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Financial Analysis Report For ANZ Banking Group, Virgin Blue Holdings and Wesfarmers Ltd

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Financial Analysis Report For ANZ Banking Group, Virgin Blue Holdings and Wesfarmers Ltd

Financial Analysis

Executive Summary

This paper seeks to analyze three companies; ANZ bank group, Virgin Blue and Wesfarmers for investment appropriateness. All three companies are based in Australia and operate in the Australia and New Zealand region with significant operations outside as well. The analysis applies both quantitative and qualitative analysis. The quantitative analysis is based on ratio analysis of the audited financial information for the years 2009 and to some extent 2008. Data available on the Australian Stock Exchange online database is also utilized. This is followed by a qualitative analysis of the information provided by the companies on their websites as well as other sources like industry journals and analyst commentary on the companies. Significant limitations are in existence in the analysis stemming from the assumptions of ratio analysis. The analysis indicates that all the companies performed poorly in the year 2009 with Virgin Blue being the worst. A conclusion on the best company to invest in is supported by qualitative factors as the quantitative analysis gives mixed results between ANZ and Wesfarmers. Virgin Blue also does not have very strong qualitative factors apart from an entrepreneurial management style. In following investment theory and weighted judgmental prediction Wesfarmers emerges better due to its diversification strategy.

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Introduction

ANZ is one of the biggest players in the banking industry in the world, ranking among the top 50. It is based in Melbourne, Australia and is one of the biggest companies in the region. It has been in operation for more than 100 years having started in the late 19th century by a Royal Charter in London. The bank group has expanded significantly over the years and now provides a wide range of financial services to all types of businesses and individuals and is among the leading in the adoption of modern operational strategies. It is obviously a company of interest to regional and world investors (Pulsford, 1892).

Virgin Blue is one of the most recognized airline brands in Australia and the whole South Pacific region. The company started in the year 2000 and through some remarkable innovation and adoption of an entrepreneurial business model, it has risen to the top of the industry both operationally and in terms of profitability. It is continuing in its expansion program into the international market and adoption of modern technology. The founders still hold significant shares in the company.

Wesfarmers started close to 100 years ago in Western Australia as a diversified supplier to the farmers in the locality. Since then the company has expanded as it diversified and it’s now hard to imagine the retail industry in Australia that Wesfarmers does not have an interest in. The company has a large shareholder base making it one of the most active companies in the Australian Stock exchange. The company is now adopting strategies to simplify its complex ownership structure to create value for its shareholders.

This analysis seeks to identify the shareholder’s return prospects in the three companies to identify which combination will provide the best return for the $10,000 to be invested.

Analysis

Quantitative Analysis

This analysis seeks to measure the returns the shareholders have received in the last few years and the risk that they have been facing. This is expected to give a guideline on the likely trend in the returns in the future. The analysis is based on the audited statements of the year 2009.

Earnings per share: This ratio gives an indication as to how much each share has earned and measures the earning power of the company from the perspective of the shareholders.

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Earnings per share in Cents
2008 2009
ANZ 170.4 131
Change -23%
Virgin Blue 9.3 -15.2
Change -263%
Wesfarmers 174.2 160
Change -8%

From the earning per share ratio above, it is observable that for all the three companies the ratio fell from the year 2008 to 2009. This is attributable to the world economic crisis that hit most economies in the world in 2008. The shareholding in Wesfarmers is the only one that changed significantly to account for the drop. Virgin Blue had the biggest fall. This is in line with the crisis situation as most travel companies around the world recorded declining performance around the same time (Altman, 1968).

Price Earnings Ratio: This is usually the most significant ratio to shareholders. The ratio indicates how much each unit of currency invested in a company earns. The ratio shows in a very direct way the earning power of a company.

Price to earnings
2008 2009
ANZ PE 7.28 7.12
Virgin PE 20.67
Wesfarmers PE 6.01 7.17

The price to earnings ratios of the three companies vary greatly. However, those of ANZ and Wesfarmers are quite stable. Virgin Blue had negative earnings per share in the year 2009 making its PE not applicable.

Dividends Yield: This ratio gives the return in dividends to the shareholders as a percentage. This return is significant in that it shows what shareholders expect to receive annually if they were to hold on to the shares.

Dividend Yield 2008 2009
ANZ Yield % 0.06 0.06
Wesfarmers Yield % 0.07 0.05

Virgin Blue did not issue any dividends in the year 2009 as the company incurred a loss.

The figures show that ANZ and Wesfarmers have both registered low dividend yields in the last two years.

Book value per ordinary share: This ratio shows the value of an ordinary share as recorded in the books. This value usually differs greatly from the market value and is a key indicator of the popularity of the share. The higher the market value than the book value the greater the popularity and the lower the expected returns in the future (Altman, 1968).

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Book Value per Share 2009
ANZ Book Value 12.9
Market Value 18.4
Virgin Blue Book Value 0.5
Market Value 0.4
Wesfarmers Book Value 21.0
Market Value 22.3

The Book values remarkably follow the market values for the three companies indicating that the Australian Stock market is quite efficient. In investment terms, only virgin blue show a discount on the book value. Wesfarmers is market value is close to book value indicating that it’s a popular stock.

Return on Assets: This ratio measures the efficiency of the company is using the resources at its disposal. The higher the return on assets the more efficient the company is. This ratio can be inferred from the PE and the trend is likely to be the same (Altman, 1968).

Current Ratio: This ratio indicates the level of liquidity in a company. The higher the ratio the more the current debts of a company are covered by the current assets.

Current Ratio 2009
ANZ Current Ratio 5.7
Virgin Blue Current Ratio 0.5
Wesfarmers Current Ratio 1.3

The current ratios differ greatly for the three companies. This is expected because the companies are in very different industries. However, the low current ratio in Virgin Blue is not favorable.

Qualitative Analysis

This analysis focuses on the areas not covered directly by the quantitative measures.

ANZ Bank Group

The company has a very robust expansion program. This can be the reason the company has registered poor performances in the last two years in terms of shareholder returns. The company has a very entrepreneurial management team and has currently gone into global markets through acquisitions and joint ventures. However, the company has not diversified its operations much making it vulnerable t industry shocks. The adoption of information technology is not an option in the banking sector and with the complex business model that ANZ has adopted this will prove challenging looking ahead. The banking industry is highly integrated the world over and very competitive. This is expected to keep margins very low. The competitive advantage for ANZ bank group therefore can only result from better information technology infrastructure as well as a superior organizational structure that will enable the company to tap into the knowledge and skills of the workers. The region in which the bank is predominant has for some time been shielded from the rest of the western economic shocks. However, this is not expected to remain the same. The history of the bank gives it an advantageous position due to its easily recognizable brand name. This can be tapped to introduce new product offerings

Virgin Blue

This is a company that has shown tremendous innovation and creativity in its competitive advantage over the years it has been in operation. The company has a strong value proposition in the region and is gaining a stronghold in international markets too. The airline industry is one of the most competitive and is extremely vulnerable to world economic shocks. The company has a very impressive environmental sustainability program. The company has not demonstrated significant diversification into other sectors to hedge on this business risk. The company has a strong brand name in the region that can be built own for even less associated products. The company has a growth-focused management team if the recent expansion programs are anything to go by. However, it has not taken enough time to integrate all its operations. The future of the airline industry is expected to improve as the world economy recovers from the 2008 recession. This can impact the earnings of Virgin Blue positively. However, the earnings of airline companies are usually correlated to the movement in oil prices and as a consequence the political situation in the Middle East region. This complicates the business model.

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Wesfarmers

This is one of the most diversified companies in the whole Australia New Zealand region. It has demonstrated a strong appetite for divergent growth over the years. This is expected to continue into the future. The company however suffers the risk of an extremely complex business model which is hard to integrate. Although the diversification program has assisted in smoothing out income growth it is not easily predictable. Wesfarmers has a very strong history in Australia and operates in the industries that supply essential products inelastic to income. The retail sector usually does not respond much to macroeconomic situations as the products offered are essential and have to be consumed anyway (Australian Bureau of Statistics 2001). However, this has a downside. The products have many substitutes making the margins very low and differentiation difficult. The company’s management has demonstrated much skill and tact in handling the complex business. The company also has an ambitious environmental sustainability program.

The three companies’ qualitative aspects give mixed signals on their projections. However, it is clear that the most diversified and the most focused in terms of handling information will have a more stable future and this far Wesfarmers hold the most diversified portfolio and ambitious management.

Discussion

Quantitative aspects

The three companies, in general, have registered dismal performances over the years 2009 and 2008. This can be attributed to the world economic crisis that affected many corporations all over the world. ANZ in the banking sector is expected to be the worst hit since the crisis was in form of a private credit crisis. This, however, is not the case as the analysis shows that in most of the quantitative measures ANZ has performed just as well as the other two which are in very different industries. Virgin Blue reported the worst result among the three in 2009 making a net loss. This is contrary to the management’s view of the performance of the company. Although the oil prices have been very volatile over the last few years the company has not been able to hedge most of its risks. Wesfarmers due to its diversified business model is expected to have smooth earnings and stable ratios. This is however the case. Although it demonstrates some strength in earnings over the other two companies. This can be attributed to the inelasticity of the retail industry where Wesfarmers operates predominantly.

Qualitative aspects

All the three companies have ambitious management teams as demonstrated by their growth patterns over the last 5 years. All three companies are seeking expansion into the world markets for greater earnings streams. However, this comes with extreme vulnerability. Wesfarmers is the only company that is widely diversified. ANZ has remained in the financial sector while Virgin Blue remains in the travel industry. Although differences in industries are expected the complexity in the business model seems to favor Wesfarmers. All the companies have a strong presence in the stock markets making them well-positioned to source capital for expansion. However, with their low shareholder returns the cost might be higher than the average. However, all the sectors of the economy were affected by the world economic crises and it’s, therefore, a matter of the strategies adopted by the various companies that will make the difference. The Australian expects the macroeconomic factors to improve over the coming years and this is reflected in the ambitious investment project undertaken by the three companies in terms of expansion (Buiter, 2006).

Limitations

This analysis faces many limitations. First is the fundamental limitation of ratio analysis. Ratio analysis is based on the assumption that the information provided by various companies is comparable. This is usually not the case since accounting principles give room for judgmental application. Secondly, companies practicing in the same industry d not always have the same situations due to some subjective internal factors. This makes generalization prone to error. Third, some qualitative aspects like the management of a company are not easy to describe and assess in terms of suitability. Their nature or effectiveness can only be inferred from the activities they engage in. This gives room for variance in expectations. Fifth, the data for the analysis is not readily available and the averages used are the best estimations (Doreen and Chris, 1999).

Conclusion

The main objective of this analysis was to make recommendations on the investment appropriateness of ANZ, Virgin Blue and Wesfarmers. The analysis of the three companies does not give a straight criterion for a conclusion on the appropriateness of any of them for investment. The qualitative analysis indicates that all the companies have performed poorly in 2009 although to different extents. The figures are mixed for ANZ and Wesfarmers. The PE, Dividend Yield and Current Ratio rule out Virgin Blue as a good investment due to the low return, and the high liquidity risk. The qualitative analysis shows that ANZ and Wesfarmers have robust plans for growth although ANZ and Virgin Blue are exposed to economic cycle vulnerabilities as they are not very much diversified into different industries. Investment theory states that past performance does not in any way indicate accurately what is likely to happen in the future when the investment is expected to be made (Boris and Cowan, 1989). However, prudence and statistical theories propose that the recent past performance is the best indicator of the likely future performance but with a possibility for variance. Given the qualitative aspects of the companies, the recommended company for investment is Wesfarmers. The reasons are as follows: First, the financial performance of the companies did not differ much in 2009 to allow for clear decision criteria. This being the case other factors have to be analyzed. The qualitative factors show that Wesfarmers is the most diversified of the three companies which is in line with the investment principle of diversification. The limitations however can not be ignored and close monitoring of the investments is recommended. The stock market offers a lot of liquidity and adjustments are easy to make. The fundamentals of the company show that it has room for expansion and innovation. The ranking of the companies, therefore, is Wesfarmers, ANZ and Virgin Blue from the best to the worst.

List of References

Altman, E. I. 1968, “ Financial ratios, discriminant analysis, and the prediction of corporate bankruptcy”, Journal of Finance, 23(4), 589–609.

Australian Bureau of Statistics 2001, ‘Measuring Australia’s foreign currency exposure’, Balance of payments and international investment position, cat. no. 5302.0, December quarter, pp 11-16.

Boris Popoff, T.K. Cowan, 1989, “Analysis and interpretation of financial statements “3rd ed. Butterworths, Sydney, Australia.

Buiter, W. 2006, ‘Dark matter or cold fusion?’, Goldman Sachs Global Economics Paper, no. 136.

Doreen McBarnet, Chris Whelan 1999, “Creative accounting and the crossed-eyed Javelin thrower”, J. Wiley, New York.

Pulsford, E. 1892, Notes on Capital and Finance in Australasia, Edward Dunlop & Co, Sydney. Reprinted from articles in the Sydney Morning Herald June 1892.

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