Time to Trash Discounted Cash Flow as a Valuation Tool

I have never been a fan of company valuations based on DCF (Discounted Cash Flow) models. The uncertainty is too large, small changes in a few parameters will give wildly different valuations and the important parameters are never revealed (in other words, minority investors who disagree with the valuations can't fight them).

Not surprisingly, it is the "weapon of choice" for any financial engineer who is asked to come up with some crazy high valuation for instance for a Related Party Transaction (as unfortunately is too often the case in Malaysia). Just tinker a bit with the growth rate until the preferred value appears.

Arturo Cifuentes, Ph.D., an adjunct professor of business in the Finance & Economics Division of Columbia University, puts it more eloquent in this article, some snippets:


Joel Dean, an American economist who died in 1979 and made important contributions to corporate finance, introduced the Discounted Cash Flow (DCF) approach as a valuation tool in 1951.  The thought was that if the Net Present Value (NPV) of the cash flows of an asset or project, estimated with the DCF method, was positive, the investment was worth pursuing.  The idea was motivated by an analogy with bond valuation.  It had long been established that the price of a bond corresponds to its future cash flows, discounted with a rate determined by the market – a rate determined primarily by the credit risk associated with the issuer.

However, the analogy between bonds and project cash flows is not as clean as it seems.  In the case of a bond, the future cash flows are well-defined.  In essence –and this is critical – the uncertainty in the bond cash flows derives from the issuer’s potential inability to pay (credit risk). But there is no uncertainty as to the amount to be paid.  To put it differently, the bond has no upside.  Therefore, the probabilistic distribution of the cash flows is one-sided; it only includes downside scenarios.
In contrast, the uncertainty in a project comes from not knowing the cash flows rather than from the capacity of the project to pay them.  Moreover, even if we make an optimistic estimate of the cash flows, there is always the possibility to exceed that estimate.  That is, the cash flow distribution is two-sided: There is upside and downside potential.

These differences are further exacerbated because the life of a project is not as clearly defined as the time-to-maturity of a bond.  Project cash flows have notoriously uncertain lifespans.  Strangely, economics textbooks never address the shortcomings of the project-bond valuation analogy.


His conclusion:


Much of the problems affecting the DCF method come from the fact that it tries to capture with one factor – the discount rate – two completely different effects: the time value of money and the stochastic nature of the cash flows.  Not only that, it attempts to transform a problem which is probabilistic in nature (cash flows are uncertain) into a deterministic problem by appealing to the “right” discount rate.

Finance is undergoing a major review of its fundamentals as a result of the subprime mortgage crisis.  Markets are more complex, more psychologically driven, more interconnected, and more unstable than previously recognized.  The limitations of models based on questionable assumptions (normal distributions, stable volatilities, simplistic utility functions, efficiency of markets, rational decision makers, etc.) are being re-examined.  There is no reason to exclude the DCF from this exercise.

In light of these arguments, there is a strong case for refocusing research on valuation techniques.  We should abandon efforts aimed at determining the “correct” discount rates.  An honest assessment of these efforts inevitably leads to one conclusion: After years of investigating this topic, basic guidelines are as elusive as they were 50 years ago.  Instead, we should shift gears and focus on developing good tools aimed at characterizing cash flows probabilistically.  That is, at developing tools to estimate their means, standard deviations, and correlations.  Moreover, the merits of incorporating into the valuation calculation the benefits that a project could bring to the relevant stakeholders, as well as the risk tolerance of the potential investors, should be explored.

It is, in any event, unacceptable to argue that the complexity of cash flow valuation makes it an exception that can only be handled through amorphous concepts like discount factors and not with the normal rules of probability and statistics.

Why did Maybulk not take the "big bath"?

Maybulk released its 2015 annual report.

I have warned many times in this blog about the upcoming loss (for instance in 2014), in regards to the need to impair the valuation of its associate company, POSH (PACC Offshore Service Holdings).

A loss of almost RM 1.2 Billion due to many provisions, impairments, etc., surely Maybulk must have taken the big bath?

But surprisingly, this has not been the case at all. When we dive into the accompanying notes to the accounts, we find the following:

In other words, the valuation used is almost three times as high as the market value, a staggering RM 652 Million difference.

On a side note, one wonders, if the POSH shares are really so much more valuable than the market price suggests, why does Maybulk still purchase new vessels, why not buy additional POSH shares? It can immediately mark up the price in its books by a factor 2.85, for every RM 100 Million invested it can book a cool profit of RM 185 Million!

If however the full impairment was taken into account (I think a lot more realistic), then the loss for 2015 would have been more than RM 1.8 Billion.

The reasons for the relatively low impairment that was used can be found in the following paragraph:

I don't like DCF projections, have warned about its use many times in this blog. Basically, by tuning some parameters financial engineers can come up with about any valuation that they want. And that is often how DCF is used (or rather misused), especially in the Malaysian context.

Some considerations in this particular case:

• The calculation itself is never given (as usual), so we can' t check its reasonableness. This is especially important in this case since DCF was used twice to calculate POSH's value (at the initial RPT and at the IPO), and both times the resulting valuation was hugely optimistic.
• The DCF valuation depends so much on the underlying assumptions, as shown above, one percent change in the discount rate will change the valuation RM 230 Million, a huge impact.
• The only cash that Maybulk gets from its investment in POSH is dividends, and they have been tiny over the last eight years, most of the years they did not receive a single cent, so how is it possible to come up with such a high valuation?
• And lastly, why did Maybulk change its method of valuation, from the unexplained price-to-book ratio in the previous year to DCF, why is no explanation given?

The balance sheet took a hit because of the reported loss, but with a debt equity of 52%, things still look reasonable (left column 2015, right column 2011):

However, if we adjust the numbers for the market value of the POSH shares, then the balance sheet looks like this:

Suddenly the borrowings are larger then the shareholders equity, implying a debt/equity ratio of clearly more than 1.

The financial picture does not look solid:

• Cash of only RM 140 Million
• Borrowings of RM 608 Million (of which RM 225 Million short term)
• Capital commitments of RM 410 Million
• Over 2015 the company booked an operating loss of RM 100 Million
• Its RM 1.1 Billion investment in POSH is hardly paying any dividend

And then taking into account that just 2.5 years ago Maybulk could have sold back its investment in POSH by exercising its put option for a profit of a few hundred million (not the current paper loss of RM 756 Million), generating more than 1 Billion extra cash, and without the need to invest a few hundred million for POSH's IPO shares.

In other words, instead of being a highly leveraged company in a weak financial position, Maybulk would be sitting comfortably on top of a huge cash pile. It could have given out RM 1 dividend per share (more than the current share price!) and would still have more cash and less borrowings than now.

Unbelievably, the minority shareholders did not even get a chance to vote about the put option.

To Cliq or not to Cliq? (4)

Cliq Energy announced the result of the fairness opinion by the independent valuation expert, Deloitte.

First of all, "good old" DCF is used. As usual, a long list of assumptions, some of which are very important:

Secondly, the result of the valuation is presented:

While the outcome of a DCF calculation can hugely change according to which parameters one uses, the final range of 113M to 124M falls "exactly" around the purchase consideration of 117M. Too much of a coincidence?

As usual, no details of the DCF are given, so we can't check anything of the actual calculation.

As often described in this blog, I don't like DCF valuations based on a huge amount of assumptions, some of which (for instance the amount of reserves, the price of oil, political/regional conditions, etc.) would alter the result by a huge margin.

Just to detail one aspect, how can one calculate the uncertainty of investing in a country like Kazakhstan? I honestly have no idea how to incorporate country or regional risk in an objective way in a DCF calculation.

On a more positive note, a comparison with similar deals is presented, something that makes much more sense to me:

The average price per boe (barrel of oil equivalent) of the three deals is USD 6.41, while Cliq only pays USD 5.82, that looks good.

But the most recent deal done is by Sumatec Resources (relevant since the price of oil and market conditions were similar to Cliq's) was done at a price of only USD 4.21 per boe. The question is why does Cliq pay 38% more per boe than Sumatec?

Unfortunately, there are no other details regarding the three deals, and how they compare to the proposed deal of Cliq (for instance the existence of assets or liabilities other than the oil reserves in the target companies).

The evaluation of Deloitte is that the deal is "fair and reasonable", which is no surprise because it was more or less announced before by the CEO:

"We know that it will fall within the fair market value, but I'm not saying 100% it will. We have intelligently analysed that the acquisition value is going to be within the fair market value unless oil prices fall to US$ 20".

DCF: Hall of Shame (1)

Interesting article from Professor Aswath Damodaran:

"DCF Myth 1: If you have a D(discount rate) and a CF (cash flow), you have a DCF!"

He defines "the consistency test" for DCF:

• Unit consistency
• Input consistency
• Narrative consistency

And continues:

"Many of the DCFs that I see passed around in acquisition valuations, appraisal and accounting  don’t pass these consistency tests. In fact, at the risk of being labelled a DCF snob, I have taken to classifying these  defective DCFs into seven groups:"

Followed by the seven DCF groups and their description. The following picture gives some insights:

From the above we can see that there are many pitfalls in making a correct DCF. That is a serious problem with DCF.

But I think there is an even larger problem: dishonesty from the side of the DCF modeller. In the Malaysian context (and may be even in the global context), that is in my opinion a huge problem.

I will detail my reasons for this in a subsequent posting.

Noble: overstating Yancoal's value?

"Iceberg Research", an unknown and anonymous website, has issued a negative report about Noble Group, the commodity trading company listed on the SGX.

For me, the most important is if the allegations are true and the most interesting item is the valuation of Yancoal in Noble's books:

• Noble owns 13% of their shares;
• Yancoal is listed and the 13% of the market cap is worth about $11M;
• Yet the investment is in the books of Noble for $614M;
• Noble doesn't seem to have significant control over the company.

That looks very weird, to put it mildly.

Macquarie writes:


"But the shares are thinly traded, which can distort market value. This is one reason why Noble can use a financial model, reviewed by auditors Ernst & Young, to value the stake. With sustained weak coal prices, we have been flagging the risk of further write downs for YAL (2012 carrying value: US$813m). The Noble CEO himself hinted at such a potential outcome at a recent sell side event. Whilst we do not see the full carrying value at risk, there could be a non-trivial impact vis-à-vis Noble’s S$0.98 BVPS (excluding perpetuals). But, again, we have been flagging this risk for well over a year."


Regular readers of this blog will know what I think about the many financial calculations (most of them DCF models) that are being used. Changing one single parameter would already later the outcome of the model hugely, but there are often many important parameters. The result is a very wide range of valuations (not a single valuation), the lowest of which has to be zero.

In other words, giving a single valuation through the use of these kind of models is (in most cases) useless, rubbish and self-serving.

Noble has since responded, no surprises here:

If the DCF model of the stake in Yancoal does indeed indicate a valuation of $614M, 56 times as much as the current market price, then the company really should publish the model's assumptions and calculations, for all to see. We could then also check the model with the outcome say three years down the road.

Unfortunately, publishing the model's details hardly ever happens is my experience.

The Monetary Authority Singapore (MAS) is looking into the case, Noble's year report will be announced on February 26, 2015.

Protasco's Puzzling Purchase (3)

I wrote in my previous posting about "Protasco's Puzzling Purchase":

"There still is hardly any transparency at all".

Protasco was simply begging Bursa to be queried, and Bursa "happily" complied, issuing a list of 21 (excellent) questions.

As far as I remember, by far the longest list of questions I have ever seen from Bursa (and I must have read hundreds of them). But may be that was Protasco's intention all the time, to be admitted to the Malaysian Guiness Book of Records.

Protasco did answer all questions, revealing lots of new information.

I will cherry pick some of it (I recommend shareholders of Protasco to read the whole document):


Question 2: why the valuation is so much lower than in the initial S&P agreement

"The purchase consideration of USD55 million under the Original SPA was derived at based on the Vendor’s valuation of the KST Field and taking into consideration Protasco’s effective interests in PT Haseba of 50.5%."

To just take over the vendors valuation sounds rather naïve to me, surely the vendor is interested to get as high a price as possible?


Question 3: Basis and justification for Protasco to enter into the Restated SPA as it is noted that Due Diligence in still on going

"The Board has decided to proceed with the Restated SPA to enable Protasco to take control of PT ASI, so that PT ASI can commence with the exploration, well re-activation and/or construction of the well (if required) in accordance with an agreed development plan approved by Pertamina.  The development plan is an integral part of the PMPA extension and/or other similar agreement by Pertamina to extend the PMPA beyond its expiry on 14th December 2014 for the Extension."

It looks like there is currently not enough money in PT ASI to commence activities, and PERTAMINA needs to see development going on. That is why the deal now is pushed through. Protasco will provide a loan of USD 5 Million for this purpose.


Question 7: To disclose basis and justification (including bases and assumption) in arriving at the valuation of USD35 million

"The valuation of USD33.3 million in KST Field by KPMG, Singapore is arrived at using the income approach [discounted cash flow method (“DCF”)].  In arriving at the valuation, the following bases and assumptions are used:"

And then a long list of assumptions is mentioned, a list that can easily be expanded on. The problem with DCF is that changes in a single assumption can cause quite large changes in the outcome, changes in a few assumptions will render the valuation basically useless. DCF might be useful in calculating the value of a bond, or of a toll highway with predictable traffic, but it is completely unsuitable to calculate the valuation of a junior energy play like PT ASI.


Question 10: Detailed information on KST Field

"(d) PT Haseba is entitled to USD32.39/bbl for every barrel received at sales point when the Indonesia Crude Price (“ICP”) is over USD100/bbl"

As far as I can see, the USD 32.39 is a fixed amount, this would hugely limit the upside potential, shareholders of Protasco should take notice.


Question 14: Information on PT Inovisi Infracom TBK (“PT Inovisi”)

"The substantial shareholder [of PT Inovisi] is PT Green Pine, holding 60.2% equity interest in PT Inovisi. PT Green Pine has business relationship with the Vendor [of PT ASI]"

What does "business relationship" mean? Do they infrequently do some trading or are the major shareholders substantially the same? I guess more towards the latter. Protasco has not been forthcoming at all about information regarding the seller (which is ultimately owned by a BVI registered company).


Question 19: Statement by Protasco

"Protasco, after considering the report by KPMG and barring unforeseen circumstances, is of the opinion that the Profit Guarantee is realistic."

For the sake of the shareholders of Protasco I definitely hope they are right, but I have strong doubts. This year for instance the company would need to make USD 2M, but the year has already started and there will be lots of initial start-up costs involved. PT ATI's track record so far also does not give any indication that the profit guarantee can be met.

If this deal is really that good, why did the seller (most likely based in Indonesia and having deep knowledge of the oil & gas industry) offer it to Protasco (based in Malaysia and with no experience in the oil & gas industry). The seller could simply have placed the PT Inovisi shares with a bank, borrowed money against it, and (re-)started the wells themselves and reap 100% of the profits.

If a deal sounds too good too be true, it often is too good to be true.

Protasco's Puzzling Purchase (2)

I wrote before about Protasco's proposed deal to buy into an Indonesian oil & gas company, a rather strange deal since Protasco has no relevant industry experience in this field.

The company just announced that it has entered in an amended Sales and Purchase Agreement, 13 months after the initial announcement. Was the first announcement made during the Christmas holiday, this time it was made on the evening of the CNY family reunion diner. Interesting timing indeed.

The deal in short (all PT companies are Indonesian based):

• Anglo Slavic Petrogas, a BVI based company, owns 100% of PT ASU
• PT ASU owns 100% of PT ASI
• PT ASI owns 95% of PT FAS, an oil & gas exploration company
• PT FAS owns 70% of PT Haseba
• PT Haseba has the rights to KST Field

Protasco wants to buy a big chunk of PT ASI shares from PT ASU.

The old deal (28 December 2012): Protasco buys 76% of PT ASI for USD 55M, with a USD 55M profit guarantee (spread out over 4 years). This deal values PT ASI at USD 72M.

The new deal (29 January 2014): Protasco buys 63% of PT ASI for USD 22M, with a USD 22M profit guarantee (spread out over 4 years). The deal values PT ASI at USD 35M.

It seems that the value of PT ASI suddenly has halved while the profit guarantee is down a whopping 60%! No reason is given for the much lower profit guarantee, puzzling.

PT ASI's net assets are only USD 9M. The valuation (about 4 times net assets) is done by KPMG based on the DCF (Discounted Cash Flow) model.

I think this tool is completely unsuitable (I wrote before about this) to calculate the valuation for a junior oil & gas company, due to the enormous uncertainties, for instance:

1. The prices of oil and gas, fluctuating a lot
2. Exchange price between different currencies
3. Cost of exploration, often projects are more expensive and take longer than planned
4. The exact amount of reserves available and the economic viability to extract them
5. The possibilities of disasters, either caused by men (oil spills etc.) or by nature (the field is near an earthquake prone area)
6. Possible changes in the conditions of the concession or in the tax rate (happen quite often, especially if profit is good and the government changes)
7. High corruption and low corporate governance standards and enforcement in Indonesia (for instance compared to Malaysia)

There is still no approval to extend the partnership agreement that expires on December 2014 for another 10 years. The extension is however a condition for the deal to go through.

There still is hardly any transparency at all, for instance:

• Who is behind the BVI based seller Anglo Slavic Petrogas?
• What are the expected extraction rates and what are the oil & gas reserves of the KST Field?
• Why was the exploration of KST Field stopped in the past? In 2011 revenue of PT Haseba was zero
• Is there any middlemen, is any commission paid for this deal?
• Who owns the other 30% of PT Haseba?
• What did PT ASI pay to own 95% of PT FAS?
• Protasco will make an advance of another USD 5 Million to be used for exploration, how much are the other companies (PT ASU, the other shareholders of PT Haseba) contributing?

Bad news is that the amount of money to be invested and loaned represents 24% of Protasco's net assets, and since this is less than 25% the company doesn't need shareholders approval nor does it need to appoint an adviser. Is it by chance that the percentage is just below the threshold?

An anonymous person pointed at the possible role that Adrian Ooi Kock Aun plays in the deal, he was appointed to the board of Protasco just before the deal was announced December 2012. He is the CFO of PT Inovisi Infracom Tbk, an Indonesian listed company that also invests in oil & gas. The guarantees that are given out are based on a large block of shares of PT Inovisi Infracom Tbk. Surely Adrian Ooi must be aware of the identity of this large shareholder who is most likely the person/company behind Anglo Slavic Petrogas, the seller. Should this information not be made public?

Independent advice: "not fair but reasonable"

Article in The Star by John Loh: More cases deemed ‘not fair but reasonable’

"In March 2010, the SC had - in an effort to raise the standard of independent advice by getting independent advisers to conduct deeper analysis and disclose more information to shareholders - issued a consultation paper that led to the additions to Practice Note 15 of the Code on Takeovers and Mergers 2010.

The revised guidelines took effect from Nov 1 last year.

The new rules essentially decoupled the terms “fair” and “reasonable” as two distinct criteria, with “fairness” referring specifically to valuation and “reasonableness” to elements other than valuation.

“The decoupling of the terms will further ensure that independent advice circulars are more easily understood, transparent and provide clear bases to justify a recommendation,” the SC had said."

Thirteen independent advises in the above table:

• 4 times "not fair but reasonable", language that is used when the price offered is less than its fair value, but at least it offers a option for the shareholder to sell (instead of holding shares in an unlisted company);
• 4 times "not fair and not reasonable", not necessarily against the wish of the majority shareholder, it could be a take-over offer at a low price where the majority shareholder wants to keep the company listed;
• 5 times "fair and reasonable".

Two remarks:

• This is a huge change from the past when almost always deals were deemed to be "fair and reasonable", the change is good; the average standard is also better than in the past (with some exceptions);
• Why are so many proposals deemed to be "not fair"? Do the Board of Directors fulfill their fiduciary obligation to work for all shareholders? Can they not come more often with deals that are deemed to be "fair"? In the case of privatizations, have they really tried to unlock more value?

The SC and Bursa Invite Comments on Proposed Best Practice Guide on Independent Advice Letters, latest by tomorrow (January 31, 2013). The documents can be found here.

My comments regarding this Guide:

• In general the guide appears to be good;
• However, guidelines are only of use with strict enforcement. SC really needs to come down hard on errant independent advisers who write biased reports in favor of the majority shareholders;
• DCF (Discounted Cash Flow): in itself a good tool in certain areas (where reliable predictions can be made), unfortunately it is often abused (to come up with sky-high valuations) and therefore I would recommend to do away with it, my previous posting about this can be found here;
• I would stress reasonableness in valuation: for instance if a certain asset is acquired not too long ago and the current valuation is very different, good reasons should be given, I often miss this common sense approach;
• Data should be as up-to-date as possible: for instance I still often miss an up-to-date balance sheets and profit and loss account; also if the amount involved is large there really should be a recent audited account. In the KFC case the independent adviser compared the company with other companies based on share prices of one year old, this should not happen;
• For asset heavy companies like property developers or plantation companies: revaluation of assets should be done if the last valuation is done more than 3 years ago; Glenealy Plantations was privatised with its last revaluation done 14 years ago, in the midst of the Asian Crisis;
• Margin of safety: if the value of an asset depends on all sort of future conditions being met, then there really should be a decent margin of safety;
• Executive summary: I would prefer this always to be done.

Some general comments, not related to the Guide:

• A random assignment of a (non-conflicted) independent adviser to a specific case would increase the chance that the independent advisers is really independent; at the moment companies (that is the Board of Directors) can choose their own independent adviser;
• Independent advice should be send together with the main document, or at least not much later.

Bursa should ban the use of DCF valuations

Catcha Media Bhd is proposing to buy over 50% of Auto Discounts Sdn Bhd (ADSB) for RM 5,000,000, valuing the whole company at RM 10,000,000. Auto Discounts operates a website carlist.my with on-line car classifieds.

The circular can be found here:

http://announcements.bursamalaysia.com/EDMS/subweb.nsf/LsvAllByID/AC12354CE071892A482579AD002507A4?OpenDocument

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:

[1] Revenue Multiple (RM) and

[2] Discounted Cash Flow (DCF).

Their findings:

[1] 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.

[2] 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.

Abolish DCF models in circulars

Discounted Cash Flow analysis is a method to value a company (or project or asset), I refer to WikiPedia:

http://en.wikipedia.org/wiki/Discounted_cash_flow

I read an interesting post: on "Where Is Ze Moola":

DCF can lead to large mistakes

I 100% agree with his conclusions. If small changes in parameters lead to big differences in the outcome then one should take the results with a (large!) grain of salt. I think that predicting the future 10 years out is anyhow madness, whichever model is used. I think may be the only possible useful application for DCF is when one wants to compare two similar companies with each other.

As an "angel" investor I receive regularly Business Plan where profits are projected in the area of USD 50 million 5 years out, and we did not invest in them .... apparently we think the projections are "slightly" unrealistic. We did invest in some of them, but even if they "only" reach 1/10th of their forecast in Year 5 we would already be very, very happy. To be frank, I don't even pay attention to them at all, I just look how realistic the forecasts are for the first 2 years until the company is cash flow positive (which is already a major feat).

One of my Corporate Governance recommendations is to do away with the "independent" reports, since they are not independent at all: "whose bread I eat, his song I sing". I challenge the authorities (Securities Commission and Bursa Malaysia) to prove me wrong, to give the statistics how many times the "independent" reports did not follow the Majority Shareholders. I can only remember one single case out of many dozens. That alone already proves how unbelievable biased these reports are, and thus how useless they are (actually, they are worse, they are doing real damage to the Minority Investors).

In brochures where the DCF model is used the underlying assumptions are never revealed. Thus, the minority shareholders can never check or challenge the outcome. And since the reports are so biased, one can safely assume that the DCF valuations are also very much biased.

Which leads me to the following recommendations:

• Do away with all "independent" reports: they are very biased
• Do away with DCF valuations in all circulars: small changes lead to big differences making them very unreliable
• If (unfortunately) DCF models are still used, at least provide the underlying assumptions so that it can be checked how reasonable they are