Investment Analysis Report

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Corporate Financial Management

Investment Analysis Report
on
Majestic Wine Plc

SECTION A

a)Majestic Wine is the UK’s biggest retailer specialising in sales of wines by the mixed case (About Majestic, 2011). The company was established in 1980 (About Majestic, 2011). It has 166 stores in the UK and has opened stores in France also (About Majestic, 2011). It also has an online presence to generate sales.

The company’s strategy is built around delivering a high standard of customer service by trained staff (Majestic annual report 2011, 2011, p. 3). All retail staffs are required to take the Wine and Spirit Education Trust’s advanced certificate after about six months in the company (Our Staff, 2011).

b)Majestic Wine is listed on the Alternative Investment Market (AIM), London Stock Exchange’s dedicated market for smaller and growing companies. This allowed Majestic Wines to raise capital by issuing shares to the public yet face lower regulatory pressures and expenses as would have been the case if it was listed on the main stock exchange (AIM, 2010, p. 5). It can be argued that Majestic’s market capitalisation is high enough for it to move to the main exchange but it will result in higher regulatory expenses which a growing company like Majestic would rather avoid to save capital for expansion.

c)The table below shows company’s financial performance over the last 5 years. Revenues increased every year although growth was higher in the last two years. The company managed to grow sales during the year ended March 2009 because of acquisition of a French wine company.

The pre-tax profits and net profits also increased every year except for the year ended March 2009. The significant decline in profits in 2009 was due to poor economic environment and high write-down on the goodwill value of French business (Majestic annual report 2009, 2009, p. 3). The pre-tax profit margins of around 8% and net profit margins of 5.5% indicate a stable and profitable business.

Trends in earnings per share followed those in profits. Dividends have grown faster than net profits over the years. Majestic even maintained its dividend in 2009 in spite of significant reduction in net profit because of the non-cash nature of goodwill write-downs as well as management’s belief that earnings will increase in the short term.

d)Majestic is a highly cash generative business. The net cash from operations was £17.2 million in the year ended March 2011 (Majestic annual report 2011, 2011, p. 30). The high cash from operations was also significantly more than the cash used in investing. The business is able to self-generate cash for growth and hence no dilution in equity for funding growth. This is also evident from the higher percent increase in dividends (53%) than in net profits (36%) over the last 5 years.

Another strength of the business is its ability to maintain profit margins in spite of the current economic climate. The company was able to maintain its prices, which show that customers value the level and quality of its service.

The higher training of staff and individual attention to customers imply that the company will face issues in increasing profit margins. The profitability will also be under pressure because of competition from superstores, which limits the ability of the company to increase prices.

(f)The company has established a strong network of retail stores in the UK (Majestic annual report 2011, 2011, p. 60). The company is confident of nearly doubling the number of stores because of reduction in minimum purchase requirements from 12 to 6 bottles (Preliminary results, 2011). The company is also targeting business customers which represented 24% of its sales in 2011 (Majestic annual report 2011, 2011, p. 8). This is expected to bring in more number of customers and is reflected in estimated 10% or higher annualised increase in sales in March 2012 and 2013 (Yahoo analyst estimates, 2011)....
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