Havelock Europa has now released its interim results for 2014.
Interiors revenue fell by £1.8M compared to the first half of last year and a small increase in Educational Supplies revenue and a £1.4M fall in the cost of sales can’t prevent gross profit from being £300K lower. Admin Expenses were broadly the same, despite a £300K reorganisation charge with finance costs and tax charges reducing slightly to mean that the loss for the period was only £60K higher than in the first half of 2013 at £1.8M.
When compared to the end point of last year, total assets fell by £870K driven by a £1.9M fall in cash and a £1.2M reduction in receivables; somewhat offset by a £1.6M increase in inventories and a £750K rise in deferred tax assets. Conversely, liabilities increased during the period, mainly down to a £1.2M increase in the pension obligations due to an increase in the scheme’s liabilities, and a near half million pound increase in borrowings. The result of this is that net assets were some £2.9M worse at £17.6M.
Before movements in working capital, there was a cash outflow of £1.3M, £320K worse than during the same period of last year. A slightly adverse movement in working capital meant that this loss widened to £1.9M, or some £650K worse than in 2013. The group then paid a small amount in interest and intangible assets before a net £453K of new loans meant that the cash outflow finished at just under £2M to leave the group with £2.2M in cash at the period end. Clearly this is disappointing. The first half of the year is always worse but the lower operating cash flow than last time is a bit of a concern. Further pressure is placed on the cash position because the group have entered into a contract for £1.2M of capital expenditure.
During the first half of the year, the Interiors business made a loss of £854K, a £218K improvement on the same period of last year despite reduced revenues due to delays to the school building programme. In the financial sector the group won a major new contract with ISS for Barclays with work similar to the work being undertaken for Lloyds and TSB and discussions are ongoing with other prospective financial sector clients. In Retail the group gained a new UK supermarket customer and work there includes the refurbishment of food stores and Havelock has delivered its first significant order for a major Australian retailer and additional orders are in manufacture. Despite the delays, the group is building a significant order book for next year end beyond in the Education sector and the first major projects have been completed in the student accommodation market.
During the first six months of the year, the Educational Supplies business made a loss of £245K, some £178K worse than in the first half of 2014 due to delays on new school projects and the fact that apparently schools are using discretionary cash flow to upgrade canteens after the Government decided to give all primary pupils free school meals. The Stage Systems have been impacted by the move away from higher margin work to lower margin sound and light projects and in order to address this change, the group are looking at reducing the cost base which is expected to give rise to restructuring costs of £380K.
In May Finance Director Grant Finlay resigned from his role after being at the business for nine years. He was replaced by Ciaran Kennedy who has 20 years of financial and operational experience at PLCs. Going forward achieving expected results in the second half of the year is dependent on the finalisation of orders and delivery schedules for the fourth quarter. In to 2015 the board expect further opportunities to develop in Financial Services as some major customers revise their high street offering.
Net debt stood at £2.6M, an improvement from the same point of last year but a deterioration when compared to the end point of 2013, predominantly due to an increase in manufactured inventory for delivery in the second half of the year. As would be expected no dividend will be paid. Overall then, the loss for the half year is broadly similar to 2013, net assets fell due to increased pension liabilities and a reduction in cash and the near £2M of cash outflow in the first half of the year was worse than in the same period last year. The new supermarket and bank clients are promising but I would have thought Lloyds and TSB have broadly finished their rebranding. In conclusion, I don’t see much evidence of the company moving forward and I can now sell out at a point that broadly breaks even so I have decided to sell my holdings here.
On the 30th January the group released a statement covering trading for the full year ending 2014. Results are expected to be in line with expectations and while turnover and profit are both expected to be lower than last year, some progress has been made on diversifying revenue streams with the international business delivered more than the original 10% of sales. In retail the group delivered a number of initiatives for their existing customer base and developed some new customer relationships which should translate to work next year. A number of financial services clients are re-evaluating their strategy which led to reduced opportunities during the year. Next year the group are expecting to benefit from the new framework contract secured with ISS and a further three year contract with the Post Office. Education activity is beginning to show signs of recovery and there is now a total order book of £25M at the end point of the year, £5M of which is for 2016 delivery. The new ERP system is on target and should be ready for implementation in Q4 2015. There was a £1.4M net cash position at the end of the year but next year the board expect the pension deficit to increase significantly following a decline in corporate bond yields. In other news, Eric Prescott has agreed to step down during 2015 and the search is on for his replacement.
I am pleased to have sold out previously as the share price performance since then has been poor. I have mixed feeling about this update though. There is little doubt that this has been a poor year which will be reflected in lower profits and the decline in bank business along with the significant pension liabilities coming their way are certainly signs for concern. The education business seems to be improving, however, and there seem to be a number of retail initiatives that will come to fruition next year. Also, the fact that Prescott has been forced out is probably good for the group as they have certainly underperformed under his leadership and some new blood will probably help. I am still not invested here but I will keep a close eye on this company going forward as I see some potential value.
On the 30th March it was announced that after Eric Prescott left as CEO, the group appointed David Richie as Chief Operating Officer. He joined the group in 2013 as Commercial Manager after spending 15 years at Balfour Beatty.