Board Paper on FHL Proposal
Prepared by: Surendra Prasad Anil Prasad Anil Kumar Prasad Ramesh Chand Navindra Sen Pillay
Phone: (679) 9907615 Fax: (679) 8814009 Email: [email protected] Website: www.mbalbsa.com.fj
AIM & OBJECTIVES• To analyze past performance of FHL• Project future performance of FHL• Find WACC• Find value of the firm• Recommend purchase or not to purchase FHL
share
TABLE OF CONTENTS• Executive Summary• Background• Strategy Implications• Assumptions for Growth• Financial Implications• Beta Calculations• WACC• Value of Enterprise• Risk Assessment• Recommendations• Bibliography
Executive Summary
The committee was tasked to analyse the past performance of Fijian Holdings Limited and to forecast the future performance based on existing data. The value of the firm was determined in order to arrive at the firms Beta and therefore the weighted average cost of capital. This in turn enabled the committee to recommend on the purchase decision of FHL shares.
Background
1984 was the year when the Fijian Holdings Limited enterprise was established. As far as Fijian enterprises go, FHL is highly successful with a good mix of ventures. This is a fully locally owned entity with an apparently Midas touch. Fijian Holdings Limited (FHL) is an investment company. The Company, through its subsidiaries, has investments in sectors of the Fiji economy, including property, media, tourism, manufacturing, building and construction, communication, and finance and retailing. The 2010 fiscal year acquisitions include Blue lagoon Cruises and the Fijian Property trust Company limited. Of the 24 FHL investments in almost all sectors of the Fiji economy and PNG, 12 are subsidiary companies with over 50% shareholding.
Issues
Strategy Implications• MIL is an investment firm geared towards profitable projects. • The company aims to double its current 50m stock portfolio in the next 5 years. • It is strategically geared towards maintain a good balance in the sectors
invested in. • FHL provides an opportunity to attain this strategic advantage in just a single
investment as they cover a range of industrial sectors. • As a company rule, no single enterprise will be invested in by more than 10m
shares. • This is to safeguard against unfavourable impacts of the global economy on the
Pacific’s single resource export economies and to maintain portfolio diversity.
Assumptions for Growth• Income – decreasing growth up to election and increase thereafter.• Beta – calculated at an assumption that risk free rate is 3% & market rate 7.5%
and rate of return at 10%• Expenses has been assumed to have increased by 5%• Cash incomes were assumed to be 60% while 40% were to be on account.• The new business (R. Patel) of FHL would fetch highly increased income.• That 5m loan would be taken.
Financial Implications
CASHFLOW 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007
Cash (used in )/ Generated from Operations 40107.16 28661.54 20215.89 20013.38 17896.24 5802 -7334 11190 15281 19731
Net Cash Generated From (used in)/ Operating Activities 48298.49 35345.93 25985.96 26434.98 24424.66 4487 26938 -1745 25013 15585
Net Cash Generated from (used in )/ Investing Activities -13791.6 -13839.3 -13886.9 -13934.2 -8981.24 -13662 -387 8104 -46870 -11543
Net Cash (used in) /Generated from Financing Activities 3235 3235 3235 3235 3235 3235 -12059 21035 -13928 -18123
Net increase/ decrease in cash and cash equivalents 8216.4 6718.8 2795.4 3584.4 21443.6 -5940 14492 27394 -35785 -14081
Cash and cash equivalents at the begininig of the year 47638.2 40919.4 38124 34539.6 13096 19036 4544 -22850 12935 27016
Cash and Cash Equivalents at the End of the Year 55854.6 47638.2 40919.4 38124 34539.6 13096 19036 4544 -22850 12935
Income StatementIncome Statement 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007
Total Income 239325.8 221598 207100.9 201068.9 193335.5 184129 182075 213087 111435 97612
Total Expenses 199218.7 192936.5 186885 181055.5 175439.2 171657 162658 154627 92165 67871
OPERATING PROFIT 40107.16 28661.54 20215.89 20013.38 17896.24 12472 19417 58460 19270 165483
Finance (Costs)/income 536 821 1150 1484 1631.74 1478 1786 3399 5390 7958
PROFIT BEFORE INCOME TAX 39571.16 27840.54 19065.89 18529.38 16264.5 10994 17631 55061 13880 173441
Income Tax Expense 7914.232 5568.108 3813.179 3705.877 3252.9 5984 7039 8136 5945 7115
PROFIT AFTER INCOME TAX 31656.93 22272.43 15252.71 14823.51 13011.6 5010 10592 46925 7935 180556
Share of profits in associates 996 1117 1219 1379 1478 1578 2430 2763 5007 0
PROFIT FOR THE YEAR 32652.93 23389.43 16471.71 16202.51 14489.6 6588 13022 49688 12942 180556
TOTAL COMPREHENSIVE INCOME 32652.93 23389.43 16471.71 16202.51 14489.6 4816 18211 57679 12942 180556
Equity Holders of the Holding Company 11026.89 7898.611 5562.498 5471.587 4893.138 2225 8426 43502 9273 9694
Non- Controlling interest/Minority interest 21626.03 15490.82 10909.22 10730.92 9596.462 4363 4596 6186 3669 4974
Equity holders of the holding company 6635.075 4752.732 3347.052 3292.35 2944.287 979 12747 51493 0 0
Non- Controlling interest 26017.85 18636.7 13124.66 12910.16 11545.31 3837 5464 6186 0 0
32652.93 23389.43 16471.71 16202.51 14489.6 4816 18211 57679 0 0
Number of shares 30465 30465 30465 30465 30465 30465 30465
BASIC EARNINGS /SHARE 1.071818 0.767748 0.540677 0.53184 0.475615 0.216248 0.427441 1.43 0.3 0.32
Balance SheetBALANCE SHEET 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007
ASSETS
Current Assets 184864.1 171170.4 159972.4 155313 149339.4 142228 144294 129432 107122 73129
Non- current assets 210802.7 208933.7 207293.9 207634.8 208790.7 202412 184208 170468 153673 207356
Total Assets 395666.8 380104.2 367266.2 362947.7 358130.1 344640 328502 299900 260795 280485
LIABILITIES
Current Liabilities 161651.8 153180.4 145893.6 146362.1 146217.5 144417 130832 112964 109727 56378
Non- current liabilities 25129.1 27716.38 30057.99 32178.44 34097.26 32918 25652 20102 32215 55870
Total liabilities 186780.9 180896.7 175951.6 178540.5 180314.8 177335 156484 133066 141942 112248
Net Assets 208885.9 199207.4 191314.7 184407.2 177815.3 167305 172018 166834 118853 168237
SHAREHOLDERS EQUITY
Share capital 30465 30465 30465 30465 30465 30465 30465 30465 30465 30465
Reserves -629 -629 -629 -629 -629 -629 1281 -1015 -14928 66112
Proposed dividends 6530.585 4677.886 3294.343 3240.502 2897.92 2546 2296 5093 2099
Retained earnings 154138.4 132052.6 128016.1 113341 114838.7 100379 103247 97389 66949 45479
Attributable to members of the holding company 190505 166566.4 161146.4 146417.5 147572.6 132761 137289 131932 84585 142056
Non-controlling interest 18380.92 32640.99 30168.3 37989.71 30242.66 34544 34729 34902 34268 26181
Total Shareholders' equity 208885.9 199207.4 191314.7 184407.2 177815.3 167305 172018 166834 118853 168237
Share prices 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007
Common stock dividends (000) 26,018 18,637 13,125 12,910 11,545 3,837 5,464 6,186 0 0
Number shares common stock (000) 30465 30465 30465 30465 30465 30465 30465 30465 30465 30465
Earnings per common share (EPS) $ 1.07 $ 0.77 $ 0.54 $ 0.53 $ 0.48 $ 0.22 $ 0.43 $ 1.43 $ 0.30 $ 0.32
Price per common share 1 1 1 1 1 1 1 1 1 1
Share Price (Market) $ 3.38 $ 3.22 $ 3.06 $ 2.92 $ 2.78 2.90 3.22 2.79 2.16 3.50
Dividend Ratio (Dividend/#shares) 0.8540 0.6117 0.4308 0.4238 0.3790 0.1259 0.1794 0.2031 0.0000 0.0000
Dividend Ratio (Dividend/#shares) 85% 61% 43% 42% 38% 13% 18% 20% 0% 0%
Retention Rate 20% 20% 20% 20% 20% 42% 58% 86% 100% 100%
Return on equity (%) [before tax] 19% 14% 10% 10% 9% 7% 10% 33% 12% 103%
RatiosFinancial Ratios 2016 2015 2014 2013 2012 2011 2010 2009 2008
Firm liquidity
Current ratio (times) 1.14 1.12 1.10 1.06 1.02 0.98 1.10 1.15 0.98
Quick or Acid-test ratio (times) 0.94 0.90 0.87 0.84 0.80 0.76 0.87 0.92 0.77
Asset Efficiency
Accounts receivables turnover( days) 141.15 143.42 145.56 146.55 147.90 149.65 126.98 102.55 207.39
Fixed assets turnover (times) 1.14 1.06 1.00 0.97 0.93 0.91 0.99 1.25 0.73
Total assets turnover (times) 0.60 0.58 0.56 0.55 0.54 0.53 0.55 0.71 0.43
Capital Structure
Total debt ratio (%) 0.47 0.48 0.48 0.49 0.50 0.51 0.48 0.44 0.54
Times interest earned (times) 73.83 33.91 16.58 12.49 9.97 7.44 9.87 16.20 2.58
Profitability
Operating profit margin (%) 16.76% 12.93% 9.76% 9.95% 9.26% 6.77% 10.66% 27.43% 17.29%
Net profit margin (%) [before tax] 16.53% 12.56% 9.21% 9.22% 8.41% 5.97% 9.68% 25.84% 12.46%
Return on assets (%) [before tax] 8.25% 6.15% 4.48% 4.46% 4.05% 1.40% 5.54% 19.23% 4.96%
Return on equity (%) [before tax] 15.16% 11.18% 7.97% 8.04% 7.32% 2.99% 6.16% 28.13% 6.68%
Market Performance
Price-earnings ratio (times) 3.15 4.19 5.67 5.49 5.85 13.41 7.53 1.95 7.20
Market-to-value ratio (times) 1.06 1.01 0.96 0.91 0.87 0.91 1.01 0.87 0.68
Growth 3.85% 2.84% 2.02% 2.04% 1.86% 2.74% 5.95% 28.32% 11.68%
Av ROE = 10%
Ratios cont..
Ratios cont..
Ratios cont..
FHL Growth Curve
FCF and OCF ForecastFree cash Flow 2016 2015 2014 2013 2012$ $ $ $ $ $Operating cash Flow Ebit 39,571 27,841 19,066 18,529 16,264Taxes 7914 5568 3813 3706 3253Depreciation 6913 6711 6516 6326 6142Operating cash Flow 38,570 28,984 21,769 21,150 19,153Free cash Flow Operating cash Flow 38,570 28,984 21,769 21,150 19,153Change in Gross fixed Asset 1869 1640 -341 -1156 6379Change in Current Asset 13694 11198 4659 5974 7111Change in Accounts payable 787 764 500 490 480Change in Accruals 0 0 0 0 0Free cash Flow 22,220 15,382 16,951 15,842 5,183Growth Rate 8.00% 7.00% 3.00% 4.00% 5.00%FCF 26140 18665 18057 17275 7181NPV of cash Flow 17791 14240 16525 15971 6839Value of Enterprise 1192427 Vd 13983 -FV/(1+r)^n Vp Common stock value 1178444 Value Per Share $ 38.45
Beta Calculation - CAPM
Re = 10% = Average ROE
Re = Rf + β ((Erm) - Rf )
10.00% 0.03 1.55 0.075 0.03
0.03 1.55 0.045
10.0% 0.03 0.070
WACC
WACC = D (Rd)(1-Tc) + E (Re)
D+E D+E
= 20473 0.08 208886 10.00%
229359 229359
WACC = 9.82%
Value of Enterprise
V ent = 1644056 18665 18057 17275 7181
1/(1.0959)^4(1+ 0.0959)^4
(1+ 0.0959)^3 (1+ 0.0959)^2 (1+ 0.0959)^1
1.4424 1.0389 1.3162 1.201 1.0959
1192427 1139806 17966 13719 14384 6552
Risk AssessmentIdentified Risk Risk Likelihood
(H,M,L)Impact of Risk
(H,M,L)Strategy to
Manage RiskHigh reliance on Equity Finance
L L Improve balance between equity and debt
Business Risk M H KPI for marginal sales
Liquidity Risk L H Reserves are high
Legal Risk L M Maintain Firm lawyerto assess decisions
Interest rate Risk M M Broker fixed term rates
Loss of key Personnel
L H Lucrative contracts where necessary
Market Risk M M Maintain Investment diversity
Regulatory risk L M Toe the line
Political Risk M H Seek Offshore Investments/Business sTo be apolitical
RecommendationsValue of Equity of the firm ( PV of FCF - PV of Debt) $ 1,192,427,000.00
# Of Common Stock Shares 30,465,000
Earnings Per Share Based on FV of FHL $38.45
Market price of Share (Current) $3.38
Gain $35.07
Options considered: Buy 10m FHL sharesNot to buy10m FHL sharesChange thenumber of shares to be purchased
• We recommend purchase of FHL Shares for a price not exceeding $3.38.
• If the company offers around 3 million shares or more than we proceed with the purchase.
• Also recommend that upon the purchase of the shares, one of the MIL ‘s board members to be part of FHL Board.
Bibliography
• www.fijianholdings.com.fj• www.spse.com.fj• www.reservebank.gov.fj• Fijian Holdings Ltd – Past Annual Reports• Megginson, W. L. & Smart, S. B., Introduction
to Corporate Finance, 2008 edition