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Transcript of Finance Project
Model Restaurant Company Section Four: Valuation Trust in management Affordable Dividends
Model Restaurants Company PLC (FOOD)
DERA for Real Estate Deera Real Estate Corporation Prepared By:
Basmah Taha Lama Da’as
Nemeh Mansour Shireen Shaka’a
Noray Fardous Wafa’ Elias Analysis Fields Why Selected Deera is a stable company that made profits for the last two years whereas the Model was making losses Deera has limited trading in stock market while Model stockholders change approximately every week. Introduction Aims to invest in real estate opportunities generating above average returns based on added values through precise vision, quality as well as predetermined strategies.
Deera's strategy focuses on small to medium size projects aiming to create & hold a well-diversified portfolio of properties and projects adhering to highly focused and predetermined criteria based on sustainable growth and wealth preservation. Jordan-based public shareholding company
Engaged in setting up fast food restaurants with an American theme.
The Company also operates and manages holiday resort restaurants, as well as offering catering and food storage services. Accounting & Economic Returns Return on Assets (ROE/ROC) Model Restaurant Deera Company
2010 2011 2010 2011
ROE -1.13 -9.2 0.27 1.91
Cost of 0.04353 -0.0731 0.0456 0.04326
ROC -2.366 -0.2248 0.3123 1.2399
Cost of 0.04353 -0.0731 0.04576 0.04326
Capital Return on Equity = Net Income in year t/Book Value of Equity at t-1
Return on Capital = EBIT (1-t) / (BV of Debt at t-1 + BV of Equity at t-1) Accounting Returns Accounting Results ROE
as it went from
1.7% to 0.27% to 1.91%
2009 to 2010 to 2011
and this is due to the conditions of the real estate investment as dpreciations is too high and the barriers of entry are not easy which might not reflect their operations efficiency. ROE is negative and is also getting lower through the year from
-1.13 to -9.2%
which indicates the company inefficiency in generating any returns from equity which is not acceptable in restaurants and service industry. Deera Model Restaurant ROC Deera Model Return on Capital went up
2011 0.0123% The company is becoming more effective in turning its capital into profits It became Better
2011 -0.0022%. Based on the size of the capital the profit is looking ok although and building it on previous analysis their profit is not high enough compared to its industry. The owners (Board of Directors): Understanding the Business The main player in Model Company is Mr.haitham al Dahleh. He controlled the company decisions and influenced the board of director.
Lately he was arrested for manipulating and forcing the group to buy another company that he owes, and trying to bribe an employee that works at public auditing control to issue false report for Food company financial statement. A trust worthy company with a good reputation and
This was the main reason for Kuwait finance house invest in it in 2008 and raised the capital of the company to 40 million.
It has a good quality board; their interests are aligned with the firm, no scandals or problem faced the company.
Usually the larger the number of outside board members is better. This makes the board more independent and allows it to provide a higher level of corporate governance to shareholders, is it true most of the time however in our case we had the opposite. The most important thing is having ethics and respecting regulation and rules. Insiders vs. outsiders: 75% of Deera Company is owned by 15 members, and usually they don’t change, but as for Model Restaurant 71% are held by 9 members. As for Model, we can see that close relatives are controlling the company which looks like a family business at that might have caused influence over the company decisions and behavior in the market. Stockholders' analysis: Financial Performance In Deera real Estate, the current ratio is too high; this means that the company is not being efficient using its current assets or its short-term financing facilities.
In Model Restaurant Company, low values for the current ratio (values less than 1) indicate that a firm may have difficulty meeting current obligations. MODEL COMPANY PLC DEERA REAL ESTATE 1- Liquidity Assessment:
Current Ratio = CA / CL Financial Performance: As depicted, the Model Restaurant Company considered as high leveraged. In terms of Debt, the company situation might be risky.
And for Deera Real Estate, the ratio is lower than in Model Restaurant Company, which reflects that the debt is not high, and in terms of Debt, the company situation is not risky. MODEL RESTAURANTS COMPANY PLC DEERA REAL ESTATE 2- Leverage Ratios In both companies, the values are low, indicating a low efficiency at using assets to generate sales or revenue. MODEL RESTAURANTS PLC DEERA REAL ESTATE 3- Total Asset Turnover
Total Asset Turnover = Sales / Total Assets Having a growing dividend per share can be a sign that the company's management believes that the growth can be sustained, but in our both companies, the situation is the opposite, as they are equal to zero in Model Restaurant Company, and even in Deera, it decreased to zero in 2011. 4- Investment Valuation Ratios: Affordable Dividends
Trust in Management
Changing Dividend Policy Dividends
Policy The purpose of this section is to assess how much the firms could have returned to stockholders and whether they should be returning more or less. By looking at the shaded areas in the above tables, we can get an idea of how much the companies could have returned to stockholders and how much they actually did.
The FOOD Company did not pay any dividends or buyback stocks with a negative FCFE during the last 3 years with ending 2011 cash balance JOD 445.185, while DERA Company paid dividends on average JOD 2200000 also with a negative FCFE during the last 2 years, with ending 2011 cash balance JOD 18,371,626 Affordable Dividends Trust in management Changing Dividend Policy The valuation of different companies in different sectors is measured by many ways, as one way might be enough and good for one sector but not enough for the other. In general estimating the value of the companies based on the cash flow choice can show the DEERA Company in a good and accepted value rank, while it presents an unacceptable value for the FOOD Company. The Inflation fell to 4½ percent back in 2011.
Whereas it was recorded at 4.42 percent in October of 2012.
This is important for local investors as it affects their purchasing power Having 15% insiders in Model Company and that influenced the company heavily. Dera has 22% insiders however this never influenced their decision or affected the reputation. Mr. Hatem Al Halawani was the CEO of Deera and was replaced by Mr. Mohammed Khamis because he was assigned as Minister of Industry and Trade and the Minister of Communications and Information Technology. As for Model, the CEO has been the same since it was established. He is connected with a good relationship of the main owner Haitham Al Dahleh, his decisions were highly influenced. Board Seats/ Shares/ Nationality Board Seats/ Shares/ Nationality Deera Real Estate Economic Value When we compare with economic value-added we notice it leads to a different conclusions than one based upon the return differences in the earlier and this is because Returns doesn't take into considerations the risk and the future expectations, While Economic Value Added (EVA) takes both return and future expectations in account. EVA Of Capital=(ROC - WACC )* (BV of debt +BV of equity) Equity EVA=(ROE-COE)*BV of equity Model Deera First Method: Based on the Cash Flow Choice.
FCFE, Dividends, stability of Leverage, and Inflation. Second Method: Estimating the value using Growth Pattern Choice.
Expectations : for the FOOD Company there is no reason to believe that the future investments of this firm will be different from the historical record according to the huge accumulated losses of the firm.
Barriers to entry : In general low, but some that might be faced are:
Lack of sufficient start-up capital , customer skepticism, Location, and the amount of marketing needed. company's earnings growth historically, analysts’ expectations on earnings growth in the future, reinvestments, rate of return, and the barriers to entry that will allow any high growth to continue. Expectations : The return that this investment generates from its capital is not stable, but yet good compared to its whole sector. Having earnings growth improving and dividends being distributed, keeps and maintains a good value of the company with a good image.
Barriers to entry : In general, Real estate barrier to entry are very low compared to other industries.
The Growth Pattern Choice also supports the previous results giving the DEERA Company a good value compared to the FOOD model restaurant and the industry, whereas the FOOrestaurant doesn’t have a good value compared to DERA Company and the food industry.
It also shows how the DEERA Company is working hard to maintain such value even in the hard circumstances . Third Method: The Value of the Firm:
Based on the Discounted Cash Flow Model. For DEERA we expected 5% growth for the coming 10 years. The DCF model as follows: For FOOD we expected 12% growth for the coming 10 years. The DCF model as follows: Expectations : value of the firm which came from the expected growth
DEERA Company FOOD Company The sensitivity of this value depends on the growth rate we expect and assumed, sensitivity analysis is very useful when attempting to determine the impact the actual outcome of a particular variable (growth rate) will have if it differs from what was previously assumed.
So each .01 change in the growth rate will yield to around 1.042 increase in the value of the firm.
So each .01 change in the growth rate will yield to around 1.042 increase in the value of the firm. Value of control of the firm:
The investors who own large shares outstanding in that company (Deera ) is:
Kuwait Finance House – Jordan since it owns 28% of the shares
The investors who own large shares outstanding in that company (FOOD ) is:
Global opportunistic fund two Company owns 28 %
Jamebal Holding Company since it owns 20.5 % Model Growing Company
No upcoming investments plans.
Value of the company is fairly estimated. Unstable company
Directors are influnced.
Income us decreasing and negatively.
Vlaue of company is decreasing The EPS reflects weak profitability for both companies. Model Deera Price per Share Model Deera Model Deera