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DCF

Key value drivers and result

We have built our DCF model based on all the information described in this analysis document. The list below summarizes the most important input factors and assumptions:

 Revenues – short-term based on specific prospects and excess capacity as described earlier (winning both India and Korea with 50% likelihood plus 20% of idle capacity in 2016-17), long-term based on YoY growth

 EBIT – short-term based on forecasting of individual cost lines as described eralier, long-term based on convergence to peers

 Terminal growth – based on market reports, adjusted for inflation and competitive convergence over time

 Discount rate (WACC) – as in our other analyses, this is based on the company’s score in the Redeye Rating™

Our base case DCF analysis indicates a fair value of SEK 21.9 per share

 Working capital – short-term based on information from CybAero regarding payment terms in receivables and payables on existing contracts, long-term based on percentage relative to sales

 Future financing needs and how they are addressed – our estimates indicate a total capital need around 35 mSEK until 2016

Given these inputs, our DCF model yields a fair value of SEK 21.9 per share.

Working capital and the development of both accounts receivable and payable over time play a special role in the context of both valuation but more specifically also financing needs. In the short-term, we have planned the balances in accounts receivable, payable and other relevant posts like accrued income based on the information available by CybAero. We expect the payment by the Chinese customs agency for at least the first system in June and the remainder in July 2015. We assume a production of 10 systems for AVIC during Q3 and 4 2015, with the buildup of payables in the same quarters, and both the payables and receivables being settled with one quarter delay. This is somewhat a simplification, since payables currently have a settlement time of 45 to 60 days while receivables still might have a longer average time to settlement due to the time CybAero needs to

produce, factory test and deliver the systems. In the mid- and long-term, we forecast the balance of receivables as a fixed, decreasing percentage of net sales, and payables as a fixed share of receivables.

As a result of these working capital assumptions, but also other estimates impacting cash flow, our estimates indicate a capital need of around 35 mSEK until 2016. We have explicitly NOT simulated any equity issues or short-term loans into our main forecast model. The required financing is instead shown in the balance sheet under long-term debt, which is priced at 12% yearly interest. We believe that the creation of any specific forecasts of equity issues or short-term loans would be misleading, since the impact of such transactions on CybAero’s share price depends highly on the exact timing of the actions, the stock price development until then in any equity financing as well as the interest rate and terms in the case of debt financing. Another option the firm might explore is of course a convertible structure, combining the two financing alternatives. The following table summarizes our key assumptions and outcome of the DCF fair value calculation, without assuming a new equity issue as explained just above.

In order to validate this outcome and set it into a perspective, we have conducted three additional exercises. Firstly, we show the result of a sensitivity analysis below, based on the key variables in the DCF. Secondly, we calculated the fair value for two alternative cases, Bull and Bear, which yield the Redeye Valuation Range as result. This gives a feeling for the potential development of the share price given both a reasonably bullish or bearish chain of events for CybAero as described separately. Finally, we set this valuation of CybAero in context with a range of relevant close as well as more remote peers.

Sensitivity analysis

The assumptions feeding into our base case fair value calculation are based on our research and the information available from CybAero, but given the stage of the firm the actual results will likely vary from these estimates significantly during the next 1-2 years. In order to understand the impact of the two key variables growth in net sales and EBIT margin, we have

conducted a detailed sensitivity analysis covering these two key assumptions. The results are shown below.

DCF Base Case Overview

Assumptions 2015-24 DCF value

CAGR Net sales 28.0% WACC 16.2%

Avg weighted EBIT margin 9.3% Discounted sum of FCF 103 Discounted terminal value 279

Maturity phase - 2024 onwards EV 382

Long-term FCF growth 5.0% Net cash end 2014 24

Horizon EBIT margin 10.8% DCF value 406

Value per share 21.9

Share price today 19.0

Potential upside 15.4%

Multiples today Implied multiples

EV/Sales 7.0 Implicit EV/Sales 8.2

Implicit EV/Sales 2015e 3.5 Implicit EV/Sales 2016e 1.4 So urce: Redeye Research

-2.0% -1.0% 0.0% 1.0% 2.0% 14.0% 25.8 28.1 30.5 32.8 35.1 15.0% 22.0 24.0 26.1 28.1 30.1 16.2% 18.4 20.2 21.9 23.7 25.4 17.0% 16.5 18.1 19.7 21.3 22.9 18.0% 14.4 15.8 17.3 18.7 20.2

EBIT margin (% point change)

So urce: Redeye Research

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