Table of Contents
1.0INTRODUCTION... 4
1.1Company Profile... 4
1.2Vision And Strategy... 4
1.3Core Values... 5
1.4Company Structure... 5
1.5Corporate Social Responsibility...6
2.0SWOT ANALYSIS... 7
2.1Strengths... 7
2.2Weakness... 9
2.3Opportunities... 9
2.4THREATS... 10
3.0BALANCED SCORE CARD... 11
3.1BALANCED SCORECARD FOR PERFORMANCE MEASUREMENT...12
3.2THE BALANCED SCORE CARD DOMESTICATED TO KAKUZI LTD...15
3.3The Financial perspective...15
3.4The customer perspective...15
3.5Internal Business Processes...16
3.6Learning and Growth...16
4.0ASSESSMENT OF FINANCIAL HEALTH OF KAKUZI...17
4.1Profitability... 17
4.2Liquidity... 18
4.3Efficiency ... 19
4.4Leverage... 20
4.6CAPITAL STRUCTURE... 22
4.7COST OF EQUITY... 23
4.8NOMINAL COST OF DEBT... 24
4.9EFFECTIVE COST OF DEBT...24
4.10WEIGHTED AVERAGE COST OF CAPITAL...25
4.11VALUE OF THE COMPANY...26
4.12Z SCORES: EDWARD ALTMAN’S MODEL...27
5.0FINDINGS AND OBSERVATIONS ...29
6.0RECOMMENDATIONS AND CONCLUSIONS...30
6.1Recommendations... 30
6.2Conclusions... 31
1.0 INTRODUCTION
1.1 Company Profile
Kakuzi Limited is a listed company trading on both the Nairobi and the London Stock Exchange. The company engages in the cultivation, manufacture and marketing of tea, growing and marketing of avocados, livestock farming, and a joint pineapple operation with Del Monte, macadamia and forestry development. Kakuzi is the largest producer of Avocado in East Africa and exports approximately 45% of the total volume from Kenya. Kakuzi is also focused on the development of out grower and Smallholder Avocado growers.
Kakuzi limited’s parent company is Camellia Plc, a UK based corporate, with a 50.7% shareholding. Kakuzi Limited’s subsidiaries include Estates Services Limited, Siret Tea Company Limited, and Kaguru (EPZ) Limited. Kakuzi Limited has a joint venture agreement with Del Monte Kenya Limited, for the growing of pineapples.
Kakuzi Limited operates in two separate locations in Kenya, the main operation and Head Office is based at Makuyu about 65 Km North East of Nairobi and the other operation mainly Tea, is situated in Nandi Hills about 350 Km North West of Nairobi.
Its plantations comprise 480 hectares of macadamia nuts, 408 hectares of avocados, 959 hectares of tea, 64 hectares of pineapple, 1282 hectares for forestry and 7805 hectares for cattle farming. It houses 861 permanent staff with a peak of an additional 720 fixed term contract staff dependent on the seasonality of activities (Kakuzi, 2013).
1.2 Vision And Strategy
Vision
Similar to all Camellia Plc. businesses, Kakuzi's vision establishes the long-term direction for the company which is based on a number of guiding principles.
• The development of a worldwide group of businesses requiring management to take a long term view.
• The achievement of long-term shareholder returns through sustained investment.
• Investing in the sustainability, environment and the communities in which we do business.
• Ensuring that the quality and safety of our products meet the highest international standards.
• The continuous refinement and improvement of the company’s existing businesses using our internal expertise and financial strength.
Strategy
Kakuzi strategy is to continue focusing on a mixed agricultural portfolio to mitigate the profit cycle risk to which agriculture has historically been subject to. Its core business activities are tea, avocados, forestry and macadamia nut production.
Kakuzi key strategic thrust is developing macadamia nut production which will add scale and customer service to parent company's existing operations in Malawi and South Africa (Kakuzi, 2013).
1.3 Core Values
The summary code of conduct is to;
• Understand and comply with all legal requirements
• Be honest, open and co-operative with all regulators
• Prohibit bribery in any form
• Compete independently and not enter into any anti-competitive agreements
• Properly record, report and review financial and tax information
The Kakuzi Board consists of the Chairman, who has executive responsibilities, four other non-executive directors and two non-executive directors. The Board meets quarterly and is responsible for establishing the corporate governance pillars, setting the strategic direction, reviewing business performance and supervision of the management of Kakuzi operations. The directors have the knowledge, experience, autonomy and skills enabling them to carry out their Board responsibilities (Kakuzi, Annual Reports, 2013).
Mr. Kenneth Tarplee Chairman Mr. Christopher Ames Director
Mr. Richard Kemoli Director (Upto 7th August 2012)
Mr. Nicholas Nganga Director
Mr. Stephen Waruhiu Director (Appointed on 29th November 2012)
Mr. Daniel Ndonye Director (Appointed on 29th November 2012)
Executive Directors
Mr. Graham Mclean Managing Director
Mr. Ketan Shah Finance Director
Company Secretary
Mr. J.L.G Maonga
1.5 Corporate Social Responsibility
Kakuzi Company continues to dedicate a part of its profit to social responsibility activities aimed at enhancing the living standards of those living close to its installations. Kakuzi businesses have the potential to impact the communities in which they operate. Kakuzi continue to make a positive contribution to these communities wherever possible in the passionate belief that the well-being of the community has a positive impact on their operations.
The company’s CSR mandated is to:
• Consult the local communities affected by our businesses and ensure that all comments are responded to and, where appropriate, acted upon
• Understand how our businesses can most effectively support the needs of their local communities and contribute to local programs and initiatives
• Ensure the social effects of major investments are assessed and monitored at the planning stage.
Ina addition to their CSR activities the company also ensures the provision of basic services to employees and their dependents. This may include:
• Access to running, potable fresh water and foodstuffs
• Access to primary health care for employees and their dependents
• Ensuring that resident children of employees of primary school age are in school
• Access to company housing that meets or exceeds local norms or statutory requirement.
2.0 SWOT ANALYSIS
The SWOT analysis is beneficial to companies in that it helps in analysing the overall strategic position of a business, its resources, and its environment.
2.1 Strengths
• Product diversification: The process of expanding business opportunities through additional
market potential of an existing product. Diversification may be achieved by entering into additional markets and/or pricing strategies. Kakuzi has diversified by entering into the dairy
products market, forestry, livestock rearing, macadamia nut production, fresh pineapple production, avocado of which it is the largest exporter, among others.
• CSR and Environmental Initiatives: Kakuzi has given strong emphasis to this significant
operational area. We have ensured that all water supply sources within out control are protected through planting and development of indigenous tree species. Our tea factory is self-sustainable in fire wood supplies and our production factories for tea and avocado have attained top level international certifications, such as ISO 22000, Global GAP and Rain Forest Alliance. Our community outreach programmes have been successful and we will continue to give a strong emphasis to this very important area of our operation. We have 12% of our total land area covered by forestry (Kakuzi, Annual Reports, 2013)
• The company operates in the agricultural, food and beverages industry and produces valuable agricultural products that are on constant demand in the export market and locally. The company’s recent entry into avocado production has seen remarkable success driving profits for 2011 and 2012. Its high-performing Fuertes and Hass avocado crop varieties especially at its Makuyu operation have had increasing value especially in the European export market.
• Positive cash returns from cattle rearing venture.
• Good export market presence: The Company enjoys a strong presence in the export market
and access to the European market through its parent company, Camellia Plc.
• To meet the international tea standards one must have top notch product inputs, thus for Kakuzi having top of the range tea input produces quality outputs which are sought after in many foreign countries, Kakuzi exports only the finest quality tea.
• Well developed and recognized brand.
• Strong financial foundation.
• The location of its main businesses within the Nairobi metropolitan, with the main establishment being at Makuyu favors the company in terms of asset value and in operations
through easy access to the local market in the capital city and proximity to the international airport.
• The company has large ownership of land assets including an agro forestry farm in Thika, tea farm in Nandi Hills, which provide a strong asset base for the company.
2.2 Weakness
• The company is part of the big 6 tea producing companies of the country, making the tea market a very competitive sub sector.
• Poor and infrequent communication of their product to the target market, little to no advertising is done to create awareness of their products locally is a major hindrance to their overall profitability.
• The high fluctuation of prices for agricultural produce locally and internationally caused by changes in weather affecting overall production affects the expected revenue and sales value for the company (KHRC, 2008, p.22).
2.3 Opportunities
• Kakuzi has the potential to further diversify their portfolio beyond those products they currently have.
• Large markets from the avocado and macadamia nut ventures the company has recently diversified into.
• The current high value of tea and fresh avocado especially in the international market continues to bolster the company’s financial position. The expected entry into the lucrative macadamia and processed agricultural fruit market, and its long-term approach for agro forestry are expected to bring sustainable business for the company in coming years (Gikunju, 2007)
• The strategic alliances with the parent firm, the company’s local subsidiaries and other agro processing companies notably Del Monte (K) Ltd present wider business opportunities for the company and its products.
• Kakuzi’ s entry into marketing of avocado fruit internationally presents a new market opportunity with high potential and very low competition from other major producers in the region. Currently Kakuzi is the largest avocado exporter
• Increasing their fresh pineapple exports from 5% to a higher value.
2.4 THREATS
• Foreign Exchange Rate Volatility: The group operates internationally and is exposed to
foreign exchange risk arising from various currency exposures, primarily with respect to the US dollar and Euro. Foreign exchange risk arises from future commercial transactions, and recognized assets and liabilities. This is a risk faced by the company on a yearly basis and could result to adverse losses for the company.
At 31 December 2012, if the Shilling was weaker / stronger by 5% against the US dollar with all other variables held constant, the consolidated post tax profit would have been Shs. 90,650 (2011: 4,537,000) higher/lower mainly as a result of US dollar trade receivables (Kakuzi, Annual Reports, 2013).
• Cash Flow Interest Rate Risk: The Group has borrowings and bank overdraft facilities at
variable rates, which exposes the Group to cash flow interest rate risk. The group regularly monitors financing options available to ensure optimum interest rates are obtained (KHRC, 2008).
The Group has interest earning deposits, whose income would be subject to interest rate risk. An increase/decrease in interest rates of 5% would have resulted in an increase/decrease in post-tax profit of Shs 3,636,000 (2011: Shs 2,490,314) (Board-of-Directors-Kakuzi, 2011).
• The global trend of being health conscious may affect tea consumption, the changing lifestyles and attitudes towards healthier lifestyles has affected consumption among some segments of the health conscious population.
• The company faces litigation surrounding its joint venture with Del Monte Ltd affecting the company’s marketing activity for its pineapple produce. The company lacks processing plant for pineapple fruit and jeopardy surrounding its business relationship with Del Monte could potentially lead to low returns and loss of significant market for the produce.
• Threat of substitute products e.g. herbal tea.
• Difficult dealings with the labor union over employee conditions, which is common in most horticultural and other plantation firms in Kenya, has affected its dealings with workers. Unruly behavior amongst rioting workers has put business operations, personnel and property at risk at the company’s Makuyu operation, denting the company’s image and creating unnecessary costs through arson and destruction of crops (Were, 2008).
• Adverse macroeconomic effects on its revenues especially caused by the high fluctuation in the local currency have potential negative impact on its international market revenues, with appreciating value of the shilling causing lower value for its tea and other products internationally (KHRC, 2008).
3.0 BALANCED SCORE CARD
The balanced scorecard (BSC) is a strategy performance management tool - a semi-standard structured report, supported by design methods and automation tools that can be used by managers to keep track of the execution of activities by the staff within their control and to monitor the consequences arising from these actions. Further it is a strategic planning and management system that is used extensively in business and industry, government, and nonprofit organizations worldwide to align business activities to the vision and strategy of the organization, improve internal and external communications, and monitor organization performance against strategic goals.
Balanced Scorecards, when developed as strategic planning and management systems, can help align an organization behind a shared vision of success, and get people working on the right things and focusing on results.
Doing the right things and doing things right is a balancing act, and requires the development of good business strategies (doing the right things) and efficient processes and operations to deliver the programs, products and services (doing things right) that make up the organization’s core business.
While there are differences in development and implementation of scorecard systems for private, public and nonprofit organizations, the disciplined process of strategic discovery used to develop scorecard systems has more similarities than differences, so the framework we will describe applies equally well to different types of organizations.
3.1 BALANCED SCORECARD FOR PERFORMANCE MEASUREMENT Translating Vision and Strategy: Four Perspectives
The balanced score card consists of the following elements: strategic management framework, measurement system, and communication tool. The balanced scorecard suggests that we view the organization from four perspectives, and to develop metrics, collect data and analyze it relative to each of these perspectives:
• The Financial perspective
• The Customer perspective
• Internal Business Process
Guide to the Balanced Score Card
ENTERPRISE SCORE CARDS SOURCE OF ENTERPRISE SYNERGIES
FINANCIAL SYNERGY “How can we increase the shareholder value of our Portfolio?” “To succeed financially how should we appear to our
shareholders?” What are the objectives, measures, targets and initiatives?
1. Internal Capital Management – Create synergy through effective management of internal capital & labor markets.
2. Corporate Brand – Integrate a diverse set of businesses around a single brand, promoting common values or themes.
3. Productivity strategy-Leads to Improved Cost Structure, Increased Asset Utilization,
4. Growth strategy - Expand Revenue
Opportunities Shareholder Value, & Expand Customer Value
CUSTOMER SYNERGY” How can we share the customer Interface to increase total customer value?” “To achieve our vision, how should we appear to our customers?”
1. Cross-Selling – Create value by cross-selling a broad range of products/services from several business units.
2. Common Value Proposition – Create a consistent buying experience, conforming to corporate standards at multiple outlets 3. Product / service attributes – Customer
Perspective, Customer Value Proposition Price, Quality & Availability Selection Functionality 4. Relationship - Service, Brand, Partnership 1. Shared Services – Create economies of scale by
sharing the systems, facilities and personnel in critical support processes.
2. Value Chain Integration – Create value by integrating continuous processes in the industry value chain.
3. Operations Management Processes: Supply,Produce,Distribute,Manage Risk. 4. Customer Management Processes: Select
INTERNAL BUSINESS PROCESS“How can we manage processes to achieve economies of
scale or value chain integration?’ “To satisfy our shareholders and customers, what business processes must we excel at?”
Customers,Acquire New Customers Retain Existing Customers,Grow Business with Customers.
5. Regulatory & Social Processes
6. Environment,Safety & Health,Employment 7. Community
8. Innovation Processes.
9. Identify New Opportunities, Design and Develop
10. Launch
LEARNING AND GROWTH “How can we develop and share our intangible assets?’ “To
achieve our vision, how will we sustain our ability to change and improve?”
1. Intangible Assets – Share a competency around the development of human, information and organization capital.
2. Strategic Themes – Provide leadership in complex organizations through the management of strategic themes
3. Human capital, information capital and organizational capital i.e. Culture, leadership and team work.
3.2 THE BALANCED SCORE CARD DOMESTICATED TO KAKUZI LTD
3.3 The Financial perspective
The financial health of Kakuzi limited has been on an upward trend over the five year period. The company seeks to leverage on its existing assets for business diversification. As per the diagram above it would be a good idea to increase efficiency of the company, in recent years especially e.g. 2012 the efficiency numbers have increased tremendously. Thus there is need to work on the efficiency.
3.4 The customer perspective
Customer satisfaction should always be the focus of every company. If customers are not satisfied, they will eventually find other suppliers that will meet their needs or substitute products. Poor
performance from this perspective is thus a leading indicator of future decline, even though the current financial picture may look good. Thus as per the score card above, service excellence is of utmost importance for the longevity of the company. Kakuzi’s attention to quality production continues to receive international recognition (Paul, 2005).
3.5 Internal Business Processes
Reduction of the cash conversion cycle/ improved efficiency is also of importance as a longer CCC will impact on the profitability of the company and leads the company into bad debts. Thus reduced payables days of holding should be considered.
For efficiency and effectiveness of operations Kakuzi has been able to invest in internal capacity and to modernize its operations in order to enhance its efficiency as well as invest in innovation in all its business spheres as seen from the diversification of their portfolio.
3.6 Learning and Growth
Alignment of personal goals to the company’s goals will ensure all employees are working to a common goal. The feeling of belonging will help increase their morale which improves productivity. This in turn has positive impacts on the overall productivity of the company.
Kakuzi encourages the professional and higher learning as well as continuous development, continuous development/ learning is necessary to keep abreast of all the changes in the business environment. In addition to continuous development and general professional training the company should ensure that they hire the key technical talent to ensure processes are performed accordingly. Having highly trained professional staff also resonates well with the consumers as they know that they can get value for their money (Paul, 2005).
4.0 ASSESSMENT OF FINANCIAL HEALTH OF KAKUZI
4.1 Profitability
5 YEAR ANALYSIS 2008 2009 2010 2011 2012
i) Profitability
a) Gross Profit Margin/mark up = Gross profit * 100 Turnover
Gross Profit 673,645.00 876,778.00 954,192.00 1,167,418.00 733,229.00 Turnover 1,613,216.00 2,008,157.00 2,113,774.00 2,376,862.00 1,564,792.00
41.76% 43.66% 45.14% 49.12% 46.86%
b) Net proft as a percentage of sales = Net profit * 100 Sales
Net Profit 282,918 390,295 385,379 644,397 408,656
Turnover 1,613,216 2,008,157 2,113,774 2,376,862 1,564,792 = 17.54% 19.44% 18.23% 27.11% 26.12% c) Return on Investment = Net Profit * 100
Total Assets
Net Profit 282,918 390,295 385,379 644,397 408,656
Total Assets 2,283,983 2,343,199 2,614,898 3,817,320 3,571,700 = 12.39% 16.66% 14.74% 16.88% 11.44% d) Return on Equity = Net profit* 100
Equity
Net Profit 282,918 390,295 385,379 644,397 408,656
Turnover 1,613,216 2,008,157 2,113,774 2,376,862 1,564,792
Total Assets 2,283,983 2,343,199 2,614,898 3,817,320 3,571,700
Equity 1,396,141 1,707,453 1,882,604 2,756,765 2,801,225
Net profit/Turnover*Turnover/Total Assets =
*Total assets/Equity Net profit/Turnover
Turnover/Total Assets Total assets/Equity
= 20.26% 22.86% 20.47% 23.38% 14.59% THE COMPANY HAS HIGH PROFIT MARGINS WHICH WILL BE BENEFICIAL FOR
FUTURE OPERATIONS
4.2 Liquidity
ii) Liquidity
Focus on liquidity as it is normally the main cause of company downfall a) Current Ratio = Current Assets
Current liabilities
Current Assets 229,477 275,217 432,800 1,174,645 1,237,473
Current Liabilities 312,322 134,224 222,394 351,157 146,023
= 0.73 2.05 1.95 3.35 8.47
b) Quick Ratio = (Current assets - Inventory) Current liabilities
Current Assets 229,477 275,217 432,800 1,174,645 1,237,473
Current Liabilities 312,322 134,224 222,394 351,157 146,023
Inventories 34,103 48,979 41,568 179,830 65,428
= 0.63 1.69 1.76 2.83 8.03
c) Acid test ratio = Cash and equivalents Current Liabilities
Cash and Equivalents 6,901 85,464 217,866 897,332 897,540
Current Liabilities 312,322 134,224 222,394 351,157 146,023
= 0.02 0.64 0.98 2.56 6.15
d) Free cash flows
= Net profit +/- change in fixed assets +/- change in Working capital
Change Change Change Change Change
Change in Fixed assets 17,099 14,476 114,116 460,577 -308,448
Change in Working Capital -225,397 -132,358 136,729 870,608 -142,306
Net Profit
= 491,216 508,177 134,534 -686,788 859,410
The company's liquidity ratio does not meet the required 2:1 ratio, thus in some years e.g 2008, 2010 its barely able and safe to meet maturing
obligations, when they fall due
Between 2008 & 2010, the quick ratio is low, indicating the company doesn’t keep excess cash in hand, and relies too much on inventory to pay its short term liabilites, while in
4.3 Efficiency
iii) Efficiency
Inventories 34,103 48,979 41,568 179,830 65,428 Receivables 154,657 140,774 173,366 97,483 274,505 Payables 110,492 90,604 210,807 283,252 129,212
Cost of Goods Sold 1,121,010 1,195,941 1,284,419 1,426,866 895,249
Turnover 1,613,216 2,008,157 2,113,774 2,376,862 1,564,792 a)Inventory days of holding = Inventory *365
Cost of goods sold
IDOH = 11 15 12 46 27
11 Days 15 Days 12 Days 46 Days 27 Days
b) Receivable days of holding = Receivables * 365 Turnover
RDOH = 35 26 30 15 64
c) Payable days of holding = Payables *365 Cost of goods sold
PDOH = 36 28 60 72 53
36 Days 28 Days 60 Days 72 Days 53 Days
d) Cash conversion cycle
= Inventory days of holding + Receivable days of holding - Payable days of holding
= 10 13 -18 -11 38
The longer the cash conversion cycle the greater the ability to experience bad debts , the lesser the efficeincy of the company, Kakuzi is quite efficient as
the CCC is through the years is significantly low.
RDOH higher than 50 may indicate collection problems and pressure on cash flows, thus in 2012 the RDOH was higher than 50 signifying collection
4.4 Leverage iv) Leverage (Gearing)
a) Long term debt Equity
Long Term debt 685,997.00 604,515.00 624,408.00 709,398.00 624,452.00
Equity 1,567,633 1,964,609 2,210,504 2,756,765 2,801,225
= 43.76% 30.77% 28.25% 25.73% 22.29%
b) Long term debt+Current liabilities Equity
Long Term debt 685,997.00 604,515.00 624,408.00 709,398.00 624,452.00
Equity 1,567,633 1,964,609 2,210,504 2,756,765 2,801,225
Current Liabilities 312,322 134,224 222,394 351,157 146,023
63.68% 37.60% 38.31% 38.47% 27.50%
c) Equity Multiplier = Total Assets
Equity
Equity 1,567,633 1,964,609 2,210,504 2,756,765 2,801,225
Total Assets 2,283,983 2,343,199 2,614,898 3,817,320 3,571,700
= 1.5 1.2 1.2 1.4 1.3
d) T.I.E = Equity Before Interest and Taxes (EBIT)
T.I.E = Equity Before Interest and Taxes 390,189 558,890 553,934 920,093 479,299 Financial costs 51,399 19,473 414 0 0
8 29 1,338 0 0
Financial costs
The capital ratio has surpassed the prescribed amounts and should be reevaluated as this could prove detrimental to the company
The equity multiplier is below the prescribed levels, thus the number of times equity can be derived from assets is also low.
The more times your T.I.E the better , if the T.I.E is low this means the company has a lower capacity to pay debts, thus in 2011 & 2012, the company
4.5 Investor Concerns
v) Investor
1.00 2.50 2.50 3.75 3.75
23.00 31.75 81.50 69.50 40
Earnings Per Share 13.12 17.34 15.87 28.06 19.35
a) Return of shares : EPS yeild = Earnings per share * 100 Market price
= 57.04% 54.61% 19.47% 40.37% 48.38%
b) Dividend yeild = Dividend per share * 100 Market price
= 4.35% 7.87% 3.07% 5.40% 9.38%
Dividend Policy = Dividend per share Earnings per share
7.62% 14.42% 15.75% 13.36% 19.38%
Retention 92.38 85.58 84.25 86.64 80.62
c) Price earnings ratio = Market price Earnings per share
= 1.75304878 1.83 5.14 2.48 2.07
The company has a good high retention ratio which is an indicator of a good growth. The company also seems to vary its issuing of dividends in each year
EPS is signifying good returns for Kakuzi
This shows that the company's shares are not stable and fluctuate yearly, the issuing of dividends varies yearly as well.
Dividend Per Share Market price
4.6 CAPITAL STRUCTURE
2008 %
2009 %
2010 %
2011 %
2012 %
Amount(shs' 000) Proportions
Amount(shs' 000)Proportions Amount(shs' 000)
Proportions Amount(shs' 000) ProportionsAmount (shs' 000) Proportions
Equity
1,567,633
70%
1,964,609
74%
2,210,504
78%
2,756,765
80%
2,801,225
82%
685,997
30%
694,515
26%
624,408
22%
709,398
20%
624,452
18%
2,253,630
100%
2,659,124
100%
2,834,912
100%
3,466,163
100%
3,425,677
100%
CAPITAL STRUCTURE
Capital
Structure
As a rule of thumb Equity should never be below 67% and Long Term debt should never exceed 33% at the maximum , the figures above indicate
that Kakuzi is within the prescribed amounts of equity and long term debt for the five year period.
4.7 COST OF EQUITY
2008
2009
2010
2011
2012
Cost of Equity, Ke
Amount(shs' 000) Proportions Amount(shs' 000) Proportions Amount(shs' 000) Proportions Amount(shs' 000) Proportions Amount(shs' 000) Proportions
DPS
1.00
2.50
2.50
3.75
3.75
23.00
31.75
81.50
69.5
40
Ke
0.043478261
0.078740157
0.030674847
0.053956835
0.09
Ke
4%
8%
3%
5%
9%
Cost of financing the company with equity is quite low for four years (2008-2011), but in 2012 the cost of financing with
equity increased tremendously in 2012, which is not advisable.
4.8 NOMINAL COST OF DEBT
2008
2009
2010
2011
2012
Proportions
Proportions
Proportions
Proportions
Proportions
Nominal cost of Debt, Kd
Finance cost
51,399
19,473
414
-
-Long term debt
685,997
604515
624408
709,398
624,452
Borrowings
0
0
0
0
0
Kd
7.492598364
3.221260018
0.066302802
0
0
Kd
Kd = 7.49%
Kd = 3.22%
Kd = 0.06%
Kd = 0%
Kd = 0%
4.9 EFFECTIVE COST OF DEBT
Effective Cost of Debt, Ki
2008
2009
2010
2011
2012
Kd
7.492598364
3.22126002
0.0663028
0
0
1-T
0.7
0.7
0.7
0.7
0.7
5.244818855
2.25488201
0.04641196
0
0
4.10 WEIGHTED AVERAGE COST OF CAPITAL
WACC
2008
2009
2010
2011
2012
Equity
70%
74%
78%
80%
82%
Ke
4%
8%
3%
5%
9%
LTD
30%
26%
22%
20%
18%
Ki
5.24%
2%
0.05%
0%
0%
5%
6%
2%
4%
8%
0.05
0.06
0.02
0.04
0.08
Ko/WACC
4.11 VALUE OF THE COMPANY
2008
2009
2010
2011
2012
Amount (shs'000)
Amount (shs'000)
Amount (shs'000)
Amount (shs'000)
Amount (shs'000)
EAT
282,918,000.00
390,295,000
385,379
644,397,000
405,104
WACC
0.05
0.06
0.02
0.04
0.08
Value
5,658,360,000
6,504,916,667
19,268,950
16,109,925,000
5,063,800.00
Value of Kakuzi
4.12 Z SCORES: EDWARD ALTMAN’S MODEL
Z score for KAKUZI ltd FY 2008 – 2012
Z Score = 1.2A + 1.4B + 3.3 C + 0.6D + 0.99 E
Where
A = Working Capital / Total Assets B = Retained Earnings / Total Assets C = EBIT / Total Assets
D = Market Value of equity / Book Value of Total Liabilities E = Sales / Total Assets
YEAR 2012 Z - score YEAR 2011 Z - score
1 A WC/TA = 1,091,450 = 0.306 0.3667 1.2 A WC/TA = 823,488 = 0.216 0.2589 3,571,700 3,817,320 1 B RE/TA = 2,703,225 = 0.757 1.0596 1.4 B RE/TA = 2,658,765 = 0.697 0.9751 3,571,700 3,817,320 3 C EBIT/TA = 479,299 = 0.134 0.4428 3.3 C EBIT/TA = 920,093 = 0.241 0.7954 3,571,700 3,817,320 1 D E/TL = 2,801,225 = 3.636 2.1814 0.6 D E/TL = 2,756,765 = 2.599 1.5596 770,475 1,060,555 1 E S/TA = 1,564,792 = 0.438 0.4337 0.99 E S/TA = 2,376,862 = 0.623 0.6164 3,571,700 3,817,320 4.48 4.21
YEAR 2010 Z - score YEAR 2009 Z - score 1 A WC/TA = 795,570 = 0.247 0.2966 1.2 A WC/TA = 314,307 = 0.109 0.1313 3,218,591 2,873,255 1 B RE/TA = 2,112,504 = 0.656 0.9189 1.4 B RE/TA = 1,866,609 = 0.650 0.9095 3,218,591 2,873,255 3 C EBIT/TA = 553,934 = 0.172 0.5679 3.3 C EBIT/TA = 558,890 = 0.195 0.6419 3,218,591 2,873,255 1 D E/TL = 2,210,504 = 2.193 1.3157 0.6 D E/TL = 1,964,609 = 2.162 1.2973 1,008,087 908,646 1 E S/TA = 2,113,774 = 0.657 0.6502 0.99 E S/TA = 2,008,157 = 0.699 0.6919 3,218,591 2,873,255 3.75 3.67 YEAR 2008 Z - score 1 A WC/TA = 30,472 = 0.011 0.0137 2,662,519 1 B RE/TA = 1,469,633 = 0.552 0.7728 2,662,519 3 C EBIT/TA = 390,189 = 0.147 0.4836 2,662,519 1 D E/TL = 1,567,633 = 1.432 0.8591 1,094,886 1 E S/TA = 1,613,216 = 0.606 0.5998 2,662,519 2.73
The Z score for Kakuzi Ltd has been improving over the years i.e. from 2.7 in 2008 to 4.5 in 2012 Current Z score of 4.5 is an indication that the firm is solvent and liquidation is out of question.
This can also be demonstrated by Chepshy's Confidence Level as below:
Confidence Level = 1 - 1/Z squared
= 1 - 1/(4.48*4.48)
= 0.950175383 = 95%
A confidence level of 95% is very high, hence this supports the conclusion that the firm is not anywhere near liquidation.
5.0 FINDINGS AND OBSERVATIONS
As the figures dictate:
• Comparisons between the presented book values and calculated values shows that Kakuzi Ltd is grossly undervalued, placing it as a better company to be purchased.
• The company has considerably high profit margins , this is beneficial for future operations of the company
• The company’s capital structure is sound, with equity above the prescribed 67% debt below 33% at the maximum.
• The prescribed normal for quick ratio should be 1.1; we can observe ratios of up to 8.03 in 2012. For the period under evaluation only the year 2008 had the prescribed ratio.
• The debt composition is within the prescribed amounts.
• Between 2008 & 2010, the quick ratio is low, indicating the company doesn’t keep excess cash in hand, and relies too much on inventory to pay its short term liabilities, while in 2011/12 the opposite is true.
• RDOH higher than 50 may indicate collection problems and pressure on cash flows, thus in 2012 the RDOH was higher than 50 signifying collection problems.
• The longer the cash conversion cycle the greater the ability to experience bad debts , the lesser the efficiency of the company, Kakuzi is quite efficient as the CCC is through the years is significantly low.
• Over the period under evaluation, the capital ratio has surpassed the prescribed amounts and should be reevaluated as this could prove detrimental to the company.
• The more times your T.I.E the better , if the T.I.E is low this means the company has a lower capacity to pay debts, thus in 2011 & 2012, the company has no capacity to pay debts.
• "The company has a good high retention ratio which is an indicator of a good growth. The company also seems to vary its issuing of dividends in each year
6.0 RECOMMENDATIONS AND CONCLUSIONS
6.1 Recommendations
• The company has greater capacity for diversification, thus it should look at other additional areas to venture into.
• The company’s marketing strategy should be made more aggressive, this is in a bid to create / increase awareness of the brand and its product offerings.
6.2 Conclusions
• Using Chepshy’s Confidence level’s Model, Kakuzi Ltd has above average confidence levels.
• The z-score of Kakuzi Ltd are above the margin 3, signifying that Kakuzi Ltd’s future can be accurately predicted.
• A confidence level of 95% is very high, hence this supports the conclusion that the firm is not anywhere near liquidation.
REFERENCES
Board-of-Directors-Kakuzi. (2011). Kakuzi Limited Annual Report and Financial Statements for
the Year Ended 31 December 2011. Nairobi, Kenya: Kakuzi Limited.
Gikunju, W. (2007, November 5). Kenya: Kibaki Tips Scales for Kakuzi Directors in Spat Over Tea Farm. Business Daily.
Kakuzi. (2013, November 19). About Us. Retrieved from http://www.kakuzi.co.ke/about-us Kakuzi. (2013, November 19). Annual Reports, 2010 and 2011. Retrieved from
http://www.kakuzi.co.ke/investor-relations. Kakuzi Financial Reports 2008 -2012
KHRC. (2008). A Comparative Study of the Tea Sector in Kenya – A Case Study of Large Scale
Tea Estates. Nairobi, Kenya. Kenya Human Rights Commission.
Paul, N. R. (2005). Balanced Scorecard Diagnostics: Maintaining Maximum Performance. Texas: John Wiley & Sons.
Ross, S. A. (2001). Corporate Finance (6th Edition ed.). New York: McGraw Hill.
Were, E. (2008, March 12). Kenya: Kakuzi Records Profit Despite Strong Shilling. Business
