Eu Yan Sang International Ltd, which is listed on Singapore Exchange, is a trusted integrative health and wellness company with a heritage in Traditional Chinese Medicine (TCM).
Currently, it offers more than 300 products under the Eu Yan Sang brand name and over 1,000 different types of Chinese herbs and other medicinal products. It has an extensive distribution network comprising 249 company-operated Eu Yan Sang and Healthy Life retail outlets in China, Hong Kong, Macau, Malaysia, Singapore and Australia. The Company’s latest financial highlights as well as the five year EPS and DPS data are presented below:
Statement of Financial Position
As at 30 June 2014
5-Year EPS and DPS
During 2013, the company issued $75 million 5-year unsecured fixed rate notes due in 2018 i.e. about 4 years from today. Interest is payable semi-annually at 4.1% per annum. Currently, the market value of these notes is $78 million. Management has indicated that it intends to maintain a target debt-to-equity ratio of 1 over the next few years.
Revenue has been growing at a compound annual growth rate of 12% over the last five years. In order to maintain this growth rate, the Board wishes to continue increasing the number of company-operated outlets and focus on increasing the sale of our private label products.
Specifically, they plan on increasing its outlet footprint in Australia. Currently, it operates 36 stores and intends to double this number over the next two years. The initial capital expenditure required for this expansion is estimated to be $30 million, which is to be depreciated equally over three years to zero net book value. No salvage value is expected.
Based on a market feasibility study which cost $2 million to undertake, it anticipates that sales will be $20 million, $40 million and $60 million for the first three years. Thereafter, it will grow at 3% per year indefinitely.
Gross profit will be 50% of sales. Fixed overheads in the first three years is estimated to be $12 million per year and this will increase to $28 million from year four onwards. Net working capital is estimated to be 15% of sales, which is required at the start of the year. As the firm expects to fully implement a just-in-time inventory system, the net working capital will be fully recovered at the end of year three.
For the purpose of investment appraisal, the company uses a market risk premium of 6% and risk-free rate of 4%. Its historical beta is 0.6 and marginal tax rate is 25%.
Compute relevant accounting ratios for FY 2014 and 2013 and evaluate Eu Yan Sang’s liquidity, profitability, asset utilisation and financial leverage.
Calculate Eu Yan Sang’s cost of equity, cost of debt and weighted average cost of capital (WACC).
Compile the 4-year financial projections, namely the forecasted income statement and forecasted cash flows, for the expansion plan.
Calculate the net present value (NPV) and appraise whether Eu Yan Sang should proceed with this growth strategy.
Analyse and comment on the Eu Yan Sang’s dividend policy over the last 5 years.
In order to finance the expansion plan, the Board is considering several options. One of which is to reduce dividends.
Examine the implications for doing so and recommend an appropriate financing alternative for Eu Yan Sang