Finance Report on JB Hi Fi Limited

This report provides an in-depth analysis of JB Hi Fi Limited, covering its financial performance, ownership structure, key ratios, market data, news, beta, cost of capital, debt ratio, dividend policy, and recommendations for potential investors.

HI5002: Finance for Business
Dream Big Advisers LLP – Report on JB Hi Fi Limited
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Table of Contents
Introduction................................................................................................................................3
Discussion..............................................................................................................................4
Brief Description of the company.......................................................................................4
Ownership-Governance Structure.....................................................................................5
Key Ratios.............................................................................................................................7
Market Price of share and other relevant data.................................................................8
Research about news and other significant announcements by the company..............10
Beta and required rate of return on investment.............................................................11
Weighted average cost of capital......................................................................................12
Debt Ratio and other relevant aspects.............................................................................13
Dividend Policy of JB Hi-Fi Limited................................................................................14
Recommendation for the client.........................................................................................15
Conclusion...............................................................................................................................16
References...............................................................................................................................17
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Introduction
The report aims at providing an insight into the financial performance and position of
the company under review. The report will be based on the facts and findings generated
after a careful analysis of the annual report of the company and the ongoing
environment around the industry. This will help to gather understanding about the
company and to report on the financial as well as non-financial aspects of the business.
It is crucial to enhance the knowledge about an investment wherein we are planning to
invest some funds in the shares of the company. The company is operating in the
Australian Market, and has branches in the New Zealand location as well. The
environmental factors affecting the company shall be taken into consideration while
reading the report. The report concludes about the decision in respect of the purchase of
investment after taking into consideration the relevant factors analysed by us.
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Discussion
Brief Description of the company
JB Hi Fi limited is a retailer in the Australian and New Zealand markets. It caters to the
consumer electronics industry. The company has established 300+ stores till the end of
the current financial year. The company has been successful in maintaining growth and
profitability through the use of cost reduction techniques. The major competitors of JB
Hifi are Target Australia and Myer. Jb Hi-Fi was established in 1974 and then grew up
to become one of the leading retailers of Australia due to its low costs. It was
subsequently listed on the Australian stock exchange in 2003 after being injected by
private equity in 2000. The company has diversified its portfolio of products from
selling music CD’s to providing a broad range of consumer electronics. The company
has also been active in activities which would boost the profitability. This involves
acquiring few companies which would be helpful in increasing the sales of the company
and an enhanced presence in the market.
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Ownership-Governance Structure
JP Morgan Nominees Australia Limited is the major shareholder which holds 20.40% of
the shares of the company. Substantial holding of the company is in the hands of the JP
Morgan group. JP Morgan is a well-recognised name in the field of Investment Banking
and private equity. It can be said that the ownership by such a brand suggests that the
business in promising and attractive for investment.
Other than holding from the JP Morgan group, JB Hi Fi limited has shareholding of
leading corporates which is given as below:
HSBC Custody Nominees (Australia) Limited - 18.52%
Citicorp Nominees PTY Limited - 11.83%
BNP Paribas Nominees PTY Limited - 10.31%
National Nominees Limited - 5.80%
It cannot be said that JB Hi Fi Limited has any particular family as an owner of the
company. It is observed that the company has a diverse range of shareholders and is
being held by a conglomerate of giant corporate houses. The board is held by a group of
individuals who are experts in their respective fields. The chairman of the company is
Mr. Greg Richards. The position of CEO is held by Mr. Richard Murray who is also the
executive director of the company. full details of the board are given below:
Mr. Stephen Goddard
Ms. Beth Laughton
Mr. Mark Powell
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Ms Wai Tang
Mr. Richard Uechtritz
Mr Tim Carter
Mr. James Saretta
Mr. Terry Smart
Mr. Cameron Trainor
Mr. Doug Smith (Company Secretary)
Directors of the company holds some equity but it is very less than the reportable limit.
Also, directors are provided shares in lieu of the work they have done for the company.
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Key Ratios
Ratio Calculation (4 Year)
Return on Assets
30.06.201
7
30.06.201
6
30.06.201
5
30.06.201
4
Net Profit After Tax (Aud Mn) 172 152 137 128
Total Assets (Aud Mn) 2246 969 895 859
Return on Assets (NPAT/Total
Assets) 7.66% 15.69% 15.31% 14.90%
Return on Equity (ROE)
30.06.201
7
30.06.201
6
30.06.201
5
30.
06.
20
14
Net Profit After Tax (Aud Mn) 172 152 137
12
8
Ordinary Equity 872 401 343 29
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4
Return on Equity (NPAT/Ordinary
Equity) 19.72% 37.91% 39.94%
43.
54
%
Debt Ratio 30.06.2017 30.06.2016 30.06.2015 30.06.2014
Total Liabilities 1374 568 552 565
Total Assets 2246 969 895 859
Debts Ratio (Total
Liabilities/Total
Assets)
0.6117542
3
0.58617131
1
0.61675977
7
0.6577415
6
The equity multiplier (TA/OE) indicates the relationship of total assets with the amount
of equity issued to public. The multiplier indicates the average amount of assets the
company holds which are being funded by the equity. If the company has a higher debt
the equity multiplier will be high as ordinary equity will reduce. Accordingly, it can be
said that the firm with high multiplier are using leverage benefits by introducing money
through debt in the firm. However, high interest burden may reduce the profits of a
company if they are not in line with the profit of the company. The return on equity is
multiplied by the return on equity to get a figure of the return on assets.
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Using a high amount of debt will reduce the ordinary equity of the company. A
reduction in the ordinary equity would mean that the denominator for the equation
(NPAT/Ordinary Equity) will be low. This results in a higher return on equity against
the return on assets. The total asset amount will be considerably higher than the total
equity of the company. Thus, the return on equity will always be higher for a company
which has a high debt in its corporate structure.
Market Price of share and other relevant data
Chart depicting the two year prices of JB Hi-Fi Limited and the all ordinaries index. ‘
(Source: Yahoo Finance, 2018)
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The shares of the company are more volatile as compared to the all ordinaries index.
The share price may be volatile in response to a number of company related factors like
mergers, acquisitions, change in the top management, earnings report etc. It can be seen
that the market has moved steadily in a positive direction. However, the share prices of
JB Hi-Fi Limited initially broke out on the positive side but started declining as soon as
the prices reached significant highs. Thereafter a continuing downtrend was noticed in
the share prices. Currently, the prices have started increasing again which can be
noticed with the positive breakout recently within the price of shares. The prices of the
share and the market do not seem to be correlated with each other.
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Research about news and other significant announcements by the company
The company has recently acquired a firm by the name Good Guys, which is expected
to provide significant value to the synergy benefits being received by the company. The
acquisition of companies is an attractive event for the shareholders and it shows the
strength of a company. The investors react in a positive manner when they receive news
of any subsequent acquisition
The Earnings report of the company is anticipated by most of the shareholders as it
gives key insight about the current financial performance and position of the company.
After the end of the financial year, the stakeholders review the performance
accordingly.
Announcements relating to the general environment the business is functioning can be
made which can have an impact on the industry and markets may react to the news by
buying or selling in the market.
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Beta and required rate of return on investment
The beta of JB Hifi limited is 0.60. It has been calculated from the website depicting
shareholder information and other relevant details about the same.
Capital Asset pricing model gives a formulae for calculating the required rate of return
on investments. The given formulae is depicted below:
Required rate of return: Risk Free rate + Beta*(Market Risk Premium)
Market Risk premium is the excess of market return over and above the risk free rate.
The required rate of return on equity is calculated below:
Required rate of return = 4% + 0.60*(6%)
= 7.60%
The investment in JB Hi-Fi Limited cannot be termed as a conservative investment as it
involves high risks in the business. The business of music stores and consumer
electronics come under the segment where profitability is based on the prices of
material. The prices of material are highly volatile and may have a negative effect on
the materials. `If an investor chooses to invest in a volatile industry, it cannot be termed
as a conservative investment.
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Weighted average cost of capital
The company has received funds at an interest rate of 2.95% from the lenders. The
weighted average cost of capital is based on the weights of debt and equity and the
respective return they are providing to lenders or shareholders.
WACC = Rate of return on debt*Weight of Debt + Rate of return on
equity*weight of equity
= 2.95%*0.39 + 7.60%*0.61
= 5.80%
There are a number of implications of a higher WACC which can be measured by the
number of factors included in measuring the weighted average cost. A higher WACC
will basically mean that the returns are expected to be higher from the project in relation
to the market return. This would lead to an aggressive strategy by the company when it
plans to get returns from the investment. A higher WACC may also imply a higher beta
for the company indicating a higher volatility and a high expectation of results.
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Debt Ratio and other relevant aspects
i. Debt ratio of a company signifies the amount of debt it has taken against the total
amount of funds available to the company. a higher debt ratio will enable the
company to take leverage benefits against the interest which will allow to be set off
against the tax payable by the company. There has been considerable debate on the
issue whether borrowing funds is good for the company in the long run. Based on
the companies background an optimal corporate structure can be formed which will
allow the company to increase shareholder wealth in the future. JB Hi Fi Limited
has a debt ratio of 0.60 which is stable and does not have to be worried out.
However, the company shall focus on repayment of debt as high interest can erode
the margins earned by the company
ii. The debts have increased for JB Hifi Limited during the current year as it has
acquired the good guys. The gearing ratio has increased to 1.60 which was just
0.40 in the past year. This is a clear indication of increasing debts by the company.
This would allow the company to use leverage benefits while filing its tax returns.
The director’s report gives a major insight into the decisions made by the
management.
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Dividend Policy of JB Hi-Fi Limited
The company is following a dividend policy of partial pay out to shareholders. It is
distributing almost 65% of the profits to its shareholders. The company has seen phases
of high growth which has led to the profits for the company. The expansion process of
the company has been limited to making acquisitions and increasing the stores presence
in the country. However, the same has led to an attraction in the market for the industry
and investors expect return against the amount invested by them
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Recommendation for the client
After analysing the facts and figures given by the company, it can be noted that the
shares of JB Hi Fi limited are worth investing as the company is posting stable growth
during the current year and looks competent enough to increase the growth in future
years. This will allow the company to continuously follow a stable dividend policy
which will attract further investment in the company. The stock has currently
consolidated as per the market prices in the past few weeks and may retain its positive
trend again. This possibility makes it mandatory for the investors to buy the shares for a
good profit and holding them for a stable return.
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Conclusion
JB HiFi limited is an organisation in the consumer electronics industry which allows
different investors to earn higher return during the investment period. The shares are
posting a constant positive trend which seems to be consolidating within the past few
months. It is the right time to make an investment in the company as the share value is
cheaper as compared to the time when the earnings are announced.
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References
 Barberis, N., Greenwood, R., Jin, L. and Shleifer, A., (2015), ‘X-CAPM: An
extrapolative capital asset pricing model’, Journal of financial economics, vol.
115(1), pp.1-24.
 Benjamin, S.J., Mohamed, Z.B. and Marathamuthu, S., (2017), ‘DuPont analysis
and dividend policy: empirical evidence from Malaysia’, Pacific Accounting
Review, (just-accepted), pp.00-00.
 Brotherson, W.T., Eades, K.M., Harris, R.S. and Higgins, R.C., (2015), 'Best
Practices' in Estimating the Cost of Capital: An Update.
 Caliskan, D. and Doukas, J.A., (2015), ‘CEO risk preferences and dividend policy
decisions’, Journal of Corporate Finance, vol. 35, pp.18-42.
 Frank, M.Z. and Shen, T., (2016), ‘Investment and the weighted average cost of
capital’, Journal of Financial Economics, 119(2), pp.300-315.
 Johnstone, D., (2016), ‘The effect of information on uncertainty and the cost of
capital’, Contemporary Accounting Research, vol. 33(2), pp.752-774.
 Lof, M. and Malinen, T., (2014), ‘ Does sovereign debt weaken economic
growth?’, A panel VAR analysis. Economics Letters, vol. 122(3), pp.403-407.
 O’Connor, M.P., Zimmerman, J.B., Anastas, P.T. and Plata, D.L, (2016), ‘A
strategy for material supply chain sustainability: enabling a circular economy in the
electronics industry through green engineering’.
 Travlos, N.G., Trigeorgis, L. and Vafeas, N., (2015), ‘Shareholder wealth effects of
dividend policy changes in an emerging stock market: The case of Cyprus’.
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