Harvey Nash have now released their interim results for the year ending 2018.
Revenues increased by £47.6M but cost of sales were up £46.7M to give a gross profit £929K higher. Depreciation was down £74K but other underlying admin costs grew by £947K. There were a slew of non-underlying costs. There was restructuring costs of £2.6M, a £245K cost associated with the AIM listing, a £134K cost relating to excess deferred consideration payable and £106K of acquisition costs. Offsetting these was a £3.5M income from the release of aged accruals, all of which meant that the operating profit was up £517K (for what it’s worth). Interest charges fell by £116K and there was a modest reduction in tax so the profit for the half year came in at £3.2M, a growth of £647K year on year.
When compared to the end point of last year, total assets increased by £22M, driven by a £23.7M growth in receivables and a £2.7M increase in intangible assets, partially offset by a £4.1M decrease in cash. Total liabilities also increased during the period due to an £11.4M increase in borrowings, a £1.2M growth in deferred consideration and a £1.3M increase in provisions. The end result was a net tangible asset level of £5.8M, a decline of £1.1M over the past six months.
Before movements in working capital, cash profits declined by £385K to £4.4M. There was a large cash outflow from working capital due to an increase in receivables, apparently reflecting growth in contract services, and after non-recurring cash outflow of £1.5M and a £162K increase in tax payments had been taken into account, the net cash outflow from operations was £11.8M, a deterioration of £13M year on year. The group also spent £531K on property, plant and equipment along with £1.5M on acquisitions so before financing there was a cash outflow of £13.9M. The group still paid dividends of £1.8M and needed to increase borrowings by £11.3M to give a cash outflow of £4.5M for the period and a cash level of £16.1M at the period-end.
The operating profit in the UK and Ireland business was £1.6M, a decline of £40K year on year, due mainly to the slowdown in the level of higher-margin permanent hiring during the period and the investment in headcount. The group increased market share in the region despite the impact of political uncertainty surrounding the UK general election and changes to the tax treatment of freelancers working in the public sector.
Executive recruitment reported growth but interim placement activity was mixed compared to the prior year. Demand from the financial services sector was strong, with increased compliance and regulation measures in preparation for Brexit driving the recruitment of technology specialists. The introduction of IR35 legislation resulted in significant activity in the public sector to transition existing freelancers and demand for new recruitment fell as a result. Despite this, overall the number of freelancers in the UK and Ireland grew by nearly 8%, improving the outlook for the seasonally more productive second half.
The operating profit in the Benelux business was £2.3M, a growth of £427K when compared to the first half of last year. Skills shortages in the region drove demand for freelancers, project teams and managed services as more companies outsource the management of their temporary staff.
The operating profit in the Nordics business was £175K, a small decrease of £12K when compared to the first half of 2017 despite the first month of post-acquisition results from PAT. Specialist recruitment and interim services offset lower executive search fees. Norway continued its turnaround, however, with gross profit up 29%.
The operating profit in the Central European business was £69K, a decline of £338K year on year. Poland reported a 66% increase in gross profit but the larger businesses in Germany and Switzerland saw gross profit fall by 23% and 18%. Germany saw a decline in freelancers exacerbated by regulatory changes to the freelance labour market and the strong currency in Switzerland led to weaker demand for permanent recruitment. Actions were taken in both countries to align costs with revenues, to refocus investment in growth areas and to reduce fixed overheads.
The operating profit in the US business was £303K, a reduction of £306K when compared to the first half of last year. Demand continues to swing in favour of permanent recruitment but record executive search revenues were offset by a decline in freelancers. Acute skills shortages in the technology sector are creating unexpected challenges. The US business had implemented a range of measures to improve conversion from open vacancies into placements, the benefits of which should be seen in the second half.
The operating loss in the Asia Pacific business was £222K, a fall of £320K when compared to the first half of 2017, aided by productivity gains in Vietnam and reduced losses in Hong Kong as the office winds down.
During the period the directors started a review of the group’s cost base. They have implemented a transformation programme to review underperforming offices, streamline the business and reduce central overheads. Offices in Geneva, Dusseldorf and Denver were closed at a cost of £600K and contracting services ended in Japan at a cost of £300K. The Hong Kong office continues to trade but it is being wound down with anticipated closure costs of £600K recognised. Businesses were streamlined in the UK, Nordics and Central Europe at a cost of £200K, £200K and £300K respectively. Restructuring of central costs totalled £400K.
The recruitment of a new finance director and consequent overlapping costs are considered the first step in this transformation and as such these costs are included in the central cost restructuring charge of £400K (that seems a bit dubious). This transformation programme is expected to complete by the end of the year at a further cost of around £1M. Expected savings from this programme in the current year are £1.1M and £2.2M in 2019.
In July the group’s shares were admitted to AIM and its listing on the main market was cancelled. The cost of this listing was £200K. The accounting estimate for aged accrued liabilities in the Netherlands was re-assessed following a detailed review, resulting in a release of aged accrued liabilities totalling £3.5M. The final deferred consideration payable for the Beaumont acquisition in Japan exceeded initial estimates and the £100K shortfall was booked as a non-recurring item.
In July the group acquired PAT Management, a recruitment business in Sweden, for an initial consideration of £1.7M, and deferred cash consideration of up to £1.8M, generating goodwill of £2.5M. After the period-end, in September, the group acquired Crimson, a UK-based IT recruitment consultancy for an initial consideration of £6M, deferred cash consideration of £4M and an earn-out of up to £5M. The business made a pre-tax profit of £1.7M last year.
Going forward the group enter the second half of the year on track and are confident about the outlook for the rest of the year.
At the current share price the shares are trading on a PE ratio of 11.4 which falls to 9.2 on the full year consensus forecast. At the period-end the group had a net debt position of £10M compared to a net cash position at the start of the year. After a 5% increase in the interim dividend, the shares are yielding 4.2% which increases to 4.3% on the full year forecast.
Overall then this has been a bit of a mixed period. Underlying profits were up modestly but the net tangible asset level deteriorated. There was also a large operating cash outflow and the cash profit declined, which is a bit of a concern. Operationally the UK and Ireland was flat, affected by uncertainty surrounding the election. The Benelux business was strong but this was offset by weakness in Germany, Switzerland and the US. The group is taking on quite a lot of debt and there are some high one-off restructuring charges to come and overall I’m not sure the forward PE of 9.2 and yield of 4.3% fully compensate for the risks.