Puncak Niaga Holdings Berhad - Financial Ratio Analysis - Case Study Example

Name: Topic: The Puncak Niaga Holdings Berhad Professor: Course: Date: Company Overview Puncak Niaga Holdings Berhad (PNHB) is an asset holding organization operating within the water treatment industry. The company has a number of subsidiaries that are essentially involved in the treatment and supply of treated water to clients in the State of Selangor, the Federal Territories of Kuala Lumpur as well as Putrajaya and China. The company’s headquarters are in Malaysia in which its foundational business activities are carried out. Through the organization’s unique operational and structural management has moved from one level of profitability to another. From the company’s corporate profile, it is noted that PNHB Group is among the leading and vibrant integrated water services corporations in Malaysia. As much as the organization is an asset holding company, its branches are primarily focused on function, repairs, administration, creation, rehabilitation, and renovation of water treatment services. The branches as well deal with research and technological growth for the water, wastewater and ecological sector. They also take part in jobs of oil and gas industry and other matters like provision of offshore and onshore engineering works. Founded in 1997, Puncak Niaga Holdings Berhad was incorporated in the Main Board of Bursa Malaysia Securities Berhad. As a result, the company’s market capitalization was rated at RM 1.0 billion. The corporation is the first one to be listed on BMSB under the Infrastructure Project Company. The company’s success is accredited to the well structured management. At the top of the management structure is the executive chairman, YBhg Tan Sri Rozali Ismail. He is the founder of Puncak Niaga (M) Sdn Bhd and has had a lot of experience working for this company. He was appointed the executive director of the company in 1997. Under the executive director is the managing director, YBhg Dato’ Matlasa Hitam who joined the company in 2003 as the executive director of the Human Resource and Administration Sector. He was appointed as the managing director of the company in October 2005. He is the Head of PNHB’s Compliance, Internal Control and Risk Policy Committee. He is as well charged with the responsibility of the audit committee and a sitting member of the Water Association of Selangor, Kuala Lumpur and Putrajaya among other responsibilities. The company’s operations sector is headed by YBhg Dato’ Ir Lee Miang Koi, who is the non-independent, non-executive director of PNHB and chief operations officer. He joined the company in 1995 charged with the responsibility of general manager of business development. He was appointed the operations manager in 2005. The company prides in good experienced top management personnel to run the company after having a long-term experiences while working with the PNHB organization. PNHB has a position for the Independent Non-Executive Director which is headed by YBhg Tan Sri Dato’ Hari Narayanan Govindasamy. He is a businessman and a member of the audit committee, remuneration committee as well as the nomination committee. A unique qualification of most top managers in the company is that they have a good educational background particularly in the engineering sector. The finance division of the company is headed by Mr. Tan Seng Lee who was appointed by the board in 2005. The profound reshuffle of member position that took place in 2005 has lifted the company to greater heights especially in using expatriates at the right job. For the purpose of continuous improvement, the company took a turning point in 2008. This was carried out by PNSB in which efforts were channeled to improvement of operational functionality and effectiveness at the WTP’s and Dams under its jurisdiction. The management of operations costs was as well made imperative for the well being of the entire company. In the previous years, operation costs were computed to have been higher than the expected margins owing to the chemical costs for water treatment. Innovative Research and Development Initiatives PNHB carried out an extensive research in both developing and developed countries universal to establish the state of water supply. The results indicated that most countries are faced with serious challenges. This follows overexploitation of a limited and sparsely distributed water resource. As a result of the increased population in the world, pressure has been exerted on water resources, natural habitats, environmental and biological systems. There was however no indication that the future would look better. The company therefore had to lay down strategies to mitigate the high pressure mounting upon the water resources around the world. The plans put in place have look into minimizing social, economic and ecological influences of pressure on water resources. The kind of research and development that PNHB Corporation engages in is to continuously focus on improvement of the water quality, sustainability and consistency of Malaysia’s water availability through a number of modernized projects of national technology. The company has a research and development team whose main function is to actively brainstorm and come up with ideas to further improve water operational effectiveness as well as cost management specifically at WTP’s and water supply network under its boundaries. Corporate Social Responsibility The company’s operation has as well focused on corporate social responsibility. This is not looked at in terms of program building but as an integral system value to shape the functionality of the entire business. As the company moves out to increase its market bounds, it continually focuses on economic, social and environmental responsibility through management of all areas of the business for the purpose of sustainability. The company’s management looks forwards to better coexistence with a wide range of stakeholders and support communities within their areas of operation. Most important in the search for social responsibility are the underprivileged people in society. In the event of corporate social responsibility, the company seeks to support talented staff members through embracing their engagement in a number of activities with the company and the community around. Inspiring people from the workforce and the community to have a continuous improvement forms part of the key strategies of the company to reach out to the community. This is well seen in the corporate responsibility vision and mission. The mission offer active support and engagement in activities that uplift the society’s living standards as well as values systems according to the aspirations of Vision 2020. Within the vision and mission of the company, not only nation concerns are paramount but also international ones. This pertains to the protection, preservation and improvement of the natural ecosystem. This shows that the company manages its business responsibly and sensitively. Trend Analysis The Puncak Niaga Berhad Company’s statements of accounts for the three consecutive years (2010, 2009, and 2008) reveal the general operation of the company and the entire group. In the analysis the paper has critically analyzed some of the major performance indicators of the company, critically looking at the financial ratios. The statement were prepared in accordance with international Accounting standards (IAS) as confirmed by the companies Independent auditors (both internal and external) report, the management and the board of directors. All the four major accounting and financial ratios have been considered in the report, that the leverage, activity, profitability and the liquidity ratios, three of which this paper will discuss briefly highlighting their significance. The general overview of the company, as recorded in the financial statements of the year ended 31st Dec 2010, draws a general decline in the net income, cash and cash equivalence, assets, pre-tax profit, net profit, current ratio Earning per share(EPS) among other financial indicators that recorded an upward trend in performance. However, there are those financial variables that increased despite a dismal performance of the company. These include the following: current assets, loans and borrowing. According to the company’s financial statements, the revenue increased slightly form RM 1887000 in 2009 to RM of 1911514 in 2010, a percentage increase of 1.3%. This was caused a rise in demand in water consumption and the better relationship in terms of tariffs set by the Malaysian government. However, the were some substantial recovery process both in Malaysia , Asia as a continent and even in the advanced countries, a factor that is attributed to consumer’s confidence, grow of businesses and activities supported by private sector investments.(1). The company’s profits in the year 2010 was declined from RM6677649 in 2009 to 183197 in 2010, due to drought and a reduction in the number of hours of operation in one of their plants. However, the company had performed remarkably well the previous year with profits rising from RM524, 144,773 in 2008 to RM of 6677649 in 2009. This impacted negatively on the earnings per share from 34.79 sen to 29.21 sen. This negative performance attributed to higher operating and financial costs of the company. In addition, the kind of contracts between the company and the Selangor state government whose, the company had to solve the dispute through a lawsuit in industrial courts in Malaysia. Cash and cash equivalents decline slightly from 115.5million in 2008 to 103.5 million in 2009 and a further decrease to a loss of 59.2 million in the year 2010.Declining profits and increase in the companies overheads cost worsened the cash base for the company in2010.Some of the external factors like unfavorable climate drove the company into a resource strain in ensuring a good service delivery and keeping with adequate water supply. As the executive chairman notes, the current financial year was quite challenging in terms of identifying ways of mitigating the threat f changing water patterns and high raw water quality. There is also an increase in economic growth, a rising in water treatment costs and a subsequent increase in the population. However, the financial variable which increased despite the challenges was current assets and current liabilities. Current assets increased because there was some borrowing from credit institutions and enhanced company-supplier relationships. The paper has attempted to briefly compute the financial ratios (liquidity, leverege, and profitability), due to their imperative indicators in any business performance of the firm. a) Liquidity Ratio The liquidity ratios are ratios used to signify a firm’s ability to meet its short-term obligations. This short-term obligations may include the current assets, current liabilities and any cash inventories’ cycles or accounts receivables. The best known liquidity ratio is the current ratio. The Puncak Niaga Holdings Berhad Company’s liquidity ratio can be computed as follows: PNHB’s Liquidity Ratio = = = 4.0327 (2008) =  = 3.6070 (2009) = 1.6736 (2010) This implies that the company was weakest in meeting its short-term obligations in 2010 as compared to 2009 and strongest in 2008 as evidenced by the ratios. In addition, the company was more volatile in 2008in performance as compared to subsequent years (2009, 2010). It also implies that the assets were not efficiently utilized. However, a close examination of the profits realized during the three years, indicates a general decline in profits (2). b) Leverage Ratio According to Pearce and Robinson (2005, p181), leverage ratios are ratios which identify the source of a firm’s capital: whether they are owners or outside creditors. The word leverage denotes using capital that have a fixed interest charge which will either increase either profits or losses relative to the equity of proprietors of ordinary supply. The most ordinarily utilized leverage ration is total debt divided by total assets. PNHB’s Leverage Ratio =  =  = 0.2566 (2008) =  = 0.2602 (2009) =  = 0.2605 (2010) Generally, all the above ratios are a stable considering the nature of the industry which the firm is a player. From the above leverage ratios, it implies that the company has the financial ability to finance its activities as compared to the external sources of finance. However, the there has been a general decline in its ability to meet its internal obligations using its own source of finance. This is supported by the rise in loans and borrowings in the financial statements. It can also signify the rising cost of finance from the credit institutions in the country. Profitability Ratios Profitability ratios are the net result of a large number of laws and decisions adopted by a company’s management (Pearce and Robinson, 2005, p 183). They show how efficiently the entire organization is being managed. The profit margin of Puncak Holdings is computed through dividing the net incomes by total sales or revenue. Profitability Ratio =  =  = 0.3826 (2008) =  = 0.0050 (2009) =  = -0.00014 (2010) The above profitability ratios indicate a general decrease in the profit margins of the firm. In 2008, the company made reasonable profits as compared to 2009 which is better still since 2010 recorded a loss. Following the imperative nature of these figures, there are a number of possible causes of reduced profitability in the company. On the one and, this could imply that assets were most efficiently managed in 2008 as compared to 2009 and 2010 respectively. Similarly, the drought situation highlighted in the chairman’s report could have greatly contributed to the decline in profitability. Another possible cause of decreased profitability was noted to have been tighter government policies that forced the company to operate within limited boundaries. There was an as well increased financial and operating cost to meet the requirements of increased population. Puncak Niaga Holdings Berhad’s Major Competitor Puncak Niaga Holdings Berhad major competitor is the Aliran Ihsan Resource Berhad (AIR), all of which operate in a similar industry: water treatment plants operated in different plants. This implies that they compete for the scarce resources and customers in terms of tendering activities and bidding. They are subjected to similar operating, remote and industry analysis, which either create a favorable climate for its business operations or act antagonistically in dainting their market and profits. The general performance of AIR was similar to their major competitor Puncak Niaga Holding due to the reasons of declining water bases due to drought that harshly affected most parts of the state. A closer examination of the o the financial statements reveal a slight decrease in their revenue in the financial year 2010 by 3.6% from RM75.1 million in 2009 to RM72.4 in the year 2010.However, on a positive note was the increase in the Profits after Tax (PAT) by RM1.4 million or 13.6 %, from RM30.2 in 2009 to RM34.3 million in the current financial year. This was cited in the chairman’s report as due to the following reasons. First, the company (AIR) undertook better cost management during the year basically in the area of the procurement and maintenance, which enabled the firm to bid attractive prices from suppliers and their contractors. As the report notes (p 13), the above cost saving initiatives decreased substantially the both the operating and other overhead cost ( a cost reduction by 22.0 %) from the previous year thus the company pushing the profit margin upwards. Similarly, the group of company’s share of profits rose top RM28.5 million compared to RM9.0 million in the financial year 2009. Second, in the corporate wing, the year 2010 was a year o transformation for the company. This was mainly due to the strategic alignments that majorly focused on their strengths to gain a sustainable growth within the challenging economic and business environments, for instance tighter policies by the government and harsh climate which drastically affected their business margins. Third, it was also to careful strategic plans well articulated and implemented by the company that buoyed it to realize margins for the company. Fourth reason and much more important, was due to a visionary, well-experienced and able, Board of Directors, management, staff and their stakeholders. The management instituted a restructure to align more their resources to priority areas. There was the company capitalization on the opportunities the company identified and used for their advantage, for instance, the federal plan to increase the incentives to the people to relieve programs like water programs, signing and approval by the government of the new plant construction. Furthermore, the technological initiative undertaken, training and retraining of their staff, customer excellence all demonstrate the speed and agility with which the company proactively responded to those challenges, in order to attain their missions of growth, survive and profitability. In the following section, the paper shall closely examine the financial statements of these tow competing firms and attempt to highlight some similarities and differences, briefly citing reasons behind their nature of occurrence across the industry. Cross-Sectional Analysis Puncak Niaga Holdings Berhad and Aliran Ihsan Resources Berhad are key players in the water treatment and operation industry, and as such, they compete for the same clients. In cross-section analysis, it will be imperative closely examine the general performance of these two firms based on their financial ratios of liquidity, leverage and profitability. This will be done over a period of two consecutive years (2009 & 2010.This is because for purposes of financial benchmarking, the AIR financial statements have only highlighted two years mentioned above. The examination shall be on yearly basis that is a cross-section analysis of 2009 and subsequent year 2010. Liquidity Ratios The liquidity ratios are ratios used to signify a firm’s ability to meet its short-term obligations. This short-term obligations may include the current assets, current liabilities and any cash inventories’ cycles or accounts receivables. The best known liquidity ratio is the current ratio. The two firms’ ability to meet their short-term obligations will be calculated and compared. Liquidity Ratio (2009) =  =  = 0.2602 (PNHB) =  = 8.3272 (AIR) Liquidity Ratio (2010) =  =  = 0.2605 (PNHB) =  = 6.5492 (AIR) In the above liquidity ratios, the ability of the two firms in meeting their short-term obligations is different, with PNHB being lower than the AIR which is a stable in meeting its short term obligations and other debts in both years in both years. The PNHB its solvency and meeting the demands of its creditors was declining slowly with 2010 financial year being hit the worst. Although, the ability of AIR in meeting its short term obligations dropped from 8.3272 to 6.5492 which implies that its financial strength waned due to the challenging business environment that might have faced the entire industry. It can also be noted that though the PNHB has a larger capital structure, its performing dismally. This indicates the source of the problem could do with increasing costs especially with company’s bloated managing directors, administrators and staff. The company would contemplate divesting the unprofitable plants and channel its resources to plants in more viable environments. More recommendations will be discussed in the recommendation section below. Leverage Ratio Leverage ratios are ratios which identify the source of a firm’s capital: whether they are owners or outside creditors (Pearce and Robinson (2005, p181).Under a cross sectional analysis, each of the two firms ability to identify its source of capital shall be examined closely, to determine either whether the firms rely heavily on external sources of finance or it can adequately its financial obligation like for example undertaking its major projects and programs. Leverage Ratio = (2009) =  =  = 0.2602 (PNHB) =  = 0.1686 (AIR) Leverage Ratio (2010) =  =  = 0.2605 (PNHB) =  = 0.1029 (AIR) Both firms sources of Capital other financial resources are major external, indicating a weaker internal sources. This is evidenced in their ratios all of which are below 1.0.However, the PNHB has stronger internal sources of capital (internal shareholders) than their competitors AIR which seems to depend on the external resources. In addition, the year 2010, PNHB recorded a slight increase in the strength (0.0003) which is a positive indicator while AIR dropped in its strength from 0.1686 to 0.1029.As much as it has recorded some substantial profits; their total equity has to be taken in great consideration so as to meet their missions not of profitability but also increase in shareholders value.. Profitability Ratio According to Pearce and Robinson (2005, p 183), profitability ratios are the net result of a large number of laws and decisions adopted by a company’s management. They show how efficient and effectively the company is being managed, which implies the soundness and concreteness the policies and decisions taken by the management, board and even staff in their daily operations. Profitability Ratio (2009) =  =  = 0.2602 (PNHB) =  = 0.07934 (AIR) Leverage Ratio (2010) =  =  = -0.1437 (PNHB) =  = 0.1039 (AIR) In 2009, AIR made a remarkable show up by recording an increase in profits as indicated by the profitable ratios. It shows how efficiently in all the systems, tools and techniques all summarized up in this firm’s vital management variable. In contrast, the PNHB recorded a loss due to the reasons cited above. It dropped drastically by from 0.2602 to a negative of 0.1437, meaning a general decline in general performance. This can be attributed to failure to balance the accounting equation whereby the costs of operation are not efficiently being managed. Table 1 Showing Other Comparisons in Financial and Other Non-Financial Performance between Two Firms (PNHB & AIR) In Their Two Consecutive Years Source: Both the Puncak Niaga Holdings Berhad (PNHB) and Aliran Ihsen Resources Company’s financial statements. In the above table, major financial data is imperative and not covered in the cross-sectional review have been highlighted as additional information. The gross profits for PNHB were larger than their major competitor AIR Company. This however, only depends on their quantitative capital structure as shown in the total equities above, and does not indicate the qualitative aspects like performance, customer excellence service delivery, skills and experience of tits human capital just to mention a few. It indicates that the PNHB has a larger market share as compared to AIR, but to stiff competition, harsh economic and environmental environments, and PNHB’s profit margin declined. In a further closer examination, the year 2010 was tougher to PNHB as compared to AIR. The former made a loss (table1) contrasted to AIR which records profits though decreased as compared to the previous year. There are other qualitative details not included here in this table, which would also serve as imperative indicators, for instance the stock market performance, earning per share, directors’ remunerations. Recommendations The following are the general directions or strategic articulations that should be undertaken in this firm. First, nothing has been said about other firms implying that there are only two firms in the industry. Therefore, both firms can partner in research and development programs. This is because they differ in the balance score cards, experience and skills in service and product delivery. Second, in term terms efficient management, the PNHB can consider reducing the costs, for instance, by reducing the number of directors, their remunerations and some staff. It could also consider closing down the unprofitable plant, to reduce the operating and other not-so-essential administrative costs. Third, the AIR could consider market development and diversification strategies for their business. This is because, their capital being smaller as compared to their major competitor PMHB, it can enhancing its reputation through pursuing customer excellence through activities like speedy and timely customer response, undertaking serious corporate social responsibility and participating fully in innovation of new product and wiping out the bureaucratic red tape in its mode of operations. Lastly, both firms should consider restricting the emerging tough economies, globalization, re-introduction of cost management measures to put the cost under check. Furthermore, new and advanced strategic measures should be carefully be instituted by both managements especially by that of PNHB that has run into losses. Each firm should start focusing on its future developments especially in meeting its objectives. Bibliography: 1) Aliran Ihsen resources, 2011. Financial calendar for the company 2009 and 2010 2) Puncak Niaga Holdings Berhad 2011. ANNUAL REPORTs for the years, 2008, 2009, and 2010. 3) Robison, B and Pearce II, 2005. Strategic Management: Formulation, implementation and control, 9th edition. New York: McGraw-hill pp 180- 186 4) Puncak Niaga Holdings Berhad, Overview of the company. The company’s press release, 2011. http://www.reuters.com/finance/stocks/overview?symbol=PNHB.KL Read More