Confidential not for third party distribution The Kadmos Initiative (Pvt) Ltd. 2009
Confidential not for third party distribution The Kadmos Initiative (Pvt) Ltd. 2009
Table of Contents
1. Overview of Financial Modeling 2. Excel Best Practices 3. Kadmos Modeling Framework 4. Thebes Airport: Situation Overview 5. Income Statement and Operating Model 6. Capital Expenditures and D&A Schedules 7. Debt and Interest Schedules 8. Tax Schedule 9. Financial Model Set Up 10. Working Capital Schedule 11. Shareholders Equity Schedule 12. Linking Financial Statements 13. Introduction to Valuation and Preliminary Returns Analysis 14. Control Page and Sensitivity Analysis
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Modeling Goals
Virtual re-creation of the actual business Ability to test assumptions to analyze historical and projected financial performance
Growth Rates Operating Margins Accounting Regulations Taxation Capital Infusion and/or Divestitures
Understanding the models purpose and possible implications are critical as they determine design and functionality
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Modeling Assumptions
Assumptions should be clear and well defined
Also referred to as drivers or inputs
Outlining proper, reasonably accurate assumptions requires a thorough understanding of the business, industry and the prevailing financing environment
Equity research reports are often a good starting point History serves as a useful guide, except for start-ups, companies with significant acquisitions/divestitures or in highly volatile markets There is no substitute for a deep understanding of the business and how it would be affected by changes in its operating environment
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Model Architecture
An effective and efficient model must be realistic, flexible and easy to follow
Unrealistic assumptions result in misleading and often meaningless output
Economic and financial environment is constantly changing, therefore a model must be able to quickly accommodate exogenous and endogenous factors
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Table of Contents
1. Overview of Financial Modeling 2. Excel Best Practices 3. Kadmos Modeling Framework 4. Thebes Airport: Situation Overview 5. Income Statement and Operating Model 6. Capital Expenditures and D&A Schedules 7. Debt and Interest Schedules 8. Tax Schedule 9. Financial Model Set Up 10. Working Capital Schedule 11. Shareholders Equity Schedule 12. Linking Financial Statements 13. Introduction to Valuation and Preliminary Returns Analysis 14. Control Page and Sensitivity Analysis
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Spreadsheet Set Up
Start working on a spreadsheet by assigning names to tabs
This can be done by double clicking on an Excel tab or using Alt, O, H, R
The first 4-5 rows on a given tab should include additional description of the tab along with author name
A key detailing color codes is very useful
Time periods typically appear along the horizontal and corresponding line items along the vertical axis Indent cells to the extreme left to navigate quickly between sections on a given tab using Ctrl + Arrow Keys Use different color shading codes for historical and projected financial statements
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2.Avoid linking cells to a different sheet 3.Dont embed inputs in formulas, instead break out into separate line items
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To group rows, first select an entire row (Shift + Space bar), hold shift and use arrow key to select additional rows, then group (Alt + Shift + Right Arrow)
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9.Always use keyboard shortcuts, to navigate shortcuts, hit Alt once and access remaining drop down menus by striking keys which are underlined on the tool bar
For e.g. to change column width, hit Alt, then O to access the Format drop down menu, then C to access the Column menu and finally W to change column width or simply Alt, O, C, W
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Importance of Formatting
Analytical work and good presentation are equally important
Sloppy, inconsistent work may give the wrong impression about work quality
The numbers may be 100% accurate, yet it may not be enough to secure a deal
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Under the Number menu, click on Custom and replace $ signs with Rs (ensure you are using quotation marks in this case), and hit OK
It is always advisable to modify pre-programmed formats instead of re-writing a Custom format, as described above
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Conditional Formatting
Use conditional formatting, especially to highlight a situation where the Company in question is running out of cash (the model will indicate this by showing a negative cash balance
To conditionally format a row or column, chose the desired cells (Shift + Arrow Key) and then hit (Alt, O D)
Use the conditional formatting menu to turn the font red in case of a negative number
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Table of Contents
1. Overview of Financial Modeling 2. Excel Best Practices 3. Kadmos Modeling Framework 4. Thebes Airport: Situation Overview 5. Income Statement and Operating Model 6. Capital Expenditures and D&A Schedules 7. Debt and Interest Schedules 8. Tax Schedule 9. Financial Model Set Up 10. Working Capital Schedule 11. Shareholders Equity Schedule 12. Linking Financial Statements 13. Introduction to Valuation and Preliminary Returns Analysis 14. Control Page and Sensitivity Analysis
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Balance Sheet
(Pak Rupees in 000s, except per share amounts) Assets Cash and Equivalents Accounts Receivable Inventory Other Current Assets Total Current Assets Gross PP&E Other Non Current Assets Accumulated Depreciation Total Assets Liabilities and Shareholders' Equity Accounts Payable Accrued Expenses and Other Current Liabilities Total Current Liabilities Secured Debt Unsecured Debt Total Debt Other Non Current Liabilities Total Liabilities Shareholders' Equity Authorized Capital of XXX,XXX,XXX common shares of Rs. XX each Common stock issued at par Additional paid-in capital Accumulated earnings (deficit) Total Shareholder's Equity Total Liabilities & Shareholder's Equity
Previous year's cash balance + change in cash, which comes from CF Statement Requires Working Capital Schedule Requires Working Capital Schedule Requires Working Capital Schedule (Cash and Equivalents + Accounts Receivable + Inventory + Other Current Assets) Existing PP&E + related capital expenditures; Requires CapEx and D&A Schedule Existing Other Non Current Assets + related capital expenditures; Requires CapEx and D&A Schedule Existing Accumulated Depreciation + book depreciation; Requires CapEx and D&A Schedule (Total Current Assets + Gross PP&E + Other Non Current Assets - Accumulated Depreciation)
Requires Working Capital Schedule Requires Working Capital Schedule (Accounts Payable + Accrued Expenses and Other Current Liabilities) Requires Debt and Interest Schedule Requires Debt and Interest Schedule (Secured Debt + Unsecured Debt) Requires schedules detailing unwinding of liabilities OR line item may be projected within the Working Capital Schedule (Total Current Liabilities + Total Debt + Other Non Current Liabilities)
Note: Authorized Capital is not added in the Shareholder's Equity section of the balance sheet Par value of issued shares Capital paid by investors in excess of par value of common stock Previous year's balance + Net Income - Dividends Paid (Common stock + APIC + Accumulated Earnings) (Total Liabilities + Total Shareholder's Equity)
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From Income Statement From Income Statement (D&A is a non cash item) For 2009: AR in 2008 - AR in 2009 For 2009: Inventory in 2008 - Inventory in 2009 For 2009: Other Current Assets in 2008 - Other Current Assets in 2009 For 2009: AP in 2009 - AP in 2008 For 2009: Accr. Exp & Other CL in 2009 - Accr. Exp & Other CL in 2008 For 2009: Accr. Exp & Other Non CL in 2009 - Accr. Exp & Other Non CL in 2008 (SUM all items above); Be careful with signs for working capital changes
Management typically provides guidance on CapEx; often CapEx = D&A is assumed Management typically provides guidance on Asset Sales Management typically provides guidance on Acquisition of Assets (Asset Sales - CapEx - Acquisition of Assets)
Management typically provides guidance Requires Debt & Interest Schedule Requires Debt & Interest Schedule Requires Shareholder's Equity Schedule Requires Shareholder's Equity Schedule Requires Debt & Interest Schedule Requires Debt & Interest Schedule (SUM all items above); Be careful with signs for debt payments and debt proceeds (Cash flow from Operation + Investing + Financing) Change in cash is linked back to the balance sheet, and that is how a balance sheet is balanced!
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3.Upon completion of Income Statement, prepare the following schedules to project the Balance Sheet, in the following order:
Working Capital Schedule Shareholders Equity Schedule
4.After Step 3 only Cash and Equivalents on the Balance Sheet will remain unfilled, use the Cash Flow Statement to populate projected Cash and Equivalents, and simultaneously complete both Balance Sheet and Cash Flow Statement 5.Incorporate a circular reference to calculate Interest Income in the Income Statement based on Cash and Equivalents on Balance Sheet
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Table of Contents
1. Overview of Financial Modeling 2. Excel Best Practices 3. Kadmos Modeling Framework 4. Thebes Airport: Situation Overview 5. Income Statement and Operating Model 6. Capital Expenditures and D&A Schedules 7. Debt and Interest Schedules 8. Tax Schedule 9. Financial Model Set Up 10. Working Capital Schedule 11. Shareholders Equity Schedule 12. Linking Financial Statements 13. Introduction to Valuation and Preliminary Returns Analysis 14. Control Page and Sensitivity Analysis
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Income Statement
(Pak Rupees in 000s, except per share amounts) Revenue Landing Fees Handling Fees Embarkation Fees Total Operating Revenue Non Operating Revenue Airport Development Fund Flying Club Rental Income Total Revenue Operating Costs Staff salaries Maintenance Marketing & Advertising Other Operating Costs EBITDA 2006 4,188 21,670 14,910 40,769
Balance Sheet
2008 4,990 28,318 18,663 51,971
(Pak Rupees in 000s, except per share amounts) Assets Cash and Equivalents Accounts Receivable Inventory Other Current Assets Total Current Assets Gross PP&E Other Non Current Assets Accumulated Depreciation Total Assets Liabilities and Shareholders' Equity Accounts Payable Accrued Expenses and Other Current Liabilities Total Current Liabilities Secured Debt Unsecured Debt Total Debt Other Non Current Liabilities Total Liabilities Shareholders' Equity Authorized Capital of 200,000,000 common shares of Rs. 1 each Common stock issued at par Additional paid-in capital Common stock issued at par to SAS Additional paid-in capital by SAS Accumulated earnings (deficit) Total Shareholder's Equity Total Liabilities & Shareholder's Equity
2006 10,430 13,000 5,000 9,105 37,535 500,000 25,889 (167,654) Rs.395,770
Historical Financials 2007 14,028 13,910 5,400 10,016 43,353 520,000 26,666 (190,054) Rs.399,965
(21,400) 9,042
(22,400) 15,070
(23,352) 19,676
100,000 234,987
100,300 235,692
100,601 236,399
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SAS typically makes minority investments in infrastructure assets in the MENASA region and has a target IRR of 20%
SAS is interested in acquiring a minority stake in Thebes Airport and requires assistance from us in preparing a financial model as well as performing a preliminary returns analysis
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Table of Contents
1. Overview of Financial Modeling 2. Excel Best Practices 3. Kadmos Modeling Framework 4. Thebes Airport: Situation Overview 5. Income Statement and Operating Model 6. Capital Expenditures and D&A Schedules 7. Debt and Interest Schedules 8. Tax Schedule 9. Financial Model Set Up 10. Working Capital Schedule 11. Shareholders Equity Schedule 12. Linking Financial Statements 13. Introduction to Valuation and Preliminary Returns Analysis 14. Control Page and Sensitivity Analysis
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The building blocks of Income Statement items above the EBITDA line
A good operating model is one which can explain very clearly how and why a business generates revenue
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Revenue Projections
At the most basic level Revenue = Price X Volume, which can be further broken down into components Assuming an arbitrary growth rate for revenue based on historical growth and other economic indicators results in projections which are not defensible To understand how and why a business will generate revenue, it is essential to ask the right questions, the following are a few examples:
What were the Companys revenues for the past 3-5 years? What is the growth rate for the industry or major competitors? What is the competitive positioning of the Company? Is it poised to steal market share and outpace industry due to differentiating factors that are sustainable? What are the pricing trends in the industry? When evaluating pricing trends it is critical to identify the customers in the relevant market segment. E.g. Swatch and Rolex are both watch makers, but fall in entirely different market segments
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Forecasting aircraft orders would typically be beyond the scope of a financial modeling exercise in an M&A transaction or even for business planning purposes There is no correct starting point when using a bottom-up approach, and is usually a judgment call
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Staff Salaries as a % of Operating Revenue Maintenance as a % of Property Plant & Equipment Marketing as a % of Revenue Other Operating Costs as a % of Total Operating Costs (Excl. Other Operating Costs)
In the above example, to project Maintenance expense, we require constructing a Capital Expenditures and Depreciation & Amortization schedule to complete the Income Statement
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Thus, we further require no. of seats in an aircraft and its maximum take off weight (MTOW) An Aircraft Movement is defined as an aircraft landing or aircraft take-off. One arrival and one departure are counted as two aircraft movements Projecting aircraft movements is beyond the scope of this exercise For simplicity all rates are stated on an Aircraft Movement basis We can make assumptions on the average occupancy or load factor* to determine passenger movements
Aircraft Movements
Passengers
For Non Operating Revenue and Operating Costs we can make assumptions based on historical ratios
Thus, we need to list out the above information in a neat, presentable format which will become the basis of our operating model
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Rate:
2009
2010
2011
2012
Input the required historical drivers Note: Inputs are always BLUE
2006
2007
2008
2009
2010
2011
2012
Historical 2007
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Step 2: Input required historical figures, rates and drivers to prepare projections
Revenue Driver Rates Landing Fees / Ton (PKR) Handling Charges / AC Movement (PKR) Embarkation Fees / Passenger (PKR) Aircraft Traffic Forecast Aircraft Movements B-737-300 A-320 A310 B747 Historical Load Factor B-737-300 A-320 A310 B747 Passenger Forecast B-737-300 A-320 A310 B747 Operating Cost Rates Staff salaries as a % of Operating Revenue Maintenance as a % of PP&E Marketing & Advertising as a % of Revenue Other Operating Costs as a % of Total Op Costs (ex-OOC) 2006 22.2% 1.7% 15.3% 4.6% 2006 Rs.93 55,000 300 2006 154 130 65 45 74% 83% 72% 70% 2006 13,447.3 15,106.0 8,611.2 12,537.0 Historical 2007 Rs.96 57,750 315 2007 160 156 80 40 77% 84% 73% 65% 2007 14,537.6 18,345.6 10,745.6 10,348.0 Historical 2007 20.9% 1.7% 14.2% 4.9%
2009
2010
2011
2012
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2008 Rs.99 60,638 331 2008 176 160 94 37 76% 82% 76% 62% 2008 15,783.7 18,368.0 13,145.0 9,130.1
2009 Rs. 106 66,095 361 2009 179 164 100 35 77% 83% 76% 62% 2009 16,158.3 18,999.4 13,984.0 8,594.8
2012 Rs. 130 85,595 467 2012 243 213 156 35 78% 85% 76% 61% 2012 22,365.7 25,347.0 21,815.0 8,469.4
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(Aircraft Movements X Aircraft MTOW X Landing Fees / Ton) (Aircraft Movements X Handling Charges / Aircraft Movement) (Number of Passengers X Embarkation Fee / Passenger)
(% of Total Operating Revenue based on Historical Ratios) (% of Total Operating Revenue based on Historical Ratios) (% of Total Operating Revenue based on Historical Ratios)
Calculations in BLACK
(9,044) (8,403) (8,843) (1,200) 30,442 (21,400) 9,042 (3,190) 939 6,791 (2,377) 4,414 7.6%
(9,768) (8,874) (9,506) (1,380) 37,470 (22,400) 15,070 (3,085) 939 12,924 (4,523) 8,400 12.5%
(10,549) (9,282) (10,267) (1,587) 43,028 (23,352) 19,676 (3,020) 939 17,595 (6,158) 11,437 15.3%
(% of (% of (% of (% of
Total Operating Revenue based on Historical Ratios) PP&E ); Requires Cap Ex and D&A Schedule Total Revenue based on Historical Ratios) Total Operating Costs (excl. OOC))
Depreciation & Amortization EBIT Interest Expense Interest Income EBT Taxes @ 37.5% Net Income Net Income Margin
Requires Debt and Interest Schedule Requires Cash Balance - Hold Constant at 1,000 for now
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(9,044) (8,403) (8,843) (1,200) 30,442 (21,400) 9,042 (3,190) 939 6,791 (2,377) 4,414 7.6%
(9,768) (8,874) (9,506) (1,380) 37,470 (22,400) 15,070 (3,085) 939 12,924 (4,523) 8,400 12.5%
(10,549) (9,282) (10,267) (1,587) 43,028 (23,352) 19,676 (3,020) 939 17,595 (6,158) 11,437 15.3%
(12,213) (13,947) (17,530) Requires Cap Ex and D&A Schedule (11,913) (13,605) (17,100) Requires Cap Ex and D&A Schedule
(21,240) (20,719)
Alerts in RED
Requires Debt and Interest Schedule Requires Cash Balance - Hold Constant at 1,000 for now
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Table of Contents
1. Overview of Financial Modeling 2. Excel Best Practices 3. Kadmos Modeling Framework 4. Thebes Airport: Situation Overview 5. Income Statement and Operating Model 6. Capital Expenditures and D&A Schedules 7. Debt and Interest Schedules 8. Tax Schedule 9. Financial Model Set Up 10. Working Capital Schedule 11. Shareholders Equity Schedule 12. Linking Financial Statements 13. Introduction to Valuation and Preliminary Returns Analysis 14. Control Page and Sensitivity Analysis
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Depreciation and Amortization is a non-cash expense which is recorded to account for the wear and tear of assets
Depreciation is recorded for tangible assets such as PP&E Amortization is recorded for intangible assets such as Goodwill
Depreciation and Amortization is thus added back to Net Income in the Cash Flow statement since it is a non-cash item A Cap Ex and D&A schedule ensures that future Cap Ex does not get lumped in with existing assets
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Schedule Set Up
Reference and link historical PP&E, Other Non Current Assets, Accumulated Depreciation and related Cap Ex from historical financials
The airport example assumes management has provided guidance on Cap Ex, otherwise the following assumptions are also reasonable:
Cap Ex can be projected as a % of Sales Cap Ex can be projected assuming it remains equal to depreciation
Create a schedule which ensures that subsequent Cap Ex is depreciated separately and not lumped in with existing balances Identify and state depreciation assumption on the schedule
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Schedule Set Up
Step 6: Set up D&A schedule and link required historical line items
Property Plant & Equipment Other Non Current Assets Accumulated Depreciation Capital Exependitures - PP&E Capital Exependitures - Other Non Current Assets Depreciation Expense (A + B + C + D)
21,400
(A)---->
Depreciation on Existing Gross PP&E 18,027 Useful Life (in years) Remaining of Existing Net PP&E 30
Year CapEx Useful Life 2009
18,027
18,027
18,027
2010
2011
2012
(B)----> (C)---->
Depreciation on Cap Ex Depreciation on Other Non Current Assets 3,433 Useful Life (in years) Remaining of Existing Net PP&E 8
Year CapEx Useful Life 2009
3,433
3,433
3,433
2010
2011
2012
(D)---->
Depreciation on Cap Ex
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Property Plant & Equipment Other Non Current Assets Accumulated Depreciation Capital Exependitures - PP&E Capital Exependitures - Other Non Current Assets Depreciation Expense (A + B + C + D) D&A Method: Straight Line assuming no residual value
21,400
(A)---->
Depreciation on Existing Gross PP&E Useful Life (in years) Remaining of Existing Net PP&E
Year CapEx Useful Life
18,027 30
2009
18,027
18,027
18,027
2010
2011
2012
1,946
1,946 1,830
(B)----> (C)---->
Depreciation on Cap Ex Depreciation on Other Non Current Assets Useful Life (in years) Remaining of Existing Net PP&E
Year CapEx Useful Life
1,946 3,433 8
2009
3,775 3,433
2010
2011
2012
100
100 120
(D)---->
Depreciation on Cap Ex
100
220
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Table of Contents
1. Overview of Financial Modeling 2. Excel Best Practices 3. Kadmos Modeling Framework 4. Thebes Airport: Situation Overview 5. Income Statement and Operating Model 6. Capital Expenditures and D&A Schedules 7. Debt and Interest Schedules 8. Tax Schedule 9. Financial Model Set Up 10. Working Capital Schedule 11. Shareholders Equity Schedule 12. Linking Financial Statements 13. Introduction to Valuation and Preliminary Returns Analysis 14. Control Page and Sensitivity Analysis
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Debt and Interest Schedule is useful because it allows the user to distinguish and project different types of debt instruments
A fixed rate long term loan is the most basic debt instrument which has a fixed amortization schedule and corresponding interest payments A variable rate loan requires projecting a forward curve for the variable base (KIBOR, LIBOR, Prime Rate etc)
Debt schedules make it easy for the user to make required updates depending on macro-economic news
A central bank announced rate cut will certainly have an impact on any forward curve used to project interest expense
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Schedule Set Up
Reference and link historical Debt Balances and the following information:
Face Value Term Rate Type (Floating or Fixed) Base Rate Spread
Input a projected forward curve for debt instruments tied to a floating rate
Step 8: Set up the Debt and Interest schedule and input historical balances
2006 KIBOR - Historical and Forward Curve Secured Debt - Principal Amount Outstanding Unsecured Debt - Principal Amount Outstanding Secured Debt - Interest Expense Unsecured Debt - Interest Expense Total Interest Expense 9.0% 24,000 10,000 2,040 1,150 3,190
13.0% 12.5% 11.0% (Existing Balance - Face Value / Term) (Existing Balance - Face Value / Term) (Existing Balance X Base Rate [or 8.5% in this case]) (Existing Balance X (Base Rate + Spread)
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2006 KIBOR - Historical and Forward Curve Secured Debt - Principal Amount Outstanding Unsecured Debt - Principal Amount Outstanding Secured Debt - Interest Expense Unsecured Debt - Interest Expense Total Interest Expense 9.0% 24,000 10,000 2,040 1,150 3,190
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Table of Contents
1. Overview of Financial Modeling 2. Excel Best Practices 3. Kadmos Modeling Framework 4. Thebes Airport: Situation Overview 5. Income Statement and Operating Model 6. Capital Expenditures and D&A Schedules 7. Debt and Interest Schedules 8. Tax Schedule 9. Financial Model Set Up 10. Working Capital Schedule 11. Shareholders Equity Schedule 12. Linking Financial Statements 13. Introduction to Valuation and Preliminary Returns Analysis 14. Control Page and Sensitivity Analysis
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Taxes Overview
Pre-Tax Income or EBT is typically taxed at a fixed percentage, which ranges from approx. 35-38% depending on jurisdiction, and for simple cases such as the example being discussed in this course, a Tax Schedule is not necessarily required However, in cases where the company under review has significant Net Operating Losses or taxation is based on a metric other than EBT, a detailed Tax Schedule is required In the airport example under discussion, we are assuming EBT is taxed at 35%, and no taxes are paid if EBT is negative
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Schedule Set Up
Reference and link historical taxes paid Calculate historical tax rate In practice, arriving at a constant tax rate for each year is not usually the case
Step 10: Set up the Tax schedule and input historical figures
Tax Schedule
2006 EBT Tax Rate Taxes Payable Rs. 6,791.0 35.0% ($2,376.9) Historical 2007 Rs. 12,923.8 35.0% ($4,523.3) Projected 2008 Rs. 17,595.0 35.0% ($6,158.3) 2009 2010 2011 2012
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Tax Schedule
Link projected Earnings Before Taxes (EBT) Apply a projected tax rate based on historical figures Incorporate an IF statement which ensures that if EBT is negative, no taxes are paid
Step 11: Complete the Tax Schedule
Tax Schedule
2006 EBT Tax Rate Taxes Payable Rs. 6,791.0 35.0% ($2,376.9) Historical 2007 Rs. 12,923.8 35.0% ($4,523.3) Projected 2008 Rs. 17,595.0 35.0% ($6,158.3) 2009 Rs. 22,472.5 35.0% ($7,865.4) 2010 Rs. 28,792.7 35.0% ($10,077.4) 2011 Rs. 43,783.9 35.0% ($15,324.4) 2012 Rs. 59,340.8 35.0% ($20,769.3)
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Table of Contents
1. Overview of Financial Modeling 2. Excel Best Practices 3. Kadmos Modeling Framework 4. Thebes Airport: Situation Overview 5. Income Statement and Operating Model 6. Capital Expenditures and D&A Schedules 7. Debt and Interest Schedules 8. Tax Schedule 9. Financial Model Set Up 10. Working Capital Schedule 11. Shareholders Equity Schedule 12. Linking Financial Statements 13. Introduction to Valuation and Preliminary Returns Analysis 14. Control Page and Sensitivity Analysis
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(9,044) (8,403) (8,843) (1,200) 30,442 (21,400) 9,042 (3,190) 939 6,791 (2,377) 4,414 7.6%
(9,768) (8,874) (9,506) (1,380) 37,470 (22,400) 15,070 (3,085) 939 12,924 (4,523) 8,400 12.5%
(10,549) (9,282) (10,267) (1,587) 43,028 (23,352) 19,676 (3,020) 939 17,595 (6,158) 11,437 15.3%
(12,213) (9,961) (11,913) (1,675) 46,980 (23,506) 23,474 (2,615) 1,000 21,859 (7,651) 14,209 17.2%
(13,947) (10,739) (13,605) (1,881) 54,316 (25,455) 28,861 (2,260) 1,000 27,601 (9,660) 17,941 19.0%
(17,530) (11,535) (17,100) (2,268) 70,330 (27,451) 42,879 (1,865) 1,000 42,014 (14,705) 27,309 23.0%
(21,240) (12,349) (20,719) (2,668) 86,922 (29,490) 57,432 (1,440) 1,000 56,992 (19,947) 37,045 25.7%
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Balance Sheet
(Pak Rupees in 000s, except per share amounts) Assets Cash and Equivalents Accounts Receivable Inventory Other Current Assets Total Current Assets Gross PP&E Other Non Current Assets Accumulated Depreciation Total Assets Liabilities and Shareholders' Equity Accounts Payable Accrued Expenses and Other Current Liabilities Total Current Liabilities Secured Debt Unsecured Debt Total Debt Other Non Current Liabilities Total Liabilities Shareholders' Equity Authorized Capital of 200,000,000 common shares of Rs. 1 each Common stock issued at par Additional paid-in capital Common stock issued at par to SAS Additional paid-in capital by SAS Accumulated earnings (deficit) Total Shareholders' Equity Total Liabilities & Shareholders' Equity 2006 10,430 13,000 5,000 9,105 37,535 500,000 25,889 (167,654) 395,770
Historical Financials 2007 14,028 13,910 5,400 10,016 43,353 520,000 26,666 (190,054) 399,965
2008 19,970 14,884 5,500 11,017 51,370 540,800 27,466 (213,406) 406,230
2009
2012
Recquires Cash Flow Statement completed Requires Working Capital Schedule Requires Working Capital Schedule Requires Working Capital Schedule
100,000 234,987
100,300 235,692
100,601 236,399
Requires Shareholder's Equity schedule Requires Shareholder's Equity schedule Requires Shareholder's Equity schedule Requires Shareholder's Equity schedule Previous Year's Balance + Net Income - Dividends
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Table of Contents
1. Overview of Financial Modeling 2. Excel Best Practices 3. Kadmos Modeling Framework 4. Thebes Airport: Situation Overview 5. Income Statement and Operating Model 6. Capital Expenditures and D&A Schedules 7. Debt and Interest Schedules 8. Tax Schedule 9. Financial Model Set Up 10. Working Capital Schedule 11. Shareholders Equity Schedule 12. Linking Financial Statements 13. Introduction to Valuation and Preliminary Returns Analysis 14. Control Page and Sensitivity Analysis
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Accounts Receivable, Inventory and Accounts Payable are projected based on collection periods and number of days for which they remain outstanding
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Schedule Set Up
Where available, always use historical working capital ratios to develop projections, otherwise utilize industry averages based comparables Assume 364.25 days in a year to account for leap years
Step 14: Set up the Working Capital Schedule by linking Total Revenue and Operating Costs
Working Capital
(Pak Rupees in 000s, except per share amounts) 2006 Total Revenue Total Operating Costs Assets Accounts Receivable Inventory Other Current Assets Liabilities Accounts Payable Accrued Expenses and Other Current Liabilities Other Non Current Liabilities Ratios and Assumptions Days in a Year Accounts Receivable (Collection Period in Days) Inventory (Days Outstanding) Other Current Assets as a % of Total Revenue Accounts Payable (Days Payable) Accrued Expenses and Other CL (as a % of Op Costs) Other Non Current Liabilities (as a % of Op Costs) 57,933 (27,490) Historical Financials 2007 66,998 (29,528) 2008 74,713 (31,685) 2009 82,742 (35,762) Projected Financials 2010 2011 94,488 (40,172) 118,762 (48,432) 2012 143,897 (56,975)
(Total Revenue X AR Collection Period / Days in a Year) (Total Operating Costs X Inv Days Outstanding / Days in a Year) (Total Revenue X Other Current Assets as a % of Revenue)
(Total Operating Costs X AP (Days Payable) / Days in a Year) (Total Operating Costs X Accr. Exp and OCL as a % of Op Costs) (Total Operating Costs X Other Non CL as a % of Op Costs)
364.25 AR Balance X Days In a Year / Total Revenue Inventory Balance X Days in a Tear / Total Op Costs Current Assets / Total Revenue AP Balance X Days in a Year / Total Operating Costs Accr. Exp and Other CL / Total Operating Costs Other Non CL / Total Operating Costs
Use appropriate averages for historical ratios or incorporate working capital improvements based on management discussions
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Working Capital
(Pak Rupees in 000s, except per share amounts) 2006 Total Revenue Total Operating Costs Assets Accounts Receivable Inventory Other Current Assets Liabilities Accounts Payable Accrued Expenses and Other Current Liabilities Other Non Current Liabilities Ratios and Assumptions Days in a Year Accounts Receivable (Collection Period in Days) Inventory (Days Outstanding) Other Current Assets as a % of Total Revenue Accounts Payable (Days Payable) Accrued Expenses and Other CL (as a % of Op Costs) Other Non Current Liabilities (as a % of Op Costs) 57,933 (27,490) Historical Financials 2007 66,998 (29,528) 2008 74,713 (31,685) 2009 82,742 (35,762) Projected Financials 2010 2011 94,488 (40,172) 118,762 (48,432) 2012 143,897 (56,975)
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Table of Contents
1. Overview of Financial Modeling 2. Excel Best Practices 3. Kadmos Modeling Framework 4. Thebes Airport: Situation Overview 5. Income Statement and Operating Model 6. Capital Expenditures and D&A Schedules 7. Debt and Interest Schedules 8. Tax Schedule 9. Financial Model Set Up 10. Working Capital Schedule 11. Shareholders Equity Schedule 12. Linking Financial Statements 13. Introduction to Valuation and Preliminary Returns Analysis 14. Control Page and Sensitivity Analysis
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Authorized Capital is the maximum the Company is authorized to issue to its shareholders and is thus not summed up when calculating Shareholders Equity
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Schedule Set Up
Set up a schedule which assumes annual dividend payment but no additional issuance of shares or re-purchases
Assume that this restriction has been imposed by SAS Capital as a pre-condition for making a minority investment in Thebes Airport
Step 16: Link historical ending equity balance and identify dividends paid in the past three years to calculate dividend pay out ratio
2006 Beginning Equity Balance Net Income Additional shares issued to SAS at par Additional paid in capital by SAS Dividends Paid Ending Equity Balance 4,414
2008 11,437
2012 37,045
(1,545.0) 346,704
(1,909.0) 353,195
(2,884.5) 361,748
Dividend Assumptions Total Dividends Paid Net Income Divident Payout Ratio
(Net Income X Dividend Pay Out Ratio) 14,209 17,941 27,309 (Assumption based on historical ratios)
37,045
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The purchase offer implies an 7.7% premium over the current stock price
Assume existing shareholders interest in Thebes is proportionally diluted as a result of SAS investment
Capital Structure as of 05/04/2009
Shareholders Frontier Capital Corporation Shareef Brothers Limited Establishment Foundation Publicly Traded Total Common Shares Outstanding % of Total 55% 17% 15% 13% 100% Common shares held 55,345 16,893 15,456 12,907 100,601
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2006 Beginning Equity Balance Net Income Additional shares issued to investor at par Additional paid in capital by investor Dividends Paid Ending Equity Balance 4,414
2008 11,437
(1,545.0) 346,704
(1,909.0) 353,195
(2,884.5) 361,748
(4,126.3) 416,503
(6,281.0) 437,530
(8,520.3) 466,055
Dividend Assumptions Total Dividends Paid Net Income Divident Payout Ratio
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Table of Contents
1. Overview of Financial Modeling 2. Excel Best Practices 3. Kadmos Modeling Framework 4. Thebes Airport: Situation Overview 5. Income Statement and Operating Model 6. Capital Expenditures and D&A Schedules 7. Debt and Interest Schedules 8. Tax Schedule 9. Financial Model Set Up 10. Working Capital Schedule 11. Shareholders Equity Schedule 12. Linking Financial Statements 13. Introduction to Valuation and Preliminary Returns Analysis 14. Control Page and Sensitivity Analysis
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Recquires Cash Flow Statement completed Requires Working Capital Schedule Requires Working Capital Schedule Requires Working Capital Schedule
100,000 234,987
100,300 235,692
100,601 236,399
Requires Shareholder's Equity schedule Requires Shareholder's Equity schedule Requires Shareholder's Equity schedule Requires Shareholder's Equity schedule Previous Year's Balance + Net Income - Dividends
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Balance Sheet
(Pak Rupees in 000s, except per share amounts) Assets Cash and Equivalents Accounts Receivable Inventory Other Current Assets Total Current Assets Gross PP&E Other Non Current Assets Accumulated Depreciation Total Assets Liabilities and Shareholders' Equity Accounts Payable Accrued Expenses and Other Current Liabilities Total Current Liabilities Secured Debt Unsecured Debt Total Debt Other Non Current Liabilities Total Liabilities Shareholders' Equity Authorized Capital of 200,000,000 common shares of Rs. 1 each Common stock issued at par Additional paid-in capital Common stock issued at par to SAS Additional paid-in capital by SAS Accumulated earnings (deficit) Total Shareholders' Equity Total Liabilities & Shareholders' Equity 2006 10,430 13,000 5,000 9,105 37,535 500,000 25,889 (167,654) 395,770
Historical Financials 2007 14,028 13,910 5,400 10,016 43,353 520,000 26,666 (190,054) 399,965
2008 19,970 14,884 5,500 11,017 51,370 540,800 27,466 (213,406) 406,230
2009
2012
To be calculated after completion of Cash Flow Statement 17,410 19,103 23,032 26,722 6,417 6,878 7,893 8,816 12,525 14,303 17,977 21,782 36,352 40,284 48,903 57,320 585,552 28,466 (236,912) 413,458 631,294 29,666 (262,367) 438,876 678,066 30,916 (289,818) 468,066 725,908 32,166 (319,308) 496,086
100,000 234,987
100,300 235,692
100,601 236,399
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2008
2009
2012
From Income Statement From Income Statement (D&A is a non cash item) For 2009: AR in 2008 - AR in 2009 For 2009: Inventory in 2008 - Inventory in 2009 For 2009: Other Current Assets in 2008 - Other Current Assets in 2009 For 2009: AP in 2009 - AP in 2008 For 2009: Accr. Exp & Other CL in 2009 - Accr. Exp & Other CL in 2008 For 2009: Accr. Exp & Other Non CL in 2009 - Accr. Exp & Other Non CL in 2008 (SUM all items above); Be careful with signs for working capital changes
Management typically provides guidance on CapEx; often CapEx = D&A is assumed Management typically provides guidance on Asset Sales Management typically provides guidance on Acquisition of Assets (Asset Sales - CapEx - Acquisition of Assets)
Management typically provides guidance Requires Debt & Interest Schedule Requires Debt & Interest Schedule Requires Shareholder's Equity Schedule Requires Shareholder's Equity Schedule Requires Debt & Interest Schedule Requires Debt & Interest Schedule (SUM all items above); Be careful with signs for debt payments and debt proceeds (Cash flow from Operation + Investing + Financing) Change in cash is linked back to the balance sheet, and that is how a balance sheet is balanced!
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2008 11,437 23,352 (974) (100) (1,002) (49) (48) (198) 32,418
2009 14,591 23,506 (2,526) (917) (1,508) 570 568 2,330 36,614
2012 36,675 29,490 (3,690) (923) (3,805) 704 702 2,879 62,032
(20,000)
(20,800)
(44,752) (1,000)
(45,742) (1,200)
(46,772) (1,250)
(47,843) (1,250)
(20,000)
(20,800)
(45,752)
(46,942)
(48,022)
(49,093)
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Balance Sheet
(Pak Rupees in 000s, except per share amounts) Assets Cash and Equivalents Accounts Receivable Inventory Other Current Assets Total Current Assets Gross PP&E Other Non Current Assets Accumulated Depreciation Total Assets Liabilities and Shareholders' Equity Accounts Payable Accrued Expenses and Other Current Liabilities Total Current Liabilities Secured Debt Unsecured Debt Total Debt Other Non Current Liabilities Total Liabilities Shareholders' Equity Authorized Capital of 200,000,000 common shares of Rs. 1 each Common stock issued at par Additional paid-in capital Common stock issued at par to SAS Additional paid-in capital by SAS Accumulated earnings (deficit) Total Shareholders' Equity Total Liabilities & Shareholders' Equity 2006 10,430 13,000 5,000 9,105 37,535 500,000 25,889 (167,654) 395,770
Historical Financials 2007 14,028 13,910 5,400 10,016 43,353 520,000 26,666 (190,054) 399,965
2008 19,970 14,884 5,500 11,017 51,370 540,800 27,466 (213,406) 406,230
2009 34,563 17,410 6,417 12,525 70,915 585,552 28,466 (236,912) 448,021
Projected Financials 2010 2011 22,308 19,103 6,878 14,303 62,592 631,294 29,666 (262,367) 461,185 15,037 23,032 7,893 17,977 63,939 678,066 30,916 (289,818) 483,103
2012 16,456 26,722 8,816 21,782 73,776 725,908 32,166 (319,308) 512,542
100,000 234,987
100,300 235,692
100,601 236,399
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Income Statement
(Pak Rupees in 000s, except per share amounts) Revenue Landing Fees Handling Fees Embarkation Fees Total Operating Revenue Non Operating Revenue Airport Development Fund Flying Club Rental Income Total Revenue Operating Costs Staff salaries Maintenance Marketing & Advertising Other Operating Costs EBITDA Depreciation & Amortization EBIT Interest Expense Interest Income EBT Taxes @ 35% Net Income Net Income Margin Interest Income Rate 2006 4,188 21,670 14,910 40,768.6 Historical Financials 2007 2008 4,603 4,990 25,179 28,318 17,003 18,663 46,784.7 51,971.1 2009 5,417 31,593 20,815 57,826 Projected Financials 2010 2011 6,032 7,425 36,166 45,546 23,837 30,028 66,035 82,999 2012 8,770 55,380 36,415 100,565
(9,044) (8,403) (8,843) (1,200) 30,442 (21,400) 9,042 (3,190) 939 6,791 (2,377) 4,414 7.6%
(9,768) (8,874) (9,506) (1,380) 37,470 (22,400) 15,070 (3,085) 939 12,924 (4,523) 8,400 12.5%
(10,549) (9,282) (10,267) (1,587) 43,028 (23,352) 19,676 (3,020) 939 17,595 (6,158) 11,437 15.3%
(12,213) (9,961) (11,913) (1,675) 46,980 (23,506) 23,474 (2,615) 1,379 22,238 (7,651) 14,587 17.6% 4.0%
(13,947) (10,739) (13,605) (1,881) 54,316 (25,455) 28,861 (2,260) 1,133 27,734 (9,660) 18,074 19.1% 4.0%
(17,530) (11,535) (17,100) (2,268) 70,330 (27,451) 42,879 (1,865) 743 41,757 (14,705) 27,052 22.8% 4.0%
(21,240) (12,349) (20,719) (2,668) 86,922 (29,490) 57,432 (1,440) 629 56,621 (19,947) 36,674 25.5% 4.0%
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Table of Contents
1. Overview of Financial Modeling 2. Excel Best Practices 3. Kadmos Modeling Framework 4. Thebes Airport: Situation Overview 5. Income Statement and Operating Model 6. Capital Expenditures and D&A Schedules 7. Debt and Interest Schedules 8. Tax Schedule 9. Financial Model Set Up 10. Working Capital Schedule 11. Shareholders Equity Schedule 12. Linking Financial Statements 13. Introduction to Valuation and Preliminary Returns Analysis 14. Control Page and Sensitivity Analysis
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Introduction to Valuation
Investors employ several valuation methodologies when considering an investment proposal some examples are as follows
Comparable Company Analysis Comparable Transactions Analysis Transaction Premiums Analysis Discounted Cash Flow Analysis Returns Analysis based on Exit Multiples
Discussion of each method is beyond the scope of this training module Assume SAS Capital has employed the above methodologies and based on results they have determined that a 7.7% premium over existing stock price should be an acceptable to Thebes Airport Now we are going to determine if such a valuation is consistent with SAS Capitals expectation on their target Internal Rate of Return or IRR
IRR is the discount rate which makes the Net Present Value of a project 0
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Set up a returns analysis schedule in a manner which indicates achievable returns based on exit year and exit Enterprise Value / EBITDA multiple To arrive at Equity Value from Enterprise Value, subtract existing debt balance and add back Cash balance
Returns Analysis
(Pak Rupees in 000s, except per share amounts) EBITDA Exit EBITDA Multiple Enterprise Value Less: Secured Debt Less: Unsecured Debt Plus: Cash Total Equity Value Sponsor's Ownership as a % SAS Equity Dividend's received by SAS SAS Returns IRR Initial Inv (30,000.0) (30,000.0) (30,000.0) (30,000.0) 2009 0.0 0.0 0.0 0.0 2010 0.0 0.0 0.0 2011 2012 Projected Financials 2009 2010 2011 Requires Earnings from the Income Statement Assumtion based on Comparative Analysis 2012
Requires Debt & Int. Schedule Requires Debt & Int. Schedule Requires Balance Sheet figure Requires Valuation Consideration Schedule
0.0 0.0
0.0
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Returns Analysis
We have determined that a 7.3x exit EBITDA multiple is reasonable based on comparables analysis Based on SAS offer of Rs 2.8 share they are entitled to 9.6% of Thebes Airport An exit in 2012 at 7.3x EBITDA allows SAS to barely achieve their desired IRR However, as Buy-Side advisors we must evaluate all possibilities and scenarios before making a recommendation
Returns Analysis
(Pak Rupees in 000s, except per share amounts) EBITDA Exit EBITDA Multiple Enterprise Value Less: Secured Debt Less: Unsecured Debt Plus: Cash Total Equity Value Sponsor's Ownership as a % SAS Equity Dividend's received by SAS SAS Returns IRR 14.1% 13.9% 19.0% 20.7% Initial Inv (30,000.0) (30,000.0) (30,000.0) (30,000.0) 2009 34,244.7 319.1 319.1 319.1 2010 38,562.3 389.9 389.9 2011 2012 2009 46,979.9 7.3 342,953 (18,000) (7,000) 34,514 352,467 9.6% 33,926 319 38,172 390 49,014 588 61,118 803 Projected Financials 2010 2011 54,316.2 70,329.8 7.3 7.3 396,508 513,408 (16,000) (6,000) 22,081 396,589 (14,000) (5,000) 14,822 509,230 2012 86,922.0 7.3 634,531 (12,000) (4,000) 16,449 634,980
49,602.7 588.4
61,920.8
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Table of Contents
1. Overview of Financial Modeling 2. Excel Best Practices 3. Kadmos Modeling Framework 4. Thebes Airport: Situation Overview 5. Income Statement and Operating Model 6. Capital Expenditures and D&A Schedules 7. Debt and Interest Schedules 8. Tax Schedule 9. Financial Model Set Up 10. Working Capital Schedule 11. Shareholders Equity Schedule 12. Linking Financial Statements 13. Introduction to Valuation and Preliminary Returns Analysis 14. Control Page and Sensitivity Analysis
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Financial statement line items which should typically be shown on a control page are:
Revenue EBITDA Net Income Cash Balance
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1) Text to be copied from the Operating Model 2) Operating Model to be relinked to the Contol Page
Projected Financials 2008 2009 2010 2011 To be linked to the Income Statement To be linked to the Income Statement To be linked to the Income Statement To be linked to the Balance Sheet
2012
To be linked to the Valuation Consideration To be linked to the Valuation Consideration To be linked to the Valuation Consideration
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Aircraft Specifications B-737-300 A-320 A310 B747 Aircraft Traffic Forecast Aircraft Movements B-737-300 A-320 A310 B747 Key Financials Revenue EBITDA Net Income Cash and Equivalents
LF Assump. MTOW (Tons) 0.5% Annually 61 0.8% Annually 73 0.0% Annually 160 -0.3% Annually 350 2007 160 156 80 40 2008 176 160 94 37
Revenue Driver Inflation Assumptions Operating Revenue: Assumption: Landing Charges / Ton Annually - Fixed Handling Charges / AC Movement Annually - Fixed Emarkation Fees / Passenger Annually - Fixed 2009 179 164 100 35 2010 188 174 105 35 2011 213 197 135 35
Historical Financials 2007 2008 66,997.7 74,713.1 37,470 43,028 8,400 11,437 14,028 19,970
Projected Financials 2010 2011 94,488.0 118,762.1 54,316 70,330 18,078 27,056 22,308 15,037
Investment Amount offered by SAS Capital Offer price / share Current Stock Price Premium Paid by SAS Capital Partners Additional Shares Issued Current Shares Outstanding Common shares outstanding post investment
Exit EBITDA Multiple Sponsor's Ownership a % IRR 14.1% 13.9% 19.0% 20.8% Initial Inv (30,000.0) (30,000.0) (30,000.0) (30,000.0)
7.3
7.3
7.3
2011
2012
49,639.5 604.6
61,938.7
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