EMAAR PJSC Financial Company Analysis - Term Paper Example

?Table of Contents Introduction: 2 Trend Analysis 3 Ratio Analysis: 5 Profitability Ratios: 6 Liquidity Ratios: 7 Capital Structure and Gearing Ratios: 8 Current scenario: 10 Pro-forma Income Statement 11 Pro-forma Balance Sheet: 13 Assumptions 14 External Financing Need (EFN): 14 Sustainable Growth Rate 15 Internal Growth Rate 15 Works Cited 16 Introduction: Emaar Properties PJSC was incorporated in Dubai in 1997. The company is involved in property investment and development. It also transits property management services, along with engagement in investment in providers of financial service. The company is also engaged in development and sale of condominiums, commercially viable assets such as leasing and management of land, malls, villas and hotels. It was ranked 462nd in the 11th Financial Times Global 500 and was assigned A- and A3 ratings by Standard & Poor and Moody’s Investor services. The company scale of operations is spread internationally in 17 countries namely Syria, Jordan, India, Pakistan, China, US, Canada, UK. The company currently has a market capitalization of AED 15.3 B with 6.1 B shares outstanding. The group is basically divided into three business segments, namely, real estate (develop and sells condominiums, villas, commercial units and plots of land), leasing and related activities (develop, lease and manage malls, retail, commercial and residential space) and hospitality (develop, own and/or manage hotels, service apartments and leisure activities). The group has been witnessing a decline in their key performance indicators in the past five years but FY 2010 turned out to be prosperous as the profitability has grown to a respectable state as compared to the last two years. They are ranked just above average in the industry but the future prospects look bright as UAE has started to recover from the massacre of recession. The construction business will see a boom in the near future and company’s market position will glue back to the one in the year 2007.The company has achieved the recent rise in profitability by improving efficiency and squeezing their expense block. Trend Analysis Trend analysis show positive signs for Emaar Properties. The revenue account has seen a U-curve as it fell from AED 10,717,000 in 2008 to 8413,000 in 2009 but it increased by 13.37% in 2010 in comparison to the base year. The y-o-y growth would look more attractive in this case. The company increased its investment in hospitality services which led to the rise in revenues this year. (Khan & Jain, 2007) Gross Profit margin has seen a decline in the last two years. The margin dropped by 21.6% from 2008 in 2009 but increase marginally in 2010. The overall gross profit declined by 13.05% in 2010 as compared to the base year. The cost of revenue has been surging which led to the detrimental decrease. The net income has been the highlight of Emaar Properties’ financial statements. The net income has jumped by a staggering 97.64 in 2009 and jumped by more than a multiple of ten in 2010 as compared to the base year. This rise is primarily attributed to the squeezing selling, administrative and general expenses as compared to the sales (Emaar, 2010). The expenses have risen by a minute proportion as compared to the handsome jump in the sales. Total assets have shown a marginal fall of 3.8% and 6.26% in 2009 and 2010 respectively. This fall is attributed to the reduction in investments, receivables and intangible assets. Total Liabilities have seen a fall as well. It dropped by 7.39% and 18% in 2009 and 2010 as compared to the base year. Although, the group took up various debt financing facilities but, it was mainly due to restructuring of their previous debt. The market price has surged in the past two years by 70.8% and 57% in 2009 and 2010. The fundamentals in 2007 were better and AED 2.27 justified the price at that time. The market has developed since then but due to weak profitability in the last two years, the price has not jumped to a level which is satisfactory for the group. The price as of December 31st, 2010 stands at AED 3.55. Ratio Analysis: Ratios Formula 2009 2010 Gross Profit 48.72% 37.4% Net profit margin 3.88% 20.14% Return on Equity 1.13% 7.8% Return on Asset 0.5% 3.91% Current Ratio 3.27 3.26 Cash ratio 0.18 0.44 Accounts Receivable Turnover 0.026 0.44 Capital Structure Ratio 55% 50% Interest Coverage Ratio 40.4 9.07 Short term debt coverage ratio N.A 4733 P/E 77.2 8.875 *Note: Price taken at Dec 31st 2009 and 2010. Currency: AED Ratio analysis provides a thorough analysis of the company’s financial statements. These ratios will help an investor to identify the fundamental price of the company and whether the return is appropriate to take up the risk attached to the security. Profitability Ratios: The profitability picture of the Emaar Group has improved in 2010. The group has left a strong base in 2010 to aim high for the future. The Gross Profit margin was 48.72% in 2009 but it could not register a proportionate growth in 2010 as compared to the rise in sales. The margin dropped to 37.4% in 2010. This is due to the surging cost of revenue for the firm. The net profit margin for the year 2009 was 3.88% which surged to 20.14% in 2010. This rise can be attributed to the reduction in selling, general and administrative expenses of the firm. Moreover, the other income of the group which is earned by their investments in other associated companies has risen considerably. Their share in Emaar MGF Land Limited showed promising results in 2010 which led to an overall heave in the net profit margin. The Return on Equity (ROE) which is the return earned by the investors over their invested equity in the company augmented significantly. The ROE for the group was 1.13% in 2009 which increased to 7.8% in 2010. Moreover, the return on asset has increased to from 0.5% in 2009 to 3.91% in 2010, which is solely due to the rise in net profit by the factors in the aforementioned paragraph. Liquidity Ratios: Liquidity ratios provide information about the company’s ability to repay creditors in the near future (Chandra, 2008). The accurate measure of liquidity is the ‘Current Ratio’ of the firm. Current ratio is the measure of the number of liquid assets that the company owns in comparison to the payments which the company needs to make in the next year (Shim & Siegel, 2008). The current ratio of the firm was 3.27 in 2009 but it has not changed in 2010. This means that company has AED 3.27 of current asset to pay ever AED of liability. (Brigham & Ehrhardt, 2010) Furthermore, the current liabilities and assets have dropped proportionally to each other which have reduced the risk of default for lenders and creditors. The Cash ratio has also risen from 0.18 to 0.44 in 2010. This ratio is a good indicator that the company has enough cash to repay its short term borrowings which is indicated by the short term debt coverage ratio as well. Asset Management Ratios: The asset management ratio tells an investor about the efficiency of the company is managing its assets. (Financial Management, 2010) The accounts receivable turnover is calculated as the net sales divided by the average accounts receivable for the year. This ratio will tell us the frequency with which the receivables are converted to cash. The receivable turnover is not impressive for the group. It is a very low turnover rate of 0.026 and 0.44. This low ratio implies that the company has a high reliance on credit sales. The company should asses its credit policy as low turnover ratio means that the company has doubtful sales collection which forces the company to have high contingency for doubtful accounts which eventually decreases the size of the assets in the balance sheet. (Siegel, Jae K. Shim, & Hartman, 1997) Capital Structure and Gearing Ratios: The capital structure of Emaar Group relies 55% on debt in 2009 which dropped to 50% in 2010. This means that the debt to equity ratio is equal to 1 which is good considering the industry it operates in. The company has maintained a proper balance between its debt and equity which has not raised the riskiness of the firm. The firm’s health is satisfactory and can absorb debt in the future. The Interest coverage ratio measures the efficacy of debt in the firm (Megginson & Smart, 2008). This ratio also measures the earnings a firm generates for every dollar of interest paid. The interest coverage ratio has fell from 40.4 in 2009 to 9.07 in 2010. This is due to the leverage taken up during FY 2010 for the restructuring of previous debt. Lastly, P/E multiple provides the present sentiments about the industry in investor’s view. It is calculated by dividing the prevalent market price with the earnings per share of the firm. The firm had an abnormal multiple in 2009 of 77.2 which reduced to 8.875 in 2010. The EPS in 2010 was AED 0.40 with the market price at the end of year of AED 3.55. Ratio analysis has provided us a concrete view of the current and past standing of the firm (Gitman, 2005). We can conclude that the firm has increased its profitability and reduced risk by decreasing the debt-to-equity ratio. Moreover, the company is not in a strong position in terms of converting receivables to cash which has led to a less than proportionate increase in cash as compared to net income. Current scenario: In the current scenario, the P/S multiple is 1.5 which is ranked average in comparison to its competitors. Moreover, the Price to book multiple is 0.5 which is below average in accordance to the industry average. The Price to cash flow multiple is above average with 11.4 which is due to the magnanimous increase in operating cash inflows in 2010. The P/E multiple is ranked just about average in terms of its competitors. This portrays a picture of a firm which has not performed outstanding in the recent past but the excess cash and profitability growth rate provides a bright picture for the years to come. Pro-forma Income Statement Pro-forma Balance Sheet: Assumptions It is assumed that the firm has an additional capacity to invest in its business segments. The group is in a service business therefore, the production capacity is not to be questioned. It is the constructor of Burj-ul-Khalifa therefore; capabilities and expertise in the construction sector cannot be questioned. Recently, the residential plots are getting sold therefore, cash inflows have increased. It is expected that the construction will continue to increase in the near future. This is the reason behind a 3% growth in the sales. Moreover, the unaudited quarterly statements are reviewed and the results provide buttress to the growth rate mentioned. The profit and loss statement account titles will move with the increase in sales, however; only the current liabilities portion of the sources side and all the underlined assets will increase with sales. The long term debt and common stock would remain constant. It is noticed that the need for external financing would not be needed. External Financing Need (EFN): The External Financing Needed (EFN) can be determined from the Partial Pro-Forma Balance Sheet. It is simply equal to the difference between Partial Pro-Forma Total Assets and Partial Pro-Forma Total Liabilities and Owners' Equity. Sustainable Growth Rate Internal Growth Rate (Ross, Westerfield, & Jordan, 2008) The company would not need any financial assistance, as the External financing need is negative. The company’s growth rate is nominal but the real growth rate would not be more than inflationary pressure. The company will not pay out any dividend this year which is in accordance with the corporate strategy. Works Cited Brigham, E. F., & Ehrhardt, M. C. (2010). Financial Management Theory and Practice. Cengage Learning. Chandra, P. (2008). Financial Management. Tata McGraw-Hill Education . Emaar. (2010). Emaar Properties PJSC and its Subsidiaries: Consolidated Financial Statements. Emaar Properties PJSC. Financial Management. (2010). DIANE Publishing. Gitman, L. J. (2005). Principles of managerial finance. Pearson Addison Wesley. Khan, & Jain. (2007). Financial Management. Tata McGraw-Hill Education. Megginson, W. L., & Smart, S. B. (2008). Introduction to Corporate Finance. Cengage Learning. Ross, S. A., Westerfield, R., & Jordan, B. D. (2008). Fundamentals of corporate finance. Tata McGraw-Hill Education. Shim, J. K., & Siegel, J. G. (2008). Financial Management. Barron's Educational Series. Siegel, J. G., Jae K. Shim, S. H., & Hartman, S. W. (1997). Schaum's quick guide to business formulas: 201 decision-making tools for business, finance, and accounting students. McGraw-Hill Professional. Read More