The Values of Foxtons Plc - Case Study Example

Foxtons Plc (Students Name) (Institution) (Date) Contents Overview of the company 2 Most reliable method used for valuing new or primary companies 3 Asset Valuation Method 4 How Foxtons Plc needs to go about valuing the company 6 The Values of Foxtons Plc 9 Asset-Based Approach 9 Market Value approach 11 Comparison between the offer price and that in the Prospectus 13 Price at the IPO and the stock’s closing price 14 Evaluation of the stock 15 References 17 Overview of the company One of the dominated Real Estate companies in the United Kingdom is referred to as Foxtons Plc. The company which was established in 1981 started as a two-person Real Estate agency. The company specializes in the Real Estate agency business in the UK and has built its name in the country and beyond. In the year 2007, Foxtons Plc was acquired by a private equity firm by the name BC Partners. The acquisition cost for the firm was £390m. The company underwent an Initial Public Offer (IPO) process for purposes of raising its initial capital for the establishment of the business. This was followed by the flotation of the company on the London Stock Exchange or purposes of attracting the private investors to raise £55m. The company has since been able to manage most of its activities due to the successful process of raising the required capital and a success process of the IPO. Foxtons Plc has since maintained a leading position in the market due to its ability to manage the shareholders and also due to its success in the implementation of further shares to the public. Currently, they are some shareholders ate Foxtons Plc some of whom came through the IPO issue and others who came after the company has been listed on the Stock Exchange. The issuance of the shares through the IPO became successful under the management of Foxtons Plc, and it also saw the process of drafting a comprehensive prospectus which is also analyzed and integrated into this paper Most reliable method used for valuing new or primary companies Every business has a life cycle which usually begins at the start-up the stage where the company is primary and just commencing its activities in the market. This is the stage where the company has not fully established its resources and still has a desire for more capital. Investors need to undertake valuation process so as to determine the exact value of the company and also dictate the need to invest in such a company. The valuation of such a young company considers a lot of factors due to its size stage of development. Nature of structure, objectives of the company and the existence of a particular style of management (Ritter & Welch 2002). Every investor would need to inquire, assess and determine what its investment in the slice of the company implies. Besides, the owners or members of such a company require a valuation to understand the value of their business in the view of others within the market. There are some ways to value primary companies in the market. However, the most reliable valuation method for young and new companies in the market is referred to as Asset Valuation Method Asset Valuation Method One of the best ways of determining the value of a new company in the market is known as the Asset Valuation method. As the name suggests, this valuation model focuses on the assets of such a company so as to assign the corresponding value of the company to the asset base. The asset valuation method implies assigning the dollar value on all the assets of the company which features in the balance sheet and determining the total of such assets. The process involves collating the total sum of any asset used for purposes of startup, assigning the dollar value to the assets, summing up the total value and giving the final value of such a company. This method of valuation depends on the accuracy of identifying and assigning a monetary value to all the assets used within the company. The process involves considering both physical and intellectual property owned by the company. However, most new companies tend to have much of the physical assets as compared to any other asset category. Therefore the physical assets are determined din this valuation process then they are assigned a dollar value. Besides, the process requires the recognition of the intellectual property such as the patent rights, trademarks among other protected values which are being owned by the company. The intellectual rights are however less in cases of new companies sin the market but are highly regarded during the evaluation process of the company. The other consideration made in the valuation process of the company involves the determination of the employees and staff in the company. Any new company selling to raise money from the investors must have an operational staff base as well as vibrant leadership (Zhang 2004). Every employee has value and contributes to the total value of the company in a great and significant manner. The valuation process considers the number of employees and also takes into account their different qualification and their value to the new company. The asset valuation process considers both the employees and the customer’s specific to the new company. The basis of perfuming the customer-business relationship is to determine the value of every customer who enters into the business relationship with the company. Every customer has a specific value that is unique and specific to the company and recognizing the customers in the valuation process tend to incorporate such a unique value of the customers. The new company is determined by the total sum of the dollar value assigned to the assets, employees and the customers associated with the company. This procedure is suitable for the new company since it’s more factual as compared to other procedures such as the market valuation process. Every asset has a specific dollar value. Besides, every person has a particular value assigned, and this is sufficiently important for running the business. This process of valuation is important before engaging in buying or issuing shares through an IPO process since it’s a preceding activity based on the available information in the company. People tend to rely on the information provided through the valuation process so as to make decisions on the need to invest or refrain from a particular company. The investment decision is normally arrived at if the prospective investor has confidence in the value of his shares depending on the assessed value of the company. Companies which show a higher value in the market as compared to others tend to attract more customers considerably as compared to those having a low-value assignment. Foxtons Plc is one of the companies which engaged in this method of valuation before engaging in the actual process of issuing the shares (Derrien & Womack 2003). The investors who participated in the Initial Public Offer sought to buy the shares from the private investors due to the asset higher value of the firm. This gave a positive signal of better prospects in the company leading people to accept and buy the shares. How Foxtons Plc needs to go about valuing the company The valuation process, especially for new companies, is usually the same even to the existing companies. Most of these procedures have similar application depending on the kind of company and the industry within which it operates. The only essence is to come up with better ways of determining the items to consider in the valuation process and the actual amount of values assigned to the items under consideration. The best and most ideal procedure for the company is the Asset Valuation Method which considers the aggregate value of all the assets assigned to the company. The procedure is specific ion determining what appears on the balance sheet and considering the value to include the staff and the customers who are more established to the company. Foxtons Plc has been in operation for some time. Since 2012, the company has engaged in serious business especially after recovering from the creditors who sought to have the company sell out its assets so as to settle their accumulated debts. The company has had significant progress in the Real Estate business and is currently one of the successful players within this are of business. The company has had other share issues after the IPO issue so as to attract more shareholders into the company. The growth in the Real Estate business in the UK has had much positive implication to Foxtons Plc, and this has been translated in the increase in its profitability and asset base (Ritter 2003). The company has also had immense progress sin attracting better professionals and staff within its structure. The ideal method to value the accompany bin its current stage of life cycle is the use of asset valuation means. The company managed to come up with various assets during its operations and has therefore been able to assign various values to the assets. Every financial year the company prepares financial statements detailing the kinds of activities which have been performed in the business. The valuation, therefore, focuses on the kind of assets belong to the company as well as some profits that can be attributable to the company for the periods within which it has been in operations. The potential investors are highly interested in the information provided in these financial statements for purposes of making an investment decision (Aggarwal et al. 2002). The following is a summary of the balance sheet, income statement and cash flow statements combined to show what the value of the company dictates during the periods of 2014, 2015 and 2016. Summary of financial statements Assets (£m) 2016 2015 2014 Reporting Date 8 Mar 2016 11 Mar 2015 11 Mar 2014 Tangible Assets 27.0 24.1 21.3 Intangible Assets & Goodwill 118.7 118.2 118.2 Investments & Other Non-Current Assets 0.3 0.9 0.7 Total Non-Current Assets 146.0 143.1 140.2 Inventory 0.0 0.0 0.0 Trade & Receivables 12.2 10.8 12.7 Cash & Receivables 25.6 22.5 23.4 Other Current Assets & Assets Held for Resale 6.1 6.3 6.8 Total Assets 189.9 182.8 183.0 Liabilities (£m) 2015 2014 2013 Short Term Liabilities 19.5 16.7 20.8 Long Term Liabilities 17.8 19.8 19.8 Other Liabilities / Pension etc 0.0 0.0 0.0 Total Liabilities 37.3 36.5 40.6 Net Assets (£m) 2015 2014 2013 Net Assets 152.6 146.3 142.5 Equity 2015 2014 2013 Share Capital 2.8 2.8 2.8 Minority Interests 0.0 0.0 0.0 Retained Earnings 96.0 89.7 84.3 Share Premium Account 52.7 52.7 52.7 Other Equity 1.1 1.0 2.6 Total Equity 152.59 146.29 142.45 Cash flow (£m) 2015 2014 2013 Cashflow from Operating Activities 39.7 35.6 37.1 Cashflow Before Financing 32.0 28.9 30.3 Increase / Decrease in Cash 3.1 ( 0.8) 13.6 Income (£m) 2015 2014 2013 Turnover 149.8 143.9 139.2 Cost of Sales 0.0 0.0 0.0 Gross Profit 0.0 0.0 0.0 Operating Profit 40.9 42.0 43.0 Pre-Tax Profit 41.1 42.2 39.0 Profit / Loss for the Year 34.6 33.4 32.2 The value of Net assets Foxtons Plc has been increasing and adjusting across the years. For example, the value if £152.6m in 2016 showing a great increase in the asset worth of the company. Besides, the cash flow trends have been seen to rise and go higher in the company signaling proper sales turnover and increase in the operating activities. The profitability of Foxtons Plc has been seen to rise steadily in the past three years with the value going up to £34.6 in 2016. The process of valuation, therefore, tends to consider the net worth of the company in consideration to the values of assets and the extent of profitability of the company (Arthurs et al. 2008). In many cases, the investors will be highly concerned to see the value of the assets that the company has. This information is beneficial in letting them understand the financial position and the ability of the company to finance its debts. Any rational investors would seek to understand the value of the company and also know the prospects that the company can offer in the market as compared to others. That is plies that the profitability value must be considered in evaluating the company. The valuation of Foxtons Plc highly considers the patterns of making profits across the years (Biais et al. 2002). This information is important to enable the investor understands the guarantee of returns from the amount put in as investments in the company. Therefore, the ideal method to value Foxtons Plc would be to use the asset valuation method which considers the financial information such as the financial statements to help in making decisions. The Values of Foxtons Plc Asset-Based Approach The use of Asset base approach is one of the ways of valuing a company. It denotes the valuation criteria depending on computing the total assets that belong to the company. Every business usually has some assets that enable easy running of the operations. Foxtons Plc, for example, prepares the balance sheet statements on an annual basis. The balance sheet indicates the asset balances for such period and makes report on such estimates. The determination of the assets helped in identifying the worth of business in regards to its resources. This approach is based on the assessment of the balance sheet approximates and also the consideration of the estimates concerning the staff and employee values (Ljungqvist et al. 2006). The specific asset-based approach suitable for Foxtons Plc is the use of a Going Concern Asset-based Approach. This is one of the types of approaches that specifically determine the balance existing between the assets and liabilities of a company. It involves subtracting the values of liability from those of the assets which are being held by the company for a particular period. In essence, the use of these approaches considers the information which belongs to the balance sheet that has been approved by the management. For the case of Foxtons Plc, the valuation will be as follows for the year ended December 2016; Value of the company for the year 2016 = £189.9m-£37.3m = £ 152.6m According to this valuation method, consideration is made on the latest information pertaining to the company. The investors will seek to understand the latest financials of the company in respect to the balance sheet and the income statement. This enable them derive the latest trends of activities and perform accurate and more recent valuation depending on such information available. In the case of Foxtons Plc, the information used regards those retrieved from the balance sheet for the year ended 2016. This is the most recent year-end financial information for the company and clearly help in reflecting the kind of activity happening at Foxtons Plc. The investors would be much wiling tom invests in the company in which the assets have much higher value as compared to the liabilities which is an indicator of better management and better prospects in the operations of such a company. For Foxtons Plc, the £ 152.6m value indicates a more promising asset balance trends and this is highly attractive to the potential investors (Lewellen 2006). The company has able to reduce its liabilities considerably and further increased the value of its assets to great extent. The balance which comes out of this calculation indicates that the company is on the right direction towards going concern and has no threat of any nature. Investors would therefore be much interested in seeking to benefit from the better trends and positive prospects existing in the company by seeking to invest in its shares. This total value is further dividend by the existing number of shareholders to determine the offer price for the stock of the company. In the case of the company, the offer process which at which the company was valued in 2016 depending on its asset base was £1.24 Book Value Per Share = (Total Equity - Preferred Stock) / Shares Outstanding (EOP) = (170.6 - 0.0) / 138.0 = 1.24 Market Value approach The market value approach is one of the ways of performing evolution for the company by considering the average prevailing process in the market. There is other business some within the same industry which has performed valuations before. Most of them have more asset base while other had fewer assets within their possession (Ljungqvist 2005). In fact, nearly every player within the Real Estate market in UK performs valuation process especially before issuing the shares to the public. The aspect of competition and also the statutory regulation existing in the country mandates every player to engage in this process so as to clearly provide all the information to the public to enable them make decision. There are several prices prevailing in the market depending on the size of the business, age and also the nature of activities performed within the business. However, the averages rate that is prevailing in the market ranges from $1.00-$2.00. Most of the companies in the market have this as their range of valuation price available for investors in the market. Therefore, Foxtons Plc considers much on the prevailing prices in the market as it tends to its price so as to be competitive and relevant within the industry (Fishe 2002). A very high cost price will scare potential; investors and also reduce the chances of subscription of the shares of the company. Therefore, the price set out corresponds to that which prevails and falls within the market domains. The following data provides an historic overview of the offer prices by the company Foxtons Group PLC Annual Data Dec10 Dec11 Dec12 Dec13 Dec14 Dec15 Dec16 Book Value Per Share 0.00 0.00 0.00 0.16 0.38 0.63 1.66 1.62 1.62 1.24 Foxtons Group PLC Semi-Annual Data Dec11 Dec12 Jun13 Dec13 Jun14 Dec14 Jun15 Dec15 Jun16 Dec16 Book Value Per Share 0.38 0.63 0.00 1.66 1.72 1.62 1.62 1.62 1.36 1.24 Comparison between the offer price and that in the Prospectus There is a great difference between the offer prices for the shares of the company as compared to the amount featuring in the prospectus. The prospectus is in regards to the IPO guiding the initial issue of the shares of the company. During this time, the shares were issued to enable the company to start up operating. The other shares subsequently issued came after the initial issues and depended much on the performance of the company. There is a great difference in these two types of prices in respect to the company. The value of offer price is £1.24 while the value of the price indicated in the prospectus is £0.01 the par value of the ordinary shares issued. There is a great difference between these two amounts. One of the reasons explaining the differences regards the time at which they both relate to the company. The share issue which occurred at the IPO relates to the initial shares that were maintained to raise initial start-up capital to help run the operations of the company. They relate to the shares issued when the company had not yet started service operations. It was still new in the market, and nobody understood its prospects or its chances of profitability (Reuter 2006). This presented much uncertainty in the face of potential investors in the market since every investor would wish to put his capital in something that has demonstrated prospects for profitability and growth. The initial public offer comes at the time when the company just engaged in the start of its business activities. Therefore, the price at which the shares went during the IPO issue was relatively lower as compared to any subsequent issues. On the other hand, the offer price at which the shares went in 2016 and any other subsequent years were relatively higher than the IPO issue price. Any company which has engaged in business for sometimes is bound to make profits and comes up with other returns from the capital investments. In the case of Foxtons Plc, the financial statements of the company have shown a progressive rise in the revenues across the years. The profits made in the company have considerably increased, and this has had a positive signal in the market. The potential investors usually seek to be associated with companies that have better performance indicators such as Foxtons Plc. This implies that the potentials of the company rose and this attracted many potential investors into the company. Whenever the demand rises, the prices always rise considerably. The price of the shares rose after the company improved its performance over time (Tian 2011). Whenever a company demonstrates better performance in the market, the interest in its shares grows immensely. Many potential investors seek interest in such a company because they are assured of returns from their investments. The company responds by increasing the share price of the various shares put on offer. This explains why the price charged during the IPO is relatively lower as compared to the price charged on the shares after the company has existed in the market for sometimes. Price at the IPO and the stock’s closing price The first day of trading of the company is usually marred by low turnout and speculative operations. This is explained by the cloud of uncertainty which always surrounds the first days of operations. What the rate of business turn up is relatively lower, and the rate of returns considerably reduces at the first day of operations. In many cases, the company remains at the lower standards regarding its price for shares as well as the closing stock price. In the first days of operations of the company, the rate of trade of the stocks was considerably lower. The number of buyers is low and the number of transactions made on this particular day is relatively lower. In many companies, the stock price is usually compared to the prospectus price in regards to the levels of activity in such a company (Fernando et al. 2004). In the case of Foxtons Plc, the price charged at the IPO was relatively lower as compared to the price charged on the first day of trade. There were considerable transactions on the first day. This is compared to the issuance or the price during the IPO when the company had not been established or had not commenced operations. There were several uncertainties at the IPO price setting as compared to the stock price during the first day of transaction. This is explained based on the argument that the first day of the transactions had witnessed at least some level of transaction that could not be compared to the IPO date. Therefore, the price of the stocks at the closing date of the first transaction date was relatively high as compared to the price of the IPO for Foxtons Plc. Evaluation of the stock One feature which best describes Foxtons Plc regards its ability to ensure the rise in the value of its stock over time. The company has been able to ensure appreciation of the stock value. A clear study of the patterns of the stock value of the company shows an increase in the value as compared to the initial starting years of the company. Every year experiences about 1.55 increases in the value of the stock of the company. The stock value is dominated on its extent to make returns on its sales and also ion its profitability trends. According to the financial statements cited above, the company has had a significant rise in its profitability status (Fernando et al. 2004). The number of transactions entered by the company has increased, and this has led to increasing in the revenue potentials. Also, there has been a considerable increase in the levels of Real Estate returns by the company advancing on the levels of income reported in the company. The stock value of the company has indicated an immense rise in the percentage across the years. The greater percentages have been realized in 2015 and 2016as compared to other years. This is attributed to the increase in the number of transactions. The values are relatively higher as compared to 1 year after listing of the company and from the issue of the IPO (Fishe 2002). The increase in the value of the stock in the company depends largely on the kind of transaction which has so far occurred in the company since its listing. There has equally been a considerably rise in the share price of the company across the years. This trend has therefore impacted positively to the company advancing the market value and the performance of its stock even in the stock market of London. References Aggarwal, R. K., Krigman, L., & Womack, K. L. (2002). Strategic IPO underpricing, information momentum, and lockup expiration selling. Journal of financial economics, 66(1), 105-137. Arthurs, J. D., Hoskisson, R. E., Busenitz, L. W., & Johnson, R. A. (2008). Managerial agents watching other agents: Multiple agency conflicts regarding underpricing in IPO firms. Academy of Management Journal, 51(2), 277-294. Biais, B., Bossaerts, P., & Rochet, J. C. (2002). An optimal IPO mechanism. The Review of Economic Studies, 69(1), 117-146. Derrien, F., & Womack, K. L. (2003). 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