Transcript Forestry Privatization in South Africa by Aditya Agarwal Siddharth Bafna Alok Gupta Ioannis Maniatis Ozlem Tanik.

Forestry Privatization in South Africa
by
Aditya Agarwal
Siddharth Bafna
Alok Gupta
Ioannis Maniatis
Ozlem Tanik
Agenda
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Background
Key Parties
Industry – Global & Local
Analysis of Parameters & Risks
Opportunities & Plans
Class Discussion
Valuation
Results
Background
• South African Government offers 75%
shareholding in SAT Pty, a timber plantation
• 10% of South Africa’s forestry assets
• Land to be leased and not sold
• 187 K hectares land out of which 126 K hectares
plantations
• Equity to be held by a consortium with min 10%
stake for Black Empowerment partner
Key Parties- CTI
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One of 3 bidders
The largest cooling tower manufacturer in India
One of the largest traders of timber in India
$46.87 million revenues in 2001
Importer of logs from RSA and New Zealand
Seeks to acquire overseas forestry assets
Key Parties-SAT
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Fully owned by South African Government
Revenues (2000) - Rand 265m (US$ 35m)
1.8m m3 of timber produced per year
80% sold under long-term contracts
Export handling capacity of 200k m3 at
Richards Bay port
Key Parties-SAT
Strengths
Weaknesses
• High product quality
• Commanding local market
share
• Fragmented local competition
• Imports are uncompetitive
• Debt free balance sheet
• Experienced forestry
management staff
• High overhead costs
• Below average
productivity standards
• Inability to retrench
redundant labor
Industry characteristics
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Global supply of rainforest timber decreasing
due to environmental concerns
Environmentally certified (plantation) wood
has more acceptability in global markets
Demand for saw logs expected to increase
faster than supply both globally and locally
Export price realizations are higher than
domestic prices
Global market outlook
• Forecasted global demand supply gap
Hardwood
2010
142 m m3
2020
200 m m3
Softwood
410 m m3
475 m m3
• International prices expected to grow at 1.1%
in the long term
Local Market outlook
• Demand supply gap in the medium term:
32%
• Demand supply gap in the long term: 40%
– Based on customer surveys
• Domestic prices are expected to grow at
1.8% over the long term to achieve export
price parity in 30 years
• Lower price volatility due to long term
contracts
Sociopolitical Parameters
• Political Stability
• Government Committed to Privatization
• Highly Unionized Labor – Unions oppose
privatization
• Black empowerment movement
• Regional instability – Crisis in Zimbabwe
• AIDS Pandemic Threat
• Moderate Corruption
• High Crime Rate
Economic Parameters
• Emerging markets crisis – Depreciating
Rand
• Responsible Economic Policies
– Growing Trade Surplus
– Falling Inflation
– Decreasing Budget Deficit
• High Unemployment
Key Economic Parameters
South Africa
Population
44.4m (2001)a
Currency
Rand
R8.61:US$1 (average, 2001)
GDP
US$113bn (2001)
US$350bn (2001, at PPP)
GDP growth
2.2% (average, 1997-2001)
2.2% (2001)
GDP per capita
US$2,549 (2001)
US$7,882 (2001, at PPP)
Inflation
6.3% (average, 1997-2001)
5.6% (average, 2001)
7/1/2001
1/1/2001
7/1/2000
1/1/2000
7/1/1999
1/1/1999
7/1/1998
1/1/1998
7/1/1997
1/1/1997
7/1/1996
1/1/1996
7/1/1995
1/1/1995
7/1/1994
1/1/1994
7/1/1993
1/1/1993
7/1/1992
1/1/1992
7/1/1991
1/1/1991
Rand/$
SA Rand vs. US Dollar 1991-2001
10
9
8
7
6
5
4
3
2
1
0
Project Specific Risks
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Quality of accounting information
Creeping expropriation – lease agreements
Outstanding land claims
Environmental lobbies
Bloated workforce - no retrenchment (strikes
possible)
• Exposure to natural disasters
Mitigation of Risks
• Currency risk hedging through exports
• Strong due diligence and use of benchmarks for
valuation
• Creeping expropriation - lease rent to be
escalated in line with inflation (PPI)
• Land claims - compensation from Government
for upheld claims
• Environmental opposition – FSC certification for
sustainable forest utilization
• Insurance against natural disasters
Future Opportunities / Plans
• Increase in output by around 200,000 m3 through
genetic improvements (already underway)
• Improvement in productivity through training and
capital investments
• Build export handling facility at Maputo port (closer
to the plantations) at the cost of R 55m
• Improve portfolio of customers by
increasing exports and domestic
spot sales
Case Discussion
Valuation methodology
• APV method
• Cash flow projections for 28 years
• Incorporated domestic and export price
growths and volatilities
• Ran Monte Carlo for base case scenario
• Valued the option for investing in the
export handling facility at Maputo using
MC simulation
Key Valuation Assumptions
• Improved productivity incorporated as
reduction in COGS
• Increased yields included in production
forecasts
• Tax setoff to the extent of value of the
plantations in total enterprise value
Proforma Profit & Loss statements
Year 1
Domestic Sales Volume
Export Sales Volume - Richards Bay
Export Sales Volume - Maputo
Total Sales Volume
Domestic Sales Price
Domestic Sales Price Growth
Export Sales Price - FOB
Export Sales Price Growth
Freight & Handling cost - Richards bay
Freight & Handling cost - Maputo
Export realization - Richards bay
Export realization - Maputo
Sales
Plantation costs
Overheads / Other costs
Additional depreciation on Maputo investment
Net Operating Income-forestry
Losses from Sawmills
Net Operating Income-Komatiland
Finance Costs
Income Before Taxation
Taxation
Net Income
Dividend
Retained Income
1580
200
1780
149
440
290
260
150
180
41%
265 308
108 776
92 915
0
63 617
5 000
58 617
30 966
27 650
0
27 650
0
27 650
Year 2
1523
200
0
1723
152
1.8%
445
1.1%
290
260
155
185
Year 3
1501
200
0
1701
154
1.8%
450
1.1%
290
260
160
190
Year 4
1698
200
0
1898
157
1.8%
455
1.1%
290
260
165
195
Year 5
1733
200
0
1933
160
1.8%
460
1.1%
290
260
170
200
Year 6
1799
200
0
1999
163
1.8%
465
1.1%
290
260
175
205
261 870
104 748
93 646
0
63 476
263 636
102 818
94 384
0
66 434
299 766
113 911
95 130
0
90 725
311 253
118 276
95 130
0
97 847
327 982
124 633
95 130
0
108 219
63 476
61 816
1 660
0
1 660
0
1 660
66 434
61 117
5 317
0
5 317
0
5 317
90 725
52 332
38 393
0
38 393
0
38 393
97 847
40 329
57 518
0
57 518
0
57 518
108 219
30 800
77 419
0
77 419
0
77 419
Cost of Capital – Base Case
Risk Premium Calculation
Inputs
Output Category
5.42
U.S. risk free in %
3.50
U.S. risk premium in %
93.10
Current U.S. Credit Rating
37.50
Institutional Investor country credit rating (0-100)
25.02 Anchored Cost of Equity Capital for project of average risk in country (ICCRC)
16.10 Country Risk Premium
Industry Adjustment
1.05
Beta (Industry)
0.18 Sector adjustment
Project Risk Mitigation
(-10 to 10; where 10=risk completely eliminated, 0=average for country)
Impact on
Country
Premium
Weights Score
Sovereign
0.40
2.00
-1.29 Currency (convertibility)
0.15
0.00
0.00 Expropriation (direct, diversion, creeping)
0.05
-5.00
0.40 Commercial International partners
0.05
-10.00
0.80 Involvement of Multilateral Agencies
0.05
-2.00
0.16 Sensitivity of Project to wars, strikes, terrorism
0.05
0.00
0.00 Sensitivity of Project to natural disasters
Project Cost of Capital
24.92
US inflation outlook
2.80
Real cost of Capital
21.52
Cost of Capital – with Maputo
Option
Risk Premium Calculation
Inputs
Output Category
5.42
U.S. risk free in %
3.50
U.S. risk premium in %
93.10
Current U.S. Credit Rating
37.50
Institutional Investor country credit rating (0-100)
25.02 Anchored Cost of Equity Capital for project of average risk in country (ICCRC)
16.10 Country Risk Premium
Industry Adjustment
1.05
Beta (Industry)
0.18 Sector adjustment
Project Risk Mitigation
(-10 to 10; where 10=risk completely eliminated, 0=average for country)
Impact on
Country
Premium
Weights Score
Sovereign
0.40
5.00
-3.22 Currency (convertibility)
0.15
0.00
0.00 Expropriation (direct, diversion, creeping)
0.05
-5.00
0.40 Commercial International partners
0.05
-10.00
0.80 Involvement of Multilateral Agencies
0.05
-2.00
0.16 Sensitivity of Project to wars, strikes, terrorism
0.05
0.00
0.00 Sensitivity of Project to natural disasters
Project Cost of Capital
22.99
US inflation outlook
2.80
Real cost of Capital
19.64
Valuation results
Base case
• Currency risk hedged
for 12 years
• Cost of capital:
21.52%
• Enterprise value:
R484 million
With Maputo option
• Currency risk hedged
for 21 years
• Cost of capital:
19.64%
• Enterprise value:
R598 million
Value of the Maputo option: R114 million
Enterprise value
Final Amount
0.07
0.06
Probability
0.05
0.04
Enterprise Value WM
Enterprise Value
0.03
0.02
0.01
0
402333.3333
542333.3333
682333.3333
822333.3333
962333.3333
Q&A