I'm going to ignore the troublesome child. If I can help just...

I'm going to ignore the troublesome child. If I can help just one person understand why KPMG came up with the valuations they did, then it will be worth it. I first started studying the principles of share valuation about 2 years into my training as an accountant about 45 years ago (it isn't a subject that's addressed until you've got the hang of a lot of other things because it's a complex subject). I first started doing share valuations (reporting to someone a lot more experienced) 'in anger' when I was about 10 years in. In my latter years I got involved in a lot of dispute resolution work, which was an area I found challenging and rewarding because the outcome of my findings made a real difference to people's lives. That's just background.

There's no doubt that DCF modelling (in order to arrive a what's called Net Present Value) is the truest way to value an asset held for commercial return. It's quite logical really because it recognises the fact that the value of any asset is the total cash that asset will return to its owner/s over its lifetime. But it's how you work out the value of future (net) cash generated now; how risky it is to assume there will be future (net) cash generation; what happens if there is high inflation; if the asset is likely to be sold by the present owner (if it's the present owner who's commissioned the valuation) what conditions are likely to prevail at the time of sale, and a host of other things that involve prediction or assumption - that is the difficulty.

You don't have to look too hard at SGH to work out that DCF/NPV isn't the right method to adopt to value the company.

Take AC out of the picture altogether but leave its debt. Assume a bank has stepped in because AC has said: you can have it for its face value - say $850m and the bank for some reason has said ok. The bank (because it's a commercial organisation) has told SGH the money is for 5 years and the rate of interest is base + 4%. Put whoever you like in charge of SGH. Then say: from next Monday it's up to you go do it.

None of the above is going to happen but SGH would still fall over within a very short period because the weight of debt is simply too high. The reality is that hedge fund lenders are in total control and unless they get what they want (they've told you what it is and it will still involve leaving debt on SGH's balance sheet that will have to be serviced, thereby restricting future profitability) then they'll get what they can out of it by liquidating the assets and move on.

I don't want to write an essay. Believe what you want - I only post because I'm interested in how it's all playing out and we all something new every day. Many know I'm an ex holder - I simply didn't think management could be so bad. One can never learn too much and what I learned here I will take forward with me and hopefully not make the same mistakes again. If I can help a few others avoid the same mistakes then it's a result.

Of course DCF/NPV isn't the right method to use to value SGH because in its present state it is hopelessly insolvent. For it to have any value moving forward it will have to be 're-geared'. There is so much uncertainty that no-one in their right mind would think it was safe to make any assumptions at all about future (net) cash flows. The figure used is NET cash - ie bottom line profit that turns into cash - not what (for instance) is 'invested' in WIP.

Grow up and stop misleading people, SWC

dyor