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  1. #2001
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    Quote Originally Posted by Jiggs View Post
    Thank you for all your recent analysis. I don't understand it all, but I do understand I have made a 54% profit from buying and selling Contact over the past 2 years, but a 4% loss over the past month, and as this cow is no longer giving me any milk (wrong metaphor I know) I have just taken her out of my herd. When it looks like she's come into calf again, I might bring her back in again.
    Way to go mate

    Might do same myself with Genesis
    When investors are euphoric, they are incapable of recognizing euphoria itself.

  2. #2002
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    Default The Problem with Valuing Gentailers under Accounting Rules

    Quote Originally Posted by Jiggs View Post
    Thank you for all your recent analysis. I don't understand it all, but I do understand I have made a 54% profit from buying and selling Contact over the past 2 years, but a 4% loss over the past month, and as this cow is no longer giving me any milk (wrong metaphor I know) I have just taken her out of my herd. When it looks like she's come into calf again, I might bring her back in again.
    Ok , I will have another go at trying to make this easier to understand. There is no shame in 'not understanding it all' because this is an extremely difficult topic.

    I decided the electricity sector would be a core part of my investment portfolio because:

    1/ everyone needs electricity through good times and bad, and therefore companies like Contract should continue to pay good divies.
    2/ being a 'boring utility' it would be easy to analyse.

    I was right on only the first of those points!

    The basic problem is that for really long lived assets that increase in value, like the renewable energy power stations, following conventional accounting practices and standards doesn't really work. Evaluating these companies requires thinking outside normal valuation techniques. In general depreciation is a way of making sure you account for the fact that at some point in the future, you will have to replace your machinery. Depreciation reduces your profits but also allows for more cashflow to come in under the radar of the taxman. That cashflow can be used to rebuild your plant and equipment as it wears out. The problem is following the tax rules tells you that everything is wearing out (depreciating) faster than it really is.

    The other 'fly in the analysis' factor is that not only do these long lived renewable assets not wear out as accounting rules suggest they should. They actually increase in value. This is because all electricity is priced in accordance with the marginal cost of building a new power station. Construction costs for large engineering projects have a habit of rocketing up faster than inflation. This isn't great for those building a brand new power station. But it is great news for those power station owners who have existing renewable power stations. Because those existing stations suddenly become worth a lot more. And this increase in value is not speculative or empty because it is accompanied by a consummate increase in the price paid for historically costed renewable energy, which is now bought at present day market price levels. The problem then becomes how do you compensate, to get a 'true value' of your investment from the numbers spat out by accounting standard compliant income statements?

    I had a good debate with Ferg on this thread a few months back (see post 1800 on this thread for Ferg's alternative viewpoint). In the end we agreed to disagree, although in fairness I don't believe there is any one correct way to solve this problem.

    My own method is initially to follow all the accounting rules as though they are representative and correct. Doing this underreports an investors real return, because it removes the unimputed portion of investors dividends from their return. But taking unimputed capital away from a company's books also reduces the book value of assets . In this process, the value of present value power is subtracted from the historical cost book value of power stations. Over time, as Ferg pointed out, this method tends to reduce the book value of all company owned power stations, (because most of the power stations are historic) to zero. This is nonsensical. So to counter this effect, I introduce a periodic revaluation of power stations that reflects their current earning capacity. No money is required to boost the earning capacity of historic power stations as the market price of power goes up. So I term my revalued capital to be 'thin air capital', because the incremental asset value of the historic renewable power stations increases from nothing.

    For those who find the notion of 'thin air capital' ridiculous, I would point out in my defence that I only needed to invent the concept because the accounting rules that exist today do not provide for realistic depreciation of long life renewable power generation assets. The debate on how to account for unimputed profits is a live one, even though I am happy with my own solution to the issue.

    Coming back to your own analogy Jiggs, your herd of (power) cows never stopped producing. It is just that some wildcat farmer offered to buy your cows for a silly price then withdrew that offer that made it look like you had lost money. If a fool offers to buy your cows for a lot more than they are worth, you can kick yourself for not taking advantage of the situation. But by not accepting at least you still have your milk (power) producing cows (except in this instance you don't because you sold them).

    SNOOPY
    Last edited by Snoopy; 23-02-2021 at 07:29 AM.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  3. #2003
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    A question : If I sell now, do I still receive the divident?

  4. #2004
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    Quote Originally Posted by tomm View Post
    A question : If I sell now, do I still receive the divident?
    Tomm it dividend not divident.

    Every dividend announcement has the dates that the shares trade ex dividend. The dates are also on the NZX site.


    https://www.nzx.com/markets/NZSX/dividends
    Last edited by 777; 23-02-2021 at 12:55 PM.

  5. #2005
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    Quote Originally Posted by 777 View Post
    Tomm it dividend not divident.

    Every dividend announcement has the dates that the shares trade ex dividend. The dates are also on the NZX site.
    Very appreciated .

  6. #2006
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    Quote Originally Posted by tomm View Post
    A question : If I sell now, do I still receive the divident?
    Distribution Amount NZD 0.15588235
    Ex Date Friday, March12, 2021
    Record Date Monday, March 15, 2021
    Payment Date Tuesday, March 30, 2021

    http://nzx-prod-s7fsd7f98s.s3-websit...580/340296.pdf
    Last edited by HKG2301; 23-02-2021 at 11:43 AM.

  7. #2007
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    Quote Originally Posted by tomm View Post
    A question : If I sell now, do I still receive the divident?
    Love the new word though, be in the next dictionary update .
    Divident - noun- A dividend is evident, transparent and imminent.

  8. #2008
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    Quote Originally Posted by Joshuatree View Post
    Love the new word though, be in the next dictionary update .
    Divident - noun- A dividend is evident, transparent and imminent.
    I thought the word referred to a reduced value dividend, as CEN announced their upcoming dividend would be reduced..

    divident 'a dividend with a dent (in value)'

    So tomm's wording looks absolutely correct to me!

    SNOOPY
    Last edited by Snoopy; 23-02-2021 at 07:29 PM.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  9. #2009
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    Quote Originally Posted by Baa_Baa View Post
    On the chart, CEN daily SP is basing now at a historical support, the 200MA and the 61.% FIB retrace from Covid-low to the insane spike-high recently. It is and remains in a severe short term down-trend.
    It is interesting that Contact closed at $6.96 today, below the nominal retail offer price of $7. If you look in the offer document, the alternative price setting mechanism is the lower of $%7 or:

    "a 2.5% discount to the volume weighted average market price of the Shares traded on the NZX Main Board over the five business day period prior to and including the Closing Date, rounded down to the nearest cent."

    A 2.5% discount on $7 is $6.83

    If the share price stays down, we 'small investors' might get one over on the big guys (for once).

    SNOOPY
    Last edited by Snoopy; 23-02-2021 at 07:30 PM.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  10. #2010
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    Quote Originally Posted by Snoopy View Post
    It is interesting that Contact closed at $6.96 today, below the nominal retail offer price of $7. If you look in the offer document, the alternative price setting mechanism is the lower of $%7 or:

    "a 2.5% discount to the volume weighted average market price of the Shares traded on the NZX Main Board over the five business day period prior to and including the Closing Date, rounded down to the nearest cent."

    A 2.5% discount on $7 is $6.83

    If the share price stays down, we 'small investors' might get one over on the big guys (for once).

    SNOOPY
    Thanks for pointing this out I read it incorrectly and thought the lowest price was $7

    FT

  11. #2011
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    Quote Originally Posted by Snoopy View Post
    It is interesting that Contact closed at $6.96 today, below the nominal retail offer price of $7. If you look in the offer document, the alternative price setting mechanism is the lower of $%7 or:

    "a 2.5% discount to the volume weighted average market price of the Shares traded on the NZX Main Board over the five business day period prior to and including the Closing Date, rounded down to the nearest cent."

    A 2.5% discount on $7 is $6.83

    If the share price stays down, we 'small investors' might get one over on the big guys (for once).

    SNOOPY
    A very good point.

    The Closing Date for the Retail Offer being the end of next week, 5 Mar 21 (I had to check) for those existing shareholders at the record date of 12 Feb 21.

    So for those thinking of adding up to $50k's worth of CEN to your existing holding to offset the equity raise dilution, you have to decide (guess?) whether to buy at these lower market prices or keep your powder dry, hoping this dip continues into next week.

    Either way, worth keeping an eye on.


    https://www.nzx.com/announcements/367760

  12. #2012
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    I think we can expect it to oversubscribed amd scaled down. No actual evidence of this but given the sheer amount of cash floating around, combined with the low returns on term deposits, I'd consider anything but being significantly scaled quite disappointing.

  13. #2013
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    Quote Originally Posted by Ohdoyle View Post
    I think we can expect it to oversubscribed amd scaled down. No actual evidence of this but given the sheer amount of cash floating around, combined with the low returns on term deposits, I'd consider anything but being significantly scaled quite disappointing.
    That may well depend on where this dip bottoms as we run into next week. If the SP looks to be averaging lower than $7.18 next week, I expect the offer will attract a lot more interest!

    But as the crystal ball is still cloudy on that front (US futures' plummet notwithstanding), I guess there's a third option to consider: buy at market if it continues lower this week and consider applying for the Retail Offer next week as well!

    What are the sums for equity dilution as a result of the $400M raise, about 7.5%...?

  14. #2014
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    Quote Originally Posted by Poet View Post
    Surely this index rebalancing isn't as simple as it's being made out in the media - I can see a scenario where an ETF fund actually might need to buy more CEN rather than to sell

    We need to take account of the actual price of the underlying share when calculating the index weighting of that share and since CEN shareprice has fallen from $10.75 to $7.11 in the last six weeks, any fund holding this share over that period would have seen the value of those CEN shares that they own fall by 35% and hence the relative weighting of CEN in that fund's index would also have fallen by the same 35%. This may mean that CEN's weighting in that ETF has already self-corrected (or even over corrected!).

    Or am I misunderstanding the way these ETF make their buy/sell decisions?
    I have been looking into this myself past few days.

    The formula by which the maximum weighting is set is on standard and poors website. The formula requires to much data input and to much hard math for me to calculate it, but would be very interested if someone had managed to do it or can find a recent article referencing the possible figures.

    What CEN and MEL medians daily volume traded over the last 6 months will affect the final weighting. Ironically all the volatility caused by BlackRock may increase the weighting.

    As of 19 February ICLN and ICRG index funds are still buying shares (slow and steady ).

    Exactly how much they will need to sell off will determine the March/ April direction. But two things I note :

    1 Alot if traders seem to be poised to buy back in to CEN and MEL after selling out in the recent highs.

    2. The dividend yield is starting to look attractive again.( I realise the 10 year bond rate is rising too).

    Overall I'm picking this selloff wont be as bad as predicted and we may be nearing the bottom. Of course exactly what the bottom is will be hard to predict as it always is.
    Last edited by Ohdoyle; 23-02-2021 at 11:13 PM.

  15. #2015
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    "I realise the 10 year bond rate is rising too"

    while the T10 is a factor it seems to be short term in nature and then other forces start to drive stock prices and its effect falls away.

    The crazy highs recently show how unpredictable the market price discovery is at the moment.

    Id be interested in Detect Inspector SNOOPS views on the sector at present as his in depth detailed work in this sector is almost second to none.

  16. #2016
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    Default Valuation: FY2020 projected dividend 'capitalised valuation' perspective Itr3 Pt1

    Quote Originally Posted by Snoopy View Post
    I have reworked my model based on just the last four years of operations.

    1/ The 'Scenario 'Dividend Per Share' and 'Scenario Earnings Per Share' columns (from my post 1978) represent a prediction of an ongoing dividend of 90% of free cash flow being paid into the foreseeable future. The FY2021 forecast, under the same policy of paying out 80-100% of free cashflow, is 35cps. This is somewhat less than my four forecast scenarios where dividends range between 41cps and 47cps. However these scenarios reflect a future where Tauhara is operational which should provide an incremental boost to Contact's profitability. I also note that in the current forecast year, the proposed dividend of 35cps is a figure towards the lower end of the 80-100% cashflow payment range. I therefore do not consider the modelled dividend payout to be unrepresentatively high, once Tauhara is up and running.
    2/ The (A) - (B) difference column, if negative, represents the amount of the projected dividend not covered by imputation credits. This is important, because a dividend paid without imputation credits is in accounting terms, equivalent to giving shareholders their own capital back (equal to the amount of the unimputed dividend) complete with a tax bill. This is generally bad for investors. It is necessary to make a negative adjustment to account for any expected tax to be paid on the unimputed dividend component (Column (D).
    3/ The capital component of the dividend is the portion of shareholder equity being returned to shareholders. This will need to be removed from the dividend return calculation. Because to pay it is to return to shareholders money on the balance sheet that they already have, so it isn't a shareholder benefit.
    4/ The unimputed component tax bill column, represents the income tax charged on share capital that is expected to be paid by the shareholder. A 28% tax rate is assumed. Note that if the (A)-(B) difference were to be positive then there would be no extra tax bill. That's because in such a year, the dividend would be 'fully imputed'.
    5/ The final 'Difference Column' represents the 'effective' dividend per share, adjusted for any extra tax obligation from paying tax on unimputed distributions.

    Scenario Basis Financial Year eps (A) Scenario dps (B) Difference (A)-(B) Divie Capital Component (C) Unimputed Tax Bill (D) Difference (B)-(C)-(D)
    2017 21.5c 43.0c -21.5c 21.5c 6.0c 15.5c
    2018 21.1c 42.0c -20.9c 20.9c 5.9c 15.2c
    2019 26.6c 47.0c -20.4c 20.4c 5.7c 20.9c
    2020 20.6c 41.0c -20.4c 20.4c 5.7c 14.9c
    Total 89.8c (E) 173.0c (F) 66.5c
    Business Cycle Imputation Rate (E)/(F) 51.91%
    .

    The expected average dividend per year, net of tax is therefore: 66.5 / 4 = 16.6cps (net)

    Using a tax rate of 28c this is equivalent to a gross income of: 16.6cps /(1-0.28) = 23.1c

    Now we come to a critical point in this analysis - the choosing of an indicative interest rate that allows us to value Contact on the basis of being an ongoing income stream. I have previously used a figure of 5.5%. But that was in a climate of investment interest rates of some 3.5%. Interest rates have fallen by at least 200 basis points since then. OTOH the Tiwai Point aluminium smelter is likely on a three year wind down closing path. The power market is consequently in a state of flux as whether an energy intensive replacement industry like hydrogen fuel production, will arrive. If not, there is work to be done, by Transpower, to ensure Contact will be able to extricate the consequential surplus energy from their Clutha River power stations at Clyde and Roxburgh. The 'transmission north' constraints need to be relieved. There is also uncertainty as to how Tauhara will feed into the mix of competitors' new wind farms that are due to come on line within a similar construction timeframe.

    To balance these competing factors, I have assessed that a gross return of 4.5% is an acceptable return from a shareholder perspective, investing in Contact Energy's assets.

    Dividends can only be imputed to the extent that tax credits are being and have been generated. The bulk of the Contact tax credits on the books came about in FY2016, because of $204m of impairments net of tax relating to the closure of the Otahuhu Power Station, an assessment that the Taheke Geothermal field is unlikely to be developed in the foreseeable future (from a June 2016 perspective) and a 'write down' in the value of inventory gas. I have calculated above that $63m of those tax credits have been used up, which means that $97m - $63m = $34m are yet to materialise. That means there are probably two years worth of 'Superimputed dividends' for Contact Energy shareholders to come. What value of superimputation is appropriate? I am going with the average that I calculated in the early part (post 1799) of this valuation exercise of 71.64% as a figure that is now appropriate for Contact Energy.

    If we assume that a business cycle investment 'gross return' of 4.5% is required, then this equates to a CEN share price of:

    23.1c /0.045 = $5.13

    So $5.13 is therefore 'fair value'.

    Readers should note that $5.13 represents 'business cycle neutral' fair value. We could argue that we are currently at the top of a low interest rate inspired valuation cycle. My rule of thumb would suggest a 'top of cycle' value some 20% higher than my calculated fair value.

    $5.13 x 1.2 = $6.16

    Contact Energy is trading at $7.49 as I write this post. This technique would suggest that Contact Energy is now 22% overvalued (above fair valuation), not unexpected given the plunge in interest rates of late is probably worrying yield investors, and not out of line with the broad overvaluation of the NZX as a whole.

    But does a 'capitalised dividend valuation' give the full picture? Maybe not!
    I have reread past dividend paying intentions and compared that to what actually happened. When Contact had their '100% of Free Operating Cashflow' policy, dividends never quite reached that level. That is because the policy was based on 'averaged hydrological conditions'. If the inflows were above average (which they were in FY2019), then the dividend was not increased. Keeping this in mind, I have created a third possible iteration of future events where dividends are capped at 41cps (This reflects the period after Tauhara has been commissioned remember). Despite the dividend reduction, I expect this iteration will show increased returns to shareholders. This is because the unimputed portion of the dividend will be reduced. The way I have done my analysis, unimputed portions of dividends reduce shareholder returns, because of the extra tax incurred by such payments.

    I continue to use my model based on just the last four years of operations.

    1/ The 'Scenario 'Dividend Per Share' and 'Scenario Earnings Per Share' columns (from my post 1978) represent a prediction of an ongoing dividend of 90% of free cash flow being paid into the foreseeable future, but now capped at 41cps. The FY2021 forecast, under the same policy of paying out 80-100% of free cashflow, is 35cps. This is somewhat less than my four forecast scenarios where dividends are 41cps. However these scenarios reflect a future where Tauhara is operational which should provide an incremental boost to Contact's profitability. I also note that in the current forecast year, the proposed dividend of 35cps is a figure towards the lower end of the 80-100% cashflow payment range. I therefore do not consider the modelled dividend payout to be unrepresentatively high, once Tauhara is up and running.
    2/ The (A) - (B) difference column, if negative, represents the amount of the projected dividend not covered by imputation credits. This is important, because a dividend paid without imputation credits is in accounting terms, equivalent to giving shareholders their own capital back (equal to the amount of the unimputed dividend) complete with a tax bill. This is generally bad for investors. It is necessary to make a negative adjustment to account for any expected tax to be paid on the unimputed dividend component (Column (D).
    3/ The capital component of the dividend is the portion of shareholder equity being returned to shareholders. This will need to be removed from the dividend return calculation. Because to pay it is to return to shareholders money on the balance sheet that they already have, so it isn't a shareholder benefit.
    4/ The unimputed component tax bill column, represents the income tax charged on share capital that is expected to be paid by the shareholder. A 28% tax rate is assumed. Note that if the (A)-(B) difference were to be positive then there would be no extra tax bill. That's because in such a year, the dividend would be 'fully imputed'.
    5/ The final 'Difference Column' represents the 'effective' dividend per share, adjusted for any extra tax obligation from paying tax on unimputed distributions.

    Scenario Basis Financial Year eps (A) Scenario dps (B) Difference (A)-(B) Divie Capital Component (C) Unimputed Tax Bill (D) Difference (B)-(C)-(D)
    2017 22.2c 41.0c -18.8c 18.8c 5.3c 16.9c
    2018 21.9c 41.0c -19.1c 19.1c 5.3c 16.6c
    2019 27.3c 41.0c -13.7c 13.7c 3.8c 23.5c
    2020 21.4c 41.0c -19.6c 19.6c 5.5c 15.9c
    Total 89.8c (E) 164.0c (F) 72.9c
    Business Cycle Imputation Rate (E)/(F) 54.76%
    .

    The expected average dividend per year, net of tax is therefore: 72.9 / 4 = 18.2cps (net)

    Using a tax rate of 28c this is equivalent to a gross income of: 18.2cps /(1-0.28) = 25.3c

    Now we come to a critical point in this analysis - the choosing of an indicative interest rate that allows us to value Contact on the basis of being an ongoing income stream. I have previously used a figure of 5.5%. But that was in a climate of investment interest rates of some 3.5%. Interest rates have fallen by at least 200 basis points since then. OTOH the Tiwai Point aluminium smelter is likely on a three year wind down closing path. The power market is consequently in a state of flux as whether an energy intensive replacement industry like hydrogen fuel production, will arrive. If not, there is work to be done, by Transpower, to ensure Contact will be able to extricate the consequential surplus energy from their Clutha River power stations at Clyde and Roxburgh. The 'transmission north' constraints need to be relieved. There is also uncertainty as to how Tauhara will feed into the mix of competitors' new wind farms that are due to come on line within a similar construction timeframe.

    To balance these competing factors, I have assessed that a gross return of 4.5% is an acceptable return from a shareholder perspective, investing in Contact Energy's assets.

    Dividends can only be imputed to the extent that tax credits are being and have been generated. The bulk of the Contact tax credits on the books came about in FY2016, because of $204m of impairments net of tax relating to the closure of the Otahuhu Power Station, an assessment that the Taheke Geothermal field is unlikely to be developed in the foreseeable future (from a June 2016 perspective) and a 'write down' in the value of inventory gas. I have calculated above that $63m of those tax credits have been used up (post 1806) , which means that $97m - $63m = $34m are yet to materialise. That means there are probably two years worth of 'Superimputed dividends' for Contact Energy shareholders to come. What value of superimputation is appropriate? I am going with the average that I calculated in the early part (post 1799) of this valuation exercise of 71.64% as a figure that is now appropriate for Contact Energy. Nevertheless my forecast period is from 2023 onwards. By that time I have to assume all of those remaining $34m of tax credits that are funding 'superimputed dividends' to be used up. That means I expect future tax credits to come out of this historical shadow and revert to reflecting operational performance.

    If we assume that a business cycle investment 'gross return' of 4.5% is required, then this equates to a CEN share price of:

    25.3c /0.045 = $5.62

    So $5.62 is therefore 'fair value'. However, this is fair value in the future, three years hence when Tauhara is up and operating. We need to discount this back using an appropriate 'time value of money' factor. This I calculated in post 1978 to be 0.8763.

    0.8763 x $5.62 = $4.92

    Readers should note that $4.92 represents 'business cycle neutral' fair value. We could argue that we are currently, keeping in mind the increasing ten year bond rate, descending from the top of a low interest rate inspired valuation cycle. My rule of thumb would suggest a 'top of cycle' value some 20% higher than my calculated fair value. However, given we may have passed the interest rate low, I am reducing my interest rate cycle premium from 20% down to 15%

    $4.92 x 1.15 = $5.66

    Contact Energy is trading at $6.77 as I write this post. This technique would suggest that Contact Energy is now still 17% overvalued (above fair valuation), but not out of line with the broad overvaluation of the NZX as a whole.

    But does a 'capitalised dividend valuation' give the full picture? This is a 'no growth valuation', so maybe not!

    SNOOPY
    Last edited by Snoopy; Yesterday at 11:04 AM.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

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    Valuation is Valuation of a business but for the Markets , it is up to the Markets to decide how much it's share is worth but base on the valuation it is being told and the growing, performing of the business. You will never expect or can write a conclusion price on any share.
    Last edited by tomm; 24-02-2021 at 09:35 AM.

  18. #2018
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    Quote Originally Posted by tomm View Post
    Valuation is Valuation of a business but for the Markets , it is up to the Markets to decide how much it's share is worth but base on the valuation it is being told and the growing, performing of the business. You will never expect or can write a conclusion price on any share.
    But you can conclude a price that informs your sale/purchase decisions. Which is where I find Snoopys analysis so useful.

  19. #2019
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    Quote Originally Posted by tomm View Post
    Valuation is Valuation of a business but for the Markets , it is up to the Markets to decide how much it's share is worth but base on the valuation it is being told and the growing, performing of the business. You will never expect or can write a conclusion price on any share.
    If that is true, how do you value a business that is not listed on the market?

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

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    Quote Originally Posted by Snoopy View Post
    If that is true, how do you value a business that is not listed on the market?

    SNOOPY
    Assets + Turn over , also can take the probability of the business's future into consideration.
    Last edited by tomm; 24-02-2021 at 10:35 AM.

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