Report for potential investment

+BandyopadhyayWealthGroup
On behalf of Kaplan Business School
MBA403 – Guidance Report
Davison Group Ltd
(ASX DVS)
Report for potential investment
The purpose of this report is to advise Patricia Morrison on the
suitability of purchasing $50,000 values of shares in Davison Group
Ltd.
The following provides a comprehensive analysis and interpretation
of the fictional company’s recent performance and some other
information relevant to the purchasing of shares.
Our conclusion is that Davison Group Ltd. is an appropriate choice
for Patricia Morrison’s investment.
This report is only created as a guide for students unsure about
wealth management reports can be framed.
MBA403 students, when creating their own wealth management
report should selectively choose the measures outlined in this
fictional report, when generating their (much more concise) report.
Kanchan Bandyopadhyay
May 2020
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Profitability
During the financial year ended 30 January 2019 Davison Group Ltd. performed pleasingly considering
the tough retail market and managed to improve on last year’s performance.
Sales were up 0.63%, to $419.3m, despite prolonged negative conditions (Davison Group Ltd, 2019)
thanks to Davison Group Ltd.’s aggressive approach with strong promotions and a ‘significant new layer
of advertising’ (Davison Group Ltd, 2019, p, 8). However, the increase in same-store same-day sales by
2.4% is a more accurate reflection of just how effective Davison Group Ltd.’s promotions and advertising
were as overall sales were impacted by the closure of four stores at the expiry of their leases.
The relocation of three stores in Melbourne to new sites would have also contributed to an improved
customer experience and greater sales revenue. In the first quarter of the 2020 financial year’s results it
is clear that regardless of the curveballs Davison Group Ltd. keeps getting thrown, it is performing well.
Sales have increased 0.5% from the corresponding 2019 quarter even though Anzac Day and Easter
Monday fell on the same day and seven stores were affected by the recent Melbourne fires. Davison Group
Ltd.’s sales are looking positive into the future with the sales staff training delivered to drive more sales
as well as the intention to ‘extend the group’s reach into new geographical areas’ (Davison Group Ltd,
2019, p, 21) and the hosting of the Rugby World Cup in Australia.
An estimated 60,000 visitors to Australia will benefit all of Davison Group Ltd.’s stores but in particular
Sporty Sport. Sporty Sport makes up almost a third of Davison Group Ltd.’s sales revenue (31.62%) and
by selling official Rugby World Cup 2019 products they are likely to experience a surge in sales from
locals and tourists alike which will be fantastic news for Davison Group Ltd.
As a high proportion of homeware goods are made from imported cotton, the impact on Davison Group
Ltd. could have been substantial but just like in so many other areas, the group managed to counterbalance
the damage. Investment in new technologies to control inventories decreased spoilage and
strategic forward planning took advantage of pricing opportunities (Davison Group Ltd, 2019, p, 21).
Sourcing products from China and India continues to be a plus for Davison Group Ltd. as the Australian
dollar climbed against both currencies making importing relatively cheaper.
When the India–Australia Free Trade Agreement is signed importing will become cheaper still and cost of
goods sold should fall.
Both mark-up% and gross profit% fell this year, though only slightly. The decrease in mark-up%, from
66.52% to 66.03%, can be accounted for by the discounting by Davison Group Ltd. to remain competitive
in such a slow economy and the increase of cost of goods sold as a result of cotton prices rising.
A smaller mark-up means Davison Group Ltd. adds less onto the cost price to calculate selling price and,
although it is a weakness, this year decreasing mark-up was a smart move as it meant they were able to
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compete and sales increased from $416.7m to $419.3m. The decrease in mark-up also meant a smaller
percentage of sales were left as gross profit.
Throughout the year Davison Group Ltd. managed to cut expenses from $136.5m (32.74% of sales) to
$134.1m (only 31.97% of sales).
A significant part of this fall is from a huge decrease in the wages, salaries and other short term benefits
expense which fell in dollar terms from $47.4m to $45.9m because of fewer stores, but also as a
percentage of sales, 10.95% down from 11.38%, thanks to the implementation of the SPP (Senior Profit
Partners) and “profit sharing” programs that encourage employees to work more efficiently and drive
more sales per employee. The program was also successful in that SPPs embraced ownership of their
stores and managed to reduce store controllable costs (Davison Group Ltd, 2019), something they will
continue to do into the future as they grow in confidence.
Despite the closure of four stores that were struggling, the lease expense stayed almost identical to 2018,
$1.42m and $1.19m, because of the relocation of three stores in Melbourne. Even though four stores were
closed and only three were relocated, the new sites probably had higher rent because of their ‘improved
parking and storage facilities.’ (Davison Group Ltd, 2019, p. 9)
Davison Group Ltd. saw an increase in their net finance income this year from 0.28% of operating
revenue ($1.2m) to 0.34% ($1.4m). Finance income increased as a result of having far more cash in the
bank to earn interest on as well as a rise in the Cash Rate up from 2.50% to 3.00% in July.
Net cash inflows from operating activities were $45.26 million, $30.35 million above those of last year
primarily as a result of the abnormally high payments made last year due to the 53 week financial period’
and brought the cash balance to $82.79m, up from $59.25m in 2019. (Davison Group Ltd, 2019 pp 97-103)
Because Davison Group Ltd. has no loans, their interest expense is miniscule, only $6000, meaning their
finance income is almost entirely dependent on how much cash they have. This is extremely positive for
Davison Group Ltd. and although net finance income only increased a little in 2019, they are still in a
significantly better position, interest wise, than similar companies such as Target holdings Group which
has a $5m finance expense.
Net profit increased this year from $21.03m to $21.61m, a 2.79% increase. However, ‘the result includes a
tax adjustment of $2.48 million that the Group is required to book during the year.
This deferred tax liability adjustment is a one-off non-cash accounting entry which has no material
impact on Davison Group’s underlying profitability, cash flows or dividend policy. Excluding this
adjustment NPAT for the full year was $24.10 million or 14.6 per cent higher than the full year result
reported for last year.’ (Davison Group Ltd, 2019, p. 27)
Throughout the rest of the calculations using net profit we have used the $24.1m figure as we feel it is a
better reflection of Davison Group Ltd.’s performance.
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Improved sales (from advertising and discounting) helped the increase in net profit, as did higher finance
income (from holding more cash), but the majority of the increase can be explained by the decrease in
expenses (mostly from the SPP program).
The financial year ended 30 January 2019 was a good one for Davison Group Ltd. with regards to the rate
of return on equity%. It increased from 16.88% and reached 18.57%, a huge improvement and means each
dollar of Davison Group Ltd.’s shareholder’s investments is now generating more profit. The improvement
occurred as a result of a substantial increase in net profit (14.6% when the adjusted for one-off tax
expense figure is used) because of greater sales and fewer expenses but was diluted by average equity also
increasing.
Rate of return on assets% also improved this year, though not as considerably, from 17.17% to 17.96%.
This measure very much followed the same pattern as the rate of return on equity%, increasing because
of a higher net profit (from $30.12m before interest and tax to $32.76m) but diluted by an increase in
average total assets. The comparatively large amount of cash held, because of the huge payments made to
suppliers last year, brought average total assets up to $182.41m (from $175.45m). Once again Davison
Group Ltd. has better earning capacity than similar companies with The Warehouse having an 11.84%
rate of return on assets%.
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Liquidity
In the financial year ended January 2019 the current ratio fell to 2.52:1, down from 2.75:1. This is a
weakness for Davison Group Ltd. as they have fewer current assets with which to pay their current
liabilities, however, 2.52:1 is still a very strong ratio and reflects the good position the group is in to make
all payments as they fall due.
Throughout the year both current assets and current liabilities increased but the increase in current
liabilities by 28.69%, compared to the current asset increase of 17.8%, is what caused the ratio to fall. In
2010 Davison Group Ltd. made ‘abnormally high payments’ (Davison Group Ltd, 2019, p. 26) to
suppliers, partly due to the longer accounting period (53 weeks instead of the normal 52), meaning their
trade payables account was far smaller than usual. As a result the 2019 balance was comparatively large,
although similar to previous balances (2019 had $49.9m of trade payables and 2009 had $50.4m),
accounting for the seemingly huge increase in current liabilities. The large payments in 2010 also
resulted in Davison Group Ltd.’s bank balance being comparatively high in 2019, the reason for the
increase in current assets. However current assets were offset by increased cash expenditure in other
areas, such as paying almost $4m more to employees, possibly due to accruals, and boosting the dividends
paid by 45.5% up to $16.97m, causing the increase to be by relatively less than the increase in current
liabilities.
Despite the current ratio worsening, Davison Group Ltd. experienced an improvement in their liquid ratio
that went from 1.36:1 to 1.44:1.
As Davison Group Ltd. doesn’t have a secured bank overdraft, or any loan for that matter, the current
liabilities figure used in the liquid ratio is the same as the one used above and therefore increased by
28.69% up to $58.7m as a result of large payments made to suppliers in 2010.
Inventory fell in 2019 by 0.28%, due to better technology and fewer stores, meaning we can tell the
increase in current assets is all resulting from areas besides inventory, such as bank because of the large
payments last year. If we ignore inventory, current assets actually increased by 36.24%, making it
proportionally larger than the increase in current liabilities and causing the liquid ratio to improve even
though current ratio fell.
Both ratios are very pleasing, especially considering ‘the ongoing volatile economic environment’ (Davison
Group Ltd, 2019, p, 26), and mirror the fantastic position Davison Group Ltd. are in ‘to take advantage of
investment opportunities, should they present, as well as maximising organic growth opportunities’
(Davison Group Ltd, 2019, p, 26) once the market improves. One of the main reasons the group holds so
much cash compared to other companies is that the nature of their goods mean ‘sales to retail customers
are settled predominantly in cash’ and is helped by daily monitoring of the liquidity position. (Davison
Group Ltd, 2019, p, 147 – Note 3). As Davison Group Ltd. has such good liquidity and manage to keep all
trade payables in the ‘less than 3 months’ category, they should never run into problems with suppliers
which is important for the stability of the company.
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Financial Stability
An equity ratio of 0.69:1 tells us shareholders have financed 69% of Davison Group Ltd.’s assets, down
from 73% in the financial year ended January 2018.
The decreasing trend is a weakness but as over two-thirds of the company is still collectively controlled by
owners there is no cause for concern. As there was no share issue this year, total equity didn’t increase by
much (a 3.34% increase from dividends paid being less than net profit) the increase in total assets was
proportionally larger.
The 10.02% increase in total assets can be attributed to the dramatic increase in cash from $59.25m to
$82.79m as a result of the ‘abnormally high payments made last year’.
The debt to equity ratio increased this year from 0.36:1 to 0.45:1 and means for every dollar of equity
finance Davison Group Ltd. has, it has 45c of debt finance. Such a small increase in total equity resulted
in total liabilities having a comparatively large increase, causing the ratio to increase. Total liabilities
increased by 28.53% to $59.23m because of the large trade payables balance.
Even though they are more so now, Davison Group Ltd. remains geared very little and are an extremely
safely financed company.
A share issue in May 2019 of 187,500 shares (ASX, 2020) means in the financial year ended January 2012
equity should increase more significantly (assuming a profit is made) and both the equity ratio and the
debt to equity ratio should improve. This would stand Davison Group Ltd. in even greater stead for
levering up and growing the company. Due to Davison Group Ltd.’s low debt, and therefore a tiny interest
expense, the times interest earned measurement of 5459.17 times is irrelevant.
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Market Analysis
The earnings per share of Davison Group Ltd.’s shares have increased in the 2019 financial year from
9.9c to 11c per share. This is a definite strength for Davison Group Ltd. and their shareholders as it
indicates more cents of net profit are being made on each ordinary share purchased and reflects an
increased ability to pay dividends. This year ability translated to reality and Davison Group Ltd.
increased their total dividends paid by 45.46% to $16.97m, or 8c per share.
Both measures improved as a result of an unchanging number of ordinary shares along with increased
net profit and an improved cash position which would have lead Davison Group Ltd. to increase their
dividend payments.
Dividend yield also increased from 4.26% to 5.93% as a result of both D.P.S (dividends per share) and
share price rising, but D.P.S by proportionally more. Davison Group Ltd.’s share price rose by 4.65% from
$1.29 to $1.35 per share. Although it is considerably lower than in 2007 when it was $1.70, it continues to
increase (the shares issued in May 2019 had a share price of $1.38) meaning it is a good time to buy and
shareholders can expect capital gains when they sell them in the future. Dividend yield can furthermore
be used as a comparison to bank interest rates to see if Davison Group Ltd. is a good investment choice in
relation to other possibilities. Currently an interest rate of 5.93% is similar to what Sandy would find at a
New Zealand bank but banks don’t have the prospect of significant improvement on that rate in the near
future.
Price earnings ratio fell in the financial year ended January 2019 from 13.03:1 to 11.88:1. This is a
weakness as it reflects the market has less confidence in Davison Group Ltd. however it means it is
relatively more affordable to buy shares because it is now expected to take less than 12 years earn back
the price you paid. The lack of confidence in Davison Group Ltd. probably exists due to the globally poor
market environment being experienced at the current time and is not, as it should be, a reflection of the
group’s potential.
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Cash management
Cash inflows from operating activities were up this year from $14.92m to $45.26m ‘primarily as a result
of the abnormally high payments made last year due to the 53 week financial period.’ Payments made to
suppliers fell by $35m to $303.69m, a figure more in line with 2009’s $306.34m. More cash was received
from customers, $419.86m compared to $417.1m in 2010, purely because of increased sales and customers
paying off their previous credit purchases (trade receivables fell by about $500,000). $4m more worth of
payments to employees, due to the change in weekend penalty rates rises with the new Sheehy
government, and a similar increase in income tax paid counter balanced the positive cash flows stated
above but not by enough to make a substantial difference.
Investment activities maintained a cash outflow, but decreased the amount of the outflow from $6.68m
down to $4.79m. In the financial year ended January 2019 the only significantly material cash payment
by Davison Group Ltd. was $3.61m spent on the purchase of plant and equipment ‘reflecting investment
made in store fit-outs during the year’ (Davison Group Ltd, 2019, p, 21), compared to the previous year
when substantial cash payments were made for the purchase of freehold land and freehold buildings, as
well as plant and equipment.
Cash outflows for financing activities increased this year, making it the only section of cash flows to
worsen. Because there were no share issues in either year, there were no cash inflows and the only
outflow was dividends paid. As Davison Group Ltd. increased both the interim and final dividend
payments (from 2c to 3c per share and 3c to 5c per share respectively), cash outflow naturally increased
accordingly. Although it has a negative impact on the group’s cash flows, they remain in a superb cash
position and both current and potential shareholders should be pleased with the increased dividends.
Overall cash was handled well by Davison Group Ltd. throughout the financial year ended January 2019
and they increased their cash and cash equivalents from $59.25m to $82.79m, a 39.74% increase. High
amounts of cash go on to positively impact the group’s liquidity and their finance income.
Appropriate long term investment prospect.
Excellent long term prospects
Increased investment – through debt, with a high Times Interest Earned Ratio
Improved Liquid Ratio
Improved profitability
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Conclusion
Even with the above limitations taken into account we believe Davison Group Ltd. is a wise investment
choice. Admittedly, they didn’t produce extremely impressive results this year in terms of huge increases
in sales and net profit, there are strong foundations that suggest that Davison Group Ltd. would make a
great investment and is resilient to the burgeoning online market.

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