The current report aims to analyse the financial markets and investment opportunities in Malaysia. For meeting the purpose of this assignment, two listed companies in Bursa Malaysia have been chosen and they include Atlan Holdings Berhad and Hai-O Enterprise Berhad. These two organisations are operating in the Malaysian retail sector having sound reputation in the market. In order to analyse investment opportunities, ratio analysis is used for evaluating the financial condition of the two selected organisations.
Based on the outcomes, they are evaluated further from the perspectives of the creditors and capital structure. After such evaluation, suggestions are provided to both the organisations from the viewpoints of their CFOs. Finally, share price analysis is conducted to provide investment recommendations in the two organisations.
Analysis of the financial statements using ratio analysis:
For analysing the financial statements of Atlan Holdings Berhad and Hai-O-Enterprise Berhad, ratio analysis technique is used, as it provides a complete picture of the financial condition of an organisation (Brigham et al. 2016). The following types of ratios are used for evaluation of the financial condition of the two above-mentioned organisations:
Liquidity ratios:
For assessing the liquidity position of Atlan Holdings Berhad and Hai-O-Enterprise Berhad, the two liquidity ratios used include current ratio and quick ratio (Refer to Appendices, Appendix 5). It has been found that current ratio is observed to increase from 1.89 in 2015 to 3.44 in 2018 for Atlan Holdings Berhad, while the same tends to decline from 4.66 in 2015 to 3.28 in 2018. For Atlan, the ratio has increased due to significant rise in cash and bank balances along with accounts receivable while trade and other payables have fallen over the years (Atlan.com.my 2018).
In case of Hai-O-Enterprise Berhad, significant rise in trade and other payables is the main reason behind the fall in current ratio. However, it is noteworthy to mention that the ratio for both companies is well above the ideal standard of 2 (Buehlmaier and Whited 2018). This implies that both organisations have large amount of idle cash, which could not be invested to improve existing business operations.
The same trends are observed in case of quick ratio, which is a better measure of liquidity, as it excludes prepayments and inventories while analysing the liquidity position of an organisation (Damodaran 2016). In case of Atlan Holdings Berhad, it has minimised its stock holdings over the year, while Hai-O-Enterprise Berhad has increased its inventory base. Therefore, both the organisations are needed to minimise their trade receivables so as to increase their cash and bank balances.
Leverage ratios:
In order to dissect the leverage position of Atlan Holdings Berhad and Hai-O-Enterprise Berhad, the two liquidity ratios used include debt-to-equity ratio and interest cover ratio (Refer to Appendices, Appendix 6). For Atlan, debt-to-equity ratio has increased in 2016 after which decline could be observed consecutively in the next two years. The reason is that the organisation has minimised its debt funding for avoiding interest payments and it has issued additional equity shares to obtain more funds from the market.
For Hai-O-Enterprise Berhad, ratio has increased over the years from 0.15 in 2015 to 0.24 in 2018 (Hai-o.com.my 2018). However, the ratio is still lower than Atlan, as it has focused on increasing its retained earnings for future investment operations. A lower ratio is always favourable, as it denotes less risky position of the organisation (Dokas, Giokas and Tsamis 2014).
On the other hand, interest cover ratio helps in determining whether an organisation possesses the capability of supporting additional debt. In case of Atlan, the ratio has increased from 12.78 in 2015 to 22.91 in 2018 and for Hai-O-Enterprise; the ratio is significantly higher from 129.97 in 2015 to 808.82 in 2018. The ratio for both the organisations is well above the ideal standard of 1, which denotes that they have adequate amount of money for settling their interest payments on debt. Therefore, in terms of leverage, Hai-O-Enterprise has better leverage position than Atlan in the Malaysian retail sector.
Efficiency/activity ratios:
In order to dissect the efficiency position of Atlan Holdings Berhad and Hai-O-Enterprise Berhad, the three liquidity ratios used include inventory turnover, receivables turnover and payables turnover ratios (Refer to Appendices, Appendix 7). Inventory turnover for Atlan is observed to increase from 2015 to 2017; however, it has fallen in 2018. The reason is that the company has reduced its inventory base in the year 2018 due to which adequate sales could be generated. On the other hand, the ratio has fallen from 137.76 days in 2015 to 93.81 days in 2017 for Hai-O-Enterprise Berhad; however, it has risen again to 99.04 days in 2018.
This is because the organisation has experienced an increase in cost of sales due to which excessive focus has been kept on increasing inventory base, which is lower than the actual market demand. It is evident that despite such increase, Hai-O-Enterprise Berhad is still managing to release its inventory at a faster rate than Atlan Holdings Berhad.
Receivables turnover ratio helps in identifying the time taken by an organisation to collect the amounts owed from the debtors (Hoskin, Fizzell and Cherry 2014). The trend is fluctuating for Atlan Holdings Berhad and in case of Hai-O-Enterprise Berhad, decline could be observed until 2017 with a slight decrease in 2018. However, the ratio for Hai-O-Enterprise Berhad is comparatively lower than Atlan Holdings Berhad, as it has adopted a stringent debtor policy in order to maximise its availability of working capital.
Payables turnover ratio, on the contrary, is an efficiency ratio that assesses the ability of an organisation in repaying its debts owed to the suppliers and the creditors (Ibn-Homaid and Tijani 2015). The trend has been fluctuating for Atlan Holdings Limited and in case of Hai-O-Enterprise Berhad, the ratio has declined until 2017 followed by an increase in the next year. A higher figure is deemed to be favourable, as it implies that the organisation has managed to retain cash in hand for a longer timeframe. However, excessive delay in settling creditor payments might result in loss of trust for the creditors and they might not be willing to extend payments terms in future (Jordan 2014). Thus, in terms of payables turnover, Hai-O-Enterprise Berhad is enjoying competitive advantage over Atlan Holdings Berhad in the retail sector of Malaysia.
Profitability ratios:
For assessing the profitability position of Atlan Holdings Berhad and Hai-O-Enterprise Berhad, the two liquidity ratios used include operating margin, net margin and return on capital employed (Refer to Appendices, Appendix 8). In terms of operating margin, the ratio has been comparatively higher for Hai-O-Enterprise Berhad, as it has generated income from other sources despite the rise in operating expenses. On the other hand, Atlan has encountered a considerable increase in raw materials and consumables used, due to which operating margin has declined in 2018. The situation is found to be similar for both organisations in terms of net margin as well, which clearly implies that Hai-O-Enterprise Berhad has generated more profit than Atlan in the Malaysian retail sector.
Finally, in terms of return on capital employed, the ratio has declined over the years for Atlan and the situation is just the opposite for Hai-O-Enterprise Berhad. This is because the latter has increased its asset base compared to the other, which resulted in additional return on capital (Miller-Nobles, Mattison and Matsumura 2016). Hence, in terms of profitability, the position of Hai-O-Enterprise Berhad is found to be better than Atlan in the retail sector of Malaysia.
Changes in the capital structure:
The capital structure of Atlan Holdings and Hai-O-Enterprise Berhad has been analysed and has been observed that there have been certain changes in their debt and equity funding proportion. From analysing the changes in capital structure, it is gathered that there have been certain changes regarding the ways in which these companies develop growth strategies trough using funds (Zainudin and Hashim 2016). In case of Atlan Holdings it has been observed that the company has made changes in its capital structure and havedecreased its debt funding in order to avoid its interest payments.
This change took place because of the reason that it issued some additional equity shares in order to attain funds from the market. However, in case of Hai-O-Enterprise Berhad it has been observed that its capital structure had changes and focussed on making increased debt funding. However, such change is minor and it does not indicate that the company can face any financial risk (Vogel 2014). This is because the company is focussed on increasing its retained earnings for all its future investment business operations.
Evaluation of performance from the viewpoint of the creditors:
The performance for Atlan Holdings and Hai-O-Enterprise Berhad has been analysed from the creditors’ point of view. The payables turnover ratio results of these two companies revealed that this ratio for Atlan Holdings indicates an increasing trend and for Hai-O-Enterprise Berhad Company, this is observed to be a decreasing trend. In case of Atlan, it can be said that the company is paying its suppliers in a rapid manner which reveals its improved financial condition (Uechi et al. 2015). The company also made timely payments after entering into a sales agreement.
On the other hand, for Hai-O-Enterprise Berhad it is evidenced that the company is not that efficient to pay its suppliers on time which signifies its weakening financial situation. This situation took place as the company’s business activities became slow and the company is involved in negotiating with its suppliers regarding absorbing some sales and service tax to deal with weak market condition.
Suggestions to changes in financial strategy from the viewpoint of CFO:
Certain change suggestions regarding financial strategies are offered for Atlan Holdings and Hai-O-Enterprise Berhad Company in their financial strategies for enhancing their performance position in the industry. Both the companies recommended shifting its focus from maintaining an increased inventory and considering maintaining their working capital in cash (Mousa 2015). In case of Atlan Holdings the company must focus on developing stringent repayment policies for debtors so that they make their payments on time and do not extend their repayment term on aa regular basis. This can enhance business everyday business activities of the company.
Share price analysis from the perspective of investors:
According to the above figure, it has been evaluated that the share price of Atlan has remained constant for a certain period of time after which it has increased for a smaller timeframe and it has again declined over the years. However, in case of Hai-O-Enterprise, the trend is observed to be increasing over time. If the shares of Atlan were purchased in January 2014, the investor would have to incur RM 4.94.
On the current date, the share price of the organisation stands at RM 4.45 and hence, a loss of RM 0.49 would have been incurred. In case of Hai-O-Enterprise, the share price has been RM 1.65 on January 2014, which is now RM 3.60 at the current date and this would lead to a gain of RM 2.95 per share. Hence, by investing in the shares of Hai-O-Enterprise, the investor could earn profit and the situation is vice-versa for Atlan.
Investment recommendation:
The above discussion clearly makes it apparent that Hai-O-Enterprise Berhad is a favourable investment opportunity for any investor to maximise the level of earnings. This is supported by upward trend in financial ratios and positive share price performance of the organisation. On the other hand, it is found that Atlan is struggling to maintain its competitive position in the Malaysian retail sector in contrast to Hai-O-Enterprise Berhad due to declining profitability and increased blockage of working capital in the form of trade receivables. Moreover, the share price has declined over the years and therefore, it is recommended to invest some money in the shares of Hai-O-Enterprise Berhad for maximising return on investment.
Conclusion:
It is identified from the above evaluation that Hai-O-Enterprise Berhad has better financial condition than Atlan Holdings Berhad because of improved profitability, efficiency and leverage positions. The only deficiency is found in the liquidity position and accordingly, recommendations are provided from the perspective of CFO. Moreover, the share price analysis clearly indicates that Hai-O-Enterprise is a better investment opportunity for the investors, as investing in the shares of the organisation would maximise their overall return on investment.
References:
Atlan.com.my., 2018. Atlan Holdings Bhd.
Brigham, E.F., Ehrhardt, M.C., Nason, R.R. and Gessaroli, J., 2016. Financial Managment: Theory And Practice, Canadian Edition. Nelson Education.
Buehlmaier, M.M. and Whited, T.M., 2018. Are financial constraints priced? Evidence from textual analysis. The Review of Financial Studies, 31(7), pp.2693-2728.
Damodaran, A., 2016. Damodaran on valuation: security analysis for investment and corporate finance (Vol. 324). John Wiley & Sons.
Dokas, I., Giokas, D. and Tsamis, A., 2014. Liquidity efficiency in the Greek listed firms: a financial ratio based on data envelopment analysis. International Journal of Corporate Finance and Accounting (IJCFA), 1(1), pp.40-59.
Finance.yahoo.com., 2018. [online] Available at: https://finance.yahoo.com/quote/7668.KL/ [Accessed 1 Nov. 2018].
Finance.yahoo.com., 2018. [online] Available at: https://finance.yahoo.com/quote/7048.KL/ [Accessed 1 Nov. 2018].
Hai-o.com.my., 2018. Hai-O Enterprise Berhad. [online] Available at: https://www.hai-o.com.my/bursa.php [Accessed 1 Nov. 2018].
Hoskin, R.E., Fizzell, M.R. and Cherry, D.C., 2014. Financial Accounting: a user perspective. Wiley Global Education.
Ibn-Homaid, N.T. and Tijani, I.A., 2015. Financial analysis of a construction company in Saudi Arabia. International Journal of Construction Engineering and Management, 4(3), pp.80-86.
Jordan, B., 2014. Fundamentals of investments. McGraw-Hill Higher Education.
Miller-Nobles, T.L., Mattison, B. and Matsumura, E.M., 2016. Horngren’s Financial & Managerial Accounting: The Managerial Chapters. Pearson.
Mousa, G.A., 2015. Financial Ratios versus Data Envelopment Analysis: The Efficiency Assessment of Banking Sector in Bahrain Bourse. International Journal of Business and Statistical Analysis, 2(2), pp.75-84.
Uechi, L., Akutsu, T., Stanley, H.E., Marcus, A.J. and Kenett, D.Y., 2015. Sector dominance ratio analysis of financial markets. Physica A: Statistical Mechanics and its Applications, 421, pp.488-509.
Vogel, H.L., 2014. Entertainment industry economics: A guide for financial analysis. Cambridge University Press.
Zainudin, E.F. and Hashim, H.A., 2016. Detecting fraudulent financial reporting using financial ratio. Journal of Financial Reporting and Accounting, 14(2), pp.266-278.
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