BUSINESS ECONOMICS AND ACCOUNTING GROUP 202 SUB-GROUP 1 FORMATIVE ASSIGNMENT BELLWAY PLC CASE REPORT - 706

Introduction
Bellway PLC is a property development company from North-Eastern England. Founded in 1946, the organisation has become the countrys fifth largest house-builder by market value. Bellway claims to have built in excess of 100,000 homes since it was founded, while employing approximately 1,400 people.

Financial Performance1
Profitability Ratios
2009 (Preexceptional item) Gross Margin (%) Net Profit Margin (%) ROCE (%) 12.74 6.67 3.04 (5.35) (3.31) 2009 TOTAL 2008 (Preexception al item) 21.21 16.10 9.82 3.02 2.56 (69.04) (277.15) (229.30) 2008 TOTAL % Change (of totals)

Table 1 Bellway plc computed profitability ratios

There are no positive results regarding the profitability of Bellway in 2009, most likely due to the financial crisis in 2008. The Net Profit Margin has a considerably large disappointing decrease, which to an individual considering an investment, could prove a significant worry. However when consulting the annual report it is evident that this includes items that the company considers as exceptional as they are non-recurring. These items add up to 66.312 million. The operating profit shows as a total negative however this includes this exceptional item. Due to the operating profits being a direct review of the management these values could be misleading however when considering the notes they contain one-off investments. Although when excluding these exceptions there is still a drastic decrease they are in fact not as worrying as they may perceive. The Return on Capital Employed ratio (ROCE) tells us how much profit we earn from the investments the shareholders have made in their company. Therefore, ROCE allows a business to view the gains or losses from its assets and liabilities. This can help when regarding possible investment opportunities. In this case the ROCE reflects the other two profitability ratios. Liquidity Ratios

1 Before consulting the financial performance of Bellway it is important to note the financial crisis that occurred in 2008, consequently leading to a crash in the housing market. It is evident in the information below that this incident affected Bellway Word Count exc. tables, titles and bibliography = 1,531

Current Ratio Acid Test Operating cash flows to maturing obligations

2009 5.31 0.39 0.78

2008 4.95 0.49 (0.23)

% Change 7.27 (20.41) (439.13)

Table 2 Bellway plc computed liquidity ratios

When observing the current ratio a small increase of 7.27% can be noted. The liquidity of a firm allows an understanding of the short-term financial strength of the firm therefore an ideal current ratio is 2:1 (or greater). However, Current Ratio is considered as a rather vague outlook of a firms liquidity therefore we can consider the Acid Test which takes inventory into consideration. An ideal ratio for the acid test is 1:1 to which this is below average, and from Table 2, can be observed as decreasing. This could be the result of the economic recession and the large one-off sum. In the case of the third liquidity ratio, the higher the amount - the better. Therefore, this is a positive result for Bellway. When considering the repayments of debt 2009 has been a positive year for Bellway, reducing their long term borrowings by 237.687 million. This reduction in debt is to improve future prospects of expansion announced by the board.
EFFICIENCY RATIOS

Average settlement periods for trade payables Average settlement periods for trade receivables Average inventory turnover period Revenue per employee Operating Cycle (days)

2009 72.70

2008 49.81

% Change 45.95

5.89

4.33

36.03

0.56 551,462 (66.25)

0.76 521,807 (44.72)

(26.32) 5.68 (48.14)

Table 3 Bellway plc computed efficiency ratios

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The firms efficiency has shown improvement between 2008 and 2009 as it has increased the time it has to repay its debtors by nearly 23 days. This is beneficial to the cash flow as this allows for greater interest accumulation in its accounts. Unfortunately the time waiting for creditors has increased by a day and a half however realistically this is a relatively small amount of days so this isnt a problem. With the industry Bellway works within you expect to see little or no inventory, which can be observed in the table by the incredible low inventory turnover ratio. This particular ratio doesnt show much however supports the positive results of Bellways efficiency. The negative values of the operating cycle reflect the deferred payments to suppliers which is a positive outlook to the cash cycle.
INVESTMENT RETURN

Earnings per Share (EPS)* Dividend per Share Dividend cover* Dividend yield ratio (%) Price earnings ratio (P/E ratio)* Return on Shareholder Funds Share price (pence)

2009 (23.9)p 9.0p (2.66) times 1.23 (30.75) (3.79) 735.0p (as at 31/7/2009)

2008 23.6p 24.1p 0.98 times 5.05 20.2 3.47 477.2p (as at 31/7/2008)

% Change (201.27) (62.66) (371.43) (75.64) (252.23) (209.22) 54.02

Table 4 Bellway plc computed investment ratios * The ratios directly affected by the exceptional items of 2009

It is noted in the annual report that the exceptions (already mentioned) have had a direct affect on the EPS, as well as the profit, this is reflected in Table 4. Although there is a large decrease that can be observed with the EPS and P/E ratio, this is due to future prospects which could be considered as a positive for a potential investor. The dividend cover has also been affected as it is show the attributable earnings that are consequently paid out as dividends; this has also had a sharp decrease.
STABILITY REVIEW

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2008

% Change

Gearing (%) Interest Cover Quiscore

3.8 (0.76) 79 (Stable)

21.7 2.53 91 (Secure)

(82.49) (130.04) (13.19)

Table 5 Bellway plc computed stability ratios

The stability ratios are among the most crucial ratios for a potential investor to consider as it can support the potential future of the firm. Bellway boasts its low gearing ratio as they have tried incredibly hard to pay off debt (reducing borrowings from 180.9m to 36.8m) therefore reducing the risk and vulnerability of the firm. Many investors today consider the Quiscore to analyse the firm in support of gearing. Even though there is a decrease, Bellway is still considered as stable.

Trend Analysis
From the table below, we clearly see that both absolute changes and percentage changes from year to year. Over the past five years, turnover of Bellway has risen in the financial years ended during 2005 to 2007. The Bellway Annual Report & Accounts 2009 states Bellways performance has plummeted since the credit crunch hit the industry in 2008, the turnover in this year has declined, and continued to decrease sharply by 40.51% in 2009.

This graph illustrates the basic loss per share of 23.9p, which is compared to 23.6p earnings in 2008. This was sharply decreasing over past 4 years. Starting from 2008, shareholders were paid their annual dividend total of just 24.1p per share, nearly half of the 43.1p paid in 2007. Continually, the Bellways board is declaring a dividend per share of 9.0p for the ended year and this decreased by 62.7% on the previous year. The dividend
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per share in 2009 was significantly lower than it had been during the previous four years. Bellway operated with negative profit in 2009 but still paid dividend to shareholders. It is likely that Bellway

will strengthen their future position. Both of gross margin and net profit margin have decreased in 2009. Especially the trend of net margin to -5.35%, the result from low turnover. Bellway has actually reduced costs and expenses with low borrowings compared with previous years. From 2005 and 2007, both of them were fairly stable.

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Bellway may be faced with deteriorating consumer confidence in the housing market during the economic recession, The Group completed the sale of 4,380 homes, a fall of 33% from last years

6,556 homes (Bellway 2009, p. 3). The number of homes sold fell significantly in 2008 from the recent peak in 2007. Meanwhile, the average selling price was lower than previous 4 years. This means that less homes sold and the lower price are the reason of low turnover generated. And, the employee turnover was very high with 65.20% in 2009. Bellways workforce seemed to be slashed by high employee turnover. In contrast, the employee turnover was relatively stable during the past 4 years.

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Competitors

Barratt Developments PLC is one of the largest residential property development companies in the United Kingdom. The first Barratt company was established in 1958 in Newcastle upon Tyne and then grew steadily. The company was first listed on the London Stock Exchange in 1968 and in 1972 a programme of rapid expansion was launched through a series of acquisitions and the creation of new companies. The first moves were into Yorkshire, the North West and Scotland, followed by expansion into the Midlands and South.

Company Perspectives: Innovation is a key factor which has contributed to Barratt's undisputed position as Britain's premier house builder. Allied to innovation is a commitment to the highest quality, standards of design, construction, finish, and service which has earned Barratt every major house-building award in the industry.

A comparison with BELLWAY PLC

Barrat Developments plc 2009 Share price (pence) 130.2p 2008 62.29p

Bellway plc 2009 735.0p 2008 477.2p

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When consulting the share prices for both Bellway and Barrett we can see that both are increasing from 2008 but if we consult the graph for Bellway we can see that there was a significant drop in the prices in 2008. Since then the share prices fluctuate dramatically showing uncertainty but an overall decrease throughout the year.

Barratt Developments plc 2009 EPS Dividend per share Dividend cover P/E ratio (15.61)p n/a n/a n/a 2008 79.60p 12.23p 6.51 times 0.5 change (95.21)p n/a n/a n/a 2009 (23.9)p 9.0p

Bellway plc 2008 23.6p 24.1p 0.98 times 20.2 change (47.5)p (15.1)p (3.64) (0.6)

(2.66) times Neg(primar y 2010 figure is 19.6) (3.79)

Return on shareholders funds

(29.12)

4.83

(33.95)

3.47

(7.26)

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Although earlier we considered Bellway perhaps not being as strong as it previously has been, Barratt is showing similar trends suggesting the market directs.

Comparison at a glance:-

So looking at the above table we can state that investing money in Bellway plcs shares would prove to be more profitable. Though the Barratt Developments plc has larger amount of sales it is incurring losses. And on the other hand Bellway plc is earning a decent amount of profit. The P/E ratio, Debt/Equity ratio and the net profit margin figures of Bellway plc are also much better than Barrat developments plcs figures.

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Clearly investing in Bellway PLC when compared to Barratt developments is a better option.

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Bellways Future Prospectives

Recent publications have shown Bellways future be encouraging. Balshov (2010) reported the property developers sales had increased 5% in the last year. As a result, they had a net cash balance of UK 66m and secured 50% of next years target.

Further scrutiny of this reports results can reveal the following;

The net profit margin of Bellway has seen a fall and they may struggle to find future investors. It is essential for them to increase the margins and reduce the operating cost. The employee turnover ratio is high at Bellway. It is people who play a major role in companys success. If you do not have dedicated people to work with you, you cannot achieve desired profits. Bellway must take care of employee satisfaction and motivate them to stay with the company. As the economy in the country is in recession and is expected to boom in the coming years, Bellway can research about the kind and number of homes required, paying capacity, prospective customers, etc and be focussed for the future. It is necessary to forecast demand and plan accordingly From the data, it is clear that Bellway is a cash rich company. They can purchase the land and book for other raw material required in the future, as they will get them at a cheaper rate and can save a lot of money. Bellway is in a strong position to take advantage of the current recession.

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Bibliography www.referenceforbusiness.com (2010) online available from http://www.referenceforbusiness.com/history2/14/Barratt-Developmentsplc.html [accessed 15 November 2010]

Introduction on Barratt developments online available from http://en.wikipedia.org/wiki/Barratt_Developments.html [accessed 15 Novembermber 2010]

www.corporateinformation.com, 2010 online available from http://www.corporateinformation.com/Company-Snapshot.aspx? cusip=C826A3020 [accessed 16 November 2010]

www.stockopedia.co.uk , 2010 online available from http://www.stockopedia.co.uk/shares/barratt-developments-plcLON:BDEV/balance_sheet/ [accessed 16 November 2010] www.barrattdevelopments.co.uk, 2010 pnline available from http://www.barrattdevelopments.co.uk/barratt/en/investor/results? year=2008 [accessed 17 November 2010]
Comparison table between Bellway plc and Barrat Developments plc, 2010 online available from http://uk.moneycentral.msn.com/investor/research/wizards/srwcompare.asp? company2=bdev&company3=&Symbol=GB:BWY [accessed 19th November 2010] Balashov, S. (2010) Bellway optimistic about 2001 targets after 2010 sales rise 5%. proactiveinvestors United Kingdom. [online] available at
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<http://www.proactiveinvestors.co.uk/companies/news/19705/bellway-optimistic-about-2011targets-after-2010-sales-rise-5-19705.html> [Accessed 8 November 2010)

Bellway (2009) Annual Report & Accounts 2009. Newcastle upon Tyne: Bellway

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