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GROUP PROJECT: ALWASL PLUMBING COMPANY LAST DATE FOR SUBMISSION: May 05, 2022 Guidelines to answering the Group Project: This is a group project, and the size of each group should be between 5-6 people. The group must distribute work amongst its members in a fair and equitable manner; however, it must be stressed that each member must participate and contribute in all questions This assignment will be graded out of 100%; distribution will be according to the following criteria: No. Description Maximum Marks 1 Depth of analysis 2 Comments on relevant matters e.g. adequacy of information, etc. 3 Suggestions 10% 4 Conclusion 15% 5 Presentation & neatness Kindly follow the rubric for the detailed distribution of marks. 60% 10% 5% In this case assignment, your work is expected to show critical, analytical and justification skills of the subject rather than being purely descriptive. You are expected to present a well- structured and organized piece of work that demonstrates your knowledge and understanding of the analytical concepts and tools to assess the credit worthiness of this particular company. In addition, you should be able to recognize how the strategic choices made by organizations are influenced by the available or forecasted financial data. Plagiarism will not be tolerated, and plagiarized work will receive O marks Definitions of cheating and plagiarism: "Copying of printed material and submitting them as part of your answers without proper academic acknowledgement and documentation. The maximum similarity index allowed is 15%. • Copying of material from the Internet, including tables and graphics. • Copying other students' notes or reports. • Using paid or unpaid material prepared for the student by individuals or firms.
GROUP PROJECT: ALWASL PLUMBING COMPANY AlWasl Plumbing Company (WPC) has approached Etihad Bank (EB) with a request for AED 2,000,000 in credit facilities to finance its working capital needs. EB's required rate of return on its loans is 10.3%p.a. 1) Evaluate WPC's loan request using analytical techniques learned eg. SC's, financial statement analysis (including calculation of appropriate selected ratios for liquidity, efficiency, profitability and leverage), working capital needs and other associated projections and appropriate measures for bank lending. This section should include your credit opinion of WPC. 2) Do you agree with WPC's strategic plans for expansion? Are there are any changes you would advise to its business and financial plans? This section must include calculations to support/justify your recommendations. 3) You are required to (a) propose type of appropriate credit facility and amount (b) propose a structure that will ensure repayment to the Bank and mitigate risks identified in your analysis. This section should include i. tenor of proposed facility. ii. cite terms and conditions, ill. place appropriate covenants, iv. recommendations for type of security (if any). AlWasl Plumbing Company (WPC) had experienced significant growth in its business during recent years and it was anticipating a further substantial increase in sales. To finance this growth, the Company had found it necessary to increase its borrowing from Dubai Small Business Bank (DSBB). However, the maximum loan that DSBB would make to any small business was AED 1,000,000 and WPC had been able to stay within this limit by relying very heavily on trade credit, in addition, DSBB had recently asked WPC to secure its borrowings with real property as a result of change in their standard credit policy requirements. Abdulla Mohamed, the sole owner and President of WPC was therefore looking for a new banking relationship where he would be able to negotiate a larger unsecured loan to finance the ongoing expansion of his business. Abdulla had recently been introduced to Hashim Al Mannai, a senior relationship manager at the much larger, Etihad Bank. The two men tentatively discussed the possibility of a AED 2,000,000 line of credit. WPC had been founded in 1991 as a partnership by Abdulla and his brother-in-law Khalid Al Dosseri. In 2008, Abdulla bought out Khalid's interest for AED420,000 and incorporated the business. Khalid had taken an IOU for AED420,000 to be paid off in 2012, thus giving Abdulla time to arrange for the necessary financing to make the payment. The major portion of the funds needed was raised by a loan of AED280,000 negotiated in late 2011. This loan was from a FINANCE 331 2
GROUP PROJECT: ALWASL PLUMBING COMPANY small mortgage bank in UAE, was secured by land and buildings, carried an interest rate of 11% and was repayable in quarterly instalments over next 10 years. The business was located in a growing suburb of the city. The Company owned land with access to the port: 2 storage facilities had been erected on this land. The Company's operations were limited to the wholesale distribution of plumbing products to the local market. Typical products included ceramic bathroom and toilet equipment, piping for water and sewerage services, and trade tools for the plumbing industry. Quantity discounts and credit terms of 30 days on open account were usually offered to customers. EPC had recently begun to selectively offer 60-day terms for certain larger customers. Sales growth had largely been achieved on the basis of successful price competition, made possible by careful control of operating expenses and by periodically buying large quantities of materials at substantial discounts, Inventory levels were around the 80-day mark and this level allowed the Company to take advantage of quantity discounts as well as to be able to offer a full product range at short notice to key customers. About 55% of sales were made in the six months from April through September. No direct sales representatives were employed, with orders being taken directly over the telephone from established customers. Abdulla was an energetic 39-year old man, who worked long hours on the job, ably assisted by one aide. In addition, WPC had 10 other employees, 5 of whom worked in the yard and drove delivery trucks and 5 of whom worked in the office and in sales. Credit checking with firms who had business dealings with WPC yielded favorable responses regarding Abdulla's sound judgement, high integrity willingness to work hard and personal control over every feature of his business. In addition to owning WPC, Abdulla held significant equity in his own home. The house had cost AED380,000 to build in 2002 and was mortgaged for AED 160,000. He held an AED300,000 life insurance policy payable to his wife. Otherwise, they had no sizeable personal investments The Bank's analysts noted the ready market for the Company's products at all times and the fact that the sales prospects were favorable. The investigator reported: "Sales are expected to reach AED14,400,000 in 2014 and may even exceed this if prices should rise substantially." It was recognized that an economic downturn might slow down the increase in sales. EPC sales, however, were protected to some degree from any fluctuation in new construction activity because of the relatively high proportion of its repair and upgrading business. The prospects appeared good for a continued growth in the volume of business and the EB analyst felt that the 30% growth rate expected in 2014 could be repeated in the following years. Abdulla outlined his strategy and plans for the future of WPC to Bank representatives: "The local economy is doing very well, and we expect the growth in construction to continue at a very high pace. There are new entrants coming into the market, but established firms like ours have a distinct advantage. It is important to be very competitive and to build a strong market share for the future. We intend to do this through several different strategies. We will continue FINANCE 331 3
GROUP PROJECT: ALWASL PLUMBING COMPANY to keep our inventory at the current level as this allows us to respond quickly to key customers. We also plan to continue offering 60-day open account terms to major customers. This will mean that our average day's receivable will continue to build up slowly over the next few years, but we have never had any problems with bad debts. I also plan to take advantage of trade discounts that are on offer and this is one of the reasons why I need a bank that has a larger lending capacity. My suppliers give me terms of 30 days but most of them have been pretty good about extending this when required. However, several of my suppliers will offer me a good discount if the invoice is paid within 20 days and I plan to take advantage of this. This will bring my payable down to 30 days, but it will mean I have a cost advantage. I can use these discounts to give customers more competitive pricing and to win more business yet still keep my gross margins at current level. We have always been very careful about controlling costs and I plan on keeping my other expenses, including depreciation around 25% of sales. I have never taken any dividends out of the Company, preferring to reinvest. If I choose to do so, it will never be more than 25% of net income. Capital expenditure will continue to grow at the same level as in the past, which is much lower than the growth in sales. This way we can build a strong market position and simultaneously maintain strong market position FINANCE 331
GROUP PROJECT: ALWASL PLUMBING COMPANY 8,050 Income Statement for the Year ending 31 December AED 000 2011 2012 Net Sales 6,786 Cost of Goods Sold 4,886 5,746 Gross Operating Profit 1.900 2,304 SG&A Expenses 1.645 1,999 Depreciation 55 61 Earnings before Interest & Tax 200 244 Interest Expense 52 80 Earnings before Tax 148 Tax 24 28 Net Income 124 136 Note: SG&A expenses includes Abdulla's salary of AED270,000 in 2011, AED320,000 in 2012, and AED430,000 in 2013 2013 10,774 7,798 2,976 2.560 72 344 132 212 36 176 164 AED'000 Balance Sheet for the Year ending 31 December 2011 2012 2013 Cash 232 192 164 684 956 888 1,304 1,268 1,672 1.872 2,384 3,104 Accounts Receivable Inventory Total Current Assets Fixed Assets Total Assets SO2 558 626 2,374 2,942 3,730 O 584 932 28 496 96 420 28 768 120 0 28 1,024 156 0 Short Term Debt Current Portion of Long-Term debe Accounts Payable Accrued Expenses Note Payable - K AlDosseri Total Current Liabilities Long Term Debt Shareholders' Equity Total Liabilities & Equity FINANCE 331 1,040 252 1.500 224 2,140 196 1,082 1218 1,394 2,374 2,942 3,730 5