Leighton Holdings Limited Analysis - Example

Leighton Holdings Limited xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Name xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Course xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Lecturer xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Date Executive summary The construction industry is one of the most stable industries in Australia. It contributes immensely to the economic growth of the economy by the virtue of the GDP it contributes. However, despite Australia experiencing positive economic growth, this front is at its lowest point in eight consecutive months. There was an increase in performance index of 0.1 to 34.8 though this improvement is irrelevant in the real terms; this is because it is still below bar rate of 50%. These figures indicate a downbeat and depressed construction sector. The reason attributed to this is the excess contracting and little assistance from the Australian reserve bank and the government at large. Leighton Holdings Limited has not been spared either, it is experiencing stinted growth making very low returns while it is investing a lot of capital in this sector. This report gives a brief background of this company. It also draws and discusses some important ratios of its financial performance and profitability. To help understand this, this report has evaluated Leighton Holdings Limited currency management approach. The report concludes by providing a recommendation to the firm of how it can improve its investments. Table of Contents Table of Contents 2 1.0 Firm and industry assessment 3 1.1 Corporate background for Leighton Holdings Limited 3 1.2 Global peers 3 1.3 Strengths and risks 4 1.4 Multinational aspects 5 2.0 Analysis of Operating & Financial performance 5 2.1 Presentation of selected ratios 5 2.2 Commentary regarding important operating and financial performance issues 7 2.3 Summary table for ratios & comments 8 2.4 Charts 9 3.0 Assessment of its approach to currency management and its performance over the past 2 years 12 4.0 Investment recommendation and forecasts 12 4.1 Investment recommendation 12 4.2 Forecasts of income statement 13 5.0 Conclusions 14 6.0 References 14 1.0 Firm and industry assessment 1.1 Corporate background for Leighton Holdings Limited Leighton Holdings Limited (LEI) is an Australian based project development and contracting company that provides a variety of project development and contracting as well as other interrelated services to the public and private sector customers (Research and Markets 2012). It is one of the most sought after companies in the world of construction. It is also among the top 225 top international contractors in the world, (Reina et al, 2006). The firm operates alongside its subsidiaries as well as associates in more than 30 countries across the world, (Girmscheid & Brockmann 2008). The company operates in countries such as Australia, Malaysia, Hong Kong, Africa and UAE. The firm’s headquarter is in Sydney Australia. The main functions of the company includes property development, heavy and general construction as well as other services dealing with environmental activities, telecommunications operations and maintenance, property investment and facility management. The firm is one of the world largest contract miners. 1.2 Global peers Some of the top world competitors of Leighton Company include, Downer EDI Limited Company, which provides engineering and infrastructure management for public and private entities. Brookfield Multiplex Company, it operates in real estate development, funds management and construction. Opus Group Berhad Company is a holding company which orchestrates infrastructure projects on large scale (HooVers 2013). The company has been successful in building a strong financial foundation over the years. The firm makes the money from the contracts awarded to them and subcontracting of contracts. For instance, when movie industry boomed, the company secured a contract to construct the famous Odeon cinema chain in England and Scotland and began building estates as well as offices around England. In June 2011, the firm won a contract worth $380 million from NBN Company to build three fiber Serving Area Modules (FSAMs) in Queensland, NSW and the ACT under a 50-50 mutual-venture with Thiess. The contract was up for renewal after the expiry of initial time of two years. In addition, the firm signed a two year contract in September 2012 worth $78 million for connection and installation work on the NBN (Battersby 2013). Some of other major project undertaken by the company includes the Clem Jones Tunnel which was completed in 2010, the Gateway Bridge Duplication which was completed in 2011, and the Airport Link in Brisbane which was opened in 2012. 1.3 Strengths and risks The firm evaluates and identifies key information as well as issues for the sake of business intelligence needs. In addition, the capability of the company in pursuing as well as delivering work is the strength that keeps it moving. On the other hand, a strong financial base for the firm as a contractor is important since it helps in investment in new plant as well as equipment and supports the working capital needs for the company (Leigton Holdings 2013). The critical risks in the company includes, employees working at heights, whereby they can slip and get injured, Mobile plant interaction, lifting operations and electrical safety as well as working with utilities and services. The firm’s proactive management as well as the flexibility and open approach to business, gives the company the chances in the property growth and management sectors. The company maintains close connections with the financial institutions, statutory authorities as well as specialist consultants to make sure of positive results for the firm in this sector (Leighton Holdings 2013). 1.4 Multinational aspects The company as stated above operates in more than 30 countries across the world. By operating in different countries, the firm’s profit increases. The cash flow remains constant since it is given to different contactors in different countries. The volume of balance sheet increases. 2.0 Analysis of Operating & Financial performance 2.1 Presentation of selected ratios Ratio Formulae 2010   2011   2012       $ ‘000’   $ ‘millions’   $ ‘millions’   Profitability ratios               Gross profit margin (Gross profit/revenue) x 100 (842,654/18,642,059) x 100 4.52% (-529.4/15,561.3) x 100 -3.40% (563.1/18,951.7) x 100 2.97% Net income margin (Net income/revenue) x 100 (519,159/18,642,059) x 100 2.78 % (-685.7/15,561.3) x 100 -4.41% (409/18,951.7) x 100 2.16% Operating profit margin (Operating profit/revenue) x 100 (615,137/18,642,059) x 100 3.30 % (-405.70/15,561.3) x 100 -2.61% (442.10/18,951.7) x 100 2.33% ROCE EBIT/net assets 842,654/2,568,142 0.33 198.10/2319.90 0.09 773.2/2916.9 0.27 Debt utilization ratios               Gearing ratio Debt/shareholders funds 1,670,367/2,568,142 0.65 1555.2/2319.9 0.67 2126.2/2916.90 0.73 Return on capital employed Sales/capital employed 18,642,059/2,568,142 7.26 15,561.3/2319.90 6.71 18,951.7/2916.9 6.50 Return on fixed assets Profit/fixed assets 615,137/4,407,085 0.14 -0.080062361 -0.08 442.10/4686 0.09 Debtors turnover (Trade debtors/sales) x 365 (2,451,916/18,642,059) x 365 48.01 (2484/15,561.3) x 365 58.26 (3440.80/18,951.7) x 365 66.27 Creditors turnover (trade creditors/purchases) x 365 (3,791,712/3,552,455) x 365 389.58 (4639.3/4369.9) x 365 387.50 (4507.3/4239) x 365 388.10 Interest cover EBI/interest 1,022,736/180,082 5.68 198.10/159.6 1.24 773.2/210.1 3.68 Liquidity ratios               Current ratio Current assets/current liabilities 4,358,789/4,023,196 1.08 4732.9/5250.2 0.90 6520.2/5794.3 1.13 Quick ratio (Current assets-inventory)/current assets (4,358,789-556,216)/ 4,023,196 0.95 (4732.9-726.7)/ 5250.2 0.76 (6520.2-549.5)/ 5794.3 1.03 Assets utilization ratios               Total assets turnover total assets/total revenue 8765874 / 18,642,059 0.47 9800.2 / 15,561.3 0.63 9900.4 /18,951.7 0.52 Net assets turnover net assets/total revenue 2,568,142 / 18,642,059 0.14 2319.90 / 15,561.3 0.15 2916.9 / 18,951.7 0.15 Current assets turnover current assets/total revenue 4,358,789 / 18,642,059 0.23 4732.9/ 15,561.3 0.30 6520.2 / 18,951.7 0.34 Return on fixed assets Profit/fixed assets 615,137/4,407,085 0.14 -0.080062361 -0.08 442.10/4686 0.09 Total assets financing total assets/equity 8765874 / 1232879 7.11 9800.2 / 2016.2 4.86 9900.4 / 2027.2 4.88 Investor ratio               Earnings per share Earnings to shareholders/weighted average shares (465,953,791/227,738,901) x 100 204.60 cents ($408,800,000/307,130,203 shares) x 100 133.10 cents ( 450,100,000/338,253,760) x 100 133.07 cents                 2.2 Commentary regarding important operating and financial performance issues The gross profit margin is indicating the group’s ability to control its operating activities consistently is not adequate as for year 2011. A margin of negative indicates that the firm does not generate enough revenues to cover the costs of sales. The firm used a lot of materials and purchases than it was able to generate revenues; this consequently affected the whole operations for the group. For years 2010 and 2012 the group had a positive gross profit margin though according to the industry analysis, the margins are not enough. This indicates that the company needs to improve its efficiency. The return on capital employed (ROCE) indicates the returns and income the management of the company has been able to generate using the resources on their disposal before making distributions of the income to the shareholders. The management was able to make good returns in year 2010 and 2012 but it was adversely affected in year 2011. This ratio indicates the efficiency of the management in terms of managing the available resources to generate income for the shareholders. The efficiency of the management, as the ROCE ratios indicate, can be improved considerably. The distributions of the returns as shown by the earnings per share are little as compared to the company peers distributions. The assets of the company have not been adequately utilized to generate revenue. The ratios of assets turnover are very low meaning that the assets have been used sparingly. Using the assets to their full capacity would make the company to generate more income and be efficient and effective at the same time. 2.3 Summary table for ratios & comments Ratio 2010 2011 2012 Profitability ratios       Gross profit margin 4.52% -3.40% 2.97% Net income margin 2.78 % -4.41% 2.16% Operating profit margin 3.30 % -2.61% 2.33% ROCE 0.33 0.09 0.27 Debt utilization ratios       Gearing ratio 0.65 0.67 0.73 Return on capital employed 7.26 6.71 6.50 Return on fixed assets 0.14 -0.08 0.09 Debtors turnover 48.01 times 58.26 times 66.27 times Creditors turnover 389.58 times 387.50 times 388.10 times Interest cover 5.68 1.24 3.68 Liquidity ratios       Current ratio 1.08 0.90 1.13 Quick ratio 0.95 0.76 1.03 Assets utilization ratios       Total assets turnover 0.47 0.63 0.52 Net assets turnover 0.14 0.15 0.15 Current assets turnover 0.23 0.30 0.34 Return on fixed assets 0.14 -0.08 0.09 Total assets financing 7.11 4.86 4.88 Investor ratio       Earnings per share 204.60 133.10 133.07         2.4 Charts Profitability ratios Debt utilization ratios Liquidity ratios Assets utilization ratios Investor ratio 3.0 Assessment of its approach to currency management and its performance over the past 2 years The past two years (2012 and 2011) has seen the company change dramatically win the way it manages its finances and consequently its performance, (Needles et al, 2009). Woerner & Ross v 2010, assert that, currency management is an essential determinant of the firm’s performance. As of year 2011, the company had not streamlined its management of its currencies which affected negatively its operations and performance very much. As a result the firm made losses in the same year from its operations. Losses are an indication of poor currency management; however, market sensitivity changes and market wide risks may have played a role, (Beattie & Jones 1999). The company improved during the following year to register profits from operations indicating some efficiency in utilization and use of its currency and finances by the management as (McGrath-Champ & Carter 2001) maintain. The firm is not in a stable financial base and this calls for improvement in its performance. 4.0 Investment recommendation and forecasts 4.1 Investment recommendation There are a number of investment projects that Leighton Holdings Limited can venture in, this projects as recommended by (Du Plessis et al, 2010), according to the financial and economic market research, indicate that they are relatively safe in especially in Australia. The economic stability and presence of efficient financial services, as (Him et al, 2011) explain; will aid the firm venturing in these projects. The cash flows emanating from the project are sustainable and would provide good returns to the investors as well. These projects are bridge and roads constructions. This will be necessitated by the assets and equipments that the company already has. It does not need to make huge capital investment in machinery and equipment as it has in its possession. This means it would not use a lot of borrowed funds. The availability of materials for carrying out the operations are also ready available. With all these positive factors, these projects would be the best to undertake for this company. 4.2 Forecasts of income statement Income Statement from the Project Millions Revenue $ 45,984.00 Expenses $ (24,086.00) Finance costs $ (4.00) Profit before tax $ 21,894.00 Income tax expense $ 6,568.20 Profit for an year $ 15,325.80 Distribution of the profits $ 15,325.80 As the income statement indicate, the firm would make good amounts of returns and increase the distributions to the shareholders in terms of earnings per share. The profits would be more than $ 15,325.80 from different projects. This is because the firm would save more from usage of its equipments. Same machines would be used for different projects. Another recommendation is that the firm reduces the number of subcontractors and takes the initiative of undertaking the projects itself rather than offering the projects to the subcontractors. This would save the company more returns than at present. 5.0 Conclusions The figures are not pleasing to read for this company and the whole construction industry in Australia. The poor performance of the company may not be wholly attributable to its management as there is a market wide poor performance in the industry and sector. The management, however, ought to have contingency plans in place in order to counter such cases of poor market performance. There is need for the government to come on board and help this sector. This report has provided such an investment that can withstand harsh market conditions. 6.0 References Battersby, L., 2013. [Online] Available at: http://www.smh.com.au/it-pro/government-it/leighton-inherits-bulk-of-nbn-contracts-20130801-hv17n.html [Accessed Tuesday October 2013]. Beattie, V., & Jones, M., 1999, Australian financial graphs: an empirical study, Abacus, Canberra. Brown, C., 2005, financing transport infrastructure: for whom the road tolls, Australian Economic Review. Connolly, J., 2010, Corporate DNA: Using Organizational Memory to Improve Poor Decision Making, Journal of Management History, 16(1), 137-138. Du Plessis, J., Du Plessis, J., Bagaric, M., & Hargovan, A., 2010, Principles of contemporary corporate governance Cambridge University Press Girmscheid, G., & Brockmann, C., 2008, Global players in the world’s construction market,Working paper, ETH Zürich, Him, L., Chenglu, G., Kit, C., & Rui, W., 2011, Equity Valuation--China State Construction International Holdings Ltd, Holdings, L., 2013. [Online] Available at: http://www.leighton.com.au/our-business/our-brands/australiapacific/leighton-properties [Accessed Tuesday October 2013]. Holdings, L., 2013. Investor and Media Centre. [Online] Available at: http://www.leighton.com.au/our-approach/strategy [Accessed Tuesday October 2013]. HooVers, 2013. [Online] Available at: http://www.hoovers.com/company-information/cs/competition.Leighton_Holdings_Limited.954661e89fed41de.html [Accessed Tuesday October 2013]. Markets, R. a., 2012. [Online] Available at: http://www.researchandmarkets.com/reports/1495058/leighton_holdings_limited_lei_financial_and [Accessed Tuesday October 2013]. McGrath-Champ, S., & Carter, S., 2001, The art of selling corporate culture: Management and human resources in Australian construction companies operating in Malaysia, International Journal of Manpower, 22(4), 349-365. Needles, B. E., Powers, M., & Shigaev, A., 2009, Financial characteristics of high performance companies in Australia, Working paper presented at the Sydney University Accounting Research Foundation, Sydney. Reina, P., Tulacz, G., & Schexnayder, C., 2006, the top 225 international contractors, Transportation, Sydney. Woerner, S., & Ross, J., 2010, IBM: Building the IT Function for a Global Business. Zimmer, I., 1986, Accounting for interest by real estate developers. Journal of Accounting and Economics, 8(1), 37-51. Read More