sample financial modeling module a

Confidential – not for third party distribution © The Kadmos Initiative (Pvt) Ltd. 2009

Financial Modeling – Module I

Fall 2010


About The Kadmos Initiative Pvt Ltd.

1

Isfandiyar Shaheen (Asfi) – Instructor

Isfandiyar Shaheen (Asfi) is the founder and Chief Executive Officer of The Kadmos Initiative Pvt Ltd. Prior to establishing TKI, Asfi was an investment banker at Seabury Aviation & Aerospace. At Seabury, Asfi has participated in M&A advisory, financial restructuring and privatization assignments. Asfi has extensive experience with financial modeling, valuation and business plan implementation. Prior to joining Seabury, Asfi was an Analyst at Analysis Group, where his primary responsibilities included developing valuation models for commercial litigation cases.

Asfi graduated from Franklin and Marshall College (cum laude) with degrees in Economics (Honors) and Mathematics and is Series 7 & 63 qualified.

Seabury Aviation & Aerospace is the leading independent transportation-focused investment banking and advisory firm serving aviation, aerospace, cargo and maritime on a global basis. The company's professionals have advised over 225 clients worldwide in the airline, aerospace, cargo/logistics and maritime sectors.


Table of Contents

2

1. Overview of Financial Modeling2. Excel Best Practices3. Kadmos Modeling Framework 4. Thebes Airport: Situation Overview5. Income Statement and Operating Model 6. Capital Expenditures and D&A Schedules7. Debt and Interest Schedules8. Tax Schedule 9. Financial Model Set Up10. Working Capital Schedule11. Shareholder’s Equity Schedule12. Linking Financial Statements13. Introduction to Valuation and Preliminary Returns Analysis14. Control Page and Sensitivity Analysis


What is a Financial Model?

3

Simplified representation of historical and projected financial performance

Management tool that allows a comprehensive evaluation of the impact a variable can have on a business

Marketing tool businesses and entrepreneurs can use for raising capital and M&A purposes

Negotiating tool for businesses in financial distress to seek concessions from creditors

Valuation and due diligence tool for investors

Projection tool used by equity research analysts for forecasting earnings estimates


Modeling Goals

4

Virtual re-creation of the actual business

Ability to test assumptions to analyze historical and projected financial performance

- Growth Rates- Operating Margins- Accounting Regulations- Taxation- Capital Infusion and/or Divestitures

Understanding the model’s purpose and possible implications are critical as they determine design and functionality


Modeling Assumptions

5

Assumptions should be clear and well defined- Also referred to as “drivers” or “inputs”

Model integrity based on assumptions- Over simplified and unreasonable assumptions result in meaningless figures

Outlining proper, reasonably accurate assumptions requires a thorough understanding of the business, industry and the prevailing financing environment

- Equity research reports are often a good starting point- History serves as a useful guide, except for start-ups, companies with significant

acquisitions/divestitures or in highly volatile markets- There is no substitute for a deep understanding of the business and how it would be

affected by changes in its operating environment

Assumptions must be reasonable and defensible


Model Architecture

6

An effective and efficient model must be realistic, flexible and easy to follow

- Unrealistic assumptions result in misleading and often meaningless output

- Economic and financial environment is constantly changing, therefore a model must be able to quickly accommodate exogenous and endogenous factors

- Well formatted and easy to follow models ensure quality control


Table of Contents

7



Spreadsheet Set Up

8

Start working on a spreadsheet by assigning names to tabs - This can be done by double clicking on an Excel tab or using Alt, O, H, R

The first 4-5 rows on a given tab should include additional description of the tab along with author name

- A key detailing color codes is very useful

Time periods typically appear along the horizontal and corresponding line items along the vertical axis

Indent cells to the extreme left to navigate quickly between sections on a given tab using Ctrl + Arrow Keys

Use different color shading codes for historical and projected financial statements


Spreadsheet Set Up Example

9


Excel Best Practices

10

1.Use a consistent color coding scheme and define it on each tab, a suggested color scheme is as follows:

- BLACK = Calculations and references on the same sheet- BLUE = Inputs (historical financials and assumptions)- GREEN = Reference from a different sheet- RED = Warning to others (always inset a comment (Alt + I, M) to explain further)

2.Avoid linking cells to a different sheet3.Don’t embed inputs in formulas, instead break out into separate line items



11

4.Never input the same number twice, let Excel flow and be dynamic5.Always enter exact figures and use Excel to round up according to format6.Do not hide rows, group if necessary

- To group rows, first select an entire row (Shift + Space bar), hold shift and use arrow key to select additional rows, then group (Alt + Shift + Right Arrow)



12

7.Use Page Setup (Alt, F U) to set up your first sheet and use that sheet as a template for the remaining work book by copying a duplicate sheet (Alt, E M) in the same work book

8.Never “merge cells”, always use “Center Across Selection” instead Select cells using Shift + Arrow key, then hit Ctrl + 1. Under “Alignment” go to the drop down

menu under “Horizontal” and chose “Center Across Selection”. Ensure that the “Merge Cells” check box is unchecked

9.Always use keyboard shortcuts, to navigate shortcuts, hit Alt once and access remaining drop down menus by striking keys which are underlined on the tool bar

For e.g. to change column width, hit Alt, then O to access the “Format” drop down menu, then C to access the “Column” menu and finally W to change column width or simply Alt, O, C, W

10.Customize your tool bar in a manner which suits you


Commonly Used Shortcut Keys

13

Excel work books must be consistent, efficient and clear Common keyboard shortcuts in MS Excel are as follows:


Commonly Used Functions

14

Commonly used functions are as follows:


Importance of Formatting

15

Analytical work and good presentation are equally important

Your work represents you (and your firm)

Sloppy, inconsistent work may give the wrong impression about work quality

The numbers may be 100% accurate, yet it may not be enough to secure a deal


Customizing Number Formats

16

Customizing number formats allows for more creative and easier formatting, while ensuring optimum functionality

- E.g. Assuming numbers are written in $ format ($233,443) to make this appear as (Rs. 233,443), do the following

Chose the cell and hit Ctrl + 1

Under the “Number” menu, click on “Custom” and replace $ signs with “Rs” (ensure you are using quotation marks in this case), and hit OK

It is always advisable to modify pre-programmed formats instead of re-writing a “Custom” format, as described above


Conditional Formatting

17

Use conditional formatting, especially to highlight a situation where the Company in question is running out of cash (the model will indicate this by showing a negative cash balance

- To conditionally format a row or column, chose the desired cells (Shift + Arrow Key) and then hit (Alt, O D)

- Use the conditional formatting menu to turn the font red in case of a negative number

- `


Table of Contents

18



Core Statements – Income Statement

19

A basic financial model requires the construction of 3 core statements; Income Statement, Balance Sheet and Cash Flow Statement Always begin work on a financial model with the Income Statement, and think

clearly about the drivers required to complete Income Statement projections Income Statement items above EBITDA are projected using various

methodologies, details of which will be discussed further in the next section

Income Statement Historical Financials Projected Financials(Pak Rupees in 000s, except per share amounts) 2006 2007 2008 2009 2010 2011 2012

Revenue Projections may be developed using historical figures and research reportsCost of Goods Sold Management typically provides guidance on expected COGS

Gross Profit (Revenue - Cost of Goods Sold)

SG&A Expense Management typically has a budget which details SG&A ExpensesEBITDA (Gross Profit - SG&A Expenses)

Depreciation & Amortization Requires Cap Ex and D&A ScheduleEBIT (EBITDA - Depreciation & Amortization)

Interest Expense Requires Debt & Interest ScheduleInterest Income Calculated based on prevailing interest rates and average cash balances

EBT (EBIT - Interest Expense + Interest Income)

Taxes @ 35.0% Tax Schedule depending on jurisdiction and Company situation requiredNet Income (Pre-tax Income - Taxes)


Core Statements – Balance Sheet

20

Once the Income Statement is developed, next steps are projecting the Balance Sheet and preparing a corresponding Cash Flow Statement

- It is advisable to project the Balance Sheet first, however some practitioners prefer projecting the Cash Flow Statement and then preparing the corresponding BS

Balance Sheet Historical Financials Projected Financials(Pak Rupees in 000s, except per share amounts) 2006 2007 2008 2009 2010 2011 2012

AssetsCash and Equivalents Previous year's cash balance + change in cash, which comes from CF StatementAccounts Receivable Requires Working Capital ScheduleInventory Requires Working Capital ScheduleOther Current Assets Requires Working Capital Schedule

Total Current Assets (Cash and Equivalents + Accounts Receivable + Inventory + Other Current Assets)

Gross PP&E Existing PP&E + related capital expenditures; Requires CapEx and D&A ScheduleOther Non Current Assets Existing Other Non Current Assets + related capital expenditures; Requires CapEx and D&A ScheduleAccumulated Depreciation Existing Accumulated Depreciation + book depreciation; Requires CapEx and D&A Schedule

Total Assets (Total Current Assets + Gross PP&E + Other Non Current Assets - Accumulated Depreciation)

Liabilities and Shareholders' EquityAccounts Payable Requires Working Capital ScheduleAccrued Expenses and Other Current Liabilities Requires Working Capital Schedule

Total Current Liabilities (Accounts Payable + Accrued Expenses and Other Current Liabilities)

Secured Debt Requires Debt and Interest ScheduleUnsecured Debt Requires Debt and Interest Schedule

Total Debt (Secured Debt + Unsecured Debt)

Other Non Current Liabilities Requires schedules detailing unwinding of liabilities OR line item may be projected within the Working Capital ScheduleTotal Liabilities (Total Current Liabilities + Total Debt + Other Non Current Liabilities)

Shareholders' EquityAuthorized Capital of XXX,XXX,XXX common shares Note: Authorized Capital is not added in the Shareholder's Equity section of the balance sheetof Rs. XX eachCommon stock issued at par Par value of issued sharesAdditional paid-in capital Capital paid by investors in excess of par value of common stockAccumulated earnings (deficit) Previous year's balance + Net Income - Dividends Paid

Total Shareholder's Equity (Common stock + APIC + Accumulated Earnings)

Total Liabilities & Shareholder's Equity (Total Liabilities + Total Shareholder's Equity)


Core Statements – Cash Flow Statement

21

The Balance Sheet requires a resulting component for it to balance – Cash! The Cash Flow statement is thus projected using the Balance Sheet, with cash

being the variable that balances a Balance SheetCash Flow Statement Historical Financials Projected Financials(Pak Rupees in 000s, except per share amounts) 2006 2007 2008 2009 2010 2011 2012

Cash Flow from OperationsNet Income From Income Statement(+) Depreciation & Amortization From Income Statement (D&A is a non cash item)(Increase)/Decrease in Accounts Receivable For 2009: AR in 2008 - AR in 2009(Increase)/Decrease in Inventory For 2009: Inventory in 2008 - Inventory in 2009(Increase)/Decrease in Other Current Assets For 2009: Other Current Assets in 2008 - Other Current Assets in 2009Increase/(Decrease) in Accounts Payable For 2009: AP in 2009 - AP in 2008Increase/(Decrease) in Accr. Exp and Other CL For 2009: Accr. Exp & Other CL in 2009 - Accr. Exp & Other CL in 2008Increase/(Decrease) in Accrued Exp. And Other Non CL For 2009: Accr. Exp & Other Non CL in 2009 - Accr. Exp & Other Non CL in 2008

Total Cash Flow from Operating Activities (SUM all items above); Be careful with signs for working capital changes

Cash Flow from Investing Activities(-) Capital Expenditures Management typically provides guidance on CapEx; often CapEx = D&A is assumed(+) Asset Sales Management typically provides guidance on Asset Sales(-) Acquisition of Assets / Other Securities Management typically provides guidance on Acquisition of Assets

Total Cash Flow from Investing Activities (Asset Sales - CapEx - Acquisition of Assets)

Cash Flow from Financing(+) Issuance of Common Stock Management typically provides guidance(+) Proceeds from Secured Debt Requires Debt & Interest Schedule(+) Proceeds from Unsecured Debt Requires Debt & Interest Schedule(+) Proceeds from Equity Raise from Foreign Investor Requires Shareholder's Equity Schedule(-) Dividends Paid Requires Shareholder's Equity Schedule(-) Payment of Secured Debt Requires Debt & Interest Schedule(-) Payment of Unsecured Debt Requires Debt & Interest Schedule

Total Cash Flow from Financing Activities (SUM all items above); Be careful with signs for debt payments and debt proceeds

Change in Cash Balance (Cash flow from Operation + Investing + Financing)Change in cash is linked back to the balance sheet, and that is how a balance sheet is balanced!


Kadmos Modeling Framework

22

1.Construct the Income Statement, all items above EBITDA are projected using various methods which will be discussed further in the next section

2.The following schedules are required to complete the Income Statement Cap Ex and D&A Schedule Debt and Interest Schedule Tax Schedule

3.Upon completion of Income Statement, prepare the following schedules to project the Balance Sheet, in the following order: Working Capital Schedule Shareholder’s Equity Schedule

4.After Step 3 only Cash and Equivalents on the Balance Sheet will remain unfilled, use the Cash Flow Statement to populate projected Cash and Equivalents, and simultaneously complete both Balance Sheet and Cash Flow Statement

5.Incorporate a circular reference to calculate Interest Income in the Income Statement based on Cash and Equivalents on Balance Sheet


Table of Contents

23



Thebes Airport: Overview

24

Thebes Airport (“Company” or “Thebes”) is located in Asia and is majority owned by Frontier Capital Corporation

The Company has a market capitalization of Rs. 261 MM as of 05/04/2009 and revenue of approximately Rs. 75 MM

Due to an Open Skies treaty between Thebes and neighboring countries, the airport is poised to grow significantly over the next 5 years

To facilitate expansion, the airport’s management is expecting a significant increase in Capital Expenditures which can not be financed by existing cash balances

Management has circulated a Request for Proposal to potential investors for an equity investment


Thebes Airport: Financial Statements

25

Thebes Airport was established in 1995, presented below are its Income Statement and Balance Sheet

Income Statement Historical Financials(Pak Rupees in 000s, except per share amounts) 2006 2007 2008

RevenueLanding Fees 4,188 4,603 4,990Handling Fees 21,670 25,179 28,318Embarkation Fees 14,910 17,003 18,663

Total Operating Revenue 40,769 46,785 51,971

Non Operating RevenueAirport Development Fund 9,564 11,478 12,389Flying Club 2,000 2,000 2,000Rental Income 5,600 6,735 8,353

Total Revenue Rs.57,933 Rs.66,998 Rs.74,713

Operating CostsStaff salaries (9,044) (9,768) (10,549)Maintenance (8,403) (8,874) (9,282)Marketing & Advertising (8,843) (9,506) (10,267)Other Operating Costs (1,200) (1,380) (1,587)

EBITDA 30,442 37,470 43,028

Depreciation & Amortization (21,400) (22,400) (23,352)EBIT 9,042 15,070 19,676

Interest Expense (3,190) (3,085) (3,020)Interest Income 939 939 939

EBT 6,791 12,924 17,595

Taxes @ 35% (2,377) (4,523) (6,158)Net Income Rs.4,414 Rs.8,400 Rs.11,437

Net Income Margin 7.6% 12.5% 15.3%

Balance Sheet Historical Financials(Pak Rupees in 000s, except per share amounts) 2006 2007 2008

AssetsCash and Equivalents 10,430 14,028 19,970Accounts Receivable 13,000 13,910 14,884Inventory 5,000 5,400 5,500Other Current Assets 9,105 10,016 11,017

Total Current Assets 37,535 43,353 51,370

Gross PP&E 500,000 520,000 540,800Other Non Current Assets 25,889 26,666 27,466Accumulated Depreciation (167,654) (190,054) (213,406)

Total Assets Rs.395,770 Rs.399,965 Rs.406,230

Liabilities and Shareholders' EquityAccounts Payable 2,476 2,426 2,378Accrued Expenses and Other Current Liabilities 2,467 2,418 2,369

Total Current Liabilities 4,943 4,844 4,747

Secured Debt 24,000 22,000 20,000Unsecured Debt 10,000 9,000 8,000

Total Debt 34,000 31,000 28,000

Other Non Current Liabilities 10,123 9,921 9,722Total Liabilities 49,066 45,765 42,469

Shareholders' EquityAuthorized Capital of 200,000,000 common sharesof Rs. 1 eachCommon stock issued at par 100,000 100,300 100,601Additional paid-in capital 234,987 235,692 236,399Common stock issued at par to SASAdditional paid-in capital by SASAccumulated earnings (deficit) 11,717 18,208 26,761

Total Shareholder's Equity 346,704 354,200 363,761

Total Liabilities & Shareholder's Equity Rs.395,770 Rs.399,965 Rs.406,230


Thebes Airport: Capital Structure

26

Thebes Airport is a publicly listed company and is majority owned by Frontier Capital Corporation

Market Capitalization =Stock Price X Common Shares Outstanding

Enterprise Value =Market Capitalization + Total Debt - Cash

Valuation as of 05/04/2009

Common shares Outstanding as of 12/31/2008 100,601Stock Price as of 05/04/2009 Rs. 2.6Market Capitalization Rs. 261,562

(+) Total Debt 28,000(-) Cash and Equivalents 19,970Enterprise Value Rs. 269,593

FY 2008 Revenue Rs. 74,713FY 2008 EBITDA 43,028FY 2008 Net Income 11,437

Enterprise Value / Revenue 3.6xEnterprise Value / EBITDA 6.3xPrice / Earnings 22.9x

Capital Structure as of 05/04/2009

Shareholders % of Total Common shares heldFrontier Capital Corporation 55% 55,345Shareef Brothers Limited 17% 16,893Establishment Foundation 15% 15,456Publicly Traded 13% 12,907Total Common Shares Outstanding 100% 100,601


SAS Capital Partners: Situation Overview

27

SAS Capital Partners is a Rs. 500 Mn investment fund and has retained us as Buy-Side advisor to make an investment in Thebes Airport

SAS typically makes minority investments in infrastructure assets in the MENASA region and has a target IRR of 20%

Investment holding period for SAS is 4-6 years

SAS is interested in acquiring a minority stake in Thebes Airport and requires assistance from us in preparing a financial model as well as performing a preliminary returns analysis


Table of Contents

28



What is an Operating Model?

29

Development of core revenue and cost drivers which describe a business

A due diligence tool for investors seeking to establish viability of a business

The building blocks of Income Statement items above the EBITDA line

A good operating model is one which can explain very clearly how and why a business generates revenue


Revenue Projections

30

At the most basic level Revenue = Price X Volume, which can be further broken down into components

Assuming an arbitrary growth rate for revenue based on historical growth and other economic indicators results in projections which are not defensible

To understand how and why a business will generate revenue, it is essential to ask the right questions, the following are a few examples:

- What were the Company’s revenues for the past 3-5 years?- What is the growth rate for the industry or major competitors?- What is the competitive positioning of the Company? Is it poised to steal market

share and outpace industry due to differentiating factors that are sustainable? - What are the pricing trends in the industry? When evaluating pricing trends it is

critical to identify the customers in the relevant market segment. E.g. Swatch and Rolex are both watch makers, but fall in entirely different market segments


Airport Economics: Revenue Forecasting

31

A revenue forecast developed using a bottom-up approach is more useful as compared to making high level and relatively arbitrary assumptions

However, it is essential to pick a starting point when developing projections otherwise one can easily get lost in the details:

- To project revenue for an airport one requires a traffic forecast- Traffic forecast is dependent on the number of aircraft orders placed with OEMs

and also regulatory issues- Aircraft orders are dependent on the global economy, health of financial markets

and the airline industry

Forecasting aircraft orders would typically be beyond the scope of a financial modeling exercise in an M&A transaction or even for business planning purposes

There is no correct starting point when using a bottom-up approach, and is usually a judgment call


Airport Economics: Revenue

32

What happens at an airport and how do airports generate revenue?- Aircraft lands or takes off, passengers board an airplane or disembark, thus at a basic level,

airports charge landing fees, embarkation fees and handling fees

What are landing fees and how can they be projected?- Landing fees should typically depend on aircraft size or weight

- Thus, for a given aircraft type (e.g. B737-300 which has a Maximum Takeoff Weight of approx 61 tons), multiply number of aircraft movements by aircraft weight by landing charge per ton to arrive at revenue from landing fees

What are handling fees and how can they be projected?- Airport operators charge a fee for passenger luggage and cargo handling, which is typically

done on a per flight basis, different business models exist in this case, but for now assume airport operator is charging a fee per aircraft movement

- Thus, revenue from handling fees is total aircraft movements in a given period multiplied by handling charges / AC movement

What are embarkation fees and how can they be projected?- For every embarking passenger, airport operators charge a fee. To determine passenger

movements, a load factor or occupancy rate assumption is required

- Once passenger movements are determined, multiply total passengers in a given period by embarkation fee / passenger to arrive at revenue from embarkation fees


Airport Economics: Operating Costs

33

What are the major operating costs for an airport?- Typically, Staff Salaries, Maintenance and Marketing are the major costs for an

airport

How are operating costs projected?- Management often provides guidelines on cost projections, however operating cost

drivers can be developed using historical ratios- Some suggested cost drivers are as follows:

– Staff Salaries as a % of Operating Revenue– Maintenance as a % of Property Plant & Equipment– Marketing as a % of Revenue– Other Operating Costs as a % of Total Operating Costs (Excl. Other Operating Costs)

In the above example, to project Maintenance expense, we require constructing a Capital Expenditures and Depreciation & Amortization schedule to complete the Income Statement


It is advisable to brain storm the operating model set up on a piece of paper

In the airport example, we have identified the following as required drivers to project landing, handling and embarkation fees:

- Aircraft Weight– Thus, we further require no. of seats in an aircraft and its maximum take off weight (MTOW)

- Aircraft Movements– An Aircraft Movement is defined as an aircraft landing or aircraft take-off. One arrival and

one departure are counted as two aircraft movements– Projecting aircraft movements is beyond the scope of this exercise– For simplicity all rates are stated on an Aircraft Movement basis

- Passengers– We can make assumptions on the average occupancy or load factor* to determine

passenger movements

- For Non Operating Revenue and Operating Costs we can make assumptions based on historical ratios

Thus, we need to list out the above information in a neat, presentable format which will become the basis of our operating model

* Load Factor = Revenue Passenger Mile / Available Seat Mile

Airport Economics: Operating Model Set Up

34



35

Input the required historical driversNote: Inputs are always BLUE

Step 1: Set up the operating model as shown

Operating Model

Aircraft Specifications # of Seats LF Assump. MTOW (Tons) Revenue Driver Inflation AssumptionsB-737-300 Operating Revenue: Assumption: Rate:A-320 Landing Charges / TonA310 Handling Charges / AC MovementB747 Embarkation Fee / Passenger

Non Operating Revenue: Assumption: Rate:Airport Development FundFlying ClubRental Income

Revenue Driver Rates Historical Projected2006 2007 2008 2009 2010 2011 2012

Landing Fees / Ton (PKR)Handling Charges / AC Movement (PKR)Embarkation Fees / Passenger (PKR)

Aircraft Traffic Forecast 2006 2007 2008 2009 2010 2011 2012Aircraft Movements

B-737-300A-320A310B747

Historical Load FactorB-737-300A-320A310B747

Passenger Forecast 2006 2007 2008 2009 2010 2011 2012B-737-300A-320A310B747

Operating Cost Rates Historical Projected2006 2007 2008 2009 2010 2011 2012

Staff salaries as a % of Operating RevenueMaintenance as a % of PP&EMarketing & Advertising as a % of RevenueOther Operating Costs as a % of Total Op Costs (ex-OOC)



36

Calculations based on average historical ratios

Calculated as: # of Seats X Aircraft Movements X Load Factor

Step 2: Input required historical figures, rates and drivers to prepare projections

Calculated based on LF assumption by aircraft type

Air Traffic forecast taken from an Industry Consultant’s report

Calculated based on Revenue Driver Inflation Assumptions

Operating Model

Aircraft Specifications # of Seats LF Assump. MTOW (Tons) Revenue Driver Inflation AssumptionsB-737-300 118 0.5% Annually 61 Operating Revenue: Assumption: Rate:A-320 140 0.8% Annually 73 Landing Charges / Ton Annually - Fixed 7%A310 184 0.0% Annually 160 Handling Charges / AC Movement Annually - Fixed 9%B747 398 -0.3% Annually 350 Embarkation Fee / Passenger Annually - Fixed 9%

Non Operating Revenue: Assumption: Rate:Airport Development Fund as a % of Op Rev 24%Flying Club as a % of Op Rev 4%Rental Income as a % of Op Rev 15%


Landing Fees / Ton (PKR) Rs.93 Rs.96 Rs.99Handling Charges / AC Movement (PKR) 55,000 57,750 60,638Embarkation Fees / Passenger (PKR) 300 315 331


B-737-300 154 160 176A-320 130 156 160A310 65 80 94B747 45 40 37

Historical Load FactorB-737-300 74% 77% 76%A-320 83% 84% 82%A310 72% 73% 76%B747 70% 65% 62%

Passenger Forecast 2006 2007 2008 2009 2010 2011 2012B-737-300 13,447.3 14,537.6 15,783.7A-320 15,106.0 18,345.6 18,368.0A310 8,611.2 10,745.6 13,145.0B747 12,537.0 10,348.0 9,130.1


Staff salaries as a % of Operating Revenue 22.2% 20.9% 20.3%Maintenance as a % of PP&E 1.7% 1.7% 1.7%Marketing & Advertising as a % of Revenue 15.3% 14.2% 13.7%Other Operating Costs as a % of Total Op Costs (ex-OOC) 4.6% 4.9% 5.3%


Operating Model

Aircraft Specifications # of Seats LF Assump. MTOW (Tons) Revenue Driver Inflation AssumptionsB-737-300 118 0.5% Annually 61 Operating Revenue: Assumption: Rate:A-320 140 0.8% Annually 73 Landing Charges / Ton Annually - Fixed 7%A310 184 0.0% Annually 160 Handling Charges / AC Movement Annually - Fixed 9%B747 398 -0.3% Annually 350 Embarkation Fee / Passenger Annually - Fixed 9%

Non Operating Revenue: Assumption: Rate:Airport Development Fund as a % of Op Rev 24%Flying Club as a % of Op Rev 4%Rental Income as a % of Op Rev 15%


Landing Fees / Ton (PKR) Rs.93 Rs.96 Rs.99 Rs. 106 Rs. 113 Rs. 121 Rs. 130Handling Charges / AC Movement (PKR) 55,000 57,750 60,638 66,095 72,043 78,527 85,595Embarkation Fees / Passenger (PKR) 300 315 331 361 393 428 467


B-737-300 154 160 176 179 188 213 243A-320 130 156 160 164 174 197 213A310 65 80 94 100 105 135 156B747 45 40 37 35 35 35 35

Historical Load FactorB-737-300 74% 77% 76% 77% 77% 78% 78%A-320 83% 84% 82% 83% 84% 84% 85%A310 72% 73% 76% 76% 76% 76% 76%B747 70% 65% 62% 62% 61% 61% 61%

Passenger Forecast 2006 2007 2008 2009 2010 2011 2012B-737-300 13,447.3 14,537.6 15,783.7 16,158.3 17,081.7 19,478.9 22,365.7A-320 15,106.0 18,345.6 18,368.0 18,999.4 20,340.6 23,236.2 25,347.0A310 8,611.2 10,745.6 13,145.0 13,984.0 14,683.2 18,878.4 21,815.0B747 12,537.0 10,348.0 9,130.1 8,594.8 8,553.0 8,511.2 8,469.4


Staff salaries as a % of Operating Revenue 22.2% 20.9% 20.3% 21.1% 21.1% 21.1% 21.1%Maintenance as a % of PP&E 1.7% 1.7% 1.7% 1.7% 1.7% 1.7% 1.7%Marketing & Advertising as a % of Revenue 15.3% 14.2% 13.7% 14.4% 14.4% 14.4% 14.4%Other Operating Costs as a % of Total Op Costs (ex-OOC) 4.6% 4.9% 5.3% 4.9% 4.9% 4.9% 4.9%


Forecast taken from Industry Consultant’s Report

Projected LF calculated based on Load Factor Assumption

37

Step 3: Calculate projected drivers based on available data


Income Statement Historical Financials Projected Financials2006 2007 2008 2009 2010 2011 2012

RevenueLanding Fees 4,188 4,603 4,990 (Aircraft Movements X Aircraft MTOW X Landing Fees / Ton)Handling Fees 21,670 25,179 28,318 (Aircraft Movements X Handling Charges / Aircraft Movement)Embarkation Fees 14,910 17,003 18,663 (Number of Passengers X Embarkation Fee / Passenger)

Total Operating Revenue 40,769 46,785 51,971`

Non Operating RevenueAirport Development Fund 9,564 11,478 12,389 (% of Total Operating Revenue based on Historical Ratios)Flying Club 2,000 2,000 2,000 (% of Total Operating Revenue based on Historical Ratios)Rental Income 5,600 6,735 8,353 (% of Total Operating Revenue based on Historical Ratios)

Total Revenue Rs.57,933 Rs.66,998 Rs.74,713

Operating CostsStaff salaries (9,044) (9,768) (10,549) (% of Total Operating Revenue based on Historical Ratios)Maintenance (8,403) (8,874) (9,282) (% of PP&E ); Requires Cap Ex and D&A ScheduleMarketing & Advertising (8,843) (9,506) (10,267) (% of Total Revenue based on Historical Ratios)Other Operating Costs (1,200) (1,380) (1,587) (% of Total Operating Costs (excl. OOC))

EBITDA 30,442 37,470 43,028

Depreciation & Amortization (21,400) (22,400) (23,352) Requires Cap Ex and D&A ScheduleEBIT 9,042 15,070 19,676

Interest Expense (3,190) (3,085) (3,020) Requires Debt and Interest ScheduleInterest Income 939 939 939 Requires Cash Balance - Hold Constant at 1,000 for now

EBT 6,791 12,924 17,595

Taxes @ 37.5% (2,377) (4,523) (6,158) Requires Tax ScheduleNet Income 4,414 8,400 11,437


Airport Economics: Income Statement

38

Step 4: Set up and link historical Income Statement and identify fields which can be projected based on data gathered thus far

Once the operating model drivers are laid out as discussed in the previous slide, set up the Income Statement

Links must be in GREEN

Calculations in BLACK


Airport Economics: Projected Income Statement

39

Step 5: Populate fields which can be projected and identify schedules required to complete Income Statement

Alerts in RED

Once the operating model is set up, revenue and certain costs can be projected, additional schedules will be required to complete the Income Statement


RevenueLanding Fees 4,188 4,603 4,990 5,417 6,032 7,425 8,770Handling Fees 21,670 25,179 28,318 31,593 36,166 45,546 55,380Embarkation Fees 14,910 17,003 18,663 20,815 23,837 30,028 36,415

Total Operating Revenue 40,769 46,785 51,971 57,826 66,035 82,999 100,565`

Non Operating RevenueAirport Development Fund 9,564 11,478 12,389 13,855 15,822 19,887 24,096Flying Club 2,000 2,000 2,000 2,487 2,840 3,569 4,325Rental Income 5,600 6,735 8,353 8,574 9,791 12,307 14,911

Total Revenue Rs.57,933 Rs.66,998 Rs.74,713 Rs.82,742 Rs.94,488 Rs.118,762 Rs.143,897

Operating CostsStaff salaries (9,044) (9,768) (10,549) (12,213) (13,947) (17,530) (21,240)Maintenance (8,403) (8,874) (9,282) Requires Cap Ex and D&A ScheduleMarketing & Advertising (8,843) (9,506) (10,267) (11,913) (13,605) (17,100) (20,719)Other Operating Costs (1,200) (1,380) (1,587) Requires Cap Ex and D&A Schedule

EBITDA 30,442 37,470 43,028

Depreciation & Amortization (21,400) (22,400) (23,352) Requires Cap Ex and D&A ScheduleEBIT 9,042 15,070 19,676

Interest Expense (3,190) (3,085) (3,020) Requires Debt and Interest ScheduleInterest Income 939 939 939 Requires Cash Balance - Hold Constant at 1,000 for now

EBT 6,791 12,924 17,595

Taxes @ 37.5% (2,377) (4,523) (6,158) Requires Tax ScheduleNet Income 4,414 8,400 11,437



Table of Contents

40



Capital Expenditures accumulate Property Plant & Equipment or other Non Current Assets on a company’s Balance Sheet

Depreciation and Amortization is a non-cash expense which is recorded to account for the wear and tear of assets

- Depreciation is recorded for tangible assets such as PP&E- Amortization is recorded for intangible assets such as Goodwill

Depreciation and Amortization is thus added back to Net Income in the Cash Flow statement since it is a non-cash item

A Cap Ex and D&A schedule ensures that future Cap Ex does not get lumped in with existing assets

Cap Ex and D&A Overview

41


Reference and link historical PP&E, Other Non Current Assets, Accumulated Depreciation and related Cap Ex from historical financials

The airport example assumes management has provided guidance on Cap Ex, otherwise the following assumptions are also reasonable:

- Cap Ex can be projected as a % of Sales- Cap Ex can be projected assuming it remains equal to depreciation

Create a schedule which ensures that subsequent Cap Ex is depreciated separately and not lumped in with existing balances

Identify and state depreciation assumption on the schedule

Schedule Set Up

42


Schedule Set Up

43

Step 6: Set up D&A schedule and link required historical line items

Cap Ex and D&A ScheduleHistorical Financials Projected Financials

2006 2007 2008 2009 2010 2011 2012Property Plant & Equipment 500,000 520,000 540,800 (Existing PP&E + Cap Ex on PP&E)Other Non Current Assets 25,889 26,666 27,466 (Existing Non Current Assets + Cap Ex on Non Current Assets)Accumulated Depreciation (167,654) (190,054) (213,406) (Existing Accumulated D&A + D&A Expense of relevant year)Capital Exependitures - PP&E 20,000 20,800 Projected based on management guidanceCapital Exependitures - Other Non Current Assets 777 800 Projected based on management guidance

Depreciation Expense (A + B + C + D) 21,400 22,400 23,352 (A + B + C + D)

D&A Method: Straight Line assuming no residual value

(A)----> Depreciation on Existing Gross PP&E 18,027 18,027 18,027 18,027Useful Life (in years) Remaining of Existing Net PP&E 30

Year CapEx Useful Life 2009 2010 2011 20122009 23 Years2010 25 Years2011 25 Years2012 25 Years

(B)----> Depreciation on Cap Ex

(C)----> Depreciation on Other Non Current Assets 3,433 3,433 3,433 3,433Useful Life (in years) Remaining of Existing Net PP&E 8

Year CapEx Useful Life 2009 2010 2011 20122009 10 Years2010 10 Years2011 10 Years2012 10 Years

(D)----> Depreciation on Cap Ex


Cap Ex and D&A Schedule

44

Step 7: Populate projected line items based on formulae and assumptions

Cap Ex and D&A Schedule

Historical Financials Projected Financials2006 2007 2008 2009 2010 2011 2012

Property Plant & Equipment 500,000 520,000 540,800 585,552 631,294 678,066 725,908Other Non Current Assets 25,889 26,666 27,466 28,466 29,666 30,916 32,166Accumulated Depreciation (167,654) (190,054) (213,406) (236,912) (262,367) (289,818) (319,308)Capital Exependitures - PP&E 20,000 20,800 44,752 45,742 46,772 47,843Capital Exependitures - Other Non Current Assets 777 800 1,000 1,200 1,250 1,250

Depreciation Expense (A + B + C + D) 21,400 22,400 23,352 23,506 25,455 27,451 29,490

D&A Method: Straight Line assuming no residual value

(A)----> Depreciation on Existing Gross PP&E 18,027 18,027 18,027 18,027Useful Life (in years) Remaining of Existing Net PP&E 30

Year CapEx Useful Life 2009 2010 2011 20122009 44,752 23 Years 1,946 1,946 1,946 1,9462010 45,742 25 Years 1,830 1,830 1,8302011 46,772 25 Years 1,871 1,8712012 47,843 25 Years 1,914

(B)----> Depreciation on Cap Ex 1,946 3,775 5,646 7,560

(C)----> Depreciation on Other Non Current Assets 3,433 3,433 3,433 3,433Useful Life (in years) Remaining of Existing Net PP&E 8

Year CapEx Useful Life 2009 2010 2011 20122009 1,000 10 Years 100 100 100 1002010 1,200 10 Years 120 120 1202011 1,250 10 Years 125 1252012 1,250 10 Years 125

(D)----> Depreciation on Cap Ex 100 220 345 470


Table of Contents

45



Debt and Interest Schedule is a simplified representation of a company’s loan obligations

Debt and Interest Schedule is useful because it allows the user to distinguish and project different types of debt instruments

- A fixed rate long term loan is the most basic debt instrument which has a fixed amortization schedule and corresponding interest payments

- A variable rate loan requires projecting a forward curve for the variable base (KIBOR, LIBOR, Prime Rate etc)

Debt schedules make it easy for the user to make required updates depending on macro-economic news

- A central bank announced rate cut will certainly have an impact on any forward curve used to project interest expense

Debt and Interest Overview

46


Reference and link historical Debt Balances and the following information:- Face Value- Term- Rate Type (Floating or Fixed)- Base Rate- Spread

Input a projected forward curve for debt instruments tied to a floating rate

Schedule Set Up

47

Debt & Interest

Debt Obligations Face Value Term Type Base Rate SpreadSecured Debt 24,000 12 Years Fixed 8.5% N/AUnsecured Debt 10,000 10 Years Floating KIBOR 2.5%

Historical Projected2006 2007 2008 2009 2010 2011 2012

KIBOR - Historical and Forward Curve 9.0% 11.0% 14.0% 13.0% 12.5% 11.0% 8.0%Secured Debt - Principal Amount Outstanding 24,000 22,000 20,000 (Existing Balance - Face Value / Term)Unsecured Debt - Principal Amount Outstanding 10,000 9,000 8,000 (Existing Balance - Face Value / Term)

Secured Debt - Interest Expense 2,040 1,870 1,700 (Existing Balance X Base Rate [or 8.5% in this case])Unsecured Debt - Interest Expense 1,150 1,215 1,320 (Existing Balance X (Base Rate + Spread)

Total Interest Expense 3,190 3,085 3,020

Step 8: Set up the Debt and Interest schedule and input historical balances


Calculate projected debt and interest payments based on available data

In yearly models assuming interest expense = interest payment is a safe assumptions

- However, in quarterly on monthly models this is not the case

Debt and Interest Schedule

48

Step 9: Complete the Debt & Interest Schedule

Debt & Interest

Debt Obligations Face Value Term Type Base Rate SpreadSecured Debt 24,000 12 Years Fixed 8.5% N/AUnsecured Debt 10,000 10 Years Floating KIBOR 2.5%


KIBOR - Historical and Forward Curve 9.0% 11.0% 14.0% 13.0% 12.5% 11.0% 8.0%Secured Debt - Principal Amount Outstanding 24,000 22,000 20,000 18,000 16,000 14,000 12,000Unsecured Debt - Principal Amount Outstanding 10,000 9,000 8,000 7,000 6,000 5,000 4,000

Secured Debt - Interest Expense 2,040 1,870 1,700 1,530 1,360 1,190 1,020Unsecured Debt - Interest Expense 1,150 1,215 1,320 1,085 900 675 420

Total Interest Expense 3,190 3,085 3,020 # 2,615 2,260 1,865 1,440


Table of Contents

49



Pre-Tax Income or EBT is typically taxed at a fixed percentage, which ranges from approx. 35-38% depending on jurisdiction, and for simple cases such as the example being discussed in this course, a Tax Schedule is not necessarily required

However, in cases where the company under review has significant Net Operating Losses or taxation is based on a metric other than EBT, a detailed Tax Schedule is required

In the airport example under discussion, we are assuming EBT is taxed at 35%, and no taxes are paid if EBT is negative

Taxes Overview

50


Reference and link historical taxes paid

Calculate historical tax rate

In practice, arriving at a constant tax rate for each year is not usually the case

Schedule Set Up

51

Step 10: Set up the Tax schedule and input historical figures

Tax Schedule


EBT Rs. 6,791.0 Rs. 12,923.8 Rs. 17,595.0Tax Rate 35.0% 35.0% 35.0%Taxes Payable ($2,376.9) ($4,523.3) ($6,158.3)


Tax Schedule

52

Link projected Earnings Before Taxes (EBT)

Apply a projected tax rate based on historical figures

Incorporate an IF statement which ensures that if EBT is negative, no taxes are paid

Step 11: Complete the Tax Schedule

Tax Schedule


EBT Rs. 6,791.0 Rs. 12,923.8 Rs. 17,595.0 Rs. 22,472.5 Rs. 28,792.7 Rs. 43,783.9 Rs. 59,340.8Tax Rate 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0%Taxes Payable ($2,376.9) ($4,523.3) ($6,158.3) ($7,865.4) ($10,077.4) ($15,324.4) ($20,769.3)


Table of Contents

53



Financial Model Set Up

54

Step 12: Populate the remaining items on the Income Statement and assume an arbitrary figure for Interest Income for now

Upon completing Cap Ex-D&A, Debt & Interest and Tax Schedules we are ready to populate the Income Statement and set up our Financial Model


RevenueLanding Fees 4,188 4,603 4,990 5,417 6,032 7,425 8,770Handling Fees 21,670 25,179 28,318 31,593 36,166 45,546 55,380Embarkation Fees 14,910 17,003 18,663 20,815 23,837 30,028 36,415

Total Operating Revenue 40,768.6 46,784.7 51,971.1 57,825.7 66,034.6 82,999.0 100,565.2`


Total Revenue Rs.57,932.6 Rs.66,997.7 Rs.74,713.1 Rs.82,742.0 Rs.94,488.0 Rs.118,762.1 Rs.143,897.3

Operating CostsStaff salaries (9,044) (9,768) (10,549) (12,213) (13,947) (17,530) (21,240)Maintenance (8,403) (8,874) (9,282) (9,961) (10,739) (11,535) (12,349)Marketing & Advertising (8,843) (9,506) (10,267) (11,913) (13,605) (17,100) (20,719)Other Operating Costs (1,200) (1,380) (1,587) (1,675) (1,881) (2,268) (2,668)

EBITDA 30,442 37,470 43,028 46,980 54,316 70,330 86,922

Depreciation & Amortization (21,400) (22,400) (23,352) (23,506) (25,455) (27,451) (29,490)EBIT 9,042 15,070 19,676 23,474 28,861 42,879 57,432

Interest Expense (3,190) (3,085) (3,020) (2,615) (2,260) (1,865) (1,440)Interest Income 939 939 939 1,000 1,000 1,000 1,000

EBT 6,791 12,924 17,595 21,859 27,601 42,014 56,992

Taxes @ 37.5% (2,377) (4,523) (6,158) (7,651) (9,660) (14,705) (19,947)Net Income 4,414 8,400 11,437 14,209 17,941 27,309 37,045

Net Income Margin 7.6% 12.5% 15.3% 17.2% 19.0% 23.0% 25.7%



55

Step 13: Project Balance Sheet using existing information and schedules, and identify additional schedules required

Linked to Cap Ex and D&A Schedule

Linked to Debt and Interest Schedule


AssetsCash and Equivalents 10,430 14,028 19,970 Recquires Cash Flow Statement completedAccounts Receivable 13,000 13,910 14,884 Requires Working Capital ScheduleInventory 5,000 5,400 5,500 Requires Working Capital ScheduleOther Current Assets 9,105 10,016 11,017 Requires Working Capital Schedule


Gross PP&E 500,000 520,000 540,800 585,552 631,294 678,066 725,908Other Non Current Assets 25,889 26,666 27,466 28,466 29,666 30,916 32,166Accumulated Depreciation (167,654) (190,054) (213,406) (236,912) (262,367) (289,818) (319,308)

Total Assets 395,770 399,965 406,230 377,106 398,593 419,163 438,766

Liabilities and Shareholders' EquityAccounts Payable 2,476 2,426 2,378 Requires Working Capital ScheduleAccrued Expenses and Other Current Liabilities 2,467 2,418 2,369 Requires Working Capital Schedule


Secured Debt 24,000 22,000 20,000 18,000 16,000 14,000 12,000Unsecured Debt 10,000 9,000 8,000 7,000 6,000 5,000 4,000

Total Debt 34,000 31,000 28,000 25,000 22,000 19,000 16,000

Other Non Current Liabilities 10,123 9,921 9,722 Requires Working Capital ScheduleTotal Liabilities 49,066 45,765 42,469

Shareholders' EquityAuthorized Capital of 200,000,000 common sharesof Rs. 1 eachCommon stock issued at par 100,000 100,300 100,601 Requires Shareholder's Equity scheduleAdditional paid-in capital 234,987 235,692 236,399 Requires Shareholder's Equity scheduleCommon stock issued at par to SAS Requires Shareholder's Equity scheduleAdditional paid-in capital by SAS Requires Shareholder's Equity scheduleAccumulated earnings (deficit) 11,717 18,208 26,761 Previous Year's Balance + Net Income - Dividends

Total Shareholders' Equity 346,704 354,200 363,761

Total Liabilities & Shareholders' Equity 395,770 399,965 406,230


Table of Contents

56



Working Capital is defined as Current Assets – Current Liabilities and represents the operating liquidity available to a business

Typically, Working Capital has three components- Accounts Receivable- Inventory- Accounts Payable

Accounts Receivable, Inventory and Accounts Payable are projected based on collection periods and number of days for which they remain outstanding

Working Capital Overview

57


Schedule Set Up

58

Step 14: Set up the Working Capital Schedule by linking Total Revenue and Operating Costs

Where available, always use historical working capital ratios to develop projections, otherwise utilize industry averages based comparables Assume 364.25 days in a year to account for leap years

Use appropriate averages for historical ratios or incorporate working capital

improvements based on management discussions

Working Capital

(Pak Rupees in 000s, except per share amounts) Historical Financials Projected Financials2006 2007 2008 2009 2010 2011 2012

Total Revenue 57,933 66,998 74,713 82,742 94,488 118,762 143,897Total Operating Costs (27,490) (29,528) (31,685) (35,762) (40,172) (48,432) (56,975)

AssetsAccounts Receivable 13,000 13,910 14,884 (Total Revenue X AR Collection Period / Days in a Year)Inventory 5,000 5,400 5,500 (Total Operating Costs X Inv Days Outstanding / Days in a Year)Other Current Assets 9,105 10,016 11,017 (Total Revenue X Other Current Assets as a % of Revenue)

LiabilitiesAccounts Payable 2,476 2,426 2,378 (Total Operating Costs X AP (Days Payable) / Days in a Year)Accrued Expenses and Other Current Liabilities 2,467 2,418 2,369 (Total Operating Costs X Accr. Exp and OCL as a % of Op Costs)Other Non Current Liabilities 10,123 9,921 9,722 (Total Operating Costs X Other Non CL as a % of Op Costs)

Ratios and AssumptionsDays in a Year 364.25Accounts Receivable (Collection Period in Days) AR Balance X Days In a Year / Total RevenueInventory (Days Outstanding) Inventory Balance X Days in a Tear / Total Op CostsOther Current Assets as a % of Total Revenue Current Assets / Total Revenue

Accounts Payable (Days Payable) AP Balance X Days in a Year / Total Operating CostsAccrued Expenses and Other CL (as a % of Op Costs) Accr. Exp and Other CL / Total Operating CostsOther Non Current Liabilities (as a % of Op Costs) Other Non CL / Total Operating Costs


Working Capital Schedule

59

Step 15: Project working capital accounts based on projected drivers

An increase in liabilities implies an increase in cash, and in increase in assets implies a decrease in cash Other Non Current Liabilities are not a component of Working Capital, but has

been included in this schedule for simplicity

Incorporate Working Capital Improvements if required

Working Capital

(Pak Rupees in 000s, except per share amounts) Historical Financials Projected Financials2006 2007 2008 2009 2010 2011 2012

Total Revenue 57,933 66,998 74,713 82,742 94,488 118,762 143,897Total Operating Costs (27,490) (29,528) (31,685) (35,762) (40,172) (48,432) (56,975)

AssetsAccounts Receivable 13,000 13,910 14,884 17,410 19,103 23,032 26,722Inventory 5,000 5,400 5,500 6,417 6,878 7,893 8,816Other Current Assets 9,105 10,016 11,017 12,525 14,303 17,977 21,782

LiabilitiesAccounts Payable 2,476 2,426 2,378 2,948 3,311 3,992 4,697Accrued Expenses and Other Current Liabilities 2,467 2,418 2,369 2,937 3,299 3,978 4,679Other Non Current Liabilities 10,123 9,921 9,722 12,052 13,539 16,323 19,202

Ratios and AssumptionsDays in a Year 364.25Accounts Receivable (Collection Period in Days) 82 76 73 77 74 71 68Inventory (Days Outstanding) 66 67 63 65 62 59 56Other Current Assets as a % of Total Revenue 15.7% 14.9% 14.7% 15.1% 15.1% 15.1% 15.1%

Accounts Payable (Days Payable) 33 30 27 30 30 30 30Accrued Expenses and Other CL (as a % of Op Costs) 9.0% 8.2% 7.5% 8.2% 8.2% 8.2% 8.2%Other Non Current Liabilities (as a % of Op Costs) 36.8% 33.6% 30.7% 33.7% 33.7% 33.7% 33.7%


Table of Contents

60



Shareholder’s Equity is the interest in remaining assets of a company spread among shareholders’ and is defined as Total Assets – Total Liabilities

Shareholder’s Equity has the following components- Authorized Capital- Paid up Capital- Additional Paid in Capital- Accumulated Earnings / (Deficit)

Authorized Capital is the maximum the Company is authorized to issue to its shareholders’ and is thus not summed up when calculating Shareholder’s Equity

Shareholder’s Equity Overview

61


Schedule Set Up

62

Step 16: Link historical ending equity balance and identify dividends paid in the past three years to calculate dividend pay out ratio

Set up a schedule which assumes annual dividend payment but no additional issuance of shares or re-purchases

- Assume that this restriction has been imposed by SAS Capital as a pre-condition for making a minority investment in Thebes Airport

Shareholder's Equity Schedule


Beginning Equity Balance 361,748Net Income 4,414 8,400 11,437 14,209 17,941 27,309 37,045Additional shares issued to SAS at par Requires Valuation Consideration ScheduleAdditional paid in capital by SAS Requires Valuation Consideration ScheduleDividends Paid (1,545.0) (1,909.0) (2,884.5) Link to Calculation Below

Ending Equity Balance 346,704 353,195 361,748 (SUM the above, be careful with signs)

Dividend AssumptionsTotal Dividends Paid 1,545.0 1,909.0 2,884.5 (Net Income X Dividend Pay Out Ratio)Net Income 4,414 8,400 11,437 14,209 17,941 27,309 37,045Divident Payout Ratio 35% 23% 25% (Assumption based on historical ratios)


SAS Capital Partners Investment Proposal

63

Assume for now that SAS Capital decides to invest Rs. 30 MM at Rs 2.8 / share for 9.6% of the Company

- Details of how SAS arrived at Rs 2.8 / share will be discussed later The purchase offer implies an 7.7% premium over the current stock price

Assume existing shareholder’s interest in Thebes is proportionally diluted as a result of SAS investment

Capital Structure as of 05/04/2009

Shareholders % of Total Common shares heldFrontier Capital Corporation 55% 55,345Shareef Brothers Limited 17% 16,893Establishment Foundation 15% 15,456Publicly Traded 13% 12,907Total Common Shares Outstanding 100% 100,601

Capital Structure post SAS Investment

Shareholders % of Total Common shares heldFrontier Capital Corporation 49.7% 55,345Shareef Brothers Limited 15.2% 16,893Establishment Foundation 13.9% 15,456SAS Capital Partners 9.6% 10,714Publicly Traded 11.6% 12,907Total Common Shares Outstanding 100% 111,315

Private Placement Proposal Summary

Investment Amount offered by SAS Capital 30,000Offer price / share Rs. 2.8Additional Shares Issued to SAS 10,714Current Shares Outstanding 100,601

Common shares outstanding post SAS investment 111,315

Stock Price as of 05/04/2009 Rs. 2.6Premium Paid by SAS Capital 7.7%


Shareholder’s Equity Schedule

64

Step 17: Complete the Shareholder’s Equity Schedule by calculating projected balances

A Rs. 30 MM investment at Rs. 2.8 / share implies 10,714 additional shares were issued to SAS and the remaining amount was additional paid in capital For simplicity assume that no additional shares will be re-purchased or issued

post SAS investment in Thebes Airport

Shareholder's Equity Schedule


Beginning Equity Balance 361,748 402,688 416,503 437,530Net Income 4,414 8,400 11,437 14,209 17,941 27,309 37,045Additional shares issued to investor at par 10,714Additional paid in capital by investor 19,286Dividends Paid (1,545.0) (1,909.0) (2,884.5) (3,268.0) (4,126.3) (6,281.0) (8,520.3)

Ending Equity Balance 346,704 353,195 361,748 402,688 416,503 437,530 466,055

Dividend AssumptionsTotal Dividends Paid 1,545.0 1,909.0 2,884.5 3,268.0 4,126.3 6,281.0 8,520.3Net Income 4,414 8,400 11,437 14,209 17,941 27,309 37,045Divident Payout Ratio 35% 23% 25% 23% 23% 23% 23%


Table of Contents

65




66

Linked to Cap Ex and D&A Schedule

Linked to Debt and Interest Schedule

Let us return to the partially completed Balance Sheet from the earlier illustrationBalance Sheet Historical Financials Projected Financials(Pak Rupees in 000s, except per share amounts) 2006 2007 2008 2009 2010 2011 2012

AssetsCash and Equivalents 10,430 14,028 19,970 Recquires Cash Flow Statement completedAccounts Receivable 13,000 13,910 14,884 Requires Working Capital ScheduleInventory 5,000 5,400 5,500 Requires Working Capital ScheduleOther Current Assets 9,105 10,016 11,017 Requires Working Capital Schedule



Total Assets 395,770 399,965 406,230 377,106 398,593 419,163 438,766

Liabilities and Shareholders' EquityAccounts Payable 2,476 2,426 2,378 Requires Working Capital ScheduleAccrued Expenses and Other Current Liabilities 2,467 2,418 2,369 Requires Working Capital Schedule



Total Debt 34,000 31,000 28,000 25,000 22,000 19,000 16,000

Other Non Current Liabilities 10,123 9,921 9,722 Requires Working Capital ScheduleTotal Liabilities 49,066 45,765 42,469

Shareholders' EquityAuthorized Capital of 200,000,000 common sharesof Rs. 1 eachCommon stock issued at par 100,000 100,300 100,601 Requires Shareholder's Equity scheduleAdditional paid-in capital 234,987 235,692 236,399 Requires Shareholder's Equity scheduleCommon stock issued at par to SAS Requires Shareholder's Equity scheduleAdditional paid-in capital by SAS Requires Shareholder's Equity scheduleAccumulated earnings (deficit) 11,717 18,208 26,761 Previous Year's Balance + Net Income - Dividends

Total Shareholders' Equity 346,704 354,200 363,761

Total Liabilities & Shareholders' Equity 395,770 399,965 406,230

Confidential – not for third party distribution © The Kadmos Initiative (Pvt) Ltd. 2009 67

Upon linking the remaining items, only the Cash and Equivalents line item remains, which will be populated after completing the Cash Flow Statement

Step 18: Link remaining items to the Working Capital and Shareholder’s Equity Schedules

Linking Financial Statements


AssetsCash and Equivalents 10,430 14,028 19,970 To be calculated after completion of Cash Flow StatementAccounts Receivable 13,000 13,910 14,884 17,410 19,103 23,032 26,722Inventory 5,000 5,400 5,500 6,417 6,878 7,893 8,816Other Current Assets 9,105 10,016 11,017 12,525 14,303 17,977 21,782

Total Current Assets 37,535 43,353 51,370 36,352 40,284 48,903 57,320


Total Assets 395,770 399,965 406,230 413,458 438,876 468,066 496,086

Liabilities and Shareholders' EquityAccounts Payable 2,476 2,426 2,378 2,948 3,311 3,992 4,697Accrued Expenses and Other Current Liabilities 2,467 2,418 2,369 2,937 3,299 3,978 4,679

Total Current Liabilities 4,943 4,844 4,747 5,885 6,611 7,970 9,376


Total Debt 34,000 31,000 28,000 25,000 22,000 19,000 16,000

Other Non Current Liabilities 10,123 9,921 9,722 12,052 13,539 16,323 19,202Total Liabilities 49,066 45,765 42,469 42,938 42,149 43,293 44,578

Shareholders' EquityAuthorized Capital of 200,000,000 common sharesof Rs. 1 eachCommon stock issued at par 100,000 100,300 100,601 100,601 100,601 100,601 100,601Additional paid-in capital 234,987 235,692 236,399 236,399 236,399 236,399 236,399Common stock issued at par to SAS 10,714 10,714 10,714 10,714Additional paid-in capital by SAS 19,286 19,286 19,286 19,286Accumulated earnings (deficit) 11,717 18,208 26,761 37,701 51,516 72,543 101,068

Total Shareholders' Equity 346,704 354,200 363,761 404,701 418,515 439,543 468,068

Total Liabilities & Shareholders' Equity 395,770 399,965 406,230 447,639 460,665 482,836 512,646


Before populating the Cash Flow Statement, review the formulae and links required

Step 19: Set up the Cash Flow Statement


Cash Flow Statement Historical Financials Projected Financials(Pak Rupees in 000s, except per share amounts) 2006 2007 2008 2009 2010 2011 2012

Cash Flow from OperationsNet Income From Income Statement(+) Depreciation & Amortization From Income Statement (D&A is a non cash item)(Increase)/Decrease in Accounts Receivable For 2009: AR in 2008 - AR in 2009(Increase)/Decrease in Inventory For 2009: Inventory in 2008 - Inventory in 2009(Increase)/Decrease in Other Current Assets For 2009: Other Current Assets in 2008 - Other Current Assets in 2009Increase/(Decrease) in Accounts Payable For 2009: AP in 2009 - AP in 2008Increase/(Decrease) in Accr. Exp and Other CL For 2009: Accr. Exp & Other CL in 2009 - Accr. Exp & Other CL in 2008Increase/(Decrease) in Accrued Exp. And Other Non CL For 2009: Accr. Exp & Other Non CL in 2009 - Accr. Exp & Other Non CL in 2008

Total Cash Flow from Operating Activities (SUM all items above); Be careful with signs for working capital changes

Cash Flow from Investing Activities(-) Capital Expenditures Management typically provides guidance on CapEx; often CapEx = D&A is assumed(+) Asset Sales Management typically provides guidance on Asset Sales(-) Acquisition of Assets / Other Securities Management typically provides guidance on Acquisition of Assets

Total Cash Flow from Investing Activities (Asset Sales - CapEx - Acquisition of Assets)

Cash Flow from Financing(+) Issuance of Common Stock Management typically provides guidance(+) Proceeds from Secured Debt Requires Debt & Interest Schedule(+) Proceeds from Unsecured Debt Requires Debt & Interest Schedule(+) Proceeds from Equity Raise from Foreign Investor Requires Shareholder's Equity Schedule(-) Dividends Paid Requires Shareholder's Equity Schedule(-) Payment of Secured Debt Requires Debt & Interest Schedule(-) Payment of Unsecured Debt Requires Debt & Interest Schedule

Total Cash Flow from Financing Activities (SUM all items above); Be careful with signs for debt payments and debt proceeds

Change in Cash Balance (Cash flow from Operation + Investing + Financing)Change in cash is linked back to the balance sheet, and that is how a balance sheet is balanced!


Pay careful attention to signs, especially for working capital accounts

Step 20: Complete the Cash Flow Statement from the corresponding Balance Sheet


Cash Flow Statement Historical Financials Projected Financials(Pak Rupees in 000s, except per share amounts) 2006 2007 2008 2009 2010 2011 2012

Cash Flow from OperationsNet Income 8,400 11,437 14,591 18,078 27,056 36,675(+) Depreciation & Amortization 22,400 23,352 23,506 25,455 27,451 29,490(Increase)/Decrease in Accounts Receivable (910) (974) (2,526) (1,693) (3,929) (3,690)(Increase)/Decrease in Inventory (400) (100) (917) (460) (1,015) (923)(Increase)/Decrease in Other Current Assets (911) (1,002) (1,508) (1,778) (3,674) (3,805)Increase/(Decrease) in Accounts Payable (50) (49) 570 363 681 704Increase/(Decrease) in Accrued Expenses & Other Current Liabilities (49) (48) 568 362 678 702Increase/(Decrease) in Accrued Expenses & Other Non Current Liabilities (202) (198) 2,330 1,486 2,784 2,879

Total Cash Flow from Operating Activities 28,279 32,418 36,614 41,813 50,031 62,032

Cash Flow from Investing Activities(-) Capital Expenditures on PP&E (20,000) (20,800) (44,752) (45,742) (46,772) (47,843)(-) Capital Expenditures on Other Non Current Assets (1,000) (1,200) (1,250) (1,250)(+) Asset Sales(-) Acquisition of Assets / Other Securities

Total Cash Flow from Investing Activities (20,000) (20,800) (45,752) (46,942) (48,022) (49,093)

Cash Flow from Financing(+) Issuance of Common Stock(+) Proceeds from Secured Debt(+) Proceeds from Unsecured Debt(+) Proceeds from Equity Raise from Foreign Investor 30,000.0 0.0 0.0 0.0(-) Dividends Paid (3,268.0) (4,126.3) (6,281.0) (8,520.3)(-) Payment of Secured Debt (2,000) (2,000) (2,000) (2,000) (2,000) (2,000)(-) Payment of Unsecured Debt (1,000) (1,000) (1,000) (1,000) (1,000) (1,000)

Total Cash Flow from Financing Activities (3,000) (3,000) 23,732 (7,126) (9,281) (11,520)

Change in Cash Balance 5,279 8,618 14,594 (12,255) (7,272) 1,419


Step 21: Link the change in cash to the existing balance sheet; Include a Balance Sheet Check (Total Assets = Total Liab + SH Equity)



AssetsCash and Equivalents 10,430 14,028 19,970 34,563 22,308 15,037 16,456Accounts Receivable 13,000 13,910 14,884 17,410 19,103 23,032 26,722Inventory 5,000 5,400 5,500 6,417 6,878 7,893 8,816Other Current Assets 9,105 10,016 11,017 12,525 14,303 17,977 21,782

Total Current Assets 37,535 43,353 51,370 70,915 62,592 63,939 73,776


Total Assets 395,770 399,965 406,230 448,021 461,185 483,103 512,542

Liabilities and Shareholders' EquityAccounts Payable 2,476 2,426 2,378 2,948 3,311 3,992 4,697Accrued Expenses and Other Current Liabilities 2,467 2,418 2,369 2,937 3,299 3,978 4,679

Total Current Liabilities 4,943 4,844 4,747 5,885 6,611 7,970 9,376


Total Debt 34,000 31,000 28,000 25,000 22,000 19,000 16,000

Other Non Current Liabilities 10,123 9,921 9,722 12,052 13,539 16,323 19,202Total Liabilities 49,066 45,765 42,469 42,938 42,149 43,293 44,578

Shareholders' EquityAuthorized Capital of 200,000,000 common sharesof Rs. 1 eachCommon stock issued at par 100,000 100,300 100,601 100,601 100,601 100,601 100,601Additional paid-in capital 234,987 235,692 236,399 236,399 236,399 236,399 236,399Common stock issued at par to SAS 10,714 10,714 10,714 10,714Additional paid-in capital by SAS 19,286 19,286 19,286 19,286Accumulated earnings (deficit) 11,717 18,208 26,761 38,084 52,036 72,810 100,965

Total Shareholders' Equity 346,704 354,200 363,761 405,084 419,035 439,810 467,965

Total Liabilities & Shareholders' Equity 395,770 399,965 406,230 448,021 461,185 483,103 512,542


Step 22: Calculate Interest Income by incorporating a circular reference from projected cash balances


Ensure iterations are enabled in MS Excel- Hit Alt + T, O and under the ‘Calculations’ tab check Iteration

Income Statement(Pak Rupees in 000s, except per share amounts) Historical Financials Projected Financials

Revenue 2006 2007 2008 2009 2010 2011 2012Landing Fees 4,188 4,603 4,990 5,417 6,032 7,425 8,770Handling Fees 21,670 25,179 28,318 31,593 36,166 45,546 55,380Embarkation Fees 14,910 17,003 18,663 20,815 23,837 30,028 36,415

Total Operating Revenue 40,768.6 46,784.7 51,971.1 57,826 66,035 82,999 100,565


Total Revenue Rs.57,932.6 Rs.66,997.7 Rs.74,713.1 82,742 94,488 118,762 143,897

Operating CostsStaff salaries (9,044) (9,768) (10,549) (12,213) (13,947) (17,530) (21,240)Maintenance (8,403) (8,874) (9,282) (9,961) (10,739) (11,535) (12,349)Marketing & Advertising (8,843) (9,506) (10,267) (11,913) (13,605) (17,100) (20,719)Other Operating Costs (1,200) (1,380) (1,587) (1,675) (1,881) (2,268) (2,668)

EBITDA 30,442 37,470 43,028 46,980 54,316 70,330 86,922

Depreciation & Amortization (21,400) (22,400) (23,352) (23,506) (25,455) (27,451) (29,490)EBIT 9,042 15,070 19,676 23,474 28,861 42,879 57,432

Interest Expense (3,190) (3,085) (3,020) (2,615) (2,260) (1,865) (1,440)Interest Income 939 939 939 1,379 1,133 743 629

EBT 6,791 12,924 17,595 22,238 27,734 41,757 56,621

Taxes @ 35% (2,377) (4,523) (6,158) (7,651) (9,660) (14,705) (19,947)Net Income 4,414 8,400 11,437 14,587 18,074 27,052 36,674

Net Income Margin 7.6% 12.5% 15.3% 17.6% 19.1% 22.8% 25.5%Interest Income Rate 4.0% 4.0% 4.0% 4.0%


Table of Contents

72



Introduction to Valuation

73

Investors employ several valuation methodologies when considering an investment proposal some examples are as follows

- Comparable Company Analysis- Comparable Transactions Analysis- Transaction Premiums Analysis- Discounted Cash Flow Analysis- Returns Analysis based on Exit Multiples

Discussion of each method is beyond the scope of this training module

Assume SAS Capital has employed the above methodologies and based on results they have determined that a 7.7% premium over existing stock price should be an acceptable to Thebes Airport

Now we are going to determine if such a valuation is consistent with SAS Capital’s expectation on their target Internal Rate of Return or IRR

- IRR is the discount rate which makes the Net Present Value of a project 0


Returns Analysis Set Up

74

Set up a returns analysis schedule in a manner which indicates achievable returns based on exit year and exit Enterprise Value / EBITDA multiple To arrive at Equity Value from Enterprise Value, subtract existing debt balance

and add back Cash balance

Returns Analysis

Projected Financials(Pak Rupees in 000s, except per share amounts) 2009 2010 2011 2012EBITDA Requires Earnings from the Income StatementExit EBITDA Multiple Assumtion based on Comparative Analysis

Enterprise Value

Less: Secured Debt Requires Debt & Int. ScheduleLess: Unsecured Debt Requires Debt & Int. SchedulePlus: Cash Requires Balance Sheet figure

Total Equity ValueSponsor's Ownership as a % Requires Valuation Consideration ScheduleSAS Equity

Dividend's received by SAS Requires Shareholders' Equity Schedule

SAS Returns

IRR Initial Inv 2009 2010 2011 2012(30,000.0) 0.0(30,000.0) 0.0 0.0(30,000.0) 0.0 0.0 0.0(30,000.0) 0.0 0.0 0.0 0.0


Returns Analysis

75

We have determined that a 7.3x exit EBITDA multiple is reasonable based on comparables analysis Based on SAS’ offer of Rs 2.8 share they are entitled to 9.6% of Thebes Airport An exit in 2012 at 7.3x EBITDA allows SAS to barely achieve their desired IRR However, as Buy-Side advisors we must evaluate all possibilities and scenarios

before making a recommendation

Returns Analysis

Projected Financials(Pak Rupees in 000s, except per share amounts) 2009 2010 2011 2012EBITDA 46,979.9 54,316.2 70,329.8 86,922.0Exit EBITDA Multiple 7.3 7.3 7.3 7.3

Enterprise Value 342,953 396,508 513,408 634,531

Less: Secured Debt (18,000) (16,000) (14,000) (12,000)Less: Unsecured Debt (7,000) (6,000) (5,000) (4,000)Plus: Cash 34,514 22,081 14,822 16,449

Total Equity Value 352,467 396,589 509,230 634,980Sponsor's Ownership as a % 9.6%SAS Equity 33,926 38,172 49,014 61,118

Dividend's received by SAS 319 390 588 803

SAS Returns

IRR Initial Inv 2009 2010 2011 201214.1% (30,000.0) 34,244.713.9% (30,000.0) 319.1 38,562.319.0% (30,000.0) 319.1 389.9 49,602.720.7% (30,000.0) 319.1 389.9 588.4 61,920.8


Table of Contents

76



Control Page and Sensitivity Analysis

77

The final step of any useful financial model is creating a control page which drives the output similar to the Operating Model control page we have already set up The control page provides a bird’s eye view of any given situation and involves

re-linking some inputs Major drivers which would be of interest in the airport example are:

- Revenue Driver Inflation Rates- Aircraft Movements- LF Assumptions- IRR Implications

Financial statement line items which should typically be shown on a control page are:

- Revenue- EBITDA- Net Income- Cash Balance


Control Page and Sensitivity Analysis Set Up

78

Once inputs and drivers are re-linked to the Control Page we can perform a comprehensive evaluation of the impact a variable can have

Control PageAircraft Specifications # of Seats LF Assump. MTOW (Tons) Revenue Driver Inflation Assumptions

B-737-300 Operating Revenue: Assumption: Rate:A-320 1) Text to be copied from the Operating Model Landing Charges / Ton Annually - Fixed Operating ModelA310 2) Operating Model to be relinked to the Contol Page Handling Charges / AC MovementAnnually - Fixed Operating ModelB747 Emarkation Fees / Passenger Annually - Fixed Operating Model


B-737-300 1) Text to be copied from the Operating ModelA-320 2) Operating Model to be relinked to the Contol PageA310B747

Key Financials Historical Financials Projected Financials2006 2007 2008 2009 2010 2011 2012

Revenue To be linked to the Income StatementEBITDA To be linked to the Income StatementNet Income To be linked to the Income StatementCash and Equivalents To be linked to the Balance Sheet

1) To be copied from Valuation Consideration 2) Valuation Consideration to be relinked to Control PageInvestment Amount offered by SAS Capital Exit EBITDA Multiple 1) Copy from Returns Analysis. 2) Returns Analysis to be relinked to Control PageOffer price / share Sponsor's Ownership a % To be linked to Valuation Consideration Schedule Current Stock PricePremium Paid by SAS Capital Partners IRR Initial Inv 2009 2010 2011 2012

Additional Shares Issued To be linked to the Valuation ConsiderationCurrent Shares Outstanding To be linked to the Valuation ConsiderationCommon shares outstanding post investment To be linked to the Valuation Consideration


Control Page and Sensitivity Analysis

79

We can see that an exit in 2012 allows SAS to barely achieve their target IRR As Buy-Side advisor, would you recommend that SAS invest in Thebes Airport?

Aircraft Specifications # of Seats LF Assump. MTOW (Tons) Revenue Driver Inflation AssumptionsB-737-300 118 0.5% Annually 61 Operating Revenue: Assumption: Rate:A-320 140 0.8% Annually 73 Landing Charges / Ton Annually - Fixed 7%A310 184 0.0% Annually 160 Handling Charges / AC MovementAnnually - Fixed 9%B747 398 -0.3% Annually 350 Emarkation Fees / Passenger Annually - Fixed 9%


B-737-300 154 160 176 179 188 213 243A-320 130 156 160 164 174 197 213A310 65 80 94 100 105 135 156B747 45 40 37 35 35 35 35

Key Financials Historical Financials Projected Financials2006 2007 2008 2009 2010 2011 2012

Revenue 57,932.6 66,997.7 74,713.1 82,742.0 94,488.0 118,762.1 143,897.3EBITDA 30,442 37,470 43,028 46,980 54,316 70,330 86,922Net Income 4,414 8,400 11,437 14,591 18,078 27,056 36,675Cash and Equivalents 10,430 14,028 19,970 34,563 22,308 15,037 16,456

Investment Amount offered by SAS Capital 30,000 Exit EBITDA Multiple 7.3 7.3 7.3 7.3Offer price / share Rs. 2.8 Sponsor's Ownership a % 9.6%Current Stock Price Rs. 2.6Premium Paid by SAS Capital Partners 7.7% IRR Initial Inv 2009 2010 2011 2012

14.1% (30,000.0) 34,244.9Additional Shares Issued 10,714 13.9% (30,000.0) 314.5 38,591.5Current Shares Outstanding 100,601 19.0% (30,000.0) 314.5 397.2 49,639.5Common shares outstanding post investment 111,315 20.8% (30,000.0) 314.5 397.2 604.6 61,938.7

sample financial modeling module a

Documents