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We have run a scenario analysis to check the impact of falling membership sales, the share buyback behavior and the repayment of borrowings on the weighted fair value of PPD and its impact on the cash balance of the company. We understand that the management is in buyback spree mode to lower the shock on the falling share price as its key metrics (membership sales) continued to decline at a faster pace.

Please note that this is being done in the existent Base Case scenario of our assumptions regarding the company's growth. The sensitivity to share buybacks, borrowings and cash balances varies significantly in the active scenarios of a Deep Downturn and an Early Economic Recovery. 

In the base case, the enterprise value of PPD is US$248.5 million while the aggregate equity value would be US$235 million. In the pessimistic scenario, the enterprise value of PPD falls to US$179.1 million while the aggregate equity value declines to US$165.7 million. In the optimistic scenario, the enterprise value of PPD rises to US$353.8 million while the aggregate equity value increases to US$340.4 million.

I have highlighted the same in the attached valuation spreadsheet output below. What is not shown explicitly in the numbers is the threat this company faces as a going concern if management continues on this suicide run. If debt is used to facilitate the share buyback as aggregate equity is eaten up and operating metrics continue to deteriorate, this company will be on course for implosion. It doesn't have to be this way, but it appears as if management will have it no other way.

 

  1Q 09E 2Q 09E 3Q 09E 4Q 09E 1Q 10E 2Q 10E 3Q 10E 4Q 10E 1Q 11E 2Q 11E 3Q 11E 4Q 11E
                         
 Membership Fees          106,928          93,782          88,649          82,483          69,356          65,726          63,191          59,463          49,302          47,126          45,829          43,410
  -1.96%                      
 Membership Fees on Total New Enrollment             11,765          10,580            9,497            7,953            6,882            6,210            5,600            4,676            4,430            4,439            4,464            4,133
 Membership Fess on Stand-alone IDT                 148               151               178               183               113               116               136               140                 86                 88               104               107
 Renewable Fess on Normal membership            66,369          55,133          50,850          46,732          38,158          35,705          33,650          31,522          24,811          23,160          21,855          20,462
 Renewable Fees on sales associates            25,816          25,250          25,248          24,988          21,737          21,142          20,960          20,591          17,809          17,220          16,936          16,513
 Add-on IDT              2,830            2,668            2,876            2,627            2,466            2,554            2,844            2,535            2,165            2,219            2,470            2,196
                         
                         
  Value for 09E -10.0%                  
 New legal service membership sales          117,635        115,024        123,504        112,166        104,463        102,144        109,675          99,606          91,721          89,685          96,298          87,457
 Growth  -10.8% -10.0% -10.0% -10.0% -11.2% -11.2% -11.2% -11.2% -12.2% -12.2% -12.2% -12.2%
  Value for 09E -23.6%                  
 New "stand-alone" IDT membership sales              4,960            5,074            5,970            6,121            3,789            3,877            4,561            4,677            2,895            2,962            3,485            3,573
 Growth  -40.5% -23.6% -23.6% -23.6% -23.6% -23.6% -23.6% -23.6% -23.6% -23.6% -23.6% -23.6%
 Total new membership sales          122,595        120,098        129,474        118,287        108,252        106,021        114,236        104,283          94,616          92,647          99,782          91,030
 New "add-on" IDT membership sales            72,850          68,664          74,025          67,629          63,485          65,744          73,196          65,240          55,729          57,109          63,567          56,519
 As a % of total new membership  59% 57% 57% 57% 59% 62% 64% 63% 59% 62% 64% 62%
                         
 Average Annual Membership fee              319.9            329.4            326.1            321.0            319.8            329.3            326.0            320.9            319.7            329.2            325.9            320.8
 Growth  0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
                         
 Total active memberships at end of period       1,527,063     1,418,102     1,334,861     1,252,919     1,175,960     1,108,145     1,058,571     1,006,372        942,158        886,110        846,043        803,547
 Members Left           154,686        229,059        212,715        200,229        185,212        173,835        163,811        156,482        158,830        148,695        139,850        133,526
  Value for 09E 15.0%                  
 Members Left as a % of Total active membership  10.1% 15.0% 15.0% 15.0% 14.8% 14.8% 14.8% 14.8% 15.8% 15.8% 15.8% 15.8%
 Renewed membership       1,372,377     1,189,042     1,122,145     1,052,690        990,748        934,310        894,760        849,889        783,329        737,415        706,193        670,021
                         
 New sales associates recruited            23,871          21,456          31,088          26,742          20,238          17,775          25,805          22,252          16,891          14,776          21,470          18,524
  Value for 09E -17.8%                  
 Growth  -7.5% -17.8% -17.8% -17.8% -15.2% -17.2% -17.0% -16.8% -16.5% -16.9% -16.8% -16.8%
 Average enrollment fee paid by new sales associates  71.53 71.53 71.53 71.53 71.53 71.53 71.53 71.53 71.53 71.53 71.53 71.53
                         
 Total Sales Associates (Active)          416,607        405,782        404,587        399,047        389,424        377,339        373,283        365,673        354,943        342,099        335,947        326,850
 Left during the year            32,282          32,282          32,283          32,283          29,860          29,860          29,861          29,861          27,621          27,621          27,622          27,622
  Value for 09E -7.5%                  
 Growth  -7.5% -7.5% -7.5% -7.5% -7.5% -7.5% -7.5% -7.5% -7.5% -7.5% -7.5% -7.5%
 Renewed membership          384,326        373,500        372,305        366,764        359,564        347,479        343,422        335,812        327,322        314,478        308,325        299,228
                         
 Average Annual Membership fee              268.7            270.4            271.3            272.5            241.8            243.4            244.1            245.3            217.6            219.0            219.7            220.7
  Value for 09E -10.0%                  
 Growth  -10.0% -10.0% -10.0% -10.0% -10.0% -10.0% -10.0% -10.0% -10.0% -10.0% -10.0% -10.0%
 Average enrollment fee paid by new sales associates              119.2            107.3              96.5              86.9              78.2              70.4              63.3              57.0              57.0              57.0              57.0              57.0
  Value for 09E -10.0%                  
 Growth  66.6% -10.0% -10.0% -10.0% -10.0% -10.0% -10.0% -10.0% 0.0% 0.0% 0.0% 0.0%
                         
 Stand Alone IDT Fees                9.95              9.95              9.95              9.95              9.95              9.95              9.95              9.95              9.95              9.95              9.95              9.95
 New add-on IDT Fees              12.95            12.95            12.95            12.95            12.95            12.95            12.95            12.95            12.95            12.95            12.95            12.95
                         
                         
 Associate Services              6,465            5,476            6,002            5,115            3,930            3,476            3,773            3,281            2,632            2,438            2,775            2,525
 Enrollment / Membership Fees              2,845            2,301            3,001            2,323            1,582            1,251            1,634            1,268               963               842            1,224            1,056
 Others              3,620            3,175            3,001            2,792            2,348            2,225            2,139            2,013            1,669            1,595            1,551            1,470
 As a % of membership fees  3% 3% 3% 3% 3% 3% 3% 3% 3% 3% 3% 3%
                         
                         
                         
                         
 Other              1,023               897               848               789               663               629               604               569               471               451               438               415
 As a % of membership fees  1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%

 

 

 

 Scenario Analysis                     
 PPD  Active Scenario Pessimistic - Sharp Economic Downturn Base Case Optimistic - Early Economic Recovery 
  Keep at E Level 4 Level 3 Level 2 Level 1   Level 1 Level 2 Level 3 Level 4
  E A B C D E F G H I
 New legal service membership growth  -10.0% -14.0% -13.0% -12.0% -11.0% -10.0% -9.0% -8.0% -7.0% -6.0%
 New "stand-alone" IDT membership growth  -23.6% -31.6% -29.6% -27.6% -25.6% -23.6% -21.6% -19.6% -17.6% -15.6%
 Members Left as a % of Total active membership  15.0% 19.0% 18.0% 17.0% 16.0% 15.0% 14.0% 13.0% 12.0% 11.0%
 New sales associates recruited growth  -17.8% -25.8% -23.8% -21.8% -19.8% -17.8% -15.8% -13.8% -11.8% -9.8%
 Sales associates exit growth  -7.5% -3.5% -4.5% -5.5% -6.5% -7.5% -8.5% -9.5% -10.5% -11.5%
 Average Annual Membership fee growth  -10.0% -12.0% -11.5% -11.0% -10.5% -10.0% -9.5% -9.0% -8.5% -8.0%
 Average enrollment fee groth  -10.0% -12.0% -11.5% -11.0% -10.5% -10.0% -9.5% -9.0% -8.5% -8.0%
                     
                     
 Fair Value of PPD    A B C D E F G H I
                        21.1                 14.9                 16.2                 17.7              19.3              21.1              23.1              25.3               27.8              30.6

 

 

 

  1Q 09E 2Q 09E 3Q 09E 4Q 09E 1Q 10E 2Q 10E 3Q 10E 4Q 10E
 Share buyback          (13,541)          (9,145)          (8,821)          (8,240)          (8,098)          (7,340)          (7,033)          (6,847)
 Average of last 13 quarters           (15,242)        (14,702)        (13,734)        (13,497)        (12,233)        (11,721)        (11,412)
 % of average of last 13 quarters    60% 60% 60% 60% 60% 60% 60%
                 
               33.21            
 No. of Share bought  422.51 275.38 265.62 248.13 243.85 221.01 211.77 206.19
 Current Share Price               33.21            
                 
                 
            (4,000)              
 Current Potion of Notes Payable            20,408          18,408          16,408          14,408          12,408          10,408            8,408            6,408
 Notes Payable            35,251          33,251          31,251          29,251          27,251          25,251          23,251          21,251
 Total Outstanding            55,659          51,659          47,659          43,659          39,659          35,659          31,659          27,659
 Repayment            (4,039)              
 Notes Payable Repayment            (4,000)          (4,000)          (4,000)          (4,000)          (4,000)          (4,000)          (4,000)          (4,000)

 

 

 

 Scenario Analysis II                     
  Keep at B Pessimistic  Base Case Optimistic            
  B A B C            
 Share Buyback  60% 80% 60% 40%            
 Notes Payable Repayment                    (4,000)             (4,000)             (4,000)             (4,000)            
 Share Buyback Price                      33.21 33.21 33.21 33.21            
                     
 Weighted Fair Value of PPD    A B C            
                      21.91 21.77 21.91 22.05            
                     
 Cash Balance at the end of FY 09    A B C            
                    24,895             15,592             24,895             33,911            
                     
 Cash Balance at the end of FY 10    A B C            
                      6,198           (16,372)               6,198             26,631            
                     
    Pessimistic        Base Case       Optimistic
    A B C D E F G H I
 Enterprise Value                  248,468           179,088           193,883           210,249        228,373        248,468        270,772        295,553         323,113        353,795
                     
    A B C D E F G H I
 Equity Value                  235,040           165,660           180,455           196,821        214,945        235,040        257,344        282,125         309,685        340,367

 

 

 

  1Q 09E 2Q 09E 3Q 09E 4Q 09E 1Q 10E 2Q 10E 3Q 10E 4Q 10E
 Share buyback          (13,541)          (9,145)          (8,821)          (8,240)          (8,098)          (7,340)          (7,033)          (6,847)
 Average of last 13 quarters           (15,242)        (14,702)        (13,734)        (13,497)        (12,233)        (11,721)        (11,412)
 % of average of last 13 quarters    60% 60% 60% 60% 60% 60% 60%
                 
               33.21            
 No. of Share bought  422.51 275.38 265.62 248.13 243.85 221.01 211.77 206.19
 Current Share Price               33.21            
                 
                 
            (4,000)              
 Current Potion of Notes Payable            20,408          18,408          16,408          14,408          12,408          10,408            8,408            6,408
 Notes Payable            35,251          33,251          31,251          29,251          27,251          25,251          23,251          21,251
 Total Outstanding            55,659          51,659          47,659          43,659          39,659          35,659          31,659          27,659
 Repayment            (4,039)              
 Notes Payable Repayment            (4,000)          (4,000)          (4,000)          (4,000)          (4,000)          (4,000)          (4,000)          (4,000)
                 
                 
                 
                 
 Scenario Analysis II    -4.23            
        (9,144.98) -9144.9824          
    4.23            
 Share Buyback        (9,140.76)            
 Notes Payable Repayment                 
 Share Buyback Price                 
                 
 Weighted Fair Value of PPD                 
                 
                 
 Cash Balance at the end of FY 09                 
                 
                 
 Cash Balance at the end of FY 10                 
                 
                 
                 
                 
 Enterprise Value                 
                 
                 
 Equity Value                 
                 
                 
                 
                 
                 
                 
                 
                 
 Base Case                 
 Share buyback                 
 Number of shares    275.38 265.62 248.13 243.85 221.01 211.77 206.19
 At 10% over the current market prices              33.21              
 Total share buyback    9,145 8,821 8,240 8,098 7,340 7,033 6,847
                 
 Borrowings            55,659          51,659          47,659          43,659          39,659          35,659          31,659          27,659
                 
 Optimistic Case                 
 Share buyback                 
 Number of shares                  184               177               165               163               147               141               137
 At 10% over the current market prices              33.21              
 Total share buyback               6,097            5,881            5,493            5,399            4,893            4,688            4,565
                 
 Borrowings            55,659          51,659          47,659          43,659          39,659          35,659          31,659          27,659
                 
 Pessimistic Case                 
 Share buyback                 
 Number of shares                  367               354               331               325               295               282               275
 At 10% over the current market prices              33.21              
 Total share buyback             12,193          11,761          10,987          10,797            9,786            9,377            9,130
                 
 Borrowings            55,659          51,659          47,659          43,659          39,659          35,659          31,659          27,659
                 
                 
 Membership Fees          106,928          93,782          88,649          82,483          69,356          65,726          63,191          59,463
                 
 Cash and short term Investment as per Base Case            35,757          30,286          27,427          24,895          18,662          13,705            9,821            6,198