Financial Performance Analysis of Lantern Hotel Group 2014-2017

This report analyses the financial performance of Lantern Hotel Group from 2014-2017 using ratio and trend analysis. The report highlights the company's declining operational revenues, continuous losses, and sell-down strategy. The report also includes a company overview, vertical analysis, and ratio analysis.

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A) Executive Summary
The given report aims to analyse the Lantern Hotel Group’s financial performance during the
year 2014-2017. The key analysis tool is ratio analysis besides the use of financial statement
analysis using trend analysis. The key observation in the horizontal analysis is that there is a
fall in operating revenues coupled with the losses being made by the continuous operations of
the company. The net result of continuous operating losses is the sell down strategy which the
company has implemented in 2017.
The profitability ratios in FY2017 have shown improvement over FY2016 but the same does
not indicate positive sign for the company owing to the contribution of profits from asset sale.
The associated cost of sales for this revenue is practically zero since this does not constitute
operating activities. In relation to company’s liquidity position, FY2017 saw some minor
decline when compared to FY2016 but is not cause of any worry. With the company having
sold all the non-current assets during FY2017, the corresponding long term liabilities are also
nil and the pending liabilities purely comprise of short term liabilities only. As the continuous
operations of the company have yielded continuous losses forcing the company to sell the
asset portfolio, hence the stock price has declined resulting poor market performance over the
given period.
B) Company Overview
Lantern Hotel Group held a portfolio of hotels and pubs located in Australia and New
Zealand. During the recent times, there have been issues on profitability and liquidity front
for the company’s assets. As a result, the company has been rejigging the asset portfolio
whereby it is selling non-profitable assets. Owing to cash crunch, it exited the New Zealand
market in 2013. The sale proceeds were used for Australian properties renovation. Further, in
2014/2015, the company made a strategic decision to retain only certain pubs while
liquidating all the other non-core portfolio assets and instead grow by acquiring new assets
(Cummins, 2016). The strategy since then has been modified and company has executed the
selloff strategy during FY2017 thus having assets only in the form of cash on the books of the
company. These can be used to make acquisitions of assets which the company believes
would be profitable (Young, 2017).
C) Analysis
1. Trend Analysis

Two items have been chosen from the profit and loss statement and a horizontal trend
analysis has been conducted for the same during 2014-2017. It is imperative to note that
since in certain years, a significant contribution of profits and revenues was derived from
discontinued operations, therefore the horizontal analysis has been conducted using the
respective values from continuous operations only.
The trend above clearly highlights the company’s operational revenues have decreased which
may be attributed to asset sale strategy being pursued by the company. The net result is that a
large share of the revenue in the recent years (especially FY2017) is being derived on account
of discontinued operations. The continuous loss generation by the company is clearly a cause
of concern.
2. Vertical Analysis
For the year 2016/2017, the income statement vertical analysis is shown below.
In FY2017 is also on account of sell down strategy by the company since when the portfolio
asset have been sold, the operating expenses would automatically decline. The tax paid for
2016 was zero on account of previous accumulated losses which got adjusted in FY2017 and
hence some taxation burden was borne by the company. The huge jump in profit after tax in
FY2017 is the result of increasing gross margins and lower expenses which is facilitated by a
large chunk of revenue being generated by profits on the discontinued operations. Hence, the
income statements of the two years are not comparable.

The balance sheet vertical analysis is indicated as follows.
A critical observation on the basis of vertical analysis is that for FY2017 closing, the
company assets are in cash and equivalent form with no non-current assets. As a result, the
company as on June 30, 2017 does not have any non-current liabilities and all the liabilities
are current in nature. There is a major shift in the distribution of liabilities and equities with
the share of liabilities jumping in FY2017 in comparison to the corresponding share in
FY2016. The composition of assets for the company has also seen dramatic alteration since
as on June 30, 2016, more than 75% of the assets of the company were in form of non-current
assets which is not surprising considering the business model of the company. However, the
representation of non-current assets has been trimmed to zero as on June 30, 2017 as the

company has executed the sell-off strategy which involved liquidation of all the portfolio
assets. The outstanding long term debt for the company has also been cleared as on June 30,
2017 when no such debt exists on the books. Thus, it can be concluded that the drastic shift in
the company’s financial position owing to the sell-off strategy is apparent from the vertical
analysis of balance sheet.
3. Ratio Analysis
The data obtained from the financial statement of the company and used for ratio
computation is shown as follows.
Over the previous two years, the relevant profitability ratios are indicated as follows.
The above comparison highlights a sizable improvement with regards to the company’s
profitability in FY2017 as compared to FY2016. All the three measures of profitability have a
significantly higher value in FY2017 in comparison to FY2016 values. The main driver of the
spectacular profitability ratios in FY2017 is the jump in profits to $ 40.86 million for FY2017
when compared to FY2016 figure of $ 7 million. This huge increase in profit is not the result
of continuous operations but rather the impact of asset sale where profits have been realised
by the company. The continuing operational revenue has seen decline during the given
period. The increased profitability in FY2017 to an extent is also aided owing to absence of
any depreciation charge for the year since there are no fixed assets with the company as on
June 30, 2017 (Damodaran, 2015).

The relevant ratio analysis of the company in relation to liquidity is highlighted as follows.
The liquidity ratios for the company have shown some decrease in FY2017 as compared to
FY2016. Even though, there has been decline in the liquidity ratios but the company faces no
issues of liquidation or short term cash crunch as on June 30, 2017 especially considering that
all assets are in the form of cash (Parrino and Kidwell, 2014). Further, the company has
disposed all non-current assets and only retains asset in the form of cash at the end of
FY2017. The liquidity ratios in FY2017 have seen a decline as current assets fall is higher
than the corresponding fall in current liabilities. Further, there is no difference between the
current ratio and quick ratio for FY2017 as the company does not have any inventory or any
other current asset which is not liquid.

References
Cummins, C. (2016) Lantern Hotel group raises $14.5m from asset sale, Retrieved from
https://www.smh.com.au/business/companies/lantern-hotel-group-raises-145m-from-
asset-sale-20161018-gs4nau.html
Damodaran, A. (2015). Applied corporate finance: A user’s manual 3rd ed. New York:
Wiley, John & Sons.
Parrino, R. & Kidwell, D. (2014) Fundamentals of Corporate Finance, 3rd ed. London:
Wiley Publications
Young, A. (2017) Lantern Hotels Group sells its last remaining pub, Retrieved from
https://www.theshout.com.au/news/pub-news/lantern-hotels-group-sells-its-last-
remaining-pub/