Business Report
Balfour Beatty
Company profile
It is a top UK construction company which was founded in 1909 by George Balfour and Andrew Beatty. The company is listed on the London Stock Exchange and has an impressive global workforce of an estimated 30,000 employees. Although, the company initially started out as a construction concern but with the passage of time has diversified into many wider areas which were relevant to the construction industry and as of today has four major business streams which are building management services, civil and specialized engineering services, rail engineering and services along with an investments function. (Balfour Beatty, n.d)
Objective
Our goal is to deliver consistent, long term growth to our shareholders (as cited in the CEOs review in Annual Report 2008).
Balfour Beatty has a legacy which stretches to more than a century. The company has performed consistently well over the years to ensure stable profits for its investors and vows to continue this in future as well. (Balfour Beatty, n.d)
Strategy
The company has been following a medium to long term growth strategy and intends to take growth measure in the following areas
The company intends to further increase its UK infrastructure and has made necessary acquisitions over the years to do so.
The company also intends to tap the demand for high-level and sophisticated services in both the UK and the US through expansion of its professional services division in the UK and through collaboration with Heery International in the US.
Similarly, Balfour Beatty further intends to increase its stake in the public-private partnership (PPP) market. The company has already acquired GMH Military Housing which has fostered domestic growth. Similarly it will shortly launch its PPP project in Singapore which will increase its market share in the Central Asian PPP market. (Balfour Beatty, n.d)
Board Structure
The companys board comprises of 12 directors of which seven including Steve Marshall (Chairman) are non-executive directors. The board is primarily responsible for the strategic direction of the company along with management of risks, allocation of resources, annual budgeting and capital expenditure among numerous other tasks.
The board further comprises of the following committees
Audit committee
This committee is responsible for correct presentation of the companys financial statements, assisting both external and internal auditors, reviewing risk management processes. It comprises of non-executive directors and is chaired by Graham Roberts who is also the Finance Director of The British Land Company. At the end of the period, this committee provides an oral report to the Board outlining their performance, achievements and any significant changes made during the period.
Nomination committee
This committee also comprises of non-executive directors and is chaired by Chairman of the Board Steve Marshall. It is responsible for the appointment of executive directors.
Remuneration committee
Similarly, this committee is also chaired by another non-executive director Robert Walvis. The function of this committee is to determine appropriate remuneration for the executive directors of the company.
Business Practices committee
The provision of this committee is not required by corporate governance and is aimed at streamlining business practices. In 2008, this committee was chaired by Stephen Howard.
Group Tender and Investment committee
This committee comprises of executive directors and is chaired by the company CEO Ian Tyler. The usual agenda items of this committee are to analyze strategic level matters for instance capital expenditure. Another function of this committee is to authorize any significant investments and divestments.
Finance and General purposes committee
Similar to Group tender and investments committee, this committee also comprises of executive directors and is aimed at dealing with financial matters for instance approval of routine banking matters. Share option grants etc.
Brief biographies of key personnel
Steve Marshall, Chairman Balfour Beatty
He is an FCMA and joined Balfour in 2005 as a company director. However in 2008 he was made the Chairman of the company.
Ian Tyler, CEO Balfour Beatty
He is a qualified chartered accountant and he joined Balfour Beatty in 1996. Prior to joining Balfour he had served as a finance director of ARC. Tyler has been consistently promoted at Balfour. He was made a director in 1999 which led to his appointment as Chief Operating Officer and which eventually led to his selection as companys CEO. (Balfour Beatty, n.d)
Accounting policies
Asset valuation and depreciation model
Balfour Beatty values it non-current assets at original cost less accumulated depreciation and any impairment losses. However, due to the transition from UK GAAP to IFRS some land and buildings were revalued which were therefore carried at their revalued amounts.
As for asset depreciation, the company uses a straight line method. Buildings which have been leased are depreciated at 2.5 over their lease term, whereas plant and equipment are depreciated at rates ranging from 4 to 33. (Balfour Beatty, n.d)
Inventory valuation
Inventories are recorded at the lower of original cost and net realizable value (NRV). The company uses the first in first out (FIFO) method for determining the cost of closing inventories. (Balfour Beatty, n.d)
Breakdown of Turnover
Business segment20072008YoY changeFigures in millions of s
Building management and services 3,527 4,498 27.5
Civil and specialist engineering services 2,112 2,587 22.5
Rail engineering services 775 1,016 31.1
Investments 51 160 213.7
Total 6,465 8,261 27.8(Balfour Beatty, n.d)
Corporate responsibility
In the wake of global warming and numerous other environmental concerns, manufacturing concerns have been subject to increased regulation. For instance, regulatory authorities in UK require industrial concerns to observe lower CO2 emissions and provide adequate facilities for both industrial waste management and maintaining employees well being.
CO2 emissions have gone down by 30 in 2008. Similarly, Balfour Beatty introduced the Zero-Harm policy which is to be observed by all its concerns in an absolute manner by the end of 2012. Furthermore the accident frequency rate (AFR) also dropped by 5 to 0.2 in 2008. (Balfour Beatty, n.d)
Vinci
Company profile
Vinci is a French construction company which is considered to be the global leader of the construction industry. It was founded in 1899 and is listed on Euronext DG. It has an enormous global workforce of over 150,000.
The company is the largest revenue generating construction concern in the world and offers a wide range of construction and civil engineering related services. (Vinci.com, n.d)
Objective
The company aims to ensure both growth and resilience along with value creation for its shareholders. (Vinci.com, n.d)
Vinci is the market leader in the construction industry and as can be seen from its objective it intends to further expand and sustain its existing market positions.
Strategy
Vincis long-term strategy is to expand on its existing business model which will assist in striking a balance between developments of both short term and long term cycles. In order
to achieve growth of short term cycles Vinci intends to do the following
Further strengthen the local market position with capture of segments which display growth potential.
Obtain the expertise and technology to gain access to niche markets across the globe.
It further intends to strengthen the companys ability for management of potentially complex projects.
The company also intends to focus more on organic growth in order to improve its financial condition. (Vinci.com, n.d)
Board structure
The board comprises of 14 directors including the chairman. Furthermore, the board also comprises of the following committees which are required as part of corporate governance
Audit committee
This committee assists the board in true and fair presentation of consolidated accounts. It comprises of three non-executive directors and is chaired by Henri Saint-Olive.
Strategy and investments committee
This committee helps the board in developing the companys strategy. It also analyses material impact of proposed investments and divestments. It comprises of six directors which are headed by Chairman of the Board namely Yves-Thibault de Silguy.
Remuneration committee
The remuneration committee is responsible in proposing and in determining remuneration of the board of directors. The committee comprises of three non-executive directors.
Appointments committee
This committee is responsible for examining of any new appointments for the board
and hence reserve the right to make any recommendations. This committee is also chaired by the Chairman of the Board.
Vinci also has two separate committee namely Executive committee and Management co-ordination committee.
Executive committee
This committee is responsible for the appropriate functioning of the VINCI and comprise of Vincis executive personnel.
Management and co-ordination committee
This committee is aimed at bringing together the board of directors and executive committee members in order to facilitate better co-ordination between them. (Vinci.com, n.d)
Brief biographies of key personnel
Yves-Thibault de Silguy, Chairman VINCI
He has had several key positions in many key government organizations in the 1970s and 80s for instance Ministry of Foreign Affairs, European Commission etc. He has extensive and diversified experience of governance in many distinct organizations and before becoming the Chairman of Vinci he served as the CEO of Suez Lyonnaise des Eaux.
Xavier Huillard, Director and CEO VINCI
He has worked as a civil servant earlier on in his career and then moved to the construction sector where he has made the rest of career. Mr. Xavier is considered to be a veteran of the construction industry with decades of experience. Prior to joining Vinci in 2000, he served as both the Chairman and CEO of SOGEA.
Richard Francioli, Executive Vice President (EVP), VINCI Construction
He has been associated with the VINCI Group for over two decades now. Francioli has also served as a civil servant earlier on in his career which led to his appointment as a director at SOGEA. He joined Vinci in 1983 and since then has held various positions in the construction function of the company which led to his appointment as Chairman of Vinci Construction in 2006 and as Executive Vice-President (EVP) in January, 2010. (Vinci.com, n.d)
Accounting policies
Asset valuation and depreciation model
Vinci values its non-current assets at production cost less depreciation and impairment losses. The company follows the cost model and therefore assets are not revalued.
Non-current assets are depreciated using the straight line method according to which the asset is depreciated over its useful life. However, in some cases the company also employs the accelerated depreciation method pertaining to the type of asset for instance components of buildings which have an estimated life of their own which is different to that of the whole building. Similarly, quarries whose estimated life is dependant on the materials extracted from it. (Vinci.com, n.d)
Inventory valuation
Inventories are valued at their cost of acquisition or production. However they are recorded at the lower of original cost or net realizable value (NRV) at each balance sheet date. (Vinci.com, n.d)
Breakdown of Turnover
Following is a breakdown of Vincis revenue as per its different business lines
Business line20072008YoY changeFigures in millions of s
Revenue from toll and other services 4,574 4,781 4.5
New infrastructure construction under concessions 1,119 1,013 -9.5
Concessions 5,693 5,794 1.8
Energy 4,300 4,614 7.3
Roads 7,706 8,183 6.2
Construction 13,653 15,772 15.5
Contracting 25,659 28,569 11.3
Eliminations and misc.- 479 - 383 -20.0
Total 30,873 33,980 10.1(Vinci.com, n.d)
Corporate responsibility
Vinci has faced similar environmental issues to Balfour Beatty since both operate in Europe and are collectively regulated by the EU to observe measures for protection of the environment. Vinci has taken concrete measures over the last year to counter the adverse effects of the environment upon the company and the society in general. CO2 emissions have dropped only slightly by 3 in 2008. Vinci has adopted the zero accidents policy similar to Balfour Beattys policy which is focused at complete elimination of workplace accidents. In the last five years, not only the AFR has dropped by 35 but the severity rate has also slumped by 40. (Vinci, n.d)
Comparison of financial performance
Ratio Analysis
Profitability
Profitability for both the companies has been quite depressed particularly, net margin which is very low. However gross profit margin of Vinci is better Balfours and has remained constant with last year. Balfour on the other hand has managed to achieve an impressive ROCE at 23 in 2007 which slightly decreased in 2008 at 22.
Return on equity (ROE) saw a sharp decline of approximately 35 from 31 in 2007 to 23 in 2008 whereas in the case of Vinci the situation was otherwise and ROE increased from 36 in 2007 to 37 in 2008.
Liquidity
Liquidity position of both companies is not good since both current and quick ratios have been found to be below 1 for the two years in question. When comparing, the liquidity position of Vinci was much better than Balfour and in fact it saw a little improvement over the last year. In the case of Balfour the liquidity position further deteriorated in 2008 although not significantly. (Vinci.com, n.d)
Marketability
The stock market position for both the companies saw a significant slump in 2008. This was largely due to the global recession which resulted in a considerable drop in the share price of both the companies. As can be seen below, the PE ratio for both the companies dropped by almost 50. Both dividend yield and dividend cover on the other saw an increase for instance dividend yield almost doubled in 2008 for Balfour and increased by 67 for Vinci from 3 in 2007 to 5.04 in 2008. Similarly, dividend cover for Balfour saw an improvement of 6 from 3.02 in 2007 to 3.21 in 2008 as can be seen below.
Gearing
Balfours leverage position is well managed when compared with that of Vinci which is extraordinarily high. Interest cover has increased by an impressive 44 from 8.5 in 2007 to 12.25 in 2008. Similarly, the gearing has also declined and is now within acceptable limits. Vinci on the other hand is highly leveraged, not only is the interest cover quite low but the gearing ratio (i.e. debt-to-equity ratio) is unacceptably high at 2.36 meaning that the companys long term liabilities are twice as much as its equity. (Balfour Beatty, n.d)
This sends a signal that the company is under heavy influence of debt holders, similarly its growth prospects are potentially abysmal. This also shows that neither the company is in a position to borrow further since existing bondholders might not permit further borrowing nor it is earning sufficient profits to discharge its long term obligations. Hence this raises questions over the sustainability of the company in the long run.
Efficiency
The working capital management at both Balfour and Vinci seem to be a mirror image of one another. For instance Days receivables outstanding (DSO) are lower for Balfour whereas its days payables outstanding (DPO) are quite high, this scenario is completely opposite in the case of Vinci. Both DPO and DSO have remained somewhat the same in 2008 for Balfour. Vinci on the other hand has seen a reduction of 5 and 6 in receivables days and payables days respectively.
Stockholding period on the other hand has increased for both Vinci and Balfour by 10 and 36 respectively. However, even with the increase in 2008 the stockholding period is low for both companies.
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