Analysis Of Securities And Credit Aspects Of Billabong International Ltd

Introduction to Billabong International Ltd

Question:

Case study on Billabong International Ltd’s.
 

Billabong International Ltd’s (BBL) is a listed company based in Australia. Its main activities relating to business is to distribute, market, retail and wholesale eye wears, wetsuits and clothing.. It is doing business in more than 100 countries and has more than 11000 stores all over the world. It has almost 6000 employees (Whelan, Woodhead and Cliff 2014). Major brands of Billabong are Von Zipper, Kustom, Sector 9, and Xcel. It was founded in the year 1973 in the gold coast of Australia. At beginning, it used to sell products locally, in the 80s it entered into world market and in 90s; it grew at an extraordinary rate.

In this assignment, security market analysis, credit analysis and distress analysis will be made to understand the current and future prospects of Billabong.

In this section, a detailed analysis of Securities and credit aspects of Billabong International Ltd will be analyzed. Distress prediction will be done based on financial statement analysis and ratio derived from it, based on which recommendation will be given.

In this section, analysis of Billabong International Ltd’s tradable securities will be done and their market value will be determined, which will examine the risk and return of individual and group securities.

The market efficiency of Billabong can be determined from the analysis of its securities. Billabong capital structure consists of only ordinary shares and there is no debt. The debts shown in the balance sheet consists of bank overdraft, short-term borrowings (Damodaran 2016). Debt-equity ratio of Billabong is currently 0.92 which means its equity is more than debt and it is a good sign for the company. There is no need for the company to introduce more funds in the form of Debt or equity without issuing convertible debentures because it has sufficient capacity.

The approach towards Fund management varies form company to company. In the year, 2000 billabong share was first listed in the Security Exchange of Australia when it made its Initial Public Offerings (IPO). It issued 2.6 million shares in the market. Investment can be managed actively or passively. Analysis of active portfolio depends heavily on the security analysis to calculate whether the shares of the company are mispriced or not (Klöti, Kotronis and Smith 2013). While in case of passive analysis, the portfolio manager avoids the cost of security analysis and fund management is based on the market index and performance of the sector.

This process involves the following steps-

(i) Selection of candidates for analysis: It is obviously not possible to analyze all the securities so a fraction of securities is taken on which focus is given. Fund are generally invested in stocks which carry a certain rate of return accompanied with risk. Another approach of selecting stock is to take few firms in the industry whose shares are mispriced and meet certain criteria. Various question that are addressed in this section are risk profile of the company and volatility of the stock.

Securities and Credit Analysis

(ii) Market expectation: While conduction security analysis to identify whether the securities are mispriced or not, the market expectation along with the analyst’s expectation is to be taken into account. It is possible to observe the price of the stock with respect to reflection in the market analysis and compare with the expectation of the analyst. However, share price gives only a statistical summary. To understand the future performance of the company a detailed analysis its revenue, operating cost and earning is required to be done (Klöti et al. 2013).

(iii) Analyst Expectation: It is based on the study of various data and information available from the annual report of the company. Analyst can use method like Capital Asset Pricing Model (CAPM), Beta analysis and Dividend Pricing Model (DDM) derive the stock price of the company (Barberis et al. 2015). The Earning Per Share (EPS) of Billabong is to be assessed to predict the future outcome of the company. 

In this section, advice is given on whether the share of the company is trading rich or cheap in the market. Based on that whether to purchase or sell the shares is determined. In making a recommendation, the time horizon of investment is to be taken into account whether it is a long-term or short-term investment, which is based on forecast and summarizing the report (Michaelides et al. 2013).

In this section, the repayment capacity of Billabong is assessed based on the financial standing of the company and the ability of the company to repay its short-term and long-term debt is assessed.

 Financial status of the borrower to repay its debts can be determined on the analysis of liquidity ratio of the company, which comprises of current ratio and quick ratio. Current ratio of Billabong is 2.19 for the year 2015, which indicates that is capability to repay its debt is very good (Spronk, Steuer and Zopounidis 2016). Current ratio of 2 is generally acceptable for a company and a minimum ratio of 1:1 is required. It is falls below 1 then it is a danger situation for the company. Therefore, it can be said that Billabong is in a very good position to repay its all kinds of debt.

Company takes loan for various purposes like running day-to-day activities, increasing its capital base, setting up new ventures and expanding existing capacity. Loan is taken based on its short term or long term needs. Currently Billabong is struggling to be in the market therefore, it has accepted to debt of $360 million from a private equity. Because of this buyout, 34% of the controlling power has gone in the hands of firms who have provided the fund. To come out of this financial crisis it has accepted that funding otherwise its market share would have been in stake.

The above funding is in the form of the long-term which is required as Billabong is restructuring its operation process and capital structure to survive in this competitive market and to give a strong financial base to the company (Bluhm, Overbeck and Wagner 2016). On the announcement of this deal, the share price of Billabong has fallen by 42.8%. It was in urgent need of the credit has it reported a loss of $ 360 million. This deal was a lifesaver for Billabong.

Market Value of Billabong

The term of the debt is 6 years which carries a fixed rate of interest of 11.9% per annum of which 5.9% is payable in cash and 6.0% is payable in kind at the option of the company. There is a facility of prepayment premium if the loan is repaid early. From the analysis of current ratio (2.19) and quick ratio (1.35), it can be said that Billabong has the ability to repay its debts. Quick ratio gives a much comprehensive idea of the liquidity position of the company (Baghai, Servaes and Tamayo 2014). It excludes those items, which may take time to convert into cash, and includes those items, which can be easily converted into cash.

In this long-term financing, Billabong has to issue 29.6 million options to the consortium, which can be exercised at a price of $ 0.50 per share. In addition to this, Billabong has committed to provide a multi currency that is asset based rotating a credit facility of US $ 140 million.

Covenants attached to this long term funding is that C/O Consortium will be able to nominate representative in the board of directors of Billabong (Spronk et al. 2016). It means the funders will have a controlling power on the management of the company. Billabong has accepted the proposal as the history of the finders say that they have good record in the retail and other market (Golin and Delhaise 2013).  

In this section, analysis will be made based on data and ratios available from the financial statement of Billabong.

Given below is the financial statement and various ratio analysis of Billabong-

	Billabong (Table-1)
	INCOME STATEMENT	2013	2014	2015
	Revenue	1341	1121	1052
Less:	Cost of goods sold	651	556	495
	Gross profit	690	565	557
Less:	operating Expenses	1511	633	557
	Operating Profit	-821	-68	0
Add:	Other Income	21	-9	28
Less:	Other Expenses	0	0	0
	Earning before interest and taxes	-800	-77	28
Less:	Interest	27	82	34
	Earning before taxes	-827	-159	-6
Less:	Provision for tax	33	75	-12
	Earning after tax / Net profit	-860	-234	6
	weighted average number of shares	2931	2905	2884
	BALANCE SHEET	2013	2014	2015
	Asset
	Current asset	899	622	496
	Receivable	245	204	154
	Other Current Asset	654	418	342
	Non Current Asset	1181	390	256
	Total Asset (a)	2080	1012	752
	Liabilty and shareholders fund
	Current liability	611	612	226
	Non Current Liability	440	128	256
	Long term Debt	242	0	208
	Other Non Current Liability	198	128	48
	Total liability (b)	1051	740	482
	Equity / Net worth (a-b)	1029	272	270
	RATIO ANALYSIS	2013	2014	2015	Variance
	Profitability Ratio
	Net margin (Net profit/Turnover*100)	-64.13%	-20.87%	0.57%	43.26%	21.44%
	Return on asset (Net profit/Total asset*100)	-41.35%	-23.12%	0.80%	18.22%	23.92%
	Return on Equity (Net profit/Equity*100)	-83.58%	-86.03%	2.22%	-2.45%	88.25%
	Asset Turnover (Turnover/Total  Asset)	0.64	1.11	1.40	0.46	0.29
	Earning per share (EPS) (Net profit/Number of shares)	-0.29	-0.08	0.00	0.21	0.08
	Liquidity Ratio
	Current Ratio (Current Asset/Current Liability)	1.47	1.02	2.19	-0.46	1.18
	Debt Equity ratio (Long term debt/Equity)	0.24	0.00	0.77	-0.24	0.77
	Activity Ratio
	Receivable turnover (Turnover/Account Receivable)	5.47	5.50	6.83	0.02	1.34

From the above Table-1, it can be clearly understood that Billabong has been running in losses in the year 2013 and 2014. It has just been able to achieve its break-even and achieve a net profit margin of 0.57% in the year 2015. Therefore, it can be said that 2013 and 2014 were an economic down turn for Billabong. All kind of profitability ratio has fallen during the year 2013 and 2014. Its EPS is already Zero, which indicates a major restructuring of its capital structure is needed (Bluhm, Overbeck, and Wagner 2016).

Due to this reason, Billabong has accepted the long-term credit of $360 million to save itself from this down turn, which is listed in the Australian Stock Exchange.

Factors that affect credit rating are history of the organization taking the debt. If there is a case, of late payment or payment is missed then it will give lower rating. The lender may also check the accounts and if there is a case of multiple accounts opening in short period of time then rating will be lower (Gratch et al. 2014). It is recommended not to take rating from many sources as higher number of rating will result in higher number of searches which will led to a lower rating.

Billabong has incurred huge losses in the year 2013 and 2014. It has just been able to turnaround in the year 2015. Therefore, it can be said that the decision of the company to take the long term financing of $ 360 million from a private equity was a good decision to survive and thrive in this competitive market. 

3.0 Conclusion

In short, it can be said that Billabong has seen massive growth in the beginning years but in the recent years, it has been running in losses. Therefore, to survive in this market they have taken a long term financing from a private equity. Due to this agreement share price of the company has dropped at lot but at the same time, it has been able to generate profit in the year 2015.

Therefore, it is recommended for the company to maintain its current capital structure and try to introduce innovative product in the market so that it can gain its market share which was which lost during the recent years. Billabong is very well known for its reputation so is its expected that it will turn around in the near future provide it take some good business decision and make their shareholder understand that.  

References

Baghai, R.P., Servaes, H. and Tamayo, A., 2014. Have rating agencies become more conservative? Implications for capital structure and debt pricing. The Journal of Finance, 69(5), pp.1961-2005.

Barberis, N., Greenwood, R., Jin, L. and Shleifer, A., 2015. X-CAPM: An extrapolative capital asset pricing model. Journal of Financial Economics,115(1), pp.1-24.

Bluhm, C., Overbeck, L. and Wagner, C., 2016. Introduction to credit risk modeling. Crc Press.

Damodaran, A., 2016. Damodaran on valuation: security analysis for investment and corporate finance (Vol. 324). John Wiley & Sons.

Golin, J. and Delhaise, P., 2013. The bank credit analysis handbook: a guide for analysts, bankers and investors. John Wiley & Sons.

Gratch, J., Artstein, R., Lucas, G.M., Stratou, G., Scherer, S., Nazarian, A., Wood, R., Boberg, J., DeVault, D., Marsella, S. and Traum, D.R., 2014, May. The Distress Analysis Interview Corpus of human and computer interviews. In LREC (pp. 3123-3128).

Klöti, R., Kotronis, V. and Smith, P., 2013, October. Openflow: A security analysis. In 2013 21st IEEE International Conference on Network Protocols (ICNP) (pp. 1-6). IEEE.

Michaelides, A., Milidonis, A., Nishiotis, G.P. and Papakyriakou, P., 2015. The adverse effects of systematic leakage ahead of official sovereign debt rating announcements. Journal of Financial Economics, 116(3), pp.526-547.

Spronk, J., Steuer, R.E. and Zopounidis, C., 2016. Multicriteria decision aid/analysis in finance. In Multiple Criteria Decision Analysis (pp. 1011-1065). Springer New York.

Whelan, J.A., Woodhead, J.D. and Cliff, J., 2014. Zircon SHRIMP U–Pb, SIMS O and LA-ICPMS Hf Isotopic Data for Granitic Gneiss of the Billabong Complex, Tanami Region. Northern Territory Geological Survey, Record, 2.