Analyzing Financial Performance: A Case Study of Permodalan Nasional Berhad

Permodalan Nasional Berhad (PNB) is the company we choose to analyse and evaluate the financial performance in year 2016 and 2017. This company are investment holding. The main purpose is to promote greater ownership of share capital in the corporate sector. According that, we analyse the type of business by the company and operates; besides we discuss about the decline on gearing ratio from year 2016 to 2017. Briefly explain the proportion of a company's borrowed funds to its equity based the calculation. Furthermore the dividend policy, we do some calculation to know the increment and predict the growth rate of the dividends.

Next, we do the calculation on Weighted Average Cost of Capital (WACC) and some comment about cost of debt. Prefer to financial performance year 2016 and 2017, we justify the percentage is increase through the sources. Not only that, we found the company’s problem to faces also the company’s risk management strategy. Lastly, on the future prospects we give a certain key risks faced by the company that need to do improvise and increase the performance.

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Introduction

Amanah Harta Tanah Permodalan Nasional Berhad (PNB) is the holding company of Amanah Saham Nasional Berhad (ASNB) incorporated in year 1978 at Malaysia. PNB which operates a number of trust fund schemes, and its subsidiaries are wholly owned by Yayasan Pelaburan Bumiputera. Its principal activity is investment holding mainly for the purpose of promoting greater ownership of share capital in the corporate sector in Malaysia by the Bumiputera. Type of the industry is Investment funds and capital management.

In year 1980, PNB launched of Amanah Saham Nasional and year 1981 also acquisition on “Dawn Raid” Guthrie Corporation PLC. PNB acquires majority stake in Maybank in year 1984 and 1985 launched of AHP, Malaysia’s first listed property fund. Other that, PNB takeover of UMW in year 1988 while year 1990 PNB launched of Amanah Saham Bumiputera (ASB) and in year 1993, joint venture with UMW Corporation to create Perodua. During year 1995 to 1998, PNB also launched of Amanah Saham Wawasan 2020, create MNI (Malaysia Newsprint Industry) and merger of port operators under NCB Holdings.

According that, in year 2000, PNB are acquisition of Singapore Unit Trusts (SUT) Ltd. and divestment of MMC Corporation. Besides, listed of Heitech Padu that specializes in develop ICT systems and infrastructure in the same year. Plus in 5 year later (2005 to 2009), PNB acquisition on Amanah Mutual Berhad (AMB), incorporation of PNB UK Ltd, merger of Sime Darby and restrusted of property companies under PNB. For year 2010 until 2015, PNB launched of Amanah Saham Bumiputera 2, acquisition on first overseas property which is Santos Place and Milton & Shire Houses.

At the beginning, there were many challenges as the target market of Bumiputera was generally countryside, with little in the way of financial resources or understanding of investment in unit trust. To disclose this, PNB’s products had to cater to the particular understandings and needs of this community, giving knowledge to an original combination and product structures that remain unconventional and characteristic till this day.

Analysis and Evaluation Company

A gearing ratio is an overall classification describing a financial ratio that relates some form of owner equity (or capital) to funds borrowed by the company. Gearing Ratio though there are some variations, the most common ratio measures how much a company is funded by debt versus how much is financed by equity, often called the net gearing ratio. Next, a high gearing ratio define that the company has a larger proportion of debt versus equity. However, a low gearing ratio means the company has a small proportion of debt versus equity (BOYTE-WHITE, 2018).

Interpretation of Gearing Ratio for Two Years

Based on the diagram above, according to the year 2017 the equity of the company is RM 281,176,048 and has the less amount of debt compared to the previous year which is RM 189,785,590. Its resulted a decrease gearing ratio which is 40.3%. As for the year 2016, the equity of Amanah Harta Tanah PNB is RM 153,877,026 and RM 196,505,590 of total debt which resulted a gearing ratio of 56.1%. The efficient management of the gearing level allows the company to sources for sizeable borrowings at competitive rates though improving shareholder’s return on equity sustainably into the future. As we can see, the gearing ratio for Amanah Harta Tanah PNB is decreasing within two years and this is good because companies with lower gearing ratio have more equity to rely upon as financing is needed. However, higher calculations of a gearing ratio show a company has higher degree of leverage and is more liable to downturns in the economy and in the business cycle.

Amanah Harta Tanah PNB with high profitability have decreasing in smaller loan by year 2017 because of the company able to provide enough funds through increases retained earnings to earn more profit. However, financing with equity investment will lead to the opportunity cost and the control of the company. Therefore, an ideal balance between equity and debt must be recognized which means the company should not have a higher debt that is greater than the amount of their own capital. Summarization of performance company that the company was performing very well year by year. It means that Amanah Harta Tanah PNB has become more independent year by year and did not depend much on the creditor to finance when its operations.

The gearing ratio is a critical indicator of a company's financial health, reflecting the proportion of borrowed funds to equity. A lower gearing ratio is generally favorable as it signifies a company's reliance on equity rather than debt for financing.

Comment on the Gearing Ratio Evident From the Calculation

This is vital for Amanah Harta Tanah PNB to control and maintain result of gearing ratio which is 2016 decreasing to 2017. Increases revenue in every year can made gearing ratio good in debt. Amanah Harta Tanah PNB real estate investment trust (REIT) saying a 77% jump in net profit for the third quarter ended Sept 30, 2017 on rental income from newly acquired Mydin Seremban 2. However, the REIT are done made a net profit of RM2.43 million for the quarter compared with RM1.37 million for the corresponding quarter in 2016. Hence, this came on the back of a 71% increase in revenue to RM7.1 million, related with RM4.15 million for the same quarter in 2016 according (thesundaily, 2017).

The factors that make the gearing move up and down and have bad and risky investment. Issue by less debt than the company’s equity because of the new borrowing acquired in the current year based on one unitholder brought up that AHP’s gearing ratio had increased substantially from 26.40% in 2015 to 41.92% in 2016 due to the heavy borrowings used to acquire Mydin Seremban 2. Even though the ratio is still below the 50% limit, concern that company has the highest gearing ratio among all Malaysian REITs in 2016 and asked how the management planned to raise funds to acquire more property in 2017 since the debt headroom is so low according (Chen, 2017).

Amanah Harta Tanah PNB has achieved the high profitability can certify the company to have overflowing internal funding sources. In addition, Amanah Harta Tanah PNB should fight more than to achieve an ideal capital structure to control and minimize the cost of the average capital employment. However, valuations are performed by accredited independent value with recent experience in the location, target and category of properties being valued. According (tai, 2018) AHP has completed the acquisition of Mydin Hypermarket Seremban 2, its largest investment made thus far.

Dividend Policy

The Dividend Policy is a financial result that states to the proportion of the firm’s earnings to be paid out to the shareholders in company. However, a firm approves on the portion of revenue that can to be distributed to the shareholders as dividends into the firm (Businessjargons, 2019). The dividend policy Amanah Harta Tanah PNB proposed distribution is known once the requirement to pay has been established according annual report. Based on (tai, 2018) AHP is trading at RM 0.84 a unit. Thus as at 31 December 2017, company has described to have RM 1.28 in net asset value a unit. AHP accepts a distribution policy to declare and pay out at least 90% of its distributable income on a semi-annual basis. Hence, last 12 months, AHP has paid out 5.20 sen in DPU. If company is talented to maintain its DPU at 5.20 sen for the next 12 months, show the gross dividend yield is expected to be 6.19.

Comment on the Dividend Policy Evident From the Calculation

Amanah Harta Tanah PNB, give the distribute dividends out of its entire earnings under the single tier system. Besides that, shareholders will receive net dividends and this income is exempted from tax. Thus, the REIT said it forecasts property market activities will be soft this year in view of the experienced a downturn in the domestic market, but the company is hardly recovered and survived with the successful projects. According (edgeprop, 2018) AHP is actively looking to acquire either retail or industrial assets that could suggestion a good return and tenant mix.

This choice will be near future once that can manage to conclude the process of negotiating and identifying the right property. In additional, taking the scenario into consideration, the REIT said it will remain to improve occupancy rates while injecting new accretive assets with the aim of creating better yields to confirm a sustainable income stream. Then, in financial year 2016, the first and second interim dividends were paid on 30 August 2017 and 28 February 2018 respectively. The trust has declared a final income distribution of 2.5 sen a unit for the six-month period ended Dec 31, 2017. The total will be paid on Feb 28, 2018. Its share price slipped 1.5 sen or 1.84% to 80 sen today with some 47,700 shares done (thesundaily, 2018).

This shows that it has good financial performance that allowed company to maintain out total dividend payout and paid dividend declared from time to time. For final year 2017, the total income distribution stood at 5.2 sen a unit, which included an interim income distribution of 2.7 sen a unit which was paid on Aug 30, 2017, and a final income distribution of 2.5 sen a unit that was paid on Feb 28 based on (Ridzwan, 2018). Thus, the total dividend paid out translated into 6.23% distribution yield for final year 2017 according to its annual report. This would be an advantage to ordinary shareholders because they are allowed to one vote per share.

The revenue of company in financial year 2016 is RM23,363,832 million become up to RM39,544,669 million in 2017. This fluctuation is because of takeover achieve by company target to reach the range of DPR. Thus, Amanah Harta Tanah PNB have a stable dividend policy because of the positive growing dividend payout year after year. Hence, Mydins Holdings Berhad is the single tenant occupying 100% of Mydin Seremban 2. Then, Mydin Holdings signed a 30-year lease with a 10% rental step-up for the first four years and, next, a 10% rental step-up every three years. The current monthly rent is RM1.4 million and get higher yield and assumes rental income will grow in 2017 (Chen, 2017).

Weighted Average Cost of Capital (WACC)

WACC is a measure of a company's cost of capital where each category of capital is proportionately weighted. It helps in assessing the cost of funding projects and is crucial for investment decisions.

As to conclude the calculation of WACC, due to percentage cost of debt, the finance cost of the company (Appendix 1.1) will be dividing by the total debt. PNB in a statement said that the acquisition was funded through a combination of financing and rights issuance of new units of AHP (NEWS, 2017). That’s means the company have the increment due to the securing of additional debts. These debt possibly comes with their own respective and strategy. Not only that, the higher cost of debt will cause the issuing on financial statement. Generally value of beta is daily change following market risk of the company. Totally the cost of equity, year 2016, is higher percentage reach 6.1048% rather than 5.8389% in year 2017.

As above, the company was Beta is a numeric value that measures the fluctuations of a stock to changes in the overall stock market (Bennett, 2019). Overall, Graph 1 also shows the result of WACC. The percentage in year 2017 might be affected by value of company that the value equity and debt reach RM470, 961,638. Due of that, the company get 2.2683% increment from year 2016, 1.6987%. The acquisition was funded by borrowings of RM140 million and the balance was raised via a rights issue. The issuance of 120 million new units was completed in January 2017 (Chen, 2019). Therefore, it is safe to assume the capital structure that cost of debt, cost of equity and WACC are being regulated but it still does not affect the operational activity of the company itself.

Risk Management Strategy

PNB has implemented an Enterprise Risk Management (ERM) framework to minimize risks such as systematic and unsystematic risks. Diversification of assets and thorough evaluation of tenants and suppliers are part of the strategies to mitigate these risks.

Performance and Future Prospects

The company's gearing ratio improved from 56.1% in 2016 to 40.3% in 2017, indicating a healthier balance between debt and equity. The dividend payout ratio decreased significantly in 2017, reflecting a strategic reinvestment of profits. The WACC increased slightly, suggesting an optimal balance in the cost of capital. Despite challenges, PNB's strategic management and diversified investment portfolio have positioned it for sustainable growth.

Conclusion

Permodalan Nasional Berhad's financial performance in 2016 and 2017 showcases its resilience and strategic financial management. With a focus on reducing gearing ratio, optimizing WACC, and a robust risk management framework, PNB is well-positioned for future growth. The company's ability to adapt and innovate in response to market challenges underscores its commitment to maximizing shareholder value.