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Executive Summary

BAA Plc is second in top ten airline/airport companies in UK after British Airways by sales in 2002/03 (Business Ratio Report, 2004).

In 2005, BAA has delivered another good set of results. Great retail performance, in spite of adverse conditions and exceptional property related profit.

Smart use and development of assets and improved customer service, all supported by a strong focus on innovation, have driven the Group's operational performance.

All these attributes give the Board confidence that the Group can sustain growth and translate its forecast rise in London passenger traffic of 3.5% into a robust financial performance for coming years.

The outlook provide many challenges for management, bright future for investor and more benefits for shareholders.

Introduction

This report review financial information on BAA Plc, leading airport company. It analyzes company’s performance, position and financial strengths and weakness revealed through the financial statements over the past 3 years. It further reviews the accounting policies used and market perception of the company.

BAA own and operate seven airports in United Kingdom and has management contracts or stakes in 11 overseas airports based in Italy, Australia and the United States. BAA serve over 141million passengers a year in UK and further 40 million passengers a year internationally. Currently, over 700 destinations are served by airports around 300 airlines (BAA Annual Report, 2005).

The source data extracted from reported financial statements by BAA’s website, FAME database, financial magazine (Financial Times & The Economist) and website reviews. The analysis on the data undertaken in context of investment point of view.

Key Statistic and Ratios including;
 Valuation Ratios (e.g. Price/Earnings)
 Per Share Data (e.g. EPS)
 Profitability Ratios (e.g. Gross Margin)
 Financial Strength (e.g. Quick Ratio) and
 Dividend Information (e.g. Dividend Yield).

4 years of financial history used for most ratios.
- Profit & Loss Account
- Balance sheet
- Cash Flow Statement

The Company: BAA plc

BAA plc is an airport company, successfully operating 7 airports in UK; Heathrow, Gatwick, Stansted, Southampton, Glasgow, Edinburgh and Aberdeen. The company expanded internationally and has management contracts or stakes in 11 airports in Italy, Australia and the United States. Focused on innovation in finance, management, engineering, commercial partnership and customer care make it worlds leaders in the sector.

Every day, on average 1,700 aircraft depart from our UK airports, approximately one every 30 seconds. Over 117 million international passengers handled during 2005 which make up 81% of total UK airport traffic.
Crucial to British economy, BAA employ over 11,000 staff and UK airports provide direct employment for some 115,000 people. BAA is widely considered a world leader in airport security and was the first to introduce 100% hold baggage screening. One-third of BAA staff work in security.

BAA is a developer and manager of airport retailing through retail management in the United Kingdom airports and through World Duty Free. The Company's wholly owned tax and duty-free business, which specializes in luxury brands and operates 64 stores across the United Kingdom airports

BAA provides over one million square meters of commercial accommodation for more than 900 organizations at its airports, one of the largest commercial landlords in UK. It is also involved in airport-related property development. Average £2 million a day investment on new airport facilities over the next decade, will support better, more efficient and more enjoyable travelling. That’s make BAA one of the UK's principal developers of infrastructure and one of the lartest client of construction industry.

Financial Analysis

Accounting Policies
The BAA financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) and under the historical cost convention except of investment properties, available-for-sale assets, derivative financial instrument and financial liabilities. These exceptions to the historic cost convention have been measured at fair value (BAA website, November 2005).

The Group financial statements consolidate the financial statements of the Company and all its subsidiaries, together with the Group’s share of net profits and net assets of associated undertakings. Investments where the Group exercises joint control are accounted for using the equity method. The results of subsidiaries acquired or sold are consolidated for the periods from or to the date on which control passed.

Financial Strengths and Weakness
SUMMARY OF RESULTS
Year ended
31 March 2005 Year ended
31 March 2004 Change %
Passenger traffic 141.7m 133.4m 6.3
Group revenue £2,115m £1,970m 7.4
Group operating profit £672m £616m 9.1
Profit before tax £733m £539m 36.0
Earnings per share 51.0p 35.5p 43.7
Dividend per share 21.2p 20.0p 6.0
Net retail income £588m £548m 7.3
Net retail income per passenger £4.16 £4.12 1.0
Capital expenditure £1,403m £1,318m 6.5
Source: BAA website, 11/2005

During the year 2005, BAA innovated across all aspects of the business. It has accommodated the record number of passengers, increase commercial revenues and control costs. All businesses performed well, airports with strong traffic and profit growth. Retail was at the high end along with property transactions. Summary business performance during the can seen.

Operating Performance/Profitabilty
The return on copital employed has increase over the year from 5.66% in 2004 to 6.99% in 2005. The net profit margin increased is significant has compared to last 4 years performance 34.66% from 27.36% (2004). The result can be seen in the company profitbility review.

Profit before tax increased 36% to £539 million and major contribution is from operating profit. Group operating profit up 9.1% beside 5.4% rise in underlying operating expenditure and £16 million reorganisation costs spend this year as compared to year 2004. It also enjoys best pre-tax profit margins in the industry in UK.

Liquidity
There has been increase in current and quick ratio (1.37 & 1.34) as compared to last year (1.25 & 1.23). This result shows that current assest are less than current liabilities. The Group liquidity appears statifactory, although it not compareable to year 2003 when current ratio was 1.73 and quick recored 1.69. Outline show that company is quite successfully meeting its short term obligations.
The group invested £16 million reorganisation costs to improve customer focus and operational effectiveness and efficiency.

Stability
The health of group business proved stable as gearing is much improved inovation in different sectors resulted in growth and development. Current gearing percentage is 96.35 as compare to 91.99 last year.
BAA is constantly focusing on capital investment programme, invested £1,403 million during the year, of which £1,316 million related to the three London airports. Heathrow's Terminal 5 remained top on investment and symbol of stability and development.

Investment return
Earnings per share is 41.9 pence (35.3 pence in 2004), it has increased by increased 18.7%. Earnings per share increased by 43.7% to 51.0p (35.5 pence in 2004). Likewise, the dividend for the year of 21.2 pence, as compare to 2004 it was 20.0 pence, This slight change increase. Net debt for the year 2005 is £3,080 million (£2,770 million).

BAA financial performance with effective management setup and improve relationship with shreholders attract good return on investment. Shareholders' funds during the year increased from £5,501 million (£4,974 million was in 2004). This increase shows trust and goodwill of the company.


Conclusion

BAA need to be more effective, responsible and accountable customer oriented organization and result can be achieve only through efficient use of resources and people. It need to continuously invest in reorganization to update and upgrade to new challenges.

In year 2005, the group sold number of hotels and petrol stations (£39million), which delivered profit but overall profit margins will be effected in coming years while new properties are not build.

BAA is still adopting a measured and control approach to international growth. Although last year profit growth was 74%, which can a sign of success and need more focus to put that side.

World duty-free is facing problems due to expansion of the European Union and weak dollar. Its profit over the year was 4% is less as compare to other business performance, so need changes.

Terminal 5 completed 60%, the investment expectations are high. The project has defiantly long term stability trust for attracting investors. This will enable world best airport company to provide services to 3.5% expected traffic growth coming years.

BAA is in strong position, air travel to its airport has forecast of increased strongly. This high demand will not be meet, unless to build new runways and capacity, more customer centered approach and utilizing efficiently resources.

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