Evaluating The Value Of Halfords Uk Finance Essay - Free Essay Example

Halfords is the UKs leading retailer, on the basis of turnover, in each of the key product markets in which it operates, being, car maintenance, car enhancement and leisure (including cycles and cycle accessories and roof boxes etc. Founded as a local hardware store in Birmingham inÂÂ  1892ÂÂ  by F W Rushbrooke, Halfords has since grown to establish its position as the leading retailer of car parts, car enhancement, cycles and travel solutions in the UK.ÂÂ   In this report the value of the company is evaluated on the basis of its current statutory accounts. In this report the alternative sources of finance available for the company are also discussed. The areas of corporate risk when raising finance, paying particular attention to funds available to the company are also discussed. Business valuation: A formal assessment of the value of a business using pre-determined and generally agreed upon formulas. Theres a range of ways to value a business. Valuations based on multiples of future earnings and the capitalisations of future cashflows are the most common. There are a number of common valuation methods: Asset valuation Earning value approaches Entry cost Market approach. Discounted cash flow Industry valuations Asset-based approaches Asset based business valuation methods total up all the investments in the business. Asset-based business valuations can be done on a going concern or on a liquidation basis. AÂÂ  going concern asset-based approachÂÂ  determines the business net balance sheet value of its assets and subtracts the value of its liabilities. AÂÂ  liquidation asset-based approachÂÂ  represents the net cash that would be received if all assets were sold and liabilities paid off. Earning value approaches Earning value business valuation methods are predicated on the idea that a businesss true value lies in its ability to produce wealth in the future. The most common earning value approach is about Capitalizing Past Earning. With this approach, a valuator determines an expected level of cash flow for the company using a companys record of past earnings, normalizes them for unusual revenue or expenses, and multiplies the expected normalized cash flows by a capitalization factor. The capitalization factor is a reflection of what rate of return a reasonable purchaser would expect on the investment, as well as a measure of the risk that the expected earnings will not be achieved. Discounted Future EarningsÂÂ  is another earning value approach to business valuation where instead of an average of past earnings, an average of the trend of predicted future earnings is used and divided by the capitalization factor. Market value approaches Market value approaches to business valuation attempt to establish the value of the business by comparing the business to similar businesses that have recently sold. Obviously, this method is only going to work well if there are a sufficient number of similar businesses to compare. Valuation of Halfords Using the Market Value approach: In the report the Halfords Company is going to be evaluated using the market value approach. Valuation Multiple A value, typically expressed as a factor, used to multiply a business economic benefit to arrive at the business value. Market-derived business valuation multiples Valuation multiplesÂÂ  derived from similar business sales are often used to estimate the likely selling price of a business. These multiples are calculated as ratios which relate some measure of business financial performance to its potential selling price. The most popularÂÂ  multiplesÂÂ  are: Selling price divided by business gross revenue Selling price divided by business net sales Selling price divided by cash flow, such asÂÂ   Sellers Discretionary Cash FlowÂÂ  orÂÂ  Net Cash Flow OtherÂÂ  valuation multiplesÂÂ  that are also used rely on well-known accounting measures, for example: Selling price divided byÂÂ  EBITDA,ÂÂ  EBITÂÂ  or net income Selling price divided by gross profit Selling price divided by the book value ofÂÂ  business assets Selling price divided by the market value of total business assets or fixed assets such asÂÂ  Furniture, Fixtures and Equipment Selling price divided by the value of owners equity Analyst Estimates: ÂÂ   2009 2010 2011 Revenue (GBP millions) 790.34ÂÂ   792.00ÂÂ   816.67ÂÂ   Estimates 15ÂÂ   15ÂÂ   11ÂÂ   High 816.00ÂÂ   829.00ÂÂ   842.55ÂÂ   Low 784.70ÂÂ   780.00ÂÂ   774.30ÂÂ   Net Profit Pre Exceptional (GBP millions) 62.89ÂÂ   66.77ÂÂ   68.84ÂÂ   Estimates 9ÂÂ   8ÂÂ   7ÂÂ   High 69.83ÂÂ   69.00ÂÂ   71.31ÂÂ   Low 53.90ÂÂ   62.61ÂÂ   64.98ÂÂ   Net Profit As Reported (GBP millions) 63.64ÂÂ   67.20ÂÂ   70.80ÂÂ   Estimates 5ÂÂ   2ÂÂ   2ÂÂ   High 65.20ÂÂ   67.80ÂÂ   71.20ÂÂ   Low 62.60ÂÂ   66.60ÂÂ   70.40ÂÂ   Pre-Tax Profit Pre Exceptional (GBP millions) 91.11ÂÂ   94.18ÂÂ   97.80ÂÂ   Estimates 17ÂÂ   14ÂÂ   10ÂÂ   High 94.50ÂÂ   97.08ÂÂ   102.00ÂÂ   Low 78.00ÂÂ   89.44ÂÂ   92.70ÂÂ   Pre-Tax Profit As Reported (GBP millions) 87.48ÂÂ   94.90ÂÂ   98.23ÂÂ   Estimates 6ÂÂ   3ÂÂ   3ÂÂ   High 92.00ÂÂ   96.00ÂÂ   101.00ÂÂ   Low 75.90ÂÂ   94.20ÂÂ   96.00ÂÂ   EPS Pre Exceptional (GBp) 31.21ÂÂ   31.94ÂÂ   33.10ÂÂ   Estimates 18ÂÂ   16ÂÂ   12ÂÂ   High 33.60ÂÂ   33.25ÂÂ   34.70ÂÂ   Low 29.86ÂÂ   29.84ÂÂ   30.97ÂÂ   EPS As Reported (GBp) 27.55ÂÂ   32.87ÂÂ   34.38ÂÂ   Estimates 6ÂÂ   5ÂÂ   5ÂÂ   High 32.40ÂÂ   33.60ÂÂ   36.30ÂÂ   Low 23.00ÂÂ   31.98ÂÂ   33.28ÂÂ   CPS (GBp) 34.36ÂÂ   39.34ÂÂ   40.82ÂÂ   Estimates 5ÂÂ   5ÂÂ   4ÂÂ   High 40.50ÂÂ   44.10ÂÂ   46.04ÂÂ   Low 26.00ÂÂ   25.10ÂÂ   28.60ÂÂ   DPS (GBp) 15.88ÂÂ   16.69ÂÂ   17.60ÂÂ   Estimates 18ÂÂ   16ÂÂ   12ÂÂ   High 16.50ÂÂ   18.00ÂÂ   19.00ÂÂ   Low 15.14ÂÂ   16.00ÂÂ   16.50ÂÂ   EBITDA (GBP millions) 123.84ÂÂ   124.99ÂÂ   128.60ÂÂ   Estimates 13ÂÂ   13ÂÂ   8ÂÂ   High 128.50ÂÂ   131.00ÂÂ   135.00ÂÂ   Low 109.45ÂÂ   116.00ÂÂ   125.71ÂÂ   EBIT (GBP millions) 101.47ÂÂ   100.53ÂÂ   104.05ÂÂ   Estimates 12ÂÂ   11ÂÂ   8ÂÂ   High 105.00ÂÂ   105.00ÂÂ   110.00ÂÂ   Low 86.97ÂÂ   95.00ÂÂ   100.50ÂÂ   NAV (GBp) 118.00ÂÂ   131.20ÂÂ   147.80ÂÂ   Estimates 1ÂÂ   1ÂÂ   1ÂÂ   High 118.00ÂÂ   131.20ÂÂ   147.80ÂÂ   Low 118.00ÂÂ   131.20ÂÂ   147.80ÂÂ   Currant finance structure: Treasury policy The Groups Treasury Policy is structured to ensure that adequate financial resources are available for the development of its business whilst managing its currency, interest rate and counterparty credit risks. The Groups treasury strategy, policy and controls are approved by the Board. The main elements of treasury activity and associated risk are outlined below: Funding The treasury function arranges sufficient secure financial resources to enable the Group to meet its medium-term business objectives, whilst arranging facility maturities appropriate to its projected needs. The Group has a syndicated five-year term facility, maturing with a bullet repayment in July 2011, totalling 300m of committed bank facilities, comprising a non-amortising term loan of 180m and a revolving credit facility of 120m, which, together with cash surpluses, provide adequate funding for the Groups operations. Counterparty credit risk The Group actively manages its relationships with a panel of high quality financial institutions. Credit risk is controlled by the treasury function setting counterparty credit limits by reference to published rating agency credit ratings and the Corporate Default Swap market. All such counterparties, which constitute the syndicated bank group, held at least an A credit rating at the time of the facility agreement. The Treasury Policy recognises that an exposure to a counterparty arises in relation to investments, derivatives and financial instruments. The Groups treasury departments main responsibilities are to: ÃÆ'Â ¢-ÂÂ   Ensure adequate funding and liquidity for the Group; ÃÆ'Â ¢-ÂÂ   Manage the interest risk of the Groups debt; ÃÆ'Â ¢-ÂÂ   Invest surplus cash; ÃÆ'Â ¢-ÂÂ   Manage the clearing bank operations of the Group; and ÃÆ'Â ¢-ÂÂ   Manage the foreign exchange risk on its non-sterling cash flows. The Groups debt management policy is to provide an appropriate level of funding to finance the Business Plan over the medium term at a competitive cost and ensure flexibility to meet the changing needs of the Group. The Group has a syndicated five-year term facility totalling 300m that provides the Group with committed bank facilities until July 2011. The key risks that the Group faces from a treasury perspective are as follows: Financial risk The Business Plan and cash flow forecasts are subject to key assumptions such as interest rates and the significance of these risks is dependent upon the level of earnings before interest, tax, depreciation and amortisation and the strength of the balance sheet. Interest rate risk The Groups policy aims to manage the interest cost of the Group within the constraints of the Business Plan and its financial covenants. The Groups borrowings are currently subject to floating rate and the Group will continue to monitor movements in the swap market. Foreign currency risk The Group has a significant transaction exposure with increasing, direct source purchases of its supplies from the Far East, with most of the trade being in US dollars. The Groups policy is to manage the foreign exchange transaction exposures of the business to ensure the actual costs do not exceed the budget costs by 10% (excluding increases in the base cost of the product). The Group does not hedge either economic exposure or the translation exposure arising from the profits, assets and liabilities of non-sterling businesses whilst they remain immaterial. During the 53 weeks to 3 April 2009, the foreign exchange management policy was to hedge between 75% and 80% of the material foreign exchange transaction exposures on a rolling 15-18 month basis. Hedging is performed through the use of foreign currency bank accounts, spot rates and forward foreign exchange contracts. Credit risk The Groups policy is to minimise the risk that foreign exchange and interest rate derivative counterparties, the holders of surplus cash and the providers of debt will be unable to fulfil their obligations and also, in the case of lenders, unwilling to extend the loan facilities when they expire. The Group ensured that such counterparties used for credit transactions held at least an A credit rating at the time of syndication (July 2006). Ancillary business, in the main, is directed to the eight banks within the syndicated group. The Treasurer is responsible for determining creditworthiness of each counterparty, based on the overall financial strength of the counterparty. The counterparty credit risk is reviewed in the Treasury report, which is forwarded to the Treasury Committee and the Treasurer reviews credit exposure on a daily basis. Conclusion: Depending on the financial data provided by the Halfords Company the current financial stability of the company is successfully analyzed. References Annual report: Halfords PLC https://www.halfordscompany.com/hal/ir/fininfo/reports/ https://www.valuadder.com/glossary/valuation-multiplier.html https://financial-dictionary.thefreedictionary.com https://www.investopedia.com/terms/c/costofcapital.asp https://www.lse.co.uk/shareprice.asp?shareprice=THTshare=thorntons_plc_ord_10p Word Count: 2078