Founded in 1975, Noel Gifts International Ltd is a Singapore-based company engaging in activities which are grouped into two divisions namely, Gifts and Properties. The Gifts division involves the online sale of gift hampers and floral arrangements in Singapore and Southeast Asia, as well as the management of the franchise programme. This division encompasses a few subsidiaries; Humming Flowers & Gifts Pte Ltd, Noel Hampers & Gifts (Johore) Sdn. Bhd. and Noel Hampers & Gifts (Penang) Sdn. Bhd. In early 2012, the Company extended their operations to China when Noel Gifts (Chengdu) Co.
Ltd (NGC) was incorporated into the group. The Properties division manages the investment and and development of properties, comprising a significant portion of the Company’s income. Growth Stagnation The company has a good margin on sales, a very good liquidity position, along with almost negligible debts and servicing of interest. Such a situation is not ideal because this means the company is being too conservative and as a result, growth has been stagnating. High Liquidity The current ratio measures a company’s ability to pay off its short-term liabilities with its current assets.
From 2008 to 2012, the company has enjoyed a high current ratio, indicating that they possess a significant amount of current assets as compared to short-term liabilities. This also shows that they have high liquidity, and are able to readily turn their products into cash. In 2012, the current ratio for the gifts industry stood at 2. 11, while the company’s stood at 5. 56. The average current ratio for the gifts industry over the past 5 years currently stands at 1. 73. As a leading entity in the gifts industry, Noel Gifts International has been consistently performing higher than the gifts industry.
Their high current ratio puts them in good stead to continue paying off their short-term obligations with ease. The acid test ratio measures a company’s ability to convert their near-cash assets to cash to pay off their short-term liabilities. From 2008-2012, the company has enjoyed a high acid test ratio, indicating that they have significant cash reserves to pay off their short-term obligations immediately. In 2012, the acid test ratio for the gifts industry stood at 0. 61, while the company’s stood at 3. 21. The average acid test ratio for the gifts industry over the past 5 years currently stands at 0. 0. Noel Gifts International has also been consistently performing high than the gifts industry in this respect, which shows that they can pay off their short-term obligations even under more stringent conditions. Enjoys Low Debt According to the Group’s Balance Sheets (‘08 to ‘12)*, the only Non-current Liabilities listed is Deferred Tax.
We can interpret that the company has not taken any Bank Loans or issued any Bonds and does not need to service any Interest Expense. The Debt Ratio Graph clearly illustrates that the company has been enjoying a safe financial position (well below 0. ) and this condition has been improving over the years. However, they are failing to leverage on this favourable condition by taking loans to fund the expansion of the company. They also have an extremely high Time Interest Earned Ratio which implies their prowess to honour any debt payment. In 2011, the ratio is approximately 747 implying that they can cover tis interest charges 747 times over. Last year, the company had zero Interest Charges resulting in an Infinity value for this Ratio. This puts them in a prime position to acquire loans.
Recommendations for Corporate Expansion I propose that the company take measures to leverage its income and grow annually instead of retarding. The company should take a loan of about $27 million to leverage its income. Borrowing this amount would bring up the total debt ratio to the range of 0. 5 which is a reasonable level. This suggestion is further backed by the fact that the company has over $9million in cash with only around $2. 5m worth of liabilities to be paid off. A significant proportion of the company’s cash is locked in fixed deposits, earning interest.
This is a very low-risk investment approach - an approach we would discourage. A 10% margin on net revenue and a 38% of total assets in investment properties mean that the company has the potential to earn much more than just the interest rate of a fixed deposit. Land in Singapore is scarce, and with increasing housing developments to cope with immigration and population increase, the price of investment properties seem to be on the rise. I strongly feel that the company will be able to service the interest arising from the loan, by the increase in revenue and gain from increase in fair value investments.
Following this, the company would still have a considerable amount left to increase net income. The concern facing us is the impact this will have on the cash flow as we pay approximately $1. 5million in dividends and now we might have to pay more with respect to interest. The interest rate for companies in Singapore is roughly about 5. 4%. With a margin of 10% on sales, over 10% of return on assets and margins on operations being roughly 44%, it is clear that the interest expense will not be a significant in comparison to the increase in income.
Hence we can easily see how the company can use the borrowed money to leverage income. It is also important to note that the company has a very strong financial position to borrow and invest money as seen by the amount of share capital and accumulated reserves. Hence, the company is in a position to absorb minor shocks in the long term. The only concern underlying the borrowing is the cash solvency which can be resolved by spending the money effectively. The amount borrowed can be used to take over a competitive firm as the amount is large enough to cover its net assets.
Noel, being the largest player, can purchase a smaller firm. It can also spend a portion of the money on investment properties as the return on investment properties this year was about 15%. However, not all money should be invested this way, as real estate dealings can be risky. Additionally, the company can consider buying back shares with the additional amount, the benefits of which will be explained in the second issue. Hence, I recommend the company to borrow additional amounts to expand their operations and investing activities in investment properties to leverage their income and company performance and grow further.
Our proposition to leverage the company is supported by the fact that the company has a more favourable return on equity, return on assets, gross, operating and net margin along with better solvency compared to the industry average. Low Share Prices Growth | Given the industry usual of 16, the P/E ratio which ranges from 3 to 7 in the last 5 years is generally The increase in both the P/E ratio and the stock prices at a decreasing rate reflects low investors’ confidence. This might be possibly due to the large number of shares with 102 million shares being issued in the market, minimising and decreasing the earnings per share over the years.
Besides that, the negative dividend growth rate for the last five years may have compounded the negative sentiments towards investing in the company. Recommendations to Raise Share Prices The low share price of the company can be attributed to the fact that the company is perceived to have stopped growing and reached a stagnant stage (i. e the company has matured and has no growth potential). According to the Horizontal Analysis*, NOEL’s revenue have been declining and people perceive that without additional expansion and growth plans, the company has no potential for growth.
Furthermore, a large portion of her cash assets is locked into fixed deposits having little cash for working capital. I recommend the company to borrowed funds to expand its activities. This will help change the perceptions that company has become stagnant with low growth potential and encourage speculation of expansion. Not to mention, the company has a good dividend yield of 0. 065 Cents per Share. The company management should use a certain portion of the borrowed funds to purchase treasury shares.
Currently, their shares are priced at 21 cents and an investment of $2 million will enable them to buy-back about 10 million shares. This will increase EPS by about 10% at current level and indicate that the company shares are undervalued. Purchasing treasury shares (which is well within their current means) allows the company to sell these shares in a short time interval to meet immediate cash requirements if they ever face financial difficulties. I predict that these activities will lead to an increase in volume of trading and share prices. Conclusion
In conclusion , i would like to say that the company has a strong financial position and has the potential to grow and expand tremendously if they take reasonable risks in their business. The company has been facing slightly declining revenues as we feel it has reached a mature state. However , additional investment can help to solve the problem. Moreover , another important aspect is the companies involvement in real estate dealings. Real estate sector in singapore is on the rise. Hence , the future of the company seems to be bright if they make the right selection in terms of investment choices.
In most key aspects , the company is performing better than its competitiors. Hence , we feel that it has reached a point from where it can use this edge over its competitiors to its advantage and use it to expand and leverage the business. Predictions I would like to make predictions which is contingent on the fact whether the company will accept the following recommendations or not. If the company does not accept the following recommendations , then the companny wil stay stagnant at this level for some years , showing signs of growth retardation and will eventually be wiped out by competitiors who are ever-expanding.
Moreover , even the share prices will tend to be on the bearish side as the company is not showing any potential. The only plus they have in the present status quo is the investment in properties as they might rise in years to come. Now if the company accpets the recommended proposals then the share prices of the company will surely be on a rising trend. It will increase as people will see more potential. Moreover , the profits of the company will increase in an increasing manner due to the concept of leveraging.