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Corporate Financial Management

Strategic Direction

(a) A.G. Barr Plc, also called as Barr’s, is a public limited company from Scotland that manufactures soft drinks. Founded in 1875, this company is listed under the FTSE 250 Index of the London Stock Exchange (Agbarr.co.uk, 2018). The company manufactures a wide variety of soft drinks such as Strathmore spring water, Tizer, KA, D'N'B, Barr's Originals, Barr flavour range, Simply juice drinks, Rubicon exotic juice drinks, St Clements juice drinksand Sun exotic (Agbarr.co.uk, 2018).It also produces packaged drinking water, sugar-free squashes, fruit drinks, free laboured water, sports drinks, dilatable, ice lollies and ice creams. A.G. Barr Plc has several offices and factories all around the UK in locations such as Wednesbury, Walthamstow, Sheffield, etc. A.G. Barr Plc also provides rent vending and water cooler machines.

In addition to its brands, A.G. Barr Plchas exciting partnerships and mergers with various third-party brand owners. The company owns an exclusive license from Rockstar Inc. in the US to distribute as well as promote Rockstar Energy in the UK, Ireland along with extending it to Scandinavia (Agbarr.co.uk, 2018). A.G. Barr Plc also has the exclusive license from the Snapple Beverages Corporation, which is a subsidiary of the Dr Pepper Snapple Group to distribute and promote Snapple in UK and EU territories. These, in turn, help the company in gaining more customers and attracting them towards the company’s products. The company has also undergone another acquisition recently of a company named Funkin Limited, which has taken the Group to a completely new segment of different cocktail mixers. These are the main activities of the company.

The strategic report of A.G. Barr Plc presented to its stakeholders show that the main strategy of the company is to deliver long-term sustainable value to its customers (Agbarr.co.uk, 2017). What the overarching ........

inks such as Strathmore spring water, Tizer, KA, D'N'B, Barr's Originals, Barr flavour range, Simply juice drinks, Rubicon exotic juice drinks, St Clements juice drinksand Sun exotic (Agbarr.co.uk, 2018).It also produces packaged drinking water, sugar-free squashes, fruit drinks, free laboured water, sports drinks, dilatable, ice lollies and ice creams. A.G. Barr Plc has several offices and factories all around the UK in locations such as Wednesbury, Walthamstow, Sheffield, etc. A.G. Barr Plc also provides rent vending and water cooler machines.

In addition to its brands, A.G. Barr Plchas exciting partnerships and mergers with various third-party brand owners. The company owns an exclusive license from Rockstar Inc. in the US to distribute as well as promote Rockstar Energy in the UK, Ireland along with extending it to Scandinavia (Agbarr.co.uk, 2018). A.G. Barr Plc also has the exclusive license from the Snapple Beverages Corporation, which is a subsidiary of the Dr Pepper Snapple Group to distribute and promote Snapple in UK and EU territories. These, in turn, help the company in gaining more customers and attracting them towards the company’s products. The company has also undergone another acquisition recently of a company named Funkin Limited, which has taken the Group to a completely new segment of different cocktail mixers. These are the main activities of the company.

The strategic report of A.G. Barr Plc presented to its stakeholders show that the main strategy of the company is to deliver long-term sustainable value to its customers (Agbarr.co.uk, 2017). What the overarching business strategy of the company is delivering its customers and stakeholders long-term sustainable value in whatever the company does. The company portrays that customer insight drives its business. Connecting with customers and understanding them is the foremost strategy of the company (Agbarr.co.uk, 2017). It believes in building and maintenance of successful, long-lasting relationships with customers across various routes of the market. The company also highlights that it is both a brand owner as well as a brand builder that offers a variety and differentiated product portfolio that is loved by its stakeholders (Agbarr.co.uk, 2017). Development of partnerships is yet another strategy of the company. With strong aspirations both in the UK and overseas, A.G. Barr Plc recognizes the benefits of working in partnerships.

The company continuously strives for effectively operating its business by ensuring powerful financial controls of the company are in its place along with investing for growth (Agbarr.co.uk, 2017). The company is committed to driving continuous improvements across its technology and processes along with its developments. Acting responsibly is also a strategy of A.G. Barr Plc. The company believes that the way it acts reflects who it is due to which it takes its responsibilities seriously and aims at being responsible and sustainable by listening to its clients, taking care of its people, minimizing its environmental hazards while benefitting the community that it serves.

(b)The analysis of the annual reports and the evaluation of the activities of the organization A.G. Barr Plc show that the strengths of the company are huge. The high revenue and profitability of the company, the low labour costs, the strong presence in the domestic market, the negligible barriers to market entry, the skilled workforce and monetary assistance of the company acts as its strengths (Agbarr.co.uk, 2018). The strengths of A.G. Barr Plc act as a source of generating new opportunities for the company. The future business opportunities of A.G. Barr Plc are as follows –

  • The high rate of growth and profitability acts as a great opportunity for the company (Agbarr.co.uk, 2018). This is because high growth and profitability are going to provide the company with opportunities for market development, leading to the dilution of the competitive advantage of the company, thereby enabling it to enhance its competitiveness.
  • The present economic conditions of the UK market show that the rate of inflation in the economy is low (Breinlich et al., 2017). This, in turn, acts as an opportunity to A.G. Barr for bringing in more market stability by enabling it to provide low-interest rate credit to its customers.
  • The growing demand for the products of the company also acts as a future business opportunity that the business can use for new market penetrations and enhance its customer base in the existing markets. The adoption of A.G. Barr with new technological standards and free trade agreement of the UK government also provides it to open up into the niche and emerging markets.
  • The adoption of new technology in the company also acts as an opportunity for the company to practice differentiated pricing strategies in new markets, which in turn is going to enable the company to maintain its loyal clients through good services and allure new customers with other value-oriented propositions.

However, in spite of the prevalence of these opportunities in the company, there are several risks for the company as well (Agbarr.co.uk, 2017). These risks might be acting as a hindrance in the path of growth and development of A.G. Barr Plc in future. The threats of the company are as follows –

  • New environmental regulations of the company such as the Paris Agreement introduced during the year 2016 can act as a threat for the existing categories of products of A.G. Barr Plc.
  • Intense competition in the market is also pose serious threats to the company in the near future. Stable profitability in the marketplace has led to increase in the number of companies in the industry, which in turn is putting downward pressure on both profitability and sales of A.G. Barr Plc.
  • Changing the behavior of consumers, for example the inclination of customers towards purchasing online products may also act as one of the biggest risks of the company in future. The existing structure of the company’s supply chain is going to be damaged due to changing buyer behaviors, thereby acting as major threats for the company.
  • Fall in demand during the lean season can also be affecting the company. The demand of the company’s highly profitable products is only during the lean season, which reduces largely during lean season.
  • Rising payment level of workers and their rising demands such as $15 per hour and the increase in the prices of labor in China can tend to lower the profitability of the company.
  • Counterfeit imitation and low quality products are also a major threat for A.G. Barr Plc, especially in the low income and emerging markets in which the company operates.

Financial performance

(c) The compare and contrast of the performance of the A.G. Barr Plc show that the operating performance of the company has been fluctuating during the past five years. The annual percentage growth and average annualized percentage increase in the revenue, the gross profit and operating profit of A.G. Barr Plc shows similar fluctuations. However, in spite of fluctuations in the annual percentage growth of operating profit, the operating profit ratio acts as one of the financial strengths of the company, as the operating profit of the company has been more or less good in all the past five years. The gross profit margin also acts as its strength, as the percentage of gross profit has remained constant and high in all the years. Therefore, gross profit ratio and operating profit ratio are the major financial strengths of the company. However, the EPS and dividend per share are the financial weaknesses of the company since there has been fluctuations in both these items in the financial statements of the company.

On the other hand, the annual report of the company A.G. Barr Plc shows that the liquid position of the company is quite good. There has been increase in the cash and cash equivalents of the company during the past five years. The value of the current assets of A.G. Barr Plc is also quite higher than the current liabilities of the company, thereby indicating high liquid position of the company. Thus, the liquid position of the company is also one of the financial strengths held by it. The annual percentage growth and average annualized percentage increase in the EPS of the company has been fluctuating. The growth has been positive in all the years except for 2014-15. Similarly, the annual percentage growth and changes in the total dividend per share also had a remarkable fall. The price to earnings of the ratio, which can be computed from the annual report of the company, also indicates that it is a financial weakness for the company. 

(d) (i) Annual percentage growth (%)

Particulars

2013-14

2014-15

2015-16

2016-17

Revenue (before exceptional items)

6.9403817

2.6802054

0.0019165

-1.456497

Gross profit (before exceptional items)

7.5478686

6.1615414

-2.767754

0.6672227

Operating profit (before exceptional items)

-9.186352

20.566016

-0.078323

2.3752969

Basic earnings per share (before exceptional items)

10.0611

-3.774981

13.961538

3.8812015

The total dividend paid per share

504.23939

-36.94956

36.216836

-3.368125

 

(ii) Average annualized percentage increase (compound annual growth rate)

Particulars

2013-14

2014-15

2015-16

2016-17

Revenue (before exceptional items)

0.0694038

0.0268021

1.916E-05

-0.014565

Gross profit (before exceptional items)

0.0754787

0.0616154

-0.027678

0.0066722

Operating profit (before exceptional items)

-0.091864

0.2056602

-0.000783

0.023753

Basic earnings per share (before exceptional items)

0.100611

-0.03775

0.1396154

0.038812

The total dividend paid per share

4.8710654

-0.327199

0.1953107

-0.083333

 

Ratios

2013

2014

2015

2016

2017

Operating profit margin

13.37907

13.64898

148.716

16.27997

17.03617

Gross profit margin

45.45719

45.30649

44.84477

46.82908

46.94671

 

 

(e) The cash conversion cycle refers to the metric that is used for gauging the effectiveness of a business through the measurement of the pace at which it converts to cash in hand into inventory and trade payables, through accounts receivable and sales, and converting them back of cash (Nobanee & Al Hajjar, 2014).

Cash conversion cycle = Days inventories outstanding + Days sales outstanding – Days payables outstanding,

Where, Days inventories outstanding = (Average stock in hand or inventories / 365) x Cost of sales

Days sales outstanding = (Average trade or accounts receivables / 365) x Net credit sales

And, Days payables outstanding = (Average trade or accounts payable / 365) x Cost of sales

 

Calculation of the cash conversion cycle of 2016

Days inventories outstanding = (15.6 / 365) x 137.5 = 41.41 days

Days sales outstanding = (52.7 / 365) x 258.6= 73.49 days

Days payables outstanding = (37.4 / 365) x 137.5= 99.28 days

Therefore, the cash conversion cycle of AG Barr Plc for the year ended 2016 = 41.41+73.49-99.28 = 16.51 days

Calculation of the cash conversion cycle of 2017

Days inventories outstanding = (17.3 / 365) x 136.4 = 46.29 days

Days sales outstanding = (51.4 / 365) x 257.1= 72.97 days

Days payables outstanding = (52.3 / 365) x 136.4= 139.95 days

Therefore, the cash conversion cycle of AG Barr Plc for the year ended 2016 = 41.41+73.49 – 99.28 = -20.69 days

(f) Ratio analysis is one of the most essential tools that help a company in measuring its performance (Warren & Jones, 2018). However, in addition to performance measurement, the tool of ratio analysis can also be used in a company for measuring its financial stability and risks. The ratios showing the financial risks of A.G. Barr Plc are as follows –

Financial stability ratios

2016

2017

Current ratio (Current assets / Current liabilities)

76.8 / 41.8 = 1.82

80.2 / 56.7 = 1.41

Debt ratio (Total debts / Total assets)

88.9 / 269 = 0.33

93.8 / 275.6 = 0.34

Debt equity ratio (Total debts / Total equity)

88.9 / 180.1 = 0.49

93.8 / 181.8 = 0.52

 

The current ratio of a company shows the short-term financial stability of a company. The analysis and comparison of the current ratio show that the liquid position of the company has decreased from 1.81 to 1.41 from 2016 to 2017, thereby indicating that the company has increased its risks of short-term financial instability. However, the liquid position of the company, in spite of decrease, is still quite stable. On the other hand, the debt ratio and the debt-equity ratio of a company indicate its long-term financial stability. Both the debt ratios of the company have decreased slightly from 2016 to 2017. However, the solvency of the company is still quite good.

 

 

Efficient market hypothesis

(g) The concept of efficient market hypothesis or stock market pricing efficiency is a theory, which states that it is not possible to “beat the market” as the stock market efficiency leads to the incorporation and reflection of all relevant information in the share prices that are existent (Kokkonen & Suominen, 2015). Stock market pricing efficiency is basically of three forms – weak, semi-strong and strong (Cao et al., 2014). Since the Boards of AG Barr Plc has declared a change in the company's main product Im Bru due to the introduction of sugar tax in the country, the filing of the drink by customers indicate that the information is going to have a direct impact on the company's share prices (Leishman, 2017). This is because the share prices will fluctuate with the fluctuation in the responses of the customers once its constituents are changed due to change in its taste. This is going to be a semi-strong market pricing efficiency in which the publicly available information will be reflected in the company's share price.

(h) As per the theory of efficient market hypothesis, the semi-strong form of market efficiency implies that the market in which a company trades its shares reflect all the publicly available information in its share price (Suliman, 2017). This form of hypothesis presumes that stocks quickly adjust to absorb new information. In semi-strong market efficiency, the historical price data available in the weak form of market efficiency is also included. This form of market efficiency also indicates that conducting fundamental analysis or going through news cannot provide traders with the better ability to predict underlying future prices.

In case of semi-strong form of efficient market hypothesis, the security prices quickly adjust to the information that is newly available, thereby eliminating the usage of technical or fundamental analysis in order to achieve a higher return. In case of the AG Barr Plc, it can be analyzed that the company had kept the recipe of its product Im Bru for a long time. However, it has recently announced that the recipe used by the company is going to be changed due to the introduction of sugar tax in UK, leading customer stock piling the drink. This response of customers towards the announcement of the new information about changes in the ingredients shows that it a semi-strong form of efficient market hypothesis. This is because the security prices of the company have quickly adjusted to the information that is newly available about the product of AG Barr Plc without any use of fundamental or technical analysis. Therefore, as the security prices are quickly adjusting to the newly available information, it is the evidence against the semi strong form of market efficiency.

 

 

 

 

Valuation

(i)

i) Net asset value per share = Net Assets / Number of outstanding shares

                                        = 181800000 / 114720000

                                        = 1.58

ii) Dividend discount model using CAPM = D 1 / (r – g), where D 1 = Dividend per share, r = Rate of discount and g = Dividend growth rate (McLemore, Woodward & Zwirlein, 2016)

The following are the figures of A.G. Barr Plc – D 1 = 10.87 p, r = 8.3 % and g = 8.03 %

(Source: Editorial, 2018)

Thus, present value of stock (P) as per the dividend discount model = D 1 / (r – g)

                                                                                                            = 10.87 / (8.3 % - 8.03 %)

                                                                                                            = 4025.93 pound

The closing share price of A.G. Barr Plc as on January 28, 2017 is £490.80. The comparison of the present value of the stock of A.G. Barr Plc and the closing share price of the company shows that the stock prices of the company are quite good and the value of the stock of the company is quite effective in order to attract new investors to the company. The comparison of the share price of the FTSE Index of the LSE with the share price of A.G. Barr Plc shows that the beta value of the company’s shares is 0.46 (Uk.finance.yahoo.com, 2018). This shows that the stock held by A.G. Barr Plc is 54% less volatile than the stock price of the FTSE Index.

(j) The net asset value per share and the dividend discount model using CAPM have several uses as well as limitations. They are as follows –

Net asset value per share

Usefulness

Limitations

  • Helps in understanding the value of each share of a company
  • Ignore the non-balance sheet assets of a company
  • Helps in financial planning
  • The concepts of in which assets are measured often create difficulty in determining asset values 
  • Helps investors in analyzing stock prices and managing their investments

 

(Source: Gordon & Gandia, 2014)

Dividend discount model

Usefulness

Limitations

  • A quantitative investigation, no subjectivity or ambiguity involved
  • Uses are limited
  • Keeps a company's investors in dividend-paying stocks
  • Might not be related to earnings
  • Highly conservative
  • Based on too many assumptions

(Source: Lazzati & Menichini, 2015)

 

 

Share price performance

(k) Price to earnings (P/E) ratio = Price per share / Earning per share = 670.5 p / 30.78 p = 0.05

Dividend Yield = Annual dividends per share / Price per share = 14.40 p / 670.5 p = 0.21 p

Thus, as per the closing prices of A.G. Barr Plcon January 28, 2017, the P/E of the company is 0.05 while the dividend yield is 0.21 pound.

(l) The share price performance of the A.G. Barr Plc is as follows –

Date

Share price

Absolute changes in share prices

28-Jan 17

490.8

0.204148

1-Dec 16

490.32

0.20355

1-Nov 16

490.8

0.234427

6-Oct 16

457.56

0.218551

30-Sep 16

457.56

0.18446

31-Aug 16

498.05

0.205159

31-Jul 16

492.71

0.179266

30-Jun 16

524.26

0.237238

31-May 16

470.09

0.179031

12-May 16

512.42

0.195152

30-Apr 16

512.42

0.180109

31-Mar 16

533.39

0.208929

1-Mar 16

505.27

0.20719

1-Feb-16

493.83

0.208861

(Source: Uk.finance.yahoo.com, 2018)

 

Fig. 4: Figure showing the absolute share price performance of AG Barr Plc from February 1, 2016, to January 28, 2017

(Source: Created by the author)

The comparison of the share price performance of AG Barr Plc from February 1, 2016, to January 28, 2017, shows that the share prices of the company have been fluctuating during each month. However, there has been no remarkable decrease or increase in the share prices of the company. Thus, the share prices of the company have been quite stable.

(m) As per the analysis of the financial performance and corporate financial information of A.G. Barr Plc, it can be recommended to the Amicable Pension Fund (APF) to maintain its shares held in the company. This is because even if the EPS and the dividend per share of the company are weak, the gross and operating profit margin of the company is strong. The liquid position and the long-term financial stability of the company are also good. The share prices are also quite stablewhereas the net asset and a present value of a stock of A.G. Barr Plc are also quite good. Therefore, Amicable Pension Fund (APF) can maintain the shareholding in A.G. Barr Plc.