The allure of the annual report (Part II)
As promised, here's the remaining section of the annual report that I will read through to see whether this company is worth investing in. I will be using Christian Dior's (CDI) 2013 Annual Report as a reference. Sorry I took such a long time to post this, I was busy with lizard hunting in my garden.
Business risk factors and insurance policy
I kinda like this section as risks are inevitable and what I am looking for is how the company manages their risk. There are four ways of managing risks which I learned when I was in school. TARA which stands for transfer, accept, reject and avoid is what a company can do but sometimes companies leave it open ended as to what their choice is. Well then it's up to you to go and find out and decide whether this risk is well managed by the company.
Naturally I am more concerned about specific risks to the company and whether there is effective risk management policies in place to prevent a major disaster from happening. Among all the risks in this section, I decided that I needed to find out more about two points in contractual constraints that bothered me.
One of which was a minimum dividend amount of 50% for Moët Hennessy and DFS which raised my eyebrows! The other was their commitment to acquire the stakes of their business partners which was valued at 5.9 billon euros and is recognized under "Other non-current liabilities" in their balance sheet. I would have to jump to Note 20 to find out more information on this as it is quite a hefty amount.
Financial Policy
This is an important section where the company goes into more details on its current financial structure and dividend payout. It's key to know the mix of credit facilities they have and its terms to see whether there has been any mismatch, i.e. using long term credit facilities for working capital. I'm always fascinated with the levels of debt a company has and sometimes it has put me off certain companies. Strangely that did not affect the share price but then yet again why wait for a ticking time bomb?
Exceptional events and litigation, Subsequent events, Recent developments and prospects
Key takeaways from this section would be whether the lawsuits have ended and whether the company is in a better position regardless of whether they are the plaintiff or the defendant. For CDI, it seems that everything was resolved nicely and there were no ongoing lawsuits. There were no surprises in the subsequent events or recent developments and prospects as well.
Management Report of the Board of Directors - CDI Parent Company
There are 9 sub-sections thus I'll just run through the key points that I look out for. I noted that their results consist primarily of dividends from LVMH less financing of the company thus the question arises as to whether it's better to buy CDI or LVMH since both companies are listed.
Next, CDI have more than doubled their dividend payout for 2013 from 2012 which is important for investors looking for a good dividends. But the question would be whether that trend is set to continue in future is more critical to me. The share ownership is another area I look out for especially if there is a majority shareholder and I usually do some googling to find out more about them especially if they also participate in the management of the company.
I also check to see how well taken up is the share option purchase plans, the key personnel granted these options which I would later cross reference to find out their positions and contributions as well as the potential dilutive effect if these options were to be exercised. They have an ongoing share repurchase program which is set to end June 2016 with the maximum portion of capital capped at 10% and maximum price per share capped at 250 euros. Currently the share price is at 146.60 euros so there's still a long way to go before it reaches 250 euros.
With regards to executive compensation, the only question I have is whether the executive delivered value to their shareholder in relation to his or her overall compensation package.
Management Report of the Board of Directors - Workforce, Environmental and Social Report
I usually read through this section as sometimes the human resource policies do sometimes appeal to me as after all humans are still the ones that can make or break a company. So far, Yakult and Unicharm recruitment policies left a deep impression on me and I think that their policies have delivered them the dual aim of being employee friendly and yet very much appropriate for their business model.
CDI mentioned that although they own lands for champagne and cognac production, it is insufficient for their needs thus they purchase the bulk of it from a network of independent producers. It seems that most of the big brands do this blended concoction as opposed to small independent labels who simply sell what they harvest from their lands.
Report of the Board of Directors on the exceptional distribution in kind of Hermes International shares
I won't go into detail on this part as this is company specific but in a nutshell this relates to the Hermes, CDI and LVMH's little unhappiness which ended up in courts and was resolved amicably. In an event that a company has any unusual events, it is important to read through it and to come to a conclusion on how this would affect the company's share price.
Report of the Chairman of the Board of Directors
This section of the report relates to corporate governance of CDI and whether it has departed from the recommended code which varies depending on which part of the world they are in. Usually I take note of whether the independent directors are truly independent, whether they have to hold a minimum number of shares in the company as well as scan through its risk management and internal control systems.
I won't be going through the consolidated financial statements which is the last section of the annual report since I'll be writing about CDI in my next post.
I kinda like this section as risks are inevitable and what I am looking for is how the company manages their risk. There are four ways of managing risks which I learned when I was in school. TARA which stands for transfer, accept, reject and avoid is what a company can do but sometimes companies leave it open ended as to what their choice is. Well then it's up to you to go and find out and decide whether this risk is well managed by the company.
Naturally I am more concerned about specific risks to the company and whether there is effective risk management policies in place to prevent a major disaster from happening. Among all the risks in this section, I decided that I needed to find out more about two points in contractual constraints that bothered me.
One of which was a minimum dividend amount of 50% for Moët Hennessy and DFS which raised my eyebrows! The other was their commitment to acquire the stakes of their business partners which was valued at 5.9 billon euros and is recognized under "Other non-current liabilities" in their balance sheet. I would have to jump to Note 20 to find out more information on this as it is quite a hefty amount.
Financial Policy
This is an important section where the company goes into more details on its current financial structure and dividend payout. It's key to know the mix of credit facilities they have and its terms to see whether there has been any mismatch, i.e. using long term credit facilities for working capital. I'm always fascinated with the levels of debt a company has and sometimes it has put me off certain companies. Strangely that did not affect the share price but then yet again why wait for a ticking time bomb?
Exceptional events and litigation, Subsequent events, Recent developments and prospects
Key takeaways from this section would be whether the lawsuits have ended and whether the company is in a better position regardless of whether they are the plaintiff or the defendant. For CDI, it seems that everything was resolved nicely and there were no ongoing lawsuits. There were no surprises in the subsequent events or recent developments and prospects as well.
Management Report of the Board of Directors - CDI Parent Company
There are 9 sub-sections thus I'll just run through the key points that I look out for. I noted that their results consist primarily of dividends from LVMH less financing of the company thus the question arises as to whether it's better to buy CDI or LVMH since both companies are listed.
Next, CDI have more than doubled their dividend payout for 2013 from 2012 which is important for investors looking for a good dividends. But the question would be whether that trend is set to continue in future is more critical to me. The share ownership is another area I look out for especially if there is a majority shareholder and I usually do some googling to find out more about them especially if they also participate in the management of the company.
I also check to see how well taken up is the share option purchase plans, the key personnel granted these options which I would later cross reference to find out their positions and contributions as well as the potential dilutive effect if these options were to be exercised. They have an ongoing share repurchase program which is set to end June 2016 with the maximum portion of capital capped at 10% and maximum price per share capped at 250 euros. Currently the share price is at 146.60 euros so there's still a long way to go before it reaches 250 euros.
With regards to executive compensation, the only question I have is whether the executive delivered value to their shareholder in relation to his or her overall compensation package.
Management Report of the Board of Directors - Workforce, Environmental and Social Report
I usually read through this section as sometimes the human resource policies do sometimes appeal to me as after all humans are still the ones that can make or break a company. So far, Yakult and Unicharm recruitment policies left a deep impression on me and I think that their policies have delivered them the dual aim of being employee friendly and yet very much appropriate for their business model.
CDI mentioned that although they own lands for champagne and cognac production, it is insufficient for their needs thus they purchase the bulk of it from a network of independent producers. It seems that most of the big brands do this blended concoction as opposed to small independent labels who simply sell what they harvest from their lands.
Report of the Board of Directors on the exceptional distribution in kind of Hermes International shares
I won't go into detail on this part as this is company specific but in a nutshell this relates to the Hermes, CDI and LVMH's little unhappiness which ended up in courts and was resolved amicably. In an event that a company has any unusual events, it is important to read through it and to come to a conclusion on how this would affect the company's share price.
Report of the Chairman of the Board of Directors
This section of the report relates to corporate governance of CDI and whether it has departed from the recommended code which varies depending on which part of the world they are in. Usually I take note of whether the independent directors are truly independent, whether they have to hold a minimum number of shares in the company as well as scan through its risk management and internal control systems.
I won't be going through the consolidated financial statements which is the last section of the annual report since I'll be writing about CDI in my next post.
Once I took a whole month to read through DBS annual report. It's very tiring but very educational.
ReplyDeleteI agree! But if it can help us earn $$$$, it's worth the time and effort! :)
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