ACF: Western Harbour Crossing
January 31, 2012
In our analysis of Western Harbour Crossing (“WHC”) we have aimed to address two questions: 1. 2. How much should GW pay for the assets? What is the likelihood of the transaction going through?
To answer question 1 we have decided to value the WHC asset using a CAPV methodology. The reasons behind choosing this approach have been the following: 1. The debt is changing over time as it matures and hence the capital structure changes making a WACC unsuitable for the valuation 2. We believe that this methodology captures in a more correct way the present value of the ITS emerging from the leverage
When applying the CAPV methodology we have had to consider a range of possible revenue growth and discount rate scenarios as well as the maximum leverage the WHC can support under each of these scenarios.
To answer question 2 we have calculated the returns for the existing WHC shareholders depending on the proceeds from the sale of the assets in 2007. We have contrasted these returns and its implied proceeds against the value that GW will attribute to the asset under the scenarios considered in the CAPV.
Our conclusions from doing the above exercise are the following: • • • • • • We believe that WHC’s revenue can grow at a rate in the range of 8%-10% Based on the steady cash flows of infrastructure businesses and the relatively low country risk of Hong Kong (embedded on the unlevered beta and the risk free rate respectively) we assume a discount rate of 9%-10% We believe that the capital structure post acquisition could easily support 68% debt to assets ratio (conservative based on DSCR of 2.5 and the capital structure put in place when the project was a greenfield) This results in an enterprise value in the range of HK$8.4 – 10.7 billion (including ITS) This range would imply levered IRRs to existing shareholders in the lower end of their acceptable range (around 10%) Therefore, we believe a deal is unlikely as the project has been significantly de-risked now and those shareholders that ran the construction risk will want to extract at least a 10% levered IRR
We have valued WHC using a CAPV methodology for the remaining franchise period (2007 – 2023).
1) Free Cash Flows
Key Assumptions • To calculate the revenue growth rate we have factored 1. The passed 1998 – 2006 CAGR in traffic in WHC as a consequence of demand shifting from other crossings to WHC and the economic growth The last 16 years inflation as the price of the toll should at least increase by this amount
Growth rate of revenue
• We have then contrasted these numbers against the maximum price constraints (adjustment mechanics) and the need to pay into the stability fund and confirmed the numbers comply with both • We have assumed that the growth in traffic applies equally to personal cars, goods vehicles and buses • We have also assumed that toll increases apply equally to personal cars, goods vehicles and buses • We have applied a 16% COGS as a percentage of revenues based on the average for the period 2000 –
Operating costs and depreciation
2006 (we assume that before 2000 WHC was not operating at full cost efficiency) • We have calculated depreciation based on the 2000 – 2006 HK$ per daily traffic depreciation rate (HK$3.3 / per vehicle) and made sure that cumulatively it doesn’t exceed the investments made • We have assumed a tax rate of 18%
Tax and other cash flows
• Maintenance capex and working capital have been assumed to be 0 in light of the nature of the business (maintenance costs are included in operating costs and there is no working capital needed)
HK$ '000 Total daily traffic crossing WHC (1) growth (CAGR 1998- 2006) (2) CPI (1990-2006) Revenue growth = (1) x (2) Operating Costs (excluding depreciation) % of revenue (2000 -2006 average) Depreciation HK$ per daily traffic (2000...