The present report is carried out for carrying out fundamental analysis of the two ASX listed companies operating within the same industry. The fundamental analysis is carried out for identification of the factors that are likely to implement directional changes in the value of the two selected companies and also on their share prices. The factors investigated are both macro and micro in context. The fundamental analysis is carried out with the use of both top down and bottom up approach. The top-down approach is used for gaining an analysis of the overall economic environment and considering the impact of the forecasting economic fundamentals on the performances of the companies selected. The bottom-up analysis is carries for analyzing the current financial situation of the selected companies. The financial analysis is carried out by examining the accounting ratios for assessing the company’s performance and its implications for the industry. The report has carried out fundamental analysis of the two selected energy companies that are, AGL Energy and APA Group stapled operating in the energy sector of Australia.
The energy sector of Australia is regarded to be a major contributor of the country’s economic growth and development. The market capitalization of energy companies in the ASX 200 is estimated to be about $74 billion. The large-scale growth realized by the energy sector of the country is due to presence of abundance of renewable and non-renewable energy sources. The higher amount of energy resources within the country is responsible for it being the ninth largest energy producer across the world. It is estimated that energy sector of the country accounts for about 2.5 per cent of energy production at a global level and about 5 per cent of world energy exports. There is presence of major energy producing companies within the sector completion each other on the basis of market share. The major competitive companies operating within the sector are Woodside, Origin Energy, Santos, AGL Energy Limited, APA Group Stapled and many others (Palmer, 2013).
AGL Energy Limited
It is regarded as a major energy producing company within Australia listed on ASX that is actively involved both in generation and retailing of electricity and gas for residential and commercial purposes. The main energy products of the company include thermal power, natural gas, wind power, hydroelectricity, and solar energy and coal gas sources. The company is headquartered in New South Wales in Australia. The mission of the company is to develop innovative energy products and services to provide affordable, reliable and sustainable energy to the customers. The vision of the company is to become the largest integrated renewable energy suppliers at a global level (AGL Energy Limited: Our Company, 2018).
APA Group Stapled
The company is known to own and operate natural gas and electricity assets within Australia. The company is recognized as largest gas infrastructure businesses within the country listed on ASX. It is actively in providing energy solutions to the customers since the year 2000 and at present has become among top 50 ASX-listed companies within the country providing employment to about 1,600 people. Its mission is to provide smart, reliable and safe energy solution to the customers by the use of its in-depth industry knowledge and high-class infrastructure. Its vision is to maintain its long-term market growth in the energy sector and sustaining its position of top most energy infrastructure business within Australia (About APA Group, 2018).
The top-down analysis is centered around conducting an overall analysis of the economic environment and the impact of the changes in the economic fundamentals on the performances of companies in the energy industry. The analysis includes evaluation of the macro-economic factors such as interest rates, GDP, inflation rate, value of $AUD and business cycle of the economy.
The Reserve Bank of Australia has forecasted the Australia economy to experience a positive economic growth of above 3 per cent in the year 2018-2019. This is on account of good business conditions with higher growth in exports and decline in unemployment rates. Also, the high level of public infrastructure investment is also supporting the economic growth to a large extent. This is supported by the growth in the Gross Domestic Product (GDP) realized by the Australian economy in present. The GDP has experienced a positive growth of about 2.27 per cent in the year 2017 as compared to previous year (Australia Economic Outlook, 2018). The GDP is also expected to grow strongly in the coming period of time from the year 2012-2022 as depicted in the following graph by the statistics:
Moreover, the low level of interest rates will continue to support the economic growth within the country. The RBA has maintained the interest a rate at 1.5 per cent and also it has been estimated that the interest rates within Australia would not be increased in anytime soon. This is on account of uncertainty existing within the growth of wages and inflation. The stagnant wage growth experienced in the Australian economy is causing the RBA to maintain interest rates to be lower. This is because even if debt levels are higher the proportion of the household income paid for mortgages interest is lower (Jericho, 2018). The current inflation rate within the country is also lower to about 2 per cent due to slow growth in the wages rate. The BA is maintaining the inflation rate to be lower for achieving price stability, full employment prosperity and welfare of the people (Australia Economic Outlook, 2018).
The Australian dollar is expecting to be traded at 0.76 by the end of the year 2018 and as such the value of Australian dollar is weakening since the last few years. This is mainly due to rising value of US dollar which is attracting more investment and thus leading to weakness in the Australian dollar (Australian Dollar Forecast, 2018). The business cycle of the Australian economy revolves around production, trading and consumption of goods and services. The economic activity in Australia regained in the year 2010 after the occurrence of global financial crisis. The economic growth in Australia has maintained stable thereafter. This has largely being on account of its growing exports to the Asia and Chain region. Also, the lower interest rates, decrease in unemployment and higher investment from the foreign companies is further likely to support its plan of economic growth. As such, the business cycle of Australia can be regarded as positive and supporting the country’s long-term growth and development (Kent, 2017).
The demand for the energy products and services is increasing within the country due to increasing population and thus energy products are required to meet their varying needs and expectations. The price of energy products and services is playing a major role n the demand of such products by the customers. As such, the stable economic conditions within the Australia will tend to lower down the operational expenses of the energy companies and decreasing the price of energy product and services. Further the development of high-quality infrastructure such as power plants, roads, buildings within the country will also tend to improve their operational efficiency of the energy companies. The lowering interest and inflation level will further increase the spending power of consumers and leading to an increase in energy products and services. As such, the energy industry is expected to experience a positive growth and thus the long-term, performance of the selected energy companies, AGL Energy and APA Group Stapled (McLean, 2012).
In bottom up analysis the focus is on individual stock rather than whole industry. The perspective of bottom up analysis is to conduct the fundamental analysis of chosen companies and to find out how each individual stock performs in respect of industry average. The fundamental tool used to conduct the bottom up analysis is ratio analysis.
Ratio analysis refers to the quantitative analysis of financial information that is contained in the company’s financial statements. It helps in making the fundamental analysis of operating and financial performance of the company. Ratio Analysis has been divided into categories. They are liquidity analysis, profitability analysis, solvency analysis, efficiency analysis, capital structure analysis, and market performance.
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Ratio Calculations |
||
|
Particulars |
2016 |
2017 |
|
Profitability Analysis |
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|
Return on assets |
Net Profit / Average Total Assets |
|
|
AGL Energy |
-2.79% |
3.73% |
|
APA Group Stapled |
1.21% |
1.58% |
|
Net Profit Margin |
Net Profit / Net Revenue |
|
|
AGL Energy |
-3.66% |
4.36% |
|
APA Group Stapled |
8.74% |
10.33% |
|
Liquidity Analysis |
||
|
Current Ratio |
Current Assets /Current Liabilities |
|
|
AGL Energy |
1.41 |
1.33 |
|
APA Group Stapled |
0.48 |
1.11 |
|
Quick Ratio |
Quick Assets / Current Liabilities |
|
|
AGL Energy |
1.23 |
1.19 |
|
APA Group Stapled |
0.45 |
1.07 |
|
Capital Structure Analysis |
||
|
Debt Equity Ratio |
Total Debt / Shareholder’s Equity |
|
|
AGL Energy |
0.52 |
0.55 |
|
APA Group Stapled |
3.68 |
3.83 |
|
Debt Ratio |
Total Debt / Total Assets |
|
|
AGL Energy |
0.28 |
0.29 |
|
APA Group Stapled |
0.74 |
0.76 |
|
Market Performance |
||
|
Earnings per Share |
Profit attributable for shareholders / Number of common Stock (Shares) |
|
|
AGL Energy |
$ (0.61) |
$ 0.81 |
|
APA Group Stapled |
$ 0.16 |
$ 0.21 |
|
Dividend per Share |
Total Dividend Distributed / Number of Common Stock (Shares) |
|
|
AGL Energy |
$ 0.94 |
$ 0.51 |
|
APA Group Stapled |
$ 0.41 |
$ 0.47 |
(APA Group, 2017: Annual Report and AGL Energy, 2017: Annual Report)
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Industry Average |
||
|
Particulars |
2016 |
2017 |
|
Profitability Analysis |
||
|
Return on assets |
-0.79% |
2.65% |
|
Net Profit Margin |
2.54% |
7.34% |
|
Liquidity Analysis |
||
|
Current Ratio |
0.94 |
1.22 |
|
Quick Ratio |
0.84 |
1.13 |
|
Capital Structure Analysis |
||
|
Debt Equity Ratio |
2.10 |
2.19 |
|
Debt Ratio |
0.51 |
0.52 |
|
Market Performance |
||
|
Earnings per Share |
0.48 |
-0.20 |
|
Dividend per Share |
0.68 |
0.49 |
(APA Group, 2017: Annual Report and AGL Energy, 2017: Annual Report)
Note: Financial Data used to calculate above ratios have been presented in appendix section of the report.
This analysis provides the information on the ability of company to use the resources for generating the revenues and also to reduce the expenses so that overall net profit can be increased.
Return on assets ratio tells percentage of profits that has been earned using the total assets of the company. It shows the ability of the company to allocate the assets in those profitable activities that generates good return. The return of assets of AGL Energy was -2.79 % in year 2016 and it got increased to 3.73 % in year 2017. On the other hand APA Group has return on assets of 1.21% in year 2016 and 1.58% in year 2017. Industry Average shows return on assets as -0.79% in year 2016 and 2.65% in year 2017 (Brigham and Michael, 2013).
Net profit margin indicates profit earned on total revenue during the period. This ratio is very important from investor’s point of view as through this ratio they get to know the return they will earn on their investment. The net profit ratio of AGL Energy was -3.66% in year 2016 that got increased in year 2017 to 4.36%. On the other hand net profit ratio of APA Group was 8.74% in year 2016 that increased to 10.33% in year 2017. Industry average shows net profit of 7.34% in year 2017.
So it can be said that in year 2017 profitability position of APA Group was much stronger than AGL Energy as it has ratios above the industry average.
Liquidity analysis measures the company ability to pay the short term liabilities on time through using the short term such as cash and cash equivalents. The ratios used to measure the liquidity analysis are current ratio and quick ratio.
Current ratio is an important measure of liquidity position of the company as it measures level of current assets to pay the current liabilities. The current ratio of AGL Energy was 1.41 times in year 2016 and it got decreased to 1.33 in year 2017. The current ratio of APA Group was 0.48 times in year 2016 and 1.11 times in year 2017. Industry average shows the current ratio of 1.22 times in year 2017. Overall it can be said that AGL Energy has better liquidity position as compared to APA Group.
Quick Ratio is also regarded as important measure of liquidity position but while considering the quick assets it ignore inventory and prepaid expenses as it does not convert into cash and cash equivalents in shorter period of time. Quick ratio of AGL Energy was 1.19 times and it was 1.07 times for APA Group in year 2017. The industry average indicates quick ratio of 1.13 times in year 2017 (Brealey, Myers and Marcus, 2007).
Overall, liquidity position of AGL Energy was much better than the liquidity position of APA Group. AGL Energy has above average liquidity ratios as compared to the industry average.
Capital structure has been defined as proportion of debt and equity capital used to finance the assets of the company. Debt capital has been regarded as leverage capital as it bears fixed rate of interest as charge on the profits of company. Company with high amount of debt capital as compared to equity capital has higher changes to become insolvent as compared to company with lower debt position.
The debt equity ratio indicates the proportion of debt as compared to equity capital of company. Lower the debt equity ratio stronger the capital structure of the company. Debt equity ratio of AGL Energy is much lower than APA Group that indicates that capital structure of AGL Energy was stronger in both the years taken for calculation. Same position has also been reflected from the debt ratio. Debt ratio shows proportion of debt capital used o finance the total assets of the company. Debt ratio was 0.29 times in case of AGL Energy and it was 0.76 times in case of APA Group. Industry average indicates the APA Group has poor capital structure as compared to AGL Energy (Brigham and Houston, 2012)
Market valuation analysis provides how company has been performing in the market. Common ratio used to analyse the market performance are earnings per share and dividend per share. EPS of AGL Energy is much better than its competitor APA Group in year 2017. AGL Energy has also paid higher rate of dividend in both the year when it was compared with APA Group. Overall it can be said that AGL Energy has better market condition as it is compared with the APA group (Higgins, 2012).
The top-down analysis has indicated that energy sector of Australia is expected to grow in a positive manner due to stable macro-economic conditions and higher exports of energy product. The performance of the companies is largely impacted by the industry conditions which in turn is dependent on the economic fundamentals of the country. It is recommended to the selected companies within the energy sector of Australia to continually invest in the development of innovative energy products and services for supporting the growth and expansion of the energy sector and economic development of Australia. The financial situations of both the companies in detail is analyzed with the use of bottom-up analysis with the use of various ratios such as profitability, earnings growth, dividend, liquidity, solvency and market evaluation ratios. It has helped in developing an understanding of the macro-economic conditions related to the further growth of the selected energy companies. It is therefore recommended on the basis of financial analysis that APA Group need to implement and develop growth strategies for improving its financial performance and securing its competitive position against AGL Energy Limited.
References
About APA Group. 2018. [Online]. Available at: https://www.apa.com.au/ [Accessed on: 21 May 2018].
AGL Energy Limited. 2018. Our Company. [Online]. Available at: https://www.agl.com.au/about-agl/who-we-are/our-company [Accessed on: 21 May 2018].
AGL Energy. 2017. Annual Report. [Online]. Available at: https://www.agl.com.au/-/media/agl/about-agl/documents/media-center/asx-and-media-releases/2017/170825-agl-207-annual-report-asx.pdf?la=en&hash=E27FEABC8A8FE5B618ACCF0966A70D6628B29950 [Accessed on: 22 May, 2018].
APA Group. 2017. Annual Report. [Online]. Available at: https://www.apa.com.au/globalassets/asx-releases/2017/apa-annual-report–sustainability-report-2017.pdf [Accessed on: 22 May, 2018].
Australia Economic Outlook. 2018. [Online]. Available at: https://www.focus-economics.com/countries/australia [Accessed on: 21 May 2018].
Australian Dollar Forecast. 2018. [Online]. Available at: https://www.australiandollarforecast.com/ [Accessed on: 21 May 2018].
Brealey, R., Myers, S.C. and Marcus, A.J., 2007. Fundamentals of Corporate Finance. Mc Graw Hill, New York.
Brigham, F., and Houston.J. 2012. Fundamentals of financial management. Cengage Learning.
Brigham, F., and Michael C. 2013. Financial management: Theory & practice. Cengage Learning.
Higgins, R. C., 2012. Analysis for financial management. McGraw-Hill.
Jericho, G. 2018. The Reserve Bank won’t be raising interest rates anytime soon. Here’s why. [Online]. Available at: https://www.theguardian.com/business/grogonomics/2018/apr/17/the-reserve-bank-wont-be-raising-interest-rates-anytime-soon-heres-why [Accessed on: 21 May 2018].
Kent, C. 2017. The Business Cycle in Australia. [Online]. Available at: https://www.rba.gov.au/speeches/2014/sp-ag-131114.html [Accessed on: 21 May 2018].
McLean, I. 2012. Why Australia Prospered: The Shifting Sources of Economic Growth. Princeton University Press.
Morning Star. 2018. AGL Energy. [Online]. Available at: https://financials.morningstar.com/ratios/r.html?t=AGLNF®ion=usa&culture=en-US [Accessed on: 22 May, 2018].
Morning Star. 2018. APA Group. [Online]. Available at: https://financials.morningstar.com/ratios/r.html?t=APA®ion=aus&culture=en-US [Accessed on: 22 May, 2018].
Palmer, G. 2013. Energy in Australia: Peak Oil, Solar Power, and Asia’s Economic Growth. Springer Science & Business Media.
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