BelttonGroup Plc

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Beltton-Group Plc
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• Discounted cash flow based valuation and analysis
  using Shareholder Value Analysis framework

Timo Nurminiemi Argon Pro Ltd
21.12.2004
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Content

• Background and purpose of the report
• Shareholder Value Analysis framework
• Beltton-Group Plc valuation and analysis
• Background and information available
• Scenarios and main assumptions
• Value drivers, Income statement and Balance sheet
• Free cash flow
• Valuation
• Sensitivity analysis
• Historical performance vs. market expectations
• Main remarks and conclutions
• Key, terms and terminology
• Appendices
• Legal disclaimer

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Purpose of this report

• Argon Pro Ltd is a consulting and training
  company specialized in the area of value and
  value creation. Value creation possibilities can
  be utilized either in business processes or in
  various value and valuation related tasks or
  projects
• As a service Argon Pro Ltd provides also
  valuations and analyses of public companies. Our
  service includes
• Discounted cash flow based valuation models
  prepared with the state of the art valuation
  tool ValueAnalytix 1
• Models, analysis and valuations prepared by
  hands with 15 years of experience
• Information about the possible future outcomes
  and value drivers effecting to cash flows,
  financing and value
• A possibility to generate own scenarios with own
  assumptions
• We do not give recommendations to buy or sell. It
  is our customers task to make the decisions,
  based on the relevant information available.
  However, multiple scenarios, key value drivers,
  as well as easy to read reports will provide a
  good basis for good decisions

1 More about ValueAnalytix software see
www.argonpro.net, or www.valueanalytix.com
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Chapter 1

• Shareholder Value Analysis, SVA framework

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Shareholder Value Analysis framework

• The SVA approach estimates the economic value of
  the investment, which could be
• the shares of a company, a strategy, merger or
  acquisition, or other capital expenditure
• The economic value is estimated by discounting
  future Free Cash Flows by their Cost of Capital
• Shareholder Value Analysis is most useful as a
  financial tool when integrated with management's
  overall approach to decision-making (i.e. Value
  Based Management concept, VBM)
• Shareholder Value Analyses approach uses Key
  Value Drivers to link modern valuation techniques
  and analysis to key management decisions

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Shareholder Value Analysis framework
CORPORATE OBJECTIVE
Shareholder Value Added (SVA)

• Total Shareholder
• Return
• Dividends
• Capital gains

VALUATION COMPONENTS
Cash flow from operations
Discount rate
Debt
KEY VALUE DRIVERS
Value growth duration

• Working capital
• investments
• Fixed capital
• investments

• Sales growth
• Operating profit
• margin
• Income tax rate

Cost of capital
KEY MANAGEMENT DECISIONS
Financing
Operating
Investment
Source Alfred Rappaport Creating Shareholder
Value, The Free Press 1998
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The Cost of Capital, WACC

• The Cost of Capital, WACC is a critical component
  in DCF/SVA valuation process
• Almost always among top five Key Value Drivers
• If you dont know the Cost of Capital, you dont
  know whether value is being created or reduced

WACC d Kd (1-t) (e Ke)
Where, d the percentage of debt in
target/optimal capital structure Kd the cost of
debt t marginal tax rate e the percentage of
equity in target/optimal capital structure Ke
the cost of equity rfree (ß) (rmkt
rfree), where rfree the risk free rate of
return rmkt expected rate of return on the
market beta, ß the systematic risk of equity
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Chapter 2

• Beltton-Group Plc valuation and analysis

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Background

• Argon Pro Ltd has estimated the value of
  Beltton-Group Plc based on various scenarios of
  the short-term and long-term future
• Valuation is prepared according to available
  (public) history information and according to
  forecast assumptions and scenarios developed by
  Argon Pro Ltd
• Valuation is based on Shareholder Value Analysis,
  SVA framework, delivering basic cash flow based
  company/business valuation, as well as important
  information about the value creation potential
  and Key Value Drivers of the company
• Technically valuation has been prepared using
  ValueAnalytix Merger Analyzer modelling and
  valuation tool and standard (International)
  modelling template
• Argon Pro Ltd, or Timo Nurminiemi does not own
  any shares of Beltton-Group Plc

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Information available

• History
• Beltton-Group Plcs Annual reports for 1999-2003
  and quarterly reports for 2004
• Beltton-Group Plcs Internet site
  (www.beltton.com)
• Other possible Internet sites
• Forecast and scenarios
• Assumptions generated and prepared by Argon Pro
  Ltd

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Business model and analysis

• Business modelling and analysis has been prepared
  on Group level
• The reporting structure used is based on the
  Income statement and Balance sheet structure of
  Beltton-Group Plc
• Sales was modelled based on Net sales per
  employee and more specifically Change in Net
  sales per employee
• Costs forecasted as a percent of Sales
• Balance sheet items forecasted as turns, days or
  percent of Sales
• Investments forecasted as a percent of Sales
• Two alternative scenarios developed based on Base
  scenario

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Scenarios

• Base scenario is aimed to be as realistic as
  possible i.e. most likely with conservative and
  reachable sales growth expectations and minor
  cost reduction operations
• In addition to Base scenario, two alternative
  scenarios were generated
• Optimistic scenario (best case), which is to
  show the upside potential of the company, but
  still using quite moderate assumptions for growth
  and cost reductions, and
• Pessimistic scenario (worst case), which is to
  show the outcome if things wouldnt go so well

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Main assumptions
1 Interim report 1-9/2004/30.9.2004
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Cost of Capital components and sensitivities
1 Government Bond S/2015/20.12.2004
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Optimal capital structure and WACC

• There are three recommended steps to go through,
  when estimating optimal capital structure
• Estimate the optimal capital structure based on
  the debt service ability of the forecasted cash
  flows. Using Pessimistic Case less 10 approach
  is widely recommended
• Compare estimated Gearing levels to Peer Group
• Analyse the managements goals related to debt
  level
• Steps 1. and 2. will give us the estimation of 70
  for optimal capital structure 1

1 Using Argon Pro Optimal capital structure
calculator and Pessimistic case less 10 cash
flows for 2004-2008
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Value drivers, Income statement and Balance sheet

• Value drivers
• See graphs, ValueAnalytix reports and sensitivity
  analysis
• Income Statement
• See graphs and full ValueAnalytix report in
  appendices (IS)
• Balance sheet
• See graphs and full ValueAnalytix report in
  appendices (BS)

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Value drivers
History/ Base Case
Optimistic Case
Pessimistic Case
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Net sales and costs
History/ Base Case
Optimistic Case
Pessimistic Case
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Operating profit and taxes
History/ Base Case
Optimistic Case
Pessimistic Case
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Free cash flow

• Free cash flow
• See graphs and full ValueAnalytix report in
  appendices (FCF)

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Working capital
History/ Base Case
Optimistic Case
Pessimistic Case
Acc. receivable
Acc. payable
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Fixed capital investments
History/ Base Case
Optimistic Case
Pessimistic Case
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Free cash flow, EP and Threshold margin
History/ Base Case
Optimistic Case
Pessimistic Case
1 Calculated using the same Cost of Capital,
WACC for all periods 2 Value neutral Operating
profit margin
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Sensitivity analysis 1

• The effect of /-1 change in a Value driver
• Base Case value 58,1 M (Shareholder Value)

1 See also sensitivity analysis report in
Appendices
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Shareholder Value Added

• Pre-strategy value based on history performance
  is 54 M
• Compared to pre-strategy value, after a 29 M
  drop in 2004, both Base and Optimistic scenario
  are increasing Shareholder Value. Pessimistic
  scenario varies between plus and minus ending
  below pre-strategy value

Pre-strategy value 1
Base Case
Optimistic Case
Pessimistic Case
1 Net pre-strategy value based on 3 year average
NOPAT/WACC
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Scenario analysis

• Shareholder Value using various scenarios

The value of Belttons current strategy (? -17 M)
9,20
11,60
4,50
5,65
1 20.12.2004 2 3 year history Average
NOPAT/WACC less Net debt 3 30.9.2004
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Historical performance vs. Market expectations

• In order to fulfill current (20.12.04) market
  value of 37 M, average increase in Net sales
  should be 3,8 i.e. less than in Base scenario.
  As the number of employees is expected to remain
  at the same level, the increase in Net sales per
  employee should be at the level of 1,8
• In order to fulfill current market value, average
  operating profit margin should be at the level of
  5,7 i.e. less than Base scenario, but still 54
  more than estimated margin for 2004

History/ Base Case
Market expectations
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Main remarks and conclusions

• Forecast for 2004 has been estimated using Q3/04
  report and Managements estimations about the
  whole years Sales and Operating profit level
• Sales is important driver in this business.
  Therefore the increase in Net sales per employee
  and increase in Number of employee have positive
  effect only as long as there is increase in Net
  sales per employee. In case the real increase in
  Net sales per employee would be 0 (in Base
  scenario), the value of Base scenario would drop
  by 20M, (-34) i.e. very close to current market
  value
• In Beltton case, personnel costs takes
  approximately 25 of all costs, so in that sense
  the value of Beltton Group is not very sensitive
  to salary costs or number of employees
• Steady positive free cash flows allows the
  optimal capital structure to reach the level of
  70 (current market value based gearing 8,8)

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Main remarks and conclusions

• Negative difference (? -17 M) between
  pre-strategy value and current market value
  indicates that stock market doesnt have very
  strong belief in the current strategy of Beltton
• However, increase in Shareholder value in
  relation to pre-strategy value indicates that (in
  Base and Optimistic scenarios) company is
  expected to invest in value creating
  opportunities and therefore its corporate rate of
  return will be greater than the Cost of Capital
• As an example of sensitivities, in order to reach
  100 M valuation level, both Sales and Operating
  profit margin should be increased from Base
  scenario assumptions by 65

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Chapter 3

• Key, terms and terminology

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Key
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Terms and terminology
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Chapter 4

• Appendices

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Appendices

• Key variables and Income Statement
• Balance Sheet
• Free Cash Flow
• Ratios
• SVA Valuation
• Sensitivity Analysis

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Chapter 5

• Legal disclaimer

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Legal disclaimer
The information and opinions presented in this
report are provided for information purposes only
and are not to be used or considered as an offer
or solicitation of an offer to buy or sell
securities or other financial instruments. The
valuation is based on the public information
available and assumptions made by Argon Pro Ltd.
However, we have not been able to check the
validity of the public information used in this
valuation and report. Information and opinions
presented in this report have been obtained or
derived from sources believed to be reliable, but
we make no representation as to their accuracy,
authority, usefulness, reliability, timeliness or
completeness. We accept no liability for loss
arising from the use of the information presented
in this report, and we make no warranty as to
results that may be obtained from the information
presented in this report. Past performance
should not be taken as an indication or guarantee
of future performance, and no representation or
warranty, express or implied, is made regarding
future performance. The valuation should be used
only as a guideline when determining the value of
the company. No valuation is an exact proxy of
the future value of a company. However, the
valuation and report is a result of several
assumptions made. All main assumptions are freely
available in this report and valuation model
prepared so that each individual can check
weather those are realistic, unrealistic or
achievable. Information and opinions contained
in this report reflect a judgement at its
original date of publication and are subject to
change without notice.  
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Contact details
Argon Pro Ltd Timo Nurminiemi Ankkurinvarsi 6
E 02320 Espoo Finland Phone [phone]
33 E-mail timo.nurminiemi_at_argonpro.net Internet
www.argonpro.net
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