Matchtech have released their results for the year ending 2012. I will start with the income statement.
Over the last year we can see that revenues have been very healthy, up nearly £70M to £371.4M. Revenue for IT recruitment and has been particularly pleasing when compared to last year. The only segment to suffer a fall in revenues was Elemense, which is generally used to add value for Matctech’s clients. We also see, however, that cost of sales are up by £60M which gives a gross profit of £36.1M, up a respectable £6.4M on 2011. Not all segments were profitable, however. The German Office, Elemense and the Professional Services arms are all still not making profit.
Admin costs are also up, including leases and legal & professional fees for something called the Value Creation plan which is designed to change the reporting structure of the group (more on that later). A slightly higher bank interest also comes into play to cause the profit before tax to be just £2.6M higher at £8M. A higher tax charge due to higher non-deductible professional fees and increased losses in Germany, then makes annual profit to be nearly £1M up at £5.7M. This is a respectable performance.
We can see that assets are up £7.2M to £65.9M. Almost all of the group’s assets are held as trade receivables, which increased by £6.3M to £62.1M. £7.4M of those receivables were overdue compared to £7.6M last year, which given the increase in overall trade receivables, is rather pleasing. There were also a few small increases in the intangible assets and leasehold improvements but nothing substantial.
Liabilities were also up (£4.6M to £38.3M) with the substantial increase here coming from future payments for contractor wages (as would be expected given the increase in revenues and receivables). Otherwise we see a fairly hefty chunk of the increase in Deferred income and a reduction in the bank loans. That dilapidation provision relates to several offices that are required to be returned to their original condition when the leases expire in 2015-2016. Overall then, this gives a £2.2M increase in net tangible assets to £27.1M.
We have quite a considerable swing from the terrible cash flow last year to something a bit more sensible in 2012. This swing is mainly due to a better control of receivables when compared to last year. In 2012, the difference between the increase in payables is very similar to the increase in receivables which gives a positive cash flow from operations of £9.2M compared to an outflow of nearly £5M last year. During the year over half a million was paid out on intangible assets but and a bit more was spent on plant & equipment but otherwise there was not much difference.
There was a cash inflow of £1.4M in 2012 compared to an outflow of £11.4M last year so quite an improvement.
During the year the group acquired the recruitment arm from Xchanging Resources for £400K. Following this, Matchtech now supply the rest of the Xchanging business with contractors. It seems to be a way for Matchtech to acquire some more contracts and is not much to pay really.
The group seem to be quite susceptible to interest rate movements and a 1% increase in interest rates would adversely affect profits by £258K. There is, however, no significant exposure to foreign currencies
The Professional Services sector of the group is fairly new – Alderwood and Barclay Meade are only 2 years old and although still unprofitable, the income from these segments seems to be ramping up, now accounting for 16% of NFI. Elemense is a managed services organisation that generates revenue through value added consultancy whilst providing account management support to key client framework agreements – it is used mainly to maintain client relationships. Barclay Meade is a high end recruitment business in the professional services sector and Alderwood is a recruiter focusing on the skills and employability sector. Barclay Meade has struggled somewhat as it has found it difficult recruiting the right people (interesting for a recruitment company). Apparently the right management team is now in place and it intends to invest in expanding into new markets. Alderwood is expanding quickly and has clients that include small companies and national framework providers.
This year has been a record year for contractors on assignment (6700) for Matchtech. Permanent recruitment continued to be sensitive to economic conditions with some increasing time to hire experienced whereas there has been an increase in demand for temporary staff with the group supplying staff to new infrastructure projects, among other areas. The group are also looking to expand further overseas and as well as work won by the German office, some contractors have been supplied to an oil and gas project in Kazakhstan and they are working with a local partner in China to supply engineers to the aerospace industry.
During the year the group has seen strong demand in the Engineering sector, in particular for aerospace, where they have been supplying staff for Airbus projects, among others; automotive and marine, where the group has been involved in finding staff for the new British Aircraft carrier builds and this strong demand should continue with a new Submarine project, however demand in the commercial and leisure marine sector has been week. Demand in Information systems recruitment has been high across all of the group’s expanding customer base and the oil and gas sector has been boosted by an office In Aberdeen. The built environment recruitment has also been strong, with the water, rail and infrastructure sectors giving most of the demand. The group has continued to struggle somewhat in Germany, where they target the aerospace, automotive and energy sectors. They have relaunched the website to make it look more like an engineering consultancy which apparently aligns it more closely with German labour leasing business models. New contracts have now been won but the group has found it hard to find skilled engineers.
Going forward, the group has made steps to restructure their operations. From next year, Matchtech will consist of Engineering – which includes Elemense, Germany and Engineering rectruitment; and Professional Services which will consist of Barclay Meade, Alderwood and Information Systems rectruitment.
Overall then, this year has seen revenue increase substantially, driven by the traditional engineering recruitment while the German operation and the newer Professional Services divisions seem to be finding things a little harder. A £1M increase in annual profit is a decent performance given market conditions and the £1.4M of cash inflow is very welcome given the terrible cash flow last year. In the past few years, margins have been reduced due to client supplier rationalisation but this has now stabilised. Matchtech is not heavily reliant on one client, with the biggest accounting for just 6% of NFI but they do recruit for a number of public sector projects, so they could be affected by further government spending cuts. They are more susceptible to adverse changes in interest rates, with a 1% change giving fairly high reductions in profit.
On the current share price, the P/E ratio is 10.1, which seems a little cheap to me. The dividend yield currently stands at a very tempting 6.6% and is covered 1.6X by profits. The way forward is not easy, with the Professional Services sector failing to make profit but demand seems to be strong in other sectors. I see these shares as fairly good value at these levels.
On 16th November, the board announced that for the first quarter, trading was in line with expectations. The NFI was up 10% on the same period of last year, within which contract NFI was 16% higher with permanent fees at a similar level to last year. Skill shortages are driving demand for contract staff and apparently the diversification strategy at Matchtech is allowing them to take market share. This all looks fine, still good value.
On Feb 7th 2013, Matchtech released a trading update. They announced that the group is trading as expected which means that the NFI generation was 8% higher than the same period of last year. There has been as slight shift in the make-up of the fees and Contract fees now account for over 70% of the total.
As hinted at above, there was a strong demand for contractors in the engineering and technology sectors as clients with multi-year engineering infrastructure projects driving this demand. Fees for permanent staff have not increased, however, and while there has been strong demand for permanent staff, apparently subdued candidate confidence has hampered this area.
As mentioned previously, there is a change in reporting structure and the group has ceased to provide executive search and financial services recruitment. This has resulted in a small change in management and a one-off £400K charge. Net debt at the end of the half year stood at £7.9M, which is a confidence inspiring improvement. The price of these shares has ticked up but given this solid update I still see them as good value.