Feasibility Study-Egg Farm- Hermel

AFC Consultants International

Egg Farm TABLE OF CONTENTS

1

EXECUTIVE SUMMARY ..................................................................................... 2

2

PROJECT DESCRIPTION................................................................................... 2

3

PRODUCTION PROCESS................................................................................... 3

4

MARKET ANALYSIS .......................................................................................... 3

4.1 4.2 5 6 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8

T ARGET MARKET.................................................................................................................................................. 4 SWOT ANALYSIS ................................................................................................................................................ 4 MARKETING PLAN............................................................................................ 4 FINANCIAL PLAN ............................................................................................. 5 INITIAL INVESTMENT............................................................................................................................................ 5 MAJOR ASSUMPTIONS........................................................................................................................................... 5 PROJECTED INCOME STATEMENT ......................................................................................................................... 6 PROJECTED BALANCE SHEET................................................................................................................................ 7 PROJECTED CASH FLOWS ..................................................................................................................................... 8 RATIO ANALYSIS .................................................................................................................................................. 8 BREAK -EVEN ANALYSIS ....................................................................................................................................... 9 SENSITIVITY ANALYSIS......................................................................................................................................... 9

7

RECOMMENDATIONS AND KEY SUCCESS FACTORS ....................................10

8

ECONOMIC IMPACT EVALUATION ................................................................10

LBN/B7-4100/IB/99/0225/JC20/0105

AFC Consultants International

1 Executive Summary The proposed project consists of establishing a chicken farm for egg production in Hermel. The farm will provide quality free range eggs for the hermel caza and close vicinities. Traditionally, Hermel eggs wholesalers and retailers used to buy their eggs’ needs from neighboring Syria. However, with the rising costs of eggs in this market and the increasing transport costs, it has become too expensive and unfeasible to continue the procurement from Syria. Hence, a new farm would help to fulfill the needs of the caza for eggs. The initial investment for the project is estimated at $421,100 which includes $10,000 in land cost, $375,000 in construction costs, $19,100 in equipment, $12,000 in vehicle, and $20,000 in working capital. The farm has a capacity for 10,000 chicks, which will produce an average of 9,250 eggs per day after a cycle of 90 days. They continue production over a period of15 months before being sold at a price of $0.7 each. Then the cycle is renewed for another 18 months. The projections are taken over a period of 7 years. The farm is expected to provide a net profit of $37,612 in year 1 and can reach up to $52,830 by year 7. The internal rate of return (IRR) is 12% and the payback period, which is the period necessary to pay back the investment, is 7 years and 9 months. These results show that the project is feasible. The payback period and the IRR reflect the importance of the investment, which should be considered as a long term investment that provides satisfactory annual returns. A worst-case scenario is taken by assuming that the price per 360-egg box is at $39 instead of $40. I n this case, the business will have a seven years average profitability of $38,342 annually. The internal rate of return is 10%. The payback period is 8 years and 8 months. A best-case scenario is taken by assuming that the price is increased to $41 per 360-eggs box. In this case, the business will have a seven years average profitability of $52,058 annually. The internal rate of return is 14%. The payback period is 7 years. The project will offer 2 job opportunities: one administrator and one worker. The project will contribute to the region by providing quality eggs at competitive prices. The administrator will handle the delivery of the eggs to wholesalers and retailers in the region.

2 Project description The proposed project consists of establishing a chicken farm for eggs’ production in Hermel. The farm will provide quality free range eggs for the hermel caza and close vicinities. Traditionally, Hermel eggs wholesalers and retailers used to buy their eggs’ needs from neighboring Syria. However, with the rising costs of eggs in this market and the increasing transport costs, it has become too expensive and unfeasible to continue the procurement from Syria. Hence, a new farm would help to fulfill the needs of the caza for eggs. The farm will be built on a 2,000 m2 parcel of land. The total built-up area of the farm is 1,250 m2. The construction will take into consideration the light conditions in the farm as light is very important in the setting up of a farm for layers. It has much to do in the maturation of the growing layers and their capability to lay plenty of eggs.

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3 Production process The production process starts at buying a stock of one-day old layers from breeder suppliers. At arrival, chicks are either placed in typical layer pens or reared in a pullet house. At the hatchery, chicks are vaccinated according to the producer’s specifications Chicks placed in pullet houses are reared on a floor covered with absorbent materials, such as pine shavings. During the first week, pullet chicks are usually beak trimmed. From chick placement through approximately 90 days of life, the pullets are fed according to body weight gain and/or age. Moreover, they are heated as shown in the below table. The goal is to raise a strong and healthy bird that can support egg production. Week

Temperature degrees (C)

1 2 3 4 5 6 throughout layer cycle

32 30 27 24 22 22

Young birds are fed a high protein diet (20 percent) during the first few weeks of life. This level continuously decreases until it reaches approximately 12 to 15 percent protein during egg production. After 90 days, the chicks would not require any heating. The farmer would just feed them and give them vaccines twice over a period of 15 months. The total production cycle is 18 months. At the end of the cycle, which extends over 18 months approximately, the hens are sold at $0.7 to $1 each.

4

Market Analysis

There are around 2,000 farms in Lebanon producing 400 million table eggs per year. There are 2 types of breeders: · ·

Layers: Chickens raised to lay eggs Broilers: Chickens raised for meat production.

Today, there is no breeder industry i n Lebanon. Producers import breeders mainly from European countries. Tanmia imports breeders from its own company in Egypt. Table eggs are sold in boxes containing 360 eggs. The estimated wholesale market size is around USD 34 million. Large players sell directly to: · Large clients such as supermarkets, restaurants, hotels, etc... · Individuals through their retail outlets Small and medium size players go through wholesale companies and do not sell directly to clients.

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Selling directly to large clients’ puts producers at risk as the economic recession is forcing many businesses to close down. Payment terms are different for each client and range from 1 to 4 months As for Hermel caza, there are no chicken farms for eggs as most wholesalers, retailers and individuals had traditionally relied on buying the eggs from Syria. However, more recently, prices have tremendously increased in Syria and the rising cost of fuel have made it unfeasible to continue supplying the local market from Syria. Hence, it became logical to establish a local egg production to meet the local demand in the caza and its vicinities.

4.1

Target market

The chicken farm for eggs will target the local retailers as well as wholesalers, and will offer quality eggs at competitive prices.

4.2

SWOT Analysis

STRENGTHS § There is no similar project in the Hermel caza. Hence, it will be filling a need in the area. §

WEAKNESSES ·

T h e p roject ensures immediate returns. Within a period 3 months, the laying chicks start producing eggs.

OPPORTUNITIES § The lack of egg farms in the region represents an important opportunity for the project. In fact, local wholesalers and retailers used to buy the eggs from neighboring Syria. The rising cost of eggs added to high transport costs is making it more difficult to continue obtaining supplies from this market. §

The increasing costs of feed, have been matched by price increases in such a way that the profit margins have been maintained at satisfactory levels in the business.

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Dealing with wholesalers and retailers may require long payment terms, which will squeeze the cash flows of the company.

THREATS · The hens could be affected by diseases, for this reason, it is imperative that the farm maintains a regular vaccination schedule. · Production rates could be negatively a f f e c t e d b y temperature extremes. Hence, the farm administrator should constantly maintain control on temperature levels to ensure optimal conditions. ·

The difficult economic situation in the country could affect the business, especially with the diminishing purchasing power of the population.

Marketing Plan

The egg farm will base its marketing strategy on the following: ·

Establishing direct contacts with wholesalers in Hermel and Bekaa region and eventually over all the Lebanese territory.

·

Ensuring high quality eggs are delivered on a regular and consistent basis to wholesalers and retailers.

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AFC Consultants International

6 Financial Plan This section details the calculations, assumptions and methodology used as a basis for the projections of the expected financial performance of the egg farm.

6.1

Initial Investment

Investment Requirements Items Land Construction of farm Egg laying boxes Feeders Automatic drinkers Packaging boxes (reusable) Vehicle Working capital Total Investment Cost

Unit cost 5 300 60 12 18 2.5 12,000

Qty Total Cost (in $) $10,000 2,000 $375,000 1,250 $7,200 120 $2,400 200 $9,000 500 $500 200 $12,000 1 $20,000 $436,100

The above table shows the various investments needed for the establishment of the egg farm. The initial investment for the project is estimated at $421,100 which includes $10,000 in land cost, $375,000 in construction costs, $19,100 in equipment, $12,000 in vehicle, and $20,000 in working capital. The farm’s capacity is for 10,000 laying hens.

6.2

Major assumptions

The assumptions are conservative and are based on achievable market levels. The following table shows the main assumptions for the income statement. The cost of layer chick (1-day old) is $0.85. The cost of feed + vaccine + heating for the first 90 days amounts to $3.7 per chick. Following this period of 90 days, the chicks do not require heating anymore, but would need vaccines for $0.24 and feed for $1.73 per month per chick. The 10,000 laying hens produce an average of 9,250 eggs per day for a period of 13 months out of a total production cycle of 18 months. The price per box of 360 eggs (12 cartons of 30 eggs each) is currently at $40. The financial plan takes into consideration annual increases in price of 2%. The laying hens are sold at a price of $0.7 each after the 18-months cycle is over. Income Statement Assumptions Cost of layer chick (1 day old) Cost of feed+vaccines+heating (90 days) Cost of feed/chicken (over period of 15 months) Cost of vaccine per chicken Number of layer chicken Quantity of eggs produced per day Net production period out of a total of 18 months Net production period Number of production days per year Price per box (360 eggs) Price increases Packaging cost Price of chicken at end of 18 months cycle Transport costs Annual increase in general expenses Dividends payout ratio (year 2 forward) Income Tax Rate (establishment)

Hermel - Feasibility Study – Egg Farm

$0.85 $3.7 $1.73 $0.24 10,000 9,500 13 72.2% 260 $40 2% $10.0 $0.7 2.0% 2% 90% 2%

per per per per

chicken chicken month per chicken the 15 months

eggs months days annually per 140 cartons per chicken of sales

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The plant will have 2 employees, out of which is one administrator and one worker. An annual increase in general expenses of 2% is taken into account to account for inflation factors. The dividends payout starting in year 2 and forward will be paid at 90% of the net profits.

Balance Sheet Assumptions 2 months of sales 2 months of cost of goods sold 1 month of cost of goods sold

Accounts Receivable Inventory Accounts payable

The farm’s accounts receivable are assumed to represent 2 months of sales and the inventory to represent 2 months of cost of goods sold. The accounts payable are assumed to represent 1 month of cost of goods sold.

6.3

Projected Income Statement

Egg Farm INCOME STATEMENT Sales Sales of chicken at end of cycle Total Revenues Cost of layer chicks Cost of feed + vaccine+ heating over 90 days Cost of feed during the rest of the year Cost of vaccine during rest of the year Packaging costs Transport costs Labor cost Administrator salaries Other charges Depreciation Total expenses Earnings before tax Tax Net profit (loss) Net profit margin

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 274,444 279,933 285,532 291,243 297,067 303,009 309,069 7,000 7,140 7,283 7,428 7,577 7,729 274,444 286,933 292,672 298,525 304,496 310,586 316,798 8,500 36,500 155,250 2,400 5,881 5,489 3,960 4,800 500 12,785 236,065 38,380 768 37,612 13.7%

8,670 37,230 158,355 2,448 5,999 5,739 4,039 4,896 510 12,785 240,670 46,263 925 45,338 15.8%

8,843 37,975 161,522 2,497 6,119 5,853 4,120 4,994 520 12,785 245,228 47,444 949 46,495 15.9%

9,020 38,734 164,753 2,547 6,241 5,971 4,202 5,094 531 12,785 249,877 48,648 973 47,675 16.0%

9,201 39,509 168,048 2,598 6,366 6,090 4,286 5,196 541 12,785 254,619 49,877 998 48,880 16.1%

9,385 40,299 171,409 2,650 6,493 6,212 4,372 5,300 552 11,285 257,956 52,630 1,053 51,578 16.6%

9,572 41,105 174,837 2,703 6,623 6,336 4,460 5,406 563 11,285 262,889 53,909 1,078 52,830 16.7%

The income statement shows satisfactory income levels with a seven-year average net profit margin of 16%. Of course, these results will depend on market conditions and the ability of the owners/administrator to carefully manage the operations and especially costs and operating charges. The company reaches a net profit that exceeds $52,000 in year 7.

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6.4

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Projected Balance Sheet

The balance sheet shows the projected assets and liabilities of the company.

Egg Farm BALANCE SHEET Assets Cash and banks Accounts receivable Inventory Total current assets Land Construction Equipment Vehicle Accumulated depreciation Net Fixed Assets Total assets

Year 1

Liabilities & Owners' equity Accounts payable Current liabilities Capital Retained earnings Owners' equity Total liabilities & owners' equity STATEMENT OF RETAINED EARNINGS Retained earnings at 1 January Net profit (loss) for the year Dividends Retained earnings at 31 December

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

16,703 45,741 25,331 87,775 10,000 375,000 19,100 12,000 12,785 403,315 491,090

31,781 47,822 25,838 105,441 10,000 375,000 19,100 12,000 25,570 390,530 495,971

48,097 48,779 26,355 123,230 10,000 375,000 19,100 12,000 38,355 377,745 500,975

64,508 49,754 26,882 141,144 10,000 375,000 19,100 12,000 51,140 364,960 506,104

81,017 50,749 27,419 159,186 10,000 375,000 19,100 12,000 63,925 352,175 511,361

96,273 51,764 27,968 176,005 10,000 375,000 19,100 12,000 75,210 340,890 516,895

111,630 52,800 28,527 192,957 10,000 375,000 19,100 12,000 86,495 329,605 522,562

17,378 17,378 436,100 37,612 473,712 491,090

17,725 17,725 436,100 42,146 478,246 495,971

18,080 18,080 436,100 46,795 482,895 500,975

18,441 18,441 436,100 51,563 487,663 506,104

18,810 18,810 436,100 56,451 492,551 511,361

19,186 19,186 436,100 61,609 497,709 516,895

19,570 19,570 436,100 66,892 502,992 522,562

Year 1

Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 37,612 42,146 46,795 51,563 56,451 61,609 45,338 46,495 47,675 48,880 51,578 52,830 40,804 41,845 42,908 43,992 46,420 47,547 37,612 42,146 46,795 51,563 56,451 61,609 66,892

0 37,612

The company is expected to start distributing dividends starting in year 2 a t $40,804 and $47,547 by year 7.

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6.5

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Projected Cash Flows

The following table shows the projected cash flows of the project. Egg Farm STATEMENT OF CASH FLOWS

Year 1

Net income Adjustments to reconcile net income to cash provided by operating activities Depreciation Changes in receivables Change in inventories Change in payables Total Adjustments Cash provided by operating activities Cash Flow from Investing Activities Capital expenditures Investment in fixed assets Net cash used in investing activities Cash flow from financing activities Capital injection Dividends distributed Cash provided by financing activities

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

37,612

45,338

46,495

47,675

48,880

51,578

52,830

12,785 (45,741) (25,331) 17,378 (40,909) (3,297)

12,785 (2,081) (507) 348 10,544 55,882

12,785 (956) (517) 355 11,666 58,161

12,785 (976) (527) 362 11,644 59,319

12,785 (995) (538) 369 11,621 60,501

11,285 (1,015) (548) 376 10,098 61,676

11,285 (1,035) (559) 384 10,074 62,905

(416,100) (416,100)

-

-

-

-

-

-

436,100 436,100

(40,804) (40,804)

(41,845) (41,845)

(42,908) (42,908)

(43,992) (43,992)

(46,420) (46,420)

(47,547) (47,547)

Cash at beginning of year Changes in cash

16,703

16,703 15,078

31,781 16,316

48,097 16,411

64,508 16,509

81,017 15,256

96,273 15,357

Cash at end of year

16,703

31,781

48,097

64,508

81,017

96,273

111,630

The projected cash flows show the initial net investment in the land, construction and equipment in year 1, which are financed by capital injection of $436,100. In year 1, the farm starts making profits. The business is able to start distributing dividends by year 2.

6.6

Ratio analysis

The following table shows the main financial ratios for the Corn fermentation plant. Ratio Analysis Liquidity Ratios Current Ratio Working Capital Profitability Ratios Net Profit Margin Financial Strength Total Debt to Owners' Equity Management Effectiveness Return on Assets Return on Equity = ROE Return on Investment = ROI Asset Management (Efficiency) Total Assets Turnover: Sales/tot assets Working Capital Cycle Days Sales Outstanding Days of inventory Days of payables

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

5.1 70,397

5.9 87,716

6.8 105,150

7.7 122,703

8.5 140,376

9.2 156,819

9.9 173,387

13.70%

15.80%

15.89%

15.97%

16.05%

16.61%

16.68%

3.7%

3.7%

3.7%

3.8%

3.8%

3.9%

3.9%

7.7% 7.9% 9.3%

9.1% 9.5% 11.6%

9.3% 9.6% 12.3%

9.4% 9.8% 13.1%

9.6% 9.9% 13.9%

10.0% 10.4% 15.1%

10.1% 10.5% 16.0%

0.56

0.58

0.58

0.59

0.60

0.60

0.61

Working Capital Turnover=Sales/Working Capital

Hermel - Feasibility Study – Egg Farm

60 45 30

60 45 30

60 45 30

60 45 30

60 45 30

60 45 30

60 45 30

3.9

3.3

2.8

2.4

2.2

2.0

1.8

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The current ratio, which is computed by dividing current assets by current liabilities, shows increasing and high levels throughout the years. The working capital is positive in all the years, confirming the ability of the company to meet its short term liabilities. The net profit margin increases from a level of 13.7% and reaches 16.7% by year 7. The return on average assets, which is computed by dividing net profits by total assets, shows how much profit the company is able to achieve from the use of its assets. This ratio has an average of 10% over the 7 years. The return on average investment shows healthy levels fueled by the growth in profitability. The average return on investment is around 14%. The total assets turnover shows how well the management is making use of its assets. The assets turnover is computed by dividing sales over total assets. The company has a relatively high investment in fixed assets due to the construction budget for the farm. The days of receivable are at 60 days, i.e. 2 months of sales, the days of inventory represent 45 days of cost of goods sold and the days of payables represent 1 month of cost of goods sold.

6.7

Break-even analysis

The following table shows the annual revenue levels needed for the business project to break even. Thus, an average of $17,028 in year 1 is a minimum level for the egg farm to break even. Chicken Farm For Eggs Break-even Analysis Total Revenues Total Variable Costs Total Fixed Costs Break-even Revenues

6.8

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

274,444 60,330 13,285

279,933 60,172 13,295

285,532 61,375 13,305

291,243 62,603 13,316

297,067 63,855 13,326

303,009 65,132 11,837

309,069 66,435 11,848

17,028

16,935

16,948

16,961

16,975

15,078

15,092

Sensitivity analysis

The internal rate of return (IRR) is 12% a n d t h e payback period, which is the period necessary to pay back the investment, is 7 years and 9 months. These results show that the project is feasible and provides satisfactory returns. A worst-case scenario is taken by assuming that the price is at $39 instead of $40 per 360egg box. In this case, the business will have a seven years average profitability of $38,342 annually. The internal rate of return is 10%. The payback period is 8 years and 8 months. A best-case scenario is taken by assuming that increase in price from $40 to $41 per 360egg box. In this case, the business will have a seven years average profitability of $52,058 annually. The internal rate of return is 14%. The payback period is 7 years. Sensitivity Analysis Average net income Average net profit margin Internal rate of return (IRR) Payback period in years

Worst-case $38,342 14%

Most likely $45,200 16%

Best-case $52,058 18%

10% 8 years and 8 months

12% 7 years and 9 months

14% 7 years

These results show that the project is feasible and provides satisfactory returns to its shareholders.

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7 Recommendations and key success factors In order to achieve satisfactory results, the following recommendations should be taken into consideration: · · · · · ·

· · · · · · ·

Keeping hens healthy: A hen that is healthy and not badly stressed will be resistant to infection by Salmonella bacteria. Maintaining optimum temperature and air quality in the farm. Ensuring that the water supply is clean and uncontaminated. Hens should not be overcrowded. Monitoring feed and water consumption closely to be able to identify and deal with a disease outbreak as soon as possible. Maintaining good biosecurity, e.g., keeping birds, animals and unauthorized people out of the layer house. Farm workers should avoid contact with poultry other than birds in the farm flock. Keeping the farm clean: A farm that is clean and free of vermin will harbor fewer Salmonella bacteria and present fewer opportunities for contamination of eggs. Manure should not be allowed to build up on dropping boards. Dropping should fall freely away from cages to minimize the number of eggs soiled by fecal materials. Scraping or washing dried yolk from broken eggs. Handling eggs properly: Fresh, whole eggs contain natural resistance factors that inhibit bacterial growth if the eggs are kept cool. Collecting all eggs promptly, especially in hot weather as eggs easily spoil in a warm surrounding Handling eggs carefully to minimize cracks. Layers will lay eggs regularly if they are kept away from noise and disturbances.

8 Economic Impact Evaluation The project will offer 2 job opportunities, of which is one administrator/driver and one worker. The project will contribute to the general enhancement of socio-economic environment in the caza and will help to provide quality fresh eggs at competitive prices.

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