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05-11-2015 
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2012 
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06-12-2011 
Rod Stephens has produced two thesis reports namely The definition of the word Minerals in relation to the UK Extractive Industry and The Valuation of Long Term Interests  A case study of the acquisition of WMCs Olympic Dam Mine by BHP Billiton (Distinction). These reports can be made available on request for selected parties only. Terms and Conditions apply.

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Stephens Valuation and Consultancy Pty Ltd    

Roderick Stephens BSc (Hons) MC AAPI (CPV)

 
 
Determination of Capitalisation Rates for Waste Management Transactions
 
The best evidence to determine the capitalisation rate for landfills or other waste management assets would involve recent sales evidence, of waste management assets operating in the same markets, where the site was acquired by the former leaseholder. Alternatively, analyses of the EBITDA multiple paid for waste management assets by a purchaser. Transactions of this nature are very rare and even where they do exist, it can be difficult to obtain the information which is often commercially sensitive.
 
Within NSW there has been a dearth of any major waste management transactions of any note in the last 2 to 3 years that can assist in determining the current waste management industry capitalisation rate. Although in 2006 and 2007 there were perhaps a record number of transactions that took place both in Australia and New Zealand.
    
    
As can be illustrated in the above chart, acquisitions in 2006 were bullish, and this was perhaps what was required at the time, in order to obtain or expand market share. However 2007 transactions showed a significant increase in derived yields or a more cautious approach and yields returned to what would generally be understood as the normal level of risk for waste management assets. The difficulty is in establishing where the current level of risk or the yield or capitalisation rate is at 2010 based on past transactions, but also then taking into account the current regulatory regime and applying the circumstances to a particular site or business. There is no doubt that the further increase of landfill levies in NSW in 2008 perhaps created more uncertainty in relation to these assets, by potentially shortening the life of future anticipated incomes and many other factors.
 
 
 
 
 
We also consider yields for market transactions based on the yield to capital value of those transactions to determine the level of risk relative to the total size of the acquisition. Obviously many large companies benefit from diversification and economies of scale, but also management costs can be easily incorporated into the existing company set up, and obtain quite high cost savings as a result. Many of these benefits are not available to smaller companies and hence you would expect yields to be higher, and this is illustrated in the chart above. Whilst it is accepted that the analyses of market transactions can be interpreted in many different ways and different yields derived, it is only when an overall consistent analyses is carried out, and a trend line established to form the basis for a broader viewpoint of where a particular transaction lies, within the overall market. However, you also need to have an understanding of the historical trend, as set out in the first chart, to determine whether a potential transaction is to be above or below the trend line or the same as. It is our belief that the general waste management industry trend would be within the range of 12% to 16% which would involve multipliers of 6.25 to 8.33 when considering earnings.
 
Expected Life of the Assets
One of the key aspects of analysing waste management transactions involves the expected life of the operations or assets. The particular assets need to be split into separate cost centres to reflect their circumstances. We set out examples of this below:
 
AWTs    Expected Life 20 to 30 years
Landfills    Expected Life 20 to 30 years
Waste Collection Contracts    Expected Life 3 to 10 years
Waste Transfer Stations    Expected Life 3 to 10 years or Perpetuity
Recycling Operations    Expected Life    Perpetuity
Plant, Machinery & Equipment    Expected Life 10 to 20 years
Non Operational Land and Buildings   Expected Life   Perpetuity
 
To further complicate matters then most of the above assets are directly linked to each other which can cause further difficulties in deriving specific incomes and revenues to the particular assets. For example many waste collection contracts could well be linked to both waste transfer stations and AWTs or landfills. If the operator controls all the assets, then they can manipulate the internal price structure to allocate additional value to a particular asset, often at the expense of another. Quite clearly the value of a collection contract may well be quite lucrative to a company, but where it is linked under contract to an AWT, which has considerable capital and operational costs, then often the profits involved for the collection contracts, in reality have to be allocated to the AWT, and the entity looked at as an overall asset, rather than allocating a loss to one asset and a profit to the other. So much of the values for these assets are linked to existing contracts, which need to be dissected, analysed and a realistic outcome derived.
 
Similarly where a collection contract is linked to a landfill, with an agreed future gate price structure, and which is owned by the same entity, then in reality, most of the profits of the collection contracts would have to be allocated to the landfill, as it is that asset that incurs the highest set up and closure capital costs, and needs to obtain the revenue to cover those costs.
 
So in reality it is the highest capital cost assets that should obtain the revenue sources from the minor revenue producing assets such as the waste collection contracts, waste transfer sites and recycling operations. The outcome of this is often that the lucrative revenues from the collection contracts are more than off set against the high capital costs of the end disposal asset.   
 
Market Risk
Therefore the risk for many waste management transactions involves the high capital costs involved of the end disposal, be that a landfill or AWT, plus the limited life of both assets together with the limited life of collection contracts. The main risks involved with an AWT is not only the high capital costs involved, but the improvement of technology, which over the years involves cheaper more efficient AWTs being developed in the future which could undercut existing contracts, and create very high obsolescence factors to existing AWTs. Consequently whilst an AWT may well have a design life of say 25 years, then if both revenues and inputs dropped in the future due to a loss in market share to a new more efficient AWT, then the life could well be cut short to 10 to 15 years, which would in turn significantly raise the capital cost structure per tonne or cubic metre and make the AWT unviable or uneconomic. This could well be supported by the more recent sale of the Eastern Creek AWT in NSW.
 
Where collection contracts are agreed for much shorter terms, say 3 to 5 years, then this increases the capital risks significantly, which impacts the overall charge or rate per tonne / cubic metre etc. Quite often the value of a Waste Transfer Station / Recycling Depot / Materials Recycling Facility can be underpinned with a collection contract. In essence if an operation does not have access to a waste stream, then it can have little value for that particular purpose. So a Waste Transfer Station by itself, only has a value, where the owner or proponent also has a waste collection contract, or access to the waste from a contract.
 
Industry Multipliers
So in conclusion there are a number of waste management assets which quite often have a limited expected life value. There are exceptions to this which involve centrally located operations, which can cater for the wider market and these assets would generally have much lower yields compared to shorter life assets.  To value an income or profit in perpetuity, which is often relevant to the majority of business assets, then the industry risk or capitalisation rate is divided by 100 to determine the multiplier for that risk. This can be illustrated below:
 
100         = 8.33 Multiplier            100             = 6.25 Multiplier
12%                                            16%
 
The assumption with the above calculations is that the application of the yields or multipliers is in perpetuity, although where an asset has a limited life then the following calculations need to be applied:
 
12% for 10 years    = 5.65 Multiplier     16% for 10 years     = 4.83 Multiplier
 
Similarly if the calculation is done over 5 years then this produces the following:
 
12% for 5 years      = 3.60 Multiplier      16% for 5 years        = 3.27 Multiplier
 
Conclusion
In order to carry out any waste management valuation then the valuer must firstly have a strong understanding of the industry assets, and how they interact with each other, particularly in relation to income streams, but to also understand the risks associated with the assets together with their expected lives.
 
The opinions expressed in the above paper are the personal views of the author gained from experience and research within the waste management industry. No responsibilities can be held for any person or company who relies on information within this paper or who attempts to take any extracts from this paper. This paper is not to be used or quoted in part or as a whole for commercial use without the express written consent of the author.
 

Stephens Valuation and Consultancy Pty Ltd

 

By Roderick Stephens BSc (Hons) MC AAPI (CPV)

Certified Practising Valuer

Registered Valuer QLD & WA

PO Box 404

Emu Plains

NSW 2750

Tel No:  02 *4704 *8483         

E mail: rodstephens@optusnet.com.au

Mobile 0423 *383 *343

Website: www.quarryvaluations.com which is a Registered Trade Mark
 
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