MBA6001 Investment Management Report 2 Sample
Assignment Brief
On the basis of official company sources and external literature, evaluate and report on the most recent annual report of a company, as if you were security analysts making a recommendation on whether or not your clients should invest in it.
Please select one company from the list in Companies for assignment file. Once you agrees on the company, please email me at nilima.paul@vit.edu.au so I can reserve this company for you. The companies are allocated at first in-first out method.
Your report should include the following:
1. Business and Strategic Analysis (30%-35% of your word count)
Your report should include:
Analysis of the economy:
• discuss briefly (2-3 paragraphs) which macroeconomic factors (political, economic, social and/or technological factors – PEST analysis) may affect the industry that your company belongs to and your company performance.
Industry analysis:
• Identify the industry that you company belongs to and the company’s place in the industry (e.g. top performer, middle range, bottom).
• Identify a competitor company that belongs to the same industry and occupies similar position in the industry. You will use this company further in your analysis.
• Conduct Porter’s five forces analysis, conclude with assessment of industry’s current profitability and growth potential.
Company’s competitive and corporate strategy:
• Discuss company’s competitive strategy:
o explain the company’s business model: focus on how the company creates value
o discuss company’s resources AND capabilities (strategic advantages)
o Evaluate growth potential of the company: discuss how the companies sustain their strategic advantages and explain risks associated with the company’s business model
• Discuss the company’s corporate strategy
Practical:
• Download a copy of the company’s annual report for current year and previous 2 years.
• Download a copy of the competitor’s annual report for current year and previous 2 years.
2. Accounting Analysis (10% of your word count)
Your report should include:
• Using financial statements for your company and their competitor and your previous analysis (analysis of the economy and industry analysis) and identify
o The link between the company’s industry (success/risk drivers) and accounting items
o The link between the company’s business model and accounting items
• Evaluate the quality of the disclosure of your company: you may use the checklist provided in the lecture slides. You can use comparison to the competitor.
• Identify potential Red Flags (2-3): what are potential areas of earnings management
Practical/ Excel file:
• Use annual reports from part 1 and prepare Excel files with financial statements for your company and the competitor (Balance sheet, Income statement and Cash flow statement) for last 3 years (current year +2 previous years).
3. Financial Analysis (20%-25% of your word count)
Your report should include:
1. DuPont analysis of your company and their competitor
2. Cross-sectional AND time-series analysis of your company’s and their competitors’ accounts over the last 3 years.
• Using your analysis in sections 1 and 2, identify financial ratios to evaluate operating management, investment management, and financial management for your company and their competitor (generally 3-4 per each area)
• Explain your choice of ratios:
o Explain which ratios allow to benchmark your company with the rest of the industry (e.g., the competitor)
o Explain which ratios allow to evaluate the company’s business model
• Discuss major trends in the cross-sectional and time-series analysis of your company’s vs competitor’s.
• Explain the above trends with the reference to changes in #macroeconomic factors/industry/business strategy.
4. Prospective Analysis (10%-20% of your word count)
Your report should include:
• Justify major estimates for the forecast of your company (sales growth rate, NOPAT margin, WC to sales, LT assets to sales, Debt ratio, after-tax cost of debt, dividend rate). Your justification should be based on your company’s prior performance (major trends identified in section 3), macroeconomic/industry factors (identified in section 1), changes in business strategy (identified in section 1).
• Brief analysis of your forecast with emphasis on overall performance.
• Analysis of valuation of your company using the abnormal earnings method and market multiple approaches.
Practical/ Excel file
• Use your prior analysis to prepare a forecast of condensed income statement, balance sheet and cash flow statements for your company for one financial year (the next year for which the company has not published an annual report).
• Prepare a valuation for your company using one of the present value methods (discounted cash flows OR abnormal earnings method).
5. Recommendation for the clients, drawing on the whole analysis of the company/company reporting (5% of your word count).
Your report should include:
• Recommendation for your clients as to sell/buy decision
Solution
1. Business and Strategic Analysis
• Analysis of the Economy
Macroeconomic Factors Affecting the Telecommunications Industry
The industry that operates in an extremely complex and dynamic macroeconomic environment is the telecommunications industry, with companies such as Telstra and Vodafone. Certain factors indispensable, both within the performance and strategies of the companies in this sector, fall under the scope of some PEST (Political, Economic, Social, and Technological) factors.
Political: The regulatory policies and government interventions are direct influences over the telecommunications industry. Governments may introduce regulations related to data, users' privacy, and competition. Competition-oriented policies may induce entry in markets, whereas tough regulations can raise operational costs (Demneh et al., 2023). Equally, international trade policies and bilateral relations have a balanced effect on the overall operations set globally and the supply chain strategies of multinational telecommunications companies for university assignment help.
Economic factors of the economic environment have a direct effect on consumer spending and investment within the telecommunications industry (Demneh et al 2023). For instance, it may be observed that with a recession, consumers are bound to reduce their spending over non-essential services; hence, this, in turn, would affect the revenue stream for firms like Telstra and Vodafone. Conversely, economic growth can spur investment in infrastructure and technology, fostering industry expansion.
Social: The destiny of most of the players in the telecommunication industry is largely dependent on changes in customer preferences and behaviors. From the increasing demand for high-speed Internet services to mobile data and value-added services, such growth compels companies to innovation and customization of products (Blumel et al., 2023). Social trends toward more remote working and the digitization of entertainment have further pushed the need for reliable and fast telecom services.
Technological: The technological factor is one of such double-edged swords that the telecommunications industry has. It offers opportunities for doing new things, differentiating themselves in the market, and at the same time, presents several challenges, thanks to their rapid obsolescence and high capital expenditure (Blumel et al., 2023). For instance, the investment in the build-out of 5G technology is huge, but it is critical to at least make sure there is competitiveness in the provision of high-speed internet services.
• Industry Analysis
Telstra identifies with the industry for the provision of telecommunications services. The company's main focus remains on services that cover mobile and broadband. The other way around, Telstra is best in terms of the performance segment within the telecommunication market of Australia, holding a huge market share and having a diversified structure of networks and wide clientele (Telstra 2023). Of services in full circle, under one roof, with technology and infrastructure investments in the strategy, it gives Qatari's a competitive edge.
Identifying Competitors: Vodafone, operating in the same industry, holds a similar position in the markets. It is also a leading name with wider operation and presence in diverse markets, offering mobile, broadband, and digital services to a large customer base.
Porter’s Five Forces Analysis:
Threat of new entrants: This is considered to be low for both Telstra and Vodafone. The telecommunication market has high entry barriers, which generally include capital costs arising out of the network infrastructure development and spectrum licenses acquisitions. The industry seems to strongly discourage new entrants, primarily due to the capital-intensiveness, which seems to have strengthened the market positions of the companies that already exist, such as Telstra and Vodafone.
Bargaining Power of Suppliers: The suppliers hold a medium to fair bargaining power (Rice 2022). The companies both require some of the equipment and technology, meaning that the number of suppliers might not be very many. However, Telstra and Vodafone are both massive corporations that have more power in terms of purchasing things, so they will be able to get their way in most cases.
The Bargaining Power of Customers: Their force is high in this case, since customers come out with more demand for the services at fewer charges. Switching amplifies the portability of the bargaining power of the two providers, compelling Telstra and Vodafone to be on the edge in improving their offerings and customer service without a break as a means to maintain subscribers and equally get new ones.
The threat from substitute products varies from moderate to high, and the reason behind this is technology changes (Rice 2022). With VoIP technology, the introduction of so many messaging applications is a barrier to traditional telecommunication services. Both of them need to innovate with such changes so that customers are not lost to such substitutes.
Bargaining Power of the Buyers: There is a very high level of competition, since pricing, quality of service, and the level of technological advancement are key areas in which Telstra and Vodafone are fierce competitors. This would tend to give pressure on profit margins through the increase of innovation. The focus of these two entities is on differentiation for a competitive advantage in the dynamic market, whereby they come up with unique value propositions.
• Company’s Competitive and Corporate Strategy
Telstra’s Competitive Strategy:
• Business Model and Value Creation: Telstra focuses on providing high-quality telecommunications services through extensive network coverage, innovative technology solutions, and comprehensive service offerings. It creates value by offering reliable connectivity, customer service excellence, and integrated digital solutions to meet diverse consumer and business needs.
• Resources and Capabilities: Telstra’s strategic advantages include its vast network infrastructure, spectrum holdings, brand reputation, and technological capabilities. These resources enable Telstra to deliver superior service quality and innovative products.
• Growth potential and strategic advantages: Growth potential for Telstra is underpinned by continued investment in network advancements, expanded reach, entry into new business areas like IoT, and tapping strategic partnerships. Sustaining strategic advantages should be based on constant innovation, a focus on the customer, and operational effectiveness.
• Risks: The risk factors identified are technological obsolescence, regulatory shifts, competitive pressure, and fluctuations in the global economy. The business has to comply with the market's changing demands and manage their operational costs to remain sustainable in the long run.
• Corporate Strategy: Telstra has an overall strategy for growth, which includes leadership in technology, market growth, and diversification. The strategic approach of Telstra to capture new opportunities and enhance the value for its shareholders includes both acquisitions and partnerships in emerging technologies.
2. Accounting Analysis
In the link of macroeconomic factors, industry dynamics, and specific accounting items in a company, as we have just analyzed in Telstra and its competitor Vodafone, one would uncover both the success and risk drivers. Susceptibility in the telecommunications sector towards technological change and regulatory forces, alongside shifting trends in consumer behaviors, directly impacts the financial performance and strategic decision-making of the business.
Link between Industry and Accounting Items: Economic and industry factors, such as huge CapEx for network infrastructure and spectrum licenses, are closely related to accounting items. This is reflected in the balance sheet of these companies through high fixed assets and depreciation expenses. The competition and innovation needs translate to huge R&D costs and marketing expenses that affect the income statement with respect to influencing operational costs and profit margins.
Link between Business Model and Accounting Items: Telstra's business model, focusing on providing comprehensive telecommunications services and investing in technology and infrastructure, is mirrored in its financial statements (Telstra 2023). Revenue from services (income statement) is a direct outcome of its business model. Investments in infrastructure and technology are reflected in the balance sheet's property, plant, and equipment (PP&E) and intangible assets, while financing these investments impacts debt levels and interest expenses. The organizational operational efficiency and effectiveness of the company's strategic initiatives can be gauged through the cash flow statements, most particularly from the operating and investing cash flows sections.
Quality of Disclosure and Red Flags: The analysis of the quality of disclosure is considered through transparency and completeness of financial reporting. For example, clarity of revenue recognition policies and detailed break-ups of CapEx and R&D expenses, along with the impact of regulatory changes, are some of the examples. The more provided detail, in this case, by Telstra, especially those related to the future investment plans of the company and how to manage the risk associated with it, may represent quality reporting (Telstra 2023).
Potential red flags in earnings management might include:
1. Unusual Changes in Accounts Receivable: If there is any disproportionate growth in the accounts receivable compared to sales growth, it could indicate aggressive practices in revenue recognition.
2. Capitalization of Expenses: It may also be the result of overcapitalization of costs that actually should have been expensed in the current period, hence inflating short-term earnings.
3. Changes in Depreciation Method or Estimates: Changing the depreciation method or changing the estimates of the life of the assets to manipulate the earnings.
3. Financial Analysis
• DuPont Analysis of Telstra and Vodafone
DuPont Analysis breaks down Return on Equity (ROE) into its three parts: Net Profit Margin (NPM), Asset Turnover, and Financial Leverage. The only silver lining could be reported to be that the NPM of Telstra had increased from 8.07% in 2021 to 8.62% in 2022, which is signified as better profit per revenue compared to the expense from sales. What this means, however, is that its asset turnover ratio has marginally declined over the three years, reflecting relative declines in efficiency in using assets to generate sales (Broekema et al., 2022). Financial leverage remains nearly the same, meaning the capital structure has not really changed much in terms of the debt financing that the business is relying upon.
On the other side, Vodafone noted a big increase in NPM from 0.13% in 2020 to 26% in 2022, increasing in profitability, most likely derived from cost control or increased pricing power. However, its asset turnover ratio reflects a huge decline from 2020 to 2022, suggesting that the company shows much lower efficiency in asset usage. The financial leverage ratio undergoes a slight decline, which may hint at a decrease in debt compared to equity.
• Cross-sectional and Time-series Analysis
Cross-sectionally, in 2022, Telstra shows stronger operating efficiency with a higher operating profit margin compared to Vodafone. However, Vodafone exhibits a much higher ROCE, which suggests that they are more effective at generating profits from their investments. Time-series analysis for Telstra indicates a steady growth in operating profit and net income, reflecting improving operational performance (Carlon 2019). Vodafone’s ROCE and ROA have increased significantly from 2020 to 2022, suggesting marked improvements in investment returns and asset efficiency.
Financial Ratios for Evaluation: For operating management, the Gross Profit Margin and Operating Profit Margin are crucial. They benchmark against the industry by indicating pricing strategy effectiveness and cost management. The Inventory Turnover ratio is also selected to evaluate operational efficiency in managing stock (Janda 2019).
In investment management, ROCE and ROA are chosen. ROCE benchmarks the company’s efficiency at turning capital into profits, while ROA indicates how well the company utilizes its assets to generate earnings. Relevant to financial management, there are several financial ratios: Debt to Equity, Acid Test Ratio, and many more. The Debt to Equity is a ratio of debt compared with industry standards for financial risk. The Acid Test Ratio includes current and liquid assets while excluding inventory sales when computing the short-term liquidity.
Major Trends and Macroeconomic/Industry/Business Strategy
Steady progress in profitability and asset efficiency over time likely reflects strategic cost control and market positioning. Either strategic shifts or changes in the market environment, with more favorable pricing or cost structures, may be responsible for the most recent huge upswing in Vodafone profitability. The divergent trends in asset turnover suggest different approaches to asset management or sales efficiency (Jansen et al., 2023). Some of these observed financial trends were being affected at the same time by the macroeconomic factors, such as the rates of technology adoption and industry competition dynamics along with the strategic decisions of each company, from investment in infrastructure to marketing.
4. Prospective Analysis
In this view, we base our analysis on historical data, macroeconomic conditions, industry trends, and strategic shifts in the company as a basis of prospective analysis of Telstra. Sales Growth Rate: The sales growth rate of Telstra can be modestly approximated, seeing the percentage increment being realized over time. In such a saturated market of telecommunications and subsequently, the market share of Telstra, it would be apt for the company to have a conservative growth rate, which is either at par with the GDP growth or slightly above it. Meanwhile, the Telstra strategic investments in the network infrastructure expansion and digital services are also believed to support this estimate.
NOPAT Margin: The only margin figure which has shown a rise over the previous period is in Net Operating Profit After Tax (NOPAT) margin, which portrays efficiency in operations at the same time (Pucheta-Martiinez & Garcia-Meca 2019). Although, looking at the cost sensitivity of the company in their pricing strategies, we expect the margin to either remain the same or increase slightly, given that there is no serious shifting around within corporate tax or any unforeseen operational costs.
Working Capital (WC) to Sales: The turnover of inventories of Telstra represents efficient management of working capital (Tudose & Avasilcai 2019). One would expect a rather consistent WC to sales ratio with improvement noticed in both inventory and receivables management side as their digital initiatives and supply chain get improved.
Long-term (LT) Assets to Sales: Given the current trend in asset utilization at Telstra, this ratio should remain more or less the same. However, continued investment in 5G network long-term assets may, in the short term, drive this ratio upwards, only for an ensuing increase in sales from new technology rollouts to neutralize the effect (Tudose & Avasilcai 2019).
Debt Ratio: The debt-equity ratio of Telstra has fluctuated but remained at levels. The trend of the projection forward for Telstra is expected to maintain the same structure of capital while balancing its leverage with investment in opportunities for growth.
After-tax Cost of Debt: The stability in Telstra’s debt levels and the current low-interest-rate environment suggest that the after-tax cost of debt may remain low. However, forecasters should be cautious of potential rate hikes as macroeconomic conditions change.
Dividend Rate: Telstra has a history of providing shareholders with stable dividends. Assuming the company maintains its financial health, a stable or slightly increased dividend payout ratio is foreseeable, balancing shareholder returns with the need to reinvest in the business for sustained growth (Jansen et al., 2023).
Overall Performance: The forecast suggests stable growth, maintaining efficiency, and leveraging strategic initiatives to bolster market position. The aim would be to sustain profitability while navigating a competitive and technologically evolving landscape.
Valuation Analysis:
Abnormal Earnings Method: Valuation through the abnormal earnings method will focus on the present value of Telstra's forecasted abnormal earnings, which are the profits exceeding the expected return on equity. Using Telstra's historical return on equity as a benchmark and adjusting for forecasted growth, we can derive the present value of these abnormal earnings to estimate the company's value (Tudose & Avasilcai 2019).
Market Multiple Approaches: Comparable company analysis using market multiples (e.g., Price/Earnings, Enterprise Value/EBITDA) would compare Telstra to its peers. Given Telstra's stable market position, the multiples should be aligned with industry averages unless Telstra's strategic initiatives significantly outperform the market expectations, which could justify a premium.
In conclusion, Telstra's valuation will integrate past performance trends, careful assessment of its capital structure, and strategic positioning within the macroeconomic and industry context. It’s important to consider potential risks such as regulatory changes, market competition, and technological disruptions that could impact the forecast and valuation outcomes.
Price to Earnings (P/E) Ratio: Telstra has a P/E ratio of 2.04, which is quite low compared to a more typical P/E ratio range for stable companies. This could indicate that the market perceives Telstra as undervalued or it reflects market skepticism about the company’s future earnings potential. The industry has a negative P/E, likely due to overall losses in the sector, which may have been caused Price to Earnings (P/E) Ratio: Under the price-to-earnings valuation method, it can be observed that the P/E ratio of Telstra comes out to be 2.04, which is highly depressed in consideration of the more conventional stable companies' P/E ratio range. That could suggest the market sees Telstra undervalued to some extent or it signals some form of market skepticism over the future earnings growth of the company (Demneh et al., 2023). The industry has a negative PPE, most likely denoting overall losses within the sector. Most seriously, these could have been the result of serious difficulties faced, for example, in making heavy investments or pricing pressures.
Price to Book (P/B) Ratio: Telstra has a P/B ratio of 0.36 against an industry average of 1.49. That would suggest that the business is not only undervalued in relation to the book value but also send a signal to possible investors that there exists skepticism about the growth or the future profits.
ROE (return on equity): The ROE for Telstra is standing at 13% when the industry has an average of 11%. This, in the same, will signal that Telstra is reaping more from equity compared to the other counterparts, hence being efficient in management or better utilization of part and reinvestment.
To calculate the book value of equity, we would typically use the following formula:
Book Value of Equity=Price per share/P/B Ratio
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The cumulative present value of the abnormal earnings after 5 years is $2,773,921.08$2,773,921.08. Adding this to the book value of equity ($17,816,000.00$17,816,000.00) gives the AEV:
AEV=$17,816,000.00+$2,773,921.08=$20,589,921.08AEV=$17,816,000.00+$2,773,921.08=$20,589,921.08
Required Earnings=Cost of Equity×Book Value of Equity
Required Earnings=0.09×$1,781,600
Required Earnings=$1,603,440
Valuation Analysis:
Abnormal Earnings Valuation (AEV):
To use the AEV method, we would first need to calculate the expected abnormal earnings. However, with the data given, we can make some qualitative assessments:
Given that Telstra’s ROE is higher than the industry average, it might generate positive abnormal earnings compared to its peers. The cost of equity is not provided, but assuming that it is less than Telstra’s ROE of 13%, the present value of Telstra’s expected abnormal earnings would be positive, potentially indicating that the company is undervalued. The Abnormal Earnings Valuation (AEV) of Telstra indicates a company value of approximately $20.6 million, combining the present value of expected abnormal earnings with its book value. The valuation suggests Telstra is potentially undervalued, given its actual performance is projected to exceed the required return on equity. This is evidenced by a positive abnormal earnings forecast, implying the company’s profitability is robust relative to investor expectations. The higher than average ROE compared to the cost of equity underpins this analysis. However, this valuation hinges on the accuracy of the assumed constant ROE and cost of equity, and it doesn’t factor in potential changes in market conditions or company strategy. It should be refined with dynamic market data for a more precise valuation.
Recommendations
As per the above analysis, investment in Telstra appears to be a prudent selection. The company’s strong as well as competitive corporate strategy highlights on high quality telecommunication services followed by innovation in technology and strategic market positioning which denotes a strong competitive edge mainly in the telecom industry of Australia. In terms of finance, Telstra higher ROE in comparison to the industry average denoted efficient equity management as well as profitability. However, the low P/E and P/B ratios denotes market undervaluation and hence provide a favorable investment opportunity that anticipates growth rebound and market revaluation. Hence, Telstra appears to be a strong choice for long term value creation.
References
Blümel, L., Siegfried, K., Riedel, F., & Thrän, D. (2023). Are strategy developers well equipped when designing sustainable supply chains for a circular bio-economy? supporting innovations’ market uptake in a PESTEL + I environment. Energy, Sustainability and Society, 13(1), 40. doi:https://doi.org/10.1186/s13705-023-00415-2
Broekema, M. J. R., Strohmaier, N., Adriaanse, J. A. A., & Jean-Pierre I van, d. R. (2022). Are business valuators biased? A psychological perspective on the causes of valuation disputes. The Journal of Behavioral Finance, 23(1), 23-42. Retrieved from: https://www.tandfonline.com/doi/pdf/10.1080/15427560.2020.1821687?needAccess=true
Carlon, S. (2019). Financial accounting: reporting, analysis and decision making. 6th ed. Milton, QLD John Wiley and Sons Australia, Ltd, https://eprints.qut.edu.au/125138/
Demneh, M. T., Zackery, A., & Nouraei, A. (2023). Using corporate foresight to enhance strategic management practices. European Journal of Futures Research, 11(1), 5. doi:https://doi.org/10.1186/s40309-023-00217-x
Janda, K. (2019). Earnings stability and peer company selection for multiple based indirect valuation . Finance a Uver, 69(1), 37-75. Retrieved from http://journal.fsv.cuni.cz/storage/1428_37_75_janda_final_issue_1_2019.pdf
Jansen, B., Md, M. H., & Taylor, J. (2023). Do analysts cater to investor information demand? International Journal of Managerial Finance, 19(2), 248-268. doi:https://doi.org/10.1108/IJMF-10-2021-0542
Pucheta-Martiinez, M. & Garcia-Meca, E. (2019). Monitoring, corporate performance and institutional directors. Australian Accounting Review, 29(1), 208-219. doi:10.1111/auar.12262
Rice, J. F. (2022). Adaptation of Porter Five Forces Model to Risk management. Defense AR Journal, 29(2), 126-139. Retrieved from https://www.proquest.com/scholarly-journals/adaptation-porters-five-forces-model-risk/docview/2649764739/se-2
Telstra. (2023). Telstra 2023 annual report & accounts. Retrieved from: https://www.telstra.com.au/content/dam/tcom/about-us/investors/pdf-g/telstra-annual-report-2023.pdf
Telstra. (2024). About us. Retrieved from: https://www.telstra.com.au/aboutus/our-company
Telstra. (2024a) Our Value chain. Retrieved from: https://www.telstra.com.au/content/dam/tcom/about-us/community-environment/pdf/TLS-SST_ValueChain-2022_V5-Remediated.pdf
Tudose, M. B., & Avasilcai, S. (2019). The assessment of the financial performance based upon ratios. A comparative analysis. IOP Conference Series.Materials Science and Engineering, 568(1) doi:https://doi.org/10.1088/1757-899X/568/1/012069
Vodafone. (2023). Vodafone 2023 annual report & accounts. Retrieved from: https://investors.vodafone.com/sites/vodafone-ir/files/2023-05/vodafone-fy23-annual-report.pdf
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