Silvia Baiocco Andrea Granelli Alessandro Grassano Gian Marco Lago Giulio LaudaniBailout Consulting
1. Analysis of the company: I. Group of reference II. History III. Strategic Business Units2. Analysis of the industry: I. Porter’s five forces model II. SWOT analysis3. ROIC expectations: I. Assumptions II. Results
Brevini India and Brevini Finland Brevini South AfricaBrothers Renato, Luciano, and Type Approval CertificateCorrado Brevini establish FRATELLIBREVINI in Reggio Emilia. Brevini Power Transmission Brevini UK, Brevini Svenska, division Brevini Espana, and Brevini Canada 1960 1970 1980 1990 2000 2009 New production plant in Brevini China, Korea, South- China east Asia (Singapore), BreviniBrevini France, Australia, and New Zealand.Brevini USA Brevini Latino Americana in Acquisition of the GermanBrevini in Germany Brazil. company “P.I.V. Antrieb Werner Reimers”
SBU MAIN CUSTOMER DISTRIBUTION GEOGRAPHIC PRODUCT LINES/ SERVICES TYPE CHANNEL AREAS Planetary gear units forBrevini Riduttori Energy Direct-distribution Worldwide industrial applications and mobile machines Parallel and right-angle shaft Material Handling PIV Drives Direct-distribution Worldwide gear units and speed Transport variators Hoisting andBrevini Winches Construction Direct-distribution Worldwide recovery systems New compact gear units for Waste Water / Piv Posiplan Direct-distribution Worldwide shaft-mounted Recycling industrial applications
Revenue by family in 2009 Agricolture Brevini Power Transmission 7% 5% Industrial Equipment 8% operates in the Industrial Material Transport 19% 9% Construction Machinery sector (NACE 2811) Marine/Port Infrastruture Mining 11% 15% Energy Plastic/rubber 12% 14% Recycling Sourced by Brevini Power Transmission website
Geographic distribution in 2009 12% 23% Italia18% UE (ex-Italy) Asia-Pacifico America 47% Sourced by Brevini Power Transmission website
Buyer Power: Moderate Supplier Power: Moderate•Brand reputation is of negligible value in this market •Suppliers operate in the Commodity sector, so they have•Buyer power is weakened by the substantial number very low power due to low differentiation of products of buyers in this market, but a big part of the revenues •Raw materials purchasing carries prices volatility and Competitive aggressiveness: Moderate comes from a small number of big commissions exchange rate risk•There is the possibility to easily switch due to the high •In the last 20 years there has been an increasing level of goods standardization, except for the engine sub-sector prices due to the continuous global economic •The market is mature and it shows a global slow growth rate growth, sustained by high demand from China and other emerging economies (1,6%), but there are differences between the different geographic area and sub-sector. Competitive aggressiveness: •The concentration in the market is low, the top 5 player account for the 12% of the overall marketThreat of new entry: Low •There is an high cost to convert theThreats of substitution: Moderate the production, this increase•High level of fixed costs and capital to stay in the market as long as exist but used-products sold competitors attitude investment •Substitutes as such do not possible•Economies of scale privately may be considered as an alternative. This would•Government regulations and high level of intellectual be cheaper than buying brand new products; however, the property machinery is unlikely to be under any kind of warranty if sold privately which may pose a high risk to buyers as the•Recent poor growth in the market machines are expected to work in difficult heavy-duty environments
Revenue by geographic area Market segmentation 2% 16% 36% 28% 38% 23% 25% Engine, Turbine and Related 32% Wood and Plastic ProcessAmericas Asia-Pacific MetalworkingEurope Rest of the world Other Purpose Sourced by DataMonitor
Strengths: Weaknesses:•Capability to exploit economies of scale •The firm is auto-financing,: exploiting its operating•A flexible structure cash flows•The main good is highly appreciated by the market •It is a family-owned business are they good because of lower prices with respect to traditional manger on the long run? technologies possibility of configuration according to the costumer’s needs and high versatility•Innovating technologies and strong investment in R&SOpportunities: Threats:•The recent investment in USA and China could allow •The recent crisis could lead to a new phase of the company to capture the higher expected growth aggregation between companies of those markets•The EU environmentally friendly legislation can boost Brevini’s growth
After analysing the market and our company, we identified 4 competitors which operate in the same market and whose businesses are tightly connected to Brevini’s Using the historical data available for our competitors, we built a statistical periodic fit with the least squares method and, hence, we were able to determine the future ROICs for those companies
◦ We applied the ROIC trend deduced from our competitors to Brevini, keeping in mind that: • We have expected a constant growth rate for the IC, which is explained by Brevini’s will to bust its production and geographical expansion The parameters of this function respond to the qualitative sentiments that have been presented in our SWOT analysis We have assumed an higher “pro-cyclical” movement than most of the other competitors and a more flexible capital structure, which has allowed Brevini to reduce the negative effect of the revenue contraction this has lead to an upward asymmetrical behavior
1. Enterprise DCF I) WACC estimate a) Capital structure : target structure, D (book value), E (iteration method) b) Ke Capital Asset Pricing Model c) Kd Spread approach II) Free Cash Flow estimate a) Time frames : scenarios b) Main assumptions III) Results IV) Sensitivity analyses2. Economic profit
◦ The key element of DCF and how we have estimated them: Ke: we have used a Market model, based on the CAPMWACC Kd: we have used the Debt ratio to find the appropriate rating and the cost of debt. We have analyzed the historical path of the main financial items to find out the relationship between them and any existing trend.FCF We have estimated the revenues growth rate through a three period model that describes our qualitative judgment on the company.
Capital structure : ◦ Our target has been the characteristic median Debt-to-Equity ratio in the industrial machinery market, which is about 14% (source: McKinsey) ◦ This goal is too far from the present structure, so we have developed a correction in the DCF model, to better fit our hypothesis with those of the model ◦ The company is not financially distressed, therefore the book value of the net debt can be a good proxy of its market value ◦ The market equity value has been calculated through an iteration ◦ Our solution has been to develop a changing structure from 2010 to 2014, which has lead to a variable WACC, due to changes in Ke, Kd and weights
o Ke has been calculated using the formula: Risk free + Beta*Mkt premiumo The risk free chosen is an equally weighted blend between the most recent German and Italian 10y zero coupon bonds rate, because the company is mainly exposed in those two countrieso The market risk premium has been taken from the paper by Fernandez. It is an average between the German and Italian ones for the same reason as beforeo The marginal tax rate chosen is 30%
We have chosen our comparables ◦ The criteria used have been: similar Business and MRO LN Man se Kawasaki Okuma Mitsubishi Geographic Area We have built a table to find out the sector unlevered beta (Hamada formula) ◦ The weights used have beenUNLEVERED WEIGTH COMPARABLES BETA LEVERED NET DEBT EQUITY (MKT CAP) (tot.Mkt cap/MktNORMAL BETA WEIGHT i)Man SE and then normalized. These weights allow us to 1,557 € 2.634,00 € 5.538,87 1,17 322% 4,01% give more importance to the smallest companiesOkuma 1,434 - € 32,17 € 617,95 1,49 in our portfolio 2889% 35,98%Mitsubishi 0,958 € 9.657,82 € 8.302,72 0,53 215% 2,68% ◦ The Betas for the comparables have beenKawasaki 0,729 € 3.117,09 € 2.949,44 0,42 calculated using the 2004-2009 interval, monthly 605% 7,54% frequency, and the MSCI World IndexMRO LN 1,598 € 362,49 € 446,49 1,02 3999% 49,79%Weighted Average 1,14 8031% 100,00%
We have re-levered the beta of the sector: ◦ We have estimated a debt/equity structure trend converging to a target structure in 2025 ◦ The target structure has been decided using the average of the steadiest comparables ◦ Assuming a slow approach to the target value, we have developed a variation to the DCF model. Mainly, we re- levered the beta using different target D/E between 2010 and 2014
Kd: we have estimated a change in the rating of our company, following our expectations: ◦ We have assumed a variable interest expense linked to the German and Italian 5y bonds + the premium corresponding to its rating (Spread Approach, though Interest Coverage Ratio calculation) ◦ We have taken into account the possible future monetary policy, which is going to cause the increase of the risk free rate, but at the same time our rating will improve and, so, the spread reduce. In conclusion, we hypnotised a stable level of Kd of 5.5%, considering the result of the two opposite effects
2010(E) 2011 (E) 2012 (E) 2013 (E) 2014 (E) 2015(E) 10,58% 10,58% 10,60% 10,59% 10,61% 10,50% Betas Mkt p. 1,15 1,35 1,55 5,25% 9,12% 9,12% 9,95% 5,85% 9,67% 9,67% 10,58% 6,45% 10,21% 10,21% 11,22%The chart above is a sensitivity analysis on the WACC. The rowrepresents a standard deviation range from the beta value used, thecolumn is a range of possible market premiums.
1. We have divided our model into three time periods: ◦ 2010-2014 We have built an IS & BS by estimating each item ◦ 2015-2024 By estimating Key drivers ◦ 2025-infinity We have computed a terminal steady growth rate using macroeconomical inputs2. We have chosen different tools to implement our proxies for each period, the ratio for each of them is: ◦ In the first period, we have less uncertainty, so we have felt confident enough to develop three scenarios with a considerably low standard deviation ◦ In the second period, due to higher uncertainty, we have developed three scenarios with a higher volatility ◦ In the last period, we have relied on the general accepted belief that the firm will reach a certain stability and will follow the global growth rate
We have set up three different scenarios: ◦ The Normal case will assume that the firm will follow its forecast growth path, which has been estimated through a periodic function based on historical data ◦ The Best scenario is going to assume that the firm’s revenues will have the same growth rate as the market when the economy faces a downturn, while it will keep its forecast growth in positive economic conditions. ◦ The Worst scenario will assume that the firm will keep behaving as forecast in negative conditions and will not be able to outperform the market growth in positive circumstances and, therefore, as a proxy, we have chosen the market growth rate itself as the path that it will follow.
The Revenue has been forecast by means of a statistical periodic fit: we have found the periodic function that approximates the data we had with the least squares method The properties of the function we obtained confirmed the qualitative analysis of the revenue’s growth: ◦ The minimum of the function is in 2011, it grows to reach the pre crisis level until 2013 and it reaches the maximum in 2014 2010 (E) 2011(E) 2012 (E) 2013 (E) 2014 (E) Revenue 202.280 185.532 239.336 315.325 361.362% (t+1-t)/t -8,19% -8,28% 29% 31,75% 14,6%
600000400000 Normal200000 Worst Best 0 2008 2009 2010 2011 2012 2013 2014 The expected CAGR of the three scenarios is 0,042% with a variance of 20% CAGR Probabilities Best case 6% 2/7 Worst case -11% 1/7 Normal case 1% 4/7
During this period, Brevini will experience a “transition” phase which will lead to a steady growth level We have set up three different scenarios: ◦ The Best scenario is going to assume an higher growth rate in comparison to the market the company will be able to increase both its production and geographical coverage ◦ The Normal case will assume a continuous growth path at a rate lower than previously, but still higher than the market average ◦ The Worst one will assume the failure of the company to achieve a satisfying competitive advantage it will reach a steady state level at the beginning of the period Our work has been lead both by qualitative and quantitative analysis: ◦ The qualitative argument is based on the capability to retain extra- earning thanks to competitive advantage ◦ The quantitative analysis is based on the shift of the geographical exposure and global growth expectation
We have taken the expected value of the compound annual growth rate of our three scenarios About 7,7% with a variance of 80,91% It means that the company will double its size in 10 years CAGR Probabilities Scenario 1 (best) 15% 14% Scenario 2 (normal) 7% 57% Scenario 3 (worst) 4,5% 29%
“Brevini Group’s industrial plans include substantial investments [...] because our growth depends on our presence around the globe […]. We are looking beyond the crisis and focusing on the recovery that will arrive,” said Renato Brevini, President of Brevini Power Transmission From this we have deduced that the company will increase its production and its investments starting from 2012
We have assumed an “exotic” function for the COGS, whose parameters have been set to capture a loss of efficiency due to a revenue contraction in 2010-11 (less scale efficiency) and then a normalization in the remaining years We have linked SGA growth to the COGS for 2/3 and to an intrinsic growth for 1/3, following the expected business plan “Other Revenues” is composed of two parts: one correlated to sales for 2/3 and the other independent and pretty steady through time
Operating cash represents the minimum amount of cash necessary for daily business it has been assumed as a fixed percentage of revenues Inventories are defined as a percentage of revenues We have assumed a reduction in production and a disbanding of its inventories for 2010-11, on the other hand in 2012 there will be an increase to anticipate the higher revenue-growth expectation A positive net change has been estimated for Receivables and Payables. We have also considered a renewed investment in WC to mach the increase in revenue in 2012-2014.
Net PPE is defined as a % of revenue, our estimate consistently matches our hypothesis on the Invested capital trend Our estimate on the Debt repayment converges to the target value, as forecast through our assumptions on the Debt ratio We have chosen to have a positive trend in PPE, independently from the revenue growth, due to our strong confidence on the IC hypothesis. To define the Debt position we have also tried to: ◦ Bound the excess cash into a coherent interval ◦ Ensure enough liquidity availability to sustain the CAPEX and new building expense 2010 (E) 2011(E) 2012 (E) 2013 (E) 2014 (E) %PPE 26% 28% 32% 30% 32%Debt Rep. (5.000) (4.000) (6.000) 17.000 (6.000)
Present geographical Target geographical distribution distribution America America 12% 20% 23% 30% 18% Asia- Italy Pacific 12% 47% UE ex UE ex 38% Italy ItalyWe forecast Brevini’s revenue growth also considering the kind ofgeographical expansion that we expect the company to followand, therefore, making a weighted average of the GDP of each area.
We have assumed a unique case, in which the company reaches a steady growth of 3%, following the global economy Our estimate has an upper limit to ensure a terminal ROIC of about 15%, which is in line with the sector average The implicit multiple of the terminal value is 7,9
PV FCF 60 % of our Enterprise2010 -14 € 22.717,14 value depends on the terminal value2015-25 €127.587,03Terminal value €229.766,28 There isn’t any Non-EV operating asset in our €380.070,46 valuation, besidesDebt value € 87.771 excess cashEquity value € 292.299,46
The WACC range comes from the sensitivity analysis made previously The column variable represents the terminal growth rate Wacc 9,58% 10,08% 10,58% 11,08% 11,58% g 2,5% € 457.074,59 € 412.787,30 € 374.685,31 € 341.644,77 €312.792,54 3,0% € 466.979,37 €420.091,34 €380.070,46 € 345.600,54 €315.675,45 3,5% €478.532,87 € 428.518,41 €386.224,91 € 350.084,01 €318.919,07
The WACC range comes from the sensitivity analysis made previously The column lines represent the revenue CAGR of the 2015-24 estimate Wacc 9,58% 10,08% 10,58% 11,08% 11,58%CAGR 1,6% €356.297,02 €326.333,93 €300.016,00 €277.739,73 €257.788,76 7,67% €466.979,37 €420.091,34 €380.070,46 €345.600,54 €315.675,45 13,72% €641.169,10 €567.096,85 €504.528,45 €451.211,38 €405.427,37
PV of EP € 99.453 The relationship between ROIC andPV of Continuing €104.908 WACC has been value negative only forInvested capital at start of € 175.709 the first 3 years of forecast our valuation modelEnterprise value € 380.070 The IC contribution has been constantly Equity value € 292.299 increasing in value
100% Source of value of the Economic profit is mainly the Initial 80% IC, while the terminal value accounts for 27,37%. Our 60% assumptions on the IC are consistent with our qualitative IC0 belief of an 40% increase over time even in the deepening of the crisis the growth rate in the IC is higher than the 20% PV revenue’s 0% Terminal value The chart below shows that the economic profit model is less dependent on the terminal value hypothesis than the Economic Enterprise enterprise DCF one profit DCF Economic profit Enterprise DCF Terminal Value 27,37% 60% PV 26,05% 40% IC0 46,05% -
Our ROIC expectations trend calculatedthrough the period function approximationhas been confirmed by the results obtainedthrough the enterprise DCF method.
I. Identification of the right comparablesII. Identification of the value driversIII. Time frameworkIV. Results
WARNING: finding companies which have the same mix of Brevini belongs to the classification NACE 2811, i.e. Manufacture of is businesses, products and size and at the same time are listed, engines impossible. Thereforeaircraft, vehicle and cycle engines. almost and turbines, except the companies which have been picked NACE 28 indicatesbelong to a very similar market –indicated by the are those which manufacturers of machinery and equipment. NACE classification-. Moreover, they either operate in the same the company has areas or have a similar size. geographicalbeen chosen as itsproducts arecomplementary tothose of Brevini:i.e. they tend to beused together as aunique component the companyhas been kept inconsideration sincethe beginning ofthe work as theirbusinesses aretightly correlated
Direct multiple: EV/EBITDA Indirect multiple: EV/Sales Less easily influenced bydifferent accounting and fiscal More commonly used in times policies and, hence, more when the company is not achievingdifficult to manipulate or cause very positive margins or is facing a misleading judgement turnaround moment Source: Valuation Guide by Borsa Italiana (2004)
When discussing about the time frame to consider, we had to keep in mind that 2008 and 2009 were years afflicted by the financial crisis.1. We started with the classical approach, which is using the last available year, i.e. 2009. The values we obtained where excessively low. This can be explained by the fact that this year has been considerably affected by the financial crisis and the situation presented by most of the companies worldwide, and in particular companies belonging to the industrial machinery sector, does not do any justice to their real value.2. We then tried to capture the value of the company by using forecast data, which we found available only up to 2012. Unfortunately, the economy is excessively negatively biased during this period, as we do not expect any recovery before 2011, therefore the values we obtain are again not doing any justice to the real value of the company.3. It would have been more appropriate to use data from 2007, when the company was able to show all its potential and external causes where not affecting its activity, but unfortunately Brevini data were not available.4. The ultimate chance we were left with was to consider data from 2008. 2008 financials are available, not too badly influenced by the financial crisis and therefore sufficiently reliable.
Hamworthy Spirax-Sarco Okuma CVTech Comparables average Are these results consistent with the previous ones?EV / EBITDA 08 7,26 8,41 5,02 4,79 6,37EV / SALES 08 0,63 1,78 0,83 0,60 0,96 YES Comparables average BreviniEV / EBITDA 08 6,37 48.152 EBITDAEV / SALES 08 0,96 356.054 Sales You have to take into account that the value we calculated is slightly lower than the one we get Brevini through 1the discounted cash flow model and close EV 306.732 to the value we obtain in our worst case scenario EV2 341.693 Mean 324.212 because the unfortunate circumstances which hit the economy cannot be completely avoided.
Orbis and Amadeus Balance sheet information DataStream Risk free Central bank of key country and IMF Growth expectation on GDP Bloomberg Betas, Mkt cap and Enterprise value Capital iQ information about competitors Data Monitor Information about the overall market “Market Risk Premium used in 2010 by Analysts and Companies: a survey with 2.400 answers”, P. Fernandez and J. del Campo
After a careful analysis, we have come to the conclusion thatBrevini is a company that operates in a highly competitivebusiness which requires a great amount of fixed investments.On the other hand, it has high growth potential, as it isplanning to expand geographically. Moreover, its products arevery versatile and, hence, can serve different purposes. It alsopresents a high efficiency of production, which might comeeven handier whether new plants were to be opened bydeveloping economies of scale . The financial crisis has had avery negative impact on the company, but we expect a promptrecovery. We have used different approaches to measure thevalue and each time we created a set of assumptions thatwere both realistic and thought through. We even tried toadapt such methods to every specific circumstance. Theresults we obtained were consistent and sound; therefore weare confident enough that the value we got is pretty fair.