3. Disclaimers
Management is assumed to be competent
Forecasts and expectations are assumed to be accurate
Projects and Forecasts on non-management given data
All projected figures denoted with *
4 – Period Moving Average – Lowest MSE
All Valuation Spreadsheet numbers in Thousands
besides Final Enterprise Value Given
3
4. Background
Bear family beginnings
Purchase of sand & gravel and ready-mix concrete company in
Washington
Expansion through Pacific Northwest
Various paving businesses
Dump truck business
Consolidated holdings into
DEF Road Construction Corp.
4
15. Industry Overview
SIC (Standard Industrial Classification): 1611
NAICS (North American Industry Classification System): 237310
The US highway and street construction industry includes 17,900 firms
Combined annual revenue of $69.56 Billion
The biggest challenges include
Volatile raw materials costs
Pressure on government agencies
Source: BLS.gov, Census.gov15
16. American Society of Civil Engineers rates road infrastructure:
D (POOR: AT RISK)
42% of America’s major urban highways remain congested
Costs the economy an estimated $101 Billion annually
Level of investment is insufficient investment & still projected to result
in a decline in conditions and performance in the long term
Industry Overview
Source: BLS.gov16
17. Projected slow growth in the five years to 2018
local and state governments continue to struggle with their
budgets
federal spending remains uncertain
Major U.S. companies in this industry are AECOM, Bechtel, Kiewit, and
Granite Construction
In 2013, the trust fund disbursed $50 Billion to states according to
Congressional Budget Office (CBO)
$43 Billion for roads
$7 billion for mass transit
Industry Overview
Sources: BLS.gov & CBO.gov17
18. The Highway Trust Fund
Established by the Highway Revenue Act of 1956
Used to finance an accelerated highway program
Relies on a fuel tax of 18.4 cents per gallon (set in 1993)
In the past 10 years, outlays have exceeded revenues
Source: CBO.gov18
21. Significant Bill: MAP-21
MAP-21 (Moving Ahead for Progress in the 21st Century Act)
P.L. 112-141 signed into law in July 2012
Provides funding for surface transportation programs at over
$105 billion for fiscal years (FY) 2013 and 2014
Public Private Partnerships as an important component
Source: CBO.gov21
22. The National Highway Construction Cost Index
(NHCCI)
Source: Federal Highway Administration
1.28
1.04 1.05
1.09
1.11
1.08
1.11
1.08 1.09 1.09
1.0
1.1
1.1
1.2
1.2
1.3
1.3
2009
2010
2011
2012
2013
2014*
2015*
2016*
2017*
2018*
22
24. Washington State
Washington roadways in poor condition cost residents
approximately $6.5 billion
Average Seattle driver loses $1,845/year as a result
21% of Washington’s roads, highways in poor condition
At least $175 Billion to $200 Billion in funding is required to meet
statewide needs over the next 20 years
Source: TRIP Research24
25. 2013 to 2018 share of state maintained roads in poor
condition more than triple from 8% to 26%
Share of state-maintained roads and highways in good
condition will decrease from 70% to 45%
Source: TRIP Research
Washington State
25
26. Hot Mix Asphalt Prices - Washington
Source: Washington Department of Transportation
$67.4
$63.4
$66.2
$80.2
$71.3
$69.7
$70.2
$71.5
$72.6
$71.0
$60.0
$65.0
$70.0
$75.0
$80.0
$85.0
2009
2010
2011
2012
2013
2014*
2015*
2016*
2017*
2018*
26
27. WSDOT Highway Construction Cost Index
Hot Mix Asphalt Prices – Washington State
Source: Washington Department of Transportation
223
232
245
258
243 240 244 246 246 244
$67.4
$63.4
$66.2
$80.2
$71.3
$69.7
$70.2
$71.5
$72.6
$71.1
$-
$20.0
$40.0
$60.0
$80.0
$100.0
200
210
220
230
240
250
260
270
2009
2010
2011
2012
2013
2014*
2015*
2016*
2017*
2018*
27
30. Industry Summary
Major source of funding: Highway Trust Fund - running out of capital
MAP-21 – Recovering Funding
Demand for new road and highway infrastructure is growing significantly
Washington State offers positive environment for Road and Highway
Construction Industry
30
42. Solvency
DEF Industry
Debt to Worth 0.55 1.2
Long-Term Debt to Total
Capital
12.3% 27.3%
Interest Coverage 47.9 5.3
Cash Flow to Current Debt 1.3 2.2
Source: DEF Road Construction Corp. Exhibit 642
43. Summary
Strong financial growth
High ability to cover obligations
Increase in operating profit and pretax profit
illustrates effective management and cost
control
Opportunity to better utilize their assets
43
46. Discounted Cash Flows (Components)
Cost of Equity Calculation – Ke
Weight Average Cost of Capital – WACC
Capitalization Rate – C
Calculation of Total Enterprise Value
Enterprise Value After Discounting
46
47. Discounted Cash Flows
Cost of Equity – Ke
Ke = Rf + (Bl x Re) + Rs + Rc
Ke = 3.54% + (1.21 x 5.00%) + 6.60% + 0.00%
Ke = 16.20%
47
48. Discounted Cash Flows
Ke – Analysis
Rf – US Treasury Bill 20Y as of 11/30/2013 – 3.54%
Bl* – Calculated by unlevering the beta of SIC 16 and re-
levering using our companies financial data
= 0.99 x (1 + ((1-34.80%) x (34.38)) = 1.21
Re – Duff & Phelps Equity Risk Premium – 5.00%
Rs – Duff & Phelps Small Company Risk Premium – 6.60%
Rc – No company specific risk premium – 0.00%
*= Bloomberg Terminal Equity Screen48
50. Discounted Cash Flows
Weighted Average Cost of Capital – WACC
WACC = (D/V x Kd x (1-T)) + (E/V x Ke)
WACC = (25.59% x 1.80% x (1-34.80%)) + (74.41% x 16.20%)
WACC = 12.36%
50
51. Discounted Cash Flows
WACC – Analysis
D/V* – SIC 16 5-Year average – 25.59%
Kd – DEF actual cost of debt, 2-Year average – 1.80%
T – DEF Tax Rate from financials – 34.80%
E/V* – SIC 16 5-Year average – 74.41%
Ke – Previously calculated – 16.20%
51 *= Bloomberg Terminal Equity Screen
52. Discounted Cash Flows
Capitalization Rate
C = WACC – G
C = 12.36% - 3.00%
C = 9.36%
G – Managements expectations of sales growth into
perpetuity
52
53. Discounted Cash Flows
DEF ROAD CONSTRUCTION CORP.
Income approach - Discounted Cash Flows Analysis - ($000)
Projected Projected Projected Projected Projected
Forecast Year Ending Nov. 30 2014 2015 2016 2017 2018 Residual
Free Cash Flow (Debt Free) $ 11,395 $ 4,820 $ 5,246 $ 5,869 $6,261 $ 6,976
Residual Capitalization Rate 9.36%
Future Value of Free Cash Flows $11,395 $4,820 $5,246 $5,869 $6,261 $74,530
Number of Periods Deferred 0 1 2 3 4 4
Present Value Factor 1.00 0.89 0.79 0.71 0.63 0.63
Present Value of Free Cash
Flows $11,395 $4,290 $4,156 $4,138 $3,929 $46,769
54. Discounted Cash Flows
Discounted Cash Flow Summary
Present Value of FY 2013-2018 Free Cash Flows $27,907
Present Value of Residual $46,769
Indicated Total Enterprise Value $74,676
Less: Distributions Payable $(6,942)
Less: Environmental Liability $(2,000)
Less: Interest Bearing Debt $(9,475)
Add: Non-Operating Assets (Majority Interest) $12,286
Add: Cash $25,475
Indicated Total Equity Value $94,020
Minority Discount @ 20% 0.8
Indicated Total Equity Value (Minority Interest) $68,518
Non-Marketability Discount @ 25% 0.75
Concluded Value - Income Approach Method $56,412
55. Discount Explanation
Minority Discount
Benchmark – 27.4%
DEF – Smaller than benchmark size, financial
buyer assumed
Discount For Lack of Marketability –
FMV Calculator and Studies flawed*
LiquiStat Study (2001)* - Range 25%-35%
Subject company smaller – Conservative 25% used
Discounted Cash Flows
55 * IRS DLOM Job Aid, pg. 87
56. Market Approach – Comparable Companies
Comparable Companies Selected:
Entire Bloomberg SIC 16 data used
US Companies only, removed outliers in every data set to
make comparisons more valid
While business specifics may differ, these companies are
subject to the same economic cycles, political influences,
and other factors which may affect future business
56
58. LTM
Representative
Level
Selected Multiple Range
Indicated Enterprise
Value Range
Revenues $167,844 0.49 to 1.83 $82,244 to $307,155
EBITDA $14,589 6.03 to 9.15 $87,972 to $133,489
EBIT $8,534 10.2 to 16.61 $87,047 to $141,750
NFY
Revenues $167,500 0.52 to 2.45 $87,100 to $410,375
EBITDA $13,079 6.96 to 9.73 $91,030 to $127,259
EBIT $6,904 8.89 to 16.43 $61,377 to $113,433
Comparable Companies
59. Selected Enterprise Value Range , $91,030
Less: Total Interest Bearing Debt $(9,475)
Less: Environmental Liability $(2,000)
Less: Distributions Payable $(6,942)
Add: Non Operating Assets $12,286
Add: Cash $25,475
Indicated Equity Value $100,167
Minority Discount @20% 0.8
Indicated Total Equity Value (Minority Interest) $88,299
Discount for Lack of Marketability @25% 0.75
Concluded Value – Market Approach $66,224
Comparable Companies
60. Market Approach – Mergers and Acquisitions
Multiples Used
Revenues
EBITDA
60% weight given to 2013 transactions
40% weight given to 2009 transactions
60
61. Mergers & Acquisitions
($000)
Representative
Level
Selected Multiple
Range
Indicated Enterprise
Value Range
LTM
Revenues $167,844 0.35 to 1.30 $58,745 to $218,197
EBITDA $14,589 2.00 to 7.90 $29,178 to $115,253
Selected Enterprise Value Range $29,178 to $115,253
Weight 40% 60%
Selected Enterprise Value $80,823
62. Mergers and Acquisitions
Selected Enterprise Value Range $80,823
Less: Total Interest Bearing Debt $(9,475)
Less: Environmental Liability $(2,000)
Less: Distributions Payable $(6,942)
Add: Non Operating Assets $12,286
Add: Cash $25,475
Indicated Equity Value $100,167
Minority Discount @20% 0.8
Indicated Total Equity Value (Minority Interest) $80,134
Discount for Lack of Marketability @25% 0.75
Concluded Value—M&A Approach $60,100
63. Conclusion of Value
Income Approach Value Weight
Discounted Cash Flow $56,412,000 80%
Market Approach
Mergers and Acquisitions $60,100,000 10%
Comparable Companies $66,224,000 10%
Concluded Value of DEF $57,762,000
Number of Shares 60,000 Shares
Price Per Individual Share $962.70
64. Conclusion of Value
We find the total value per share of DEF Road
Construction Company to be $962.70 with an
Enterprise Value at $57,762,000.00
In our valuation, we have our weight distribution based
on the pertinence of our own companies projections
and less emphasis on the market data
64
We are using the 20 year t-bill rate to estimate the cost of borrowing for DEF construction.
This number is in line with the actual cost of borrowing.
As you can see, the Interest rates have dropped from 2009 to 2012. We project that the rates will vary slightly, from 2014 to 2018, with rates between 3.48 and 3.27%
Double check numbers…projections 2014- consistency with * or color
Producer price index is important bc it is indicator of the total amount that needs to be spent on raw materials and capital goods
Quick summary to how this is relevant to company
Explain why the SIC and NAICS numbers are relevant. Using this to make an apples to apples comparison. By comparing companies within the road and bridge construction industry we can get an accurate measure of how our company is doing within this industry. We did not pick general construction or other type onf construction bc DEF does not compete in those areas. This is the only true measure of the comparison
Level of investment needs to be fixed. Joe will fix it
wording
Addressed by transferring $54 billion from the general fund of the Treasury to Highway Trust Fund (CBO).
Change colors. Take out courtesy in data reference
Move gross up, put net below
The NHCCI dropped in 2010 as a result of the great recession. Instead of bidding up the price of road construction, firms were bidding them down.
By 2013, the prices had stabalized. We expect the prices to be stable into 2018, given current economic conditions.
If the Hot Mix Asphalt price goes up, the RCCI goes up. The correlation is actually .9810. So we see a strong positive correlation. We project that the Hot Mix prices will continue to increase, thus increasing the RCCI.
First the red line comes up, then the blue line appears: strong correlation.
Start at 2009.
Red line animate/transition from left to right.
Government Highway Spending
2008 - 2018
Star on 2014
Same colors. Give revenues for our company from 2009-2013. upward comparision
Talk about MAP 21 Act has increased gov spending.
Talk about wash state DOT
Animated the growth line $000
PUT REFERENCE AS TO HOW PROJECTIONS WERE GIVEN
Projections came from mgmt. mgmt is assumed to be accurate and competent
Use adjusted numbers: check
Animate growth line : check
Research WHY operating income growth spike (JACKI NOTES: COGS decreased)
Animate
Their focus to product sales is important because it reflects an increase in their total revenue despite the decrease in government funding.
Change colors.need to compare to industry …change colors on pre tax to bring emphasis
Adjusted ratio analysis tab on excel has the industry averages for the current year
Look for reason for discrepancy…add in industry
Reason the margins were decreasing from 2009 to 2012 was because they were taking out capital expenditures.
Spending money in 2012 allowed them to take depreciations in 2013, explaining the spike.
2009-2011 we see decline
2012 we see an increase from 1.1 to 3.2 , almost trippled our net profit margin
Mgmt forecast gross profit year over year of 13.7% for the next 5 years
Explain relationship between quick ratio and cash, why its important..
Compare to industry average
NEEDS TO PROJECT TO 2018
