Study And Analysis Of Billabong International Finance Essay

Billabong International Limited (BBL) is an Australia based listed company. The

main business activities of the BBL are related to marketing, distribution, whol
esale and retail of wetsuits, clothing, eye wears, hardboards for board games an
d accessories concerned with the season of snow fall, surfing and skating. Compa
ny has signed so many MOUs (memorandum of understanding) with third parties who
are doing business in different parts of the world. The products of BBL are bein
g sold through its own stores and by virtue of licensing and by using different
distribution channels. There are approximately 11000 stores through which BBL is
selling its merchandizes. The major part of the revenue of the BBL comes from i
ts own outlets in Australia, Europe, Brazil, New Zealand, South Africa, North Am
erica and Japan. BBL promotes its apparel and accessories through promotional ag
reements with top of the athletes and sponsors sports events of international le
vel.
BBL is doing business in more than 100 countries and approximately 6000 employee
s are working in this organization. The main brand of this company are the Billa
bong, Sector 9, Von Zipper, Element, Kustom, Palmers Surf, Honolua Surf Company,
Xcel, Nixon, Tigerlily, DaKine and RVCA brands. Surfer and surfboard shaper Gor
don Merchant and his partner are the founder of Billabong. This was established
in Australias Gold Coast in 1973. In the early days the products were made by the
mselves and sold through local surf shop. The products were sold and customers w
ere found satisfied due to which demand for the products rose, day by day. Durin
g 80s company start its business at world level for which initial focus was on N
orth American market. Due to rise in demand for the products licenses were grant
ed to the number of regions such as New Zealand, Japan and South Africa. During
90s the surf industry grew extraordinary and by following the same strategy and
providing high quality products company expanded its business.
In year 2000 it was listed on Australian Securities Exchange and offered its fir
st public offer, initial public offering (IPO), which was appreciated publically
. Just after the seven years of IPO company passed through the acquisitions of V
on Zipper and then four months late, again an acquisition took place when it acq
uired Element Skateboards brand. BBL pass through many acquisition which were wi
th Honolua Surf Company, Kustom footwear, Palmers Surf, Nixon watches, specialis
t wet suit brand Xcelm, California-based RVCA brand, girls swimwear Tigerlily, W
est 49 retail chain of Canada, Jetty Surf, Surf Dive n Ski (SDS), Rush, Sector9 an
d Dakinepreminum. Company started its business through online sales when it acqu
ired US-based Swell.com and Australias Surfstitch.com.
EXECUTIVE SUMMARY
Billa Bong International Limited (BBL) is Australian based organization and list
ed on Australias stock exchange. The main merchandize of company are wetsuits, cl
othing, eye wears, hardboards for board games and accessories related to the sea
sonal games being played during snow fall and surfing and skating. It is doing b
usiness in more than 100 countries and having approximately 6000 employees in it
s workforce. Company sells its products through approximately 11000 stores and m
ajor part of the revenue is being generated from the self managed stores.
[Students Work: This is a student's work and is of a lower quality than our cust
om work]
Company issued total 252,547,370 shares. The brand of company is very famous and
is of high value and the worth of it is increasing by passing each day and by g
oing through a large number of acquisitions. For business purpose company has di
vided its market into four main segments/regions which are Australia, America, E
urope and other countries. The net present value after tax (NPVAT) for the fisca
l year ended on 30 June 2010 was $146.0 million which was 8.1% greater than the
year 2008-09 while talking in currency term and from year 1999 to 2010 the reven
ue of the company grew from approximately $110 million to $1.5 billion. The memb
ers of the board of governance are competent enough and they not only devised ve
ry effective strategies by also implemented these strategies very well due to wh
ich during the current economic recession the BBG did not face any severe loss o
r problem other than a decline in total revenue which was not of greater value a
nd now management is confident enough that BBG will be able to keep on growing w
ith same strategy and will earn good repute along with increasing the wealth of
the stock holders.
The compensation policy of the company is very attractive and fair wages are bei
ng given to the employees at all level. Companys shares being offered against per
formance of the executives is 2,192,433 shares which are given under long term c
ompensation policy of the BBG. The retained profit at the end of the fiscal year
2010 was US$546,840,000 and total equity was US$ 1,181,180. Basic earning per s
hare at the end of the fiscal year was $ 58.3.
In reported terms, NPAT was 4.5% less than the previous fiscal year. No change w
as found in group sale of $1.48 billion which was 11.2% lesser than the previous
year while analyzing in reported terms. EBITDA (Earnings before interest, tax,
depreciation and amortisation) decreased in current year as compare to the previ
ous year in money and constant term which was 0.9% and 11.1%, respectively. The
working capital of the BBG was $422.4 million.As company doing business in diffe
rent regions the progress on regional basis is different in different regions. S
ale in European region went up 5.2% in constant currency terms and it declined t
o 11.3% in reported terms and EBITDA of the same region was $69.8 million which
was 5.1% greater than previous year and 15.2% lesser in reported term. Sales in
U.S. were $712.6 million which is 14.8% less in reported term and 1.2% in consta
nt terms and EBITD was improved up to 1.7%. The sales in Australian region went
down to $1.9% with $425.7 million. EBITD of Australia also went down to 10.3% in
constant term and 11.2% in reported term as its value was $89.2.
Firm Structure
The board of directors consists of eight members. Board of governance is respons
ible for all of the decisions which are critical and are risky. There are some s
tanding committees established by the board of governance and these committees a
re responsible for giving recommendations to the Board. The permanent standing c
ommittees are Audit Committee, HR & Remuneration Committee and Nominations Commi
ttee. The organizational structure is devised geographically into four main divi
sions on continental bases, which are given as under:
[Students Work: This is a student's work and is of a lower quality than our cust
om work]
Executive directors including CEO, CFO, Senior Management and Regional Managers
receive a fixed amount of remuneration and are accountable for the day to day ac
tivities and behaving in such a way which is inconsistent with the culture and v
alue of the group. These remunerations are given according to the base salary of
these executives which (the base salary) is given as per the market value for t
he said job. Short term incentives are also being offered to the executive direc
tors for encouraging them for achieving the target performance, achieving groups
general performance as per expectations in the annual budget and regional budget
. For qualifying the short term incentive plan the executives have to meat some
minimum requirement (the performance indicator) which is mandatory to achieve. F
or example the bonus payment is given to the CEO and the CFO on the performance
of the group NPAT. In addition to this, the compensation plan also includes long
term incentives for which in order to align the goals of the management with th
e goals of the organization and wealth maximization expectations by the sharehol
ders along with ensuring the retention of the key employees. This plan is being
split into two main parts one is for the five most senior executives and the lat
ter for all remaining participants. Both tires of the long term incentive plans
gives option to the employees for selecting either payout in terms of shares or
options, which depends upon the tax implications and some other legal requiremen
ts in which that particular employee falls. These qualifying criteria and vestin
g rights are given below:
Tier One
Per share earnings is used as a selected measure which links this incentive to t
he wealth maximization interests of the shareholders. Here long term means 3 yea
rs. The right to select the preferred incentive is vested on completion of the t
hree years. For example the awards which were given during fiscal year of 2009-1
0 were given when on the scale of 50% to 100% when compound growth of EPS (Earni
ng per Share) was ranging from 6% to 10% of its face value.
Tier Two
In tier two policy, Firstly the performance of the employees is judged through t
he shareholders return during last 3/4/5 years is more than 80/100/120 percent. S
econdly relative shareholder return is measured as a criterion to ensure that pe
rformance may remains above median TSR performance of ASX companies of the same
sector or industry. In this tier two policy employees are vested with the right
from 3rd year to onward on a percentage basis.
However, in remuneration plan the executive directors can earn if they performed
in such a way that the wealth of the share holders increased and non executive d
irectors are paid on the basis of predefined performance and it keep their inter
est neutral and they work for the shareholders.
Capital Structure
The capital structure of the company consists of the only one type of the ordina
ry shares and the share holders have the right of voting. In capital market comp
any do not have any debt which is trade able and the debt on balance sheet are m
ostly consisting of financial lease obligations, bank overdraft facilities, shor
t term borrowing and multi currency draw-down facilities. During the last two ye
ars repayments and fresh intake of debt, dividend payments, dividend reinvestmen
t schemes, issuance of new shares, acquisition of treasury stock etc like activi
ties were generated in capital structure.
During last two years total debt financing to equity has stood at 48:52 & 35:65,
respectively. The total debt financing to equity ratio shows that along with lo
wering the cost of capital there will be leverage in balance sheet. This ratio a
lso shows that there will be no need to straight debt and equity without attract
ing investors by using convertible warrants etc. just because of the sufficient
capacity of the capital structure. The net present value value after tax (NPVAT)
for the fiscal year ended on 30 June 2010 is $146.0 million which is 8.1% more
than the year 2008-09 while talking in currency term and from year 1999 to 2010
the revenue of the company grew from approximately $110 million to $1.5 billion.
Final ordinary dividend given was 18.0 cent which takes the full year dividend
to 36.0 cent/share and full year EPS payout ratio was approximately 62% which is
15.8% down to the previous year.
Strategy of the Company
Due to global economic crisis the sport industry faced accelerated changes in bu
siness and consumer environment. The response of the Billabong group was totally
proactive for the changes in economic market and companys strategy was to maximi
ze the growth opportunities for the profit of the shareholders. BBL has history
of using its business model which has the capacity to accommodate the changes in
the competitive environment. Recently, due to economic crisis group facing prob
lems regarding extreme swings in foreign exchange rates, regional economic shock
s and related consumer slowdowns, discounting from competitors and supply chain
pricing pressures.
The strategies used by BBL to handle the current dynamic situation were:
Fast-tracking growth of the direct-to-consumer model through bricks and mortar r
etail and online retail, including the acquisition of the West 49 and Rush Surf,
swell.com and acquisition of small heritage retailers which include Becker Surf
and Sport, Bay Action and joint venture with Surfection. Interest in acquisitio
n of surfstitcch.com which is an online business and opening of green field reta
il stores.
By acquiring RVCA brand the brand of the company become more stronger in the sec
tor of board sports and growth opportunities rises.
Company implemented new global product life cycle management system for improvin
g management of product design, sampling and manufacturing process.
Focusing the overhead cost and removing it up to the reasonable level.
New media partnerships and strategic alliance with Fuel TV for better advertisem
ent of the product. Broadcasting major sports events in Australia, Brazil, Portu
gal and Germany. Renegotiation regarding Syndicated Revolving Multi-Currency Fac
ility which improved the total facility balance from US$483.5 to US$790.0 millio
n.
These initiatives contributed for increasing the access of the end user to the G
roups compelling brand portfolio which contributed little in current financial re
sults but will contribute a lot in the long run. It is expected that EBITDA marg
ins will improve during 2011-12 and results in rising the profitability of the c
ompany along with reducing the operating cost of the company. The group consider
ed the current session as the initiative session due to which growth during the
year 2009-10 was not as much as it was required but the implementation of very g
ood strategies the company is expecting that it will be able to rise its EPS up
to 10% as compare to the previous year.
CAPM Beta and Factor Model Analysis
The capital asset pricing model (CAPM) is very useful and effective tool which c
an be used for financial analysis and strategic decision making by the managemen
t and is used for measurement of risk (Tapon, 1983). Most of the time companies
face 2 types of risks:
Systematic Risk
Non-systematic Risk
Non-systematic risks can be managed by diversification which means making invest
ments in different companys shares. However, systematic risk is measured by Beta
method. CAPM is used to indulge the systematic risks for required returns for th
e investors before investing in any company or project. Beta is also known as th
e market risk of that particular company with reference to the security market r
eturn lines which are concluded by the data acquired from the stock market. The
Beta can be calculated from the data on daily basis or on weekly basis but the d
ata on daily basis will be more helpful and precise as compare to the other type
s of the data.
E(Rk) = RF + [E(RM) - RF ]
Where:
E(Rk) = required rate of return on asset k
RF = risk free rate of return on govt. bonds
Rm = Market return
This formula can be helpful for risk calculation which is required for decision
making. The investors generally calculate these beta values for understanding th
e level of the risk on stock of the particular organization (Hamada & Valdez, 20
08).
In project analysis and WACC (Weighted average cost of capital), we need capital
rationing and project NPV and a suitable cost of capital is required to measure
these things. For measurement of cost of equity CAPM model is used by assuming
that the market is represented by the BBL/S&P500 index and this index is conside
red the best representative market index for Australian stock market. Three year
s of monthly returns from July 2008 to May 2011 are used in the analysis so that
current market situation can be studied and the report can conclude the pin poi
nt issues and challenges along with decisions or strategies for handling these i
ssues.
CONCLUSION
By going through whole of the report it is easy to conclude that BBL is well rep
uted and strong business organization and growing rapidly from the day of its bi
rth. Companys management is competent enough that economic crises did not created
serious problems for the company which can be seen by going through the history
and financial statements of the company. BBL is less risky organization for inv
estment purpose and can gives higher returns as compare to the other companies a
nd the existing interest rate of the financial market.
The value of beta for BBG is 0.9226 which is less than unity and shows that inve
stors can invest in this organization and there is minimum risk for the investor
s. BBGs per share earning given through divided during last fiscal year was more
than the 67% of the face value of the shares. The retained profit at the end of
the fiscal year 2010 was US$ 118,118,0 and the earning per share was $ 58.3. The
gross margins of the company improved up to 54.4% from 53.2%. The slight improv
ement in gross margin shows that the promotional retail environment was week in
U.S. As BBG working in more than 100 countries worldwide and market is divided i
nto four main segments the performance of each region is different depending upo
n the strength of shocks in economic markets of these regions due to the effects
of the economic crises at global level.
The sale of American region declined but the EBITD improved from 11.9% to 13.6%.
There was a weak trading term in the markets of Japan, New Zeeland and South Af
rica which caused decline in the sales and EBITD of these countries. The perform
ance of the BBG based sales centers was higher than the performance of the all o
ther sales centers and results in rise in overall earning. BBG is the best optio
n to invest through stock market because the rate of return of its share is high
er than the all other options available in the market. The risk free rate for it
s securities is 4.40 and rate for risk premium is 8.40. The scatter diagram show
s that the response of the investors for the shares of BBG is normal and there i
s less risk for these stocks. As in normal curve most of the values accumulates
in the middle and remaining towards the both tails of the normal distribution. T
he expense charges for depreciation and amortization are decreasing day by day a
s it decreased up to 5.8% while comparing with the previous year. Most of the ti
me cash out flow of the company is very high in the cash flow statements which a
re due to the release of payments against acquisitions.
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