Overview of New Zealand Seafood Industry

New Zealand entails a total territorial water space also known as EEZ (Exclusive Economic Zone) of 4.4 Mn Sq. Km, which is 4^th biggest globally thereby framing the country as a superpower in ocean space. In absolute terms, the coastline is spread across approximately 15,134 kms (Seafood New Zealand, 2017).  

New Zealand accounts for an approximate 600,000 metric tonnes production of seafoods (excluding aqua-culture) every year an employs more than 13,000 dependent work force. In 2017, the total exports of seafoods accounted for NZD 1.8 Bn and in absolute terms accounted for ~127,760 tonnes (Seafood New Zealand, 2017).

This report evaluates and analyses the working capital requirements, capital budgeting techniques and future investments etc. for two of the significant players in the said industry, namely, Sanford Limited and Moana New Zealand.

Since its inception in 1881, Sanford is eyeing to be “Best Seafood Company in the world” on back of its rich experience of more than 130 years. Sanford’s prominence in the area of holding (fishing area) at ~23% New Zealand’s quota of the fishing waters along with 211 aquaculture farms and 49 fishing vessels, frames the company as New Zealand’s biggest consolidated seafoods business (Sanford Limited AR, 2017).

Sanford Limited operates in New Zealand, Australia and China, furthermore, the company exported a total of ~3498 containers in 2017. For the year ended 30^th September 2017, Sanford posted an annual revenue of NZD 478 Mn, indicating a y-o-y growth of 3.12%. However, despite of an average decrease in cost of sales of the company by ~1.66% in past five years (2013-17), the overall increase in revenues are flat at CAGR of ~0.82% during the said period (Sanford Limited AR) based on several inferences quoted by NZherald (2018) in its news article NZ dollar sinks to two-year low against pound. 

Source: Sanford Limited Performance over previous five years (Sanford Annual Reports)

On the other hand, due to increasing efficiency in operations the company has witnessed a significant growth in its profitability measures namely, gross profit, operating profit, PBT and PAT all increasing by a CAGR of 11.89%, 23.87%, 15.36% and 16.42% respectively during the period 2013-2017 (Sanford Limited AR).

On the profitability front (Ratio Analysis), the company witnessed a drop in in net profit margins from ~8.16% in 2016 to ~7.84% in 2017 mainly because of relatively higher growing cost of sales at ~4.25% as compared to growth in revenue at 3.12% annually (Appendix 2) based on recommendations given by Investopedia (n.d) in Profitability Ratios.

Sanford Limited

Company has reduced its current ratio from 2.81 in 2013 to 1.22 in 2017, indicating its inefficiency in maintaining the working capital during the said period; accordingly, the quick ratio has also decreased from a healthy 2.09 in 2013 to 0.86 in 2017 based on inferences stated by MorningStar Inc. (n.d) in Liquidity Ratios. In capital structure, the debt-equity ratio is maintained below ~0.3 times, indicating stable operations backed by equity and neglecting the impact of debt, thereby creating more value for their stakeholders (Appendix 2).

Coming over to turnover/efficiency ratios, Sanford Limited has maintained a healthy asset turnover at over 3 times consistently. However, the company has witnessed a fixed asset turnover ratio around ~0.7 times, indicating a working capital driven operation as these recommendations are quoted by Drake in Financial Ratio Analysis. Furthermore, the working capital turnover has witnessed fluctuations during the past five years (mostly positive), ranging from lows of 2013 at ~5.53 times and highs of ~32.61 times in 2015, presently, in 2017 the working capital turnover is pegged at ~17.91 times based on the propositions made my EduPrestine (2014) in Ratio Analysis – Turnover Ratio (Appendix 2).

In returns related ratios, the company’s returns on capital employed to its stakeholders has been increasing consistently from ~4.06% being the lowest in 2013 and ~6.91% being highest in 2017. Similarly, the return on assets is also increasing consistently from 0.029 times in 2013 to 0.046 times in 2017 (Appendix 2).

The Du-Pont Analysis primarily considers three ratios for analysis namely, profitability, efficiency and capital structure. In profitability front, the net margin ratio has been increasing consistently during the past five years except in current year 2017. In absolute terms, the net margin has increased from ~4.41% in 2013 to ~6.78% in 2016 (being the highest during the period) and experiencing a slip in 2017 to settle at ~6.51% (Appendix 2).

The efficiency ratio has been slowing down during the past five years from 3.6 times in 2014 to 3.28 times in 2017, indicating decremental efficiency in its operations. Lastly, the financial leverage has been flat during the said period ranging between 1.38 times to 1.46 times in 2013 to 2015 respectively (Appendix 2).

Moana New Zealand, the biggest seafood’s company owned and operated by Maori community procures and produces premium fisheries from the territorial waters of New Zealand. Moana entails a vivid product portfolio including product lines namely, Abalone, Fin Fish, Lobsters and Oysters. The company has recently got into partnership with WWF – New Zealand, for deploying premier operational mechanisms to drive practices which are both environment friendly and sustainable in nature as quoted by Moana New Zealand (2017) in its integrated annual report.

Moana New Zealand

For the year ended 30th September 2017, Moana New Zealand posted an annual revenue of NZD ~152 Mn, indicating a y-o-y degrowth of ~14.1%. The recent year’s y-o-y degrowth has been the primal reason for flat CAGR degrowth of ~0.03% during the past five years; alas during the period 2013-2016 the company has witnessed a CAGR of ~5.15% in its revenues. 

On the other hand, due to the restructuring of the capital structure in 2017, the company did witness a degrowth in its profitability measures namely, gross profit, PBT and PAT all diminishing by a y-o-y of 11.56%, 5.76% and 0.82% respectively. However, apart from the degrowth experienced in 2017, the company’s profitability measure namely PAT surged by a staggering ~47.59% during the period 2013 – 2016 (Moana New Zealand Integrated AR).

On the profitability front (Ratio Analysis), the company witnessed an increase in in net profit margins from ~ 10.96% in 2016 to ~ 12.66% in 2017 mainly because of an abnormal increase in other incomes by ~ 1222.87% as compared to degrowth in revenues at -14.09% annually (Appendix 3).

Company has reduced its current ratio from ~0.93 in 2013 to ~0.66 in 2017, indicating its reiteration of objectives to work for the Maori community (primary stakeholders) and create value for them; accordingly, the quick ratio has also decreased from a healthy 0.70 in 2013 to 0.51 in 2017. In capital structure, the debt-equity ratio is maintained below ~0.2 times, indicating stable operations backed by equity and neglecting the impact of debt, thereby creating more value for their stakeholders (primarily the Maori community) (Appendix 1).

Coming over to turnover/efficiency ratios, Moana New Zealand has maintained a healthy asset turnover at over ~4.5 times throughout the period of 2014 – 2017 (Appendix 3). However, the company has witnessed a fixed asset turnover ratio of even lower than ~0.4 times, indicating a working capital driven operation which is in line with the industry standards prevailing and as stated by Ministry of Business, Innovation and Employment [NZ] (The Investor’s Guide to the New Zealand Seafood Industry, 2017).

In returns related ratios, the company’s returns on capital employed to its stakeholders have been inconsistent ranging from lows of ~0.43% in 2013 and to highs of ~3.59% in the subsequent year i.e. 2014, further the current ROCE is pegged at ~ 3.14% in 2017. However, the return on assets have been flat throughout the research period ranging from 0.030 to 0.042 (Appendix 3).

Financial Performance Analysis

The Du-Pont Analysis primarily considers three ratios for analysis namely, profitability, efficiency and capital structure as stated by Isberg in The Credit and Financial Management Review. In profitability front, the net margin ratio has been inconsistent during the past five years ranging from lows of ~ 1.49% in 2013 to highs of ~ 5.32% in the subsequent year, with currently settling down at ~ 4.41% (Appendix 3). –

The efficiency ratio has been flat during the past five years oscillating between 4.47 and 4.63, indicating stable efficiency in its operations. Conclusively, the financial leverage has been flat during the said period also ranging between 1.24 times to 1.29 times in 2013, 2017 to 2014 respectively (Appendix 3).

The Financial decisions entails a detailed introspection of a company’s performance and position, in other words, critical analysis of financial statements is mandatory for making feasible financial decisions. The primary step to be considered while ascertaining any financial decision for a proposal / investment, is to estimate the value of organisation based on its projections of future cash flows and to look into the present scenarios like inventory, receivable and payable management. The biggest challenge while doing any financial decision is to project the exact values of cash flows arrising in the future. The analyst is required to analyse and study the relevant future cash flows, their degree of uncertainty and the relevant values of these cash flows taking into consideration all the uncertainty associated with them (Drake, Capital Budgeting Techniques).

The financial decision’s comprehension of the selected two cases are mentioned as under:

Sanford Limited has maintained its current ratio during the period 2013 – 2017 with the range between 2.81 times to 1.12 times, indicating that the current assets are more than current liabilities through which it can be concluded that the company is able to pay its current liabilities without further infusing fresh capital based on the statements made by Wilkinson (2013) in Working Capital Analysis.

Based on the facets drawn forward by Brycz and Pauka (2012) in Analysis of Cash Flow Statement, we come over to the net cash flows from operations which have been steady in the range of NZD ~32.47 Mn to NZD ~54.97 Mn, which indicates that the company enjoys steady cash flows from its operations.

Based on above findings, it can be inferred that the company has the capacity to invest in expansion plans without worrying about capital structure as that too is not a concern (Appendix 4).

Financial Decisions

Moana has been suffering with negative working capital, as a result of which the company has to infuse fresh capital every year in order meet their current liabilities which are to be paid off within one year. Furthermore, the current ratio of the company has been low consistently below 1, indicating a negative working capital.

Moreover, the net cash flows from operating activities have been flat during 2013 – 2015 period at around NZD 10 Mn, but thereafter during the period 2015 – 2017, the cash flows have increased by an outrageous CAGR of ~39.87% (Appendix 5).

Based on the above findings, it can be inferred that although the company does have a favourable capital structure (Debt to Equity) but amidst concerns of negative working capital, the company is not in a capacity to invest in expansion or new plans.

The Maori economy as per MBIE is projected to experience an augmented growth going forward. With factors like population of 723,500, of which 70% is relatively young as compared with that of non-Maori which are at 50%. Moreover, the Maori organisations are expected to infuse NZD 1.5 Bn to NZD 2.0 Bn per year for 20 years. In absolute terms, New Zealand is projected to grow by more than 3% annually as stated by Ministry of Business, Innovation and Employment [NZ] (Maori Economy Investor Guide, 2017).

The Maori controls ~50% of the total fishing area (quota) along with holding ~1.4 Mn hectares of land, with more land being possessed by private parties. Furthermore, the Maori economy, both historically and currently has been growing faster than the country’s GDP, as a result of which the Maori economy has experienced more than 5% growth rate in their assets and incomes, which could have a projected increase in their asset value from current NZD 50 Bn to NZD 100 Bn as stated by (MBIE, 2017).

In case of Sanford and Moana, both enjoys a stable and progressive economic and social environment for their business operations.

In taxation domain, the Iwi/M?ori organisations have to abide with the taxation laws just like any normal taxpayer and have to pay a tax of 17.5%. Further, Iwi/M?ori organisations are required to keep accounts of their organisations for seven years. Furthermore, these organisations are required to abide with certain special tax laws as stated by Inland Revenue Department [NZ] (2017) which are mentioned as under:

• Maori authority credit account (MACA)
• Attaching credits to distributions

In our two cases of Sanford and Moana New Zealand, both the companies abide the taxation environment prevailing in the universe, which they have also mentioned specifically in their annual reports.

The reporting framework for Iwi/M?ori organisations is just like with other organisations which requires the reports to be presented in accordance with International Integrated Reporting Council (IIRC), Integrated Reporting Framework and the newly launched Global Reporting Initiative (GRI) Standard 2016.

Both Sanford and Moana New Zealand have prepared their reports in accordance with the above-mentioned frameworks in order to create greater transparency in showcasing their operations.

As stated by Harmsworth (2006) in Investigating key Mäori business characteristics for future measures: Thinking Paper, the Tikanga / Principles / Kaupapa are implemented by Maori organisations at various levels. With some believing it to be transforming and evolving while on the other hand, some have opinion of pessimism.

However, it must be duly noted that the Maori organisations never had a motive of commercial business but apparently in modern era they are responsible for taking care of the business assets namely, farms, fisheries quota, aqua culture, vineyards etc. Maori businesses are generally mandated to function inside the purview of double contexts of New Zealand’s legal systems and within its own values followed in business (Tikanga) as Thorndon stated (2003) in his paper M?ori Economic Development.

In both the case of Sanford and Moana the values, the Tikanga is adhered with by incorporating numerous policies since the very inception of business itself. 

References

Seafood New Zealand – Key Facts. (2017). Retrieved from https://www.seafoodnewzealand.org.nz/industry/key-facts/

Sanford Limited. (2017). 2017 Annual Report of Sanford Limited [PDF File]. Retrieved from https://www.sanford.co.nz/investors/reports-1/company-reports/2017/2017-annual-report/

Ministry of Business, Innovation and Employment. (2017). The Investor’s Guide to the New Zealand Seafood Industry 2017 [PDF File]. Retrieved from https://www.mbie.govt.nz/info-services/sectors-industries/food-beverage/documents-image-library/folder-2017-investors-guides/investors-guide-to-the-new-zealand-seafood-industry-2017.pdf

Moana New Zealand. (2017). 2013 – 2017 Integrated Annual Report of Moana New Zealand [PDF File]. Retrieved from https://moana.co.nz/news/integrated-annual-report-2017/

Drake, P. (n.d) Capital Budgeting Techniques [PDF File]. Retrieved from https://educ.jmu.edu/~drakepp/principles/module6/capbudtech.pdf

Ministry of Business, Innovation and Employment. (2017). Maori Economy Investor Guide 2017 [PDF File]. Retrieved from https://www.mbie.govt.nz/info-services/infrastructure-growth/maori-economic-development/documents-image-library/maori-economy-investor-guide.pdf

Inland Revenue Department [NZ]. (2017). M?ori authority tax rules [PDF File]. Retrieved from https://www.ird.govt.nz/resources/a/a/aa7831bd-4ff3-41ac-901e-97ddd38feded/ir1202.pdf

Harmsworth, G. (2006). Investigating key Mäori business characteristics for future measures: Thinking Paper [PDF File]. Retrieved from https://www.landcareresearch.co.nz/__data/assets/pdf_file/0007/77047/2_1_Harmsworth.pdf

Thorndon, H. (2003). M?ori Economic Development. Retrieved from: https://nzier.org.nz/static/media/filer_public/de/31/de315bcb-3188-4760-b21d-348382149aa0/maori_economic_development.pdf

Wilkinson, J. (2013). Working Capital Analysis (The Strategic CFO). Retrieved from: https://strategiccfo.com/working-capital-analysis-2/

Isberg, S. (n.d). The Credit and Financial Management Review [PDF File]. Retrieved from: https://home.ubalt.edu/ntsbisbe/fin640/dupont.pdf

Drake, P. (n.d). Financial Ratio Analysis [PDF File]. Retrieved from: https://educ.jmu.edu/~drakepp/principles/module2/fin_rat.pdf

Brycz, B., & Pauka, M. (2012). Analysis of Cash Flow Statement [PDF File]. Retrieved From: https://www.dbc.wroc.pl/Content/22740/Brycz_Pauka_Analysis_of_cash_flow_statement.pdf

EduPrestine (2014). Ratio Analysis – Turnover Ratio. Retrieved from: https://www.edupristine.com/blog/ratio-analysis-turnover-ratio

MorningStar Inc. (n.d). Liquidity Ratios. Accessed from: https://news.morningstar.com/classroom2/course.asp?docId=145093&page=4

NZherald (2018). NZ dollar sinks to two-year low against pound. Accessed from: https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12122969

Investopedia (n.d) Profitability Ratios. Accessed from: https://www.investopedia.com/terms/p/profitabilityratios.asp