Super Cheap Auto Group Limited - Essay Example

Running Head: SUPER CHEAP AUTO GROUP LIMITED Super Cheap Auto Group Limited Submitted by: XXXXXX Number: XXXXXX XXXXX of XXXXXX Executive Summary Super Cheap Auto Limited is one of the biggest retailers of car auto parts as well as the boating, camping and fishing accessories. The company operates out of Australia and New Zealand and has over the years been able to develop a brand image for itself. The company has improved its processes and the overall revenues. From the financial reports of the company it is clear that Super Cheap Auto has changed its source of financing and currently uses higher levels of debt to fund its operations. The company’s reports have also highlighted that the overall assets of the company have increased over the years and the company has shown an improvement in the overall operations. The company’s dividends have also increased over the past year and this shows a level of improvement and bettered operations. The calculation of the CAPM highlights that Super Cheap Auto pays out a higher level of return than the market while the minimum return expected by the shareholders is 9.30%. Also based on the calculation of the WACC, it has been noted that the company requires a minimum return of almost 10.50% from all new projects and this is the rate to be utilised for the investment appraisals in the future. Table of Contents Executive Summary 2 Table of Contents 3 Introduction: 4 Overview of Super Cheap Auto Group Limited: 4 Current Business Activities: 5 Company’s Capital Structure: 6 Recent Financial History: 6 Changes in Capital Structure: 7 Debt and Equity of Super Cheap Auto Group: 7 Company’s Dividend Policy: 8 Calculation of CAPM: 8 Assumptions: 8 Calculation: 9 Weighted Average Cost of Capital (WACC): 9 Assumptions: 10 Calculation of WACC: 11 References 12 Introduction: Super Cheap Auto deals with retailing of cars in Australia and New Zealand. This paper aims at analysing the company and discussing the financial aspects of the company. The paper will begin with an overview of the company followed by the current activities of the company. The paper will also discuss the company’s capital structure and aspects of debt and equity that the company operates with. Calculation of the capital asset pricing model and the weighted average cost of capital of the company will also be discussed. Overview of Super Cheap Auto Group Limited: Super Cheap Auto Group Limited is a retailer of car products. The company caters to the markets of Australia and New Zealand and provides the country with excellent brands of vehicles as well as automotive parts. The company falls under the NAICS codes of 441310 – which deals with the Automotive Parts and Accessories Stores. Also the SIC Codes that the company operates under are: 5013 – Motor Vehicles Supplies and New Parts Industry Report, 5531 – Auto and Home Supply Stores Industry Report and 5731 - Radio, Television, and Consumer Electronics Stores industry report (High Beam Business, 2010). The company was started as an automotive parts and accessories retailer in Queensland in 1974. Over the years the company has seen immense growth and now operates in over 212 outlets and the in almost every state and territory of New Zealand and Australia. The company has worked hard on the expansion and improvement of the business and has been able to even acquire Marlows in 2003. Marlows was the largest retailer in automotive parts and also accessories. The company entered the New Zealand markets in November 2003, by opening seven stores and has grown to currently own as many as 32 stores in New Zealand. The company is led by Mr Robert Wright the Chairman, Mr Peter Birtles the Managing Director, and the three Non Executive Directors, Mr Darryl McDonough, Mr Reg Rowe and Mr John Skippen, and the company secretary Mr David Kelley (Boardroom Radio Australia, 2010). Current Business Activities: The company’s principal activities include the Super Cheap Auto, BCF i.e. Boating, Camping and fishing and Goldcross. The company mainly deals as retailers for sales and distribution of motor vehicles, the accessories and all spare parts for cars. On the other hand the company deals with the retail sales for the various equipments for boating, camping and fishing as well (Invest Smart, 2010). Goldcross involves the retailing, wholesaling, and distributing of bicycles and the bicycle parts and accessories. All the operations of the company are carried out from Australia and New Zealand. Super Cheap auto have as many as 300 stores across Australia and New Zealand and the group has over 5000 members in the team. The company makes as much as over $800 million in sales each year. The three brands that the company deals with include the following: a) Super Cheap Auto, which provides the customers with retail in spare parts, hand tools, power tools, electrical, outdoor products, car care and many more (Super Cheap Autp Group Limited, 2010). b) BCF, which deals with the boating, camping and fishing products. The company provides only trusted brands and has the widest range of products in the boating, camping and fishing products (Super Cheap Auto Group Limited - BCF, 2010). c) Goldcross Cycles deals mainly with the various products, services and information that relate to cycles. The aim of the company is to ensure that cycling becomes simpler for all thereby making it a part of the healthier lifestyle. Company’s Capital Structure: The company’s capital structure is made up of debt as well as equity. As of 2009, the contribution from equity accounted for $ 84, 627, 000 of the total capital and the debt of the company totalled to almost $ 110,553,000 (Super Cheap Auto Gorup Limited, 2009). Recent Financial History: The company as a whole has seen a major increase in the overall finances. It is clear from the balance sheet of the company that there has been an improvement in the overall working of the company. The company has been able to improve its reserves and has been able to grow the reserves from – 3,344,000 in 2008 to $42,000 in 2009 (Super Cheap Auto Gorup Limited, 2009). In terms of the assets of the company, there has been a clear increase of almost $ 52,615,000 from 2008. The borrowings of the company have also seen a major decline and the annual report highlights that the borrowings have moved down from $56,692,000 in 2008 to $39,496,000 in 2009 (Super Cheap Auto Gorup Limited, 2009). The company’s current ratio has seen an increase and has risen from 1.39 in 2008 to 1.55 in 2009. This simply implies that the company has higher levels of liquidity. This can be clearly seen in the table below: Particulars 2008 2009 Current Assets $ 221,966,000 $ 264,744,000 Current Liabilities $ 159,275,000 $ 170,864,000 Current Ratio 1.39 1.55 (Super Cheap Auto Gorup Limited, 2009) Changes in Capital Structure: The capital structure of the company has to a great extent remained constant, with the contribution from equity at the same level, whereas there has been a little increase in the overall non – current liabilities. The overall debt has increased by almost $ 20,433,000. Also considering the debt to capital ratio, the company has seen an increase in the overall debt which has thereby led to an increase in the ratio making it almost 25.25% (Super Cheap Auto Gorup Limited, 2009). Super Cheap Auto Limited has clearly being using a debt financing for the overall operations. Particulars 2008 2009 Long term Debt $ 90,120,000 $ 110,553,000 Total Capital $ 385,156,000 $ 437,771,000 Debt To Capital Ratio 23.40% 25.25% (Super Cheap Auto Gorup Limited, 2009) Debt and Equity of Super Cheap Auto Group: The company has been noted to have a high debt to equity ratio. This is clear from the table below: Particulars 2008 2009 Total Liabilities $ 249,395,000 $ 281,417,000 Shareholders Equity $ 135,761,000 $ 156,354,000 Debt to Capital Ratio 1.84 1.80 (Super Cheap Auto Gorup Limited, 2009) It is clear that the company is currently using a higher level of debt compared to the equity which simply implies that Super Cheap Autos has been aggressively funding its capital from debts. This has definitely helped in the increase of the overall earnings of the company however it also makes the overall earnings very volatile. Company’s Dividend Policy: The company has constantly paid dividends to its shareholders since going public in July 2004. In 2007, the company paid a dividend of 0.055 cents per share. The dividends increased steadily and the company paid 0.065 cents and 0.075 cents per share in 2008 and 2009 respectively. The company’s dividend policy has not been explained in detail in the Corporate Website and Profile of Super Cheap Auto Limited. However, it is evident that the shareholders are given prime importance and the company relies on common equities to raise additional capital whenever required. The expansion plans for the company are disclosed to all shareholders to gain their trust in the company’s future earning potential (Super Cheap Auto Gorup Limited, 2009). Calculation of CAPM: The expected rate of return on equity is computed based on the capital asset pricing mode (CAPM). According to CAPM, the expected return is given by: Re = Rf + β (Rm – Rf) where Rf  Risk free rate of return β  Beta value of Super Cheap Auto Limited Rm  Market Return (Clayman, Fridson, & Troughton, 2008) Assumptions: 1. The risk free investment is assumed to be a Treasury Bond issued by Australia. In this case, the interest rate offered on a 10 year Australian treasury bond is considered to be the risk free rate of return. Rf = 4.50 % (ASX, 2010) 2. The beta value of Super Cheap Auto Limited is found to be: β = 1.02 3. The market return is arrived at, using the returns on S & P ASX 200 Index. The return on market portfolio is assumed to be the total return from the ASX for this year. Rm = 9.21 % (ASX.com, 2010) Calculation: From the above values, the rate of return on equity for Super Cheap Auto Limited is computed as follows: Re = 4.50 % + 1.02 (9.21 % - 4.50 %) = 9.3042 % The CAPM value indicates that the expected rate of return on the company’s equity is slightly higher than the market returns. The shareholders of the company require a minimum return of 9.30 % from the shares invested in Super Cheap Auto Limited. Weighted Average Cost of Capital (WACC): The most common method adopted to compute the cost of capital (cost incurred to raise capital) of a company is the Weighted Average Cost of Capital (WACC) (Clayman, Fridson, & Troughton, 2008). As the name indicates, WACC is computed based on the weighted proportions of the various elements that make up the company’s capital structure. WACC is computed as follows: K = [Ke * (Ve / Ve + Vd)] + [Kd (1 – T) * (Ve / Ve + Vd)] where Ke = Cost of Equity Kd = Cost of Debt Ve = Total Equity Capital Vd = Total Debt Capital T = Corporate Tax Assumptions: 1. The cost of equity for Super Cheap Auto Limited: The cost of equity is computed from the dividend paid and the market price of the stock. The dividend is assumed to be constant at all times. The cost of equity is computed as: Ke = $ 0.65 / $ 5.07 = 12.82 %(Super Cheap Auto Gorup Limited, 2009) 2. The cost of debt for Super Cheap Auto Limited: The cost of debt is the interest rate on long term borrowings. It is computed from the interest paid in 2009 and the total value of debt outstanding: Kd = $ 11,891,000 / $ 92,000,000 = 12.925 %(Super Cheap Auto Gorup Limited, 2009) 3. The corporate tax for Super Cheap Auto Limited is assumed to be 35 %. 4. The total value of equity (Ve) of the company is found to be $ 84,627,000 and the total long term debt (Vd) is found to be $ 92,000,000. The total capital of the company based on the two values (Ve + Vd) is $ 176,627,000 (Super Cheap Auto Gorup Limited, 2009). Calculation of WACC: Based on the above values, the WACC of Super Cheap Auto Limited is computed as follows: K = 12.82% ($84.627 m / $ 176.627 m) + 12.925 % (1 – 0.35) ($92 m / $176.625 m) = 6.14 % + 4.36 % = 10.50 % Hence the weighted average cost of capital of Super Cheap Auto Limited is found to be 10.50 %. This is the minimum expected return from new projects, or in other words, this is the discount rate to be used for investment appraisal purposes. References ASX. (2010). ASX 3 and 10 Year Bond Series. Retrieved April 22, 2010, from http://www.asx.com.au/products/futures/interest_rates/3_10_year_bond_series.htm ASX.com. (2010). Home Page. Retrieved April 23, 2010, from http://www.asx.com.au/index.htm Boardroom Radio Australia. (2010). Super Cheap Auto Group Limited (SUL). Retrieved April 18, 2010, from http://www.brr.com.au/asx/SUL/super-cheap-auto-group-limited/ Clayman, M. R., Fridson, M. S., & Troughton, G. H. (2008). Corporate Finance: A Practical Approach (Cfa Institute Investment). Wiley . Invest Smart. (2010). Super Cheap Auto Group Limited (SUL). Retrieved April 17, 2010, from Invest Smart: http://www.investsmart.com.au/shares/asx/Super-Cheap-Auto-Group-SUL.asp Super Cheap Auto Gorup Limited. (2009). Annual Report 2009. Super Cheap Autos. Super Cheap Auto Group Limited - BCF. (2010). BCF. Retrieved April 17, 2010, from http://www.supercheapautogroup.com/our-brands/bcf.aspx Super Cheap Autp Group Limited. (2010). Super Cheap Auto. Retrieved April 19, 2010, from http://www.supercheapautogroup.com/our-brands/supercheap-auto.aspx Read More