DU Company Analysis - Case Study Example

DU Company Analysis Student’s Name Institutional Affiliation A. Company Profile, Industry Overlook & Competition Du is an incorporated telecommunication service provider, which was founded in 2005, operating within the United Arab Emirates (Bloomberg Markets, 2016). It is headquartered in Al-Salam Tower, Dubai and employees more that 2000 people as at 2014. Some of its notable subsidiaries include; EITC Investment Holdings Limited. The company is focused on provision of both fixed and mobile-based telephony services; aspects related to broadband connectivity and IPTV services (Bloomberg Markets, 2016). All of these products are offered to both business premises and homes as well. It was formerly known as Emirates Integrated Telecommunications Company before it was rebranded to du in the early 2007. It is owned by both the Emirates Investment Authority; Mubadala Development Co., Emirates Communications & Technology Company as well as a small percentage of shares is owned by the general public shareholders (Bloomberg Markets, 2016). In the UAE, du operates approximately 56 stores that seeks to extend their products and services to more than 3000 authorized dealers that are positioned within the UAE as well as reaching a substantial section of customers through its online portal. Du’s major competitor is Etisalat, which commands a significant share of the overall market base within the United Arab Emirates. In fact, in addition to operating extensively within the UAE telecommunication segment, Du also extends its services to more than 17 countries across the globe and thus, caters for more than 94.7M subscribed customers worldwide (Bloomberg Markets, 2016). In regards to fixed line and internet services, Du only commands at least 15% of the overall total revenues posted within any given year while the rest if mostly ascribed to Etisalat Company. Interesting to note, UAE telecommunication sector is majorly dependent on mobile services, which accounts for more than 56% of industry revenues with such other services as internet and data raking in about 35% while fixed line rakes about 9% in total. The significant reduction in service prices that is a result of intense competition between local carriers and Etisalat and Du has fostered quality and affordable consumer products (Bloomberg Markets, 2016). These operators are however; being exposed to intense set of sustained decreases in their imminent overall averages revenues per each user as a result of charges offered by services especially in relation such products and services as voice call and SMS as well as notable discounts. The future of the UAE telecommunication sector is set to improve tremendously especially with the potential growth areas related to long-term evolution networks (LTE), which relates to superfast broadband connections. Both Etisalat and Du have all finished conducting LTE trials while Etisalat has already launched its 4G network platform. B. Stock Market Analysis Taking a look at Graph-1 within the appendices section, it can be clearly ascertained that the stock prices of the company has continued to grow over the past five years or so. The increase in the stock prices in the period between 2012 and 2014 improves from 3.0AED to 6.3AED but later decreases slightly within the two period from 2014 to 2015 from 6.3AED to 5.00AED before improving again within the current operational to 5.85AED. The improvement in the stock prices for this company is perhaps attributed to more investors having trust with the company’s overall activities and operations. It is also attributed to the current growth in the overall telecommunication market share especially in relation mobile services as well as internet and data services as a whole. There are currently numerous level of risks associated with UAE telecommunication industry as a whole. For instance, there is the potential risk attributed to operational threats (Telecommunications Regulatory Authority, 2016). The sector is exposed to operational threats that that might result to more damages in the event that the development of infrastructural process is not done in the correct manner and in cases where there are numerous occurrences of natural disasters and crises (Ernst & Young, 2014). Consequently, the company is likely to be affected by strategic risks that are likely associated with intense level of competition especially from such well-developed companies like Etisalat. Taking into consideration that Etisalat has already laid out its LTE 4G network platform; the firm is likely to suffer from imminent strategic issues that will emanate from their immediate failure to adopt to new routes related to innovation as well as lack of extensive skills needed for comprehending customer’s overall value (Telecommunications Regulatory Authority, 2016). C. Ratio Analysis To successfully gain a clear understanding of the financial performance of Du, the financial ratio analysis will cover a period of 3 years that ranges between 2013 and 2015. The discussion is provided as follows; 1. Liquidity Ratios Ratio/Year 2013 2014 2015 Current ratio=current assets/current liabilities 6,837,195/ 5,619,910 =1.22 8,358,888/ 5,904,549 =1.42 8,292,029/ 5,488,720 =1.51 Quick asset ratio= current assets-inventory/current liabilities 6,837,195-56,251/ 5,619,910 =1.21 8,358,888-150,183/ 5,904,549 =1.39 8,292,029-83,237/ 5,488,720 =1.50 Liquidity Analysis The company’s ratio increases within the three-year period from 1.22 and 1.51 in 2013 and 2015 respectively. The ratio is fairly positioned in comparison to the industry averages in the UAE as Etisalat’s ratio stands at 0.99 in 2015. This is an indication that Du has made sufficient efforts to ensure that they can meet their short term obligations as and whenever they fall due. Their financial position has been specifically strengthened as a result of its continual policy that relates to improving the size of its underlying short term investments. The quick ratio also increases within the three-year period from 1.21 to 1.50 in the period between 2013 and 2015 respectively. This is a good indication as it means that Du is fairly positioned to meet its short term obligations as and whenever they fall due without having to depend on the underlying stock levels. In fact, in comparison to Etisalat’s ratio of 0.94 in 2015; the company is fairy positioned within the UAE’s overall telecommunication industry. 2. Profitability Analysis Ratio/Year 2013 2014 2015 Return on Equity(ROE)= net income/equity 1,986,400/ 7,143,677 =27.8% 2,109,349/ 7,838,739 =26.9% 1,941,353/ 7,818,656 =24.8% Return on Assets: EBIT/ total assets 3,042,944/15949072 =19.1% 3,715,955/17878099 =20.8% 3,862,315/17940370 =21.5% Gross margin= gross profit /sales revenue*100% 8130664/ 10,799,320 =75.3% 9191987/ 12,238,365 =75.1% 9491953/ 12,337,048 =76.9% Analysis The company’s return on equity ratio reduces from 27.8% to 24.8% in the period between 2013 and 2015 respectively. Despite this level of decrease; the ratio stands way above the 20.47% for Etisalat Company within the 2015 operational period. This is a positive indication as it means that the company’s ability to generate profits from the underlying set of equity funds is favorably-positioned within this three-year period. The company seems to be making lots of progress in the way shareholder’s equity funds are utilized to post profits. The return on assets’ ratio increases slightly within the three-year period from 19.1% to 21.5% in 2013 and 2015 respectively. The increase is fairly way above Etisalat ratio of 7.04% in 2015, which means that DU’s overall capacity to generate profits from the underlying asset-base is generally higher within the industry averages. This might be attributed to the management efficient policies in asset wear and tear so that any worn-out equipment is easily and quickly replaced to ensure that the operations of the company are conducted in a more efficient and transparent manner. It is important to understand that the company is mainly focused on ensuring that customers; both domestic and corporate have efficient access to services related to internet and data services as well as mobile services; the latter constituting the larger percentage of revenue streams. Gross profit margin ratio improves within the three-year period from 75.3% to 76.9% in the period between 2013 and 2015 respectively. The improvement in the ratio is fairly positioned within the industry; meaning that it has put efficient mechanisms in place to ensure that a lot of revenues are derived from the sales conducted within the period. This might be attributed to the rather extensive and well-intensified marketing campaigns conducted to promote the quality of mobile services in the market. It might also be associated with the company’s policy of ensuring that major mobile services subscriptions as well as internet and data services are offered at a definite discount and in turn, attracting lots of customers. 3.0 Asset Efficiency Ratio Ratio/Year 2013 2014 2015 Asset turnover= sales revenues/ total assets 10,799,320/15949072 =0.68 12,238,365/17878099 =0.68 12,337,048/17940370 =0.68 Days inventory ratio=average inventory/cost of sales*365days 56,251/2,668,656*365 days = 7days 150,183/3,046,378 *365 days =17 days 83,237/2,845,095 *365days = 10 days Analysis The firm’s asset turnover ratio improves from 0.67 to 0.68 within the three-year period from 2013 and 2015 respectively. Despite the slight increase, the ratio still stands fairly well in comparison to Etisalat whose ratio value is placed at 0.41. This means that the ratio is fairly positioned within the industry average hence an indication that the firm is able to generate profits from the underlying base. Days sales inventory ratio increases slightly from 7 to 10 days within the three-year period. The increase in this ratio is positioned below the industry’s average of 28days. It thus means that DU has been able to formulate and implement policies that relate to efficient credit sales especially in regards to provision of mobile, internet and data services to existing customer base. Due to this efficient credit sale policy, the company has been able to ensure that enough cash resource is made available to conduct the day-to-day operational activities of the company. 4.0 Gearing Ratios Ratio/Year 2013 2014 2015 Gearing ratio=Long-term debt + Short-term debt + Bank overdrafts/ Shareholders' equity 1,031,651+2,943,799 /7,143,677 =0.5 574,462+3,856,136/ 7,838,739 =0.6 133,669+4,357,789/ 7,818,656 =0.6 Interest Coverage Ratio=EBIT/ Interest costs 3,042,944/83,752 =36.3 3,715,955/106,539 =34.9 3,862,315/116,202 =33.2 Analysis The firm’s gearing ratio increases slightly within the three-year period from 0.5 to 0.6 in 2013 and 2015 respectively. The ratio stands slightly above Etisalat’s ratio of 0.40 in 2015 meaning that it is positioned fairly within the industry averages. It means that DU has continued to make significant level of efforts to ensure that it has attained a balance between the levels of its debt structure in comparison to its overall equity funds. This might be attributed to owners and management attitude towards inclusion of debt funds within their overall capital structure. DU interest coverage ratio decreases slightly within the three-year period from 36.3 to 33.2 in 2013 and 2015 respectively. The ratio is fairly positioned within the industry and in fact means that it has the potential to meet its interest expenses within the operational period more efficiently. This is attributed to the firm’s ability to generate enough sales revenues and thus, profits that are necessary for meeting this rather definite expense at any given moment in time. 5.0 Investor/Market Ratios Ratio/Year 2013 2014 2015 Earnings per Share= net profit after tax/ no. of shares held 1,986,400,000/ 4,571,428,571 =0.43 2,109,349,000,000/ 4,571,428,571 =0.46 1,941,353,000,000/ 4,571,428,571 =0.42 Dividend yield=gross dividend / share market price 2,377,143/3.52 =675,324.7 1,417,142/6.58 =215,371.12 1,965,715/5.04 =390,022.81 Price earnings =Current market price/EPS 3.52/0.43 =8.2 6.58/0.46 =14.3 5.04/0.42 =12 Analysis The company’s earnings per share remain relatively stable despite it decreasing from 0.43 to 0.42 in the three-year period between 2013 and 2015 respectively. The ratio is fairly positioned within the overall industry averages meaning that it is fairly positioned to post enough earnings from the existing number of shares held by the firm. Potential investors are attracted to such positive EPS ratios over years. Despite the fact that dividend yield ratio decreases tremendously within the three- year period, it is quite clear to ascertain that the firm provides a positive and efficient return on investment opportunity for any given potential investor at any given moment in time. The firm’s price per earnings ratio increases within the three-year period from 8.2 to 12 in 2013 and 2015 respectively. Taking a look at this ratio improvement, it can be successfully ascertained that the value of the company is fairly conducted within this period and thus, it is highly recommended that potential investors invest with the firm. D. Horizontal & Vertical Analysis Vertical Analysis Taking a closer look at the balance sheet (Appendix 2), it can be noted that property plant and equipment has the largest percentage of about 34,428.5% of total asset base while derivative financial instrument has the lowest percentage, which is set at 12.5%. This means that the latter is fully supported the by the underlying asset base while the latter is less supported by the underlying asset-base value in the period ending 2015. The income statement analysis indicates that earnings before interest, tax, depreciation and amortization is the largest beneficiary of sales revenues at 43.9% while other income is the lowest supported item at 0.03% within the 2015 financial period. Horizontal Analysis Taking a closer look into the balance sheet item in the horizontal analysis (Appendix 3); it can be ascertained that intangible assets enjoys the largest degree of change at 699.7% within the period between 2014 and 2015 while the least of change is witnessed in the level of inventories, which might be a result of low customer purchases and poor service delivery that has resulted to a low demand for DU’s mobile product services. The income statement portrays the largest percentage change on its rent and utilities item at 27.8% and this might be attributed to opening of new stores within the UAE to facilitate provision of efficient and convenient services to customers. The least percentage change is witnessed in other section within the same period. References List Bloomberg Markets. (2016). Emirates Integrated Telecommunications Co. DU. Retrieved from https://www.bloomberg.com/quote/DU:UH Ernst & Young. (2014). Top 10 Risks in Telecommunications 2014. Retrieved from http://www.ey.com/gl/en/industries/telecommunications/ey-top-10-risks-in-telecommunications-2014 Telecommunications Regulatory Authority. (2016). Telecom Business Continuity Forum to Discuss Risks and Challenges in Telecoms Sector. Press Release. Retrieved from https://www.tra.gov.ae/en/media-hub/press-releases/2016/9/22/telecom-business-continuity-forum-to-discuss-current-risks-and-challenges-in-telecoms-sector.aspx Appendix Graph 1 Source: Bloomberg- https://www.bloomberg.com/quote/DU:UH 2. Common Analysis DU Statement of Financial Position As at 2015 2015 Common Size Statements (%) Current Assets: Cash and cash equivalents 163,288 163,288/24,205.2 674.5% Trade and other receivables 1,448,359 1,448,359/24,205.2 5983.7% Inventories 83,237 83,237/24,205.2 343.9% Short term investments 6,200,000 6,200,000/24,205.2 25,614.3% Due from related parties 397,145 397,145/24,205.2 1640.7% Total current assets 7,174.8 7,174.8/24,205.2 29.6% Non-current assets Intangible assets 1,200,961 1,200,961/24,205.2 4961.6% Property, plant and equipment 8,333,480 8,333,480/24,205.2 34,428.5% Derivative financial instrument 3,033 3,033/24,205.2 12.5% Investment in associate 110,867 110,867/24,205.2 458.02% Total non-current assets 9,648,341 9,648,341/24,205.2 39,860.6% Total assets 24,205.2 24,205.2/24,205.2 100% Current liabilities: Trade and other payables 5,326,980 5,326,980/24,205.2 22,007.6% Borrowings 133,669 133,669/24,205.2 552.2% Due to related parties 28,071 28,071/24,205.2 115.9% Total current liabilities 5,488,720 5,488,720/24,205.2 22,675.8% Non-current liabilities: Borrowings 4,357,789 4,357,789/24,205.2 18,003.5% Provision for employees’ end of service benefits 186,887 186,887/24,205.2 772.01% Other provisions 88,318 88,318/24,205.2 364.9% Total non-current liabilities 4,632,994 4,632,994/24,205.2 19,140.5% Net assets 7,818,656 7,818,656/24,205.2 32,301.6% Equity: Share capital and reserves Share capital 4,571,429 4,571,429/24,205.2 18,886.1% Share premium 393,504 393,504/24,205.2 1625.7% Other reserves 1,987,804 1,987,804/24,205.2 8212.3% Retained earnings 865,919 865,919/24,205.2 3577.4% Total equity 7,818,656 7,818,656/24,205.2 32,301.6% Du Statement of Comprehensive Income As at 2015 2015 Common Size Statements (%) Revenue 12,337,048 12,337,048/12,337,048 100% Interconnect costs 2,845,095 2,845,095/12,337,048 23.06% Staff costs 908,466 908,466/12,337,048 7.36% Network operation and maintenance 753,792 753,792/12,337,048 6.1% Product costs 569,286 569,286/12,337,048 4.6% Outsourcing and contracting 496,575 496,575/12,337,048 4.03% Commission 269,041 269,041/12,337,048 2.1% Telecommunication license and related fees 338,596 338,596/12,337,048 2.7% Marketing 359,391 359,391/12,337,048 2.9% Rent and utilities 106,828 106,828/12,337,048 0.86% Other expenses 274,136 274,136/12,337,048 2.2% Other income 3,329 3,329/12,337,048 0.03% Earnings before interest, tax, depreciation and amortisation (EBITDA) 5,419,171 5,419,171/12,337,048 43.9% Depreciation 1,384,161 1,384,161/12,337,048 11.2% Amortisation of intangible assets 172,695 172,695 Operating profit 3,862,315 3,862,315/12,337,048 31.3% Finance income 112,821 112,821/12,337,048 0.9% Finance expense 116,202 116,202/12,337,048 0.9% Share of profit / (loss) of investment in an associate accounted for using equity method 2,977 2,977/12,337,048 0.02% Profit before royalty 3,861,911 3,861,911/12,337,048 31.3% Royalty 1,920,558 1,920,558/12,337,048 15.6% Profit for the year 1,941,353 1,941,353/12,337,048 15.7% 3.0 Horizontal Analysis DU Statement of Financial Position As at 2015 2014 2015 Current Assets: Cash and cash equivalents 192,737 163,288 163,288-192,737/192,737*100% =-15.3% Trade and other receivables 1,709,493 1,448,359 1,448,359-1,709,493/1,709,493*100% =-15.2% Inventories 150,183 83,237 83,237-150,183/150,183*100% =-44.6% Short term investments 5,840,000 6,200,000 6,200,000-5,840,000/5,840,000*100% =6.2% Due from related parties 466,475 397,145 397,145-466,475/466,475*100% =-14.86% Intangible assets 150,183 1,200,961 1,200,961-150,183/150,183*100% =699.7% Property, plant and equipment 8,202,372 8,333,480 8,333,480-8,202,372/8,202,372*100% =1.6% Derivative financial instrument - 3,033 3,033/24,205.2 Investment in associate - 110,867 Current liabilities: Trade and other payables 5,330,087 5,326,980 5,326,980-5,330,087/5,330,087*100% =-0.06% Borrowings 574,462 133,669 133,669-574,462/574,462*100% =-76.7% Due to related parties - 28,071 28,071 Non-current liabilities: Borrowings 3,856,136 4,357,789 4,357,789-3,856,136/3,856,136*100% = 13% Provision for employees’ end of service benefits 165,396 186,887 186,887-165,396/165,396*100% =13% Other provisions 88,318 88,318/24,205.2 Net assets 7,838,739 7,818,656 7,818,656-7,838,739/7,838,739*100% =-0.25% Equity: Share capital and reserves Share capital 4,571,429 4,571,429 4,571,429-4,571,429/4,571,429*100% =100% Share premium 393,504 393,504 393,504-393,504/393,504*100% =100% Other reserves 1,792,982 1,987,804 1,987,804-1,792,982/1,792,982*100% =10.9% Retained earnings 1,080,824 865,919 865,919-1,080,824/1,080,824*100% =-19.9% Total equity 7,838,739 7,818,656 7,818,656-7,838,739/7,838,739*100% = -0.25% Du Statement of Comprehensive Income As at 2015 2014 2015 Revenue 12,238,365 12,337,048 12,337,048-12,238,365/12,238,365*100% =0.8% Interconnect costs 3,046,378 2,845,095 2,845,095-3,046,378/3,046,378*100% =-6.6% Staff costs 903,690/ 908,466 908,466-903,690/903,690*100% =0.5% Network operation and maintenance 746,829 753,792 753,792-746,829/746,829*100% =0.93% Product costs 637,275 569,286 569,286-637,275/637,275*100% =-10.7% Outsourcing and contracting 470,314 496,575 496,575-470,314/470,314*100% =5.58% Commission 362,079 269,041 269,041-362,079/362,079*100% =-25.7% Telecommunication license and related fees 311,606 338,596 338,596-311,606/311,606*100% =8.7% Marketing 296,993 359,391 359,391-296,993/296,993*100% =21% Rent and utilities 83,665 106,828 106,828-83,665/83,665*100% =27.8% Other expenses 270,940 274,136 274,136-270,940/270,940*100% =-1.2% Other income 6,160 3,329 3,329-6,160/6,160*100% =-45.9% Earnings before interest, tax, depreciation and amortisation (EBITDA) 5,030,407 5,419,171 5,419,171-5,030,407/5,030,407*100% =7.7% Depreciation 1,162,403 1,384,161 1,384,161-1,162,403/1,162,403*100% =19.1% Amortisation of intangible assets 152,049 172,695 172,695-152,049/152,049*100% =13.6% Operating profit 3,715,955 3,862,315 3,862,315-3,715,955/3,715,955*100% =3.9% Finance income 93,095 112,821 112,821-93,095/93,095*100% =21.1% Finance expense 106,539 116,202 116,202-106,539/106,539*100% =9.1% Share of profit / (loss) of investment in an associate accounted for using equity method 968 2,977 2,977-968/968*100% =2.1% Profit before royalty 3,701,543 3,861,911 3,861,911-3,701,543/3,701,543*100% =4.3% Royalty 1,592,194 1,920,558 1,920,558-1,592,194/1,592,194*100% =20.6% Profit for the year 2,109,349 1,941,353 1,941,353-2,109,349/2,109,349*100% =-7.9% Read More