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Ownership and Governance Structure

Discuss about the Dividend Policy Changes in Emerging Stock Market.

The main purpose of this report is to analyze the financial statements of CSR ltd. The report will be focusing on the current financial position of CSR ltd so as to provide a means for the shareholders to take effective decisions regarding investments. The report will be analyzing the financial statement of CSR ltd so as to understand the corporate governance policies of the business and also the ownership structure of the business (Tallon 2013). The report will also be including calculations of significant ratios which are related to profitability, solvency and efficiency of the company so as to have a basic understanding of the viability of the business.

A graphical representation of the shares prices of the company will be carried out and the same will be compared against the all ordinary index to understand the movement in the share prices over the years. In addition to this, emphasis will be provided on the debt structure of the business along with the dividend policy of the business (Travlos, Trigeorgis and Vafeas 2015). The report will be concluding with a letter of recommendations which will be including significant recommendations regarding investments prospects in the company.

CSR limited is considered to be one of the major Australian company which is engaged in the business of producing building products for the business. The head quarter of the company is situated in Sydney, Australia. The company is listed in Australian stock exchange. The company had started off as a sugar refining company as the colonial Sugar Refining Company and the company expanded its business into milling of sugarcane business (Corporate. 2018). The company in no time became one of the most important miller and refiner in Australia. With a further view to diversify the business of the company the company moved to manufacture of building materials as early as 1942. The business acquired Bradford Insulation in 1959 which was engaged in the manufacture of heart insulation materials for buildings and the company established insulation business in China, Thailand, Malaysia. The other products of the company which the business manufactures are cement sheeting, aerated concrete products, bricks and system tom support plasterboard.

The company has performed excellently in terms of financial performance which is depicted in the financial statements of the business for the year 2017. As per the chairman’s report the business is has achieved growth for the continuous for four years including the currentnyears performance of the business.

People involved in the governance of TPG Telecom Ltd Board

There are two substantial shareholders of the company as per the financial statements of the business. The table which is presented below shows the shareholders of the company:

Name of the Shareholders

Total number of Ordinary shares held

Total percentage of the capital held

HSBC Custody Nominees (Australia) Limited

161,695,116

32.05%

J P Morgan Nominees Australia Limited

81,826,711

16.22%

Citicorp Nominees Pty Limited

53,131,022

10.53%

National Nominees Limited

28,266,912

5.60%


The tabular representation which is shown above show that the substantial shareholder of the business is HSBC custody Nominee (Australia) which holds more than 20% shares of the business. The JP Morgan Nominee is shown to possess around 16.22% shares of the company (Lim, How and Verhoeven 2014). In addition to this, there are tow shareholders of the business which holds more than 5% shares which are Citicorp Nominees Pty Limited and National Nominees Limited. CSR ltd can be considered to be a family company for HSBC Custody Nominees (Australia) Limited as the company holds around 32.05% shares of the business.

The structure of the board for CSR ltd is made up of both executive and non-executive directors of the business along with the chairman for the business. The management of the business is made up of the directors, chairman and the chief financial officers of the business.

Name

Position Held

NON-EXECUTIVE DIRECTORS

Jeremy Sutcliffe

Chairman

Christine Holman

Director

Michael Ihlein

Director

Rebecca McGrath

Director

Matthew Quinn

Director

Penny Winn

Director

EXECUTIVE DIRECTORS

Rob Sindel

Managing Director

David Fallu

Chief Financial Officer

Greg Barnes

Chief Financial Officer


The above table shows the board of directors of CSR ltd and the classification as well between the executive and non-executive directors of the business. The directors of the company do not hold any shares of the company as per the financial statements of the company for the year 2017. Therefore, it can be said judging by the directors not holding any shares in the business, the company is not managed by any family member and such do not have a role in the corporate management of the business.

The movement in the share price of the business is plotted in the graph above in order to show changes in the shares prices due with respect to changes in the all ordinary index. The graph portrays that the share price of the company has fluctuated in the two years period which is shown in the graph above. As per the graph the share price line has against started to go up from 1.10.17 and is shown to be on an increasing trend. The share price has mostly been above the all ordinary index line (Pozzi, Di Matteo and Aste 2013). There is a period between 1st December 2015 and 1st April 2016 where the share price of the company is above all ordinary stock index line. Then there is a period of 1st July 2016 when there is a sharp fall in the share prices of the business and the share price line falls below the all ordinary index line. There has been a as high as 16-17% change which is depicted in share price line in comparison to all ordinary index line in the month of August 2017 and this represents the highest point in the graph as portrayed and plotted. The lowest point which can be identified is when the share prices of the business fall and the same is shown in the graph as -15% fall in the month of April 2017.

Calculations of the Fundamental Ratios

The graphical movement of stock prices which is depicted in the graph above of CSR ltd shows that the fluctuation in prices are on a random basis which suggest that the stock is volatile in nature. This can be one of the reasons due to which the shares prices of the business has fallen on certain occasions. The movement in the stock prices suggest that the stocks of the business are undervalued considering the future cash flow expectations of the business.


CSR ltd is engaged in producing building materials for the business and the company has been performing well in financial terms. In addition to this, the financial statements of the business reveal that the company is in its growing phase and has been able to achieve continuous growth in profitability and revenue generation for a continuous period of four years. However, the business has faced the fall in the stocks prices of the company in spite of better performance from the business.

In March 2017, CSR ltd announced that the company was entering into an agreement with the Federal Government of Australia for a project for which the government has sanctioned a grant which is worth $ 3 million as per the estimation. The project is about innovation and development of Australian first high-performance building façade system. This resulted in rise in the stock prices of the business and the investors were willing to invest more in the stock prices of the company as the government was involved in the project and as they had approved the grant this surely meant that the project was an important one which could lead to development of the buildings in Australia. In addition to this, the company enjoy positive responses from the general investors as the government trusted the company with an important project. Therefore, there was an increase in the stock prices of the business as the investors wanted to be a part of the growth which the business would be able to achieve when the project was completed. This is evident from the graph which is shown in figure 6 where the stock prices of the business have increased in the month of March 2017. Moreover, the management of the CSR ltd also responded that such a project is quite innovative in nature and the business will greatly benefit from such a project. In addition to this, it is estimated when the project is completed than such will make the construction market in Australia competitive against the global manufacturers and reduce the overall costs for the range of products.

There have also been significant changes in the share prices of the business which is due to the regular commitment of the business in corporate social responsibility of the business. The business has been committed towards ensuring that the activities of the business do not harm the environment or society as a whole. The policies of the business is focused towards sustainable development and only those activities are undertaken which are considered to be sustainable in nature. The management of the company follows a sustainability program which is published along with the financial statements of the business. The sustainability report shows the commitment of the business towards sustainable practices and saving the environment and at the same time pursuing the goals of the business. The sustainability report of the company focuses on issues such as greenhouse gas emissions, energy consumption and water and waste management. These are the areas which can be affect an environment. The policies of the business creates an awareness and a positive image of the company in the mind of the general people and naturally the company is rewarded with higher share prices as shown in figure 6 as well. Moreover, the new project which the company has received from the government will be requiring quite significant employees for which recruitment will be made. This will result in employment generation and the country will be benefiting from such a project. In addition to this, this will also develop skills in the workers and the overall efficiency of the business is likely to increase.

In the month of April 2017 there was an announcement made which stated that the management of CSR ltd was intending on selling the Monier Roofing Rosehill site where the business was engaged in manufacturing activities. The management reasoned that the property was sold off to facilitate better services to the customers as the business was looking for a potential replacement of the site in New South Wales area of Australia. This might be one of the reasons fro the fall in the prices of shares which is noticeable in figure 6 after the month of April. The sale o a working and functioning site is not a favorable sign from the view point of the investors and therefore there is a fall in the share prices of the business.

Another factor which may have impacted the share price of the business is the level of competition which the company faces from the potential competitors in the industry. The market always has been pretty much competitive in nature and in addition to this, the global construction manufacturers are also entering the market which further makes the level of competition in the market intense (Boons et al. 2013). The competitors make the market conditions intense and attracts the investors and customers with different sort of strategies which are followed by such businesses.

Particulars

Amount

Beta of the company

A

1.07

Risk Free Rate

B

4%

Market Risk Premium

C

6%

Required Rate of Return

D=B+[AxC]

10.42%

The beta of the company as per the calculated figure for CSR ltd is shown in the table above is shown to be 1.95 (Johnstone 2016).

The above table shows that the calculation of return rate of return for the business. The calculated required return is shown to be 10.42% and the risk-free rate of return is shown to be 4% and the market risk premium is shown to be 6%.

The rationale for making the investment in the CSR ltd is because the company has better earnings in comparison to other business which are present in the industry. The return on earnings of the business is also appropriate as shown in the calculations above (Eisdorfer, Giaccotto and White 2013). In addition to this, the company has been achieving growth for the last four years consecutively and the net profit of the business has increased tremendously from the previous year’s estimate as shown in the profit and loss account of the business for the year 2017 (Mwangi,  Muathe and Kosimbei 2014).

Another factors which can be considered for estimating the rational for investment is that the company is developing which is shown in the growth of business and profitability during the year 2017. There has been an 8% increase in the EBIT of the business from the previous year’s estimate. The net profit after tax for the business has also increased from the previous year and the growth in the net profit after tax as shown in the financial statements of the business is around 11% (Summers 2014). The earning per shares of the business is also shown to be appropriate which is shown to be 36.5 cents per share.

Particulars

Amount

Weightage

Cost

Return Rate

Tax Rate

WACC

Total Long Term Debt

30.5

2.47%

3.4

11.15%

30.00%

0.19%

Total Equity

1207

97.53%

10.42%

10.16%

TOTAL

1237

100%

10.36%

As per the above table, the calculations for weighted average cost of capital is shown which is shown to be 12.63%. The WACC of the company is an aggregate of the cost of equity and cost debt and the weightage for the same is also considered. In case a business has a higher WACC signifies that the level of risks which the business faces is high. Such risk is associated with the operations of the organization (Hann, Ogneva and Ozbas 2013). The WACC of the business is considered to be an important tool for estimating the expected cost which is involved in financing the overall resources of the business (Frank and Shen 2016). The cost of equity is shown in the above table as 10.42% and the cost of debt which is shown in the table above shows 11.15% as the cost of debt of the business. The computation of cost of debt considers the total debt which the business has undertaken for the period.

Alternative definition of WACC states that it is the measure of the expenditure which the business needs to incur for the purpose of raising one added dollar of money. The WACC of the business reflects the level of risks which the business faces and it is always suggested that the business needs to keep the overall cost of capital at a minimum (Cheynel 2013). This can be done by formulating an appropriate capital structure for the business and attaining a balance between the equity share capital and debt capital of the business (Brotherson et al. 2015).

Debt ratio of the business refers to the financial leverage of the business that is the debt which is employed by the business. The ratio shows relation between total debts of the business to the total assets of the business (Pescatori, Sandri and Simon 2014). The debt ratio of the business is shown to be 0.42 for the year 2017 and the same is shown to be 0.41 for the year 2016. The debt rati0o has slightly increased which suggest that the debts which are employed by the business has increased from the previous year (Obradovich and Gill 2013). The financial statement of the business reveals the key measures for the business performance which includes capital gearing ratio which proves that the business has taken loan during the year and the capital gearing ratio is shown as 0.9 for the year 2017 whereas the same was not applicable in the 2016.

The level of debts which is taken by the business as per the five years performance statement which is provided in the financial statement of the CSR ltd shows that the business has only taken a loan in 2017 which is of $ 11.4 million. The interest for the same is also paid as per the financial statement of the business.

 The dividend per share which is paid by the business during 2017 as shown in the five years performance statement prepared by the business is 26 cents per share which has increased from the previous year’s estimate which was 23.5. The dividend payout ratio of the company is more or less same as per the financial statement of the company (Masum 2014). The board of directors is committed towards fulfilling the needs of the shareholders of the company. The company has declared a dividend of 13% due to the overall increase in the profits of the business as shown in the notes to accounts part of the financial statement (Bradford, Chen and Zhu 2013).

This letter is written with the intention of informing you about the performance of CSR ltd and also to recommended to you whether you should invest in the shares of the company or not. The share price of the company is gradually rising but still the same is comparatively cheaper. This would be a great time for purchasing the shares of the company as the share price is on the rise and the investors will be able to trade and make profits from the same.

In addition to this, the net profit of the business has grown by 11% which suggest that the company can be a fruitful investment for future as the share price is anticipated to rise further. Moreover, the company has offered an attractive dividend during the year of 13 % which shows the intention of the company and the management plans to do the same in coming years. We expect that you will invest in the company.

Reference

Boons, F., Montalvo, C., Quist, J. and Wagner, M., 2013. Sustainable innovation, business models and economic performance: an overview. Journal of Cleaner Production, 45, pp.1-8.

Bradford, W., Chen, C. and Zhu, S., 2013. Cash dividend policy, corporate pyramids, and ownership structure: Evidence from China. International Review of Economics & Finance, 27, pp.445-464.

Brotherson, W.T., Eades, K.M., Harris, R.S. and Higgins, R.C., 2015. 'Best Practices' in Estimating the Cost of Capital: An Update.

Cheynel, E., 2013. A theory of voluntary disclosure and cost of capital. Review of Accounting Studies, 18(4), pp.987-1020.

Corporate. (2018). CSR Building Products - a leading building products brand in Australia & New Zealand. [online] Available at: https://www.csr.com.au/ [Accessed 24 May 2018].

Eisdorfer, A., Giaccotto, C. and White, R., 2013. Capital structure, executive compensation, and investment efficiency. Journal of Banking & Finance, 37(2), pp.549-562.

Frank, M.Z. and Shen, T., 2016. Investment and the weighted average cost of capital. Journal of Financial Economics, 119(2), pp.300-315.

Hann, R.N., Ogneva, M. and Ozbas, O., 2013. Corporate diversification and the cost of capital. The journal of finance, 68(5), pp.1961-1999.

Johnstone, D., 2016. The effect of information on uncertainty and the cost of capital. Contemporary Accounting Research, 33(2), pp.752-774.

Lim, M., How, J. and Verhoeven, P., 2014. Corporate ownership, corporate governance reform and timeliness of earnings: Malaysian evidence. Journal of Contemporary Accounting & Economics, 10(1), pp.32-45.

Masum, A., 2014. Dividend policy and its impact on stock price–A study on commercial banks listed in Dhaka stock exchange.

Mwangi, L.W., Muathe, S.M.A. and Kosimbei, G.K., 2014. Relationship between capital structure and performance of non-financial companies listed in the Nairobi Securities Exchange, Kenya.

Obradovich, J. and Gill, A., 2013. The impact of corporate governance and financial leverage on the value of American firms.

Pescatori, A., Sandri, D. and Simon, J., 2014. Debt and growth: is there a magic threshold? (No. 14-34). International Monetary Fund.

Pozzi, F., Di Matteo, T. and Aste, T., 2013. Spread of risk across financial markets: better to invest in the peripheries. Scientific reports, 3, p.1665.

Summers, L.H., 2014. Reflections on the ‘new secular stagnation hypothesis’. Secular stagnation: Facts, causes and cures, pp.27-38.

Tallon, P.P., 2013. Corporate governance of big data: Perspectives on value, risk, and cost. Computer, 46(6), pp.32-38.

Travlos, N.G., Trigeorgis, L. and Vafeas, N., 2015. Shareholder wealth effects of dividend policy changes in an emerging stock market: The case of Cyprus.

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