Starhill REIT: Financial Analysis

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1. PROFITABILITY

Return on Ordinary Shareholders’ Funds (ROSF)
ROSF examines the profit a business generates with the shareholders’ funds. The ROSF of Starhill Real Estate Investment Trust (hereinafter refer as Starhill REIT) raised steeply in year 2009 from 7.09% to 27.73%, an increase of 20.64% compared to previous year. The remarkable increment of the percentage was conducing by the growth of income after taxation in year 2009. Included in income after taxation was a revaluation surplus of RM274.36 million required to be made under fair value accounting standards. Meanwhile, the growth in recurring profit was contributed substantially by increased in service charge rates for all tenancies in the retail complexes. This showing a good phenomenon for Starhill REIT as more profit was generated with shareholders’ funds. (Excluded the revaluation surplus of RM274.36 million which was unrealized in year 2009, there was still an increase in income after taxation from RM81.27 million in year 2008 to RM81.49 million in year 2009.) Nevertheless, the good phenomenon of Starhill REIT blew up in year 2010 when the ROSF fell dramatically to 2.22%. The 2010 ratio was very poor as deposit in bank account* would yield a better return than this. This tragic outcome mainly caused by a loss on disposal of investment properties amounted to RM39.65 million which recognized in the year 2010, and hence, boosted up the total expenses thus affected the income after taxation. Besides that, Starhill REIT also incurred a divestment fee and other professional fees of approximately RM5.7 million in relation to the disposal in the year 2010. Return on Capital Employed (ROCE)

ROCE expresses the return a business earns on the assets and showing how efficiently the business using its resources. In year 2009, the ROCE of Starhill REIT increased significantly from 6.75% in year 2008 to 24.76%, this indicated that the company was earning a better return on their assets. The satisfying ratio was contributed substantially by the increment in income before taxation and interest which included a revaluation surplus and increased in service charge rates. (Excluded the unrealized revaluation surplus of RM274.36 million in the year 2009, the ROCE of Starhill REIT in 2009 was 6.12%, a slightly dropped compared to 2008. The diminution of the ratio was due to the gain of capital employed.)

In the year of 2010, the ROCE dropped sharply to 2.66%. The decrement was based on the loss on disposal as well as the incurred of divestment fee and other professional fees. This ratio had shown the same story as ROSF, i.e. poor performance. The return on the assets was lower compared to its finance costs rate and this was a worrying sign. (The rate of finance costs was 4.8% per annum.)

Net Profit Margin

Net profit margin indicates the average profit on each dollar of sales. The net profit margin of Starhill REIT was rising steeply from 83.09% in 2008 to 329.90% in 2009 and dropped significantly to 36.16% in 2010. As mentioned in ROSF and ROCE, the raising of ratio in 2009 was contributed substantially by the increment in income before taxation and interest which included a revaluation surplus and increased in service charge rates, whereas the falling of ratio in 2010 was based on the loss on disposal as well as the incurred of divestment fee and other professional fees. (After excluded the unrealized surplus of revaluation, the net profit margin of Starhill REIT in 2009 was equaled to 81.58% which shown a slightly decrease compared to prior year. The increment of the net revenue seemed to be the factor of causing the diminution of the ratio.)

2. EFFICIENCY

Average Settlement Period for Debtors

The average settlement period for debtors calculates how many days it takes, on average, to collect a day’s sales revenue. In the case of Starhill REIT, we make an assumption that all sales are incurred on credit term. Although the average period had increased...
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