Portmeirion Share Blog – Interim Results Year Ending 2018

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Portmeirion has now released their interim results for the year ending 2018.

Revenues grew when compared to the first half of last year as an £853K decline in South Korean revenue was more than offset by a £1.3M increase in US revenue, a £966K growth in UK revenue and a £2.4M increase in ROW revenue. Operating costs also increased to give an operating profit £393K above last time. There was a modest decline in finance costs, mainly due to lower pension scheme costs but tax charges were up £92K which meant that the profit for the period was £1.6M, a growth of £378K year on year.

When compared to the end point of last year, total assets declined by £4.7M driven by a £3.8M fall in cash and a £3.4M decrease in receivables partially offset by a £2.9M growth in inventories. Total liabilities also declined due to a £991K decrease in borrowings, a £760K decline in payables and a £586K fall in the pension deficit. The end result was a net tangible asset level of £29.5M, a decline of £2M over the past six months.

Before movements in working capital, cash profits increased by £440K to £3.1M. There was a cash outflow from working capital and even after tax payments reduced by £97K the net cash from operations was £1.7M, a decline of £1.4M year on year. The group spent £397K on tangible assets and £122K on intangibles to give a free cash flow of £1.2M. This did not cover the £2.9M paid out in dividends and the group also purchased a net £1.1M of their own shares, presumably to satisfy share schemes, and repaid £1M of loans to give a cash outflow of £3.8M and a cash level of £4.7M at the period-end.

The UK retail sector remains uncertain due to the ongoing Brexit negotiations and challenges in the high street. Despite this the group’s retail channel and e-commerce sales continue to grow driven by new product launches.

The US has seen a strong start to the year, delivering revenue growth of 29% at constant currency, although this reduced to 18% in Sterling terms. The retail environment in the US continues to change rapidly with sales moving from traditional channels to online. The board remain confident of prospects in the second half, driven by their ongoing development of the Spode Christmas tree range.

Sales in South Korea fell by 23%. This market remains under focus and the group are working closely with their distributor on expanding their product portfolio and targeting new customers. The board are confident of a recovery of a recovery in this market and expect second half sales to be in line with the prior year. Sales to the rest of the world showed the largest growth, increasing 22% to £13.4M. Sales into Europe continued to grow as well as their further penetration of Asian markets such as Taiwan and Hong Kong.

The UK business had a strong first half performance with a sales increase of nearly 9% driven by strong export sales to Asian markets and new product launches in the UK such as Sara Miller London and line extensions within Royal Worcester Wrendale Designs collection. Sales from the home fragrance division increased by 14% to £6.2M. The underlying performance of the Wax Lyrical business was pleasing with some new customer wins which was supplemented by further home fragrance sales penetration through the other distribution channels.

Going forward, the board remain confident in their ability to meet full year market expectations.

At the current share price the shares are trading on a PE ratio of 18.5 which falls to 16.6 on the full year consensus forecast. After an 8.1% increase in the interim dividend the shares are yielding 2.9% which increases to 3.1% on the full year forecast. At the period-end the group had a net debt position of £1.3M compared to net cash of £1.6M at the year-end due to the usual inventory build at this point.

Overall then this has been a solid period for the group. Profits increased and although the operating cash flow declined, this was due to working capital movements and cash profits were up. The free cash didn’t cover the dividend, however, and the net asset positon deteriorated slightly. The US and ROW markets are performing very well and the UK seems to be fairly decent. The problems lie in South Korea, which saw quite a drastic decline. This is apparently being addressed. With a forward PE of 16.6 and yield of 3.1% the shares are not cheap but this is a solid company and I am happy to hold.

On the 17th January the group released a trading update covering the year as a whole where they stated that they expect revenues to be at least £89.2M, ahead of market expectations driven by strong growth across the UK, US and South Korea.  The home fragrance business continues to thrive, growing more than 11% and online sales growth was 20%.  They also expect pre-tax profit to be ahead of market expectations.   

Paypoint Share Blog – Final Results Year Ended 2018

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Paypoint has now released their final results for the year ended 2018.

Revenues increased when compared to last year as a £17.8M growth in Romanian revenue was partially offset by a £9.4M decrease in UK revenue, a £1.4M fall in Irish revenue and the elimination of North American and French revenue. There was a £4.5M decrease in the commission payable to retail agents but the cost of mobile top ups increased by £12.5M. There was no card scheme sponsor charges, which accounted for £2.1M last time but depreciation was up £1.1M and amortisation grew by £2M. Other cost of sales fell by £1.4M to give a gross profit £6M below that of last year. Audit costs were down £518K, R&D costs fell by £400K, staff costs decreased by £4.1M and other underlying admin expenses were down £1.8M. There was no profit on the disposal of a business, which was £15.7M last time, however, so the operating profit fell by £14.5M. There was a £1.2M fall in joint venture profits, bank charges were up £489K and tax charges increased by £504K to give a profit for the year of £42.9M, a decline of £16.7M year on year.

When compared to the end point of last year, total assets increased by £62.7M driven by a £61.1M growth in items in the course of collection, a £7.3M increase in cash collected on behalf of clients, a £4M growth in goodwill and a £3.7M increase in trade receivables, partially offset by a £14.3M fall in cash. Total liabilities also increased during the period due to a £61.1M increase in settlements payable and a £7.3M growth in the amount owed in respect of client cash. The end result was a net tangible asset level of £35.8M, a decline of £17.3M year on year.

Before movements in working capital, cash profits increased by £4M to £65.1M. There was a cash inflow from working capital due to an increase in payables and even after tax payments increased by £1.6M and bank charges grew by £489K, the net cash from operations was £63M, a growth of £21.2M year on year. The group spent £7.1M on tangible assets, £6.3M on intangibles and £926K on acquisitions to give a free cash flow of £48.8M. This did not cover the £55.9M spent on dividends, however, and there was a cash outflow of £7.1M and a cash level of £46M at the year-end.

In Ireland the group have a network of 450 sites but given the focus on the UK and Romanian operations they have decided to wind down the bill payment services in Ireland which generates around £500K of net revenue per annum.

Overall retail network net revenue increased by 1.8% to £119.6M driven by a 30% growth in Romania to £11.9M which included £1.7M of net revenue from the acquired Payzone business. In the UK, net revenue fell by 0.6% due to the new commercial terms with Yodel and last year’s one-off VAT recovery. Excluding this, net revenue increased despite a decline in transaction volumes in top-ups.

Overall net revenue in bill and general increased by 2.5% to 60M. In the UK net revenues were broadly flat reflecting an improved mix of clients counteracting the reduction in transaction volumes. Multi Pay continued to grow robustly with transactions increasing by 88% and net revenue doubling to £2.4M. Included in net revenue was £4M from the Department for Work and Pensions Simple Payment Service which ended in March. In Romania, net revenue grew by 26% to £7.7M.

Overall top-up net revenue increased by 9% to £20.8M. UK and Irish net revenue was up 4.6% to £17.7M. Transactions were down, affected by market trends whereby UK prepay transactions are being replaced by direct debit payments. Despite this, the net revenues increased following the full year impact of their renegotiations of performance incentives and increased average top up values. They also achieved growth in eMoney transactions. In Romania, the 42% increase to £3.1M was driven by the Payzone acquisition.

In Romania the group intends to lunch a new Android terminal appropriate to the local market that will in time replace the existing second generation terminal and provide an integrated card payments solution to meet the Romanian government’s requirement for all stores to be able to transact cards as well as replace the Payzone in-store technology that will soon be out of support

In October the group acquired Payzone SA in Romania for an initial consideration of £2.3M. The business operates a network of 10,000 retailers offering similar services to the existing Romanian business of bill payment, mobile top-up services and money transfer services. The transaction generated goodwill of £3.9M as the business had negative net assets.

The group were successful in their challenge to an HMRC VAT ruling issued in 2015. The ruling required certain revenue streams to be treated as VAT exempt which reduced VAT recovery and increased the cost base. Following the tribunal outcome they have started the recovery of the VAT element of invoices previously issued to clients. As a consequence, included in the current year cost base is an estimated benefit of £2.4M of which £1.5M relates to years prior to 2018. In addition the group made £1.2M of sustainable cost efficiencies. These were offset by Payzone adding £1.2M of costs and £3.4M of underlying cost increases due to investments in CRM salesforce and Paypoint One, one-off reorganisation and asset useful life adjustments of £1.2M.

Going forward there is now strong momentum across Paypoint One, Multipay and Romania and a compelling parcel proposition reflected in a strong pipeline of client deals. Non-recurring items that will affect the business in 2019 include the closure by the Department for Work and Pensions of their Simple Payment Service worth £4M per annum in net revenue and the second-year impact of £1M reduction in net revenue from the agreement with Yodel to lower parcel fees. Despite these headwinds and whilst the outturn for the forthcoming financial year will be influenced by the timing of and volumes from new parcel contracts, the board anticipates a progression in profit before tax in this financial year as the growth drivers in their business continue to develop.

After an increase of 2% in the ordinary dividends, the shares are yielding 9%. The additional dividend programme of £25M per annum continues until 2021 alongside the ordinary dividend policy. From April 2019 the dividends will be split into four equal quarterly payments.

On the 26th July the group released a trading update covering Q1. In parcels they have now added eBay as a partner to their Collect+ network. In the UK they have implemented some improvements to enhance their retailers experience including an interactive voice response technology. In Romania, growth continued to benefit from the Payzone acquisition and solid growth in the underlying business. In all the full year outlook remains in line with previous guidance.

Following the period-end the group had a technical incident that impacted around a third of the terminal estate. During this period customers were able to undertake services at alternative local sites as they were able to continue to provide coverage to 98% of households. They fully restored services during the course of the day and are confident that it was a one-off issue.

Net revenue reduced by £700K reflecting the closure of Simple Payments Service, the second year impact of reduced Yodel parcel fees and the implementation of IFRS 15. These factors had a combined impact of £1.4M. Transactions increased by 3.6% as a 44% increase in Romanian transactions was partially offset by a 2.4% decrease in UK transaction volumes.

In the UK and Ireland like for like retail service net revenue was up 3.3% driven by service fees which increased 46% to £2.3M. In the quarter their focus has been on the rollout of their EPoS Pro which was installed in 138 new sites. Wholesaler links with NISA are now live and are in a pilot programme with Booker, with their retailers now ordering stock directly from their PayPoint One terminal. Overall their PayPoint One terminal was in operation in 9,260 sites, an increase of 710 since the beginning of the year.

Card payment transactions grew by 14%. In January the government ban on all surcharges for card payments came into effect. As a consequence the increased transaction volume was offset by reduced average transaction values which decreased by £1 to £13 resulting in a slight reduction in card payment rebate revenue. ATM transactions increased by 4.5% driving an increase in ATM net revenue. Their Collect+ network was in 7,456 sites but parcel volumes were down 17% reflecting a reduction in parcel volumes from their current partner, although they expect to return to growth once their new parcel partners begin to introduce volumes.

Net revenue in bill and general decreased by 13%. In a large part this was due to the closure of the SPS scheme. There was a strong performance in the energy sector, however, where net revenue increased by 3.3%. In addition eight new clients were added during the quarter including a leading UK challenger bank, Tide, enabling customers to manage payments to their Tide e-money accounts through a UK-wide network which is larger than any high street bank. Bill and general transactions reduced by 5% but MultiPay volumes were up 63%.

Top-up transactions declined by 15% as the prepaid mobile sector continued to contract. Net revenue only reduced by 2%, however, as average top-up values and e-money transactions continued to grow.

In Romania transactions increased by 44% and net revenue was up 37% driven largely by the integration of Payzone. Organically, net revenue was up 7%.
The group had net cash of £48.5M at the period end compared to £46M at the year-end. A the current share price the shares are trading on a PE ratio of 14.7 which is expected to remain the same on next year’s consensus forecast. Including all the additional dividends, the shares are yielding 9% which increases to 9.2% on next year’s forecast.

Overall then this has been a bit of a mixed year for the group. Profits were down due to last year’s subsidiary sale. Without this, there was not much change year on year. Net assets decreased but the operating cash flow improved with plenty of free cash being generated, although the dividends were not covered. As usual Romania seems to be the driver of growth, offset by a sluggish performance in the UK. So far this year the group has been impacted by the closure of the Simple Payment Service and lower fees from Yodel. The shares are decent value with a forward PE of 14.7 and yield of 9.2% but it is hard to see where much growth is coming from.

Braemar Shipping Services – Final Results Year Ended 2018

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Braemar Shipping has now released their final results for the year ended 2018.

Revenues declined by £2.5M when compared to last year as the maiden £3.7M contribution from the financial business was offset by a £4.4M decline in technical revenue, a £1.3M decrease in shipbroking revenue and a £613K reduction in logistics revenue. Cost of sales also reduced to give a gross profit £125K lower. Amortisation of acquired intangibles increased by £1.9M, there was no gain on the disposal of an investment (£1.7M last time), there were £5M of costs relating to the Naves acquisition and £594K for the Atlantic Brokers acquisition. Other restructuring costs fell by £2.9M, however, and other operating costs fell by £3.4M. All of this meant that the operating loss represented a £1.4M detrimental swing. Finance costs increased by £349K and tax charges were up £857K to give an annual loss of £2.9M, an increase of £2.4M year on year.

When compared to the end point of last year, total assets increased by £6.7M driven by an £11.2M growth in goodwill, a £2.9M increase in assets held for sale, and a £2.7M growth in other receivables, partially offset by a £6M decline in trade receivables and a £1.4M decrease in cash. Total assets also increased during the year as a £1.7M fall in trade payables and a £2.4M decline in other accruals and deferred income was more than offset by a £7.3M growth in short term borrowings and a £10.3M increase in deferred consideration. The end result was a net tangible asset level of just £1.3M, a decline of £18.8M year on year.

Before movements in working capital, cash profits declined by £663K to £2.9M. There was a cash inflow from working capital, but this was lower than last year and after tax payments reduced by £1.5M the net cash from operations was £3.1M, a decline of £1.6M year on year. The group spent £995K on capex and £5.9M on acquisitions which meant that there was a cash outflow of £3.8M before financing. They then took out a net £7.3M of new borrowings, paid out £3M in dividends and spent £1.1M on their own shares to give a cash outflow of £552K for the year and a cash level of £5.4M at the year-end.

The Shipbroking results were £7.7M, a decline of £140K year on year. The markets were characterised by a weakening of tanker rates and the offshore rates remained low. The dry cargo market was stronger, however, which contributed to firm activity in sale and purchase. Transaction volumes increased in virtually all sectors and the total forward order book at the year-end had grown by $5M to $44M. During the year they sought to build their presence in the dry cargo sector by hiring several dry cargo brokers in London, Singapore, Australia and Brazil.

The deep sea tanker market weakened further towards the end of the year. Fleet size in the crude tanker market grew at a faster rate than demand. Deliveries of new tonnage rose and whilst demolition values experienced some improvement, the growing disparity between vessel supply and demand put downward pressure on rates and income. Fleet size growth in the products tanker tankers slowed down but the historic oversupply coupled with high product stocks and reduced vessel demand drove a decline in earnings.

Next year both crude and product tanker fleet growth is expected to fall with an expected reduction in deliveries of new tonnage and an increase in the level of ship demolition. Growth in demand for crude oil is expected from the key importing regions of China and India which are seeking crude oil supply from non-OPEC producers in the Atlantic basin. Improvements to inland and portside infrastructure in the US are expected to make their growing supply of these products available for export. US exports are expected to require larger vessels with the result that projected tonne-mile demand growth will exceed projected supply growth. Although fleet utilisation may only be marginally better, the board feel an improved trading environment could lead to an improvement in earnings, although the overall view is that 2019 will continue to be challenging for tanker markets.

High stock levels of refined product have been a major factor in the weakness of the product tanker market since 2015. Inventories in OECD countries have been drawn down to the 2012-2016 average during the year leaving the product tanker market likely to benefit from demand growth. As consumers are likely to increase their reliance on imports, this may allow increased arbitrage trade opportunities. They expect oil demand growth in many importing regions during 2019 which is expected to improve CPP trade. They expect clean tanker demand growth will be matched by fleet growth leaving the supply and demand balance broadly unchanged.

There has been a continued expansion of the fleet of gas carriers in the VLGC sector which has continued to put pressure on freight rates in the spot market and restricted demand for time charters. The group’s fixture volumes and earnings remained steady, however. The LNG shipping market experienced demand growth towards the end of 2017 and a number of new export facilities came onstream in the US, Malaysia and Australia. In 2018 it is expected that further new facilities will come on line in Australia, the US and Russia which will fulfil the demand growth in China.

Weakness in LPG freight rates continued during the year as fleet growth outpaced seaborne LPG trade, particularly in the VLGC sector. They expect a slowdown in fleet growth and increased LPG production next year, particularly in the US. This, together with increasing demand in the key markets of India and China, is expected to improve rates.

The dry bulk market performed well during the year due to increased demand and reduced fleet growth. The group continues to develop their market presence and now have a strong global team in place which has significantly increased their transaction volume. While the whole market is presently weak, they expect it to improve during the year across most dry bulk sectors. Chinese steel production will remain the key driver for dry bulk commodities trade.

The offshore desk continued to experience over-supplied markets as global oil and gas exploration and production activity remained low. They are starting to see early indications of market recovery in some regions but it will take some time for oil price increases to translate into increased exploration and production expenditure. They have maintained their core team in readiness for a cyclical recovery.

During the year the team concluded similar volumes of second-hand and demolition vessel transactions compared to the prior year with an increase in the average value of vessels sold. Most of the vessel sales were dry bulk carriers with reduced activity on tanker sales. With positive sentiment returning to the dry cargo market and weakened freight rates in the tanker market this was not unexpected. In the coming year they expect to see an increase in demolition as new ballast water treatment regulations come into effect from 2020.

The group were involved in the placing of several important tanker newbuild orders during the year which has enhanced the forward order book. They were also successful in arranging long term employment for the vessels which will benefit future years.

The Technical profits were £722K, an improvement of £2.9M when compared to last year. The key drivers in the improved performance were cost control measures that were implemented last year, combined with increased utilisation of staff. This has been achieved despite a tough environment in the upstream energy sector and the related impact this has on the insurance market. While the oil price continued to recover during the year, they have not yet seen large scale increases in offshore exploration and production, albeit there are promising signs of increased activity for 2018.

Recent announcements from the Lloyds insurance market confirmed the difficult market conditions and while the insurance market sustained significant impact from natural disasters in 2017, they did not have a significant impact on the energy, offshore and commercial hull and machinery sectors. The upstream energy sector continued to experience very low premium levels due to reduced offshore construction projects, rig activity and asset values. They sector reported a profit in the year due to the reduction in volume and size of losses sustained.

In the marine market, while lloyd’s ended up making a loss, this was largely due to compound premium pressure over previous years and the effect of hurricanes Harvey, Irma and Maria, particularly in the Yacht and cargo sectors. While there was an increase in activity associated with the hurricanes, this was tempered by reduced activity in some other areas and continued price pressure for all service providers. As such, their positive performance was despite a challenging environment. They remain optimistic that a cyclical recovery in the upstream sector and an expected hardening of marine insurance markets towards the end of this year, bode well for the future.

The marine warranty surveying and offshore consultancy business continued to be affected by project delays and low exploration and construction activity in the region. Despite a difficult start to the year, they have recorded an improving performance quarter on quarter with a positive result in Q3 and Q4 despite the seasonal downturn of activity in SE Asia in Q4. Vietnam, India, Malaysia and Indonesia continued to be their strongest performing areas and at the close of the year they are seeing an increase in tender activity and are encouraged by contract wins in several of their offices in SE Asia and the Gulf of Mexico.

The consulting engineering business was impacted heavily at the end of the prior year by the reduced activity in the LNG tanker newbuild market and the ongoing delays associate with LNG import/export projects in general. The business returned to profitability in the second half of the year, however.

The team concluded its work to obtain general design approval for the FSP Type B LNG containment system in conjunction with their joint venture partners Honghua Offshore and Jamestown Metal Marine Services. This has resulted in their appointment for additional development work for individual tank designs and moved the project to the next development phase in relation to an export terminal project located in the Gulf of Mexico. They are also currently working on several new build and modification proposals and are encouraged by an improved pipeline of business compared with the same time last year.

The energy loss adjusting business reported a profitable performance in the year. The ongoing low level of upstream activity has had an impact on staff utilisation which averaged just 57%. The office in the Middle East continued to perform well and in the Far East the performance continued to improve throughout the year, augmented by the addition of a number of senior personnel resulting in a significant increase in activity. Upstream activity in Europe and North America has been slower to respond to the improving oil price and so they have experienced lower activity in these locations. They have widened their adjusting services and received numerous instructions in the downstream, mining and power sectors.

The marine hull and machinery surveyor and consultancy had a much better year. This was driven by repositioning the business to access other markets as well as managing cost reductions. In particular they have seen increased work on P&I claims, technical due diligence and ports & harbours consultancy. Utilisation has averaged 60%, a slight fall from last year, but they have been able to raise revenue through the increase of higher value consultancy work.

The Logistics profits were £777K, a decrease of £477K when compared to 2017. In the port and hub agency, following the business development seen last year they have consolidated that position and delivered a solid performance across the global network. Their international hub business continues to develop and win new clients. The UK operations saw a market driven dip in activity in Q3 but by Q4 revenues returned to normal levels. The US business suffered in the first half of the year due to low market activity but they had a strong finish to the year as they won new customers.

Despite competitive pressures the liner agency and freight forwarding business maintained a steady performance. In freight forwarding they continued to experience challenging market conditions in the imports and exports business and an increasingly competitive environment. An adverse mix of activity diluted margins, however. There was a one-off charge during the year of £500K for the conclusion and settlement of an historic claim relating to activity in the early 2000s. This followed £250K paid out last year.

The Financial business made a maiden profit of £1.8M this year. During the year they supported more than 20 restructuring mandates. This was driven by the ongoing structural weakness in shipping sectors such as tankers, MPP/heavy lift and smaller container vessels without long term employment. The pre and post insolvency and management business benefited from the time lagged impact of cyclical lows in the container market and in the dry bulk market seen in 2016. Increasing charter rates indicate decreasing insolvency filing activity with lenders and owners moving to sell off or refinance assets. Where this may limit insolvency advisory services, it provides opportunities to strengthen their refinancing service portfolio.

Deal flow from restructuring related sale and purchase activity remained strong with more than 20 vessels being sold during the period. Lenders are using increasing asset price in containers and dry bulkers to exit from loans and vessels.

European banks are downsizing their portfolios and shrinking new business volumes so an increasing number of shipowners are facing the need to develop new funding sources. The business is supporting clients to attract both debt and equity financing in an increasingly complex environment. They have worked with more than fifty finance providers for many years and are able to broaden shipowners’ relationships with new banks.

The group expect their activities around loan acquisition support services and loan servicing to increase in the short and medium term. They have received enquiries concerning the disposal of loan portfolios.

The German market represents the historic core of the NAVES business. They have expanded to support the Greek and Cypriot markets and have established a presence in London. They continue to review geographic expansion opportunities to strengthen their links to institutional investors as well as integrate their services with the wider Braemar group.

During the year the group resolved to dispose of their response operations under the technical division. The business has net assets of £2.1M and made a loss of £595K in the year. They expect to sell the business within the year.

In September the group acquired NAVES Corporate Finance, headquartered in Hamburg. They advise clients on corporate finance related to the maritime industry including restructuring advisory, corporate finance advisory, M&A, asset brokerage and financial asset management. The agreement provides for a minimum consideration of €24M and a maximum of €35M (generating goodwill of £12.5M). The initial consideration was €14.8M, of which half was paid in cash and the other half by the issue of convertible loan notes; and €1.5M to be satisfied by the issue of 458,166 shares to the sellers. Three annual instalments of €1.4M will be payable to the sellers, 50% in cash and 50% by the issue of loan notes and five annual instalments of €700K will be payable to sellers by the issue of loan notes. An additional amount of up to €11M may be payable over the three years following completion in loan notes. The business generated an operating profit of €3M in 2016. To be honest, this seems like a rather expensive and complicated transaction.

In February 2018 the group acquired Atlantic Brokers, an introducing broker of physical and financial coal products in the Atlantic and Pacific basins. There was a total consideration of £4.8M. £2.7M was in cash and £2.1M will be satisfied by the issue of 804,426 shares at a price of £2.61 per share, generating goodwill of just £12K. The business made a pre-tax profit of £600K last year which seems a good deal to me.

There were a number of “non-recurring” items during the year. The group charged amortisation of £2.4M in relation to acquired intangibles. Acquisition related expenditure included £600K incurred in relation to the restricted share plan implemented to retain key staff following the merger with ACM Shipping. The incurred expenditure of £5.1M directly linked to the acquisition of NAVES. This included £2.1M of acquisition fees and £3M of post-acquisition remuneration payable. Finally they incurred £600K of expenditure directly linked to the acquisition of Atlantic Brokers including £400K of acquisition fees and £200K of post- acquisition remuneration.

At this point in the cycle, tanker freight rates are relatively low and with the growth in the fleet, they are unlikely to see a recovery before next year. The dry bulk market has been recovering and the board expect this to continue through the year. In the medium term it is likely that they will see an increase in demolition as new environmental legislation takes effect by 2020. The financial division is expected to increase its contribution to the group’s profits due to the full year of ownership and they expect the technical and logistics divisions to continue their recent recovery trends. The impact of Brexit on the logistics business is as of yet hard to quantify.

The forward order book has increased by 13% to $44M compared to the start of the year.

As the group was loss making during the year the current PE ratio is rather meaningless but going on the consensus forecast for next year they are trading on a forward PE ratio of 10.2. After an increase in the dividend the shares are yielding 6%, increasing to 6.5% on next year’s forecast. At the year-end the group had a net debt position of £2.4M compared to a net cash position of £7.1M at the same point of last year.

On the 22nd June the group released a trading update covering Q1 2019 which was in line with board expectations. The shipping markets are largely unchanged since the results announcement. Strong commodities demand continues to drive the dry bulk market while the tanker freight market remains below average levels. The group’s sale and purchase activity was supported by fleet transactions in more than one sector and has contributed to the strong forward order book.

NAVES had a strong Q1, concluding several refinancing transactions as well as providing advisory services to purchasers of shipping debt portfolios, and has traded ahead of board expectations. In the Technical business, trading activity remains relatively subdued, especially in offshore, but the level of new enquiries is providing encouragement.

The group’s port agency and hub management business has had a strong Q1 assisted by improved performances from overseas operations which are being developed. These are offset somewhat by lower freight forwarding activity. The group also announced that James Hayward has been appointed as interim CFO.

Going forward the board’s expectations for the year remain unchanged and the group as a whole is trading in line with expectations.

Overall then this has been a rather mixed year for the group. The losses worsened, not helped by the rather large acquisition costs. Even without these, however, the underlying organic profit declined. The net tangible asset level declined too, and is now precariously close to zero. The operating cash flow also fell and no free cash was generated after the acquisition. There was some prior to that but not enough to cover the dividends.

The broker business declined somewhat due to a weaker tanker market and continued low levels of offshore activity. There are some signs of improvement with a stronger order book but 2019 is expected to continue to be challenging for the tanker market. The dry bulk market is much better, mainly driven by Chinese steelmaking requirements. The technical division saw an improvement in performance due to cost control measures. The upstream energy market continued to be tough, however.

The logistics business saw profits dive, apparently due to a poor Q1 in the UK port division and a poor first half of the year in the US. Both divisions have shown improved performances by the end of the year. The financial division is contributing well and should offer a good counter-cyclical revenue stream. The acquisition does seem to be needlessly complex and rather costly, however. The shares are not very expensive, trading on a forward PE of 10.2 and yield of 6.5%. This is a tricky one – Q1 trading is not very different from the full year and the group seems to have stabilised but on the other hand I am getting concerned they are over-reaching on acquisitions.

On the 10th October the group announced the disposal of Braemar Response to Group Ambipar for £774K. This comprises an initial cash payment of £400K with a further £374K payable within a year of completion. The group purchased the business in 2006 for £900K. It made a loss of £595K last year.

Avingtrans Share Blog – Interim Results Year Ending 2018

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Avingtrans has now released their interim results for the year ending 2018.

Revenue increased by £17.4M when compared to the first half of last year and after cost of sales also increased, the gross profit grew by £4.7M. Distribution expenses were up £1.2M, there were £1.5M of acquisition costs, a £1.2M increase in restructuring costs, £1.8M of acquired intangible amortisation and a £2.9M increase in other admin costs which meant that the operating loss widened by £3.9M. Finance costs were up somewhat but this was offset by a £345K increase in tax receipts to give a loss for the period of £4.3M, an increase of £3.8M year on year.

When compared to the end point of last year, total assets increased by £67.6M driven by a £22.9M increase in property, plant and equipment, a £20.4M growth in receivables, an £18.8M increase in other tangible assets, a £15.4M growth in goodwill and a £8.1M increase in inventories, partially offset by a £20.9M decline in cash. Total liabilities also increased during the period due to a £16.3M growth in payables, a £10.4M increase in borrowings and a £6.4M growth in provisions. The end results was a net tangible asset level of £28.8M, a decline of £9.5M over the past six months.

Before movements in working capital, cash losses widened to £2M. There was a large cash outflow from working capital with a particularly large decrease in payables and after interest payments increased modestly, the net cash outflow from operations was £10.5M, an increase of £7.1M year on year. The group then spent £1M on fixed assets and £205K on intangible assets to give a cash outflow of £10.9M before financing. They also paid back £9.1M in borrowings, £436K of finance leases and £230K in dividends to give a cash outflow of £20.7M and a cash level of £6.8M at the period-end.

The operating loss in the Energy business was £2.6M, an increase of £2.5M year on year. At Hayward Tylor UK the main restructuring activities are largely complete and the performance is already improving with new orders being secured such as for nuclear plant life extension in Sweden. Hayward Tylor in the US has seen solid order intake in the nuclear life extension market, both in the US and with KHNP in South Korea where they have booked over $10M of new orders since the acquisition. The business has also completed the development of a new pump condition monitoring system for aftermarket applications.

The Hayward Tylor team in China have been working hard to complete the factory there. This project is now expected to be complete by the end of the year. This expanded manufacturing and repair capability will also support their new product introduction plans. Meanwhile, in India, they are carefully expanding their operations to include a rewind centre with aftermarket potential in mind.

At Metalcraft the second phase of the factory redevelopment for Sellafield 3M3 box operations at Chatteris has gone smoothly and they have now delivered the first pre-production boxes. The programme is tracking broadly to plan but they expect some reshaping of the delivery schedule over the next few months. Whiteley Read is busy, with a variety of smaller contracts won such as with GDF Suez for gas storage, so that this subsidiary is now restored to health. Business with other existing key accounts such as Cummins, was steady, although timescales for some new opportunities have slipped by a few months.

Maloney Metalcraft has seen slow progress with oil and gas orders in the first half but there were some signs of life with a number of smaller contracts won. The EDF nuclear life extension contract is tracking to plan. After the period-end they acquired certain assets of the Ormandy Group for £100K and this activity will be merged into Maloney’s operations with a modest sales uplift expected next year.

Peter Brotherhood was the other Hayward Tyler unit that underwent significant restructuring, largely completed as planned in the period. The board anticipated that OEM sales recovery would be slow due to oil and gas market issues so they have been concentrating on aftermarket opportunities where a number of mid-sized contracts have been secured. The business is manufacturing a steam turbine to drive a boiler feed pump at the Tees Renewable Energy Plant which will be the largest dedicated biomass power plant in the world. Other opportunities are being pursued to broaden the footprint of the business in the medium term.

The fluid handling business in Scotland will be rebranded following its move away from the other HT businesses. They had a solid initial period and will seek to build on their existing relationship with Sellafield in particular. Crown has a solid first half. The contract with Fluor for flame detector masts was largely completed and the business continued to win contracts associated with the smart motorway developments.

The operating profit in the Medical business was £75K, an increase of £21K when compared to the first half of last year. Performance has been mixed within the year. Scientific Magnetics had somewhat disappointing results with orders being slower to materialise than expected which will mean the business will make a loss this year. In China Metalcraft has experienced delays from its MRI and NMR customers which has led to reduced forecasts in China. In contrast, in January, they launched a Europe-wide NMR service with their partners MR Resources in the US. Composite Products had a promising first half and the business with Rapiscan is expanding.

The development of Small Modular Reactor technology is a promising opportunity for the group. With a good product and capability fit, a footprint in the UK and US, and a partner in China, the group is fully engaged in positioning itself as a key player in this market. From reactor coolant pump sets through to steam turbines and high integrity fabrications, the group views this smaller, factory built technology both as an attractive route forwards for their nuclear technology and as a good fit to their capability and capacity.

The upstream oil and gas market is still difficult. Bidding activity is slowly increasing but with a clear message that the majors are targeting a 20% cost reduction across their supply chain for new projects.

In September the group acquired Hayward Tyler for a total consideration of £29.5M in shares and a further £13.2M in cash to pay off the business’ loans. The acquisition generated goodwill of £12.8M and included other intangible assets of £22.2M so it looks like its balance sheet was not in a great way! The restructuring is now mostly complete and they are now into the investment and development phase. Balance sheet strength has been restored, expensive debt cleared, costs reduced, creditor overhang resolved and strategies refreshed. Progress has been as expected at this early stage and it is expected that the group will be cash generative in the second half of the year.

Following the acquisition, the group are reorganising their energy assets into two divisions: Engineered pumps and motors consists of Hayward Tyler’s units in the UK, US, China and India whereas Process Solutions and Rotating Equipment consists of Metalcraft’s energy assets, including Maloney and Whiteley Read plus Peter Brotherhood, Crown and the fluid handling business in Scotland.

At the current share price the shares are trading on historic PE ratio of 192.2 but this is meaningless as the company has completely changed following the acquisition. They are trading on a forecasted forward PE of 21 for 2019. After an increase in the interim dividend, the shares are yielding 1.7% which is expected to remain the same next year. At the period-end the group had a net debt position of £8.2M compared to a net cash position of £26.4M at the same period of last year.
On the 30th April the group announced that non-executive director Graham Thornton sold 20,000 shares at a value of £43K. Following the sale he no longer holds shares in the company.

On the 25th June the group released a trading update covering the year as a whole where full year results will be in line with market forecasts. The group has a robust order book and order cover is at 72% of revenue expectation for 2019. Net debt is marginally higher than expected due to the investment of additional working capital following the acquisition of Ormandy. Following the integration of Hayward Tyler and Ormandy, the group is reporting an improved margin mix and therefore expects profits in 2019 to exceed previous expectations.

The have also announced that they have been awarded a contract with a UK government agency worth £6M which is scheduled for completion in 2020. This is a new customer for Peter Brotherhood and will allow the group to tender for further business.

Overall then it is quite hard to assess the group on the financial performance over the year. Losses increased, the net tangible assets fell and the operating cash outflow widened. All this can be attributed to the transformational deal for Hayward Tyler, however. Operationally things seem to be going well and the restructuring is mostly complete. The oil and gas market remains tight, however, and the medical business has mixed fortunes. I think there is a decent company here but the forward (2019) PE of 21 and yield of 1.7% looks a bit expensive to me.

Easy Jet Share Blog – Interim Results Year Ending 2018

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Easy Jet has now released their interim results for the year ending 2018.

Revenues increased when compared to the first half of last year due to a £268M growth in passenger revenue and an £88M increase in ancillary revenue. Fuel costs were broadly flat but airport and ground handling costs increased by £48M, crew costs were up £45M, maintenance costs increased by £24M and other costs grew by £30M to give an EBITDA £191M ahead of last tome. Dry leasing costs increased by £19M and depreciation was up £10M which meant that the operating profit grew by £162M. There was a modest reduction in finance costs but tax charges were up £30M to give a loss for the period of £54M, a £138M improvement year on year.

When compared to the end point of last year, total assets increased by £612M driven by a £229M growth in cash, a £123M increase in property, plant and equipment, a £67M growth in money market deposits, a £67M increase in receivables, a £45M increase in intangible assets and a £42M growth in other non-current assets. Total liabilities also increased during the period was a £35M reduction in the current tax payable was more than offset by a £741M increase in unearned revenue and a £56M growth in maintenance provisions. The end result was a net tangible asset level of £2.066BN, a decline of £192M over the past six months.

Before movements in working capital cash profits increased by £243M to £886M. There was a cash outflow from working capital but this was slightly less than last time. A £22M reduction in interest payments was mostly offset by a £20M growth in tax payments to give a net cash from operations of £764M, a growth of £256M year on year. The group spent £335M on fixed assets and £52M on intangible assets to give a free cash flow of £377M. Of this, £162M was spent on dividends and £69M was paid into money market deposits. The group received £106M from the sale and leaseback of aircraft which meant the cash flow was £248M and the cash level at the period-end was £940M.

Revenue per seat grew by nearly 11%, reflecting a strong underlying performance and the Air Berlin acquisition. Excluding Tegel operations, revenue per seat grew by 9.5% at constant currency. This was driven by a 4.6% increase in capacity, focused on growth in the French regions, further consolidating positions in core UK airports and continuing to grow in Basel and Venice; an increase of 1.7 percentage points in the load factor; lower market capacity following the bankruptcy at Monarch and Air Berlin and the winter withdrawal of Ryanair from the UK domestic market.

Other drivers of the increase in revenue per seat have been the partial movement of Easter to Q2; a strong performance on ancillary revenue per seat, increasing by 14%, due mainly to an improved bag proposition, smarter bag yield algorithms and further benefits from the Hands Free product.

Total cost per seat was broadly flat as the benefits of the group’s cost focus and lower fuel price offset a negative forex impact. At constant currency, the cost per seat reduced by 1.5%. Excluding fuel and the Tegel operation, constant currency costs increased by 1.3% as lower airport charges, lower navigation charges and the up-gauging of the fleet offset disruption from severe weather, increased crew pay, higher ground charges, the sale and lease back transaction and costs associated with the higher load factor.

During the year the group focused its growth on maintaining market share in the UK and Switzerland and growing in regional France. This included the opening of a new base in Bordeaux, where they are now already the number one airline. They also invested capacity growth in its city strategy: in Venice to consolidate their number one position, and in Amsterdam where the airport is now at full capacity. Further capacity growth was deployed in their lean bases to increase their scale and leverage their cost advantage. In March they closed their Hamburg base and now have 29 across the network.

The group is looking at a number of future opportunities to drive growth. They are focusing on transforming their holiday business, creating a more compelling business passenger proposition and driving loyalty. They expect to invest both capital and operational expenditure with the majority of investment occurring in 2019 with a delivery of increased profit per seat in 2020.

They see a significant opportunity to transform their holidays proposition. Currently only 500,000 passengers book a hotel with them out of an addressable market of 20M so they see an opportunity to add significant value by forming a dedicated business unit offering a clear and attractive proposition. Improving the business offering will mostly focus on capabilities such as building a new online portal to allow small and medium size businesses to book more easily with them, automating invoicing and more direct contracting with their corporate customers.

During the period the on time performance was up one percentage point to 81%. This was despite the severe weather and regular third party strike activity which led to a 39% increase in cancellations and delays.

In December the group completed the partial acquisition of Air Berlin’s operations at Berlin Tegel and progress to date has been in line with expectations. The group operated a winter schedule with a fleet of mainly wet leased aircraft in order to retain its slot portfolio. As expected, this start up phase has resulted in lower than average load factors (63%) and revenue per seat (£35.97) due to the short lead times to sell flights and a mainly inherited schedule. Higher than normal cost per seat (£48.02) reflects the expensive nature of interim wet leasing arrangements while they introduce their own fleet. This has led to a headline loss of £26M with non-headline costs of £24M.

As usual there were a number of “non-underlying” items. There was sale and leaseback charges of £19M which represents an £11M loss on the disposal of ten old A319 aircraft and an £8M maintenance provision catch up. There was £4M of Brexit-related costs associated with the new AOC in Austria due to the cost of re-registering aircraft. There was a £24M cost relating to the Tegel integration comprising £9M of engineering costs to align the technical specs of ex Air Berlin aircraft with the rest of the fleet, £7M of dry lease rental costs incurred prior to these aircraft becoming operational, and £8M of consultancy and legal fees.

In May the Civil Aviation Authority confirmed that the group had been awarded a new UK Air Operator Certificate. They plan to transfer their UK-based fleet across to the AOC in June and their Luton based group operations will continue to support all three standalone AOCs in Austria and Switzerland as well as the UK.

Going forward, capacity excluding Tegel is planned to grow by around 5% in H2. Ex-Tegel revenue per seat should be slightly higher, reflecting the improving capacity environment and the ongoing strikes at Air France. They expect the Ex-Tegel cost per seat excluding fuel to increase by 2% for the full year reflecting the expected higher employee incentive costs due to the strong operational performance.

At Tegel they now expect to deliver a headline loss of £75M to £95M reflecting a £15M adverse impact from the increase in fuel price, recent security charge increases in Germany, as well as a lower average gauge than planned on some of the wet leased aircraft. In addition this reflects uncertainty regarding summer revenue while the group flies the sub-optimal Air Berlin schedule. This is expected to be offset by a combination of trading benefits from Schonefeld, which benefits from the improved Berlin customer proposition, and savings in the non-headline implementation costs which are now expected to be £60M due to lower than expected lease costs. The board expect the Tegel operations to be earnings enhancing in 2019.

It is estimated with jet fuel remaining between $680 and $740 per tonne, the fuel bill is likely to decrease by around £65M. Exchange rate movements are likely to have a £25M positive impact on profits and the board expect the reported headline pre-tax profit for 2018 including Tegel to be £530M to £580M. The group has hedged 56% of next year’s fuel requirements at $549 per tonne.

At the current share price the shares are trading on a PE ratio of 21 which falls to 10.4 on the full year consensus forecast. The shares are currently yielding 2.5% but this increases to 3.4% on the full year forecast. At the period-end the group had a net debt position of £238M compared to £413M at the prior year-end.

On the 18th July the group released a trading update covering Q3. They had a strong performance with robust customer demand driving outperformance in their revenue growth. Disruption across Europe continues to be an industry wide issue and is having an impact on revenue, cost and operational performance with the main drivers being European industrial action and air traffic restrictions. Despite this increase in disruption the group has increased its headline pre-tax profit guidance for the year to between £550M and £590M.

Total revenue increased by 14% and ancillary revenue was up 21%. Passenger numbers increased by 9.3% driven by an 8.9% increase in capacity and a 0.3 percentage point increase in load factor. Total revenue per seat excluding Tegel increased by 4.8% at constant currency driven by a benign competitor environment with unfilled Monarch capacity and challenges in France; continued positive underlying trading with a strong May due to the timing of public holidays; an increase in ancillary revenue with more customers choosing allocated seating and adding bags; offset by a £40M negative impact of Easter moving partially into the first half of the year. The board now expect H2 revenue per seat to increase by low to mid-single digits.

Operational performance for the quarter has been significantly impacted by external factors, in particular the sustained ATC industrial action in France as well as the impact of severe weather. The group experienced 2,606 cancelled flights in the period compared to 314 in Q3 last year. As a result of the disruption the OPT was 73% compared to 78% last year.

The group’s underlying cost performance has been solid. Headline cost per seat excluding fuel at constant currency increased by 4% reflecting increased disruption costs, the accrual of expected employee incentive payments due to the strong financial performance, and costs relating to increased loads, crew costs and underlying inflation. Mainly as a result of the increased disruption, the group now expects full year cost per seat to increase by 3%.

At Tegel load factors are increasing and are now consistently over 80% and have reached 86% for June. Revenue per seat is weaker than previously guided due to recent additional capacity in the Berlin market and as a result, headline losses are expected to be £125M instead of the £95M previously guided. The group is now targeting a break-even position in 2019.

For the year as a whole, excluding Tegel, the group is expecting capacity to grow by 4.5%, H2 revenue per seat to increase by low to mid-single digits, full year headline cost per seat excluding fuel to increase by 3%, full year unit fuel bill likely to be £65M lower, and forex movements to have a £20M positive impact. The Tegel operations are expected to deliver a headline loss of £125M and a non-headline loss of £50M. Headline profit for the year, including Tegel, is expected to be between £550M and £590M, up from previous guidance of £530M to £580M.

Overall then this has been a good period for the group. Losses (the first half is always loss making) improved, net assets declined (again due to seasonality) and the operating cash flow improved with a decent amount of free cash being generated. The revenue per seat was strong, aided by both capacity increases and load factor improvements and also problems at other airlines such as Monarch. Costs per seat were flat during the period. Things are not all going Easy Jet’s way, however, the Tegel operations are taking longer to turn a profit than expected and there has been a huge amount of disruption due to strikes causing cancellations but with a forward PE of 10.4 and yield of 3.4% I am happy to hold on here. I am tempted to buy more.

On the 28th September the group released a trading update covering the year as a whole. They will deliver a strong performance in Q4 with robust customer demand driving outperformance in both their passenger and ancillary revenue growth, and strong profitability. Disruption across Europe continues to be an issue and is having an impact on revenue, cost and operational performances with the main issues being European industrial action and air traffic restrictions. They have seen an improved performance in Tegel reducing the expected headline loss to around £115K along with further savings in non-headline integration costs to around £45M.

Despite the impact of disruption, the group expects to deliver full year headline pre-tax profit of between £570M and £580M, in the upper half of previous guidance.
Passenger numbers in the full year excluding Tegel are expected to increase by 5.4%, driven by an expected increase in capacity of 4.2% and a 1 percentage point increase in the load factor to 93.6%. Total revenue per seat excluding Tegel at constant currency is expected to increase by 5%, at the higher end of previous guidance and the expected revenue is expected to be nearly £5.9BN.

The headline cost per seat excluding fuel and Tegel at constant currency is expected to have increased by around 3.8%, higher than previously expected due to sustained high levels of disruption. Underlying cost control remains solid and in line with expectations. They experienced an increase in cancellations due to third party industrial action, air traffic control restrictions and severe weather across Europe. The headline cost excluding fuel and Tegel is expected to be around £4.135BN. The total fuel cost for the year including Tegel is expected to be around £1.185BN including an expected additional £15M cost compared to previous guidance as a result of US forex exchange impacts and carbon emission trading costs.

The group is progressing well with implementing its operational delivery and building market presence in Berlin, whilst flying an inherited inefficient schedule that had the biggest impact in the peak summer season. Headline losses for the Tegel operations for the year are expected to be around £115M, an improvement on previous guidance. Load factors remain relatively strong at around 85% in Q4, highlighting positive customer uptake. The group expects a further reduction in non-headline costs for the year to around £45M. The expected total loss for Tegel operations has now improved to be in line with the original guidance of £160M.

Over the past three years the group has been investing in its commercial IT platform which has delivered revenue benefits through significant improvement in the customer facing website and seating capability as well as improvements in underlying resilience and control systems. They have now made the decision to change their approach to technology development, however, through better utilisation and development of existing systems on a modular basis rather than working towards a full replacement of their core commercial platform.

As a result of this change of approach, they are recognising a non-headline charge of around £65M relating to IT investments and associated commitments that they will no longer require. They will continue to invest in their digital and e-commerce layers that will enable them to continue to offer a leading innovative, revenue enhancing and customer friendly platform.

The outlook including Tegel for the year is that capacity will grow by about 10%. Around half of this represents the annualisation of Berlin flying as well as the benefit of fleet up-gauging in the summer. H1 revenue per seat is expected to decrease by low to mid single digits. This reflects a continuation of positive trading offset by a number of one-off revenue benefits from H1 2018 such as the bankruptcies of Monarch and Air Berlin, as well as the impact from Ryanair’s winter flight cancellations. The benefit of Easter will shift from H1 into the second half of the year.

Full year headline cost per seat excluding fuel at constant currency is expected to be flat, which represents an expected decrease in underlying cost per seat offset by inflationary airport and crew pay deals and investment in the business. The full year fuel bill is likely to be £55M to £105M worse than this year. Forex movements are expected to have a £10M net negative impact on profits. The group is targeting a break even in Berlin.

Overall the group expects to deliver a strong performance in both Q4 and the full year, driven by better than expected growth in passenger and ancillary revenues as well as reduced losses at the Tegel operation. They now expect their headline profit for the year to be between £570M and £580M, at the top of their guidance range. It is worth taking into account that they have benefited from a number of one-off events in 2018, however.

On the 31st October the group announced that it had submitted a revised expression of interest for a restructured Alitalia. The submission, which is in response to the new government’s ongoing sales process, is consistent with the group’s existing strategy for Italy.

Cohort Share Blog – Final Results Year Ended 2018

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Cohort has now released their final results for the year ended 2018.

Revenues declined when compared to last year as a £5M growth in MASS revenue, a £3.1M increase in EID revenue and a £2.6M growth in MCL revenue was more than offset by the £5M reduction in SCS revenue and a £6.6M fall in SEA revenue. Cost of inventories declined by £3.8M but other costs of sales increased to give a gross profit £416K higher. R&D costs fell by £1.9M, amortisation reduced by £5.9M and there were no reorganisation costs, which were £2.6M last year. Other admin costs rose by £1.7M but the operating profit increased by £9M. There was a modest increase in finance costs and the tax charge increased by £2.5M to give a profit for the year of £8.1M, a growth of £4.4M year on year.

When compared to the end point of last year, total assets declined by £1.3M driven by a £5.1M decline in trade receivables, a £5.3M fall in intangible assets and a £1.5M decrease in the amounts recoverable under contracts, partially offset by an £8.5M increase in cash, a £2.1M growth in prepayments and accrued income and a £1.1M increase in inventories. Total liabilities also declined during the year as a £5.6M growth in the bank loan and a £2.4M increase trade payables and accruals was more than offset by an £8.1M decrease in accruals and deferred income and a £1.1M decline in deferred tax liabilities. The end result was a net tangible asset level of £32.8M, a growth of £5.4M year on year.

Before movements in working capital, cash profits increased by £2.9M to £16.4M. There was a cash outflow from working capital but this was much less than last year and after tax payments reduced by £807K the net cash from operations was £13.2M, a growth of £12.6M year on year. The group spent £747K on capex, £3.5M on the EID acquisition and £2.5M on deferred consideration on the MCL acquisition which meant that the free cash flow was £6.4M. The group spent £1.5M buying their own shares and paid out £3M in dividends so after a drawdown of a further £5.5M on the loan the cash flow was £8.2M and the cash level at the year-end was £20.5M.

The operating profit in the EID business was £4.7M, a growth of £443K year on year. Although the board expected the net margin to fall, driven by less naval support work, the outcome for the year was better than expected with some higher margin R&D projects. The order intake of £8.9M included a significant order for upgrading a class of Portuguese patrol vessels. The order was lower than expected, however, with some important orders for the Portuguese army slipping into the coming year.
The closing order book of £18.2M provides some good underpinning to the coming year in the Naval division and some good prospects, particularly in the tactical systems division. The board expect the business’ revenue to grow in the coming year. The mix of work at the business is expected to change with lower levels of naval support activity and increased deliveries of intercom and radio products. The latter generate a lower margin so margins are expect to fall to around 20%.

The operating profit in the MASS business was £7.1M, an increase of £1.2M when compared to last year with revenues increasing by £5M. The inclusion of the training support division from SCS contributed £2M of revenues. In April 2018 the business completed a large biennial joint forces exercise, increasing margin and revenue for the year. The other main growth driver was the higher level of cyber activity, including initial deliveries of the digital forensics services to the Met police and the completion of several cyber vulnerability investigations.

This offset a decline in EWOS work. A countermeasure project for an export client finished early in the year and the Shepherd development project came to an end in the year. Shepherd is now entering its five year support phase and the board expect to secure extra tasking in the coming years. Some long term export EWOS activities continued to be funded on short term, lower value rolling purchase orders, while the prime contractor worked to finish the lead contract. They expect to see these support contracts secured at their full long term value in the coming year.

The business’ net margin increased slightly to 18.9% due to higher margins in cyber and only slight increases in overheads. The order intake was slightly lower than last year which included two long term contracts which were mot repeated. The most significant order in the year was a two year extension of the joint forces command support for £10.5M. Other orders included £6M in cyber and £10M in EWOS.

The business enters the current year with a strong order book and pipeline of opportunities including exports and renewals. They will see the conclusion of their current long term contract with the UK MOD, supporting the UK’s strategic defence capability. The MOD is holding a competition for the follow on contract with a decision expected in the autumn.

The operating profit in the MCL business was £2.1M, broadly flat with an increase of just £19K with revenues increasing by 18% due to increased deliveries of hearing protection systems to the UK MOD, which has a lower margin than some of the other work. Overheads increased somewhat due to an increase of work force and higher levels of overseas supplier activity. The business secured several key contracts in the year including a further £6M of orders for hearing protection systems and other equipment development, production and support for specialist military users. The order book has slipped back somewhat, which is viewed as temporary.

The operating profit in the SEA business was £4.4M, a decline of £861K when compared to 2017 with revenues falling by £6.6M. The business had another challenging year with growth in its maritime export deliveries and a return to growth of its research activity more than offset by a significant contraction in its submarine activity.
This trend has been accompanied by reduced revenue predictability as the revenue generated by long term contracts has declined. This is expected to continue in the medium term while they await the next major ECS contract which will be to provide the system for the new Dreadnought class of ballistic missile submarines. In the meantime the business is seeking to expand its export business, especially in maritime markets.

In the maritime division the UK submarine communications work moved in 2016/17 from design and testing of systems to delivery. During the year, the level of work dropped further with minimal deliveries of systems and the ongoing design work now mainly in respect of technical developments and upgrades. Activity is expected to remain at this low level for the next two years until significant Dreadnought class work starts, which is currently expected in 2020. Good progress on the communications system development work has significantly de-risked the programme, allowing contingency to be released.

Excluding Submarines, SEA’s maritime business grew. The level of torpedo launch systems was above that of last year with delivery completed for one customer, continuing for a second and starting for a new third customer. They expect a marketed increase in this work in the coming year as the two customers receive systems. Within the maritime division the business suffered further losses on a one-off development project for a specialist sonar array, a contract inherited with the J&S business acquired in 2014. This programme is now almost complete, and no further loss is expected.

SEA’s SSP division increased revenue somewhat, mostly derived from increased orders for traffic enforcement systems and other defence products. Total transport revenue dropped slightly as the delivery of the upgrade to TFL for its digital traffic enforcement systems fell following peak activity in the second half of last year.
Improved margins in the maritime, research and SSP divisions, along with volume increases partly offset the marked deterioration in submarine activity. Following the fall in activity at the research division over the past two years, the business secured a new contract to carry out research into soldier systems, the Future Individual Lethality System. As a result, revenue has stabilised and they expect it to increase in 2019, although not back to the peak levels of three years ago.

SEA’s subsea division saw its revenue increase by around 5% and its profitability maintained despite the low oil price holding back spending by oil producers in the North Sea. The gross margin stayed high due to the proportion of refurb and repair activity. The division absorbed the former SCS divisions of capability development and air systems last year which added £1M to revenues. The closing order book of £33.1M included nearly £16M of revenue to be delivered in the coming year.
Following two years of declining revenue and profitability, and in the expectation that SEA’s submarine activity will remain low in the near term, the group have acted to reduce the cost base of the business by around £1M per annum. This restructuring, costing £500K, has already started and will complete in the first half of 2019, delivering an expected saving of £800K in that year.

The decrease in the group’s order intake was across the group. This was partly due to slippage of some significant renewals into the current year, especially at MASS. The falls at EID and MCL were to some extent expected, with large orders for naval systems and hearing protection having been received in 2017. SEA’s order intake was also down, primarily in submarine activity, but they did see another good export win for their torpedo launch system.
The SCS business was discontinued having made an operating loss of £455K last year.

In August 2017 the group paid £2.5M as the final settlement of the earn out from the MCL acquisition and in November they paid £3.5M for a further 23% of EID, taking their holding up to 80%. EID contributed £4.7M of the operating profit for the year.

Going forward, the political and economic context within which the group operates has not changed much since last year. On the one hand the security environment calls for greater resources to be devoted to defence and counter terrorism but on the other hand the pressures on public expenditure in the UK are strong. Although the UK defence market remains tight, MASS continues to make progress with its cyber capability and SEA with its Road Flow product range. They have begun to introduce their wider product range in the new markets brought to the group by EID. Lower order intake was mainly due to delays rather than losses or a lack of opportunities and the closing order book provides a reasonable underpinning for the current year.

There are several important long-term opportunities that are likely to be decided in 2019 and will have a major impact on the group’s prospects for growth. The renewal of a major support contract for MASS, the MOD is conducting a competition to select the supplier; further export EWOS contracts for MASS, particularly for the supply of countermeasures and the provision of local support in the Middle East; a large opportunity for EID to supply vehicle intercom systems to a customer in the Middle East; an extension of MCL’s contract to provide tactical intelligence gathering equipment to the Royal Navy; several competitive opportunities for SEA to provide its Torpedo launch system for export customers and to supply communications equipment to the Royal Navy’s Type 31 Frigate.

At the current share price the shares are trading on a PE ratio of 20.5 which falls to 12.9 on next year’s consensus forecast. After a 15% increase in the dividend the shares are yielding 2% which increases to 2.3% on next year’s forecast. At the year-end the group had a net cash position of £11.3M compared to £8.5M at the end of last year.

Overall then this has been a rather mixed year but overall fairly positive. Profits increased, mainly due to lower costs. Net assets grew and the operating cash flow improved with some decent free cash being generated, despite the deferred consideration payments made. The EID and MASS business both performed well, although margins are expected to lower at EID. The MCL business struggled a bit, although the hearing protection work seems to be going well. The real drag was SEA which saw lower profits due to less submarine work, with little prospect of this changing over the medium term.

The forward PE of 12.9 and yield of 2.3% looks OK given the net cash position. I do think this company is actually performing well but the question remains over the lower order books and general malaise in some of the end markets. A tricky one this, prudence should dictate staying out but I like the company.

On the 8th October the group announced that SEA had been awarded contracts worth more than £3M by Network Rail to supply and install its Metro Red Light enforcement system at selected level crossing sites. The system uses video analytics to detect and capture evidential images and video of any vehicle which crosses a level crossing while the red lights are activated. Under these contracts the business will deliver and install over thirty systems.

On the 25th October the group announced that MASS has been selected as preferred bidder for an eight year contract valued at over £50M following a highly competitive tender process. Under the contract, they will provide in-service support for the UK MOD including operational analysis studies, IT infrastructure management modelling and simulation and software engineering. This is a continuation of work undertaken since 2000. The contract will run until March 2027.

On the 3rd November it was announced that MASS had been awarded a £3.2M 18 month contract to provide business analysis support for the MOD.

On the 13th November it was announced that EID had been awarded two contracts to supply vehicle intercom systems valued at a total of €11M. The contracts are for supply to existing export customers and deliveries will take place over the next two years.

On the 20th November the group announced that SEA had been awarded a follow on five year contract by an existing customer worth £5.4M to support maritime equipment for the Royal Navy.

Telford Homes Share Blog – Final Results Year Ended 2018

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Telford Homes have now released their final results for the year ended 2018.

Revenues increased when compared to last year as a £35.4M decline in contract revenue and a £4.1M fall in freehold sales revenue was more than offset by a £66.3M growth in open market revenue and a £2.1M increase in other revenue. Cost of sales also increased to give a gross profit £17.7M higher. Depreciation was up £307K and other admin expenses grew by £3M. Selling expenses were up £1.6M and the share of profit from joint ventures fell by £2.2M to give an operating profit £10.7M higher. Loan interest declined but tax charges were up £1.8M to give a profit for the year of £37.4M, a growth of £9.9M year on year.

When compared to the end point of last year, total assets increased by £13.9M driven by a £12.9M growth in amounts owed by joint ventures, a £12.4M increase in development properties, a £7M growth in amounts recoverable on contracts and a £6.7M increase in investments in joint ventures, partially offset by a £25.8M decline in cash. Total liabilities declined during the year as a £58.4M increase in bank loans and a £9M growth in accrued expenses were more than offset by a £35.8M reduction in deposits received in advance, a £26.7M fall in land creditors due to the unwinding of creditors in relation to a development site at Cambridge Heath Road following completion of the land transaction, and a £17.3M decline in trade payables. The end result was a net tangible asset level of £231M, a growth of £27M year on year.

Before movements in working capital, cash profits increased by £13.4M to £46.4M. There was a big cash outflow from working capital and after interest payments increased by £2.4M, tax payments were up £874K and there was a £7.5M swing to investments into joint ventures, there was a net cash outflow from operations of £73M, a detrimental movement of £90M year on year. The group spent £2.1M on intangible assets and received £773K in interest to give a cash outflow of £74.3M before financing. They took out £60M of new loans and paid out £12.4M in dividends which gave a cash outflow of £25.8M and a cash level of £12.8M at the year-end.

Open market residential revenue increased from £153.5M to £225.1M from 476 completions (289) with an average price of £473K (£531K). The lower average price is due to the mix of developments completing in each period in terms of product and location and to some degree reflects when individual contracts were exchanged with a significant proportion of the homes forward sold a number of years ago.

Contract revenue was £86.8M compared to £126.6M last year with the reduction due to the timing of entering into new contracts as revenue recognition is often weighted somewhat towards the start of the contract. In the current year the group exchanged contracts to deliver 279 affordable homes whereas in the prior year they exchanged contracts to deliver 400 and entered into three new build to rent contracts to deliver 387 build to rent homes.

The gross margin increased from 22.3% to 26.5% and the margin achieved on open market sale completions increased from 25.4% to 28.2%. The majority of open market completions this year were forward sold a number of years ago where the sales achieved had benefited from some price inflation prior to launch. This, combined with an easing of build cost inflation in the last year has resulted in strong margins. It is expected to trend down towards the 24% target over time as older development are replaced with sites appraised more recently.

The margin achieved on the build to rent revenue increased from 16% to 17.8%. This is due to some of the land being purchased at more advantageous rates prior to becoming part of the build to rent portfolio, but also due to build cost savings recognised in the period. The group’s target margins are still expected to be around 12 to 13%.

The London market for housing at the group’s price point has remained robust with ongoing demand from a broad base of purchasers. Although prices have fallen in some prime locations, their market has been more stable. The average price of the open market homes in their development pipeline is £539K compared to £527K last year and the board expect that to remain relatively constant in the future.

In January the group started the launch of the second phase of New Garden Quarter in Stratford. They secured more than 100 reservations across three weeks. A quarter of these were to UK buyers, a greater proportion than expected, with the remaining sales going to buyers in Hong Kong and China. The group are seeing growing investment from China despite the uncertainty surrounding Brexit. All of the remaining homes at Bermondsey Works have been sold in recent weeks alongside a slower but continuing rate of sale of the remaining higher priced homes at Manhattan Plaza. Homes priced about £750K are taking longer to sell.

Due to a number of developments being sold for build to rent rather than individual sale the group has undertaken fewer sales launches in the year than usual. In addition, some developments have been held back until nearer the build completion to encourage sales to owners. In late March the group launched all 83 homes at Bow Garden Square, E3, focused on owner-occupiers. Initial interest has been encouraging and nine reservations have been secured to date.

The group completed and handed over 476 open market homes in the year compared to 289 last year. A combination of the significant increase in recognised profit from these completions of forward sold homes and fewer launches in the last year have reduced the total forward sold position to £344M, from £546M last year. This is exacerbated by the timing of some significant build to rent transactions occurring in the final few months of the ear with the next build to rent sales expected in 2019. Forward sales still equate to over 100% of the total revenue recognised this year, however.

The development pipeline now includes over 4,000 homes, of which almost 75% are in detailed design or under construction. In December they acquired a residential development site in Walthamstow for £33.8M. Having completed some initial design work they recently began a formal sale process to identify a build to rent investor for the 257 open market homes. This process is going well and they have had an encouraging response. Depending on the timeframe to get into contract they expect to announce the transaction in the next few months.

In June 2017 they signed a pre-construction agreement with Greystar to develop nearly 900 build to rent homes in Nine Elms, Battersea. The detailed scheme is expected to go before the local planning committee in the near future. Soon after receipt of planning consent they expect to enter a full design and build contract but at this point the scheme is not included in the development pipeline. They are also exploring the possibility of undertaking further developments with Greystar.

The group are pursuing several opportunities and have recently agreed heads of terms on two separate acquisitions with a combined land value of £50M. One of these already has a planning consent and the other has been agreed subject to securing a satisfactory consent. Each will now progress through the legal process and a period of due diligence. Both are expected to be individual sale developments and as a result they are able to direct their immediate acquisition focus to predominantly build to rent opportunities.

Going forward the board expects 2019 to show continued growth in revenue and profits with the development pipeline already secured to deliver this growth and a strong forward sold position. Margins are likely to trend down towards the targets used during initial site appraisal, although this could be improved upon if there is any further easing in build cost pressures (I assume the reverse is also true). In addition the group expects to move more towards build to rent transactions as a percentage of its business in the coming years which will reduced reported combined margins.

In all the group has secured forward sales of £344M as of the year-end. This comprised of £243M in relation to open market contracts, £49M of affordable housing revenues and £52M of build to rent revenue.

At the current share price the shares are trading on a PE ratio of 8.3 which falls to 7.4 on next year’s consensus forecast. After an 8% increase in the total dividend the shares are yielding 4.1% which grows to 4.5% on the full year forecast. At the year-end the group had a net debt position of £103.1M compared to £14.3M at the end of last year.

On the 12th July the group released a trading update. Since the year-end, the group has continued to trade well. The London housing market at their price point has remained robust with ongoing demand from a broad base of customers. Their homes priced below £600K continue to sell at a steady rate but above that level they have to work harder with prospective customers, although they are still securing sales in line with their forecasts.

They have started contractual negotiations for the sale of 257 homes at Equipment Works in Walthamstow with a significant build to rent investor. The group are continuing to search for a build to rent investor in which to establish a longer term relationship and have instructed Savills to assist them in the process with significant progress expected before the end of 2018.

Overall then this seems to have been a good year for the group. Profits and net assets both increased. There was an operating cash outflow compared to an inflow last year but this was due to working capital movements and cash profits increased. Margins have been strong this year but they should begin to trend downwards going forward. The market for the group’s price point is still robust, although it seems like the threshold for expensive houses that are struggling to be sold is coming down. The board expect further growth next year, however, and with a forward PE of 7.4 and yield of 4.5% these shares look decent value to me.

On the 10th October the group released a trading update covering the first half of the year. In recent weeks there has been an increasing amount of negative commentary around the outcome of Brexit. This adds to a more general downturn in the market for expensive prime homes in London which has been evident for some time.

Despite a more uncertain backdrop they have continued to achieve sales at a consistent rate in the last few months, particularly where the homes are priced under £600K on developments that are either complete or nearly complete. These sales are predominantly to owner-occupiers and a significant proportion of them are using Help to Buy. They continue to see very little domestic investor demand from individuals. In addition the sale of homes above £600K has become more challenging and each transaction takes longer to secure. This is not expected to get any easier in the short term as negative sentiment is leading customers to take a wait and see approach or look for more significant price reductions to offset a perception of higher risk as Brexit gets closer.

In order to achieve their target of exceeding £50M of pre-tax profit in 2019 they have just under 90 homes left to sell alongside some affordable and build to rent contracts that they expect to exchange during the next half year. The greater risk is in the homes yet to be sold and of these only 25 are priced over £600K. Whilst they still have sales to secure they are not changing their targets at this point and continue to expect to achieve over £50M of pre-tax profit assuming the market does not worsen further as Brexit approaches.

They are currently in the early stages of their second off plan launch of the year. The UK launch of Gallions Point two weeks ago is now being followed by events across Asia throughout October. Short term sentiment is a big factor in overseas investor demand and as such recent Brexit commentary and talk of increased stamp duty has not helped. Regardless of the outcome the vast majority of the apartments at Gallions Point are priced under £600K with completions due in 2020.

The group continue to make progress in the build to rent sector. Greystar have secured planning approval for 894 build to rent homes in Nine Elms and the group are now progressing towards entering into a full build contract in order to start on site as soon as possible. They have also been chosen to partner a major land owner to obtain planning consent for around 700 homes in East London with a view to developing a combination of subsidised affordable housing, build to rent homes for the landowner and individual sale homes. They are expecting to replicate this approach elsewhere.

The group are also close to exchanging contracts to purchase a site in West London which has planning consent to deliver nearly 280 homes for a combination of open market individual sales and subsidised affordable homes. There are many more opportunities being appraised, especially for build to rent.

As with the previous two interim reporting periods, there will be fewer completions in the first half of the year than in the second half. Pre-tax profit for H1 will therefore be lower than H2 but is expected to exceed the £8.7M achieved in H1 2017.

Overall then, the group still seems to be performing well but it looks like the period from now until Brexit will be turbulent and I think it wise to take profits here for the time being.

On the 5th November the group announced the exchange of contracts for the purchase of part of Greystar’s development site in Greenford for a total consideration of £28.4M. The development has planning consent for 1,965 homes along with retail space, restaurants and cafes, leisure facilities, work space and a primary school. Whilst around 70% of the homes are to be delivered as build to rent by Greystar the remainder are for individual sale and affordable housing. The group has acquired part of the site to deliver 194 homes for individual open market sale at an average selling price of £500K, and 84 affordable homes for shared ownership. They intend to start work on site in mid-2019 with completion anticipated in 2022.

Amino Technology Share Blog – Interim Results Year Ending 2018

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Amino Technologies has now released their interim results for the year ended 2018.

Revenues have declined when compared to the first half of last year as a $2.7M increase in European revenues have been more than offset by a $10.7M decline in North American revenue, a $518K decrease in Latin American revenue and a $112K fall in ROW revenues. Cost of sales also declined to give a gross profit $4.8M lower. Operating expenses declined by $462K and there was no contingent post acquisition remuneration which cost $750K last time, but amortisation increased by $800K, there was $338K of aborted acquisition costs and $1.6M of redundancy costs to give an operating loss $6.4M worse than last time. Finance expenses increased marginally but there was a $457K swing to a tax credit to give a profit for the period of $153K, a decline of $6M year on year.

When compared to the end point of last year, total assets declined by $2.8N, driven by a $2.5M reduction in intangible assets and a $2.3M decrease in cash, partially offset by a $2.2M growth in receivables. Total liabilities increased during the period due to a $2.6M growth in payables. The end result was a net tangible asset level of $10.2M, a decline of $2.2M over the past six months.

Before movements in working capital, cash profits declined by $5.9M to $5.2M. There was a modest cash outflow from working capital compared to a large inflow last year and with tax payments remaining broadly flat, the net cash from operations was $5.1M, a decline of $11.3M year on year. The group spent $2.2M on intangible assets and $112K on fixed assets to give a free cash flow of $2.8M. This didn’t cover the $5.2M paid out in dividends so there was a cash outflow of $2.3M in the first half and a cash level of $15M at the period-end.

Software and service revenues increased by 24% as a result of growth across Amino TV, Amino OS software and support for their Amino View devices. Device revenues declined as a result of the change in phasing of orders by one of their major customers in North America and they expect this trend to reverse in the second half of the year.

The group’s performance in the North American market was impacted by the phasing of orders received from a major customer, more of which will be recognised in the second half of the year than the first half. They continue to see sustained growth for their software-based service assurance platform which is becoming a key element in operators’ efforts to drive down operational costs through improved remote troubleshooting and device self-installation.

Latin America was broadly flat but the group have made good progress with follow on orders from key customers and secured a significant new contract with a major regional operator. European sales recovered after a period of decline with a long-standing customer restarting orders in the second half of last year. Following on from the DELTA launch of multiscreen services, Dutch regional provider Kabelnoord will also deploy the Amino TV platform to support a new service rollout in the second half of 2018. A contract win with T-2 in Slovenia to support their deployment of 4K UHD services was also announced during the period.

Operationally they have been mitigating ongoing pricing pressure on key device components such as silicon, memory and MLCCs. The focus on supply chain management continued to mitigate, where possible, price increases for customers and hence this pricing pressure does not alter the board’s confidence in meeting their previous expectations for the full year. They expect further pressure on component pricing and availability for the rest of the year, however.

At the start of the year, Dutch operator DELTA deployed the group’s Amino TV video delivery platform as part of a major project to transition their existing cable TV subscriber base to an all IP-based multiscreen service model. As well as delivering significant bandwidth savings, the operator also deployed their service assurance platform to provide a range of further cost efficiencies including customer self-installation.

Initial orders for operator ready Android TV devices have been secured in North America as demand is driven by their differentiated operator ready solution which adds their own software capabilities to the underlying Android platform. During the period they updated the platform to the latest Android O version and have also carried out a series of marketing workshops at industry events with Google partners in Europe, North America and Asia.

In March the group completed the final stage of rationalising their three R&D centres into two which resulted in $1.4M of annualised costs reductions. This also led to $1.6M of restructuring costs in the period. In addition, $300K of costs were incurred in potential acquisitions which were aborted following the completion of phase one of due diligence.

The group entered the year with a strong order backlog and have seen growing demand for their solutions with 40% more orders during the first half than in the corresponding period last year. As a result they entered July with 75% of their forecast revenue for the full year secured, in line with the same point of last year. The board is confident on delivering a full year performance in line with its previous expectations.

At the current share price the shares are trading on a PE ratio of 14.6 which falls to 12.4 on the full year consensus forecast. After a 10% increase in the interim dividend the shares are yielding 3.7% which is expected to fall to 3.6% on the full year forecast. At the period-end the group had a net cash position of $15M compared to $16.8M at the same point of last year.

Overall then this has been a bit of a difficult period for the group. Profits have declined, net assets decreased and the operating cash flow decreased. The group still managed to make some free cash, but this did not cover the dividend payments. The software and services division performed well but the device division saw profits fall due to the phasing of orders from a large North American client. This will apparently reverse in the second half. The group is also suffering some price pressure. The shares offer decent value with a forward PE of 12.4 and yield of 3.6% but there is a lot riding on the second half and I am somewhat cautious.

On the 8th October the group released a trading update covering the year ending 2018. They expect pre-tax profit to be around $11.5M reflecting an intensification of external macroeconomic headwinds. This has resulted in lower than expected orders and higher than expected component price increases in the second half of the year.

They have seen customer decisions on orders delayed in the second half because of instability in the economies of certain emerging markets, planned trade tariffs in the US which have created confusion among customers, and the diversity and depth of change in the industry. In addition they expect component prices to continue to increase in the near future.

The group remains profitable and cash generative but it is hard to see how long this state of affairs will continue for so I feel it is prudent to sell out here.

On the 6th December the group released a trading update covering the full year. They expect to report trading in line with market expectations.

Air Partner Share Blog – Final Results Year Ended 2018

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Air Partner has now released their final results for the year ended 2018.

Revenues increased when compared to last year as a £327K decline in aircraft inspection revenue was more than offset by a £4.6M growth in aircraft chartering revenue, a £1.5M increase in consultancy revenue and a £289K growth in aircraft remarketing revenue. Cost of sales also increased to give a gross profit £4.4M higher. Depreciation was up £323K, staff costs increased by £970K and other underling admin costs grew by £1.7M. We also see a £240K increase in acquisition costs to give an operating profit £874K higher. There was a modest increase in finance costs but this was offset by a £249K reduction in tax charges which meant that the profit for the year was £3.6M, a growth of £1.1M year on year.

When compared to the end point of last year, total assets increased by £7.3M driven by a £6.1M growth in non-restricted cash, a £3.2M increase in restricted cash, a £2.1M growth in goodwill and a £1.5M increase in prepayments and accrued income, partially offset by a £6M decline in jetcard cash. Total liabilities also increased during the year due to a £4.3M growth in deferred income and Jetcard deposits and a £2M increase in current tax payables. The end result was a net tangible asset level of just £445K, a decline of £1.8M year on year.

Before movements in working capital, cash profits increased by £2.6M to £6.4M. There was a big cash inflow from working capital and despite tax payments increasing by £484K, the net cash from operations was £10.2M, a growth of £8.4M year on year. The group spent £708K on fixed assets, a £204K on computer software and £2m on acquisitions to give a free cash flow of £7.4M. Of this, £2.8M was paid out in dividends, £457K on loan repayments and £500K on share purchases to give a cash flow of £3.9M and a cash level of £23.2M at the year-end.

The underlying operating profit in the Commercial Jets division was £3.8M, a growth of £461K year on year. Strength has been seen across territories and sectors and from new and existing customers. In the US they posted record results despite a strong comparative last year. The traditionally softer second half of the year did not materialise as they were able to respond to customers needs in the face of the hurricanes which hit the US, and to a non-hurricane related evacuation for a customer in the leisure sector. There has also been an increase in the corporate sector.

In Europe they have benefited from prior investment in people in the sports sector and they are well placed to perform well with the world cup taking place in Russia. They saw good results from their tour operator programmes and continued strength in automotive, where they have helped with the launch of a cross over vehicle for a major German manufacturer and are seeing growing opportunities despite an increasingly competitive environment. In the UK and Europe they continue to see steady, year round demand to meet government requirements.

Air Partner Remarketing has had an encouraging year in which it has secured a number of exclusive mandates and demonstrated the benefit of inclusion in the wider group with the recent sale of a 2009 vintage Beechcraft King Air 200 for Air Hamburg, the result of an introduction from the Private Jets business. During the year they also sold two B737 aircraft and a GE engine for Kenya airways, two 747s on behalf of China Airlines, and won exclusive contracts with a large Australian bank and with Saudia, the latter to market 15 Boeing 777 aircraft.

The underlying operating profit in the Private Jets division was £1.1M, a decline of £1.4M when compared to last year. This largely reflects lower sales in the UK, as the group moved key personnel to the US, and the subsequent impact of investment they have made in upskilling the sales team. They are beginning to see the benefit in the New Year. In the US, where they expanded their office in NY last year, the investment has enabled them to service an increase in demand and they have seen a record rise in overall client numbers of 80%. Business from existing customers is performing well with Jetcard renewals up 16% including two €1M renewals and utilisation up 8%.

The underlying operating profit in the Freight business was £1.8M, an increase of £1.5M when compared to 2017. This performance has been driven by a mix of charters carried out across the Caribbean to support the aid efforts of hurricanes Irma and Maria, the impact of new hires over the period, and ongoing contracts in the Middle East.

The underlying operating profit in the Consultancy and Training business was £561K, a decrease of £90K year on year. Baines Simmons had an encouraging year with good long term contract wins and some of the pipeline projects crystallising in the second half. Contract wins have been good across civil and military organisations and the forward pipeline remains strong. In the first half the business secured contracts with national carriers, the RAF of Oman and the European Defence Agency. In January they won the Safety Training for Error Prevention tender with the MOD for a four to six year contract. A number of commercial contracts were also won throughout the year.

The fatigue risk management team has had a good second half. Over the year they have carried out work for national carriers and airlines across the world along with a train provider in the UK. In a move into rotary, a national air rescue client became the first rotary operator in Europe to be given a fatigue risk management approval by the regulator. The pipeline of opportunities for the business is good and they expect to increase efficiency further next year.

SafeSkys, acquired in September, has performed well over Q4. The integration of the team was completed in November. The business has a good customer base with stable contracts of an average of four to six years. A key RAF contract was secured at the year-end to operate in the Scottish region. The air traffic control side of the business is performing in line with expectations.

In September the group acquired Safe Skys ltd, a supplier of turnkey ATC services and wildlife management services. The total consideration was £3M, of which £2.2M was paid in cash with the remainder deferred consideration. The business contributed £70K of profit in the first five months of ownership and the acquisition generated £2M of goodwill.

The business provides airport wildlife management and services, air traffic control and air traffic engineering to over 85 international airports. The business is also an Air Navigation Service Provider. One of the group’s ATS contracts is with Llanbedr, which was resurrected in 2014 as a centre of excellence for unmanned aerial systems. The acquired business was engaged early in the project to re-establish the provision of air traffic services which involved designing and re-equipping the control tower with state of the art equipment, the production of procedures and operations manuals as well as the design and implementation of the safety management system.

In April, following the recruitment of new and enhanced skills into the finance department, the group identified an issue, predominantly relating to the accounting for receivables and deferred income, originating in 2011. They then appointed independent advisors to carry out a review which is now concluded. No cash or assets were lost and no customer was impacted. Integrating the review into the full year audit took significant time and forced the suspension of trading in the shares. CFO Neil Morris resigned and an interim CFO has been appointed. The group will incur costs of £1.3M in 2019 as a result of the review and an aborted acquisition.

In late 2017 the group entered discussions to acquire a managed services business. At the beginning of January, having agreed transaction terms they entered into an exclusivity period expiring at the end of April. The acquisition wold have met the group’s financial return criteria and immediately increased the weighting of their consultancy profitability by 30%. When the above accounting issues were identified, they let the exclusivity lapse but they remain in dialogue with the board members of the business.

Going forward, at the start of the year the board are seeing a particularly strong performance in Freight and the US. Commercial jets is flat while private jets UK has started the year slowly. At the beginning of the year, for global charter at least, it is too early to predict the full year outcome. The more pipeline oriented businesses have encouraging order books which will develop even further during the year ahead.

After a 5.8% increase in the full year dividend, the group is yielding 4.7% which increases to 4.8% on next year’s consensus forecast. At the current share price the shares are trading on a PE ratio of 17.8 which falls to 16 on next year’s forecast.

Overall then this has been a rather mixed year for the group. Operationally it has been rather decent with increased profits and an improvement in the operating cash flow with a good amount of free cash being generated, although the latter was mostly due to working capital movements. Commercial Jets had a good year with a boost from the hurricanes and the world cup along with growth in the corporate and automotive markets. Freight has also fared well with a boost from the hurricanes. Private Jets has struggled somewhat, however, seemingly as resource was moved from the UK. Consulting also saw a reduced profit but no reason is given for this.

Obviously overshadowing this is the accounting debacle which means they have been over stating profits and assets. This does seem to be resolving, however, but it is still an unprofessional embarrassment. Going forward, the year has started OK but private jets still seem to be struggling in the UK. With a forward PE of 16 the shares are not exactly cheap but the yield of 4.8% is very decent. Tricky one this, on balance I might wait and see how the year pans out.

On the 24th August the group released a trading update covering the first half of the year when underlying pre-tax profit was in line with board expectations and with the same period last year. The US business had a record year last year and that strong performance continued across all business lines in the region with a new office being opened in Los Angeles.

In the UK, after a flat start, commercial jets performed well over Q2 with increased activity around the World Cup in Russia and a good result from tour operations. They continue to see the benefit of investments made in their freight business with another strong performance throughout the period. In the US and Europe, private jets has seen good growth in both jet card numbers and bookings throughout the first half. Whilst the UK has been more subdued, they have seen an increase in the number of jet cards in issue.

The consulting and training division is trading in line with expectations, winning some excellent long term contracts in the period. They have an encouraging pipeline for the remainder of the year and the division remains well placed for further growth.

Overall the board are encouraged by the start to the year and remain confident in the group’s prospects for the full year.