Anno accademico

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1 Anno accademico Corso di Laurea Magistrale in Economia Aziendale Curriculum amministrazione e governance delle aziende (ex DM 270) PRINCIPLES OF BUSINESS VALUATION

2 Valuing a Changing Perimeter Business An Example of Valuing a Retail Chain Founding Managing Partner Cross Court Capital October 2018

3 CHANGING PERIMETER BUSINESSES Valuing a Changing Perimeter Business Page 2 October 2018

4 What is a Changing Perimeter Business There are numerous industries that are characterized by a significant evolution in the perimeter of their business Retail (store opening / closures) Real Estate (increasing portfolio through asset acquisitions or divestments) Hotel chains Airline (routes) To understand, and subsequently value these businesses, like-for-like analysis is needed. Such analysis is useful to: better understand the historical rate of growth forecast the implied growth rate in the future Price-in Investments needed to grow the business Growth may come from, one or both of New assets (ie new stores ) Existing assets (ie same stores ) already in-place or recently in-place Growth from new assets is usually expensive and financed through investment Capex Working Capital Valuing a Changing Perimeter Business Page 3 October 2018

5 Like-for-Like Analysis Like-for-like analysis allows to: exclude any effects of expansion, acquisition, or other events that artificially enlarge the company's sales (or vice versa) indicate direct comparison to a previous year, while eliminating all sales made due to acquisitions, losses, or other circumstances that were not present the previous year Identify other details that could inflate or deflate the comparable business done by the company It will be possible to analyze the rate of growth underlying the business, without having to scale it up Analysis of historical results adjusting to eliminate the effect of perimeter evolution (ie new openings, new buildings) Sales are adjusted and so is the income statement in order to consider growth coming from previous assets (already invested) and growth coming from investments Rump analysis is possible to sterilize for growth coming for ramp-up of businesses Valuing a Changing Perimeter Business Page 4 October 2018

6 Like-for-Like Analysis: An Example If a business had 10 stores one year and opened another 10 stores in the first month of the next year, for example, it would probably use like-for-like analysis of sales to accurately state growth in overall sales Otherwise, the company would be comparing the sales of 10 stores one year with the sales of 20 stores the following year. In like-for-like sales analysis, the 10 new stores would be ignored, and only the 10 original stores would be used for analysis The following year, however, the 20 stores could be compared to the 20 stores the year before to establish like-for-like numbers. If, however, three stores closed, then the remaining 17 stores would only be compared to the sales numbers for those 17 stores the previous year to generate like-for-like sales numbers Valuing a Changing Perimeter Business Page 5 October 2018

7 Like-for-Like Analysis: Uses and Valuation Rationale Like-for-like analysis is useful to understand the sustainability of a business. It is needed to: Determine sustainable EBITDA Determine sustainable EBIT Determine sustainable cash flow Once sustainable margins of the business are defined / analyzed, valuation multiples may be applied depending on where growth comes from Existing asset base New assets Both Perimeter decline (closures / asset divestments) need to be analyzed, but the approach is specularly the same Valuing a Changing Perimeter Business Page 6 October 2018

8 Valuation: Critical Reasoning Depending on where growth comes from, the business may be more / less valuable. In the case of a given growth rate: Old asset base most valuable Recent openings less valuable New Store openings least valuable In the case of revenue / EBITDA streams with different growth rates, valuation approach can be the following: 1. Apply different multiples to EBITDA stream deriving from (i) existing asset base (lower growth rates) as opposed to (ii) EBITDA coming from new assets (higher growth rates) 2. Apply forward multiples to recently invested asset base 3. Apply current multiples to recently invested asset base and discount back at WACC With regards to new store openings, the approach would be to apply low EBITDA multiples to proxy for Uncertainty in finding and successfully opening store (execution risk) Capex Working Capital Valuing a Changing Perimeter Business Page 7 October 2018

9 Like-for-Like Analysis: An Example (1/2) Sales CAGR Same store opened prior ,0 55,0 60,5 66,6 73,2 10,0% Recently opened stores after ,0 23,1 42,4 69,2 105,4 80,2% New Openings 3,8 5,0 6,4 8,0 9,9 27,4% Total Sales 63,8 83,1 109,2 143,7 188,5 31,1% EBITDA Same store opened prior ,5 8,3 9,1 10,0 11,0 10,0% Recently opened stores after ,0 2,3 4,2 6,9 10,5 80,2% New Openings 0,2 0,2 0,3 0,4 0,5 27,4% Total EBITDA 8,7 10,8 13,6 17,3 22,0 26,2% If we were to apply a single EBITDA multiple, the valuation would be the following EV/EBITDA17 8x ; EV = 8 x 8.7 = 69.6 EV/EBITDA20 4x ; EV = 4 x 17.3 = 69.2 Most of the value derives from stores opened and already ramped-up (prior to 2017), encompassing 86% of EBITDA (in 2021 same-store EBITDA equals 50%!) We would be grossly undervaluing the business, because we don t consider recently opened stores and future openings Valuing a Changing Perimeter Business Page 8 October 2018

10 Like-for-Like Analysis: An Example (2/2) Valuation example 1 - apply different trailing multiples Sames stores Recent Stores New Openings Total EBITDA ,5 1,0 0,2 8,7 EV/EBITDA 8,0x 20,0x 4,0x 9,3x Enterprise Value 60,0 20,0 0,8 80,8 Valuation example 2 - apply forward multiples Sames stores Recent Stores New Openings Total EBITDA 8,3 6,9 0,4 15,6 EV/EBITDA 6,0x 4,0x 4,0x 5,1x Enterprise Value 49,5 27,7 1,6 78,8 Valuation example 3 - apply trailing multiples and discount back Sames stores Recent Stores New Openings Total EBITDA ,0 6,9 0,4 17,3 EV/EBITDA ,0x 8,0x 8,0x 8,0x Enterprise Value 79,9 55,4 3,2 138,4 Discounted EV 49,9 34,6 2,0 86,4 As can be seen, the value of the company is closer to 80 than 70! Or 9.3x 2016 EBITDA Valuing a Changing Perimeter Business Page 9 October 2018

11 A REAL-LIFE EXAMPLE: COMPARABLE COMPANY ANALYSIS Valuing a Changing Perimeter Business Page 10 October 2018

12 Comparable Company Analysis Peer Comparison Company Country CAGR CAGR CAGR EBITDA Margin 18 EBITDA Margin 19 EBITDA Margin 20 EBITDA Margin 17 EBIT Margin 18 EBIT Margin 19 EBIT Margin 20 EBIT Margin Kingfisher Plc United Kingdom 3,8% 2,4% 2,4% 8,8% 7,8% 8,1% 9,1% 6,5% 5,6% 5,9% 6,8% Industria De Diseno Textil Sa Spain 8,7% 7,1% 7,5% 21,7% 20,4% 21,0% 21,1% 17,6% 16,0% 16,8% 16,9% H & M Hennes & Mauritz Ab Sweden 5,1% 4,9% 4,4% 14,5% 12,6% 12,7% 12,9% 10,3% 8,1% 8,1% 8,3% Next Plc United Kingdom -1,0% 1,4% 1,4% 23,1% 21,8% 21,1% 20,9% 20,3% 18,8% 18,1% 17,8% Marks And Spencer Group Plc United Kingdom 0,7% -0,1% 0,1% 11,4% 11,8% 11,1% 10,9% 5,9% 5,8% 5,9% 5,9% Dixons Carphone Plc United Kingdom -0,5% -0,4% 0,1% 6,4% 5,4% 4,7% 4,8% 4,7% 3,4% 3,0% 3,1% Debenhams Plc United Kingdom 18,1% 8,8% 6,1% 9,3% 5,8% 6,0% 6,1% 4,6% 1,6% 1,7% 1,8% B&m European Value Retail Sa Luxembourg 24,6% 18,5% 15,8% 9,6% 9,3% 9,7% 9,8% 8,5% 8,0% 8,4% 8,5% Associated British Foods Plc United Kingdom 2,0% 2,8% 3,6% 12,0% 12,4% 12,2% 12,6% 8,3% 8,8% 8,6% 9,0% Mean*= Mean excluding min and max Mean 6,8% 5,1% 4,6% 13,0% 11,9% 11,8% 12,0% 9,6% 8,5% 8,5% 8,7% Source: Thomson Reuters Mean* 5,4% 3,9% 3,7% 12,5% 11,4% 11,5% 11,8% 8,8% 8,0% 8,1% 8,4% Median 3,8% 2,8% 3,6% 11,4% 11,8% 11,1% 10,9% 8,3% 8,0% 8,1% 8,3% Valuing a Changing Perimeter Business Page 11 October 2018

13 Comparable Company Analysis - Market Data Company Country Currency Levered Beta Leverage Unlevered Beta Price Outstanding shares (M) Market Cap Minority Interest Total Debt Cash EV Kingfisher Plc United Kingdom GBP 0,394-2,6% 0, , , ,2 0,0 89,0 228, ,2 Industria De Diseno Textil Sa Spain EUR 0,680-7,8% 0,720 24, , ,8 28,0 45, , ,8 H & M Hennes & Mauritz Ab Sweden SEK 0,816 1,0% 0, , , ,7 0, , , ,7 Next Plc United Kingdom GBP 0,725 15,8% 0, ,00 139, ,8 0, ,7 97, ,1 Marks And Spencer Group Plc United Kingdom GBP 0,881 33,8% 0, , , ,5-2, ,2 228, ,7 Dixons Carphone Plc United Kingdom GBP 0,803 11,8% 0, , , ,0 0,0 477,0 255, ,0 Debenhams Plc United Kingdom GBP 0, ,5% 0,311 8, ,8 109,5 0,0 287,3 41,4 355,4 B&m European Value Retail Sa Luxembourg GBP 0,632 13,6% 0, , , ,2 13,7 620,9 90, ,0 Associated British Foods Plc United Kingdom GBP 0,877-1,1% 0, ,00 791, ,7 84,0 764,0 961, ,7 Mean*= Mean excluding min and max Mean 0,74 32,1% 0,64 Source: Thomson Reuters Mean* 0,76 10,3% 0,66 Median 0,80 11,8% 0,71 Valuing a Changing Perimeter Business Page 12 October 2018

14 Comparable Company Analysis Trading Multiples Company Country EV/ SALES EV/EBITDA EV/EBIT Kingfisher Plc United Kingdom 0,5x 0,4x 0,4x 0,4x 5,2x 5,7x 5,4x 4,7x 7,1x 7,8x 7,5x 6,3x Industria De Diseno Textil Sa Spain 3,0x 2,8x 2,6x 2,4x 14,0x 13,7x 12,6x 11,6x 17,3x 17,4x 15,8x 14,4x H & M Hennes & Mauritz Ab Sweden 1,2x 1,1x 1,1x 1,0x 8,2x 9,0x 8,6x 8,1x 11,6x 14,0x 13,3x 12,6x Next Plc United Kingdom 2,0x 2,1x 2,0x 1,9x 8,8x 9,4x 9,3x 9,3x 10,0x 10,9x 10,9x 10,9x Marks And Spencer Group Plc United Kingdom 0,6x 0,6x 0,6x 0,6x 5,1x 4,9x 5,3x 5,3x 9,9x 10,0x 9,9x 9,9x Dixons Carphone Plc United Kingdom 0,2x 0,2x 0,2x 0,2x 3,1x 3,7x 4,3x 4,1x 4,2x 5,8x 6,6x 6,4x Debenhams Plc United Kingdom 0,2x 0,1x 0,1x 0,1x 1,6x 2,2x 2,1x 2,1x 3,3x 8,1x 7,5x 6,9x B&m European Value Retail Sa Luxembourg 1,8x 1,5x 1,3x 1,2x 19,1x 15,8x 13,5x 12,0x 21,5x 18,2x 15,6x 13,8x Associated British Foods Plc United Kingdom 1,2x 1,2x 1,1x 1,1x 9,9x 9,4x 9,2x 8,5x 14,4x 13,2x 13,0x 11,8x Mean*= Mean excluding min and max Mean 1,2x 1,1x 1,1x 1,0x 8,3x 8,2x 7,8x 7,3x 11,0x 11,7x 11,1x 10,4x Source: Thomson Reuters Mean* 1,1x 1,0x 1,0x 0,9x 7,8x 8,0x 7,8x 7,4x 10,6x 11,6x 11,1x 10,4x Median 1,2x 1,1x 1,1x 1,0x 8,2x 9,0x 8,6x 8,1x 10,0x 10,9x 10,9x 10,9x Valuing a Changing Perimeter Business Page 13 October 2018

15 THE RETAIL CHAIN Valuing a Changing Perimeter Business Page 14 October 2018

16 The Company at a First Glance SALES & STORE EVOLUTION 2014A 2015A 2016A 2017A 2018E 2019E 2020E 2021E TURNOVER Growth YoY % 21,1% 28,8% 13,7% 10,4% 14,9% 18,7% 9,4% Direct Stores sales Growth YoY % 14,1% 33,8% 15,0% 12,4% 15,5% 20,3% 9,4% Franchising store sales Growth YoY % 57,1% 9,9% 7,5% 0,5% 11,4% 10,2% 9,3% STORES Sales/store 149,5 136,9 156,0 150,7 155,2 161,5 173,6 181,8 Direct Stores Sales/store 187,8 180,1 202,8 197,2 197,3 207,0 224,6 240,4 Franchising stores Sales/store 72,9 72,2 76,0 70,1 71,7 72,0 72,3 72,5 We would need to understand how much of the growth comes from existing stores and how much from new ones A like-for-like analysis would have to be carried out in order identify the multiple/s and value the company Valuing a Changing Perimeter Business Page 15 October 2018

17 Like-for-Like Analysis: Direct Store Revenues 1/2 LIKE FOR LIKE ANALYSIS OPENINGS OF DIRECT STORES 2014A 2015A 2016A 2017A 2018E 2019E 2020E 2021E All openings before 2014 Stores n Sqm Sqm per store Revenues LfL LfL / sqm 3,332 3,700 3,906 4,024 4,225 4,647 4,787 Yoy 11,0% 5,6% 3,0% 5,0% 10,0% 3,0% Revenues per store 215,0 238,8 252,1 259,6 272,6 299,9 308,9 Opening in 2014 Stores n Sqm Sqm per store Revenues Revenues per sqm 1,380 1,530 1,716 1,767 1,855 2,041 2,245 Yoy 10,9% 12,1% 3,0% 5,0% 10,0% 10,0% Revenues per store 111,6 123,7 138,7 142,9 150,0 165,0 181,5 Opening in 2015 Stores n Sqm Sqm per store Revenues Revenues per sqm 1,444 2,222 2,666 2,799 3,079 3,172 Yoy 53,9% 20,0% 5,0% 10,0% 3,0% Revenues per store 119,3 183,7 220,4 231,4 254,5 262,2 Valuing a Changing Perimeter Business Page 16 October 2018

18 Like-for-Like Analysis: Direct Store Revenues 2/2 2014A 2015A 2016A 2017A 2018E 2019E 2020E 2021E Opening in 2017 Stores n Sqm Sqm per store Revenues Revenues per sqm 1,200 2,160 2,808 2,892 Yoy 80,0% 30,0% 3,0% Revenues per store 78,0 140,4 182,5 188,0 Opening in 2018 Stores n Sqm Sqm per store Revenues Revenues per sqm 1,236 2,287 2,813 Yoy 85,0% 23,0% Revenues per store 80,3 148,6 182,8 Opening in 2019 Stores n Sqm Sqm per store Revenues Revenues per sqm 1,273 2,266 Yoy 78,0% Revenues per store 82,8 147,3 Opening in 2020 Stores n. 5 Sqm 325 Sqm per store 65 Revenues 426 Revenues per sqm 1,311 Revenues per store 85,2 Revenues from openings from 2014 onwards Valuing a Changing Perimeter Business Page 17 October 2018

19 Total Revenue GLOBAL REVENUE SUMMARY 2014A 2015A 2016A 2017A 2018E 2019E 2020E 2021E TOTAL DIRECT STORES N. direct stores Total sqm Avg. Sqm per store Avg per sqm 2,799 2,989 2,907 2,922 3,076 3,349 3,587 Total turnover from Direct Stores FRANCHISING STORES Existing stores B-O-Y (n ) Sales from existing stores (per store) Sales from existing stores Openings (n ) Sales from new openings (per store) Sales from new openings Switches (n ) 0 0 (11) (2) -7,0 0,0 0,0 0,0 Closing (n ) 0 (1) 0 (1) 0,0 0,0 0,0 0,0 Switches sales (525) Closing sales Franchising stores E-O-Y (n ) Franchising stores turnover TOTAL Turnover breakdown - Direct stores sales Franchised stores sales TOTAL STORES TURNOVER OTHER REVENUES Yoy 57,5% -32,3% 45,2% 10,0% 10,0% 10,0% 10,0% Valuing a Changing Perimeter Business Page 18 October 2018

20 Income Statement P&L 2014A 2015A 2016A 2017A 2018E 2019E 2020E 2021E - Direct stores sales Franchised stores sales Stores' revenues Other revenues TURNOVER Growth YoY % 22,1% 26,7% 14,3% 10,4% 14,7% 18,5% 9,4% Purchases (6.122) (7.915) (9.482) (10.398) (11.615) (13.414) (16.131) (17.654) on Direct Stores' Turnover 56,2% 63,7% 57,0% 54,4% 54,0% 54,0% 54,0% 54,0% Inventory change on Direct Stores' Turnover -4,0% -5,9% -1,9% -1,6% -1,8% -2,5% -3,0% -1,6% GROSS MARGIN % 57,5% 55,9% 55,7% 57,3% 56,9% 57,2% 57,0% 55,9% Costs for services (864) (1.050) (1.299) (1.526) (1.707) (1.989) (2.351) (2.463) on Direct Stores' Turnover 7,9% 8,4% 7,8% 8,0% 7,9% 8,0% 7,9% 7,5% Costs for rents and leasing (1.624) (1.864) (2.352) (2.791) (2.968) (3.191) (3.569) (3.888) on Direct Stores' Turnover 14,9% 15,0% 14,1% 14,6% 13,8% 12,8% 11,9% 11,9% Other operating costs (652) (701) (789) (894) (1.040) (1.174) (1.337) (1.373) on Direct Stores' Turnover 6,0% 5,6% 4,7% 4,7% 4,8% 4,7% 4,5% 4,2% VALUE ADDED % 34,0% 33,8% 34,2% 35,2% 35,0% 36,0% 36,5% 36,0% Labour costs (3.360) (4.404) (5.353) (6.213) (6.827) (7.527) (8.454) (8.951) on Direct Stores' Turnover 30,9% 35,4% 32,2% 32,5% 31,7% 30,3% 28,3% 27,4% Yoy 31,1% 21,5% 16,1% 9,9% 10,2% 12,3% 5,9% Risk provisions 0 0 (48) EBITDA EBITDA margin 8,8% 6,8% 8,1% 8,9% 8,8% 10,8% 12,7% 12,9% Amortization (255) (367) (446) (513) (540) (589) (645) (664) Depreciation (219) (212) (336) (437) (483) (580) (690) (754) EBITA EBITA margin 5,3% 3,2% 4,3% 4,9% 4,9% 6,9% 8,9% 9,2% Valuing a Changing Perimeter Business Page 19 October 2018

21 Valuation 2018E 2019E 2020E 2021E Adj. EBITDA x multiple 9,6x 9,6x 9,6x 9,6x EV Adj. NFP Equity Valuing a Changing Perimeter Business Page 20 October 2018

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