MFM ST1 Memo Edited Q1 FS Analysis

Marks
Calc Diss
Ratio Discussion 2021 2020 2019
While the gross profit decreased slightly for 2019 and 2020, the gross profit for 2021 decreased to a gross
loss. The decrease in gross profit should however be assessed within context of a particularly abnormal
year with the riots negatively impacting the production and distribution channels as well as the reduced 3 1
R500 million closing inventory impact on cost of sales.
-0.58% 8.09% 9.42%
If the R500 million less closing inventory is reversed, the cost of sales would have been R5567m
which would have translated into a gross profit of 7.71% which while better than currently
repoted gross profit of -0.58% it is still a reduction from the 2020 financial year. 2 1

Even when comparing the adjusted gross profit percentages it would appear that the company is struggling
to maintain the prior years gross profit margin. 1

The South African operations are currently operating at a gross profit loss -2.93% compared to
2 1
Gross profit margin

that of Botswana 18.73% that appear to be more profitable from a gross profit perspetive.
While the inflation for the last three years was around 6% the revenue for 2021 and 2020
increased by 0.2% and 12.44% for the 2021 and 2020 financial years respectively. 2 1
0.200% 12.44% N/A
Sweet is therefore either loosing market share or demand for their product is declining. 1

Anaylising the revenue per geographical region, the RSA revenue decreased by -0.08% compared to the SA -0.08%
10.18% in the previous year. By comparison the Botswana revenue grew by 14% during the 2021 financial 3 1
year. BW 14% SA 10.18%
It is clear that the destruction of the sugar cane plantations and disruption of the supply chain as a result of
1
the riots have had a significant negative impact on the South African operations.

Evaluating the negative revenue growth of 2021 within the context of inflation of 6%, the company has
1
really struggled to generate revenue.

The introduction of sugar tax as at 1 March 2021 has further negatively affected the market demand for
sugar in South Africa. The fact that Botswana have not implemented similar sugar taxes may contribute to 1 1
an increase in the demand for suger.
MAX 17 13 10
 MFM ST1 Memo Edited Q1 FS Analysis

From an operations perspective the company is not performing well at all. Since 2020 the company has
struggled to operate profitably. The decreased operating margin of 2.66% in 2020 and operating loss margin -4.82% 2.66% 3.89% 3 1
of-4.82% for 2021 is of grave concern.
Net-Operating profit (LOSS) margin

While the Botswana operation may be more profitable from a gross profit perspective it would appear that (-291 / 6032) (160 / 6020) (208 / 5354)

the operating expenditure in relation to this revenue is significantly more expensive than that of the South 1
African.
The operating expenditure of the Botswana operations as a percentage of revenue is 29.27% which is
2 1
significantly higher than that of the South African equivalent of 9%.

The Botswana operating has been operating at a loss for both 2020 and 2021. The primary reason for the
1
loss being the excessively high operating expenditure.

Despite a very small decrease in the revenue relating to the South African operations the South African
operating expenditure has further increased by 15.29% compared to the 9.03% pf the previous 2020
15.29% 9.03% 2 1
financial year. The company has therefore incurred significantly more administative expenditure during the
2021 financial year. This increase is disprortionate in relation to the increased revenue and inflation.
 MFM ST1 Memo Edited Q1 FS Analysis

2021 2020 2019

Rm Rm Rm
Operating expenditure 571 497 422
South Africa 530 460 422
Botswana 40 37 -

South African % of Total 92.9% 92.6% 100.0% 15.29% 1

Botswana % of Total 7.07% 7.4% 0.0% 9.03% 1
Net-Operating profit (LOSS) margin

Operating expenditure % of Revenue 9.46% 8.26% 7.88% 1

South Africa - Op exp. % Revenue 9.00% 7.80% 7.88% 1
Botswana - Op exp.% Revenue 29.27% 30.48% 0.00% 1

Increasing by 17.77% in 2020 and 14.86% in 2021 company's operating expenses is of concern and
1
contributing to the company incurring a financial loss in 2021. Inflation is 6%.
The operating expenditure also increased more than the 0.02% increase in revenue for 2021. Indicating that
the company most likely has spending a disproportionate amount on operating expendtire when compared 1
to the increase in revenue.
While the poor performance may partially be attributed to the riots that disrupted production and supply
chain. The increases in the operating expenditure appear to be excessive in relation to the increase in 1
inflation of 6%.
The only positive increase relates to the fair value adjustment in the other operating income. The 85.29%
increase in 2021 does appear to be excessive compared to the 34.92% in 2020. The increase from 2019 till
2021 does appear to be disproportionately large. Given the destruction of the sugar cane plantations due to 85.3% 34.9% 2 2
the riots, one would of expected a smaller fair value adjustment in 2021.

MAX 15 15 9
 MFM ST1 Memo Edited Q1 FS Analysis

The net profit margin has been deteriorating since 2019. The decrease is primarily due to the decreases in
the gross profit (2021 Gross Loss), significant increase in the operational expenditure as well as the 3 1
Net profit / (loss)
-9.71% -0.96% 1.64%
increase in the finance cost as depicted by the deteriorating
margin

interest cover from 1.056 in 2019 to -0.074 in 2021. -0.074 0.611 1.056 2
While it acknowledged that the decrease in the gross profit and increase in operating expenditure have all
contributed to the increase in the Net Loss margin, the increase in finance cost as a result of the increased 1
debt levels has exacerbated the situation even further.
MAX 3 5 2

The EBITDA margin has decreased from R10.91% in 2020 till R1.34% in 2021. This indicates that Sweets
EBITDA Margin

ability to generate a postive cash flow from revenue was severly impaired in 2021. Sweets just barely 1.34% 10.91% 13.30% 3 1
managed to achieve positve EBITDA margin in 2021.
It is most likely due to the lack of an increase in revenue while operating expenditures have increased
significantly. 1
MAX 3 3 2
The return on assets measures the profitability of the company as a whole in relation to the assets
employed. While the company managed to maintain a 2.67% and 2.54% return on assets in 2019 and 2020,
Return on Assets

-6.08% 2.54% 2.67% 3 1

the loss incurred in 2021 has resulted in a very negative return on assets for 2021.

Management have therefore not managed the assets of the company efficiently in generating sufficient
profits in 2021. While the riots may have significantly contributed to this result, the poor performance is 1
likely to continue in the foreseeable future as demand for sugar decreases.

MAX 3 3 2

The significant negative ROCE in 2021 indicates that Sweets has been not been able to generate profit (add
value) from the capital employed. The increase in the operational expenditure and insignificant increase in
Return on Capital
Employed (ROCE)

revenue has resulted in decreased returns on the capital employed. -7.91% 3.15% 3.51% 3 1

The ROCE for all three years less than Sweets' WACC which means that Sweet has actually eroded
shareholder value for the last three years since 2019. 1

MAX 3 3 2
 MFM ST1 Memo Edited Q1 FS Analysis

Return on equity measures how effectively management is using a company’s assets to create profits.
Sweets' return on equity has worsened since 2019 as a result of the poor financial performance during 2020 -11.39% -1.36% 2.08% 3 1
Return (Loss) on Equity

and 2021 with a R586 million loss being made in 2021.

What makes the decrease in the ROE even more concerning is the fact that this ratio has decreased while
the debt levels have increased. The total assets have also decreased which therefore means that debt was 1
used to finance the daily operational activities of the company.

From this ratio it can be seen that the return on shareholders funds has declined significantly
over the last three years. This is to be expected, given the increased costs and decline in the other 1
profitability ratios as calculated above.
MAX 4 3 3
Conclusion: Sweets has performed extremely poorly in of the current financial year and the deteriorating financial
performance since 2019 is of grave concern.
Total Possible 75 45 30
MAX 48 marks 48
MAX 49 MARKS + 1 Conclusion 1
L&P 1
50
 MFM ST1 Memo Edited Q1 Part B Business Risk

Risks

1.1. Interest rate risk - debt finance 1

This is the effect that adverse movements in interest rates can have on the amount of interest that is owed on
interest-bearing borrowings. 1
Given that Sweet has interest bearing long-term loans and further wishes to make use of local debt financing to
finance foreign operations the company is exposed to interest rate risk.

1.2 Exchange rate risk - Foreign operations 1

An entity that has foreign operations or foreign subsidiaries (or any foreign assets or foreign liabilities, for that
matter) runs the risk of adverse movements in foreign exchange rates from one reporting date to the next
(translation risk). 1
With Sweets operating in more than one country, its operations would have greater exposure to foreign currency
risk. Currently 20% of the produce is exported to Kenya and the company has established production facilities in
Botswana.

1.3 Operational risk - foreign operations 1

Operational risk is the risk of loss resulting from ineffective or failed processes, people, systems, or external
events that can disrupt the flow of business operations.
Expanding into Africa, but retaining the administration from South Africa and sending staff on a rotational basis to 1
locations may result operational and logistical problems that may disrupt the foreign operations.

1.4 Business Risk - product risk 1

An entity that sells a narrow range of products is very dependent on the performance of a small number of
products to generate profits and value. If one of these products fails in the market, then the entity's profit and
sustainability can suffer. 1
Sweets is largely dependent on it's sugar production with revenue consisting of 80% sugar and only 20% other
products. If there is any change in the demand or production of sugar, Sweets may be severely affected with 80%
of the revenue coming from sugar. Illustrating the point, the introduction of sugar tax decreased demand for their
primary product, sugar.
 MFM ST1 Memo Edited Q1 Part B Business Risk

1.5 Business Risk - Geographic diversification 1

Entities whose geographic footprint is limited to a single area or region may do less business than entities who
diversify the areas in which they do business.
Although Sweets have recently expanded their operations into Botswana, the revenue generated from the 1
Botswana operations are very limited. Sweets is therefore still very reliant upon the success of their South Africa
operations. Illustrating the point, the riots had a significant impact on Sweets 2021 financial year. The demand
growth potential for sugar in South Africa is also limited compared to other countries.

1.6 Business Risk - Supply Chain Risk 1

An entity relies on the uninterrupted supply of goods in order for production of goods or the delivery of services to
take place. Any disruption to this supply may mean that the entity is unable to produce sufficient output to satisfy
demand or deliver the required service, and in so doing may lose customers and profit.
1
As already experienced in 2021, the riots resulted in a disruption of the supply and production of the company.
Although the company has recently expanded operations into Botswana, the production and retail are insignificant
to mitigate this risk. Sweet further relies on various other smaller sugar cane producers to supply 35% of the raw
material required. This exposes the company to the risk of a lack of raw materials being available should these
producers not be able to deliver.

1.7 Business Risk - Trading Risk 1

An entity selling goods locally and/or internationally is exposed to trading risk.
- physical loss of the goods. Sweets experienced this during the riots when a significant amount of finished goods
were looted during the riots. 1
- liquidity risk. Sweet's current financial position is not desirable and the company may not have access to sufficient
funding or liquid resources to enable it to provide credit facilities to its customers. Evidenced by the increase in the 1
debt and decrease in the cash and cash equivalents.
 MFM ST1 Memo Edited Q1 Part B Business Risk

1.8 Corporate failure or going concern risk 1

This is the risk that the entity will cease to exist in future. This risk can arise as a result of a number of other risks
that are discussed in this document. 1
Given Sweet's accumulated losses, increase in debt and extensive losses being made in 2021 the company is
definitely exposed to corporate failure risk.

1.9 Financial risk - Capital Structure 1

Financial risk is driven by the mix of funding that an entity uses. As more debt is introduced into the entity's capital
structure, the risk that the entity will not be able to service debt repayments increases. 1
Sweets interest bearing debt has increased in 2021 and 2020. The company is clearly exposed to capital structure
risk.

1.10 Financial Risk - Cash Flow Risk 1

An entity is at risk when it does not have sufficient liquid resources to finance its operating cycle, namely extending
credit to customers and paying commitments as they fall due.
Sweets current financial position with the negative inflow of cash from operating activities and the positive inflow 1
from financing activities exceeding the investment activities, indicates that the company has utilized long-term
funding to finance its operations activities.
 MFM ST1 Memo Edited Q1 Part B Business Risk

1.11 Financial Risk - Currency Risk 1

An entity that enters into transactions with foreign suppliers or foreign customers and is invoiced or invoices in a
foreign currency is exposed to the effect of adverse movements in the currency before cash settlement of the
transaction (transaction risk).
An entity that has foreign operations or foreign subsidiaries (or any foreign assets or foreign liabilities, for that
matter) runs the risk of adverse movements in foreign exchange rates from one reporting date to the next
(translation risk). 1
Currently Sweets exports 20% of their sugar to Kenya and is thus exposed to foreign exchange rate fluctuations.
Sweets further has established operations in Botswana and are this further exposed, although to a limited degree,
Currency movements can, however, also drive strategic risk. An exporter can lose foreign market share if their
local currency strengthens against foreign currencies so that their products or services become too expensive for
their foreign customers (economic risk).

1.12 Financial Risk - Legal Risk 1

this relates to the risk of an entity failing to comply with relevant laws or regulations. This risk can result in fines or
penalties being levied on the entity or the entity's licenses being revoked. 1
Being in the food production industry Sweets is automatically exposed to this risk with food production standards
as well as extensive and complex health and safety standards being applicable to the company.

1.13 Ethics Risk - Cultural Risk 1

This is the risk of entering a foreign market where the language, beliefs and customs differ from those to which the
entity is accustomed to locally. 1
Sweets has established, although small, operations in Botswana and are planning to expand their African footprint.
The company is thus exposed to this risk.
 MFM ST1 Memo Edited Q1 Part B Business Risk

1.14 Market Risk - Environmental Risk 1

This refers to the effect that an entity can have on the natural environment and vice versa. Generating pollution in
the form of effluence or emissions. This may result in fines levied on the entity or the entity being required to incur
rehabilitation costs. This risk can result in a strategic risk as the entity's reputation may also be damaged as a
result of its effect on the environment (environmental risk may drive reputational risk).
1
Sweet's operational activities have a negative impact on the environment and therefore the company is exposed to
this risk.

1.15 Market Risk - Political Risk 1

This risk relates to actions taken by the government of the day or the lack thereof that may result in financial loss
for the entity. Such risks arise in respect of local and foreign operations. 1
The recent riots illustrate the potential political risk that Sweets is exposed to. With the company expanding into
other countries they are exposed to the political risks of each country.
Possible 31
Max 14
Layout and presentation 1
Total 15
 MFM ST1 Memo Edited Q1 Part C - CPC

Part c)

Mr Mokoma is a CA(SA) and therefore needs to comply with the SAICA

1
Code of Professional Conduct.

By manipulating the fair value adjustments, Mr Mokoma is in breach of the

1
principle of integrity as he is not being straightforward and honest.

He is also not acting with professional competence and due care as he is

not preparing the financial statements with the required diligence and in 1
accordance with the applicable financial reporting framework.

Mr Mokoma’s decision making is clearly influenced by the effect of the fair

value adjustment on his performance bonus and is therefore also not 1
applying the fundamental principle of objectivity.

By misstating the financial statements, Mr Mokoma is in breach of his

fiduciary duty to act in the best interest of the company, thereby not
1
complying with the Companies Act. This results in a breach of professional
behaviour.

Total 5
 MFM ST1 Memo Edited Q1 Part D Six Capitals

Financial capital consists of financing or funds mainly obtained in the

form of debt and equity issues, as well as funding generated from 1
operations or investments.

Manufactured capital refers to physical objects such as buildings and

equipment. Intellectual capital refers to intellectual property such as 1
patents, copyrights, rights and licences.

Intellectual capital refers to intellectual property such as patents,

copyrights, rights and licences.
1

Organisational capital such as systems and protocols. Human capital

includes people’s competencies, capabilities and experience.
1

Social and relationship capital refers to institutions, networks and the

relationships between stakeholders, as well as the ability to share 1
information.

Natural capital refers to all renewable and non-renewable environmental

resources such as water, air, land, eco-systems, forests and minerals.
1

6
 MFM ST1 Memo Edited Q2 TVM Risk

RAF Investment

Nominal rate 9%

2015 - 2019
N 5 1
PMT 120 000
PV 0
I/Yr 9.00% 1
FV R718 165 2

2020
N 1
PMT - 1
PV R718 165
I/Yr 9.00%
FV R782 800 1

2021 - 2030
N 10
PMT 120 000
PV R782 800 1
I/Yr 9.00%
FV R3 676 324 2

Shine Ltd Investement

2015 - 2019
Cum. Shares MV share Total MV Capital Gain
Shares purchased 2015 360 360 100.00 36 000 36 000 -
Shares purchased 2016 330 690 109.09 75 273 72 000 3 273
Shares purchased 2017 300 990 120.00 118 800 108 000 10 800
Shares purchased 2018 265 1 255 135.85 170 491 144 000 26 491
Shares purchased 2019 250 1 505 144.00 216 720 180 000 36 720

2020 - 2030
N 11 11
PMT 0 0
I/Yr 9.54% OR 9.57% 1
FV R590 739 R592 527

Total value of retirement funding available:

Retirement Annuity 3 676 324 3 676 324 1
Investment in Shine 590 739 OR 592 527 1
Total 4 267 063 4 268 852 MAX 12 12
 MFM ST1 Memo Edited Q2 TVM Risk

PART B - Bitcoin

Bitcoin CV 65.50% Shine CV 16.31% OR 22.49%

13.00% 9.54% 9.54% 1

Risk / Return 5.038461538 Risk / Return 1.708835 2.356328 2

Given that Mrs. Grace is 10 years away from retirement is it

prudent to follow a more risk averse approach. 1
The co-efficient of variation for Bitcoint indicates that the risk 1
per every 1% return is more than double that of investing in Shine Ltd.
Bitcoin is therefore not considered an appropriate investment option for Mrs Grace. 1
With Bitcoin being so volatile, it is possible that Mrs. Grace may loose money and then still
have to repay the bank. 1
While shines return is less than that of Bitcoin it should be assessed against the risk of the investment.

The co-efficient of variatio for Shine is 3 times less than that of Bitcoin. With a smaller standard 1
deviation in the share price the investment in shine is considered to be more appropriate while still
delivering a return in excess of inflation of 6%. 1
MAX 7 9

Part C - Bitcoin Net Value 2030.

Bitcoin 2030 Value

N 10 1
PMT -
PV -650 000
I/Yr 13.00% 1
FV R2 206 469 1

Bank Loan
N 10
PMT -
PV -R650 000
I/Yr 10.75% 11.04% effective rate 1
FV R1 852 103 1

Bitcoin - Net Value

Expected future value of Bitcoin 2 206 469

Less Expected future debt - 1 852 103
Net increase in value: 354 366 1
MAX 5 6