FACULTY OF BUSINESS AND MANAGEMENT

SEMESTER SPETEMBER 2012

BBPW 3203 FINANCIAL MANAGEMENT II

MATRICULATION NO IDENTITY CARD NO TELEPHONE NO EMAIL LEARNING CENTRE

: : : : :

850106015325001 850106-01-5325 016 7924214 tamil850106@oum.edu.my JOHOR BAHRU

CONTENTS

1.0 2.0 3.0

TRC SYNERGY BERHAD : An Intro Capital Structure Related Ratio Computation Capital Structure Analysis of TRC Synergy Berhad for the year 2008 until 2010

1-2 3-4

56

4.0

Capital Structure and Financial Condition evaluation of TRC Synergy Berhad. 78 9

5.0 6.0

Summary Appendix 6.1 6.2 6.3 Balance Sheet Of the year 2008 Balance Sheet Of the year 2009 Balance Sheet Of the year 2010

10 11 12 13 14 15

(i)

1.0

TRC SYNERGY BERHAD : AN INTRO TRC Synergy Berhad was initially incorporated as a private limited company in

Malaysia under the Companies Act, 1965 on 11 December 1996 under the name TRC Synergy Sdn Bhd. On 8th January 1997, the company changed its status from a private limited company to a public company and assumed the name TRC Synergy Berhad (TRCS).

TRCS was listed on the Main Board of the Bursa Malaysia Securities Berhad on 6th August 2002, where it offered Public Issue and Offer For Sale of 16,000,000 and 3,500,000 ordinary shares respectively. TRCS is principally an investment holding company while the principle activity of its subsidiary companies are construction, manufacturing of construction materials and property development. The TRCS group of companies employs over 500 personnel of which more than 15% are in sub-professional and professional group. TRCS not only has the ability to undertake common projects like roads and building construction, but also specialized mega projects like airports, railway track works, stadium, hospitals and large property development ventures. The companys motto As one with the nation sums up the companys aspiration to progress in tandem with the nations vision. The construction division is the main contributor to TRC Groups revenue and profit. The construction activities are undertaken by TRC Synergy Berhads wholly owned subsidiary, Trans Resources Corporation Sdn Bhd. With over more than 27 years of experience in the construction industry, TRC has now established itself as one of the reputable contractors in the country, capable of undertaking major construction projects like roads, bridges, railway, airport facilities, hospital, prison complex, submarine base and other infrastructure works.

Its key achievements include the successful completion of fast track design and build projects such as the National Hockey Stadium at Bukit Jalil, the Labuan Airport, Westport Rail Link Projects, Prison Complex in Bentong Pahang, Sepanggar Bay Submarine Base and Kuala Terengganu Runaway Extension projects. Among TRCs current projects are the extension to the Kelana Jaya Line of the LRT project, the Stations and Depot works to the Klang Valley MRT(KVMRT) packages and the modernization of Brunei International Airport. TRC is a safe bet as it has already got a ticket to ride on the current public infrastructure spending boom, i.e. via the RM950m main contract of the Package A of the Kelana Jaya LRT Line extension project. Also, its lean setup means that it can profitably execute certain smaller public jobs and subcontracts of key large-scale projects

Analysis from RHB Research Institute Sdn. Bhd.

2.0

Capital Structure Related Ratio Computation There are four leverage ratios; Debt ratio, Debt equity ratio, Equity multiplier and Interest coverage ratios use to assess the financial strength of a company. In general, analysts use the first two, the Debt ratio and Debt equity ratios, are popular measurements. The ratios deliver key insights to evaluating a companys capital structure. The debt ratio compares total liabilities to total assets. The debt equity ratio which compares long term liabilities to total shareholders equity. The formula to measure Debt ratio and Debt equity ratio: Debt ratio = Total liabilities / Total assets and multiplied by 100.

(The percentage will indicate the proportion of debt on its total assets. Higher ratio means higher debts, generally, lower ratio always favored) Debt equity ratio = Long-term liabilities / total shareholders equity.

(The percentage will indicate the total debts for each ringgit of equity the owners. The lower ratio is better for shareholders) A) Leverage Ratio Computation of TRC Synergy Berhad for the year 2008 Computation (RM) RM 456,333,269 RM 189,465,987 RM 7,981,776 RM 266,867,282 RM 189,456,987 RM 456,333,269 = 0.415172 X 100 = 41.52 % DEBT EQUITY RATIO RM 7,981,776 RM 266,867,282 = 0.02990 = 2.99 % X 100 DEBT EQUITY RATIO = 2.99 % Percentage / Ratio DEBT RATIO = 41.52 %

Properties Total Assets Total Liabilities Long-term Liabilities Total Share holder Equity DEBT RATIO

B)

Leverage Ratio Computation of TRC Synergy Berhad for the year 2009 Computation (RM) RM 447,255,344 RM 160, 912,423 RM 7,174,785 RM 286,342,921 RM 160,912,423 RM 447,255,344 = 0.35977 X 100 = 35.98 % Percentage / Ratio DEBT RATIO = 35.98 %

Properties Total Assets Total Liabilities Long-term Liabilities Total Share holder Equity DEBT RATIO

DEBT EQUITY RATIO

RM 7,174,785 RM 286,342,921 = 0.02505 = 2.51 % X 100

DEBT EQUITY RATIO = 2.51 %

C)

Leverage Ratio Computation of TRC Synergy Berhad for the year 2010 Computation (RM) RM 458,081,723 RM 159,846,246 RM 1,205,553 RM 298,235,477 RM 159,846,246 RM 458,081,723 = 0.34894 X 100 = 34.89 % Percentage / Ratio DEBT RATIO = 34.89 %

Properties Total Assets Total Liabilities Long-term Liabilities Total Share holder Equity DEBT RATIO

DEBT EQUITY RATIO

RM 1,205,553 RM 298,235,477 = 0.00404 = 0.40 % X 100

DEBT EQUITY RATIO = 0.40 %

3.0

Capital Structure Analysis of TRC Synergy Berhad for the year 2008 until 2010 The strengths of a companys balance sheet can be evaluated by three categories, working

capital, assets and capital structure. A companys capital comprised of long-term capital, which consist of debt and equity. A healthy proportion of equity capital is opposed to the over dependent on debt capital. In financial term debt is a good example to increase the amount of financial resources for the firms growth. There is an assumption that management can earn more on borrowed funds than its payment of interest expenses on these funds. However, management to maintain a solid record of commitment on its borrowings. On the other hand, a company with high leverage may find its freedom restricted by its borrowers and may have its profitability affected as a result of paying high interest costs. Incidentally, a company in highly competitive business, if burdened with high debt may find its competitors taking advantage of its problems to grab more market share. A companys reasonable use of debt and equity to support its assets is a key indicator of strengths. A healthy capital structure, with a low debt and a proportionate level of equity is a positive sign of investment quality. TRC Synergy Berhad is a big public listed company with 2634 shareholders and more than 5 million paid up capital shares. It is quite common for big companies capital structure having bigger debt obligations. TRC Synergy berhads Debt Ratio of 41.52% in year 2008, 35.98% in 2009 and 34.89% in the year 2010, indicates a significant decrease in debt ratio each year, explains the firm is under the process of improving its debt margin. The change passively achieved by improving in its fund management. The total liability of RM 189,465,987 in the year 2008, had been decreased to RM 159,846,246 in the year 2010. It shows that 15.63 % of the companys debt leverage was dropped fairly and increased the capital equity. The capital equity in the year 2008 is RM 266,867,282 meanwhile in the year 2010 is increase to RM 298,235,477. Clearly, the companys capital management opt for equity financing than debt financing. In general, the construction industry has a small debt ratio indication means constructions are in a good position to manage their funds independently. They have smaller borrowings comparing other firms in different industries. It can be assumed that the stable economy growth can be a factor for their strong financial positions.

The Debt Equity Ratio also shows a good signs of improvements. Its long term debts are far smaller and had decreased its leverage to a better management of its funds and have its proportional funds left at bad times. A small long term liabilities means low interest servicing can increase the shareholders equity to attract their confidence. The Debt Equity Ratio of the TRC Synergy Berhad shows a good sign that its long term liabilities against its total equity is only 2.99 % in year 2008, 2.51% in 2009 meanwhile in the year 2009 the debt equity ratio lower than 1.0 % because of there is no details about borrowings at their financial statements. An indication at almost zero debts of the firm. It means the shareholder equity have big

dividends.means the shareholders can count fair distribution of dividend. Smaller percentage of debt equity ratio is always a good position against the leverage. The long term liabilities which made up of bonds, preference shares and other similar long term maturity type borrowings, and these holders cannot demand payment as long as the company pays the interest on its funded debt. In general, The financial leverages is smaller that construction industry which of its funding most come from debts. Higher debt ratio sometime due to the size of the business can be a factor for bigger debt financing. A small long term liabilities means low interest servicing can increase the shareholders equity to attract their confidence.

4.0

Capital Structure and Financial Condition evaluation of TRC Synergy Berhad. The construction industry plays an important role for growth of the Malaysia economy, which has contributed about 2.5 % of gross domestic product (GDP) in year 2010. In the Malaysia Master Plan 2006 2015, more than 800,000 job oppurtunities have been created within these industries. Therefore efforts towards improving construction efficiency in cost effectiveness and shorten construction time would be implemented from time to time. Construction industry in Malaysia considered as fragmented industry, whereby policy, implementation guideline and practice within industry are inconsistent among the players involved. TRC Synergy Berhad is a successful player in this construction industry for more than 15 years. Capital structure decisions have the underlying aim towards maximizing the value of a firm. Any event that could accumulate unnecessary costs such as financial distress, liquidation and bankruptcy would deviate companies from attaining this objective. The ultimate consequences lay ahead may be worst if any major misjudgment occurred following financing decisions of the firms activity. Firm needs to efficiently allocate its source of capital that will finally reduce its cost through lowering its weighted cost of capital. The results will be increased in net economic return and eventually its value. Thus, in todays financial management, regardless whether it is property or construction or any other sectors, achieving the best capital structure is crucial. Since the financial condition of construction companies are very sensitive with the economic cycle, the decision to finance the company with internal or external source is very crucial. The results of the study show that large firms such as TRC Synergy Berhad rely heavily on the debt financing. We also discovers that asset tangibility has influence the most on the debt. The rationale behind this situation is that, when the company has more assets tangibility, the demand for debt in financing the assets is also increased.

Based on our analysis, TRC Synergy Berhad show a good financial performance at each financial year. Debt payments are tax deductible. As such, if a company's tax rate is high, using debt as a means of financing a project is attractive because the tax deductibility of the debt payments protects some income from taxes. Based on our analysis, TRC Synergy Berhad has the debt ratio in between 42.0 % and 32.0 %. More stable and mature firms such as TRC Synergy Berhad typically need less debt to finance growth as its revenues are stable and proven. These firms also generate cash flow, which can be used to finance projects when they arise. The debt equity of TRC Synergy Berhad is in between 3.0 % and 0.5 % means the equity for each ringgit earns a sky fall dividends for their shareholders. Usually their share rates are quite high in the market. They prefer more equity for their capital structure. Its proven when the total equity increase from RM 266,867,282 in the year 2008 to RM 298,235,477 in the year 2010. More equity means more shareholder, more shareholders means more customers and more customers bring more profit. More profit margin can cushion their overall operating expenses. Generally shareholders would prefer smaller debt engagement will earn them a bigger dividends. Company is to dispose off their financial obligations against the shareholders dividends. Based on Hong Leong Research report, the EBIT ratio in the year 2010 is 20.4 % meanwhile in the year 2009 is 37.9 % shows that earnings before interest and taxes increase and also indicate that the firms profitability increase in that particular year.

5.0

Summary The study of capital structure on TRC Synergy Berhad in three subsequent years finds that there is proven that financial management of the said firm at optimal standard and best capital structure engagement. After analyzing a number of factors, a firm establishes a target capital structure it believes is optimal according to its nature and strength, which is used as a guide for raising funds for its operation. The finding of the report shows, that TRC Synergy Berhad tends toward the equity financing instead of the debt financing. Main source of external financing

available to firms is from commercial banks. These commercial banks encourage short and secured loans only. Larger firms can easily get loans from banks of which likes to advance loan to those are financially sound. Consequently, a companys reasonable use of debt and equity to support a healthy capital structure that reflects a low level of debt and corresponding a high level of equity is a very positive sign of investment.

[ Total Words : 2453 ]

6.0

Appendix 6.1 Balance Sheet of TRC Synergy Berhad (Year 2008)

6.2

Balance Sheet of TRC Synergy Berhad (Year 2009)

6.2

Balance Sheet of TRC Synergy Berhad (Year 2010)