Security Valuation for Morrison Public Limited Company - Essay Example

Financial ment Analysis & Security Valuation for Morrison Plc Summary The striking performance of Morrison plc evident in its position as the 4th largest supermarket in the the UK calls for financial valuation and security analysis to pave way for an effective management. The strategic criterion calls for the analysis of the company’s aspirations by regarding the ABC analysis. This enables the company to align corporate and supply strategies1. The requirement strategies base several guidelines. One base on the financial or the amount they spent and the others capitalizes on the reducing risk, use of the emergent technology and the attainment of the guarantee of supply in the stringent market environments. The Morrison plc relies on the viable, competitive benefits and the corporate picture or image regards for improvement the strategic requirements. The financial analysis will make use of Reformulation, ratio, valuation using AOP and FCF model (including sensitivity and WACC calculation) to help in creating a meaningful summary of information based on financial statement of the company. Analysis 1. Reformulation model ROE = interest rate x equity/equity + net interest rate x debt/equity = 10% x $2000/$2000 + (10% - 6%) x $8000/$2000 = 26% RNOA = $100 / $1,000 = 10% Spread = RNOA – Interest Rate = 10% – 6% = 4% FLEV = Interest-Bearing Debt / Equity = $800 / $200 = 4. The reformulation yields the following balance sheet   income statement NOA NFO   revenue $59,490 24, 874 $9,955   operating expense 54421   SE   operating income 5069   $14,919   income taxes 1928       NOPAT 3141       NFE 354       Net Income 2787 The exhibited big difference between cost of goods sold (CGS) to sales and selling, general and administrative expense to sales indicates that Morrison Plc classify their costs based on the major expense category differently. The unexpected dividend changes normally results to the signaling effects and wealth-transfer. The transfer of the wealth between the debt holders and the equity holders in the market depends on the unexpected changes in the market; hence, the wealth transfers in the market (Fabozzi & Grant 2000, 87). The signaling effect is the change in the stock prices in the market with the unexpected change in the dividend. The unexpected increase in dividend will normally signal the decrease in the price of the stock in the market. The dividend is a significant determinant of the operation in the market because it determines the future earnings of the managers in the market. The higher dividend implies that the managers are reducing the agency problems between them and their shareholders; hence, they will be able to involve the shareholders in the increase of stock price (MacMinn, 2005, p. 20). The dividend policy determines the payment of which the business will pay to its shareholders. It determines whether the business will be paying the fraction of the profit to the shareholders, or they will be keeping the whole profit in the business (Baker & Kolb 2009). The dividend policy determines the image the firm will be able to uphold in the market especially to the investors. The market regulates the market policy. 2. FCF model From the data provided in the balance sheet: Calculate the Change in Net Working Capital Formula: Ending ∆ (Cash + A/R + Inv. - A/P +Accruals) - Beginning ∆ (Cash + A/R + Inv. - A/P +Accruals) = ∆ in Net Working Capital Morrison plc (2007): 1,212,084 - 1,655,337 = -443,253 Updated: Free Cash Flow Formula: Operating Cash Flow - Capital Spending - ∆ in Net Working Capital = Total Cash Flow of the Firm (FCF) Morrison (2007): 1,360,465 - 555,026 - (-443,253) = 1,248,692 As shown, the FCF (free cash flow) of the company is $ 1.2. The stock repurchasing involves the business purchasing back the shares hence reducing the number of share held by the investors. Therefore, this increases the EPS of the company in the market. The repurchasing of stock also increases the P/E (price earnings ratio) because the business has to pay less to the shareholder as compared to when the business was using the cash dividend (Melicher & Norton, 2011, 45). When a business buys back, their stock there will associate decrease in assets hence the return on assets (ROA) will increase (Bragg 2010). The ROA always depends on the assets of the business that in turn receives impact the stock repurchase. Stock repurchases increase the return on equity (ROE) because the business will repurchase their stock hence increasing their proportional stake on the stock (In Fabozzi, 2013, p. 172). The stock repurchase implies that the business will reduce their investment on their shareholders hence having a negative NPV. 3. AOP model AOPt+i = NOPATt+i – WACC*NOAt+i-1 AOP= $3141 – 0.16*3000 = $2661 \While the cash dividend of the company involves the payment fraction made to the shareholders, the stock repurchasing involves the business buying back their stock from the customers. As shown in the calculation of AOP, in the appendix, this implies that the stock repurchasing is just another category of cash dividend since the company will be paying the shareholders in order to retain the stock. In buying back the stock, the company will have to offer a higher price for the shareholder above that in the market hence a form of dividend to the shareholders. The main difference that exists between the two is the fact that the cash dividend paid on a regular basis while the stock repurchasing paid once, besides the amount paid also differing (Ehrhardt & Brigham, 2010, 90). While the stock repurchasing can only benefit the business in the long term, it involves the business using a higher amount than when using the cash dividend strategy. For the investors, the stock repurchasing is a onetime payment while the cash dividend is on a regular basis, hence they should consider the latter because stock repurchasing only benefits the business than the shareholders. Justification for using the model The Company aims to offer high quality coffee at affordable prices and accessible location for the customers. The major targets are adults, young adults, kids and teens. The adults of between ages 25 and 40 forms the primary target market, accounting for 49% of the total business. The customers tend to have high income and urban residents. Morrison Plc makes use of attractive adverts and décor, which attracts the working group. Young adults, ages between 18 and 24 account for 40% of the industry sales. In order to attract these young adults, the company establishes some of its coffeehouses in place where the college students go for hang-outs (Hill et al, 113). Kids and teens, ages between 13 and 17 account for 2% of the company’s sales. The low percentage arises because most of the kids rely on their parents to purchase the products. Morrison Plc incorporates ingredients, such as steamed milk, which help in attracting the teens. The Company aims to achieve 20% return on its assets and 5% return on equity, by 2015 to ensure proper management of its effectiveness. It also aims for a market cap of 57B by the last quarter of 2015 (Brigham & Daves, 2012, 278). The company also looks forward to increasing its market share through increasing its interaction with the customers and the investors. This will be possible through increasing its involvement in community services, such as offering youth action grants, support to farmers and ensuring environmental friendly operations. For instance, the company works towards a goal of $20 million by 2015, from $14 million (2013), meant for farmers support. Morrison Plc also involves in engaging more than 50000 young people in community services. Accounting quality Cost leadership would be the most suiting strategy for the company to maintain its profitability in the market. The saturation of the market calls for the company to establish a competitive advantage to reduce the burden of the competition. Through this strategy, the firm should be able to offer lowest prices to the target market through operating at the lowest cost possible (Wahlen et al, 2010, p. 97). This would help in reducing the influence of the local cafés, which always offer lower prices. To achieve lowest cost operation, the firm should involve in bulk buying and offering the most standardized products in the market. Buying in bulk helps in attracting quantity discounts to help in reducing on the cost of operation. Further, offering highly standardized products also help in keeping low the production cost, because there are fewer component and models required. The use of promotional strategy will also help in creating virtue for the low cost products. Recommendation justification The Company would require partnership with other firms to help in implementing the cost leadership strategy. Partnership would be important in cases where there is need for buying products in bulk since it helps in creating a pool of funds necessary for reducing the cost. Further, reducing the cost of operation would require the company to increase its partnership with the supermarkets. The supermarkets, acting as retailers, are always in close contact with the customers. Partnership with the supermarkets would help in reducing the weight of competition from the local cafes since they (supermarkets) are able to offer lower prices. The option of collaborating is more suitable than a “go it alone” strategy because of its effectiveness in reducing the cost of production. A “go it alone” could only be suitable if there was less competition in the market. Based on my evaluation, the decision of conversion to public traded corporation is a step to the growth of the company. Through selling its shares to the public, the company is able to increase its capitalization in the market and the subsequent exploitation of the market. Generally, as part of the positive effects, the company increased their command in the market because of the increased sales of their shares to the public. The shortcoming of the conversion is the reduced control of the company over its own management since it had to be responsible to the public. Yes, the conversion serves great in increasing the capital of the company since the selling of shares helps in diversifying the sources of capital. Bibliography Brigham, E. F., & Daves, P. R. (2012). Intermediate financial management. Mason, Ohio: South-Western. Bruce, B. (2014). Trading and Money Management in a Student-Managed Portfolio. Academic Press. Econometric analysis of financial and economic time series: A. (2006). Amsterdam [u.a.: Elsevier. Ehrhardt, M. C., & Brigham, E. F. (2010). Corporate finance: A focused approach. New York: South-Western [u.a.. Fabozzi, F. J., & Grant, J. L. (2000). Value-based metrics: Foundations and practice. New Hope, Pa: Frank J. Fabozzi Associates. In Fabozzi, F. J. (2013). Encyclopedia of financial models. Hoboken, N.J: John Wiley & Sons. MacMinn, R. D. (2005). The Fisher Model And Financial Markets. Singapore: World Scientific. Melicher, R. W., & Norton, E. A. (2011). Introduction to finance: Markets, investments, and financial management. Hoboken, NJ: Wiley. Wahlen, J. M., Bradshaw, M., Baginski, S. P., & Stickney, C. P. (2010). Financial reporting, financial statement analysis, and valuation. Mason, Ohio: South-Western. Yahoo finance, 2014. Wm. Morrison Supermarkets plc (MRW.L). retrieved from: http://finance.yahoo.com/q/bs?s=MRW.L+Balance+Sheet&annual Appendix AOPt+i = NOPATt+i – WACC*NOAt+i-1 AOP= 990 – 0.16*3000 = £510m or AOP= (0.33-0.16)*3000= £510 m FCFt+i = NOPATt+i - (NOAt+i – NOAt+i-1 ) FCF= 990 – (3900-3000) = £90m Balance sheet for Morrison plc Period Ending Feb 2, 2014 Feb 3, 2013 Jan 29, 2012 Jan 30, 2011 Assets Current Assets Cash And Cash Equivalents 261,000   265,000   241,000   228,000   Short Term Investments -   -   -   -   Net Receivables 200,000   205,000   237,000   215,000   Inventory 852,000   781,000   759,000   638,000   Other Current Assets 1,000   5,000   2,000   4,000   Total Current Assets 1,430,000   1,342,000   1,322,000   1,138,000   Long Term Investments 97,000   31,000   31,000   -   Property Plant and Equipment -   -   -   -   Goodwill 10,000   34,000   34,000   7,000   Intangible Assets -   -   -   -   Accumulated Amortization -   -   -   -   Other Assets -   -   -   -   Deferred Long Term Asset Charges -   -   -   -   Total Assets 10,729,000   10,527,000   9,859,000   9,149,000   Liabilities Current Liabilities Accounts Payable 1,436,000   1,501,000   1,409,000   1,400,000   Short/Current Long Term Debt 3,079,000   2,451,000   1,715,000   1,052,000   Other Current Liabilities 353,000   261,000   306,000   299,000   Total Current Liabilities 2,873,000   2,334,000   2,303,000   2,086,000   Long Term Debt 2,516,000   2,389,000   1,593,000   1,045,000   Other Liabilities -   -   -   -   Deferred Long Term Liability Charges -   -   -   -   Minority Interest -   -   -   -   Negative Goodwill -   -   -   -   Total Liabilities 6,037,000   5,297,000   4,462,000   3,729,000   Stockholders Equity Misc Stocks Options Warrants -   -   -   -   Redeemable Preferred Stock -   -   -   -   Preferred Stock -   -   -   -   Common Stock 361,000   342,000   360,000   373,000   Retained Earnings 1,734,000   2,292,000   2,473,000   2,489,000   Treasury Stock 2,598,000   2,596,000   2,564,000   2,558,000   Capital Surplus -   7,000   7,000   7,000   Other Stockholder Equity -   -   -   -   Total Stockholder Equity -   -   -   -   Net Tangible Assets -   -   -   -   Read More