Borals Core Businesses - Research Proposal Example

Boral Limited Name and Student Number:   Tutorial day and Time:       Tutor’s Name: Word Count: Content 1.0 Executive Summary……………………………………………………….………p.3 2.0 Introduction to the Company and the Industry……………………………………p.3 3.0 Introduction to the Company and the Industry…………………….……………...p.3 3.1 Industry Analysis……………………………………………….…………p.3 3.1.1 Porter’s Five Forces………………..………………………….p.4 3.1.1.1 Threat to a new entrant………………………………...….p.4 3.1.1.2 Threats to substitutes……………………………………...p.5 3.1.1.3 Bargaining power of supply……………………..…….…..p.5 3.1.1.4 Bargaining power of buyers……………………………….p.5 3.1.1.5 Competitive rivalry…………………………………….…p.6 3.1.2 Industry Prospect……..……………………….…………………p.6 3.2 Company Analysis………………………………..……………………….p.6 3.2.1 SWOT Analysis…………………………………………………………….……p.7 3.2.2 Company Prospect…………………………..……………………………..…….p.7 4.0 Accounting and Financial Analysis………………………………………….…….p.7 4.1 Accounting Analysis…………………………………………………………….…p.8 4.2 Financial Analysis………………………………………………………………….p.8 4.2.1 Cross section Analysis………………………………………………………….p.8 4.2.1.1 Market Comparison…………………………………………………………….p.8 4.2.1.2 Peer Comparison………………………………………………………………p.8 1.0 Executive Summary Boral Ltd is an international construction and building materials company with its headquarter in Sydney, Australia. Boral’s core businesses are construction materials and cement in Australia. Roof tiles in US and Australia, plasterboard in Asia and Australia (Brailsford, Handley, and Maheswaran, 2012). In a cyclical industry, with broadly commoditized products, the company strategy is to build a strong market position and support margins through the cycle by managing production costs and output levels and achieving price increases where possible. In terms of the attractiveness of industry in which Boral operates, the company is considered to have attractiveness to its customers which will contribute to the growth of the company despite existence of many competitors in the market. Porter’s Five Forces Model will be used to analyze the current position of the Boral in the market. In our attempt to study the effectiveness of Boral industry strategy, SWOT analysis will be used to determine the company’s success, and then the company’s prospect will be estimated. An evidence of the company’s earnings manipulations will be identified in the company’s accounting analysis which therefore may suggest a less fair presentation of the company’s financial statements. In terms of financial condition of the company, the paper will make a conclusion on the performance of the company for the last four years from 2010 to 2013, but an improvement can be seen in 2011. But when comparison is made with its peers and industry, within the construction market, Boral Ltd has shown superior performance in the last four years. Nevertheless, Boral Ltd is estimated to be worth AUD 5.52 which is considerably equivalent to the last observed market price of Boral which was valued at AUD 5.70 which considered slightly higher to the last observed market price of Brambles which was valued at AUD 5.70 as at 1st May. In the last few months, the share price has been fluctuating between AUD 5.52 to AUD 5.85. We therefore propose recommendation that investors should not sell their shares at the company because the company has stability. 3.0 Introduction to the Company and the Industry 3.1 Industry Analysis Boral Ltd manufactures and supplies building and construction materials in its main market Australia, the United States and Asia. The company offers ash, aggregates, blocks, asphalt, ceiling tiles, bricks, cement, concrete, cement additives and dry mixes, decorative concrete, cornice, and demolition agents; and fiber cements, doors, hardwood, grout among other products. This paper will employ the Porter’s five forces Model to perform the industry analysis. 1.1.1 Porter’s Five Forces Boral Ltd has a firm position with each of its ethnic group and target audiences. As it is know that that the market for the construction industry is at high demand level, and the fact that construction sector is always updated and makes the retail sector act efficient and fast towards achieving and satisfying customers and consumers needs and wants. In this case, different competitors will try to cut their niche and compete against one another in order to be the market leader. Boral Ltd has a strong brand name and this has given it power in the construction industry. Overall, the attractiveness of the construction industry in which Boral Ltd operates is considered as medium. This may allow the company to grow despite other factors in the construction industry. Since Boral Ltd has a strong brand name and as a result of that it hold a good position in both Australia and U.S construction industry, the company is considered as the only company with ‘one stop shop’, other competitors in the construction industry have lost their competitive power. However, Boral Ltd still has some global and regional competitors where in Australia and Asian region, Buzzi Unicem SpaA, Ciments Francais SA, Jones Lang LaSalle Inc and Owens Corning are its main competitors and in the US, USG Corp is among its key competitor. As such, we conclude that competitive forces in the construction industry in Australia, Asia and US are medium. Since the demand for construction materials in Australia where Boral Ltd main operations is located, it has affects the company consumers’ choice to some extent; hence the treat of substitute product as medium. 3.1.1.1 Threat to a new entrant Threat to a new entrant acts as a barrier to any new competitor trying to enter the market. Customers have already established trust and relationships Boral Ltd and this makes it difficult for a “newborn company” to challenge the status quo and to build a “name” and reputation for itself. One major threat is the capital costs required to establish a new retail chain outlets, this requires the company to have millions and millions of dollars. Boral has enough capital that can enable it to meet its financial needs. Another threat would be that Boral Ltd has already established the goal that would make the “new born company” into the construction industry more of challenge to try and penetrate the industry. Another threat is that Boral has economies of scale, which include, economic use of by-product, specialization of factors of production, growth of supporting facilities and services is encouraged by the construction’s large scale of operation. Lastly, other threats that Boral Ltd has include cost disadvantages regardless of size, production differentiation, access to necessary inputs, access to distribution channels, switching costs and government policy (Brailsford, Handley, and Maheswaran, 2012). In addition, the bargaining power of the higher-margin buyers can be high and vice versa. Overall, Boral Ltd is able to overcome these threats at same time, and use these threats to its advantage. 3.1.1.2 Threats to substitutes The “threat to substitutes” to Boral Ltd is low, if customers are not satisfied with price, the products and services, there are several other construction companies at efficient levels within the construction industry. Direct competitors or substitute involved in this industry are Buzzi Unicem SpaA, Ciments Francais SA, Jones Lang LaSalle Inc and Owens Corning are its main competitors and in the US, USG Corp. Threats of substitutes or direct competitors will increase if Boral will have low switching costs. In addition, if the price of substitutes "sets the ceiling" for pricing, this will be serious if the price of substitutes is falling. 3.1.1.3 Bargaining power of supply Boral Ltd is a leading Australia construction company and has the power to exert prices from their supplier onto the sector by reducing the quality or raising prices of the goods or service. This can do harm to their competitors or ‘newborn’ entrant. But Boral Ltd has good brand and has good heritage with its customers, this will be enough without exerting the power of the supplier. 3.1.1.4 Bargaining power of buyers The “bargaining power of buyers” gives the consumers the power to purchase that they desire. If consumers have high bargaining power means reduced profits for the construction company, concentration of buyers, volume purchases and even switching costs. For example, if Boral Ltd bring out the latest construction product for the market price and Unicem SpaA or Ciments Francais SA come with a similar product for the same price, it will depend on the customer choices where they will want to purchase this product. 3.1.1.5 Competitive rivalry This relates to the number of competitors in the construction market, in Boral case, there are not many in Australia’s construction sector, but the existing competitors such as Unicem SpaA or Ciments Francais SA are almost all equal in power and in size. In addition, there is production differentiation and switching costs, visibility in industry growth, corporate stakes, exit barriers and industry over-capacity 3.1.3 Industry Prospect Looking at the construction industry, specifically the supply sector. The Australia strategy is to focus on developing leading positions in markets with favorable industry structure and demographic trends, and with long-term growth within construction and material and building products sectors. Given the fact that now, the construction industry has been growing in the past years; this has increased the demand for construction materials which consequently makes the construction industry attractive. However, due several factors such as competitive rivalry, bargain power of buyers and suppliers, threat to new entrant, and treat to substitute, Boral may face difficulties in exploiting that may emerge from the positive prospect of the construction industry. Therefore, it likely Boral’s sales growth in future to declined. 3.2 Company Analysis Boral’s overall strategic investment in new resource positions and acquisition of existing quarry operations will reinforce the company’s standing as leading construction materials supplier in Australia (Reserve Bank of Australia, 2013). In addition, the company has started diversifying into other segments by offering wider range of products and services. For example, the company has aligned itself with bigger contractors or with those with different types of expertise so they could take on work or projects they wouldn’t. In addition, the company is planning to strengthen its brand position and improve the quality of its products and services and finally, attract, develop and retain the right employees to deliver all aspects of its strategy and push the level of innovation and quality required by customers. For example, the company has employed supervising subcontractors and civil engineers doing civil work for the company, having such division has again cut-out on the company’s margin that previously existed. Therefore, SWOT analysis will be used to evaluate the company’s strategy. 3.2. 1 SWOT Analysis The company has been in the construction industry for over 5 decades, the company has been able to build its brand name over the years, hence it has been able to grow it customer based both locally and internationally (David, 2007). In the past, Boral Ltd has successfully developed multi-format strategies, and these strategies have accelerated the company’s advantage (Reserve Bank of Australia, 2013). In Australia, Boral Ltd are reported to be 60 per cent larger than its competitors. This has made it difficult for its competitors to replicate the company’s complex operations and network, this has given the company an edge over its closes competitors porter. Diversification has also helped the company reach new customers (Brailsford, Handley, and Maheswaran, 2012). However, the company has over relied on Australia and US market and this could potentially be it weak point especially if there is economic downturn in these two countries. Nevertheless, Asia is an emerging market that has given the company a good opportunity to expand its business and through acquisition of existing quarry in those countries has given the company a platform to penetrate easily in Asia countries (David, 2007). Unfortunately, as the company expand its operations globally, it has faced significant threat of competitions particularly in its core market (i.e. Australia and US). Integration of new technology into building materials has helped the company to have superior products than it close competitors. 3.2.2 Company Prospect Boral’s sale is expected grow in 2013-2014 financial year. The company’s financial results from the first quarter of 2013 have shown an increase of sales revenue by 10% compared to the first quarter results in 2012 (Reserve Bank of Australia, 2013). Thus it can be concluded that it is likely Boral Ltd to have a positive results at the end of 2013-2014 financial year. This would be contributed by the company expansions strategies in Asia continent. In addition, the company has focus on operations efficiency to maximize it profit. 4.0 Accounting and Financial Analysis 4.1 Accounting Analysis Boral’s consolidated accounting report of the company for the year ended 30 June 2012 comprise the company and its controlled entities (Yahoo! Finance, 2013). The accounting report is a general purpose accounting report which has been prepared in accordance with Australian Accounting Standards adopted by the Australian Accounting Standards Board and the Corporations Act 2001 (Yahoo! Finance, 2013). The accounting report of the Company and the Group complies with international Financial Reporting Standards (IFRS) and its interpretation has been adopted by the International Standards Board. Based on Margaret Taylor, Company Secretary, Boral Ltd has invested more to it US business despite continue difficult business conditions in the US and a slowdown in non-residential activity in the Australia market (Yahoo! Finance, 2013). Besides, Boral Ltd still bared a high level of debts of AUD 4,805.30 during financial year 2012. But the company has managed to keep its debt on check. When look at the Boral’s operating lease commitments, the company’s operating lease payment has increased for financial year 2012, this was partly contributed by acquisitions existing quarries in both Australia and Asia. 4.2 Financial Analysis Two types of financial analysis were conducted: cross-sectional analysis and time-series analysis. 4.2.1 Cross section Analysis Since Boral Ltd is a leading construction and material suppliers company, they don’t really have domestic competitor (Yahoo! Finance, 2013). Under cross section analysis, market and sector comparison and compare it with key companies in the construction industry. 4.2.1.1 Market Comparison Based on the market comparison data, it can be seen that Boral Ltd has distinguished itself in all points, indicating Boral Ltd would be successful in the future (Yahoo! Finance, 2013). The construction industry generally has lower P/S, P/E, P/B and P/E Growth than market, the higher ratio in Boral Ltd compare to market reinforce our bullish outlook. 4.2.1.2 Peer Comparison Comparing Boral Ltd to four main competitors in the construction industry in Australia, Boral Ltd is outstanding in both P/E ratio and EPS growth, indicating Boral has strong market statues with highest share price within the Construction industry in Australia. However, dividend yield in Boral Ltd is relatively low within the construction industry. 4.2.2 Time-series Analysis Time series analysis will be used to evaluate Boral’s performance from 2009 to 2012 in term of efficiency, liquidity, profitability and solvency (Yahoo! Finance, 2013). 4.2.2.1 Liquidity Ratio This ratio helps a business to assess whether a company has sufficient money or equivalent current assets that can be used to pay its debts as they fell due (Yahoo! Finance, 2013). In Liquidity ratio makes use of current ratio which measure whether a business is able to pay debts due within one year out of the current assets. Current ratio that is less than one is often a cause for concern, particularly if it persists for a length of time. Boral Ltd has a potential of liquidity risk. However, this ratio has not been constant, for example the liquidity ratio was 0.92 in 2009, 0.76 in 2010, 0.70 in 2011 and 0.96 in 2012, but all ratios have been less than one, which indicates Boral Ltd cannot be able to pay its debt in less than one year. The reasons for this fluctuation are a result of acquisition of existing quarries Australia which required large amount of working capitals. 4.2.2.2 Efficiency An efficiency ratio is a measure of how effective a company manages its production and resources (Reserve Bank of Australia, 2013). Boral Ltd has strong assets turnover, with average ratio around 0.76, while the company’s receivable turnover has been fluctuating from 5.42 in 2009, 6.45 in 2010, 5.56 in 2011 and 5.34 in 2012, indicating a longer period for account receivable. While the company has payment days has increased from 58.15 to 63.13. This means Boral did not have enough working capital and they risk borrowing to support its existing working capital. 4.2.2.3 Solvency The solvency ratio is used to determine whether or not a company can stay solvent. Solvency ratio is a comprehensive measure of solvency (Yahoo! Finance, 2013). It measures this cash flow capacity in relation to all liabilities, rather than only debt, with debt to equity ratio has declined from 2.57 in 2009 to 1.75 in 2012. Also, financial leverage has decreased from 3.61 to 2.95; this means the company has less financial risk and cannot be bankrupt any soon. 4.2.2.4 Profitability Boral’s profitability ratio has been on a declined in the last four years. ROE has declined from 30.46% in 2009 to 22.20% in 2012, while ROA has also declined from 8.43% in 2009 to 7.53% in 2012. 5.0 Forecasts and Valuations 5.1 Sales Based on the analysis that has been conducted on the company, since 2009, sales of the company have increased. In the next 10 years, the company’s sales growth is estimated to be pegged at 6.60 per cent. This growth will be contributed to positive construction industry and company outlook 5.2 Net Operating Profits after Tax/Sales In respect to the company’s NOPAT/Sales ratio, the ratio is seen to increase and this is projected to increase in the next 10 years. This increase has/will be contributed to the company continues to invest more on cost efficiencies. It is projected the Net profit to increase at the rate of 6 per cent in the next 10 years. 5.3 Net operating working capital During the last four years, Boral Ltd has shown a decrease in its net operating capital. This shows that the company has poor capital management which is consistent with the company’s current ratio and quick ratio that is below one in liquidity analysis. Our prediction is that at the end of 2012, the company’s net operating working capital over sales will reduce as the company tries to maximise its efficiencies in operations and remain constant in the years after up to the terminal base year in 2018. 5.4 Net operating long-term assets Although the company’s major operation is in Australia, US and Asia, the company has the opportunities to expand its business operations at more emerging markets in Asia such as in China and Singapore. Therefore, it can be forecast that the company will continue acquiring more existing quarries in those markets they operate. Because of this, the net operating long-term assets is projected to increase to 55 per cent of sales at the end of 2012 and grow by 5 to 6 per cent per year in the years after up to 2017. 5.4.1 Valuations Cost of Capita-Weighted Average Cost of Capital (WACC) Calculation MODEL INPUT Risk-free rate The 10 year government bond will yield 3.25% and this may be used for the discounting purpose of the model since it will reflect the long-term time horizon for the valuation. Beta Bora Ltd has a beta of 1.86 this is according to Investment research at Morningstar. Market risk According to the recent studies by Brailsford, Handley and Maheshwaran (2012), the historical equity risk premium in Australia from 1958-2010 is 6.1%. Cost of equity The Cost of equity is worked out using the CAPM formula: Rf + β*(Rm- Rf) => = 3.25% + 1.86 × (11.52% − 0.72%) = 20.16% Conclusion and Recommendation We conclude Boral Ltd will continue to prosper and this is based on the industry and company analysis. From fancial analysis, Boral Ltd performance fluctuated but improved in 2011 and is better than the market its industry and peers. Based on our valuation, we estimate Boral value to be at AUD 5.57 References Brailsford, T., Handley, J., and Maheswaran, K., 2012, ‘The historical equity risk premium in Australia: post-GFC and 128 years of data’, Accounting and Finance 52 (2012) 237–247. Reserve Bank of Australia, n.d. Capital Market Yield, viewed 4th April 2013, . Yahoo! Finance, 2013, AUD/USD, viewed 30th April 2013, . David, F.R. 2007, Strategic management: concepts and cases 11th ed, Pearson Prentice-Hall, Upper Saddle River. Fetch, J, 2001, How to carry out a SWOT analysis, Sage Publishers, New York. Read More