AFM101 Introduction To Financial Accounting

Short term debt – for the accounting year ended on 30^th June 2017, the short term debt of the company amounted to $ 0.8 million. The total borrowings were raised through secured term from the finance lease liabilities.

Long term debt – for the accounting year ended on 30^th June 2017, the long term debt of the company amounted to $ 801.1 million. During the year the company entered in a agreement for senior unsecured 7 year debt facility of bilateral term amounted to $ 150 million with the Clean Energy Finance Corporation. Further, the company raised an amount of $ 305 million through the ASX listed note issue for the period of 7 years. Out of the total amount of $ 801.1 borrowings, an amount of $ 797.5 million were raised through unsecured sources and the rest amount of $ 3.6 million were raised through secured term from the finance lease liabilities (Qube.com.au, 2017).

The net debt of the company for the year ended on 30^th June 2017 amounted to $ 801.9 million. Out of which $ 0.8 million falls under short-term and $ 801.1 million falls under long-term. Further, out of the total borrowings, amounts of $ 797.5 were raised through unsecured source and $ 4.4 million were raised through secured sources.

1. Influence of the industry

Qube Holdings Limited falls under the logistics and infrastructure industry in Australia. The performance of logistic system has major effect on the capital structure, competitiveness, service quality and revenue structure. However, as the logistic industry is growing fast for the last few years and chances of failures are less, it is easy for them to raise borrowings long term and unsecured loan and therefore, Qube’s debt structure includes long – term and unsecured debt.

1. Debt cost

The cost of the debt for the year ended on 30^th June 2017 was 5%.

Cost of equity (k_e) = R_{f +} β (R_m – R_f)

Where,

Β = Beta = 1.42

R_f  = Risk free rate = 2.76%

R_m = Market risk premium = 5.5%

Thus, k_e = 2.76 + 1.42 (5.50 – 2.76) = 6.65%

• Revenue – the revenue of the company for the year ended on 30^th June 2017 amounted to $ 1512.80 million which is in increasing trend from the year closed on 30^th June 2016 as the amount for that date was $ 1,332.50 million. Therefore, it can be identified that there is 14% increase in the revenue as compared to the previous year (Qube.com.au, 2017).
• Earnings – the earnings of the company for the year ended on 30^th June 2017 amounted to $ 77.3 million which is in decreasing trend from the year closed on 30^th June 2016 as the amount for that date was $ 92.50 million. Therefore, it can be identified that there is 16% decrease in the earnings as compared to the previous year.
• EPS – as the earnings were in decreasing trend, the earning per share of the company was also in decreasing trend. The EPS of the company for 2016 accounting period was 7.2 cents whereas, the same reduced to 5.4 cents for the accounting year ended 2017 (com.au, 2017).
• Dividend – the company paid the final dividend for the year ended on 30^th June 2016 was 2.8 cents per share that was paid 11^th October 2016 and the interim dividend paid for the year ended on 30^th June 2017 on 5^th April 2017 of 2.7 cents per share.
• Growth expectation –

The strong balance sheet with the low gearing position and diversified source of funding put the company in a better position for the continuous growth for the future years. The strong earnings and revenues from port division and logistics are also forecasting the future growth of the company. Further, the successful completion of wide range of the funding initiatives assures that the company has strong funding structure and capacity for supporting the continuous growth for the business in the long run.

Comparable approach – the comparable approach compares the value of the company’s stock with its competitors. Various methods like dividend growth model and P/E approach can be used for the purpose of comparing.

• P/E approach –

 From the above table it can be recognized that the forecasted P/E ratio for the next year for Qube Holding is lower as compared to Macquarie group, however, it is better as compared to Westlink Logistics (Investsmart, 2017).

From the above table it can be recognized that the forecasted dividend yield for the next year for Qube Holding is lower as compared to Macquarie group, however, it is better as compared to Westlink Logistics (Investsmart, 2017).

Net debt = $ 801.9 million

Shareholder’s equity = $ 2,612.6 million

Weight of debt = 23%

Weight of equity = 77%

WACC after tax –

WACC = w_d (cost of debt after tax) + w_e (cost of equity)

            = [(1-0.30)*(0.23*5)] + (0.73*6.65)

            = 5.66%

1. For the computation of weighted average cost of capital the effective rate of tax was 30%.
2. Cost of the debt and cost of the equity difference

The debt is normally raised from the banks or the financial institutions and the amount is repayable with the interest on periodic basis. The debt carries various risks like credit risk, market risk and interest risk. On the other hand, equity is raised through share issuance and the payment is made to the investors based on the profitability level of the company (Valta, 2016). The main advantage of debt is that it is tax deductible but at the same time it involves more risks.

1. As the current obligations or liabilities are deductible expenses under tax, it shall be included while calculating the cost of the capital. However, the main issues with including the current liability are that it increases risk in the capital structure.
2. In the computation for WACC, the main component was the equity part as it comprise of 73% of total capital structure. As the debt part is lower as compared to the equity part, it represent that the company is low leveraged and financially stable and strong. This strong position will influence the investor to invest their money in Qube Holding Limited.
3. Two major investment decision of the company are – (i) Qube Holding completed acquisition of 50% interest in a company named Patrick on 18^th august 2016 and (ii) undertaken some new campaign in the existing market.
4. The debt equity structure of the company is 23:77 which is not complied with the industry standard as the ratio of 1:2 is regarded as ideal capital structure for any entity. Therefore, for any further investment or business operation the company has scope to obtain some more amounts through debt.
5. The optimal capital structure is regarded as the structure of equity and debt at which the company is able to optimize its return with minimization of cost. The changes in the optimal structure have direct impact on the weighted average cost of the capital as more debt will increase the risk component (Della Seta, Morellec & Zucchi, 2015).

As per Simplywall.st, the growth prospect of Qube Holding is forecasted as good over the future years. 50.1% growth is estimated nd forecasted for the EPS that will be ranged from $ 0.08 to $ 0.19.

During same period the revenue are expected to grow to $ 1,474 million from $ 1,286 million till the year 2020 and the profits of the company are forecasted to reach $ 178 million from $ 82 million till the year 2020 (Canly & Canly, 2017).

As per the financial analyst, Qube Holding is underperforming since last few years in the transportation industry. The return on equity of the company at 5.2% leaves the company at a position where lot more can be expected as it is far behind the industry average of 11.22%. This low level of performance will not influence the investors to invest their money in this company (De Fiore & Uhlig, 2015).

Yes, I have the same opinion as the financial analyst’s report as the facts focussed by the analyst can be conformed from the financial statement and market analysis of the company.

Canly, M., & Canly, M. (2017). Qube Holdings Limited (ASX:QUB): Is it a good long term opportunity?. Simply Wall St. Retrieved 21 October 2017, from https://simplywall.st/news/2017/02/22/qube-holdings-limited-asxqub-is-it-a-good-long-term-opportunity/

De Fiore, F. & Uhlig, H., (2015). Corporate debt structure and the financial crisis. Journal of Money, credit and Banking, 47(8), pp.1571-1598.

Della Seta, M., Morellec, E. & Zucchi, F., (2015). Debt structure, rollover traps, and default risk. Working Paper.

InvestSMART. (2017). Qube Holding Limited. [online] Available at: https://www.investsmart.com.au/shares/asx-bkl/qubeholding-limited [Accessed 21 Oct. 2017].

Qube.com.au. (2017). Qube infrastructure and logistics – Australia’s most trusted. [online] Available at: https://www.qube.com.au/ [Accessed 21 Oct. 2017].

Valta, P., (2016). Strategic default, debt structure, and stock returns. Journal of Financial and Quantitative Analysis, 51(1), pp.197-229.