The August 2018 MCS centres on the fictional high-end camera manufacturer, Montel. Montel has done very well to register solid profit growth in a no-growth industry through good cost-control and an excellent senior management team. The company will need to find a way to replace their fast-fading bridge and compact models however, and they are still hugely reliant on those products. Montel has plenty of financing options with gearing (debt/equity) of just 5% meaning they can very comfortably take on more loans if they wish to finance an expansion.
The consolidated statement of profit or loss to March 2018 reflects the challenging market conditions for camera manufacturers given the relentless rise of smartphones as a viable alternative to standalone cameras. Montel's revenues are down by 0.8% and gross profit has declined by 1.1% given the necessarily high cost of producing such high-end camera models. Montel does however, demonstrate good cost discipline in selling, general and administrative expenses, which have declined by 3.5% in the last year. This allows the company to maintain an improving level of profitability, with the net profit for 2018 rising by 11% in comparison to 2017. That is impressive profit growth in a no-growth market demonstrating the importance of tight cost control for Montel.
Turning to the consolidated statement of financial position we see that camera manufacturing is an asset-intensive business with PPE representing by far the biggest entry on the balance sheet. The fact that goodwill has risen by 14.5% hints at acquisitions by Montel over the past year. These acquisitions are yet to bear fruit though in the form of revenue growth. Inventory days has risen from 145 days to 151 days, tying up cash in the business for longer. This is problematic as Montel may get stuck with soon-to-be obsolete bridge and compact cameras which are in relentless decline as people opt for smartphones instead of these entry-level cameras. 75% of Montel's net profit is being paid out in dividends to shareholders. Overall, the minor growth in total assets points to a company biding its time and happy to adopt a wait-and-see approach to future market developments.
The segmental information presented on regional and product performance in 2018 compared to 2017 shows how reliant Montel still is on its lower-end bridge and compact camera models. Those two account for 55% of the 2018 revenues yet are declining rapidly at 4% (bridge) and 8% (compact). There is promising growth for the company's higher-end models and that growth will need to continue if Montel is to replace the fast-declining revenues of its two most basic camera models. In the regions, only Europe registered revenue growth in 2018, while the Other region (LatAm, Middle East, Africa?) fell by almost 8% on the reveue-front and declined 14% in terms of gross profit. Clearly, Montel's high-pricing is hurting it in those developing markets. It's also notable that the higher-end models have the lowest gross profit margins due to the high costs associated with selling through Montel's own-brand stores for example.
Montel's main rival, Kira, shows similar trends in their financial statements, only more positive. This seems to be due to the fact that Kira is a more diversified company through their scientific instruments arm. This additional business area has seen them grow revenues by 12.4% in 2018 and net profits by 31%. Kira is also investing more aggressively than Montel, with total assets increasing by 2.4% in 2018 compared to growth in total asses of just 0.9% for Montel. Kira is in a stronger position to make the kinds of investments that will secure revenue growth into the future due to its increased earnings from its scientific instruments business.
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