Harvey Nash has now released its interim results for the year ending 2017.
Revenues increased when compared to the first half of last year mainly due to favourable currency movements as a £1.1M decline in Central Europe revenue was more than offset by a £37.4M growth in Benelux revenue, an £8.5M increase in UK & Irish revenue, a £1.7M growth in US revenue and a £1.5M increase in Nordic revenue. Cost of sales also increased to give a gross profit £2.9M above that of last time. Admin costs grew by £3.9M but the group benefited from there being no deferred consideration settlement which was £120K last time so that the operating profit decline by £982K. Interest charges remained broadly flat but there was no loss from discontinued operations, which was £707K last time but despite this, the profit for the half year was £200K lower at £2.6M.
When compared to the end point of last year, total assets increased by £4.7M driven by a £9M growth in receivables related to the devaluation of Sterling and a £3.1M increase in intangible assets related to the devaluation of sterling after the disposal of capitalised software costs related to discontinued operations, partially offset by a £7.6M decrease in cash. Total liabilities also increased during the period as a £1.6M growth in payables was only partially offset by a £582K reduction in borrowings. The end result was a net tangible asset level of £3.7M, a growth of £286K over the past six months.
Before movements in working capital, cash profits declined by £411K to £4.8M. There was a modest cash outflow from working capital but this was much lower than last time and after the group paid £660K less in taxes, the net cash from operations was £1.1M, a positive movement of £15.2M year on year. They spent £462K on capex and lost £6M in the disposal of a subsidiary! This meant that before financing, there was a cash outflow of £5.3M. After £1.7M was paid out in dividends and £1.5M of borrowings were paid back, the cash outflow for the period was £8.4M to give a cash level of £10.9M at the period-end.
The operating profit in the UK and Ireland division was £1.6M, a decline of £514K year on year with demand for permanent hiring subdued. The uncertainty from the EU referendum began to have an impact from Q4 last year. Despite this, contractor numbers were steady. Uncertainty impacted demand for executive recruitment in areas closely aligned with the public sector and financial services. A number of one-off costs, relating to the reduction of headcount in the business were also included in the operating profit figures. Growth came from offices outside London. Gross profit in the England regions and Scotland grew by 6.5% while London declined by 8.3% and Dublin was 11.6% lower. Following the Brexit vote, however, gross profit from permanent placements in London improved by 24.5% in July which is encouraging as the business enters the second half.
Results from Europe were lifted by growth in the Nordics and Benelux with generally favourable currency tailwinds. In constant currency, operating profit was held back by investment in fee-earning headcount and management to achieve critical mass in subscale locations. There were also one-off costs relating to the realignment of the German recruitment business following the disposal of Nash Technologies. Overall, operating profit grew by 6.6% but declined by 4.3% on a constant currency basis.
The operating profit in the Benelux division was £1.9M, broadly flat year on year with a growth of just £95K with an improvement noted in the Netherlands in particular. The majority of growth was derived from new client wins in contract recruitment and managed services with a 58% increase in permanent recruitments.
The operating profit in the Nordics division was £187K, an increase of £80K when compared to the first half of last year with Sweden posting a 6.7% growth in gross profit on a constant currency basis, driven mainly by specialist technical recruitment while executive recruitment was subdued with a decline of 6.6%. Growth also came from smaller offices in Denmark and Norway where the turnaround has been encouraging and the investment in management and fee-earners is beginning to pay off.
The operating profit in the Central Europe business was £407K, a fall of £22K when compared to the first half of 2016 despite currency tailwinds. In Switzerland, weak demand for permanent recruitment was linked to the strength of the currency, although tight control of costs resulted in a small improvement in the operating profit. In Germany, gross profit was 5.3% lower than the same period last year due to shorter than expected temporary contract durations. This has resulted in lower contractor numbers partly mitigated by a strong increase in permanent revenue.
The operating profit in the US division was £609K, a decline of £147K year on year held back by a bad debt write off. Strong market conditions in the country favoured permanent technology recruitment and executive search. The swing from temporary to permanent recruitment was significant, as client demand for software development skills particularly on the West Coast, continued to grow. The profit figure was also held hack by an increase in fee earners and record comparative figures.
The operating loss in the Asia Pacific business was £542K, a deterioration of £474K when compared to the first half of last year as strong growth in executive recruitment revenue in Japan and in technology recruitment in Australia was offset by weakness in Hong Kong, where it was down by 30%. The majority of the decline in profits came from Vietnam, however, where costs were impacted by adverse currency movements.
After eleven years with the group, CFO Richard Ashcroft has notified the company of his intention to sept down from the board next year.
As the group begin the seasonally stronger second half of the year, UK conditions remain challenging but broadly stable while there are opportunities for growth in mainland Europe, the US and Asia. Overall the board are confident that they are on track to achieve full year expectations.
At the current share price the shares are trading on a PE ratio of just 6.4 but this increases somewhat to 7.2 on the full year forecast. At the period-end the group had a net debt position of £6.8M compared to net cash of £170K at the year-end. After a 5% increase in the interim dividend, the shares are yielding 6.5% which increases to 6.7% on the full year forecast.
Overall then this has been a bit of a difficult period for the group. Profits were down and although net assets and the operating cash flow improved, the former is attributed to the devaluation of Sterling and the latter due to a more favourable movement in working capital with cash profits declining. There is not free cash after the disposal is taken into consideration but even excluding that, it does not cover the dividends.
Operationally, many regions struggled but the UK seems to be the largest contributor to the decline in profits, which is being blamed on Brexit. The currency devaluation in Vietnam has also taken its toll in the Asia Pacific region. The board expect to deliver results in line with expectations, however, and the shares look pretty good value at this level with a forward PE of 7.2 and 6.7%. I suppose the real question is whether things will get worse in the UK but I am tempted by the value on offer here.
On the 3rd March the group released a trading update ahead of their final results. The board expect to report pre-tax profit in line with market expectations. Overall gross profit increased by 8% but fell by 1% on a constant currency basis. While growth was held back in the UK and Ireland by Brexit uncertainty gross profit was up 4% in mainland Europe (constant currency). There was a 7% decline in ROW due to challenging market conditions in Hong Kong while in offshore services it was due to increased costs in Vietnam as a result of the depreciation in Sterling. The group had net cash of £5.5M at the year-end.
This all seems decent enough but it is clear that were it not for the deprecation in Sterling, there would be no growth here.