Lichtenburg Nut Company Business Plan — Valuation and Investment Returns

The return profile, valuation basis and exit assumptions, and what the numbers do and do not support.

Section 32 of 37

Valuation and Investment Returns

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31.1 Cost of capital

Table 72. Cost of capital build

Component	Value	Basis
Risk-free rate	9.8%	South African government long-dated nominal yield
Equity risk premium	5.5%	Long-run South African market premium
Unlevered beta	0.85	Listed South African food manufacturers
Levered beta	1.36	Relevered at a target 45% debt-to-value ratio
Small company and illiquidity premium	3.0%	Single-site, sub-scale, unlisted, no operating history
Cost of equity	20.27%
Cost of debt, pre-tax	12.00%	Prime plus 1.50%
Cost of debt, after tax	8.76%	At a 27% tax rate

Weighted average cost of capital	15.09%	55% equity, 45% debt

31.2 Discounted cash flow

Table 73. Free cash flow to the firm, FY2028 to FY2033

R million	FY2028	FY2029	FY2030	FY2031	FY2032	FY2033
EBITDA	-7.9	-4.9	2.3	12.0	20.3	25.3
Less working capital movement	(2.6)	(12.9)	(5.9)	(7.5)	(6.6)	(5.5)
Less taxation paid	(0.0)	(0.0)	(0.0)	(0.0)	(0.0)	(0.6)
Less capital expenditure	(105.0)	(0.0)	(0.0)	(19.1)	(1.8)	(1.8)

Free cash flow to the firm	-115.5	-17.8	-3.6	-14.6	11.9	17.4

Table 74. Free cash flow to the firm, FY2034 to FY2038

R million	FY2034	FY2035	FY2036	FY2037	FY2038
EBITDA	28.4	31.0	34.6	39.1	43.0
Less working capital movement	(4.3)	(4.8)	(5.3)	(5.5)	(0.8)
Less taxation paid	(0.0)	(0.7)	(0.9)	(1.3)	(2.0)
Less capital expenditure	(33.5)	(2.3)	(2.3)	(2.3)	(2.3)

Free cash flow to the firm	-9.4	23.2	26.0	30.0	38.0

Table 75. Discounted cash flow valuation

Component	Value (R million)	Comment
Present value of explicit forecast, FY2028 to FY2038	-87.8	Ten years of free cash flow discounted at the weighted average cost of capital
Terminal value at FY2038	375.1	Gordon growth at 4.5% perpetual growth
Present value of terminal value	98.7

Enterprise value	10.9	Against total capital deployed of R161.2 million
Less net debt at FY2028	(42.5)
Implied equity value at close	-31.6	Against R96.0 million of ordinary equity

The present value of the explicit ten-year forecast is negative because free cash flow is negative in the construction year and the first four operating years. Essentially the whole of the enterprise value sits in the terminal value, which is a warning about the quality of the valuation rather than a feature of it.

31.3 Sensitivity of value to the discount rate

Table 76. Enterprise value by discount rate

Weighted average cost of capital	12.0%	13.5%	15.0%	16.5%	18.0%
Enterprise value (R million)	100.5	48.5	12.7	-13.1	-32.3

Enterprise value moves from R100.5 million at a 12.0% cost of capital to negative R32.3 million at 18.0%. The valuation is extremely sensitive to the discount rate, which is another consequence of the back-loaded cash flow profile.

31.4 Valuation cross-checks

Figure 1. Every method brackets or falls below the capital the project consumes

Table 77. Valuation cross-checks (R million)

Method	Low	High	Basis
Discounted cash flow	-13.1	48.5	Ten-year explicit forecast at 13.5% to 16.5%
Year 5 EBITDA multiple	152.0	202.7	25 at 6.0x to 8.0x
Replacement cost	146.0	172.0	Plant and equipment at depreciated replacement cost plus working capital
Year 10 EBITDA multiple discounted to Year 5	127.9	170.6	43 at 6.0x to 8.0x, discounted five years

South African listed food manufacturers have traded in a broad 6x to 10x EV/EBITDA range. A single-site, sub-scale manufacturer would trade at a discount to that range on a financial sale and potentially at a premium to a strategic acquirer with synergies.

31.5 Equity returns

Table 78. Equity returns by exit assumption

Exit assumption	EV	Less net debt	Equity value	MOIC	Equity IRR
Year 5 exit at 6.5x FY2033 EBITDA	164.7	(50.5)	114.1	1.19x	3.9%
Year 5 exit at 8.0x FY2033 EBITDA (strategic)	202.7	(50.5)	152.1	1.58x	10.6%
Year 10 hold, exit at 6.5x FY2038 EBITDA	279.8	(-2.3)	282.1	3.14x	12.8%

Equity invested is R96.0 million: R74.0 million at close and R22.0 million in month 26. Dividends of R19.6 million are declared between Operating Years 7 and 10 and are included in the ten-year figures.

Figure 2. A Year 5 exit is below the cost of equity at every plausible multiple

Table 79. Year 5 equity return by exit multiple

Exit multiple	5.0x	5.5x	6.0x	6.5x	7.0x	7.5x	8.0x	8.5x	9.0x
Equity value (R million)	76.1	88.8	101.5	114.1	126.8	139.5	152.1	164.8	177.5
MOIC	0.79x	0.92x	1.06x	1.19x	1.32x	1.45x	1.58x	1.72x	1.85x
Equity IRR	-5.0%	-1.7%	1.2%	3.9%	6.3%	8.5%	10.6%	12.5%	14.3%

31.6 Return on invested capital

Figure 3. ROIC first exceeds the cost of capital in Year 9

Table 80. Return on invested capital and economic profit

	FY2029	FY2030	FY2031	FY2032	FY2033	FY2034	FY2035	FY2036	FY2037	FY2038
NOPAT (R million)	-10.4	-4.7	1.8	7.2	11.1	13.2	14.0	16.4	20.1	22.9
Invested capital (R million)	109.9	105.9	121.8	118.5	114.4	140.5	134.6	128.9	123.9	114.1
Return on invested capital	-9.6%	-4.3%	1.6%	6.0%	9.5%	10.3%	10.2%	12.5%	15.9%	19.2%
Economic profit (R million)	-26.8	-21.0	-15.4	-10.9	-6.5	-6.1	-6.8	-3.4	1.0	4.9

Economic profit is NOPAT less a capital charge at the 15.1% weighted average cost of capital. It is negative in every year to FY2036 and turns positive in FY2037. Cumulative economic profit over the ten operating years is negative, which is the same conclusion the discounted cash flow reaches by a different route.

Figure 4. The plan's margin is credible for the sector but cannot carry the capital intensity