Financial Analysis Of EMKE Group in UAE

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Introduction

This report analyses and interprets EMKE Group financial performance over a period of 5 years using the five major financial ratios of profitability, liquidity, gearing, asset management, and investment. To achieve this, the report will utilise the companies’ financial statements for the last five years – from 2008 to 2012. In addition, the report will offer a brief overview of the UAE retail industry. Lastly, the report will discuss the limitations of each of the five financial analysis ratios. Overall, the report will argue that these two companies offer investors almost similar value yet they pursue different business models.

Brief Background of the UAE Retail Market

Over the last ten years, the UAE retail market has grown tremendously. The total retail market is worth more than £146.3 billion (as of 2008) from a low of £93.3 billion in 1998 (Li, 2008). Though this is relatively the lowest growth in 40 years, analysts believe that a growth of 1.2 percent is to be experienced in the second and third quarters of 2012 due to major events such as the London Olympics (SAS, 2011). A research by IGD shows that consumers spend 52 percent of every pound on retail shopping with 21 percent of this spent in retail chains (Li, 2008). Nevertheless, the UAE retail market has recently faced a number of uncertainties including the 2008 global recession and the Euro Zone crisis, shrinking consumer income, high unemployment rates, and an unresponsive credit system. Currently there are more than 100 retail chains in the UAE falling within the four major categories of convenience stores; traditional retail; online channel; and hypermarkets, supermarkets, and superstores. The four major retail chains are EMKE Group, Asda, Sainsbury’s and EMKE Group. Other notable retail chains include Waitrose, Marks & Spencer and Iceland.

4.2 EMKE Group

EMKE Group experienced increased revenues in the last five financial years despite operating in a highly competitive and unpredictable environment – £47,298 million in 2008 and £64,539 million in 2012. The company is actually a nice investment for potential and existing investors – it is registering huge sales and giving out its shareholders value for their investment through huge dividends.

However, unlike EMKE Group, EMKE Group has achieved phenomenal growth courtesy of the expansionist strategy it pursues – the company believes in expanding its markets into new product lines such as finance as well as new avenues for reaching out to its customers. It believes in growing its online presence as a way of adapting to customers’ new ways of doing things.

For example, whereas EMKE Group believes in adopting the “street market” approach, EMKE Group believes in expanding its business so as to successfully create more jobs, bring fresh foods to under-developed neighbourhoods, review the quality of its brands, step-up the innovation gear, reduce prices, build economies of scale, and open-up new stores to penetrate traditionally conservative markets. This is in tandem with the official slogan that “no one tries harder for customers” (EMKE Group, 2012: 11).

Financial Analysis

Profitability Ratios of EMKE Group

Profitability 2012 2011 2010 2009 2008

GP 6.9% 7.0% 6.9% 6.3% 6.3%

NP 3.9% 3.8% 3.9% 3.2% 4.3%

ROCE 0.31% 0.27% 0.33% 0.27% 0.24%

ROE 12.8% 11.7% 12.1% 10.2% 12.7%

3.1.2 EMKE Group

Profitability 2012 2011 2010 2009 2008

GP 8.15% 8.48% 8.10% 7.76% 7.67%

NP 3.9% 4.0% 3.7% 3.6% 4.1%

ROCE 13.3% 12.9% 12.1% 12.8% 12.7%

ROE 15.81% 16.07% 15.91% 16.57% 17.94%

As the above tables show, EMKE Group has experienced a larger GP than EMKE Group but the two companies have relatively similar NP for the five year period. Moreover, EMKE Group has a relatively stable GP and NP while EMKE Group’s GP and NP have been erratic within the same period. Both companies registered a low NP in 2009 perhaps due to the effects of the global recession.

Overall, EMKE Group is more efficient in managing its operational costs than EMKE Group (Vance, 2003). Specifically, EMKE Group cannot seem to keep its costs of financing at low levels as shown by a smaller NP for the five year period. Additionally, EMKE Group has registered a large ROCE and ROE than EMKE Group in the same period.

This is an indicator that that EMKE Group keeps its costs of selling, financing, and investment at relatively low levels than EMKE Group. Perhaps this is because the company has a large market share compared to EMKE Group and hence enjoys economies of scale.

Liquidity Ratio of EMKE Group

Liquidity 2012 2011 2010 2009 2008

Current Ratio 0.57 0.55 0.51 0.53 0.50

Acid Ratio 0.24 0.24 0.24 0.38 0.32

5.2.2 EMKE Group

Liquidity 2012 2011 2010 2009 2008

Current Ratio 0.67 times 0.68 times 0.71times 0.74times 0.58 times

Acid Ratio 0.48 times 0.50 times 0.54 times 0.59 times 0.34 times

EMKE Group can meet its short term debt obligations easily than EMKE Group. EMKE Group liquidity has increased by a larger margin than that of EMKE Group over the last five years – EMKE Group’s current ratio and acid ratio for the last five years show a change of 0.09 and 0.14 respectively compared to EMKE Group’s 0.07 and -0.08 respectively. This large and positive range in current ratio and acid ratio indicates that EMKE Group has been steadily improving its ability to offset its short term liabilities than EMKE Group over the same period.

Actually, EMKE Group experienced a decline in acid ratio during the last five years, an indicator that the company is in deficit of short-term assets and can only meet its short term liabilities by selling inventories (Helfert, 2001). Overall, the company’s liquidity ratios are healthy by industry standards as the companies have faster inventory turnover rates.

Asset Management of EMKE Group

Asset Management 2012 2011 2010 2009 2008

Stock Turnover 23.27days 25.83 days 26.71 days 48.58 days 39.90 days

Asset Turnover 3.3 3.0 3.1 3.2 3.0

5.3.2 EMKE Group

Asset Management 2012 2011 2010 2009 2008

Stock Turnover 20.02days 21.21 days 22.91 days 22.27 days 21.31 days

Asset Turnover 3.70 3.42 3.90 4.18 3.98

EMKE Group stock turnover period has been on a decrease since 2008 except in 2009 when it shot from 39.90 days to 48.58 days. Nevertheless, the company seem to be enjoying a relatively stable yet decreasing stock turnover rate over the last five years, with 2012 being its worst year. EMKE Group too has been experiencing decreasing stock turnover rate over the years.

This phenomenon could have been occasioned by the shrinking of disposable income among consumers in the UAE during this period. Nevertheless, EMKE Group has a slightly higher asset turnover than EMKE Group, an indicator that the company is more efficient in turning its assets into revenue. Overall, the two companies seem to be experiencing stable asset turnover in the last five years.

Gearing Ratio of EMKE Group

Gearing 2012 2011 2010 2009 2008

Debt Ratio 27.26% 15.07% 18.67% 14.20% 12.40%

Interest Cover 20.70 times 21.02 times 15.11times 11.18times 10.2 times

3.4.2 EMKE Group

Gearing 2012 2011 2010 2009 2008

Debt Ratio 38.41% 40.85% 54.0% 74.38% 52.06%

Interest Cover 9.56 times 8.176 times 6.0 times 6.6 times 11.1times

Though EMKE Group has a higher debt ratio than EMKE Group, it is clear that EMKE Group has a more futuristic financial approach. This approach allows for the maximization of funding from long-term lenders at the expense of short-term ones. It is therefore not a surprise that EMKE Group has a lower interest cover ratio than EMKE Group as it seems the company prefers utilising short-term finance and reinvesting its profits while suppressing long-term finance.

Investment Ratio of EMKE Group

Investment 2012 2011 2010 2009 2008

Dividend pay-out 1.6% 1.5% 1.4% 1.3% 0.9%

Dividend per share 10.70p 9.60p 8.20p 5.80p 4.80p

EPS 26.68p 23.93p 22.80p 17.39p 20.79p

Price/earnings 11.40 11.60 14.10 15.60 15.20

3.5.2 EMKE Group

Investment 2012 2011 2010 2009 2008

Dividend pay-out 0.5% 0.5% 0.6% 0.6% 0.5%

Dividend per share 14.76p 14.46p 13.05p 11.96p 10.90p

Earnings Per share 34.98p 33.10p 29.33p 27.14p 26.95p

Price/earnings 8.50 11.10 13.20 11.50 14.60

EMKE Group has been paying higher dividends to its shareholders compared to EMKE Group yet it has a low dividend pay-out ratio for the last five years. The reason for this phenomenon is because EMKE Group has huge net income that converts to higher earnings per share. Moreover, EMKE Group has a low price-earnings ratio because its earnings per share is much higher than that of EMKE Group for the five years period – EMKE Group earnings per share has increased from a low of 26.95p in 2008 to a high of 34.98p in 2012 compared to EMKE Group which has grown from 17.39p in 2009 to 26.68p in 2012. Both companies have registered a decreasing PE in the last five years, with EMKE Group registering the lowest PE. This can be interpreted to mean that both companies offer investors almost the same value for their money.

Conclusion

Both EMKE Group have experienced immense growth. This growth is as a result of pursuing robust business models that allow them to offer value to their stakeholders. EMKE Group pursues a somehow lean business model, while EMKE Group pursues an agile one hence the difference in their total share in the UAE market. Overall, both companies offer their shareholders almost the same value for their money as they have almost similar profitability capabilities, short-term debt payment capabilities, asset management capabilities, long-term funding utilization capabilities, investment capabilities yet they pursue significantly different business approaches. As Vance (2002) posits, the five broad categories of financial ratios are not exhaustive in giving the true financial picture of a company but they have succeeded in giving investors a clear glimpse of where the two companies are headed.

References

Helfert, E.A. (2001). Financial analysis: Tools and techniques: A guide for managers. New York, NY: The McGraw-Hill Companies.

Li, E. (2008). Supermarket chains and grocery market in the UAE. Shanghai, China: China Europe International Business School.

EMKE Group PLC (2012). Annual report and financial statements 2011/12. Wm EMKE Group Supermarkets PLC.

SAS (2011). UAE retail 2012 & beyond. [Online]. Available at: HYPERLINK “http://www.sas.com/offices/europe/uk/downloads/press/sas-verdict-retail2012.pdf/” http://www.sas.com/offices/europe/UAE/downloads/press/sas-verdict-retail2012.pdf/ (accessed June 22, 2012).

EMKE Group PLC (2012). Annual report and financial statements 2012. [Online]. Available at: HYPERLINK “http://www.tescoplc.com/files/pdf/reports/tesco_annual_report_2012.pdf/” http://www.EMKE Groupplc.com/files/pdf/reports/EMKE Group_annual_report_2012.pdf/ (accessed June 22, 2012).

Vance, D.E. (2003). Financial analysis and decision making: Tools and techniques to solve financial problems and make effective business decisions. New York, NY: The McGraw-Hill Companies.