Free Cash Flow Valuation of UniversityStay and Financial Restructuring

Question 1 (60 marks)
UniversityStay is a student accommodation provider whose footprint is in Gauteng, servicing universities and technikons in and around the Johannesburg, Pretoria and Vaal areas. The business venture started when three students identified a gap in the market that tuition providers had long failed to cater for. Since UniversityStay’s inception in 2015, the business has been doing extremely well, especially after the “fees must fall campaign” in which students raised concerns around the availability of accommodation. This led to an influx of funding from government bodies, as well as the corporate world, to ensure that students had access to decent living conditions.
The Covid-19 pandemic changed the trajectory, which has kept the trio on their toes. Learning has taken on different forms, mostly non-physical, which means that students can now learn from the comfort of their homes. This has translated to the fact that student accommodation has become non-essential in the short term, affecting UniversityStay’s operations. A property expert, Mrs Radebe, had the following to say about the prospects of the industry:
“Employing a hybrid approach would allow student numbers at tertiary institutions to grow, rather than the reduced headcounts predicated. If student enrolment numbers at universities increase, it can be expected that the demand for student housing will grow concomitantly as students remain partial to living in student accommodation. This preference for student housing over home-based studying in South Africa has been well documented and proven. The conclusion could be that, instead of dampening demand for student housing as first feared, Covid-19 might actually have a boosting effect on the South Africa student housing market.
“However, in an ever-changing world, it would be prudent to not discount the impact that eLearning (and particularly free online courses) could have on the tertiary education landscape. Will we see many students studying ‘abroad’ while living at home? Or will things return to ‘normal’?”

The funding of UniversityStay was funded mostly by a long-term loan from a local bank, which was extended at 8% compounded monthly. Entities on the JSE have shown a steady return of 11% in the past year. Trafalz Ltd is a similar entity that is listed on the JSE and has a beta of 1.2 with a debt-to-equity of 4. The corporate tax rate in South Africa is 28%.
An advert for government bonds and their terms is shown below As the pandemic has proven to be some sort of reset button, the shareholders
of UniversityStay have been weighing up their options so as to avoid exiting the student accommodation space when it is already too late. One of the exercises that they have carried out is a valuation. You have been provided with the additional information for the purpose of performing a Free Cash Flow valuation:
• Depreciation is 25% of administrative expenses.
• Other income is from regular sales at the laundry mart on the premises.
• Property under development is expected to grow by 15%, from 2021 to 2024.
• The growth is expected to decrease by 4% for the next three years, then increase by 3% into perpetuity.
• Trade and other receivable will decrease by 10% due to tighter collection policies, and creditors will decrease by 5% for the next four years.
• The long-term loan’s market value is the same as its book value.

Required:
1.1 Evaluate the overall performance and position of UniversityStay. Provide recommendations on how they could financially restructure their business in light of Mrs Radebe’s comments. (20)
Hint: No marks will be awarded for a ratio description without showing links among ratios, unapplied theory or mere calculations.