Financial Analysis of WS Atkins Plc - Case Study Example

Report: Financial Analysis of WS Atkins plc Executive Summary Error: Reference source not found Introduction Error: Reference source not found 2. ATKINS Overview Error: Reference source not found 3. ENGINEERING Industry PEST Analysis Error: Reference source not found 4. Competitor Analysis Error: Reference source not found 4.1 AMEY FOSTER WHEELER PLC Overview Error: Reference source not found 5. ATKINS SWOT Analysis Error: Reference source not found 6. Segmentation Analysis Error: Reference source not found 6.1 Breakdown of Total Sales by Segment Error: Reference source not found 6.2 Breakdown of Total Sales by Geographical Area Error: Reference source not found 7. Financial Performance and Ratio Analysis 10 7.1 Growth Ratios Error: Reference source not found 7.2 Profitability Ratios 13 7.3 Liquidity Ratios 17 7.4 Gearing Ratios 19 7.5 Investor Ratios 20 8. Conclusion 21 9. References 22 Appendices 23 Appendix A – List of Figures 23 Executive summary WS Atkins plc is the UK-based engineering and design consultancy company. This report provides an overview of the external environment in which the company operates, followed by analysis of the financial performance of WS Atkins plc compared to the performance of its closest competitor, Amey Foster Wheeler plc. It has been clearly identified that the company’s performance is subject to various political factors, which may both pose restrictions and open new opportunities for business development. Overall, the industry is forecasted to grow within the next 5 years, which indicates on business growth opportunities for the Atkins plc. The key areas for growth are referred to the renewable energy sector, nuclear energy, regional growth of Asia Pacific, and increased urbanisation. The company has a diversified product portfolio and strong technical and professional skills in order to stay competitive in today’s highly competitive environment. Analysis of key financial ratios of Atkins Company and its major competitor, Amec Forster Wheeler plc has shown that Atkins much better financial performance, especially in terms of sales growth, gross profit growth, operating profit growth and net profit growth. However, Atkins debt position raises major concenrs. 1. Introduction WS Atkins plc is the UK-based engineering and design consultancy company. Atkins is a globally operating organisation with a diversified product portfolio. With an increased competition in the global engineering and construction industry, WS Atkins plc faces both opportunities and threats for further business development. The aim of this report is to analyse the financial performance of WS Atkins plc by calculating a comprehensive set of financial ratios for a two-year period and to compare it to the performance of its closest competitor, Amey Foster Wheeler plc and industry benchmarks. The report is supported with a brief overview of both the global external business environment and internal environment of WS Atkins. 2. Atkins Overview WS Atkins plc is the UK-based engineering and design consultancy company operating across the globe. Atkins was founded in 1938 in South Wales. Nowadays, the company’s headquarter is located in Surrey, and the company employs approximately 17,489 people across the globe (MarketLine Advantage, 2015a; WS Atkins plc Annual Report, 2014). The company offers a wide range of services varying from risk planning, logistics services and feasibility studies to intellectual property designing and project management. Atkins provides solutions to a broad variety of customers operating in different sectors, including aerospace, buildings, aviation, environment, information communications, nuclear, oil and gas, roads, water sectors, tourism and leisure, etc. (MarketLine Advantage, 2015a). Atkins is a publicly traded company with such major shareholders as Ameriprise Financial, Newton Investment, Schorders and Standard Life Investments Limited, Norges Bank and Management Limited (MarketLine Advantage, 2015a). 3. Engineering Industry PEST analysis As WS Atkins operates globally, it is important to evaluate the external environment of engineering industry in a global context. Below is presented a brief overview of key political, economic, social and technological factors of engineering industry. Political In global scales, it is quite difficult to analyse the political environment of engineering industry as it varies from country to country. It is possible to state only that political factors have a very strong impact on the business as highly complex level of regulation, political instability and legal/tax aspects all influence on the level of favourability of doing business in a particular country. Government initiatives play an important role on the industry development. Foreign players such as WS Atkins plc may be restricted to be involved in projects in domestic markets (MarketLine Advantage, 2013). On the other hand, the companies may gain attractive contracts for public project due to its reliability and good reputation. Government initiatives providing loans to businesses (such as the Funding for Lending Scheme in the UK) also should have positive impact on the industry development (Uvais, 2014). Economic According to the experts’ estimates, in 2017 the global construction and engineering industry will grow in value by 36,6% since 2012, reaching a value of $4, 522.4 billion (MarketLine Advantage, 2013). Asia Pacific region is one of the most attractive markets as it accounts for 47,7% of the global construction and engineering industry value (MarketLine Advantage, 2013: 9). The next attractive market by industry value share is Americas market which accounts for 24,3%, followed by Europe (20%) and Middle East and Africa (8,3%) (MarketLine Advantage, 2013). Social factors The major social trend is a movement of world population to urban environments (WS Atkins plc Annual Report, 2014). It is forecasted that urban growth will be especially notable in Asian and African regions. Urbanisation rate in Africa will reach a 50% urbanisation rate by 2035 and 50% in Asia by 2020 (WS Atkins plc Annual Report, 2014). Technological factors As the company operates in an engineering and construction industries, technological advances in the project’s design and engineering plays an important role for the business. Developments of such tools as 3D, 4D, 5D design and Building Information Modelling create new opportunities for the companies operating in engineering industry. Moreover, development of such technologies as cloud-based applications and the application of large data sets provide companies with new easier solutions for planning, designing, infrastructure construction and maintenance projects (WS Atkins plc Annual Report, 2014). 4. Competitor analysis 4.1. Amec Foster Wheeler PLC Overview Amec Foster Wheeler PLC is one of the major competitors of the Atkins Company. It offers engineering, consulting and project management services to the clients operating in different sectors. Comparing to Atkins Company, Amec Forster Wheeler is relatively young company as it was established in 1982 through a merger between Fairclough Construction and Willam Press (MarketLine Advantage, 2015b). Nowadays, the company operates across North and South Americas, Northern and Southern Europe, Middle East, Asia, Africa, and Commonwealth of Independent States (CIS) (MarketLine Advantage, 2015b). Due to significant geographic presence and diversified end market exposure Amec Forster Wheeler plc has more avenues for growth and sources for revenues. As of FY 2013. The company reported revenues of £3, 974 million whereas: Americas accounted for 56% of the total revenues; Europe accounted for 30, 6% out of which UK accounted for 28%; growth regions accounted for 13, 3%; and investment services accounted for 0, 1% (MarketLine Advantage, 2015b). Below is presented visual breakdown of revenue generation by key segment. Figure 1: Revenue breakdown by geographical area (Source: MarketLine Advantage, 2015b). 5. Atkins SWOT Analysis In order to better understand the company’s financial performance and to evaluate its capabilities it is important to analyse its internal strengths and weaknesses. Also, it is important to consider existing opportunities and threats, which WS Atkins plc needs to consider while developing its strategic direction. Below is presented a SWOT analysis for WS Atkins plc. Strengths Extensive diversification of end market The company offers a broad range of services to various categories of customers. This aspect enables the company to work with different segments and to take over attractive projects. Due to a diversified portfolio Atkins is more resilient to market fluctuations (WS Atkins plc Annual Report, 2014). Strong reputation The company operates 75 years on the market. It has established a positive worldwide reputation ‘for excellence in design, engineering and project management’ (WS Atkins plc, 2014). This aspect contributes to the overall stability of the business and helps to retain existing and attract new clients. Strong geographical presence Due to an extensive geographical diversification of end market, WS Atkins is capable to work on a greater number of projects, and increase its customer base (WS Atkins Annual Report, 2014). Weaknesses Significant dependence on the UK market UK market is recognised to be an important revenue generator for the company. Slowdown of economy and other external forces could lead to substantial decline of the Atkin’s revenues (WS Atkins plc Annual Report, 2014). Opportunities Strong growth in the global renewable energy The global renewable energy market has shown strong growth in the several past years. Aggressive growth has been ntable also during the period from 2013-2014 as the revenue generated by the global renewable energy market increased by 11% (MarketLine Advantage, 2015b). This market is expected to continue to grow aggressively within the next several years. According to the estimates of MarketLine Advantage (2015b), the global renewable energy market will have an anticipated compound growth rate of 10% during the next 4 years. Growth of global nuclear energy industry The global nuclear energy industry is expected to grow in the medium term perspective. The experts forecast a continuous growth of the industry, with an anticipated compound annual growth rate of 7 % during the next four years (MarketLine Advantage, 2015b). WS Atkins secured a number of nuclear energy projects, and growth of the market may be a great opportunity for further developments (WS Atkins plc Annual Report, 2014). Regional growth of Asia Pacific Regional growth of Asia Pacific is another major growth opportunity for the company (WS Atkins plc Annual Report, 2014). Threats Intense competition in the industry The industry in which WS Atkins operates is recognised to be highly competitive. The company competes with both multinational corporations and domestic organisations operating in engineering and construction markets (MarketLine Advantage, 2015b). Competition is expected to continue to grow and thus pose greater risks on the company’s capability to maintain and grow its market share (MarketLine Advantage, 2015b). Political instability in the world Political instability in key regions (the Middle East and Asia Pacific) where the company has established its business might have a negative impact on its ability to perform contractual obligations and to receive payment for the projects (WS Atkins plc Annual Report, 2014). 6. Segmentation analysis 6.1. Breakdown of Total revenues by Segment The company has several segments used for end market analysis. These segments include the following: aerospace and aviation, defence and security, education, rail, roads and water environment (WS Atkins plc Annual Report, 2014). Below is presented a breakdown of revenues by sector. Figure 2: Revenue breakdown by segment (Source: WS Atkins plc Annual Report, 2014). As it is shown in the figure above, roads, rail and energy segments are the three major segments generating revenue to the company. 6.2. Breakdown of total revenue by geographical area Atkins Group differentiates its markets according to a regional model. This model includes three major groups: United Kingdom and Europe, North America, Middle East and Asia Pacific. Breakdown of total revenues generated by each geographical area is presented below: Figure 3: Revenue breakdown by geographical area (Source: Annual Report, 2014). As it is possible to note, European and the UK markets generate the highest level of revenues for the company, followed by the North American market. 7. Financial Performance and Ratio Analysis 7.1. Growth Ratios Growth Ratios give some form of measurement of a company’s performance using its sales revenue and profit figures over time. Sales Growth Figure 4: Sales growth figures It was observed that Atkins experienced an increase in sales revenue by 2.63%, from £1705.2m in 2013 to £1750.1m in 2014. The main segments that contributed to this growth were the United Kingdom and the European region accounted for 55% and 21% respectively. Amec Plc experienced a decrease in sales revenue from £4088m in 2012 to £3974m in 2013, leading to a negative decrease in sales growth of -2.79%. Gross Profit Growth Figure 5: Gross profit growth figures There was a significant increase in Atkins gross profit between 2013 and 2014, from £616.6m to £685.1m respectively, due to increase in its sales revenue. The gross profit growth is five times higher than the revenue growth (2.63%) which indicates on increased operational efficiency. There was a decrease in Amec gross profit growth rate from 10.37% in 2012 to 2.07% in 2013 as compared to an increase on Atkins gross profit. Operating Profit Growth Figure 6: Operating profit growth figures Atkins experienced a significant increase in its operating profit between 2013 to 2014 from £104m to £113.7m respectively, which represented a positive increase by 11.11%. It would seem that Atkins measures in decreasing its cost of sales from £1088.6m in 2013 to £1065m in 2014 has a lucrative effect on its profits. Amec also experienced a slight increase in its operating profit between 2013 and 2013 from £254m to £255m respectively, which represented a positive 0.90%. Measures taken by the company by reducing its cost of sale from £3556m in 2012 to £3431m in 2013 has also yielded a positive result for their operating profit. Net Profit Growth Figure 7: Net profit growth figures Atkins continued to progress in their growth rate, showing a 14.23% increase in net profit from £84.3m to £98.3m in 2013 and 2014 respectively due to high gross profit and sales growth which led to a higher net ptofit, and also increase in sales of their UK highways services operations. Amec is expected that with such a marked decrease in the gross profit, its net profit will show a similar pattern. A mark decrease of a negative 14.83% in net profit was representative of a decline from £209m to £178m from 2012 to 2013 respectively. 7.2 Profitability Ratios Profitability ratios measure a company’s ability to generate earnings relative to sales, assets and equity (Ready Ratios, 2014). Gross Profit Margin Figure 8: Gross Profit Margin figures Atkins reported an increase in their gross profit margin from 36.16% in 2013 to 39.14% in 2014 representing an increase of 2.98% . We noted earlier on the sales growth ratio, that Atkins was on a positive side, hence, it would mean that this change in gross profit margin is as a direct result of decrease in cost of sales and increase in sales. Amec on the other hand shows a slight increase in gross profit margin from 13.01% in 2012 to 13.66% in 2013 resulting to an increase of 0.65%. Though their sales figures may have decreased over the years, there was also a decrease in cost of sales which had a positive effects on the gross profit. Operating Profit Margin Figure 9: Operating Profit Margin Atkins experienced an increase in operating margin profit from 6.59% in 2013 to 7.30% in 2014, this signifies that Atkins is able to acquire profits from their operations. This is a good position for a company. Amec also experienced an increase in its operating profit margin from 6.21% in 2012 to 6.42% in 2013, this also means that Amec is able to acquire profits from its operations. Net Profit Margin Figure 10: Net Profit Margin Atkins net profit increased from 4.94% in 2013 to 5.50% in 2014. This indicates that Atkins is in a position to keep higher percentage of its revenue as income through better management. This again could be because of cost or expenses has decreased, hence, more cash is available. The net profit margin figures for Amec are also reflective of the changes that we have seen in the net profit ratio. Amec experiences a decrease in net profit margin from 5.11% to 4.48% in 2012 and 2013 respectively. This means Amec is keeping less of its total revenue as income. Atkins’ higher profit margin than Amec may indicate that it is a more profitable company that probably has better control over its costs compared to its competitor, Amec. Return on Capital Employed (ROCE) Figure 11: Return on Capital Employed Atkins shows an increased ROCE from 21.65% in 2013 to 28.81% in 2014. An increase in ROCE generally means a good performance measure for a company. There was a slight decrease in ROCE for Amec from 2012 with 18.58% to 18.48% in 2013. This suggests inability to make use of available capital. Amec could try to increase its operating profit without increasing the capital employed or try to reduce their long term liabilities to experience improvement on ROCE. Return on Equity (ROE) Figure 12: Return on Equity Atkins experienced a significant increase in ROE, we noticed a huge percentage of ROE (57.62%) in 2013 which also increases to 73.96% by 2014, which shows that Atkins Plc has taken advantage of its shareholder equity to generate profit and produced an increase in ROE. However, there was a drop in Amec Plc ROE from 19.30% in 2013 to 15.84% in 2013. Indeed this does not augur well for the company. 7.3 Liquidity Ratios As the name implies, liquidity ratios give an idea of how liquid or solvent a company is. That is how easy it is to for a company to convert its short term assets to cover its short term debts. Working Capital (Current Ratio) Figure 13: Working Capital – Current ratio Atkins managed to increase its current ratio from 1.16 in 2013 to 1.26 in 2014, which places them in a more liquid position than their competitor, meaning their current assets can cover their current liabilities 1.26times. This indicates that Atkins is less likely to suffer cash flow problem. Amec also experienced an increase in its current ratio from1.13 in 2012 to 1.22 in 2013, which indicates that their current assets can cover their current liabilities 1.22 times and they are less likely to suffer cash flow problem. Acid Test Ratio (Quick ratio) Figure 14: Quick Ratio As expected, both companies displayed the same pattern with the Acid test ratio as they did with the working capital ratio, they both seems to be in a more encouraging positions. Both working capital and Acid test ratio suggest that in short term Atkin and Amec Plc are financially strong and stable. 7.4 Gearing Ratios Gearing is a measure of a company’s financial leverage and shows the extent to which its operations are funded by lenders versus shareholders (Investopedia, 2014). Gearing Ratio Figure 15: Gearing Ratio Atkins had an higher and increasing gearing ratio than Amec with 71.79% to 75.74% in 2013 and 2014 respectively, leading to a 3.95% increase, while Amec gearing ratio decreased from 20.78% to 18.55% in 2012 and 2013 respectively. This suggests that Atkins had a higher risk of repaying debt and interest (Collier, 2009), this may be due to substantially higher long term liability ans shareholders funds {£130.2m} in 2014, in comparison helped Amec Plc pay back some of the long term debt compared to Atkins. This high leverage is risky but can lead tohigh returns for the shareholders (Refer to ROE ratio). Interest Cover Ratio Figure 16: Interest Cover Ratio Atkins has a significantly smaller interest cover ratio with 6.39 in 2014 due to high finance cost, resulting to less cash to pay off their interest. Amec interest cover ratio has been higher over the last two years (18.21 in 2013 and 23.09 in 2012), even though there was a decrease since 2012 due to increase in finance costs, the ratio is still very high. This indicates that Amec is generating more than sufficient income to pay their interest. They are in a comfortable position in this regard. Debt Ratio Figure 17: Debt Ratio Atkins debt ratio in 2014 increased from 0.53 in 2013 to 0.59, making it higher than Amec debt ratio by 5.36times. This shows that Atkins was highly leveraged, which suggests that most of its assets are financed through debt and not equity. Conversely, if a company has a low debt ratio, this indicates that most of its assets are fully owned through the firm’s equity, not debt. In some instance, a high debt ratio indicates that a business could be in danger if their creditors were to suddenly insist on repayment of their loans (Economic, 2014) Amec debt ratio remains the same over the last two years, which shows it is still more financially stable and in a better position to borrow now and in the future. It either pays its debts in cash or hesitates to take on debt (Investinganswers, 2012c). Conclusion This report has provided a brief overview of the external environment of engineering industry and a more detailed analysis of the WS Atkins plc. WS Atkins plc is a UK-based company with well-established business operation across the globe. The company has a diversified product portfolio and strong technical and professional skills in order to stay competitive in today’s highly competitive environment. Analysis of key financial ratios of Atkins Company and its major competitor, Amec Forster Wheeler plc has shown that Atkins much better financial performance, especially in terms of sales growth, gross profit growth, operating profit growth and net profit growth. Atkins also performed better than Amec in terms of gross profit margin increase. Atkins’ also reported higher profit margin than Amec, which implies that Atkins has better control over its costs than Amec. However, Atkins Plc has taken advantage of its shareholder equity to generate profit and produced an increase in ROE and performed better than Atkins did. In terms of liquidity issue both companies performed quite well. The major concern related to Atkins financial performance is referred to the debt position of the company. References: MarketLine Advantage (2013). Construction and Engineering Industry Profile [online]. Available from www.marketlineadvantage.com MarketLine Advantage. (2015a). Company Profile: WS Atkins plc [online]. Available from www.marketlineadvantage.com MarketLine Advantage. (2015b). Company Profile: Amec Foster Wheeler plc (formerly AMEC plc). [online]. Available from www.marketlineadvantage.com Uvais, I. (2014). Architectural Activities in the UK, Revenue rebuild: Firms are expected to draw from increased construction activity. IBISWorld Industry Report M71.110. Ws Atkins plc Annual Report (2014). Annual Report [Online]. Available from http://www.atkinsglobal.com/~/media/Files/A/Atkins-Corporate/group/reports-and-presentations/full/ar-2014.pdf Appendix B: List of Figures Figure 1: Revenue breakdown by geographical area …………………………………………6 Figure 2: Revenue breakdown by segment……………………………………………………9 Figure 3: Revenue breakdown by geographical area …………………………………………9 Figure 4: Sales growth figures (Atkins and Amec sales 2012-2013)………………………..10 Figure 5: Gross profit growth figures………………………………………………………..11 Figure 6: Operating profit growth figures…………………………………………………...11 Figure 7: Net profit growth figures………………………………………………………….12 Figure 8: Gross Profit Margin figures……………………………………………………….13 Figure 9: Operating Profit Margin…………………………………………………………..14 Figure 10: Net Profit Margin………………………………………………………………..14 Figure 11: Return on Capital Employed…………………………………………………….15 Figure 12: Return on Equity…………………………………………………………………16 Figure 13: Working Capital– Current ratio………………………………………………….17 Figure 14: Quick Ratio……………………………………………………………………….18 Figure 15: Gearing Ratio……………………………………………………………………..19 Figure 16: Interest Cover Ratio………………………………………………………………20 Figure 17: Debt Ratio………………………………………………………………………...20 Read More