Murgitroyd provides a range of intellectual property advisory services. In addition to the UK branches, the group also operates offices in Ireland, France, Germany, Italy and Finland with a sales office in the US. It is listed on the AIM exchange and has now released its final results for the year ending 2014
Overall, revenues increased year on year as a £709K decline in UK revenue was more than offset by increases elsewhere, in particular the £2.7M growth in US revenue. Cost of sales also increased, though, to give a gross profit broadly flat year on year, down by just £2K. Admin costs also increased, made worse by the lack of a property revaluation uplift which now apparently goes straight to equity. The interest on the bank loan came down as the group paid off some debt and tax was lower but the profit for the year fell by £376K year on year to just under £3M.
When compared to last year, total assets increased by £1.2M, driven by a £604K increase in “other” receivables and a £468K growth in cash. Conversely liabilities fell during the year as a £1.1M fall in loans and borrowings was partially offset by a £190K increase in “other” payables and a £171K growth in trade payables. The end result when we exclude goodwill is a £2M increase in net assets to £11.5M. The operating leases outstanding are not all that substantial and fell by £795K over the year to £3M.
Before movements in working capital, cash profits fell by £510K to £4.3M. An increase in payables when compared to last year, though, meant that operational cash flow increased by £234K to £3.9M. This became a £739K increase to £2.9M after the lower tax bill and interest payment was taken into account. This was easily enough to pay for the £320K worth of tangibles and £87K worth of intangibles the group spent on capital expenditure to give a decent free cash flow of £2.5M. The group used about equal amounts of this to pay for the dividends and to reduce debt to give a cash flow for the year of £472K and a cash pile at the year-end of £1.5M.
The increase in sales was due to organic growth accruing from investment in business development, especially in the US where revenues saw strong growth and have offset falls in the core UK market. The flat gross profit reflected both the changes in client mix as well as the price pressure that continues in the market for professional IP advisory services. The strong pound also had an adverse effect on earnings and caused gross profits to fall by £340K. Much of the US new business comes from larger corporate clients, many using the group’s IP Portal national phase filing service, a market the sales teams are continuing to target.
The group has now rebranded all of its operating businesses under the simplified “Murgitroyd” brand and deputy Chairman Edward Murgitroyd has assumed day to day leadership of the operational business’ management teams from Chairman Ian Murgitroyd. They are also recruiting paralegals, specialist formalities staff and patent and trademark admins as opposed to attorneys to try and reduce costs and change the way the group delivers services to clients. Despite this, attorney numbers have increased in the newer offices such as Munich, London and Dublin. Other cost cutting initiatives involve investing in IT to streamline the way that clients are interacted with.
The markets where Murgitroyd is active continue to display growth with stats showing an increase in European trademark applications of about 4.6% but while the market remains robust, price pressures remain. The larger corporate clients in particular continue to demand more for less from their professional advisors and investing in improvements in the group’s working practices and service delivery cost control remains a priority.
Next year the group will focus on the European market with the aim of reversing the recent contraction of revenues there despite the current stagnation of the market, alongside continued growth in the US. The price pressures seen in the market will continue to impact the group and the board expects this to constrain profits progression both this year and next. Management will look for potential acquisitions where they are immediately earnings enhancing.
The KPIs this year were a bit of mixed bag. As profitability fell, the various margins declined although net margin remained fairly robust at nearly 11%. Debt levels improved, however, with gearing down and the current ratio up. Also of note is the increased turnover per pound of salary costs and the increased bad debt exposure which grew from 0.5% last year to 0.8% this year and represented some £721K of receivables which is quite a material amount and something I hope if being given a priority.
As with many family controlled businesses, the board make up is a little unusual. Executive chairman is founder and largest shareholder Ian Murgitroyd with the deputy executive chairman position taken up by Edward Murgitroyd, presumably his son. The CEO and Finance Director position is just one post, occupied by Keith Young who is an accountant from KPMG which seems a little odd. In any case, the remuneration does not seem excessive for a company of this size.
As far as risks are concerned, the increasingly international nature of the business will mean that they are susceptible to Sterling strength, as seen during the year with a further 10% appreciation against the US dollar potentially giving rise to a loss of £99K and the same appreciation against the Euro giving rise to a loss of £33K which are noticeable amounts for a company of this size. In addition, the IP market is dependent on global macroeconomic conditions as during lean times companies may start to cut down in their expenditure on R&D and therefore reduce the need for patent services.
Going forward, the group are committed to an aggressive dividend policy following the reduction in debt and this year dividends increased by 6% to give a yield of 2.3%, increasing to 2.5% on next year’s consensus forecast. At the end of the year the group had net debt of £383K compared to £1.9M at the end of 2013. At the current share price, the shares trade on a P/E of 17.7 which falls to 17.1 next year which looks a little pricey to me.
Overall then this was a mixed set of results. Revenues were up due to strong growth in the US, offset by weakness in the UK market but profits fell as costs increased. Net assets improved year on year and the balance sheet looks very healthy. Operating cash flow increased year on year but this was due to the poor movements in working capital last year – underlying operating cash flows deteriorated slightly but the group is in a comfortable position where a low level of capital expenditure means there is plenty of free cash to continue paying down debt and spending on dividends.
Operationally though, things seem a little difficult. Despite a strong market, price pressures really seem to be taking their toll and the board has indicated that pricing pressure will constrain profit in the new year and given this, the forward P/E of 17.1 looks a little strong to me.