Read the requirements very carefully and finish 2parts of a group report. 1200words approx.

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timer Asked: Jun 5th, 2018
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Question description

Read the requirements very carefully and finish 2parts of a group report.1200words approx.

The two parts are "valuation" and "recommendation"

I have uploaded the other parts which have been done already and you can have a look.

The company you write about has to be "Aurizon (azj)". And the peer industry(if needed) is Qube Holdings.

Please read everything very carefully. Make sure it follows the instruction very well.

All the work has to be 100 percent original.

Any guides/existing papers you find on internet will definitely not be accepted

Any kind of plagiarism will definitely not be accepted.




ACCG350 – S1, 2018 – GROUP MAJOR ASSIGNMENT INSTRUCTIONS This assignment is to be completed in groups of three or four students. The students take the viewpoint of sell-side analysts. The markers take the viewpoint of shareholders educated in accounting and finance but not necessarily intimately familiar with the company subject to analysis. There are two components to this assessment task: the presentation and the report. PRESENTATION The presentations, of work-in-progress on the major assignments, will occur during the tutorials in Weeks 8 and 9. The presentations are worth 5% of the total assessment. The presentations will be on the strategic and business analysis, accounting analysis and financial analysis. There are two principal purposes of the presentation. The first purpose is to enable students to obtain feedback, on their work to date, from the tutor and their fellow students. The second purpose is to discipline the students to work of the major assignment. Each presentation should last for 12 – 15 minutes. All members of the group are required to contribute. After each presentation, there will be a short group discussion, to provide the presenters with feedback. It would be a practical impossibility to adequately cover all aspects of the aforementioned topics during the time allocated. Hence, each group should select up to four issues for which they would most like feedback. Students must select at least one issue from all three aforementioned stages of the analysis. Their presentation should focus on these issues. Students are welcome to use visual aids. The presentations will be marked out of 25. Each student in each group will receive the same mark for the presentation. The marking criteria for the presentations are as follows: explanation of the issues for which the group would like feedback (15 marks), presentation and communication skills (4 marks), structure (4 marks) and timing (2 marks). Marking templates will be provided on iLearn. No extensions will be granted. 1 THE REPORT Each group is required to submit a report of their sell-side analysis. The report for the major assignment is worth 15% of the total assessment. The report is to be approximately 20 – 25 pages in length, excluding references and appendices. The reports are to be in 1.5 spacing. The reports will be marked out of 100. The following sections should be included. 1. Introduction (/5 marks), including a clear statement of objectives, an outline of the structure of the report and a summary of the principal findings. 2. Business Strategy Analysis (/15 marks), including the following: • • • • • A clear statement of the company’s activities Analysis of macroeconomic settings, and an assessment of their impacts for the company being value. Students may include analyses of other macro-level factors, such as demographic and regulatory factors. Analysis of the industry in which the company operates Evaluation of the company’s competitive and corporate strategy Assessment of the implications of these factors for the company’s future profitability. 3. Accounting Analysis (/15 marks), including the following: • • • • • • • Identification of three critical success factors for the company Identification of three key accounting policies for the company Assessment of the windows for managerial discretionary afforded by Australian accounting standards with respect to the critical accounting policies Identification of potential incentives for opportunistic accounting policy choice Evaluation of the accounting strategies followed regarding the key accounting policies, including comparison with an industry competitor Evaluation of the quality of the company’s disclosure quality Identification of any “red flags”, if applicable. 4. Financial Analysis (/15), including the following: • • Presentation of key ratios and indices relating to: profitability, asset management, liquidity and solvency. Students should present at least three ratios relating to each of these dimensions, for both the company being valued and the competitor for the past three years Discussion of the indices and ratios, culminating in evaluation of the company’s performance and overall financial position 2 5. Prospective Analysis Forecasts (/20 marks) • • • Forecasts of re-formatted income statements and balance sheets for the company for the next five (5) financial years. Free cash flow should also be forecast if students are going to conduct free cash flow valuation. Students have the option of either forecasting Statements of free cash flow or arriving at forecast free cash flow, using data from the forecast income statement and balance sheet. Discussion of forecast assumptions and estimation of forecast parameters Discussion of the sensitivity analysis. The latter may be used to identify the assumptions upon which the forecasts most critically depend. Valuations (/15 marks) • • • • Valuation of the company using two different methods. One of the valuations must entail discounting of earnings, abnormal earnings, dividends or free cash flows. Argumentation as to why the valuation methodologies chosen are appropriate for the company being valued Explanation of how the assumptions underlying the valuation and estimation of valuation parameters Estimation of value per share, including discussion of the input factors upon which the value most critically depends (identified via sensitivity analysis). 6. Recommendation (/10 marks) for the clients, synthesising the report. • • A brief summary of the principal conclusions A comparison of the estimated value per share with the market value, and a portfolio recommendation. Up to five (5) marks will be awarded for presentation. Valuations are required to be performed as at the balance date of the financial statements released during the 2017 calendar year (i.e., 1 January, 2017 – 31 December, 2017). Both in-text references and bibliography should be provided. Commercial data services may be used to source annual report and other information. Any commercial data sources used should be acknowledged and referenced in the written report. Note that plagiarism from commercial analysts’ reports can be easily identified and will result in zero marks for the assignment. 3 Marking – Each student will receive a different mark for the report, as explained in the appendix to these instructions. Extensions will only be considered after consultation with the unit convener. Penalties • • A report that exceeds 25 pages will be penalised. A deduction of 10% of the total assignment mark will be imposed each day for late submission. Submission Procedures • • The reports are to be submitted, via Turnitin, in soft copy format, by 5pm on Tuesday 5 June, 2018. The following items should be submitted, in hard copy format, to your tutor during the Week 13 tutorial: the assignment coversheet for group assessments, the group assignment report marking and feedback sheet. The assignment coversheet for group assessments must include signed plagiarism statements, indication of the relative contribution of each group member and the signatures of each group member. If students contribute less than their peer group members, their marks will be proportionally reduced to reflect their effort in the group assignment. Table 1 lists the companies which students may choose to analyse for their major assignments. Students should inform their tutor, immediately after forming groups. They should indicate their preferred company and the section of the major assignment for which each student will be in charge. Each company may be taken by no more than two groups within a tutorial. 4 Table 1 – Companies Available for Major Assignment Company Name ASX Code ASX Industry Classification Principal Activities GLG Corporation Ltd GLE Textiles, apparels and luxury goods Supply of knitwear and apparels Oohmedia Ltd OML Media Out-of-home advertising Aurizon Holdings Ltd AZJ Road and rail Rail transportation services Energy World Corporation Ltd EWC Independent power and renewable electricity production Power generation 1300 Smiles Ltd ONT Health care providers and services Dental services The information in Table 1 was sourced from the websites of the Australian Securities Exchange and DatAnalysis Premium. The URLs for these websites are http://www.asx.com.au and http://datanalysis.morningstar.com.au respectively, accessed on 8 March, 2018. Access to the latter database, maintained by Morningstar, was provided by Macquarie University. 5 Appendix – Regime for allocation of marks for the report Each student is required to nominate one substantial section of the report for which (s)he has primary responsibility: strategic and business analysis, accounting analysis, financial analysis, forecasting or valuation. Each student's mark will be the equally-weighted average of two marks: the group mark (for the assignment as a whole) and the mark (s)he received for the section for which (s)he agreed to be primarily responsible, scaled to 100. The following hypothetical example, documented in Table 2, illustrates the policy. The group comprises four students: British Columbia, Quebec, Manitoba and Nova Scotia. Table 2 – Hypothetical example of group and individual marks Section Name of student in charge Introduction Final mark for the section, as originally recorded Final mark for the section, scaled to a score out of 100 5/5 Strategic analysis British Columbia Accounting analysis Quebec Financial analysis Manitoba Forecasts of financial statements Nova Scotia Valuation No student was nominated. Recommendation Presentation Total mark for the group 9 / 15 Calculation of final mark for the student Mark for the student (/100) Not applicable 60 0.5 *(60 +69) 64.5 12 / 15 80 0.5 * (80 + 69) 74.5 14 / 15 93 0.5 * (93 + 69) 81.0 8 / 20 40 0.5 * (40 + 69) 54.5 10 / 15 Not applicable 7 / 10 Not applicable 4/5 Not applicable 69 / 100 6
Accounting Analysis Critical success factors As the largest rail freight operator in Australia, Aurizon has a long history started from the government owned brand ‘QR National’. It already has a great reputation and some long-term customers and cooperative partners. The coal and freight haulage market has concentrated several major operators and high thresholds. This makes new entrants difficult to enter the market and hence protect Aurizon's future earnings. Client contracts also tend to last for a long time, further protecting Aurizon’s revenue. Second, the rail freight has its irreplaceable position among the logistics industry. There are 81% of freights transported by rail through the East and West Corridor. Due to longdistance transportation and the ability of double-stack freight cars between Adelaide and Perth, the rail freight’s costs and time are more competitive than road freight. Aurizon operates in five states and manages a 2,670-kilometer coal mine network in central Queensland. It connects the coal mine with the coal ports of Bowen, Gladstone and Mackay and is the largest iron ore transportation company outside the Pilbara. (Ferrier Hodgson, 2018) Lastly, the whole mining industry showed an uptrend during the last two decades. The demand of coals and iron ore has increased steadily around the world, which ensure the income for companies like Aurizon. However, Aurizon recently depends on sustained economic growth in countries such as China that are driving demand for commodities. Changes in regulations may also affect the industry and damage Aurizon's rail network activities. Key accounting policies According to the annual reports of Aurizon for the past 3 years, the major part of this company’s assets is property, plant and equipment, which accounted for 88.18% of the total assets averagely and the proportion has continuously grown from 2014 to 2017. The key accounting policies regarding to PPE include the initial recognition and measurement and depreciation and amortisation. The notes to the consolidated financial statements of FY2017 annual report has stated that land, buildings, plant and equipment, rollingstock and assets under construction Buildings, plant and equipment, and rollingstock are carried at cost less accumulated depreciation; non-corridor land owned by the Group and assets under construction are carried at cost. Costs include the direct costs of acquiring assets or the fair value of other items acquired during the acquisition or construction process. Only when the future economic benefits associated with the assets are likely to flow into the Group and the costs can be measured reliably, the asset costs of the construction in progress are capitalized. Costs could also include exchange gains and losses of foreign currency cash flow hedge from purchasing property, plant and equipment, and capitalized interest. For depreciation and amortisation, the notes stated different depreciation methods for several assets. Assets are depreciated or amortized from the date of purchase, or internally from the construction or manufacturing of assets after they have been completed and are ready for use. Buildings, infrastructure, rollingstock, plants and equipment use the straight-line method to calculate the net cost of their residual value, not their estimated useful life. Depreciation of motor vehicles is performed using a declining method (proportion range from 13.6% to 35.0%). No depreciation is provided for land and assets under construction. The team established a dedicated mine infrastructure for customers and provided accessibility measures for these customers. During the contract period, the infrastructure controlled by the group devalued, unless it is expected that the contract will generate economic benefits after the end of the contract. Depreciation and amortization rates are reviewed every year and adjusted as appropriate. If the asset's carrying amount is higher than its estimated recoverable amount, the asset's carrying amount is written down to the recoverable amount. Another major account for this company is ‘borrowing’, as 65.39% of the total liability and averagely from the past three years. The main accounting policy to it is the recognition and measurement. Borrowings were initially recognized as fair value, which is the net gain of transaction costs. Subsequently, the effective interest rate method is used to measure the amortized cost of borrowings. The effective interest rate method was used to calculate the interest costs, where effective interest rate refers to the accurate discount of future cash payments or receipts through the life expectancy of financial instruments. Interest is calculated on a monthly basis and paid at maturity. The establishment costs have been capitalized and amortized over the period of the relevant borrowings, and it is expected that the borrowings will be refinanced in the year before maturity. Borrowings are classified as current liabilities unless the group has unconditional rights to delay the debt settlement at least 12 months after the reporting date. When the obligations stipulated in the contract are discharged, cancelled or expired, the borrowings will be taken out of the balance sheet. (Aurizon, 2017) Potential incentives Aurizon's compensation practices are consistent with the company’s strategy of providing executive rewards that motivate and reflect the creation of shareholder value while attracting and retaining executives with the appropriate ability to achieve results. Aurizon executive remuneration framework consists of three parts: Fixed remuneration (no risk) include wages and other benefits like superannuation; STIA (risk component, issued based on 12-month performance), including cash portion and 12-month equity extension; LTIA (risk component, based on the achievement of three-year and four-year performance conditions) contains only the equity portion. The structure is designed to provide a combination of appropriate fixed and variable remuneration, and a combination of incentives designed to promote the performance of the company's short and long-term business objectives. Accounting strategies Aurizon’s accounting policies are similar to the norms in the industry, so does its competitor, Qube Holdings Ltd. Both companies stated the clear notes of recognition and measurement for each account in their annual reports. From their annual reports, there are no evidences showing managers’ strong incentives to use accounting discretion to manage earnings. Quality of disclosure Aurizon Holdings has adopted a disclosure and communication policy that stipulates processes and practices that ensure compliance with the continuing disclosure requirements of the ASX Listing Rules and Corporations Act. All annual reports of Aurizon provided detailed accounting policies for every account, and also indicated the changes in them if any incurred. In annual report for FY15, the change in accounting policies include the new and amended standards adopted by the company. From December 2014, the company stared to use AASB 9 replacing the provisions of AASB 139 related to the recognition and measurement, impairment, derecognition and general hedge accounting. In annual report for FY16, the accounting policies for property, plant and equipment has been changed in relation to rail renewal. The previous policy was to pay for railway renewals. Due to the minimal retroactive effect, the new accounting policy was adopted on 1 July 2015. The revised policy was then consistent with global industry practice and comply with regulatory measures, which would make benchmarks for this industry more relevant and meaningful. From Aurizon’s annual report, the total revenue contains five segments as network, coal, iron ore, freight and other. the director’s report explained different business and their major partners and customers in each segment. Some detailed reports like the revenue recognition and measurement and the impairment of assets have also been explained in different segments. The annual report shows excellent discussion of the company’s performance by business segments. Either the annual report or interim financial report for the first six months of a financial year has provide any forecasting amount of the future performance like earnings or assets. However, both reports have stated some activities the company expected to do in the next year, such as the acquisition program. Some indexes were forecasted as well to give the readers a reference substance to their performance, such as the inflation rate. Since there are no data for a forecasting earning, the report shows a conservative and factualist attitude. Forecasts Income Statement for the next five years Sales Revenue Total Operating Expenses EBITDA 2018 3329.07 -1974.80 1354.27 2019 3205.83 -1831.50 1374.33 2020 3082.60 -1688.20 1394.40 2021 2959.37 -1544.90 1414.47 2022 2836.13 -1401.60 1434.53 Depreciation, amortisation and impairment EBIT Financial Income Financing Costs Net Borrowing Costs NPBT Tax Expense NPAT -910.78 443.49 3.63 -203.47 -199.84 243.65 -73.10 170.56 -910.78 463.56 3.15 -225.63 -222.49 241.07 -72.32 168.75 -910.78 483.63 2.75 -247.80 -245.06 238.57 -71.57 167.00 -910.78 503.69 2.40 -269.97 -267.56 236.13 -70.84 165.29 -910.78 523.76 2.10 -292.13 -290.03 233.73 -70.12 163.61 0.30 0.30 0.30 0.30 0.30 310.44 324.49 338.54 352.58 366.63 Estimated Effective Income Tax Rate Estimated Earnings Before Interest and After Tax Balance sheet for the next five years References Aurizon, 2015, Annual Report 2014-15, viewed on 1 June 2018, . Aurizon, 2016, 15/16 Annual Report, viewed on 1 June 2018, . Aurizon, 2017, 16/17 Annual Report, viewed on 1 June 2018, . Ferrier Hodgson, 2018, Rail Freight, viewed on 3 June 2018, . Qube, 2017, Qube Holdings Limited Annual Report 2017, viewed on 1 June 2018, .
2. Business Strategy Analysis 2.1 Aurizon Holding Limited background Aurizon Holding Limited is a public company in Australia. The main business activities of Aurizon are the rail freight industry. The company was founded on 14 th September 2010 and the headquartered office is in Brisbane Australia. there are about 5,600 employees working for Aurizon Holding Limited in 2017 (IBIS 2017). There are three major segments of Aurizon to make sure the company can operate the business according to the IBIS report. These three segments are Commercial and Marketing segment, Operations segment, and Network segment. The commercial and marketing segment is focus on the commercial negotiation of sales contracts and the customer relationship management. The operation segment is responsible for the national delivery of all products. The operation segment consists of two parts: the coal delivery and inter modal & bulk freight. The coal delivery department is responsible for coal freight haulage services which transports the coal mines from Queensland and New South Wales to the customers in China, Japan, South Korea, India, Taiwan, and so on (IBIS world 2017). The inter modal & bulk freight of operation segment is mainly responsible for providing transportation, logistics and supply chain services to the agricultural, industrial and mining industry. On the other hand, the inter modal & bulk freight department is also responsible for providing inter modal transport of general, industrial and special goods. The last segment is the network service segment. This segment is responsible for the management and maintenance of the Central Queensland Coal Network (CQCN). 2.2 Macroeconomic environment Chart 1: Australian GDP (Current LCU) The chart above comes from World Bank Group (2018) which shows the GDP with current local currency unit from 1960 to 2016 in Australia. Based on the chart above, it clearly shows the Australian GDP has an upward trend from 1960 to 2016. The GDP is relatively low and constant from 1960 to 1975. Since 1990s, we can find that the GDP growth rate has started jumping, and it reaches its top in 2016 with $1.655 trillion AUD. It should be noticed that the whole GDP chart from 1960 to 2016 does not show any GDP decrease which means the Australia experiences a positive GDP growth rate for 56 years. As an Australian company, Aurizon can operate under this kind of macroeconomic environment which means the company can at least guarantee a positive growth rate with a correct business strategy. Chart 2: Australian Population The chart above comes from World Bank Group (2018) which shows the Australian population situation from 1960 to 2016. Like the GDP, the number of population also have a positive upward trend in this period. Different from GDP, the population has a stable and positive growth rate from the start to the end of the period. The number of population started with 10,276,477 in 1960 and reaches the top in 2016 with 24,810,209. The immigration Office did an important job in control the population in Australia. As we all know, Australia is an immigration country. The migration population between 2015 and 2016 is 182,165. So Australian government will tight the immigration policy when they believe the population growth is too fast, and they will relax the policy when they believe Australian needs higher population growth rate. Above all, the Australian government use the immigration policy to control their population growth rate. That is one of the major reason why Australia has a stable growth rate of population each year since 1960. On the other hand, the stable and positive population growth rate is very good to the local economic. Firstly, the company like Aurizon will have a sufficient labour source to meet the requirement of company’s development. Secondly, the increasing population can make sure the market is keep increasing as well for the company it means more business opportunities. So, based on the GDP and population analysis, this paper believes the macroeconomic environment in Australia is relative good for the company to survive and make slow but stable improvement step by step in long-term. 2.3 Rail transportation service in Australia According to the report of IBIS world (2017), the rail transportation industry in Australia has experienced a strongly growth rate for five years. The main factors caused the strongly growth are as follows. Firstly, the GDP growth rate in Australia is stable and positive. Secondly, the number of tourist in Australia has a strongly growth rate as well which also brings more business opportunities for the rail transportation service. Thirdly, the increasingly serious traffic jams, higher parking costs and people are paying more and more attention to environmental problems are encouraging the rail transportation service growth higher and higher. On the other side, the average growth rate of industry revenue is 2.1% for the rail transportation industry in Australia from 2012 to 2017. The total industry revenue reached $8.9 billion USD in 2017. Based on the previous analysis, this paper believes the rail transportation industry will have an upward growth trend in the near future. 2.4 Company’s competitive and corporate strategy In order to analysis the company’s competitive and corporate strategy, this paper decided to use the Porter’s five force model to discuss. Threat of new entrants This paper believes the threat of new entrants of the rail transportation industry in Australia. Because the maintain capital will be a huge expenditure in this industry, and the heavily investment on the new tracks in the rail transportation industry is not a good choice as well based on the industry scenario. On the other side, railcar costs, manpower training, and right-to-operate tracks are major entry barriers for new firms. Based on this situation, the threat of new entrants is low for Aurizon and the corporate strategy is passive to against the threat of new entrants. Competitive rivalry There are two major factors directly affected the competition between the companies in rail transportation industry in Australia. The first factor is the service expense, lines, service reliability and quality. The second factor is the quality of railway equipment. According to the report of IBIS world (2017), the major market players in this industry is Transport Victoria, Queensland Rail, and Transport for NSW. Among all these first class carries, Aurizon owns small market share in this industry with the relatively small business scale. So, Aurizon faces the stiffest competition due to the make leaders can provide better service with similar or cheaper price because of their financial strengths. On the other side, the competitors in rail transportation industry can also be the customers to each other because they need to exchange the merchandise with other companies. These rail transportation companies will also share rail cars can routes for ease of operations. The market leaders will have a strong power in these deals because they have more merchandises, routes, and rail cars. Based on the analysis above, this paper believe the Aurizon has a very high level of competitive rivalry. Aurizon’s strategy to deal with the high competitive rivalry is focus on the specific parts of the transportation like large ore cargo transportation from domestic to international to strength their competitivity. Threat of substitution The threat of substitution level is heavily depending on the fuel price in rail transportation industry. When the fuel price is high, the rail transportation has very big advantage of doing long-distance transport because of the railcars are almost have four times higher fuel efficient than trucks and ships. So, the threat of substitution is very low. When the fuel price is low, Aurizon will face the threat of substitution from truck transportation company. On the other side, the current fuel price is very high due to the nuclear issue between the America and Iran. So, the current threat of substitution is low. The main corporate strategy for Aurizon is using futures and forward contracts to make a lower expenditure on fuel cost and enhance competitivity. Bargaining Power of Buyers The bargaining power of buyers is high for Aurizon because of the competitive market and other major market players. Customers have several choices for transporting the goods with comparison. Like this paper mentioned above, Aurizon owns small market share in this industry with the relatively small business scale. So, customers may use this point to request the lower price. Aurizon’s corporate strategy against this problem has two parts. Firstly, Aurizon is focus on the specific parts of the transportation like large ore cargo transportation from domestic to international to strength their competitivity. Customer will choose Aurizon as their first choice when they want to transport large ore cargo. Secondly, Aurizon has a segment specialize in improving the customers’ relationship to build the customer’s loyalty Bargaining Power of Suppliers The bargaining power of supplier is moderate because GE is one of world’s largest locomotive suppliers. the new manufacturers face high entry barriers due to its capital-intensive nature. Aurizon’s corporate strategy in this part is considering the expenditure on railcar improvement research as a part of necessary budget in the financial plan. Reference list IBIS world, (2017), ‘Aurizon Holdings Limited - Profile Company Report Australia’, Available at , accessed on 1st June 2018 World Bank Group, (2018), ‘Australian GDP current LCU’, available at , accessed on 1st June 2018

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