1.0 introduction1.1 from past to presentShell Refining Company (Shell Malaysia) first appeared in Malaysia on 19 September, 1960 and was listed on the main board of Bursa Malaysia (formerly known as KLSE) two years later with a 25% Malaysian public participation. 50 years later in 2012, the public participation percentage increased to a staggering 49%. (Shell Malaysia, 2013) In 1963, Shell Malaysia’s Simple Hydro skimming refinery began operating with the Crude Distiller I, producing 20 kbbl/day.
Over the years, production capacity continuously increased with the appearance of new technologies, machineries and plants, like the platfomer I and Hydro-Desulphurisation Plant in 1967, Crude Distiller II in 1974, Platformer II with Continuous Catalyst regeneration facility in 1982, and more. Shell Malaysia did not stop here. In 1991, the ‘Samudra’ jetty was set up to maximize the handling of product outlet through waterfront. In 1999, Shell Malaysia’s investment of RM1.4 billion in Malaysia’s first ever Long Residue Catalytic Cracker was completed. The completion of LRCC added significant value to Shell Malaysia’s operations. The refinery’s production capacity increased dramatically to 125 kbbl/day. (Shell Malaysia, 2013)
And now, in 2013, the refinery’s new diesel processing unit, Project Hijau, a part of an investment of RM5.1 billion, is completed. This unit bears the production capacity of 6,000 tonnes per day, which is another major breakthrough in Shell Malaysia history. (Shell Malaysia, 2013)
1.2 Vision, Mission & Objectives1.2.1 VisionShell Malaysia’s vision is to become the top performing and most admired refinery in Asia. (Shell Malaysia, 2013) 1.2.2 Mission Shell Malaysia emphasizes greatly on trying to manufacture and supply oil products and services that meets their customers’ demands while continuously delivering shareholder value. It also strives to achieve operational excellence in order to cut unnecessary waste, and in turn, cut cost.
Shell Malaysia has also shown its sense of responsibility by conducting business in the safest, most environmentally sustainable and economically optimum way. The core of a company is its people, and Shell Malaysia acknowledges that. In fact, it is Shell’s mission to employ an innovative, diverse and result-oriented team that is motivated and determined to deliver nothing less than excellence. (Shell Malaysia, 2013) 1.2.3 Objectives
Shell Malaysia has set up a series of objectives to realize its vision. For one, Shell Malaysia is committed in safeguarding the company’s assets with integrity. Also, delivering maximum satisfaction to the company’s shareholders and customers. In order to maximize profit and to serve both customers and shareholders better, delivering structural cost reductions are something Shell Malaysia deems vital. In an act of responsibility towards society, Shell Malaysia has also made delivering sustainable Health, Security, Safety as well as environmental excellence one of its main objectives. (Shell Malaysia, 2013) 1.3 Board of Directors (Shell Malaysia, 2013)
Mr. Iain John LoChairmanNon-Independent andNon-Executive DirectorMember of Remuneration Committee and Nominating CommitteeYBhg. Datuk Zainun Aishah Binti AhmadIndependent andNon-Executive DirectorChairman of Nominating CommitteeMember of Audit Committee and Remuneration CommitteeYBhg. Dato’ Seri Talaat Bin HusainSenior Independent andNon-Executive DirectorChairman of RemunerationCommitteeMember of Audit Committee andNominating CommitteeYBhg. Tan Sri Datuk Clifford Francis HerbertIndependent andNon-Executive DirectorChairman of Audit CommitteeMember of Remuneration Committee and Nominating CommitteeMr. Lau Nai PekNon-Independent andNon-Executive DirectorMember of Audit CommitteeYBhg. Dato‘ Saw Choo BoonIndependent and Non-Executive DirectorMember of Audit Committee, Remuneration Committee and Nominating Committee Mr. Chew Seng HengNon-Independent and Non-Executive DirectorMr. Khong Kok ToongNon-Independent and Non-Executive DirectorTuan Haji Rozano Bin SaadManaging Director and Executive Director1.3.1 Chairman’s Profile(Shell Malaysia, 2013)Mr. Iain John LoMalaysian, Age 51ChairmanManaging Director of Sarawak Shell Berhad and Sabah Shell Petroleum Company Limited effective 1st July 2012 1987- University of California, Los Angeles (UCLA) Bachelor of Science in Civil Engineering 1988-UCLA, Master of Science in Civil Engineering
1990- Field Engineer in Sarawak Shell Berhad2009- Appointed board member to the Singapore Economic Development Board (Asian Talent Council for Royal Dutch Shell Plc) (Shell Malaysia, 2013)
1.3.2 Managing Directors’ Profile(Shell Malaysia, 2013)Tuan Haji Rozano Bin SaadMalaysian, aged 56Managing Director1984- College of Swansea, UK, Bachelor Degree in Mechanical Engineering 2001- Primal Leadership Award2004- Prime Minister’s Quality Award (Shell Malaysia, 2013)
2.0 Internal & External Environments2.1 Internal Environment FactorsThe internal environment of an organization means the events, entities, conditions and factors in an organization that influence its activities and choices, especially employee behaviour. Factors that are taken into count usually include the organization’s culture, mission and vision, and leadership styles.
(Business Dictionary, 2013) Business success in companies like Shell Malaysia is directly connected to its people and their ability to face both current and upcoming challenges. Therefore Shell Malaysia is always ready to invest in human development to develop its human resources. (Shell Malaysia, 2013) Shell Malaysia has a big advantage in resources as it is a part of Shell Global. Shell Malaysia provides an unique environment for its people to develop, mature and gain experience in downstream services.
The company trains its future leaders in safety, teamwork and managing society relations, and expose them to the operational, managerial and strategic side of the business while perfecting their abilities in environmental management. (Shell Malaysia, 2013) Other than structured training on soft and technical skills, the “Be Well” program is designed to reduce health risks by helping employees to adopt and maintain a healthier lifestyle. The “You are in Control” program which offers activities like health talks, weight loss workshops, and smoking cessation programs, took place in various locations with full success. (Shell Malaysia, 2013)
2.2 External Environment FactorsThe external environment of an organization includes certain events, entities, conditions and factors surrounding it that influence its activities and choices. External environment also determine the organization’s opportunities and risk. External environment is also known as operating environment. (Business Dictionary, 2013) 2012 was a year full of challenges for Shell Malaysia as energy demand remains in a state of flux. Global recovery was still fragile, and Asia still bore the impact from the Euro-zone financial crisis. In certain countries like China, energy prices remained uncertain and fluctuating continuously, which meant tight margins for Shell Malaysia.
Shell Malaysia’s respond was focusing on global reliability, keeping costs low and products quality high, all at the same time keeping things safe, efficient and also environmentally sensitive. (Shell Malaysia, 2013) Under these circumstances, competition among oil companies had never been so strong. Refining in Malaysia is more competitive than ever due to the appearance of new refining facilities with bigger capacities in the country.
Shell Malaysia is currently depending on its new project, Hijau, to refine more sour crudes with greater margin performances, and in turn, achieving greater cost competitiveness. To stand its ground in 2013, Shell Malaysia is focusing on improving its operational and financial performances, ensuring cost effectiveness, processing flexibility and plant reliability. (Shell Malaysia, 2013)
3.0 Ratio3.1 Profitability RatioProfitability ratio shows the final achievements of a certain business operation. Profitability ratio can be divided into profit margin ratio and rate of return ratio. (Prasanna, 2011)
Gross Profit MarginThis ratio represents the margin left after deducting production cost, measuring the efficiency of manufacture and also pricing. This margin can be affected by cost of goods sold, including labour, material cost, manufacturing overheads etc. (Prasanna, 2011) Net Profit Margin
Net profit, otherwise known as operation profit, shows the pure operation profits, not taking into count taxes and interests. It is the percentage of the remaining sales dollar after paying for the cost and expenses of the firm. A higher percentage is always preferred. (Pinson, 2008) Expense Margin
Chart of Profitability RatioRefer to Appendix 1
Gross profit margin remains at -0.87% during the period under review. There is a slight increase in net profit margin from -1.46% in 2011 to -0.81% in 012. Expenses margins decreased from 0.59% in 2011 to 0.06% in the following year. There was no change in gross profit margin because both sales and cost of sales increased synchronously. Net profit margin increased due to the increase in the Other Income section. Expense Margin declined because of the decrease in administrative expenses. The company should control its cost of sales to increase gross profit margin. The company must continue to minimize expenses to maintain the rise of net profit margin and also the fall of expenses margin.
3.2 Liquidity RatioLiquidity ratio calculates the ability of a business operation in satisfying its short-term obligations when they are due. Low or declining liquidity often means upcoming financial distress or bankruptcy, therefore liquidity ratios are useless indicators of a firm’s cash flow. Current ratio and quick ratio, also known as acid ratio, are two basic measurements of liquidity. (William L. Megginson)
Current RatioCurrent assets are assets that can be converted to cash within one year while current liabilities Current ratio measures a firm’s ability to meet its short term obligations. It shows the business operation’s ability to pay off liabilities due with assets it can access quickly. (Carlberg, 2009) Quick Ratio
The quick ratio, or acid-test ratio, is similar to current ratio except that inventory is excluded because it is the asset with least liquidity. Inventories are not easily sold because they might only be partially finished, or items for special purposes only, etc. Also, goods are usually sold on credit, which means it is debited into accounts receivable before converting into cash. (John R. Graham, 2009)
Chart of Liquidity RatiosRefer to Appendix 2Current ratio of Shell Malaysia increased in 2012 from the former 1.95:1 in 2011 to 2.1:1. There is a marginal increase in quick ratio from 1:1 in 2011 to 1.1:1 in 2012. Current ratio increased because there is a rise in trades receivable and fall in trades payable. On the other hand, quick ratio increased because of a slight decline in inventories. To increase current ratio and quick ratio, Shell Malaysia should use long term finance instead of short term finance.
3.3 Efficiency RatioEfficiency Ratio, or otherwise known as productivity ratio, shows a firm effectiveness in using its elements of production to provide satisfactory products and services, and generate profit. (Dooley, 2006)
Debtor Collection PeriodDebtor collection period represents the average number of days required to collect sales on credit. It represents the efficiency the firm possesses in granting and collecting credit sales. Usually, the shorter the debtor collection period, the higher cash holdings will be. (Giorgio Calcagnini, 2009) Credit over Payment
Credit over payment represents the number of days the firm takes to pay its creditors. The cash required in one time for a company to pay its creditors is partly dependent on the period of time taken to pay the firm’s creditors. (Fulford, 2000) Stock Turnover
Stock turnover is also known as inventory turnover, it represents the restock speed of a company. (Mayo, 2013) Fixed Assets Turnover The fixed assets turnover shows the ability of the company in using the property, plant and machinery in its disposal to generate sales. (R. Charles Moyer, 2008)
Chart of Efficiency Ratio
Refer to Appendix 3Debtor collection period has increased from 0.36 days in 2011 to 0.52 days in 2012. Credit over payment, however, has declined from 6.55 to 4.23 during the period under review. Stock turnover dramatically decreased from 42.44days of 2011 to 27.19 days of 2012.
Fixed assets turnover increased from 7.50 times to 8.61 times. Shell Malaysia has good working capital management because debtor collection period is shorter than credit over payment. Stock turnover declined because of good Fixed assets turnover increased because the company improved in utilizing its assets to generate sales. To maintain good debtor collection period and credit over payment, Shell Malaysia must collect debts faster than paying them. For better fixed assets turnover, fixed assets must be fully utilized to generate sales.
3.4 Investors RatioInvestors’ ratio represents the ability of a company to make profit from the money invested.
Earnings per ShareEarnings per share are the profit or loss after tax and interest accruing to shareholders for each outstanding share.
Chart of Investors Ratio
Refer to Appendix 4Earnings per share increased from -0.42 in 2011 to -0.32 in 2012. This is because Shell Malaysia has decreased its loss after tax. To increase profit after tax, Shell Malaysia should control its cost of sales and increase sales. 4.0 Long Term Sustainability
4.1 What is Long Term SustainabilityLong term sustainability has gained more and more attention following revelations on dwindling natural resources, global warming and other environmental issues. This business concept represents the ability of a company to manage and maintain its resources with consideration and responsibility to improve its chances of survival in the future. It is believed by many that long term sustainability is one major element in long-term success. (WiseGEEK, 2013) 4.2 Global Brand
Global Brand is the brand of one or more products which is known worldwide.Shell is known worldwide. Global brands have the advantage of many things including reputation, customer preference, and economies of scale in production. (QFINANCE-The Ultimate Resource, 2009) (Logo Share, 2013)
In 2013, the brand name Shell has ranked number 12 in the Global 500, number 1 in the Netherlands 50, and number 1 in the Brands of British Origin Top 50. According to results taken at 31st December, Shell has a brand value of 29,752million dollars with an enterprise value of 232,439million dollars. (Brand Finance, 2013)
To popularize its brand, Shell created and sponsored the Eco-Marathon which is a yearly competition in which contestants build vehicles that achieve the highest fuel efficiency possible. It has been held in Germany, UK, Finland, Japan, USA, France and more. Shell also sponsored the Ferrari team since it first appeared in Formula One in 1950. This partnership also exists in World Superbike and MotoGP racing, and other than promoting both brands, Shell has developed better fuels in the credit of this project. (Brand Finance, 2013)
4.3 ProductivityDespite the arduous operating environment, Shell Malaysia has proved its productivity by its creditable performance in overall circumstances. A total of 370,000,000 barrels were processed in 2012, compared to 280,000,000 barrels in 2011. Sales also increased from 85,200 per day in 2011 to 110,200 per day in 2012. (Shell Malaysia, 2013) (Shell Malaysia, 2013)
24 different kinds of crudes were processed successfully in 2012. To ensure that they were able to fully optimize their refining margin, the purchase of crudes were driven by the economic attraction of each relative kind of crude. (Shell Malaysia, 2013) (Shell Malaysia, 2013)
4.4 Corporate Social Responsibility
In Shell, there are twelve high risk operations in work which carelessness or failure to comply can cause serious injury or even death. For the safety of workers, The Life Saving Rules was launched in 2009. Shell Malaysia is determined to cultivate a culture of compliance and failure to comply with the Rules will result in disciplinary action, including removal from site or dismissed from post. (Shell Malaysia, 2013)
5.0 ConclusionAll in all, Shell Malaysia has a strong management team headed by Mr Iain John Lo as it provides a good training environment for its people. The corporate had withstood for more than 50 years since the 1960s, therefore the years of experience has given it a firm base for the future and evidence of its sustainability. Years since corporation has also allowed Shell Malaysia to expand and evolve into the Shell we see today.
Shell Malaysia belongs to the oil and gas industry, an industry which is quickly expanding with increase of demands for different sectors from all parts of the world. Also, Shell is no less the leader of this industry, which is why the future prospect of Shell Malaysia is bright and full of opportunities. Profitability is Shell Malaysia’s shortcoming for the recent years as it is operating on loss. As shown above, Shell Malaysia’s profitability ratio is hardly satisfactory.
However, there is evident progress in its profitability. The company made a loss of RM95 million last year, which shows great improvement when compared to loss of RM126 million in 2011. I am confident the company will be generating profit again in the near future. To survive the undercurrents of economic recession, Shell Malaysia is focusing on improving its operational and financial performance to ensure processing flexibility, high plant reliability and cost competitiveness.
The BOD has also promised to safeguard Shell Malaysia’s assets and people via asset integrity and employee safety programmes. Shell Malaysia is determined to learn from past unfortunate events in the industry, and to avoid untoward events from happening. As a conclusion to everything stated above, I greatly recommend investors to invest in Shell Malaysia as it has a strong brand reputation, elite employers and employees, and a bright future prospect.
6.0 BibliographyBrand Finance. (2013). Shell. Retrieved august 16, 2013, from Brand Directory: http://brandirectory.com/profile/shell Business Dictionary. (2013, 7 25). Business Dictionary. Retrieved 7 25, 2013, from InternalEnvironment: http://www.businessdictionary.com/definition/internal-environment.html Business Dictionary. (2013, 7 25). Business Dictionary. Retrieved 7 25, 2013, from External Environment: http://www.businessdictionary.com/definition/external-environment.html Carlberg, C. (2009). Business Analysis with QuickBooks. John Wiley & Sons. Dooley, D. (2006). BTEC National Business (Vol. 2). Heinemann. Dunne, P. M. (2013). Retailing (8th ed.). Cengage Learning.
Fulford, J. (2000). The Accountant’s Guide to Advanced Excel. Giorgio Calcagnini, E. S. (2009). The Economics of Imperfect Markets. John R. Graham, S. B. (2009). Graham’s Corporate Finance. Cengage Learning. Logo Share. (2013). Shell Logo. Retrieved august 19, 2013, from Logo Share: http://logo-share.blogspot.com/2013/02/shell-logo.html Mayo, H. B. (2013). Investments: An Introduction. Cengage Learning. Pinson, L. (2008). Anatomy of a Business Plan: The Step-by-step Guide to Building Your Business and Securing Your Company’s Future. aka associates. Prasanna, C. (2011). Financial Management (8 ed.). Tata McGraw-Hill Education. QFINANCE-The Ultimate Resource. (2009, august 16). QFINANCE-The Ultimate Resource. Bloomsbury Information Ltd. R. Charles Moyer, J.
R. (2008). Contemporary Financial Management. Cengage Learning. Shell Malaysia. (2013, 7 19). SHELL REFINING COMPANY (FEDERATION OF MALAYA) BERHAD [S] (4324). Retrieved 7 19, 2013, from BURSA MALAYSIA: http://www.bursamalaysia.com/market/listed-companies/list-of-companies/plc-profile.html?stock_code=4324 William L. Megginson, S. B. (n.d.). Introduction to Corporate Finance, Abridged Edition. Cengage Learning. WiseGEEK. (2013). Long Term Sustainability . Retrieved august 19, 2013, from WiseGEEK: http://www.wisegeek.com/what-is-long-term-sustainability.htm
7.0 Appendix7.1 Appendix 1
FormulaCalculation for 2012 (‘000)Calculation for 2011 (‘000)Gross Profit MarginGross Profit/Sales x 100%(131,633)/15,086,427 x 100% = -0.87%(97,910)/11,212,679 x 100% = -0.87%Net Profit MarginNet Profit/Sales x 100%(121,585)/15,086,427 x 100% = -0.81%(163,813)/11,212,679 x 100% = -1.46%Expenses MarginGross Profit Margin-Net Profit Margin-0.87%-(-0.81%) = -0.06%-0.87%-(-1.46%) = 0.59%
7.2 Appendix 2
FormulaCalculation for 2012 (‘000)Calculation for 2011 (‘000)Current RatioCurrent Assets/Current Liability2,418,807/1,175,506= 2.1:12,709,706/1,391,069= 1.95:1Quick RatioCurrent Assets-Stock/Current Liability2,418,807-1,133,554/1,175,506 = 1.1:12,709,706-1,315,114/1,391,069 =1:1
7.3 Appendix 3
FormulaCalculation for 2012 (‘000)Calculation for 2011 (‘000)Debtor Collection PeriodTrade Debtors/Sales x 36521,633/15,086,427 x 365= 0.52 days10,975/11,212,679 x 365 = 0.36 daysCredit over PaymentTrade Creditors /Sales x 365174,769/15,086,427 x 365 = 4.23 days201,165/11,212,679 x 365 = 6.55 daysStock TurnoverClosing Stock/Cost Of Sales x 3651,133,554/15,218,060 x 365= 27.19 days1,315,114/11,310,589 x 365= 42.44 daysFixed Assets Turnover
Sales/ Fixed Assets15, 086, 427/1,751,425 =8.61 times11,212,679/1,494,369 =7.50 times
7.4 Appendix 4
FormulaCalculation 2012 (000’)Calculation 2011 (000’)Earnings per Share (EPS)Profit after Tax/No. of Ordinary Shares(94,660)/300,000= -0.32(125,744)/300,000= -0.42