Introduction of the Abacus Group and Valad Group
Abacus Property Group is a diversified company that incorporates the following strategic business units (SBU) in its portfolio
- Property Investments
- Funds Management
- Property Finance
- Projects and Investments
The company was formed in 1996 as a subsidiary of Godfrey Pembroke Ltd, whose main objective was to source and package property based investments for GPL financial partners. However in 1999 ABP became independent of GPL and in the following years, amalgamated some trusts to become Abacus Property Group. In 2002 ABP diversified its operations to include property investment, property finance, funds management and joint venture projects and in the same year was listed on the Australian Stock Exchange with total group assets in excess of $420 million. In the years to follow, ABP merged with the Abacus Diversified Income Fund and currently has $ 2.3 billion assets under its management.
The Property Investment business activity involves a diversified portfolio of commercial, industrial and retail properties. It has investments in QLD, NSW, VIC. ACT, and SA and also residential properties in New Zealand
Fund Management’s main emphasis is on property funds investment, and its major investment options include:-
- Property trusts
- Mezzanine fund
- Presales agreement just to name a few
This SBU is closely related to the Property Finance division.
ABP also has major projects and investments it manages under the Property & Investment business unit and has gross revenue in excess of $ 750 million. It is involved in residential subdivision in VIC, shopping centre development in Brighton, and development of retirement accommodation in NSW among major projects (Home page) .
Valad Property Group is the very similar company as Abacus Property Group. In this case, they are the two object compared in this report.
Future profitability of the ABP
ABP is in the real estate industry section (Abacus Property Group (ABP)) . Due to the credit crisis of America happened in June, 2007, the problem came bigger and bigger. In 2008, there are three of five the biggest investment bank in Wall Street disappeared (Ellis, 2008) . And the biggest two real estate trust saved by U.S. government. This is the biggest financial crisis from the thirty’s (Stewart, 2008) .
The beginning of this crisis was the subprime in the real estate area. The mortgage provider gave the credit to the unqualified customers to buy the house and then issued debt to the financial market. After the modern financial products issued among the financial market, the risk and amount enhanced to the trillions. The crisis hit the global economic (Greenburg, 2007) .
Valuation:
The company’s property values in 2008 have decreased compared with 2007 from $120.4 million to $72.4 million in statutory profit after tax. Net devaluation in 2008 was $15.7 million while it was $33.3 in 2007. Despite this, the firm concludes with having a strong financial position still in these difficult market conditions, and will expect continued growth of earnings and distributions. This is because a total assets increase in 2008 of 29.7% from 2007’s $1.3 billion to 2008’s $1.7 billion. Another alibi is the total equity increase of 15.2% or $925 million as opposed to June 30’s $803 million (Business spectator, 2008) .
Liquidity problem:
Abacus property group’s liquidity problem is due to net devaluation in property value. The firm’s acquisition of assets and opportunity creation in diversified business areas makes sure future growth in earnings (Annual financial report, 2008) .
Consumer Confidence:
Consumer confidence is good because long term investors know they will get strong returns on their stocks as long as they remain keeping diversified portfolios (Owen Hodge Financial Plan-Market Review 3rd Quarter 2007, 2007) . Funding for future distributions comes from cash earnings, and consumers know the firm is doing well since it’s growth of earnings and distributions are steady (Annual financial report, 2008) .
The Australian share market cannot escape from this crisis either. The S&P AU51 index dropped from 6,700 at 25 October 2007 to 4,073 at 10 October 2008 (bloomberg.com, 2008) . Especially the real estate companies’ shares dropped deeper than the S&P AU51. The ABP share was 2.00 and now is 0.70 (Abacus Property Group (ABP)) . And the crisis is worse than expectation. The situation will not be changed in several months.
Financial ratio analysis of ABP and VPG
The use of financial ratio helps to analyse trends and interpret the financial position and performance .This analysis includes looking at the companies balance of debt in relation to the owners equity, it also involves the efficiency in which a company is able to utilise its resources in order to generate revenues and profits. The financial reports ending 30 June 2008
Profitability Ratios
Return on Equity (ROE)-this is calculated as operating profit after tax divided by owners equty and it indicates how much return the firm is genetaing on shareholders equity and this is particularly important to shareholders.
For ABP the ROE is
72426000/924999000 =7.83%
So every dollar that the shareholders have invested they are receiving 7 cents
Looking at the Return on Assets which measures how much the company is utilising its resources in order to generate profits and this is calculated as follows:-
Operating Profit After Tax/Total Assets
For ABP the ratio of the year ended 30 June 2008 is as follows:-
72426/1647193=4.4%
Profit Margin is calculated as Operating Profit After Tax divided by revenue and this determines the percentage of revenue that ends up as profit or the average profit on each dollar revenue.
ABP’s Profit Margin
72426/138423=52.3%
Earning per share show how much earning that are generated per dollar share and this is attributed to ordinary shares that have been issued.
Dividend Payout Ratio measures that portion of earnings paid to shareholders. It measures the percentage out of profit that was distributed to shareholders and this ratio determines investors confidence in the company and is guided by the company’s policy on dividends from year to year. It is calculated as ; -
Dividends Declared Per Share/Earnings per Share
Liquidity Ratio
The ratio applicable to ABP is the current ratio which indicates the company’s ability to cover its short term liabilities with the available current assets. ABP’s current ratio is:-
Current Assets/Current Liabilities= 245 811/133 779 = 1.84
The ratio above 1 indicates that the company has greater financial stability and low risk for both creditors and owners.
Financial Structure Ratio
Debt-to-equity ratio measures that portion of owners’ equity which is attributable to debt or borrowings and this reflects the company’s policy regarding finance its assets. For ABP
Total liabilities/Owners Equity=722 194/924 999= 0.78
This shows that most of the company’s assets are financed by owners’ equity and not much of debt.
Leverage ratio is also closely related to the debt to equity ratio and it considers how much of assets are financed by equity. It is calculated as follows:-
Total Liabilities & Equity/Equity=Total Assets/Equity=1 647 193 000/924 999 000=1.78
The profitability ratio for ABP save for the profit margin might appear to be small, however these ratios are relative to the different types industry. For example a retail company might have higher profitability ratios than a jewellery company, however the revenue generated in terms of real monetary figures would favour the jeweller. As for ABP the figures are very consistent with the industry they operate in. The liquidity ratio and financial structure ratios are also good meaning that the company cab cover its short term commitments and not much of its assets is financed by debt. This means the company would be able to borrow in future if it requires long term investment assets. These ratios would not make sense if there is no comparison between similar firms (Trotman & Gibbins, 2005) .
The following is a side by side comparison with VALAD Property Group (bloomberg.com, 2008)
| ABP | VPG | |
| Operating profit margin | 50.13% | -34.44% |
| Net profit margin | 52.32% | -34.33% |
| Rate of Return | ||
| Return on equity | 7.83% | -11.95% |
| Return on assets | 4.40% | -6.65% |
| Liquidity | ||
| Current ratio | 1.84 | 2.27 |
| Gearing | ||
| Gearing ratio | 63.61% | 66.35% |
| Financial Structure | ||
| Debt to equity | 0.78 | 0.80 |
| Debt to assets | 0.44 | 0.44 |
| Leverage ratio | 1.78 | 1.80 |
Utilise the capital asset pricing model (CAPM) to value the stock of ABP and VPG
Use CAPM to calculate the present value of the ABP share.
The CAPM presents the expected return of an asset based on risk-free rate plus a premium for risk.
“The CAPM is a model based on expectations: the expected return of the asset, the expected return of the market, the expected beta and the expected risk-free rate.” (Ross, Thompson, Christensen, Westerfield, & Jordan, 2007)
The CAPM can be seen that:
E(Ri) = rf + bi [E(Rm) – rf ]
E(Ri) is the expected return of the asset. Now, it is the expected return of the share.
rf is the risk free rate of return. At here, 10 years Australian government bonds rate is the risk free rate of return. Then we have:
rf = 5.25% (bloomberg.com, 2008)
bi is the coefficient of the share. It can tell us how much systematic risk a particular asset has relative to an average asset (Ross, Thompson, Christensen, Westerfield, & Jordan, 2007) .
On the Bloomberg.com, we can have the bi of the ABP:
bABP = 0.955 vs AS51 (bloomberg.com, 2008) .
E(Rm) is the expected market return. We can use the ABP’s historical data to calculate the result. From the Bloomberg.com, here is the historical price of ABP (bloomberg.com, 2008) .
| Iterm | Date | Closing Price | Dividends of the year (cps) |
| 1 | 29 Jun 2004 | 1.15 | 11.227 |
| 2 | 30 Jun 2005 | 1.35 | 11.400 |
| 3 | 30 Jun 2006 | 1.57 | 11.800 |
| 4 | 29 Jun 2007 | 1.98 | 12.500 |
| 5 | 30 Jun 2008 | 1.15 | 13.500 |
We can have the BY 2004 investment return rate as:
R04 =((Closing Price 2005-Closing Price 2004)+Dividend2004)/Closing Price 2004
=((1.35-1.15)+0.11227)/1.15
= 27.15%
As the same, we can have the 2005, 2006 and 2007 investment return rates as below.
| Iterm | Year | Closing Price | Dividends of the year (cps) | Capital yield | Dividend yield | Return rate of investment |
| 1 | BY2004 | 1.35 | 11.400 | 17.39% | 9.91% | 27.15% |
| 2 | BY2005 | 1.57 | 11.800 | 16.30% | 8.74% | 24.74% |
| 3 | BY2006 | 1.98 | 12.500 | 26.11% | 7.96% | 33.63% |
| 4 | BY2007 | 1.15 | 13.500 | -41.92% | 6.82% | -35.61% |
Then we can have the standard deviation of ABP in 2004-2007.
| Iterm | Year | Annual return rate of investment | Average annual return | Deviation | Squared deviation |
| 1 | BY2004 | 27.15% | 12.48% | 14.67% | 0.021532984 |
| 2 | BY2005 | 24.74% | 12.48% | 12.26% | 0.015032576 |
| 3 | BY2006 | 33.63% | 12.48% | 21.15% | 0.044734675 |
| 4 | BY2007 | -35.61% | 12.48% | -48.09% | 0.231226922 |
| Total | 49.92% | 0.312527158 |
Variance (s2) = 0.312527158/(4-1)= 0.104175719
Standard deviation (s) = 0.1041757190.5= 32.28%
E(Rm) = 12.48%
Then we can have:
E(Ri) = rf + bi [E(Rm) – rf ]
= 5.25% + 0.955 [12.48% – 5.25% ]
= 12.15%
As expected company’s profit growth rate in BY2009 is 15%.
We use average growth rate of dividends from BY2004 to BY2008 as g, the growth rate in the future.
| Iterm | Year | Closing Price | Dividends of the year (cps) | Dividends growth rate | Average Dividends growth rate |
| 1 | BY2004 | 1.15 | 11.227 | ||
| 2 | BY2005 | 1.35 | 11.400 | 1.54% | 4.75% |
| 3 | BY2006 | 1.57 | 11.800 | 3.51% | 4.75% |
| 4 | BY2007 | 1.98 | 12.500 | 5.93% | 4.75% |
| 5 | BY2008 | 1.15 | 13.500 | 8.00% | 4.75% |
PV2008 = D2009/(E(Rj)-g) = D2008*(1+Excepted Growth Rate)/(Excepted market earning rate- Excepted Growth Rate)
| Present Value | Dividends in 2008 | Dividends in 2009 | Growth Rate | Excepted Growth Rate | Excepted discount on growth rate | Market Earning Rate | Excepted Market Earning Rate | Excepted discount on market earning rate |
| 1.83 | 0.135 | 0.1414125 | 4.75% | 4.75% | 0.00% | 12.48% | 12.48% | 0.00% |
| 1.05 | 0.135 | 0.1414125 | 4.75% | -0.95% | 120.00% | 12.48% | 12.48% | 0.00% |
Based on recent five years dividends and share price, the present value of ABP is 1.83 per share. The value is higher than the present price in the stock market.
Use CAPM to calculate the VPG share
For the competed company, we selected the Valad Property Group. There are the performance and value analysis of the VPG.
From the historical data we can have a price and dividends form below (bloomberg.com, 2008) :
| Iterm | Year | Closing Price | Dividends of the year (cps) |
| 1 | BY2003 | 1.00 | |
| 2 | BY2004 | 0.91 | 9.550 |
| 3 | BY2005 | 1.34 | 9.800 |
| 4 | BY2006 | 1.36 | 10.300 |
| 5 | BY2007 | 1.99 | 11.070 |
| 6 | BY2008 | 0.67 | 11.100 |
Then we can have the investment return rate in below.
| Item | Year | Closing Price | Dividends of the year (cps) | Dividends yield | Capital yield | Investment return rate |
| 1 | BY2003 | 1.00 | ||||
| 2 | BY2004 | 0.91 | 9.550 | 9.55% | -9.00% | 0.55% |
| 3 | BY2005 | 1.34 | 9.800 | 10.77% | 47.25% | 58.02% |
| 4 | BY2006 | 1.36 | 10.300 | 7.69% | 1.49% | 9.18% |
| 5 | BY2007 | 1.99 | 11.070 | 8.14% | 46.32% | 54.46% |
| 6 | BY2008 | 0.67 | 11.100 | 5.58% | -66.33% | -60.75% |
We can have the stand deviation of the VPG stock and the average investment return rate is 12.29%.
| Item | Year | Investment return rate | Average investment return rate | Deviation of investment return | Square of deviation | Variance | Stand deviation |
| 1 | BY2003 | ||||||
| 2 | BY2004 | 0.55% | 12.29% | -11.74% | 0.01378771 | 0.23382233 | 48.36% |
| 3 | BY2005 | 58.02% | 12.29% | 45.73% | 0.20912208 | 0.23382233 | 48.36% |
| 4 | BY2006 | 9.18% | 12.29% | -3.11% | 0.00096908 | 0.23382233 | 48.36% |
| 5 | BY2007 | 54.46% | 12.29% | 42.17% | 0.17784038 | 0.23382233 | 48.36% |
| 6 | BY2008 | -60.75% | 12.29% | -73.05% | 0.53357004 | 0.23382233 | 48.36% |
We can also have the average dividends growth rate as 3.87%.
| Iterm | Year | Closing Price | Dividends of the year (cps) | Dividends growth rate | Average dividends growth rate |
| 1 | BY2003 | 1.00 | |||
| 2 | BY2004 | 0.91 | 9.550 | N/A | |
| 3 | BY2005 | 1.34 | 9.800 | 2.62% | 3.87% |
| 4 | BY2006 | 1.36 | 10.300 | 5.10% | 3.87% |
| 5 | BY2007 | 1.99 | 11.070 | 7.48% | 3.87% |
| 6 | BY2008 | 0.67 | 11.100 | 0.27% | 3.87% |
We can have the excepted earning rate at 16.24% and present value is 0.93.
| Item | Year | Dividends of the year (cps) | Average investment return rate | Average dividends growth rate | Risk free rate | beta | Excepted Earning Rate | PV use CAPM |
| 1 | BY2003 | |||||||
| 2 | BY2004 | 9.550 | 12.29% | |||||
| 3 | BY2005 | 9.800 | 12.29% | 3.87% | ||||
| 4 | BY2006 | 10.300 | 12.29% | 3.87% | | |||
| 5 | BY2007 | 11.070 | 12.29% | 3.87% | ||||
| 6 | BY2008 | 11.100 | 12.29% | 3.87% | 5.25% | 1.56 | 16.24% | 0.93 |
Comparison
After we used CAPM to calculate present value of the ABP and VPG share, we can find the present value of ABP share is 1.83 per share and the value of VPG is 0.93. ABP has the higher present value than the VPG.
Then we can find the present value base on CAPM is higher than their market price. The present value is almost 1.5 to 2.5 times higher as the market price.
The market price is given 60% discount on their present value. The discount is based on industry research and financial ratio research.
Conclusion
In short-term period, we suggest to sell the ABP share. As this share was influenced by the credit crisis very seriously, the price will not rise in several months.
But in long-term, based on the CAPM calculation, the price of ABP is under value. We suggest buying when the crisis is over.
References
Abacus Property Group (ABP). (n.d.). Retrieved 9 2, 2008, from Australian Securites Exchange: http://www.asx.com.au/asx/research/CompanyInfoSearchResults.jsp?searchBy=asxCode&allinfo=&asxCode=abp
Annual financial report. (2008, 6 30). Retrieved 9 10, 2008, from www.abacusproperty.com.au: http://www.abacusproperty.com.au/content/documents/2008%20reports/APG_2008_financial_accounts.pdf
bloomberg.com. (2008, 8 28). Retrieved 8 28, 2008, from goverment bonds: http://www.bloomberg.com/markets/rates/australia.html
Business spectator. (2008, 8 28). Retrieved 9 10, 2008, from Abacus Property normalized profit up 15% to 92m: http://www.businessspectator.com.au/bs.nsf/Article/Abacus-Property-normalised-profit-up-15-to-92m-HX79Q?OpenDocument&src=is
Ellis, D. (2008, 9 15). Lehman Brothers collapse stuns global markets. Retrieved 9 18, 2008, from CNN.com/world business: http://edition.cnn.com/2008/BUSINESS/09/15/lehman.merrill.stocks.turmoil/index.html
Greenburg, H. (2007, 12 10). The Subprime Crisis is just beginning. Retrieved 9 10, 2008, from The mortgage pot: http://www.themortgagepot.com/the-subprime-crisis-is-just-beginning
Home page. (n.d.). Retrieved 9 10, 2008, from www.abacusproperty.com.au: http://www.abacusproperty.com.au/home.asp
Owen Hodge Financial Plan-Market Review 3rd Quarter 2007. (2007, 10). Retrieved 9 15, 2008, from www.ohfp.com.au: http://www.ohfp.com.au/LinkClick.aspx?fileticket=X/JvNc2UJjc%3D&tabid=55&mid=808&language=en-AU
Ross, S., Thompson, S., Christensen, M., Westerfield, R., & Jordan, B. (2007). Fundamentals of corporate finance: fourth edition. North Ryde: McGraw Hill Australia Pty Ltd.
Stewart, H. (2008, 9 16). IMF says US crisis is 'largest financial shock since Great Depression'. Retrieved 9 20, 2008, from www.guardian.co.uk: http://www.guardian.co.uk/business/2008/apr/09/useconomy.subprimecrisis
Trotman, K., & Gibbins, M. (2005). Financial Accounting third edition. South Melbourne: Thomson.
