OBV (Oyster Bay Marlborough Vineyards)

[SCOTTY]

In the NZX release dated 31 May 04, OBV stated that it had sold the harvest to Delegates Wine Estate for $6,554,776. (Last year $2,346,230).
Should be a good Divi [:p].
Disc. Happy holder [8D].

[foodee]

Scotty
My impression is that Oyster Bay Wines is owned by Delegates. OBV supplies the grapes and price is more or less set by Delagates. Any added value thereafter as in OBW goes to Del.
Still it is a good and enjoyable drop.[:p]

cheers

[SCOTTY]

quote:Originally posted by foodee

Scotty
My impression is that Oyster Bay Wines is owned by Delegates. OBV supplies the grapes and price is more or less set by Delagates. Any added value thereafter as in OBW goes to Del.
Still it is a good and enjoyable drop.[:p]

cheers

Hi foodee
OBV is listed and trades on the NZAX.
OBV have a grape purchase agreement with Delegat's Wine Estate Ltd which requires Delegat's to purchase all grapes produced by OBV at market value. Dalegat's also provide accounting and administration services to OBV under a Vineyard Management and Administration Agreement.
Delegat's has a 32.58% shareholding in OBV and is also doing other (Fixed Price) vineyard development work for the company.
Cheers
P.S. Have corrected the Delegate holding from 29.78 to 32.58% [:I].

[foodee]

Hi Scotty
Thanks for confirming my impression. OBV income is based on 'commodity price' of grapes where as the final product Oyster Bay Wines margins are 'open ended' and go to Delegates. Still let this not detract from the pleasure of vineyard ownership.
Cheers

[CAM]

Hmmm yeah....purchase all grapes at market value......with a large crop nationwide this year and talks of surplus wine would that mean the market value of the juice be down this year???

Yes they sold the harvest for more, but is this because they managed to produce a greater yield from the same vines as the year before or did they purchase/plant more vines???

[foodee]

Cam & Scotty
OBV crop has fetched almost three times more than the previous year. Most likely reason is more vines coming into production plus some increase in yield of producing vines. It is unlikely due to any spike in price of grapes - which I think is pretty static and therefore income of OBV will be quite static once it reaches full production.

[SCOTTY]

foodee
What I particularly like about this company is the (IMHO) conservative NTA of the operation.
I understand that vineyards in this area have sold as high as $195,000 per hectre. With 466 hectres planted out of 535, the numbers start to really stack up.
As you rightly point out, most of the increase in production is due to new plantings coming into production and with more to come I think that the future prospects look good.
As well as existing holdings, they are looking at further lease-hold expansion and during the vineyard tour at the last AGM they pointed out some of the areas that they had in mind.
Cheers

[Gryffyn]

Also like look but aren't some of the biggest recent falls (what few there are) in property prices in the Nelson/Marl area?

[bermuda]

OBV will appreciate rapidly once their maiden dividend is released.Some are forecasting 12-14 cents per share.A very well run company.

[foodee]

quote:Originally posted by scotty
..they are looking a further lease-hold expansion

Could you please explain this? [?] Thanks.

[SCOTTY]

quote:Originally posted by foodee


quote:Originally posted by scotty
..they are looking a further lease-hold expansion

Could you please explain this? [?] Thanks.

Hi Foodee
They have their eye on land to lease and plant in addition to developing their own property.
Cheers

[Selena]

Hi Scotty, OBV is on target with the grape sales being slightly over their projections in 2001 when they expanded the vineyard. The gross dividend projection then was 13 cents, but the real key is the underlying land and vineyard value. In March 2001 the valuation was $30.4 million compared to Book Value of $14.355 million, so the NAB was about $3.78 then. A new valuation was announced at the AGM last year to be done as at 30 June this year. Bearing in mind these shares were issued at $2 five years ago with dividends coming on stream and the Nett asset backing likely now over $5, watch this space...Selena

[Selena]

Delegats the major shareholder in OBV have announced a Capital Notes issue at 9.75% interest, but this apparently rises by 1.5% if they don't raise share capital by the end of 2005. If the share issue is a Public Issue, OBV shareholders are entitled to a pro-rata to 30% of that issue. Ref. Deed of Understanding dated 13th May 1999 page 21 NZAX disclosure document dated 11 November 2003

[SCOTTY]

Hi Selena
Great to see a new member - and a Mainlander to boot :D.
Welcome aboard.
Cheers

[David Renwick]

...and Delegates want to build a $70m winery in Marlborough.

[floyd]

but the winery construction date keeps getting put back, was supposed to be started a few years back and now wont be started till 2005-6 last time i heard. mates use to work for oyster bay.

[Selena]

Report in Sunday Star Times on 6th June said "a 20,000 tonne capacity winery in Marlborough is scheduled to take the company's (Delegats) 2006 harvest". Delegats have an option to buy or lease 8 hectares of the Airfields Vineyard and Giffords Creek Vineyard from OBV for the purpose of constructing grape processing facilities under the long term co-operation agreement dated 13th May 1999

[Blue Boy]

Is the 13 CPS dividend based on the proposal for the fault lake Vineyard put out a couple of years ago?
I remember seeing the document but I can't seem to find it.

[Selena]

The 13 cent gross dividend was in the forecast when the Fault Lake and Wairau vineyards proposal to acquire,lease and develop was put out. This would use about $871,000 cash, leaving positive cash of say $469k plus depreciation of say $800k totalling $1.269 million based on projections so a higher divi may be possible.

In the NZAX disclosure statement 11 November 2003 the profit projection after tax on Revenue of $6.465 million for 2004 ( Actual Revenue achieved $6,554,776 ) was $1.340 million rising to $1.832 million in 2005, the same as in the acquisition proposal.

[SCOTTY]

A good article in the NBR (Stake in Oyster Bay pays off handsomely).
The well respected David Rankin (Christchurch based Valuer and Real Estate Agent) has taken his holding to 5.05%.
It has taken a valuer to see the value potential of this stock [:P].

[k1w1]

I like the way Mainlanders ramp a stock. Its so more cultured and less crass than the way the North Island boys do it.:)

[SCOTTY]

quote:Originally posted by k1w1

I like the way Mainlanders ramp a stock. Its so more cultured and less crass than the way the North Island boys do it.:)

Ramping? [:I].

[Selena]

I see in the Press yesterday, Blenheim based Peter Yealands is seeking 5% of the company at $2.80. Yes mainlanders do know how to ramp up a stock!:):):)

[kittydashwood]

Best ramp of the year dude. Is your last name Gould?

[bermuda]

Once the dividend has been declared and the land assets are placed in the books at current value the shareprice will go towards $3.50.The chardonnay is very good value too.

[Selena]

Once the dividend has been paid the annual late frost worries will prevail. This together with the dividend projections not growing immensely will precipitate escape artists getting out after a good run. So around $2.80 is likely well priced.[?]

[k1w1]

Berm, you've got to learn to ramp classy like a South Islander does, nothing to crass or over the top the way a JAFA or an Aussie would.

[spector]

quote:Originally posted by k1w1

Berm, you've got to learn to ramp classy like a South Islander does, nothing to crass or over the top the way a JAFA or an Aussie would.


Yes I agree. That Scotty chap sounds like the sort of guy my girlfriends parents wish she was going out with.

[SCOTTY]

quote:Originally posted by spector


quote:Originally posted by k1w1

Berm, you've got to learn to ramp classy like a South Islander does, nothing to crass or over the top the way a JAFA or an Aussie would.


Yes I agree. That Scotty chap sounds like the sort of guy my girlfriends parents wish she was going out with.

Is she pretty[?]:D

[spector]

quote:Originally posted by SCOTTY


quote:Originally posted by spector


quote:Originally posted by k1w1

Berm, you've got to learn to ramp classy like a South Islander does, nothing to crass or over the top the way a JAFA or an Aussie would.


Yes I agree. That Scotty chap sounds like the sort of guy my girlfriends parents wish she was going out with.

Is she pretty[?]:D


yes! but a bit stupid.... which is why she is going out with me.:)

[Selena]

Result today: Nett profit at $1.667m before tax. One might have thought for a record harvest it could have come in ahead of forecast. However the big disappointment is the property valuation at $45.010 million. In 2001 it was $30.4 million and a further $18 million has been spent since then on land and development costs which implies a downgrade of $3.39 million and a net asset backing of $3 per share. The $4.50 Bermuda talked about is most unlikely now and the share price may well go South:(

[bermuda]

Selena,
See my post of 4 August.It was $3.50, not $4.50.
So the asset backing has risen to $3.00.This is a good increase and a maiden dividend will see the price rise towards $3.50. ps. the Chardonnay's better than the Savignon.

[SCOTTY]

13c divi announced today. Ex date 29th Oct, payable 5th Nov.
Anyone know if it carries imputation credits?
Cheers

[Selena]

The 13 cent divi is taxable as there are no imputation credits available:(

[Paper Tiger]

There has been a takeover battle running over this for a couple of months and I am the first to post on it.
This all started at a bid of $3.10 a share

Anyway I think we have reached the end game.
Delegats have just upped their offer to $4.00 to match Peter Yealand's and they have 43% as opposed to Peter's 16%. Both are looking for a simple majority.

This all started at $3.10 a share
I would be surprised if anyone bids any higher.

Happy drinking, hic :D

[bermuda]

$4.00 is well north of my $3.50 previously forecast and the asset value of the company is north of $4.00. However there is no use owning valuable assets if the return on them is low.Take the $4.00 and run.

[bermuda]

Sunday Times
"The takeovers panel said it would meet on Tuesday to decide whether to intervene in a takeover for OBV.Winemaker Delegat's won a bidding war for OBV against Peter Yealands,but a complaint was lodged with the panel alladging OBV should have disclosed information about the value of its vineyards.The panel said the complaint merited investigation"

Apparently it is all to do with the land value not being fully disclosed.As I have said before if the correct land value is used then the value of OBV is well north of $4.00,...in fact more like $5 or even $6. Could be really interesting. No wonder Delegat's kept on out trumping Yealand's offer.

[kiwi_on_OE]

Is it just me or is this getting really interesting? Another NZ takeover turning messy. My latest reading of the situation is: -

1) that the OBV land was valued on an 'encumbered' basis in the takeover documents because of the long term contracts with Delgats. And the encumbered value is lower than the unencumbered value. This is presumably on the basis that the contracts were for less than market value?

2) And now the NZX have given OBV a slap and withdrawn a waiver to a requirement that OBV get shareholders to approve the annual contracts, as the NZX are no longer convinced that the contracts have been negotiated on an 'arms-length' basis.

I look forward to the Takeovers Panel's next comments.

I wonder if OBV shares are worth buying?

[nelehdine]

Good well established sauvignon blanc vineyards change hands for between $75,000 and $100,000 per acre planted. OBV have some good acreage and I would agree if it wasn't contracted to Delegats it would be worth alot more. Delegats have a reputation for being one of the lower payers in Marlborough , normally well below the average. I have a share in a 50acre vinyard and we grow for Montana (30acres ) and Vavasour (20acres ) ... last season we were paid approx $2300/t , you should be able to work out what OBV were paid for their Sav. from their NZX releases

[bermuda]

Nelehdine.
I heard that last year's Marlborough Sauvignon was worth $3000/tonne(e.g Clifford Bay..see their newsletter) and that the value of OBV's land was $90 million not $45 million.This whole thing is a scam.No wonder Delegat's kept on upping Yealand's bid five minutes later.

[kiwi_on_OE]

Just to stir things along . . . I wonder if any OBV shareholders may take a dim view of their directors performance and either vote them out at the AGM (Nov?) if the company is still up for grabs, or possibly some other action if it can be shown that their performance has been less than professional?

[Selena]

The full report on the suspension of the takerover is on www.takeovers.govt.nz . The essence is that the shares have an underlying NTA of $8.00 each and this was not disclosed. Delegats are in a special position to take advantage of this as they control the long term contracts and thus should pay a premium. The recommendation to shareholders should have reflected this by saying "The best return can be extracted from the Yealands offer as there would likely be a 90% payout, wheras under the Delegats offer it may only be 35% (actual 36.7%). Once Delegats have control the share price is likely to slip back to $2.50 so you would need to get a bid from Delegats of about $6.10 to give the same result as the Yealands offer. Two yellow cards (that usually makes one red) for the Directors so far. I predict Yealands will eventually get full disclosure on the grape prices and if he is right that the payout has not been for premium grapes, but only for average grapes, the third yellow card will require resignations. This is not over by any means yet!

[bermuda]

Selena,
Thanks for that .What a sham.The Directors should be axed.At the very least their credibility has been severely dented.They were aware that OBV was worth considerably more but chose to accept the lower value in their report to Shareholders.

[Selena]

Third Yellow card from NZX this week, 4th yellow card suspending the dividend. Where to next?[xx(]

[bermuda]

They urgently need some Directors who can work for the interests of the Shareholders.

The current Directors seem to be in Delegat's pocket as evidenced by their turning a blind eye not only to the land valuation (which was an absolute scam) but also to the low price Delegat's have been obtaining wine from OBMV.

I think Mr David Rankin should be given a Board seat.He will certainly be good for OBMV Shareholders.

[Selena]

Stunning play by Peter Yealands today announcing a further bid for 50.1% of Oyster Bay at an increased price of $4.50. If the High Court orders cancellation of the Delegats bid then its all on again. Otherwise if the High Court gives acceptors of Delegats bid the opportunity to withdraw there would be a sound reason for them to do so. Either way the "Battle For Oyster Bay" is by no means over. The AGM now on 9th December looks like it may be a humdinger.

[Paper Tiger]

quote:
OBV
18/11/2005
TAKE_PAN

REL: 1417 HRS Oyster Bay Marlborough Vineyards Limited

TAKE_PAN: OBV: Takeovers Panel Changes Position on Oyster Bay

The Takeovers Panel has today advised the Court that it has changed its view
on remedies to resolve the takeover offer for Oyster Bay Marlborough
Vineyards by Delegat's Wine Estate Limited.

The Panel has decided that the remedies it had earlier sought from the Court
are no longer appropriate.

The Panel changed its view after considering updated valuation information
about Oyster Bay's vineyards that was omitted from the target company
statement. In the Panel's view this was a fundamental omission.

The Panel believes that the most appropriate remedy is for the Delegat's
offer to be cancelled and for the takeover contest to start again.

It is anticipated that these issues will be resolved by the Court as a result
of a further hearing on 28 November next.

In coming to this view the Panel has been mindful of an irrevocable
undertaking given by Mr Yealands to make a further offer for Oyster Bay at
$4.50 per share.

Earlier, the Panel held a meeting under section 32 of the Takeovers Act at
which it determined that Oyster Bay had contravened the Code because of the
omission of certain information from a target company statement issued on 19
July 2005. That information related to the market value of Oyster Bay's
vineyard properties on encumbered and unencumbered bases.

The Panel had decided that the most appropriate remedy for the contravention
by Oyster Bay would be for shareholders who had accepted Delegat's offer to
be given the opportunity to revoke their acceptances after they had had time
to consider a correcting statement issued by the independent directors of
Oyster Bay and approved by the Panel.

However, the cumulative effect of the errors in the target company statement,
some of which are fundamental, are such that in the Panel's view this remedy
would no longer be appropriate.
End CA:00123929 For:OBV Type:TAKE_PAN Time:2005-11-18:14:17:43



quote:Originally posted by Paper Tiger [on 29/07/2005]

There has been a takeover battle running over this for a couple of months and I am the first to post on it.
This all started at a bid of $3.10 a share

Anyway I think we have reached the end game.
Delegats have just upped their offer to $4.00 to match Peter Yealand's and they have 43% as opposed to Peter's 16%. Both are looking for a simple majority.

This all started at $3.10 a share
I would be surprised if anyone bids any higher.

Happy drinking, hic :D


Just ignore everything I post (except the happy drinking bit :D)

[Lizard]

quote:Originally posted by Paper Tiger
Just ignore everything I post (except the happy drinking bit :D)


Been obeying orders ever since sir!

...hic...

[Paper Tiger]

Delegats takeover as been voided by the courts and PY is offering $4.50 a <s>bottle</s> share.

Mondays can be soo good, now where is the corkscrew?

[Paper Tiger]

Now Delegat's is now going to offer $5 a pop :)

This is nearly as good as drinking the stuff [:p]

[Selena]

The AGM was bottled by the resolutions approving the grape price notification deficiencies being lost ( Delegats could not vote! ). David Rankin received just over 2.5 million votes as a director with the lowest polling being Chairman Falconer at about 4.2 million, clearly being supported by the Delegats vote of some 3 million, from which one must conclude Rankin achieved 2 votes to one for Falconer from the independent shareholders. The independent shareholders have spoken, but have they got the Board got the Message. $5.00 certainly has a bouquet about it...even more so if it was for 100% as accepting shareholders will only get about 33% taken up after scaling. What will Yealands move now be?

[foodee]

This has been an interesting saga. Delagat's latest offer gives one the impression of either or both of two things:- [1] attempt for a knock out punch, [2]an act of desperation to protect its contracts (both management and grape harvest) with OBV. OBV grapes is already a proven product, however what is the value of OBW as a label or brand (owned by Delegates) without the OBV fruit.
The other interesting thing is if they are both aiming for control (say 50.1%) then for every $1.00 D offer, Y has to come up with $2.68.

Share holders will have an interesting time.

disc: none held

[bermuda]

Well well well.So Delegats have now upped their offer to $6.00.What a pack of scoundrels these Directors are.Just a few months ago they signed off the value as being about $4.

Just what due diligence did Ruth Richardson and Falconer do when acting for OBV.??? This is a first class rort and I am pleased they have been taken to task.

And if they have to pay $6 then I would say that they will have to make an offer for the lot.That's the least the Shareholders should expect from these bods.What a pity Rankin never succeeded in his bid for a Board post.He had 2.5 million votes but was rorted.

[Anna Naum]

I am told that the reason they are ready to pay so much is that the contracts with Delagets are so good that they can afford to pay up. In the last week at least two other leading local wine merchants have approached local growers wishing to contract grapes at much higher prices now that the cat is out of the bag.

[foodee]

Seems like Delagates is going to get control. Any guesses as to the future sp of OBV?

[Selena]

A happy [:o)]day for shareholders on Friday $6.00 per share![:I][:o)][:I] Only trouble is scaling could reduce the take-up to only 25% to 30% as shareholders try to cash up. Really puts pressure on the 2006 grape price now with rumoured negotiations of over $2500 per ton for Sav Blanc and $3200 for Pinot! It seems as though the big boys can't get enough of Marlborough grapes to meet the oversees demand...Comes from the huge supply networks they have, wheras small wineries may struggle with too much volume. Watch out for the usual Sunday Star Times article in February promolgated by grape buyers casting doom and gloom because of a grape supply mountain to put pressure on growers. A good harvest and top prices could see OBV tip over the $6.00 Mark in March April 2006. In the meantime, How can the independent Directors claim to be infdependent when they needed Delegats support to stay in office?? Why would Delegats support them when the process has cost Delegats so much[?][?][?]

[Selena]

As predicted the share price has fallen out of bed to $2.50 once Delegats took control. If say Yealands had won at $6.00 per share 10,000 shares with 90% takeup would have netted about $56,500 selling the balance at $2.50, whereas under the Delegats bid with only a 30% takeup 10,000 shares would yield $35,500, a massive $21,000 difference or $2.10 per share. A successful Delegats bid was never going to be as good as a Yealands successful bid [V][V]

[SCOTTY]

quote:Originally posted by Selena

As predicted the share price has fallen out of bed to $2.50 once Delegats took control. If say Yealands had won at $6.00 per share 10,000 shares with 90% takeup would have netted about $56,500 selling the balance at $2.50, whereas under the Delegats bid with only a 30% takeup 10,000 shares would yield $35,500, a massive $21,000 difference or $2.10 per share. A successful Delegats bid was never going to be as good as a Yealands successful bid [V][V]


Be positive Selena - Enjoy your priority pool for the Delegat's Public Offering [:p].

Cheers

[COLIN]

Enjoy your priority pool for the Delegat's Public Offering [:p].

Cheers
[/quote]


That may not be anything to enjoy. Brokers seem to be giving it a lukewarm reception. The way Delegats (mis)handled the OBV situation hardly inspires. Will sit this one out.

[Selena]

Three years have slipped by and the OBV share price is in the doldrums despite the NAB now being recognised as over $6. The Yealands case is still before the Courts, but why OBV are spending money opposing the Oppression of minority shareholders winding up case is anyone's guess when it is really Delegats battle. The current price is appalling compared to the float price of $2. Another wine! Another sleep!

[GTM 3442]

" . . . but why OBV are spending money opposing the Oppression of minority shareholders winding up case is anyone's guess when it is really Delegats battle."

Um, maybe it's better than spending their own money ?

It's a useful thing to be able to decide where to take your costs and profits.

[Silverlight]

Could someone explain to me the the value of biological assets on the balance sheet?


HY Report to 31 December:

Non-current Assets
Biological Assets 41m
Land 26m
Buildings etc 16m

Current Assets 718k

Total Assets 85m

Liabailities
Non current 27.5m
current 500k

Total Liabilities 28m

NTA 56.9m or $6.32 per share, however if you delete biological assets its $15.7m or $1.75 per share, which seems more accurate with best sells being:

2000 @ 1.69
5000 @ 1.70
4000 @ 1.75

Are biological assets totally intangible? or is OBV deeply undervalued?

[macduffy]

I don't know the answer, Silverlight, but I would think that OBV is currently valued on the basis of the value of its grape harvest which isn't too bright these days.

As a guess, I'd think that "biological assets" are probably grape vines?

[Lizard]

Biological assets are most likely vines. Under IFRS, their valuation is probably calculated based on future cashflow estimates.

I have a big problem with biological assets under IFRS when it comes to investing. The valuations are so vulnerable to assumptions. It seems a bit like a company estimating it's own book value, not by what it paid for assets, but based on what it thinks it will make in the future from those assets (with an "appropriate" discount rate).

OBV clearly will take a big hit on the biological asset valuations this year and probably on the land value as well - since I would think it would also be assessed on a "future earnings/cap rate" type basis.

[Lizard]

Just had a chance for a closer look at the OBV reports. Looks like land and buildings might be cost-based valuation (depreciation on improvements and buildings).

The biological assets are based on a valuation using the following parameters:

i) Average remaining life of grape vines(a): Variable (seems from note "a" that this is perpetuity)
ii) Average yield per hectare of mature vineyards(b): 10.0 to 12.5 tonnes per hectare
iii) Pre-tax discount rate at which cash flows are discounted(c): 10.0%
iv) Annual rate of inflation to cost and revenue inputs(d): 1.0% to 2.0%
v) Vineyard maintenance costs(e): $8,400 to $9,400 per hectare

The most variable part of this valuation is probably the grape price - the last annual report noted that the price used was $1800-$2700/tonne. However, it is worth considering that the price for this years harvest was set at $1469/tonne with DGL and that, more typically, grapes have been selling for under $1000/tonne recently as reported by other vineyards. Although I would expect they could justify using higher rates in future years.

I would also think that a 10% discount rate is a bit on the low side for such an operation given the risks - I would prefer to see 15%+ for biological assets.

Note that the biological asset value rises from full year to half year as no revaluation generally takes place, but the move forward towards harvest increases the NPV.

[Snoopy]

Just had a chance for a closer look at the OBV reports. Looks like land and buildings might be cost-based valuation (depreciation on improvements and buildings).

The biological assets are based on a valuation using the following parameters:

i) Average remaining life of grape vines(a): Variable (seems from note "a" that this is perpetuity)
ii) Average yield per hectare of mature vineyards(b): 10.0 to 12.5 tonnes per hectare
iii) Pre-tax discount rate at which cash flows are discounted(c): 10.0%
iv) Annual rate of inflation to cost and revenue inputs(d): 1.0% to 2.0%
v) Vineyard maintenance costs(e): $8,400 to $9,400 per hectare

The most variable part of this valuation is probably the grape price - the last annual report noted that the price used was $1800-$2700/tonne. However, it is worth considering that the price for this years harvest was set at $1469/tonne with DGL and that, more typically, grapes have been selling for under $1000/tonne recently as reported by other vineyards. Although I would expect they could justify using higher rates in future years.

I would also think that a 10% discount rate is a bit on the low side for such an operation given the risks - I would prefer to see 15%+ for biological assets.


I guess the main long term risk here is that maintenance costs will end up exceeding crop value, meaning zero value for the shareholder grape growers. While the company might carry on like that to get them through a bad patch, I guess that OBV could simply lock the gate and walk away if things got really tough longer term The land in Marlborough years ago was just sheep paddocks. So I guess it could revert to that which would at least mean the land would have some value. Do Oyster Bay Vineyards rent their land or own it? I am assuming they are the owners.

Perhaps to avoid ripping out the vines by humans they could just send some goats in, in a worst case scenario?

That all sounds rather gloomy and given that grape vines probably have an optimized productive life of around 60 years, it is probably unfair to focus on the prospect of even five straight years of gloom and doom. A discount rate of 10% means that profits 10 years out have a present value of around 20c in the dollar of the cash expected to be received. Worth considering if you think an even higher discount rate is justified. IMO 10% discounting is probably too low from a short term perspective. Longer term, IMO, 10% looks too high.

SNOOPY

discl: do not hold

[Silverlight]

Thanks for the information Lizard/ Snoopy. I think I need to start studying IFRS a bit more.

Isn't creating a balance sheet asset based on potential future cash flows discounted to today exactly what caused the Enron scandal? Seems a bit mischievous to me.

[Lizard]

That all sounds rather gloomy and given that grape vines probably have an optimized productive life of around 60 years, it is probably unfair to focus on the prospect of even five straight years of gloom and doom. A discount rate of 10% means that profits 10 years out have a present value of around 20c in the dollar of the cash expected to be received. Worth considering if you think an even higher discount rate is justified. IMO 10% discounting is probably too low from a short term perspective. Longer term, IMO, 10% looks too high.


In my view, the main return to the company is the cashflows they make off the vines. If they value the vines on this basis, they are effectively booking the profits in advance. So there will only be the discount left to book to profit in future years (under the assumption that they used the correct price and it remains constant).

Personally, 10% is the lowest discount rate/return I would expect from any equity investment. Given the risks around biological assets, I'd want it higher.

Overall, I find the valuation of biological assets under IFRS to be distortionary to a true picture of a company profitability. I think it pays to use a fair bit of caution on any business with a large value of biological assets - you could consider that they higher they value the assets, the less they will be able to book to profit at a later date when the products are sold. Of course, if prices for the products start rising, the rise in profits is exaggerated by a consequent rise in the value of biological assets, so it is possible to play this rather cynically if you presume that many investors will just read the NPAT headline.

[Snoopy]

In my view, the main return to the company is the cashflows they make off the vines. If they value the vines on this basis, they are effectively booking the profits in advance. So there will only be the discount left to book to profit in future years (under the assumption that they used the correct price and it remains constant).


The valuation of the vines is based on projected future cashflows - yes. I don't see that as booking future profits (say around 15 years worth) in advance though. After those future profits have been banked the values of those vines on the books will still be intact (providing the future value of the next period of cashflows is broadly similar).

SNOOPY

[Snoopy]

Overall, I find the valuation of biological assets under IFRS to be distortionary to a true picture of a company profitability. Of course, if prices for the products start rising, the rise in profits is exaggerated by a consequent rise in the value of biological assets, so it is possible to play this rather cynically if you presume that many investors will just read the NPAT headline.


Exactly the same issue is faced by NZS with the rise and fall in milk prices being reflected in the rising and falling value of their milking herd. Unless NZS plan on a net selling of cows the value of their herd is irrelevant to the long term business plan. I agree that you should ignore revaluations of biological assets when assessing the operational performance of a company.

SNOOPY