Course Title: ADVANCED FINANCIAL DECISIONS

Course Code: FIN 4274

Name: He Jiahua
ID: J13014144
Section: F3
Lecturers name: Chang Jau Ho

"I(We) declare that this assignment is my(our) own work

entirely and suitable acknowledgement has been made for any
sources of information used in preparing it."

Dividend policy

Year 2011 2012 2013 2014 2015

Dividend Per Share 0.065 0.1 0.1 0.1 0.1
Earnings Per Share 12.17 10.71 12.16 15.38 14.98
Payout ratio (%) 0.51% 0.93% 0.82% 0.65% 0.67%
 Table 1: SCC Holdings Berhad dividend amount and payout ratio

The above data divided per share and earnings per share was collect from SCC
Holdings Berhad annual report 2015. From the table 1, it shows that the SCC
Holdings Berhad (SCC) dividend per share constant in RM 0.1 sen from year 2012 to
2015. Which from year 2011 RM 0.065 sen increase to 0.1 and constant 4 years.
Moreover, payout ratio of SCC from years 2011 to 2015 was 0.51%, 0.93%, 0.82%,
0.65% and 0.67% respectively, which appear increase trend first and decrease until
constant between 0.65% and 0.67%.

According to the above data description, the relevant dividend policy theory for the
SCC is stable dividend policy. (EFinanceManagement, 2015) First of all, SCC Bhd is
in line with the stable dividend policy describe, which is the company dividend per
share after year 2011 RM 0.065 sen dividend per share increase to RM 0.1 sen in year
2012 and constant it to year 2015. Moreover, according to the SCC holding berhad
annual report we can see that the company did constant the dividend in RM 4,276,000
in recent year, no matter how the company earing trend look like. Particularly put
forward here, even though SCC Bhd in 2011 earing is higher than year 2012. The
company still increase their dividend per share and constant it in the following year.
And the company profit after tax in year 2012 and 2013 only RM 4,576,000 and RM
5,198,000 respectively. It is not well than the company in year 2011 profit after tax
RM 5,202,000.
As mention before, the stable dividend policy will maintain the company dividend in
the one level. This is one of feature of stable dividend policy, no matter how the
company economic status and operating performance doing well or not, it will still
keep the company dividend in this level. Only when the company management
believe the company future earnings will be significant and it can not be reverse the
growth, the company will increase the dividend into the next level. SCC has indeed
determined its dividend on the basis of this policy in the past few years, although the
latter's request has not been fully achieved to raise the dividend. in general, it is in line
with the requirements of this policy, and the earnings of year 2014 and 2015 of
company did higher than year 2011.
Satyaprasad and Raghu (2009) mentioned in the book to maintain a stable dividend
have the following advantages. First, this makes the shareholders of the company full
of confidence, in general, for the implementation of the policy of the company has a
stable business. This also shows that the company wants to express the company's
development prospects to investors is bright. But because of this, if the company
rashly reduce the dividend will let the stock holders doubt the company's future
business operate. The second is conducive to attracting investment in women, the
elderly and retirees, mainly because most of these people are more in need of living
expenses. So, by contrast, SCC is able to attract such investors from companies that
do not have a fixed dividend to invest in their own companies. Third, the stable
dividend can help the company's market price of share to maintain a good price for
investors and the company. Studies of individual shares have revealed that stable
dividend buffer the market price of the stock when earnings. SCC's market price per
share is RM 1.04, 1.34 and 1.83 between 2013 and 2015 respectively. Fourth, this can
increase the company's additional external funds, investors buy the stock will choose
long-term holdings and expect the company to raise the stock price, and if the
company sells new shares, these investors will tend to buy them so that the company
easily makes External access to funds.

In view of the SCC 2015 annual report and the use of stable dividend policy, this
report makes the following recommendations and why the reasons for this proposal.
Companies should continue to use the stable dividend policy and increase the
company's dividend per share over the next few years. Compared to the 2014
company revenue, in the year 2015 SCC revenue has increased by 42.89%, in other
words the company in the year increased by RM 18.12 million revenue. Most of the
reason is the introduction of new products, bringing revenue in the RM 13.5 million.
However, the company's actual profit is not so significant improvement. The annual
report also mentioned that this is mainly due to the devaluation of the Malaysian
currency to improve the business costs. In the next few years, the company can
improve the price of goods and other ways to solve the problem of currency
devaluation, the increase in profits is not significant. Is expected in the near future by
raising the dividend per share to get dividend policy benefits.

Capital structure and Debt policy

Year 2013 2014 2015

RM 000' 000' 000'
Total Liabilities 2151 2936 5798
Total equity 31471 33780 35924
Debt/Equity Ratio 0.0683 0.0869 0.1613
Table 2: SCC Holdings Berhad Debt/Equity Ratio

According to the table 2, the companys debt / equity ratio from years 2013 to 2015
was 0.068, 0.087 and 0.1613 respectively. Which is presentation gradually rising
trend. Due to the total liabilities amount is smaller compare with total equity amount.
Therefore, the debt has faster growth. This makes the SCC company debt/equity ratio
increased year by year. (Reserved, 2016)

Nevertheless, the company's debt / equity ratio is still below 20%. Which is generally
lower than the average level of 40% to 60% of the debt / equity ratio. On the whole,
the debt / equity ratio increased by almost 2% between 2013 and 2014, which is
within the acceptable range. While the debt / equity ratio increased by nearly 7.5%
between 2014 and 2015. This is only a gradual increase in the past, the increase is too
large. By SCC's annual report we can find total liabilities increased from RM
2,936,000 to RM 5,798,000. The main reason is on trade payables, it increased from
RM 45,000 in 2014 to RM 2,961,000 in 2015. This is mainly due to the devaluation of
the Malaysian currency, which led to the SCC has a higher business costs. Since the
SCC has a low debt / equity ratio, the pecking order theory is suitable for explaining
the company's capital structure. in addition, the company dividend per share stable in
past 4 years. So when the SCC need to invest in new projects and so on, it should start
from the inside to raise funds.

Pecking order theory was proposed by Myers and Majluf (1984), who pointed out that
in the internal financing and external financing to raise funds, the first choice is the
former. And in the external financing in the direct financing and indirect financing to
raise funds, the preferred is the direct financing. In the direct financing of the bond
financing and stock financing to raise funds, the preferred is the bond financing.
Internal financing mainly refers to the company itself has the funds and production
operation of the process of accumulation of funds. The company's managers on the
company's own asset value and future development opportunities have more
information can be analyzed compared to external investors. So these investors will
pay close attention to the company's financing decisions to infer the company's future
development. Compared with trade off theory, this theory does not predict the best
debt ratio. If the company is required to issue new equity financing through the issue,
then the stock value will be seriously underestimated that new investor capture more
than the NPV of the new project resulting in a net loss to existing shareholder. If the
company can use a security that is not underestimated by the market to finance new
projects, this lack of investment can be avoided. (H. Kent and Gerald S., 2011)

According to the SCC annual report, the above dividend policy and the analysis of the
company's asset structure, the report made the following recommendations and
reasons. The company launched a new product makes the company's revenue in 2015
received a more substantial increase. But the increase in trade payables makes the
company's debt / equity ratio to 16%. This indicates that SCC has sufficient internal
funds to continue the development of its new company's new projects. So it is
recommended that the SCC continue to apply pecking order theory, and to improve
their own debt / equity ratio to seek better development of the company. Because the
SCC's debt / equity ratio is not enough to make the company into a crisis such as
bankruptcy. In the case where the company's future debt / equity ratio is relatively
saturated, it is possible to consider the way in which the company financially develops
through external financing. Because the SCC uses the stable dividend policy,
investors are relatively optimistic about the company's future development.
Companys valuation

Year 2013 2014 2015

Market value per share 1.04 1.34 1.83
Earnings per share 0.1216 0.1538 0.1498
P/E ratio 8.55 8.71 12.22
Table 3: SCC Holdings Berhad P/E ratio

P / E ratio will be used to evaluate the company's stock valuation.

The company P / E ratio showing a rising trend year by year, the P / E ratios for the
three years from 2013 to 2015 are 8.55, 8.71 and 12.22 respectively. The reason for
the increase in P / E ratio between 2014 and 2015 can be attributed to the introduction
of new products from SCC to investors The performance and future prospects of
development. According to the P / E ratio level, 14-20 belong to the normal level.
While the SCC is below this normal level, meaning that the value of the company has
been underestimated. From this three-year trend, investors can invest in the SCC.

Year 2013 2014 2015

Market value per share 0.12 0.18 0.19
Earnings per share -1.80 1.41 0.24
P/E ratio -0.07 0.13 0.79
Table 4: Oversea Berhad P/E ratio

Oversea Berhad will be competitor firm contrast with SCC BHD. Both of SCC
Holdings Berhad and Oversea Berhad are listed as TDAD/SERV in Bursa Malaysia.
According to the table 4 we can see, the Oversea Berhad showing an upward trend.
The company P / E ratio from 2013 to 2015 only -0.07, 0.13 and 0.79 respectively.
Compare with SCC BHD, Oversea Berhad's P / E ratio is much lower. In other words,
SCC BHD has a higher P / E ratio compared in contrasting companies. Having a
higher P / E ratio means that investors are paying a higher share price to influence
EPS, and expect a higher growth rate. From this situation, SCC did not meet the
expectations of investors. In 2015 has a higher share value, but earnings per share but
did not improve but reduced. This is because share price is often used to reflect future
performance expectations. The earnings are often related to past performance.
(OHare, 2013)

Reference
B.G., S. and G.A., R. (2009) advanced financial management. P72.

EFinanceManagement (2015) Available at:

https://efinancemanagement.com/dividend-decisions/dividend-payout-policies
(Accessed: 16 February 2017).

H. Kent, B. and Gerald S., M. (2011) Robert W. Kolb Ser. : Capital Structure and
Corporate Financing Decisions : Theory, Evidence, and Practice (1). P19,79.

OHare, J. (2013) Analysing Financial Statements for Non-specialists. P66.

Reserved, A.R. (2016) Debt to equity ratio | formula | analysis | example.

Available at: http://www.myaccountingcourse.com/financial-ratios/debt-to-
equity-ratio (Accessed: 16 February 2017).