Matchtech has now released its interim results for the year ending 2015.
Revenue fell when compared to the first half of last year as a £1M decline in engineering revenue was only partially offset by a £324K increase in professional services. We also see cost of sales fall, however, to give a gross profit some £331K higher. There was then a £379K increase in share based payments with the remainder of the underlying admin expenses broadly flat but £710K in acquisition costs and £220K in restructuring costs, partially offset by a £287K fall in finance costs meant that profit for the period fell by £668K, a bit of a disappointing result actually.
When compared to the end point of last year, total assets fell by £7.7M driven by a £9.6M decline in trade receivables, somewhat offset by a £1.9M increase in other receivables. We also see a fall in liabilities due to a £7.6M fall in payables and a £1M decline in borrowings which means that net tangible assets increased by £1.2M to £40.2M. This is a very strong balance sheet currently but this is likely to change once the acquisition is taken into account.
Before movements in working capital, cash profits fell by £436K to £6.8M. Payables and receivables broadly cancelled each other out and after tax and interest, both of which were lower than last year, the net cash from operations came in at £5.3M, a decline of £37K. This was easily enough to pay for capital expenditure which mainly related to leasehold improvements, and free cash flow was an impressive £4.9M which filtered through to a cash inflow of £1.2M for the year after dividends.
Overall NFI was up 2% with contract NFI increasing by 3% and contract margins improving from 7.4% to 7.5%. NFI conversion declined to 24% from 28% and Permanent fees were broadly flat year on year
Underlying operating profit at the Engineering division fell by £300K to £4.7M. The business saw NFI increase by 5% with contract NFI up 3% and permanent fees up 17%. Infrastructure NFI increased by £1M to £4.8M with a very high demand for skilled engineering personnel in the sector driven by continued investment in highways maintenance schemes and new build rail infrastructure, along with a recovering property market. Energy NFI fell by £300K to £2.1M with the well documented challenges in the oil and gas market being partially mitigated by focussing on Power, Nuclear and Renewables markets where NFI was up 43%.
NFI increased by £200K to £1.8M in the General Engineering sector that fed off strong growth in the UK’s high-tech manufacturing sector. Automotive NFI fell by £100K to £2.1M with a steady performance in the UK as the group worked with clients on their innovative and global sourcing strategies. NFI at the German business fell by £100K to just £200K but the business has been downsized and it is now at a broadly break-even level. Aerospace NFI was flat at £1.7M as a downturn in design requirements was offset by increased demand for manufacturing skills as the sector moves its focus into the build phase. Maritime NFI fell by £100K to £1.5M with the sector being adversely affected by the previously announced closure of shipbuilding at Portsmouth Naval Base.
Underlying operating profit at the Professional Services division increased by £300K to £1.8M. The NFI declined by 3% to £8.5M with contract NFI up 2% and permanent fees down 10%. Technology NFI was up £100K to £5.8M with growth below expectations considering the macro-economic recovery. The group expects the shortage of permanent staff will lead to an increase in demand for temporary labour. The electronics market remained busy while the fall in the price of oil has affected Controls and Automation and the group has re-aligned its structure in order to capitalise on an improving market, focussing on higher value roles and offering a niche service that will better appeal to a demanding customer base in a mature market.
NFI at Barclay Meade fell by £200K to £2M and after a review, the board believes that the London operation that serves non-engineering and technology clients has not gained enough traction to be viable over the medium term. As a result, this part of the business will be closed. NFI at Alderwood fell by £200K to £700K due to the uncertainty in the apprenticeship sector due to the potential changes in government funding that has affected the volumes of staff being recruited, something that is likely to continue until after the general election.
During the period, the group won a six year contract with Southern Water to provide them with engineering, operational and head office staff. They have also extended an existing contract with BAE for a further three years to provide engineering and technology staff across the company. After the end of the period, the group acquired Networkers International for approximately £57.9M. The acquisition adds telecoms recruitment to the group’s activities and also adds a substantial and profitable overseas operation with offices in Africa, Asia, Europe, the Middle East and the Americas. The consideration was paid for with £29.3M of cash and equity of £28.6M
Based on trading in the first two months of the new year and continued close cost management, the board expects the results for the full year to be in line with expectations with an additional four months contribution from the acquired company. At the end of the period, net debt stood at £1.9M, a reduction of £8.6M when compared the same point of last year. After the post period end acquisition, net debt stood at approximately £45M with the group entering into a £30M three year loan with HSBC. After the 5% increase in the interim dividend, the shares now yield 3.9%, increasing to 4% by the end of the year at current estimates.
Overall then this was a bit of a disappointing update. Although profits were down, this was only due to the acquisition costs and an improving net asset level was offset by a fall in operational cash flow, although the group still generates substantial amounts of free cash flow. Operationally, there has been slower than expected growth with both the problems affecting the oil and gas industry and the upcoming general election causing a drag on results. The purchase of Networkers after the period end is transformational for the group and should give Matchtech the chance to enter several new markets. For the moment, though, I think I will remain uninvested here until more progress is made with the acquisition and trading improves.
On the 17th April it was announced that CEO Brian Wilkinson purchased shares to a value of £193K to give him a holding of 45,000.
On the 31st July it was announced that non-executive director Stephen Burke tendered his resignation and will step down with immediate effect. No reason was given for his resignation and he had been with the company since 2006.
On the 6th August the group released a trading update covering the full year. Overall, profits should be in line with current market expectations and will include a maiden four months contribution from Networkers International.
At Matchtech total NFI increased by just 1% to £45.4M. Both contract and permanent NFI increased by 1% and within contract a 2% increase in Engineering NFI was partially offset by a 2% fall in professional services NFI. Within permanent, a 27% increase in engineering NFI was mostly offset by a 14% fall in professional services NFI. During the four months at Networkers, total NFI was flat year on year with a 3% increase in contract being offset by a 7% decline in permanent NFI. The second half of the year was impacted by the closure of the Barclay Meade London operation which had not gained enough traction to be viable over the medium term.
Investment in headcount at the end of last year did not translate into the expected increase in client demand so it was reduced again during the second half of the year but combined with the continued management of other overheads, profitability is expected to be in line with expectations.
Net debt stood at £35.5M at the end of the period compared to £3.1M at the end of last year, mainly as a result of the acquisition. The integration of Networkers has started well and the board is confident of achieving its targets for overhead savings by the end of 2016, although this is expected to incur integration costs of around £1M both in 2015 and 2016. In addition, the board has accelerated its plan to integrate certain sales teams and from August the IT businesses of both companies will have a common leadership.
At the start of the new year, the group will integrate the engineering business and looking ahead the board’s plan is for group NFI to return to growth in the second half of 2016 with further growth over the medium term. Clearly the first half of 2016 is not expected to be particularly strong then and this update is rather lacklustre overall in my view given the buoyant state of the UK job market – still this was broadly what was expected given earlier updates so no real surprises.