25300: Fundamentals of Business Finance- Collins Foods Limited- Report Writing Assignment

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Report Writing Assignment:

Task:

1. Collins Foods Limited (hereafter known as “Collins”) ordinary shares are listed on the Australian Securities Exchange (ASX). Collins owns and operates the KFC, Sizzler and Snag Stand brands. Although there are over 600 KFC stores across Australia, Collins is the largest KFC franchisee in Australia. According to the recent announcement made to the ASX on 28/06/2016 titled Presentation re FY16 Financial Results (hereafter “Presentation”), Collins is keen to pursue further growth opportunities such as building 7 to 8 new stores.

Collins has already performed a substantial amount of data analysis related to one particular planned new store in the north-western Sydney suburb of Vineyard. The planned new store satisfies many of the criteria that are likely to ensure its financial success such as the recently completed nearby North-West rail link, the forecasted large population growth rate, and access to major arterial roads. However, costs associated with the construction of a new KFC restaurant and the operating expenses are substantial. Therefore, before Collins commits to building the new restaurant a financial analysis is needed to determine if it will contribute to the goal of creating wealth for its shareholders.

2. You are employed in Collins’ finance department and have impressed senior management with your aptitude for financial analysis. This talent was developed through the practice-oriented assignments that you completed at University. You recall how exciting it was learning about listed companies by searching and reading announcements made to the ASX. The Chief Financial Officer (CFO) has asked you to perform a financial analysis of the planned Vineyard store using a purpose-built preformatted EXCEL spreadsheet. The CFO has suggested you liaise with company employees from a variety of different departments to collect the information that is necessary to perform the analysis. You will also search through public documents to identify some of the assumptions that will be required in your financial analysis, and to locate the data required to analyse Collins’ equity and debt. Your analysis will be provided to the Board of Directors who must approve substantial capital expenditures.

3. The two major cash outflows associated with a new restaurant are the cost of the building and the equipment such as grills, fryers and refrigeration. The directors are accountable to the shareholders and so a rigorous financial analysis is necessary to be confident that the investment in the new Vineyard KFC restaurant is justified. The following paragraphs contain a substantial amount of information that has been gathered from across
the business and it is your job to determine which information is relevant to the analysis.

4. Forecasted sales in 2017 for the new Vineyard store
The annual sales for a new store are difficult to predict. However, Collins is confident that the Vineyard KFC store can achieve sales in the first year of operation that are equal to an ‘average’ KFC store. You read the Presentation to identify the following two figures
a) FY16 Statutory Revenue and
b) Number of restaurants at Year end and then calculate an average sales figure per KFC restaurant in 2016.

However, because the new Vineyard store opens in 2017, the average sales figure needs to be adjusted for one
year’s sales growth. Consequently, you assume that sales in 2017 increase at the same rate as the 2016 KFC Same-Store-Sales (SSS) growth rate (using Collins Foods’ methodology).

Forecasted sales for 2018 (and beyond) for the new Vineyard store Collins’ assumptions regarding the growth rate in sales for KFC restaurants are contained in Note F5 of the 2016 annual report that was announced to the ASX on 28/07/2016. For simplicity you assume that sales for the Vineyard restaurant for 2018 until 2021 increase at the annual cash flow growth rate stated in the first paragraph. Sales from 2021 then increase at a marginally slower annual rate, which is specified in the second paragraph of Note F5.

5. Collins owns a block of land at Vineyard on which they plan to build the new KFC. In 2013 when Collins constructed the $1.7 million Rouse Hill KFC restaurant they also purchased salt processing equipment which is situated on the land at Vineyard. This equipment is outdated and must be sold before the Vineyard store is built. The processing equipment had a capital cost of $100,000 three years ago. It has a remaining depreciable life of two years and a buyer has agreed to pay $84,000 cash today for the equipment. It will have zero value in two years. Because the $100,000 cash outflow relating to the salt processor has already occurred the accountant suggests it be treated as a sunk cost in the analysis. Collins will continue to own the land if the Vineyard KFC store does not proceed.

6. Collins’ 2011 prospectus reveals that KFC enjoys gross profit margins of approximately 54%. Therefore, your analysis assumes that costs of goods sold at the Vineyard store are 46% of sales. Fixed costs at the Vineyard store in 2017 are $240,000. Management is confident that with rigorous cost control they will be able to contain the increase in fixed costs to 2% p.a. for each subsequent year. If the Vineyard KFC is built, Collins’ anticipates that total cash operating expenses in the first year of operation will equal 26% of sales. With the greater economies of scale associated with increasing annual sales and a “disciplined focus on operational performance” (Source: Presentation, Page 4), management are confident they can achieve a 0.5% reduction in operating costs to 25.5% in 2018, and then continue to achieve further annual reductions of 0.5% for each following year.

7. Starting in 2017, employees at the Vineyard KFC will receive annual training. Collins performs all training in-house using a dedicated facility that was established in 2011. The facility has an annual budget of $655,000 and inducts new employees in all aspects of proper food handling associated with working in KFC, Sizzler and Snag Stand stores. Ordinarily,Collins would charge an arms-length amount of $75,000 per annum staff training. However, the training division has sufficient spare capacity to train the Vineyard store’s employees without the facility incurring any additional costs. The accounts department recommends internally invoicing the $75,000 training expense to the Vineyard store each year.

8. The capital cost of the Vineyard KFC building is expected to be $2.3 million today (similar to the estimated cost of an average store according to page 6 of the Presentation). Collins already has $23,512,333 cash and it plans to use $700,000 cash to pay for the building to reduce the cash cost to just $1.6 million. Throughout 2015 Collins incurred
$260,000 of expenses on external architectural plans relating to the new restaurant. There is some debate among management about whether the cost of these plans should be classified as a tax-deductible expense in the analysis.

REQUIREMENTS
Your team must answer the following questions. All answers must be entered into the preformatted EXCEL spreadsheet available on UTSOnline. Questions 1 to 4 require information relating to the capital budgeting decision of the proposed KFC restaurant. Questions 5 to 8 require you to analyse Collins’ equity and debt securities.

Capital Budgeting Information
Present an itemised breakdown (and the total) for each of the following:
1. The cash flows at the start.
2. The cash flows over the life.
3. The cash flows at the end.
4. What is the NPV of the proposed Vineyard KFC restaurant, and your recommendation?

Equity and Debt Information
5. What is the percentage return on Collins’ shares for the year 2015? You will need to perform some research and obtain the share price on 02/01/2015 and 31/12/2015. You also must include all dividends paid in 2015 in your return calculation.

6. Analysts forecast that Collins’ dividends in 2016 will be 10% higher than the total dividends per share paid in 2015. Total dividends in 2017 are also predicted to increase by 10% compared to 2016’s dividends. From 2017 annual dividends are forecasted to grow at 6% p.a. If the appropriate discount rate (i.e., the overall required return for Collins) is 9%, what is a fair value for one Collins’ share in 2016?

7. According to the 2016 Annual Report, what is another part (other than opening new restaurants) of Collins’ strategy to enhance shareholder value?

8. Collins’ 2016 Annual Report under Note B – Cash Management discloses information about the Collins’ Used Revolving Bank Loans as at July 2016. Assume Collins make the $65 million tranche payment on the stated date. If Collins then makes a further $65 million repayment in October 2019, what is the balance of the loan outstanding on the facility’s expiry date? Assume the interest rate is 5.4% p.a. compounded monthly, as stated in Note C1.

 

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Posted on : February 14th, 2018
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