see.. the confusion has to do with the land present value.

Though, they cant sell the land - as that would kill the Plant cash generation potential, i am valuing the land currently based on the future selling price at the end of cash flow analysis lifetime...when the plant had been fully depreciated say in 20 years time.

If say the land value is 500M now, i am estimating its future value grows at the same rate of the discount factor you use on your DCF..
Meaning its NPV is indeed = 500M.

If the future value grows at a lesser rate than discount factor, then its NPV is much lesser than 500M

will comment if any after reading yours in detail ..bz now

2017-10-02 19:51

Equityengineer

while the book value of equipment is depreciating, why can't the land value been included in DCF calculation, after all land value always go up.

2017-10-02 20:08

stockraider

Posted by Ricky Yeo > Oct 2, 2017 04:54 PM | Report Abuse

@ probability I don't think I make it complicated. Plus I provide a link for more clarification in case my explanation is too complex. I never talk about terminal value either. All of these needs to be explained without COC, NPV, demands etc.

Now look at your statement "NPV of any asset is the sum of the discounted cash flow to take place in future during the time frame of the cash flow analysis still holds 100% true."

So you are right, NPV is the sum of future DCF, so when is the land generating cash flows? IF the land is worth $50 and the entire business is $100? How much is the whole business? $150? For real? If I sell the land for $50, I can't get the $100. If I keep the business at $100, I will never get the $50. This is the logic.
IT IS NOT LOGIC MAH...IF UR CASHFLOW IS NPV RM 1OO AND UR LAND NPV IS RM 50...WHEN U CLOSE SHOP U GET NPV OF RM 100 PLUS RM 50 = RM 150.

For everyone's reading pleasure, I will paste the comments from the link here. Keep this open. Get this until everyone is on the same page.

"You're valuing the assets in reference to their future expected cash flows. Those assets are valuable insofar as they provide a future benefit. That benefit is calculated and measured in currency. Valuing the assets + their respective cash flows, if it were possible to even do this at all (since the assets can only be valued by referring to their expected cash flows), would constitute double counting."
YA BENEFIT HAS A FINITE LIFE MAH, UR CASHFLOW MAY LAST 30 OR 40 YRS...WHEN TYPE TO CLOSE SHOP U LAND VALUE ALSO CONTRIBUTE ALOT TO NPV MAH....!!

"The book values are irrelevant when it comes to the actual value of those assets; book values represent past economic conditions. In other words, those values no longer represent the future benefit stream of the underlying asset." WHAT NOT RELEVANT ?? LAND HAS TERMINAL VALUE ??
DON TELL ME, U JUST WANT TO COLLECT RENTAL ON YOUR HOUSE FOR NEXT 50 YRS DISREGARDING THE POTENTIAL VALUE OF UR PROPERTY AH ??

"a DCF using unlevered free cash flows will give you the enterprise value of the business, which already takes into account the value of *operational assets* - the value of a firm's core, operational assets is embedded in the cash flows that the business produces." YA THIS THEREOTICAL APPROACH...MISSED OUT THE IMPORTANCE OF LIQUIDATION VALUE IN THE END LOH..!! COMMON SENSE SAY WRONG LOH..!!

"The simple way to think about this - say I have a business which produces widgets and I have one machine which lasts forever{WHERE GOT MACHINE LAST FOREVER LEH ? THIS JUST A FAIRY TALES LOH}, costs nothing to run, and produces $10 of widgets per year. At a 10% discount rate, using a perpetuity DCF, the business is worth $100. Suppose the machine cost $50 and I could sell it at any time for $50. That doesn't matter - the value of the business as a going concern (as an operating company) is still only $100, because we can't sell the machine and yet still collect $10 per year in cash flow. On the other hand, we could liquidate the business (sell the machine) and get $50, but in this case the business is worth more as a going concern. But the key principle is that adding the liquidation value of the firm's assets to your DCF output would be double counting those assets." BCOS UR ASSETS DO NOT LAST FOREVER LIKE IN FAIRY TALES...YOUR LIQUIDATION VALUE VERY IMPORTANT LOH..!!

"The rule of thumb is - if you are including the income generation of the asset in your projected cash flows for the DCF, then you shouldn't add it (that would be double counting). If, on the other hand, it's an excess asset not accounted for your DCF, then it should be added to determine the value of the firm's securities." LAND AFTER BUSINESS KAPUT...STILL WORTH ALOT OF MONIES...WHERE GOT DOUBLE COUNT ?
THATS WHY LAND VALUE IMPORTANT LOH...!!

2017-10-02 21:59

stockraider

IF say the land value is 500M now, i am estimating its future value grows at the same rate of the discount factor you use on your DCF..
Meaning its NPV is indeed = 500M.

CERTAINLY...LAND VALUE WOULD HAD APPRECIATED IN 30 TO 40 YRS TIME LOH..!!

LAND VALUE KEEP TRACK OF INFLATION LOH....!!
POTENTIAL RETURN FROM LAND APPRECIATION IS BETWEEN 2% TO 10% PA...BASED ON MSIA PAST TRACK RECORD LOH...!!

SO TO TAKE CURRENT LAND APPRECIATION = DISCOUNT RATE IS A FAIR ASSUMPTION LOH..!!

2017-10-02 22:04

probability

Just managed to go through Ricky postings in detail... realized Raider had answered exactly what i had in mind. Could not have explained better than him. Thanks Raider

Ricky, to close the chapter and conclude, hope you can roughly come to agreement with raider's feedback above.

2017-10-02 23:29

probability

Look at the land as equivalent to gold....

the land has cash flow of its own, it can take place at the end of the life of the plant...its a ONE TIME sale transaction (cash flux 1).

the plant which is generating continuous cash stream (cash fluxes 2) will become nothing at that point of time...

all the cash flows (cash fluxes 2) are assumed to be invested into something else which is expected to continue growing at the discount factor...

and what is that investment?

i can find it to be any better investment than the land itself

meaning..the land's NPV (from cash flux 1) is much more secured than the cash flows NPV (from cash fluxes 2) you are getting from the DCF.

2017-10-02 23:54

Ricky Yeo

So what you and Raider are saying is: You want to count the NPV of land, which technically can only be taken out in a liquidation, and add that with the value of the business right? But how on earth can both co-exist together? If you liquidate the whole business, then you will get the NPV of land, but you won't get all the cash flows after that. In contrast, if you keep the business as going concern, you will never get the NPV of land, which is included in the NPV of the business anyway.

You probably have done so many time DCF valuation yourself. Maybe far from calling it a gold standard, but it is a robust tool to value a stock. Or else Aswath Damodaran won't have use it in every lecture. So have you thought about why DCF valuation doesn't come with a label that says "Please add assets after you derive the final value"? We are not taking small matter here. If DCF valuation exclude assets, we are looking at a gap of 30-50% of miscalculation in intrinsic value. Why? Why everyone that does DCF only use the business cash flows?

Why when KC Chong does a DCF on MFCB (https://klse.i3investor.com/blogs/kcchongnz/47535.jsp) he never add 'operating assets" after PV of core operations? MFCB got assets in the name of power plants. This is just one example. You can pull out all the DCF he has ever done in i3, can you find out why he never adds any lands or assets into the final figure to derive a fair value? Think about your probability of being right and your probability of being wrong. Think about it.

2017-10-03 04:09

stockraider

Posted by Ricky Yeo > Oct 3, 2017 04:09 AM | Report Abuse

So what you and Raider are saying is: You want to count the NPV of land, which technically can only be taken out in a liquidation, and add that with the value of the business right? But how on earth can both co-exist together? If you liquidate the whole business, then you will get the NPV of land, but you won't get all the cash flows after that. In contrast, if you keep the business as going concern, you will never get the NPV of land, which is included in the NPV of the business anyway. THAT IS THE CORRECT THING OF DOING THINGS OPERATING CASHFLOW OVER THE LIFETIME OF BUSINESS PLUS THE LIQUIDATION OF THE BUSINESS DCF = NPV MAH...!!
YES IT CAN BE DONE BY SEGREGRATING BOTH CASHFLOW NPV AND TERMINAL NPV MAH....!!
BUT PUT IT THIS WAY LOH, IF U HOLD COUNTERS LIKE NESTLE,DLADY OR BAT WHERE ITS NTA IS INSIGNIFICANT RELATIVE TO ITS OPERATING CASHFLOW, EVEN OMITTING THE TERMINAL VALUE WHICH IS WRONG, UR MARGIN OF ERROR IS STILL NOT THAT SIGNIFICANT MAH...!!
BUT IF UR BUSINESS WHERE THE TERMINAL VALUE FORM THE BULK OF UR ASSETS LIKE ORIENTAL, KSENG AND BJCORP THAN THE TERMINAL VALUE IS VERY IMPORTANT, OMITTING IT MAKES YOUR VALUATION TOTALLY WRONG LOH..!!
A GOOD EXAMPLE IS ALCOM, WHICH TAKENOVER RECENTLY FOR RM 0.67 PER SHARE ONLY LAST YR, WHERE THE VALUATION IS DONE WRONGLY AS TERMINAL EXCLUDED LOH...!! AFTER THE TAKEOVER WITHIN 6 MTHS THE ACQUIRER ABLE TO DECLARE DIV RM 0.22 AND CAPITAL REPAYMENT RM 0.32 = RM 0.54 PAYOUT .
THE CURRENT SHARE PRICE IS RM 1.20 LOH...!!
RAIDER ASK THE DIRECTOR HOW THEY MANAGE TO DO THAT BY PAYING OUT SO MUCH CASH, HE SAYS SIMPLE, JUST LEVERAGE AGAINST THE HIGH VALUE OF THE COMPANY ASSET LOH...!!

You probably have done so many time DCF valuation yourself. Maybe far from calling it a gold standard, but it is a robust tool to value a stock. Or else Aswath Damodaran won't have use it in every lecture. So have you thought about why DCF valuation doesn't come with a label that says "Please add assets after you derive the final value"? We are not taking small matter here. If DCF valuation exclude assets, we are looking at a gap of 30-50% of miscalculation in intrinsic value. Why? Why everyone that does DCF only use the business cash flows? AS RAIDER SAY SOMETIME PEOPLE JUST CONVENIENTLY OVERLOOK OR WHEN THE TERMINAL VALUE IS INSIGNIFICANT LOH...!! FOR EXAMPLE RAIDER, SAYS HALF YR HRC NET CASHFLOW PER SHARE IS RM 1.44, SO SAY FULL YR CASHFLOW RM 2.88 PER SHARE, WHICH SUCH A STRONG CASHFLOW AND PROJECTED TO MAINTAIN GOING FWD, RAIDER NO NEED TO TALK ABOUT TERMINAL VALUE LOH..!!
BUT IF WHEN TAKEOVER PRICE IS RM 1.92, CERTAINLY THE TERMINAL VALUE OF HRC FREEHOLD LAND IS HIGHLY IMPORTANT.

Why when KC Chong does a DCF on MFCB (https://klse.i3investor.com/blogs/kcchongnz/47535.jsp) he never add 'operating assets" after PV of core operations? MFCB got assets in the name of power plants. This is just one example. You can pull out all the DCF he has ever done in i3, can you find out why he never adds any lands or assets into the final figure to derive a fair value? Think about your probability of being right and your probability of being wrong. Think about it.
U JUST POSE TO KC, WHY ? RAIDER THINK IT IS A COMPUTATION ERROR LOH, SINCE MFCB HAS HIGH TERMINAL VALUE MAH...!!

2017-10-03 08:33

rojakmee

hahahahhahahhahahaha

2017-10-03 09:58

Ricky Yeo

Raider if you want to say Aswath Damodaran (who live and breath DCF) and everyone else like KC that they either conveniently overlook or due to computation error, well, what can I add more to it.

2017-10-03 11:13

probability

Post removed.Why?

2017-10-03 11:31

stockraider

Posted by Ricky Yeo > Oct 3, 2017 11:13 AM | Report Abuse

Raider if you want to say Aswath Damodaran (who live and breath DCF) and everyone else like KC that they either conveniently overlook or due to computation error, well, what can I add more to it.

U must computation of operating cashflow over the life of business is extremely difficult loh...!!
So alot, of people take the short cut way of estimated cashflow in pepetuity, meaning the business will go on & on at the same level of positive cash flow forever loh....!!

This type of approach is only suitable for business that is assets light mah, surely Damodaran will not be wrong if he use it for company like coca cola etc mah...!!

The most correct way is still operating cashflow plus terminal value loh....!!

What is terminal value ? It is the net realiseable of assets at current mkt price applied dcf = Terminal NPV

BUT PUT IT THIS WAY LOH, IF U HOLD COUNTERS LIKE NESTLE,DLADY OR BAT WHERE ITS NTA IS INSIGNIFICANT RELATIVE TO ITS OPERATING CASHFLOW, EVEN OMITTING THE TERMINAL VALUE WHICH IS WRONG, UR MARGIN OF ERROR IS STILL NOT THAT SIGNIFICANT MAH...!!

BUT IF UR BUSINESS WHERE THE TERMINAL VALUE FORM THE BULK OF UR ASSETS LIKE ORIENTAL, KSENG AND BJCORP THAN THE TERMINAL VALUE IS VERY IMPORTANT, OMITTING IT MAKES YOUR VALUATION TOTALLY WRONG LOH..!!

A GOOD EXAMPLE IS ALCOM, WHICH TAKENOVER RECENTLY FOR RM 0.67 PER SHARE ONLY LAST YR, WHERE THE VALUATION IS DONE WRONGLY AS TERMINAL EXCLUDED LOH...!! AFTER THE TAKEOVER WITHIN 6 MTHS THE ACQUIRER ABLE TO DECLARE DIV RM 0.22 AND CAPITAL REPAYMENT RM 0.32 = RM 0.54 PAYOUT .
THE CURRENT SHARE PRICE IS RM 1.20 LOH...!!
RAIDER ASK THE DIRECTOR HOW THEY MANAGE TO DO THAT BY PAYING OUT SO MUCH CASH, HE SAYS SIMPLE, JUST LEVERAGE AGAINST THE HIGH VALUE OF THE COMPANY ASSET LOH...!!

I hope u understand the concept of cashflow & complete with complete assets liquidation when business life end, as a basis of investment valuation loh...!!

Please reread Intelligent investor Benjamin Graham clearly explain his concept of using NPV valuaing a company which is bond like loh...!!

As i say the net tangible assets or higher NPV of net realiseable of the business, do matters as it give the business a higher NPV head starts loh..!!

2017-10-03 11:46

probability

Post removed.Why?

2017-10-03 11:50

probability

to me these sounds very familiar...similar to all the priest and islamic ulama is doing...in the name of islam.....you now can't even question the bibles..or Quran...

2017-10-03 11:59

Jay

my view is any appreciation of value would add to a company's value, but if it's operating assets that generate cashflow then it may not be straightforward. typical DCF is valuing cashflow plus value of non-operating assets. cashflow however could change depending on your assumptions. if you assume it has a shelf life, end of the day the higher land value should be taken into account. if you assume it's perpetual the asset value may not be apparent. but logically, everything has a useful life. if one day the cashflow returns from running the plant, after considering reinvestment is less than the land value or land converted for other use, then that's where land value becomes apparent. that said, hengyuan plant is still up and running so no point really shouting about land value

2017-10-03 12:07

I LOVE HENGYUAN, sexy babe RM21

HI Jay bro, welcome BACK! your opinions always HIGHLY appreciated. Please do come back more often, many doubts, questions to clear with your smart mind. hehe

2017-10-03 12:08

rojakmee

revalue land, NTA increase, share capital increase, profit increase during the period and HRC share price increase and that whats shareholders want.

2017-10-03 13:19

probability

lets make it a little more simpler:

Say you have a rubber plantation, 1000 acre...and the rubber price is so low, that the DCF valuation (20 years till all rubber tree dies of old age, with discount factor of 10%) based on the projected cash flow due to future rubber selling price gives asset (1000 acre) at RM 10k per acre...


And also, say the same land at the same time in the neighbouring area is valued at 20k/acre currently...due to palm plantation ...and after 20 years, the land value is expected to appreciate at the same discount factor (of 10% per annum) for next 20 years (palm oil selling price is projected to be way much better than rubber in future)...

Would you value the rubber plantation land now at "10k/acre + 20k/acre" = 30k/acre...or just value it at 10k /acre?

2017-10-03 14:09

stockraider

As i say the net tangible assets or higher NPV of net realiseable of the business, do matters as it give the business a higher NPV a head starts loh..!!

A GOOD EXAMPLE IS ALCOM, WHICH TAKENOVER RECENTLY FOR RM 0.67 PER SHARE ONLY LAST YR, WHERE THE VALUATION IS DONE WRONGLY AS TERMINAL EXCLUDED LOH...!! AFTER THE TAKEOVER WITHIN 6 MTHS THE ACQUIRER ABLE TO DECLARE DIV RM 0.22 AND CAPITAL REPAYMENT RM 0.32 = RM 0.54 PAYOUT .
THE CURRENT SHARE PRICE IS RM 1.20 LOH...!!
RAIDER ASK THE DIRECTOR HOW THEY MANAGE TO DO THAT BY PAYING OUT SO MUCH CASH, HE SAYS SIMPLE, JUST LEVERAGE AGAINST THE HIGH VALUE OF THE COMPANY ASSET LOH...!!

my view is any appreciation of value would add to a company's value, but if it's operating assets that generate cashflow then it may not be straightforward. typical DCF is valuing cashflow plus value of non-operating assets. cashflow however could change depending on your assumptions. if you assume it has a shelf life, end of the day the higher land value should be taken into account. if you assume it's perpetual the asset value may not be apparent. but logically, everything has a useful life. if one day the cashflow returns from running the plant, after considering reinvestment is less than the land value or land converted for other use, then that's where land value becomes apparent. that said, hengyuan plant is still up and running so no point really shouting about land value

2017-10-03 14:20

probability

Post removed.Why?

2017-10-03 14:21

Ricky Yeo

If you want my practical answer, 10k/acre. Why should I anchor my valuation on the unknown? Yes I can touch the land, it is real, but unless I have a clue what it is worth in 20 years time to do a reliable DCF today, what is the meaning of doing it? Not to mention the growth rate of the land can be plucked from the skies to justify any present value. If I'm going to sell the entire plantation next month, yes I should value the land now, but not in 20 years when I sell it, and needless to say not in the case of the business running in perpetuity either. So Im not sure where we find the confidence to add another 50% extra value on Hengyuan when no one knows whether there's a bird, or if it will ever appear.

2017-10-03 17:49

probability

Ricky,...even the cash flows we are projecting for the DCF is highly uncertain...as for the case of rubber trees to derive the 10k/acre.

how do i know which is more certain...my DCF on the rubber trees future cash flow OR.. the fact that people are willing to buy an empty land now at 20k/acre...with the assumption that they will get the return they are expecting at the discount rate we use?


Posted by Ricky Yeo > Oct 3, 2017 05:49 PM | Report Abuse

If you want my practical answer, 10k/acre. Why should I anchor my valuation on the unknown? Yes I can touch the land, it is real, but unless I have a clue what it is worth in 20 years time to do a reliable DCF today, what is the meaning of doing it? Not to mention the growth rate of the land can be plucked from the skies to justify any present value. If I'm going to sell the entire plantation next month, yes I should value the land now, but not in 20 years when I sell it, and needless to say not in the case of the business running in perpetuity either. So Im not sure where we find the confidence to add another 50% extra value on Hengyuan when no one knows whether there's a bird, or if it will ever appear.

2017-10-03 19:01

probability

If you ask me, i am more certain on the value of land....as that is a valuation done by the market at large, the certainty level is higher than my individual (business skills) cash flow projection for the rubber trees.

As such, knowing that very likely i will be able to sell my land at NPV of 20k/acre currently...in the future with 10% appreciation per annum.... and knowing that i can generate cash from rubber trees to invest on other similar land, i have ensured by NPV of my asset is at 30k/acre.

So, i am not willing to sell the stock any lesser than 30k/acre now....

2017-10-03 19:13

Alex Foo

not bad la, alex got learn a lot of good stuff from discussion here.

But one thing can't be denied is that this china company owns some land here. I still wonder how to fit 350 acre around that port dickson area also. If someone know the answer, can paste picture here =)

2017-10-04 09:41

probability

another important factor overlooked in valuing business, especially where there is no net growth in the invested capital via DCF is that in reality, the FCF are seldom paid out as dividends and even if it is paid out, the certainty of the new invested capital (RONIC) from this dividends (FCF) to match the COC is unlikely...imagine if the cash are just kept in FD...compared to the valuation rise of land.

one can track the valuation rise on land especially those close to the port , city and even plantation land for the last 20 years...how much it had grown in value?

That easily justifies the present price of any land to match its NPV derived from its almost infinite lifetime.

Ignoring land valuation and treating it purely as if it is an asset like plant, property, equipment to generate cash...to support the business is almost like being blind and stuck to contextual theories.

The theories are not incorrect, but one has to understand on what context in can be used - its applicability.

Land, especially like those in Malaysia - are just second to the fundamental source of energy, the sunlight where all other energy (values) are derived, where the GDP is made finally.

It is the reference frame of all other values, its NPV is almost permanently fixed.

2017-10-04 13:23

Ricky Yeo

I would regard taking into account the invisible cashflow of land to be more of a contextual theories than ignoring it, even under the context where lands are held by a property developer such as Tropicana with GDV 52 bil against $2.5 bil in EV since they can readily be deployed for productive use i.e building properties. No one ignore the value of the land, but it is about understanding the role the land plays as one of the assets that indirectly sustain the business operation and generate operation cash flow. Without the land, the business can still survive by placing it in another piece of land. Without the business, the land itself is just a piece of solid ground that does not generate any value unless being exploited for productive use. So the real disagreement here is taking into account the invisible cash flow and subject it to a 10% growth. That land would be larger than the whole economy in perpetuity.

2017-10-05 06:35

Ricky Yeo

Thanks probability. But good to learn your viewpoint as well. : )

2017-10-05 11:40

probability

Ricky, at this moment Jay's msg below shows the difference in our way of thinking.

The major difference between us arise due to the lifetime of the cash flow analysis and how you calculate the terminal value.

My DCF has very short lifetime (less than 10 years) and i do not assume the cash flow generated at the end of these 10 years grows indefinitely with a a certain value below the discount factor.

I deteriorate its ROIC due to erosion of competitive edge very quickly such that the business becomes no longer worth to continue in 10 years.

I am not locking the land value to be dictated by this refinery business only, i am leaving it free for other business at that time.


So my selling price of the land and your TV estimates may greatly differ.


I tend to adjust my TV estimates (land selling price) based on current developments on the surrounding land.


You do not value these development and are only concern on the particular business changes at that point in time to derive the pending future cash generation potential and thus its terminal value, TV.


The significance largely depends on the current stock price relative to the land value, and the assumption of the lifetime of the business.

It seems more apparent for plantations.


Posted by Jay > Oct 3, 2017 12:07 PM | Report Abuse

my view is any appreciation of value would add to a company's value, but if it's operating assets that generate cashflow then it may not be straightforward. typical DCF is valuing cashflow plus value of non-operating assets. cashflow however could change depending on your assumptions. if you assume it has a shelf life, end of the day the higher land value should be taken into account. if you assume it's perpetual the asset value may not be apparent. but logically, everything has a useful life. if one day the cashflow returns from running the plant, after considering reinvestment is less than the land value or land converted for other use, then that's where land value becomes apparent. that said, hengyuan plant is still up and running so no point really shouting about land value

2017-10-05 16:47

probability

https://en.wikipedia.org/wiki/Terminal_value_(finance)

2017-10-05 19:37

probability

https://bizfluent.com/how-7591081-determine-value-commercial-real-esta...

Since i am using Exit Multiple (just realized actually the term) from the above and that the Rental rate of the empty land will be growing just like people assume the cash flow of business grows.....

It is expected my land (A) would be worth in comparable sense to my business(B) which as per my conservative DCF i had assumed deteriorated significantly by the end of 10 years....

The business (B) is worthless in 10 years, its TV is far below the Selling price of the Land alone at that time.....

Ricky, you are right that on my TV i cannot add up both the TV of Land and the TV of the business, but i will chose the one that is bigger.

However, the NPV derived from the business till the point of time i decide to sell in 10 years. either the Land alone or the Business together with the land (whichever having more value), can still be added to this TV (the land for my case).

2017-10-05 19:59

probability

One can see that the TV of the land alone would be obviously higher than the TV of old Rubber trees locked with the Land.. due to its age.

Thus the Land's value is not dictated by the Future cash generation potential of the Rubber trees...but, other potential plants like palm trees.

Somehow, i tend to value all business like these rubber trees...which fades...especially those which cannot renew its technology, i.e its competitive advantage.

2017-10-05 20:08

tecpower

behavioral finance? How do you prove answers you got are correct? They may choose answers randomly. haha

2018-11-24 10:27