AFX9590 Group Assignment 1

2013

Christian, Hana Putri 22328327

Gasim, Rifath 25057395

Sarker, Mohammad Rabiul - 24935123

Zhang, Yan Li - 25408453

AFX 9590 Accounting and Finance for

International Managers

9/17/2013

Financial Analysis of Telstra, Telecom New Zealand, and

Singapore Telecommunications

AFX 9590 Group Assignment 1 Financial Analysis of TLS, TEL, and SGT

Page | 1

Table of Contents 1.0 Introduction .................................................................................................................... 2

1.1 Companies Background .............................................................................................. 2

1.1.1 Market Capital and Market Price ........................................................................... 2

1.1.2 General Information .............................................................................................. 2

2.0 Companies Performance Analysis ................................................................................... 4

2.1 Profitability Analysis .................................................................................................... 4

2.2 Asset Efficiency Analysis .............................................................................................. 7

2.3 Liquidity Analysis ....................................................................................................... 11

2.4 Capital Structure Analysis .......................................................................................... 13

2.5 Market Performance Analysis .................................................................................... 16

3.0 Company Representing the Best Investment ................................................................. 19

4.0 References .................................................................................................................... 20

Word Count: 3,000 Words excluding the title page, table of contents, headings, references,

footer, header, tables, charts/graphs, and table of references.


Page | 2

1.0 Introduction This report has been carefully articulated to provide analysis regarding profitability,

efficiency, liquidity, capital structure, and market performance for Telstra Corporation

Limited (TLS), Telecom Corporation of New Zealand Limited (TEL), and Singapore

Telecommunications Limited (SGT) for the period of 2009-2013.

The report first provides individual analysis of profitability, efficiency, liquidity, capital

structure, and market performances for all the three companies; showing several analyses,

comprising the trend analysis throughout 2009-2013, horizontal analysis, vertical analysis,

and also ratio comparison between the three companies. Furthermore, the report also

provides the benchmark analysis, comparing TLS, TEL and SGT to their intra-industry

company which operates in US, Verizon Communications Inc.

Finally, the report is concluded by providing the combined analysis, determining which of

the three companies (TLS, TEL, and SGT) that has proven to have the best performance

throughout the five years.

Note: Some of the ratios final values and values that were used for calculation were taken from Aspect Huntley

Fin Analysis, and several other values that were not provided in the Aspect Huntley Fin Analysis were taken

from the companies Annual Reports.

1.1 Companies Background

1.1.1 Market Capital and Market Price

1.1.2 General Information

TLS operation dominates most parts of Australia, including rural and remote areas. It

provides solutions such as fixed lines, mobiles, Internet access, and Pay TV services. TLS has

also expanded internationally, for instance, its expansion to Hong Kong as CSL New World

Mobility Limited. Furthermore, Telstra Global also encompasses network services across

Asia Pacific, China, India, Europe and Africa. Lastly, TLS also manages submarine cable

network.

TEL on the other hand, has geographical limitation, in which hinders it from expanding

globally (Moritz, 2012); its international operations is limited to providing integrated

telecommunications between New Zealand, Australia, and several other countries globally

(Aspect Huntley Fin Analysis, 2013). However, it is the dominant telecommunications

service provider in New Zealand. It provides services and products not only to residential,

but also to SME (Small Medium Enterprises). TEL has several business units which comprises


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of Telecom Retail (fixed line, broadband, dial-up, and online services), fi, Gen-I, AAPT,

Telecom Wholesale & International and Technology and shared services.

SGT is a Singaporean Telecommunication group (Group Consumer, Group Digital Life, and

Group ICT) which dominates Singapore telecommunications, covering fixed lines, mobile,

data, Internet, info-communications technology, satellite and pay TV. SGT also operates in

Australia, as Optus. Furthermore, SGT operates internationally, which includes association

and joint ventures in Thailand, India, Philippines, and Indonesia. Moreover, SGT holds

interests in several mobile communications businesses in Asia and Africa.


Page | 4

2.0 Companies Performance Analysis

2.1 Profitability Analysis

Table 1. Profitability Ratios

Source: (Aspect Huntley Fin Analysis, 2013)

Table 1 shows the profitability ratios. Net Profit Margin measures how much earnings a company has from every dollar of its sales, whereas,

EBIT Margin includes the interests and tax in the revenue calculation. Furthermore, ROE indicates returns to shareholders, which is impacted

by its ROA that measures how efficient the company uses its asset to generate profit. Lastly, cash flow to sales provides the companys ability

to generate cash from its current operations. If these ratios have higher values, it shows better profitability performance.


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Figure 1. Net Profit Margin and ROE Chart

Figure 1 indicates that Net Profit Margin for all three companies has a slightly declining

trend from 2009-2011, due to competition from resellers' that has forced many to cut prices

and lower profit. This declining trend of profits has also explained the decreasing trend of

ROA, which further impacted the ROE.

However, in 2012, both TLS and SGTs ROE and ROA increased; TLSs ROE increased to

31.11% and its ROA to 11.78%, whereas, SGTs ROE has also increased to 17.00% and its

ROA to 10.54%.

On the other hand, as figure 1 clearly pointed out, in 2012, TELs Net Profit Margin flunked

to -10.16% (its EBIT Margin fell to -4.77%). This is due to the high increase in their expenses,

during the demerger with Chorus limited and also due to government regulation. Therefore,

there was high revenue deduction that resulted in 2012s negative value (Telecom

Corporation of New Zealand Limited, 2012). This has also affected TELs negative ROA (-

9.21%) and further resulted in the negative ROE (-26.28%).

Nevertheless, in 2013, TELs Net Profit Margin has improved significantly to 8.52% and its

EBIT Margin increased to 12.63% (impacting on ROE recovery to 24.16%, which shows the

ability of TEL to finally generate return to its shareholders); this is owing to the reduction of

regulatory burden and additional cost saving after the demerger completion.

Turning to SGT, although that it has a declining trend, its Net Profit margin and EBIT margin

are still comparatively higher compared to the other two companies, which shows that It

-30.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

2009 2010 2011 2012 2013

Net Profit Margin and ROE Chart

TLS Net Profit Margin TEL Net Profit Margin SGT Net Profit Margin

TLS ROE TEL ROE SGT ROE


Page | 6

has better profit-generating ability. Nonetheless, its ROE is lower compared to TLS; this

might be due to its lower ROA, 9.64% as compared to TLSs ROA of 12.03% in 2013.

TLS, on the other hand, has reasonable improvements from 2011-2013, as shown by the

ratios. And figure 1 clearly depicted that TLS ROE is definitely higher compared to TEL and

SGT.

To conclude, TLS proved to have the highest and most stable ROA and ROE throughout the

five years; this indicates that TLS was better at generating money that its shareholders has

invested, and it was also more efficient compared to the other two companies in using its

assets to generate profits.


Page | 7

2.2 Asset Efficiency Analysis

Table 2. Asset Efficiency Ratios


Table 1 shows the asset efficiency performance ratios. In general, TEL has higher asset efficiency ratios, compared to SGT and TLS; this means

that TEL were more efficient in converting inventory into cash and collecting cash from debtors and was also better at utilizing its assets.


Page | 8

Figure 2. Asset Turnover Chart

Asset Turnover ratio provides the companys overall efficiency in generating income per

dollar of investments in assets, for both current and non-current investments. Figure 2

clearly shows that TEL was better at utilizing its assets to generate revenue. Furthermore, in

2012&2013, the difference with TLS and SGT was highly significant.

However in 2009-2011, TELs operating revenue was less compared to its total assets.

Throughout the 5 years, SGT and TLS operating revenue was also less compared to their

total assets.

According to annual report 2012, the Asset Turnover ratio of Verizon (US intra-industry) was

0.51 times. TEL and TLS managed to achieve higher Asset Turnover ratio than Verizon. So,

SGT should take actions in order to utilize their assets to generate revenue more efficiently.

0 0.2 0.4 0.6 0.8 1 1.2

2013

2012

2011

2010

2009

Asset Turnover Chart

SGT Asset Turnover Ratio (Times) TEL Asset Turnover Ratio (Times)

TLS Asset Turnover Ratio (Times)


Page | 9

Figure 3. Debtors Turnover Chart

Days Debtors Ratio indicates how quickly the debtors are paying; the lesser the days, the

better it is. Whereas, Debtors turnover (times) indicates the number of times cash are

collected from debtors in an accounting period, which means the higher the ratio, the more

efficient a company is in collecting cash from its debtors.

Figure 3 show that TEL has the shortest period of receiving money from debtors throughout

all the five years. SGT and TLS Days Debtors have increased consecutively from 2009-2013,

due to their increasing receivables. In 2013, there is a high rise in Days Debtors for SGT, due

to the vast increase in its receivables. However, TELs Days Debtors has shown the opposite.

Nevertheless, the average receivable collection period in 2012 for Verizon was 38.36 days

(Verizon, 2012). In 2012, TEL was the only one that managed to receive money in a shorter

period than Verizon, which were 35.2. Therefore, SGT and TLS should re-assess their credit

policy.

0

2

4

6

8

10

12

0

20

40

60

80

2009 2010 2011 2012 2013

Days Debtors Turnover and Times Debtors Turnover Chart

TLS Days Debtors Turnover TEL Days Debtors Turnover SGT Days Debtors Turnover

TLS Times Debtors Turnover TEL Times Debtors Turnover SGT Times Debtors Turnover

Days Times


Page | 10

Figure 4. Inventory Turnover Chart

Days Inventory Ratio indicates the average period of time it takes for a firm to sell its

inventory, whereas Inventory Turnover (times) indicates the number of times inventory is

sold in a time period (e.g. 1 year). The higher the Inventory Turnover (times), the more

efficient a company is able to convert its inventory into cash.

Throughout the five years, all three companies have shown fluctuation. In 2013, although

TELs Inventory Turnover decreased to 63.86, the number was still higher compared to SGT

and TLS; this shows that TEL was better at managing its inventory.

In 2011, SGT had the lowest Inventory Turnover; nonetheless, they have managed to

increase the ratio in 2012&2013. Looking at TLS, despite its improved performance in 2012,

the ratio was showing a weakening trend up to 2013.

In conclusion, looking at Days Inventory and Days Debtors Turnovers, TEL proved to have a

more efficient entitys activity cycle (operating cycle) as compared to SGT and TLS. The time

line below shows its cash cycle in 2013:

Figure 5. TEL's 2013 Cash Cycle

0

20

40

60

80

100

0

5

10

15

2009 2010 2011 2012 2013

Days Inventory Turnover and Times Inventory Turnover Chart

TLS Days Inventory Turnover TEL Days Inventory Turnover

SGT Days Inventory Turnover TLS Times Inventory Turnover

TEL Times Inventory Turnover SGT Times Inventory Turnover

Days Times


Page | 11

2.3 Liquidity Analysis

Table 3. Liquidity Ratios


Both of the ratios that are shown in table 3 provide the indication of liquidity of the

company. Current (working capital) Ratio provides the indication of dollar of current assets

per dollar of current liabilities; the general acceptance is 2, nevertheless the acceptance

differs depending on the industry. Whereas, quick asset (acid test) ratio excludes inventory

from the current assets calculation; this provides the information of instant/quick liquidity

of the company.

Figure 6. Liquidity Analysis Chart

As can be seen from figure 6, throughout the five years, all three companies are showing

current ratio that is on average below 1. However, TLS has been showing the steadiest

increase, with 1.05 in 2013; this means TLS had $1.05 of current assets for every $1 of

0

0.2

0.4

0.6

0.8

1

1.2

2009 2010 2011 2012 2013

Liquidity Analysis Chart

TLS Quick Asset Ratio TEL Quick Asset Ratio SGT Quick Asset Ratio

TLS Current Ratio TEL Current Ratio SGT Current Ratio


Page | 12

current liabilities. SGT has also showed a steady increase up to 2012, with a current ratio of

1.05. Nonetheless, in 2013, it has decreased to 0.83. TEL on the other hand, shows slight

fluctuations in its short term debt-paying ability, and has been below one all throughout the

five years.

Moreover, the quick asset ratio has shown the same pattern. Looking at the

telecommunications industry, these companies would invest in inventories such as goods

available for sale, and materials to be used in constructing and maintaining the

telecommunication network; supporting sales and network expansion (Telstra Corporation

Limited, 2013). Therefore, their quick asset ratio should be lower than its current ratio.

In general analysis, the amount of current liabilities for all the three companies were

exceeding their current assets throughout 2009-2013, which is an indication of these

companies inability to pay their short term liabilities immediately. This could result in having

to seek for external sources of funding (loans/bonds), in order for them to be having

sufficient cash for the future investment and to reduce the amount of short term liabilities.

However, comparing the three companies to Verizon, they are showing similar

performance. Its current ratio is 1.01 and 0.79 and its quick asset ratio is 0.98 and 0.75 in

2011 and 2012 respectively. Therefore, in a nutshell, all the three companies are showing an

average liquidity performance, and due to TLSs upward trend, TLS has shown the most

promising liquidity assurance.


Page | 13

2.4 Capital Structure Analysis

The capital structure analysis shows how the companies finance their operations, which may

include sources of funding, such as long-term debt and/or specific short-term debt and

common equity and/or preferred equity.

Table 4. Capital Structure Ratios


Table 4 provides the ratios which indicates the companies capital structure. If d/e ratio is

greater than 100% means that the company is using more debt for its financing decision.

Furthermore, the interest coverage ratio shows the ability of the company to pay its interest

expense. Lastly, debt coverage ratio provides the information of the companys ability to

fund its long term debt with its cash flow from its operating activities. Therefore, the greater

the number, the better it is, for both interest coverage ratio and debt coverage ratio.


Page | 14

Figure 7. Debt to Equity Ratio Chart

Figure 7 shows that TLS has an extremely high d/e ratio compared to TEL and SGT, with

$1.17 of debt for every $1 of its equity. However, comparing it to the intra-industry, Verizon

(d/e ratio of 163.32% and 168.26% in 2012&2011, respectively), TLS has shown better

financing composition performance. This might be due to Verizon acquisition of Hughes

Telematics for $621m (Moritz, 2012).

For TEL, although its d/e ratio is consecutively higher than 90% for 2009-2011, in

2012&2013, TEL has managed to reduce its debt financing significantly to 62.24% and

69.07%, respectively. This is the result of TELs tightening control of its project cost, due to

the demerger with Chorus Limited. Therefore they cut down their capital expenditure.

(Telecom Corporation of New Zealand Limited, 2012)

SGT on the contrary, has shown the strongest financial position; its low numbers of d/e ratio

provide the indication of SGT ability to issue more debt (corporate bond) in the future. In

2013, its d/e ratio was 33.05%, which means SGT has $0.33 of debt for every $1 of equity.

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

140.00%

2009 2010 2011 2012 2013

Debt to Equity Ratio Chart

TLS

TEL

SGT


Page | 15

Figure 8. Debt Coverage Ratio and Interest Coverage Ratio Chart

Figure 8 shows that TEL has the lowest interest coverage ratio, with its peak of having a

negative ratio (-2.50) in 2012. Nonetheless, in 2013, TEL has been able to turn the table

around to having earnings of 12 times higher compared to its interest expense, as a result of

regulatory burden that has been reduced significantly after the post-merger with Chorus

Limited. (Telecom Corporation of New Zealand Limited, 2013)

Moreover, SGTs low d/e ratio throughout the 5 years explains its high interest coverage

ratio of around 14 times throughout the five years; due to its low amount of debt, SGT has

managed to have 15 times more earnings relative to its interest expense. In addition, SGTs

debt coverage ratio has always shown a positive indication (below 1) throughout the five

years.

In conclusion, SGT has shown to have the better financial strength as compared to TLS and

TEL. TLS in contrast, has proved to be the worst, owing to the fact that it has a high debt

which might result in the company having a high cost of debts, which would increase the

companys vulnerability to default risk.

-5

0

5

10

15

20

2009 2010 2011 2012 2013

Debt Coverage Ratio and Interest Coverage Ratio Chart

TLS Debt Coverage Ratio TEL Debt Coverage Ratio

SGT Debt Coverage Ratio TLS Interest Coverage Ratio

TEL Interest Coverage Ratio SGT Interest Coverage Ratio


Page | 16

2.5 Market Performance Analysis

Table 5. Market Performance Ratios


Market performance analysis provides the analysis regarding the companies performance

in terms of publics view. Table 5 provides earnings per share ratio (EPS) and price earnings

ratio (PER). EPS is generally considered to be the single most important variable in

determining a share's price, whereas, PER reflects the willingness of shareholders to pay for

the firms shares. PER has been one of the most common approaches to assess share price,

the reasons are:

a) PER measures the relationship between EPS and the share price

b) PER does not fluctuates much over time

c) If EPS increases/decreases, the share price is expected to increase/decrease as well.

This new share price would be the new EPS times the constant PER


Page | 17

Figure 9. EPS and P/E Ratio Chart

Figure 9 shows clearly that TLSs EPS is gradually decreasing from 2009-2011; with 2011 as

its peak, due to the earnings that dropped by almost 16.9%. This is caused by the increased

of their operating expenses, which is almost 6 times compared to the previous year (Telstra

Corporation Limited, 2011). Therefore, although there is an increase in the revenue and

total income generated, the high rise in the expenses has contributed more to the fall of the

EPS ratio.

Nevertheless, in 2012-2013, TLS has increasing earnings of 11.6%, which contributed to its

EPS (27.5 cents). In terms of PER, TLS has also shown a gradual increase throughout the five

years, especially in 2012&2013, which is due to the gradual increase in its market price; this

provides reasons for shareholders to trust TLS.

Looking at SGT, its EPS has shown slight fluctuations. In 2013, its EPS went down to 22.02c.

This was the result of their net profit that declined by 2%. In constant currency terms,

underlying net profit would have been stable; however, including its exceptional items, its

net profit has declined by 12% to SGD3.51b. This was largely due to a one-time loss of

SGD225m from the divestment of Warid Pakistan (Singapore Telecommunications Limited,

2013).

Nonetheless, SGTs PER has been consistent throughout the five years. Simultaneously, their

market price has also increased throughout the five years. Therefore, this provides a good

reason for shareholders to trust the companys ability to perform.

TEL conversely, despite of its significantly high EPS in 2012 (47.48c), its PER has shown to be

decreasing. However, in 2013, its EPS dropped significantly to 11.09c, which has been due

to TELs net EAT for its continuing operations has shown a downturn to NZD238m, from

NZD311m. TELs mobile revenues also declined to NZD14m due to the fewer handset sales.

TELs high fluctuation pattern is not providing a good sign for the shareholders.

10.3 10.35 11.07 13.41 15.53 10.35 9.42 12.14 10.81 12.21 9.62 8.66 8.45 9.02

12.17

0

10

20

30

40

50

2009 2010 2011 2012 2013

EPS and P/E Ratio Chart

TLS P/E Ratio TEL P/E Ratio SGT P/E Ratio

TLS EPS (Cents) TEL EPS (Cents) SGT EPS (Cents)


Page | 18

In conclusion, judging from the EPS ratio alone, TLS has proved to be the better performing

company compared to TEL and SGT; it has managed to provide consistent earnings that is

reflected in its EPS throughout 2009-2013.

In terms of P/E ratio, TLS and SGT have shown better performance as compared to TEL

throughout 2009-2013. This means that shareholders were able to trust TLS and SGT more

as compared to TEL.


Page | 19

3.0 Company Representing the Best Investment A linkage can be form between the ratios, such that it is possible to determine the company

that has the best financial health amongst the three and therefore represents the best

investment. Linkages between the ratios can be formed through breaking down the return

on equity (ROE). ROE can be increased by achieving a higher return on assets (ROA) and

leverage. ROA can be measured from profit margin and asset turnover. Leverage can be

measured from debt ratio and internet coverage ratio.

Asset turnover (revenue/total assets) and profit margin (net income/revenue) is directly

linked to ROA (net income/total assets), therefore, to have a better ROA, an organization

must be able to perform well in terms of asset turnover and profit margin. In the case of

SGT, although that its profit margin is highest amongst the three company, it has not

perform well in managing its assets (asset turnover). Whereas, TEL has shown to have

achieved the highest value in its asset turnover, and owing to the shorter amount of time

for TEL to convert inventory and collect cash from its debtors much faster compared to TLS

and SGT. Nevertheless, TEL performed below SGT and TLS in terms of profit margin.

Conversely, TLS performed evenly for both asset turnover and profit margin, which led TLS

to have the better ROA.

Turning into the leverage multiplier, this can be derived from the capital structure analysis,

which consists of both debts to equity ratio and interest coverage ratio. Out of the three

companies, SGT performed better in both ratios. Nevertheless, its ROA was inferior

compared to TLS.

Therefore, among the three companies, TLS has managed to achieve the highest ROE; this

shows that TLS is in a better financial position to provide higher return to the shareholders.

Correspondingly, TLS has also proved to have better liquidity assurance, with its 2013

current ratio of 1.05 as compared to SGT and TEL that achieved the current ratio below 1.

The statement is further supported by TLSs high share price of $4.80 on the 6th September

2013, as compared to TEL and SGT, $1.92 and $2.97, respectively. This shows that TLS has

managed to have better market performance, and provides better return to the

shareholders, thus, TLS (Telstra Corporation Limited) represents the best investment.

Word Count: 3,000 Words excluding the title page, table of contents, headings, references,

footer, header, tables, charts/graphs, and table of references.


Page | 20

4.0 References Aspect Huntley Fin Analysis. (2013, September 6). Aspect Huntley Fin Analysis. Retrieved

September 7, 2013, from

http://www.aspecthuntley.com.au.ezproxy.lib.monash.edu.au/af/company/annuals

ummary?ASXCode=TEL&xtm-licensee=finanalysis

Aspect Huntley Fin Analysis. (2013). Aspect Huntley Fin Analysis TEL Business Summary.

Retrieved September 9, 2013, from Aspect Huntley Fin Analysis:

http://www.aspecthuntley.com.au.ezproxy.lib.monash.edu.au/af/company/mainvie

w?ASXCode=TEL

Moritz, S. (2012). Bloomberg. Retrieved September 7, 2013, from

http://www.bloomberg.com/news/2012-06-01/verizon-to-acquire-hughes-

telematics-for-612-million-in-cash.html

Singapore Telecommunications Limited. (2013). Directors report For the financial year

ended 31 March 2013. Singapore: Singapore Telecommunications Limited and

Subsidiary Companies.

Telecom Corporation of New Zealand Limited. (2012). Annual Report For the Year Ended 30

June 2012. Telecom Corporation of New Zealand Limited.

Telecom Corporation of New Zealand Limited. (2013). Annual Report for the Year Ended 30

June 2013. New Zealand: Telecom Corporation of New Zealand Limited.

Telstra Corporation Limited. (2011). Telstra Corporation Limited 2011 Annual Report.

Melbourne: Telstra Corporation Limited.

Telstra Corporation Limited. (2013). Telstra Corporation Limited - 2013 Annual Report.

Melbourne: Telstra Corporation Limited.

Verizon. (2012). Verizon 2012 Annual Report. United States: Verizon.

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