How would you characterise the economics of UST business? What are the primary business risks associated with UST [Hint:Compile a list of factors that a credit analyst would take into account when evaluating the proposed recapitalisation]? UST is a principal producer of moist smokeless tobacco products, controlling roughly 77% of the overall market. It has $913.3m of assets of which tobacco accounts for 54.5%. The net income for UST has been growing at 11% compounded annual growth rate (CAGR) for the past 10 years, while the cash flows have been relatively stable and growing at 12% CAGR for 10 years. This can all be ascribed to UST’s dominance of the moist smokeless market, well-built brand name and premium products that command a high price. Therefore, we can deduce that the products are inelastic in demand. UST has also been named the most profitable company in America in 1998 by the Forbes magazine and Dreman Asset Management. UST had specially been noted for its very high ratios compared against other corporate firms. UST’s dividend per share has increased by 16% CAGR 10 years. UST has maintained the top rating for its commercial paper at A-1, while being very cautious with its debt policy. Overall UST can be summed as a very profitable company with a sturdy brand name. It has a high dividend payout policy to shareholders while remaining a very cash generative business. There are number of primary business risks that UST would need to address that are of some concern. They are lack of product diversification, slack management, and modest risk of litigation cases, competitive environment and marketing restrictions (legislation). The biggest risk facing UST currently is its lack of product diversification. 96.8% of its profits come from tobacco while its noncore (wine and cigars) operations account for only 3.2%. In 1998, UST spent 46% of its overall capital expenditure (CAPEX) on the wine segment of its business. However it only yielded 3% of...
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