Financial Analysis AGLs Performance

Question: Describe about the Financial Analysis for AGLs Performance. Answer: Executive Summary The report given aims to highlight AGLs performance in FY2015 and compare the same with the previous year i.e. FY2014. Besides, a competitor has also been chosen in the form of Genesis Energy and performance is compared for the corresponding time period. The differences in the ratios of the two companies have been explored and based on this analysis investment advice has been given to the reader. Introduction AGL Energy is an Australia based integrated energy company which is involved in the complete energy value chain right from generation to marketing and distribution, The retailing of electricity is extended not only to residential customers but also commercial customers. The company even though was founded in 1837 but has assumed the current name only in 2006. The company has a host of coal based and gas based power plants and also focuses on the renewable segment namely wind, hydro and solar. The company boasts of having the largest portfolio of renewable energy plants in the Australian private sector (AGL Energy, 2015) Genesis energy is a Auckland based company which was formed on the back of energy reform way back at the turn of the millennium. Besides, electricity generation, the company also deals with LPG and natural gas retailing. The company has dual listing on both ASX and New Zealand Stock Exchange. It is a dominant player in the NZ market accounting for 42% and 26% market share with regards to retailing of natural gas and electricity respectively. With regards to electricity generation capacity, also, the company is the third largest private sector company in NZ (Genesis Energy, 2015). Income Statement AGL Energy The revenue growth is lacklustre for the year FY2015 and has come primarily on account of the acquisition of the New Energy Ltd. However, the concerning aspect for the company should be the muted growth in profits as on one hand the energy markets division continues to deliver stellar performance but the other operations has posted a significant loss which have tapered the gains made by the energy markets business. The requisite profitability ratios for AGL Energy over the period 2014-2015 are summarised below (AGL Energy, 2015) The above ratios indicate the lacklustre performance of the company in the year FY2015 when both ROA and net profit margin have witnessed a drop. One of the contributory reasons is the lack of growth in the revenue in certain segments of the energy markets particularly in the renewable energy segment. Further, with regards to profitability margins, the renewable energy segment has been a drag on the energy markets segment which otherwise would have posted even stellar results on the back of growth in the wholesale markets. Additionally, integration costs totalling to $15 million have been incurred for integration of New Energy Ltd in FY2015. However, the single largest factor that has contributed to reduced profitability is the other operations business segment which has operating losses. With regards to ROA, besides decreasing profit, the rising total assets also have made a contribution (AGL Energy, 2015) Balance Sheet AGL Energy With regards to the FY2015 balance sheet, only fixed assets and current liabilities have experienced significant change, however, the current assets have continued to retain their level. The increase in fixed assets in FY2015 has been to the extent of $ 1.6 billion primarily due to investment by the company in PPE. Also, the short term borrowings have surged by $ 398 million in FY2015, thus leading to the higher current liabilities at the end of FY2015. The relevant liquidity and capital structure ratios for the company are given below (AGL Energy, 2015) The above values suggest that short term liquidity ratios have shown a declining trend in FY2015. However, this is due to the constant level of current asset but an increase in the current liabilities level due to higher short term borrowings as explained above. Further, since the company is into energy retailing, hence inventories are typically lower sue to which quick ratio and current ratio both are above one. With regards to the long term liquidity, a critical parameter is debt to equity ratio which has decrease in FY2015. This is despite the fact that there has been an increase in the total liabilities. However, the increase in equity has been substantial primarily because of two reasons. One, the company has issued new shares to the tune of $ 1.2 billion in FY2015. Also, there has been contribution of the retained earnings from the income statement. This surge in equity is also responsible for increasing equity ratio despite the increase in total assets (AGL Energy, 2015). Cash Flow - AGL Energy The cash flow statement primarily consists of three major elements i.e. cash from operating activities, investing activities and financing activities. In the year FY2015, cash flow from operating activities increased by $ 443 million because the suppliers and employers were given lower payments in cash. The investing cashflow saw a huge jump in the cash outflow due to the company acquiring New Energy for $ 1.4 billion approximately. There was a net outflow in cash flow due to financing due to increase in repayment of loans in FY2015 as compared to the previous year (AGL Energy, 2015) Market Performance AGL Energy The market performance parameters for AGL Energy are summarised below. (AGL Energy, 2015) It is evident from the ratios above that there has been a decline in the EPS of the company which has been contributed to by both the declining profitability of the company along with rise in the total outstanding shares of the company as the share capital saw a significant in the year Fy2015. The company has significantly increased the dividends paid to the increased shareholders which caused a rise in the per share dividend and is incremental for shareholders (AGL Energy, 2015) Performance Comparison AGL Energy and Genesis Energy The comparison in the performance of the two companies is captured in the table outlined below ((AGL Energy, 2015;Genesis Energy, 2014). Profitability In FY2014, while AGL Energy leads in terms of profitability, the picture has turned upside down in FY2015 when Genesis Energy has the edge. Further, considering the lacklustre performance of the renewable segment in the absence of a stable climate policy in Australia, it is expected that underperformance would continue unless definite policy stance emerges and also the prices of CER recover globally (AGL, 2015) Liquidity- Both the companies do not face any short term liquidity crisis since the current ratio and acid ratio are maintained at level above one. The corresponding ratios for AGL is higher than Genesis primarily because of higher account receivables for the former owing to wholesale consumer portfolio. Gearing The gearing ratios for the companies seems similar and simultaneously hint that no liquidity issues are expected in the near future foe any company. Also, the operating profits generated by both company is healthy enough so as to meet the interest obligation (Petty et. al, 2015). Market performance While in absolute terms the EPS of AGL Energy may be higher but the growth potential seems to be higher for Genesis Energy which has registered a growth of 100% in the EPS in FY2015. This is also confirmed from the high P/E ratio in excess of 20 for Genesis as compared to P/E of 6-7 for AGL Energy. Similar case is witnessed in case of dividends where in absolute terms, AGL has the edge but in terms of dividend yield, Genesis is better off. Efficiency Ratios- The higher debtor turnover observed in case of Genesis may be explained on the basis of difference in revenue contribution of wholesale segments for the two companies. Conclusion The above trend analysis coupled with ratio analysis, hints to the fact that the performance of AGL Energy has diminished in the year FY2015 as compared to the previous year. This trend is also observed in the companys stock price which has been range bound. However, the Genesis company has showed a stellar performance with both topline and bottomline growth. However, it is imperative that these historical trends should be viewed cautiously as future trends may be significantly different (Damodaran, 2008). Also, it is possible that the accounting policies of the companies may not be same due to which the ratios may not be comparable. Further, the two players operate in two different markets and hence the woes of AGL may be attributed to uncertain policy regime in Australia (Parrino Kidwell, 2011). Recommendations Based on the limited analysis that has been conducted above, it is recommended that investment should be made in the competitor i.e. Genesis energy. The factors favouring this decision are highlighted below (Brealey, Myers Allen, 2008). High dividend yield of 5-7% on the stock. High growth potential offered by the company in the NZ market which is also captured by the high P/E ratio. Low leverage and dominant position which can be further leveraged to enhance coverage and thereby drive greater growth. References AGL Energy 2015, Annual Report 2015, Available online from https://www.agl.com.au/about-agl/media-centre/article-list/2015/august/agl-annual-report-2015 (Accessed on August 31, 2015) Brealey, R, Myers, S Allen, F 2008, Principles of Corporate Finance (Global edition), 10th edn, McGraw Hill Publications, New York Damodaran, A 2008, Corporate Finance, 2nd edn, Wiley Publications, London Genesis Energy 2015, Annual Report 2015, Available online from https://www.genesisenergy.co.nz/documents/10180/2699552/Genesis+Energy+Annual+Report+FY2015.pdf/fa13f57b-fd37-4262-9bb2-5c591a55aab3 (Accessed on August 31, 2016) Parrino, R Kidwell, D 2011, Fundamentals of Corporate Finance, 3rd edn, Wiley Publications, London Petty, JW, Titman, S, Keown, AJ, Martin, P, Martin JD Burrow, M 2015, Financial Management: Principles and Applications,6th edn, Pearson Australia, Sydney