Forum Archive Index - March 2001

["G Stolwyk" <stolwyk@wave.co.nz>]

 

Hugh,

 

Let us discuss valuations.

 

It so happens, I am looking at some option certificates of SMART, a property company. It went belly-up in the 1987 crash.

 

I received a 1986 Annual report with a photo of a brick warehouse located close to the SMART H.Q. on the Karangahape road. It mentioned that the valuation was about $1 mill.

 

H: I suppose, you were excited when you saw that valuation?

 

G: I decided to have a look at the property. The land value could not have been that high on the perimeter? And the warehouse was not that large either!  

 

I had an uneasy feeling that something was amiss, I sold most of the options!

 

In those days of higher inflation and high building contract rates, government valuations were ignored.The BNZ had plenty of cash to lend without asking too many difficult questions.

 

Property in the Auckland CBD was turning over at a high rate and valuers were in high demand!

If a client were to mention to valuers that " more work could be forthcoming", then some valuers took their cue from that remark:

 

A building to be sold would be valued at say $10 mill., but the same valuer could value the same property at $9 mill., if the same client was engaging him for the purpose of buying that property!

 

As I said, demand was very high and the money supply extremely loose; it was important to secure a property, thus, his client may well have paid $10 mill. to buy it, after all !! 

 

H: You could say that the Dot-com episode in its heyday resembled the period before the 1987 crash.   

 

G: True, I read that after the crash of 1987, the then Plimmer hotel in Wellington sold at 40% of the pre-crash valuation!

 

H: Later on, somebody showed me a valuation of standing timber of some forestry blocks. He calculated that the share price based on that valuation, should have been about $25.

 

But why was it $17 when there was such a high demand for timber? In reply, I mentioned that the first logs were to be sold in about three years time.

 

And what about roading, logging, trucking and other costs to be incurred? These needed to be deducted and hence the lower share price!

 

G: What about valuations of a Director's property / company to be backed into a listed or unlisted public company ?

 

H: There can be several problems: The independent Directors may not know the true value of the asset to be bought for shares / options and / or cash.

 

Sure, they can engage a valuer but the assets may have " hidden snags " : there are many examples where a tycoon managed to sell some of his inferior assets at high prices to a company of which he was also a director!

 

G: I can see it now: His fellow directors on the Board are his mates and the " excellent buy " will be approved even as he does not partake in the voting!

 

H: Mind you, even without any director being dishonest, a ' buy ' may proceed simply, because the independent director(s) lack the skills or never fully studied the pros and cons of a proposal. 

 

Reading a prospectus from a company to be listed, can be entertaining at times.

Look at the small print in the last few pages and you could find some very onerous contracts: One CEO of a property company had a contract which enabled him to deduct a fee calculated as a percentage from gross revenue.

 

On top of that, he also managed to obtain a fee on the selling and buying of properties. It was called a ' finders ' fee! Rest assured that there was a good turnover of properties! 

 

All went well till the interest rates rose sharply and at the high rate of borrowing that contract became a very onerous one: Property prices fell, the banks then wanted their money back and the company collapsed! 

 

G: The calibre and ability of  Directors always are very important parameters when making investments !!!

 

Gerry