Finance Review of Fertilizer Sector 2014

Corporate Finance
Final project:
The Fertilizer Industry

Company

Risk Characteristics

Investment Performance
Capital
Structure

Dividend Policy

Valuations

ach

Beta

Jensen's
Alpha

R
squared

ROE -
COE

ROC -
WACC

EVA
Current
Debt
ratio
Optimal
Debt
Ratio
Change
in
WACC

Duration

Dividends

FCFE

Value/share

Price/Share

Put overall sector chart here combined wala

B

6.26

-5.92%

35.00%

n.m.
-
8.15%

(1,129.50)

86.65%

20.00%
-
7.06%

0

0

765.3

10.06

10.20

-

B 1.24 27.35% 27.00% 5.24% 2.01% 53.30 23.87% 10.00% 0.04% 5.3 0 23.5205 6.76 5.55

- -

B 1.42 4.43% 7.00% 2.80%
-
2.27%
-
(191.00) 44.86% 45.00% 0.00%
-
3.3 145 257.1 3.22 5.80
B 0.82 28.42% 15.00% 3.23% 3.53% (37.30) 0.00% 20.00% 0.54% 0 14.3 41.2 31.69 30.45

1
3

4

I. Executive Summary

Executive Summary
21% of Pakistans GDP is backed by the agriculture sector and a hefty 62% of countrys population is
directly or indirectly dependent on agriculture. The Agriculture sectors strong linkages with the rest of
the economy are not fully captured in the statistics. While on the one hand, the sector is a primary
supplier of raw materials to downstream industry, contributing substantially to Pakistans exports, on
the other, it is a large market for industrial products such as fertilizer, pesticides, tractors and
agricultural implements. A thriving agriculture sector is also essential to the prosperity of
manufacturing sector of the economy which mainly consists of agro based industries such as textiles,
sugar, food etc.
Fertilizers are substances added to soil to improve the growth of plants, as well as their yield. Fertilizer
industry in Pakistan is dominated by two main products; urea (nitrogen based product, accounting for
66% market share) and DAP (phosphorus based product, having 19% market share). Countrys annual
urea demand is approximately 6.5mn tons with local manufacturing capacity being 5.0mn tons. Delta
demand is met through imports. While Fauji Fertilizer Bin Qasim is the sole producer of DAP in
Pakistan, accounting for 42% of local DAP market share, whereas the remaining 58% demand is met
through imports.
Due to this high dependence ratio on agriculture sector, Government has always maintained a
transparent and consistent policy for fertilizer industry regarding, a) fresh investments, b) input prices,
c) supply of inputs. After domestic consumers, fertilizer industry is placed at priority list when it comes
to rationing of gas. The largest domestic urea producing companies receive their gas supply from Mari
Gas field. Mari field gas is not pipeline quality due to which there is limited risk of gas diversion, even
if there is shortage of gas in other segments.
The government sets minimum purchase prices of major crops (wheat, paddy, sugarcane). In the
absence of a commodity exchange, support prices ensure a fair return to the farmers, thus giving them
incentives to invest in these crops. Besides this, the farmer income is exempt from corporate and
general sales tax.
Pakistan is currently deficient in urea production by 1.5mn tons, but the scenario will change in the
next few months once Fatima Fertilizer and Engro plants comes online. The total urea capacity of two
plants will be around 1.8mn tons. The concerns that the country may face excess capacity in domestic
market leading to under utilizations or price wars is exaggerated as new urea capacity of 1.8mn tons is
only 0.3mn tons above the current deficit. The gas loadshedding is estimated to reduce domestic
fertilizer production by 0.3-0.6mn tons at least. Looking at current local demand supply balance,
imports, future expansions and gas curtailment, it is likely that Pakistan will face urea shortage from
2012 and onwards on a conservative basis.
5
Flash floods so far depict a devastating picture. While final numbers would take time to shape up, the
situation is dire and macro targets for FY11E are destined to change. In a nutshell we see demand for
both urea & DAP will be soft in 2010E and should correct in 2011E. The last instance of excessive
flooding in Pakistan (c. Sep 1992 i.e., FY93) resulted in FY93 agricultural growth of -5.3% (from
+9.5% in FY92). Likewise, the year following 1992 floods, nitrogen application growth slowed down to
+1% while phosphate demand slipped to -5%. A potential positive for the longer term is that the
present increase in dams water level may actually bode well for agricultural growth and fertilizer
demand one year out where lower than mean water availability has stunted growth in major crops in
the last couple of years.

R i s k P r o f i l e

We used ___ measures of beta to estimate the exposure of each company to market risk. The
results reflect the fundamental characteristics of each company and in particular variance of earnings
and leverage. The riskiest company as measured by historical regression beta is
__________________ and the least risky__________. Because of the historical character of the
regressions beta and high standard errors of the estimates we used bottom-up betas in our further
analysis.
In addition, we used ______methods to compute returns of each company with relation to its
risk

_____________________ratio. Under both methods the top performing companies were ______
and ______.
Investment Analysis

We used accounting measures of return to analyze the return on typical investment projects
at which the companies are investing in fertilizer sector, such as ROC and ROE.
___________proved to be the company with highest returns and the EVA of the companies was
_____________.In addition we assessed the future prospects of each company, analyzing the
sustainability of its competitive advantages. This analysis was used as a basis for the valuation of the
Firms.

C a p i t a l s t r u c t u r e

The three companies adopt very different policies with regards to their capital structure,
ranging from the highly over levered _____________ (debt ratio of _____) to the all equity financed
________. Taking into account the potential benefits and disadvantages from the use of debt we
computed optimal capital structures for each firm and assessed the impact on the share price from
6
moving from the current capital structure to the optimal. The result was an average of _____%
increase/decrease in the firm
7
value of the firms, most of this increase comes from __________. It was interesting to find that
____________ current debt ratio is equal to its optimum roughly ____%
D i v i d e n d p o l i c y

All three companies are dividend paying companies, although for very different reason, FFC
Bin Qasim pays out all profit in its dividend .__________exhibits a great potential to invest in projects
with positive excess returns (ROC exceeds Cost of capital). ______and ________ are companies
with more steady and predictable cash flows and reinvestment needs and this is reflected in their
dividend policies. Our analysis is presented in Sections____ and _____.
V a l u a t i o n

The results from our valuations are presented in the table below:
Valuations wale combine kr k excel k paste here.

Valuation summary
Fatima
FFCBL

FFC

Sector
Model Chosen
Value per Share
FCFF 2 Stage
10.06
FCFF 3 Stage
6.76
FCFF 2 Stage
3.22
FCFF 2 Stage
31.69
Current Stock Price 10.20 5.55 5.80 30.45
Undervalued / (overvalued) -1.3% 21.8% -44.4% 4.1%
Reccomendation HOLD BUY SELL HOLD
Source: Analysis

pages.
The valuation models are based on the results from our analysis as presented in the following

II. Introduction and the companies

1. Introduction

The current report examines major trends in the Fertilizer sector focusing on 3 major production
companie in particular Fatima Fertilizer (__), Fauji Fertilizer company and Fauji Fertilizer Bin
Qasim. The companies reviewed operate in same businesses, Fertilizer production industry, utilize
different business models and are at different stage of their life cycle. The purpose of the report is to
analyze different aspects of their corporate finance policies and to assess the effect of these policies on
the value the managements of these firms create for their shareholders. Summary information for each
company is presented in Figure 1.
8
Figure 1 Summary company information
Same excel thing
American
Company information Airlines Ryanair BAA Asur
Country of incorporation United States Ireland
United Kingdom
Mexico

Primary listing NYSE ISE London Stock
Exchange
NYSE
Year of establishment 1926 1985
1965
1998
Year of stock exchange listing 1939 1997
1987
2000
Reporting currency US dollar Euro British pound US dollar

Revenues in 2004 (MM local
currency)

18,645 1,074 1,970 1,976
Revenues in 2004 ($ equivalent
1
) 18,645 1,336
3,546
177

Book value of capital (MM 2004
local currency
2
)
Book value of capital (2004 $
equivalent)
13,749 2,939 8,960 12,326

13,749 2,158 16,128 1,106

Throughout the report analysis has been presented based on information gathered from
various public sources, including statutory filings with regulatory authorities in the respective
jurisdiction, company annual reports, management presentation and other publicly available
information. We have tried to acknowledge each source of information where possible. Figures
and data that is not referenced to any source has been result of our own analysis.
For computational ease the analysis for each company has been undertaken in the reporting currency
under which the company reports annual results.

2. Brief description of the companies

Fatima Fertilizer

1
About the company
Fatima Fertilizer is a joint venture of Fatima Group and Arif Habib Group. Fatima Group and Arif Habib Group
also own Pak Arab Fertilizers Limited which produces CAN, NP and UREA having a total capacity of 0.85mn
tons/annum. Fatima Fertilizer is setting up largest fertilizer complex with production capacity of 1.58 Million
tons/annum. 110 MMCFD gas has been allocated from Mari Gas Company Limited for ten years which can be
extended afterwards. China National Chemical Engineering Corporation (CNCEC) was the main Civil,
Mechanical and commissioning contractor.

1
http://wwwfatima-groupcom.itrademarket.com/profile/fatima-fertilizers-comapany-ltd.htm
9

CAN and Urea have already started production. NP plant is projected to start commercial production from
December this year. The project is located on 947 Acres of land acquired at Plant site Mukhtar Garh
Sadiqabad, Rahim Yar Khan in the Punjab Province.

Final Products
Urea plant 1,500 TPD
Calcium Ammonium Nitrate Plant (CAN) 1,400 TPD
Nitro Phosphate Plant (NP) 1,200 TPD

Intermediary Products
Ammonia Plant 1,500 TPD
Nitric Acid Plant (NA) 1,500 TPD

Cost estimates
The cost of the project has increased to around PKR63bn from the initial PKR60bn. As of 1QCY10 balance
sheet (post share offering), 34% of the project was financed by common share holders, 7% by preferred
stocks which are convertible and whose dividends are cumulative (carrying a high dividend rate of 6M KIBOR
plus 3%). The rest of the project is to be financed by debt and subordinated loan from sponsors. The
management also stated that they are planning to issue an American Depository Receipt (ADR) by end 2010
with Bank of New York Mellon assistance.
10

Plant Performance
Commercial production for the urea and CAN plants had started in Apr-10, while the NP/NPK plant is slated
to come online by Dec-10. As per NFDC, urea and CAN production for the first two months (Apr-May) stood
at 69.4k tons and 23.9k tons. As per the mgmt., current utilization of both urea and CAN plants stands at
107% and 94% respectively.

11
Fauji Fertilizer Company Limited

2
About the Company
Fauji Fertilizer Company (FFC) was incorporated in 1978 as a private limited company, in a joint
venture between Fauji Foundation (a leading charitable trust in Pakistan) and Haldor Topsoe A/S of
Denmark. Present share capital of the company stands at PKR6.8bn. FFC has 51%, 12.5% and 13.5%
stake in Fauji Fertilizer Bin Qasim Limited (formerly FFC-Jordan Fertilizer Company Limited), Pak
Maroc Phosphore (PMP) and Fauji Cement Company Limited (FCCL) respectively. FFC commenced
commercial production of urea in 1982 with designed annual capacity of 570k tons, which has been
subsequently augmented to 1.9mn tons at present. FFC currently has 678.5mn shares outstanding
out of which 44% shares are held by Fauji Foundation, being the largest shareholder of the
company.
FFC is involved in manufacturing & sale of urea, and also imports and sells phosphate fertilizers.
Fauji holds 50.88% share in Fauji Fertilizer Bin Qasim (FFBL), a listed company involved in
manufacturing and sale of urea and DAP. FFBL is the only DAP manufacturer in the country. FC also
has joint-venture investment with OCP of Morocco in phosphoric acid manufacturing operations
(Pak Maroc Phosphore). PMP is a USD 240mn project with FFC holding 12.5% of the equity.
Sone Urea most widely used fertilizer in the country. Fertilizer is white in color, free flowing, readily
soluble in water and both contain 46% Nitrogen. Because of its high solubility, it is suitable for
solution fetilizers.

Sona DAP is the most concentrated phosphatic fertilizer containing 46% P 2O5 and 18% Nitrogen. It
is the widely used phosphatic fertilizer in the world as well as Pakistan. The solubility of DAP is more
than 95%. Its nitrogen to phosphoris ratio (1 : 2.5 ) makes it an ideal fertilizer, to meet the initial
requirement of most of the crops.

Sona SOP This fertilizer is an important source of Potash, which is a quality nutrient for production
of crops especially fruits and vegetables. Potash improves the resistance of the plants against pests,
diseases and stresses like water.
Largest Urea producer

2
http://www.ffc.com.pk/
Foundation Securities Fertilizer Sector Analysis
* also referred own previous research work
12
FFC is currently the largest urea manufacturer in the country (Engro, after its 1.3mn ton expansion
will overtake FFC to become the largest urea manufacturer in 2010) with a market share of 42%.
The company has a production capacity of approximately 1.9mn tons. Being the largest urea
manufacturer, FFC benefits from economies of scale, and as a result has the best gross, operating
and net margins in the industry.
Graph: 5 year average margins

Production Efficiency
GOTH MACHHI-Urea Production (met Tons/Year)
Base Unit Expansion Unit Total
Years Production
Capacity
Factor (%
Design)
Production
Capacity
Factor (%
Design)
Production
Capacity
Factor (%
Design)
1982 325,452* 93.86 - - 325,452 93.86
13
1983 566,771 99.43 - - 566,771 99.43
1984 589,258 103.37 - - 589,258 103.37
1985 598,694 105.03 - - 598,694 105.03
1986 594,901 104.36 - - 594,901 104.36
1987 632,079 110.89 - - 632,079 110.89
1988 637,737 111.88 - - 637,737 111.88
1989 632,972 111.04 - - 632,972 111.04
1990 652,665 114.50 - - 652,665 114.50
1991 629,266 110.39 - - 629,266 110.39
1992 648,178 102.55 - - 648,178 102.55
1993 657,376 94.58 477,339** 95.85 1,134,715 100.41
1994 678,114 97.57 659,526 103.86 1,337,640 100.57
1995 680,062 97.85 700,031 110.24 1,380,093 103.76
1996 710,862 102.28 695,749 109.56 1,406,611 105.76
1997 773,048 111.22 734,275 115.63 1,507,323 113.33
1998 742,599 106.84 682,969 107.55 1,425,568 107.18
1999 726,723 104.56 734,689 115.69 1,461,412 109.88
2000 729,864 105.01 695,938 109.59 1,42,5802 107.20
2001 737,607 106.13 756,417 119.12 1,494,024 112.33
2002 801,825 115.43 713,889 112.38 1,515,714 113.97

* Start-up of commercial production on 14 June 1982
** Start-up of commercial production on 21 March 1983
14

MIRPUR MATHELO-Urea Production (met Tons/Year)
Base Unit Expansion Unit Total
Years Production
Capacity
Factor (%
Design)
Production
Capacity
Factor (%
Design)
Production
Capacity Factor
(% Design)
2002 59,886* 102.91 - - 590,886 102.91

* FFC aacquired 100% management control of PSFL-Mirpur Mathelo
effective from July 1,2002

Source: http://www.ffc.com.pk/contents/manfacturing.htm
Vast distribution networks an important plus point
FFC being the current market leader in urea, has the most stretched out distribution network. The
company has its outreach in all four provinces with market leadership in Punjab, Baluchistan and
NWFP provinces, whereas the companys prime competitor Engro only has a strong hold in Sindh
region. FFC also markets FFBLs products through its distribution setup. The company charges
commission for marketing these products. This ensures that FFBL is able to cost efficiently and
effectively sell its produce throughout the country, which indirectly benefits FFC through dividend
income.

Low leverage levels
One of the strongest points for FFC is its low level of leverage. In the current environment of high
interest rates, this attribute gives FFC an edge over its competitors which are suffering from high
finance costs. FFC, currently does not have any significant expansion plans in sight other than BMRE
15
on plant 1 (this would not require any significant financing requirement). Hence, the debt level is
expected to remain low. However, in case of any attractive future investment plans, FFC could
easily leverage its balance sheet to fund the investments.

Gas curtailment more than offset by price hike
FFC and Engro have more than offset the negative impact of lost production by raising urea prices
by PKR 75/50kg bag. The price increase was calculated on the assumption of 12% gas curtailment
on Mari field based plants whereas the actual curtailment during 1h2010 has been only 4-5%. Mari
field based fertilizers plants have witnessed margin increased during 2q2010 due to lesser than
expected gas curtailment.

Mulling purchase of Agritech Ltd
FFC is reportedly contemplating bidding for Agritech Ltd (AGL) and its 100% owned subsidiary
Hazara Phosphate Fertilizers (HPFL), as Azgard Nine Ltd, the majority shareholder of Agritech, has
decided to completely divest its 80% equity stake in the company. Agritech currently has the
capacity to produce 0.38mn tons of urea and 0.1mn tons of single super phosphate (SSP) per
annum. The company plans to increase urea capacity to approx 0.46mn tons / annum through BMR
in Cy10.
While the details on the proposed transaction are not yet available, simplistic calculation indicates
that FFC can easily fund its acquisition through leverage due to companys low current leverage.
Assuming acquisition price is equal to prevailing market price of approximately PKR 23/share, FFC
would require approx PKR 9bn to purchase 100% equity of the target company. Given that cash and
liquid investments amounted to PKR 3.8bn as at Mar 31, 2010, out of which payment of ~PKR 2.7bn
would have been made for the 1qCy10 dividend, FFC would be left with PKR 1.1bn in
cash/investments. Assuming this as minimum cash balance required for working capital needs, it is
likely that the company takes on PKR 9bn (100%) worth of debt to fund the acquisition.
Furthermore, given FFCs strong internal cash generation, it is plausible that the company funds the
acquisition through financing. As such, additional annual financial charges of PKR 1,350mn
(assuming 15% cost of debt), is hardly significant compared to companys average annual EBITDA of
Rs15bn.

Wind power project expected to commence in 1qCy12
16
Financial close for the USD 130mn, 50MW wind power project proposed to be set up at Jhimpir,
Thatta is now expected to be achieved in Sept-2010 against earlier expectation of June-2010. The
project is likely to start commercial production approx 16 months after financial close (1qCy12).

Benefits from Engros cost increase and margin push
To mitigate its rising expansion costs, stemming from depreciating Rupee and higher financial
charges, Engro has been pushing for increase in urea selling prices. This as a result has directly
benefited FFC, as the company has followed Engros price hikes. The above has resulted in margin
increase for the company. During CY07 and CY08, local urea prices have increased by approximately
PKR170/bag, while FFCs gross margins have increased by 800 bps over the same period. We expect
Engro to continue with price hikes, (at least till local supply demand scenario remains favorable
for manufacturers) which will continue to benefit FFC.

2. Management compensation

Management compensation does not appear to be an issue at any of the companies analyzed.
All CEO getting market competitive compensations. All firms, with the exception of ______ use
stock options as a mean to align managements interest with those of shareholders, but with the
exception of ________, none of the CEOs own a significant stake in their companies. Details
about the CEOs, their compensations and the composition of the Board are presented in Figure 3 and
17
IF data not available just write it down.
18
Figure 3 Brief presentation of management

Chief Executive Officers

American
Airlines Ryanair BAA Asur
Name
Age 46 43 52 50
6 (Asur), 11
Years at the Company 23 17 4 (CPH)
Years as CEO 3 9 3 1
Education MBA n.a. MA, Engeneering, (Denmark)
Salary ('000) 518.8 505.0 553.0 N/A
Bonus ('000) - 127.0 167.0 N/A
Other (000) 0.2 49.0 21.0 N/A
Stock Options (000.) 172.0 502.0 525.0 0
Total Compensation (000).) 691.0 1,183.0 741.0 1,317.0*
Stock Ownership (% of Total) 0.1% 5.44% 0.001% 0%
Market Value of Stock Held (mm) 1.14 237 0.1 0.0
* Compensation to all 5 executive officers including the CEO
Source: Annual reports, Statutory filings

Figure 4 Board of Directors

Board of Directors

Number of members

13

9

9

7
Insiders 1 1 5 3
CEO of other Companies? 7 no yes 3
Related Companies? 2 no No Yes
Source: Annual reports, Bloomberg,KSE various public sources
19

4. Social responsibility

FFC CSR
For Fauji Fertilizer Company Limited, social responsibility means facilitating communities and empowering
its people. Sustainability shall always remain quintessential for the performance of CSR. Historically, FFC
has always been socially a responsible corporate entity. The Company started its CSR per se as early as in
1982 by introducing Agri-Services thus helping in poverty alleviation of common farmer and assisting them
in sustained empowerment. Gradually FFC started interventions in most of the defined sectors and has
developed a history of about 30 years of contributions to the society.FFC, further plans to bring
sustainability in its interventions and desires to achieve international standards by aligning CSR with our
business objectives. FFC is also committed to improve quality and quantum of its interventions by
maximizing on the available resources.
Since FFC has become member of covenants like UNGC, the CSR has to be aligned with international
guidelines. It is necessary to standardize the interventions and monitor the quality of interventions at a
central level. We need to stay committed to its principles. Keeping the vision of responsible corporate entity
in mind, FFC has moved in this direction. FFC has made quality as its core value when it comes to CSR
intervention at any level, and in future this will remain as the prime objective.
Relief
In districts Rahim Yar Khan and Ghotki, flood had crippled the lives of people of the area. FFC thus
took the task of shouldering its share of responsibility initially in flood relief effort for the affected
natives of District Rahim Yar Khan and Ghotki. Some of these relief efforts were:
Distribution of cooked food
Dry ration for families
Transport for Evacuation
Mineral & FFC filtered Drinking Water
Tents/ shelters
Cloths, Blankets & Shoes for the affected families
Soap & Washing Powder
Crockery
FFC employees voluntarily made remarkable contribution in their respective plant sites which
amounts to millions. Food, drinking water, beddings, shelters and clothing was provided to the flood
affectees in the relief phase of the operation. Medical teams from FFC medical units performed day
night service for the flood affectees in Rahim Yar Khan and Ghotki, saving many precious lives.
20
Rehabilitation
FFC has taken up the challenge of reconstructing 3 villages of districts Rahim Yar Khan and Ghotki.
The intervention is planned in Reconstructing of Houses, Education, Health, Shelter, Water and
Sanitation and Infrastructure. This project of rehabilitation and reconstruction will cost 102 million
(PKR) out of which 50% will be contributed by FFC.
A project has been devised to construct Houses, water supply, pathways & sanitation facility for the
affected natives of Muaza Chacharan, Mohib Shah (Rahim Yar Khan) and Chuttoo Chachar
(Ghotki). FFC while acting as a responsible corporate entity has lead from the front in this time of
national grief and has played an exemplary role for other entities to come forward and contribute
their share.
Fatima Fertilizer CSR
At Fatima Fertilizer Company, CSR revolves around a self-regulating mechanism and adheres to the laws, ethical
standards and internal values.
Fatima Fertilizer Welfare Hospital
Fatima Fertilizer Welfare Hospital (FFWH) is a key project of Company's vision towards community welfare.
The Company, under the guidance of Government of Punjab has undertaken to establish a modern welfare hospital in
the vicinity of Plant site, to cater for the needs of underprivileged of the area.
This is the first ever initiative of its kind and magnitude in private sector.
Clean Development Mechanism
Global warming has become the most important challenge the world is facing in the 21st century. A lot of research and
development is being done for curtailing greenhouse gas emissions. Following its accession to the Kyoto Protocol of
the United Nations Framework Convention on Climate Change (UNFCCC) in January 2005 Pakistan made the
Ministry of Environment the Designated National Authority (DNA) for CDM under the protocol. A CDM cell was
created in the Ministry in August 2005.
In order to care for the environment and greenhouse effect, the Management has installed a Clean Development
Mechanism (CDM) Project on its Nitric Acid plant.
It is expected that about 1.3 million CER's per annum will accrue from the start of the project up to 2020.
Mitsubishi Corporation has assisted in implementation of the project and is now in the process of registration of
Fatima Fertilizer's CDM Project with the United Nations.
Uhde has provided the technology and equipment and also helping with the implementation of CDM for Fatima
Fertilizer.

21

IV. Stockholder Analysis

V. Risk Profile

1. Market risk and return
In analyzing the risk characteristics of the three companies we first looked at their returns over
a ____ year period compared them to the returns of a broad based market index such as the KSE 100.
Figure 12 below presents the rebased share prices of all three companies and the level of the KSE 100

"' "' "'
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Figure 12 Stock price performance (insert chart of market and companies stocks)

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In general, ______ out of the _____ firms did better than the market. These results were
expected for ______ and _____. _ _ _ _ _ _ on the other hand, is more mature less volatile company
characterized by steady income stream and cash flows.

To analyze the market risk of the three firms we regressed their returns against broad based
market index and used the coefficient of the regression as a measure of market risk. We used __ year
monthly returns for the regression. The choice of index reflected the marginal investor in each
company, assuming that each investor is exposed to the same market risks in their respective
market.

17
18
focuses on the regression coefficient (beta), the regression constant (used for computation of Jensens
alpha) and the regression R-squared. The results from the regressions are summarized in Figure 13.
Figure 13 Risk return characteristics
Risk profile FFC Fatima FFCBL Faisal
Regression Beta
Reference index
4.67
KSE 100
1.21
KSE100
0.35
KSE 100
0.99
KSE 100
Industry average beta 1.34 1.80 0.95 0.95
Average Risk free rate 4.59% 4.58% 4.24%
Jensen's Alpha -5.92% 27.35% 4.43% 28.42%
R
2
of Regression 35.0% 27.0% 7.0% 15.0%
Standard Error of Beta
Jansen's Alpha -
0.56 0.48 0.17 0.32
industry average -4.27% -4.27% n/a n/a
Source: Bloomberg,Kstock.com,FX Street.com,ForexFactory.com analysis, www.damodaran.com

Slope of the regression - Beta

The coefficients of the individual regressions are the companies betas and are used as a
measure of the company exposure to market risk. The analysis indicates that ____________ is the
company with highest exposure to market risk (regression beta of ____), which is also more/less than
__ times the industry average. This is a reflection of high indebtedness and negative and volatile
earnings. _______ and ____________ on the other hand have regression betas much lower than
the industry averages. The reasons behind the different risk profiles of each firm will be examined
in greater details further in the report.
We also examined the excess returns of each firm as measured by its Treynor ratio. The
Treynor ratio measures the excess return of a stock given its level of risk (non-diversifiable) and is
computed with the formula below:

Treynor

Rstock " R

=
!

Figure 14 below presents the Treynor ratios and the spread between stock Treynor ratio and
the market Treynor ratio over different investment horizons. The results suggest that over the last 5
years Ryanair had highest excess return compared to the market taking into consideration its risk.
None of the stocks outperformed the market over a 10 year period. Over the last couple of years the
best performing stock was Asur. These two stock were excluded from the 10 year horizon analysis, as
data for them was not available.
19
T
r
e
y
n
o
r

r
a
t
i
o
E
x
c
e
s
s

r
e
t
u
r
n

.

Figure 14 Treynor ratios

80.0%

70.0%

60.0%

50.0%

40.0%

30.0%

20.0%

10.0%

0.0%

-10.0%

-20.0%

1 year 2 year 5 year 10 year

Investment horizon
70.00%

60.00%

50.00%

40.00%

30.00%

20.00%

10.00%

0.00%

-10.00%

-20.00%

Treynor ratio AA Treynor ratio Ryanair Treynor ratio BAA Treynor ratio Asur

Excess return AA Excess return Ryanair Excess return BAA Excess return Asur

The calculations of the Treynor ratios are presented in Appendix II.

I n t e r c e p t o f t h e r e g r e s s i o n a n d J e n s e n s a l p h a

We further used the intercept of the regression to compare the actual stock performance of
each company to the market expectation. For each stock we computed Jensens alpha equal to
I n t e r c e p t R i s k F r e e r a t e x ( 1 B e t a ) , using the average monthly risk free over the period. The
results were annualized using the formula:
( 1 + M o n t h l y e xc e s s r e t u rn )
1 2
1

The annualized returns indicated that on average all companies except for ___________
generated returns that exceeded the markets expectations. In addition, comparing _________
high/low excess return to the negative/Positive industry Jensens alpha suggests that the company
performed better/Worse than expected at a time when the sector as whole did not meet the markets
expectations.
20
R - s q u a r e d

R-squared of the regression provides information as to what proportion of the variability in
returns could be explained by the regression. The market non-diversifiable risk represents
__%,__% and ___% for _________, __________, and ________ respectively. The remainder is
company specific, non-diversifiable risk. While the relatively low/high R-squared for ______and
________ could be explained by the fact that they were small, fast growing companies during the
observed period and were facing numerous company specific challenges in establishing their business
models, we were surprised to estimate that __________was characterized by a large proportion of (___%)
of company specific, diversifiable risk.

S t a n d a r d e r r o r s

The standard errors of the regression betas appear to be _________, suggesting a ______interval
for the possible values of the beta. This is one of the reasons why we considered an
____________approach to measuring the companys exposure to market risk, which is described below.

2. Bottom up betas

As an alternative approach to regressions betas we considered using bottom-up betas for our
analysis.
E s t i m a t e s o f u n l e v e r e d b e t a

We used market information about firms in the sector to estimate the risk profile of each of
the companies. The main stream of cash flows for _______ and _______ come from their core
business. Calculation of the unlevered beta of
Presented in Figure 15 and Figure 16.

Figure 15 Unlevered Bottom up Beta for BAA
Estimated

Unlevered

Division

Weight *
Business line Value Comparable Firms Beta Weight Beta
Airport 4,125 Airport
Development/Maintenance
Retail 4,770 Retail (Consumer Electronics /
Luxury / Restaurants)
0.73 46% 0.34

1.05 54% 0.56

Firm total 8,895 0.90

Figure 16 Unlevered Bottom up Beta for Asur
Estimated

Unlevered

Division

Weight *
Business Line Value Comparable Firms Beta Weight Beta
Aeronautical services 684.2 Airports 0.88 75.0% 0.66
21
Non-aeronautical services 228.5
Commercial activities 76.3

Luxury 38.2
Retail Perfume &
Cosmetics 1.08 4.2% 0.05
Restaurants 38.2 Retail - Restaurants 0.82 4.2% 0.03
Real Estate
Access fees 152.2 Mgmt/Services 0.47 16.7% 0.08

Firm total 912.7 100.0% 0.82

Bottom-up betas
After estimating unlevered beta for each firm we levered back the beta to estimate a firm beta
that reflects the additional risk associated with financial leverage. The sector betas were unlevered and
re-levered using the formulae bellow:

{3unle vered

Where:

T
f3ma rket
(1+ (1- T)(D I E)

applicable tax rate;

f3te vered = f3unte vered x(l + (1 - T )x(D I E))

D /E

market value of debt / market value of equity

The market value of equity has been computed as current share price multiplied by the number of

shares outstanding. Details of the computation of the market value of debt are presented in Figure 21.

Figure 17 Beta estimation - summary
American
Beta measure Airlines Ryanair BAA Asur

Top down Beta 4.67 1.21 0.35 0.99

Bottom up Beta (levered) 6.26 1.24 1.42 0.82

Industry avg. Beta (levered) 1.34 1.80 0.95 0.88

3. Cost of equity

The computed bottom up beta has been use to compute the cost of equity for the firms. The cost of
equity has been calculate using the Capital Asset Pricing Model and includes the following inputs:
Risk free rate of return (Rf) -in estimating the cost of equity we have used long term government
bond denominated in the respective currency to come up with the risk free. The current 10 year
bond yields were used in the analysis . The 10 year maturity of the bond used reflects the long
term investment horizon of the likely projects. Other periods should be considered for shorter
term projects.
Market risk premium (Rp)- this measure reflects the excess return to which an investor is entitled
as a compensation for the higher risk he / she undertakes by investing in risky security rather than a

??
23
riskless one. We have used the geometric average of excess returns from the market over long
term Treasury bonds for the period between 19___ and 20__.
Beta as computed above.

The cost of equity, for all companies except Asur, is defined as:

Ke =Rf + x Rp

The cost of equity for Asur, is defined as:

Ke =Rf + x (Rp+Country Risk)

The cost of equity computation is summarized in Figure 18.

Figure 18 Calculation of cost of equity
Cost of Equity American Airlines Ryanair BAA Asur
Risk Free Rate 4.27% 3.47% 4.5% 4.24%
Beta 6.26 1.24 1.42 0.82
Risk Premium 4.82% 4.82% 4.82% 4.82%
Country Risk - - - 1.80%
Cost of Equity 34.54% 9.45% 11.30% 9.65%

4. Cost of debt

The other important component of the cost of capital is the cost of debt. It reflects the
perceived risk of the companies by lenders and debt investors, or its credit risk. The two components
of credit risk are default risk (or the probability that a company will cease making payments as agreed
in the credit agreement) and non-recovery risk (or the probability of recovery of the capital provided,
once the company goes in default). More detailed analysis of the borrowing policies of all firms is
presented in Section VII Capital Structure.
24
The cost of debt for each company has two components a risk free rate of return and
compensation for the credit risk associated with the company. In estimating the credit risk for each
company we took __ approaches:
write down approaches used company wise in just one line each

After obtaining the respective credit ratings we looked at the credit default spreads
corresponding to each rating, which is a measure of the risk premium required. For all companies we
used the credit default spread embedded in current yields of publicly traded debt. We computed the
cost of debt for each by adding the default spread to the risk free rate for the respective company. The
results are presented in Figure 19.
Figure 19 Calculation of cost of debt
Cost of debt American Airlines Ryanair BAA Asur
Credit Rating
Spread vs. Treasury (a)
CCC
9.66%
A-
1.00%
A+
0.70%
n.a.
0.00%
Risk Free Rate (b) 4.27% 3.47% 4.47% 0.00%
Pre-tax Cost of Debt (c) = (a) + (b) 13.93% 4.47% 5.17% 0.00%
Marginal Tax Rate 35.00% 12.50% 30.00% 33.00%
After Tax Cost of Debt (c) * (1-tax rate) 13.93% 3.91% 3.62% 0.00%

After computing the cost of debt for each firm we computed the after tax cost of debt. The after tax cost of debt
reflects the fact that interest payable on debt is deductible from the operating income for tax purposes and results in
tax savings for the firms.
25
5. Cost of capital

M a r k e t v a l u e o f e q u i t y

The market value of equity for each firm has been estimated by multiplying the number of
shares outstanding for each company by the current share price. The market values of equity are
presented in Figure 20.
Figure 20 Market values of equity place from excel file
Market Value of Equity (million) American Airlines Ryanair BAA Asur

Market Value of Equity (million) 1,862.2 4,352.4 6,153.3 912.7

Source: KSE

M a r k e t v a l u e o f d e b t

In estimating the market value of debt we again took __ approaches:

Use the current value for debt that is publicly traded and information is obtainable;

Project interest and principal payments and discount them back at the current cost of
debt as estimated above.
In projecting the interest payments we have used the current interest payments to book value
of debt ratio as a proxy for the average interest rate payable on the debt; and the average maturity of
the outstanding debt.
Summary of the market value of debt calculation is presented in Figure 21.
26
Figure 21 Estimation of market value of debt
Market value of debt (million) American Airlines Ryanair BAA Asur
Book Value of Debt 14,254.0 1,178.7 4,578.7 -
Current cost of debt 13.93% 4.47% 5.17% 0.00%
Average maturity 7.3 6.4 11.1 -
Interest Expense 894.0 53.3 143.0 -
Market Value of Debt (a) 6,261.3 1,179.6 4,618.2 -
PV of Operating Leases (b) 5,822.57 181.64 388.82 -

Total Market Value of Debt (a) + (b)

12,083.9

1,361.3

5,007.1

-

D e b t a n d E q u i t y r a t i o s

The market values of debt and equity have been used as weights in calculating the weighted
average cost of capital.

Figure 22 Capital weights
American
Airlines

Ryanair
Industry
Avg.*

BAA

Asur
Industry
Avg.**
Market Value of Equity (a) 1,862.2 4,352.4 6,153.3 912.7
Market Value of Debt (b) 12,083.8 1,361.3 5,007.1 -
Firm Value (a) + (b) 13,946.0 5,713.7 11,160.4 912.7
D/(D+E) 86.65% 23.82% 33% - 49% 44.86% 0% 9% - 35%
E/(D+E) 13.4% 76.2% 67% - 51% 55.1% 100% 91% - 65%
Source: Bloomberg, own analysis, www.damodaran.com
*Airline Transportation industry, **Airport maintenance and operation industry

Comparing the debt ratios for the analyzed companies to the industry average we observe that
_________s financial leverage is significantly higher/lower than that of the average for the sector
(between __% for companies).

These inputs are used in computing the cost of capital for each firm. The weighted average
cost of capital is computed as follows:
W A C C = K e x E / ( D + E ) + K d x D /( E + D )

The inputs and results are summarized in

Figure 23.
27
Figure 23 Calculation of cost of capital
Cost of capital American Airlines Ryanair BAA Asur
Beta 6.26 1.24 1.42 0.82
Cost of Equity 34.54% 9.45% 11.30% 9.65%
E/(D+E) 13.35% 76.18% 55.14% 100.00%
After-tax Cost of Debt 13.93% 3.91% 3.62% 0.00%
D/(D+E) 86.65% 23.82% 44.86% 0.00%
WACC 16.69% 8.13% 7.85% 9.65%

the company with highest cost of capital is _______. The lowest cost of capital, i s that of
_______.

The ability of each firm to grow and create value for its stockholders ultimately depends on its
management capability to identify and undertake projects that generate returns exceeding the cost of
capital employed. In this section we will analyze the quality of the projects that the three companies
undertake ad review the past performance of the companies as measured by indicators such as Return
on Capital (ROC) and Return on Equity (ROE).

1. Typical project

The companies, subject to our analysis are involved primarily in fertilizer business. Some of
the characteristics of a typical project for each business are presented in Figure 24.
28

Figure 24 Typical projects
Business Typical Project / Flow Characteristics

Airlines

Aeronautical Services

Retail
Fleet Acquisition: Long term payment, Long life of the asset
New Route Opening: local offices and labor force. Long term and
different currencies
Set up of new bases long term, may have option value to expand in
new routes at a later stage.
New Terminal buildings and maintenance. Long term, single currency
Cash flows are volatile and sensitive to macroeconomic risk factors.
Medium to long term
Cash outflows that are primarily in local currency,
but there could be a significant dollar component
Cash inflows that are almost exclusively in local currency
Part of cash flows related to passengers can be volatile and sensitive to
global risk factors.
Another significant part of cash flows is less volatile as it consists of
fixed payments made by airlines for use of facilities and servicing.
Medium term
Cash outflows that are almost exclusively in local currency
Cash inflows that are primarily in local currency,
but there could be a significant dollar component
Can be very volatile, specially sensitive to global risk factors

In general, the time horizon of the core businesses of companies is agriculture related business
only.

2. Measuring Returns

ROE and ROC

For each of the company we computed the Return on Equity (ROE) and Return on Capital (ROC) as
follows:

where:

ROE =
NetIncome
(BVE
t
+ BVE
t !1
) / 2

ROC =
Op.Income(1 ! T )
(BVE
t
+ BVD
t
+ BVE
t !1
+ BVD
t !1
) / 2
29
BVE - book value of equity

BVD - book value of debt

T - tax rate

t - time period

The historical returns are presented in

Figure 25 and Figure 26.

Figure 25 ROE, ROC and industry averages

16.00%

14.00%

12.00%

10.00%

8.00%

6.00%

4.00%

2.00%

0.00%

American Airlines Ry anair BAA Asur
16.00%
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
-2.00%
-4.00%

ROE ROC ROE (indusry average) ROC (industry average)

Source: Analysis and industry average from www.damodaran.com

Figure 26 Investment returns
American
ROE n.m.
3
14.69% 8.50% 5.15%
ROC 8.54% 16.94% 5.59% 4.76%

E c o n o m i c V a l u e A d d e d

We further compared the obtained returns to the cost of equity and cost of capital. The results are
presented in Figure 27 and Figure 28.

3
The ROE calculation is not meaningful as it has negative net earnings and negative book value of equity
30
Figure 27 Equity Economic Value Added
American
ROE (a)
4
nm 14.69% 8.50% 5.15%
Cost of Equity (b) 34.54% 9.45% 11.30% 9.65%
Equity Return Spread (a)-(b) nm 5.24% -2.80% -3.23%
Average book value of equity (268.0) 1,574.7 4,797.0 1,057.7

Equity EVA n.a 82.5 (134.5) (47.6)

From the companies included in the analysis _______ created excess returns on equity

(Return in Equity Cost of Equity). It created a positive equity economic value added (EVA) of
________pkr million based on the last 12 months results. At the same time the fertilizer industry
destroyed on average value of ________pkr in 2014. Both ________ and _______ had return on
equity lower/higher than their cost of equity. Comparing these results with the positive Jensens alpha
values calculated in Section IV, we can conclude that, both firms performed better/poor that the
market expected, they have/not generated equity returns in excess of their equity costs.
Multiplying the spread between the return on capital and cost of capital for each company by
the average book value of total capital (equity + debt) we estimated the economic value added for each
firm.
Figure 28 Economic Value Added
American
Airlines

Ryanair

BAA

Asur
ROC 8.54% 10.14% 5.59% 4.76%
Cost of Capital (b) 16.69% 8.13% 7.85% 9.65%
Capital Return Spread (a)-(b) -8.15% 2.01% -2.27% -4.89%
Average book value of capital 13,862.5 2,652.8 8,427.0 1,057.7
EVA (million) (1,129.5) 53.3 (191.0) (51.7)

the company that created value during the observed period was _______ and _____.
The average EVA for the sector in 2014 was $_______

3. Future outlook
The ability of any of the companies to generate positive excess returns depends on its competitive

Advantages and their sustainability in the medium and long term. In this section we look at some key

4
The ROE calculation is not meaningful as it has negative net earnings and negative book value of equity
31
indicators for the Fertilizer sector, which could help us to understand how the companies are
positioned for the future.
Figure 29 Comparison of key figures airline transportation

Traditional and low cost air carriers at a glance

AMR

RyanAir
US Industry
Average
EU Industry
Average
Revenue Yield per Passenger Mile (RAPM) ($ cents) 11.5 n.a. 12.3 15.8
Load Factor 72.8% 84.0% 73.4% 64.8%
Number of Planes 1,013 79 213 80.9
Revenue per Employee ('000 $ or EURO) 202.4 489.3 174.6 n.a.
Average Age of planes 12.5 n.a. 11.2 n.a.
Source: AMR annual Report, Ryan Air Annual Report, ATA (Air Transport Association), AEA (association of European
Airlines) and Elfaa (association of low fares airlines) Economic reports

The analysis suggests that __________ has more efficient operations which is evident
from higher capacity utilization and higher revenues per employee (Pkr_____K
7
compared to
Pkr____K for______________. Further analysis supports the fact that __________ relies on
___________ efficiencies to maintain its cost
advantages:
Figure 30 Key Performance Indicators add
chart of
Chart of key performance indicator
KPI Ryanair Low cost carriers Industry Average

Passenger per employee

10,050

6,000

1,069
Average fare (Euros) 40.0 86.3 206.6
Lost bags per 1000 passengers 0.5 n.a. 11.3
Employees per aircraft 35 n.a. n.a.
Schedule on time 93.0% 85.0% 81.2%

C o n c l u s i o n s

In conclusion, we believe that in the medium term ______________ can sustain competitive
advantages which will allow the company to earn return on capital in excess of its cost of capital. The
company has an investment program aimed at increasing its capacity from the current
____________to __________ by 20__. This would enhance _________ growth.
Returns on capital and operating margin long term are going to be positive/negative again.

.

VII. Capital Structure Choices

1. Current financing mix

Figure 32 below summarizes the current debt structure of all three companies. has no debt). As can
32
be observed, the three companies employ very different kinds of debt:

FFC check the info
and verify

has outstanding a variety of debt notes, from bank debt, plain vanilla bonds to more structured debt
instruments. On one hand this is driven by the necessity to tailor the debt to match the
companys cash flow profile and risk, which is very specific. On the other hand this is a symptom of
the financial difficulties the company has been going through and the need to raise capital in any form
it was available.

1. FFCBinQasim

____________has _________ debt outstanding and this is a reflection of both the early stage of the
life cycle is in and its ability to generate cash flows, thus funding growth largely with internal funds.
We expect the financing mix to change as the company continues to expand.
33
2. Fatima Fertilizer

Fatima debt is almost all made up by _________bonds (____% of the total), with the rest coming from
______ debt and_______ bonds issues. This is due to the ____________ and ______________ of
its cash flows and have its D/E from___% to __% ..

Figure 32 Current debt characteristics add chart of debt if not available
leave it. And delete this chart only

Company Type of Financing Amount (mm)
Secured Variable and Fixed rate

Interest Rate on
Books Maturity

Americal Airlines
indebtness 6,340.0 2.03% - 9.16% 2021
Enhanced Equipment trust
certificates 3,707.0 2.14% - 9.09% 2011
Special facility revenue bond 946.0 6.00% - 8.50% 2036
Credit Facility Agreement 850.0 9.150% 2010
Senior Convertibles Notes 619.0 4.25% - 4.50% 2023-2024
Debentures 330.0 9.00% - 10.20% 2021
Notes 303.0 7.88% - 10.55% 2039
Other 1,159.0
Straight Bond 200.0 7.875% 2007
Straight Bond 400.0 5.750% 2013
Straight Bond 300.0 11.750% 2016
Straight Bond 250.0 8.500% 2021
BAA Straight Bond 200.0 6.375% 2028
Straight Bond 900.0 5.750% 2031
Straight Bond 750.0 4.500% 2014
Convertible Bond 424.0 2.940% 2008
Convertible Bond 425.0 2.625% 2009
Secured bank debt 80.3 n.a. 2005
Ryanair Secured bank debt 88.1 n.a. 2007
37

Based on the above analysis, we draw the following conclusions:

______ and _______________ have the ability to carry higher debt ratios given the relative
stability of their cash flow profile compared to ____________ and __________. Whereas
_________debt ratio is a at the correct level.
compared to other, ____________ should be able to have a higher debt ratio.
_ _ _ _ _ _ _ _ _ _ _ _ _ debt ratio is clearly too high.
VIII. Optimal Capital Structure

1. Current Cost of Capital / Financing Mix

In the table below we computed the current cost of capital for each of our companies, with the
cost of equity based on a levered bottom-up beta and using market values to compute the debt/equity
weights. As expected given their operating and financial profiles, __________ has the highest cost of
capital and __________ the lowest.

Figure 35 Current cost of capital and inputs for calculation of optimal cost of capital
Cost of capital - summary American Airlines Ryanair BAA Asur
Cost of Equity 34.54% 9.45% 11.30%
9.65%
After-tax Cost of Debt 14% 4% 4% 0%
D/(D+E) 87% 24% 45% 0%
E/(D+E)
Rating
13%
CCC
76%
A-
55%
A+
100%
Not Rated
Stock Price 10.2 5.77 5.8
30.45
Cost of Capital 16.69% 8.13% 7.85% 9.65%
Firm Value (million) 13,946.0 5,713.7 11,160.4
912.7

2. Cost of Capital at Different Financing Mixes

As the next step in our analysis to estimate the optimal capital structure we used the cost of
capital approach to compute a different WACC at each debt ratio for our companies. The table below
Summarizes our results

Cost of capital
38

Debt Ratio American Airlines Ryanair BAA Asur
0.0% 10.07% 8.16% 8.82% 9.65%
10.0% 9.76% 8.09% 8.58% 9.48%
20.0% 9.63% 8.13% 8.39% 9.39%
30.0% 10.96% 8.71% 8.24% 9.56%
40.0% 11.78% 11.30% 8.18% 9.93%
50.0% 13.86% 13.33% 8.90% 12.01%
60.0% 20.06% 14.53% 11.03% 12.48%
70.0% 22.06% 21.40% 14.79% 13.89%
80.0% 24.06% 23.40% 15.99% 14.50%
90.0% 26.06% 25.40% 17.19% 15.11%

Based on the objective of minimizing the cost of capital, the table above yields the following results:

_________ Fertilizer: assuming a EBIT of _______million (which results in a ROC of

_____%, ___________ should reduce/increase its debt/capital ratio from the current ___% to
___%.

________fertilizer: this analysis shows that _______ is currently over/under levered and
should decrease/increase its debt/capital ratio from its current ___% to ____%.
______Fertilizer: is currently at its optimal capital ratio (the actual optimum is at the current
debt ratio of around __%).
3. Firm Value at Optimal

The following tables present the computed expected Firm Value and Stock Price if our
companies were to move to their optimal capital ratios.
39
Figure 36 Effect of moving to the optimal capital structure
paste optimal structure chart here

American

Optimal Ratios
Cost of Equity 11.01% 8.62% 11.30% 10.56%
After-tax Cost of Debt 4.07% 3.34% 3.62% 4.72%
D/(D+E) 20.00% 10.00% 44.86% 20.00%
E/(D+E) 80.00% 90.00% 55.14% 80.00%
A- (probably capped at
Rating BB+ AAA A+ BBB)
40
(2)
Current stock price 10.20 5.77 5.8 30.45
Cost of Capital 9.63% 8.09% 7.85% 9.39%
Firm Value
(1)
(million) 24,173.0 5,742.7 11,160.4
938.1

Firm Value
(2)
(million) 33,107.3 5,763.7 *
951.2

Stock Price at optimum
(1)
$74.99 $5.80 *
31.30

31.74

Stock Price at optimum $130.41 $5.83 *

(1) assuming no growth, (2) assuming 3% growth
* BAA is currently at its optimum debt ratio

Figure 37 Firm value at the optimum capital structure
Firm value at
structure
optimal capital American
Airlines

Ryanair

BAA

Asur
Debt Ratio Current 86.65% 23.87% 44.86%
0%
Optimal 20.00% 10.00% - 20%
Rating Current

Optimal
CCC

BB+
A-

AAA
A+

-
Not Rated
A- (probably
capped at
BBB)
Cost of Capital Current 16.69% 8.13% 7.85%
10.13%
Optimal 9.63% 8.09% 7.85% 9.59%
Firm Value
(1)

Current

13,946.0

5,716.8 11,160.4
912.7

Optimal 24,173.0 5,742.7 11,160.4
963.5

Change in firm value

10,227.0 25.9 0.0 50.8
(1) assuming no growth

As the table shows ___________ is the company that would benefit the most from the transition,
whereas the effect on _________ and ____________ value would be more limited. More in detail:

4. Optimal capital structure APV approcah

We also applied the APV approach with American airlines in order to verify the optimal capital
structure we have identified earlier. Given its state of financial distress we believed that this additional
approach can give us more insight about their real debt capacity.
Our basic assumptions in this process are:

Cost of Bankruptcy: direct and indirect costs of bankruptcy are estimated very high given the high
capital intensive business model and the complex regulations of the industry. Our guess estimate is
45% of firm value.

Tax rate is assumed at 35% stable

Unlevered firm value is calculated as Current Firm Value tax benefits on debt + Expected

Bankruptcy cost.

Figure 38 APV optimal capital structure - assumptions
Basic
41
American Airlines Assumptions
Current Debt ratio 86.8%
Unlevered Firm Value = $12,615.13
Current Firm Market Value $13,923.99
Tax rate 35%
Debt Market value $12,083.85
Tax Benefits on Debt $4,229.35
Expected Bankruptcy costs 45%
Bankruptcy probability 47%
Cost of Bankruptcy $2,920.49
42
We have undergone an iterative process that yielded us the capital structure that maximize the firm

value.

Figure 39 AA optimum debt level APC approach
Unlevered

Expected

Debt
ratio
$ Debt
Tax

Rate
Firm
Value
Tax
benefit
Rating
Prob of

Default
Bankruptcy
Costs
Value of
Firm
0% $0.00 35% $12,615.13 $0.00 AAA 0.01% $0.57 $12,614.57
10% $1,307.21 35% $12,615.13 $457.52 AAA 0.01% $0.59 $13,072.07
20% $2,707.69 35% $12,615.13 $947.69 A+ 0.40% $24.37 $13,538.46
30% $4,198.77 35% $12,615.13 $1,469.57 A- 1.41% $88.80 $13,995.90
40% $5,515.42 35% $12,615.13 $1,930.40 BB 12.20% $756.99 $13,788.54
50% $6,687.62 35% $12,615.13 $2,340.67 B 26.26% $1,580.55 $13,375.25
60% $7,457.22 35% $12,615.13 $2,610.03 CCC 50.00% $2,796.46 $12,428.70
70% $9,010.81 35% $12,615.13 $3,153.78 CCC 50.00% $2,896.33 $12,872.59
80% $10,679.48 35% $12,615.13 $3,737.82 CCC 50.00% $3,003.60 $13,349.35
87% $11,072.48 35% $12,615.13 $3,875.37 0 65.00% $3,731.89 $12,758.61
90% $11,614.96 35% $12,615.13 $4,065.24 CC 65.00% $3,774.86 $12,905.51
Source Aswath Damodaran, AMR Annual Report, our estimates

The analysis yields us an optimal debt ratio of 30%, not far from the results obtained with the
optimal capital structure model.
However, given the high subjectivity of the bankruptcy cost, we have run a sensitivity analysis
that, taking into account also the tax rate, provide a measure of the debt ratio that maximize the firm
value.
Figure 40 Sensitivity analysis tax rate (horizontal axis) and bankruptcy costs (vertical axis)
$0.30 20% 25% 30% 35% 40% 45% 50% 55% 60%
20% 80% 80% 90% 90% 90% 90% 90% 90% 90%
25% 30% 80% 80% 80% 90% 90% 90% 90% 90%
30% 30% 30% 80% 80% 80% 90% 90% 90% 90%
35% 30% 30% 30% 80% 80% 80% 80% 90% 90%
40% 30% 30% 30% 30% 80% 80% 80% 80% 90%
45% 30% 30% 30% 30% 30% 80% 80% 80% 80%
50% 30% 30% 30% 30% 30% 30% 80% 80% 80%
55% 30% 30% 30% 30% 30% 30% 30% 80% 80%
60% 30% 30% 30% 30% 30% 30% 30% 30% 80%
65% 30% 30% 30% 30% 30% 30% 30% 30% 30%
70% 30% 30% 30% 30% 30% 30% 30% 30% 30%
43
5. Sector and market debt ratios

S e c t o r d e b t r a t i o s

In addition, we looked at the sector and the debt ratios at which other firms in the fertilizer
industry operate. There are only 4 listed companies in sector and we analyzed 3 of them which are our
companies too, for their debt to capital ratios. In order to account for the difference in size, risk and tax
rate we regressed the market debt ratio against ln(Revenues), beta and effective tax rate for each
company. The resultant regression is as follows: M a r k e t D e b t t o C a p i t a l = 0 . 3 8 7 - 0 . 2 6 0 E f f Ta x
R a t e - 0 . 0 1 9 5 L n R e v + 0 . 1 3 7 3 - y r
R e g r e s s i o n B e t a

The R-squared of the regression is ___%. The T-statistics reveal insignificance at ___% confidence
interval. The results from the regression indicate the following debt ratios:
Figure 41 Debt ratios based on sector information.
Variable Coefficient AA Ryanair BAA Asur
Constant
Tax rate
0.387
-0.26

0%

9.90%

29%

33.5%
LnRev -0.0195 9.83 6.98 7.59 7.59
Beta 0.137 6.26 1.24 1.42 0.82
Predicted Debt ratio 105% 40% 36% 26%

M a r k e t d e b t r a t i o s

We additionally looked at a regression based on the overall market. The regression applied is:

M a r k e t D e b t t o C a p i t a l = 4 . 8 8 1 + 0 . 8 1 E f f T a x R a t e - 0 . 3 0 4 I n s i d e r h o l d i n g +

0 . 8 4 1 E B I T D A / A V C a p e x / T o t a l a s s e t s

The results are summarized below:

Figure 42 Optimal capital structure market regression
Variable Coefficient AA Ryanair BAA Asur
Constant 4.881
Insider holdings -0.304 2.00 12.47 0.03 30.59
Effective tax rate 0.81 - 9.9 29.0 33.5
EBITDA/EV 0.841 7.92 9.03 9.46 13.75
Capex/Total assets -2.987 2.85 10.44 12.56 3.25
Predicted Debt ratio

2.44% -14.47% -1.20% 24.61%
44

IX. Mechanics of moving towards the optimal

Quantitative Analysis and Overall Recommendation on Financing Mix

To further evaluate the optimal debt characteristics for each company we regressed the firm
value and the EBITDA of each of our companies against: Change in Long Term Rate, GDP growth,
Change in local currency, Change in inflation.
The Firm value regression results and the conclusion for each company are shown below. Regressions
on EBITDA against macroeconomic variables are presented in Appendix IV.

FFC

Long Term Interest Rates: very weak/strong R square and T statistic. The regression
suggests that the duration of the operating assets of the company is very low/high/normal. .
GDP Growth: The companys earnings are _______ and shows a positive/negative
coefficient with EBITDA. R-squared is fairly significant: The negative/positive coefficient
with firm value is likely to be related to the high leverage: high GDP growth rates are
usually related to high interest rates that affects negatively the firm value.
Currency: A weaker currency helps EBITDA, but at the same time has a negative effect
on firm value. Revenues in foreign currencies (about __% of total sales) although the effect
is small (probably offset by foreign currency costs and expenses.
Inflation: Does not impact significantly EBITDA, while is negatively correlated to the firm
value, probably due to the high amount of debt, hence higher discount rate.

The regression results for FV are presented below
45
Figure 44 Regression of Firm value against macroeconomic variables

American Airlines Constant Coefficient T-statistic R
2

Firm value (dependent variable)
Change in Long Term rate 8.205 1.81 0.55 1.6%
GDP growth 20.3 -4.08 -2.08 19.3%
Change in Dollar 8.2 0.61 1.2 7.4%
Change in Inflation 7.29 -3.3 -1.13 6.6%
Change in price of oil 7.34 0.047 0.24 0.3%

FFC BinQasim

L o n g T e r m I n t e r e s t R a t e s : - the regression on change of firm value on change in long term
rates indicates that the average duration of the operating assets of the firm is approximately
_____ year
G D P G r o w t h : the firm value is positively related to the GDP growth of countries
(where the companies generates its revenues), while the operating income is
negatively/positivel related. One possible interpretation of this is that higher GDP growth
boasts companys long term growth prospects.
Currency : - the value of the firm does/does not appear to be influenced by the exchange

rate, stronger currency has significant/insignificant negative impact on operating income.
I n f l a t i o n : ________ firm value seems to be significantly related to the inflation rate.

The results from the regressions are presented in the tables below.
46

BAA Constant Coefficient T-statistic
Change in Long Term rate 8.80 -3.30 0.21
GDP growth 6.60 1.72 0.20
Change in GBP 10.30 -0.72 -0.04
Change in Inflation 11.50 15.9 0.74

Ryanair Constant Coefficient
T-statistic of
coefficient R
2

Change in Long Term rate 30.2 -5.3 -0.2 0.70%
GDP growth 6.03 3.24 2.63 36.60%
Change in EURO 32.4 0.68 -0.27 1.20%
Change in Inflation 18.8 6.56 1.56 16.80%
Change in price of oil 38.5 -0.532 -1.08 16.3%

3. F
a
t
i
m
a

F
e
r
t
i
l
i
z
e
r

Fatima Fertilizer
Long Term Interest Rates: Both regressions have a negative/positive coefficient which
points to a longer/shorter duration of debt, approx. __years. It should be noted that the T-
statistic and the R
2
of both regressions are very weak/strong.
GDP Growth: ______ is positively correlated to GDP growth but shows a low degree
of cyclicality as evidenced by the coefficients.
C u r r e n c y : _______ is not/is influenced by changes in the British Pound.
Inflation: the FV regression shows a high positive sensitivity to changes in inflation, which
therefore suggests the use of floating/Fixed rate debt

R
2

0.6%
0.2%
0.0%
7.2%
3. Summary of desirable debt charachteristics

The profile of the ideal debt that the companies should use is presented in Figure 48 below:
48

Figure 48 Summary of desired debt features
Company Maturity Currency Interest rate Comments Other features
American Airlines Medium to long term, US dollars Fixed rate Analysis distorted by None, provided

despite the regression

the distressed state of that the company

the firm is hedged against

sharp movement in

price of oil
Ryanair medium term (5 Euro Floating rate Analysis is distorted None, provided

years)

by the growth stage of that the company

the firm is hedged against

sharp movement in

price of oil
BAA short term (2 years) British Fixed rate n.a. n.a.

Pounds

Asur short to medium term Peso Floating rate
n.a. n.a.

X. Dividend Policy

1. Current Dividend Policy

companies that we are analyzing, all of them pay dividends:

FFC

BAA has kept a stable/non stable dividend policy over the past __ years, with an average
dividend yield of

____%.
49

Figure 49 Dividend policy - BAA
Historical Dividends BAA 2000 2001 2002 2003 2004
Dividend Paid (mm) 150 178 188 196 205
Stock Buyback 0 141 0 0 0
Total Cash to shareholders 150 319 188 196 205
Average Market Cap 4,071 6,604 6,787 5,027 6,106
Dividend Yield (%) 3.7% 2.7% 2.8% 3.9% 3.4%
Dividend Payout (%) 58% 46% 114% 52% 54%
Source: BAA annual reports, Bloomberg

Fatima Fertilizer

The company generates and still have a dividend payout ratio ___.. the companys ROC is far
lower/higher than its cost of capital and it is rapidly accumulating excess cash.
Figure 50 Dividend policy - Asur

Dividend policy ASUR 2000 2001 2002 2003 2004
Dividend Paid ($ mm) 0.00 0.00 43.42 13.88 n.a.
Stock Buyback 0.00 0.00 0.00 0.00 n.a.
Total Cash to shareholders 0.00 0.00 43.42 13.88 n.a.
Dividend Yield (%) 0.0% 0.0% 12.0% 3.4% n.a.
Dividend Payout (%) 0.0% 0.0% 213.0% 56.5%
n.a.
Source: Asur Annual reports

FFC BIN QASIM

The company pays out all of its profit in dividend
The dividend policy in below:

(chart for div policy)
51

XI. Dividend Policy: a Framework

1. Affordable Dividends

In order to determine the amount our companies could have paid out in dividends we have
computed the average FCFE over the last __-year and compared it to the dividends and buyback paid
by the companies.
Figure 52 Dividend policy sector analysis

Dividend policy analysis
American
Airlines

Ryanair

BAA

Asur
Average FCFE in million (last 5 years) 765.3 23.5
248
41.2
Average Dividends & Stock Buybacks 0 0 183 14.3
Difference 765.3 23.5 -65 26.9
% Dividends / Stock Buybacks 0.0% 0.0% 74% 34.7%

Figure 53 Dividend policy sector analysis
American
Dividend policy - Sector analysis Airlines Ryanair BAA Asur
Dividend Yield 0.0% 0.0% 3.4% 3.9%
Dividend Yield (sector) 0.06% 0.05%
Difference -0.06% -0.05% 3.36% 3.90%
Payout Ratio 0.0% 0.0% 54.4% 67.4%
Payout Ratio (sector) 2.6% 79.4%
Difference -2.6% -79.4% 54.4% 67.4%

2. Management Trust and Changing Dividend Policy

As a second step in our analysis we analyzed past ROE and ROC to judge if firms that paid out
less than they could afford created value for their shareholders. In the case of _____________ the
company has been justified in its policy of not paying out dividends by the largely positive spread, both
in terms of ROE-Cost of Equity and ROC-WACC. On the other hand _____ and ________ have
recorded negative ROE-Cost of Equity / ROC-WACC spreads. This suggests that they should
increase their dividend payout ratios.

Figure 54 Analysis of past returns and dividend policy
52

American Industry Industry
Analysis of dividend policy Airlines Ryanair Average BAA Asur average
ROE n.m. 14.69%
Cost of Equity 34.54% 9.45%
Difference Na 5.24%
ROC 8.54% 16.94%
WACC 16.69% 8.13%
Difference -8.15% 8.81%
2.76%
10.69%
-7.93%
14.22%
8.65%
5.57%
8.23% 5.15%
11.30% 9.65%
-3.07% -4.50%
5.59% 4.76%
7.85% 9.65%
-2.27% -4.89%
10.20%
n.a.
n.a.
5.71%
n.a.
n.a.

Figure 55 Analysis of past returns AA
Historical returns AA 2001 2002 2003 2004
ROE
Cost of Equity
Difference
ROC
WACC
-32.79%
15.69%
-48.49%
-12.29%
14.32%
-366.88%
42.69%
-409.56%
-16.82%
16.04%
-2669.57%
26.01%
-2695.58%
-4.23%
15.70%
Nm
29.88%
Nm
-0.72%
15.96%
Difference -26.62% -32.86% -19.94% -16.68%

Figure 56 Analysis of past returns Ryanair
Historical returns Ryanair 2001 2002 2003 LTM
ROE 18.80% 17.99% 21.34% 14.69%
Cost of Equity 8.25% 9.46% 9.53% 9.45%
Difference 10.56% 8.53% 11.81% 5.24%
ROC 12.02% 10.74% 12.59% 16.94%
WACC 7.85% 8.95% 8.57% 8.13%
Difference 4.17% 1.80% 4.02% 8.81%

Figure 57 Analysis of past returns BA

A

Historical returns BAA 2001 2002 2003 2004
ROE 8.59% 3.41% 7.89% 8.23%
Cost of Equity
Difference
ROC
10.35%
-1.76%
6.07%
9.48%
-6.07%
5.72%
10.51%
-2.63%
5.56%
11.30%
-3.07%
5.59%
WACC 8.92% 7.77% 7.85% 7.85%
Difference -2.85% -2.05% -2.30% -2.27%

Figure 58 Analysis of past returns Asur
Historical Returns Asur 2001 2002 2003 2004
ROE
2.31% 1.81% 2.45% 5.15%
Cost of Equity
Difference
9.89%
-7.58%
9.94%
-8.14%
10.46%
-8.01%
9.65%
-4.50%
ROC
2.25% 1.89% 2.94% 4.76%
WACC
Difference
9.89%
-7.65%
9.94%
-8.05%
10.46%
-7.52%
9.65%
-4.89%
53

\
Figure 59 Analysis of historical returns

30.00%

25.00%

20.00%

15.00%

10.00%

5.00%

0.00%

-5.00%

-10.00%

-15.00%

-20.00%

-25.00%

-30.00%

2001 2002 2003 2004

- 32.8%
- 366.9%
- 2669.6%
20.00%

10.00%

0.00%

-10.00%

-20.00%

-30.00%

-40.00%

-50.00%
54

American airlines ROE Ryanair ROE BAA ROE

Asur ROE AA Spread Ryanair Spread
BAA Spread Asur Spread

R e c o m m e n d a t i o n s

Write 2 to 3 lines recommendation on each company kuch bhi hawai fire from above pasted chart
XI

1. Valuation models

Based on the analysis presented above we proceeded to perform valuation of the market value
of the equity of all three companies. Table Figure 60 below summarizes the choice of our valuation
model and the results.
Figure 60 Summary of valuation results

Valuation summary
American
Airlines

Ryanair

BAA

Asur
Model Chosen
Value per Share
FCFF 2 Stage
10.06
FCFF 3 Stage
6.76
FCFF 2 Stage
3.22
FCFF 2 Stage
31.69
Reccomendation HOLD BUY SELL HOLD
Source: Analysis

The choice of growth period reflects the sustainability of competitive advantages of each firm as
outlined in above Investment Returns and Future prospects.
2. Valuation assumptions and inputs.

The valuation assumptions are presented in Figure 61 to Figure 64 below.

CHECK BELOW MENTIONS INPUSTS AND COPY PASTE ALL INPUTS FILES WE USED FOR
ASSIGNMENT IN VALUATIONS replacing all input till next text below
55

Figure 61 American Airlines DCF valuation assumptions
American Airlines High Growth Phase Stable Growth
Length of Period 10.0 Forver
Revenues 18,883.0
Pre-tax Operating Margin 13.8%
Tax Rate 35% (theoretical) 35.0%
Return on Capital 8.5% 10.5%
Non-Cash Working Capital -8.4% -8.4%
Reinvestment Rate (Net Cap Ex + Working
Capital Investments/EBIT

16.5%

19.0%
Expected growth Rate in EBIT 1.4% 2.0%
Debt Capital Ratio 86.6% 25.0%
Beta 6.26 1.22
Cost of Debt 13.9% 25.0%
Source: Company reports, analysis

Figure 62 Ryanair DCF valuation assumptions
Ryanair High Growth Phase Stable Growth
Length of Period 4 years and 4 years transitional period Forever
Operating income growth 22.53% 3%

Tax Rate

12.50%

20.00%
Cost of capital 8.13% 7.78%
Non-Cash Working Capital starting at 8.45% and declining to 2% 2.00%

146%

39%
Beta 1.24 1.00

Figure 63 BAA DCF valuation assumptions
BAA High Growth Phase Stable Growth
Length of Period 4 Years Forever
Starting at 1,970 and growing with 4.8%
Revenues CAGR Growing at 2.00%
Tax Rate 30% 30%
Capital Investments/EBIT Starting at 161.65% and declining to 28.85% 28.85%
Expected growth Rate in EBIT starting at 8.45% and declining to 2% 2.00%
Debt Capital Ratio 45% 45%
Beta 1.42 0.90
57

Figure 64 Asur DCF valuation assumptions
Asur High Growth Phase Stable Growth
Length of Period 5.0 Forever
Revenues 177.2
Pre-tax Operating Margin
Tax Rate 33.0% 33.0%
Non-Cash Working Capital 5.93 5.93

85.0%

30.0%
Expected growth Rate in EBIT 7.0% 3.0%
Beta 0.82 0.80

In building our assumptions into the valuation model we had the following approach:

We have used the bottom-up beta estimates we calculated earlier in the cost of equity computation.

The risk characteristics in perpetuity are likely to change as follows:

o changing debt ratio. The beta used in is the unlevered average industry beta re-
levered to a more sustainable debt ratio
o as the company grows and becomes more mature, the risk is expected to
converge with the market
o risk is assumed to converge with market risk, although at the low end reflecting stability
in cash flows
Growth rate are derived from ___________ and based on ROC and Reinvestment rates. In
perpetuity the growth rate is set at levels below or close to long term sustainable economic growth
as we dont expect these sectors to be the major drivers of economic growth.
Growth phase Capex and Working capital changes have been projected on the basis of historical
data. In perpetuity the _________ reinvestment rates were used.
Leverage we projected that in the ______ term the companies _________ move to their optimal
capital structure, except for the firm,which is already at its optimum.

3. Valuation results

The valuation results are presented in

Figure 65 Valuation results
American
Airlines

Ryanair

BAA

Asur
58

Value of Operating Assets 13,776.0 5,272.9 7,452.1 848.0
Cash & Marketable Securities 148.0 1,447.9 973.9 102.8
Firm Value 13,924.0 6,720.7 8,426.0 950.8
Market Value of Debt 12,083.8 1,549.1 5,007.1 -
Equity Value 1,840.1 5,171.7 3,417.9. 950.8
Value of Equity in Options 217.9 71.7 2.45 -
Value of Equity in Common Stock 1,622.3 5,099.9 3,415.4 950.8
Number of Shares 161.2 754.3 1,060.9 30.0
Value per Share 10.06 6.76 3.22 31.69
Source: Analysis

We performed the DCF valuation on the basis of the inputs presented above. The equity values
of FFC, Fatima and FFC BinQasim includes also the equity options outstanding written by the
companies. In computing the options values we have used the ____________ in the __________log-
normal returns
& P
1
#

on a monthly basis for 5 years ( Ln$
P

! ), the average strike price and maturity of the options.
% 0 "

On the basis of the valuations results we reached the following conclusions

Valuation summary American Airlines Ryanair BAA Asur
Value per Share 10.06 6.76 3.22 31.69
Recommendation HOLD BUY SELL HOLD
Source: Analysis

58

59

Appendix I

From here paste the financial info we used here off all 3 companies
AMR Income Statement 2001 2002 2003 2004 1Q04 1Q05 2004TTM
Passenger Revenues 17,208 15,871 15,851 16,897 4,098 4,292 17,091
of which American Airlines 15,780 14,440 14,332 15,021 3,678 3,841 15,184
of which Regional 1,428 1,431 1,519 1,876 420 451 1,907

Cargo

662

561

558

625

148

151

628
Other 1,099 988 1,031 1,123 266 307 1,164
Total Revenues 18,969 17,420 17,440 18,645 4,512 4,750 18,883

Labour Costs

-8,032

-8,392

-7,264

-6,719

-1,640

-1,644

-6,723
Fuel -2,888 -2,562 -2,772 -3,969 -808 -1,097 -4,258
Commission and Bookings -1,540 -1,163 -1,063 -1,107 -288 -271 -1,090
Maintenance -1,165 -1,108 -860 -971 -231 -235 -975
Other rentals and airport fees -1,197 -1,198 -1,173 -1,187 -305 -300 -1,182
Food Service -778 -698 -611 -558 -137 -125 -546
Other Operating -2,996 -2,715 -2,428 -2,366 -582 -617 -2,401
Special Charges -1,466 -718 -407 -11 0 0 -11
US Government Grant 856 10 358 0 0 0 0

Ebitdar

-237

-1,124

1,220

1,757

521

461

1,697
Aircraft Rentals -829 -840 -687 -609 -153 -148 -604
Ebitda -1,066 -1,964 533 1,148 368 313 1,093
Depreciation and Amortization -1,404 -1,366 -1,377 -1,292 -326 -290 -1,256
Ebit -2,470 -3,330 -844 -144 42 23 -163
Interest Income 110 71 55 66 14 36 88
Interest Charges -538 -685 -703 -871 -212 -235 -894
Capitalized Interest 144 86 71 80 18 23 85
Other -2 -2 113 108 -28 -9 127
Financial Income / (Charges) -286 -530 -464 -617 -208 -185 -594
EBT -2,756 -3,860 -1,308 -761 -166 -162 -757
Tax Benefits 994 1337 80 0 0
Income (Loss)
Accounting Change Impact
Net Loss
-1,762
0
-1,762
-2,523
-988
-3,511
-1,228
0
-1,228
-761

-761
-757

-757
60

AA Balance Sheet 2001 2002 2003 2004 1Q05
Current Assets 6,469 4,833 4,562 4,851 5,272
Currrent Liabilities -6,740 -6,372 -5,755 -6,212 -6,852
Inventory 0 0 0 0 0

Net Working Capital

-271

-1,539

-1,193

-1,361

-1,580

Tangible Assets

19,655

19,694

19,460

19,137

19,116
Intangible Assets 6,615 5,636 5,188 4,665 4,631
Financial Assets (cash) 102 104 120 120 148

Total Assets

26,372

25,434

24,768

23,922

23,895

Termination Indemnity
reserves

-10,122

-9,760

-9,599

-8,812

-8,758

Net Capital Employed

15,979

14,135

13,976

13,749

13,557

Total Debt

-10,606

-13,178

-13,930

-14,330

-14,254
Total Equity 5,373 957 46 -581 -697

Net Capital Employed

15,979

14,135

13,976

13,749

13,557
61

Ryanair - Income statement
Last Twelve
months Dec-04 Dec-03 2004 2003 2002 2001 2000

'000 EUR '000 EUR '000 EUR '000 EUR
'000
EUR
'000
EUR '000 EUR
'000
EUR

Operating revenues 1,238,387 1,015,536 851,373 1,074,224 842,508 624,050 487,405 370,137

Operating expenses
Depreciation and amortization (100,623) (70,960) (71,728) (101,391) (76,865) (59,010) (59,175) (44,052)
Lease payments (42,018) (23,636) (6,450) (24,832) - (4,021) (7,286) (2,097)
Staff, fuel, route charges and others (811,193) (636,753) (509,771) (684,211) (502,169) 398,086) (306,933) (239,933)
Total operating expenses (953,834) (731,349) (587,949) (810,434) (579,034) (461,117) (373,394) (286,082)

Operating profit before exceptional costs 284,553 284,187 263,424 263,790 263,474 162,933 114,011 84,055

Reorganization costs - - (3,012) (3,012)
Other exceptional costs - - (9,491) (9,491)
Amortization of goodwill (2,287) (1,702) (1,757) (2,342)
Total exceptional costs (2,287) (1,702) (14,260) (14,845) - - - -

EBIT 282,266 282,485 249,164 248,945 263,474 162,933 114,011 84,055
383 350 340 222 173 128
Financial charges -
Interest expenses (53,254) (40,992) (35,302) (47,564) (30,886) (19,609) (11,962) (3,781)
Other financial income/(charge) 25,981 17,368 18,486 27,099 31,962 29,050 21,339 9,820
Total (27,273) (23,624) (16,816) (20,465) 1,076 9,441 9,377 6,039

Profit before tax 254,993 258,861 232,348 228,480 264,550 172,374 123,388 90,094

Taxes (23,680) (24,257) (22,446) (21,869) (25,152) (21,999) (18,905) (17,576)
-
Net income 231,313 34,604 209,902 206,611 239,398 150,375 104,483 72,518
62

Balance sheet
Last Twelve
months

Dec-04

Dec-03

2004

2003

2002

2001

'000 EUR

'000 EUR

'000 EUR

'000 EUR

'000 EUR

'000 EUR

'000 EUR

Fixed assets
Intangible

30,872

30,872

45,085

44,499

-

36
Tangible 1,845,452 1,845,452 1,611,127 1,576,526 1,352,361 951,806 613,591 315
Total fixed assets
Current asets
Cash and liquid resources
1,876,324

1,447,850
1,876,324

1,447,850
1,656,212

1,124,671
1,621,025

1,257,350
1,352,361

1,060,218
951,806

899,275
613,627

626,720
315

355
Receivables 14,467 14,467 11,478 14,932 14,970 10,331 8,695 21
Prepayments and other receivables 18,608 18,608 22,977 19,251 16,370 11,035 12,235 6
Inventories 27,160 27,160 24,183 26,440 22,788 17,125 15,975 13
Total current assets 1,508,085 1,508,085 1,183,309 1,317,973 1,114,346 937,766 663,625 397
Total assets 3,384,409 3,384,409 2,839,521 2,938,998 2,466,707 1,889,572 1,277,252 712

Current liabilities
Payables

89,439

89,439

82,491

67,936

61,604

46,779

29,998

22
Accrued expenses and others 317,049 317,049 223,679 338,208 251,328 217,108 139,406 107
Current portion of long term debt 106,841 106,841 79,545 80,337 63,291 38,800 27,994 9
Short term borrowings 2,325 2,325 4,454 345 1,316 5,505 5,078 3
Total current liabilities
Long term liabilities
Provisions
515,654

107,741
515,654

107,741
390,169

97,915
486,826

94,192
377,539

67,833
308,192

49,317
202,476

30,122
143
Other creditors 22,958 22,958 268 30,047 5,673 18,086 15
Long term debt 1,046,546 1,046,546 893,285 872,645 773,934 511,703 374,756 112
Total long term liabilities
Shareholders equity
Share capital
1,177,245

9,652
1,177,245

9,652
991,468

9,637
996,884

9,643
847,440

9,588
579,106

9,587
404,878

9,194
127

8
Share premium 562,015 562,015 559,717 560,406 553,512 553,457 371,849 248
Profit and loss 1,119,843 1,119,843 888,530 885,239 678,628 439,230 288,855 184
Total equity funds 1,691,510 1,691,510 1,457,884 1,455,288 1,241,728 1,002,274 669,898 441
Total liabilities and equity 3,384,409 3,384,409 2,839,521 2,938,998 2,466,707 1,889,572 1,277,252 712
63

BAA - Income Statement 2002 2003 9M 2003 2004 9M 2004 2004LTM
Retail (incl. World Duty Free) 866 755 802
Airport/traffic charges 677 690 734
Property/op. facilities 260 266 282
Other 60 49 59
Total Airports 1,863 1,760 1,452 1,877 1,589 2,014
Rail 58 64 50 67 51 68
Other 51 58 18 26 15 23
Total Revenues 1,972 1,882 1,520 1,970 1,655 2,105

Labour Costs

(443)

(420)

(475)

Retail Expenditure (276) (167) (176)
Operating Leases Expenses (45) (43) (44)
Other Operating Costs (401) (407) (401)
Total Costs (1,165) (1,037) (829) (1,096) (882) (1,149)
Share of operating profit in Joint Venture 6 11 5 9 15 19

Ebitda

813

856

696

883

788

975

Depreciation and Amortization

(257)

(258)

(191)

(258)

(213)

(280)

Ebit

556

598

505

625

575

695

Interest Income

34

60

52

Interest Charges (134) (176) (143)
Net Interest (100) (116) (66) (91) (63) (88)
Other Financial Income 49 42 2 2 9 9
Financial Income / (Charges) (51) (74) (64) (89) (54) (79)

EBT

505

524

441

536

521

616
Taxes (152) (161) (137) (162) (153) (178)
Minority Interests (2) (2) (1) (1) (1) (1)
Income (Loss) 351 361 303 373 367 437
64

BAA - Balance Shteet 2002 2003 2004 Dec-04

Trade Receivables 183 218 270 314
Trade Payables (125) (143) (152) (150)
Inventory 34 27 23 53
Net Working Capital 92 102 141 217
Other Current Assets / (Liabilities) (576) (669) (792) (810)
Total Net Current Assets (484) (567) (651) (593)

Tangible Assets 6,975 7,802 9,074 9,997
Intangible Assets 10 10 10 10
Share of Gross Assets 51 75 60 62
Share of Gross Liabilities (39) (72) (46) (48)
Loans 39 30 17 18
Investments in JVs 51 33 31 32
Investments in associates 6 7 49 42
Othe investments 80 142 122 80
Total Fixed Assets 7,122 7,994 9,286 10,161

Other Liabilities (267) (971) (901) (941)

Net Capital Employed 6,371 6,456 7,734 8,627

Gross Financial Debt 2,567 3,029 3,598 4,169
of which Convertible Debt 311 730 838 838
of which Bonds 1,842 1,873 2,266
of which Bank Loans 350 378 447
other financial debt 34 48 47
Cash & Marketable Securities (939) (1,156) (890) (849)
Net Debt 1,628 1,873 2,708 3,320
Minority Interest 6 8 8 9
Total Equity 4,737 4,575 5,018 5,298

Net Capital Employed 6,371 6,456 7,734 8,627
65
ASUR 1999 2000 2001 2002 2003 2004

Income Statement
Revenues:
Aeronautical revenues 94.2 112.6 107.8 92.7 102.8 132.9
Non-aeronautical revenues 15.8 19.4 19.1 22.1 27.7 44.4
Total revenues 110.1 132.0 127.0 114.8 130.5 177.2
Operating expenses:
Cost of services 25.4 30.8 31.4 31.8 32.9 41.9
Technical assistance fee 6.6 6.0 4.2 3.5 4.1 6.0
Concession fee 5.6 6.6 6.3 5.7 6.5 8.9
General and administrative 12.6 11.5 10.9 9.9 10.8 9.5
Depreciation and amortization 29.9 33.1 33.0 31.0 31.6 35.8
Total operating expenses 80.1 87.9 85.8 81.9 85.9 102.1
Operating income 30.0 44.1 41.1 32.9 44.7 75.1
Interest income 3.8 6.0 8.6 4.5 4.8 0.0
Interest expense (1.8) (1.8) (0.1) (0.1) (0.1) 0.0
Exchange gain/(losses), net (0.1) (0.4) (0.6) 1.1 0.5 0.0
Chages in monetary position (0.1) (5.5) (4.1) (2.9) (3.1) 0.0
Comprehensive financing cost 1.7 (1.6) 3.8 2.5 2.2 (2.6)
EBT 31.8 42.4 44.9 35.4 46.8 72.6
Provision for asset tax 0.0 0.0 0.0 (2.9) (4.0) 0.0
Income tax and profit sharing (13.4) (18.6) (16.7) (11.3) (16.6) (16.5)
Income before extraordinary items 18.3 23.9 28.3 21.2 26.2 56.0
Contract termination fee 0.0 0.0 (0.7) (0.4) (1.5) 0.0
Other special items 0.0 0.0 0.0 (0.3) (0.1) (1.6)
Net income 18.3 23.9 27.6 20.4 24.6 54.4

EBITDA 59.9 77.1 74.2 63.9 76.2 111.0
66
ASUR 1999 2000 2001 2002 2003 2004

Balance Sheet
Cash and marketable securities

63.7

95.8

46.0

63.2

102.8
Trade receivables
Recovarable taxes and other current
assets
10.9

2.1
14.1

6.7
15.4

5.5
15.2

12.5
19.0

2.8
Total current assets 76.7 116.6 66.9 90.9 124.6
Property, plant and equipment 30.7 65.4 79.4 103.8 149.4
Airport concessions, net of amortization 827.9 806.1 703.4 683.8 704.2
Right to use airport facilities, net 233.6 225.1 194.4 187.8 192.7
Total assets 1,169.0 1,213.3 1,044.0 1,066.3 1,170.9
Trade accounts payable 1.3 0.1 0.2 0.9 1.0
Accrued expenses and other payables 7.3 8.7 11.1 13.0 14.9
Total current liabilities 8.6 8.8 11.4 13.9 15.9
Long term debt 0.0 0.0 0.0 0.0 0.0
Other 0.0 0.0 0.1 0.1 1.3
Deferred income tax and profit sharing 24.2 40.7 36.0 42.6 48.1
Total liabilities 32.8 49.5 47.4 56.5 65.3
Capital stock 1,082.2 1,082.2 970.6 970.6 1,029.0
Legal reserve 1.4 7.3 3.6 4.6 20.5
Retained earnings 52.5 74.2 22.5 34.6 56.0
Total stockholders' equity 1,136.2 1,163.7 996.7 1,009.8 1,105.5
Total liabilities and stockholders' equity 1,169.0 1,213.3 1,044.0 1,066.3 1,170.9
67

Appendix II

Analysis if returns - Ryanair
1-Year
Horizon
2-Year
Horizon
5-Year
Horizon
10-Year
Horizon
Compounded Annual Return 19.8% -3.1% 20.22% n.a
Market Index Compounded Annual Return 4.61% 10.96% -5.70% n.a
Beta 1.34 1.16 0.73 n.a
Risk-free Rate 2.07% 2.52% 5.20% n.a
Stock Treynor Measure 13.2% -4.9% 20.6% n.a
Market Treynor Measure 2.54% 8.45% -10.90% n.a
(Under)/Outperformance 10.68% -13.33% 31.48% n.a.
Source: Bloomberg, Ryanair's's annual report, Eurostat

Analysis of returns - BAA
1-Year
Horizon
2-Year
Horizon
5-Year
Horizon
10-Year
Horizon
Compounded Annual Return 12.8% 12.6% 9.4% 3.3%
Market Index Compounded Annual Return 4.61% 10.96% -5.70% 8.99%
Beta 0.2 0.32 0.35 0.23
Risk-free Rate 4.83% 4.52% 4.73% 5.71%
Stock Treynor Measure 39.7% 25.3% 13.2% -10.4%
Market Treynor Measure -0.22% 6.45% -10.44% 3.28%
(Under)/Outperformance 39.95% 18.89% 23.66% -13.72%
Source: Bloomberg, BAA's annual report, Bank of England

Analysis of returns - American Airlines
1-Year
Horizon
2-Year
Horizon
5-Year
Horizon
10-Year
Horizon
Compounded Annual Return -18.3% 59.0% -21.21% -3.03%
Market Index Compounded Annual Return 2.34% 13.71% -4.36% 8.49%
Beta 4.71 3.54 4.67 2.02
Risk-free Rate 4.27% 4.25% 5.11% 5.57%
Stock Treynor Measure -4.8% 15.5% -5.6% -4.3%
Market Treynor Measure -1.93% 9.46% -9.47% 2.92%
Stock (Under)/Outperformance -2.87% 6.00% 3.84% -7.18%
Source: Bloomberg, AA's annual report, Fed reserve bank

Analysis of returns - Asur
1-Year
Horizon
2-Year
Horizon
5-Year
Horizon
10-Year
Horizon
Compounded Annual Return
52.5% 65.3% 21.4%
N/A
Market Index Compounded Annual Return 2.5% 12.4% -4.8% N/A
Beta 0.82 0.87 0.81 N/A
Risk-free Rate
4.2% 4.2% 4.3%
N/A
Stock Treynor Measure 59.0% 70.6% 20.9% N/A
Market Treynor Measure -1.7% 8.2% -9.2% N/A
Stock (Under)/Outperformance
60.8% 62.4% 30.0%
N/A
Source: Bloomberg, Asur's annual report, Mexican Central Bank
68

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