Joseph Wainaina

GILCHERY SKIP-TRACE LIMITED Business valuation reports as at 30th May 2019 Business valuation reports as at 30th May 2019 1. SUMMARY OF VALUATION FINDINGS Using the discounted free cash flow method, it is estimated that the fair market value of Gilchery is equal to KES 450,705,537.87 as of 30th May 2019. The purpose of this appraisal is solely to provide an independent valuation opinion in order to assist Gilchery management offering the subject business additional investment thus this restricted appraisal report is intended for use by Gilchery management only. Several methods were considered when arriving at this valuation. This included the market multiple valuation but no appropriate comparable was found for use with this company. We also considered the net asset value of the company based on the cost approach, but concluded that this approach was not appropriate for this firm being valued as a going concern. This report is therefore based on the income stream the company has generated and has potential to grow in the future. The estimate of business value that results from this valuation engagement is expressed as a conclusion of business value, elsewhere in this report. 1.1. Standard and Premise of Value This appraisal report relies upon the use of fair market value as the standard of value. For the purposes of this appraisal, fair market value is defined as the expected price at which the subject business would change hands between a willing buyer and a willing seller, neither being under a compulsion to conclude the transaction and both having full knowledge of all the relevant facts. This is essentially identical to the market value basis as it is defined under the International Valuation Standards. The appraisal was performed under the premise of value in continued use as a going concern business enterprise. In our opinion this premise of value represents the highest and best use of the subject business assets. 1.2. Scope of the Report This report is performed on a restricted report scope basis. Specifically, the restricted report is not an appraisal report intended for parties other than the client. Page 2 of 13 Business valuation reports as at 30th May 2019 2. DESCRIPTION OF THE ENTITY BEING VALUED Gilchery was established in 2011 with the need to improve debt collection and recovery practices for companies and institutions. Its headquarters are located in Nairobi, with call centres located on Mombasa Road, Alpha Centre. It offers services such as consumer debt recovery, commercial debt recovery, international debt recovery, skip and asset tracing, debt surveillance and field services 2.1 Industry Overview The industry is still in infancy stage though there are numerous players combining debt recovery activities with private investigation and auctioneering. Statistics and data of this industry are not readily available thus it is not possible to get its scope in the financial sector. The players in the industry include; a) Nimble Group Kenya They provide debt collection services to some of the largest loan providers in Kenya such as Branch, Tala, and Timiza. b) . Apex Collections Africa Ltd It’s a first-class debt collection agency located in Nairobi. The company provides professional receivable management solutions for both financial and commercial markets and focus on maximizing clients’ cash flow management and credit control aspects. It offers debt collection services, skip tracing and surveillance. c) Cyka Limited It is located in Tom Mboya Street, Nairobi. It offers professional services in debt collection and debt management, specializing in commercial and consumer debts. d) Lolwe Auctioneers It is a firm of a group of Licensed Kenya Auctioneers, Licensed Court Process Servers, Kenya Debt Collectors, repossesors and private investigators. e) Tebz Debt Solution Limited It is a local debt collection agency located in Utalii House, 2nd floor, room 234, Nairobi. Its main objective is to help businesses in managing their bad debts by increasing the percentage of bad debt recoveries. f) Swipe Recoveries Experts Ltd It is located at Airport View Plaza, Suite 3, Ground floor, Airport North Road, Nairobi. It specializes in debt collection services, investigation services, skip tracing, asset searches, background checks and debt management training. g) Excel Credit Management Solutions It is a professional debt collection company located in Mombasa. It offers debt recovery services, document serving, and locations skip tracing, commercial litigations, investigations and receivables management. h) Calm Recoveries Ltd It is located at Theevan Plaza, 2nd floor, suite 11, Nairobi. It provides solutions that span the entire credit lifecycle, from receivables outsourcing to debt risk management training. Page 3 of 13 Business valuation reports as at 30th May 2019 Services offered include; consumer debt collection, commercial debt collection and international debt collection. i) Sinosa Ltd It is a top investigation and debt collection company located in Nairobi, along Tom Mboya street. It specializes in debt collection, debt management, investigation services, debt advisory, skip tracing and rent collection. j) Skywave Management Services Ltd It is located along the Eastern bypass- Ruiru, Arch Business Centre, fourth-floor suite C9. It offers debt collection services, site verification, and property management and skip tracing. It specializes in commercial and consumer debts. 2.2 Information Sources The financial information used in the valuation is based on the company’s 2016, 2017 and 2018 audited financial statements. Information about the current and projected operating conditions of the company and possible areas of firm-specific risk has been provided by the company’s management. The following sources of information were used in preparing the appraisal: a) Interviews with the management team. b) We have consulted the Central Bank of Kenya publicly available data for the cost of capital data. These data were used in estimating the appropriate discount and capitalization rates. c) Business financial statements and tax records of the subject business over the most recent 3 years have been analyzed to estimate the business current performance and outlook for continued income generation. d) Financial statements, including the company historic Income Statements and Balance Sheets, have been reconstructed to determine the business earning power and provide inputs for the selected business valuation methods. 3. Valuation Purpose The purpose of the valuation is to establish an independent, arm’s length value for use in gifting shares to related parties.. 3.1 Valuation Key Assumption A key assumption of this valuation is that the assets of Gilchery, such as equipment, technology, intangible assets, or have no greater value as standalone assets than they have as profit-generating assets for this business. Based on the opinion of the company’s management and a review of their financials, we believe that this assumption is valid for this valuation. The valuation is for the income generated by the total entity from the main business operations. We have reviewed the company’s financials for income generated by other nonoperating activities, for non-operating assets, and for the value of assets on the balance sheet to determine if the net working capital is either below or in excess of the amount needed for on-going operations. We have concluded that the level of net working capital is consistent with the company’s operational needs and expected growth. Page 4 of 13 Business valuation reports as at 30th May 2019 3.2 Ownership and Management Gilchery has two owners, each with an equal 80% and 20 % interest respectively in the company; both are actively involved in managing the company. a) Mr. Gilbert Cheruiyot b) Mrs. Caroline Jepkoech 3.3 Valuation Methods used There are three fundamental ways to measure the value of a business or professional practice: Asset approach, Market approach and Income approach. Under each approach, a number of methods are available used to determine the value of a business enterprise. Each business valuation method uses a specific procedure to calculate the business value. No one business valuation approach or method is definitive. Hence, it is common practice to use a number of business valuation methods under each approach. The business value then is determined by reconciling the results obtained from the selected methods. 3.4 Asset Approach The asset approach to business valuation considers the underlying business assets in order to estimate the value of the overall business enterprise. This approach relies upon the economic principle of substitution and seeks to estimate the costs of recreating a business of equal economic utility, i.e. a business that can produce the same returns for its owners as the subject business. The business valuation methods under the Asset Approach include: (i) Asset accumulation method and (ii) Capitalized excess earnings method. 3.5 Market Approach Under the Market Approach to business valuation, one consults the market place for indications of business value. Most commonly, sales of similar businesses are studied to collect comparative evidence that can be used to estimate the value of the subject business. This approach uses the economic principle of competition which seeks to estimate the value of a business in comparison to similar businesses whose value has been recently established by the market. The business valuation methods under the Market Approach are: (i) Comparative private company transaction method and (ii) Comparative publicly traded company transaction method. 3.6 Income Approach The Income Approach to business valuation uses the economic principle of expectation to determine the value of a business. To do so, one estimates the future returns the business owners can expect to receive from the subject business. These returns are then matched against the risk associated with receiving them fully and on time. The returns are estimated as either a single value or a stream of income expected to be received by the business owners in the future. The risk is then quantified by means of the so-called capitalization or discount rates. The methods which rely upon a single measure of business earnings are referred to as direct capitalization methods. Those methods that utilize a stream of income are known as the discounting methods. The discounting methods account for the time value of money directly and determine the value of the business enterprise as the present value of the projected income stream. The methods under the Income Approach include: (i) Discounted cash flow method. (ii) Multiple of discretionary earnings method and (iii) Capitalization of earnings method. Page 5 of 13 Business valuation reports as at 30th May 2019 3.7 Selection of the method used The debt recovery and investigation sector though has numerous players; market place data is not available. Thus it is not possible to utilize the market approach to value calculation. On the other hand, Gilchery derives its value from the income statement i.e. the volume of business it generates and its potential to grow its share of the market place, thus the asset based approach will not provide a fair view of the company’s value. This report is therefore based on the income stream the company has generated and has potential to grow in the future. Thus the adoption of the – DCF method. The result obtained is an estimation given the unavailability of financial market place data; it is not possible to calculate the Beta coefficient - a measure of a company’s stock returns relative to overall market returns. 3.8 Financial Summary 2018 Financial Statements Summary (Yearly) Income Operating Income Net Profit Before Tax Operating Expenses Administrative Expenses Finance Cost Assets Cash & bank balances Debtors & prepayments Investments Fixed assets 2018 2017 2016 164,982,894 78,325,510 33,780,148 52,404,219 62,343,084 19,158,848 22,829,754 20,030,257 17,086,- 473,017 324,125 0 1,030,442 18,078,563 52,537,655 11,822,158 8,714,086 4,512,530 0 13,103,032 -,534,347 Liabilities Tax Payable 23,497,653 324,125 0 Creditors & Accruals Long-term liabilities 774,213 4,833,435 0 0 4,739,311 0 3.9 Key Performance indicators In order to better understand your company’s operations, we have calculated a variety of Key Performance Indicators KPIs for your review and comparison to industry benchmarks. In terms of valuation outcomes for your firm, key factors include size, profitability and growth. Historic Profitability The company’s historical EBITDA and pre-tax profit before adjustments for valuation purposes are shown in graph form below. Before adjustments for one-time events, technical accounting issues, and owner discretionary items, both the company’s EBITDA and pre-tax profit exhibited an increasing trend throughout the period of review. Page 6 of 13 Business valuation reports as at 30th May 2019 180,000,-,000,-,000,-,000,-,000,000.00 Profit Before Tax 80,000,000.00 Operating Income 60,000,-,000,-,000,- 2017 2018 Over the three years of review, the company averaged a gross margin of 35.00%. (2016; 28% 2017; 31% and 2018;47%). Financial Metrics Compared to Revenue Cash Flow-to-Revenue -18.64% Cash-to-Revenue -5% Fixed Assets-to-Revenue 12% Receivables-to-Income (Pre-Tax) 2.11% Fixed Assets-to-Income (Pre-Tax) 12% Page 7 of 13 Business valuation reports as at 30th May 2019 3.10 Adjusted Financial Statements a) Adjusted Statement of Financial Position ASSETS 2018 2017 NON CURRENT ASSETS Property, Plant & Equipment 11,822,158.00 13,103,032.00 Investments 52,537,655.00 Total Non-Current Assets CURRENT ASSETS Debtors & prepayments Cash & bank balances 64,359,813.00 13,103,032.00 27,275,605.00 1,030,442.00 4,512,530.00 8,714,086.00 Total Current Assets 28,306,047.00 13,226,616.00 TOTAL ASSETS 92,665,860.00 26,329,648.00 FINANCED BY LIABILITIES & EQUITY LIABILITIES CURRENT LIABILITIES Tax Payable 23,497,653.00 Creditors & Accruals Total Current Liabilities LONG-TERM LIABILITIES Borrowings 209,-,707,526.00 4,833,435.00 4,739,311.00 4,833,435.00 4,739,311.00 TOTAL LIABILITIES EQUITY Share capital 28,540,961.00 4,739,311.00 100,000.00 100,000.00 Retained earnings 64,024,899.00 21,490,337.00 TOTAL EQUITY 64,124,899.00 21,590,337.00 TOTAL EQUITY & LIABILITIES 92,665,860.00 26,329,648.00 b) Adjusted statement of comprehensive income INCOME Operating Income Operating Expenses Administrative Expenses Finance Cost Net Profit/Loss Net Profit Before Tax Corporate Tax @ 30% Net Profit / (Loss) for the year After tax Net Profit / (Loss) to retained earnings -,121,525.43 (33,780,148.00) (52,404,219.00) (473,-,464,-,464,-,439,-,024,-,024,899.00 2017 62,343,084.00 (22,829,754.00) (20,030,257.00) (324,-,158,-,158,948.00 5,747,-,411,-,411,263.60 Total long-term liabilities Page 8 of 13 Business valuation reports as at 30th May 2019 4. Company Valuation Three main assumptions were made when using the DCF method to determine the company valuation, these are; a) The calculations assumes that the following are constant as a % of revenue for all future years of the business; EBITDA, depreciation, amortization, capital expenditures, level of working capital b) Revenue growth adjusts from short to long term growth rate linearly over 10 years c) Flat discount rate is used. This Discounted Cash Flow Analysis and all components thereof are provided on an “as is” basis. We therefore make no guarantees or warranties of any kind as to the adequacy, completeness, Sufficiency, or accuracy of the template used. In no event shall we be liable to you, or to any third party, for any lost profits, incidental, consequential, punitive, special, or indirect damages arising out of or in connection with the use of the Data. 4.1 Summary of valuation Inputs Date of Valuation End Date of Latest Year of Financials Operating Inputs (KES) Revenue EBITDA (Earnings) Depreciation Amortization Capital Expenditures Working Capital -,121,-,464,141.43 3,317,739.00 2,036,866.00 4,598,521.00 Rate Inputs (%) Discount Rate Short Term Revenue Growth Rate (still growing) Long Term Revenue Growth Rate (at maturity) Tax Rate 6.00% 65.00% 65.00% 30.00% Outputs Company Value Company Value / 2018 Revenue Company Value / 2018 EBITDA 450,705,-x 4.9x Page 9 of 13 Business valuation reports as at 30th May 2019 4.2 Detailed tabulated value determination Operating Summary Revenue % growth EBITDA % of sales Depreciation % of sales Amortization % of sales EBIT % of sales Income Taxes % tax rate Net Operating Profit After Tax % of sales Plus: Depreciation % of sales Plus: Amortization % of sales Less: Capital Expenditures % of sales Less: Change in Working Capital % of sales Plus/Less: Change in Other Operating Assets/Liabilities % of sales Free Cash Flow"FCF" % of sales Note: Working Capital % of sales ( Twelve Month Period Ending) -,121,-% 31-12-19 31-12-20 31-12-21 31-12-22 31-12-23 31-12-24 31-12-25 31-12-26 31-12-27 31-12-28 293,900,-% 484,935,-% 484,935,-% 800,144,-% 1,320,237,-% 2,178,392,-% 3,594,347,-% 5,930,673,-% 9,785,611,-% 16,146,258,-% 91,464,-% 3,317,739.0 1.9% 0.0 0.00% 88,146,402.4 150,915,-% 5,474,269.4 1.9% 0.0 0.0% 145,441,564.0 249,011,-% 9,032,544.4 1.9% 0.0 0.0% 239,978,580.6 249,011,-% 9,032,544.4 1.9% 0.0 0.0% 239,978,580.6 410,868,-% 14,903,698.3 1.9% 0.0 0.0% 395,964,658.0 677,932,-% 24,591,102.2 1.9% 0.0 0.0% 653,341,685.7 1,118,589,-% 40,575,318.6 1.9% 0.0 0.0% 1,078,013,781.4 1,845,672,-% 66,949,275.8 1.9% 0.0 0.0% 1,778,722,739.4 3,045,358,-% 110,466,305.0 1.9% 0.0 0.0% 2,934,892,520.0 5,024,842,-% 182,269,403.2 1.9% 0.0 0.0% 4,842,572,658.0 8,290,989,-% 300,744,515.3 1.9% 0.0 0.0% 7,990,244,885.7 49.5% 49.5% 49.5% 49.5% 49.5% 49.5% 49.5% 49.5% 49.5% 49.5% 49.5% 26,443,-% 43,632,-% 71,993,-% 71,993,-% 118,789,-% 196,002,-% 323,404,-% 533,616,-% 880,467,-% 1,452,771,-% 2,397,073,-% 61,702,-% 101,809,-% 167,985,-% 167,985,-% 277,175,-% 457,339,-% 754,609,-% 1,245,105,-% 2,054,424,-% 3,389,800,-% 5,593,171,-% 3,317,739.0 1.9% 0.0 5,474,269.4 1.9% 0.0 9,032,544.4 1.9% 0.0 9,032,544.4 1.9% 0.0 14,903,698.3 1.9% 0.0 24,591,102.2 1.9% 0.0 40,575,318.6 1.9% 0.0 66,949,275.8 1.9% 0.0 110,466,305.0 1.9% 0.0 182,269,403.2 1.9% 0.0 300,744,515.3 1.9% 0.0 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% (2,036,866.0) (1.1%) (3,360,828.9) (1.1%) (5,545,367.7) (1.1%) (5,545,367.7) (1.1%) (9,149,856.7) (1.1%) (15,097,263.5) (1.1%) (24,910,484.8) (1.1%) (41,102,299.9) (1.1%) (67,818,794.9) (1.1%) (111,901,011.6) (1.1%) (184,636,669.1) (1.1%) 8,628,095.0 4.8% (2,989,038.7) (1.0%) (4,931,913.8) (1.0%) 0.0 0.0% (8,137,657.7) (1.0%) (13,427,135.2) (1.0%) (22,154,773.2) (1.0%) (36,555,375.7) (1.0%) (60,316,369.9) (1.0%) (99,522,010.4) (1.0%) (164,211,317.1) (1.0%) 75,054,831.0 75,054,831.0 75,054,831.0 75,054,831.0 75,054,831.0 75,054,831.0 75,054,831.0 75,054,831.0 75,054,831.0 75,054,831.0 75,054,831.0 42.1% 146,666,280. 7 25.5% 15.5% 15.5% 9.4% 5.7% 3.4% 2.1% 1.3% 0.8% 0.5% 175,988,327.6 241,595,100.4 246,527,014.2 349,846,275.5 528,460,714.4 823,174,538.7 1,309,452,348.7 2,111,810,735.2 3,435,702,072.9 5,620,122,780.1 82.3% 59.9% 49.8% 50.8% 43.7% 40.0% 37.8% 36.4% 35.6% 35.1% 34.8% 4,598,521.0 2.6% 7,587,559.7 2.6% 12,519,473.4 2.6% 12,519,473.4 2.6% 20,657,131.1 2.6% 34,084,266.4 2.6% 56,239,039.5 2.6% 92,794,415.3 2.6% 153,110,785.2 2.6% 252,632,795.5 2.6% 416,844,112.6 2.6% Page 10 of 13 Business valuation reports as at 30th May 2019 Projection Period Calculation 0.3 Discount Period Discounted FCF, Assuming Discount Rates as Shown 0.00% 1.3 2.3 3.3 4.3 5.3 6.3 7.3 8.3 9.3 175,988,327.6 241,595,100.4 246,527,014.2 349,846,275.5 528,460,714.4 823,174,538.7 1,309,452,348.7 2,111,810,735.2 3,435,702,072.9 5,620,122,780.1 172,993,891.0 224,006,091.6 215,640,513.2 288,693,649.4 411,402,397.3 604,464,560.0 907,115,834.1 1,380,136,929.5 2,118,248,049.7 3,268,375,342.4 170,211,204.6 208,564,091.0 190,019,384.7 240,764,595.3 324,720,759.4 451,477,809.0 641,233,430.6 923,343,779.5 1,341,238,183.4 1,958,318,599.7 6.00% 12.00% Cumulative Discounted FCF over Projection Period 0.00% 14,842,679,907.6 6.00% 9,591,077,258.2 12.00% 6,449,891,837.2 Page 11 of 13 Business valuation reports as at 30th May 2019 Terminal Value Calculation Terminal Year EBITDA 8,290,989,401.0 Terminal Year FCF 5,620,122,780.1 Terminal Year Discount Period Discount Rate Discount Rate Sensitivity Step Perpetual Growth Rate Perpetual Growth Rate Sensitivity Step Terminal Value ("TV") Perpetual Growth Rate 9.3 6.00% 6.00% Discount Rate 65.00% 59.00% 65.00% 71.00% 0.00% (15,145,754,610.8) (14,266,465,518.7) (13,535,788,667.5) 6.00% (16,860,368,340.3) (15,717,292,520.6) (14,785,246,083.0) 12.00% (19,012,755,788.0) (17,496,608,655.0) (16,288,830,430.4) 6.00% Implied EBITDA Multiple Perpetual Growth Rate Discount Rate 59.00% 65.00% 71.00% 0.00% (1.8x) (1.7x) (1.6x) 6.00% (2.1x) (2.0x) (1.8x) 12.00% (2.4x) (2.2x) (2.1x) Present Value of TV Perpetual Growth Rate Discount Rate 59.00% 65.00% 71.00% 0.00% (15,145,754,610.8) (14,266,465,518.7) (13,535,788,667.5) 6.00% (9,805,126,027.2) (9,140,371,720.3) (8,598,341,285.4) 12.00% (6,624,950,156.3) (6,096,652,244.2) (5,675,804,754.9) Page 12 of 13 Business valuation reports as at 30th May 2019 Discounted Cash Flow Summary Perpetual Growth Rate = 59.00% Discount Rate 0.00% 6.00% 12.00% Company Value Calculation FCF over Projection Period 14,842,679,907.6 9,591,077,258.2 6,449,891,837.2 Terminus (15,145,754,610.8) Company Value (303,074,703.1) Company Value Attribution % Value in Projection Period (4897.4%) % Value in Terminus 4997.4% Implied Valuation Multiples Company Value / 2018 Revenue (1.7x) Company Value / 2019 Revenue (1.0x) Company Value / 2018 EBITDA (3.3x) Company Value / 2019 EBITDA (2.0x) Implied Terminal EBITDA Multiple (1.8x) Perpetual Growth Rate = 65.00% Perpetual Growth Rate = 71.00% 0.00% 6.00% 12.00% 0.00% 6.00% 12.00% 14,842,679,907.6 9,591,077,258.2 6,449,891,837.2 14,842,679,907.6 9,591,077,258.2 6,449,891,837.2 (9,805,126,027.2) (6,624,950,156.3) (14,266,465,518.7) (9,140,371,720.3) (6,096,652,244.2) (13,535,788,667.5) (8,598,341,285.4) (5,675,804,754.9) (214,048,769.1) (175,058,319.1) 576,214,388.9 450,705,537.9 353,239,593.0 1,306,891,240.1 992,735,972.7 774,087,082.3 (4480.8%) (3684.4%) 2575.9% 2128.0% 1825.9% 1135.7% 966.1% 833.2% 4580.8% 3784.4% (2475.9%) (2028.0%) (1725.9%) (1035.7%) (866.1%) (733.2%) (1.2x) (1.0x) 3.2x 2.5x 2.0x 7.3x 5.6x 4.3x (0.7x) (0.6x) 2.0x 1.5x 1.2x 4.4x 3.4x 2.6x (2.3x) (1.9x) 6.3x 4.9x 3.9x 14.3x 10.9x 8.5x (1.4x) (1.2x) 3.8x 3.0x 2.3x 8.7x 6.6x 5.1x (2.1x) (2.4x) (1.7x) (2.0x) (2.2x) (1.6x) (1.8x) (2.1x) Page 13 of 13