19-05-2015, 03:43 PM
So how do you propose we adjust the assets? And if you use the ROA as an approximation, doesn't that bring us back to where we started? How is your ROA different from ROIC? I better clarify, since your definition of these terms might well be different from convention. Using the segmental breakdown would reveal little conclusively as well, since the asset base attributable to the property development segment is also questionable. Not to mention the timing and amount of the cash flows too. Of course, carrying out the analysis on a per project basis would make the most sense, but isn't that the RNAV approach?
The main idea behind the RNAV approach is due the the rules of accounting, which forbid developers from recognising profits on certain projects until they TOP, even if they are almost sold out. Therefore, it wouldn't make sense to lump a REIT together with a property developer, since the business model is complelety different, and therefore the valuation methodologies differ as well.
Definitely I agree with your point that developers in general have a much higher capital base, since property development is capital intensive. However, to completely disregard the capital structure using the ROIC method would ignore the benefit of taking a suitable amount of debt to finance the development.
Indeed, you are not remunerated to answer my questions, but neither am I remunerated to point out the flaws in your valuation methodology. But all these is done in the spirit of learning, so we can benefit collectively as an investing community.
The main idea behind the RNAV approach is due the the rules of accounting, which forbid developers from recognising profits on certain projects until they TOP, even if they are almost sold out. Therefore, it wouldn't make sense to lump a REIT together with a property developer, since the business model is complelety different, and therefore the valuation methodologies differ as well.
Definitely I agree with your point that developers in general have a much higher capital base, since property development is capital intensive. However, to completely disregard the capital structure using the ROIC method would ignore the benefit of taking a suitable amount of debt to finance the development.
Indeed, you are not remunerated to answer my questions, but neither am I remunerated to point out the flaws in your valuation methodology. But all these is done in the spirit of learning, so we can benefit collectively as an investing community.
(18-05-2015, 03:41 PM)specuvestor Wrote: [ -> ]As the base you can use adjusted asset and ROA as an approximation, or segmental breakdown, or some VB uses on a per project basis. Other clues include the capitalisation of the subsidiaries that are used to perform these projects. Depends how precise you want your analysis to be
Neither have you answer nor agree that developers have a much high capital base due to higher working capital which is why the huge discount is valid. Once you understand the business model then your MOS will have to adjust accordingly. But saying a discount should be 20 or 50% has no real fundamental basis except as relative to peers until you understand the cashflow impact
We can have a discussion on the investment merits but i am not remunerated to answer your questions. There is a difference and the tone has to be set properly.
I brought out the REIT to let u understand the difference in business model and working capital has a huge impact on the "discount to RNAV". The regulators know that and is also why there is a restriction on development business and leverage for REIT
(15-05-2015, 03:00 PM)Teletubby Wrote: [ -> ]If you read my previous posts again carefully, I never mentioned that you were a theorist. What I said was that the method of valuing all businesses based on their ROIC is not a practical approach. Of course, theory has to fit observations, and theory is derived from observations, such as your comment on the 15% discount for cash companies.
For a property development company, it doesn't take good management to have a working knowledge of their cashflow projections, as properties sold are subjected to the standard S&P agreement payment schedule. However, it is very difficult for the layman investor to estimate this, primarily due to timing issues and development cost estimation uncertanties. And also, what do we use as the asset base to calculate ROIC? I'm still waiting for the answer.
All these issues make the ROIC approach impractical when using it on a developer. Which is why estimating the RNAV and then applying a reasonable discount would make more sense with regards to valuation. I notice that you agree with me, so it seems this issue is settled.
A REIT is a totally different creature from a property developer (with caps on gearing, limits on capital allocated for property development, minimum distribution requirements etc), so why bring it into our discussion? Not that relevant IMO. In any case, the RNAV approach would not be suitable for valuing a REIT. In fact, the RNAV is unlikely to be materially different from the NAV for a REIT. Rather, a more sensible approach would be to value the REIT based on your ROIC approach, as the cashflow is more predictable and easier to quantify.
(15-05-2015, 11:51 AM)specuvestor Wrote: [ -> ](15-05-2015, 11:29 AM)Teletubby Wrote: [ -> ]What specuvestor proposes sounds good in theory but hard to execute in practice when valuing companies like CES. Looking at the situation from the perspective of a property developer, how do you estimate the cashflow? Do you use a year's worth of operating cashflow? Or three years? Or five? And what exactly are the "assets" you are talking about that generate this cash flow? Do these include the properties under development? Or also the PPE?
That's why we need to understand the business and structure properly of the company we are valuing, and not apply ROIC blindly, even though the principle might be valid. Of course valuing tech companies using the RNAV approach makes no sense, a more appropriate approach could be the PEG approach.
What I'm suggesting, if you read my previous posts carefully, that you value a developer by first estimating it's RNAV, and then applying an appropriate discount to that RNAV to get an estimate of its fair value. This is the method that makes most sense.
Also, thinking back on the recent waves of privatizations, I cannot recall any one company which was a pure cash company. Perhaps someone can kindly point one out to me.
If you read some of my 2000+ posts, I'm not a theorist. Theory has to fit observations, not the other way round. I'm not here to help you analyse but I can say any projections above 3 years is funny numbers. So how does management do it? That's why there are management, and there are good management. Key is to understand business model, the historical track, the moat vis a viz Porter's 5 forces, and how the 3 A-B-S layers interact. People keep thinking it's a science when accounting itself is not even science.
If you put a suitable/ reasonable discount to CES RNAV then it will make more sense. Check out then the discount for other developers and why discount for REITS are much lesser.
Watch Ocean Sky. Cash companies dont get privatised. They get delisted (downside) or RTO (upside).