FIN3CSF Case Study: Evaluating Santos Ltd & Harbour Energy Deal

This case study provides an independent expert's report on Santos Limited, an Australian natural gas company, in light of a takeover bid by Harbour Energy. The report analyzes Santos Limited's financial statements, including income statement, balance sheet, and cash flow statement, using various financial ratios and trend analysis to assess the company's performance and financial position. It evaluates the profitability, liquidity, asset efficiency, and investment ratios, and compares the company's valuation using discounted cash flow and residual earnings methods. The report concludes that Harbour Energy's deal is not efficient and recommends that Santos Limited should not pursue the acquisition, based on the forecasting of the company's improved future performance. The analysis uses data from annual reports, Yahoo Finance, and Morningstar to support its findings.

[ T y p e t h e c o m p a n y
n a m e ]
lenovo
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Independent
Expert’s Report

ABN 48798542
License no. 8795486
Sydney,
Chief executive officer, Australia
Santos Limited Telephone: [phone]
Australia Fax: [phone]
www.expertreport.com
20 May 2018
Subject: Expert Report about Santos Limited

Santos Limited,
Introduction:
1. An offer has been made to Santos limited by one of the largest energy company of US
market to acquisition.
2. The company has offered the Santos limited a deal of acquisition.
3. In the acquisition statement of Harbour limited, it has been mentioned by the company.
Harbour limited that the stock position of the company is not well in the market.
4. Harbour limited has measured the market and explained that the stock price of Santos
limited at the end of April 2, 2018 is $ 5.07.
5. However, harbour limited is offering AUD 6.13 to Shareholders of Santos limited per
share.
6. Company has also mentioned that if someone does not want to sell the ownership of the
company than the Harbour limited would offer fully franked dividend to the shareholders
of Santos limited.
7. Initially, the offered deal of acquisition, dividend and franked dividend are quite
attractive for Santos limited as the company is not performing well from last few
decades.
8. The company is natural gas dealer in Australian market. It majorly focuses on the various
activities of natural gas from exploration to sales of natural gas (Home, 2018).
9. Santos limited has been recognized by the Australian market as second largest oil and gas
Exploration Company in private sector.
Opinion about the Harbor energy’s deal:
10. The annual report (2017) and yahoo finance (2018) of Santos limited explains that the
share price of the company has been lower as well as no profits have been earned by the
company in last 5 years.

11. On the other hand, it has been found that the valuation measurement and forecasting
process on the company explains that the financial performance and the financial position
of the company has improved a bit and in future, the company would again be able to
make the profits.
12. It explains that the performance of the Santos limited must be measured on the basis of
the financial performance, changes into the final statement of the company, changes into
the performance and the strategies of the company, dividend policy of the company etc.
Financial statement analysis:
13. The financial statement of the company has been measured to identify the performance of
the company. The main statement of the Santos limited contains the income statement,
cash flow statement and the balance sheet of the company. It measures the financial
performance of the company and explains about the entire changes in the performance of
the company.
14. The income statement of the company has been evaluated firstly and it has been analyzed
that the performance of the company is average. The share price and the market
performance of the company have been lower. However, company has maintained to
manage the level of expenses which has improved the profitability position.
2014 2015 2016 2017
Share Return 54.49% -472.75% -76.79% -22.08%
P/E ratio 1.51% -0.08% -0.52% -2.47%
Market Book ratio 86.22% 63.71% 83.50% 123.83%
Gross profit margin 44.59% -180.65% -14.26% 12.56%
Net profit margin -22.74% -81.58% -37.61% -10.93%
Income ratios
(Annual report, 2018)
15. The balance sheet of the company has been evaluated further and it has been analyzed
that the stock and financial position of the company has been improved. The company
has made enough changes into the financial position and the capital structure of the
company to manage the performance of Santos limited in 2017.

2014 2015 2016 2017
Return on assets 275.00% -2389.00% -519.00% -111.00%
Return on equity 566.00% -5338.00% -1411.00% -501.00%
Share capital / Total equity 73.36% 99.90% 125.47% 126.33%
Revenue growth 11.86% -19.56% 16.34% 9.80%
Operating expenses / Sales revenue55.41% 280.65% 114.26% 87.44%
SGA expenses / Sales revenue 55.41% 280.65% 114.26% 87.44%
Current ratio 106.12% 229.46% 189.59% 207.36%
PPE/Total assers 21.60% 18.76% 24.63% 32.16%
Total liabilities / Total equity137.38% 114.92% 115.56% 91.67%
Long term debt / Total assers 49.17% 47.66% 43.42% 40.89%
Balance sheet ratios
16. Further, the cash flow position of the company has been analyzed on the basis of the free
cash flow of the company. The calculations explain that the free cash flow of the
company has been lowered in context with the total assets of Santos limited.
2014 2015 2016 2017
Free cash flow / Total assets 3.47% 5.26% 13.27% 8.98%
Cash flow ratios
17. The study explains that the Santos limited’s management and the directors have made
various changes into the performance of the company which are for the good of the
company.
Trend analysis:
18. The further study has been done on the trend of the final financial statement of the
company. The income statement explains that the position of the company is
continuously improving and very soon, it would be able to gain profits again.
Item Dec-14 Dec-15 Dec-16 Dec-17
Operating Revenue 10.88% -19.59% 10.44% 11.12%
Other Revenue 117.65% -17.57% 330.45% -8.21%
Total Revenue Excluding Interest11.86% -19.56% 16.34% 9.80%
Reported NPAT After Abnormal-281.20% 188.56% -46.37% -68.10%
EPS Adjusted (cents/share) 5.05% -967.59% -83.76% -71.25%

19. Further, the balance sheet of the company has been measures and it explains that the few
changes have been made by the management of Santos limited in the financial
performance of the company on the basis of the total revenue and the profitability level.
20. The changes are for the better health of the Santos limited.
Item Dec-14 Dec-15 Dec-16 Dec-17
Total Current Assets -0.0063 0.29305 0.283513 -0.61254
Total NCA 0.086243 -0.06709 -0.11696 -0.13104
Total Assets 0.077691 -0.01911 -0.03955 -0.20032
Total Liabilities 0.196025 -0.10304 -0.03685 -0.3455
Total Equity -0.08488 0.077338 -0.04268 -0.06724
21. The trend measurement and the performance of the company explain that the Santos
limited would soon be in the profitable state again and the current performance has also
been handled by the company perfectly.
Financial ratio analysis:
22. The ratios have been evaluated and analyzed further of Santos limited. It would help to
measure the various level of the company. On the basis of that, a better decision could be
made about the acquisition deal on the behalf of Santos limited.
23. . Profitability ratio calculations of Santos limited explains that the company is improving
the profitability level through reducing the extra cost of the company.
Gross Profit Margin
Gross profit / 1,74,30,00,000 1,83,30,00,000 5,97,40,00,000- 54,86,45,660- 53,07,69,230
Sales Revenue (note used operating revenue) 3,67,50,00,000 4,11,10,00,000 3,30,70,00,000 3,84,74,29,519 4,22,43,58,974
Answer: 47.4% 44.6% -180.6% -14.3% 12.6%
Operating profit margin
Operating profit / -1,93,20,00,000 -2,27,80,00,000 -9,28,10,00,000 -4,39,60,75,179 -3,69,35,89,743
Sales Revenue % 3,67,50,00,000 4,11,10,00,000 3,30,70,00,000 3,84,74,29,519 4,22,43,58,974
Answer: -52.57% -55.41% -280.65% -114.26% -87.44%
24. The liquidity ratio is also maintained by the company according to the industry position.
Company could easily meet all the short term debt obligations.

Liquidity Ratios 2013 2014 2015 2016 2017
Current Ratio
Current Assets / 2,07,80,00,000 2,06,50,00,000 2,92,10,00,000 4,07,68,38,032 2,52,82,05,128
Current liabilities 1,72,60,00,000 1,94,60,00,000 1,27,30,00,000 2,15,03,59,314 1,21,92,30,769
Answer: 1.20 1.06 2.29 1.90 2.07
Acid test ratio
Current Assets - Inventory / 2,07,80,00,000 1,74,40,00,000 2,50,20,00,000 3,63,38,38,032 2,03,32,05,128
Current Liabilities 1,72,60,00,000 1,94,60,00,000 1,27,30,00,000 2,15,03,59,314 1,21,92,30,769
Answer: 1.20 0.90 1.97 1.69 1.67
25. The company has changed into the financial position of the company which has lead to
the company towards more efficiency position.
Asset Efficiency Ratios 2013 2014 2015 2016 2017
Trade payable payment period ratio
Accounts payable/ 0 1,23,50,00,000 1,38,20,00,000 84,90,00,000 71,86,29,076
Cost of sales 1,93,20,00,000 2,27,80,00,000 9,28,10,00,000 4,39,60,75,179 3,69,35,89,743
Answer: (note the above needs to be x 365) 0.0000 197.8819 54.3508 70.4913 71.0148
Inventory Turnover (days)
Average Inventory / 0 32,10,00,000 41,90,00,000 44,30,00,000 49,50,00,000
Cost of Sales # days 1,93,20,00,000 2,27,80,00,000 9,28,10,00,000 4,39,60,75,179 3,69,35,89,743
Answer: (note the above needs to be x 365) 0.00 51.43 16.48 36.78 48.92
Receivables Turnover (days)
Average trade debtors / 3,10,00,000 1,00,00,000 60,00,000 69,09,894 -
Sales revenue (note used operating revenue) # days 3,67,50,00,000 4,11,10,00,000 3,30,70,00,000 3,84,74,29,519 4,22,43,58,974
Answer: (note the above needs to be x 365) 3.08 0.89 0.66 0.66 0.00
26. Lastly, the investment ratios explain that the market performance of Santos limited is not
at all good. The main reasons behind the lower market position are loss of the company.

Investor's Ratios 2013 2014 2015 2016 2017
Earnings per share
Net income 50,40,00,000 53,30,00,000 -5,44,60,00,000 -1,38,05,97,014 -45,89,74,358
Weighted average shares outstanding 96,72,88,518 97,81,66,528 1,15,19,77,771 1,79,78,96,876 2,07,88,58,067
Answer: 0.521 0.545 -4.728 -0.768 -0.221
Dividend coverage ratio
Net income / 50,40,00,000 53,30,00,000 -5,44,60,00,000 -1,38,05,97,014 -45,89,74,358
Dividend paid to shareholders 15,70,00,000 19,60,00,000 21,50,00,000 5,94,25,096 0
Answer: 3.210 2.719 -25.330 -23.233
(Bhimani et al, 2008)
27. Financial ratios brief that the Santos limited’s operations, policies and the financial
performance is away better.
Valuation analysis:
28. The Santos limited’s stock has been evaluated in the market on the basis of the
discounted cash flow of the company and the residual earnings of the company.
29. Residual earnings method explains about the total earnings of $ 0.29 and $ 0.32 in 2018
and 2019 respectively.
30. The below table explains that the intrinsic value of the stock should be $ 2.85 and $ 3.15
which is quite lower than actual stock price of the company.
31. It explains that the Santos limited’s stock is overvalued (Hill, 2006).
2018 2019
Eanings per share 0.29$ 0.32$
Earnings yiled 10.16% 10.16%
Intrisic Value (Earnings per
share / Earnings yield) 2.85 3.15
Share Price 6.25 6.44
Stock is overvalued Stock is overvalued
Residual eanings Ratio

(Yahoo finance, 2018)
32. The case only concentrates on earnings of the company and thus it is explaining about
overvalued stock price.
33. Further, the study of discounted cash flow has been done on the company.
34. It explains that the stock of the company is undervalued.
35. The stock price of Santos limited on the basis of the discounted cash flow is $ 15.67 and
the stock price in market is $ 6.25 which explains about better performance of the
company.

Year FCFF ($M)PVF @ 5.05% PV of Cash Flows
1 38,10,22,437.69 0.952 36,27,05,795.04
2 38,86,42,886.44 0.906 35,21,75,069.91
3 39,64,15,744.17 0.863 34,19,50,091.68
4 40,43,44,059.06 0.821 33,20,21,983.35
5 41,24,30,940.24 0.782 32,23,82,125.67
6 42,06,79,559.04 0.744 31,30,22,149.63
7 42,90,93,150.22 0.708 30,39,33,929.20
8 43,76,75,013.23 0.674 29,51,09,574.28
9 44,64,28,513.49 0.642 28,65,41,423.86
10 45,53,57,083.76 0.611 27,82,22,039.35
3,18,80,64,181.98
Terminal cash flows 46,44,64,225.44 29,39,64,69,964.36
32,58,45,34,146.35
2,07,88,58,067.00
15.67
Total value of Equity
No of Shares Outstanding
Per share value of value of equity
Present value of discrete cash flows for next 10 years
Total
Present value of terminal cash flows
(Morningstar, 2018)
Recommendation:
36. The above study clearly explains that the Harbour limited’s deal is not efficient.
37. Santos limited must not look for the acquisition process and must done the entire
operations as its own.
38. Forecasting of the company explains about better position of the company.

References:
Bhimani, A., Horngren, C. T., Datar, S. M., and Foster, G. 2008. Management and cost
accounting (Vol. 1). Pearson Education.
Haynes, M., Thompson, S. and Wright, M., 2007. Executive remuneration and corporate
divestment: Motivating managers to make unpalatable decisions. Journal of Business Finance &
Accounting, 34(5‐6), pp.792-818.
Hill, J.G., 2006. Regulating executive remuneration: International developments in the post-
scandal era. Eur. Company L., 3, p.64.
Home. 2018. Santos Limited. [online]. Available at: https://www.santos.com/ (accessed 27/5/18).
Morningstar. 2018. Santos Limited. [online]. Available at:
http://financials.morningstar.com/income-statement/is.html?t=STO&region=aus (accessed
27/5/18).
Yahoo Finance. 2018. Santos Limited. [online]. Available at:
https://finance.yahoo.com/quote/sto.ax?ltr=1 (accessed 27/5/18).