GRADUATE DIPLOMA IN BUSINESS & MANAGEMENT

COURSE NAME: BUSINESS ANALYSIS AND DECISION MAKING (Question 1)

NAME OF STUDENT:

STUDENT ID:

INTAKE:

JULY 2002

LECTURER:

INDEX

1) i) 2) i) 3) 4) i) ii) 5) i) ii) 6) 7) 8) 9)

THE LISTED COMPANY -------------------------------------------------------------------3 History and background 3

LINEAR REGRESSION MODEL DEFINITION ------------------------------------3 Method & Terminology 3

ANALYSIS TECHNIQUE CAUSAL FORECASTING METHOD --------------4 CO-RELATIONSHIP OF F&N SHARE PRICE WITH COMPOSITE INDEX -5 Analysis by F&N analyst 5

Coefficient Of Correlation (r ) ------------------------------------------------------------6 SHARE PRICE FORECASTING ---------------------------------------------------------7 Time Series Forecasting----------------------------------------------------------------------8 Calculation To Forecast The Trend-------------------------------------------------------8 WHY USE LINEAR REGRESSION MODEL ------------------------------------------9 PROBLEM & RESERVATION ------------------------------------------------------------9 CONCLUSION ------------------------------------------------------------------------------ 10 REFERENCE -------------------------------------------------------------------------------- 11

1) The Listed Company

Fraser & Neave Holding Berhad most familiar with the name F&N is the manufacturer of soft drinks and dairy products. Besides that, it also produces glass containers and is now involved in property development. As a soft drink manufacturer and distributor, the F&N Groups brand Coca-Cola holds more that 70% share in the cola market segment while 100 plus has more than 90% share of the isotonic segment. The soft drinks plants are operating throughout Peninsular Malaysia as well as in East Malaysia. F&N went into listing in the KLSE Main Board (Consumer Products) on the 3rd August 1970. (KLSE, 2002). (Please refer graph 1.0) i) History and background

In August 2001 the Group, through subsidiary Malaya Glass Products Sdn Bhd (MGP), entered into a JVA with the Tuopai Group of the Peoples Republic of China (PRC) to build a glass container manufacturing plant in Sichuan Province in the PRC. The JVC, Sichuan Malaya Glass Co Ltd, will be 60% owned by MGP. The US$28m plant has a production capacity of 270 m/t per day and is expected to be fully operational by October 2002. The Group, which currently operates three glass-manufacturing plants (two in Malaysia and one in Vietnam), envisages the additional plant will secure a lucrative market for glass products in
1

China.

(KLSE,

2002)

http://www.klse.com.my/website/listing/lc/fnhold.htm

2) Linear Regression Model Definition

i) Method & Terminology

The outcome expected from this analysis is to be able to forecast the dependent variable, which is the Share Price of F&N Berhad in KLSE against the Composite Index. This is established by recording the daily readings of the Share Price and the Composite Index. 3

An approximated straight line called the Linear Regression line is formed from the data collected for a period of time. The companys share price record or data will be parked on the dependant axis y and the Composite Index data will be parked on the independent axis x. In linear regression analysis, multiple regressions too can be analyzed. Here, the Consumer Index is analyzed to see the interrelationship of the three lines or variables. (Please refer graph 2.1)

3) Analysis Technique Causal Forecasting Method

Linear Regression is defined as a statistical technique that can be used to develop a mathematical equation showing how variables are related.2 Using Scatter Graph (3.0 a & b) the interrelationship between axis x which is the dependent variable and axis y which is the independent variable is analyzed and a straight line will derive from the two axes. This line is called the Linear Regression Line and the equation for any straight line is y = a + bx. x and y are the variables for instance here the variables are the Share Price against Composite Index. Using this technique or model, it allows forecasting the sales of a company or the expected profits to be earned by a company based on the independent variables (at axis y). There are a few types of forecasting methodology for example; Projection, Prediction and finally forecasting which is more sophisticated than the rest. Here, the Forecasting Methodology is used to forecast the Share Price against the Composite Index as the independent variable.

Firstly, in order to calculate the forecast of the unit share price for F&N Berhad, the equation of the straight line should be calculated and the outcome is explained below.

y = 0.963 + 0.00360x ( Please refer appendix 3.1a)

Using the above formula of linear regression or the regression line, the forecasted share price can be easily obtained. Therefore the value of share price, if the composite index is valued at 680 is:- 3.411 (Refer Appendix 3.1b) 4

The intercept for the regression line is at:- (Please refer appendix 3.1c)

x = 664.79 (RM) and y = 3.3560 (RM) The graph than should be presented as graph 3.0 whereby a straight linear line is visible.

4) Co-relationship of F&N Share Price with Composite Index

i) Analysis by F&N analyst

The next growth impetus for the company would most likely come from its China glass plant (as mentioned above), given that the capacity of the plant, which will only start operation in January 03, has already been scaled upwards by 60%. For the nine months ended June 30, F&N reported a 17.3% rise in pre-tax profits to RM96.6 mil compared to RM82.3mil in the previous corresponding period. Revenue however dipped marginally to RM1.16bil form RM1.17bil.

Graph in Appendix 5.2a & b outlines the movement of Composite Index for 3 months and it shows that the pattern of the line is erratic and this is due to the uncertainty of the macro economic situation. Composite Index is affected by the macro and the microenvironment and it is difficult to see the relationship of the composite index against the share price of F & N Berhad.

ii)

Coefficient Of Correlation (r)

The Share Price has been analyzed for the period of 64 days and a total reading of 64 times. (Please refer Appendix 4.2). This has been then brought down to analyze the readings for 15days. The coefficient of readings gives an indication of the strength of the linear relationship between the two variables (x and y).

n xy - x y [n x - (x)2 (n y2 - (y)2 ]
2

33.73 51.304 0.66

r=

So the correlation of x and y is 0.66

Linear Regression Line For F&N Berhad

Share Price

3.450 3.400 3.350 3.300 650.00

y = 0.0036x + 0.9678 2 R = 0.4164

655.00

660.00

665.00

670.00

675.00

680.00

Composite Index
Share Price Linear (Share Price)

By putting these readings into the graph, it is learnt that the regression line is of a horizontal straight line with gradient of 0.0036x. This shows that the linear regression line is of a Positive Correlation and slopes upwards in the graph. However wide the scatter of the data, a line of best fit can be calculated using squares. Although such a line can always be calculated, it does not mean that the best-fit line is likely to be much useful for predictive purpose, unless it is an accurate presentation of any trend in the data. To find out how good the line of best fit is, a measure of coefficient of determination can be calculated. Based on the x and y variables of share price and composite index, the calculation of correlation (r ) is presented in Appendix 4.2

Here the coefficient of determination is presented as: -

r2 = 0.662 r = 0.44 or 44%

The Correlation (r ) is 44% and this figure shows that there is only 44% of

correlationship of the share price against the composite index of the KLSE. This shows that because composite index is controlled by the micro and macro economics, so its ups and downs of the indices does not much affects the share price of the respective listed company. The share price is much affected by direct sales of drinks sold or to be more precise, the share price might be more accurate against the actual sales and not the macro environment.

5) Share Price Forecasting

i) Time Series Forecasting Time series analysis uses some form of mathematical calculation of statistical analysis on past data. It comprises of four components; trend (T), seasonal fluctuation (S), cycle fluctuation (C ) and random variation (R ). Also there are two series of statistical model and they are the multiplicative model and additive model. The table for the 3 months data is as follows. Data
Month 1 Month 2 Month 3 Week 1 664.33 666.14 667.02 Week 2 663.10 663.00 658.72 Week 3 665.05 667.10 666.26 Week 4 661.72 661.64 671.30

The figures above, for the period of three months shows, an erratic flow. So the multiplicative and additive method should not be used. In this case the seasonal fluctuation too is difficult to judge because as mentioned earlier, the composite index fluctuates not only with the total trading of KLSE but also affected by the other share markets due to the micro and macroeconomics. Therefore the seasonal fluctuation should not be considered as well. Unless a reading for a long period is analyzed and it will then show the trend based on global factors like incline or decline in economy.

i) Calculation To Forecast The Trend

It is learnt that the company is looking at multiplication of revenue and the graph will forecast an upward forecast of share price. (Please refer graph 3.0).

Average Reading :Month Month 1 Month 2 Month 3 Week 1 Week 2 Week 3 Week 4 664.33 663.10 665.05 661.72 666.14 667.02 663.00 658.72 667.10 666.26 661.64 671.30

As per the calculation in Appendix 5.2 (a & b) the forecast of composite index for the 4th month is 667.40. Therefore the forecasted share price of F & N should be presented as 3.366.

Also attached is the historical data, which is used in this assignment (refer Appendix 5.3)

6) Why Use Linear Regression Model

In linear regression the future sales figure or any forecasting for the matter, can be calculated. In this assignment the share price is forecasted and the value of the share price for the near future is determined. This model also allows the interpretation and correlation of an activity or result. In projection for the future, a stable situation is considered. This means the environmental changes do not affect the outcome of the activity. On the other hand, prediction is where the above factors are taken into account and prediction is done to get the predicted outcome.

7) Problem & Reservation

Though the linear regression method is used to forecast or calculate the value of correlation (r ), a high value only shoes a strong association between the two variables. A low correlation or perhaps close to zero, does not give an accurate reading relation of variable. It perhaps might show that there is no relation between the two.

Another point to consider is that an accurate and a historical data for a reasonable long period has to be captured before the analysis can be done. Should there be lack of information or data for a constant period, the analysis might not be accurate.

Other problems are the trend forecast whereby it is difficult to judge the environmental factors to predict or forecast the share price. All calculation my be accurate but, these analysis are useless because the environmental factors cannot be forecasted. Here sometimes human prediction may be used but it is more of qualitative rather than quantitative and difficult to measure.

8) Conclusion
To conclude, the linear regression model and time series analyses are used basically to do simple forecasting. They use certain historical data to establish the trend and they are the quantitative techniques. As stated earlier, a certain level of qualitative method may be required. There should be many other factors to be taken into account before a proper forecast can be done. Having said that, any such method lacking sufficient information may prove to be a relatively poor forecast.

10

9) Reference

1. http://www.klse.com.my/website/listing/lc/hnhold.htm 2. (Anderson, Sweeney, Williams, Quantitative Methods For Business, 2001, Page 191, Chapter 6- 6.5)

11