Strategic Direction Of A.G. Barr Plc: Business Opportunities And Risks

Outline of its main activities

Discuss About The Disrupting Investment Management Industry?

A.G. Barr Plc is the Scottish soft drink producer that is based in Cumbernauld. The company is the producer of popular Scottish drink. Barr Plc is listed on the London Stock Exchange and it is regarded as one of the constituent of FTSE 250 Index (Agbarr.Co.Uk, 2018). The current report is based on the determination of the strategic direction of A.G Barr Plc by outlining the major activities undertaken with vital features of its strategy. The report would analyse the business opportunities and risk that is faced by the company with emphasis would be paid on operating performance.

The report to Amicable Pension Fund would include details of financial performance over the last five years with. Reference to stock market pricing efficiency and efficient market hypothesis would be made to assess the market efficiency of A.G. Barr plc. The report will further cover valuation and share price performance to provide brief comment on share performance with appropriate recommendations on investment perspective for Amicable Pension Fund.  

The main business activities of A.G. Barr Plc are concerned with the production capabilities, producing higher quality products throughout the well invested and effective production sites. The primary business activities of A.G. Barr Plc are associated with the sourcing of raw materials across the world to design its packaging materials to strive for constant improvements. The company has the fleet of more than one hundred vehicles with long standing relationships with its key distribution partners (Scott, 2015). The company strives to render greater service to all of its customers from the biggest food service customers to the smallest local shop. The company operates across the multiple routes in order to market its products. The major activities of the company are concerned with the operating activities and efficient distribution networks with its direct store channel of delivery.  

Considering the key business features of A.G. Barr Plc, clarity of purpose and constancy of approach results in best outcome. The key business features of A.G. Barr Plc include;

1. Strongly differentiated brands
2. Effective and flexible operations
3. Innovative based understanding of customers
4. Partnerships that derives growth
5. G. Barr Plc leverages the strength and commitment of its teams.

In spite of the macro environment influences the business has retained its focus on the execution of its strategy and particularly improving its internal actions. With the acquisition of Funkin business the company remains opportunistic regarding the continuous growth momentum of Funkin brand and business. With the changing consumer taste and preference, the demand for great testing, lower sugar products have increased (Williams, 2014). The company has recently announced that 90% of the brand that are owned by A.G. Barr Plc would contain less than 5g of total sugar per 100 ml. Therefore, this could be viewed as the positive illustration of business opportunities as how A.G. Barr Plc is responding with the pace and commitment.

Key features of business strategy

On the other hand, the principle risk and uncertainties surrounding A.G. Barr Plc is the changes in the customer preferences, perception or purchasing behaviour (Agbarr.Co.Uk, 2018). The consumer might decide on purchasing and consuming alternative brands or make less spending on soft drinks. Another risk faced by business is changing consumer attitudes towards the sugar (Warren & Jones, 2018). With changing government intervention on sugar customer made decide on purchasing and consuming alternative brands or make less spending on sugared soft drinks. Additionally, the adverse publicity in respect to soft drinks industry may have an adverse impact on the reputation of customer and consumer pattern. 

A.G. Barr Plc has made considerable amount of progress across the business over the last twelve months and has rendered a strong financial performance under volatile and uneven market conditions. Financially, A.G. Barr Plc has rendered a strong business performance with profit before the exceptional items stood £42.4m representing a rise of 2.7% from the performance of previous year (Henderson et al., 2015). A.G. Barr Plc has enjoyed better performance from the business of Funkin cocktail. The operating margin before the exceptional items stood 16.3% during the year 2016 and positively increased to 16.8% in 2017. The free cash flow of the organization stood £28.3 million in 2016 whereas in 2017 the free cash flow of A.G. Barr Plc significantly increased to £43.2 million.

Considering the financial performance of the organization the gross margin of the company stood 46.8% during the year 2016 and marginally rose to 46.9% in the year 2017. The profit before tax and exceptional items of A.G. Barr Plc stood £41.3 million during 2016 which subsequently rose to £43.1 million in 2017 representing a rise of 4.4% over the prior year. It is pleasing to identify that the company have put behind the challenges of supply chain and system application challenges that served as the constrained in 2016 (Mullinova, 2016). Though the reported revenue felled by 0.6% however its underlying revenue from the business improved by 1.5% that resulted in improved revenue by 1.5% driven by innovation across IRN BRU and Rubicon brands.   

The financial strength and weakness of A.G Barr Plc is based on the diverse and differentiated business portfolio (Davis & Lleo, 2015). Considering the strength of A.G. Barr Plc, the company is not only concerned with the production of soft drinks but also have moved towards cocktail mixer segment that has widened and strengthened its portfolio with the unique and market leading brand in a rising market.

Five year trends of performance

Another business strength of A.G Barr Plc is the strong balance sheet and cash generated by the company. As a result of this the board has undertaken the decision of returning around £30 million to its shareholders through the on-market share repurchase programme (Agbarr.Co.Uk, 2018). Furthermore, the company has dedicated group of people that have contributed to the success of the business testament.  

With the increasing amount of growth in the net asset the balance sheet of the company is significantly gaining strength (Barberis et al., 2015). The strong balance sheet enables the business to access the cost effective and flexible debt facilities to offer optionality as this would enable the company in making sure they have the agility of taking advantage of opportunities that is identified.

The company has robust risk management structure of assessing risk. The risk management framework sets out the systematic approach of managing risk (Kahn & Lemmon, 2014). The strength of the company is vested in re-assessment of risk by mitigating the controls implemented. The strength of the company is the wide variety of products offered by its wide range of brands. A.G Barr Plc provides its customers with products from varied brands through variety of trade channels and customers.

There are certain significant amount of failings or weaknesses identified during financial year. A.G. Barr Plc to some extent faces the failure of maintaining the appropriate customer relationships. This may enable the company to faces certain reduction in the base of customer that can have the adverse impact on the sales of A.G. Barr Plc with decline in operating profit (Fernandez, 2015). Additionally, it is identified that there is an inability of protecting the group intellectual property rights. The failure of the company could be considered as the weakness as this could result in lower value intellectual property rights with loss of brand value.

Furthermore, the analysis from the computed ratio states that current ratio reported by the firm stood 2.70 while in the subsequent year declined to 2.26. Additionally, the debt to equity ratio of the organization stood 1.35 in the year 2016 which subsequently increased to 1.56 in the year 2017 (Reid & Myddelton, 2017). This represents that the company has been undertaking higher amount of debt and could potentially result in increase in increase in operational risk of the organization.  

The efficient market hypothesis can be regarded as the investment theory that defines that it is not possible to beat the market because stock market efficiency reflects the presence of share price to incorporate and reflect all the necessary information (Zabarankin et al., 2014). As evident recent imposition of sugar tax in UK could be viewed as semi-strong information. Stocks are regularly traded at their fair value on stock exchanges that makes it not possible for the investors to either purchase undervalued stocks or selling the stocks at the inflated price. The government announcement of sugar tax could be viewed as semi strong since the information that is obtained to predict the stock performance may well be reflected in the stock price.

Annual Percentage Growth

The information of increased sugar tax may enable the company to accelerate the long standing sugar soft drinks programme would enable the company to capitalize on the price trends of the tradable security in the market (Agbarr.Co.Uk, 2018). The central engine behind the change in price of A.G Barr plc is the arrival of the new information. As a result of this, the current prices of the securities provide all the necessary information from the external sources and consequently there is no reason behind believing that the prices are very high or too low (Blitz et al., 2015). In respect of A.G. Barr Plc, the new piece of information reflects the existence of efficient market for the investors to profit from the new information.      

Semi strong form of efficiency is considered as the efficiency market hypothesis which implies that all the public information is computed into the stock present share price. This represents that neither the fundamental nor the technical analysis could be used to attain the superior gains (Fernandez, 2017). The semi strong market efficiency provides information on the public available benefit that the investors are looking to earn through the abnormal returns on the investments.

Similarly in case of A.G.Barr Plc the information of government implementation of sugar tax suggest only the information for the benefit of investors to generate the abnormal returns on the investors. The information obtained by A. G. Barr Plc is accounted into the stock price and the stock price can be classified as semi strong since the information available is obtained from the external sources (Adam et al., 2016). The stock of A. G. Barr Plc can benefit the investors that are seeking abnormal returns on investments.    

Net asset Value Per Share:

As evident from the computations performed above an assumption can be bought forward by stating that computation under the dividend discount model for A.G. Barr Plc is performed based on the total dividend paid by the company over the last five years. Evidently, the computations performed represents that the market value of shares under the dividend discount model is overvalued (Hatemi & El-Khatib, 2018). Furthermore, on considering the value derived under the net asset value it is also found that the fair value of the share prices stood £0.97 whereas the market value per share stood £521.00. Therefore, it can be stated that the both under the net asset value and dividend discount model the market value of share is overvalued.

Cash conversion cycle

Investing in the shares of A.G. Barr Plc for the potential investors might not seem to be a feasible. However, given the consistency of dividend paid to the shareholders over the period of five years it can be stated the investing in the shares of A.G. Barr Plc could be feasible options as the food and beverage company though the other market players provide higher amount of dividend to shareholders.  

The dividend discount model is regarded as the useful method of valuing the stock of the company depending upon the theory that the stock of the company is worth the sum of all the value of the future dividend payments (Lazzati & Menichini, 2015). The dividend discount model is useful in determining the intrinsic value of the stock and excludes the present value of the conditions. The model is useful in equating the value of the present value of shares future dividends. 

The net asset value per share method is the useful form of business valuation which emphases on the organizations net asset value or the fair market value of its total assets after subtracting the total liabilities in order to ascertain the amount of cost to recreate the business. The net asset method is best used in creating the financial picture of the organization through the information on the balance sheet.

Considering the limitations of the Dividend discount model it fails to take into the consideration the non-dividend factors namely the brand loyalty and ownership of the intangible assets (Jordan, 2014).  As all of this increases the value of the company. Furthermore, the model is reliant on the assumption that growth rate is constant and stable which in actual world is instable.

On the other hand, under the net asset value method it is difficult to determine the value of intangible assets namely the property rights. Furthermore, the statement of financial position might prematurely value the assets due to the presence of depreciation.

Computation of PE Ratio:

As evident A.G Barr has pleased its shareholders over the period of last ten years and has paid out an average dividend of around 2.35% on the yearly basis. The stock presently yields around 2.3% with the market cap of around $946 million (Agbarr.Co.Uk, 2018). Taking into the considerations the stock price movement of A.G Barr Plc it can be stated that stock price of the company has been in accordance with the FTSE and has reported lower amount of volatility in respect to the FTSE index (Cornell, 2015). As an investment prospect for Amicable Pension Fund investing in the shares of A.G Barr Plc can be viewed as the feasible prospect with the company providing an annualised divided of around 2.35% each year to its investors over the past ten years.

Financial Ratios

The pay-out ratio of the A.G Barr Plc is around 44% which represents that the dividend is sufficiently covered by the earnings of the organization. Taking into the context the three-year analysis it is anticipated that the dividend per share is approximately around £0.169 with the EPS of the company increasing to around £0.35. This is assumed that the company is able to constantly pay-out the dividend with the anticipated future pay-out ratio of around 49%. The Amicable Pension Fund can be relied upon for its dividend stocks (Sabir et al., 2016). In case of A.G. Barr Plc they have the increased dividend per share from £0.06 to £0.14 over the last ten years. The company has been constantly paying out during this time given that the dividend are increasing. Consequently A.G. Barr is regarded as the attractive for investment and with the attractive yield of 2.3% could be considered as higher for the food and beverage stock.  

Conclusion:

On a conclusive note an assertion can be bought forward by stating that making an investment in the stock of A. G. Barr Plc could be viewed as a viable option for Amicable Pension Fund. Furthermore, the company is competing with the market pace and commitment. Furthermore, the stock price of company is within the standard of FTSE with better dividend pay-ratio to the investors over the period of five years. Though, the imposition of sugar tax could be viewed as risk for the company however the wide range branded products and extended market programs would make sure in attaining optimum outcome for the organization.

Reference List:  

"Investors | A.G. BARR Share Information". 2018. Agbarr.Co.Uk. https://www.agbarr.co.uk/investors/.

Adam, K., Marcet, A., & Nicolini, J. P. (2016). Stock market volatility and learning. The Journal of Finance, 71(1), 33-82.

Barberis, N., Greenwood, R., Jin, L., & Shleifer, A. (2015). X-CAPM: An extrapolative capital asset pricing model. Journal of financial economics, 115(1), 1-24.

Blitz, D., Falkenstein, E., & van Vliet, P. (2015). Practical Applications of Explanations for the Volatility Effect: An Overview Based on the CAPM Assumptions. Practical Applications, 2(3), 1-4.

Cornell, B. (2015). Using Dividend Discount Models to Estimate Expected Returns. The Journal of Investing, 24(1), 48-51.

Fernandez, P. (2015). CAPM: an absurd model. Business Valuation Review, 34(1), 4-23.

Fernandez, P. (2017). The Capital Asset Pricing Model. In Economic Ideas You Should Forget (pp. 47-49). Springer, Cham.

HA Davis, M., & Lleo, S. (2015). Risk-Sensitive Investment Management.

Hatemi-J, A., & El-Khatib, Y. (2018). The Dividend Discount Model with Multiple Growth Rates of Any Order for Stock Evaluation. arXiv preprint arXiv:1802.08987.

Henderson, S., Peirson, G., Herbohn, K., & Howieson, B. (2015). Issues in financial accounting. Pearson Higher Education AU.

Jordan, B. (2014). Fundamentals of investments. McGraw-Hill Higher Education.

Kahn, R. N., & Lemmon, M. (2014). The Asset Manager’s Dilemma: How Strategic Beta Is Disrupting the Investment Management Industry. Working paper, BlackRock.

Lazzati, N., & Menichini, A. A. (2015). A dynamic approach to the dividend discount model. Review of Pacific Basin Financial Markets and Policies, 18(03), 1550018.

Mullinova, S. (2016). Use of the principles of IFRS (IAS) 39" Financial instruments: recognition and assessment" for bank financial accounting. Modern European Researches, (1), 60-64.

Reid, W., & Myddelton, D. R. (2017). The meaning of company accounts. Routledge.

Sabir, S. A., Sheikh, S. M., & Meo, M. S. A. (2016). Investigating Stock Price Volatility: Do Conventional Models Have Some Explanatory Power?. Oman Chapter of Arabian Journal of Business and Management Review, 34(3966), 1-11.

Scott, W. R. (2015). Financial accounting theory (Vol. 2, No. 0, p. 0). Prentice Hall.

Warren, C. S., & Jones, J. (2018). Corporate financial accounting. Cengage Learning.

Williams, J. (2014). Financial accounting. McGraw-Hill Higher Education.

Zabarankin, M., Pavlikov, K., & Uryasev, S. (2014). Capital asset pricing model (CAPM) with drawdown measure. European Journal of Operational Research, 234(2), 508-517.