Business and Strategic Analysis3
4Industry and company’s potential7
Step 1: Identify Key Accounting Policies9
Step 2: Accounting Flexibility10
Step 3: Evaluate accounting strategy11
Step 4: Quality of disclosure12
Step 5: Potential red flags12
Step 6: Undo accounting distortion13
5Cash flow analysis18
Breville Group (BRG) is a market leader in the kitchen appliances industry according to the Investor Presentation of BRG in 2012. We had classified BRG as a company in the consumer discretionary group as accordance to the Australian Stock Exchange (ASX). In this report, we will investigate BRG mainly from its annual reports up till 2011.
We will first analyze the economic environment BRG is facing from various macro-economic data. We will then take a deeper look into BRG's strategy and the industry characteristics using Porter's Five Forces. With all these information, we will analyze the industry and company's potential and whether BRG will be profitable in the near future.
Besides business and strategic analysis, we will put emphasis in investigating the accounting policies and quality of BRG's financial statements. With the financial statements, we will calculate various ratios and compare it with its peer, which we choice G.U.D Holdings Limited (GUD). By making comparisons, we can have further information to make conclusions.
We had concluded that BRG although is in a low potential industry, BRG itself is a high potential company due to its success business strategy in differentiation of products, a healthy balance sheet in this volatile economy and we did not spot significant red flags which may hide the truth of the company. The share price of BRG rose from AUD3 to AUD5.4 from the period of 7th September 2011 to 7th September 2012. This significant rose in the share price reflected that BRG’s potential had not yet been fully captured in the past. We had also noticed that BRG’s sales revenue focuses in the first half of the financial year. If there were sudden downturn in the first half of the financial year, BRG’s whole year result would be affected.
Business and Strategic Analysis
1. Economic Analysis
2.1 Exchange Rate (Appendix 1)
Half of Breville Group (BRG)'s revenue comes from places outside Australia. With a consistent strong Australian Dollar (AUD), BRG products would become relatively more expensive. If BRG didn't raise the export price, BRG has to absorb the loss from currency exchange. Moreover, BRG imports raw materials from the US, which is also affected by a volatile exchange rate. From the notes in the 2011 Annual Report (AR), BRG was losing money in “currency translation difference” and on “cash flow hedges”. It seems that the currency market would maintain a period of volatile due to the European Debt Crisis and BRG’s hedging strategy needs to be investigated. 1.2 Macro Environment in Australia (Appendix 2)
Australia is BRG's largest market, recording half of the group's sales, hence, Australia's macroeconomic environment is very important to BRG. The graph is the GDP growth rate of Australia by quarter from Q1 2008 to Q1 2012. From the graph, we can see that when the GDP growth rate falls from previous quarter, it rebounds rigorously in the following quarter, escaping from a recession. The Westpac Consumer Sentiment Index (CSI) is also an important indicator for BRG as this index reflects whether consumers are willing to spend or not which directly affect BRG's sales. From the 2 graphs, we can see that when the economy is contracting, the CSI will fall as well. We could also see that the current CSI had not yet return to the pre-GFC level which means that BRG is still facing a relatively...