(12-12-2014, 10:04 AM)zerobeta Wrote: (30-10-2014, 03:35 PM)Boon Wrote: (30-10-2014, 10:05 AM)rickytj Wrote: hi i have a question regarding REIT valuation,
when we use DDM, projecting their income available for distribution and discounting them to present value, do we still need to subtract the total present value with net debt?
i found reports from CIMB, OSK, etc. dont subtract the net debt anymore...
thx
Do not subtract the net debt is the correct procedure.
Yes but then again if we don't substract the PV with net debt, are we assuming the company won't pay back the debts?
I understand when we use DDM for non-REIT equities, we dont have to subtract the PV with net debt because we assume shareholders only receive dividend after the company pays back its interest and principal.... but for REIT, they usually distribute 90% of income as dividends (hence very little retained earnings), so if we discount all these future dividends to their PV but we don't subtract with net debt, are we assuming the company won't need to repay the principal??
The DDM is a method of valuing a company's share price based on the basic concept that its share price is simply the sum of all of its future dividend payments, discounted back to their present value.
Please note that the concept of perpetuity is also being assumed or used in the DDM.
In the context of a company (be it Reit or non-Reit) with perpetual life, which pays dividends regularly :
It could be debt free all the times.
It could be debt free some of times.
It could have debt some of the times.
It could have debt all the times – i.e. perpetually.
There is no implicit or explicit assumption, under the DDM valuation method, on the debt level of a company – its share price is simply the PV of future dividends.
Hence, to apply the concept of DDM consistently in the share price valuation of a company (Reit or non-Reit), net debt should not be deducted from the PV - to deduct net debt from the PV is conceptually inconsistency.
Company A :
Number of shares = 500 million
DPS = 5 cents, perpetually
Net Debt = zero
Company B :
Number of shares = 1,000 million
DPS = 5 cents, perpetually
Net Debt = 300 million or 30 cents per share
Assuming discount rate = 7%
Under DDM,
Value (A) = Value (B) = PV = 5 / 0.07 = 71 cents
If net debt were to be deducted:
Value (A) = 71 cents
Value (B) = 71 – 30 = 41 cents
Research, research and research - Please do your own due diligence (DYODD) before you invest - Any reliance on my analysis is SOLELY at your own risk.