Exam Number:
Marks
Discuss whether or not, SIA is living up to their three strategic objectives based on Avai Award
the information at your disposal. l
(a)
Objective 1: Operate the airport profitably
SIA seems to falling short of this objective given the followowing:
Decline in the ASQ ratings
1,0
Concerns by the retail partners highlight that SIA is not achieving stakeholder
satisfaction 1,0
Objective 2: Acquire and develop other airports
Through Project Ghana, they seem to be fulling this objective.
1,0
Objective 3: Grow the SIA market share
SIA's strategic move to charge aernautical revenue at 80% of the maximum
charges or tariffs regulated by government has resulted in SIA becoming an 1,0
attractive attractive alternative for low-cost airlines.
SIA struggled to increase their footprint during the current year, when considering
the decrease in revenue. The decline is due to the liquidation of a low-cost airline, 2,0
which is not in management's control.
The crucial partnerships built by SIA with the low cost airlines, will go a long way in
increasing SIA's footprint 1,0
The potential listing of SIA, may also raise awareness of SIA and likely lead to increased
1,0foot traffic.
Available 8,0
Maximum 6,0
(b)
Cost of Equity (Ke) Avail. Award
CAPM will be used, Ke calculated with reference to comparable companies provided.
A few arguments can be made regarding which company is comparing to SIA:
The first of which being that none of the three companies are comparable, and thus an
average of the three Beta's is applicable
Another argument is that Sydney Airport is the most comparable, being only one airport
1,0 p
and so to is SIA.
Another argument is that Grupo Aeroportuario operating in a similar economy as SIA
(Mexico versus SA).
Assuming weighted average Beta (however accept any valid argument and figure)
Weighted average Beta (0,75 + 0,8 + 0,9)/3 0,82 1,0 p
Additional risk adjustment due to unlisted status, sovereign risk etc. of
SIA 1,1 2,0 p
Note: Any accepted, as long as Beta is increased
βL=Levered beta of SIA
βL= 1.1 * [1 + [(1-27%) * (50/100)]]
βL= 1,51 2,0 p
Thus finally Ke of SIA
Ke = 7.35% + 1.5 (7.9%)
19,29%
Ke = 2,0 p
Cost of debt (Kd)
Kd = 8% * 73% 5,84%
1,0
WACC = (19,29% * 100/150) + (5,84% * 50/150) = 14,80% 1,0 p
Available 10,0
Maximum 10,0
Total 10
(c)
2023 2024 2025 2026 2027 2028 Avail. Award.
Y0 Y1 Y2 Y3 Y4 Y5
Notes R'm R'm R'm R'm R'm R'm
Cost of upgrades -200,00 1,0
Feasibility (Sunk) 0,00 1,0
Passenger fee income W1 85,80 123,34 170,21 228,36 264,00 5,0
Landing revenue W2 33,52 48,18 66,50 89,21 103,13 2,5
Parking revenue W3 13,41 16,80 26,60 35,68 41,25 2,5
Aeronautical operating expenses -92,91 -131,82 -184,31 -247,28 -285,86 2,0
Lease income 33,00 33,00 33,00 33,00 33,00 1,0
Non aeronautical operating expenses -13,20 -13,20 -13,20 -13,20 -13,20 1,0
Working capital W4 -0,72 0,30 0,41 0,49 0,30 5,0
-0,79 1,0 p
Total cash flows -167,00 58,90 76,60 99,20 126,27 109,61
Adjustment of WACC 2,0 p
Adjust WACC to before-tax discount rate 1,0 p
NPV at 15% 134 1,0 p
15% Thus financially viable 1,0 p
Total 27
Maximum 24
Communication 1
Workings
Revenue pp in
W1: Annual passengersMarket size % Market share ZAR Total
2023 1 500 000,00
2024 1 950 000,00 20% 390 000,00 220,00 85 800 000,00 1,0
2025 2 242 500,00 25% 560 625,00 220,00 123 337 500,00 1,0 p
2026 2 578 875,00 30% 773 662,50 220,00 170 205 750,00 1,0 p
2027 2 965 706,25 35% 1 037 997,19 220,00 228 359 381,25 1,0 p
2028 3 000 000,00 40% 1 200 000,00 220,00 264 000 000,00 1,0 p
Market share Average Number ofFee per landing Landing
W2: plane size landings Revenue
2024 390 000,00 160,00 2 437,50 13 750,00 33 522 500 0,5 p
2025 560 625,00 160,00 3 503,91 13 750,00 48 180 000 0,5 p
2026 773 662,50 160,00 4 835,39 13 750,00 66 495 000 0,5 p
2027 1 037 997,19 160,00 6 487,48 13 750,00 89 210 000 0,5 p
2028 1 200 000,00 160,00 7 500,00 13 750,00 103 125 000 0,5 p
Number of landings Parking
W3: fees
2024 2 437,50 13 409 000 0,5 p
2025 3 503,91 16 797 000 0,5 p
2026 4 835,39 26 598 000 0,5 p
2027 6 487,48 35 684 000 0,5 p
2028 7 500,00 41 250 000 0,5 p
Debtors Creditors Net Working Movement
W4:
capital
2023 0 0 0,00
2024 10 909 438 -11 628 717,81 -719 279,45 -719 279,45 1,0
2025 15 477 904 -15 892 619,18 -414 715,07 304 564,38 1,0
2026 21 640 993 -21 644 835,62 -3 842,47 410 872,60 1,0
2027 29 034 524 -28 545 464,86 489 059,62 492 902,09 1,0
2028 33 565 068 -32 773 972,60 791 095,89 302 036,27 1,0
(1p + 1) (1p + 1) 791 095,89
1
Total
(d) Discuss what other considerations, SIA should take into account in addition to the financial
viability of Project Ghana, as determined above before deciding whether or not to proceed with
Project Ghana
Annual operational expenses were not adjusted for inflation in Ghana, this is not realistic.
1
The same applies to the price inflations on the passenger fee. As the market grows, don't we
1
expect changes in ticket prices?
Will the Ghanian tax authorities allow any tax allowances on cost of the upgrades? 1
Will at least some of the cost of upgrades be recoverable at the end of 5 years? 1
From SIA perspective, both annual income and expenses through NewServCo will be subjected to
exchange rates movements, which could adversely or positvely affect the NPV as calculated 1
above
However given NewServCo is a Ghanian company already, SIA cannot hedge against this 1
A blanket WACC of 15% has been applied to Project Ghana, however this rate should be adjusted
for known risk difference most notably a sovereign risk adjustment for the fact that Ghana is a 1
different sovereign state to South Africa to which SIA is familiar.
This is also the first time SIA will be undertaking a project of this nature and thus it will inherently
1
be riskier
NewServCo will be seen as a Special Purpose Vehicle according to IFRS and thus SIA and
NewServCo will be seen as a group and will need to be consolidated 1
Consequently, the terms of the loan from SIA to NewServCo, will need to be to be at arms length
as they will be related parties. 1
Given that the loan will be made from SIA's cash and cash equivalents, If NewServCo is unable to
service the loan, it may be have significant effect on SIA's ability to meet operational cash 1
requirements (currently R207.8m, will be only 7.8m after providing loan).
The existing millitary base facilities still belong to the Ghanaian Ministry of Defense - can they
decide to use the base before the airport period has lapsed? What happens after the five years? 1
How will SIA successfully gain market share - through marketing? Location of airport in relation to
Ghana Int.? Include marketing costs on capital budget. 1
Consider impact of relevant laws and regulations in Ghana. 1
Does SIA have access to staff to successfully run operations in Ghana/ will their current staff be
1
willing to travel?
Available 15
Maximum 12
Communication skills: Clarity of expression 1
Total 13
(e) Avail Award
Investment case
SIA is the fourth largest airport in the country 1
First listed airport operator in South Africa 1
Hub for the country’s leading low-cost carriers 1
Any other valid 1
Benefits of listing
Increased company public profile and reputation 1
Increased access to capital funding 1
Disadvantages of a listing
Lots of listing requirements which are costly 1
Listing is an expensive exercise 1
Increased public scrutiny 1
Dilution to existing shareholders 1
Other key Considerations
Whether there will be public interest for SIA shares 1
Are market conditions ideal for listing, will SIA obtain a good price on their shares? 1
Available 12
Maximum 7
Communication 1
Total 8
(f) Marks
Avail. Award.
Step 1: Sustaninable EBITDA 2023
R'000
Aeronautical Revenue (2022 x inflation) 433 735 2
Non-aeronautical revenue 295 123 1
Operating expenses -492 394 1
EBITDA 236 464
Step 2: Comparable EBITDA multiple
All three airport companies provided is vastly different from SIA, although it can be argued that
_______ is most similar as they ___________only 1 airport (MUST DISCUSS ALL 3)
3
Sydney airport:
Similar due to - Sydney ariport provides aeronatic and retail services
Not similar due to - Sydney airport is located in a developed country and is one of the largest
airport companies listed on the ASX
Corporacion America:
Similar due to - Corporacion America has airports located mainly in developing countries and is
focused on the acquring, developing and operating of airports
Not similar due to - Corporacion America operates approximately 52 airports and is substantly
bigger than SIA
Mexican Aiport:
Similar due to - Mexican airports are located in a developing country.
Not similar due to - Mexican airport operates 12 airports
Thus use a starting EBITDA of: 11,5 1
Alternative argument
All three airport companies provided is vastly different from SIA, therefore an average of the 3
airports is most applicable 2
Thus use a starting EBITDA of: (11,5 + 10 + 5,5) / 3 9,00 2
Step 3: Adjustments to comparable EBITDA multiple
Alternative
Starting point 11,5 9
Longer history/established compared to other companies. 1 1 1
SIA is unlisted where as comparable company(ies) are listed -1,5 -1,5 1
Political/country specific (any valid point and valid direction) -1 -1 1
SIA is less diversified in operations -1 -1 1
Adjusted EBITDA multiple 9 6,5
Step 4: EBITDA valuation
before surplus cash and
debt : Sustainable EBITDA
(Step 1) x EBITDA multiple
(Step 3)
Alternative
R'000 R'000
Sustainable EBITDA 236 464 236 464
Adjusted EBITDA multiple 9 6,5
EBITDA valuation before surplus cash and debt 2 128 172 1 537 013 1 p
Step 5: Add surplus cash to step 4
Alternative
R'000 R'000
EBITDA valuation 2 128 172 1 537 013
Cash and cash equivalents 207 800 207 800 1
Less operational cash requirements
(20% of maintainable revenue) -145 772 -145 772 1 p
EBITDA valuation before debt 2 190 200 1 599 042
Step 6: Deduct debt at market value form Step 5 Alternative
R'000 R'000
EBITDA valuation before debt 2 190 200 1 599 042
Interest bearing debt 135 410 1
Fixed interest rate 10% 1
Remaining term 10
Fixed PMT R22 037
Market rate 8% 1
PV? (R147 872) 1 p
Thus less debt at marke value (R147 872) (R147 872) 1 p
Thus EBITDA Valuaton 2 042 328 1 451 169
Current shareholindg 10 000 10 000 1
Thus IPO Value per share R204,23 R145,12
Total available 21
Max: 21
Neatness and layout 1
Logic of justifications 1
Total 23
