Daily Archives: April 18, 2016

Delta #EpicFail : What is Delta Worth ? $10.5M or $52.5M ? (Murray & Co)

Election Year : The following opinion is offered in the public interest. -Eds

Received from Christchurch Driver [CD]
Sun, 17 Apr 2016 at 11:41 p.m.

Your correspondent was ruminating about the DCC over a cup of Choysa last week, and was in need of some light relief, so he had a quick read of the latest DCC “report” – (I use the term in the loosest possible sense) about the efficacy of its DCHL assets, including of course, Delta. Your correspondent urges readers with a taste for comedy and irony to read it. It will not disappoint.

Agenda – Council – 11/04/2016 (PDF, 1.6 MB)
Item 22 Dunedin City Council Investments and Returns (pp 109 – 123)

The report starts by explaining why a holding company structure was set up in 1994. It was to “operate commercially”, the major benefit of which is helpfully explained as the interest can be tax deductible under a company structure whereas as a DCC entity it cannot. Let’s just think about this in light of the recent fuss about offshore trusts and tax planning : Accountants call it tax efficient, or tax minimisation. Some, including the Government might consider it a form of tax avoidance, particularly when the Owner of those companies constantly has its hand out to central government begging poverty, seeking handouts for capital projects. ($15M for the Stadium, $5M for Otago Settlers Museum, etc).

The humour starts when the report nonchalantly notes that Delta is valued using the current ($13.8M) asset valuation for the elderly Noble debt. In its words there is no allowance for any “additional impairment” – spot the careful euphemism, or excitingly, “any increase in value” : Yes readers, they actually wrote that. There is a useful biblical precedent to this statement in Luke 6:39. Readers’ homework is to look this up….

Delta is valued at “$45-60M”, but this clearly alarmed at least one of the DCHL Directors, Mr Keith Cooper, who as CEO of Silver Fern Farms has recent extensive experience trying to merge or flog off basket (brisket?!) cases to foreigners. Mr Cooper hurriedly said that “a lot of preparation” would be needed to get Delta ready for sale at anywhere near that figure. Your correspondent thinks that preparation would actually be a very good idea.

Getting Delta “prepared for sale” would require some clarity around the costs and revenues of each of its business activities, and each of its major contracts, not just aggregating everything as per the current annual reports.

However, your correspondent believes that level of detail won’t ever be revealed, for a reason which readers should be aware, and that is your correspondent has been advised by former Delta staff that Delta is propped up by its sweetheart contracts with Aurora, and they are the reason that Delta survives and makes a profit. Most of its other activities are awash in a sea of red ink.

Of course, if this is not true, then some detailed information can be released to show that your correspondent is barking up the wrong tree here. Now, is that likely to happen ?

Naturally, Christchurch-based merchant bankers Murray & Co did not provide detail about how the $45-60M valuation figure was arrived at.

What we know from previous Delta posts (Some Forensics, 30.1.16) is that Delta has shareholders’ equity of $15.804M. This is the difference between the alleged $59.705M in assets and the staggering $43.901M in liabilities, which includes $26.49M in term debt. The key factoid : average Delta net profit over the 5 year period 2011-2015 was $2.636M. It is not forecast to pay a dividend for the next three years. Remember, this includes the proceeds from the sweetheart Aurora contracts which are unlikely to be so generous if owned by a private non DCC entity. In 2015 Delta completed $35.4M, fully one third their turnover, on Aurora work.

Now, your correspondent has had a bit to do with valuing companies for sale. A contracting company such as this would sell for an average P/E (Price Earnings ratio) of between 3-5, over a 3-5 year period. With the 5 year $2.636M average net profit, and using a P/E of 4, that gives a value of $10.54M. That is a long, long way from $52.5M, the value DCC and Murray & Co say it is worth.

There is a case to be made that net profit before impairments should be used, but this will not get to anywhere near the $52.5M. On that basis the 5 year net profit would be $4.59M, which at a P/E of 4 gives a nominal value of $18.38M. Your correspondent says this is too much, no one is going to pay many millions over and above net asset backing for goodwill for an “impaired” contracting company.

Readers, who is right ? A tea drinking blogger, with an interest in the facts, or Ms Bidrose and Mr McKenzie, signatories to the report, assisted by Murray & Co ?

Your correspondent can hear the readers’ lament already – CD is a numbskull ! –what about the $15.804M in equity –it has to be worth at least that much !!

Sadly readers, as outlined in the earlier forensics post, it is my prediction that the $15.804M equity will be written down to $5-8M and quite likely less, when the Noble Debacle is finally dissolved, and the actual loss known.

The Owner of Delta is going to have to pump millions in to recapitalise Delta, otherwise it is a dead company walking – towards extinction.

Your correspondent says it is a feat of extreme positive thinking to get to a value of $52.5M, the figure used in the report. Edward de Bono would be proud. Murray & Co probably bend spoons as a warm up exercise.

This correspondent is incredulous that this figure saw the light of day. Your correspondent says it is completely unsupported by the facts.

[ends]

Tue, 12 Apr 2016
ODT: Valuations raise asset-sale questions
A report tabled at yesterday’s Dunedin City Council meeting has revealed the extent of the city’s assets for the first time. The report, which revealed the $417.9million value of council-owned companies, raised some questions during the meeting about the possibility of asset sales.

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Posted by Elizabeth Kerr

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