Photo by Nathan Dumlao on Unsplash
Key Points
Accounts are for 6 months
All amounts in Australian dollars
Improving profits of $5.1 mn
Gradually improving equity ratio at 50.6%
Massive level of intangibles at 63.7% of total assets
Significant cash and short-term investments reserves of $32.2 mn
Interest bearing debt down 6.6%
Declining but positive operating cash flow at $5.6 mn
Enterprise value $263.7 mn
Market capitalisation $152.6 mn
Funding cost cover 4.7 times
Significant and unquantifiable contingent liabilities related to franchisees and the ACCC
No dividend
Negative NTA/share
Source: Direct Broking
Recast Revenue Statement
EBIT decreased by 25.9% from the previous period at $8.0 mn which very adequately covers the company's debt servicing costs of $1.7 mn.
The decline in EBIT was mainly due to leased assets' impairments moved below the operating profits after tax and recorded as unrealised expenses.
The extraordinary item of lease terminations was 90.5% lower than the previous period at $0.1 mn as the company nears completion of its restructuring process.
The company started to pay tax again which is a positive sign of profitability.
The depreciation and amortization charges fell by a far greater percentage than the decline in the amount of fixed assets as the intangibles stayed roughly the same. This may warrant further investigation when the annual results come in although impairment charges can vary significantly and may account for the fall in the expense.
Revenue fell 4.9% as the business restructured.
Recast Balance Sheet
Horizontal Analysis:
Interest bearing debt which includes lease obligations fell by 6.6% but there was a concerning 39.9% rise in current liabilities over the previous period.
The current ratio was therefore much worse than in the previous period.
Inventories rose by 39.2% to $6.9 mn which is of interest given that revenues fell by 4.9%.
Vertical Analysis:
The main feature if the balance sheet is the high level of intangibles which comprise 63.7% of the total assets. Indeed they are significantly higher than the shareholders’ funds.
This probably doesn't bode well for a liquidation situation but the company seems to be improving constantly as a going concern.
Recast Statement of Movements in Equity
The format above enables the changes in shareholders’ funds to be understood much more easily than in the published accounts.
It’s worth mentioning that the ending balance for the prior period does not equal the starting balance of the current period.
This is because the periods are not consecutive as there is a 6 month gap between them.
Recast Cash Flow Statement
Operating cash flow was positive in both periods although it declined by 37.9% to $5.6 mn in the current period.
This positive cash flow and cash were used to fund fixed asset purchases and retire interest bearing debt.
Ratio Analysis
Funding cost cover was strong in both periods but has declined from 5.8 to 4.7.
The current ratio is poor at 0.68 in the current period.
The equity ratio at 50.6% is ok for this type of company but it is because of the massive level of intangibles.
The share price is above the net tangible assets per share amount of -2.2 cents.
No price earnings ratios are calculated because the periods recorded are only 6 months and not a year.
Segmental Analysis
Coffee retail systems were the standout category in the current period improving by 41.6% from the prior period to $5.2 mn.
That segment improved in both the domestic and international franchising subcategories.
The other categories were significantly down due to closures of operating sites.
Summary
This is a company that has massively reorganised in order to survive.
It is now showing some profitability as it works its way back.
It has a very high level of intangibles and it will be interesting to see if that is justified in the future.
Overhanging the company is a legal decision from the ACCC and also a number of outstanding litigations with franchises. It is difficult to out a value on the likely costs if these legal issues which makes assigning a value to the company very difficult.