DCF Question - Large Growth CapEx for One Year
I'm currently doing a DCF for an automotive parts supplier. Management has stated that they will be spending a few hundred million to build a new factory in 2018.
However, when I incorporate this growth capex into my unlevered DCF, it causes the entire PV of UFCF to go negative. As a result, more than 100% of the value of the company now comes from the terminal value, which is obviously a problem.
Should I just normalize capex and not count the building of the factory, and instead just increase maintenance capex in the future?
If I do do that, how should I account for the increased revenue from the new factory.
Any help would be appreciated.
Thanks!
No, that makes sense. Growth capex is a gamble. What your DCF is telling you is that the project better work. You can't have your cake and eat it too -- you can't spend a shitton of money on a project to grow the company and expect to still generate positive cash flow.
Now, you might want to break out more info on the project itself (ie show the costs and incremental cash flow) separately just so people can understand how much of the value is coming from the existing business vs the growth capex.
Hi Orangutan, I also have a similar problem as yours, how did you resolve it? Thanks in advance for the help.
If you are trying to get a legit DCF you need to account for the capex - you should be building into your revenue assumptions the increased production and therefore sales capacity try to find anything that mgmt has said about when that capex will start bearing fruit.
Not all CapEx will be funded by free cash flow most likely, If the client is financing the CapEx, i would only included the unfinanced portion of CapX, that way you capture the cash flow available for shareholder distrubutions
Discounted Cash Flow - Adjusting Growth (Originally Posted: 11/17/2016)
Hi All,
This is probably a stupid question. But is it normal for the valuation of a company using a DCF to go down if i up the growth rate in the last year of the forecast horizon?.
I am thinking it is because it reduces the working capital but i am not 100% sure.
Many Thanks
If you are projecting WC as a percentage of revenue, then your WC will increase as your revenue does. A positive change (i.e. increase) in WC will lower your FCF. The reason for this is because when WC increases, current assets have increased at a larger rate than current liabilities have. An increase in assets represents a cash outflow and therefore a decrease in FCF.
I guess that is somewhat of a flaw in the model, well assuming i link WC with revenue?
You could also try creating another tab and building out a WC schedule (non-cash CA, non-interest bearing CL). My firm does this and it helps also when the client wants to get a bit more granular
Thank you everyone.
I have actually broken down the working capital further like you guys suggest, i just was being lazy ^.^
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