Newmark Security Share Blog – Final Results Year Ended 2019

Newmark Security has now released their final results for the year ended 2019.

Revenues increased when compared to last year with a £3M growth in electronics revenue and a £512K increase in asset protection revenue.  Amortisation was down £220K, there was no impairment of development costs, which were £698K last time but other cost of sales grew by £1.8M to give a gross profit £2.6M higher.  Redundancy costs increased by £152K and other admin expenses were up £220K to give an operating profit which was a £2.2M improvement.  Invoice discounting charges increased by £27K and tax charges were up £197K which meant that the profit for the year was £189K, an improvement of £2.1M year on year.

When compared to the end point of last year, total assets increased by £1.5M driven by a £991K growth in inventories and a £359K increase in other receivables.  Total liabilities also increased due to a £595K growth in accruals, a £499K increase in trade payables and a £246K growth in the invoice discount account.  The end result was a net tangible asset level of £2.4M, a growth of £171K over the past year.

Before movements in working capital cash profits improved by £1.2M to £873K.  There was a cash outflow from working capital and after interest was up £22K and tax payments increased by £45K the net cash from operations was £288K, an improvement of £533K year on year.  The group spent £333K on development costs and a net £143K on capex to give a cash outflow of £188K before financing.  They received £246K through invoice discounting and paid £87K in finance leases to give a cash outflow of £29K for the year and a cash level of £1M at the year-end.

The pre-tax profit of the Electronic division was £1M, an improvement of £2.3M year on year.  In the US where the Human Capital Management sector is larger, growth has been aided by increasing the scope of services offered, particularly in the areas of data protection and management.  HCM providers are now choosing Grosvenor to provide a range of services in a SaaS basis and this is expected to increase revenues. 

Elsewhere the HCM sector remains less mature and of smaller scale.  In Europe, HCM providers often look to adjacent technology sectors to allow them to offer additional services downstream.  Grosvenor’s Access Control line of business has been a further driver of revenues as synergies between the product and services offerings have facilitated their cross-sale approach.

US revenues increased by 167% to £4.5M and has provided the most success and opportunities.  While data collection edge devices remain at the heart of the offering, their data protection and edge device management software services are becoming increasingly important.  In ROW, HCM revenues remained broadly flat at £2.4M.  There were no significant end user projects but organic growth was shown across the majority of existing clients.  Negotiations began with several large HCM providers based in Europe and Australia, with a view to providing a range of hardware and software as a service. 

The US continues to provide opportunities for both software and hardware sales and is expected to continue to growth in the current year.  Investment in the region continues to be increased and it is anticipated that both headcount and market will be increased in the forthcoming periods.

Access Control revenues increased by 6% to £4.1M.  The legacy Janus platform has now been retired and the end user upgrade programme to the Sateon platform has now been completed.  The decline in Janus revenues was less pronounced than in the previous period, down just 3%, but revenues are expected to decline in future periods in line with the reduced demand for legacy hardware.

Sateon revenues grew by 9%.  As expected, the final release of this platform was made available during the year and no further development is being carried out other than essential maintenance.  The focus is now on maintaining revenues at the current level with existing customers.  Towards the end of the year the group released their new platform Janus C4, an integrated security management and access control product aimed at the increasing industry demand for single platform solutions.  The software is developed in collaboration with a third party and uses the group’s hardware. 

The pre-tax profit in the Asset Protection division was £321K, a decline of £58K when compared to last year although revenues increased by 6% with product revenue declining slightly despite increased competition and depletion of traditional niche products.  The sales of products to public sector markets continued to be affected by a lack of investment as a result of budget cuts and Brexit uncertainty.  As they market contracted they experienced increased pressure from customers to reduce prices whilst they saw an increase in the number of competitors. 

Products revenue decreased by 1.3% with revenue from high street banks and building societies decreasing by 33% and 24% respectively as they move away from fortress counters to open plan branches.  Revenue from sales of time delayed cash handling equipment to the Post Office increased 17% due to orders received as part of their Network Development programme.  This programme is now completed so this revenue stream will reduce. 

Revenue from other cash handling sales increased as a result of a programme of work for a long-term customer.  Revenue from sales of security doors decreased by 17.5% as their work is project based and they are reliant on customers and markets having programmes of work.  Other product groups declined by 7%.

As a result of declining sales in this division and the lack of repeat programmes of refurbishment from their long term customers, a reconstruction plan was implemented in Q4 and resulted in staff reduction and other cost saving measures.  Unprofitable customers and product groups have been removed.  As part of the cost savings, the Kempston warehouse has been closed and plans are in place to consolidate the warehouse and main offices in Dartford which will be completed in the current year. 

Despite developing new products, sales of counter terror security equipment for staff and customer protection have not increased and the lack of sales is due to reduced spending as a result of Brexit.  They will continue their programme of selected product certification for bullet, blast and manual attack, however.  Product margins continue to be affected by the increased costs of raw materials and imported components and they expect this trend to continue.

The Service business continued its bank branch upgrade work and delivered sales 18% higher.  This was against a backdrop of a general reduction in bank and building society sites in the high street.  Overheads were reduced by 1.7% as the business managed its field resource with less head office involvement now that the ERP system has been fully embedded.  Margins were slightly diminished by 2pp as a result of entering new markets which are non-niche and more competitive.  The strategy going forward continues to be to develop within new markets and resource has been introduced to further these aims.

In the electronics division the trend to generating more revenues from HCM activities is set to be maintained, particularly in North America.  The board believes there will be medium term growth in both divisions core market and it is expected that revenues will continue to grow in the recently launched Janus C4 Access Control offering.  In both divisions the ambition is to generate a greater proportion of recurring revenues.  In the short term this will be more prevalent in the HCM sector where provision of SaaS will increase.

The asset protection division will benefit from the restructuring.  The products business will concentrate on increasing the range of physical security products with continued product development and certification.  The development of staff remains at the heart of this strategy in the service business as the UK based team of technicians supports an increasing number of third party products not related to Safetell’s traditional core business.  Additional resources have been deployed to bolster sales and marketing and early stage negotiations with potential partners are initially positive.  The board are encouraged by the return to profitability and looks forward to the year with confidence.

At the current share price the shares are trading on a PE ratio of 26 and I can find no forecast for next year.  There is no dividend on offer here.

Overall then this has been a much improved year for the group. They have moved into profit, net assets increased and the operating cash flow improved, although the group still isn’t able to generate any free cash.  The Electronics division seems to be doing well, especially in US data protection but the asset protection division is struggling due to Brexit-related lack of investment, high street banks moving away from fortress counters, and the post office programme coming to an end.  This has prompted restructuring.  Whilst the group certainly looks more healthy than it did, the lack of cash generation is concerning and the PE of 26 looks a bit expensive to me.

On the 13th November the group announced that finance director Graham Feltham purchased 800,000 shares at a value of £10K.  This is his first share purchase.

On the 12th December the group announced that Chairman Maurice Dwek purchased 1M shares at a value of £14K.  He now owns 95M shares.

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