Pointer Telocation — Update 8 November 2016

Increasing positioning of telematics products at the centre of transportation and logistics, the need for fleets to boost efficiency in highly competitive markets and a rapidly evolving range of services is driving global take-up of telematics services, leading to a forecast market CAGR of 24% to 2021 (Markets and Markets). We believe that PNTR’s exposure to still under-penetrated markets in Latin America and Africa gives it above-average growth potential, and this is supported by a high level of recurring revenue and operational leverage from its SaaS business model. Ownership of its own IP, a focus on R&D/innovation and IT services are key drivers of client stickiness in its core services as well as the group’s expansion into promising new verticals. These include the recent launch of a wireless multi-sensor product in late 2015 and a planned connected car product in 2017.

Pro-forma excluding the RSA business, the group generated 14.7% y-o-y growth in local currency revenues in H116, but FX weakness, particularly in the Brazilian real, cut the increase in reported dollar-terms to 0.4%. We forecast double-digit local currency revenue growth to continue through 2017. Brazilian operations should be boosted by an improving demand environment and the purchase of local player Cielo Telecom. The ramp up of sales of PNTR’s new multi-sensing IoT product should also feed through to product revenues, while high operating leverage should expand margins in the services business. The successful spin-off of the group’s roadside assistance (RSA) business to existing shareholders in June 2016 should also enable management to have a greater focus on its core, higher potential businesses. Based on financial market expectations, we have also factored in greater stability in future forex rates (5% annual declines), leading to greater local currency revenue growth showing through. Certainly, for Q416 the ongoing stability of the US dollar against the Israeli shekel and the recent revival in the Brazilian real against the US dollar – up 25% since the start of 2016 – are positive indicators. Finally, we note PNTR’s high recurring revenues, cash conversion levels of over 100% and low gearing of 8% at mid-2016, which point to the strong financial foundations of the group and its ability to continue to fund value-accretive acquisitions.

Our peer comparison and DCF analysis suggest PNTR shares are significantly undervalued, with the stock trading at a 34% forward year P/E discount to the sector. Applying 20% discounts to the Telocation sector P/E multiples to reflect the group’s exposure to developing markets and associated FX risk and a 10% discount to the multiples of larger fellow Israeli telematics company Ituran, which has similar geographical exposure, we derive a value for PNTR of $8.85 (NIS33.9) per share.

MRM product sales (37% of 2015 revenue) are geared to new vehicle sales and replacement cycles, which are sensitive to interest rates and economic growth. Product lifecycles in the cellocator segment have fallen in recent years from 3-4 to 2-2.5 years, and products are growing more complex, requiring the company to spend more on R&D for new product launches to maintain sales. Sales of telematics installed directly by OEMs are likely to challenge sales of after-market products. PTNR reports in US dollars, while the bulk of revenues are generated in Israel, Brazil, Argentina and Mexico, giving rise to risks from currency translation and emerging markets exposure. Cyber-attacks on wireless systems are a growing risk across the sector. The group has systems in place to counter these threats, but such attacks could result in extra costs and/or liabilities. Alongside a number of other players in the market PNTR has an (unprovisioned) $11.5m tax claim in Brazil, which its lawyers expect to be heavily negotiated down and take many years to resolve.

PNTR is a leading provider of mobile resource management (MRM) products and services to the fleet management, automotive, insurance and logistics sectors. Its B2B cellocator segment designs, develops and produces MRM (telematics) products including asset-tracking devices, fleet management and portable wireless IoT sensor products. One-third of products are sold to service customers and the remainder to third-party MRM operators worldwide, generating 37% of external revenues. The group generates 63% of revenues from services that are mostly recurring and entirely software-as-a-service (SaaS) based, with contract terms of two to five years.

The use of Saas gives the service business a high degree of scalability, with gross margins on new customers estimated by management at 75-80% vs the 55% margin of existing customers. At the same time, high levels of recurring revenues, a strong balance sheet and high cash conversion give the group the potential to ride out difficult market conditions.

PNTR’s strong R&D/IT orientation and expertise in telematics products are major strengths of the service business. The group has large R&D/IT teams in Israel and Macedonia as well as local teams in each service market. This and the ownership of its own intellectual property enables PNTR to tailor and integrate its services to improve the customer experience and tie them into the brand. The R&D focus is also seeing expansion into new verticals. The group launched the CelloTrack Nano hub and wireless multi-sensor IoT product in December 2015. PTNR’s 2017 R&D pipeline includes CelloTrack Nano 2.0, a new software platform for the CelloTrack Nano, as well as a connected car and new cellocator telematics product.

PNTR’s largest market is Israel, which generated 44% of total revenue in 2015 (see Exhibit 1). Nevertheless, management sees exposure to underpenetrated foreign markets, particularly Latin America and Africa, as key growth drivers for the next five to seven years. Latin America and Mexico contributed 38% of service revenues last year, while other markets including Africa generated 15% of the total. While these markets carry above-average levels of political and forex risk, they have significant advantages for a smaller global player through their above-average growth prospects and less competitive environments compared to major markets in the US and Europe.

PNTR management is very strategically focused. The recent spin-off of the RSA business was undertaken to enable the group to increase its focus on growth markets. Current strategic aims are:

Pointer Telocation provides SaaS-tailored mobile resource management solutions to 208k subscribers via its own proprietary software. It offers a range of services, of which the most significant are fleet management, remote diagnostics, asset management and stolen vehicle recovery (mainly to the insurance sector).

With telematics services becoming broader and more complex, PNTR uses a cloud-based software platform to extract and capture critical data from a range of input points (offices, drivers, vehicles, containers, cargo, routes/schedules, etc). The analysed data is uploaded to the client’s customisable dashboard along with actionable recommendations, analytics reports and KPIs.

Key solutions include:

One of PNTR’s key service differentiators is its IT focus, reflected in its investment in IT teams in Israel and low-cost Macedonia as well as smaller teams of IT staff in each country. This enables it to offer customers highly tailored software solutions and to integrate them into the client’s existing portfolio of software. Each fleet management client is also assigned a dedicated analyst.

Almost all service revenues are recurring. Average contracts in fleet management are 36 months, although some are as long as five to seven years. In Stolen Vehicle Recovery systems, the average contract lasts three to four years, giving rise to a high level of recurring revenue. Churn levels are not published, but according to management levels are low (mainly related to client bankruptcy) because the Pointer product is integrated into the fleet owner’s system.

PNTR’s key service geographies are Israel, Brazil, Argentina, Mexico, Europe and South Africa. Israel is the group’s largest operation, generating 44% of revenues in 2015, but PNTR looks to its foreign operations to provide growth given high levels of competition and limited growth potential in this market. While the products side is highly international in terms of sales and competition, in the services business, competitors can differ widely from market to market, given the requirement for a local presence. Here, the group’s operations are also concentrated into a few markets.

In 2015 Israel contributed 50% of group service and 33% of group product revenues. Both services and product revenues have been boosted by record levels of vehicle sales in recent years. The Israeli market for telematics products is highly competitive with strong pricing pressure. By way of contrast, there is a good level of price stability and discipline in the services business.

Pointer, and fellow Israeli operator Ituran are by far the largest players in the services market. Consumer oriented Ituran had Israeli subscriber numbers of 381k in 2015 versus Pointer’s c 90k (half of PNTR’s group total) but Pointer estimates that its share of the Israeli commercial fleet market is c 30%. Stolen vehicle recovery is a larger business area for PNTR in Israel than elsewhere, reflecting the current c 22% of private vehicles, and all buses and trucks, which are required by insurance companies and/or authorities to use asset tracking devices. As a major player with its own products, Pointer is able to provide attractive bulk deals for insurance companies which support its market position. Besides Ituran, other competition in the fleet market is US firm ISR Transit and local player Traffilog.

Brazil is the second largest services business for the group, contributing 19% of revenue in 2015. This reflects fleet management services gaining increasing traction with local companies and high levels of crime, which supports demand for stolen vehicle recovery products. Although the Brazilian economy and the Brazilian real were weak in 2015 and into 2016, demand for MRM services remained strong, with PNTR experiencing double-digit subscriber growth in Brazil in H116.

Political changes earlier this year in Brazil have led to business confidence hitting a two-year high in September and surging share prices, and PNTR has reported promising developments in winning tenders. Pointer also raised its profile in Brazil this year, winning a contract from the Rio Transport Authority to monitor 200 vehicles during the Olympic Games.

On 7 October 2016 Pointer acquired the operations of Cielo Telecom (CT) in Brazil for $6.5m. The company specialises in truck fleet management services in the south of Brazil, providing expansion potential for PNTR’s existing commercial fleet base in the north.

The addition of CT’s 16,000 MRM subscriptions increases PNTR’s total subscriber base by c 8%. Moreover, its high monthly ARPUs of c $25 compare well with the group blended ARPU of $18 in H116. Based on this data we estimate annual revenues at $5m. We also understand that the operation is profitable at the EBITDA level. Significant cost savings and synergies in sales, purchasing, etc, should be realised from combining the business with Pointer’s existing operation in Brazil, which generated $7.1m in revenues in 2015. On this basis, the purchase price plus $2m acquisition costs represents an EV/sales of 1.3x, which compares favourably with recent sector transactions and PNTR’s own prospective 2016 EV/sales of 1.0x (see discussion in valuation section).

Key competitors in Brazil are local player Sascar Tecnologia and Qualcomm-owned Omnitracs. Recently other high-end companies such as Mix Telematics and Telelogis have entered the market. In fleet management, most competitors are focused on the provision of low or entry level vehicle products and therefore are less able to compete with PNTR’s product range.

Other key markets: Into Africa and Argentina

Argentina: Based on Driscoll & Associates’ market data, we estimate PNTR’s market share in Latin America at 2.3%. PNTR’s operations in Argentina are focused on the commercial fleet market. The Argentine market has suffered from economic and political turbulence in recent years, but contributed 12% to group service revenues in 2015. PNTR’s key competitors are LoJack and Ituran.

South Africa: PNTR entered the South African market in 2014 with the acquisition of Global Telematics. The group transferred its South African subscribers to the SaaS cloud service in 2015, with savings coming through in the 2016 results. The South African market is very competitive, and dominated by local company MiX Telematics, with Trackwork and global players CTrack and Cartrack also competing. PNTR sees the business as a strong base for selling into the greater African market, where demand is growing rapidly as African economies continue to develop (with the region forecast to show 3.7% growth this year) and the telematics business case continues to improve in the face of high crime levels.

Driscoll & Associates, a specialist in telematics markets in the US, forecasts the global telematics market (services and products) to grow at an 18.9% CAGR between 2015 and 2020 to reach $47.6bn. Latin America and Africa are forecast to achieve CAGRs in the high teens, at 15.6% and 17.3%, respectively. This is forecast to result in these markets growing respectively from $1.4bn and $1.9bn in 2015 to $2.5bn and $3.6bn in 2018.

Forecasts purely for telematics services also support a double-digit growth outlook for the sector. Markets and Markets forecasts a 23.9% CAGR in global telematics service revenues to $27.9bn in 2021 as the ROI for telematics services continues to increase (see sector drivers below). For Latin America, sector specialist Berg Insight forecasts a 13% CAGR in telematics subscribers to 4.1m by 2020, representing growth in penetration from 8.9% to 14.7%. The key drivers are expected to be the increasing ROI case for telematics systems and government regulation.

Based on the trends in the US market, we see good grounds to expect compound annual growth rates in less developed markets such as Africa and Latin America to remain in their high teens during the 2020-25 period. The longer-term potential for these markets can be seen in the Berg Insight forecast for commercial vehicle telematics penetration in the US to reach 39.2% in 2020.

We expect increasing sales of vehicles with integrated telematics to put more pressure on the margins of aftermarket suppliers, but also to drive more aftermarket suppliers to sell to OEMs. Berg Insight estimates that sales of vehicles containing embedded telematic devices will grow from 8.4m in 2013 to 54m by 2020 (representing 54% of estimated annual car production) with total users of embedded telematics services at 159m. It warns that many of these will be very basic products, such as a calling function.

Telematics is a key source of cost savings: Frost and Sullivan estimate that telematics address 68% of fleet costs ie fuel (30%), wages (26%), maintenance (5%) and insurance (6%).

Pointer’s fully-owned subsidiary Cellocator started producing wireless telematics devices in 1997. The company is present in the US, India, South America, Central America, the Commonwealth of Independent States and Eastern Europe and offers a range of telematic products (equipment with wireless connectivity used to improve the function of vehicles or fleets of vehicles) for use in fleet management, asset and cargo tracking, transport and logistics, the construction industry, vehicle leasing and rental cars and public security. Currently 1.5m vehicles in 50 countries are fitted with Pointer’s products, supported by regional offices. Cellocator’s key product markets are Israel (33% of 2015 product revenues), Europe (24%) and Latin America (20%). A further 23% of products were sold in other global markets.

Cellocator’s key customer groups are Pointer’s telematics service arm, third-party telematics service-providers and car importers, which install the devices in new vehicles before sale. The company is working on expanding its customer base to include vehicle manufacturers (OEMs) in view of the rising trend of sales of vehicles with telematics installed at manufacture.

The key selling points of the Cellocator range are their high level of reliability (with advertised failure rates of less than 0.3%), richness of features, product reach across different segments of the market and quality.

Cellocator’s most basic product (CR300/B) targets large fleets, insurance and leasing companies. It monitors basic driver behaviour through sensors detecting speed and collisions, as well as providing enhanced security by reacting to jamming attacks (eg by disabling the engine), detecting vehicle towing and tracking vehicle locations. With accessories it can do more, such as monitoring fuel consumption and cargo temperatures and checking driver IDs.

The top-end Cello-IQ range adds to this with:

Besides fleet management, the use cases for the Cello-IQ range include usage-based insurance (UBI), pay-as-you-drive insurance, crash detection and support, and automation and asset protection for car rental/sharing companies via user ID checks and real-time driver monitoring. The cost savings from improved driver behaviour include lower fuel, insurance, accident and wear and tear outlays as well as improved passenger safety for public transport companies.

The CelloTrack, a more basic, heavy-duty asset tracker (not included in Exhibit 2), is aimed at transportation equipment such as trailers, containers, train wagons or any valuable mobile assets. The above products are supported by software platforms sold separately or as part of the group’s tailored telematics service offerings. The Cellocator web-based platform allows Cloud-based maintenance, upgrades and configurations. Cellocator also offers an application protocol interface (API) to allow direct access to web services.

Launched in December 2015, Pointer’s IoT product is a portable smart hub and wireless sensor network that enables real-time monitoring and logistical control of objects and people. The sensors monitor a wide range of conditions including humidity, temperature, altitude, location, light, movement/impact, tampering, magnetism, open/closed door and free fall/impact. It is also able to detect noises and relay conversations. The sensors are attached to boxes or crates and the hubs typically located on the inside walls of a trailer/containers and/or warehouses. They communicate via low-energy Bluetooth while the hubs use 2G and 3G wireless communication and the cloud to analyse sensor data and deliver alerts and advice to PNTR apps on tablets and smartphones.

With such a range of sensors (see Exhibit 3), there is a huge range of potential applications for the product. The focus of current marketing is (a) safe transport of refrigerated/perishable cargoes for cold chain logistics, (b) security of high-value cargoes, (c) monitoring rental vehicle/plant for potential damage (eg by impact and freefall detectors), and (d) lone worker protection.

CelloTrack Nano’s key competitive advantages are its wide range of sensing capabilities (see comparison with the sector in Exhibit 3), with advanced triggering by exception (eg if the temperature drops below a target), its use of BLE wireless to create a short range wireless sensing network within transportation and logistics environments, and its mobility and location legacy features from the CelloTrack and Cello product lines. It is also customisable for various market needs, including integration into platforms of other telematics networks. We also understand that the system is being priced attractively in relation to the market, with the hub being marketed between c $80 and c $150 depending on whether it is the version with or without the humidity sensors and whether it uses 2G or 3G communications.

The launch of the CelloTrack Nano has given PNTR exposure to some of the fastest-growing markets in logistics. The first target sales area is the cold chain logistics market (refrigerated transport), which Markets and Markets forecasts to achieve a global CAGR of just under 16% to 2019. In emerging markets, growth potential looks set to be even higher, as these markets experience catch-up growth in more advanced transport and logistics methods. This can be seen in refrigerated warehouse capacity, which had CAGRs of 26% in Brazil and 27% in Mexico between 2008 and 2014, vs 9% in the US (source: Global Cold Chain Alliance).

Tracking of trailer and cargo containers is another market in which PNTR is active with its CelloTrack system and new IoT multi-sensor CelloTrack Nano. Berg Insight forecasts this market to achieve a CAGR of 28.5% during 2015-19 to reach 1.5m units. During this period, the installed base of remote tracking systems is forecast to grow at a 26.2% CAGR from 1.8m to 5.8m units.

In H116 the company integrated CelloTrack Nano into the platforms of a number of third-party telematics companies in order to increase its global reach. In H217, it plans to launch its own platform for cargo and cold supply chain applications to progress from its current position of selling standalone devices to offering comprehensive solutions for large and small organisations. PTNR also plans to launch a second-generation CelloTrack Nano in mid-2017 (see Pointer Telocation milestones Exhibit 4), building on the experience gained from the existing product with more sensing capabilities, better positioning features, improved encryption and better power consumption.

Management expects sales of the product to start to significantly contribute to revenues in H217 and to achieve further growth in 2018 with the new platform and improved product. In H217 PNTR also plans to release its next-generation Cellocation telematics product.

In 2017 the company is also is looking to launch a low-cost dongle (USB device enabling Bluetooth access) solution for driver behavior to meet demand from insurance companies for low-cost solutions. This will augment the existing driver behaviour features in the CelloIQ range. In the services area the group is looking at potentially further developing and Cloud-enabling the software platforms offered with its existing products to enable it to potentially sell direct to fleet managers in areas without a local presence.

Pointer Telocation plans to launch a connected car product, incorporating hardware and software, in late 2017. The product will enable communication between car components and Android apps via the cloud. Pointer expects the product to be sold on a white-label basis to a local manufacturer or OEM, and to this end PNTR plans to leverage existing relationships with local auto importers.

The company is developing two solutions integrated into in-car entertainment (ICE) systems:

Field tests are expected to take about six months and PNTR aims to implement one of the solutions with two car importers in Israel during H117. The product is being launched into the fast-growing auto IoT market, which Markets and Markets forecasts to grow from $15.9bn in 2015 to $82.8bn in 2022 (CAGR 26.8%). Key drivers are the benefits of real time traffic and incident alerts, increased government mandated telematics plus the growth of driver assistance systems, but key challenges include security/hacking concerns and the reduced margin for error given the risk of loss of life.

The management team at Pointer Telocation is headed by David Mahlab, who has been president and CEO since 2011. Mr Mahlab was the co-founder, CEO and chairman of Scopus Video Networks and holds an MSc in electrical engineering as well as an LLB and an MBA from Tel Aviv University. CFO Zvi Fried was appointed to the role in 2007. Previously CFO of airline Chim Nir and finance director of Amdocs, Mr Fried is a CPA with a BA in economics and accounting. CTO Dudy Markus joined PNTR in 2001 and has served in a range of technological and management positions. Mr Markus has built Cellocator’s R&D operation and led the technology roadmap and product strategy. CIO Rami Peled has been with Pointer since its foundation in 1998, and served as VP IT of Shagrir Systems (divested in June) as well as being a specialist in organisational systems including ERP, CRM and billing. VP Sales and Marketing Joshua Rozanski is responsible for the sales, marketing and technical support teams as well as Pointer’s subsidiaries in the US and India. A qualified electrical engineer and MBA, Mr Rozanski has a background in sales at analytics and optimisation software firm TEOCO and fibre-connectivity firm Packetlight Networks.

We summarise the key sensitivities for Pointer as follows:

In H116 PNTR reported a 14.7% increase in local currency revenues, which after forex weakness against the dollar translated into 0.4% year-on-year revenue growth to $31.0m, with a 2.6% increase in operating profit and a 21.2% fall in net profit on continuing operations to $2.1m, reflecting an abnormal boost to financial income in H115. We forecast PNTR to achieve a CAGR in normalised net profit (which excludes the spun-off RSA business) for 2015-19 of 10.7%, reflecting the following key drivers:

Costs

Earnings are sensitive to foreign currency movements. Key areas of foreign exchange exposure are (a) earnings from MRM services, with both revenues and costs generated principally in the local currencies of Israel, Brazil, Mexico and Argentina, and (b) revenues and margins from Cellocator products, which are principally denominated in the above local currencies, but with the bulk of the cost (c 95%) arising in dollars. For G&A, c 50% of costs are denominated in Israeli shekels and the rest in local subsidiary currencies. Dollar hedging is not employed due to its prohibitive cost.

Current bond yields indicate that the currency weakness of the last year was greater than market expectations for the future. We calculate the blended yield on 10-year government (local currency) bonds in Pointer’s key markets at 6.6%. Based on equivalent US bond yields of 1.6%, this looks to price in a maximum expectation of FX weakness of 5% pa over a 10-year term, assuming that US bonds are considered to carry lower sovereign risk. We have accordingly modelled 5.0% per annum FX declines from mid-2016 until end-2017, when we assume that with improving economic conditions forex weakness will decline by one percentage point a year before stabilising at 3% pa.

PNTR had a cash conversion rate (operating cash flow to operating profit) of a high 163% in 2015 and 150% in H116 arising from its strong recurring revenues and industry-wide low capex requirements. Even with the assumption of higher investment in working capital, we forecast cash conversion rates to remain above 110% over at least the next three years. Management does not intend to pay dividends in the foreseeable future as it intends to keep cash on the balance sheet ready to fund acquisitions, in order to accelerate future profit growth.

Pointer has a strong balance sheet with net debt to equity of 7.6% and net debt and cash reserves of $3.2m and $7.7m, respectively, at mid-2016. The spin-off of the RSA business (Shagrir) had a slight negative impact on net debt, as the divestment was achieved by transferring shares in subsidiary Shagrir to existing shareholders without any payment to PNTR and net cash of $1.8m was included in the spun-off vehicle. The high cash balances reflect management’s strategy to be acquisition-ready at all times. The acquisition of Cielo Telecom for $6.5m was funded with a $6m 60-month (Israeli) bank loan in dollars, secured at Libor plus 3.5%, with an additional $2m cash used to pay transaction related fees. The company plans to continue to use such facilities for any further acquisitions rather than equity, as management and the major shareholders do not consider the current share price to be reflective of the value of the business. We forecast net debt of $10.4m at end-2016, representing a debt/equity ratio of 24%.

We see peer sector comparison as the most applicable valuation method given the strong international nature of the telematics service industry and the developed state of Pointer’s business. Peer comparison shows that PTNR trades at a c 30-34% discount to the telematics/IoT sector on prospective EV/EBITDA and P/E multiples. We see this as reflective of above-average emerging market, political and currency risk exposure arising from the group’s businesses in Latin America, Israel and South Africa. That stocks with this risk can trade at minimal or no discount is demonstrated by Ituran. Similar to PNTR, it is based in Israel and has significant exposures to Latin America, but is trading in line with or above the market on most multiples. Ituran has some qualitative advantages in lower product sales than PNTR (27% vs 37% of revenues) and a higher margin helped by its stronger exposure to consumer telematics. Taking into account Pointer’s new product pipeline, recent acquisition in Brazil and its potential to participate in sector consolidation, we believe a discount of 10% to Ituran and 20% to the sector fully reflects PNTR’s risks. Applying these discounts to prospective current year EV/EBITDA and P/E multiples gives rise to a valuation range of $9.68 from Ituran to $8.01 for the sector as a whole, averaging $8.85 (NIS33.9).

Industry focused on M&A with high takeover valuations

The telematics sector is highly M&A oriented, principally because of the synergies and operational leverage that can be driven from acquiring new customers using a SaaS type model as well as the advantages of spreading R&D costs over a larger revenue base. In readiness for acquisitions as they arise, the sector is cash-rich, with cash to equity averaging 4.6% (see Exhibit 7).

M&A deals in 2015/16 where valuation multiples have been made public include the $2.4bn acquisition of Fleetmatics (active in the US, UK and Ireland) by Verizon on an EV/sales of 6x; Masternaut, Europe’s largest fleet services provider, by Summit Capital on a 5x multiple; and major Brazilian fleet management service provider Sascar, bought by Michelin for €520m on an EV/sales of 6x. Less rich multiples were seen in the $87m acquisition of South African M2M specialist DigiCore by Novatel Wireless on an EV/sales of 1.2x, and in PNTR’s acquisition of Cielo Telecom on a similar multiple of 1.3x, the latter reflecting PNTR’s focus on price discipline in acquisitions.

Our DCF model, showing the longer-term valuation potential of the group, gives a valuation for PNTR of $11.1 (NIS42.6) per share. This reflects strong forecast cash flow growth to 2019 on the back of new product launches and acquisitions and rising margins in the MRM business helped by operational gearing. We assume a WACC of 10.0%, using our revenue weighting of 10-year government bond yields of 6.6% as the risk free rate (RFR), and a 5% equity risk premium.

Using the same assumptions, our reverse DCF indicates that the market is pricing in a negative CAGR in free cash flow of 0.5% from 2018. We see potential for the market to adjust its valuation upwards in the event of: