Accounting Essays | Financial Analysis
Of HAYS Plc
Hay plc is
a recruitment services company. According to its 2004 annual
report 'Hays provides specialist recruitment services for clients
and candidates requiring permanent and temporary, professional
and technical staff' (Hays, 2004).
1.a
For the year ended 30 June, 2004, Hays had £530.2m of assets
on its balance sheet, made up of £137.9m of fixed assets and
£392.3m of current assets. Appendix 1 gives a summary of Hays
consolidated balance sheet.
Hays has £323.5m of current liabilities and hence £68.8m of
net current assets. Total assets less current liabilities of
£206.7m are being financed through long-term creditors, provisions
and shareholders funds.
The company has only £0.1m of long-term bank loan. The company
has long term other creditors of £6.7m which represents the
amount due for the acquisitions made by it.
The company has also £125.4m of provision for liabilities and
charges relating mainly due to pensions (£10.6m), deferred taxation
(£17.1m), property (£34.9m) and other (£42.3m). These provisions
are being financed through internal accruals. The company has
taken money out of profit and loss account and put it into provisions
for items that it think it may have to pay in future.
The book value of shareholders funds is £74.5m. If Hays doesn't
have provisions that shareholders funds would increase by £125.4m
and would instead be £199.9m.
Hays has £79.4m of cash at bank and in hand. The total short
and long term bank borrowings and overdraft are only £2m, less
than 0.4% of total assets. The company as net debt of -£77.4m
and so the gearing ratio is zero.
1.b
Cash flow statement shows that Hays financing moved away from
debt towards equity and internal accruals. Hays plc almost completely
reduced its debt in 2004. During the year ended 30 June 2004,
the company reduced its borrowings from £400.4m (£196.7m + £203.7m)
to £2m only, a reduction of £398.4m. This was achieved by repaying
£306m of long term borrowings and £39.9m of short term borrowings.
The company also disposed some of its businesses and that further
reduced its debt by £44.9m.
The reduction in debt was financed mainly by sale of some of
its businesses in the year. The net cash due to disposal of
business was £334.7m (352.9-18.2). The debt repayment was also
helped by £18m increase in cash before acquisitions and disposals.
Hays also issued £0.6m of ordinary shares and disposed off another
£1.4m of its shares.
1.c
Hays has very less debts, £2.0m in short and long term bank
borrowings. Most of the financing, £199.9m were being financed
by shareholder funds and internal accruals in terms of provisions.
Equity financing is much more costlier than debt financing,
especially when company debt levels are no where near bankruptcy.
Hays could use more debt at a lower cost and return the costlier
capital to shareholders. The company had higher debts in 2003.
But it sold some businesses in 2004 and used the cash to retire
almost all of debt.
Returning capital to shareholder by taking more debt would decrease
shareholders funds and increase interest costs. Higher interest
costs would reduce tax costs, reducing net interest costs. But
the consequent decrease in shareholders funds mean that the
returns on capital will increase significantly.
2.a Earnings per share
Appendix 3 gives the earnings per share in the last five years.
Only once in the last five years did basic earnings per share
increase. Over the five year period, basic earnings per share
have dropped by 50 %.
From 2000 to 2002, basic earnings per share decreased gradually
from 7.7p to 4.82p. Then it drops significantly to -28.39p.
This is mainly due to a very high exceptional charge of £490m.
Exceptional charge relates to goodwill written off from acquired
businesses of £442.8m and restructuring charges of £47.2m.
Appendix 3 also shows earnings per share before goodwill amortisation
and exceptional items. This is a better reflection of earnings
as goodwill amortisation is a non-cash charge. Earnings per
share before goodwill amortisation and exceptional items also
declines over the five year period but the fluctuations in it
are much less than in basic earnings per share. While basic
earnings per share was hugely negative in one year, earnings
before goodwill amortisation and exceptional items were positive
in all five years.
2.b Five year dividend policy
In the five year period from 2000 to 2004, dividend increases
in the first three years and decreases only in the last year.
In the first three years from 2001 to 2003, dividend increase
each year by 15%. Only in the last year, dividend decreased
by 44 %.
The constant 15 % rise in the first three years of five year
period is not consistent with the pattern observed in basic
earnings per share, which have declined in all three years.
In 2003, basic earnings per share was negative but dividend
still increased to 5.38 p.
The contrast growth pattern observed above is also seen when
we use earnings before goodwill amortisation and exceptional
items. But dividend is still less than earnings before goodwill
amortisation.
Companies normally have a dividend policy and most of the companies
follow a constant increase policy. Security markets like companies
with less uncertainty. By adopting a constant dividend growth
policy, companies want to convey the message that business is
going well and take this opportunity to assure investors. Hays
has also followed this constant growth or progressive dividend
policy as stated in its 2004 annual report. 'The Board intends
to follow a progressive dividend policy' (Hays, 2004).
Hays earnings have declined in most of the five year period.
Managers use progressive dividend policy to convey the message
that fundamental business is strong and earnings will soon increase.
It is assumed that if managers are not sure about business's
fundamentals, they won't increase dividend and instead would
like to conserve cash for future. Any fall in dividend, like
the one observed in 2004, indicates that managers now accept
tough conditions ahead and this leads to sharp reduction in
share prices. So a progressive dividend policy, even at times
of adverse conditions, prevents rapid share fall.
2.c PE ratio
Hays plc's price to earning ratio, as taken from Financial Times,
was 38.51 on 9th March 2005 (Financial Times). This multiple
is based on a share price of 133 p and an earning per share
of 3.45 p. Financial Times website explains that 'EPS value
is taken from the basic or adjusted EPS figure reported directly
by the company' (Financial Times).
Hays Annual Report 2004 has basic earnings per share and diluted
earnings per share of 3.87 p and 3.86 p respectively (Hays,
2004). Using a basic earning per share of 3.87 p, the PE ratio
for a share price of 133 p is 34.37.
If we look at earning per share before goodwill amortisation,
we will see that average in the five years is around 9.23 p.
If Hays returns to average performance this year, PE on expected
earning would be only 15, which is close to average market PE.
Hays has a progressive dividend policy with 15% annual growth.
15% is a good growth rate. If Hays increases its dividend by
15 % each year, dividend yield will increase from 2.2% now to
4.0% in 4 years.
2.d
Hays plc has a higher PE ratio than the sector. PE ratio in
mid-thirties looks to be high. But PE alone is not a complete
indicator of value of the stock. High PE ratio means that market
is expecting bigger improvements in profits in near future.
Last two years had been very volatile for Hays and it had negative
earnings in 2003. Market now expects things to improve greatly
for Hays.
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