The Deloitte audit firm has valued the assets of Ukrzaliznytsia at UAH 245 billion. "According to the results of the independent valuation performed by Deloitte, the market value of Ukrzaliznytsia today is approximately UAH 245 billion. The replacement cost will be UAH 1.2 trillion. However, considering the fact that its infrastructure is worn out, we have come down from UAH 1.2 trillion to UAH 245 billion," Ukraine’s Minister of Infrastructure Andrii Pyvovarskyi. According to him, this amount does not include the valuation of Ukrzaliznytsia’s assets in the Crimea and the conflict zone in eastern Ukraine. The society immediately began debating whether this value is understated or overstated. We asked experts what they think about this.
Dmytro Iahiello, a consultant with CFTS Consulting
Firstly, the figure that was announced allows determination of the authorized capital of the joint-stock company that is being created. Furthermore, according to financial statements of railroad enterprises published on the website of the Ukrainian Ministry of Infrastructure, their assets were valued at UAH 133.6 billion at the end of the first half of 2015, i.e. Deloitte practically doubled their value to UAH 245 billion.
This means that Ukrzaliznytsia will increase its depreciation allowance in the future, resulting in lower income-tax payments.
This is quite positive for Ukrzaliznytsia, which has always been the "cash cow" for the state budget because the money that is freed up can be directed towards investment.
Oleksii Andriichenko, a senior analyst with Art Capital
The valuation of Ukrzaliznytsia can be approached in different ways. There is a set of assets that has some potential value if the company is able to use it as efficiently as possible. This is specifically the way to view the Deloitte valuation of UAH 245 billion (USD 11 billion), and I consider it appropriate from that perspective.
Unfortunately, Ukrzaliznytsia is currently unable to use all this set of assets efficiently to generate profits. Firstly, unlike other transport companies, Ukrzaliznytsia is not free to change its tariffs as it deems necessary in accordance with market conditions.
Raising Ukrzaliznytsia’s tariffs is a complex process that is met with a hostile reception in various ministries and within the industry lobby. The tariffs that are set eventually do not reflect the economic cost of transportation. This is particularly true for passenger transportation, as a result of which Ukrzaliznytsia must annually use up to 16% of its revenue to cover losses.
Investors and financial analysts take account of such operating peculiarities in their assessments, and they will not be willing to pay a lot for a company that does not control its profitability and incurs unreasonable losses.
This business model affects the profitability of the company. Therefore, if we calculate its value in the current situation and how much investors would be ready to pay for it, the discounted cash flow method can be used. With an EBITDA (earnings before interest, taxes, depreciation, and amortization) of USD 760 million and a net debt of USD 2,470 million last year, such a company would be worth around USD 600 million on the market, given the fact that business assets in the CIS are traded at a discount of up to 50% compared to similar assets around the world.
If Ukrzaliznytsia was allowed to raise its tariffs to economically justified levels and the government allocated money to cover its losses from passenger transportation, then its EBITDA could increase to USD 2 billion even with today's problems involving transportation volume. Then the value would reach USD 5.5 billion. If the investment attractiveness of assets in Ukraine recovered to the pre-crisis levels, then the value of Ukrzaliznytsia would reach the level declared by Deloitte. That is, one can say that the valuation performed by Deloitte shows the potential value of Ukrzaliznytsia after implementation of reforms and reduction of Ukraine’s risks.
Roman Kutsiak, a senior manager with KPMG
(from a Facebook post)
Even if it is one hryvnia, it does not matter if they do not plan to break up Ukrzaliznytsia or privatize it. Valuations always take account of how much income is generated and interest rates. At a rate of 30% per hryvnia, that is still a normal price.
After valuation of all assets (for which there is no market value) a depreciation test, which adds up all the future cash flows of an asset, is performed. Everything leads to the current value through the discount rate. If the rate is high, then the current value of these flows reduces.