Swallowfield have now revealed their results for the year ending 2012, following on from my earlier post last year.
The income statement is as follows:
Looking at the profit for the year, we can see that the group had a modest increase on last year, up by £200K to £1.3M. UK Revenues have suffered a fall of £900K but this has been more than counteracted by increases in Europe and ROW revenues. Cost of sales increased slightly and admin costs have reduced. We can see that staff costs reduced slightly but building costs increased. The group also benefited from not having to spend £100K on the special AGM that occurred last year.
The total income from the year, however, has fallen £200K to just under £1M. The reason for this are differences in exchange rates for foreign operations, presumably as sterling strengthened against the Euro last year.
Moving on to the assets:
Total assets for the year fell by nearly £500K to £34.8M. There was an increase in plant and machinery cancelled out by a similar sized decrease in the value of buildings and land. Inventory levels have shown a small reduction, as did trade receivables (perhaps showing a streamlining of the order process). Otherwise we see a £300K reduction in cash to £900K.
Liabilities have also fallen – £700K to £21.1M. Trade payable have fallen by £430K to £11.5M but we see taxes and accruals/deferred income on the rise. This means that net assets are up slightly (£260K) to £13.7M – this all looks fairly stable to me.
The headline figure here is a net cash outflow of £260K, compared to an inflow of £2.5M last year – on the surface this looks rather disappointing, so what happened?
The cash from operations of £2.9M is actually £500K up on last year. As well as actually getting more revenues in, the group seem to have a better control over trade receivables (or perhaps orders have reduced) which has given the higher cashflow. We also see a reduction in taxation and cash paid out for the purchase of assets. During the year, the group also gained £420K from new loans.
The cash starts flowing out when we look at the other loans – the group has paid a net amount of cash out to repay the loans, and this added to the dividends are what has driven the cash flow slightly negative. Last year the group received nearly £3M in net loans, which is where the difference with last year lies. Indeed, were it not for these proceeds last year then cash flow this year would be better than the 2011 figures.
| EPS |
2012 |
2011 |
| PROFIT AFTER TAX |
1,263,000 |
1,082,000 |
| NUMBER OF SHARES |
11,306,416 |
11,306,416 |
| EPS |
11.2 |
9.6 |
| SP |
119.5 |
108.0 |
| P/E |
10.7 |
11.3 |
Earnings per share are higher than last year, but the share price has also risen. At the end of the year, however, the P/E ratio was a rather undemanding 10.7 and the ratio at the current share price remains unchanged. Going forward, analysts are giving an EPS for next year of 12.2, which gives the shares a very good value ratio of 9.8. Given the board’s conservative outlook, however, I am not sure I agree with this EPS prediction.
Overall then this seems like quite a stable, if unexciting year for Swallowfield. The profit was up marginally but within that we saw UK revenues down as customers rationalised and consolidated their supply chains but new business wins in Europe and the rest of the world counteracted this. The actual income received was adversely affected by the exchange rates. There was a negligible upwards movement in net assets and a small cash outflow, but overall, due to repaying of loans net debt was down on last year, with the group £566K better off in this regard.
The group do seem to rely quite heavily on a few large clients, with one customer accounting for 25% of revenues and another accounting for 16% which is rarely a good sign.
There seems to be a good control over trade receivables, with only £496K overdue, and all of those are less than 90 days old. The group may be hit by an increase in interest rates next year (a 0.5% interest rate increase would reduce profit by £27K) and there is no hedging in place but hopefully the current financial markets would make this unlikely. The group is somewhat hedged against exchange rates, however, but a 5% strengthening of the pound would still reduce profit by £82K.
In the coming year, customers are likely to continue rationalising and consolidating supply chains which will impact growth in the first half but with the help of some new overseas contract wins where the US and French sales offices are winning business, Swallowfield hope to return to growth in the second half. There is good news on the cost side of things, with raw material and input costs stabilising. The boardroom chaos seems to have quietened down somewhat and the board now seem to be pulling in the same direction but Gyllenhammer and Western Selection still control much of the company and have been at odds with some of the board members before so it could boil over again.
After climbing substantially every year in the last 5, revenues seem to have stagnated. It is also true that profit is still lower than in 2008 so there is still some work to do here.
This year has been a quiet one for the group. They have concentrated on making efficiencies and driving overseas grown, to the detriment of trade in the UK. Given the current climate I think this is a wise strategy. The current dividend yield is 5.3%, which is covered by earnings 1.8 times, which is a decent return that is getting towards a sensible coverage. The group has a gearing of 30%, which again is a sensible level in my view and they are able to pay back some of this debt out of the cash flow for the year. At a current P/E ratio of 10.7, these shares are pretty good value in my opinion but the lack of any real likelihood of growth this year is likely to mean there is not much capital appreciation so I would buy on any dips for the dividend.
On 15th November, Swallowfield issued a profits warning that stated that during the year the group have experienced more difficult trading conditions due to customer caution and some customers have taken work in-house. Apparently new customer conversions and launches is gaining pace for the second half but they still expect full year earnings to be significantly below market expectations. This is a real blow, especially with the use of the word “significantly”. As usual the market reacted to the news before I read the update so my selling opportunity is passed. Some may say this is a good entry opportunity but I will not be buying any more of these shares until I can study the half year results and assess the damage. So I now hold, looking for a possible exit.
After a small rally, I have sold my holding here.