(Solution) FINM036 Financial Decision Making

Solution

UNIVERSITY OF NORTHAMPTON

FACULTY OF BUSINESS AND LAW

FINANCIAL DECISION MAKING

FINM036

ASSIGNMENT

REPORT ANALYZING THE PERFORMANCE AND OPERATIONS OF BILLINGTON HOLDINGS PLC

1. Table of Contents
2. Introduction…………………………………….………………………………………………….3
3. Company Overview………………..……………………………………………………………3-4
4. Equity Holdings………………………………………………………………………………….4-5
5. Statement……………………………………………………………………………….………….5
6. Competitor…………………………………………………………………………………………6
7. Financial Ratios Analysis………………………………………………………………………….7
8. Profitability Ratios………………..……………………………………………………………..7-8
9. Efficiency Ratios……………………………………………………………………………..…8-9
10. Liquidity ratios…………………………………………………………………………..…….9-10
11. Gearing Ratios…………………………………………………………….………………….10-11
12. Corporate Governance Compliance……………………………………………………………..12
13. Compliance……………………………………………………………………………………12-13
14. Proposed Financial Strategies…………………………………………………………………….13
15. References…………………………………………………………..………………………..14-15
16. Appendix 1……………………………………………………………………………………….16
17. Appendix 2……………………………………………………………………………………….17

Introduction

This statement is a financial analysis of the Billington Holdings Plc, the organisation is listed on the Alternative Investment Market (AIM) in the London Stock Exchange, the ratios for the past 5 years will be analysed, which will include profitability, efficiency and liquidity. Moreover, the company will be compared with a competitor within the same industry, namely Sigmaroc Plc. Therefore, the analysis will inform the development of the company’s vision and strategic financial goals as it anticipates on becoming a FTSE 100 company in the near future. Lastly, the company’s corporate governance compliance and brand impact and reputation will be evaluated. Consequently, the comprehensive report will aim at creating financial strategies for the company to become a FTSE 100 company and dominate the construction and materials industry in the UK.

Company Overview

The company is located in South Yorkshire, United Kingdom, and operates within the construction services, construction equipment, and building subcontractors sector (Lse, 2019). Billington Holdings was established in 1989, and the stock were listed on the London Stock Exchange under the ticker BILN on November 3, 2000. The company operates several subsidiaries, including Billington Structures Limited and Peter Marshall Steel Stairs Limited, which predominantly focus on the structural steelwork manufacturing and design (Marketline, 2020). In addition, the other subsidiary is Easi-Edge Limited, which provides safety solutions and barrier systems to the building sector. Notably, the company is also involved in the manufacturing of underground tunneling, road heading equipment, and the construction of schools and power stations ((BILN, 2020). In this regard, the organisation has become one of the UK’s leading

structural steelwork contractors because of its nearly 70 years’ professional experience within the industry.

The company has a workforce of nearly 379 individuals, and the chief executive officer is Mark Smith, who has to lead the company since 2015 ((BILN, 2019). Because of this experienced and skilled labor force, the company is capable of producing complex structures over 12000 tonnes. Moreover, the organization has steel plants in Barnsley and Bristol, which can produce nearly 35,000 tonnes of fabricated steel per year. The company also can service the UK market and other strategic markets within the European Union. Additionally, the company has the capacity and expertise to provide edge protection solutions and safety barriers for its customers’ labor force. As expected, the company is also a leading fabricator of steel staircase for residential, domestic, and commercial buildings within the UK. Therefore, due to its presence and vast experience in the construction sector, the company has a competitive edge against other players in the industry.

Equity Holdings

The Billington top ten shareholdes are summarised in the table below based on the amount of equities held and percentage of ownership. The top ten shareholders hold 87.16% of the total equity whereby the instituional stockholders and individual stockholders account for 80.99% and 6.17% respectively.

The Billington equity holding are summarised below.

Statement

The Chairman’s statement reveals that Billington achieved impressive performance evidenced by substantial progress across all divisions regarding the growth in revenues and profit before tax as well a strong balance sheet (Annual Report, 2019). The CEO statement validates that the company reported strong performance and presents the operational review of the Billington Structures, Shafton Steel Services, firm’s commitment to health, safety, sustainability, people as well as the steel industry and prospects and outlook (BILN, 2020).

Competition

One of the key strategic competitors of Billington Holdings PLC is Sigmaroc PLC. Both companies operate in the construction material space within the UK and the European Union. Notably, Sigmaroc PLC is registered in AIM and has a deliberate understanding of the construction material industry. The company’s Chief executive Chairman is David Barret, who has incorporated a solid strategy and operational expertise within the sector. As a consequence, the company proves to be a worthy competitor to Billington holdings PLC (Sigmaroc Annual Report). Both companies have tapped into their pool of experienced and skilled labor force to remain dynamic and competitive.

Theorectical Basis

Billington has been experiencing considerable growth in the financial performance as evidenced by revenues and high profits. This can be attributed to the firm’s strengths that include delivery of diverse projects across varied sectors, like distribution, high-end residential, leisure. Another strength is the strong reputation in the market, which has led to the record order books that encourage a pipeline of opportunities. In addition, the company’s strengths are the cost savings, low debt financing, higher efficiency in production, strong liquidity, and capital positions. The Group is well-positioned delivers higher growth in the future, but the main weaknesses are limited product offerings, minimal international presence, higher input costs, and other expenses. The external environment consists of promising prospects of growth in the industry that offer various opportunities that can drive the company’s growth in the future. They include responsible sourcing and sustainable supply chains, global trade, pioneering technological advancements, the advent of the circular economy, and UK Export support mechanisms. Finally, several threats pose a threat to the company, such as fluctuations and volatility in steel prices as well as the Depletion of high-grade raw materials (Lambotte et al. 2018). The UK’s departure from the EU leads to interruptions of supply, pressures on solid waste management, and an increasingly competitive environment that could hinder the future growth of Billington Holdings.

Financial Ratios Analysis

Profitability Ratios

These ratios are used to indicate an organisation’s ability to generate profits from existing operations. Thus, the focus is predominantly on the company’s return on investment from inventory or assets. The information is critical, especially for investors who seek information on a company’s profitability capacity. Billington Holdings’ profitability over the past five years will be analysed using the gross margin, profit margin, return on assets, and return on equity ratios.

Since 2014, Billington has seen a considerable growth in performance owing to consistent investments and improved business environment, as evidenced by high profitability ratios relative to the Sigmaroc PLC and industry margin averages. The gross margin declined since growth in revenues (71.31%) was higher than gross profit (56.94%). The revenues increased primarily due to the surge in Billington Structures output. At the same time, gross profit declined at a slower rate due to pricing pressures, the uncertainty of ongoing and uninterrupted supply of products. Contrastingly, the net margin increased since net profit increased by 180.21%, which was considerably higher than the 71.31% increase in revenues. In 2018, the revenue raised to £77.3

million (2014: £45.103 million), and profit increased to £4.05 million (2015: 1.45 million) both are record values (Annual Report 2018). The ROA and ROE also increased substantially since the net profit growth surpassed the increase in total assets (66.67%) and owners’ equity (63.95%). This is attributed mainly to the successful delivery of diverse projects across a significant number of sectors, like distribution, education, commercial, high-end residential, sports, and leisure. The firm recorded remarkable performance across all divisions, as evidenced by record order books, promising pipeline of opportunities, and costs savings. The Group is well-positioned deliver higher growth in the future.

Efficiency Ratios

Efficiency ratios are used in measuring Billington’s ability to utilize its asset base and manage short-term liabilities effectively by assessing how efficiently the Group uses its assets in generating sales revenues while managing assets (McLaney and Atrill, 2018). The Group’s efficiency will be analyzed using the inventory turnover, asset turnover, and accounts receivables turnover ratio and compared to its competitor and industry average.

• the past five years, the Group recorded an increase in efficiency in the management of the inventory, account receivables, and total assets, as illustrated by the steady rise in all efficiency ratios. Billington outperformed Sigmaroc PLC and industry in terms of the asset turnover and accounts receivables turnover but, the inventory turnover was slightly below the peers in the industry. The inventories, accounts receivables, and total assets increased by 42%, 48%, and 67%
• the business enjoyed an increase in activity levels in the past five years. Thus, the accounts receivables turnover increased from 8.9 to 10.27, which means that the Group is now collecting its receivables more than ten times annually. The upward trend denotes higher efficiency that is favorable from the cash flow viewpoint since the cash is collected sooner and is used in settling obligations. Likewise, the increasing inventory turnover means that the Group is efficiently controlling its merchandise and effectively selling its inventory. But, in 2018, there was a slight decline in inventory turnover due to the UK’s imminent departure from EU and the allied uncertainty that has undoubtedly presented challenges in the supply of products since the Group sources some of its products from Europe through subcontractors and suppliers

Liquidity Ratios

The liquidity ratios are used in the measurement of the Billington’s capacity of meet its current debt obligations by paying off its current liabilities once they are due (Fridson 2011). The Group’s liquidity will be appraised using the cash, current, and acid test ratios.

The liquidity analysis demonstrates that the Group’s liquidity increased in the last five years since the cash, current, and acid-test ratios increased considerably. However, the current and acid-test ratios are lower than Sigmaroc PLC and industry average. In terms of the cash ratio, Billington Holding outperformed Sigmaroc PLC and peers in the industry. The increasing liquidity

rations can be attributed to the fact that the increase in current assets (66%) surpassed the growth in current liabilities (61%). The 66% increase in current assets included the increase in inventories, 42%, trade, and other receivables 48%, as well as growth in cash balances (140%). Whereas, the total rise of £7,457, 000 in current liabilities mainly comprised a growth in trade and other payables following a considerable increase in the activity levels. In 2018, the Group reported net cash inflows amounting to £1.20 million resultant in gross cash balance worth £9.30 million, meaning that the company has adequate funds to cover its working capital requirements along with funding opportunities as soon they arise in the future.

Gearing Ratios

The gearing ratios are used in measuring the financial leverage of the Group by assessing the degree of the interest-bearing liabilities in the company capital structure (Subramanyam 2014).

The Group’s debt to equity and debt to assets ratios increased in 2015; since then, the ratio has declined from 15.22% to 6.40%. The debt to equity and debt to assets metrics are much lower than the Sigmaroc PLC and industry average, which implies that the company uses less debt funding relative to peer companies in the industry. In 2018, the debt to equity and debt to assets

were 6.40% and 3.37%, which implies the liabilities account for only 6.40% of the equity and 4.37% of the total assets. Since 2014, the non-current debt increased by 437.63%, while the owners’ equity increased by 63.95% (Annual Report 2013). But, the higher interest coverage ratio proves that Billington can service its debt because the company is making sufficient money to pay its interest as well as principal payment on existing debt. The interest average ration is too high, meaning that the company can offset interest on debt with no chances of defaulting. The conservative funding policy signifies that the company has lower financial risks to debt funding and higher costs of servicing the debt in comparison to the peers in the industry (Editorial, 2020). The analysis of the gearing ratios denotes that the company uses investor funding and a modest level of debt to invest in the Group’s factories and sites to ensure that the company continually improve its operational and financial performance.

Corporate Governance Compliance

Good corporate governance is one of the core values upheld as it is a requirement in the standards of the AIM-listed entities. The Group has undertaken a serious approach in safeguarding that the Board of directors applies the Quoted Companies Alliances Corporate Governance Code that is used in the regulation of the Small and Mid-sized Quoted Companies (Quoted Companies Alliance 2013).

Compliance

The evidence of compliance with the corporate governance standards involves the separation of the role of the CEO (Mark Smith) and Non-Executive Chairman (Ian Michael Lawson) (Mallin 2013). The Chairman is accountable for leading the Board, facilitating the contribution of members, and ensuring that the Board operates in the shareholders’ interest. The CEO is liable for business leadership and the implementation of the core strategy. The Board comprises of two (2) Executive and three (3) Non-Executive Directors, and the Board chair is the Non-Executive Chairman; hence, the representation of the Non-Executive to Executive Directors in the company’s Board is 60% and 40% respectively. According to Thornton (2018), The Board meets officially 11 times yearly and on ado basis if necessary. In the past fiscal year, the board attendance was Mark Smith (11/11-100%), Trevor Taylor 11/11-100%), Peter Hems (11/11-100%), John Gordon (10/11-91%), Doctor Ospelt (2/11-18%), and Stephen Wardell – 0/0 (appointment January 2019). However, the company does not observe gender and diversity since the Board consists of 7 with no women representation on the company’s Board. The Non-Executive Directors are viewed by the Board as independent of the company’s management as they bring experience welcomed by Executive Directors. Consistent with the corporate governance structure, the Board has formed an Audit and Remuneration Committees. As a result, Billington

Holdings’ adherence to corporate governance standards has had a positive impact on the Billington brand and reputation in the steel industry (Billington Holdings PLC. 2020).

Proposed Financial Strategies

The company should focus on improving the production methods using the latest technologies and increasing the contributions from in-house manufacturing of its products to ensure that Billington Structures and Shafton Steel Services are operating at the near-optimal output. The increased production will support the record order book that has been demonstrated in recent years while ensuring that the business is well aligned to deliver revenues in the medium and long-term. The Group should increase its sales efforts by focusing more on securing more extensive and diversified contracts with partner clients across all segments to generate higher sales. The company should explore cheaper debt funding options for funding further investments in a substantial capital expenditure program in Billington’s core products, better utilization, as well as new customer, wins to maximize opportunities in the industry, and drive growth.

The Group should continue seeking cost savings and improved utilization where suitable to enhance the sustainability of the company’s gross and net profit margins. There are margin pressures within the global structural steel markets. However, prospects point towards added growth driven by growing demand (International Iron and Steel Institute 2017). The Group should also remain alert to continuously evolving economic and political uncertainties like the Brexit by aiding in the development and implementation of suitable measures that are aimed at identifying and addressing the risks presented to each aspect of the business. The company should undertake projects in other countries in emerging economies to lower the present risks of delay in construction projects, cost fluctuations of the inputs as well as the uncertainty of quantum of revenues in the U.K markets. The implementation of these strategies will result in additional years of growth and progression for the Billington Group in the near and long-term.

Reference

1. Bilington Holdings PLC.(2020) (n.d.). Retrieved Jan 9, 2020, from Bloomberg:https://www.bloomberg.com/profile/company/BNGHF:US
2. (BILN), B. (2020). About Billington Holdings PLC (BILN) – Investing.com. [online] Investing.com. Available at:https://www.investing.com/equities/billington-holdings-plc-company-profile [Accessed 09 Jan. 2020].
3. Billington Holdings Plc (BILN). (2020). Retrieved Jan 9, 2020, from Market Screener:https://www.marketscreener.com/BILLINGTON-HOLDINGS-PLC-4001636/company/
4. Billington Holdings Plc (2019). Company Profiles: Billington Holdings Plc. Business Source Premier.
5. Billington Holdings Plc (BILN). (2019). Report and Finanical Statements for the year ended 31 December 2018. Retrieved Jan 9, 2020,https://billington-holdings.plc.uk/wp-content/uploads/2019/11/BH_Report_and_Financial_Statement_Year_Ended_2018_WEB_SP-2.pdf.
6. Billington Holdings PLC. (2020). Board Profile – Billington Holdings PLC. [online] Available at:https://billington-holdings.plc.uk/aim-information/board-profile/ [Accessed 10 Jan. 2020].
7. Eddie McLaney and Peter Atrill, (2018), Accounting and Finance: An Introduction 9th edition.
8. Editorial, R. (2020). BILN.L – Billington Holdings PLC Profile | Reuters. [online] Uk.reuters.com. Available at:https://uk.reuters.com/companies/BILN.L/profile [Accessed 10 Jan. 2020].

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4. Lambotte, Guillaume., Lee, Jonghyun., Allanore, Antoine., & Wagstaff, Samuel. (2018). Materials processing fundamentals 2018.
5. Mallin .A. Christine (2013). Corporate governance. Oxford, Oxford University Press.
6. Marketline-com.ezproxy.northampton.ac.uk. (2020). Sign In. [online] Available at:https://advantage-marketline-com.ezproxy.northampton.ac.uk/Company/Summary/billington-holdings-plc [Accessed 10 Jan. 2020].
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9. Subramanyam, K. R. (2014). Financial statement analysis. New York, NY: McGraw Hill Education.

Appendix One: Selected Financial Data

Appendix Two: Formula

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