Five things I learnt from the ICAEW Valuation Community Conference

Featuring Richard Wadman | 7th November, 2018

Firstly, I need to confess that the title is a little disingenuous as I learnt more than five things.

This blog post is more about five things that I thought may be of general interest from an information packed day at the ICAEW Valuation Community Annual Conference 2018.

  1. There are winners and losers in retail currently

A partner in PwC’s Retail Strategy team informed us (in what I must say was an excellently delivered presentation) that a number of retailers were successful despite the news being focused on high street casualties.  She argued that successful retailers would have to understand who their customer base was; what these people wanted and be agile and adaptive in satisfying these needs. She gave a number of examples of retailers who had managed to enhance their offering or create a new offering through technology and / or logistics.

These messages were reinforced in the presentation by the Senior Vice President, CFO, of McDonald’s UK and Ireland who was able to relay some pretty impressive growth statistics together with some developments in their offering (including Uber deliveries and some fancy in store tech) – almost made me want to visit a McDonalds!

Need to consider the above in the valuation of a retailer – i.e., a number of factors to consider in the choice of Price Earnings Ratio.

  1. The economic outlook for the UK is uncertain, but forecast growth is “poor”

Paul Johnson a Director at the Institute for Fiscal Studies gave an enlightening economic update, which included reference to:

  • UK economic growth for the next five years predicted at 1.6% per annum (which is “poor” and approx. 1% down on historic performance)
  • Brexit vote has impacted negatively to the UK economy to the tune of £40bn – which is apparently what the Bank of England had predicted, but their trajectory was incorrect (they predicated a sharper decline followed by a levelling off whereas the decline has been slower but longer)
  • More than 50% of our trade is with the EU and some 2/3rds of that is business to business (B2B). The impact of a no deal Brexit was described as “not  amenable to modelling” but a deal where we have WTO rules trade barriers has been estimated to cost the UK economy 3% and the impact will affect industry sectors disproportionality.”

(I confess to a bit of bias in my reporting of this presentation – but as we said in other blog posts, it would seem sensible for all businesses to be running scenario models of their profit and loss and cash flow forecasts)

Our valuation reports make reference to the Brexit vote and the additional uncertainty this gives in company and share valuations at present.

  1. Valuations matter (and the need to be underpinned by well-constructed thought and sense check)

 Nick Talbot, CEO, International Valuation Standards Council (IVSC) spoke of the work that the organisation is doing with other parties to work towards common valuation practices/ standards across the globe and also the need of these valuations to be undertaken to be suitably qualified people.  This was perceived to be important for a number of reasons – which are nicely summarised to a musical score in the video on the IVSC homepage.

In one of the questions raised for Nick Talbot, the delegate asked why he could not see anything in the International Valuation Standards about the need “to look at a valuation prepared, on whatever basis prepared, and sense check it.”  To be honest, I cannot remember the response but I recall it was accompanied by a wry smile…

A wry smile was also on the face of Steve Thomas from HMRC’s Share and Assets Valuation team when he spoke of a couple of matters his team had recently dealt with. This included sitting in a room with a company/ their adviser who were arguing for a full minority discount of shares whilst in the same building as other people from the same company were discussing [final] points on the company sale.  He asked for ‘valuers’ to be open with HMRC’s Share and Assets Valuation team so that a judgement call can be made (this was pleasing to hear as the ‘open and transparent’ approach is the one I have been adopting – and this does give the ‘valuer’ the opportunity to clearly state their case/ pre-empt any questions.)

4. Crowdfunding valuations are disrupting the market

Whilst not a major part of Alistair Brew of Business Growth Fund’s presentation, he did allude to discussions he had with potential investee companies on the subject of valuation and the impact of crowdfunding, and ‘peer group’.  He made a point that I have on occasion made in discussions and in valuation reports that one must consider and differentiate the motives for investors in arriving at the valuation – and specifically with a crowd investor one should consider the motives/ incentives to invest which may include the attractive investor tax reliefs and the ‘enjoyment’ of backing a company (another one I would consider is the crowd investor is potentially able to take a more portfolio approach to investing in smaller sums and maybe less concerned with downside and upside on a specific investment).  Likewise, one should consider the specific motivations and perceived opportunities that lead to high valuations in a company’s peer group as ‘comparable transactions’.

In any transaction based valuation there is a need for both parties to be ‘happy’ and Alastair shared with us how he and his panel approach valuations at BGF and the types of return they are modelling when arriving at the value and the deal structure for a deal.

  1. Black Scholes Model explained…

But that will be the subject of another blog post when I have the slides from the conference…

In the interim, two travel tips:

  1. Do not keep your Travelodge room key card next to your phone when you go out for a run – otherwise you, in sweaty running gear, might have to join a long slow queue of people booking into the Travelodge just to get your key card reactivated
  2. Do not pre-buy a single destination ticket for the London Underground thinking it will save you time when you need to get back across London to catch your train home later that day. The ticket may time-out leaving you needing to speak to attendants at the ticket barriers negating any time saving!
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