Deferred tax assets

[alwaysinvert]

How do you go about valuing it? Do you do a DCF on 'normalized' earnings or just some kind of shortcut, for example stating that it's like 70% cash or something? Or do you perhaps incorporate it in your earnings multiple?

 

I'm trying to value a company that has lots of deferred tax assets, representing about 1/4 of the market cap, and that has been profitable for 5+ years. Grateful for any input.

[scorpioncapital]

I think there was another thread about this try a search. Generally I would use a multiple scenario analysis and come up with 2 or 3 potential figures for the present cash value. You have to estimate future tax rates and interest rates. You also have to estimate future losses that could increase existing losses. I wouldn't use earnings in any of these calculations, you don't need to - the only assumption you have to make is either all will be used, some will be used, or only those equal to past earning rate will be used (if trying to be more conservative).

[CFA Omaha]

Leucadia I presume?

[Guest Bronco]

It would be more helpful if we knew the company. 

 

I would never buy a business based solely on the tax attributes though.

 

It may prove difficult to estimate the NPV of the DTA.  You can use book income as a guide, but what you are looking for may be tough.

 

 

[alwaysinvert]

I'm sorry if the same thing has come up before, didn't think of searching. I will do that too.

 

It's a newly spun off micro cap that's quite illiquid, and while I don't think most people on the board even could buy it if they wanted to I'd prefer to keep the name to myself until when/if I have done my business. I will of course happily name it afterwards if there is any interest.

 

I am fairly sure that they will be able to use the tax assets since the losses are inherited from the mother company, which is in a more speculative business and has been more volatile. Normalized operating income for the last three years is about 25% of the tax assets. Pro forma ebit earnings for 2010 are 25m. As of today they trade on a multiple of 8,6 to that.

 

They have in total 82m of deferred tax assets but only take up 21m of that in the pro forma balance sheet. I can't seem to figure out the rationale for that since there is no time limit on using it and they have been comfortably in the black historically. IFRS states that you can have it on the balance sheet if there is a reasonable chance that you will be able to use it in the future, no? 

[Myth465]

How do you go about valuing it? Do you do a DCF on 'normalized' earnings or just some kind of shortcut, for example stating that it's like 70% cash or something? Or do you perhaps incorporate it in your earnings multiple?

 

I'm trying to value a company that has lots of deferred tax assets, representing about 1/4 of the market cap, and that has been profitable for 5+ years. Grateful for any input.

 

Value it as it will be used. Take pretax profits and use those vs. aftertax profits. I dont like assigning a value to them like they can be turned into cash.

[alwaysinvert]

How do you go about valuing it? Do you do a DCF on 'normalized' earnings or just some kind of shortcut, for example stating that it's like 70% cash or something? Or do you perhaps incorporate it in your earnings multiple?

 

I'm trying to value a company that has lots of deferred tax assets, representing about 1/4 of the market cap, and that has been profitable for 5+ years. Grateful for any input.

 

Value it as it will be used. Take pretax profits and use those vs. aftertax profits. I dont like assigning a value to them like they can be turned into cash.

Ok, that is what I am leaning towards, too.

[scorpioncapital]

There is no doubt that tax loss credits have a value so it should be assigned some number. I mean you can consider the risk they won't use it before it expires, but that's unlikely. I once saw in the newspaper an ad for a corporate shell with $'x' of tax losses and no income and they wanted to sell it for a certain sum. Clearly I wouldn't want to buy this vehicle for the price of the tax savings, so you can probably use a worst case scenario where the company has zero income from now on and what would you pay to get control and take those losses? 50%, 75%?

[alwaysinvert]

There is no doubt that tax loss credits have a value so it should be assigned some number. I mean you can consider the risk they won't use it before it expires, but that's unlikely. I once saw in the newspaper an ad for a corporate shell with $'x' of tax losses and no income and they wanted to sell it for a certain sum. Clearly I wouldn't want to buy this vehicle for the price of the tax savings, so you can probably use a worst case scenario where the company has zero income from now on and what would you pay to get control and take those losses? 50%, 75%?

Yeah, I mean if I owned comfortably profitable business of some size I think paying at least 75% would make great sense. Didn't Buffett buy a shell like that at some time? Of course, the value of the assets should maybe be discounted MORE when they are running a profitable business in which it will take years to make use of them.

 

OTOH, I guess you could argue that the assets make the company more attractice for an acquirer to the same extent regardless.