The Westfield Group is an Australian company that deals in the area of Real Estates Investment Trusts. The analysis of annual reports of this company for fiscal years 2008 and 2009 reveals that The Westfield Group experienced considerable changes in its performance results over this period and, although its nominal revenues decreased in 2009, all other essential factors show that The Westfield Group grows in a proper direction, modifies its capital structure, implements the policies of asset replacement and hedging, and increases its net equity amounts annually.
The company selected for the analysis in the current paper is The Westfield Group, an Australian business entity which has more than 110 shopping centers with more than 4,000 employees around the world, and is the largest retail property group in the world that is capitalized by equity market. The group owns, develops, designs, constructs, leases, funds, markets and manages assets and property.
Westfield Holdings (WSF), Westfield Trust (WFT) and Westfield America (WFA) merged together into one, internally managed group called The Westfield Group in 2004.
The Westfield Group has two Group Managing Directors, Mr. Steven M. Lowy AM, and Mr. Peter S. Lowy.
Valuation of the Westfield Group
There are two major approaches that can be used in the valuation of the selected company: book value approach and value of earnings method. The book value approach allows for calculation of the firm’s value using the formula:
- Book value = Total assets – Total liabilities
Accordingly, the valuation of The Westfield Group for fiscal years 2008 and 2009 will look as follows based on the data of the company’s annual reports (The Westfield Group, 2010):
- 2009: Book value = 47,165.6 – 22,858.7 = 24,306.9
- 2008: Book value = 55,909.0 – 30,951.3 = 24,957.7
Under the value of earnings method, the following formula is used to value The Westfield Group:
- Equity value = PER (price earning ratio) x earnings (net income)
- PER = share’s price / earning per share
- 2008: PER = 12.95 / (43.82) = (0.296)
- Equity value = (0.296) * earnings (net income)
- Equity value = (0.296) * (2,182.1) = $ 645,901.6
- 2009: PER = 12. 54 / (3.34) = (3.75)
- Equity value = (3.75) * (450.1) = $ 1,687,875
Valuation of The Westfield Group using the book value approach shows that there was a slight decline in value, while the valuation of earnings shows a significant growth in the company’s value between 2008 and 2009 (see Appendices 1 and 3).
Evaluation of Cash Flows
Operating Cash Flow
Cash flow analysis is one of the basic elements of a company’s valuation, and examining the operations of The Westfield Group it is also necessary to consider operating, investing, and financing cash flows in their dynamics in 2008 and 2009 fiscal years. Thus, the operating cash flow for a period of time is calculated using the formula:
- Operating cash flow = EBIT + Depreciation – Taxes,
Where, EBIT represents the earnings of the company before interest and taxes. Accordingly, this formula allows seeing the operating cash flows of The Westfield Group for 2008 and 2009:
- 2008: Operating cash flow = (2,724.1) + 91.9 + 542.0 = $ (2,090.2) million
- 2009: Operating cash flow = (625.1) + 63.7 + 175.0 = $ (386.4) million
Investing Cash Flow
Cash flow from investing activities for 2008 is comprised of Settlement of asset hedging currency derivatives and proceeds from sale of property investments. Payment made by The Westfield Group amount to 3,926.1, while the proceeds reduce it by 193.2 to the level of 3,732.9. In 2009, Cash flow from investing activities is comprised of Net proceeds from the sale of property assets by equity accounted entities, Proceeds from the sale of plant and equipment, Settlement of asset hedging currency derivatives, and Proceeds from the sale of other investments. Payment made by The Westfield Group amount to 1,934.9, while the proceeds reduce it by 344.7 to the level of 1,590.2.
Thus, the investing cash flow decreased by 57 % in 2009.
Evaluation of cash flows
From the financial statements, it is evident that the company reinvests most of its earnings, which suggests that the company follows a residual dividend policy. This is a dividend policy whereby earnings are invested in profitable projects before dividends are declared. In other words, dividend is only paid when there are no profitable projects.
The company paid a Final dividend of 7.5 cents per share for the period ended 28 June 2008, and an Interim dividend 6.5 cents per share for the period ended 27 June 2009.
The Directors have also recommended the payment of a final dividend of 11.5 cents per ordinary share.
Cost of ordinary equity
- Cost of equity = Earnings per share / market price per share
- Earnings per share = Earnings attributable to ordinary shareholders / number of ordinary shares outstanding
- Current Earnings per share is given as $ 30.2
- Market price per share is given as $ 5.07
- Cost of equity = 30.2 / 5.07 = 5.96 %
- Using the Capital Asset Pricing Model (CAPM), Cost of equity can be calculated using the formula: Ke = RF + βe* (RM – RF)
- Where Ke is the cost of equity, in our case the cost of Super Cheap Auto Group’s equity
- RF is the risk free rate, which we are given as 4 %
- βe is the beta of Super Cheap Auto Group’s equity which we are given as 1.24 RM is the return on market portfolio, which we are given as 5.58 %
- Ke = 4 % + 1.24 * (5.58 % – 4 %)
- Ke = 4 % + 1.24 * (1.58%)
- Ke = 4 % + 1.96 % = 5.96 %
Weighted Average Cost of Capital
- Effective cost of debt = (1 – corporate tax rate) * nominal cost of debt (Block and Hirt, 2007).
- Corporate tax rate we are given as 30 % (Company website).
- Nominal cost of debt we are given as 8 % (Company website).
Effective cost of debt = (1-0.3) * 8 % = 5.6 %
The current capital structure is as follows:
- Source of funds Amount Cost
- Equity $ 156.3 5.96 %
- Mortgage $ 110.5 5.6 %
- Total $ 266.8
Weighted Average Cost of Capital = K e * [Equity / (Debt + Equity) + K d * [Debt / (Debt + Equity) (Fridson and Alvarez, 98)
Weighted Average Cost of Capital = 5.96 % * (156.3 / 266.8) + 5.6 % * (110.5 / 266.8)
Weighted Average Cost of Capital = 5.96 % * 58.6 % + 5.6 % * 41.4 %
Weighted Average Cost of Capital = 3.5 % + 2.3 % = 5.8 %
Common size financial statements
|Consolidated Income Statement|
|For the year ended||31-Dec-09||31-Dec-08|
|Cost of sales||1,653.90||2,080.60|
|Other Operating Income|
|Property expenses and outgoings||-154.1||-159.6|
|Financing Income (Expense)|
|Net interest expense||-63.7||-91.9|
|Net gain from capital transactions||69.5||73.3|
|Consolidated Balance sheet|
|Prepaid expenses and other current assets||288.10||242.20|
|Plant and equipment||40,680.00||47,156.10|
|Deferred tax assets||78.70||196.90|
|Total Operating Assets||41,532.20||48,322.10|
|Accounts payable and other creditors||2,093.90||2,540.10|
|Deferred tax liabilities||1,784.30||2,606.00|
|Net Operating Assets||37,590.40||43,071.50|
|Cash and cash equivalents||9.30||68.30|
|Interest bearing liabilities||16,117.30||20,989.00|
|Other financial liabilities||1,709.00||1,857.80|
|Net Financial Assets||-13,283.50||-18,173.70|
|Common Shareholders Equity||24,306.90||24,897.80|
|Consolidated Cash flow statement|
|For the year ended||31-Dec-09||31-Dec-08|
|Note $million $million $million $million|
|Cash flows from operating activities|
|Receipts in the course of operations (including sales tax)||4,430.20||4,399.80|
|Payments in the course of operations (including sales tax)||-1,813.50||-1,823.40|
|Settlement of income hedging currency derivatives||45.5||156.8|
|Dividends/distributions received from equity accounted associates||246.7||239|
|Dividends received from subsidiaries||347.9||–|
|Income and withholding taxes paid||-81.3||-131.6|
|Sales tax paid||-131.3||-136.1|
|Net cash flows from/(used in) operating activities||2,696.30||2,704.50|
|Cash flows from investing activities|
|Payments of capital expenditure for property investments||-1,807.40||-3,482.80|
|Proceeds from the sale of property investments||–||187.9|
|Payments for the acquisition of other investments||-44.2||-202.4|
|Proceeds from the sale of other investments||162.9||–|
|Net outflows for investments in equity accounted investments||-39.9||-172.3|
|Net proceeds from the sale of property assets by equity accounted entities||89.7||–|
|Payment for the purchases of investments in subsidiaries||–||–|
|Payments for the purchases of plant and equipment||-43.4||-68.6|
|Proceeds from the sale of plant and equipment||11.8||–|
|Settlement of asset hedging currency derivatives||80.3||5.3|
|Net cash flows used in investing activities||-1,590.20||-3,732.90|
|Cash flows from financing activities|
|Proceeds from the issuance of securities||3,633.40||333.9|
|Payments for costs associated with the issuance of securities||-66.2||–|
|Payments for redemption of other financial liabilities||-1.3||-409.7|
|Termination of surplus interest rate swaps upon repayment of interest|
|bearing liabilities with the proceeds from the issuance of securities||-232.5||–|
|Termination of surplus interest rate swaps upon the restructure of the|
|Group’s interest rate hedge portfolio||-327.6||–|
|Termination of surplus interest rate swaps|
|Net (repayment of)/proceeds from interest bearing liabilities||-843.1||4,092.90|
|Net proceeds from related entities||–||–|
|Dividends/distributions paid by controlled entities to minority interests||-9.5||-9.1|
|Net cash flows (used in)/from financing activities||-1,170.10||910.9|
|Net (decrease)/increase in cash and cash equivalents held||-64||-117.5|
|Add opening cash and cash equivalents brought forward||242.7||343.9|
|Effects of exchange rate changes on opening cash and|
|cash equivalents brought forward||-5.7||16.3|
|Cash and cash equivalents at the end of the year||173||242.7|
Financial ratios may be classified into the following broad categories.
- Short term liquidity ratios , also known as working capital management ratios,
- Long term risks and capital structure ratios, also known as leverage or debt management or solvency ratios,
- Operating efficiency and profitability ratios,
- Investment ratios
Short term liquidity ratios
Emery, Finnerty, & Stowe (2007) demonstrate that liquidity refers to an enterprise’s ability to meet its short term debts as and when they fall due.
Working capital ratio
Stickney, Weil, & Schipper (2009) demonstrate that this ratio represents current assets that are financed from long term capital resources that do not require repayment in the short run, implying that the portion that is financed by long term capital is still available for repayment of short term debts. It is computed as follows:
Working capital = Current Assets – Current Liabilities
From the financial statements:
Current assets (£m) 13,647 13,647
Current Liabilities (£m) 18,040 18,040
Working Capital (£m) 4,393 4,393
In both years £ 4,393 m of working capital, representing current assets financed by long term capital resources is available to pay short term debts. The working capital ratio has therefore remained the same.
Stickney, Weil, & Schipper (2009) demonstrate that current ratio also tests short term debt paying ability of an enterprise, by measuring the amount of liquid and near liquid resources available to meet short term debts. A high current ratio is assumed to indicate a strong liquidity position, while a low current ratio is assumed to indicate a weak liquidity position. This ratio can be computed as follows:
Current ratio = Current assets 13,647 13,647
Current Liabilities 18,040 18,040
For every dollar that is owed current liabilities in both years, the firm has 0.76 dollars to pay the debt. The current ratio has also remained the same in both years.
Average collection period
= Average trade receivables * 365 days 1,798 * 365 1,798 * 365
Credit sales 59,426 70,123
11.04 days 9.36 days
The average collection period shows that in 2009, The Westfield Group Plc took longer to collect its trade receivables than it took in 2010.
Long term solvency ratios
Fridson & Avarez (2002) demonstrates that a firm is said to be leveraged whenever it finances a portion of its assets by debts. Debts commit a firm to payment of interest and repayment of capital. Borrowing is only advised if the return earned on the funds borrowed is greater than the cost of the funds.
Debt to equity ratio
Fridson & Avarez (2002) demonstrate that this ratio measures the proportion of assets financed by outsiders. It is calculated as follows:
Debt to equity ratio = Total liabilities *100
Debt to equity ratio = 33,058 *100 33,052 *100
Debt to equity ratio = 71.8 % 71.8 %
This ratio shows that in 2009, 71.8 % of the company’s assets were financed by outsiders while in 2010, 71.8 % of the company’s assets were financed by outsiders. This ratio has also not changed.
Profitability and operating efficiency ratios
Bragg (2007) demonstrates that these ratios consist of tests used to evaluate a firm’s earnings performance during the year. These ratios combined with other data can be used to forecast the earning potential of a firm since in the long run, the firm has to operate profitably in order to survive.
Fridson & Avarez (2002) demonstrates that this ratio describes the company’s ability to earn income. It computes the proportion of sales that contribute form profit. In our case, we shall substitute sales with revenue.
Profit margin = Net income 2161 * 100 2,550 * 100
Net sales 59,426 70,123
3.64 % 3.64 %
This ratio shows that in both years, 3.64 % of the company’s revenue contributed to profit. This ratio has also not changed.
Return on total assets
Fridson & Avarez (2002) demonstrate that this ratio measures how well management has employed assets, and is given by:
Net income * 100 2161 * 100 2,550 * 100
Average total assets 46,053 46,053
4.69 % 5.53 %
This ratio shows that in 2010, management was able to employ the assets better than in 2009.
2008 % 2009 %
Debt 90.1 39.9 110.5 41.4
Equity 135.8 60.1 156.3 58.6
Total 225.9 266.8
Over the years, both the company’s debt and equity have been increasing. This can be explained by the growth and expansion that the company has been carrying out over the years. Between 2008 and 2009, the proportion of debt in the company’s capital structure has been reducing. This means that the company has been using more of its equity funds to finance the expansion than it was issuing fresh debt for the same. However in 2009, this proportion increased from 39.9 % in 2008 to 41.4 % in 2009.
Property, plant and equipment
The total payments due under operating leases have been deducted from the value of Property, plant and equipment as follows:
At 31.3.08 At 31.3.07
Property, plant and equipment reported in the balance sheet 3,582,126 2,901,505
Add Property, plant and equipment held under operating leases 287,758 306,443
Restated value Property, plant and equipment 3,869,884 3,207,948
Hedging and use of derivatives
Operating Lease expenses
From the notes to the financial statements, we are given the following schedule as future minimum payments due under operating leases
At March 31,
Present Value @ 6.4 % 2008 2007
Due within one year 73,506 70,791 78,210 75,322
Due between one and two years 69,084 66,533 78,210 75,322
Due between two and three years 61,580 51,913 74,176 75,322
Due between three and four years 37,085 54,087 47,530 69,320
Due between four and five years 25,598 32,469 34,907 44,277
Due after five years 20,905 30,650 22,243 44,471
Total 287,758 306,443 335,276 384,034
From the analysis of the predicted financial position and performance of The Westfield Group, the company is expected to perform nearly the same in the year ended 31st December 2009 as it performed in the year ended 31st December 2008. This is shown by the similarity in the majority of the ratios computed above. The working capital ratio, current ratio, profit margin, and debt to equity ratio all remain the same for the two years. Only the average collection period shows that the company will take less time in 2009 to collect the amounts owed by trade debtors, and return on total assets ratio shows that in 2010, management was able to employ the assets better than in 2009.
Block, S., Hirt, G., (2007). Foundations of Financial Management. New York: McGraw.
Bragg, S. (2007). Financial statement analysis: a controllers’ guide. United States: John Wiley &Sons, Inc.
Fridson, M, Avarez, F. (2002). Financial statement analysis: a practitioners’ guide. United States: John Wiley & Sons, Inc.
Mukherjee H., & Mohammed, H. (2005). Corporate Accounting. New York: McGraw-Hill.
Stickney, C., Weil, R., & Schipper K. (2009). Financial Accounting: An Introduction to Concepts, Methods and Uses. Florence: Cengage Learning.