Origin Energy: Advanced Corporate Finance Case Study Report

This case study provides a comprehensive financial analysis of Origin Energy, an Australian integrated energy company. The report examines the company's corporate governance structure, including the roles of the CEO and board of directors, and evaluates its ownership structure and lender relationships. It delves into financial market considerations, social constraints, and historical risk parameters, including beta, alpha, and default risk, to assess the company's financial stability and investment risk. The analysis further explores the cost of capital, existing investments, competitive strengths, and financing sources, including debt versus equity trade-offs and dividend policies. Peer group analysis and valuation approaches (FCFE, DDM, and PE) are employed to determine the company's financial health and strategic position. The report concludes with an overall assessment of Origin Energy's management, financial performance, and provides recommendations based on the analysis.

Running Head: APPLIED FINANCE 0
Applied Finance
(Student Name)

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Executive Summary
There is great increase in the demand for renewable energy as well as with an increased global
population, the demand is expected to double or triple over the next five decades that represent a
big business opportunity for the companies that produce energy. One of the Australian based
companies Origin energy has string presence within the country as well as in other countries. The
company deals with natural gas production, renewable energy that supplies electricity to the huge
number of population within and outside the country. The company founded in the year 2000.
The given report will describe about the management as well as directors or the company, the
corporate governance and risk analysis of the company that presents that there is average
performance of the company that support them to survive in the competitive market in an
effective manner.

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Table of Contents
Executive Summary.........................................................................................................................2
Introduction......................................................................................................................................3
Scope of Report............................................................................................................................3
Background of Company.............................................................................................................3
Corporate Governance.....................................................................................................................3
Chief Executive Officer...............................................................................................................3
Board of Directors........................................................................................................................4
Ownership Structure....................................................................................................................6
Lenders.........................................................................................................................................6
Financial Market Consideration...................................................................................................7
Social Constraints........................................................................................................................8
Historical risk parameters:...............................................................................................................8
Default risk and cost of debt:.......................................................................................................9
Estimating cost of capital:..........................................................................................................10
Analyzing the Existing Investment................................................................................................10
Assessing the Competitive Strength..........................................................................................11
Financing Sources..........................................................................................................................12
Current financing.......................................................................................................................12
Trade-off on Debt versus Equity................................................................................................12

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Costs and Benefits of debt......................................................................................................13
Dividend policy.............................................................................................................................13
Dividend policy analysis............................................................................................................13
Custodians of cash.....................................................................................................................15
Peer group analysis....................................................................................................................16
FCFE approach:.............................................................................................................................17
DDM approach:..........................................................................................................................17
PE approach:..............................................................................................................................18
Conclusion.....................................................................................................................................18
Bibliography..................................................................................................................................19

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Introduction
Scope of Report
In the following report there will be detailed analysis of energy retailing company Origin
Energy, their growth of business in the international market, with the purpose of determining
how effectively the company is managing as well as whether it is one of the viable investment
opportunity or not. The level of risk will also analyze in this report to represent actual growth of
the company in such international market. Aiding the analysis are the five most recent years
financial as well as company data that will support in analyzing the productivity of the company
are explained in blow points:
 Risk and Return profile
 Corporate Governance
 Cash Flow and Earning
 Financing Sources
 Policies related to Dividend
Background of Company
Origin Energy is one of the leading Australian integrated energy company that deliver electricity
to 4.2 million consumers as well as developing with producing natural gas- a cleaner form of
energy for the consumers in Australia as well as other areas also. The companies also aspire to be
the number of Renewables Company in Australia, by empowering the consumers to reduce their
carbon footprints through wind, solar as well as storage technology 1.
Corporate Governance
Chief Executive Officer
Frank Calabria was appointed as Chief Executive Officer as well as Managing Director of the
Company in October 2016. Frank is a member of the Company Health, Safety and Environment
1 Janusz Brzeszczyński, Socially responsible investment and market performance: the case of
energy and resource firms. (Pearson, 2016)

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Committee. He was firstly origin as Chief Financial Officer in the year 2001 as well as was
appointed as Chief Executive Office Energy Markets in the year 2009. Therefore, it represent
that Frank was already the part f the company he was promoted within the company to grow the
company in the competitive market in an effective manner.
Frank manage the role of CEO as well as Managing Director in the company since the year 2016
as he is majorly responsible for the integrated business within the Australia including retailing as
well as trading of natural gas, electricity as well as LPG power generation with the soar and
energy services. Such criterion gives the board qualitative as well as qualitative guidelines to
access performance related to EBIT growth, compound annual growth of EPS as well as
numerous non-financial measures.
Mr. Frank received A$ 3,389,341 in compensation for the year 2017 in the form of:
 Salary of $ A$1,646,466
 Performance Bonus of A$1,742,875
 Stock Option of A$ 1,430,210
 And other compensation of A$3,489,051
It represent that almost 40% of his total compensation is in the form of performance bonuses
where an independent remuneration committee has also recommended the objective criteria
benchmarks in the form of short as well as long-term incentives. In the recent, Mr. Frank owns
163,530 shares in the company that make them contributor in the growth and success of the
business in an effective manner2.
Board of Directors
The table of board of directors is explained in below table:
2 Alden, S, Ottaway, A, and Tetstall, J, Australia: Drafting contracts: guidance on managing
ambiguity (2012)
http://www.mondaq.com/australia/x/163072/Contracts+Deeds/Drafting+contracts+guidance+o
n+managing+ambiguity

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The board is comprised of six non-executive directors. It represent as the positive sign as they
allow them to have unbiased judgment as well as act in the best interest of the stockholders.
Bruce William Morgan, Maxine Brenner, Steven Sargent, Teresa and Greg Lalicker are

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controlled by other companies as they have interest in the origin company that support the
company in taking decision in more effective and efficient manner.
All non-executive directors are compensated in form of salary with no share of performed
bonuses. No director except CEO as well as the Chairman has substantial stockholdings that also
implies that such area of the board is required to enhance.
There are two female directors in the board and six male directors as well as could probably
benefit from the further gender diversity to enhance the liquidity of stock as well as in turn the
market efficiency. The remuneration of the directors is already explained in above table that
represent that they have average remuneration of 3, 00000 to 6, 00000. The meeting held once in
an year in which all the directors are allowed to attend that meeting and make participate in the
decision making of the company.3
Ownership Structure
3 Yahoo Finance, AGL Energy Ltd (2018) https://au.finance.yahoo.com/quote/AGL.AX/

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According to the analysis of table most of the share part is covered by corporates in which they
have covers almost 69 percent in the overall company. While the insiders, and other individual
has small share in the company. It represent that the larger companies are keen to be investors of
Origin Energy.
The top 20 shareholders are comprised of large investment banks as well as super funds that
cover 70 per cent of the total hate outstanding. There are also no founding shareholders that are
present in the either table as well as the chairman of the company has not shown any activist
behavior in the past. 4
Lenders
The company majorly borrows money from banks as well as they also issue bonds in the market
to lend money from market in an effective manner. The company borrow fund from various
banks as well as they also issue bonds and work in derivative to raise funds from the market. The
agency has not imposed any restriction on the debt process of the company therefore; they
borrow the funds according to their convenience that make them competitive in the market.
However, they follow al the regulation of Australia while raising funds from the market. The
company has maintained perfect compliance throughout the time period analyzed as well as
additionally self-monitors such ratios on the monthly basis. Moody has given B rating to the
company according to the analysis of overall performance of the company5.
4 Annual Report, Origin Energy (2017)
http://www.originenterprises.com/template/pdf/Origin_Enterprises_plc_Annual_Report_2017.pd
f
5 Yahoo Finance, Origin Energy Limited (2018) https://au.finance.yahoo.com/quote/org.ax

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Financial Market Consideration
He financial market consideration of the company represent that they have great flow of stock in
the market that make them grow in the competitive market. The company is benefiting from
stock trading liquidity. However, the stock is significantly less traded on an average than the year
2016. It is not a cause of concern due to the reason it would not be considered thinly traded with
an average daily trading volume. The share price of the company fluctuated due to the reason of
high competition in the market that affect overall market share of the company at greater level6.
Social Constraints
The company has played great role in following their responsibilities towards the environment,
society and government that make them competitive in the market. The company has earned
6 Bloomberg, AGL Energy Ltd (2018) https://www.bloomberg.com/quote/AGL:AU

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great image as a corporate citizen by contributing in protecting the environment as well as
society in an effective manner. They accelerate the growth of renewable energy in an effective
manner. The company has taken various initiate to protect the society. However, some of the
environment incident also penalized the company in which they were required to pay $12615 in
the form of penalty.
Environment: an environmental incident or Origin’s failure to consider as well as adequate
mitigate the environmental, social as well as socio economic impacts on the communities with
the environmental has great impact on the reputation of the company at greater level.
Social: as experience in programs implementing the health safety as well as environment
strategies that also include for mental health with physical wellbeing. The company has adopted
various steps in socially sustainable development to set and monitor the sustainability aspirations
Governance: consider, review as well as monitor the climate related risks as well as opportunities
as a part of the investment consideration, with the regular financial as well as operational
performance reviews. The HSE committee also meets and analyzes the risk at least quarterly.
Historical risk parameters:
On the basis of regression analysis, it has been found that the beta and alpha of the
company is -0.38 and -0.002. The risk and return performance of the company against the market
index is as follows:

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Calculation of return
Figure 1: Risk evaluation
The beta of company defines that there is high volatility into stock price of the company
in context with the market index. It explains that the investment into the company is quite riskier.
The slope of regression defines about huge changes on monthly basis and explains that the
investor must evaluate the market position and stock performance of the company before
investing into the market. Beta estimates tell about huge fluctuations as well as higher risk
associated with the stock of the company. Alpha defines about the industry risk i.e. -0.002 and
beta defines about the business risk of the company which is -.03. It is important for the investors
to know about different risk in order to make better decision.
Financial leverage risk of the company is also higher because of the mismanagement of
capital structure of the company. On the basis of beta figures, cost of equity of the company has
been calculated which is 2.63% (appendix). According to a manager, it indicates about lower
cost of the company. Hence, the equity level must be managed by the company accordingly7.
7 Morningstar, 2 differing views on these utility, energy stocks (2018)
https://www.morningstar.com.au/stocks/article/2-differing-views-on-these-utility-energy-
stocks/167890