80.2K

Verified Solution

Link Copied!

Fresh Food Lovers (FFL), a listed entity, operates a chain of outlets selling fresh vegetables and meat over the island. The company also supplies a number of hotels with fresh and non-perishable food items. The company has expanded in the last 10 years with a view of getting closer to customers. Six new stores opened their doors in Ebene, Bagatelle, Cascavelle, Tamarin, Grand Baie and Floreal during 2017 bringing the companys total to 42 outlets.

During 2017 there has been speculation in the financial press that the entity is likely to be a takeover target by a food giant from South Africa. The board members of the company are nearing retirement and they all own significant minority shareholdings in the business. As such it is unlikely that they would resist this takeover bid.

The latest financial statements of FFL with comparatives for the previous year and other financial information regarding the sector are shown below:

Statement of Financial Position as of 31 December

	2017	2016
	$m	$m
Non-Current Assets
Property, Plant and Equipment	530	525
Goodwill	150	150
	680	675
Current Assets
Inventories	48	47
Trade receivables	11	13
Cash	46	11
	105	71
Total Assets	785	746
Equity
Share capital	140	140
Accumulated profits	161	136
	301	276
Non-Current Liabilities
Interest-bearing borrowings	142	140
Deferred tax	25	21
	167	161
Current Liabilities
Trade and other payables	287	263
Short-term borrowings	30	46
	317	309
	785	746

Income statement for the year ended 31 December

	2017	2016
	$m	$m
Revenue	1255	1220
Cost of sales	(1177)	(1145)
Gross profit	78	75
Operating expenses	(21)	(29)
Profit from operations	57	46
Finance cost	(10)	(10)
Profit before tax	47	36
Income tax	(14)	(13)
Profit for the period	33	23

Statement of changes in equity for the year ended 31 December

	2017	2016
	$m	$m
Opening balance	276	261
Profit for the year	33	23
Dividends	(8)	(8)
Closing balance	301	276

Four key ratios for the industry (based on the latest available financial statements of 12 listed entities in the sector) are as follows:

• Annual sales per store: $27.6m.
• Gross profit margin: 5.9 per cent.
• Net profit margin: 3.9 per cent.
• Non-current asset turnover (including both tangible and intangible non-current assets): 1.93.

Required:

You have been approached by an international supermarket chain which wants to start operations in Mauritius and is considering FFL as a potential target. Acting as an independent consultant, prepare a report analysing the performance and position of FFL based on the financial statements and other information provided. The report should include comparisons with the key sector ratios.

Word limit is 700.

Answer & Explanation Solved by verified expert

See Answer