Credit and Lending Decisions - Case Study Example

Credit and lending decisions al affiliation) Lending for Jumbo interactive limited Prepared by W. Banker 2nd MAY 2015 Background details Address Company contacts Jumbo Interactive Ltd. 601 Coronation Drive Level 1 Toowong, Queensland (QLD) 4066 Phone : +61.7.3831.3705 Fax : +61.7.3369.7844 Web : www.jumbointeractive.com Directors The following are the directors of the company The main directors in the company includes; Mike Veverka who is the chief executive officer of the company; David Keith who is the non-executive chairman; David Todd is the chief financial officer of the company; Xavier Robert is the chief technology officer for the company; William Gordon is an independent non-executive director; Kate waters is the chief administration officer with Bradley Board being the chief managing officer. Shareholders Name % Shares Mr. Mike Veverka 20.5% 9,060,472 The Forager Funds Pty Ltd. 5.99% 2,647,997 The Watermark Funds Pty Ltd. 4.95% 2,189,532 The Barnaby Colman Caddick 1.67% 737,000 The Victor John Plummer 1.36% 600,000 the Warawong Pty Ltd. 1.20% 530,000 A brief overview of the facts of the deal During the meeting with the chief financial officer and the chief executive officer of the jumbo interactive limited, I was informed that the jumbo interactive limited would like to transfer all their banking transactions to the excel bank. The company wishes to close all the existing bank accounts as well as settle any debts that exist with the other banks (Firth, 2012). The company has a good cash balance and their business operation seems to be expanding and therefore they do not wish to tie up all the cash in the purchase of offices and equipments. Jumbo interactive limited have stated that the reason which forces them to move to the excel bank is because the bank has recently developed a reputation and have an outstanding customer services (Grace, 2010). the funding requirement for the company is that they wish to borrow five million dollars from the excel bank as follows; one million dollars overdraft facility for the ongoing operations of the company as well as term loans of four million dollars that will be directed towards the purchase of modern computer equipment at the cost of five million dollars and the purchase of commercial properties for the offices at a cost of around five million dollars. Jumbo interactive company will be able to contribute a total of six million dollars of their own cash towards the purchase. An overview of the borrower Jumbo interactive company is engaged in online lottery trade and retailing services in Australia. The company specializes on selling online lotteries. The company also provides online traditional lottery distributions and retails of lotteries to eligible international jurisdiction and in Australia as well as selling of internet database management. Jumbo interactive limited operates three segments that include internet lotteries Mexico, internet lotteries Germany and internet lottery Australia. The other segments that are provided by the company includes the sale of services and non lottery products which is a primarily exploration in the leveraging of the existing lottery customer database. The company was founded in July 16th 1986 by mike Veverka and is headquartered in Toowong in Australia (Guner, 2011). The company has a total number of over one hundred and sixteen employees. Since the year 2000, the company has registered positive growth as a result of rise in the popularity of the internet lotteries. The company is currently working in four other countries to allow expansion of the government lotteries through internet innovation that is not available in any other part of the world. The company created the popular ozlotteries.com website that is used to sell lotteries that are considered official and which have raised to nearly $100 million in the last five years. The total transaction of the company in 2013 reached 109 million dollars for Australian lotteries in a country with over 22 million people. The potential customers of the company will be four hundred and eighty million people in USA, Germany, Mexico and Australia (Marriner, 2012). Even though it is rare for an internet business to have such a long history, jumbo interactive limited was listed among other companies in the Austrian stock exchange in the year 1999 with an online shopping mall and e-commerce business. The law was later changed in 2000, to allow sales of lotteries through the internet with Jumbo Company beginning to sell charity art union games online. The company expanded into national lotteries through acquisition of the Ozlotteries.com website. Industry analysis With the increase in internet use around the world, jumbo interactive limited has continued to expand its sales and has registered positive performance. Lotteries around the globe are experiencing sustainable growth that is considered strong as a result of the right combination of technology, people and experience at Jumbo. The company has experienced a hundred percent pure internet lottery since the year 2000. The company has also increased the number of customers with over 1.7 million customers in the country. The company has continued to pursue further opportunities in other regions such as Asia, Latin America, the United States of America and some parts of Europe (McCann, 2013). The internet has resulted to positive changes in the lottery industry both in Australia and other countries in the world. The goal of the company is to be at the forefront of such a growth trend. Moreover, the company is positioned in such a way that it will be able to partner with other national lottery businesses around the globe. The 2013/2014 financial year was the most significant for the industry as a result of the launch of the 1st international website known as jumbolotto.de in Germany. The result adds to the success of the industry in Australia where www.ozlotteries.com registered its 14th record in sales of tickets as well as maintaining its unbroken run. The company has also registered increase in sales for the past five years coupled with opening of new markets in various parts of the world. The lottery business has also attracted the younger generations who are many and therefore an indication that the business is set to increase. More than 1.72 million accounts have been opened up around the world with a ten percent customer increase. The company registered growth of 1.39 million in 2011/12 financial year, 1.57 in the 2012/2013 financial year and 1.74 in the 2013 to 2014 financial year. The company has posted significant progress in its growth strategy via international expansion over the last twelve months. The expansion of the internet lotteries was evidence in the recent years when the sales from the flagship website rose with decline in jackpots (Mirtalaei et al, 2012). Even though, the jackpot sales declined by eighteen percent in 2014, the company registered an increase in customer accounts with a rise of flagship website by four percent. A young generation is a key success to the lottery business. The growth of the mobile internet technology has made it easier for the young generation purchasing their goods through the mobile. The young generation has preferred buying their lottery tickets by utilizing their phones. The company has recorded 39% of their sales coming through the mobile technology. Business Performance Customer and sales accounts based on the flagship website of www.ozlotteries.com have grown by almost four to ten percent respectively. Reduced large jackpot activity reduced revenues and TTV as well as expenses leading to the rise in the operating profits. The TTV for the financial year was $ 105,706,982 as compared to $ 108, 267,952 that was registered in 2013. In addition, the operating profit $ 6,765,422 in 2014 as compared to $ 6,354,472 that was recorded in 2013 (DAmato, 2012). The total revenue of the company was also recorded at $23,836,781 in 2014 as compared to 24, 403,335 that was recorded in 2013. The company is also still bearing costs $ 2.6 million that is related to the international expansion activities. The total transaction value increased from $109.1 million in 2013 to $109.3 million in 2014. EBITDA reduced to $5,970,034 from $6,681,262 in 2014. PROFIT-NPAT was $2,784,958 in 2014 as compared to $2,982,157. The cash at bank was $24.5million in 2013 which later increased to $25.4million in 2014. In addition, the net assets of the company was recorded at $20.5 million in 2013 and later reduced to $19.8 million in 2014. The NTA was approximated at $13.8 million in 2013 as compared to $11.8 million in 2014 (Sanches, 2013). The net asset of the company declined by $691,688 in June of 2013 to approximately $19.8 million in 2014, the decline was as a result of decrease in fair value for the available for-sale financial assets to zero. The working capital of the company increased marginally to $11,553,705 in 2014 from $11,315,057 in 2013. The non-current assets reduced to $8,547,487 in 2014 as compared to the value in 2013. The director of the company believes that the group is in a sound financial position to grow and expand its current operations. Long Term Solvency Loan analysis will focus on the financial statements of the company as well as the strengths and the weaknesses that are related the company. The company has better plans for the future and the market values seems to increase with the company’s continued targets towards the youths. The company’s profits have continued to increase with the cost of sales being well managed (Andreassen, 2010.). The company has also registered strong solvency position and liquidity position as well as strong revenue streams since the year 2000 as a result of increased utilization of the internet technology in Australia and other parts of the world where the company has established new markets. Jumbo interactive limited deserve the loan as a result of increase in assets (Ruhnke, Pronobis and Michel, 2008). The amount of capital being requested by the company is less than the profit generated. The asset owned by the company are also enough to act as security to the loan that will be offered. The total liabilities are less than the total assets. The net asset of the company is $19,817,537 which is more than the loan of four million. Cash Bonuses The key managers are entitled to short term case incentive depending on their performance mechanism as described in the first section of the remuneration report. The payments were made on the 23rd December and 28 August during 2013 and 2014. The details of the short term incentives are recognized as forfeited, to invest in the later years as shown in appendix 3. Strengths The management board has abilities and skills to deliver the vision of the company of being the world lottery e-retailer. The company has also put in place a reliable and stable online infrastructure that aims at managing increasing traffic on the company’s websites. This includes quantity caching to manage the website load, ticket and result queuing, account enhancements and customer transactions (Arnold, 2012). The move by the company aims at enhancing better website experience that meets the lottery partners and needs of the customers. The recent applications such as point of sale jumbo smart signs, android and iPhone lottery ticket purchase application, jumbo digital instants, jumbo social group play and the jumbo fun pickers have made it easier to reach the many customers as well as increase sales as a result of ease of access of the customers towards the company. The company has made it easier to play the lottery games in any device and has made it as interactive as possible. The growth in the utilization of the internet has made it easier to use the internet among the people especially the young people (Arping, 2010).The creation of websites such as Ozlotteries.com has made it easier for the company to sell the tickets to various parts of the country. The acquisition of the various partnerships which was secured during the 2012 to 2013 financial year was in line with the global growth strategy of the company. The partnership that was created with Mexico, Germany and the USA has made it easier for the company to expand the lottery business and operation leading to increase in sales. The result led to increased total transaction values by 9%, increased share price by 43% and increased market capitalization by 47%. Weaknesses The company has failed to attract the old population since most of them do not use the internet. The effect has forced the company to focus so much on the youths who have less income. The other weakness is that the company is facing challenges such as competition as more companies or industries are realizing the benefits of the internet as a marketing tool as well as the investment of lotteries (Fiordelisi, Monferra and Sampagnaro, 2010). Increased competition may reduce the sales as well as the market size. The other risk facing the company is that their current contract with SA, VIC and NSW may not be renewed when they expire. The partners earn a lot by utilizing the online channel that will be provided by the company from any other reseller or newsagent of lottery ticket. Failing to extend the contract may impact negatively to the sales of the company. The other risk is that Jumbo interactive has diversified into other businesses that are conducted online. The company at some point set up an accessories business and pet food (Veverka, 2014). Even though the businesses may be profitable to the company especially in Australia where pet market is large enough, the risk to the company is that it may lose focus from the main lottery business. Recommendations The company may qualify for the loan given that they have registered increase in sales and profits in the past five years (Coad et al, 2010). The company is also managed by a very experienced chief executive office with an experience of over twenty years in information technology. Mike Veverka is also the founder and the largest shareholder of the company. The net profit of the company is good with a positive cash flow that will make it easier for them to settle the loan. The company has been paying dividends and has registered a hundred percent equity in cash. Jumbo interactive is currently the most profitable business with an experienced management and a positive flow in cash. They have no debts with a record of a hundred percent in equity cash (Nilsen, 2009). The business too has large potential which indicate that the company may be able to settle their loan and that their full move towards excel bank will be of benefits. Short Term liquidity The balance sheet for the company has remained to be healthy with the net assets estimated to be 19.4 million dollars in 2014. The performance is despite the expenses for international expansion in Germany, USA, and Mexico. The cash position of the company remains to be very strong at an amount of 23.8 million as at December 2014. The customer accounts for 1.82 million offer opportunity for the additional revenue streams to boost the growth in the short term while the market needs some more time gain that traction. This is all evident on the summary of key findings in the paper. References Andreassen, O. (2010.). Getting Credit: How Banks Make Lending Decisions in Argentina, Peru, and the World, With an Emphasis on Secured Transactions and Trust. SSRN Journal. Arping, S. (2010). Credit Protection and Lending Relationships. SSRN Journal. Arnold, G. (2012). The Financial Times Guide to Investing: The definitive companion to investment and the financial markets. Pearson UK. Coad, A., Frankish, J., Nightingale, P., Roberts, R. and Storey, D. (2010). Business Experience and Start-Up Size: Buying More Lottery Tickets Next Time Around?. SSRN Journal. DAmato, E. (2011). Discovering Discretionary Stocks. DAmato, E. (2012). Symptoms of company failure. Fiordelisi, F., Monferra, S. and Sampagnaro, G. (2010). Relationship Lending and Credit Quality. SSRN Journal. Firth, M. (2012). A note on the impact of audit qualifications on lending and credit decisions. Journal of Banking & Finance, 4(3), pp.257-267. Grace, F. (2010). Risky Business: Heterosexual Credit and Lending Practice. Sexualities, 2(4), pp.433-449. Guner, A. (2011). Lending Opportunities, Credit Standards, and Loan Sales. SSRN Journal. Marriner, S. (2012). Economic Growth of Australia. Business History, 13(2), pp.114-123. McCann, J. (2013). Overvaluation of Expected Returns – Observations from Lottery Ticket Sales. Business Valuation Review, 22(4), pp.192-195. Mirtalaei, M., Saberi, M., Hussain, O., Ashjari, B. and Hussain, F. (2012). A trust-based bio-inspired approach for credit lending decisions. Computing, 94(7), pp.541-577. Nilsen, J. (2009). Trade Credit and the Bank Lending Channel. SSRN Journal. Ruhnke, K., Pronobis, P. and Michel, M. (2008). Audit Materiality Disclosures and Credit Lending Decisions. SSRN Journal. Sanches, D. (2013). Pairwise Credit and the Initial Cost of Lending. SSRN Journal. Veverka, M. (2014) Dividend Reinvestment Plan sent to Shareholders. Appendix 1 The financial statements of the company 2013 in $ 2014 in $ The total current assets 24, 934, 718 26, 055, 495 The total non-current assets 9,799,668 8,547,487 Total assets 34,734,386 34,602,982 Total current liabilities 13,619,661 14,501,790 Total non-current liabilities 605,500 283,655 Net asset 20,509,225 19,817,537 Total equity 20,509,225 19,817,537 Appendix 2 Summary of the company’s performance for Six months Appendix 3 Read More