re: to redfaces - a reply From your newsletter, Goldman Sachs...

re: to redfaces - a reply From your newsletter, Goldman Sachs had a valuation of $2.65 and Macquarie had a valuation of $2.79 a few months ago.

I read about their DCF/NPV (discounted cash flows / net present value) valuations in either the media or aireview.

Both valuations assume termination of the TTS gaming licence in 2012.

Your newsletter questioned "why such a gap might exist" between the market price and those valuations.

The answer, in my opinion, is simple - the market does not believe that the TTS business will terminate in 2012.

If the share price moved towards $2.79, TTS pricing would probably be akin to a bond valuation (minimal risk inherent). Yet, share returns (dividends and any capital gain/loss) are different from bond returns (yields at coupon rates and redemption value).

This DCF/NPV modelling ignores any renewal of gaming licence beyond 2012. It also ignores the fact that TTS can at any point in time, legally raise the gross profit return on pokies from 10 cents in the dollar to 13 cents in the dollar.

Try plugging that into your DCF/NPV model.

After that, build in a steady rise of say, 3% p.a. into total revenue between now and 2012 (just for sensitivity analysis).

Now, lower the cost of capital used in the discounting of cash flows, by say 25 basis points, also for sensitivity analysis.

Finally, the coup de grace, assume the status quo for the gaming licence renewal, in terms of sharing of the carve of the cake between the three stakeholders (government, punters and TTS).

Ten different analysts, using ten different sets of assumptions for cash flow projections, leads to 10 different DCF/NPV valuations.