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HA1022 Principals Of Financial Markets Group Assignment
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HA1022 Principals Of Financial Markets Group Assignment
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Course Code: HA1022
University: Holmes Institute
MyAssignmentHelp.com is not sponsored or endorsed by this college or university
Country: Australia
Question:
Fundamental Analysis seeks to identify factors that are likely to influence directional changes in the value of a company and hence its share price. These factors may be macro or micro in context.
a) Conduct a Top Down analysis of the overall economic environment and consider how forecast changes in economic fundamentals will impact on the performances of companies in the industry your group has chosen. Consider questions including, but not limited to: What is the current interest rate? What is the current value of the $AUD? What is current GDP? What is the inflation rate? What business cycle is the economy currently operating in?
b) Conduct a Bottom Up analysis of companies’ current financial situation. Consider accounting ratios and measures of a firm’s performance, how these need to be compared to the industry and company history,
All of the required information for calculation and often the actual ratio/number can be found on various websites on the internet.
Refer to both your textbook and information available on the internet. This assignment involves research to finding the information and then analysing this resulting information.
When writing the report, imagine that your audience are people that know nothing about finance or the financial markets. At each stage you will need to carefully explain what do are analysing and why. Do not think that just because your lecturer will know what this ratio means that you do not have to define it.
The research questions for the top down analysis will include:
What is the current interest rate?
What is the current $AUD value?
What is the current GDP?
What is the inflation rate?
Which business cycle does the country’s economy run in currently?
What is the country’s unemployment rate?
Bottom down analysis
The research questions for the bottom up analysis are:
What are the accounting ratios of each of the chosen companies?
What are the measures of the firms’ performance?
How does these two i.e. accounting ratios and firm’s performance relate to the industry and company history?
Answer:
Introduction
The basic definition of property management that has been widely adopted is that it is “…the overseeing, operation, and control of real estate.” Over the past decade beginning 2007-2008, the Australian real estate industry has seen a national dwelling soaring of up to 41.8% (Chikolwa, 2016). Just like any other business, the distribution of consumers in the real estate market is set to change depending on a number of factors and so is the investment. With the current demand of property in regional areas, a new set of real estate boom areas is being marked for exploitation. Conisbee (2018) identifies the areas with the most potential for real estate investment to be:
Ballarat, Victoria
Orange, New South Wales
Mackay, Queensland
Launceston, Tasmania
Often it is the affordability of property that ensures a wide market, in the aforementioned business areas, the average cost of houses is set at approximately $315,000 AUD which is affordable. However, the real estate market prices are determined by forces of demand and supply thus after sometime only the wealthiest can afford the property as demand grows and supply diminishes.
Purpose of study
The aim of this study is to conduct a fundamental analysis on the overall economic environment in a chosen industry and how forecast changes in the industry affect company performance.
Industry & companies
The real estate industry is chosen as the industry of interest while companies are Land lease group and Land and Homes group limited Australia.
Top down analysis
In conducting our top down analysis of the Australian economy, we will explore: the current business cycle of the economy, Growth Domestic Product growth, Inflation rate, current interest rate, current exchange rate of the AUD, Unemployment rate, as well as the government Debt to GDP
After which we will consider how the elements affect operations, i.e. monetary such as sales and profit in Real estate industry.
Current Business cycle of the economy
Kimberly (2018) in “why we are in the current business cycle”, notes that a business cycle can be subdivided into four phases: expansion phase, Inflation phase, contraction phase and the trough. According to an article by Melbourne University, the current business cycle began in 2017, i.e. it is at its peak.
Relating to a real economy, i.e. production, trade as well as consumption among the factors that really matter is how strong our trading partners are. Taking into consideration the strength of our trading partners as seen in figure 1, there has been a relatively stable overall growth in the Country’s major trading countries according to statistics of 2013.
Often, the state of world advanced economies also affects the country’s economic state in different ways in that, however the economies of countries such as Japan, England and United states are in various varying cycles, the overall inflation is relatively low ensuring that monetary regulations are stimulatory in their economies (Carmine, 2014). Hence, the stimulatory policies promote good expansion of central bank balance sheets therefore promoting low global interest rates leading to what is termed as “search for yield” (Kent, 2015). For instance, when considering the Australian economic state through factors such as unemployment rate, GDP growth etcetera as shown in the figures below.
By the year 2014, the unemployment growth rate of Australia had grown gradually and despite that in the year 2015 it was projected to remain relatively low it was forecasted that it would grow further by 2016.
The current Unemployment rate is at 5.3% a drop from 6.2% in 2014 and a further drop from 5.6% in April 2018, it is however projected to remain at the stable rate of 5. 25 by the 2nd quarter of 2020.
Growth Domestic Product (GDP) and other economic factors
The current Australian GDP growth rate is at 0.90% see figure 6. It is however predicted to drop to 0.8 in the 3rd quarter of 2018 and further to 0.6 by the end of 2018 by the year 2020; the GDP is forecasted to be at a 0.8% growth rate a figure that is lower than the current rate due to forecasted change in business economic cycle. By the start of the 2nd quarter in 2018, the Balance of Trade was 1551 AUD million which was projected to drop by the 3rd quarter to 600 AUD million and rise to 2000 AUD by close of 2018. By the year 2020 the Balance of Trade is forecasted to drop below negative to -500 AUD million dollars.
Additionally, the inflation rate which is at 2.10% is expected to drop to 1.8% by end of 2018 and 1.7% in the beginning of 2019, it is forecasted to however hike to 2.5% in 2020 due to projected global economic recession.
Given low inflation rates, (Thangaraj, 2012) ordinarily the interest rates would drop hence marking the economy as weak with a high unemployment rate, however in Australia the unemployment rate as of the 2nd quarter of 2018 was 5.4 which is nevertheless forecasted to rise by 0.1% to the 3rd quarter. Despite such a low inflation rate, the real estate industry is seemingly unaffected with property prices remaining fairly stable due to the low interest rates of 1.5 thereby increasing housing demand (Wills, 2008).
Effect of the economy elements on the Real estate industry
Currently
The low interest rates are set to increase housing and property demand therefore ensuring more sales which translate to more profits at company level. However, the country’s GDP will drop given the low interest and inflation rates.
Forecasted
With the inflation rate forecasted to rise to 2.5 by 2020 and the interest rates to follow suit to follow suit to 2%, the housing and property demand is likely to decrease due to increase in prices. In contrast such increases will see a projected growth in the country’s GDP to 0.8%
Inference
It is clear that the real estate industry and the economy elements such as inflation, GDP and interest rates have no correlation in terms of profitability, i.e. despite the fact that when inflation is high, the interest rates are high and housing demand is low. The growth of GDP has nothing to do with the profitability of real estate and vice versa.
Bottom up analysis
In the bottom up analysis, a segment of fundamental analysis, we will examine the basics of two ASX listed firms (Land lease group and Land and Homes group limited Australia).
What are the accounting ratios of each of the chosen companies?
What are the measures of the firms’ performance?
How does these two i.e. accounting ratios and firm’s performance relate to the industry and company history
In the analysis we will explore the analysis of the companies in context to the 2018 business cycle.
Lendlease Group
About
Founded by Dick Dusseldorp and headquartered in Barangaroo, Sydney, Lend Lease is an international real estate company that deals in property and infrastructure. The company boasts of up to 13,000 employees. They have overseen projects such as the Athletes’ Village in London and Sydney Opera House among others. The current C.E.O of the company is Steve McCann
Vision and Strategy
Lendlease has a strategy that aims to bring into fruition their vision of developing the best places through leverage of their integrated business model among key cities.
Revenue
The company’s net revenue in 2016 was $15.09 USD, the stock price of the company as of 25th Sep 2018 is LLC (ASX) A$19.44 -0.02 (-0.10%).
Performance
The total revenue generated by the company by the close of fiscal year 2016 is $ 7,945 million while that for fiscal year 2017 is $ 8,691.2 million. From the income statement, it is noted that the cost of sales for end of fiscal year 2016 is $7,077 million and that of 2017 is $7,778 million whereas the profit after tax is $394.5 million by end of 2016 and $425.7 million by end of 2017.
The company’s total equity by mid 2017 was $6,166.5 million and $6,429.1 million by close of fiscal year 2017.
Balance sheet analysis
From the balance sheet analysis above, the book value per share is set to increase through 2019, 2020 and 2021 while the cash flow per share will increase in 2019 and 2020 but drop in 2021.
The return on equity in the year 2017 is 12.9 % while that for the year 2018 is 13.8%. Where in the year 2017 the R.o.E dropped from 13.0 and rose in 2018.
The price to earnings ratio in the end of the 2nd quarter was $ 19.51 AUD while that from 2017 is $12.53 AUD.
Lend lease, recorded a high P/E (TTM) and P/E (including extraordinary items) ratio of 45.26 and 45.25 respectively, this statistics imply that the investors are hopeful of better future performance by the company. In addition, the current ratio of 2.07 by end of financial year 2017 indicates that the company is in a position to pay off its short-term and long-term liabilities.
Financial ratios
The operating margin of Lendlease is set to increase in the year 2020 to 6.95% from a projected 6.74% in 2019. In addition, its return on equity is projected to drop from 13.8% to 13.3% in the years 2019 and 2020.
Land and Homes group limited
About
Operating as a land and property management company in the Australian real estate industry, Land and Homes group interests itself in development of apartments ranging from residential through to commercial and mixed used apartments (Bloomberg, 2018). The company is headquartered at Brisbane, Australia.
Revenue
The company generated revenue of $244, 347 by end of fiscal year 2017-2018 a drop from AUD 3,021,133 recorded in the previous financial year.
Market and earnings
The Market cap for the LHM group in 2018 is 29.4 a drop from 44.1 recorded in 2017. Moreover, in 2018 the net interest cover drop to a negative of 4.05 from 1.03 in 2017. The net gearing percentage increased to 218.8 from 200.9 in 2017. The earnings per share for the year 2017 are +0.01 therefore per every 1 AUD stock the company makes 0.01 AUD profit. Statistically such an input output ratio is considered low and may account to the drop in revenue and losses generated by the company.
Ratios
The company made a loss of $3.1 million in 2018. In addition, the company recorded a negative return on equity of -26% a drop from+0.1% in 2017. The shareholders equity also dropped to $11.9M from $15M in 2017.
The net profit before Abs was -3.1; such low net profit is attributed to factors such as low sales given that the company recorded a very high drop in revenue generated for the fiscal year 2017-2018.
How the companies fared in relation to the industry and the economy
Despite a drop in the growth of the real estate industry, Lendlease maintains its profitability as well as increases the return on equity therefore ensuring more dividends to shareholders, i.e. more value for the shareholders with a positive return on equity and also managing to score an average price earnings of above 20 thus maintaining the trust of the shareholders in its performance. Given a positive profitability margin, and high revenue recorded for the fiscal year 2017 and the first half of 2018, we can therefore inference that the company is not affected by the Australian economic landscape adversely i.e. factors such as inflation and regulation policies did not affect its performance.
Land and Homes group
Of the two companies, Land and Homes group seems to be hard hit by the unstable real estate boom in the fiscal years 2017 and by the 2nd quarter of 2018 both in the Australian consumer environment. Given negative return on equity, negative gross and net profitability margin, and negative return on assets, the company lost money in the financial year 2017. Such a loss can be therefore be attributed to several external factors as discussed in the earlier section, which include, inflation effects and GDP growth which are mainly driven by the laws of demand and supply as well as other internal factors. Given such statistics, we can therefore infer that, despite the positive belief in the company’s performance as seen from the high E/P ratio, the company is one of the hard hit by the current drop in housing demand, low inflation and low interest rates in the Australian Economy (Westermann, Noblock and Kotrt, 2018).
Summary and Recommendations
From our study, it is evident that an economy is made up of several elements that interplay to control the performance of a given industry or company. Factors such as inflation, GDP growth rate, Unemployment, interest rate and the current business cycle are noticed to have been influential in how companies operate i.e. they influence prices and eventually sales which in return affect a company’s profits. However, there are several other factors other than macro-economic that determine the performance of a company. Evidently, in the same financial year Lendlease makes profits and has a positive forecast while Land and Homes makes loses with a forecast of more loses in the coming financial years. Thus, from the fundamental analysis, we realize that, different companies are influenced differently by the performance of an economy despite the fact that they may be in the same economy. Such a difference may arise from internal factors for example management and internal policies as well as the role of stakeholders and how well the company responds to competition. Therefore, it is not enough to study the effect of external factors on the performance of an economy since a given different companies may perform quite differently even though they are form the same economy.
Recommendations
Following our study, we recommend that for:
Lendlease Group
The company should invest more in the commercial and residential apartments since they generate more revenue compared to mixed apartments.
The company should monitor its investing pattern to ensure they are at par with the market demand and respond adequately to competition.
Land and Homes Group
The company should hire competitive managers and put in place sufficient internal structures so as to ensure good adaptation to whatever environment the economy presents.
It should come up with adequate measures to keep up with competition so as to maintain its profitability
The company should strategize and come up with means to achieve their goal
Generally, the government should device ways in which to protect producers against extreme environments such as inflation i.e. through provision of incentives in an effort to low production costs.
References
Bloomberg. (2018). Real Estate management and Development. Available from: https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapid=1271040 [Accessed 23rd September 2018]
Carmine, D. (2014). Oil, economic growth and strategic petroleum stocks. Energy Strategy reviews, 5(2), pp.48-58. DOI: 10.1016/j.esr.2014.
Chikolwa, V. (2016). Determinants of listed property trust and Bond Ratings. Australian journal of investment, 3 (2), pp. 453-459
Kent, C. (2015). Monetary policy transmission – what’s known and what’s changed [Online]. Available from: https://www.bis.org/review/r150616a.htm [Accessed 22nd September 2018]
Kimberly, A.(2018). Why we are in the current business cycle [Online]. Available from: https://www.thebalance.com/where-are-we-in-the-current-business-cycle-3305593 [Accessed 22nd September 2018]
Thangaraj, T.k.(2012). Effect of the Global Financial crisis on the Australian Real estate industry. Property and development, 34(5), pp. 53-55
Wills, P.C. (2008). Corporate real estate practice in Australia. Real estate, 12(3), pp. 37-46
Westermann, S., Noblock, S. and Kortt, M. (2018). A review of Corporate social responsibility and Real estate investment Trust Studies: Ann Australian perspective. Applied Economics and policy, 37(1), pp. 101-198. DOI: 10.1111/1759-3441.1220110.004
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