Compelling case for an investment., page-20

"Also, i'm not sure i'm in full agreement with @madamswer previous estimation of recovery rates on ongoing plant & equipment sales (in non-firesale circumstances). His analysis assumed that impairments applied to P&E were applied uniformly across the board. However, i suspect (though i may be wrong) that the impairments will generally have been applied to a select quantity of equipment. What's more, it's quite possible (likely?) that equipment moved to the AHFS pool (which was subject to additional impairment at the time of transfer) was selected from previously impaired equipment. The equipment disposed each year has roughly matched the average AHFS balance, and so i assume the bulk of sales have come from AHFS (previously i suggested otherwise, but i think i was wrong). So the bottom line, i am suggesting, is that recovery rates may be substantially lower than what Madam previously suggested."

I have now got the numbers in front of me.

In FY2015:
The average impairment charge applied to rental equipment (in PPE, not in AHFS), across the board, was about 5% (of the pre-impaired book value). However, 96% of these impairment charges were reserved for equipment held in WA and NSW (obviously resources related). The average impairment charge to the affected equipment was about 8%.

In FY2014:
The average impairment charge applied to rental equipment (again, in PPE, not in AHFS), across the board, was only about 1.4% (of the pre-impaired book value). However, this was all reserved for equipment held in WA. The average impairment charge to the affected equipment was about 5%.

The average annual impairment applied to equipment transferred to the AHFS pool has been trending up from about 10% in FY2009, to about 25% in FY2015. If the bulk of the equipment transferred to the AHFS pool is selected from the most heavily impaired PPE, then we can say, at best, that the total impairment applied to disposed assets is about 30%, representing a 7% impairment at the PPE stage, and a further 25% impairment at transfer to AHFS (1-0.93)x(1-0.75) = 0.70.

But in truth, the impairment could be much greater, as it is likely that the equipment transferred to AHFS is more heavily impaired (at the PPE stage) than other equipment. If we assume a 14% impairment (which may perhaps be reasonable) at the PPE stage (for that equipment earmarked for likely future transfer to AHFS) and a subsequent 25% impairment at the time of transfer to AHFS, then the total impairment for equipment sold, will be about 36% to 40%.

Thankfully, profits on sold equipment have also been trending up over the past few years (perhaps this just shows that impairments have been increasingly aggressive). In FY2009, the profit (trend of) was about 10%, an by FY2015 it was (trend of) about 25%. On this basis (assuming sold equipment was impaired by 40%) then we can say that the equipment carrying value is about 0.6 x 1.25 = 0.75. Hence, rental equipment market value could be said to be about 75% of book. So this is not too much below Madam's 80% estimate. However, given the uncertainty in terms of the degree of impairment applied to targeted equipment (it could be higher than my 40% guesstimate), I would be inclined to assume a 70% figure. I am also aware, that the trend of impairments has been increasing (though this has been counterbalanced by a similar trend in profits on sale).

This may, or may not, be significant in terms of the remaining assets that the business has to work with, as a going concern (I have not yet run the relevant scenarios).

Of course, what value may be recovered for rental equipment, in a fire-sale, if that's what it came to, is another question.