grindrod //policy investment€¦ · 3.1 business units and divisions are to prepare and perform an...
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GROUP INVESTMENT POLICY
Contents 1. INTRODUCTION ....................................................................................................................................................... 2
2. OBJECTIVE ............................................................................................................................................................... 2
3. METHODOLOGY ...................................................................................................................................................... 2
4. DEFINITIONS AND GLOSSARY ................................................................................................................................. 3
5. PROJECT HURDLE RATES ......................................................................................................................................... 5
6. WEIGHTED AVERAGE COST OF CAPITAL (“WACC”) ................................................................................................ 6
7. KEY CONSIDERATIONS WHEN MOTIVATING AN INVESTMENT PROPOSAL ............................................................ 6
8. CONSIDERATION OF THE 6 RESOURCES ................................................................................................................. 8
9. CONSIDERATION OF THE IMPACT ON GRINDROD’ S 5 CHOSEN SUSTAINABLE DEVELOPMENT GOALS (SDGs) ... 9
10. FINANCIAL ASSESSMENT OF A PROJECT ........................................................................................................... 10
11. FINANCIAL ASSESSMENT OF AN ACQUISITION ................................................................................................. 11
12. FUNDING OF INVESTMENT ............................................................................................................................... 12
13 DUE DILIGENCE CHECKLIST ............................................................................................................................... 13
14 POST INVESTMENT REVIEWS ............................................................................................................................ 13
ANNEXURE 1 ..................................................................................................................................................................... 14
ANNEXURE 2 ..................................................................................................................................................................... 19
ANNEXURE 3 ..................................................................................................................................................................... 23
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1. INTRODUCTION The investment policy applies to any of the following categories:
1.1 All capital expenditure
1.2 Acquisitions (including the investment in working capital)
1.3 Lease commitments
2. OBJECTIVE Capital is a finite resource and investment opportunities must compete to enable Grindrod to maximise
value for its stakeholders.
3. METHODOLOGY 3.1 Business Units and Divisions are to prepare and perform an independent review of all capital
expenditure, projects, long-term leases and potential acquisitions. The independent review is to
include, but not limited to, investment motivation, valuation method, funding and other assumptions.
3.2 Items exceeding the Divisional limits of authority and being submitted to the Grindrod Executive
Chairman, the Grindrod Executive Committee (“Exco”) or Board for approval, as may be applicable
are required to be reviewed by the Group Financial Director and Group Special Projects prior to
submission to the Grindrod Executive Chairman, Exco and Board.
3.3 Once approval has been given by the Executive Chairman, the investment proposal can be submitted
to the Exco Board for approval.
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4. DEFINITIONS AND GLOSSARY
MEASURE SHORT NAME PERIOD CALCULATED ON DESCRIPTION
Economic
dimension
Eco D Overall
project
measure
Change in financial or
economic value
The increase, decrease or
maintenance of financial value.
Environ-
mental
dimension
En D
Change in
environmental value
The positive or negative impact of the
proposed capital application on the
natural environment.
Equity
Internal
Rate of
return
Equity
IRR
Overall
project
measure
The leveraged IRR
calculated using geared
cash flows at the
expected project debt /
equity ratio.
The Equity IRR and the Project IRR
are equal when there is no debt in the
project otherwise Equity IRR will
always be higher than Project IRR.
The equity IRR represents the
leveraged return due to project
gearing.
Project
internal rate
of return
Project
IRR
Overall
project
measure
The IRR of the project
cash flows, regardless
of how it is funded.
Although the WACC calculates the
specific return required to satisfy
capital providers, every project carries
a unique risk profile and level of
uncertainty in its cash flow projections.
Project hurdle rates are used to
benchmark the return requirements to
allow a headroom for these factors to
ensure that the WACC is achievable.
The project IRR of an investment is
simply the discount rate at which the
estimated cash flows would have a
net present value (NPV) of zero. The
project IRR gives an indication of the
robustness of the proposed
investment.
The investment decision and the
financing decision are considered
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MEASURE SHORT NAME PERIOD CALCULATED ON DESCRIPTION
separately. The project IRR is the
return on the project, regardless of
how the project is funded and is
therefore calculated on un-geared
cash flows.
Return on
equity
ROE Periodic
measure
Annualised Net Profit
after Tax over average
shareholders’ equity for
the period
The ROE measures the actual income
statement impact for each year and its
impact on the reported results of the
company.
Six
Resources
of the Value
Creation
Model
6 R Overall
project
measure
Some or all of the 6
Resources of the Value
Creation Model which
may be applicable to
the capital application.
All organizations depend on various
forms of capital for their success and
ultimate sustainability. The 6
Resources are part of the Value
Creation Model of the company. The
Company needs all or some of these
6 Resources to achieve its strategy
and thereby create value for its
stakeholders in terms of the Value
Creation Model. The 6 Resources
are: Our Money; Our Assets; Our
Skills; Our Relationships; Our People
and Our Environment.
Social
dimensions
SD Overall
project
measure
Change in social value The positive or negative impact on
Our People.
Sustainable
Develop-
ment Goals
SDGs Overall
project
measure
The specific SDG(s),
and their targets that
may be applicable to
the capital application.
Consist of 17 goals, 169 targets, 231
indicators to end poverty, fight
inequality and injustice and tackle
climate change by 2030.
In September 2015, the United
Nations General Assembly agreed on
the 2030 Agenda for Sustainable
Development.
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MEASURE SHORT NAME PERIOD CALCULATED ON DESCRIPTION
Terminal
Value
TV Cash
flow
project-
tion
The steady-state
periodic cash flows
which are expected to
occur into perpetuity.
TV = (Free cash flow x
(1+growth
rate))/(Discount rate –
growth rate)
TV is only relevant where the cash
flows continue into perpetuity. Where
there is doubt, the terminal value
should represent the price at which
the cash flows could be sold for at the
end of the project time-frame.
Weighted
average
cost of
capital +
DCF model
WACC Overall
project
measure
Blended after tax cost
of debt and equity
based on the target
debt / equity ratio.
The cost of equity is the
rate of return required
by the shareholders of
the company. The cost
of equity changes as
the levels of gearing
change and the
company-specific or
industry-specific risk
changes.
WACC is the minimum return that the
company must earn on its existing
asset base and future projects to
satisfy its creditors, owners, and other
providers of capital.
The Group WACC calculation is
reviewed annually and approved by
the Board in November as part of the
business plan.
5. PROJECT HURDLE RATES The current hurdle rates, effective from July 2017, are set out below.
LOW MEDIUM HIGH Project IRR 12% 15% 18%
All projects should be evaluated against the high-risk hurdle rate, unless the applicant can justify, after
assessing all key risks and their mitigating factors, that the project is deemed to have a low or medium
risk. The calculated project IRR must then exceed the hurdle rate for the applicable level of project risk.
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In some cases, the project is funded entirely from a debt provider in the form of on or off-balance sheet
financing. In these cases, although there is no equity directly invested, any losses need to be funded out
of existing equity capital and therefore equity capital is at risk. The IRR is an important measure to ensure
that relationship between risk and returns is appropriate for risk appetite of the company’s shareholders.
6. WEIGHTED AVERAGE COST OF CAPITAL (“WACC”) In terms of this Group investment policy, the Group WACC, is calculated below, using a target debt equity
ratio of 75%, i.e. 75c of debt for every R1 of equity. This calculation is updated regularly and the most
recent calculation should always be used.
ELEMENTS RATIO Cost of equity / required rate of return 13.30%
Long-term cost of borrowings * 11.60%
Therefor after-tax cost of long term debt 8.40%
WACC based on 75% debt/equity 11.2% * (5 year ZAR swap + premium) / (5 year USD swap + premium)
6.1 As Grindrod is a South African company listed on the JSE, the cost of equity or shareholder
required rate of return is the same regardless of whether the debt is US Dollar or Rand based.
6.2 The long-term cost of debt can vary depending on currency and region. The long-term cost
of debt used in the WACC calculation can be tailored to the expected cost of debt for the
project. However, the deviation from the above calculation must be well documented and
motivated in the application.
6.3 The group target return on equity is 15%. If investments exceed the Project IRR hurdle rates,
the return on equity objective will be met in the long-term.
7. KEY CONSIDERATIONS WHEN MOTIVATING AN INVESTMENT PROPOSAL When submitting or approving an investment proposal, the following considerations apply. Failure to be
able to adequately address the questions below weakens the business case for the investment.
Macro considerations: 7.1 Have the relevant macro “big trends”, such as the Global Political Landscape, The Internet of
Things, Big Data, Displacement of People, Urbanization, Climate Change been considered?
7.2 Is the proposed investment consistent with Grindrod’s ethics, as underpinned by the six core
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values?
7.3 Is the proposed investment in an industry which Grindrod considers being core to delivering
on its long-term strategy?
7.4 Is it clear why the investment is being proposed now and is this reasoning convincing?
7.5 Does the proposal focus on maximising (and not just adding) value across as many resources
as may be applicable and does the proposal describe, in conceptual terms, the source of the
value created?
7.6 What would the consequences be of not undertaking the investment?
7.6.1 Does the risk analysis reflect the uncertainty range of the individual risk factors rather than
simplistic one-factor changes (i.e. is the sensitivity analysis robust)?
7.7 Have systems, processes and procedures been considered?
7.8 Has technology, software and hardware been considered?
Economic considerations: 7.9 Does the proposal include consideration of all commitments or subsequent investments which
will result from the current proposal?
7.10 Does the proposal demonstrate that it is the best solution compared with other reasonable
alternatives, on matters such as scale, alternative uses for facilities, alternative acquisition
targets, etc.?
7.11 Are the valuations/project justifications optimistic or pessimistic (e.g. increasing margins
above competitors) and are there convincing reasons for believing that these assumptions
are sustainable? Consider presenting a worst-case, base-case and best-case scenario in the
return metrics.
7.12 Can the current valuation be satisfactorily reconciled against previous valuations where
available? Do the results of the valuations make sense against the back-of-the-envelope
calculations and rule-of-thumb tests (e.g. comparative multiples)? If not, can the differences
be satisfactorily explained?
7.13 Does the project justification rely on sound valuation techniques rather than unquantified
vague “strategic” notions of value?
7.14 Does the risk management plan show the critical decision points (or potential exit points) at
which the outcome of risk mitigation plans for headline risks become apparent?
7.15 Are the valuation parameters explicit and unambiguous?
Social considerations: 7.16 Have all relevant non-financial factors, as set out below and where applicable, been
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considered;
7.16.1 Safety, health and quality
7.16.2 Governance
7.16.3 Legal compliance
7.16.4 Cultural fit (in the case of a possible merger of acquisition)
7.16.5 Human Resources practices
7.16.6 Community needs and challenges
Environmental considerations: 7.17 Has the precautionary principle been considered?
7.18 Have all possible negative impacts to the environment been considered?
7.19 Has environmentally friendly technology been considered?
7.20 Has waste reduction, energy efficiency and water saving measures been investigated?
8. CONSIDERATION OF THE 6 RESOURCES The Company’s strategy is developed to create value for its stakeholders by means of the Value
Creation Model. In order to ensure maximum value is created, considering all relevant stakeholders,
the Company needs to draw on its 6 Resources, e.g. Our Money, Our Assets, Our Skills, Our
Relationships, our People and Our Environment. In other words, how best can you use the
Company’s 6 Resources to successfully apply for and implement the capital project towards
achieving the Company’s strategy?
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9. CONSIDERATION OF THE IMPACT ON GRINDROD’ S 5 APPROVED SUSTAINABLE DEVELOPMENT GOALS (SDGs)
Ensure inclusive and equitable quality education and promote
lifelong learning opportunities for all.
Ensure availability and sustainable management of water and
sanitation for all.
Promote sustained, inclusive and sustainable economic growth,
full and productive employment and decent work for all.
Build resilient infrastructure, promote inclusive and sustainable
industrialization and foster innovation.
Take urgent action to combat climate change and its impacts.
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10. FINANCIAL ASSESSMENT OF A PROJECT Grindrod defines a project as follows: Capital expenditures, including long-term leases, working capital requirements for new or existing
businesses and investments to acquire fixed or long-lived assets from which systemic and holistic
value or a stream of benefits is expected. This capital expenditure can either be on new projects or
expansionary in nature.
For these projects, a project internal rate of return (project IRR) justification should be presented.
The project IRR should be considered in conjunction with the project NPV. The project IRR must
exceed the hurdle rate which is generally higher than the WACC. The positive NPV therefore
represents the buffer over the returns required to satisfy the capital providers and therefore equals
the value add in the project.
Calculation of project IRR To ensure accuracy of the project IRR calculation, the following should be observed:
1. Project scope
The capital cost of a project depends on the scope of the project and this should be clearly
defined (inclusions and exclusions). The scope of the project should clearly define each of the
key components of the project.
2. The capital cost of the project must include
2.1 all start-up costs;
2.2 working capital requirements;
2.3 contracted losses and any other direct costs;
2.4 contingencies for price escalations; and
2.5 any other contingencies to cover expenditures that are expected to occur but have
not been identified.
3. Key assumptions underpinning the forecast of future cash flows (quantity and timing). The cash
flow estimates should reflect expected changes in regulation (e.g. tax rates, fees etc.). It is the
timing of the cash payments rather than the schedule of work that should be considered in the
cash flow.
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4. Length of projections: because of the inherent uncertainties of forecasting for long periods,
forecasts should not generally be prepared for periods longer than ten years unless special
circumstances dictate that a longer period should be used.
5. Key assumptions underpinning the calculation of the residual value where the project IRR
includes a residual value calculation.
6. The project IRR should then be calculated and compared with the minimum level of return
required against the appropriate project hurdle rate given the level of risk in the project.
7. A sensitivity analysis showing the sensitivity of the project returns to changes in key assumptions
underpinning the forecast cash flows and the residual value calculation.
8. The project payback period (in years). This is the period over which the investment ‘pays back’
the capital invested. It is an indicator of how long an investment is at risk.
9. Indicative financial returns should be presented that consider the expected level of gearing of
the project. The return on equity (RoE) calculation should be shown clearly and measured
against the group’s target return on equity of 15%. Where the RoE is not met, an explanation
should be given. Indication should be given as to when the RoE target is expected to be met.
The project should ultimately be weighed up against the opportunity cost of undertaking the project
(i.e. what returns are being forgone by investing in the project).
An example of how the project paper/justification should be presented to the board or Executive
Committee, as the case may be is set in Annexure 2.
11. FINANCIAL ASSESSMENT OF AN ACQUISITION Acquisition: discounted cash flow valuation method A discounted cash flow valuation model (DCF) should be presented for the acquisition, which
ignores the proposed method of project funding. The presentation of the DCF should include:
11.1 The acquisition price must include all startup costs, working capital requirements, contracted
losses and any other direct costs and must be comparable to the valuation of the target
under the DCF.
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11.2 Detailed DCF based on a minimum forecast period of five years.
11.3 Justification of the WACC rate used based on the project risk.
11.4 Discounts for lack of marketability of 20% and lack of control (where acquiring 50% or less
of the target) of 15%.
11.5 Key assumptions underpinning the forecast of future cash flows, including forecasts on
future capital expenditure requirements.
11.6 Length of projections: because of the inherent uncertainties of forecasting for long periods,
forecasts should not generally be prepared for periods longer than 10 years unless special
circumstances dictate that a longer period should be used.
11.7 Key assumptions underpinning the calculation of the terminal value where the DCF includes
a terminal value calculation.
11.8 The terminal value, should in general, not exceed 33% to 50% of the total value, and where
it does, a detailed justification should be presented supporting the residual value calculation.
11.9 A sensitivity analysis showing the sensitivity of the DCF valuation to changes in key
assumptions underpinning the forecast cash flows and the terminal value calculation.
11.10 Indicative financial returns should be presented that consider the expected level of gearing
of the project. The RoE calculation should be shown clearly and measured against the
group’s target return on equity of 15%. Where the RoE is not met, an explanation should be
given. Indication should be given as to when the RoE target is expected to be met.
11.11 Cashflows from associated synergies are to be excluded from the model, however detail on
the synergies can be highlighted in the project motivation.
11.12 Any possible contingencies should be highlighted and allowed for in the project motivation
by way of scenario analysis.
The project should ultimately be weighed up against the opportunity cost of undertaking the
acquisition (i.e. what returns are being forgone by investing in the acquisition).
An example of how the DCF should be presented to the board or the Executive Committee as the
case may be is set out in Annexure 1.
12. FUNDING OF INVESTMENT The investment proposal should include detail on how the investment is intended to be funded,
considering the following factors:
12.1 Existing and optimal debt structure of division
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12.2 Impact of project on divisional and group gearing ratios
12.3 Debt requirement from existing facilities
12.4 Debt requirement from new facilities and detail on the proposed new facilities
12.5 Additional equity requirement from group
12.6 Working capital requirements and proposed funding thereof
12.7 Guarantees/security required for funding
An equity IRR calculation should be prepared and disclosed showing the impact of the funding on
the returns.
13 DUE DILIGENCE CHECKLIST A full due diligence must be performed on all acquisitions. A financial due diligence exercise must
be performed on all projects and full due diligence for all projects exceeding R10 million. In
assessing the viability of a potential project/acquisition, due care should be taken in ensuring that
all the material risks associated with the venture are fully assessed to limit the risk of project failure.
Set out in annexure 3 is a checklist of items that must be considered when undertaking a project/
acquisition. The topics covered include:
For each project, management must ensure that it has adequately addressed the various items in
the due diligence check list. Where external advisors have been used to carry out certain elements
of the due diligence work, this should be noted in the application.
The key element of the due diligence is the financial and commercial due diligence to assess the
financial and commercial feasibility of the project/acquisition. However due consideration must be
given to the social and environmental factors applicable.
14 POST INVESTMENT REVIEWS Post investment review feedback must be given to the Executive committee and Board on all
investments one year after the implementation of the project. To make the feedback meaningful,
analysis of any shortcomings and successes should be made and reported to avoid the same errors
being committed in future investments. Once the project/acquisition has been absorbed into the
operations, its performance is required to be monitored by management as part of the overall
businesses within the divisions. A template for such post investment review is attached, as
Annexure 4.
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FINANCIAL JUSTIFICATION EXAMPLE ANNEXURE 1
The example below serves to illustrate the key features of the cash flow model supporting the financial justification. In this example, no
terminal value is assumed.
Gross Tax Net Ratio Alloc Equity cost 13.3% 13.3% 30.0% 4.0% Debt cost (after tax) 11.6% -3.3% 8.4% 70.0% 5.9% WACC 9.8% Debt ratio (debt / net assets) 70.0% Growth Rate (inflation plus) 6.0% Include terminal value? No Project IRR R'm Jan X0 Dec X1 Dec X2 Dec X3 Dec X4 Dec X5 Dec X6 Dec X7 Dec X8 Revenue 100% - 1,430 1,516 1,607 1,704 1,806 1,914 2,029 2,151 Operating costs (cash only) 100% - (1,144) (1,213) (1,286) (1,363) (1,445) (1,531) (1,623) (1,721) EBITDA - 286 303 321 341 361 383 406 430 Taxation (incl wear and tear allowance) 28% - (40) (45) (50) (55) (61) (67) (73) (80) Free cash flows - 246 259 272 286 300 316 332 350 Project cost 100% (1,150) - - - - - - - - Project cash flows excluding residual value (1,150) 246 259 272 286 300 316 332 350 Residual value (Steady cash flows / (WACC - growth)) - - - - - - - - - Project free cash flows (1,150) 246 259 272 286 300 316 332 350
Project IRR 18.1% Cash flows ignoring terminal value 18.1% Terminal Value 0.0% Project pay-back period 4.3 years NPV (at WACC rate) 394 NPV of other cash flows 394 NPV of terminal value -
Key assumptions
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R'm Dec X1 Dec X2 Dec X3 Dec X4 Dec X5 Dec X6 Dec X7 Dec X8 Volumes (units) 1,430 1,430 1,430 1,430 1,430 1,430 1,430 1,430 Growth in units (%) n/a 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Price per unit (R's) 1.00 1.06 1.12 1.19 1.26 1.34 1.42 1.50 Growth in selling price per unit (%) n/a 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% Operating costs per unit (R’m) 70 74 79 83 88 94 99 105 Growth in operating costs p/a (%) n/a 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%
Sensitivity analysis Project IRR sensitivity Input -20% -15% -10% -5% Base 5% 10% 15% 20% Sales volumes 12.7% 14.1% 15.4% 16.8% 18.1% 19.4% 20.6% 21.9% 23.1% Gross profit percentage 12.7% 14.1% 15.4% 16.8% 18.1% 19.4% 20.6% 21.9% 23.1% Capital cost 24.3% 22.5% 20.9% 19.4% 18.1% 16.8% 15.7% 14.6% 13.6%
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Equity IRR The below example demonstrates how financing a portion of the project with debt leverages the equity return. The increase in return reflects
the increased risk within the project as debt must be serviced before equity returns are received.
Equity IRR R'm Jan X0 Dec X1 Dec X2 Dec X3 Dec X4 Dec X5 Dec X6 Dec X7 Dec X8 Revenue - 1,430 1,516 1,607 1,704 1,806 1,914 2,029 2,151 Operating costs - (1,144) (1,213) (1,286) (1,363) (1,445) (1,531) (1,623) (1,721) EBITDA - 286 303 321 341 361 383 406 430 Taxation (including tax relief on interest) 28% - (14) (21) (28) (36) (45) (54) (65) (76) Free cash flows - 272 283 293 305 316 328 341 355 Project cost (1,150) - - - - - - - - Borrowings cash flow 805 (160) (160) (160) (160) (160) (160) (160) (160) Project cash flows excluding residual value (345) 112 123 133 145 156 168 181 195 Residual value (Steady cash flows / (WACC - growth)) - - - - - - - - - Project free cash flows (345) 112 123 133 145 156 168 181 195
- 1,430 1,516 1,607 1,704 1,806 1,914 2,029 2,151 Equity IRR 35.7% Project pay-back period 2.8 years NPV (at WACC rate) 438 NPV of other cash flows 438 NPV of terminal value -
Where the project is financed 100% by debt, an equity IRR is not relevant, but the project IRR is still the key measure of risk/return. Although
there is no upfront equity investment, the equity provider is exposed to funding any losses, closure costs, etc should the project or investment
fail.
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Example including terminal value The example below illustrates the impact of a terminal value in a project cash flows. The terminal value is essentially the price at which the
cash flows could be sold, assuming they continue into perpetuity. In the example below, the cash flows from year eight are assumed to
grow at the growth rate.
Project IRR R'm Jan X0 Dec X1 Dec X2 Dec X3 Dec X4 Dec X5 Dec X6 Dec X7 Dec X8 Revenue - 543 576 610 647 686 727 770 817 Operating costs (cash only) - (434) (461) (488) (517) (549) (581) (616) (653) EBITDA - 109 115 122 129 137 145 154 163 Taxation (incl wear and tear allowance) 28% - 10 8 6 4 2 (0) (3) (5) Free cash flows - 118 123 128 133 139 145 151 158 Project cost (1,150) - - - - - - - - Project cash flows excluding residual value (1,150) 118 123 128 133 139 145 151 158 Residual value (Steady cash flows / (WACC - growth)) - - - - - - - - 2,300 Project free cash flows (1,150) 118 123 128 133 139 145 151 2,458
Project IRR 18.0% Cash flows ignoring terminal value -1.0% Terminal Value 19.0% Project pay-back period >8 years NPV (at WACC rate) 655 NPV of other cash flows (430) NPV of terminal value 1,085
As can be seen above, the project IRR meets the high-risk hurdle rate. However, most of the value in the project is generated by the terminal
value. The assumptions supporting these long-term cash flows are less certain and the financial justification should consider the impact of
the terminal value on the financial metrics. If the terminal value has a very significant impact on the metrics, the capital application should
disclose this fact with a motivation to justify including it in the model.
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Pro-forma income statement and statement of financial position Income Statement R'm Jan X0 Dec X1 Dec X2 Dec X3 Dec X4 Dec X5 Dec X6 Dec X7 Dec X8 Revenue - 356 377 400 424 449 476 505 535 Operating costs - (71) (75) (80) (85) (90) (95) (101) (107) EBITDA - 285 302 320 339 360 381 404 428 Depreciation (144) (144) (144) (144) (144) (144) (144) (144) EBIT - 141 158 176 195 216 237 260 284 Interest (94) (86) (77) (68) (57) (45) (32) (17) NPBT - 47 72 99 128 159 192 229 268 Corporate tax - (13) (20) (28) (36) (44) (54) (64) (75) NPAT - 34 52 71 92 114 139 165 193
Return on capital cost of project 3.0% 4.5% 6.2% 8.0% 9.9% 12.0% 14.3% 16.8% Return on equity 10.4% 13.2% 16.4% 19.2% 21.8% 24.1% 26.4% 28.3% Statement of Financial position R'm Jan X0 Dec X1 Dec X2 Dec X3 Dec X4 Dec X5 Dec X6 Dec X7 Dec X8 Assets
Fixed assets 1,150 1,006 863 719 575 431 288 144 - Cash 46 114 173 222 261 287 300 298 Accounts receivable (days) 40 157 166 176 187 198 210 222 236 Accounts payable (days) 40 (125) (133) (141) (149) (158) (168) (178) (189)
Total assets 1,150 1,084 1,010 927 835 732 617 488 345
Equity Shareholder equity 345 345 345 345 345 345 345 345 345 Retained earnings (100% dividend assumption) - - - - - - - - -
Long term liabilities Bank Loans 805 739 665 582 490 387 272 143 0
Total equity and liabilities 1,150 1,084 1,010 927 835 732 617 488 345
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ANNEXURE 2
EXECUTIVE COMMITTEE / BOARD MEETING (CHOOSE APPROPRIATE OPTION)
DIVISION NEW CAPITAL APPLICATIONS
(INSERT NAME OF PROJECT HERE)
Project/contract Value: Delete which is not applicable
Board Approval:
Currency Required: EXCO Approval:
Section 45 of the Companies Act (Financial Assistance) YES/NO Executive Chairman
Approval:
Exchange Control Approval
YES/NO
Level of Authority: WHICH ITEM NUMBER IN THE APPROVAL FRAMEWORK APPLIES HERE
Note: All section headers should remain, if not applicable please explain why. 1. EXECUTIVE SUMMARY
Detailed analysis of the project being proposed for approval 2. PROJECT SCOPE
Items to discuss in this section include but are not limited to:
• Assets to be acquired / constructed
• Details on key off-take contracts
• Pricing of the project
• Financial cost of delivering on the project including:
o all start-up costs;
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o working capital requirements;
o contracted losses and any other direct costs;
o contingencies for price escalations; and
o any other contingencies to cover expenditures that are expected to occur but have
not been identified.
3. KEY RISK ANALYSIS
The list below includes some examples of risks to consider
Risk Mitigation Residual Risk Level
Counterparty Explanation High/Medium/Low BBBEE Labour disruption Legal and Governance Reputational Forex exposure etc…
4. STRATEGIC ALIGNMENT
Incorporating a clear statement of the proposed objectives and business issues with linkages to the long-term plan for Grindrod. 5. USE OF THE 6 RESOURCES
• Our Money Financial Justification
See Annexure 1
Risk Measure Hurdle Rate
Actual Rate
Comment
Project IRR % 15% Project NPV R’000 >0 Equity IRR % 15% Return on equity % Debt Ratio %
Additional information required:
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• Pro-forma income statement and balance sheet
• Key assumptions
• Sensitivity analysis
• Key risks to achieving financial justification including areas where significant judgement
was used or uncertainty exists
• Terminal value justification
• WACC used and justification if different to the Grindrod WACC
Funding:
An explanation must be provided explaining how the project is to be funded. Where debt facilities
are required, indicate whether existing facilities will be used or new facilities will be required. This
should match the debt ratio referred to in the financial justification section.
As a rule, the maximum amount of external debt should be sought and the term of that debt should
match the project timeline.
Detail any guarantees required by group companies to support the facilities or supplier contracts.
Note: the following lists of examples is not exhaustive and more factors can be added.
• Our Assets
Factor Value Net Income Fixed Assets Net Working Capital
Return on Net Assets
• Our Relationships Factor Comment Community impact Education Innovation
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• Our People Factor Value/comment Projected attrition rate
Safe working environment
• Our Skills Factor Comment Innovation Specialised skills External consultant: skills and fees
• Our Environment
Factor Expected Impact GHG Emissions Water use Waste Recycling
6. OTHER MATERIAL CONSIDERATIONS WHERE APPLICABLE
7. APPROVAL REQUEST
Approval
• This section should be in red font and should detail the precise approvals required.
• This section should specifically name the person or persons who are to be approved to sign
all documents required to put the project into action. See pro-forma resolution.
• Where there is a specific approval required for specific aspects of the project in terms of the
limits of authority, they should be listed separately here with reference to the limits of
authority.
• Where financial assistance is being provided, a liquidity and solvency test must be provided
by the relevant finance manager.
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STANDARD FINANCIAL AND COMMERCIAL DUE DILIGENCE SCOPE ANNEXURE 3
Category Description 1. BUSINESS SCOPE Key historical events Brief history and significant events; major acquisitions and disposals, etc. Capital and funding Particulars of the capital base of parent company (equity and debt).
Recent stock/share issues; major stock/shareholdings; stock/share options. Stock/Share performance (if quoted); total market capitalisation; investment ratings, etc.
Group organisation Group legal structure, indicating main subsidiary undertakings. Group organisational structure (if different) Key locations and premises.
Products and market review Size and nature of market (growing/mature); group's market share; home and export. Analysis of sales; sales by product/activity; compare sales growth with market growth; sales by region; Description of main product lines and their characteristics.
Customers Customer base concentration Key customers and contractual arrangements.
Purchases and Suppliers Main purchases components: material, labour, overheads, other Main vendors/suppliers; alternative sources of supply; purchase contracts and commitments; purchases currency.
Management and employees Functional and line management charts for key functions. Appropriateness of management structure; quality of management; remuneration and succession issues. Headcount analyses by age location and function; dependence upon skilled labour; workforce age profile;
2. TRADING RESULTS (MINIMUM OF LAST THREE YEARS AND YEAR TO DATE) Summary of results Identification of key performance indicators; ratio and trend analysis.
Any significant change in accounting policies or practices or impact of inappropriate policies. Non-recurring items and quality of earnings
Adjusted EBIT OR EBITDA (restate for group depreciation standard rates; reason for adjustments (review of management adjustments and further adjustments): non-recurring revenue or costs, lost customers, accounting policy changes, reserve movements, other. Significant impact on results resulting from differences between target and buyer's accounting policies, if relevant. Non-operating items. Reconciliation of EBIT to net results; appropriateness of items recorded as exceptional.
Sales Analysis of sales by product/activity in quantity and value; mix changes; seasonal patterns and shifts in patterns.
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Category Description Gross to net sales reconciliation. Monthly sales; Profitability by product/activity, gross margin, trend, growth.
Cost of sales components Trend of cost of sales by product/activity. Break down of manufacturing cost by product/activity; compare material cost growth with average selling price growth. Break down of manufacturing/activity overheads by component.
Overheads Main classes of overheads below gross margin by type of cost/by department; significant trends; standalone issues. Sales incentives; control over distribution channels and outlets; licensing; joint ventures. Promotion, advertising; exhibitions expenditure. Analysis and review of other overheads.
Labour cost analysis Analysis of all labour related costs; analyses by type of employee/by department/by location, average cost per employee; incentive schemes. Accident frequency, staff turnover; key personnel losses; strike record; union involvement.
Severance plans and costs Redundancy payments (history and detail of any schemes); severance provision, roll forward analysis, description of any existing plans
Other labour issues Retirement schemes and other employee’s benefits and related liabilities. Profit sharing agreements. Post-retirement medical and pensions.
3. BALANCE SHEETS (MINIMUM OF LAST TWO YEARS AUDITED AND LATEST AVAILABLE) Summary of balance sheets Statement of net assets.
Comment on significant trends; change in accounting policies; any assets with a book value significantly different from market value. Any non-trading items; basis of valuation in the accounts and alternative market valuation (if available). Significant off-balance sheet items.
Fixed assets Summary by type of asset and by location/activity. Basis of valuation; depreciation rates (where any assets are depreciated to a residual that is not zero, then those assets at that residual level need to be specifically valued).; use of accelerated depreciation rates for tax purposes; profits/losses on disposals. If relevant, indicate accounting policy for capitalising interest and expenditure on repairs and renewals; own labour capitalised. Fixed assets held under finance leases. Fixed assets register; extent of physical verification. Nature of intangible assets; valuation; amortisation policy; own costs (R&D, other) capitalised. Goodwill; patents, copyrights; brands; capitalised research and development.
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Category Description Inventories Summary of inventories by category; monthly inventory levels.
Location; method of valuation; treatment of overheads; inventory records and control. Inventory roll forward. Analyses of inventory reserve: raw material/finished goods ageing analyses, inventory turn; excess inventory (comparison with consumption/sales), lower of cost and market value analysis
Receivables General client terms of trade; sales currency issues; export arrangements and restrictions. Credit control; discounts allowed; factoring of debt; product warranties, provisions for credit notes/returns. Receivables analysis; ageing, roll forward of receivables reserve, major past due accounts; receivables days sales outstanding.
Terms of trade and payables Terms of trade, days purchases outstanding; ageing analysis; reason for delays in settlement. Other assets and liabilities Summary of other assets and liabilities; review of unusual items; significant fluctuations.
Adequacy of provision for outstanding liabilities; provision against guarantees and warranties given; after-sales service. Retirement and post-retirement benefits; severance payments. Litigation pending; claims not settled. Dividends payable/receivable; deferred consideration; other significant balances. Current and deferred taxation liabilities.
Net interest-bearing debt Analysis of the net interest bearing debt by component and maturity (including cash and equivalent, bank overdrafts, loans, intra group financing, finance leases, other interest-bearing liabilities) Any terms of borrowings significantly different from market conditions; any exposure to specific financing instruments.
Shareholders' funds Movement in net asset; stock/share capital; stock/share option schemes; distributable/non-distributable reserves.
4. CASH FLOWS Summary of cash flows (for periods covered in Sections 2)
Reconciliation of EBIT, EBITDA and operating cash flows for the group and by key activity/location.
Working capital Analysis of the working capital movements; by activity/location. Seasonality Monthly analyses of cash flows; significant intra-month cash movements. Capital expenditure Analysis of capital expenditure in value, by activity/location and by purpose (for growth, maintenance,
compliance/regulatory purposes). 5. CURRENT TRADING AND FULL YEAR OUT-TURN Current trading Review of current year to date trading per latest management accounts Compared to budget, previous
year to date Comment on reliability of management accounts Identify and quantify key trends in results.
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Category Description Full year out-turn Present current year to date trading and full year forecast and compare to budget and previous year in the
same format. Comment on reliability of past budgets and forecasts. Extrapolate key trends and form a view on achievability of management's full year forecast.
6. FUTURE RESULTS AND CASH FLOWS Projected results Summarise the projections, key lines in the profit and loss account, and compare to historic results and
current year out-turn. Comment on significant trends. Confirmation that accounting policies are consistent with last accounts. Main assumptions underlying forecast and projections. Analysis of sales, product mix, volume/price changes assumptions; analysis of projected cost of sales, manufacturing overheads, sales and general administration overheads. Areas of vulnerability and upside. Assessment of the above assumptions: realistic or targets; past record of success in forecasting (including cash flows); adequacy of contingency provision; our view of the sensitivities (quantified).
Projected cash flows Reconcile projected cash flows with projected results. Projected working capital requirements compared with past trends; highlight any seasonality. Projected capital expenditure (for growth, maintenance, compliance/regulatory purposes); committed planned expenditure. Compare capital expenditure projections with identified needs. Vulnerabilities and upsides in projected cash flows; cash flow impact of sensitivity analysis.
7. STAND ALONE ISSUES Operational changes Significant changes required for the group to operate on a stand-alone basis (quantified); nature of the
changes required and related timing. Pro forma results Effect on earnings if the group had operated on a stand-alone basis over the past year(s).
Reconciliation between reported results and pro forma stand-alone results. 8. FINANCING THE DEAL Deal structure Context and terms of the transaction; expected acquisition vehicle; financing of the transaction. Estimated closing/completion balance sheet
Estimated closing/completion balance sheet, adjustments to be made on acquisition (purchase accounting; transaction adjustments, other) and pro forma balance sheet. (How do we deal with embedded STC on reserves if acquiring shares in a company?)
Forecast results, cash flows and headroom
Projected results and cash flows considering stand-alone organisation, transaction costs and new financial structure and cash flows; head room available.
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Category Description Any covenants and possible breaches based on sensitivity and vulnerability analyses to assess robustness of the financing structure.
9. MANAGEMENT INFORMATION, CONTROLS AND INFORMATION TECHNOLOGY Management information Arrangements for management and accounting information; reliability and efficiency; reconciliation with
financial accounts; year-end adjustments; quality of internal controls, auditor’s management letter. Obtain the complete list of owners and management checks being performed
Accuracy of past budgets and forecasts
Soundness and appropriateness of system; effectiveness of action taken on variances; frequency of updating; accuracy and reliability of past budgets and forecasts. Comparison of budgeted and actual results for previous years.
Information technology IT strategy; facilities; management of IT; contingency plans; costs of improvements/changes. Overview of principal software, systems and applications. Plan for dealing with Euro issues.
Other matters Type of costing systems employed: integration with financial accounts; adequacy and reliability. Treasury organisation. Foreign exchange management; in-house management of any legal issues.
10. TAXATION Corporate taxation (consider the use of external tax advisor for due diligence)
Analysis of tax charges; comparison of effective and nominal tax rates. Treatment of deferred tax assets/liabilities. Extent to which liabilities are agreed with the tax administration; outstanding issues; tax losses; tax planning; taxable distributable reserves. Overall assessment of risks.
Local taxes Nature of these taxes; extent to which liabilities are agreed; outstanding issues. Sales tax Sales tax schemes (if applicable); inspections; outstanding issues. Employment taxes Social charges; administration inspections; outstanding issues. 11. MARKET REVIEW Market analysis Past and possible future trends based on annual and projected economics of the industry.
Estimate of industry's ability to supply present and expected demand; effect and probability of change in government policy. Trade associations; monopolies and restrictive practices legislation.
Portfolio of existing and new products/activities
Sales/market growth; analysis of past sales by product; product profitability; price/volume analysis of sales growth; sales/market growth; highlight of seasonal patterns. New product development; product life cycles.
Competitors and competitive products
Competitors' products and potential; estimated share of market; marketing policy; recent successes and failures; special features of competition.
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Category Description Market share, customers and prospects
Group market share, internal factors affecting current sales; sales volumes and pricing policies; credit terms; productive capacity; (price collusion issues) Analysis of present and potential; domestic and export customers new areas for expansion; special discount and credit terms for incentive purposes; loss leaders retained in development of new markets; distribution costs; most profitable areas and products; customers' reaction to products.
Commercial organisation and distribution methods assessment
Description of the commercial department; methods of distribution; own transport and storage.
Control over distribution channels and outlets; licensing; joint ventures. Sales management organisation; advertising and promotion campaigns (expenditure as a percentage of sales); salesmen's incentive schemes; customer contacts; customer satisfaction.
Detailed analysis of net sales and sales forecasts
Comparison of net sales forecasts with actual over past [three] years; sales, cancellations and returns.
Sales and associated expenses; salesman; customer services costs, shifts in product mix and effect on profit margins; order processing costs; customer complaints and lost customers; new accounts opened; delivery record; penalty clauses; after sales service. Three to five year projections of company's sales and estimate of market share; underlying commercial assumptions; order book position. Detailed revenues and related costs projections concerning new products plans. Sensitivities review (to link to Section 9)
12. OPERATIONAL ISSUES Synergy review Profit and cash impact of the operational synergies over a period; Timing of realisation and costs incurred;
Implementation costs; Potential barriers to/risks of implementation; Potential areas of opportunity/upside; and Overall view on the achievability of the plans and level of recommended contingency.
Production strategy Own manufacture; subcontracting, "just in time"; to order or for stock. Existing production facilities Location, size and condition of factories and major plant installations; development areas; assembly lines;
production techniques; power sources; local infrastructure. Production process and key elements; current production capacity usage; unused capacity; organisation and division of manufacturing responsibility; labour force utilisation; shift and overtime working; production planning; material handling techniques; control of work-in-progress; use of subcontractors; licensing arrangements; basis of manufacturing planning. Assessment of senior production officials; technical competence; managerial abilities and leadership potential.
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Category Description Manufacturing/operating efficiency
Standard cost variance analysis; significant fluctuations and trends of material and labour usage; labour efficiency; capacity utilisation; break-even levels; spoilage and product rejections; defective production; idle time; absenteeism; delays in delivery times. Critical lead times of machines, tooling etc; routing schedules; machine times; materials handling; efficiency of production and layout. Quality control arrangements; incidence of waste, scrap; rejects and returns; customer satisfaction. Detailed manufacturing overhead costs and comparison with earlier years; comparison of production costs with industry-wide production cost data where available. Sustainability of production volume trends and assumptions underlying the forecasts.
Future requirements Assessment of likely capital investment requirements; assumptions underlying forecast; new products planned.
Procurement organisation Purchasing function; purchasing department personnel; departmental or divisional organisation. Co-ordination with production, research and development and quality control divisions; requisitioning routines; purchasing, re-ordering and approval procedures.
Procurement policy Sources and terms of supply of raw materials; alternative source of supply; monopoly suppliers; past needs of raw materials and bought-in components; warehousing facilities; stock requirements; purchase contracts. Estimate of future requirements; underlying assumptions; changes due to technological developments; effects of government policies on imports. BEE consideration.
Supply chains and distribution methods
Supply chains used, currency of purchases, type of transport used, lead time for delivery, centralised purchases or not, central warehouses or not. Distribution methods used from production/centralised warehouse to selling outlets if relevant. Logistics, including transportation, customs clearance. Inventory Management & Control, stock levels, integration with sales and marketing, production planning and manufacturing planning & control.
Research and development strategy and facilities
Strategy; pure or applied research; in-house or third parties; comparison with competitors.
Location and layout of facilities; description of personnel; qualifications; experience; technical talents; managerial competence and leadership potential. Recent, current and planned projects. Details of trademarks, patents and other such rights.
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Category Description Products nearing end of economic life; production planning for new products; further projects under development; new techniques now in use; own product and techniques sold elsewhere under licence; important patents owned.
Operational Effectiveness and KPI’s
Benchmark against industry standards if applicable data is available. KPI’s for operational and corporate overhead functions. Business processes.
Cost reduction Identification of cost reduction initiatives across all core business functions and support overhead functions such as Finance, Marketing and HR.
Information Technology (consider the use of group IT)
IT strategy; facilities; management of IT; contingency plans; costs of improvements/ changes.
Overview of principal software, systems and applications. Impact of operational assumptions on financials
Profit and cash impact of the operational assumptions over a period; Comparison of sales forecast to production capacity and engineering plans; Sufficiency and impact of capex requirements on valuation; Capex budget accuracy; Potential areas of opportunity/upside; and Overall view on the operational achievability of the business plan and the impact of operational assumptions on achievability of financial projections.
13. ENVIRONMENTAL MATTERS AND HEALTH AND SAFETY STANDARDS Site descriptions Descriptions of the sites visited, work performed, sites not visited.
For sites visited, brief summary of past and present activities, environment/health and safety/security issues noted; estimation of clean-up costs.
Relevant regulations and legislation
Impact of current and future environmental legislation on sources of raw materials, production facilities and general business activities; use and ultimate disposal of finished products; existing and potential costs, liabilities and contingent liabilities. Existing health and safety standards and requirements Health and safety track record
14. INSURANCE AND RISK MANAGEMENT (CONSIDER THE USE OF GROUP RISK MANAGEMENT) Key insurance policies Descriptions of the key insurance policies (plant, property, employer’s liability, loss of profits, key
management life insurance), risks covered and associated costs; insurance brokers and any intra-group insurance policy; any uncovered significant risk.
Recent claims and losses Analyses of recent claims with reconciliation of their impact on the results, balance sheet and cash flows. 15. LEGAL (CONSIDER THE USE OF EXTERNAL LEGAL ADVICE) Company law Group structure; shareholders; pledges; shareholder agreements; articles of association; company
minutes.
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Category Description Assets Mortgages; guarantees; leasing; investments; property leases; freehold property; maintenance contracts;
insurance policies; claim records. Intellectual property Trademarks; patents; licences; software. Borrowings Guarantees and warranties given; loans and overdrafts; bank accounts. Business contracts Operating and other licences; commercial contracts; distribution, marketing, sales, purchases; relationship
between the company, the directors and related companies. (exposures to penalties/loss of goods/value of products under our custody at any time should be noted etc)
Litigation All claims outstanding; claim history. 16. HUMAN RESOURCES (CONSIDER THE USE OF GROUP HR) Group Services Consider the services provided by group HR
Define upfront whether the shared services including pension, medical aids and other employee benefits will be moved to group services
Employment law Employment contracts, and other benefits. Employees statute, collective statute (collective bargaining agreement); profit sharing and incentives schemes; employee relations (minutes of formal personal meetings). Respect of the Hygiene, Health and Security regulations and legislation; review of recent social security audit. Review of any restructuring plan; recent individual redundancies
17. B-BBEE B-BBEE The current BEE status of the target needs to be quantified and the impact of the BEE status on future
returns needs to be considered.