Page 8 - Valuation in Abnormally Uncertain Times

COVID-19 has definitely increased the complexity of projecting of the future free cash flows. We set out below some of the key
questions to consider in relation to the key financial drivers in the DCF-model:

Key Financial Considerations
Drivers
▪ How is customer demand affected by lockdowns and safety measures? Will it lead to contractions in
quantities and potential price changes?

▪ How will demand evolve in the short-term, medium-term and long-term?
Revenue
▪ Will there be a risk of losing long-term contracts?
▪ How will the customers’ ability to pay for goods-and-services affect sales on credit terms?

▪ How will the availability and timing of delivery of materials, etc. affect production schedules?
Cost of
Goods Sold ▪ How will the suppliers' financials affect supplies and payments?
▪ How will lockdowns and other mandatory safety measures affect production or services?

▪ How will lockdowns and other mandatory safety measures affect employee availability and
productivity?
Operating ▪ Are there any government policies in place to help alleviate cash outflows in employee remuneration?
Expenses
▪ Are there any opportunities to reduce operating expenses and efficiencies, e.g. negotiate rental rebates
or utilise excess space?

Taxes ▪ Are there any incentives available to defer payments?
▪ How are Trade Receivable Days on Hand and bad debts affected, and how can collections be improved?

▪ How will inventory availability affect production and revenues?
Working
Capital ▪ How are inventory Days on Hand and obsolescence affected, and how can inventory Days on Hand be
improved?

▪ How are Trade Creditor Days on Hand affected, and how can these be improved?
Capital ▪ How is major capital expenditure affected and should timing be reconsidered?
Expenditure ▪ How will increases in the cost of capital affect the viability of major capital expenditure projects?

Discount ▪ How will the discount rates be affected by the abnormal uncertainty and what adjustments should be
Rate made?

For the purposes of projecting free cash flows in times of abnormal uncertainty, it may be relevant to consider various scenarios,
incorporating conservative and less conservative potential outcomes. A caveat when projecting various scenarios is to consider
the issue of risk and not “double dip”, i.e. to explicitly incorporate risk in the projected cash flows and the discount rate at the same
time. It is important to calibrate the discount rate to reflect the level of risk commensurate with the projected free cash flows, such
that a lower discount rate is applied to a more conservative scenario and a higher discount rate to a less conservative scenario.

The short-term, medium-term and long-term effect of the crisis on the above key financial drivers need to be considered even
though there is significant uncertainty as to whether the economic recovery will be in a "V", "U" or "W" shape. In this regard, and
in addition to working with scenarios, it may be relevant to work with two-stage or three-stage model to reflect various possible
recovery outcomes.

8 RSM