NYU Stern Advanced Corporate Finance Fall 2021

Corporate Finance Project: Transpaco Limited (“Transpaco” or the “Company”)

Registration number: 1951/000799/06

ISIN: ZAE000007480
JSE Main Board: Containers and Packaging sector
Share code: TPC
Listing date: 1987
Shares in issue (3 December 2021): 31 839 483
Market capitalisation: ~R557m
Intrinsic valuation – R24.66
Prepared by: JWS le Roux Closing price 3 Dec 2021 – R17.49
NYU ID #: N14774818 52 Week High – R17.76
52 Week Low – R13.00
Overview

› Transpaco manufactures and distributes plastic and › Segmental contribution and salient features:
paper packaging products for various sectors of the
economy including retail, industrial, agriculture, mining,
pharmaceutical and automotive
› Founded 1951
› Listed 1987
› Products are customised to customer requirements
and distributed across South Africa (“SA”) and exported
into Southern Africa
› Operates through two main divisions: Plastic Products
and Paper & Board
› Brief timeline:
› Plastic products include refuse bags, bin liners, and
sheeting and films; retail vest–type plastic bags, retail
boutique plastic bags, courier bags, industrial plastic
bags, tubing and sheeting, scholastic stationery, high
density and low-density polyethylene; and specialised
films
› Paper and board products include printed folded
cartons and package inserts; heavy duty and light duty
cores, yarn and tape cores, conical containers, void
fillers, carton dividers, angle boards, and paper straws
› In addition, the company provides packaging and
machinery products
Source: Transpaco website, Transpaco Integrated Reports

2
Stockholder analysis and corporate governance

› At first glance, Transpaco’s shareholding base appears › Of the remaining ~58% share in issue, ~27% is
quite diversified: held by institutions, of which Old Mutual is the
Type
Common Stock % of Total Shares Market Value largest at ~15%
Equivalent Held Outstanding (ZAR in mm)
Institutions 8 476 244 26.62 148.3 › The marginal investor in Transpaco can therefore
Corporations (Private) 1 611 787 5.06 28.2 be considered as a well diversified institutional
Individuals/Insiders 7 149 102 22.45 125 investor
VC/PE Firms (>5% stake) 6 661 225 20.92 116.5
Public and Other 7 941 125 24.94 138.9 › The company’s board currently consists of 7 members
Total 31 839 483 100.00 556.9
Year Years
Surname Role
appointed active
› However, 42% of the shares in issue are held by Thomas Chairman* 2005 16
insiders: Abelheim CEO 1977 44
Common
Stock % Of Market Value Bouzaglou Exec director 1991 30
Holder
Equivalent CSO (ZAR in mm) Weinberg CFO 2004 17
Held
Botha* Independent director 1998 23
CEPPWAWU Investment 6 661 225 20.92 116.5
Abelheim, Phillip Norman (CEO & Executive Director) 5 570 510 17.50 97.4 vd Linde* Lead independent director 2002 19
Bouzaglou, Shalom Raphael (Executive Director) 1 019 562 3.20 17.8 Mkhondo* Independent director 2017 4
Weinberg, Louis (CFO & Executive Director) 252 227 0.79 4.4 Length of service statistics
Total held 13 503 524 42.41 236.1
Longest 44
› Executive directors hold ~22% and CEPPWAWU holds Shortest 4
~21% Median 19
Average 22
› Phillip Abelheim is the CEO and part of the
Total years of service 153
founding family
› CEPPWAWU is Transpaco’s black economic › The majority of the board positions (4/7) are occupied
empowerment (“BEE”) partner under SA legislation by executives or representatives from the largest
shareholder, with the former having significant tenure
(the CEO approaching 45 years)
Source: Capital IQ, Transpaco Integrated Reports, own analysis

3 * Representing CEPPWAWU
Stockholder analysis and corporate governance (cont.)

› The majority of the independents (2/3) has tenure
of ~20 years
› It is clear that there is no significant rotation at
board level
› This does, theoretically, improve the board’s
understanding of the business and industry but
does comprise its independence
› ~42% of shareholders, in the form of the largest
shareholder (CEPPAWU) and the executives are
all represented on the board
› Institutional investors hold ~27% and they may
have very little interest in management’s actions
and decisions
› The board is likely to not challenge the
management enough due their interest alignment
and long tenure, the latter which would have led to
familiarity
› To improve governance, it’s recommended that:
› The board of directors are increased to at least
9* by appointing 2 additional independent
directors
› This will give independents the majority of the
voting on the board – 5 vs 4
› Consider acquisition opportunities where shares
could be used as part currency in order to
decrease the quantum of shares held by insiders
› Ensure that the board challenges the Company’s
management frequently
› The typical Transpaco investor would benefit from
additional large active investors having appointees to
the board
› Managerial performance should be constantly
challenged to improve overall firm and shareholder
value

Source: Capital IQ, Transpaco Integrated Reports ,own analysis * Unlikely that current directors would resign

4
Competitive environment

› Transpaco competes in SA with international players as

well as with large local players:
Commentary:
› Bowler Metcalf - Transpaco has been one of the worst
performers amongst its peers iro
› Mpact share price
- Nampak has gone through various
› Nampak changes over the last 5 years ito
disposing assets and streamlining
› Key metrics of Transpaco and SA competitors (R m): operations
Market cap Net debt EV Debt to capital ratio Debt to EBITDA ROC Revenue EBITDA 5 year rev growth EBITDA % - Transpaco is the smallest listed
Bowler Metcalf 852.23 (246.59) 605.63 0.19% 0.0x 9.80% 635.51 129.99 4.94% 20.45%
player in SA
Mpact 4 684.91 1 787.30 6 472.21 30.27% 1.5x 8.82% 11 921.80 1 286.60 3.95% 10.79%
Nampak 2 434.45 5 603.70 8 038.15 74.91% 4.4x 6.11% 13 958.40 1 530.40 -6.12% 10.96% - Transpaco’s gearing levels compares
Transpaco 556.87 165.79 722.66 30.42% 1.0x 11.40% 2 078.89 214.04 3.96% 10.30% favourably with Mpact
- Tranpaco has the highest return on
Max 4 684.91 5 603.70 8 038.15 74.91% 4.4x 11.40% 13 958.40 1 530.40 4.94% 20.45% invested capital (“ROC” or “ROIC”)
Min 556.87 (246.59) 605.63 0.19% 0.0x 6.11% 635.51 129.99 -6.12% 10.30% - Transpaco’s EBITDA margin is in line
Median 1 643.34 976.55 3 597.44 30.34% 1.3x 9.31% 7 000.35 750.32 3.95% 10.88%
with its peers, apart from Bowler
Average 2 132.12 1 827.55 3 959.67 33.95% 1.7x 9.03% 7 148.65 790.26 1.68% 13.13%

ROC is calculated as per Capital IQ – Capital IQ does not reduce

invested capital with the cash balance. The effective tax rate used
is based on the US rate of state and federal taxes (~37.5%) and
not country specific tax rates. However, for comparison purposes
Source: Capital IQ, own calculations and analysis
this has been left unchanged. Other ROC calculations in this
document would therefore differ from the above table as it is
5
based on SA marginal tax rates and takes into account cash
Risk and return
› The principal segments of the Company have been
identified by grouping of similar-type products:
› Plastic products (52% of revenue)
› Paper and board (48% of revenue)
› No geographical segments are reported as the group
operates mainly in SA
› Reuters β regression indicates a low β of 0.161, with a
range of +/- 0.081. Considering the nature of the
products sold (packaging for a variety of products,
including food and related, which is less cyclical and
non-discretionary) a β approximating 1 or less is
expected
› The R2 is only 0.82, which means less than 1% of the
risk in Transpaco shares is attributable to the market
› A significant reason for this is may be due to the fact
that the company is a small cap company and insiders,
who do not trade, hold ~42% of the shares, and hence
the share price does not react to market movements as
there is very low trading volumes
› Risks it faces include:
› Stigma surrounding plastics
› Low growth environment
› Modern equipment requirements
Reuters, own analysis, Transpaco Integrated reports,
http://pages.stern.nyu.edu/~adamodar
6
› The Company’s Jensen’s Alpha is calculated at
negative 5.9%, meaning that, on average, the share
did ~6% worse than the JSE index
› A required return may be calculated as follows:
› Risk free rate – 7% [9.48% (SA Government bond (denoted
in Rand)) minus default risk spread of 2.48%]
› β - 0.161
› Equity Risk Premium (“ERP”) of 6.9% (SA only)
› Required Return = 8.11% (7% + 0.161 * (6.9%))
› Calculating a bottom-up β should result in a different,
but more realistic return, that can be applied in
determining the CoC
› Although the products manufactured are of a wide
variety it all relates to packaging. Two sectors are
potentially applicable, Packaging & Container and
Paper/Forest Products (Emerging markets)
› Due to the fact the unlevered βs (adjusted for cash)
are 0.8 and 0.74, respectively, only the Packaging &
Container β will be used as it’s deemed a better fit
› Unlevered β = Emerging market Paper &
Container industry average of 0.8
› Due to the lack of disclosure, it is not practical to
calculate an ERP other than using that of SA
Risk and return (cont.)

› The cost of debt for Transpaco is calculated as follows: › The CoC for Transpaco is calculated at 11.1%
Risk free Default Cost of Cost of debt
rate spread Debt Tax after tax Weighting Unlevered β Weighted β
7.00% 0.85% 7.85% 28.00% 5.65% Implied value of operations 722.66 90.3% 0.8 0.72
EBIT LFY 164.85 Cash 77.64 9.7% - -
Interest paid LFY 15.90 800.30 100.0% 0.72 Company unlevered β
Interest cover 10.37 Market value of equity 556.87 69.6%
Debt 243.43 30.4%
Synthetic Moodys Rating Aa2/AA Total Equity and debt 800.30 100.0%

Debt to equity 43.7%

› Market value of debt calculation: Debt to capital 30.4%
Period years (avg) % Weighting Years Notes
Weighting Cost
0.5 24.2% 0.12
Cost of Equity 13.55% 69.6% 9.4%
1 24.1% 0.24
Cost of debt 5.65% 30.4% 1.7%
2.5 51.7% 1.29
Cost of capital 11.1%
Total duration 100.0% 1.66

Market value of debt 238.62 PV(7.85%,1.65,6.53% * 243.4, 243.4) Cost of equity calculation Risk free rate + β x Equity risk premium
Cost of debt calculated 7.85% As calculated Risk free rate 7.0%
Implied cost of debt 6.53% Interest expense / Book debt Levered β 0.95 Unlevered β x (1+(1-Tax rate)*D/E
Equity risk premium 6.9%
Book value of debt 243.43 Tax rate 28.0%
Interest expense 15.90

› The difference between the book value and market

Debt maturity profile < 1 year 1 to 2 years 2 to 5 years
value is negligible and the market value is assumed to 24.2% 24.1% 51.7%
be equal to the book value due to the limited
information available to calculate the duration of the
debt
› A debt to equity ratio of 43.7% is applied in the Cost of
Capital (“CoC”) calculation, higher than the Packaging
& Container sector (Emerging markets) of ~30%

Reuters, Capital IQ, own analysis and calculations, Transpaco

Integrated reports, http://pages.stern.nyu.edu/~adamodar
7
Measuring investment returns and capital structure choices

› The ROC achieved by Transpaco for the period 2017 to › Transpaco’s debt accounts for ~30% of its capital
2021 is illustrated below: structure
2017 2018 2019 2020 2021 › Debt components:
Debt components R'm %
EBIT 121.7 139.2 97.0 135.9 164.9 Long term 62.7 25.8%
Tax 34.1 39.0 27.2 38.0 46.2 Short term 6.2 2.6%
EBIT(1-t) 87.6 100.2 69.8 97.8 118.7
Lease liabilities 174.5 71.7%
Invested capital 542.9 691.0 703.7 767.9 900.1
243.4 100.0%
BV equity 561.2 620.1 637.9 679.5 734.3
BV debt 82.2 132.6 115.0 150.3 243.4 › Debt maturity:
Cash 100.5 61.7 49.1 61.9 77.6 Debt maturity profile < 1 year 1 to 2 years 2 to 5 years
24.2% 24.1% 51.7%
Return on capital 16.14% 14.50% 9.92% 12.74% 13.19%
Cost of capital 11.10% 11.10% 11.10% 11.10% 11.10%
› The nature of Transpaco’s projects are expected to be
Economic value added 27.4 23.5 (8.3) 12.6 18.8 medium term (development of new products) as no
information is disclosed in its integrated report
› Transpaco’s ROIC has exceeded its CoC for the 5
years under review, apart from 2019. It has therefore › All manufacturing operations are in SA
added economic value, in aggregate, over the same › Although competition is a hallmark of the industry, it
period would appear that Transpaco is able to pass on price
› As illustrated earlier, Transpaco’s ROIC is the highest increases to its customers, as evident in average
when compared to its local SA peers. However, as revenue growth of ~6.5% over the last 3 years
illustrated under the valuation section, Transpaco may › It is therefore recommended that Transpaco borrows in
require increased investment and this is expected to local currency (Rands) over the medium term (~3 to 5
reduce the overall ROIC (refer valuation section) years) and at a floating rate
› This recommendation is in line with Transpaco’s
current debt profile
Source: Capital IQ, Transpaco Integrated reports, own analysis
and calculations
8
Optimal capital structure

› The optimal capital structure for Transpaco is depicted › Transpaco can maximise its equity value by
below: increasing its debt to 50% (an increase of ~20%).
RESULTS FROM ANALYSIS Although there is a decrease in the rating, it still
Current Optimal Change remains investment grade
D/(D+E) Ratio = 30.41% 50.00% 19.59%
› However, this would translate into to a share price
Beta for the Stock = 0.95 1.24 0.29 increase of only ~3%
Cost of Equity = 13.56% 15.58% 2.02%
Rating on Debt Not rated › Transpaco should also consider earnings’ volatility.
After-tax cost of Debt = 5.65% 6.00% 0.35% The average operating income over the last 5
years is 25% lower than the operating income in
WACC 11.15% 10.79% -0.36%
Implied Growth Rate = -3.41%
2021
Enterprise value $723 $741 $19 › Other factors to consider:
Value/share (Perpetual Growth)
$17.49= $18.07 $0.58
› Tax benefit
› The Company’s optimal debt to capital ratio is
› Transpaco’s marginal rate and effective tax
calculated at 50%, which will increase the firm value by
rate is similar at ~28%
R19m, or 58c per share
Debt Ratio Beta Cost of Equity Bond Rating Interest rate on debt Tax Rate Cost of Debt (after-tax) WACC Enterprise Value
0% 0.7226 11.99% Aaa/AAA 7.69% 28.00% 5.54% 11.99% $683
10% 0.7804 12.38% Aaa/AAA 7.69% 28.00% 5.54% 11.70% $696
20% 0.8527 12.88% Aaa/AAA 7.69% 28.00% 5.54% 11.41% $710
30% 0.9456 13.52% A1/A+ 8.07% 28.00% 5.81% 11.21% $720
40% 1.0694 14.38% A2/A 8.18% 28.00% 5.89% 10.98% $731
50% 1.2429 15.58% A3/A- 8.33% 28.00% 6.00% 10.79% $741
60% 1.5030 17.37% Ba1/BB+ 9.31% 28.00% 6.70% 10.97% $732
70% 1.9366 20.36% B2/B 11.86% 28.00% 8.54% 12.09% $679
80% 2.8037 26.35% B3/B- 12.94% 28.00% 9.32% 12.72% $652
90% 5.4050 44.29% Caa/CCC 16.46% 28.00% 11.85% 15.10% $569
Source: Capital IQ, Transpaco Integrated reports, own analysis
and calculations, http://pages.stern.nyu.edu/~adamodar
9
Optimal capital structure (cont.)
› Other factors to consider (cont.):
› Added discipline of debt
› Transpaco is a maturing company, with
significant insider holdings. It already has a
debt to equity ratio of 30% and moving to
the optimal would not increase value
substantially. Limited added discipline is
expected
› Bankruptcy risk
› There is some volatility in the business but
it has produced fairly consistent cash flows
and managed to pay its obligations and
dividends. However, with an increased
debt burden, bankruptcy risk would
increase
› Agency cost
› Agency cost should be relatively low.
Lenders should be able to monitor and
control how money is used – limited
intangible assets with investment typical
required for machinery – this should
facilitate lending appetite
10
› Flexibility
› Keeping some debt capacity available for
future needs (acquisitions/product
development and/or reinvestment) should
be beneficial to the Company
› Considering the limited value increase by moving
to optimal, the volatility risk in earnings and the
fact that the company is unlikely to be a takeover
target (Insiders own ~42%), it recommended that it
slowly increases its debt over the short to medium
period
› As shown in the valuation section, Transpaco may
be required to increase its reinvestment to match
its peers. This should be financed by way of debt
in order to move to the optimal capital structure
 Dividend policy and analysis

› Transpaco has generated FCFE of R536m over the
last 5 years, paying R209m (~39%) to shareholders
› Its ROC has mostly exceeded its CoC during this
period but, over the last two years, the ROC has only
been ~2% above the CoC
› Indicating a firm that is maturing
› Over the same time period the share price has
decreased from ~R30 to ~R17.5 per share
› Combination of Transpaco being a small cap company,
limited free float and the general stigma surrounding
packaging
› The average dividend payout ratio over the last 5 years has
been ~46%, with a latest cash balance of ~R77m
› Transpaco has consistently returned cash to shareholders
whilst maintaining an average cash balance over the last 5
years of ~R71m
› The Company has earned ROIC above its CoC for most
years
› The share has underperformed, as illustrated earlier in this
document and supported by Jensen’s Alpha
› The Company’s payout ratio of ~46% lags the payout ratio
of ~71% of the Packaging & Container (emerging market)
industry

› FCFE calculation: › Transpaco has in all likelihood secured a shareholder base

2017 2018 2019 2020 2021 Average that finds its dividends attractive (the current dividend yield
Net income 86.36 97.49 57.19 68.95 110.28 84.05 is ~9%)
Plus depreciation 45.26 40.66 43.44 72.46 74.79 55.32
› Based on Transpaco’s future investment needs (refer
Less capex (118.40) (38.70) (47.00) (112.30) (84.60) (80.20)
Change in working capital 37.55 (52.13) (8.20) 54.39 (59.98) (5.68) valuation section), its cash pile and cash generation
Less acquisitions - (96.60) - - - (19.32) capabilities, it should be able to maintain its dividend
Change in debt 59.93 66.43 64.78 71.42 102.50 73.01 payout ratio and ensure adequate reinvestment is made
FCFE 110.70 17.15 110.20 154.92 142.98 107.19 › Transpaco has earned a ROC > CoC over the review
period and probably has some flexibility to reduce its
Dividends paid 48.10 38.60 39.50 27.30 39.80 38.66
dividend payout, should the right investment/acquisition
Share buy backs - - - - 15.70 3.14
opportunity present itself
Total 48.10 38.60 39.50 27.30 55.50 41.80
› However, the ROC, as depicted in the valuation
Payout ratio 55.7% 39.6% 69.1% 39.6% 36.1% 46.0% section, is expected to come under pressure as the
Company increases its reinvestment rate to ensure
Total distribution as % of FCFE 43.5% 225.1% 35.8% 17.6% 38.8% 39.0% competitiveness
Source: Capital IQ, own analysis and calculations,
11 http://pages.stern.nyu.edu/~adamodar
Intrinsic valuation – Key assumptions

› CoC first 5 years › Terminal growth set at 5%, a premium to expected long term SA
inflation, but less than the risk free rate, due to maturing industry
› CoC as calculated at 11.1%
› Other valuation assumptions:
› Cost of debt notes Description Initial phase Transition phase Stable growth phase
› Calculated synthetic rating, implied cost ~10.3%
Period 5 years 5 years Perpetuity after 10 years
› Considered too high in SA context Average revenue 5% growth per 5% growth, lower than
growth last 5 annum risk free rate of the
› Current borrowing at average of 6.5% years of 4%, economy, taking into
Revenues linear increase to account historic growth
› SA prime rate at 7% - reference point for all SA
5%, representing and industry maturing
borrowings local SA peers
growth over last 5
› Country default spread of 2.45% ignored in
years
calculations and used 7.85% (risk free of 7% + default Current levels of Improvement from Stable at 8.1%
spread of 0.85%) as base cost of debt. This compares 7.9% 8% to 8.1% (best
more reasonably to the company’s historic and current EBIT margin improving to 8% achieved over last
borrowing rates as well as SA market practice 5 years)

› CoC years 6 to 10 Tax rate 28% 28% 28%

Based on sales to Stable at sales to Stable at sales to capital
› Assumed optimal capital structure – 50% debt to capital capital ratio. capital ratio of ratio of 1.64x
ratio Linear movement 1.64x
Reinvestment rate from current 2.31x
› Cost of debt slightly higher at 6% to 1.64x
(representing SA
› β* Debt ratio overall CoC peers average)
› CoC terminal period › Due to increased reinvestment and limited growth with stable
› β equal to 1 – matured firm, stable growth phase margins, ROC reduces to below CoC from year 4 to 10. This
appears reasonable as Transpaco appears to require
› Debt to capital ratio unchanged reinvestment, when compared to peers, but returns are limited
› CoC due to low growth. Terminal year narrows the difference
between ROC and CoC
Source: Capital IQ, own analysis and calculations, * Β increased to 1.23
http://pages.stern.nyu.edu/~adamodar
12
Intrinsic valuation – WACC, valuation, sensitivities
WACC Weight (debt) Cost of Equity Cost of Debt Pre-tax 7.9%
11.1% 30.4% 13.55% 5.65% Tax rate 28%

Beta Market risk premium

Risk free rate 0.95 South Africa 6.9%
SA 10y Gov Bond 9.5%
Default spread 2.5% Unlevered beta Current D/E
Implied Risk free rate 7.00% 0.72 43.7%
Emerging market industry average
Year (R 000) 0 1 2 3 4 5 6 7 8 9 10 Terminal year

Revenue 2 079 2 162 2 254 2 355 2 467 2 591 2 720 2 856 2 999 3 149 3 306 3 472
Revenue growth 4.00% 4.25% 4.50% 4.75% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%
EBIT 165 171 179 189 198 208 221 232 244 256 269 282
EBIT margin 7.9% 7.9% 7.9% 8.0% 8.0% 8.0% 8.1% 8.1% 8.1% 8.1% 8.1% 8.1%
Tax rate 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0%
EBIT(1-t) 119 123 129 136 143 150 159 167 176 184 194 203
Reinvestment 36 116 141 172 215 79 83 87 91 96 101
FCFF 87 13 (4) (30) (65) 80 84 88 93 98 102

Cost of Capital 11.1% 11.1% 11.1% 11.1% 11.1% 10.8% 10.8% 10.8% 10.8% 10.8% 9.95%
PV factor 0.90 0.81 0.73 0.66 0.59 0.53 0.48 0.43 0.39 0.35
PV 79 10 (3) (19) (38) 43 40 38 36 34

Sales to capital ratio 2.31 2.14 1.97 1.81 1.64 1.64 1.64 1.64 1.64 1.64 1.64
Invested capital 900 936 1 052 1 193 1 365 1 580 1 659 1 741 1 829 1 920 2 016 2 117
ROIC 13.2% 13.2% 12.2% 11.4% 10.4% 9.5% 9.6% 9.6% 9.6% 9.6% 9.6% 9.6%

PV implicit period 220 Terminal value

PV of terminal value in 10 years 731
Cash not seen as wasted as ROC > COC therefor full cash balance 2 069
EV 951 added back
- debt (243)
- minority interest -
+ cash 78
WACC Revenue growth
Termina growth

+ non operating assets - 2466.1% 9.1% 10.1% 11.1% 12.1% 13.1% 24.66 3.00% 3.50% 4.00% 4.50% 5.00%

EBIT margin
- non operating liabilities - 3.0% 26.51 25.21 23.97 22.80 21.69 6.9% 16.51 16.11 15.63 15.05 14.33
Equity value pre options 785
3.5% 26.87 25.54 24.28 23.09 21.96 7.4% 20.24 20.20 20.15 20.09 20.02
Share options -
* Equity value
Shares in issue
785
31.8
4.0%
4.5%
27.31
27.84
25.95
26.45
24.66
25.13
23.44
23.88
22.28
22.69
7.9%
8.4%
23.97
27.70
24.28
28.37
24.66
29.17
25.13
30.16
25.72
31.41
Price per share (R) 24.66
5.0% 28.51 27.07 25.72 24.43 23.21 8.9% 31.43 32.45 33.69 35.20 37.10
Currrent price per share (R) 17.49
Potential upside 41.0%
Sources: Capital IQ, own calculations and analysis, , * No share options allotted – bonus structure implemented,
http://pages.stern.nyu.edu/~adamodar, Transpaco Integrated already part of EBIT. No minority interest and/or non-cash
13 Reports operating assets/liabilities
Intrinsic valuation – Optimistic scenario

› An optimistic valuation scenario was considered based on the following thought process and key inputs:
› Additional reinvestment requirement should lead to improved efficiencies and lead to enhanced margins
› Significant reinvestment is forecast in line with peers Sales to capital ratio
› EBIT margins where increased linear over years 1 to 10, from 7.9% to 8.8%
› The average EBIT margin for SA peers is 10.3% over the last 5 years
EBIT margin 2017 2018 2019 2020 2021 Average
Bowler 18.6% 16.6% 11.7% 16.1% 17.5% 16.1%
Mpact 4.5% 6.9% 6.4% 5.7% 7.0% 6.1%
Nampak 11.0% 12.4% 9.6% 2.8% 8.4% 8.8%
Average 11.4% 12.0% 9.3% 8.2% 11.0% 10.3%

› Distorted by Bowler Metcalf at 16.1%

› Therefore moved to Nampak average EBIT margin over last 5 years of 8.8%
› Improved EBIT margins leads to increased ROC, thus narrowing gap of ROC vs CoC as presented in the base
case - ROC exceeding CoC into perpetuity by ~0.5%
› Implied value per share R29.56, implying an under valuation of 69%
› Comfort on base case margins applied as Packaging & Container industry (Emerging markets) average EBIT of
8.15%, is in line with base case valuation EBIT margin of 8.1%

Sources: Capital IQ, own calculations and analysis

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Conclusion

› Transpaco is maturing firm that was founded in 1951 and has been listed since 1987
› Transpaco’s corporate governance can be reviewed and amended, especially ito insiders and additional independent
directors appointed to the board
› The Company’s ROC has exceeded its CoC, on average, over the last 5 years
› Transpaco has debt capacity and can improve its capital structure by moving to its optimal – although the value
created from this is not significant
› It could benefit from increasing its leverage in order to increase its reinvestment (especially modern machinery)
and identifying and investing in more attractive projects (ROC>CoC) and using debt as a funding source
› The Company has been paying dividends. Transpaco should continue with this policy, unless it has identified
attractive projects (ROC>CoC) that it can invest in
› Transpaco is facing limited growth opportunities with a need for increased reinvestment, which will impact the ROC
› Transpaco has an estimated intrinsic value of R24.66 versus a current share price of R17.49
› Based on conservative assumptions, the share is undervalued by ~41%

Own calculations and analysis

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