Stock Movement

Discuss about the Performance Evaluation for Billabong International.

Billabong International commenced business in the year 1973 when it was established as a clothing business which was the sole business till the time of its listing on ASX in 2000.  However, after going public, it has acquired a host of businesses (both domestically and internationally) and therefore has diversified into skateboard products. The company paid a huge premium for these brands and companies as these were acquired at  the peak valuation but the timing of acquisition was not accurate as immediately afterwards there was the global economic crisis which had a major adverse impact on the sales of these businesses. In wake of the difficult operating climate, the company had to impair the goodwill of a host of businesses besides discontinuing the operations of some of the these businesses by liquidating them. This has had adverse impact on the financial statements of the company during the  period FY2011-FY2014 (Billabong, 2015).  In wake of this, the given report aims to carry out a qualitative and quantitative analysis with regards to Billabong stock so as to offer prudent investment advice to potential investor.

The stock price movement of Billabong International during the last one year is indicated below (Yahoo Finance, 2016).

It is apparent that the stock has registered negative returns and has fallen more than 50% from FY2015 highs that it attained. This is primarily on account of the weakness in the market coupled with weak trading environment for the company where recovery in the near terms looks ascertain.

In the quantitative analysis of the company, the focus of the company would be on the trend analysis in relation to the key elements of the balance sheet and the profit loss statement coupled with analysis of certain selected ratios.

Key Trends from the Profit and Loss Statement

From FY2011 to FY2014, there is declining trend in revenues which have decreased from $ 1.687 billion in FY2011 to $ 1.027 billion in FY2014 before increasing to $ 1.056 billion in FY2015. This may be attributed to the declining demand of the products of the company coupled with discontinuation of certain businesses which the company was not in a situation to sustain. Further, considering that the majority of revenues of the company are generated from USA and Europe, the weakness in demand is expected on account of the aftermath of the global financial crisis (Billabong, 2015; 2013;2011). 

Quantitative Analysis

From FY2011 to FY2013, there is a surge in the other expenses which were $ 151.2 million for FY2011 but peaked to $ 934.85 million for FY2013. This surge is attributed to high amount of impairment charges primarily in the goodwill of the various acquired businesses. In FY2011, impairment of intangible assets stood at zero which increased to $ 329.93 million in FY2012 and further witnessed a surge to reach $ 604.32 million in FY2013.  However, post FY2013, there is a decline in the other expenses with corresponding figures of $ 165.94 million and $ 127.68 million in FY2014 and FY2015 respectively. In FY2015, the impairment of intangibles has reduced to zero which highlights the fact that the worst may be over for the company (Billabong, 2015; 2013;2011). 

There is no particular trend with regards to finance costs. The finance costs had increased by about $ 3 million from FY2011 to FY2012 before decreasing by $ 14.3 million in FY2013. However, in FY2014, the finance cost increased by a whopping $ 56 million primarily on account of the write off in regards to the capitalized interest cost to the extent of $ 42 million approximately. Further, in FY2015, the finance costs have again come back to their normal level of $ 34 million (Billabong, 2015; 2013;2011). 

There has been a declining trend in net profits from FY2011 to FY2013 as the net profit of the company has declined from $ 118.04 million in FY2011 to a loss of $ 863 million in FY2013. This is primarily on account of the huge impairment losses especially with regards to the goodwill of the businesses as has been discussed above in the other expenses. However, in FY2014, there has been a decline in losses to $ 239.93 million and further the company has returned to profit of $ 2.55 million in FY2015 (Billabong, 2015; 2013;2011). 

The cash and cash equivalents have increased from $ 144.86 million at the end of FY2011 to $ 317.26 million at the end of FY2012. However, there was a decline in the cash balance to $ 113.84 million at the end of FY2013 primarily because of the intangible impairment suffered which has already been discussed above. From FY2013 onwards, there is an increasing trend in the cash and cash equivalent for the remainder period leading to June 30, 2015 (Billabong, 2015; 2013; 2011). 

The intangible assets of the company have witnessed a decline from FY2011 to FY2013. From a level of $1.27 billion as of June 30, 2011, the intangible assets have declined to a level of $ 795.9 million and $ 212.69 million as of June 30, 2012 and Jun 30, 2013 respectively. The impairment losses have been suffered primarily on account of the diminishing valuation of the acquired businesses thus reducing the goodwill associated with these. The decline in intangible assets continued in FY2014 also to reach a level of $ 143.66 million which since then have recovered to reach $ 161.53 million as on June 30, 2015 (Billabong, 2015; 2013; 2011).

Key Trends from the Profit and Loss Statement

The current borrowing has seen an increasing trend from FY2011 to FY2013. These borrowings have increased from $ 15.26 million as on June 30, 2011 to a peak level of $ 314.56 as on June 30, 2011. This steep rise in current borrowings is attributed to the syndicate facility (secured) to the tune of $ 283.32 million. However, as on June 30, 2014, the current borrowings levels have declined to reach a level of $ 7.36 million primarily because of elimination of the previously availed syndicate facility (Billabong, 2015; 2013; 2011).

Unlike the current borrowing, the non-current borrowing has seen an declining trend from FY2011 to FY2013 as the long term facilities were converted into short term facilities. This is apparent from the decline in debt from $ 597.9 million as of June 30, 2011 to $249.07 million as of June 30, 2012 and further to $ 5.92 million as of June 30, 2013. However from FY2014 onwards, there is again an increasing trend in non-current borrowings as the corresponding debt levels as on June 30, 2014 and 2015 are $ 404.93 million and $597.9 million respectively (Billabong, 2015; 2013; 2011).

The shareholders equity has witnessed a declining trend from FY2011 to FY2014. This is apparent from the fact that as of June 30, 2011, the total shareholders’ equity stood at $ 1.196 billion which got reduced to $1.027 billion and $ 0.268 billion as on June 30, 2012 and June 30, 2013 respectively The huge decline in equity in FY2013 is on account of huge losses witnessed by the company on account of the impairment of the goodwill of the acquired businesses. The decline continued to caused further decline in equity in FY2014 to reach $ 0.259 billion from which there has been an improvement in shareholders’ equity to reach $ 0.282 billion (Billabong, 2015; 2013; 2011).

The relevant ratios for the company based on the financial statements from FY2011 to FY2015 are summarized below (Billabong, 2015; 2013; 2011).

ROA – The ROA has turned negative for FY2012, FY2013 and FY2014 which may be attributed to the impairment charges with regards to goodwill to the tune of $ 934.8 million, $543.6 million and $62.4 million respectively. Further, the profit has also been negatively impacted as the discontinued businesses have led to losses to the tune of $ 179.3 million and $ 30.1 million in FY2013 and FY2014 respectively. Further, the hike in the magnitude of the ROA in FY2012, FY2013 and FY2014 is primarily on account of the decrease in total assets which in comparison to FY2012 levels have suffered a decline of 50% and in comparison to FY2013 levels have suffered a decline of 25% on a y-o-y basis (Billabong, 2015; 2013; 2011).

Key Trends from the Balance Sheet Statement

Net Profit Margin – The net profit margins for FY2012, FY2013 and FY2014 is negative which may be attributed to the impairment charges with regards to goodwill to the tune of $ 934.8 million, $543.6 million and $62.4 million respectively. Further, the profit has also been negatively impacted as the discontinued businesses have led to losses to the tune of $ 179.3 million and $ 30.1 million in FY2013 and FY2014 respectively. However, from the company’s perspective it is encouraging that in FY2015, the company has again made profits which indicate that the worst is over for the company (Billabong, 2015; 2013; 2011).

Inventory Turnover – The inventory turnover after witnessing a slight increase in FY2012 over the levels in FY2011, further decreased in FY2013 which indicates the decrease in the demand for the products offered by the company. Otherwise also, FY2013 was financially the most difficult year for the company as it took a huge good impairment. However, in FY2014, on back of improvement in trading environment, there was an improvement in the inventory turnover which could not continue in FY2015 as the global weakness adversely impacted the sales especially in the US and  Europe market (Billabong, 2015; 2013; 2011).

Current Ratio – The current ratio witnessed a decline from FY2011 to FY2013. This is primarily on account of increase in the current borrowing as on June 30, 2012 and June 30, 2013 as has earlier been explained in the trend analysis.  Further, the current assets have also witnessed a decline primarily on account of decrease in cash and cash equivalents caused due to losses in the business. However, during FY2014 and FY2015, there has been an improvement in the current ratio even though current assets have decreased. This is primarily on the back of decrease in the current liabilities caused due to repayment of current borrowing (Billabong, 2015; 2013; 2011).

P/E ratio – From a healthy price of $ 19.3 at the end of FY2011, the stock price slumped to below $ 1 levels primarily due to the huge impairment losses in FY2012 and FY2013. However, the share price has witnessed some slight improvement over the last two years as it has crossed $ 2 and is on the upside. The P/E ratio for FY2015 was 5.5 which is a huge improvement over the previous values and indicative of better times ahead for the company (Billabong, 2015; 2013; 2011).

Debt Ratio – While the debt ratio has remained largely constant for FY2011 and FY2012, it has increased for FY2013 which can be explained on account of the sizable decrease in the intangible assets and cash which led to a decline of almost 50% in the asset value and hence is responsible for the steep rise in the debt ratio. However, since then, the company has managed to keep the ratio under control by rationalization of the debt levels so as to improve the long term liquidity of the company (Billabong, 2015; 2013; 2011).

Based on the above ratios, it is apparent that ROA and the net profit margin of the company is inferior as compared to the industry average although considering that the company is just recovering from a major write off and difficult trading conditions, it may not be an appropriate comparison. Further, the products of the company are significantly different from the normal retail company which further makes comparison difficult. Only on account of the current ratio would the firm be rated higher than the industry average but again considering the difference in business model, it is highly uncertain as to the underlying credibility in this regard (Christensen et. al., 2013).

Based on the above analysis, investment should be made in the company at the current price levels but it is suitable investment only for a risky investor as the dividend payment is zero and the company has not completely recovered from the woes but the major issues have been sorted out through management change and other prompt measures to enhance operational efficiency. In wake of this, there is limited downside risk which the upside over the medium term is potentially huge (Damodaran, 2008). Hence, a buy call would be suitable for investors who can assume risk with a medium perspective.

Stock Valuation Exercise

Dividend paid in FY2016 = $ 0.1

Dividend growth rate = 5% pa

Required rate of return = 10% pa

The relevant formula for dividend discount model is shown below (Graham & Smart, 2012).

Intrinsic price of stock = Next year dividend /(Required rate of return – Dividend growth rate)

Hence, intrinsic price of stock = 0.1*1.05/(0.1-0.05) = $ 2.1

References

Billabong 2015, Annual Report 2014/2015, Billabong Website, Available online from file:///C:/Users/omsairam/Downloads/20151016%20Annual%20General%20Meeting%20and%20Annual%20Reports.pdf (Accessed on October 12, 2016)

Billabong 2013, Annual Report 2013/2014, Billabong Website, Available online from https://www.billabongbiz.com/phoenix.zhtml?c=154279&p=irol-reportsannual (Accessed on October 12, 2016)

Billabong 2011, Annual Report 2011/2012, Billabong Website, Available online from https://media.corporate-ir.net/media_files/IROL/15/154279/AGM1/_20110923%20FINAL%20FULL%20FINANCIAL%20REPORT.pdf (Accessed on October 12, 2016)

Christensen, M, Drew, M, Blanchi, R & Ross, S 2013, Fundamentals of Corporate Finance, 6^th eds., McGraw Hill, New York

Damodaran, A 2008, Corporate Finance, 2^nd eds., Wiley Publications, London

Graham, J & Smart, S 2012,   Introduction to corporate finance, 5^th eds., South-Western Cengage Learning, Sydney

Yahoo Finance 2016, Billabong International, Available online from https://finance.yahoo.com/quote/BBG.AX?p=BBG.AX (Accessed on October 12, 2016)