RISK MANAGEMENT

SCOPE OF DISCUSSION : 1 MEASURING / MONITORING RISK 2 MITIGATING RISK 3 MANAGING REMAINING RISK

MEASURES FOR RISK MONITORING

1 2 3 4 5 EXPECTED VALUE STANDARD DEVIATION PORTFOLIO RISK STOCK MARKET RISK MEASURES BUSINESS RISK MODELS LEVERAGE ANALYSIS Z SCORE ANALYSIS OPERATING RISK IRR AS A MEASURE OF RISK BROAD BASED SENSITIVITY ANALYSIS MONTE CARLO BUSINESS SIMULATION

6 7 8 9

1 EXPECTED VALUE AND STANDARD DEVIATION EV = SD = SUM OF ( INDIVIDUAL OUTCOMES * RELATED PROBABILITIES ) SQUARE ROOT ( SUM OF DIFFERENCES FROM EV^2 * RELATED PROBABILITIES )

CO A IS CONSIDERING INVESTMENT IN A COLOMBIAN FDI PROJECT. THEY HAVE COMPUTED THE PROJECTED CASH FLOWS USING US $ AS THE BASE CURRENCY. THE PROJECTED IS CONSIDERED EXPANSIONARY BY THE COMPANY AND WILL CREATE NEW SOURCES OF REVENUE. THE PROJECT IS RATHER SENSITIVE TO LOCAL ECONOMIC CONDITIONS SO THE FINANCE DIRECTOR HAS ASKED FOR A PROBABILITY BASED ANALYSIS. YOU HAVE GATHERED THE FOLLOWING DATA: Economic Conditions in Colombia Prob. Net Income (US $ 000's) EXPECTED VALUES Strong Growth 30% 500 150 Mild Growth 40% 480 192 Mild Correction 20% 450 90 Downturn 10% 410 41 EXPECTED VALUE (EV) = 473 STANDARD DEVIATION : Prob (Outcome - EV)^2 VARIANCE VALUES 30% (500-473)^2 = 729 218.7 40% (480-473)^2 = 49 19.6

20% 10%

(450-473)^2 = (410-473)^2 =

529 3969 VARIANCE = SD^2= STD DEVIATION =

105.8 396.9 741 27.2 USD $ K

RISK MANAGEMENT REPORT :

1 THIS PROJECT HAS AN EXPECTED NET INCOME OF US $ 473,000 /2 THE STANDARD DEVIATION IS US $ 27,200 / - OR ABOUT 5.75% OF EXPECTED VALUE. 3 THE EXPECTED OUTCOME RANGE IS US $ 445,800 /- TO US $ 500,200 /OR EXPECTED NET INCOME = US $ 473,000 /- + /- 5.75% 4 THE PROBABILITY OF POSITIVE MARKET CONDITIONS IS 70% WITH EXPECTED NET INCOME VALUE OF AT LEAST US $ 342,000/-

PORTFOLIO RISK AND STOCK MARKET RISK MEASURES

1 PORTFOLIO = A GROUP OF ASSETS OR INVESTMENTS A BUSINESS MAY ALSO BE REGARDED AS A PORTFOLIO OF ASSETS A COLLECTION OF INVESTMENTS ON THE STOCK MARKET IS ALSO A PORTFOLIO 2 STOCK MARKET RISK IS MEASURED USINF BETA VALUE BETA = N * SUM OF (X*Y) - (SUM OF X * SUM OF Y) N * SUM OF X^2 - (SUM OF X)^2 WHERE:N = NUMBER OF PAIRS OF OBSERVATIONS X = RETURNS FROM THE STOCK MARKET Y = RETURNS FROM AN INDIVIDUAL SHARE OR LISTED BOND A COMPANY LISTED ON THE NIGERIAN STOCK EXCHANGE WISHES TO DETERMINE ITS BETA VALUE FOR ITS EQUITY SHARES. DATA FOR RETURNS HAS BEEN COMPILED AS FOLLOWS: YEAR 2012 2011 2010 2009 2008 2007 2006 MARKET RETURNS COMPANY RETURNS 15 25 8 10 (12) (21) 3 (5) 21 30 17 25 11 11 63 75 NUMERATOR VALUE = DENOMINATOR VALUE = BETA = IF THE CURRENT MARKET INDEX ON NSE = 8,351 5,082 1.64 33,468 AND IS EXPECTED TO X*Y 375 80 252 -15 630 425 121 1,868 X ^2 225 64 144 9 441 289 121 1,293

INCREASE TO 37,800 IN ONE YEAR'S TIME, COMPUTE THE MARKET RETURNS. IF RISK FREE RETURNS ARE TAKEN AT 3.5%, COMPUTE THE REQUIRED RETURN FOR THIS SHARE EXPECTED MARKET RETURNS = (INDEX @ Y1 - CURRENT INDEX) % CURRENT INDEX Rm = (37,800 - 33,468) / 33,468 % = 12.9 % REQUIRED RETURN = Rf + ( Beta * Market Premium for Risk) = 3.5 % + ( 1.64 * (12.9 - 3.5) ) = 18.9 %

PORTFOLIO RISK
RISK IN A COLLECTION OF INVESTMENTS PORTFOLIO THEORY A THEORY DESIGNED TO MEASURE THE RISK AND RETURNS FROM A COLLECTION OF FINANCIAL INVESTMENTS. PORTFOLIO RETURNS WEIGHTED AVERAGE RETURNS FROM A PORTFOLIO = sum of (proportionate investment * individual returns )

EG : CO. B HAS THE FOLLOWING PORTFOLIO OF SHARES : Shares Number of shares (000's) Price Total Value (RM 000's) Maybank 50 7.82 391.00 Digi 70 5.81 406.70 Air Asia 100 3.31 331.00 TOTAL PORTFOLIO VALUE = 1,128.70 Shares Maybank Digi Air Asia Proportion 0.35 0.36 0.29 Returns Portfolio Returns 15% 5.25 12% 4.32 25% 7.25 PORTFOLIO RETURNS = 16.82 % = Weighted Average of the Component Returns

RISK MEASUREMENT USING PORTFOLIO THEORY PORTFOLIO THEORY REQUIRES THAT A NEW INVESTMENT BE SELECTED BASED ON THE FOLLOWING CRITERIA : 1 INDIVIDUAL RETURNS EXPECTED FROM THE NEW INVESTMENT 2 INDIVIDUAL RISK IN THE NEW INVESTMENT 3 RISK RELATIONSHIP OF THE NEW INVESTMENT WITH THE EXISTING PORTFOLIO PORTFOLIO RISK IS MEASURED BASED ON A 2 ASSET PORTFOLIO WHERE : THE EXISTING PORTFOLIO IS ONE ASSET

THE NEW INVESTMENT BEING EVALUATED IS THE SECOND ASSET RETURNS FROM A 2 ASSET PORTFOLIO Rp = (R a * Proportion of A) + ( R b * Proportion of B) IF PROPOTION INVESTED = W = THE WEIGHT THEN PORTFOLIO RETURNS ARE : Rp = (Wa * Ra) + (Wb * Rb)

(A) (B) portfolio new asset value = 10m 5m returns= 8% 12% Proptn = 10/15 = 5 /15 0.67 0.33 portfolio returns = (0.67*8%) + (0.33*12%)

RISK FROM A 2 ASSET PORTFOLIO : p = SQ RT { ( Wa^2 * a^2 ) + ( Wb^2 * b^2 ) +

The proportionate risk in Asset "a" COR ab = COR COR COR THE EG :

( 2 * a * b * Wa * Wb * CORab ) } Risk Relationship between Asset "a" and Asset "b"

The proportionate risk in Asset "b"

COEFFICIENT OF CORRELATION BETWEEN ASSET "a" and ASSET "b"

HAS VALUES BETWEEN - 1 TO +1 = 1 IS CALLED PERFECT CORRELATION = 0 INDICIATES NO RELATIONSHIP CLOSER THE VALUE OF COR TO EITHER +1 OR -1 THE STRONGER IS THE CORRELATION

AN EXISTING PORTFOLIO HAS MARKET VALUE OF $ 300,000 AND PROVIDES RETURNS OF 15%. THE SD HAS BEEN MEASURED AT 7 %. A NEW INVESTMENT OF $100,000 PROMISES EXCITING RETURNS OF 22% WITH A RISK PROFILE OF SD = 12%. THE INVESTMENT ADVISER HAS SUGGESTED THAT THIS NEW INVESTMENT HAS A RISK CORRELATION OF ONLY 0.3 AND THEREFORE REPRESENTS GOOD DIVERSIFICATION. Q : COMPUTE THE RETURNS AND RISK FROM THE NEW PORTFOLIO INDIVIDUAL RETURNS INDIVIDUAL RISK COEFFCIENT OF CORRELATION = Portfolio 15 % 7% New Investment 22 % 12 % 0.3 AND NEW INVESTMENT = ASSET "b" 0.75 0.25 16.75

PROPORTIONS IF PORTFOLIO = ASSET "a" Wa = 300 / 400 = Wb = 100/400 = PORTFOLIO RETUNS =

( 15 % * 0.75 ) + ( 22 % * 0.25 ) =

PORTFOLIO RISK : SQ RT (( 7^2 * 0.75^2 ) + ( 12^2 * 0.25^2 ) + ( 2 * 7 * 12 * 0.75 * 0.25 * 0.3 ) If correlation was negative: PRPORTIONATE RISK IN PORTFOLIO = 27.5625 27.5625 PRPORTIONATE RISK IN NEW INVESTMENT= 9 9

RISK RELATIONSHIP VALUE = SUM = PORTFOLIO RISK = SQ RT OF 46 = p=

9.45 46.0125 6.78 %

-9.45 27.1125 5.21

WITH THE NEW INVESTMENT, PORTFOLIO RETURNS WILL INCREASE FROM 15% TO 16.75% AND RISK WILL BE MAINTAINED OR DECLINE SLIGHTLY FROM 7% TO 6.78% THEREFORE, THE NEW INVESTMENT CAN BE INCLUDED INTO THE PORTFOLIO. OBSERVATIONS OF PORTFOLIO THEORY 1 PORTFOLIO RETURNS CAN BE IMPROVED BY ADDING ON INVESTMENT WITH RETURNS THAT ARE HIGHER THAN THE RETURNS FROM THE EXISTING PORTFOLIO. 2 PORTFOLIO RISK CAN BE REDUCED BY ADDING ON INVESTMENT WITH A RISK CORRELATION THAT IS A LOW POSITIVE OR BETTER STILL, WITH A NEGATIVE CORRELATION TO THE EXISTING PORTFOLIO. THEREFORE, PORTFOLIO THEORY PROVIDES MATHEMATICAL EVIDENCE THAT PORTFOLIO RISK MAY BE REDUCED USING DIVERSIFICATION. HOWEVER, IN THE REAL WORLD, DIVERSIFICATION IS DIFFICULT TO ACHIEVE BECAUSE : A. WITHIN THE SAME COUNTRY SEVERAL DIFFERENT INDUSTRIES ARE OFTEN INTER-DEPENDANT B. WITH GLOBALISATION, FINANCIAL SKILLS, STRATEGIES AND ACTION ARE BECOMING SIMILAR ON A GLOBAL SCALE. INVESTORS MAY FIND IT CHALLENGING TO SEEK INVESTMENT OPPORTUNITIES WHOSE CASH FLOWS ARE TRULY COUNTER - CYCLICAL. ON THE STOCK MARKET, WHERE MOST SHARES ARE SIMILAR IN RISK PROFILE, DIVERSIFICATION IN 15 SECURITIES OR MORE HAS BEEN SHOWN TO SIGNIFICANTLY REDUCE DIVERSIFIABLE UNSYSTEMATIC RISK. FOR A WELL DIVERSIFIED PORTFOLIO, THE ONLY RISK THAT NEEDS TO COMPENSATED WITH RETURNS IS MARKET RISK. THIS IS WHERE THE CAPITAL ASSET PRICING MODEL COMES IN. (CAPM) THIS IS WHY CAPM ONLY MEASURES MARKET RISK = BETA VALUE RISK

RELATIONSHIP BETWEEN RISK & RETURNS

JENSEN VALUE = TREYNOR VALUE = SHARPE RATIO = EG : EXPECTED RETURNS % - REQUIRED RETURNS % (EXPECTED RETURNS - Rf ) / Beta Value (EXPECTED RETURNS - Rf ) / Std Deviation %

THE FOLLOWING REPRESENTS THE PORTFOLIO OF MR RICH Shares Proptn Returns SD Beta REQUIRED RETURNS A 0.2 15% 5% 1.5 20 % B 0.15 20% 6% 1.2 17 % C 0.22 25% 7% 1.8 23 % D 0.28 30% 9% 0.9 14 %

E Rf = Rm =

0.15 5% 15%

10%

3%

1.15

16.5 %

Q : COMPUTE PORTFOLIO REQUIRED RETURNS AND COMPARE WITH ACTUAL RETURNS SHOWN ABOVE. COMPUTE THE JENSEN VALUE, TREYNOR VALUE AND SHARPE RATIO FOR EACH SHARE. Shares Proptn Returns Risk Prem SD Beta Sharpe Treynor A 0.2 15% 10 5% 1.5 2.0 6.7 B 0.15 20% 15 6% 1.2 2.5 12.5 C 0.22 25% 20 7% 1.8 2.9 11.1 D 0.28 30% 25 9% 0.9 2.8 27.8 E 0.15 10% 5 3% 1.15 1.7 4.3 extra risk in Risk Pr/SD Risk Pr / Beta returns these given shares by these shares over & above the Rf

COMPREHENSIVE CASE STUDY ON CAPM

Mth 1 2 3 4 5 6 7 8 9 10 11 12 Q :

% % Co Returns Mkt Returns xy x^2 12 10 120 100 FOR THE LAST 4 MONTHS, STOCK MARKET DATA HAS BEEN 20 15 300 225 COMPILED AS FOLLOWS : 5 3 15 9 Month End Values : 25 12 300 144 Mkt Returns : Mkt Index Company Shares -10 -3 30 9 MTH 9 1500 50 -3 0 0 0 (1550-1500)/1500% MTH 10 1550 52 12 5 60 25 (1325-1550)/1550% MTH 11 1325 45 28 15 420 225 (1600-1325)/1600% MTH 12 1600 55 15 10 150 100 16 3.3 52.8 10.89 DURING MONTH 10, THE COMPANY PAID A DIVIDE -13.5 -14.5 195.75 210.25 OF $6 PER SHARE. 22.2 20.7 459.54 428.49 128.7 76.5 2103.09 1486.63 1 COMPLETE THE SCHEDULE OF RETURNS ABOVE 2 USE THE INFORMATION TO COMPUTE BETA VALUE = 1.28 3 IF MARKET RETURNS IN THE COMING YEAR ARE EXPECTED TO BE 12% AND RISK FREE RETURNS ARE 4%, COMPUTE THE REQUIRED RETURNS ON THIS COMPANY'S SHARES IN THE COMING YEAR. = 4 + (1.28 * [12 - 4] ) =

BETA ADJUSTMENTS
TO ADJUST FOR CHANGES IN EXPOSURE TO MARKET RISK CHANGES IN THIS RISK CAN BE CAUSED BY CHANGES IN : 1 LEVEL OF GEARING 2 NATURE OF BUSINESS APPLICATIONS : 1 ESTIMATE BETA FROM SIMILAR LISTED COMPANIES IF OUR COMPANY IS UNLISTED 2 ESTIMATE BETA FROM SIMILAR LISTED COMPANIES IF OUR COMPANY IS NEWLY LISTED 3 LISTED COMPANY MAKES A CHANGE IN ITS GEARING OR BUSINESS OPERATIONS 2 TYPES OF RISK TO ADJUST FOR : 1 FINANCIAL RISK CAUSED BY GEARING ADJUSTED BY RE-GEARING THE BETA TO THE NEW GEARING LEVEL 2 BUSINESS RISK = OPERATING RISK CAUSED BY NATURE OF BUSINESS ADJUSTED BY COMPUTING A NEW WEIGHTED AVERAGE BETA CONTAINING COMPONENTS OF EXISTING BUSINESS AND NEW BUSINESS

GEARING UP THE EQUITY BETA

BETA GEARED = BETA UNGEARED * ( 1 + (D /E ) ) WHERE D = MARKET VALUE OF DEBT NET OF TAX E = MARKET VALUE OF EQUITY MKT VALUE OF EQUITY EXISTING MKT VALUE OF DEBT ISSUE OF NEW DEBT TAX RATE = 25 % EXISTING BETA EQUITY = Q : A PLC 500 200 100 1.5 B PLC 300 0 100 0.8 C PLC 700 300 100 1.75

COMPUTE THE GEARED BETA EQUITY FOR EACH COMPANY ABOVE. A PLC : GEARED BETA EQUITY = B PLC : GEARED BETA EQUITY = C PLC : GEARED BETA EQUITY = 1.75 * ( 1 + ( 375 /700 )) = 2.69 0.8 * ( 1 + ( 75 /300 ) ) = 1 1.5 * ( 1+ (275/500) ) = 2.325

DE-GEARING UP THE EQUITY BETA

BETA UNGEARED = BETA GEARED / ( 1 + (D /E ) ) WHERE D = MARKET VALUE OF DEBT NET OF TAX E = MARKET VALUE OF EQUITY D PLC MKT VALUE OF EQUITY 500 EXISTING PROPORTION OF DEBT 40% NEW PROPORTION OF DEBT 0% TAX ADJUSTMENTS HAVE ALREADY BEEN MADE EXISTING BETA EQUITY = 1.5 D PLC : DEGEARED BETA = E PLC : DEGEARED BETA = 0.8 / ( 1 + (40 /60) ) = 0.48 @ 0% Gearing 1.5 / ( 1 + (40/60) ) = 0.9 @ 40% Gearing E PLC 300 40% 20% 0.8 F PLC 700 40% 55% 1.75

RE-GEAR THE BETA TO THE NEW PROPORTION OF DEBT (20%) : Gearing up to 20 % = 0.48 * ( 1+ (20 /80) ) = F PLC : DEGEARED BETA = 1.75 / ( 1 + (40 /60) ) =

0.66 @ 20% Gearing

1.05 @ 0% Gearing

RE-GEAR THE BETA TO THE NEW PROPORTION OF DEBT (20%) : Gearing up to 55 % = 1.05 * ( 1+ (55 /45) ) =

2.33 @ 55% Gearing

ADJUSTING THE BETA FOR CHANGES IN OPERATING RISK

NEW ASSET BETA = (EXISTING BETA * Proportionate Value of Existing Business ) + (BETA ON NEW BUSINESS * Proportionate Value of New Business) IT IS THE WEIGHTED AVERAGE OF EXISTING BETA WITH THE NEW BUSINESS BETA. EG : A COMPANY IS DIVERSIFYING INTO BUSINESS REPRESENTING 25% OF ITS EXISTING MARKET VALUE. THE NEW BETA IS EXPECTED TO REDUCE RISK AS IT IS ONLY 0.8 COMPARED TO THE COMPANY'S EXISTING BETA OF 1.7. WHAT IS THE NEW ASSET BASED BETA ? NEW ASSET BETA = ( 0.75 * 1.7 ) + ( 0.25 * 0.8 ) = 1.48

Propotionate Investment 0.35 0.36 0.29

new asset

7*8%) + (0.33*12%) =

9.32%

nship between nd Asset "b"

ation was negative:

FOLIO RISK

K INVESTMENT

RSIFICATION

JENSEN SCORE -5% 3% 2% 16 %

Action SELL BUY BUY BUY

-6.5 %

SELL

Risk Pr / Beta

DATA HAS BEEN

Company Shares $ $ $ $

Company Returns (52-50+6) / 50 (45-52) / 52 (55-45) / 45

PANY PAID A DIVIDEND

8 * [12 - 4] ) =

14.24%

WLY LISTED

@ 40% Gearing

@ 0% Gearing

@ 20% Gearing

@ 0% Gearing

@ 55% Gearing

ED TO THE

RISK OF BUSINESS FAILURE

1 2 3 4 5 6 7 8 9 10 11 12 13 REVENUE OPERATING PROFIT OR EBIT NET PROFIT AFTER TAX NET FINANCE CHARGES RETAINED EARNINGS TOTAL ASSETS CURRENT ASSETS CURRENT LIABILITIES TOTAL LIABILITIES TOTAL BORROWINGS TOTAL EQUITY @ BOOK VALUE TOTAL MARKET CAPITALIZATION PE Balance Sheet Check RISK INDICATORS OPERATING MARGIN NET MARGIN ASSET UTILISATION (RM) ROI EQUITY MULTIPLIER ROE 1000 300 100 25 80 800 350 200 300 150 500 2500 12 times

BASIC 1 2 3 4 5 6

OP / R % NPAT /R % R / TA RM NPAT / TA % TA / EQ times ROI * EQ MULTIPLIER

300/1000 100 /1000 1000/800 100/800 800/500 12.5 * 1.6

30 10 1.25 12.5 1.6 20 30 18.75 12

7 GEARING } DEBT / EQUITY 8 ASSET FINANCING } DEBT / ASSETS 9 INTEREST COVER 10 PRICE / BOOK ASSETS 11 PRICE / BOOK EQUITY 12 PRICE / LIABILITIES

TB / EQ % 150/500 TB / TA % 150/800 EBIT / NET INTEREST COST300/25 PRICE PER SHARE / TA PER SHARE PRICE PER SHARE / EQUITY PER SHARE PRICE PER SHARE / LIABILITIES PER SHARE

Business Factors Cash flow management Threats from competitors Poor distribution network Poor execution of plans/implementation Poor transparency of the operations Management Factors Experience of Management

Environmental Factors Changes in technology Political instability Regulation changes Natural disaster Economic Crisis Cost Factors Inflation of key resources

Incompetency of Management, improper communication Cultural difference High staff turnover Fraud / Poor Internal Control Internal conflicts Over dependance on key management personnel

Scarce resources Poor budgeting / planning Inefficient supply chain / wastage Poor Performance Management

Strategy Factors Obsolete ideas - no blue ocean thinking Inflexibility of strategy Strategy not well defined Wrong KPI focus Over/under optimistic

PROFITABILITY RISK
1 ABILITY TO GENERATE SALES IS THE CORE RISK. WITHOUT REVENUE, THERE CAN BE NO PROFIT THIS IS MEASURED USING ASSET UTILISATION RATIO HIGHER ASSET UTILISATION MEANS LOWER RISK BECAUSE THE COMPANY HAS A STRONG ABILITY TO GENERATE INCOME FROM THE USE OF ITS ASSETS ASSET UTILISATION RATIO = REVENUE TOTAL ASSETS

LIQUIDITY RISK
2 LIQUIDITY RISK ARISES FROM : - MISMATCH OF FINANCING EG : WHERE THE COMPANY USES EXCESSIVE AMOUNTS OF SHORT TERM FINANCING SUCH THAT ALL CURRENT ASSETS AS WELL AS SOME FIXED ASSETS ARE FINANCED USING CURRENT LIABILITIES. THIS IS INDICATED WHEN WORKING CAPITAL IS NEGATIVE CURRENT RATIO = CA / CL MUST BE > $1

- INSUFFICIENT CASH RESERVES THE BALANCE OF CASH AND CASH EQUIVALENTS SHOULD NORMALLY BE > 30% OF CURRENT LIABILITIES CASH RATIO = CCE / CL > 30 % IN ORDER TO CORRECT A MISMATCH OF FINANCING WHERE SHORT TERM FUNDING IS TOO HIGH, THE COMPANY CAN : - BORROW LONG TERM TO REDUCE OR ZERORISE SOME OF THE CURRENT LIABILITIES ESPECIALLY THOSE THAT ARE INTEREST BEARING EG : TAKE A TERM LOAN TO REPAY DOWN THE OVERDRAFT

OR RE-FINANCE SOME FIXED ASSETS USING A LEASE OR MORTGAGE TO RELEASE SOME CASH

BORROWING RISK
IS MEASURED USING GEARING RATIO AND INTEREST COVER GEARING = DEBT / EQUITY = TOTAL BORROWINGS / EQUITY

INTEREST COVER = OPERATING PROFIT / TOTAL FINANCE CHARGES COMPANY GEARING INTEREST COVER F 60% 6X G 160% 28X

GENERALLY HIGHER GEARING IS AN INDICATOR OF HIGHER FINANCIAL RISK. THIS FINANCIAL RISK IS CAUSED BY THE FIXED COMMITMENT TO REPAY LOANS AND INTEREST AND CAN BE MEASURED USING THE INTEREST COVER. THEREFORE, COMPANY G HAS LOWER FINANCIAL RISK EVEN IF GEARING IS HIGHER BECAUSE ITS EARNINGS AND REPAYMENT CAPACITY ARE STRONGER THAN CO. F - BASED ON A HIGHER INTEREST COVER OF 28 TIMES.

Z SCORE FOR PUBLIC LISTED COMPANIES

1.2 1.4 3.3 0.6 1 WORKING CAPITAL RETENTIONS & ORGANIC GROWTH OPERATING PROFITABILITY MARKET CAP / LIABILITIES ASSET UTILIZATION Z SCORE TOP GLOVE TOTAL ASSETS CURRENT ASSETS CURRENT LIABILITIES TOTAL LIABILITIES MKT VALUE OF SHARES (M CAP) REVENUE OPERATING PROFITS NPAT DIVIDENDS RETAINED EARNINGS WC / TA RE /TA OP / TA MCAP/ TL R / TA 2012 1,598 811 274 318 3,609 619 2,314 240 207 80 127 2011 2012 1,423 715 229 276 3,609 as at 12th April 2013 619 2,054 145 115 87 28

No of shares

1.2 1.4 3.3 0.6 1

WORKING CAPITAL RETENTIONS & ORGANIC GROWTH OPERATING PROFITABILITY MARKET CAP / LIABILITIES ASSET UTILIZATION Z SCORE

2012 0.40 0.11 0.50 6.81 1.45 9.27

2011 0.41 0.03 0.34 7.85 1.44 10.06

Z SCORE PROCESS 1 COMPUTE EACH RATIO AND MULTIPLY BY THE WEIGHTS 2 ADD UP THE VALUE OF THE 5 RATIOS TO GET THE Z SCORE 3 INTERPRETE THE Z SCORE : Z SCORE LESS THAN 1.88 FINANCIAL DISTRESS LIKELY IN THE NEXT 2 YEARS Z SCORE BETWEEN 1.88 & 3.33 NON CONCLUSIVE SCORE Z SCORE GREATER THAN 3.33 FINANCIAL DISTRESS NOT LIKELY COMPANY HAS STRONG SURVIVAL INDICATORS

OTHER RISK INDICATORS

1 IRR MAY GIVE AN INDICATION OF RISK BECAUSE IT IS THE SENSITIVITY OF PROJECTED CASH FLOWS TO CHANGES IN DISCOUNT RATE. IT REPRESENTS THE HIGHEST % RETURNS THAT CAN BE ACHIEVED FROM A SET OF PROJECTED CASH FLOWS

2 MONTE CARLO BUSINESS SIMULATION THIS INVOLVES RE-CREATING THE BUSINESS ENVIRONMENT USING COMPUTER SOFTWARE WHERE MANY INTER RELATED FACTORS CAN BE ALLOWED TO CHANGE IN REPSONSE TO EACH OTHER EG: SALES VOLUME, LABOUR COSTS, INTEREST RATES ETC THE SOFTWARE WILL COMPUTE THE PROJECTED PROFIT UNDER EACH SCENARIO.

IOI 1 2 3 4 5 6 7 8 9 10 11 12 13

CORP REVENUE OPERATING PROFIT OR EBIT NET PROFIT AFTER TAX NET FINANCE CHARGES RETAINED EARNINGS TOTAL ASSETS CURRENT ASSETS CURRENT LIABILITIES TOTAL LIABILITIES TOTAL BORROWINGS TOTAL EQUITY @ BOOK VALUE TOTAL MARKET CAPITALIZATION PE

2012 15,640 2,367 1,829 141

2011 16,154 2,816 2,291 123

23,065 19,655 9,186 7,703 2,202 2,288 10,149 7,394 8,122 5,397 12,916 12,261 31,642 17.7 TIMES

% % RM % times % % % times

IOI CORP BASIC RISK INDICATORS 1 OPERATING MARGIN 2 NET MARGIN 3 ASSET UTILISATION (RM) 4 ROI 5 EQUITY MULTIPLIER 6 ROE 7 GEARING } DEBT / EQUITY 8 ASSET FINANCING } DEBT / ASSETS 9 INTEREST COVER 10 PRICE / BOOK ASSETS 11 PRICE / BOOK EQUITY 12 PRICE / LIABILITIES

2012 15.1 11.7 0.68 7.9 1.79 14.2 62.9 35.2 16.8

2011 17.4 14.2 0.82 11.7 1.60 18.7

% % RM % times %

44.0 % 27.5 % 22.9 times

1.37 BASED ON DATA 2.45 FOR WEEK ENDED 3.12 FEB 15th 2013

y resources

g / planning ply chain / wastage ance Management

- no blue ocean thinking

ell defined

ATION RATIO =

OTAL ASSETS

CESSIVE AMOUNTS AT ALL CURRENT TS ARE FINANCED

CAPITAL IS NEGATIVE

UIVALENTS SHOULD

FUNDING IS

T LIABILITIES

2011

at 12th April 2013

T RATES ETC