Infinis energy plc

Infinis Energy PLC

Research Project

An analysis and evaluation of the business and financial performance of Infinis Energy PLC over a three year

period ending 31 March 2014

Name: Md.Mamunur Rashid Redoy

Word count: 7,450

Md.Mamunur Rashid Redoy Page 1

Infinis Energy PLC

1.1 Introduction

Author has selected Infinis Energy Plc to conduct analysis for topic 8 that’s ‘Analysis and evaluation of the business and financial performance of an organization over a three years period’. This analysis relies on recent financial and business information regarding Infinis Energy Plc from 2012 to 2014. So as to hold out sustentative business analysis, Good Energy Group Plc is used as a comparator. Both organizations belong to the utilities sector & renewable energy industry. Infinis Energy Plc is cited as “INFI” and Good Energy Group Plc as “GOOD” throughout project. This analysis is distributed specifically from investor’s perspective in order to aid their decision making about share holding in “INFI”.

Financial statement conveys the financial information in absolute terms which may not be understood by everyone. Moreover these statements don’t disclose all the relevant and required information. Further financial statements suffer from inherent limitations. In order to obtain relevant and material information for knowing the strength and weakness of the company analysis and interpretation is necessary(Rao, 2007).

On the opposite hand Business and society are closely related to each other and it’s basically business that has to adapt itself to changing demand of society(Jain, Trehan and Trehan, 2010) and which is a important concern for investors. So this research take under consideration both financial and business analysis.

1.2 Reasons for Choosing Topic 8

This topic has several aspects that make it stand out because it offers a chance not solely to calculate numbers, however it furthermore give an opportunity to form sense of those numbers by comparing and analyzing underlying causes of the results made by management.

Firstly, this topic is chosen supported author’s enthusiasm and analytical within the financial area.

Secondly, this topic sums up most of the information author has learned up to now from the ACCA studies particularly paper F7(Financial reporting).

Thirdly, as author intend to work as business analyst, therefore, this project is incredibly relevant and will enhance author’s knowledge in understanding the true financial performance of any organization.

Lastly, with the exception of gaining career connected benefit, at the tip of this project, author will gather facts about two growing organizations which will contribute UK to meet its energy security.


Infinis Energy PLC

1.3 Reasons for Choosing Infinis Energy

Reason behind the selection to analyze the financial position of “INFI” is that, by 2020 UK government expects renewable energy to contribute about 30% of electricity generation to meet its binding EU renewable energy target(Infinis, 2014a). Independent and diversified renewable power generator like “INFI” is well positioned to continue to contribute the UK’s renewable energy targets and aims to be an attractive yield stock for their shareholders. After living and travelling to different parts of the world, it is clear that, many people still don’t have reliable and affordable electricity source which makes harder for their social and economic growth. Renewable energy can answer this issue while ensuring sustainable future for upcoming generations. It is a clean source of energy that has a lower environmental impact than conventional energy sources. It will not run out ever, but other sources of energy are finite. Most renewable energy investments are spent on materials and workmanship to build and maintain the facilities which means renewable energy investment stay home to create jobs and fuel local economies, rather than going overseas. Many times supply of energy disrupted due to political unrest, but renewable energy source can achieve energy security by reducing foreign energy dependency(Renewable Energy World, n.d.). Following chart shows renewable power market share of top 3 companies in UK(Ofgem, 2014) -

SSE

Npower

Infinis group

0 2 4 6 8 10 12 14 16

Market share(%)

1.4 History of Infinis Energy

“INFI” is a UK based renewable energy company which was established as an independent company in May 2006 prior to Terra Firma, the private equity group, selling the Waste Recycling Group Limited, its former parent company, in July 2006(Infinis Energy, n.d.-b). “INFI” operates a growing portfolio of landfill gas (LFG), onshore wind and hydro plants across the UK. In view of the challenging decarbonisation targets adopted by the UK government by 2020, it has a unique opportunity to play an active role in building out the UK renewable power generation capacity requirements over the coming decade. “INFI” has the strategic vision, funding, operational and development capabilities to play a leading role in one of the most dynamic growth sectors while positively contributing to carbon abatement in communities across the UK(Infinis Energy, n.d.-d). As one of the largest renewable energy generators in the UK it employs approximately 365 people across 147 operating sites. “INFI” is also included in the FTSE250 index after achieving a premium listing on the London stock exchange(Clean Tech Investor, 2014)


Infinis Energy PLC

1.5 Project Objectives

To perform and compare Horizontal financial analysis of “INFI’s” performance over three years from 2012 to 2014 with “GOOD”.

To establish attractiveness of “INFI” for long run and short term investors while identifying its competitive ambiance.

To compute financial and non financial performance of “INFI” for investment decision.

1.6 Research Questions

What data is needed throughout the project and the ways to congregate them also the sources of information which can offer decent knowledge about the company and sector?

What are the areas that author have to be compelled to focus within the financial statements?

What are the IT and communication skills compulsory to perform and present the work properly?

How will author establish the strategic position of the company and whether conclusions are conscious from the work done?

1.7 Overall Research Approach

Research approach employed in this project is meant to addresses the priority of investors. A methodical approach is adopted to convene objectives of this research so as to facilitate deciding for current and potential investors.

These following steps and strategies are used to succeed in substantive conclusion:

In order to start analysis, information from financial statements of each “INFI” and “GOOD” are going to be utilized in Excel sheets to calculate ratios and draw charts.

Sources of internal and external information will be acknowledged which might facilitate in analysis and evaluation method of “INFI” and “GOOD”.

Ratio analysis and evaluation will be conducted by looking for trends in “INFI’s” recent performance and by benchmarking that performance with “GOOD” illustrated by graphs. Also, Interpretation of ratios will be conceded out by examining the explanations behind results.

“INFI’s” business analysis will be carried out with SWOT and Porter Five Forces Model which can cause conclusion of whether it’s worthy for investors to invest or


Infinis Energy PLC

hold their current investment in “INFI”.

Finally conclusion and recommendation will be provided from wider perspective.

2.1 Information Gathering


Infinis Energy PLC

While gathering information, secondary data is often the start point for data collection as it’s the first type of data to be collected and collecting primary data can be expensive, time consuming and not always feasible. Secondary data is information which already exists in some form or other but which was not primary collected, at least initially, for the purpose of the consultancy exercise at hand(Crowther and Lancaster, 2012). The secondary data collected in this research is gathered from sources provided by “INFI” and external resources e.g. - financial websites. These are explained as following:

2.1.1 Annual Reports of Infinis Energy and Good Energy Group

Every year companies go through the routine of producing their annual report. Publication of this report is far more than just a legal or accounting formality, it should capture the very spirit and personality of a company, forming the basis of the company’s image and projecting the essence of a company’s identity and direction(Stittle, 2003). Financial statements alongside with management commentary of “INFI” and “GOOD” are wont to extract relevant financial and non financial information to calculate and interpret ratios.

2.1.2 Newspapers

It is essential to grasp the entire story behind the figures obtained from financial statement. Articles and commentaries revealed in newspapers like Financial Times gives knowledgeable analysis on the strategic decisions created by the directors and sometimes have a major impact on the share price of a company.

2.1.3 Financial Websites

There are many financial websites which give summarized or thorough outlook of company in question. This websites are used for information gathering which are difficult to find from any other sources like annual report. On the opposite aspect, volume of information is big that demands to rigorously choose relevant and reliable websites. Imperative websites includes Morningstar.com, Gurufocus.com etc.

2.1.4 Books

The study texts available by Kaplan Publication for ACCA syllabuses and eBooks from “Google books” were a piece of background reading and have assisted greatly in generating helpful ideas on the formation and analysis of this report.

2.2 Limitation of Information Gathering


Infinis Energy PLC

Financial statements of “INFI” (Y/E 31 March) and “GOOD” (Y/E 31 December) have 3 months difference because of their year ends and author has tried to make relevant comparison between two companies by knowing this fact. It’s unlikely that management will reveal their secret tactics and future plans through financial statements as we know in this competitive business environment, cost saving information is precious for companies to have competitive edge.

Additionally to it, past information has its restricted use because it may not be handy in swiftly changing environment.

This research is based on secondary data and again one doesn’t always know how accurate the secondary data are. In case the degree of inaccuracy is high, the use of such dubious data involved undermine the utility of a research study(Kumar, 2008).

2.3 Ethical Issues

The goal of ethics in research is to ensure that no one is harmed or suffers adverse consequences from research activities(Cooper and Schindler, 2001). For that reason analysis and evaluation is presented without hazy conclusion and author tried to uphold high moral standards by ensuring that data are objective and factual(Herbst & Coldwell, 2004) otherwise ethical issues will arise.

Decision relating to analysis should be taken by author while mentor’s job will be to advise author. To overcome this downside, author has scan books on analysis and interpretation and set to incorporate relevant models and ratios according to wants of investors.

Ethical issue may arise when author disclose findings that are inconsistent with the available data and manipulates research methods and techniques by using technical jargons, that’s why author tried to express his findings in simplest terms by assuming that everyone with basic understanding of business can find the true picture of “INFI” and “GOOD”.

Author has consulted several books from diverse authors and has given reference in Harvard referencing style that eliminates the chance of stealing work done by others.

2.4 Accounting and Business Model Used and Their Limitations

2.4.1 Analysis of Financial Ratios

The first step in financial analysis typically includes an evaluation of the firm’s ratios. The ratios are designed to show relationships among financial statement accounts within firms and between firms. Translating accounting numbers into relative values, or ratios, allows us to compare the financial position of one firm with the financial position of another firm, even if their sizes are significantly different(Besley and Brigham, 2007). Therefore ratio analysis is


Infinis Energy PLC

helpful tool for investor. However ratios are to be used cautiously supported by the personal judgment of the decision makers about the relevant issues(Barthwal, 2007). During this research following ratio will be calculated to help in analysis and interpretation of financial results which can address different concern of investors:

Profitability ratios

Liquidity ratios

Market ratios

Efficiency ratios

Cash flow ratios

Gearing ratios

2.4.2 Limitations of Ratio Analysis

Shim & Siegel (2006) shed light on number of problems that users of ratio analysis ought to remember that are as following:

It’s often difficult to identify the industry group in which the company belongs which makes the industry comparisons a problem.

Diversity among companies in applying GAAP may result in distorted ratios and comparisons.

Published industry norms are only approximations.

The historical cost of an asset may differ from its current value, like land.

A ratio doesn’t reveal its component. For instance current ratio may be high but inventory may be composed of obsolete merchandise.

2.5 SWOT Analysis

SWOT is an acronym used to describe the particular strengths, weakness, opportunities and threats that are strategic factors for a specific company. It should not only result for the identification of a corporation’s distinctive competencies, the particular capabilities and resources that a firm possess and the superior way in which they are used, but also in the identification of the opportunities that the firm is not currently able to take advantage of due to a lack of appropriate resources(Wheelen and Hunger, 2011).


Infinis Energy PLC

2.5.1 Limitations of SWOT Analysis

According to Wheelen and Hunger (2011) there are following issues in using SWOT analysis:

It uses no weights to reflect priorities and doesn’t how to identify the factors.

The same factor can be placed in two categories like strength may also be a weakness.

It requires only a single level of analysis.

This analysis can over emphasize internal strengths and downplay external threats.

A SWOT analysis can be static and can risk ignoring changing circumstances.

2.6 Porter’s Five Forces

Once the boundaries of an industry have been identified, the task facing managers is to analyze competitive forces in the industry environment to identify opportunities and threats. Michael E. Porter’s well known framework, known as the five forces model, helps managers with this analysis(Hill and Jones, 2009)

According to(McGuigan, Moyer & Harris, 2010) five types of forces influence organization from outside are described in following Table:

Table1: Porter’s Five Forces FrameworkFive Forces Brief introduction

Threat of new entry It worries with ease or difficulty of new companies to enter into explicit industry counting on the competitive advantage of existing organization i.e. economies of scale.

The power of supplier It points out that if supplier can charge high prices while not poignant their demand, they posses supplier power.

Buyer’s Power Customer’s ability to barter prices on their terms is called buyer’s power. If buyers are powerful and posses high power, they can simply negotiate low prices that mean low profit.


Infinis Energy PLC

Substitute Products Substitute products or services are similar in terms of customer desires however these belong to a different industry and posse’s different characteristics. These enable customer to have alternative & change to another consequently damaging profit.

Rivalry Rivals are companies that belong to same industry and so as to grow they need to contend by taking share of different companies typically through price.

2.6.1 Limitations of Porter’s Five Forces Framework

Despite being the most popular and widely used framework for analyzing industry structure and therefore industry attractiveness, Porter’s five forces model suffers from two major limitations. Firstly, it uses current industry structure as a basis for predicting the nature of competition and industry performance in the future. Secondly, it presents a static view of competition among the firms in the industry rather than a dynamic interaction of competitive forces(Gupta, Gollakota & Srinivasan, 2007).


Infinis Energy PLC

3.1 Horizontal and Inter-firm Analysis of Infinis Energy

The analysis and evaluation of economic performance of “INFI” from 2012 to 2014 is administrated by scheming ratios, distinguishing trends and scrutiny that performance with “GOOD” in similar period (there is a three month difference between the companies throughout because of their year ends) & reasons behind these results. The source of information for following 1-13 Figures and ratios is “INFI’s” and “GOOD’s” yearend(Y/E) annual reports.

3.2 Profitability

3.2.1 Revenue1

2012 2013 20140

50

100

150

200

250

300

Figure1: Revenue of "INFI" and "GOOD"

Rev

enue

(£'

mill

ion)

1 2014 represented Y/E March 2014 for “INFI” but Y/E December 2013 for “GOOD”. These are the closest latest accounts as in essence there is only a 3 month gap. Throughout this research project this format is used for analysis and evaluation.


Infinis Energy PLC

2012 2013 201405

101520253035404550

Figure2: Revenue Growth of "INFI" and "GOOD"gr

owth

rate

%

Figure 1&2 shows that “INFI’s” sales increased from £218m(Y/E2012) to £226m(Y/E2013) at the rate of 3.53%, which is far lower than growth rate of 13.99%(Y/E2012) due to decrease in export power, continued decline in gas yield, engine outages at one of the largest sites and lower realised power prices(Infinis, 2013e). Again, revenue went up to £242(Y/E2014) and growth rate rise to 7.33%. It is suggested that increase in sales growth is due to 5.7% increase in total exported power to 2,639GWh from 2,497GWh(Y/E2013) and increases in average selling price of 3.6% from £83.99/MWh(Y/E2013) to £86.99/MWh(Infinis, 2014c).

Over last three years growth rate of “GOOD” rise significantly from 7.69%(Y/E2012) to 43.28%(Y/E2014) which is far higher than 7.33% of “INFI’s”. Successful sale of two solar farm development sites & increase in customer number at “GOOD’s” Wind Farm fueled this growth(Good Energy Group, 2014a). This kind of consistent progress will help “GOOD” to retain and attract more investors.


Infinis Energy PLC

3.2.2 Gross Profit Margin(GPM)

2012 2013 201405

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Figure3(a): Gross Profit Margin (%) of "INFI" and "GOOD"

Gro

ss P

rofit

Mar

gin

(%)

2012 2013 20140

2

4

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8

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14

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Figure3(b): change in revenue and cost of revenue of "INFI"

chan

ge %

Figure3(a) shows “INFI’s” GPM increased slightly from 44.7%(Y/E2012) to 45.01%(Y/E2013) and reached to its peak of 45.73%(Y/E2014). The reason behind consistent increase in gross margin is that increase in cost of revenue remained lower than corresponding increase in revenue except Y/E2012 where cost of revenue increased more than revenue but this was canceled out in Y/E2014 when revenue growth was 7.33% but cost of sales just rose by 5.93% figure3(b). Solid performance in LFG business, additional capacity in wind portfolio and continued focus on cost control are major factors behind consistent increase in GPM(Infinis, 2014i)

“GOOD’s” GPM was at 40.3%(Y/E2012) which was lower than “INFI’s” but recently in Y/E2014, this difference grow bigger as “GOOD” failed to maintain its growth in GPM. Price


Infinis Energy PLC

freeze in November of 2013, increasingly competitive pricing structure and third-party endorsement have all contributed to the continued growth in customer numbers but in the expense of healthy GPM growth(Good Energy Group, 2014b).

3.2.3 Operating Profit Margin(OPM)

2012 2013 20140

5

10

15

20

25

Figure4: Operating Profit Margin (%) of "INFI" and "GOOD"

Ope

ratin

g Pr

ofit

Mar

gin

(%)

Figure4 shows “INFI’s” OPM rise slightly at 22.04%(Y/E2013) from 20.04%(Y/E2012) but again it got downward and reached the dip of 12.95%(Y/E2014) which is quite significant decrease compared to previous year. This decrease in operating profit resulted from IPO related third party & staff cost of extra £37m due to “INFI’s” listing in stock market along with 8.2% increase in depreciation of tangible fixed assets(Infinis, 2014g).

Comparatively, “GOOD’s”(Y/E2012) OPM of 8.28% was almost one third of “INFI’s”(20.04%).The reason behind better performance in OPM is economies of scale enjoyed by “INFI” which had market share of 9% in UK’s renewable market(infinis, 2013b). However, OPM dipped down sharply to 7.18%(Y/E2013) due to 18% increase in operating lease rental( £263,446(Y/E2013) & £222,640(Y/E2012) ) and massive audit related cost of £170,000(Y/E2013) from £59,200(Y/E2012) but it saw higher OPM of 9.55%(Y/E2014) due to strict cost control of auditor related cost(Good Energy Group, 2014d).


Infinis Energy PLC

3.2.4 Return on Equity(ROE)

2012 2013 2014-5

0

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25

Figure5: Return on Equity of "INFI" and "GOOD"R

etur

n on

Equ

ity (%

)

Return on equity measures an organization's profitability by revealing how much profit a company generates with the money shareholders have invested(Lee & Lee, 2006).

Figure5 shows Throughout Y/E2012 to Y/E2014 “INFI” experienced fall in ROE from 3.1% to -3.7% which resulted from similar changes in equity and earnings(Appendix-A&C). This instability isn’t good sign for shareholders, as they dislike uncertainty over their return on investment.

“GOOD’s” ROE experienced dramatic improvement over last three accounting years as it’s ROE improved sharply from 2.4%(Y/E2012) to 13.34%(Y/E2013) and again rose to 19.4%Y/E2014 which is superior of INFI’s(-3.7%).

Comparatively, “GOOD’s” management provided sound stewardship to its shareholders in current energy market conditions where, dropping oil prices hurting energy stocks(Shmuel, 2015).


Infinis Energy PLC

3.3 Liquidity

3.3.1 Current Ratio

2012 2013 20140

0.5

1

1.5

2

2.5

3

Figure6 :Current ratio of "INFI" and "GOOD"

curr

ent r

atio

(tim

es)

Figure 6 reveals, trend and comparison with respect to current ratio of “INFI” and “GOOD”. “INFI’s” current ratio remained at 2.17(Y/E2012) but slipped down to 1.55(Y/E2013) and again improved to 1.89(Y/E2014).

Current ratio must be analyzed in the context of the industry the company primary relates to(Tracy, 2012). In utilities sector it’s standard to have current ratio of 3.6(Inc, n.d.) and it enables them to borrow cheaply and pay off the interest with their cash flows. For example, cash and cash equivalents of “INFI” were £81m(Y/E2014) whereas short term debt was £17 million(Appendix-B&C).

“GOOD’s” figures show similar current ratio as that of “INFI” which confirms that its industry norm to have higher current ratio on top of 1. Rising company in renewable energy sector like “GOOD” can utilize this opportunity to borrow more and go for aggressive business expansion as they have better current ratio.


Infinis Energy PLC

3.3.2 Quick Ratio

2012 2013 20140

0.5

1

1.5

2

2.5

3

Figure7: Quick Ratio of "INFI" and "GOOD"

Qui

ck R

atio

(tim

es)

Figure7 shows that during these three terms quick ratio of “INFI” has been fluctuating. Quick ratio of 2.14(Y/E2012) times means it had £2.14 to pay £1 of total current liabilities by its current asset excluding inventories. It deteriorated and fell to 1.52 times(Y/E2013) but situation improved and quick ratio is 1.86 times(Y/E2014) which is close to current ratio of 1.89 times(Y/E2014). As “INFI’s” cash balance jumped up significantly from £47m(Y/E2013) to £81m(Y/E2014) and trade payables also decreased in same period(Appendix-C) quick ratio has been improved.

Compare to industry norm, “GOOD” have alarming quick ratio in Y/E2013 but it bounced back in Y/E2014 when trade receivable and cash & cash equivalents improved tremendously(Good Energy Group, 2014e). Overall both companies have good cash flow which is very crucial for utilities sector to invest in new technology and power generation sites.


Infinis Energy PLC

3.4 Market Ratios

3.4.1 Dividend per Share(DPS)

2012 2013 20140

1

2

3

4

5

6

Figure8:Dividend per Share of "INFI" and "GOOD"

DPS

(pen

ce)

DPS is the dividend paid for the past 12 months divided by the number of weighted average of shares outstanding over the reporting term(Nasdaq, n.d.). “INFI” didn’t paid dividend in Y/E2012 and Y/E2013 as shown in figure8, but proposed maiden dividend of £60.6m(Y/E2013) and also proposed first DPS of 6.63 pence per share as a listed company in Y/E2014(Infinis, 2014d).

According to Fontinelle (n.d.) company that is still growing rapidly usually won’t pay dividends because it wants to invest as much as possible into further growth. “INFI” aim to develop wind plants which includes 450-500 MW onshore wind pipe line & re-investing in new renewable generation capacity which justifies their reason for not paying dividend and keeping the growth rate of energy generation infrastructure as high as possible(Infinis, 2014b).

On the other hand “GOOD” provided consistent but small dividend to their shareholders throughout three years compare to “INFI” provided that DPS increased by 0.5 pence from Y/E 2012 to Y/E2014. Dividends provide an added incentive to own stock in stable companies even if they are not experiencing much growth but they try to keep their investors happy(Investor Guide Staff, 2013). As a developing company in UK’s renewable energy sector “GOOD” is doing their best to attract and retain investors while making sure they invest enough resources for their further development.


Infinis Energy PLC

3.4.2 Earnings per Share(EPS)

2012 2013 2014

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-5

0

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Figure9: Earnings per Share of INFI and GOOD

EPS

(pen

ce)

EPS describe the amount of net sales a company achieves per share of common stock issued and outstanding. By comparing the EPS rate with historical and forecasted results, one can determine if stocks are appropriately priced(Gildersleeve, 1999).

Figure9 shows the movements in “INFI’s” EPS over last three years. It was 1pence(Y/E2012) which declined to -0.01pence(Y/E2013) because net income decreased by £13.5m(Appendix-A). Again EPS was at its dip of -4pence(Y/E2014) which is resulted from higher other expense and income tax than Y/E2013(Infinis, 2014h).

“GOOD’s” EPS was a success story and reason behind this continuous rise is that it’s net income was glorified by higher finance income, lower finance cost and taxation as shown in analysis of NPM(figure5). “INFI’s” EPS(Y/E2014) was totally opposite than that of “GOOD’s” which means “INFI’s” management should pay attention to their net income otherwise it might scare off existing and potential shareholders as healthy EPS is a sign of healthy organisation.


Infinis Energy PLC

3.5 Efficiency Ratios

3.5.1 Asset Turnover

2012 2013 20140

0.2

0.4

0.6

0.8

1

1.2

Figure10: Asset Turnover of "INFI" and "GOOD"

Asse

t tur

nove

r (tim

es)

Asset turnover ratio reveals the ability of a firm to procure and generate funds from available sources and their utilization for generating sales(Sheeba, 2011).

Care must be exercised when evaluating the asset turnover ratio, some industries such as electric utilities requires a substantially larger investment in assets to produce a sales dollar than do other industries such as restaurant(Rich et al., 2011).

“INFI’s” asset turnover climbed up from 0.21times(Y/E2012) to 0.22times(Y/E2014) which was result of its revenue increased due to higher total exported power and average selling price as discussed in revenue analysis(Figure1&2). However it declined by 4.8% to 0.2 times(Y/E2013) & it’s due to “INFI’s” strategy of expansion as it opened four new energy generating sites(Infinis, 2013a).

In comparison, “GOOD’s” asset turnover has been above industry average(0.3times) and “INFI”(CSI Market, n.d.-a). Which means, “GOOD” proved itself more efficient in utilizing its asset like it’s Asset turnover is 0.94times(Y/E2014) that is 327% higher than “INFI’s” 0.22times.


Infinis Energy PLC

3.5.2 Inventory Turnover

2012 2013 20140

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45

50

Figure11: Inventory Turnover of "INFI" and "GOOD"

Inve

ntor

y Tu

rnov

er (t

imes

)

Inventory turnover shows how quickly the inventory is turning into cash through sales. Generally the higher the rate of inventory turnover, the larger the amount of profit, the smaller the amount of working capital tied up in inventory, and the more current the stock of merchandise(Bose, 2006)

Figure11 illustrates that “INFI” has fluctuating trend in inventory turnover in recent three years. It was at 47.33(Y/E2012) then fell down to 43.66(Y/E2013) and again rise to its peak of 47.51(Y/E2014). The cause of fluctuation in inventory turnover is that it couldn’t match up its revenue growth in Y/E2013 but recovered its growth in Y/E2014 as shown in figure1 and also decrease & increase in inventories throughout three years(Appendix-C).

Average inventory turnover for utility company is 7.23 times(CSI Market, n.d.-b) whereas “GOOD’s” inventory turnover is improving but still it’s too low compare to “INFI’s”. Without better inventory turnover it will be hard for them to manage other expenses. But overall, “INFI” proved itself more efficient in utilising its inventory.


Infinis Energy PLC

3.6 Cash Flow Ratios

3.6.1 Free Cash Flow to Revenue

2012 2013 2014

-30

-25

-20

-15

-10

-5

0

5

10

15

20

Figure12: Free cash flow to revenue of "INFI" and "GOOD"

FCF

to re

venu

e(%

)

Free cash flow (FCF) to revenue indicates the “real” amount of cash that a company earns. This is because it’s much more difficult to distort free cash flow with accounting gimmicks than it is to manipulate earnings. Ratio of more than 5% is a sign of a high quality company(Investopedia, n.d.).

“INFI’s” FCF to revenue is 0.79%(Y/E2013) that means it failed to maintain at least 5% rate and then again rise to 10.99%(Y/E2014). FCF to revenue should be analyzed from a long term perspective, because any years it can be drastically affected by the spending on property, plant & equipment(PPE) of the business in that year(Guru Focus, n.d.). In Y/E2013 “INFI” expanded its wind power generating site from 10 to 15 which resulted massive investment in plants and as a result there is a huge gap of FCF compare to Y/E2012(Infinis, 2013d).

Recently as shown in figure12, “GOOD’s” FCF to revenue is -24.98(Y/E2014) and it’s due to increase in acquisition of PPE and intangible fixed assets(Good Energy Group, 2014c). Though FCF to revenue looks scary but underlying reason for this drop is promising for investors as it’s a sign of business expansion and opportunity for more profitability.


Infinis Energy PLC

3.7 Gearing Ratio

3.7.1 Interest coverage

2012 2013 20140

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3.5

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4.5

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Figure13: Interest coverage of "INFI" and "GOOD"

Inte

rest

cov

erag

e (t

imes

)

Figure13 reveals interest coverage ratio (ICR) of both “INFI” and “GOOD”. This indicator measures number of times that income covers interest charges also measures long-term liquidity risk. ICR attempts to indicate the relative protection that operating profitability provides bondholder, permitting them to assess the profitability that a firm will fail to meet required interest payments(Stickney et al., 2009).

“INFI” is struggling to maintain its ICR and its ratio is also way lower than “GOOD’s”. This downgrade is mainly due to fall in operating income and as well as fluctuation of interest expense of “INFI” throughout these three years(Appendix-A). ICR for Y/E2014 is even below 1 and it indicates that “INFI” is not generating enough cash to cover its interest payments. “INFI” may find itself in jeopardy of defaulting on its interest payments which is likely to encounter an escalating set of financial problems that are sure to affect the holdings of both shareholders and lenders.

On the other hand “GOOD’s” ICR was a success story because of rise of operating income although interest expense is also rising at the same time(Appendix-D). Its ICR for three years is also higher than 2.0 which is a good sign for “GOOD’s” shareholders as they can justify “GOOD” as a low risk solvent company(Bergen, n.d.).


Infinis Energy PLC

3.8 Business Analysis of Infinis Energy plc

3.8.1 Porter Five Forces Analysis

Rivalry:

The industry “INFI” compete within is a fragmented industry, since the government initiatives towards renewable energy sector influenced other to participate, and this makes the competition concentrated on efficiency, technology development and prices. The industry consists of several small to medium sized companies, with the ten biggest companies in the industry counting for more than 65% of the UK renewable power market(Infinis, 2013b). The industry has experienced significant growth in the past years, however, recently times have been tougher especially due to financial crisis rivalry has been intensified.

Buyer’s Power:

“INFI’s” direct and indirect consumer includes individuals, industries, transportation etc. High number of buyers diminishes the impact on market players of losing one customer and weakens buyer’s power. But buyers can switch supplier without enormous expense and they are also price sensitive which increase their bargaining power. Also buyer is mostly of a very small size compared to normally very big energy producers, no considerable threat of backwards integration exist. Overall, buyer’s bargaining power is to be assessed as weak(Novelli et al., 2012).

Supplier’s power:

The more concentrated is the whole supplier’s industry the higher is their bargaining power. In UK’s LFG market “INFI” holds nearly 40% share which makes them powerful enough to control its price and supply. But “INFI” heavily invested in specialized equipment and after sales services related to those products which means switching suppliers will be massively high for them. The forward integration threat doesn’t really assume remarkable dimensions due to the size, both in terms of value and production capacity of “INFI”. In conclusion one can say that supplier’s power is weak to moderate.

Threat of new entrants:

Economies of scale are for the energy market in general one of the most significant barrier to market entry. They deter new entrances by forcing the aspirants to come in on a large scale or to accept a cost disadvantage. Extremely high financial investments both in fixed facilities and research and development (R&D) also represent very important and considerable barriers for new entrances. Potential rivals also have to face cost disadvantages which are not directly related to the size of entrenched companies. On the other side many governments are involved in energetic policies aiming to boost the whole renewable energy industry, in order to create profitable and sustainable future perspective. Distribution needs to be secured by newcomers but most of the time energy producers own it(Novelli et al., 2012). Overall threat of new entrance is quiet moderate, not representing any particular danger for “INFI”.


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Substitute products:

The most direct substitute for renewable energy is electricity generated in fossil fuel or nuclear power stations. Traditionally they have also been more economical than renewable sources of energy. Despite this cost of important components like wind turbine has declined in recent years(Quilter, 2012). Till now fossil related energy still represents in certain cases like gas or coal for residential a better price-performance trade-off compared to renewable energy such as electricity. The threat of substitutes is the one of the most significant for “INFI”.

3.8.2 SWOT Analysis

The SWOT analysis will not tell investors what price is fair for stock but force some discipline and systematic thinking into the investment evaluation process which give investors a screening tool for potentially interesting ideas that merit further research(Simpson, n.d.).

3.8.2.1Strengths

Political and Public Support:

Major political parties in UK have agreed to phase out the use of coal in power generation while accelerating the development of an energy efficient low carbon economy(Edis, 2015). It’s a big push for “INFI’s” future growth as government has pledged to support alternative energy.

A new survey released by the department of energy and climate change has found that, 80% of the public said they support the use of renewable energy to provide the UK’s electricity, fuel and heat(Casey, 2014) which is a strength point for “INFI” as they have public backing for their projects.

Power Plants:

In 2009 the EU adopted a wide-ranging package on climate change which includes 20% cut in green house gas, 20% increase in use of renewable energy & 20% cut in energy consumption through improved energy efficiency by 2020(BBC, 2010). “INFI’s” 147 power plant with renewable energy generating capacity of 2639GWh is contributing UK to meet its target by 2020 while ensuring revenue growth for coming years. Particularly “INFI” is the market leader in LFG business with 40% market share in UK which accounted for most of their operation(Infinis, 2013c).

Green Business Image:

According to McCorry (2012) sustainable or green business practice can enhance brand and competitive advantage, increase productivity and reduce cost, improve financial & investment opportunity, minimize carbon risk & improve energy efficiency and increase


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employee retention & recruitment. For “INFI” these benefits are their strengths which appear due to their nature of operation and crucial to step forward in competitive business jungle. The only challenge for “INFI” will be that how efficiently they can use these benefits.

3.8.2.2 Weaknesses

Initial Infrastructure cost:

Approximately 75% of the total cost of energy for a wind turbine is related to upfront costs such as the cost of the turbine, foundation, electrical equipment, grid connection and so on. Thus a wind turbine is capital intensive compared to conventional fossil fuel technologies(Krohn, Morthorst & Werbuch, 2009). As “INFI” is aimed to have large scale of wind energy operation, it will cost them initially a big portion of budget. So efficient budgeting should be carried out before investing more in future otherwise it will be hard to maintain their other successful projects like LFG.

Vulnerable to laws & regulations:

The development and generation of renewable energy in the UK relies, in large part, on the national and international regulatory & financial support of renewable energy. It’s possible that this approach could be modified or changed in future, including as a result of a change in governmental policy. So “INFI’s” development and future operations are particularly vulnerable to changes in EU and UK law or regulations(Infinis Energy, n.d.-c)

3.8.2.3 Opportunities

International expansion:

According to Johson (2012), benefits of international expansions are more customer which equals more profit, larger talent pool from diverse background, more efficiency through economies of scale, company will iterate faster & create better products and it’s the future as soon it will be the standard operating procedures. Global support for renewable energy and government initiatives like tax break will help “INFI” in their transition to multinational company. Expansion may attract foreign investments which will result faster growth in overseas and home markets and of course higher return for shareholders.

Investment in other sources of energy:

“INFI’s” portfolio of renewable energy sources includes LFG, wind & hydro. But there are many more sources of energy that “INFI” can work with like solar, wave, tidal, biomass, geothermal etc. All of them are environmentally friendly and supported by governments and communities through different initiatives. According to Vidal (2014), UK breaks solar power record due to sunny weather also it doubles it’s capacity with more installations and ultimately creating more job opportunities for the community. If “INFI” can embrace solar technology then again they will see growth in exported power and ultimately it will affect their


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profitability positively.

Consumption boom of renewable energy:

Renewable energy is growing fast around the world & will edge out natural gas as the second biggest source of energy after coal by 2016 and developing countries are building more wind, solar & hydro-electric power plants to meet rising power demand and combat local pollution problems(Fahey, 2013). Government, organizations and people from all over the world are developing eco awareness allows alternative energy company like “INFI” to attract more customers. Current consumption boom of renewable energy will be the biggest opportunity for “INFI” and management should execute proper actions which will help “INFI” to become the market leader in home

3.8.2.4 Threats

Credit and capital market volatility:

After recession of 2008 it’s becoming more difficult to raise and borrow money. Volatility in credit and capital market is the biggest threat for “INFI” as it’s still in growing phase and sudden downturn in overall economy will have adverse affect upon them.

Less competitive:

It’s difficult to generate large quantity of energy from renewable sources as those made by coal powered plants. This implies that companies need to setup additional such facilities to match up with the growing demand which also requires large tracts of land to setup these power plants(Conserve Energy Future, n.d.). Difficulties like this may turndown “INFI’s” expanding opportunities and it’s a huge threat for a growing company like this.

Cheap oil: Cheap energy substitute like shale oil could put investment in renewable energy in risks as businesses want most output from least input. Also when oil prices fall, low-carbon sources of energy such as wind and solar power may seem less attractive to investors, creating doubts about the pace of the world's transition to clean energy(Chestney, 2015). Threats like these can’t be removed but can be managed as research on fossil fuel is the main priority for big oil companies.

3.8.3 Non Financial Performance


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Employee’s satisfaction:

According to Gregory (2011), employee satisfaction is essential to the success of any business. A high rate of employee contentedness is directly related to a lower turnover rate. Thus keeping employees’ satisfied with their careers should be a major priority for every employer. “INFI” aimed to attract and retain top quality people through competitive basic salary, performance related bonus, pension, life insurance cover, car allowances, paid holidays & employee assistance program(Infinis Energy, n.d.-a).

Environment:

“INFI” is providing a positive impact on the environment and it’s achieved through their core business, making responsibility for environmental issues and tackling climate change a line management responsibility with ultimate responsibility sitting with the chief executive. “INFI’s” environmental management framework managing environmental impact of LFG, wind farm and hydro while ensuring lower carbon footprint and waste is properly handled(Infinis, 2014f).

Health and safety:

Ensuring health and safety is “INFI’s” highest priority. Strong performance in this area helped them to achieve both the royal society for the prevention of accidents gold standard for the 6th year running and the British safety council’s international safety award for the 7th

year in a row(Infinis, 2014e).

Achievements:

“INFI” has been awarded European onshore wind deal of the year(2013), RenewableUK’s CSR award(2012), Sunday times buyout track “10 biggest” company and best green companies award(2012&2011), CEEQUAL award(2012), HSBC growth strategy of the year award(2010)(Infinis Energy, n.d.-e).

3.9 Conclusion

The above research and analysis report tried to find out the financial condition and the future developing opportunities of “INFI” by qualitative and quantitative methods based on various operational, financial and other performances. Following are some key findings:

“INFI” had successful years in terms of its core business which is electricity generation from renewable sources. It managed to increase its exported electricity by 5.7% while maintaining same amount of power generation capability from last year(Y/E2013). It’s a sign of good efficiency from both engineering and managerial team. Electricity generation is expected to increase to stay in line with the government plan. That’s why “INFI” has several onshore wind farms under development but in mean time they need to spend more on R&D which will ensure that they are in the frontline when managing upcoming huge renewable energy demands otherwise competition will be fierce as big boys of energy industry will try to gain


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market share from promising company like “INFI”. Mean time to repair for LFG machinery increased by 20.7%, but mean time to breakdown reduced by 2.1%. This needs to be monitored carefully otherwise in coming years keeping up these machines in their best position to generate electricity will be a tough job. Hydro plants were 16% more available to generate electricity compare to last year(Y/E2013). More investment of resources will make this a reliable source of electricity while making sure continuous innovation is carried out for this age old electricity generation source.

In terms of revenue and its growth “INFI” saw a huge spike and it’s due to increase in exported electricity and it can be projected that in coming years it will increase at this or higher pace. But other indicators like OPM, ICR & EPS were not promising due to extra cost for IPO and increasing financial costs. Having sweep accounts will allow them to earn interest on extra transferred balance, lowering overhead cost, selling unproductive assets, monitoring accounts receivable, negotiating longer term payments with vendors and finally reviewing profitability regularly will help “INFI” to improve performance indicators. Excluding IPO cost it could have been a fabulous year for “INFI”. Current and Quick ratio was behind industry average and competitor (“GOOD”), which can be improved by converting inventory to cash or accounts receivable. “INFI” also possess long term liquidity risk which is indicated by interest coverage ratio. Its ICR is decreasing year by year and it should be top most priority of “INFI’s” management to improve it otherwise shareholders will deem investment in “INFI” as risky. Utilities are classic income growth stocks and “INFI” is no exception, “INFI” is committed to increase dividend at least in line with inflation. Inventory turnover for “INFI” was above industry average and it’s an excellent sign as less money is tied up in inventory. FCF to revenue was healthy and better than its competitor also it’s important to mention that cash flow is the life blood of every business without healthy one it’s impossible to survive in competitive business environment.

“INFI’s” income from core business will be further benefited from the robust trading environment, such as fabulous market opportunities brought by UK’s 2020 target & rising environmental awareness among citizens. Expansion of business in terms of geography and product (introducing solar power plant in “INFI’s” portfolio) will bring further economic prosperity for the company. Furthermore the established leading market position as the largest electricity producer from LFG and support in UK will ensure its future growth. Reputation attained from health & safety regulators and the communities are the keys to ensure its sustained development.

On the basis of “INFI’s” current business activities, not only has it performed well in the past but it’s ready for further developments. As one of the leading renewable energy company in the UK, it cherishes the opportunity in fulfilling future energy demand while ensuring sustainable world for future by fighting against climate change.


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