Question 12.S-A.1: Permian Holdings plc is a large conglomerate company that is...
Permian Holdings plc is a large conglomerate company that is listed on the London Stock Exchange. The board of directors of Permian Holdings plc has decided to restructure the business and, as part of the restructuring plan, it has been agreed to spin off one of its largest subsidiaries, Miocene plc, as a separate business. Miocene plc will not seek an immediate Stock Exchange listing.
The most recent financial statements of Miocene plc are set out below.
Statement of financial position (balance sheet) as at 30 November 2008
| £m | |
| Non-current assets (cost less depreciation) | |
| 33.2 | Property |
| 24.3 | Plant and equipment at cost |
| \underline{10.4} | Fixtures and fittings at cost |
| \underline{67.9} | |
| Current assets | |
| 34.8 | Inventories |
| \underline{29.6} | Trade receivables |
| \underline{64.4} | |
| \underline{132.3} | Total assets |
| Equity | |
| 10.0 | Ordinary £0.25 shares |
| 5.0 | Share premium account |
| \underline{45.1} | Retained earnings |
| \underline{60.1} | |
| Non-current liabilities | |
| \underline{21.0} | 10% loan notes |
| Current liabilities | |
| 35.9 | Trade payables |
| 3.9 | Tax |
| \underline{11.4} | Bank overdraft |
| \underline{51.2} | |
| \underline{132.3} | Total equity and liabilities |
Income statement for the year ended 30 November 2008
| £m | |
| 153.6 | Sales revenue |
| (\underline{102.4}) | Cost of sales |
| 51.2 | Gross profit |
| (12.3) | Selling and distribution expenses |
| \underline{(10.2)} | Administrative expenses |
| 28.7 | Operating profit |
| \underline{(3.6)} | Finance expenses |
| 25.1 | Profit before taxation |
| \underline{(7.9)} | Tax |
| \underline{17.2} | Profit for the year |
The following additional information has been gathered concerning Miocene plc:
1 A firm of independent valuers has recently established the current realisable value of the business’s assets as:
| £m | |
| 65.4 | Property |
| 18.8 | Plant and equipment |
| 4.6 | Fixtures and fittings |
| 38.9 | Inventories |
The statement of financial position value of trade receivables reflects their current realisable values.
2 A similar business to Miocene plc is listed on the London Stock Exchange and has a price/earnings (P/E) ratio of 11.
3 The profit for the year for Miocene plc for the forthcoming year is expected to be the same as for the year to 30 November 2008. The dividend payout ratio is expected to be 40 per cent and dividends are expected to grow at 4 per cent per year for the foreseeable future.
4 The business has an estimated cost of ordinary shares of 10 per cent.
Required:
(a) Calculate the value of a share in Miocene plc using the following valuation methods:
(i) Statement of financial position (balance sheet) basis
(ii) Liquidation basis
(iii) P/E basis
(iv) Dividend growth basis.
(b) Explain what is meant by the term ‘spin-off’ in the context of restructuring and suggest
reasons why Permian plc might undertake this form of restructuring.
(a) (i) The statement of financial position (balance sheet) basis is:
Price of an ordinary share (P_{0})=\frac{Net assets at statement of financial position values}{Number of ordinary shares}
=\frac{£60.1m}{40m}=£1.50
(ii) Liquidation basis
=\frac{Net assets * at current realisable values}{Number of ordinary shares}
=\frac{85.1m}{40m}=£2.13
* The net assets figure is derived as follows:
| £m | £m | |
| Assets | ||
| 65.4 | Property | |
| 18.8 | Plant and equipment | |
| 4.6 | Fixtures and fittings | |
| 38.9 | Inventories | |
| \underline{29.6} | Trade receivables | |
| 157.3 | ||
| Less Liabilities | ||
| 51.2 | Current | |
| \underline{72.2} | \underline{21.0} | Non-current |
| \underline{85.1} | Net assets |
(iii) The price/earnings basis is:
P_{0} =\frac{Price/earnings ratio × Profit for the year}{Number of ordinary shares}
=\frac{11 × £17.2m}{40m}
=\frac{£189.2m}{40m}=£4.73
(iv) The dividend growth basis is:
P_{o}=\frac{D_{1}}{K_{0} − g}
=\frac{[(£17.2m × 40\%)/40m]}{(0.10 − 0.04)}=£2.87
(b) This topic is covered in the chapter. Refer as necessary.