TAKE A CLOSER LOOK: The DCF valuation indicated a fair value of R45.29 a share. Another valuation method used in his model was EV/Ebitda, which indicated a fair value of R47 a share. Photo: Simphiwe Mbokazi.African News Agency (ANA)

PRETORIA – A senior Public Investment Corporation (PIC) official has told retired Judge Rex Mpati that the enterprise value-to-earnings before interest, tax, depreciation and amortisation (EV/Ebitda) valuation method put AYO Technology Solutions’ actual value as high as R47 a share at the time of the company’s initial public offering.

The PIC’s portfolio manager of non-consumer industrials and listed equities, Sunil Varghese, told Mpati’s commission into alleged improprieties at Africa’s largest asset manager that EV/Ebitda was a popular valuation multiple used in the finance industry to measure the value of a company. 

He said it was the most widely used valuation multiple based on enterprise value and often used in conjunction with or as an alternative to, the price-to-earnings (P/E) ratio to determine the fair market value of a company.

Varghese said the P/E gave a base case value of R43 a share, which was derived from earnings a share of R2.68 a share multiplied by 16 x P/E.

He said the key assumption was that the fundamental or fair value was discoverable using the tools: discounted cash flow (DCF), internal rate of return (IRR), exit P/E, price to book and EV/Ebitda.

Varghese said the PIC assistant portfolio manager Victor Seanie was very familiar with the normalised P/E valuation methodology, and it was his preferred approach when he valued companies. “We also did a DCF valuation as a backup, but this was not annexed to the PMC submission of December 20, 2017,” he said. 

“The DCF valuation indicated a fair value of R45.29 a share. Another valuation method used in his model was EV/Ebitda, which indicated a fair value of R47 a share.” 

Varghese said the AYO valuation was based on the premise that the PIC expected it to win market share in the information technology (IT) and related services industry due to its superior black economic empowerment (BEE) credentials. 

The commission heard that a key pillar of the investment thesis was the acquisition of British Telecoms (BT) South Africa and bolt-on acquisitions thereafter winning more business on that platform using BEE credentials. 

“In a sense, AYO was like a special purpose acquisition company that would raise funds from the market to pursue specific target acquisitions using those funds to grow the business. The pre-listing statement (PLS) gave broad outlines of around 10 businesses that Ayo targeted,” said Varghese.

However, a key challenge was the lack of historical financials of BT SA, but the PLS included pro forma forecasts that included BT, which were verified by reporting accountants Grant Thornton, he said. 

Based on the forecast revenues presented in the PLS approved by the JSE, AYO would have a modest market share of 3.4 percent in 2019. 

“We then used these forecasts and peer group analysis to determine a normalised price to earnings valuation. In order to calculate a normalised earnings number, one would project earnings forward to a normalised level, three years in the case of AYO, since the first two-year period has substantial acquisitions and then discount it back to current level,” he said.

Earlier, the Financial Sector Conduct Authority (FSCA) said it had never received any irregularity report with regard to the PIC’s investment into AYO. The FSCA’s divisional executive for licensing and the business centre, Felicity Mabaso, said the authority was informed that there were no mandate breaches in what is now known as the AYO transaction. 

She, however, said: “We will follow up from our side as we are following these proceedings, and are noting the submissions being made by the witnesses so we can make an informed decision.”

BUSINESS REPORT ONLINE