emerging from the chrysalis, page-8

Corporate,

Apologies for reverting only now, but I’ve been spending time away from a computer for a while.

Your asking about how I’ve modelled CTX’s financials, and I hope you won’t be disappointed when I say that there was nothing too scientific about it.

Because the thing I’m interested is Free Cash Flow, I simply took consensus EBITDA forecasts for FY15 (the first “clean”, full-year of CTX post-cessation of refining at Kurnell) as the starting point.

From this I constructed a crude, pro forma P&L for FY2015, as follows:

EBITDA = $925m (while this is what analysts are currently forecasting, I believe that once Kurnell is closed, CTX will be enjoying a far better product mix, and the resulting fuel distribution margin will actually surprise on the upside, so I believe that the scope and/or probability for FY2015 EBITDA to exceed $1.0bn is high; still, for the sake of prudence, I’ve used the consensus figure)



So:

EBITDA = $925m [consensus]
Less: Depreciation and Amortisation = $200m [guidance from the company]

-> EBIT = $725m
Less: Net Interest = $80m [Based on Average Net Debt of $900m]

-> Pre-Tax Profit = $645m
Less: Tax = $160m

-> Net Profit After Tax = $480m


And hence, deriving a Cash Flow Statement

Operating Cash Flow (OCF) =

EBITDA
Less: Interest Payments
Less: Tax Payments
Less: Change in Working Capital [Here I’ve taken a working capital investment equivalent to 5% of OCF...because CTX is not an aggressive revenue growth business, the working capital impost is expected to remain relatively constant over successive financial periods]

i.e. OCF = $925m - $80m - $160m = $650m
Stay-in-Business Capex = $200m [Management guidance, and equal to depreciation]

So, that means Free Cash Flow of $650m - $200m = $450m

Ipso facto:
- On a Market Cap of $5.0bn, that translates to a FCF Yield in excess of 9%, and
- On an Enterprise Value of around $5.8 bn, the FCF yield is around 8%


I think the thing about financial modelling is that it is an inexact science, and should be considered as indicative, rather than prescriptive.

Often 90% of the answer is obtained by applying 10% of the maximum effort.

Sometimes I build financial models in greater detail, but in CTX’s case all I wanted to get a “feel” for was what the Free Cash Flow landscape might look like in 2015, once Kurnell is closed.

And because 2015 is a reasonably long time out trying to build an accurate financial model is a meaningless exercise given the exponential rate at which error risks rise the further out one tries to forecast.

Hope that is remotely helpful

Cam