Metcash is an Australian company which distributes and markets the fresh products, groceries, hardware, beverages and other consumable products. A financial analyst is required to focus on the past and present financial data of the business in order to identify that how would be the financial performance of the business so that a better decision could be made about the strategies and other policies of the business. The financial analysis study makes it easy for investors to get the real information and forecasting of the performance of the business so that the investment decision could be made accordingly. A strategic decision could be made on the basis of the financial performance and it leads the manager to a clear conclusion (Madura, 2014). In the report, the financial analysis study has been performed on Metcash. The forecasting models have been applied firstly on the financial statement of the company in order to, along with that, the valuation model, sensitivity analysis and management decision process has been studied to measure the overall position of the company and make a recommendation about the investment level in the business.
In order to forecast the future performance of a business, it is important for an analyst to take each and every financial and non financial aspect of the business in context. It is important for the analyst to forecast the other factors first and then make a decision about the ultimate item. Such as, in case of measuring the forecasted profit margin level of the business, it has been found that the analyst requires to forecasted sales and expenses of the business first. By linking each of the forecasting items, it becomes easy for the analyst and the investors to reach over a conclusion immediately.
Forecasting is a process which takes the concern on the previous year figures and the present factors of the business to measure about the future changes in a business. It is important for a business to measure all the relevant changes and make the decision about the forecasting accordingly.
Sales growth is one of the most important factors to measure and evaluate in order to find the future changes and performance of a business. There are various factors which could influence the sales level of the Metcash such as foos demands, liquor demand, inflation rate, GDP etc. During the financial year 2017, the sales growth of the comapny was highest because of strong sells in the liquor and acquisition of the hardware company. Though, in the year of 2018, the growth rate has been decreased because the Metcash hard competition in the food sector with Woolworths, Wesfarmers and Aldi and inflation rate has also affected the sales of the business.
The food sales of Metcash limited has been reduced by 1.4% because of the prices cut by Woolworths and Coles. The food sales of Metcash has also been affected because of the Darkes Supermarket, who is one of the largest client of Metcash because of the lower demand from the market. However, few changes have been made by Metcash limited to improve the demand and turnover of food. The store of Metcash has deleted 6000 products from the warehouse and added 2900 new products to attract more customers. Ready meals are also offered by the company in order to improve the sales of the business.
Liquors are provided by Metcash limited in two divisions which are Independent brand Australia and Australian liquor markets. The reports explain that the demand of liquor has been increased to 5.7%. because of the acquisition of Porters liquor. Metcash limited has also various opportunities which could improve the sales at huge level in near future such as provide premium products, improvement in the wholesale sales, sales through IBA network etc.
In case of Hardware performance, the demand of Metcash limited has been improved at great extent. The changes have taken place because of the synergies. The forecasting level explains that in near future, the hardware sales would be improved more. Metcash limited could grab the various opportunities such as it could support independent retailers, reduce the wholesale price etc to improve the demand of products.
the logistic demand would be improved along with the changes in the market and the changes in the sustainable growth and cost structure of Metcash limited.
Below given figure explains that how much changes have occurred into the sales level of the company from 2017 to 2018.
Figure 1: Sales overview
(Yahoo finance, 2018)
On the basis of the food, liquor and hardware, it has been measured that the sales growth forecast of the company would be 2.5% in the year of 2019, 2020 and 2021 which would be reduced to 2% in next 2 years. The changes would occur into the business because of the pressure from the industry and the changes into the various external factors of the business. Insider retail (2018) explains that the food sales of the business would be half dropped in the near future. However, the increased demands of the liquor would compensate that and the sales of the company would be growing up by 2.5% only. As well as, it has been measured that the logistic and hardware sales of the business would be improved at great level which would manage the lower demand of other products of the company. It has also been estimated that the changes into the inflation rate, population’s growth and the GDP would affect the sales level of the business.
Figure 2: Sales growth rate
(Insider retail, 2018)
The inflation rate changes have been studied further and it has been found that the inflation rate of the country and international level would be changed at a great level and it would affect the overall performance of the business. However, it has been found on the basis of the below figure that the global inflation rate would be reduced to 3.07% which would improve the overall sales demand of the company but the competition and aggressive expansion of coal and Wesfarmers would affect the sales demand of the business and thus the sales of the company would be reduced to 2% in the year of 2022 and 2023.
Figure 3: Inflation rate
(Statista, 2018)
Further, the population growth and the GDP of the country has been forecasted in order to identify the consumption level and the performance if the business. the study explains that the population of the country would be almost similar because of the lower birth rate and in case of GDP, it has been estimated that the GDP rate of the country would be lower in the year of 5.8% but because of the lower market share of the company, the sales level of the business would not be affected much.
|
2018 |
2019 |
2020 |
2021 |
2022 |
|
|
Forecasted GDP |
6.3% |
6.2% |
6.0% |
5.8% |
5.5% |
(Statista, 2018)
On the basis of the overall study on the previous data of the sales growth and the current changes, it has been estimated that the sales of the business would be grown at a lower rate in next 5 years.
Asset turnover ratio has further been forecasted in order to measure the total sales of the business against the available resources at a particular time (Higgins, 2012). The ATO ratio measures the overall efficiency level of the business. On the basis of the previous data of the company, it has been studied that the ATO of the business was highest in the year of 2018 because ATO depends on sales revenue and net operating assets. In 2018, sales operating assets decreased due to the intangible assets and goodwill.
The changes have occurred because of the demand from Drakes Supermarkets and the changes in the carrying value of the assets. Around $ 1 million has been charged as impairment on goodwill and other food pillars. Because of item the company has ked to statutory loss worth $ 149.5 million.
Figure 4: ATO
On the basis of the above figure, the forecasting level of ATO in year 2019 and 2020 would be higher because such kind of asst impairment and other activities are not expected in the future. the ATO level would be decrease slightly because of the decrement in the sales level. Further, it has been estimated that the decrement in the ATO level describes that the company has reduced the efficiency level and due to which the sales level of the company has been decreased on the basis of the available sales.
Company could reduce the level of the resources and assets on the basis of the demand of the products in order to manage the efficiency level of the business. It improves the overall performance of the business. The few changes into the assets level and the strategies of the business would improve the performance of the business.
Profit margin:
Further, along with the sales volume, sales demand etc, the profitability margin level of the business has been studied. The profit margin level of the Metcash explains that the profitability margin level of the company has been fluctuated at great level in last 5 years. According to the annual report and income statement in 2015, 2017 and 2018, NOPAT level has been decreased because of the significant item’s impairment. So, it is important to take the concern on the impairment test and the losses of the business.
Various changes have occurred into the profitability margin level of the business because of the higher operating expenses (Appendix), changes into the sales figures, affect of the inflation rate and GDP on the business etc. As well as, it has been found that in order to manage the cost leadership pricing strategy (the lowest cost in the market to improve the market share), the company has to reduce the margin % (Higgins, 2012). In last 5 years, from 2013 to 2018, the profit margin of the company was reduced by 0.9% because of the changes in the demand of food, liquor and prices of Metcash limited.
Figure 5: Forecasted PM
It has been forecasted that the profit margin level of the business would be fluctuated from the year of 2019 to 2023 among the 1.5% to 1.8%. The PM ratio describes that in the recent years (2019, 2020 and 2021) the profitability margin level of the business would be improved because of the various changes and opportunities grabbed by the business in order to improve the sales and meet the overall objective of the business. But after the reduction in the sales volume, market share and customer loyalty of the business would also be affected which would ultimately reduce the profitability margin in 2022 and 2023 of the business (Lord, 2007).
Further, it has also been studied that the changes have also occurred because of the aggressive expansion of the sales of Coals and Wesfarmers limited. In order to manage the market share and become a leader in the market, the firm has reduced the sales price and the margin of the company. Though, the margin position of the company would be better from the previous 5 years of the company.
Dividend payout ratio defines about the total payment of business to the shareholders against their invested fund as the name of dividend. It evaluates the total paid amount against the total profit of the business. Increment in the NOPAT improves the FCF level of the business which is driven by the total profit kevel and the sales of the company. Through conducting the study on Metcash, it has been found that the dividend payout ratio of the company has been lower in the year of 2018 at great extent because of the reduction in net income. the decrement has occurred because of the loss of Drake contract.
|
2014 |
2015 |
2016 |
2017 |
2018 |
||
|
Dividend |
207.1 |
55.9 |
1.4 |
1.3 |
105.3 |
|
|
Dividend payout Ratio =Dividend paid /Net Income |
95.76% |
-16.52% |
0.57% |
0.67% |
-84.24% |
Figure 6: Leverage
On the basis of the future study on forecasting level, it has been measured that dividend payout ratio of the company would be 60% in 2019 and 2020 and 70% in next 3 years because management prefer to keep actual div up, not down. Year 2020 has good forecast so div ratio can stay the same at 60%, later yrs have less positive forecast but need to keep div up so 70% is reasonable. Also, from 2021 forecasts are stabilised so the rate of 70% can stay unchanged.
The company is looking forward to make better position in the capital market in order to improve the investment and stock price of business. These changes into the dividend payout ratio would make it easier for the business to improve the stockholder’s interest in the business.
|
2019 |
2020 |
2021 |
2022 |
2023 |
||
|
Forecast net dividend payout ratio |
-84.24% |
60% |
60% |
70% |
70% |
70% |
Further, the cost of debt level of the business has been studied in order to evaluate that how much cost would be spent by the company in order to manage the funds from the debenture holders of the business. The cost of debt level of the business explains that the cost of debt of the business is 13.5%. It explains that the level of cost of debt of the business is quite higher and it would lead to the business towards the huge cost level. In order to manage this much of cost, the business has to invest in those projects and investment proposal, where the cost of debt of the business is lower (Higgins, 2012). The cost of debt level of the Metcash is even higher than the Reserve Bank of Australia’s interest rate which explains that the few requirements are required in the business in order to manage the cost level.
After measuring the level of cost of debt, the other cost of the company related to the equity of the business. the beta factor explains about the fluctuations in the stock price of the company in a particular time period.
On the basis of the below given table, it has been measured that the risk free rate if Australia is 2.77%, the market risk premium of Australian capital market is 5% and the systematic risk of Metcash limited is 1.23 which leads to the study that the total return which could be expected by the investors from the company is 8.92% (Bloomberg, 2018). It expresses that the total cost for the equity of the company would be 8.92%.
|
Cost of equity Calculations: |
|
|
Risk- free return rate |
2.77% |
|
Market Risk Premium |
5.00% |
|
Beta of Metcash |
1.23 |
|
Estimated Cost of Capital for equity (RE) CAPM |
8.9200% |
(Bloomberg, 2018)
On the basis of the calculated cost of debt and cost of equity, it has been found that the weighted average cost of capital of the company is 9.13% which is quite higher and explains that the company has to invest into those projects which would offer more than 9.13% return to the company.
|
Cost of debt (RD) |
13.52% |
|
NFO |
127 |
|
MVe |
2,655 |
|
Estimated Cost of Capital for firm (WACC) |
9.13% |
After forecasting the financial performance, position and cash flow level of the business, the valuation analysis method has been applied in order to identify the intrinsic value of the stock and compare it with the market value of the stock that whether the company is enough capable to maintain the stock price in the market or the stock of company is overvalued. In order to measure the value of the stock, 4 valuation model has been applied which would be studied below.
Dividend discount model has been applied firstly in order to identify the actual worth of the stock. This model mainly concentrates on the dividend paid by the company to measure the stock price of the company. It is one of the most used valuation model because of the interest on dividends by shareholders. DDM is simplest model to identify the present value of the expected dividend. In the model, it has been estimated the dividend amount of the company would be variable and it would differ on the basis of the market fluctuations and demand of the stock in the market. The perpetuity growth rate of the company is 2% (Appendix 2).
In order to identify the worth of the stock, 5 years dividend amount has been forecasted and on the basis of those figures, it has been measured that the total stock value of the company should be $ 2.55 whereas the stock worth of Metcash on 8th Oct 2018 is $ 2.92 which explains that the stock price of the company is overvalued in the market.
Residual income model has been applied further in order to identify the actual worth of the stock. This model is different from other model because it taken the concern on the capital cost. it uses the accrual accounting base and financial statement to identify the stock price of the company which makes it different from other valuation models.
In order to identify the worth of the stock, 5 years net income and operating income have been forecasted and on the basis of those figures, it has been measured that the total stock value of the company should be $ 2.10 whereas the stock worth of Metcash on 8th Oct 2018 is $ 2.92 which explains that the stock price of the company is overvalued in the market (Market.ft.com, 2018).
Further, residual operating income model has been applied in order to identify the actual worth of the stock. This model mainly concentrates on the NOPAT, NOA etc. to measure the stock price of the company. In the model, the operating profit after tax is concentrated which makes it different from other valuation model. it is most accurate model because of the WACC and CAPM level of the business. The perpetuity growth rate of the company is 2%.
In order to identify the worth of the stock, 5 years NOPAT, NOA etc have been forecasted and on the basis of those figures, it has been measured that the total stock value of the company should be $ 2.83 whereas the stock worth of Metcash on 8th Oct 2018 is $ 2.92 which explains that the stock price of the company is overvalued in the market (Yahoo finance, 2018).
the free cash flow model uses the investment, operations and WACC level of the business. It considers the investment as an expenses in order to identify the cash level of the business. It is different from other valuation model because of its focus on the cash level only. The perpetuity growth rate of the company is 2% (Higgins, 2012).
In order to identify the worth of the stock, 5 years FCF level has been forecasted and on the basis of those figures, it has been measured that the total stock value of the company should be $ 2.83 whereas the stock worth of Metcash on 8th Oct 2018 is $ 2.92 which explains that the stock price of the company is overvalued in the market.
As seen in the below figure, the residual operating income model is most accurate valuation model whereas the FCF model explains about the largest deviation from the market value.
Figure 7: Valuation model
The sensitivity analysis has been further conducted on the residential operating income model. In this method, all the independent variable has been changed in order to measure the impact on the dependent variable. The main objectives of this method is to identify the stock price if any changes would take place in NOPAT and NOA level than at what level, the stock price of the business would be changed.
Firstly, the changes into the sales growth have been done to identify the impact on the stock price of the company. Optimistic and pessimistic worth has been focused in this model. On the basis of optimistic case, if the sales growth would be improved by 15% than the stock price of the business would be $ 2.81 whereas in pessimistic case, if the sales growth would be reduced by 15% than the stock price of the business would be $ 2.65 (Appendix 3). The normal case stock price is $ 2.73. It expresses that the changes into the sales growth would impact average on the stock price of the company.
Further, the changes into the ATO have been done to identify the impact on the stock price of the company. Optimistic and pessimistic worth has been focused in this model. On the basis of optimistic case, if the ATO would be improved by 15% than the stock price of the business would be $ 3.04 whereas in pessimistic case, if the sales growth would be reduced by 15% than the stock price of the business would be $ 2.31. The normal case stock price is $ 2.73 (Appendix 3). It expresses that the changes into the ATO level would impact at huge level on the stock price of the company.
Additionally, the changes into the profit margin have been done to identify the impact on the stock price of the company. Optimistic and pessimistic worth has been focused in this model. On the basis of optimistic case, if the PM would be improved by 15% than the stock price of the business would be $ 3.28 whereas in pessimistic case, if the sales growth would be reduced by 15% than the stock price of the business would be $ 2.17. The normal case stock price is $ 2.73. It expresses that the changes into the profit margin level would impact at huge level on the stock price of the company (Appendix 3).
Furthermore, the changes into the dividend payout have been done to identify the impact on the stock price of the company. Optimistic and pessimistic worth has been focused in this model. On the basis of optimistic case, if the dividend payout would be improved by 15% than the stock price of the business would be $ 2.73 whereas in pessimistic case, if the sales growth would be reduced by 15% than the stock price of the business would be $ 2.73. The normal case stock price is $ 2.73 (appendix 3). It expresses that the changes into the dividend payout would not affect the stock price at all.
Lastly, the changes into the NBC have been done to identify the impact on the stock price of the company. Optimistic and pessimistic worth has been focused in this model. On the basis of optimistic case, if the NBC would be improved by 15% than the stock price of the business would be $ 2.73 whereas in pessimistic case, if the sales growth would be reduced by 15% than the stock price of the business would be $ 2.73. The normal case stock price is $ 2.73 (Appendix 2). It expresses that the changes into the NBC would not affect the stock price at all.
It explains that the main factor which affects the stock price of the company is asset turnover ratio and profit margin ratio. If these factors would be controlled by the business than the stock price level would be improved.
After evaluation on the sensitivity analysis, it has been found that the main factor which affects the stock price of the company is asset turnover ratio and profit margin ratio. If these factors would be controlled by the business than the stock price level would be improved. In order to manage these factors in Metcash limited, following opportunities could be grabbed by the business. However, few of the challenges could also be faced by the business on the basis of that.
On the basis of the above opportunities and threat, it has been realised that the few changes into the strategies of the business would lead the overall performance of the business and the company would be able to meet the forecasting level. the changes in the cost leadership strategies and pursuing differentiation, it has been measured that the changes would help the Metcash limited to improve the overall performance. The company should improve the research and development process of the business to forecast the other opportunities and improve the sales turnover, ATO and PM level of the business.
If the above stated challenges would be controlled by the business than the overall PM level, sales level and ATO level of the business would be improved.
Conclusion:
To conclude, Metcash limited’s performance is tend to decrease in current scenario. Few changes into the strategies and policies would improve the overall performance of the business as well as it would help the business to improve the overall PM level, sales level and ATO level of the business. The challenges level could also be reduced by the business through implementing the new strategies.
References:
Bloomberg.com. 2018. Australian Rates & Bonds. [online] Available at: https://www.bloomberg.com/markets/rates-bonds/government-bonds/australia [Accessed 15 Oct 2018].
Higgins, R. C., 2012. Analysis for financial management. McGraw-Hill/Irwin.
Home. 2018. Metcash limited. [online] Available at: https://www.metcash.com/ [Accessed 15 Oct 2018].
Insider retail. 2018. Metcash Ltd: Food sales. [online] Available at: https://www.insideretail.com.au/news/food-blip-for-metcash-as-hardware-builds-revenue-201712
Insider retail. 2018. Metcash Ltd: Impairment on grocery. [online] Available at: https://www.insideretail.com.au/news/metcash-to-book-352-million-impairment-on-grocery-weakness-201806
Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.
Lord, B.R., 2007. Strategic management accounting. Issues in Management Accounting, 3 (2) p.p. 32.
Madura, J. 2014. Financial Markets and Institutions. Cengage Learning.
Markets.ft.com. 2018. Metcash Ltd, BKL:ASX profile – FT.com. [online] Available at: https://markets.ft.com/data/equities/tearsheet/profile?s=MTS:ASX [Accessed 15 Oct 2018].
Statista. 2018. Global inflation rate 2012-2022 | Statista. [online] Available at: https://www.statista.com/statistics/256598/global-inflation-rate-compared-to-previous-year/ [Accessed 15 Oct 2018].
Yahoo finance. 2018. Metcash limited/ history. [online] Available at: https://au.finance.yahoo.com/quote/MTS.AX/history/ [Accessed 15 Oct 2018].
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