Not that anyone is noticing, maybe Al Rosen, we just imputed BCE’s year-end financials for December 31, 2011. Canadian investors should and may know public Canadian companies must report their financial statements conforming to IFRS standards as opposed to what was known as Canadian GAAP. Canadian companies started doing this on quarterly basis in 2011, and are now releasing annual financials based on IFRS. From what we understand, annual financial statements follow stricter rules than the quarterly numbers under these new standards.
As more Canadian companies are reporting their year-end numbers we are interested in the differences occurring in the reporting standards, between IFRS and Canadian GAAP.
One interesting example is BCE. (There are others, which we will get to over time.)
BCE took a write-off of equity (retained earnings) of $4.7 billion from last year’s annual financial statements. This dropped total equity of the company by almost 19%. Most of the write-off had to deal with BCE’s pension obligations, in that, their plan’s deficit (assets minus liabilities) had to be recorded on the company’s balance sheet under the new standards.
One can see the impact on our Model Price chart. See the EBV lines, and the decline in these lines over the 2011 calendar year. This is the long-term chart of BCE going back to 2005. A simple observation, of the EBV lines (parallel lines), they seem “wavy”. For a seemingly stable utility, the net equity in BCE over the years has been volatile. Remember these lines loosely represent the balance sheet equity of the company.
BCE with monthly price bars, EBV Lines (colored lines) and model price (dashed line)
For those interested, a daily updated chart of BCE subsequent to this post will be maintained on Facebook, here.
What is the “Bottom Line”?
1. We are just drawing our readers attention to the write off BCE has taken from a switch in accounting standards from Canadian GAAP and IFRS.
2. This write-off against retained earnings reduced the net equity of the company by almost 20%.
3. We account for this in our model price charts, since these charts represent a fundamental basis of the company’s financial statements.
4. This write-off positively affected model price! This is not surprising. Why? If the company is earning the same amount of money (income) on a lower equity base, the rate of return increases making the company more valuable. Because of the above noted write off the model price has increased by 10%.
5. EBV+3 seems to be the maximum valuation the market seems to want to give BCE (see long term chart above). This makes sense because model price is always below where the stock has been trading going back to 2005. With EBV+3 now being $37.54, we wouldn’t be surprised, over time, the stock falling to this level and continue to grow along EBV+3. We can also calculate EBV+3 one year out. For February 2013, we have EBV+3 at $39.65. Comparing this price ($39.65) to February 15, 2012, close of $39.37 doesn’t give much upside room for BCE. So to be clear, if BCE crawls along EBV+3, which would be our most optimistic scenario, investors can only expect to collect their yield of 5.51% over the next year. (See chart below.)
BCE with weekly price bars, EBV Lines (colored lines) and model price (dashed line)