7211Afe | Corporate Finance | Assessment Answers
1. Prepare a brief description of the company, outlining the core activities, the market(s) in which it operates within and any factors in the companies’ history which you consider help present a “picture” of your company.
2. Specify ownership-governance structure of the company:
i) Name the main substantial shareholders:
With higher than 20.00% of shareholdings. Based on this argument you should classify a firm as a family or non-family company, and With higher than 5.00% of shareholdings.
ii) Name the main people involved in the firm governance:
The ChairmanBoard membersCEO.
> Whether any of these people have the same surname as any of substantial shareholders (>20% share capital). If yes- you could use this as an argument for the presence of an owner or family member(s) in the firm’s governance.
> Whether any of shareholders with more than 5% share capital are involved in firm governance.
3. Calculate the following key ratios for your selected company for the past 4 years. Annual reports are accessible via company websites (show all working out):
i) Return on Assets (ROA) = (NPAT / Total Assets) Return on Equity (ROE) = (Net Profit After Tax / Ordinary Equity) Debt Ratio = Total Liabilities / Total Assets
ii) Explain what phenomenon is being “captured” by the variable TA/OE, and how it is impacting on the relationship between Return on Assets and Return on Owners Equity.
iii) Explain why the ROE (EBIT) is significantly greater than or less than the ROA (EBIT).
4. Using the information from the ASX website: www.asx.com.au you must complete the following tasks:
i) Prepare a graph / chart for movements in the monthly share price over the last two years for the company that you are investigating. Plot them against movements in the All Ordinaries Index.
ii) Write a report which compares movements in the companies’ share price index to the All Ords Index. For instance, how closely correlated is the line with the All Ords Index. Above or below? More or less volatile?
5. Research via the internet or financial/business publications:
From research via the internet (using credible sources) or financial/business publications, note any significant announcements which may have influenced the share price of your company. These factors could include merger activities, divestitures, changes in management’s earnings forecasts, changes in analysts’ forecasts, unusual write-offs or abnormal items, macroeconomic factors, industry wide factors, significant management changes, changes in the focus of the company, impact of competitors or law suits etc.
Answer:
Introduction
The report explains the overall analysis of a New Zealand based company named as The A2 Milk Company. It provides a brief overview of the firm highlighting its core activities and the market in which it operates. Furthermore, the report also discusses the structure of ownership and governance including its CEO, board of directors and substantial shareholders. In the later part, the key ratios of the company are calculated which includes ROE, ROA and Debt ratio followed by the explanation of the concept of equity multiplier. The report also discusses the movements in the share price of A2 Milk and the same has been compared to the all ordinaries index. In the last, the significant announcements made by the firm are made followed by a conclusion in the end.
Description of the company
The A2 Milk Company Limited is a corporation which is listed on ASX 200 and is engaged in the commercialization of intellectual property related to the company and distribution of the A2 brand milk. Previously, it was known as A2 Corporation Limited and was found in 2000. The firm also owns the intellectual property that allows the identification of cattle for producing A1 protein free milk products. The company operates through four segments that include Australia and New Zealand, United Kingdom, USA, China and Asia. The sale of milk, cream, milk powder, ice cream and other related products is operated through Australia and New Zealand segment. The Asian segment and China includes sale of infant formula, whole milk powder and the division is also responsible for the supply chain of infant formula from NZ to all the markets (Reuters. 2018).
A2 Milk operate in consumer staples sector and as per the report, Australian costumer staples has made a gain of 24.1% recently due to the outstanding performance of Wesfarmers Limited through its Coles and Bunnings sector. The share price of the company rises by 22% making a huge contribution in the growth of sector (The Motley Fool. 2018).
Ownership and governance structure
Following section provides the details of individuals that forms the governance and ownership structure of A2 Milk Company.
Main substantial shareholders
- Higher than 20% shareholdings
The company has no shareholders that hold more than 20% of the shares in the organization.
- Higher than 5% shareholdings
- Commonwealth Bank with 7.34% holdings
- Pendal Group Ltd. With 5.26% holdings
- BlackRock Inc have holdings of 5.21%
- UBS Group AG and other related bodies hold 5.05% of holdings.
Main people involved in the firm governance
- The Chairman: David Hearn (Executive director)
- Board of directors: Julia Hoare (Deputy Chairman & Non-Executive Director), Peter Hinton, Warwick Every-Burns and Jesse Wu.
- The CEO: Geoffrey Babidge (Managing Director and Chief Executive Officer (CEO).
None of the shareholders are involved in the firm governance of the company.
Calculation of key ratios
Part 1
|
Ratios |
Formula |
2014 |
2015 |
2016 |
2017 |
|
Return on Assets |
NPAT / Total Assets |
0.01% |
-2.4% |
14.5% |
26.4% |
|
Return on Equity |
Net Profit After Tax / Ordinary Equity |
0.02% |
-3.6% |
22.9% |
37.5% |
|
Debt ratio |
Total Liabilities / Total Assets |
23.48% |
34.0% |
36.7% |
29.8% |
(A2 Milk. 2017).
Part 2
According to the concept of DuPont analysis the return on equity breaks down into different components. The calculation of ROA is divided into two elements and then the product is multiplied with the equity multiplier which is calculated by dividing total assets with owners’ equity. It is the phenomenon which establishes a link between company’s return on assets and return on equity. The equity multiplier is used to measure the degree of leverage taken by the firm. Generally, a high multiplier indicates higher portion of debt financing. The manner in which the multiplier influences the relationship of ROE and ROA is that an increase in it will bring an upsurge in the total assets which result in a decrease in the ROA. However, increase in sales quantity will boost the ratio but the multiplier will remain same. Thus, it can be interpreted that the variable has negative and no relationship with the ROA. Therefore, a high multiplier will reduce the ROA and increase the ROE whereas a boosted return on assets ratio will bring an upsurge in return on equity, keeping the equity multiplier constant (Brigham and Houston, 2012).Â
Part 3
The ROE of A2 Milk Company was more than its ROA for the past four years. in 2015, both the ratios were negative. However, in 2016, the trend got reversed and the firm reported a ratio of 22.9% in 2016 and 37.5% in 2017. This was due to the huge amount of profit earned by the company in the last two years. The reason for having a negative ratio was the losses made by A2 Milk in 2015. The strong growth in A2 Milk brand contributed to the increase in profits. This is the reason why ROE (EBIT ) was more than the ROA (EBIT) in case of A2 Milk Company.
Graph and share price movements
Part 1
Graphical representation of the fluctuations in the share prices of A2 Milk and the comparison of the same with All Ordinaries Index.Â
(Source: Yahoo Finance. 2018).
Part 2
The above graph shows the variations in the average returns of company’s share prices and market return. It can be interpreted that the market has been stable for the past two years while huge movements can be observed in the share price returns of A2 Milk. In October 2016, the company offered high return of 36% while the market was at low 2.3%. Similarly, when company’s return became negative the market remains positive. Overall, it can be said that returns offered by A2 Milk were higher than the market. In the start of 2018, A2 Milk offered 47.5% of returns while the market was negative. Thus, it can be said that the line is not closely related and the firm’s stock is highly independent of the market fluctuations.
Significant announcements
The following are the noteworthy announcements made that have influenced the share price of the company.
- The company announce about its financial results for the year 2018. It is reported that the revenue of the firm increased by 68% with an upsurge of 101% in EBITDA. The report also highlights the increase in company’s EPS by 113%. All this has impacted the share price of the firm (ASX. 2018).
- On July 2018, the company declare the appointment of Ms Jayne Hrdlicka as managing director and CEO of A2 Milk. Previously, she was the senior executive having strengths related to A2MC’s next growth phase.All the material terms of Jayne’s employment are properly disclosed in the announcement (ASX. 2018).
- On January 2018, A2 Milk Company announce about the expansion of its US business to the North East region. The area is significant for the refrigerated milk category and has 20% of the total milk category volume in US. As a result, the retail stores of A2 Milk increased in the numbers from 3600 to 5000 (ASX. 2018).
Conclusion
From the above report, it can be concluded that the performance of A2 Milk Company has improved and increased from financial aspect as its debt ratio reduces in 2017 and return on equity and return on assets has shown an upsurge during the same year. Also, the company has offered high returns on its shares irrespective of the fluctuations in the market return. Further, the appointment of Ms Jayne Hrdlicka will help the business to grow with a high pace with appropriate strategies. So, it will be recommended to the investor to invest $10 million in the company as it is focused on increasing its sales and improving its profits. Moreover, the company has offered high returns to its shareholders so it will be appropriate to invest the funds in the company.
References
A2 Milk (2017). Annual Report 2017. [Online]. Available at: https://thea2milkcompany.com/wp-content/uploads/The-a2-Milk-2016-2017-Annual-Report-spreads.pdf [Accessed 7th October 2018].
ASX (2018). The a2 Milk Company expands US business to the North east. [Online]. Available at: https://www.asx.com.au/asxpdf/20180116/pdf/43qvn9wd8qfth0.pdf[Accessed 7th October 2018].
ASX (2018). Annual Report 2018. [Online]. Available at: https://www.asx.com.au/asxpdf/20180822/pdf/43xjp6x9rfwlbx.pdf [Accessed 7th October 2018].
ASX (2018). Managing Director and CEO Succession. [Online]. Available at: https://www.asx.com.au/asxpdf/20180705/pdf/43w9jw42n71r1c.pdf [Accessed 7th October 2018].
Brigham, E.F. and Houston, J.F. (2012). Fundamentals of financial management. USA: Cengage Learning.
Reuters (2018). Company overview of A2MXX.AX. [Online]. Available at: https://www.reuters.com/finance/stocks/companyProfile/A2MXX.AX [Accessed 7th October 2018].
The Motley Fool (2018). These were the best performing sectors in FY 2018. [Online]. Available at: https://www.fool.com.au/2018/07/02/these-were-the-best-performing-sectors-in-fy-2018/ [Accessed 7th October 2018].
Yahoo Finance (2018). The a2 Milk Company Limited (A2M.AX). [Online]. Available at: https://finance.yahoo.com/quote/A2M.AX/history?p=A2M.AX&.tdata-src=fin-srch [Accessed 7th October 2018].
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