Investing in Billabong International Limited - Case Study Example

Executive summary This report is prepared for investors interested in investing in Billabong International Limited by RSM Group Accountants & Investment Advisors. The report looks at the company’s 2014 performance with an aim of establishing whether it is a worthy investment target. As such, a number of areas have been addressed in the report. First, the report looks at the kind of activities that the company is involved in before analyzing the issues that arose from the company’s 2014 annual report. The report then addresses itself to the aspects of the company’s corporate governance statement before performing a financial analysis for the company. It concludes by recommending investing in the company since the investment criteria has been met. In addition, the reason behind this recommendation despite its having realized losses has been explained. It is hoped that the report will go a long way into guiding the investors’ decision criteria. Table of Contents Executive summary 1 Table of Contents 2 Introduction and a description of the company’s core business including full details of its operational activities 3 Issues emerging from the directors report 3 A discussion of the company’s corporate governance statement 5 Financial ratio analysis 7 Conclusion on financial ratio analysis 11 Conclusion and overall evaluation of the company and recommendation on investing in the company 11 References: 12 Introduction and a description of the company’s core business including full details of its operational activities Billabong International limited has its core business as the marketing, distribution, wholesaling and retailing of apparel accessories, eyewear, wetsuits and hard goods in the board sports sector under the Billabong, RVCA, element, von, zipper, Honolua surf company, kustom,palmers surf Xcel, sector 9 and Tigerlily brands (Billabong International Limited, 2014). Based on the company’s website, it’s primarily a clothing retailer which also produces accessories including watches and backpacks and skate board and snowboard products under other brand names. The group’s principal continuing activities in the year 2014 included the wholesaling and retailing of surf, skate, snow and sports apparel, accessories and hardware, and the licensing of the group trademarks to specified regions of the world. Issues emerging from the directors report The most significant issues that emerge from the directors’ report include the steps that the company has been taking in a bid to ensure its turn around to profitability given that it has been operating at losses. This is because in 2013, the company realized a net loss of $859,541,000 which declined to a net loss of $233,712,000 in 2014. Consequently, the report indicates that no dividend was declared in 2014 while it was also hoped that no dividend would be declared in 2015. The most significant issues that arise from the directors ‘report aimed at turning the company around include; a) Recapitalization of the company- the company undertook various transactions aimed at bringing about the company’s financial stability which would assure it of its future. Some of the transactions included the sale of DaKine to the Altamont consortium while the board recommended to the shareholders the Centerbridge and Oaktree consortium unconditional refinancing proposal over that of Altamont (billabongbiz.com, 2015). This refinancing was aimed at bringing about the company’s stability for the first time since it started experiencing instability. b) Changes to the board – in a bid to bring about return to stability and hence profitability, there were significant changes made to the board. The most significant change in this respect was the appointment of Neil Fiske as the company’s CEO who was also responsible of bringing together a board with the appropriate mix of brand, apparel, retail and financial expertise together with an international outlook. This way the board is aimed at working together to bring about recovery in the company. c) Changes to ensure sound financial base –the report indicates that the shareholders approved a $50 million rights issue. The rights offer combined with the above restructuring strategies were aimed at providing the company with a significantly restructured as well as solid balance sheet as well as financial headroom to undertake the strategic turnaround. d) The strategies by the CEO- The directors’ report have also outlined the issues or areas that the CEO considers vital in reviving the company’s performance. The seven areas covered in the CEO’s recovery strategy included brand, product, marketing, Omni-Channel, Supply chain, Organization and financial discipline. These strategies have the aim of ensuring that the company’s brand generates growth while ensuring that the operational structure and cost efficiencies are in place to support them hence ensuring company’s turnaround. e) Divesting- the company has disposed a number of interests and sold a number of assets it held in other companies in a bid to return to profitability. In addition to the above issues that arose from the director’s report, it is worth noting that the company has taken numerous steps aimed at ensuring that it remains socially responsible. Such steps include recycling of plastic bottles to create products instead of leaving them to pollute the environment among other environmental conscious steps. The company has also put in place steps to ensure responsible supply chain under the principles of worldwide responsible accredited production (WRAP) which would also include conducting audits of supplier factories via the group’s central sourcing function. Some of the principles that the supply chain must observe include complying with laws and workplace regulation, prohibition of forced labor and child labor and prohibition of harassment or abuse and discrimination, hours of work among other principles (Koons, 2012). This has been boosted by employing Chief Operating officer Jeff Streader with the responsibility for the company’s supply chain. It is to be noted that the CFO has been a board member of WRAP and is hence to be of great contribution towards a socially responsible supply chain. A discussion of the company’s corporate governance statement The company’s board of directors is responsible to the shareholders for the company’s effective performance and hence they have put in place high standards of corporate governance in a bid to achieve shareholders expectations of maximized returns. The following are the principles of the company’s corporate governance observed by the company. a) Laying solid foundations for management and oversight In this regard, the board is responsible for setting goals and objectives as well as the strategic direction of the company while monitoring its financial performance. The board also establishes monitors and evaluates the company’s internal controls, risk management as well as compliance systems. The board appoints the CEO as well as senior management staff in addition to approving and monitoring major capital expenditure, acquisitions, capital management among other financial decisions. The board also ensures that the company conforms to environmental, social and occupational health and safety requirements while reporting to shareholders on performance. The board also delegates to the CEO authority for achieving the company’s objectives together with senior staff. b) The structure of the board The board has both executive and non-executive directors with the majority being non-executive directors. The board has ensured a balance between directors’ experience and knowledge of the group as well as directors with external perspective while ensuring that its size is conducive for effective discussions and decision making. It is also worth noting that in line with its mandate, the board may seek independent professional advice at the company’s expense. The director’s independence is reviewed on annual basis or as circumstances may deem appropriate. In this regard, factors considered include their shareholding whether directly or indirectly. Whether they are employed or have been employed in an executive capacity by the company within the last three years (Billabong, 2015). Whether within the last three years they have been material professional advisors or consultants for the company or they are suppliers or customers of the company. The directors should also be free of any business or relationships that could materially interfere with their independence. Bearing all these factors in mind, the company considers its board of directors to be independent. The board also assesses the commitment of its members and has outlined the number of meeting each board member attended of the 34 board meetings that were held in 2014. The board governs through committees in executing its mandate. In this regard, it has established a number of committees including nominations, human resource and remuneration and audit committees. The committees are entirely composed of non-executive directors with distinct roles and responsibilities. c) Promoting ethical and responsible decision making The company’s code of conduct is available in nine languages and composes of company practices and policies. In it are the company’s values including integrity, honesty, teamwork, trust, respect and desire for excellence in all endeavors. The company also has a securities trading policy that regulates dealings by directors, senior managers and employees in share options and securities issued by the company. In this regard, trading from the close of trading on 30 June till after two clear trading days of the full year results release is prohibited. The company also values diversity while recognizing the benefits of diverse workforce and has put in place a workplace equity and diversity policy. In 2014, the company had 55% of its employees being female for instance. d) Safeguarding integrity in financial reporting This is done through ensuring the independence of the audit committee who are also financially literate. In addition, the CFO and CEO have to state in writing that the company’s financial reports present a true and fair view in all material respects of the company’s financial position and operational results and that they are in accordance to relevant accounting standards. In addition, the company appoints external auditors who are independent in a bid to ensure integrity in reporting. e) Making timely and balanced disclosure and respect of the rights of shareholders In this regard, the company has put in place policies aimed at ensuring timely disclosure of material information concerning the company. Such include internal reporting procedures aimed at ensuring that any material price sensitive information is reports to the company secretary in a timely manner f) Recognizing and managing risk In this regard, the board through the Audit committee is charged with the responsibility of ensuring the adequacy of the company’s risk management and compliance framework as well as its system for internal controls and for regular review of its effectiveness (Richard, 2007). In this regard, the board is charged with risk identification, risk evaluation, risk treatment and mitigation as well as risk monitoring and reporting. g) Remunerating fairly and responsibly The board through the human resources and remuneration committee is charged with ensuring fairness and responsibility in remunerating in all the levels of the organization. Financial ratio analysis In this section, the suitability of the company as an investment option is analyzed by comparing the company’s performance in five areas. The areas are explained below. Profitability analysis The ratio reveals how effective the company has been in generating profit or returns for its shareholders. a) Return on Equity (ROE) = (Net profit/Average equity) 100 2013 = (-$863,732,000/ (1,072,261,000+312,067,000)/2)) 100 = -125% 2014 = (-$239,933,000/ (312,067,000+ 259,036,000)/2)) 100 =-84% The company realized negative returns on equity. This was because the company had generated a net loss in both 2013 and 2014 However, it should be noted that the ROE greatly increased from -125% in 2013 to -84% in 2014. This is attributed in the reduction in the level of losses that the company made within the two years. b) Return on Assets (ROA) = (EBIT/Average total assets) 100 2013 = (-$629,339,000/ (2,080,684,000+1,019,292,000)/2))/100 = -41% 2014 = (-$52,870,000/ (1,019,292,000+751,866,000)/2))/100 =-6% The company also realized negative returns on assets of -6% in 2014 which was an improvement from the 2013 level of -41% owing to the reduced loss that was made in 2014 compared to 2014 figures. Asset efficiency ratios a) Times inventory turnover =Cost of goods sold/Average inventory 2013= ($541,466,000/ (266,806,000+293,201,000)/2)) 100 = 1.93 times 2014 = ($555,758,000/ (180,222,000+266,806,000)/2)) 100 = 2.49 times b) Days inventory = 365/Inventory turnover in times 2013 = 365/1.93 =189.12 days 2014 =365/2.49 =146.59 days The company had an inventory turnover of 2.49 times in 2014 which translated to 145.59 times. This was a great improvement from the 1.93 times recorded in 2013 translating to 189 days. The improvement resulted from reduction in the levels of the company’s inventory within the two years. c) Times debtors turnover =Sales revenue/Average trade debtors 2013= (1,107,492,000/ (204,429,000+245,035,000)/2)) 100= 4.93 times 2014 = (1,125,454,000/ (204,429,000+153,850,000)/2)) 100 = 6.28 times d) Days Debtors =365/ Debtors turnover in times 2013 = 365/4.93 = 74.04 days 24 = 365/6.28 = 58.12 days The company’s return on debtors was 6.28 times translating to 58 days in 2014 compared to 4.93 times or 74 days in 2013. The improvement is attributed to the decline in the company’s debtors in 2014. Liquidity ratios a) Current ratio =Current Assets/ Current liabilities 2013 = 622,368,000/612,495,000 =1.02 2014 = 495,801,000/225,671,000 =2.2 b) Quick asset ratio = Current assets less inventory/ Current liabilities 2013 = ($622,368,000-266,806,000)/612,495,000 = 0.58 2014 = ($495,801,000-180,222,000)/225,671,000 = 1.4 As can be seen above, the company’s liquidity both in terms of current ratio and quick asset ratio greatly improved in 2014. The improvement is attributed to the decline in the company’s current liabilities. Capital structure ratios a) Debt ratio = (Total liabilities/total assets) 100 2013 = $707,225,000/1,019,292,000 = 69% 2014 = $492,830,000/751,866,000 = 66% The company’s debt ratio significantly declined in 2014 from69% in 2013 to 66%. The improvement is as a result of relative reduction in the company’s total debt during 2014. b) Equity ratio = (Total equity/Total assets) 100 2013 =$312,067,000/1,019,292,000 =31% 2014 = $259,036,000/751,866,000 =34% The company’s equity ratio significantly improved from 31% in 2013 to 34% in 2014 owing to relative reduction in the company’s total assets in 2014 (Jared, 2014). Market ratio a) Net tangible assets per share (Equity- Intangible assets/Number of ordinary shares on issue at year end) 2013 = (312,067,000-212,686,000)/478,944,242 =21% 2014= (259,036,000-143,664,000) /990,370,034= 12% The company’s net tangible assets per share declined from 21% in 2013 to 12% in 2014 owing to the increment in the company’s number of ordinary shares. b) Earnings per share = Net profit available to ordinary shareholders/Weighted number of ordinary shares on issue 2013 = -132.4 cents per share 2014 = -28.6 cents per share The company’s earnings per share improved from -132.4cents per share in 2013 to -28.6 per share in 2014 owing to the reduction in the amount of losses that the company generated in 2014. Conclusion on financial ratio analysis Based on the above analysis, the company’s financial performance is wanting especially given that it reported losses both in 2013 and 2014. However, as can be seen, the 2014 performance is a great improvement of the 2013 performance. As such, if such improvement is sustained, then the company will be profitable in the near future. Based on this, one would invest in the company given that the share price is at its lowest meaning one will realize good returns in terms of capital growth. Conclusion and overall evaluation of the company and recommendation on investing in the company Based on the above analysis, it is evident that the company deals with products that are highly marketable despite the fact that the company has been making losses. In addition, the directors report reveals that the company fits your investment criteria of supporting Australian made products and socially responsible investing both in terms of social good and sourcing from ethical suppliers that maintain good workplace health and safety standards in their factories. Though the company currently has negative returns to its shareholders since it has been making losses, the financial ratio analysis has revealed that the company’s performance is improving furthermore; the directors’ report has revealed that the company has put in place measures aimed at turning the company around in a state that it can generate return to shareholders. It should also be noted that the company adheres to corporate governance standards which is one of your investment criteria (Frank, 2011). Thus, based on the analysis, I would recommend that you invest in the company especially at its current state. This is because the strategies it has put in place especially the seven strategies that the CEO has put in place will go a long way in ensuring the company turns around. As such, the company can expect to generate returns both from dividends and growth in share values. References: Billabong International Limited, 2014, Annual report 2014, Retrieved on 4th June 2015, from; http://media.corporateir.net/media_files/IROL/15/154279/AGM/20141010%2020141016 %20FINAL_BB_FULL_FINANCIAL_2013-14_email.pdf billabongbiz.com, 2015, Corporate overview, Retrieved on 4th June 2015, from; http://www.billabongbiz.com/phoenix.zhtml?c=154279&p=irol-irhome Koons, C2012, Billabong basks in takeover interest, The Wall Street Journal. Billabong, 2015, Billabong, Retrieved on 4th June 2015, from; http://www.billabong.com/ Jared, B2014, Introduction to financial accounting, London, Rutledge. Readyratios.com, 2015, Financial analysis, retrieved on 4th June 2015, from; http://www.readyratios.com/reference/analysis/ Frank, R2011, Investment analysis and portfolio management, Western Australia, Cengage Learning. Richard, A2007, Qualitative investment analysis, New York, John Wiley & Sons. Read More