Watawala Plantations PLC

 

1.     Introduction to company

 

Watawala Plantations PLC is a reputed plantation company in diversified agribusiness. It is a pioneer in palm oil plantation in Sri Lanka, catering to Sri Lanka’s demand for edible oil, whilst providing thousands of employment opportunities directly and livelihood opportunities to the communities we operate in on an indirect basis in the southern province. Over the years, the Company has evolved to become Sri Lanka's largest palm oil cultivator through strategic investments and focus on innovation and value addition. Furthermore, Watawala Plantations has, over the last decade, diversified into the dairy industry with the establishment of its dairy farm in Ginigathhena on Lonach Estate which boasts of a herd strength amounting to 1,741 cattle and over 800 milking cows at any given time. The dairy farm caters to a growing national demand for dairy in the face of the current dearth of said product in the industry.

Watawala Plantations specializes in palm, dairy, rubber, tea, cinnamon, and coconut.

 

1          Trend Analysis

 

With the horizontal analysis we can derive the trend of financials to have an overview how the company has behaved during a time series. Here the trend of different variables of financial statement are analyzed cross 5-year period.

 

 

Revenue

 

It can be observed that even though there had been a loss of revenue during 2019/18, company had recovered and had a steady growth for next 2 years and on financial year 2022/21 had a massive revenue hike of 76%.

 

 

 

 

 

Gross Profit

 

Even during the revenue drop during 2019/18 the gross profit had been maintained at company average. During financial year 2022/21 company had a gross profit increase of 88%. This shows that the cost of sale increase is not directly proportionate to sales increase. It can be assumed that direct costs are streamlined for better performance.

 

 

 

Net Profit

 

Net profit is revenue attributable to shareholders after all the expenses. It can be observed that in the year 2022/21 the net profit had increased by 107%. And the trend indicates that the there is a positive trend in net profit increase.

 

 

 

Earnings Per Share

 

Earning per share states the profit attributable to 1 share of the company. Watawala Plantations. EPS has a growth which can be viewed through the trend line. With a massive increase 107% corresponding to net profit increase. Which states there had not been any share issue during the period.

 

 

 

Non-Current Assets

 

Non-Current assets shows the growth of a business, this can be through either internal growth or by acquisition or mergers. It can be observed that company have a growth. During financial year 2022/21 non-current assets had grown by 9%

 

 

 

 

Current Assets

 

Current assets are used in short term to manage working capital. Current assets had increased by 87% during the financial year 2022/21.

 

 

Total Assets

 

Total assets include the company position. Watawala plantations had positive growth through out the years in consideration.

 

 

 

 

 

Equity

 

Equity analysis below comprises of state capital, retained earnings showing equity attributable to equity holders of the company. As there had not been any issue of shares the retained earnings had grown in a uniform manner with business growth. We can assume that the business is having a natural growth with its internal funds. Equity had increased by 30% in the last financial year.

 

 

Non-Current Liability

 

Non-Current liabilities are long term loans and credits used by business to assist in the growth. Watawala Plantations had increased its non-current assets during 2022/19 to facilitate growth but reduced during 2022/21.the company is relying less on non-current liabilities to facilitate growth.

 

 

 

Current Liability

 

Current liabilities facilitate the working capital requirements on day-to-day business. Current liabilities of the business had increased throughout the time period showing company is better managing the working capital. During financial year 2022/21 the company had increased its current liabilities by 38%.

 

 

2          Common size financial statement analysis

 

Income Statement

 

Income statement shows the performance of the company during a specific time period.

 

Below shows the composition of income statement of the financial year 2022/21. The total revenue of the company is allocated across as per the below graph. 60% of the sales are recognized as net profit. Cost of sales comprises of 30% of sales.

 

 

 

 

Statement of Financial Position

 

Statement of financial position or the balance sheet show the business financial status of a specified date.

 

Assets

 

Watawala plantations consists of 31% of bearer biological assets of its portfolio. And 25% on its investment is subsidiaries, while 17% of assets are in cash and cash equivalent form.

 

 

Equity and Liabilities

 

Watawala Plantations assets are 78% financed by its own retained earnings.

 

3          Ratio Analysis

 

3.1        Liquidity/ Efficiency

 

Liquidity or efficiency refers to how fast the company can obtain cash to pay short term bills. This section covers the working capital analysis as well.

 

3.1.1        Current Ratio and Acid Test Ratio

 

Current ratio measures companies’ ability to pay short term obligations with one year. This is calculated as a fraction of current assets vs current liabilities. It is considered having a current ratio of 1.5 is ideal for industries. How ever watawala plantations had increased their current ratio from 1.5 to 4.00.

 

Quick ratio (Acid test) is calculated by dividing the most liquid assets by current liabilities, which shows the liquidity to cover the liabilities on an immediate day. Researchers indicate having a quick ratio of 1 is ideal in most business. Watawala plantations had a quick ratio of 1.77 during financial year 2018/17 but had grown by 108% to achieve a quick ratio of 3.69.

 

 

3.1.2        Account Receivable Turnover and Days’ Sales Uncollected

 

Accounts receivable turnover is the number of times per year that a business collects its average accounts receivable. Watawala plantations currently have a high account receivable turnover during 2022/21 than the company average during past years. This shows a great potential in the business.

Sales days uncollected is used to estimate the number of days before receivables will be collected. Watawala plantation had reduced its sales days uncollected during past 5 years to achieve a considerable low day of 14.

 

3.1.3        Days’ Sales in Inventory and Merchandise Turnover

 

Day’s sales of inventory (DSI) are the average number of days it takes for a firm to sell off inventory. Watawala plantations have had an increase in this metric, from 32 days to 43 days. Which means it takes 43 days to sell the inventory in the stores.

 

Merchandise turnover measures how many times in a given period a company is able to replace the inventories that it has sold. Watawala Plantation had maintained a constant merchandise turnover during past years.

 

 

 

3.1.4        Total Asset Turnover

 

Total assets turnover measures the efficiency of a company's use of its assets in generating sales. In comparatively to past years Watawala plantations had used a low level of assets to achieve a high sale. This shows a company is effectively utilizing its assets and has a high growth potential.

 

 

 

 

3.2        Solvency

 

A solvency ratio measures the extent to which assets cover commitments for future payments, the liabilities.

 

3.2.1        Debt Ratio and Equity Ratio

 

Debt ratio shows Total Liabilities as a percentage of total assets. While equity ratio shows the equity component of the company as a percentage of total assets. Watawala plantations have had a low debt to equity ratio during past 5 years.

Further during financial year 2022/21 the debt is reduced more. Watawala plantation is a low geared company with a debt component of less than 20%. We can assume the with lower leverage the company is not utilizing the full potential of tax shields it can obtain and increase return to shareholders.

 

 

 

3.2.2        Times interest earned

 

Times interest earned shows the companies ability to pay its debt service. In financial year 2022/21 watawala plantations had achieved a rate of 75 times. Due to its increased profitability and low use of debt. This shows that the company has a sound financial position and can attract more debt if needed.

 

 

3.3        Profitability

 

 

3.3.1        Profit Margin and Gross Margin

 

Profit margins measure the net profit and gross profit as a percentage of sales. This shows the overall profitability of the company and its growth cross the time period. Watawala plantations had achieved a staggering high net and gross profit margin in 5 years of 59% and 60% respectively, in comparison to last 5 years data. from the below graph is can further be identified indirect overhead costs have been greatly optimized as well. As the gap between net profit and gross profit has decreased gradually.

 

 

 

 

 

3.3.2        Return on Total Assets and Return on Common Shareholders’ equity

 

Return on shareholder equity and total assets had increased by 82% and 72% respectively. Which shows a promising future for the shareholders as with lower debt more of the profits are allocated to shareholders.

 

 

 

3.3.3        Book value per Common Share and Earnings per Share

 

Earnings per share depicts the net profit attributable to shareholder divided by number of outstanding shares, it is observed EPS of watawala plantations had improved gradually from 2018/17 to 2022/21.

And book value per share is value of total assets per share. Indicating that shareholders have LKR 35 per share stake in the company.

Both the metrics had improved during the past 5 years, from which we can believe investors are getting a better return and will continue to do so with company growth.

 

 

3.4        Market

 

3.4.1        Price earnings ratio and Dividend Yield

 

The price/earnings ratio, also called the P/E ratio, tells investors how much a company is worth. PE ratio on watawala plantation had decreased during 2022/21 and the past data are variable that does not show a trend for predictions. Even though the company had achieved high sales and its financial outlook seems positive, the stock exchange trading prices had not reflected the same.

This may be due to the lower dividend yield given to the shareholders. Dividend yield had reduced to 10% where on 2019/18 the yield was at 12%.

 

 

4          Analysis of Reporting

 

4.1        Executive summary

 

In the chairmen’s and CEO’s review it is mentioned of the impacts of the current economic downfall the company is facing and steps the company had taken to mitigate them. One of the issues was destroying and writing off palm nurseries due to a government regulation. This new regulation had limited the ability to uproot any unprofitable palm trees and replant the same. Which can affect the future palm oil income.  As palm oil and other related product constitute a majority of the plantations income this can lead to huge downfall in income in the next year.

 

Also, the company had major impact from the ban on inorganic fertilizers. The company had quickly adopted organic fertilizers from the dairy farm, and this the reversal of the ban, company is now looking into a mix of organic and inorganic fertilizer mixture to limit the cost impact from high prices of inorganic fertilizers. This also can have an impact on the yield of crops for future years where the harvest will be less.

 

Even though the Chairmen states that the dairy operations have a promising future, the lack of proper feed formula can decrease the milk yield in the future as well.

 

Two of the sectors Watawala plantation account for 90% of the company top line will have a negative impact in the next year as per the executive summary. But the company is working to address the issues through innovation and by increasing the efficiency and yield in other products as well. but as the other products such as cinnamon, tea, rubber and coconut accounts only to less than 10% of the portfolio we can expect to see a less than average result on the next financial year with the risks forecasted.