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Financial Performance Management Proof Reading Service
This report is to discuss and evaluate the financial performance of a company which is listed on Australian Stock Exchange namely Abacus Property Group by analysing the historical data of last five years of the company beginning from the year 2011. The report covers both qualitative and quantitative element or performance indicators. The report discusses the background of the company and how it is placed in the industry along with overview of stock price movements of the company. The analysis of trends is being made of the items of profit and loss statement and balance sheet after which ratios have been calculated to measure the liquidity, profitability, capital structure and market aspects in relation to the performance of the company. The share price of the company is also calculated taking certain assumptions. After the evaluation of the operations and performance of company recommendations are also made in the report to the investors in order to support them in making their decision whether to invest in the company or not.
About the company
Abacus Property Group is an Australian company established in 1996 and Australian Stock Exchange in 2002 and is included in S&P/ASX 200 index. The objectives of the company are investing in core plus properties in Australia. The company holds securities in combination of three companies viz., Abacus Group Holdings Limited, Abacus Group Projects Limited and Abacus Storage Operations Limited, and three trusts viz., Abacus Trust, Abacus Income Trust and Abacus Storage Property Trust. The company invests in properties which have the growth potential in rental income and asset value. The company occupies market position being the single core plus investor listed in ASX 200. The company invests in the property investments which are likely to yield equity returns of 12-15% per year. The competitive advantage is achieved by the company by efficient management of asset portfolio and reinvestment of sale proceeds which is its Unique Selling Proposition. This results in the enhancement of income and capital growth of the company and provides great opportunities for investors to achieve good returns by minimising the risks attached to the properties. The business of company on the whole apart from investing in office, real estate and industrial properties comprises of comprises of investment in self-storage facilities, participation in property ventures, development of properties and funds management and partnership with finance providers. The business objectives focus on residential and commercial development opportunities. (Clipici, 2010)
Analysis of historical performance
The net income of the company is continuously increasing every year even after the falling revenues during the last five years. The net income grew by 23.30 % and rose to 133.50 million Australian dollars in 2015 as compared to 108.27 million in the year 2014 as observed from the financial statements of the company for last five years with the fiscal year being ended June 30 every year. Despite of fluctuating revenues the net income shows an increasing trend during past five years which shows that the company has a high potential of earning profits for its investors and shareholders. The profit margins are as follows:
Gross margin 67.27%
Net Profit margin 37.32%
Operating margin 48.62%
The net operating margin of the company in the year 2014 was 28.70% and in the year 2013 was 24.18%. This shows that the net profit from operations of the company is showing an increasing trend. The net profit margin of the real estate industry in Australia is 38.70%. (ABP;ASX and subview, 2016)
The rate of return for the investors and shareholders of the company are as follows:
Return on assets 6.56%
Return on equity 10.80%
Return on investment 6.79%
The industry rate of return on equity is 22.80%.
The Debt to total capital ratio of the company in 2015 fell down to 33.93% in 2015 as compared to 57.94% in 2014. During the last five years the debt of the company started decreasing after the year 2013. The liquidity ratios of the company for the financial year 2015 are as follows:
Current ratio 7.33
Quick ratio 7.13
The capital structure ratios of the company are as follows:
Debt to Equity ratio 0.5288
Debt to capital ratio 0.3393
The Total debt to Total Equity ratio of industry is higher than the company debt to equity ratio being 0.7590. (Preliminary, 2015)
For the year 2015 the company earned 119.33 million Australian dollars as cash flows from operating activities, cash flow from investment actives included spending of Australian dollars 31.18 million and Cash flow from financing activities included spending of Australian dollars 111.26 million on financing activities. The cash flow margin of the company came out to be 31.75% for the year 2015. The cash flow per share was recorded at $0.283 and price cash flow at $11.66. The cash flows in the year 2015 fell by Australian dollars 23.27 million as compared to the year 2014. Out of the last five years the positive cash flows can be seen only during two years and highest negative cash flows can be observed in the year 2015. This shows that the cash flows of the company are highly fluctuating. Despite of negative cash flows being large amount spent on financing and investment activities, the book value of the company per share was recorded at $ 2.61 and tangible book value at $2.55 per share in 2015. The price cash flow of industry is –$16.00.
During the last five years the dividend per share of the company is increasing at an average growth rate of 1.58% which was 1.69% in the year 2015. This shows that the company has a good track record of payment of dividends and is in line with the industry average when compared to its peers and competitors. The average dividend yield for the five years is 7% with the dividend pay-out ratio of 64.11%. The industry dividend yield is less compared to the company being 3.2%. (Engsted, 2010)
The average growth rate in the earnings per share during the last five years of the company is 27.28% and 14.73% for the year 2015. This growth rate in earnings per share has been calculated excluding extraordinary items in order to make uniform comparison with the industry average and make analysis of the performance of company which is not biased. The EPS of the company shows an increasing trend during the last five years and has been ranked in line with the industry average and that of its competitors and peers in the industry.
The market capitalization of Abacus Property Group is Australian dollars 1.79 billion with average volume of shares being 941,360 and outstanding shares of Australian dollars 556.58 million for the year 2015. The EPS of the company for the year is 0.2702 thus achieving the Price Earnings ratio of 11.92. The free float of the company amounts to 298.68 million Australian dollars. The industry market cap is 3113 billion and the price earnings ratio in industry is prevailing at 11.80.
Stock price movements
The market forecasts as of 17 June 2016 on the basis of stock price movements in the company predict that the company will outperform in the market and advises the investors to hold their position in the company. The median target for the company is 3.02 with a high estimate of 3.18 and low estimate of 2.89. The median estimate represents a -5.33% decrease from the last pike of 3.19. (SWABP, 2014)
The stock prices of the company on Australian Stock Exchange are highly fluctuating if the analysis is made of the past five year information of the changes in the stock prices of company. The following chart represents the stock price movement of the company on Australian Stock Exchange during the last five years:
Calculation of value of stock
The calculation of the value of share of Abacus Property Group is being made using the Constant Dividend Growth rate Model. For the purpose of this calculation the dividend growth rate of the company is assumed to be 4% and the rate of return is assumed to be 9%. The latest share price of the company listed on the Australian Stock Exchange S&P/ASX index is $3.210 per share. The EPS of the company for the year 2015 is $0.25 and the Dividend per share is $0.17.
Constant Dividend Growth Model
A per this model the price of a company’s share can be calculated using the following formula:
P = D (1+g)/Ke-g
Where, P is the price of the company’s share
D is the Dividend per share
g is dividend growth rate and
Ke represents return on equity
Thus the price of share of Abacus Property Group using the above formula will be:
= $ 0.17 (1+0.04)/0.09-0.04
= $ 3.54 (approx.)
The price of stock of Abacus Property Group calculated using the Constant Dividend Growth Rate model comes out to be $3.54 per share whereas the latest market price of the company as per Australian Securities Exchange listing is $3.21. There is a difference of $0.33 in both the share prices as calculated and actual. Therefore it can be concluded that the share of the company is under-priced in the Securities Market of Australia as the worth of share is more than its actual market price by $0.33. Thus there are good arbitrage opportunities for the investors dealing in the shares of the company. (Ivanovski, 2015)
Evaluation of company’s performance
The current ratio of Abacus Property Group is 7.33 and quick ratio is 7.13 for the financial year 2015 which means that the current assets of the company are 7.33 times of its current liabilities. Thus it can be concluded that the current assets of the company are capable to finance its current liability and therefore the company has a strong liquidity position in the market allowing it to gain competitive advantage in the industry of real estate development in Australia in which the other companies do not enjoy good liquidity position. The working capital requirements of the company are easily accomplished enabling the company to perform its operations in a smooth and efficient manner.
The net profit margin of the company is 37.32% which has increased in comparison to 28.70% in 2014 and 24.13% in 2013. Since the net profit of the company shows an increasing trend despite of fluctuating revenues during the past years therefore the company has a high growth potential for generating huge profits for the investors and the shareholders of the company. The dividend yield of the company is quite high at 7% as compared to the industry dividend yield of 3.2%. It shows that the company is distributing a large part of its profits to the shareholders by earning high returns on their investments. However the return on equity of the company is 10.80% which is low as compared to the return on equity of industry which is 22.80%. But the return on assets is 6.56% and with increasing net income and profit margin the company has the potential to increase the return on assets in long term. (Farmer, 2013)
On an analysis of the company’s historical data during past five years it can be observed that during recent years the debt of the company is decreasing. The debt to equity ratio of the company is 0.5288 and the debt to capital ratio is 0.3393 for the year 2015. The industry debt to equity ratio is 0.7590 which is higher than the debt equity ratio of the company. Thus the better off as compared to other companies in the industry in terms of its debt position. This gives the company competitive advantage and opportunity to enhance its position in the market through management of its capital structure.
The market capitalization of the company is 1.79 billion Australian dollars and the price earnings ratio is 11.92 as compared to the industry average price earnings ratio of 11.80. The market cap of industry is 3,113 billion Australian dollars. The price earnings of the company are better than the industry average ratio which is an advantage for the company. This shows that the value of the company represents 11.92 times of its earnings. With this price earnings ratio the cost of capital for the company comes out to be approximately 8% which is less than its Return on Equity of 10.80%. This means that the company is earning at the rate which is higher than the cost of capital for the company. The beta of the company 0.6155 times and the beta of industry is 1.15 times this shows that the risk attached to the share price of company is less as compared to the industry and thus investment in the company is less risky.(Kotane, 2015)
On the basis of above analysis of the financial and operational performance of the company evaluated from the historical data of past five years of the company it can be observed that in spite of fluctuating revenues the company is maintaining net profit margin at the industry level and there is an increasing trend in the net income of the company. The price earnings ratio of the company also shows that the cost of capital of company is less than its return on equity which means that the shareholders of the company are getting returns on their investment in excess of their cost of investment in the company. This is the advantage for investors who intend to earn profits at high rate in long term. The liquidity position of the company is also sound and the current assets are highly capable to finance its current liabilities. Apart from this the dividend yield of company is also very high as compared to industry average. However, the company shows positive cash flows in two out of the five years but the price cash flow of industry is negative and the reasons for the negative cash flows also relate to large spending in investment and financing activity which means that the cash flows from operating activities of company are positive. The return on equity when compared to industry is also less but the other factors indicating high growth potential ensure good returns to investors. Hence the investors are recommended to invest in the company due to the above mentioned reasons. (McMillan, 2014)
On the basis of above analysis and evaluation of performance of Abacus Property Group during last few years as discussed in this report it can be concluded that the company enjoys a good and secured position in the Australian market. Out of the other countries belonging to real estate industry listed on Australian Securities Exchange and trading in Stock market of Australia the price of the company’s share reflect its true worth and the investors will be able to earn good returns by investing in the shares of the company. From the overview of the stock price movements it can be concluded the price of the share of company in Australian market is highly fluctuating and as compared to other companies belonging to financial and REIT sectors of the industry it can v=be seen that the price movements of Abacus Property Group are high. Thus the performance of the company can be rated as good in context of industry performance.
(SWABP) Ferret's Stock Watch: ABACUS PROPERTY GROUP 2014, , Australian Associated Press Pty Limited, Sydney.
ABP:ASX&subview 2016 Markets.ft.com, Financial Statments
Clipici, E. & GÂDOIU, M. 2010, "COMPANY PERFORMANCE EVALUATION– GENERAL INFORMATION", Anale. Seria Stiinte Economice, , pp. 331-335.
Engsted, T. & Pedersen, T.Q. 2010, "The dividend–price ratio does predict dividend growth: International evidence",Journal of Empirical Finance, vol. 17, no. 4, pp. 585-605.
Farmer, M., Archbold, S. & Alexandrou, G. 2013, "CEO Compensation and Relative Company Performance Evaluation: UK Evidence", Compensation & Benefits Review, vol. 45, no. 2, pp. 88-96.
Ivanovski, Z., Ivanovska, N. & Narasanov, Z. 2015, "APPLICATION OF DIVIDEND DISCOUNT MODEL VALUATION AT MACEDONIAN STOCK-EXCHANGE",UTMS Journal of Economics, vol. 6, no. 1, pp. 147-154.
Kotane, I. 2015, "Evaluating the importance of financial and non-financial indicators for the evaluation of company’s performance", Management Theory and Studies for Rural Business and Infrastructure Development, vol. 37, no. 1, pp. 80-94.
McMillan, D.G. 2014, "Modelling Time?Variation in the Stock Return?Dividend Yield Predictive Equation", Financial Markets, Institutions & Instruments, vol. 23, no. 5, pp. 273-302.
Preliminary 2014 Abacus Property Group Earnings Presentation - Final 2014, , CQ-Roll Call, Inc
Preliminary 2015 Abacus Property Group Earnings Presentation - Final 2015, , CQ-Roll Call, Inc