Created by Piccolo Partners

1. Piccolo Partners
Pacific Towers Valuation

2. Recommendation: Maximum offer $76 million
Methodology
Discounted cash flow (DCF) valuation
- Independent analysis of income generators
Key Inputs
- Cash flow schedule
- Ten year leases with upward-only rent
review terms
- Weighted Average Cost of Capital (WACC)
- Risk-free rate
- Market risk premium
- Tenant risk premium
- Terminal growth rate
- 2.5%, inline with long-term GDP growth
Valuation of
$76 million
Terminal Growth
WACC 2.00% 2.25% 2.50% 2.75% 3.00%
6.4% $70,304,780 $70,506,976 $70,730,654 $70,979,429 $71,257,775
6.8% $73,590,703 $73,792,899 $74,016,577 $74,265,352 $74,543,698
7.0% $75,289,417 $75,491,614 $75,715,292 $75,964,066 $76,242,413
7.2% $76,326,409 $76,528,605 $76,752,283 $77,001,058 $77,279,404
7.4% $77,527,703 $77,729,900 $77,953,578 $78,202,352 $78,480,699

3. Calculating the Discount Rate
Return
Return

4. Faltering Long Term Regional Growth
Tex
t
Tex
t
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t
Trouble for Commodities
- Cottongong’s economic future is reliant on its
steelworks and Seaport
- Recent growth driven largely by China’s
increase from 1% of area’s coal exports to
18% from 2007 to 2014
- China’s economic slowdown and shift to an
investment based economy will dial back this
growth in demand
- Planned cap on coal consumption in
2020
- Steel prices driven down by oversupply and
unsustainable demand
- Region appeals to investors looking for
cheaper real estate = prices must remain
competitive to sustain growth
Promising Tech Sector
• Small but growing
• UoW produces the most ICT
graduates in the country
• $20 million startup incubator and
innovation centre
• NBN roll out

5. How much to borrow?
• Borrow $41m to achieve a leverage ratio
of 53%
• Borrowing <$41m would reduce the
expected return on equity to below the
required 11.5%
• Borrowing >$41m may be unnecessary
How to finance?
Debt (in order of preference)
● Syndicated loan
○ Spread of default risk across multiple
lenders
○ Long term interest rate of 4.5%
○ Requirement of Pacific Towers asset
as collateral
○ Other debt covenants
● Corporate bonds
○ Issued on international bond markets
○ Exposure to currency risk
Equity (bearing in mind the target leverage ratio)
● Greater use of retained profits for
relatively higher leverage
● Greater issuance of mutual fund units for
relatively lower leverage
Financing
Forgo investment if $41m in debt cannot be
raised or if it is otherwise inappropriate to do so

6. Appendices

7. Appendix A - Impact of leverage on return
(graph)

8. Appendix B - Impact of leverage on return
(table)

9. Appendix C - Calculation of Weighted Leverage

10. Appendix D - Cash flows from each unit