Valuation Practices Survey 2017

For all it’s worth
KPMG Valuation Practices Survey 2017
July 2017
KPMG.com.au
© 2017 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 and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.
Contents
Introduction 4
About the survey 5
The survey results 6
General market environment 6

Impairment 8
Risk-free rate and market risk premium 10
Beta and gearing 12
Company specific risk premium 13
Country risk premium 13
Small stock premium (SSP) 14
Imputation credits 15
Income approach 16
Discounts/premiums 17
Valuation methodology 18
4 For all it’s worth | KPMG Valuation Practices Survey 2017
Introduction
Welcome to KPMG’s Valuation
Practices Survey 2017
In this report, KPMG presents the key findings of its

2017 Valuation Practices Survey. Slightly deviating from
our previous two surveys (2013 and 2015), the 2017 survey
takes a deeper look at the assumptions being applied by
those who are currently issuing valuation opinions.
We believe the results provide insight into the thinking
behind the valuers’ opinions. This can only help build
consistency in valuation practices and enhance trust in the
accuracy and independence of our valuations.
Many thanks to those who completed the survey.
Your input is, as always, invaluable.
Please feel free to discuss the results of the survey
with us.
Sean Collins
Partner in Charge, Valuation Services
Deal Advisory
© 2017 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 and logo are registered trademarks or trademarks of KPMG
International. Liability limited by a scheme approved under Professional Standards Legislation.
For all it’s worth | KPMG Valuation Practices Survey 2017 5
About the survey

Why this survey matters Who was surveyed
Valuation plays a significant role within many areas We captured the views of 45 valuation practitioners from
of finance. a variety of core valuation organisations across Australia,
including Australia’s Big 4 accounting firms, prominent
Understanding what an asset is worth, and what
boutique firms, second-tier accounting firms and
drives that value, is essential when management and
smaller practitioners.
stakeholders need to make informed, and effective,
business and investment decisions. This requires decision The survey was circulated to various practitioners, and
makers to trust the valuer’s opinion. responses were received, in late 2016.
Valuation, however, is not objective. Value is always
influenced by a variety of factors: the preconceptions and
bias of the asset’s owner, the valuer’s understanding of
the market, the methodology that is being used, and the
complexity of the underlying business. These influences
impact the assumptions being made by valuers.
Decision makers must be confident that the assumptions
applied are appropriate, and that they are not overly
optimistic or needlessly pessimistic. This is why it is
essential to know, and understand, the basis of the
assumptions made by a valuer.
We believe the information gathered by this survey
highlights the key assumptions being made by those who
are currently issuing valuation opinions – and provides
a strong reference point in understanding the basis of
those assumptions.
The survey results

General market environment
In 2016, Australia recorded its 25th consecutive year of What is your opinion as to the current levels
economic growth. Combined with a low unemployment of value for the following asset classes?
rate, this would normally be an indicator of a strong
economy, but concerns in some sectors tempers the
belief that the Australian economy will sustain a steady 0 = Undervalued 1 = About right 2 = Overvalued
rate of growth.
We asked respondents for their opinion as to current level
1 1
of value for certain key asset classes in Australia:
Real Estate: was considered to be overvalued. Will the 0 2 0 2
south-east Australian property boom continue or will the
housing market finally cool during 2017 and into 2018?
Infrastructure: was seen as ‘highly valued’ reflecting a
significant level of new investment flowing into the sector Real Estate Infrastructure
during the past decade chasing a limited supply of
quality assets.
Listed equities: the perception is that listed equities are 1 1
slightly overvalued. The low interest rate environment 0 2 2
0
continues to drive the equities market, despite a global
environment that is struggling with broad demand and
GDP growth.
Bonds: uncertainty in the bond market is being fuelled by
the underlying interest rate environment. Listed Equities Bonds
Agriculture: a sector that is quickly rising in prominence
with an increase in foreign investment driving transaction 1
1
activity. This has resulted in prices being driven up, but
respondents view the sector as fairly valued. 0 2 0 2
Resources: low commodity prices have impacted
valuations in the resources sector, however, respondents
view the sector as slightly undervalued.
Agricultural Resources
Although the regulatory environment is

a critical factor in assessing value, most
respondents did not believe that the
government intervention in the sale of
AusGrid would negatively impact prices
achieved in the infrastructure sector.
While 44% of How do you expect the S&P/ASX200 index to move

respondents expect in 2017?
the ASX200 index
30 % 44%
to increase in 2017,
the impact of Brexit
and an emerging anti- said steady
globalisation sentiment said increase
in the global economy
may temper equity
market expectations.
In late 2016, the US

Federal Reserve
increased benchmark
rates – causing a How do you think the yield on 10-year Australian
re-evaluation of government bonds will move in the next 12 months?
growth and inflationary
expectations.
Is this the start of
a return to historic
interest rate levels?
While 68% of
68%
respondents were
expecting an increase
in the yield, 50% of
respondents thought the
increase would be less 20%
said steady
said increase
than 1%.
Impairment What has been your experience of the

incidences of impairment over the past
The past 12 to 24 months have seen numerous 12 months?
impairment challenges for companies. The broad
consensus is that impairment has increased slightly Increased
in the past 12 months. 33%
25%
In the next 12 months there is, on balance, a slight
increase in the expectation of impairment, with the
Steady
key ‘at risk’ sectors noted on the following page.
51%
63%
Decreased
16%
12%
2017 2015
What are your expectations of impairment

over the next 12 months?
Increase
26%
19%
Steady
67%
81%
Decrease
7%
0%
2017 2015
The ‘Value in Use’ approach

is considered when assessing
impairment in 80% of situations and
the ‘Fair Value Less Cost to Sell’
approach is considered in 23%.
Which of the following sectors do you expect The sector viewed to be most at risk in the next
12 months is construction, a direct result of an
to face impairment challenges over the next
expected slowdown in housing activity and the end of
12 months? large-scale investment into the oil and gas sector.
The Australian retail sector is currently experiencing a
difficult trading environment, with online activity and
24% 20%
other disruptive behaviour (such as Amazon Grocery’s
unique delivery approach) seeing traditional bricks and
mortar retail businesses struggle. Retail is also viewed
Construction Retail Trade as an at-risk sector from an impairment perspective.
18% 15%
Manufacturing Mining
11% 3%
Finance, Insurance, Agriculture,
Real Estate Forestry, Fishing
3% 3%
Services Public
Administration
2% 2%
Transportation Wholesale Trade
& Public Utilities
Risk-free rate and market Which of the following do you mostly

risk premium use as a benchmark for the risk-free rate
in Australia?
Valuers continue to take different approaches in
setting the risk-free rate, as reflected in the relatively 2017
wide range of risk-free rates being adopted.
2015
0 20 40 60 80 100
The 10-year government bond yield
remains the most common source for 10-year gov. bond yield without adjustment
the Australian risk-free rate. Cash rate
10-year gov. bond yield with adjustment
House view
Other
What was the most recent risk-free

rate adopted?
4.5%+
4.0% to <4.5%
3.5% to <4.0%
The range of risk-free rates last applied
by respondents is 1.8% to 4.5%,
3.0% to <3.5%
reflecting the split between valuers
using a spot rate and those using an
2.5% to <3.0%
adjusted rate.
2.0% to <2.5%
<2.0%
0 2 4 6 8 10
Frequency
Where you adjust the government bond yield,

what is your adjustment based on?
Respondents are using differing
approaches to modify the risk-free
rate, giving rise to the wide range of
0 20 40 60 80 100 risk-free rates.
Longer-term yield expectation

Historical yield averages
Other
If you have an asset with a finite life, do you

adjust the risk-free rate to reflect the life of
the asset? To get the right discount rate, most
respondents agree the risk-free rate
should be adjusted to a duration that
matches the life of the asset.
0 20 40 60 80 100
Yes No
What was the most recent market risk

premium?
7.5%+
Australia’s current low-interest
environment has resulted in some
valuers adjusting the market risk
7.0%
premium upwards by either 0.5%
or 1.0%. However, 6% remains the
6.5% most commonly adopted market risk
premium for Australia.
6.0%
0 5 10 15 20 25 30
Frequency
Beta and gearing If you unlever and relever the Beta, which
formula do you use?
Market volatility continues to drive valuers to a longer
reference period when assessing beta, with the
majority of respondents preferring a 5-year monthly
or 4-year monthly period over the shorter 2-year
weekly measurement. 0 20 40 60 80 100
Harris Pringle Hamada
When selecting the beta, generally what

period and frequency do you deem to be
most appropriate?
The Hamada formula is the preferred

choice for valuers in unlevering and
relevering the beta.
54%
5-year When selecting your gearing level, what do
monthly you base your gearing level on?
0 20 40 60 80 100
30
The average gearing level of the comparable companies
% Optimal gearing level

2-year The actual gearing level of the subject company
weekly
Other
14 %
4-year
monthly What tax rate do you use in calculating
2% notional tax cash flows or in re-levering Beta?
Other
0 20 40 60 80 100
Marginal corporate tax rate
Effective corporate tax rate of subject entity
Other
Company specific risk premium How often do you consider an alpha?
Ideally, all of an asset’s risk is reflected in the forecast

cash flows. The reality is that cash flows are often not
prepared on a risk-adjusted basis and therefore, as 4%
7%
the respondents have indicated, valuers include an
adjustment in the calculation of the cost of equity to 7%
Always
account for the risk that’s not reflected in the 40%
cash flows. Often
Sometimes
Rarely
42%
Never
The common factors leading to
an ‘alpha’ adjustment include the
assessment of forecasting risk,
start-up risk, construction risk and/or
refinancing risk.
When applying an Alpha, how do you

determine the quantum of the Alpha?
0 20 40 60 80 100
Sensitivity analysis
A valuer’s judgement remains the most Reference to the implied multiples
common source for determining the Empirical research

quantum of an ‘alpha’ adjustment.
Valuers judgement
Other
Country risk premium If a country risk premium is applied, what is

the source of the premium?
A premium is added to the assessed discount rate
when the discount rate is built by using base inputs
from a country different to that of the subject entity.
0 20 40 60 80 100
Premium based on bond yield spreads
Premium based on credit rating
Premium based on Credit Default Swap spreads
Other
Small stock premium (SSP) In applying an SSP, which factor is adjusted?
Small companies tend to be more exposed to risk 2017

than large companies, which typically means that an
adjustment needs to be made to reflect the inherent
risk of smaller companies, as the respondents
have indicated. 2015
0 20 40 60 80 100
An SSP is explicitly included in the CAPM formula disclosed

Beta
MRP
Alpha
What premium is added to the discount

rate to account for the size of the
entity being valued?
Equity value: <$50 million

1% 5% 20%
Equity value: $51 – $100 million

0% 3% 10%

0% 1.4% 6%

0% 0.9% 4%
Equity value: $501 – $1,000 million

0% 3%
For entities valued at less than Equity value: >$1,001 million

$50 million, the most commonly 0% 0.5%
applied adjustment is 5%.

Median Mode
Imputation credits Do you include a value for future imputation benefits in the
following situations:
If a company franks its dividends, shareholders
receive a franked dividend, which means they get
an imputation credit for the tax that a company has Discounted cash flow (DCF) for a
already paid. For valuation purposes, a decision must general business
be made whether to include or ignore the franking
benefit (credit).
0 20 40 60 80 100
Yes, through a cash flow adjustment
Yes, by adding a Gamma factor in the discount rate
No
Multiple approach for a general business
0 20 40 60 80 100
Yes, through an earnings adjustment
Yes, by an adjustment to the multiple
Yes, by valuing separately on an NPV basis and adding to capitalised value
No
Discounted cash flow for an

infrastructure asset
0 20 40 60 80 100
Yes, through a cash flow adjustment
Yes, by adding a Gamma factor in the discount rate
No
When used, most valuers use

between 70% and 80% as their
franking utilisation rate.
Income approach What do you consider to be an appropriate

minimum cash flow period?
An income approach, typically in the form of a DCF,
continues to be a widely applied methodology.
However, the application of the approach continues
to evolve.
0 20 40 60 80 100
1-3 years 4-5 years 6-10 years 10+ years
Modern financial reporting guidelines

have dictated a 5-year cash flow When calculating the Terminal Value in a
period, which has facilitated a general Discounted Cash Flow valuation what
acceptance of shorter forecast method(s) are considered?
periods over the traditional longer
cash flow periods. 2017
0 20 40 60 80 100
Gordon growth model (perpetuity method)
Exit multiple model
Other
If the Gordon Growth method is employed,

how do you usually determine the perpetuity
(residual) growth rate?
2017
The Gordon Growth (or perpetual
model) remains the preferred
methodology for assessing terminal
value. 2015
The alternative adopted by 34% of

respondents is an Exit Multiple 0 20 40 60 80 100
model, which eliminates some of the
issues associated with the influence Consumer Price Index/Inflation
of financing and capital expenditure Long-term bond yields
cash flows in the later years of the Gross Domestic Product growth
forecast period. House view
Long-term asset specific growth periods
Other
Discounts/premiums What discount do you apply in valuing a

minority interest?
After determining the value of an entity, the
application of a discount to account for minority or Size of stake: 1% – 24%
marketability issues can have a material impact on the 0% 25% 30% 50%
final outcome.
Size of stake: 25% – 49%
0% 15% 30%
Size of stake 50:50 JV

0% 5% 30%
Median Mode
What premium do you apply to reflect the

level of control offered by the size of the stake
60% of respondents apply a discount being valued?
to an interest in a 50:50 joint venture. Size of stake: 51% – 74%
0% 10% 15% 30%

0% 20% 33%
Size of stake: 100%

0% 25% 30% 33%
Most respondents apply a higher Median Mode

premium for higher levels of control
above 50%, reflecting the increased
benefits obtained as ownership levels When a marketability discount is required,
increase. what sized discount do you apply?

0% 30% 50%

0% 20% 45%
Where a 100% interest is valued, Size of stake: 50%

0% 10% 15% 40%
valuers typically do not include a
marketability discount, highlighting the
possibility of running an unhindered Size of stake: 51% – 74%
0% 10% 35%
sales process to realise the value of
the asset.
0% 3.8% 30%
Size of stake: 100%

0% 15%
Median Mode
Valuation methodology How often do you use the following valuation

Over time, valuation methodologies can go in or out
approaches assuming a going concern?
of favour. The Price/Earnings methodology, once a
valuers’ staple, is rarely used today with pre-financing Others
earnings the preferred option.
Asset based methodology
Market approach (Earnings or asset base multiple)
Enterprise value/Earnings before interest & tax (EBIT)
Income approach (DCF)
A market-based approach continues to

be the preferred methodology, regularly 0 20 40 60 80 100
used by 90% of respondents.

Always Often Sometimes Rarely Never
Which of the following methodologies do you

only use as a cross-check approach?
Industry rules of thumb and revenue

multiples are typically reserved for
cross-check purposes. Together with 0 20 40 60 80 100
Regulated Asset Base type multiples,

they provide a useful sense check but EV/Rev EV/EBIT EV/EBIT EV/RAB
lack the robustness required to be a
EV/Resource EV/CFO P/E(pre-tax) P/E(post-tax)
primary determinant of value.
Industry rule of thumb P/BV P/BV
When using the market approach as a

primary approach, how often are the
following valuation multiples used?
Price/Earnings post-tax
Price/Earnings pre-tax
Enterprise value/Regulated Asset Base
Enterprise value/Earnings before interest & tax (EBIT)
Enterprise value/Earnings before interest & tax, depreciation &

amortisation (EBITDA)
Price/Book value of equity
Industry rule of thumb
Enterprise value/Operations cash flow
Enterprise value/Resource
Enterprise value/Revenue
0 20 40 60 80 100
Always Often Sometimes Rarely Never
© 2017 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 and logo are registered trademarks or trademarks of KPMG
International. Liability limited by a scheme approved under Professional Standards Legislation.
Contact us
Sydney Melbourne
Sean Collins Adele Thomas
Partner in Charge Partner
Valuation Services, Deal Advisory Valuation Services, Deal Advisory
+61 2 9335 7447 +61 3 9288 6139
scollins1@kpmg.com.au athomas1@kpmg.com.au
Jo Lupton Brisbane
Partner Bill Allen
Valuation Services, Deal Advisory Partner
+61 2 9335 7530 Valuation Services, Deal Advisory
jlupton@kpmg.com.au +61 7 3233 3174
billallen@kpmg.com.au
Ian Jedlin
Partner Perth
Valuation Services, Deal Advisory
Jason Hughes
+61 2 9335 8207
Partner
irjedlin@kpmg.com.au
Valuation Services, Deal Advisory
+61 8 9263 7452
jhhughes@kpmg.com.au
KPMG.com.au
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(“KPMG International”), a Swiss entity. All rights reserved.
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Liability limited by a scheme approved under Professional Standards Legislation.
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For all it’s worth

KPMG Valuation Practices Survey 2017

About the survey 5

The survey results 6

General market environment 6

In this report, KPMG presents the key findings of its

About the survey

The survey results

Although the regulatory environment is

While 44% of How do you expect the S&P/ASX200 index to move

In late 2016, the US

Impairment What has been your experience of the

What are your expectations of impairment

The ‘Value in Use’ approach

Risk-free rate and market Which of the following do you mostly

What was the most recent risk-free

Where you adjust the government bond yield,

Longer-term yield expectation

If you have an asset with a finite life, do you

What was the most recent market risk

Harris Pringle Hamada

When selecting the beta, generally what

The Hamada formula is the preferred

% Optimal gearing level

Marginal corporate tax rate

Effective corporate tax rate of subject entity

Company specific risk premium How often do you consider an alpha?

Ideally, all of an asset’s risk is reflected in the forecast

When applying an Alpha, how do you

A valuer’s judgement remains the most Reference to the implied multiples

common source for determining the Empirical research

Country risk premium If a country risk premium is applied, what is

Premium based on bond yield spreads

Premium based on credit rating

Premium based on Credit Default Swap spreads

Small stock premium (SSP) In applying an SSP, which factor is adjusted?

Small companies tend to be more exposed to risk 2017

An SSP is explicitly included in the CAPM formula disclosed

What premium is added to the discount

Equity value: <$50 million

Equity value: $51 – $100 million

Equity value: $101 – $250 million

Equity value: $251 – $500 million

Equity value: $501 – $1,000 million

For entities valued at less than Equity value: >$1,001 million

applied adjustment is 5%.

Yes, through a cash flow adjustment

Yes, by adding a Gamma factor in the discount rate

Multiple approach for a general business

Yes, through an earnings adjustment

Yes, by an adjustment to the multiple

Yes, by valuing separately on an NPV basis and adding to capitalised value

Discounted cash flow for an

Yes, through a cash flow adjustment

Yes, by adding a Gamma factor in the discount rate

When used, most valuers use

Income approach What do you consider to be an appropriate

1-3 years 4-5 years 6-10 years 10+ years

Modern financial reporting guidelines

Gordon growth model (perpetuity method)

Exit multiple model

If the Gordon Growth method is employed,

The alternative adopted by 34% of

Long-term asset specific growth periods