Office Facility and Working Capital for the Business - Research Paper Example

1300SMILES LIMITED 1.0 Background Borrower: 1300SMILES LIMITED Address: 280 Flinders Street, Townsville QLD 4810 Directors: Position Shares Dr. Daryl Holmes (Managing Director) 14,224,737 Robert Jones (Chairman) - William Bass (Non-Executive Director & Company Secretary) - Top 5 Shareholders: Number of Ordinary Shares Percentage Shareholding Dr. Daryl Holmes 14,224,737 60.07% JP Morgan Nom Aust Ltd 1,528,704 6.46% National Nom Ltd 889,682 3.76% Evelin Inv PL 664,632 2.81% Kredithaus Pty Ltd 566,000 2.39% 2.0 Overview of facts of the deal 1300SMILES Ltd currently hold their banking and lending facilities with ‘Elsewhere Bank’, however they wish to transfer this business to Excel Bank. From their current cash flow, 1300SMILES will be able to repay all borrowings held with ‘Elsewhere Bank’. 1300SMILES Ltd is currently undergoing an ongoing expansion and acquisition of new equipment for the company and has requested Excel Bank to provide $6 million funding for equipment and acquisition of new office facility and working capital for the business. 1300SMILES indicate they are willing to move their banking and lending facilities to Excel Bank due to our outstanding customer service and expertise in our industry. Funding requirements are detailed below: $4 million to purchase new equipment $1 million to purchase additional offices (valued at $2 million) $1 million overdraft facility (due to ongoing cash flow needs in their business) Limit: $6 million Term: Existing equipment–5 years Interest rate – 8% Plant and Equipment – 5 years Overdraft facility – on going expansion Purpose: Working Capital Interest Rate: 8% Commencement Date: July 2013 Overview of 1300SMILES Ltd 2.1 Company Description 1300SMILES is an Australian company with over 25 branches located all over Australia. The company is committed to expansion to assert its existence in almost all the locations throughout Australia. It does this by establishing its own new operations and by acquiring existing dental practices. The company has its administrative and corporative offices in Townsville. With the capacity to perform operations on 112 dental surgeries with 118 dentists and over 230 support staff, 1300SMILES is one of the major dental practitioners in Australia (“Why Us,” 2014). 2.2 Recent Company History 1300SMILES company’s shares rose 5 per cent by February 2012, (“King,” 2012) when the company reported $3.4 million net profit after tax. This represents a 27 per cent increase over the prior corresponding period. Revenues went up 20 per cent to $17.4 million. The net profit margin is safely pegged at 19.5 per cent, up slightly over FY2011 full year results (“1300SMILES Annual Report – 2012,” 2012). Source: Company Report The company paid dividends totaling over 95 cents a share since listing in 2005, and has declared an interim dividend of 8.6 cents payable on 12thApril 2012, (“King,” 2012). The company averaged earnings per share (EPS) growth of more than 22 per cent since 2005 (“King,” 2012). 2.3 Company History The company was founded by Dr. Daryl Holmes twenty years ago. He started his professional career in the RAAF as a dental officer, before starting his own practices in the rural Burdekin towns of Ayr and Home Hill. 1300SMILES was registered on the Australian stock Exchange in 2005. It has since grown to a multimillion dollar enterprise extending down the east coast of Australia from Queensland and across to South Australia. 3.0 Industry Analysis The dental industry in Australia has experienced steady growth amid difficulties in regulation of the sector. Many dental practitioners have come up in the recent years owing to the rising demand for the services among the masses. 1300SMILES has since established its market share and faces a bright future owing to the promising growth of awareness and demand. Overall, the company has waded through a tough industry to establish itself as the dental hospital of choice among the Australians. 3.1 Key success factors Affordable Prices 1300SMILES has set its prices to as low as $1 for checkup. This is an affordable price which is within the reach of a large percentage of Australians. Respect for the Rights of Shareholders and Customers 1300SMILES has devised a way of keeping the shareholders informed on the goings on in the company. The company does this through annual reports, half year reports as well as quarterly reports. The company holds its customers with high esteem and they ensure that their customers get the best quality of service as possible. Acquisitions The company has witnessed exponential growth due to the practice of acquiring already established dental facilities. The company has also engaged in an expansion spree by establishing branches in almost the entire southern part of Australia. The ability to adapt to changes A successful company is one which has adapted to the culture of making profit and loss and using the failures to build a stronger foundation for a better future. The company must also appreciate the use of technology to offer better and concise services. Changes in technology impact a lot in the performance of any company and 1300SMILES must be ready to keep up to date with the available technology. 3.2 Key sensitivities Foreign Exchange Risk The smooth running of a business is determined by the stability of their currency against the major world currency. For 1300SMILES, various currency exposures will affect the total number of A$ and this will affect the business (“1300SMILES Annual Report – 2012,” 2012). Interest Rate Risk Almost every company borrows money from the various lending institutions. This ends up raising the interest rate risk. From their annual report, we learn that consolidated entity policy is put in place to manage the risks in order to minimize the liquidity risk that comes with this. Price Risk Much as companies try so much to set the price of their services at an optimum, it is always difficult to determine the right price that gives just enough returns to the company while keeping at a level acceptable to the customers. The prices of services directly affect the company’s income. Higher prices will keep customers away while denying the company the much needed income. Financial Analysis The financial analysis of the reports produced by 1300SMILES will help us understand the actual financial status of the company. From the annual reports in Appendix 1, we can tell the capability of the company to repay the loan within the stipulated time frame of five years. The net profit after tax for 1300SMILES in the year 2013 went up 3.1 per cent to $6.4 million. This was an increase from the previous year where they recorded a net profit after tax of $6.2 million. From calculations, the company will be able to repay the loan amount which is $1.712 million. After paying this amount, the company will be left with a surplus amount of $4.688 million and $4.488 million profit for 2013 and 2012 respectively. Furthermore, the company has experienced steady growth since 2005 and this is a clear indication of a future characterized by continued growth. Short-term Liquidity The ratios have generally improved in liquidity. This trend tends to hinge centrally on the liquidity of the borrowings and stock levels. The liquidity risks depend generally on the ability of the company to repay its loans. From the balance sheet of 1300SMILES Ltd, the quality of their borrowings decreased from $7.5 million in 2012 to nil in 2013. This is a good gesture to the company that they will be able to collect money at an increased rate. In terms of the risks to the bank, the bank is the one currently providing all the liabilities of the company. This is a clear indication that there are no other creditors who lay any claim on the assets of the company. The main risks are in the current assets. 4.0 Long-term Solvency The capital position of business performs quite well. The contributed equity occupies large portion, although there is quite little capital in both reserves and retained earnings. The retained earnings increased much more in the business so that the capital position improved a lot obviously. As a result, the company is not only dependent on the bank borrowings. And also, company will have the ability to absorb the losses. 4.1 Business Performance Since its listing in 2005, the company has had a good trend in profit making. The actual business performance may not be as easy to tell but from the actual figures obtained indicate a good future for the company. The net profit grew noticeably from 17 per cent to 30 per cent. This is a very encouraging trend. The company should however pay more attention to the level of stock that should be controlled in a medium level. Generally, the trend of consistency in profit making will give people more confidence, especially when the growth margin is maintained or even increased. 5.0 Security From the security position which indicate the overall securities about 1300SMILES Ltd in Appendix 3, the second way out is $397500. Furthermore, the total amount of borrowing is $5.894 which includes current liabilities of $5.254 million and non-current liabilities of $0.64 million.In fact, the datum of first way out and second way out equals the datum of debtors and plant and equipment, respectively. In other words, treating the term deposit as the security first way out and treating plant and equipment as the second way out. Through comparing, the number of stock is high, but first way out and second way out are both weak. Since, it is not independent. If the business performs well, the first way out will weak. On the contrary, the second way out will be weak. 5.1 Key Strengths Relating to the Proposal 1300SMILES has already established an Audit Committee which consists of more than three members and they are a majority of independent directors and non-executive directors. 1300SMILES lays a solid foundation for management so that the company can operate smoothlythrough the supervision of the Board, directors and shareholders. (“1300SMILES Annual Report – 2013,” 2013). As a result, the performance evaluation will help the company to improve the management. In order to respect the right of shareholders, the company offers information to shareholders through annual report, half yearly report, announcements through ASX, the annual meeting and website. The Board of directors has already adopted to improve the ethical and responsible decision making skills. It can make the Board more honest and give customers more confidence that the company can offer good performance. 1300SMILES lays a solid foundation for management so that the company can operate smoothlythrough the supervision of the Board, directors and shareholders. (“1300SMILES Annual Report – 2013,” 2013). As a result, the performance evaluation will help the company to improve the management. 5.2 Key Weaknesses The company has a single shareholder who owns over 60 per cent of the shares. This may be a problem when decision is to be made, which the majority shareholder is against. The director should be prevailed upon to sell some of his shares so as to distribute decision making. According to the balance sheet, we know that the debtors take up the majority to support the company. That is the reason why the short term liquidity ratio is very high. The management should try to decrease the level of the debtors. High interest rate will lead to the high interest costs. The company may use the interest rate derivatives to make interest costs expected. 1300SMILES is an Australian owned company. But, the dentistry industry is a competitive industry in Australia because there are several companies that in trade the same business. The company should improve service quality and decrease the price of the services offered. 6.0 Recommendation Considering the difficult environment the 1300SMILES is operating, it is encouraging that the company can still manage to maintain a steady rise in profit generation. This gives a bright picture about the future of the company. The company has managed to get itself away from borrowing and this shows the commitment by the management to keep the company independent of creditors. The implication of this is that the company will be able to stand and operate on its own capital without borrowing. However, the company needs to invest more on durable equipment to reduce the overall liquidity of the entity. Otherwise the company offers a relatively less risk for lending. As a lender, I would recommend that the request by the company to be offered $6 million be granted since it has proved beyond reasonable doubt the company it is able to repay the debt in the stipulated time frame. The steady rise in the company’s profit gives a clear outlook of the company and its ability to comfortably shoulder the debt. 7.0 Appendices Appendix 1: Security Position ($000) Extend at Safe Lending Margin Cash 8,051 0% $0 Debtors 795 50% $397,500 Other 202 0% $0 Plant and equipment 8,747 40% $3,498,800 Loans Receivable 1,827 0% $0 Investment property 333 50% $166,500 Deferred tax assets 546 0% $0 Intangible assets 13,314 0% $0 Total available 33,815 $4,062,800 Security: First Way out – Cash ($0) Second Way out – Plant & Equipment ($3,498,800) Property ($166,500) Debtors ($397,500 Appendix 2- Analysis of Historical Financials Balance Sheet (as at 30 June 2013) 2013 ($000) 2012 ($000) ASSETS CURRENT ASSETS Cash and cash equivalents 8,051 13,471 Tradereceivables 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 & equipment 8,747 9,690 Intangible assets 13,314 12,251 Deferred tax asset 546 635 Other 31 32 Total Non-Current Assets 24,798 24,310 Total Assets 33,846 38519 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 291 485 Other liabilities 350 - Total Non-Current Liabilities 640 257 Total LIABILITIES 5,894 12,506 NET ASSETS 27,952 26,013 Income Statement (as at 30 June 2013) 2012 ($000) 2011 ($000) Revenue 36,183 36,661 Other income 5 6 Expenses Consumables, lab fees and other supplies (5,284) (5,361) Employee benefits expenses (15,044) (16,055) Depreciation and amortization expense (2,120) (1,772) Property expenses (2,207) (1,730) Operating expenses (2,187) (2,110) Corporate and administration expenses (302) (381) Finance costs (106) (498) (27,250) (27,209) Share of net profit of joint venture 3 - Profit before income tax expense 8,941 8,760 Income tax expense (2,574) (2,585) Profit after income tax expense for the year attributable to the owners of 1300SMILES Limited 6,367 6,175 Other comprehensive income for the year - - Profit after income tax expense for the year attributable to the owners of 1300SMILES Limited 6,367 6,175 Basic earnings per share 26.9 26.6 Diluted earnings per share 26.9 26.6 Ratio Analysis 2013 2012 Short Term Solvency Current 172.2% 116% Quick 153.2% 110% Long Term Solvency Fixed / Sh Funds 108.64% 120.2% Sh Funds / T Assets 60% 64.24% Sh Funds / Outside 1.22 1.02 Business Performance Gross Margin 68.56% 72.34% Net Margin 16.86% 18.32% 8.0 References 1. 1300SMILES. (2014). Directors, Retrieved 22 May, 2012, from https://www.1300smiles.com.au 2. IBSISWorld. (2014). Dental Services in Australia: Market Research Report, Retrieved from 22 May, 2014, from http://www.ibisworld.com.au/industry/default.aspx?indid=613 3. MarketLine. (2014). Industry information, Retrieved 22 May, 2014, from www.marketline.com Read More