Bursa should ban the use of DCF valuations
|M.A. Wind||Feb 24, 2012|
The circular can be found here:
The financials of ADSB are as follows:
The numbers do not look exactly attractive, cumulative revenue over the first 3 years of operating were not even RM 100K. Due to the history of loss making the shareholders' funds are minus RM 1.7 million.
Moore Stephens AC Advisory Sdn Bhd is brought in to value this company. They use two methods:
 Revenue Multiple (RM) and
 Discounted Cash Flow (DCF).
 RM: Moore Stephens uses a multiple of 6.0, but this is a very high multiple, much more normal are revenue multiples of between 1 and 2. Also, since RM 5.85 million represents 50% of ADSB, they value the whole company at RM 11.7 million. Given the multiple of 6.0 they expect a revenue of RM 1.95 million for this year, which seems very high given the first half year revenue of only RM 0.29 million.
 DCF: Moore Stephens calculates the value of ADSB to be RM 12 million. This is a very high valuation and unfortunately, as always in Malaysia, the whole basis of this valuation (the projections regarding revenue, expenses, profits, etc) are not revealed, so the readers can't check anything at all. Although the whole report contains 79 pages and the DCF data can be packed in a single page, this information (probably the most important part of the whole report) is always left out.
Apart from that, DCF valuations are only reliable if the underlying business (or asset) has a very stable income and revenue stream, like a toll bridge or a bond or sometimes a blue chip with a history of 40 year stable growing profits and dividends. A young internet startup with a history of losses and a very uncertain growth path is therefore the least suitable to be used for this kind of valuation: a small change in growth rate will give hugely different outcomes.
Bursa Malaysia really should ban the usage of DCF models in circulars, readers have no way of evaluating the quality of these (often sky-high) valuations since all important details are left out.
Disclosure: I own indirectly a company that owns a website which is a competitor to carlist.my. I have a Masters degree in Maths, have used mathematical models for 30 years and have put my money where my mouth was (by actively investing using the models, not just coming up with theoretical values). I have used DCF valuations before, but have stopped using them due to the highly uncertainty of the outcome, and the limited possibilities to use them.