Reg Vardys Financial Analysis - Case Study Example

Reg Vardy PLC Reg Vardy PLC (Reg Vardy) is one of the leading distributors of vehicles in the United Kingdom. To the firm has a total of 98 dealerships. Distribution line comprise of prominent marques such as Aston Martin, Renault, Alfa Romeo, Audi, BMW, Citroen, Fiat, Mercedes and Jaguar among others. This paper analyses the firm's financial health by deriving the relevant financial ratios as the basis for assessment. Furthermore, this paper provides a comparative analysis between the company and its rival Pendragon PLC (Pendragon). Apart from these, it also discusses the feasibility of the possible acquisition of Reg Vardy by Pendragon in light of the reported acquisition offer of the latter. Company Background The company, which is named after founder Reg Vardy, is one of the leading motor retail groups in the United Kingdom. Reg Vardy was initially established as a haulage business at Houghton-le-Spring. Due to the success of the business, it diversified into the sale of vehicles (Yahoo! Finance 2005). Under the leadership of the founder's successor, Chief Executive Officer Sir Peter Vardy, the firm acquired franchises from a number of the finest motor and car manufacturers in the world. Through the course of the company history, Reg Vardy was appointed as the sole distributor of Aston Martin for the North of England. This was followed by the company's franchise of Ferrari and Rolls Royce. Reg Vardy was also awarded the main dealer franchise for other marques such as Jaguar/Daimler, Mercedes and BMW among others. (Company History 2005) In 1989, Reg Vardy became listed in the London Stock Exchange. The initial flotation has raised about 5 million and allowed for expansion outside North East Heathen. With this, the company expanded further as it acquired more dealerships from other volume marques. (Company History 2005) To finance its expansion binge, the company issued rights in 1998 and raised 26 million. The fund was used to acquire Trust Motor Group, the firm's largest acquisition to date. In the same period, the company also established Vardy Contract Motoring, which is focused on the contract hiring and leasing operations (Company History 2005). This year, Reg Vardy pushes through with its strategic acquisitions given the upcoming purchase of five dealerships from the Priory Motor Group. This highlights the company's strategy of acquiring performing and high quality business that accounts from payments of goodwill. (Reg Vardy PLC Annual Report 2005) So far, Reg Vardy sells about 200,000 vehicles annually and employs around 6,000 workers. It has also substantially increased its total franchises to 98 dealerships in 2005 from only 63 dealerships in 1998 (Reg Vardy PLC Annual Report 2005). The company continues to distribute new and used cars for Aston Martin, Renault, Alfa Romeo, Audi, BMW, Citroen, Fiat, Mercedes and Jaguar. Its major shareholders include the Vardy family (28%), Deutche Bank (20.6%) and Aegon (3.59%). (Yahoo! Finance 2005) Financial Highlights Table 1 - Balance Sheet Balance Sheet (in millions) 2005 2004 2003 2002 2001 Assets Current Assets Cash and Equivalents 39.2 24.3 45.5 39.7 12.0 Receivables 73.6 66.6 61.9 52.6 64.0 Inventories 243.2 247.5 174.8 123.1 128.2 Other Current Assets 14.5 12.0 15.0 6.5 8.5 Total Current Assets 370.5 350.4 297.2 221.9 212.7 Property Plant and Equipment-Net 180.9 181.7 154.8 162.0 165.6 Intangible Other Assets 3.5 3.2 1.3 1.3 1.8 Other Assets 3.5 3.2 1.3 1.3 1.9 Total Assets 555.0 535.3 453.3 385.2 380.3 Liabilities and Shareholders' Equity Current Liabilities Accounts Payable 186.2 184.3 146.9 96.5 78.8 Short-Term Debt 34.1 38.7 70.1 42.3 35.7 Other Current Liabilities 44.4 37.0 28.8 25.6 47.3 Total Current Liabilities 277.2 271.3 256.8 174.5 169.3 Long-Term Debt 47.9 49.7 12.7 53.0 57.1 Provision for Risks/Charges 5.4 1.2 1.4 2.8 4.0 Deferred Taxes 6.4 5.9 5.1 4.1 4.8 Other Liabilities 12.6 10.8 6.3 1.7 12.4 Total Liabilities 349.4 338.9 282.3 236 247.6 Shareholders' Equity Ordinary Share or Common Stock 5.6 5.9 5.9 5.8 5.8 Capital Surplus 54.1 54.0 52.6 49.9 49.5 Retained Earnings 145.9 137.3 113.6 94.5 78.3 Ordinary Share Equity 205.5 196.4 171.0 149.1 132.6 Total Liabilities and Share Equity 555.0 535.3 453.3 385.2 380.3 (Reg Vardy PLC Annual Report 2005) Table 2 - Income Statement Income Statement (in millions) 2005 2004 2003 2002 2001 Turnover 1,717.9 1,610.4 1,325.4 1,387.6 1,303.5 Cost of Goods Sold 1,481.3 1,382.8 1,126.9 1,185.1 1,109.1 Gross Income 223.3 215.0 182.9 183.9 176.3 Depreciation and Amortisation 13.3 12.5 15.6 18.6 18.1 Selling, General and Admin Expenses 184.3 170.6 145.2 146.3 145.8 Operating Income 39.0 44.5 37.7 37.6 30.5 Non-Operating Interest Income 0.8 0.5 1.3 0.6 0.4 Other Income/Expense 6.4 5.6 4.4 1.0 0.1 Interest Expense on Debt 5.7 5.0 4.8 6.6 6.8 Pre-tax Income 43.8 45.6 38.8 32.6 24.3 Income Tax 11.1 12.3 10.6 9.9 7.8 Net Income 32.7 33.3 28.1 22.7 16.5 Earnings per Share (pence) 57.6 57.7 49.5 40.1 29.6 Dividends per Share (pence) 17.6 16.0 14.3 13.0 12.0 (Reg Vardy PLC Annual Report 2005) Financial Ratios Table 3 - Financial Ratios Profitability Ratios 2005 2004 2003 2002 2001 Net Profit Margin 1.9% 2.1% 2.1% 1.7% 1.2% Industry Average -302.9% 5-Year Company Average 1.8% 5-Year Industry Average -184.6% Gross Profit Margin 13.0% 13.4% 13.8% 13.3% 13.5% Industry Average 11.4% 5-Year Company Average 13.4% 5-Year Industry Average 17.7% Asset Turnover 3.1 3.0 2.9 3.6 3.4 Industry Average 1.3 Investment Ratios 2005 2004 2003 2002 2001 Price Earnings Ratio 8.5 6.5 4.6 8.8 10.1 Industry Average 9.2 Payout Ratio 0.31 0.28 0.29 0.32 0.41 Return on Equity 16.6% 19.5% 18.9% 17.1% 13.1% Industry Average -35.6% 5-Year Company Average 17.0% 5-Year Industry Average -10.1% Liquidity and Leverage Ratios 2005 2004 2003 2002 2001 Net Working Capital Ratio 0.17 0.15 0.09 0.12 0.11 Current Ratio 1.3 1.3 1.2 1.3 1.3 Industry Average 5.1 Debt Equity Ratio 23.3% 25.3% 7.4% 35.5% 43.0% Industry Average -145.5% Interest Coverage 8.6 10.0 9.1 5.9 4.6 (MSN MoneyCentral 2005) Analysis of Financial Results and Ratios Based on the above financial highlight, it can be seen that Reg Vardy managed to pose a 6.7% growth in turnover, to 1.7 billion in 2005 from 1.6 billion in the previous year. However, this level of increase is way below the industry average of the miscellaneous manufacturing group. According to MSN MoneyCentral, the company's sales growth differs from the industry average by -123.7 percentage points. In addition, the firm generated profits on ordinary activities after taxation of about 32.7 million in 2005, which is about 1.9% lower that its earnings for 2004. The reduction in earnings is attributed to the adverse impact of declining volumes of new vehicles sold to private customers in the United Kingdom. The company reported that the reduced demand significantly impacted the retail sector particularly in the smaller cars segment. Furthermore, Reg Vardy declared that the decrease in earnings is due to the effect of the company's investment in acquired and start-up businesses, which are said to be exhibiting lackluster performance relative to the company's core dealerships. (Reg Vardy PLC Annual Report 2005) In terms of profitability, the firm posted a net profit margin of 1.92% in 2005. This is higher than the company's five-year average of 1.8% and the industry average of -302.9%. This may mean that the company has somehow maintained its ability to efficiently generate profits given a particular level of sales (Brealey, Myers & Marcus 1995). This can also be said of how the company utilises its assets. The current year asset turnover ratio of Reg Vardy is about 3.1. This figure is not far from the firm's five-year average and better than the industry average of 1.3. Indicative of the company's financial health, the firm posted an average return on equity of about 17.0%, substantially higher than the industry average of -10.1%. Reg Vardy's earnings per share is also steadily increasing from about 29.6p in 2001 to 57.6p in 2005. To date, the firm's price-earnings ratio stands at 11.4, higher than the industry average of 9.2 (MSN MoneyCentral 2005). It should be noted that the company's share price has increased by 38.5% in the past twelve months, a difference of 33.2 percentage points from the industry average. As an additional sweetener for investors, the company has a payout ratio of around 0.3 in 2005 as it increased the full year dividend from 16.0p to 17.6p, a 10% year-on-year increase. This signifies the company's Board of Directors' confidence in its future. (Reg Vardy PLC Annual Report 2005) Given Reg Vardy's liquidity ratios, it can be inferred that the company has sufficient current assets to cover its short-term obligations. The firm has a current ratio of about 1.34, which means that it has 134p in current assets to cover every 100p of current liabilities. Furthermore, the company has generated more than sufficient earnings to service interest payments as indicated by its interest coverage of 8.6. This is higher than the liquidity threshold of 1.5 (Investopedia). This may imply that the firm has ample current assets to cover arising interest expense. In terms of financial leveraging, note that the capital structure of the company is comprised of shareholders' equity funds, bank loans and overdraft facilities, and fixed interest rate debt from finance houses. As at end-April 2005, the company has committed bank loan and overdraft facilities of 50 million and 15 million, respectively. Reg Vardy also has significant committed lines of funding with a wide range of finance house to fund the planned long-term expansion of its subsidiaries. To manage the risk of fluctuation in interest rates, the firm has already forged treasury contracts. (Reg Vardy PLC Annual Report 2005) Reg Vardy's capital structure spawned a debt equity ratio of 23.3%, way above the industry average of -145.49%. However, the firm managed to improve its net debt position to 212 million in 2005 from 45.9 million in 2004. As such, the company reported that its gearing fell to 10.3% from 23.3% (Reg Vardy PLC Annual Report 2005). This is favorable for Reg Vardy's shareholders as greater earnings could be allocated for them, as there is lower fixed interest cost to be serviced (Brealey, Myers & Marcus 1995). Competitor Comparison One of Reg Vardy's most formidable competitors is Pendragon, the top vehicle dealer in United Kingdom. Pendragon is the sole retailer of Cadillacs in the country and biggest distributor of Harley Davidson motorcycles outside the United States. It is headed by Trevor Finn and Sir Niger Rudd, a takeover specialist with good track record of integrating deals. (Verjee 2005) Using the financial results in the past twelve months, Reg Vardy and Pendragon are compared as follows: Table 4 - Comparative Analysis Reg Vardy Pendragon Total Sales 1.72 billion 3.17 billion Total Income 32.7 million 44.1 million Sales Growth 6.7% 72.3% Income Growth -1.9% 44.7% Net Profit Margin 1.9% 1.4% Asset Turnover 3.1 2.4 Company Price Performance 38.5% 49.8% Return on Equity 16.6 30.0 Current Ratio 1.3 0.9 Debt Equity Ratio 23.3 159.9 (MSN MoneyCentral 2005) Being a relatively larger company, with a total of 236 franchises in the United Kingdom, Pendragon generated higher total sales and income as compared to Reg Vardy. Its sales and income growth also proved promising as it posted sales and income growth rates substantially higher than Reg Vardy's. In terms of financial health, Reg Vardy posted better figures with better net profit margin and much lower debt equity ratio. This means that Pendragon has a higher financial leverage as compared to Reg Vardy. In terms of company price performance, both companies have exhibited notable increase in share price in the past twelve months. However, Pendragon's share price has jumped by almost 50%, 10% higher than Reg Vardy's level of increase. Company News Spawned by the recent increases in the company's share price and good financial health, it is reported that Pendragon is currently negotiating for the potential acquisition of Reg Vardy (Pendragon Approaches Vardy 2005). Allegedly, the offer price is set at 750p per share at a total acquisition cost of about 420 million, of which 118 represents the Vardy family's 28% shareholdings (Verjee 2005). This will be financed through Reg Vardy's asset (Pendragon upgraded to buy 2005). According to analysts, the deal would result in the reduction of Pendragon's interest costs by 8 million and generation of working capital efficiency of about 50 million in over two years under the assumption of absence in growth (Pendragon upgraded to buy 2005). Furthermore, the acquisition would augment the annual sales and income of the consolidated company by 1.8 billion and 100 million, respectively with combined 350 franchised dealerships (Pendragon in bid talks with Reg Vardy 2005). This positive outcome is expected since the acquisition would offer both companies with cost savings from potential streamlining of operations. More importantly, the acquisition is deemed synergistic and would fill in the gaps in terms of the geographical coverage of the two distributors (Verjee 2005). This planned acquisition would be the second biggest takeover by Pendragon in two years. It has considered Reg Vardy as target after its deal with CD Bramall has protected the company from recent industry slump and enhanced its bottomline figures (Winning 2005). Reg Vardy is currently valued at 375 million or 668p per share before the announcement. However, analysts forecast that the company's shareholders may opt for a higher price as mentioned since a number of its properties have not been revalued sin 1989. (Sector Movers: Autos full throttle 2005) Given that Pendragon is valued only at 532 million, some analysts are doubtful of its ability to finance the acquisition. However, market response regarding the announced negotiation was generally positive as share prices of both companies increased following the announcement. Investors have clearly perceived the advantages of major car dealers becoming bigger to maintain sustainable growth and competitive edge. Conclusion To summarise, Reg Vardy has posted respectable return and is in good financial health as indicated by its profitability, efficiency, liquidity and leverage ratios. Furthermore, the upward trend in the company's share price indicates investors' confidence in its future opportunities to engage in high-yielding undertakings. This is reinforced by the increase in the firm's dividend payout, which may have sent positive signals to the market. As the company intends to be a beneficiary of market consolidation as stated in its annual report, Reg Vardy may consider the proposed acquisition of its biggest rival Pendragon. This would result in the consolidated company's economies-of-scale as their operations complement each other in terms of geographical coverage or market reach. Such would enhance the resulting company's competitive edge as it captures a bigger market share. Albeit there has been no final agreement, the initial phase of the negotiation is met optimistically by both analysts and investors as indicated by the increase in both companies' share price. The potential downside to this is that some employees may have to be retrenched should their job scope be classified as redundant. The rationalization of operations may have a positive effect on earnings due to cost savings derived. On the contrary, this may negatively affect bottomline as the downsizing procedures may have adverse impact on employee morale and productivity. In view of the above, Reg Vardy's Board and management should undertake all measures to ensure that shareholders' value is maximized. They should cautiously consider if the proposed acquisition terms would truly bode well for its current stakeholders and use sound judgment to determine the effects on the overall well being of the company. Works Cited Brealey, R.A., Myers, S.C. and Marcus, A.J. (1995). Fundamentals of Corporate Finance, McGraw-Hill, Inc. "Company History", (Reg Vardy PLC), Available: http://www.regvardy.com/company_history.htm (Accessed: 19 November 2005). Reg Vardy PLC Annual Report. (2005) MSN MoneyCentral. Available: http://uk.moneycentral.msn.com (Accessed: 19 November 2005). "Pendragon Approaches Vardy", (Yahoo!), Available: http://uk.biz.yahoo.com/051116/214/fx15v.html (Accessed: 19 November 2005). "Pendragon upgraded to buy", (Yahoo!), Available: http://uk.biz.yahoo.com/051117/322/fx5r4.html (Accessed: 19 November 2005). "Sector Movers: Autos full throttle", (Yahoo!), Available: http://uk.biz.yahoo.com/051117/214/fx5d7.html (Accessed: 19 November 2005). Verjee, N. "Rudd scorns critics with 408m offer for Reg Vardy", (Times Online), Available: http://business.timesonline.co.uk (Accessed: 19 November 2005). Winning, D. "Pendragon looks to get Reg Vardy in tow", (Manchester Evening News), Available: http://www.manchesteronline.co.uk/men/business/s/182/182219_pendragon_looks_to _get_reg_vardy_in_tow.html (Accessed: 19 November 2005). Yahoo! Finance, Available: http://uk.finance.yahoo.com (Accessed: 19 November 2005). Read More