Corporate Finance and Analysis of Petronas Gas Berhad Company

This report has been prepared to evaluate the objective of Petronas Gas Berhad Company related to wealth maximization and source of external finance available for the company. In addition to this, weighted average cost of capital and other capital budgeting technique has also been used to evaluate the available project for the company.

RUNNIGN HEAD: Corporate Finance 1
Name of the student
Topic- Corporate finance and analysis
University Name-

Corporate Finance 2
Table of Contents
Introduction...........................................................................................................................................2
Brief description of company.............................................................................................................3
Group structure of Petronas Gas Berhad Compan............................................................................3
Stakeholder’s wealth maximization.......................................................................................................4
Importance of wealth maximization..................................................................................................4
Risk minimization model....................................................................................................................4
Analysis of Stakeholders model.........................................................................................................5
Importance of stakeholders...............................................................................................................7
Problems of reconciling the two models...........................................................................................7
Sources of finance available..................................................................................................................8
Possible consideration was undertaken by management.....................................................................9
Discussion of weighted average cost of capital and computation of the same...............................10
Implication of higher weighted average cost of capital on the investment decision.......................11
The main problem which may arise while computing weighted average cost of capital in general
firms................................................................................................................................................12
Problem which may arise while computing weighted average cost of capital................................12
Recommendation................................................................................................................................13
Conclusion...........................................................................................................................................14
References...........................................................................................................................................15

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Introduction
With the changes in economic and complex business structure, each and every
organization has been using financial analysis tools to evaluate the financial performance,
availability of the sources of finance and use of capital budgeting tools. In this report,
Petronas Gas Berhad Company has been taken into consideration. This is the natural gas
distribution company which has been running its business on a domestic and international
level. This report has been prepared to evaluate the objective of Petronas Gas Berhad
Company related to wealth maximization and source of external finance available for the
company. In addition to this, weighted average cost of capital and other capital budgeting
technique has also been used to evaluate the available project for the company. This report
emphasizes upon the financial analysis for the effective welfare of stakeholders, raise funds
from the external sources and evaluating the same by using a weighted average cost of
capital.

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Brief description of company
The Petronas Gas Berhad Company is natural gas distribution company headquartered
in Malaysia. It has several subsidiaries- Kimanis power sdn. Bhd. It was incorporated in 1983
and was listed on the main market of Bursa Malaysia security stock exchange. This company
has the strong brand image in market. Initially the company was wholly owned subsidiary of
Petronas and the biggest oil selling company in Malaysia. The company is performing well in
the oil and petroleum industry. However, the sales revenue of the company has increased to
MYR 4.58 billion in 2016 which is 5% higher than the last four year data. The gross income
of the company has also increased to MYR 2.07Billion in 2016. This amount reflects that
company has been performing well in the market and increasing the return on capital
employed in determined approach.
Source: (Yahoo finance, 2018)
Group structure of Petronas Gas Berhad Compan
It is a listed company in which CEO and managers take all the important decisions of
the organization. It is observed that company has been following decentralized business
functioning in which all the decisions are taken by the process manager and line mangers
(Hörisch, Freeman and Schaltegger, 2014).

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Stakeholder’s wealth maximization
Shareholders are the key promoters and owners of company who provide capital to
the company. There are several stakeholders of the company such as employees,
shareholders, management, staff members, suppliers, and vendors and government who may
influence or get influenced by the activities of an organization. It is evaluated that the
company are providing high amount of return to its shareholders with the increase in its
earning. However, strategic alliances with the suppliers are also increasing the revenue
returns (Baker and Wurgler, 2015).
Importance of wealth maximization
It is observed that shareholders are the key investors of the company. It is evaluated
that if a company does not offer the proper return to shareholder then the brand image of
company and efficiency to raise funds from the market wil be effected. There are several
ways to establish wealth maximization of shareholders such as setting profit based dividend
policy, issue of bonus and other incentive plans. The importance of wealth maximization is
related to creating value of the invested capital of the shareholders for their long-term
benefits. If this wealth maximization process is not undertaken then it may destruct the value
of the shareholders (Hörisch, Freeman and Schaltegger, 2014).
Risk minimization model
The risk model is implemented to minimize the risk associated with the business of
the company. It helps in mitigating the financial and business risk in determined approach.
The standard risk model is implemented to identify the risk, develop an action plan and
implement proper business activities to mitigate the issues. It also helps in identification of
the best course of action which company could take to increase the overall outcomes (Denis,
2016).

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(Source by author)
Analysis of Stakeholders model
The wealth maximization of the stakeholders is highly dependent upon the nexus
established by the management department for the organizational development and
company's welfare. The company has issued bonus shares, contribution in employee’s
provident funds and adequate dip points to suppliers and vendors. In the recent years the
company has increased its dividend payment amount to its shareholders with the increase in
its profit. It reflects that company adopted profit based dividend policy (Mitchell, et al.,
2016).
The below given is the stakeholder holder which reflects all the internal and external
holders of the company.

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(Source by author)

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Importance of stakeholders
The main important thing about the stakeholders is related to the contributed capital of a
company. It is observed that there is several importance of stakeholders (Tantalo and Priem,
2016).
 Established proper nexus between company's developments with the stakeholder's
development.
 Use of capital to expand the business.
 Formulation of clients oriented policies and frameworks.
 Local support and new business functioning.
Problems of reconciling the two models
This business model reflects that these two models have different objects and
approaches. It is observed that if these models are reconciled together then it may destruct
the existing business operations of the company. It is evaluated that the company needs to
evaluate whether the existing business functions has been offering best results to
stakeholders and also complying with the fundamental perspectives. The below-given
chart reflects how the stakeholder's models could be reconciled with the risk events of the
company. It may increase the overall quality of the business but also reduce the risk of the
company.
Source: (Kacperczyk, et al., 2015)

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Sources of finance available
There are several sources of finance available to such as an issue of equity shares,
debentures, applying for loans in banks and securitization of assets with the assets
securitization company (Schwarzmüller, et al. 2017).
Equity shares- the company could issue share through an initial public offer and
further public offer. It is observed that company could opt this option if by raising funds from
equity shares holders gives more return on capital employed. However, the cost of the equity
covers all the expenses incurred to issues of shares in market and return and dividend given to
shareholders.
Debentures- It is observed that debentures could be defined as bonds and documents
offer by the the company to investors for their capital. It has fixed interest payment which is
charged on the profit. If a company fails to pay this interest amount to debenture holders then
it may result to wind up or dissolution of a company (Cox and Nguyen, 2018).
Securitisation- It is the process which could be used by the company to covert its
long-term assets into liquid assets. For instance, company could sales it's fixed assets and
machines to other companies for the temporary basis and take finance from them (West and
Bogers, 2014).
Banks loans- It is observed that the company has strong brand image in the market. It
could raise capital from the banks and financial institutions after applying for loans.
However, banks may charge high interest from the company which results to increase the
cost of capital of the company (Rostamkalaei and Freel, 2016).
Distinguished for the Petronas Gas Berhad Company
It is observed that the company is listed company and having a strong brand image.
After evaluating all the details and information regarding the company, it is inferred that the
company should raise funds from different sources of methods. For instance, 60% capital
could be raised by issue of equity shares in the market. The issues of equity shares have zero
financial leverage nor does company pay fixed amount to shareholders. On the other hand,
issues of debentures may increase the financial leverage and the interest payment is the
charge on the profit. It may decrease the value of the investment and put negative impact on
the business functioning of an organization if a company fails to have adequate gearing ratio.

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However, in case, if a company is having strong profitability then the company could opt for
the issues of debentures in a market. This option not only decreases the cost of capital but
also increase the financial leverage of company (Cuevas‐Rodríguez, Cabello‐Medina and
Carmona‐Lavado, 2014).
Possible consideration was undertaken by management
These above-given sources of finance are opted by the company for raising funds on the basis
of cost associated with the business and return on capital employed. Company could use
proper analysis tools such as capital budgeting tools, net present value methods, cash flow
methods to determine whether the particular source of finance would increase the net present
value of investment of company (Queen, 2015).
Cost of the capital- It is amount of total money which is required to be paid by company to
the persons who have deployed their capital in the business of the company. However, it
includes the cost of equity, debentures and the bank loan financial risk- It is the risk which
reflects company’s sustainability and business risk. It is observed that if company is having
low profitability then it will have high financial risk and vice-versa. This risk is also known
financial leverage which may put company in danger for its sustainable business (Kacperczyk
Beckman and Moliterno, 2015).
It is observed that raising funds from market may be complicated for the company. It
is analyzed that company could select the particular source of funding. The selecting of
particular source of funds depends upon the two important factors such as financial leverage
and cost of capital. After evaluating the annual report of the company, it is analysed that
company is having low financial leverage. The total assets of the company are MYR 16554
million in 2017. The total liability of the company is MYR 4587 million in 2017. On the
other hand, the profitability of company is also very high and increased its profit by 22%
since last two years. The net profit of company is MYR 1739 million in 2017 (Ng, and
Rezaee, 2015). This data reflects that the company has very low financial leverage in the
market. It is observed that company should raise more funds from the market by using debt
funding process. It will help company to reduce the overall cost of capital and increase the
return on capital employed of company. There are main two advantages of raising funds from
the market first is related to the low cost of capital and another is related to decrease in the

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financial leverage of the company. Therefore, it could be inferred that the company could use
debt funding to raise funds from the market (Montmartin, and Herrera, 2015).
Now, in the end, it could be inferred that company could raise funds from the market
by issue of debentures in market. It will reduce the overall cost of the capital and increase the
overall return on capital employed of company. The management of the company needs to
evaluate whether the issue of debts in market would be expensive for the organization or not.
It will also reduce the overall cost of capital and create value of the investment (Frank, and
Shen, T., 2016).
Discussion of weighted average cost of capital and computation of the same
It is the amount of overall cost of capital which pays to its internal and external
factors. This weighted average cost of capital assist organizations to determine whether the
particular project should be accepted or not. If the return on capital employed is positive then
management of the company could accept that project and vice-versa. The weighted average
cost of capital could be computed as below.
Cost of equity (calculated through CAPM) = This is the amount cost which is
computed by following capital assets pricing model.
Cost of Debt = 3%
Interest payment= MYR 103 Million
Total liabilities= 3548
Cost of debt before deducting tax benefits=
Computation of the cost of debt
Interest payment 103
Debt 3548
Interest rate 3%
Cost of debt 2.03%
Cost of debt after deducting the tax= 2.03%
Computation of the cost of equity

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The cost of equity is the amount of return paid to equity shareholders. However, cost
of equity is determined on the basis of using proper CAPM model (Krüger, Landier and
Thesmar, 2015).
Computation of the cost of equity
RF 4%
RM 10%
Beta 0.99
CAPM (Re) 9.9400%
WACC = Cost of debt (interest rate after tax) + cost of equity
WACC Capital Amount
Cost of
capital % of portion WACC
Equity 11967 9.94% 77.1318% 7.67%
Debt 3548 2.03% 22.87% 0.46%
Total
capital 15515 WACC 8.13%
After evaluating all the details from the annual report of company such as total debt
amount, equity share portion and interest payment, the WACC of the company has been
computed as above. The weighted average cost of capital of company is 8.13%. (Petronas
Gas Berhad Company, 2016).
Implication of higher weighted average cost of capital on the investment
decision
It is observed that the weighted average cost of capital is the total amount of cost of
capital which company requires paying to internal external investors for the use of their
capital in organization. The implication of higher WACC on the investment decision would
be negative on the business. If company has low WACC then it could easily accept any
project. In case, the company has higher WACC then the return on capital employed would

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be low. Therefore, lower WACC reflects the positive indication to the company as it could
easily accept any project (Dagher, 2016).
The main problem which may arise while computing weighted average cost
of capital in general firms
The main problem which arises in computing the WACC is related to identifying the
right beta of company, risk-free rate of return and tax deduction available on the interest
expenses.
Beta- It reflects the risk of company based on the marketing factors. However, it
could be computed on the basis of the share price of company and market capitalization. It
becomes cumbersome to compute in case when there are high differences between share
price fluctuation and share price of all ordinary indexes
Risk free rate of return- It is hard to determine which risk free rate of return should be
chosen to compute the cost of equity in the absence of proper information. It may also deviate
the results of calculation.
Tax deduction- It is evaluated that in case of international transactions, company may
face problem while determining the tax-deductible expenses. Therefore, it may create
problem while computing the cost of debt of company (Ortiz-Molina and Phillips, 2014).
Problem which may arise while computing weighted average cost of capital
It is observed that the company has two types of capital such as debt capital and
equity capital. It is evaluated that in order to compute the cost of equity of company, the
company could use capital assets pricing model. The main difficulty which may arise could
be related to identifying the right beta, Risk-free rate of return and the market premium of
company.

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The trade-off theory of capital structure
The the company is having good amount equity capital which reflects that company
should establish the proper capital structure. It is observed that company is managing debt
portion of 22% and 68% equity portion. It is observed that the company may have to face
high financial cost due to high equity portion and less debt portion. The Company needs to
increase the overall its deb portion in its business. It will not only reduce the overall cost of
capital but also increase the financial leverage of company ( Biørn, 2017).
Recommendations
After evaluating the annual report and other details of company, it is inferred that The
the company is having low financial leverage but a high cost of capital. In addition to this,
company is also having good profitability in its business. Therefore, company should increase
the debt to equity portion by increasing the overall debt funding in business.
Particular
(MYR in
Million) Capital Amount
Equity 11967
Debt 3548
Total capital 15515
The total capital of company is MYR million 15515 which is accompanied by the 78% equity
portion and 22% debt portion.
It has increased its revenue by 22% in 2017 as compared to last four years data. Therefore,
company should also increase its debt portion to reduce the overall cost of capital.

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The existing capital structure of company is managing debt portion of 22% and 68% equity
portion which reflects low financial leverage and high cost of capital. the company should be
more inclined towards increasing the debt portion and increasing the return on capital
employed.
The gearing ratio of the company is 10% which is very low and clearly indicates that
company could charge more interest amount on its profit (Wang. et al. 2015).
Conclusion
The capital structure of the company is accompanied by the debt and equity portion.
The company has strong brand image and high profitability in its business. The company
should be less worried about the financial leverage and market risk. After analyzing the
financial details, it could be inferred that company has moderate cost of capital and has
increased its return on capital employed throughout the time. Nonetheless, the debt portion
should be increased to 30% to keep the balance between risk and cost of capital. It is easy to
understand that increase in the debt portion will surely decrease the overall cost of capital of
company (Cerutti, Dagher and Dell'Ariccia, 2017).

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