MPAC has now released their interim results for the year ending 2019.
Revenues increased when compared to the first half of last year as a £1.5M reduction in pharmaceutical revenue was more than offset by a £16.9M increase in healthcare revenue, a £700K growth in food and beverage revenue and a £1.5M increase in other revenue. Cost of sales also increased to give a gross profit £7.2M higher. Distribution costs increased by £700K, non-underlying admin expenses increased by £1.1M, other admin expenses were up £1.7M and other operating expenses grew by £200K to give an operating profit £3.5M higher. Finance costs and tax were flat so the profit for the period came in at £2.6M, a growth of £3.5M year on year.
When compared to the end point of last year, total assets increased by £29.3M driven by a £16.1M increase in intangible assets, an £8.8M increase in the pension surplus, a £6.6M growth in receivables, a £5.1M growth in right of use assets, a £4.2M increase in contract assets and a £4M growth in inventories, partially offset by a £17.4M decline in cash. Total liabilities also increased as a £4.5M decline in contract liabilities was more than offset by a £12.5M growth in payables, a £4.6M increase in deferred tax liabilities, a £5.1M increase in lease liabilities and a £2.6M growth in deferred consideration. The end result was a net tangible asset level of £32.4M, a decline of £7.2M over the past six months.
Before movements in working capital, cash profits increased by £5M to £5.5M. There was a cash outflow from working capital and after interest and tax were up £300K the net cash outflow from operations was £5.8M, an increase of £2.1M year on year. The group also spent £1.1M fixed assets and £10.6M on an acquisition to give a cash outflow of £17.6M before financing. Of which there was none so the cash outflow for the half year was £17.6M and the cash level at the period-end was £10.5M.
The gross profit in the Original Equipment division was £10.4M, a growth of £6.2M year on year. Order intake was 42% above last year and at the end of the period the order book was broadly in line with June 2018. Revenue in the Americas increased by £18.1M and sales in Asia Pacific increased by 29%, although the EMEA region saw revenues reduce by 32%.. Sales to the healthcare sector increased by 200%, driven by the large contracts won in late 2018 and early 2019. Sales to the food and beverage and other markets also showed steady progress. Pharmaceutical revenue was adversely affected by the timing of contracts within the industry and is expected to recover in the second half.
Gross margin was up from 18% to 27% with the increase as a result of delivering the higher opening orderbook at contract margins. Last year’s performance included a significant cost contingency driven by two technically challenging legacy contracts.
The gross profit in the Service division was £2.7M, an increase of £1M when compared to the first half of last year. Order intake was up 75% with the increase a result of additional focus on pushing the service side and improved offering in conjunction with new machine sales. This led to a 52% increase in revenues with the improvement being broadly equal between the Americas and EMEA regions. Service sales in Asia Pacific improved more steadily but still showed progress, up 20%. Improved operational and supply chain efficiency also led to an increase in service margin in the period from 34% to 36%.
The group started the year with a significantly higher order book than at the start of 2018. The quality of the opening order book was the driver behind the financial performance. There remain, however, potential for forecast orders to be delayed due to general economic uncertainty for the medium term. Therefore the board anticipates that while the results for the year will be above current market expectations, primarily as a result of an increased number of repeat projects and by operational efficiencies, the medium-term economic outlook is less certain.
Currently the order book is broadly in line with the level at the end of June 2018 and the conversion of orders is more difficult to predict in the current environment as customers defer discretionary investment
The group owns an investment property and land comprising of 10 acres in Buckinghamshire which is held at a book value of £800K and is not required for their operations. They were not successful in their recent efforts to have the site designated for residential housing development but will continue to explore all high value options for the investment.
The actuarial deficit in the UK pension scheme reduced from £69.9M to £35.2M in the formal valuation. The deficit is now expected to be eliminated by July 2024 compared to August 2029 under the previous valuation, representing a saving of £9.7M. The current annual deficit recovery payments have been maintained but will now cease more than five years earlier than was agreed previously. The net valuation of the US pension schemes showed a deficit of £6.1M, which was unchanged.
In May the group acquired Lambert Automation, a provider of automation solutions to the medical and consumer healthcare markets for an initial consideration of £15M and a further £3M subject to the business achieving certain earn-out criteria. It is expected that the acquisition will be materially earnings enhancing and it generated goodwill of £5.9M. The business contributed profit of £1.3M to the group during the first half of the year.
Going forward, profits for the full year are expected to be significantly above market expectations. General market uncertainty has increased with global FMCG companies under pressure to eliminate plastic in consumer products leading to investment delays whilst they develop new solutions. Order intake is also variable and sensitive to geo-political events and recent signs of slowing growth resulting in delayed investment decisions. Overall progress is expected to continue and short term prospects remain positive.
At the current share price the shares are trading on a PE ratio of 27.8 which falls to 7.5 on next year’s forecast. There are no dividends on offer here. At the period-end the group had a net cash position of £9.6M compared to £27M at the end of last year.
Overall then this has been a good period for the group. Profits increased with both service and original equipment divisions doing well. Net tangible assets did decline, however, as did the operating cash flow which shows a cash outflow, although this was due to working capital movements. Although this has been an outperformance, there are a few warnings that this may be temporary, with market uncertainties growing. For this reason, despite the cheap-looking forward PE of 7.5 I’m tempted to sell.