Issuu on Google+

CREDIT AND FINANCIAL ANALYSIS FOR BANK LOAN DECISION MAKING CASE STUDY ON EYATH S.A

1


CONTENTS Credit and financial analysis for bank loan decision making Case study on eyath s.a ......................................................................................................................................................................................... 1 Contents....................................................................................................................................................................... 2 Introduction............................................................................................................................................................... 3 Group Overview........................................................................................................................................................ 3 Macroeconomic (PEST) Analysis....................................................................................................................... 3 SWOT Analysis........................................................................................................................................................... 5 Financial Analysis.................................................................................................................................................... 6 Risk Management.................................................................................................................................................. 10 Currency Risk..................................................................................................................................................... 10 Financial Risk..................................................................................................................................................... 10 Business Risk....................................................................................................................................................... 10 Strategic............................................................................................................................................................... 11 Credit Risk Analysis.............................................................................................................................................. 12 Logistic Regression.......................................................................................................................................... 12 Altman’s Z score................................................................................................................................................ 14 Conclusions............................................................................................................................................................... 14 Bibliography............................................................................................................................................................ 15

2


INTRODUCTION Water Supply and Sewerage Systems Company of Thessaloniki SA (EYATH S.A) is in the process of expanding its operations. In order to undertake the scheduled projects EYATH S.A needs additional funding. As a result the management of EYATH S.A has already applied to our Bank for a long term loan. The loan amount is 10828.38 million â‚Ź. Aim of the following analysis is to evaluate the application and make a formal recommendation as to whether the loan should be granted or not.

GROUP OVERVIEW Water Supply and Sewerage Systems Company of Thessaloniki SA is Greece-based and owned by 74.55% by the Greek Government. It is traded at the Athens Stock Exchange and has the ticker EYAPS. Additionally the group belongs to the Gas, Energy and Multiutilities sector and its main activities are the provision of water supply and sewerage services and the exploitation of all products originating from the water waste treatments.

MACROECONOMIC (PEST) ANALYSIS EYAPS operates in Greece, a country that faces a sovereign debt crisis and that after several unsuccessful attempts to stem it, concluded to a bailout deal with EU and the IMF with the obligation to implement many urgent measures that were agreed. Consequently, in our analysis the macroeconomic framework is of great importance and the sovereign debt crisis a determinant parameter. 3


Political

Economic

Default Risk Due to public resistance and electoral repercussions political parties are not willing to implement the reform agenda that was agreed and Greece is threatened with bankruptcy. Political Uncertainty Political parties could not form a coalition government after the national elections of 6th May and a caretaker government was formed in order to lead the country to the elections of 17th June. Political Change SYRIZA, a party that is against the conformity to the terms of the EU’s and the IMF’s bailout agreement and the austerity, was strengthened at the recent elections and has the prospect to come first at the elections of 17th June. Privatizations Privatization of companies owned by the Greek government.

The performance of Greek Economy deteriorated the last 3 years. The present condition of Greek Economy could be summarized through the following indicators. Shrinking GDP GDP (at constant prices) of the 1st Quarter of 2012 is 6.5% lower. Consumption Reduction Total final consumption expenditure of the 1 st Quarter of 2012 recorded a decrease of 7.5%. Inflationary trend at CPI Consumer Price Index of May 2012 increased by 1.4%. High unemployment rate Unemployment rate of the 1st Quarter of 2012 increased by 9.2% and escalated to 22.6%. High Taxation

Social

Technological

Social issues affecting Greece are similar to those of many EU countries. Aging Population Greece faces the challenge of aging population because the increase of life expectancy was not followed by a proportionate increase in the birth rate. High Unemployment Additionally due to the financial crisis and the austerity policies Greece faces: Poverty There is widespread poverty in Greek society, with a poverty rate that is among the highest in Europe, 19.7% of the Greek population is at risk of poverty Turmoil Austerity measures that affected negatively the welfare of the society have led frequent protests and riots. Immigration Greece faces high immigration rates.

Growing number of R&D personnel The period 2002-2007 there was a significant increase in the number of researchers. Additionally the total number of R&D personnel faced a growth of 8.7%. Government Policies Promoting R&D Greek government has taken many initiatives in order to promote R&D. The Greek government has taken measures to expand R&D infrastructure and to strengthen cooperation and synergy between public research organizations and enterprises. Lack of Innovation The low level of innovation in Greece is reflected by the low number of patents registered. Greece is by far behind the EU average.

4


SWOT ANALYSIS Strengths •

Strong customer service network (165 points) and broad customer base Good quality water resources from Arravisos springs;

Weaknesses •

Low specialization of personnel.

High personnel expenses (estimated at € 43,000 per annum).

High energy cost.

High operation cost due to lack of automatic installations. Facilities are not technologically modern.

Lack of a modern centralized control for installations and network. Lack of a centralized IT system.

Low technological know-how. Poor R&D activities.

Opportunities

Threats

Liberalization of water and sewerage market in Southeast Europe.

Declining trend in annual average water usage by the households.

Investment initiatives through Greek Development Law.

Climate changes and low water collection.

Cost benefits from establishing private sector related practices in operating and managing the Company.

High energy costs.

Slow implementation of the Company’s business plan.

Entrance into the already liberalized markets of telecommunications and energy.

Market liberalization.

Strategic partnerships in Greece and abroad.

5


FINANCIAL ANALYSIS In this part of the analysis an overview of the financial performance of EYATH S.A over the past 3 years is presented. Through the Success Framework and a brief ratio analysis the information needed for the evaluation of the Group’s performance is acquired. Deriving information from the financial statements, we calculated the most indicative ratios. By assessing profitability, efficiency, quality of profits and riskiness ratios, we made useful conclusions on the group’s performance. Accounts1 Balance Sheet Information Total Assets Total Liabilities Total Shareholder’s Equity

2009

2010

2011

157.950 52.581 105.369

166.965 54.056 112.909

180.473 51.926 128.547

Income Statement Information Revenues Operating Expenses Operating Income

77.376 60.936 16.440

71.182 55.575 15.607

75.400 54.619 20.781

Cash Flow Statement Information Net Cash Flow - Operating Activities Cash Dividends Paid - Total

15.649 4.580

11.329 4.832

19.473 4.145

TABLE 1.BASIC ACCOUNTS

Ratios Efficiency of Assets Profit Margin Quality of Profit Retention Rate Riskiness

2009 48.99% 21.25% 95.19% 72.14% 33.29%

2010 42.63% 21.93% 72.59% 69.04% 32.38%

2011 41.78% 27.56% 93.71% 80.05% 28.77%

TABLE 2.FINANCIAL RATIOS

1

All amounts are in million €.

6


EYATH S.A is quite effective in using the investment in assets to generate revenues. The last 3 years an investment of 1€ generates revenues that range between 0.42€ -0.49€. Efficiency of Assets ratio takes high values and this is an indication of financial strength of the group. Though its high values, efficiency of assets ratio followed a downward trend the last 3 years. EYATH S.A has increased the total investments in assets, specifically investments in assets increased by 5.71% at 2010 and by 8.09% at 2011 respectively. However that rise was not followed by an upward trend in net sales. As a result, Efficiency of Assets ratio deteriorated.

FIGURE 1.EFFICIENCY OF ASSETS RATIO

As far as Profit Margin is concerned, it performed well. At 2010 it increased by 3.19% and at 2011 by 25.7%. Specifically at 2011 the group made 0.28€ (before interest and taxes) for every euro of sales. This event is basically attributed to the decrease of operating expenses.

7


FIGURE 2.PROFIT MARGIN RATIO

The vast majority of EYATH S.A profits are collected in cash. Quality of Profit ratio proves that at 2011 93.71% of the group’s profits were interpreted in cash flows.

FIGURE 3.QUALITY OF PROFIT RATIO

At 2011 EYATH S.A due to the uncertainty of the economical environment, reduced the amount of dividend payments. Specifically, the group paid 435,000€ less dividends to its shareholders compared to 2009 and 687,000€ less compared to 2010. Obviously, the Retention Rate boosted at 80.05%. 8


FIGURE 4.RETENTION RATE RATIO

Finally, Figure5 proves that the group does not face financial risk. The range of the debt financing of assets of EYATH S.A the last 3 years is 28.27%-33.29% with a descending trend. The reduction of debt financing of assets at 28.27% at 2011 could be partially interpreted by the increase of earnings that were retained.

FIGURE 5.RISKINESS RATIO

9


The ratios interpreted above prove that the group under analysis is financially strong and sustainable. All indicators have shown improvement except the efficiency ratio that has slightly deteriorated, though performing in quite satisfactory levels.

RISK MANAGEMENT In the Risk Management part of the analysis we would summarize the risks EYATH S.A faces and we would try to provide options of mitigation.

CURRENCY RISK The Group does not face any exchange risks, as during the ending fiscal period it had not performed any transactions in foreign currency and the total of its assets and liabilities was in Euros.

FINANCIAL RISK EYATH S.A as it was briefly explained above is financially strong and sustainable. The indicators of vital importance perform well and there is not any financial risk.

BUSINESS RISK The risks EYATH S.A faces are almost exclusively cover the business spectrum. These risks could be separated into the macro, the strategic and the operational risks. MACRO Macro risks have to do with the political, economical and social condition. The formation of coalition government at the elections of 17th June and the alteration of the austerity policies consist the only solution to this kind of risks.

10


STRATEGIC •

The combination of a fast growing population, highly stressed natural water resources and the challenge of industrialization means that developing new water sources and putting wastewater to better use is a priority. EYATH apparently lags behind in this effort as compared to international players. In an effort to improve its performance the largest part of the Company’s investment program is now focusing on the wastewater sector and on the highest possible utilization of water resources. Additionally, there were also constructed and given in operation plants on biological sewerage treatment such as sludge draining and other works of €17.5 mil. and more are under construction of €4.5 mil..In the same direction and in the framework of NSRF two more works were announced which will be under auction in April 2012 with the co finance of NSRF.

The risk that EYATH S.A faces in terms of Technology and R&D could be mitigated by the fact that the group in the current fiscal period realized research and development expenses of € 446 million in total, which regarded the development of new products.

Also EYATH suffers from human capital risk, the Company’s personnel possess low specialization and technological knowhow. This risk could be faced through the investment plan that assumes significant resources spent for education and training purposes.

Finally, high energy costs remain a concern against the Company’s ability to deliver operating growth rates above its historic average. In order to mitigate

11


that risk, the Management plans to take initiatives in the energy production sector for own as well as third party needs.

CREDIT RISK ANALYSIS This part of the analysis consists the decision part. The decision is highly correlated with the probability of default that is derived via the application of the logistic regression. Additionally, decision is affected by the bond credit rating that the group will take according to Altman’s Z score.

LOGISTIC REGRESSION The main factors that affect probability of default are the firm’s riskiness, profitability and cash flow ability. These factors are quantified by the 3 first ratios in Table3. 2009

2010

2011

Income Statement Information Revenues Operating Expenses Operating Income

77.376 60.936 16.440

71.182 55.575 15.607

75.400 54.619 20.781

Balance Sheet Information Total Assets Total Liabilities Total Shareholder's Equity

157.950 52.581 105.369

166.965 54.056 112.909

180.473 51.926 128.547

Cash Flow Statement Information Net Cash Flow - Operating Activities Probability of Default

15.649 0.003%

11.329 0.005%

19.473 0.000%

2009

2010

2011

TABLE 3.LOGISTIC REGRESSION

Ratios

12


Total Liabilities/Total Assets (TL/TA)

0.333

0.324

0.288

Operating Income/Total Liabilities (EBIT/TL)

0.313

0.289

0.400

Net Cash Flow-Operating Activities/Total Liabilities (CFFO/TL)

0.298

0.210

0.375

TL/EBIT

3.198

3.464

2.499

TL/CFFO

3.360

4.771

2.667

Years to repay

3.1983.360

3.4644.771

2.4992.667

TABLE 4.RATIOS

The period in which EYATH S.A repaid the funds through which it financed its investments in assets was 3.198-3.360 at 2009, 3.464-4.771 at 2010 and 2.499-2.667 at 2011.

FIGURE 6.PROBABILITY OF DEFAULT

The probability of default of EYATH S.A the last 3 years is close to 0%. This is a result of the good financial performance and its sustainable growth.

13


ALTMAN’S Z SCORE The model that is applied in the analysis is a modified version of the Z-score model. Specifically, it is adjusted for an intercept of 3.35. The formula used to calculate the Z scores is:

Z = 6.56*

WorkingCapital Re tainedEarnings EBIT BookValueofEquity + 3.26* + 6.72* + 1.05* + 3.25 TotalAssets TotalAssets TotalAssets TotalLiabilities

It should be noted the bond rating according to the scores in Table4 are AA+ for 2009 and 2010 and AAA for 2011.

Working Capital/Total Assets Retained Earnings/Total Assets Operating Profit/Total Assets Book Value of Equity/Total Liabilities Z'' Bond Rating

2009 0.238 0.075 0.104 2.004

2010 0.244 0.065 0.093 2.089

7.861 7.884 AA+/AAA AA+/AAA

2011 0.315 0.092 0.115 2.476 8.987 AAA

TABLE 5.ALTMAN’S Z SCORE

CONCLUSIONS Water Supply and Sewerage Systems Company of Thessaloniki SA (EYATH S.A) operates in a quite unstable political and economic environment. However, it is a monopoly owned by the Greek Government that has a fine financial performance, with low risk, high efficiency, high profitability and high amounts of cash. Additionally, the group the last 3 years has a repayment period that is far lower from that of 5 to 10 years, the period in which EYATH S.A prefers to pay back the loan. As a result, the loan of 10828.38 million € should be granted.

14


BIBLIOGRAPHY 1. Brealey, R., Myers, S., Allen, F. (2011), Principles of Corporate Finance, 10th Edition, McGraw-Hill, New York, NY, USA. 2. Hwaawini, G., Viallet, C. (2011), Finance for Executives: Managing for Value Creation, 4th Edition, South Western, Cengage Learning, Mason, OH, USA. 3. Hull, J. (2012), Risk Management and Financial Institutions, 3rd Edition, Willey Publishers, New Jersey,USA. 4. EYATH SA. (2011) EYATH S.A Financial Report. Thessaloniki, Greece. 5. Investment Research & Analysis Journal (2007) EYATH S.A. Efficient management of existing resources maintains growth. Diversification of activities still lies ahead. Valuation & Research Specialists, Thessaloniki, Greece, Working Paper. 6. Thomson One (2012) https://www.thomsonone.com.

15


EYATH SA Credit & Financial Analysis