BUILDERS OF VISIONS (I)

Transcription

1 VOL. #13 BUILDERS OF VISIONS (I) *DISCLAIMER. This article is prepared based on material compiled from data considered to be reliable at the time of writing, but Raine & Horne does not make any representation or warranty, express or implied, as to its accuracy, completeness or correctness. This article has been prepared for information purposes only. No part of this report may be shared, reproduced, distributed, transmitted, displayed or published in any manner without the written consent of Raine & Horne. Raine & Horne does not accept any liability, be it directly, indirectly or consequential losses or damages that may arise from any reliance based on this article.

2 About us. Incorporated in 1982, Raine & Horne International Zaki + Partners Sdn. Bhd. is a firm of Chartered Surveyors and Registered Valuers. Our practice covers a wide range of services including property valuation, investment and project management, property management, real estate agency and property consultancy. The firm currently operates twelve (12) offices in Malaysia: Kuala Lumpur, Petaling Jaya, Subang Jaya, Kelang, Johor Bahru, Melaka, Ipoh, Seremban, Kuantan, Penang, Kota Kinabalu and Kuching. Since its inception and establishment, Raine & Horne International Zaki + Partners Sdn. Bhd. has enjoyed an outstanding and enviable reputation and success. The firm has received wide recognition from all quarters, nationally and internationally. Founded in 1883, Raine & Horne is one of the world s largest real estate organisations with offices and affiliates all over the world, including in the major cities of South East Asia, Europe, Canada, USA, Fiji, Australia, New Zealand, Japan and Africa. Raine & Horne International Zaki + Partners Sdn. Bhd. aims to provide our clients with quality professional service. Raine & Horne International Zaki + Partners Sdn. Bhd. is committed to the Quality Management System required by ISO 9001:2008 Standards. Our team comprises of highly qualified partners in various expertise which authorize us to offer broad ranges of services in: Professional Valuation Services Corporate Advisory Services Project Management Property Management & Maintenance Real Estate Agency Auctioning Market Research & Feasibility Studies Property Investment Consultancy Building Auditing Bio Asset Valuation Forensic Valuation 2

3 Contents Financial Analysis Activity Ratios...12 (A) Number of days of Receivables (B) Number of days of Payables (C) Days of Payables / Days of Receivables (D) Total Asset Turnover (E) Fixed Asset Turnover (F) Working Capital Turnover 2. Liquidity Ratios...18 (A) Current Ratio (B) Quick Ratio (C) Cash Ratio (D) Summary of Liquidity Ratios 3. Solvency Ratios...22 (A) Debt-to-Equity Ratio (B) Debt-to-Capital Ratio (C) Debt-to-Assets Ratio (D) Financial Leverage (E) Interest Coverage Ratio (F) Summary of Solvency Ratios 4. Profitability Ratios...28 (A) Net Profit Margin (B) Gross Profit Margin (C) Operating Profit Margin (D) Pre-Tax Margin (E) Return on Assets Ratio (F) Operating Return on Assets Ratio (G) Return on Total Capital Ratio (H) Return on Equity Ratio (G) Summary of Profit Margin Ratios 3

4 Contents 5. Price Multiples Ratios...37 (A) Price-Earnings (P/E) Ratio (B) Price-Sales (P/S) Ratio (C) Price-Book Value (P/B) Ratio (D) Price-Cash Flow (P/CF) Ratio (E) Summary of Price Multiples Ratios References...42 Contact Us...43 International Affiliations

5 Financial Analysis Sample Selection Basis The sample size of this analysis include 10 of the largest listed companies in Bursa Malaysia based on:- i. Market capitalization ii. Main market iii. Property sector However, it must be noted that not all companies in the sample list are engaged fully in property development. Some of them might be well-diversified into other industries and might include subsidiaries such as plantation, construction, and healthcare under the group s listing. Nonetheless, the activity of property development remains the major revenue contributor to such groups. Financial Analysis Basis The state ofthe companies within the sample list is determined using 5 different measures:- i. Activity Ratios: measures how efficiently the firm is managing its assets (asset utilization or operating efficiency ratios) ii. Liquidity Ratios: measures the firm s ability to pay its short-term liabilities iii. Solvency Ratios: measures the firm s financial leverage and ability to iv. meet its long-term obligations Profitability Ratios: measures the overall performance of the firm relative to revenues, assets, equity, and capital. v. Price Multiples Ratios: measures the stock price in relative to the firm s financial metrics. A cross-sectional comparable measure is being employed in this analysis with the median value of the 10 firms being used as the average benchmark. It should be noted as well that some of the firms within the sample list have different time frame due to different financial year end period. Nonetheless, all of them are within the year of While the stock price used in computing the price multiples ratios are based on historical price for that specific firm (based on their respectively financial year end period). Some of the financial reports used are unaudited (quarterly reports). 5

6 1. Activity Ratios. 1. ACTIVITY (A) NUMBER OF DAYS OF RECEIVABLES (B) NUMBER OF DAYS OF PAYABLES (C) DAYS OF PAYABLES / DAYS OF RECEIVABLES (D) TOTAL ASSET TURNOVER (E) FIXED ASSET TURNOVER (F) WORKING CAPITAL TURNOVER SP SETIA IOI UEM SUNWAY IJM IGB MAH SING UOA E&O MRCB MEAN MEDIAN Financial Analysis 6

7 2. Liquidity Ratios & 3. Solvency Ratios. 2. LIQUIDITY (A) CURRENT RATIO (B) QUICK RATIO (C) CASH RATIO 3. SOLVENCY (A) DEBT-TO-EQUITY (B) DEBT-TO-CAPITAL (C) DEBT-TO-ASSETS (D) FINANCIAL LEVERAGE (E) INTEREST COVERAGE SP SETIA SP SETIA 63.59% 38.87% 32.95% % IOI IOI 18.20% 15.40% 13.97% % UEM UEM 34.58% 25.70% 21.49% % 9.93 SUNWAY SUNWAY 59.75% 37.40% 29.30% % 9.75 IJM IJM 28.70% 22.30% 13.54% % IGB IGB 48.89% 32.83% 28.99% % 5.92 MAH SING MAH SING 63.70% 38.91% 27.35% % 5.84 UOA UOA 2.75% 2.68% 2.26% % E&O E&O 47.99% 32.43% 29.43% % 5.38 MRCB MRCB % 64.08% 52.31% % 2.43 MEAN MEAN 54.66% 31.06% 25.16% % MEDIAN MEDIAN 48.44% 32.63% 28.17% % 9.84 Financial Analysis 7

8 4. Profitability Ratios. 4. PROFITABILITY (A) NET PROFIT MARGIN (B) GROSS PROFIT MARGIN (C) OPERATING PROFIT MARGIN (D) PRE-TAX MARGIN (E) RETURN ON ASSETS (F) OPERATING RETURN ON ASSETS (G) RETURN ON TOTAL CAPITAL (H) RETURN ON EQUITY SP SETIA 13.56% 29.07% 22.58% 18.96% 4.48% 6.86% 8.26% 8.25% IOI 62.14% 54.56% 73.48% 77.03% 8.09% 9.19% 10.94% 10.65% UEM 18.03% 31.01% 19.83% 22.89% 5.00% 5.08% 6.00% 7.22% SUNWAY 16.95% 32.81% 15.88% 20.01% 7.33% 6.40% 8.28% 13.71% IJM 27.01% 36.12% 32.65% 34.26% 9.16% 10.57% 17.12% 17.66% IGB 27.97% 56.77% 37.10% 35.89% 5.49% 6.23% 7.07% 7.62% MAH SING 11.62% 26.94% 15.61% 15.66% 8.01% 9.17% 13.30% 15.92% UOA 33.11% 43.44% 42.02% 42.74% 11.03% 13.83% 16.49% 13.26% E&O 24.09% 53.43% 38.57% 33.63% 5.92% 7.75% 8.63% 8.14% MRCB 11.05% 32.86% 27.47% 14.56% 4.33% 6.10% 7.57% 8.80% MEAN 24.55% 39.70% 32.52% 31.56% 6.88% 8.12% 10.37% 11.12% MEDIAN 21.06% 34.49% 30.06% 28.26% 6.62% 7.30% 8.46% 9.72% Financial Analysis 8

9 5. Price Multiples Ratios. 5. PRICE MULTIPLES (A) PRICE-EARNINGS (P/E) RATIO (B) PRICE-SALES (P/S) RATIO (C) PRICE-BOOK VALUE (P/B) RATIO (D) PRICE-CASH FLOW (P/CF) RATIO SP SETIA IOI UEM SUNWAY IJM IGB MAH SING UOA E&O MRCB MEAN MEDIAN Financial Analysis 9

10 Financial Analysis 1. Activity Ratios It was observed that property development firms displayed lengthy periods in collecting and paying their bills. Nonetheless, the amount of time taken to pay their bills were almost twice of that for receiving; which is quite healthy and liquid. In addition, these firms exhibited characteristics of high asset base and capital intensive; hence they collectively have low assets and working capital turnover. Under the activity category, Sunway Berhad and Mah Sing were the outperformers, while Eastern & Oriental was the underachiever. 2. Liquidity Ratios The sample size has quite respectable liquidity displayed under current ratio. However, when inventories was removed from the calculation; they performed poorly with low quick ratio. Thus, semi-completed inventories (known as capitalized development charges under current asset) played a very vital part in the firms balance sheet. Therefore, the continuation of these firms hinges on the ability to convert these semi-completed inventories into revenue (cash and accounts receivable). Any severe slowdown in the property market would possibly cause a liquidity crisis and financial distress situation. Under the liquidity category, some of the top performers were UEM Sunrise, UOA Development, and Eastern & Oriental. While, the underperformer include MRCB. 3. Solvency Ratios It was noted that debt is an important source of financing for the property developers being examined; however, it is not the major option. Total debt only made up half of that of total equity, and one third of total capital. While in general, the total assets held by these firms could cover the debts taken by more than 3.5 times. Thus, equity is still the major source of financing over debt. Whilst the sample size displayed exceptionally good interest coverage ratios. 10

11 Financial Analysis Hence solvency is not an issue at the moment for this group of companies. Under the solvency category, some of the top performers were IOI Properties and UOA Development. While, the underperformer include MRCB. 4. Profitability Ratios The profitability measure is quite harmonized over the 10 firms being examined, with IOI Properties being the only outstanding candidate among the group. In general, the sample size possessed low gross profit margin; with high COGS incurred (most probably building cost). While other operating expenses were kept quite low. The group s net profit margin was quite respectable at 21%. Return on assets and capitals were quite modest at single digit possibly due to high asset base, capital intensive, and the sheer size of these blue chip firms. 5. Price Multiples Ratios When compared against the P/E ratio of KLCI for the corresponding period which has a reading of 18; the P/E ratio for the sample size is considered relatively cheap at 11. While the P/B ratio is quite subtle as well at The group s P/CF ratio was dragged down by UEM Sunrise which was running under negative operating cash flow. Under the price multiples category, some of the firms that were considered relatively expensive include Eastern & Oriental and SP Setia. While those that were less pricy include Sunway Berhad and IOI Properties. However, price multiples ratios should not be read in isolation; a relatively pricy firm might suggest higher growth prospect, better future expectations, or even better management. Deduction It should be noted that the different categories used to analyze the sample size are not mutually exclusive. Thus, the overall performance and health of a firm should only be determined after examining the different category ratios. 11

12 NUMBER OF DAYS OF RECEIVABLES 1. Activity Ratios 1. (A) Number of days of Receivables NUMBER OF DAYS OF RECEIVABLES MEAN (2014) MEDIAN (2014) The number of days of receivables represent the average collection period; which is the average number of days it takes for outstanding payments to be made to the firm. Generally, a shorter collection period is more ideal. The average (median) reading is approximately 118 days; which is about 4 months. Out of the 10 firms being examined, 4 had longer collection periods than average (red), 4 were in line with the average reading (yellow), and 2 posted shorter collections period (green). 12

13 NUMBER OF DAYS OF PAYABLES 1. Activity Ratios 1. (B) Number of days of Payables NUMBERS OF DAYS OF PAYABLES MEAN (2014) MEDIAN (2014) The number of days of payables is basically the average amount of time it takes the company to pay its bills. Generally, a longer collection period is more ideal. The average (median) reading is approximately 233 days; which is about 8 months. Out of the 10 firms being examined, only 1 had shorter collection period than average (red), 7 were in line with the average reading (yellow), and 2 posted longer collection periods (green). 13

14 DAYS OF PAYABLES / DAYS OF RECEIVABLES 1. Activity Ratios 1. (C) Days of Payables / Days of Receivables DAYS OF PAYABLES/DAYS OF RECEIVABLES MEAN (2014) MEDIAN (2014) The number of days of receivables and number of days of payables are only meaningful when they are compared against each other. In this case, the ratio used is days of payables divided by the days of receivables. Generally, this ratio should be more than 1, with a larger ratio being more desirable. The average (median) reading is approximately 1.84, which is fairly decent. Out of the 10 firms being examined, 4 had lower ratios than average (red), 3 were in line with the average reading (yellow), and 3 posted higher ratios (green). UEM Sunrise posted a ratio of less than 1 (at 0.59), which could be a pressing issue if no correction effort is being implemented. 14

15 TOTAL ASSET TURNOVER 1. Activity Ratios 1. (D) Total Asset Turnover TOTAL ASSET TURNOVER MEAN (2014) MEDIAN (2014) Total asset turnover ratio is basically the usage efficiency of the firm s total assets to create revenue. Generally, a larger reading is more ideal. The average (median) reading is approximately Such a low reading would suggest that this industry has high asset base and is capital intensive. Out of the 10 firms being examined, 4 had lower ratios than average (red), 3 were in line with the average reading (yellow), and 3 posted higher ratios (green). Companies with low total asset turnover such as IOI Properties and IGB Corporation would signify that too much capital are being tied up in their asset base. Moreover, they are not using their assets efficiently to generate sufficient revenue. 15

16 FIXED ASSET TURNOVER 1. Activity Ratios 1. (E) Fixed Asset Turnover FIXED ASSET TURNOVER MEAN (2014) MEDIAN (2014) Fixed asset turnover ratio is basically the usage efficiency of the firm s fixed assets to create revenue. Generally, a larger reading is more ideal. The average (median) reading is approximately Such a low reading would suggest that this industry has high fixed asset base and is capital intensive. Out of the 10 firms being examined, 3 had lower ratios than average (red), 3 were in line with the average reading (yellow), and 4 posted higher ratios (green). Companies with low fixed asset turnover such as IOI Properties and IGB Corporation would signify that too much capital are being tied up in their asset base. Moreover, they are not using their assets efficiently to generate sufficient revenue. 16

17 WORKING CAPITAL TURNOVER 1. Activity Ratios 1. (F) Working Capital Turnover WORKING CAPITAL TURNOVER MEAN (2014) MEDIAN (2014) Working capital turnover ratio measures how effectively a company is using its working capital to generate revenue. Net working capital is the residual value of current assets minus current liabilities. Generally, a larger reading is more ideal. The average (median) reading is approximately Such a low reading would suggest that this industry has a very high working capital requirement. Out of the 10 firms being examined, 4 had lower ratios than average (red), 3 were in line with the average reading (yellow), and 3 posted higher ratios (green). Companies with low working capital turnover such as IJM Land and UOA Development would signify that they are not using their available working capital efficiently to generate sufficient revenue. 17

18 CURRENT RATIO 2. Liquidity Ratios 2. (A) Current Ratio CURRENT RATIO MEAN (2014) MEDIAN (2014) The current ratio is the best-known measure of liquidity; in which a company will be able to pay its short-term bills. Generally, a larger reading is more ideal. The average (median) reading is approximately 2.42, which is quite healthy. Out of the 10 firms being examined, 3 had lower ratios than average (red), 3 were in line with the average reading (yellow), and 4 posted higher ratios (green). Companies with low current ratios such as IGB Corporation and MRCB would signify that they are struggling to meet their short-term obligations. 18

19 QUICK RATIO 2. Liquidity Ratios 2. (B) Quick Ratio QUICK RATIO MEAN (2014) MEDIAN (2014) The quick ratio (acid-test ratio) is a more stringent measure of liquidity because it does not include inventories and other assets that might not be very liquid. Generally, a larger reading is more ideal. The average (median) reading is approximately 0.95, which is quite a distressed level. The great difference between the current and quick ratios suggest that majority of the firms current assets are tied up in inventories. Out of the 10 firms being examined, only 1 had lower ratio than average (red), 5 were in line with the average reading (yellow), and 4 posted higher ratios (green). However, more than half of the firms above have a quick ratio reading of less than 1; which could be a liquidity problem if left unchecked. 19

20 CASH RATIO 2. Liquidity Ratios 2. (C) Cash Ratio CASH RATIO MEAN (2014) MEDIAN (2014) The cash ratio is the most conservative liquidity measure because it further excludes receivables on top of inventories and other prepayments. Generally, a larger reading is more ideal. The average (median) reading is approximately The difference between the quick and cash ratios is not that great, thus suggesting that inventories had a greater weightage over receivables under current assets. Out of the 10 firms being examined, 2 had lower ratio than average (red), 4 were in line with the average reading (yellow), and 4 posted higher ratios (green). Companies with low cash ratios such as Mah Sing and MRCB would signify that they have little cashor cash-equivalent securities to service their current liabilities. 20

21 LIQUIDITY RATIOS 2. Liquidity Ratios 2. (D) Summary of Liquidity Ratios CURRENT RATIO QUICK RATIO CASH RATIO The chart above summarizes all the 3 liquidity measures used. They include the standard current ratio, the more stringent quick ratio, and the most conservative cash ratio. In almost all instances, it was noticed that inventories carried a higher weightage in current asset than receivables. An obvious exception was observed for UEM Sunrise. Out of the 10 firms being examined, only MRCB displayed liquidity portent in all 3 measures. While, Sunway Berhad, IGB Corporation, and Mah Sing are showing some early signs of such threat. 21

22 DEBT-TO-EQUITY (%) 3. Solvency Ratios 3. (A) Debt-to-Equity Ratio % % % % % % 80.00% 60.00% 40.00% 20.00% 0.00% DEBT-TO-EQUITY MEAN (2014) MEDIAN (2014) The debt-to-equity ratio measures the proportion of debt (fixed-cost financing sources) over equity; in which the company is utilizing to finance its assets. Generally, a lower reading is more ideal (with lesser reliance on debt as a source of financing). The average (median) reading is approximately 48%, which is considered quite standard among property developers. Out of the 10 firms being examined, only 1 had a higher ratio than average (red), 6 were in line with the average reading (yellow), and 3 posted lower ratios (green). It was noticed that MRCB had a very high debt-to-equity ratio (178%), whereas UOA Development had very little debt at 3% over equity. 22

23 DEBT-TO-CAPITAL (%) 3. Solvency Ratios 3. (B) Debt-to-Capital Ratio % 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% DEBT-TO-CAPITAL MEAN (2014) MEDIAN (2014) The debt-to-capital ratio is an extension of the debt-to-equity ratio as mentioned earlier. This ratio measures the proportion of debt (fixed-cost financing sources) over total capital; in which the company is utilizing to finance its assets. Total capital equals all short-term and long-term debt plus preferred stock and equity. Generally, a lower reading is more ideal (with lesser reliance on debt as a source of financing). The average (median) reading is approximately 32%. Out of the 10 firms being examined, only 1 had a higher ratio than average (red), 7 were in line with the average reading (yellow), and 2 posted lower ratios (green). It was noticed that MRCB had a very high debt-to-capital ratio (64%), whereas UOA Development had very little debt at 3% over total capital. 23

24 DEBT-TO-ASSETS (%) 3. Solvency Ratios 3. (C) Debt-to-Assets Ratio % 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% DEBT-TO-ASSETS MEAN (2014) MEDIAN (2014) The debt-to-assets ratio defines the amount of debt (fixed-cost financing sources) in relative to assets. Generally, a lower reading is more ideal (lower degree of financial leverage and higher financial flexibility). The average (median) reading is approximately 28%, which suggests that the amount of debt taken is well-covered by the available assets. However, such measure do not take into account the quality of the assets. Out of the 10 firms being examined, only 1 had a higher ratio than average (red), 6 were in line with the average reading (yellow), and 3 posted lower ratios (green). Again, it was noticed that MRCB had a very high debt-to-assets ratio (52%), whereas UOA Development had very little debt at 2% over total assets. 24

25 FINANCIAL LEVERAGE (%) 3. Solvency Ratios 3. (D) Financial Leverage % % % % % % % 50.00% 0.00% FINANCIAL LEVERAGE MEAN (2014) MEDIAN (2014) The financial leverage ratio (equity multiplier) is simply the average total assets over the average total equity. The greater value of such multiplier would indicate greater financial leverage and usage of debt. Generally, a lower reading is more ideal (with lesser reliance on debt as a source of financing). The average (median) reading is approximately 184%. A reading of more than 200% implies that the usage of debt as a source of financing is more than 50%. Out of the 10 firms being examined, 2 had a higher ratios than average (red), 4 were in line with the average reading (yellow), and 4 posted lower ratios (green). It was noticed that MRCB and Mah Sing had financial leverage ratios of over 200%; which suggests a greater dependency on debt as a source of financing. 25

26 INTEREST COVERAGE RATIO 3. Solvency Ratios 3. (E) Interest Coverage Ratio INTEREST COVERAGE MEAN (2014) MEDIAN (2014) The interest coverage ratio basically measures the firm s ability to repay its interest on outstanding debt. Generally, a higher reading is more ideal (higher EBIT value over interest expense). The average (median) reading is approximately 10, which is excellent. In general, a fair reading should be anything above 1.5. Out of the 10 firms being examined, 4 had a lower ratios than average (red), 2 were in line with the average reading (yellow), and 4 posted higher ratios (green). It was noticed that MRCB is showing early warning signs of difficulty in meeting its interest expenses at a ratio of

27 SOLVENCY RATIOS (%) 3. Solvency Ratios 3. (F) Summary of Solvency Ratios % % % % % % 80.00% 60.00% 40.00% 20.00% 0.00% DEBT-TO-EQUITY DEBT-TO-CAPITAL DEBT-TO-ASSET The chart above summarizes 3 solvency measures being used. They include the debt-to-equity ratio, debt-to-capital ratio, and the debt-to-asset ratio. It should be noted that total assets include total liabilities and total owners equities. Thus, total capital is part of total assets. While, total capital include total debt and total owners equities. Hence, total debt is part of total capital. Out of the 10 firms being examined, only MRCB displayed solvency portent in all 3 measures. While, UOA Development, IOI Properties, and IJM Land had better than average readings. 27

28 NET PROFIT MARGIN (%) 4. Profitability Ratios 4. (A) Net Profit Margin % 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% NET PROFIT MARGIN MEAN (2014) MEDIAN (2014) Net profit margin measures the firm s ability to generate profit (net) from its revenue (sales and other income). Generally, a higher reading is more ideal. It is based on net income from continuing operations while disregarding discontinued operations. The average (median) reading is approximately 21%, which is considered good and industrial standard. Out of the 10 firms being examined, 9 were in line with the average reading (yellow), and 1 posted higher ratio (green). It was noticed that IOI Properties posted exceptional net profit margin for the fiscal year ended at 62%. 28

29 GROSS PROFIT MARGIN (%) 4. Profitability Ratios 4. (B) Gross Profit Margin % 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% GROSS PROFIT MARGIN MEAN (2014) MEDIAN (2014) Gross profit margin basically is the residual value of revenue after deducting cost of goods sold (COGS), divided by revenue. Generally, a higher reading is more ideal. A low ratio might suggest that either the cost of goods sold is too high or pricing of goods is too low. The average (median) reading is approximately 34%. Out of the 10 firms being examined, 7 were in line with the average reading (yellow), and 3 posted higher ratios (green). Some exceptional performers include IOI Properties, IGB Corporation, and Eastern & Oriental. All three firms posted ratios of more than 50% in

30 OPERATING PROFIT MARGIN (%) 4. Profitability Ratios 4. (C) Operating Profit Margin % 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% OPERATING PROFIT MARGIN MEAN (2014) MEDIAN (2014) Operating profit margin which is also known as earnings before interest and taxes (EBIT); is the residual value after deducting all operating expenses (COGS and other operating expenses), divided by revenue. Generally, a higher reading is more ideal. The average (median) reading is approximately 30%. Out of the 10 firms being examined, 9 were in line with the average reading (yellow), and 1 posted higher ratio (green). Again, it was noticed that IOI Properties posted exceptional operating profit margin for the fiscal year ended at 73%. 30

31 PRE-TAX MARGIN (%) 4. Profitability Ratios 4. (D) Pre-Tax Margin % 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% PRE-TAX MARGIN MEAN (2014) MEDIAN (2014) Pre-tax margin is simply the extension of operating profit margin (EBIT) after deducting interest expenses. Generally, a higher reading is more ideal. The average (median) reading is approximately 28%. Out of the 10 firms being examined, 8 were in line with the average reading (yellow), and 2 posted higher ratios (green). Yet again, the outperformers include IOI Properties (77%) and UOA Development (42%). 31

32 RETURN ON ASSETS (%) 4. Profitability Ratios 4. (E) Return-on-Assets Ratio % 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% RETURN ON ASSETS MEAN (2014) MEDIAN (2014) The return-on-assets ratio basically measures how efficient is the company utilizing its assets to generate earnings. Generally, a higher reading is more ideal. The average (median) reading is approximately 6.6%. Industries with extensive capital requirements such as real estate development will usually have lower readings. Out of the 10 firms being examined, all were in line with the average reading (yellow). A notable overachiever include UOA Development which posted a reading of more than 10%. 32

33 OPERATING RETURN ON ASSETS (%) 4. Profitability Ratios 4. (F) Operating Return-on-Assets Ratio % 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% OPERATING RETURN ON ASSETS MEAN (2014) MEDIAN (2014) The operating return-on-assets ratio is an extension of the previous return-onassets ratio. It measures how efficient is the company utilizing its assets to generate operating profit (EBIT). Generally, a higher reading is more ideal. The average (median) reading is approximately 7.3%. Industries with extensive capital requirements such as property development will usually have lower readings. Out of the 10 firms being examined, all were in line with the average reading (yellow). Significant outperformers include UOA Development (13%) and IJM Land (10%). 33

34 RETURN ON TOTAL CAPITAL (%) 4. Profitability Ratios 4. (G) Return-on-Total Capital Ratio % 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% RETURN ON TOTAL CAPITAL MEAN (2014) MEDIAN (2014) The return-on-total capital ratio measures how efficient is the company utilizing all its sources of financing (debt and equity) to generate operating profit (EBIT). Generally, a higher reading is more ideal. The average (median) reading is approximately 8.4%. Industries with extensive capital requirements such as property development will usually have lower readings. Out of the 10 firms being examined, all were in line with the average reading (yellow). Some notable outperformers include IJM Land and UOA Development, in which both firms posted readings of more than 15%. 34

35 RETURN ON EQUITY (%) 4. Profitability Ratios 4. (H) Return-on-Equity Ratio % 18.00% 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% RETURN ON EQUITY MEAN (2014) MEDIAN (2014) The return-on-equity ratio measures how much profit a company generates with the money shareholders (both common and preferred stocks) have invested. Generally, a higher reading is more ideal. The average (median) reading is approximately 9.7%. Companies with higher market capitalization will tend to have lower readings. Out of the 10 firms being examined, all were in line with the average reading (yellow). Some notable outperformers include IJM Land and Mah Sing, in which both firms posted readings of more than 15%. 35

36 PROFIT MARGIN RATIOS (%) 4. Profitability Ratios 4. (I) Summary of Profit Margin Ratios % 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% NET PROFIT MARGIN OPERATING PROFIT MARGIN PRE-TAX MARGIN GROSS PROFIT MARGIN The chart above summarizes 4 profitability measures being used. They include net profit margin, pre-tax margin, operating profit margin, and gross profit margin. i. Gross profit margin = (Revenue COGS) / Revenue ii. Operating profit margin = (Gross profit margin + other operating income other operating expenses) / Revenue iii. Pre-tax margin = (Operating profit margin ± profit/losses of associated companies ± other non-operating income/expenses) / Revenue iv. Net profit margin = (Pre-tax margin taxes) / Revenue Hence, under normal circumstances gross profit margin will be the highest, followed by operating profit margin, pre-tax margin, and net profit margin. However, a notable exception was witnessed for IOI Properties which posted a lower gross profit margin than net profit margin. This might be caused by the net inflow of other operating and non-operating incomes, and net profit of associatedcompanies. 36

37 P/E RATIO 5. Price Multiples Ratios 5. (A) Price-Earnings Ratio PRICE-EARNINGS RATIO MEAN (2014) MEDIAN (2014) The price-earnings (P/E) ratio is simply the firm s stock price divided by earnings per share and is one of the most widely used price multiples ratio. It basically measures the number of years it takes for investors to recover their invested money given the current earnings performance. Generally, companies with high P/E ratios are considered overvalued (or high growth with great future expectations). The average (median) reading is approximately 11. While the overall KLCI has a P/E ratio of 18. Out of the 10 firms being examined, 4 had higher ratios than average (red), 2 were in line with the average reading (yellow), and 4 posted lower ratios (green). Eastern & Oriental and SP Setia both posted P/E ratios of more than 20, while IOI Properties and Sunway Berhad displayed readings of less than 8. 37

38 P/S RATIO 5. Price Multiples Ratios 5. (B) Price-Sales Ratio PRICE-SALES RATIO MEAN (2014) MEDIAN (2014) The price-sales (P/S) ratio is simply the firm s stock price divided by revenue per share. Similar to P/E ratio, companies with high P/S ratios are considered overvalued (or high growth with great future expectations). The average (median) reading is approximately Out of the 10 firms being examined, 4 had higher ratios than average (red), 3 were in line with the average reading (yellow), and 3 posted lower ratios (green). Eastern & Oriental and IOI Properties both posted P/S ratios close to 5, while Sunway Berhad and Mah Sing displayed readings close to 1. 38

39 P/B RATIO 5. Price Multiples Ratios 5. (C) Price-Book Value Ratio PRICE-BOOK VALUE RATIO MEAN (2014) MEDIAN (2014) The price-book value (P/B) ratio is simply the firm s stock price divided by book value of equity per share. Whereas book value is calculated by subtracting intangible assets and liabilities from total assets (quite comparable to owners equity). Similar to P/E and P/S ratios, companies with high P/S ratios are considered overvalued (or high growth with great future expectations). The average (median) reading is approximately Out of the 10 firms being examined, 3 had higher ratios than average (red), 4 were in line with the average reading (yellow), and 3 posted lower ratios (green). Eastern & Oriental and SP Setia both posted P/B ratios of more than 1.5, while IOI Properties, UEM Sunrise, and Sunway Berhad had P/B ratios of less than 1. 39

40 P/CF RATIO SP SETIA (31/10/2014) IOI PROPERTIES (30/6/2014) UEM SUNRISE (31/12/2014) SUNWAY BERHAD (31/12/2014) IJM LAND (31/3/2014) IGB CORP. (31/12/2014) MAH SING (31/12/2014) UOA DEVELOPMENT (31/12/2014) E&O (31/3/2014) MRCB (31/12/2014) 5. Price Multiples Ratios 5. (D) Price-Cash Flow Ratio PRICE-CASH FLOW RATIO MEAN (2014) MEDIAN (2014) The price-cash flow value (P/CF) ratio is basically the firm s stock price divided by cash flow per share. Whereas cash flow refers to only operating cash flow. Similar to all other price multiples ratios, companies with high P/CF ratios are considered overvalued (or high growth with great future expectations). The average (median) reading is approximately 13. Out of the 10 firms being examined, 6 had worse ratios than average (red), and 4 posted better ratios (green). Under specific situation where P/CF appears to be negative; this would imply that the firm has negative operating cash flow and is very much undesirable. Such an example would include UEM Sunrise, which posted negative P/CF ratio. While IJM Land which has a reading of 62 is very pricy as well. 40

41 PRICE MULTIPLES RATIO SP SETIA (31/10/2014) IOI PROPERTIES (30/6/2014) UEM SUNRISE (31/12/2014) SUNWAY BERHAD (31/12/2014) IJM LAND (31/3/2014) IGB CORP. (31/12/2014) MAH SING (31/12/2014) UOA DEVELOPMENT (31/12/2014) E&O (31/3/2014) MRCB (31/12/2014) 5. Price Multiples Ratios 5. (E) Summary of Price Multiples Ratios P/E RATIO P/S RATIO P/B RATIO P/CF RATIO The chart above summarizes 4 price multiples measures being used. They include price-earnings (P/E) ratio, price-sales (P/S) ratio, price-book value (P/B) ratio, and price-cash flow (P/CF) ratio. When compared against the average (median), Eastern & Oriental displayed overvalued characteristics for all price multiples ratios. While SP Setia has 3 of such characteristics (except for P/S ratio). Some of the less pricy firms include Sunway Berhad and IOI Properties. In addition, it was noticed that P/CF ratio is the most volatile ratio and could change drastically over a short period of time. 41

42 References Bursa Malaysia. (2015) Prices, [Online], Available: [22 Apr 2015]. Investopedia. (2015) Terms, [Online], Available: [22 Apr 2015]. Kaplan University. (2013) Schwesernotes tm 2014 CFA Level I Book 3: Financial Reporting and Analysis, United States of America: Kaplan Inc. Kaplan University. (2013) Schwesernotes tm 2014 CFA Level I Book 4: Corporate Finance, Portfolio Management, and Equity Investments, United States of America: Kaplan Inc. KLSE Info. (2015) Historical Prices, [Online], Available: [22 Apr 2015]. CYF.A12/

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