Banking and Credit Facilities with Australia Commercial Bank - Research Paper Example

Running header: Lending submission Student’s name: Instructor’s name: Subject code: Date of submission: 1300 Smiles Limited –Lending submission Prepared by: Date: 10th May 2013 Background Detail Borrower 1300 Smiles Limited ABN 91 094 508 166 Address 105 Denham Street Townsville QLD 4810 Directors: Director Number of ordinary shares Robert Jones 32,606 Dr. Daryl Holmes 14,711,729 William Bass 16,200 Top 5 shareholders: Name Number of shares Percentage Dr. Daryl Holmes 14,169,237 59.84 JP Morgan Nom Aust Limited 1,068,480 4.51 Evelin Inv PL 980,000 4.14 National Nom LTD 604,302 2.55 Krdithaus Pty ltd 566,000 2.39 A Brief Overview of the Facts of the Deal 1300 Smiles Ltd currently have their banking and credit facilities with Australia Commercial Bank. However, the company wishes to move their banking to Excel Bank. 1300Smiles limited has paid all the facilities at their existing bank while their exising banking will be moved to Excel bank and hence 1300 Smiles will not have any facilities with Australia Commercial Bank. 1300 Smiles Limited intends to undertake some development/expansion projects of the company and have requested Excel Bank to provide $ 6 million funding for the intended projects. 1300 Smiles Limited have indicated that they intend to move their banking and lending facilities to Excel Bank owing to the fact that Excel Bank has developed a reputation for outstanding customer service and expertise in the industry. The funding requirements requested by 1300 Smiles Limited are detailed below; Facility 1: Fixed Term Business Loan i) $4 million to purchase new dental equipment Purpose: to purchase new dental equipment Amount: $4 million Term: 4 years Interest rate: 8% ii) $1 million to purchase additional offices which are valued at $2 million Purpose: to purchase additional offices Amount: $ 1 million Term: 4 years Interest rate: 8% Facility 2: Overdraft Purpose: working capital to finance operational activities as well as cash flow management Amount: $1 million Interest rate: 8% 1300 Smiles limited requires the two facilities immediately Overview of the Borrower 1300 Smiles Limited is a company that owns and operates full dental services and facilities in different locations in Australia including Queensland, Adelaide in South Australia. The company was founded by its managing director Dr Daryl Holmes and has been listed on the Australian stock exchange since 2005. The company operates in a relatively highly competitive market whose other peers include Morningstar and Pearl Health Limited. These companies have emerged to be the best dental health care facilities in Australia specializing in types of dental care services. The industry’s size is currently $9 billion. The company has a strong management team that is lead by its founder as its managing director Dr. Daryl Holmes. Other major management executives include Robert Jones and William Bass. As part of its growth strategies, the company intends to procure new dental services equipment as well as a new office block to enable it offer better services to its customers. The company employs approximately 250 employees in its 25 branches across Australia. They include dental specialists who are mostly graduates as well as clerical staff who have been instrumental in its progress. Industry analysis The dental industry is a relatively big industry with annual revenue of 9 billion dollars. The industry’s annual growth averaged 2.7% in 2009 to 2013 with future growth forecasted to be 3.1%. The industry comprises of about 11,350 businesses and has employed more than 40,000 employees. The industry has been expanding at a high rate owing to the progress made in understanding common dental disease including gum disease and tooth decay. In addition, a bigger proportion of the country’s population has been making attempts to retain their original teeth hence boosting the demand for dental services. The Major part of the industry’s revenue is derived from providing general dental services which include diagnostic, restorative and preventive services. It should be noted that there are no major players in the industry but most of the participants are small operations comprising of just a few employees with the 50 biggest firms generating less than 50% of the industry’s revenue. It is worth noting that profitability in the industry is driven by efficiency in operations. Large dental services practices such as 1300 smiles derive their advantage in marketing and offering wide range of quality services while small firms are able to effectively compete by offering superior service quality mainly focused on regional that are underserved. Financial analysis Based on the financial analysis below, all the performance indicators for the company are fairly strong. The company has a very strong short-term liquidity as portrayed by current ratio. The company has $$8,051,000 in cash at the year end as well as $795,000 in debtors. Its capital stands at $27,952,000 which includes $12,451,000 in retained earnings. The company also has a very low gearing ratio at 2.24%. In addition, the company has repaid all its current facilities with the previous bank which shows that the company has the ability to take and repay the requested $6 million. The company also continued to perform well with the net profit increasing from $6,175,000 in 2012 to $6,367,000 in 2013. In addition, the Company has recorded a general improvement in its profitability and liquidity indicators as discussed above. The company also has a considerable amount of fixed assets which form the bulk of the company’s assets. As such, there is no major risk that would result from a slow down in revenue on the company’s solvency position. In conclusion, based on this information as well as projections of the company’s ability to pay, the company’s first way out is fairly strong and hence based on it, I would recommend that the bank extends the credit facility to 1300 Smiles limited. Key Strengths and weaknesses regarding the deal Key strengths 1. As indicated above, the company has a strong first way out. This is based on the company’s historical earnings, its cash balances as well as the fact that it has no current long-term loan having repaid its existing facilities with its previous bank. This indicates that there is a good first way out for the company. 2. Although the second way out is slightly below the loan amount, the assets would provide a sufficient security based on the fact that the security is a secondary way out and given that the first way out has already been found fairly strong. 3. The company’s balance sheet has been found fairly strong and in fact it has been paying dividends owing to the fact that it has been operating profitably. 4. Most of the company’s practices operate in growing regional areas where in most cases demand exceed supply implying that the company’s revenues and hence cash flows are likely to remain strong 5. The company has the capacity to increase its existing facilities at no additional cost implying that revenue and hence cash flow could be increased. This implies improved ability to pay Key weaknesses 1. 1300 Smiles limited is heavily reliant on one line of service i.e. offering dental services. With increasing competition, the amount of revenue the company is likely to generate will be limited which may affect the ability to repay Mitigating factors: The Company has an ambitious growth plan and is currently present in 25 locations that are prime growth areas which ensures that the company continually generates revenue In addition, the company’s dental insurance scheme is favorite among many people which assure the company of constant revenue hence boosting its ability to repay 2. Changes in governmental policy and regulatory risk that may affect the company’s performance Mitigating factor – The Company strives to ensure it is in line with government regulation while taking advantage of changes in government policies. For instance, the company has taken advantage of the government slamming the door on the CDDS scheme to establish contracts with Queensland hospital and the health services board. 3. Loss and inability to recruit productive dentists Mitigating factor: The Company has undertaken aggressive marketing steps while reviewing its terms with dentists in a bid to ensure that it attracts quality dentists at all times 4. Increased competition from other dental practices – Mitigating factor: The Company has undertaken measures to overcome the threat of increased competition including its dental insurance scheme, aggressive marketing as well as establishing contracts with Queensland hospital and the health services board. 5. Reduced volumes of patients as well as reduced value of patients which could greatly alter revenues and hence ability to repay Mitigating factor: there has been increased awareness on the need for dental health. This is in addition to increasing need among the population to retain their original teeth. In addition, the increasing middle class implies that the future market prospects may be bright. Recommendations: 1300 Smiles limited is seeking to acquire a $6 million loan facility to be repaid within four years to finance acquisition of new dental machinery and purchase new offices. The loan if granted though it will weaken its gearing ratio and hence its solvency position will go a long way in helping the company improve its revenues and hence its ability to meet its obligations. Besides, the company has a good reputation as a dental health services provider in Australia. A review of its financial performance aspects has indicated that the company has been improving while its first way out has been found relatively strong. This was seen in its strong liquidity as well as solvency indicators. Besides, its revenues have been noted to improve which has led to an increase in profits. It is worth noting that the company has also been able to manage its costs of operations as they have been noted to decline from those of last year. The earnings as well as the balance sheet have been found to be relatively strong. The first and second way out have been found to be relatively strong. It is in this regard that I recommend that Excel Bank should accept 1300 Smiles to be our new customer. I also recommend that the bank provides the requested facility to 1300 Smiles Limited as it has been found capable. Appendix 1: Safe Lending Margin $000 Extend at Safe lending margin $000s Cash 8,051 0% 0% Debtors 795 50% 397,500 Plant and Equipment 8,747 40% 5,498,800 other 233 0% Loans receivable 1,827 0% Investments accounted fro using the equity method 333 0% Intangible assets 13,314 0% Deferred tax assets 546 0% Total SLM 5,896,300 The above information has been obtained from 1300 Smiles Limited financial report NB// no value has been extended for cash since it is not in a fixed account Property, plant and equipment was increased by $5 million owing to the planned acquisition of offices and new dental equipment. The safe lending margin of $5,896,300 is below the requested amount of $6 million hence the second way out is not sufficiently sound. Appendix: 2 Comparative statement of financial position 2013 2012 Assets Current assets Cash and cash equivalents 8,051 13,741 Trade receivables 795 356 Other 202 382 Total current assets 9,048 14,209 Non-current assets Loans receivable 1,827 1,702 Investments accounted for using the equity method 333 - Property, plant and equipment 8,747 9,690 Intangible assets 13,314 12,251 Deferred tax assets 546 635 Other 31 32 Total non- Current assets 24,798 24,310 Total assets 33,846 38,519 Liabilities Current Liabilities Trade and other payables 4,178 4,166 Borrowings - 7,500 Current tax liability 886 519 Provisions 36 39 Other Liabilities 154 25 Total current liabilities 5,254 12,249 Non-current liabilities Provisions 290 257 Other liabilities 350 - Total non current liabilities 640 257 Total liabilities 5,894 12,506 Net Assets 27,952 26,013 Equity Contributed Equity 15,501 15,370 Retained profits 12,451 10,643 Total equity 27,952 26,013 Statement of changes in Equity Contributed Equity $000 Retained profits $000 Total equity $000 Consolidated balance as at 1st July 2012 15,370 10,643 26,013 Profit after tax 6,367 6,367 Total comprehensive income 6,367 6,367 Transaction with owners Deferred tax benefits 131 131 Dividends paid (4,559) (4,559) Balance as at 30th June 2013 15,501 12,451 27,952 Ratio analysis Ratio 2013 2012 Fixed assets/Shareholders funds 88.72% 94.45% Shareholders funds /total assets 82.59% 67.53% Shareholder funds/Outside liabilities 474% 212% Gearing 2.24% 0.98% Current Assets /Current Liabilities 172.21% 116% Current assets less stock/current liabilities less overdraft 172.21% 116% NB// since there are no stock or overdraft, the current assets less stock/ current liabilities less overdraft remains ratio the same as current assets/ current liabilities ratio Short term liquidity Fixed assets/Shareholders funds – the company’s fixed assets were 88.72% of shareholders funds in 2013 which was a decline from the 94.45% recorded in 2012. In 2013, the shareholders funds increased significantly from $26,013,000 in 2012 to $27,952,000 in 2013 which caused the decline in fixed assets/ shareholders funds ratio. Shareholders funds/total assets- the company’s shareholders funds were 85.29% of its total assets which was an improvement from the 2012 level of 67.53%. The increase is attributed to the increase in shareholders funds. Shareholder funds/Outside liabilities – the ratio increased from 212% in 2012 to 474% in 2013. The increase resulted from a decrease in outside liabilities from $12,506,000 in 2012 to $5,894,000 in 2013. Gearing – the company’s gearing is extremely low at 2.24% in 2013 which is however an increase from the 2012 level of 0.98%. This was caused by an increase in long-term debts from $257,000 in 2012 to $640,000 in 2013. Current ratio- the current ratio was 172.21% in 2013 an improvement from 2012 level of 116%. This resulted from the decline in current liabilities in 2013. Statement of comprehensive income 2013 $000 2012 $000 Revenue 36,183 36,661 Other income 5 6 Expenses Consumables, lab fees and other supplies (5,284) (5,361) Employee benefits expense 15,044 16,055 Depreciation and amortization expense (2,120) (1,772) Property expenses (2,207) (1,730) Operating expenses (302) (381) Corporate and administrative expenses (106) (498) (27,250) (27,907) Share of net profit of joint venture 3 - Profit before income tax expense 8,491 8,760 Income tax expense (2,574,) (2,585) Profit after tax 6,367 6,175 Ratio Analysis 2013 2012 Gross profit/Sales 85.40% 85.38% Operating expenses/ Sales 75.311% 76.12% Net profit before tax/Sales 23.47% 23.89% Net profit/sales 17.60% 16.84% Trade debtors/Average daily sales 8.02 3.55 Trade creditors/Ave. daily cost of sales 288.54 284.37 Stock turnover N/A N/A Basic earnings per share 26.9 26.6 Diluted earnings per share 26.9 26.6 No. of shares 23,678,384 23,678,634 Gross profit/sales- it is relatively high at 85.40% which is almost at the same level with 85.38% in 2012. Operating expenses/ Sales- the ratio is 75.31% in 2013. It is a slight decline from the 2012 level of 76.12% owing to a decline in expenses from $27,907,000 in 2012 to $27,250 in 2013. Net profit (before tax)/sales was 23.47% in 2013 compared to 23.89% in 2012. Similarly, net profit/sales was 17.60% in 2013 compared to 16.84% in 2012. Trade debtors/average daily sales- the ratio increased from 3.55 in 2012 to 8.02 in 2013 due to increase in debtors from $356,000 in 2012 to $795,000 in 2013. Trade creditors/average daily sales- the ratio increased slightly from 284.37 in 2012 to 288.54 times in 2013 due to the increase in trade creditors. Earnings per share- the company’s earnings per share slightly improved from 26.6 cents in 2012 to 26.9 cents in 2013 due to the increase in the net profit. Short term Liquidity The company has a very strong short-term liquidity as portrayed by current ratio. The company has $$8,051,000 in cash at the year end as well as $795,000 in debtors. Its capital stands at $27,952,000 which includes $12,451,000 in retained earnings. The company also has a very low gearing ratio at 2.24%. In addition, the company has repaid all its current facilities with the previous bank which shows that the company has the ability to take and repay the requested $6 million. Profitability The company continued to perform well with the net profit increasing from $6,175,000 in 2012 to $6,367,000 in 2013. Solvency The company has recorded a general improvement in its profitability and liquidity indicators as discussed above. The company also has a considerable amount of fixed assets which form the bulk of the company’s assets. As such, there is no major risk that would result from a slow down in revenue on the company’s solvency position. Apendix3: Projected cash flow The company has not provided a projected cash flow statement. However, the following is the calculation of the customer’s ability to pay; = EBIT –Interest-Tax- Principal = Surplus =$8,491,000-2,574,000-6,000,000 =$367,000 It has been established that the company can be able to repay the principal and still have a surplus of $367,000. This displays the company’s ability to repay the money borrowed. References: Sathye, M, Bartle, J&, Boffey, R2013, Credit analysis and lending management, Tilde University Press, Melbourne. Read More