Accounting Assignment: Financial Analysis Of Ahmad Zaki Resources Berhad (AZRB) & BinaPuri Holdings Bhd

Question

Task: Ratio Analysis
The Managing Director of your company is considering diversifying the company’s portfolio by investing in other successful companies in other industries. Two companies have been identified for the investment purpose. Due to limited financial resources, only the most successful company with high potential of providing highest return would be selected.

Required:
Prepare a report on accounting assignment that summarises the financial aspects of the companies’ operations for the past 3 years. This report will be presented to the board of directors at their next meeting.

The report should include the following points:
i. Background of the companies.
ii. Analysis on the financial risk by using ratios (such as liquidity risk, debt ratio etc). Analysis should include comparison with previous year statistics, competitor, and industry average ratios.
iii. Analysis on the non-financial risks (such as operational risk, technology risk, integrity risk, market risk etc) that relevant to the company.

• A description of the risks and potential impacts
• Indicator or triggers that need to be monitored to help identify the risk as early as possible
Recommendation for investment with justifications.

Answer

Introduction
Financial analysis as presented in the accounting assignment is one of the main mechanisms that enables to understand the financial strength, as well as weakness of the firm . Further, it can be utilized to understand in which company the investment should be done. In this report, the selected companies are Ahmad Zaki Resources Berhad (AZRB) and BinaPuri Holdings Bhd. The report aims to evaluate the performance of both these companies using the annual report of the year 2020 and 2021. Further, an analytical study is being done to understand the investment potential of one company over another. The report even sheds light on the evaluation of the non-financial risk like the operational, technology and integrity risk that is linked to the company. It even provides a brief description of the risks and the potential influence. Lastly the report concludes with the investment decision and from the interpretation it can be commented that AZRB is better placed as compared to BPUR because the company has positive profitability followed by a decent liquidity.

i. Background of Ahmad Zaki Resources Berhad (AZRB) & Bina Puri Holdings Berhad
Ahmad Zaki Resources Berhad (AZRB) is a pioneer in the Engineering and Construction group with the headquarters located in Kuala Lumpur. The company is listed on the Main Market of Bursa Malaysia. Since its inception in the year 1982, the company has grown in a rapid manner and transformed into a trusted ad prominent leader. The company is engaged into investment holding that provides management services and contractors of civil and construction work. It performs in four segment that is oil and gas trading followed by other linked services that include dealing in marine fuels, products of petroleum, cultivation that is linked to oil palm and other operations that is linked to development of property, holding of investment and provision of management services . The main rivals of the company include IJM Corporation Berhad and Sunway Construction Group Berhad.

Bina Puri Holdings Berhad is a leader as a contractor for earthwork and building. The company was formed in 1990 and operates into five main segments. It is listed on the main board of Bursa Malaysia as a public limited company. The diverse business of the company comprises of investment holdings, civil and building which is both on national and international basis, development of property, operations of quarry and hospitality management. The group is certified and has won many awards for the same. The portfolio of Bina Puri consists of the major investment portfolio of the 33 km toll highway that links the Kuala Selangor Expressway, the Main place residence and the other powerplants in Indonesia . Bina Puri’s notable list of investment portfolios includes the 33km toll highway linking KL-Kuala Selangor Expressway, the Main Place Residence and Mall at USJ 21, and power plants in Indonesia. The main rivals of the company include IJM Corporation Berhad and Sunway Construction Group Berhad

ii. Analysis on the financial risk by using ratios

• Profitability
Of the three elements of vertical analysis, profitability is best suited for investors as they provide a general understanding of the performance of the company. Profitability here is compared in three major ways that is the Return on equity ratio, Return on Asset ratio and the Net profit margin. Such ratio helps in explaining the profit generated on the investment of the shareholder, utilization of the assets by the company and the profit generated over the net sales.

Return on Total Assets helps in the measurement of the company efficiency in terms of management of the asset. Based on the table it can be commented that both the company are performing below the par when it comes to the asset management. However, if compared to BPUR, AZRB is performing better as it has a positive rate. Investors consider such ratio because it denotes the effectiveness with which the company is utilizing the resources. IJM posted 2.21% as their ROA with industry average being 2.5 indicating the company is lagging behind the competitor and industry average.

Return on Equity is utilized to understand the company’s efficiency of using the shareholder money for generation of profits unlike the ROA that comprises of both equity and debt while the ROA is from the investor point of view. From the table it can be ascertained that ARB is performing better as it is in the positive zone however, a massive decline is observed. On the other hand, the ratio of BPUR is worrying as it indicates weakness. From the investor point of view both the company’s projects weakness. if compared with the rival of AZRB that is IJM Corp Bhd and the industry average the performance is low. IJM posted 2.52% as their ROE while the industry average is 4.1. Both the companies failed to meet the industrial average and the rival’s numbers As per the table, it can be commented that the net profit margin of both the company runs weak and thereby is a matter of great concern because the investors usually check the profitability before investing. The NPM of AZRB has bettered from -9.82% in 2020 to 3.07% in 2021. On the other hand, the ratio for BPUR is negative that signals negative trend.

The net profit posted by IJM is 8.55% and the industry average stands at 8.77. Both the companies in question failed to deliver and are much below the industry average and the competitor numbers.

Result of IJMS ratios

Current ratio between AZRB and BPUR stands at 0.84:1.18. The current ratio is for reflecting the ability of the firm to complete the obligations of the short term. BPUR ratio indicates that the company has the capacity to repay the debt because the presences of currents are more as compared o the current liabilities.

Quick assets can be easily converted into cash for example accounts receivable and other investment of short term . Quick ratio between AZRB and BPUR stands at 0.80:0.85. AZRB quick ratio denotes that $0.80 was available to repay a $1 of current liabilities. Hence, deficit exists while repaying the obligation and the company needs to bridge this gap. On the other hand, BPUR has $0.85 of quick assets to repay $1 of current liabilities. There are several issues that make this to happen such as requirement of a greater number of days for receipt of cash.

The quick ratio of IJM is 1.22 times and industry average being 1.55 times. Both the companies are far behind the rival ILM and the industry average.

• Solvency
This analysis projects the capacity of the companies in meeting the long-term requirement that would help the company to stay afloat and repay the long term debts. Having debt is not bad for the business if utilized in an effective manner . Moreover, it is an opportunity to capitalize the future profits. There are risks associated with the utilization of debt like the chances of incurring losses and unable to bear the interest component. This might slow down the operation and lead to bankruptcy .

The debt to equity of AZRB and BPUR is high in both the years with AZRB ratio being 7.29 and BPUR being 4.84. BPUR is better places because it has incurred less debt. Hence, considering this, AZRB is likely to be riskier as compared to BPUR. Presence of more debt indicates higher interest payment and this would put immense pressure on the company’s sales The debt to equity of the rival IJM stands at 51.32% which is reasonable and the industry average is 64.65% which means the debt component should be under desired control. In both the cases the debt component of the company is high hence not an ideal match

As seen in the above ratio the debt ratio of both the companies AZRB and BPUR stands high. However, the debt ratio of AZRB indicates higher component of debt where the percentage of debt is more than 50%. in such a scenario it would be difficult for the company to borrow money from the market. Hence, both the companies are under risk and pressure because the debt ratio ranks above 60%. The debt management policy of the company runs weak and hence management must ensure effective plan for lowering the debt.

iii. Analysis on the non-financial risks

BPURI
Economic risk
An overall decrease and shutdown in the local and global economy will affect the construction and property division and will further create overcapacity situations for the capital resources of the businesses. A consistent decline in sales has been noticed in the division of property because of the saturated market conditions, customer sentiments, and step competition. The factors which can further affect the profitability of the group are:

• Getting into long-term recurring projects for securing yearly incomes.
• Diversifying the business by entering various geographical locations.
• Creating a review system for the business to address the shortfalls and gaps.
• Try and maintain a good relationship with the contractors which can be further used for the negotiation of deals with many favourable terms.
• Create a new scheme to retain the customers and further build relationships with them to gain more projects.

Project risk
There are various risks in the property and construction business of various natures which may lead to a great deal of loss to the group. Various short-term and long-term risks are associated with this business which may arise from any kind of delay in the project, inflation in the construction costs, and unavailability of the raw materials, inefficient project managers, and shortage or absence of skilled workers.

Mitigation strategies
Various strategies can be developed to manage project risks:

• Conduct a detailed study to analyse the common significant risks that are occurring in such projects.
• Creating a certain governance structure that will define the project and planning process for efficient functioning.
• Conducting a talent management program for up-skilling the labours and workers.
• Delegating attentive and efficient project managers to calculate the risks and manage the project efficiently.

AZRB
Technical risks
Since AZRB is into construction technical risks are present that restricts the company from creating the product that is desired by the customers. This comprises of the resource’s uncertainty and raw materials availability, inadequate investigation of the site or the incomplete design. Such risks happen when there are changes in the scope of the project and needs and if errors happen in design

Environmental risk
This risk comprises of natural disaster and other seasonal implications. Such risks are generally overlooked when people are unfamiliar with the local scenario. Weather risk can lead to potential delay in the construction project.

Management related risk
This appears as a common management related risk that is uncertain productivity of resources. Before the initiation of the project it is important that the company should have skilled staff and must address the roles and responsibilities. Failure in such can lead to immense losses.

Potential risk associated with the companies is:
i. Working at height
The construction of buildings needs employees to work at height that accounts for over one quarter of the construction industry death. The utilization of ladders, mobiles and stairways exposes the workers to the risk of falling from height. While working at height, workers have access, as well as restriction to mobility, which is another factor that leads to more risk.
ii. Moving vehicles
The construction site is changing as the project commences. In the ever-changing environment a large number of vehicles and hazards are present. Overhead lifting tools, supply vehicles, and dump truck are steering that increases the accident chances.
iii. Manual Handling
On the site of construction, materials and equipments should be lifted. In some cases, lifting tools might be used however some time workers are needed to do this work manually. This might lead to lower back injury that leads to 15% of injuries across the sector .

Triggers to be identified
The top-level management of the organization is responsible for identifying and evaluating and monitoring and reporting the risks and internal control strategies that may be appropriate for the organization in that particular time frame. The operational manuals and policies determined by the organization will help them to run the business operations with efficiency
The audit committee of the organization must comprise of regular risk management assessment and reviewing internal audit and control processes for determining the effectiveness of the systems. The audit committee of the organization has an independent external and internal group of auditors which helps them to define the authenticity of the systems without any kind of unwanted disturbances. The audit Committee report states the details of the tasks carried out by the committee The organization must create an annual plan and budget for various business divisions. The efficiency of each business division will be calibrated by assessing the budget of the group with explanations of expenses on significant variances presented to the board every quarter.

Policies and procedures
iv. Recommendation for investment with justifications
AZRB reported a loss in the year 2021 amounting to .1 million (2020: RM116.7 million). There was an improvement in 2021 as compared to 2020. The lower losses were due to measures undertaken by the group to lessen the cost for mitigation of the situation. However, other ratio such as ROA and ROE posted lower figures of 0.14% and 1.91% respectively. Similarly, the liquidity of the company is below the standard ratio of 1:1 indicating deficit in the current and quick liabilities. The company even ranks high in terms of solvency ratio where debt to equity is 7.29 and debt ratio is 93%. With a lower profitability and higher debt, the company does not seem a viable option for investment.

On the other hand, BPUR posted revenue of RM287.5 million and loss of RM62.4 million that attributed towards lower performance across all segments which was mainly due to disturbance in the operating environment due to Covid-19 cases. The profitability of the company posted negative numbers which is NPM, ROE and ROA of -17.27%, -3.38% and -0.60% respectively. The liquidity is better as compared to AZRB. The debt of the company is lower as compared to AZRB however the debt to equity and debt ratio stands at 4.84 and 83% respectively. Similar condition is observed here whereby the company is performing at loss making situation however if compared with AZRB it is a better venture because the liquidity is better and debt component is low. Hence, considering the fundamentals it can be considered for investment.

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