Analysis On Financial Performance Of Suncorp Group Limited

pages Pages: 4word Words: 890

Question :

HC2091: Finance for Business

INSTRUCTIONS

Students are required to form a group to study, undertake research, analyse and conduct academic work within the areas of business finance covered in learning materials Topics 1 to 10 inclusive. The assignment should examine the main issues, including underlying theories, implement performance measures used and explain the firm financial performance. Your group is strongly advised to reference professional websites, journal articles and text books in this assignment (case study).

Tasks

This assessment task is a written report and analysis of the financial performance of a selected listed company on the ASX in order to provide financial and investment advice to a wealthy investor. This assignment requires your group to undertake a comprehensive examination of a firm’s financial performance based on update financial statements of the chosen companies.

Group Arrangement

This assignment must be completed IN Group. Each group can be from 2 to maximum 5 student members. Each group will choose 1 company and once the company has been chosen, the other group cannot choose the same company. First come first served rule applies here, it means you need to form your group, choose on company from the list of ASX and register them with your lecturer as soon as possible. Once your lecturer registers your chosen company, it cannot be chosen by any other group. Your lecturer then will put your group on Black Board to enable you to interact and discuss on the issues of your group assignment using Black Board environment. However, face to face meeting, discussion and other methods of communication are needed to ensure quality of group work. Each group needs to have your own arrangement so that all the group members will contribute equally in the group work. If not, a Contribution Statement, which clearly indicated individual contribution (in terms of percentage) of each member, should be submitted as a separate item in your assignment. Your individual contribution then will be assessed based on contribution statement to avoid any free riders.

Submission

Please make sure that your group member’s name and surname, student ID, subject name, and code and lecture’s name are written on the cover sheet of the submitted assignment.

When you submit your assignment electronically, please save the file as ‘Group Assignment- your group name .doc’. You are required to submit the assignment at Group Assignment Final Submission, which is under Group Assignment and Due Dates on Black Board.

Submitted work should be your original work showing your creativity. Please ensure the self- check for plagiarism to be done before final submission (plagiarism check is not over 30% of similarity, except the cases where the similarity is reflected by using the same format of Holmes’ assignment, the same references or sources of data) in accordance with SafeAssign Student Guide in Black Board. Please note that it takes 48 hours for the self-check report to be available for your viewing.

Always keep an electronic copy until you have received the final grade for the Unit. Please make sure that you submit the correct file. Any appeal relating to submitting wrong files after the deadline will not be considered.

Deadlines

Registration of groups and chosen companies: 5 pm Friday, Week 4

Final Submission of Group Assignment: Midnight (23:59 pm.) Sunday, Week 10

Late submission incurs penalties of 5 (five) % of the assessment value per calendar day unless an extension and/or special consideration has been granted by the lecturer prior to the assessment deadline.

BACKGROUND

You’re a group of investment analysts who work for a large investment consulting firm based in Australia. There’s one big institutional investor from overseas that is interested in investing in the Australian market. You’ve been asked to choose a listed company in Australia (in the industry you think will have the most promising future for investment) then evaluate it and give your client financial advice on whether or not she/he should include the share of that company in her/his investment portfolio.

Required:

Create your group’s “business name” under which your group will be providing the financial advisory services. Choose one listed company that your group will investigate/analyse for the purposes of possible recommendation to your client. The group should obtain all information about the selected company from this web site: www.asx.com.au.

2

Obtain a copy of the last two financial years (2016-2017 and 2017-2018) Financial Statements of the chosen company (annual reports are accessible via company websites). Your group can downloaded these documents from the suggested web site using the firm’s code (example, BHP- for BHP Billiton Company, etc.).


1.Description of the
Prepare a brief description of the selected company, outlining the

companies

 
core activities, competitive advantages, and the market in which

 
it operates within and any factors in the company’s history which

 
you consider help present a “picture” of your chosen company.

 
 
 
 
5 marks

 
 

2.Calculation and
Using financial data obtained from current financial statements of

your selected company for the given 2 years to calculate the

analysis of financial

following ratios and present them in relevant charts or tables.

ratios

Provide analysis on the company performance and justify your

 

 
opinions using the data:
 
 

 
-
Liquidity ratios
 
 

 
-
Profitability ratios
 
 

 
-
Market value ratios
 

 
 
 
 
5 marks

 
 

3.Graphs and
Using the information from the ASX website: www.asx.com.au

to prepare
one
or more graph
displaying movements
in the

comparison of share

monthly share
prices over the
last two years for the
chosen

price movements

company that you are investigating.
 

 
 

 
Providing an analysis to compare the movements in the

 
companies’ share prices to the All Ordinaries Index. For instance,

 
whether your selected company price trend is more or less volatile

 
compared to the index? How closely it is correlated with the All

 
Ordinaries Index, above or below the index?
 

 
Do a research to identify the factors that affected the share price

 
movements of the company within 2 years.
 

 
 
 
 
5 marks

 
 

4. Calculation cost of
Go online to http://www.reuters.com/finance/stocks/ and type in the

equity
code for your company into the Search Stocks field and click on the

 
magnifying glass button.
 
 

 
 
 
 
 
 

 
 
 
 
 
3
 
What is the calculated beta (β) for your company?
 
If the risk free rate is 6 % and the market risk premium is 7 %, use
 
the Capital Asset Pricing Model (CAPM) (SML approach) to
 
calculate the required rate of return for the company’s shares.
 
 
5 marks
 
 
5. Identify the capital
Identify and discuss the capital structure of the company by
structure
calculation capital structure ratios and weights of debts and equity
 
capital. Comment on any change in the company’s capital structure
 
through years. Support your comments and analysis by further
 
research.
 
 
5 marks
 
 
6. Consulting Report
After completion of your analysis, you need to present a well-
 
structured report to your client using appropriate style and language.
 
Structure of the Report: will include:
 
1.
Title
 
2.
Introduction
 
3.
Table of Content
 
4.
Body (in text citation: paraphrased or quotation to support
 
 
your arguments)
 
5.
Conclusion
 
6.
Recommendation
 
7.
Reference lists (Harvard Style)
 
 
5 marks
 
 
 

Academic Writing, Referencing and Plagiarism

Presentation of written work

The report must have an academic written structure including an introduction, body and conclusion.

▪Use numbers to structure body of the report (e.g., “2.5. Research via the internet”).

▪Provide an explanation on each of these issues (points) and explain how they confirm the underlying financial management theory.

▪You are required to use Times New Roman font, size 12 with 1.5 line spacing.

▪Please insert page numbers into your assignment and use 3 cm margins.

A high standard of work is always expected, so poorly presented work may be returned unmarked with a request to re-submission. 

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Answer :

HC2091: Finance for Business

Executive Summary 

The report which is presented below represents the analysis made upon the financial performance of the company Suncorp Group Limited. The purpose behind the preparation of the report is to extend advice relating to investment decision and finances to the potential investors. The financial statements that are published by the company have been used extensively to arrive at the judgements offered. The report is properly sectioned into different parts. The first part deals with the description of the company expressing the activities performed at the core level along with the market of company’s operation. The different ratios for the company are calculated to check the financial status. 

Introduction

With the ramified economic changes, each and every investors need to assess the financial performance of company. The graph depicting the movements that have happened in the share price over two years on monthly basis is also presented. The comparison then is made with the ordinary index. The factors that affected and led to these movements are also discussed. The cost of equity is computed using the capital asset pricing model. Thereon the company’s capital structure is identified. Based on all this calculation an accumulation is done which has led to the preparation of this report. The end part of the report is providing conclusions and recommendations for the places where the performance of the company can improve.

Description of company

Suncorp Group Limited is situated and operating from Brisbane in Queensland, Australia. The corporation works in the core area of finance, insurance and banking. However, the largest area of working revolves around general insurance. The insurance market is captured by the company including the life, commercial, and general insurance. The company forms up the largest banking corporation that operates in that region. 

The competitive advantage is offered to the company by the strategic assets that it owns. These are famous by the name of “4Cs”. The assets are named Capital, Cost, Customer and Culture. These elements strengthen the company’s functioning and help to attain a position that is competitive over the rest competitors. The company has been rated A+ with a strengthened positioning of capital and finances. The customers are highly satisfied by the kind of service extended. The company has also been rewarded for remarkable performance by several awards (Smith, Henderson, and Ginger, 2015).

The market captured by the group is also huge. The company has a customer base of more than 9 million customers. The number of business and retail banking outlets for the entity range around 232. Further the acquisitions of GIO and Promina had added to the number of agencies and retail branches that are operated under the group control (Smith, and Henderson, 2015).

The factors that help to make the picture that is reflected by the company on present date are several. The company has several priorities when it comes to the strategies formulated. The customers are prompted and served with various services that are completely personalised. The business is digitalised using the latest available technologies. The human resources have been focused to be well trained and updated as well (Sun crop Group Ltd., 2019). They have been trained to be technology savvy. Along with every internal fineness, the regulatory requirements are also followed appropriately. All the core activities are main areas to inspire growth through harmonisation (Johnstone, and Wilkinson, 2016). 

Calculation and analysis of financial ratios

The ratios calculated are:

  1. LIQUIDITY RATIOS

The liquidity ratios calculated include the current ratio and quick ratios.

current asset details
 
2017-06
2018-06
cash & cash equivalents
1840000000
1165000000
short-term investments
1520000000
1639000000
premium & other receivables
567000000
474000000
current assets
3927000000
3278000000
quick assets
1840000000
1165000000


current liabilities
 
2017-06
2018-06
unearned premiums
4965000000
50360000000
short-term debt
2022000000
2983000000
current liabilities
6987000000
53343000000


ratio
formula
2017-06
2018-06
current ratio
current assets/current liabilities
0.56
0.06
quick ratio
quick assets/ current liabilities
0.26
0.02

(Yahoo finance, 2018).

ANALYSIS: 

The liquidity ratios represent the current financial stability that endures the organisation. The current ratio shows the falling strength that the company has when the current position to settle claims is observed. The ratio has drastically fallen. The same is seen for the liquid position that is stated by the liquidity ratio. The cash crunch severity is sure to strike the organisation if the situation does not get better (Castiglionesi, Feriozzi, and Lorenzoni, 2017).

  • OPINION: the company must start to focus on handling the cash assets well. New cash, if required must be incorporated into the business through the help of share issue or sale of unwanted or cost acquiring assets (Borio, and Gambacorta, 2017) 

  1. PROFITABILITY RATIOS

The profitability ratios that are computed are net margin ratio, return on assets ratio, and return on equity ratio.

details
 
2017-06
2018-06
net profit
1075000000
1059000000
revenue
12670000000
12953000000
total assets
97109000000
99333000000
total equity
13782000000
13963000000


ratio
Formula
2017-06
2018-06
net margin (%)
net profit/ revenue x 100
8.48%
8.18%
return on assets 
net profit/ total assets x 100
1.11%
1.07%
return on equity
net profit/ equity * 100
7.80%
7.58%


  • ANALYSIS: 

Same as the liquidity ratios, the profitability ratios are also showing a falling trend. The net profit margin has fallen. The assets have increased, but the profit is not compensating the rise. As far as the return on equity is observed, the rise in the equity is also not supported by a consequent rise in the profits of the organisation (Dizkirici, Topal, and Yaghi, 2016).

  • OPINION: 

The company is required to focus upon increasing the profitability of business. The profit can be increased by either increasing the sales or cutting the costs. The sales could be raised by promoting the business through new marketing approach. The business must be advertised in new and positive manner. For the cost reduction, idle costs must be cut off (Ahmad, 2016).


  1. MARKET VALUE RATIOS

The market value ratios that are computed for the company include earnings per share, book value per share, and market value per share and dividend yield per share.

details
 
2017-06
2018-06
net profit
1075000000
1059000000
number of shares
1282167879
1288766728
book value of shares
12766000000
12863000000
market value of shares
17917000000
16400000000
dividend paid
911000000
942000000
dividend per share
0.71
0.73


ratio
formula
2017-06
2018-06
earnings per share (basic)
net profit/ number of shares
0.84
0.82
book value per share
book value/ number of shares
9.96
9.98
market value per share
market value/ number of shares
13.97
12.73
dividend yield
dividend per share/ market price per share
5.08%
5.74%


  • ANALYSIS: 

These ratios show a mixed picture. As far as the profitability or the standing of the company in market is observed, the earning per share has shown a downward movement. This is due to the decreased net profits and at the same time increased number of outstanding shares. The book value of the company’s share has risen. This has led to an obvious rise in the book value per share. But, if the correct position has to be identified, the market value per share is required to be computed. This has fallen. It shows that the company’s market capitalisation has fallen, which is somehow due to the falling market price per share. For the dividend yield, a raise is seen. The same is due to the increased amount of dividend that is being paid per share by the company (Almumani, 2018).


  • OPINION: 

The company must focus to increase the overall wealth of the shareholders. This shall incorporate a rise to be brought in the profits along with the market performance of the company’s common stock. This could be done by enhancing the brand image by incorporating changes that are favourable both to the profitability and brand image of the entity (Mule, Mukras, and Nzioka, 2015).

3. Graphs and comparison of share price movements

Date
Share price
% change
All Ordinary Stock exchange index
% change
30-Jun-16
11.84
 
5192
 
31-Jul-16
13.43
13.43%
5644
8.71%
31-Aug-16
12.74
-5.14%
5529.4
-2.03%
30-Sep-16
12.11
-4.95%
5525.2
-0.08%
31-Oct-16
12.08
-0.25%
5402.4
-2.22%
30-Nov-16
12.55
3.89%
5502.4
1.85%
31-Dec-16
13.52
7.73%
5719.1
3.94%
31-Jan-17
13.03
-3.62%
5675
-0.77%
28-Feb-17
13.27
1.84%
5761
1.52%
31-Mar-17
13.21
-0.45%
5903.8
2.48%
30-Apr-17
13.8
4.47%
5947.6
0.74%
31-May-17
14.03
1.67%
5761.3
-3.13%
30-Jun-17
14.82
5.63%
5764
0.05%
31-Jul-17
14.29
-3.58%
5773.9
0.17%
31-Aug-17
12.98
-9.17%
5776.3
0.04%
30-Sep-17
13.05
0.54%
5744.9
-0.54%
31-Oct-17
13.58
4.06%
5976.4
4.03%
30-Nov-17
14.11
3.90%
6023.5
0.79%
31-Dec-17
13.86
-1.77%
6167.3
2.39%
31-Jan-18
13.56
-2.16%
6146.5
-0.34%
28-Feb-18
13.56
0.00%
6117.3
-0.48%
31-Mar-18
13.34
-1.62%
5868.9
-4.06%
30-Apr-18
14.02
5.10%
6071.6
3.45%
31-May-18
13.43
-4.21%
6123.5
0.85%
30-Jun-18
14.59
8.64%
6289.7
2.71%

Source: (Yahoo finance, 2018)


ANALYSIS:

 The company’s price trend is highly volatile and is largely affected by the movements that are observed in the market. The situation is surely due to the company’s beta being closer to 1. Ignoring a few exceptions, a positive correlation is seen in the company’s share price trend and the ordinary index. However, the correlation’s closeness lies above 1. This is because the company’s change in the share price is way higher than the change that happens in the value of ordinary index.

E.g. if the data for the ending month of financial year 2018 is observed itself, the ordinary index has appreciated by a mere percentage of 2.71. However, this rise when hit the company’s stock price, the rise is as huge as 8.64%. This shows that the company is positively and at the same time with high volatility correlated with all ordinary indexes for the economy.

FACTORS THAT AFFECTED THE SHARE PRICE MOVEMENTS OF THE COMPANY IN TWO YEARS: 

A single factor is not responsible for the changes that the company has shown in the share price trend over the tenure of two years. Multiple factors have made it happen. Some factors relate to the internal processing of the company, while the others relate to the external environment which generically hits all the corporations working in the same business. The analysis is done as follows:

  • INTERNAL FACTORS
  • The various mergers and acquisitions that the company has entered into in this time period of two years. The major include the acquisition of Tower Insurance Limited. This was a loss affair and led to a loss of about $ 3.9 million.
  • The various joint ventures, partnerships and alliances that the company has done.
  • The launch of new business areas. E.g. launch of small business insurance.
  • The strategic policy formation and their implementation leading to either profitable or loss returns.
  • EXTERNAL FACTORS
  • Political instabilities leading to an overall effect on the stock market.
  • The economic condition that relate to the general economy of the country specifically and the world generally.
  • The value of Australian dollars in the international currency market.

Share Price Analysis

4. Calculation of cost of equity

The capital asset pricing model is used to compute the cost of equity for the Suncorp Group Limited. The formula used in the capital asset pricing model is:

Cost of equity = risk free rate + (beta x market risk premium)

The details of the required inputs for the computation of the cost of equity are:

  • Risk free rate: 6 % 
  • Market risk premium: 7%
  • Beta, as identified: 0.91

Beta of company can also be computed 

SUMMARY OUTPUT
Regression Statistics
 
Multiple R
0.728422054
R Square
0.530598688
Adjusted R Square
0.510189936
Standard Error
186.5820378
Observations
25


ANOVA
 
df
SS
MS
F
Significance F
Regression
1
905085.0128
905085.0128
25.99858
3.65132E-05
Residual
23
800695.7072
34812.85684
 
 
Total
24
1705780.72
 
 
 


 
Coefficients
Standard Error
t Stat
P-value
Lower 95%
Upper 95%
Lower 95.0%
Upper 95.0%
Intercept
0.012
681.8305143
3.439151139
0.002236
934.4443074
3755.392072
934.4443074
3755.392072
X Variable 1
0.89
50.8369616
5.098880746
3.65E-05
154.0473372
364.3758722
154.0473372
364.3758722


NOTE: The beta of .91 is taken as available on yahoo finance (Yahoo finance, 2019).

The beta of 0.91 shows that the shares of the company are highly risky. Any movement in the market is able to bring upon a change in the share prices of the company. the same face is also reflected by the position of the company’s share price. Any single trend is not observed in the share price. They are increasing and decreasing depending upon the market situations. They are highly correlated to the ordinary index as well.

The cost of equity as per capital asset pricing model is: 

6% + (7 x 0.91)

= 12.37 %

The return expected by the shareholders is more than double of the risk free rate. This confirms the risk that lays around the entity’s shares. The investors while investing in such risky shares have a higher expectation in form of returns. The cost of equity in other words is what the shareholders expect out of the money that they invest in the business of the entity. this high return depicts the cost that company has to bear for its investments being too risky for the investors (Zhu, 2014).

5. Capital structure

  • The capital structure of the company is represented as follows: 


2017-06
2018-06
long term debt
9958000000
14396000000
stockholder's equity
13782000000
13963000000
total
23740000000
28359000000

 The capital structure has changed in the financial year 2018 as compared to the financial year 2019. The proportion of debt has risen in the financial year 2018 over the previous financial year (Nicholson, & Kiel, 2007).

  • The book value weights based upon the capital structure are shows as follows:
book value weights
2017-06
2018-06
debt
41.95%
50.76%
equity
58.05%
49.24%

Due to the rise of the proportion of debt in the capital structure, the company has witness that the book value weights have also reversed. The percentage of debt that was in the capital structure in the financial year 2017 was 42% approximately has risen to reach around 51% approximately. While the share of equity has fallen by same percentage with which debt raise (Yahoo finance, 2018).

  • The capital structure ratio used to analyse the capital structure for past two years in the debt equity ratio. This ratio represents the proportion of debt in comparison to the company’s equity. Only long term debt is considered while computing this ratio. However, when the equity is taken, it comprises of equity as well as the retained earnings of the company Yahoo finance, 2018


Ratio
formula
2017-06
2018-06
debt equity ratio
debt/ equity
0.72
1.03

The debt equity ratio depicts the same picture as shown by the capital structure. In financial year 2017, the debt was only just 0.72 times the equity of the company. But, in financial year 2018 the same has become 1.03 times of the equity. 

ANALYSIS: 

The company has tried to trade on equity. But one thing that company completely has ignored might be the weighted average cost of capital. With the introduction of more debt in the capital structure, there is a chance that it has promoted the fall in the net profit margin and the return on equity. The financing cost may be higher. This high financing cost has to the overall fall in the returns that is expected and generated by the company on its ordinary shares. The company is in the need to change the capital structure. New shares are required to be issued, or the debt has to be repaid. But there might lay certain problem in repayment of debt without new share issue because of the cash crunch that the company is already facing. This analysis has shown the financing cost and business changes which has impacted the weighted average cost of capital of company (Brealey, et. Al. 2012).

CONCLUSION

The company’s analytical analysis has shown that the company’s performance is not improving. The ratios computed in the range of liquidity, profitability as well as for market value have all fallen. The company is at the alarming position to improve its working to sustain in the market, as far as the risks are concerned, the stocks of the company are highly risky. The beta of 0.91 depicts high volatility in the share performance. The same is observed from the share price chart of the company. The company has to work proper in line to improvise its current position. All the recommendations that have been mentioned ahead are important for the company to follow, if it wants to bridge the gap of expectations and reality. Now in the end, it could be inferred that financial performance of company is stable if company wants to sustain its business then it needs to lower down the debt capital. It will not only lower down its business financial leverage but also strengthen the corporate finance of company. 

RECOMMENDATIONS


The scope of improvement is huge. Some little steps can help to cement the gaps and attain fulfilment. The certain recommendations that can enlighten the current position to a favourable peak are:

  • The company must start to revamp the capital structure position. The debt is highly used and incorporated every year on a fresh basis. If reliance on debt has to be continued than the financing has to be done from the debt sources that are cost effective. Costly debt financing is negatively affecting the company’s returns. However, the best alternative could be to switch into share issuance. This would provide the company with new funds and at the same time shall not raise the working average cost of capital (King, & Levine, 2013).
  • The profitability must be taken good care of. Falling profits even after raised revenues is a negative signal. This represents that the company is unable to channel profits because of increasing costs. One reason is debt cost. The other reasons must be identified on a rapid rate and must be eliminated or minimised. This shall help to add into the profitability of the company.
  • The company is representing one of the highly risky share profiles. The volatility is high. Depending upon the high volatility, the return demanded by the shareholders is also higher. To maintain shareholder trust, the return that they expect must be paid to them. And this could only be done by adding to the profits and brand image. Both could be achieved by positive promotion tactics. If required, a separate marketing team must be created and entrusted with the task to deal with the different operational zones with different agendas to grab the target customer groups (Brooks, 2014).
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