Question

Nazir Sdn Bhd is the largest seller of Petrochemical products in Malaysia. Traded on the Bursa Malaysia, sales exceed RM30 billion annually and market capitalization exceeds RM87 billion (as of December 31, 2019 balance sheet date). The company was incorporated in 1977. They focus on all aspects of product value including the process, development, marketing and sales of Petrochemical products, Fuel oil, Fertilizer and Diesel. On November 19, 2019 Nazir’s Board of Directors approved a new four-year, RM12 billion program to repurchase shares of Nazir’s Common Stock. At the same time, they declared a 14% increase in Dividends Per Share and a Two-For-One Stock Split. The market reacted favorably to the news and analysts interpreted the plan as a sign of financial strength and future performance. Interested in learning more about why the market reacted so strongly to the news, you should look more deeply at the financial statements of the firm.

You begin the task of finding some of the drivers that create stock value and financial strength over time. Given your limited background, you decide to focus on the last five years of income statements and an examination of key indicators such as EPS, dividends and Repurchase history.

Table 1. Income Statements for years 2015-2019 ended December 31.

In Millions, except per share data	2019 (RM)	2018 (RM)	2017 (RM)	2016 (RM)	2015 (RM)
Revenues	30601	27799	25313	23331	20117
Cost of Goods Sold	16534	15353	14279	13183	10915
Gross Profit	14067	12446	11034	10146	9202
Advertising & Promotion Expenses	3213	3031	2745	2607	2344
Operating Overhead Expense	6679	5735	5051	4458	4017
Total Selling and Administrative Expense	9892	8766	7796	7065	6361
Operating Income	4175	3680	3238	3083	2841
Interest Expense	28	33	-3	4	4
Other (Income) Expense, Net	-58	103	-15	54	-25
Income Before Tax	4205	3544	3256	3025	2862
Tax Expense	932	851	805	756	690
Net Income from Continuing Operations	3273	2693	2451	2269	2172
Net Income from Discontinued Operations	0	0	21	-46	-39
Net Income	3273	2693	2472	2223	2133

ADDITIONAL INFORMATION

	2019	2018	2017	2016	2015
Dividends Per Share	RM1.08	RM0.93	RM0.81	RM0.70	RM0.60
Cash Dividends in RM	RM899	RM799	RM703	RM619	RM555
Weighted Average of Common Shares Outstanding (Number)	861.7	883.4	897.3	920.0	951.1
Number of Shares Repurchased	29.0	37.0	34.0	40.0	48.0
Repurchased in RM	RM2534	RM2628	RM1674	RM1814	RM1859
Share Price (May,3, 2020)	RM101.41	RM75.84	RM60.04	RM51.87	RM39.78
Debt Ratio	41.2%	41.8%	36.6%	32.9	34.4%

Required:

1. Compute BASIC EPS for each year. Re-run EPS with a modified number of shares; add back the number of shares repurchased to the weighted average number of common shares outstanding. Determine the EPS result before repurchases. Interpret the difference between the BASIC EPS to the EPS modified.

2. Compute the total payout in Ringgit, as a percent of net income, and per share. Discuss trends over time

[Total 20 marks]

Answer 1

	2019	2018	2017	2016	2015
Weighted average of common shares	RM     861.70	RM     883.40	RM     897.30	RM     920.00	RM     951.10
Net income	RM 3,273.00	RM 2,693.00	RM 2,472.00	RM 2,223.00	RM 2,133.00
Basic EPS (Net Income/Common shares)	RM          3.80	RM          3.05	RM          2.75	RM          2.42	RM          2.24
Weighted average of common shares	RM     861.70	RM     883.40	RM     897.30	RM     920.00	RM     951.10
(+) Number of shares repurchased	RM        29.00	RM        37.00	RM        34.00	RM        40.00	RM        48.00
Outstanding common shares (modifeied)	RM     890.70	RM     920.40	RM     931.30	RM     960.00	RM     999.10
Net income	RM 3,273.00	RM 2,693.00	RM 2,472.00	RM 2,223.00	RM 2,133.00
Modified EPS (Net Income/Common shares)	RM          3.67	RM          2.93	RM          2.65	RM          2.32	RM          2.13
Difference	RM          0.12	RM          0.12	RM          0.10	RM          0.10	RM          0.11

We have difference and the EPS reduces when the number of shares increases. We calculated the modified number of shares outstanding by adding repurchases shares. We are including that shares also in the calculation. That increases the number of shares thereby reduces the earnings per share.

	2019	2018	2017	2016	2015	Total
Dividend	RM     899.00	RM     883.40	RM     897.30	RM     920.00	RM     951.10	RM    4,550.80
Net income	RM 3,273.00	RM 2,693.00	RM 2,472.00	RM 2,223.00	RM 2,133.00	RM 12,794.00
Dividend percentage ((Dividend/Net income)x100)	27.47%	32.80%	36.30%	41.39%	44.59%	35.57%

Dividend payout reducing year after year. The market value of the share is getting increased and this will increase the price earning ratio.