Table of contents

1. Executive summary……………………………………….2

2. Ratio Analysis
1) Liquidity Ratio………………………………….……………3
2) Capital Structure……………………………………………...3
3) Profitability Ratio…………………………………………….4
4) EPS…………………………………………………….....4
5) Conclusion………………………………………………….4

1. Corporate Growth
Sustainable Growth Rate………………………………………....4

2. Share Valuation
1) Basic tools for valuation………………………………………5
2) Constant Growth Dividend and Share Price……………………….5

1. Risk and Return

1) Risk and Return on ordinary shares……………………………..5
2) Systematic Risk and Beta……………………………………..6

1. Investment
1) Payback period…………………………………………......6
2) Discounted Payback period……………………………………6
3) Accounting Rate of Return (ARR) ……………………………..7
4) Internal Rate of Return (IRR) …………………………………7

1. Other Considerations……………………………………7

2. Conclusion……………………………………………….8

3. List of reference………………………………………….9

4. Appendix……………………………………………….10
Executive summary
Aristocrat is one of the biggest and well reputed suppliers of gaming machines in all over the
world. The company is in the business for more than fifty years and has more than two
thousand employees. Aristocrat has a very strong hold in Australia and New Zealand, and
these nations have one of the longest standing gaming markets in the world. The main aim of
the company is to provide the perfect mix of games along with the correct system solutions.

Tabcorp is Australia’s largest gambling entertainment organization. The aim of the company
is to create and provide better and bigger games for all the stakeholders. Tabcorp’s activities
include provision of gambling and other entertainment services. Star City Hotel, Casino in
Sydney also three other Jupiter Hotels and Casino facilities located in Brisbane, Gold Coast
and Townsville are all under Tabcorp’s operation. The company also has wagering, gaming
and related media operations.

In comparing the choice of investment among these two companies, various ways of financial
analysis were used. Under ratio analysis which compares the company’s solvency, capital
structure and profitability, it appears that ALL has stronger in short-term solvency and the
potential power to generate more profit. But based on the actual worldwide economic
downturn, TAH showed more steady structure and better profit.

Based on the corporate growth analysis and share valuation, it appears that ALL will face a
lack of external financing situation, and it increases the company’s risk significantly. Also
from the calculated expected dividend and the share price, we can see that TAH will have
more dividends and the share value will have positive change.

Risk and return is also a critical part of the analysis. Based on the data listed as appendix, we
compared risk and return on ordinary shared and systematic risk. The main signal from the
data is that ALL has greater potential power to generate high return but following risk is
higher than TAH. Basically, these two companies are facing more volatility than the average
data from All Index.

In the Investment section, payback period analysis, ARR and IRR are used to compare these
two companies. The results are indicating TAH can payback investments comparably in
shorter time than ALL. And based on the assumption that the required rate of return is 10%,
TAH will be more profitable.

At the end, after evaluating the overall situation and each company’s
advantages & disadvantages, we conclude that TAH is worth to invest
majorly based on the stable structure and stable return.

- Required return = 10% WHY?

Ratio Analysis
According to Fundamentals of Corporate Finance (Ross, 2007), financial ratios could be used
to compare the short-term solvency, ability to long-run obligations, efficiency of asset usage,
ability to control expenses and market value of the two companies. By comparing them using
this analysis, we may understand which company is more deserve to be invested and its share
price. The date we are comparing is based on 31 December 2009.

1. Liquidity ratios

This ratio measures the firm’s short-term solvency.

ALL TAH
Current ratio 0.8145 0.5763
Quick ratio 0.6664 0.5559

Since ALL company’s current ratio and quick ratio are higher than its TAH, and the ratio of
TAH is quite low (around 0.55), we can say that TAH has more risk not to pay their short-
term debt back on time.

2. Capital structure ratios

This ratio measures the firm’s ability to meet long-run obligations.

ALL TAH
Debt / equity ratio 4.2522 0.9346
Equity multiplier 5.2522 1.9346
Net interest cover 23.60 5.58

Based on information that offered by each company (ASX, 2010), debt/equity ratio of ALL is
4.25 and of TAH is 0.93. A high debt/equity ratio reflects ability of using outside financial
resource, and more potential profit may be generated than it would have without outside
financial resource. However, if interest rates are high, such as in 2007, the cost of external
financing may larger than the benefit that generated by the debt form investments and
operations. In this particular case, debt/equity ratio of TAH is 0.93 that indicates TAH
collected outside money in a controllable range. Compared with TAH, the ratio of ALL is
significantly high. Investors of ALL may need to face a risk that the company could not
handle the cost of borrowing and lead to terrible consequences. Furthermore, revenue of ALL
decreased from 466.3 million to 441.7 million in 2009, and EBIT also decreased 19.2% last
year. Compared with ALL, TAH used less outside money but its revenue increased slightly
from 2136 million to 2180 millions. Therefore, the higher debt did not generate more benefit
for ALL.

3. Profitability ratios

This ratio measures the firm’s ability to control expenses

 ALL TAH
Gross margin -17.37% 12.39%
ROA -19.53% 8.23%
ROI 21.03% 14.12%
ROE -102.58% 15.92%

Return on asset (ROA), return on equity (ROE) and return on investment (ROI) are also
related factors in analysis companies’ performance. ALL only has one ratio (ROI) id better
than TAH, and the other two are negative number which is due to the bad downtime and bad
operation. Compared with ALL, TAH has all positive ROA, ROI and ROE. And seems quite
stable than ALL. Compared these two companies, ALL’s ROA, ROE and ROI are all higher
than TAH. Especially in ROE, ALL has a ROE of 1.1 which is enormously higher than
TAH’s 0.08. Thus, based on these ratios, ALL contains ability to gain more profit.

4. EPS

ALL TAH
EPS -0.30 cents per share 0.86 cents per share

The earnings per share of ALL is -0.30 and of TAH is 0.86. As this ratio reflects that how
much profit could gain per share, this is a straight forward ratio for investors. Higher EPS
means more benefit could be gain by share.

5. Conclusion

In conclusion, TAH is better than ALL although ALL’s ROI is better than TAH’s, the risk
based on the calculation of debt/equity ratio is too significant for ALL, as its revenue
decreased last year and contained a high level debt that may cause serious problems to ALL.
TAH has a higher EPS and lower debt risk compared with ALL. Thus, TAH will be chose as
investment target.

Corporate Growth
Sustainable Growth Rate (SGR)

We assume that both the two countries do not want to change its debt capacity, ROE and
retention ratio. In this case we may use SGR as the growth rate of two companies because it
is the rate the firm can increase sales and assets without changing above ratios. Our required
return for investment was fixed to 10% per annum.

ALL TAH
SGR -9.30% 1.62%

TAH has bigger SGR because of larger number of ROE and its net profit of the year. Since
there was negative net profit in ALL company’s performance, ALL could not grow without
External Financing.

Share Valuation
1. Basic tools for valuation
• Growth rate = SGR
• Required Return = 10%

2. Constant Growth Dividend and share price

Since we are going to use this year’s SGR as the growth rate of sales as well as dividend, the
rate will not be changed constantly. Therefore, we are going to use constant growth dividend
formula to calculate future dividend and share valuation.

ALL - dividend TAH - dividend ALL – share TAH - share

2009 65.50 65.00 307.82 788.19
2010 59.41 66.05 279.17 800.95
2011 53.88 67.12 253.21 813.96
2012 48.87 68.21 229.69 827.21
2013 44.33 69.32 208.29 840.57
2014 40.20 70.44 188.92 854.19
2015 36.46 71.58 171.35 868.03
2016 33.07 72.74 - -
* represented as cents
* Dividend from 2010 to 2014 shows expected amount
* All share price inside table are expected amount

Expected share price from 2010 dividend is 307.82 and 788.19 cents respectively. However
their actual price of April 2010 is 415.00 and 650.00 respectively. Therefore, the actual price
of ALL shares is 107.18 cents higher than its expectation although TAH actual share price is
138.19 cents lower than its expectation.

Risk and Return

1. Risk and Return on ordinary shares

To help clarify the profitability of investing in ALL and TAH respectively, we need to
compare the holding-period return on both companies for the last 2 years. All the price
figures are based on monthly line chart. The holding-period return is the return an investor
would receive from holding a security for a period of time.

The appendix 1 suggests that the average monthly return for TAH is lower than the average
return on ALL. Moreover, ALL has experienced greater volatility of returns than the TAH
shares, with a standard deviation of 14.60% compared with 8.30% for the index. We can
interpret that as ALL generated more returns than TAH, but also more risky.

2. Systematic risk and beta:

Beta is the relationship between an investment’s returns and the market returns. To calculate
the Beta, we should know the return on the market index. We add more information to the
above table to compare the two companies’ returns as well as all ordinary shares index on a
monthly basis.
<Appendix 3>
The monthly return for ALL is slightly lower than the average return on all the ordinary
shares of the market. Likewise, the TAH counterpart is far less than the Market Index. The
standard deviation indicate that both ALL and TAH experienced greater volatility of returns
than the All Index. That is, ALL and TAH’s stock, on average, are more risky than the
market.
Beta is the slope of the line in which returns on the share are presented on the vertical axis,
against returns of the market plotted on the horizontal axis. In this case we do not need to
calculate the beta value, as we can compare the two companies and the market index directly
from the table above.

Investment
1. Payback period

We may use payback period to compare two companies. Payback period is the amount of
time required for an investment to generate cash flows to recover its initial cost. As the period
is longer, the company is less attractive to invest money.

ALL TAH
From share From div Total From share From div Total
Share price -415.00 -650.00
2010 -135.83 59.41 -76.42 150.95 66.05 217
2011 -25.96 53.88 27.92 13.01 67.12 80.13
2012 -23.52 48.87 25.35 13.25 68.21 81.46
2013 -21.40 44.33 22.93 13.36 69.32 82.68
2014 -19.37 40.12 20.75 13.62 70.44 84.06
2015 -17.57 36.46 18.89 13.84 71.58 85.42
TOTAL -375.58 -19.25
* represented as cents

From the calculation, TAH share investors will payback their investment between 6 to 7 years
later. On the other hand, ALL shareholders will not have returned their investment enough
even 6 years later.

2. Discounted payback

If we compare two companies using discounted payback, the time we get out investment back
will be longer. In the case of TAH, unreturned investment is only 19.25 cents in the 6th year,
but it will be 168.42 cents if we use discounted payback. Nevertheless, the fact that TAH is
better choice to return our investment faster will not be changed what method we use.

3. Accounting Rate of return (ARR)

This is an investment’s average net income divided by its average book value. A project is
accepted if ARR is bigger than our required return. I will calculate ARR for the share
investment as 5 years average cash inflow from share and dividends divided by average share
price.

ALL TAH
Average cash inflow (5y) 4.11 109.07
Average share price (5y) 231.86 827.38
ARR 1.77% 13.18%

Since our required return is 10%, we will invest our money to TAH, but ALL will not be
accepted.

4. Internal Rate of Return (IRR)

This is the discount rate that equates the present value of the future cash flows with the initial
cost. If this IRR is more than required rate of return, the project will be accepted.

ALL TAH
IRR -11.72% 22.59%

Our required return is 10% and TAH has bigger IRR amount. So we need to invest money to
TAH for the better return.

Other considerations
1. The influence of economic downturn and other countries

Since there was a severe economic crisis, the growth rate of the world has been dropped.
However, the influence of that was more serious in some countries such as Japan (appendix
7), and the country’s growth rate will be still lower than Australia even after economic crisis.
In appendix 7, Japan has shown lower performance than Australia, and also expected to have
worse performance. In this circumstance, the performance of ALL will be worse than TAH
because their business has many ties in Japan. As Japan’s whole growth is restricted, its
leisure industry will also lose their vigor. Then ALL’s growth will also be restricted by Japan
market since its big sale portion is still in Japan.

2. The influence from interest rate adjustment

Reports from IMF indicate the overall economic in Australia is now on the phase of recover.
The recovery just started because of various actions taken by Australia government. Although
the speed was restricted because of the increasing interest rate but the overall estimation is
optimistic. IMF announced the estimation that the growth rate of the Australia economy will
be 3% and it will increase to 3.5% in 2011. Compared with unstable global environment
Australia will keep on stable recovery. Under this circumstance it is a good choice to invest in
domestic company.

Conclusion

Based on the information above it is a better choice to invest in TAH rather than ALL.
Although some analysis are indicating that ALL has stronger potential profitability and higher
rate of return but under economic downturn it is better to choose a more stable and more
concentrated domestic company.

List of reference

• Stephen Ross, Spencer Thompson, Mark Christensen, Randolph

Westerfield, Bradford Jordan, Fundamentals of Corporate Finance,
Fourth Edition

• <http://www.chinaports.org/info/201004128688.htm>
• Aristocrat Leisure Limited Annual Report 2009

• Tabcorp Preliminary Final Report for Year 2009

APPENDIX 1

ALL TAH
Period Price ($A) Returns (%) Price ($A) Returns (%)
May 2008 6.48 - 9.25 -
June 4.90 -24.38 8.28 -10.49
July 5.90 16.95 8.50 2.66
August 6.50 10.17 8.15 -4.12
 September 3.80 -41.54 6.80 -16.56
October 3.90 2.63 7.00 2.94
November 3.85 1.30 7.00 0.00
December 3.75 2.60 6.60 -5.71
January 2009 3.74 0.27 5.48 -16.97
February 2.90 -22.46 6.50 18.61
March 3.60 24.14 7.49 15.23
April 3.65 1.39 7.80 4.14
May 3.76 3.01 7.20 -7.70
June 4.30 14.36 7.28 1.11
July 4.60 6.98 6.75 -7.30
August 5.25 14.13 7.15 5.93
September 4.50 -14.29 7.20 0.70
October 4.05 -10.00 7.25 0.69
November 4.00 -1.11 6.95 -4.14
December 3.98 -0.50 7.05 1.44
January 2010 4.25 6.78 6.80 -3.55
February 4.50 5.88 6.90 1.47
March 4.30 -4.44 6.88 -0.29
April 4.15 -3.49 6.50 -5.52
Average
Monthly -0.72 -1.19
Return

Monthly
Standard 14.60 8.30
Deviation
* figures from appendix 2

Appendix 2
APPENDIX 3
Returns(%) Returns(%)
All ordinaries Index
ALL TAH
 Period Price Returns(%)
May 2008 - 5773.9 - -
June -24.38 5332.8 -0.0764 -10.49
July 16.95 5052.6 -0.0525 2.66
August 10.17 5215.5 0.0322 -4.12
September -41.54 4631.3 -0.1120 -16.56
October 2.63 3982.7 -0.1401 2.94
November 1.30 3672.7 -0.0778 0.00
December 2.60 3659.3 -0.0037 -5.71
January 2009 0.27 3296.9 -0.0521 -16.97
February -22.46 3532.3 0.0714 18.61
March 24.14 3744.7 0.0601 15.23
April 1.39 3813.3 0.0183 4.14
May 3.01 3947.8 0.0353 -7.70
June 14.36 4249.5 0.0764 1.11
July 6.98 4484.1 0.0552 -7.30
August 14.13 4739.3 0.0569 5.93
September -14.29 4646.9 -0.0195 0.70
October -10.00 4715.5 0.0148 0.69
November -1.11 4882.7 0.0355 -4.14
December -0.50 4596.9 -0.0585 1.44
January 2010 6.78 4893.1 0.0520 -3.55
February 5.88 4833.9 -0.0121 1.47
March -4.44 5773.9 -0.0764 -0.29
April -3.49 5332.8 -0.0525 -5.52
Average
Monthly -0.72 -0.5840 -1.19
Return
Monthly
Standard 14.60 6.1402 8.30
Deviation
* All ordinary index is from Appendix 4
APPENDIX 4
 APPENDIX 5

TAH dividend payment

 APPENDIX 6

ALL dividend payment

2006

2007

2008
2009
 APPENDIX 7

* from OECD