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AFX 9590 Group Assignment 1 Financial Analysis of TLS, TEL, and SGT
Table of Contents
1.0 Introduction .................................................................................................................... 2 1.1 Companies Background .............................................................................................. 2 1.1.1 Market Capital and Market Price ........................................................................... 2 1.1.2 General Information .............................................................................................. 2 2.0 Companies Performance Analysis ................................................................................... 4 2.1 Profitability Analysis .................................................................................................... 4 2.2 Asset Efficiency Analysis .............................................................................................. 7 2.3 Liquidity Analysis ....................................................................................................... 11 2.4 Capital Structure Analysis .......................................................................................... 13 2.5 Market Performance Analysis .................................................................................... 16 3.0 Company Representing the Best Investment ................................................................. 19 4.0 References .................................................................................................................... 20
Word Count: 3,000 Words excluding the title page, table of contents, headings, references, footer, header, tables, charts/graphs, and table of references.
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AFX 9590 Group Assignment 1 Financial Analysis of TLS, TEL, and SGT
1.0 Introduction
This report has been carefully articulated to provide analysis regarding profitability, efficiency, liquidity, capital structure, and market performance for Telstra Corporation Limited (TLS), Telecom Corporation of New Zealand Limited (TEL), and Singapore Telecommunications Limited (SGT) for the period of 2009-2013. The report first provides individual analysis of profitability, efficiency, liquidity, capital structure, and market performances for all the three companies; showing several analyses, comprising the trend analysis throughout 2009-2013, horizontal analysis, vertical analysis, and also ratio comparison between the three companies. Furthermore, the report also provides the benchmark analysis, comparing TLS, TEL and SGT to their intra-industry company which operates in US, Verizon Communications Inc. Finally, the report is concluded by providing the combined analysis, determining which of the three companies (TLS, TEL, and SGT) that has proven to have the best performance throughout the five years.
Note: Some of the ratios final values and values that were used for calculation were taken from Aspect Huntley Fin Analysis, and several other values that were not provided in the Aspect Huntley Fin Analysis were taken from the companies Annual Reports.
TLS operation dominates most parts of Australia, including rural and remote areas. It provides solutions such as fixed lines, mobiles, Internet access, and Pay TV services. TLS has also expanded internationally, for instance, its expansion to Hong Kong as CSL New World Mobility Limited. Furthermore, Telstra Global also encompasses network services across Asia Pacific, China, India, Europe and Africa. Lastly, TLS also manages submarine cable network. TEL on the other hand, has geographical limitation, in which hinders it from expanding globally (Moritz, 2012); its international operations is limited to providing integrated telecommunications between New Zealand, Australia, and several other countries globally (Aspect Huntley Fin Analysis, 2013). However, it is the dominant telecommunications service provider in New Zealand. It provides services and products not only to residential, but also to SME (Small Medium Enterprises). TEL has several business units which comprises
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AFX 9590 Group Assignment 1 Financial Analysis of TLS, TEL, and SGT
of Telecom Retail (fixed line, broadband, dial-up, and online services), fi, Gen-I, AAPT, Telecom Wholesale & International and Technology and shared services. SGT is a Singaporean Telecommunication group (Group Consumer, Group Digital Life, and Group ICT) which dominates Singapore telecommunications, covering fixed lines, mobile, data, Internet, info-communications technology, satellite and pay TV. SGT also operates in Australia, as Optus. Furthermore, SGT operates internationally, which includes association and joint ventures in Thailand, India, Philippines, and Indonesia. Moreover, SGT holds interests in several mobile communications businesses in Asia and Africa.
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AFX 9590 Group Assignment 1 Financial Analysis of TLS, TEL, and SGT
Source: (Aspect Huntley Fin Analysis, 2013) Table 1 shows the profitability ratios. Net Profit Margin measures how much earnings a company has from every dollar of its sales, whereas, EBIT Margin includes the interests and tax in the revenue calculation. Furthermore, ROE indicates returns to shareholders, which is impacted by its ROA that measures how efficient the company uses its asset to generate profit. Lastly, cash flow to sales provides the companys ability to generate cash from its current operations. If these ratios have higher values, it shows better profitability performance.
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AFX 9590 Group Assignment 1 Financial Analysis of TLS, TEL, and SGT
30.00%
20.00% 10.00% 0.00% -10.00% -20.00% -30.00% TLS Net Profit Margin TLS ROE TEL Net Profit Margin TEL ROE SGT Net Profit Margin SGT ROE 2009 2010 2011 2012 2013
Figure 1 indicates that Net Profit Margin for all three companies has a slightly declining trend from 2009-2011, due to competition from resellers' that has forced many to cut prices and lower profit. This declining trend of profits has also explained the decreasing trend of ROA, which further impacted the ROE. However, in 2012, both TLS and SGTs ROE and ROA increased; TLSs ROE increased to 31.11% and its ROA to 11.78%, whereas, SGTs ROE has also increased to 17.00% and its ROA to 10.54%. On the other hand, as figure 1 clearly pointed out, in 2012, TELs Net Profit Margin flunked to -10.16% (its EBIT Margin fell to -4.77%). This is due to the high increase in their expenses, during the demerger with Chorus limited and also due to government regulation. Therefore, there was high revenue deduction that resulted in 2012s negative value (Telecom Corporation of New Zealand Limited, 2012). This has also affected TELs negative ROA (9.21%) and further resulted in the negative ROE (-26.28%). Nevertheless, in 2013, TELs Net Profit Margin has improved significantly to 8.52% and its EBIT Margin increased to 12.63% (impacting on ROE recovery to 24.16%, which shows the ability of TEL to finally generate return to its shareholders); this is owing to the reduction of regulatory burden and additional cost saving after the demerger completion. Turning to SGT, although that it has a declining trend, its Net Profit margin and EBIT margin are still comparatively higher compared to the other two companies, which shows that It
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AFX 9590 Group Assignment 1 Financial Analysis of TLS, TEL, and SGT
has better profit-generating ability. Nonetheless, its ROE is lower compared to TLS; this might be due to its lower ROA, 9.64% as compared to TLSs ROA of 12.03% in 2013. TLS, on the other hand, has reasonable improvements from 2011-2013, as shown by the ratios. And figure 1 clearly depicted that TLS ROE is definitely higher compared to TEL and SGT. To conclude, TLS proved to have the highest and most stable ROA and ROE throughout the five years; this indicates that TLS was better at generating money that its shareholders has invested, and it was also more efficient compared to the other two companies in using its assets to generate profits.
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AFX 9590 Group Assignment 1 Financial Analysis of TLS, TEL, and SGT
Table 2. Asset Efficiency Ratios Source: (Aspect Huntley Fin Analysis, 2013)
Table 1 shows the asset efficiency performance ratios. In general, TEL has higher asset efficiency ratios, compared to SGT and TLS; this means that TEL were more efficient in converting inventory into cash and collecting cash from debtors and was also better at utilizing its assets.
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AFX 9590 Group Assignment 1 Financial Analysis of TLS, TEL, and SGT
SGT Asset Turnover Ratio (Times) TLS Asset Turnover Ratio (Times)
Asset Turnover ratio provides the companys overall efficiency in generating income per dollar of investments in assets, for both current and non-current investments. Figure 2 clearly shows that TEL was better at utilizing its assets to generate revenue. Furthermore, in 2012&2013, the difference with TLS and SGT was highly significant. However in 2009-2011, TELs operating revenue was less compared to its total assets. Throughout the 5 years, SGT and TLS operating revenue was also less compared to their total assets. According to annual report 2012, the Asset Turnover ratio of Verizon (US intra-industry) was 0.51 times. TEL and TLS managed to achieve higher Asset Turnover ratio than Verizon. So, SGT should take actions in order to utilize their assets to generate revenue more efficiently.
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AFX 9590 Group Assignment 1 Financial Analysis of TLS, TEL, and SGT
Days
80 60 40 20 0 2009
Times
12 10 8 6 4 2 0
2010
2012
Days Debtors Ratio indicates how quickly the debtors are paying; the lesser the days, the better it is. Whereas, Debtors turnover (times) indicates the number of times cash are collected from debtors in an accounting period, which means the higher the ratio, the more efficient a company is in collecting cash from its debtors. Figure 3 show that TEL has the shortest period of receiving money from debtors throughout all the five years. SGT and TLS Days Debtors have increased consecutively from 2009-2013, due to their increasing receivables. In 2013, there is a high rise in Days Debtors for SGT, due to the vast increase in its receivables. However, TELs Days Debtors has shown the opposite. Nevertheless, the average receivable collection period in 2012 for Verizon was 38.36 days (Verizon, 2012). In 2012, TEL was the only one that managed to receive money in a shorter period than Verizon, which were 35.2. Therefore, SGT and TLS should re-assess their credit policy.
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AFX 9590 Group Assignment 1 Financial Analysis of TLS, TEL, and SGT
Days
15 10 5 0 2009
Times
100 80 60 40 20 0
2010
2011
2013
TLS Days Inventory Turnover SGT Days Inventory Turnover TEL Times Inventory Turnover
Days Inventory Ratio indicates the average period of time it takes for a firm to sell its inventory, whereas Inventory Turnover (times) indicates the number of times inventory is sold in a time period (e.g. 1 year). The higher the Inventory Turnover (times), the more efficient a company is able to convert its inventory into cash. Throughout the five years, all three companies have shown fluctuation. In 2013, although TELs Inventory Turnover decreased to 63.86, the number was still higher compared to SGT and TLS; this shows that TEL was better at managing its inventory. In 2011, SGT had the lowest Inventory Turnover; nonetheless, they have managed to increase the ratio in 2012&2013. Looking at TLS, despite its improved performance in 2012, the ratio was showing a weakening trend up to 2013. In conclusion, looking at Days Inventory and Days Debtors Turnovers, TEL proved to have a more efficient entitys activity cycle (operating cycle) as compared to SGT and TLS. The time line below shows its cash cycle in 2013:
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AFX 9590 Group Assignment 1 Financial Analysis of TLS, TEL, and SGT
Both of the ratios that are shown in table 3 provide the indication of liquidity of the company. Current (working capital) Ratio provides the indication of dollar of current assets per dollar of current liabilities; the general acceptance is 2, nevertheless the acceptance differs depending on the industry. Whereas, quick asset (acid test) ratio excludes inventory from the current assets calculation; this provides the information of instant/quick liquidity of the company.
As can be seen from figure 6, throughout the five years, all three companies are showing current ratio that is on average below 1. However, TLS has been showing the steadiest increase, with 1.05 in 2013; this means TLS had $1.05 of current assets for every $1 of
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AFX 9590 Group Assignment 1 Financial Analysis of TLS, TEL, and SGT
current liabilities. SGT has also showed a steady increase up to 2012, with a current ratio of 1.05. Nonetheless, in 2013, it has decreased to 0.83. TEL on the other hand, shows slight fluctuations in its short term debt-paying ability, and has been below one all throughout the five years. Moreover, the quick asset ratio has shown the same pattern. Looking at the telecommunications industry, these companies would invest in inventories such as goods available for sale, and materials to be used in constructing and maintaining the telecommunication network; supporting sales and network expansion (Telstra Corporation Limited, 2013). Therefore, their quick asset ratio should be lower than its current ratio. In general analysis, the amount of current liabilities for all the three companies were exceeding their current assets throughout 2009-2013, which is an indication of these companies inability to pay their short term liabilities immediately. This could result in having to seek for external sources of funding (loans/bonds), in order for them to be having sufficient cash for the future investment and to reduce the amount of short term liabilities. However, comparing the three companies to Verizon, they are showing similar performance. Its current ratio is 1.01 and 0.79 and its quick asset ratio is 0.98 and 0.75 in 2011 and 2012 respectively. Therefore, in a nutshell, all the three companies are showing an average liquidity performance, and due to TLSs upward trend, TLS has shown the most promising liquidity assurance.
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AFX 9590 Group Assignment 1 Financial Analysis of TLS, TEL, and SGT
Table 4. Capital Structure Ratios Source: (Aspect Huntley Fin Analysis, 2013)
Table 4 provides the ratios which indicates the companies capital structure. If d/e ratio is greater than 100% means that the company is using more debt for its financing decision. Furthermore, the interest coverage ratio shows the ability of the company to pay its interest expense. Lastly, debt coverage ratio provides the information of the companys ability to fund its long term debt with its cash flow from its operating activities. Therefore, the greater the number, the better it is, for both interest coverage ratio and debt coverage ratio.
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AFX 9590 Group Assignment 1 Financial Analysis of TLS, TEL, and SGT
120.00%
100.00% 80.00% 60.00% TLS TEL SGT
40.00%
20.00% 0.00% 2009 2010 2011 2012 2013
Figure 7 shows that TLS has an extremely high d/e ratio compared to TEL and SGT, with $1.17 of debt for every $1 of its equity. However, comparing it to the intra-industry, Verizon (d/e ratio of 163.32% and 168.26% in 2012&2011, respectively), TLS has shown better financing composition performance. This might be due to Verizon acquisition of Hughes Telematics for $621m (Moritz, 2012). For TEL, although its d/e ratio is consecutively higher than 90% for 2009-2011, in 2012&2013, TEL has managed to reduce its debt financing significantly to 62.24% and 69.07%, respectively. This is the result of TELs tightening control of its project cost, due to the demerger with Chorus Limited. Therefore they cut down their capital expenditure. (Telecom Corporation of New Zealand Limited, 2012) SGT on the contrary, has shown the strongest financial position; its low numbers of d/e ratio provide the indication of SGT ability to issue more debt (corporate bond) in the future. In 2013, its d/e ratio was 33.05%, which means SGT has $0.33 of debt for every $1 of equity.
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AFX 9590 Group Assignment 1 Financial Analysis of TLS, TEL, and SGT
Figure 8 shows that TEL has the lowest interest coverage ratio, with its peak of having a negative ratio (-2.50) in 2012. Nonetheless, in 2013, TEL has been able to turn the table around to having earnings of 12 times higher compared to its interest expense, as a result of regulatory burden that has been reduced significantly after the post-merger with Chorus Limited. (Telecom Corporation of New Zealand Limited, 2013) Moreover, SGTs low d/e ratio throughout the 5 years explains its high interest coverage ratio of around 14 times throughout the five years; due to its low amount of debt, SGT has managed to have 15 times more earnings relative to its interest expense. In addition, SGTs debt coverage ratio has always shown a positive indication (below 1) throughout the five years. In conclusion, SGT has shown to have the better financial strength as compared to TLS and TEL. TLS in contrast, has proved to be the worst, owing to the fact that it has a high debt which might result in the company having a high cost of debts, which would increase the companys vulnerability to default risk.
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AFX 9590 Group Assignment 1 Financial Analysis of TLS, TEL, and SGT
Table 5. Market Performance Ratios Source: (Aspect Huntley Fin Analysis, 2013)
Market performance analysis provides the analysis regarding the companies performance in terms of publics view. Table 5 provides earnings per share ratio (EPS) and price earnings ratio (PER). EPS is generally considered to be the single most important variable in determining a share's price, whereas, PER reflects the willingness of shareholders to pay for the firms shares. PER has been one of the most common approaches to assess share price, the reasons are: a) PER measures the relationship between EPS and the share price b) PER does not fluctuates much over time c) If EPS increases/decreases, the share price is expected to increase/decrease as well. This new share price would be the new EPS times the constant PER
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AFX 9590 Group Assignment 1 Financial Analysis of TLS, TEL, and SGT
15.53
12.21 12.17
2009
2013
Figure 9 shows clearly that TLSs EPS is gradually decreasing from 2009-2011; with 2011 as its peak, due to the earnings that dropped by almost 16.9%. This is caused by the increased of their operating expenses, which is almost 6 times compared to the previous year (Telstra Corporation Limited, 2011). Therefore, although there is an increase in the revenue and total income generated, the high rise in the expenses has contributed more to the fall of the EPS ratio. Nevertheless, in 2012-2013, TLS has increasing earnings of 11.6%, which contributed to its EPS (27.5 cents). In terms of PER, TLS has also shown a gradual increase throughout the five years, especially in 2012&2013, which is due to the gradual increase in its market price; this provides reasons for shareholders to trust TLS. Looking at SGT, its EPS has shown slight fluctuations. In 2013, its EPS went down to 22.02c. This was the result of their net profit that declined by 2%. In constant currency terms, underlying net profit would have been stable; however, including its exceptional items, its net profit has declined by 12% to SGD3.51b. This was largely due to a one-time loss of SGD225m from the divestment of Warid Pakistan (Singapore Telecommunications Limited, 2013). Nonetheless, SGTs PER has been consistent throughout the five years. Simultaneously, their market price has also increased throughout the five years. Therefore, this provides a good reason for shareholders to trust the companys ability to perform. TEL conversely, despite of its significantly high EPS in 2012 (47.48c), its PER has shown to be decreasing. However, in 2013, its EPS dropped significantly to 11.09c, which has been due to TELs net EAT for its continuing operations has shown a down turn to NZD238m, from NZD311m. TELs mobile revenues also declined to NZD14m due to the fewer handset sales. TELs high fluctuation pattern is not providing a good sign for the shareholders.
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AFX 9590 Group Assignment 1 Financial Analysis of TLS, TEL, and SGT
In conclusion, judging from the EPS ratio alone, TLS has proved to be the better performing company compared to TEL and SGT; it has managed to provide consistent earnings that is reflected in its EPS throughout 2009-2013. In terms of P/E ratio, TLS and SGT have shown better performance as compared to TEL throughout 2009-2013. This means that shareholders were able to trust TLS and SGT more as compared to TEL.
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AFX 9590 Group Assignment 1 Financial Analysis of TLS, TEL, and SGT
Word Count: 3,000 Words excluding the title page, table of contents, headings, references, footer, header, tables, charts/graphs, and table of references.
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AFX 9590 Group Assignment 1 Financial Analysis of TLS, TEL, and SGT
4.0 References
Aspect Huntley Fin Analysis. (2013, September 6). Aspect Huntley Fin Analysis. Retrieved September 7, 2013, from http://www.aspecthuntley.com.au.ezproxy.lib.monash.edu.au/af/company/annuals ummary?ASXCode=TEL&xtm-licensee=finanalysis Aspect Huntley Fin Analysis. (2013). Aspect Huntley Fin Analysis TEL Business Summary. Retrieved September 9, 2013, from Aspect Huntley Fin Analysis: http://www.aspecthuntley.com.au.ezproxy.lib.monash.edu.au/af/company/mainvie w?ASXCode=TEL Moritz, S. (2012). Bloomberg. Retrieved September 7, 2013, from http://www.bloomberg.com/news/2012-06-01/verizon-to-acquire-hughestelematics-for-612-million-in-cash.html Singapore Telecommunications Limited. (2013). Directors report For the financial year ended 31 March 2013. Singapore: Singapore Telecommunications Limited and Subsidiary Companies. Telecom Corporation of New Zealand Limited. (2012). Annual Report For the Year Ended 30 June 2012. Telecom Corporation of New Zealand Limited. Telecom Corporation of New Zealand Limited. (2013). Annual Report for the Year Ended 30 June 2013. New Zealand: Telecom Corporation of New Zealand Limited. Telstra Corporation Limited. (2011). Telstra Corporation Limited 2011 Annual Report. Melbourne: Telstra Corporation Limited. Telstra Corporation Limited. (2013). Telstra Corporation Limited - 2013 Annual Report. Melbourne: Telstra Corporation Limited. Verizon. (2012). Verizon 2012 Annual Report. United States: Verizon.
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