Living within the Valley - Raine & Hornemail.raineandhorne.com.my/pdf/Articles/13. Builders...

BUILDERS OF VISIONS (I)

VOL. #13

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About us

.

2

Incorporated in 1982, Raine & Horne International Zaki + Partners Sdn.

Bhd. is a firm of Chartered Surveyors and Registered Valuers. Our practice

covers a wide range of services including property valuation, investment and

project management, property management, real estate agency and

property consultancy.

The firm currently operates twelve (12) offices in Malaysia: Kuala Lumpur,

Petaling Jaya, Subang Jaya, Kelang, Johor Bahru, Melaka, Ipoh, Seremban,

Kuantan, Penang, Kota Kinabalu and Kuching.

Since its inception and establishment, Raine & Horne International Zaki +

Partners Sdn. Bhd. has enjoyed an outstanding and enviable reputation and

success. The firm has received wide recognition from all quarters, nationally

and internationally.

Founded in 1883, Raine & Horne is one of the world’s largest real estate

organisations with offices and affiliates all over the world, including in the

major cities of South East Asia, Europe, Canada, USA, Fiji, Australia, New

Zealand, Japan and Africa.

Raine & Horne International Zaki + Partners Sdn. Bhd. aims to provide our

clients with quality professional service. Raine & Horne International Zaki +

Partners Sdn. Bhd. is committed to the Quality Management System required by

ISO 9001:2008 Standards.

Our team comprises of highly qualified partners in various expertise which

authorize us to offer broad ranges of services in:

Professional Valuation Services

Corporate Advisory Services

Project Management

Property Management & Maintenance

Real Estate Agency

Auctioning

Market Research & Feasibility Studies

Property Investment Consultancy

Building Auditing

Bio Asset Valuation

Forensic Valuation

CYF.A13/04.15

Contents

3

Financial Analysis......................................5

1. Activity Ratios.....................................12

(A) Number of days of Receivables

(B) Number of days of Payables

(C) Days of Payables / Days of

Receivables

(D) Total Asset Turnover

(E) Fixed Asset Turnover

(F) Working Capital Turnover

2. Liquidity Ratios..................................18

(A) Current Ratio

(B) Quick Ratio

(C) Cash Ratio

(D) Summary of Liquidity Ratios

3. Solvency Ratios...................................22

(A) Debt-to-Equity Ratio

(B) Debt-to-Capital Ratio

(C) Debt-to-Assets Ratio

(D) Financial Leverage

(E) Interest Coverage Ratio

(F) Summary of Solvency Ratios

4. Profitability Ratios.............................28

(A) Net Profit Margin

(B) Gross Profit Margin

(C) Operating Profit Margin

(D) Pre-Tax Margin

(E) Return on Assets Ratio

(F) Operating Return on Assets Ratio

(G) Return on Total Capital Ratio

(H) Return on Equity Ratio

(G) Summary of Profit Margin Ratios

CYF.A13/04.15

Contents

4

5. Price Multiples Ratios........................37

(A) Price-Earnings (P/E) Ratio

(B) Price-Sales (P/S) Ratio

(C) Price-Book Value (P/B) Ratio

(D) Price-Cash Flow (P/CF) Ratio

(E) Summary of Price Multiples Ratios

References.................................................42

Contact Us.................................................43

International Affiliations.........................44

CYF.A13/04.15

Financial Analysis

Sample Selection Basis

The sample size of this analysis include 10 of the largest listed companies in

Bursa Malaysia based on:-

i. Market capitalization

ii. Main market

iii. Property sector

However, it must be noted that not all companies in the sample list are engaged

fully in property development. Some of them might be well-diversified into

other industries and might include subsidiaries such as plantation, construction,

and healthcare under the group’s listing. Nonetheless, the activity of property

development remains the major revenue contributor to such groups.

Financial Analysis Basis

The state of the companies within the sample list is determined using 5 different

measures:-

i. Activity Ratios: measures how efficiently the firm is managing its assets

(asset utilization or operating efficiency ratios)

ii. Liquidity Ratios: measures the firm’s ability to pay its short-term

liabilities

iii. Solvency Ratios: measures the firm’s financial leverage and ability to

meet its long-term obligations

iv. Profitability Ratios: measures the overall performance of the firm

relative to revenues, assets, equity, and capital.

v. Price Multiples Ratios: measures the stock price in relative to the firm’s

financial metrics.

A cross-sectional comparable measure is being employed in this analysis with

the median value of the 10 firms being used as the average benchmark. It

should be noted as well that some of the firms within the sample list have

different time frame due to different financial year end period. Nonetheless, all

of them are within the year of 2014.

While the stock price used in computing the price multiples ratios are based on

historical price for that specific firm (based on their respectively financial year

end period). Some of the financial reports used are unaudited (quarterly

reports).

5CYF.A13/04.15

Financial Analysis

6CYF.A13/04.15

MED

IAN

118.

74

233.

18

1.84

0.28

0.78

1.14

MEA

N

164.

61

242.

87

1.76

0.29

1.05

1.70

MR

CB

302.

09

344.

66

1.14

0.22

0.80

4.55

E&O

214.

94

295.

17

1.37

0.20

0.35

0.95

UO

A

147.

14

222.

00

1.51

0.33

1.01

0.64

MA

H

SIN

G

87.9

7

228.

50

2.60

0.59

3.05

1.23

IGB

94.2

9

223.

28

2.37

0.17

0.26

2.10

IJM

116.

79

245.

78

2.10

0.32

2.00

0.64

SUN

WA

Y

120.

68

189.

26

1.57

0.40

1.32

3.92

UEM

344.

50

202.

04

0.59

0.26

0.75

0.72

IOI

113

.99

240

.14

2.11

0.13

0.28

1.15

SP S

ETIA

103

.65

237

.86

2.29

0.3

0

0.70

1.1

3

1. A

CTI

VIT

Y

(A)

NU

MB

ER O

F D

AY

S O

F R

ECEI

VA

BLE

S

(B)

NU

MB

ER O

F D

AY

S O

F P

AY

AB

LES

(C)

DA

YS

OF

PA

YA

BLE

S /

DA

YS

OF

REC

EIV

AB

LES

(D)

TOTA

L A

SSET

TU

RN

OV

ER

(E)

FIX

ED A

SSET

TU

RN

OV

ER

(F)

WO

RK

ING

CA

PIT

AL

TUR

NO

VER

1. A

cti

vit

y R

ati

os.

Bett

er

tha

n A

vera

ge

In L

ine w

ith

Average

Worse

th

an

Av

era

ge

Financial Analysis

7CYF.A13/04.15

MED

IAN

2.42

0.95

0.53

MED

IAN

48.4

4%

32.6

3%

28.1

7%

184.

34%

9.84

MEA

N

2.59

1.34

0.67

MEA

N

54.6

6%

31.0

6%

25.1

6%

194.

04%

17.2

3

MR

CB

1.13

0.78

0.26

MR

CB

178.

43%

64.0

8%

52.3

1%

358.

95%

2.43

E&O

2.84

1.68

0.88

E&O

47.9

9%

32.4

3%

29.4

3%

168.

24%

5.38

UO

A

4.80

2.56

1.58

UO

A

2.75

%

2.68

%

2.26

%

12

1.6

1%

77.8

1

MA

H

SIN

G

2.54

0.91

0.40

MA

H

SIN

G

63.7

0%

38.9

1%

27.3

5%

233.

16%

5.84

IGB

1.14

0.80

0.53

IGB

48.8

9%

32.8

3%

28.9

9%

162.

20%

5.92

IJM

3.56

0.98

0.51

IJM

28.7

0%

22.3

0%

13.5

4%

201.

93%

18.9

7

SUN

WA

Y

1.38

0.84

0.45

SUN

WA

Y

59.7

5%

37.4

0%

29.3

0%

200.

50%

9.75

UEM

4.07

2.83

0.70

UEM

34.5

8%

25.7

0%

21.4

9%

156.

42%

9.93

IOI

2.09

0.80

0.53 IO

I

18

.20

%

15

.40

%

13

.97

%

136

.95%

21.9

6

SP S

ETIA

2.3

0

1.22

0.8

4

SP S

ETIA

63.

59%

38.8

7%

32.9

5%

20

0.4

3%

14.3

5

2. L

IQU

IDIT

Y

(A)

CU

RR

ENT

RA

TIO

(B)

QU

ICK

RA

TIO

(C)

CA

SH R

ATI

O

3. S

OLV

ENC

Y

(A)

DEB

T-T

O-E

QU

ITY

(B)

DEB

T-TO

-CA

PIT

AL

(C)

DEB

T-TO

-ASS

ETS

(D)

FIN

AN

CIA

L LE

VER

AG

E

(E)

INTE

RES

T C

OV

ERA

GE

2. L

iqu

idit

y R

ati

os

& 3

. S

olv

en

cy R

ati

os.

Bett

er

tha

n A

vera

ge

In L

ine w

ith

Average

Worse

th

an

Av

era

ge

Financial Analysis

8CYF.A13/04.15

MED

IAN

21.0

6%

34.4

9%

30.0

6%

28.2

6%

6.62

%

7.30

%

8.46

%

9.72

%

MEA

N

24.5

5%

39.7

0%

32.5

2%

31.5

6%

6.88

%

8.12

%

10.3

7%

11.1

2%

MR

CB

11.0

5%

32.8

6%

27.4

7%

14.5

6%

4.33

%

6.10

%

7.57

%

8.80

%

E&O

24.0

9%

53.4

3%

38.5

7%

33.6

3%

5.92

%

7.75

%

8.63

%

8.14

%

UO

A

33.1

1%

43.4

4%

42.0

2%

42.7

4%

11.0

3%

13.8

3%

16.4

9%

13.2

6%

MA

H

SIN

G

11.6

2%

26.9

4%

15.6

1%

15.6

6%

8.01

%

9.17

%

13.3

0%

15.9

2%

IGB

27.9

7%

56.7

7%

37.1

0%

35.8

9%

5.49

%

6.23

%

7.07

%

7.62

%

IJM

27.0

1%

36.1

2%

32.6

5%

34.2

6%

9.16

%

10.5

7%

17.1

2%

17.6

6%

SUN

WA

Y

16.9

5%

32.8

1%

15.8

8%

20.0

1%

7.33

%

6.40

%

8.28

%

13.7

1%

UEM

18.0

3%

31.0

1%

19.8

3%

22.8

9%

5.00

%

5.08

%

6.00

%

7.22

%

IOI

62

.14

%

54

.56

%

73

.48

%

77

.03

%

8.09

%

9.19

%

10

.94

%

10

.65

%

SP S

ETIA

13.5

6%

29.

07%

22.

58%

18.

96%

4.48

%

6.86

%

8.26

%

8.25

%

4. P

RO

FITA

BIL

ITY

(A)

NET

PR

OFI

T M

AR

GIN

(B)

GR

OSS

PR

OFI

T M

AR

GIN

(C)

OP

ERA

TIN

G P

RO

FIT

MA

RG

IN

(D)

PR

E-TA

X M

AR

GIN

(E)

RET

UR

N O

N A

SSET

S

(F)

OP

ERA

TIN

G R

ETU

RN

ON

A

SSET

S

(G)

RET

UR

N O

N T

OTA

L C

AP

ITA

L

(H)

RET

UR

N O

N E

QU

ITY

4. P

rofi

tab

ilit

y R

ati

os.

Bett

er

tha

n A

vera

ge

In L

ine w

ith

Average

Worse

th

an

Av

era

ge

Financial Analysis

9CYF.A13/04.15

MED

IAN

11.4

8

2.57

1.22

13.8

2

MEA

N

12.8

2

2.89

1.20

7.38

MR

CB

15.2

7

1.69

1.24

16.3

8

E&O

20.7

0

4.99

1.63

24.9

5

UO

A

9.17

3.04

1.15

24.6

8

MA

H

SIN

G

9.64

1.12

1.43

10.2

9

IGB

15.9

6

4.46

1.20

11.2

7

IJM

8.36

2.26

1.30

62.7

2

SUN

WA

Y

7.64

1.29

0.99

8.15

UEM

13.3

3

2.40

0.94

-116

.27

IOI

7.90

4.91

0.63

8.39

SP S

ETIA

20.1

8

2.7

4

1.5

4

23.2

7

5. P

RIC

E M

ULT

IPLE

S

(A)

PR

ICE-

EAR

NIN

GS

(P/E

) R

ATI

O

(B)

PR

ICE-

SALE

S (P

/S)

RA

TIO

(C)

PR

ICE-

BO

OK

VA

LUE

(P/B

) R

ATI

O

(D)

PR

ICE-

CA

SH F

LOW

(P

/CF)

R

ATI

O

5. P

ric

e M

ult

iple

s R

ati

os.

Bett

er

tha

n A

vera

ge

In L

ine w

ith

Average

Worse

th

an

Av

era

ge

Financial Analysis

1. Activity Ratios

It was observed that property development firms displayed lengthy periods in

collecting and paying their bills. Nonetheless, the amount of time taken to pay

their bills were almost twice of that for receiving; which is quite healthy and

liquid.

In addition, these firms exhibited characteristics of high asset base and capital

intensive; hence they collectively have low assets and working capital turnover.

Under the activity category, Sunway Berhad and Mah Sing were the

outperformers, while Eastern & Oriental was the underachiever.

2. Liquidity Ratios

The sample size has quite respectable liquidity displayed under current ratio.

However, when inventories was removed from the calculation; they performed

poorly with low quick ratio. Thus, semi-completed inventories (known as

capitalized development charges under current asset) played a very vital part in

the firms’ balance sheet.

Therefore, the continuation of these firms hinges on the ability to convert these

semi-completed inventories into revenue (cash and accounts receivable). Any

severe slowdown in the property market would possibly cause a liquidity crisis

and financial distress situation.

Under the liquidity category, some of the top performers were UEM Sunrise,

UOA Development, and Eastern & Oriental. While, the underperformer include

MRCB.

3. Solvency Ratios

It was noted that debt is an important source of financing for the property

developers being examined; however, it is not the major option. Total debt only

made up half of that of total equity, and one third of total capital. While in

general, the total assets held by these firms could cover the debts taken by more

than 3.5 times. Thus, equity is still the major source of financing over debt.

Whilst the sample size displayed exceptionally good interest coverage ratios.

10CYF.A13/04.15

Financial Analysis

Hence solvency is not an issue at the moment for this group of companies.

Under the solvency category, some of the top performers were IOI Properties

and UOA Development. While, the underperformer include MRCB.

4. Profitability Ratios

The profitability measure is quite harmonized over the 10 firms being

examined, with IOI Properties being the only outstanding candidate among the

group.

In general, the sample size possessed low gross profit margin; with high COGS

incurred (most probably building cost). While other operating expenses were

kept quite low. The group’s net profit margin was quite respectable at 21%.

Return on assets and capitals were quite modest at single digit possibly due to

high asset base, capital intensive, and the sheer size of these blue chip firms.

5. Price Multiples Ratios

When compared against the P/E ratio of KLCI for the corresponding period

which has a reading of 18; the P/E ratio for the sample size is considered

relatively cheap at 11. While the P/B ratio is quite subtle as well at 1.22. The

group’s P/CF ratio was dragged down by UEM Sunrise which was running

under negative operating cash flow.

Under the price multiples category, some of the firms that were considered

relatively expensive include Eastern & Oriental and SP Setia. While those that

were less pricy include Sunway Berhad and IOI Properties. However, price

multiples ratios should not be read in isolation; a relatively pricy firm might

suggest higher growth prospect, better future expectations, or even better

management.

Deduction

It should be noted that the different categories used to analyze the sample size

are not mutually exclusive. Thus, the overall performance and health of a firm

should only be determined after examining the different category ratios.

11CYF.A13/04.15

1. Activity Ratios

12CYF.A13/04.15

1. (A) Number of days of Receivables.

The number of days of receivables represent the average collection period;

which is the average number of days it takes for outstanding payments to be

made to the firm. Generally, a shorter collection period is more ideal.

The average (median) reading is approximately 118 days; which is about 4

months.

Out of the 10 firms being examined, 4 had longer collection periods than

average (red), 4 were in line with the average reading (yellow), and 2 posted

shorter collections period (green).

0.00

50.00

100.00

150.00

200.00

250.00

300.00

350.00

400.00

NU

MB

ER O

F D

AY

S O

F R

ECEI

VA

BLE

S

NUMBER OF DAYS OF RECEIVABLES MEAN (2014) MEDIAN (2014)

Better than Average Worse than AverageIn Line with Average

1. Activity Ratios

13CYF.A13/04.15

1. (B) Number of days of Payables.

The number of days of payables is basically the average amount of time it takes

the company to pay its bills. Generally, a longer collection period is more ideal.

The average (median) reading is approximately 233 days; which is about 8

months.

Out of the 10 firms being examined, only 1 had shorter collection period than

average (red), 7 were in line with the average reading (yellow), and 2 posted

longer collection periods (green).

0.00

50.00

100.00

150.00

200.00

250.00

300.00

350.00

400.00

NU

MB

ER O

F D

AY

S O

F P

AY

AB

LES

NUMBERS OF DAYS OF PAYABLES MEAN (2014) MEDIAN (2014)


1. Activity Ratios

14CYF.A13/04.15

1. (C) Days of Payables / Days of Receivables.

The number of days of receivables and number of days of payables are only

meaningful when they are compared against each other. In this case, the ratio

used is days of payables divided by the days of receivables. Generally, this ratio

should be more than 1, with a larger ratio being more desirable.

The average (median) reading is approximately 1.84, which is fairly decent.

Out of the 10 firms being examined, 4 had lower ratios than average (red), 3

were in line with the average reading (yellow), and 3 posted higher ratios

(green).

UEM Sunrise posted a ratio of less than 1 (at 0.59), which could be a pressing

issue if no correction effort is being implemented.

0.00

0.50

1.00

1.50

2.00

2.50

3.00

DA

YS

OF

PA

YA

BLE

S /

DA

YS

OF

REC

EIV

AB

LES

DAYS OF PAYABLES/DAYS OF RECEIVABLES MEAN (2014) MEDIAN (2014)


1. Activity Ratios

15CYF.A13/04.15

1. (D) Total Asset Turnover.

Total asset turnover ratio is basically the usage efficiency of the firm’s totalassets to create revenue. Generally, a larger reading is more ideal.

The average (median) reading is approximately 0.28. Such a low reading wouldsuggest that this industry has high asset base and is capital intensive.

Out of the 10 firms being examined, 4 had lower ratios than average (red), 3were in line with the average reading (yellow), and 3 posted higher ratios(green).

Companies with low total asset turnover such as IOI Properties and IGBCorporation would signify that too much capital are being tied up in their assetbase. Moreover, they are not using their assets efficiently to generate sufficientrevenue.

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

TO

TA

L A

SSET

TU

RN

OV

ER

TOTAL ASSET TURNOVER MEAN (2014) MEDIAN (2014)


1. Activity Ratios

16CYF.A13/04.15

1. (E) Fixed Asset Turnover.

Fixed asset turnover ratio is basically the usage efficiency of the firm’s fixedassets to create revenue. Generally, a larger reading is more ideal.

The average (median) reading is approximately 0.78. Such a low reading wouldsuggest that this industry has high fixed asset base and is capital intensive.


Companies with low fixed asset turnover such as IOI Properties and IGBCorporation would signify that too much capital are being tied up in their assetbase. Moreover, they are not using their assets efficiently to generate sufficientrevenue.

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

FIX

ED A

SSET

TU

RN

OV

ER

FIXED ASSET TURNOVER MEAN (2014) MEDIAN (2014)


1. Activity Ratios

17CYF.A13/04.15

1. (F) Working Capital Turnover.

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

WO

RK

ING

CA

PIT

AL

TUR

NO

VER

WORKING CAPITAL TURNOVER MEAN (2014) MEDIAN (2014)


Working capital turnover ratio measures how effectively a company is using itsworking capital to generate revenue. Net working capital is the residual value ofcurrent assets minus current liabilities. Generally, a larger reading is more ideal.

The average (median) reading is approximately 1.14. Such a low reading wouldsuggest that this industry has a very high working capital requirement.


Companies with low working capital turnover such as IJM Land and UOADevelopment would signify that they are not using their available workingcapital efficiently to generate sufficient revenue.

2. Liquidity Ratios

18CYF.A13/04.15

2. (A) Current Ratio.

The current ratio is the best-known measure of liquidity; in which a company

will be able to pay its short-term bills. Generally, a larger reading is more ideal.

The average (median) reading is approximately 2.42, which is quite healthy.

Out of the 10 firms being examined, 3 had lower ratios than average (red), 3


(green).

Companies with low current ratios such as IGB Corporation and MRCB would

signify that they are struggling to meet their short-term obligations.

0.00

1.00

2.00

3.00

4.00

5.00

6.00

CU

RR

ENT

RA

TIO

CURRENT RATIO MEAN (2014) MEDIAN (2014)


2. Liquidity Ratios

19CYF.A13/04.15

2. (B) Quick Ratio.

The quick ratio (acid-test ratio) is a more stringent measure of liquidity becauseit does not include inventories and other assets that might not be very liquid.Generally, a larger reading is more ideal.

The average (median) reading is approximately 0.95, which is quite a distressedlevel. The great difference between the current and quick ratios suggest thatmajority of the firms’ current assets are tied up in inventories.

Out of the 10 firms being examined, only 1 had lower ratio than average (red),5 were in line with the average reading (yellow), and 4 posted higher ratios(green).

However, more than half of the firms above have a quick ratio reading of lessthan 1; which could be a liquidity problem if left unchecked.

0.00

0.50

1.00

1.50

2.00

2.50

3.00

QU

ICK

RA

TIO

QUICK RATIO MEAN (2014) MEDIAN (2014)


2. Liquidity Ratios

20CYF.A13/04.15

2. (C) Cash Ratio.

The cash ratio is the most conservative liquidity measure because it further excludes

receivables on top of inventories and other prepayments. Generally, a larger reading is

more ideal.

The average (median) reading is approximately 0.53. The difference between the

quick and cash ratios is not that great, thus suggesting that inventories had a greater

weightage over receivables under current assets.

Out of the 10 firms being examined, 2 had lower ratio than average (red), 4 were in

line with the average reading (yellow), and 4 posted higher ratios (green).

Companies with low cash ratios such as Mah Sing and MRCB would signify that they

have little cash or cash-equivalent securities to service their current liabilities.

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

CA

SH R

ATI

O

CASH RATIO MEAN (2014) MEDIAN (2014)


2. Liquidity Ratios

21CYF.A13/04.15

2. (D) Summary of Liquidity Ratios.

The chart above summarizes all the 3 liquidity measures used. They include the

standard current ratio, the more stringent quick ratio, and the most conservative

cash ratio.

In almost all instances, it was noticed that inventories carried a higher

weightage in current asset than receivables. An obvious exception was observed

for UEM Sunrise.

Out of the 10 firms being examined, only MRCB displayed liquidity portent in

all 3 measures. While, Sunway Berhad, IGB Corporation, and Mah Sing are

showing some early signs of such threat.

0.00

1.00

2.00

3.00

4.00

5.00

6.00

LIQ

UID

ITY

RA

TIO

S

CURRENT RATIO QUICK RATIO CASH RATIO


3. Solvency Ratios

22CYF.A13/04.15

3. (A) Debt-to-Equity Ratio.

The debt-to-equity ratio measures the proportion of debt (fixed-cost financingsources) over equity; in which the company is utilizing to finance its assets.Generally, a lower reading is more ideal (with lesser reliance on debt as asource of financing).

The average (median) reading is approximately 48%, which is considered quitestandard among property developers.

Out of the 10 firms being examined, only 1 had a higher ratio than average(red), 6 were in line with the average reading (yellow), and 3 posted lowerratios (green).

It was noticed that MRCB had a very high debt-to-equity ratio (178%), whereasUOA Development had very little debt at 3% over equity.

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

140.00%

160.00%

180.00%

200.00%

DEB

T-T

O-E

QU

ITY

(%

)

DEBT-TO-EQUITY MEAN (2014) MEDIAN (2014)


3. Solvency Ratios

23CYF.A13/04.15

3. (B) Debt-to-Capital Ratio.

The debt-to-capital ratio is an extension of the debt-to-equity ratio as mentioned

earlier. This ratio measures the proportion of debt (fixed-cost financing sources) over

total capital; in which the company is utilizing to finance its assets. Total capital

equals all short-term and long-term debt plus preferred stock and equity. Generally, a

lower reading is more ideal (with lesser reliance on debt as a source of financing).

The average (median) reading is approximately 32%.

Out of the 10 firms being examined, only 1 had a higher ratio than average (red), 7

were in line with the average reading (yellow), and 2 posted lower ratios (green).

It was noticed that MRCB had a very high debt-to-capital ratio (64%), whereas UOA

Development had very little debt at 3% over total capital.

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

DEB

T-T

O-C

AP

ITA

L (%

)

DEBT-TO-CAPITAL MEAN (2014) MEDIAN (2014)


3. Solvency Ratios

24CYF.A13/04.15

3. (C) Debt-to-Assets Ratio.

The debt-to-assets ratio defines the amount of debt (fixed-cost financingsources) in relative to assets. Generally, a lower reading is more ideal (lowerdegree of financial leverage and higher financial flexibility).

The average (median) reading is approximately 28%, which suggests that theamount of debt taken is well-covered by the available assets. However, suchmeasure do not take into account the quality of the assets.

Out of the 10 firms being examined, only 1 had a higher ratio than average(red), 6 were in line with the average reading (yellow), and 3 posted lowerratios (green).

Again, it was noticed that MRCB had a very high debt-to-assets ratio (52%),whereas UOA Development had very little debt at 2% over total assets.

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

DEB

T-T

O-A

SSET

S (%

)

DEBT-TO-ASSETS MEAN (2014) MEDIAN (2014)


3. Solvency Ratios

25CYF.A13/04.15

3. (D) Financial Leverage.

The financial leverage ratio (equity multiplier) is simply the average total assetsover the average total equity. The greater value of such multiplier wouldindicate greater financial leverage and usage of debt. Generally, a lower readingis more ideal (with lesser reliance on debt as a source of financing).

The average (median) reading is approximately 184%. A reading of more than200% implies that the usage of debt as a source of financing is more than 50%.

Out of the 10 firms being examined, 2 had a higher ratios than average (red), 4were in line with the average reading (yellow), and 4 posted lower ratios(green).

It was noticed that MRCB and Mah Sing had financial leverage ratios of over200%; which suggests a greater dependency on debt as a source of financing.

0.00%

50.00%

100.00%

150.00%

200.00%

250.00%

300.00%

350.00%

400.00%

FIN

AN

CIA

L LE

VER

AG

E (%

)

FINANCIAL LEVERAGE MEAN (2014) MEDIAN (2014)


3. Solvency Ratios

26CYF.A13/04.15

3. (E) Interest Coverage Ratio.

The interest coverage ratio basically measures the firm’s ability to repay its

interest on outstanding debt. Generally, a higher reading is more ideal (higher

EBIT value over interest expense).

The average (median) reading is approximately 10, which is excellent. In

general, a fair reading should be anything above 1.5.

Out of the 10 firms being examined, 4 had a lower ratios than average (red), 2


(green).

It was noticed that MRCB is showing early warning signs of difficulty in

meeting its interest expenses at a ratio of 2.4.

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

INTE

RES

T C

OV

ERA

GE

RA

TIO

INTEREST COVERAGE MEAN (2014) MEDIAN (2014)


3. Solvency Ratios

27CYF.A13/04.15

3. (F) Summary of Solvency Ratios.

The chart above summarizes 3 solvency measures being used. They include the

debt-to-equity ratio, debt-to-capital ratio, and the debt-to-asset ratio.

It should be noted that total assets include total liabilities and total owners’

equities. Thus, total capital is part of total assets. While, total capital include

total debt and total owners’ equities. Hence, total debt is part of total capital.

Out of the 10 firms being examined, only MRCB displayed solvency portent in

all 3 measures. While, UOA Development, IOI Properties, and IJM Land had

better than average readings.

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

140.00%

160.00%

180.00%

200.00%

SOLV

ENC

Y R

ATI

OS

(%)

DEBT-TO-EQUITY DEBT-TO-CAPITAL DEBT-TO-ASSET



28CYF.A13/04.15

4. (A) Net Profit Margin.

Net profit margin measures the firm’s ability to generate profit (net) from its

revenue (sales and other income). Generally, a higher reading is more ideal. It is

based on net income from continuing operations while disregarding

discontinued operations.

The average (median) reading is approximately 21%, which is considered good

and industrial standard.

Out of the 10 firms being examined, 9 were in line with the average reading

(yellow), and 1 posted higher ratio (green).

It was noticed that IOI Properties posted exceptional net profit margin for the

fiscal year ended at 62%.

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

NET

PR

OFI

T M

AR

GIN

(%

)

NET PROFIT MARGIN MEAN (2014) MEDIAN (2014)



29CYF.A13/04.15

4. (B) Gross Profit Margin.

Gross profit margin basically is the residual value of revenue after deducting

cost of goods sold (COGS), divided by revenue. Generally, a higher reading is

more ideal. A low ratio might suggest that either the cost of goods sold is too

high or pricing of goods is too low.



(yellow), and 3 posted higher ratios (green).

Some exceptional performers include IOI Properties, IGB Corporation, and

Eastern & Oriental. All three firms posted ratios of more than 50% in 2014.

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

GR

OSS

PR

OFI

T M

AR

GIN

(%

)

GROSS PROFIT MARGIN MEAN (2014) MEDIAN (2014)



30CYF.A13/04.15

4. (C) Operating Profit Margin.

Operating profit margin which is also known as earnings before interest and

taxes (EBIT); is the residual value after deducting all operating expenses

(COGS and other operating expenses), divided by revenue. Generally, a higher

reading is more ideal.



(yellow), and 1 posted higher ratio (green).

Again, it was noticed that IOI Properties posted exceptional operating profit

margin for the fiscal year ended at 73%.

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

OP

ERA

TIN

G P

RO

FIT

MA

RG

IN (%

)

OPERATING PROFIT MARGIN MEAN (2014) MEDIAN (2014)



31CYF.A13/04.15

4. (D) Pre-Tax Margin.

Pre-tax margin is simply the extension of operating profit margin (EBIT) after

deducting interest expenses. Generally, a higher reading is more ideal.



(yellow), and 2 posted higher ratios (green).

Yet again, the outperformers include IOI Properties (77%) and UOA

Development (42%).

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

PR

E-TA

X M

AR

GIN

(%

)

PRE-TAX MARGIN MEAN (2014) MEDIAN (2014)



32CYF.A13/04.15

4. (E) Return-on-Assets Ratio.

The return-on-assets ratio basically measures how efficient is the company

utilizing its assets to generate earnings. Generally, a higher reading is more

ideal.

The average (median) reading is approximately 6.6%. Industries with extensive

capital requirements such as real estate development will usually have lower

readings.

Out of the 10 firms being examined, all were in line with the average reading

(yellow).

A notable overachiever include UOA Development which posted a reading of

more than 10%.

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

RET

UR

N O

N A

SSET

S (%

)

RETURN ON ASSETS MEAN (2014) MEDIAN (2014)



33CYF.A13/04.15

4. (F) Operating Return-on-Assets Ratio.

The operating return-on-assets ratio is an extension of the previous return-on-

assets ratio. It measures how efficient is the company utilizing its assets to

generate operating profit (EBIT). Generally, a higher reading is more ideal.


capital requirements such as property development will usually have lower

readings.


(yellow).

Significant outperformers include UOA Development (13%) and IJM Land

(10%).


0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

OP

ERA

TIN

G R

ETU

RN

ON

ASS

ETS

(%)

OPERATING RETURN ON ASSETS MEAN (2014) MEDIAN (2014)


34CYF.A13/04.15

4. (G) Return-on-Total Capital Ratio.

The return-on-total capital ratio measures how efficient is the company utilizing

all its sources of financing (debt and equity) to generate operating profit

(EBIT). Generally, a higher reading is more ideal.


capital requirements such as property development will usually have lower

readings.


(yellow).

Some notable outperformers include IJM Land and UOA Development, in

which both firms posted readings of more than 15%.

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

RET

UR

N O

N T

OTA

L C

AP

ITA

L (%

)

RETURN ON TOTAL CAPITAL MEAN (2014) MEDIAN (2014)



35CYF.A13/04.15

4. (H) Return-on-Equity Ratio.

The return-on-equity ratio measures how much profit a company generates with

the money shareholders (both common and preferred stocks) have invested.

Generally, a higher reading is more ideal.

The average (median) reading is approximately 9.7%. Companies with higher

market capitalization will tend to have lower readings.


(yellow).

Some notable outperformers include IJM Land and Mah Sing, in which both

firms posted readings of more than 15%.

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

20.00%

RET

UR

N O

N E

QU

ITY

(%

)

RETURN ON EQUITY MEAN (2014) MEDIAN (2014)



36CYF.A13/04.15

4. (I) Summary of Profit Margin Ratios.

The chart above summarizes 4 profitability measures being used. They include netprofit margin, pre-tax margin, operating profit margin, and gross profit margin.

i. Gross profit margin = (Revenue – COGS) / Revenueii. Operating profit margin = (Gross profit margin + other operating income –

other operating expenses) / Revenueiii. Pre-tax margin = (Operating profit margin ± profit/losses of associated

companies ± other non-operating income/expenses) / Revenueiv. Net profit margin = (Pre-tax margin – taxes) / Revenue

Hence, under normal circumstances gross profit margin will be the highest, followedby operating profit margin, pre-tax margin, and net profit margin. However, a notableexception was witnessed for IOI Properties which posted a lower gross profit marginthan net profit margin. This might be caused by the net inflow of other operating andnon-operating incomes, and net profit of associated companies.

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

PR

OFI

T M

AR

GIN

RA

TIO

S (%

)

NET PROFIT MARGIN PRE-TAX MARGIN

OPERATING PROFIT MARGIN GROSS PROFIT MARGIN


37CYF.A13/04.15

5. (A) Price-Earnings Ratio.

The price-earnings (P/E) ratio is simply the firm’s stock price divided by earnings per

share and is one of the most widely used price multiples ratio. It basically measures

the number of years it takes for investors to recover their invested money given the

current earnings performance. Generally, companies with high P/E ratios are

considered overvalued (or high growth with great future expectations).

The average (median) reading is approximately 11. While the overall KLCI has a P/E

ratio of 18.

Out of the 10 firms being examined, 4 had higher ratios than average (red), 2 were in

line with the average reading (yellow), and 4 posted lower ratios (green).

Eastern & Oriental and SP Setia both posted P/E ratios of more than 20, while IOI

Properties and Sunway Berhad displayed readings of less than 8.

0.00

5.00

10.00

15.00

20.00

25.00

P/E

RA

TIO

PRICE-EARNINGS RATIO MEAN (2014) MEDIAN (2014)



38CYF.A13/04.15

5. (B) Price-Sales Ratio.

The price-sales (P/S) ratio is simply the firm’s stock price divided by revenue

per share. Similar to P/E ratio, companies with high P/S ratios are considered

overvalued (or high growth with great future expectations).

The average (median) reading is approximately 2.57.

Out of the 10 firms being examined, 4 had higher ratios than average (red), 3

were in line with the average reading (yellow), and 3 posted lower ratios

(green).

Eastern & Oriental and IOI Properties both posted P/S ratios close to 5, while

Sunway Berhad and Mah Sing displayed readings close to 1.

0.00

1.00

2.00

3.00

4.00

5.00

6.00

P/S

RA

TIO

PRICE-SALES RATIO MEAN (2014) MEDIAN (2014)



39CYF.A13/04.15

5. (C) Price-Book Value Ratio.

The price-book value (P/B) ratio is simply the firm’s stock price divided bybook value of equity per share. Whereas book value is calculated by subtractingintangible assets and liabilities from total assets (quite comparable to ownersequity). Similar to P/E and P/S ratios, companies with high P/S ratios areconsidered overvalued (or high growth with great future expectations).

The average (median) reading is approximately 1.22.

Out of the 10 firms being examined, 3 had higher ratios than average (red), 4were in line with the average reading (yellow), and 3 posted lower ratios(green).

Eastern & Oriental and SP Setia both posted P/B ratios of more than 1.5, whileIOI Properties, UEM Sunrise, and Sunway Berhad had P/B ratios of less than 1.

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

P/B

RA

TIO

PRICE-BOOK VALUE RATIO MEAN (2014) MEDIAN (2014)



40CYF.A13/04.15

5. (D) Price-Cash Flow Ratio.

The price-cash flow value (P/CF) ratio is basically the firm’s stock pricedivided by cash flow per share. Whereas cash flow refers to only operating cashflow. Similar to all other price multiples ratios, companies with high P/CF ratiosare considered overvalued (or high growth with great future expectations).

The average (median) reading is approximately 13.

Out of the 10 firms being examined, 6 had worse ratios than average (red), and4 posted better ratios (green). Under specific situation where P/CF appears to benegative; this would imply that the firm has negative operating cash flow and isvery much undesirable.

Such an example would include UEM Sunrise, which posted negative P/CFratio. While IJM Land which has a reading of 62 is very pricy as well.

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-120.00

-100.00

-80.00

-60.00

-40.00

-20.00

0.00

20.00

40.00

60.00

80.00SP

SET

IA (

31/1

0/20

14)

IOI P

RO

PER

TIES

(30

/6/2

014)

UEM

SU

NR

ISE

(31/

12/2

014)

SUN

WA

Y B

ERH

AD

(31

/12/

2014

)

IJM

LA

ND

(31

/3/2

014)

IGB

CO

RP

. (3

1/12

/201

4)

MA

H S

ING

(31

/12

/201

4)

UO

A D

EVEL

OP

MEN

T (3

1/1

2/2

01

4)

E&O

(3

1/3/

2014

)

MR

CB

(31

/12/

2014

)

P/C

F R

ATI

O

PRICE-CASH FLOW RATIO MEAN (2014) MEDIAN (2014)



41CYF.A13/04.15

5. (E) Summary of Price Multiples Ratios.

The chart above summarizes 4 price multiples measures being used. They

include price-earnings (P/E) ratio, price-sales (P/S) ratio, price-book value

(P/B) ratio, and price-cash flow (P/CF) ratio.

When compared against the average (median), Eastern & Oriental displayed

overvalued characteristics for all price multiples ratios. While SP Setia has 3 of

such characteristics (except for P/S ratio).

Some of the less pricy firms include Sunway Berhad and IOI Properties.

In addition, it was noticed that P/CF ratio is the most volatile ratio and could

change drastically over a short period of time.

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-120.00

-100.00

-80.00

-60.00

-40.00

-20.00

0.00

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SP S

ETIA

(31

/10/

201

4)

IOI P

RO

PER

TIES

(30

/6/2

014)

UEM

SU

NR

ISE

(31/

12/2

014)

SUN

WA

Y B

ERH

AD

(31

/12/

2014

)

IJM

LA

ND

(31

/3/2

014)

IGB

CO

RP

. (3

1/12

/201

4)

MA

H S

ING

(31

/12

/201

4)

UO

A D

EVEL

OP

MEN

T (3

1/1

2/2

01

4)

E&O

(3

1/3/

2014

)

MR

CB

(31

/12/

2014

)

PR

ICE

MU

LTIP

LES

RA

TIO

P/E RATIO P/S RATIO P/B RATIO P/CF RATIO

References

Bursa Malaysia. (2015) Prices, [Online], Available:

http://www.bursamalaysia.com/market/securities/equities/prices/#/?filter=BS02

[22 Apr 2015].

Investopedia. (2015) Terms, [Online], Available: http://www.investopedia.com/

[22 Apr 2015].

Kaplan University. (2013) Schwesernotestm 2014 CFA Level I Book 3: Financial

Reporting and Analysis, United States of America: Kaplan Inc.

Kaplan University. (2013) Schwesernotestm 2014 CFA Level I Book 4:

Corporate Finance, Portfolio Management, and Equity Investments, United

States of America: Kaplan Inc.

KLSE Info. (2015) Historical Prices, [Online], Available:

http://www.klse.info/companies/listed-companies [22 Apr 2015].

42CYF.A12/01.15

http://www.bursamalaysia.com/market/securities/equities/prices/#/?filter=BS02

http://www.investopedia.com/

http://www.klse.info/companies/listed-companies

Contact Us

43

OFFICE EMAIL TELEPHONE

HQ (KL) [email protected] 603 26980911

Petaling Jaya [email protected] 603 78806542

Subang Jaya [email protected] 603 56319668

Klang [email protected] 603 33420193603 33420182

Ipoh [email protected] 605 2532804605 2413888

Seremban [email protected] 606 6333211

Melaka [email protected] 606 2860017606 2840017

Penang [email protected] 604 2638093604 2612032

Johor Bahru [email protected] 607 3863791607 3863795

Kuantan [email protected] 609 5157100

Kuching [email protected] 6082 235236

Kota Kinabalu [email protected] 6088 266520

CYF.A12/01.15

International Affiliations

44

Country Affiliates

Australia

Corporate Office – SydneyNew South Wales – Sydney

Queensland –BrisbaneVictoria - Melbourne

South Australia – Kent TownTasmania – Hobart

Western Australia – South PerthNorthern Territory – Parap

Austria DMH Vienna

Belgium Activia Belgium SA

Czech Republic Huber Holdings Prag s.r.o

Fiji Raine & Horne Fiji

Hong Kong Raine & Horne Projects Hong Kong

Hungary Dr. Max Huber Kft.

India Arora & Associates Realty Ltd.

Italy GC International S.R.L.

JapanKiuchi Property Counselors & Valuers

Inc

United Kingdom Raine & Horne Crossgates

UAE Raine & Horne Dubai

Vanuatu Raine & Horne Vanuatu

CYF.A12/01.15

Raine & Horne International Zaki + Partnerswww.raineandhorne.com.my

Perpetual 99, Jalan Raja Muda Abdul Aziz, 50300 Kuala Lumpur

Tel: 03-2698 0911 Fax: 03-2691 1959 Email: [email protected]

Company No. 99440-T, VE (1) 0067

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