Runner-up Presentation made at CIMA Corporate Business Leaders' Challenge 2017 on Evaluating Sale & Lease Back to generate funds for dividend and suggesting other options

1. ZX FURNITURE
PROPOSAL FOR FUNDING OF DIVIDEND
Group 9 - AUH Alpha
Fouad Abid/ Abdul Matin

2. AGENDA
■ Proposal
■ Transaction Structure
■ Pros & Cons
■ Other Considerations
■ Key Negotiation Points
■ Financial Treatment
■ IFRS 16 – Changes in Leasing
■ Impact on Financials
■ Impact on Financial Metrics/ Ratios
■ Proforma Financials
■ Financial Analysis
■ Possible Alternatives
■ Next Steps & Timeline
CIMA Business Leaders Challenge Middle East - November 2017 Group 9 2

3. PROPOSAL
Overview
■ Funding for Proposed Dividend distribution ~ K$ 5 million
■ Preferred Mode of Funding – No leverage on Balance Sheet
■ Proposed Financing – Sale & Leaseback of Factory (the Transaction)
■ Book Value - K$2 million (Plant fully depreciated – commissioned in 1992)
Indicative Offer
■ Offered Value – K$3.5 million
■ Lease Back Period – 15 years
Conclusion
■ The company generates enough cash to be in a position to payout approx. K$2.5m annually (slide 13)
■ The Transaction has +ve NPV of K$0.6m discounted at Cost of capital of 5.56% p.a (slide 13)
■ Given that the competition may force us to invest in state-of-the-art/ automated plant, the Transaction may provide a
leeway to unlock the value locked in factory and gradually transition towards upgradation
■ The Pros & Cons of the Transaction should be weighed in while taking the decision (slide 5)
■ Better terms can be negotiated for the Transaction (slide 7)
■ Alternative financing options may add more value at less onerous terms (slide 14)
CIMA Business Leaders Challenge Middle East - November 2017 Group 9 3

4. TRANSACTION STRUCTURE
CIMA Business Leaders Challenge Middle East - November 2017 Group 9
ZX Bank
Lessee Owner
Sells Factory
Leases Factory
Becomes Becomes
Pays dividend
Shareholder
Cash Flow
Alternative
Investments
Lease rentals
Bank may ask for
SBLC/ Guarantees
Sale Proceeds
@ higher return than ZX ROE
4

5. PROs & CONs
CIMA Business Leaders Challenge Middle East - November 2017 Group 9
PROs
 Cash generation by unlocking the value stuck in fixed assets while retaining possession & use
 Alternative to loan financing at better terms (no charge on asset/ guarantees, flexible term, less restrictive covenants)
 More funds raised compared to loan financing which is linked to loan-to-value ratio/ debt-coverage-ratio
 Lease rental is tax deductible, higher than depreciation as land is not depreciated, rental is based on higher value
 Deterrent to takeovers / shorter time for disbursement than debt drawdown due to CPs
 Mitigate exposure to risks of ownership (obsolescence, devaluation, asset retirement)
CONs
 Loss of fixed assets (minimize this with repurchase option)
 Possible relocation at end of term (extension at current market rent)
 Loss of flexibility associated with ownership( modifications/ upgrades)
 Restrictions on right to transfer/ disposal/ assignment of leasehold interest
 Difficult to obtain financing for leasehold property
 Locked into high rental payment even when market softens
 Buyer Bankruptcy will let the trustee cancel the lease, reject right to renew or impose more onerous terms
 Higher cost (implicit interest rate is higher as bank assumes risks by financing >100 percent of the FMV)
 Capital gain will increase tax liability in absence of carryover losses
 Tax may not follow the new lease accounting model, new temporary differences may originate for deferred tax
 In case of merger or entering capital markets in future, this will be considered a capital lease, hence long-term liability
 Buyer/ Lessor will ask for Bank Guarantees/ SBLC
 Higher cost in initial years as both interest on lease and depreciation expense will be booked
5

6. OTHER CONSIDERATIONS
■ Increased scrutiny – market tends to react adversely to SLB transactions. Suggests that company is unable to raise
finance other than through sale of its cash generating unit
■ Change in strategy – a new strategy in near future might require ownership of asset
■ Change in laws – new tax laws/ accounting rules may mitigate tax benefits perceived with SLB
■ Expansion – Lack of owned asset may affect expansion plans/ strategic partnership
■ Going concern issues may surface due to inability/ delay to resume operations following disruption/ insurance event
CIMA Business Leaders Challenge Middle East - November 2017 Group 9 6

7. KEY NEGOTIATION POINTS
CIMA Business Leaders Challenge Middle East - November 2017 Group 9
 Exit : Negotiate the rights to assign, re-let, transfer the leasehold interest
 Pricing: Implicit rate lower than commercial borrowing rate should be negotiated
 Structure rentals matching with head room in operating cash flows
 ZX should have option to buy back at end of term, extension option or early termination
 Cash at a higher future cost
 Tenor should be shortened
 Cap legal charges/ transactions fees/ duties & charges on sale
 Negotiate to include upgradation/ modification as plant is 25 year old
 Consider if LTSA/ SLA is part of arrangement.
 Maintenance/ overhauls/ insurance/ should be responsibility of buyer which will be tough to negotiate without increasing the lease
rentals
 Lease should be structured to have separate lease & non lease components (e.g., services) with a higher proportion of variable
payments compared to fixed payments or shorter initial rental terms to achieve smaller lease liabilities
 Bank should be requested to separately price non-lease components to support the allocation of consideration between the lease and
non-lease components to minimize the financial statement impact of IFRS 16
 Protection through market disruption/ variation clauses should be negotiated
 No breakage cost/ no step-in right provisions
 Change in Law/ EoD protection, pass through/ sharing of benefits materialized by buyer
 Bank may ask for bank guarantee/ SBLC to backstop rentals
 Evaluate the lease proposals using different scenarios with variables of term, rate (lower than WACC), IRR, CPI
7

8. FINANCIAL TREATMENT
■ Accounting treatment of the Transaction depends on classification under current IAS 17 and the new IFRS 16 (effective Jan 2019)
■ A ‘right-of-use’ model replaces the ‘risks and rewards’ model
CIMA Business Leaders Challenge Middle East - November 2017 Group 9
IAS 17
Finance Lease
Risks & Rewards
acquired
Operating
Lease
Risk & Rewards
relinquished
IFRS 16
Sale
under IFRS15
Control* relinquished
No Sale
under IFRS15
Control* retained
- Derecognize asset
- Record Right-of-Use Asset &
Liability
- Both depreciation & interest
expense
- Gain
If sale=FMV, proportionate to
rights transferred (PV/FMV)
If sale> FMV, additional liability
If sale<FMV, prepaid rent
- Asset unchanged
- Transaction is
considered Financing
- Liability under IFRS 9
- Both depreciation &
Interest expense
- No gain
Control - ability to direct the use of identified asset
and obtain all the remaining benefits from the asset.
Lease term covers major part of asset life
PV of payments = fair value of asset
- Derecognize asset
- Record Leasehold Asset &
Liability
- Both depreciation & interest
expense
- Gain deferred & amortized
over lease term
- Derecognize Asset
- Lease rental expense
- Full gain
ZX retains ownership risks & rewards as well as control due to lease term,
control, right to all benefits, specialized asset type. Accordingly:
- Till YE 2018, Finance lease under IAS 17 (Leasehold asset/ liability, gain
deferred)
- 2019 onward, Financing under IFRS 16 (liability, no gain)
8

9. IFRS 16 - CHANGES IN LEASING
CIMA Business Leaders Challenge Middle East - November 2017 Group 9 9

10. IMPACT ON FINANCIALS
IAS 17 IFRS 16
BALANCE SHEET
Fixed Assets – no change (Asset out/Lease Asset in) Fixed Assets – no change (Asset out/ROU Asset in)
Lease liability recorded Financing liability (IFRS 9) recorded
INCOME STATEMENT
Gain deferred & amortized over term No Gain
lease rentals expense Interest expenses on financing
CASH FLOWS
Inception: No impact (sale proceeds offset by dividend) Inception: No impact (sale proceeds offset by dividend)
Lease rental outflows Lease rental (loan repayment) outflows
CIMA Business Leaders Challenge Middle East - November 2017 Group 9 10

11. IMPACT ON FINANCIAL METRICS
CIMA Business Leaders Challenge Middle East - November 2017 Group 9
IAS 17 IFRS 16
Transaction Classification Finance Lease No Sale
Balance Sheet Asset No change No change
Liability Increase Increase
Income Statement Operating costs Increase No change
Financing costs Increase Increase
Cash Flow Operating activities Increase No change
Financing activities No change Increase
Ratios/ Metrics Leverage (gearing)  
Current Ratio  
Asset Turnover  
Interest cover  
EBIT/EBITDA  
NPAT  
EPS  
ROCE  
ROE  
Operating Cashflow  
Net Cashflow  
11

12. PROFORMA FINANCIALS
CIMA Business Leaders Challenge Middle East - November 2017 Group 9
Income Statement for the period ended October 31, 2017 Balance Sheet as at October 31, 2017 Cash Flow Statement for the period ended October 31, 2017
K$ '000 K$ '000 K$ '000
2017 2016 2017 2016 2017
Non Current Assets Cash flow from Operating Activities
Revenue 86,117 93,821 Property, Plant & Equipment 11,909 11,909 Operating income 5,717
Cost of Sales (60,432) (64,736) Current Assets Add: Depreciation -
Gross Profit 25,685 29,085 Inventories 7,546 5,445 (Increase)/Decrease R/A 185
Trade Receivables 10,667 10,852 (Increase)/Decrease Inv (2,101)
Selling & Distribution expenses (14,518) (15,701) Cash & cash equivalents 7,998 2,261 Increase/(Decrease) in P/A 1,936
Administrative expenses (3,000) (3,167) 26,211 18,558 Cash generated from operations 5,737
Total Assets 38,120 30,467
Operating Profit 8,167 10,217 Cash Flow from Investing Activities
Other income/ (expenses) - - Equity Capital expenditure -
Share Capital 5,050 5,050
Profit before taxation 8,167 10,217 Retained Earnings 23,317 17,600 Cash Flow from Financing Activities
28,367 22,650 Dividends -
Taxation (2,450) (3,743) Non Current Liabilities
Deferred Tax 100 100 Net Change in Cash Flow 5,737
Net profit after taxation 5,717 6,474 Current Liabilities Cash at beginning of the period 2,261
Trade Payables 6,354 6,868 Cash at end of the period 7,998
Tax 3,299 849
9,653 7,717
Total Equity & Liabilities 38,120 30,467
12

13. FINANCIAL ANALYSIS
CIMA Business Leaders Challenge Middle East - November 2017 Group 9
K$ '000
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033
Net Profit before tax 6,929 6,648 6,718 6,789 6,860 6,932 7,005 7,079 7,153 7,228 7,304 7,380 7,458 7,536 7,615 7,694
Taxation (30%) (2,529) (1,994) (2,015) (2,037) (2,058) (2,080) (2,102) (2,124) (2,146) (2,168) (2,191) (2,214) (2,237) (2,261) (2,284) (2,308)
Net Profit after tax 4,400 4,654 4,703 4,752 4,802 4,853 4,904 4,955 5,007 5,060 5,113 5,166 5,220 5,275 5,330 5,386
Cash from operations 4,050 4,650 4,695 4,741 4,788 4,835 4,882 4,930 4,978 5,027 5,076 5,126 5,176 5,226 5,278 5,329
Cash from investing activities 3,000 (1,850) (850) (850) (850) (1,850) (850) (850) (850) (1,850) (850) (850) (850) (1,850) (850) (850)
Sale & Leaseback 3,500 (350) (350) (350) (350) (350) (350) (350) (350) (350) (350) (350) (350) (350) (350) (350)
Maintenance CAPEX (500) (500) (500) (500) (500) (500) (500) (500) (500) (500) (500) (500) (500) (500) (500) (500)
Growth CAPEX (1,000) (1,000) (1,000) (1,000)
Cash used in financing activities
Dividend payout (3,500) (2,327) (2,351) (2,376) (2,401) (2,426) (2,452) (2,478) (2,504) (2,530) (2,556) (2,583) (2,610) (2,638) (2,665) (2,693)
Net Cash generated/ (used) 3,550 473 1,494 1,515 1,537 558 1,580 1,602 1,624 647 1,669 1,692 1,716 739 1,763 1,786
Sale & Leaseback 3,500 (350) (350) (350) (350) (350) (350) (350) (350) (350) (350) (350) (350) (350) (350) (350)
Tax @ 30% (450) 105 105 105 105 105 105 105 105 105 105 105 105 105 105 105
Net Cashflows from Transaction 3,050 (245) (245) (245) (245) (245) (245) (245) (245) (245) (245) (245) (245) (245) (245) (245)
Discounted (@ 5.56%) 3,050 (232) (220) (208) (197) (187) (177) (168) (159) (151) (143) (135) (128) (121) (115) (109)
NPV 600
Assumptions:
Net profit before taxation (after rentals) will continue to fluctuate amid tough competition, however, a modest 1% YoY increase has been assumed
Cash from operations amounts to K$5.7m during 2017. For projected cash forecast, a conservative estimate of K$4.5million (with 1% YoY growth) p.a. has been assumed
Dividend payout of 50% of NPAT has been assumed
Maintenance Capex of K$500k p.a and Growth Capex of K$1m every 5years has been assumed
13

14. POSSIBLE ALTERNATIVES
CIMA Business Leaders Challenge Middle East - November 2017 Group 9
SPV
 Setup an offshore SPV (Cayman/ Channel Islands) 100% owned by the MD or in partnership
 Sell the Factory to SPV at book value of K$2m (avoid capital gain tax)
 SPV to sell factory for K$3.5m & leaseback Factory to bank/leasing (no capital gain tax)
 SPV to enter into short term service agreement (<12 month to avoid lease classification) with ZX
 ZX will add value through tax savings through fully deductible manufacturing service payments to SPV
 The MD will get full K$5.5m dividend (2m from ZX + 3.5m from SPV) without any tax exposure
 ZX will have to formulate a dividend policy to drive the annual pay-out vs capitalization/ reinvestment
Franchises
 Franchising (for enhanced outreach & funds). The new franchises will generate cash in terms of fees and will give ZX
presence in Kordia’s Capital & other cities
Other Sources
 While the choice of funding is driven by the amount of control desired, transaction economics, etc., the following
alternatives may also be explored:
Internal sources
Tighter credit control/ Inventories rationalization/ obtain longer supplier credit
External sources
Working capital financing (charge on current assets)
Factoring (liquidate trade receivables of K$10 million)
Invoice discounting (at a rate lower than bank rates)
14

15. NEXT STEPS/ WAY FORWARD
■ Subject to the Board decision, following are the suggested next steps with indicative timeline
CIMA Business Leaders Challenge Middle East - November 2017 Group 9
Action Responsibility Target Date
1. Go ahead by Board on the Transaction/ to explore alternatives BOD Nov 4, 2017
2. Solicit at least 3 offer letter from banks/ leasing companies FC Nov 16, 2017
3. Negotiation & finalization of discussion culminating in signed Term Sheets FC Nov 30, 2017
4. Submission of Funding Strategy Paper to the Board CFO Dec 4, 2017
5. Final approval from the Board on funding & dividend distribution BOD Dec 4, 2017
6. Execution of transaction documents & fulfillment of Conditions Precedent FC Dec 14, 2017
7. Disbursement of Sale Proceeds from Bank/ Distribution of dividend FC Dec 14, 2017
Negotiate
& Finalize
Execution &
Disbursement
Strategy paper
for final approval
Obtain offersPreliminary
go-ahead
15

16. THANK YOU