Harvey Nash has now released their final results for the year ended 2017.
Revenues increased by £107.8M when compared to last year. Staff costs were up £5.4M and other cost of sales increased by £94.9M to give a gross profit £7.6M above that of last year. Depreciation was down £175K but operating lease rentals were up £1M and other underlying admin costs increased by £7.4M. There was a bad debt write-off of £559K and a £99K impairment of goodwill but this was offset by a £539K release of accruals and the lack of £228K of a settlement of deferred consideration that took place last time which meant that the operating profit declined by £723K. Loan interested declined by £173K which meant that after tax charges fell by a little bit, the profit from continuing operations was £6.3M, a decline of £516K year on year.
When compared to the end point of last year, total assets increased by £8.2M driven by a £4.2M growth in goodwill due to forex movements, a £4.3M increase in accrued income, a £1.7M growth in cash and a £600K increase in other receivables, partially offset by a £3.4M decline in trade receivables. Total liabilities also increased during the year as a £6.6M reduction in other payables, mostly related to the costs of disposal, and a £3.6M decrease in the invoice discounting facility were more than offset6 by a £6.6M growth in trade payables and a £3.7M increase in accruals. The end result was a net tangible asset level of £7M, a growth of £3.5M year on year.
Before movements in working capital cash profits declined by £149K to £10.7M. There was a cash inflow from working capital due to a decrease in receivables and after interest was down £173K and tax payments reduced by £413K the net cash from operations came in at £14.4M, a growth of £2.3M year on year. The group spent £1M on capex, £439K on deferred consideration and an incredible £6.2M on disposing a subsidiary which meant there was a free cash flow of £6.8M. This covered the dividends of £2.8M and enabled the group to pay back some loans which meant there was a cash outflow of £143K for the year and a cash level of £20.3M at the year-end.
The operating profit in the UK and Ireland division was £3M, a decline of £486K year on year due to restructuring costs and the effect of the Brexit vote. Gross profit was broadly flat in a market that declined substantially. Demand for senior executive recruitment suffered most, particularly in the public sector, along with financial services in London. Other offices across the region reported a strong year of growth. Gross profit was positively influenced by forex movements and on a constant currency that was down somewhat too.
Gross profit from contracting was 2.4% higher but although permanent revenue improved in the second half, overall in the year it was down 6.6%. Gross profit from the UK business outside London grew by 5% while in London it declined by 3%. Gross profit in Ireland was flat on a constant currency basis but up 15% on actual currency terms.
The operating profit in the Benelux division was £4.9M, a growth of £1.1M when compared to last year, aided by the £500K release of accrued liabilities. This was supported by investment in fee earner headcount. In the Netherlands, new regulations governing temporary recruitment led to the development and launch of a new service offering which enabled the business to win new clients and gain market share. In Belgium the group continued to make good progress with gross profit increasing by nearly 9% on a constant currency basis.
The operating profit in the Nordics division was £594K, an increase of £185K when compared to 2016 with Sweden performing well, Norway reducing its losses following a strengthening of the management team and improved economic outlook, and Finland experiencing a decline in profits on a constant currency basis.
The operating profit in the Central Europe division was £606K, a decrease of £357K when compared to last year. This decline was due to a poor performance in the recruitment business in Germany, with shorter than expected temporary contract durations resulting in lower revenue, partly mitigated by a strong increase in permanent revenue. In Switzerland performance was solid despite the strength of the currency which has weakened recruitment demand for back-office staff, and a turnaround was achieved in Poland, with profits up year on year.
The operating profit in the US division was £745K, a fall of £641K year on year with a bad debt write-off of £1.5M. This figure includes a £500K impact from a major client going into administration with the remaining £1M resulting from a failure of internal control, specifically in segregation of duties and includes a charge of £600K relating to historic aged debts no longer collectable under contract terms. The board is now satisfied that the financial controls in the business are operating effectively.
Overall demand was strong in the US, particularly on the West Coast with digital transformation at large clients driving record results in executive search. The financial services division was more subdued but were it not for the significant bad debt write-off, overall results would have exceeded expectations.
The operating loss in the Asia Pacific division was £516K, a negative swing of £647K when compared to 2016, mainly due to a drop in performance in Hong Kong. Japan performed well, increasing gross profit by 21%, and Australia was profitable for the first time. The results from Vietnam were affected by increased costs as a result of the strength of the US dollar with gross profit falling by 21%. Management have taken a number of actions in Asia to improve performance in the coming year, including the closure of the Hong Kong office, steps to bolster Singapore profitability and the adjustment of client contracts in the Vietnam business to reflect the strength of the dollar.
The non-recurring items this year relate to a £600K write-off in the US arising on aged receivables no longer contractually enforceable after a review of the trade receivable ledger revealed uncollected historical invoices (how does this happen??), £100K of goodwill impairment in Nordics relating to a Polish acquisition and a £500K release of accrued liabilities aged beyond the local statutes of limitation in Benelux after Dutch accounting estimates were re-assessed to align more closely with local statutes of limitation.
After the year-end, following a disappointing performance in the year, the board have taken the decision to close the Hong Kong office with an anticipated restructuring cost of £500K. The board have also indicated that the group will move from the main market to AIM which seems like a bit of a backwards step. Going forward the board are confident of driving profitable growth in 2018. The current year has started well with performance marginally ahead of expectations.
At the current share price the shares are trading on a PE ratio of 9.2 which falls to 8.8 on next year’s consensus forecast. After a 7% increase in the final dividend, the shares are yielding 5.1% which increases to 5.4% on next year’s forecast. At the year-end the group had a net cash position of £5.6M compared to £200K at the end of last year.
Overall then this has been a rather mixed year for the group. Net assets increased, as did the operating cash flow with a decent amount of free cash being produced, although this was due to working capital movements and the cash profits were down modestly. Profits were also down, driven by the UK and Ireland, where restructuring and Brexit both took their toll; Central Europe, where the performance was poor in Germany; the US, affected by the bad debt write-off; and the poor performance in Vietnam and Hong Kong, the latter having now been closed.
There were some decent performances, however. The US saw a decent underlying demand, the Nordics did fairly well as Norway returned to profit, and there was a very strong performance in Benelux. Also, I can’t help but feeling that in some ways this company is quite badly run. The amount of cash spent on the German disposal is obscene and the US debt write-off seems to be something that shouldn’t be happening. Having said that, the valuation reflects that with a forward PE of 8.8 and yield of 5.4%. If there are no more skeletons in the closet, this could be a decent value play.
On the 29th June the group released a trading update where they stated that they are performing in line with management expectations so far and ahead of the prior year despite the macroeconomic headwinds such as the UK general election. The immediate outlook is positive with contractor work in progress comfortably ahead of last year.
The board are in the process of implementing a transformation programme including actions to streamline the business and reduce central overheads. Measures have already been undertaken which will result in a reduction in ongoing trading costs of about £1M in the current year. One-off cash costs of about £1.3M in relation to this exercise will be incurred in the current year in addition to the costs of closing the Hong Kong office and the proposed move to AIM.
On the 3rd July the group announced the acquisition of PAT Management, a Swedish HR consultancy company for an initial cash consideration of £1.7M and up to £1.7M of deferred consideration, potentially payable over the next three years. Last year the business delivered pre-tax profits of £570K.