International Finance CEMEX CASE STUDY 17 April 2011

SHANMUGA PILLAIYAN (010194) TAN CHEE HOAW (010120) KAM CHUN HOE (008757) LIM SOK YEN (008715)

Agenda
1. Key assumptions

2. Exchange Rate projection 3. Cost of Capital 4. Project Cash flow 5. Parent Cash flow 6. Sensitivity analysis 7. Real option analysis 8. Final Bid

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April 2012 Slide 2

Key Assumptions
1. Indonesian withholding tax for dividends is at 15%

2. As the cement business is localized, investment in Indonesia does not cannibalize existing CEMEX sales, especially the Philippines subsidiary. 3. CEMEX utilizes internal funds for the acquisition of Gresik. 4. CEMEX functional currency is USD, Semen Gresik is IDR. 5. 50% of net profits of Gresik are paid out as dividend.

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April 2012 Slide 3

Exchange Rate Projection IDR/USD

1. Projection done based on Purchasing Power Parity theorem. 2. Hyper-inflation in Indonesia is expected to normalize. 3. The United States inflation rate is forecasted to be stable.
Indonesian Inflation Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Nottingham Malaysia

USA Inflation Rate (%) 4.00 4.00 4.00 4.00 4.00 5.00 5.00 5.00 5.00 5.00

Estimated USD/IDR Exchange Rate 13000 15000 15865 16781 17749 18256 18778 19314 19866 20433
April 2012 Slide 4

rate (%) 29.40 20.00 10.00 10.00 10.00 8.00 8.00 8.00 8.00 8.00

Cost of Capital CEMEX

1. Assumption is that CEMEX uses internal funds for the purchase of Gresik. 2. CEMEX Cost of capital is taken to be the average ROE of CEMEX from 1993 to 1998, 13.1% . 3. As the Indonesian project is viewed as risky, a risk premium of 6.9% is included. 4. Final CEMEX cost of capital of 20.0% for the duration of the project.

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April 2012 Slide 5

Cost of Capital Semen Gresik

1. Equity to debt ratio is 50% - 50%. 2. Assumed that Indonesian Government maintained real interest rate of 4.3%. 3. Assumption is all debt is raised internally in Indonesia. 4. WACC is calculated for each year.
Year Equity risk premium Inflation Rate Risk Free Rate Beta Cost of Equity After-tax cost of debt Weighted cost of capital
Nottingham Malaysia

1998 6 29.4 33.7 1.2 40.9 23.59 32.25

1999 6 20.00 24.30 1.2 31.5 17.01 24.26

2000 6 10.00 14.30 1.2 21.5 10.01 15.76

2001 6 10.00 14.30 1.2 21.5 10.01 15.76

2002 6 10.00 14.30 1.2 21.5 10.01 15.76

2003 6 8.00 12.30 1.2 19.5 8.61 14.06

2004 6 8.00 12.30 1.2 19.5 8.61 14.06

2005 6 8.00 12.30 1.2 19.5 8.61 14.06

2006 6 8.00 12.30 1.2 19.5 8.61 14.06

2007 6 8.00 12.30 1.2 19.5 8.61 14.06

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Terminal Value Semen Gresik Semen Gresik

1. Terminal value is calculated for the continuing value of the plant after year 5. I. 3. Discounted perpetual cash flow

2. Terminal value estimated based on: II. Earnings multiples The average value of 49,231 Billion is taken as the terminal value.
Terminal Value Valuation Method EV/ Capacity Perpetual Model Average Value (Billion Rupiah) 39,228 59,234 49,231

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Terminal Value Semen Gresik Semen Gresik

1. Terminal value is calculated for the continuing value of the plant after year 5

2. Terminal growth rate is assumed to be 14.0% 3. WACC is assumed to be 15.76% at year 2002 4. Terminal value = IDR 59,234 Billion 5. Terminal value is very sensitive to the values chosen for WACC & growth rate. Other method shall be carried out for checking purposes.

Terminal
Nottingham Malaysia

Value

NOCF (1 + g) k WACC g
April 2012 Slide 8

Terminal Value Earnings Multiples

1. Multiples of enterprise/ capacity, regional average multiple of 126.43 USD per metric tonne

2. Constant capacity of 17.48 million metric tonne 3. Terminal value of 39,228 billion IND in 2002.
Country Total Market Cap EV/ capacity EV/EBITDA Price/FCF Price/Earning

India Indonesia Thailand Malaysia Philippines Taiwan South Korea Total Market Cap.
Nottingham Malaysia Regional Average

1094 1468.4 1336.6 417.9 254.2 3059.9 185.7 7816.7

86 52 146 55 58 188 52

7.2 8.9 10.7 11.5 4.1 12.1 6.1

10.4 9.2 4.3 8.4 4.2 11.5 2

41.4 9 -2.2 -26.9 5.5 19.7 9.9

126.43

10.14

9.05

13.80

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Project Cash Flow The project has a positive NPV and thus profitable
Billions of IDR Assumed Growth Rate EBIT Add Depreciation & Ammortisation EBITDA Less Tax (30% of EBIT) Less Capex Less Change in net working capital Terminal Value Total FCF 496.90 585.70 714.84 804.32 1998 16% 445.00 261.00 706.00 (133.50) (40.00) (35.60) 1999 27% 599.00 276.00 875.00 (179.70) (40.00) (69.60) (65.50) (78.60) (94.30) 49,231.18 50,143.08 2000 20% 720.48 276.00 996.48 (216.15) 2001 20% 867.03 276.00 1,143.03 (260.11) 2002 20% 1,043.14 276.00 1,319.14 (312.94)

Present value factor Present value of cash flow

Nottingham Malaysia NPV

1.0000 496.90 29,949.12

0.8048 471.37

0.7463 533.49

0.6447 518.57

0.5570 27,928.78
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Project Cash Flow Semen Gresik is valued at USD$3.35 per share

Enterprise Value Less net debt Less Minority Interest Equity Value 29,949.12 (4,113.50) (23.10) 25,813

Shares Outstanding (millions)

593.2

Fair Value of equity per share (IRD) In US Dollar

43,514.02 3.35

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Project Cash Flow 50% of net profits are assumed to be paid out as dividends
Income Statement (Billions of IDR) Sales by Gresik Tonasa Padang Non-cement Total Net Sales Growth in Net Sales (%) COGS Gresik COGS Tonasa COGS Padang Total cost of goods sold Gross profit Gross margin (% of net sales) Less Selling, general & admin expense Less Consulting Services to Cemex Operating Profit Less Net Interest Forex Losses on debt Contributions from subsidiaries Others Non-operating income Pretax Profit Less Indonesian taxes Net Profit Return on Sales (%) Nottingham Malaysia 1998F 874 437 511 20 1842 16% (534) (289) (277) (1,100) 742 40% (284) (13) 445 (788) 5 10 (773) (328) 99 (230) -12% 1999F 1189 522 607 20 2338 27% (734) (345) (317) (1,396) 942 40% (328) (15) 599 (700) (74) 6 10 (758) (159) 48 (111) -5% 2000F 1429 627 729 20 2805 20% (886) (389) (401) (1,676) 1,129 40% (393) (16) 720 (464) (105) 7 10 (553) 168 (50) 117 4% 2001F 1716 753 876 20 3366 20% (1,064) (467) (482) (2,013) 1,353 40% (469) (17) 867 (468) (139) 8 10 (590) 277 (83) 194 6% 2002F 2062 905 1052 20 4039 20% (1,278) (561) (579) (2,418) 1,621 40% (560) (18) 1,043 (472) (175) 9 10 (628) 415 (125) 291 7% April 2012 Slide 12

Parent Cash Flow At USD1.38 a share, the NPV of parent cash flow is positive (USD 28.67 mill) and IRR of 25%
1998 IDR/USD FX rate Dividend Paid (Billions of IDR) Dividends Received by CEMEX - 14% (Billions of IDR) Less indonesian withholding tax (15%) Net Dividend remitted to CEMEC (Billions of IDR) Dividends Received by CEMEX (USD) Consulting services (USD) Total cash flow Purchase of 14% stake in Semen Gresik Port upgrading & capacity expansion Terminal Value (14% stake) Total free cash flow Cost of capital PV NPV Nottingham Malaysia IRR 13,000 0 0 0 0 0.00 1,000,000.00 1,000,000.00 (114,606,240.00) (50,000,000.00) 388,328,239.70 -163,606,240.00 20% -163,606,240.00 28,670,450.05 25% 1,000,000.00 20% 833,333.33 1,440,526.59 20% 1,000,365.69 1,688,733.00 20% 977,276.04 392,876,106.60 20% 189,465,714.99 April 2012 Slide 13 1999 15,000 0 0 0 0 0.00 1,000,000.00 1,000,000.00 2000 15,865 58.73 8.22 1.23 6.99 440,526.59 1,000,000.00 1,440,526.59 2001 16,781 97.12 13.60 2.04 11.56 688,733.00 1,000,000.00 1,688,733.00 2002 17,749 145.26 74.08 11.11 62.97 3,547,866.89 1,000,000.00 4,547,866.89

Parent Cash Flow USD1.72 a share is the maximum price with a positive NPV for the parent cash flow.
1998 IDR/USD FX rate Dividend Paid (Billions of IDR) Dividends Received by CEMEX - 14% (Billions of IDR) Less indonesian withholding tax (15%) Net Dividend remitted to CEMEC (Billions of IDR) Dividends Received by CEMEX (USD) Consulting services (USD) Total cash flow Purchase of 14% stake in Semen Gresik Port upgrading & capacity expansion Terminal Value (14% stake) Total free cash flow Cost of capital PV NPV Nottingham Malaysia IRR 13,000 0 0 0 0 0.00 1,000,000.00 1,000,000.00 (142,842,560.00) (50,000,000.00) 388,328,239.70 -191,842,560.00 20% -191,842,560.00 434,130.05 20% 1,000,000.00 20% 833,333.33 1,440,526.59 20% 1,000,365.69 1,688,733.00 20% 977,276.04 392,876,106.60 20% 189,465,714.99 April 2012 Slide 14 1999 15,000 0 0 0 0 0.00 1,000,000.00 1,000,000.00 2000 15,865 58.73 8.22 1.23 6.99 440,526.59 1,000,000.00 1,440,526.59 2001 16,781 97.12 13.60 2.04 11.56 688,733.00 1,000,000.00 1,688,733.00 2002 17,749 145.26 74.08 11.11 62.97 3,547,866.89 1,000,000.00 4,547,866.89

Strategic Reasons for Investing

1. Inline with CEMEXs corporate strategies:
I. II. III. To leverage its core cement and ready-mix concrete franchise To concentrate on developing markets To maintain high growth by applying free cash flow towards selective investments that further its geographic diversification

2. Early mover advantage into Indonesia which is a large (200 million population) and rapidly growing market. 3. To ensure that other competitors dont get a foot hold in Indonesia via Gresik. 4. Potential for export to regional markets (Singapore, Taiwan, etc) if Rupiah exchange rate remains low.
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Sensitivity Analysis Country Specific risk is perceived to be high

1. High risk of future policy change due pressure from public opinion. Indonesian government succumb to pressure and modified its offer from 35% to 14% of the company.

2. Strong opposition against sale of state assets to foreigners from politicians and the general public. 3. Thread of punitive action by provincial governor to remove certain concessions to Gresik subsidiary. 4. Street demonstrations against sale of Gresik in Jakarta & West Sumatra. 5. Currency risk is minimal as the Rupee is expected to appreciate once the current crisis abates. 6. Implementation of free market reforms under IMF has reduced Transfer risk.
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Sensitivity Analysis Firm Specific risk is perceived to be high

1. Fear of lay offs resulted in street remonstrations in Jakarta and West Sumatra. Gresik management has guaranteed that no one would be laid off. Seriously limiting options.

2. Agency risk. With only 14% ownership of the firm, CEMEX doesnt not have control of the board or the management. Risk that managements interest may be in conflict with that of CEMEX. e.g. reducing headcount and dividend payouts. 3. Risk of price war in the Indonesian market. Potential for sales price of drop 10%.

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April 2012 Slide 17

Real Option Analysis

Year 0 Year 5

Purchase of controlling stake (Additional 51% from Government) NVP = USD 593.5 million Purchase (14%) NVP = - 158.6 million 25% Probability

75% Probability Sell shares at market Price NPV = USD 49.2 million

Option to exit in 5 years Dont Purchase, NVP =0

April 2012 Slide 18

Real Option Analysis NPV of cashflow from the first 5 years is -USD158.6 million
Optioin to purchase 14% in Year 0 IDR/USD FX rate Dividend Paid (Billions of IDR) Dividends Received by CEMEX - 14% (Billions of IDR) Less indonesian withholding tax (15%) Net Dividend remitted to CEMEC (Billions of IDR) Dividends Received by CEMEX (USD) Consulting services (USD) Total cash flow Purchase of 14% stake in Semen Gresik Port upgrading & capacity expansion Total free cash flow Cost of capital PV NPV 1998 13,000 0 0 0 0 0.00 1,000,000.00 1,000,000.00 (114,606,240.00) (50,000,000.00) -163,606,240.00 20% -163,606,240.00 -158,602,042.09 1,000,000.00 20% 833,333.33 1,440,526.59 20% 1,000,365.69 1,688,733.00 20% 977,276.04 4,547,866.89 20% 2,193,222.85 1999 15,000 0 0 0 0 0.00 1,000,000.00 1,000,000.00 2000 15,865 58.73 8.22 1.23 6.99 440,526.59 1,000,000.00 1,440,526.59 2001 16,781 97.12 13.60 2.04 11.56 688,733.00 1,000,000.00 1,688,733.00 2002 17,749 145.26 74.08 11.11 62.97 3,547,866.89 1,000,000.00 4,547,866.89

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April 2012 Slide 19

Real Option Analysis Option to sell 14% stake NPV of cashflow from share sale is USD 49.2 mill
Key Assumptions: 1. Annual share price appreciation is 5%
Individual share purchase price Annual share price growth rate Individual share purchase price at year 5 Gross preceeds from sales (IDR) Withholding tax (0.1%) Net preceeds from sales (IDR) Sales remitted to CEMEX (USD) 17,940.00 5% 21806.18 1,810,959,813,117.00 181,095,981.31 1,810,778,717,135.69 102,022,528.97

NPV of sales (USD)

49,200,679.48

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Real Option Analysis Option to buy 51% Positive NVP of USD 593 Million
Value of option to purchase additional 37% to gain controlling stake.

Annual Growth Rate at 8.2% Individual share purchase price (USD) Purchase cost (USD) Terminal Value (65%) Net cashflow Net Present Value 1.89 (572,215,276.37) 1,802,952,541.47 1,230,737,265.10 593,526,844.66

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April 2012 Slide 21

Real Option Analysis The parent cashflow has a positive NPV and thus profitable
NPV = NPV of cash flow + (NPV of exit option)(probability) + (NVP of option to purchase additional shares)(Probability) = -158,602,042.09+ 49,200,679.48 X (0.75)+ 593,526,844.66 X (0.25) = USD 26,680,178.69

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April 2012 Slide 22

Final Bid
No. 1 2 3 Item Cash offer of USD$1.38 as share for 14% stake Port upgrading & capacity expansion A five-year put option to the Indonesia government to sell its remaining shares to Cemex at a base price of USD$ 1.38/ share plus an 8.2% annual premium 4 Mutual consent on the operation of Semen Gresik. Cemex to be given right to participate in the decision making of Semen Gresiks operation and investment. TOTAL 164,606,240.00 Value (USD) 114,606,240.00 50,000,000.00 -

The maximum share price will be set at a price of USD 1.72 per share.

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Thank You

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