The main purpose of preparing this report is to facilitate performance comparisons between Ann Joo Resource Berhad (AJRB) and Kinsteel Berhad (KB) to aid investment decision. Both of these companies are steel manufacturers and they are among the five leading players of the steel manufacturing industry in Malaysia. The comparisons on performance are going to be achieved by comparing various accounting ratios calculated from figures obtained from the annual reports of the two companies for Year 2008 and 2009. These ratios are general indicators of profitability, efficiency, liquidity, investment returns and capital structures. By comparing and analyzing the values of these accounting ratios relative to one another, it is possible to arrive at an informed decision as to which company is worth investing. Before going into that level of details, a rough observation is first made based on the five years' financial highlights of the two companies. The issue of corporate governance, as well, is taken into consideration. This report will discuss the manner in which the two companies are administered and also the roles of the companies' Board of Directors. Another area that is given due consideration is the accounting policies practised by the companies, specifically, the valuation and depreciation policy of non-current assets and the valuation of inventory.
2.0 Corporate Governance & Roles of Directors
One of the areas of concern when it comes to investing in a company is corporate governance. Good corporate governance is key towards maintaining investors' confidence. In this aspect, both companies' practices can be considered satisfactory. There is adequate separation of responsibility at the top leadership - both companies' Boards of Directors are lead by the Chairman whose role is to ensure the effective functioning of the Board; whereas the responsibilities of leading the management, running day-to-day business, making operational decisions and implementing policies lie with the Managing Director.
The Boards of Directors of both companies consist of a balanced mix of executive and non-executive directors (independent and non-independent). The directors contribute expertise and specialisation from different fields to the running of the business. The independent directors, on the other hand, contribute independent and unbiased to the decision making of the Board and act as check and balance for decisions by the executive directors. The make-up of the Board of Director is in such a way that no one individual or group of individuals can enjoy an absolute concentration of decision-making power.
Additionally, the directors, in preparing the annual financial reports, are assisted by the Audit Committee so as to ensure that the reports comply with applicable accounting standards as well as the Companies Act 1965. Internal control is exercised and a transparent relationship with external auditors is actively maintained. Investors can be sufficiently confident when investing in either company.
3.0 Accounting Policies (Non-current Assets, Depreciation & Inventories)
3.1 Non-current Assets & Depreciation
For AJRB, non-current assets are stated at cost less accumulated depreciation and/or any accumulated impairment losses. Assets comprising land and buildings are revalued at 5 years or shorter interval whenever the fair values of the assets are deemed to be significantly different from their carrying values.
Depreciation basis for AJRB for property, plant and equipment is straight-line over the assets' estimated useful lives. Assets leased are depreciated over the shorter of the lease term and their useful lives.
For KB, non-current assets are recognized at initial cost value. Subsequent to that, property, plant and equipment except for freehold land are stated at cost less accumulated depreciation and/or any accumulated impairment losses.
Freehold land and capital work-in-progress are not depreciated. Depreciation is on straight-line basis for depreciable assets and is calculated based on percentage decrease in value per year.
3.2 Inventories
Inventories for Ann Joo are measured at the lower of cost and net realizable value. Inventories cost are based on the weighted average cost and include as well expenditure incurred in acquiring the inventories (transport, storage, etc.). Appropriate share of production overheads will be included for semi-finished and finished products.
Kinsteel Berhad states its inventories at lower of cost and net realisable value. Cost is determined using the weighted average method. The cost of raw materials comprises purchase price and incidentals incurred in bringing the raw materials to their present location. The cost of finished goods comprises costs of raw materials, direct labour, other direct costs and appropriate proportions of manufacturing overheads based on normal operating capacity.
4.0 Five Years' Financial Highlights
The five years' financial highlights included in both companies' annual reports are good measures of past performance as it includes all the key indicators of financial performance of the companies. From here the trend can be observed, whether it is a declining one or a descending one. The following are the highlights for AJRB from Year 2005 - 2009 extracted from Annual Report for Financial Year 2009.
Table 4.1: Five Years Financial Highlights (AJRB 2009 A. Report)
One would observe that between 2005 and 2009, the figures are generally increasing year by year. However Year 2009 saw almost all the figures for AJRB dropping by huge percentage. This could be due to two factors:
the global economic downturn causing steel consumption to decline and hence steel price tumbles, and/or,
AJRB having to finance its Prai steel manufacturing plant expansion and at the same time have to close the plant and stop production
This pattern is expected to last only temporarily because the upgrading work is now finished and the plant output resumed, and the plant production capacity is now higher and the process more efficient. The global economic are showing subtle signs of recovery hence demand for steel export is expected to gradually recover. An interesting point worth noticing from here is that the profit after tax for Year 2008 is higher than the profit before tax of the same year. This is explainable by tax incentive on that year. This has the effect of negating the tax expense. Thus causing after-tax profit to increase.
Financial highlights for KB are summarized below:
Table 4.2 Five Years Financial Highlights (KB 2009 A. Report)
Profit is declining from Year 2006 to 2009. In fact KB actually registered a loss for 2009. Besides that, we can see that earnings per share figure is decreasing as well. Like the case of AJRB, this downtrend could be attributable to the global economic downturn. Another possible explanation for this is the acquisition of debt-ridden Perwaja Holdings Berhad. The cost to administer the company away from its loss-making state maybe very high and this in turn will affect KB's profitability.
5.0 Ratio Analysis
The financial information contained in the annual report is not conveniently comparable, especially when cross-company comparisons are to be made. A solution towards this problem is by standardizing these information into ratios - which will be comparable regardless of the size of the companies to be compared or the magnitude of the figures involved. This approach is referred to as Ratio Analysis. Besides being used for comparison, ratios are also clear indicators of the performance and financial position of a company. For the Ratio Analysis conducted in this report, the ratios can generally be divided into five categories:
Profitability Ratio
Efficiency Ratio
Liquidity Ratio
Investors' Ratio and,
Capital Structure Ratio
All five categories of ratios measure different aspect of the performance/financial position of a business. A precaution when handling ratio analysis is that we must compare 'like' with 'like'. In other words, ratio analysis is only useful if you compare between similar businesses of identical scale and in similar industry. For this report both Ann Joo Resources Berhad and Kinsteel Berhad are in the steel manufacturing industry and they are of similar scale, therefore ratio analysis on these two companies will be of practical use.
5.1 Profitability Ratio
Profitability ratio measures, like its name suggests, how effectively a company's management is generating profit. In this report four profitability ratios are obtained for both companies for financial year 2008 and 2009. They are summarized as below:
PROFITABILITY RATIO
2008
2009
ANNJOO
KINSTEEL
ANNJOO
Return on capital employed, %
11.1
4.3
6.2
Return on equity, %
15.7
4.0
3.5
Gross profit margin, %
7.8
4.2
8.3
Net profit margin, %
6.7
2.1
2.4
Table 5.1 Profitability Ratio
Return on capital employed, ROCE, measured in percentage, is the amount of profit a company gets in return for the amount of capital utilized to run revenue-generating activities. From the table, AJRB has significantly higher value of ROCE compared to KB. This means that for every unit of capital employed, AJRB will be able to generate more profit than KB. This is probably due to AJRB having a production process which is more cost-effective than KB.
Return on equity, ROE is similar to ROCE, only that it measures profitability per amount of shareholders' equity used in running the business. Again, AJRB seemed to be ahead of KB, signalling that AJRB is utilizing the shareholders' equity more efficiently.
Gross profit margin, GPM shows gross profit as a portion of the revenue. The bigger the figure, the higher the percentage of revenue that ends up as gross profit. The gross profit margin of KB leaped from 4.2% in 2008 to 11.4% in 2009 - a more obvious increase than AJRB's figures. However it will later be seen that the high 11.4% GPM does not really translate to a high net profit for Kinsteel.
Net profit margin, NPM, measures how big a percentage of the revenue ends up as net profit. AJRB fares better in this aspect, whereas Kinsteel Berhad registered a net loss for financial year 2009 thus giving a negative NPM value. This loss is due to high expenditure and relatively low revenue for 2009.
5.2 Efficiency Ratio
Efficiency ratio shows how well a company is managing its working capital.
EFFICIENCY RATIO
2008
2009
ANNJOO
KINSTEEL
ANNJOO
Inventory turnover ratio
2.06
1.45
1.35
Asset turnover
1.93
1.04
1.38
Table 5.2: Efficiency Ratio
Inventory turnover ratio is the number of times the inventory of a business is turnover during the financial reporting period. AJRB and KB both display acceptable level of inventory turnover. The difference in value could be due to different ways of inventory management between the two companies.
Asset turnover ratio measures the effectiveness of assets in generating revenue. AJRB has a higher value for asset turnover ratio, indicating that AJRB's assets are better used in generating sales. KB's turnover ratio is not significantly inferior, again, there is bound to be slight differences between different companies.
5.3 Liquidity Ratio
Liquidity ratio measures the sufficiency of a company's resources in order to meet its financial obligations.
LIQUIDITY RATIO
2008
2009
ANNJOO
KINSTEEL
ANNJOO
Current ratio
1.36
0.93
1.03
Acid test ratio
0.29
0.26
0.17
Table 5.3: Liquidity Ratio
Current ratio indicates whether a business' current assets are adequate to fulfil current liabilities obligations. It is not unusual for companies to have a current ratio of less than 1. Despite having a current ratio of less than 1 for year 2008 and 2009, Kinsteel Berhad is probably not going to face any difficulties in paying up current liabilities. This is because current liabilities normally have differing due dates, i.e. they are not all going to be due at the same time. Having a ratio of more than 1 like AJRB is desirable.
Acid test ratio is identical to current ratio, only difference being that the inventories are not taken into consideration as current assets. Reason of excluding inventories is that inventories may not necessarily be able to be immediately turned into cash. In this analysis, both companies showed ratio that is within the acceptable range.
5.4 Investors' Ratio
Investors' ratio is an expression of how well-performing a company is relative to its share price, dividends and number of shares.
INVESTORS' RATIO
2008
2009
ANNJOO
KINSTEEL
ANNJOO
Earnings per share, Sen
26.7
3.48
6.05
Price/Earnings ratio, year
7.22
12.29
22.81
Dividend yield, %
10.4
4.3
2.2
Dividend cover
3.12
2.04
2.80
Table 5.4: Investors' Ratio
Earnings per share, EPS measures the profit attributable to each unit of ordinary share. For every unit of ordinary share of AJRB, 26.7 sen of profit is attributable in 2008 and 6.05 sen in 2009. The EPS figures of AJRB are higher than KB meaning more profit is attributable to each ordinary share for AJRB than for KB.
Price/Earnings ratio, P/E ratio, measured in year, shows how much investors are willing to pay for a company's shares, given its current EPS. This ratio indicates investors' confidence in a company's future prospect of growth. Usually, a high P/E ratio is a good sign that investors are confident that future earnings of the company will increase. However this is not always the case, it should not be forgotten that P/E ratio is affected by the EPS of a company, therefore a high P/E could be the result of a low EPS. Such is the case of Kinsteel Berhad for 2008 and 2009. The P/E ratio for 2009 is exceptionally high because of its low EPS.
Dividend yield is a simple measure of dividend paid over the market price of a share. The higher the yield, the more lucrative a dividend payout appears to be.
Dividend cover computes the number of time dividend is able to be covered by current level of earnings. The dividend cover ratios for AJRB and KB are normal although AJRB does appear to have more attractive ratios.
5.5 Capital Structure Ratio
Capital structure ratio shows the way in which a company is financed (by debt/equity)
CAPITAL STRUCTURE RATIO
2008
2009
ANNJOO
KINSTEEL
ANNJOO
Gearing ratio
0.63
0.95
0.42
Debt ratio
0.56
0.56
0.53
Table 5.5 Capital Structure Ratio
Gearing ratio is the proportion of non-current liabilities over capital employed. The higher the value, the more leveraged a company is. Kinsteel's gearing ratio of 0.95 and 0.96 for year 2008 and 2009 suggests that the very much financed by its non-current liabilities. This is not a healthy sign.
Debt ratio is concerned with the sufficiency of a company's assets in relation to meeting all its liabilities when it is due. The ratios in the range of 0.5 are rather acceptable for AJRB and KB, indicating that their assets are almost twice their liabilities.
*The calculations and formulas of the ratios mentioned above are included in the appendix.
6.0 Conclusion
From the analysis conducted, it is evident that Ann Joo Resources Berhad is a better option to invest in. AJRB has been shown to be utilizing its resources more efficiently than Kinsteel Berhad in generating profits. AJRB is in better shape financially as it has superior efficiency, liquidity and most importantly, investors' ratio. Also, AJRB is less heavily leveraged, unlike KB, which makes it less risky as an investment option. Additionally, AJRB's Prai steel manufacturing plant expansion is timely as the company's improved productivity means that it is now ready to meet the global demand of steel, considering that the global economy is recovering.
Appendices
PROFITABILITY RATIO
FORMULA
Return on capital employed, %
Return on equity, %
Gross Profit Margin, %
Net Profit margin, %
EFFICIENCY RATIO
Inventory Turnover Ratio
Asset Turnover
LIQUIDITY RATIO
Current Ratio
Acid Test Ratio
INVESTORS RATIO
Earnings Per share, Sen
Price/Earnings Ratio, Year
Dividend Yield, %
Dividend Cover
CAPITAL STRUCTURE RATIO
Gearing ratio
Debt Ratio
PROFITABILITY RATIO
ANNJOO
2008
2009
Return on capital employed, %
Return on equity, %
Gross profit margin, %
Net profit margin, %
EFFICIENCY RATIO
Inventory turnover ratio
Asset turnover
LIQUIDITY RATIO
Current ratio
Acid test ratio
INVESTORS' RATIO
Earnings per share, Sen
Price/Earnings ratio, year
Dividend yield, %
Dividend cover
0
CAPITAL STRUCTURE RATIO
Gearing ratio
Debt ratio
PROFITABILITY RATIO
KINSTEEL
2008
2009
Return on capital employed, %
Return on equity, %
Gross profit margin, %
Net profit margin, %
EFFICIENCY RATIO
Inventory turnover ratio
Asset turnover
LIQUIDITY RATIO
Current ratio
Acid test ratio
INVESTORS' RATIO
Earnings per share, Sen
Price/Earnings ratio, year
Dividend yield, %
Dividend cover
CAPITAL STRUCTURE RATIO
Gearing ratio
Debt ratio
