Independent Valuation Report as at 31 August 2017 Renuka Hotels Limited

Transcription

1 Independent Valuation Report as at 31 August 2017 Renuka Hotels Limited WIJEYERATNE & COMPANY 1 P a g e

2 Important message to any person not authorized to have access to this report. Should any unauthorized person obtain access to and read this report, by reading this report such person accepts and agrees to the following terms: 1. The reader of this report understands that the work performed by Wijeyeratne & Company was performed in accordance with instructions provided by our addressee client and was performed exclusively for our addressee client s sole benefit and use. 2. The reader of this report acknowledges that this report was prepared at the direction of our addressee client and may not include all procedures deemed necessary for the purposes of the reader. 3. The reader agrees that Wijeyeratne & Company, its partners, principals, employees and agents neither owe nor accept any duty or responsibility to it, whether in contract or in tort (including without limitation, negligence and breach of statutory duty), and shall not be liable in respect of any loss, damage or expense of whatsoever nature which is caused by any use the reader may choose to make of this report, or which is otherwise consequent upon the gaining of access to the report by the reader. Further, the reader agrees that this report is not to be referred to or quoted, in whole or in part, in any prospectus, registration statement, offering circular, public filing, loan, other agreement or document and not to distribute the report without Wijeyeratne & Company prior written consent. For any clarification or comment on the information contained in this document, please contact Navodya Premaratne, Manager Wijeyeratne & Company, No 15, Maitland Crescent, Colombo 07 or telephone

3 Renuka Hotels Limited, 328, Galle Road, Colombo 3 21 st of September 2017 Dear Sirs, Independent Share Valuation of Renuka Hotels Ltd In accordance with your instructions, we present our independent opinion of the fair market value (the Valuation ), as at 31 st August 2017 of Renuka Hotels Ltd, which operates in the hospitality industry in Colombo. This valuation is based on the assumptions provided by the management of the Company ( Management ). When arriving at the Fair Value of the Equity Shares of Renuka Hotels Limited, we have complied with the applicable regulatory and technical requirements in our capacity as the independent valuer. Staff engaged in this assignment were members of good standing employed in a professional manner relevant to the valuation assignment undertaken. They also possessed the necessary skill and resources to arrive at a competent independent opinion in determining the reference price. Further, we confirm that we are not a related party of the Renuka Hotels Limited as defined in the SLAS, nor has a conflict of interest with the company or the group nor significant interest in or financial connection with Renuka Hotels Limited or the group. We initially presented a valuation report on Renuka Hotels Ltd erroneously dated 15th September 2014 (should read as 15th September 2015) reflecting the position of the Company where the value per share ranged between LKR The valuation was amended subsequently after taking into consideration the observations made by the Colombo Stock Exchange to reflect the group position to facilitate the proposed listing through Introduction. The consolidated performance of the group derives a more accurate picture considering the significant impact of the subsidiary which resulted in an amended value ranging from LKR The Increase in value from 2015 to 2017 is due to the use of consolidated results of the group and the respective enhanced performance over the past 2 years. We draw your attention to important comments regarding the scope and process of our work, set out immediately following this letter. If you require any clarification or further information, please do not hesitate to contact the under signed on Yours faithfully, CHARTERED ACCOUNTANTS Partners : C.S. Wijeyeratne FCA, FCMA, W.J.L.S Fernando ACA, FCMA, Mrs. D N Perera ACA, FCMA, B.Sc, Mrs. N S Perera ACA, S Egodagamage ACA, ACCA, B.Sc (Bus. Admin) Sp. (USJ) 3 P a g e

4 Table of Contents Scope and Process... 5 Executive Summary... 7 Company Profile and Industry Overview... 8 Financial Projections/Performances Valuations Appendices... 22

5 SCOPE AND PROCESS Scope of work Purpose of valuation Wijeyeratne & Company has been engaged by the management of Renuka Hotels Limited ( Management ) to provide an independent assessment of the fair market value of Renuka Hotels Limited as at 31 August 2017 ( Valuation Date ). Valuation is not a precise science and the conclusions arrived at in many cases will be subjective and dependent on the exercise of individual judgment. Given the same set of facts and using the same assumptions, expert opinions may differ due to the number of separate judgment decisions which have to be made. There is, therefore, no indisputable single value and we normally express our opinion as falling within a likely range. We define fair market value as the price which might reasonably be expected to be obtained in money or money s worth, in a sale between a willing buyer and a willing seller, each of whom is deemed to be acting for self-interest and gain and both of whom are equally well informed about the business and the markets in which it operates. Our work was carried out in connection with the proposed listing through Introduction on the Colombo Stock Exchange. We also do not envisage our valuation report(s) to be used by the Company for any other financial reporting purposes. Basis of valuation In providing our fair market value opinion, we have adopted the Discounted Cash Flow ( DCF ) methodology, Net Assets Value Methodology and Earnings Capitalisation Methodology described in detail later in this report. Implicit in the use of these methodologies is the assumption that the business is a going concern. Sources of information During the course of our work, we have relied on data and information made available to us through different sources, including prospective financial information ( PFI ) obtained from the Company, sector specific information obtained from the public domain, and financial and industry sources. The principal sources of information provided to us by Management included: Consolidated audited financial statements of Renuka Hotels Limited from FY 14/15 to FY 16/17.** Consolidated interim financial statements of Renuka Hotels Limited for the period ended 31 st August 2017.** Management projections for the succeeding financial years from FY 17/18 to FY 21/22 (the projection period ). Other Information Provided by the management on the company overview, average daily rates, capacity, occupancy, projected expansion plans and capital structure.** (** We have not independently verified the factual accuracy of these information presented, and have relied upon the members of management to 5 P a g e

6 provide us with representation that the information contained is materially accurate and complete, fair in the manner of its portrayal and therefore forms a reliable basis for the share valuation.) Other sources of Information are as follows: Colombo Stock Exchange - Central Bank Of Sri Lanka- Industry specific information and research on sector performance and expectations published by the Sri Lanka Tourism Development Authority (SLTDA) Procedures performed Based on the information set out in the preceding paragraphs, we undertook an analysis of the financial projections including revenues, expenses, working capital and capital expenditure. We discussed the basis of the financial projections and assumptions used with the members of Management. We independently verified the reasonableness of such assumptions by analysing the historical operating results, Industry trends (Source-SLTDA) and publically available information of similar listed entities (Source- CSE). We also undertook an analysis of other facts and data, including those specific to the Company and the industry in which it operates, which we considered pertinent to this valuation, to arrive at the fair market value. Limiting conditions This report has been prepared by Wijeyeratne & Company solely for the purpose of Listing at the Colombo Stock Exchange. We do not accept or assume any liability or duty of care for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent. In no event, regardless of whether consent has been provided, shall we assume any responsibility to any third party to which the report is disclosed or otherwise made available. Wijeyeratne & Company expressly disclaims all liability for any loss or damage of whatsoever kind which may arise from any person acting on any information and opinions relating to Renuka Hotels Ltd contained in this report. Our work has not included any legal review and accordingly have not considered impact or outcome of any existing or potential legal matters. Our Services are provided as at the date of this report. Economic conditions and market factors may result in the information contained in the document becoming quickly outdated and may require updating from time to time or before any major decisions are taken based on our Report. Hence, the validity period of the report is 7 Months. In any event, if you intend to make any decision based on our Services more than 7 months from the date of the Report you must request our confirmation as to the efficacy of our Services. The valuation conclusions arrived at in many cases are by their very nature subjective and dependent on the exercise of individual judgement. Given the same set of facts and using the same assumptions, expert opinions may differ due to the number of separate judgement decisions which have to be made.

7 EXECUTIVE SUMMARY The report sets out the indicative value assessment of Renuka Hotels Limited. The assessment of value has been carried out as at 31 August 2017 for the purpose of facilitating the Listing on the Colombo Stock Exchange ( CSE ) by way of an Introduction. The proposed listing at the CSE consists of 40,297,530 Voting Shares, and the three methodologies used for the valuation depict the fair value per share as follows: Valuation Summary Methodology Fair Value Per Share (LKR) Discounted Cash Flow Method (DCF) Net Assets Value Method Earnings Capitalisation Method Based on the analysis, a value which is within the likely range of LKR to per share can be justified. Hence, the reference price of LKR per share can be considered fair and reasonable. Valuation Methodologies Discounted Cash Flow Method; For revenue projections, we have reviewed forecasts prepared by management, and where applicable made adjustments based on market prospects and competition in the industry. Therefore, the value derived from the Discounted Cash Flow method is greatly dependent on the achievement of such revenue projections vis-à-vis the growth projections for the local tourism industry. We note that the management will need to manage future costs and position the property within target markets in order to secure suitable room rates and revenue in order to maintain desired GOP margin levels. The value conclusion has taken into consideration: We have assumed constant room inventory in the forecast period, The Company s ability to leverage on Renuka brand to promote the property, especially amongst its South Asian and East Asian clientele and hence maintain a relatively higher price point relative to some local peers in the vicinity; Impact from competition and newer hotel properties as well as informal accommodation (i.e. Airbnb) within the region, which have had and are likely to continue to negatively impact occupancies of larger properties. A Cost of Equity at 15.7% and assumed a terminal growth of 4% per annum. Net Assets Value Method; No adjustments have been considered on the statement of financial position of the company and the group provided as at 31 August 2017 and assumed that all assets and liabilities are stated at fair values. A realization cost of 10% was assumed for valuation purposes. Earnings Capitalisation Method; Value per share is derived by considering the weighted average maintainable earnings based on historic performance capitalized at the rate of expected return. A capitalization rate of 15.7% is employed. 7 P a g e

8 COMPANY PROFILE General Renuka Hotels Limited ( the Company ) operates a three star category hotel registered with the Sri Lanka Tourist Development Board. Nestled in the heart of the commercial district, where the splendor of modern living meets the needs of every discerning traveler is one of the most unique hotels in Colombo city. Lying within a mere 45 minutes from the Bandaranaike International Airport, the Hotel Renuka stands majestically above the hustle and bustle of the city. Every guest can find an abundance of business hubs, healthcare centres, restaurants and entertainment venues within an easy and convenient distance from the hotel. Renuka Hotels Group consists of 99 rooms and 3 restaurants and primarily caters to business and transit travelers mostly from South Asia and East Asia. The property also includes other facilities such as a banquet hall, conference rooms, pool and fitness center. Group Structure Renuka Hotels Limited is the ultimate parent of Renuka City Hotels PLC with a controlling interest of 62.22%. INDUSTRY OVERVIEW Sri Lanka is a growing market with great potential as a tourism destination. Many of the challenges posed by the three-decade civil war which ended in 2009 are subsiding, as strong government support for the industry is providing necessary improvements to infrastructure and industry standards, and increasing awareness of what the country has to offer through marketing campaigns. Overall, the industry is fast growing and promising. The tourism industry is beginning to attract more foreign investment, which should increase competition in the market and pressure the large domestic conglomerates that currently operate much of the tourism industry to become more competitive.

9 QUALITATIVE FACTORS Industry Outlook For the first time in the history, Tourist arrivals reached to new milestone of 2 million arrivals in 2016 registering 14% increase compared to Total number of nights spent by a tourist who visited the country during the year could be taken as a better and stable measure of tourism volume. Reported number of tourist nights in 2016 increased by 15 % with an average duration of 10.2 nights. (Source- SLTDA) (Source: BMI Forecast for tourist arrival) Visitors from Asia continued to be the main source of Tourism to Sri Lanka in the year 2016 accounting for 45% of the total share. Similarly, the number of arrivals from Western Europe continued to be the second source of tourism with a share of 31%. (Source- SLTDA) The overall annual room occupancy rate of tourist hotels increased to 75% in 2016 from 74.5% per cent in the preceding year. Colombo city recorded an increase of 0.35 percentage compared to the previous year. (Source- SLTDA) (Source- SLTDA Occupancy in Colombo) Tourism arrival from all regions increased amongst which Western Europe remains the largest region of tourist origin for Sri Lanka representing 31.4%, with the number of tourists increasing by 16.5%. Tourist earning increased due to higher spending and increased duration of stay. Earnings during 2016 amounted to USD3.5Bn during (Source- SLTDA) The trends and forecasts suggest prospects of growth in the Hospitality Industry. Further, various projects initiated by the government including the Port City Project and anticipated depreciation of LKR against major currencies will also have a positive impact on the Hospitality Industry. 9 P a g e

10 Services and Customer Base The group capacity of Renuka Hotels comprises two 3 star category hotels with 99 rooms and 3 restaurants/ bars and also offers other facilities such as a banquet hall, conference rooms, pool and fitness center. Hotel is often recommended and receives good reviews in popular booking sites. Customers are mainly business and transit travelers mostly from South Asia and East Asia. As stated by SLTDA, visitors from Asia continued to be the main source of Tourism to Sri Lanka accounting for 45% of the total share. Similarly, the number of arrivals from Western Europe continued to be the second source of tourism with a share of 31%. Per SLTDA, the largest proportion of business travelers were from South Asia (50.5%), followed by East Asia (22.2%) and Western Europe (15.6%). The trends suggests promising business for Renuka Hotels Limited. Convenient Location Colombo 3 is a great choice for travelers interested in food, restaurants and shopping and an ideal location for travelers visiting for business purposes having ease of access to the Commercial hub of the country. Also, the hotel is just 30 km from the Airport and makes it a convenient location to the transit traveler. Competitor Assessment Renuka Hotels Limited is located in close proximity to other City Hotels and Corporate Hotels including Cinnamon red, OZO, Mandarina, Ramada and also many other high end hotels which in itself leads to intense competition amongst the hotels. Hotel Room Inventory Average Daily Star Rating Location Rate (Range) Renuka Hotels Group 99 USD Star Colombo Cinnamon Red 242 USD Star Colombo Ozo 158 USD Star Colombo Mandarina 80 USD Star Colombo ( Source: Company Websites)

11 FINANCIAL PROJECTIONS The key management assumptions that have underpinned the forecasts are as follows. Revenue Tariff Adjustments to financial forecasts have been made to reflect expected revenue commensurate with price trends, service offerings and competition. Revenue growth assumptions were considered a major value driver (driving many cost assumptions as well) and thus we have focused on establishing reasonable estimates. Room revenue which accounts for a majority of the company revenue has been estimated based on occupancy rates and Average Daily Rates (ADR per year) provided by management. Renuks Hotels Group consists of 99 Rooms including Deluxe and Super Deluxe Rooms. Despite the high competition within the region and newer hotels which have commenced operations recently, Renuka Hotels Limited has managed to sustain an average occupancy rate over 80% post the major refurbishment done in 2014/2015. This is slightly above the average industry occupancy rate of 75% Hence, we have assumed forecast occupancy to remain at 80% in the forecast period which is in line with average historical occupancy of the Hotel. Occupancy Rates Month FY16/17 April 65% May 71% June 62% July 78% Aug 102% Sep 87% Oct 68% Nov 85% Dec 90% Jan 94% Feb 97% March 77% Average 81% Average Daily Rates Month FY16/17 April May June July Aug Sep Oct Nov Dec Jan Feb March Average ADR has been forecast at a marginal growth rate of 10% per annum during the forecast period, given the historical growth in ADR. Growth in revenue may also be positively impacted by the expected currency depreciation. Increase in ADR appears to coincide with the growth rate in ADR for other competitive hotels. Revenue forecasts have been assumed exclusive of taxes (NBT, VAT, TDL and service charge) which will all be pass-through costs to the customer. 11 P a g e

12 Food and Beverages/other operating income Revenue from F&B and other revenue were forecasted at 35% and 25% of revenue respectively, in line with historical performance. Direct Costs (Cost of Sales) Calculated as 25% of revenue for expenses associated with Rooms, F&B and other revenue in line with historical costs recorded. Sales and marketing expenses Forecast at 5 % of revenue which is in relation to the historical trends. Administration expenses and Other Expenses Projected to grow adjacent to the forecast national inflationary rate of 5%. Income Tax Expenses Other Income Increase/(Decrease) in working capital The Company is liable for corporate tax at the rate of 12% up to the FY 2017/2018, however the corporate tax rates will be increased to 14% per the New Inland Revenue Department Bill which will be effective from the 01 st of April Hence, an income tax rate of 14% has been considered for the Projection Period from FY2018/2019 to 2021/2022. Dividend Income is considered tax exempt. Other non-operating income including Dividend and Interest Income are assumed to be constant over the projection period based on prior financial years. Working capital has also been assumed in line with the Company s historical working capital requirement. Working capital No.of Days Inventories 17 Trade debtors 26 Trade creditors 125 Capital Expenditure Budget The Hotel has undergone a major refurbishment project during the Financial year 2014/2015 and the management has no plans of further expansion or significant refurbishment during the projection period. Hence, we have considered 1% of revenue for replacement of furniture, fittings and equipment based on past trends in capex. Deprecation has been assumed in line with the Company s standard depreciation policies. (Refer Appendix 1.1and 1.2 for detailed calculation of cash flow projection)

13 VALUATION Basis of value assessment and key considerations Basis of valuation Our indicative assessments of the valuation of shares of Renuka Hotels Limited, is based on the future profitability and cash flows generated from the use of assets held by the above mentioned business. For the purpose of this report Fair Market Value is defined as the price that would be negotiated at the Valuation Date in an open and unrestricted market between a knowledgeable, willing but not anxious buyer and a knowledgeable, willing but not anxious seller acting at arm s length. For the purpose of our valuation, we have adopted the discounted cash flow ( DCF ) approach as our primary valuation methodology. The principal elements of a DCF approach are estimating the likely cash flows that will be generated by the continuing operations of the business and applying a discount rate to the cash flows that is commensurate with risks attaching to such cash flows Also, Net Assets Value per share attributable Equity Holders was calculated as at 31 August 2017 which generally depicts a conservative value of shares. The valuation is derived by taking the value of net assets (i.e Invested equity capital + Reserves) adjusted for cost of realization. Further, Earnings capitalization method was utilized to derive at the value per share based on maintainable profits based on historical performance of the company which is capitalized at rate equivalent to the expected rate of return. 13 P a g e

14 1. DISCOUNTED CASHFLOW METHOD (DCF) Valuation Summary Forecast FCF to Firm FY17/18 FY18/19 FY19/20 FY20/21 FY21/22 EBT 724,946, ,010, ,491, ,750, ,187,127 Less: Taxation (52,793,600) (56,401,274) (60,418,924) (64,890,009) (69,862,455) Add: Depreciation 46,678,058 46,678,058 46,678,058 46,678,058 46,678,058 Add: Changes in working capital 1,175, , , , ,264 Less: Capital expenditure (5,502,592) (6,052,851) (6,658,136) (7,323,949) (8,056,344) FCFF 714,504, ,453, ,332, ,478, ,237,649 Terminal Value 7,425,192,784 Discount factor at 15.7% Discounted FCFF 617,481, ,266, ,914, ,505,178 3,982,455,874 Enterprise Value 6,094,624,034 No. of shares 40,297,530 Value per share Assumptions Cost of equity / WACC 15.7% Risk free rate 10.6% MRP 6.4% Beta 0.80 Terminal Growth Per Annum 4.0% Key Considerations To facilitate the preparation of this analysis, the management of Renuka Hotels Limited has provided us with information on the company including the consolidated audited financial statements for FY14/15. FY15/16, FY16/17and consolidated Interim Financial Statements as at 31 August As at 31 August 2017, we have reviewed the Company operations and projected the financial performances over the forthcoming 5 years until FY21/22. For our analysis, we have assumed that the Company will continue current operations on substantially an as-is basis. We have also determined a terminal value based on the continuing operations of the Company following the end of the projection period.

15 In considering the value on an as-is basis, we have only considered the likely future returns from company under its incumbent management, existing and available operating scale, branding and facilities, and considering the present capital structure. We have not investigated or considered the impact of any change to any of these factors, either individually or collectively, which may have a material impact on the overall conclusions arrived at in our report. The estimates of future performance have been primarily based on its normal course of operations. We have not undertaken any revaluation of property, plant or equipment of the company and where necessary, book values or other relevant information provided by the Company have been employed. Assumptions For the purpose of our projections, we have considered an accounting period reflective of the respective company s financial reporting period. Thus the forecast captures a 12 month period commencing from April to March. The projected growth in income and the supporting operating costs for the Company has been based on management view of future financial outlook. In estimating the discount rate for the DCF approach, we have used industry data on other related companies whose operations and geographical locations are broadly comparable to the respective companies. Cost of Capital When applying the Income Approach, the cash flows expected to be generated by a business are discounted to their present value equivalent using a rate of return that reflects the relative risk of the investment, as well as the time value of money. This return is an overall rate based upon the individual rates of return for Invested Capital/Enterprise Value (equity and interest-bearing debt). This return, known as the weighted average cost of capital (also known as the rate of return on Invested Capital/Enterprise Value) WACC, is calculated by weighting the required returns on interest bearing debt and common equity capital in proportion to their estimated percentages in an expected capital structure. Renuka Hotels Limited is a fully equity financed Company, hence the WACC will be equivalent to the Cost of Equity. Cost of equity We used the International Capital Asset Pricing Model ( CAPM ) to determine the required return on equity. CAPM has been empirically tested and is widely accepted for the purpose of estimating a company s required return on equity capital. In applying the international variant of CAPM, the rate of return on common equity is estimated as the current risk-free rate of return uplifted for country risk, plus a market risk premium expected over the risk-free rate of return, multiplied by the beta for the stock. Beta is defined as a risk measure that reflects the sensitivity of a company s stock price to the movements of the stock market as a whole. The CAPM rate of return on equity capital is calculated using the formula: Ke=((1+Rf ) x (1+CRP)-1) + (β x (Rm - Rf)) 15 P a g e

16 where: Ke=Rate of return on equity capital Rf=Risk-free rate of return CRP=Country risk premium (used where Rf is not inclusive of such premium) β=beta or systematic risk for this type of equity investment Rm - Rf =Market risk premium; The expected return on a broad portfolio of stocks in the market (Rm) less the risk free rate (Rf) Beta Beta is a statistical measure of the volatility of the price of a specific stock relative to the movement of a general group. Generally, beta is considered to be indicative of the market s perception of the relative risk of the specific stock. For unlisted firms, practical application of the CAPM is dependent upon the ability to identify publicly traded companies that have similar risk characteristics to the subject company, in order to derive meaningful measures of the subject company beta. Betas reported in public sources are leveraged, which incorporates the added risk to a stockholder due to the debt financing of the company. To derive a beta applicable to the subject company based on our guideline companies, the reported leveraged betas must first be unlevered and then re-levered at assumed target debt levels appropriate for the Company. In the case of Renuka Hotels Ltd, re-levering of beta is not required as the company is fully equity financed. This beta calculation has been based on the betas for comparable companies with similar businesses as at 31 August 2017 which derived an equity beta of (Refer Appendix 1.3 for the calculation of Equity Beta) Equity market risk premium Practical application also relies on an estimate of the Market Risk Premium. Since the expectations of the average investor are not directly observable, the Market Risk Premium must be inferred using one of several methods. One approach is to use premiums that investors have historically earned over and above the returns on long-term bonds. The premium obtained using the historical approach is sensitive to the time period over which one calculates the average. The Country Risk Premium of 6.4% is used in this regard which is obtained from a publication of NYU Stern. (Refer - appendix 1.4) Risk free rate The risk-free rate of 10.6% was taken as the yield to maturity on the LKR ten year bonds as at August 2017 which was obtained from the website of Central Bank of Sri Lanka.

17 Gearing Gearing is defined as the debt capital as a percentage of the sum of the debt, preferred and common equity capital ( Total Invested Capital ). Presently the Capital Structure of the company consists only of Equity capital and the management intends to maintain the prevailing capital structure in the long-run. Terminal value The terminal value represents the present value of all future cash flows projected to be generated by the Company beyond the last year of the explicit projection period into perpetuity. A terminal growth rate of 4% has been used for the entity based on long term economic growth outlook, consumer spending and competitive nature of business. We have used the following cash flow into perpetuity formula to calculate the terminal value: Terminal Value = (Projected Maintainable Cash Flows) x (1+g) (WACC-g) Where: WACC = weighted average cost of capital g = expected growth rate into perpetuity Conclusion Combining the above assumptions produces a base case WACC or Cost of Equity of 15.7% for the Company and terminal value of LKR 7,425,192, P a g e

18 2. NET ASSETS VALUE METHOD. Valuation summary Net Assets FY15/16 FY16/17 YTD AUG FY17/18 Stated Capital 112,508, ,508, ,508,648 Reserves Revenue reserves 3,763,481,067 4,263,481,067 4,263,481,067 Retaining Earnings 288,117, ,699, ,568,658 AFS Reserve 1,663,662,449 1,593,106,298 1,236,431,048 EQUITY 5,827,770,082 6,264,795,163 6,366,989,421 Realization Cost 10% 10% 10% Cost of Realization Cost 582,777, ,479, ,698,942 Realizable net assets of the company attributable to equity holders Number of shares 5,244,993,074 5,638,315,647 5,730,290,479 Ordinary Shares 40,297,530 40,297,530 40,297,530 Realizable Net Assets Value per Share Key considerations To facilitate the preparation of this analysis, the management of Renuka Hotels Limited has provided us with information on the company including the consolidated audited financial statements for FY16/17 and the interim financial statements as at 31 August For our analysis, we have assumed that the Company will continue current operations on an as-is basis. We have not undertaken any revaluation of property, plant or equipment of the company or obtained the services of a professional valuer. Assumptions For the purpose of the valuation, we have assumed that Financial Statements provided by the management states all assets and liabilities at fair values The Cost of Realisation of assets is assumed at 10% considering the capital gains tax and other costs that may arise.

19 3. EARNINGS CAPITALISATION METHOD Valuation Summary FY15/16 FY16/17 FY17/18 (annualised) PAT attributable to Equity holders 409,318, ,754, ,969, /2018* Annualised 652,969, / ,754, ,754, / ,318, ,318, ,318, / ,267, ,267, / ,013,100 Calculation of Weighted Average Profit 425,750, ,527, ,956,045 Capitalization Rate 15.7% 15.7% 15.7% Value of the company 2,711,787,331 3,022,470,372 3,617,554,428 Number of shares 40,297,530 40,297,530 40,297,530 ECM Value per share P a g e

20 Key considerations and Assumptions To facilitate the preparation of this analysis, the management of Renuka Hotels Limited has provided the consolidated audited financial statements of the company and the group for FY 2015/2016, 2016/2017 and the interim financial statements as at 31 August For our analysis, we have assumed that the Company will continue current operations on an as-is basis. To normalise the earnings, adjustments pertaining to one-off gains, one-off employee benefits, seasonality of the business and dividend income were incorporated. To determine the maintainable earnings, weighted average earnings over a period of 3 years where most recent earnings are given a higher weightage was used. Capitalization rate of 15.7% is calculated using the formula: Capitalisation rate= Rf + (β x (Rm - Rf)) +Company Specific Risk Premium Rf =Risk Free Rate of 10.6% was taken as the yield to maturity on the LKR ten year bonds as at August 2017 which was obtained from the publication of Central Bank of Sri Lanka. Β = This beta calculation has been based on the betas for comparable companies with similar businesses as at 31 August 2017 which derived an equity beta of Rm - Rf= The expected return on a broad portfolio of stocks in the market (Equity Risk Premium) of 6.4 % is used.

21 QUALIFICATIONS AND EXPERIENCE J L S Fernando ACA, FCMA Partner W J L S Fernando is an Associate Member of the Institute of Chartered Accountants of Sri Lanka, a Fellow Member of the Chartered Institute of Management Accountants (UK). He joined the partnership in 1998 after being associated with the organization for over 12 years. W J L S Fernando has served as the engagement partner in numerous advisory engagements ranging from business valuations, financial due diligences, private placements, and mergers for enterprises in diverse industries. S Egodagamage ACA, B.Sc (Bus Admin) Sp. (USJ) Partner S Egodagamage is an Associate member of the Institute of Chartered Accountants of Sri Lanka and holds a BSc. (Bus. Admin) Special degree from the University of Sri Jayewardenepura. He has extensive tax, audit and advisory experience of 10 years having worked for PricewaterhouseCoopers (overseas). He has served as the engagement partner in numerous advisory engagements ranging from business valuations, financial due diligences, private placements, and mergers for enterprises in diverse industries including retail, leisure and banking sectors. 21 P a g e

22 APPENDIX 1.1 Key Drivers Forecast Income statement in LKR FY16/17 FY17/18 FY18/19 FY19/20 FY20/21 FY21/22 Room revenue No. of rooms Available room days 36,135 36,135 36,135 36,135 36,135 36,135 Occupancy % 81% 80% 80% 80% 80% 80% Occupied room days 29,397 28,908 28,908 28,908 28,908 28,908 ADR in USD ADR in LKR 10, , , , , , Growth % 10% 10% 10% 10% 10% 10% RevPAR in USD RevPAR in LKR 8,799 9,517 10,469 11,516 12,668 13,934 Revenue in LKR 322,030, ,911, ,303, ,133, ,746, ,521,518 F&B revenue F&B as a % of room revenue 32% 35% 35% 35% 35% 35% Total 103,430, ,369, ,406, ,646, ,211, ,232,531 Other revenue As a % of room revenue 20% 25% 25% 25% 25% 25% Total 65,517,520 85,977,993 94,575, ,033, ,436, ,880,379 Total gross revenue 490,978, ,259, ,285, ,813, ,394, ,634,428 Growth % 12% 10% 10% 10% 10% Direct costs Cost of sales (119,585,473) As a % of total revenue 24% 25% 25% 25% 25% 25% Total forecasted cost of sales (137,564,789) (151,321,268) (166,453,394) (183,098,734) (201,408,607) Gross profit Hotel gross profit 371,393, ,694, ,963, ,360, ,296, ,225,821 Margin % 76% 75% 75% 75% 75% 75% Other income Dividend income 241,672,759 Profit on disposal of PPE 41,749,673 Gain of FVTPL 2,188,119 Sundry Income 58,522 Total forecasted Other Income 285,669, ,000, ,000, ,000, ,000, ,000,000

23 Overheads Marketing expenses (20,024,125) As a % of total revenue 4% 5% 5% 5% 5% 5% Forecasted marketing expenses (27,512,958) (30,264,254) (33,290,679) (36,619,747) (40,281,721) Administration expenses (155,437,705) As a % of total revenue 32% Forecasted admin expenses (5% inflationary rate) (163,209,590) (171,370,070) (179,938,573) (188,935,502) (198,382,277) Operating expenses (780,942) As a % of total revenue 0% Forecasted operating expenses (819,989) (860,989) (904,038) (949,240) (996,702) Other expenses (2,254,857) As a % of total revenue/growth % 0% 0% 0% 0% 0% 0% Forecasted other expenses (2,527,106) (2,779,817) (3,057,799) (3,363,579) (3,699,936) Total overheads (178,497,629) (194,069,643) (205,275,129) (217,191,089) (229,868,067) (243,360,637) Depreciation (46,678,058) (46,678,058) (46,678,058) (46,678,058) (46,678,058) (46,678,058) 1.2 Forecasted EBT Forecast Income statement in LKR FY17/18 FY18/19 FY19/20 FY20/21 FY21/22 Revenue 550,259, ,285, ,813, ,394, ,634,428 Cost of sales (137,564,789) (151,321,268) (166,453,394) (183,098,734) (201,408,607) Gross profit 412,694, ,963, ,360, ,296, ,225,821 Other Income 285,000, ,000, ,000, ,000, ,000,000 Marketing expenses (27,512,958) (30,264,254) (33,290,679) (36,619,747) (40,281,721) Administrative expenses (163,209,590) (171,370,070) (179,938,573) (188,935,502) (198,382,277) Operating expenses (819,989) (860,989) (904,038) (949,240) (996,702) Other expenses (2,527,106) (2,779,817) (3,057,799) (3,363,579) (3,699,936) EBITDA 503,624, ,688, ,169, ,428, ,865,185 Depreciation (46,678,058) (46,678,058) (46,678,058) (46,678,058) (46,678,058) Finance Income 268,000, ,000, ,000, ,000, ,000,000 EBT 724,946, ,010, ,491, ,750, ,187, P a g e

24 1.3 Calculation of the Ungeared Equity Beta Name Debt Equity DE ratio Equity Beta City Hotels The Kingsbury PLC 1,510,856,000 1,449,646, % 1.11 Renuka City Hotel PLC - 551,909,620 0% 0.47 Galadari Hotels (Lanka) PLC - 768,522,683 0% 1.17 Trans Asia 370,256,000 1,112,880,000 33% 1.39 Average 470,278, ,739,576 34% 1.04 Ungeared beta 0.80 *We have obtained the equity beta from the Colombo Stock Exchange as at 19 September Further, the debt to equity distribution was noted from the published annual reports for FY16/ Risk Premium Reference:

25 1.5 Historical Financial Ratios Consolidated Income Statement Base Year Income statement in LKR FY15/16 FY16/17 Revenue 451,808, ,978,829 Cost of sales (119,815,884) (119,585,473) Gross profit 331,993, ,393,356 Other Income 225,990, ,669,073 Marketing expenses (23,689,942) (20,024,125) Administrative expenses (81,993,628) (108,759,647) Operating expenses (49,435,405) (47,459,000) Other expenses (66,749,314) (2,254,857) EBITDA 336,115, ,564,800 Depreciation (48,235,438) (46,678,058) Finance Income 286,301, ,390,965 EBT 574,181, ,277,707 Income tax expenses (17,389,527) (36,907,467) Profit for the year 556,792, ,370,240 GP Margin 73% 76% EBITDA Margin 74% 97% EBT Margin 127% 143% PAT Margin 123% 135% EPS LKR LKR Revenue Composition 25 P a g e

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