Financial Market Analysis: Abacus vs. Aveo Real Estate Companies

This report presents a comprehensive financial analysis of the Australian real estate market, focusing on Abacus Property Group Stapled (ABP) and Aveo Group Stapled (AOG), both listed on the Australian Securities Exchange (ASX). The analysis employs a top-down approach, examining the impact of economic fundamentals such as interest rates, currency value, GDP, inflation, and exchange rates on the performance and share prices of these companies. A bottom-up analysis is also conducted, utilizing financial ratios for 2016 and 2017 to assess profitability, liquidity, efficiency, solvency, and dividend payout. The report compares the performance of ABP and AOG, providing insights into their financial health relative to industry standards. The conclusion offers recommendations for both firms and investors based on the findings.

PRINCIPLE OF
FINANCIAL MARKETING

EXECUTIVE SUMMARY
Financial market is a place where different typeof securities, stock, fungible items,
derivatives and commodities are traded among the buyers and sellers. Generally, transactions are
done at low cost within the markets for gaining higher returns. Under this, stock, equity,
preference shares, bonds, etc., are included whereas commodity comprises with metal,
agricultural items, precious stones etc. The present study isbased upona fundamental analysis of
the companies that are listed in the stock market. Real estate industry is taken as a base where
Abacus Property Group Stapled and Aveo Group Stapled firms are taken into consideration.
Both these companies are listed in the Australian Securities Exchange (ASX) market. There are
wide range of aspects included in the economic environment that creates either negative or
positive impact on firm's performance. Along with this, the value of business and prices of shares
also get affected by such factors. Economic fundamentals affecting includes interest, inflation,
GDP, exchange rate, currency value etc. Apart from this, by considering accounting information
of Abacus and Aveo companies, business performance is also being measured over here.
Performance of both these firms are also compared with the real industry in the study of financial
market.

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
Introduction of the Australian real estate industry.................................................................1
Mission statement of selected firms.......................................................................................1
SECTION 1: TOP – DOWN ANALYSIS.......................................................................................2
Impact of economic fundamental changes on chosen business performance and its share prices
................................................................................................................................................2
SECTION 2: BOTTOM – UP ANALYSIS.....................................................................................3
Financial ratios of Abacus property and Aveo group for the year ended 2016 and 2017......3
Comparison with industry standards....................................................................................11
SUMMARY AND RECOMMENDATIONS................................................................................12
REFERENCES .............................................................................................................................14

INTRODUCTION
In the financial market, shares, bonds, securities, commodities, derivatives etc. are traded
among two or more parties with a purpose of generating income. In the present project, real
estate industry is considered as a base of this study. Further, Abacus Property Group Stapled
(ABP) and Aveo Group Stapled (AOG) companies are chosen that are listed in the ASX market.
In the current study, various factors are explained that known to affect the share prices of the
cited firm. Along with this, such economic fundamentals are analysed that creates an overall
impact on the carried business performance. Beside this, financial ratios ofboth these entities are
performed in order to assess their performance in the real estate industry. At the end of this
report, recommendations are provided to the firms as well as the investors for taking effective
and fruitful decisions.
Introduction of the Australian real estate industry
The real estate market of Australia comprises with two basic factors which are trading of
property and permanent fixture of itsposition in the country. When looking at the growth rate of
the property market in Australia,it can be assessed that, it is growing in a positive and fruitful
direction. Due to which, its contribution in Australian GDP is higher in comparison to other
markets. Housing prices in this country have steadily grown from the past few years due to
higher demand by the local community. Growth rate in this market is approximate 3% per year
since 1970. Apart from this, charges of the real estate are highly attractive that has supported to
grow in a positive direction (Australian Real Estate: Market Overview, 2016). When considering
the global property market, then also performance and improvement is found to be at a higher
pace in the Australian economy.
Mission statement of selected firms
ABP company:
The Abacus entity is developing as one of the leading diversified group of property which
operates in Australia and offer houses at attractive prices. It was established in the Australian real
estate industry in 1996 with the below stated mission:
Mission of ABP is to provide a reliable, profitable, higher and increasing returns to their
investors who are investing their valued money in property.
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AOG company:
The AOG firm is stated as another leading provider of property to senior living
communities in Australian market where it changes residential lifestyle over a particular period.
Mission of AOG is to continuously grow its portfolio in the property market for achieving
estimated acquisitions within an accounting period.
SECTION 1: TOP – DOWN ANALYSIS
Method of analysis which shows a big picture of the company after considering small
details to the component is known as top-down analysis. With the help of this, overview of an
entity is ascertained along with the factors affecting it (Cox and Steigerwald, 2016). In the
present study, various economic fundamentals affect to the chosen company which are ABP and
AOG. Further, those factors which influencesthe business performance and share prices are
mentioned below:
Impact of economic fundamental changes on chosen business performance and its share prices
Interest rate: One of the major aspect that impacts on the carried performance of ABP
and AOGis interest rate which is a part of monetary policy. It is a rate on which central and other
commercial banks provide loan to the firms. When central bank of Australia increasesthe interest
rates, then it leads to the rise of indirect expenses. Therefore, it cannot generate high net profit in
the real estate industry that leads to the decline of overall business performance (Ahmed,
Coulibaly and Zlate, 2017). In the present time, rate of interest is 1.5% in Australian economy
which is at a moderate level but affectsboth selected property groups.
Value of currency: In the economy, currency has a highly pivotal role which is taken as a
base for exchanging goods and services. As of now, value of 1 AUD is 0.81 against the US
Dollar by which exports and imports are affected to a great extent. In the economy, if value of
AUD declines, then people will not consider purchasing the properties which will in turn
influence both ABP and AOG firms. The reason is that, lower the valuation of currency, it
indirectly affects the profit level and sales on the property market. Therefore, entities unable to
perform well in the Australian real estate sector directly impacts on the business valuation (Kaul
and Kayacetin, 2017).
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Gross Domestic Product (GDP): The rate which reflects position of an economy within a
nation is called GDP and is one of the significant part of every country. With an enhanced rate of
GDP in Australia,businesses will beable to earn high level of sales and profit. The reason behind
this is high growth rate income of people which leads to enhance their purchasing power in the
economy. Therefore, AOG and ABP companies become more profitable and boost up
performance in the relevant sector. Current GDP of Australia is worth 1204.62 billion US dollars
which is lower than previous year’s statistics.
Inflation rate: Another fundamental of an economy through which performance of AOG
and Abacus affected is inflation rate. In the Australian economy, this rate is 1.9% as per the
analysis of July 2017 which has shown an increment from the last year (Inflation rate of
Australia, 2017). As the rate of inflation enhances in economy, this also leads to an increased
priceby to declining the sale of property in the market. Therefore, profit directly influences up to
a higher extent and cannot perform well in the industry. In overall economy, inflation is a highly
and directly influential component on the businesses of any industry.
Exchange rate: Other than the above stated economic aspects, exchange rate also has a
major impact on both cited enterprises. When rate of exchange is high or declines, then exports
and imports of the firm directly affectsthe economy (Smith, 2017). Hence, change in this
particular fundamental of economy influencesboth sales and business performance.
When looking at the share price which is influenced from economic factors,it can be said
that, through such fundamentals, they unable to boost up profit and performance as well.
Therefore, value of businesses in the market and relevant sector highly affected in same
direction. For instance: if income and performance of AOG and ABP declines due to GDP,then
valuation will obviouslyget influenced. Lower the business valuation, better for the listed firm
for raising share prices in ASX market (Grossmann, Paul and Simpson, 2017). Hence, if value of
companies reduces, then stock prices will also decline and vice-versa.
SECTION 2: BOTTOM – UP ANALYSIS
The approach in which only internal aspects are considered in order to perform
investigation of a particular company is identified as bottom-up analysis. It includes different
number of ways where financial ratio is one of the best technique (Cashin, Mohaddes and Raissi,
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2017). In the current case scenario, by using various ratios and industry averages performance of
ABP and AOG is being analysed.
Financial ratios of Abacus property and Aveo group for the year ended 2016 and 2017
Financial ratios of accounting period 2016
Profitability ratios:
Profitability ratios Formula
Abacus Property
Group Stapled
Aveo Group
Stapled
Net sales 264 445
Operating profit 97 157
Net profit 186 116
OP ratio Operating profit / net sales *100 36.74% 35.28%
NP ratio Net profit / net sales *100 70.45% 26.07%
Analysis: From the above graph of profitability ratios, it can be ascertained that, in the
FY 2016, OP and NP both ratios are higher in Abacus group as compared to Aveo. Net income
ratio is 70.45% in Abacus whereas Aveo generates only 26.07% in the same year. This particular
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situation clearly shows that Aveo was not able to manage and decline indirect expenses in the
financial period of 2015-16.
Liquidity ratios:
Liquidity ratios Formula
Abacus Property
Group Stapled
Aveo Group
Stapled
Current assets 478 431
Current liabilities 208 339.1
Closing stock 9.85 275
Prepaid expenses 0 12
Current ratio Current assets / current liabilities 2.30:1 1.27:1
Quick ratio
Current assets – (closing stock +
prepaid expenses) / current liabilities 2.25:1 0.42:1
Analysis: Higher proportion of current ratio of Abacus firm i.e. 2.30:1 indicates that, it
has more capabilities of meeting debts which are taken for short term. Value of same ratio in
Aveo group is only 1.27:1 which performs lower as compared to previous entity. Apart from this,
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quick ratio of ABP and AOG is 2.25:1 and 0.42:1 respectively in the year end of 2016 in which
Abacus has also performed well (Financials of Abacus Property Group, 2017).
Efficiency ratios:
Efficiency ratios Formula
Abacus Property
Group Stapled
Aveo Group
Stapled
Cost of goods sold 94 274
Average stock 8.66 267.5
Net sales 264 445
Average total assets 2294 3744
Stock turnover ratio COGS / average stock 10.85 times 1.02 times
Assets turnover ratio Net sales / average total assets 0.12 times 0.12 times
Analysis: Financial ratio by which capability of the company in terms of generating the
use of various assets is analysed is known as efficiency (Atoom, Malkawi and Al Share, 2017).
In the present case, stock turnover ratio of Abacus and Aveo is 10.85 and 1.02 times respectively
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in the fiscal period 2016. It reflects that, ABP utilisation is anaccessible inventory in an optimum
direction for generating revenue within workplace. When looking at another efficiency ratio,
then it can be said that, both performs equally in the year 2016. However, total assets turnover is
only 0.12 times which is extremely low.
Solvency and dividend pay-out ratio:
Solvency ratio Formula
Abacus Property
Group Stapled
Aveo Group
Stapled
Debt 802 462
Equity 1516 1628
Debt to equity ratio Debt / Equity 0.53:1 0.28:1
Total dividends 95 44
Net income 186 116
Dividend Payout Ratio Total dividends / net income 51.08% 37.93%
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Analysis: Capital structure of Aveo group is better and profitable in the financial period
of 2015-16 as compared to Abacus. The reason is that, ABP generated capital from debt in high
proportion than the equity financing. Debt equity ratio is 0.53:1 and 0.28:1 in Abacus and Aveo
where it can be ranked at second position for meeting an ideal ratio in the real estate industry of
Australia. Apart from this, 51.08% dividend pay-out in Abacus represents that, it provides higher
amount of dividend to shareholders than Aveo group stapled.
Therefore, financial performance of Abacus is well and better in real estate market in FY
2016 in comparison to Aveo property group.
Financial ratios of accounting period 2017
Profitability ratios:
Profitability ratios Formula
Abacus Property
Group Stapled
Aveo Group
Stapled
Net sales 252 421
Operating profit 142 307
Net profit 285 253
OP ratio Operating profit / net sales *100 56.35% 72.92%
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NP ratio Net profit / net sales *100 113.10% 60.10%
Analysis: The above calculated ratio indicates the capability of an entity by ascertaining
the level up to which it will be able to generate profit within an accounting period. In the present
case, operating profit ratio of Aveo is high i.e. 72.92% in the industry in the year end of 2017.
When considering the net profit ratio, then it is 113.10% and 60.10% on ABP and AOG groups
respectively. On the basis of this,profitability performance of Abacus is also well associated to
its competitor.
Liquidity ratios:
Liquidity ratios Formula
Abacus Property
Group Stapled
Aveo Group
Stapled
Current assets 169 330
Current liabilities 41 466.2
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Closing stock 8.47 170
Prepaid expenses 0 13
Current ratio Current assets / current liabilities 4.12:1 0.71:1
Quick ratio
Current assets – (closing stock +
prepaid expenses) / current liabilities 3.92:1 0.32:1
Analysis: Liquidity ratios are considered to analyse a position in which ability of an
entity for achieving obligations of short-term(Lakshmi, Martin and Venkatesan, 2016). Current
ratio of Abacus is 4.12:1 in FY 2017 which is the highest in comparison to 0.71:1 which is of
AOG company. On whose basis, the previous entity generates high net profit which leads to
boost up its capability of paying short-term liabilities. In addition to this, quick ratio is also at the
lowest situation in Aveo i.e. 0.32:1 whereas in rivalry it is 3.92:1 in the same period.
Efficiency ratios:
Efficiency ratios Formula
Abacus Property
Group Stapled
Aveo Group
Stapled
Cost of goods sold 78 219
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Average stock 9.16 222.5
Net sales 252 421
Average total assets 2444 5025
Stock turnover ratio COGS / average stock 8.52 times 0.98 times
Total assets turnover
ratio
Net sales / average total
assets 0.10 times 0.08 times
Analysis: The above prepared graph clearly presented stock and assets turnover where
both the efficiency ratios are higher in Abacus group of property as compared to another stated
company. When looking at the inventory ratio, then it is 8.52 times in Abacus and 0.98 times in
Aveo in the fiscal year 2016-17. On the other side, assets turnover proportion is 0.10 and 0.08
times within Abacus and its rivalry respectively. By considering such values, it can be said that,
Abacus group is highly efficient in order to utilise its inventory as well as total assets in FY
2017.
Solvency and dividend pay-out ratio:
Solvency ratio Formula Abacus Property Aveo Group
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Group Stapled Stapled
Debt 549 573
Equity 1766 1948
Debt to equity ratio Debt / Equity 0.31:1 0.29:1
Total dividends 101 52
Net income 285 253
Dividend Pay-out Ratio Total dividends / net income 35.44% 20.55%
Analysis: It can be articulated from the above performed calculation that Aveo company
generated less capital from debentures and prefer equity financing in comparison to another
selected firm. In the fiscal period 2017, debt to equity ratio in ABP and AGO is 0.31:1 and
0.29:1 respectively. Moreover, as compared to ideal ratio i.e. 0.5:1 both real estate firms perform
well in the industry (Le and Viviani, 2017). Apart from this, Abacus provide higher dividend
amount to its shareholders than its competitors. Value of dividend pay-out ratio in Abacus and
Aveo is 35.44% and 20.55% respectively in FY 2017.
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Hence, the Abacus property group performs well in terms of financial within Australian
real estate market and Aveo performs poor.
Comparison with industry standards
In order to assess performance of an entity within real estate industry, average ratios of
the whole property market are undertaken (Dias and et.al., 2016). In the present case, ratios of
year ending 2016-17 are considered which helps to analyse that Abacus and Aveo are up to
which level performs in the Australian property industry. Further, the comparison and
interpretation is mentioned below:
Name of ratios Industry average
Abacus Property Group
Stapled
Aveo Group
Stapled
Operating profit ratio 70.12% 56.35% 72.92%
Net profit ratio 110.85% 113.10% 60.10%
Current ratio 1.44 4.12 0.71
Quick ratio 0.93 3.92 0.32
Stock turnover ratio 6.89 8.52 0.98
Total assets turnover ratio 0.07 0.10 0.08
Debt to equity ratio 0.39 0.31 0.29
Dividend Payout Ratio 33.16% 35.44% 20.55%
Interpretation: The above presented table reflected that, in terms of NP ratio, Abacus
perform better than its rivalry. The company has NP ratio 113.10% which is higher than the
industry average i.e. 110.85% within property market. When looking at the liquidity values then
it can be assessed that quick and current ratios of industry are 1.44:1 and 0.93:1 respectively.
Both of these ratios are higher than Aveo firm and lower than another selected enterprise. The
Abacus group allows shareholders to provide more dividend amount as compared to the industry
averages. However, in terms of OP ratio AOG company performs well within the industry.
Moreover, as per the industry comparison, Abacus also has better and increasing performance in
the real estate market of Australia.
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SUMMARY AND RECOMMENDATIONS
From the above study it can be summarised that, to the share prices of a listed entity
influences various kinds of economic factors affect up to greater extent. Hence, when any factor
pertaining to Australian economy increases or declines then Abacus Property and Aveo Group
Stapled would not become able to generate higher profit and provide dividend to the
shareholders. Economic fundamentals influencing to listed entities include interest, exchange,
GDP rate, currency value etc. On the basis of second section it can be assessed that, Abacus
group performs well in the whole industry as compared to Aveo company in both the accounting
periods such as 2015-16 and 2016-17. When visualising to the industry comparison then also
ABP enterprise has the higher performance than another selected entity. However, as per the debt
to equity ratio AOG organisation performs very well and for fund raising generally prefer equity
source. On the basis of such analysis, suggestions to the firm and investors are explained below:
 It can be recommended to Aveo group that, it needs to apply cost management strategies
for reducing the level of indirect expenses. By doing this, firm would become able to
enhance profitability performance operated in the property industry of Australia.
 Apart from this, Aveo requires arranging training and development programmes so that
workforce will be able to utilise its assets and inventory in an optimum direction. This
strategy will lead to improve efficiency of personnel and thereby enhances total sales in
the market and meet industry averages.
 It can be suggested to Abacus company that, for raising capital using external sources of
finance it should consider equity shares instead of debentures in the company. The reason
is that it reduces interest expenses burden on the entity along with ratio of debt to equity.
 Moreover, AOG should employ cash management techniques in the workplace through
which it will be able to improve liquid as well as current assets.
 When looking from the investor's point of view then they need to consider Abacus
property group for making investment and avoid another enterprise. The reason is that, it
provides higher amount of dividend due to generating more net income in the year
ending.
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REFERENCES
Books and Journals
Ahmed, S., Coulibaly, B. and Zlate, A., 2017. International financial spillovers to emerging
market economies: How important are economic fundamentals?. Journal of International
Money and Finance.
Atoom, R., Malkawi, E. and Al Share, B., 2017. Utilizing Australian Shareholders' Association
(ASA): Fifteen Top Financial Ratios to Evaluate Jordanian Banks' Performance. Journal of
Applied Finance and Banking.7(1). p. 119.
Cashin, P., Mohaddes, K. and Raissi, M., 2017. China's slowdown and global financial market
volatility: Is world growth losing out?. Emerging Markets Review.31. pp. 164-175.
Cox, R. T. and Steigerwald, R. S., 2016. "Incomplete demutualization" and financial market
infrastructure: central counterparty ownership and governance after the crisis of 2008-9.
Journal of Financial Market Infrastructures. 4(3). pp. 25-38.
Dias, A. and et.al., 2016. Signaling Tax Evasion by Using Financial Ratios and Cluster Analysis.
OBEGEF.
Grossmann, A., Paul, C. and Simpson, M. W., 2017. An evaluation of the equilibrium value of
the euro, its predecessors and their constituent currencies based on economic
fundamentals. Applied Economics. 49(33). pp. 3280-3312.
Kaul, A. and Kayacetin, N. V., 2017. Flight-to-quality, economic fundamentals, and stock
returns. Journal of Banking & Finance. 80. pp. 162-175.
Lakshmi, T. M., Martin, A. and Venkatesan, V. P., 2016. A genetic bankrupt ratio analysis tool
using a genetic algorithm to identify influencing financial ratios.IEEE Transactions on
Evolutionary Computation. 20(1). pp. 38-51.
Le, H. H. and Viviani, J. L., 2017. Predicting bank failure: An improvement by implementing
machine learning approach on classical financial ratios. Research in International Business
and Finance.
Smith, S. C., 2017. Equity premium estimates from economic fundamentals under structural
breaks. International Review of Financial Analysis. 52. pp. 49-61.
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