Not the SUGARY DRINK scenario again!!!
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I missed this slide earlier in the year. It's quite interesting. Intercompany charges are normally run pro rata to reflect physical things like volume of work (perhaps litres or kg's consumed) or staff headcount, or a combination of several parameters. Done properly, and with the appropriate documentation in place, it's a tax efficient mechanism.
The figure I find interesting on the slide is the charge being costed to the NZ operation ($10.6M). Its massive relative to the size of the operation here (notwithstanding see weed's ongoing efforts!!!), and presumably mainly reflects the licensing arrangement with FV. Another good reason to see FV gone and fees reinvested in an alternate growth mechanism.
Still thinking about your final question w69.
Cheers,
Trigger
There’s been quite an increase in intercompany charges over the last two years.
It reflects the company having gone from operating within a single market, Australia, to having opening up two new markets in the UK and China and the overhead and support staff required for those markets. I’ve allowed for a further step when the US market is opened next year.
At the end of the day Trigger, although intercompany charges are an overhead, in this instance they are also an investment in growth and although they may seem a bit large at present they probably will stabilise off a little next year once the US entry is initiated.
The revenue growth from the three opened markets UK, China and US, are all at the very bottom of the curve, and in a couple of years those intercompany charges will seem much much less as a percentage of gross.
Yep I'm comfortable with all that Mac. And have no issue with the mechanism. What I hadn't appreciated in the past was the high charge attributed to the NZ operation. I doubt this reflects the size of the operation here, though its a little hard to tell with physical consumption kept away from the market. So I can I only put it down to the second element of cost in winner's slide - i.e. license (Fresha's) fees. My point being, once Fresha leave the building in early 2017 we should see a positive knock on for the consolidated business. Am I barking up the wrong tree?
Trigger
Trigger, I don't think I misread you but you seem to say nz carries $10.6m in inter company charges
I actually think it is actually a "credit" - the offset in the charges made to Australia etc.
I assume this is admin cost recovery and some license fee/royalty arrangement bring profits back to NZ. In other parts of the accounts NZ is reported as making lots of money on hardly any sales.
Is that how you see it?
Yes you're right sorry guys. In my mind the model was Australian Head Office as hub, supporting the regional offices (UK, China, NZ and soon to be US) and inter company charges for services being made to each region on, for instance, a volume basis. Thanks.
Trigger
Couple of small points
Australia has become the business hub but some staff are still in Auckland, and since the company is listed in NZ, a lot of corporate expenses would be picked up here, including listing costs, accounting/auditing, strategic advice, IP legal advice and executive travel costs.
Regarding Fresha Valley, my guess is that the situation will change before 2017. MAC reported from the ASM that the FV deal is not exclusive, and that the company is aware of impatience among NZ shareholders. I'm sure the Synlait operation offers options for ATM to start up its own NZ distribution system at least south of Auckland, and there are also other options, such as farms in Waikato that have already converted to A2-only, just waiting. FV could be allowed to continue looking after the Auckland market meantime. It has its own big market in Auckland for standard milk, which is its main priority, and might be pretty happy to be relieved of its current obligation to distribute A2 milk nationwide.
On the other hand, shareholders who are already questioning whether ATM can afford to simultaneously break into the UK, China and the US would be reluctant to see resources being diverted to market development in NZ, at best a minor market, as well.
Winner or anyone,
Has anyone tried going through the accounts and cutting out all the money estimated to be spent on growth etc and worked out an underlying 'profit' for Australia for the $110m of sales?
Cheers
Yeah, I've given it a go for the last few reports, there's not really enough information to do that accurately I've found, although you can get close from evaluating the profitability of the Australian segment, which is basically close to most of the operating revenue.
Australian operating EBITDA at FY14 was $18.7M,
Gross margins are a good indicator generally though of underlying performance;
Attachment 6542
I can take it one step further than that.
$18.7m is the EBITDA earnings from Australia before licence fees and less investment in new market development of $7.5m and the undeclared 'corporate costs' which reduce EBITDA to $3.6m. So licence fees and corporate costs must be:
$18.7m - ($7.5m + $3.6m) = $7.6m
If we assume that 1/4 of corporate costs relate to Australia, while the other 3/4 go to developing China, UK and USA, then underlying EBITDA for Australia is:
$18.7m - ($7.5m + 0.25($7.6m))= $9.3m
Since Australia is the only developed market we can assume that all the Depreciation and Amortization relates to that market.
So NPBT = $9.3m - $1.9m = $7.4m
Tax that result at 30% and you get NPAT of $5.18m. There are 660m shares on issue. So this gives earnings per share of:
$5.18m / 660m = 0.00785cps
A reasonable growth multiple might be 20 if ATM finds itself an Australian only brand in the future.
So fair value for ATM Australia is.
20 x 0.00785 = 15.7c
At 63c, ATM has an awfully long way to fall to get back to fair value. There is some chance, say 25%, that ATM will become an Australia only company in a few years. So such a scenario needs to be factored in to what ATM is worth.
SNOOPY