Halfords business analysis | Free essay | Management essays

Introduction

Halfords is the UK’s 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 in1892by 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.

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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. There’s 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 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.

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• Agoing concern asset-based approachdetermines the business net balance sheet value of its assets and subtracts the value of its liabilities.
• Aliquidation asset-based approachrepresents 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 business’s 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 company’s 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.

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Discounted Future Earningsis 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:

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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 multiplesderived 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 popularmultiplesare:

Currant finance structure:

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Treasury policy

The Group’s 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 Group’s 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 Group’s operations.

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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 Group’s treasury department’s main responsibilities are to:

• Ensure adequate funding and liquidity for the Group;
• Manage the interest risk of the Group’s debt;
• Invest surplus cash;
• Manage the clearing bank operations of the Group; and
• Manage the foreign exchange risk on its non-sterling cash flows.

The Group’s 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.

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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

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The Group’s policy aims to manage the interest cost of the Group within the constraints of the Business Plan and its financial covenants. The Group’s 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 Group’s 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.

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Credit risk

The Group’s 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:

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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
• http://www.halfordscompany.com/hal/ir/fininfo/reports/
• http://www.valuadder.com/glossary/valuation-multiplier.html
• http://financial-dictionary.thefreedictionary.com
• http://www.investopedia.com/terms/c/costofcapital.asp
• http://www.lse.co.uk/shareprice.asp?shareprice=THT&share=thorntons_plc_ord_10p