Jumbo Interactive Limited - Lending Submission - Example

Jumbo Interactive Limited Credit and Lending Solutions Jumbo Interactive Limited - Lending Prepared by 16th May 2015 Background Detail Borrower Jumbo Interactive Ltd ABN 66 009 189 129 Address Level 1, 601 Coronation Drive, Toowong Qld 4066 Directors: Number of Ordinary Shares Options to acquire Ordinary Shares David K. Barwick- Chairman 0 0 Mike Veverka- CEO 579,112 400,000 Bill Lyne 0 0 Top 5 Shareholders (%) Vesteon Pty Ltd 19.32% National Nominees Ltd 9.63% UBS Nominees Pty Ltd 5.30% JP Morgan Nominees Australia Ltd 4.83% BNP Paribas Noms Pty Ltd 2.02% A Brief Overview of the facts of the Deal Jumbo Interactive Ltd. wants to move its banking and lending facilities to Excel Bank due to their outstanding customer service. Jumbo is expanding its business operations and they do not want to tie up all their cash in the purchase of equipment and offices; hence the reason for the loan request from Excel Bank. All the debts of Jumbo shall be paid at their existing bank and all the existing accounts shall be closed. They have requested to borrow a sum of up to $5 million from Excel Bank. The funding requirements are detailed below: Facility 1: Fixed Term Business Loan Purpose: Purchase of new commercial property Amount: $5 million Term: 10 years Interest Rate: 8% Facility 2: Fixed Term Business Loan Purpose: Purchase of new computer equipment Amount: $5 million Term: 2 years Interest Rate: 8% Facility 3: Overdraft Facility Purpose: Working capital – operational activities and cash flow management Amount: $ 1 million Term: 2 years Interest Rate: 8% Overview of the Borrower Jumbo Interactive Limited is a leading internet lottery business that has operations running in Australia and Germany. It started as an e-commerce business with an online shopping mall when it got listed on the Australian Stock Exchange in 1999. Jumbo’s history dates back to 2000 when it sold its first lottery ticket on the internet, after laws were changed to allow the sale of lottery tickets over the internet. The year 2009 was a good year for Jumbo as it recorded impressive domestic growth. Due to this growth, Jumbo is expanding its operations further internationally to Latin America, the USA, Asia and Europe and it aims to be at the forefront of this business. Jumbo launched its first international website in Germany called Jumbolotto.de sometime in the year 2013 - 2014. Other great achievements for Jumbo include maintaining its 14th year record of ticket sales in Australia’s www.OzLotteries.com. Jumbo Interactive Ltd has a staff of more than 100 employees who work in the Brisbane offices and others in its international outlets as well. Industry Analysis The growth of the internet has revolutionized how everything is done in this era. The sale of lotteries is no exception. Organizations around the world are coming up with ways that are quick, easy and convenient to purchase lottery tickets online. Remarkable growth over the past years has been reported on the lottery industry. This has been brought about by intense product innovation. Consumers have a wide variety of choice from where they can purchase their lottery tickets. That includes the web, social media and mobile devices. The key success factors that have made Jumbo gain market in the lottery include its cutting edge innovative technology. The technology has been in development for the last ten years, and it provides a safe and secure online environment. This is vital for any online enterprise. The high standards of service and responsibility that Jumbo upholds are also major key success factors. It also provides reliable delivery for its customers in terms of providing an easy to use and convenient way of buying lottery tickets, which is what consumers want. Some of the key sensitivities in this industry include decline in prizes and jackpots. This is one of the factors that led to the decline in sales for Jumbo in the 2014 financial year. Key strengths and weaknesses (risks) Strengths The strategy of Jumbo expanding their operations across the continent by securing partnerships in the USA, Mexico and Germany according to the Jumbo Interactive Limited Annual Report 2014, shows how confident Jumbo are with their financial position to undertake this partnerships. This has in turn increased their customer base. The strong presence that Jumbo plays on social media platforms through its digital marketing has enabled it to grow and retain its customer base which is currently over 1.5 million users. Jumbo can pride itself in its leadership team that has time and again delivered its vision of being the leading global lottery e-retailer. Jumbo has gone a notch higher with its cutting edge technology in the provision of online lottery services as evidenced by the launch of world’s first lottery App for Apple watch (Roberts, 2015). They have got proven systems which provide a repeatable model to get and win new contracts around the world. Lately, Jumbo’s appeal to the younger demographics has increased. The younger generation wants to access these services in the comfort of their phones or other devices. Jumbo has made sure it is possible by ensuring that customers are buying tickets on their phones, on the move and even when relaxing with friends. Weaknesses The recent decline in prizes and jackpots being awarded has dealt a major blow to Jumbo by resulting in a drop of sales of lotteries. This can be mitigated by carrying out aggressive campaigns to attract more. This might encourage many people to buy the lottery tickets. Jumbo is working with lotteries that have not yet legislated internet lottery sales in the belief that the benefits will outweigh the challenges as mentioned by Mico (2013). This is a good strategy of increasing its customer base but a risky one too. It can lead to some consumers being conned and this might tarnish Jumbo’s good image (Berzon, 2012). Jumbo can mitigate this by coming up with clear and strict contracts that will prevent such lotteries from engaging in bad activities. The fact that Jumbo is the third party in the businesses it has, the license manager can choose not to allow sales through Jumbo sites, and instead keep all the sales to itself. This shows that the balance of power does not entirely end with Jumbo. Jumbo can mitigate this through coming up with long term agreements to contain such risks (Mico, 2013). Jumbo is relying on mainly the online lottery tickets for its revenue, which is a risk in itself should anything happen to that revenue stream. To mitigate this issue, Jumbo should find a way to diversify its products portfolio. Recommendation Jumbo boasts of more than 14 years in lottery operations since the year 2000. With the company’s cutting edge technology, Jumbo is bound to expand and succeed in its operations. The use of internet for lottery sales is an advantage to Jumbo Interactive Limited. With recent use of the internet by scores of people, sales will increase as internet subscription increases. The company’s overall business performance has shown an upward trend of improvement. This is demonstrated by their strong positions in liquidity and solvency and increasing revenue streams. Therefore their profitability rate is on a consistent increase as the rate of annual sales is increasing steadily. However, the weaknesses of Jumbo Limited outweigh the strengths. The fact that Jumbo is working with unlegislated internet lotteries sales is a perk. Jumbo relies on the internet for the sales of lotteries. The fact that the customers face the risk of conning might change the game plan for Jumbo Interactive Limited. If the clients face these risks, the sales of the company may drop tremendously. A drop in sales and revenue means that the financial position of the company will be wanting. I therefore recommend that Excel Bank does not accept the proposal of Jumbo Interactive Limited. Thus, Excel Bank should not extend a loan of $5 million to Jumbo Interactive Limited. Appendix 1 Safe Lending Margin calculation: ‘000 Extend at SLM Margin Trade and other receivables 639,734.00 50% 319,867.00 Inventories 49,404.00 40% 19,761.60 Property1 5,200,379.00 50% 2,600,189.50 Plant & Equipment2 5,117,683.00 40% 2,047,073.20 SLM 4,986,891.30 Sourced from Jumbo Interactive Limited Financial Report 2011 Working Out SLM Margin = Value * Weightings SLM = Sum of SLM Margin Conclusion (1). Property has increased by 5 million owing to the planned expansion by Jumbo Interactive Limited. (2). Plant Equipment has been increased by 5 million each due to the planned expansion. The Safe Lending Margin of $4,986,891.30 is not sufficient to cover the requested borrowing of 5 million. This is because the amount of the Safe Lending Margin is less than the amount Jumbo wants to borrow from Excel bank which is a sum of $5 million. Appendix 2 Comparative Balance Sheet 2014 2013 $ $ Assets CURRENT ASSETS Cash and Equivalent 25,366,357 24,460,703 Trade & other receivables 639,734 418,917 Inventory 49,404 55,098 Total Current Assets 26,055,495 24,934,718 FIXED ASSETS Receivables 121,945 193,688 Investments accounted for using the equity method 1 1 Available-for-sale financial assets - 2,530,054 Property, Plant & Equipment 318,062 366,059 Deferred Tax Assets 514,785 395,562 Intangibles 7,592,694 6,314,304 Total Non Current Assets 8,547,487 9,799,668 TOTAL ASSETS 34,602,982 34,734,386 Liabilities CURRENT LIABILITIES Trade and other payables 13,417,446 12,496,899 Current tax payable 884,185 752,946 Provisions 200,159 369,816 Total Current Liabilities 14,501,790 13,619,661 NON CURRENT LIABILITIES Borrowings 163,950 133,857 Deferred Tax Liabilities 119,705 471,643 Total Non-Current Liabilities 283,655 605,500 TOTAL LIABILITIES 14,785,445 14,225,161 NET ASSETS 19,817,537 20,509,225 SHAREHOLDERS FUNDS Paid up Capital 29,759,572 29,544,572 Retained Earnings (26,037,236) (26,037,236) SUBTOTAL SHAREHOLDERS/PROP FUNDS 3,722,336 3,507,336 Less: Intangibles (16,095,201) (17,001,889) TOTAL EQUITY 19,817,537 20,509,225 Ratio Analysis 2014 2013 Fixed Assets/Shareholders Funds 2.29 2.79 Shareholders’ Funds/Total Assets 0.11 0.10 Shareholders’ Funds/Outside Liabilities 0.25 0.25 Gearing 3.97 4.05 Current Assets/Current Liabilities 1.8 1.83 Current Assets Less Stock/ Current Liabilities Less Overdraft 1.79 1.83 Statement of Comprehensive Income Sales 24,133,876 25,191,215 Cost of sales (2,665,999) (3,290,679) Gross profit 21,467,877 21,900,536 Other revenue/income 1,070,897 1,108,744 Distribution expenses (26,201) (26,029) Marketing costs (4,721,395) (3,599,335) Occupancy expenses (765,311) (762,743) Administrative expenses (12,287,967) (13,208,145) Finance costs (1,130) (9,500) Share of losses of joint ventures accounted for using the equity method (170,136) (87,610) Profit before income tax expense 4,566,634 5,315,918 Income tax expense (1,781,676) (2,333,761) Profit after income tax expense for the year 2,784,958 2,982,157 Other comprehensive income Items that may be reclassified subsequently to profit or loss Foreign currency translation 43,085 17,360 Change in fair value of available-for-sale financial assets - 233,989 Items that will not be reclassified to profit or loss Change in fair value of financial assets at fair value through other comprehensive income. (2,530,668) - Other comprehensive income for the year, net of tax (2,487,583) 251,349 Total comprehensive income for the year 297,375 3,233,506 Earnings Per Share (cents per share) Basic earnings per share (cents per share) 6.4 6.9 Diluted earnings per share (cents per share) 6.3 6.8 Ratio Analysis 2014 2013 Gross profit/Sales 89% 87% Operating Expenses/Sales 74% 70% Net Profit (before tax)/Sales 19% 21% Net Profit/Sales 12% 12% Trade Debtors/Average Daily Sales 9.7 6.1 Trade Creditors/Average Daily Cost of Sales 1837 1386 Stock Turnover 51 43 Basic Earnings Per Share 6.4 6.9 Basic Earnings Per Share (cont ops) 6.3 6.8 Number of Shares 43,902,560 43,552,560 Results Sourced from Jumbo Interactive Limited Financial Report 2014 Appendix 3 It is about determining if Jumbo can pay the proposed debt. Surplus/Deficit = EBIT – Interest – Tax – Principal EBIT = $ 4, 566,634 Interest = $ 1,130 Tax = $1,781,676 Principal - $5,000,000 = $4,566,634 - $1,130 - $1,781,676 - $5,000,000 = ($2,216,172) The figure shows a deficit of $2,216,172, meaning Jumbo might not be able to pay the proposed debt. Short term liquidity risk This risk arises from the demand to finance current operations. Current ratios are relevant as a measure of safety against uncertainties and random shocks to a company’s cash flow (Damadoran, 2012). The short term liquidity position of Jumbo looks fair. It reported a credit ratio of 1.8, which is a slight drop from 1.83 in the year 2013. This could be as a result of its expansion of operations. Jumbo Interactive Limited, it is able to meet its short term debt obligations by the remarkable current and quick ratio of 1.8 and 1.79 respectively. There is improvement in the turnover ratios which is also a good measure of short term liquidity risks. Turnover ratios measure the efficiency of working capital management. Jumbo Interactive Limited improved its stock turnover from 43 to 51 which is a good indicator. A higher stock turnover is usually preferred for it translates to a strong sales performance and it boosts a company’s liquidity to keep up with short term debt obligations (Kokemuller, 2013). Long term solvency risk Damadoran (2012) explanation of long term solvency is that it attempts examine a firm’s capacity to meet interest and principal payments in the long term. The ratios are designed to measure long term solvency by relating profitability to the level of debt payments in order to identify the degree of comfort with which the firm can meet the payments. Jumbo reported a drop in its capital position from $20,509,225 to $19,817,537. The gearing ratios are also evidently low, 4.05 in 2013 and 3.97 in 2014. This means that the owner’s equity far exceeds the long term external borrowing. Gearing ratio is the measure of capital structure analysis and financial strength of the company and is important to financial institutions when an organization wants to borrow (Accounting Tools, 2015). For Jumbo, the gearing ratio has decreased from 4.05 in 2013, to 3.97 in 2014. Jumbo was highly geared in 2013 compared to 2014. For Jumbo this is a good indicator since most banks and financial institutions will be ready to give it loans because there is no risk that their loans will not be repaid. Gearing will therefore limit the total amount of debt in a case where a company’s debt to equity ratio exceeds some certain set limits (Ting, 2004). Banks and financial institutions prefer low geared companies when offering loan services as the companies have more to offer (Pretty, 2012). These companies grow progressively and methodologically. A low geared company holds a more secure position for the equity holders and provides quite a significant option for the company. There is increase in the dividends paid out to the shareholders which is an important strategy for growth. Business performance The revenue figures for 2014 show a drop from 2013 which has obviously led to a drop in the gross profit from 2013, but there is a 2% improvement of the gross profit margin for 2014 despite the challenges (Jumbo Interactive Limited Annual Report, 2014). Administration expenses have also risen which has of course affected the net profit of Jumbo. The net profit margin has shown no change. There is an improvement in the number of days it takes to sell the lottery tickets. In 2013 it took 8 days, but in 2014 it has improved to 7 days. This shows there is a measure of efficiency in the way the business is operating when compared to its competitors. References Accounting Tools: Gearing Ratio. (2015). Retrieved from www.accountingtools.com/gearing-ratio Berzon, A. (2012). States up the Online Ante. Wall Street Journal. Retrieved from http://www.wsj.com/articles/SB10001424052702303978104577362121444589922 Damodaran, A. (2012). Tools and Techniques for Determining the value of any Asset (3rd ed). Hobeken, NJ: John Wiley & sons, Inc. Jumbo Interactive Limited. (2014). Annual Report 2014. Retrieved from www.jumbointeractive.com. Kokemuller, N. (2013). Does a Company Want High or Low Inventory Turnover? Retrieved from http://yourbusiness.azcentral.com/company-want-high-low-inventory-turnover Loth, R. (2012). Liquidity Measurement Ratios: Introduction. Retrieved from www.investopedia.com/university/ratios/liquidity-measurement/ Mico, D. (2013). Jumbo Interactive Limited. Retrieved May16th, 2015, from www.edgeseven.com.au/articles/jin-jumbo-interactive-limited Pretty, M. (2012). Companies with low gearing levels have plenty to offer. The Sydney Morning Herald. Retrieved from http://www.smh.com.au/business/companies-with-low-gearing-levels-have-plenty-to-offer-20121113-29ad6.html Roberts, B. (2015). Jumbo Launches World’s First Lottery App for Apple Watch. Retrieved from http://www.marketwired.com/press-release/jumbo-launches-worlds-first-lottery-app-for-apple-watch-asx-jin-2005463.htm Ting, A. (2004). Thin Capitalisation: Issues on the “Gearing Ratio”. Journal of Australian Taxation. Retrieved from http://www.buseco.monash.edu.au/blt/jat/2004-issue1-ting.pdf Read More