Bizval Indicator Report
for December 2020
We like to think of the Bizval Indicator as a ‘barometer’ of SME valuation multiples providing a perspective of the value of Australian small-to-medium sized businesses.
Unlike listed companies, the sale prices of SME’s are not readily available. The Bizval Indicator helps monitor movements in the drivers of SME values.
The Bizval Indicator is derived from key drivers of SME values and is then reviewed in the context of a basket of general economic indicators.
|NOW||1 YEAR AGO||MOVEMENT|
Source: Bizval, 31 December 2020.
Bizval Indicator farewells 2020 on high, up 10.9%.
The Bizval Indicator has maintained its unexpected climb in the second half of 2020.
An indicator of 362 was recorded in December 2020, up from 326 a year ago, and 339 in the September quarter. This was an increase of 6.6% for the December quarter and 10.9% for the year.
Price/Earnings Ratios of small ASX listed companies were the strongest influencer of the Bizval Indicator this quarter. The P/E Ratios alone increased by around 11% over the past 12 months.
If we drill down into this data a little further, by using the ASX All-Ordinaries as a proxy for share prices, the prices at the end of December 2020 were almost identical to those of December 2019.
That would suggest that the earnings of these companies have deteriorated, thereby driving up the P/E Ratios.
The volume of businesses for sale decreased over the quarter, however this move was offset somewhat by small drop in our own data of actual valuation multiples.
Business lending rates advertised by the big four banks remained fairly stable.
General Economic Indicators
|INDICATOR||NOW||1 YEAR AGO||MOVEMENT|
|All Ordinaries Index AU (1)||6,851||6,802||-0.72%|
|RBA Cash Rate AU (2)||0.10%||0.75%||-0.65%|
|GDP AU (3)||-3.30%||1.70%||-5.00%|
|Dow Jones Industrial Average USA (4)||30,606||28,584||7.07%|
|Inflation Rate AU (5)||0.70%||1.70%||-1.00%|
|Unemployment Rate AU (6)||6.80%||5.20%||1.60%|
(1) Source: Australian Stock Exchange, 31 December 2020
(2) Source: Reserve Bank of Australia, 2 December 2020
(3) Source: Australian Bureau of Statistics, 30 September 2020 (seasonally adjusted, yearly)
(4) Source: New York Stock Exchange, 31 December 2020
(5) Source: Australian Bureau of Statistics, 30 September 2020 (headline, yearly)
(6) Source: Australian Bureau of Statistics, 30 November 2020
Gross Domestic Product
Following the mammoth fall of 7% in the June quarter, Australian economic activity rose 3.3% in seasonally adjusted terms in the September quarter of 2020, according to figures released by the Australian Bureau of Statistics (ABS).
Reduced COVID-19 case numbers resulted in an easing of social distancing measures and trading restrictions across most states and territories during the September quarter. Victoria was the exception, with the state implementing stage 4 restrictions in early August.
Household spending drove the economy, rising 7.9% due to increased spending on both goods and services. Spending on services rose 9.8%, driven by spending on hotels, cafes and restaurants, health and recreation and culture as containment measures were relaxed. The easing of restrictions also increased demand for goods, which rose 5.2%.
Seasonally adjusted employment increased by 90,000 people (0.7%) between October and November, and hours worked by 2.5%, according to the Australian Bureau of Statistics (ABS).
Bjorn Jarvis, Head of Labour Statistics at the ABS, said this latest data showed an ongoing strengthening in Victoria’s labour market.
“Employment in Victoria increased by 74,000 people in November, following last month’s increase of 82,000 people,” Mr Jarvis said. “Hours worked in Victoria also recovered strongly again, increasing by 5.2%, following an increase of 5.6% in October. “The gap between Victoria and the rest of Australia has narrowed considerably since September, off the back of two consecutive months of strong recovery in employment and hours.
Drivers of SME Values
The Bizval Indicator is calculated using a proprietary formula. We research, monitor and evaluate the following components to arrive at the result.
ASX Small Cap P/E Ratios
Small Capitalisation companies have greater similarities to private SMEs than large cap stocks. Bizval reviews the mean and median price earnings (P/E) ratios of companies with market capitalization of between $20 million and $200 million. We adjust these figures to align them more closely with private SMEs by reducing the P/E ratios to account for differences in size, key-person dependence and ability to easily buy or sell (liquidity).
Business Loan Interest Rates
Bizval monitors the advertised interest rates of Australian major banks for business loans. Using an average of these rates we then add a risk margin (commonly added to the base rate by banks when lending to small businesses). We also add a hypothetical margin for the SME proprietor to reflect their return on investment. This interest rate is then converted to a multiple.
Businesses for Sale
Bizval undertakes a review of the volume of businesses listed for sale across Australia, taking into account any movements in this number.
We review an average of the multiples used in our business valuations and combine these with multiples from actual business sales (where available).
In addition to the four drivers of SME values, the Bizval Indicator is evaluated in the context of six national / international General Economic Indicators.
The All Ordinaries Index (Australian Stock Exchange)
The ‘All Ords’ is the oldest index of shares in Australia, dating from 1980. It is derived from the share prices of 500 of the largest companies listed on the Australian Securities Exchange (ASX).
Reserve Bank of Australia Cash Rate
The RBA sets the target ‘cash rate’, which is the market interest rate on overnight funds. It uses this as the instrument for monetary policy, and influences the cash rate through its financial market operations.
Gross Domestic Product (Australia)
GDP is a monetary measure of the market value of all final goods and services produced over a defined period of time.
Dow Jones Industrial Average (USA)
The ‘Dow’ is a US stock market price-weighted index monitoring the share trading performance of 30 large, publicly owned American-based companies.
Inflation Rate (Australia)
The Consumer Price Index (CPI) measures the average change over time in the prices paid by Australian households for a fixed basket of goods and services.
Unemployment Rate (Australia)
The proportion of unemployed persons in the labor force is seasonally adjusted to take account of changes in demand for agricultural labor, students seeking employment after completing education, and so on.
An independent business valuation compiled by a professional can help. Contact BIZVAL or order your business valuation today.