Western Harbour Crossing
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ACF: Western Harbour Crossing
January 31, 2012
Executive summary
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
ACF: Western Harbour Crossing
January 31, 2012
Executive summary
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