afa comparision between breadtalk & old chang kee
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TRANSCRIPT
GOLDEN PHOENIX PTE LTD
DETAILS
Ms Wanna Lui approached our firm with $100,000
She wanted to invest in the stock market Requirements:
Timeframe of 5 years Medium risk taker Investment return of 5% per annum
Should she buy the shares at this point of time???
IFS Part 1
BACKGROUND OF F&B INDUSTRY
Background of Industry
• The F&B sector contributed 0.7% to Singapore’s GDP in 2007
• In 2008, it comprised about 5,900 establishments an increase of 12.4% as compared to 2007.
• It employed 82,600 workers.
Operating receipts in the F&B Increased by 8.5 per cent to $5,555 millionOperating expenditure Increased by 8.6% to $5,335 millionOperating surplus Increased by 8.2% to $393 millionValue added Increased by 7.7% to $1,910 millionProfitability ratio Remained at 7.1 per cent
Background of Industry
Background of Industry
• F&B industry is further categorize into restaurants, fast food outlets, food caterers and others.
• Old Chang Kee and BreadTalk will be under others.
Background of Industry
Establishments by group
Background of Industry
Employment by group
Background of IndustryProfitability ratio
Old Chang KeeSince 1956
Sells signature curry puffs & 25 other food products
Sales are on a takeaway basis
Pie Kia Shop retail outlets offer variety of pies
Take 5 dine-in retail outlets carry a range of local delights
Delivery and catering services are also available to the central business districts.
6 Pie Kia Shop outlets 70 outlets in Singapore
To deliver superior quality hot finger food and ready meals at a value-for money price positioning; in a clean, and customer friendly retail environment.
Listed in the SGX on 16 January 2008 Limited liability company Incorporated in Singapore Principal activity of the Company is investment
holding
1. Liquidity (Sales)2. Product quality3. Production4. Distribution
5. Marketing6. Human Resource7. R&D8. Strategic Location
Collects mostly cash payments
Popular demand The food items are certified halal and hence it caters to
everyone HACCP certification for the manufacturing of Curry puff
and implemented a quality assurance program
Manufactured in a factory in Woodlands Fresh frozen food products are delivered
daily to the outlets
Always have sufficient stocks in hand Freshly fried at the individual outlets
Creative Products Innovative names. E.g. Yan K8 Constantly introduces more products Wide range of products
Creative advertising E.g. Curry puff said to be ‘pregnant’
Delivery service For special occasions and/or bulk orders
Efficient and enough workers to serve the high human flow at individual outlets
Introduces flexi-work hours/ arrangement for mature homemakers
Production Staff Replace manual labor with automation to
reduce physical strain Simplify work processes and
improve productivity
Food Retailing Staff Train staff in standard work processes Training in soft skills such as customer
service and interacting with customers
Brainstorms and tests the consumer market Source for ways to better the taste their
quality ingredients that go into their curry puffs
Installed a delivery system software
The Group has 70 outlets in Singapore They are located in shopping malls, petrol
stations and outdoor kiosks The outlets are strategic located to enhance
their distribution channel
1. Product quality2. Risk management committee3. Production4. Marketing5. Foreign currency risk
Very risky to have only one factory for the production
No risk management committee
Not much offers going on to push sales
Fried foods may not be appealing to the health conscious citizens.
Introduce new but similar types. E.g. onsticks Ready made frozen curry puffs
Foreign currency risks The Group does not have a formal hedging policy About 34% of the Group’s purchases are
denominated in foreign currencies Hence they are exposed to foreign currency risk
where if it is not monitor well, it will cause the company to lose money
However, it is monitored on an on-going basis to keep the net exposure to an acceptable level
1. Political and regulatory environment2. Technology3. Demographics4. Sociological5. Future Development of Singapore
The corporate income tax rate will be reduced from 18% to 17% with effect from Year of Assessment 2010.
Company pays lesser tax and hence result in more savings for other investments or have better cash flow.
The F&B industry is characterized by continuing improvements of food quality and services which result in many new products introduced.
Old Chang Kee have to constantly introduce new food items and incorporate technology to improve customer services and demand.
In this case, Old chang kee have creative products and advertising, HR and R&D department to keep up with the trends and improve customer services to meet the demand of consumers.
Therefore the technology is sufficient to meet the demand.
The price range is affordable (i.e. from $1 to $2)
Hence it is an opportunity for Old Chang Kee to cater to everyone needs.
In a fast pace society, a 'grab and go' service is convenient to the consumers
Popular among all age groups
A touch of Singapore flavor Attracts both tourists and Singaporeans
Integrated Resorts The two integrated resorts is going to open in
2009 and 2010 Hence provides opportunities as this will
boost their sales due to the increase tourists
1. Economic2. Political and regulatory environment3. Other competitor factors
The food items are considered as snacks and hence, not a necessity.
In times of financial crisis, consumers may choose not to purchase these food items.
Foreign currency risks Currency risk arises from the change in price of one
currency against another. There is uncertainty in the fluctuation in the
exchange rates. The group did not have a formal hedging policy
hence they face foreign currency risk which is a threat.
Job Credit Scheme It allows businesses to receive a cash grant based
on the CPF contributions they have made for their existing employees.
It provides a significant incentive for businesses to retain existing workers, and where their business warrants, to employ new ones.
The job scheme will only be available till 2010. Therefore, the Old Chang Kee will have to find ways to manage their cash flow.
The F&B industry is a highly competitive environment.
Other food chains that provide “grab and go” service such as “doughnut factory, breadtalk etc."
Main Competitor
• BreadTalk Group Limited is incorporated in Singapore
• Founded in 2000 and was listed in SGX in 2003• The principal activity of the Company is
investment holding• Expanded to 12 countries, with more than 241
bakery outlets, 29 food courts and 8 restaurant.
StrengthsStrengths Constantly introduces new products Signature breads- eg. Chicken flosss Covers different food businesses – Bakery, Food
atrium, and Restaurant ‘See-through’ kitchens showcasing the expertise of
their bakers Expended business overseas across 15 countries BreadTalk outlets located at strategic locations
which have high customer traffic flow
WeaknessesWeaknesses Products are priced higher than products of
other bakeries The wide selection of products is only limited
to bread, and cakes- ie. few selection of pastries
Food items are not Halal thus Muslim people are unable to buy them
These common food chains provide “grab and go” service and affordable price as well.
IFS Part 2
Revenue
• Old Chang Kee (‘000) (Taken from F/S)Revenue (2008) = 212,249Revenue (2007) = 156,610
• Breadtalk (‘000) (Taken from F/S)Revenue (2008) = 48,437Revenue (2007) = 40,548
Old Chang Kee- Chairman’s Statement
OLD CHANG KEE (‘000) BREADTALK (‘000)Year Revenue2008 48,437 212,2492007 40,548 156,610
Difference 7,889 55,639
• Increase in revenue is due to 13 newly opened outlets in 2008 and higher revenue achieved in existing outlets• Main increase is due to outlet sales which have shown an increase of 19.67% despite the decrease in export sales• Thus increase in sales is mainly due to outlet sales
Old Chang
Kee
Analysis
• Increase in revenue of 35.53% is due to good performance by the 3 sectors of business which BreadTalk is in, which are the bakery, food atrium and restaurant business
Bakery business • Revenue contributor of 44.7% •New outlets set up across Asia (27 new owned bakeries, 44 franchised outlets, 8 were in Singapore. )
•Food Atrium • Contributed 32.6% of revenue• The Singapore food atrium: contributed 31.8% (21.3 million / 69.2 million) consolidation of revenue from MWA Pte Ltd, (50% equity stake in) • Suntec City Singapore had a full year contribution
BreadTalk
Analysis
The PRC and Hong Kong registered a revenue of 69.2% for the Food Atrium business sector (47.9 million / 69.2 million). This was due to the recently upgraded Shanghai Metro City food atrium and an additional 3 food atria opened in Hong Kong. Restaurant business • Contributed 15.2% of revenue• Higher store sales from Ding Tai Fung restaurants • Revenue consolidation from Cosmopolitan Café acquired in December 2007$$$
BreadTalk
Analysis
Comparison• Breadtalk has a larger increase in revenue as compared to OCK because they a larger expansion of 44 franchise outlets and 27 owned bakeries while OCK has only 13 new outlets•Breadtalk is covering a more diversified area including Bakeries, Food Atrium and Restaurants in the F&B industry while OCK place the main focus on ‘grab and go services’ and a few restaurants•Furthermore, OCK has a drop in export sales of $46,000
BreadTalk
Gross profit margin workings• Old Chang Kee GP margin (2008) = (115,446/ 212,249) X100 = 54.39% point GP margin (2007) = (86,747/ 156,610) X100 = 55.39% point• BreadtalkGP margin (2008) = (28,875/ 48,437) X100 = 59.61% point GP margin (2007) = (23,741/ 40,548) X100 = 58.55% point
Gross Profit/Sales
OLD CHANG KEE BREADTALK
Year Gross Profit Margin
2008 59.61% point 54.39% point
2007 58.55% point 55.39% point
Difference 1.06% point 1.00% point
• Increase in GP margin is due to a large improvement in product mix• Increase in price of flour by 131% due to a shortage of flour in October 2007• As flour is not the main ingredient, Old Chang Kee is able to cover the costs•This could be the reason why the increase in Gross Profit Margin was not significant
Analysis
Old Chang
Kee
• Measures the percentage of sales that is converted to profits to the company.
BreadTalk
• As Breadtalk is heavily dependent on flour for the production of breads, the increase in the price of flour has caused GP margin to decrease
Analysis
Comparison
• Old Chang Kee has shown a higher GP margin as compared to Breadtalk• As Old Chang Kee is not as heavily dependent on flour as Breadtalk, it is able to maintain the GP margin and keep cost of sales down
Old Chang
Kee
Net Profit Margin workings• Old Chang KeeNet profit margin (2008) = (3,588/48,437 ) X 100
= 7.41% point Net profit margin (2007) = (2,963/40,548) X 100
= 7.31% point
• BreadtalkNet profit margin (2008) = (8,427/212,249) X100
= 3.97% pointNet profit margin (2007) = (8,438/156,610) X100
= 5.39% point
Net Profit Margin = Net Profits / Sales
Old Chang Kee - Analysis
One Off Expenses Initial Public Offering
(S$638,000: 2008 ; S$319,000: 2007) Pre-Opening Expenses
(S$716,000 in 2008)
Incurred only in one particular financial year, therefore they are added back/ deducted to/from the Net Profit.
Breadtalk- Analysis
One off expenses:One-off compensation from landlord: S$326,000
in 2008 Pre-operating expenses of S$395,000 in 2008
Incurred only in one particular financial year, therefore they are added back/ deducted to/from the Net Profit.
OLD CHANG KEE BREADTALKYear Net Profit Margin2008 7.41% point* 3.97% point*2007 7.31% point* 5.39% point
Difference 0.10% point 1.42% point
* Figure is derived after adding back One Off Expenses.
• Measures how profitable a company is after taxes
Old Chang
Kee
• Increase of 0.1 percentage point due to less loss in exchange differences and substantial increase of income from franchises• there was an increase in the depreciation expenses due to acquiring more assets. • however, the overall increase in revenue after adding back the one-off expenses offset the depreciation expenses
Analysis
BreadTalk
• Decrease of 1.42 percentage point due to increase in depreciation expense from acquisition of new plant and equipment• Increase in distribution and selling expenses, employee benefits and fix portion of operating expenses
* Figure is derived after adding back One Off Expenses.
Analysis
Comparison
Old Chang
Kee
• Though depreciation expenses increase, franchise income and some expenses had significantly dropped• Old Chang Kee saw an increase in their franchise income, which indicates that more people are willing to be their franchise• there was a huge decrease in exchange differences which shows that Old Chang Kee has become more efficient in hedging against forex losses.
Comparison
BreadTalk
• Expansion plans have caused the overall gross profit margin to drop• Expenses have significantly increased, presumably due to more outlets and thus more overhead costs• Decrease in Gross profit margin due to the flour hike has also impacted their revenue
Adequacy and Sustainability? Franchise in Indonesia and Philippines Currently in early stages of development Able to generate significant income in future when they are more stable. New restaurant in Chengdu, October 2008 China is a huge market with a lot of room for expansion.Able to generate significant income for Old Chang Kee
In times of financial crisis, it can be seen that Old Chang Kee is still able to generate profits from their operation, thus it shows that Old Chang Kee's operation is not waivered even by adverse conditions, it shows great prospect for Old Chang Kee, as they will be able to perform even better in good times.
ADEQUATE & SUSTAINABLE!
Venturing overseas Reasonable steps taken to test the marketNot being too anxious Reduces losses if overseas venture turns out to be unsuccessful.
If there ever comes a time where Singapore is badly affected by economy downturn and the group is unable to generate any operating profit from operations in Singapore, Old Chang Kee need not fear, as they would still have operating profits from their overseas outlets which are not as affected, sustaining the difficult period.
Adequacy and Sustainability?
ADEQUATE & SUSTAINABLE!
Investment & Solvency Ratios
• Fixed Asset Ratio• Debt-Equity Ratio• Interest Coverage Ratio
Fixed Asset Turnover Ratio Workings
• Old Chang Kee (‘000)FA Turnover Ratio 2008 = 48,437/ (11,223+ 1,275)
= 3.88FA Turnover Ratio 2007 = 40,548 / (9,361 + 820)
= 3.98• Breadtalk (‘000)
FA Turnover Ratio 2008 = 212,429 / 58,156 = 3.64
FA Turnover Ratio 2007 = 156,610 / 44,893 = 3.48
Sales/Net Fixed Assets
Old Chang Kee
• Insert print screen
Breadtalk
OLD CHANG KEE BREADTALKYear FA Turnover Ratio2008 3.88 3.642007 3.98 3.48
Difference 0.10 0.16
Old Chang
Kee
• Indicates amount of sales generated for every dollar invested in fixed asset.
• This means that for every dollar invested in fixed assets, $3.88 and $3.98 of sales can be generated for 2008 and 2007 respectively• Slight decrease by 0.10• Increase in investments in fixed assets• The purchase of new assets can be used to generate future income
Analysis
• This means that for every dollar invested in fixed assets, $3.65 and $3.48 of sales can be generated for 2008 and 2007 respectively• Slight increase by 0.16• Mainly due to the huge increase in revenue
BreadTalk
Analysis
Old Chang
Kee
• Old Chang Kee is slightly higher than Breadtalk by 0.24
• Old Chang Kee is investing enough to get as much interest as Breadtalk
• Old Chang Kee can expect higher sales in future periods due to the increase in investment of fixed assets
Comparison
Are the investments sufficient to safeguard future profitability?
• Generally high fixed asset turnover ratio that is above 3 which shows a high degree efficiency in asset utilization.
• Maintaining operations in newly tapped markets – China, Philippines & Indonesia.
• Revenue streams are varied: Island wide outlets, overseas outlets and restaurants.
YES
Debt-Equity Ratio Workings• Old Chang Kee (‘000)
Debt-equity Ratio 2008 = (6,712 + 2,032)/ 16,010 = 0.55
Debt-equity Ratio 2007 = (6,053+2,266) / 9,468 = 0.88
• Breadtalk (‘000)Debt-equity Ratio 2008 = (82,866+8,158)/ 56,133
= 1.62Debt-equity Ratio 2007 = (62,996 + 5,428)/ 47,266
= 1.44
Total Liabilities / Total Equity
Breadtalk Ltd The Group 2008 2007 (‘000) (‘000)
Breadtalk (Continued)2008(‘000)
2007(‘000)
The Group
OLD CHANG KEE BREADTALKYear Debt-Equity Ratio2008 0.55 1.622007 0.88 1.44
Difference 0.33 0.18
Old Chang
Kee
BreadTalk
• Decrease by 0.33• Uses more equity over debt, increase cost of borrowing• Due to the issuance of 25 million shares
• It indicates what proportion of equity and debt the company is using to finance its assets and determines solvency through its financial structure.
• Increase by 0.18• Uses more debt over equity• May face a certain level of insolvency
Analysis
ComparisonOld
Chang Kee
• Old Chang Kee adopted a conservative financing strategy, indicating a lower risk of insolvency.
• Using BreadTalk as a base line, Old Chang Kee debt-equity ratio should have maintained at above 1, since debt financing is a cheaper way of financing.
Interest Coverage Ratio Workings• Old Chang Kee (‘000)
Interest Coverage Ratio 2008 =(3,092+638+716+183)/ 183 = 25.30
Interest Coverage Ratio 2007 = (3,487+ 319+ 67)/ 67 = 57.81
• Breadtalk (‘000)Interest Coverage Ratio 2008 = (12,001+326+395+851) / 851
= 15.95Interest Coverage Ratio 2007 = (11,228+ 908) / 908
= 13.36
(Net profit before tax + Interest+ One off expenses*) / Interest
Old Chang Kee (One Off Expenses)
One Off Expenses
One Off Expenses
Old Chang
Kee
OLD CHANG KEE BREADTALKYear Interest Coverage Ratio2008 25.30 15.952007 57.81 13.36
Difference 32.51 2.59
• Steep decrease by 32.51• Due to increase in interest expense and one off expenses incurred in both financial years• In 2008, Old Chang Kee was in the process of getting listed, opened 13 new outlets and a restaurant in Chengdu. Hence the company has to borrow money from the investors. Thus this lead to the increase in interest expense which in turn decrease the interest coverage ratio.
• It measures ability to make contractual payments and shows how many times company can pay interest from current earnings.
Analysis
•Slight increase by 2.59• Due to increase in earnings before interest and tax due to the increase in revenue generated and the add back of one-off expenses.• Decrease in interest expenses due to the decrease of payment of term loans.
BreadTalk
Analysis
Comparison
Old Chang
Kee
Despite the decrease, Old Chang Kee’s interest coverage was still slightly higher than Breadtalk. Both are still able to meet contractual interest payments as their interest coverage ratio is high.
Debt Equity VS Interest CoverageDebt-Equity Ratio (‘08) Interest Coverage (‘08)
OLD CHANG KEE
0.55 25.30
BREADTALK 1.62 15.95
• Uses more debt than equity as it is a much cheaper way to finance the company’s operation. • They do not have to worry about insolvency as they have high interest coverage.•Able to pay its interests when they are due.
Comparing debt-equity against interest coverage….
BreadTalk
Debt Equity VS Interest Coverage
•They rely heavily on equity financing which lowers the risk of insolvency but it is a more expensive way to finance the company's operation. • However, the company’s interest coverage is high and yet they did not use more debt financing, which is a cheaper way to finance its operation.
Comparing debt-equity against interest coverage….
Old Chang
Kee
Debt-Equity Ratio (‘08) Interest Coverage (‘08)OLD CHANG
KEE0.55 25.30
BREADTALK 1.62 15.95
Are the finances of Old Chang Kee sensibly and effectively structured?
• Old Chang Kee has portrayed inefficiency in managing their funds.
• The capital structure adopted for the company’s operation may be too conservative.
• The cost of borrowing is higher for equity financing as dividends have to be given out to the shareholders.
• Did not consider using debt financing despite high interest coverage.
NO
IFS PART 3
Liquidity ratios
Net working capital workings• Old Chang Kee (‘000)NWC 2008 = 12,031 – 6,712
= 5,319NWC 2007 = 7,351 – 6,053 = 1,298• Breadtalk (‘000)NWC 2008 = 77,348 – 82,866 = -5,518NWC 2007 = 59,089 – 62,996 = -3,907
Current assets – Current liabilities
OLD CHANG KEE
BREADTALK 2008 2007
Measure of both a company's efficiency and its short-term financial health
OLD CHANG KEE (‘000) BREADTALK (‘000)Year Net Working Capital2008 5,319 -5,518 2007 1,298 -3,907
Difference 4,021 1,611
Old Chang
Kee
BreadTalks
• Able to pay off short term liabilities with its current assets
• Unable to pay off its creditors in short-term • The increase in liabilities exceed the increase in assets in 2008
Analysis
Comparison
Old Chang
Kee
• Old Chang Kee shows a positive increase of NWC while Breadtalk shows a negative decrease of NWC
• Old Chang Kee is more stable as compared to Breadtalk as net assets is sufficient to cover current liabilities
• There will be lesser risk of insolvency as Old Chang Kee is able to pay off its debts. Breadtalk might face a higher risk of insolvency.
Current ratio• Old Chang KeeCurrent ratio (2008) = 12,031/ 6,712
= 1.79Current ratio (2007) = 7,351/ 6,053 = 1.21• Breadtalk Current ratio (2008) = 77,348/ 82,866 = 0.93Current ratio (2007) = 59,089/ 62,996 = 0.94
Current assets /Current liabilities
Quick ratio• Old Chang KeeQuick ratio (2008) = (12,031-749-449)/ 6,712
= 1.61Quick ratio (2007) = (7,351-534-577)/ 6,053 = 1.03• Breadtalk Quick ratio (2008) = (77,348-3,925-2,558)/ 82,866 = 0.86Quick ratio (2007) = (59,089-2,506-1,798)/ 62,996 = 0.87
(Current assets –inventories-prepayments)/Current liabilities
OLD CHANG KEE
BREADTALK 2008 2007
• Current ratio measures a company's ability to pay short-term obligations
• Quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets. It is also known as acid test.
OLD CHANG KEE BREADTALK
Year Current ratio
2008 1.79 0.93
2007 1.21 0.94
Difference 0.58 0.01
OLD CHANG KEE BREADTALK
Year Quick ratio
2008 1.61 0.86
2007 1.03 0.87
Difference 0.58 0.01
Old Chang
Kee
• Current and quick ratio is maintained above 1 and has shown an increase• Due to the increase of cash and bank balances by 95.57% [(9,569-4893) / 4893 *100] • Suggest that OCK is able to pay off its debts when they fall due • Current assets readily sufficient and convertible to cash to pay off current liabilities• No risk of insolvency in the short period
A current and quick ratio of 1 to 2 means that the company is in a good financial position and is able to meet short-term obligations. Similar to current ratio, quick ratio shows a more accurate of firm’s liquidity by deducting the less liquid assets such as inventories. Prepayments is also deducted as it is a payment made in advance.
Analysis
BreadTalk
Analysis
• Current and quick ratio is below 1 and has shown an decrease• Even though both the current assets and current liabilities increased by 30.90% and 31.54% respectively, the amount of current assets are not enough to cover the current liabilities • Usage of debt financing is more than equity financing which results in higher liabilities (IFS PART 2)• May not be able to pay off its obligations when they fall due• Might face insolvency issues
Comparison
Old Chang
Kee
• Old Chang Kee is in a better financial position as compared to its industry, Breadtalk• Old Chang Kee is able to pay off its current liabilities with the current assets when they fall due while Breadtalk’s current assets are not enough to cover the current liabilities• Old Chang Kee will not face any insolvency issues in the short-term but Breadtalk is in a risky position and may face insolvency issues
Accounts receivables turnover workings
• Old Chang Kee AR turnover (2008) = 48,437/ [(232+250)/2] = 200.98AR turnover (2007) = 40,548/ [(232+250)/2] = 168.25• BreadtalkAR turnover (2008) = 212,249/ [(4,761+3,027)/2] = 54.51AR turnover (2007) = 156,610/ [(4,761+3,027)/2] = 40.22
Sales/Average debtors
Average collection period workings• Old Chang Kee ACP (2008) = 366/ 200.98
= 1.82ACP (2007) = 365/ 168.25
= 2.17• BreadtalkACP (2008) = 366/ 54.51
= 6.71ACP (2007) = 365/ 40.22
= 9.08
No. of days in a year/AR Turnover
OLD CHANG KEE
BREADTALK
• Accounts receivable turnover measure a firm's effectiveness in extending credit as well as collecting debts
• Average collection period is the number of days a business takes to collect its debts
OLD CHANG KEE BREADTALK
Year Accounts receivable turnover
2008 200.98 54.51
2007 168.25 40.22
Difference 32.73 14.29
OLD CHANG KEE BREADTALK
Year Average collection period
2008 1.82 6.71
2007 2.17 9.08
Difference 0.35 2.37
Old Chang
Kee
• The high AR turnover is due to increase in sales by 19.46%• OCK operates on a cash sales basis rather than credit sales which leads to high sales and low accounts receivables
• An increase may imply that Breadtalk’s extension of credit and collection of AR is efficient
Accounts receivable turnover can be further illustrated by calculating average collection period. The higher the AR turnover, the lower the average collection period is.
Analysis
BreadTalk
Comparison
Old Chang
Kee
• Both companies are doing well as they have shown an increase in AR turnover and they take lesser days to collect their debts• The gap in ratio is due to the different way both companies function• Breadtalk has other subsidiaries such as restaurants which will result in a higher accounts receivable turnover as compared to OCK which only functions on mainly cash sales basis
BreadTalk
Inventory turnover workings• Old Chang KeeInventory turnover (2008) = 19,562 /[(749+543)/2]
= 30.49Inventory turnover (2007) = 16,807 /[(749+543)/2] = 26.20• Breadtalk Inventory turnover (2008) = 96,803 /[(3,925+2,506)/2]
= 30.11Inventory turnover (2007) = 69,863 /[(3,925+2,506)/2]
= 21.73
Cost Of Goods Sold /Average Inventory
Days to sell inventories workings• Old Chang KeeNo. of days (2008) = 366/ 30.49
= 12.00No. of days (2007) = 365/ 26.20
= 13.93• Breadtalk No. of days (2008) = 366/ 30.11
= 12.16No. of days (2007) = 365/ 21.73
= 16.80
No. of days in a year/Inventory Turnover
OLD CHANG KEE
BREADTALK
• Inventory turnover is the number of times a company's inventory is sold and replaced over a period
OLD CHANG KEE BREADTALK
Year Inventory turnover
2008 30.49 30.11
2007 26.20 21.73
Difference 4.29 8.38
OLD CHANG KEE BREADTALK
Year No. of days to sell inventories
2008 12.00 12.16
2007 13.93 16.80
Difference 1.93 4.64
Old Chang
Kee
• The inventory turnover ratio for OCK is maintained at almost the similar level as its industry, Breadtalk• Both companies has shown efficiency in inventory management as inventory turnover has increased and they took lesser days to sell the inventories• Since both companies shows a relatively high ratio, stock obsolescence would not be a concern• However, both companies have to keep sufficient stocks to ensure that it is enough to keep sales going
Inventory turnover can be further illustrated by calculating number of days to sell inventories. The higher the inventory turnover, the lesser days it takes to sell off the inventories.
Analysis
BreadTalk
Is Old Chang Kee sustainable?
• Despite the economic downturn in 2008, sales have increased.• In the future periods, when the economic stabilizes, sales will
continue to increase.• As mentioned in IFS part 1, OCK has just started business in
other countries such as Cheng Du, Philippines and Indonesia. These outlets will generate more future income.
• The increase in sales will result in generating more cash and thus liquidity ratios will also increase.
• This means that OCK will be able to pay off its debts when they fall due.
YES
Stock market ratios
Earnings Per Share
• Old Chang Kee (Taken from F/S)EPS(2008) = 2.42EPS(2007) = 3.87
• Breadtalk (Taken from F/S)EPS(2008) = 3.31EPS(2007) = 3.23
EPS= Net Earnings / Outstanding Shares
Price to earnings ratio
• Old Chang KeeP/E ratio (2008)= 0.23/0.0242= 9.50P/E ratio (2007)= 0.23/ 0.0387= 5.94
• Breadtalk P/E ratio (2008)= 0.69/ 0.0033= 20.84P/E ratio (2007)= 0.69/ 0.0323= 21.36
P/E ratio= Market value per share/ EPS
OLD CHANG KEE
BREADTALK
2008
2008
2007
2007
OLD CHANG KEE (‘000) BREADTALK (‘000)
Year Earnings per Share
2008 2.42 3.31
2007 3.87 3.23
Difference -1.45 0.08
• Earnings per share measures the number of dollars earned on each outstanding ordinary share
• Price to earning ratio measures the amount that investors are willing to pay for each dollar of the firm’s earnings
OLD CHANG KEE (‘000) BREADTALK (‘000)
Year Price to Earning ratio
2008 9.50 20.84
2007 5.94 21.36
Difference 3.56 -0.52
Earnings per share and Price to Earning ratio
Old Chang
Kee
• A huge decrease of 1.45 was due to the issuance of 25 million shares after the IPO. (initial Public Offering)• An increase of 3.56 in the P/E ratio indicates investors confidence of future growth for the company• Shows that investors of the market are optimistic about Old Chang Kee’s business and are buying into that idea
However, the decrease of 1.45 in Old Chang Kee’s EPS is not properly justified.
Analysis
BreadTalk
• A slight increase of 0.08 due to the increase of net earnings in 2008• A decrease of 0.52 in the P/E ratio shows pessimism of investors that it may be risky• This may probably be due to the flour hike, which has increased many times in the span of 2008• This significantly reduces investor’s confidence and they see this rising food prices to affect Breadtalk badly
Earnings per share and Price to Earning ratio Analysis
Why is it not justified? • There was an actual increase in net income but it is not
reflected as the issuance of 25 million shares diluted the profit for each shares.
• There is a timing difference between the issuance of shares after the year end and the profits generated for the year.
• This capital injection from the issuance of shares was not used to generate the profits for the year 2008.
• Thus, with the additional capital injection for future expansion plans, they should be generating more profits which means more promise of increase in their EPS in subsequent years.
Comparison
Old Chang
Kee
• EPS ratio of Breadtalk is higher than Old Chang Kee• However, there is an increase of P/E ratio for Old Chang Kee while a decrease for Breadtalk • Capital obtained from the IPO can be used for expansion plans which in turn will generate more profits for the company
Dividend Yield
• Old Chang Kee Dividend Yield (2008) = (0+0.0005)/0.23= 2.17%Dividend Yield (2007) = (1+0)/0.23= 434.8%
• Breadtalk Dividend Yield (2008) = (0+0.1)/0.69= 1.45%Dividend Yield (2007) = (0+0.55)/0.69= 79.7%
Dividend Yield= Annual dividends per share/ price per share
OLD CHANG KEE
BREADTALK
OLD CHANG KEE (‘000) BREADTALK (‘000)
Year Dividend Yield
2008 2.17% 1.45%
2007 434.8% 79.7%
Difference -432.63% -78.25%
• Dividend yield is a measure of how much cash flow in return for every dollar invested in an equity position
Old Chang
Kee
BreadTalk
• Huge decrease in the dividend yield of 432.63 percentage point• Reason due to paying dividends to family shareholders before getting listed
• Huge decrease in the dividend yield of 78.25 percentage point• Reason due to anticipation of cash flow difficulties in the future period and hence paying a higher dividend now
Analysis
Comparison
Old Chang
Kee
• Old Chang Kee is financially more stable than Breadtalk. Payment of• Old Chang Kee also has a much higher dividend yield compared to Breadtalk in both 2007 and 2008.• More attractive since higher dividend yield would means more return at the year end of the investment.
Net asset backing per share
• Old Chang Kee NAT (2008) = 16,010,000/93,400,000=0.1714
NAT (2007) = 9,468,000/68,400,000=0.1384
• Breadtalk NAT (2008) = 56,133,000/234,911,034=0.2390
NAT (2007) = 47,266,000/234,911,034=0.2012
NAT= Shareholder’s equity/ No. of ordinary shares
Price to Book ratio
• Old Chang Kee P/B ratio (2008) = 0.23/0.1714=1.3419
P/B ratio (2007) = 0.23/0.1384= 1.6618
• Breadtalk P/B ratio (2008) = 0.69/0.2390=2.8870
P/B ratio (2007) = 0.69/0.2012=3.4294
P/B ratio= Market value of share/ Net asset backing per share
OLD CHANG KEE
BREADTALK
2008
2008
2007
2007
OLD CHANG KEE
BREADTALK
OLD CHANG KEE (‘000) BREADTALK (‘000)
Year Net Asset backing ratio
2008 0.1714 0.2390
2007 0.1384 0.2012
Difference 0.0330 0.0378
• Net asset backing ratio is a measure of the value of assets backing each share
• Price to book ratio measures the stock’s market value to its book value
OLD CHANG KEE (‘000) BREADTALK (‘000)
Year Price to Book ratio
2008 1.3419 2.8870
2007 1.6618 3.4294
Difference -0.3200 -0.5424
Net asset backing per share and Price to Book ratio
Old Chang
Kee
• Increase of net asset backing per share 0.033 due to more capital injection from the IPO• Decrease in P/B ratio of 0.32 to 1.3419• The drop shows that the company is investing in more assets in order to be ready for future expansion plans of the company.
Analysis
BreadTalk
• Increase of net asset backing per share of 0.0378 due to increase of profits in 2008• Decrease in P/B ratio of 0.54 to 2.8870• This is probably due to losing confidence of investors in Breadtalk’s foreseeable future due to the flour hike.
Comparison: The Net asset backing for Breadtalk is slightly more due to it having larger operations than Old Chang Kee. Overall , the ratio shows both companies are backing its shares with more assets and also fair as both also seen an increase
Net asset backing per share and Price to Book ratio Analysis
Net asset backing per share and Price to Book ratio
Old Chang
Kee
• Breadtalk has higher coverage of shares by assets.• This means that Breadtalk is able to pay more back to its investors compared to Old Chang Kee if they went into liquidation• This factor is not very important as the likelihood is low and more relevant to look at the P/B ratio of each company.• P/B ratio of Old Chang Kee is much lower than Breadtalk.• Indication that Old Chang Kee may be underrated and Breadtalk an overrated investment • Old Chang Kee’s investment is not as overpriced compared to Breadtalk’s
Is the stock price attractive?
• Although there is a drop in Old Chang Kee’s EPS ratio, there is future growth expected that will increase the price of EPS using the money from the IPO
• The dividend yield of Old Chang Kee is significantly higher than Breadtalk’s which makes it much more attractive
• Net asset backing ratio is roughly the same comparing with Breadtalk’s
• However, the P/B ratio is significantly lower compared to Breadtalk
• Thus, Breadtalk may seemed to be overpriced and not value for money
• This makes it a CHEAP investment to buy the stocks in Old Chang Kee
YES
ConclusionStrength
• Reputable household brand and innovative products (IFS part 1)
• Decline in fixed assets turnover due to more assets (IFS part 2)
• Potential growth of OCK in other countries (IFS part 2)
• Positive outlook of liquidity ratios (IFS part 3)
• Positive P/E ratio indicates more growth prospects (IFS part 3)
Weakness• No adoption of foreign
currency hedging (IFS part 1)
• Over dependence on one factory for food production (IFS part 2)
• Uses more equity ratio than debt ratio (IFS part 3)
MORE STRENGTHS THAN WEAKNESS
Old Chang Kee’s dividend payout
RecommendationCalculation
Expected returned per annum = $5,0005 years expected return = $25,000Share price = $0.23Number of shares Wanna Lui can buy = 434,782 shares434,782 shares = 434 lots (1 lot = 1,000 shares) Dividend payout = no. of shares brought x
amount of dividend declared = 434,000 shares x $0.005 = $2,170
Recommendation
• The low dividend payout is due to the issuance of 25,000,000 shares as the company has just been listed
• Dividend payout out will definitely increase in the future periods and there is a possibility that $25,000 can be achieved in 5 years
• Ms Wanna Lui might want to grab the opportunity to sell off the shares in the near future to earn profits when the share price increase
• Investment in OCK will be much more worthwhile than investing in the bank which pays a much lower interest
• Therefore, Ms Wanna Lui should invest in OCK!
Disclaimer
Limitations• No breakdown of credit sales• Trend analysis is inaccurate
(comparison between 2007 and 2008 but not the previous years)
• Different characteristics of competitor (Breadtalk sells bread but OCK sells fried food)
• Different accounting methods to account for inventories (FIFO method for OCK and weighted average method for Breadtalk)
Assumptions• Total sales is used to
compute AR turnover • Share price is taken from
previous close, not updated to current date
• Adding back of one-off expenses
END
Citations
• Recent F&B Trends & Future Developments . (2009). Retrieved (2010, January 24) from http://www.business.gov.sg/EN/Industries/FoodNBeverage/StatisticsNTrends/FactsFiguresNTrends/fnb_overview_trends.htm
• Currency risk. (2009). Retrieved (2010, January 24) from http://en.wikipedia.org/wiki/Currency_risk
• BreadTalk Group Limited. (2008). Annual Report. Singapore: Author.• Debt/Equity Ratio. Retrieved (2010, January 28) from
http://www.investopedia.com/terms/d/debtequityratio.asp• Interest Coverage Ratio. Retrieved (2010, January 28) from
http://www.investopedia.com/terms/i/interestcoverageratio.asp• Asset turnover ratio. Retrieved (2010, January 28) from
http://www.businessdictionary.com/definition/asset-turnover-ratio.html
• http://www.wildsingapore.com/news/20070910/071021-1.htm
Citations
Citations• Investopedia. (2010). Current ratio. Retrieved (2010, January 19) from
http://www.investopedia.com/terms/c/currentratio.asp• Investopedia. (2010). Quick ratio. Retrieved (2010, January 19) from
http://www.investopedia.com/terms/q/quickratio.asp• Investopedia. (2010). Working capital. Retrieved (2010, January 19) from
http://www.investopedia.com/terms/w/workingcapital.asp• Investopedia. (2010). Receivables turnover ratio. Retrieved (2010, January
19) from http://www.investopedia.com/terms/r/receivableturnoverratio.asp
• Investopedia. (2010). Inventory turnover . Retrieved (2010, January 19) from http://www.investopedia.com/university/ratios/inventoryturnover.asp