Finance Assignment: Is Cleanway An Attractive Investment Opportunity?
As a financial analyst you have been asked to analyses an ASX listed company. The company is one of your choosing. Your task is to make a recommendation as to whether this company is an attractive investment opportunity. Before you draw a conclusion, you are required to address the following questions in the finance assignment:
1) Discuss how successful the company has been at maximizing stakeholder’s value over a set analysis period. This period may be 12 months, 2 years, or 5 years.
2) Analyse the company's share price history and traded volumes over the chosen analysis period.
3) Calculate the return for investing in the company both short term and long term and identify the main causes of its volatility in return over the corresponding holding period. The discussion of volatility should consider economic-wide and firm-specific factors.
4) Apply the valuation technique(s) taught in this course and undertake a current valuation of the equity for your company. Based on your calculation, would you recommend a prospective investor to buy, hold or sell this security and why?
5) Analyse the company's dividend policy. Should the company follow a progressive dividend policy? Critically evaluate factors that are affecting corporate dividend policy and how your company's dividend policy may have influenced its capital structure and share price.
6) Analyse the company's capital structure. How would you describe the current capital structure for your company and justify with reasons that should potential investors view this company as a favourable investment choice?
Based on the attempt to all of above questions conclude whether your company is an attractive investment opportunity. You should clearly explain your assumptions used in the valuations and estimations and critical discuss the limitations of your analysis and any other risks that may affect investors' decision making
The business organization selected in the present context of finance assignment is Cleanway which is one of the largest companies in Australia referred as a “waste management company” and is successfully listed on the ASX. Cleanway Company was founded in the year 1979, headquartered in Melbourne, Australia. The company has employed more than 6000 employees working across Australia. They have more than 300 branches across the nation. The company is not only delivering their solution and support to the customers but also working for the communities as well. The company also provides facilities such as transfer stations, refineries and liquid treatments too. They also cater its business with small to large commercial organisations across different range of industries nationwide.
Audits on waste and workshop on education promotes an opportunity that can show how much recycling can be done with the waste. As per the sustainability report the financial and the operational performance of the company has resulted into a strong positive growth by allowing increasing the share paid to the shareholders. From the reports of the year 2019 reviewed in this segment of finance assignment, it can be seen that the growth of share percentage has increased considerably of 37.5% from 1.40 cents (Bierman Jr, 2010). Overall there is a total increase of 40% share as compared to last 1 year. For the last 5 years the company is striving hard to become a great company by implementing various strategies and taking measurable significant steps to achieve strong growth in all the business segments. The major key to the success of this company is a positive work culture and strategic planning that is fostered by the company regularly. For the past 5 years Cleanway has managed to become one of the biggest market leaders across the country in every sector.
Last year a new strategy was implemented to maximize the shareholders is introducing "Toxfree" a business solution to enhance the total offerings of the waste management of the company.
In the year 2019 a discipline of free cash flow has been viewed as a highly managed waste management company. In the same year the percentage of free cash flow has increased achieving a rate of 76.4%.
Waste value chain was also optimized in the same year as a strategy to focus on the recovery of the resources (Coles, Lemmon & Meschke, 2012).
While losing any share or stock you can maximum lose the share up to 100%. But if you choose a company which is really flourishing in the market the risk is bit less because there is a chance to earn more than 100%. Cleanway is a company that is really progressing with each year in the market of share price. For the last 5 year the company has reached 136% in less than half of the time of their company.
But the share prices do not reflect its value in the company's business every time. To examine the market sentiment it is important to know the interaction between the share price of the company and the earning per share or EPS of that company. During the past 5 years the company has increased its profitability share in the market. The profitability sign indicates the company's earnings growth of the company and towards a strong gain in share prices. But the company was not making profits before 5 years ago; it has started making extra profits for the last 3 years respectively. The share price of the company was 73% in the last 3 years and EPS grows up to 29% per year. The earnings and revenue trends are the two most important factors to check the interactive graph of the Cleanway Company.
The TSR of the company for the last 5 years has been noted as 163% which is much better than the return of the share prices as discussed above. The shareholders return was boosted by the dividends of the company. For the last 1 year the TSR was noted to be of 24 % , which falls short in the market. The average annual return report of the company undertaken to prepare this finance assignment shows that the company is improving overtime to gain insight in the future (Ekpo et al. 2017).
The expected volatility of the company depends on the historic volatility of the company shares for a period of time. There are two types of share based payments; one is “short-term incentive plan” and “Toxfree Integration incentive plan”.
Short term incentive plan or STI is used as a reward to motivate the senior executives for a range of measures for their performance throughout the financial year. If the performance needs are met, then EBITDA is used to enhance the performance standard for this plan.
Toxfree Integration incentive plan or TII is used to focus on the synergy benefits of the company in terms of acquisition and performance in the financial market.
The balance sheet data attached below within this finance assignment gives the information of the financial position of the company or a summary of the financial condition of the company. The consolidated balance sheet was recognized by adjusting the remediation of both the asset and the provisions. Tax losses, capital losses and any temporary differences are also identified in the balance sheet (Gitman, Juchau & Flanagan, 2015). Based on the period evaluations asset revaluation is also included in the balance sheet for further financial information.
The above figure shows the cash flow of the company for the last five years and gives the value of net operating cash value for the year 2020. This shows the movement of money for the last 5 years is paid to the creditors either in cash or in cash equivalents. It also helps to understand the amount of money coming and flowing out of the business (Lusztig & Schwab, 2014). It can be concluded that the rate of cash flow has increased considerably starting from the year 2016 till 2020.
The causes of market volatility can be resulted from the imbalances of trade or economic releases often in one direction. High rate of volatility means the price of stock is moving a lot. For a long term opportunities volatility is good because it will develop opportunities for the traders in the market. There are certain strategies implemented to deal with the market volatility such as investing regularly, thoroughly maintaining a diversified portfolio and by staying focused to align the portfolios to expect a huge returns from the stocks invested.
The valuation technique in a company is adopted to use in the appropriate situations and to measure the fair value from the sufficient data available in the market. The technique also increases the use of observable inputs and reduces the uses of unobservable inputs. Valuation techniques can be done by following three levels-
- Level 1 – used for identical values of assets and liabilities in the active market as “Quoted market price”
- Level 2- The lowest observable input is used which is directly or indirectly observed in the active market.
- Level 3- The lowest observable input which is directly observable for a fair value measurement available in the market.
Different company applies different valuation techniques during the evaluation methods. Commonly used techniques in valuation are DCF analysis, comparative analysis, and precedent transactions analysis. From the above diagram the approach techniques of any business is broadly classified. In this company DCF analysis is followed and simultaneously accounted the technique in two stages. For the higher growth period first stage is applied that leads towards a terminal value. To evaluate the first stage as mentioned in this finance assignment we need to calculate the estimate cash flow value of the last ten years, if possible analyst estimates can also be used. This is done to show the trends in the early years generally. After getting the value of the future cash flow, we can calculate the terminal value for all the future cash flows by providing a certain discount to the cost of equity (Schlegel, 2015). Three fundamental aspects should be looked at before valuation such as financial health of the company, future earnings and any other quality alternatives if present. Therefore, by judging the above conditions of the company, it can be stated that an investor should invest in this security class.
Dividends are generally paid out of the income earned by the company. If a company pays more than how much it earns will give a higher dividends minimizing the market risk of the company. From the reports of the last year it has been found that the Cleanway Company has shared a dividend of 59% to their investors, which is usually a normal payout for most of the businesses. The positive aspect of the Cleanway Company is that it has managed to cover its contribution to the investors from the profits earned and through the cash flow. This sign marks for the sustainable dividend in the market.
A progressive dividend policy means with the increase in the earnings of per share, there should be an increase in the percentage of dividend as well. In this situation, if however the earnings share is reduced, the dividend share will not be reduced. For the above reasons it is important for a company to follow a progressive dividend policy to achieve a stable dividend policy.
Factors affecting the corporate dividend policy decisions are Taxation- where investors are mainly concerned on the after tax returns associated with their part of investment. Other factor is issues with the floating cost when issuing equity. It is difficult for a company to pay a dividend rather than reinvestment of the earnings for a company.
Cleanway has created a solid foundation for the growth in the business and to increase their dividend policy by 2025 through delivering short term and midterm commitments for the future growth of the company.
CENTS PER SHARE - 2019 2018
Dividends paid during the period 1.40 1.10
Final dividend relating to prior period 1.65 1.10
Interim dividend relating to current period 3.05 2.20
Dividends determined in respect of the period 1.65 1.10
Interim dividend relating to current period 1.90 1.40
Final dividend relating to current period 3.55 2.50
It is mentioned herein finance assignment that capital structure of a company gives the value of all the debts and equities that are used by the company to continue its operations in the market. A low sign of debt and high level of equity shows a healthy investment quality in the market. The capital structure of a company can be studied by using the balance sheet. The capital structure managed by the company is a mix of various funding options available to manage the risks of any equity.
The gearing ratio of the Group at reporting date was as follows:
For the year 2019 –
Current interest-bearing liabilities - 17.1
Non-current interest-bearing liabilities - 697.6
Less cash and cash equivalents- (56.2)
Net debt- 658.5
Total equity- 2,580.5
Gearing ratio - 20.3%
It is seen in this finance assignment that investors may have more than one objective to invest in a company and find a right balance in achieving their worthy goals. There is no complete safe and any secure investment thing in a business, but you can get bit closer to this thing (Sheikh & Wang, 2011). By studying the capital structure of the Cleanway Company the investors could in some extent risk their money as a part of investment to earn more either in short term or in midterm investment.
From the study and discussion of the above report on finance assignment it can be concluded that for the investors the company will be an attractive investment opportunity to expect any investments returns from the stocks of the company. For a fast growing company it is very helpful for the investors to invest in a hope to expect the return in a short period of time. In this type of market there is an ease to sell the stock at any favorable time that means there is liquidity in the structure of the market which they have adopted. It means you can convert your shares quickly at less transaction costs. But there are certain disadvantages or risks involved for the investors. If the company runs poorly at any point of time, your entire investment can be lost too. Other disadvantage involved in this type of market situation is the professional competition. Use of advanced trading tools and financial models can create a higher rate of competition in the market, with the increased risk of investments in the market.
Bierman Jr, H. (2010). Introduction to accounting and managerial finance, an: a merger of equals. World Scientific. Retrieved from: http://digilib.stiem.ac.id:8080/xmlui/bitstream/handle/123456789/100/An%20Introduction%20to%20Accounting %20and%20Managerial%20Finance.pdf?sequence=1&isAllowed=y
Coles, J. L., Lemmon, M. L., & Meschke, J. F. (2012). Structural models and endogeneity in corporate finance: The link between managerial ownership and corporate performance. Journal of financial economics, 103(1), 149-168. Retrieved from: https://kuscholarworks.ku.edu/bitstream/handle/1808/8769/Meschke_2012_Structural-Models-Corporate-Finance.pdf;sequence=1
Ekpo, N. B., Etukafia, N. I., Acha, I. A., Udoidem, J. O., & Asogwa, I. E. (2017). Growth implications of managerial finance in business: Empirical evidence from Akwa Ibom State, Nigeria. Finance assignment World, 3(1), 061-068. Retrieved from: https://mail.premierpublishers.org/wjef/150720171198.pdf
Gitman, L. J., Juchau, R., & Flanagan, J. (2015). Principles of managerial finance. Pearson Higher Education AU. Retrieved from: https://www.academia.edu/download/52266901/complete.pdf
Lusztig, P., & Schwab, B. (2014). Managerial finance in a Canadian setting. Butterworth-Heinemann. Retrieved from: https://books.google.com/books?hl=en&lr=&id=fhGjBQAAQBAJ&oi=fnd&pg=PP1&dq=managerial+finance&ots=JrYZaM99Eh&sig=-lxbzy-XTI_10ak2X3W2byWUoNY
Schlegel, D. (2015). Cost-of-Capital in Managerial Finance. Springer. Retrieved from; https://www.academia.edu/download/56962896/2015_Book_Cost-of-CapitalInManagerialFin.pdf
Sheikh, N. A., & Wang, Z. (2011). Determinants of capital structure. Managerial Finance. Retrieved from: https://www.academia.edu/download/33151989/1905551.pdf