Finance for Business Analysis - Austal Limited Case Study

This report analyzes the finance environment of Austal Limited, an Australian shipbuilder. It covers company description, ownership structure, key ratios, share price movements, significant announcements, financial data, and recommendations for investment.

HI 5002 Finance for Business
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Contents
Introduction:....................................................................................................................................3
1. Prepare a brief description of the company.............................................................................4
2. Specify ownership-governance structure of the company.......................................................5
3. Calculate the following key ratios for your selected company for the past 4 years................7
4. Prepare a graph / chart for movements in the monthly share price over the last two years for
the company that you are investigating. Plot them against movements in the All Ordinaries
Index.............................................................................................................................................9
5. Significant announcements which may have influenced the share price of your company...13
6. Financial data of company:....................................................................................................15
7. Weighted average cost of capital...........................................................................................16
8. Debt ratio of company............................................................................................................17
9. Dividend policy......................................................................................................................18
10. Based on your analysis above, write a letter of recommendation to your client, providing
an explanation as why you would like to include this company in his/her investment portfolio.
....................................................................................................................................................19
Conclusion:....................................................................................................................................20
References:....................................................................................................................................21
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Introduction:
The report is prepared to gain an understanding of the various issues concerning with the finance
environment in a business. The finance for business is a crucial component and it directly affects
the capital structure of the company. The company named Austal Limited will be analysed here
for making a research and obtaining the results after that analysis. It is an Australian shipbuilder
company which designing, building and supporting the commercial and defence vessels in more
than 44 countries in the world. The report will include the description about the corporate
governance in the company while evaluating the independence concerned with that corporate
governance. The substantial shareholders of the company will be identified and the nature of
their relationship and influence will be evaluated in this report. For understanding the financial
position of the company the key ratio will be calculated on the share price and the factors
influencing the share price will be identified. The graphical presentation will help in
understanding the nature of fluctuations in the share price of the company. The financial data of
the company will be evaluated with the calculation of weighted average cost of capital and a
recommendation will be made to the investors for making investment in the company. The
dividend policy will be evaluated and the letter of recommendation will be made accordingly.
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1. Prepare a brief description of the company.
Austal Limited is a company operating in Australia and has been considered as a shipbuilder,
maritime technology partner of choice, global defence prime contractor which is engaged in
business activities like designing and constructing the defence and commercial vessel for many
p\operators all over the world. The company and the organisation has been developing the iconic
vessel platforms which are significant for redefining the naval capability for USA Navy as well
as extensive range of patrol vessels for Australian Border Force and Royal Australian Navy
(Austal, 2017).
The company is also involved in designing, installing, integrating and maintaining the
sophisticated maritime communications and radar systems that will control the system in marine
link. The company has been competitive over the last few years by becoming a world leader in
designing, constructing and supporting the highly customized and increased level of performance
based aluminium vessels which is obtained from ongoing success of the company in the global
ferry and offshore market. This has been an achievement gained by the company over the last 28
years.
The international facility for Austal Limited includes:
 Defence shipyards in Henderson (Perth)
 A dedicated commercial shipyard in Balamban, Philippine, Western Australia and
Mobile, Alabama USA
 Delivers through-life competence management (vessel support) services from its facilities
in Australia, the United States, Philippines and the Middle East (Austal, 2017).

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2. Specify ownership-governance structure of the company.
Substantial shareholders of company:
With higher than 20% of shareholdings - The substantial shareholders of the company
represents the individual or group holding significant part of shareholding o the company. By
analysing the shareholder information form the annual report of the company Austal Limited for
the year ending 2017 it can established that only one shareholder holds more than 20% of the
shareholding of company which is HSBC Custody Nominees (Australia) Limited holding
holding 107,629,283 shares and 30.80% shareholding in the company (Ongore, et. al., 2015).
On the basis of the above fact it can be said that the company is a family company because one
individual Group is holding certain significant part of the ownership of company for their 2017.
This will impact the independence of the corporate structure of company (Austal, 2017).
With higher than 5% of shareholdings – The substantial shareholders with more than 5%
of the shareholding in the company are as follows:
Name Number of shares % of holding
J P Morgan Nominees
Australia Limited
59,208,602 16.94%
Citicorp Nominees Pty Ltd 40,860,758 11.69%
Austro Pty Ltd 32,807,692 9.39%
National Nominees Limited 23,427,053 6.70%
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Main people of corporate governance:
The Chairman - John Rothwell AO
Board Members – The BOD includes
Name Designation
John Rothwell AO Chairman
David Singleton CEO
Jim McDowell Independent director
Giles Everist Independent director
CEO - David Singleton
No, by referring to the structure of the corporate governance none of the shareholders has the
same surname as of the Board members or KMP of the company (Warren & Jones, 2018).
As per the information extracted it can be established that the company is a non-family company
as there is no influence of one family in the corporate governance of the company and the same
ensures that the company is an independent company with independent Board structure.
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3. Calculate the following key ratios for your selected company for the past 4 years.
The various financial ratios are calculated as under:
 Return on assets = NPAT/ Total assets – The return on assets helps in interpreting the
profits earned by the company during a particular year and in relation with the total assets
employed by the company in that year. It will be calculated by dividing the net profits after
taxes by the total assets of the company.
 Return on equity = NPAT/ Common equity – The same is obtained by dividing the net
profits after taxes with the common equity employed by the company in a financial year.
This will give an estimation of the return obtained by the shareholders of the company by
employing their funds in the company (Ongore, et. al., 2015).
 Debt ratio = Total liabilities/ Total assets – The debt ratio represents the solvency ratio of
the company which exhibits the ability of the company to pay all of its debts during ten
financial year concerned. The same is obtained by dividing the total liabilities with the total
assets of the company.
Particular($) 2017($000) 2016($000) 2015($000) 2014($000)
Net profit after
tax
15,350 -84,182 53,156 31,859
Total assets 960,001 1,013,126 1,070,879 911,297
Total liabilities 503,087 555,574 558,480 478,065
Ordinary Equity 456,914 457,552 512,399 433,232
Ratios:
Return on assets 0.02 -0.083 0.05 0.03
Return on equity 0.03 -0.18 0.10 0.07
Debt ratio 0.52 0.55 0.52 0.52
Analysis of the equation:
EBIT/TA * NPAT/ EBIT * TA/ OE should be equal to NPAT/ OE
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39865000/960001000 * 15350000/39865000 * 960001000/456914000 = 15350000/456914000
= Gives that the following equation satisfies for the company.
The total assets can be directly related with the ordinary equity employed by the company as the
profits gets affected with the cost of capital associate with each item of the balance sheet (Austal,
2017).
By referring to the interpretations made in the financial ratios of the company it can be
established that the return on equity is greater than the return on asserts obtained by the company
and the same is due to excessive assets employed in the company in comparison to the assets
employed in the company (Warren & Jones, 2018).
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4. Prepare a graph / chart for movements in the monthly share price over the last two years
for the company that you are investigating. Plot them against movements in the All
Ordinaries Index.
The information about the movements in the monthly share price of the stick is presented below:
Month ASX($)
29-12-2017 1.85
30-11-2017 1.82
31-10-2017 1.7
29-09-2017 1.76
31-08-2017 1.55
31-07-2017 1.71
30-06-2017 1.8
31-05-2017 1.83
28-04-2017 1.8
31-03-2017 1.72
28-02-2017 1.73
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31-01-2017 1.9
30-12-2016 1.6
30-11-2016 1.74
31-10-2016 1.89
30-09-2016 1.54
31-08-2016 1.47
29-07-2016 1.48
30-06-2016 1.16
31-05-2016 1.21
29-04-2016 1.36
31-03-2016 1.56
29-02-2016 1.57
29-01-2016 1.38
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(Source: Austal Limited, 2017)
Introduction:
The report will be prepared in order to analyse the movements in the share price of the company
Austal Limited in comparison to the all ordinary index and obtaining the correlation with these
aspects.
Content:
As per the historical information abstracted for the company annual report and other sources of
information it can established that the share price of the company has been fluctuating over the
last two years. However there has been seen an upward trend in the share price of the company.
In comparison to all ordinary indexes the correlation is directly attributable as the movement in
the index directly influences the share price of the company. Also the volatility of the price can
be seen with the frequent changes in the share price (Buehlmaier & Whited, 2016).
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Conclusion:
The above report concludes that the direct correlation exist between the share price of the
company and the all ordinary index movements. The share price of the company is volatile in
comparison to market and industry factors.
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5. Significant announcements which may have influenced the share price of your company.
Significant accouchements that have impacted share prices of Austal Limited:
The current share prices of Austal Limited are $1.840. Latest accouchements for the company
Austal Limited are listed below:
Changes in resolutions at the annual general meeting:
Changes in resolutions were made for the adoption of new remunerations reports, approval of
new auditor and the new constitution. Such changes in an annual meeting were carried out as
ordinary resolution with more than 70% of votes in favour. Due to positive results of annual
meeting share prices has been increased by 6.98% from $1.720 to 1.840 (The Sydney Morning
Herald, 2018).
Allocation of shares under dividend reinvestment plan:
Austal Limited has decided to allocate their ordinary shares under firm's dividend reinvestment
plan (DRP). Such ordinary shares priced at the cost of $1.66 per share price in the financial year
2017 at the time of final allocation of a dividend. Ordinary shares were allocated an average
market price as per DRP provisions for specific days (five trading days). Such shares were
allocated to the participating shareholders that raised the prices of share by 6.57% (Austal
Corporate, 2018).
Changes in the focus of the company:
Changes in the company’s management influenced the movement of share prices of the Austal
Limited. The changes have been noticed related to nature and relevant interest of substantial
shareholders or changes in association related to voting rights and securities of the company until
shareholders were not last required to provide a substantial shareholding notice to the individuals
and to the firm. The company followed form 605 a notice of being substantial shareholders. Such
changes in the company’s policies had increased the share prices rate by 5.75%
Commonwealth announcement (regarding purchases of two more vessels):
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Austal limited had purchased two more vessels (Guardian Classy Pacific Patrol Boats) and
contracted with the Australian government in order to increase total productivity and production
unit quantity from 19 to 22 which was committed to the government. Such commitment had
enhanced the production level by 20. Growth in productivity and purchases of new vessels had
increased the level of share prices by 6.67% on 6th of November 2017 (Invest SMART, 2018).
Changes in an official quotation by reinstatement:
The company suspended its official quotation for its official securities and for strong
shareholding policies. Such changes were made according to Company pursuant to listed rule in
17.2 that had been pending to release at the time of the announcement of in order to complete
government shipbuilding agreement. Such changes increased the share price of the company by
9.85% (Austal Corporate, 2018).
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6. Financial data of company:
Beta of company = The beta of the company is 3.63
The beta represents the volatility of the stock of the company in relation to the market factors
and change in the market conditions. The excessive beta of 3.63 for Austal Limited indicates that
the company share price will increase more in comparison to the increase or decrease in the
prices in the market or changes in the market factors.
Required rate of return = Rf + B (Rm – Rf)
= .04 + 3.63 (.06)
= .04 + .2178
= .2578
=25.78%
The investment made in the company Austal limited will result in regressive approach as the
market beta and the expectation of the shareholders of the company is very high ensuring a high
risk for the stock of the company. The same will yield high returns but high risk is also associate
with the investment and in shares (Baltes, et. al., 2015).
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7. Weighted average cost of capital
The formula for calculating the weighted average cost of capital is,
WACC = E / (E + D) * Cost of Equity + D /
(E + D) * Cost of Debt * (1 - Tax Rate)
By considering the above information presented in the financial results we get WACC to be
8.23% for Austal Limited.
WACC = 8.23%
The WACC of 8.23% provides a riskier position of the investor while making investment in the
shares of the company as the expectation of the stakeholders in relation to the cost of capital is
high which creates an excessive pressure on the company and reduces the efficiency of business
operations.
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8. Debt ratio of company
Does it appear to be working towards the maintenance of a preferred optimal capital
structure?
The debt ratio of the company is 0.52 for the year 2017 which represents that the company is not
optimally utilizing the sources of finance available to the company. An optimal structure
suggested for the company is 1 which is obtained when the equal balance of debt an assets are
employed in the company (Buehlmaier & Whited, 2016).
What have they done to adjust/amend their gearing ratio? Increase or repay borrowings?
Issue or buy back shares? Has the Director’s Report given any information as to why they
have made any adjustments?
In order to achieve the optimal structure of the capital o be employed in the company and
maintaining enough returns the debts of the company should be increase as the same would
result in low cost of capital to the company. By referring to the director’s report it can be
established that there is no recommendation regarding the increase or decrease in the capital
structure of the company (Baltes, et. al., 2015).
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9. Dividend policy
In reference to the annual report presented by the company austal Limited for the year 2017 it
can be seen that there is no particular dividend policy of the company which has been considered
for payment of dividend to the shareholders of company. It can be observed that the management
of the company has a practice of declaring a dividend half yearly and a final dividend at the end
of the reporting period (Arruda, et. al., 2015).
By considering the above policy the Group ,made an announcement for final dividend to be paid
for the year 2016 of 2 cents per share while the shareholders has an option of reinvesting the
dividend. Also an interim dividend has been declared by the company in March 2017.
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10. Based on your analysis above, write a letter of recommendation to your client,
providing an explanation as why you would like to include this company in his/her
investment portfolio.
Letter of Recommendation
To,
The Client,
The letter of recommendation is in reference to the request obtained for providing the
suggestions about making investment in the share of company Austal Limited. By analysing the
above report it can be seen that the growth prospects of the company are sound for the future
operations. By reviewing the operations of company for the last two years it can be seen that the
company has increased the revenue and there has been a significant increase in the net profits
obtained by the company over the last year. The financial ratios are in agreement with the
industry ratios however the capital structure will be improved in future years (Arruda, et. al.,
2015).
Therefore it is recommended to make investment and purchase the shares of austal Limited so
that the same can be included in the portfolio of the investor.
Thanks
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Conclusion:
The above report on finance in business concludes that the capital structure of the company
should be at an optimum level in order to earn future profits in the company. The independence
of the corporate governance in the company is crucial for success and transparency to be
obtained in the presentation of financial information. The cost of capital of the company is high
but the investment to be made in the company is optima and will give profits to the investor.
Therefore the share of Austal Limited should be purchased by the investor.
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References:
 Arruda, P.D., Girão, A.P., ,Lucena, L., 2015. Information Asymmetry and Share Prices:
Analysis of the Use of Social Networks in the Brazilian and U.S. Capital Markets. ISSN
1808-057X.
 Austal Corporate, 2018 Announcement. [Online] investor.austal.com, Available at:
http://investor.austal.com/phoenix.zhtml?c=159601&p=irol-news&nyo=1 [Accessed on:
24 January 2018].
 Austal Limited, 2017. Annual Report 2017.[ONLINE] Available at:
file:///C:/Users/Administrator/Downloads/Austal%20FY2017%20Annual%20Report
%20to%20Shareholders.pdf
 Baltes, N., Dragoe, A.G.M. and Ardelean, D.I., 2015. Study regarding the determination
of the financial performance of a company through market rates. Studia Universitatis
Vasile Goldis Arad, 24(3), pp.1-10.
 Bordo, M. D., & Haubrich, J. G, 2017. Deep recessions, fast recoveries, and financial
crises: Evidence from the American record. Economic Inquiry, 55(1), 527-541.
 Buehlmaier, M.M. and Whited, T.M., 2016. Are financial constraints priced? Evidence
from textual analysis.
 Invest SMART, 2018. Latest company announcements for Austal Limited (ASB)
[Online] Invest SMART, Available at:
https://www.investsmart.com.au/shares/asx-asb/austal-limited/announcements [Accessed
on: 24 January 2018].
 Nesticò, A. and Pipolo, O., 2015. A protocol for sustainable building interventions:
financial analysis and environmental effects. International Journal of Business
Intelligence and Data Mining, 10(3), pp.199-212.
 Ongore, V.O., Peter, O.K., Ogutu, M. and Bosire, E.M., 2015. Board composition and
financial performance: Empirical analysis of companies listed at the Nairobi Securities
Exchange. International Journal of Economics and Financial Issues, 5(1), p.23. Ranti,O,.2013. Determinants of Dividend Policy: A study of selected listed Firms in
Nigeria. Change and Leadership,
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 Soondur. S.A.K,. 2016. Determinants of the Dividend Policy of Companies Listed on the
Stock Exchange of Mauritius. Conference on Global Business, Economics, Finance and
Social Sciences, Paper ID: M619 .
 Susko, D., Karunatillake, S., Kodikara, G., Skok, J.R., Wray, J., Heldmann, J., Cousin, A.
and Judice, T., 2017. A record of igneous evolution in Elysium, a major martian volcanic
province. Scientific Reports, 7.
 The Sydney Morning Herald, 2018 ASB - AUSTAL LIMITED - Share Prices, Company
News and Announcements [Online] the Sydney Morning Herald, Available at:
http://www.smh.com.au/business/markets/quotes/price-history/ASB/austal-limited
[Accessed on: 24 January 2018].
 Warren, C.S. and Jones, J., 2018. Corporate financial accounting. Cengage Learning.
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