Analysis of Aveo Group's Corporate Finance and Investment Decisions

This report provides a comprehensive analysis of Aveo Group's corporate finance practices. It examines the company's financial goals, including capital management, funding strategies, and investment policies. The report delves into Aveo's code of ethics, ethical theories, and corporate social responsibility, particularly concerning its retirement villages and the impact of financial decisions on sustainability. It discusses the causes of share price fluctuations and the factors influencing trading volumes, highlighting the company's responses to negative media investigations and allegations of unethical practices. The report also assesses Aveo as an investment, considering the volatility in the market and the company's overall performance. It concludes by emphasizing the importance of ethical financial management and the need for the company to address its operational challenges to maintain investor confidence and ensure long-term sustainability.

CORPORATE FINANCE

Aveo group
Contents
Introduction.................................................................................................................................................2
Goals of Aveo..............................................................................................................................................2
Code of ethics, ethical theories, corporate social responsibility.................................................................3
Aveo as an Investment................................................................................................................................4
Causes of fluctuations in the share price and the volumes traded..............................................................5
Conclusion...................................................................................................................................................7
References...................................................................................................................................................8
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Introduction
Efficient financial management is the essence of an organization and this is the reason why
financial management policies like capital management, dividend policy are given due
recognition. In relation to Aveo Group, the policies implemented by it have assisted it to make a
strong progress over the years. An analysis has been done to shed light on the goals of Aveo and
whether the corporation should consider the influence of financial decision on sustainability and
responsibility.
Goals of Aveo
Firstly, the Group intends to obtain continuity of flexibility and funding and for such purpose, it
utilizes bank loans, overdraft facilities, finance leases, etc in addition to other sources of income.
It also reviews its current lines of funding so that future requirements can be addressed. This
allows the Group to enhance its flexibility by matching the profiles of cash flow requirements
with that of short-term investments. Further, this also allows for timing the negotiation of various
credit facilities (Bauer & Hann, 2010). This assists the Group in enhancing the efficacies of their
social responsibility actions that is its main priority. Secondly, it recognizes the importance of
management of capital and for such purpose; it ensures that a mix of funding options are utilized.
Besides, this is done in alignment with the objective of maximizing shareholders’ returns.
Further, it intends to maintain a capital structure that can assure a lowest available WACC
(weighted average cost of capital). In relation to this, the Group attempts to maintain its gearing
ratio in the range of ten and twenty percent. This can be proved by the fact that its gearing ratio
was 17.4% in the year 2015. Moreover, in order to attain advantage from variations in the cost of
capital, the Group may adjust such capital structure including variations in dividend payable to
shareholders, adjusting the level of debts, etc (Damodaran, 2010). Thirdly, in order to ensure that
the resources of the Group are not hampered, it ensures that customers who are willing to trade
on credit terms are properly subjected to credit scrutinization processes including an evaluation
of their financial position, regulation of industries, etc. Further, the Group also possesses a cash
management policy that allows it to maintain liquid cash and other portfolio investments so that
preservation of cash is done at all times (Melville, 2013). This can play a key role for the Group
in the proper investment of resources for the attainment of prime goals and objectives (Bauer &
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Hann, 2010). Moreover, management of working capital can also be done with the help of such
financial management practice so that future complications and risks can be avoided, and the
resources can be committed to enhancing the lives of aged people in Australia. Fourthly, Aveo
also possesses a securities trading policy wherein employees and directors are restricted from
dealing in the securities of the company especially in the prevalence of price-sensitive
information in order to safeguard insider trading (Aveo, 2017). Lastly, in relation to investments,
the Group has an investment policy wherein when it comes to joint ventures and associates; the
same is done through an equity-accounted investment measure so that the key social objective of
development of retirement villages can be easily taken care of (Williams, 2012).
Code of ethics, ethical theories, corporate social responsibility
In relation to financial decisions on social responsibility and sustainability, not a slight
carelessness can be undertaken. This is because of the fact that Aveo being badly accused of
ripping its customers at their retirement villages even though it intends to maximize social
responsibility through their actions. Even though Aveo is focused on retirement only by
investing more than $700 million towards retirement items and services, yet it must consider the
ramification of their financial decisions towards on sustainability and social responsibility. Aveo
denies that it pursues a policy to churn the residents and states that most of its residents are
happy. However, the truth is that the company has used complicated contracts and exorbitant
fees to enhance its profits (Paradise & Rogoff, 2009). Moreover, even though the company has
denied to the same, yet there are cases of many residents facing intense issues because of the
company (Kruger, 2015). This can be proved by the fact that the company’s three different
sources of income, despite being focused towards the lifestyle of residents, yet are causing
troubles to them. The Group rakes in cash from the sales price received from the occupants, it
also charges a management fee for various services offered, and a deferred management fee
(DMF) is also taken after vacation of the unit. All these have fetched immense profits to the
Group as it rose to $116 million in 2016 surpassing the expectations of the analysts. The
accusations implanted upon the Group have made it realize that many customers were let down
because of its financial decisions on sustainability and therefore, it has reconsidered its plans by
strengthening and improving its own complaints and processes of incident handling that includes
a need for independent mediation (Libby et. al, 2011). Further, it has also endeavored to make its
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contracts simpler so that the residents have adequate certainties about what they spend (Aveo,
2017). Moreover, it can be seen from the annual report of Aveo that it has taken every relevant
step to ensure that its customers are properly looked after but it must also consider the
consequences of their financial decisions because many consumers encountered losses and other
issues because of the Group’s policy. According to various investigations, it was found that
many residents were slipping through cracks in the regulatory system. This is because many
authorities like the Consumer Affairs did not have enough powers to prevent such business
practice of Aveo (Albuquerque et. al, 2013). Even lawyers have defined various clauses in the
contracts of Aveo as draconian and complex.
Therefore, on a whole, even though the major corporate Aveo has denied all the allegations, yet
residents have encountered issues both mentally and financially. The Group intends to enhance
the living style of its customers but every time it was proved that its main intention is to enhance
profits. Besides, most of its profits derived from exit fees in the year 2016 that shows how much
unsatisfied the consumers were. Hence, even if the accusations are untrue, the problems occurred
to the residents cannot be unreal and it is just because of the ineffective financial decisions
conducted by the company (Aveo, 2017). Thus, the Group must take into account the
ramifications of their decisions on sustainability because if not, more residents will be caught in
such financial prison.
Aveo as an Investment
Going by the overall study and an in-depth research it can be said that the customers remained
unsatisfied with the company and it is purely dedicated on reaping profits leaving other factors
ignored. As per the study, it is seen that the acts of the organization have led to major issues and
has affected the performance. Therefore, as per the evaluation, it can be said that the company is
riding under immense difficulties and hence, any wrong or negative new can badly degrade its
position in the stock market (Damodaran, 2012). Hence, investment at the current juncture would
lead to difficulty as volatility is present and share has taken a sharp dive. Therefore, for the
purpose of investment, it must be left to operate and must be kept under the radar so that a
decision can be taken in the near future.
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Causes of fluctuations in the share price and the volumes traded
The Aveo group share price pattern reveals that there has been volatility in the share prices.
However, the overall trend was strong until 2017 where the graph was indicating higher high and
higher low. However, in the year 2017, the share price plunged owing to negative media
investigation that concerns the operational performance.
The share prices of Aveo group became the worst performers on the Australian Stock Exchange
when it declined by eleven percent following the allegations made by Four Corners and Fairfax
Media. However, the company has witnessed major volatility in the prices of its shares and even
the volume in the last two years. The major underlying reasons behind such volatility can be
attributed to the performance of the Group and satisfaction on the part of its residents. When it
comes to volatility it affects the prices of the shares and the volume too (Davies & Crawford,
2012). Before such investigation claiming unethical practices conducted on the part of the
Group, there were customers who were unsatisfied with the contracts of the company.
For such purpose, Aveo endeavored to simplify the contracts in a way that it makes it simpler for
the residents to understand. This assisted in enhancing the share prices of the Group and it can be
proved by the fact that based on a survey, more than ninety percent of residents were satisfied
with the services provided by the company (Ronngard, 2016). In addition, since the past two
years following the rollout of Aveo contract, more than 2000 customers have gained from the
simplification of the contract and it is increasing day-by-day. Moreover, this has resulted in
doubling the profits of the company that has enhanced its share price by 10pc in the year 2017.
Further, in the year 2016, the acquisition of Freedom Aged Care Pty Ltd allowed the company to
diversify its services across Australia that also increased its prices of shares (Aveo, 2017).
Furthermore, one year ago, the company moved to full authority over another operator named
Retirement Villages Group that allowed it to absorb the remaining twenty seven percent of the
stake it did not hold. As a result, there was an enhanced contribution from the sales of
development units that was greater than the sales of its current units. This can be proved by the
fact that the Group recorded an interim sales of 108 (development) in comparison to 29 of 353
overall sales that incurred in the first half of 2016. Besides, the development arm of the company
contributed more than eight percent to the earnings of the Group in the past years that have in
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turn maximized its share prices. However, even though the company recorded efficient results,
yet its practices became questionable under the eyes of the law that eventually played a key role
in decreasing its share prices (Horngren, 2013). Besides, even though the contracts were
simplified, yet many residents were unhappy and when the Australian Competition and
Consumer Commission took over the case, hearing such news resulted in a decline of its share
price by 5pc. Any questionable fact is considered by the market with utmost negativity and
impacts the smooth operation of the company (Benabou & Tirole, 2010). Due to all these
questionable practices on the part of the Group, it finally decided to launch a $145 million
buyback program so that it can enhance the prices of its shares. However, the Group could not
encounter the questionable allegations even though it spent millions on advertising to avoid such
accusations (Aveo, 2017). This resulted in a class action against the Group that declined its share
prices by more than ten percent. Therefore, it is imperative that the company failed to prove the
reason and give a complete justification of the happening. Hence, any further proceedings in the
case can lead to more volatility and hence, Aveo at present is under difficulties and should not be
considered for any investment purpose. It must be allowed to resurrect so that the trend or the
pattern can be known.
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Conclusion
The study above clearly indicates that Aveo has faced difficulty in operation and is mainly due to
the external scenario. Hence, it is the duty of the management to ensure that the company should
be free from all such allegation by laying down a structure of strong corporate governance. It
needs to be noted that any wrong or negative news can bring the stock prices to a big fall. This
affects the goodwill of the company and leads to a disturbance in the stock market. Overall, the
market scenario of the company remains in a bearish mode and the sharp plunge in the stock
prices must be considered before taking any vital decision. In all probability, the current scenario
of the company is not a good bet for investment. At present the trend is unknown and hence, the
stock must be left to operate on its own and decision must be taken accordingly.
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References
Albuquerque, R, Durnev, A, Koskinen, Y 2013, Corporate social responsibility and firm risk:
theory and empirical evidence, Boston University.
Aveo 2017, AOG - AVEO GROUP - Share Prices, Company News and Announcements, viewed
2 September 2017 http://www.smh.com.au/business/markets/quotes/price-history/AOG/aveo-
group
Bauer, R & Hann, D 2010, Corporate environmental management and credit risk, Maastricht
University.
Benabou, R & Tirole, R 2010, ‘Individual and Corporate Social responsibility’, Ecnomica
vol.11, pp. 1-19
Damodaran, A 2010, Applied Corporate Finance: A User’s Manual, New York: John Wiley &
Sons
Damodaran, A 2012, Investment Valuation, New York: John Wiley & Sons.
Davies, T. & Crawford, I 2012, Financial accounting, Harlow, England: Pearson.
Horngren, C 2013, Financial accounting, Frenchs Forest, N.S.W: Pearson Australia Group.
Kruger, P 2015, ‘Corporate goodness and shareholder wealth’, Journal of Financial economics,
pp. 304-329
Libby, R., Libby, P. and Short, D 2011, Financial accounting, New York: McGraw-Hill/Irwin.
Melville, A 2013, International Financial Reporting – A Practical Guide, 4th edition, Pearson,
Education Limited, UK
Paradise, R & Rogoff, B 2009, Side by Side: Learning by Observing and Pitching In’, Ethos, vol.
37, pp. 102–138
Ronngard, H 2016, Aveo Group Climbs 8% after Confirming Acquisition, viewed 2 September
2017 https://www.moneymorning.com.au/20160218/aveo-group-climbs-8-after-confirming-
acquisition-cw.html
Williams, J 2012, Financial accounting, New York: McGraw-Hill/Irwin.
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