This independent expert’s report is due to be submitted to the Independent Board Committee (IBC) of Santos Limited by 6.00pm on Monday 28rd May 2018, via the FIN3CSF subject LMS site. This case study contributes 20% to the overall final assessment in the FIN3CSF subject. This case study is to be completely individually, and the maximum word limit, excluding calculations and financial analysis reporting (such as tables).
- On 3rdApril 2018, a bid has been offered by Harbour energy limited to Santos limited. A statement has been announced by Harbour energy limited which is explaining about the bid price. The statement explains that in the next few months:
- Harbour energy limited is planning to take over the business Santos limited through purchasing the stock of Santos Limited.
- Harbour energy limited has planned to offer US $ 4.98 per share which is AUD 6.5. The company has explained in the bid statement that the AU $ 6.13 per share and 37% shares as franked dividend would be offered by the company to the shareholders of Santos Limited.
- The stock price of Santos limited has been measured from Australian stock exchange on 2ndApril 2018. It was $ 5.07.
- The market price of Santos Limited is just $ 5.07 whereas the Harbour limited is offering $ 6.5 to each shareholders of the company.
- Part d explains that the deal is quite influence and attractive for the shareholders of Santos Limited.
- The bid statement of Harbour limited explains that the shareholders who are interested in the acquisition process would got $ 6.13 per share and the shareholders who are not ready to accept the proposals would get fully franked dividend.
- Harbour energy limited is the major player in the US energy industry. It explains about the better position and performance of the company.
- Santos limited is operating its business under the Australian oil industry. The major market share of the company is in Australia itself. The company produces and delivers natural gas to its customers.
- The main operations of Santos limited includes exploration of natural gas, production of natural gas, development of natural gas and sales of natural gas to the Australian clients as well as international clients of the company.
- Santos limited is known in the Australian market as second largest independent oil and gas Production Company.
- In 1954, Santos limited has been founded and it started operating its business in Australian market (Home, 2018).
- The production process of the company includes ethane, shale gas, methane, liquid petroleum gas and oil.
- The annual report of Santos limited explains about huge decrement in the revenue and the profitability level of the company.
- The deal which has been made by Harbour energy limited to Santos limited has been studied and it has been recognized that in general, the offer is attractive but if other financial factors of the company are concerned in the report than this could offer different outcome to the company.
Summary of opinion:
- General overview on the financial performance of Santos limited explains that the Harbour energy limited has offered a good base to the company and the offer must be accepted by the company.
- However, the review of the financial [performance industry evaluation and various valuation method explains that the deal is not competitive and Santos Limited must think about the offer again.
- Following are few points which has been evaluated to identify the performance of the company:
- Study on trend analysis has been done to measure the performance of the company and evaluate the harbour energy limited offer to Santos Limited (Horngren, 2009).
- Trend analysis is a financial statement analysis study which is calculated by the professionals to measure the changes into the income statement, balance sheet and cash flow statement of the company.
- The trend analysis evaluation on the financial statement of Santos limited, has been measured to recognize the changes into the final statement of the company. On the basis of the trend analysis, it has been found that the total revenue of the company has been improved by 11.12% in the year of 2017.
- As well as, the net loss position of the company has also been improved by 68.10%. It briefs that the company has improved the financial performance of the company (Kinsky, 2011).
- The trend analysis also explains that the earnings position of the company has also been improved.
- The trend analysis on income statement are explaining about better performance of the company and explains that the company should not involve in any acquisition process for now as forecasting process explains that the performance of the company would be better.
- In addition, the trend analysis has been done on the balance sheet of the company. On the basis of the study, it has been found that the total current asset of the company explains about the decrement in the company.
- The noncurrent assets and the total assets level have also been lowered by the company to manage the capital structure as well as the efficiency position of the company (Garrison et al, 2010).
- The liability position and the equity stockholder’s position have also been improved by the company. It measures and explains about the changes into the performance of the company.
- The industrial changes, economical changes etc have affected on the financial statement and the financial performance of the company.
- The trend analysis study explains that the financial position and the financial performance of the company have been better.
- Further, the study has been done on the fundamental ratios to measure the performance of the business and the conclusion about the acquisition process of the Santos limited and Harbour energy limited.
- Initially, the study has been done on the profitability ratios of the company to measure the profitability level and the presentation of the company. The return on capital employed (ROCE), operating profit margin (OM) and gross profit margin (GM) explains that the position of the company has been improved from last 5 years (Hansen, Mowen and Madison, 2010).
- Further, the liquidity ratios have been measured to evaluate the short term debt obligation of the company. The current ratio and quick ratio explain that the risk position of the company has been improved from last 5 years.
- In addition, efficiency ratios have been measured to evaluate the efficiency position of the company. The payment turnover, receivable turnover and inventory turnover ratio explain that the efficiency of the company has been lowered from last 5 years..
- Lastly, the investment ratio and capital structure ratio have been measured to evaluate the investment and risk position of the company. The various ratio of investment and capital structure explain that the risk position of the company has been improved from last 5 years.
- The overall performance and evaluation explains that the position of the company has bee improved.
- The valuation model has been applied on the company to measure the intrinsic value of the company.
- The share price has been measured on the basis of dividend discount model, residual earnings model and discounted cash flow.
- Firstly, WACC of Santos limited has been measured and it has been found that the WACC of the company is 4.52% (Baker and Nofsinger, 2010).
- It explains that the debt and equity has been managed by the company in optimal way.
- DDM model has been applied on Santos Limited to measure the share price of the company. the study explains that the stock price of the company is undervalued.
- The discounted cash flow method further explains about the higher stock price than the market price of the company. It also measures and explains that the performance of the company is better and stock has been undervalued in the market.
- Further, teh residual earning model explains that the stock of the company is overvalued the intisnc price of the stock of the company should be $ 2.85 and $ 3.15.
- The price earnings ratio of the comapny explains that the performance of Santos limited would be better in near future.
- This is among the largest private companies of Australian market in context of natural gas explorations and sales.
- The study concludes that the offer made by Harbour energy limited is not reasonable.
- The financial performance explains that the position of the company would be improved in near future.
- Current trend analysis explains that the performance of the company has already been improved.
- The financial ratio measured the different level of the company and explains that overall performance has been better.
- The valuation model also explains that the stock price is undervalued in the market.
- Thus, Santos limited should not accept the proposal of Harbour limited.
Baker, H.K. and Nofsinger, J.R. 2010. Behavioral Finance: Investors, Corporations, and Markets. John Wiley and Sons.
Bhimani, A., Horngren, C. T., Datar, S. M., and Foster, G. 2008. Management and cost accounting (Vol. 1). Pearson Education.
Garrison, R. H., Noreen, E. W., Brewer, P. C., and McGowan, A. 2010. Managerial accounting. Issues in Accounting Education, 25(4), 792-793.
Hansen, D. R., Mowen, M. M., and Madison, T. 2010. Cornerstones of cost accounting. Issues in Accounting Education, 25(4), 790-791.
Home. 2018. Santos Limited. [online]. Available at: https://www.santos.com/ (accessed 26/5/18).
Horngren, C. T. 2009. Cost accounting: A managerial emphasis, 13/e. Pearson Education India.
Kinsky, R. 2011. Charting Made Simple: A Beginner's Guide to Technical Analysis. John Wiley and Sons.
Morningstar. 2018. Santos Limited. [online]. Available at: https://financials.morningstar.com/income-statement/is.html?t=STO®ion=aus (accessed 26/5/18).
Yahoo Finance. 2018. Santos Limited. [online]. Available at: https://finance.yahoo.com/quote/sto.ax?ltr=1 (accessed 26/5/18).
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