Summary
MarineCorp was the maritime solution provider for the SURIA group of companies. It had two subsidiaries which are Green Port Sdn Bhd and Sungai Emas Port Sdn Bhd. Hafiz Hasyim is the person who is responsible to report financial performance in the company. He is one of the Boards which is CFO in organizational structure for the three companies. Besides, Vessel inspection and vetting was a major business of MarineCorp. MarineCorp also provide consulting services to SURIA and its related contractors that included those for newly built vessel for upstream and downstream oil and gas operations. For Green Port, it major activities included pilotage and marine support, emergency response, port management and operations, navigational safety, and marine services to the Single Buoy Mooring facilities. Last but not least, Sungai Emas major activities included pilotage and marine support, emergency response, port management and operations, and navigational safety. Protagonist/Decision maker
Hafiz Hashim, the Chief Financial Officer of Marine Corp Sdn Bhd and responsible for the financial management of MarineCorp and its wholly-owned subsidiaries which are Green Port Sdn Bhd and Sungai Emas Port Sdn Bhd.
Problem
There are some problems that Hafiz face during this financial performance which is he in dilemma situation whether to approach economic earnings that has required by SURIA group, Value Based Management (VBM) or use profits as practised by the company(Marine Corp Sdn Bhd) and its subsidiaries to report financial performance. Also, the Chairman requested specifics action that can improve company’s performance due to financial performance. Other problem faced by the protagonist is pressure from the General Manager of Green Port and also Marine Corp Sdn Bhd where they want to have better performance so they can get higher bonuses. GM Green Port, Anita Osman requested to amortise the dregging cost because Hafiz miscalculated them while GM Marine, Lee Chong Way refused to propose the dividend to the shareholders because of the cash already spend to fund investments. There are also certain accounting issues that arise that give pressure to solve it.
The Major Issue
The major issue occurred when there are two types of opinions that Hafiz has to consider. First is the opinion president of Suria Group so that Value Based Management (VBM) to be used for the SURIA Group and all its subsidiaries and associated companies. Secondly, for the current situation the MarineCorp and it subsidiaries are practicing profit base to measure the company performance. Besides, General Manager (GM) of Green Port requested to change dredging cost by amortizing it. Another issue occurred also in Marine Corp while the GM of the company refuse to propose dividend to their shareholders and use cash to generate interest income on fund investment. Case Exhibits
From Appendix G it shows the companies’ NOPAT, Average Invested Capital and Weighted Average Cost of Capital (WACC) and from these components the performance for each company can be measured. Under the VBM model, both economics earning for Sungai Emas and MarineCorp are positive which are 5,030,563 and 14,274,611 thus it’s shown that these company are creating value for their company. In the other hand, economic earning for Green Port is -14,588,232 (negative) and this indicates that value was destroyed for the company. Besides, under profit based the Green Port company shown the most profitable company compared to Sungai Emas and MarineCorp when the net profit after tax for the Green Port is the highest among them.
Question 1:
Determine the economic earnings of the MarineCorp Sdn Bhd, Green Port Sdn Bhd and Sungai Emas Sdn Bhd. Because the president of SURIA wants to use the Value Based Management (VBM) system, the company would be measured by economics earnings. The table above show economic earnings for each company. Green Port will have negative economic earnings while the other two will have positive economic earnings. Positive economic earnings means that value was created for the company and investment should be done in this company because it provides higher return than the cost of capital. Negative economic earnings would mean than the value of company was destroyed and investment should be avoided from this company because it illustrate that the company failure to provide higher returns than the cost of capital.
Question 2:
Rank the companies in terms of their financial performance.
Measurement
Marine Corp
Sungai Emas
Green
Ranking
Economic profit
14,274,611
5,030,563
(14,588,232)
M>S>G
Net profit after tax
15,348,792
5,841,524
27,370,609
G>M>S
Profit margin
28.89%
24.03%
28.46%
M>G>S
Current ratio
2.47
2.96
1.13
S>M>G
ROA
70.57%
26.94%
5.56%
M>S>G
Based on the Table1.1, we have decided that Marine Corp Sdn Bhd has the best financial performance compare with others two subsidiaries; Sungai Emas Port Sdn Bhd and Green Port Sdn Bhd. Even Green Port has the larger profit based but actually the company has destroy value if we calculate with the Value Based Management (VBM) as requested by the group SURIA. The value was destroy maybe because of the net operating profit was include the higher dredging cost that has been spend which is the amount that General Manager Green Port, Anita Osman want to amortise the cost to ensure that the company gain profit. Moreover, the Green port also had financial charges while the other two companies did not have financial charges. In fact, the amount for profit based and economic earnings is differ where the amount of profit decrease. In term of ratio, profit margin shows that Marine Corp is the higher percentage which 28.89% and follow by Green Port.
However, Sungai Emas Port has lower profit margin, 24.03% but the company has higher current ratio where is means an indication of a company’s ability to meet short-term debt obligations or the possibility the company can pay debts because of Sungai Emas Port has higher current assets and lower current liabilities. Green Port has the lower percentage to pay the debt only 1.13. Return on Assets (ROA) tells an investor how much profit a company generated for each dollar of assets. The higher ROA, more investor want to invest in the company. So it gives good impressions to the company. Marine Corp has higher ROA with 70.57% followed by Sungai Emas Port 26.94% while Green Port only 5.56%. Overall, Marine Corp Sdn Bhd has better financial performance compare to other companies even current ratio Sungai Emas is higher than Marine Corp but the different is not too large. Marine Corp still can pay the debt. Follow by Sungai Emas Port Sdn Bhd and lastly Green Port Sdn Bhd.
Question 3:
In your opinion, why are the General Managers Green Port Sdn Bhd and MarineCorp behaving in such manner? In my opinion the reasons why the General Manager of both MarineCorp and Green Port behaving in such manner are self interest and stakeholder perspective towards their company. First scenario is when Anita Osman who is the General Manager of Green Port asks Hafiz to change the dredging by amortizing it. Basically, amortization is a method of recovering (deducting) certain capital costs over a fixed period of time. It is similar to the straight line method of depreciation.According to ‘Win Mark Business solution’, “the amortization only applies to expenses incurred after you decide to establish a particular business and before the business actually begins operation. It applies not to all expenses. Some of them such as advertising; salaries and wages paid to employees who are being trained; travel expenses incurred in lining up prospective distributors, suppliers, or customers; and salaries and fees paid or incurred for executives, consultants, or similar professional services”. It does not, however, apply to expenses that would not be deductible if incurred after you start the business.
In this case, the dredging cost exists under this category. It can’t be amortize when it has incurred. It will violate the accounting principle of prudent. Furthermore, the financial statement would not give a true and fair when the cost is understated because of the amortization. When Anita decided to amortize the dredging cost, the total expense would decrease. This condition will lead to the higher profit even though from the reality view it is not. When the profit is higher, thus the performance of the company is viewed as excellent. As the company performance is good, the bonuses for the General Manager which is Anita Osman would increase. In case of General Manager of Green Port, Lee Chong Way refuses to pay dividend to shareholder. In his point of view, generate interest income on fund investment is better than giving away dividend to shareholder. The reason is market analysts worldwide are ranking companies by looking at the profit of the company. Moreover, the investor will attract to invest in the company that having ability to generate higher profit. The higher the profit, it is mean the company is the top company. Besides, when the company is in excellent rank, the pleasure will be credit to Lee Chong Way who is the General Manager. The conclusion is the evaluation of general manager is based on the company performance.
Question 4
What action can be taken to improve future performance of Marine Corp and its two subsidiaries? Prepare a report of your recommendations to be presented the chairman of the board.
Based on analysis that we handle, it seems that company needs to improve their performance to sustain development in the future. It is due to poor management in handling economic earnings of the one of subsidiaries in the company. We would suggest some recommendation to the chairman, firstly; mission, vision and goal of a company would be the most important determination the establishment of the company. However the organization of the company (chairman) has to review back this goals, mission and vision and remind the entire organization so that they would not go far from the objectives and improve the performance of the company. Next, think strategically and identify key metrics. In fact, you cannot manage what you cannot measure. It is important to recognize and having a very systematic plan for the next two, three, five and even ten year ahead in the future and how you will measure the performance. Besides, your company should create balance score card to your strategic performance. The Balanced Scorecard provided four frameworks that a company should be identified. There are financial, customers, innovation and growth and internal process.
To summarize in easy to understand language: What are the key drivers of profit and performance from all the key areas of the organization? Long term profitability comes from understanding how key variables in the organization are interrelated. To increase long term profitability your company must determine what variables drive that performance. In addition, pay attention to best in class which is set up your benchmark. Even in a life of person, there should have a benchmark to make sure his life focus to achieve something. Same goes to a company. How do we stand up to the best in class? When benchmarking, as with the balanced scorecard, it is important to benchmark many facets of the company not just company profits and product performance. What are their customer service policies, product quality, and reward? Remember benchmarking is a fast track to high performance and profitability. This was Toyota’s approach when they started. They are profitable enough that they could own the big 3 American motor companies. Moreover, the recommendations that can give to improve the companies is conduct research for example, when you need specific information and prospect that does not exist conduct your own primary research rather than copied others. When the company conduct the research, they can ensure the accuracy of their findings. In addition, the companies should implement the SWOT analysis to measure their strength and weaknesses (Strength, Weakness, Opportunity, Threats).
Other areas that need to be focus more is welfare of the employees’ where the manager has to meet employee’s welfare such SOCSO, EPF and others so that they can give fully commitment to doing their job accordingly. By doing so, it can maintain professionalism and motivate labour forces. Besides, the companies should appoint employee that fulfil the requirement that have been set by the companies. It is because these employees are the key factor that will determine successful of the company. On the other hand, selections of best employees can avoid the company to have higher turnover. Furthermore, the company should focus on stakeholders retention because getting a new customers is five time more expensive than retaining a current one. So the company must provide better service to have customer satisfaction. In term of shareholders, the companies must delivering on advertising promises and develop return policy that with satisfied both parties for instance pay dividend to the shareholders. This situation might affect investment in the future as shareholders give their trust and confident to the company.
