Harvey Nash has now released its final results for the year ended 2016.
Revenues declined when compared to last year as a £4.1M growth in UK & Ireland revenue, a £6.9M increase in USA revenue and a £4.6M growth in Asia Pacific revenue was more than offset by a £10.3M decline in French and Benelux revenue and a £7.5M fall in Central European revenue. Staff costs increased by £3.6M but other cost of sales decreased by £10.5M to give a gross profit some £5.4M above that of 2015. Depreciation was up £251K and there was a £128K increase in forex losses with a £4.6M growth in other underlying admin costs. A £228K expense related to the settlement of deferred consideration was offset by the non-recurrence of a £500K Norwegian restructuring cost and £200K of acquisition costs that occurred last time which meant that the operating profit increased by £866K. The interest was up £295K but tax was down £71K so that the profit from continuing operations came in at £6.8M, a growth of £642K year on year. After losses on disposals are taken into account, however, the loss from the year was £7.6M, a detrimental movement of £12.9M when compared to 2015.
When compared to the end point of last year, total assets increased by £8.5M driven by a £26.3M growth in trade receivables, mainly due to the timing of invoicing in the Netherlands, a £1.8M new loan receivable and a £1M increase in goodwill, partially offset by an £18M decline in prepayments and accrued income and a £1.7M fall in capitalised development costs. Total liabilities also increased during the year as a £7.3M increase in “other payables”, mainly relating to payment obligations incurred with the NT disposal; a £6.9M growth in accruals and deferred income; a £4M increase in other tax and social security payables; a £2.7M growth in trade payables and a £1.5M increase in invoice discounting facilities, partially offset by a £2M reduction in deferred consideration and a £1.1M fall in current tax liabilities. The end result was a net tangible asset level of £3.4M, a decline of £9.8M year on year.
Before movements in working capital, cash profits increased by £635K to £10.8M. There was a large working capital cash inflow, mainly due to an increase in payables and after interest and tax payments both increased, the net cash from operations came in at £12.2M, an increase of £5.4M year on year. The group spent £2M on fixed tangible assets, £2.1M on software costs, £2.1M on deferred consideration and £2.7M on getting rid of a subsidiary to give a free cash flow of £3.3M. This just about covered the dividends, and after an £898K reduction in borrowings, the cash flow for the year was £241K to give a cash level of £18.5M at the year-end.
Overall these results were in line with expectations. The operating profit in the UK and Ireland was £3.5M, a growth of just £66K year on year. During the first half of the year the UK contingent recruitment business saw strong growth and experienced robust demand, especially for permanent hires. During the final two months, however, client decision making processes slowed and a swing from permanent recruitment to contract reflected a more cautious approach. Trading conditions in the market for executive and leadership roles tightened up considerably compared to the prior year, impacted by the UK election in May and global uncertainty in relation to China and energy markets in the second half the year. The offshore business appeared to benefit from these variable conditions, however, and reported a record year in the UK.
Overall the division had a solid performance as the business capitalised on market share gains and continued to invest in capacity expansion. The sluggish performance was due to the swing from permanent to temporary recruitment in the UK in Q4, a weaker market for senior executive search and a decline in contribution from Ireland. Offsetting this was strong growth from the UK regions and Scotland driven by organic investment in headcount and newly established offices in Glasgow and Bristol. New client wins and increased market share resulted in a 17% increase in gross profit for the year. London was weaker with exposure to the oil and gas slowdown affecting numbers of contractors. The decline in the energy market also impacted executive recruitment and the group decided to close their oil and gas business.
The operating profit in the Mainland Europe division was £5.2M, a reduction of £400K year on year, although on a constant currency basis there would have been an increase of £100K. The operating profit in Benelux and France was £3.8M, a decline of £542K when compared to last year. Results from the Benelux was solid with a 3.1% increase in gross profit on a constant currency basis. In the Netherlands, uncertainty over new legislation in relation to temporary recruitment impacted demand and resulted in delays in clients hiring. In Belgium, the group made further progress with its relatively new location in Ghent with a good contribution for the year and the new service of providing teams of permanently employed technical apprentices reported an increase in gross margin of 10%. The acquisition in Antwerp delivered excellent results throughout its three year earn-out period.
The operating profit in the Nordic business was £409K, an increase of £58K when compared to 2015. The business in Sweden reported strong results with overall gross profit up 7% despite challenging trading conditions. The reported results were materially impacted by weak currencies, recession in Finland and uncertainty linked to the decline of the oil price in Norway. The business in Finland saw NFI down 14% although the office was broadly breakeven. The Norwegian business remained loss making but the performance improved year on year.
The operating profit in Central Europe was £963K, an increase of £40K year on year. Germany saw gross profits up 6% but in Switzerland results were down 9% mainly due to the decline of managed services revenues in the financial services sector. Whilst Poland Technology recruitment reported a slightly higher loss than the prior year, this was mainly due to restructuring and the business will serve as a near shore recruitment centre for the Swiss business with the benefits of lower costs and higher productivity.
The operating profit in the US was £1.4M, a growth of £521K when compared to last year following the investment in fee-earning staff in the prior year. The US economy was once again the strongest market across the group. All services grew strongly with demand for enterprise recruitment the strongest with gross profit up 79% at constant currency. Executive search also reported a record year with NFI up 19% to $3M. Permanent IT recruitment was also strong with gross profit up 17% in a buoyant market for technology specialists. The swing from temp to permanent affected contractor numbers but higher margins resulted in an overall increase in gross profit. Offshore solutions also posted good growth of 11% in gross profit.
The operating profit in the Asia Pacific business was £131K compared to a loss of £304K in 2015. There was particularly strong growth in the second half of the year with the business benefiting from demand in offshore services in the US and UK. Executive search fees grew 72% in Hong Kong and Japan and the new office in Singapore resulting in a profit being recorded before the Singapore investment. Professional recruitment fees in Vietnam were up 41% and delivered good business contribution growth. Gross profit from offshore services grew 48% as results from the Japanese market improved. Whilst Australia remained challenging throughout the year, revenues were up 5% and the loss reduced when compared to 2015.
If we discount the discontinued operations, there was not much in the way of non-recurring items with £200K relating to the excess consideration payable over the previously recognised deferred consideration on the Talent IT acquisition being the only item of note. In discontinued items, there was a huge £13.6M cost of disposal for the NT Group and £200K relating to the closure costs for the oil and gas division.
In December the group sold the German telecoms outsourcing business Nash Technologies to a management buy-out. The initial consideration is just €28K with possible further earn-out consideration dependent on the performance of the business from 2016 to 2020 with a maximum cap of €9M and a fair value of zero. The group also provided a loan to NT of £1.8M for product investment, although so far nothing has been drawn down. The business made a loss of £420K in the year and the loss on disposal was a massive £13.6M, further split into £11M of disposal related costs relating to £6.8M of loans written off and £4.2M of payments accrued in respect of the agreement to indemnify the buyer in relation to certain liabilities of the NT group.
There was also a ridiculous £2.6M on advisory and deal related costs. The business had negligible net assets but there was £6.8M of balances with other group companies that were waived on disposal which makes up part of these costs. As if this wasn’t enough the group capitalised £2.1M of software development this year, all of which was given away with the NT disposal! This disposal seems to have been a bit of a disaster to me, although I don’t really understand exactly what has happened.
Also during the year a decision was made to close the oil and gas business which focused on recruiting international engineering and technology candidates for mainly Middle East based companies in the energy sector. There were no assets or liabilities attributed to the business and it made a small loss during the year.
Going forward, the UK experienced a slowdown in permanent recruitment in the final two months of the year as uncertainty surrounding the Brexit vote affected clients’ decision making processes, which is likely to continue until the referendum on Europe concludes. In the current year, uncertainty in Asia as a result of economic challenges in China continues but trading in Europe has been broadly on track. Visibility is undoubtedly limited whilst global economic and UK political volatility persists but the group’s performance so far this year is in line with expectations.
At the year-end the group had net cash of £200K compared to £2.1M at the end of last year. At the current share price the shares are trading on a PE ratio of just 7.5, although this is expected to remain flat on next year’s consensus forecast. After an 8.7% increase in the final dividend, the shares are yielding 5.5% which increases to 5.7% on next year’s forecast.
On the 29th April the group announced that it had granted share options over nearly 1.2M shares. These reward require the company’s compound annual growth in adjusted EPS to be at least 15% in the three years to 2019 in order to vest in full.
Overall then, this has been a bit of a mixed year for the group. There were large losses but if we discount the loss on the disposal, underlying profits increased. Net assets were down and the balance sheet isn’t looking that great but the operating cash flow improved, albeit helped by a growth in payables which doesn’t bode that well for next year. Nevertheless, a decent amount of free cash flow was generated which just about covered the dividends.
Operationally, the UK and Ireland was flat as growth in market share was offset by declines in senior exec search, oil and gas markets and a poor performance in Ireland. Worryingly the division was weaker in the final two months of the year. European profits declined, but this was as a result of detrimental forex movements and underlying profits increased modestly. Over the region we saw a decent performance in Germany and Sweden offset by difficulties in Switzerland, the Netherlands due to uncertainty surrounding new employment legislation, and Finland due to a recession there. The performance in the US was good, reflecting a strong market, and there was also a strong performance in the Asia Pacific regions with growth in all areas.
I am very uncomfortable about the NT disposal, as this seems to have been a very bad deal for the group – they must have been desperate to get rid of it. Also, the start of this year looks a bit uncertain with Brexit uncertainty in the UK and Chinese problems affecting some Asian markets. Nevertheless, the year has started in line with expectations and it would seem that a forward PE of 7.5 and dividend yield of 5.7% take these risks into account.
On the 30th June the group announced that they had traded in line with board expectations in the first four months of the year under challenging conditions, achieving a 4% increase in gross profit on a constant currency basis (8% on actual terms). While mindful of economic uncertainty following the EU referendum and an associated lack of visibility, the board believe that the group, due to their high proportion of non-sterling earnings, are well placed to deliver further resilient performances through uncertain times.
Within that 4% growth, the US was up 17%, Mainland Europe increased by 4%, Asia Pacific was up 1% and the UK and Ireland were flat. Also, temporary and offshore saw an 8% increase whilst permanent recruitment saw a 2% fall.