Financial Resilience
Landcare Research needs flexibility to respond to changes in the external environment and pursue strategic opportunities. In determining a tailored rate of return to shareholders, we use the following principles:
- The rate of return on equity (RoE) needs to be sustainable to support the organisation.
- The Board proposes a lower tailored return on equity so that it can support the Databases and Collections and strategic investments, which will enhance science, provide benefit to New Zealand and underpin future value.
- The targeted return on equity will be reviewed by the Board over the planning period as other strategic investment opportunities with long-term benefits are presented.
The MBIE Strategic Funding Agreement, which is extended to 30 June 2017, has historically provided a degree of certainty but no recovery of inflation (continuing its erosion in real terms). We expect strong competition in the science sector for other sources of government and private sector revenue. We have made the financial assumption that equivalent funding will continue to be received to support our Statement of Core Purpose.
Our ability to ensure financial viability through a sustained period of fiscal pressure will be critical to the ongoing success of Landcare Research.
Financial Operating Plan
The 5 year financial plan reflects modest but steady revenue growth and continuing tight control and efficiency gains on operating costs.
Financial performance and position (consolidated group)
| For the year ending 30 June | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | |
|---|---|---|---|---|---|---|---|
| Target | Forecast | Target | Target | Target | Target | Target | |
| Revenue | 59.2 | 57.3 | 61.9 | 62.3 | 62.9 | 63.7 | 64.8 |
| EBIT2 | 2.1 | 1.1 | 1.3 | 1.5 | 2.1 | 2.6 | 2.9 |
| Total Assets | 50.0 | 52.0 | 53.8 | 53.5 | 53.9 | 55.9 | 58.3 |
| Capital Expenditure | 5.5 | 4.1 | 7.8 | 7.1 | 4.1 | 3.6 | 4.1 |
| Dividend | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
| Equity ratio3 | 66% | 64% | 62% | 63% | 66% | 68% | 69% |
| Gearing4 | 0 | 0% | 0% | 0% | 0% | 0% | 0% |
Footnote [1] Revenue growth in 2016 and 2017 includes BioHeritage Challenge funds dispersed to other organisations. Landcare Research is the host for this Challenge and we are contractually responsible to MBIE for delivery of the Challenge work programme
Footnote [2] EBIT: Earnings before interest, financial lease charges and tax, and after committed business development expenditure and technology service expenditure
Footnote [3] Equity ratio: Average shareholders’ funds ÷ Average total assets
Footnote [4] Gearing: Interest bearing debt ÷ Interest bearing debt + shareholders’ funds, expressed as a percentage
Financial strength and flexibility
In 2017 Landcare Research revenue is budgeted at $61.9M, up by $4.6M compared with the 2016 year, driven by Landcare Research’s leadership of the BioHeritage National Science Challenge. Of this, $4.4M is accounted for by subcontractor costs associated with the BioHeritage Challenge, resulting in underlying net revenue increases for Landcare Research of $0.2M compared with the 2016 year. This year’s SCI continues the approach of prior years, reflecting an expectation of only limited underlying revenue growth opportunity through the period beyond that associated with the National Science Challenges.
Tailored Return on Equity
Landcare Research’s tailored return on equity in 2017 is 6.9%. The tailored return on equity recognises
- the investment made in Collections and Databases for the benefit of New Zealand, and for which a commercial return cannot be expected. In addition to the $7.3m of MBIE Strategic Funding focused on Collections and Databases, we invest an additional $1 M per annum.
- the continued reinvestment of surpluses in strategic investment opportunities that will create long-term benefits. We intend to reinvest surpluses with an EBIT impact of $0.8 M each year. This will be financed from both science research surplus and the performance of prior investments.
Balance Sheet
Landcare Research’s science requires an ongoing investment in scientific equipment if we are to secure revenue and be financially sustainable. Beyond this underlying capital spending requirement, the priority for 2017 and 2018 is to redevelop aspects of the Lincoln site consistent with the concept of the Lincoln Hub and to provide modern fit-for-purpose facilities for our people.
Cashflow and Dividend
Landcare Research expects to continue to deliver steady operating cash flows, with an EBITDAF of $5.1M in 2017, which is forecast to improve or remain at similar levels through the 5 years of this SCI, with a predicted EBITDAF of $6.9M in 2021.
Based on the strategic capital investment needs identified above, no dividends are planned during the period of this SCI; however, the Landcare Research Board will review this on an annual basis.
Risks
There is forecasting uncertainty associated with Landcare Research revenue budgets, in particular related to the National Science Challenges, contestable funding and MBIE Strategic Funding:
- In excess of $3M per annum of contestable MBIE research contracts end in 2016, and there is uncertainty about the contestable process in future and our ability to secure revenues in what is likely to be an increasingly competitive process.
- There are risks and opportunities of competition and disruptive technologies with the potential to impact capability and future business sustainability.
- The MBIE Strategic Funding Agreement, which is extended to 30 June 2017, has historically provided a degree of certainty but no recovery of inflation (continuing its erosion in real terms). A review of MBIE Strategic Funding is underway; the outcome of which could positively or negatively affect our revenues beyond 2017.
- Landcare Research is confident that its plans remain robust in the near-term to potential negative volatility, and we will actively monitor and respond to any emerging risks.
Key performance indicator: The Landcare Research Group shows improvement in efficiency, while maintaining growth, investment and appropriate levels of risk.
| Actual | Forecast | Business Plan | |||||
|---|---|---|---|---|---|---|---|
|
For year ending 30 June: |
2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 |
| Efficiency: | |||||||
| Operating margin1 | 11.2% | 9.0% | 8.2% | 8.6% | 9.7% | 10.4% | 10.6% |
| Profit/ FTE | $19,679 | $16,331 | $16,174 | $16,990 | $19,467 | $21,081 | $21,917 |
| Risk: | |||||||
| Quick ratio2 | 1.33 | 1.71 | 1.34 | 1.06 | 1.08 | 1.27 | 1.45 |
| Interest coverage3 | N/A | 1026 | 34 | N/A | N/A | N/A | N/A |
| Profit volatility | 12.8% | 15.6% | 17.7% | 17.1% | 11.4% | 12.0% | 13.1% |
| Forecasting risk4 | 1.0% | 0.3% | 0.4% | 0.6% | 0.0% | 0.1% | 0.5% |
| Tailored return on equity | |||||||
| RoE before Collections and Databases | 10.1% | 7.7% | 6.9% | 7.7% | 8.6% | 9.3% | 9.4% |
| RoE before Investment | 7.2% | 4.8% | 4.5% | 5.3% | 6.2% | 6.9% | 7.0% |
| RoE NPAT5 | 5.5% | 2.9% | 2.8% | 3.6% | 4.7% | 5.4% | 5.6% |
| Growth/Investment: | |||||||
| Revenue growth | 6.4% | -1.6% | 8.1% | 0.6% | 1.1% | 1.3% | 1.7% |
| Capital renewal6 | 0.5 | 1.0 | 2.0 | 1.9 | 1.0 | 0.9 | 1.0 |
1 Operating Margin: EBITDAF ÷ Revenue, expressed as a percentage and per FTE (EBITDAF is Earnings before Income Tax before Depreciation, Amortisation and Fair value adjustments)
2 Quick ratio: (Current assets − Inventory - Prepayments) ÷ (Current liabilities – Revenue in advance)
3 Interest cover: EBITDAF ÷ Interest paid
4 Forecasting Risk: 5-year average of return on equity less forecast return on equity
5 Return on equity: NPAT ÷ average shareholders’ funds, expressed as a percentage (NPAT is net profit after tax). Shareholders’ funds: includes share capital and retained earnings
6 Capital renewal: Capital expenditure ÷ depreciation expense plus amortisation expense
 Jane Taylor Chairman |
 Dr Paul Reynolds Deputy Chair |