Mercer Group

Company Background
The story of Mercer is a story that runs parallel to many other New
Zealand enterprises. They can trace their present standing, prestige and service
to very humble beginnings. The Mercer Company was originally established in
Christchurch, New Zealand back in 1882 by James Mercer. For a company that
started in the business of general copper-smithing and metal working, it has now
become the Mercer Group with four manufacturing plants becoming an
international leader in the design and manufacture of innovative technology
solutions as well as fabrication of steel products. Thus from being a company
that primarily dealt with metal workings, the Mercer Group now has businesses
in different industries including: kitchens, bathrooms and laundries; storage and
transport; industrial processing; health care and laboratories; and packaging and
materials handling. In order to manage their presence in these different
industries, the Mercer Group has three major business divisions: Stainless,
Medical and Interiors.
Mercer Stainless designs and fabricates stainless steel and associated
equipment for the industrial, dairy, processing, domestic and commercial
sectors, produced from two large facilities in Christchurch and New Plymouth.
Mercer Medical designs, manufactures, imports, distributes and is a service
provider of infection control and sterilization services to healthcare providers in
both the public and private sectors, laboratories and the Armed Forces. Mercer
Interiors designs, manufactures and distributes of a range of kitchen, bathroom
and laundry products. Mercer Interiors has offices in New Zealand and Australia.
In addition, the Mercer Group also has the Titan Superior Slicing Division
and the Technologies Division. Mercer Technologies is the technology arm of the

Mercer Group and is expected to initiate, develop and market value added
technology products.
Owe to its proven commitment to excellence, Mercer is now a major force
in the design of innovative engineered materials handling equipment solutions,
health care solutions in infection control as well as the supply of customized
stainless steel components and fabrication throughout the world.
Corporate Governance
Mercer Groups Board of Director has five members which are elected by
the shareholders. The Directors oversee the management of the company and
are responsible for all corporate governance matters. Currently the Directors are:
1. Garry Diack;
2. Humphry Rolleston;
3. Richard Rookes;
4. Rodger Shepherd; and
5. Paul Smart.
Though Mr. Diack and Mr. Rookes are required to retire, in accordance with
Mercer Groups constitution they remain eligible for re-election at the next
annual general meeting. Further, in accordance with NZX Listing Rules 3.3.2 and
10.5.3(l) the directors determined that the following directors were independent
directors as at 30 June 2013: Mr. Diack and Mr. Smart.
As with any company, Mercer Groups Board has both an Audit Committee
and a Remuneration Committee. The Audit Committee is composed of Messrs.
Diack, Rookes and Smart with Mr. Smart being the Chairman. The Audit
Committee assists the Board in carrying out its responsibilities under the
Companies Act 1993 and the Financial Reporting Act 1993. In particular, to
ensure that management maintains sound accounting practices, policies and

controls, and to review and make appropriate inquiry into the audits of the
Groups financial statements by the external auditors.
The Remuneration Committee meanwhile comprises of Messrs. Diack and
Rolleston. The main function of the Remuneration Committee is to make
recommendations to the Board concerning Executive Directors and Executive
Officers remuneration.
Management Team
Mercer Groups management team is composed of:
* Rodger Shepherd, Chief Executive Officer
* Tobin Blathwayt, Chief Financial Officer
* Alan Dowman, General Manager, Mercer Technologies
* Ross Coppard, Operations Manager, Stainless Division
* Sean Marr, Chief Executive, Titan Slicers
* Kelvin Wright, Branch Manager, Stainless New Plymouth
* Denis Nolan, Branch Manager, Stainless Australia
* Hayden Searle, General Manager, Mercer Interiors, New Zealand
* Charles Brothers, General Manager, Medical Division

Financial Highlights
For the year ended June 30, 2013, the Mercer Group reported revenues of
$38.7 million compared to revenues of $33.3 million for the year ended June 30,
2012. Net income for the year ended June 30, 2013 was $631,000 compared to a
net loss of $1 million for the year ended June 30, 2012.
The Group's balance sheet showed that as of June 30, 2013, total assets
stood at $31 million with total liabilities of $13.8 million resulting in a positive
equity of $17.2 million. This compares to total assets of $27.2 million with $10.8

million in total liabilities resulting in total positive equity of $16.4 million as of

June 30, 2012.
Earnings per Share
Earnings per Share (EPS) is calculated by dividing the profit attributable to
equity holders by the weighted average number of ordinary shares issued during
the year. The table below shows Mercer Groups EPS from 2011 to 2013.
Year

Earnings Available to

No. of Ordinary

Earnings per

2013
2012
2011

Shareholders
$763,000
($962,000)
($9,352,000)

Shares
238,843,956
221,730,959
114,135,767

Share
$0.0031
($0.0043)
($0.081)

The table shows that for the years 2011 and 2012, the company reported
negative EPS with 2011 at (8.1) cents and 2012 at (0.43) cents. EPS increased to
0.31 cents by 2013. What this tells is that from 2011 to 2012, Mercer Group
performed better despite reporting a net loss. However the company managed to
report positive net income by 2013 resulting in a positive value for EPS.
The reason for the strong growth can be gleaned for the companys
Annual Report for the Year ended June 30, 2013. The company reported that as a
result of the restructure of their trading activities as well as a refocus on key
markets, all divisions reported positive EBITDA in 2013. The companys Stainless
division also experienced a strong year owe to the dairy expansion across the
country. The acquisition of 75% of Titan Slicers also added a decent increment to
the companys EBITDA.

Equity Value and Share Value

From Mercer Groups Annual Report for the year-ended June 30, 2013, we
have the following information:

EBITDA: $2,501,000
Cash on hand: $307,000
Total Liabilities: $13,853,000
Outstanding shares: 238,843,956
Enterprise value: 8.5

First we obtain the enterprise value estimate:

$2,501,000 x 8.5 = $21,258,500

We then deduct the debt and add the cash:

Estimated Equity Value: $21,258,500 - $13,853,000 + $307,000 =
$7,712,500

To find the share value, we divide the estimated equity value with the total
shares:

Estimated Share Value: $7,712,500 / 238,843,956 = $0.032

Time Value of Money - Machinery

To compute for the time value of money, we use the formula:
PV = PMT [((1 1/(1+r)n)/r]
where PV = present value
PMT = amount of each annuity payment
r = The interest rate
n = number of periods over which payments are made

For the first scenario, the firm wants to buy a piece of machinery on hirepurchase after 4 years. Under the contract, the company will pay $120,000 at
the start of each year and pay an interest rate of 15% per annum. The present
value is therefore:
PV = 120,000[((1 1/(1+0.15)4)/0.15]
PV = 120,000[2.855]
PV = $342,600
The present value of the machinery is $342,600.
Time Value of Money - Building

Based on the facts, we know that the building costs $450,000. Since there
is a down payment of 10%, then the remaining amount that needs to be financed
is:

Remaining Amount = $450,000 (1 0.10) = $450,000 (0.90) = $405,000

We know that:
PV = PMT [((1 1/(1+r)n)/r]
PMT = PV / [((1 1/(1+r)n)/r]
Paying on a monthly basis for 10 years means that n = 12 months x 10
years = 120. Thus,
PMT = $405,000 / [((1 1/(1+0.12)120)/0.12]
PMT = $48,600

Paying on a monthly basis for 10 years means that n = 10. Thus,

PMT = $405,000 / [((1 1/(1+0.12)10)/0.12]
PMT = $71,679

The company stands to benefit if it puts up the new building. Not only can
the company expand its operations but it will have an additional fixed asset. If
the company decides to pay on a monthly basis, it is expected to pay $48,600
per month for 10 ten years. This would mean total payments of $5,832,000. On
the other if it decides to pay annually, it will need to pay $71,679 for 10 years for
a total of $716,790. Thus the company stands to benefit a great deal if it will go
for the annual payment.

Cash Conversion Cycle

The cash conversion cycle or CCC is considered as one of the many ways
to measure how effective management is. In essence, CCC measures how fast
the company, in this case the Mercer Group, is able to convert its cash on hand
into additional cash on hand. Solving for the CCC includes using accounts
payable, accounts receivable and inventory, ratios that can be found on the
company's balance sheet and income statement.

Cash conversion cycle is computed using the formula:

CCC = DIO + DSO - DPO

where DIO = days inventory outstanding

DSO = days sales outstanding
DPO = days payable outstanding

So we need to solve first for DIO.

DIO = Average inventory/cost of goods sold per day per day

From Mercer Group's Annual Report, inventory for 2012 was $3,332,000
while it was $4,362,000 for 2013. Cost of inventory sold was ($17,708,000).

DIO = [($4,362,000 + $3,332,000)/2]/($17,708,000)/365 days = 48.4 days

DSO is given by:

DSO = Average accounts receivables/revenue per day

Again from Mercer Group's financial statement, there was no accounts

receivable for 2012 while for 2013 it was $5,362,000. Revenue for the year
ended 2013 was $38,773,000

DSO = [($5,362,000 + $0)/2]/($38,773,000)/365 days = 25.2 days

Finally for DPO we have:

DPO = Average accounts payable / cost of goods sold per day. For 2012, Mercer
Group's Annual

Report showed that trade and other payables stood at $275,000 while it
went up to $5,955,000 by 2013.

DPO = [($5,955,000 + $275,000)/2]/($ 17,708,000)/365 days = 64.2 days

Using all these values will give us:

CCC = 48.4 days + 25.2 days 64.2 days = 9.4 days

Financial Leverage

In its Annual Report for the Year Ended June 30, 2013, Mercer Group disclosed
that in 2012, the company focused on delivering turnaround performance. Thus for
2013, the company focused on taking advantage of these gains. For the year ended
2012, the company reported revenues of $33.2 million compared to revenues of $38.7
million for the year ended 2013. This meant a growth of 5.5 million. Mercer Group
disclosed that this growth in sales consumed $1.8 million of working capital.

In addition to the growth in sales, the company invested in a number of

acquisitions that included buying a 75% stake in Titan for $800,000 in 2013. The
company said that these investments were funded out both from the retained earnings
as well as a new debt facility that the company negotiated with the Bank of New
Zealand. Said facility amounts to $3.65 million having a committed cash advance
facility of $4.0 million and an overdraft of $1 million. As of June 30, 2013 the company
says that $1.6 million in undrawn facilities.

Mercer Group further stated that all of its financial liabilities were due in less
than 12 months except for two liabilities. Hire purchase agreements at $221,000 due
between 2 and 5 years and bank debt of $5,283,000 due between 2 and 5 years.

Investment in Shares

For the year ended June 30, 2013, Mercer Group does not have any investment in
shares considering that for the previous year, it was mainly focused in turning around

the company after a poor performance in 2011. For 2013 the company put emphasis on
taking advantage of the relatively good performance in 2012.

Share Price

The Dividend Discount Model enables investor to the share price at time0
through the use of this formula: P 0 = (Div1 + P1)/(1 + rE). However from Mercer Groups
Annual Report, we know that it has not paid any dividend for the past two years. We
also found out earlier that the estimated share value is $0.032. Assuming 12% cost per
annum, we can see that the price is:
P0 = (0 + $0.032)/(1 + 0.12) = $0.032/1.12 = $0.028

The fact that the price to pay for the share is lower than the estimated share
value is not surprising. If one wants to invest in Mercer Group, since there is no
dividend, then investors would likely pay a smaller price than what is being offered.
We know there is no dividend yield, but what about the capital gain?
Capital gain: [($0.032 $0.028) / $0.028] x 100 = 14.28%

Present Value of Bond

Mercer Group
Bond Issue
As of
Par Value
Coupon Rate
Maturity Date (after 5 years)
Yield to Maturity
Current Yield
Rating
Coupon Payment Frequency
First Coupon Date
Type
Callable

5 May 2014
$1,000,000
8.25%
5 May 2019
6.75%
5.60%
AA
Annual
15 July 2015
Corporate
No

To compute the present value of the bond being offered, we first compute for the
lay out the timing and amount of future cash flow promised.

CPN = (Par Value x Coupon Rate) / (Number of Coupon Payments per Year)
= ($1,000,000 x 0.0825) / 1
= $82,500

Next we determine the appropriate discount rate for the cash flow. We can use
the value of 6.75% which the yield to maturity rate. We now find the PV of the
lump-sum principal and the annuity stream of coupons.

PV of Coupon Stream = PMT x 1 - [1/(1+r)n]/r

= $82,500 x 1 - [1/(1 + 0.0675) 5/0.0675
= $82,500 x [1 - (1/1.386)]/0.0675
= $82,500 x [1 - 0.721]/0.0675
= $82,500 x 4.133
= $340,972.50
Next we solve the PV of the par value:

PV of Par Value = FV x [1/(1+r)n)]

= $1,000,000 x [1/(1+0.0675) 5]
= $1,000,000 x [1/1.386]
= $1,000,000 x 0.721
= $721,000

Finally to get the bond price we add the amounts we obtain for the present
values.

Bond Price = $340,972.50 + $721,000 = $1,061,972.50

Thus the bond will be sold for $1,061,972.50 on May 5, 2019.

Securitys Return and Valuation

Year
May
2010
2011
2012
2013
2014
Averag
e
STDEV
STDEV

Close
0.30
0.06
0.11
0.16
0.18

Return

-0.24
0.05
0.05
0.02

-80%
83%
45%
13%
15%

-0.80000
0.83333
0.45455
0.12500

0.69828
70%

Prediction Interval = 15% - (2 X 70%) to 15% + (2 x 70%)

= 15% - 140% to 15% + 140%
= -125% to 155%
Even with a 15% average return from 2010 to 2014, the Mercer Group remains
very volatile. With a 95% confidence we can say that the 2015 return lie between
-125% - 155%. The big gap in the prediction interval is largely due to the fact that there
were only five data points as sources from the internet yielded only historical data for
the company until 2010.

Summary

Based on the case study, it is clear that Mercer Group is doing its best to be on
top again. After a rather poor performance for the year ended June 30, 2011, the
company managed to turn things around by the year ended June 30, 2012. Evidence of
this can be seen in its financial statements. There was for example increase revenue
from $30,454,000 in 2011 to revenue of $33,310,000 in 2012. Revenues went up
further in 2013 o $38,773,000.

Though total assets decreased in 2012 to $27.2 million from $32.3 million in
2011, it went up in 2013 to $31.0 million. Total liabilities however continue to increase
from $6.4 million in 2011, to $10.8 million in 2012 and $13.8 million in 2013.

EPS was now positive at $0.0031 from ($0.0043) in 2012 and ($0.081) in 2011.
The company's estimated equity value stands at $7,712,500. Cash conversion cycle for
2013 was good with days of inventory outstanding at 48.4 days, days sales outstanding
at 25.2 days and dayas payable outstanding at 64.2 days. This resulted in a CCC of 9.4
days.

With a good performance in 2012, the company continued the progress in 2013
acquiring a number of assets including a 75% stake in Titan. The company also
benefited by obtaining a deal with the Bank of New Zealand for a new debt facility
ensuring that its investments plan are not stopped.

The company's annual report however also showed that equity-to-assets ratio is
at 55.4%. In 2012, this was 60.3%. What this means is that the company is owned by
its shareholders. Most agree however that an equity-to-assets ratio of at least 70% in
order for the company to borrow money easily.

Given all these facts, one can conclude that the Mercer Group has to remain
vigilant if it wants to continue experiencing good financial performance. For example,
though the company reported a net profit of $778,000 for the year ended June 30,
2013, the profit margin was at 2%. In terms of liquidity, the Mercer Group shows
relatively good result with a ratio of 1.43. This means that the company is able to meet
its short-term obligations.

To be able to fully exploit what they have started in 2012, the Mercer Group
needs to be able to realize the potential of its investments. In addition to its purchase
of a 75% stake in Titan, the company has also invested in a number of new
technologies. It has spent more than $1 million in different innovations and new
technologies.

Mercer Group must also be able to close license agreements in order to enter the
North American market. The company remains to focused on New Zealand and
Australia. However if it does manage to obtain rights to the North American market this
could greatly help the company in ensuring a more stable future.