The Deloitte audit and consulting company (one of the four largest in the world) has valued the assets of Ukrzaliznytsia at UAH 245 billion. The future Ukrainian Railways public joint-stock company will have an authorized capital of UAH 229,879,115,000. This figure reflects the value of Ukrzaliznytsia’s assets minus its liabilities, and it was calculated in accordance with the procedures established by the Cabinet of Ministers.
Ukrzaliznytsia is the largest enterprise in Ukraine to have the general value of its assets appraised since the country attained independence. The list of the objects that were appraised consists of almost 1 million items. They exclude the assets that are located on territories not controlled by the Ukrainian government.
The assets that are located on the territory controlled by the Ukrainian government in the east of the country are expected to be appraised in 2016 and their value added to the authorized capital of the Ukrainian Railways public joint-stock company. The assets that are located on the territories not controlled by the Ukrainian government (the Crimea and parts of eastern Ukraine) will be appraised after restoration of Ukrainian government control over these territories.
The process of appraisal of Ukrzaliznytsia’s assets lasted about eight months. Deloitte submitted the act of appraisal to Ukrzaliznytsia in June 2015. Ukrzaliznytsia sent the document to the State Property Fund for review. The consolidated act of assessment, which includes the amount of the authorized capital, was positively reviewed by the State Property Fund and approved by the interagency commission for the creation of the Ukrainian Railways public joint-stock company.
The next step will be adoption of the draft charter of the Ukrainian Railways public joint-stock company, as well as the composition of its management board, supervisory board, and audit commission. How was the appraisal performed? Which assets were included in it? Is the value of the Ukrzaliznytsia brand known? We put these questions to Artur Ohadzhanyan, a partner at Deloitte & Touche.
Which Ukrzaliznytsia assets did you appraise and for what purpose?
The objects of the appraisal were all the non-current assets of the enterprises that were part of Ukrzaliznytsia: fixed assets, intangible assets, long-term financial investments, and unfinished capital investments. The task also included appraisal of the assets that are not listed on the books of Ukrzaliznytsia - land use rights. The number of objects appraised exceeded 900,000. In addition to Ukrzaliznytsia’s assets, the equity of seven enterprises that engage in meeting the technical needs of Ukrzaliznytsia (rolling-stock repair enterprises, reinforced concrete plants, etc.) were also appraised.
The appraisal was conducted for the purpose of corporatization of Ukrzaliznytsia. The results of the appraisal were used for formation of the authorized capital of the public joint-stock company established based on the assets of Ukrainian railways.
I would like to note separately that most of the assets of Ukrzaliznytsia – primarily its rail infrastructure and rolling stock – were not legally owned by its enterprises. They were used (and they will continue to be used) based on economic management rights granted by the state. Accordingly, the rights to economic management of these fixed assets are specified in the authorized capital of the newly established joint-stock company. Given the fact that the state is and will remain the sole shareholder of the newly established joint-stock company, this was not reflected in the value of the assets. While giving the joint-stock company the opportunity to use these assets without obstruction, the state retains the ownership right to them.
"Most of Ukrzaliznytsia’s assets – primarily its railway infrastructure and rolling stock – were not legally owned by Ukrzaliznytsia’s enterprises"
Is the Ukrzaliznytsia brand included in the appraised value?
The fact is that a brand has value only if gives value to a product (or service) and distinguishes the product from the other products on the market.
For a monopolist, which is what Ukrzaliznytsia is, the existence or absence of a registered trademark has absolutely no effect on the value of the company.
Was the valuation based only the net asset value method? Financial flows and the prospects for their rise and fall were not taken into account?
No, that is not quite the correct understanding. Different approaches and methods of appraisal were used to appraise different types of assets. The assets on the market (machinery, equipment, and vehicles, including part of the rolling stock) were appraised primarily based on the sale comparison (market) approach.
The so-called specialized assets, i.e. assets that generally are not objects of direct sale/purchase and are not traded on the market (buildings, structures, including railway tracks, stations, bridges, tunnels, etc.) cannot be appraised via this approach. For their appraisal, the cost approach, which involves assessment of the costs of creation of such assets minus depreciation and impairment (physical, functional, and economic), was used.
To determine the degree of economic impairment, it is necessary to compare the total estimated value of the assets to the value of the enterprise as a business. The appraisal of the enterprise was performed based on the income approach, the essence of which is calculation of the expected cash flows generated by the business.
The value of Ukrzaliznytsia’s assets that was obtained is the result of complex appraisal procedures, which include assessment of the company’s prospects and the future cash flows generated by its combined assets.
Is there a difference between your valuation of Ukrzaliznytsia’s assets and the market value of the company? What is the difference?
The total market value of the capital assets that were appraised based on the income approach, among other approaches, was the basis for determining the amount of the authorized capital of the newly established joint-stock company.
This amount, which was derived when the relevant commission was preparing the consolidated assessment act, generally corresponds to the market value of the company’s equity capital.
As of what date was the appraisal performed?
In accordance with the set task, the appraisal was performed as of 31 July 2014. This does not necessarily mean that the value would have been higher if the appraisal was performed as of a later date. The fact is that investors consider the risks associated with investments in Ukraine to be much higher in 2015, compared with the valuation date. Accordingly, the discount rate used for the valuation of the enterprise increased significantly.
How did the appraisal account for the fluctuations of the hryvnia’s exchange rate?
We used real cash flows, i.e. cash flows that do not consider the expected inflation. Of course, the real discount rate, which is lower than the so-called nominal rate specifically by the size of the expected inflation, was used.
Our calculations did not include direct predictions regarding currency inflation rates and related exchange-rate fluctuations. Although the result of the appraisal in this case is the same as the result would have been if inflationary expectations had been taken into account.
What are the key factors that negatively affected the value of Ukrzaliznytsia’s assets? Obsolete rolling stock?
Attention should be paid to the fact that it is not only Ukrzaliznytsia’s rolling stock that is obsolete. Practically all the enterprise’s key assets, including the railway infrastructure, are physically worn out and functionally obsolete.
Another, no less important factor is the fact that the company is just at the beginning of the road to reform.
When will the full list of the appraised assets be published?
This question should be addressed to the company. We have no right to do that. I can only say that the full list of assets occupies tens of thousands of pages.
What does Ukrzaliznytsia need to do for the value of the company to rise rather than the price of its assets?
Ukrzaliznytsia should implement the planned reforms with serious support from the government.
In our appraisal, we proceeded from the assumption that reforms will be gradually implemented over the next few years and that it this will lead to a significant improvement in the financial and economic performance of the company, improvement of the quality of its assets, and increase of its value.
Read more: The Value of Ukrzaliznytsia: Expert Opinions