Leighton Holdings Limited - Recommendations for Investor - Example

Investment Research Report - Leighton Holdings Limited Table of Contents List of Figures 3List of Tables 4 Executive Summary 5 1.Introduction 6 2.Overview of Leighton Holdings and Comparison with Global Competitors 6 3.Operating and Financial Analysis of Leighton Holdings 8 3.1.Analysis and Interpretation of Selected Financial Ratios 8 3.1.1.Profitability 9 3.1.2.Asset Utilization 11 3.1.3.Liquidity 12 3.1.4.Debt Utilization 14 3.2.Significant Operating and Financial Issues 15 4.Currency Management and Performance Evaluation of Leighton Holdings 16 5.Recommendations for Investor 16 List of References 18 List of Abbreviations Used 19 List of Figures Figure 1: Profitability Ratios 11 Figure 2: Asset Utilization Ratios 12 Figure 3: Asset Utilization Ratios 14 Figure 4: Debt Utilization Ratios 15 List of Tables Table 1: Key Industry Averages Comparison 8 Table 2: Profitability Ratios 9 Table 3: Asset Utilization Ratios 11 Table 4: Liquidity Ratios 13 Table 5: Debt Utilization Ratios 14 Executive Summary In this report, a comprehensive business analysis of Leighton Holdings Limited has been presented. Based on the analysis conducted and a comparison of the company’s financial performance and standing, recommendations have been given for an offshore institutional investor as to whether the company offers a favourable investment opportunity and also what areas and strategies shall be considered before making investment therein. For the purpose of presenting a comparative analysis, Keller Group PLC has been considered as a competitor of the company. The analysis of Leighton Holdings Limited’s performance and financial standing and its comparison with its competitor reveals that the company offers a favourable opportunity for investment. In this regard, stability in the financial performance of the company has been the major finding which provides justification for recommending investment. The profitability ratios, liquidity ratios, debt and equity levels are indicative of the fact that investments made in the company will earn reasonable returns for the investor. Investment Research Report - Leighton Holdings Limited 1. Introduction Making investment in a business, notwithstanding whether it is at national or international arena, requires tremendous research, analysis and evaluation of the potential opportunities, threats and implications. It is therefore considered extremely pertinent to undergo intense evaluation of an investment opportunity before deciding about making it or not. This report undertakes a comprehensive business analysis of Leighton Holdings Limited, a large investment contractor, and presents recommendation for an offshore institutional investor as to whether the company offers a favourable investment opportunity and also what areas and strategies shall be considered before making investment therein. The report is divided into four broad sections, which include a brief overview of Leighton Holdings and its comparison with global competitors, commentary on the operating and financial issues of the company in light of selected ratios, an evaluation of currency management and overall performance of the company and recommendations for potential investors on the basis of analysis and evaluations carried out in this report. 2. Overview of Leighton Holdings and Comparison with Global Competitors Leighton Holdings Limited, being amongst the largest international contractors around the world, was established in the year 1949 and is headquartered in Sydney. The company was listed on Australian Stock Exchange (ASE) in 1962 (Leighton Holdings, 2013; Yahoo Finance, 2013). The current business profile of Leighton Holdings Limited shows numerous operations, which include construction, development and maintenance of infrastructural facilities, mining, resource provision and real estate services (Leighton Holdings, 2013). In addition, the company also undertakes projects related to construction of road, railway networks, cleaning up of contaminated areas, disposal of waste, and other related services. Apart from the domestic Australian market, the operations of the company are also spread internationally, which include regions 20 countries in the Asian region, Middle Eastern region, southern parts of Africa and the neighbouring country New Zealand. On the company’s portfolio, there are independent contractors also, which include: Leighton Contractors, Thiess, John Holland, Leighton Asia, India and Offshore, and Leighton Properties (Leighton Holdings, 2013). In addition to this, the company also has a shareholding of about 45 percent in Habtoor Leighton Group (Leighton Holdings, 2013). The following table shows a comparative analysis of Leighton Holdings Limited’s different indicators of financial and market performance with its peers. Statistic Industry Leader Leighton Holdings Limited Leighton Holdings Limited’s Rank Market Capitalisation 772.06 B 6.70 B 52 / 272 P/E Ratio (ttm) 2,439.39 9.6 97 / 272 PEG Ratio (ttm, 5 yr expected) 23.83 2.76 10 / 272 Revenue Growth (Qtrly YoY) N/A 6.90 % 98 / 272 EPS Growth (Qtrly YoY) 3799.70 % 24.90 % 39 / 272 Long-Term Growth Rate (5 yr) 54.20 % 4.53 % 39 / 272 Return on Equity (ttm) 81.15 % N/A N/A Long-Term Debt/Equity (mrq) 99.236 N/A Dividend Yield (annual) 1.40 % N/A N/A Table 1: Key Industry Averages Comparison Source: (Yahoo Finance, 2013a) In this table, it can be seen that Leighton Holdings Limited can be regarded as amongst leading international contractors. The ranking of Leighton Holdings Limited in relation to earnings per share ratio and long term growth rate of the company is the best amongst the ratios listed in the table. However, the gap between performance indicators of Leighton Holdings Limited and industry leader is considerable in almost all of the indicators shown above (Yahoo Finance, 2013a). 3. Operating and Financial Analysis of Leighton Holdings For the purpose of carrying out the analysis of operating and financial aspects of Leighton Holdings, there are four main ratios considered in this section, which include profitability ratio, asset utilization, liquidity and debt utilization ratios. 3.1. Analysis and Interpretation of Selected Financial Ratios As mentioned earlier, there are four types of ratios included in this analysis, which include profitability ratio, asset utilization, liquidity and debt utilization ratios. These ratios have been calculated by considering the related financial information for the financial years 2011 and 2012, so as to present a comparative financial performance evaluation. For the purpose of comparative financial analysis, a competitor of Leighton Holdings has been considered in this section, which is Keller Group plc, an international contractor operating from the United Kingdom (Keller Group PLC, 2012). 3.1.1. Profitability Profitability ratios determine the performance of a company in relation to its profit earning ability and a comparison can be performed between two or more years to determine the trend. The most common profitability ratios used to analyse profit making ability and trends associated with it include gross profit margin, net profit margin, return on assets and return on equity. These ratios are individually presented for the two companies and discussed as under while considering the related information for past two years: Company Leighton Holdings Limited Keller Group plc Leighton Holdings Limited Keller Group plc Year 2011 2011 2012 2012 Gross Profit Margin 7.90% 2.50% 4.27% 3.67% Net Profit Margin 3.39% 1.42% 2.33% 2.28% Return on Assets 3.48% 2.00% 3.95% 3.65% Return on Equity 12.47% 5.02% 15.16% 8.94% Table 2: Profitability Ratios Source: (Leighton Holdings Limited, 2012; Keller Group PLC, 2012) Gross Profit Margin The gross profit margin has decreased in the year 2012 as compared to 2011 due to higher increase in the operating expenses of the company in relation to the revenues earned (Leighton Holdings Limited, 2012; Keller Group PLC, 2012). Net Profit Margin Similar to gross profit margin, the net profit margin has also decreased in the year 2012 as compared to 2011 due to higher increase in the operating expenses of the company in relation to the revenues earned (Leighton Holdings Limited, 2012; Keller Group PLC, 2012). Return on Assets The return on assets for Leighton Holdings Limited increased slightly in 2012 due to significant increase in revenues of the company. Although, total assets have also increased but the increase in revenues has been significant enough to portray a positive growth in return on assets for the company (Leighton Holdings Limited, 2012; Keller Group PLC, 2012). Return on Equity Similar to return on assets, the return on equity also increased for Leighton Holdings Limited in 2012, although slightly. The revenues increased by almost 90 percent in 2012, whereas there is only a slight increase in the equity of company due to increased retained earnings included in the balance sheet (Leighton Holdings Limited, 2012; Keller Group PLC, 2012). Following bar diagram shows a graphical representation of trends in the past two years for the two companies with respect to the ratio being discussed in this section: Figure 1: Profitability Ratios 3.1.2. Asset Utilization Asset utilization ratios help in determining whether a company is making use of its assets in an efficient manner or not. The most common ratios included in asset utilization evaluation include total assets turnover ratio and fixed asset turnover ratio. These ratios are individually presented and discussed as under while considering the related information for past two years: Company Leighton Holdings Limited Keller Group plc Leighton Holdings Limited Keller Group plc Year 2011 2011 2012 2012 Total Assets Turnover 102.72% 140.48% 169.12% 160.24% Fixed Assets Turnover 189.83% 296.58% 404.43% 356.18% Table 3: Asset Utilization Ratios Source: (Leighton Holdings Limited, 2012; Keller Group PLC, 2012) Total Asset Turnover Owing to a significant increase in the revenues of the company, total asset turnover for the company increased by almost 70 percent in 2012. Total assets of the company increased slightly primarily due to major increase in trade and other receivables (Leighton Holdings Limited, 2012; Keller Group PLC, 2012). Fixed Asset Turnover The fixed assets of the company declined in the year 2012 due to significant decrease in the property, plant and equipment and investments of the company. This decline when related to a significant increase in revenues resulted in a considerable growth in the fixed asset turnover of the company for the year 2012 (Leighton Holdings Limited, 2012; Keller Group PLC, 2012). Following bar diagram shows a graphical representation of trends in the past two years for the two companies with respect to the ratio being discussed in this section: Figure 2: Asset Utilization Ratios 3.1.3. Liquidity Liquidity ratios determine the ability of a business enterprise to pay off its short term obligations. Current ratio and acid test or quick ratio are the most common ratios included in liquidity analysis. These ratios are individually presented and discussed as under while considering the related information for past two years: Company Leighton Holdings Limited Keller Group plc Leighton Holdings Limited Keller Group plc Year 2011 2011 2012 2012 Current Ratio 89.78% 156.08% 112.53% 144.23% Quick Ratio 78.35% 142.62% 91.26% 131.06% Table 4: Liquidity Ratios Source: (Leighton Holdings Limited, 2012; Keller Group PLC, 2012) Current Ratio The liquidity position of Leighton Holdings Limited has improved in 2012 due to considerable increase in current assets. The trade and other receivables of the company increased from $ 2,461.6 million to $ 3,440.8 million in 2012. On the other hand, current liabilities also increased but not in the same proportion as current assets have (Leighton Holdings Limited, 2012; Keller Group PLC, 2012). Acid Test or Quick Ratio Similar to current ratio, the quick ratio for Leighton Holdings Limited has also shown improvement due to increase in quick assets, which include the impact of a considerable increase in the trade and other receivables for the company (Leighton Holdings Limited, 2012; Keller Group PLC, 2012). Following bar diagram shows a graphical representation of trends in the past two years for the two companies with respect to the ratio being discussed in this section: Figure 3: Asset Utilization Ratios 3.1.4. Debt Utilization Debt utilization ratios are indicative of the financial well-being of a company in long run. In other words, these ratios evaluate the debt proportion in the balance sheet of a company. The most common ratios considered in evaluating the debt utilization of a company are debt ratio and debt to equity ratio. These ratios are individually presented and discussed as under while considering the related information for past two years: Company Leighton Holdings Limited Keller Group plc Leighton Holdings Limited Keller Group plc Year 2011 2011 2012 2012 Debt Ratio 20.94% 60.23% 22.26% 60.23% Debt to Equity Ratio 74.93% 151.44% 85.54% 151.44% Table 5: Debt Utilization Ratios Source: (Leighton Holdings Limited, 2012; Keller Group PLC, 2012) Debt Ratio The debt ratio for the company increased slightly due to the fact that the long term interest bearing liabilities of the company increased considerably. This resulted in an unfavourable change in the debt ratio (Leighton Holdings Limited, 2012; Keller Group PLC, 2012). Debt to Equity Ratio Similar to debt ratio, the debt to equity ratio of the company has also increased due to increased interest bearing liabilities, which resulted in an overall increase in the total debts of the company (Leighton Holdings Limited, 2012; Keller Group PLC, 2012). Following bar diagram shows a graphical representation of trends in the past two years with respect to the ratio being discussed in this section: Figure 4: Debt Utilization Ratios 3.2. Significant Operating and Financial Issues As mentioned earlier, the company owns 45 percent of shares in Habtoor Leighton Group (HLG). The investment in this Group has resulted in a significant exposure which amounted to $ 1.1 billion at the end of year 2012. Although the company has kept this matter on its top priority, but the matter is of significant concern as Leighton Holdings Limited has a large stake involved in HLG (Leighton Holdings Limited, 2012). 4. Currency Management and Performance Evaluation of Leighton Holdings Since Leighton Holdings Limited operates on a global scale, therefore there are various risks faced by the business which emerge at international level (Leighton Holdings Limited, 2012). Amongst various risks, the foreign currency exposure is a substantial one because it has a significant impact on the earnings of a company during a financial period. The global economic crisis, frequent changes in currency values and other factors have altogether raised the importance and significance of currency management (Leighton Holdings Limited, 2012). In its risk policy framework, Leighton Holdings Limited has included ten different risk management areas and has thus defined management strategies for each of them. In a similar way, foreign currency exposure is also included in Leighton Holdings Limited’s risk policy framework (Leighton Holdings Limited, 2012). Although the management of Leighton Holdings Limited places strong emphasis on the management of foreign exchange translation risks, there are still circumstances which are beyond control. It is due to this reason that the company incurred a foreign exchange loss equal to $ 15 million in the financial year 2012 (Leighton Holdings Limited, 2012). 5. Recommendations for Investor Keeping in view the operating and financial performance analysis and current risk management practices of the company, particularly in relation to currency management, it is recommended that Leighton Holdings Limited offers a favourable opportunity for investment. Apart from the fact that the company has a considerable difference in comparison with its peers, as far as performance indicators are concerned, the stability in financial performance is the key justification for recommending investment. The profitability ratios, liquidity ratios, debt and equity levels are indicative of the fact that investments made in the company will earn reasonable returns for the investor. However, since this report includes a small scale analysis, which stretches to two recent financial years only, it is therefore advised that potential investors shall consider reviewing the financial performance and indicators on a large scale. Particularly, considering the global economic downturn, it is advisable that investors shall consider the performance of the company before and after the financial crisis and conclude whether the company remained resilient towards financial distresses faced by it globally. List of References Arnold, G. & Kumar, M., 2008. Corporate Financial Management. New Delhi: Pearson Education India. Brigham, E.F. & Houston, J.F., 1998. Fundamentals of Financial Management. 8th ed. Orlando: Dryden Press. Helfert, E.A., 2001. Financial Analysis Tools and Techniques: A Guide for Managers. New York: McGraw-Hill. Keller Group PLC, 2012. Annual Report 2012. Financial Statements. London: Keller Group PLC. Leighton Holdings Limited, 2012. Annual Report. Financial Statements. Sydney: Leighton Holdings Limited. Leighton Holdings, 2013. Profile. [Online] Available at: http://www.leighton.com.au/who-we-are/profile [Accessed 10 September 2013]. Yahoo Finance, 2013a. Industry: General Contractors. [Online] Available at: http://au.finance.yahoo.com/q/in?s=LEI.AX [Accessed 14 September 2013]. Yahoo Finance, 2013. Profile. [Online] Available at: http://au.finance.yahoo.com/q/pr?s=LEI.AX [Accessed 9 September 2013]. List of Abbreviations Used P/E Ratio Price to Earnings Ratio PEG Ratio Price Earnings Growth EPS Growth Earnings Per Share Growth ttm Trailing Twelve Months Qtrly YoY Quarterly Year of Year mrq Most Recent Quarter Read More