Key Success Factors of Capilano Honey Limited - Case Study Example

Capilano Honey Limited’s lending submission Analysis Name: Institution: 1.0 BACKGROUND Borrower: Capilano Honey Pty Limited ABN 55 009 435 Address: 399 Archerfield Road, Richlands OLD Australia 4077 Directors: Position shareholding Mr. Trevor R Morgan, FAICD (Chairman) 39,128 Mr. Phillip F McHugh, MAICD (Deputy Chairman) 44,276 Dr. Benjamin A McKee (Managing Director) 90,300 Mr. Simon L Tregoning (Independent Non-Executive Director) - Mr. Robert N Newey (Non-Executive Director) - Company secretary and financial controller: Mr. Dirk Kemp Stock Exchange Listings: Capilano Honey Limited’s shares are listed on the Australian Securities Exchange (ASX ticker: CZZ)[ASX141]. Website Address: www.capilano.com.au Major Shareholders The twenty largest holders of quoted shares are: Name No. of ordinary shares Percentage Wroxby Pty Ltd 1 1,065,025 12.50% RBC Investor Services Australia Nominees Pty Ltd 385,111 4.52% National Nominees Limited 287,583 3.38% 4 J P Morgan Nominees Australia Limited 197,023 2.31% Name No. of ordinary shares Percentage HSBC Custody Nominees (Australia) Limited 135,513 1.59% Capefin Pty Ltd 100,003 1.17% Dr Benjamin McKee & Mrs. Sophie McKee 90,300 1.06% Barnes Apiaries Pty Ltd 70,000 0.82% UBS Wealth Management Australia Nominees Pty Ltd 64,700 0.76% Mr. Enrico Albertani & Ms Alison Woodbury 60,735 0.71% Rubicon Nominees Pty Ltd 45,000 0.53% Mr. Cain William Treanor 45,000 0.53% Muirhead Electrical Pty Ltd 43,400 0.51% Mr. Colin James Smith & Mr. Maurice William Smith 43,252 0.51% Mr. Peter McDonald 42,425 0.50% Ginga Pty Ltd 40,000 0.47% Mrs. Marlene Rosemary Nelson 40,000 0.47% Ruge Super Pty Ltd 37,978 0.45% Mr. Peter Roy Barnes 37,520 0.44% Mr. Trevor Richard Morgan & Mrs. Penelope Ann Morgan 37,128 0.44% Mr. Donald Gordon Keith & Mrs. Lorice Ruth Keith 36,979 0.43% Mr. Jonathan William Williams & Mrs. Maxine Alice Williams 36,960 0.43% Totals 2,941,635 34.53% Source[Cap14]. Financing Proposed The grounds for this submission is to evaluate the viability of financing Capilano Honey Pty Limited to the tune of $ 17 Million. The money will be employed as follows; A Term loan of $12 million to repay all their debt at their existing bank of 8.7 million and to purchase $3.3 million new equipment. A $2 million overdraft facility for ongoing business operations. A 3 million to purchase new commercial property for storage (the market value of the additional property is $3 million). 2.0 An overview of Capilano Honey Limited 2.1 Business Description Capilano Honey Limited is an Australian based company, registered on the Australian stock Exchange under the trading code CZZ[ASX141]. The company’s headquarters is in Richlands Queensland, Australia[ASX141]. Under the ASX, the company’s core business is identified as packaging and marketing of honey[ASX141]. The company’s main products are the 100% Australian honey, active Manuka honey, Premium floral honey, Special honey and certified organic honey[Cap141]. 2.2 Company history The company was formed in 1953 and has grown tremendously throughout the decades. As of 2014, the company’s share in the Australian Market stood a 49.4 % representing a 0.7 % increase in market share[Cap14]. Currently, the organisation has a significant presence in North America, Parts of Europe, The Middle East and Asia. 2.3 Main controlled entities Name incorporation stake Honey Corporation of Australia Pty Ltd Australia 100% The Manuka Honey Company Pty Ltd Australia 50% Source[Cap14]. 3.0 Industry Analysis 3.1 A background into the industry. Capilano Honey Limited falls under the Tea, Coffee and other Food Manufacturing industry in Australia. The IBSworld report estimates that the industry generates annual revenues of about $ 6 billion dollars while the annual growth between 2010 and 2015 is estimated to be 3.8%[IBI14]. Other products falling under this category include salt, yeast, prepared food additives and prepared meals. Products are distributed through various supermarket chains. Therefore, a significant presence in these large retail outlets is vital to the product’s penetration presence. 3.2 Key Sensitivities The IBS report points out that the industry has performed remarkably well given the backdrop of an ailing global economy, volatility in commodity prices and declining consumer confidence. The performance has been attributed to the relatively low prices of the final products. However, changing consumer preference makes the industry very volatile. Therefore, innovation, value addition and product differentiation on are vital in the consolidation and expansion of ones the market share. Steps taken by the company to ensure this is the diversification of the product. Different honey products are available to cater for the varied tastes and preferences of consumers broadening the overall market base. 3.3 Key Success Factors Some of the industrial success factors specific to the company include Attractive and visible product presentation The fact that the products are sold through an independent retailer means that firms in this industry have to take additional measures to ensure that their products are strategically placed within these retailers. Proper and strategic placement enhances product visibility and boosts sales and market penetration Innovation and product differentiation Competition in this industry is very competitive given the fact that the products are close substitutes. Therefore, product differentiation and innovation is key in consolidating and broadening the market share. Capilano Honey Limited has achieved this through differentiating from competitors’ products as well as the other in house products. The company can also diversify its investment portfolio core business through investing in other industries. Market penetration ad proximity to the consumer In most cases, companies in this industry do not own or operate outlets that are solely dedicated to their particular products. Therefore, they must align themselves with retailers with a broad network of outlets. Supermarket chains are ideal for this and companies such as Capilano Honey Limited have to partner to ensure high sales volumes. Moreover, the company runs an online store widening the brands reach and boosting sales[Cap141]. Sensitivity to consumer demands Firms in the industry have to be very sensitive to consumer demands. Tastes preferences and trends shift continuously and it is up to each firm to keep abreast with these changes. A good example of this is the growing health and wellness segment in the industry that caters for consumers who are very cautious and particular about the nutritional value of the things they consume. To cater for this segment, Capilano Honey Limited launched Barnes Naturals, a health brand targeting health food and pharmaceuticals[Cap14]. 4.0 Financial Analysis 4.1 Summary of Appendix 2 An analysis of the financial statements shows that the company is solvent both in the short-term as well as long-term. The liquidity ratios show that Capilano Honey Limited can comfortably meet all its current obligations. Secondly, the gearing ratios show a resounding improvement the previous two financial years. 4.2 4.2 Cash Flow Projection 2014 2013 Cash flows from operating activities Receipts from customers 86,365,643 73,237,003 Payments to suppliers and employees (75,651,930) (70,690,257) Interest received 311 416 Goods and services tax received 1,802,891 1,605,041 Income tax paid (65,548) - Interest paid (649,826) (908,353) Net cash generated from operating activities 11,801,541 3,243,850 Cash flows from investing activities Acquisition of Wescobee - (4,068,565) Wescobee acquisition cost - (165,701) Payment for property, plant and equipment (2,069,930) (1,219,898) Proceeds from sale of property, plant and equipment 6,500 7,273 Net cash used in investing activities (2,063,430) (5,446,891) Cash flows from financing activities Dividend paid (1,277,785) (426,010) (Decrease) / Increase of borrowings (7,596,669) 2,937,938 Net cash (used in) generated from financing activities (8,874,454) 2,511,928 Net increase in cash and cash equivalents held 863,657 308,887 Cash and cash equivalents at the beginning of the financial year 239,902 (68,985) Cash and cash equivalents at the end of the financial year 1,103,559 239,902 The cashflows have increased over the two-year period. The results have been occasioned by improved cash management and increase in sales. 5.0 Security Calculations in appendix 1 show that Capilano Honey limited’s safe lending margins are below the loan. It indicates that the loan won’t be guaranteed. However, the results are not definite given the fact that the company’s investments in Honey Corporation of Australia Pty Ltd and The Manuka Honey Company Pty Ltd have not been included in the calculation. 6.0 Key Strengths & Weaknesses relating to the proposal Key Strengths The company controls about 49% of the market. The figure shows that the brand is popular among the consumer base, and it is also indicative of high sales volumes. The products are diversified and cater to different niches in the market. For instance, new brands like the premium seasonal honey and the pot set honey have been specifically designed to target the new clientele as well as attract back the consumer base that had moved to other brands. The brand has a global presence. This ensures that low sales in one region can be compensated by high sales volumes in other regions. In essence, a global presence reduces the inherent risks associated with changing demand in the consumer base. Capilano Honey Limited has a strong financial base. The net assets stand at over $ 28 million. Moreover, the company recorded a rise in both revenue and profitability despite an increase in inventory costs occasioned by the sharp decline in supply. Key Weaknesses Capilano Honey limited’s safe lending margins are below the loan. Therefore, should the company default on payments, the asset base would not be sufficient to recover all the debt. The rising costs of raw material occasioned by the drop in honey supply are a source of worry since there are no guarantees that the trend will be reversed. 7.0 Recommendation Despite the fact that the safety margins have not been met in terms of security, partnering with Capilano Honey limited is still a lucrative investment. The asset, profitability liability and cashflow trends all show that the business is moving towards the right direction financially. Moreover, both the short term and long term solvency of the business is satisfactory. For this reason, I strongly recommend the issuance of the loan to the company. 8.0 Appendix 1. Security Position The calculation of safe lending margin for Capilano Honey is as follows: Security available from a Fixed and Floating charge over the assets of Capilano Honey Limited and its subsidiaries. Cash and cash equivalents $ 1,103,559 0% $0 Trade and other receivables $ 14, 922,176 50% $ 7 461,088 Plant and equipment $ 19,634,969 40% $7,853,988 Other $ 26519 0% $0 Total $ 35687223 $15,315,076 The calculations show that the total safe lending margin 15,315076 is more than the loan 17,000,000 the Capilano Honey Limited wish to borrow. 9.0 Appendix 2. Analysis of Historical Financials Revenue 2 86,003,491 72,160,396 Finance costs (863,070) (1,092,014) Other Expenses (80,055,896) (66,845,874) 5,084,525 4,222,508 Impact of fire damage at Richlands’ Plant Insurance proceeds 2,296,993 4,694,337 Damage to assets and consequential expenses (891,395) (3,922,035) Profit before income tax 6,490,123 4,994,810 Income tax expense (1,871,112) (1,548,206) Net profit for the year attributable to members of CZZ 4,619,011 3,446,604 Other comprehensive income - - Total income for the year attributable to members of CZZ 4,619,011 3,446,604 Earnings per share (cents) 54.2 40.4 Diluted earnings per share (cents) 54.2 40.4 Consolidated statement of financial position 2014 2013 CURRENT ASSETS Cash and cash equivalents 1,103,559 239,902 Trade and other receivables 14,922,176 15,250,167 Inventories 13,736,111 18,328,709 Other current assets 262,519 266,677 TOTAL CURRENT ASSETS 30,024,365 34,085,455 NON-CURRENT ASSETS Property, plant and equipment 19,634,969 19,744,122 Intangible assets 24,467 64,823 Deferred tax assets - 804,939 TOTAL NON-CURRENT ASSETS 19,659,436 20,613,884 TOTAL ASSETS 49,683,801 54,699,339 CURRENT LIABILITIES Trade and other payables 13 9,394,986 11,119,964 Short term borrowings 14 1,291,904 1,355,887 Provision for dividend 1,704,285 - Deferred tax liabilities 12 891,972 - TOTAL CURRENT LIABILITIES 13,283,147 12,475,851 NON-CURRENT LIABILITIES Long term borrowings 7,404,958 14,937,644 Long term provisions 303,128 338,870 Provision for income tax 12 108,653 - TOTAL NON-CURRENT LIABILITIES 7,816,739 15,276,514 TOTAL LIABILITIES 21,099,886 27,752,365 NET ASSETS 28,583,915 26,946,974 EQUITY Issued capital 7,728,221 7,728,221 Reserves 4,042,851 4,042,851 Retained earnings 16,812,843 15,175,902 TOTAL EQUITY 28,583,915 26,946,974 Ratio analysis 2014 2013 Liquidity Current ratio 2.3 2.7 Quick ratio 1.2 1.3 AC Receivable ratio 63.41 77.35 Long term solvency Fixed asset/ share funds 68.77% 76.49% Share funds/outside liability 135.46% 97.09% Share funds/ Total assets 57.53% 49.26% Business performance Gross Margin 8.5% 8.7% Net Margin 5.37% 4.77% Operating expenses/ sales 8.18% 8.43% ‘ 9.1 Short Term Liquidity The current ratio over the two periods remained relatively high. The figures show that over the two periods the company would have been able to cover twice the amount of current debt they had accrued. The dip in liquidity experienced in 2014 can be attributed to the significant drop in inventories. The management points out that the drop in inventory was due to the sharp decline in supply and increased completion for raw material among industry players[Cap14]. However, this drop was countered by an increase in cash and its equivalents due to an increase in wholesale prices[Cap14]. The quick ratio was also positive for the two periods. The ratio reinforces the argument that in 2013 inventories accounted for a larger percentage of current assets than in 2014. This is observed by the fact that the difference between the current ratio and quick ratio is lower in 2014 that it is in 2013. In summary, the liquidity ratios are positive as they indicate that the company can comfortably clear its current obligations as they arise. Therefore, the company should be able to clear /meet interest payments and other short term loan obligations attributed to the proposed loan. 9.2 Long Term Solvency Fixed assets formed a relatively high for both periods. However, 2014 experienced a slight drop in fixed assets. Moreover, the share funds increased over the same period resulting to a decrease in the fixed assets to share funds ratio. The higher fixed assets in 2013 are attributed to the deferred taxes and the higher intangible assets. On the other hand, the higher share funds recorded in 2014 are attributed to the slight increase in retained earnings. The ratio of share funds to outside liability shows considerable improvement over the two periods. In 2013, the liabilities exceeded owner’s equity by around $ 900,000. However, a drop in loan term debt by almost $ 7 million pushed the total liabilities to $ 21 million from the previous high of $ 27 million. Moreover, the increased in retained earnings pushed the owners’ equity upwards resulting in the positive share funds to outside liability ratio. Since the value of issued share and reserves remained relatively constant over the two periods, it can be argued that the loan term debts were cleared using the potion of profits that did not go to retained earnings The company recorded an 8% increase in the share fund to total assets ratio. The rise is attributed to the fact that inventories dropped by more than $ 4 million adversely affecting the total asset base. In summary, the assets, liabilities and share funds figure show a positive trend. The sharp drop in long-term liabilities and the increase in retained earnings signal that the business profitable and the capital management decisions are sound. Therefore, the long term solvency of the company remains positive. 9.3 Business Performance Both profit margin ratios seem very low. However, the industry is very capital intensive mostly due to the high costs of inventory and other expenses. The net profit margins increased over the two periods despite the higher expenses incurred in 2014. The rise is attributed to the higher revenue figures reported in that financial period. The rise in the cost of inventory was neutralised by higher wholesale prices giving the final result its positive outlook. The decline in inventory balances also reduced the operating expenses resulting to a reduction in the operating expenses to sales ratio. Overall, the business outlook is positive despite the threat caused by the inventory shortage. 9.0 Appendix 3 Analysis of Cash Flow 2014 2013 Cash flows from operating activities Receipts from customers 86,365,643 73,237,003 Payments to suppliers and employees (75,651,930) (70,690,257) Interest received 311 416 Goods and services tax received 1,802,891 1,605,041 Income tax paid (65,548) - Interest paid (649,826) (908,353) Net cash generated from operating activities 11,801,541 3,243,850 Cash flows from investing activities Acquisition of Wescobee - (4,068,565) Wescobee acquisition cost - (165,701) Payment for property, plant and equipment (2,069,930) (1,219,898) Proceeds from sale of property, plant and equipment 6,500 7,273 Net cash used in investing activities (2,063,430) (5,446,891) Cash flows from financing activities Dividend paid (1,277,785) (426,010) (Decrease) / Increase of borrowings (7,596,669) 2,937,938 Net cash (used in) generated from financing activities (8,874,454) 2,511,928 Net increase in cash and cash equivalents held 863,657 308,887 Cash and cash equivalents at the beginning of the financial year 239,902 (68,985) Cash and cash equivalents at the end of the financial year 1,103,559 239,902 Reference ASX141: , (ASX, 2014), Cap14: , (Capilano Honey Pty LTD, 2014, p. 62), Cap141: , (Capilano Honey Pty LTD, 2014), Cap14: , (Capilano Honey Pty LTD, 2014, p. 6), Cap14: , (Capilano Honey Pty LTD, 2014, p. 44), IBI14: , (IBISWorld), Cap14: , (Capilano Honey Pty LTD, 2014), Read More