OBU- RAP - Oxford Brookes University Research and Analysis Project PDF

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Oxford Brookes University Research and Analysis Project...

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Oxford Brookes University

Research and Analysis Project

OXFORD BROOKES UNIVERSITY

TOPIC 8 THE BUSINESS AND FINANCIAL PERFORMANCE OF STARHILL REAL ESTATE INVESTMENT TRUST OVER A THREE YEARS PERIOD

Being a Research and Analysis Project submitted in partial fulfillment for the degree of BSc (HONOURS) IN APPLIED ACCOUNTING (6499 words)

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Oxford Brookes University

Research and Analysis Project

TABLE OF CONTENT

TOPIC / SECTION PART 1 - PROJECT OBJECTIVES AND OVERALL RESEARCH APPROACH

Page Number 3

1.1 Topic context

3

1.2 Organization profile

4

1.3 Reason for choosing the topic

4

1.4 Reason for choosing the organization

5

1.5 Project objectives and research questions

6

1.6 Overall research approach

6

PART 2-INFORMATION GATHERING AND ACCOUNTING/ BUSINESS TECHNIQUES

7

2.1 Sources of information

7

2.2 Methods used to collect data

8

2.3 Limitations of information gathering 2.4 Ethical issues 2.5 Accounting/ Business techniques used

9 - 10 10 11 - 12

PART 3- RESULTS, ANALYSIS, CONCLUSIONS AND RECOMMENDATIONS 3.1 Analysis of financial performance

13

13

3.1.1

Profitability Ratios

13 - 18

3.1.2

Liquidity Ratio

19 - 23

3.1.3

Gearing Ratios

23 - 24

3.1.4

Shareholders’ investment ratio

24 - 25

3.1.5

Competitor analysis

26 - 30

3.2 Analysis of business performance

31

3.2.1

Threats of New Entrants

3.2.2

Threats of Substitute

32

3.2.3

Bargaining Power of Supplier

33

3.2.4

Bargaining Power of Buyers

34

3.2.5

Intensity of Rivalry

34

3.3 Conclusion and Recommendation

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31 - 32

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Oxford Brookes University

Research and Analysis Project

PART 1- Project Objectives and Overall Research Approach The topic chosen for this research project is topic 8 titled “The Analysis and Evaluation of the Business and Financial Performance of An Organization over a Three Year Period.” The company targeted for this research project is Starhill REIT (Stareit).

Real Estates Investment Trusts (REITs) was founded in 1960. It became popular when large number of real estate companies went public in 1990 (Verma, 2000). However, Asian REITs was first started in 2001 by Japan before Singapore, Hong Kong and Malaysia follow suit (New Straits Times Online, 2012). REITs have been increasing in demand among investors since then.

As most investor would like to diversify their investment, this applies to real estate’s investors as well. However, it seems to be impossible for them to invest in a diversified portfolio due to limited resources i.e. cash. The advent of REITs industry makes it possible for the investor to diversify their investment in real estate as REITs pool funds from investors to invest in a diversified real estate portfolio. REIT also allows investor to invest in different countries (Whiting, 2007).

1.1

Topic Context

Financial statement is prepared to allow the user to obtain information like financial position, profitability, investing and financing activities of a particular company (The Arbor Investment Planner, n.d.). This will help to avoid information asymmetry. Non-financial ratio such as trend analysis and financial ratio such as liquidity ratio, gearing ratio etc can also be obtained. This helps the shareholders to make sound decisions i.e. whether to invest in the company.

Besides, performance of a company can be analysed by using the SWOT analysis, Porter’s Five Forces, PESTEL etc.

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1.2

Research and Analysis Project

Organisational Profile

The Stareit was established on 18 November 2005 and was listed on the Main Market of Bursa Malaysia Securities Berhad on 16 December 2005 as the largest REIT. However, it was not able to maintain the title even though Stareit owned properties in the golden triangle which is the main shopping and entertainment district of Kuala Lumpur (KL), Malaysia (Voyage99.com, n.d.). (Starhill REIT, 2012)

1.3

Reason For Choosing The Topic

Being a student, knowledge acquired should not only be applied in the exam hall but also being able to apply in real life situation. Knowledge learned from the F7 Financial Reporting and P3 Business Analysis can be used to analyse and to evaluate the business and financial performance. For example, to enable one to make wise decision before investing in a company in order to lower their risks exposure to suit their risk appetite. Therefore, by doing this research topic, it will help one to apply the knowledge learned in his further studies or future working life. Furthermore, this topic allows one to obtain information easily. Information regarding a company’s financial position can be easily obtained due to the availability of secondary information. Considering the targeted company is a listed company, information such as company’s annual report can be easily found through internet. Thus, primary information such as interview with the employees can be avoided. Lastly, this topic is chosen due to personal interest. By choosing this topic, one is able to understand more about the financial standing of an organisation. For instance, it will enable one to develop skill to learn about the company future condition i.e. stability of the company.

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1.4

Research and Analysis Project

Reason For Choosing The Organisation

Stareit was chosen as there were many personal encounters that occurred with this company. This will help one familiarise with the industry easily. A family member who was formerly an employee of YTL Corporation Berhad, who launched the Stareit, provided the opportunity to visit some of the above properties owned by the entity which mostly five star rated hotels that are higher rating than its competitors. Those visits are contributing factors to my interest in Stareit. Furthermore, most of the companies exist due to trading activities. However, Stareit is involved in an industry which is unlike the norm. This had triggers one’s curiosity. Lastly, this industry is seldom the choice for the students in Malaysia for this project. This might be due to lack of exposure to this industry as Malaysia REITs (MREITs) has a short history as it was launched in year 2005 (The Star Online Business, 2009). Despite with the help of prevailing regulations that have been accommodative for the expansion of MREITs industry, MREITs is still in the growing phase and relatively small in comparison to Singapore REIT (The Star Online Business, 2012). Therefore, in order to find out more about this industry, it will be more practical if one is able to perform analysis upon it.

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1.5

Research and Analysis Project

Project Objectives and Research Question

The project objectives identified are shown below: I.

To perform an analysis of Stareit’s financial performance over a three-year period, i.e. Years 2010 to 2012, using appropriate ratios.

II.

To evaluate and analyse the business performance of Stareit.

III.

To compare Stareit’s performance with its competitor (AmFirst REIT).

The research questions identified are shown below:

1.6

I.

What has Stareit’s financial performance been like over the 3 year period?

II.

How was Stareit’s business performance using Porter’s Five Forces?

III.

How was Stareit’s performance as compared to its competitor?

Overall Research Approach Knowing the Topic and Targetted Company Identify Project Objectivity

Identify Research Questions

Collection of Information Qualitative

Quantitative

Research Approach Qualitative Research Method

Quantitative Research Method

First, one should have a targeted company and a chosen topic before any research can be carried out. Next, one shall also identify the project objectivity and research questions. Collection of information is an important step before moving on to the next step which is the research approach. Research approach is done by using both qualitative research and quantitative research methods. Quantitative research method is a numeric analysis (Crossman, n.d.). This is done by using financial ratios. Qualitative research method is done by using Porter's Five Forces Model which will help to achieve objective 2, stated in 1.5 (ii) above.

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Research and Analysis Project

PART 2- INFORMATION GATHERING AND ACCOUNTING/ BUSINESS TECHNIQUES

2.1

Sources of information

Generally, information can be divided into two categories. The key issues to categorise the information is the nature of the records and the origin of the information in the record (Progenealogists, n.d.).

Primary Information Primary information is information that was recorded at the time the event occurred (Progenealogists, n.d.). It is done by someone who is associated with the event (Calstatela, 2008). It is also known as first-hand information (Holmdelschools, n.d.). Some examples of these sources of information are autobiographies, diaries, records, letters, original works of music such as lyrics and etc.

Usually this category of information is limited as it is difficult to obtain. Thus, a higher cost will be associated to obtain primary information. Therefore, primary information is not utilised in this research project due to its nature and higher cost associated.

Secondary information Secondary information is information that was recorded sometime after the event occurred by someone who is not associated with the event (Progenealogists, n.d.). It is also known as second-hand information (Holmdelschools, n.d.). For instance, article, biographies, dictionaries, textbooks etc.

Since Stareit is a listed company, there will be plenty of secondary information available for this research project. Secondary information used in this project is information available in the internet such as corporate website, organisational annual report, reference books, newspapers etc. This will allow one to save time and cost.

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2.2

Research and Analysis Project

Methods used to collect information

Methods used to collect information regarding Stareit are based on the followings:

Library Research As a student of Sunway University College, I am able to enjoy the library facilities provided. The provision of Tun Hussein Onn Library (THOL) allows one to easily gain access to the information needed. One shall benefit from the amount of information available in the library. This includes reference books, textbook, thesis, newspaper etc. Besides, THOL also provides e-books to the user which is beneficial to the user as it is available at any time.

Electronic Research Due to the advancement of technology, one should also be able to obtained information from the internet. One is able to gather information conveniently as the internet is available widely throughout the world whether at home, at school or in the public.

Search engines available in the internet come in handy too. Any information required can be gathered in the shortest possible time.

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2.3

Research and Analysis Project

Limitation of information gathering

In this modern times, information can be found floating everywhere especially after the invention of internet. Students can now gather information at the tip of their hand. However, one shall be aware that there are limitations of information gathering. Limitation one encountered during the gather of information for this project shall include the followings:

Reliability of information As mentioned in 2.1, the sources of information can be categorised into primary and secondary sources. One of the differences of these two sources of information is the reliability of information. Primary information is more reliable as compared to secondary information as primary information is gathered by the intender user and hence is within his control. Bearing in mind that most of the information gathered comprised mostly of secondary information. Hence, some of the information for this RAP may not be reliable. This is due to the reason that information might be filtered or misinterpreted by the producer of information as secondary information is recorded sometime after the incident. This tends to lead to wrong information being provided to the user. However, the information gathered for this Rap of mine can be considered as reliable as they were audited factual financial results published by the companies concerned for public consumption.

Biasness Different people may interpret the same ratio differently (Accounting For Management, n.d.). This may result in some articles appearing to be bias or in favour of a particular organisation if it is influenced by the personal thoughts, experience or even feelings of the author. The will eventually lead to the user of the information being misled.

Insufficient disclosure Insufficient disclosure of notes to financial statements had been a limitation during the gathering process that resulted in some information not available publicly.

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Research and Analysis Project

Purchase Requirement Some of the information available in the internet requires one to purchase before he or she is entitled to access to it. For example, e-book available in the internet required one to purchase the book before one can have access to it.

2.4

Ethical issues

When conducting research project, one might encounter with ethical issues. These ethical issues are stated as follow: Plagiarism “Plagiarism” originates from Latin from the word “plagiarius”, which has the meaning of “kidnapper”. Plagiarism is defined as the practice of taking other’s people works or ideas and passing them off as theirs (The Guardian, 2005). One of the brilliant quotes related to plagiarism is “Immature poets imitate; mature poets steal.” (Eliot, 1960). It is important for us as a student to avoid plagiarism. If everyone is to plagiarise, there will be no uniqueness in researches. A research project is given to students to enhance their knowledge meanwhile to enable them to express their thoughts. As a result, when doing a research, proper referencing work should be provided. This can avoid one of being accused of plagiarism. Objectivity One the fundamental principles provided by ACCA rulebook is objectivity. It is defined as “should not allow bias, conflicts of interest or undue influence of others to override professional or business judgements” (ACCA, 2011). Objectivity is a state of mind. However, in some situation, preservation of objectivity can be shown by maintenance of independence from influences which could impair objectivity (BPP Learning Media, 2009). As a student of ACCA, we are required to observe objectivity. This is to ensure biasness or favouritism are avoided. For instance, one should not neglect information that is not favourable to the targeted company due to the reason he or she is interested in the particular company.

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Oxford Brookes University

2.5

Research and Analysis Project

Accounting and business techniques

Accounting Techniques The accounting techniques used in this research project is financial ratio analysis. The financial ratios used in this project were shown as the followings: i.

Liquidity ratios

Company liquidity will determine whether the company can meet its obligations for current liabilities in the short run (Friedlob and Schleifer, 2003). ii.

Profitability ratios This is a ratios measures the success of firm at generating profits.

iii.

Gearing ratios This ratios provide an indication of the long-term solvency of the firm.

iv.

Investment valuation ratios This ratios helps the investor to assess the performance of a business as an investment. (NetMBA, n.d.)

However, there are some limitations associated with financial ratios. This includes: i.

Experience of the analyst Although many of us are able to generate the list of financial ratios, experience plays an important role. An inexperienced analyst might not be able to link the outcome. This can be demonstrated by an inexperience analyst who is unable to explain the increase in gross profit margin. Other sources of data should also be taken into consideration when one is making judgement about an organisation (Accounting For Management, n.d.).

ii.

Limitation of single used ratio A single ratio does not help the analyst to conclude anything as it hardly contains any information on its own (Accounting For Management, n.d.). It will only be useful if a set of ratios is being calculated and compared against industry average or competitor.

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Oxford Brookes University

Research and Analysis Project

Business Techniques The business model used to analyse Stareit's business performance in this research project is Porter’s Five Forces. Porter’s five forces framework was established as a way of assessing the attractiveness of an industry in terms of five competitive forces which comprise of threat of new entrants, threat of substitutes, bargaining power of suppliers, bargaining power of buyers and the extent of rivalry between competitors. This business model will help one to identify the company position by understanding how the competition changes within and around the industry. It is noted by Porter that when these five forces are high, the industries are not attractive to compete in. Porter’s Five Forces model can be illustrated through the figure as shown below. (Johnson and Scholes et al., 2011)

Threats of New Entrants

Bargaining Power of Buyers

Rivalry Among Existing Competitors

Bargaining Power of Suppliers

Threats of Substitutio n

Figure 1: The Five Forces That Shape Industry Competition. Limitations of Porter's Five Forces However, one shall be noted that there are limitations associated with this business model. One of the limitations is that this model is only applicable for an industry level analysis and it is not applicable to be used for an analysis of an industry sector. For instance, pharmaceuticals may be considered one industry and bio-technology another even though they both belong to the Life Sciences industry sector.

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Oxford Brookes University

Research and Analysis Project

PART 3- Result, Analysis, Conclusions and Recommendations This part of this research ...