Mainstreet Junction Business Plan — Investment Returns

A 21.9% project IRR and 34.6% equity IRR, the gearing behind the difference, and the assumptions each depends on.

Investment Returns

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Figure 19. Returns against the exit assumption.

Measure	Result	Basis
Project IRR, unlevered	21.9%	Five-year hold including terminal value at 4.0 times exit EBITDA
Equity IRR, levered	34.6%	After debt service, on R14.5m of equity
Project NPV	R10.5m	Discounted at 15.5%
Equity NPV	R11.2m	Discounted at 18.0%
Terminal enterprise value	R56.1m	Year 5 EBITDA of R14.02m at 4.0 times
Debt outstanding at exit	R16.2m	Senior facility only; the equipment facility is fully repaid
Terminal equity value	R39.9m	After repaying outstanding debt
Money multiple on equity	3.76x	Cumulative free cash flow plus terminal equity over R14.5m
Cumulative free cash flow to equity	R14.71m	Before exit proceeds — a surplus of R210 784 over the equity subscribed
Terminal value share of total return	73%	The equity return is substantially an exit outcome

Exit multiple	Enterprise value	Terminal equity	Project IRR	Equity IRR	Project NPV at 15.5%
3.0x	R42.1m	R25.8m	17.9%	26.8%	R3.7m
3.5x	R49.1m	R32.8m	20.0%	31.0%	R7.1m
4.0x	R56.1m	R39.9m	21.9%	34.6%	R10.5m
4.5x	R63.1m	R46.9m	23.7%	37.9%	R13.9m
5.0x	R70.1m	R53.9m	25.4%	40.9%	R17.4m
5.5x	R77.1m	R60.9m	26.9%	43.7%	R20.8m
6.0x	R84.1m	R67.9m	28.4%	46.2%	R24.2m

Figure 20. Where the equity return actually comes from.

This is substantially a property and licence play with a trading business attached

Roughly 73 per cent of the equity investor’s total return arrives as terminal value rather than as operating cash. Cumulative free cash flow to equity across five years is R14.71 million against R14.5 million subscribed — the equity is repaid, and essentially nothing more, from trading. What creates the exit value is the freehold land, the site licence, the ten-year supply agreement, the quick-service lease and an established trading history: an accumulation of rights that takes twelve to twenty-four months of approvals to assemble and cannot be quickly replicated. The operating cash flows service the debt and produce a modest income yield along the way. An investor who understands they are underwriting a licensed freehold asset rather than a trading annuity is buying the right thing; one expecting a cash yield from operations will be disappointed.

13.1 Free cash flow

R’000	Year 1	Year 2	Year 3	Year 4	Year 5
EBITDA	5 324	7 909	10 418	12 393	14 023
Movement in working capital	1 278	(370)	(320)	(261)	(223)
Taxation	—	(553)	(1 400)	(2 026)	(2 569)
Free cash flow to the firm	6 602	6 986	8 698	10 106	11 231
Interest and capital	(4 483)	(6 107)	(6 107)	(6 107)	(6 107)
Free cash flow to equity	2 119	879	2 591	3 999	5 123
Cumulative free cash flow to equity	2 119	2 998	5 589	9 587	14 711

Free cash flow to the firm is positive from Year 1 and grows steadily; free cash flow to equity is positive in every year but modest, because debt service absorbs between 55 and 84 per cent of it. Cumulative free cash flow to equity crosses the R14.5 million subscription only in the final year of the projection, which is the arithmetic behind the equity payback of five years.

Previous section12. Debt Service and Working Capital

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