ACC 4345: FINANCIAL STATEMENT ANALYSIS

Financial Statement Analysis of Kahawatte Plantations PLC

Group No. 01

7th October 2020

Year IV, Semester II

Department of Accounting
Faculty of Management Studies and Commerce
University of Sri Jayewardenepura
Nugegoda
 Group Members

Name MC CPM
P. G. B. MADUMALI 83764 16101

W. N. V. FERNANDO 83527 16086

K. M. M. S. T SEWWANDI 84078 16236

U. P. ALUTHWATTA 83343 16758

P. U. U. FERNANDO 83522 16536

F. M. A. MOHAMMED 83814 16532

R. M. S. D. RATHNAYAKE 83988 16367

P. G. D. P. AMARASIRI 83353 15916

M. LAJEEVAN 83724 16247

W. H. SHASHANKA 84086 15962

i
Acknowledgement

We wish to express our sincere gratitude to the subject coordinator and resource person of
Financial Statement Analysis, Mr.Rangajeewa Herath for the knowledge and timely
encouragement given to us to perform this assignment on the analysis of financial statements. We
express our sincere gratitude to the Head of the Department, Dr. Harendra Kariyawasam and all
the lectures of the Department of Accounting for the efforts which were taken to improve our
knowledge, skills, and attitudes. Further, institutional personnel, friends and all the others who
supported us in preparing this report are also appreciated greatly.

ii
Table of contents

Group Members ................................................................................................................................. i

Acknowledgement ............................................................................................................................ ii
Executive summary .......................................................................................................................... 1
Introduction ...................................................................................................................................... 2
Company Profile........................................................................................................................... 2
Scope of the study ........................................................................................................................ 2
Methodology ................................................................................................................................ 2
STEP 01: Industry Analysis ............................................................................................................. 3
Overview of Plantation Sector in Sri Lanka ................................................................................. 3
Tea ............................................................................................................................................ 3
Rubber ...................................................................................................................................... 3
Industry Economic Analysis............................................................................................................. 3
Industry Economic Analysis Using PESTEL ............................................................................... 3
Political Factors ........................................................................................................................ 3
Economic Factors ..................................................................................................................... 3
Social Factors ........................................................................................................................... 4
Technological factors ............................................................................................................... 4
Environmental Factors.............................................................................................................. 4
Legal Factors ............................................................................................................................ 4
Industry Economic Analysis Using Porter’s Five Forces Model ................................................. 4
Vertical competition ..................................................................................................................... 4
Supplier power ......................................................................................................................... 4
Buyers Power ........................................................................................................................... 5
Horizontal Competition ................................................................................................................ 5
Threat of Substitution ............................................................................................................... 5
Threat of new entrants .............................................................................................................. 5
Degree of competition .............................................................................................................. 5
Industry Economic Analysis Using Value Chain Model.............................................................. 5
Industry Economic Analysis using Economic Attributes Framework. ........................................ 5
Demand .................................................................................................................................... 5
Supply....................................................................................................................................... 5
Manufacturing .......................................................................................................................... 5
Marketing ................................................................................................................................. 6
Investing and Financing ........................................................................................................... 6

iii
STEP 02: Strategy Analysis ............................................................................................................. 6
Diversification strategy ................................................................................................................ 6
Human Resource Development and Social Responsibility .......................................................... 6
Futuristic strategic focus............................................................................................................... 6
STEP 03: Analyze profitability and risk .......................................................................................... 6
Common size analysis & Trend Analysis .................................................................................... 7
Common size Statement of profit or loss of KWPL (In %) ..................................................... 7
Common size Statement of Financial Position of KWPL (In %) ........................................... 10
Ratio Analysis ............................................................................................................................ 11
Analysing operating activities ................................................................................................ 11
Analysing Investment Activities ............................................................................................ 12
Analysing Finance Activities ................................................................................................. 14
Risk Analysis.............................................................................................................................. 16
Risk Management Policy ........................................................................................................ 16
STEP 04: Forecasted Financial Statement ..................................................................................... 20
Forecasted Statement of Profit or Loss ...................................................................................... 20
Forecasted Statement Financial Position .................................................................................... 21
STEP 05: Valuation of the company .............................................................................................. 23
Net assets method ....................................................................................................................... 23
Earning valuation basis .............................................................................................................. 23
Discounted cash flow method .................................................................................................... 24
Conclusion ...................................................................................................................................... 25

iv
List of Tables
Table 1:Common size Statement of profit or loss of KWPL (In %) ................................................ 7
Table 2:Common size Statement of Financial Position of KWPL (In %) ...................................... 10
Table 3:Asset Utilization Ratios ..................................................................................................... 13
Table 4:Short-Term Liquidity Ratios ............................................................................................. 17
Table 5:Long -Term Liquidity Risk Ratios .................................................................................... 18
Table 6:Interest rate risk ................................................................................................................. 19
Table 7:Forecasted Statement of Profit or Loss ............................................................................. 20
Table 8:Forecasted Statement Financial Position ........................................................................... 21
Table 9:Net assets per share ........................................................................................................... 23
Table 10:Earning valuation basis ................................................................................................... 24
Table 11:Discounted cash flow method ......................................................................................... 24

List of Figures
Figure 1:Trend Analysis of P&L ...................................................................................................... 8
Figure 2:Product wise Sales and Cost of sales ................................................................................. 8
Figure 3:Revenue from Mini Hydro Power plant ............................................................................. 9
Figure 4:Trend Analysis ................................................................................................................. 11
Figure 5:EPS Movement ................................................................................................................ 11
Figure 6:GP margin, PM,ROA & ROE across 5 years .................................................................. 12
Figure 7:Inventory Turnover Ratios ............................................................................................... 14
Figure 8:Receivables Turnover Ratios ........................................................................................... 14
Figure 9:Payables Turnover Ratios ................................................................................................ 14
Figure 10:Current Ratio.................................................................................................................. 15
Figure 11:Quick Ratio .................................................................................................................... 16
Figure 12:Extract of the entity’s 2019 annual report ...................................................................... 25

v
Executive summary

This report focuses on an analysis of financial statements of Kahawatte Plantations PLC, one of the
country's largest companies with an annual turnover in excess of Rs 75 billion. The objective of this
report is to obtain an understanding of the financial position, performance and future trend of
Kahawatte Plantations PLC by critically analysing the past five years’ financial statements of the
company.
Method of analysis includes industry and strategic analysis, common size analysis, accounting
analysis, comprehensive ratio analysis covering profitability, liquidity, work in capital management
etc., risk analysis, forested financial statements, and business valuation. For this purpose, Statement
of Profit or Loss and Other Comprehensive Income, Statement of Financial Position, Statement of
Cash Flows, Statement of Changes in Equity and Notes to financial statements of Kahawatte
Plantations PLC for the years ending 31st December 2015, 2016, 2017,2018 & 2019 have been
scrutinized using published annual reports.

1
Introduction
Company Profile
Kahawatte Plantation PLC (KWPL) is one of the leading agribusiness companies in Sri Lanka. The
company is guided by the vision of “Enjoy leading the way in creating the best value agribusiness
enterprise”. The company mission is to “Enhance stakeholder value, surpass customer expectations,
and empower people in a learning organization, be an employer of choice, respect and nurture planet
earth.”
KWPL was incorporated under the Companies Act No.17 of 1982 on 15 June 1992. Afterwards, it
was re-registered under the Companies Act, No. 07 of 2007 on 26th December 2007.
The company’s principle activities are cultivation, manufacture and marketing of tea, rubber,
cinnamon, forestry products and other crops. However, the company’s core business is
manufacturing and sale of tea and this line of business accounts for the entire operation of the
company. Its estates are spread over the Kahawatte region and Nawalapitiya region. The company
plays an important role in Sri Lankan plantation economy and is amongst 20 key plantation
companies operating within the country.

Scope of the study

This study analyses the financial statements of KWPL PLC from 2015 to 2019. We attempt to
forecast the financial statements and ultimately value the company based on the information
gathered from the annual reports and publicly available information of the company.

Methodology
The scope the study is attempted to be covered through the following steps;
1. Identifying economic characteristics and competitive dynamics in the plantation industry
2. Identifying company strategies
3. Analyzing the profitability and risk of the company
4. Projecting the future financial statements
5. Valuing the company

2
STEP 01: Industry Analysis
Overview of Plantation Sector in Sri Lanka
Tea
Compared with 2018, in terms of prices and revenue, the tea industry demonstrated a very low
improvement. Total sales volume for 2019 was 301 Mn kg,10 Mn kg more than in 2018. Total
export volume amounted to 92Mn kgs, an increase of 10Mn kgs vs the previous year.
Rubber
Natural Rubber (NR) prices recorded slight downward movement in the current year. However,
newly planted rubber estates will contribute to an oversupply situation up to 2028. China and India
used almost 50% of the global rubber consumption and a reduction in rubber consumption of those
countries adversely affected. The NR market will continue to be heavily influenced by major
external factors, such as oil price movements. A preview of the volatile global economy for 2020
and anticipated developments do not favor a recovery of NR prices in 2020.

Industry Economic Analysis

KWPL is one of top 20 players in planation industry. Company mainly depends on tea and rubber
production and sales. However as many of companies in industry, KWPL made losses during the
year 2018 and 2019. The reporting period of KWPL ends on 31st December and therefore we
selected the latest annual report which is the annual report of 2019 for the comprehensive industry
economic analysis. The economic analysis is based on the following tools;
1. PESTEL analysis
2. Porter’s Five Forces Model
3. Value chain model
4. Economic Attributes Framework

Industry Economic Analysis Using PESTEL

Under PESTEL analysis we can identify and explore political, economic, social, technological
environmental and legal aspects of KWPLs activities.
Political Factors
• The government policy on ban to the use of Glyphosate, adversely impacted the plantation
productivity.
• Government policies on estate workers’ minimum wages is a hinderance for hiring and
firing
• The political instability towards the latter part of 2019 adversely affected the industry.
• Political decisions relating to main buyers of tea and rubber (Russia banded import tea from
Sri Lanka due political reasons.)
Economic Factors
Price level of local and foreign tea, rubber and cinnamon markets directly affect KWPL. Estate
employees’ wage negations with trade unions and market wage rates highly impact to companies’
production cost and performance. Fluctuations in the foreign exchange rate directly affects
company’s export sales revenue.
In brief, we can identify following factors as economic factors affecting KWPL;
• Inflation rate for companies’ outputs and inputs.
• Requirement of continuous increase in wages of estate workers.
• Unpredictable fluctuations in foreign exchange rates.
• Unpredictable fluctuations of local and foreign market demand of company products.
• Economic conditions of major buying countries of tea and rubber.

3
Social Factors
Following main social responsibility are described in the annual reports.
• Company vows never to use child labour.
• Continuously improve health and safety of employees.
• Company mainly believes that all development should be sustainable while preventing
planet Earth.
Technological factors
Company tries to utilize technology and techniques to maximize production and reduce costs. As
per their Chairman review in the annual report, the company has undertaken the following;
• Adoption of new technologies to support management of tea, rubber, cinnamon & other
ancillary crops. The adoptions are expected to deliver results over a 3-year period.
• Use technology to increase land productivity.
• Conduct research on a climate adaptive and eco-friendly farming and crop management
package for tea.
• Invested Rs. 56.6Mnin new technology during the year.
Environmental Factors
Company links environmental sustainability with their operations. KWPL identifies that the
environmental sustainability of its plantations depends on the health of the ecosystem at large.
KWPL collaborates with Dilmah Conservation to initiate climate-smart agricultural projects,
biodiversity conservation projects and climate educational programs. Following are some activities
undertaken by the company to align its activities with environmental needs.
• Company has undertaken research on climate adaptive and eco-friendly farming and crop
management package for tea.
• Company conducted a tree planting event within 2019
• Started Biochar application in the plantations, which is a nutrient rich soil enhancer, is
capable of offsetting greenhouse emissions.
• Continuation of the Endana Nature Corridor Project which is directed towards establishing
a biodiversity corridor. This is an attempt to regain biological connectivity among the
fragmented forests around the Sinharaja World Heritage Site
Legal Factors
Government as well as other authorities related to the plantation sector such as the Sri Lanka Tea
Board have a comprehensive list of rules and regulations which the company adheres. Some of
such Acts and rules which are adhered by the company are;
• Companies Act No. 07 of 2007
• Employee’s Provident Fund Act
• Employee’s Trust Fund Act
• Collective agreements entered between the EFC, the CESU & NESU
• Inland Revenue Act No. 24 of 2017
Also, KWPL is directly regulated and monitored by ministry of plantations. Labour laws and
government policies relating estate employees’ effects companies’ performance as it reduces the
flexibility of operations. Also, environment policies of government directly affect the plantation
industry.

Industry Economic Analysis Using Porter’s Five Forces Model

Vertical competition
Supplier power
Mainly labor incentive industry. Therefore, power of labor suppliers and trade unions are very high.

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Buyers Power
Prices of tea and rubber are mainly decided in global auctions. Demand quantity mainly depend on
global market. Therefore, buyer power is also high.

Horizontal Competition
Threat of Substitution
Artificial materials were introduced for rubber at less cost. Substitutes for tea such as coffee gained
more popularity in the recent past.
Threat of new entrants
The initial capital requirement and regulations over the plantation industry is complex. Therefore,
threat of potential entrants to the industry is low.
Degree of competition
Within the industry we can identify high level of competition. Small and medium sector companies
and estate owners serve the local market and the local market has limited demand. Therefore, almost
all large companies try to win over the global demand. There are more than 20 players in the market.
Therefore, competition within the market is high.

Industry Economic Analysis Using Value Chain Model

The value chain of the industry represents the main internal activities and supportive activities a
company in the industry undertakes when converting their inputs into outputs. These activities
provide means of achieving competitive advantage to the companies. The point at which the
competitive edge is created differs
The industry’s main activities can be analysed based on Porter’s Value Chain Model. The activities
initiate at the point of plucking the produce. Thereafter, transporting such to the factory and storing
them for processing forms the inbound logistics. Processing the produce comes next. The processed
produce is stored until they are distributed to the customers and dealers. Such activities form the
outbound logistics of the company. All of these primary activities are performed with the support
of activities such as financial and managerial infrastructure, procurement, effective human resource
management procedures and advanced technological assistance. The company provides a highly
diversified selection of tea, rubber and cinnamon and thus, we see the ‘operations’ as the vital point
where the company adds value.

Industry Economic Analysis using Economic Attributes Framework.

Demand
Demand for the company’s tea and rubber mainly depend on global tea and rubber market demand.
Price of the products also depend on global market tea and rubber auctions. Middle East countries
buy most of the tea brands whereas India and China are the main buyers of rubbers. Buyers power
is high in these markets. Demand for tea and rubber depend on many external factors such as
fluctuations in the oil market.
Supply
All most all plantation companies in the industry provide the same agricultural products to the
market. Therefore, suppliers’ power is low. Requirement of a very high amount of capital
investment which includes obtaining land rights and other sophisticated regulations over the
industry act as the main barriers for entry. No company holds a substantial market share both in the
local and global markets and thus, no company is powerful over the other in the industry.
Manufacturing
Tea and rubber production are highly labour incentive. According to the annual report of KWPL,
they have more than 4500 employees. Production process involves extensive use of equipment.
Such equipment used for processing agricultural produce are similar among plantations companies.

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Marketing
Promoting activities are carried out mainly through the company website where buyers are invited
to place a quote for the varieties of tea, rubber and cinnamon.
Investing and Financing
According to 2019 annual report the company has more than 4.4 Bn non-current assets and more
than 0.5 Bn current assets. As a planation company, it is normal to have a higher amount of non-
current assets. Such non-current assets mainly include plantation estates, factories, and machineries.
Liquidity of these assets are at very low. Most of land are leased from the government for 99 years.
Currently the industry is not much profitable to maintain strong cashflows. According to KWPL’s
cashflow statement, net operating cashflow is negative in 2018 and the positive value in 2019 is not
substantial. Company currently have more than 4.4 Bn liabilities and its equity is only 0.7 Bn,
indicating that the company is geared.

STEP 02: Strategy Analysis

Diversification strategy
The company is more towards following a differentiation strategy as it is difficult to influence
prices. As per the prevailing economic and political uncertainty of the state’s ancillary crop policies
KWPL is continuing to pursue opportunities for supplementing core crops with other cultivations.
Furthermore, company has spent 1.9 Bn on rubber and tea replanting since 2012.

Human Resource Development and Social Responsibility

Plantation community development, which has been an integral part of the overall strategy of the
KWPL, is supported by the MJF Charitable Foundation. It mainly focuses on nutrition support
programs covers 62 child development centers of the company. The MJF Foundation's Scholarship
Program helped 16 students with specialties during the year.
Most of the programs started in previous years will continue till 2019. Some of such programs are
aimed at preventing dengue fever, raising awareness of both infectious and non-communicable
diseases, dental hygiene clinics, and visual review reporting clinics.

Futuristic strategic focus

Its board has been stable over the past few years and has been spending a considerable amount on
core development. In parallel, KWPL has undertaken major complementary crop development
programs to develop new sources of income and have a moderate reliance on volatile traditional
crops. The board has initiated a comprehensive effort to diversify crops with fruit and vegetable
crops on some farms. With the participation of the MJF Foundation and Dilmah Conservation,
micro and small enterprise programs will be implemented, which includes aspects of agroforestry
and broader environmental sustainability. The adoption of new technologies to support the
management of tea, rubber, cinnamon and other ancillary crops is expected to produce results over
a period of 3 years.
The fundamental challenges for the industry intensified in 2019. Reduction in land productivity,
over-reliance on pruning-labor, and lack of comprehensive national mechanization and automation
are aspects which are yet to be resolved. Improvements in regular wage productivity, stable or
declining export earnings and the complete absence of a national policy for the development of a
sector that provides livelihood to more than 10% of the country’s population are major challenges
to overcome in the coming years.
In the face of the aforementioned challenges the company is considering a mechanism to obtain
cheaper sources of financing, in particular for replanting / filling. Also, the company has plans to
halt the decline in land productivity.

STEP 03: Analyze profitability and risk

The profitability and risk of KWPL is analyzed hand-in-hand using the following methods;

6
 Common size analysis & Trend Analysis
Common size Statement of profit or loss of KWPL (In %)
(Revenue is used as the base for the preparation of common size statement of profit or loss)

Description 2019 2018 2017 2016 2015 2014

Revenue 100.00 100.00 100.00 100.00 100.00 100.00
Tea 88.75 89.54 89.55 86.53 91.05 90.55
Rubber 9.60 8.90 8.29 9.61 7.56 8.42
Others (5.1a) 1.65 1.56 2.16 3.86 1.40 1.03
Cost of sale (109.94) (104.12) (93.03) (98.73) (104.90) (96.54)
Tea (93.62) (88.36) (82.09) (83.97) (94.60) (86.40)
Rubber (13.85) (12.23) (9.15) (12.60) (9.22) (9.47)
Others (5.1a) (2.47) (3.54) (1.80) (2.16) (1.07) (0.67)
GP (9.94) (4.12) 6.97 1.27 (4.90) 3.46
Other income 2.36 2.96 1.50 1.15 1.21 1.16
Amortization of Capital Grants 0.47 0.78 0.54 0.37 0.33 0.28
Sale of Redundant Items - - (0.02) 0.05 0.03 0.06
Rent Income 0.12 0.11 0.10 0.12 0.12 0.12
Annual Income from Mini Hydro Power
Project 0.21 0.21 0.11 0.15 0.30 0.18
Sundry Income 1.12 1.25 0.68 0.32 0.43 0.48
Write Back of Other Payables 0.45 0.60 0.09 0.15 - 0.03
Fair Value Gain on Biological Assets 5.23 3.62 0.97 0.82 2.62 5.98
Administrative Expenses (4.08) (3.74) (3.52) (3.98) (4.13) (3.39)
PL from Operating activities (6.43) (1.29) 5.92 (0.74) (5.19) 7.20
Net Finance Cost (10.10) (7.78) (5.32) (4.93) (2.65) (2.51)
Profit/(Loss) before Taxation (16.53) (9.07) 0.60 (5.67) (7.84) 4.69
Income Tax (Expense) / Reversal (2.13) 1.05 (0.12) 0.68 0.79 (0.89)
Net Profit/Loss (18.66) (8.01) 0.48 (4.99) (7.04) 3.80
Other Comprehensive Income
- Items that will never be reclassified to
Profit or Loss;
Actuarial Gain on Retirement Benefit
Obligation 2.21 3.19 2.65 5.21 1.23 (3.97)
Deferred tax charge on Retirement Benefit
Obligation (0.31) (0.45) (0.37) (0.74) (0.18) 0.58
Surplus on Revaluation of Plant &
Machinery 11.43 - - - - -
Deferred tax charge on Revaluation of Plant
& Machinery (1.60) - - - - -
Other Comprehensive income for the
year, net of tax 11.73 30.83 27.50 46.57 13.96 (40.37)
Total comprehensive Income /(expense)
for the year (6.93) (59.24) 33.25 (5.32) (79.27) 4.77
Table 1:Common size Statement of profit or loss of KWPL (In %)

7
 Trend Analysis of P&L
4,000,000

3,000,000

2,000,000

1,000,000

-
2019 2018 2017 2016 2015 2014 2013
(1,000,000)

Sales Cost of sales

Gross Profit Net Profit
Figure 1:Trend Analysis of P&L

With the available financial statements, latest being the financial statement of 2019 we can observe
that the company is struggling in their performance. One of the main factors that’s affects
profitability is the top line. In the company, the top line has been deteriorating in the past years.
This is a direct result of loss of tea market and other adverse seasonal changes which affects the
industry as a whole.
The cost of sales data provides a basic overview of cost incurred for the top line. In KWPL, cost of
sales has a positive relationship with sales. As a result, the gross profit shows a steady decrease.
This is acceptable since the company cannot make a substantial change in the sales or cost of sales.
However, in actual terms, in 2019 the cost of sale of tea, rubber, cinnamon and other products is
greater than the sales itself. This puts high doubt on companies’ ability to manage its products. The
increase in cost of sales in 2019 from 2018 is just 8%. Though this percentage change is minimal,
the gross loss of the company has increased by 112% as revenue of the company has dropped by
12%.
Below graph shows the 2019 results of product wise sales and cost of sales.

Product wise Sales and Cost of

sales
3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
-
Tea Rubber Others (5.1a)

Revanue Cost of sale

Figure 2:Product wise Sales and Cost of sales

In 2019 other income has reduced by 30% compared to 2018. Most of its sustainable income is
from the mini hydro power plant. Performance of the hydro power plant is show in the below graph.

8
 Revenue From Mini Hydro Power
plant
10,000

8,000

6,000

4,000

2,000

-
2019 2018 2017 2016 2015 2014 2013

Figure 3:Revenue from Mini Hydro Power plant

The major reason for the lower yield during 2019 in tea plantation was due to a ban imposed by the
government on use of glyphosate, which was removed later. Another factor which has led to the
reduction of revenue from tea is that there is insufficient replantation of tea bushes. However, the
company has taken measures to invest in bio assets. This is an indication that the company has
undertaken efforts in replantation which will help to increase the profitability in the coming years.
High cost in rubber is due to high cost to process the rubber in Sri Lanka. This has made Sri Lankan
rubber less competitive in the world market as Sri Lankan rubber is comparatively expensive. This
is another factor which contributes to reduce the yield. As part of its intended strategies the company
is seeking more cost effective and automotive ways to process rubber in order to be competitive in
the global market by increasing profitability through cost saving and capturing new customers.
Furthermore, the company experiences an operating loss in 2018 and 2019. A significant increase
in the operating loss in relation to sales can be seen in 2019 compared with 2018. This is mainly
due to the increase in labour costs by 46% from 2018 and due to the increase of defined contribution
plan costs by 30%. Added to this, the company has an inventory write off worth Rs. 4 million.

9
Common size Statement of Financial Position of KWPL (In %)
(Total Asset is used as a base for the preparation of common size statement of financial position)

Description 2019 2018 2017 2016 2015 2014

Non-Current Assets
Leasehold Right to Bare Land of
JEDB/SLSPC Estates 3.05 3.36 3.50 3.84 4.25 4.59
Immovable Leased Assets of JEDB/SLSPC
Estates 1.07 1.37 1.57 1.91 2.38 2.85
Property, Plant & Equipment 20.56 15.46 15.52 17.09 18.50 19.79
Biological Assets 64.68 67.86 65.94 63.74 63.23 57.18
89.37 88.05 86.52 86.57 88.35 84.41
Current Assets
Produce on Bearer Biological Assets 0.11 0.12 0.16 0.14 - -
Inventories 6.87 8.52 10.77 10.05 8.54 11.46
Trade and Other Receivables 3.05 2.86 2.31 3.02 2.94 3.89
Amounts due from Related Parties 0.11 0.10 0.02 0.01 0.01 0.01
Cash and Bank Balances 0.49 0.36 0.22 0.21 0.15 0.22
10.63 11.95 13.48 13.43 11.65 15.59
Total Assets 100.00 100.00 100.00 100.00 100.00 100.00
EQUITY AND LIABILITIES
Equity
Stated Capital 17.86 19.60 19.64 20.80 22.23 23.26
Revaluation Reserve 5.33 - - - - -
Accumulated Losses/ retained earnings (10.69) (0.69) 2.89 0.65 1.04 5.32
12.51 18.91 22.52 21.45 23.27 28.58
Non-Current Liabilities
Deferred Income 5.98 6.79 6.95 7.37 7.92 7.79
Deferred Tax Liability 2.80 0.67 1.08 0.71 0.72 1.18
Interest Bearing Loans and Borrowings 13.49 6.18 8.03 11.61 11.69 13.69
Retirement Benefit Obligations 9.86 11.78 13.18 15.26 18.54 18.57
Net Liability to Lessor of JEDB/SLSPC
Estates 2.54 1.59 1.63 1.77 1.92 2.05
34.67 27.00 30.86 36.71 40.79 43.28
Current Liabilities
Interest Bearing Loans and Borrowings 10.96 16.12 11.36 10.15 8.08 0.77
Net Liability to Lessor of JEDB/SLSPC
Estates 0.01 0.04 0.03 0.04 0.04 0.04
Trade and Other Payables 12.93 11.78 12.27 13.30 11.94 11.89
Amounts due to Related Parties 12.61 7.76 6.16 6.24 3.03 1.72
Bank Overdraft 16.31 18.40 16.79 12.11 12.86 13.73
52.82 54.09 46.61 41.84 35.94 28.14
Total Liabilities 87.49 81.09 77.48 78.55 76.73 71.42
Total Equity and Liabilities 100.00 100.00 100.00 100.00 100.00 100.00
Net Asset per Share 7.88 10.86 12.91 11.60 11.78 13.82
Table 2:Common size Statement of Financial Position of KWPL (In %)

10
 Trend Analysis of Assets Trend Analysis of Liabilities &
6,000,000 Equity
5,000,000 6,000,000
4,000,000
3,000,000 4,000,000
2,000,000
2,000,000
1,000,000
0 -
2019 2018 2017 2016 2015 2014 2019 2018 2017 2016 2015 2014

Current Assets Non current Assets Current Liabilities Non-Current Liabilities

Total Assets Total liabilities Equity

Figure 4:Trend Analysis

We can observe that net assets per share has declined over the years. There is an increase of
property, plant and equipment (PPE) in 2019 from 2018 by 46%. This is partly due to the
revaluation gain of PPE and additions during the year worth Rs. 84.3 Mn. The non-current
liabilities show a drastic increase in 2019 from 2018. This is due to the 140% increase in interest
bearing loans and borrowings. A more detailed picture on the statement of financial position can be
obtained by ratio analysis presented below.

Ratio Analysis
Analysing operating activities
Earnings per share
Earnings per share (EPS) is an indicator of profitability and it is calculated by dividing
company's profit by the outstanding shares of its common stock. KWPL is having a negative
earnings per share value of -6.37 for 2019, this is twice as the loss in 2018 which it had an
EPS of -3.11. Below graph shows the EPS movement in the recent years.

EPS Movement
2
1
0
-1 2019 2018 2017 2016 2015 2014 2013

-2
-3
-4
-5
-6
-7
Figure 5:EPS Movement

GP Margin.
Gross profit margin analyses the financial health of the company by calculating the remainder of
sale after cost of goods sold. At KWPL the cost of goods sold is high that the revenues itself.
Therefore, having a negative gross profit margin throughout the years. It can be observed that the
company is failing to make any returns throughout the recent past.

11
Profit Margin
Profit margin of a company reflects its net profit or loss against the sales. We observed that the
profit margin has been considerably declining which shows that the operations of the entity are
not streamlined, and management is failing in their duty to run the business.
ROA
Return on assets indicate how profitable the business is relative to its total assets. This give the
investors an idea how efficiently the assets are managed by the managers of the company. With
the recent losses at KWPL we arrive at a negative ROA indicating the assets are not managed
properly and efficiently to attract more sales.
ROE
Return on equity is another financial performance calculating the return to equity holders. This
can be arrived as a multiplication of profit margin (PM) and return on assets (ROA). As of KWPL
both PM and ROA are negative, equity holders are losing on their investments. Negative ROE
and failing returns could bring down the stock prices drastically, having investors loss over their
investments.

GPM, PM, ROA, ROE across 5 years

20%
2%
0%

-20%
-15%
-21%
-40% -28%

-60%
-57%
2019 2018 2017 2016 2015

GM Margin PM ROA ROE

Figure 6:GP margin, PM, ROA & ROE across 5 years

Analysing Investment Activities

An asset is a resource controlled by the entity as a result of past events and from which future
economic benefits are expected to flow to the entity. There are two types of assets as follows.
• Current Assets (resources that are expected to be converted to cash within a year)
• Non-current assets (resources expected to generate economic benefits to the company
more than one accounting period)

Asset Utilization Ratios

Asset turnover ratios
Asset turnover ratio gives an indication of how efficiently assets are being used to generate
sales. All turnover ratios are decreasing over the years. One of the reasons for the drop in
asset turnover ratio is due to the increase in PPE by 46%. It is typical for a plantation as major
investments should be made in machinery. During 2019, the company has purchased plant
and machinery worth 61Mn. The drop is due to the drop in sales as well.

Ratio 2019 2018 2017 2016

12
 Asset turnover 0.57 0.68 0.85 0.66
ratio
Fixed asset 0.64 0.78 0.98 0.76
turnover ratio
Current assets 5.04 5.33 6.32 5.28
turnover ratio
Sales (000) 2,730,645 3,105,691 3,784,762 2,775,758
Average total 4,808,810 4,581,856 4,448,925 4,181,661
assets (000)
Average fixed 4,267,247 3,999,150 3,850,338 3,656,229
assets (000)
Average 541,563 582,707 598,587 525,432
current assets
(000)
Table 3:Asset Utilization Ratios

Analysing current assets

When compared to last year current assets decreased by Rs. 13,437,000. It is a 2.45%
decrease compared with last year. There is no significant difference among current assets of
the company.
Analysing Non-Current Assets

Property Plant and Equipment

Property plant and equipment is 23% from the total non-current assets of the company. The
amount of addition to property plant and equipment throughout the year is Rs. 84Mn. Items
of property, plant and equipment are measured at cost less accumulated depreciation and
accumulated impairment losses. Cost includes expenditure that is directly attributable to the
acquisition of the asset. The cost of self-constructed assets includes the cost of materials and
direct labour and any other cost directly attributable to bringing the assets to a working
condition for their intended use. Company has revalued the Plant and machinery during the
period with and has recognised a revaluation reserve worth Rs. 312 Mn.

Working Capital Ratios

Inventory Turnover and Inventory Residence Period

The inventory residence period shows a gradual decrease over the years and this is matched
by an increasing inventory turnover rate. On average, the company’s inventory will turn into
sales in 50 days.

Inventory Turnover Inventory Residence Period

10 80.00

8 60.00
6 40.00
4
20.00
2
-
-
2019 2018 2017 2016 2015 2014
2019 2018 2017 2016 2015 2014

13
 Figure 7:Inventory Turnover Ratios

Receivables Turnover and Receivables Collection Period

Over the years the receivables turnover has averaged at 5 times. The collection period has
increased. This is not favourable as long settlement periods involve an opportunity cost and
requires financing

Receivable Turnover Receivable Collection

40 Period
. 30 20.00
20
10.00
10
- -
2019 2018 2017 2016 2015 2014 2019 2018 2017 2016 2015 2014

Figure 8:Receivables Turnover Ratios

Payables Turnover and Payables Payment Period

The payables turnover has averaged at 7 times over the years. The company has been successful
in lengthening the payment period in line with the extension of the receivables period. This is
seen as beneficial since trade payables is an interest free funding method and thus contributes to
reduce finance costs. The cash conversion cycle of the company is extremely short and at times is
zero days. This means that the company carefully balances receivables and payables to avoid
interest bearing short- or long-term borrowings to finance working capital.

Payable Turnover Payables Payment Period

12 80.00

10 70.00
60.00
8
50.00
6 40.00
4 30.00

2 20.00
10.00
-
2019 2018 2017 2016 2015 2014 -
2019 2018 2017 2016 2015 2014
Figure 9:Payables Turnover Ratios

Analysing Finance Activities

Finance activities are activities which are either financed with equity or liability or a
combination of both. Therefore, when analysing the financing activities of KWPL will be
analysed in terms of both total equity and liability summing to Rs. 5,031,277,000. This
comprises of equity attributable to the equity holders worth Rs. 629,162,000, total liabilities
of Rs. 4,402,065,000 out of which total non-current liabilities are worth Rs.1,744,465 and
total current liabilities of 2,657,600/=.
.

14
Liability
Total liabilities contribute to 87% of the total financing of KWPL, out of which 60% is
current liabilities and 40% is non-current liabilities. Furthermore, current liabilities have
increased by 7% and non-current liabilities have increased by 41% compared to 2018.

Equity
Company’s equity consists of stated capital, revaluation reserve and accumulated losses.
Company’s stated capital only consists of ordinary shares. Company has done a revaluation in
2019 and recognized a revaluation gain. In the previous years (i.e. up until 2019) there was no
revaluation reserve. KWPL has accumulated losses from past years. Thus, the total equity has
dropped by 27%

Liquidity Ratios
Current Ratio
The norm is to maintain this ratio at 2:1. However, the ideal ratio to maintain depends on the
industry. Being a manufacturing company, it is generally assumed that the company maintains
more inventories Over the years, the current asset ratio of the company is depleting as the amount
of increase in current liabilities exceed the increase in current assets. The ratio is less than one
meaning that required assets are not available to meet short-term obligations if they become due
all at once. The main increase in current liabilities is caused by the amounts due to related parties
which shows a 78% increase in 2019 from 2018. 97% of the amounts due to related parties consist
of amounts due to non-trade transactions. Accordingly, it can be said that the company follows an
aggressive approach for working capital management where permanent current assets are
financed through short-term financing sources.

Current Ratio
0.6
0.5
0.4
0.3
0.2
0.1
0
2019 2018 2017 2016 2015 2014

Figure 10:Current Ratio

Quick Ratio
The norm is to maintain this ratio at 2:1. On average over 60% the company’s current assets
compose of inventories and as such it can be expected the ratio to be below the norm. A
healthy movement in the ratio is seen stating from 2017. However, the ratio being below one
raise liquidity concerns.

15
 Quick Ratio
0.16
0.14
0.12
0.1
0.08
0.06
0.04
0.02
0
2019 2018 2017 2016 2015 2014

Figure 11:Quick Ratio

Long-term financial stability ratios

Debt ratio
Over 80% of the company’s total assets are financed through debt and thus it can be seen that the
company is highly leveraged. It is identified that the company has recorded a loss of Rs. 510
Million during the financial year ended 31st December 2019 and as of that date, contains
accumulated losses amounting to Rs. 538 Million. Furthermore, company’s current liabilities
exceeded its current assets by Rs. 2,123 Million in 2019. The company has loans and borrowings
of Rs. 552 million due within 12 months from 31st December 2019 and the interest-bearing loans
and borrowings of the company has increased over by 140% within 2019. This indicates that the
finance costs of the company which makes a substantial portion of expenses will increase in the
forthcoming years. This raises the concern of going concern. However, the financial statements
have been prepared undergoing concern principles as the company expects future growth and has
continuous financial support from ultimate parent.
Equity Ratio
The company is highly leveraged thus lower equity. The stated capital remains unchanged over
the years. The company has recognized a revaluation gain in 2019 as per its policy on property,
plant and equipment which is to recognize any revaluation gain/loss every 3 years. The reduction
in equity is solely due to accumulated losses over the years.
Interest cover ratio
The company is not generating enough earnings to settle its interest obligations and thus the ratio
is negative. We see that the interest cover ratio is increasing in in 2019 from 2018 in line with the
increase in debt. Thereby, cannot say that the company may go bankrupt as it has continuous
financial backup from the ultimate parent.

Risk Analysis
Risk Management Policy
The company audit committee monitors the company adherence to risk profile. Audit committee
reviews the management compliance with risk management policies and risk framework. The
company has exposure to the following risks in their financial statements.

Credit risk
Risk that counterparty will not meet its obligation under a financial instrument or customer
contract leading to a financial loss is considered as credit risk. The company is exposed to

16
credit risk from its operating activities (primarily from trade receivables) and from its
financing activities, including deposits with banks and amount due from related company.

The minimum exposure to credit risk for trade and other receivables at 31st March 2019 is
12.8bn. The business restricts the exposure of the trade receivables to credit risk due to the
establishment of the maximum payment 7-day duration from the tea brokers. To risk
monitoring, customers were categorized based on their credit characteristic. Such as
individual entity or legal entity, wholes sale, retail and end user customer. In addition,
receivable balances were monitored on ongoing basis.

The company held cash in hand and at bank equivalents to 24.6 MN as at 31st March 2019
which represents its maximum credit exposure to these assets.

Liquidity Risk
Short-Term Liquidity Risk
Short-term liquidity risk is the risk that a company may be unable to meet its short-term
financial demand. In other words, it measures the firm's ability to generate sufficient cash
to meet working capital needs and service debts. Short-term liquidity risk can be analysed
by using financial statement ratios.

Ratio 2019 2018 2017 2016 2015 2014

Current ratio 0.22 0.29 0.32 0.32 0.55
0.20
Quick ratio 0.07 0.06 0.06 0.08 0.09 0.15
Operating cash
0.01 -0.01 0.1 0.09 0.11 0.06
flow ratio
Revenue to
110.49 187.84 369.82 299.11 452.03 357.47
Cash Ratio
Days Revenue 1.94 0.98 1.22 0.80 1.02
3.30 Days
held In Cash Days Days Days Days Days
Table 4:Short-Term Liquidity Ratios

A drop can be identified in current ratios from 2014 to 2019. Company tends to use bank
overdraft facilities. It indicates the amount of cash available and other current assets of the
firm is low, relative to obligations coming due.
Short-Term Liquidity risk is more sharply measured by Acid Test ration (Quick Ratio). The
ratio is below one as over 60% of the current assets are composed of inventories and quick
assets such as trade receivables, short-term investments, cash and cash equivalent balances
represent a small portion of current assets.

The operating cash flow ratio measures how well the current liabilities are covered by the
cash flows generated by the company. This measure is seen as a more accurate measure as
earnings related measures can be manipulated. As this ratio is below one and sometimes
negative, we can conclude that the company is in deep liquidity problems as its current
liabilities exceed the cash flows generated through operating activities and thus, additional
funding from investing and finance activities will be needed to settle the current liabilities.

17
 Cash turnover of the company is high over the years. The main reason is for this is that the
cash and cash equivalent balances are depleting. A higher cash turnover ratio is desirable
as it signifies that the company is efficient in turning cash into revenue. The number of
days revenue held in cash reflects the cash turnover ratio.

The contractual maturity of liabilities in the upcoming 12 months in 2020 amounts to 2

billion approximately. However, this is no different to the same which was recorded in
2018. The company has received grants worth Rs. 2.3 million from the Plantation Human
Development Trust (Plantation Housing and Social Welfare Trust) and Asian Development
Bank (ADB) are for the development of workers welfare facilities. Further, the Company
applied and secured several relief packages under ‘Saubagya Covid – 19 Renaissance
Facility initiated by Central Bank of Sri Lanka which eased the short and mid-term cash
requirements.

Long -Term Liquidity Risk

Ratio 2019 2018 2017 2016 2015 2014
Debt ratios
-Liabilities to Assets Ratio 81% 81% 77% 79% 77% 71%
-Liabilities to Equity Ratio 490% 414% 395% 378% 345% 307%
Interest coverage ratio 0.63 -0.17 1.11 -0.15 -1.96 2.87
Table 5:Long -Term Liquidity Risk Ratios

Long-Term Solvency ratios examine the firm's ability to make interest and principal
payments on long-term debts and similar obligations.

Debt to equity ratio shows the composition of the firm's capital structure. Company has
maintained a low geared capital structure in 2014 to 2017. But starting 2018 the debt to
equity ratio has risen considerably. Consequently, higher percentage of the total assets have
been financed by using debts. Company’s total debts are more than 3 times its equity. The
high gearing ratio is unhealthy since it increases future interest and capital repayments. The
contractual maturities of the company as at 31st December 2019 which extend more than a
year amount to Rs. 806 million. This is a 126% increase from such amounts appearing in
2018 financials under contractual maturities extending over one year.

One of the main drawbacks of having excessive interest payments is that the shareholders
are at a risk of getting an inconsiderable return as profits are spent on settling debts. The
company has not declared any dividends for the past couple of years due to operating losses.
Furthermore, the EBIT of the company is negative meaning that the operating profits are
not sufficient even to cover the interest payments.

Despite the above, the company maintains going concern as the company anticipates
favourable growth in cash flows with the introduction of online tea auctioning and also
expects that prices and demand would grow owing to the recognition of Black as a healthy
beverage and has continuous financial back-up from its parent company.

Market risk
Market risk is the risk that changes in market prices, such as foreign exchange rates and
interest rates will affect the Company’s income or the value of its holdings of financial

18
instruments. The objective of market risk management is to manage and control market risk
exposures within acceptable parameters, while optimizing the return. Market risk includes,
➢ Currency risk
➢ Interest rate risk

Currency risk
The company is exposed to currency risk on sales that are denominated in a currency other
than Sri Lankan Rupees (LKR). Most transactions are denominated in United Stated
Dollars (USD) which is a less volatile currency. Company mainly export tea products to
India, Thailand and Iran. Since small portion of activities related to foreign currency
company has less currency risk in the market.

Interest rate risk

Interest risk rate is the risk the fair value or future cash flows of a financial instrument will
fluctuate because of changes in market interest rates. Its means changes in the interest rate
related to the company long-term debt and obligation. Company manage interest rate risk
through a mixed portfolio of long-term debt and bank overdraft. In 2019, company has
obtained 400 Mn short term loan which has led to a remarkable increase in loans

Debt Portfolio 2019 2018 2017 2016 2015

Bank Overdraft
(000) 820,730 843,710 768,640 523,274 520,026
Term Loan (000) 1,230,282 1,022,569 887,174 940,045 799,013
Table 6:Interest rate risk

19
 STEP 04: Forecasted Financial Statement
Forecasted Statement of Profit or Loss
Description 2024 2023 2022 2021 2020 2019 2018

Revenue 1,450,762 1,643,698 1,863,902 2,115,328 2,402,511 2,730,645 3,105,691

Cost of sales (1,622,314) (1,831,122) (2,069,004) (2,340,152) (2,649,366) (3,002,149) (3,233,770)

Gross Loss (171,552) (187,424) (205,103) (224,823) (246,855) (271,504) (128,079)

Other Income 31,140 35,282 40,008 45,405 51,570 64,558 91,887

Fair value gain
on biological
assets 178,495 170,655 163,156 155,982 149,119 142,865 112,378
Administrative
expenses (23,124) (26,200) (29,710) (33,717) (38,295) (43,525) (47,399)

Depreciation (66,029) (66,029) (66,029) (66,029) (66,029) (68,020) (68,743)

Loss from
operating
activities (51,071) (73,716) (97,677) (123,183) (150,491) (175,626) (39,956)

Finance income 1,056 1,056 1,056 1,056 1,056 696 -

Finance Cost (697,996) (618,788) (555,334) (543,937) (332,702) (276,531) (241,583)

Loss before
taxation (748,011) (691,449) (651,956) (666,065) (482,138) (451,461) (281,539)
Income tax
expense/
Reversal (120,621) (112,120) (105,869) (106,963) (80,153) (58,093) 32,648
Loss for the
year (868,631) (803,569) (757,824) (773,028) (562,291) (509,554) (248,891)
Table 7:Forecasted Statement of Profit or Loss

20
 Forecasted Statement Financial Position
Description 2,024 2023 2,022 2021 2,020 2019 2018
ASSETS
Non Current Assets
Leasehold Right to Bare Land of JEDB/SLSPC123,926
Estates 129,853 135,780 141,707 147,634 153,561 154,180
Immovable Leased Assets of JEDB/SLSPC Estates10,067 18,535 27,003 35,471 43,939 53,889 62,735
Property, Plant & Equipment 704,343 770,372 836,402 902,431 968,460 1,034,488 708,928
Biological Assets 4,074,449 3,895,562 3,724,461 3,560,795 3,404,230 3,254,445 3,112,268
4,912,785 4,814,323 4,723,645 4,640,403 4,564,263 4,496,383 4,038,111
Current Assets
Produce On Bearer Biological Assets 2,945 3,337 3,784 4,295 4,878 5,544 5,695
Inventories 186,312 211,612 237,528 269,961 304,036 345,805 390,567
Trade and Other Receivables 66,276 96,309 87,969 121,071 116,247 153,376 131,068
Amounts due from Related Parties 2,872 3,254 3,690 4,188 4,756 5,406 4,417
Cash and Bank Balances 24,713 24,713 24,713 24,713 24,713 24,713 16,534
Bank Overdraft (1,042,580) (964,599) (984,616) (941,938) (920,487) (820,730) (843,710)
Total Current Assets (759,462) (625,373) (626,932) (517,710) (465,858) (285,886) (295,429)
Total Assets 4,153,323 4,188,949 4,096,713 4,122,693 4,098,405 4,210,497 3,742,682
EQUITY AND LIABILITIES
Equity
Stated Capital 4,619,790 3,659,272 2,775,776 1,980,433 898,760 898,760 898,760
Revaluation Reserve 268,356 268,356 268,356 268,356 268,356 268,356 -
Accumulated Losses (4,303,298) (3,434,666) (2,631,097) (1,873,273) (1,100,245) (537,954) (31,430)
584,849 492,962 413,034 375,516 66,871 629,162 867,330
Non Current Liabilities
Deferred Income 159,897 181,161 205,431 233,142 264,794 300,960 311,373
Deferred Tax Liability (384,931) (264,310) (152,190) (46,322) 60,642 140,795 30,572
Interest Bearing Loans and Borrowings 1,501,538 1,423,872 1,262,293 1,132,850 1,109,601 678,694 283,344
Retirement Benefit Obligations 263,654 298,718 338,736 384,429 436,620 496,254 540,057
Net Liability to Lessor of JEDB/SLSPC Estates
124,860 125,440 126,021 126,601 127,182 127,762 73,063
1,665,018 1,764,881 1,780,291 1,830,701 1,998,839 1,744,465 1,238,409
Current Liabilities
Interest Bearing Loans and Borrowings 1,220,330 1,157,209 1,025,890 920,689 901,795 551,588 739,225
Net Liability to Lessor of JEDB/SLSPC Estates 25581 581 581 581 581 584 1,640
Trade and Other Payables 345,552 391,506 443,956 503,842 572,245 650,402 540,147
Amounts due to Related Parties 336,995 381,811 432,962 491,365 558,074 634,296 355,931

1,903,457 1,931,107 1,903,389 1,916,477 2,032,695 1,836,870 1,636,943

Total Liabilities 3,568,475 3,695,987 3,683,679 3,747,178 4,031,534 3,581,335 2,875,352
Total Equity and Liabilities 4,153,323 4,188,949 4,096,713 4,122,693 4,098,405 4,210,497 3,742,682
Table 8:Forecasted Statement Financial Position

21
*** Please refer to the Excel for detailed workings, notes to forecasted financial statements and assumptions
Proje cte d State me nt of profit or loss
De scription 2024 2023 2022 2021 2020 2019 2018 Caption Assumption Calculation Rate
Revenue 1,450,762 1,643,698 1,863,902 2,115,328 2,402,511 2,730,645 3,105,691 Revenue Revenue will grow in a consistant rate Tea -13%
Cost of sales (1,622,314) (1,831,122) (2,069,004) (2,340,152) (2,649,366) (3,002,149) (3,233,770) Rubber -5%
Gross Loss (171,552) (187,424) (205,103) (224,823) (246,855) (271,504) (128,079) Other -7%
Other Income 31,140 35,282 40,008 45,405 51,570 64,558 91,887 Gross profit Gross margin will be consistant over the period Tea -5%
Fair value gain on biological assets 178,495 170,655 163,156 155,982 149,119 142,865 112,378 Rubber -44%
Administrative expenses (23,124) (26,200) (29,710) (33,717) (38,295) (43,525) (47,399) Other -50%
Depreciation (66,029) (66,029) (66,029) (66,029) (66,029) (68,020) (68,743)
Loss from ope rating activitie s (51,071) (73,716) (97,677) (123,183) (150,491) (175,626) (39,956) Other income Other income will be consistant with the revenue Other income rate 2%
Finance income 1,056 1,056 1,056 1,056 1,056 696 -
Finance Cost (697,996) (618,788) (555,334) (543,937) (332,702) (276,531) (241,583) Fair value gain on biological
Fairassets
value gain will be as percentage of last year biological assets 5%
Loss be fore taxation (748,011) (691,449) (651,956) (666,065) (482,138) (451,461) (281,539)
Income tax expense/ Reverasal (120,621) (112,120) (105,869) (106,963) (80,153) (58,093) 32,648 Administrative expenses Administrative expenses will be consistant with the revenue 1.59%
Loss for the ye ar (868,631) (803,569) (757,824) (773,028) (562,291) (509,554) (248,891)
Finance income Finance income will be as percentage of last year cash at bank 4.28%

Finance cost Finance income will be as percentage of last year long term loans 27%

Current tax expense As there is a projected loss before profit, it is assumed that there will not be a tax liability 0%

Deferred tax
Proje cte d State me nt of financial position
De scription 2,024 2,023 2,022 2,021 2,020 2,019 2,018 Depreciation Dereciation expense/PPE prior year cost 4%
ASSETS
Non Curre nt Asse ts
Leasehold Right to Bare Land of JEDB/SLSPC123,926Estates129,853 135,780 141,707 147,634 153,561 154,180 Leasehold Right to Bare Land
Ammortization as a percentage of gross amount of last year 2%
Immovable Leased Assets of JEDB/SLSPC 10,067
Estates 18,535 27,003 35,471 43,939 53,889 62,735
Property, Plant & Equipment 704,343 770,372 836,402 902,431 968,460 1,034,488 708,928 Immovable Leased Assets
Amortization of tea sector as a percentage of gross amount of last year 3%
Biological Assets 4,074,449 3,895,562 3,724,461 3,560,795 3,404,230 3,254,445 3,112,268
4,912,785 4,814,323 4,723,645 4,640,403 4,564,263 4,496,383 4,038,111 PPE Based on PPE to sales ratio 38%
Curre nt Asse ts
Produce On Bearer Biological Assets 2,945 3,337 3,784 4,295 4,878 5,544 5,695 Produce On Bearer Biological
As a percentage
Assets of sales 0%
Inventories 186,312 211,612 237,528 269,961 304,036 345,805 390,567
Trade and Other Receivables 66,276 96,309 87,969 121,071 116,247 153,376 131,068 (22,308) Inventories Based on Inventory turnover period 8.2
Amounts due from Related Parties 2,872 3,254 3,690 4,188 4,756 5,406 4,417
Cash and Bank Balances 24,713 24,713 24,713 24,713 24,713 24,713 16,534 Trade receivables Based on Trade receivables turnover period 105.3
Bank Overdraft (1,042,580) (964,599) (984,616) (941,938) (920,487) (820,730) (843,710)
Total Curre nt Asse ts (759,462) (625,373) (626,932) (517,710) (465,858) (285,886) (295,429) Other receivables Other receivables will be consistant with the revenue 5%
Total Asse ts 4,153,323 4,188,949 4,096,713 4,122,693 4,098,405 4,210,497 3,742,682
EQUITY AND LIABILITIES Deferred income Deferred income will be consistant with the revenue 11%
Equity
Stated Capital 4,619,790 3,659,272 2,775,776 1,980,433 898,760 898,760 898,760 Accumulated Losses It is assumed that dividends will be not paid due to continous losses
Revaluation Reserve 268,356 268,356 268,356 268,356 268,356 268,356 -
Accumulated Losses (4,303,298) (3,434,666) (2,631,097) (1,873,273) (1,100,245) (537,954) (31,430) Loans and Borrowings Current interest bearing borrowings ratio 45%
584,849 492,962 413,034 375,516 66,871 629,162 867,330
Non Curre nt Liabilitie s Trade payables & other payables
As this is a manufacturing company and no data available to find the 24%
Deferred Income 159,897 181,161 205,431 233,142 264,794 300,960 311,373 purchases to calculate turnover & HR related expenses are also included
Deferred Tax Liability (384,931) (264,310) (152,190) (46,322) 60,642 140,795 30,572 Amounts due to Related Parties
in cost of sales it is assumed that trade & other payables are consistant 23%
Interest Bearing Loans and Borrowings1,501,538 1,423,872 1,262,293 1,132,850 1,109,601 678,694 283,344 with revenue.
Retirement Benefit Obligations 263,654 298,718 338,736 384,429 436,620 496,254 540,057 Retirement Benefit Obligations
Assumed this is consistant with revenue as no data available to project 18%
Net Liability to Lessor of JEDB/SLSPC Estates
124,860 125,440 126,021 126,601 127,182 127,762 73,063
1,665,018 1,764,881 1,780,291 1,830,701 1,998,839 1,744,465 1,238,409 Stated Capital Debt to equity ratio 46%
Curre nt Liabilitie s
Interest Bearing Loans and Borrowings1,220,330 1,157,209 1,025,890 920,689 901,795 551,588 739,225 Balancing the Balance sheet
Assumed cash at bank is consistant and bank overdraft is fluctuating
Net Liability to Lessor of JEDB/SLSPC Estates 58125 581 581 581 581 584 1,640 2020 It is assumed that 1 mn term loan is obtained to settle the deficit 1,000,000
Trade and Other Payables 345,552 391,506 443,956 503,842 572,245 650,402 540,147 2021 It is assumed that 0.4 mn term loan is obtained to settle the deficit 400,000
Amounts due to Related Parties 336,995 381,811 432,962 491,365 558,074 634,296 355,931 278,365 2022 It is assumed that 0.6 mn term loan is obtained to settle the deficit 600,000
2023 It is assumed that 0.7 mn term loan is obtained to settle the deficit 700,000
1,903,457 1,931,107 1,903,389 1,916,477 2,032,695 1,836,870 1,636,943 2024 It is assumed that 0.6 mn term loan is obtained to settle the deficit 600,000
Total Liabilitie s 3,568,475 3,695,987 3,683,679 3,747,178 4,031,534 3,581,335 2,875,352
Total Equity and Liabilitie s 4,153,323 4,188,949 4,096,713 4,122,693 4,098,405 4,210,497 3,742,682
- - - - - - -

Workings
Note 01 Re ve nue 2,024 2,023 2,022 2,021 2,020 2,019 2,018
Tea 1,218,147 1,397,798 1,603,945 1,840,494 2,111,929 2,423,395 2,780,796
Rubber 201,656 212,529 223,989 236,066 248,794 262,209 276,347
Other revenue 30,959 33,370 35,968 38,769 41,787 45,041 48,548
Total re ve nue 1,450,762 1,643,698 1,863,902 2,115,328 2,402,511 2,730,645 3,105,691

Note 02 Gross loss 2,020 2,019

Tea (66,820) (76,675) (87,983) (100,959) (115,848) (132,933)
Rubber (89,265) (94,078) (99,150) (104,497) (110,131) (116,069)
Other revenue (15,467) (16,671) (17,969) (19,368) (20,877) (22,502)
Total gross loss (171,552) (187,424) (205,103) (224,823) (246,855) (271,504)

Note 03 Othe r income 2,024 2,023 2,022 2,021 2,020 2,019

Profit from disposal of Property Plant and Equipment
- - - - - 5,945 This was a one off profit as there were no profit from disposal of PPE
Other income 31,140 35,282 40,008 45,405 51,570 58,613
Total othe r income 31,140 35,282 40,008 45,405 51,570 64,558

Note 04 Cash and cash e quivale nts 2,024 2,023 2,022 2,021 2,020 2,019 2,018
Cash at bank 24,650 24,650 24,650 24,650 24,650 24,650 16,254
Cash in hand 63 63 63 63 63 63 280
Total 24,713 24,713 24,713 24,713 24,713 24,713 16,534

Note 05 Income tax 2,020 2,019 2,018

Current tax - - -
Deferred tax 58,093 (32,648)
Total tax - 58,093 (32,648)

Note 06 Le ase hold Right to Bare Land of JEDB/SLSPC

2,024 Estate
2,023
s 2,022 2,021 2,020 2,019 2,018 2,017
Leasehold Right to Bare Land gross 314,145 314,145 314,145 314,145 314,145 308,843 308,843 308,843
Remeasuremnt of Leasehold Right as at 1st July
- 2019 - - - - 5,302 - -
314,145 314,145 314,145 314,145 314,145 314,145 308,843 308,843
As at 1 January (184,292) (178,365) (172,438) (166,511) (160,584) (154,663) (148,836) (143,009)
Amortisation for the Year (5,927) (5,927) (5,927) (5,927) (5,927) (5,921) (5,827) (5,827)
Ne t book value 123,926 129,853 135,780 141,707 147,634 153,561 154,180 160,007

Note 07 Immovable Le ase d Asse ts of JEDB/SLSPC

2,024 Estate s2,023 2,022 2,021 2,020 2,019 2,018
Te a Rubber and other minor crops are fully amortized
Immovable Leased Assets gross 254,049 254,049 254,049 254,049 254,049 254,049 254,049

As at 1 January (235,514) (227,046) (218,578) (210,110) (201,642) (193,174) (184,705)

Amortisation for the Year (8,468) (8,468) (8,468) (8,468) (8,468) (8,468) (8,469)
Ne t book value 10,067 18,535 27,003 35,471 43,939 52,407 60,875

Total gross 337,448 337,448 337,448 337,448 337,448 337,448 337,448

As at 1 January (318,913) (310,445) (301,977) (293,509) (285,041) (276,573) (267,998)

Amortisation for the Year (8,468) (8,468) (8,468) (8,468) (8,468) (8,468) (8,469)
Ne t book value 10,067 18,535 27,003 35,471 43,939 52,407 60,981

Note 08 Total biological asse ts 2,024 2,023 2,022 2,021 2,020

Openning balance 3,898,900 3,728,245 3,565,089 3,409,108 3,259,989
Fair value gain 178,495 170,655 163,156 155,982 149,119
Closing balance 4,077,394 3,898,900 3,728,245 3,565,089 3,409,108

(-) Agricultural produce (2,945) (3,337) (3,784) (4,295) (4,878)

Non curre nt biological asse ts 4,074,449 3,895,562 3,724,461 3,560,795 3,404,230

Note 09 Inve ntory 2,024 2,023 2,022 2,021 2,020

Average inventory 198,962 224,570 253,744 286,998 324,920

Note 10 Trade and othe r re ce ivable s 2,024 2,023 2,022 2,021 2,020 2,019 2,018
Trade receivables 2,972 24,585 6,636 28,768 11,412 34,223 17,645

Other receivables 63,305 71,724 81,332 92,303 104,835 119,153 113,423

Amount due from related parties 2,872 3,254 3,690 4,188 4,756 5,406 4,417
Total othe r re ce ivable s 66,177 74,978 85,022 96,491 109,591 124,559 117,840

Average trade receivables 13,778 15,611 17,702 20,090 22,818

Note 12 Accumulate d loss 2,020

Openning balance (3,434,666) (2,631,097) (1,873,273) (1,100,245) (537,954)
Loss for the period (868,631) (803,569) (757,824) (773,028) (562,291)
Closing balance (4,303,298) (3,434,666) (2,631,097) (1,873,273) (1,100,245)

Note 13 Inte re st Be aring Loans and Borrowings2,024 2,023 2,022 2,021 2,020
Movement
Openning balance (NCL + CL) 2,581,081 2,288,183 2,053,539 2,011,396 1,230,282
Interest expense 697,996 618,788 555,334 543,937 332,702
Repayments (1,157,209) (1,025,890) (920,689) (901,795) (551,588)
New loan 600,000 700,000 600,000 400,000 1,000,000
Closing balance 2,721,868 2,581,081 2,288,183 2,053,539 2,011,396

Note 14 Ne t Liability to Le ssor of JEDB/SLSPC Estate s

Movement
Openning balance (NCL + CL) 126,021 126,601 127,182 127,762 128,346
Repayments (581) (581) (581) (581) (584)
Closing balance 125,440 126,021 126,601 127,182 127,762

Amount payable within next 4 years as per 2,322

AR 2,322 2,322 2,322 2,322
Payable within next year 581 581 581 581 581

Note 15 De fe rre d tax 2,024 2,023 2,022 2,021 2020 2019

Te mporary diffe
Taxreence
ffe ct Te mporary diffeTax
re nce
e ffe ct Te mporary diffe re
Tax
ncee ffe ct Te mporary diffeTax
re nce
e ffe ct Te mporary diffe
Taxreence
ffe ct Te mporary diffe re nce Tax e ffe ct Temporary difference to net book value
On Property Plant and Equipment and Bearer
2,189,158
Bioloigcal306,482
Assets 2,394,382 335,214 2,599,607 363,945 2,804,831 392,676 3,010,055 421,408 3,215,276 450,139 3.11
On Retirement gratuity (333,062) (46,629) (377,355) (52,830) (427,909) (59,907) (485,631) (67,988) (551,561) (77,219) (626,893) (87,765) 1.26
On Tax loss carried forward (5,726,973) (801,776) (4,978,962) (697,055) (4,287,513) (600,252) (3,635,557) (508,978) (2,969,493) (415,729) (2,487,355) (348,230) Added the current year loss
On Biological Assets 1,101,021 154,143 1,052,681 147,375 1,006,445 140,902 962,219 134,711 919,911 128,788 879,435 123,121 0.27
On Leasehold Right To Bareland 20,349 2,849 21,322 2,985 22,295 3,121 23,269 3,258 24,242 3,394 25,215 3,530 0.16
De fe rre d tax asse t (384,931) (264,310) (152,190) (46,322) 60,642 140,795
De fe rre d tax loss (120,621) (112,120) (105,869) (106,963) (80,153)

Note 16 State d capital 2021

To keep the debt equity ratio based on 2020 borrowings
Equity to be there as at 31st march 2021
1,453,480 1,296,531 1,170,859 1,148,543
Stated capital 960,518 883,497 795,343 1,081,673

Note 17 Property Plant and Equipment

Cost 1,499,452 1,499,452 1,499,452 1,499,452 1,499,452 1,499,452 1,544,662
Acc Depreciation (795,109) (729,080) (663,050) (597,021) (530,992) (464,963) (835,734)
Written down Value 704,343 770,372 836,402 902,431 968,460 1,034,489 708,928

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STEP 05: Valuation of the company
As a listed company in Colombo Stock exchange, share valuation will be necessary where there is
a takeover bid and the offer price is an estimated ‘Fair value’ in excess of the current market price
of shares.
For the purpose of valuation following commonly used techniques were identified as suitable for
the company and calculations were performed according to those methods.
➢ Net asset value method
➢ Earning valuation basis
➢ Discounted free cash flow method (DCF)

Net assets method

The asset basis can be used to provide a minimum value which can be useful if a business is difficult
to sell.
Net assets consist of total equity of the entity. Net asset value per share is derived by dividing total
equity by number of shares
Year (ending 2019 2018 2017 2016 2015 2014
31st December)

Total equity 629,162 867,330 1,031,029 926,708 940,908 1,104,408

(‘000)

No. of shares 79,889.806 79,889.806 79,889.806 79,889.806 79,889.806 79,889.806

(‘000)

Net assets per 7.88 10.86 12.91 11.60 11.78 13.82

share

Table 9:Net assets per share

Company’s net assets have been decreasing over the past 6 years due to the decrease of total equity.

Earning valuation basis

The highest business valuation is usually calculated by valuing the earnings under new ownership.
This method uses the Price-earnings ratio (P/E ratio) which shows the stock market’s view of the
growth prospects of a company.
The P/E ratio (Earnings) method of Valuation
P/E Ratio = Market Value
Earnings Per share

Earnings Yield Valuation method

Earnings Yield = EPS

Market Price per share

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 Year (ending 31st 2019 2018 2017 2016 2015 2014
December)

Market value 36.5 39.9 38.9 37.7 37.2 35.5

per share as at
31st December

EPS (6.38) (3.12) 0.23 (1.73) (2.41) 1.46

P/E ratio (0.175) (0.078) 0.006 (0.046) (0.065) 0.041

Earnings yield -17% -8% 1% -5% -6% 4%

Table 10:Earning valuation basis

Entity’s P/E ratio has decreased over the period where it records a negative value. A negative P/E
ratio means the company has negative earnings or is losing money.

Discounted cash flow method

The present value of future free cash flow model focuses on the strategic need of companies to
reinvest in new plant to maintain or increase current operating cash flows.
Using this model, value of the company is the sum of future discounted free cash flows.
2024 2023 2022 2021 2020 2019 2018

EBIT (51,071) (73,716) (97,677) (123,183) (150,491) (175,626) (39,956)

(1-.14) 0.86 0.86 0.86 0.86 0.86 0.86 0.86

EBIT *(1-.14) (43,921) (63,396) (84,003) (105,937) (129,422) (151,038) (34,362)

Depreciation and
Amortization 66,029 66,029 66,029 66,029 66,029 68,020 68,743
Net Capital
Expenditure** - - - - - - -
Increase/decrease in
Working Capital

Inventories 25,301 25,916 32,432 34,075 41,769 38,294 102,398

Trade receivable 30,033 (8,340) 33,103 (4,825) 37,129 (21,302) (21,222)

Amount due from related
parties 382 436 498 569 650 (989) (3,646)

Trade payables (45,955) (52,450) (59,886) (68,403) (78,157) 101,866 (31,679)

Amount due to related
parties (44,817) (51,151) (58,403) (66,709) (76,222) 224,046 66,103

Net working capital (35,056) (85,589) (52,257) (105,293) (74,831) 341,915 111,954

FCFF (12,947) (82,956) (70,230) (145,201) (138,224) 258,897 146,335

Interest rate 14.8% 14.8% 14.8% 14.8% 14.8% 14.8% 14.8%
**It is assumed that there is no capital asset purchases and disposals during the upcoming five years.

Table 11:Discounted cash flow method

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Conclusion
Entity is loss making over last four years where, the possibility of assuming that the entity has
planned strategic plans to overcome from the current position of the entity is hard. Therefore,
based on above calculation method we can conclude as follows
✓ Discounted cash flow method

As per the above calculations, using discounted cash flow method is not suitable as the entity’s
free cash flow for the future period is negative. It expresses that the entity’s cash outflow is
higher than the cash inflow in upcoming period.
✓ Earning valuation basis

Negative P/E may not be reported publicly instead, the EPS might be reported as "not
applicable" for quarters in which a company reported a loss. Investors buying stock in a
company with a negative P/E should be aware that they are buying shares of an unprofitable
company and be mindful of the associated risks. Further a consistent negative P/E ratio run
the risk of bankruptcy. Therefore, this method is not suitable for the valuation.

✓ Dividend based Valuation

Company has not declared dividend for the past five years and further it is impractical to decide
that entity will declare dividend in future with the current loss and negative free cash flows.
Therefore, calculation of expected future dividend is not suitable with the current position.
✓ Net assed based valuation

Considering all the above factors suitable method to calculate the entity’s value is net
asset based. As this method provide a measure of the security in a share value. The asset
backing for shares provides a measure of the possible loss if the company fails to make the
expected earnings or dividend payments. Valuable tangible assets may be a good reason for
acquiring a company, especially freehold property which might be expected to increase in
value over time.
Further entity has reported the net asset per share in their annual report where it confirms that
entity has identified to value their business based on net asset basis.
Figure below is an extract of the entity’s 2019 annual report.

Figure 12:Extract of the entity’s 2019 annual report

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References
1. Annual Reports of Kahawatte Plantations PLC (years 2015,2016,2017,2018 & 2019)
2. Company website https://www.kahawatteplantations.lk/
3. Colombo Stock Exchange website https://www.cse.lk/

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