BBA Aviation Plc: Financial Analysis

Introduction

BBA Aviation plc is based in London. The company was started in 1879 to provide belting works in Scotland (BBA Aviation, 2013). Today, it is listed on the London Stock Exchange under the FTSE 250 Index. BBA Aviation plc (BBA) has focused on “flight support services and aviation aftermarket services mainly in the aviation sector” (BBA Aviation, 2013). The company aims to maintain a “balanced range of aftermarket services and aviation support to achieve high growth rates and attractive returns for investors” (BBA Aviation, 2013). The BBA derives most of its business accounts from the business and general aviation (B&GA) segments while the rest of the revenues emanate from military relations.

BBA business involves providing professional “on-airport support services to the operators and aircraft owners and other commercial flights” (BBA Aviation, 2012). On the other hand, BBA offers aftermarket services and support to aerospace parts, sub-components, and systems (BBA Aviation, 2012).

The BBA has a structure that works together to set strategies, allocate resources, enhance cross-business sharing, improve efficiency and coordination, and control operational oversights through its executive committee. This happens throughout the company’s five operational areas. The company has independent operating management groups, but most departments share customers, technologies, and business operations and processes. This improves overall achievement and a greater gain for the company.

The company has over 12,000 employees located across 220 locations in five continents.

Against a backdrop of a tough market and anticipated poor performance, BBA managed to improve its operations and cash flow. In addition, the company also achieved better strategic progress.

Profits, Earnings, and Dividends (Ratio Analysis 2010 – 2012)

Gross profit marrgin

2010: 352.4/1,833.7 * 100 = 19.22 %

2011: 407.3/2,136.7 * 100 = 19.06 %

2012: 412.4/2,178.9 * 100 = 18.93 %

Understanding gross profit is critical for any investor and the business. It shows all expenses and available profit. A higher gross profit margin ratio or percentage is good for the business.

The above percentages show changes in gross profits for BBA over the past three years. These outcomes show the condition of BAA. There are slight declines among the three financial periods. Generally, BBA’s gross profit margins are high and show good financial performance.

Operating profit margin = Operating income/Sales

2010: 171.4 /1,833.7 = 0.0935

2011: 198.9 / 2,136.7 = 0.0931

2012: 195.4/2,178.9 = 0.0897

BBA has a good proportion of revenues after paying for all variable costs involved in operations. The company can pay for its fixed costs. These figures give an investor an idea about the company’s revenues on each dollar of sales. BBA has experienced declines in its operating profit margins within the last three years. These show that its earnings per dollar have declined slightly over the period. However, the ratios show a healthy financial position.

Net profit margin = Net income/Sales

2010: 100.7 / 1,833.7 = 0.055

2011: 152.1 / 2,136.7 = 0.0712

2012: 138.7 / 2,178.9 = 0.0637

The net profit margin ratio shows the final net incomes after all expenses and taxes. Most financial analysts and investors specifically track net profit ratios because they show a company’s performance over a given financial period. This is the ‘bottom line’ metric in income statements and among the most important ones (Drake, 2009).

Earnings Ratio

The price-to-earnings ratio (P/E ratio) is derived by dividing the market price per share and earnings per share.

Price to Earnings Ratio = Market Price per Share / Earnings per Share

2010: 178 / 23.6 = 7.54

2011: 224 / 32.5 = 6.89

2013: 312.5/ 24.2 = 12.91

Source of market price per shares (London South East Limited, 2014)

Normally, high P/E ratio gives investors confidence about the company’s future. The normal ratios range from 20 to 25 times of earnings. On this note, BBA’s P/E ratios are below the market averages. However, the company does not lose any earnings because the P/E ratio has increased steadily over the past three years.

Dividend ratio

Dividend per share / Earnings per Share

2010: 7.96 / 23.6 = 0.337

2011: 9.95 / 32.5 = 0.306

2012: 10.45 /24.2 = 0.432

These are final dividend ratios.

Investors consider dividend ratios in order to decide whether a company is profitable and suitable for investment. BBA pays out dividends to its shareholders. Moreover, the dividend ratios are steady and have increased in the last financial period. The dividend ratio shows steady income for investors. BBA has not reinvested earnings for possible future earnings but pays out its shareholders. This is a good indicator of a good company. On the other hand, any reduction in the dividend ratio has a negative impact on potential investors. BBA’s stock prices have appreciated over the last few years as many investors seek to invest in the company. It shows steady dividend earning ratios and a strong dividend procedure as established by the firm’s board of directors.

Financial Stability and Liquidity (Ratio Analysis)

These ratios are suitable for measuring the ability of a firm to settle its long-term credit commitments and if the company has enough capital to run.

Debt ratio

Debt ratio = total liabilities
total assets

2010: (1,389.9) / 2,147.3 = -0.647

2011: (1,291.3) / 2,271.0 = – 0.569

2012: (1,364.8) / 2,386.2 = – 0.572

BBA has had negative liabilities for the past three years. In this case, BBA has been able to pay out more than what it owed creditors. In other words, BBA has been paying more to reduce its original liabilities. As a result, subsequent payments have no offsetting effects on liabilities. This results in negative total liabilities on the balance sheet.

Negative liabilities result from meager amounts that accumulate from other liabilities. These negative liabilities are mainly in the account payable register as credits. The company can use these accounts payable to settle future debts or supplies. Generally, any negative liabilities are technically a part of BBA assets. Hence, they are prepaid expenses.

Debt ratios indicate whether the company has the ability to repay its long-term debts. This financial ratio shows a part of the firm’s assets gained through debts. It accounts for the company’s total debts and total assets.

Usually, when a company has a ratio that is below 0.5, then most of its assets come from equity financing. On the other hand, any ratio above.5 indicates that a firm relies on external debts to provide funds for business operations. A highly leveraged firm has a high debt to asset ratios.

Debt Equity ratio

Equity ratio = Total liabilities
Shareholders’ equity

2010: (1,389.9) / 757.4 = – 1.835

2011: (1,280.8) / 979.7 = – 1.307

2012: (1,364.8) / 1,021.4 = – 1.336

The debt-equity ratio shows how BBA can leverage its total liabilities against its total shareholders’ equity. These ratios show what other partners, creditors, and obligors have invested in the company against shareholders’ investments.

To some extent, investors can use this ratio to understand the company’s leverage abilities from total liabilities and shareholders’ equity point of view. A low equity ratio shows that a firm has low leverage and has an advantage on an equity position.

Although these ratios are simple to calculate, they show potential investors the position of BBA with regard to its equity-liability position. Hence, they are critical for investors who want to understand the company’s leverage position. Usually, many big, well-established firms can afford to have high liability in the balance sheet with no possible financial challenges. However, BBA has managed to keep its liabilities as low as possible.

Capitalization ratio

Capitalization ratio = total assets
total shareholders’ equity

2010: 2,147.3 / 757.4 = 2.835

2011: 2,271.0 / 979.7 = 2.318

2012: 2,386.2 / 1,021.4 = 2.337

The analysis of capitalization used in the case of BBA is total assets to total shareholders’ equity.

These ratios show that BBA does not heavily rely on debts to fund its operations. Instead, the company uses equity for business funding. These ratios are not high and do not exceed the borrowing limit of 65 percent.

Liquidity Ratio

Liquidity = current assets/current liabilities

2010: 693.5 / (635.7) = 1.091

2011: 712.9 / (539.5) = 1.321

2012: 801.2 / 583.8) = 1.372

Low liquidity ratios (less than one) show that the company may not easily meet its short-term obligations. BBA has high liquidity ratios more than one. Hence, the company can meet its near-term obligations.

The company can meet its obligations through its current assets (current ratio). This is important because BBA can change its short-term assets into cash in order to clear its debt easily. Hence, it may not face bankruptcy. The above ratios show that BBA will be able to continue as a going concern.

Analysis of Customers, Markets, Products, Growth, and Risks facing the Company (PESTLE and SWOT)

Customers

BBA gets most of its business accounts from the business and general aviation (B&GA) segments while the rest of the revenues emanate from military relations.

SWOT for BBA

Strengths

  • Long-term market reputation
  • Sufficient capital
  • Strong presence in global markets
  • Barriers for new entrants

Weaknesses

  • Unable to predict future market conditions, debt ratios, and other profitability
  • Slow pace acquiring new technologies

Opportunities

  • Increase in incomes
  • Growth opportunities in new markets
  • New acquisitions
  • Increasing demands from global markets
  • Solid investment by shareholders
  • Good growth rate and profitability

Threats

  • Severe competition in the market
  • Decline in-flight support service revenues
  • Changes in prices
  • Rising costs of services
  • Deregulations affect costs and profitability

PESTE Analysis

Political

BBA operates mainly in politically stable countries globally. Moreover, the company has strong business ethics and follows standards established by different countries.

Economic

Economic conditions have favored the growth of the company for several years. Its strong capital structure and profitability have protected it from effects of recession and downturns in the airline industry. Hence, BBA is able to sustain and maintain its position in the market. Adverse changes in exchange rates and fuel costs affect the profitability of BBA.

Social

The company operates in different social and cultural environments. Internally, the company has focused on social development, including people from different cultures and social backgrounds because of its global operations.

BBA also engages in corporate social responsibility (CSR) activities by ensuring customer safety, environmental protection, observing business ethics, and charitable giving. It maintains values and integrity throughout different business units (BBA Aviation, 2013).

Technological

BBA strives to achieve business success by enhancing efficiency in customer service, products, and competitive advantage through embracing latest technologies. The company uses technologies to support operations, service provisions, and create new products.

Environmental

Adverse environmental factors such as snow and Hurricane Sandy affected the company’s operations in affected areas. These conditions lead to an early exit and subsequent loss of revenues.

Products

BBA has two important services, which are aftermarket services and flight support services. Revenues from aftermarket services have increased significantly over the years. These have resulted in high profits and improvement in operating margins.

On the other hand, the company noted that revenues from flight support services declined due to decline in market activities, business and B&GA, commercial flights, effects of Hurricane Sandy, early exit in snow areas, and de-icing costs. There were also high costs of fuel and overall impacts of disposal and acquisitions

Reflection of BBA

BBA has focused on expansion through acquisitions. For instance, in 2011, the company raised £88.6m to acquire other companies. In the recent past, it engaged Dubai Aerospace Enterprise (DAE) in order to acquire and merge some of their assets, but there was no formal sales process, which resulted in the collapse of the talk (Menon and Nair, 2013).

This shows potential investors that the company is poised for further expansion and growth in the future.

Asset Value per Share

NAVPS = Net Assets / Number of Shares Outstanding (Capital reserve)

2010: 757.4/ 35.5 = 21.335

2011: 979.7/ 39.2 = 24.992

2012: 979.7/ 34.4 = 28.4797

NAVPS shows investors the value of a company’s share. It allows investors to understand fund performance within the market. However, shareholders must understand that these values change with time and short-term evaluation could provide a good insight.

Current Market Share Price

The BBA share price as at the close of business on January 10, 2014, was 318.6p. The share price has risen steadily since 2011 to date.

Current Market Share Price
Source: London South East Limited, 2014.

An Investment Opportunity

From BBA Aviation outlooks and business activities, with careful analysis of risks and uncertainties, future expansion potentials, profitability, and prevailing economic conditions, the company has adequate resources for its continuous operations. Financial statements show a going concern of the company. Moreover, the share prices have increased significantly in the past three years.

BBA Aviation is a good investment opportunity for potential investors.

Annual Cash flow

Cash flow = incoming cash less outgoing cash

First year

Cash from sales = 6,000 units * £14 = £84,000

Variable costs = 6,000 units * £10 = £60,000

Cost of capital or Interest Expense = Principal x Rate x Time (year)

£150,000 *12/100*1 =£18,000

Cash flow = £84,000-£60,000-£18,000 = £6,000

Second year

Cash from sales = £14 * 12,000 = £168,000

Variable costs = £120,000

Interest expense = £150,000 *12/100*2 = £36,000

Cash flow = £168,000 – £120,000 – £36,000 = £12,000

Third year

Cash from sales = £14 * 18,000 = £ 252,000

Variable costs = £180,000

Interest expense = £150,000 *12/100*3 = £54,000

Cash flow = £ 252,000-£180,000-£54,000 = £18,000

Fourth year

Cash from sales = £14 * 18,000 = £168,000

Variable costs = £180,000

Interest expense = £150,000 *12/100*4= £72,000

Cash flow = £168,000-£180,000-£72,000 = -£84,000

Fifth year

Cash from sales = £14 * 6,000 = £84,000

Variable costs = £60,000

Interest expense = £150,000 *12/100*5= £90,000

Cash flow = £84,000 – £60,000 – £90,000 = -£66,000

The ARR, Payback, NPV, and IRR

Accounting rate of return (ARR).

ARR = Average Accounting Profit
Average Investment

Annual Depreciation = (Initial Investment − Scrap Value) ÷ Useful Life in Years

Annual Depreciation

Payback

Payback Period = Initial Investment
Cash Inflow per Period

3+150,000/6,000+12000+18000-84,000-66,000 = 4.32 years

NPV

Year 1: 6,000/ [1+.12]1 = 5357.14

Year 2: 12,000/ [1+.12]2 = 9600

Year 3: 18,000/ [1+.12]3 = 12857.14

Year 4: -84,000/ [1+.12]4 = -53503.18

Year 5: -66,000/ [1+.12]5 = -37714.29

Less Cost +Year 1+ Year 2+ Year 3+Year 4+ Year 5

NPV = £-213,403.2

This is a negative value. Hence, the investor should discard this business.

Internal Rate of Return (IRR)

PV of future cash flows − Initial Investment = 0

-150000
6000
12000
18000
-84000
-66000
(Internal Rate of Return) IRR: -99.99%
Currently, the project has a negative NVP, and therefore losing money. It would be impossible to have a positive rate of return.

Reference List

BBA Aviation. (2012). Annual Report 2011, Web.

BBA Aviation. (2013). Annual Report 2012, We.

Drake, P. (2009). Financial ratio formulas, Web.

London South East Limited 2014, BBA Aviation Share Price (BBA) – Buy BBA Shares, Web.

Menon, P and Nair, D 2013, Dubai’s DAE ends tie-up talks with BBA Aviation, Web.