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$m
Cash flow from operating activities
Profit before tax
Adjustments for :- (3)
Depreciation / amortisation (115 + 25)
Finance cost
Operating profit before working capital changes (4)
Increase in inventory (200 - 110)
Increase in receivable (195 - 75)
Increase in payable (210 - 160)
Cash flow from operations (3)
Interest paid
Tax paid (W1)
$m
195
140
40
375
(90)
(120)
50
215
(40)
(90)
85
(305)
(125)
(230)
(660)
100
(55)
300
345
(230)
120
(110)
Workings ($m)
1)
Bal c/f
Tax paid (balance)
110
60
2)
Bal b/f
Revaluation
Addition (balance)
PPE
410 Bal c/f
80 Depreciation
305
680
115
3)
Bal c/f
Dividend paid (balance)
Retained earnings
375 Bal b/f
55 Profit for the year
295
135
(b) Revenue increased by 48% in year 2012, but the gross profit only increase by
11%. This shows that the cost of sales increases faster than revenue. Additionally,
most expenses also increased at a bigger scale as compared to revenue, such as
distribution cost of 77%, admin cost of 73%, and finance cost by 7 times.
It could be true for the non executive director to say the result is disappointed.
However, the main factor for the poor performance is due to the new venture to
manufacture and supply the jet side. Winning a competitive contract means Tangier
quoted low enough to beat the competitor, which is directly affecting the gross profit
margin. Also, as a new venture, Tangier should be still at the start of the learning curve,
where wastages of resources are at maximum.
Comparing current year results with year 2011 might not be showing a fair picture as
the new contract was not in last year. Tangier's future performance should be better
once they move up along the learning curve.
Main reason for the sharp increase in distribution costs should be due to new product
(jet side) transportation costs, which was not incurred in pervious year. Arguably,
higher distibution costs, pair with thin margin, Tangier might even incurred losses
at this stage, which explains the lower than usual gross profit and net profit.
Hopefully Tangier can find a cheaper solution for distribution, if not, they are facing
a long term disadvantage.
Tender processing fees should be responsible for the obvious increase in administrative
expenses. It should be note that this is an one off event and should not be taken into
consideration when assessing Tangier's future performance.
Huge finance cost this year 2012 was due to a huge procceds from loan note, which in
turn was used to finance the expansion plan. It is noticed that Tangier also increase
equity shares for the expansion, but they uses more loan capital. This directly alter
the gearing ratio, to make the company now at higher geared. The reason behind the use
of more loan capital could be due to the finance cost of 10% is cheaper than $55m
dividend / $350m share capital = 16%. However, now Tangier has a higher commitment
and it might stop potential investors as the overal risk of doing business is higher.
Gain on revaluation gives confidence to the investors. It increases the asset based,
but without actual resources. This will certainly affect the ratios such as asset turnover
and return on capital employed. To get a better picture, such gain should be excluded
from ratio analysis.
Investment in non current assets are essential to sustain the new contract. This will
create a hugh outflow, which is a non recurring activity. Besides that, depreciation
and amortisation are now higher to result in a lower profit, although they are non
cash items.
Getting just 8% stake in Raremetal fails to create significant influence (and surely no
control) in the investee. This will not secure the material supplies. A better deal would
be having a long term supply contracts with Raremetal, to use cash term or even to pay
a premium on purchases. That will free up huge cash for other operational needs,
and Tangier can eliminate the bank overdraft and save some finance costs.
As a conclusion, it is unfair to compare 2012 with 2011 directly. If Tangier can survive
through the learning curve, and manage to find ways to reduce the distribution cost, then
Tangier can be increasing the profit in multiplier.