Super Cheap Auto Group Limited: Financial Analysis for a Company

Historical overview of Super Cheap Auto Group Limited

Super Cheap Auto Group Limited was founded in 1972 as an automotive accessories mail order business. The company established retail operations in 1974. In 1981, the name was changed to Super Cheap Auto. By 1993, the company had eight retail stores across Queensland, with sales of 19.4 million dollars. In 1997, the company made an organic expansion into New South Wales (Company website).

In 1998, the company appointed Bob Thorn as its Managing Director. In 1999, the company opened its 50^th store, and made another organic expansion into Australian Capital Territory. In 2001, the company made another organic expansion into Victoria and Northern Territory. In 2002, the company opened its 100^th store, and made another organic expansion into Tasmania (Company website).

In 2003, Super Cheap Auto Group Limited acquired Marlows, a 20 store network based in Perth, Adelaide and Melbourne. The company opened 7 New Zealand stores in one day (Company website).

Super Cheap Auto Group Limited was listed on the Australian stock exchange in July 2004, and the company opened its 200^th store in December the same year. In January 2005, Super Cheap Auto Group Limited acquired Queensland based Camp Mart’s four camping and outdoor leisure stores. The company was also announced naming rights sponsor of the Bathurst 1000 in the same year (Company website).

In July 2005, Super Cheap Auto Group Limited announced its plans to launch Boating Camping and Fishing (BCF) by Christmas of the same year (Company website).

Peter Birtles was appointed the company’s Managing Director in January 2006 and in May the same year; the company announced its plans to reinvigorate its business in terms of its brand, store format, new products, and marketing. In October the same year, the company opened a sourcing office in Hangzhou (Company website).

In June 2008, Super Cheap Auto Group Limited acquired Melbourne based Gold cross with eleven bicycle and accessories retail stores, surpassing 300 stores for the group. In august the same year, the Group Limited won the 2008 Australian retailer of the year (ARA Awards) (Company website).

Current business activities of the company

Super Cheap Auto Group Limited operates in Australia and New Zealand, in the retailing industry, where it has more than 300 stores. The company has three segments, namely, the Super cheap Auto segment, the Boating Camping and Fishing (BCF) segment, and the Gold cross Cycles segment, and it sells handyman items, accessories, tools, auto parts, and equipment (Company website).

The Super cheap Auto segment’s contribution to the group’s total business about seventy five percent, and it has more than 200 stores, which engage in retailing and distributing motor vehicle spare parts, accessories, tools, and equipment (Company website).

The BCF Boating, Camping and Fishing segment contributes about a quarter of the company’s revenue. This segment is engaged in the retail and distribution of boating, camping, and fishing equipment, and has operates 47 stores. 12,000 lures, 600 reels, 1,000 rods, 20kms of rope, coolers and fridges are some of the product categories offered by the stores. (Company website)

The Gold cross Cycles segment contributes less than five percent of the group’s total revenue (Company website).

The main competitors of Super Cheap Auto Group Limited are Schaffer Corp, Orbital Corp, Advanced Braking Technology, and Datadot Technology (Australian Securities Exchange).

Company’s Capital structure (Australian Securities Exchange)

2006           %          2007        %         2008         %           2009         %

Debt                     81.4          41.9         85.1       40.6       90.1        39.9        110.5        41.4

Equity                 112.9         58.1         124.5      59.4      135.8       60.1        156.3       58.6

Total                    194.3                        209.6                    225.9                      266.8

Over the years, both the company’s debt and equity have been increasing. This can be explained by the growth and expansion that the company has been carrying out over the years. From the company’s history, we see that the company opened a sourcing office in Hangzhou October 2006 and in June 2008, it acquired Melbourne based Gold cross with eleven bicycle and accessories retail stores. This expansion had to be financed by either issuing more debt or raising more equity funds. Between 2006 and 2008, the proportion of debt in the company’s capital structure has been reducing. This means that the company has been using more of its equity funds to finance the expansion than it was issuing fresh debt for the same. However in 2009, this proportion increased from 39.9 % in 2008 to 41.4 % in 2009.

Major debt and equity instruments (Australian Securities Exchange)

The Major debt and equity instruments that the company had outstanding as at 30/6/08 and 30/6/09 were as follows:

As at 30^th June 2008, the company had capital leases outstanding of 0.7 Million Australian Dollars and Comprehensive Income and Other of -3.3 Million Australian Dollars. These were cleared during the year 2009, and these components had no outstanding balances as at 30^th June 2009.

The company’s common stock and Pension & Other Post-Retirement remained constant during the two years 2008 and 2009.

During the year 2009, the company raised additional long term debt.

Dividend policy of the company

Super Cheap Auto Group Limited pays cash dividend, but it also has a dividend reinvestment plan (DRP). This is an alternative to cash dividends which allows shareholders to receive new shares, often issued at a discount without brokerage instead of cash dividends (Bragg, 95).

From the financial statements, it is evident that the company reinvests most of its earnings, which suggests that the company follows a residual dividend policy. This is a dividend policy whereby earnings are invested in profitable projects before dividends are declared. In other words, dividend is only paid when there are no profitable projects. (Graham , Smart, and Megginson, 78)

For the period ended 28^th June 2008, the company paid a Final dividend of seven point five cents per share. The company also paid and an Interim dividend of six point five cents per share for the period ended 27^th June 2009. A final dividend of eleven point five cents per share has also been recommended by the directors (Company website)..

Cost of ordinary equity

• Cost of equity = Earnings per share / market price per share (Ross, Westerfield, and Jordan, 140)
• Earnings per share = Earnings attributable to ordinary shareholders / number of ordinary shares outstanding (Block, and Hirt, 59)
• Current Earnings per share is given as $ 30.2
• Market price per share is given as $ 5.07
• Cost of equity = 30.2 / 5.07 = 5.96 %
• Using the Capital Asset Pricing Model (CAPM), Cost of equity can be calculated using the formula: K_e = R_F + β_e* (R_M – R_F) (Erich, 86)
• Where K_e is the cost of equity, in our case the cost of Super Cheap Auto Group’s equity
• R_F is the risk free rate, which we are given as 4 % (Australian Securities Exchange)
• β_e is the beta of Super Cheap Auto Group’s equity which we are given as 1.24 (Yahoo finance)
• R_M is the return on market portfolio, which we are given as 5.58 % (Australian Securities Exchange)
• K_e = 4 % + 1.24 * (5.58 % – 4 %)
• K_e = 4 % + 1.24 * (1.58%)
• K_e = 4 % + 1.96 % = 5.96 %

This means that the cost of ordinary equity to Super Cheap Auto Group Limited is 5.96 %. It also means that if the company can borrow funds at an interest rate that is less than 5.96 %, it would rather borrow at the lower interest rate to finance future projects, than issue more ordinary shares.

Weighted Average Cost of Capital

Effective cost of debt = (1 – corporate tax rate) * nominal cost of debt (Emery, and Finnerty, 162)

Corporate tax rate we are given as 30 % (Company website).

Nominal cost of debt we are given as 8 % (Company website).

Effective cost of debt = (1-0.3) * 8 % = 5.6 %

The current capital structure is as follows:

• Source of funds Amount Cost
• Equity $ 156.3 5.96 %
• Mortgage $ 110.5 5.6 %
• Total $ 266.8
• Weighted Average Cost of Capital = K _e * [Equity / (Debt + Equity) + K _d * [Debt / (Debt + Equity) (Fridson and Alvarez, 98)
• Weighted Average Cost of Capital = 5.96 % * (156.3 / 266.8) + 5.6 % * (110.5 / 266.8)
• Weighted Average Cost of Capital = 5.96 % * 58.6 % + 5.6 % * 41.4 %
• Weighted Average Cost of Capital = 3.5 % + 2.3 % = 5.8 %

This means that the overall cost of capital to Super Cheap Auto Group Limited is 5.8 %. It further means that the company should never undertake any project which has a rate of return that is lower than 5.8 %. A project which has a rate of return that is lower than 5.8 % would lead to a negative Net Present value which would lead to a loss to the company.

Works Cited

Australian Securities Exchange (online). Web.

Block, Stanley, and Hirt Geoffrey. Foundations of Financial Management. New York: McGraw -Hill Companies, 2007.

Bragg, Steven. Financial statement analysis: a controllers’ guide. United States: John Wiley & Sons, Inc., 2007. Emery, Douglas, and Finnerty John. Corporate Financial Management. New Jersey: Prentice Hall Publishing, 2007.

Erich, Helfert. Financial analysis tools and techniques: a guide for managers. New York: McGraw -Hill Companies, 2001.

Fridson, Martin, and Alvarez Fernando. Financial statement analysis: a practitioners’ guide. United States: John Wiley & Sons, Inc., 2002

Graham, John, Smart Scott, and Megginson William. Corporate Finance – Linking theory to what companies do. Ohio: South Western Educational Publishing, 2009.

Ross, Stephen, Westerfield Randolph, and Jordan Bradford. Fundamentals of Corporate Finance. New York: McGraw -Hill Companies, 2005.

Super Cheap Auto Group Limited. Company website (online). Web.

Yahoo finance (online). Web.