e) Evaluate the past 5-year capital structure of your company.

Do you think your company is currently using too much of debt or equity? Recommend an appropriate strategy of capital structure for the next 5-year for your company.

A Capital Structure concerns the composition of the liabilities of a company or more specifically, the relative participation of the several financing sources in the composition of the total obligations (MBA Lecturers, 2011). The decision of capital structure is very crucial to each and every organization, because they will desire a mix or arrangement that could help their companies become more profitable and increase in overall value. Therefore, I have collected the past 5-year annual reports of Harrisons Holding from Bursa Malaysia Website in order to evaluate its past 5-year capital structure. By the way, the latest financial annual report of Harrisons Holding that available to obtain is only until FY2010 and the new annual report FY2011 may come out in this May. Thus, after analyzing Harrisons Holdings annual reports, I would like to shows its past 5-year capital structure at below: FY2010 Total Debts 35,219 FY2009 28,072 241,522 11.62% FY2008 33,024 215,467 15.33% FY2007 49,265 189,665 25.97% FY2006 72,279 173,082 41.76%

Shareholders Equity 271,749 Debts/Equity Ratio 12.96%

From the data above, it stated out that the Debts/Equity Ratio of Harrisons Holding is decreasing over the year, and only increase slight on FY2010. Besides, all the debts extracted from Total liabilities are short-term and long-term borrowing that needs to pay interest. Besides, Harrisons Holdings earning power has been increase during the past 5years even though there is a reduction in debts borrowing, which I will discuss it deeply at latter part. Next, It is a crucial question to ask whether Harrisons Holding is currently using too much of debts or equity? In order to solve this question, I would like to make some comparisons at below: 1) Comparing Past 5 Years Debt/Equity Ratio (FY2006-FY2010) with another Past 5 Years Debt/Equity Ratio (FY2002-FY2006) of Harrisons Holding: As what I mentioned at above, Harrisons Holdings Debts/Equity Ratio is decrease gradually from the past 5-year (only slightly increase in FY2010), especially drop rapidly during FY2006 and FY2007 which is from 41.76% reduce to 25.97%. So, I would like to evaluate whether the decrease in debts borrowing will reduce the companys profitability by comparing another past 5years Debts/Equity Ratio (FY2002 to FY2006, Harrisons Holding maintaining at higher debts level). Eventually, I am able to find out the debt changing impact on Harrisons Holdings earning based on my fundamental analysis. Now, I would like to lists out another past 5-year capital structure of Harrisons Holding at below:

FY2006 Total Debts 72,279

FY2005 79,497 162,362 48.96%

FY2004 71,785 152,514 47.07%

FY2003 87,387 147,026 59.44%

FY2002 79,135 139,224 56.84%

Shareholders Equity 173,082 Debts/Equity Ratio 41.76%

Obviously, Debts/Equity Ratio of Harrisons Holding during FY2002 to FY2006 is higher than the past 5-year Debts/Equity Ratio, which mean Harrisons Holding is maintaining at a higher debt level during FY2002 to FY2006. However, Harrisons Holding starting to reduce its debts after FY2006 and maintaining a lower debt level afterward. Therefore, I would like to evaluate whether higher debts level or lower debts level is contributing more benefit to Harrisons Holding and find out whether it is using too much debts or equity. Past 5-year Annual Growth Past 5-year Annual Growth Gap % (FY2006Rate % (FY2006-FY2010)- Rate % (FY2002-FY2010)- FY2010 over Lower Debt Level Revenue Gross Profit Net Profit after Tax Earnings per Share(EPS) Return on Equity (ROE) Net Profit Margin Return on Assets (ROA) 8.1% 14.53% 29.53% 25.66% 15.73% 19.79% 17.3% Higher Debt Level 7.23% 5.41% 15.16% 14.85% 9.1% 7.46% 7.47% performed) 0.87% 9.12% 14.37% 10.81% 6.63% 12.33% 9.83%

(All the Data of Fundamental Analysis above can be referred to Appendix.) From the table above, it clearly shows that the performance of Harrisons Holding is much more attractive and outstanding during the past 5-year (FY2006-FY2010) compared with another past 5-year (FY2002-FY2006), which is significantly over-performed!!! Even though there is a reduction on debt over time. So, higher debt level doesnt help Harrisons Holding to increase its profitability, and the return generated from projects funded by borrowing might be lesser than the using internal retained earnings.

On the other hand, the Interest Coverage Ratio is increasing gradually from 5.91 times at FY2006 to around 50times at FY2010 (fluctuating between 4 to 6times during FY2002 to FY2006) , which mean the decrease in debts borrowing is reducing the burden for Harrisons Holding(Financial Distress) to pay interest. A company may face bankruptcy if the Interest Coverage Ratio is too low, because the companys earning may be insufficient or not strong enough to pay the borrowing interest. In addition, I would like to introduce another ROE calculation method that will help in determining the earning that Harrisons Holding would gain if it were completely debt-free, which this method is known as The DuPont Model. According to Joshua Kennon (no date), The DuPont Model calculate the ROE by using three components which are Net Profit Margin (Net Income/Revenue), Assets Turnover (Revenue/Total Assets) and Equity Multiplier (Total Assets/Shareholders Equity), the formula is presented at below: ROE=(Net Profit Margin)*(Assets Turnover)*(Equity Multiplier) Table 1 ROE ROE(Debt Free) ROE(from Debt) FY2010 13.65% 7.76% 5.89% FY2009 12.57% 7.11% 5.45% FY2008 10.80% 6.16% 4.64% FY2007 9.52% 5.24% 4.29% FY2006 7.61% 3.75% 3.86% Growth R 15.73% 19.9% 11.14%

Table 2 ROE ROE(Debt Free) ROE(from Debt)

FY2006 7.61% 3.75% 3.86%

FY2005
7.41% 3.50% 3.91%

FY2004
6.84% 3.20% 3.64%

FY2003
5.64% 2.55% 3.09%

FY2002
5.38% 2.43% 2.95%

Growth R
9.1% 11.46% 6.95%

The two tables above presenting how much Harrisons Holding would earn if it were wholly debtfree (by taking out the Equity Multiplier factor from the ROE equation). When comparing two companies, the more attractive of the two would be the company with the higher percentage of internally-generated sales (ROE generated from completely Debt Free). In this case, I am not comparing two companies but only a company with two different period of time (Low debt period and High debt period). Thus, data above showing that Table 1 Debt Free ROE growth rate is higher than the Debt Free ROE growth rate at Table 2, and the Debt Free ROE even double up at FY2010 to 7.76% compared with FY2006 which only 3.75%. Besides, the ROE generated from debt borrowing at Table 1 also higher than Table 2, even though there is a significant decline in debt borrowing after FY2006. After comparing Harrisons Holdings two different debt level periods and evaluated the impact on changing in debt, I have to conclude that if Harrisons Holding can do better with low debt borrowing, high Debt to Equity Capital Structure is not worthwhile to the company. Therefore, all the fundamental analysis above is justifying that Harrisons Holding can do better with lower debt borrowing.

2) Comparing

Harrisons

Holdings

past

5-year

Debt/Equity

Ratio

with

Pharmaniaga Berhad:

Pharmaniaga Berhad is engaged in business that partially similar with Harrisons Holding, both of them are listed on Bursa Malaysia at the same year which is 1999. Hence, I would like to measure its past 5-year Debt/Equity Ratio: FY2011 Total Debts 188,320 FY2010 33,126 437,473 7.57% FY2009 65,505 446,336 14.68% FY2008 122,145 402,202 30.37% FY2007 224,935 362,460 62.06%

Shareholders Equity 483,307 Debts/Equity Ratio 38.96%

From the table, it shows that Pharmaniaga Berhads Debt/Equity Ratio is decreasing gradually from FY2007 to FY2010 and suddenly increased sharply at FY2011, which the amount of debt increase around 470% from RM33,126,000 to RM188,320,000. Subsequently, I would like to make comparison on past 5-year Debt/Equity Ratio between Pharmaniaga Berhad and Harrisons Holding at below: Year1 Pharmaniaga Berhad Harrisons Holding 38.96% 12.96% Year2 7.57% 11.62% Year3 14.68% 15.33% Year4 30.37% 25.97% Year5 62.06% 41.76% Average 30.73% 21.53%

The table above presenting the difference between Pharmaniaga Berhad and Harrisons Holding in term of their past 5-year capital structure, and the average debt/equity ratio of Pharmaniaga Berhad is higher than Harrisons Holding. According to Trade-off Theory, a firm should find the optimal debt level in order to maximize its value and the optimal debt level is different among different industries. Besides, there is one way to find the optimal debt level by

finding out the average debt level of the firm in the industry. Therefore, I would like to make a simple calculation to find out the average debt level in this logistic industry, which is: Average Debt Level= (30.73%+21.53%)/2 = 26.13% So, Harrisons Holdings debt level at FY2010 is much lower than 26.13% which only 12.96%, and it indicating Harrisons Holding is holding too low of debts if using Average Debt Level to make comparison. However, the lower debt level is welcomed if follow the conclusion made by first comparison method. Therefore, I believe Harrisons Holding current debt level is not too low. On the other hand, Pecking-order Theory counter-argue that there is no such thing call optimal capital structure and profitable firm tend to use lesser debt because they always generate more retained earnings (Harrisons Holdings Retained Earning is 4.45times more than its Net Profit in FY2010), which is consistent with the real world situation. Moreover, many successful companies in the world, and also in Malaysia, have less or even no debt. In addition, the management of the company may like to have the reserve borrowing capacity that intentionally borrow below their optimal debt level, so that the reserve borrowing capacity can be used in the future, as well as help to avoid the equity financing in the future. Thus, I think Harrisons Holdings current debt level is acceptable (even it has lower debt level than Pharmaniage Berhad) and it may have reserve borrowing capacity which prepared for the future.

All in all, after analyzing and evaluating both comparisons at above, I believe that Harrisons Holding currently not using too much debt (but can reduce further in the future) and the current equity level is maintaining at a very stable condition which is not too much also (Number of share Outstanding only increase from 60,000,000 to 68,476,000 during the past 10 years, and the increased amount is only use for ESOS). After evaluated Harrisons Holdings past 5-year capital structure and found out whether its current capital structure is using too much debts or equities. Now, I would like to recommend an appropriated strategy of the capital structure for the next 5-year for the Harrisons Holding. As I discussed and explained at above that Harrisons Holding perform outstandingly when the debt level become lower, Harrisons Holding may decide to reduce further or maintain its current debt level even though its current Debt/Equity Ratio is only 12.96% which considered low compared with Pharmaniaga Berhad. On the other hand, the management teams may be able to restructure Harrisons Holdings capital structure by clearing all the debts and make it becomes a completely debt-free company. So, the purpose of both recommended strategies are reducing or maintaining Harrisons Holdings debt level for the next 5-year instead of increase the debts borrowing which is consistent with Warren Buffetts philosophy. Warren Buffett stated that he doesnt like debt and invest in companies that having too much debt. He preferred to invest in companies with little or no debt and he believed that: Good business or investment decisions will eventually produce quite satisfactory economic results, with no aid from leverage. (Warren Buffett Secret, no date).

However, some issues may arise if company using less or no debts. According to Jensen (1986), he stated that agency cost of equity may happen because of conflict of interest between the management teams and shareholders. Management may tempted to take the suboptimal decision that will not work in maximizing companys value but only benefit them. Under Jensen Free Cash-Flow Hypothesis, he explains the conflict of interest between managers and shareholders, especially when there is plenty of Free Cash Flow (FCF) inside the company. So, as Harrisons Holding current debt level is considerable low and I suggested it to reduce more debts in the future, this may lead to increase in FCF and the agency cost of equity may arise. In order to reduce the agency cost of equity, Jensen had list out several possible ways. However, some of the methods he suggested are inconsistent with my recommendation which is debt reduction. Therefore, I only adapt an appropriated method to mitigate this issue which is increase in dividend payout. By taking this move, Harrisons Holdings shareholders may use their voting right to force the management team to increase the dividend payout. Based on my fundamental analysis, Harrisons Holdings Dividend Payout is fluctuating between 20% to 28% from the past 5-year. By forcing the management to increase dividend payment, the FCF will be reduced as well as mitigate the conflict of interest (But there is a possibility that this plan will backfire and give negative impact on Harrisons Holding future earning). On the other hand, there is another method to reduce the impact of agency cost of equity which is giving more incentive to the management teams to motivate them work harder for the company, such as Employee Share Option Scheme (ESOS). Actually, Harrisons Holding is using more and more ESOS during the past 5 years, the number of share outstanding is increased from 60,656,000 in FY2006 to 68,476,000 in the FY2010, in which the excessive number of share outstanding over 60,000,000 is resulted by ESOS. Although there will lead to dilution effect to the Earning per Share (EPS),

but the EPS growth rate of Harrisons Holding for the past 5 years is still undeniably outstanding which is around 25.66% yearly!!! In conclusion, I recommended Harrisons Holding to reduce its debt borrowing or even restructure the capital to become a debt-free company for the next 5-year. Last but not least, I believe that Harrisons Holding has the ability to overcome any unexpected crisis in the near future if it maintaining its capital structure at a lower debt level or even completely debt free, as well as the financial distress faced will be much lower.

References:
Bursa Malaysia, 2012, Company Announcement: Annual Report, [online]. Available at: http://www.bursamalaysia.com/website/bm/listed_companies/company_announcements/annual_r eports/index.jsp Bursa Malaysia, 2012, Company Announcement: IPO Prospectus, [online]. Available at: http://www.bursamalaysia.com/website/bm/listed_companies/company_announcements/prospect us/index.jsp KLSE info, 2012, Historical Prices-Harrisons Holding 5008, [online]. Available at: http://www.klse.info/counters/historical-prices/stock/5008/date/1999-12-31/page/2 KLSE info, 2012, Historical Prices- Pharmaniaga Berhad 7081, [online]. Available at: http://www.klse.info/counters/historical-prices/stock/7081/date/1999-11-26 Harrisons Holding, 2012, Announcement, [online]. Available at: http://www.harrisons.com.my/ TradeSignum, 2012, Harrisons Holding-Big Mistake in Calculation, [online]. Available at: http://www.tradesignum.com/discussion_2440_harrisons-big-time-mistake-calculation InvestingAnswer, no date, Debt-Equity Ratio, [online]. Available at: http://www.investinganswers.com/financial-dictionary/ratio-analysis/debt-equity-ratio-358

Warren Buffett Secret, no date, Warren Buffett on Debt [online]. Available at: http://www.buffettsecrets.com/warren-buffett-debt.htm BIZWIS CONSULTING, no date, Return on Assets Ratio [online]. Available at: http://www.bizwiz.ca/profitability_ratio_calculation_formulas/return_on_assets_ratio.html Finance Formulas, no date, Interest Coverage Ratio [online]. Available at: http://www.financeformulas.net/Interest_Coverage_Ratio.html About.com, no date, Return on Equity-The Dupont Model, [online]. Available at: http://beginnersinvest.about.com/od/financialratio/a/aa040505.htm Learn Center, no date, Dupont Analysis: Breaking down ROE, [online]. Available at: http://education.stocktrak.com/index.php/tag/articles Pharmaniaga Berhad, 2012, Investors Relations: Financials, [online]. Available at: http://pharmaniaga.listedcompany.com/financials.html

Appendix:
Qd) Historical Price:
Month C/Price(RM) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 1.77 1.8 2.22 2.95 2.99 2.49 2.4 2.09 2.08 1.98 1.87 1.74 1.78 1.61 1.47 1.42 1.26 1.17 1.14 1.15 1.16 1.22 1.04 1.07 1.12 1.15 1.38 1.22 1.35 1.38 1.26 1.24 Harrisons Holding 25 Oct IPO: 1999 First Day C/ Price: 1.89 Average P: First Yr: Second Yr: Third Yr: Month 1Month 2Month 3Month 4Month 5Month 6Month 7Month 8Month 9Month 10Month 11Month 12Month 13Month 14Month 15Month 16Month 17Month 18Month 19Month 20Month 21Month 22Month 23Month 24Month 25Month 26Month 27Month 28Month 29Month 30Month 31Month 32Month C/Price(RM) 2.19 3.275 3.45 5.25 5.35 5.05 5 5.35 5 4.85 4.775 5 4.775 4.25 4.2 4 3.65 3.75 3.55 3.425 3.75 3.525 3.3 3.375 3.875 3.75 3.65 3.95 4.45 4.325 4.15 4.275 Pharmaniaga BHD 12Nov IPO: 1999 First Day C/ Price: 1.4 Average P: First Yr: Second Yr: Third Yr:

2.1983333 1.2908333 1.2208333

4.545 3.7958333 4.0875

33 34 35 36

1.2 1.13 1.17 1.05

33Month 34Month 35Month 36Month

4.2 4.225 4.1 4.1

Qe) Fundamental Analysis: FY2006 to FY2010 versus FY2002 to FY2006

Past 5-year:
Data REVENUE (COST OF SALES) (GROSS PROFIT) *(Interest Expenses) (Profit Before Tax)

(NET PROFIT AFTER TAX)

(EARNING PER SHARE) (Number of Share Outstanding) DIVIDEND (SHARE PRICE) (INVENTORIES) (CASH IN HAND) (TRADE RECEIVABLE) (CURRENT ASSETS) (FIXED ASSETS) (TOTAL ASSETS) (CURRENT LIABILITIES) LONG TERM LIABILITIES TOTAL LIABILITIES (SHAREHOLDER EQUITY) (RETAINED PROFIT) Net Cash Generated from Operating Activity Total Debt

Year2010 Year2009 Year2008 Year2007 RM,000 RM,000 RM,000 RM,000 1184470 1056648 1051880 946792 1058452 951491 952028 864156 126,018 105,157 99,852 82,636 1,025 741 1,486 3,832 49,893 39,532 32,382 25,442 37,091 30,348 23,265 18,059 0.54166 0.44319 0.34108 0.29006 68,476 68,477 68,209 62,260 0.15 0.09 0.075 0.07 2.25 2.05 1.2 1.36 126480 112098 101254 84796 114293 94694 88713 74701 177708 157138 131338 138812 419748 365109 322010 298422 58415 61538 55790 46521 478163 426647 377800 344943 204826 180902 158642 151451 1588 4223 3691 3827 206414 185125 162333 155278 271,749 241,522 215,467 189,665 202,385 172,998 147,055 127,293 20,745 24,005 43,036 16,431 35,219 28,072 33,024 49,265

Growth Year2006 Rate RM,000 867473 8.10% 794225 73,248 14.53% 3,940 19,365 13,176 29.53% 0.21723 25.66% 60,656 0.06 1.12 77244 82273 138860 298423 52908 351331 174316 3933 178249 173,082 112,388 24,905 72,279

Ratio Analysis:
PE Ratio (Dividend Yield) (Dividend Payout) (Gross Profit Margin) (Net Profit Margin) (Assets Turnover) Return on Assets (ROA)EBIT/Total Assets (Current Ratio) (Quick Ratio) (Interest Coverage Ratio) (Debtors turnover) (Inventory turnover) Equity Multiplier ((SE+LD)/FA) (Debt/Equity Ratio) (Liability to Assets Ratio) ROE) The Dupont Model(calculate ROE) The Dupont Model(Without Equity Multiplier) Operating Cash/Net Profit Net Tangible Assets (NTA) 4.154 6.67% 27.69% 10.64% 3.13% 247.71% 10.43% 2.04929 1.43179 49.68 54.76156 43.62 1.76 4.68 12.96% 0.43168 13.65% 13.65% 7.76% 0.55930 3.96853 4.626 4.39% 20.31% 9.95% 2.87% 247.66% 9.27% 2.01827 1.39861 54.35 54.2805 43.00 1.77 3.99 11.62% 0.43391 12.57% 12.57% 7.11% 0.79099 3.52705 3.518 6.25% 21.99% 9.49% 2.21% 278.42% 8.57% 2.02979 1.39154 22.79 45.574 38.82 1.75 3.93 15.33% 0.42968 10.80% 10.80% 6.16% 1.84982 3.15892 4.689 5.15% 24.13% 8.73% 1.91% 274.48% 7.38% 1.97042 1.41053 7.64 53.5137 35.82 1.82 4.16 25.97% 0.45016 9.52% 9.52% 5.24% 0.90985 3.04634 5.156 5.36% 27.62% 8.44% 1.52% 246.91% 5.51% 1.71197 1.26884 5.91 58.4271 35.50 2.03 3.35 41.76% 0.50735 7.61% 7.61% 3.75% 1.89018 2.8535

19.79% 17.30%

15.73%

Another Past 5-year:

Data REVENUE (COST OF SALES) (GROSS PROFIT) *(Interest Expenses) (Profit Before Tax)

Growth Year2006 Year2005 Year2004 Year2003 Year2002 R RM,000 RM,000 RM,000 RM,000 RM,000 867473 819657 801853 709663 656036 7.23% 794225 749548 730161 647041 596717 73,248 3,940 19,365 13,176 0.217225 60,656 0.06 1.12 77244 82273 138860 298423 52908 351331 174316 3933 178249 173,082 112,388 24,905 72,279 70,109 4,078 17,544 12,029 0.198728 60,530 0.06 1.09 77648 73644 137893 289452 54135 343587 137554 43671 181225 162,362 99,231 8,725 79,497 71,692 3,957 17,278 10,428 0.17352 60,098 0.06 1.39 72500 70335 128845 272305 53403 325708 128145 45049 173194 152,514 89,815 38,872 71,785 62,622 4,335 12,973 8,293 0.13822 60,000 0.05 1.1 76082 56980 138314 271423 53528 324951 136778 41147 177925 147,026 84,425 8,205 87,387 59,319 3,469 12,719 7,492 0.12487 60,000 0.05 1 75378 51750 129263 256391 51444 307835 127749 40862 168611 139,224 76,126 16,824 79,135 5.41%

(NET PROFIT AFTER TAX)

(EARNING PER SHARE) (Number of Share Outstanding) DIVIDEND (SHARE PRICE) (INVENTORIES) (CASH IN HAND) (TRADE RECEIVABLE) (CURRENT ASSETS) (FIXED ASSETS) (TOTAL ASSETS) (CURRENT LIABILITIES) LONG TERM LIABILITIES TOTAL LIABILITIES (SHAREHOLDER EQUITY) (RETAINED PROFIT) Net Cash Generated from Operating Activity Total Debt

15.16% 14.85%

Ratio Analysis:
PE Ratio (Dividend Yield) (Dividend Payout) (Gross Profit Margin) (Net Profit Margin) (Assets Turnover) Return on Assets (ROA)EBIT/Total Assets (Current Ratio) (Quick Ratio) (Interest Payment Ratio) (Debtors turnover) (Inventory turnover) Equity Multiplier ((SE+LD)/FA) Debts/Equity Ratio (Debt to Assets Ratio) ROE) The Dupont Model(calculate ROE) The Dupont Model(Without Equity Multiplier) Operating Cash/Net Profit Net Tangible Assets (NTA) 5.156 5.36% 27.62% 8.44% 1.52% 246.91% 5.51% 1.7119656 1.2688393 5.91 58.427063 35.50 2.03 3.35 41.76% 0.5073535 7.61% 7.61% 3.75% 1.8901791 2.8535017 5.485 5.50% 30.19% 8.55% 1.47% 238.56% 5.11% 2.104279 1.539788 5.30 61.40489 37.81 2.12 3.81 48.96% 0.52745 7.41% 7.41% 3.50% 0.72533 2.682339 8.011 4.32% 34.58% 8.94% 1.30% 246.19% 5.30% 2.12498 1.55921 5.37 58.6497 36.24 2.14 3.70 47.07% 0.53175 6.84% 6.84% 3.20% 3.72766 2.53776 7.959 4.55% 36.18% 8.82% 1.17% 218.39% 3.99% 1.98441 1.42816 3.99 71.1389 42.92 2.21 3.52 59.44% 0.54754 5.64% 5.64% 2.55% 0.98939 2.45043 8.009 5.00% 40.04% 9.04% 1.14% 213.11% 4.13% 2.00699 1.41694 4.67 71.9183 46.11 2.21 3.50 56.84% 0.54773 5.38% 5.38% 2.43% 2.2456 2.3204

7.46% 7.47%

9.10%