I AM NOT A FINANCIAL ADVISOR> THIS WAS AN ESSAY I WROTE FOR MY MBA…DO NOT USE THIS AS FINANCIAL ADVICE
Introduction
The purpose of this financial report is to provide independent financial and cash flow analysis of Briscoes Group Limited (BGP-NZ) for the intended audience: Social share investing club. This report will provide an overview of BGP-NZ and leverage industry standard accounting ratios; focusing on financial performance, financial stability, efficiency and investment accounting over the past three years. This report will also provide analysis on the companies cash flow over three years and will determine if this company is suitable for the social share investing group to invest in. It is assumed that the social share investment group have a low-risk tolerance and are looking for long-term investment dividends.
Overview
BGP-NZ is a New Zealand company operating 79 retail stores throughout New Zealand trading in two market segments, homeware and sporting goods with three brand names: Briscoe’s Homeware, Living & giving and Rebel Sport. BGP-NZ is also the largest single shareholder in Kathmandu.
BGP-NZ has a broad geographical presence, good brand and the largest shareholder RA Duke Trust has owned the majority since 1990 and made shares available to the public in 2001.
| Corporate Values | (http://briscoegroup.co.nz/career, n.d.) |
| We believe in effective communication | We endeavor to communicate with our people in a real and meaningful manner. Honest and open discussions are encouraged. |
| We value our people | We encourage trust and respect in relationships. We celebrate our successes and treat both our staff and customers with respect. |
| Innovation and vision leads to success | We have a smart approach to retailing and the discipline to get the job done. Continuous improvement is part of our game. |
BGP-NZ has a board appointed by the shareholders, who oversee the management of the company for the best long-term interests of the company. BGP-NZ also have external auditors and seems to go above and beyond their minimum requirements for security compliance. The companies strategy is to focus online to obtain a larger market share and focusing on each store independently for return, however, there is no clear traceability for their strategy.
Financial Analysis
In the following financial analysis, I will provide ratio analysis from the last three years of BGP-NZ financial statements and review each segment separately.
Financial Performance. Across the three financial years, expenses have gone down from 29.09% to 27.7% of sales revenue. Gross profit has maintained and is above industry standard, showing BGP-NZ is receiving a larger profit for each product they sell than other companies, combining expenses shows a clear trend in the profit and loss to higher profit per product sold.
Return on capital employed (ROCE) allows a comparison on the companies profitability and how efficient the capital is used, for BGP-NZ there has been a trend of decreasing ROCE from 28% to 24%, showing a low efficiency. ROCE is also below industry standards of 33%, this also is shown on the return on total assets decreasing from 22% to 19%, this may, however, just be due to BGP-NZ high asset cost in building their own buildings with no debt which is why the profitability is higher than industry standard but ROCE is lower.
Based on profitability ratios, BGP-NZ is not making good use of its assets and is focusing on predictability and not profitability. This is in line with their long-term strategy and vision for the company.
Financial Stability. With a low debt ratio and zero long-term debt. They have used shareholders to finance the large growth since 2001. With growing cash funds driving a stable liquidity test; which is the ability to liquidate and pay back debt, BGP-NZ looks like it Is saving for something specific.
BGP-NZ is a stable company with little to no risk to an investor from liquidation.
Efficiency Ratios. Although inventory has not increased and BGP-NZ has a decreasing inventory turnover period from 89 days to 78 days, BGP-NZ has a lot of assets relative to sales, causing asset turnover period increasing from 155 to 205 days over the financial years. Wages have remained constant relative to turnover, this fits in with BGP-NZ values to treat their employees well. Lastly, the efficiency has been increased by increasing the time to pay suppliers which have led to a decrease in cash cycle rate, which is the ability to recoup cash from purchase.
BGP-NZ is efficient in store with inventory and has a high stock turnover with a 9-day cash cycle rate. However, it is worth pointing out that their high assets show less efficiency. BGP-NZ assets including cash (78m), property (83m) and investments (95m) are not being used efficiently as the inventory in stores.
Investment ratios. From an investment point of view, there are two attributes to consider. The ability to retain capital for the shareholder and ability to receive cash dividends. BGP-NZ has the ability to pay dividends as it is currently only paying out 66% of net profit attributed to shareholders. Earnings per share have been increasing year on year, however, on further analysis, this is due to investments in 2018 as operating cash flow has decreased in FY18. New Zealand population is set to increase 1.5% due to net migration (http://stats.govt.nz, n.d.), this allows BGP-NZ to cater for new customers in homeware and helps to confirm a 3% growth rate for the company.
The current return from BGP-NZ share price is 5.42%, which is lower than the NZX industry average but higher than the bank’s interest rate of 3%. BGP-NZ has the ability to pay dividends in the long term.
Cash Flow Analysis
Analysis of the last three years of BGP-NZ cash flow will allow an accurate understanding of performance and risk profile.
The cash flow from operating services over sales shows BGP-NZ is receiving less cash flow for each dollar that they receive each year; 15.55% to 11.53%. We can evaluate that BGP-NZ retail stores are effectively costing more to run and may be a reason why suppliers have been negotiated for longer payment terms. Free cash flow coverage shows an increase from 14% to 19%, this is the cash required to operate. However, upon evaluation of supplier’s discrepancy relative to sales, BGP-NZ may have negotiated a temporary deal in stock cost and payment terms.
BGP-NZ has no debt and a high margin compared to others in the industry, however, has a lower than expected operating cash flow which has been decreasing over the last three years, this could raise the risk that they are dependent too much on a certain product range and this is causing more interest in investments, this cannot be evaluated at this time.
Conclusion
The financial performance of BGP-NZ is good, however, it would do better to release more of its assets to shareholders. BGP-NZ is a financially stable company and this is shown in the low return on investment that the market values the stock at. Based on the predicted growth and cost of capital; which is made up of the cost of debt and equity, this financial analysis shows an estimated value of BGP-NZ at $2.87 per share.
| Valuation | FY2018 |
| Predicted Growth | 3% |
| FY18 (000) | $61,325 |
| FY19 (000) | $63,165 |
| FY20 (000) | $65,060 |
| FY21 (000) | $67,011 |
| Cost of Equity – Suspect activity | 13% |
| Cost of Debt | 5% |
| Cost of Capital | 13% |
| Perpetuity Value | 693,052 |
| Present estimated value | 634,240 |
| Estimated Value (per share) | $2.87 |
Recommendation
BGP-NZ is a solid New Zealand company with a great balance sheet, a management team with long-term vision and no long-term debt, I would place BGP-NZ as a long-term hold purchased at a lower price. I base this on the companies reducing cash flow, less operating profit and a discrepancy in lending terms vs supplier costs in the cash flow that cannot be explained at this time. BGP-NZ could be looking to move more into investing in other businesses instead of their operating model and might look to release more shares to do this, this will put a selling pressure on BGP-NZ. Until more information is revealed from BGP-NZ, it would be my recommendation to await a lower entry point and not for the social share investing club to invest in BGP-NZ at this time.
References
http://briscoegroup.co.nz/career. (n.d.). Retrieved from Briscoes Group.
http://stats.govt.nz. (n.d.). Retrieved from Stats Nz.
