Page 9 - AMANGO MODEL ANSWER 2

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B3. GROUP DIVIDEND, FINANCE AND INVESTMENT STRATEGY

This issue presents a strategic weakness and a threat but also an opportunity to develop our

business in Canada (requiring US$1,600m). Growth has been elusive the last 8 years, yet we need
to return to dividend payment, which may limit the amount of funds available for growth. Our share
price, though having recovered, still seems undervalued by as much as 34%; yet, we have not yet

regained our investment grade status, so, we cannot return to the capital market without undue risk
premium. We have done detailed calculations in Appendix 2 and summarise the key figures as
follows:
US$ m

Cash flow from operations 983
Increase in inflow triggered by JV in Canada (US$2,517- USD4 279m) 2,238
Dividend capacity 2,964

Dividend capacity funds left after investment in Canada 1,456
Market capitalization today (US$8.8*3,088m) 27,174
Market capitalization if we invest in Canada and return to 6% constant dividend 36,284
growth (US$11.75*3088m)

Based on the dividend valuation model, our analysis is that market capitalization will rise by 34%
(US$36,284/US$27,174m – 100%). Be warned however, that the large inflow this same year of

about US$2,238m before tax, is almost 157% of the investment into Canada and arising within one
year of our investment in that country. This appears highly improbable and needs to be investigated.
Having said that, the 34% increase in value derived by applying this dividend valuation model, is
about the same 38% by which the Group CFO and CEO have argued we are currently undervalued.

Let’s now explore a bit the two dividend policy choices in contention:

1. Constant growth dividend policy

The projected market capitalization has been estimated by applying the dividend valuation model
(Po = d/ke-g). Be warned however, that this model is based on a number of factors such as: an
accurate estimation of the dividend growth rate, a non-changing cost of equity and a predictable

future dividend stream growing in perpetuity. We have used the 6% we achieved in the past for this
purpose, and because we managed to deliver this in the past, we are probably safe on this front; but
then, the cost of equity depends on a number of factors outside our control, e.g. the equity beta of
AMANGO, which is driven largely by market sentiment, and, that changes often. Dividend and their

growth rate are not necessarily the sole drivers of corporate value, but, that is all we got right now!

Developed by The CharterQuest Institute for 'The CFO Business Case Study Competition 2017'
www.charterquest.co.za | Email: thecfo@charterquest.co.za