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  1. #2041
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    Quote Originally Posted by Monarch View Post
    It is on the email. If you look for a grey bar towards the end of the email, it is written on that.
    Not on my email, will have to phone them on Monday I guess

  2. #2042
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    The title of the email is "Contact Energy Limited - Share Offer" if that helps

  3. #2043
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    Quote Originally Posted by Monarch View Post
    The title of the email is "Contact Energy Limited - Share Offer" if that helps
    To my surprise that did find the email, and that is the only way it appears! no idea why, so thanks for that

  4. #2044
    Contrarian Investor Ferg's Avatar
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    TLDR: Use FCF?

    Hello Snoopy, you are correct in that words do matter and sometimes I don't quite get it right. Sometimes message transmitted <> message received. You were spot on with CEN dividends having no impact on the earnings potential of the hydro schemes. However, I think the "thin air" revaluations offsetting the "reducing to zero" reductio ad absurdum argument I used are two different things, given one has a cash impact and the other is non-cash (**instantly regret this statement and don't want to lose an hour researching it**). Let's park that last sentence.....

    The context of "personal and enterprise value" was based on the value of money in the pocket of the shareholder from dividends + the value of the business to that same theoretical shareholder. This was all off the back of your excluding the unimputed dividend from your shareholder value calculations but deducting the tax thereon. Note the previous sentence you quoted was referring to the value to the shareholder; the "enterprise" component includes the value of the business (as measured by the SP in this instance) multiplied by their % ownership. I should have used the word "business" or "shares" and not "enterprise", given the pre-amble refers to the SP, and the value of the business to the shareholder (aka their investment) would be shares x SP. I didn't state that explicitly at the time given I try not to be too wordy, but I now accept it carries the risk of being misinterpreted or misunderstood. That was the intent given the discussion was based around the value to the shareholder. You did pick up on this given you mentioned "personal and enterprise value" was not the same as a strict definition of enterprise value, so let's not get too hung up on that.

    Notice also the massive caveat at the start of that sentence "Assuming returning capital via unimputed dividends does not impact upon future profitability".
    I am of the opinion that paying dividends does actually impact future profitability and therefore affects total shareholder value (on the basis a share is valued using a price earnings ratio x earnings per share). Lower debt (by not paying unimputed dividends and instead repaying debt) results in less interest costs and higher profitability and by extension a higher EPS. Assuming the same P/E ratio, this gives a higher SP. This change in the SP value would then be compared to the value in the pocket of the investor from the dividend for a nett positive or negative impact based on a bunch of other factors. In other words, it's complicated (*more on this later). You also picked up on this in that the reduction in cash impacts the EV calculation, assuming no change to MC. Edit: on reflection yes C is lower but maybe MC would be higher?

    The enterprise valuation method ignores the capital versus debt structure and in theory, and as you touch on in other posts, values the underlying income producing assets (less any associated operating costs of course). The formula EV = MC + D - C is looking through the ownership structure at the underlying assets. By ignoring the capital vs equity components, it is by extension also ignoring any associated payments, being dividends and interest. Taking this one step further, what the recipients of those payments do with those funds is also irrelevant, therefore the tax on unimputed dividends is irrelevant for any shareholders unlucky enough not to be able to offset that income with deductible expenses. That is one pillar of my argument as to why the tax on unimputed dividends should be ignored, assuming you are also ignoring the unimputed dividend.

    The second pillar revolved are around the impact on the individual shareholder. The company puts unimputed dividend of $1 into the shareholders pocket. Under my way of thinking, the tax of 30c is paid from the $1 in the pocket and the shareholder received a partial "return of capital" (more on this below) of 70c. Under your method, the tax of 30c is taken from a second pocket. The $1 in the first pocket is ignored, but the 30c taken out of the second pocket is deducted. I view that as inconsistent, despite the fact (and I acknowledge) the tax is paid to an entity outside of the circle of shareholder + entity.

    The third pillar is the gentailer is not paying the unimputed dividend from historic equity, they are paying it from FCF that was earned in the relevant year. Accordingly, they are not returning equity, they are distributing unimputed income - which they are able to do ad infinitum assuming nothing fundamentally changes.

    You are correct in that there is an imbalance between FCF and tax paid earnings available for imputed dividends given capex is less than depreciation, and often any new significant capex is funded via additional debt (e.g. a new hydro scheme). In short, the FCF method looks through all of the accounting complexities and I expect will give you the answer you seek. Notice this is FCF to the entity, not the shareholder and (4th pillar) the tax on the unimputed dividend is once again irrelevant.

    Edit: I think part of the complication arises on depreciation on revalued assets. This results in a lower profit, but is not deductible for tax purposes, hence the mismatch? To your point and it pains me to say this, but maybe depreciation should not be allowed for revalued assets, much like for landlords as you mentioned.

    *More on Valuation complications
    Clearly, EV is not the same as value to a shareholder given MC is a component of that formula and MC is total shares on issues x SP. Furthermore MC in theory would be Equity plus Future Earning Potential (I made that formula up). Equity would include some components of future earning potential given gentailer asset revaluations include the "thin air capital" to which you refer. And given the SP often exceeds NTA, shareholders have built in additional future earnings potential. IOW, SP = NTA + FEP.

    Also, differing valuation methods end up with contradictory results, a bit like: "many hands make light work" versus "too many cooks spoil the broth". For example, using an underlying asset approach would give a value, and the EV method may give the same or a different value - let's assume it never pays a dividend but it still has this value. However, to a shareholder, a share that never pays a dividend (as in never ever in perpetuity), has a theoretical value of zero under the dividend valuation method. The real answer would be somewhere above zero given a) the asset and EV methods would assume a return of capital to the shareholder at some point in the future, discounted for the time they have to wait to get it back and b) a profitable entity should be worth more than zero.

    In other words it is complicated and there are many ways to skin a cat. So long as you are clear and consistent in your own thinking, then you are free to choose any valuation method you like. I hope I have demonstrated there is more than one choice, especially given people are subject to confirmation bias and will use whatever method suits their agenda (I am not referring to you, I'm looking at investment bankers and new listings).

    P.S. It would be great to thrash over this over a beer or a wine, but I suspect that differing cities and COVID restrictions will put paid to that.

    Quote Originally Posted by Snoopy View Post
    This message from 1st September 2020 is still haunting me

    I like to think of my investments according to the Buffett model. A business has an intrinsic rate of return. on shareholder equity (ROE). The more equity the business has, the higher number you can use to multiply that intrinsic rate of return by. Consequently as shareholder equity goes up, profit goes up. However, I am realistic enough to admit that in the real world, with certain kinds of businesses in particular, like gentailers with long lived assets, these 'Buffett rules' are weakly correlated with what actually happens.

    Ferg said
    "Assuming returning capital via unimputed dividends does not impact upon future profitability, P/E ratio or SP, then the overall personal and enterprise value should remain unaffected."

    Now, I think I know what Ferg is getting at here. If Contact pays shareholders a large dividend, that doesn't mean the power stations will slow down until they recover their equity and then return to full generating capability again later. I am fairly sure the earnings capability of power stations has no connection to year to year fluctuations in shareholder capital. Take out a bit of share capital, imputed or unimputed, to pay a dividend and the company carries on operating as normal. In this sense, taking an unimputed dividend out of Contact or an imputed dividend out of a company will make no difference to operating performance. Both imputed and unimputed dividends make a positive difference to a shareholder's bank account. So what justification do I have for counting, in my modelling, an unimputed dividend as a 'negative event' for shareholders?

    Ferg said
    "overall personal and enterprise value should remain unaffected."

    Enterprise Value = Market Capitalisation +Total Debt−Cash on hand

    Clearly if a dividend is paid, then cash on hand is reduced. So paying a dividend must affect enterprise value, by definition. I feel like I am dancing on the head of a pin by pointing this out. But sometimes words do matter. Although I do note that Ferg said "personal and enterprise value" which maybe absolves him from the strict definition of 'Enterprise Value' that I rolled out above.

    It looks like the method I use, subtracting unimputed dividends directly from shareholder equity and not counting the unimputed dividend as a benefit, will in time reduce a gentailer shareholder's funds to zero. However, in practice, this will not happen. Because in tandem with this, I am using the concept of 'thin air capital' to recapitalise balance sheets to recognise the capitalised value of the increasing ability of long lived generation assets to earn more cash in the future as power prices rise.

    Right now I remain unconvinced there is a better way than mine to deal with what is a mismatch between accounting rules for depreciation and the cashflow in the form of dividends from those same assets being way more than is needed to cover the depreciation. Perhaps depreciation of long life power generation assets needs to be banned? That is what happened to rental houses depreciation claimed by landlords

    SNOOPY
    Last edited by Ferg; 28-02-2021 at 12:39 PM. Reason: typos & clarifications

  5. #2045
    Contrarian Investor Ferg's Avatar
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    Snoopy

    Here's an interesting thought experiment.

    IF EV = MC + D - C
    but for a shareholder:
    Investment Value = MC% - Debt + Cash

    where MC% is the % of the business they own x MC which = Number of shares x SP;
    Debt is any debt used to fund the purchase of the investment (hopefully nil for sensible shareholders!), and
    Cash is what is in the investors pocket from (nett) historic dividends.

    Notice EV has +D-C and IV has -D+C.

    So to my point in my previous post, whatever method you use depends on the viewpoint and agenda.
    Last edited by Ferg; 28-02-2021 at 12:22 PM.

  6. #2046
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    Over an afternoon ale with a mate on a hot afternoon I mentioned this ‘thin air capital’ concept to him.

    He’s into financial analysis in a big way ...he got excited and is going to ‘research’ it

    I just smiled to myself ...hope he doesn’t spend too much time on it
    When investors are euphoric, they are incapable of recognizing euphoria itself.

  7. #2047
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    Deleted ...got posted twice

    But Capitalism without Capital is interesting.
    Last edited by winner69; 28-02-2021 at 06:35 PM.
    When investors are euphoric, they are incapable of recognizing euphoria itself.

  8. #2048
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    Quote Originally Posted by winner69 View Post
    Over an afternoon ale with a mate on a hot afternoon I mentioned this ‘thin air capital’ concept to him.

    He’s into financial analysis in a big way ...he got excited and is going to ‘research’ it

    I just smiled to myself ...hope he doesn’t spend too much time on it
    No need to do much research, as the team at Mercury Energy have written the book on how to do it. All their geothermal energy power stations were built using 'thin air capital' mostly generated via the Waikato river system. And despite being government controlled, the state never had to put up a cent to build anything (neither did any other shareholder). It is a fantastic business model.

    SNOOPY
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  9. #2049
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    Quote Originally Posted by Ferg View Post
    Snoopy

    Here's an interesting thought experiment.

    IF EV = MC + D - C
    but for a shareholder:
    Investment Value = MC% - Debt + Cash

    where MC% is the % of the business they own x MC which = Number of shares x SP;
    Debt is any debt used to fund the purchase of the investment (hopefully nil for sensible shareholders!), and
    Cash is what is in the investors pocket from (nett) historic dividends.

    Notice EV has +D-C and IV has -D+C.

    So to my point in my previous post, whatever method you use depends on the viewpoint and agenda.
    Let's agree to take the 'investor perspective'. I think that would be the point of view of most of those reading this thread. For the 'C' bit though, I think I would be interested in 'future dividends declared' not 'past dividends paid'.

    SNOOPY
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  10. #2050
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    Default A new category of 'thin air capital'?

    Quote Originally Posted by Ferg View Post
    Use FCF?

    You are correct in that there is an imbalance between FCF and tax paid earnings available for imputed dividends given capex is less than depreciation, and often any new significant capex is funded via additional debt (e.g. a new hydro scheme). In short, the FCF method looks through all of the accounting complexities and I expect will give you the answer you seek. Notice this is FCF to the entity, not the shareholder and (4th pillar) the tax on the unimputed dividend is once again irrelevant.
    If I am valuing a company from a 'capitalised dividend valuation' perspective, then I am valuing it from the point of view of the shareholder. In this sense the 'free cashflow' we are concerned about is the dividend, fully imputed, partially imputed or not imputed. Whatever the imputation rate of the dividend, the cash used to pay it comes out of shareholder equity, or if you must, positive cashflow as a result of operations during the year that, if it had not been paid out, would have been reclassified as retained earnings and added to shareholder equity.

    If you don't believe me, then look at the 'Statement of Changes in Equity". There is a line in there which says 'dividends paid' which is a negative number. This means the dividend has been removed from the balance sheet and from a shareholder perspective (I don't believe there is any other way a shareholder should consider what is happening), the shareholder capital that formed the dividend is no longer in the ownership of the said shareholder. Thus our shareholder has lost capital but gained an equivalent dividend, less any tax that was sent to the IRD as a result of the dividend being paid. I think all of the above is unarguable and in the annual report in black and white.

    But next things get a bit murky.....

    Quote Originally Posted by Ferg View Post
    You were spot on with CEN dividends having no impact on the earnings potential of the hydro schemes.
    This is a point we both agree on, but to believe it means something rather odd is happening. If you agree that unimputed dividends can continue 'ad infinitum', at least to a certain level, this is equivalent to saying that the unimputed dividends paid somehow 'restore themselves' into the value of the company. This follows because paying the unimputed dividends has not compromised the ability of Contact to pay dividends in the future. Allow me to clarify:

    If:

    1/ Contact's underlying 'asset value' is determined by the sum of the discounted future value of the cashflows that Contact can expect to pay, AND

    2/ Paying those unimputed dividends does not affect the ability of Contact to pay such dividends in the future THEN

    it follows that there must a a 'magical' inflow of new capital onto the Contact books (new capital you will nevertheless not find in the Contact accounts) to replace the unimputed dividends paid out. This is a different category of 'thin air capital' compared to the other kind that I have previously talked about - the revaluation of any power station as a result of the ability to deliver more profit. Instead it is "thin air capital" that has effectively been restored to the company by dint of the fact that Contact's cash generating ability has not diminished as a result of paying an unimputed dividend. Sounds crazy, but frighteningly, it seems to make sense!

    SNOOPY
    Last edited by Snoopy; 28-02-2021 at 10:29 PM.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  11. #2051
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    Quote Originally Posted by Ferg View Post
    The second pillar revolved are around the impact on the individual shareholder. The company puts unimputed dividend of $1 into the shareholders pocket. Under my way of thinking, the tax of 30c is paid from the $1 in the pocket and the shareholder received a partial "return of capital" of 70c.
    You are viewing an unimputed dividend as a return of capital which is taxed as a result of ending up in the shareholders pocket (the first pocket). I understand and agree with that way of looking at things.

    Quote Originally Posted by Ferg View Post
    Under your method, the tax of 30c is taken from a second pocket. The $1 in the first pocket is ignored, but the 30c taken out of the second pocket is deducted. I view that as inconsistent, despite the fact (and I acknowledge) the tax is paid to an entity outside of the circle of shareholder + entity.
    I think what you are saying here is that by subtracting the imputed part of the dividend from the total dividend and effectively ignoring the imputed bit, I am effectively saying that the imputed part of the dividend does not exist. Therefore I should not take tax out of a dividend that I am claiming was effectively never paid in the first place?

    However, I do not have this interpretation of what happened. I am not saying that the unimputed part of the dividend was not paid. I am saying it was paid but it had no cash benefit to the shareholder. If fact quite the opposite. The paying of the what is in effect shareholder capital back created a tax bill, which I think you acknowledge in the first part of your post that I have quoted.

    SNOOPY
    Last edited by Snoopy; 28-02-2021 at 11:18 PM.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  12. #2052
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    Duplicate Deleted
    Last edited by Snoopy; 01-03-2021 at 09:10 AM.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  13. #2053
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    Share Offer Question. Do the shares issued under the Share Offer also get the dividend payable on the 30th March? Offer document seems to say so in so many words which created a doubt in my mind.

  14. #2054
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    Quote Originally Posted by Snoopy View Post
    …...

    .....who holds CEN shares, bought at a price significantly less than $6.04!
    I have a few bought at $0.01

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    How many are taking up the offer? I am considering it.

  16. #2056
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    Quote Originally Posted by theace View Post
    How many are taking up the offer? I am considering it.
    Will wait to see how the SP fares this week...

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    Quote Originally Posted by HKG2301 View Post
    Will wait to see how the SP fares this week...
    Don't forget that if the SP goes below $7, so will the issue price - to some degree.

    I'm adding a few.

  18. #2058
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    Quote Originally Posted by macduffy View Post
    Don't forget that if the SP goes below $7, so will the issue price - to some degree.

    I'm adding a few.
    Below 7.18 by my calculations. The lower of 2.5 percent discount of this weeks VWAP and 7 dollars will be the issue price.

    In my way of thinking, the institutions who participated in the cap raise would also want to buy this week to prop the price up, help protect their investment.

  19. #2059
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    “deleted. “
    Last edited by Master98; 02-03-2021 at 11:06 PM. Reason: question answered.

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    Quote Originally Posted by Ahgong View Post
    Share Offer Question. Do the shares issued under the Share Offer also get the dividend payable on the 30th March? Offer document seems to say so in so many words which created a doubt in my mind.
    Yes, according to page 21 of the offer document:

    10.1 Offer Shares issued under the Offer will rank equally with, and have the same voting rights, dividend rights and other entitlements as, existing fully paid Shares quoted on the NZX Main Board and the ASX. Eligible Shareholders will receive the biannual dividend for the six months ended 31 December 2020, which is expected to be paid on 30 March 2021 in respect of any Offer Shares allocated to them under the Offer.

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