Investments Analysis And Portfolio Management Essay

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Discuss about the Investment analysis and portfolio management.

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Introduction

This report contains a whole analysis of CSL Limited which operates in biotechnology industry. The report includes a brief overview of the company along with the information related to its board of directors and external auditors. Investing and financing decisions taken by the company during the fiscal year 2016-2017 is also discussed in the report. In the later part, facts related to the key recommendations of ASX CGC, key investors and measures taken by CSL to comply with ethical standards are also mentioned. The last part of the report deals with the analysis of the company’s financial statements by measuring several types of ratios. Proper evaluation of the financial performance is been done followed by the conclusion.

CSL Limited – Brief Summary

CSL is a global biotechnology company that deals in manufacturing, researching and marketing the products used for treating and preventing serious human medical conditions. The products of the company include blood plasma derivatives, vaccines and other laboratory and medical products. CSL Limited operates in biotechnology industry, having headquarters situated in Melbourne, Parkville and Victoria. The company was founded in 1916 and is listed on Australian Securities Exchange with a ticker symbol ASX: CSL. Stock of the company is a constituent of S&P/ASX 50 Index (csl.com. 2018).

As a leading company, it delivers medicines to the patients in more than 60 countries and has approx. 2000 employees who are motivated with a fact of serving thousands of patients all over the world. The company mainly focuses on manufacturing high quality products, establishing world-class research and development and having a patient-centred management in order to develop innovative biotherapies and influenza vaccines. The mission of CSL is to treat and save lives of thousands of people from life-threatening medical problems. The continuing priority of CSL is to serve quality medicines and ensure the safety of the patients, while improving the access to innovative therapies that have a real and lasting impact on the lives of people (Bloomberg.com. 2018).

Talking about the financial performance, in last year CSL has made a revenue amounted to $6615.8 million which was more than that of in 2016. In that year, the revenue was reported at US$ 5.909.5 million. The net profit of CSL has also increased in last year from US$ 1242.4 to US$ 1337.4 along with the rise in Earnings per Share (diluted) to US$ 2.931 in 2017. On a whole, company has performed better in 2017 with offering positive returns to its shareholders and a reduced debt to equity ratio (csl.com. 2017).

Board of directors

Name

Gender

Age

Education

Career History

Post

Remuneration (US$)

Professor John Shine

Male

71

BSc (Honours), PhD, DSc, FAA, FRCPA, FAHMS

From 1990-2012, he served as an Executive Director to Garvan institute of Medical Research. He was also a former president of Museum of Applied Arts and Science and the chairman of NHMRC.

Chairman

526,197

Paul Perreault

Male

59

BA Psychology

In past, Mr Paul was the chairman of the Global Board for the Plasma Protein Therapeutics Association. In addition to this he has also worked with Wyeth, Centeon, Aventis Bio services and Aventis Behring.

CEO and Managing Director

8,180,831

David Anstice

Male

69

Bec

He was appointed as a senior executive in Merck % Co., Inc. In addition to this, he has served as a director of US study centre at University of Sydney.

Chairperson of Human Resources and Remuneration Committee

216,116

Bruce Brook

Male

62

B.Com, BAcc, FCA, MAICD

Previously, he has been a chairman of Energy Developments Limited and also a director of Lihir Gold and Boart Longyear Limited. Along with this, he has also been the Chief Financial Officer of WMC Resources and deputy CFO of ANZ Banking Group.

Chairperson of Audit and Risk Management Committee

199,954

Dr. Megan Clark

Female

59

BSc (Honours) PhD

Along with the Board member of CSL, she is also a director of Rio Tinto and Care Australia. She has been a CEO of CSIRO for the period of 2009-2014.

Member – HR and Remuneration Committee

196,196

Abbas Hussain

Male

53

BSc (Honours)

He was Global President, Pharmaceutical of GlaxoSmithKline. Director of Viv Healthcare Limited and previously served on Board of Aspen Healthcare and University of Singapore Medical School.

Member - Innovation and Development Committee

N/A

Marie McDonald

Female

61

BSc (Honours), LLB (Honours)

In 2012-2013, she was Chair of the Corporations Committee of the Business Law Section of the Law Council, Australia. Prior to that in 2001-2010, she has been the member of Australian Takeovers Panel.

Member – ARM Committee

180,410

Dr. Brian McNamee

Male

60

MBBS, FAICD, FTSE

Worked with Kohlberg Kravis Roberts as an advisor and has also served on the panel of Australian Government’s Financial System Inquiry.

Member - Innovation and Development Committee

N/A

Christine O'Reilly

Female

56

Bbus

She was a co-head of Unlisted Infrastructure Investments and CEO of GasNet Australia Group.

Member – ARM Committee

201,458

Dr. Tadataka Yamada

Male

72

MD, BA

Has been CMSO at Takeda Pharmaceuticals and the president of Bill & Melinda Gates Foundation Global Health Program.

Member - Innovation and Development Committee

N/A

(csl.com. 2017).

Characteristics of the Board

The CSL Board of Directors comprises of the knowledgeable and professional people having quantum of experience in their field respectively. The role of the CSL’s Board is to recognize and appreciates the commitments made to the patients and to timely deliver all the obligations to the stakeholders of the company. The strategic and oversight directions of CSL Limited are guided by the Board of directors. The Chairman John Shine, who has a strong career history assist the company well and motivates each and every employee to achieve their targets and focus on the mission of the company. The experts of Audit and Risk management committee monitors the financial and operational performance of CSL Limited. Policies and practices related to human resources are framed and approved by the chairperson and members of Human Resources and Remuneration Committee. The board is responsible for approving the budgets and the plans made related to the business. Bruce Brook, Chairperson of Audit and Risk Management department is held responsible for overseeing the company’s risks, financial reporting practices and framework of compliance (csl.com. 2018).

CSL has a formal charter of its Board of directors which reflects the membership of its key people, their roles and responsibilities, operating procedures and appointment of duties between the board and management. For the purpose of research and development programs, board has made a committee of Innovation and Development that assists the organization in taking strategic directions regarding product research and product development programs. Also provide guidance on priority issues along with technical assistance. The HRRC is also set up for helping the Board in fulfilling its obligations towards the shareholders in con text of CSL’s remuneration policies and procedures. This committee is held responsible for making and deciding the framework of overall remuneration for CSL Group, along with setting the remuneration framework for managing director and Group’s executives. The duties also include setting of policies and practices related to remuneration followed by their implementation in an effective and efficient manner (csl.com. 2018).

Apart from these, CSL Board has many other committees named as Innovation and Development Centre, Nomination Committee Centre and Securities and Market Disclosure Charter. People employed in these groups are professional having a great experience in their field and are best at their work respectively. By delegating the authorities, the Board is able to meet the requirements of its clients and stakeholders easily and quickly (csl.com. 2018).

Investment and Financing Decisions

In December 2017, there was a media releases about the strategic partnership of CSL limited and Vitaeris, which is a privately held company in HBM Healthcare Investment portfolio. The company invested in this partnership with the purpose of accelerating the development of clazakizumab (anti-IL6 Mab) as a healing solution for solid organ transplant rejection. CSL has paid USD 15 million to Vitaeris for having a control over the projects through end of Phase III (Hbmhealthcare.com. 2017). Also in Seqirus, the company continues to the process improvement programs with a specific objective of realising the potential of cell based technology at Holly Springs. Along with this it also announced a new investment at their Liverpool site in order to have a greater control over the global supply chain (csl.com. 2017).

In 2016-2107, CSL has invested US$ 645 million on its research and development department which is supported by approx. 1400 scientists across the world. Talking about the financing decisions, CSL announced buyback of shares in 2016. The company declares about its intention to conduct an on-market buyback of shares up to A$500 million. In 2017, the same was completed as a part of capital management program. These buybacks benefited CSL’s shareholders by improving the investment ratios including return on equity and EPS (csl.com. 2017).

ASX CGC recommendations

The corporate governance practices of CSL are complied with ASX Corporate Governance Council‘s ‘Corporate Governance Principles and Recommendations’. The Key recommendations are:

Principle or Recommendation

Description

Solid foundation should be laid for management and oversight

Clear roles and responsibilities of Board and management

Structure the Board to add value

Effective composition, size and commitment.

Should act ethically and responsibly

Promote ethical and responsible decision making

Safeguarding the integrity at time of corporate reporting

Structure should be made which safeguards and verify the integrity of financial reporting.

Timely and balanced disclosure should be made

All material matters should be disclosed timely and in balanced form.

Give respect to the right of security holders

Should respect the shareholder’s right

Risk recognition and management

Establishment of sound system for risk management and internal control.

Fair and Responsible remuneration

Remuneration composition should be sufficient and reasonable.

Audit Function of CSL

The annual reports of CSL limited are audited by Ernst & Young LLP, which is a professional services company. The company provide services like auditing, assurance, transaction support, enterprise risk management, mergers and acquisitions and many more. It also has it subsidiary named as Ernst & Young Corporate Finance which provides services related to the corporate finance (Bloomberg.com. 2018).

Auditors have audited the financial report of CSL Limited which comprises consolidated statements of financial position, comprehensive income, cash flows and notes to financial statements along with the summary of accounting policies and declarations made by directors. In the opinion of the auditors, the report is in accordance with the Corporation Act 2001 and Australian Accounting Standards. It represents the true and fair view of company’s financial position. The auditors are independent of the Group as per the auditor independence requirements for Corporations Act 2001 and the ethical requirements of APES 110 ‘Code of Ethics for Professional Accountant’.

EY was entitled to get a remuneration of US$ 4,203,240 for its auditing services and US$ 1,035,630 for rendering non-auditing services. The total remuneration paid was US$ 5,238,870 in year 2017 and the same figure in 2016 was US$ 4,845,901 (csl.com. 2017).

Ethics and Ethical Judgements

In order to comply with the ethical standards, following key steps are taken by the company which are mentioned in its Corporate Responsibility report 2017.

  • In July 2017, CSL handed over the third edition of its code of Responsible Business Practice to all the employees, which sets out the obligations and power of the employees and the commitments made towards the stakeholders.
  • The company has conducted a materiality assessment in accordance with the GRI standards of sustainability in year 2015-2016 (com.au. 2017).
  • In order to ensure safety and quality of its therapies, CSL has adopted a product lifecycle approach. It has employed an integrated quality function that stimulates the maintenance of high standards by following global policies and local procedures. The approach includes quality audit, implementation of quality system at plasma centre and many more.
  • CSL put its product in the market in a very ethical manner by following company’s specific policies and procedure which are monitored by compliance mechanism and control systems. CSL’s ARMC is also responsible for guiding the marketing practices of the company.
  • Company is focused on creating a positive environment for working by treating all its employees in a lawful and fair manner (csl.com.au. 2017).

Key Investors or Shareholders

According to the annual report the key shareholders of the company as at 30 June 2017 are:

Shareholder

Shares

Holding %

HSBC Custody Nominees Limited

156,300,435

34.47

J P Morgan Nominees

69,781,224

15.39

Citicorp Nominees PTY Limited

24,471,413

5.40

National Nominees Limited

15,462,035

3.41

BNP Paribas Nominees PTY Limited

8,354,564

1.84


All the above people are the largest shareholders of CSL limited. HSBC has the highest stake in CSL Limited followed by JP Morgan Australia which holds 15.39% of company’s shares. (csl.com. 2017).

Financial Statements - Ratio Analysis

Latest annual reports of CSL Limited are used to calculate the ratios and measure the financial performance of the company.

Liquidity ratios

The current ratio of the company is 2.78 in 2016 and 2.84 in 2017, which is more than the ideal ratio of 2:1. This implies that CSL has enough current assets to meet its current liabilities. Similarly the quick ratio in both the years has increased due to rise in Current assets and is also more than its ideal ratio of 1:1. This also indicates the same that the liquidity position of CSL has become better in 2017 as compared to previous year (Bragg, 2012).

Asset Management Ratios

Receivables turnover ratio depicts the ability of the company in collecting its debtors timely. CSL’s DTR has increased to 5.81 times in 2017 as compare to 2016. This implies that company operates on cash basis and also collects its debtors quickly. The impact of which can be seen in the amount of cash which has increased over the year. Also its collection days has reduced by 2 days which also implies the same. ITR shows how many times a company sold its inventory and replace it during a period of time. CSL’s ITR has reduced over the year due to the high increase in the amount of inventory. Also the days’ sales in inventor has also increased which means the company is taking more time in converting its stock into cash (Jenter, and Lewellen, 2015).

Talking about total assets turnover ratio, it has reduced to 0.79 from 0.85. This implies that CSL has generated less sales from its assets and there is a huge increase in the value of total assets which reduces the ratio. Similarly, the CTR of the company has reduced to 3.09 times along with the upsurge in average payable days. This is due to the large increase in the value of creditors as CSL takes longer to pay them back, because most of the cash is been held in form of inventory (Parrino, Kidwell and Bates, 2011).

Capital Structure ratios

The Debt- Equity ratio reflect the proportion of debt taken by the organization against its equity funding. In 2017, it was reported at 1.88 lower than 1.95. This reduction is due to the increase in amount of shareholder’s equity. The same trend is followed in ICR and debt to total assets ratio. The portion of debt in total assets of CSL is reduced by 1% and minor reduction is there in CSL’s ICR. Overall, it implies that company has less financial risk (Ferrarini, Hinojales and Scaramozzino, 2017).

Profitability ratios

Both the operating and gross profit margin of CSL Limited has increased by 3% and 2% respectively in 2017. Reason being, the increase in both the profits is more than the increase in total revenue. On the other hand, company’s net profit margin, ROE and ROA reported a minor reduction to the low increase in overall net profit of the firm. The returns on equity fall by 6% and ROA falls by 2%. A decreases of 1% was there in net profit ratio (Higgins, 2012).

Market Value ratios

The book value and market value per share of the company, both have increased over the year. BVPS rises due to increase in the number of outstanding shares and market value continues to increase because CSL has strong liquidity and profitability position with reduced financial risk. Dividend yield decreases to 0.92% because of reduced DPS of US$1.26 in year 2017. EPS rises from 2.683 to 2.933 in recent past year. This shows that CSL has made more earnings for its shareholders because of the positive change in the net profit and increased number of shares. In addition to this, CSL has high P/E ratio which means its investors are estimating high growth in future due to increased profits and earnings (Tracy, 2012)

Cash flow Management ratios

CSL’s OCFR is 86% in 2016 and the same reduced to 77% in 2017. This ratio shows the number of times a company can pay its current liabilities with the cash generated from operations. The figure is been reduced to the high increase in the Current liabilities of the company (Heisinger, 2009). While, on the other hand price to cash flow ratio increases due to increase in share price and company’s CFO. The figures are small which implies that CSL has generated ample cash flows in the last year (Reilly and Brown, 2011).

Conclusion

From the above report, it can be concluded that the overall financial status of CSL is good as the company has low financial risk and high operating profit. Also the market price of its stock has increased over the period and the firm has generated enough cash inflow that it can easily meet its current liabilities. In addition to this, it has taken many steps in order to maintain the quality in its products and to serve its patients best. So overall, it can be said that company has performed very well in the last year and is expected to have an increased growth in future.

References

Asx.com.au. (2018). Corporate Governance Principles and Recommendations with 2010 Amendments. [Online] Available at: [Accessed 28 March 2018].

Bloomberg.com. (2018). CSL: ASE Stock Quote - CSL Ltd. [online] Available at: [Accessed 28 March 2018].

Bloomberg.com. (2018). Ernst & Young LLP: Private Company Information - Bloomberg. [Online] Available at: [Accessed 28 March 2018].

Bragg, S. M. (2012). Business ratios and formulas: a comprehensive guide (Vol. 577). 3rd ed. New Jersey: John Wiley & Sons.

Corporateresponsibility.csl.com.au. (2017). CSL Limited Corporate Responsibility. [Online] Available at: [Accessed 28 March 2018].

csl.com. (2017). CSL LIMITED ANNUAL REPORT 2016/2017. [Online] Available at: [Accessed 28 March 2018].

csl.com.au. (2017). CSL LIMITED OUR CORPORATE RESPONSIBILITY 2016/2017. [Online] Available at: [Accessed 28 March 2018].

csl.com. (2018). Board and Management. [Online] Available at: [Accessed 28 Mar. 2018].

csl.com. (2018). Our Company. [Online] Available at: [Accessed 28 March 2018].

Ferrarini, B., Hinojales, M. and Scaramozzino, P. (2017). Leverage and Capital Structure Determinants of Chinese Listed Companies.

Hbmhealthcare.com. (2017). CSL and HBM Portfolio Company Vitaeris Announce Strategic Partnership with Option to Acquire. [Online] Available at: [Accessed 28 March 2018].

Heisinger, K., (2009). Essentials of managerial accounting. USA: Cengage Learning.

Higgins, R. C. (2012). Analysis for financial management. McGraw-Hill/Irwin.

Jenter, D., and Lewellen, K. (2015). CEO preferences and acquisitions. The Journal of Finance, 70(6), 2813-2852.

Parrino, R., Kidwell, D. S., and Bates, T. (2011). Fundamentals of corporate finance. 2nd ed. USA: John Wiley & Sons.

Reilly, F.K. and Brown, K.C., (2011). Investment analysis and portfolio management. 10th ed. USA: Cengage Learning.

Tracy, A. (2012). Ratio analysis fundamentals: how 17 financial ratios can allow you to analyse any business on the planet. RatioAnalysis. net.

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