Corporate Finance Project: Analysis of Almarai Company's Financials

This corporate finance project provides a comprehensive analysis of the Almarai company, a major dairy and food producer in Saudi Arabia. The project delves into various aspects of corporate finance, including investment appraisal techniques, capital structure, risk and return analysis, and dividend policy. It examines the company's background, shareholder objectives, and corporate governance practices. The project also assesses Almarai's risk management strategies, including business, market, and economic risks. Furthermore, it explores the company's capital structure, valuation, and financial performance. The project aims to evaluate the company's financial position, identify potential issues, and provide insights into its financial management.

Corporate finance project
Contents

EXECUTIVE SUMMARY.............................................................................................................1
INTRODUCTION...........................................................................................................................3
Background of the company:..................................................................................................3
1. Shareholders/ manager objectives......................................................................................4
5. Risk and Return:.................................................................................................................6
6. Measuring Investment Return:...........................................................................................8
7. Capital structure..................................................................................................................8
8. Dividend Policy................................................................................................................13
9. Valuation..........................................................................................................................16
CONCLUSION..............................................................................................................................16
REFERENCES..............................................................................................................................18

EXECUTIVE SUMMARY
This project summaries various information about corporate finance. Under which
various investment appraisal techniques is been used in order to determine current position of the
cited company. In accordance with evaluating present structure of an organization quantitative
analysis is been done. Certain costs of capital approaches are to be examine in order to evaluate
financial position of the company. All those risk those are affecting productivity and
sustainability has been identified under this project report. The complete valuation of the firms is
made after computing of certain ratios and measure to remove issues those are associated with
the company.
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INTRODUCTION
Finance is the main thing that can be used by the business in order to run the business
effectively. There is a need to raise fund in order to run the business in an effective manner.
however, this can be said that each decision which a business incorporate has the financial
implications, and any kind of decision which influence the finance of an organisation is known
as the corporate finance (Liu, Wei and Xie, 2014). But before going to raise the funds, there is strict
need to make certain policies in an effective manner. the financial analyst’s main focus is to
optimise the value of the business which assist to raise corporate finance. As an emergence of
this, single objectives. Each firm is required to take investment related, financing related and
dividend related decisions in an effective manner. these decisions can be taken while applying
the corporate finance in an effective manner.
Background of the company:
This project is based on the Almarai company which The Almarai is the biggest dairy
organisation in the Saudi Arabia in terms of market value, running dairy farms and the processed
foods, apart from the marketing dairy goods and fruit juices. Almarai other name is green
pastures in Arabic.
The chairman of the cited organisation is HH Prince Sultan bin Mohammed bin Saud Al
Kabeer which addressed an opportunity to convert Saudi Arabia’s traditional dairy farming
industry to satiate the needs of firm’s fast increasing domestic market (Serfling, 2014). This
company was formed in the year of 1977. Presently, Almarai is the planet chief vertically
integrated dairy organisation along with the perfect reputation. Its ultimate aim is to renders
nutritious food and beverages which enrich our consumers lives on each day. This is serving a
various range of high quality food and beverage goods to consumers throughout the Arab world.
In 2014, the Almarai’s performed consistent financial performance (Martínez-Sola, García-Teruel
and Martínez-Solano, 2013). The CEO of the company is Georges Schoderet who was appointed in
the designation in Feb 2015. Although, he connected to Almaria in the year of 2004 as CEO and
in the year of 2011 became its Chief Operating Officer. On the other hand, Abdullah Al Badar
has connected Almarai in 2000 and was selected as the General Manager of the Bakery in
August 2015. He held a number of positions in the organisation and recently as a General
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Manager. Which assist services prior to his existing role as the General Manager. He is worked
for diverse business sectors.
The Company is committed to consistently emerge by further combining firm’s market
presence in the current categories and enhancing the market throughout the region. The
application of our strategic plan during 2015 saw consistently sales growth throughout many of
the categories and enhancing company’s joint venture strategy, it geographical expansion has
been seen (Philippon, 2015). However, innovation and consistent competence gain would produce
robust cash flow and enhance working capital management in order to fund capital expenditure
for the future development.
Shareholders/ manager objectives
The main aim of corporate governance code is to fix Almarai’s approach to the corporate
governance. This is committed to handle more standards of corporate governance and adopts
Sound corporate governance which is a mandatory tool for optimising high term shareholder
value, and this is regulate with this commitment to the quality in entire of its procedures and
products (Balance, 2014). The rules fixed out in the organisation’s CG Code which are essential
for entire directors and members of the company and any further changes can be done by
amending resolution in the BODs.
CG is known as the system through which organisations are managed. The CG structure
emphasis the spreading of the authority and accountability among diverse contestants in the
company, like- board members, stakeholders and others and frame out the rules and procedures
for incorporating decisions on the corporate affairs. By implementing this, it likewise renders the
construction via which the firm’s objectives are framed out and means of attaining those
objectives and handling performance (Eckbo and Thorburn, 2013). The Board of Directors is
accountable company’s CG code.
The shareholders’ role in the corporate governance is to engage the board of directors and
auditors and also to satiate themselves which an adequate governance layout is in place. The
accountability of the board covers framing the firm’s strategic purpose, rendering leadership to
make them into practically, overseeing the administration of the corporate and reporting to
shareholders on their stewardship (Eccles, Krzus, Rogers and Serafeim, 2012). The Board’s actions
are done by considering rules, regulation and applicable laws to the shareholders in the general
meeting. Almarai’s CG code is formed as per the global principles of the CG and regional
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regulatory needs. This must be reflected as the fixing framework of the needs for CG throughout
the company. This must be observed that as a substitute for effective judgements and honourable
arms-length dealings by the directors and employees of the organisation. In specific, the
stipulations of the adhering, needs of which have not entire been formed under this code, focus to
be borne in the mind at the time of adopting CG issues (Berger, Kick and Schaeck, 2014).
BODs would authorise amendments to the CG code on time for complying with varying
legal and operational needs, consistent effective management and good governance practices.
Almarai’s CG Code form full CG that are issued by the CMA which states that investors, who
are judicial individual and who perform on behalf of others, shall reveal in their annual reports
their voting policies, actual voting and manner of dealing with any material issues of interest
which might influence fundamental rights in connection with their investments (Gullifer and
Payne, 2015). The reason for not covering this clause under the firm’s governance policy is that
the cited company does not have the legal entity to make them aware investors with legal status
who are acting on behalf of others in order to disclose their voting policy (Aktas, Croci and
Petmezas, 2015).
Almarai’s articles and corporate governance assist that shareholders enjoys entire rights
connected to shares; in specific the right of achieving a share of authorised dividend payments,
the right to achieve a share of the firm’s assets during liquidation, the right to attend general
meeting and contribute in their voting, the right of share disposal, right to check work of the
board of directors and file accountability litigation against the BODs and the right to ask and
seek information which does not co-operate and also does not conflicts with the regulations of
the Capital Market Authority. Almarai has considered an electronic voting framework to
incorporate it easier for shareholders to entertain the right of the voting if they could enable to
attend in person (Hillier and et. al., 2014).
Almarai main investors are as follows:
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From the above mentioned table, this can be said that the Savola Group Company have
the largest stake in the company. It has 36.5% stake in the company. While on the other hand,
banks and financial institutions have 0.5% stake in the company. Which is the least one.
Risk and Return:
Risk and return is the interchangeable thing which are connected to each other. Almarai
addresses that risk is a most crucial part of for entertaining business (Fracassi, 2016). Risk
management is a crucial contributor to the incorporating and protecting values and henceforth is
a vital portion of the firm’s governance and OM. Managing risk adequately throughout the
business is critical to the existing and future achievement of Almarai. However, Almarai
emerged a methodology to handle potential operational risks. This is aligned with addressed
industry standards and best practices relied on the COSO ERM.
Methodology is revised on a consistent basis and where essential, considering to assure it
emerge with the firm’s operational needs, henceforth enabling Almarai to control risks in an
efficient manner, assisting attaining of short and long term objectives. The Almarai RMP is
connected to COSO model factors and process elaborated in ISO31000:2009. This cyclical
procedure is helpful by the ERM division via provision to the business management teams and
implementing of an ancillary toolset of recording, assessment and reporting on the risk (Brealey
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and et. al., 2012). However, this could be said that risk can be divided into three parts. Which are
as follows:
Business risk Market risks Economic and regulatory
risks
Goods risk Water supply and fodder Economic and the political
risk
Diversification strategy Foreign currency and
commission risk
Pricing regulatory system
Project and program risk Competitive environment Environmental risk
Safety of intellectual property Potential rivals pricing
pressure
Labour force regulation
To manage the risk, there is a need to adopt the best recognised practices. Almarai runs a
three lines of defence model in order to ensure firm wide responsibility for governance,
administration, and reporting of risks and manage environment.
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These three lines of defence model assist to manage the risk in an organisation at all the three
levels.
Risk free rate of return and market risk premium: This is the return which is paid by
government if someone is going to invest in the sovereign bonds issued by the central
government. In Saudi Arab, the risk free rate of return is 2% which simply means that the
company will pay 2% as a return to their investors and above than will be counted as the market
risk premium. Risk free rate of return is calculated as:
Expected inflation +forecasted real interest rate in the economy.
Measuring Investment Return:
Return on capital = Operating income from most recent year (1 - Marginal tax rate)/ (Book value
of debt + Book value of equity from end of previous year- Cash from end of previous year)
=14127.9(1-.35)/(12359.68+13456.84-729.70)=0.36%.
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Capital structure
Capital structure indicates towards the financial growth and position in business
environment. It is made of multiple components such as equities, reserves and surplus, share
holdings and stock holdings, liabilities and debts, long term and short term debts and loans.
Finance managers and analyst evaluate the capital structure of the organisation and give
suggestions subject to generating finance requirement from market.
a) Qualitative analysis of optimal capital structure
Almarai is one of the successful traditional organisation which deals in dairy products,
farming and domestic food products in Saudi Arabia. It is rapidly enlarging its business scale
with its string infrastructure and capital structure in the world. It was established in 1977 since it
is achieving milestone success year by year. Its regular upgrading scale of revenues and income
building its capital structure more strong (Strebulaev and Whited, 2013). It is also beneficial for an
organisation to build an strong capital in the basis of self generated goodwill and revenue scales.
As per above analysis of financial position of Almarai company it is seen that revenue
and profit scale has been increasing on yearly basis. There is a continuous growth is been
recoded in the history of Almarai company's life cycle. From 2005 it started the inventions and
experiments in its operations and management which resulted positive benefits in the form of
increased profitability and revenue. Tax rates: As per financial reports of 15 years from 31 Dec 2002 to 31 Dec 2017
company's effective tax rates were nil from 2002 to 2006 for five years. As per above
analysis of financial statements Zakat and foreign interest in Saudi Arab in respect of
Almari company was calculated 35.25% as effective tax rate. Effective tax rate also
known as marginal cost rates. Added Discipline: it is recorded that the company is retaining 49,726 shareholders
measured at (31st December 2016). Corporate investors were calculated 63.7% of total
shareholding and ownership. Individual investors measured as 36.3%. SAVOLA Group
Company contains the high percentage of ownership with the shareholding of 36.5%.
company has debts of 236.93 in 2002 whereas it gets increased up to 12359.68 in 2017.
which indicates towards strong capital structure in respect of shareholding and stock
holdings.
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 Bankruptcy costs: As per reports Almarai contains the bank overdraft balance of worth
SAR 165,620,000 and short term credits and loans were recorded as SAR 146,911,000 in
2016. it is containing outstanding shareholders of 992,274,000 as per disclosure of
company on 31 December 2017. Agency costs: Company deals in traditional farming and dairy products and operating
large number of distributors and supply chain across the world. Utility price got increased
by 500 billion riyals in 2016 due to broadcasting and distributor channels.
 Future financing Flexibility: As per the financial reports from it is seen that the EBIT
DA recorded at maximum level in the year 2018. Almarai is one of the growing
organisation in Saudi Arabia. It has large capital structure in respect of debts and equity.
Company is retaining the 12359.68 overall equity as at 31st December 2017.
b) Cost of capital approach
Inputs
Operating lease expense in
current year = 2541.88
Operating Lease
Commitments (From
footnote to financials)
Year Commitment
! Year 1 is
next year, ….
1 94.45
2 -
3 -
4 -
5 -
5 and beyond 1784
Pre-tax Cost of Debt = 3.45%
From the current financial
statements, enter the
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following
Reported Operating
Income (EBIT) = 4336.76
Reported Interest
Expenses = 351.34
As per above analysis following figures came out which revels the capital structure and
financial position of Almarai company. As per financial reports of company company has
operating lease of for the first year was SAR 94.45 and for next years it was centralised around
zero investments. Lease amount is evaluated as SAR 1784. Pre tax cost rate retained as 3.45%.
Reported operating income is recorded as SAR 4336.76 for the current year and interest
expenses are calculated as SAR 351.34
Output
Number of years embedded in yr 5
estimate = 94.45
Converting Operating Leases into
debt
Year Commitment
Present
Value
1 94.45 91.3
2 - 0
3 - 0
4 - 0
5 - 0
5 and beyond 18.89 443.32
Debt Value of leases = 534.62
Above figures indicates towards the average operating leases handed over for next 5 years and
above. As per above analysis 94.45 is average operating lease and total debt value is 534.62
calculated for the current year.
Restated Financials
Operating Income with Operating leases reclassified as debt = 2541.88
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