Finance Report Annual Report and Accounts

Questions: This assignment is required to select any two (2) public listed companies in the Australian Stock Exchange ASX and then write a report to evaluate their financing sources, by using their financial statements for the two years 2012 and 2013 OR for the two years 2013 and 2014. You have to be clever and pragmatic on selecting the company. It has to be large, substantial and must have available information for desk research. You are required to explore and collect information on the company to complete this assignment. Additional research is also required for this written report. It is highly expected from you to purport the following perspective of the report: Introduction of the two selected companies Identification and evaluation of the companies financing sources Analysis and comparison of the companies financing sources Summary of interesting findings and any recommendation/prediction if possible. Answers: BHP Billiton Introduction BHP Billiton is present on a global scenario and is tagged as one of the potent company in the field of resources. It mainly produces commodities like iron ore, coal, copper, etc. It has enhanced its operations and also covers area of conventional, as well as unconventional oil, coal and gas. It has crafted a niche for itself in the market and tagged as the major producer of commodities like silver, iron ore, etc. the main aim of the company is to have a foothold in the market and operate the assets of long-term and short term that are divided by geography and market (BHP Billiton , 2014). The major concentration is seen in the oil extraction and minerals from the region of Australia. As per the annual report, in 2014 it had 123,800 employees, as well as contractors that spans to more than 120 plus locations. It is the long term forecasting of the operations that has helped the company to have a strong community linkage. BHP Billiton is considered to be one of the largest commodity p roducers in the world and hence it is also regarded as the leading company in relation to the diversification of resources (BHP Billiton , 2014). It was formed in the year 2001 due to a result of merger between BHP and Billiton. The position of the company gives an overall indication of the contribution and help it has provided in terms of economic growth. It enjoys the dual listing feature and has two parent companies. It has its headquarters located in Melbourne in Australia. The main listing is in on Australian Stock exchange and operates with a power model. Trend BHP Billiton projected a strong profit of US$ 13.8 billion and the net operating profit reflected US $25.4 billion. The results were favorable on account of strong production, as well as efficiencies related to costs. From the balance sheet, it can be seen that there is a strong solidity and the allocation of credit rating of A goes in its favour. Further, the company made an investment in options and that lead to higher returns. The asset of US$6.7 billion was sold at higher prices. Furthermore, it made a commendable contribution to the environment. The strong contribution enhanced its goodwill. The recordable injury also dropped lower by 9% signifying a strong management. The revenue increased by 2 per cent that took the figure to US$ 67.2 billion and the figure of the attributed profit appeared US$ 13.8 billion (BHP Billiton, 2014). The major focus of the company is to reduce the costs of production and enhancing the life of assets and for this purpose, BHP has decided to twist it s other assets into a separate company. In simple words, the assets that are of long-life together with low-cost were at the center of the companys approach while other assets that did not fall under these categories were not (BHP Billiton, 2014). Most of the assets that were demerged were basically small in comparison to the relevant or core ones and they contributed only 3% of the EBITDA of the company (Earnings before Interest, Tax, Depreciation and Amortization). Framework The corporate planning process of BHP is strong that has helped the company in meeting the changes in the external environment and this enabled to increase the total return. A bottom up review can be visualized because the initial phase pacifies the development of the central case. The corporate plan is chalked in a manner that enables to reduce various adverse circumstances. Further, the structure enables to design the external factors that contains technical, political, as well as governance (Craig, 2012). The governance mechanism and the compliance strikes that the mechanism of internal control is ascertained and policies are dealt in a strong manner. Therefore, the framework is designed in a manner that helps to curtail the risk and provide solidity to the business (Dobbs, 2014). Sources of Finance The net debt consisted of liabilities that contained interest and the group even issued a four tranche Global bond that sums US$ 5 billion and it consisted of senior floating rate interest of US$ 500. Commercial papers worth US$ 6 billion were even supported by the US$ 6 billion credit arrangements. There was no case of outstanding of the commercial papers. The financing activity sheds light on the manner of the activity. Mostly those were interest bearing in nature, proceeds happened from the debt concerned instruments and repayment of the liabilities that were bearing an interest on it (BHP Billiton, 2014). There were even activities of buy back, returns from ordinary shares, dividend payment. Such activities led to cash flow from the activities of finance. Further the component of equity consisted of share capital, treasury shares, reserves and retained earnings. The share capital that was issued consisted of shares by the public, treasury shares and the preference shares. Rio Tinto Introduction Rio Tinto is a rival of BHP Billiton that deals in the field of mining and concerned in mining, as well as processing of minerals. The presence of this company can be seen on a global scale and the major focus is on processing mineral resources from the Earth. The priority of the company is to enhance the overall returns that are sustainable when it comes to shareholder point of view and to derive them efficiently from the portfolio. The company can be seen in more than 40 countries and having a workforce of over 60,000 employees that sheds light on the solidity of the workforce. Founded in the year 1873, it has its headquarters is in UK and the listing is on the Australian Stock exchange (Rio Tinto, 2014). With a strong global reach, the company is able to give genuine expertise at the correct moment. The presence of an efficient, as well as diversified portfolio enables the company to post strong numbers. The chief aim of the company is to provide a value of superior nature and to strengthen as a strong trusted partner. Trend As per the highlight of the year 2014, the company functioned in a strong manner and posted returns that were sustainable for the shareholder by providing commodities of chief needs for the common life. The operational and financial segment from the balance sheet proves the superiority of the company. The underlying earnings stood at US$ 9.3 billion and the net cash that was derived from the operating activities stood at US$9.3 billion (Rio Tinto, 2014). The achievement of the company was commendable as it reduced the debt component and the capital expenditure declined to US$ 8.2 billion. The best achievement that the company made was that the contribution over the past 4 years crossed US$ 230 billion. Dividend was paid amounted to 204.5 cents on individual share and this was more than that was paid in 2013. The net debt reduced from US$18,055 in 2013 to US$12,495 that provides a clear example of the fact that the company reduced the debt component (Rio Tinto, 2014). Hence, it indica tes that a larger chunk of the funds will not go in paying of the interest. Further the CHG emission intensity was dropped by 18% indicating a big achievement. Framework Rio Tinto is concerned with management of the risk that is vital for the smooth functioning of the company. It helps in creating, as well as enhancing value. The structure of risk management stresses that leaders are vital and aims to create value by managing the business. The framework is structured in a manner that reduces the risk content (Christensen, 2011). Sources of Finance Rio Tinto has a well established financial access that is not constrained to the banks and the financial market. In the year 2013, Rio Tinto Finance bonds were issued. Moreover, it joined hand with finance limited that created an additional sum of $7.5 billion. Further, the group associated with the banks and entered into an agreement of bilateral nature. To keep the momentum going, Rio issued 1,436,542 shares from treasury and allotment of 951 new shares were done. The trustees purchased 842000 shares. Moreover, during the year, the registrar purchased 1,089,189 shares to meet the obligations (Rio Tinto, 2014). The share capital of the company comprised of share premium, reserves, and retained earnings. Moreover, the financing structure of the company comprised of dividend payment from the equity shares, borrowings repayment, interest purchase that were non-controlling in nature and other cash flow from financing activities (Choi Meek, 2011). Comparison BHP Billiton vs Rio Tinto In terms of flexibility, BHP Billiton has successfully surpassed Rio Tinto. Even though Rio Tinto might be more profitable at the current scenario, still when it comes to flexibility, BHP Billiton is better than that of Rio Tinto. Even in relation to credit rating of both these companies, the SPs have given BHP Billiton an A debt rating, whereas Rio Tinto has obtained an A- debt rating from the SP (Graham Smart, 2012). When it comes to cutting costs, the capital expenditure budget of BHP Billiton in the year 2014 is $7 million that is $3 million more than that of Rio Tinto with a capital expenditure budget of $4 million. It is to be noted that even though the capital expenditure of both companies are close to their depletion, depreciation etc, the larger budget of BHP Billiton gains it several advantages over Rio Tinto, like it can have more cash flow opportunities in order to fund effective acquisitions. BHP Billiton pursues more exposure of Oil and Gas The majority of underlying earnings of Rio Tinto comes from its aluminium and iron ore that successfully contributes segment underlying earnings of $1.12 billion and $3.95 billion respectively in the year 2015 while the total earnings of Rio Tinto being $4.54 billion. It is to be noted that Rio Tinto has also involved its operations in coal and copper that has made it obtain $274 million of segment earnings last year. When it comes to BHP Billiton, the majority of the underlying earnings of the company come from its iron ore and it also has fundamental operations in coal and copper. The relevant presence of energy that is required in a company is present in BHP Billiton while Rio Tinto lacks the same. The profit sensitivity to several price changes of commodity of BHP Billiton can be explained by the following figure. It can be observed that the profit after tax of BHP can rise by $600 million if the prices of crude also rise by $10 per barrel. In the short-run, the energy exposure of BHP Billiton is not very efficient as the prices of crude have fundamentally decreased but in the long-run, the energy exposure may benefit the company as the crude fundamentals improve. Therefore, even if the price of iron ore remains below $50 per metric ton, still the company can achieve better efficiency if the crude price recovers. Flexibility Both BHP Billiton and Rio Tinton have strong or effective balance sheets, low production costs, quality tier-1 assets that enable them to perform better in the long-run as the high demand from the markets continues to absorb the excess supply in the commodity market. Rio Tinton may prove to be effective in the short-run in terms of profit per share but since BHP Billiton has more flexibility, powerful credit rating and energy exposure, it is considered as a better option when uncertain situations arise in the commodity markets because stronger the company, better the results (Deegan, 2011). Capital Management The investors of both Rio Tinton and BHP Billiton were disappointed with the results in August arising out of a lack of capital return announcement. By the message of BHP from two capital market days and from the reduction in the present environment of oil price and iron ore, it can be assumed that the capital management of BHP Billiton is far off from the agenda in the current scenario. On the other side, Rio Tinton focused on materially increasing the returns of shareholders at the investor day that was held in Sydney in November, 2015. The capex of Rio Tinton has declined at a rapid rate in comparison to that of BHP Billiton. The main reason to this is the $4 billion of capital expenditure that BHP possesses for its oil segment in order to enhance the development of US onshore shale assets of the company. Credit strategies BHP Billiton, on one hand focuses on maintaining a strong and effective A rating by the credit rating agencies while Rio Tinton on the other hand, is willing to decrease one grade of the credit rating so that it can execute its growth strategies. Around 85% of the earnings of Rio come from its iron ore operations and it is to be noted that the decrease in the price of iron ore is structural in nature that is it does not pause the operations of the company. Productivity initiatives and weak local currency may provide some assistance to the company (Yao, 2014). On the other side, the share prices of BHP are getting affected due to its exposure to petroleum products. It is expected that in the short-run, BHP will underperform Rio just because of its exposure to petroleum products and absence of capital management initiatives that Rio will soon declare with further results. It is also expected that in the coming times, Rio may obtain flexibility in its operations that may in turn prove to be very effective for it to obtain various additional options for growth. Summary The above discussion clearly reflects on a point that BHP and Rio both belongs to the same industry. However, both have their unique way of management. The framework for both the companies is different. The framework for BHP is mainly concerned with governance while for Rio it is associated with risk management. Secondly, both the companies have a different approach when it comes to rising of funds. Thirdly, both these companies have a different strategic vision and hence, a difference is observed (Davies Crawford, 2012). Going by the entire discussion it is perceived that BHP has a broad network as compared to Rio and hence, has a better chance to outer performed Recommendation The diversification of operations of BHP Billiton into energy is not being performing well in the present scenario because of the fact that the oil price trading of the company is at four year lows. But according to various experts, it has been established that this situation will not be continued for a prolonged period of time (Detar, 2015). Hence, it is expected that even though the oil prices will not rise to their long-term average as it was before, it will gradually get stabilized with a particular period of time, most probably later in the year 2015. The productivity target of BHP has been enhanced from $500 million to $4 billion of annualized efficiencies and for this purpose, the company aims to decrease its cash cost per annum by $2.6 billion by the end of 2016. The simplified and effective portfolio of BHP with its four pillars will support it in enhancing the performance of the business worldwide. From the financial presentation and analysis it can be said that both Rio and BHP will prosper in the long run. If the overall sector is considered then both the companies are favourite. However, if the bullish view is specifically concerned to aluminium then Rio is the all time favourite (Yao, 2014). One major point that needs to be noted is that if the entire commodity sector prospers then the cash flow of Rio will be enhanced meaning that it can pay the debt and once this is eliminated, Rio will be able to target the production growth and can see a strong challenge between Rio and BHP for the supremacy. However, in the current scenario, Rio is a risky buy because it depends on the bull run of the commodities sector. If everything goes right, it is bound to get a great boost. However, there are many things to be covered before Rio overtakes BHP (Yao, 2014). In totality, BHP is a safer bet considering the portfolio of the company because it has steady growth. However, there is lesse r room for a huge enhancement because the market capitalization of BHP is at all time high. Hence, there appears to be lesser room for growth while Rio is operating at 60% of the market capitalization and hence, have more room for growth (Detar, 2015). Conclusion From the overall discussion it can be commented that both the company strives to be a marker leader and attain supremacy in the market. However, going by the entire discussion it is seen that BHP has better stability and likely to be a safer bet. Overall it is better placed and performs on a bigger scale as compared to Rio Tinto. Both the companies are facing a problem in the current scenario and this can be rectified through a strong support from the commodity sector (Horngren, 2013). This reveals that the fundamentals of both the companies are safe and is projected to provide returns if the stock of the companies are held patiently. Therefore, the first selection should be BHP Billiton if the investor is conservative while for a risk appetite investor, Rio can be selected. References Craig D 2012, Australian Financial Accounting, McGraw-Hill Book. Rio Tinto 2014, Rio Tinto Annual Report and accounts 2014, viewed 7 June 2016, Christensen, J 2011, Good analytical research, European Accounting Review, vol. 20, no. 1, pp. 41-51 Davies, T. and Crawford, I 2012, Financial accounting, Harlow, England: Pearson. Deegan, C. M 2011, In Financial accounting theory, North Ryde, N.S.W: McGraw-Hill. Dobbs, M 2014, Guidelines for applying Porters five forces framework: a set of industry analysis templates, Competitiveness Review,vol. 24, no. 1, pp. 32-45. Graham, J. and Smart, S 2012, Introduction to corporate finance, Australia: South-Western Cengage Learning. Horngren, C 2013, Financial accounting, Frenchs Forest, N.S.W: Pearson Australia Group. Detar, J 2015, Value Fortescue Tie up could challenge Rio Tinto, BHP, viewed 5 June 2016, Yao, J 2014, Better Buy Now: Rio Tinto vs. BHP Billiton, viewed 5 June 2016.