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Financial Analysis : Genesis Corporate Finance
0 Downloads | 7 Pages 1,552 Words | Published Date: 28/11/2017
AGL Eenrgy boasts of a long history which commenced in 1837, although the current company came into existence in 2006 only. It is listed on the ASK and a part of the ASX 200 index. It is an integrated energy player which is involved in production of electricity along with retailing of the same to both commercial and residential customers. The company has an impressive generation portfolio which consists of traditional coal based thermal power plants along with gas based and also renewable sources portfolio. The renewable energy generation portfolio possessed by the company is largest for any Australian private company (AGL Energy, 2015)
Genesis energy came into existence as a result of the energy reforms that took place in the New Zealand electricity market in the 1999. The company is involved in generation of electricity and also is involved in the retailing of LPG and natural gas. The company is based in Auckland and listed on both Australian and New Zealand stock exchanges. The company is the largest retailer of natural gas and electricity in NZ with an estimated share of 42% and 26% respectively (Genesis Energy, 2015).
With regards to the income statement of AGL Energy, it is evident that that the revenue growth is quite muted. However, the increase in the expenses is comparatively higher. However, for Genesis Energy there is an increase in the revenue on account of increased generation and supply coupled with increase in the profitability due to decreasing expenses. The comparison of the profitability ratios for the two companies is shown below (AGL Energy, 2015)
It is apparent from the above figures that both the ROA and net profit margin for the company have declined. This may be attributed to the lacklustre growth in revenue primarily because of the pressures in the consumer market due to greater competition. Additionally, the cost for the production CER (Certified Emission Reductions) also increased besides the $ 15 million integration cost for New Energy.. Further, the decline in profitability could also be explained on the back of the lacklustre performance in the other operations division which constitutes of thermal electricity production along with electricity production from source such as natural gas and other renewables (AGL Energy, 2015).
Genesis energy has increased the revenue on the back of greater electricity generation from coal and hydro power plants coupled with decreased expenses related to employees and fuel management due to the emphasis on digital platforms and increased operational efficiency (Genesis Energy, 2015).
It is evident from the balance sheet of the company at the end of FY2015, the major changes have been in the fixed assets and also the current liabilities. The fixed assets have witnessed an increase of almost $ 1.6 billion on account of increase in PPE. Besides, the current liabilities have increased due to increase in short term borrowing from $ 45 million at the end of FY2014 to $ 443 million at the end of FY2015. The ratios with regards to liquidity and capital structure are presented below (AGL Energy, 2015; Genesis Energy, 2015)
On the basis of the above table, it is apparent that the current ratio and quick ratio have declined which is primarily attributed to the increased short term borrowing in the year FY2015 which caused the current liabilities to increase while the current asset level has continued to remain at the last year level only. The debt to equity ratio at the end of FY2015 has witnessed a small decline even though total liabilities have increased fuelled by the increase in current liabilities. This can be explained by the higher percentage increase in the equity on account of increased in share capital by almost $ 1.2 billion besides the increase contributed by the retained profits (AGL Energy, 2015)
The sharp decline in current ratio and quick ratio for Genesis is on account of increase in short term borrowings from $ 12.3 million at the end of FY2014 to $ 117.8 million at the end of FY2015.
Cash Flow Trends - AGL Energy
It is apparent from the cash flow statement of the company that there has been a significant increase in the cash flow to the tune of almost $ 1.4 billion on accounting of investing activities in FY2015. Besides, the cash flow from operations have increased by $ 443 million on account of lower cash payments to suppliers and employers. Due to higher repayment of debt in FY2015 as compared to FY2014, there is a net outflow of $ 207 million due to financing cash flow (AGL Energy, 2015).
With regards to Genesis Energy, no major changes have been indicated with regards to any the cash flow statement and the various components are similar to corresponding figures for FY2014 (Genesis Energy, 2015).
Market Performance – AGL Energy
The relevant indicators of the market performance of the company for FY2014 and Fy2015 are presented in the table below (AGL Energy, 2015)
From the table above, it is apparent that EPS per share has dipped significantly in the year FY2015 which is but expected as the net profit in FY2015 has dipped in comparison with the previous year and also because there has been an increase in the weighted shares due to fresh issue of shares in FY2015. The dividend per share has increased for the shareholders as the company decided to pay a higher sum of money as dividends to shareholders (AGL Energy, 2015).
However, for genesis EPS has increased on back of higher profits and also in line with the higher profits, dividend paid to shareholders per share has also increased (Genesis Energy, 2015).
Comparison of Financial Performance – AGL Energy and Genesis Energy
The comparable set of ratios for the two companies is listed below ((AGL Energy, 2015;Genesis Energy, 2014).
Profitability – With regards to profitability, it is apparent that Genesis energy has been an outperformer especially in the year FY2015. This may be attributed to the lower portfolio of Genesis with regards to renewable energy as the focus is only on wind and hydroelectric. This is in contract with ACL Energy which also tends to focus on solar and other renewable sources which have underperformed (Damodaran, 2008).
Liquidity- The current ratio and quick ratio for both companies is in excess of one which indicates that business is robust. However, the higher liquidity ratios of AGL can be explained on the basis of larger scale of operations and more receivables due to greater contribution from wholesale markets.
Gearing – The gearing ratios for both the companies are comparable and indicate that these have no long term liquidity issues. This is because the D/E ratio for both companies is lesser than 1. The interest coverage of both companies is impressive which does not indicate any issues (Petty et. al, 2015).
Market performance – The EPS as expected is greater for AGL energy, however the encouraging trend for Genesis is that its EPS has grown by 100% on a y-o-y basis which augers well for the company. Even though dividend paid by AGL energy is higher in absolute terms in comparison to Genesis but the dividend yield for Genesis is significantly higher.
Efficiency Ratios- The debtors turnover of Genesis is significantly higher than that of AGL energy which to an extent is attributed to the difference in the segments served.
On the basis of the above analysis, it may be concluded that AGL energy has underperformed in FY2015 in comparison to FY2014 with all indicators lagging and this has led to the stock price remaining almost constant with choppy sideways movements. The other operations segment of the company is a drag on the energy markets and it is unlikely that it would turn dramatically. But the company still is robust and in due course as the policy regime becomes more definitive, the company would be in leveraging position. However, Genesis has shown a significant improvement in the various financial indicators in the year FY2015 as is apparent from the positive changes in all ratios and financial indicators. (Parrino & Kidwell, 2011).
It is recommended that the investor should not invest in AGL energy as the underperforming of the company’s renewable business is expected to continue. Further, there is uncertainty of policy in Australia with regards to energy prices and also suitable tax structure to promote renewable energy sources which globally are witnessing a soft market (AGL Energy, 2015).. In such scenario, it makes sense to invest into Genesis which pays a dividend yield of almost 6% and has showed encouraging financial performance in FY2015. Also, the significant market share that it commands in the New Zealand market is an additional benefit for the company (Brealey, Myers & Allen, 2008).
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
Genesis Energy 2015, Annual Report 2015, Available online from https://www.genesisenergy.co.nz/documents/10180/2699552/Genesis+Energy+Annual+Report+FY2015/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
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