Evaluation of Business
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Table of Contents1.0 Background 2 Global and domestic socio-economic and political environment 3 Industry analysis 3.1 Rivalry between existing firms 3.2 Threat of entry new firms 3.3 Threat of substitutes 3.4 Bargaining power of buyers 3.5 Bargaining power of suppliers 4. Business Analysis 4.0 Accounting Analysis 4.1 Key Accounting Polices and Its Flexibility 4.1.1 Management Manipulation 4.1.2 Inventories 4.1.3 Property, Plant and Equipment and Depreciation 4.2 Accounting Strategy 4.2.1 Evaluating Accounting Strategy 4.2.2 Potential “Red Flag” 5.1 Financial Analysis 5.1.1 Return on Equity (ROE) 5.1.2 Profit Margin (PM) 5.1.3 Assets Turnover (ATO) 5.1.4 Financial Leverage (Debt/ Equity) 6.1 Forecast 6.1.1 Sales Growth 6.1.2 Assets Turnover (ATO) 6.1.3 Profit Margin (PM) 6.1.4 Dividend Payout Ratio 6.1.5 Cost of debt after tax 7.0 Valuation 7.1 Residual Income Valuation Method 7.2 Discounted Cash Flow Method 8.0 Sensitivity Analysis Appendix 1 Appendix 2 Appendix 3 Appendix 4 Appendix 5 Appendix 6 Appendix 7 Appendix 8 Appendix 9 Appendix 10 Appendix 11 Appendix 12 Appendix 13 Appendix 14 Appendix 15 Appendix 16 BackgroundAs an Australian-owned listed company, Incitec Pivot Limited (IPL) has operated in multiple countries and specialised in manufacturing fertiliser, explosives chemicals and mining service. It is the largest fertiliser supplier within Australia and the second largest supplier of explosives products and service in the world.
2 Global and domestic socio-economic and political environmentSince 2010, revenue has been decreasing gradually and the profit has sharply dropped in last few years. (Appendix 1&2) One factor that affects the revenue gaining is the conditions in the Agriculture subdivision. The weakness of the fertiliser price has render negative effect to the earnings. Secondly, the weather changes in Australian has led to a reduction in the amount of the fertiliser consumption especially due to the drought conditions in northern Australia and the flood in Queensland. The strong Australian dollar in last five years also gives the implications for competitive position of industry exports and rival imports. But it is also challenging for the manufacturer that the healthy nutrient application pattern is more recognised by society. 3 Industry analysis3.1 Rivalry between existing firmsAs showing in Appendix 3, the profit margin has been declining for last five years for IPL, which could also reflect the industry trend. This actually approves the intensive competition among rivals. There are two major players: IPL and West farm in Australia. Other small players have strived to survive. The degree of differentiation is low and scale and learning economies is extended to large due to the price competition. Therefore, the competition between rivals is intense.Threat of entry new firmsThe industry has low entry. The barriers for the new entrant are super high. There are two major players have control of the access of channels, distribution and relationships with farmers or government who makes entering this industry even more difficult. There are legal barriers as well in manufacture fertilisers that are hard for new firms to obtain. Thus, the threat of new entries is low.Threat of substitutesThe threat of substitutes is low. The using of fertiliser is highly necessary and the amount of consumption for agriculture is significant for farmers. Therefore it is unlikely there would be threats that farm discontinue or switch other substitutes in order to yield the same level of farm products. Bargaining power of buyersThe customer purchases these products are not entirely price sensitive. Power of buyer to forcing the price down is low due to the demand of fertiliser is necessary. Bargaining power of suppliersOn the contrary, the bargaining power of supplier is low to medium. There are adequate amount of suppliers and it is not depend mainly on the manufacturer about the price. In most situation it is depends on the external factors such as global price and weather condition and the power of supplier then lower than expected.4. Business Analysis Incitec has executed its strategy by positioning itself on the input side of the value chain. The industrhy has a comparatively intense competition. The mature stage of the industry and high exit barriers gives all existed competitor the strong “incentives” to continually compete and especially on price. The profit margin has been dropping since 2010 from 18.4% to 9.3%. Moreover, the return on asset decreased from 6.5 to 3.1 since 2010. This means it becomes difficult for Incitec to generate high profit by utilising the asset. Then it is the proper choise to concentrate the cost. By choosing the cost leadership, Incitec has not only cut down the cost on building more manufacturing operating site but also on the downstream of business.