The Largest Service Provider in the UK - Research Proposal Example

Brewin Dolphin Holdings Plc Table of Contents Table of Contents 2 Introduction 3 Business and key markets study 4 Corporate and financial actions 5 Financial trends 6 Profitability ratio 7 Liquidity 9 Financing gearing 10 Investment 11 Risk Management 11 Exchange rate risk management 12 Political Risk Management 15 Firm based 15 Country based 16 Global risk management 16 Conclusion and recommendations 17 Reference list 18 Introduction Brewin Dolphin Holdings Plc is regarded as the most renowned and largest service provider in the UK. It aims at delivering discretionary and personalized wealth management services along with investment and financial planning services to the customers in the UK. Its main objective is to meet the needs and requirements of the intermediaries, customers and investors. The company is regulated by Financial Conduct Authority (FCA) and is registered under the London Stock exchange (LSE) (Brewin Dolphin Holdings Plc, 2014a). It has two main business units: Corporate Advisory and Broking and Investment Management Brewin Dolphin Holdings Plc, 2014a). The company employs around 1877 employees (Brewin Dolphin Holdings Plc, 2014a). It has established good position in the recent years through its improved financial and wealth management services to the institutions, charities and trusts. The growth of revenue is marked in the following figure: Figure 1: Increase in revenue (Source: Author’s creation) The figure highlights the fact that the company has encountered growth in revenue over the past five years, which indicated that the clients prefer their services to a great extent. The total managed fund of the company is observed to be £ 28.2 million and there are increases in discretionary funds to about £ 21.3 billion till September 2013. Business and key markets study Table 1: Segment information (amount in £millions) 2013 2012 2011 2010 2009 Discretionary 192.7 156.3 180 157 160 Advisory Managed 27.5 23.3 78.0 27 25 (Source: Brewin Dolphin Holding Plc, 2014b) As per the table, it is observed that majority of the revenue is generated from the Discretionary management service section. This is the parts of the Investment management division. This division has encountered important developments such as acquisition of Tilman Brewin Dolphin Limited situated in Dublin. The fluctuation in the amount is observed over the years due to the business activities of the company, which is quite dynamic. However, the income from advisory managed section should be increased by improving its advisory services to the clients. Moreover, the company is of the opinion that the demand for investment management services is higher in Republic of Ireland and hence it has gained confidence on Tilman to provide the services to the clients. However, Tilman have managed to earn € 0.90 billion in 2012 on behalf of the customers (GlobalData, 2013). Additionally, the company has opened an imminent branch for this division in Bristol; this branch has helped in covering the national gap. The following figure highlights on the market position of the company in the UK: Figure 2: Market share of wealth management institutions in the UK (Source: Brewin Dolphin Holding Plc, 2014b; Brewin Dolphin Holding Plc, 2014d) It is evident from the figure that Brewin Dolphin occupies the second position in the UK market with respect to market share. Despite the volatile situation of the financial market in the UK, Brewin Dolphin has succeeded in increasing it total income by 5.3% in 2013 as compared to 2012. Corporate and financial actions Despite the volatile global financial market, Brewin Dolphin has succeeded in delivering resilient performance in the last few years. The company has clearly focused on the requirements of the individual customers and underpinned its ability to retain in the long run. The company has 41 offices in the UK, Ireland and Channel Island and these offices have made good improvement over the past five years as the customer base has increased (Brewin Dolphin Holding Plc, 2014c). The company has also undertaken various acquisition activities, which have helped them to trade in different parts of the world. Brewin Dolphin trades as Brewin Dolphin in the England, Channel Island and Wales, Bell Lawrie in Northern Island and Scotland, wise Speke in North England and Hill Osborne in East Midlands. In order to reduce its operational cost of the stock trade program, the company has hired HP; however, the outcome was spectacular as the cost was cut down by 40% (HP, 2013). In order to improve its financial performance, the company has concentrated on capitalizing the human resource assets. It has hired Ms Gordon to establish strong relationship with Independent Financial Advisor (Brewin Dolphin Holding Plc, 2014c). Financial trends The financial trend of Brewin Dolphin is explained in this section by emphasizing on its gearing, profitability, liquidity and investment (Yahoo! Inc, 2014). Table 2: Income statement of Brewin Dolphin (5 years)   2009 2010 2011 2012 2013 Sales (£m) 187 224 248 253 272 Cost of sales (£m) 168 194 220 239 246 Gross profit (£m) 19 30 28 14 26 Gross Profit Margin 10.16% 13.39% 11.29% 5.53% 9.56% Net Profit (£m) 16 22 14 18 21 Net Profit Margin 9% 10% 6% 7% 8% Current Assets (£m) 80.28 77.77 70.04 67.29 72.06 Current Liabilities (£m) 75.62 68.6 60.12 58 55.11 Current Ratio 1.061623909 1.133673 1.165003 1.160172 1.307567 Total long-term debt (£m) 5.82 5.18 6.92 5.53 4.62 Equity (£m) 18.56 26.23 32.96 36.47 40.26 Long-term debt/ Equity ratio 0.313577586 0.197484 0.209951 0.151631 0.114754 (Source: Brewin Dolphin Holding Plc, 2014d) Profitability ratio Figure 1: Gross profit margin of Brewin Dolphin (Source: Author’s creation) From the figure provided above it can be stated that the gross profit margin of the company has decreased over the years from 2011 to 2012, it indicate the fact that the company failed to reduce its expenditure as compared to sales revenue due they concentrated more on developmental works and acquisition rather than increasing its profit and revenue. However, it is observed that the company has tried to improve the value during 2013. Figure 2: Net profit margin of Brewin Dolphin (Source: Author’s creation) Like the gross profit margin, the net profit margin has also fluctuated to a great extent during the past five years; however the company has made effort in improving its income during the period. Brewin Dolphin has tried to draw in more revenue from the acquisition of different companies worldwide. By acquiring Tillman, the company has managed to draw an income of € 0.90 billion during the 2012 (GlobalData, 2013). The company also improve its business by opening new branches in different places of the UK so that it can reach every customer across the region and reduce the national gap. Liquidity Figure 3: Current ratio of Brewin Dolphin (Source: Author’s creation) From the above graph, it can be stated that Brewin Dolphin has improved its liquidity position over the five years; however the value of the current ratio is not high enough to suggest a strong liquidity position for the company, since an ideal value for current ratio is 2 (Lincoln, 2014). It indicates that the company have encountered difficulty in paying its lenders and suppliers. The current assets and liability does not have enough margins thus this suggests that the company should increase its asset base so as to make its liquidity position strong. Financing gearing Figure 4: Long term debt/ equity (Source: Author’s creation) The ratio has decreased over the years from 2009 to 2013. This highlights the fact that the company has decreased its debt obligations and improved equity investments. This indicates that Brewin Dolphin has undertaken conservative financing policy to source its finance. Hence, it can be stated that the company has increased its shareholder’s equity over the years. If there is increase in long term debt obligations, the company will have to encounter the burden of interest payments over the years. However, by choosing conservative policy to source its finance, the company has decreased its liability and increased the scope of earning interest on the investment amount of the customers and investors. This ensures that the shareholders have also received good return, which is reflected in their investment pattern. Investment Figure 5: Dividend pay-out ratio (Source: Author’s creation) The dividend payout ratio of Brewin Dolphin reached its highest position in 2011; however, it has decreased to a great extent in 2012 and improved in 2013. This indicates the fact that the company has lowered the dividend to the shareholders but have balanced the return on equity. It is well known that companies should maintain a high dividend payout ratio in order to satisfy the shareholders. The improvement payout ratio of the company shows that the company had made efforts to draw in more shareholders by improving the amount of dividend. Risk Management Brewin Dolphin operates in the UK, Channel Island and Republic of Ireland, hence it implies that is a multinational company; hence the company is bound to encounter political and exchange rate risks. This risk has imposed challenge for the company and has affected its operation to a great extent. However, Brewin has developed a number of solutions to overcome the risks ways to overcome and handle these risks. Exchange rate risk management Exchange rate fluctuation is a very important factor for influencing profit of a company. This type of risk is experienced by the investor during any transaction. The overall corporate strategy of the company is to deal with the exchange rate risk as apart from the investments of the investors it also influences the income of the company. Hence, market risk is a vital phenomenon that should be controlled by the company for its successful operation. In order to control these types of risk, the company accumulates considerable amount of cash for managing the exchange rate fluctuations (Bouchaud and Potters, 2003; Lobo, 2014). Apart from the above mentioned explanation, the exchange rate risks have can be broken down into three types by Papaioannou (2006): transactional, translational and economic. The transactional risk is defined by the author as the cash flow change risk that arises due to the alteration in the exchange rates. It influences the financial activities such as import contracts, export contracts and repatriation of funds. Translational risk takes into account the changes that occur in the value of balance sheet in foreign subsidiary with that of the parent company situated in home country (Papaioannou, 2006). The risk is measured with respect to net assets to exchange rate fluctuations. Moreover, economic risk takes into account the total economic downturn that is encountered by a firm due to the modifications in exchange rate (Papaioannou, 2006). Brewin operates only in the UK and Channel Islands; hence, it can be stated that the company is not subject to several exchange rate risks, which denotes currency imbalance. Managing foreign exchange risks in the UK and Netherlands are related to restricting the net open position for working balances of the companies. Bank of England has formulated policy pertaining to foreign currency, the net of which is dealt in one currency and it should be higher than 10% of capital (Bank of England, 2011). Thus, Brewin Dolphin obeys this policy and maintains its net opening as assigned by the regulations (Bank of England, 2011). Most of the companies in the UK manage the exchange rate risk through derivative products. The derivative is used for hedging purpose. Here, hedging refers to the elimination of risk from certain transactions, which are subject fluctuations in exchange rate. The financial market in the UK has the ability to generate enough profit for companies and investors and at the same time the transactions made by both are subject to several risks, one of them being exchange rate fluctuations (Li and Resnick, 2003). Derivatives such as forward, future, swap and options are used for eliminating risk from a transaction, whether it is made by a company or an individual customer or investor (Raines and Leathers, 1994; Brigham and Houston, 2011). Hence, in both the case, the derivatives play a significant role in hedging those risks. Brewin Dolphin has the option of employing future and forward contract to hedge the risk associated with transaction that are made by the company and its investor (Becker and Mazur, 1995). The investors who invest in the company bear the risk of losing it if the company do not perform well in the long run and fails to deliver good return on their investments. Hence, the company has the option of investing the shareholder’s equity in other countries so as to gain interest and this is distributed among the shareholders as good return. In this process, hedging against the foreign currency risk is crucial for the company. It can be done through forward and future contract. Brewin Dolphin use Bond Fund (GBP) in order to promise its investors for generating higher return than the gilt market of the UK. This is a very good example of hedge fund that can be employed for minimizing the risk and maximising profit (Brewin Dolphin Holding Plc, 2014c). This fund allows the company to invest in foreign funds so as to gain considerable interest. Another instrument, Discretionary management service is used for managing the risk that arises from currency fluctuations (Brewin Dolphin Holding Plc, 2014c). If the company aims at generating profit during exchange rate fluctuation, it has to maintain a good portfolio of derivatives that will defend its transactions from providing excellent profit. Brewin Dolphin gauges exchange rate risk with the help of foreign exchange RRR method. This method is exclusively used for calculating foreign exchange risk that is associated with the investment portfolio. All the net openings denominated in different currencies are converted into the base currency at the prevalent spot rates (Brewin Dolphin Holdings PLC, 2008). Majority of the companies in the UK comply with the policies that are related to management of risk and hence reduce risk exposure. The UK is integrated with global economies, which have resulted in hedging of risk that is associated with the transactions. According to Modigliani and Miller (1958), mitigation of exchange rate risks with the help of hedging instruments works only when the information are symmetrical and the transaction cost is negligible. Brewin Dolphin has encountered profit due to their hedging activities with the help of a number of instruments. The minimization of risks has resulted in increase in profit prior to the recession period. Political Risk Management Political risks play an important role in dominating the operation of company and is also regarded crucial for its success and failure. The political risk is divided into firm, country and global based risk. However, several solutions are provided for managing this kind of risk. Firm based Brewin Dolphin comply with the legislations that are attached companies in which they operate and invest. General election is a big challenge for the company as the change of political power can affect its operations to a great extent. Hence, the company is very much concerned about how to deal with the situation. Apart from that another major issue is the European Union Referendum. If the Labour Party wins then it will put pressure on the financial and insurance companies to encounter the reformed structure (Financial Times, 2014; Broderick and Cox, 2010). There will be introduction of a number of policies that will favour the labour of the nation. However, these reforms are measures for the economic recovery (Barton, 2001). The policy of the UK government associated with the industrial policies, corporate taxes and market liberalization challenge the operation of Brewin Dolphin. Presently, it does not donate any cash to the political parties. Nevertheless, if there is any such unstable situation in future, the donation policy should be considered by the company in order to maintain a good relationship with the UK government (DiPiazza and Bremmer, 2006; Hirsa and Neftci, 2013). Lobbying activities such as legal bodies are supported along with that enforcement of regulations, active participation in activities that are adopted by the company for creating favourable government policies. Brewin Dolphin has planned to incur an amount of £5000 as donations to the political parties in the UK. Correspondingly, Brewin Dolphin Limited, subsidiary of parent company is predicted to provide a donation of £22,000 pounds to the political parties (Brewin Dolphin Holdings PLC, 2013). Apart from the UK, the company also encounters moderate risk for operating in Republic of Ireland. It is an independent region with its own rules and regulations. However, it is observed that the political risk factor in Republic of Ireland is low, which signifies that the company should concentrate on eliminating this risk. In order to mitigate the risk, the company can enter into contracts with the government. Country based Brewin Dolphin is affected by the political risks that originate from the actions of the UK government and also from Republic of Ireland. The political risk varies country- wise and it depends on two vital factors. Firstly, the country should have the capability to prevent external events that may decrease the productivity of the economy. If this productivity is measured with respect to other countries then it can be deduced that the countries, which develop policies to mitigate the risks attached to transactions, can develop a stronger economy. However, it is observed that in the UK the government policies are weak that reflects political instability (Burgess, 2011). Global risk management Though Brewin Dolphin cannot be regarded as a multinational company, but it has encountered a number of risks related to exchange rate and currency fluctuations (Levine, 1997). However, Brewin follows the laws and regulations that are prevalent at global level. Brewin invests money in the investment project of other countries as a result it can to comply with the policies of that country and hence, the transactions are protected legally. The company can mitigate the global risk by entering into contract with the respective government and using derivative instrument during any transaction process with foreign countries. Conclusion and recommendations The risk management strategies adopted by Brewin Dolphin has assisted to mitigate the risk that originates from exchange rate and political unrest. It follows a number of steps that are coordinate with the government policies and does not violate them in any case as it can lead to a severe consequences. The company has encountered challenge due to fall in their profit after the global recession. Brewin Dolphin is affected by the movement in the exchange rate when they invest in investment projects globally. In order to eradicate the exchange rate and political risk it is significant for the company to take a number of steps. It is recommended that Brewin should give donation to the political parties so that they receive their support at times of need. In order to eliminate the risk prevailing in the Republic of Ireland, the company can enter into contracts with the government. Along with that the company should use increasing number of derivative instruments so as to hedge their investment in international projects against exchange rate risk. Reference list Allayannis, G., Ihrig, J. and Weston, J. P., 2001. Exchange-rate hedging: Financial versus operational strategies. American Economic Review, pp.391-395. Bank of England, 2011. 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