Finance Project Report

This finance project report analyzes two Australian companies, TPG Telecom Limited and Domino's Pizza Enterprises Limited, to recommend the best investment option for a large institutional investor. The report compares their operations, performance ratios, share price movements, and dividend policies, utilizing key financial metrics like liquidity ratios, profitability ratios, leverage ratios, and the CAPM model.

Finance

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY ..................................................................................................................................1
1. Operations and comparative advantage of two companies.....................................................1
2. Comparison of performance ratios of two companies............................................................3
3. Analysis of monthly share prices movements of two companies...........................................5
4. Identification of significant factors which may affected share prices of both the companies 8
5. Calculation of Beta values and expected return using CAPM model.....................................9
Dividend policies......................................................................................................................10
Recommendation letter.............................................................................................................11
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
Finance is the field which is concerned with investments and their allocations over a
time. In this project report, this field is focused on financial performance of two companies. As a
group of investment analysts of large investment consulting company named as ABL,
recommendations of suitable investment is provided in this report. These recommendations are
developed by using various aspects such as operations, performance using key ratios, share price
movements and significant factors. The main aim of this project report is to make
recommendation for a big institutional investor. In order to which two companies that is TPG
Telecom Limited and Domino's pizza enterprises limited are chosen. Beta, ratios and expected
returns are ascertained to determine which of these two companies are appropriate to invest in.
The first company deals in food industry whereas the second company operates in
telecommunication industry. Comparison between these two organisations are performed in this
report (Ben-David, Graham and Harvey, 2013).
MAIN BODY
1. Operations and comparative advantage of two companies
Investment analysis is a process in which two or more companies are compared in order
to determine which organisation can provide more profit. In order to conduct the investment
analysis, the first company which is selected is TPG Telecom Limited. TPG is a Australian based
Information technology company operates in telecommunications industry. This company is
considered as the largest mobile virtual network operator and second largest internet service
provider in Australia. TPG provides retail telecommunications services to residential and small
business consumers. Main products and services provided by these companies are internet
access, networking, OEM services, mobile phone service and accounting software. TPG is listed
on Australian stock exchange and is a force in Australian telecommunications industry. Main
aim of this company is to provide communication services which are reliable, fast and cost
effective. Client list of this company includes residential users, small and medium enterprises,
large corporate enterprises and wholesale customers.
There are various acquisitions in the history of this company which has resulted in
making strong backbone of this company. Some of these major events in the journey of TPG
includes acquisition of iiNet in august 2015, reverse takeover of SP Telemedia Limited in April
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2008, acquisition of PIPE Networks in march 2010 and TPG becomes Singapore's fourth mobile
operator in December 2016. Comparative advantages of TPG can include low purchase prices,
higher operating margin and unregulated monopoly (Comparative advantage of TPG, 2018).
Domino's Pizza Enterprises Limited is the second company which is selected in order to
compare and ascertain the best company in terms of investment. This company is considered as
the largest chain of pizza in Australia in terms of store numbers and network sales. This
company deals in food and beverages sector. Various segments of this company includes
Australia, New Zealand, Europe and Japan. Activities and operations of this company may
include manufacturing and distributing numerous range of pizza and other beverages.
Events and factors which affect the picture of Domino's can include various innovations.
In the year of 2009, this company launched an application for iPhone's operating system. In year
2011, an online ordering website was introduced as well as an application for Android. In
preceding years, innovations such as GPS Driver tracker, autonomous delivery vehicle and
camera units resulted as number one chain of pizza in several countries. Due to the power of
game changer, Domino's hit millions of Facebook fans which reflects popularity among young
clients. Domino's Pizza enterprises is listed on Australian stock exchange. Comparative
advantages of this company may include pricing power, smart business model, growing returns
and growing stores (Comparative advantage of Dominos Pizza enterprises, 2015).
From the perspective of investment, comparative advantages of TPG are more satisfying
as this company has acquired various companies and the level of their profitability is also high.
TPG operates in telecommunications industry which is much more profitable and growing sector
than food and beverages industry. When compared these two companies based on their
competitive advantages, TPG is recommended to be more profitable. Other comparative
advantages such as unregulated monopoly allows TPG to earn more revenue and build a strong
position in the market. Domino's pizza enterprises is a company which is also listed on
Australian stock exchange. Comparative advantages which reflects benefits of investment in this
company can include their massive growth in terms of innovation and huge client base. When
compared these two companies based on their competitive advantages, TPG is recommended to
be more profitable.
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2. Comparison of performance ratios of two companies
In order to compare the position of both the companies it is important to compare them
with the help of performance ratios. To determine which company has effective performance,
key ratios which are needed to be determined are Liquidity ratios, Profitability ratios and capital
structure or leverage ratios (Chun-juan, 2003). To conduct comparative analysis of selected
companies, financial statements of past three annual accounting years that is 2015, 2016 and
2017 are used.
Ratio analyses:
Liquidity ratios – These ratios are the financial metrics which helps to ascertain current
debt paying ability of an organisation. Types of this ratio can include quick and current ratio.
Current ratio can be ascertained by comparing current assets and current liabilities,
Whereas Quick ratio can be ascertained by using quick assets and current liabilities.
Formula 2015 2016 2017
Current ratio Current assets/current liabilities
TPG Limited 0.98:1 0.70:1 0.37:1
Domino's Pizza
Enterprises
0.89:1 0.70:1 0.82:1
Quick ratio Current assets-inventory /current
liabilities
TPG Limited 0.93:1 0.63:1 0.31:1
Domino's Pizza
Enterprises
0.69:1 0.55:1 0.61:1
In the case of current ratio, it can be said that both the companies has equal short term
debt paying ability. As average of three years of their current ratio is nearly equal. Ideal current
ratio is considered to be as 2:1, by this statement none of the selected company is ideally paying
their debts from their revenue. While analysing quick ratio, it has been observed that TPG
Limited is more sound to pay their debts from quick assets. To provide evidence to above
statement, ideal quick ratio is considered to be 1:1 and 0.93:1 is quick ratio of this company in
the year of 2015.
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Profitability ratios – These ratio are the determiners which are used to access a
business's ability to generate earnings against expenditures. In order to ascertain the profitability
of selected companies, two ratios that is net profit margin and return on equity is calculated.
Formula 2015 2016 2017
Net profit margin Net profit after tax/net sales*100
TPG Limited 17.64 15.9 16.61
Domino's Pizza
Enterprises
11.16 10.96 13.01
Return on equity Net income/owner's equity*100
TPG Limited 24.42 27.34 19.85
Domino's Pizza
Enterprises
22.69 23.56 25.41
From the above analysis, it has been observed that TPG Limited as more net profit ratio
than Domino's Pizza enterprises. In all three years Net profit margin of TPG is more than the
other company, by which it can be said that this company is earning more profit even after
paying all the debts. Similar to net profit, return on equity of TPG is also high which shows that
this business organisation is earning more return against the equity which is invested in the
business operations.
Leverage ratios – These ratio helps in indicating the level of debt incurred by a
business entity. It is a metric which ascertains leverage power of an organisation. To
determine leverage power of these two companies, ratios such as interest coverage and debt
equity are calculated below:
Formula 2015 2016 2017
Debt equity Total debts/shareholder's equity
TPG Limited 0.33 0.76 0.36
Domino's Pizza
Enterprises
0.4 0.72 0.75
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Interest coverage
ratio
EBIT/Interest expense
TPG Limited 16.26 7.08 12.39
Domino's Pizza
Enterprises
40.93 39.16 34.85
Contrasting to other two ratios, leverage ratios shows that overall performance of
Domino's Pizza enterprises are more sound than TPG Limited. Debt equity ratio reflects long
term debt paying ability and Interest coverage ratio shows ability of paying interest from yearly
profits.
3. Analysis of monthly share prices movements of two companies
Shares are the part of company's capital which are issued in public by public limited
companies. TPG Limited and Domino's Pizza enterprises are two companies which are listed on
Australian stock exchange. Share prices of these companies are presented by comparing them
against ordinary index. Ordinary index are the benchmarks which are derived from share prices
for 500 of the largest companies listed on ASX (Fee, 2013). By observing share price
movements of these two companies of last three years, various graphs are developed which are
presented below:
For the accounting year of 2015-16:
TPG Limited
Domino's Pizza Enterprises
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From the above graphs of both the companies which are correlated with ordinary indexes,
it can be said that they are following different trends. Difference in share prices of both the
companies is huge. Highest share price in the case of TPG is 11.5 Australian dollar in year 2015-
2016 and highest share price of Domino's Pizza Enterprise is 65 Australian dollar. Movements in
the share price both the companies is also different. Share price of Domino's Pizza enterprise is
in increasing trend, whereas in the case of TPG movement in uneven (Hribar, 2015).
Share price of TPG started with 9 dollars and closed with 11.5 dollars for the entire year.
It faced various ups and down in the month of December 2015. Due to the major acquisitions,
the share price of this company observed to be at a maturity stage in month of November 2015.
Share price of Domino's started with 40 Australian dollars and closed with 70 dollars. An
increasing trend is observed while analysing the share price. Due to innovative ideas introduced
by this company, share price of Domino's was at highest in the month of May 2016.
After this analysis, it can be said that prices of Domino's are more correlated with
Ordinary indexes and they are more volatile. Prices of TPG are below the prices of Ordinary
indexes.
For the accounting year of 2016-17:
TPG Limited
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From the above graph, it has been observed that TPG Limited has declining trend in the
share prices. The above graph is prepared against ordinary indexes. Share price of this company
started with 11.8 and closed with 5.8 . By evaluating values of shares of both the companies, it
has seen that in this year also value of shares of Domino's is comparatively high. The high share
prices of Domino's can not state that the high performance of this company as number of shares
which are issued are comparatively less.
Domino's Pizza Enterprises
After analysing share prices of Domino's Pizza enterprises, it has been observed that there
is an uneven share trend. By analysing the trends of Ordinary index, it can be said that this
company is highly correlated with ordinary index. This correlation also results in high volatility.
Share prices of other prices is less correlated when compared to Domino's enterprise.
For the accounting year of 2017-18:
TPG Limited
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Share price analysis of TPG of 2017-2018 shows an uneven trend which more correlated
with ordinary index when compared. Share price of this company opened with 6 dollars and
closed with 5.8 dollars. Due to high fluctuations, shares of this company is said to be highly
volatile.
Domino's Pizza Enterprises
From the above analysis, it has been observed that share prices of Domino's reflecting a
decreasing trend which is not correlated with the ordinary index and less volatile than TPG.
Share price of this company opened with 60 dollar and closed with 48 dollars.
4. Identification of significant factors which may affected share prices of both the companies
Share prices of the companies may fluctuate due to various reasons. Few factors which
are considered as the reasons of fluctuate share prices of TPG are discussed below:
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Low forecasted data – Finance department of this company has forecasted low profit for
the year of 2018 due to which share prices of this company has started to decline. This factor can
affect the share prices but not for a long time period (Li, 2005).
Employee layoffs – Due to the rumours of major employee layoffs in the company of
TPG, share prices of this company falls severely in the year of 2016-17.
Domino's is also a public limited company and there are few factors which has influenced
its share prices and they are mentioned below:
Innovations – Domino's pizza enterprise is known for it's innovative ideas of marketing
and sales. Due to several innovations in the year of 2015-16, share prices of this company hiked
from 40 to 70 dollars per share.
Dividend declaration – Every public company declares dividend at the end of an
accounting year. Dividend is the part of profit which is distributed to shareholders from which
image of the company positively impacted. In the year 2015-16, top level management of this
company declared dividend at high rates due to which share prices increased severely.
5. Calculation of Beta values and expected return using CAPM model
Beta:
Beta is the measure of systematic risk which a security or stock has to face when
compared to the market. Beta is a component of CAPM which calculates the expected return
(Malkiel, 2013). This measure is used to ascertain involved risk in a security which is calculated
using regression analysis. As an investment analysts, beta of both the companies is observed
from the stock and finance section of the companies websites.
If the Value of beta is less than 1, that means the stock or security is less volatile than the
market. If the beta id more than 1, it indicates that the security's price is more volatile than the
market. Beta value of TPG Telecom Limited is observed to be 0.62 . This beta value of TPG
shows that it is less volatile than the market.
Beta value of Domino's Pizza enterprises is observed to be 1.37 . From this value it can
be said that share price of this company is more volatile than the market. Volatile refers to the
fluctuations. Due to high beta and volatility of this company it can be said that the shares of this
company is tend to fluctuate.
Expected return:
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This value is ascertained with CAPM. Capital asset pricing model is a model which
calculates expected return based on expected market risk and return (Moffett, 2014). This model
describes the relationship between systematic risk and expected return for assets specially in case
of organisational securities. Main aim behind using CAPM is to pricing of risky securities and
generating expected returns of assets.
Expected return using CAPM can be calculated as:
Expected return rf+β(rm-rf)
Where rf Risk free rate
rm Return on the market
Calculation of expected return for TPG Telecom Limited:
Expected return rf+β(rm-rf)
Risk free rate 5.00%
Return on the market 6.00%
Beta 0.62
Expected return 5%+0.62(6%-5%)
Expected return 0.09
From the above ascertainment of expected return, it has been evaluated that due to less
volatility, return on investments is 0.09 . Reason behind this low return is low beta value of this
company which shows less fluctuations. Fluctuations are the high possibilities in the changes of
share prices, but these changes can also result in high prices due to expected return of this
company is low (Renz, 2016).
Calculation of expected return for Domino's Pizza enterprises:
Expected return rf+β(rm-rf)
Risk free rate 5.00%
Return on the market 6.00%
Beta 1.37
Expected return 5%+1.37(6%-5%)
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Expected return 0.13
From the above calculation, it has been ascertained that this company is capable of
paying more returns than TPG. The reason behind the high expected return of this company is
high value of beta. High risk is considered to be attract higher returns. This statement is evidence
of the higher expected return of Domino's.
Dividend policies
Dividend policy is the set of guidelines which a company decides to follow in order to
distribute their earnings to public. There are various types of dividend policies such as regular,
stable, irregular and no dividend policy. From the annual reports of TPG Telecom Limited, it can
be said that this company is following the policy of Regular dividend. Under this policy,
company distributes dividend every year but not of the same amount (Swift, 2014).
From the annual reports of Domino's Pizza enterprises, it has been observed that this
company is also following regular policy. As this company is distributing dividend every year
but of varied values. From the dividends of both the companies, it can be said that Domino's is
tend to distribute more dividend (Yuan, 2011).
Recommendation letter
As a investment analyst, two companies which are selected are TPG Telecom Limited
and Domino's Pizza enterprises. Key ratios such as profitability, liquidity and leverage shows
that TPG company is more profitable. But the share prices analyses and CAPM analyses it has
been ascertained that Domino's is more efficient and volatile. As an investor, share prices and
expected return is more considered rather than ratios or background of the company. Not only
movement of share prices and CAPM concerns with recommended Domino's but the dividend
policy also shows that this company is more effective in terms of investment.
CONCLUSION
From the above project report, it can be said that as a group of investment analyst group,
Domino's Pizza enterprises is the company which is recommended for investment to a large
investment group. The main aim of evaluating the performance of both the companies is
achieved by ascertaining various ratios, expected return and dividend policies. The reason behind
recommending Domino's can be concluded as the movement of share prices of this company is
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more correlated and volatile. Also the returns of this policy are said to be achieved more.
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