International FinanceCEMEX CASE STUDY17 April 2012

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

Agenda

1.Key assumptions

2.Exchange Rate projection

3.Cost of Capital

4.Project Cash flow

5.Parent Cash flow

6.Sensitivity analysis

7.Real option analysis

8.Final Bid

Slide 2April 2012Nottingham Malaysia

Nottingham Malaysia

Key Assumptions

1.Indonesian withholding tax for dividends is at 15%

2. As the cement business is localized, investment in Indonesia does not cannibalize existing CEMEX sales, especially the Philippines subsidiary.

3. CEMEX utilizes internal funds for the acquisition of Gresik.

4. CEMEX functional currency is USD, Semen Gresik is IDR.

5. 50% of net profits of Gresik are paid out as dividend.

April 2012Slide 3

Nottingham Malaysia

Exchange Rate ProjectionIDR/USD

1. Projection done based on Purchasing Power Parity theorem.

2. Hyper-inflation in Indonesia is expected to normalize.

3. The United States inflation rate is forecasted to be stable.

April 2012Slide 4

Year

Indonesian

Inflation

rate (%)

USA

Inflation

Rate (%)

Estimated

USD/IDR

Exchange Rate

1998 29.40 4.00 13000

1999 20.00 4.00 15000

2000 10.00 4.00 15865

2001 10.00 4.00 16781

2002 10.00 4.00 17749

2003 8.00 5.00 18256

2004 8.00 5.00 18778

2005 8.00 5.00 19314

2006 8.00 5.00 19866

2007 8.00 5.00 20433

Nottingham Malaysia

Cost of CapitalCEMEX

1. Assumption is that CEMEX uses internal funds for the purchase of Gresik.

2. CEMEX Cost of capital is taken to be the average ROE of CEMEX from 1993 to 1998, 13.1% .

3. As the Indonesian project is viewed as risky, a risk premium of 6.9% is included.

4. Final CEMEX cost of capital of 20.0% for the duration of the project.

April 2012Slide 5

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Cost of CapitalSemen Gresik1. Equity to debt ratio is 50% - 50%.

2. Assumed that Indonesian Government maintained real interest rate of 4.3%.

3. Assumption is all debt is raised internally in Indonesia.

4. WACC is calculated for each year.

April 2012Slide 6

Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Equity risk premium 6 6 6 6 6 6 6 6 6 6

Inflation Rate 29.4 20.00 10.00 10.00 10.00 8.00 8.00 8.00 8.00 8.00

Risk Free Rate 33.7 24.30 14.30 14.30 14.30 12.30 12.30 12.30 12.30 12.30

Beta 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2

Cost of Equity 40.9 31.5 21.5 21.5 21.5 19.5 19.5 19.5 19.5 19.5

After-tax cost of debt

23.5

9 17.01 10.01 10.01 10.01 8.61 8.61 8.61 8.61 8.61

Weighted cost of

capital

32.2

5 24.26 15.76 15.76 15.76 14.06 14.06 14.06 14.06 14.06

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Terminal Value – Semen GresikSemen Gresik

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

2. Terminal value estimated based on:

I. Discounted perpetual cash flow

II. Earnings multiples

3. The average value of 49,231 Billion is taken as the terminal value.

April 2012Slide 7

Terminal Value Valuation Method

Value (Billion

Rupiah)

EV/ Capacity 39,228

Perpetual Model 59,234

Average 49,231

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Terminal Value – Semen GresikSemen Gresik

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

2. Terminal growth rate is assumed to be 14.0%

3. WACC is assumed to be 15.76% at year 2002

4. Terminal value = IDR 59,234 Billion

5. Terminal value is very sensitive to the values chosen for WACC & growth rate. Other method shall be carried out for checking purposes.

April 2012Slide 8

gk

g)(1 NOCFValue Terminal

WACC

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Terminal ValueEarnings Multiples1. Multiples of enterprise/ capacity, regional average

multiple of 126.43 USD per metric tonne

2. Constant capacity of 17.48 million metric tonne

3. Terminal value of 39,228 billion IND in 2002.

April 2012Slide 9

Country Total Market Cap EV/ capacity EV/EBITDA Price/FCF Price/Earning

India 1094 86 7.2 10.4 41.4

Indonesia 1468.4 52 8.9 9.2 9

Thailand 1336.6 146 10.7 4.3 -2.2

Malaysia 417.9 55 11.5 8.4 -26.9

Philippines 254.2 58 4.1 4.2 5.5

Taiwan 3059.9 188 12.1 11.5 19.7

South Korea 185.7 52 6.1 2 9.9

Total Market Cap. 7816.7

Regional Average 126.43 10.14 9.05 13.80

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Project Cash FlowThe project has a positive NPV and thus profitable

April 2012Slide 10

Billions of IDR 1998 1999 2000 2001 2002

Assumed Growth Rate 16% 27% 20% 20% 20%

EBIT 445.00 599.00 720.48 867.03 1,043.14

Add Depreciation & Ammortisation 261.00 276.00 276.00 276.00 276.00

EBITDA 706.00 875.00 996.48 1,143.03 1,319.14

Less Tax (30% of EBIT) (133.50) (179.70) (216.15) (260.11) (312.94)

Less Capex (40.00) (40.00)

Less Change in net working capital (35.60) (69.60) (65.50) (78.60) (94.30)

Terminal Value 49,231.18

Total FCF 496.90 585.70 714.84 804.32 50,143.08

Present value factor 1.0000 0.8048 0.7463 0.6447 0.5570

Present value of cash flow 496.90 471.37 533.49 518.57 27,928.78

NPV 29,949.12

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Project Cash FlowSemen Gresik is valued at USD$3.35 per share

April 2012Slide 11

Enterprise Value 29,949.12

Less net debt (4,113.50)

Less Minority Interest (23.10)

Equity Value 25,813

Shares Outstanding (millions) 593.2

Fair Value of equity per share (IRD) 43,514.02

In US Dollar 3.35

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Project Cash Flow50% of net profits are assumed to be paid out as dividends

April 2012Slide 12

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

Net Profit (230) (111) 117 194 291

Return on Sales (%) -12% -5% 4% 6% 7%

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Parent Cash FlowAt USD1.38 a share, the NPV of parent cash flow is positive (USD 28.67 mill) and IRR of 25%

April 2012Slide 13

1998 1999 2000 2001 2002

IDR/USD FX rate 13,000 15,000 15,865 16,781 17,749

Dividend Paid (Billions of IDR) 0 0 58.73 97.12 145.26

Dividends Received by CEMEX - 14% (Billions of IDR) 0 0 8.22 13.60 74.08Less indonesian withholding tax (15%) 0 0 1.23 2.04 11.11Net Dividend remitted to CEMEC (Billions of IDR) 0 0 6.99 11.56 62.97Dividends Received by CEMEX (USD) 0.00 0.00 440,526.59 688,733.00 3,547,866.89Consulting services (USD) 1,000,000.00 1,000,000.00 1,000,000.00 1,000,000.00 1,000,000.00Total cash flow 1,000,000.00 1,000,000.00 1,440,526.59 1,688,733.00 4,547,866.89

Purchase of 14% stake in Semen Gresik (114,606,240.00)Port upgrading & capacity expansion (50,000,000.00)Terminal Value (14% stake) 388,328,239.70

Total free cash flow -163,606,240.00 1,000,000.00 1,440,526.59 1,688,733.00 392,876,106.60

Cost of capital 20% 20% 20% 20% 20%

PV -163,606,240.00 833,333.33 1,000,365.69 977,276.04 189,465,714.99

NPV 28,670,450.05IRR 25%

Nottingham Malaysia

Parent Cash FlowUSD1.72 a share is the maximum price with a positive NPV for the parent cash flow.

April 2012Slide 14

1998 1999 2000 2001 2002

IDR/USD FX rate 13,000 15,000 15,865 16,781 17,749

Dividend Paid (Billions of IDR) 0 0 58.73 97.12 145.26

Dividends Received by CEMEX - 14% (Billions of IDR) 0 0 8.22 13.60 74.08Less indonesian withholding tax (15%) 0 0 1.23 2.04 11.11Net Dividend remitted to CEMEC (Billions of IDR) 0 0 6.99 11.56 62.97Dividends Received by CEMEX (USD) 0.00 0.00 440,526.59 688,733.00 3,547,866.89Consulting services (USD) 1,000,000.00 1,000,000.00 1,000,000.00 1,000,000.00 1,000,000.00Total cash flow 1,000,000.00 1,000,000.00 1,440,526.59 1,688,733.00 4,547,866.89

Purchase of 14% stake in Semen Gresik (142,842,560.00)Port upgrading & capacity expansion (50,000,000.00)Terminal Value (14% stake) 388,328,239.70

Total free cash flow -191,842,560.00 1,000,000.00 1,440,526.59 1,688,733.00 392,876,106.60

Cost of capital 20% 20% 20% 20% 20%

PV -191,842,560.00 833,333.33 1,000,365.69 977,276.04 189,465,714.99

NPV 434,130.05IRR 20%

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Strategic Reasons for Investing

1. Inline with CEMEX’s corporate strategies:I. To leverage its core cement and ready-mix concrete franchise

II. To concentrate on developing markets

III. To maintain high growth by applying free cash flow towards selective investments that further its geographic diversification

2. Early mover advantage into Indonesia which is a large (200 million population) and rapidly growing market.

3. To ensure that other competitors don’t get a foot hold in Indonesia via Gresik.

4. Potential for export to regional markets (Singapore, Taiwan, etc) if Rupiah exchange rate remains low.

Slide 15April 2012

Nottingham Malaysia

Sensitivity AnalysisCountry Specific risk is perceived to be high

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

2. Strong opposition against sale of state assets to foreigners from politicians and the general public.

3. Thread of punitive action by provincial governor to remove certain concessions to Gresik subsidiary.

4. Street demonstrations against sale of Gresik in Jakarta & West Sumatra.

5. Currency risk is minimal as the Rupee is expected to appreciate once the current crisis abates.

6. Implementation of free market reforms under IMF has reduced Transfer risk. April 2012

Slide 16

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Sensitivity AnalysisFirm Specific risk is perceived to be high

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

2. Agency risk. With only 14% ownership of the firm, CEMEX doesn’t not have control of the board or the management. Risk that management’s interest may be in conflict with that of CEMEX. e.g. reducing headcount and dividend payouts.

3. Risk of price war in the Indonesian market. Potential for sales price of drop 10%.

April 2012Slide 17

April 2012Slide 18

Purchase (14%)

NVP = - 158.6 million

Option to exit in 5 years

Sell shares at market Price

NPV = USD 49.2 million

25% Probability

75% Probability

Purchase of controlling stake (Additional 51% from Government)

NVP = USD 593.5 million

Year 0 Year 5

Don’t Purchase, NVP =0

Real Option Analysis

Nottingham Malaysia

Real Option AnalysisNPV of cashflow from the first 5 years is -USD158.6 million

April 2012Slide 19

Optioin to purchase 14% in Year 0 1998 1999 2000 2001 2002

IDR/USD FX rate 13,000 15,000 15,865 16,781 17,749

Dividend Paid (Billions of IDR) 0 0 58.73 97.12 145.26Dividends Received by CEMEX - 14% (Billions of IDR) 0 0 8.22 13.60 74.08Less indonesian withholding tax (15%) 0 0 1.23 2.04 11.11Net Dividend remitted to CEMEC (Billions of IDR) 0 0 6.99 11.56 62.97Dividends Received by CEMEX (USD) 0.00 0.00 440,526.59 688,733.00 3,547,866.89Consulting services (USD) 1,000,000.00 1,000,000.00 1,000,000.00 1,000,000.00 1,000,000.00Total cash flow 1,000,000.00 1,000,000.00 1,440,526.59 1,688,733.00 4,547,866.89

Purchase of 14% stake in Semen Gresik (114,606,240.00)Port upgrading & capacity expansion (50,000,000.00)

Total free cash flow -163,606,240.00 1,000,000.00 1,440,526.59 1,688,733.00 4,547,866.89

Cost of capital 20% 20% 20% 20% 20%

PV -163,606,240.00 833,333.33 1,000,365.69 977,276.04 2,193,222.85

NPV -158,602,042.09

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Real Option Analysis – Option to sell 14% stakeNPV of cashflow from share sale is USD 49.2 mill

Key Assumptions:

1.Annual share price appreciation is 5%

April 2012Slide 20

Individual share purchase price 17,940.00

Annual share price growth rate 5%

Individual share purchase price at year 5 21806.18

Gross preceeds from sales (IDR) 1,810,959,813,117.00

Withholding tax (0.1%) 181,095,981.31

Net preceeds from sales (IDR) 1,810,778,717,135.69

Sales remitted to CEMEX (USD) 102,022,528.97

NPV of sales (USD) 49,200,679.48

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Real Option Analysis – Option to buy 51% Positive NVP of USD 593 Million

Value of option to purchase additional 37% to gain controlling stake.

April 2012Slide 21

Annual Growth Rate at 8.2%

Individual share purchase price (USD) 1.89

Purchase cost (USD) (572,215,276.37)

Terminal Value (65%) 1,802,952,541.47

Net cashflow 1,230,737,265.10

Net Present Value 593,526,844.66

Nottingham Malaysia

Real Option AnalysisThe parent cashflow has a positive NPV and thus profitableNPV = NPV of cash flow + (NPV of exit option)(probability)

+ (NVP of option to purchase additional shares)(Probability)

= -158,602,042.09+ 49,200,679.48 X (0.75)+

593,526,844.66 X (0.25)

= USD 26,680,178.69

April 2012Slide 22

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Final Bid

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

April 2012Slide 23

No. Item Value (USD)

1 Cash offer of USD$1.38 as share for 14% stake 114,606,240.00

2 Port upgrading & capacity expansion 50,000,000.00

3 A five-year put option to the Indonesia government to sell its

remaining shares to Cemex at a base price of USD$ 1.38/

share plus an 8.2% annual premium

-

4 Mutual consent on the operation of Semen Gresik. Cemex to

be given right to participate in the decision making of Semen

Gresik’s operation and investment.

-

TOTAL 164,606,240.00

Thank You

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