FINA3324 Assignment 2016
Valuing S. Kidman & Co’s land properties
On 27 January 2016, the Australian Financial Review reported businessman Dick Smith’s reaction to news of a possible sale of Australia’s largest landholder, S. Kidman & Co, to foreign investors. He was quoted as being totally opposed to the sale and saying “it’s complete madness. Farming land is going to be incredibly valuable – it is going to generate a lot of wealth into the future so you don’t want all that wealth creation to go overseas.” S.Kidman & Co, which has cattle station1 holdings covering 11 million hectares, was placed on the market for sale in April 2015. The Kidman properties comprise about 2.6% of Australia’s agricultural land and 1.3 per cent of the country’s entire land mass. The company was expected to sell for more than $325 million2. DomaCom is a “crowdfunding” business that allows investors to make a fractional investment in property assets that are too large for them to purchase in their entirety on their own. Earlier this year, DomaCom set up a fund to allow individual investors to have a
“beneficial interest” in the Kidman properties for as little as $2,500. Once a sufficient level of interest in joining the fund has been received from investors, DomaCom will make a bid for the Kidman properties. DomaCom’s crowdfunding campaign to acquire the Kidman Station via the Fund is restricted to the land component only. However, for the purpose of this assignment assume that both the properties and the cattle raising business that is run on the properties are purchased together. See www.domacom.com.au for more details.
Required
(a) Provide your estimate of the maximum value of the Kidman properties that DomaCom
should pay. The maximum price is the price at which you think an investment via
DomaCom’s crowdfunding campaign is not worthwhile. This valuation should be done
from the perspective of a potential investor based in Australia who has an existing
portfolio of investments consisting of shares in around 30 randomly selected
companies that are listed on the ASX. (17 marks, see below for further breakdown)
(b) Assuming the expected cash flows and cost of capital you use in arriving at your
estimate of the maximum value of the Kidman Properties are accurate, do you think a
foreign investor should use the same cash flows and cost of capital? Justify your
answer. (3 marks)
Your final estimate of the Kidman Properties’ value is largely irrelevant in terms of getting
marks. You will be awarded marks for the quality of your reasoning and evidence in
justifying your estimated maximum price. Note: the lectures in weeks 7 and 8 will be
particularly relevant to this assignment. They will focus on issues in forecasting and in
constructing spreadsheets of discounted cash flows. The lecturer will also make
references to this particular assignment in class and give further hints.
Here are some hints on how to structure part (a) of the assignment. The hints show the
weights awarded to each component of your answer.
The fundamental valuation formula is Price = E[Cashflows]/E(r)
You will need to set out an Excel spreadsheet with forecast cash flows over a period and a
terminal value and then discount the cash flows using the expected cost of capital. Keep
the Excel spreadsheet in case you are called on to explain a figure but submit only a
summary version using either Word or a PDF file. An example will be provided in class.
There is very little publicly available information about the Kidman properties’ revenues
and expenses (which makes one wonder how Dick Smith can be sure that it is going to be
“incredibly valuable”). However, some material is provided in the assignment folder on
LMS. You should supplement this material with your own research. You will need to
estimate the revenues the Kidman Properties receive from raising cattle and the profit
margin on that revenue. The number of cattle on the Kidman Properties and the tonnes of
beef it produces each year are publicly available as are estimates of the profit margin from
producing beef. You will then need to adjust the figures each year to account for expected
growth (or decline) depending on the demand and supply of beef.
A crucial element in the estimate of cash flows is the projected change in the demand and
supply of beef in the next few years. If demand goes up, supply doesn’t keep up and costs
remain the same then profit margins will increase. On the other hand, if supply outpaces
demand then profit margins will decrease. You will need to undertake an analysis of the
Australian beef industry to develop an idea of the likely change in profit margins. The
analysis should address expected changes in supply, demand and costs and how well
positioned Kidman Properties is to take advantage of industry trends. There will be a total
of 10 marks awarded for your analysis of expected cash flows.
The next important step is estimating and justifying the cost of capital you will use to
discount the cash flows. You should use the CAPM. (4 marks)
Finally, comment on your confidence about the accuracy of the value of your estimate of
the maximum price of the Kidman Properties. You may wish to compare the price against
recent similar property transactions in the industry (2 marks)
Due Date: Electronic submission via LMS, by 12 noon 11 May Thursday 2016 (noon)
Weight: 20% of final grade;
Length: 8 A4-pages maximum, excluding the cover page and excluding up to 4 pages of
appendices and references. Font size: 12-times Roman (or equivalent), line and half
spacing. Harvard-style referencing required.
This is an individual assignment. The assignment should be written by you alone but you
may discuss it with others. In the cover page, include the list of all fellow students with
whom you have discussed the assignment. It’s OK to discuss the assignment so you won’t be disadvantaged by writing a long list of students with whom you have talked about the assignment. Smart people try to get as many different points of view as they can before they make up their mind