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International Finance CEMEX CASE STUDY 17 April 2011

SHANMUGA PILLAIYAN (010194) TAN CHEE HOAW (010120) KAM CHUN HOE (008757) LIM SOK YEN (008715)

Agenda
1. Key assumptions

2. Exchange Rate projection 3. Cost of Capital 4. Project Cash flow 5. Parent Cash flow 6. Sensitivity analysis 7. Real option analysis 8. Final Bid

Nottingham Malaysia

April 2012 Slide 2

As the cement business is localized. Semen Gresik is IDR. 5. 50% of net profits of Gresik are paid out as dividend. Indonesian withholding tax for dividends is at 15% 2. especially the Philippines subsidiary. 4. CEMEX utilizes internal funds for the acquisition of Gresik. 3. Nottingham Malaysia April 2012 Slide 3 .Key Assumptions 1. CEMEX functional currency is USD. investment in Indonesia does not cannibalize existing CEMEX sales.

00 8.00 4.00 5. The United States inflation rate is forecasted to be stable.00 8.00 5.00 4.00 8.00 4.00 8.00 5. Projection done based on Purchasing Power Parity theorem.00 .00 Estimated USD/IDR Exchange Rate 13000 15000 15865 16781 17749 18256 18778 19314 19866 20433 April 2012 Slide 4 rate (%) 29.00 5.00 5. 3.Exchange Rate Projection IDR/USD 1.00 10.00 4.00 10.40 20. 2. Indonesian Inflation Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Nottingham Malaysia USA Inflation Rate (%) 4. Hyper-inflation in Indonesia is expected to normalize.00 10.00 8.

As the Indonesian project is viewed as risky. 13. a risk premium of 6. Assumption is that CEMEX uses internal funds for the purchase of Gresik. 3. CEMEX Cost of capital is taken to be the average ROE of CEMEX from 1993 to 1998. Nottingham Malaysia April 2012 Slide 5 . 4.9% is included. Final CEMEX cost of capital of 20.0% for the duration of the project. 2.1% .Cost of Capital CEMEX 1.

06 2007 6 8.76 2001 6 10.00 14.2 19.50%.5 17.30 1.00 12. Assumed that Indonesian Government maintained real interest rate of 4.30 1.25 1999 6 20.00 14.2 21.00 12.30 1.00 14.2 19. WACC is calculated for each year.76 2002 6 10.2 19.06 2006 6 8.2 21.00 12.2 31.5 8.30 1.2 19.3%.06 April 2012 Slide 6 .5 10.5 8.2 19. 4.00 12.5 8. Equity to debt ratio is 50% . 2.01 15.2 40.61 14. Assumption is all debt is raised internally in Indonesia.59 32.30 1.01 24.Cost of Capital Semen Gresik 1.30 1.9 23. Year Equity risk premium Inflation Rate Risk Free Rate Beta Cost of Equity After-tax cost of debt Weighted cost of capital Nottingham Malaysia 1998 6 29.01 15.00 24.30 1.06 2004 6 8.01 15.30 1.61 14.61 14.61 14.7 1.30 1.5 10.26 2000 6 10.06 2005 6 8.5 8.5 10.2 21.4 33.61 14.5 8. 3.76 2003 6 8.00 12.

Terminal value is calculated for the continuing value of the plant after year 5. I. Terminal value estimated based on: II.231 Nottingham Malaysia April 2012 Slide 7 . Terminal Value Valuation Method EV/ Capacity Perpetual Model Average Value (Billion Rupiah) 39.234 49. 3. Earnings multiples The average value of 49. Discounted perpetual cash flow 2.Terminal Value – Semen Gresik Semen Gresik 1.228 59.231 Billion is taken as the terminal value.

Terminal value = IDR 59.234 Billion 5. Other method shall be carried out for checking purposes. Terminal growth rate is assumed to be 14.Terminal Value – Semen Gresik Semen Gresik 1. Terminal value is very sensitive to the values chosen for WACC & growth rate.76% at year 2002 4. Terminal Nottingham Malaysia Value = NOCF × (1 + g) k WACC − g April 2012 Slide 8 . Terminal value is calculated for the continuing value of the plant after year 5 2.0% 3. WACC is assumed to be 15.

9 185.4 9. Country Total Market Cap EV/ capacity EV/EBITDA Price/FCF Price/Earning India Indonesia Thailand Malaysia Philippines Taiwan South Korea Total Market Cap. regional average multiple of 126.9 10. Multiples of enterprise/ capacity.3 8. Terminal value of 39.Terminal Value Earnings Multiples 1.4 1336. Nottingham Malaysia Regional Average 1094 1468.6 417.7 9.2 -26.14 9.2 4.1 6.43 10.05 13.5 2 41.228 billion IND in 2002.2 3059.1 12. Constant capacity of 17.2 11.4 4.5 19.9 5.4 9 -2.2 8.9 254.5 4.7 7816.7 86 52 146 55 58 188 52 7.7 11.48 million metric tonne 3.43 USD per metric tonne 2.1 10.9 126.80 April 2012 Slide 9 .

00 1.50) (40.90 585.60) 1999 27% 599.57 0.32 1998 16% 445.48 (216.70 714.12 0.00 706.11) 2002 20% 1.15) 2001 20% 867.00 875.6447 518.49 0.00 261.7463 533.00 996.90 29.03 276.00 (179.00 276.231.143.043.03 (260.00 1.Project Cash Flow The project has a positive NPV and thus profitable Billions of IDR Assumed Growth Rate EBIT Add Depreciation & Ammortisation EBITDA Less Tax (30% of EBIT) Less Capex Less Change in net working capital Terminal Value Total FCF 496.319.78 April 2012 Slide 10 .84 804.60) (94.48 276.8048 471.08 2000 20% 720.14 (312.5570 27.143.60) (65.0000 496.50) (78.37 0.18 50.14 276.00 (133.00) (69.30) 49.00) (35.949.928.70) (40.94) Present value factor Present value of cash flow Nottingham Malaysia NPV 1.

113.Project Cash Flow Semen Gresik is valued at USD$3.02 3.949.10) 25.35 Nottingham Malaysia April 2012 Slide 11 .514.35 per share Enterprise Value Less net debt Less Minority Interest Equity Value 29.2 Fair Value of equity per share (IRD) In US Dollar 43.50) (23.813 Shares Outstanding (millions) 593.12 (4.

278) (561) (579) (2.621 40% (560) (18) 1.100) 742 40% (284) (13) 445 (788) 5 10 (773) (328) 99 (230) -12% 1999F 1189 522 607 20 2338 27% (734) (345) (317) (1.Project Cash Flow 50% of net profits are assumed to be paid out as dividends Income Statement (Billions of IDR) Sales by Gresik Tonasa Padang Non-cement Total Net Sales Growth in Net Sales (%) COGS Gresik COGS Tonasa COGS Padang Total cost of goods sold Gross profit Gross margin (% of net sales) Less Selling.129 40% (393) (16) 720 (464) (105) 7 10 (553) 168 (50) 117 4% 2001F 1716 753 876 20 3366 20% (1.396) 942 40% (328) (15) 599 (700) (74) 6 10 (758) (159) 48 (111) -5% 2000F 1429 627 729 20 2805 20% (886) (389) (401) (1.064) (467) (482) (2. general & admin expense Less Consulting Services to Cemex Operating Profit Less Net Interest Forex Losses on debt Contributions from subsidiaries Others Non-operating income Pretax Profit Less Indonesian taxes Net Profit Return on Sales (%) Nottingham Malaysia 1998F 874 437 511 20 1842 16% (534) (289) (277) (1.013) 1.043 (472) (175) 9 10 (628) 415 (125) 291 7% April 2012 Slide 12 .418) 1.353 40% (469) (17) 867 (468) (139) 8 10 (590) 277 (83) 194 6% 2002F 2062 905 1052 20 4039 20% (1.676) 1.

526.866.106.26 74.000.08 11.440.240.000.000.00 1.04 392.240.05 25% 1.00) 388.239.000.00 1.240.000.526.000.14% (Billions of IDR) Less indonesian withholding tax (15%) Net Dividend remitted to CEMEC (Billions of IDR) Dividends Received by CEMEX (USD) Consulting services (USD) Total cash flow Purchase of 14% stake in Semen Gresik Port upgrading & capacity expansion Terminal Value (14% stake) Total free cash flow Cost of capital PV NPV Nottingham Malaysia IRR 13.526.00 20% 977.000.000.00 1.00 28. the NPV of parent cash flow is positive (USD 28.328.00 2002 17.547.56 688.440.000.00 1.733.69 1.00) (50.70 -163.60 20% 189.749 145.000.59 1.12 13.99 440.67 mill) and IRR of 25% 1998 IDR/USD FX rate Dividend Paid (Billions of IDR) Dividends Received by CEMEX .865 58.000.688.59 20% 1.606.333.365.60 2.73 8.714.781 97.23 6.59 2001 16.99 April 2012 Slide 13 1999 15.00 1.22 1.000.866.000 0 0 0 0 0.00 20% -163.00 (114.00 1.000 0 0 0 0 0.450.547.606.000.000.688.04 11.000.89 1.Parent Cash Flow At USD1.876.465.33 1.000.000.89 .00 2000 15.670.733.733.606.97 3.000.00 4.00 1.00 20% 833.38 a share.000.11 62.276.

547.328.99 April 2012 Slide 14 1999 15.89 1.00 20% 977.000.440.733.99 440.276.000.000.72 a share is the maximum price with a positive NPV for the parent cash flow.714.000.749 145.00) (50.00 1.04 11.00 (142.781 97.000.000.333.000.865 58.08 11.000.560.000.00 1. 1998 IDR/USD FX rate Dividend Paid (Billions of IDR) Dividends Received by CEMEX .Parent Cash Flow USD1.440.000.000.14% (Billions of IDR) Less indonesian withholding tax (15%) Net Dividend remitted to CEMEC (Billions of IDR) Dividends Received by CEMEX (USD) Consulting services (USD) Total cash flow Purchase of 14% stake in Semen Gresik Port upgrading & capacity expansion Terminal Value (14% stake) Total free cash flow Cost of capital PV NPV Nottingham Malaysia IRR 13.465.000.842.560.00 434.04 392.365.05 20% 1.000.526.239.000.106.560.000.11 62.00 4.12 13.000.59 2001 16.70 -191.00 1.876.00 2002 17.00 20% -191.000.842.00) 388.00 1.866.00 1.547.33 1.00 20% 833.688.00 1.842.59 20% 1.000 0 0 0 0 0.526.56 688.00 2000 15.000 0 0 0 0 0.00 1.000.26 74.89 .60 20% 189.130.60 2.733.733.73 8.69 1.23 6.97 3.526.866.22 1.59 1.000.688.

Nottingham Malaysia April 2012 Slide 15 . To leverage its core cement and ready-mix concrete franchise To concentrate on developing markets To maintain high growth by applying free cash flow towards selective investments that further its geographic diversification 2. 3. Taiwan.Strategic Reasons for Investing 1. 4. II. Early mover advantage into Indonesia which is a large (200 million population) and rapidly growing market. To ensure that other competitors don’t get a foot hold in Indonesia via Gresik. Potential for export to regional markets (Singapore. Inline with CEMEX’s corporate strategies: I. III. etc) if Rupiah exchange rate remains low.

Strong opposition against sale of state assets to foreigners from politicians and the general public. 2. High risk of future policy change due pressure from public opinion. 3. Nottingham Malaysia April 2012 Slide 16 . 5. 6. Thread of punitive action by provincial governor to remove certain concessions to Gresik subsidiary. 4.Sensitivity Analysis Country Specific risk is perceived to be high 1. Implementation of free market reforms under IMF has reduced Transfer risk. Street demonstrations against sale of Gresik in Jakarta & West Sumatra. Indonesian government succumb to pressure and modified its offer from 35% to 14% of the company. Currency risk is minimal as the Rupee is expected to appreciate once the current crisis abates.

Gresik management has guaranteed that no one would be laid off. reducing headcount and dividend payouts. CEMEX doesn’t not have control of the board or the management. Agency risk. Risk that management’s interest may be in conflict with that of CEMEX. Nottingham Malaysia April 2012 Slide 17 . 2. Fear of lay off’s resulted in street remonstrations in Jakarta and West Sumatra. Seriously limiting options.Sensitivity Analysis Firm Specific risk is perceived to be high 1.g. Risk of price war in the Indonesian market. Potential for sales price of drop 10%. With only 14% ownership of the firm. e. 3.

NVP =0 April 2012 Slide 18 .2 million Option to exit in 5 years Don’t Purchase.Real Option Analysis Year 0 Year 5 Purchase of controlling stake (Additional 51% from Government) NVP = USD 593.5 million Purchase (14%) NVP = .6 million 25% Probability 75% Probability Sell shares at market Price NPV = USD 49.158.

97 3.000 0 0 0 0 0.440.222.00 1.85 1999 15.606.193.000.00 1.6 million Optioin to purchase 14% in Year 0 IDR/USD FX rate Dividend Paid (Billions of IDR) Dividends Received by CEMEX .526.23 6.99 440.00) -163.00 20% -163.09 1.00 1.000.688.781 97.00 2000 15.33 1.000.526.042.000.Real Option Analysis NPV of cashflow from the first 5 years is -USD158.000.00 20% 977.69 1.14% (Billions of IDR) Less indonesian withholding tax (15%) Net Dividend remitted to CEMEC (Billions of IDR) Dividends Received by CEMEX (USD) Consulting services (USD) Total cash flow Purchase of 14% stake in Semen Gresik Port upgrading & capacity expansion Total free cash flow Cost of capital PV NPV 1998 13.000.22 1.000.00 1.276.000.89 Nottingham Malaysia April 2012 Slide 19 .00 1.365.000.240.00 20% 833.240.866.00 -158.866.11 62.733.00) (50.000.59 2001 16.26 74.749 145.865 58.733.59 20% 1.000.606.12 13.000.89 20% 2.59 1.000.56 688.606.00 2002 17.000.240.08 11.00 (114.60 2.688.602.00 4.333.000.547.000.440.000.00 1.000.866.73 8.526.733.000.00 1.000 0 0 0 0 0.04 4.89 1.547.04 11.547.

2 mill Key Assumptions: 1.135.Real Option Analysis – Option to sell 14% stake NPV of cashflow from share sale is USD 49.022.810.48 Nottingham Malaysia April 2012 Slide 20 .1%) Net preceeds from sales (IDR) Sales remitted to CEMEX (USD) 17.00 5% 21806.717.959. Annual share price appreciation is 5% Individual share purchase price Annual share price growth rate Individual share purchase price at year 5 Gross preceeds from sales (IDR) Withholding tax (0.778.981.31 1.97 NPV of sales (USD) 49.200.69 102.679.095.00 181.940.18 1.528.810.117.813.

541.737. Annual Growth Rate at 8.952.276.89 (572.37) 1.47 1.802.10 593.2% Individual share purchase price (USD) Purchase cost (USD) Terminal Value (65%) Net cashflow Net Present Value 1.66 Nottingham Malaysia April 2012 Slide 21 .230.215.265.526.844.Real Option Analysis – Option to buy 51% Positive NVP of USD 593 Million Value of option to purchase additional 37% to gain controlling stake.

200.042.Real Option Analysis The parent cashflow has a positive NPV and thus profitable NPV = NPV of cash flow + (NPV of exit option)(probability) + (NVP of option to purchase additional shares)(Probability) = -158.679.69 Nottingham Malaysia April 2012 Slide 22 .178.66 X (0.844.75)+ 593.526.09+ 49.602.25) = USD 26.680.48 X (0.

Final Bid No.000.00 - The maximum share price will be set at a price of USD 1. 1 2 3 Item Cash offer of USD$1.000.72 per share. Nottingham Malaysia April 2012 Slide 23 .38 as share for 14% stake Port upgrading & capacity expansion A five-year put option to the Indonesia government to sell its remaining shares to Cemex at a base price of USD$ 1.606.606.00 Value (USD) 114.240.00 50. Cemex to be given right to participate in the decision making of Semen Gresik’s operation and investment. TOTAL 164.2% annual premium 4 Mutual consent on the operation of Semen Gresik.38/ share plus an 8.240.

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