O'Mighty Capital Articles Archive

SAPNRG – Understanding Goodwill

omightycap
Publish date: Thu, 29 Mar 2018, 11:11 AM

See the original here

We posted what we think Sapura Energy is worth yesterday and eventually we wrote-off a huge lump sum on goodwill at RM7.8 billion. Many people questioned as why we did not place a value but placed a big ZERO on it.

Understanding Goodwill

Goodwill is the extra value you account for an asset which you’ve overpaid. Think of buying a property. If you bought your house at RM 1 million but the valuator comes and put only RM 800k on your house. The bank loans you RM800k for this house.

This is how your personal balance sheet is going to look like.

1.jpg

  1. Your cash reduced by RM 200k, bank loans you RM 800k
  2. Your valuator says your property is worth RM 800k
  3. Plus a goodwill of RM 200k.
  4. On your balance sheet, you still have RM200k in equity like before.

That’s fine!

But what if you turn bankrupt? Bank is going to re-posses your house for not paying the RM800k loan. When you can’t pay the loan, it also meant that the value of the house had declined and you can’t sell it to cover your loan. The valuation in the first place is merely RM800k and that’s problem No. 2. Basically there’s no market for your house.

The bank is going to take your house and add it into their balance sheet. Will the bank pay you back your RM200k? Think about it…

Similar Case With Sapura Energy

The oil asset had lost its appeal, with the amount of debt owing to banks being huge puts them in a tough situation. If Sapura goes bankrupt the liquidators will come in and strip things apart.

Whatever they have overpaid earlier could be written off in an instant. This is why we couldn’t put a price on intangibles and goodwill assets.

In short, a goodwill asset is an asset on paper. Goodwill asset have yet to realized until the point that the physical asset that it ties down to gets sold.

Taking into account the oil and gas sector had been in a mess with smaller companies going bust like Perisai Petroleum. The supply of oil and gas assets are at plenty. Why would one buy those assets at a higher price?

If oil price is $200 a barrel today we wouldn’t even have this discussion, Sapura Energy would have brighten up their books by slowly writing off goodwill as an expense and allocate more room for goodwill towards acquiring better assets.


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1 person likes this. Showing 8 of 8 comments

Jon Choivo

Not a precise as i would like it, since usually goodwill is done with DCF, and you dont take into account real goodwill, like brands (heim etc). But the essence is right.

2018-03-29 11:18

omightycap

goodwill on brands are different... people give O&G contract due to how cheap they bid it for and of course Anak Maha***r. Now the political scene turns back Petronas also forced to do something else. One buys Heineken coz its Heineken. Drink too much Carlsberg also boring. But if everyday someone charge you 1 cent to drive you to work... you wouldnt even bother what car it is...

2018-03-29 11:27

qqq3

https://www.thestar.com.my/business/business-news/2018/03/29/cimb-research-retains-add-for-sapura-energy-higher-target-price-of-89-sen/


Analysts buy into the story that impairment is good....rather the other story of whether its last audited accounts gives a true and fair view? whether you should trust your money to such management?...whether got job or no job? if got jobs why the need for impairments?

2018-03-29 11:48

brisk

Qqq3, do you even need to ask should you trust the management? Just look at related party transaction. 70m every year for 'branding and IP' to corporate shareholder.

2018-03-29 12:47

tanjqe

thx for the explanation, now i understand why people always talking about goodwill and what it was.

2018-03-30 20:38

qqq3

pain has been changed into joy because analysts love impairments on a share that have drop from $ 4.00 to 50 sen.......

that is why share market follows its own laws......

2018-03-30 21:43

qqq3

brisk > Mar 29, 2018 12:47 PM | Report Abuse

Qqq3, do you even need to ask should you trust the management? Just look at related party transaction. 70m every year for 'branding and IP' to corporate shareholder.
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but looks like people who buy make money

people who know only empty pocket

2018-03-30 21:46

datola

Too much knowledge, you ended up teaching
Just enough knowledge, you ended up scared and static
Fools only have little knowledge and faith, but ended up wealthy or mati

2018-04-04 10:08

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