Corporate Leverage Strategy in Emerging Market

Question: Discuss about the Corporate Leverage Strategy in Emerging Market. Answer: Introduction The statistics of 2015 reflects that Australia has experienced a high-profile release in the smartphone division with the growing preferences of the customers. In the background of the similar statement, KarpaviÄ ius (2014) asserted that the sales in the mobile retail volume are expected to stagnate over the course of the forecasted period. The reports of the previous scholar's display that the mobile division of the Australian market is expected to increase by 10% (Min, 2015). The study attempts to evaluate the strategic financial activities of Telstra. The annual report of Telstra, 2015 signifies that the brand continues to perform strongly in the Australian market (www.telstra.com.au, 2016). The existing report displays that the increasing revenue helped the Telstra to increase the dividend up to $ 4.7 billion. Accounting analysis Financial statements of Telstra are prepared by the Australian Corporations Act 2001. Telstra follows various authoritative pronouncements made by the Australian Accounting Standards Board (AASB) (Min, 2015). For example, depreciations and amortisations on the assets of the business are computed and accounted for by AASB 116 Property, Plant and Equipment and AASB 138: Intangible Assets respectively. Annual Report of the organisation shows that the financial statements comply with International Financial Reporting Standards (IFRS) (Chibuzor, 2016). The currency used in the preparation of financial statements is Australian dollars. Few non-Australian controlled entities prepare their accounts in the other currency. These are subsequently converted into Australian dollars for the purpose of consolidation. Erutku (2014) stated that the effect of all intragroup transactions and balances are eliminated in full from the consolidated financial statements of the organisation. A Financial statement is prepared on the historical cost basis. Few financial instruments are recorded at fair value. Assets held for sale are measured at fair value less cost to sell. Financial analysis A thorough study of the Annual Report of the organisation reveals the financial performance of Telstra. It is noted that the revenue has increased approximately 3% between the period FY 2014 to FY 2015 (www.telstra.com.au, 2016). This increase is mainly attributable to enhancement of business of rendering services and sale of goods. This increase in revenue is also partially due to the revenues earned from construction contracts. Though the revenue generated from Foxtel Partnership has decreased slightly, this has been offset by the increase in revenue from property rent (Urza, 2009). Operational expenses like labour expenses, cost of purchase and other general and administrative expenses have also amplified in the current financial year. This has led to the increase of total expenses at around 5% from its previous year. Moreover, share of net profit from joint ventures and other associated entities has also declined drastically to the extent of 21%. This has caused sharp decrease in Earnings before interest, tax, depreciation and amortisation (EBITDA) from $11,135 million (2014) to $10,745 million (2015). Though interest costs have dropped significantly to the extent of 28%, reduction in Profit before Tax (PBT) could not be avoided in the current financial year. EBIT has decreased by 2% from last year (www.telstra.com.au, 2016). Profit from the continuing operation has diminished by 6% that is from $4,549 million (FY2014) to $4,286 million (FY2015). Profit from the discontinued operation has amplified considerably. In FY 2014, there was a loss of $204 million, whereas, the same for FY 2015 has been a profit of $19 million. This has contributed to the overall bottom line of the company, and total profit attributable to the shareholders of Telstra and other non-controlling entities stood at $4,305 in FY 2015 (www.telstra.com.au, 2016). This was a minor decrease from its last financial years figure of $4,345 million. The above mentioned financial performance of Telstra in FY 2015 has not impacted on the Earnings per share (EPS) of the firm. Basic EPS has remained nearly constant at 34.5 cents per share, and Diluted EPS has increased marginally 34.3 cents per share in FY 2014 to 34.5 cents per share in FY 2015 (www.telstra.com.au, 2016). The table below in Appendix 1 and 2 show the above-mentioned calculation in details. Forecasting The table in Appendix depicts the financial history of the firm for last 5 years. From the table, it is identified that the Return on Average Assets (ROA) has increased in last 5 years. In the year 2011, the same was 15.90%, whereas the same grew to 20.40% in 2014. However, the firm witnessed a fall in ROA figure in FY 2015 and the same stood at 18.90% (www.telstra.com.au, 2016). Appendix shows such trend in ROA for last 5 years. Same trend is applicable for Return on Equity (ROE) also. This is graphically portrayed in Appendix. Dividend Payout Ratio (DPR) has steadily declined over the years, and the same has been 88% in FY 2015 (www.telstra.com.au, 2016). It may be inferred that the decrease in DPR is because of the fact that the company is attempting to increase its accumulated reserves for the purpose of future expansion and sustainability. Net Debt of the firm has also regularly decreased from $13,595 million in FY 2011 to $10,521 million in FY 2014, except in FY 2015 with an in crease to $13,566 million (www.telstra.com.au, 2016). Valuation The financial performance of the firm has been found to be robust for last few years (Wahlen et al. 2010). An attempt has been made to value the share prices and consequently the entire firm for FY 2015. While doing the same, Discounted Cash Flow (DCF) technique has been used. The table shown in Appendix shows the last 5 years financial performance of the business. Free Cash Flow (FCF) for last 5 years has been identified. The same has been discounted using the derived Weighted Average Cost of Capital (WACC) (www.telstra.com.au, 2016). This gives the Present value (PV) of all free cash flow of the firm for last 5 years. On the other hand, this may be termed as the total value of the firm. By deducting the borrowings from the derived amount, value of equity may be ascertained. This exercise provides the total value of equity capital to be around $94,867 million for FY 2015 and $7.74 per share (www.telstra.com.au, 2016). Equity security analysis The income statement of Telstra states a poor equity financing state, it has dropped $44million during the year 2014-2015, constituting to 1% drop, and this state is a result of declining share of net profit from joint ventures and associated entities. According to the Blinder (2010), the price per share has dropped by 0.88% in the year 2015.Though the revenue has increased other incomes have decreased 40%.As a result of this interest of shareholders have been diminishing, further aiding to price per share drop, absence of controlling interest might hamper the security of the company. The financial cost has declined $267million, meaning, less interest payable on long or short term liabilities, on the other hand equity share holders has also declined.Comparing the equity with lowered financial cost, it can be stated equity, with time the interest of shareholders will increase in the company, bringing the companys equity health back to track (Busco, 2008). Earnings per share for continuing operation has declined by 5%.The reasons for the drop of Telstra share is introducing costly products in newly acquired market in Asia, without sufficient market survey.Other reasons are increased competition, previous dormant competitors becoming active, negative share market trend. The table in Appendix below shows the share price movement of the firm for last 4 year (FY 2011-15). In FY 2011 the price of Telstras share was around 2.5 to 3.5 cents whereas the same has risen to 6.140 as on 30th June 2015. Credit analysis The credit rating of the firm has been pretty standard. The table below in Appendix shows the credit rating provided by the agency like SP and Moody's. These ratings prove the fact that the firm has been sound enough to repay its debt obligations and hence enjoy a superior grade by the rating agencies. This has also contributed to Telstras strong reputation among the financial institutions and banks. As far as the credit risk of the business is concerned, Telstra has a profound credit policy for performing a thorough credit risk assessment and accordingly undertaking the risk mitigation processes. The Credit risk of the firm is mainly of two types namely customer credit risk and treasury credit risk. Receivable balances of the business are monitored on a constant basis and any deviations from the plan are noted and acted upon accordingly (Lendel et al. 2015). Telstras policy is to reduce significantly the level of bad debt so that the realisations are assured and risk of non payment is lessened to optimum level. Investments made by the organisation in the money markets are exposed to treasury risk and hence effort is undertaken to monitor the process and manage the risk accordingly (Kieschnick Rotenberg, 2015). The company engages Value at Risk (VaR) methodology to manage credit exposure in the market. Mergers and acquisitions The acquisition of Pacnet has enabled the firm acquiring 29 data centres along with the 109 points of presence (www.telstra.com.au, 2016). The annual report of FY 2015 indicates that new venture Telkomtelstra had also introduced a higher business opportunity for the firm. In addition, the Ooyala has helped the firm increasing the ownership, which has become 97.3% now (Lehner et al. 2015). The financial report indicates that overall merger and acquisition has improved 23.2% NAS revenue of the firm. The reported results also indicate that these acquisitions have resulted increase in the free cash flow in the FY 2015. On the contrary, it has been identified that Tesltra acquired Ooyala in the FY 2014 was not a pure acquisition, as Tesltra tried to keep Ooyala independent entity (www.ooyala.com, 2016). It has been estimated that this merger would help the firm to earn revenue at a growth rate of 20% , primarily due to the video advertisements (www.telstra.com.au, 2016). The free cash flo w adjustments related to the merger and acquisition activity have resulted potential operating results. Additionally, the acquisition with Pacnet has almost doubled the customer base of Telstra in Asian belt (telecoms.com, 2016). This acquisition has enabled Telstra to further increase the China operations through its joint venture. In this context, Lehner et al. (2015) stated that Pacnets acquisition by Telstra was done against a cash value of $5 billion. This acquisition has helped Telstra exploiting the skilled workforce of the Pacnet, thereby exploiting the opportunities to expand the business operation beyond Australia. The executive director of the Telstra announced that the firm had acquired Melbourne headquartered service provider Kloud. The main purpose of the acquisition is to enhance the growth and development of the firm for achieving the next success of the ladder regarding operating margin (Kohlbeck Warfield, 2010). According to the opinion of Liu (2011), the impact of this acquisition process is to improve the cloud-based application of the firm as the organisation had lacked in the enterprise cloud application. This initiative would build up the future capability of the firm and the firm would be able to leverage the channel partners (Edited Risberg, 2006). The Klouds value proposition has the capability to develop a cloud strategy for the customers. The entitled mobile broadband customers of the firm can enjoy the unlimited free Wi-Fi data from the Telstra Air hotspots around the Australia. In the opinion of Coate (2013), the Klouds value proposition is also helpful for the firm to select the suitable technology to transfer the workload. The financial data analysis indicates that the firm has improved its profit on sale by $561m in FY 2015 by incorporating the several merger acquisitions policies (www.telstra.com.au, 2016). Recommendation Since the market price of the share (MPS) as on 30th June 2015 is $6.14 only, and the value per share is calculated at $7.74, it may be inferred that the price of the firms share is undervalued. Hence, it is advisable to hold the shares of the firm. In future, the price of the same will rise. For prospective investors, it is recommended that they should buy the shares of Telstra for a similar reason. Conclusion The primary assertion of the study indicates that the strategic financial analysis of the firm Telstra. While conducting the study, the accounting analysis, financial analysis, valuation and the equity analysis for the firm has been illustrated by the research associate. It helps to identify the revenue margin and the other equity share of the enterprise. Furthermore, the credit analysis of the organisation has donated to Telstras strong reputation among the financial institutions and the other banks. Finally, a strategic recommendation provided by the researcher helps to improve the share values and the interest of the prospective investors. References Blinder, A.S. (2010) Time for financial reform, plan C, The Economists Voice, 7(1), pp. 132134. Busco, C. (2008) Linking governance to strategy: The role of the finance organization, Strategic Direction, 24(4), pp. 2025. Chibuzor, I.M. (2016) The effect of merger and acquisition on development of a firm A case of Migros and TansaÃ…Å ¸ merger in turkey, International Journal of management and economics Invention, 4(2), pp. 125128. Coate, M.B. (2013) Unilateral effects in merger analysis: Models, merits, and merger policy, International Journal of the Economics of Business, 20(2), pp. 145162. Edited, A.R. Risberg, A. (2006) Mergers and acquisitions: A critical reader. Edited by Annette Risberg. New York, NY: Taylor Francis. Erutku, C. (2014) Endogenous merger with learning, The B.E. Journal of Economic Analysis Policy, 14(3), pp. 220225. Freddie (2014) In Ooyala, Telstra sees a partner, not just an acquisition. Available at: https://www.ooyala.com/videomind/blog/ooyala-telstra-sees-partner-not-just-acquisition (Accessed: 8 August 2016). KarpaviÄ ius, S. (2014) Dividends: Relevance, rigidity, and signaling,Journal of Corporate Finance, 25(3), pp. 289312. Kieschnick, R. Rotenberg, W. (2015) Working capital management, the credit crisis, and hedging strategies: Canadian evidence,Journal of International Financial Management Accounting, 27(2), pp. 208232. Kohlbeck, M. Warfield, T. (2010) Accounting standard attributes and accounting quality: Discussion and analysis,Research in Accounting Regulation, 22(2), pp. 5970. Lehner, O.M., Grabmann, E. Ennsgraber, C. (2015) Entrepreneurial implications of crowdfunding as alternative funding source for innovations,Venture Capital, 17(1-2), pp. 171189 Lendel, V., Soviar, J. Vodk, J. (2015) Creation of corporate cooperation strategy, Procedia Economics and Finance, 23(2), pp. 434438. Liu, B. (2011) A brief discussion on legal guarantee of industry security in foreign capital merger and acquisition, Asian Social Science, 7(2), pp. 1820. Min, B. (2015) Corporate leverage strategy in an emerging market, Global Business Finance Review, 20(2), pp. 3548. Min, B. (2015) Corporate leverage strategy in an emerging market,Global Business Finance Review, 20(2), pp. 3548. Mobile phones, prepaid phones, broadband, internet, home phones, business phones (no date) Available at: https://www.telstra.com.au (Accessed: 8 August 2016). Skinner, T. (2015) Telstra wraps up Pacnet acquisition. Available at: https://telecoms.com/416552/telstra-wraps-up-pacnet-acquisition/ (Accessed: 8 August 2016). Urza I., F. (2009) Too few dividends? Groups tunneling through chair and board compensation,Journal of Corporate Finance, 15(2), pp. 245256. Wahlen, J.M., Baginski, S.P. Bradshaw, M.T. (2010)Financial reporting, financial statement analysis and valuation: A strategic perspective (book only) - 7th edition. 7th edn. United States: South-Western Cengage Learning.