Gattaca has now released their interim results for the year ending 2019.
Revenues increased when compared to the first half of last year as a £3.9M decline in international revenue was more than offset by an £18.5M increase in UK engineering revenue and a £2.4M growth in UK technology revenue. Cost of sales also increased to give a gross profit £556K higher. Depreciation and amortisation decreased by £971K and there was no impairment of acquired intangibles, which accounted for £18.7M last time, although restructuring costs were up £282K, share based payments increased by £143K and other admin expenses were £1M to give an operating profit £18.8M higher. Finance costs reduced somewhat but tax charges grew by £1.7M and there was a £3.1M loss from discontinued operations which meant that the profit for the period was £928K, an improvement of £14.3M year on year.
When compared to the end point of last year, total assets declined by £19.2M, driven by a £16.3M decrease in accrued income, a £6.9M fall in trade receivables and a £612K decline in acquired intangibles, partially offset by a £3.7M growth in cash and a £767K increase in software licenses. Total liabilities also declined during the period as a £1.1M growth in provisions was more than offset by a £10.6M decrease in payables and a £9.4M fall in borrowings. The end result was a net tangible asset level of £30.1M, a decline of £608K over the past six months.
Before movements in working capital, cash profits declined by £1.4M to £6.5M. There was a cash inflow from working capital due to a decrease in receivables and after interest was up £372K but tax payments decreased by £665K the net cash from operations was £15.8M, a growth of £3.4M year on year. The group spent £950K on intangible assets and £161K on other capex to give a free cash flow of £14.8M. Of this, £9.3M was used to pay back borrowings and £106K went on finance costs which meant the cash flow was £5.4M and the cash level was £13.5M at the period-end.
The operating profit in the UK Engineering business was £6.1M, a decline of £127K year on year. Contract NFI increased by 3% and permanent NFI was up 5%, giving a growth of 4% overall. The maritime provision produced NFI growth of 25%, driven by major defence projects such as the QEC,. Dreadnought and Type 26, alongside a significant commercial international shipbuilding contract. Demand for engineering personnel within naval defence remains strong.
Engineering technology achieved 11% growth due to increasing demand for niche skills across all sectors, particularly defence and rail, alongside technological advanced bringing opportunity for greater connectivity and smart infrastructure. They continue to expand their presence in the electric vehicle market, whilst the move towards Connected and Autonomous vehicles is creating a new transportation landscape, allowing us to maximise their technology presence within this growth sector.
Infrastructure NFI grew 7% despite mixed levels of demand in each area. Rail site services experienced a spike in demand during the winter months and in highways increased spend was driven by the Routes to Market initiative and increased funding for smart motorway schemes. The buildings sector saw delays in investment for large private projects and in the water market demand was more tempered as the funding cycle AMP 6 entered its final year.
NFI in the automotive sector declined 20% reflecting the challenges widely reported in that sector where OEMs have closed plants, conducted out of season shut down, delayed new car platform releases and have made redundancies. This has affected the supply chain in an already unsettled market where new car sales are in decline and demand from China for prestige brands has slowed.
The operating profit in the UK Technology business was £1.4M, an increase of £1.1M when compared to the first half of last year. Total NFI was down 13% with a 10% decline in contract and a 22% fall in permanent. The telecoms business has undergone a significant restructure. A focus on the networks market has already seen traction being gained in the area of fibre networks, whilst further focus working at the forefront of future technology in the area of research and innovation also represents scalable and profitable growth opportunities moving forward.
Within IT the structure has now been aligned to capitalise on growth opportunities, with resource allocated to IT security, AI and Big Data, Cloud Infrastructure and Software Development roles. The government is investing heavily in the fintech market, looking for the UK to be a post-Brexit market leading provider of disruptive technologies, as well as continuing to invest in the IT security market to protect national security. Additionally the demand for developers and AI specialists continues to outstrip supply and the group are partnering with companies to train and develop technology staff to resolve such challenges.
The operating profit in the International business was £426K, a growth of £42K when compared to the first half of 2018. Overall NFI grew by 15% as a 23% decline in contract NFI was more than offset by a 37% increase in permanent NFI. Following the restructuring, the main international business operations are now in the Americas, South Africa and China which tend to have a greater emphasis on permanent recruitment. The Americas achieved growth of 6% in NFI.
Whilst the overall Americas operation has grown, the growth in the US has been lower than planned. Action has been taken to address this and the group continue to invest to accelerate growth as their chosen markets represent significant opportunities across engineering and technology which has seen them strengthen their sales capability in Texas and Georgia.
The withdrawal from the telecoms infrastructure contractor markets in Latin America has seen them adapt the structure and focus of their office in Mexico where they are now targeting the energy and engineering marketplace, whilst in Canada they saw continued growth driven across both contract and permanent recruitment.
In China and South Africa they have repositioned successfully and are showing double digit growth in operations. China has focussed on high value permanent business within technology sales, the semiconductor market, automotive and infrastructure whilst South Africa has grown across contract and permanent in engineering and technology.
The principal elements of the improvement plan include an aligned go-to market plan, and selling the full range of products to their existing customer base and having a more structured approach to new client acquisition; delivering a consistent product methodology and a broader offering to meet evolving requirements; scaling their delivery capability and extending their external talent pools within engineering and technology; building sales leadership and capability and further investment in technology and process to improve group performance through common methodologies.
In September the group announced that it was withdrawing from the contract Telecoms Infrastructure markets in Africa, Asia and Latin America as well as its operations in Dubai, Malaysia and Qatar. These operations brought in £3.5M of cash in the period.
Going forward the board notes that economic uncertainty has increased over the last half year. Notwithstanding this, trading so far in Q3 is as expected and they remain confident in their outlook for the full year and expect results to be in line with expectations at this time.
At the current share price the shares are trading on a PE ratio of 7.8 which falls to 6.2 on the full year consensus forecast. There was no dividend and there is forecasted to be no dividend for the full year either. At the period-end the group had a net debt position of £27.8M compared to £36.2M at the same period last year.
Overall then this has been a rather mixed period for the group. Profits were up, but removing the impairment from last year they were broadly flat before tax. Net assets declined, as did the cash profits, although the operating cash flow improved due to working capital movements and there was a decent amount of free cash generated.
The Engineering business saw profit fall due to lower automotive demand but the technical business did better due to lower costs and the international business saw growth across most markets, although the US remains tough. Investing in a recruiter seems rather risky now but this is reflected in the share price with the forward PE of 6.2 looking good value but on the whole I would like to see debt come down to make this a less risky play.
On the 6th August the group released a trading update covering the year. Underlying pre-tax profit is expected to be slightly above market expectations and net debt lower. Overall NFI was flat with UK Engineering having performed strongly in the second half, partially offset by UK Technology and particularly Telecoms. Benefits of the restructure undertaken in the first half began to feed through towards the end of the period. The international operations also grew, although the strong performance in the first half, particularly in the US, was offset by softer trading in the second half.
Group NFI is expected to be in line with last year at £71.4M. UK Engineering was up 7% on last year in the second half, bringing the full year increase up to 5%. This was driven largely by the Solutions business, Engineering Technology and Infrastructure. UK Technology declined 19% with an H2 fall of 24% as the restructuring fed through. The business continued to contribute around £5M to profits and they expect operating profit to only be slightly down, with a return to growth next year.
International NFI grew 3% but trading in H2 was softer following reduced demand at key customers, although there was quarter on quarter NFI growth in Q4 and they expect growth in 2020.
Legal fees in relation to the US DOJ’s enquiry into Networkers before its acquisition amounted to £3.6M, although this will be included in discontinued operations as the business has been closed. The information requests and independent review have largely been completed so they expect a significant reduction in the level of advisory fees going forward.
Net debt of around £25M benefited significantly from year-end falling at the most opportune day for working capital. Nevertheless, allowing for this factor, it was below expectations. The current estimate for non-underlying costs are £8.7M comprising the £3.6M in legal costs, £2.1M for restructuring, £1.9M losses of discontinued businesses and £1.1M in onerous lease provisions following the exit from the Bromley site.