Operating Position and Financial Situation of Travis Perkins Plc - Essay Example

Operating Position and Financial Situation of Travis Perkins Plc Table of Contents Table of Contents Introduction 4 Mission of the Company 4 Business Environment of the Company (PESTEL Analysis) 5 Political Factors 6 Economic Factors 6 Technological factors 7 Environmental Factors 7 Legal Factors 7 SWOT Analysis of the Company 8 Strength 8 Weakness 8 Opportunity 9 Threat 9 Long Term Strategy 9 Financial Strategy 10 Enhancing Profitability 10 Generation of Cash Flow 10 Weighted Average Cost of Capital 11 Market Share Maximization and Cash Generation 11 Retained Earnings 11 Working Capital 11 Borrowings 12 Performance over Last Three Years 12 Borrowings 12 Returns to Shareholder 13 Financial Innovation 13 Spreadsheet Analysis 14 Profitability Situation 14 Liquidity situation 14 Gearing and solvency situation 15 Reference 15 Introduction Travis Perkins plc is a leading company in the builders’ merchant and home improvement markets. It is the largest supplier of building materials in the United Kingdom. The principal activities are the sale of building materials, timber, heating and plumbing products, and the hiring of tools to the industry, building trade and the general public, within UK (Ukgbc, 2013, p.1). On 11 March 2011, it acquired the BSS Group plc which was the parent company of Buck & Hickman and a market leading distributor to specialist trades. Travis Perkins is the main supplier to the building and construction sector. It has also acquired ToolStation on 3rd January 2012. The merger of Travis Perkins and the BSS Group creates a new British plc. The company will now operate 19 separate businesses from over 1,700 branch location across the UK (Kilby, 2011, p.1). Mission of the Company The mission describes the basic function of the company in the society, in terms of the product and services it produces for its customers. It includes purpose, strategies and scope, values and standards and behaviour of the organisation. The purpose for the existence of Travis Perkins is to create wealth for the shareholders and to satisfy the needs of its employees, creditors and the society. They seek mutual benefits with all stakeholders, think about the impact of their actions and they search for similarities between their decisions and customers expectations. The strategies and the scope of the company include the competences through which it tries to succeed and its method of competing. It provides complete building material solutions to everyone creating, repairing, maintaining and improving the built environment, thus helping to build Britain. They guarantee that anyone in Britain who wants to contact for any kind of building material through any form of supply channel will have Travis Perkins operation as their first choice. It defines the nature of their business. The standards and behaviour of Travis Perkins includes delivering deliver better returns by growing the best businesses with operations and outstanding people. They actively work with each other; when something goes wrong, they fix the problem in spite of blaming others. They challenge themselves how they work and they look for fresh ideas that are different from others. They apply rules where it is necessary. The values which they offer are: they understand their customer needs, treat them with respect, beat their expectations and know their major customers personally. They say what they actually offer, listen and respond impartially and they explain their decisions. They prepare themselves with the skills which are needed to perform. They enjoy being the best; they know exactly what each of them is expected to achieve and they focus on getting results. This is a great company and they make work enjoyable for everyone (Hemscottir, 2011, p.6). Business Environment of the Company (PESTEL Analysis) The environment of the company is defined as the aggregate of events, conditions and influences that affect an organization in the way it is doing things. PESTEL analysis consists of political, economical, social, technological, environmental and legal factors which affect the business environment of the company. PESTEL analysis is done to provide a broad framework on how the broader environment forces affects an organization and influences the way a firm practices strategy. It is used to look at the future impact of environmental factors, which may be different from the past impact. Political factor which may affect the company comprises of government attitude, government stability, licensing & quotas and subsidies & protection. Economic factor consist of GDP, inflation & interest rates, economic cycles, currency stability, capital market & forex reserves, and FDI & FII inflows. Social factors comprises of diversity, population, religious sentiments, literacy levels and language barriers. Technological factors which may affect the company comprises of innovation, patents, obsolescence rate, research & development and technological convergence. Environmental factor consist of product design, extended producer responsibility, environmentally preferable purchasing, waste disposal & emission, carbon credits and pollution control. Legal factor which may affect the company consist of FERA Act, MRTP Act, employment laws, direct and indirect taxes, product safety and health hazards, patent laws, land acquisition laws and consumer protection laws. But it is not necessary that all factors will have an impact on the company (Kotler and et al, 2009). Political Factors Political factors which affect the reputation of the company are as follows: The Company is exposed to litigation, including that related to asbestos and environment pollution and product liability. Government pressure is also there to reduce carbon emission which may result in significant changes to the new build market (Hemscottir, 2011, p.53). Economic Factors Economic factors are as follows: The economic factor which is affecting the company is the interest rate fluctuation. The company has borrowed in Sterling at floating rates, whereas it’s US$ denominated notes have fixed rate of interest (Hemscottir, 2011, p.50). Technological factors The technological factors which positively effect the environment of the company are as follows: The operations of the company depend on the wide range of information technology system which is operating efficiently. Maintenance is undertaken on a continuous basis to make sure the flexibility of group systems and escalation procedure are in place to determine any performance issues at an early stage. On a regular basis, two data centres represent each other with data processing switched from one to the other. IT disaster recovery plan is tested on a regular basis together with the business continuity plan for both retail and trade businesses (Hemscottir, 2011, p.52). Environmental Factors The Environmental factor of Travis Perkins plc is as follows: 5% of its earnings before interest and tax come from profit on sale of environmental technologies including insulation and profit from timber product sales to customers and also from reduced waste and energy costs which is a net of environmental operating costs. They were involved in the production of a Sustainable Housing Action Plan report on the Community Green Deal. They supply detailed information to the Carbon Disclosure Project, Waste and Resources Action Plan, and Forest Footprint Disclosure Project. They also provide waste services to their customers by taking back the waste materials. These all factors are positively effecting the environment of the company. (Hemscottir, 2011, p.37). Legal Factors The legal factors are as follows: Product safety and product quality and health hazards are the main factors which effect the environment of the company. In a retail and trade business, product quality and security of supply of products are monitored by product category directors. The company has an in-house legal team, which together with environmental and health & safety experts, monitors the changes in legislation that affect the company and allow it to take timely action to ascertain that any impacts are reduced (Hemscottir, 2011, p.52). SWOT Analysis of the Company SWOT analysis is done to know the strength, weakness, opportunity and threat of the company. It helps the company to capitalize on the opportunities by maximizing its strengths, minimizing the weakness and by neutralizing the threats. It is one of the earliest models in environment scanning (Kotler and et al, 2009, p.50). Strength One of the strength of the company is its strong human resources. The hard working employees delivered excellent results for the shareholders in difficult circumstances (Hemscottir, 2012, p.13). They are critical towards the company success. Increased revenue with a continuing focus on cost reduction, cash generation and margin protection has produced an excellent result in the economic circumstances. They have strong working capital management, with tight control on capital expenditure. There was an ample progress in spite of the recession (Hemscottir, 2011, p.12). Weakness The Company is exposed to litigation, including that related to asbestos and environment pollution and product liability. Government pressure is also there to reduce carbon emission. Opportunity The successful implementation of strategy in order to improve the business resulting in becoming the most attractive supplier in the market and also to outperform their competitors are the initiative that gave them opportunity to capture economies of scale and synergies through purchasing into low cost, highly efficient and powerful central function and also through centralisation of common activities. Implementation of the strategy gave them chance to acquire BSS. Over the last three decades, the company has experiences rapid growth and now trades from 103 outlets (Hemscottir, 2012, p.14). Threat The threats regarding the company are that the company is exposed to liquidity risk, foreign exchange risk, interest rate risk, capital risk, credit risk and tax risk. So, the company is adopting different policies to minimise the adverse effects of these risks on financial performance and net assets (Hemscottir, 2011, p.49). Long Term Strategy They are pursuing the vision of ensuring that anyone in the United Kingdom who wants materials to construct, improve or repair the built environment will prefer Travis Perkins business as their first choice. So, in order to achieve this, their long term strategies are: They will offer best products to customer in each market through a low risk programme of continuous improvement. Second strategy is that by applying their business model of tight cost control, margin management, strong alignment of accountability and incentives and clear focus on capital returns have the highest operating margin in each sector. In terms of revenue growth and returns, this approach has produced sector-leading performance and permits them to grow their asset base in order to achieve powerful positions in each sector. Over the last four years there was a turning point in construction markets, during the course of recession i.e. a sharp downturn, a return to stability and a gradual recovery. At each turn they adapted their position to trading, investment and cash. They put more investment back in as the market stabilised and committed to a major acquisition as growth returned last year. These actions mean that they have placed themselves with a large footprint in the sector, a leading position in heating and plumbing. The growth strategy of the company is based on a combination of external expansion and self-help initiatives. This strategy is delivering increased sales and increasing market share while they monitor both their performance and market conditions to keep ahead their competitors. They will retain their policy of continuous improvement by taking a number of small steps in a large number of areas (Hemscottir, 2011, pp.22-24). Financial Strategy Enhancing Profitability The long term financial strategy of the company involves improving profitability with the help of a medium term target for profit growth, increasing the market share of the company by way of sales growth and targeted expansion through brown field openings, acquisitions and in-store development. Generation of Cash Flow It also includes generating adequate free cash flow to facilitate the company to expand its operations though funding attractive returns to shareholders and reducing its debt and pension deficit. Weighted Average Cost of Capital The company engages itself in operating an efficient balance sheet through structuring sources of capital in order to minimise the company’s weighted average cost of capital reliable with maintaining an financial profile along with the ratio of net debt to earnings before interest tax depreciation and amortization being between one and two and a half times. Market Share Maximization and Cash Generation The other financial strategy is applied to maximize the cash generation for the company. It also emphasizes on maximizing market share by increasing its penetration in the growing customers segments. Reducing transportation cost and managing supplier pressure from credit insurance market. The acquisition of BSS Group led it to operate 19 separate businesses across the United Kingdom. Their strategy was to reduce group borrowings through cash generation, increase the company’s market share and continue the shareholder’s value creation by increasing profits. And lower interest rates along with lower borrowings following the right issue have led to the decrease of net finance charges. Retained Earnings The retained earnings for the period 2011-12 have increased from 1335.6 to 1513.8 i.e. by 178.2. And for the period 2010-11 have increased from 1199.2 to 1335.6 i.e. by 136.4. Therefore the continuous increase in retained earnings indicates the growth of the company. Working Capital The working capital for the year 2012 was negative i.e. -1153 which indicates that the company is not in a position to meet its short-term liabilities with its current assets. For 2011, it was 132.7 which have also decreased in comparison to previous year i.e. 2010 which was 150. However, positive working capital shows that the company is able to pay off its short-term liabilities. Borrowings In 2012, the borrowing from the bank was £452m. It has reduced in comparison to previous year which was £583m. It has also reduced in comparison to 2010 which was £788m. The company is continuously reducing its borrowing from bank which shows that it is paying off its debts. Performance over Last Three Years Profitability Situation In 2012 adjusted operating profit was up 4.3% to £327m, and adjusted profit before tax (PBT) was up 1.1% to £300m. The revenue was increased to 1.4%. Profit before tax after exceptional item was up 16.2% to £313m. Gross profit margin before synergies was increased by 0.2%. In 2011 Revenue has increased up to 52% and 6% on a like-for-like basis. Adjusted profit before tax was also increased to 37%. Adjusted operating margin was maintained at 6.6%. In 2010, the revenue of the company was increased to 8% and 5% on a like-for-like basis. Adjusted profit before tax was increased up to 20%. Adjusted operating profit margin was increased to 7.8%. There was also an increase of 0.2% in retail like-for-like sales. Borrowings In 2012, the borrowing from the bank was £452m. It has reduced in comparison to previous year which was £583m. It has also reduced in comparison to 2010 which was £788m. The company is continuously reducing its borrowing from bank which shows that it is paying off its debts as its earnings has also shown an increase of 2.1% as compared to previous year. In 2012 its Earnings per share (EPS) was 95.1p. It shows the growth of the company. Returns to Shareholder In 2012, 25p per share dividend was paid to shareholders that have increased to 25% as compared to the previous year dividend which was paid to them i.e. 20p. The dividend for the year of 2011 had also increased in comparison to 2010 which was 15p per share. It shows that the company is making continuous profit that’s why it was able to pay more dividends to their shareholders. In spite of the tough conditions in construction markets, the company has made good progress. It resulted in the increase in turnover and profits, more development of the networks and services in the United Kingdom, continued strong cash generation and the commencement of a small scale trial in continental Europe. (Hemscottir, 2013, pp.1-2). Financial Innovation Travis Perkins have announced that the Board has suggested a final dividend of 0.17 per share, which was payable to shareholders on the register on 3rd May 2013, which will give a total dividend of 0.25 per share for 2012. Latest developments for this company include acquirement of Solflex Energy System, announcement of interim dividend and recommendation of final dividend (Reuters, 2013, p.1). Year over year, the revenue of the company remain relatively flat i.e. 4.8B GBP to 4.8B GBP, however the company was able to increase its net income from 212.4M to 259.6M (Businessweek, 2013, p.1). As on 21st March 2013, Travis Perkins share rose 1.1% and traded up 1% at £1,423 at 10:42 a.m in London. It has 25 % exposure to the new residential sector so; it will be benefited most from an increase in the activity. This year, the company has gained 31%, the 5th biggest advance amongst the 31 companies which was listed on the FTSE 350 Support Services Index (Bloomberg, 2013, p.1). Spreadsheet Analysis Profitability Situation The net profit margin has shown a continuous increase. It shows the efficiency of the company in terms of converting revenue into actual profit and indicates that how well it control its costs. The gross profit margin measures the distribution and manufacturing efficiency of the company during the production process. It has increased as compare to previous year which shows that it can make a reasonable profit by keeping its overhead cost in control. It also indicates that the company can control its production cost. Profit before interest and tax ratio was constant for two years but it has increased last year which is not a good sign for company because the lower the ratio, the better the value to investors. Liquidity situation Current ratio was constant for the period 2010 and 2011 but it has decreased last year which indicates the low ability of the company to pay its debts over its business cycles. Moreover, in all the three years it does not maintain the standard i.e. 2:1 which is an acceptable current ratio. Liquid ratio indicates the short term liquidity of the company. It remained constant for the period of 2010 and 2011 but has decreased last year which shows that the company depends too much on inventory or other assets instead of liquid assets to pay its short-term liabilities. However, in all the three years, it had not maintained the ideal liquid ratio i.e. 1:1. Gearing and solvency situation The gross gearing ratio has shown a continuous decrease over the last three years which means that the company is less risky. It is less exposed to downturn which is quite a good sign for company. Reference Bloomberg., 2013. Travis Perkins Rises on U.K. Home Buying Measures: London Mover. 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Travis Perkins PLC Recommends Final Dividend. [online]. Available at: http://www.reuters.com/finance/stocks/TPK.L/key-developments/article/2696941. [Accessed 21 March 2013]. Ukgbc., 2013. Travis Perkins Group plc. [online]. Available at: http://www.ukgbc.org/member-directory/travis-perkins-group-plc. [Accessed 21 March 2013]. Read More