Matchtech has now released its full year results for the year ending 2014.
Revenues have improved across both businesses with Engineering sales up £18.1M and professional services revenue up an impressive £24.6M. Wages and salaries increased by £2.6M and other cost of sales were up £33.4M to give a gross profit some £6.6M higher than last year. The Amortisation charge is considerably higher than in 2013 due to the amortisation of intangibles acquired with the business purchase and there were also unfavourable movements in the share based charge, foreign currency translation and other admin expenses, although there was no repeat of the £425K restructuring charge that occurred last year to give an operating profit £3.8M higher. Fairly modest increases in finance costs and a larger tax hike meant that the annual profit for the year was £1.6M higher at £9.1M.
When compared to the end point of last year, total assets increased by £5.3M. This increase was driven by a £2.5M growth in trade receivables, a £1.7M increase in acquired intangibles and a £1.6M hike in goodwill. Liabilities reduced during the year predominantly due to a £7.7M reduction in the loan and a £1.4M fall in taxation liabilities, somewhat offset by a £3.6M increase in contractor wages to be paid. This all meant that net tangible assets increased by a decent £7.3M to £39M.
Before movements in working capital the cash profits were £15.7M, some £3.6M better than last year before an increase in receivables was broadly counteracted by an increase in payables, the group then spent £642K on interest payments and some £2.8M on tax to give a net cash from operations of £12.3M which was a £3.8M improvement on 2013. There was not much in the way of capital expenditure but the £4.2M spent on the acquisition was paid for by a similar amount gained from the issue of new share capital. The group then spent £4.5M on dividends and still managed to post a £7.5M cash inflow.
Contractor numbers only increased by 100 during the year but Net Fee Income (NFI) has grown by 14% over the same period driven by wage inflation and placing candidates in higher pay rates. The group have found that as the UK economy improves, candidates are receiving multiple job offers and counter offers from incumbent employers which is increasing the time to hire somewhat and slightly reducing permanent fees. There is some investment taking place with a plan to increase headcount in the Engineering business during the first half of next year.
Engineering reported a profit of just under £10M, a £1.4M improvement on last year but the German office continued to struggle with a loss this year of £373K increasing from the £106K loss in 2013. Infrastructure was the strongest performing area with a 36% increase in NFI due to major investment in rail, highways, utilities and building structures. Network Rail announced £38BN of funding into engineering projects and the Highways Agency delivered record spending which helped increase confidence in the sector and an increased activity was seen in both permanent and contract recruitment. Aerospace NFI grew by 17% as the design and engineering phases of the Airbus A380 and A350 moved into volume manufacturing. Automotive NFI was up 5% and there were sustained high levels of investment from JLR and increased levels of interest in UK automotive capability from developing nations. Energy NFI was flat year on year as the Nuclear division recorded strong growth but Oil and Gas was impacted by stalling North Sea investment. The Maritime business was impacted by the planned completion of the QEC aircraft carrier build phase in Portsmouth with NFI down 7%.
Professional Services reported a profit of £2M, a £660K hike on last year’s numbers. Excluding the £1.8M contributed from Provanis, the underling NFI grew by 13% with contract NFI up 11% and permanent fees increasing by 13%. Technology increased NFI by 27% (8% on a like for like basis) and is predominantly contract based. The business concentrates on high margin low volume business and has expertise in several niches such as Control & Automation, Electronics & Systems, Software Communications, Business Intelligence, ERP and Project Management with the acquisition increasing the group’s penetration into the ERP market. Professional Staffing NFI was up 19% with a strong growth in permanent fees. The business also operates within skill specific markets with a focus on Procurement, Finance, HR, Sales, Marketing and Training. Within the team, there is a capacity to increase productivity within the current staffing levels before any further investment in headcount is needed.
The largest client accounted for just under 8% of revenues with the majority occurring under the Engineering segment and clearly the group would feel the loss of this customer but no client accounted for more than 10% of earnings which adds some protection. There is also some exposure to any potential interest rate hikes with a 1% increase affecting profits by £285K, although the group seem to be making decent progress in bringing borrowings down. During the year Andy White stepped down from the board after spending 24 years at the company, he was also a substantial shareholder but has been reducing throughout the year.
During the year the group acquired Provanis for a total cash consideration of £4.3M. Provanis is a technology recruitment business with niche expertise in the Oracle applications marketplace which seems like a good addition to improve revenues in the Professional Services business. The acquisition comes with £1.6M of Goodwill and was paid for by issuing new equity. Since the acquisition period in July, the acquired group has contributed £13.2M to revenues and a gross profit of £1.8M and including the £579K amortisation of intangibles have contributed £276K in profits. It seems a bit strange that some of the acquired intangibles have been immediately amortised – does this mean the group has overpaid for the acquisition?
Net debt at the end point of the year stood at £3.1M which is a vast improvement over the £10.5M of net debt recorded at the end of 2013. At the current share price the shares are yielding a not so shabby 3.7% after a 14% increase in the final dividend, rising to 3.9% on next year’s consensus. At the current share price the P/E ratio is 15.6 but this falls to a rather undemanding 13.3 on next year’s consensus. Overall this is a good set of results for the group. Profits are up due to increased sales across both businesses; net tangible assets increased as the group paid off its debt and there was an increased positive cash flow from operations. As the cash was used to pay off the loan, if all things stay the same, the debt should be paid off next year and once this is done, it will be interesting to see what is done with the cash. It is a shame that the German business is still struggling and the group are obviously dependent on the recovering UK economy but I see some more value here and am tempted to top up.
On the 14th November the group released a statement covering Q1 2015. NFI in the period was up 3% with contracts up 2% and permanent up 7%. They have invested to accelerate growth in the Engineering business by increasing headcount and the board is confident that the outlook for 2015 remains in line with previous expectations. Not a bad update, but could have been better. I am still looking to top up but the share price seems to be in decline so I would like to wait for that trend to be broken.
On the 28th January the group released a statement covering the first half of 2015. NFI was up 2% compared to the same period last year with a 6% increase in Engineering income offset by a 5% fall in professional services. Contract NHI was 2% higher than last year, driven by Engineering that saw a continued strong demand for contractors, particularly within Infrastructure and the Power and Nuclear markets whose NFI was £600K and £300K higher respectively. This was somewhat offset by a £200K reduction in Maritime NFI following the closure of shipbuilding at Portsmouth Naval Base and a £500K fall in Oil and Gas NFI due to the well publicised weakness in that industry. Permant fees were also up 2% as Engineering NFI was up 22% including 60% growth in infrastructure, 40% in general engineering and 25% in maritime. This was counteracted by a 10% fall in Professional Services as penetration into the group’s non-core markets proved challenging. Overall, the board expects results for the full year to be in line with expectations.
Also on the 28th January it was announced that Adrian Gunn who has been CEO for eight impressive years is stepping down immediately. He has taken the decision in the light of the group’s acquisition of Networkers International (more on that shortly). Brian Wilkinson, who has been Chairman for the past year will take up the role of CEO with current senior independent non-executive director, Ric Piper, assuming the role of interim non-executive Chairman until a replacement can be found.
Finally, on the 28th January the group announced it’s proposed acquisition of Networkers International for 34p and 0.063256 Matchtech shares per share of Networkers. At the current share price this values the group at £57.9M and the cash portion should come to around £28.6M to my reckoning, which is to be financed from an HSBC loan facility of £30M, which doesn’t seem to leave much room for maneuver. Under this agreement, current Networkers shareholders would hold about 17.9% of Matchtech equity. The acquisition will have a number of benefits for the group, including adding some new markets both in terms of industries and most interestingly, in the form of its international presence. The directors expect the acquisition to be earnings enhancing in the first full financial year.
The Newtworkers directors are suggesting that their shareholders accept the deal and indeed, Matchtech already have the agreement of 72.9% of the shareholders so this looks like a done deal. As well as the new markets, another benefit should come in the form of the higher pricing points and profit margins of Networkers. Matchtech have a gross margin of 10% but Networkers enjoys a gross margin of 17% so hopefully some of this will rub off on the enlarged group. On the downside, this deal may increase exposure to the beleagered oil and gas industry, although Energy and Engineering only makes up 16% of NFI.
Overall then, this has been a very busy day for Matchtech. Having been concerned about the slowly declining share price I had already sold off half of my holdings here which now seams timely. As far as the update is concerned, the results were OK if nothing special and the decline in Professional Services is a concern and makes me wonder if the group might give up on this side of things given the acquisition. The early loss of Adrian Gunn is a bit of a blow as he is clearly very talented but I guess his decision is understandable. The acquisition seems to be a bit of a gamble. Certainly the new international markets look exciting but this is going to load a lot of debt for a company the size of Matchtech which puts some pressure on future performance. I am currently happy to hold on to the remainder of my shares to see how things develop but if it looks like I might be able to buy back in for cheaper I might off load the rest with a view to buying back in when it is clearer how the acquisition is progressing.
On the 2nd April it was announced that Neville Goodman, the chairman of Networkers has joinded the board of Matchtech as a non-executive director. He is also currently a director at Apogee and NRG Consultants.