Finance for Business: Investment Recommendations for Overseas Institutional Investor

Running head: FINANCE FOR BUSINESS
Finance for Business
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

1FINANCE FOR BUSINESS
Executive Summary:
The paper is prepared for providing investment-related recommendations to a big overseas
institutional investor from the perspective of a group of investment analysts involved in a big
investment Australian consulting firm. For meeting the purpose of this report, the two
organisations selected include Caltex Australia Limited and Washington H. Soul Pattinson
and Company Limited that have business operations in diversified areas. It could be found
that WHSP is placed in a favourable position in the Australian market in terms of liquidity,
profitability and solvency, which denotes that investing in this organisation would maximise
the return on investment. Moreover, the share price of WHSP even though has fluctuated
over the years, it has moved in tandem with the All Ordinaries Index. Finally, it has not failed
in making dividend payments to its shareholders since its inception. Therefore, it is
recommended to invest in this stock for obtaining better and favourable returns in future.

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Table of Contents
Introduction:...............................................................................................................................3
1. Description of operation and comparative advantages of Caltex Australia and Washington
H. Soul Pattinson:.......................................................................................................................3
2. Calculation and comparison of performance ratios of the two organisations:.......................4
2.1 Liquidity ratios:................................................................................................................4
2.2 Profitability ratios:...........................................................................................................6
2.3 Capital structure (leverage ratios):...................................................................................8
3. Analysis of monthly share price movements of the two organisations:...............................10
3.1 Graphical representation for monthly share price movements over the last three years
against the movements in the All Ordinaries Index:............................................................10
3.2 Report on the share price movements:...........................................................................10
4. Significant factors having influence on the share price of the two organisations:...............11
5. Calculation of beta values and expected rates of return using the CAPM:..........................12
5.1 Calculated beta of Caltex Australia and Washington H. Soul Pattinson:......................12
5.2 Required rate of return for the shares of the two organisations:....................................13
6. Dividend policies adopted by Caltex Australia and Washington H. Soul Pattinson:..........13
7. Recommendation letter:.......................................................................................................13
Conclusion:..............................................................................................................................13
References:...............................................................................................................................15
Appendices:..............................................................................................................................17

3FINANCE FOR BUSINESS
Introduction:
The current report is prepared with the intent to provide investment-related
recommendations to a big overseas institutional investor from the perspective of a group of
investment analysts involved in a big investment Australian consulting firm. For meeting the
purpose of this report, the two organisations selected include Caltex Australia Limited and
Washington H. Soul Pattinson and Company Limited that have business operations in
diversified areas and they are listed in ASX (Asx.com.au 2018). The financial conditions of
these organisations would be analysed based on their published annual reports by using the
technique of ratio analysis. Moreover, their historical share prices would be considered and
comparison would be made with All Ordinaries Index for the past three years. Besides, the
factors having impact on their share prices would be highlighted in this paper as well by
assessing the significant announcements associated with these two organisations.
Furthermore, the dividend policies of both the organisations would be considered. Based on
all these aspects, recommendation would be provided to the overseas investor regarding
investment in one particular stock.
1. Description of operation and comparative advantages of Caltex Australia and
Washington H. Soul Pattinson:
Caltex Australia Limited:
The organisation is involved in buying, distributing, refining and selling petroleum
products in Australia, Singapore and New Zealand. The operations of Caltex are carried out
through Lytton and Supply and Marketing segments. The Lytton segment is engaged in
refining crude oil into diesel, petrol, jet fuel, greases and speciality products like liquid
petroleum. It has been established in 1900 having its headquarters in Sydney, Australia with
an employee base of nearly 5,600 (Caltex 2018). The organisation owns approximately 35%
of the oil refining capacity of Australia.
The history of Caltex started years ago when Ampol, the Australian oil importer was
listed in ASX in 1940. Ampol and Caltex initiated their refineries in 1950 and 1960 and due
to this, intense competition was observed between them in the oil product marketing sector
and service station arena. However, with the passage of time, Caltex acquired Golden Fleece
and Ampol acquired Total. Moreover, in 1995, these two companies merged with each other
that have assisted Caltex in becoming the biggest Australian refiner-marketer. This factor

4FINANCE FOR BUSINESS
could be identified as the significant comparative advantage of the organisation in the
Australian market. Despite all such developments, both Ampol and Caltex have been
relatively small.
Washington H. Soul Pattinson and Company Limited (WHSP):
WHSP is an investment group having diversified asset portfolio within a range of
industries. It has been listed on ASX since 1903 and one of its primary contributions to the
shareholders is timely and regular payment of dividends. The origin of the organisation is
deemed to be observed in the Australian pharmacies. However, at present, it has diversified
beyond the pharmaceutical industry and the investment portfolio has widened due to
investments in building materials, natural resources, agriculture, telecommunications, retail,
investments, property equity and corporate advisory services (Whsp.com.au 2018). For
instance, it holds significant shareholdings of 25.3% in TPG Telecom, 50% in New Hope
Group, 43.9% in Brickworks Limited, 19.3% in Australian Pharmaceutical Industries, 8.6%
in BKI Investment Company Limited, 100% in Pitt Capital Partners and others. All these
factors have assisted WHSP in gaining comparative advantage in the Australian market.
2. Calculation and comparison of performance ratios of the two organisations:
In the words of Barth (2015), ratio analysis could be defined as the financial statement
evaluation, which is used for gaining a quick indication of the financial position of an
organisation in several key performance areas. The ratios could be categorised into debt
management, short-term solvency, profitability, liquidity, asset management, efficiency and
market value ratios. However, as the overseas client is interested particularly in liquidity
ratios, profitability ratios and capital structure or leverage ratios, these three types of ratios
would be evaluated in the context of Caltex Australia and WHSP.
2.1 Liquidity ratios:
For evaluating the liquidity position of Caltex Australia Limited and WHSP, the
liquidity ratios that are taken into consideration include current ratio and quick ratio. The
calculations and analyses of these ratios are represented as follows:
Particulars
Caltex Australia Limited WHSP
2015 2016 2017 2015 2016 2017
Current 1.6 1.4 1.1 8.9 2.2 3.2

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ratio 5 3 6 6 5 8
Quick ratio
0.8
5
0.7
1
0.4
4
8.5
1
1.8
2
2.8
1
*(Refer to Appendix 1 for detailed calculations)
Table 1: Liquidity ratios of Caltex Australia and WHSP for the years 2015-2017
(Source: Caltex 2018: Whsp.com.au., 2018)
2015 2016 2017 2015 2016 2017
Caltex Australia Limited WHSP
-
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00
Liquidity Ratios
Current ratio
Quick ratio
Companies
Figure 1: Liquidity ratios of Caltex Australia and WHSP for the years 2015-2017
(Source: Caltex 2018: Whsp.com.au., 2018)
From the above figure, it could be identified that Caltex has experienced a decline in
current ratio from 1.65 in 2015 to 1.16 in 2017. On the other hand, the current ratio of WHDP
has declined significantly from 8.96 in 2015 to 2.25 in 2016; however, it has increased to
3.28 in 2017. In this regard, it is to be noted that current ratio helps in measuring the ability of
a firm to settle its short-term obligations with the help of those assets that could be converted
into cash easily (Beatty and Liao 2014). In case of Caltex, the main reasons that the ratio has
declined over the years are due to the fall in cash balance and significant increase in accounts
payable, as it has extended its credit terms with the suppliers. However, for WHSP, the
current ratio is observed to be significantly high than the ideal ratio of 2 (Barr and McClellan
2018). In 2015, the ratio is abnormally high due to huge amount of term-deposits received by
the organisation. However, the amount of term deposits has declined over the years due to