Vital Bio-Energy

Pre-IPO research
July 2010

Published by Edison Investment Research

Pre-IPO research
13 July 2010

Vital Bio-Energy
Year Revenue PBT* Net Income* DPS
End ($m) ($m) ($m) (c)
06/11e 4.1 (2.2) (1.5) N/A

06/12e 11.0 2.7 1.8 N/A

06/13e 17.9 7.0 4.7 N/A

Note: *PBT and EPS are normalised, excluding goodwill amortisation and exceptional items.

Investment summary: Oil from soil

Vital Bio-Energy’s (VBE) proposed Pongamia plantation located in Kenya is designed
to capitalise on the growth of the international market for vegetable oils and help
reduce the country’s reliance on imported energy. We estimate VBE could be worth
$23.6m under our base case scenario, although the valuation remains sensitive to
core assumptions on the discount rate, crop prices and yields. Applying market
prices for vegetable oil to our model would increase the average valuation to $34.9m.

Profitability and valuation sensitive to yields and prices

VBE’s profitability is sensitive to the yield and market price of its principal crops. In
the short term profitability remains dependent on the castor crop; in the longer term
the Pongamia assumes greater importance. We have assumed achieved selling
prices for Pongamia oil of $800/tonne and $1,050/tonne for castor, compared to
current market prices of $780/tonne and $1,522/tonne respectively. The market
price of castor oil has risen significantly during the preparation of this note;
nevertheless, applying current market prices to our model would boost 2015 net
profit by 71% (to $16.8m) and 2020 net profit by 10% (to $34.9m).

Cash generation potential Business

The successful commercial cultivation of castor and Pongamia could generate Vital Bio-Energy is seeking to develop a
plantation of 24,000 hectares in Kenya.
significant cash flow. After an initial phase of relatively high capex, our base forecasts The principal crop will be Pongamia, but
project that VBE will amass cash of $5.6m by year four of operation. If VBE achieves in the early years it will be intercropped
with castor.
current market prices for its crops the cash pile could increase to over $20m.

Valuation: Blended valuation of $23.6m

Based on a tripartite approach of DCF, asset based valuation (mature hectares under Analysts
cultivation) and multiple comparisons, we estimate VBE could be worth c $23.6m. Graeme Moyse 020 3077 5700
Neil Shah 020 3077 5715
However, as with profitability, the valuation remains very sensitive to core
industrials@edisoninvestmentresearch.co.uk
assumptions on crop prices and yields. Applying market prices for vegetable oil to
our model would increase the average valuation to $34.9m.

Vital Bio-Energy is a research client of Edison Investment Research Limited

2 | Edison Investment Research | Pre-IPO Research | Vital Bio-Energy | 13 July 2010

Investment summary: Oil from soil

Company description: Kenyan plantation manager
VBE’s proposed Pongamia plantation (24,000 hectares) intends to capitalise on the growth of the
international market for vegetable oils and reduce Kenya’s reliance on imported energy. In the early
years the Pongamia will be intercropped with castor to provide short-term revenues, but once the
Pongamia has successfully established itself, the castor will be phased out. Successful commercial
cultivation of the Pongamia crop could generate significant cash flow, provide the opportunity to
acquire additional land and fund the expansion of the business.

Valuation: Blended valuation of $23.6m

The untested commercial cultivation of Pongamia, the hiatus between planting and seed
production and the absence of directly comparable companies all present challenges in valuing
VBE. Based on a tripartite approach of DCF, asset based valuation (mature hectares under
cultivation) and multiple comparisons, we estimate VBE could be worth c $23.6m. However, the
valuation remains very sensitive to the assumptions used on discount rate, crop prices and yields.
Applying market prices for vegetable oil to our model would increase the average valuation to
$34.9m.

Risks and sensitivities

We believe VBE’s principal risks fall into three broad groups: agricultural, financial, and country
specific. The management has taken steps to mitigate some of the risks, such as crop failure and
volatile market pricing, through its business plan, its agricultural practices and crop diversification.
Inevitably, however, uncertainties remain.

As we have highlighted, Vital Bio-Energy’s profitability and valuation is sensitive to the yield it
achieves on its principal crops and the price it obtains for these crops in the market place. In the
short term profitability remains dependent on castor crop yields and prices, while in the longer term
the Pongamia assumes greater importance.

Financials
VBE will record a loss in its first year of operation, but should achieve profitability in its second year.
With relatively high capex spend in the early years, VBE will accumulate net debt (c $8.2m including
HP Loans at the end of year one), but by year four it should have generated a cash pile of c $5.6m.
In the event that VBE achieves current market prices for its vegetable oil the net cash position at
the end of year four could reach $20.4m. If the assumptions used to create our financial projections
are met, VBE could generate significant cash flows in the following years.
3 | Edison Investment Research | Pre-IPO Research | Vital Bio-Energy | 13 July 2010

Company description: Kenyan plantation company

VBE’s proposed Pongamia plantation intends to capitalise on the growth of the international
market for vegetable oils and reduce Kenya’s reliance on imported energy. In the early years the
Pongamia will be intercropped with castor to provide short-term revenues, but once the Pongamia
has successfully established itself the castor will be phased out. Successful commercial cultivation
of the Pongamia crop could generate significant cash flow and provide financial firepower for
expansion.

Plantation manager
Vital Bio-Energy (VBE) has secured a lease from the Kenyan government’s Agricultural
Development Corporation for 48 years (three × 16 years) on 29,000 hectares of land in south-east
Kenya. The land, known as the Kulalu Ranch, is leased on a rent plus-profit share arrangement and
is located in Kenya’s Coast province, 100km west of Malindi.

The site, which was formerly used for cattle ranching, is now over run with thorn scrub and is not
regarded as suitable for mainstream arable cultivation. VBE has secured all of the required
operating licences and bush clearance began in January of this year. Prior to this VBE spent 18
months trialling and selecting a suitable crop. Following the selection of the Pongamia as the
principal crop a nursery was established to cultivate the Pongamia ahead of full planting.

Business opportunity
Kenya is a significant net importer of fuel and currently imports 100% of its mineral diesel. VBE
believes that there is a sizeable opportunity to provide both vegetable oil and biomass to help
reduce this imbalance. At full capacity Kulalu could supply up to 6% of Kenya’s current mineral
diesel requirements.

The international market for vegetable oil and biodiesel also continues to grow rapidly. With
generally better climatic conditions and lower labour costs, developing countries like Kenya are
better placed to produce than industrialised countries.

A recent UN study, “The Biofuels Market: Current Situation & Alternative Scenarios”, has suggested
that, even if the EU and US take a protectionist stance on the importation of biofuel, international
trade could reach $200bn by 2020, and if they adopt a more permissive attitude to imports the
figure could reach $520bn by 2020.

Business strategy
VBE intends to grow Pongamia on the plantation, with a view to the Pongamia producing oil six
years after initial planting. Pongamia oil has a number of applications, including as a fuel for lamps
and cooking, for electricity generation and in soap making. The oil will be sold either into the local
market or exported. Prior to the commercialisation of the Pongamia crop, the company intends to
generate revenue from the intercropping of castor and the sale of biomass derived from plantation
clearance. The castor oil crop is expected to produce revenue immediately, reaching peak
revenues by year five and declining to zero by year 12. Pongamia will begin to produce revenues in
year six and will reach peak productivity only by year 14.
4 | Edison Investment Research | Pre-IPO Research | Vital Bio-Energy | 13 July 2010

Exhibit 1: Vital Bio-Energy’s evolving revenue split

100

80

60
$m
40

20

2013

2016

2018

2019

2023
2011

2012

2014

2015

2017

2020

2021

2022

2024

2025
Pongamia Castor Biomass
Source: Edison Investment Research

Pongamia
Pongamia (also known as the Beech tree and the Honge tree) has been selected by the
management as the principal crop for the plantation. The Pongamia is a medium-sized evergreen
tree that can grow to 25 metres.

The Pongamia tree was selected as the principal crop for Kulalu after trials that also included
Jatropha and Moringa plants. The Pongamia was considered the most appropriate crop as it can
grow in areas with annual rainfall in the range of 500mm to 2,500mm (the Kenyan average is
790mm); it tolerates a temperature range of 1-38oC and is a nitrogen fixing plant. Trials also
showed that Pongamia was less vulnerable to insect attacks than the Jatropha, more resistant to
fungus and consumed less water. Pongamia is also not susceptible to grazing from indigenous
animals.

The tree begins to produce seeds six years after planting and yields between 9kg and 90kg of fruit
depending on its maturity. We have assumed that the maximum yield of seeds (50kg/tree) will
occur in year 14. The seeds yield Pongamia oil at a rate of c 25-40% of their weight (we have
assumed 30%).

Once the oil has been extracted the remnants of the seeds can be used either as biomass, as a
fertiliser, or used as a feed for poultry and cattle. Pongamia wood can also be used as a fuel.

Castor
Given the time required by the Pongamia tree to begin producing seeds, VBE has decided to
intercrop with castor in the initial years of the project in order to generate revenue. Castor is prolific
and reaches maturity within six or seven months. It requires rainfall of only 600mm pa, can grow on
marginal land and, given its toxicity, is not foraged on by animals. Although the growth cycle
indicates the potential for up to two crops a year, we have assumed only one crop in our financial
model.

Castor seed will be planted in year one (2,000 hectares), with land under cultivation increasing to
18,000 hectares by year five and declining to zero by year 12. The castor will begin to produce a
crop within seven to eight months and for the purposes of our modelling we have assumed that
each hectare will yield three tonnes of castor seed, with a seed to oil conversion rate of 43%.

Castor oil has a range of applications, from use as bio-diesel, to use in medicines, cosmetics and
lubricants.
5 | Edison Investment Research | Pre-IPO Research | Vital Bio-Energy | 13 July 2010

Biomass
To complement revenues generated from the sale of its main crops, VBE is planning to sell
biomass. In the early stages the majority of the biomass will be produced as a result of site
clearance of the plantation, but as the project progresses it will also come to include biomass
remaining once the oil has been extracted from the Pongamia and castor seeds. An independent
report has estimated that a yield of 25 tonnes of raw biomass per hectare is possible from the site
clearance and that, once the oil has been extracted from the castor and Pongamia, approximately
90% of the residue will be usable as biomass.

After drying and chipping, potential markets could include either the local cement market or the
international export market.

Corporate and social responsibility

VBE is aware of, and has taken steps to fulfil, the social and environmental obligations related to
the establishment of the plantation.

From an environmental perspective, VBE has selected scrub land, regarded as unsuitable for the
cultivation of arable crops, on which to establish its plantation. The crops, in part at least, have also
been selected on the basis of their relatively low requirement for water.

VBE has also committed to take additional measures to ensure that its business operates to the
highest standards of environmental responsibility. The business expects to carry out a full
Environmental Audit, commission a full set of site and condition surveys of the ranch, align its
operational procedures with the Sustainability Performance Standards of the International Finance
Corporation and undertake a project lifecycle carbon assessment. In the event the lifecycle carbon
assessment highlights a deficit, VBE will take measures, such as planting additional trees, in an
effort to achieve carbon neutrality.

VBE’s plantation will contribute to the Kenyan economy. In addition to paying for the lease of the
land, VBE will pay 3% of its profits to the Kenyan government, providing valuable income from land
that does not generate revenue currently. The plantation is also located in an economically
deprived area of Kenya and so will provide valuable jobs and boost the local economy. The VBE
team plans to engage with local communities in out-grower contracts. The out-grower programme
will be guided by the practices of the Kenyan sustainable rural development financing initiative, the
One Acre Fund. Specifically, we expect VBE to set aside $20k in each of the first five years in order
to finance and promote the out-grower schemes.

VBE will take steps to ensure that it respects the local cultural heritage and assists the community
by adopting a number of initiatives and measures:

• VBE will help the local community by providing medical and educational facilities on site.

• VBE will undertake game monitoring surveys to determine animal movement corridors
and watering holes.

• The company is in the process of setting up a charitable trust for the benefit of wildlife, to
which it will donate 1% of its after tax profits.

• The Watha pastoralists seasonally migrate livestock across the plantation. VBE will
conduct a cultural heritage survey to ensure that sites and routes regarded as culturally
significant will be respected by VBE in the management of its plantation.
6 | Edison Investment Research | Pre-IPO Research | Vital Bio-Energy | 13 July 2010

Route to market
The initial business plan is to sell the unrefined oils into either the domestic or international market.
International markets for raw castor and Pongamia already exist and the oils are traded on
international commodity markets (eg, the Bombay Commodity Exchange). If the market opportunity
is judged suitable, a bio-diesel refinery could be constructed in due course.

No long-term supply agreements have yet been signed for the sale of VBE’s oils, although the
management team remains confident that it will be able to find a market for the product. Within
Kenya, VBE has identified a number of potential customers and preliminary discussions have been
held with Kengen (Kenya Electricity Generating Company) and Rift Valley Railways for the sale of
raw vegetable oil. VBE has also received expressions of interest for its oils from international
commodity brokers with a view to the broker taking the entire output of castor oil.

Similarly, no long-term sale agreements have been put in place for the biomass crop, although
once again both domestic and international markets are being considered as potential sales routes.
VBE’s management believes there might be an opportunity to export the biomass to supply the
growing international market for the co-firing of existing thermal plants. Within Kenya, local cement
company Bamburi has been identified as a potential purchaser of biomass.

Pricing
For the purposes of our financial projections we have assumed a flat price of $1,050/tonne for
castor oil and $800/tonne for Pongamia oil. Our forecasts compare to current international market
prices of c $1,522/tonne for castor and $780/tonne for Pongamia (Bombay Commodity Trading
Exchange 21 June 2010). Prices for Pongamia oil have ranged from $600/tonne to $1,350/tonne
since the beginning of 2008, while prices for castor oil have fluctuated between $800/tonne and
$1,600/tonne over the same period.

In years one to five we have assumed a potential price of $40/tonne for the biomass generated
from the bush clearance. From year six onwards, to align with the existing revenue of macadamia
husks, we have assumed $35/tonne. We examine the sensitivity of our profit projections and
valuation to changes in the sales price in more detail in the sensitivities section of this note.

Strategy and additional opportunities

VBE has identified a number of additional business opportunities beyond the development of its
initial plantation.

The most obvious route for expansion is the acquisition of an additional 40,000 hectares of land
adjacent to VBE’s Kulalu ranch. We understand that initial discussions were held with the current
owner of the land, the Agricultural Development Corporation, but the need to generate cash flow
and prove the commercial validity of the initial plantation prevented the discussions being
concluded. Once commercial success has been effectively demonstrated, and VBE begins to
benefit from the cashflow generated by its initial plantation, we believe there is the potential for the
acquisition of the additional land to be concluded.

VBE is also considering the potential for expansion into other African countries, and Zambia and
Tanzania have already been identified as potential target locations. Preliminary discussions have
been held in Zambia, but once again it is unlikely that a transaction will be concluded prior to the
successful commercial operation of the initial plantation.
7 | Edison Investment Research | Pre-IPO Research | Vital Bio-Energy | 13 July 2010

The business plan is based on the sale of raw Pongamia or castor oil to either domestic customers
and/or the international market. However, Kenya is heavily dependant on imports to fulfil its energy
requirements and at the moment no bio-diesel refining capacity exists in Kenya. With a bill currently
going through parliament designed to impose a minimum of 5% of all transport fuel to come from
biodiesel, the management team believes that, in time, there may be an opportunity to build bio-
diesel refining capacity. However, the management of VBE is aware of the number of mothballed
biodiesel refineries globally.

Initial moves have been made by VBE to encourage an out grower operation and the company
distributed castor seeds to smallholders last October. Out grower programmes can be
unpredictable in terms of their returns and although the castor seeds should now be being
harvested, VBE understands that a number of out growers delayed planting due to the late arrival
of the rainy season. There is, therefore, little evidence as to how successful VBE has been in
encouraging smallholders to plant their castor seeds. In time, should the initial scheme prove
successful, VBE will consider expanding this programme. We have not included any revenues or
profits associated with the out grower programme in our financial projections, but we have
assumed an annual cost of $20,000 for the first five years to help encourage the out grower
programme.

Corporate structure
Vital Bio-Energy is incorporated in Jersey and owns 100% of Vital Kenya Holdings Limited. In turn
Vital Kenya Holdings owns 100% of Vital Bio-Energy (Kenya) Company Limited, the plantation
operating company, and Vital Plantation Lease Company Limited, the owner of the plantation lease.
In the event that VBE establishes additional plantations in other countries it is probable that a new
company will be set up to sit alongside Vital Kenya Holdings to act as a holding company for the
constituent businesses in the relevant country.

Exhibit 2: Vital Bio-Energy corporate structure

Vital Bio-Energy
(Jers ey) Plc

Vital Kenya
Holdings Ltd

Vital Bio-Energy Vital Plantation

(Kenya) Company Leas e Company
Ltd Ltd

Source: Vital Bio-Energy

Management
The board of Vital Kenya Holdings Limited remains unchanged with Geoffrey Grime, Charles Grime
and Julian Trinder.

The three executives on the Vital Bio-Energy (Jersey) Plc (VBEJ) board are Charles Grime (CEO),
Neil Halliday (commercial director) and Robert Porter (finance director). The three non-executives
are Geoffrey Grime (Chairman), George Lorraine and Mike Liston.
8 | Edison Investment Research | Pre-IPO Research | Vital Bio-Energy | 13 July 2010

The board of Vital Bio-Energy (Kenya) Company Limited (VBEK), the company responsible for the
day-to-day operations of the Kenyan plantation, will include Charles Grime, Neil Halliday and the
finance director, along with other directors Jonathan Atherton and Eric Mwashighadi. VBEK will
also have two non-executive directors, Tony Mzee and Gai Cullen. Bruce Crossing will act as a
consultant to the board.

The board of VBEJ contains a wide spread of accounting legal and management experience while
the board of VBEK includes personnel with additional experience of farming, agronomy, security
and business operations in Kenya.

Below we summarise the experience and qualifications of the key personnel of VBEJ.

Charles Grime (CEO)

Charles founded Vital and currently works full-time for Vital Jersey. Charles is qualified as a solicitor
of England and Wales and has significant international experience as a practising lawyer as well as
experience of working in Africa. Charles has three years’ experience in developing the Kenyan
business.

Neil Halliday (commercial director)

Neil qualified as a solicitor in the United Kingdom and is also qualified as a Barrister and Attorney in
Bermuda. Born in England, Neil is now a citizen of Bermuda. Neil works full-time for Vital Jersey.

Geoffrey Grime (non-executive chairman)

Geoffrey is currently chairman of EFG Offshore and Jersey Electricity and was formerly a deputy of
the States of Jersey (between 2002 and 2005). Geoffrey was also formerly chairman of Abacus
Financial Services. Geoffrey is a qualified accountant and was appointed senior partner of Coopers
& Lybrand (Channel Islands) in 1990.

Robert Porter (finance director)

Robert qualified as a chartered accountant with KPMG. He spent 17 years in finance and
operations in international investment and private banking organisations. Since 2000 Robert has
served on the boards of a number of AIM-listed and private organisations and is also a non-
executive director of Optimisa plc and Renewable Power and Light plc.

Mike Liston (non-executive director)

Mike is a Chartered Engineer with considerable experience in the power industry, both in the UK
and internationally. Mike was CEO of Jersey Electricity for 16 years, standing down in 2009 to
concentrate on non-executive roles. Mike is currently chairman of Renewable Energy Generation
and KSK Emerging India Energy Fund, both of which were listed on AIM under his leadership.

George Loraine

George is a qualified accountant and was a partner at the then Coopers & Lybrand before helping
to set up Abacus Financial Services. George has also headed up the private client department of
EFG offshore and recently founded Governance Partners, which provides governance, consulting
and non-executive director services to investment funds.
9 | Edison Investment Research | Pre-IPO Research | Vital Bio-Energy | 13 July 2010

The qualifications and business experience of those on the board of VBEK are outlined below.

Eric Mwashighadi

Eric is a Kenyan national, with significant experience in Kenya’s important tourism industry. Eric
brings with him experience of manpower planning, inventory control and accounting functions as
well as local knowledge.

Jonathan Atherton

As well as extensive experience of the hotel industry, Jonathan possesses significant logistical
experience gained in the US military where he served as a paratrooper. Jonathan has extensive
experience of security.

Tony Mzee (non executive chairman)

Tony was born and educated in Kenya and has been involved in the agri-business for over 30
years. He has managed the agricultural division of CMC Motors for the last 15 years. Tony sits as a
non-executive on company boards in Kenya, Tanzania and Southern Sudan.

Gai Cullen (non exec)

In 1977 Gai founded a leading security firm, Wells Fargo, and currently serves as operations
director of the firm. Wells Fargo provides security services to the commercial sector in Kenya. In
addition, Gai also recently retired as chief inspector from the Kenya Police Reserve after 15 years’
voluntary service.

Bruce Crossing (plantation consultant)

Bruce has operated farming and grazing properties (including large scale cotton and soy
plantations) in New South Wales for over 35 years. Bruce has experience in establishing large scale
operations from virgin land.
10 | Edison Investment Research | Pre-IPO Research | Vital Bio-Energy | 13 July 2010

Business risks
We believe the principal risks facing VBE can be divided into three broad groups: agricultural,
financial and country specific. The management has taken steps to mitigate some of the risks,
such as crop failure and volatile market pricing, through its business plan, its agricultural practices
and crop diversification; inevitably, however, uncertainties remain. We highlight what we believe are
the principal risk in this section of our note and attempt to quantify some of the more important
variables in the following sensitivities section.

Agricultural
The risk of crop failure remains the most potent threat to the success of the operation. Causes of
crop failure include pest, fire, disease and water shortage; as part of its business plan VBE has
sought to minimise these threats.

Initial trialling of crops showed the Pongamia exhibits greater resistance to disease and pests than
either the Jatropha or the Moringa. In addition, in the early years at least, intercropping of castor
provides an element of crop diversification. The management also believe that crop failure due to
fire will be minimised by its plantation management strategy (spacing and firebreaks). In addition, as
we have already outlined, the Pongamia can survive with minimum levels of rainfall. To help mitigate
the effects of low rainfall, VBE has obtained abstraction rights from the nearby Galana River. VBE
will be allowed to abstract water up to a limit of 6m litres a day until 2015, although the company
expects to be able to extend the duration of its abstraction rights beyond this date. VBE plans to
build a reservoir of up to 100 acres and will also utilise existing storage tanks in the bush.

Political
Businesses operating in Africa face high levels of political risk, although Kenya enjoys greater
stability than many countries in the region and we derive comfort that a number of the management
team have experience of running businesses in Kenya. Despite concerns relating to political
stability, Kenya’s economy is growing rapidly. Both major political parties (the PNU and the ODM)
would like to reduce Kenya’s reliance on imported energy and recognise the importance of foreign
investment and earnings to the country. Reflecting this outlook there is no restriction on profit
repatriation and Kenya has had a historically relatively stable taxation regime.

Financial
The financial risk relates primarily to the global demand dynamics and the internationally traded
price of Pongamia and castor oil. The company also faces foreign exchange risk as a result of the
capex programme being largely denominated in sterling, while it reports its financial results in US
dollars and faces expenses in Kenyan shillings. Although it is difficult to mitigate the impact of the
global price for its major crop oils, management intends to hedge with financial instruments to
offset the potential impact of currency fluctuations. In an attempt to reduce the risks associated
with the time lag until the commercialisation of the Pongamia tree, VBE has adopted a policy of
intercropping with castor.
11 | Edison Investment Research | Pre-IPO Research | Vital Bio-Energy | 13 July 2010

Sensitivities
Vital Bio-Energy’s profitability and valuation is particularly sensitive to the yield it achieves on its
principal crops and the price it obtains for these crops in the market place. In the short term
profitability remains dependent on castor crop yields and prices, while in the longer term the
Pongamia assumes greater importance. Due to the high discount rate employed in our DCF
analysis (30%) this measure of valuation is particularly influenced by the short-term profitability of
castor oil.

The table below sets out the potential variability of net profit in 2015 and 2020 as well as the
impact on our DCF valuation of changes to our principal modelling assumptions. The impact of
changes to the rate at which we discount future cash flow is examined in greater detail in the
following section on valuation.

Exhibit 3: Profit and valuation sensitivities

Note: *Peak yield applies to entire Pongamia crop only from year 15.
Central case Sensitivity ± Chg to net profit Chg to net profit Chg to DCF (%)
2015 (%) ± 2020 (%) ±
Peak Pongam Crop Yield (kg/tree) * 50 10 0% 3% 7%
Mkt Price of Pongam Oil ($) 800 200 0% 24% 18%
Castor Crop Yield (kg/hectare) 3,000 500 26% 4% 17%
Mkt Price of Castor Oil ($) 1,050 250 38% 7% 25%
Biomass Yield From Clearance (tonnes/hectare) 25 5 6% 0% -4%
Mkt Price Of Biomass ($) 40 10 9% 0% 5%
Taxation (%) 30 5 7% 8% 6%
Source: Edison Investment Research

Our analysis shows that the short-term profitability of VBE is particularly sensitive to the market
price of castor oil and the crop yield. Due to the high discount rate used in our DCF analysis, short-
term profitability has a significant impact on this particular approach to valuing the company. In the
longer term VBE is sensitive to the market price of Pongamia. Both 2020 profits and the DCF are
less affected by the maximum yield assumption for Pongamia as under our projections the
Pongamia crop reaches maximum yield in year 15.

The assumptions on achieved selling prices for Pongamia and castor oil compare to current market
prices of $780/tonne and $1,522/tonne.
12 | Edison Investment Research | Pre-IPO Research | Vital Bio-Energy | 13 July 2010

Valuation
The untested commercial cultivation of Pongamia, the hiatus between planting and seed
production and the absence of directly comparable companies all present challenges in valuing
VBE. Based on a tripartite approach of DCF, asset based valuation and multiple comparisons, we
estimate VBE could be worth $23.6m. However, this valuation remains sensitive to core
assumptions on the discount rate, crop prices and yields. Applying market prices for vegetable oil
to our model would increase the average valuation to $34.9m.

DCF
The starting point for our valuation of VBE is a discounted cash flow (DCF) analysis. We have used
a discount rate of 30% to reflect the commercial and political risk inherent in the project. Given the
finite period of the lease, we have also used a terminal value of zero. The valuation produced by
DCF of course remains highly dependent on the discount rate applied and in the table below we
highlight potential changes to the valuation from an alteration in the discount rate. Applying market
prices for vegetable oil to our model would increase the DCF valuation from $26.7m to $39.4m
using a discount rate of 30%.

Exhibit 4: DCF modelling assumptions

Variable Assumption
WACC 30%
Terminal value zero
Tax Rate 30%
Charitable contributions 1% of post tax profits
Profit share with Kenyan government 3% of post tax profits
Biomass yield 25 tonnes/hectare (from clearance)
Pongam yield 50kg/tree from year 10
Castor yield 3,000kg/hectare
Biomass ASP $40/tonne (until year 5 - thereafter $35/tonne)
Pongam ASP $800/tonne
Castor ASP $1,050/tonne
Source: Edison Investment Research

Exhibit 5: DCF valuations under varying discount rate scenarios

Discount rate (%) 10 20 30 40 50 60
Valuation ($'000) 221,594 65,707 26,718 12,434 5,999 2,698
Difference from central case 729% 146% 0% -53% -78% -90%
Source: Edison Investment Research

Land under cultivation

We have also considered mature land under cultivation as a guide to valuing VBE. As a benchmark,
Asian palm oil companies appear to trade on valuations of between $20,000 and $30,000 per
hectare of mature plantation. However, given that these companies produce palm oil, they are not
directly comparable to VBE. We have therefore sought to determine a valuation for VBE based on
revenue per hectare calculation adjusted to reflect the cultivation of Pongamia. A straight valuation of
VBE’s business using the $25,000 a hectare average for palm oil would produce a valuation of
$600m. Adjusting this for the lower yield of Pongamia (we estimate palm oil yields 1.6x more revenue
per hectare than Pongamia) we arrive at a lower valuation of $378m. However, this number needs to
13 | Edison Investment Research | Pre-IPO Research | Vital Bio-Energy | 13 July 2010

be further discounted to reflect the fact that VBE’s land will not reach maturity for at least 10 years.
Using the 30% discount rate employed in our DCF we arrive at a valuation of just over $27m.

Multiples
Given the lack of directly comparable companies and the fact that VBE will record losses in year
one of its operation, multiple comparisons also suffer from limitations. However, our analysis of a
range of plantation and palm oil stocks indicates an average P/E rating of 9.2x year two earnings.
Simply placing VBE on 9.2x year two earnings produces a valuation of c $17m. Potentially higher
year two profits generated by applying the current market price for castor oil would produce a
valuation of $37.7m.

A valuation combining (averaging) all three approaches produces an overall valuation of c $23.6m
for VBE. An identical approach to valuing VBE, but applying current market prices for vegetable oil
instead of our core modelling assumptions, would produce an average valuation of $34.9m.

Exhibit 6: Valuation summary

40

35

30

25
$m

20

15

10

0
DCF Cultivated Land Multiple

Average Valuation Based On Core Assumptions

Average Valuation Based On Market Prices
Source: Edison Investment Research
14 | Edison Investment Research | Pre-IPO Research | Vital Bio-Energy | 13 July 2010

Financials
VBE will record a loss in its first year of operation, but should achieve profitability in its second year.
With relatively high capex spend in the early years, VBE will accumulate net debt (c $8.2m
including HP loans at the end of year one), but by year four it should have generated a cash pile of
c $5.6m. As long as the assumptions used to create our financial projections are met, VBE could
generate significant cash flows in the following years.

Profit & loss

We expect VBE to record an operating loss in its first year of operation, but to achieve profitability in
year two and grow strongly after. As we have seen, however, earnings and cash flow projections
remain very sensitive to crop yields and achieved selling price for the oil and biomass.

We have assumed a 3% rate of interest on cash balances, a corporate tax rate of 30%, 3% of after
tax profits payable to the Kenyan government and 1% to the charitable foundation set up by VBE.
We have not assumed a dividend is paid, although from year two onwards we believe there is clear
capacity for a payment to be made to shareholders.

Exhibit 7: P&L summary

($) 2011 2012 2013 2014
Pongomia revenues 0 0 0 0
Castor revenues 2,709,000 8,127,000 13,545,000 18,963,000
Net revenue from biomass 1,370,808 2,852,424 4,334,040 4,555,656
Revenue 4,079,808 10,979,424 17,879,040 23,518,656
Cost of sales (1,218,491) (2,479,473) (3,952,455) (5,749,437)
Gross profit 2,861,317 8,499,951 13,926,585 17,769,219
Operating expenses (3,003,245) (2,994,370) (3,022,270) (3,041,703)
Sales & distribution costs (77,400) (232,200) (387,000) (541,800)
EBITDA (219,328) 5,273,381 10,517,315 14,185,716
Depreciation (1,516,414) (2,102,759) (3,107,697) (3,680,666)
EBIT (1,735,742) 3,170,622 7,409,618 10,505,050
Interest expense (127,336) (251,284) (162,742) (38,793)
Interest income 0 0 0 101,985
HP loan interest (318,867) (229,809) (214,682) (139,650)
Profit before tax (2,181,945) 2,689,529 7,032,193 10,428,591
Taxation 654,583 (806,859) (2,109,658) (3,128,577)
Profit after tax (1,527,361) 1,882,670 4,922,535 7,300,014
Charitable contributions payable 0 (18,827) (49,225) (73,000)
Profit share with govt 0 (56,480) (147,676) (219,000)
Profit after tax & profit share (retained earnings) (1,527,361) 1,807,364 4,725,634 7,008,013
Source: Edison Investment Research

Cash flow & balance sheet

In the first three or four years cash flow remains subdued as capex remains relatively high. Beyond
year four the capex declines and profitability continues to rise, rendering the business cash
generative as long as the assumptions included in our projections are met.
15 | Edison Investment Research | Pre-IPO Research | Vital Bio-Energy | 13 July 2010

Exhibit 8: Cash flow

($) 2011 2012 2013 2014
Net profit (1,527,361) 1,882,670 4,922,535 7,300,014
Depreciation 1,516,414 2,102,759 3,107,697 3,680,666
Profit to Kenyan govt 0 (56,480) (147,676) (219,000)
Charitable donations 0 (18,827) (49,225) (73,000)
(10,948) 3,910,122 7,833,331 10,688,679
Changes in working capital
Tax assets (654,583) 654,583 0 0
Tax payable 0 1,461,442 648,216 1,018,919
Cashflow from operations (665,531) 6,026,148 8,481,547 11,707,599
Purchase of fixed assets (6,852,454) (6,088,760) (4,033,751) (2,290,000)
Hire purchase loan repayments (1,328,614) (2,208,304) (2,907,991) (1,835,628)
Cash from investing (8,181,068) (8,297,064) (6,941,742) (4,125,628)
Repayment of directors' loans (232,667) (232,667) (232,667) 0
HP loans 3,985,841 2,639,070 2,099,063 768,750
Increase/(decreases) in debt 5,093,425 (135,487) (3,406,201) (1,551,737)
Cash from financing 8,846,599 2,270,916 (1,539,805) (782,987)
Source: Edison Investment Research

Our balance sheet does not include any money raised from an equity issue and carries debt in the
early years of the project. Due to the strong and rising cashflow the debts are paid off rapidly and
we project those loans from directors and short-term debt will be paid off by year three and HP
loans by year seven. In the long term, the balance sheet accumulates cash although a dividend
payout or expansion of the business through acquisition could alter that picture. We have not
assumed either dividend payments or acquisitions in our forecast.

Exhibit 9: Balance sheet

($) 2011 2012 2013 2014
Fixed assets (PPE) 5,474,041 9,460,042 10,386,096 8,995,429
Cash & cash equiv 0 0 0 6,798,984
Tax assets 654,583 0 0 0
Total assets 6,128,624 9,460,042 10,386,096 15,794,413

Short term debt 5,093,425 4,957,938 1,551,737 0

HP loans 2,657,227 3,087,994 2,279,066 1,212,188
Loans from directors 465,334 232,667 0 0
Tax liability 0 1,461,442 2,109,658 3,128,577
Total Liabilities 8,215,986 9,740,041 5,940,460 4,340,765

Share capital 460,000 460,000 460,000 460,000

Share premium account 56,000 56,000 56,000 56,000
Retained earnings (2,603,362) (795,999) 3,929,635 10,937,648
Shareholders' equity (2,087,362) (279,999) 4,445,635 11,453,648
Total liabilities & shareholder equity 6,128,624 9,460,042 10,386,096 15,794,413
Source: Edison Investment Research
16 | Edison Investment Research | Pre-IPO Research | Vital Bio-Energy | 13 July 2010

Exhibit 10: Financials

$’000s 2011e 2012e 2013e
30-June IFRS IFRS IFRS
PROFIT & LOSS
Revenue 4,080 10,979 17,879
Cost of Sales (1,218) (2,479) (3,952)
Gross Profit 2,861 8,500 13,927
EBITDA (219) 5,273 10,517
Operating Profit (before GW and except.) (1,736) 3,171 7,410
Intangible Amortisation 0 0 0
Exceptionals 0 0 0
Other 0 0 0
Operating Profit (1,736) 3,171 7,410
Net Interest (446) (481) (377)
Profit Before Tax (norm) (2,182) 2,690 7,032
Profit Before Tax (FRS 3) (2,182) 2,690 7,032
Tax 655 (807) (2,110)
Profit After Tax (norm) (1,527) 1,807 4,726
Profit After Tax (FRS 3) (1,527) 1,883 4,923

Gross Margin (%) 70.1 77.4 77.9

EBITDA Margin (%) -5.4 48.0 58.8
Operating Margin (before GW and except.) (%) -42.5 28.9 41.4

BALANCE SHEET
Fixed Assets 5,474 9,460 10,386
Intangible Assets 0 0 0
Tangible Assets 5,474 9,460 10,386
Investments 0 0 0
Current Assets 655 0 0
Stocks 0 0 0
Debtors 655 0 0
Cash 0 0 0
Current Liabilities (5,093) (6,419) (3,661)
Creditors 0 0 0
Short term borrowings (5,093) (4,958) (1,552)
Long Term Liabilities (3,123) (3,321) (2,279)
Long term borrowings (3,123) (3,321) (2,279)
Other long term liabilities 0 0 0
Net Assets (2,087) (280) 4,446

CASH FLOW
Operating Cash Flow (874) 7,389 11,166
Net Interest (446) (481) (377)
Tax 655 (807) (2,110)
Capex (6,852) (6,089) (4,034)
Acquisitions/disposals 0 0 0
Financing 0 0 0
Dividends 0 0 0
Net Cash Flow (7,518) 13 4,645
Opening net debt/(cash) 698 8,216 8,279
HP finance leases initiated 0 0 0
Other 0 (75) (197)
Closing net debt/(cash) 8,216 8,279 3,831

Source: Edison Investment Research

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