Longtable Group Limited (LON) Analysis, Stock Market Performance, And Financial Ratios

Overview of Longtable Group Limited

Question:

Discuss about the Economic Rates Of Return And Investment Analysis.

Founded in the year 2000, Longtable Group Limited (LON) that was previously known as Primary Opinion Limited is the ASX listed company and is focussed on the beverage and food industry. The company is particularly focussed on the premium products and it is carrying out the investment in MBP (Maggie Beer Products Pty Ltd. the mission of the company is to become the leader for matching the high level expectation of the consumers for high quality and new beverages and foods experiences that will be complied with the behavioural changes of the consumers (Longtablegroup.com 2018).

1. Substantial shareholders

As per the shareholders information provided in the annual report of the company, it can be identified that no shareholder is holding more than 20% shares of the company. However, some of the shareholders are there who are holding more than 5% shares of the company. The details of those shareholders are as follows –

• HSBC Custody Nominees (Australia) Limited – A/C 2 is holding 77,777,908 shares that is 10.53%
• Sieana Pty Ltd is holding 59,292.952 shares that is 8.03%
• HSBC Custody Nominees (Australia) Limited is holding 43,319,058 shares that is 5.86%
• Bollinger Investments Pty Ltd – Brightr Side A/C is holding 38,850,000 shares that is 5.26%

1. Name of key persons

• Chairman – Mr. Tony Robinson
• Board members – other key members of the board are –
• Tom King – Non-Executive Director
• Hugh Robertson – Non-Executive Director
• Laura McBain – Managing Director
• CEO – Mr. Tony Robinson

It is identified that any of the above mentioned key personnel is not holding more than 20% or 5% of shares of the company and therefore will not be considered as substantial shareholder.

1. Return on assets (ROA) = (NPAT / Total Assets)

Return on Equity (ROE) = (Net profit after tax / Ordinary equity)

Debt ratio = Total liabilities / Total assets

EBIT/TA * NPAT/EBIT * TA/OE = NPAT/OE

EBIT/TA * NPAT/EBIT * TA/OE = -10,270,418/9588632 * -10293092/-10270418 * 9588632/9433900 = -1.091

NPAT/OE = -10293092/9433900 = -1.091

      Hence,

EBIT/TA * NPAT/EBIT * TA/OE = NPAT/OE (Proved)

1. Phenomenon of TA / OE variable

TA/OE variable represent the total asset of the company as compare to its owner’s equity.  It states the percentage of the total asset that is owned by the shareholders of the company. Higher TA/OE ratio represents that the debt portion of the company is higher than the equity part (Heikal, Khaddafi and Ummah 2014). If the ratio increases beyond a certain limit, it will lead the company to unsustainable situation as higher debt will be associated with higher amount of interest and the company will be overburdened for paying off the interest.

• Reasons behind higher ROE than ROA

ROA and ROE both are considered as profit metrics. Greater ROE as compared to ROA represent that the total asset of the company management is more than the owner’s equity. The ROE of the company is lower than the ROA that represents that the company is not earning on its borrowing. In other words, the interest rate on debt is higher than the required rate of return of the company (Barry and Robison 2014). Therefore, the company can raise the additional fund through equity and borrowing instead of only through of debt.

Monthly stock movement for last 2 years

Longtable Group Limited –

Figure 1: Stock movement graph of Longtable Group Limited

(Source: In.finance.yahoo.com 2018)

All Ordinary Index

Figure 1: Stock movement graph of All Ordinary Index

(Source: In.finance.yahoo.com 2018)

It can be identified from the above graphs that the stocks of Longtable Group Limited that though the stoch started moving upward initially, it started falling from the month of June, 2016 and then continue falling till April, 2017. However, it managed to rise from next month and hold the rising trend till the month of November 2017. Therefore, the stocks are in decreasing trend then it was in increasing trend. It states that the stock is less fluctuating (In.finance.yahoo.com 2018). On the other hand, the stocks of All Ordinary Index were in increasing trend and started from 5082.80, it reached to the price of 6016. Therefore, if both the stocks are compared, it can be identified that the stocks of Longtable Group Limited are more volatile as compared to All Ordinary Index. Further, the correlation between 2 stocks is -0.060. It represents that they are negatively correlated management (Blitz, Falkenstein and Van Vliet 2013).

• IOOF Holdings Limited became the substantial shareholder of the company on 22-12-2017 through holding 166,666,600 shares that comes to 7.06% holdings.
• The company acquired Paris Creek that is the organic-biodynamic dairy beverages and food businesses from Australia. The company is considering that acquiring of Paris Creek is unique opportunity for building the brand with the support of strong credentials, developed factory and transparent supply chain of biodynamic-organic nature.

Shareholders Information and Financial Ratios

1. Calculated beta of Longtable Group Limited is 0.82
2. Risk free rate = R_f = 4%, Market risk premium = R_m = 6%

Therefore, required rate of return of the company’s share =

R = R_f  + β ( R_m – R_f )

R = 4% + 0.82* (6% – 4%) = 5.64%

• Conservative investment

Conservative investment allows the investor to grow the money with lower level of risk. The conservative investor chooses those investments which are not very fluctuating and the money required by the investor in short span of time. Through it protects the investor from the adverse impact of inflation, the investors at the same time misses the opportunity of explosive growth during the time of economic prosperity (Streby et al. 2014). As it can be seen that the beta of the company is 0.82 and required rate of return is 5.64%, which is not so high, investment in Longtable Group Limited will be considered as conservative investment.

1. Computation of WACC

WACC = E/V * R_e +D/V * R_d * (1-T_c), Where,

E/V = Equity percentage in the capital structure

D/V = Debt percentage in the capital structure

R_e = Cost of equity = 5.64%

R_d = Rate of debt

T_c = corporate tax rate

However, as it can be found that the company did not have any debt during the years 2017, the WACC is the cost of equity only that is 5.64%.

1. Impact of the higher WACC

Higher WACC represents that the beta of the company is high which in turn will increase the financial risks of the company (Krüger, Landier and Thesmar 2015). Therefore, to cover up additional risk the company will require additional return.

1. Optimal structure for capital

The debt ratio states the best mix of debt and equity at which the company will be able to maximum return. The debt ratio of 0.4 is considered as ideal for any company (Morley 2013). It can be seen from the above that the debt ratio of the the company for 2016 was 0.276 that reduced to 0.016 in 2017. Therefore, if the company requires additional fund, it shall raise through debt instead of equity (Brusov, Filatova and Orekhova 2014).

1. Gearing ratio

It is the analysis ratio of the company’s long term borrowing as compared to the equity capital. For adjusting the gearing ratio the company increased their equity from 14,56,223 to 94,44,900. However, nothing regarding this increase has been mentioned in the report provided by the directors (Serghiescu and V?idean 2014).

There were no dividends declared, recommended or paid by the company for previous year or current year. The reason behind this policy may be that the company prefers to keep the money and will utilise it for further investment or for paying off the current obligation (Hombert and Thesmar 2014).

Based on the above discussion it can be concluded that if the risk factor is taken into consideration, the stock of Longtable Group Limited shall be included in the client’s portfolio. The reason is that the beta as well as the required rate of return for the company both is moderate. However, if the return factor is taken into consideration then the stock shall not be included as the company was not able to earn any positive income over the last 4 years. Further, the company does not pay or recommends the payment of dividend. All these factors shall be taken into consideration before investing.

Reference

Barry, P.J. and Robison, L.J., 2014. Economic rates of return and investment analysis. The Engineering Economist management , 59(3), pp.231-236.

Blitz, D., Falkenstein, E.G. and Van Vliet, P., 2013. Explanations for the Volatility Effect: An Overview Based on the CAPM Assumptions.

Brusov, P., Filatova, T. and Orekhova, N., 2014. Mechanism of formation of the company optimal capital structure, different from suggested by trade off theory. Cogent Economics & Finance, 2(1), p.946150.

Heikal, M., Khaddafi, M. and Ummah, A., 2014. Influence analysis of return on assets (ROA), return on equity (ROE), net profit margin (NPM), debt to equity ratio (DER), and current ratio (CR), against corporate profit growth in automotive in Indonesia Stock Exchange. International Journal of Academic Research in Business and Social Sciences, 4(12), p.101.Cooray, A., Dzhumashev, R. and Schneider, F., 2017. How does corruption affect public debt? An empirical analysis. World development, 90, pp.115-127.

Hombert, J. and Thesmar, D., 2014. Overcoming limits of arbitrage: Theory and evidence. Journal of Financial Economics, 111(1), pp.26-44.

In.finance.yahoo.com. (2018). LON.AX: Summary for LONGTABLE FPO – Yahoo Finance. [online] Available at: https://in.finance.yahoo.com/quote/LON.AX?p=LON.AX [Accessed 12 Mar. 2018].

Krüger, P., Landier, A. and Thesmar, D., 2015. The WACC fallacy: The real effects of using a unique discount rate. The Journal of Finance management , 70(3), pp.1253-1285.

Longtablegroup.com. 2018. Share Our Passion | Longtable Group. [online] Available at: https://www.longtablegroup.com/ [Accessed 12 Mar. 2018].

Morley, J., 2013. The Separation of Funds and Managers: A Theory of Investment Fund Structure and Regulation. Yale LJ, 123, p.1228.

Serghiescu, L. and V?idean, V.L., 2014. Determinant factors of the capital structure of a firm-an empirical analysis. Procedia Economics and Finance, 15, pp.1447-1457.

Streby, H.M., Refsnider, J.M., Peterson, S.M. and Andersen, D.E., 2014. Retirement investment theory explains patterns in songbird nest-site choice. Proceedings of the Royal Society of London B: Biological Sciences, 281(1777), p.2013183

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