Paulo Leitao Mercurio Capital Business Mathematics Made Simple 1 - - PowerPoint PPT Presentation

Paulo Leitao

Mercurio Capital Business Mathematics Made Simple

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• (25 -30 minutes presentation)
• Overview capital intensive versus “light capital”
• Project design
• Cost of equity
• Valuations
• Q&A (20-25 minutes)
• I am NOT going to cover: tax, debt costs, complex

capital structures

Natural resources make a country rich. Capital intensive sectors are old-fashioned. Investors can make more money in digital economy than in heavy industry. Germany is very successfull with their industrial and manufacturing sector. UK economy will never have a strong industrial sector.

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High Capex/ high Opex Liquidity premium (business plan and business model lack of flexibility) Sensitivity to country/national risk High Capex – low Opex// Low Capex – high Opex

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Liquidity Premium Square root to payback and/or breakeven in years: (Initial investment – salvage value) Country Risk Premiums Economist Intelligence Unit Country Risk Reports (score system): Standard & Poors Sovereign 10-year yields 10-year Sovereign bond yield

% 100 score country home score country home score country n destinatio X −

1 cos cos 1 −         +

life project

t asset value scrap less t asset

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5 10 15 20 25 30 35 40 1 2 3 4 5 6 7 8 9

Return Risk Licensing Build Operation

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• Risk

measured

• Event

driven (ex licences)

Pre- feasibility

• Risk

contracted

• “Bankable”

diligence “Feasibility”

• Attention

turns to liquidity management

Value mgt

• Uncertainty
• Small equity

investments

• Measure

Value Drivers!

Licensing

• Contracts in

place

• High capital

needs

• Equity and

debt secured

Build

Operation

Heuristics

Seed DCF/ Assets

Startup

DCF

Operation

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Default Market Valuation

Discounted Cash Flows (DCF) Increase cash flows Decrease risk

• Multiples (Terminal values)

There is liquidity in the market!

EBITDA multiple Net Income multiples Sales multiples Contract/client-based

No liquidity in the market/no cash flows

Asset based Probability Heuristics

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Cost of Equity is the return needed to keep the equity in the company Intrinsic Risk & External non-controllable variables Business Risk + Liquidity + Country Risk Main challenges with Equity:

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Not visible (not cash/accounting cost) Measured indirectly (Mkt multiples, Quantitative Methods, Benchmarking, Ungeared Beta, etc) For private companies, more difficult to measure

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10 20 30 40 50 60 70 1 2 3 4 5 6 7 8 9 10 11 12

Seed Startup Early Growth Late Expansion IPO Mature Required Rate of Return Time Event driven “TIO”

“T” - Technology “I” - Implementation “O” - Operation

Build

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Licensing Business Premium Build Business Premium

Start

Up

BP BP BP BP BP BP BP BP BP BP BP

Liquidity Premium

LP LP LP LP LP LP

Country Premium

CP CP CP CP CP CP CP CP CP CP CP EXIT Sweet Spot

Uncertainty

Risk protection (project finance) Income streams: Futures Interest rates: Swaps Currency: Forwards

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Management Go/NoGo decision & “Design freeze”

Investment logic & capital structure Capital Budgeting Group Impact

Natural resources make a country rich. Capital intensive sectors are old-fashioned. Investors can make more money in digital economy than in heavy industry. Germany is very successfull with their industrial and manufacturing sector. UK economy will never have a strong industrial sector.

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Mercurio Capital Ltd www.mercurio-capital.com

Follow us on Twitter! (Business Mathematics) https://twitter.com/MercurioCapital LinkedIn Group (Business Mathematics Made Simple)

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