Havelock Europa has now released its interim results for the year ending 2016.
Revenues reduced when compared to last year as a result of a reduction in contracting spend from a major banking customer but cost of sales also fell and gross profits increased by £242K. There were no costs for board reorganisation this time, which accounted for £402K last time and other admin expenses reduced by £666K to give an operating loss which was £1.3M lower than last year. Finance costs also fell and there was no loss from discontinued operations (£136K) but there was also no tax rebate, which gave an income of £451K last time. All of this meant that the loss for the first half was £868M, an improvement of £1M year on year.
When compared to the end point of last year, total assets increased by £2M as a £2M reduction in cash was more than offset by a £1.9M growth in inventories, a £943K increase in receivables and an £851K growth in intangible assets. Total liabilities also increased during the period due to a £2.6M growth in borrowings and a £2.4M increase in pension obligations as a result of a fall in corporate bond yields. The end result was a net tangible asset level of £438K, a reduction of £3.7M over the period.
Before movements in working capital there was a cash outflow of £402K, an improvement of £1.4M. There was a large cash outflow from working capital, in particular a £1.9M increase in inventories to give a net cash outflow of £3.7M from operations, a detrimental movement of £1.1M year on year. The group then spent just £51K on property, plant and equipment along with £951K on intangible assets to give a cash outflow of £4.7M before financing. After some finance leases were paid back, there was a cash outflow of £4.8M and -£2.9M at the period-end.
The strong order book carried into this year, largely comprising public sector work, helped to offset the downturn in demand within the corporate sector, caused mainly by the major reduction in spending from a large banking customer with demand in the retail and lifestyle sector also being lower than expected. The reduction in overheads was helped by a credit on R&D costs, stronger margins from a richer mix of sales with fewer pure contracting sales, and simpler business processes.
Public sector volumes benefited from the strong order book taken into the year with the challenge in the second half being to ensure this is replenished for 2017. Public sector margins also benefited from the changes made to simplify and standardise the business.
As expected the corporate sector experienced significantly reduced volumes in the period and the group are working to develop this sector and increase their market share within the office fit out market. The retail and lifestyle sector had a challenging six months with customers continuing to re-evaluate their business case for proposed investments and searching for more cost effective solutions. To respond to this they are expanding their design capability and are increasingly working with clients early in the life cycle of a project and a key element of this will involve the business investing in a London design office which is expected to be operational in Q4 this year.
This new design office facility will also help with diversifying the customer base by bringing in additional clients. During this period they developed to major UK retailers into significant customers and are now beginning to grow a pipeline of opportunities. International retail continues to be a significant element of the business, again delivering over its 15% of turnover benchmark.
Operationally, the board have identified further cost savings within the infrastructure of the business which the manufacturing management team will be delivering. Additional savings and benefits will also accrue next year from the new ERP system which will be operational by the end of the year. This new system will provide the operational framework that will better enable them to continue the process of simplifying and standardising the business and delivering an enhanced customer experience.
Hew Balfour was appointed to the board in April as a non-executive director – he was previously CEO of the group from 1989 to 2010 so his arrival should shake things up a bit. In addition, Chairman David MacLellan is stepping down.
Going forward, although demand in the retail and lifestyle sector is subdued and the Brexit vote increased pricing pressure, demand in the public sector has been strong and overall, trading across the business remains in line with market expectations.
As the group is loss making, there is no PE ratio but based on the consensus forecast for the year as a whole, the forward PE ratio is 23.1. There are no dividends currently on offer here. Net debt at the end of the period stood at £3.6M compared to £3.1M at the same point of the prior year.
On the 20th December the group announced the appointment of Ian Godden as the new Chairman who is also subscribing to 3,000,000 new shares at 10p per share. Ian was previously a director of the group from 1995 to 2006 and on completion of the subscription he will own 7.69% of the company. This represents a premium to the previous share price of 8.5p per share.
Overall this has been a difficult period for the group as in improvement in public sector work was not enough to offset difficult market conditions in retail and a reduction in work from a large banking customer. The loss did improve on last year, however and although the operating cash outflow deteriorated cash losses also improved. The net asset situation deteriorated further, however. The group is looking to make further cost savings and the boardroom shake up might be a help but a forward PE of 23.1 looks a bit optimistic to me and doesn’t even offer good value if it is hit. I remain uninvested here.
On the 25th January the group released a trading update covering the full year. The board believe that results will be in line with market expectations. The benefits that have accrued from the measures taken in late 2015 are clear throughout the group and have enabled them to trade in line with market expectations despite the increasingly challenging retail sector. The current order book for 2017 currently stands at £21M.
On the 31st March the group announced the appointment of Donald Borland as CFO to succeed Ciaran Kennedy who is stepping down to take up the role of Director for Scotland at Clancy Docwra. Donald is a former Finance Director of Scottish real estate business Miller.