Abacus Distribution plc - Research Paper Example

Abacus Distribution plc Question Investments: The major investments undertaken by the company has been the acquisition of two companies, Deltron in January 2004 and the purchase of Axees Technologies Group in April 2006. The successful merger of the former two companies into the Abacus group has resulted in cost savings to the tune of 5.5 Million. With these acquisitions, it is believed that there would be a major thrust in the financial markets. This has also resulted in the consolidation of the product markets by Abacus and it is now positioned as the 5th largest distributor of electronic components in the industrial markets in Europe. (Annual Report and Accounts. 2006). The changes from GAAP to IFRS have brought about a major transformation in the treatment of Goodwill in accounting records. In the earlier accounting periods, goodwill was amortized through the profit and loss account, along with other intangible assets, but under IFRS, good will valuation is reviewed through a yearly goodwill impairment evaluation method. (Amortisation of Acquired Intangibles and Exceptional Items). Capital: On 30/9/2006, the Net Bank debt was to the tune of 61.4 Million due to the amounts of 12.1 million and also 1.8 million acquired from Deltron and Axees Technologies. A sum of 6.9 million was also paid towards purchase consideration for the acquisition of Axees Tech. (Cash flow and working capital. 2006). These factors have increased the operating capital requirements for the Company. During earlier years, the Deltron business had reduced working capital to such an extent that the needs of the customers were not being met, with the integration of these companies into the Abacus fold, the situation would improve considerably in future years. Since Abacus enjoys invoice discounting facilities with the banks, there are reduced pressures for the minimizing the debtors levels. However, there is further need for exercising greater control over the working capital needs, and to bring it down to lower levels once the integration is totally carried out. The financial policy of the company has been to make sure that adequate financial resources are made available in a cost-effective manner. At Abacus, no speculative transactions are carried out and all foreign currency transactions are recorded at their projected levels. Dividends: Dividends: the dividends declared by the Company are as follows: 1. In the year 2002 - 9.7 Pence 2. In the year 2003 -10.2 Pence 3. In the year 2004 - 10.5 Pence 4. In the year 2005 - 7.2 Pence 5. In the year 2002 - 7.2 Pence (Annual Review and Accounts. 2006). The fall in the dividend rate is a major matter of concern for the shareholders. it is found that the dividend rate has remained unaltered in 2005 - 2006. The management feels that with increased operational performance, in future years the rate of dividend could be improved in future years. Question 2 Market Value Added The Market value added could be seen as the difference between the market value of Abacus stock - the equity capital of shareholders. In this case, the market capitalization value is 53. 32M on 13.11.2007. (Abacus Group PLC; Holding(s) in Companies.( 2007). The equity capital available to shareholders is 80.2M Therefore the MVA = 80.2-53.32 = 26.88 (In the absence of market cap. figures for 2005 and 2006 the figures could not be provided) Market Book Values During 2004, EPS stood at 5.4 p (Abacus Group) (Abacus Group plc. 2004). and the Book value of the share price=0.5p, therefore, the Market Book Value would be 5.4 X 0.5 =2.7 During 2005, the EPS stood at 14.1p (Financial review: earnings per share 2005). and the Book value of the share price=0.5p, therefore, the Market Book Value would be 14.1x 0.5 = 7.05 (Note: In the absence of Market Value of Abacus share as on 30.11.2004 & 2005, the calculation has been based on EPS valuation) Again the Market book value could be Market Price per share/ Book value per share In this case it is seen Market Value per share = 72.75 P and the book value is 5 pence Therefore the Market book value is 72.75/ 5 = 14.55 Shareholders Returns: The Shareholders returns were 15% in the year 2004 and 13% in 2005 (Abacus Group plc P. 6). However, in year 2006, there would be no net amount available to shareholders since there is amortization of acquisition and intangible receipts. (Consolidated income Statement. 2006). Question 3: Discussion of the company's performance from the shareholders' perspective; The perspective of the shareholders would be in terms of the safety and growth potential of the investments and the annualized returns on the investments. It is seen that although the investments seen to be safe, their growth potential seems to be of the downward trend. However, this could be attributable to the series of acquisitions and mergers taken place in the Company. The rate of return on capital is between 17.5 % in 2002 down to 10.0% in 2006. Therefore, it is seen that the rate of returns has fallen by 7.5 % in just 5 years time. Also the dividend rate has been 7.2 P /share for the last two years. Considering the fact that the share movements are not showing upward trends and dividends are not rising, it would not be a very promising for future investments. Risks: There are no apparent risks to the Company since the asset base is quite large and realizations from debtors are bank secured. However, the effects of several aspects of the Company with regard to changes occurring due to change of accounting policy from GAAP to IFRS has to be considered on a long-term basis. It becomes necessary to fully understand the various impacts over a longer period of time of the Company's performance. Wealth creation: Profitability and its resultant wealth creation could be done either by increasing revenue generation or by cutting costs and rendering savings. In this case, since the Company is operating in a competitive global market, which may be price sensitive, it is necessary to achieve economies of scale by entering to trade cartels, acquisitions , mergers, etc so that competitors could be downsized and markets expanded. This is precisely what Abacus is focusing on and it is believed that it could hold the key for future wealth generation of this Company. On their part, it is seen that the Directors are leveraging business opportunities for optimum wealth creation for shareholders Market assessment. The market assessment of the value of the Company is based on several factors Goodwill of the company Management team Social conduct and awareness of social commitments and environmental protection Strategic alliances with vendors, suppliers, customers and employees. It could be said that the ultimate objective of any company is stockholder wealth creation, which translates into maximizing the price of the firm's common stock. (Eugene & Ehrhardt 2004). APPENDIX Formulas: Market Value Added = Market Value of Stock - Equity Shareholders Capital Market Book Ratio = Market Value Per Share Book value Per Share Shareholders Returns = Net Income for shareholders Common Equity Bibliography Abacus Group PLC; Holding(s) in Companies. (2007). [online]. Yahoo Finance. Last accessed 13 November 2007 at: http://uk.biz.yahoo.com/31102007/323/abacus-group-plc-holding-s-company.html Annual Report and Accounts. (2006). Financial Review. [online]. Abacus Group. Last accessed 13 November 2007 at: http://www.abacus-group.co.uk/jkcm/cache/fl0000299.pdf Annual Review and Accounts. (2006). Five Year Summary P. 80. [online]. Abacus group. Last accessed 13 November 2007 at: http://www.abacus-group.co.uk/jkcm/cache/fl0000299.pdf Cash flow and working capital. (2006). Financial Review. Annual Report and Accounts. [online]. Abacus Group. Last accessed 13 November 2007 at: http://www.abacus-group.co.uk/jkcm/cache/fl0000299.pdf Consolidated income Statement. (2006). Annual reports and accounts. [online]. Abacus group. Last accessed 13 November 2007 at: http://www.abacusgroup.co.uk/jkcm/cache/fl0000299.pdf Eugene, Brigham F & Ehrhardt, Michael C (2004). Financial Management: Theory and Practice. 10th ed. Thomson Asia Pte. Limited: Singapore. Abacus Group plc. (2004). [online]. For Immediate Result. Last accessed 20 November 2007 at: http://www.promax.dk/pdfs/InterimsVersion.pdf Financial review. Earnings per Share. (2005). [online]. Last accessed 20 November 2007 at: http://www.abacus-group.co.uk/jkcm/cache/fl0000444.pdf Abacus Group plc. P. 6. Last accessed 20 November 2007 at: http://www.abacus-group.co.uk/jkcm/cache/fl0000444.pdf. Read More