Tan How Ann-18871605-Miri CS PDF

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Case Study Berjaya Auto Berhad (KLSE: BJAUTO,5248)

Corporate Finance FNCE 3000 Name Tan How Ann

Student ID 18871605

Tutor’s Name: Mr Md Saifur Rahman Tutorial Day: Friday Tutorial Time: 10am – 11am

(3216 Words) Introduction

Berjaya Auto Berhad (BAuto) was incorporated in Malaysia since 11 May 2010. Before it was listed as public company, it was a private limited company which goes by the name of Fiscal Start Sdn Bhd. Later on 14 February 2011, Fiscal Start Sdn Bhd then change the company name to Berjaya Auto Sdn Bhd, on 11 July 2011, Berjaya Auto Sdn Bhd was successfully converted to public company and was listed in Malaysia stock exchange, Bursa Malaysia Main Market as stock symbol “BJAUTO”, stock code “5248” on the 18 November 2013. Berjaya Auto Berhad business is mainly on distribution and retailing Mazda vehicles in Malaysia. It also provides aftersales services and spare parts for Mazda vehicles that was sold in Malaysia via Bermaz Motor Sdn Bhd and Bermaz Motor Trading Sdn Bhd. Berjaya Auto Berhad headquarter was located in Shah Alam, Malaysia. 1 The company most significant subsidiaries recorded as 12 July 2016:2 Name of Subsidiaries

Equity holdings

Bermaz Motor Sdn Bhd

100%

Bermaz Motor Trading Sdn Bhd

100%

Bermaz Motor International Ltd

100%

Berjaya Auto Philippines Inc.

60%

Mazda Malaysia Sdn Bhd

30%

Inokom Corporation Sdn Bhd

29%

This report provides an overview of Berjaya Auto Berhad, as in shareholder analysis, a risk-return analysis and a decomposition of its cost of capital. ______________________ 1

“Company Overview of Berjaya Auto Berhad”, accessed on 22 August 2016,

http://www.bloomberg.com/Research/stocks/private/snapshot.asp?privcapId=216296059 2

“Annual Report 2016”, Berjaya Auto Bhd, accessed 22 August 2016,

http://www.bauto.com.my/images/annualreports/BAuto_AR_2016.pdf, 16

1.0 Shareholder Analysis

A marginal investor is defined as those investors that have certain level of education or knowledge regarding finance or stocks. Normally marginal investors in a firm are more likely to influence the share price of the company, they are the buyers and sellers of the company shares in the market. They usually own a lot of company shares and trade them on daily basis. Besides that, marginal investor also possesses significant of capital and time to invest in a well-diversified portfolio. Hence this part of the report will discover and profile the marginal investors of Berjaya Auto Bhd provided the top 20 shareholder list in the annual report 2016 of Berjaya Auto Bhd. Appendix A contain the table of top 20 investors of Berjaya Auto Bhd as of 12 July 2016.

The largest investor that was on the list as of 12 July 2016, is Maybank Nominees (Tempatan) Sdn Bhd. As recorded, Maybank Nominees (Tempatan) Sdn Bhd on behalf of Dynamic Milestone Sdn Bhd has brought 196,000,000 shares which is the total of 17.11% of the outstanding shares under nominees account.

Maybank Nominees (Tempatan) Sdn Bhd act as an asset management for its clients and is liable to hold the shares for it client which is Dynamic Milestone Sdn Bhd. As for anonymity purposes, it is unclear that Dynamic Milestone Sdn Bhd nature interest in Berjaya Auto Bhd. We can assume that Maybank Nominees (Tempatan) Sdn Bhd act as fund managers, which holds a certain number of shares under nominees account of various company on behalf of other individual shareholders. Fund managers usually holds a significant amount and diversified portfolio and make financial decision on behalf of underlying investors. We can then make an education assumption that Maybank Nominees (Tempatan) Sdn Bhd is a marginal investor.

The second largest investor that was on the list as of 12 July 2016 is Citigroup Nominees (Tempatan) Sdn Bhd. Citigroup Nominees (Tempatan) Sdn Bhd currently holding 82,870,240 of shares, which is 7.24% of the outstanding

shares. As stated above Citigroup Nominees (Tempatan) Sdn Bhd is similar to Maybank Nominees (Tempatan) Sdn Bhd, is act as a fund manager for its client and hold the shares of Berjaya Auto Bhd in a nominee account and make financial decision on behalf of the client. Citigroup Nominees (Tempatan) Sdn Bhd is one of the subsidiaries of Citigroup Nominees (Malaysia) Sdn Bhd3 which is under the subsidiaries of Citibank Berhad. 4 A nominees account is mean that shares that is legally owned by client are being held inside this account for easy transaction purposes. If any other client wishes to stay anonymous, the nominees account will then hide their identity from public record. One can assume that Citigroup Nominees (Tempatan) Sdn Bhd is a marginal investor to this company. Base on educational assumption, we can classify that these fund managers are welldiversified, they possess a large amount of fund and manage it with doing financial decision on behalf of the individual investors as individual investors are not well-diversified and they do not possess this much of fund and knowledge in order to make financial decision.

The remaining top 5 shareholders of Berjaya Auto Bhd are Amanahraya Trustees Berhad, Permodalan National Berhad, Kumpulan Wang Persaraan (Diperbadankan) which holds 5.95%, 3.70%, and 3.65% respectively.5 Although the amount or percentage that these 3 shareholders are not as large as the top 1 shareholder of this company, but they also can affect the market price, but not as significant effect as the top 1 shareholder. These three shareholders are also same as Maybank Nominees (Tempatan) Sdn Bhd and Citigroup Nominees (Tempatan) Sdn Bhd, they are institutional investors.

However, there is one individual shareholder in the top 20 shareholder of Berjaya Auto Bhd as per record 12 July 2016 which is Tunku Aminah Binti Tunku Ibrahim Ismail which holds 14,948,360 shares similar to 1.31% of the outstanding shares. As we can see that she is an individual investor who did not hold share on behalf of other investors. We can make education assumption that she is an insider of Berjaya Auto Bhd. Although she holds a

portion of the company shares and she is classified as an insider of the company, is said to have certain influential level on the share price. Other investors may assume that she is part of the management team and which her decision on buying or selling the company share definitely will affect the market share price.

_____________ 3

“Company Overview of Citigroup Nominees (Tempatan) Sdn Bhd”, assessed 22 Aug 2016,

http://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=212325289 4

“Company Overview of Citigroup Nominees (Malaysia) Sdn Bhd”, assessed 22 Aug 2016,

http://www.bloomberg.com/Research/stocks/private/snapshot.asp?privcapId=212323823 5

“Annual Report 2016”, Berjaya Auto Bhd, assessed 22 Aug 2016,

http://www.bauto.com.my/images/annualreports/BAuto_AR_2016.pdf, 82

2.0 Risk and Return Berjaya Auto Berhad encounter several risk during operation, for instance, foreign exchange risk, credit risk, interest rate risk, technology and recruitment risk.

2.1.1 Foreign Exchange Risk Berjaya Auto Berhad currently is retailing and distributing automotive from Mazda Motor Corporation, which is origin from Japan. All the retailing auto motor was imported from Japan; hence the price is exposed to fluctuating exchange rate which are not fix from time to time. Berjaya Auto Berhad and other subsidiaries are expose to this risk as well. Other subsidiaries that was based in other country which involve in transaction of different currencies. As a company that encounter foreign exchange risk, the company revenue will be affected negatively if the foreign currency rate is unfavorable to the company as the company convert the currency into home currency, vice versa. Foreign exchange risk can be eliminated through hedging by entering in to forward currency contract with the intermediaries.

Berjaya Auto Berhad entered into forward currency contract in order to eliminate this foreign currency risk. The forward currency contract allows Berjaya Auto Berhad to make payment after one month the commitment of purchase is made. The group policy stated that the terms of the forward contract has be negotiated in order to minimize the exposure of the foreign currency risk.6

__________________________ 6

“Annual Report 2016” Berjaya Auto Berhad, assessed 28 Aug 2016

http://www.bauto.com.my/images/annualreports/BAuto_AR_2016.pdf, 74

2.1.2 Credit Risk Credit risk is deriving from receivables of a company, which they purchase from the company with future cash flow.7 The company maybe lose what is being credited to the receivable. The receivables of Berjaya Auto Berhad usually are the authorized car dealers who have a large amount of payment to be made to Berjaya Auto Berhad as credit of purchasing the Mazda vehicles. Berjaya Auto Berhad group policy stated that those receivables will be put under monitors, as for those receivables that had significant balances that was past due of payment and more than 90 days, will be monitor individually. This is because, those past due receivables are deemed to have a higher credit risk towards the company. The risk management department, had taken steps to analyze these receivables in order to calculate their realized value. 8

_____________________ 7

“Credit Risk” Investopedia, assessed 28 Aug 2016,

http://www.investopedia.com/terms/c/creditrisk.asp 8

“Annual Report 2016” Berjaya Auto Berhad, assessed 28 Aug 2016,

http://www.bauto.com.my/images/annualreports/BAuto_AR_2016.pdf, 75

2.1.3 Interest Rate Risk Interest rate risk is a kind of market risk, which it affects the fix-incomed securities in the market. The interest rate will change from time to time, therefore sometimes it may be favorable to investors, sometimes it is not. For a company, the interest rate risk is the value of its future cash flows and the other financial instrument of that company. Berjaya Auto Berhad interest rate risk is the future cash flows and other interest bearing assets. Berjaya Auto Berhad manage this risk by deposits with the licensed financial institutions for the most favorable interest rate which will yield better returns than deposits in the bank. As time goes by, Berjaya Auto Berhad make deposits in short and long term. Besides that Berjaya Auto Berhad review its investment portfolio in order to capitalize cheaper funding in the low interest rate period and in the result, this strategy allows the company to achieve protection against interest rate hikes in the future. Berjaya Auto Berhad uses swap contract as well as other derivative instrument for speculation.9

_____________________ 9

“Annual Report 2016” Berjaya Auto Berhad, assessed 31 Aug 2016,

http://www.bauto.com.my/images/annualreports/BAuto_AR_2016.pdf, 73

2.2 The Return for the financial year 2015/2016 Berjaya Auto Berhad’s total stock return for the year financial year 2016 can be calculated using the following formula: Total Return=

Dividen Payment−(Final Share Price−Initial Share Price) Innitial Share Price

Appendix B indicates the share price of Berjaya Auto Berhad weekly closing price for the financial year 2015. Base on Appendix B the initial price of Berjaya Auto Berhad is RM 3.28 (1 January 2015), and the final closing price is RM 2.14 (28 December 2015). The capital gain of Berjaya Auto Berhad can be calculated with the following formula. Capital Gain=

¿

Final Share Price−InitialShare Price Innitial Share Price

RM 2.14− RM 3.28 RM 3.28

¿−34.76 % There was a capital loss of 34.76% for the financial year 2015 due to the stock price has decline throughout the year 2015. In the 2016 Annual Report, stated that there were dividends payout throughout 2016, the first interim dividend was paid at 21 October 2015 for 2.25 sen per share, second interim dividend was paid at 15 January 2016 for 2.50 sen per share and the third interim dividend was paid at 13 April 2016 for 2.15 sen per share. The dividend yield can be calculated as following: Dividen Yeild =

¿

First Dividend + Second Dividend+Third Dividend Initial Share Price

RM 0.129 RM 3.28

¿ 3.93 %

The dividend yield for the period is 21.03%

The total return provided by Berjaya Auto Berhad is calculated as following: Total Return=Dividend Yeild +Capital Gain ¿ 3.93+ (−34.76 )

¿−30.83 % Appendix D shows the adjusted closing value of FTSE Bursa Malaysia KLCI. To calculate the return on market for the period, the price is extract from FTSE KLCI for the year 2015. The initial closing value was 1752.77 (2 January 2015), and the final closing value is 1692.51 (28 December 2015). The return on market can be calculated as follow: Return on Market=

¿

Final Index Value−Initial Index Value Initial IndexValue

1692.51 −1752.77 1752.77

¿−3.44 %

Based on the calculation for return on market above, we can determine that Berjaya Auto Berhad is underperformed throughout year 2015. As the total return for Berjaya Auto Berhad shows a negative figure, -13.73 compare to the market return which is -3.44% due to economic recession.

Berjaya Auto Berhad Security Market Line 10 4.19 5 0 0 0 -5

0.2

0.4

0.6

0.8

0 -3.44-4.27 1 1.2

1.4

1.6

1.8

2

-10

ExPected Return

-15 -20 -25 -30.83

-30 -35

Beta

The graph above shows the Security Market line for Berjaya Auto Berhad. Base on Bursa Malaysia, the market has a beta of 1 and the government 10years bond indicate the market risk-free rate which is 4.19%. This indicate that the systematic risk of Berjaya Auto Berhad is 1.11 times that of the market. Capital Asset Pricing Model (CAPM) can be used to calculate Security Market Line. Security Market Line indicates the systematic risk and the market return in a certain financial period of the company. In the Security Market Line, the risk free rate lies on the beta (β) = 0 this means that the government bond is a risk free asset. The market portfolio which β=1, calculate that the market return is -3.44% and the total return for Berjaya Auto Berhad’s stock, using CAPM with the estimated beta of 1.11 is -4.27%. However, the real return of Berjaya Auto Berhad stock is –30.83% which is plotted under the expected return of the stock. Therefore, we can say that Berjaya Auto Berhad stock is overvalued as the investors are expecting higher return for same amount of risk. As comparison between the actual return and the expected return, Berjaya Auto Berhad is over perform provided this level of risk and the actual rate of return.

3.0 Cost of Capital Cost of capital is the cost of fund used to finance a company operation activities and other investment activities, or in other words, the required rate of return for investors.10 It also known as hurdle rate.11 Cost of capital is made up of a portion of debt and equity. The company can choose either to use debt to finance the company or equity or both. Thus the cost of capital can be calculated using Weighted Average Cost of Capital (WACC). 3.1 Cost of Equity 3.1.1 Capital Asset Pricing Model The Capital Asset Pricing Model (CAPM) formula as following: r e =r f +β (r m −r f ) The cost of equity is determined by risk-free rate, market risk premium and the beta for the stock return and the market return. Beta (β i) is also known as systematic risk, which are non-diversifiable. Therefore, there are return for investors who are willing to take on this risk on his or her investment. Based on Appendix E, the risk free rate r f

will be the 10-years Malaysian

Government Securities (MGS), which is 4.19% as at 31 December 2015. Risk-free rate is the required return for a risk free investment, for instance bond. Beta (β) indicates the market risk, also known as systematic risk. Based on Appendix F, beta is can be calculated by computing the covariance of Berjaya Auto Berhad weekly closing price and the FTSE KLCI return divided by the variance of market return. Thus, the calculated beta for Berjaya Auto Berhad is 1.11. _______________________ 10

“Cost of Capital” Investopedia, assessed 31 Aug 2016,

http://www.investopedia.com/terms/c/costofcapital.asp 11

Goh Elson, 2016, “Corporate Finance Lecture Week 2: Risk and Return” PowerPoint

lecture notes

Market risk premium ( r m −r f ) is calculate using market return minus riskfree rate, which is -7.63%. Market return is -3.44% and the risk-free rate is 4.19%. The cost of equity is calculated as follow: r e =r f +β (r m −r f ) r e =4.19+ 1.11(−7.63 ) r e =−4.27 %

The cost of equity, r e is a negative due to economy recession and the weaken Malaysia ringgit that cause the decrease in value. 3.1.2 Dividend Growth Model (DGM) Dividend Growth Model is used to determines the present value of a stock based on future dividend series with constant rate. The formula as follow: r e=

D1 +g P0

The formula shows that the cost of equity is calculated by using current dividend payment multiply by expected growth rate of the dividend, and divided by the final closing price of the financial year, as Berjaya Auto Berhad initial price for the financial year 2015 is RM 2.14. The total dividend payment is RM 0.129 as Berjaya Auto Berhad paid dividend 4 times per year. Appendix G shows the earnings per share, net income and total equity which has shown in Annual Report 2015. To calculate the expected growth rate ( g), the formula as follow must be taken with some variables: g= ( 1−Dividen Payout ratio ) × Return on Equity

(

g= 1−

)(

Dividend Payment Net Income × ' EPS Shareholde r s Equity

Based on Appendix G, g=(1−

210360000 0.129 )×( ) 0.1732 563014000

g=9.53 %

)

Figure of EPS and net income are extract from the Statement of Profit or Loss and other comprehensive income, and total equity is extract from Balance Sheet. Using DGM to calculate the cost of equity as follow: e=¿

¿

D 2015 ( 1+g ) P0 r¿

+g

0.129 (1+9.53 % ) + 9.53 % 2.14

¿ 16.13 %

3.1.3 Evaluation and comparison of CAPM and DGM Calculation for cost of equity using CAPM and DGM shows the different figure. Using CAPM method, it gives -4.27% meanwhile using DGM it gives 16.13%, there is a different of 11.86%. In theory using both of these methods are correct, however in reality there is always some error or inaccurately of calculation. Reviewing both calculation, CAPM is more suitable for Berjaya Auto Berhad because Dividend Growth Model required a constant growth of dividend payout, and Berjaya Auto Berhad paid 4 times per year and an additional special dividend, which the amount is not consistent. However, using CAPM might not be accurate as the stock price might be misprice from time to time being, therefore, CAPM can be use just as guidance for investors but not to ensure a safe investment for investors. For risk free rate, using short-term government bond may not result in accurate figure. This is due to the change of value on daily basis and it depends on the economy day to day performance. 12 As for beta, the figure that was calculated might not be accurate as well, there might be uncertainty rises which will affect the beta from time to time. Therefore, the figure of beta was calculated based on estimation. CAPM and DG...