Capital Structure And Corporate Performance: A Case Study Of Boral Limited

Capital structure

Discuss about the Capital Structure and Corporate Performance.

Boral limited deals in construction and building material throughout various countries. The company employs more than 12,000 employees across 600 operation places and having $4.31 billion sales as per the financial statement of 2016. Boral is a multinational company with having their business in United States, Asia and Australia and having their head office in Sydney, Australia.

Capital structure provides the information related to the structure of capital of the company, their risk exposure, how the risks affect the financial position and performance of the company and the way company manage the risk. The capital structure of the company consists of equity and debt. As per the financial statement of 2016, the company’s capital structure comprised of total equities amounted to $3,506.30 million and total debt including short-term as well as long-term amounting to $ 1345.20 million. They have total reserves amounting to $ 162 million as on 30^th June 2016. As on 30^th June 2015, the company’s capital structure comprised of total equities amounted to $3,524.10 million and total debt including short-term as well as long-term amounting to $ 1322.60 million. On 1^st July 2015, a syndicate loan facility amounted to US$ 400 million was established to provide more liquidity for corporate purposes. The maturity date of the loan facility is scheduled on 1^st July 2010. However, as on 30^th June 2016 the facility stands undrawn. The company also has a unsecured overdraft facility amounting to A$ 20 million ((Boral Annual Report 2016).

The capitalization ratio of the company, calculated as [Long-term debt/ (Long-term debt + shareholders equity)] come as 27.26% for 2015 and 22.04% for 2016. The decreasing capitalization ratio indicates that the company was able to decrease their long-term borrowing over the year from $1320.8 million to $ 992.80 million. It indicates that the company is well positioned to pay off their long-term loans as and when they become due (Mittal 2013).

The business activities of the company are exposed to various financial risks like liquidity, interest rate, foreign currency, credit and risks of commodity prices. These risks managed through derivative instruments. The financial instruments or derivatives are not used by the company for speculative or trading purposes and are controlled by the board of directors of the company (Zeitun and Tian 2014).

Credit risk: Credit risk is the risk that will be exposed to if the counterparty fails to fulfil any liabilities. The company is exposed to credit risks from cash at bank, financial instruments and trade or other receivables. The credit risk of the company is monitored through the policy of counterparty credit risk and is observed on regular basis (Baghai, Servaes and Tamayo 2013). Credit risk related to derivative contracts and cash in bank is minimised through counterparties that possess credit rating higher than A-/A3. However, an amount of AS$20 million or 10% total asset, whichever is lower is to be deposited with the counterparties who possesses a rating less than A-/A3.

Risk management

Liquidity risk: The company is exposed to liquidity risk when they does not have sufficient funds to pay off their financial liabilities on becoming due. It also involves the future planning for business risks and unpredicted events that may results into pressure on the liquidity of the company (Imbierowicz and Rauch 2014). Boral limited manages their liquidity risks through the following:

• Their debt profile is well spread with a target maturity period of more than 3.5 years.
• They have cash plus facilities from committed undrawn amounted to more than A$ 500 million
• Current debt less deposits of cash not be more than 20% of total sum of committed undrawn facilities that have more than 1 year of maturity period and total debt.

Foreign currency risk: Foreign currency risk is the exposure to fluctuations in currency rate arising from raw material purchase, interest expense of borrowing from non–Australian dollar, receivables from export, payables for import and investment related transactions (Corazza and Malliaris 2015). The foreign currency risk is managed through:

• The company makes sure that the foreign currency exposures amounting to more than A$ 0.5 million must be fully hedged at the time of approval from Capex
• Net investment inclusive of intercompany loans must be hedged wherever the hedge instruments and regulatory conditions permit.
  • If the operational foreign currency exposures are hedged, it must not exceed 75% for 1^st year, 50% for 2^nd year and the maximum allowed period for hedging is 2 years.

Total assets of the company including of non-current assets and current assets as on 30^th June 2016 amounted to $5,800.50 million. Self-constructed assets are inclusive of cost of direct labour, raw material and any other cost incurred for preparing the asset for its intended use. The payments made for the assets financed through operating lease are accounted under straight line method over the lease term, except where any alternative method are recognised to be more appropriate. Minimum lease payments are inclusive of fixed rate for increase. For the year ended 30^th June 2016 the rental charges for operating lease amounted to $73.9 million as compared to $ 75.5 million for 2015. It means the company has not taken any asset under lease and the due lease payments are paid-off on time. It also indicates that the company is financially viable to pay off their dues on time.

Level: the dividend paid for the year ended 30^th June 2016 was amounted to $ 154.20 million as compared to $129.10 million for the year ended 30^th June 2015. Dividend payment for the company was as follows:

Year	2012	2013	2014	2015	2016
Dividends in AUD	0.19	0.11	0.17	0.22	0.27
Payout ratio (%)	87.10	74.20	–	141.50	76.30

Table 1: Distribution ratio

(Source: Boral Annual Report 2016, 2017)

It can be seen from the above table that the dividend payment of the company has been increased over the year from 2014 to 2016 and increased from AUD 0.17 to AUD 0.27.  however, the payout ratio has decreased to almost half to 76.30% in 2016 as compared to the 141.50% of 2015. The dividends of the company comprised of interim dividend and final dividend and are paid in time.

Form: For the shareholders who have registered address in New Zealand and Australia will be paid the dividend through direct credit to their nominated bank account only rather than through posted check to the registered address. The shareholders can always update their bank account through contacting the share registration office or visiting their websites. However, for those who does not possess any registered address in New Zealand and Australia wish to get their dividend directly in their bank account, credit union account or building society in New Zealand or Australia, they must contact the share registration office or visit their websites. The payment are directly credited electronically on the date of   dividend payment and is confirmed through payment advice that are posted to the registered address of the shareholders. Shareholders are also advised to deposit the cheque of dividend payment as early as possible otherwise the cheque has to handed over to the Chief Commissioner of State Revenue under Unclaimed Money Act 1995.

Asset financing policy

Stability: Boral has assured their shareholders to pay the dividend on continuous basis. As per the announcement made on 10^th February 2016, to offer more clarity, the board of directors has formalised the dividend policy that is proposed to reward  the stakeholders with regard to the profit and maintaining the capital growth at the same time. The board decided to pay out and maintain a dividend payout ratio ranging from 50% to 70% of income before considerable items, with regard to the financial position of the company (Kamyabi and Noushabadi, 2014). A payout ratio of 50% to 70% is considered as high as the company is paying more than half of their earning as dividend. It implies that the the company will maintain lower level of retained earnings. From the investors perspective, a high rate of dividend is very good, however, at the same time it is considered as bad for the company as  the low level of earnings will give less scope for the company for new plans for capital expenditures, which in turn, will limit the ability of the company for dividend growth in future.  Therefore, it will be ideal for the company to maintain healthy payout ratio that is ranging between 35% and 55%. High ration of dividend is attractive over short-term period but over the long-run it will not be considered good and beneficial for the company. The company can also go for revising their payout ratio, if they are looking for earning pick up or hybrid value (Li, Zhuang and Shapiro 2014).

Reference:

Baghai, R., Servaes, H. and Tamayo, A., 2013. Have rating agencies become more conservative? Implications for capital structure and debt pricing.

Boral Annual Report 2016. (2017). 1st ed. Australia: https://www.boral.com.au/.

Corazza, M. and Malliaris, A.T.G., 2015. Multi-fractality in foreign currency markets.

Imbierowicz, B. and Rauch, C., 2014. The relationship between liquidity risk and credit risk in banks. Journal of Banking & Finance, 40, pp.242-256.

Kamyabi, Y. and Noushabadi, S.Z., 2014. The impact of Corporate Governance on Dividend Payment Policy: empirical evidence from Iranian Listed Companies. Miicema 2014 organising committee, p.380.

Li, S., Zhuang, A. and Shapiro, D., 2014. Dividend Payout Policy and Institutional Investors Ownership: Theory and Empirical Evidence. Working Paper, Belk College of Business.

Mittal, R., 2013. The Effects of Market Capitalization Ratio on GDP Growth and Capital Market Robustness in Newly Industrialized Countries. Undergraduate Businesss Journal, 4, pp.45-54.

Zeitun, R. and Tian, G.G., 2014. Capital structure and corporate performance: evidence from Jordan.