Overview of Valuation Methodologies

Table of Contents

Section 1 Valuation Fundamentals 3

Section 2 Modelling Best Practices 42
Section 3 Q&A and Open Discussion 45

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SECTION 1

Valuation Fundamentals

3
 Com parable Precedent Discounted Leveraged
Basics
Com panies Transactions Cash Flow Buyout

Valuation Basics (1/2)

Glossary of Terms

Enterprise Value Equity Value

• Total value of company, belonging to all providers of capital
• Represents value available to service claims of all investors, including
holders of both debt and equity securities
• Also known as aggregate value, asset value, total value and firm value
• Value belonging to holders of ordinary equity after net debt and
preferred claims have been serviced
• Market value of a company’s ordinary equity
• Represents flows available to holders of equity after debt and preferred
claims have been serviced

Unlevered Free Cash Flow Discounted Cash Flows (DCF)

• Unlevered free cash flows (or free cash flows to the firm, “FCFF”) • Calculate the present value of the unlevered free cash flows and of
represent the normalised cash flows available to all providers of the terminal value using an appropriate cost of capital
capital to the firm

Weighted Average Cost of Capital (WACC) LBO Value

• The weighted average cost of capital (WACC) represents a firm's • Determines the range of prices that a financial buyer would be
average cost of capital from all sources, including common stock, willing to pay for an asset assuming a range of target rates of
preferred stock, bonds, and other forms of debt return

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Valuation Basics (2/2)
Equity Value vs. Aggregate Value
Equity Value
• Value belonging to holders
of ordinary equity after net
debt and preferred claims
have been serviced
Aggregate value
• Total value of company,
belonging to all providers of
capital
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Precedent Discounted Leveraged
Transactions Cash Flow Buyout
Equity Value Aggregate Value
• Market value of a company’s ordinary equity • Represents value available to service claims of all
investors, including holders of both debt and equity
• Represents flows available to holders of equity after securities
debt and preferred claims have been serviced
• Also known as enterprise value, asset value, total
• Typical equity value multiples value and firm value
– Price/Earnings (P/E) • Typical aggregate value multiples
– Price/Book Value of Equity (P/BV) – Aggregate Value/Revenue
– Price/Earnings / Long-Term EPS Growth (PEG) – Aggregate Value/EBITDA
– Aggregate Value/EBIT
Equity Value = Total Shares Outstanding (TSO) x Share Price
+ Net Debt = Short-Term Debt + Long-Term Debt - Cash & Cash equivalents
+ Other Debt Adjustments = Preferred Stock + Capitalised Leases + Unfunded Pension Liabilities, etc
+ Minority Interests
= Aggregate Value
VALUATION FUNDAMENTALS 5
 Com parable Precedent Discounted Leveraged
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Com panies Transactions Cash Flow Buyout

Valuation Methodologies Can Be Regrouped In Two Main Categories

Relative Valuation Fundamental / Intrinsic Valuation

Relative or market-based valuation relies on the market price of
comparable companies operating in a similar industry as the basis of
its valuation
Intrinsic or absolute valuation is a method of valuing a business based
on the present value of its future cash flows
It relies on the valuer’s expectations of how the business will evolve,
including its growth rate, margins, and investment levels

There are 2 main relative valuation methodologies: There are 2 main fundamental / intrinsic valuation methodologies:

A• Comparable Companies C• Discounted Cash Flows

B• Precedent Transactions D• Leverage Buy-Out (LBO) [refer Appendix]

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Bringing It All Together: The Football Field

• The football field allows to Valuation Benchmarks

summarize the ranges of Enterprise Value (US$m)

valuation implied by each Enterprise Value

methodology
FY+1 EV/EBITDA

Trading
Com ps
FY+1 EV/EBIT

LTM EV/EBITDA
Transaction
Com ps

LTM EV/EBIT

DCF Valuation
x – y% WACC
Valuation
DCF

DCF Valuation
x – y% Terminal Grow th
Valuation

LBO
LBO

20% - 25% IRR

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 Com parable
Basics
Com panies
Overview of Comparable Companies Analysis
• Comparable companies
analysis implies a
company’s value based on
public company
benchmarks through the
analysis of comparable
companies’ trading and
operating statistics
• Key concepts include
– Selection of comparable
companies
– Matching of correct
earnings type to relevant
multiples
– Collection and calculation
of key financial inputs
– Calendarisation of
earnings
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Precedent Discounted Leveraged
Transactions Cash Flow Buyout
• Provides company’s implied value in the public equity markets through analysis of
comparable companies’ trading and operating statistics
• Does not include control premium
• Apply multiples derived from similar or “comparable” publicly traded companies to
Description company’s operating statistics
• Reliability depends on the level of comparability of other publicly traded companies
– Factors include industry of operation, range of products, revenue base (size),
geographical presence, profitability and growth
• A change of control premium may be applied to estimate private market value
 Based on public information
 Market efficiency implies that, in theory, trading valuation should reflect all available
information including trends, business risk, growth characteristics, etc
Advantages
 Values obtained can be reliable indicator of the value of the company for a minority
investment
 Difficult to find large sample of truly comparable companies; it is difficult/impossible to
adjust for differences in the underlying business of comparable companies
– Despite “market efficiency” arguments, sometimes difficult to explain different valuations
and trading levels for apparently similar companies
Disadvantages  Trading valuation of a company may be affected by thin trading activity, small
capitalization, poor research coverage, and small public float
 Stock prices may be impacted by outside variables such as M&A activity in the sector,
regulatory scrutiny, etc
 Does not take into account control premiums
VALUATION FUNDAMENTALS 8
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Application of Comparable Companies Analysis

1 Select a Set of Comparable Companies

2 Identify Relevant Valuation Multiples

3 Calculate and Apply Valuation Multiples to the Financial Metrics of the Company being Valued

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Step 1: Selecting a Set of Comparable Companies

• Comparable companies are selected based on their business and financial characteristics

• Business characteristics to consider include

– Products

– Product mix

– Geographical markets

– Customers

• Financial characteristics to consider include

– Size (revenue, operating income)

– Profitability (operating margins)

– Leverage

Notes:

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Step 2: Identifying Relevant Valuation Multiples (1/2)

• Certain valuation multiples are relevant across most industries

– AV/EBITDA

– AV/EBIT

– P/E

– Dividend yield (while not a “multiple” dividend yield is a commonly used valuation benchmark)

• However, some industries will have specific valuation benchmarks

– Utilities: AV/Capacity

– FIG: Price/Book

– Oil & Gas: AV/2P Reserves

• Most trading comparables sets will also include leverage multiples

– Useful for explaining variations in trading multiples and for determining an appropriate level of leverage for a similar, publically listed company

– Common leverage multiples include Debt/EBITDA, Net Debt/EBITDA, EBITDA/Interest Expense

Notes:

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Com panies Transactions Cash Flow Buyout

Step 2: Identifying Relevant Valuation Multiples (2/2)

• It is important to ensure Matching Earnings “Type” to Relevant Multiples

that you are matching the
correct “type” of earnings
with the correct “type” of
multiple Revenue
Aggregate value
multiples
• Aggregate value multiples
should be applied to AV/Revenue Available to all
EBITDA
earnings items “above” the providers of capital
interest expense line as AV/EBITDA
these earnings are
available to all providers of AV/EBIT
capital EBIT
– Aggregate
Value/Revenue
– Aggregate Value/EBITDA Available to debt
Interest Expense
– Aggregate Value/EBIT holders

• Equity value multiples

should be applied to PBT
earnings items “below” the Equity value
interest expense line multiples:
– Price/Earnings (1) Price/Earnings Available to
– Price/Book Value Tax
government
– Price/Long-Term EPS Price/Book Value
Growth
Price/EPS Growth Available to
Net Income
shareholders

Notes:
1. Net Income is the most common, though you may also use PBT, particularly If there are differences in tax rates across the companies you are reviewing

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Com panies Transactions Cash Flow Buyout

Step 3: Collection of Historical and Forecast Financials (1/3)

Definitions for Key Financial Statistics

Key Financial Statistics and Relevant Sources

Statistic Definition Source in Financial Statements

Sales (Revenue) • Receipts from the sale of goods and services (excludes other income and • Income statement in latest financial report
interest income) • Often disclosed in results or other investor presentations
• Ideally based on continuing operations

EBITDA • Earnings before interest, taxes, depreciation and amortisation • Income statement in latest financial report
• EBIT + depreciation and amortisation, or Revenue – operatingexpenses before • May need to go to notes to find individual items (e.g. depreciation/amortisation)
depreciation and amortisation if not disclosed in income statement
• Should exclude one-off and non-core items, and should ideally be based on • Often disclosed in results or other investor presentations and should be on a
continuing operations normalised basis
EBIT • Earnings before interest expense/income and taxes • Income statement in latest financial report
• Pre-tax income + net interest expense, or EBITDA – depreciation and • May need to go to notes to find individual items if not disclosed in income
amortisation statement
• Should exclude one-off and non-core items, and should ideally be based on • Often disclosed in results or other investor presentations and should be on a
continuing operations normalised basis
Net Incom e (“NPAT”) • Consists of after-tax income from continuing operations, after preferred • Income statement in latest financial report
dividends • Often disclosed in results or other investor presentations and should be on a
• Should exclude one-off items and ideally be based on continuing operations normalised basis

Earnings per Share • Net income / w eighted average shares outstanding • Income statement in latest financial report
(EPS) • Often disclosed in results or other investor presentations and should be on a
normalised basis

Minority Interests • Book value of the equity in the company’s subsidiaries not ow ned by the • Balance sheet in latest financial report
company itself

Net Debt • Calculated as short term debt + long term debt -cash & cash equivalents • Balance sheet in latest financial report
• May make adjustments for preferred equity, finance leases (may even • May need to go to notes for adjustments
capitalise operating leases w here significant, although w ill then need to add-
back operating lease expense to EBITDA and EBIT) and unfunded pension
liabilities
Capital Expenditure • Expenditure on capital goods (i.e. property, plant and equipment) • Cash flow statement in latest financial report
(“Capex”) • May include expenditure on intangibles for some businesses (e.g. software
development)

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Com panies Transactions Cash Flow Buyout

Step 3: Collection of Historical and Forecast Financials (2/3)

Make a Commercial Judgment About the Appropriate Source for Inputs

Input Data and Relevant Sources

Data Required Use Sources

Share Price • Used to calculate market capitalisation, w hich also forms an input into • Financial databases (e.g. CapIQ, Bloomberg)
aggregate value
• Last tw elve months trading range is also relevant to provide a sense for how
the stock has performed recently
Total Shares • Used to calculate market capitalisation, w hich also forms an input into • Ideally, found from the most recent relevant company filing
Outstanding aggregate value
• Theoretically, should include dilution for in-the-money options outstanding

Net Debt, Other Debt • Used to calculate aggregate value and relevant leverage metrics
Adjustments and • Most common adjustments are finance leases and preference shares/hybrids.
Minorities US companies w ill also have unfunded pension liabilities
• Some industries w ill also require other adjustments
• Ideally, found from the most recent relevant company filings (i.e. latest annual,
semi-annual or quarterly for US companies)
• How ever, this can be time consuming and may not add much value w here the
comparables set is large and the use is for business development. Use
financial databases w here more practical, but be sure to check reasonableness

Financial Year End • Used to “calendarise” historical and forecast financials to a common year end • Historical financials: Financial statements adjusted to a corresponding time
for comparability period / financial databases
• Forecast financials: Financial databases
Historical Financials • Used to calculate last tw elve months (“LTM”) trading multiples, forward trading • Ideally, found from company filings. Most relevant metrics (revenue, EBITDA,
multiples w here calendarising to an earlier financial year end, and historical EBIT, NPAT, etc) are often disclosed directly in results/investor presentations
operating metrics • Again, this can be time consuming and may not add much value. Use financial
databases w here more practical, but be sure to check reasonableness
Forecast Financials • Used to calculate forward trading multiples and projected operating metrics • Based on broker consensus estimates w hich can be pulled from financial
databases, but check to make sure that estimates are reasonable

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Com panies Transactions Cash Flow Buyout

Step 3: Calendarisation of Earnings

• Companies within a trading Overview of Calendarisation

comparables set may have
different financial year-ends
– This creates a
comparability issue that
requires “calendarisation”
of all earnings to a
common year-end
• Companies w ithin a trading comparables set may have different financial year-ends
– For example, the financial year-end for Myer and David Jones is 31 July, but the financial year-end for The Reject Shop is 30 June
– This creates a comparability issue as earnings w ill be “closer” or “further away” depending on the financial year-end
– Necessary to “calendarise” all earnings to a common year-end (typically the year end of the company for w hich the trading comparables set is
being prepared)
Worked Example
• David Jones financial year-end is 31 July, w hile The Reject Shop is 30 June
• This means that the David Jones financal year-end is one month “ahead” of The Reject Shop year-end
• To calendarise David Jones to 30 June, one month of its prior year earnings w ill need to be used
– For example, assume FY2012 revenue w as A$1,868MM and FY2013 revenue is forecast to be A$1,902MM
– FY2013 revenue calendarised to 30 June 2013 is (1/12) x A$1,868MM + (11/12) x A$1,902MM = A$1,899MM

TRS 30 June 30 June 30 June

Financial 2012 2013 2014
Year-End

DJS
Financial 31 July 31 July 31 July
Year-End 2012 2013 2014

1 Month 11 Months
of FY2012 of FY2013

Months Used to Calendarise to 30 June 2013

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Com panies Transactions Cash Flow Buyout

Do’s and Don’ts of Comparables Analysis

• A good cross-check is to go Do Don’t

to Capital IQ’s “key
statistics” tab for a
company and check the
multiples you have
calculated against those
– These multiples do not
take into account
calendarisation and any
adjustments that have
been made to AV or EV.
They do, however,
provide somewhat of a
sanity check in most
cases
 Back out extraordinary items
 Tax-effect extraordinary items where necessary
 Footnote all adjustments
 Double check the numbers
 Do a “do the numbers make sense” review of output
pages
 Always include mean and median values
 Use consistent formatting
 Forget to convert numbers reported in different
currencies
 Forget to calendarize inputs
 Forget to “NM” (“Not Meaningful”) any irrelevant
statistics (e.g. negative multiples)
 Overlook the effect of outliers on mean and median
multiples
 Assume “inherited” comps are correct

 Make industry specified adjustments

 Understand which multiples are most relevant for a

given industry

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Com panies Transactions Cash Flow Buyout

Example Trading Comparables Output

Trading Comparables(1)
Calendarised to June Year End

Current Price Market Cap Agg Value AV / EBITDA (x) AV / EBITA (x) AV / EBIT (x) P / E (x) Net Debt / EBITDA (x)
Company (lcl/share) (NZ$MM) (NZ$MM) FY12 FY13 FY14 FY12 FY13 FY14 FY12 FY13 FY14 FY12 FY13 FY14 FY12 FY13 FY14

Australian Waste Peers

Transpacific 0.85 1,680 3,314 6.0x 5.8x 5.5x 9.9x 9.1x 8.5x 10.5x 9.7x 9.0x 18.0x 13.9x 11.0x 2 .4x 2.3x 2.2x

Tox Free 2.77 400 460 7.1x 6.5x 5.9x 10.6x 9.6x 8.7x 10.9x 9.9x 8.9x 17.0x 14.2x 12.6x 0 .9x 0.8x 0.8x

Mean 6.6x 6.1x 5.7x 10.2x 9.4x 8.6x 10.7x 9.8x 8.9x 17.5x 14.1x 11.8x 1.7x 1.6x 1.5x

Median 6.6x 6.1x 5.7x 10.2x 9.4x 8.6x 10.7x 9.8x 8.9x 17.5x 14.1x 11.8x 1.7x 1.6x 1.5x

International Waste Peers

Lassila & Tikanoja 10.50 643 821 5.7x 5.3x 5.0x 9.1x 8.2x 7.6x 11.3x 9.9x 9.0x 16.8x 12.0x 10.9x 1.2x 1.1x 1.1x

Seche Environnement 27.00 366 668 4.7x 4.6x 4.3x 8.1x 8.5x 7.9x 8.1x 8.6x 8.0x 16.4x 16.8x 13.3x 2.1x 2.1x 2.0x

Shanks Group 0.79 615 1,044 5.1x 5.1x 4.7x 9.9x 9.6x 8.6x 10.8x 10.5x 9.3x 12.1x 12.8x 11.0x 2.1x 2.1x 1.9x

Suez 8.42 6,753 22,525 6.3x 5.7x 5.4x 10.2x 9.5x 8.9x 12.9x 11.9x 10.9x 13.4x 12.3x 10.7x 3.5x 3.2x 3.0x

Veolia 8.12 6,527 34,362 7.5x 7.5x 7.2x 11.3x 11.1x 10.4x 15.3x 14.9x 13.7x NM 13.8x 10.3x 5.1x 5.1x 4.9x

Casella Waste Systems 4.54 216 812 7.3x 6.7x 6.6x 21.4x 21.0x NA 21.8x 21.5x NA NM NM NA 5.4x 4.9x 4.8x

Republic Services 28.03 12,515 21,128 7.0x 7.0x 6.6x 10.2x 10.2x 9.5x 11.2x 11.2x 10.4x 15.8x 14.2x 13.2x 2.9x 2.8x 2.7x

Waste Connections 30.61 4,610 5,679 9.3x 8.8x 8.0x 13.5x 12.9x 12.2x 14.3x 13.7x 12.9x 22.5x 21.3x 19.7x 1.7x 1.6x 1.5x

Waste Mangement 32.32 18,313 30,546 7.5x 7.3x 7.0x 11.7x 11.4x 10.8x 12.0x 11.7x 11.0x 15.4x 14.5x 13.4x 2.9x 2.8x 2.7x

Progressive Waste Solutions 19.78 2,841 4,497 6.9x 6.7x 6.5x 11.3x 11.2x 10.7x 13.6x 13.5x 12.7x NM 17.7x 15.9x 2.5x 2.5x 2.4x

Mean 6.7x 6.4x 6.1x 11.7x 11.4x 9.5x 13.1x 12.6x 10.6x 16.1x 14.7x 12.8x 3.0x 2.9x 2.7x

Median 7.0x 6.7x 6.6x 10.2x 10.2x 9.2x 12.0x 11.7x 10.7x 15.8x 14.0x 12.1x 2.9x 2.8x 2.7x

Notes:
1. Market data as at 15 October 2012

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 Com parable
Basics
Com panies
Overview of Precedent Transactions Analysis
• Precedent transactions
analysis provides a
valuation benchmark in a
“change of control”
scenario by applying
valuation multiples paid for
similar businesses in past
acquisitions
• Key concepts include
– Premiums paid vs.
valuation multiples
– Sourcing relevant
precedent transactions
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Precedent Discounted Leveraged
Transactions Cash Flow Buyout
• Provides private market benchmark in a “change of control” scenario
• Does include control premium
• Apply multiples derived from similar or “comparable” precedent M&A transactions to
company’s operating data
Description
• Reliability depends on number of recent precedent transactions and their degree of
comparability, the market landscape at the time of the referenced transaction, as well as
the relative supply and demand for a certain type of asset at the time of the transaction
 Based on public information
 Realistic in the sense that past transactions were successfully completed at certain
premiums. The analysis therefore indicates a range of plausibility for offered premiums
 May show trends such as consolidation, foreign acquirors, financial acquirors, etc
Advantages
 Provides guidance to assess likely interlopers and their willingness and ability to pay
 Public data on past transactions can be limited and misleading
 Precedent transactions are rarely directly comparable
 Not all aspects of a transaction can be captured in multiple valuation (e.g., commercial
agreements, governance issues)
Disadvantages
 Values obtained often vary over a wide range and therefore can be of limited use
 Market conditions at the time of a transaction can have substantial influence on valuation
VALUATION FUNDAMENTALS 18
 Com parable Precedent Discounted Leveraged
Basics
Com panies Transactions Cash Flow Buyout

Application of Precedent Transactions Analysis

1 Select a Set of Comparable Transactions

2 Identify Relevant Valuation Metrics

3 Calculate and Apply Valuation Metrics to the Financial Metrics of the Company being Valued

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 Com parable Precedent Discounted Leveraged
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Com panies Transactions Cash Flow Buyout

Step 1: Select a Set of Comparable Transactions

• Two key steps in compiling Identifying Relevant Deals

a precedent transactions
set • Useful databases include: Mergermarket, Thomson, Bloomberg or Capital IQ databases

• Identify relevant deals

• Source relevant data

Sourcing Relevant Data

• Level of detail depends on purpose of precedent transactions

– For a live execution, best approach is to compile the input data yourself using company filings for public market
transactions and press articles for private market transactions
– Where time is limited, Mergermarket often provides transaction multiples. However, necessary to check for
reasonableness

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 Com parable Precedent Discounted Leveraged
Basics
Com panies Transactions Cash Flow Buyout

Step 2: Identify Relevant Valuation Metrics

Premiums Paid vs. Valuation Multiples

• Two broad metrics considered Premiums Paid

when compiling precedent
transaction multiples
– Premiums paid
– Valuation multiples
• Represents the premium of the offer price per share to the target’s stock price before the transaction w as announced or rumored in the market
– Only relevant for public market acquisitions
• Unaffected share prices can be calculated at the date prior to announcement or over a period of time
– Common time periods are 1 day, 30 days and 90 days

• Premiums paid only relevant – 30 day and 90 day share prices calculated as a volume-w eighted average (“VWAP”)
for public market acquisitions
• Best source VWAP data is Bloomberg
– Represents the percentage
paid above an “unaffected”
share price
– Unaffected share price
calculated prior to
announcement of the
transaction or when it was
rumoured in the market Valuation Multiples
• Represents price paid as a multiple of a given earnings metric
• Valuation multiples relevant – Relevant for both public and private market transactions
for both public and private
market transactions • Typical multiples include
– Typical multiples include – AV/EBITDA
AV/EBITDA, AV/EBIT and – AV/EBIT
P/E – P/E
– Industry-specific metrics
may be relevant (e.g. AV/2P • Methodology is the same as trading comparables
reserves for oil & gas)
• May also consider pre and post-synergies multiples

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Com panies Transactions Cash Flow Buyout

Example Precedent Transactions Output (1/3)

P/LTM Earnings
x

60
Median P/Es
Pre 2007 20.9x
2007 16.8x
2008 8.6x
40.2 2009-11 16.1x
40

27.7
25.0 24.0 Mean: 17.7x
23.5
21.2 21.2 20.7 20.1 Median: 16.7x
19.5 18.6
20 17.8 17.6 16.8 16.6 16.2 16.1 16.0 15.9 14.9 14.6 13.8
11.0 11.0 9.9 9.8 8.6 7.7

0
Date 10/06 1/06 9/00 4/02 3/00 12/07 3/06 4/00 4/02 12/09 12/09 7/07 3/00 5/07 8/06 11/04 6/09 11/10 6/11 6/08 8/11 6/07 5/08 9/09 11/03 12/07 11/08 7/08
(1)

(1)

(2)
Platinum IPO
Colonial (Life) / CBA

AWM / IOOF
Perennial / IOOF

Colonial (Funds Mgmt) / CBA

Select / AWM

AXA AP / AMP (Revised)

Oasis / ING

Aviva / NAB

AustChoice / Deakin
Ord Minett / AWM

Sthn Cross / Bell Financial

Rothschild AM / Westpac

DKN / IOOF
Western Pacific / Snowball

Wilson HTM IPO

Bell Financial Group IPO

ING JV / ANZ

ING JV / ANZ
Count / CBA
MLC / NAB

AXA AP / NAB
Bridges / Tower

Genesys / AXA AP
AXA AP / AMP

Plan B IPO
BT IM IPO

AWM / Tower Demerger

Source: Company Announcements

Notes:
1. Based on FY10E NPAT for AXA’s Australian and NZ business; NAB bid since terminated (included for reference)
2. Revised proposal, based on FY11E NPAT for AXA’s Australian and NZ business

MORGAN STANLEY SINGAPORE INVESTMENT VALUATION FUNDAMENTALS 22

BANKING TECHNICAL SKILLS WORKSHOP
 Com parable Precedent Discounted Leveraged
Basics
Com panies Transactions Cash Flow Buyout

Example Precedent Transactions Output (2/3)

Mean/Median Premia Paid

1 Day Prior 30 Days Prior 90 Days Prior
Unsolicited
All 48% / 54% 49% / 36% 57% / 49%
Cross Border 61% / 55% 61% / 58% 74% / 57%
Domestic 38% / 36% 41% / 35% 45% / 43%
Friendly
All 38% / 29% 50% / 37% 52% / 37%
Cross Border 45% / 36% 64% / 41% 70% / 41%
Domestic 32% / 24% 37% / 32% 35% / 33%
Source: Bloomberg, IRESS, FactSet

Mean/Median Premia Paid

1 Day Prior 30 Days Prior 90 Days Prior
Unsolicited
Cash 52% / 54% 53% / 42% 57% / 49%
Stock 33% / 33% 42% / 42% 90% / 90%
Cash & Stock 21% / 21% 18% / 18% (8)% / (8)%
Friendly
Cash 44% / 37% 58% / 38% 63% / 44%
Stock 37% / 23% 43% / 31% 43% / 24%
Cash & Stock 22% / 21% 35% / 37% 29% / 32%
Source: Bloomberg, IRESS, FactSet

Notes:

MORGAN STANLEY SINGAPORE INVESTMENT VALUATION FUNDAMENTALS 23

BANKING TECHNICAL SKILLS WORKSHOP
 Com parable Precedent Discounted Leveraged
Basics
Com panies Transactions Cash Flow Buyout

Example Precedent Transactions Output (3/3)

Australia Life Insurance Sector

• Life insurance precedent Australia Life Precedent Transactions

transactions have occurred
at around 20x forward Acquired Size P/E P/Bk P/EV
earnings and 1.4x EV Date Target Acquirer (%) (A$MM) (x) (x) (x) Comments

29-Dec-10 Tower Australia Dai-ichi Life 71% 1 ,760 21.5x 2.9x 1 .4x Life insurer acquisition

15-Nov-10 AXA AP Aust & NZ AMP 100% 4 ,154 16.0x 2.6x 1 .2x Life insurer acquisition

17-Dec-09 AXA AP Aust & NZ NAB 100% 4 ,610 19.5x n.a. 1.4x Major bank acquisition

25-Sep-09 ING Australia ANZ 51% 1 ,760 11.8x 1.7x 1 .2x Exit by parent (in JV with ANZ)

22-Jun-09 Aviva Australia NAB 100% 9 25 16.1x 0.9x 1 .1x Exit by parent

8-Aug-08 Tower Australia Dai-ichi Life 30% 3 76 23.2x 2.3x 1 .6x Strategic investment by Dai-ichi

30-Jan-06 PrefSure Life Tower Group 100% 1 45 20.7x 1.3x 1 .1x Exit by parent

26-Aug-02 BT Financial Group Westpac 100% 9 00 n.a. n.a. n.a. Major bank acquisition

30-Apr-02 ANZ (49% JV) ING (51% JV) 49% 3 ,753 20.1x 1.9x n.a. Major bank JV

23-Apr-02 Rothschild Australia Westpac 100% 3 23 24.0x n.a. n.a. Major bank acquisition

10-Apr-00 MLC NAB 100% 4 ,610 20.7x 5.3x 2 .0x Major bank acquisition

9-Mar-00 Colonial (Life Business) CBA 100% 5 ,456 17.6x n.a. 1.5x Major bank acquisition

9-Mar-00 Colonial (FM Business) CBA 100% 2 ,235 23.5x 2.0x n.a. Major bank acquisition

Mean 19.6x 2.3x 1 .4x

Median 20.4x 2.0x 1 .4x

Source: Company Filings, Company Announcements

MORGAN STANLEY SINGAPORE INVESTMENT VALUATION FUNDAMENTALS 24

BANKING TECHNICAL SKILLS WORKSHOP
 Com parable
Basics
Com panies
Overview of Discounted Cash Flow Analysis
• Discounted cash flow
analysis discounts a
company’s future operating
cash flows at an
appropriate cost of capital
• Key concepts include
– Unlevered free cash
flows
– WACC
– Mid-year convention
– Terminal growth rate vs.
terminal value multiple
MORGAN STANLEY SINGAPORE INVESTMENT
BANKING TECHNICAL SKILLS WORKSHOP
Precedent Discounted Leveraged
Transactions Cash Flow Buyout
• Theoretical valuation / Intrinsic valuation
• Project the company’s future operating cash flows for five years or more
• Calculate the present value of those cash flows and the terminal value using an
appropriate cost of capital and terminal value methodology
Description
 Theoretically, the most sound valuation method
 Forward looking analysis, based on cash flow (less affected by accounting rules than net
income); incorporates expected operating strategy into the model
 Less influenced by volatile public market conditions
Advantages
 Allows a valuation of the separate components of a business or synergies separately from
the business
 Valuation is highly sensitive to underlying assumptions for cash flows (i.e., validity of
projections), terminal value calculation and discount rate
 Terminal value often represents significant portion of total value
 Impervious to market dynamics and associated control premia, theoretical valuation may
Disadvantages misrepresent what would actually be paid for a business
VALUATION FUNDAMENTALS 25
 Com parable Precedent Discounted Leveraged
Basics
Com panies Transactions Cash Flow Buyout

Application of DCF Analysis

1 Forecast Unlevered Free Cash Flows / Terminal Value

2 Calculate an Appropriate Discount Rate (WACC)

3 Discount Cash Flows / Terminal Value and Summate at Date of Valuation

MORGAN STANLEY SINGAPORE INVESTMENT VALUATION FUNDAMENTALS 26

BANKING TECHNICAL SKILLS WORKSHOP
 Com parable Precedent Discounted Leveraged
Basics
Com panies Transactions Cash Flow Buyout

Step 1: What is Unlevered Free Cash Flow?

• Unlevered free cash flows Unlevered Free Cash Flow

(or free cash flows to the
firm, “FCFF”) represent the • Unlevered free cash flow (or free cash flows to the firm, “FCFF”) represents the normalised cash flow available to all
providers of capital to the firm
normalised cash flows
available to all providers of – The sum of a company’s discounted FCFF represents the intrinsic aggregate value of the company
capital to the firm

Calculating Unlevered Free Cash Flow

Change in
EBITDA - Unlevered Tax - Capex - Working Capital = FCFF

Where
• EBITDA = Earnings before interest, taxes, depreciation and amortisation
• Unlevered tax = EBIT x tax rate
• Capex = expenditure on capital goods/non-current intangibles
• Working capital = short term operational assets (receivables, inventories, other current assets excluding cash) –
short term operational liabilities (payables, income taxes payable, other current liabilities excluding debt)

MORGAN STANLEY SINGAPORE INVESTMENT VALUATION FUNDAMENTALS 27

BANKING TECHNICAL SKILLS WORKSHOP
 Com parable Precedent Discounted Leveraged
Basics
Com panies Transactions Cash Flow Buyout

Step 1: Forecasting Unlevered Free Cash Flow

• Cash flows will be forecast for Option 1: Broker Consensus Forecasts

individual years over a defined
forecast period
• The most simple method of forecasting the unlevered free cash flow of a company is to take an average/median of
what brokers are forecasting
– The length of this forecast
period is determined by the • Approach is simple to apply and has the advantage of combining the analysis of multiple brokers into a single
degree of visibility in the forecast
company’s earnings
• Most appropriate when analysis needs to be done relatively quickly/there is insufficient data available to build a full
– A mature, stable company operational model for the given company in the circumstances
for example will have more
visibility in its earnings than
a rapidly growing
technology start-up
• There are two primary
methods for forecasting
individual cash flows – using
broker forecasts or building an
operational model Option 2: Building an Operational Model
• A more involved method of forecasting cash flows is to build an operational model for the company being valued
• Involves making assumptions about key earnings drivers, operational costs, capital expenditure requirements etc
– Modeller will need to take a view on factors such as volume growth and pricing growth in the business

• Approach allows individual assumptions underlying forecasts to be assessed and sensitised internally – can provide
greater confidence in forecasts

• Most appropriate when detailed valuation is required for live executions

• Remember, outputs are only as good as the inputs. An operational model is most reliable with substantial input from
management

MORGAN STANLEY SINGAPORE INVESTMENT VALUATION FUNDAMENTALS 28

BANKING TECHNICAL SKILLS WORKSHOP
 Com parable
Basics
Com panies
Step 1: Calculating a Terminal Value
• Once cash flow forecasts
have been generated for n
periods, a terminal value
needs to be calculated for
the business
– This effectively
represents the value of
the ongoing business
beyond year n
• Two basic methodologies
to calculate a terminal
value
– Multiple applied to
terminal year earnings
– Discount FCFF post the
terminal year assuming
they grow at a certain
rate into perpetuity
MORGAN STANLEY SINGAPORE INVESTMENT
BANKING TECHNICAL SKILLS WORKSHOP
Precedent Discounted Leveraged
Transactions Cash Flow Buyout
Terminal Value Overview
• When performing a DCF analysis w e project cash flows for n years and then estimate a terminal value for the ongoing value of the business
beyond year n
– Alternatively, the terminal value can be view ed as the sale price of the business in year n
• There are tw o basic methodologies to calculate a terminal value
– Apply a multiple to a specified financial statistic (Revenue, EBITDA, EBIT, Net Income) in the terminal year (“m ultiple m ethod”)
– Assume a grow ing perpetuity based on the terminal year’s cash flow (“perpetual growth m ethod”)
Multiple Method
• Assumes the business is sold at the end of the projection period
• Use the most appropriate multiple or range of multiples for the company’s industry
Tip
There are two schools of thought: 1) It is common practice to assume an exit multiple that is largely in-line with trading comparables and
account for potential variations with sensitivity tables; and 2) It is also common practice to assume an exit multiple that implies a perpetual
growth rate in-line with reasonable long-term growth estimates (2-3%)
Perpetual Growth Method
• Assumes FCFF continues in perpetuity, grow ing at some constant rate
• Terminal grow th rate should not exceed the long term nominal grow th rate of the economy
• Important to cross-check with multiple method and to normalise terminal year projections
Tip
Theoretically, it is appropriate to assume a perpetual growth rate that is in line with the annual growth rate of the economy. Typical to assume
2-3%
VALUATION FUNDAMENTALS 29
 Com parable
Basics
Com panies
Step 2: Weighted Average Cost of Capital (1/2)
• The appropriate discount
rate to be applied to FCFF
reflects the blended cost of
capital for both debt and
equity investors, commonly
known as the weighted
average cost of capital
(“WACC”)
• The cost of debt is
determined based on a
relevant base rate plus a
credit spread
• The cost of equity should
reflect both compensation
for the time value of money
and the riskiness of the
stock (volatility of returns
around the mean)
MORGAN STANLEY SINGAPORE INVESTMENT
BANKING TECHNICAL SKILLS WORKSHOP
Precedent Discounted Leveraged
Transactions Cash Flow Buyout
Calculating WACC
After-tax Cost of
Cost of Debt x 1 – Tax Rate = Debt
Where
• Cost of debt = interest rate that w ould be applied to a new debt issue by the company (often calculated assuming a base rate, such as the A$ 5
year sw ap rate, plus a margin based on the credit profile of the company)
• Tax rate = marginal tax rate
Equity Risk
Risk-Free Rate + Barra Beta x Premium = Cost of Equity
Where
• Risk-free rate = relevant government bond yield (e.g. US Government 10-year government bond)
• Beta = company’s equity beta, a measure of risk of the particular company vs. the overall market portfolio (Bloomberg or CIQ)
• Equity risk premium = Excess return of the market portfolio over the risk-free rate (depending on Bank’s guidance)
After-tax Cost of Debt / Capital 1 –Debt / Capital
Debt x Ratio + Cost of Equity x Ratio = WACC
Where
• Debt/capital ratio = target or current long term debt / (debt + market value of equity ratio)
VALUATION FUNDAMENTALS 30
 Com parable Precedent Discounted Leveraged
Basics
Com panies Transactions Cash Flow Buyout

Step 2: Weighted Average Cost of Capital (2/2)

Cost of Equity

• Theoretical cost of equity
requires estimation of
– Risk-free rate
– Beta
– Equity risk premium
• Rate at which an investment may earn interest without incurring any risk with respect to
amount or timing of cash flows
Risk-Free Rate • Typically based on the yield on a government security with a tenor equal to that of the
investment being valued
• Common to use the current yield on 10-year Australian government bonds

• Measure of the risk of the particular company vs. the overall market portfolio
• Where the company being valued is listed, there are a number of methods for calculating
beta
– Bloomberg adjusted beta (go to the <BETA> screen on a Bloomberg terminal). Calculate
over 3+ years (if possible) and on a monthly returns basis (1)
Beta – Calculate directly using historical stock and index returns
– Average of broker estimates
• Where the company being value is not listed
– Select a set of comparable, listed companies and calculate an average unlevered
beta(2). Re-lever the beta for the capital structure of the company being valued

Equity Risk • Excess return of the market portfolio over the risk-free rate
Premium • Dependent on Bank’s guidance

Notes:
1. Bloomberg adjusted betas are calculated as (1/3) + (2/3) x unadjusted beta. This adjustment assumes that all company betas should approach 1 over time
2. Unlevered beta = levered beta / [1 + (D/E)*(1-t)]

MORGAN STANLEY SINGAPORE INVESTMENT VALUATION FUNDAMENTALS 31

BANKING TECHNICAL SKILLS WORKSHOP
 Com parable Precedent Discounted Leveraged
Basics
Com panies Transactions Cash Flow Buyout

Step 3: Discounting Cash Flows – the Mid-Year Convention

• When discounting cash

CF1 PV2 + PV3 + PV4
flows, it is common and PV1 = PVTOTAL = PV1 +
more realistic to assume (1+r)6/12 (1+r)6/12
that cash flows occur
throughout the year CF1
12/31/05 6/30/06 12/31/06
– e.g. 31 December year-
end FCFF are assumed 6/12
to occur on 30 June CF2
– e.g. 30 June year-end PV2 =
FCFF are assumed to (1+r)1
occur on 31 December CF2
12/31/05 6/30/06 12/31/06 6/30/07 12/31/07

1
Valuation Date CF3
PV3 =
(1+r)2

CF3
12/31/05 6/30/06 12/31/06 6/30/07 12/31/07 6/30/08 12/31/08

1 2
CF4
PV4 =
(1+r)3

CF4
12/31/05 6/30/06 12/31/06 6/30/07 12/31/07 6/30/08 12/31/08 6/30/09 12/31/09

1 2 3

MORGAN STANLEY SINGAPORE INVESTMENT VALUATION FUNDAMENTALS 32

BANKING TECHNICAL SKILLS WORKSHOP
 Com parable Precedent Discounted Leveraged
Basics
Com panies Transactions Cash Flow Buyout

Step 3: Discounting Terminal Value – the Mid-Year Convention

• The appropriate method to Option # 1 – Multiple Method

use to discount terminal
value depends on whether
• The multiple method assumes terminal value occurs at the end of the final period
the multiple or perpetual
growth method has been • This means that the mid-year convention does not apply to discounting the terminal value to the present value
used to calculate it

Option # 2 – Perpetual Growth Method

• The mid-year convention does apply to discounting the terminal value to the present value when the perpetual
growth method has been used

MORGAN STANLEY SINGAPORE INVESTMENT VALUATION FUNDAMENTALS 33

BANKING TECHNICAL SKILLS WORKSHOP
 Com parable Precedent Discounted Leveraged
Basics
Com panies Transactions Cash Flow Buyout

Example DCF Output

Projected Cash Flows

FY2009A – FY2020E

A$MM, June Year End FY09A FY10A FY11A FY12E FY13E FY14E FY15E FY16E FY17E FY18E FY19E FY20E
EBITDA 29 29 36 36 40 44 44 45 46 47 48 49
D&A (14) (17) (16) (16) (16) (17) (18) (18) (19) (20) (20) (21)
EBIT 15 11 19 20 23 26 26 27 27 27 28 28
Less: Tax at 30% (4) (3) (6) (6) (7) (8) (8) (8) (8) (8) (8) (8)
EBIT (1-T) 10 8 14 14 16 18 19 19 19 19 19 20
Less: Maintenance Capex (6) (6) (6) (6) (6) (6) (6) (6) (6)
Less: Expansionary Capex (1) 0 (2) 0 0 0 0 0 0
Less: Remedial Capex (0) (2) 0 0 0 0 0 0 0
Less: Change in WC 1 1 1 1 1 1 1 1 1
Plus: D&A 16 16 17 18 18 19 20 20 21
FCFF 24 26 28 31 32 33 34 35 35

WACC Calculation DCF Valuation

Target D / D + E 65% A$MM
Risk-Free Rate 4.1% Terminal Growth Rate (%) 2.0%
ERP 6.0% Terminal Value 447
Beta 1.30 PV Terminal Value 198
Cost of Equity 11.9% PV of FCFF 181
A$MM Base Rate Margin Kd PV of Firm 379
Senior Facility 46 4.0% 1.5% 5.5% Less: Gross Debt (134)
Mezzanine A 26 4.0% 7.0% 11.0% Plus: Cash 29
Mezzanine B 44 4.0% 7.0% 11.0% Less: Minorities (1)
Mezzanine C 18 4.0% 7.0% 11.0% PV of Equity 272
Other 2 4.0% 7.0% 11.0% TSO (MM) 2,726
Cost of Debt 134 9.1% PV of Equity per Share (A$ / Share) 0.10
WACC 10.1% Premium to Current Share Price (%) 284.4%

MORGAN STANLEY SINGAPORE INVESTMENT VALUATION FUNDAMENTALS 34

BANKING TECHNICAL SKILLS WORKSHOP
 Com parable Precedent Discounted Leveraged
Basics
Com panies Transactions Cash Flow Buyout

Overview of Leveraged Buyout Analysis

• Leveraged buyout analysis • Determines the range of prices that a financial buyer would be willing to pay for an asset
determines what price a assuming a range of target rates of return
financial sponsor would be • Analysis is heavily dependent on the cash flow profile of the asset, leverage and exit value
willing to pay for an asset assumptions
assuming a certain rate of Description
return
• This is not a “valuation
methodology” per se, but
an ability to pay analysis
based on a financial
 Reflects methodology used by financial sponsors and hence represents a theoretically
sponsor’s desired equity
sound view of what private equity might be willing to pay for an asset
return and the
leveragability of a business
• Often viewed as a floor Advantages
valuation and typically
yields lower values than an
traditional discounted cash
flow valuation

 May not be appropriate for all businesses – will depend on ability for the business to
sustain leverage and for a financial sponsor to exit its investment in 3 – 5 years
– Only a relevant benchmark where potential bidder field includes private equity
 Requires additional assumptions around leverage and exit multiples
Disadvantages
 IRR can be sensitive to leverage and exit multiple assumptions

MORGAN STANLEY SINGAPORE INVESTMENT VALUATION FUNDAMENTALS 35

BANKING TECHNICAL SKILLS WORKSHOP
 Com parable Precedent Discounted Leveraged
Basics
Com panies Transactions Cash Flow Buyout

Key Concepts of Leveraged Buyout Analysis

1 How an LBO Creates Value

2 Suitable Assets for Private Equity

3 Leverage

4 LBO Analysis as a Valuation Tool

MORGAN STANLEY SINGAPORE INVESTMENT VALUATION FUNDAMENTALS 36

BANKING TECHNICAL SKILLS WORKSHOP
 Com parable Precedent Discounted Leveraged
Basics
Com panies Transactions Cash Flow Buyout

1: How an LBO Creates Value

• Value is generated in a Increase in Value through Operations

leveraged buyout in two Exit
Value
primary ways
Market Value LBO Assets Debt $15
– Operational before LBO LBO Value $30
improvements –acquirers Assets Debt $6 Assets Debt $15
Value of asset increases
often restructure the through grow th as w ell as
$20 $20 Equity
Equity improvements in
operations of a business $14 operations. Assumes no $15
to increase the value of debt paydow n
Equity $5
its assets
– Improvements in capital
+
structure – through the Increase in Value through Financial Engineering
Market Value LBO Exit
use of financial leverage, LBO
before LBO Value Value
acquirers can reduce the
cost of capital of the Assets Debt $6 Assets Debt $15 Assets Debt $5
business and increase $20 $20 $20
Debt is paid dow n with
Equity Equity
the rate of return on cash flow generated by
$14 $15
assets. Assumes no
equity increase in asset value
Equity $5

=
Total Increase in Value
Exit
Value

Market Value LBO Assets Debt $5

before LBO LBO Value Value of assets increases $30
Equity
Assets Debt $6 Assets Debt $15 through grow th as w ell as $25
$20 $20 improvement in
Equity operations, and cash flow
$14 generated by the assets
pays dow n debt
Equity $5

MORGAN STANLEY SINGAPORE INVESTMENT VALUATION FUNDAMENTALS 37

BANKING TECHNICAL SKILLS WORKSHOP
 Com parable Precedent Discounted Leveraged
Basics
Com panies Transactions Cash Flow Buyout

2: Suitable Assets for Private Equity

• Common characteristics of Characteristics of Private Equity Assets

LBOs are
– Ability to exit, have a Typical Characteristics Drivers of Value
story that still appeals to Grow th Plays • Young grow ing companies • Value creation through EBITDA/cash flow expansion
future buyers (i.e., need
• Operating in grow ing industries • Better access to capital
to have value left in
business, especially for
IPOs)
– Cash flow generation Operational • Mature companies in stable industries or neglected • Operational improvement
Im provement Plays industries (non-core division of conglomerates)
(low capex, high margins, – Balance Sheet optimisation
low volatility in working – Margin expansion
capital swings) • Potential multiple expansion
– Stability of cash flows Roll-Up Plays • Small/medium companies in fragmented markets • Value creation through bolt-on acquisitions and
through the cycle to synergy extraction
sustain high leverage • Potential multiple expansion
– Asset base that can be
used as security for debt
holders
– Ability to motivate
management through
better incentive structure
– High growth

MORGAN STANLEY SINGAPORE INVESTMENT VALUATION FUNDAMENTALS 38

BANKING TECHNICAL SKILLS WORKSHOP
 Com parable Precedent Discounted Leveraged
Basics
Com panies Transactions Cash Flow Buyout

3: Leverage Available to Financial Sponsors

Typical Financing Instruments

Liabilities &
Shareholders’ Priority in cash
Equity Typical Characteristics/Comments “waterfall”
Assets

Senior
• Priority claim on the assets
• Imposes restrictive maintenance covenants on company
• Pricing: Floating rate LIBOR + 200–325 bps (N.B. swaps)
Bank Debt
40% • Maturity: 5–9 years
• A, B, C tranches
• Repayment: A amortizes over life of loan, B and C in bullet

• “Junk” Bonds
High Yield • 10-year, 5-year non-callable
20% • Pricing: Benchmark bond + 400–700 bps

Quasi • Also known as “mezzanine” financing

Equity
15% • Characteristics of debt and equity

• Riskiest security in capital structure

Pure
• Full upside potential / No protection on downside
Equity
25% • Financial Sponsors have historically required returns on investment of
Junior approximately 20%

MORGAN STANLEY SINGAPORE INVESTMENT VALUATION FUNDAMENTALS 39

BANKING TECHNICAL SKILLS WORKSHOP
 Com parable Precedent Discounted Leveraged
Basics
Com panies Transactions Cash Flow Buyout

4: LBO Analysis as a Valuation Tool

• LBO valuation evaluates Overview of LBO Valuation

what a financial sponsor
can afford to pay, given
• LBO valuation analysis is based on cash flow projections and takes a company’s leveraged capital structure into
specific target returns
consideration

• Methodology is similar to a
levered DCF valuation
• IRR is the primary output
that is used to guide
investment decisions
• From a technical perspective, it is therefore similar to a levered DCF analysis
• However, LBO analysis approaches valuation from the specific perspective of LBO Sponsors; the key valuation
drivers therefore are:
– Debt capacity: maximizing leverage, within standard market parameters, will allow the financial sponsor to
maximize purchase price, given desire to contribute as little equity as possible

– Essentially the discount – Equity returns: once debt capacity has been ascertained, equity commitment will be determined by target
rate which, when applied assumed exit proceeds and equity returns, typically in the range of 20 – 25% historically
to the cash flows and
price paid for the – The interaction of these two factors will determine the LBO valuation
company under analysis,
• While financial sponsors consider many methodologies to calculate a “take-out” valuation, the most important pricing
gives a present value of
zero consideration is the projected return generated by the investment

– An IRR of 20% is – Basic question is “what price could be paid for the asset assuming a certain capital structure and a target return?”
typically considered to be
the rate of return on
equity to attract interest
from private equity
buyers

MORGAN STANLEY SINGAPORE INVESTMENT VALUATION FUNDAMENTALS 40

BANKING TECHNICAL SKILLS WORKSHOP
 Com parable Precedent Discounted Leveraged
Basics
Com panies Transactions Cash Flow Buyout

Example LBO Outputs

Sources and Uses Projected Cash Flows and Credit Metrics

Sources Commit Funded % Total x EBITDA A$MM, Dec YE LTM CY13E CY14E CY15E CY16E
Term Loan A 53 53 19% 1.5x Term Loan A 53 32 18 5 -
Term Loan B 80 80 28% 2.3x
Capex Facility 35 - - - Term Loan B 80 71 63 56 56
Revolver 35 - - -
Capex Facility - 11 30 35 3
Total Senior Debt 203 133 47% 3.8x
Mezzanine - - - - Revolver - - - - -
Total Debt 203 133 47% 3.8x
Shareholder Loan - 66 24% 1.9x Total Senior Debt 133 115 111 96 59
Common Equity - 82 29% 2.3x
Mezzanine - - - - -
Total Equity - 148 53% 4.2x
Total Sources - 281 100% 7.9x Total Debt 133 115 111 96 59

Cash 2 5 6 10 2
Uses A$MM % Total x EBITDA
Acquisition Price 266 95% 7.5x Total Net Debt 131 110 105 86 57
Transaction Costs 13 5% 0.4x
Mezzanine Upfront Fee - - - EBITDA 37 40 42 43 49
Minimum Cash Balance 2 1% 0.1x
Add: Non-Cash Items 2 2 2 3 2
Total Uses 281 100% 7.9x
Joint Venture Adj. (1) (1) 1 1 1

IRR Sensitivity Inc in Working Cap. 5 (0) (1) (0) 0

Less Growth Capex (5) (10) (19) (12) (8)

Entry AV ($MM) / AV/EBITDA (x)
Less Maint. Capex (7) (4) (5) (4) (4)
248 266 284 301 319
Capex Facility Drawdown - 10 19 5 -
7.0x 7.5x 8.0x 8.5x 9.0x
Less Cash Tax - - - - -
12.1x 6.0x 14% 11% 8% 5% 3% Less Withholding Tax (1) (1) (1) (2) (2)
AV/EBITDA (x)
Exit P/E (x) /

13.4x 6.5x 17% 13% 10% 8% 5% FCF 31 35 37 34 38

14.7x 7.0x 19% 16% 13% 10% 8%

DSCR 2.1x 1.4x 1.6x 1.6x 1.5x
16.1x 7.5x 21% 18% 15% 12% 10%
Senior Debt / EBITDA 3.6x 2.8x 2.7x 2.2x 1.2x
17.4x 8.0x 23% 20% 17% 14% 12%
Total Net Debt / EBITDA 3.6x 2.7x 2.5x 2.0x 1.2x

Interest Coverage 2.5x 2.9x 3.3x 4.0x 5.1x

Notes:

MORGAN STANLEY SINGAPORE INVESTMENT VALUATION FUNDAMENTALS 41

BANKING TECHNICAL SKILLS WORKSHOP
Bringing It All Together: The Football Field

• The football field allows to Valuation Benchmarks

summarize the ranges of Enterprise Value (US$m)

valuation implied by each Enterprise Value

methodology
FY+1 EV/EBITDA

Trading
Com ps
FY+1 EV/EBIT

LTM EV/EBITDA
Transaction
Com ps

LTM EV/EBIT

DCF Valuation
x – y% WACC
Valuation
DCF

DCF Valuation
x – y% Terminal Grow th
Valuation

LBO
LBO

20% - 25% IRR

MORGAN STANLEY SINGAPORE INVESTMENT VALUATION FUNDAMENTALS 42

BANKING TECHNICAL SKILLS WORKSHOP
SECTION 2

Modelling Best Practices

43
Modelling Best Practices (1/2)

• A good model is • Use colours/formats, but not for aesthetics

– Simple and easy to – Simple colour codes go a long way towards ensuring that your formulae are not over-written:
understand
blue for inputs, black for calculations, red for unusual items, green for Capital IQ formulae and
– Formatted cleanly links to other sheets, italic for percentages (growth, margins etc.)
– Has as few sheets as
possible
– Easily printed
• Make sure your model is clean and easy to understand
– People will be inherently sceptical of a messy/confusing model, but are more likely to trust a
model with a clean layout

• Avoid changing column widths and row heights

– Put your model outputs on a separate sheet where you change column widths and row
heights—avoid doing so in the actual model

• Always do all calculations in your model (and in cells) - do not use your calculator. This makes it
easier for someone else to reconcile the model

• Don’t scatter your assumptions and inputs. Make sure your inputs and assumptions are where
they should logically be

• Avoid having numbers and formulae in the same cell. Reference formulae to input cells

MORGAN STANLEY SINGAPORE INVESTMENT MODELLING BEST PRACTICES 44

BANKING TECHNICAL SKILLS WORKSHOP
Modelling Best Practices (2/2)

• A good model is • A model should always be able to be checked with a calculator and the print-out
– Simple and easy to – Make sure your model is set up so that it is easy to quickly print out a version for a senior to
understand
review
– Formatted cleanly
– Has as few sheets as
possible • Note data and sources of inputs (use “comments” function)
– Easily printed
• Use consistent line and column headings

• Format as you create the model

• Never enter the same number or assumption twice. If it makes sense to show the assumption
again, link it to the original input

• Use logical names for different versions of the model and don’t forget to save regularly a new
version

• Don’t use macros if you don’t really need them. You will very rarely need macros

• Keep formulae simple—if you have a complicated formula, break it down. This will make it easier
for yourself and anybody else to review the logic

• Don’t hide anything. If really necessary, group

MORGAN STANLEY SINGAPORE INVESTMENT MODELLING BEST PRACTICES 45

BANKING TECHNICAL SKILLS WORKSHOP
SECTION 3

Q&A and Open Discussion

46
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MORGAN STANLEY SINGAPORE INVESTMENT 47

BANKING TECHNICAL SKILLS WORKSHOP