Alliance one Analysis 2016

Alliance One

Business Model

Alliance one is one of the two world biggest tobacco merchants. They purchase, process, pack and ship tobacco leaves to the world major tobacco manufacturers. They work primarily with 3 types of tobacco (flue-cured, burley and oriental) that are the most popular for the international brand cigarettes.

The purchasing process varies according to the laws and market traditions of every country in which the company operates (actually the company purchases tobacco in 35 different countries were North America represent s 25% of the total purchases). For example, in China they purchase tobacco from local entities that purchase the tobacco directly from growers, while in India they buy tobacco throughout auctions.

The processing of the tobacco is made according to every customer necessities and specifications. Since tobacco leaves are a natural and perishable product; the processing of the raw product should be done as soon as possible in order to meet high quality standards. Hence, Alliance One has several processing plants around the world to quickly process the product and ship it according to its customer’s quality standards. “Upon arrival at our processing plants, flue-cured and burley tobacco is first reclassified according to grade. Most of that tobacco is then blended to meet customer specifications regarding color, body and chemistry, threshed to remove the stem from the leaf and further processed to produce strips of tobacco and sieve out small scrap. We also sell a small amount of processed but unthreshed flue-cured and burley tobacco in loose-leaf and bundle form to certain customers. Oriental tobaccos are handled and processed in a similar manner other than that the tobaccos are not threshed to remove stems.”^[1] 

Finally, after the processing, the company re-dries and packs the tobacco leaves, and ship them to its customers in approximately 90 countries around the world. Specifically, Europe represent 44% of the sales, United States 16% and the rest is supported by Asia and Africa.

Financial Analysis

Starting with the balance sheet, the company has a long base of current assets, which represent about 75% of total assets. Moreover, Inventory accounts for 53% of the current assets, trade receivables 20% and cash for the 14%. In the right side of the balance sheet, Alliance One shows a significant level of debt, with a financial leverage (Assets/Equity) of 7.4 times. With debt to banks represents 70% of the total liabilities.

Regarding the Income statement, the company, presents a mixed operating performance. Although revenues have been decreasing since 2014, average gross margin has been steady at 12% for the last five years; and an average operating margin is also solid at levels of 6% for the same period of time (2016 figures following the same trend). NOPAT is also positive and varies around 1.6% and 4.3% for the last 4 years. On the other hand, net results from the operation (net income) has been negative for the last 3 years (For analysis purposes the Net Income shown by the company in 2016, was adjusted to a loss, since the result is mainly driven by change in accounting consolidation policies) due to the high level of debt and hence, the relative high interest expense.