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Estimation of the value of unquoted shares of enterprises in the public sector

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Title: Estimation of the value of unquoted shares of enterprises in the public sector


1
Estimation of the value of unquoted shares of
enterprises in the public sector
  • Central Bureau of Statistics
  • Israel

2
Introduction
  • Balance sheets for Israel have been prepared for
    1995, and annually from 2001.
  • In the first versions the market value of
    unquoted shares was estimated using simple
    comparisons with traded shares.
  • The methods were improved for public sector
    enterprises in 2005 as presented in this paper,
    using accepted approaches for evaluation of
    shares in financial theory.

3
Problems with methods used previously
  • Comparisons with data for traded enterprises were
    made at an aggregate level.
  • Main deficiency estimation not linked to the
    profitability of the enterprises or their lack of
    liquidity.
  • Also difficult to match kinds of activity of
    public sector enterprises with the industries of
    enterprises traded on the stock exchange.

4
International Recommendations
  • SNA 1993 13.73
  • The value of shares in corporations that are
    not quoted on stock exchanges or otherwise traded
    regularly should be estimated using the prices of
    quoted shares that are comparable in earnings and
    dividend history and prospects, adjusting
    downward, if necessary, to allow for the inferior
    marketability or liquidity of unquoted shares.
  • ESA 1995 gives similar, but more detailed
    recommendations.

5
International task forces on unquoted shares
  • Eurostat and OECD task forces 2003 and 2004
    recommendations
  • In principle one may arrive at a market value for
    all unquoted shares using the multiplier a
    weighted average of the ratio between the market
    price of the shares and the equity in enterprises
    with traded shares.

6
International task forces on unquoted shares
(contd)
  • Establishment of a suitable data base with
    following characteristics
  • Small enterprises and enterprises with a very
    large multiplier should be excluded.
  • Very large enterprises (Stoxx600 in Europe)
    should be excluded.
  • List of shares on stock exchange should be
    divided into 10 NACE industries.
  • Use data from domestic market or an international
    data bank (such as the Pan European).

7
Common methods of estimating the value of
enterprises
  • There are a number of common methods of
    estimating the value of enterprises derived from
    existing theory on financial markets.
  • Such methods are for example used when
    determining the price of a share, when an
    enterprise is launched on the stock exchange.
  • The choice of methods of evaluation of the value
    of an enterprise is dependent upon the purpose of
    the evaluation, the available data, resources,
    and time.

8
1. Asset value method
  • Cost of the assets after deducting liabilities
    either at net sales value or at the value of use
    (or re-exchange value).
  • Does not take into account intangible assets such
    as goodwill, accumulated knowledge, management
    abilities, patents, etc.

9
1. Asset value method (contd)
  • A certain advantage for evaluating real estate
    enterprises and similar enterprises, where the
    market value of the assets themselves is the
    major part of the value of the enterprise.
  • Disadvantage ignores potential for future
    profits, except the assets recorded in the
    balance sheets of the enterprise.

10
2. Comparison of similar transactions
  • Uses the actual price of transactions made by
    similar enterprises with respect to activity,
    operational characteristics, tradability and
    financial data, and made within a reasonable
    period before the time of the evaluation.

11
2. Comparison of similar transactions (contd)
  • Advantages reflects all parameters that affect
    the prices of willing buyers and willing sellers,
    and no need for debatable forecasts.
  • Disadvantage difficulty of finding similar
    enterprises.

12
3. The multiplier method
  • The multiplier method is similar to the method of
    comparison of similar transactions, but it is
    based on prices of traded shares of enterprises
    in the relevant industry.
  • Using the average ratio between the market value
    of shares and a chosen accounting parameter in
    the industry, where the enterprise is active.

13
3. The multiplier method (contd)
  • Advantage simplicity.
  • Disadvantage does not take into account a number
    of factors affecting the specific value of the
    enterprise, and making it different from other
    enterprises in the same area, such as rate of
    growth, structure of capital, political events.

14
4. The discounted cash flow method
  • Future cash flows are discounted using the price
    of capital reflecting the risk of the
    enterprise's activity, expressing the revenue
    that an investor would expect to receive from an
    enterprise with a similar risk.
  • Forecasts of sales, cost of sales, overhead,
    taxes and capital formation in order to derive
    the expected cash flow.

15
4. The discounted cash flow method (contd)
  • Advantage matched to the specific enterprise and
    relating to unique factors affecting the
    enterprise.
  • Disadvantage difficulty of forecasting the
    relevant future income, expenditure and
    investments, and determining the appropriate
    price of capital.

16
Public sector enterprises in Israel
17
Proposed method
  • The proposed method is a combination of the
    above-mentioned methods and it includes
  • Adjustment of equity of the enterprise with
    unquoted shares using the multiplier market
    value/own funds at book value of a "similar
    enterprise" traded on TA stock exchange.
  • Comparing the multiplier own funds at book
    value/annual net profit.
  • Estimation of differences in liquidity of traded
    share and non-traded share for public sector
    companies.

18
Proposed formula
  • P R K E N
  • where
  • P market value of unquoted shares
  • R own funds at book value of the non-traded
    public sector market enterprise (the part that
    is held by government)
  • K multiplier market value/own funds at book
    value of a similar enterprise on TA stock
    exchange
  • E proportion between multipliers own funds at
    book value/annual net profit in enterprises
    compared
  • N multiplier representing liquidity
    differences

19
Proposed treatment
  • Handle each public sector market enterprise
    separately.
  • Treat enterprises with profits, loss and mixed
    results as 3 different groups
  • For the computation of a weighted average
    multiplier, the data are chosen by industry
    (areas of activity) within the group "Tel Aviv
    100", relevant for the area of activity of the
    unquoted public sector market enterprises.
  • When the own funds at book value of a "government
    enterprise" is less than zero (for example
    bankrupt enterprises with government guarantees
    to pay their debts) the market value is zero.

20
Special cases
  • For enterprises, which according to the
    government decision mainly act as providers of
    goods and services not for profit, but where the
    activity is market production one should use
    the multiplier method as done for other market
    producers - except the comparison of
    profitability between enterprises.
  • For enterprises where the character of their
    activity is similar to quasi-corporations - the
    book value of own funds multiplied only by the
    relevant liquidity multiplier has been used.

21
Results
22
Conclusion
  • Estimates of market value of unquoted shares may
    be refined, using a combination of accepted
    methods for evaluation used in financial
    management, and comparing with similar
    enterprises (as to activity, size, profitability)
    traded on the stock exchange.
  • A data base with stock exchange information, and
    special multipliers for different groups (by
    level of profitability) is important.
  • It seems possible to implement similar methods
    for other sectors as well.
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