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Associate in Management 2012

Financial and Management Accounting

Financial Analysis Project

Name: Neil Conrad (400) Due date: 04 June 2012 Lecturer: Jimmy Winfield

Table of Contents 1.Introduction and Business Context 2. Common Sense review of Annual Financial Statements 2.1 Income Statement 2.2 Statement of Financial Position 2.3 Statement of Changes in Equity 2.4 Cash Flow Statement Page 5 Page 4 Page 4 Page 5 Page 3

3. Ratio Calculations 4. Ratio analysis 5. Conclusion 6. Bibliography Plagiarism Declaration

Page 7 Page 9 Page 11 Page 11 Page 12

1. Introduction and Business Context SABMiller plc (SABMiller) is a holding company, which has brewing and beverage interests across six continents. The company, along with its subsidiaries, offers lager, soft drinks and other beverages in global markets. SABMiller's wide portfolio of brands includes over 200 plus international and local brands. During the fiscal 2011, the company sold 270 million hectolitres of total beverage and 218 million hectolitres of lager1. The premium international beers brands include Grolsch, Miller Genuine Draft and Peroni Nastro Azzurro while domestic brands include Pilsner Urquell, Aguila, Miller Lite, Snow, Castle and Tyskie. The company's six brands rank among the top 50 in the world. SABMiller is also one of the largest bottlers of Coca-Cola products in the world. The company is headquartered in London, UK.2

Global Context The global economic crisis had an impact on SAB revenues. It is expected that it will have a further effect on SABs growth in the new financial year. Globally, what has transpired is that the emerging countries have turned their focus towards the emerging economies as their projected GDP will exceed developed economies. This can be evidenced by the comments on page 10 of the beer growth trends 2011 2015. SAB has recognised this and their strategy going forward will be to capitalise on this. Through CR Snow, an associate company in which SAB holds 49%, they are the largest brewer in China. In India, they are the second largest brewer.

Local Economy Locally the results were positive but this was mainly due to the 2010 Soccer World Cup. It is important to note that earnings were not only generated from beer but beverages (Coca Cola), hotel and gaming interests as well. Locally, the beer market is matured and hence growth will be seeked in the rest of Africa. GDP growth, in the rest of Africa is expected to reach between 6% - 7% versus a GDP of approximately 3% in South Africa. Going forward growth can be expected through improvement in volumes through sales and marketing, increase in prices and lower raw material costs. In addition it is my opinion that asset efficiency will also add to this.

Global Beer Market In the past decade, the global beer market has gone through a process of rapid change. In many emerging and developing markets, economic and societal developments and transformative improvements in the quality and appeal of beer brands have resulted in strong organic growth in the beer category. Developed markets have also undergone change as brewers have responded to constrained or declining beer consumption trends.

Industry consolidation has continued apace, and today the four largest brewers Anheuser-Busch InBev, SABMiller, Heineken and Carlsberg produce almost half of all industry volume and generate up to 70% of industry profits2. Beer industry consolidation has continued during the last 12 months, with smaller transactions in Asia, Africa and Latin America.

Alcohol Trends Beer consumption continues to rise in Africa, Latin America and Asia, driven by growth in population and incomes and improvements in beer quality and appearance. In this context, many consumers are shifting from informal and unregulated forms of alcohol to aspirational, attractively-branded and safer commercial beers. The beer category is therefore growing at the expense of subsistence alcohol. Commercially produced beer has also been claiming a greater share of the regulated commercial alcohol market in emerging countries. On a pure alcohol basis, its share rose from 34% in 2000 to 40% in 2010.

Outlook Looking ahead to 2015, it is likely that growth will continue to be led by emerging markets. The 25 fastest-growing markets are forecast to deliver over 5% CAGR in beer volumes. China is expected to account for almost 40% of this growth with Vietnam, Brazil, Ukraine, Nigeria, India and Peru contributing significantly.

Beer growth trends by volume %

Company Specific An interesting article I found in The Telegraph refers to how Snow is the worlds best selling beer. It overtook Bud-Light, from competitor AB Inbev, in 2008. Although not as profitable for SAB as BudLight is for AB Inbev, it has a 10% growth rate each year. In comparison, Europe and the US are steadily reducing their consumption due to the economys poor state in developed countries. This again highlights to me SABs growth strategy is in the right direction. The above also underlines investor sentiment in holding SAB shares. The reasons, according to Moneyweb are: Most geographically diversified stock on the JSE 80% of revenues are generated in emerging countries It is either the largest or second largest brewer in these countries Offers good defensive position against economic uncertainty listed in developed world but makes most of its money in emerging market.

2. Common sense review of Annual Financial Statements 2.1 Income Statement Revenue increased by 8%. Key reasons for this are price increases and strong volume growth in
emerging economies. Lager volumes only grew by 2% year-on-year. The table below clearly indicates the strong volume growth in the emerging economies.

The table below shows earnings before interest, tax and amortisation by each region. Latin America Contribution to group EBITA1 2011 Europe Contribution to group EBITA1 2011 North America Contribution to group EBITA1 2011 Africa Contribution to group EBITA1 2011 Asia Contribution to group EBITA1 2011 South Africa Contribution to group EBITA1 2011

Despite a negative growth of volumes sold in Latin America, Europe and North America, they still contribute 62% of EBITA.

2.2 Statement of Financial Position The business is solvent as total assets exceed total liabilities. However, the business is illiquid as current liabilities exceed current assets. It will be interesting to see the ratios to see why SAB is still able to trade. Due to healthy revenue cash and cash equivalents have increased by US$288 million. It appears as if they have also used to decrease borrowings by US$260 million. 2.3 Statement of Changes in Equity SABMiller paid a total dividend for the year of US81 cents, up by 19% from 2010. Retained earnings have increased by US$1 466 million from 2010 to 2011. 2.4 Cash Flow Statement Operating activities

There has been very little change year on year. The biggest cash outflow, US$885 million, has been paid to various tax authorities. Investing activities

What is interesting here is that SABMiller has reduced their investing activities by US$655 million. Financing activities

Repayment of borrowings exceeded proceeds from borrowings by US$1 159 million. Dividends paid to shareholders of parent company increased whereas dividends paid to non-controlling interests decreased. In part this was due to the company buying back shares. Cash and cash equivalents have increased from US$589 million to US$813 million.

3. Ratios Calculations
Current Year 2011 Return on equity (ROE) ROE = NPAT x 100 Total Equity Return On Capital Employed ROCE = NPAT Capital Employed 2557/(39108-5947) = 8% 2081/(37499-5978) = 7% XXXXXXXXXXX 2 557/22 759*100 = 11% Prior Year 2010 2081/20593*100 = 10% Sector Ratios 12.60%

Total Asset Turnover (TAT) TAT = Revenue Total Assets Net Margin Net Margin = Net Profit x 100 Revenue

19 408 / 39 108 = 0.50 times

18 020 / 37 499 = 0.48 times

0.99 times

2557/19408 = 13%

2081/18020 = 12%


Return On Assets (ROA) ROA = TAT x NM x 100 = NP / Total Assets x 100 Equity Multiplier EM = Total Assets Total Equity

2557/39108 = 7

2081/37499 = 6


39108/22759 = 1.72

37499/20593 = 1.82

Debt Ratio (DR) DR = Total Debt x 100 Total Assets

6 013 + 10 336 = 16 349

5878 + 10 928 = 16 906


16349/39108 x 100 = 42% Interest cover (IC) IC = Operating Profit Interest Expense Acid-Test Ratio/Quick Ratio Acid Ratio = CA Inventory Current Liabilities Days inventory on hand (DI) DI = Inventory x 365 Cost of Sales Debtors collection period (CP) = Accounts Receivable x 365 Sales Gross Profit Margin (GPM) GPM = Revenue COS Revenue Current Ratio CR = Current Assets Current Liabilities 4178/5947 = 0.70 (4178-1256)/5947 = 0.49 (3127+358)/883 = 3.95 times

16906/37499 = 45% (2619+316)/879 = 3.34 times 5.60

(3895-1295)/5978 = 0.43


1256/4640*365 = 99 days

1295/4565*365 = 104 days


1687/19408*365 = 32 days

1665/18020*365 = 34 days


(19408-4640)/19408 = 76 %

(18020-4565)/18020 = 75 %


3895/5978 = 0.63


Price earnings ratio PE = Share Price HEPS Settlement period SP = Accounts Payable x 365 COS

35.75/150.8 x 100 = 24%

29.85/127.3 x 100 = 23%


1103/4640*365 = 87 days

1058/4565*365 = 85 days


4. Ratio Analysis 4.1 Return on equity It measures how the value of the business has increased over the past financial year in relation to the total value of the business. We have been told that it is only through profit the value of the business is increased hence we look at profit in relation to total equity. Although the ratio is below the industry norm it is on an upward curve. I believe that with the existing strategy they have, they will be able to improve on it in the 2012 financial year. 4.2 Return on Capital Employed The above ratio goes hand in hand with ROE. What is does is measure the value the business generates during the year in relation not only to equity but outside borrowings as well. In other words it measures how effective leverage was in generating a companys profitability. Again, we see that there is an upward movement in the ratio from 2010 to 2011 which indicates that SABMiller is utilising their leverage more efficiently to generate profitability. 4.3 Total Asset Turnover The aim of this ratio is to measure how efficient the assets were used to generate the revenue Again we see that the ratio is below the industry norm. For every US$1 invested in assets, revenue of 50c is generated. Again we see an upward trend in asset efficiency. 4.4 Net Margin Net margin measures the final profit after all deductions are taken into account as a percentage of revenue. For every US$100 revenue generated, US$13 profit is generated. Here we see that the company has performed better than the sector ratio. 4.5 Return on Assets ROA determines how well the business has used its assets to generate profit. What we see is that there was an improvement from 2010 to 2011. For every US$100 invested in assets, US$7 was generated in profit. 4.6 Equity Multiplier Equity multiplier is a measure of financial leverage. High leverage could substantially increase the return to the shareholders. The ratio improved from 2.22 in 2010 to 2.38 in 2011. This indicates that the gearing in the business has increased. 9

4.7 Debt ratio Debt ratio is a measure of solvency which reveals the extent to which a company is financed with debt. Investors and creditors use this ratio to determine the companys level of risk. The debt ratio has improved partly due to the net debt reducing by US$1 307. 4.8 Interest cover This ratio measures the degree to which the companys operating profit can pay the interest bill. Shareholders dont want to see operating profits being wasted by a large interest bill. A low interest cover figure means the company may not be able to service debt if profit fall and interest rate rise. Interest cover improved from 2010 to 2011 with the company able to cover the interest 3.95 from operating profit. 4.9 Acid test ratio The acid test (quick) ratio measures a companys ability to meet its short-term obligations with its near cash or liquid assets. The higher the quick-ratio, the better the companys position in meeting its shortterm obligations. Acid ratio is less than 1 which indicates it does not have sufficient current assets to service its current liabilities. SABMiller is still able to operate as its working capital cycle is positive. It collects its debtors in 32 days and pays its creditors every 87 days. It is able to use the cash to cover its operating activities. 4.10 Days inventory on hand

This ratio indicates the number of days the company keep inventory from the day it purchased to the day it is sold. The ratio has improved and the company is ensuring it continues to improve on this as can be read on page 8 of its annual report where it is trying to improve its distribution network.


Debtors collection period

The collection period is the average number of days debtors take to pay. The shorter the collection period the better the cash flow. Collection has improved despite tough economic climate from 34 days to 32 days. 10


Creditors payment period

This ratio indicated the number of days that the company takes to settle its debts, mainly its suppliers. This is probably one of the main reasons SABMiller is able to trade as it took 87 days to pay its creditors. I must admit that on a personal level I wonder how socially responsible that is when a small business has to wait almost 3 months for payment. I guess that is for a discussion on another day. 4.11 Price earnings ratio The price earnings ratio (PE ratio) tells what the market thinks your business is worth. The higher PE ratio suggests that investors are expecting higher earnings growth. Investors were willing to pay R24 for R1 of headlines earnings to get shares in SABMiller in 2011 an improvement from 2010. It is almost double the sector ratio. Again, another reason to hold ones shares in SABMiller.

5. Conclusion My conclusion is that SABMiller has followed the correct growth strategy in ensuring that its future income will be generated from its emerging markets. Its large geographical footprint ensures a spread of risk between developed and developing countries. Also, its local value creation together with the benefits it brings to local communities ensures that its corporate citizenship profile is increased which filters into its desire for long-term value growth.

6. Bibliography 1. SABMiller full year results. (2011, May 19). Retrieved June 4, 2012, from SABMiller site: 2.Market Publishers. (2012, May 11). Retrieved June 4, 2012, from Market Publishers web site: 3.All graphs from SABMiller 2011 financials