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Adelaide Brighton Ltd, an Australian cement importer

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Added on  2019-09-30

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The analysis of the financial statements looked at liquidity, profitability, capital structure and share value providing a rounded analysis. The response from the investor market shows a share value that is above the share value calculated using the constant dividend discount model. Financial Analysis 1 2.1 Liquidity: Current ratio 1 2.2 Profitability: Net profit margin ratio and Return on total assets 3 2.3 Capital structure: Debt ratio and Interest cover ratio 5 2.4 Market value: Price-earning trend. This report on the financial analysis of ABC, to
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Executive SummaryThe subject of this analysis is Adelaide Brighton Ltd, established in 1882, distributed in strategic locations across Australia. Adelaide Brighton, the largest importer of cement in Australia, supplies building, construction and infrastructure markets with material. Proactivemanagement has kept costs under control with a reliable and efficient asset base.The prime motive for business is to make a profit and for investors to have a return on their investments. The analysis of the financial statements looked at liquidity, profitability, capitalstructure and share value providing a rounded analysis. The ratios representing liquidity, profitability and capital structure show an organisation that is sustainable in the long-term and supports investment. Analysis of the capital structure shows potential for the organisation to grow the capital base.The response from the investor market shows a share value that is above the share value calculated using the constant dividend discount model. The financial statements lean towards a recommendation to invest, while the investor market indicates a no-buy position.
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Contents1.Introduction...........................................................................................................................................12.Financial Analysis...................................................................................................................................12.1Liquidity: Current ratio...................................................................................................................12.2Profitability: Net profit margin ratio and Return on total assets...................................................32.3Capital structure: Debt ratio and Interest cover ratio....................................................................52.4Market value: Price-earning (P/E) ratio.........................................................................................63.Share Valuation - Constant Dividend Discount Model...........................................................................84.Recommendation................................................................................................................................105.Conclusion...........................................................................................................................................11References...................................................................................................................................................126.Appendix 1...........................................................................................................................................141Financials.........................................................................................................................................142Growth & Ratios..............................................................................................................................153Industry Averages............................................................................................................................164Competitive Environment................................................................................................................177.Appendix 2...........................................................................................................................................21
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1.IntroductionAdelaide Brighton Ltd is a publicly owned company, established in 1882 and is registered on the Australian Stock Exchange (ASX) under the code ABC. Adelaide Brighton (ABC) manufactures and distributes material across the building construction and infrastructure markets as well as mineral processing market. Major manufacturing facilities are strategically located in South Australia, Western Australia and the Northern Territory, enabling ABL to supply all Australian major centres. To support this, ABL have distribution joint ventures in Victoria and Queensland.The majority of revenue, 104.92%, for ABC is derived from the cement, lime, concrete and aggregates segment with concrete products providing 10.09% and unallocated industry segments returning -15.01% [ CITATION IBI15 \l 3081 ]. Adelaide Brighton has a 38.6% share of the cement and lime-manufacturing segment, followed by Cement Australia Holdings Pty Ltd andBoral Ltd [ CITATION IBI15 \l 3081 ]. This report on the financial analysis of ABC, to support or not support investment in ABC, will look at liquidity using the current ratio, profitability using net profit margin and return on total assets, and finally the capital structure using debt ratio and interest cover ratio. The results of the analysis will be presented in the recommendation section of this report with concluding remarks in the conclusion.Towards the end of November 2015 the shares recovered to an upward trend. The past five years has seen patterns of upward and downward trends. Overall, there has been an upward trend in the share price. The cyclical nature of the share price trends for ABC has seen drops in price close the beginning of the year with recovery around July. Recovery for 2016 was early, around January reflecting the possibility that the share price might be over inflated and due for adownward trend. 2.Financial AnalysisThe financial analysis from financial records published by ABC and reported on by IBISWorld (2016). 2.1Liquidity: Current ratioNote: Unless otherwise stated, the values used are from Appendix 1.Page | 1
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The liquidity of a business can be defined as the ability for a business’s short-term assets to meetshort-term liabilities and provide an indicator of near future cash flow [ CITATION OMa15 \l 3081], that is the ability to meet short-term obligations [ CITATION Vas15 \l 3081 ]. The current ratio is the result of dividing current assets into current debts. A value below one represents current liabilities which are higher than current assets and raises concern providing indication that inventory levels may be excessive, borrowing power utilisation, or potential difficulties in operations [ CITATION Vas15 \l 3081 ]. Vasiu, et al. (2015) states that although high levels of current ratio—current ratio above two times—may not indicate critical issues, it is still an area ofconcern for the firm. Issues that contribute to a higher current ratio includes poor customer collection, and low stock rotation. The current ratio for ABC is 2.25 times, indicating a liquid financial position. In comparison to the industry average of 1.64 we find that ABC’s liquidity is above the industry average in which it operates. Inventory levels have grown 4.6% over the year while sales revenue has grown 5.7% over the same time period, providing evidence that inventory is not contributing to a higher current ratio. ABC has a debtors’ turnover of 41.52 days, down from 43.67 days for the previous year, compared to an industry average of 40.44 days. The higher than average debtor turnover may account for a part of the reason that there is a higher than average current ratio. The improvement in the customer collection period has contributed to the change in the current ratio from 2.33 the previous year to 2.25.A limitation of this ratio is that it is a static measure, fixed point in time, and manipulated easily to show favourable ratios. In addition, the receivable item in the financial statements influences this ratio. As the collection period for receivables extends, the value of receivables increases resulting in a higher current ratio. While this may show favourable liquidity, receivable defaults could negatively affect the overall liquidity of ABC[ CITATION Cag13 \l 3081 ].In a comparison to the quick ratio, current ratio excluding inventory, we find that ABC remains ina liquid state. The trend, as shown in fig 1, shows the two ratios have a stable trend over time.Page | 231-Dec-201031-Dec-201131-Dec-201231-Dec-201331-Dec-201431-Dec-20151.72 2.30 1.88 1.85 2.33 2.25 0.98 1.35 1.18 1.20 1.40 1.34 Liquidity RatiosCurrent RatioQuick ratio
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Figure 1 ABC Liquidity ratiosTable 1 Liquidity ratios31-Dec-201531-Dec-201431-Dec-201331-Dec-201231-Dec-2011Total Current Assets(Refer Appendix 1)403100387,200390,200363,700307,800Total Current Liabilities(Refer Appendix 1)179300166,000211,200193,500133,700Inventory (Refer Appendix 1)161500154,700136,300134,800127,900Current Ratio (Calculated using Appendix 1 values)2.25 2.33 1.85 1.88 2.30 Quick ratio(Calculated using Appendix 1 values)1.35 1.40 1.20 1.18 1.35 Formulas used for calculations:CurrentRatio=CurrentAssetsCurrentLiabilitiesQuickRatio=CurrentAssets−InventoryCurrentLiabilities2.2Profitability: Net profit margin ratio and Return on total assetsNote: Unless otherwise stated, the values used are from Appendix 1.Page | 331-Dec-201031-Dec-201131-Dec-201231-Dec-201331-Dec-201431-Dec-20151.72 2.30 1.88 1.85 2.33 2.25 0.98 1.35 1.18 1.20 1.40 1.34 Liquidity RatiosCurrent RatioQuick ratio
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The net profit margin reflects the outcome of operations after all the costs incurred by the business are considered and is calculated by dividing net profit into sales. The net profit margin demonstrates the company’s effectiveness at controlling costs [ CITATION Tit16 \l 3081 ]and should be viewed as part of a bigger picture. In addition to profit margin, analysis of the return on the capital investment required to produce profits and revenues is required to demonstrate further the profitability. The sustainable part of earning is of particular interest to investors and analysts because estimated future earnings are the basis of equity value [ CITATION Ext13 \l 3081 ]—a premium will be paid on sustainable earnings.The return on assets (ROA) ratio combines cost control with asset usage and presents a measure of operating profitability [ CITATION Tit16 \l 3081 ]. The return on assets is calculated by dividing the operating profit—earnings before interest and tax (EBIT)—by the total assets. Titman[CITATION Tit16 \n \l 3081 ]decomposes this to show the cost control and asset utilisation components, presenting the following equation:ReturnonAssets=OperatingProfitMargin×TotalAssetTurnoverWhere OPM represents cost control of the firm and TATO represents the asset utilisation of the organisation.The net profit margin for ABC is 14.7% up in 12.9% from 2014 and an industry average of 8.4% indicates that ABC has a competitive advantage over the average industry. The return on assets has grown from 9.5% for 2014 to 11.3% for 2015. Comparing the ROA for ABC against the industry average of 5.18%, the indication is that ABC is utilising their assets more efficiently than the industry average. ABC actively engages in activities to enhance and promote company performance and efficiency, and continually look for opportunities to improve [ CITATION Bry15 \l 3081 ].Both measures are above the industry average, indicating that ABC is profitable when looking profits against sales and profits against assets. The indication is that ABC are able to control costsin an efficient manner as well as make use of assets efficiently. The net profit margin has shown positive values over the past five years, with growth in the net profit margin between December 2013 and December 2015.Page | 4
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