Mainstreet Brick Business Plan — Investment Returns

A 15.5% project IRR against a 16.5% hurdle — what that shortfall means, and what would have to change to close it.

Investment Returns

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14.1 Free cash flow
14.2 An honest comparison

Figure 17. Returns against the exit assumption.

Measure	Result	Basis
Project IRR, unlevered	15.5%	Five-year hold including terminal value at 3.5 times exit EBITDA
Project hurdle rate	16.5%	Reflecting start-up manufacturing risk in a cyclical sector
Project NPV	(R0.63m)	Discounted at 16.5%; the project does not clear its hurdle
Equity IRR, levered	14.2%	After debt service, on R6.30m of equity
Equity NPV	(R1.63m)	Discounted at 20.0%
Terminal enterprise value	R18.62m	Year 5 EBITDA of R5.32m at 3.5 times
Debt outstanding at exit	R5.27m	Development finance and working capital facility; equipment finance fully repaid
Terminal equity value	R13.35m	After repaying outstanding debt
Money multiple on equity	2.12x	Cumulative free cash flow plus terminal equity over R6.30m
Cumulative free cash flow to equity	R13 610	Across five years, before exit proceeds
Equity payback	Beyond the five-year projection	From operating cash flow, excluding exit proceeds
Terminal value share of total return	100%	The entire return is the exit

Exit multiple	Enterprise value	Terminal equity	Project IRR	Project NPV at 16.5%	Equity IRR
2.5x	R13.30m	R8.03m	11.3%	(R3.10m)	4.3%
3.0x	R15.96m	R10.69m	13.5%	(R1.86m)	9.7%
3.5x	R18.62m	R13.35m	15.5%	(R0.63m)	14.2%
4.0x	R21.28m	R16.01m	17.4%	R0.61m	18.1%
4.5x	R23.94m	R18.67m	19.2%	R1.85m	21.6%
5.0x	R26.59m	R21.33m	20.8%	R3.09m	24.7%

Figure 18. Where the equity return comes from.

The composition of this return requires plain statement

Cumulative free cash flow to equity over five years is R13 610 — effectively nothing. The equity investor receives no income from operations within the projection period; the entire return depends on the terminal value at exit. That makes this a capital-appreciation investment in an operating asset rather than an income investment, and it means the realised return is hostage to the state of the construction cycle in Year 5 — a market the investor does not control and which has disappointed for most of the past decade. At the modelled 3.5 times the project returns 15.5 per cent against a 16.5 per cent hurdle and does not clear it. It clears at 4.0 times and above. An investor should therefore be explicit at entry about which exit route they are underwriting, because the difference between 3.5 and 4.0 times is the difference between a project that destroys value and one that creates it.

14.1 Free cash flow

R’000	Year 1	Year 2	Year 3	Year 4	Year 5
EBITDA	2 005	3 440	4 701	5 219	5 319
Movement in working capital	(1 367)	(723)	(628)	(456)	(373)
Taxation	—	—	(259)	(687)	(783)
Free cash flow to the firm	638	2 717	3 814	4 075	4 163
Interest and capital	(2 230)	(3 291)	(3 291)	(3 291)	(3 291)
Free cash flow to equity	(1 592)	(574)	523	785	872
Cumulative free cash flow to equity	(1 592)	(2 166)	(1 643)	(858)	14

Free cash flow to the firm is positive from Year 1 and grows steadily to R4.16 million by Year 5. Free cash flow to equity is negative in Years 1 and 2, because debt service exceeds the cash the plant generates in the years it is ramping, and turns positive from Year 3. Cumulative free cash flow to equity crosses zero only in the final year of the projection.

14.2 An honest comparison

A project return of 15.5 per cent against a 16.5 per cent hurdle is a shortfall, and it should be read alongside what the same capital could earn elsewhere. South African government bonds have offered materially lower-risk returns not enormously below this figure over recent periods, and R6.30 million deployed into a business with faster payback and less operating leverage would carry a fraction of the execution risk described in Sections 12 and 15.

The case for this project is not that the return is high. It is that the return is real, asset-backed, job-creating, and improvable through the specific actions in Section 16 — which together are worth R1.39 million a year, roughly a quarter of Year 5 EBITDA, and would move the project comfortably above its hurdle. An investor who can execute those actions is buying a different project from the one the base case describes. An investor who cannot should not make this investment.

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