Matchtech has now released its final results for the year ended 2015.
Revenues increased when compared to last year due to the £57M maiden revenue generation from the acquired Networkers business. Organic revenues declined as an £892K increase in the engineering business was more than offset by a £7.2M fall in professional services revenue. Wages and salaries increased by £4.8M, leasing costs increased and other cost of sales grew by £35.5M to give a gross profit £9.8M above that of last year. We then see an increase in the amortisation of acquired intangibles along with underlying admin costs and after a £1.7M exceptional acquisition cost and a £1M restructuring cost relating to the acquisition the operating profit was down £598K. After a bigger interest cost and tax bill, the profit for the year came in at £8.3, a decline of £811K year on year, although this was only due to the exceptional acquisition costs.
When compared to the end point of last year, total assets increased by £79.7M driven by a £24.8M growth in goodwill, a £23.5M increase in trade receivables, a £17.6M growth in customer relationships and a £4.2M increase in trade names. Total liabilities also increased during the year as a £34M increase in borrowings, a £10.8M growth in accruals and deferred income and a £5M increase in the deferred tax liability was partially offset by a £4.4M decline in the contractor wages creditor. The end result is a net tangible asset level of £24.3M, a decline of £14.7M year on year.
Before movements in working capital, cash profits increased by £970K to £16.7M. Working capital movements nearly cancelled each other out although the fall in receivables was slightly higher than the decline in payables and after a higher tax payment, the net cash from operations came in at £13.2M, an increase of £965K year on year. The group then spent £524K on tangible fixed assets and £387K on intangibles before the £37.6M spent on the acquisition meant that before financing there was a £25.2M cash outflow. After dividends were paid out, the group drew down £28.6M from the term loan to give a cash outflow of £2.1M for the year – this would actually be pretty good were it not for the acquisition.
The pre-tax profit in the Engineering business was £9.8M, broadly flat year on year. NFI increased by 6% with contract NFI up 2% and permanent fees increasing by 24%. The infrastructure division, which focuses on primarily UK-based projects in environmental and water engineering, highways, transportation and planning, property and rail sectors, had a successful year with significant NFI growth in both contract and permanent recruitment. The group provided staff in many key infrastructure projects including the Thames Tideway Tunnel and the HS2 rail link. Other major projects included the new M8 scheme in Scotland and the M1 smart motorway scheme. While the completion of the water industry’s AMP5 capital investment framework period meant demand for engineers lessened somewhat during the year, the decline was not as marked as the previous AMP completions. The group are now active in meeting the new recruitment demand stimulated by the start of AMO6 which runs from 2015 to 2020.
Very strong permanent placement in the marine sector contributed to a successful year, during which the business expanded their international focus with a particular emphasis on Canada. This focus culminated with a contract to work on the Canadian National Shipbuilding Procurement Strategy, where the government selected two shipyards to rebuild Canada’s naval and coast guard fleets with packages of work worth a combined $33BN. In the UK the maritime division worked through the year with BAE on the major ongoing projects to build and supply the Royal Navy’s new Type 26 Frigate and the successor programme.
Issues around the falling price of oil have had an impact on recruitment numbers in the energy sector although the acquisition of Networkers gives the group a foothold in the renewable energy sector, particularly in areas like offshore wind power in Europe. The group downsized their German operation during the year but there was a substantial increase in the UK automotive business which was driven in particular by the relationship with Jaguar Land Rover. The aerospace division underwent a major shift in emphasis during the year as they responded to changing patterns in client demand. Across the industry, focus in the production cycle has moved from a primarily design-led phase to manufacture, significantly altering the type of engineering personnel that aerospace companies are looking for. The group therefore moved their attention away from the declining contract opportunities to concentrate on the more in-demand high margin and permanent positions. In doing so, they have protected their position in a flat market.
It was a good year for the general engineering division, particularly for skilled and semi-skilled placements throughout the South with growth particularly strong on the permanent side of the business.
The pre-tax profit in the Professional services division was £3.9M, an increase of £1.2M when compared to last year. NFI for the year was down 7% with contract NFI down 2% and permanent fees down 14% although if the closed Barclay Meade office is discounted, contract was broadly flat and permanent fell by 7%. Despite the profitable Barclay Meade office in Hampshire, the board believed that the London office had not gained enough traction to be viable over the medium term so it was closed in the second half of the year.
The Connectus IT recruitment business had a varied year, with strong performance in both the corporate account client base and within the core ERP business area, offset by challenges faced in other specialist markets. The corporate accounts team was able to deliver a profitable service with 800 placements across the year, retaining a place on the NHS framework, which allows them to enhance their position as a top ten supplier of IT contractors to the body. The development of the specialist markets including software, project management and IT infrastructure was challenging, but they saw significant contract wins with a number of technology, professional services and engineering clients which should fuel growth next year.
At Alderwood, the group diversified their product offering, putting a larger emphasis on engineering and technical training professionals. This has allowed them to utilise their client and candidate base whilst also working to support the number of candidates gaining the skills and qualifications to enter industries with significant skills shortages. They also expanded their offering overseas, working with education providers in regions such as the Middle East to help them with the delivery of teaching in areas such as English, maths and IT as well as general engineering, construction and the service sector. This will be a major focus moving forward as the Saudi government continues to invest in up-skilling the population as part of its five year education plan. They also shifted the emphasis of the UK recruitment business to focus on a technical and vocational product offering.
The maiden pre-tax profit in the acquired Networkers business was £1.9M. Trading for the four months was in line with last year generating NFI of £9.5M with contract NFI up 3% and permanent fees down 7%. The business has been providing recruitment services to the telecoms sector for over 15 years and during this time has become a market leader in providing skilled technical resource to the leading vendors and service providers with an emphasis on emerging markets. There remains a high demand for candidates in specialist technologies where skills shortages are greatest and therefore demand from clients is strongest. The Energy and Engineering division continued to show impressive growth rates despite the slowdown in the oil and gas sector due to the focus on renewable energy.
The main event during the year was the acquisition of Networkers International in April. The total consideration was £58.5M and as part of the consideration the group issued new shares to Networkers shareholders as well as a cash consideration of £29.2M. Networkers is an international recruitment business which supplies staff on a permanent or temporary basis in the telecoms, IT and Energy & Engineering sectors. The acquisition generated goodwill of £24.8M and generated profits of £471K in the four months it has been part of the group.
During the year there were a number of “non-underlying” costs. There was £1.7M incurred in respect of the Networkers acquisition. The restructuring costs are items relating to the integration of Networkers and redundancy costs following the restructuring of Barclay Meade.
The operational aspects of the integration programme are continuing. In areas like finance, HR, IT and management they are already achieving cost synergies and best practice. Areas for rationalisation remain, for example they still have two CRMs, two back offices and two sets of associated systems. They have also identified synergies in the stock exchange listing costs, the board, management overhead and the rationalisation of property. These synergies should realise in the region of £1.3M next year on a fully annualised basis with more cost synergies to follow. The group have chosen to re-invest some of these cost synergies to improve the business and accelerate future growth as well as strengthening functional management in some areas.
The group has working capital facilities with HSBC which allows the group to borrow up to 90% of its invoiced debtors up to a maximum of £65M. Interest charges on borrowings are at a rate of 1.1% over the HSBC base rate. The group has also agreed a three year, £30M term loan facility with interest charged at a rather more costly 3% over HSBC LIBOR rate. There is currently £57.2M undrawn bit given the fact that a 1% movement in interest rates would reduce profits by £420K I think it would be prudent to leave it undrawn. The group is now also rather susceptible to exchange rates with a 25c weakening of the Euro and the Dollar against Sterling would reduce profits by £1.4M.
The group have appointed Patrick Shanley as Chairman who will start from the AGM. He will replace the interim chairman, Ric Piper.
So far, 2016 has started in line with management’s expectations with many buoyant markets across the group’s core sectors. In engineering, particularly encouraging is the continued progress in the infrastructure division where relationships with key multi-national clients will be expanded internationally, as well as in the automotive, aerospace and maritime markets. In energy the group now enjoys a strong position in the European renewables sector and the telecoms sector is also performing well, fuelled by clients investing in 4G and converged service offerings. The newly combined IT team is well placed to take advantage of strong demand.
The group has a good new business pipeline and signs of sales synergies are coming through with early joint bids progressing well. They are now in a position to pursue more larger-scale relationships. The board are planning for substantial growth over the next few years.
After a 12% increase in the final dividend, the shares are yielding 4.3% which is expected to remain the same next year. At the current share price, the shares trade on a PE ratio of 15.7, falling to 12.4 on next year’s estimate, although these have not yet been updated following the release of the results. The net debt position at the year-end was £33.6M compared to £3.1M at the end of last year.
Overall then, this is likely to have been a transformational year for the group. Profits did decline buy if the acquisition costs are excluded there was an increase (although I doubt much of this was organic), net tangible assets also fell as the group acquired a lot of goodwill but operating cash flow increased and the group produced plenty of free cash before the acquisition. The engineering market was fairly flat with presumably lower margin permanent vacancies increasing at the expense of contract hires. The energy sector is obviously feeling the pain from the decline in the oil price but the UK automotive sector is buoyant.
In professional services, the opposite was true and permanent hires falling compared to flat contracts but profits still improved. Clearly the most important aspect this year was the transformational Networkers acquisition which although it did not come cheap, does open up some interesting geographic diversity. Due to the acquisition the group are now much more susceptible to exchange and interest rate changes with the potential increase in interest rate a real risk going forward which means that paying back the debt is hopefully a priority.
There are clearly also some risks surrounding the acquisition and it is possible that the core business might suffer if attention is diverted to merging the two businesses but the outlook statement reads very positively and with a yield of 4.3% and a PE ratio of 12.4 the shares look good value to me and I have dipped back in.
On the 29th October the group announced the appointment of Patrick Shanley as Chairmen. Patrick is currently chairman of Accsys Technologies and has previously been CFO of Courtaulds.
On the 2nd December the group released an AGM statement where they stated that the group continues to trade in line with their expectations.
On the 7th December it was announced that non-executive director George Materna purchased 100,000 shares at a value of £515K. This means that he now owns 7,877,405 shares representing 25.55% of the total issued share capital. This is a nice vote of confidence I think.
On the 28th January the group released a trading update for H1 2016. Overall the operational performance was in line with their expectations and the board anticipate that profit for the full year will also be in line with their expectations (it would be quite strange if they didn’t!)
NFI performance for the group was up 59% to £35.7M but this was entirely due to the acquisition and on a like for like basis it was down 1%. Engineering LFL NFI was up 7% to £21.7M with a particularly strong 17% growth in permanent fees and contract NFI growing 4%. Within Engineering there was a strong performance from Infrastructure, with NFI up 19%. Technology LFL NFI was down 12% to £14M and down 2% on H2 2015. Within the division, Telecoms was in line with last year but IT was down 20% and the board are committed to enhancing their overall offering in this sector.
The integration of Networkers continues to go well, and they have now identified nearly £2M of annualised synergies which will be fully realised in 2017. They expect to identify additional cost synergies as they continue the integration process and combine the remaining back office functions by the end of this year. The group are re-investing some of these synergies in improving systems connectivity in Asia and North America. They have also appointed regional senior management in both regions in order to accelerate growth in these important markets. Finally they have taken the opportunity to strengthen the group management structure and invest further in their business development capability. Sales synergies are coming through and the new business pipeline across the group is apparently encouraging.
With the integration expected to be mostly completed by the end of the year, the CEO and CFO of Networkers will be leaving the group at that time. Demand in the UK for skilled engineers remains robust and looking ahead, the board see a number of opportunities to roll out their Engineering recruitment services across overseas locations. Investment in headcount is taking place in these areas and they remain confident that they will convert these opportunities into significant growth over the next few years.
Overall then, it seems a poor performance in the IT business has dragged down what is an encouraging performance in the other areas. The opportunities from the acquisition do seem exciting, though, and I will continue to hold.