Financial Analysis for Vodafone Qatar - Case Study Example

Financial Analysis for Vodafone Qatar Executive Summary Qatar Vodafone Q.S.C (Qatar Sharia Compliant), a subsidiary of the international company the Vodafone Group, is a telecommunications company incorporated in Qatar in March 2009. It is the second leading telecommunications company in Qatar after Ooredoo. The company deals in the provision of prepaid and postpaid mobile services, data services and the sale of mobile accessories. These services are offered through the monthly and prepaid plans, mobile broadband, internet services, and fixed line services. The company also engages in the provision of the messaging, voice call and voicemail services. It is from these services that the company derives its revenues. The company has been trading on the Qatar Stock Exchange since 2012. Recently (effective January 2015) the company has begun its compliance with Sharia Laws according to the requirements of the Qatar government on all its operations, both commercial and financial. The Qatar Vodafone Company prepares its financial statements every financial year that ends on the 31st March of every calendar year in compliance with the Commercial Company Law No. 11 of 2015, the sharia laws and the international financial reporting standards. PwC is in charge of auditing the financial reports of Vodafone Qatar Company. This report seeks to critically analyze the financial outcomes of the company and its operations and the possible consequences of these outcomes on the shareholders wealth in line with the presumed objectives of the company. . This analysis will be based on the financial reports of the company for the financial year ended 31st March 2016 ass published on May 2016. The trend analysis will review the company’s performance over the years while a ratio analysis will be able to establish the true financial health of the company. Much focus will also be put on the sustainability reports and the risk analysis of the company. The objective therefore of this report ids to establish whether Qatar Vodafone is a company with investing in, and if the shareholders should buy or sell the shares. Financial objectives Financial Management studies show that every firm has a given set of objectives that they seek to achieve and that every other decision made by the company is subject to these objectives. Among the main avenues for achieving these objectives ids the investment, financing and dividends decisions they make. These objectives can be summed up to include shareholders wealth and profit maximization, increasing the shares value through Earnings Per share growth and most recently corporate responsibility (Kaplan Financial Knowledge Bank). Therefore the management as the agents of the shareholders are to be prudent in their decisions to ensure that investor wealth is created and maintained or is growing. The agency theory also dictates that mangers objective is to maximize shareholders wealth. The most important aspect of this objective is based on the financing decisions of the company and the financing mixture of debt and equity. The M & M (Modigliani and Miller) proposition that posits that the finance mixture is inconsequential to the value of the firm does not work in reality, and not certainly to Vodafone Qatar. The company has had an increase in its debt liabilities in Wakil agreements which have significantly reduced the value of the firm. The company has failed to achieve the second objective of profit maximization for the last two preceding years that it has been reporting losses. Vodafone Qatar company has set up its vision and mission to be in line with the Qatar National Visio of 2030. The Vision seeks to achieve sustainable development while ensuring the human, economic, social and environmental development. The vision’s strategy of Qatarization is also one that Vodafone Qatar seeks to achieve. This policy is meant to increase the number of Qataris in employment in both public and private companies. Based on the reported financial statements of Vodafone Company in 2016, the company has set upon its objective to increase their profits. The losses report has been partly due to increased employee expenses and the company has set its agenda to lay off some of its workers (Doha News, 2016). A true definition of the market value of the firm can be established through the EPS value of the company’s share and based on the financial reports; Vodafone Qatar is yet to achieve a market value attractive enough for investors to invest: the company has reported negative EPS for the last two consecutive years. It would there be assumed that this would be an objective for the company in the coming financial year. It is clear that the objective of Vodafone Qatar would be to increase their profits and consequently the EPS growth for this year. The company would also need to invest The company’s report does not however indicate the company’s activities in achieving sustainable development and social responsibilities. It is the objective of all shareholders to be associated with a company that engages in environmental sustainability in view of the rising concerns over the impact of the industrial activities on the environment and the dangers of products on the health of users. It is also within the shareholders interest of a company that is conscious of the health impact of their products. Vodafone Qatar has paid particular interest in ensuring that their technology is safe. These standards are in line with the requirements of the World Health Organization (WHO) following their report on electromagnetic fields and public health (Vodafone Qatar CSR Sustainability). The company has also been advocating for the adoption of the International Electrotechincal Commission (IEC) testing standards. Vodafone Qatar also requires that manufacturers test the specific absorption rate of the mobile devices that it purchases (Vodafone Qatar CSR Sustainability). As a shareholder, the principal objective of being a stakeholder in the company is to realize the value for my money and that is to imply that the EPS should be significantly high that what is right now. Moreover, the company’s loss does not give much wealth maximization foe the shareholders who are taking all the risk in investing in the company. Accounting Policies Vodafone Qatar is a company incorporated in Qatar and is also a participant in the Qatar Stock Exchange therefore it is required to disclose its financial statements every financial year. The company is also required to be sharia compliant in its operations and financial activities (effective January 2015). Consequently the company’s reports are prepared with compliance to the Commercial Company Laws no.11 of 2015. The international financial reporting standards (IFRS) and International Accounting Standards have also been adhered to in the presentation and preparation of these financial reports. All the reports are made in the operating currency of Qatar Riyals. The sharia compliance will require that the company reviews its Articles of Association and the remuneration terms for the board members. The new laws require that Vodafone Qatar to pay a board member only when the earnings attributable to shareholders is at least 5% of the share capital and that the cumulative remuneration should not exceed 5% of the company’s profits( Vodafone Qatar Annual report, pg.6). Revenue and expense recognition, financial assets and financial liabilities accounting are in accordance with the IFRS standards. The expenses rare recorded o include the regulatory costs, commissions paid to intermediaries and the roaming and connection costs incurred by Vodafone Qatar in the distribution of its services. The company does not however incur any income tax expenses for this year per the Income Tax Law (2009) though the law requires that any company that is not fully owned by Qataris should pay the corporate tax. The company recognizes trade receivables and cash and its equivalents (including the Mudaraba deposits) as its financial assets and they have been recorded in their nominal value since they do not attract any interest. The financial liabilities include trade payables, the Wakala financing while the shareholders equity is based on the shares outstanding at the time of reporting (March 2016). The company applies a straight line basis for allocating the deprecation expenses for each financial year Trend Analysis The trend analysis will focus on the performance of Qatar Vodafone Company over the years. An expert of the financial statement shows that Qatar Vodafone has been increasing its revenues since 2012 up to 2015, with a decline of 187,371QRm on the 12 months to 2016( Financial Times Markets Data, 2016). This decline in revenue is irrespective of the increase in the customer base by 7 %( the Vodafone Qatar Investor Relations Report, pg. 1). However the company reckons that this decline has been brought about by the structural changes they have had to experience in the financial year and the increased competition in the telecommunications industry. There was also an increase in the costs of business, the administrative and other expenses, which saw the company experiencing have very low incomes(loss) for the year (Financial Times Data, 2016). The net income was a loss for the financial years from a loss of 215.835m in 2015 to a loss of 465.714m in 2016. There was also a decline in the total assets of the company by 6% though there was a 10% increase in the total liabilities from 2015 to 2016. The general impact was a decline in the amount allocated for distributable profits. Based on the two preceding year’s financial statements, the Vodafone Company has had a reduction in the shareholders equity from 5,566,205,000QR in 2015 to 4.922.957, 000 in 2016. The statement of cash flows reveal that the company experienced a reduction in the cash flows from operating activities by approximately 55% as well as a reduction of 41% in the company’s cash flows from investing activities. This will be highly unusual given that the company’s main source of revenue is mobile services and the company reports to have an increase in the mobile customer market share (Vodafone Qatar Investor Relations Report, pg. 9). There was a more than 60% decline in the cash flows used in investing activities valued at 238.98m. In the same financial year, the company’s cash reserves had decline by close to QR20.8m giving a cash flow per share value of 0.4 (Financial Times Data, 2016). This is an indication of the liquidity if the company but it does not offer much gratification for the investors who would only get QR0.4 should the company get into financial difficulty. Ratio analysis The ratio analysis looks at the performance of the company in the given year. This analysis focuses on how efficient the firm was in its operations throughout the year and the overall using its liquidity and activity positions. The ratios include the liquidity ratios, the profitability ratios, activity ratios, market ratios and debt ratios. Liquidity ratios indicate how prepared the company is in covering its current liabilities. Low liquidity implicates possibilities of bankruptcy within the company. The two ratios that indicate the liquidity of a company is the current ratio and the quick acid test ratio. The quick acid test ratio is a better valuation of the liquidity of the firm as it excludes inventory and only looks into the most liquid assets of the company. Vodafone Qatar reported a current ratio of 0.51 which was a 14% increase from the previous year. The quick acid test ratio was approximately 0.49, 19% more than the recorded value in 2015. This shows that in general the liquidity of the company improved from 2015 to 2016. Vodafone Qatar can cover up to half of its current obligations using its most liquid assets. Activity ratios measure how fast the company converts its account into cash and they indicate how efficient the firm is in its operations. Moreover the ratios also show the credit policies adopted by the company. It is also an indication of the liquidity of the firm. These ratios include the average collection and payable days and the inventory turnover ratios. The total asset turnover ratio for the year 2016 stood at 0.30 a 2% decrease from last year’s turnover ratio. This implies that Vodafone Qatar turns over its assets 0.3 times a year which shows that the company is not quite efficient. It takes Vodafone Qatar 56 days to collect its debt. On the other hand, Vodafone Qatar takes approximately 8 days to pay its debt, 2 days more than the payment period in 2015. The payment period is also an indication of the high liquidity of the company. Debt ratios show the degree of the company’s indebtedness: the source of financing for the firm’s activities and the investment mixture of the financial resources. The leverage of the firm also indicates the risk and return that a shareholder as it shows the long-term obligation of the firm to the creditors. The leverage of Vodafone Qatar is established using the debt ratio, interest coverage ratio. The debt ratio of Vodafone Qatar stands at 0.45 which shows that 45% of the company’s capital structure is composed of debt instruments. The gearing ratio (based on net debt) stands at 18%, a 4.5% increase from the previous year) to reflect the company’s policy of having the Wakala funds to close any fund deficits within the company (Vodafone Qatar Annual Report, pg. 19). An analysis by the Financial Times reveals that the company was operating at a total debt to equity ratio of 0.20 and a total debt to capital ratio of 0.17(Financial Times Data, 2016). Profitability ratios are the index used to measure the profit levels of the company with respect to the available resources. The profitability of the Vodafone Qatar is measured by the gross and operating profit margin and the earnings per share accruing to each shareholder. The return on Equity and the return on asset are also indicative of the profitability levels of the company and the efficiency with which these resources are used to generate revenue sales. The gross profit margin for Vodafone Company for the financial year 2016 declined by 23% in 2015 to stand at 0.19. The net profit margin was a negative value of 0.22 which was more than 100% increase from the previous year. Vodafone Qatar also reported a negative value for return on asset and return on equity at -0.07 and -0.09 respectively. This represents a more than 100% increase from the previous profitability index. The Earnings per share for the company was a loss of 0.55 per share which was 112% more than the value in the previous year. However a better indication of the proportion of the company’s profits accruing to shareholders is given by the cash flow per share value which was 0.4. The cash flow per share indicates that Vodafone Qatar produces a net cash value of QR0.4 for each share outstanding during the period of operations. Market ratios are the analysis tools that show the value of the company’s share. This report uses the price earnings ratio and the market to book ratio to establish the true value of Vodafone Qatar’s share as per its trading activities in the Qatar Stock Exchange. The price earnings ratio for the company’s stock was at -18.82 which were 9% an improvement from the previous year. The market to book ratio was at 1.04 which implies that the investors are willing to pay QR1.04 for every QR1.00 book value of the common stock. This is an indication of the confidence that is still being exhibited by the investors towards the company’s common stock. This investor confidence is likely to be short-lived in the wake of the losses the company has been making over the last two financial years that does not guarantee the value of the investors’ investment in the company. The company’s stock began trading at the Qatar Stocks Exchange in 2009 with a total of 845,400,000 shares trading at the Initial Public Offering (IPO) price of QR10.25. Only 40% of their shares were issued to the public at the time of the IPO (QSE Annual Report 2015, pg. As of end of financial year 2015, the company’s stock was trading at QR11.45. There is an indication of the fall in value of the Vodafone Qatar share value over the last financial year. The volatility with which the common stock is trading at QSE is most likely to attract less investor in the coming financial years. Capital structure Finance theory suggests that for every firm there is an optimal capital structure for which the cost of capital is minimal. The Modigliani and Miller proposition on capital structure assumes that there are no significant differences in the value of the firm whether the firm takes up the debt or the equity or a combination of the two in financing its investment activities. Theory posits that there can be maintained a balance between the debt and equity of the firm to determine its finance mix depending on the costs and benefits of either form of financing. Debt is said to be beneficial as it reduces the tax liability of a company through the tax shield though it poses the risk of the firm going into bankruptcy following the increased interest obligations. Another theoretical view of capital structure is described as the Pecking order theory that suggests that managers will always follow a hierarchy of financing options. The theory suggests that a firm will always begin with internal sources before outsourcing finances. In this regard, a company should use up its retained earnings before acquiring debt. Equity financing, according to this theory, should be the last option as it gives the company a higher obligation than debt and retained earnings. . However this is just the theory that rarely applies in real life as these outcomes are based on the assumptions that the firm is operating in a perfective competitive market with information symmetry. The company’s financial statements reveal that Vodafone Qatar uses both debt and equity in its financing activities. Based on the financial statements of Vodafone Qatar, the firm’s debt financing is through the Wakala agreement. The Wakala is an agreement that gives the bank (Muwakil) the authority to invest money in approved activities for profits for the Wakil. The Vodafone Qatar entered into a 5 year agreement with Vodafone Finance Limited as part of being Sharia Compliant (Vodafone Qatar). As of the time of the preparation of the financial statements, the Wakala agreement was worth QR1, 022,868,000. The Wakala agreement was part of the requirements for the Sharia Compliance of the company though it offers the same flexibility as that offered by the intercompany loan agreements entered by the company previously (Vodafone Qatar). Vodafone Qatar also has its shares trading on the Qatar Stock Exchange and the use of equity financing in its capital structure. As of March 2016, Vodafone Qatar had 845,400,000 shares trading worth QR10 each. Other sources for the equity financing include the legal reserve and distributable profits. An analysis of the financial reports for the financial year ending March 31st reveal that the company has a debt to equity ratio of 0.45 and a gearing ratio of 18%. This shows that Vodafone Qatar has 45% of its activities financed by debt. With this in mind the company has been operating at a loss for the last preceding year with 2016 seeing the company more than double the loss incurred in 2015. A report by the BMI research team indicates that the telecommunication sector has been growing due to the increase customer base and increase population (Qatar Telecommunications Report, 2015). The recent infrastructural development prior to the World Cup in 2022 has also attracted a good number of migrants into Qatar (Qatar Telecommunications Report, 2015). Not to mention the increased investment by the government in expanding the ICT sector. However with the declining profits the company’s CEO has had to quit while the company is still undertaking structural changes within the company: The Company reported to have sack close to 50 staff in the wake of these declining results (Doha News, 2016). There has been an increase in the use of data services world over as compared to voice services (Doha News, 2016), from which Vodafone derives its most revenues. The CEO has been quoted, in a statement issued to the press, to point at the price wars that they have been having with the largest competitor Ooredoo who before 2009 operated as a monopoly. The chances that the company has in surviving world highly depend on their innovative strategies to tap into the increased customer base, the high penetration rate of the mobile market and expand the services in data, which stands as the largest service taken up in recent times. The Qataris are identified by their contribution to the Liquefied Gas industry which is the major contributor to its economic growth. The telecommunications only contributes about 3% of the total Gross Domestic Product of Qatar (ICT Qatar, pg.6). The main players of the telecommunications sector in Qatar are the Vodafone Qatar and the Ooredoo Company with the Ooredoo Company being the largest telecoms company. Vodafone Qatar majorly provides prepaid and postpaid mobile services, data services and the distribution of phone accessories. The company reported a loss in the current financial year despite the high penetration rates (Oxford Business Group). There has also been reported an increase in demand for data and broadband services all over the world. Currently, Vodafone provides these services to the Qataris. Moreover the Qatar government is also investing broadband connection in the country. With all these developments in mind, then the Vodafone Qatar company but to engage in expansion activities. However, very little of these has been done. Recommendations The trend analysis shows that the company has been experiencing difficult times despite a higher customer base and high revenues. The company reported a more than 100% increase in losses from the previous year’s loss. Moreover the company’s statements of cash flows reveal that the company is using up more of the company’s cash flows from operating activities in covering their financing costs rather than in investment activities. There seem to be no clearly defined expansion taken by the company in the previous 12 months. This is also because of the high total liabilities to total equity ratio of 45%. There are potential risks with this high ratio especially in the uncertainty industry the company is operating, steered by the monopoly Ooredoo. This has seen the company charge guards at the management level by appointing a new CEO and the latest strategy to lay off 50 workers (Doha News, 2016). The financial ratio analysis also point towards the same financial unhealthiness of the firm. The profitability ratios show that the company is experiencing negative profit margin with an operating profit margin of -21.07% (Financial Times Data, 2016).The liquidity of the company is relatively stable at 0.49 and improvement from the previous year. However the EPS ratio does not increase the investor confidence at it is currently a negative value of 0.55. The market ratios give a further confirmation that the stock is currently overvalued as it reveals that investors are only willing to pay QR1.04 each QR1.00 value of the common stock they hold. This has also been evident in the fall of the price of the share from QR11.40 in 2015 to QR10.35 in 2016. The price earnings ratio is a negative number which imply that the company is only generating losses for its shareholders. The economic and regulatory framework in Qatar does not seem to offer much reprieve for the loss making Vodafone Qatar. The country’s largest telecoms company, Ooredoo, which has been enjoying monopoly until 2009 has been engaged in price wars with Vodafone Qatar. The price competition has given the company a less competitive advantage over Ooredoo. Moreover there has been increased demand for data services at the expense of voice services, thus reducing the company’s ability to make profits since its major source of revenue are voice services. Given the trend and the financial analysis and the economic outlook in Qatar, it would appear that holding the share stock in Vodafone Qatar is not a very good investment. The amount of returns on every share that is held is a negative value. Moreover for a company that has much of its financing through liabilities poses a risk of bankruptcy and therefore not stable. The financial difficulties from the competition with Ooredoo also do not put the stock in a good position as the volatility and risk of holding the share in increased. The company cannot be fully determined to be a going concern in the wake or recent developments as it is now seeking to have made some structural adjustments. A change of guard always gives shockwaves to the market and usually the market responds by a fall in the share price. The same effect is achieved where there is some bad news concerning the company, in the case of Vodafone Qatar this would be a possible impact with the announcement of the layoff. Additionally, the company has not declared dividends to shareholders for this financial year. Appendix Ratios Calculation Formulas Current ratio= current assets/ current liabilities Quick ratio= Debt to equity ratio= Interest coverage ratio= Asset turnover= Days payable outstanding= Days sales outstanding = Gross profit margin= Operating profit margin= Net profit margin= Earnings per share= Return on investments/assets= Return on equity= Price/earnings ratio= References Doha News, Kovessy P. (2016) Vodafone Qatar chairman quits following ‘dificult’ year [online] Avaliable at dohanews.co/vodafone-qatar-chairman-quits-following-difficult-year/ [accessed 27/6/2016] Doha News, Scott V. (2016) Approximately 50 people laid off from Vodafone Qatar [online] available at dohanews.co/around-50-people-laid-off-from-vodafone-qatar/ [accessed 27/6/2016] Financial times. Finacial times markets data.[online] Available at markets.ft.com/research//Markets/Tearsheets/Finacials?s=200357508&subview=Overview&period=a. accessed 27/06/2016 ICTQatar. Launch of New Telecommunications Licenses for Fixed & Mobile Services Report. Vodafone Qatar Q.S.C Finacial Statements and Independent Auditors Report. 31st march 2016. Vodafone Qatar Vodafone Qatar Q.S.C FY 16 Finacial Results Presentation. Vodafone Qatar 31st March 2016 Qatar Stock Exchange. (2015) . Qatar Stock Exchange Annual Report 2015 Read More