Gattaca has now released its final results for the year ending 2016.

Revenues increased when compared to last year following the acquisition with a £90M growth in technology revenue and a £31.1M increase in engineering revenue. Wages and salaries increased by £10M and other cost of sales were up £87M to give a gross profit £18.2M ahead. We then see a £2M increase in the amortisation of acquired intangibles and a £1.3M growth of restructuring costs, offset by the lack of £1.7M of acquisition costs that occurred last year. Other admin expenses were up £14.3M to give an operating profit that increased by £2.7M. The group benefited from a £1M forex difference but tax costs grew by £2.2M which meant that the profit for the year was £9.9M, a growth of £1.6M year on year.

When compared to the end point of last year, total assets increased by £822K driven by a £4.3M growth in trade receivables, a and a £3.4M increase in cash, partially offset by a £2.6M decline in other receivables and a £2.1M reduction in the value of customer relationships. Total liabilities declined during the year as a £15M reduction in the term loan and a £3.3M fall in accruals and deferred income was only partially offset by a £9.8M growth in the working capital facility, a £2.4M increase in contractor wages creditor, a £1.6M growth in other payables and a £1.3M increase in the current tax liability. The end result was a net tangible asset level of £33.2M, a growth of £8.9M year on year.

Before movements in working capital, cash profits increased by £4.8M. There was a small cash outflow due to an increase in receivables and after modest rises in interest payments and tax charges, the net cash from operations came in at £14.6N, a growth of £1.3M year on year. The group spent £471K on fixed assets, £462K on intangibles and £390K on acquisitions so after £420K received from the sale of a subsidiary, the free cash flow was £13.7M. Of this, £15M was used to pay back the loan and £6.9M was paid out in dividends which meant that after exchange rates were taken into account, there was a cash outflow of £6.3M and a cash level of -£11.5M at the year-end.

The new Engineering reporting segment includes the Engineering business previously reported together with the Engineering business included within Networkers and the professional services brands of Barclay Meade and Alderwood. The Technology segment includes the Connectus brand previously reported within professional services and the remaining Networkers business.

On a like for like basis overall operating profit increased by just 1%. On the back of the acquisition the group has achieved £3.1M of cost synergies, the majority of which will be realised in 2017. Large parts of the integration are complete but they have further work in harmonising systems and they expect a final £500K of integration related costs in the first half of 2017.

The operating profit in the Engineering business was £14M, a growth of £864K year on year. Infrastructure performed particularly strongly with 18% NFI growth on the back of continued investment in the UK on major projects including Crossrail, Thames Tideway, London Bridge, South West Rail extension, major highway upgrades and HS2. To accelerate growth the group have increased headcount in the London office. They also see significant opportunities internationally, particularly in the US where Texas Road and Highway Construction alone has an annual budget of $2.5BN dedicated from 2018 and is an opportunity to mirror one of the UK’s strongest divisions in the Dallas office.

The energy business as a whole was down 7% due to the continued global downturn in oil and gas but was mitigated somewhat by the nuclear, renewables and transmission sectors. There was growth in the renewables market in the UK, the Middle East and Africa. In the UK, delays to the nuclear new build programme slowed activity but the approval since the year-end of Hinkley Point and the renewal of Trident should spur activity in the coming years. The automotive division saw NFI decrease by 4%. In the UK, new car sales are at record highs and R&D investment is high but there are acute skills shortages.

The aerospace division saw growth of 12% on the back of OEMs enjoying strong order books for existing aircraft model production. The group are seeing demand predominantly across precision machining and interiors skill sets. Maritime had a challenging year, with the lull in naval build programmes following the completion of the QE class aircraft carriers leading to a fall in contract NFI of 17%. With new aircraft carriers due to arrive in Portsmouth next year, however, and the successor submarine programme approved by parliament, they expect to return to growth.

Overseas, they continue to build on their success sourcing talent for the Canadian surface combatant programme helping permanent fee income grow 11% and they have recruited staff to capitalise on opportunities in Europe and Australia.

There was growth of 10% in general engineering and permanent fee income increased by 25% as a result. Demand remains high for science and medical staff in pharmaceutical and radiography in private healthcare where UK shortages prompted candidate attraction campaigns in Europe and the US. There was a strong performance from Engineering Technology with contract NFI increasing by 17% and there was also good growth in the professional staffing business with NFI up 16%.

The operating profit in the Technology business was £7.5M, an increase of £3.3M when compared to last year but on a pro-rata basis the division underperformed with NFI down 6% as telecoms delivered strong growth of 9% offset by IT which was down 17% year on year, although the rate of decline did slow (21% in H1 vs 14% in H2).

Telecoms performed well globally, particularly strong in Africa, Asia and Latin America on the back of investment in 4G network rollouts and upgrades. The new markets of IP/broadcast, post-paid billings and mobile money are also creating opportunities. The convergence of Telecoms and IT skills has presented high-end roles in IT security, ERP and development. As previously reported, the group have streamlined the IT structure to focus on five specialisms.

The leadership business performed steadily with NFI broadly the same as last year, supplying change and transformation experts, programme and project managers and business analysts to the engineering, leisure and retail sectors in the UK. ERP was down 30%, impacted by a major client outsourcing its entire IT function. This business has predominantly been focused on the European market delivered from the UK and to improve resilience and growth opportunities, they have increased headcount in the US and Singapore.

There was a 20% reduction in demand from the corporate account and public sector clients and they have integrated their two public sector businesses and formed one, industry-focussed, business unit. Internationally, IT grew by 8% with particularly strong performances in the Middle East, Asia and North America. Going forwards, IT development skill shortages in permanent recruitment are resulting in an active contract market and the focus on small and medium sized organisations is gaining traction, particularly in financial technology. They have a well-established team I the UK and have invested in new headcount in the US and Canada offices.

The business works with system integrators on cloud implementation projects and are seeing increased demand across Europe in the niche cloud applications market and are looking to extend this into other locations. Cyber security is a relatively new specialism and they see this as a growth market with businesses forecast to significantly increase investment, based on the vast amounts of fate being created and the increasing importance of keeping it secure.

It is worth noting that the operating lease liabilities have increased considerably this year and now stand at £12.5M compared to £3M in 2015. The group is somewhat susceptible to interest rate movements and a 1% increase in the rate would reduce profits by £450K. They also have some exposure to exchange rate movements. A 25c weakening of the Euro and Dollar against Sterling would decrease profits and net assets by £3.6M.

In the months immediately before and after the EU referendum, there was a pause in some client’s recruitment, but activity returned quickly to pre-referendum levels. Companies that were recruiting before have continued to do so in the subsequent months. Demand for skilled engineers in both the UK public and private sectors remains strong and they have yet to see any change to vacancy flow. The outcome of the vote continues to make the economic outlook uncertain, however, although it still too early to say what its near term impact will be for the group. Whilst the amount of business they conduct in Europe is not significant, the same cannot be said for many of their clients and any uncertainty can have a knock-on effect in the investment decisions that their clients make.

Going forward, uncertainty about the future of the British economy raises concerns for companies such as this but the approach of partnering with their clients on long-term public and private infrastructure projects mitigates this risk to some extent, as does the increasing geographic diversification. Since entering the new financial year, the group have seen a slowdown in trading in the UK with group NFI in Q1 forecast to be down 3%. They are continuing to invest in their overseas operations which enjoy growth and to some extend mitigates the uncertainty around the UK economy in the medium term. The full year effect of the Networkers acquisition is expected to come through in 2017 with first concrete sales synergies now being realised.

At the current share price the shares are trading on a PE ratio of 9.3 which reduces to 7.2 on next year’s consensus forecast. After the total dividend was increased by 5%, the shares are now yielding a stonking 8% increasing to 8.1% on next year’s forecast. At the year-end the group had a net debt position of £25M compared to £33.6M at the end of last year.

Overall then this has been a solid year of consolidation for the group. Profits were up, net assets increased and the operating cash flow grew with plenty of free cash being generated, although like for like profits were relatively flat so this good performance can be attributed to the acquisition. The engineering business performed well as a strong showing from the infrastructure division along with aerospace and general engineering offset sluggish conditions in the oil and gas and maritime markets.

The technology business performed less well as growth in telecoms was more than offset by a decline in IT, not helped by a major customer outsourcing its IT department during the year. Going forward things seem very uncertain, as Brexit-induced inertia among customers has meant that Q1 is currently experiencing a slowdown. These conditions seem to be reflected in the valuation, however, and the forward PE of 7.2 along with a stonking dividend yield of 8.1% meant that I might have been a bit hasty exiting this position and I am tempted to re-enter at these prices.

On the 8th December the group announced that CEO Brian Wilkinson purchased 34,488 shares at a value of £100K and Chairman Patrick Shanley purchased 15,000 shares at a value of £43K which represents his maiden share purchase. Not a bad lot of buying.

On the 2nd February the group released a trading update covering the first half of the year. Due to the phasing of planned client projects in the second half, and the improving performance of the UT division, the board has confidence that full-year profit will be in line with expectations.

NFI in the period was down 2% to £35.1M with both contract and permanent fees also down 2%. This was flattered by forex movements, however, and at constant currency NFI declined by 5%. Engineering NFI was down 4% to £21.1M as growth in the engineering technology and aerospace sectors were offset by weakness in most other sectors as the time to hire lengthened following the outcome of the EU referendum. Vacancy flow continues to be strong, however.

Technology NFI was down 6% to £14M but within the division, IT saw a return to growth, up 1% following a year of decline. Telecoms declined 14%, however, with a flat year on year performance in the UK offset by delays in a number of client projects internationally.

Also on the same date the group announced the acquisition of Resourcing Solutions, a niche engineering recruitment business. The company operates from three UK offices, providing specialist contract and permanent candidates to businesses operating in the rail, power and built environment sectors. It is expected to generate an underlying EBITDA of £2M this year with the bulk of NFI generated from contract placements.

The group will initially acquire 70% of the share capital for £6.9M from the founder and CEO with the remaining 30% subject to put and call option exercisable from a year after completion for 5x trailing EBITDA. The maximum total consideration payable is £15M and it will all be paid in cash from existing resources.

Overall, it seems as though things are pretty sluggish at the moment and I don’t think I will be investing at this time.

On the 13th April the group released a trading update where they stated that profits for the year are likely to be about 10-15% lower than their prior expectations. The softening of NFI in H1 was driven by near term uncertainty which led to elongated hiring decisions and some projects being delayed although the medium term outlook remains positive with some signs of a return to confidence in recent weeks.

Unexpected one time cost overruns relating to the setting up of international entities to support a pan-European contract win and delays in realisation of back office cost savings will result in overheads exceeding initial expectations in H2. Alongside this the group have been making the appropriate investments in headcount which will further increase costs. This all sounds a bit messy and I am not rushing to invest quite yet.