I will look more closely at the remainder of your valuation, but for now, I'm sorry to say that you have made several fundamental errors, relating to: 1) treatment of tax losses; 2) lack of discount for risk; and 3) sustainability.
TAX LOSSES:
Tax losses cannot be enumerated on a 1:1 basis.
On 20 August 2002, CFO Dawson stated that:
"We now have about $41 million of tax losses available. At a 30 percent rate, the benefit's over $12 million. Closer to the end of the year we'll need to reassess the potential to bring this asset to account in light of our future profit forecasts. We're unlikely to be able to give any further guidance on the issue until then".
In other words, you have overstated the compensating benefit to debt.
What you need to enumerate for is the FTB (Future Tax Benefit) which adjusts the losses for the applicable corporate tax rate (ie: $30%). On this basis, net debt, assuming your same formula (ie: GD-TXL=ND) would actually read GD-(TXL*.3)=ND, or $64.4m.
I also dispute the ability to use this as an appropriate formula, however, as tax losses go to the P&L whilst debt goes to the BS.
Before a tax loss can be brought to account as a future tax benefit, an assessment of future taxable profits needs to be carried out (ie: to ensure that the FTB can be effectively utilised for future tax paying purposes).
Based on current net profit (or continuing loss) trends for UEC, I doubt that any more than 50% of the currently available FTB will eventually prove of value or benefit for UEC.
Also, in the event of an acquisition occurring, it does not automatically follow that the current tax losses, or FTB, can be utilised to pay down on group tax positions (even allowing for entity consolidation regimes, as from 1st July 2003, for tax management purposes).
DISCOUNT FOR RISK:
The remainder of your valuation approach also strikes me as there is no discount for risk factored in.
I would have thought this appropriate, as the UEL facility carries a fixed interest rate of 8%. This is 288bp above Friday's 10-year Commonwealth Bond rate which serves as the proxy risk free rate of return applicable in the bond markets.
Again, on 20th August 2002, CFO Dawson stated:
"We'll look at opportunities to refinance the facility".
At the time, media reports also suggested that UEC wanted to get cheaper sources of fiznance than what the UEL facility provided for. However, with an extended facility, subject to an 8% fixed interest rate, the following strikes me as being of concern: 1) UEC's facility is ~300 basis points over "risk free"; 2) this is on an internal facility; 3) this suggests that the financial markets would impose an even greater risk margin (ie: corporate rates closer to 9 or 10%) to accommodate for UEC's risk profile; and 4) effectively, UEL is treating UEC as being at least 200bp over risk (meaning that instead of charging a 6% rate, UEL is charging UEC an 8% rate). In the context of risk, this translates to a 33% risk weighting on UEC (by UEL), or ~50% risk weighting, if externally financed.
SUSTAINABILITY:
T grow the business, you have assumed growing EBITDA, and growing EBITDA margins. However, with an increasing OPEX spread, I will stick by my assumptions of EBITDA margin contraction for UEC, although I concede that overall EBITDA will increase. Just, not at the rate of velocity that you have optimistically assumed.
ADJUSTING FOR VALUE:
V Now equals $64.4m (using your disputed formula).
To get to a 50c valuation, using your approach, would require: 1) 4q2004 EBITDA (annualised and terminal) of $30m; 2) application of a 12x EBITDA multiple; and 3) no more debt than $80m (except that UEC also has a $20m guarantee facility in place with UEL which takes its overall debt profile to $100m).
You're right thought, the controversy has started.
