Financial Anaylsis of ASMAK Company - Research Paper Example

?ADVANCE FINANCIAL ANALYSIS Table of Contents Table of Contents 2 Executive Summary 4 Introduction 4 Company Overview 5 Business Activities of ASMAK 7 Future Plans of ASMAK for the Year 2012 9 Economic Environment and its Impact on ASMAK 10 Industry and Market Analysis 11 Risk Management by ASMAK 12 1)Liquidity Risk 12 2)Credit Risk 12 3)Interest Rate Risk 13 4)Capital Risk 13 5)Market Price Risk 14 Management and Ownership of ASMAK 14 SWOT Analysis of ASMAK 15 Strengths 15 Weaknesses 16 Opportunities 16 Threats 16 Financial Analysis of ASMAK 17 Income Statement 17 Balance Sheet 18 Cash Flow Statement 18 Ratio Analysis 19 Conclusions 19 References 21 Executive Summary ASMAK is a fish farming company, headquartered at Abu Dhabi, UAE. Its shares are publicly traded in the Abu Dhabi Securities Exchange. It has been a pioneer in the field of producing, processing and marketing of aquaculture products in the Middle East. The company achieved various milestones during all these years of its operations. The company sets high objectives for itself and strives to be the leading company in the field of aquaculture. Until recently, ASMAK management have decided to diversify its business activities in other fields like real estate, consultancy services, etc. ASMAK suffered a huge setback financially in the year 2011 and its sales revenues declined significantly. Hence, it has been involved in borrowing money to recover its profitability position, thereby increasing its debt exposure considerably. However the company has huge opportunities available which can be explored effectively to make huge gains from it. The company is recovering at a fast rate and might be requiring more money which they would have to borrow in the upcoming future. Introduction International Fish Farming Holding Company, commonly called as ASMAK is a well reputed fish farming company in the Middle East. It is a multinational public company located at Abu Dhabi. The company has been studied it details and has been discussed in this study. First of all a brief overview about the company affairs have been mentioned in this study. Next the company objectives and the business activities followed by the company have been discussed in details in this study. The strategic plans of the company’s management in future have also been studied. The economic environment of the country and how it had an effect on the company has been mentioned in the study. A detailed analysis of the aquaculture industry and its market in UAE and abroad has been carried over in this study. Various types of financial risks associated with the company have also been discussed in this study. The financial statements of the company for the past two years have been analyzed to know about the current financial condition and the need of further financing by the company. Next a SWOT analysis of the company has been carried out in order to analyze impact of various internal and external factors on the company. Hence, this study gives a detailed overview about the company and its business activities. Company Overview The International Fish Farming Holding Company is an UAE based multinational company headquartered at Abu Dhabi. It is commonly known as ASMAK. It is a public company which was established in the year 1999. Its shares are traded in the Abu Dhabi Securities Exchange. ASMAK is one of the leading companies in the field of manufacturing and exporting frozen fish products in the Middle East and UAE. ASMAK aspires to be the leading aquaculture organization in the world. It aims to have a rapid expansion of its business all over the Arabian Gulf nations and worldwide. Fishing is a common practice for many years in the states of the Gulf Corporation Council (GCC). The business process of ASMAK includes, preservation of fish and other resources from seas through freezing and cooling, trading of the fish products, farming of fishes, packing and processing of sea foods, exports, etc. It is also engaged in the business of providing consulting services regarding sea resources. ASMAK is also involved in the real estate business (ASMAK, 2012a). Slowly but steadily ASMAK has adopted the strategy of diversification of its business with the objective of having a sustainable development of the company. This would ensure that the shareholders of the company get a good value for their invested money in the company. ASMAK is one of the pioneer companies in UAE engaged in the business of fish farming and its allied activities. It has grown up into a fishing giant over the years since its inception. During all these years of its business activities ASMAK have achieved several milestones which have contributed towards generating revenues and sustained performance over the past many years. ASMAK is the first organization of its kind in UAE to have been able to successfully gained approval of its fish processing plants by Federal Drug Administration (FDA) and European Union. ASMAK is also certified under HACCP and ISO which signifies its compliance with the hygiene standards and safety standards in UAE in producing standardized and high quality products. ASMAK also has a great impact in facilitating marine environment preservation and engages itself in activities related to safeguarding the diversity of natural marine life (AMEinfo, 2012a). With respect to the core business activity of ASMAK, one of the recent investment decisions of the company was an investment made in a hatchery that is situated in Red Sea of Saudi Arabia. This investment decision is expected to have a significant impact on increasing the capacity of production of the company. It is expected that the production capacity would increase 3 folds to 3000 tons annually as compared to existing 1000 tons per annum. Furthermore, a processing business unit has been opened up by ASMAK in Delma at Abu Dhabi. It would help the company get hold of the source of a major chunk of fresh fish ranging around 5% of the total fish source. ASMAK have also made continued efforts to diversify its business over the years to make sustainable profit over a period of long term. In line with its strategy of diversification of its business, one of its subsidiaries named Emirates Stallion was successful in acquiring a land at Abu Dhabi. This is expected to have a significant impact in increasing the expertise of ASMAK's management in the field of real estate business. Hence it would add to the revenues generated by the company to the overall activities related to operations. ASMAK also entered into a contract with the objective of raising capital around AED 210 million from the Royal Group by issuing 2 years convertible bonds with no interest. Later in 2011 the convertible bonds were converted into equity shares by the Royal Group (AMEinfo, 2012b). ASMAK also entered into a landmark deal in September, 2011. It was a two year contract with Military Consumer Establishment (MCE) of Jordan. According to this contract International Fish Farming Holding Company (ASMAK) is supposed to export $ 9 million valued fisheries product annually to MCE. It implies MCE would receive annually around 2000 tons of aquaculture products from ASMAK. The products would be sold by MCE through its retail outlets in Jordan. This is a significant achievement for ASMAK and is expected to boost its profit figures significantly (Zawya, 2011). Business Activities of ASMAK The business activities of ASMAK are not confined to fishing business only. It has adopted a diversification strategy and is involved in various other businesses too. Business activities and operations of ASMAK comprises of mainly four types. They are: a) Commercial Activities, b) Fish Farming activities, c) Real Estate and d) Administrative Issues. The distribution and logistics network for the purpose of distribution of products locally are managed by the company itself. Its existing business operations include fish farming. The fish hatcheries of ASMAK have huge capacities. It is engaged in producing aquaculture products from the seas in UAE. These aquaculture products are sold either in fresh form or in frozen forms. ASMAK is also engaged in distribution of fishery products after packing and processing them. The surplus that is generated from the hatchery production of ASMAK after all its operational activities are made available for the purpose of sale to farmers who are engaged in fish farming or are utilized as inventories of wild fisheries. Subsidiaries of ASMAK and related processing plants situated in UAE, Yemen and Oman are engaged in the business of processing and packaging of variety of fisheries products. Stringent hygiene requirements that are approved internationally and high levels of quality standards are maintained by these subsidiaries of ASMAK. The principal objective of ASMAK is providing high levels satisfaction for its customers. ASMAK maintains a team for its sales and marketing activities who are committed to serve the customers through its services and offerings of high quality products. The sales team is engaged in facilitating wide range of services starting from wholesale to retailing. A well organized regional distribution network supplemented with online business networking helps ASMAK to successfully serve its clients both regionally and internationally. ASMAK has the expertise which is well equipped to facilitate establishment of aquaculture related operational activities in the region. ASMAK utilizes its vast experience in the field of aquaculture to develop its consultancy business to help in the set up and establishment of fish farming and associated business activities by the upcoming business entities in the region. Some of its consulting activities include performing feasibility studies, facilitating funding proposals, providing license approvals, designing of aquaculture systems, marketing activities, etc. In the recent past ASMAK proved to be have a significant impact in the developments of new aquaculture systems in the countries which are members of GCC. ASMAK is also committed towards further developments of mutual partnerships and increased investments in growth of business related to aquaculture both regionally and internationally. Future Plans of ASMAK for the Year 2012 Since its inception ASMAK have strived to excel in its business activities and increase performance and operational efficiency. The company has also been successful in implementing its various diversification strategies over the years. It has considerably expanded its operational activities all over UAE and internationally. In accordance with the operational activity plans of the company for the year 2012 as stated by its Board of Directors are as stated below: 1) The company plans to achieve production capacity in full by the end of 2012 in all its existing fish farming and hatcheries plants located both in UAE and outside the country. 2) The company also plans to strengthen its existing processing units of value added products produced by them. In order to achieve this objective, ASMAK is already equipped with having well advanced facilities related to the production of frozen fish products and other value added products in Middle East nations where it has its business set ups located. 3) ASMAK also aspires to increase the revenue generated from the production of value added products by giving more emphasis towards producing high quality products on a consistent basis, fulfilling the needs and requirements of its customers so as to achieve high level of satisfaction for the customers and implementing a strong network for distributing and marketing of its products in the MENA region including UAE. 4) The company also aims to develop a concept of integrating its fisheries production activities with the help of developing a mutual partnership agreement with various organizations situated in UAE and abroad who are related to the business activities performed by ASMAK. This would help in the activation of the market related to marine products along with the associated equipments (Asmak, 2012b). Economic Environment and its Impact on ASMAK As mentioned earlier ASMAK utilizes the varied resources of fish in the seas of UAE. The economy of UAE is characterized with per capita income of people being quite high. UAE also enjoys significant amount of trade surplus. Majority portion of the GDP of UAE is considered to be dependent on its oil reserves. However recent developments in the country shows that a significant amount of diversification of economy has been achieved and the country’s economy are no longer so much dependent on exploring oil. Government of UAE is now more concerned about spending on creating job opportunities in the country and developing expansion strategies in the infrastructure sector. Private sector industries are now being encouraged more in the country. Foreign investors are attracted more in the country because of existing Free Trade Zones in UAE which offers no taxes and availability of 100% ownership title for foreigners. The Global Financial Crisis (GFC) had an adverse effect on the economy of UAE during 2009 and 2010. It tried to blunt the negative impacts of GFC by allowing increase in liquidity in the financial institutions through increased spending. Abu Dhabi had a significant impact because of this GFC. The strategic plan of UAE in the upcoming years include increased focus on diversification, increased opportunities for the local nationals through increased employment in private sector and improvement in the education sector of the country. All these economic indicators of UAE are significantly favorable for ASMAK to continue its business activities and make sustainable development in future. Industry and Market Analysis The seafood market worldwide is expected to expand significantly in the upcoming future. The market is supposed to expand because of several reasons like the increasing population worldwide, increased standard of living of people, and various technological developments like improved transportation and packaging. Demand for the fishery products are expected to be high particularly in the regions encompassing developing nations including Asia Pacific and Latin America. The market is also driven by other factors like the increasing trend amongst people towards the habit of eating healthy foods. Fishes are characterized by having a high level of protein content. Hence fishes are becoming the preferred choice over meat for the consumers who are conscious about their health. Spending on researches related to fish farming has increased considerably. Global Financial Crisis had a significant impact on the hindering the path of progress of this industry, however it is recovering fast. All these factors prove to be very advantageous for a company like ASMAK which is engaged in the business of producing and exporting aquaculture products. Japan and European Union are the principle and primary markets with respect to consumption of fresh as well as frozen fish products. Consumption level of frozen, canned or fresh fish products is particularly high in United States too. Hence it can be concluded that the future forecast for the market of fisheries and aquaculture is quite favorable with a high rate of recovery in the fish production because of increased trade activities in this industry sector. The fisheries industry is expected to expand at an alarming rate in future with the rising demand for seafood worldwide. Application of advanced technologies in the field of aquaculture is expected to result in significant amount of profits for the companies operating in this industry. Hence, ASMAK is at an advantageous position to explore and make good use of all these available opportunities in their favor in order to make sustainable profit for a period of long term. Risk Management by ASMAK The management officials of ASMAK are responsible for the management of risks, especially financial risks related to the business activities of the company. The financial risks associated with the company's operational activities can have an adverse effect on the profitability of the company. Different types of financial risks associated with the company includes, liquidity risk, credit risk, interest rate risk, capital risk and market price risk. The adverse effects of these risks are minimized by the management team of ASMAK through the strategy of diversification of its capital sources. Timely reports are maintained with respect to the functions related to risk management. Various policies that are being implemented by the company in order to hedge the risk exposures are closely monitored by the management officials of the company. 1) Liquidity Risk Liquidity risks can be defined as those risks which might result in the business organization being susceptible to facing difficulties while fulfilling its obligations related to the existing liabilities of a company. ASMAK has developed a framework for managing these types of risks by ensuring that adequate cash reserves and funds are available with the company to fulfill its obligations. 2) Credit Risk Credit risk is defined as those risks which would result in the debtors defaulting to meet its obligations on time which might end up as a loss for the business organization. In order to mitigate the credit risks associated with the debtors ASMAK follows a credit policy which is characterized by allowing credits to those parties who are worthy of it and by collecting adequate collateral against the money lend by the company. The company is engaged in a regular monitoring of the credit ratings associated with the debtors of the company. Credit evaluation is performed for the debtors on an ongoing basis. However ASMAK is not exposed to a significant amount of credit risk which is observable from the amount of financial assets possessed by the company. 3) Interest Rate Risk ASMAK is supposed to be exposed to the risk of fluctuations in interest rates because of mismatches in the reprised or matured amounts of liabilities and assets in a particular year. ASMAK has developed strategies of managing these risks which involves reprising of liabilities and assets of the company. Financial liabilities or assets of the company that are exposed to the risk of fluctuations in interest rates of the cash flows comprises of those assets or liabilities which have floating rate of interest. Considerable part of the fixed deposits, loans, bank dues has floating rates of interest. As of 31 December 2012 the interest rates that are effective on the fixed deposits of ASMAK ranges around 2 to 3% and its short term loans have an interest bearing equivalent to EIBOR + 2%. 4) Capital Risk The capital structure of the company is regularly reviewed by the management. Its capital structure comprises of debt instruments and equity funds. The company takes into account the cost of capital associated with each of the different types of components of its capital structure and the corresponding risks are dealt with accordingly. The capital structure of the company is well managed through the adoption of strategies of optimizing the correct balance between equity and debt. This ensures that the company is able to continue in future as a going concern and would be able to maximize the returns generated by the company operations for its shareholders. 5) Market Price Risk This type of risk arises when there is a fluctuation in the market prices related to various assets owned by the company. ASMAK is exposed to such type of risk mainly because of its various investments in marketable securities. The company is able to mitigate such risk by maintaining portfolio which is well diversified in nature and through the process of monitoring the market developments on a continuous basis (International Fish Farming Holding Co., 2012, p.29-30). Management and Ownership of ASMAK As discussed earlier ASMAK is a public company with its shares listed in Abu Dhabi Securities Exchange. As of 31 December 2011, total shareholders’ equity of ASMAK amounted to AED 983662 million. The book value of the paid up capital of the company is AED 51 million. The company is well managed by the Board of Directors and other management officials of the company. The Chairman of the Board of Directors of the company is Mr. Hamad Abdulla Al Shamsi. Mr. Mohamed Helal Al Muhairi is the vice chairman of the board. Talal Abu Ghazaleh & Co. International of Sharjah acts as the external auditor of ASMAK (Asmak, 2012c). Some of the other Board of Directors of ASMAK includes Mr. Hamad Kalfan Al Shamsi, Adil Hassan Al Nuwais, Muamar Ibrahim Al Hadadi, Khalid Biti Al Shamsi, Laith Bin Jaree Al Faraih and Khalid Biti Al Shamsi (AMEinfo, 2012b). Currently the single largest shareholder of ASMAK is Hydra Properties. It is a fully owned company of the Royal Group of Abu Dhabi and accounts for around 47 per cent stake in ASMAK. As discussed earlier ASMAK has issued two year convertible bonds that is free of any interest associated with it to the Royal Group of Abu Dhabi so as to borrow money for imparting growth of the company and boost its profit figures. Next, when these convertible bonds get matured in two years time, Royal Group is expected to become the major shareholder of the company (Fis, 2011). Hence Royal Group can have significant impact on the ownership stake of ASMAK and is supposed to be influential in the management decision making process of ASMAK. SWOT Analysis of ASMAK Strengths ASMAK is one of the pioneers in the field of aquaculture production in UAE. Its main strength is thus its competitive advantage in the market with regards to production, processing and marketing of the aquaculture products. ASMAK has been able to generate significant amount of sales revenues from its business activities except for the year 2011. Other strength of ASMAK is its brand value. ASMAK brand is well recognized all over the world. The company has its presence not only in UAE but internationally as well. UAE is characterized by having huge reserves of fishes and other marine products and ASMAK makes efficient utilization of its resources. Until recently, ASMAK have been successful in diversifying its activities considerably into the fields of real estate business, consultancy services and partnership activities. These operational activities have already started generating significant amount of revenues for the company. Weaknesses ASMAK has been successfully running its business over the years and have contributed towards increasing the wealth of its shareholders. However it has its limitations too. The sales revenues along with the net profit of the company have decreased significantly last year (2011). It indicates the inefficiency of the management of the company to operate the business effectively and efficiently. If ASMAK is not able to recover its financial position quickly enough, it may possess a great threat to the profitability of the company. Moreover the core business activity of ASMAK which includes production and processing of fish have not been performing up to its potential in 2011. Although ASMAK is making considerable effort to diversify its activities, it has not established those business activities strongly enough. Opportunities As discussed earlier, the economy of UAE is greatly dependent on oil exports from the country. This fact can prove to be an opportunity ASMAK in developing its business activities which has not been explored well in the country. The country has huge reserves of marine life, which can prove to be advantageous for the company. Moreover ASMAK have taken the strategy of diversifying its business activities for making sustainable development of the company. There is a huge opportunity for the company to utilize its brand to develop its real estate and consulting activities. ASMAK already has the expertise required to explore these opportunities. On proper utilization of these opportunities ASMAK is expected to perform well in the long term. Threats The main threat for the company is its core business activity related to aquaculture production. It is a seasonal business and highly volatile in nature which can affect the profitability of the company. Moreover it possesses the threat of various natural calamities which can affect the marine life. This would have an adverse effect on the business activity of ASMAK. Red tides have already put a hold on the activity of fish farming at various business location of ASMAK last year which resulted in decline of its sales revenues considerably. Competitors of ASMAK also possess a threat for the company by taking away its potential customers and thereby affecting its profitability. Financial Analysis of ASMAK Income Statement The income statement prepared by ASMAK shows that its sales revenue for the year 2011 was AED 361.619 million. As compared to the previous year the sales revenue for the company dropped down significantly during 2011. At the end of 2010 the sales revenue of ASMAK was AED 504.577 million. The administrative expenses for the year 2011 were AED 37.146 million. ASMAK was able to reduce its administrative expense during this year which was AED 45.002 million in 2010. There was a considerable increase in the finance costs incurred by the company which amounted to AED 26.081 million in 2011. For 2011 the finance cost of ASMAK was much lower at AED 1.667 million. Operational profit of the company for 2011 was AED 21.482 million which marked a significant decline from the 2010 figures of AED 68.522 million. Furthermore, the net profit of the company also reduced a great deal to AED 21.012 million in 2011 which was equal to AED 70.674 million in 2010. Hence ASMAK suffered a huge loss in 2011 as compared to 2010. Balance Sheet Current assets of ASMAK amounted to AED 479.178 million in 2011. It increased slightly from the previous year’s figures of AED 461.869 million. The long term assets for the company were AED 1102.906 million in 2011. It increased considerably from AED 488.212 million which was the amount of long term assets of ASMAK in 2010. The current and long term liabilities of ASMAK for the year 2011 were AED 390.416 million and AED 208.006 million respectively. When compared to the 2010 figures it is observable that current assets have reduced significantly from AED 600.134 million. However ASMAK's long term liabilities increased significantly which was only AED 5.620 million in 2010. This is mainly attributed to the loan received from related parties in 2011. It is noteworthy that ASMAK issued 2 year convertible bonds amounting to around AED 200 million to the Royal Group in 2011 in order to raise capital to boost the company's profit. Hence conversion of these bonds into equity would significantly reduce the long term obligations for the company. Shareholders’ equity as it stood in the year 2011 end which is attributable to the shareholders of the company was AED 774.076 million. Cash Flow Statement The Cash Flow Statement of ASMAK for the year 2011 shows that the company is suffering from liquidity crunch situation. It is so because Cash from Operation of the company was (-) AED 296.132 million in 2011. Cash from Investment amounted to (-) AED 448.039 million. However ASMAK generated significant amount of cash from its financing activities in the year 2011. The Cash from Finance increased from AED 18.905 million in 2010 to AED 920.709 million in 2011. Ratio Analysis If we look at the liquidity ratios of the company, it can be found that the current ratio of the company have improved to 1.23 in 2011, which was 0.77 in 2010. The quick ratio for the company is 1.19 for 2011 and 0.75 for 2010. The trade receivables days for ASMAK were 124 days in 2011 and 87 days in 2010. It shows that the company has been inefficient it’s receivable into cash. The liquidity position of the company is not so good. Next if we look at the profitability ratios, it can be found that the net profit margin for the company was 5.8% for 2011 and 14% for 2010. It indicates that the net profit of the company has decreased significantly in 2011. The return on equity figures of the company were 2.18% for 2011 and 19.90% for 2010. Hence, the company failed to live up to the expectations of the shareholders and its returns generated were significantly reduced in 2011. Thus ASMAK was not at all profitable in the year 2011. Now if we look at the leverage ratios of the company, it can be found that the debt equity ratios were 1.61 for 2011 and 2.76 for 2011. It shows that ASMAK have increased its debt exposure in 2011 it may not be successful to meet its long term obligations efficiently in future. The assets turnover ratios of the company were 0.23 in 2011 and 0.53 in 2010. It indicates that company has not been able to generate adequate revenues in the year 2011. Hence it can be concluded that ASMAK have increased its debt exposure considerably in 2011. Conclusions ASMAK is a very well known brand in the Middle East and other parts of the world. It has been successfully carrying out its business activities over the past many years since its inception. Until recently in the year 2011 it suffered a huge loss in revenues and the company profit reduced significantly. It is mainly attributed to the red tides that occurred in some of its fish farming locations. However the company has started to make considerable efforts to diversify its business activities into various other fields like real estate, consultancy, etc. The company has a huge opportunity to utilize its resources more effectively to make a sustainable growth and development in future. Recently the company has increased its exposure to debt by borrowing money to boost its profits. It may require borrowing more funds to finance its planned business activities in future. The company has a competitive in producing and processing aquaculture products and strives to be the leading company in this field. References AMEinfo. (2012a). Asmak to Highlight Growing Presence in Regional Seafood Market at Gulfood 2012. Retrieved from http://www.ameinfo.com/290605.html. AMEinfo. (2012b). Asmak Elects Board of Directors at Annual General Meeting. Retrieved from http://www.ameinfo.com/262284.html. Asmak, (2012b). Directors’ Report for the year 2011. Retrieved from http://www.adx.ae/English/News/Pages/Directors%20Report%202011%20Eng_3-31-2012%207_54_31%20PM.pdf. Asmak. (2012a). About the Company. [Online]. Retrieved from http://www.asmak.biz/about/. Asmak. (2012c). International Fish Farming Holding Co.: General Information. Retrieved from http://www.adx.ae/English/News/Pages/Archive2012/Major%20Elements%20of%20the%20Consolidated%20Financial%20Statements_02-13-12%208_35_03%20AM.pdf. Fis. (2011). Aquaculture Firm Receives USD 114 mln for Recovery. Retrieved from http://www.fis.com/fis/worldnews/worldnews.asp?monthyear=1-2011&day=4&id=39888&l=e&country=0&special=&ndb=1&df=0. International Fish Farming Holding Co. (2012). Independent Auditors’ Report and Consolidated Financial Statements for the year ended 31 December 2011. Retrieved from http://www.adx.ae/English/News/Pages/Asmak%20-%20FS%20-%2031-12-11%20-%20English_3-31-2012%207_49_55%20PM.pdf. Zawya. (2011). Asmak Inks US$18 Million Landmark Deal with Jordan's Military Consumer Establishment. Retrieved from http://www.zawya.com/story/ZAWYA20110914131820/Asmak-inks-$18m-deal-with-Jordans-military-consumer-establishment/. Read More