The global financial market
2008 was a trying year when the global financial market and subsequent recessionary conditions put Singapore property markets under pressure and led to a loss of confidence among property buyers and investors. However, the property market regained strongly from April 2009. For Sim Lian Group, they remained steadfast to their strategy of staying flexible and paying close attention to what their customers want. As the result, their total revenue improved over the last financial year. Group's standing is reflected in their broad portfolio of development today, embracing both freehold condominiums in prime district as well as public housing. Currently, the Group's two core activities are highly synergetic property development and construction. Thus, the Group offers greater value to its customers by being a well-rounded business entity.
2. ANALYSIS OF SIM LIAN'S PERFORMANCE
The Group saw in an increase of 48% in revenue for FY2009. It was $575.5 million, compared to $389.6 million for FY2008. However, in spite of this substantial increase in revenue, the overall profit for the Group before income tax decreased by 11% from $59.9 million in FY2008 to $53.6 million in FY2009. It is due to a decline in other operating income, as well as foreseeable losses for a development project. The Group's net profit attributable to equity holders of the company is only $38.7 million, a decrease of 12% compared to FY2008. Two figures in below highlight clearly the trend of revenue and profit fom 2005 to 2009 (according to Sim Lian annual report 2009).
Basic and diluted earnings per share are 6.8 cents for FY2009. It declines by 13%, compared to 7.8 cents for FY2008 because of the decrease of 14% in profit after income tax for FY2009 (according to Sim Lian annual report 2009).
2.1 Financial aspects
GPM of Sim Lian went down slightly, from 0.17 in 2008 to 0.151 in 2009. It is due to in 2009, the company paid too much for contract cost which was more than in 2008, about $170 million in spite of the substantial increase of 48% in revenue in 2009. Additionally, the slight proportion of operating profit between 2008 and 2009 also attributed to create OPM ratio in 2009 which was 0.09, lower than 0.126 in 2008. Moreover, the profit before income tax declined, compared to FY2008, led to NPM (before tax) decrease from 0.154 to 0.093, that following as was the decline of NPM (after tax) from 0.118 to 0.069 between 2008 and 2009. It means for Sim Lian, every $1 in revenue makes out 6.9 cents profit for 2009.
ROTA in 2009 was 0.044, a little bit lower than 0.046 in 2008. It presents that in 2009 the company gains 4.4 cents profit per $1 they invest in their assets. Similarly, the investors would receive the lower ROE in 2009, compared to 2008. It indicated every $1 shareholders invested, their return was 0.183. However, ROE was much higher than ROTA in both years. It was resulted that the company's efficiency of using the bank loan enlarged ROE.
TA turnover in 2009 was twice more than in 2008. It was 0.637 in 2009 and 0.391 in 2008. It indicated that Group's ability to deploy their assets was more efficient. They could control their assets and match the level of sales achieved.
The slight reduction of Net working Capital about $27 million from $684 million in 2008 to $657 million in 2009 signified that Group had excess current assets in 2009 less than 2008. However, current ratio indicated Group's liquidity position in 2009 was healthier than 2008. It meant Group would be willing to pay any debts, in fact, in 2009, Group had $4.21 current assets to guarantee $1 for the short-term debts. Similarly, Group had the high quick ratio which was 4.2 in 2009 and 3.5 in 2008.
Gearing ratio declined from 0.81 in 2007 to 0.757 in 2009 but in both years, this ratio was less than one. It meant Group had more assets than debts and promoted in use total liabilities as a necessary leverage in the development. Moreover, Times Interest Earned in 2009 was 22.68 times, only one fourth of 2008 that was 88.7 times. It is due to interest expenses in 2009 went up dramatically. However, Group still promoted their interesting paying capacity of their business by their operating profit.
Credit sales and Accounts receivable:
Trade Debtors Turnover in 2009 was 5.44. It was a little bit higher than in 2008. This ratio indicated that the trade debtors turnover about 5.44 times in 2009. It meant the period to collect their payments was 67 days. It stood at 72 days in 2008. Group should keep their collection period as short as possible.
Inventory turnover grew up shapely from 163.19 in 2008 to 226.62 times in 2009. According to this result, Group's inventories would be sold out about 227 times during 2009, and the age of inventory was about 2 days per cycle.
Credit purchase and Accounts payable
Trade creditors turnover went up about twice, from 5.64 in 2008 to 11.26 in 2009. As the result, the creditors' payment period was 32 days in 2009 and 65 days in 2008. It meant in 2009, Group did not taking the full advantage of credit facilities allowed by the creditors and had to pay in 32 days.
v Cash conversion cycle/Working capital Cycle: the duration of time that takes Group to convert their activities requiring cash back into cash returns was 37 days for 2009 and 9 days for 2008. It showed Group's ability to manage their working capital, it meant Group sold their inventories and collected their receivables before paying their payables even though in 2009, there had a sign that Group might be facing a cash flow crunch more than 2008.
2.1.5 Stock market
EPS of Group was 6.8 cents in 2009 and 7.8 cents in 2008.
Dividend per share was 0.014 for 2009 and 0.016 for 2008.
Market price in 2008 was 0.29 and 0.45 in 2009.
Price earning ratio in 2009 was 0.066, twice more than 2008. It showed that the price of Group was sold more than current earning was 0.066 times for 2009.
Dividend yield indicated that Group's dividend kept 3.1% of market price in 2009, and 5.5% in 2008.
Dividend cover in both years was the same at 49 times, it meant Group's profit attributable to shareholders was about 49 times the mount of dividend paid out.
2.2 Non-financial aspects:
- Out look of economy: The global financial crisis and subsequent recessionary conditions led to a loss of confidence among property buyers and investors. However, the Singapore property market grew strongly from April 2009. Thus, driven by expectations that home prices may rise again after a long period of correction, buyers are once again entering the market in good numbers. It creates many opportunities for Group to gain their huge number of new homes sold and improve revenue.
- Group's innovative productions: In property development, Group's blueprint for growth has fused their strong industry experience with innovative solutions. As the result, Group leveraged successfully on this strategy to achieve higher customer satisfaction. Besides, Group remained their strategy of staying flexible and paying close heed to what their customers want. This supported them well and allowing them to minimize their exposure to the chaos. Also, Group creates innovative, quality at affordable prices.
- Architectures: Group focuses on convenient developments with a clean architectural design and contemporary styling in their landscaping. Also, to cater to the demands of today's market, Group creates efficient features and functional layouts in their apartments.
- Experienced management: also is another important competitive strength which decides the Group success.
- Group's future opportunities: Group is encouraged by recent heartening signs in the property market while the global economic situation remains uncertain. The local residential property market is enjoying a revival as indicated and reflected in high sale rates of their recent developments. In addition, the mass market will be a market segments that hold more opportunities.
3. RISK MANAGEMENT
1. Interest risk:
The Group's exposure to interest risk relates primarily to fixed deposits and debt obligations.
2. Foreign exchange risk:
The Group's exposure to foreign currency risk is minimal as Group transacts primarily in SGD. It is exposed to foreign exchange risk arising from deposits denominated in foreign currencies.
-The Group manages interest cost by using a mixture of fixed and variable rate debts.
-The Group may enter into interest rate swaps from floating rates to fixed rates from time to time to manage its exposures to interest rate risk.
Group can use derivative financial instruments to manage foreign currency risk.
-The Group has no significant concentration of credit risk because the Group's principal financial assets are bank balances and cash, trade and other receivables.
-The Group's exposure to credit risk on receivables arising from the sale of condominium.
-The Group carries out construction work for public and private sectors.
-The Group monitors its potential losses on credit extended. Rent deposits are received as security from tenants of its investment properties. Cash and fixes deposits are held with creditworthy financial institutions.
The Group finances its liquidity through internally generated cash flows.
The Group maintains sufficient cash and cash equivalents, and internally generated cash flows to finance its activities and minimizes liquidity risk by keeping committed credit line available.
The capital structure of the Group consists of debt, which includes the borrowings, cash and cash equivalents, and equity attributable to equity holders of the Company.
-The Group should manage its capital while maximising the return to stakeholders through the optimization of the debt and equity balance (the payment of dividends and new share issues as well as the existing debt).
4. SIM LIAN'S COST OF EQUITY AND GROWTH RATE
4.1 Evaluation of beta coefficient:
The period time: from 5 October 2009 to 16 November 2009 (30 working days).
Expected return: 0.002
Standard devi: 0.05
Beta: 0.512. The positive beta means the stock's changes would follow the market's changes. It indicates that the stock of Group would move up 0.512% as the market goes up 1% or the stock is only half as volatile as the market.
4.2 The cost of equity:
According to: Beta = 0.512
krf = 1.625% (the risk free rate - the lowest of government bonds rate)
km = 9.62% (the expected rate of return on the market portfolio)
The expected return of Sim Lian's security is determined:
4.3 The growth rate:
ROE = 18.3%
DPS = $0.014
EPS = $0.68
The growth rate Group can be calculated:
It indicated every $1 shareholders invested, their return was 0.183. However, ROE was much higher than ROTA in both years. It was resulted that the company's efficiency of using the bank loan enlarged ROE. Thus, investors can believe in the stable development of Group.
EPS is worth for investors to invest into Group's ordinary shares.
p/e : shareholder paid .... to earn $1 per share. Therefore, shareholder can buy option ordinary share and pay more money with hopefully group will have good news to increase more the market price.
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