TOPCIMA: is the Merbatty Boat Company's five-year plan watertight? Adrian Sims reviews the case study's pre-seen material and flags up some key issues.
| Author | Sims, Adrian |
| Position | PAPER P10 - Chartered Institute of Management Accountants - Case study |
The Merbatty Boat Company (MB) has been trading successfully for 33 years. You may think that its future will be plain sailing and that its managers merely need to keep it on its current course. They may think so, too, but they'd be wrong. Conditions have changed and, if the right decisions aren't made, MB could go badly off course and even founder.
The first significant change occurred last year when MB went from being captained in a hands-on way by its 90 per cent shareholder, Alberto Blanc, to being a listed company with 40 per cent of its stock owned by a wider crew of value-focused investors. To get the best price for these shares, MB's management team promised spectacular growth in a five-year plan, seeking to double revenues and profits by the end of the period. Its big new investor, JKL, has a nominee on the board. Simone Lellet will want the management to hold fast to its growth plan.
The pre-seen material states: "Boat-building companies are facing the difficult task of balancing the need to deliver customer choice and a high specification at a price that is competitive ... [They must] generate sufficient profitability to invest in research for future designs in order to stay competitive and to give a return."
This illustrates the trade-offs that listed firm faces. To make good boats costs money, but can these costs be recovered given the competitive market, featuring new rivals in Australia and Asia? Short-term returns may be blunted by high R&D spending to make new models.
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Appendix 5 of the pre-seen material shows the targets and assumptions behind the profit forecasts given by the board on flotation last year. It shows rising profits (from 76m [euro] last year to 137m [euro] in 2011) and rising dividends (from 20m [euro] to 40m [euro]), with revenues increasing from 502m [euro] to 1bn [euro]. MB predicts revenue growth in every geographical segment, but most markedly in the Middle East. The firm intends to increase revenues from 640m to 180m [euro] in five years there, compared with a mere doubling of revenues in its segments in Europe and the US. To service this, it plans to open a new boatyard in the Middle Eastern country of Surania this month. Is this feasible? Appendix 2 tells us that in 2006 only eight per cent of its revenue came from the Middle East, but that this is forecast to rise to 18 per cent by 2011. To build the business there, MB intends to rely on the same agent who has been selling for 15 years in Surania and it has appointed four more agents in the region.
The five-year plan must deliver its profit growth in order to satisfy the investors. An inspection of margins is interesting. We are told that MB enjoyed an overall operating profit margin of 15 per cent in 2006. Appendix 5 forecasts a 137m [euro] operating profit on turnover of 1bn [euro], which equates to 13.7 per cent--ie, a fall. This could reflect greater competition. It does explain why the board is considering improving margins by building larger boats and trying new models. This makes some sense, given that MB has capacity constraints, as indicated by its discussion of the trade-offs between switching production towards a smaller number of large boats or focusing on small boats to increase throughput. This decision may well feature in the exam as a calculation using extra data provided on the day.
We are told that the finance raised at last year's flotation was...
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