Hello all,When considering the real value of SFX shares there is...

Hello all,

When considering the real value of SFX shares there is one particular slide which highlights that very well. However the picture is not necessarily that clear on the surface. In order for the picture I'm talking of to shine through one must have a good working understanding of what a Net Present Value (NPV) number (at a particular snap shot of time) comprises, or, in other words how the NPV number is derived.

Below is the graphic from today's Investor Presentation that I'm referring to.


I'll get straight to the main point first and then explain it in a bit more detail for those that are not able to see the depth of the graphic at first glance.

Main Point

Even though the headline NPV of the project is $1.28bil (2022), if we look at the first graph it shows an NPV for TB of $2.35mil in 2028. That equates to an NPV for SFX's share of TB of $1.17bil, that's almost twice what the headline NPV of $640mil is (versus a market cap of $170mil).

So a shareholder that sells their shares in 2024, theoretically could sell them at a share price based on an SFX market cap of $750mil (~50% of NPV of $1.55bil, see graphic (a) above, year 2024), that's $2.17 per share, and no dividends to that point.

A shareholder that sells their shares in 2028, theoretically could sell them at a share price based on an SFX market cap of $1.175bil (~50% of NPV of $2.35bil, see graphic (a) above, year 2028), that's $3.40 per share, probably still no dividends by then.

And taking this further, If we look to 2046 the NPV is still above 1.2bil (that's 18 years above $1.2bil NPV, with a peak of $2.35bil in 2028).

So a shareholder would do amazingly well if they sold their shares in SFX in 2046 based on a market cap of 50% of $1.2bil ($1.73 per share) after having received a huge amount of dividends for the prior 18 years, at a guess probably over $1.6 billion dollars worth of dividend cashflow up to 2046 for SFX shareholders, ie and additional $4.60 per share).

and the current SFX market cap is $170mil ($0.50 per share)

This is what is meant by deep discount to value.

Elaboration

This next bit is just for those who don't have a full grasp on NPV theory. For those that do grasp NPV theory, skip this part and just revel in the above graphics.

Net Present Value (NPV) - a simplistic view

The NPV of a project is dynamic and changes depending on what point in time it is calculated (this because the net life of project +cashflows and the capital investment required from that timeframe forward, change at different time points).

The NPV is the net present value of all future cash flows. What this really means is that the NPV tells us what a $1million that is earned in 10 years is worth in today's money (taking into account the cost of money - which is represented as the discount rate in the NPV formula).

So $1mil earned in 10 years may have an NPV of let's say $385,000 today (using a discount rate of 10%) and a value of $465,000 today if we use a discount rate of 8%. The NPV formula tells us that we could justify buying a million dollars that will be delivered to us in 10 years time for an approx outlay of $385,000 today.

$1mil dollars delivered in 10 years time has a value in today's terms of approx $385,000.

$1mil dollars delivered in 30 years time has a value in today's terms of approx $55,000.

$1mil dollars delivered in 3 years time has a value in today's terms of approx $750,000

So if a project delivered net cashflows as described above, the project NPV today would be $1.19mil ($750,000 + $385,000 + $55,000, for overall deliverance of $3 million over 30 years, obviously normal projects ont have such big gaps of no income in them).

The NPV formula also factors in how much money needs to be sunk into the project to bring it to life. That means that if you needed to buy $300,000 worth of plant today to get the above project to deliver its net cashflows then that $300,000 is considered a cost against the NPV of the future cashflows and is therefore reduced from the NPV of cashflows to give the final NPV.

In this example the NPV of cashflows is $1.19mil but there is a need to sink $300,000 in plant today, so the net NPV is $1.19 - $300,000 = $890,000

Once the funds have been sunk they are no longer a liability (unless they remain as debt in the project) and therefore if the NPV is calculated a year later (or a day later for that matter) the NPV would increase from $890,000 back up above $1.19mil ($1.280mil actually, if 1 year later) because the future earnings have gotten closer and therefore less discounting applies ($1mil net earnings in 2 years time is now worth $830,000 instead of $750,000 when it was 3 years away, as well as an increase in the NPV of the other discounted cashflows) and of course the $300,000 cost of plant is no longer needed.

So we can see how NPV changes at different time snap shots depending on the income stream to come, how far away it is, and the initial investment required to get the cashflows going.

So, to a new investor the project at year 1 is theoretically worth $1.28mil (according to its NPV), whereas at year 0 it would have only had an NPV of $830,000 to the same investor because at year 0 there was a plant cost of $300,000 required to bring the cashflows into pass which at year 1 no longer existed. The NPV value I refer to equates to the price tag that a potential investor would need to pay to buy the project, or an owner would offer to sell the project for.

Now back to the above graphics and what they show.

The headline NPV for SFX's share of TB is 640mil at year 0 (initial investment costs are factored into this NPV figure and still need to be sunk at this point).

At year 0, where we would be at FID, 2022, the NPV, as well as including the capital requirements as a charge, includes a runway of a few years of no cashflow, early years of ramping up cashflows, and heavy discounting of cashflows many years out.

Even though the headline NPV is $1.28mil in 2022 (SFX $640mil), if we look at graphic (a) it shows an NPV for TB of $2.35mil in 2028 (SFX $1.17bil) that's almost twice what the headline rate in 2022 is.

The reason for that is that by 2028 the plant costs would have been paid off (ie no initial investment charge remains in the NPV number at that stage and the years of no income and ramp up income have dropped off, we're into peak income and its coming in the door).

Importantly as an aside and addition to this, long life projects have something unique, and that is that the NPV number remains high even as years of revenue get put behind them. In a short life project, you may have a high NPV but as some years of cashflows pass, the NPV drops off quickly. What you will note for TB is that the NPV remains above $1.2bil until 2046. What this means is that after having received income for many years (income which is essentially returns for existing shareholders in the form of dividends or investment in other assets) the value of the future cashflows still justifies an NPV hat is very high, this means that as an SFX shareholder you could sell your share of TB in 2046 for $600mil (50% of $1.2bil) after having received a crapload of dividends between 2028 to 2046 (probably well over $1.6bil worth of dividends $4.60 per share).

Or, according to graphic (a) you could sell your SFX shares in 2028 at a theoretical SP based on a SFX valuation of $1.17bil (divide that by 346,000,000 on issue, because stage 2 capital will probably be funded through a refinancing given the high cashflows), and that means selling your shares in 2028 for $3.40 a share (although you'd get much more of a return if you kept holding as I describe at the top of the post).

The second graphic shows the NPV of the actual dividends SFX expects to receive from KMS, which is a representation of what SFX shareholders could expect as dividends which is a bit different to NPV of the project. This needs to be interpreted slightly differently to graphic (a), but that is for another day.

The above discussion assumes that the cashflows in actuality happen exactly as they are forecast in the NPV calculations and that the SP trades at NPV (In actuality this wont eventuate as there are too many moving parts, but we have to pick something to work off, and so a theoretical forecast is the best we have.

Enjoy