Case Study: Ambertech Technology Limited

Letter of Transmittal
16th October 2009

Mr Mukesh Garg
Department of Accounting and Finance
Monash University 400 Dandenong Road
Caulfield Vic 3145

Dear Mr Mukesh Garg,
Ref: Business Valuation Group Project 2 in Semesters 2, Year 2009

Here is the report you requested on 16th October, 2009. This report attempts to analyze Ambertech Technology Limited by industry analysis, accounting analysis, financial analysis and evaluation and forecasting from ***to ***** through ***** and relative valuation multiple models.

We would like to express our sincere thanks for your valuable guidance and support during the research and completion for this assignment. Please feel free to contact us if you have any further queries regarding this
report.

Yours sincerely,

Shuai LI
ID 21643873 [e-mail]

Fei KONG
ID 21631239 [e-mail]

Table of Contents

Introduction
Purpose
This report is business valuation of Amberthech Technology Limited. The report attempts to estimate the value of the firm based on the current performance and forecast the future performance of the company.

Scope
This report is mainly consisted of 5 parts, which are Business & Industry Analysis, Corporate governance analysis, accounting analysis, financial analysis and forecasting analysis. The time period chose here is from 2005 to 2009.
Methodology
Over-time analysis and peer analysis are used in financial analysis part. And *** in forecasting and valuation. The data used mainly from annual reports of AMO, internet, electronic database. These data were complied to analyze the sustainability of the company.
Limitation
The result of this report would be limited to the amount and quality of available information and the given time frame. Relevant assumptions would be made in the case of inadequate information. Bias may arise due to data has been collected from various database which may have different sources.

Business and Industry analysis
Economic Analysis
It seems that the most severe phase of economic downturn triggered by global financial crisis has passed. It is likely that quarter to quarter economic growth will become positive during the second half of the year.

As to the recovery of the economy, there are few signs. To be sure, targeted fiscal measures have lifted sales of motors in many countries. In addition construction activities are influenced by government actions. More broadly, such fiscal policies and government actions as tax cut and cash payment has led to the upturn of the consumer spending.

Despite of the great shock in 2008, Australia economy has managed to avoid the first two quarters negative economic growth. Aggressive monetary and fiscal policies have effectively influenced business sectors. Even though corporations profit have a sharp fall and debt and capital expenditure is being reduced.

As to the retail industry including technology equipment and hardware sector is facing worst two years of 2009-2010 like other industries.

After 2010, as the recovery of the economy and government’s continuous encouragement action, the condition of the retail industry will be better.
Business strategy analysis
Competitive advantages
The purpose of competitive strategies analysis is to analyze the position of AMO in the whole industry. As there are 3 main types of strategies: cost leadership, differentiation and a combination of both.

The strategy of AMO takes is regarded as differentiation for the following reasons:
Superior product quality
AMO only choose those excellent manufacturers who produce high quality products as its partners. So as a result, the quality of the products which AMO distributed is always superior.

Superior product variety
As we have analyzed above, AMO has 6 segments doing different businesses. AMO has a quite wide range of products ranging from the projectors to even small accessories.

Superior customer service
One of AMO’s missions is to build strong customer relationship by providing them superior products and excellent services. AMO provide customers installation services for free in order to let them enjoy the new equipments as soon as possible.

Investment in research and development
AMO never stop to find new excellent manufacturers and develop innovative products and services. In 2006, it invested in lifestyle entertainment unit to establish an agency; in 2008, it developed new products in professional segments to provide better performance products.

SWOT Analysis
Strengths
Clear strategic direction
-AMO’s clear direction is to build strong relationship with manufacturers and customers.
Strong R&D
-Depends on the excellent R&D AMO can always find the new products delivered to customers
Diversified product range
A wide variety of products give them much flexibility
Excellent customer services
-timely resolved customers’ needs and try to satisfy each requirements
High quality products
-AMO choose to distribute only high quality products
Weaknesses
Easily affected by economic environment
-AMO can easily be affected by both the industry and the whole environment
Not clearly separation of duties of board of directors
-one person responsible for both auditing and preparing accounts
Depends on the manufacturers
-AMO does not product themselves, they only distribute the finished products provided by their fellow partners.
Opportunities
Great popularities
-people are more and more interested in high technology products
Further expansion
-facing the great popularity AMO can further expanded to other places
Strong brand name
-as a leader in this industry people are believed in AMO

Threats
Increased competition
-more and more companies are set up as they see the upward profitability in this industry
Bargaining power of buyers
-as many other same companies, buyers now have more flexibility in choosing products
Threats of substitutes

Industry Analysis: Hardware and Electronic Equipment Industry

Ambertech Limited operates in the hardware and electronic equipment industry and in general this industry has its roots in the Information Technology sector hence making it one of the most exciting industries of times. AMO currently has 0.0848% share in the IT sector which indicates its relative position. Most competitors to AMO come from technological firms that specialise in software design and providing IT optimisation solutions for their client base hence relatively strong competition intensity. Closely related peers include but not limited to Technology One.

H&EE Industry Analysis

Threat of New Entrants: Medium
This industry requires a lot of initial capital invested as well as ongoing working capital, to continue operating efficiently. Capital needs come mainly in the form of stocking equipment to smoothly operate. Survival of new entrants will depend on good customer relations as well as customer base which might take time to establish.

Rivalry amongst Existing Competitors: Medium
The distribution part of this industry, especially the higher end which is the professional distribution does not have much competitors with only a few to mention, hence less rivalry which is to the advantage of AMO

Threat of Substitute Products: High
This industry is mainly focused with distribution services especially what AMO is involved in, hence the distributed products and distribution channels can easily be changed and manipulated to the advantage of the initiating company.

Bargain Power of Buyers: High
This industry relies mainly on strong networks of buyers to sell your products, hence the more customers you have on your contacts the better, it is more of negotiation to come up with a pricing otherwise the customers can easily purchase directly to manufacturers.

Bargain Power of Supplies: High
This industry especially the distribution sector operates on a squizzed position, these days when middlemen can easily be substituted at the advantage of buyers and manufacturers, especially when it evolves professional products. Hence suppliers can easily bargain on the prices that they are offering their products for.

Corporate Governance Analysis
Corporate governance is on crucial factor to lead the company to the success. It is defined as the set of process, policies and operations affecting the way the corporation is directed, administered and controlled.

As to the 2007 and 2008 annual report, AMO’s board chose ASX 10 corporate governance principles as the benchmark to evaluate the corporate governance. In the board, there are four non-executive directors who have high qualification in high technology equipment, finance, accounting and corporate governance. The board adopt primarily consistent with guidance of ASX except the independence of non-directors whose interest are less than 10% of issued capital, where that the director is not the major shareholder, where no ongoing services are being provided to the company by the director or related entities.

There are two committees in the board which are Audit and Risk Management committee and Nomination and Remuneration committee. Audit and Risk Management committee is responsible for the performance indicators consistent with the legislative and accounting standard, company’s control and accountability system and governance policies which must comply with the legislation. To make sure the effectiveness, it can get straight access to the employees, auditors and experts. As to Nomination and Remuneration committee, it is responsible remuneration policies, incentive scheme and retention strategies.

In relation to the securities trading, directors and officers can not deal in any company’s share while in procession of unpublished price sensitive information and before the AGM.

In addition, external auditors are chosen to provide an annual declaration of independence to Audit and Risk Management committee.

Overall AMO has the complete and efficient corporate governance structure to make sure the good operation and appropriate policies.

Accounting analysis
The purpose of the accounting analysis is to evaluate the flexibility of AMO’s key accounting policies. Furthermore, we examine these policies in order to find any distortions and identify the related red flags. The period we selected here is from 2005 to 2009.

Key accounting policies
For mainly doing the distribution stuffs, the concern of AMO is the long-term fixed assets. And the followings are the key accounting policies of Ambertech Limited1. depreciation amount of all fixed assets are depreciated on a straight line basis over their estimated lives and this is unchanged through all the 5 years
Judgments made concerning the impairment of goodwill.
Consolidation – all inter-company balances and transactions between entities in the economic entity have been eliminated on consolidation
Preparing financial statements in accordance with accounting standards and accrual basis is used as required
Inventories are measured at the lower of cost and net realizable value and costs are assigned on a first-in-first-out basis
Non-current investments are measured on the cost basis
Foreign currency transactions during the year are converted to Australian currency at the rates of exchange applicable.
Revenue from sale of goods is recognized when the control over the future economic benefits of the goods has been passed to customers

Assessing the accounting flexibility
Some firms are constrained to accounting methods strictly; however, AMO has some flexibility in choosing from different methods. The first concern here is the depreciation methods. Through all the past five years, AMO were using straight line depreciation method. For this one, AMO has great flexibility regarding the useful life and residual value of the depreciated assets in order to increase revenue, since they are reassessed annually. Secondly, AMO has choices of recognizing revenue. For example, there is no strict condition required in recognizing the income from resale or disposal of the fixed assets that accounts for a large number of the revenue. It more focus on the real control right which can be realized by many different ways not certain conditions. The revenue is recognized based on the substance over form rule that gives the company more flexibility.

Evaluate Accounting strategy
As other companies in the industry, AMO prepare their financial statements according to the AASB. From the remuneration report, each manager owns some of the company’s shares; these give them some incentives to manipulate accounting numbers. In addition, from 2005 to 2009, there were two major changes in 2006 and 2008 respectively but this did not affect the accounting results of AMO significantly.

2006

AASB 7 Financial instrument and AASB 2005-10 are applicable to annual report periods beginning on or after 1 January 2007 and application of these will impact the type of information disclosed in relation to the economic entity’s financial instruments

2008
i. AASB 8 will be applied from 1 January 2009 ii. Revised AASB 101 “presentation of financial statements” will apply for annual reporting periods begin from 2009. iii. Revised AASB 123 Borrowing Costs and AASB 2007-6 Amendments to accounting standards.

Evaluate the Quality of Disclosure
Disclosure quality is quite important regarding the whole quality of the financial reports. Several questions should be asked below in order to assess the disclosure quality:

Does the company provide adequate disclosure to assess its business strategy and its economic consequences? – Yes, Median
Does the firm adequately explain its current performance? – Yes. Fully explained
Do the notes explain key accounting policies adequately? – Yes. Highly
What is the quality of its multiple business segment disclosure? – Median level
Does the company disclosure and explain the reasons for bad news? – Yes. Median

From the above questions, we could conclude that AMO has disclosed relevant and important information in their annual report but lack of some adequacies. For example, AMO did not explain too much about the segment performance and regarding the bad news, it did not give a clear reason of how that happened just like the one-time large amount of written-off in 2009.

Earnings quality assessment

Regarding earnings management, persistency of the number is the primary concern. Then whether the management has the incentives and opportunities to manipulate is also included in our discussion. Firstly, to assess the persistency of earnings, earnings persistence model is used and the followings are the output.

Output area: Coefficients
Standard Error t Stat
P-value
Intercept
0.309887
2.952125
0.104971
0.933417
X Variable 1
-0.44218
0.714594
-0.61878
0.64724

From the above table, it is clear that AMO’s earnings is not persistent over time since it got the lower coefficients and higher P-value.

Director
Ordinary shares
Options over Ordinary shares percentages P Wallace
114,297
100,000
0.37%
P Amos
4,275,343
400,000
14%
T Amos
5,484,625

18%
E Goodwin
2,883,556

9%
D Swift
2,933,556

10%

Regarding management incentives, we can see managers like P Amos and T Amos do have the incentives to manipulate since they own a large percentage of the total shares of the firm. Also, after analyzing the corporate governance, some managers do have the opportunities. For example, the board of directors is mostly consisted of those managers; also, some of them are also a member of audit committee. The dual role will give them opportunities to manipulate.
Identify the red flags
Sales growth vs. Receivables

2005
2006
2007
2008
2009
ROA
12.22%
5.84%
9.94%
10.78%
6.37% receivables/operating rev
14.28%
18.38%
12.74%
16.85%
15.85%
sales growth
15%
-3%
16%
16%
3%
inventory/trading rev
23.65%
27.71%
24%
16.53%
19.95%

From 2005 to 2006, we can see an obvious increase in receivables, which in turn we would expect to see an increase in sales as well. However, the sales dropped substantially from 15% to -3% as well as the ROA. Here, we can see manipulations of management. This is probably because Ambertech relaxed their credit terms to receivables in order to have higher revenue appear on the book. After 2006, sales begin to grow accompanied with the increase in ROA. The receivables however declined which can explain the abnormal increase in revenue.

Plant and Equipment Treatment
We can note that in 2005, each class of Plant and Equipment was carried at Cost or Fair Value less any applicable depreciation whereas in 2006 they clearly stated that each class of Plant and Equipment is carried at the historical cost less depreciation.
Historical cost is normally less than the fair market value for most tangible assets, hence the exclusion of fair market value allow a lower depreciation cost which can be translated into higher reported earnings and hence showing a positive outlook for the company especially 2006 which seemed like a difficult year.
Goodwill Treatment
The way they amortised their Goodwill is questionable in the way they changed it from the previous treatment, in 2005 both purchased goodwill and goodwill on consolidation were done through a straight line basis over 20 years. This all changed in 2006 when the board of director changed the treatment of Goodwill, now Goodwill is allocated to cash generating units and is not subject to amortisation, but tested for annual impairment. Most probably they are trying to reduce the amortisation costs and hence boost the profitability of the
company.
Foreign currency transactions and Balances
In 2005 the assets and liabilities are translated at year end rate and operating results are translated at the end of each month, while in 2006 goodwill and fair value adjustments arising on consolidation are included in the translation to Australian dollars at exchange rate ruling at the balance sheet date. In addition the revenue and expenses of foreign operations are translated to Australian dollars at rates approximating to the exchange rates ruling at the dates of the transactions. Changes in tax
Management did change some tax policies during 2005-2006, some of which will directly affect the income and expenses accounts that will finally lead to the abnormal increase or decrease in the net earnings, looking at an example the different treatments of deferred tax between 2005 and 2006. They are recorded in the future benefits or provisions accounts in 2005, however, management choose to recognize them as income or expense provided they are not related to the equity in 2006.

Financial Analysis
Evaluating operating management
Decomposition of ROE 2008 AMO
2009 AMO
CLT 2009
KLM 2009
TSH 2009
Net profit margin
4.56%
2.52%
-18.40%
0.64%
-19.11%
* asset turnover
211.20%
219.05%
155.89%
364.32%
121.37%
ROA
9.63%
5.52%
-28.68%
2.33%
-23.19%
*Financial leverage
168.63%
160.76%
169.27%
301.96%
145.27%
ROE
16.24%
8.87%
-48.55%
7.04%
-33.69%

From the above table, it is obvious that AMO has done pretty well in both ROA and ROE when compared with the other 3. However, both of them declined substantially in 2009. By decomposing the components of ROE, we conclude that the high ROA of AMO is mostly because their high net profit margin. Other factors like asset turnover and financial leverage are quite similar with its competitors.

The high net profit margin is also a reflection of AMO’s competitive advantage of differentiation. Because they want their products to be unique instead of cheap price, as a result the price of their products should be higher.

Common-sized Income statement and profitability ratios
AMO overtime analysis

2005
2006
2007
2008
2009

Trading Revenue
100.00%
100.00%
100.00%
100.00%
100.00%
Expenses
-90.15%
-94.41%
-93.93%
-92.53%
-95.50%
EBITDA
10.24%
5.60%
6.90%
7.68%
4.50%
EBIT
9.35%
4.94%
6.34%
7.24%
3.98%
Net Interest Expense
-0.49%
-0.75%
-0.72%
-0.44%
-0.42%
Tax Expense
-2.96%
-1.30%
-1.32%
-2.24%
-1.04%
NPAT
5.90%
2.89%
4.30%
4.56%
2.52%

From the historical analysis, expenses increased slightly in 2006 and after that it appears to be quite stable. However, it increased again since 2009. EBITDA followed the same trend with expenses as well as the NPAT. In addition, both net interest expense and tax expense are stable over time.

The annual report 2006 of AMO states that they have established a distribution agency in lifestyle entertainment unit which incurred set up cost, costs of hiring staffs etc. this is why we see an upward trend of expenses in 2006. Also, from the expenses to sales ratio, we could conclude that AMO did control their expenses well because there are no huge fluctuations during the past five.

Competitors

AMO FY2008
AMO FY2009
CLT FY2009
KLM FY2009
TSH FY2009

Trading Revenue
100.00%
100.00%
100%
100%
100%
Expenses
-92.53%
-95.50%
-106%
-98%
-118%
EBITDA
7.68%
4.50%
-5.39%
1.81%
-18.36%
EBIT
7.24%
3.98%
-6.37%
1.13%
-20.69%
Net Interest Expense
-0.44%
-0.42%
-0.68%
-0.07%
-0.52%
Tax Expense
-2.24%
-1.04%
-0.14%
-0.42%
2.28%
NPAT
4.56%
2.52%
-18.40%
0.64%
-19.11%

Expenses are the indicators of how the company controls their overhead activities. By comparing this ratio between AMO and its competitors, it is clear that expenses spent by AMO are low which in turn explains the high profit margin of AMO.

In order to make the comparison more meaningful, EBITDA and NPAT are used to assess the performance of AMO. Both of the two ratios of AMO are much more than the other 3, which in turn could again explain AMO’s differentiation strategy and better control of their expenditure.

Evaluating Investment management
Ratio
AMO
FY2008
AMO
FY2009
CLT
FY2009
KLM
FY 2009
TSH
FY2009
Operating working capital /sales
22.73%
19.54%
8.53%
1.14%
15.96%
PP&E/sales
4.1%
0.82%
14%
3.79%
5.14%
Operating WP turnover
439.91%
511.67%
1172.24%
8738.84%
626.7%
PP&E turnover
9044.42%
12268.61%
3627.85%
5707.69%
1947.09%
Accounts receivables turnover 5.93
6.31
3.89
7.9
4.4
Inventory turnover
604.95%
501.13%
1245.84%
1573.66%
1022.01%
Accounts payable turnover
8.87
1.03
9.82
8.42
7.53
Days accounts receivables
61
58
94
46
83
Days’ account payable
365
365
37
43
48

Working capital management
AMO’s working capital has been relatively stable from 2008-2009, however the numbers show that AMO did not manage its working capital quite well which can be seen from the large positive number of turnovers. But when comparing with its fellows, it seems AMO’s position is much better. This may due to the reason of its powerful supply chain, which they buyout the distribution channel of those strong brand name products. And the large working capital turnover may be the result of using credit card which leads to large receivables.

By further discussing the elements of working capital, we look at accounts receivables, payables as well as the days collected or paid.
Accounts receivables turnover is relative higher but it is fine with accounts payables when comparing to others. As we all know that one way to manage your working capital better is to decrease periods of receivables while increase your payables time. AMO has been done quite well in these areas. They have one month or less time to collect money from customers but they got nearly a year to pay off their liabilities, which would give them much flexibility of using funds.
Long term assets management
The PPE turnover of AMO is quite high compared with other three, which we can say AMO has fully utilized it long-term assets.

Since AMO is mainly distributing what they bought from others, they do not product themselves, the core long-term assets may the vans which they use to distribute. Sending goods everyday to everyplace of consumers, there definitely will incur a higher ratio of PP&E
turnover.

Evaluating financial leverage
Liquidity Ratio
Ratio
AMO FY2008
AMO
FY 2009
CLT
FY 2008
KLM
FY 2009
TSH
FY 2009
Current ratio
2.25
2.44
2.22
1.2
2.3
Quick ratio
1.35
1.21
1.89
0.84
1.73
Cash ratio
0.36
0.24
0.91
0.14
0.48
Operating cash flow ratio
0.28
-0.022
0.88
0.18
0.37

AMO has a greater cushion than other 3 when looking at its current ratio and quick ratio. Both of them are all greater than 2 and are quite stable over time which indicates that AMO has enough assets to pay for its debt in the short-term. This is especially true when we found the short-term debt of AMO in 2009 is zero. From the following graph, it is also clear that AMO’s current ratio is above the average level of the industry. So we would like to conclude that AMO is liquid

However, cash and operating cash flow ratio put AMO in a lower position. Both of them are lower than 1 and even negative operating ratio in 2009, which show us that AMO may not have enough money or exchangeable securities. Considering the economic environment both in 2008 and 2009, this is true when people have less confidence to consume.

Financialeverage

Again by only looking at the financial leverage of both AMO and its competitors, the graph shows that AMO has a low level of debt which we have concluded from the above analysis that this is the result of AMO’s lower short-term debt policy. The slightly increase in 2006 is the result of the management’s expansion plan.

Debt-to-equity ratio

Debt-to-equity ratio is a useful ratio when analyzing how much debt the company has incurred using funds collected from the shareholders. Generally AMO tracked the trend with the whole industry; however, there was a huge deviation in 2006. This is because in 2006, management of AMO was planning further strategic expansion in Professional division, all these sizable projects valued at more than $1 million. Also, in 2006, Ambertech has signed a distribution agreement with Panasonic Australia for the distribution rights.

Interest coverage ratio
1

Here the ratio of interest coverage ratio is the measurement of a firm’s ability to measure all fixed obligations, such as interest payment, lease payments and debt repayments. (Palepu, K and Healy, P., 2008) By investigating the trend, AMO has quite stable net interest expense overtime. This is mainly because there were not huge changes in debt policies overtime and as a result it is quite consistent. While others were experiences large fluctuations, AMO can still keep their interest expense at a certain level.

Sustainable growth rate

2005
2006
2007
2008
2009 sustainable growth rate

AMO
19%
9%
14%
16%
9%
TSH
9%
18%
5%
6%
-34%
CLT
10%
3%
14%
-9%
-49%
KLM
33%
23%
28%
15%
7%
Average
18%
13%
15%
7%
-17%

The growth rate of AMO is stable and consistent over time when compared to its competitors. The fall in 2006 is mainly due to the economic environment at that time. The price of the whole industry sharply dropped and AMO is affected as well. Again the decreased pace in 2009 is affected by the financial crisis when the whole industry on average has dropped to -17%.

Cash flow analysis
Cash flow can always give a direct image of how many cash available for a firm and thus can compare this number with what we have analyzed before to support our summary. Here, operating CF and investing CF as well as financing CF are analyzed. In the first place, we will see the trend of the three through past 5 as follows:

For operating cash flow, there was a sharp increase from 2006 to 2007. By looking at the separate items, the reason is that from 2006 to 2007, revenue increased 24% and interest received has increased by 26% compared with 2006, also the tax paid was less in 2007 as well. 2007 to 2008 seems to be a peaceful, the numbers are quite stable. However, again affected by the financial crisis and economic environment, operating cash flow decreased quickly to even negative one in 2009.

Looking at the investment cash flow, it is quite stable and consistent from year to year while negative all the time. The main cash outlay regarding investment for AMO is the purchase of PP&E which is also the critical assets of the firm. From year to year, they have to add new equipments in order to keep the efficiency of the distribution. They have large amount of investment in PPE from 2006 to 2009 with no disposal or sale of any of these. That is also why we see the negative numbers from all these 5 years.

While it seems AMO did not manage its financing cash flow well since they are all negative especially when in 2007 achieved its lowest level of -2,692,000. AMO raising funds mainly through borrowing, however they have the problems of paying back short term debt using these borrowings. AMO is consistently increasing payout ratio which in line with their mission statement.

Cost of Equity and WACC
Cost of Equity Determination

Cost of Equity Calculations Risk Free Rate
5.67%

Ambertech Ltd
1.003

Market Return Yearly
6.36%

Equity Cost
6.36%

GDP growth
3.200%

Ambertech Ltd does not have any debt on its balance sheet ever since financial year of 2007; this implies that the Weighted Average Cost of Capital is just founded from the cost of equity which is highly summarised as shown above. We arrived at the Cost of Equity through, the use of CAPM model, which requires inputs that include 1] Market Return 2] Risk Free Rate 3] Beta.
The various inputs have been calculated and inserted as above with the illustration of beta calculation below.

Beta

After regression the ASX All ordinaries monthly returns for a period of 4 years against the AMO stock returns over the same period, we found out that the Beta for the company is 1.003 which is given by the formula inserted above.
Risk Free Rate
This is given by the Australian Treasury Bonds, in this particular case we are looking at the 10 year bonds.
Market Return Rate
This was given by regressing market returns over a ten year period
Equity Cost Calculation

E(r) = Rf + Beta(Risk Premium) = 5.67% + 1.003(6.36%-5.67%)
WACC
= 6.36%

Distressed Analysis
The main purpose of distressed analysis is to analyze whether the company is facing financial distress or not. When one company can not pay its debt, it indicates that the company is facing distress. Generally, one company that faces financial distress will get higher cost for financing and lead to bankruptcy. In this part we will use two methods including Altman Model and Castagna and Matolcsy Model to do distressed analysis for AMO.

Altman Model
This model is based on USA model and uses Z score to predict the bankruptcy condition. If the Z score is greater than 2.67, it means that the company is healthy. If the Z score is less than 1.81, it means that the company is facing financial distress. In addition, if the Z score is between 1.81 and 2.67, it is considered as ignorance zone and further investigation is needed.
Below is the formula to calculate Z score

Where:
X1 = Working capital divided by total assets
X2 = Retained earnings divided by total assets
X3 = Earnings before interest and taxes divided by total assets
X4 = The market value of equity divided by the book value of total liabilities
X5 = Sales divided by total assets

2005
2006
2007
2008
2009
1.2X1
1.029
1.028
1.029
1.047
1.042
1.4X2
0.277
0.252
0.343
0.350
0.385
3.3X3
0.596
0.271
0.423
0.504
0.288
0.6X4
0.938
0.723
1.025
0.876
0.987
1.0X5
1.937
1.667
2.044
2.115
2.187
Z score
4.777
3.941
4.864
4.892
4.889

According to the table above, we can see that Z scores from 2005 to 2009 are all greater than 2.67 and it means during the five years AMO’s financial condition is in healthy.
Castagna and Matolcsy Model

To make the distressed analysis more reliable, we choose Castagna and Matolscy Model which is based Australia analysis model to do the second analysis.

Below is the formula to calculate Z score Where
V1 = Return on Shareholders Funds(ROE)
V6 = Gross Cash Flow / Total Debt
V2 = EBIT / Total Assets
V7 = Total Debt / Total Assets
V3 = Operating Income / Operating Assets
V8 = Working Capital / Total Assets
V4 = Quick Asset Ratio
V9 = Retained Earnings / Total Assets
V5 = Current Asset Ratio
V10 = Market Capitalisation / Total Debt

As to this model, if Z score is greater than zero, the company will fall in distressed condition or is in healthy.

2005
2006
2007
2008
2009
0.0025V1
0.000475
0.0002
0.00034
0.0004
0.00027
0.4512V2
0.081
0.057
0.067
0.069
0.039
0.7574V3
1.462
1.214
1.321
1.538
1.146
2.2905V4
2.497
2.084
2.2284
3.092
2.909
1.0999V5
2.563
2.167
2.3359
2.475
2.68
0.0360V6
0.0099
0.0076
0.0083
0.0103
0.0095
0.0972V7
0.038
0.042
0.034
0.039
0.035
0.0572V8
0.049
0.049
0.049
0.050
0.048
0.06559V9
0.013
0.011
0.012
0.016
0.018
0.4014V10
8.919
5.643
7.863
8.012
5.56
Z score
-6.796
-4.736
-5.657
-7.473
-5.629

As to the table above, we can see that all results of Z score are greater than zero, so it means the performance of the company will be healthy in the future.
Forecast and Valuation Analysis
Sales growth analysis

Expected
Year

2009
2010
2011
2012
2013
2014
Sales Growth
2.71%
8.16%
10.11%
9.50%
5.75%
3.20%

Historical
Year
2006
2007
2008
2009
Sales growth rates
-2.74%
16.28%
16.38%
2.71%

AMO is a market leader in the Australian market for hardware and electronic equipment industry hence its performance has a high correlation with what happens in the market hence it as well follows the pick and toughs of this industry. It is also an industry which is affected by a lot of factors both internal and external to the industry performance.
Taking a look at historical analysis of sales growth, we noted a significance improve from a negative growth figure in 2006 to a positive figure in 2007 and a fairly consistent performance thereafter before a downturn in 2009
A snap short analysis above can same be applied to the future performance noting that miracles can happen in sales growth figures. After 2009 which is our base year we expect sales growth to improve to 8.16% and reach a peak point in 2011 before cooling off to a terminal growth of 3.20% in 2014.
There are a number of factors that support the predicted sales growths under the forecasting part, being a variation from internal and external factors as pretty much as indicated in the SWOT and Porter’s Five analysis. An analysis will be done as below year by year.

2010 [8.16%]
The company’s fundamentals haven’t change that much, only improving for the better in anticipation of a good year ahead. Various strategies are in store for the coming year to boost sales from the 2009 figures. Lifestyle department continues to improve the market share and margins and the New Zealand sector is continuing to invest in broadening its areas of expertise this year.
Significantly affecting AMO sales in 2008 was the market downturn caused by the sub-prime crisis in the USA, and as we are progressing into 2009 everything has been improving on a positive note, with markets returning to normalise and GDP of various countries especially Australia and NZ our main markets showing a greater improvement hence an upsurge in the sales growth is expected.

2011 [10.11%]
We predict 2011 is going to be the most exciting year in our future analysis with our sales growth expected to be on their peak during the 2011 financial year same applies with the economic turnaround which is expected to be back to normal around end of 2010 implying it will affect our 2011 financial period hence the predicted pick of our sales growth in 2011, we have seen Wayne Swan has increased interest rates during this quarter with other expected increase in interest rates to increase over time as well, this clearly indicates that our GPD is overheating that’s increasing at a faster rate than the sustainable one hence we are upbeat our sales increase. We expect our strategies to improve margins as well as expansion of our professional division to be fruitful in 2011. Ambertech Ltd is also involved in a number of acquisitions and expansion of a number of products that it offer in its product mix, hence by 2011 we expect to have acquired at least 2 products which will be reflected into our sales growth. We expected to increase our market share by revamping our marketing strategy and be more aggressive throughout the year 2011. Couple by strong economic growth, aggressive market expansion and improved product mix we expect the sales growth predicted to be achieved in 2011.

2012 [9.50%]
After reaching our peak in 2011, we anticipate the sales growth to start cooling down in line with GDP which we expect to be now increasing at a constant rate. After a revamp in our marketing strategies in 2011 we expect our market to be near saturation in 2012 hence the penetration rate will have slowed down giving an overall growth rate of 9.50% in 2012.

2013 [5.75%]
As time moves by and we move towards the terminal year we expect the sale growth to be mean reverting and going towards the terminal growth rate. Hence, the expected growth rate is expected to fall to a level of 5.75%. The main contributors being the saturation of our products into the market, slowing down economic growth rates and exhaustion of the product mix hence the need to re strategise over the coming period.

2014 [3.20%]
According to the due diligence for Ambertech Ltd (AMO) our terminal year will be 2014, hence we expect the growth rate for the company to follow the predicted GPD growth rate for Australia, and this is mainly because Australia is where our main market share is hence on a going concern basis we can’t exceed its Australian GDP.

Reasonable Assumptions for forecasting purpose:
For the purpose of forecasting the financial statements for AMO, we have come up with a number of reasonable assumptions that will apply into the operations of the entity in the future. These include:
Australian tax regime with not change the corporate tax which will stand at 30% into the future.
COGS to Sales ratio will remain at a constant of 63.07% from now on into the future as a going concern operation, this is reasonable because AMO is a distributor hence its expected to have higher COGS
EBIT to Sales ratio will remain at 3.98% into the future; this lower figure is expected because of squeezed margins in this distribution industry.
Operating Current Assets and Liabilities to sales ratio will remain constant at 39.72% and 16.28% respectively into the future
Net Fixed Assets will also grow with sales at a ratio of 3.01% to sales into the future.

VALUATION OF AMERTECH LTD

Consolidated Income Statement

Reported Year

Forecasted Years

2009
2010
2011
2012
2013
2014
Sales Revenue
71,526,000.00
77362521.6
85183872.5
93276340.42
98639730
101796201
Sales Growth

8.16%
10.11%
9.50%
5.75%
3.20%
COGS
45109000
48792542.37
53725468.4
58829387.91
62212077.7
64202864.2
Gross Profit
26,417,000.00
28569979.23
31458404.1
34446952.52
36427652.3
37593337.2
SG&A
23,570,000.00
25493312
29597735.2
32409520.08
34273067.5
35472624.9
EBIT
2,847,000.00
3079028.36
3390318.13
3712398.349
3925861.25
4051488.81
Net Interest(Assume Constant)
-298,000.00
-298000
-298000
-298000
-298000
-298000
Profit before Tax
2,549,000.00
2781028.36
3092318.13
3414398.349
3627861.25
3753488.81
Tax
-743,000.00
-834308.5079
-927695.438
-1024319.5
-1088358.38
-1126046.64
Net Profit
1,806,000.00
1946719.852
2164622.69
2390078.844
2539502.88
2627442.17

Consolidate Balance Sheet

Operating Current Assets
28,413,000.00
30728393.58
33835034.2
37049362.42
39179700.8
40433451.2
Operating Current Liabilities
11,641,000.00
12594618.52
13867934.4
15185388.22
16058548
16572421.6
Working Capital
16,772,000.00
18133775.06
19967099.7
21863974.2
23121152.7
23861029.6
Net Fixed Assets
583,000.00
2328611.9
2564034.56
2807617.847
2969055.87
3064065.66
Net Operating Assets
17,355,000.00
20462386.96
22531134.3
24671592.04
26090208.6
26925095.3
Change in Net Operating Assets 3,107,386.96
2,068,747.32
2,140,457.76
1,418,616.54
834,886.67

Change in BVND
0
0
0
0
0
0

Free Cash Flow to Equity -1,160,667.11
95,875.37
249,621.09
1,120,886.34
1,792,555.50

Valuation models
Our valuation analysis after a thorough due diligence of AMO operations and fundamentals behind it, we are going to use two valuation models which include:
Discounted free cash to equity

2010
2011
2012
2013
2014
Free Cash Flow to Equity -1,160,667.11
95,875.37
249,621.09
1,120,886.34
1,792,555.50
NPV

-1091241.56
84748.78
207453.58
875819.179
1316857.27
Terminal Value

56689304.6
PVTerminal Value

41645418
Total NPV -1091241.56
84748.78
207453.58
875819.179
42962275.3
Rumbik Value $ 43,039,055.23

Value per Share $ 1.40

The model given above is the Free Cash Flow to Equity, which is deduced by discounting the forecasted free cash flows to equity by an appropriate discount rate in this case given in the WACC calculation part. The above model has been forecasted based on the financial statements given in the Forecasting Part of the excel sheet. It is assumed that AMO will have a high growth rate period over the next five years and thereafter it will reach the terminal period whereby it will grow at a constant growth (represented by the expected long-run Australia GDP) as a going concern.
The aggregated NPVs of yearly free cash flows to equity and the terminal value of a going concern business gives Ambertech Ltd a total equity value of $43 039 055.23 which translate to a per share value of $1.40 at Outstanding shares amounting to 30.9million.

Comparable Company Analysis
In our analysis we are going to use the following companies as the bases of our comparison:
KLM: KLM Group Ltd
TSH: TSH Holdings Limited
CLT: Cellnet Group Limited
KLM Group Ltd
It focuses in the design and installation of communication and electrical solutions in various industries around Australia, with its customers varying from government to commercial sector. As of today, it has a market capitalization of $22million and it falls in the same industry as Ambertech Ltd
TSV Holdings Limited
TSV is a supplier, distributor and integrator of electronic communication equipment, audio visual equipment and electronic security businesses and its market capitalization currently stands at $14million which makes it a good comparable company to AMO
Cellnet Group Limited
CLT is a distributor of information and telecommunication products in both Australia and New Zeland, this is a good comparison to AMO and it falls in the same industry. It has a market capitalisation of about $22million.

Comparable Company Analysis

2006
2007

Stock Price Outstanding Shares
P/E
P/E
Average
KLM Group Ltd
$0.360

59900000
7.89
10.28
9.085
TSV Holdings Ltd
$0.017

93400000
13.16
18.78
15.97
Cellnet Group Ltd
$0.280

76800000
37.25
8.33
22.79

Ambertech Valuation
Forecasted NPAT
Average P/E
AMO Value

AMO Value
$2,627,442.17
15.9483333
$41,903,323.54

Outstanding Shares

30,800,000.00

Discounting Factor

6.36%

AMO Value NPV

$ 30,786,252.49

AMOV per Share

$ 1.00

Through the Comparable company analysis we had to use P/E ratios of the year 2006 and 2007 as 2008 and 2009 were really affected by recession hence rendering the values useless. The valuation per share stands at $1.00 after rounding off.

Recommendation for Investors
The report above is a due diligence of Ambertech Ltd, as outlined we have thorough analysed the hardware and electronic equipment industry and it business operations. Conclusively, AMO is on top of its game in this industry and relatively it will perform well in the future with its share prices increasing to enable shareholder wealth creation. The company is a market leader in the professional distribution industry hence it has a strong bargaining power with further consolidation enabling to fully put it on thrust.
Below is a share price analysis:

We strong recommend investors to buy this stock as it is greatly discounted at today (15/10/09) share prices of $0.50. After using the two models explained above we found out that 1] Through the FCFE the share price is worth $1.40 a premium of 180% to today’s price 2] Using Multiples the share price is value at $1.00 which is a premium by 100% to today’s price. Hence if investors buy AMO’s share over time we expect them to earn those premium after that market corrects the fair view of AMO current share price.

Bibliography
ANZ, “ANZ Economic Outlook: September 2008.” revised 2008 http://www.anz.com/Business/info_centre/economic_commentary/AEO_Sep07.pdf. Viewed 27 September, 2009

Amber Technology, http://www.ambertech.com.au/index.php viewed 27 September 2009

Amber Technology, Annual Report 2005 http://www.ambertech.com.au/files/articles/AMB_AR_2005.pdf viewed October 3, 2009

Amber Technology, Annual Report 2006 http://www.ambertech.com.au/files/articles/Ambertech%202006%20AR.pdf viewed October 3, 2009

Amber Technology, Annual Report 2007 http://www.ambertech.com.au/files/articles/Annual%20Report%202007.pdf viewed October 3, 2009

Amber Technology, Annual Report 2008 http://www.ambertech.com.au/files/articles/Annual%20Report%202008.pdf viewed October 4, 2009

Economy Watch, “Australia Economy” http://www.economywatch.com/world_economy/australia/ viewed October 1, 2009

FinAnalysis, “Ambertech Limited- annual Per Share Statistics”, http://www.aspectfinancial.com.au.ezproxy.lib.monash.edu.au/af/company/annualpst?ASXCode=AMO&xtm-licensee=finanalysis viewed September 27, 2009

Palepu, K.G., Healy, P.M. & Bernard,V.L., Business Analysis & Valuation: using Financial Statement, 3rd ed, 2004, USA.