Introduction
Founded in 2008 and headquartered in Leicestershire, England, Breedon Group is a UK-based independent aggregates business with integrated businesses centered on processing aggregates from different quarries and producing finished construction products (Breedon Aggregates 2015). Throughout the UK, the company is regionally respected because it is among the most visible independent aggregate businesses in the country (Smith 2016). Breedon’s main area of specialization is in the production of cement, asphalt, and other materials used in the construction process. It has three main divisions that include Breedon Southern Limited, Breedon Cement Limited, and Breedon Northern Limited (Breedon Aggregates 2015). The three entities create a revenue stream of more than 318.5 million Euros (Breedon Aggregates 2015). Independent estimates also show that the company has a market capitalization of more than $1 billion and is currently enjoying a decade of financial prosperity (Smith 2016).
This report provides financial analysis and corporate governance review of Breedon Group throughout the last five years 2012-2016. The financial analysis includes a review of key financial ratios, which are the rate of return (ROI), P/E ratio, net profit margin, current ratio, quick ratio, asset turnover, inventory turnover, return on equity, dividend yield, and earnings per share. Part of this report also involves a general analysis of the organization’s internal environment through an investigation of its strengths, weaknesses, opportunities, and threats (SWOT) and a review of the external environment through an examination of the political, economic, social, and technological (PEST) forces underpinning it. An investigation of the company’s internal environment through a SWOT analysis appears below.
Analysis of Internal Environment (SWOT Analysis)
Strengths
One of the main strengths of Breedon Group is its strong growth forecast that is firmly underpinned in a positive trajectory in sales numbers that experts predict would be sustained in the coming years (Godbold 2017). This projection is also supported by annual appraisals, which point towards an improvement of earnings per share forecasts every fiscal year (Godbold 2017). Breedon’s strong growth forecast is also expected to increase the company’s sales numbers because it currently enjoys high margins from its operations (Breedon Aggregates 2015). The positive financial projections are also partly supported by the rise in the company’s stock prices, which are usually categorized as “buy” or “overweighted” stocks (Smith 2016).
Breedon’s other strength is its huge financial reserves. The company has enough capital put away for its daily operations and the financing of its growth plans (Smith 2016). Unlike other companies that are suffering from low liquidity levels, Breedon Group has enough cash flow that is currently bankrolling an elaborate expansion plan hinged on a well thought out acquisition strategy (Pegden 2017). Another strength underpinning Breedon’s operations is a strong asset backing strategy that has seen the company benefit from having an adequate supply of materials that it uses for its production processes (Breedon Aggregates 2015). Some observers support this fact by saying the company’s asset backing strategy is largely responsible for its success (Pegden 2017). Through this key competency, the company now boasts of having 750 million tons of mineral reserves and resources that it uses to support its operations (Breedon Aggregates 2015).
Weaknesses
A general overview of Breedon’s internal operations does not show many weaknesses associated with it. However, operational issues revolving around acquisition-linked cultural influxes emerge as a significant area of concern for the company. As will be highlighted in subsequent sections of this report, the company has acquired many companies, some of which come with incompatible management structures, or unfit corporate cultures, which may dilute Breedon’s superior organizational performance. Thus, there is a possibility of cultural clashes, which may pose a challenge to the company’s overall corporate performance.
Opportunities
Part of Breedon’s corporate strategy focuses on acquiring new companies. According to the company’s 2016 financial report, the company pursued this strategy further by acquiring Hope Construction Materials for more than £336m and Sherburn Minerals Group for an undisclosed amount (Smith 2016). While this strategy is largely welcomed, some opportunities could be pursued through merger agreements with other construction entities. Such opportunities could manifest for the company if it pursues a vertical integration strategy that would yield value chain advantages. This opportunity could complement the existing horizontal integration strategy currently being pursued through the acquisition strategy. More opportunities for Breedon Group also exist in the consolidation of the UK heavy material industry because this market has not been fully “conquered” by the organization (Godbold 2017). Given the positive financial numbers the company has posted in the last couple of years, this opportunity is ready to be exploited.
Threats
Competition from other firms that make construction materials is a threat to the operations of Breedon Group Plc because it could diminish its market share (Healy & Palepu 2012). A decline in the company’s market share could significantly affect its bottom-line operations and create significant implications on the company’s profitability.
Technological developments are also threats to Breedon Group’s bottom-line because they could render some of their stock obsolete. Evidence exists of several building technologies that have made traditional construction materials irrelevant, or not cost-effective. Advancements in technology are ongoing and thus emerge as a significant threat to the operations of Breedon Group. Lastly, legal changes in the company’s operating environment also emerge as another potential threat to the company’s operations. Since the scope of influence that legal changes could have on the company’s operations is unlimited, this threat emerges as the most significant for the company.
The SWOT analysis table below summarizes the findings above.
Generally, the SWOT analysis highlighted in this report shows that the Breedon group has strong financial pillars that could sustain its growth for the next few years. This is largely true because the company possesses a strong mix of strong fundamentals of finance that include, but are not limited, to a good blend of growth, debt, and profitability.
Analysis of External Environment (Macroeconomic Factors Relevant to Investors)
An analysis of the macroeconomic factors relevant to potential investors of Breedon Group will be done using the PESTLE analytical framework, which is modeled after an analysis of the political, economic, social, and technological forces affecting the company’s working environment.
Political
The commitment by the UK government to invest in infrastructure improvements has the potential of improving the fortunes of Breedon Group because it could create an increase in the demand for its products (Harrington 2017). The company’s executive Chairman, Mr. Peter Tom, adds that this strategy could create new opportunities in the private housing market – a development that would be a major profit driver for the organization (Harrington 2017). The exit of the UK from the European Union also portends significant political implications for the Breedon Group because the full impact of the withdrawal has not been fully felt, or executed. It would be interesting to see how this political move affects the organization in the end, or even the construction materials industry in the short-run.
Economics
Since Breedon is a major supplier of construction materials in the UK, the economic environment of the country affects its business. For example, the UK economy could affect the purchasing power of its major clients, thereby affecting its bottom-line operations. At the same time, the general economic environment of the UK could have an indirect impact on the demand of its products mostly because some of its customers depend on loans to finance their purchases (Breedon Aggregates 2015). Thus, if interest rates are high, the demand for its product may decline. Comparatively, if interest rates are low, the demand for its products could increase because more people would be taking loans to buy construction materials. Al the same time, the cost of doing business in the country could affect different angles of its business, including, transportation costs, cost of inputs, cost of labor, and such factors. Thus, the economic environment of the country has a direct impact on the business’s operations.
Social
The social environment characterizing the activities of the Breedon group is mostly dominated by discussions surrounding its mining, excavation, and mineral exploitation activities (Breedon Aggregates 2015). Although these activities are at the core of the company’s operations, they come at a huge cost to the environment and in some cases the local communities that neighbor the quarries. Stemming from this concern, the company must ensure its activities are sustainable and have a low environmental impact.
Technological
Technology has a significant influence on the activities of the Breedon Group because most of its production activities are done using technological inputs. The availability of new technology has a significant impact on the company’s operations because, without such technology, the company could not be able to provide its customers with affordable construction materials. Similarly, the unavailability of technology could also affect the quality of products produced by the company.
Corporate Governance Analysis
A company’s corporate governance structure is often responsible for its success or failure. While many organizations are free to develop their corporate governance strategies, as they deem fit, their ability to make such principles responsive to their market dynamics and their willingness to stick to them would determine their success in the long-run. The UK Financial Reporting Council is largely responsible for monitoring and enforcing financial rules of accounting in the UK (FRC 2017). In this regard, Breedon Group is subject to its authority. According to FRC (2017), the main principle of the code is leadership, effectiveness, accountability, remuneration, and relationship with shareholders. These principles form the framework of this analysis as we strive to find out how Breedon’s corporate governance arrangement has improved from 2012-2016.
Leadership
FRC (2017) largely requires organizations to have strong leadership structures. As far as Breedon’s corporate governance principles and structures are concerned, the company has complied with this principle by improving its leadership structure in the past five years. This observation suffices although the organization is not necessarily mandated to comply with the UK Corporate Governance Code, by being an AIM-listed company. As espoused in the company’s latest annual report, the organization has created strong leadership principles to the extent that the Quoted Companies Alliance in 2013 (the ‘QCA Code’) stipulates of small and medium-sized companies. The process of complying with the above-mentioned provisions of corporate governance is largely responsible for the company’s corporate success. This is because Breedon’s performance has largely been based on the strong leadership of the company’s managers. Evidence of this fact manifests in the organization’s effective entrepreneurial and managerial skills that have seen it successfully acquire new companies.
Disclosure of Corporate Governance Arrangements
The principle of disclosing corporate governance arrangements is outlined in schedule B of the UK corporate governance code (FRC 2017). Within it, the provision of outlining corporate governance arrangements is outlined in detailed disclosure arrangements that are specified in three areas. The first one is the disclosure and transparency rule outlined in subchapters 7.1 and 7.2 (FRC 2017). These provisions outline the main issues that need disclosure. The second area of disclosure is the FCA listing rules, which include provisions where companies are supposed to comply or explain, the specific accounting steps they take to prepare their books (FRC 2017). The third area specifying disclosure arrangements is the UK corporate governance code, which stipulates that when companies choose not to comply with specific provisions, they must provide valuable information that would help authorities to investigate the non-compliance issues (FRC 2017).
Throughout the five years under investigation (2012-2016), Breedon has not engaged in actions that contravene existing accounting principles, meaning that it is largely compliant. However, an “irregular” action often highlighted by some observers and shareholders is the failure of the company to pay dividends when it is profitable. As would be highlighted in later sections of this report, this action is informed by a management strategy that favors growth at the expense of rewards. It is also largely supported by most shareholders in the organization (Breedon Aggregates 2015).
Part of the principles outlined in the UK corporate governance principles is financial disclosure, which is largely deemed a “normal” procedure for Breedon Group. This is evidenced by the fact that the company publishes its financial books annually and provides periodic financial reports (quarterly). At the same time, its corporate governance arrangements are open to the public, as stipulated in the company’s annual reports (Breedon Aggregates 2015). Similarly, all its employees are competent in their respective areas of expertise, as outlined in the disclosure and transparency rules. For example, the organization’s Chief Financial Officer (CFO) is an independent person who is competent in accounting and auditing. He carries out the functions stipulated in DTR 7.1.3 R, which require the timely preparation of accounting books.
Design of Performance-Related Remuneration for Executive Directors
The remuneration committee of Breedon Group is mostly chaired by non-executive directors to eliminate any possibility of conflicts of interest with executive directors (Breedon Aggregates 2015). The non-executive directors are David Williams, David Warr, and Susie Farnon. These executives are solely responsible for making important decisions surrounding the terms of service, benefits, and remuneration of all directors in the organization. Whenever necessary, the remuneration committee consults with external parties to give a way forward, especially when there is gridlock in any area of discussion (Breedon Aggregates 2015).
Relations with Shareholders
Breedon Group always strives to maintain strong relations with its shareholders in a bid to maintain its buy-in throughout different stages of the organization’s decision-making processes. To maintain these strong relationships, the board of Breedon group holds regular meetings with institutional shareholders to encourage them to actively participate in annual general meetings (Breedon Aggregates 2015). In such meetings, shareholders ask different questions and the management can respond to them accordingly. This action complies with the UK corporate governance code, which requires companies to send their shareholders with related papers at least 20 days before such meetings are held (FRC 2017). Through such engagements, the leadership of the organization communicates the shareholders’ views to management to encourage them to take action by incorporating the same views in the organization’s overall strategic direction.
Financial Ratio Analysis
Profitability
Return on Equity (ROE)
A company’s return on equity is an indicator of the type of profits or returns ordinary shareholders get from their investments in the company (Healy & Palepu 2012). A historical analysis of Breedon’s ROE shows a consistent increase in this index because, in 2012, 2013, 2014, 2015, and 2016, the company’s ROE were 7.61%, 8.2%, 10.81%, 12.45%, and 10.49% respectively (Morning Star 2017). A general comparison of these standards shows that the company’s ROE is above the industry’s average of 8.7% (Morning Star 2017). Since current borrowing rates are between 4%-6%, a quick review of this index shows that the company could not possibly benefit from further borrowings from the market to finance its operations.
At the same, investors would find that their money would be much safer in the company, as opposed to any other type of investment. However, it is important to review the findings of Bragg (2012) who cautions investors from being overly optimistic about companies that have this type of returns because, in the long-run, they may differ from future returns. Although Breedon’s latest ROE of 10.5% is not bad by many general standards of analysis, it is important to point out that it is still low for the materials industry because the sector often posts an average ROE of 17.99% (Harrington 2017). Nonetheless, Breedon’s positive ROE, as depicted above, is partly a product of the company’s commitment to creating value for its shareholders (Godbold 2017). It is partly enshrined in eight principles governing its corporate governance framework. The principles hinge on staying local, staying nimble, devolving responsibilities, squeezing assets, eliminating underperformance, keeping central performance to a minimum, not paying rent, and delivering value from acquisitions (Breedon Aggregates 2015).
Net Profit Margin
According to AJ Bell Limited (2017), a leading UK market and investment research group, the net profit margin of a company is ordinarily used to assess the profitability of an organization. This financial ratio is derived by expressing net profit as a percentage of sales revenue. A historical analysis of Breedon’s net profit margin in 2012, 2013, 2014, 2015, and 2016 reveals that there has been a dramatic increase in this financial ratio throughout the years under analysis because it reported figures of 2.66, 5.36, 7.54, 10.84, and 11.96 (respectively) in the five years mentioned above.
A quick overview of these numbers shows that between 2012 and 2016, the company managed to increase its net profit numbers more than five times. This impressive performance is largely attributed to the acquisitions and investments the company made within the period under analysis. This fact is enshrined in the company’s 2015 annual report, which shows that in different years, it made significant investments through the acquisition of different companies. For example, in 2011, it acquired C&G concrete; in 2012, it acquired Nottingham Readymix; in 2013, it invested in major plant replacement programs for acquired units and started a project to increase capacity at Norton Bottoms (Breedon Aggregates 2015).
In 2014, similar investments were made where the company reopened two of its dominant quarries (West Deeping and Ardchronie quarry). In the same year, Breedon also purchased a concrete plant at Clearwell quarry and opened another one at Cannock (Breedon Aggregates 2015). Another significant investment made during the same year was the purchase of an asphalt plant in Suffolk and Essex. Lastly, part of the reason for Breedon’s strong profit growth throughout the period under analysis is the significant gains made in 2015 when the company made major capital investments at former Barr quarries and undertook significant upgrades at one quarry – Cloud Hill (Breedon Aggregates 2015). In the same year, the company erected a new asphalt plant at Daviot. Collectively, these strategic actions undertaken by the company contributed to the net capital flow of the business and ultimately, its profitability.
Investment
Price/Earnings (P/E Ratio)
Financial analysts use the P/E ratio to evaluate a company’s share price, relative to per-share earnings. According to Morning Star (2017), the P/E ratio of Breedon Group has been 28.9, 25,2, 21.5, 18.3, and 16.5 for the years 2012, 2013, 2014, 2015, and 2016 respectively. According to Tracy (2012), the P/E ratio for the Breedon group has generally been on a steady decline, meaning that it would take a long time to recover the market price for a share if the company’s future earning potential remained constant. This finding means that there is not as much market confidence in the company’s earning potential as should be the case. Such an outcome is associated with Breedon because the company’s leadership strategy largely focuses on expanding its business, as opposed to rewarding shareholders for good performance (Breedon Aggregates 2015).
Earnings per Share
Earnings per share are financial ratios used to understand the kinds of profits that shareholders would receive from every ordinary share held. The general rule of thumb is that high earnings per share indicate a healthy financial performance, while low earnings per share denote weak financial performance (Brigham & Houston 2016). A historical review of Breedon’s earnings per share in 2012, 2013, 2014, 2015, and 2016 reveal that the company had enviable numbers because it posed figures of 0.01, 0.01, 0.02, 0.02, and 0.03 respectively (Morning Star 2017).
These numbers are better than the industry average because most investors in the construction industry hardly get any earning per share. Breedon’s commitment to its shareholders as a driving principle of management largely explains why investors get a return on their investments, while many others do not (Breedon Aggregates 2015). At the same time, the company’s earnings per share are largely caused by positive news emerging from different quarters of the media, which continually report stories of earning-enhancing acquisitions (AJ Bell Limited 2017). Since such stories increase the confidence of the public about the future strength and corporate direction of the organization, Breedon’s image is boosted and its share price increased.
Dividend Yield
An analysis of the dividend yields of the Breedon group presents an interesting dynamic because, throughout the five years under analysis (2012-2016), there were no dividend yields (AJ Bell Limited 2017). This situation is largely a product of the company’s commitment to invest its profits in expanding its business operations, as opposed to rewarding shareholders (Breedon Aggregates 2015). This strategy is also a product of negotiations between the company’s management and investors in the company’s annual general meetings (Breedon Aggregates 2015). Since its investors have consented to this strategy, the lack of dividend yields is not a measure of Breedon’s financial performance.
Liquidity
Current Ratio
A review of the current ratio of Breedon Group in 2012, 2013, 2014, 2015, and 2016 shows that this financial ratio has not changed much because throughout the five years under analysis, the current ratios were 1.38, 1.62, 1.36, 1.28, and 1.07 respectively (Morning Star 2017). This financial index is a measure of Breedon’s ability to meet its short-term financial obligations. According to Healy and Palepu (2012), the current ratio of any company mostly depends on the type of business it engages in. Based on this fact, an average current ratio of 1.3 throughout the five years means that Breedon Group easily converts its stock to cash. The ease which the company converts its stock to cash is largely attributed to its horizontal integration strategy, which has seen it increase its market presence in the UK throughout the five years under analysis (Breedon Aggregates 2015).
Quick Ratio
Since many companies cannot effectively convert their stock into cash, there is a need to supplement the findings of the current ratio analysis with quick ratio analysis. The quick ratio analysis is useful in the assessment of Breedon’s financial position because it eliminates stock from the overall review of the company’s liquidity position (Palepu 2012). According to Godbold (2017), a general rule of thumb when evaluating a company’s quick ratio is looking for numbers that are close to 1:1. This ratio is ideal for meeting a company’s current liabilities. A review of Breedon’s quick ratio in 2012, 2013, 2014, 2015, and 2016 reveals that throughout the years under investigation, the company reported figures of 1.15, 1.38, 1.17, 1.11, and 0.85, respectively (Morning Star 2017).
These numbers show that Breedon is in a healthy financial position mostly considering its quick ratio figures are (averagely) close to the ideal 1:1. This ratio is better than the construction industry average of 1:2, meaning that it could meet its current liabilities better than other organizations could. This positive performance largely stems from the surge in profitability through the years under investigation and the steady decline in debt within the same period, as explained in the company’s annual report of 2015 (Breedon Aggregates 2015).
Efficiency
Asset Turnover
According to Brigham and Houston (2016), asset turnovers normally refer to the efficiency in which companies use their assets to generate enough sales revenue to sustain their operations. A quick analysis of Breedon Group’s asset turnover numbers reveals that this index has been steady over the past five years. This finding is supported by the fact that in 2012, 2013, 2014, 2015, and 2016, the company reported asset turnover numbers of 0.88, 0.94, 0.89. 0.96 and 0.79 respectively (Morning Star 2017). These numbers show that this financial ratio has been steady throughout the years because there are not any significant variations. This outcome is largely caused by the use of steady accounting policies in the company throughout the five years under analysis, spearheaded by the leadership of Peter Tom, who is the company’s executive Chairman (Breedon Aggregates 2015).
Inventory Turnover
Inventory turnover ratios largely refer to the ability of companies to convert their stock into cash. Conventionally, this ratio denotes the period between which an organization purchases items and sells them (Brigham & Houston 2016). Breedon’s inventory turnovers for 2012, 2013, 2014, 2015, and 2016 were 15.76, 16.99, 15.59, 16.52, and 13.31 respectively (Morning Star 2017). Average inventory turnover of 15.9 for the five years under analysis reveals that Breedon Group has a desirable inventory turnover, mostly because the industry average is about 13.3 (Brigham & Houston 2016). The high inventory turnover is a product of the company’s focus on efficiency and organic growth as admitted by the company’s CEO Mr. Peter Tom in the 2015 annual report (Breedon Aggregates 2015). He added that this strategy has streamlined most of the company’s operations and is now responsible for less wastage (Breedon Aggregates 2015). Thus, a high level of efficiency is largely responsible for the company’s inventory turnover numbers.
Return on Assets (ROA)
As its name suggests, a company’s ROA refers to how profitable it is, vis-à-vis the types of assets its employees in the course of doing business (Healy & Palepu 2012). By extension, this financial ratio is an indicator of how efficient a company’s management is in the deployment of its assets to generate sufficient profits for its shareholders (Healy & Palepu 2012). A historical analysis of Breedon’s ROA reveals that this financial ratio has steadily improved from 0.61% in 2011 to 6.41% in 2016 (Morning Star 2017). The increase in this financial measure is partly attributed to the increase of its asset base, which has been largely supported by the company’s acquisition strategy. Since major acquisitions have been made as late as 2016, the company’s ROA is expected to increase in later years.
Summary
Based on the financial analysis and corporate governance investigations highlighted in this report, we find that Breedon’s financial position is relatively stronger than most of its competitors and, by extension, the industry. A comprehensive overview of its internal and external environments, through the SWOT and PEST analyses, also affirm the same position because the company has strong internal competencies that allow it to capitalize on its position as a leading aggregates business in the UK.
The strong corporate governance principles spearheaded by the company’s executive Chairman, Peter Tom are largely responsible for this success. To the organization’s benefit, most of these principles of governance are metamorphosing into a culture of excellence for the organization. From an economic point of view, the company is positioned to exploit some of the emerging opportunities in infrastructure developments that align with the UK’s current policy on infrastructure development. Coupled with the key advantages it enjoys through its acquisition strategy, its key competencies in the aggregates business, and the emerging opportunities in the construction industry, Breedon seems set to cement its place in the country’s aggregates business.
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