Company Analysis - Liberty International Plc - Assignment Example

Company analysis-Liberty International Plc Executive summary This is the analysis of financial report of the Liberty International Plc which is listed in the London Stock Exchange .The year under review is 2007. Liberty International Plc is a property holding company having rental income from its city and regional shopping centres with high occupancy levels and business from non-shopping centres. It has been able to maintain steady business consistently in spite challenges to real estate market growth due to sub-prime crisis emanating from the U.S. The company has operations in the U.S. and South Africa besides the U.K. The UK regional shopping centres are worth £ 6.5 billion which the company relies on for business stability and resilience. Its compounded total return for 10 years is 12.4 percent with 15.1 % in 20006. The company has strong financial health indicated by 42 percent debts to assets ratio. After its conversion into a Real Estate Investment Trust, it has the potential for creating wider investor base. During the year, assets have increased from £ 8.2 billion to 8.6 billion. Net rental income that is the revenue for the company increased by 10% from £ 340.6 million to £ 374. 3 million. Loss for the year because of downward revaluation of £ 279.1 million, is £ 105 million .Earning per share (adjusted) is 36 p as against the previous year’s earning of 33. 9 p, an increase of 6%. Dividend also increased by 10% from 31 p per share for the last year to 34.1 p this year under review. Given the level playing field, its performance compares well with the UK’s top ranking company of British Land Company. With all these positive features, the company remains an ideal destination for prospective investors and the existing shareholders. Introduction Liberty International Plc is a UK based listed company. It is a FTSE-100 ranking and the third largest property holding company in the UK with 91% stake in retail property, next only to British Land and Gecina. (Schiller et al, 2005, p 105, 484) The company was converted into Real Estate Investment Trust (REIT) from 1 January 2007 to be eligible for special treatment in taxation as a non-Paid Income Distribution (non-PID) company. With 100% ownership in Capital Shopping Centres, the UK regional shopping centre businesses both in the capital and counties and a retail and commercial property investment company, Liberty International has £ 8.6 million worth properties as at 31 December 2007(Annual Report 2007) Some of its major tenants include Marks & Spencer, Debenhams & Boots. 15 regional shopping centres of the company have a total area of about 12 million sq.ft. (Hoovers) The company’s origin dates back to 1980 when Sir Donald Gordon started it in 1980 as Transatlantic Insurance Holdings Plc as a subsidiary of his parent company Life Association of Africa, South Africa established in 1957. After some 10 years of operations in 1980 in life business which it abandoned later and diversified into property development company in 1990s. Sir Gordon, a South African by birth and a Chartered Accountant by profession holds 21% stake in the company as his family holding. The website of the company states that it was founded in 1980 with Head Quarters in London, England. It has posted revenue of £ 374 million and an operating income £129 million and a net loss of £ 105 million for the year 2007 details of which can be seen in the following pages. (answers.com) The two core activities of the company are shopping centre business and commercial property development. Shopping centre business Called Capital Shopping Centres (CSC) with 100 % ownership, they are spread out as 14 regional shopping centres from which the company receives rental income. Some of the prestigious retail brands of Marks and Spencer, Debenhams and Boots are the company’s tenants. Eight of these shopping centres are part of the U.K.’s leading 21 regional shopping centres. The floor space of the company’s 14 centres comprising of 12.6 million sq ft commands a market value of £ 6.5 billion as at the end of the year under review. The largest few centres of the company are Metrocentre, Gateshead, Lakeside, Thurrock, Manchester Arndale, Braehead, Renfrew, Glasgow and a mall at Cribbs Causeway in Bristol. Three projects are in the channel in Cardiff, Newcastle and Oxford. (About us) Commercial property development business.as Capital and Counties About 7.2 million sq ft worth £ 2.2 billion as at 31 December 2007 have been developed as Covent Garden Area, Covent Garden Market with an investment of £ 664 million. Besides, £ 353 million in Central London and £ 375 million have been invested. It US operations has an investment of £ 381 million comprising of 2.7 million sq ft are located in California. Prominent among them in U.S is the Serramonte Shopping Centre, Daly City, San Francisco with 856,000 sq ft. (About us) 2007 was a year in transition for the company when it experienced sudden slump in UK property market as reflection of US sub-mortgage crisis. This resulted in adverse valuation of its properties, as market value of its properties had to be reported as mandated by International Financial Reporting Standards (IFRS) which are of recent origin. This resulted in a net deficit of £ 279 million (£ 316 million-gain on disposals £ 37 million) in the valuation of its assets and a loss before tax of £ 125 million as against the underlying profit of £ 129 million. (Chairman’s Statement) Despite the above, the company reports robustness of its investments and mentions some salient features of its properties classified as super-prime, prime and secondary shopping centres. The Annexure 1 is indicative of its UK property market valuation yields certified by their valuers CB Richard Ellis. (Chairman’s Statement) As stated in the Chairman’s report, city shopping centres went up in value from 4.84 % in 2006 to 5.07 % in 2007 which fact was mainly responsible for deficit of only 3.9% in like-for-like valuation. This demonstrates the inherent strength of company’s CSC properties to rage against the crisis in real estate market by virtue of the property’s unfailing income streams. The company also claims similar stability in valuation of Capital & Counties non-shopping projects in U.K.. and U.S.A. The company believes in long-term perspectives in real estate investments rather than being diffident about fall in values which are of short-term nature due to crisis elsewhere. Net rental income grew by 3.5% and occupancy levels stood at 98.7 % as against the previous year’s 97.7%. Expectations are not belied since in the next year till the date of the Chairman’s report, 7% of tenancy changes (138 out of 2021 tenancies) alone resulted in an increase of annual rents by £ 7 million as against £ 1.5 million due to 124 tenancy changes in the year 2006. Similar positive features in respect of properties of capital and counties and overseas have also been stated by the Chairman in his report. (Chairman’s Statement) Corporate Social Responsibility The company claims to have been rated as a BITC top 100 company in its discharge its corporate social responsibility commitments. (Chairman’s Statement) Dividends This year total dividend declared for the year under review was 34.1 p per share as against 31 p per share for the previous year amounting to an increase of 10%. The company prides itself of having consistently increased dividend payments from 4.5p per share in 1985 to 34.1 p per share in 2007. This year under review has given additional benefit of higher dividend due to tax savings by conversion into REIT company. The dividends have been paid without tax deduction as a non-PID. (Chairman’s Statement) Key risks The directors’ report has listed some risk factors for the company under the categories of financial risks, asset management risks, investment/strategic risks, development risks, HR risks, disaster/terrorism risks, and health and safety risks. The report also states the measures taken to mitigate the risks. The table of risks from the said report is reproduced in annexure 2 below. (Directors’ report) Summary of last five years’ Balance sheet, Profit and Loss Account and per-share information as mentioned in the Annual report is furnished below in Annexure 3(five year record) Company’s financial statement are analysed below for interpretations in terms of ratios. To begin with, common size statement of the company for the years 2006 & 2007 is given in the Table below, followed by various ratios for the years 2005 to 2007 I a separate table. 1 Table Calculation of Common-Size Analysis 2007 2006 Amount£ m Percent Amount £ m Percent Balance Sheet Assets Current Assets Cash and cash equivalents 188.4 6.1 321.8 5.3 Trading property 43.7 0.48 45.2 0.52 Accounts receivable, net 155.3 1.69 113.8 1.30 Cash and cash equivalents 188.4 2.05 321.8 3.68 Total current assets 387.4 4.22 480.8 5.5 Good will 26.6 0.30 0.00 0.00 Investment & development property 8,622.8 94.00 8,187.1 93.56 Other assets 135.7 1.48 82.3 0.94 Total Non-current Assets 8785.1 95.78 8,269.4 94.50 Total Assets 9,172.5 100.00 8,750.2 100.00 Current Liabilities Trade and other payables 341.7 3.73 319.5 3.65 Tax Liabilities 5.7 0.06 2.1 0.03 Borrowings ,including finance leases 152.3 1.66 43.5 0.50 Derivative Financial Instruments 3.8 0.04 4.6 0.05 Total current liabilities 503.5 5.49 369.7 4.23 Long-term debt (non-current liabilities) 3,960.1 43.17 3,648.1 41.69 Stockholders' equity 4,708.9 51.34 4,732.4 54.08 Total liabilities and stockholders' equity 9172.5 100.0 8,750.2 100.0 Income Statement Rental Income and other income & gain on revaluation , deferred tax & minority interests 598.9 100.0 1,929.7 100.0 Rental expenses (172.4) (152.5) Deficit on revaluation (279.1) 0.0 Administrative expenses (45.2) (34.2) Operating income & minority interest 102.2 1743.0 Interest expense 176.8 (24.6) Income before income taxes (74.6) 1,718.4. Taxation (30.4) (154.3) Net income (105.00) 1,564.1 Table 2 Ratios Analysis 2007 2006 2005 Current ratio: current assets / current liabilities (2007) 387.4/503.5 ;(2006)480.8/369.7; (2005)285.1/417.5; 0.77 1.30 0.68 Quick Ratio: (Acid test ratio) (current ratio-inventory)/Current Liabilities (20077)387.4-43.7/503.5; (2006)480.8-45.2/369.7; (2005) 285.1-132.6/417.5 0.68 1.18 0.37 Gross Profit Margin: Gross Profit/Sales (2007)97.2/546.7x100; (2006) 961.9/493.1x100; (2005)/879.8/417.1x100 17.78% 195.07% 211% Net Profit Margin: Net profit before interest, tax/sales (2007) 52.00/546.7X100; (2006) 927.7 /493.1x100;(2005)850.6/417.1x100 9.51% 188.14% 203.93% Return on capital employed: Net profit before tax, intrest,dividends(EBIT)/Capital Employed (2007)52/total liabilities 4463.6+ Total equity 4798.9x100; (2006)927.7/4017.8+4732.4x100; (2005)850.6/4356.1+2933.1x100 0.57% 10.60% 11.67% Asset Turnover: Sales/net Assets (2007)546.7/4708.9; (2006)927.7/4732.4; (2005)417.1 / 2933.1 0.12 0.20 0.14 Earnings per share (EPS) profit attributable to equity shareholders/average number of shares in issue (2007&2006) 362,772,673; (2005) 337,772,673 -29.0p 462.1 p 114.8p Price earnings ratio P/E: Market price per share/ Earnings per share (2007) 1017/-29; (2006)1396/462.1;(2005)980/114.8 -35.07p 3.02 8.54 Dividend yield: dividend per share/market price per share (2007)34.1/1017: (2006)31/1396 (2005)28.25/980 0.03 0.02 0.03 Dividend cover: EPSC /dividend per share paid to equity shareholders (2007)-29/34.1 ;(2006)462.1 /31;(2005)980/28.25 -0.85 14.90 34.69 Gearing: debt/equity or debt (long term)debt(long term)+ equity (2007)3960/8669; (2006) 3648.1/8380.5;(2005)3938.6/6871.7 0.46 0.44 0.57 Interest cover ratio: ebit/interest; (2007) 331.1/200.5 ; (2006) 341.2/ 186.1;(2005) 285.1/164.2 1.65 1.83 1.73 The above ratios indicate the company’s financial strength without having to depend on outside sources much. The revaluation of assets either way gives a distorted picture of the company and that is the reason why the company has been steadfast in declaring dividend that too confined to what has been earned regardless of loss or gain on revaluation. Since the company believes in the long-term increase in the valuation of its rent yielding properties, it is not deterred by short-term fall or gain in valuation. Its strength lies in the selection of prime properties for development and also on its ability to maintain more than 97% occupancy even in times of depression. As there is no stock in trade as such and the revenue is purely the value addition and not inclusive of cost of goods sold, some of the above ratios like quick ratio and others may not be on par with that of trading concerns. The chairman in his report has been invariably mentioning debts to assets ratio of 42 as the inherent strength of the company. The report therefore treats the company as a going concern. Auditors Pricewaterhouse Coopers LLP report does not find any thing adverse and has certified the account as having been prepared in accordance with the IFRS and UK regulations and that the accounts reveal true and fair view of the company’s affairs. The company’s performance also compares well with its competitors in the field. British Land Company’s latest report will be interpreted for comparison purposes. Table 3. Intel Industry Comparative Analysis   Performance Area Liberty International Dec 2007 British Land March 2008 Leverage:     Debt/Equity (%) 0.95 0.78 Interest Coverage 1.65 No interest commitment Liquidity: Current Ratio 0.77 0.67 Profitability: Gross Profit Margin (%) on Sales 17.78% Loss -286.87% Return on Assets (%) -1.15% -12.36% loss Return on Equity (%) -2.23% -26.68% loss Efficiency: Revenue/Assets 0.06 0.04: British Land Company is the largest property development company ranking first among others, Liberty International Plc being the third. The Inter-firm comparison reveals that Liberty International Plc has better efficiency ratio in terms of revenue on total assets i.e. 0.06 compared to 0.004 for British Land. Instead of trying to prove Liberty is superior to British, it can only be said that Liberty is in no way inferior to the former. The lesser efficiency for the British is because of larger value of assets. A margin should be given to it because, larger the company, problems and risks are more. Liberty International can draw comfort that it is almost on par with British Land. Both are professionally managed and they hold properties at vantage positions which obviously give them early mover advantages. Since supply of land is limited, those who enter business are in more advantageous positions. Both the companies have been converted into REIT about the same time and have also undergone revaluation because of IFRS requirements. This, however, will be a continuing exercise on the part of all listed companies. Conclusion The above analysis shows that Liberty International is in a position to meet its commitments even in times of adversity. It does not depend on outside sources for funds. As the company’s revenue is the rental income, it has no stock-in-trade as such, which would require huge funds for manufacturing or trading operations. The company has been declaring dividends consistently and the shareholder need not divest his investment in the company because of the losses incurred resulting out of revaluations. As long as it has been able to generate rental income regardless of negative or positive revaluation, the company is a safe investment for the shareholder. In a way, the IFRS revaluation enables the investor to be aware of the ultimate value of the company if it were go into liquidation immediately. The fact that the company has been converted as a REIT shows that it can save on tax payment as non-PID Company. References About us, available5 December 2008 Answers.com, Liberty International Plc, available 6 December 2008 Chairman’s Statement, available 6 December 2008 Directors’ Report, available< http://annualreport2007.liberty-international.co.uk/corporategovernance/directorsreport.jsp> Five year record, available 6 December 2008 Hoovers, 360° Company information, available< http://www.hoovers.com/liberty-international/--ID__58146--/free-co-profile.xhtmlaccessed >6 December 2008 Schiller Dijkman, Dijkman Marinus and Schiller Andreas, 2005, Europe Real Estate Yearbook, page 105, 484 Annexures Annexure 1 31 December 2006 31 December 2007 Notional impact on valuations of yield shift in the year Retail Prime shops 4.00 4.75 (16)% Prime shopping centres 4.75 5.00 (5)% Secondary shopping centres 5.50 6.25 (12)% Prime retail parks 3.85 4.75 (19)% Offices       Prime West End of London 3.75 4.75 (21)% Prime City of London 4.25 5.25 (19 Annexure 2 The key risks of the group are as set out in the table below: Risk Description Mitigation Financial risks (further information is included in note 21) – Interest rate risk Group policy to eliminate substantially all exposure to establish certainty over long-term cash flows. Hedging. – Liquidity risk Efficient treasury management and strict credit control. – Market price risk Regular monitoring of fair value of debt and financial instruments. – Change in value of property portfolio Regular market valuations; focus on quality assets; regular portfolio reviews including identifying properties for disposal. – General economic downturn Internal group limits on debt to assets and interest cover ratios. Asset management risks – Increased voids Policy of active tenant mix management. Development and remodelling projects to respond to changing requirements of retailer and shopper. – Failure to meet rental targets Regular reporting of performance against targets Investment/Strategic risks – Diversification into new areas of property use and geographical location Retaining and appointing experienced management teams/overseas representatives. Securing local partners for overseas investment but retaining a measure of influence. Development risks – Acquisition of sites for development Internal authority limits for capital expenditure. – Securing planning consent for developments Policy of sustainable development and regeneration of Brownfield sites. Constructive dialogue with planning authorities. – Commitment to proceed Approval process based on detailed project appraisals. – Construction and letting risk Regular monitoring and forecasting of project costs and rental income. People/HR risks – Appointment and retention of key staff Annual performance and remuneration reviews. Career development and succession planning. Disaster/Terrorism risk – Effect of natural disaster/terrorist strike on business continuity Disaster recovery plan in place. Security and Health & Safety policies and procedures in shopping centres/offices. Terrorist insurance is in place. Health & Safety – Responsibility for the safety of visitors to shopping centres Comprehensive Health & Safety policies and security systems installed at shopping centres. – Impact on reputation of potential criminal/civil proceedings Monitoring by Board of all litigation and legal risk (source : Directors’ report) Annexure 3 Balance sheet   UK GAAP IFRS 2003 £m 2004 £m 2004 £m 2005 £m 2006 £m 2007 £m Investment properties UK shopping centres 3,760.3 4,362.9 4,349.0 5,839.0 6,542.8 6,466.0 Other 864.9 950.0 948.6 1,098.8 1,644.3 2,156.8 4,625.2 5,312.9 5,297.6 6,937.8 8,187.1 8,622.8 Other assets less current liabilities 366.3 381.2 451.6 (66.1) 193.4 46.2 Total assets less current liabilities 4,991.5 5,694.1 5,749.2 6,871.7 8,380.5 8,669.0 Long-term debt (1,814.4) (2,118.8) (2,268.0) (2,970.2) (3,493.7) (3,773.7) Convertible bonds (233.9) (235.4) (220.9) (105.4) (108.7) (111.3) Provisions for liabilities and charges (83.8) (95.9) (726.1) (863.0) (45.7) (75.1) Total shareholders’ funds including minority interests 2,859.4 3,244.0 2,534.2 2,933.1 4,732.4 4,708.9 Profit and loss account UK GAAP IFRS 2003 £m 2004 £m 2004 £m 2005 £m 2006 £m 2007 £m UK shopping centres 175.9 181.2 187.4 235.6 272.0 288.8 Other commercial properties 61.4 64.0 68.9 64.5 68.6 75.4 Exhibition – – – – – 10.1 Net rental income 237.3 245.2 256.3 300.1 340.6 374.3 Property trading 4.5 9.9 6.2 11.6 32.8 2.9 Other income 10.8 8.9 8.9 2.6 2.0 (0.9) Administrative expenses (24.8) (26.5) (27.2) (29.2) (34.2) (45.2) Share of operating profit of joint ventures 8.1 7.7 – – – – Operating profit 235.9 245.2 244.2 285.1 341.2 331.1 Net interest payable (131.7) (129.5) (137.2) (164.2) (186.1) (200.5) Profit before taxation, valuation and exceptional items 104.2 115.7 107.0 120.9 155.1 130.6 Gains on revaluations and sale of investment properties – – 357.3 565.5 586.5 (279.1) Exceptional profits 5.8 42.6 32.2 (13.7) (2.0) (3.3) Change in fair value of derivative financial instruments – – (41.4) (145.8) 163.5 27.0 Profit on ordinary activities before taxation 110.0 158.3 455.1 526.9 903.1 (124.8) Profit for the financial year attributable to shareholders after taxation and minority interests 80.6 124.6 332.1 366.3 1,564.1 (105.0) Ordinary dividends (77.7) (84.0) (81.1) (86.3) (97.4) (122.1) Transfers to retained profit 2.9 40.6 251.0 280.0 1,466.7 (227.1) Per share information   UK GAAP IFRS 2003 £m 2004 £m 2004 £m 2005 £m 2006 £m 2007 £m Earnings per share before exceptional items (adjusted) 27.45p 29.02p 27.1p 29.8p 33.9p 36.0p Earnings per share (basic) (includes exceptional items) 26.25p 39.32p 104.8p 114.8p 462.1p (29.0)p Dividends per share 25.00p 26.50p 26.50p 28.25p 31.00p 34.10p Net assets per share (diluted, adjusted) 906p 1017p 1025p 1188p 1327p 1264p Ordinary shares in issue 316.6m 317.3m 317.3m 335.4m 361.7m 361.5m Ordinary shares in issue (diluted) 351.7m 352.1m 352.1m 352.0m 377.1m 376.4m Rough sheet Calculations Other assets in common size statement Plant & Equipment 1.2 0.9 Trade & other receivables 83.5 81.4 Investments 51.0 0.00 Total 135.7 82.3 Other assets under non-current assets 2007 2006 in common size statement Plant & Equipment 1.2 0.9 Trade & other receivables 83.5 81.4 Investments 51.0 0.0 Total 135.7 82.3 Items under revenue in common size statement 2007 2006 Rental income 546.7 493.10 Other income 2.0 34.80 Gain on revaluation 0.0 586.50 Current tax reserve 0.0 0.80 Deferred tax 0.0 814.50 Minority profit 50.2 Total 598.9 1929.70 Comparative statement British land March 2008 Liberty International December 2007 Leverage: Debt/Equity (%)Debt /equity : 5297/6798= 0.78 503.5+39601/4708.9=0.95 Interest Coverage - no interest commitment 1.65 see ratios working Liquidity: Current Ratio 377/561= 0.67 0.77 see ratios working Profitability: Gross Profit Margin (%) -1609/561= -286.87% 17.78% see ratios working Return on Assets (%) -1563/12648=--12.36% Return on Equity (%) -1563/5858 =-26.68& Efficiency: Revenue/Assets 561/12648=0.04 546.7/9172.5=0.06 Debts to Assets Ratio 42% slide no 6 cash 725 million and committed facilities Overall increased from 8.2 to 8.6 billion Net assets per share -5% side 24 CAPCO USA 19.1 % return on equity slide 82 4.5% income/14.6% capital appreciation 1.2% increase in NOI at $ 38.25 m $56.5 m total return pretax profit up 1% at 16.7 m Read More