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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.
Amanah Harta Tanah Permodalan Nasional Berhad (PNB) is the holding company of Amanah Saham Nasional Berhad (ASNB) incorporated in year 1978 at Malaysia.
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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.
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).
Table: Calculation of Gearing Ratio
| Year | Total Equity (RM) | Total Debt (RM) | Gearing Ratio (%) |
|---|---|---|---|
| 2016 | 153,877,026 | 196,505,590 | 56.1% |
| 2017 | 281,176,048 | 189,785,590 | 40.3% |
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.
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.
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.
Table 4.1 (a): Calculation of Dividend Payout Ratio
| Year | Dividend Payout Ratio (%) |
|---|---|
| 2016 | 94% |
| 2017 | 28% |
Based on table as per calculation above, 2017 reach 28% of DPR since the dividend per share (DPS) is 2.60 and the Earnings per Share (EPS) is 9.17 on that year. So, it clearly shows that 2017 is sharply decrease compare to 2016. Then, DPR for 2016 have some increase from 2016 which is 94% respectively. Based on table 3.1(b) Mainly, the shareholders give focus on the dividend growth to value the company performance and how decision are making in investing project. From the calculation above, in 2017 have increases which is up to 0.2333% compare to 2016 the dividend growth is only -0.3571%. In 2016 the EPS 2.40 and then in 2017 the EPS increase to 9.17.
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).
WACC is formula to calculate and identify the average rate of return in the company. The amount is the value of each financing source in the company’s target capital structure or debt. The first calculation to made WACC is the company’s cost of debt (Kd) and cost of equity (Ke). The importance and usefulness of weighted average cost of capital (WACC) as a financial tool for both investors and the companies are well accepted among the financial analysts (Borad, 2019). The factors of capital structure and dividend also could influence the value of WACC.
Cost of Debt (Kd) =
= 4,548,969 x 100%
196,505,590
= 0.0231 @ 2.31%
= 8,535,802 x 100%
189,785,590
= 0.0449 @ 4.50%
Post Tax Cost of Debt = Kd x (1-tax)
= 2.31% x (1 - 24%)
= 0.0175%
= 4.50% x (1-24%)
= 0.0342%
Cost of Equity (Ke) =
CAPM / Ke
rf + β (rfm – rf)
= 4.24% + 0.63 (2.96%)
= 6.1048%
= 3.93% + 0.63 (3.03%)
= 5.8389%
Value of Equity (Ve)=
= 100,000,000 x 97.5 cent
= 9,750,000,000
= 219,120,869 x 83.5 cent
= 182,965,925,600
Value of Company = Value of Equity (Ve) + Value of Debt (Vd)
= 153,877,026 +196,505,590
= 350,382,616
= 281,176,048 + 189,785,590
= 470,961,638
Weighted Average Cost of Capital (WACC)
= (Ke x value of Equity) /(Equity + Debt)
= (6.1048% x 9,750,000,000) (153,877,026 +196,505,590)
= 5.95218 .
350,382,616
= 1.6987 %
= (5.8389%x182,965,925,600) (281,176,048 + 189,785,590)
= 1.0683 .
470,961,638
= 2.2683%
Table: Calculation of WACC
| Year | WACC (%) |
|---|---|
| 2016 | 1.6987% |
| 2017 | 2.2683% |
The information above in Table 5.1 shown is following from the Annual Report of Amanah Harta Tanah Permodalan Nasional Berhad (PNB) for the year 2016 and 2017. . The first calculation is cost of debt (Kd) are increasing from 2.31% to 4.50%. Other than that, we used formula Capital Asset Pricing Model (CAPM) to calculate cost of equity. Next, the result of cost of equity (Ke) is decrease. In year 2016, get higher percentage reach 6.1048% rather than 5.8389% in year 2017. Overall, WACC shows the increment from 1.6987% in year 2016 to 2.2683% in year 2017.
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.
Identifying risk in any organization is crucial that could negatively impact the achievement of PNB Group objective. PNB Group has establish Enterprise Risk Management (ERM) to reduce the level of the risk at a minimum. On 13 May 2017, PHNB has partaken in a Business Continuity Management (BCM) organized by PNB. Its objective is to create awareness regarding the business nature. Business continuity was appealed and operations were straight away conducted. PHNB were able to recover its business to their normal business operation as a results.
This risk highlight toward the entire market that can cause the market system to crash. It can also be called as idiosyncratic risk. It can be caused by the financial system instability, catastrophic event and any other interdependencies that can affect the entire market.
The strategy that have been made by the top management is to diversifying the asset (asset allocation). By implementing asset allocations, it will reduce the risk at a minimum instead of investing only in property. PNB and its unit trust funds is expected to increase 16.4% which is RM17.7 billion in 2017 compared to RM15.2 billion in 2016. The asset allocation rose 4.8% which is RM 279.2 billion compared to the previous year. PNB also made some private investment such as the acquisition of the SILK Highway and the internal restructuring of Prolintas. The private investment perform better than the other asset by generating the highest yield which is 18.2%. Amanah Saham Bumiputera and Amanah Saham Malaysia is also the asset allocation of PNB which recently made a distribution payout of RM 562.9 million and RM1.1 billion in early 2018. There are also other asset such as Amanah Saham Gemilang (ASG) in context of education, health and retirement. (Sun Daily, March 2018)
It is a threat related to a specific security or a portfolio of securities. It can be caused by the quality of tenants, quality of assets, suppliers, human capitals, education programs and etc. The management has taken several steps to reduce these risk to a minimum.
a) Quality Tenants
Quality tenants is essential to sustainable rental income. Thoroughly background check is significant for acquiring a quality tenant. It must have a good financial statements, good reputation and legitimate business operations. Maintaining a good relationship with the tenants are important aspect in retention. (Nicole Nusca, 2018)
b) Quality of Assets
The most important factor in property investment is the location of the building. Wrong decision will affect the company in huge loses. There are also other factors that must be accounted such as occupancy rates, tenants mix, tenancy arrangement and competitive rental rates. A qualified property manager has been appointed to manage in this aspect. A well maintained real estate is one of the main features in quality of assets, thus, confirming a tenant’s satisfaction and continuous income. (Maikel Spellman, 2012)
c) Reliable Supplier
Suppliers is vital factor in real estate industry. Selection and appointment of suppliers have a huge impact on the industry. Screening process and evaluation is required to select and maintain the performance of the supplier. Dealing directly with tenants and daily operation of real estate is one of the most important suppliers in AHP. Property manager must respond to tenant’s requirements resourcefully and the real estate must be well managed. (Bob Reiss, 2010)
The total debt for had a slight decrease which is RM189, 785,590 compared to 2016 were 196,505,590 and total equity increase by RM127, 299, 022 in 2017. Therefore, the gearing ratio decrease by 9.8%. Next, dividend payout ratio in 2016 and 2017 is 94% and 28%. The dividend growth stated an increase from -0.3571% in 2016 to 0.2333% in 2017.The capital structure was in better performance due to the total debt was lesser from the total equity. The biggest factor is because of the revenue increase by 54.73%.
The company performance during past recent years from the perspective of capital structure was in good performance in regards to its debt management as observed in the gearing ratio and that total of the equity was prospectively showed that there was increasing from year 2017. The capital structure was in better performance due to the total debt was lesser from the total equity. Even though PNB is making a significant revenue comparing to the previous year, the company did not make payment because of the management decided to reinvest the money. It is essential for a company to gain feedback and collecting a reliable source of data. (Quint Studder, 2018) It will attract more potential investor towards the company as it is an advantage to PNB generates cash instead of making loans. It shows that the company is making profit and able to pay to their shareholders.
The Malaysian Institute of Economic Research (MIER) predicted the growth projection for 2018 will be maintained at a range of 4.7% - 5.3% as at October 2017 while awaiting new projects. As for the property market activities, it is expected that it will be another challenging year for 2018. It is set to improve gradually in the years ahead to 2020 (thestar, 2018). It was also reported by NAPIC that there will be an additional supply of shopping complexes in the market by 2018. The additional space will certainly increase the total supply available in both sectors which may result occupancy rates to decrease if not supported by market demand. Taking consideration on the scenario, PHNB as the manager of AHP will continue to improve occupancy rates while injecting new accretive assets.
In conclusion, PNB manage to turnover its situation in 2017. 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.
Financial Analysis and Future Outlook of Permodalan Nasional Berhad (PNB). (2024, Feb 17). Retrieved from https://studymoose.com/document/financial-analysis-and-future-outlook-of-permodalan-nasional-berhad-pnb
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