Levubu Root Business Plan — Investment Case and Valuation

A 2.45x base case money multiple and 27.5% IRR, the valuation basis and the exit assumptions behind them.

Investment Case and Valuation

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23.1 Discounted cash flow
23.2 Valuation cross-checks
23.3 Exit and investor returns
23.4 Who this investment suits, and who it does not

23.1 Discounted cash flow

The discounted cash flow uses a weighted average cost of capital of 17.5%, built from a cost of equity of 22.5% and after-tax debt at target gearing of 35%. The cost of equity comprises a risk-free rate of 10.75%, an equity risk premium of 6.0% at a beta of 0.85, a size premium of 4.5% and a crop-specific premium of 2.0% for single-crop and soil-borne disease exposure.

Discounted cash flow	R million	Note
Present value of explicit forecast, FY2027 to FY2031	(20.48)	Negative: the plan period is net cash-consuming
Continuation value at FY2031	131.63	Five-year fade to terminal growth of 5.5%
Present value of continuation value	58.77	Discounted at 17.5%
Enterprise value today	38.30
Implied exit multiple on FY2031 EBITDA	5.19x	Cross-check against the exit multiple range
Unlevered project IRR	46.2%	On the full five-year cash flow with continuation value
Unlevered IRR if the enterprise is worth only its asset cost	20.8%	A deliberately punitive floor case

Table 55. Discounted cash flow summary. Enterprise value today of R38.3m against R56.0m of capital to be committed.

What the DCF actually says Almost all of the value in this business sits beyond the forecast period. The present value of the explicit five years is R(20.5)m, negative, and the entire enterprise value of R38.3m comes from the continuation value. That is not a defect of the model; it is an accurate description of a venture that spends five years building a producing asset and a seed franchise, and then harvests them. It does, however, tell an investor exactly where to concentrate scepticism. The valuation is a bet on FY2031 EBITDA of R25.3m being real and being sustainable, not on anything that happens before it.
Discount rate sensitivity	15.5%	17.5%	19.5%
Continuation value at FY2031	160.90	131.63	110.86
Present value of explicit forecast	(20.28)	(20.48)	(20.61)
Enterprise value today	57.99	38.30	24.88
Implied FY2031 EBITDA multiple	6.35x	5.19x	4.37x

Table 56. Enterprise value across the discount rate range. R million unless stated.

23.2 Valuation cross-checks

Figure 28. Enterprise value at FY2031 across four valuation approaches.

Four approaches are used and they converge on a range of roughly R100m to R165m at FY2031. The replacement cost band of R61.5m to R82.0m is the important one, because it is the floor: it is approximately what a buyer would pay for the infrastructure, the established rotation footprint and the seed block if the earnings were not there. The gap between that floor and the earnings-based range is the value of the operating business, and it is what an investor is actually paying for.

23.3 Exit and investor returns

Figure 29. Investor MOIC and IRR across the exit multiple range.

Exit at FY2031	4.00x EBITDA	5.25x EBITDA	6.50x EBITDA
Enterprise value (R million)	101.36	133.04	164.72
Less net debt	10.27	10.27	10.27
Equity value (R million)	111.63	143.31	174.99
Investor share	61.7%	61.7%	61.7%
Investor proceeds (R million)	68.83	88.36	107.89
Investor capital committed	36.00	36.00	36.00
MOIC	1.91x	2.45x	3.00x
IRR	19.2%	27.5%	34.6%

Table 57. Investor returns at exit on 31 October 2031. Tranche A is committed at month 0 and Tranche B at month 12, which is reflected in the IRR calculation.

At the base exit multiple of 5.25x the investor returns 2.45x MOIC and 27.5% IRR over five years. That is a respectable but not spectacular private equity outcome, and the plan presents it as such. It sits below the 30% IRR that many growth funds target and well below what a successful venture investment returns. What it offers instead is an asset-backed position in a business with a durable competitive advantage and a floor set by replacement cost.

23.4 Who this investment suits, and who it does not

Suits	Does not suit
Agricultural and food sector specialists who can diligence the agronomy independently and who value the seed franchise for what it is.	Generalist growth equity seeking 30%-plus IRRs. The returns here are 27.5% at the base case and the risk is concentrated in the first two seasons.
Development finance institutions with an import substitution, employment or sector-development mandate. The seed franchise creates a capability that does not exist domestically.	Investors requiring early liquidity or dividends. The company generates no distributable cash before FY2030 and should not distribute before FY2031.
Patient capital with a seven to ten year horizon, for whom the five-year exit is an option rather than a requirement. The business is materially more valuable at FY2034 than at FY2031.	Investors uncomfortable with a single-crop, single-region exposure. Diversification within the plan is limited to two districts and two product streams of the same crop.
Strategic investors in fresh produce for whom the packhouse, cold chain and seed block have value beyond the standalone returns.	Lenders seeking asset security. The land is leased, and the most valuable asset, the indexed seed block, is a biological inventory that a lender cannot realistically realise.

Table 58. Investor fit. The right-hand column is included because an investment that does not state who it is wrong for is not being described honestly.

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