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Draft Report
On
05 December 2020
Table of Contents
03 Responses to Requirement-(a)
04 Responses to Requirement-(b)
(i) Evaluation of strategic planning of the company and SWOT analysis 10-12
with recommendations to the Board justifying the acquisition and
05 Responses to Requirement-(c)
06 Appendix 14-19
This report is prepared for the management of Obokash Ltd. (company) based on the information
provided by the management. No attempt has been made to verify the authenticity of the data and
information produced by the management. Necessary adjustments have been made to present the
financial statements fairly and perform the analysis of data for economic decision making
purposes.
The report covers the following:
i. Evaluation of financial performance, assessment of viability of business expansion plan
and its financing options.
ii. Evaluation of the strategic plan of the company and SWOT analysis justifying the
acquisition of business.
iii. Advice regarding appointment of second auditor, ABC & Co.
iv. Assessment of economic and social impacts and evaluation of ethical issues.
This report is prepared solely for the internal use of the management and the Board of Directors
of Obokash Ltd.
Executive Summary
Obokash Ltd. is a well-established company in tourism industry of Bangladesh which leads with
providing tour packages to the customers. It has been experiencing impressive business and
financial growth since incorporation except the year 2020 due to the outbreak of Covid 19 and
other regional chaos. The company intended to acquire K&Q Tourism Company for business
expansion through diversification of services.
Performance Analysis:
We have calculated the adjusted net profit of the company considering the accounting and tax
adjustments which is attached in Appendix-A. The adjusted net profit shows net profit after tax of
Tk. 39.78 million for the year 2019-20.
The performance of the company has been evaluated based on ratio analysis. The revenue has
decreased by 24 percent in 2019-20 due to restricted travelling as a result of Covid-19 pandemic
from early December 2019 globally. The gross profit and net profit of the company has decreased
by 34 percent and 68 percent respectively in 2019-20 from 2018-19 because of the higher cost of
sales caused by Covid-19 pandemic. ROCE has also reduced to 3.75 percent in 2019-20 compared
to that of 7.17 percent in 2018-19 whereas ROA has declined to 1 percent in 2019-20 compared to
that of 4 percent in 2018-19.
The liquidity ratio- current ratio and quick ratio has soared to 1.2 times and 1.09 times respectively
in 2019-20 from 1.16 times and 1.06 times in 2018-19 which shows that the company has enough
current assets to meet the current obligations.
The receivable turnover period of the company has ascended to 44 days in 2019-20 in comparison
with 37 days in 2018-19. The supplier payment period has also increased to 74 days in 2019-2020
from 53 days in 2018-19. This outgoing ratio indicates poor management of the company in terms
of recovery of accounts receivable and working capital management.
Conclusion & Recommendations:
The performance of the company is satisfactory. However, the company should comply with the
rules and regulations of IFRS and guidelines issued by the regulators.
Expansion plan and viability of the acquisition scheme:
We have reviewed the business expansion scheme and financing plan of the company. We
calculated the Net Present Value (NPV) of the future cash flows using discounted cash flow
technique. The calculated net asset value (NAV) of K&Q is Tk. 190 million, which is considered
to be the purchase consideration of acquiring K&Q. The discounted projected future cash flows
(Appendix-B) indicated positive NPV of Tk. 137.12 million. Therefore, the expansion scheme
may be viable and acceptable. However, management should look at the non-financial factors
while taking decision.
Detail Report
Responses to Requirements: (a)
We have prepared the adjusted net profit of the company which is attached in ‘Appendix-A’ of
this report. We have considered the adjusting events of inadequate tax provisions, loss on sale of
fixed assets. Nevertheless we have not accounted for the forgery in selling flats.
We have evaluated the company performances based on ratio and basic trend analysis. We have
further compared the data with industry average where applicable.
Inventory holding period has increased to 74 days in this year from 53 days in the previous year
which indicates management inefficiency in terms of working capital management. The probable
reasons for this can be slow items included in the inventory due to Covid-19 pandemic. Moreover,
the quality of services being impacted by coronavirus outbreak can be another possible reason for
restructuring.
Business size, growth and related party:
Investments in fixed assets and human capital have been downsizing every year which indicates
that the company has been narrowing its management efficiency and operational capacity.
Mahin Ltd. is a related party and it may sell goods to Obokash in loaded price than usual market
price.
Conclusion:
The company has purchased 25 percent of supplies from Mahin Ltd. which may adversely impact
the performances of the company. Given the global Covid-19 outbreak, the overall performance
of the company can be considered ‘satisfactory’.
Recommendation:
We recommend the company to diversify its services to meet the customer demands. The company
is recommended to review its existing strategic plans to improve profitability. System re-
engineering of the collection process and inventory management should be used to improve
efficiency ratios.
The incremental revenue of 10 percent over the year for the next 16 years and thereafter, is
evaluated in terms of its present value at expected rate of return @11 percent per annum. The
acquisition consideration is computed at net assets value of Tk. 190 million. The project then gave
positive Net Present Value (NPV) of Tk. 137.12 million (Please refer to Annexure –B).
Henceforth, the company should go for acquisition because of increase in market shares and
revenue generation along with the following synergy impacts:
Revenue synergy- 10 percent revenue will increase over the years for the next 16 years because
of better negotiation skills with international tour operators, hotels and best air ticket sellers for
tourists.
Cost synergy – The overhead costs of the amalgamated company may be reduced because of the
economies of scale and better negotiation skills of the supply chain employees.
Operational efficiency –The company has loyal customers and good network with foreign tourists
particularly in the USA and the Middle East whereas K&Q has staff experienced in negotiation
and reputation in booking hotels and tickets at reasonably lower prices.
Economies of scale – Economies of scale will arise due to synergy effect of acquisition.
However, the company has been working on fixing the complaints made by the customers in terms
of arranging quality foods and secured services, shortage of company working capital, holding
higher inventory and adequate capable tour guides. The sector is enjoying comparative advantages
of getting government support in terms of infrastructure for Islamic Tourism and strengthening
security of the tourists to have higher contribution in GDP.
Financing options for business expansion:
The Obokash has three financing options which are Initial Public Offering (IPO), issuance of
subordinate bonds and bank loan. The calculated value per share of the amalgamated company as
per earnings based valuation technique is Tk. 2.66. The company may not get 50 percent premium
over face value in offering shares to the general public through IPO.
Initial Public Offer (IPO):
The company expects a 50 percent premium of Tk. 5 over face value of the shares of Tk. 10 each
while issuing initial public offering (IPO) for raising fund of Tk. 2000 million. The calculated
value per shares of amalgamated company (Appendix-C) is computed to be in between Tk. 1.84
and Tk. 35.85 per share.
The EPS for last 5 years has remained within Tk. 0.28 to Tk. 0.62 whereas dividend per share
(DPS) has remained within Tk. 0.25 to Tk. 0.50. The dividend payout ratio of the company and
governance culture here indicates that the BSEC may not approve of the IPO application with a
premium of Tk. 5 each.
Advantages of IPO include wider pool of finance, enhancement of public reputation and growth
in confidence although it comes with disadvantages of dilution of control, high issuing cost,
consumption of time and strict regulations.
Issue of subordinate bonds:
The company may raise the fund through issuance of subordinated bonds. It is easier to arrange
the fund through this option which is also comparatively a cheaper source of finance than equity.
It has no dilution impact on EPS and interest is tax deductible increasing the growth ratio of the
company.
Bank loan:
The company may raise fund through bank loan which is again easier to arrange and cheaper than
equity finance. In this case, no dilution of controls arises in the company and bank interest is tax
deductible.
Conclusion
The company should pursue the project due to projection of the expected growth. IPO appears to
be a preferable choice for this case other than bank loan or issue of subordinate bonds.
Recommendation:
We recommend the company to issue IPO for raising the required fund for acquisition. For issuing
the IPO with expected premium, the company should maintain proper book of accounts and should
comply with the BESC rules.
The company has been providing tour services to the customers and achieving substantial growth
till the year 2019. Covid-19 pandemic has unfortunately pulled down the growth of the business
and its performances. However, Bangladesh has great opportunities in the tourism sector and
therefore the company can expect to have better business prospects in future. In this regard the
company has undertaken some strategic business decisions to bring back its business in a positive
platform which are:
Purchasing of K&Q Ltd., a tourism company
Negotiating with the international tourism companies for air ticket booking and hotel
fixation at discounted prices throughout the year
Expending company assets efficiently and keeping the resources healthy all the time
Preserving high quality services, and
Delivering superior financial performances etc.
Conclusion:
With the above mentioned strategic plans, the company is presuming to reach its goal and achieve
its objectives.
SWOT Analysis and justification of the acquisition of K&Q
Strengths:
The company is well established and operates it business throughout the country. It offers services
to the global village particularly in the Middle East countries and the USA. The company has a
large operating capacity, experienced resource pool, leading brand reputation, delivery of quality
services, and good relationship with customers along with the compliance of applicable rules and
regulations, to use the diversity and abundance of tourist places in Bangladesh at its best.
Weakness:
The growth of the company is slow owing to its high capital cost but low investment. There is also
shortage of adequate infrastructural development and lack of security and hygiene measures in
Bangladesh.
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Opportunity:
The service of the company has huge demand both at home and abroad. Due to globalization and
its scope for dissemination of information and communication, there arises possibilities of making
the tourist spots more attractive and creating new business segments. The company has earned a
reputation for providing quality services to the customers and has probabilities of further obtaining
synergy benefits for acquisition. Furthermore, the number of new entrants in this business is
comparatively lower.
Threats:
The company has huge competition and higher market shares. The company also has to face
serious threats like conservative social and religious systems, absence of proper tourism policies,
strict regulations of the government, technological changes, political collision between tribal and
Bengali people, and political instability in the country.
Conclusion & Recommendation:
Every weakness and threat create an opportunity for reconsidering the strategic plans. We
recommend the company to comply with the rules and regulations and maintain the integrity issues
in line with the code of conduct issued by the authority.
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The company management intended to appoint ABC & Co. as a second auditor of the amalgamated
company after holding annual general meeting (AGM). The company management has decided to
appoint a second auditor in order to achieve the following:
ABC & Co. Chartered Accountants will prepare the IPO prospectus fulfilling certain
requirements to get an approval of the prospectus at premium even at lower EPS and
dividend pay-out ratio.
ABC & Co. has agreed to compromise the compliance of reporting issues.
ABC & Co. being an expert in taxation services, has suggested to release the deferred tax
liabilities
The above matters are threats to the fundamental principles of ethics. Therefore, the appointment
of ABC & Co. would be illegal because the previous auditor has already accepted the appointment
for the next year and submitted Form 23B to RJSC. Every company should appoint an external
auditor in accordance with section 210 of Company Act 1994 and Section 31 of the Financial
Reporting Act 2015. Moreover, as per Companies Act, auditor must be appointed in annual general
meeting (AGM) where the auditor has to get approved by the shareholders. Since no decision was
taken in AGM regarding the appointment of second auditor, the company management cannot
appoint ABC & Co, as a second auditor for next year.
Conclusion & Recommendation:
The primary objective is to appoint the new auditor possess threats to the fundamental principles
of ethics. The company should comply with the above procedures to appoint auditors of the
company. Accordingly, the appointment of ABC & Co. is illegal as the existing auditor has
submitted its acceptance in 23B. However, company management can appoint ABC & Co, as an
Adviser or Financial Consultant.
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Appendix-A
Calculation of Adjusted Net Profit:
The Obokash Ltd
Statement of Profit & Loss Accounts (Extract)
For the year ended 30 June 2020
Figures in million
Amount in Tk.
Operating Profit 95.30
Add: non- Operating income 1.26
Less: Loss on Sales of Property (3 million- 2 million) (1.00)
Less: Provision for Gratuity (assuming that no provision was (20.00)
made by the management for gratuity)
Profit before WPPF 75.56
Less: Contribution of WPPF (3.78)
Profit before Tax 71.78
Income Tax Provision (32.00)
Net profit after tax 39.78
EPS 0.20
Selling of flats at substantially lower price to the relatives is a fraudulent activity and
related party transaction, which need to be disclosed. The company management and BOD
must comply with the regulations and IFRS to record such transaction in the company
accounts.
Notes:
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ii. Property sales Tk. 2 million which book value was Tk. 3 million. Tk. 1 million loss is
charged to the P/L Account during the year 2019-20 and also property value decreased
Tk. 3 million from the Balance Sheet during the year.
iii. Special discount for supplier 5% not effect during the financial statement because it
just completed negotiation.
iv. 20 Katha Land in Bandarban gave the power of attorney on 30 June 2020, this is not
accounts for because this is not financial transaction, Need to disclosures.
1. Performance Analysis:
b. Ratio Analysis:
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Efficiency Ratio:
Assumption:
i. We assume all bales are credit sales considering the receivable turnover period.
ii. Year Consider as 365 days
iii. Purchase Consider as closing inventory plus COGS minus Opening inventory for payable
period.
iv. Inventory Consider as cost of sales for calculation of inventory holding period.
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Appendix-B
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NPV Calculation:
For the above calculation the NPV of the project is positive of Tk. 137.12 million. So, project may
be accepted from financial consideration point of view.
Assumption:
i. Additional income consider 50% of incremental sales revenue.
ii. Tax rate will remain unchanged i.e. @25%
iii. Assume the project is continue in foreseeable future. So, consider terminal value as
valuation of PV of cash flow.
iv. Acquisition Cost consider as net assets value of acquisition @ 190 million. No goodwill
consider for the valuation of K&Q Tourism Company Limited.
v. NPV of the project is positive. So the management of the company should acquire the
K&Q Tourism Company Limited.
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Appendix-C
So, the above calculation, the indicative price of a share could be between Tk. 1.84 to Tk. 35.85.
The face value of amalgamated shares would be Tk. 10.
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