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Keller Share Blog – Interim Results Year Ending 2015

Posted on August 7, 2015 by Share Research

Keller has now released its interim results for the year ending 2015.

When compared to the first half of last year, total revenues fell by £32.4M as a £42.8M increase in North America revenue was more than offset by a £62.7M collapse in Australia revenue, an £8.4M fall in Asia revenue and a £4.1M decline in EMEA revenue. Underlying operating costs fell considerably, though, and the group also benefited from the lack of a £30M charge relating to the contract dispute but there was also no contingent consideration credit, which amounted to £6.9M last year relating to Keller Canada that the group no longer expects to pay. In all, operating profit was £27M ahead of the same point of last year which became an increase of £25.3M to £20.2M after finance costs and tax. It should be noted that translational exchange differences completely wiped this profit out, however.

When compared to the end point of last year, total assets fell by £9.4M driven by a £30.3M fall in cash, an £11.5M decline in intangible assets and a £9.6M decrease in property plant and equipment, partially offset by a £36.5M increase in receivables. Liabilities also increased during the year as a £38M increase in borrowings and an £18.5M growth in payables was partly offset by a £20.2M fall in “other” liabilities, and a £29.1M decline in provisions relating to the payment of the litigation costs. The end result is a net tangible asset level of £163.1M, broadly flat when compared to the end of last year.

Before movements in working capital, cash profits increased by £2.7M to £64M. A huge increase in receivables, however, was not entirely offset by an increase in payables so that cash from operations fell by £13M to £18.6M. We then see the £25M payment relating to the contract litigation and a £5.4M increase in tax provide a net cash outflow at the operating level of £26.7M. The group then spent a further £33.8M on fixed assets to give a cash outflow before financing of £60.2M. The group then took out a net £46.1M of new borrowings which enabled a £12.6M payment of dividends but the cash outflow for the half year was still £27.5M to give a cash level of £53.1M at the period end, although it should be noted that the group seems to be more cash generative in the second half of the year.

Operating profit at the North America division was £28.4M, an increase of £7.7M year on year and the operating margin increased from 5.5% to 6.8%. In the US the value of total construction expenditure in the period was up 6% compared to the same period last year. Private expenditure on construction, both residential and non-residential, increased by 7% whilst public construction spend was up 3%.

The US business continued to take advantage of the improved market conditions with activity levels picking up significantly in Q2 after a slow start to the year due to adverse weather conditions. Case, in particular, performed well and bid on a record number of large projects. The Amtrak Catenary Pole Foundation work is now over halfway complete and the business secured significant work on the hydroelectric plant at Red Rock Dam on the Des Moines River in Iowa, as well as a large project on phase 1 of the $1.3BN Capitol Crossing private development in the District of Columbia.

More generally, the US piling companies had an excellent first half with profit up significantly up on last year. Contract awards in the period were strong and they enter the second half of the year with a record order book. Hayward Baker reported a steady first half performance, aided by the final settlement of two large contracts. Results varied across its diverse sectors, reflecting differences in local market conditions. Progress on the Elliott Bay seawall project in Seattle, which was delayed earlier in the year, is now back on track. Suncoast, which is mainly focused on residential construction, had a solid first half and is apparently well set to benefit from the recent increase in housing starts.

Market conditions in Canada continued to be difficult, with investment in the Canadian resources markets, particularly the oil sands market, at a very low level. As a result the group have seen increased competition in commercial and infrastructure construction, adversely impacting margins in these areas. Against this challenging market backdrop, Keller Canada recorded lower profits than in the same period of last year. Costs have therefore been cut in a number of areas.

Operating profit at the EMEA division was £7M, an increase of £4.3M when compared to last year with margins increasing from 1.3% to 3.3%. Most European construction markets continued to be challenging, so far the group has not seen many signs of a market recovery and competition remains intense. Better prospects have been seen in the Middle East and African regions, however.

The group’s German subsidiary produced a good result and the business in Poland, after a quiet first half, is well set for the remainder of the year. The major rail project in Austria announced earlier in the year is now up and running, underpinning a much improved result in that country. Having completed major projects at Crossrail and Victoria station, revenues in the UK were down year on year but strong recent contract awards should lead to an improved second half to the year. The businesses in Southern Europe continued to face very difficult market conditions. The Middle East and Africa, particularly South Africa, performed well during the period and the work on Ada phase 2, a major jetty project on the coast of Ghana, progressed well. The group are now mobilising on a major project in the Caspian region after some earlier delays.

Operating profit at the Asia division was just £600K, a decline of £3M when compared to the first half of 2014 and margins collapsed from 6.4% to 1.2%. This performance was partly explained by the timing of revenues from major projects with much of the revenue for the Sengkang hospital project occurring in the first half of last year while this year has seen delays in the start of the project at Changi airport. This much reduced revenue in Singapore was combined with more difficult market conditions in other parts of the region which has been affected by lower oil and gas investment following the continued decline in the oil price.

Another issue being faced are measures by the Singaporean government to reduce foreign investment in real estate which adversely impacted investment in residential construction. Looking forward, short term prospects are more encouraging. Resource Piling has just started the foundations for another large hospital project for the Ministry of Health in Singapore whilst Ansah is beginning a number of packages of work on the RAPID petrochemical and refining complex in Southern Malaysia. Keller India had a good first half, with results ahead of expectations in a market where there are some early signs of recovery and the potential for some significant projects for the group.

Operating profit at the Australia division was £4.2M, a collapse of £6.4M when compared to the first half of last year with a margin that fell from 7.4% to 5.2%. The decline in performance in the country is largely the result of the completion last year of the work on the on-shore LNG processing plant in Wheatstone. The construction market in Australia remained challenging and major projects in the resources industries are scarce. Commercial and residential construction also remain slow and there is a lull in investment in infrastructure, not helped by the changes in state governments. The group has therefore further reduced costs in the country as whilst there is a pipeline of significant projects being tendered, their timing remains uncertain.

Waterways, the near-shore construction business remained busy, however, despite the general malaise in the market. Austral, the acquired business, provides piling and civil construction services to the infrastructure and mining industries, with a particular focus on near-shore marine work.

As can be seen, there has been a payment of £25M in cash as a result of the settlement agreement. The remainder of the costs are due to be incurred over the next year and they are substantial.

After the end of the period, the group acquired the Austral Constructions for an initial cash payment of £20.5M and a deferred payment of up to £9.8M dependent on Austral’s EBITDA earned in the three years to 2018. The acquisition complements the group’s existing expertise in near-shore marine work in Australia. It is certainly a brave move to make a large acquisition in Australia but I would hope that the amount paid would reflect this. The group also announced that it had reached a conditional agreement to acquire the net assets of the GeoConstruction group of Layne Christensen for an initial cash consideration of £25.4M with the acquisition expected to complete by the end of August.

While conditions remain challenging in many of the markets in which the group operates, the recovery in US construction remains robust and this together with a 5% increase in the order book and the benefits from the improvements management have implemented, gives the board confidence that results for the year as a whole will be in line with market expectations.

At the current share price the shares yield 2.4%, increasing to 2.6% for the year as a whole. At the end of the year, the group was in a net debt position of £171.5M compared to £102.2M at the end of last year and £161.9M at the same point of last year.

Overall then this was a robust performance I think. Profits improved, even when the contingent consideration credit and the litigation cost last year are removed and net assets remained flat. Underlying cash profits did improve slightly but the operational cash flow took a real hit, partly as a result of the first payment relating to the litigation but also partly due to a big increase in receivables which I suspect is somewhat seasonal. Operationally, things are tough in many of the group’s markets. The continued weakness in commodity prices is hitting operations in Australia and Canada, the falling oil price is affecting the Malaysian business and the Singapore business has been hit by delays on the Changi airport project and the government’s decision to restrict foreign investment in real estate.

These negative headwinds are more than made up for by the small number of markets which are improving. India seems to be starting to show signs of life and the EMEA region in general seems to be slowly easing out of the doldrums but it is the US that is really driving the increase in profits. Construction in the group’s largest market really seems to be coming alive, although whether this will continue if interest rates are increased there remains to be seen.

Overall then, this is a tricky one, if a downturn were to hit the US, the group would be in quite a bit of trouble – there is likely to be continued cash outflow form the acquisitions and the litigation payments. Despite this, I believe we have a quality outfit here though and I am tempted to buy in but can’t help feeling a better entry point may present itself (famous last words!)

The shares have certainly recovered from the dip at the end of last year and now seem to be enjoying a decent run.

On the 16th November the group released a trading update. There has been no significant change in market conditions since the interim results. In North America, the US construction market continues to grow steadily while the market in Canada remains very challenging. European construction markets as a whole remain stable but the outlook in Australia shows no sign of improvement.

Overall trading for the group during the four months has been in line with management expectations. Year to date revenue remains down on last year as a result of lower revenues from major products, primarily due to the completion of the Wheatstone project last year. Operating profit is ahead of the same time last year, supported by solid operational progress and some good final project settlements, particularly in the US. The order book at the end of October for work to be executed over the next year is around 20% higher than at the same time last year and the board’s expectations for the group’s results for the full year remains in line with market expectations.

The acquisitions of GeoConstruction for £29M and Austral Construction for £19M were both completed in the period but other than this there has been no material change in the financial position of the group since the end of June.

The ongoing improvement in the US construction market continues to contribute to good results from the US business as a whole with Suncoast continuing to benefit from the increase in housing starts. Bencor, the business they bought earlier in the year for its advanced diaphragm wall technology, is being successfully integrated and working on a number of prospects with the other Keller businesses. The Canadian business is operating in a very difficult market but ongoing cost reductions have enabled the business to record a small profit.

The EMEA division has continued to produce results ahead of last year, helped by good profitability in German, Poland and Austria and Franki Africa is performing well and seeing increased opportunities in the Middle East. The major contract in the Caspian region continued, albeit slower than original anticipated and the next $25M of work has just been confirmed.

The performance of the Asian business has improved in recent months and the division will have a much better second half. The result is underpinned by a major project in the refinery and petrochemical integrated development project in SE Johor, Malaysia where the group has just secured another contract bringing the total value of their contracted projects in the area to $46M. In October they won their first major ground improvement project in Indonesia for about $25M of vibro-compaction works at Pluit City, a newly created island located near Jakarta.

In Australia the foundations business continues to struggle in a difficult market and further cost reductions are being implemented. The group expect to reach agreement on a final settlement on Wheatstone before the end of the year which will benefit the 2015 Australia results. Waterways and Austral, the near-shore marine construction specialists, continue to perform well. The integration of Austral is proceeding to plan.

The group has recently completed a strategic review of its organisational capabilities. Changes include the strengthening of key functions, formalising product teams and rationalising structure where appropriate. The Asia and Australia divisions are set to merge from the start of 2016 and the structures within both are under review.

In summary, while conditions remain challenging in many of the markets they operate in, the US construction market remains healthy and this, together with the benefits from cost-cutting measures means that the board is confident that the results for the full year will be in line with expectations. Nothing much has changed here really, but the share price has come down quite a bit and despite the problems affecting many of the group’s markets as long as the US construction industry remains strong, they should be ok. The shares are therefore starting to look rather cheap to me.

Fairpoint Share Blog – Final Results Year Ended 2014

Posted on August 7, 2015 by Share Research

Fairpoint provides debt solutions and legal services, particularly for individuals experiencing personal debt problems but has branched out into more broad legal services this year through the acquisition of Simpson Millar. When the group was created it was dependent on IVAs as their only substantial income stream but this has been expanded in recent years with a growing number of debt management solutions, claims management and legal services. It is listed on the AIM exchange and its operations are located wholly within the UK.

IVA consists of group businesses Debt Free Direct and Clear Start, the core debt solution brands. The primary product offering of these brands is an Individual Voluntary Agreement which consists of a managed payment plan providing both interest and capital forgiveness and results in a consumer being debt free in as little as five years. Debt Management consists of the brand Lawrence Charlton. DMPs are generally suitable for consumers who can repay their debts in full, if they are provided with some relief on the rate at which interest accrues on their debts. They could take more than five years to complete and offer consumers a fixed repayment discipline as well as third party management. Claims Management activities involve enhancing the financial position of customers through PPI and other claims and offering a switching facility on personal outgoings such as utility costs. Legal Service activities provide a range of consumer focused legal services with the main lines being family, personal injury and clinical negligence through 13 offices around the UK.

For IVA fees, revenue is recorded to recognise gross income during the life of the IVA based on the cost of the work to date as a percentage of the total cost of services to be performed. They are discounted to reflect the fair value of cash flows recoverable. Over the life of the IVA the actual cash flows of the case in excess of fair value at recognition are recognised through finance income (unwinding of discount). The group also receives fee income for work performed for both Scottish and self-employed clients who require trust deeds or IVAs from other providers. In this instance, IVA income is recognised once a contractual obligation is incurred by the IVA provider accepting the referral.

The group received income in relation to claims management activity, principally for refunds of PPI in relation to its current client base. These fees and commissions are recognised when the claim has been settled by the creditor. In debt management, revenue is recognised on a cash receipt basis reflecting the proportion of work performed. Initial fees are recognised once a customer has made their first contribution to the plan and subsequent fees are recognised on receipt of funds into the plan. In legal services, revenue is recognised as it is earned over time and the group assesses the extent to which it considers it has the ability to recognise revenue based on the likelihood of recovery on a particular case. Services provided to clients that have not yet been billed are recognised as legal services revenue within trade and receivables. This all looks sensible although I suppose there is margin for error in the recognition of the legal services revenues.

Impairment provisions against trade receivables arising from the breakage of IVA payment plans are recognised when there is objective evidence, such as significant delay in payment, that the group is unable to collect all of the amounts due.

Fairpoint has now released its final results for the year ended 2014.

Overall revenues increased year on year as a maiden contribution of £11.9M from the legal services division and a £2.8M increase in debt management revenue was partially offset by a £2.9M decline in IVA revenues and a £1.9M fall in claims management revenue. Cost of sales also increased, which included a higher staff cost (not sure how much of those staff costs actually are cost of sales) to give a gross profit some £5.2M ahead of last year. We then see a big fall in marketing costs along with a £523K decline in credit impairments of IVA revenues but there was a £1.7M increase in the amortisation of acquired intangibles and an increase in other underlying admin costs along with some one-off expenses relating to the restructure of debt line and acquisition costs of Simpson Millar to give an operating profit £1.6M below that of 2013. Finance income fell year on year with a £760K decline in the unwinding of the discount on IVA revenues and an increase in borrowing costs before a lower tax bill meant that the profit for the year was £2.9M, a fall of £1.8M year on year.

When compared to the end point of last year, total assets increased by £21.3M driven by a £4.8M growth in goodwill, a £5.3M increase in acquired back books, a £5.4M growth in unbilled legal services income and a £5.8M increase in trade receivables. Total liabilities also increased during the year due to a £9.9M growth in bank borrowings and a £4.6M increase in contingent consideration to give a net tangible asset level of £25.3M, a decline of £5.3M year on year. For the tangible assets I have discounted goodwill, software development and customer relationships but kept the other intangible assets as I reckon they might be worth something.

Before movements in working capital, cash profits fell by £846K to £8.1M which became £7.9M after working capital movements before an increased interest cost, partly relating to refinancing costs, and a reduced tax bill meant that net cash from operations stood at £5.7M, a decline of £323K year on year. This was enough to cover the capital expenditure, including software development along with the purchase of debt management back books but was not enough to cover the acquisition so before financing, the cash outflow stood at £7.7M. The group then took out nearly £10M in new borrowings which enabled them to pay the dividends of £2.6M to give a cash outflow for the year of £491K and a cash level of £2.4M at the year-end.

Market conditions for the group’s debt solutions remain challenging. Whilst the volume of new IVA solutions in the country increased to 52,190 from 48,881 last year, the group has found that these volumes have been driven from customers with lower disposable incomes which has resulted in lower fees. These market conditions are likely to continue until the bank rate increases adversely affect the financial circumstances of home owners who typically have higher incomes. In the sector, a rigorous regulatory agenda has been driven by the FCA which is likely to result in both change and further consolidation in the market. As with all firms operating within the sector, the group has traded under an interim regulatory permission but has submitted its application for full regulatory permission which is expected to be processed in 2015.

Pre-tax profit at the IVA business was £3M, a decline of £600K when compared to last year. In light of the market conditions outlined above, the group has focused on profit margin maintenance through tight cost management which meant that margins remained at 25% during the year. Revenues reduced largely as a result of fewer incepted cases as the group continues to avoid exposure to fee levels which it considers uneconomic. The total number of fee-paying IVAs under management at the end of the year was 17,628 compared to 19,337 this time last year, the number of new IVAs written reduced from 4,491 to 2,716 and the average gross fee per new IVA was £3,437, up from £3,239 last year.

The pre-tax loss at the Debt Management business was £316K, although this included exceptional costs of £1.3M, without which the profit would have been £1M which was broadly flat on the profit recorded in 2013. Three DMP back books were acquired during the year and the total number of DMPs under management increased by 62% to 25,462 as a result of this. The pre-tax profit at the Claims Management business was £1.1M, a fall of £1.2M year on year. Claims levels, largely relating to PPI reclaim activity from existing IVA clients have reached maturity while those from the growing number of debt management clients are still under development. As anticipated this resulted in a reduction in claims revenues and profitability during the year but expertise in the acquired Simpson Millar provides support for further development of more sustainable forms of claims activity.

The pre-tax profit at the Legal Services was £548K which included £749K of exceptional items, without which the profit would have been £1.3M. This was the first year that the division has been trading but represents good growth on the same period of last year. Good progress is being made on detailed integration work streams in areas including sales, marketing and support services.

There were a number of one-off costs this year which included £700K of costs relating to the acquisition of Simpson Millar, £500K of costs associated with the refinancing of the debt with AIB, and £1.3M of transactional and restructuring costs in relation to the acquisition of Debt Line.

On the 16^th June the group acquired Simpson Millar, a customer-focused legal services company with services that include family, personal injury and clinical negligence. The group paid a total consideration of £12.7M that included cash of £6.1M, shares at a value of £2M and contingent consideration of £4.6M. The acquisition came with intangible assets of £5.3M and generated goodwill of £4.8M. Since the acquisition the business contributed £1.6M to pre-tax profit which seems like a good acquisition to me. Also during the year the group acquired the Debt Support Company which comprised a DMP back book, for a cash consideration of £1.3M; the Money Debt and Credit DMP back book for £2.7M and Debt Line Topco for £3M which also included a DMP back book. The board have indicated that they are targeting further value enhancing acquisitions in 2015

There is now some susceptibility to interest rate rises with a 0.5% increase reducing profit by £48K. The group entered into a banking facility with AIB Group which expires in May 2019. The new committed facility, which has a five year term, comprises a £12M revolving credit facility and an £8M term loan. The term loan was used to finance the initial cash consideration of the acquisition of Simpson Millar with £5M repayable within five years and the remaining £3M repayable at the end of the five year term. The long term loan has an interest rate of 2.85%+LIBOR and the credit facility has 3% + LIBOR, which actually seems like quite a lot to me.

The main operational risks include the potential for regulatory change with some of the services coming under the regulation of the insolvency act; underlying economic conditions such as interest rates, unemployment and consumer debt levels; and the potential for customers to default on plans. On the latter point, fees on new IVA cases are based upon a budgeted percentage of defaults based on historical experience but there is a risk, that through external factors, the rate of default is higher than planned (unemployment and disposable incomes are particular factors that can affect this).

Going forward, the group will benefit from a full year of trading from the legal services platform which should provide a good growth stimulus. The market conditions in the IVA segment will remain challenging with a continued focus on margin management but the board expect the development of PPI claims through the DMP clients to mitigate the effects of the maturing IVA claims activity so they expect to make good progress in 2015.

At the current share price the shares trade on a PE ratio of 24.3 including the one-off items and amortisation of acquired intangibles (the ratio is 9.4 when these items are discounted). This reduces to a very cheap-looking 8.7 on next year’s consensus forecast. After a 7% increase in the total dividend, the shares are currently yielding 4% which increases to 4.3% on next year’s forecast which again, seems pretty decent. At the year-end net debt stood at £7.6M compared to a net cash position of £2.8M at the end of last year. There is also £8.9M of future operating lease payments off the balance sheet.

Overall then this has been a bit of a difficult year for the group. Profits were down, not helped by the debt line restructuring and acquisition costs; net tangible assets fell due to increased levels and borrowing and operational cash flow declined when compared to last year. The main issue is that the fees being received for IVAs have been pushed down due to the lower disposable incomes of people hitting difficulties. This has meant that the group has taken on less business this year as fees become uneconomical and this has a knock on effect on the amount of commission earned in the claims management business.

The group have taken some interesting measures to combat this problem though, they have purchased more DMP back books which will boost the debt management division and should provide more impetus to the claims management division, replacing some of the lost commissions relating the IVA customers. More importantly, though , they have acquired a legal services business which already seems to be generating decent profits and offers another interesting division to the group, and one which should help mitigate declines in other areas. The forward PE ratio looks cheap and the dividend yield of over 4% also looks tempting. I am thinking of taking a position here.

On the 3^rd August the group released a trading update covering the first half of the year. Overall trading has been materially ahead of the same period of last year and in line with the board’s expectations reflecting a strong contribution from the legal services business. In that division, Simpson Millar performed well and is now the group’s largest source of income and have made some acquisitions in this area (more on that below). Market conditions remained difficult in the IVA market, however, with volumes of new IVA solutions in the country falling by over 23% in Q1 2015 but the group are sensibly being cautious about not writing uneconomic business despite the pressure to do so.

Revenues in the DMP division were broadly flat year on year which largely reflects the absence of acquisitions in the area as the group favours capital deployment towards the legal services business because the evolution of the DMP market remains unclear. The claims management activities were also broadly in line with last year as good growth from the in house claims management services offset a reduction in IVA related claims activity. At the period end net debt stood at £5.2M compared to £7.6M at the end of last year which shows some decent cash generation.

At the same time the group has announced the acquisition of Colemans, comprising Colemans-CTTS and Holiday Travel Watch, for an initial consideration of £9M and a potential contingent consideration of £7M. The initial consideration consists of £8M in cash and £1M in Fairpoint shares while the contingent consideration consists of two payments of £3.5M based on the financial performance of Colemans and the achievement of certain integration targets for 2016 and 2017. It is split 50/50 in shares and cash and is expected to be self-funding given the hurdles set which is very nice to hear.

Colemans is a provider of consumer focused legal services with particular expertise in volume personal injury, volume conveyancing and travel law. In the last year it made pre-tax profits of £2.3M and is expected to be immediately earnings enhancing to the group. The acquisition will be funded out of existing financial resources but to ensure appropriate funding for the group following completion, they have extended the current five year debt facility with AIM from £20M to £25M. Immediately following the acquisition, the net debt of the group is expected to be £13.2M.

To me this seems like a good acquisition. Given the profitability of the business and the fact that the contingent consideration will be self-funding, the initial price of £9M looks a great entry point. I have decided to buy some shares in the company.

Having gone no-where in the past year or so the shares seem to have broken out.

Keller Share Blog – Final Results Year Ending 2014

Posted on August 6, 2015 by Share Research

Keller is the world’s largest independent ground engineering specialist. Their services are used across the construction sector in infrastructure, industrial, commercial, residential and environmental projects. Piling involves the installation of structural elements to transfer foundation loads through weak soils to stronger underlying ground. The group offers a wide range of piling and earth retention systems including diaphragm walls and marine piles. Ground improvement techniques are used to prepare the ground for new construction projects and to reduce the risk of liquefaction in areas of seismic activity. Common soil stabilisation techniques include a combination of vibro-compaction with stone, concrete or lime columns as well as soil mixing and injection systems.

Anchors, nails and minipiles are used to provide temporary or permanent solutions for a wide range of stability or support problems and are often used to underpin or stabilise buildings, slopes and embankments. Speciality grouting strengthens target areas in the ground and controls ground water flow through rocks and soils by reducing their permeability. It is applicable to both new construction projects and to repair and maintenance work. Other applications include excavation support, settlement control and geo-environmental services to protect adjacent ground from contamination. Post-tension cable systems are used to reinforce concrete foundations and structural spans, enhancing their load bearing capacity by applying a comprehensive force to the concrete, once set. Suncoast’s post-tension systems are used in foundation slabs for single family homes and, in the commercial high rise sector, in concrete structural spans and beams.

The group also specialises in providing instrumentation and monitoring solutions for a wide range of applications. They provide and install a wide range of instruments and then provide repeatable data presenting it to their clients. About half of the work the group undertakes is piling and earth retention, with about 20% in ground improvements, 10% anchors, nails and minipiles, 10% speciality grouting and 9% post-tension concrete.

The group is the market leader in North America and operate from locations across the US and Canada. Hayward Baker offers ground engineering solutions across both counties. In the US, Case, McKinney and HJ are heavy foundation specialists and Suncoast provides post-tension cable systems. In Canada, Geo-Foundations specialises in micro piling, ground anchors and speciality grouting services and Keller Canada offers a broad range of piling solutions. The EMEA division has operations across Europe, the Middle East and Africa along with a developing business in South America. The group operate as Keller across these regions except for in Sub Saharan Africa where they operate under the Franki brand.

The group offers a wide range of foundation services in Asia and they are well established in Singapore, India and Malaysia where they predominantly trade as Keller. In Australia, Frankipile, Vibro Pile and Piling Contractors offer a range of piling services; Keller ground engineering offers specialist ground improvement and geotechnical solutions; and Waterway specialises in foundations for and the maintenance of wharves, jetties and other marine structures.

Keller has now released its final results for the year ended 2014.

When compared to last year, total revenues increased by £161.5M driven by growth in all markets as the contribution from acquisitions was partially offset by a £9.3M adverse movement in foreign exchange. The cost of raw materials and consumables increased by £60.7M and staff costs grew to £41.1M. We also see a £2.1M increase in reorganisation costs and a £29.9M hike in other operating costs along with large increases in operating leases and depreciation. There was a general increase in non-underlying expenses as a £54M charge relating to a contract dispute partially offset by a £5.4M reduction in acquisition costs and a £10.7M positive swing in contingent consideration payments to give an operating profit some £20.8M lower than last year at £35.3M. After finance charges, which included less “other” finance income and more interest on the loans the profit before tax was £28.2M which was entirely wiped out by the £29.4M tax bill to give a loss for the year of £3M, a negative swing of £32.3M year on year.

When compared to the end of last year, total assets increased by £28.1M to £872.4M driven by a £32.3M increase in cash, a £9.6M growth in plant and machinery, an £8.1M increase in other receivables and a £4M growth in goodwill, partially offset by a £17.1M fall in trade receivables, a £13.4M decline in inventories and a £7.4M fall in intangibles associated with acquisitions. Liabilities also increased during the year as a £55.2M increase in legal provisions, a £5.1M growth in current tax liabilities and a £4.5M increase in derivative financial liabilities (which stands at a substantial £19.4M) was partially offset by a £9.2M fall in loans and borrowings and a £5.2M decline in contingent consideration to give a net tangible asset level of £162.8M, a decline of £21.9M year on year.

Before movements in working capital, cash profits increased by £14M to £140M. This was further boosted by decent falls in inventory levels and receivables before a higher interest charge and tax cost meant that net cash from operations stood at £126.9M, an increase of £21.8M year on year. This comfortably covered the £63.6M spent on property, plant and equipment along with the nominal £5M spent on acquisitions to give a free cash flow of £61.4M. The group then repaid a net £8.3M in loans and borrowings along with £1.2M in finance leases and after £18M was spent on dividends the cash inflow for the year was £33.9M and the cash levels at the year-end stood at a decent £85.6M. This is actually a pretty good performance, although that future legal payment is something to remember.

In the US, expenditure in private non-residential construction increased significantly for the second year with good market growth in most segments. The year also saw a return to growth in public expenditure on construction with spend up 2% after four years of decline. In Canada construction activity in the Western Canadian resources markets remains subdued but demand in the commercial and infrastructure segments is holding up well. Conditions for most of the group’s European markets remain challenging, particularly in Southern Europe but there are some reasonable prospects in Poland and Austria despite the overall markets being relatively quiet. Demand for the group’s services in Germany remains flat but the UK has returned to steady, albeit slow, growth.

There are some good opportunities in the Middle East but the market remains very competitive, and the market in South Africa has picked up. Whilst there are some exciting opportunities elsewhere on the continent, a number of them are in the oil and gas arena and their timing is uncertain. Construction expenditure in the group’s Asian markets remains generally robust. There are a number of significant infrastructure projects in Singapore and the Malaysian construction market is buoyant while in India, the group are continuing to see signs of increasing confidence after a couple of relatively slow years.

In Australia, construction expenditure across virtually all segments, including the resources sector, has been subdued for some time and there are no significant signs of this changing in the short term. The exception has been in LNG, where the group has won and performed a number of large projects, including the Wheatstone project, although the foundation works for the LNG plants under construction are now effectively complete. Whilst there are some significant infrastructure projects on the horizon, these are unlikely to come to fruition in 2015.

In North America like for like revenues increased by 11% and operating profit increased by £8.3M to £59.9M as conditions continued to improve in the group’s largest market and reflecting improved profitability in the US foundation contracting business along with a solid contribution from the Canadian businesses. The US businesses had a strong second half of the year as construction activity continued to gradually improve across the country.

The largest North American business, Hayward Baker, finished the year strongly. Its business model of performing a wide range of small to medium sized contracts across a broad range of products benefited from better conditions across the market. In addition to this, there have also been an increasing number of larger contracts performed in recent years. The largest contract undertaken in the year at a value of £36M was the I-635 highway expansion project in Dallas where the business is installing earth retention systems for new high-occupancy managed lanes.

Good progress has been made on the Elliott Bay Seawall project in Seattle, a project valued at £25M, where the business is performing jet grouting to depths of 85 feet to provide seismic stability and foundation support for the repair and maintenance of a 0.7 mile section of the seawall. Hayward Baker also worked with the group’s piling business based in Miami to deliver projects at Oceana Bay Harbour and One Ocean with augercast, wet soil mixing, sheet piling and tie back anchor technology. This is an example of combining the presence of one company with the products and solutions of another to give an advantage in the marketplace.

Other piling businesses, Case and McKinney performed well in the year. McKinney had a good broad based result across the southern and eastern states and Case, which undertakes larger contracts, worked on projects such as the foundations for a mixed use high rise building on the Chicago River and the installation of catenary poles on an Amtrak high speed rail line in the North East. Suncoast continued to experience improving profitability despite the slight softening of the single family home market in the summer. The high-rise business performed particularly well on the back of more commercial developments and a significant increase in multi-family home starts.

In Canada the group merged their Toronto based geotechnical business, Geo Foundations, into the larger Keller Canada business which led to some cost savings in the Toronto area and has resulted in a more focussed business in eastern Canada. After a disappointing first half, the results in the country improved in the second half with a full year revenue of around C$190M and an operating margin of about 5%.

Like for like revenues in the Europe, Middle East and Africa region increased by 5% year on year with operating profit nearly doubling to £12.9M. Margins increased by 1.2% but remained razor thin at 2.9%. Despite the continued challenging markets in Europe, the group improved their performance through a focus on cost control, risk management and careful contract selection. The Polish business had a particularly good year, much improved on last year as the infrastructure market offered some good opportunities despite a competitive backdrop. Germany also reported a good result as it continues to adapt to the difficult climate in which it operates. The UK business successfully completed its large projects at Crossrail and Victoria Station.

After a difficult winter-affected first half, the Austrian business picked up in the second half and finished the year ahead of 2013. Work performed during the year included a technically complex project at the Semmering railway tunnel in the south of the country. After the year-end, the Austrian business announced another large infrastructure rail project, a major £23.1M project on the Koralm railway line between Graz and Klagenfurt. The results were not as good in Southern Europe with the French market weak and business remaining very challenging in Spain and Portugal, with the Iberian business returning a small loss on revenues 20% lower than last year.

Competition in the Middle East remained tough but the group increased both its revenue and profit from the region. This performance was aided by a good result in Saudi Arabia and a number of contract wins in Qatar where, from a standing start, they are building a reputation for reliability and quality. Franki Africa performed in line with expectations in its first year as a Keller subsidiary. The integration has been completed and a number of technology workshops have been held to introduce Keller’s grouting and ground improvement technologies to the region. They have already performed some jet grouting jobs in South Africa. Elsewhere on the continent the group has undertaken significant contracts in a number of African countries, notably Algeria and Ghana.

The group have expanded their sales network to cover the key markets in Latin America: Sao Paulo and Rio in Brazil, Chile, Peru, Panama and Mexico. The business is now well established in Brazil and elsewhere they have performed a number of small projects involving small diameter techniques, piling and ground improvement works.

In Asia, operating profit fell by £700K to £8.3M despite revenues increasing as the margin fell from 9.4% to 7.5%. This was due to a major project that was won this year at a lower than average margin. The Malaysian business had a good year operating in a strong construction market. During the year they further expanded their piling business in the country and established a presence in Johor, a province neighbouring Singapore which is currently benefiting from substantial industrial and commercial investment. In August the group acquired a small Malaysian driven piling business, Ansah, broadening their product offering in the region with the group now offering a full range of foundation services and civil works.

In Singapore, Resource Piling completed the major Sengkang hospital project ahead of schedule and on budget. The project included a number of different technologies such as piling, diaphragm wall construction and micro tunnelling. After the year-end the group was awarded a major contract at Changhi Airport totalling £28M that comprises vibrocompaction of the ground as part of the land penetration works for a major expansion at the airport. The Indian business had a much improved performance in the year and prospects for 2015 apparently look encouraging. The group completed a number of large design and build LNG related projects to schedule using both bored piling and ground improvement techniques.

Operating profits in Australia were broadly flat year on year, increasing by just £100K to £15.7M as a result of the weakening Aussie dollar, and margins declined from 6.4% to 6% as last year benefited from the conclusion of a major project. Waterway Construction had a successful year working on contracts such as the Brisbane City Council wharf upgrade programme and the Overseas Passenger Terminal in Sydney Harbour. The other Australian businesses, however, found the year more challenging, mainly due to the subdued state of the market.

The piling for the onshore LNG processing plant at Wheatstone, the group’s largest ever project, is almost complete with 24,000 piles delivered. With the challenging market conditions and the completion of Wheatstone representing the last of the foundations work on LNG projects under construction in the country, the year ahead for the Keller Australia will be difficult. Management has begun to implement a number of initiatives to streamline the business and obtain cost savings. Frankipile received an award for sustainable achievement and leadership from Exxon Mobil in relation to their work on a major LNG project in Papua New Guinea.

There are a number of case studies included in the annual report. A 100 year old seawall built on top of wood piling was erected to provide access to Seattle’s piers, and supports the Alaskan Way Viaduct and the Alaskan way itself. The contract is worth £25M and the customer is the City of Seattle. Hayward Baker is currently performing jet grouting to depths of up to 85 feet to provide seismic stability and foundation support for the repair and replacement of a 0.7 mile section of the seawall.

The group is engaged on a £13.7M contract on the Berlin State Opera house in a joint venture with Bauer Spezialtiefbau where the group has completed the excavation pit to a depth of 12 to 14 metres. Another contract is on the Sengkang General Hospital for the Ministry of Health in Singapore worth approximately £28M where the group has completed piling works comfortably ahead of schedule. Finally the group’s largest ever contract in Wheatstone in Western Australia for Chevron working alongside Bechtel was mostly completed during the year. The contract was to procure, install and test around 20,000 piles and was worth about £105M. In addition, the group was also conducting certification and maintenance of piling platforms, storage, transport and distribution of piles and various other services.

The group is working in partnership with Monash University to develop geothermic piles incorporating heat exchangers for the intermittent storage of energy in soils for the heating and cooling of buildings. This technology should minimise the carbon footprint of built structures while also providing substantial long-term cost savings. Hayward Baker is partnering with three US universities to design methods for using ground improvement in liquefaction remediation. Also, Keller in the UK is working in partnership with Novacem on a carbon negative cement solution for the ground engineering industry which should see energy savings of between 60-80% over traditional methods.

During the year the group acquired Ansah, a business based in Kuantan in Malaysia for an initial consideration of £3.5M and contingent consideration of up to £1.5M. The acquisition generated £3.6M in goodwill. In May the group acquired the remaining 45% minority shareholding of Keller Engenharia Geotecnica in Brazil for a cash consideration of £2.8M at a premium of £1M to net book value. These acquisitions were fairly minor when compared to the £198M spent last year on Keller Canada, Franki Africa and Geo Foundations.

The reason the group made a loss this year was the £54M provision for a pay out on a disputed contract. A UK contract completed in 2008 was subject to litigation proceedings that was settled in February 2015. The final cost to the group is subject to a number of remedial and other actions to be undertaken as part of the settlement agreement and the above charge is the best estimate of the net cost to the group before taking account of future recoveries under applicable insurance. It is unclear exactly what the problem with the contract is and the extent to which it is covered by insurance as the company has not given any details but this is a substantial figure that needs to be paid.

The group refinanced most of its debt and financial facilities during the year, extending maturities, further diversifying the sources of finance and improving a number of key terms. A new five year £250M revolving credit facility was agreed in July, replacing a £170M facility expiring in 2015 and a $150M facility expiring in 2017. The group also raised $125M through a private placement with US institutions, the proceeds of which were used in part to repay $70M of private placement borrowings which matured in October. The group’s debt facilities now mainly comprise $165M of US private placements maturing between 2018 and 2024 and the £250M multi-currency revolving credit facility expiring in 2019. At the year-end there was £197.4M undrawn.

The group has pension schemes based in the UK, Germany and Austria. The UK scheme was closed to future benefit accrual in 2006. The last valuation of the scheme found that it was only 77% funded which means that going forward the group has to make £1.6M contributions a year to try and recover the deficit of £11.6M. The Austrian scheme also had a deficit which was £13.8M at the year-end.

The group has hedges against the dollar/sterling exchange rate changes but the fair value of the hedge currently has a liability of £18.5M which doesn’t look great and an increase of ten percentage points of Sterling against the other principal currencies would reduce profits by about £8.2M. An increase of one percentage point with regards to interest rates would reduce the pre-tax profit by £800K and this includes the impact of hedges. Other risks are associated with market cycles and economic downturns, although the international nature of the projects provides some protection against this. Also, as seen with the disputed contract that recently went to court, the tendering and management of contracts is another potential risk.

It was announced that the CEO was intending to retire at the end of next year having spent 25 years with the group, 11 of which were as CEO. While the group find a replacement, Justin will continue to carry on in the job. Also during the year the group appointed Nancy Tuor Moore as a non-executive director.

Going forward, after a relatively quiet period in the summer, the group’s contract awards have picked up in recent months. As a result, the order book at the end of January is 8% higher than at the same time last year with the increase spread across all of the divisions except for Australia where the Wheatstone contract was largely completed. Whilst conditions in the main markets remain mixed, the gradual upturn in the US, the largest market, continuing improvements in the operating performance and the strong order book mean that the group is set for “another year of progress” in 2015.

After a 5% increase in total dividends, the shares are now yielding 2.4%, increasing to 2.6% on next year’s consensus forecast. At the current share price the shares trade on an underlying PE ratio of 14.3 which falls to 12.4 on next year’s consensus forecast, which seems decent value. At the end of the year, net debt stood at £102.2M compared to £143.7M at the end of last year. It is also worth noting the £50.4M of operating leases off the balance sheet, however, which represented an increase of £6.6M year on year.

So, on an underlying basis this has been a pretty good year for Keller. Underlying profits increased, underlying net tangible assets improved and the increased operational cash flow provided lots of free cash. The one thing that hangs over all of this is the litigation surrounding the contract dispute – this has sent the group into a loss for the year and reduced net tangible assets year on year. The contract took place in 2008 so I hope lessons have been learned here. Operationally the group has done well in North America and the EMEA region with Asia and Australia proving more difficult. Markets that are reliant on the natural resources sector such as Canada and Australia have going rather difficult and profits from Australia in particular are expected to fall next year without the considerable benefit of the Wheatstone project.

Despite the problems in Australia, the board expect further progress next year, the banks are obviously happy and have increased headroom on the debt and the order book is now head of the same time last year. The dividend yield of 2.6% is OK if not spectacular but the forward PE of 12.4 seems good value for a market leader such as Keller. These shares look potentially interesting.

RPS Group Share Blog – Interim Results Year Ending 2015

Posted on August 5, 2015 by Share Research

RPS has now released its interim results for the year ending 2015.

Overall revenues increased when compared to the first half of last year as a £28.2M decline in energy revenue was more than offset by a £1.9M increase in Australia Asia Pacific, a £10.9M increase in N. America built environment and a £20.1M growth in European built environment. It should be noted that the Norwegian business is now reported in the BNE Europe segment as opposed to the Energy segment. Recharged expenses remained broadly flat year on year to give a fee income some £4.8M ahead at £253.4M. Operating costs, however, grew by more than £6.5M and we also see a £2M increase in amortisation of acquired intangibles to give an operating profit £2.8M lower than last time. A considerable increase in finance costs was then more than offset by a fall in the tax expense to give a profit for the half year of £13.2M, a fall of £2.1M year on year – although it should be noted that at an equity level, this was entirely wiped out by foreign exchange translation.

When compared to the end point of last year, total assets increased by £12.8M driven by a £15.3M increase in intangible assets, partly offset by a £2M fall in property, plant and equipment. Liabilities also increased during the period due to a £9.8M increase in payables, a £7.1M growth in deferred consideration, a £3.7M increase in current tax liabilities and a £2.2M growth in deferred tax liabilities. The end result is a £24.8M decline in net tangible assets to a negative £24.8M which is looking increasingly stretched to me.

Before movements in working capital, cash profits fell by £1.5M to £36M but after favourable movements in both receivables and payables, no deferred consideration as remuneration and £3.9M less paid in tax, partially offset by a higher amount of interest paid, the net cash from operations stood at £40.7M, an increase of £24.2M year on year. The bulk of this was paid for the acquisition of a subsidiary but it also comfortably covered deferred consideration and capital expenditure to give a free cash flow of £10.6M. This just about covered dividends and a modest repayment of dividends to give a cash flow for the half year of £300K and a cash level of £17M at the period end.

The group made two acquisitions during the period. Klotz, a water and transportation consultancy based in the US, was acquired for a total consideration of £15.6M, £11.1M in cash initially with a further £4.5M of deferred consideration. This acquisition came with £5.8M of intangible assets and generated goodwill of £9.1M. In the four and a half months since acquisition the business has contributed £563K to operating profit on revenues of £7.9M so this seems fairly averagely valued on first sight. The other acquisition was Metier, a project management and training business based in Norway. The total paid for Metier was £22.2M which included £14.4M in initial cash and £7.7M in deferred consideration. The acquisition came with £8.6M of intangible assets and generated goodwill of £15.5M. The business contributed £145K to profit in the two months since acquisition and although it is still early days, that one seems a bit richly valued to me. The board have stated that further acquisition opportunities are being evaluated.

Since the period end, the group have put in place a five year £150M revolving credit facility with Lloyds Bank and HSBC. This replaced an RCF with Lloyds of £125M due to expire next year on more favourable terms. In addition six years remain on the £52M fixed term fixed rate notes issued in 2014.

Profit in the European Built and Natural Environment division increased by £2.7M to £14.3M and the margin increased from 12.8% to 13.4%. The acquisitions made in 2014 have been integrated successfully and assisted the growth of the UK water and planning businesses. Those activities which assist clients in developing new capital projects, particularly the planning and development business in the UK, continued to benefit from improving market conditions. Those exposed to operational environments such as providing environment management advice continued to struggle in the face of customer’s tightening budgets. The water business in the UK along with the lab activities in the Netherlands, however, performed well in the period by offering cost efficient services. The group have won significant new business in recent months, particularly in the form of large long term contracts and are looking forward to a successful second half of the year.

The North American built and natural environment business increased profits by £1.1M to £5.3M but margins fell from 22% in the first half of last year to 18.7% this year. This business has significant exposure to the provision of environmental services to the energy infrastructure market which held back progress in recent months as clients reduced and delayed expenditure on this type of project. The acquisition of Klotz earlier in the year continued the process of diversifying into more traditional planning and development and environmental consultancy activities, as did the acquisition of GaiaTech last year. Both businesses performed well and assisted the division to secure year on year growth. The board are expecting the first half trends to continue for the rest of the year with full year growth being achieved.

The Energy business saw profits fall by £7.1M to £9.6M and margins decline from 18.8% to 14.3%. The division was hit by a significant reduction in their client’s spend and an extended period of uncertainty about whether and when projects might commence. They continued to benefit from a good demand for their range of advisory services, particularly in relation to transactions and valuations. Their client’s budgets remain substantial, although many of them have delayed start-up decisions. As a result the total volume of work available so far this year has reduced significantly and fee rates have come under pressure. National Oil companies and government agencies have been less affected than the international companies so the group have further developed their relationship with those clients.

The year started slowly but activity in Q2 was somewhat higher than in Q1 and profit in Q2 was well ahead of Q1. The cost base has been significantly reduced and the group anticipate the second half should deliver further improvement.

The Australia Asia Pacific division saw profits increase by £1.9M to £5.8M and margins increase from 7.7% to 11%, primarily as a result of the group repositioning their strategy and the acquisition of Point last year. The board see activity in the resources sector remaining flat at best, as Australia unwinds its high cost production structure. Point has made a significant contribution to the strategy to take advantage of increased public expenditure on infrastructure. Following recent elections in New South Wales, Victoria and Queensland, this is an increasingly attractive market. The board, therefore, see further growth being achieved in the second half of the year.

The broad spread of clients, services and geographies has enabled the group to weather the storm in some difficult market conditions. Energy profit grew significantly in Q2 compared to Q1 and it is expected that the second half will show further improvement. After a much improved first half, AAP is expected to achieve further growth in the second half of the year. In all, it is expected that the BNE business will also continue to perform well and with AAP should help balance any further softness in energy for the remainder of the year.

After a 15% increase in the interim dividend, at the current share price the shares have a dividend yield of 4.1% which increased to 4.4% for 2015 as a whole, which is a decent amount actually. At the period end the group has a net debt position of £72.7M compared to £73.2M at the year-end.

So, this has been an interesting six months for the group. Profits fell year on year as the decline in energy profits was not quite totally mitigated by increases in the other divisions. Net tangible assets also showed a concerning fall with a large negative value now apparent as payables and deferred consideration both increased substantially. The operational cash flow was good this year but this was entirely due to favourable working capital movements – it is unclear whether this will reverse in the second half but I would guess it will to some extent. The group continues to make more acquisitions and these ones seem more fully valued than they have been in the past but the despite this, net debt did not increase as a result of the tight working capital management mentioned above.

Operationally, the performance in the built environment divisions has been good and partly offset weakness in the energy division as the continued decline in the oil price has encouraged clients to cancel and delay projects. Given the similar issues surrounding commodity prices, the performance in the Australia Asia Pacific division has been surprisingly robust and I suspect most of this is due to recent acquisitions. The potential dividend yield of 4.4% is good carrot that is dangled in front of investors but given the continued weakness in energy and commodity prices I see this as a bit too risky at the moment given the levels of debt and deferred consideration on the books along with the weakening balance sheet.

This chart is not really one that I want to invest in either so I am keeping a watching brief.

On the 30th October the group announced two new acquisitions. They purchased Iris Environmental, a Californian based consultancy providing environmental services in the US market, for a maximum consideration of £8.8M. Iris is headquartered in San Francisco with an office in LA and undertakes projects associated with managing environmental risk primarily for private sector clients in California. Last year it made a pre-tax profit of £1.5M and comes with net assets of £1.6M. Of the total consideration, £5.3M was paid in cash on completion and £1.8M in cash will be paid to the vendors on the first and second anniversaries of the transaction subject to certain operational conditions.

The other acquisition was Everything Infrastructure for a maximum consideration of £15.2M. Founded in 2006, the business is headquartered in Sydney with offices in Melbourne and Brisbane. It provides strategic advice in respect of infrastructure development, delivery and management. They have experience in all the major sectors of investment including roads, heavy and light rail, power and water. The business made a pre-tax profit of £2.7M las year and comes with net assets of £600K. Of the total consideration, £9.1M was paid in cash on completion and a further two sums of £3M each will be paid to the vendors on the first and second anniversaries of the transaction subject to certain operational conditions being met.

The acquisition of Iris extends their capability in the US environmental risk/due diligence market which was established with the acquisition of GaiaTech in 2014. EIG further develops their penetration of the infrastructure market in Australia and supports their diversification away from the resources sector in that country. As we are near the company’s year end, they do not expect to get a material contribution from either but they should from next year, diluting further the continuing effect of the downturn in the oil and gas sector on their energy business.

Goals Soccer Centres Share Blog – Final Results Year Ended 2014

Posted on August 4, 2015 by Share Research

Goals Soccer Centres is listed on Aim and is an operator of 5-a-side soccer centres with 45 in the UK and one in Los Angelis. The group derives revenues from customers using their football facilities which includes revenue from leagues operated by the group, revenue from customers who use the facilities to play on a non-league basis, corporate events, children’s birthday parties and children’s coaching. The revenue is recognised once each game is complete. They also derive secondary revenues which include soft drink vending, bar sales, confectionary vending and revenue from sales of football equipment. Goals Soccer Centre has now released its final results for the year ending 2014.

Overall revenue increased when compared to last year with an £823K growth in UK revenue and a £100K increase in USA revenue which represented a 3% headline increase and 2% like-for-like growth. Cost of sales also increased to give a gross profit some £627K ahead of last year. Wages remained fairly flat but rent rates and insurance saw a £150K increase, partly offset by a fall in depreciation and audit costs, the former resulting from an extension of the useful life of pitches from 7 to 10 years which reduced depreciation by £286K. Pleasingly operating lease costs fell by £405K year on year but at £2.2M they were still substantial for a company of this size. Other operating costs saw a fairly sizeable fall but this year the group saw a £571K charge for bad debts that meant some receivables had to be written off. This pushed the operating profit down £505K when compared to last year. We then see a substantial fall in interest on the loans more than offset by a £2.2M charge relating to the cancellation of the interest rate hedge and a £500K charge for the bank arrangement fees written off which, together with an increased tax bill as last year benefited from a reduction in the deferred tax liability due to the fall in the UK corporation tax rate, meant that the profit for the year stood at £5.1M, an decline of £3.3M year on year.

When compared to the end point of last year, total assets increased by £5.7M driven by a £2.6M increase in leasehold property, a £1.7M growth in assets in the course of construction and a £1.7M increase in software development. Total liabilities fell during the year as a £9.5M fall in secured bank loans, the eradication of the interest rate derivative, which was a liability of £2.6M last year, and a £1.1M fall in current tax liabilities was partially offset by a £1.2M increase in the deferred tax liability, relating to timing differences. The end result is a £15.2M increase in net tangible assets to £71.7M. This is a much improved balance sheet from last year and appears to look strong at first glance but it is propped up by the £105M worth of leasehold property and the corresponding outstanding operating lease is off the balance sheet which to me seems a little misleading.

Before movements in working capital, cash profits fell by £3M to £11.7M. After a moderately favourable working capital movement due to a small increase in payables and a higher tax charge than last year, the net cash from operations stood at £9.9M, a fall of £383K when compared to last year. The group then spent £6.4M on property, plant and equipment relating to £4.5M incurred on new centres, £200K on IT and £1.7M on upgrading the mature centres, along with £1.8M on computer software and they also spent £1.3M on interest to give a free cash flow of just £400K, which was not enough to cover the £1.1M in dividends before the group raised £10.6M from a share issue to pay back nearly £10M of that massive debt pile. For what it’s worth, the cash outflow for year stood at £34K and there was a negative £131K cash level at the year-end.

The group remains confident in the long term growth potential of the UK market and with limited competitor activity and relatively high barriers to entry, they believe they should be well placed to realise this opportunity. 5-a-side football is increasing in popularity in the country and is now fully recognised and supported by the FA with all of the group’s centres being FA accredited.

The centre in Los Angelis continued to show strong growth with sales up 13% and is one of the top performing centres in the portfolio. The board believe they now have a strong understanding of the LA market and they are in advanced discussions on a number of sites within the metropolitan area and have agreed headline terms on two sites, one of which should open in the second half of 2015, although the process of site acquisition is more complicated than in the UK.

Sales in the UK centres increased by 2% on a like or like basis with football revenues increasing by 1% (82% of total sales) as a one off activity worth £300K with a large corporate customer was not repeated in 2014 and the group delayed their usual post summer price increase until January; bar and vending sales increasing by 5% as increased football volumes and the general recovery in the economy increased midweek bar sales; and other revenues falling by 9%. The increase in average overheads per centre was just 1% due to a number of efficiencies but next year, centre costs are likely to increase by 4%. The centre EBITDA increased by 2% to £17.2M but as a result of the planned increase in UK head office costs, the EBITDA generated by the UK business fell by £100K to £14.3M. Sales at the US business increased by 13% to $1.7M and centre EBITDA increased by 19% to $800K which relates to about £600K. The costs of operating the US head office remained flat at £100K.

The new mobile app and website were launched at the end of the year which provides an improved experience for customers with downloads of the app running ahead of expectations with over 20,000 to date. The app is designed to reduce frustration for team organisers when they struggle to find sufficient players or are let down by players calling off at the last minute which can sometimes result in a team organiser deciding not to continue. The app includes the ability to invite, select and manage players with their own pool; direct player payment where organisers can invite selected players to pay their share of the game fee direct to Goals and monitor who has paid; player blast, which provides the ability to seek a replacement player from their own squad, Facebook friends or a local Goals centre database for players who are up for a game. The app also enables the ability to book a pitch at any time and includes a league fixtures and results functionality that was previously only available on the website.

Additionally the “Up For a Game” functionality allows individual players to register their details and availability after which they can be selected via the player blast function by team organisers or groups of similar players brought together by Goals to form new teams. Since the launch, almost 1,000 player blasts have been sent with a 90% acceptance rate enabling some games to go ahead that would otherwise have been lost. In total about 6% of all games are now being organised through the app.

During the year the group appointed a Social Media Manager to work alongside the e-commerce and marketing manager in order to increase focus on social media with the group experiencing an increasing number of enquiries through platforms such as Facebook and Twitter. They have also launched a Play5s-GetFit campaign which promotes the health and fitness benefits of playing 5-a-side football. Marketed heavily on Talksport radio, they have included activities in branch including team weigh-ins and fitness boot camps. The group has attracted a number of national events including the annual Powerade Fives, Kia Cup, The Warrior Fives, Skins Cup and retained the official partnership of Movember with teams winning the opportunity to attend the World Cup in Brail.

Additionally, the group holds national tournaments for corporate clients such as McDonalds, Wetherspoon and Odeon but due to the loss of a significant one-off activity that occurred in 2013, like for like corporate event and sponsorship sales decreased by 11% year on year. In the autumn, the September uplift campaign was launched to encourage players who had taken a break over the summer holiday period to get back into the game with offers promoted through the support of the FA. During the year the group played host to over 500 teams as part of the FA Reds vs Blues tournament and in February 2015 they saw the launch of the FA Peoples Cup with almost 4,000 teams taking part in total with Goals playing host to some 1,700 of these teams. A major Kids Party promotion through digital channels has delivered a 65% increase in bookings since the start of 2015 on top of an already strong year in 2014.

The group has developed goals-cam technology which is now being rolled out across the business and will be live on the new website. This technology records game highlights from two different angles and makes a 20 second highlights clip available to players for download or for sharing across social media. The pilot installations have been proven successful, and created another way in which to spread the brand across social media. In addition, the group are now rolling out their new “Soccer Blast” product, a kids party experience aimed at older children and youths.

The group has committed £742K in capital commitments at the year-end which have not been provided for but by far the biggest issue in my view is the outstanding operating lease commitments of a staggering £140.7M, although this has reduced somewhat year on year and the bulk of the commitments are payable in over five years’ time as they lease their sites for about 50 years in advance, this still makes me a little uneasy. I think the problem for me is that the balance sheet strength in underpinned by £105.4M-worth of leasehold property assets but these operating lease payments are obviously off the balance sheet – something doesn’t quite seem right about this to me, surely if the assets are being capitalised the lease payments should be included as a liability? Obviously this is not the case but it seems logical to me, is the asset possibly the deposits put down or something?

As can be seen, the group carries a substantial amount of debt. The secured bank loan has £26.8M outstanding with £5.4M currently undrawn, attracts interest at 1.2%+LIBOR and matures in 2019. This rate actually looks pretty good but the group will have to be aware of the likely increase in interest rates going forward. During the year the company closed outs its interest rate swap which had hedged interest rates at 3.9% this year and 4.4% next year which is rather excessive. An increase in interest rates of 100 basis points would have reduced profits by £37K this year. The vast majority of business takes place in the UK so there is little exposure to exchange rate changes but a 1% strengthening of the US$ would have decreased profit by £3K. An operational risk includes the impact of severe weather conditions with people clearly less likely to want to play football when it snows!

Customers are generally expected to pay in full prior to using the group’s facilities and trade receivables only occur when a pitch is booked and not utilised, or in relation to a limited number of corporate accounts. With the development of the new app the board have decided to re-engage with lapsed team organisers, which is expected to result in the group not fully recovering its existing debts which resulted in the £600K provision against bad debts. This suggests that there was little or no prospect of recovering the debt anyway so perhaps the group need to look at the way they provide for un-recoverable receivables?

After the end of the year, the group acquired a centre in Newcastle, opened a new centre in Manchester and have commenced construction on a new centre in Doncaster which is scheduled to open in April 2015. This site is using the new modular build concept that reduces capital expenditure and build time by 35%. All of these are cities where they have previously not had any presence.

Going forward, in the first eight weeks of the new year, sales have been flat as a result of adverse weather at the start of the year. Sales have strengthened in the past three weeks as the weather has improved. As a result of the new app and website, the strength of the core business, the expansion opportunity in the US and the improving economic backdrop the board are confident of making further progress in 2015.

I have decided to take off the interest rate swap cancellation but have left all other “non-underlying” costs intact so, at the current share price the shares trade on a PE ratio of 16.2 reducing to 13.6 on next year’s consensus forecast which does not look to bad on the face of it. After an 8% increase this year, the dividend yield currently stands at 1% on a rolling annual basis which is nothing to get excited about. At the year-end the group is in a net debt position of £36.9M which is a substantial improvement on the £46.4M recorded at the end of last year but still seems like a lot for a company of this size.

Overall then I have mixed feelings about this company. Profit fell year on year driven by bad debts, the cancellation of the interest rate swap and the write-off of the arrangement fees after some debt was paid back early thereby reducing the amortisation time for the fees. Net assets did improve as the issue of new shares was used to pay off debt but I remain uncomfortable about the leasehold properties underpinning the perceived balance sheet strength. Operating cash was down year on year and there was negligible free cash flow. I think in essence my issues surround the high debt levels, the massive operating leases off the balance sheet, the fact that the balance sheet strength is underpinned by these leases and the recoverability of receivables – it seems that if organisers owe money and decide not to carry on using the group’s centres, there is little incentive for the organisers to pay that money, as has been shown by the bad debt charge this year.

So far, this is all rather negative but there are some exciting growth opportunities for the group. The new app and website functionality really seems to add features that would encourage more customers to play games but the real opportunity in my view is the expansion possibility in the US. The Los Angelis site is currently decently profitable (more so than most of the UK sites) so there is a real opportunity here for the group. Closer to home, performance was actually a little disappointing with most of the growth actually coming from mid-week bar sales as the group lost a fairly large corporate event this year. At a forward PE of 13.6 and a dividend yield of 1% the shares look a bit expensive on current trading but the exciting opportunities for growth may yet sway me!

On the 7^th May the group released an AGM statement covering trading so far in the year. During the year to date the company have opened new centres in Manchester and Doncaster and remain on schedule to add one further centre in the UK before the year-end. They are making good progress in the US and are in advanced discussions on several sites within the LA area and have so far agreed terms on two of these sites. As a result of the progress made so far, the group have appointed an experienced development director and the enhanced activity will increase costs by some £300K in the current year and in each year thereafter. After a difficult start to the year due to bad weather, sales growth has strengthened over the past months or so and the board are confident of making further progress during the year.

On the 9^th July the group released a trading update covering the first six months of the year. Group sales were flat year on year at £17.1M with like for like sales down 1%. UK like for like sales declined by 2% as a result of adverse weather conditions in Q1 and some softness in the casual market. Trading strengthened in Q2 but it was not enough to recover the Q1 shortfall. The US business continued to perform strongly with like for like sales jumping up 20% as the centre’s popularity increases. The US site pipeline is developing with legals concluded, planning consent achieved and building permits at an advanced stage on one site with construction due to start in the second half of the year. Terms are agreed and legals have commenced on a further three sites.

Take-up of the new mobile app continued to grow during the period with total downloads in excess of 30,000. Use of player blasts have been one of the most used features which has helped reduce cancellations by sourcing additional players. A new app loyalty scheme is being developed to accelerate greater take-up of other features. In all the UK performance has been slightly below board expectations but they are encouraged by the ongoing strength in US trading. I feel that the UK performance has been rather poor with like for like sales declining but that US opportunity looks so tempting…

The chart doesn’t look to good so this is the reality check I need to wait on the sidelines for now.

RPS Group Share Blog – Final Results Year Ended 2014

Posted on August 3, 2015 by Share Research

RPS is an international consultancy that provides advice on the exploration and production of oil and gas and other natural resources; the development and management of the built and natural environment; and the development of infrastructure to ensure the supply of energy resources to market and to provide appropriate transport, water and power resources.

The group has a number of different business segments. Energy involves the provision of integrated technical, commercial and project management support and training in the fields of geoscience, engineering and health, safety and environment on a global basis to the energy sector. Built and Natural Environment involves consultancy services to many aspects of the property and infrastructure development and management sectors. These include environmental assessment, the management of water resources, oceanography, health and safety, risk management, town and country planning, building, landscape and urban design, surveying and transport planning. Consultancy services are provided on a regional basis in Europe and North America. In the Australia Asia Pacific division there is a single board that manages both the energy and build and natural environment sectors so this is taken as a separate segment.

In the case of fixed price contracts, revenue is recognised in proportion to the stage of completion of the transaction at the balance sheet date measured by reference to the milestones achieved or cost incurred as a proportion of the total forecast cost. RPS has now released its final results for the year ended 2014.

Overall revenue increased year on year as a £29.1M decline in Australia Asia Pacific revenue was more than offset by increases in all the other business segments. Recharged expenses fell during the year so fee income was £505M, an increase of £12.8M when compared to last year. Staff costs saw a significant increase, up £18.9M and amortisation increased by £5.4M but more modest falls in sub consultant costs and depreciation, along with a £4.9M decline in deferred consideration considered as remuneration and other operating costs meant that operating profit was some £4.5M ahead of last year. There was a considerable increase on finance lease interest and a smaller growth in deferred consideration interest but this was counteracted by a £2.1M fall in tax expenses so that the profit for the year stood at £33.3M, an increase of £4.7M when compared to 2013.

When compared to the end point of last year, total assets increased by £38.3M driven by a £26.9M increase in goodwill, a £13.5M growth in trade receivables, a £3.5M increase in customer relationships and a £2M growth in deferred tax assets, partially offset by £4.7M fall in deferred income and a £1.2M decline in cash. Liabilities also increased during the year as a £40.5M hike in bank loans was partially offset by a £9.1M fall in deferred consideration, a £1.7M decline in deferred income and a £1.3M decrease in other payables to give a net tangible asset level of -£20.3M, a deterioration of £18.1M year on year and a bit of a disappointing balance sheet in my view. It is also worth noting that there is £46M worth of operating leases off the balance sheet, although these have declined year on year.

Before movements in working capital, cash profits increased by £4.1M to £79.3m before this was eroded somewhat by a large fall in payables to produce cash from operations of £70.8M. After significant deferred consideration as remuneration and interest, the net cash from operations after tax stood at £44M, an increase of £1.3M year on year. The group then spent an incredible £19.7M on deferred consideration, £7.7M on capital expenditure and £37M on acquisitions to give a cash outflow of £20M before financing. This necessitated £36.4M of new borrowings, offset by £17.4M spent on dividends to give a cash outflow for the year of £1.6M and a cash level of £17M at the year end. Another company that is borrowing to pay its dividends then, not something I am a fan of. If the group is short of cash then I would prefer they cut the divi for a year if it is a one-off but not everyone will agree with me!

The profit in the energy sector was £38.8M, an increase of £2.5M year on year on a margin of 19% compared to 19.5% last year. The energy business continued to grow, with an improved result in the second half supported by acquisitions made last year, managing the rapid decline in oil price and political unrest in the Middle East. The group experienced good demand for their consultancy advice, including transaction and asset valuation support. During Q2 some of the group’s clients sought to reduce their expenditure which continued through the second half of the year against the backdrop of falling oil prices. Their trading was also affected by the political disruption in the Middle East which caused clients to delay investment in Iraq. Recent market conditions have been unusually volatile. As a result clients are likely, in the short term, to continue to focus on cost management and therefore the group are reducing their cost base and concentrating on the parts of the market and projects likely to receive benefit.

The profit in the built and natural environment Europe sector was £21.1M, an increase of £2.4M when compared to last year on a margin of 13.6% compared to 12.8% last year. The group experienced some clients looking to cut costs in the operational and environmental management sectors but still managed to secure good performances in the Dutch and UK businesses providing support to the nuclear and defence industries. The acquisition of Clear Environmental Consultants will assist the development of the business as they seek to renew and win a significant number of contracts with the UK water utilities. It is expected that this business should sow further growth in 2015.

The profit in the build and natural environment North America sector was £9.1M, an increase of £700K year on year on a margin of 22% compared to 25.4% last year. The acquisition of GaiaTech has boosted the group’s offering in the environmental due diligence market, a high margin activity, and has integrated well so far. The parts of the business close to the oil and gas activities experienced some modest expenditure tightening from clients and staff retention became difficult in the part of the business involved in permitting and licensing of industrial facilities which significantly reduced the performance in that area. The oceanography business performed well, however. The addition of GaiaTech gives the board confidence about the division’s performance in 2015.

The profit in the Australia Asia Pacific sector was £8.2M, a fall of £600K when compared to last year on a margin of 9.3% compared to 7.9% last year. The acquisitions of Point and Whelans, both property consultants, enabled the business to offset the significant impact of the severe slowdown in investment in the resources sector in this region. Throughout the year the mining and energy clients in the region remained focused on operational efficiency rather than capital expenditure which has caused a significant number of projects to be delayed or cancelled which has led to a reduction in the cost base in the region.

As the business is repositioned, they are benefiting from increased client investment in urban development and public sector infrastructure projects but state funding in Queensland and Victoria has been slowed by recent changes in government but despite this, they remain attractive markets and the board expect an improved performance for the division in 2015.

It is noticeable this year that trade receivables more than 30 days overdue increased from £13.5M last year to £22.3M which is something that we should keep an eye on and could help explain the big jump in receivables that we have seen this year.

The group really relies on acquisitions for growth, in fact I don’t remember seeing another company that has been as acquisitive as this one. The board have stated that this will continue to be a part of their strategy and are seeking to acquire further small to medium sized businesses in North America, Australia and Europe. They expect further transactions during the course of 2015 supported by their “strong” balance sheet – definitely their words, not mine!

During the year the group made a total of six acquisitions. Whelans Corp is a surveying business based in Australia. It was purchased for £1.4M in cash and another £619K in deferred consideration and generated goodwill of £773K. Since the acquisition the business has generated £407K in profit so this looks to be a good value acquisition to me. Clear Environmental Consultants is a water consultancy based in the UK. It was purchased for £6.8M with a contingent consideration of £1.2M depending on the renewal of a key contract and generated goodwill of £3.2M. Since the purchase the business has generated operating profits of £423K so this also seems to be reasonable value.

GaiaTech Holdings is an environmental consultancy based in the US. It was purchased for £17.9M in cash and generated goodwill of £11.1M. Since the acquisition date the business has contributed £1.2M to operating profits. CgMs Holdings is a project management company based in the UK. It was purchased for £7M in cash and £5.8M in deferred consideration and generated goodwill of £7.6M. Since the acquisition date in August the business has generated operating profit of £173K so the value here looks a little toppy. Delphi is an oil and gas consultancy based in Norway. It was purchased for £384K in cash and £358K in deferred consideration and generated goodwill of £501K. Since the acquisition the business has contributed £13K to operating profits. Point Project Management is a project management company based in Australia. It was purchased for £10.4M in cash and £6.4M in deferred consideration and generated goodwill of £9.5M. Since the acquisition in September the business has contributed £449K to operating profits.

The group has two defined benefit pension schemes which are closed to new entrants. Although they are showing a deficit, the amount doesn’t seem to be particularly material. There are two main borrowing facilities. There is a committed £125M multi-currency revolving credit facility that has a couple of covenants attached. There is also a $150M seven year US private placement shelf facility. Seven year notes with principle of £30M were drawn in September bearing fixed interest at just under 4% per annum and seven year notes with principle of $34.1M were drawn at the same time bearing interest at 3.84% per annum. The group has £86.8M undrawn on the credit facility and is rather susceptible to interest rate increases with a 1% hike decreasing profit before tax by £694K. The group hedges the majority of its transactional foreign currency exposures, so the sensitivity to foreign currency risk is not material.

The real risks involve the global economic environment. Continued Eurozone uncertainties may affect the businesses in Ireland and the Netherlands, and the continued slowdown in the Australian natural resources sector has continued to affect the group’s trading performance there. In addition the reduction in global oil prices and the resultant project delays has had an impact on the performance of the energy business. As well as the general economic environment, the group is also sensitive to political events and this year their operations in Iraq have been affected by the continued conflict there whilst sanctions imposed on the Russia are likely to affect their business sin that part of the world. In addition, recent state elections in Australia may reduce demand for their services there.

It has to be said that in my view the executive directors are very generously paid with CEO Alan Hearne earning nearly a million pounds during the year, of which £243K was a bonus. Interestingly he has been CEO for over thirty years and is still only 62.

After the end of the balance sheet date the group acquired Klotz Associates, a Texas based consultancy providing engineering, planning and environmental services for a maximum consideration of £15.9M payable entirely in cash. The amount paid on acquisition was £11.1M with £3.2M to be paid on the first anniversary of completion and £1.6M to be paid on the second anniversary. Last year the business had a profit before tax of £2.4M.

At the current share price the shares trade on a PE ratio of 14.4 decreasing to 10.2 on next year’s consensus forecast which doesn’t look too taxing. After a 15% increase in the total dividend, the shares currently have a yield of 3.9% which increases to 4.5% on next year’s forecast which again seems pretty good but whether the group can actually afford dividends of this size is up for debate. At the year end the group was in a net debt position of £73.2M compared to £32.4M at the end of last year.

So, this has been a bit of a mixed year. Profits were up as was operational cash flow but this only seems to be because more of the deferred consideration was counted as remuneration last year which apparently means it is an operating expense for reasons I don’t really understand. There is some free cash flow but it is not enough to cover the acquisitions which have to be considered operating expenses too in my view as that is an important part of the group’s strategy. The balance sheet is stuffed full with goodwill and as such there is quite a hefty negative net tangible asset figure which got worse during the year.

Operationally, the energy business did OK due to prior acquisitions and the build environment businesses seem to be doing quite well but the Australian business has been hit by the continued low commodity prices and collapse of the oil price. Indeed, the balance sheet concerns aside, the real issue at the moment is the beleaguered state of the markets in which the group operates – I find it difficult to imagine that the energy and Australian businesses are going to pick up any time soon, which brings me on to the large increase in overdue receivables – I am concerned this could be because some of the group’s customers are finding cash flow a bit of a problem. The shares look cheap on both a PE ration basis and on the dividend yield but I feel the risks of things getting worse outweigh the potential value on offer given the increasing debt and falling net assets.

GSK Share Blog – Interim Results Year Ending 2015

Posted on July 31, 2015 by Share Research

GSK has now released its results for Q2/H1 2015.

When compared to Q2 last year, total revenues increased by £327M as a £433M fall in global pharmaceutical revenue was more than offset by a £488M increase in consumer healthcare revenue, a £207M growth in ViiV healthcare revenue and a £55M increase in vaccines revenue. Cost of sales also increased to give a gross profit some £44M ahead of last year. Sales and admin costs increased by £486M and there was a £347M negative swing in other operating expense which meant that the operating profit was £802M lower than in the same quarter of last year. After finance expenses of £194M and a considerably smaller tax bill, the profit for the quarter stood at £115M a crash of £587M when compared to the same period of 2014.

When compared to the end point of last year, total assets at the half year point were some £13.467BN higher, driven by an £8,294BN increase in intangible assets, a £3.208BN growth in cash, a £1.348BN increase in goodwill, a £714M increase in receivables, a £566M growth in inventories and a £552M increase in other investments, partially offset by a £952M fall in assets held for sale, a £236M decline in deferred tax assets and a £255M fall in the value of investments in associates and joint ventures. Liabilities also increased during the half year as a £7.333BN increase in other non-current liabilities relating to the potential requirement of GSK to purchase the rest of the consumer healthcare joint venture with Novartis, a £1.276BN increase in deferred tax liabilities and an £882M growth in current tax payable was partially offset by £1.145BN fall in long term borrowings, a £471M decline in short term borrowings and a £287M fall in derivative financial instruments to give a net asset level, excluding goodwill, of £5.48BN, an increase of £4.268BN when compared to the end of 2014.

Before movements in working capital, cash profits fell by £680M to £1.98BN. This fall was exacerbated by adverse working capital movement and a higher tax bill to give a net cash from operations of £587M, a decline of £1.106BN year on year. The bulk of this cash (£515M) was spent on fixed assets and intangible assets accounted for £265M so that there was no free cash flow. The group then spent £3.461BN on acquisitions but received £10.026BN from the disposal of the businesses to Novartis and £564M in proceeds from the disposal of an associate so that the cash inflow before financing stood at a hefty £7.221BN. The group used some £1.289BN in repaying loans, £344M went on interest payments and over two billion pounds was spent on dividends to give a cash inflow for the half year of £3.099BN to give a cash level of £7.106BN at the period-end.

The total operating profit of £335M was considerably impacted by non-core items which resulted in a net charge of £1.014BN. The core profit for the period would actually have been £936M comparted to £982M this time last year so much better than it initially appears. There was an intangible asset amortisation charge of £125M but this seems to occur each year so I am not sure if this is really “non-core”. The major restructuring charges probably are, though, to some extent as within the £515M charge this quarter was the acceleration of a number of restructuring projects following the completion of the Novartis transaction. Legal charges of £50M are probably ongoing costs in a company like this so should not be ignored. The £322M charge relating to acquisitions and other items included the unwinding of the discounting effects on both the contingent consideration for the ViiV healthcare joint venture and the consumer healthcare joint venture put option. Other items also included equity investment and asset disposals, one-off regulatory charges in R&D and certain other items.

Overall sales grew 7% on a reported basis and 2% on a pro-forma basis (the reported figures include four months turnover for the former Novartis vaccines and consumer healthcare products and exclude sales of former GSK Oncology products from the start of March). New product performance was positive in all three of the businesses with the standout performance coming from the new HIV drugs, Tivicay and Triumeq. Both of these are tracking ahead of recent launches and together generated sales of £294M. Elsewhere saw continued strong uptake for Flonase OTC, an improving market share for Beo Ellipta following the indication for asthma granted in April and continued uptake for the newly acquired Meningitis vaccines Bexsero and Menveo. Interestingly the growth of the new products is now more than offsetting declining sales of Seretide which is a great result really.

Sales of respiratory pharmaceuticals fell by 6% to £1.467BN quarter on quarter. Seretide sales fell by 13% to £960M, Flixotide sales decreased 10% to £159M and Ventolin sales rose 2% to £160M. Breo Ellipta recorded sales of £53M and having been launched in the US, Europe and Japan recorded sales of £15M. In the US, sales declined by 12% to £704M reflecting a 5% volume growth but a 17% negative impact of price and mix. This decline included the price and mix impact of new contracts agreed last year in response to competitive pressure in the market where Advair and Breo Ellipa compete. European respiratory sales were down 8% to £369M with Seretide down 16% to £267M reflecting the expected pressures of increased competition from generics and the transition of the portfolio to newer products. Relvar Ellipta, approved in Europe for both COPD and Asthma, recorded sales of £19M in the quarter while Anoro Ellipta, with launches underway in many countries throughout the region, recorded sales of £3M. Respiratory sales in the ROW region grew by 5% to £394M with emerging markets up 4% and Japan benefiting from comparison with a weak Q2 2014, up 17%.

Sales in the cardiovascular, metabolic and urology category rose 5% to £242M with the sales of Prolia increasing by 38% to £11M reflecting the impact of the termination of the joint commercialisation agreement with Amgen in some European markets, Mexico and Russia in Q2 2014. In the US, generic competition to both Avodart and Jalyn is expected to begin in Q4 2015 which will impact sales next year. Immuno-inflammation sales were up 27% to £56M driven by US sales of Benlysta and in other pharmaceuticals, sales were down 6% to £542M as dermatology sales fell by 8% as a result of supply constraints due to capacity limitations while Augmentin sales increased by 2% to £143M. Relenza sales more than doubled to £33M, partly driven by the timing of US CDC orders and sales of products for rare diseases increased by 2% to £94M including sales of Volibris which were up 8% quarter on quarter.

Established products turnover fell 5% to £655M with sales in the US down 16%. Lovaza sales fell 22% to £24M as the impact of generic competition started to annualise. Europe was down 13% to £121M with Serevent sales down 23% to just £9M. ROW sales were up 3% to £366M with higher sales of Amoxil, up 77% to £22M and Valtrex, up 71% to £33M following the regaining of exclusivity in Canada until October. These gains were partially offset by a 26% decline in sales of Zeffix in China.

The one saving grace really was HIV sales which increased by 59% to £559M in the quarter with the US up 84%, Europe up 46% and ROW up 26%, all driven by Tivicay and Triumeq. The ongoing roll-out of Tivicay resulted in sales of £145M and Tiumeq, now launched in the US and much of Europe recorded sales of £149M. Epzicom, which benefited from use in combination with Tivicay, increased 1% to £185M but Selzentry sales fell 18% to £31M. There were also continued declines in mature portfolio, mainly driven by generic competition to both Combivir and Lexiva.

Vaccine sales grew 11% to £814M with the US up 13%, Europe up 27% and ROW down 2%. The business benefited from the sales of the newly acquired products, primarily Bexsero in Europe and Menveo in the US. On a pro-forma basis, sales for the quarter actually declined by 5% primarily reflecting the phasing of tenders in international markets for Synflorix and Havrix, together with competitive pressures on Infanrix. In the US, reported sales grew 13% but declined 5% on a pro-forma basis due to the 12% decline in Infanrix sales as a result of the return to the market of a competitor vaccine, partly offset by growth in the Meningitis portfolio, Rotarix and Boostrix sales.

In Europe sales grew 27% on a reported basis and 12% pro-forma. This growth primarily reflected increased sales from Bexsero, mainly driven by the UK NHS immunisation programme along with Portugal and Italy. The period also benefited from improved supplies of Boostrix, up 31% which was partly offset by a 15% decline in sales of Hepatitis vaccines, reflecting supply constraints as well as tender phasing, together with an Infanrix sales decline of 3% which was also impacted by the introduction of a competitor vaccine and the phasing of shipments in several countries. ROW sales fell 2% on a reported basis and 16% on a pro-forma basis due to a decline in Brazil, the Middle East and North Asia due to the phasing of tenders, partly offset by growth of Synflorix in Africa.

In Consumer Healthcare, turnover grew 51%, benefiting significantly from the first full quarter’s sales of the newly-acquired products. On a pro-forma basis, growth was 6%, of which 4% related to volume and 2% related to price. This principally reflected the strong growth in the US following the launch of Flonase OTC. Also, momentum from Q1 launches drove innovation contribution with sales from products introduced in the last three years representing about 15% of sales in the quarter. US sales grew 28% on a pro-forma basis.

As mentioned, Flonase was the region’s primary growth driver and with quarterly sales of £45M the brand has contributed to the category growth of 15%, achieving 11% market share in the period. Oral health sales were driven by Sensodyne, which continued its strong performance with growth of 27%, helped by improved supply and the launch of Sensodyne Repair and Protect Whitening. Excedrin grew 25% in the quarter due to a strong base business performance combined with new variant launches and price increases. Nicorette Mini lozenges and alli continued their recovery from supply shortages last year and Tums started to recover from Q1 interruptions.

Sales in Europe grew 7% on a pro-forma basis. Oral health products reported growth of 11%, helped by improved supply relative to Q2 2014, but also reflecting strong performances from Sensodyne due to new advertising in key markets and the roll-out of Sensodyne True White in the UK, Sensodyne Repair and Protect in Germany, and Sensodyne Mouthwash across a number of markets together with some supply recovery of Aquafresh. In Wellness, Voltaren grew 18% with strong performances across the region, particularly in Germany with strong marketing support behind a new advertising campaign.

ROW sales declined by 2% on a pro-forma basis. India continued to perform well with double digit growth reflecting distribution expansion, enhanced marketing campaigns and the achievement of a four year market share high for Horlicks. Oral health sales continued to show growth in the region, up 9%, driven by Sensodyne but sales in Wellness were affected by the negative impact of reducing channel inventories in the acquired consumer businesses.

The core operating profit at the pharmaceuticals business was £1.116BN, a fall of 1% when compared to Q2 last year on a constant currency basis. The core operating margin was 2.5 percentage points higher on a pro-forma basis, reflecting strong growth in HIV partly offset by continued pricing pressure in global pharmaceuticals, particularly respiratory products. Vaccines operating profit fell by 32% to £177M with the operating margin down 12.5% on a constant currency basis, primarily driven by the cost base of the former Novartis business. The pro-forma margin declined by 1.3 percentage points reflecting mix changes and additional supply chain investments, partially offset by reductions in R&D. Consumer Healthcare operating profit was £108M, an increase of 41% quarter on quarter but on a pro-forma basis, the operating margin was 0.6 percentage points lower driven by a one-off sales tax settlement which impacted the operation margin by 1.3%.

The new pharmaceutical and vaccine products that have been tasked with providing growth for the next five years showed a £322M sales growth, a rate in excess of 100% and they now represent about 10% of Pharmaceuticals and vaccines turnover. As already mentioned, it was the new HIV drugs that really drove proceedings with Triumeq sales of £149M and Tivicay sales of £145K. Sales of Relvar/Breo Ellipta are also starting to gain traction, more than doubling at £53M with the next most important contributor being Bexsero which more than doubled to £30M. In all, it is expected that the new pharmaceutical and vaccine products will deliver at least £6BN in revenue per annum by 2020.

Since the end of Q1, it has been quite a quiet period for the group’s pipeline of new products but there have been a number of milestones. There was the start of a phase 3 study of the combination use of Dolutegravir and Rilpivrine; the FDA AdCom recommended US approval of Nucala for adult patients with severe asthma with eosinophilic inflammation; Nucala was filed in Japan for sever eosinophilic asthma; and there was a positive CHMP opinion for Mosquirix.

Core EPS for 2015 is expected to decline at a percentage rate in the high teens due to continued pricing pressure on Seretide in the US and Europe, the dilutive effect of the Novartis transaction and the inherited cost base of the Novartis businesses. In 2016 the group expects to see a significant recovery in core EPS with a double digit percentage growth as the adverse impacts of 2015 diminish and the sales and synergy benefits of the Novartis transaction contribute more meaningfully. The strong Sterling continued to adversely affect the group and if the rates were to hold at the current level for the rest of 2015, the estimated adverse impact on turnover would be around 2% and the adverse effect on core EPS would be 6% so this is significant.

At the period end, the net debt stood at £9.553BN compared to £14.377BN at the end of last year. The group has maintained the quarterly dividend at 19p per share which represents a rolling annual dividend of 5.8% which is rather spectacular.

Overall then, things continue to be difficult for GSK but these results may not have been as bad as people were expecting. Profits in the quarter were indeed lower than Q2 last year, but strip out the restructuring following the Novartis transaction and things don’t look so dire. Net assets improved over the end of last year, mainly due to intangible assets gained from Novartis and the cash position is much better, again due to cash received from Novartis although operational cash flow seems rather poor and there is no free cash at the moment.

Seretide sales continue to be battered due to lower prices in the US and Europe but the good news is that the new product sales are stepping up to take the slack with the two new HIV drugs doing particularly well. Seretide is still by far the biggest contributor to sales though so there is probably still further to go and now it seems Avodart could be in trouble next year. There are also foreign exchange headwinds to look out for with the strong pound really taking its toll on top of the operational issues. Despite this though, with the strong contribution from the HIV drugs and the stonking 5.8% dividend yield still on offer this looks to me like it might be worth investing in again and I am thinking about re-entering.

On the 20^th August the group announced that they had divested the rights in ofatumumab for auto-immune indications including MS to Novartis for a potential consideration of $1M. Novartis had already required the oncology indications for the drug and after this transaction they will own rights to all indications. Novartis will pay $300M in cash initially with a $200M payment subject to the start of a phase 3 study in relapsing remitting MS. Further contingent payments of up to $534M will be payable on the achievement of certain other development milestones. Novartis will also pay royalties of up to 12% on any future net sales of ofatumumab in auto-immune indications. This looks like a sensible deal to me.

On the 8^th September the group announced the results from the study to understand mortality and morbidity in COPD for Relvar/Breo Ellipta. The study involved 16,485 patients who had COPD with moderate airflow limitation and either a history or increased risk of Cardiovascular disease. For the primary end point of the study, the risk of dying was 12.2% lower than on a placebo, which was not statistically significant.

For the first of the two secondary endpoints, the drug reduced the rate of lung function decline by 8mL per year compared with the placebo but as the primary end point was not met, statistical significance cannot be inferred from this results. For the secondary endpoint, the risk of experiencing an on-treatment cardiovascular event at any time was 7.4% lower than the placebo patients, which was not statistically significant.

This seems like a bit of a disappointing result. Whilst it seems the drug is somewhat effective, the results were not good enough to be statistically significant.

On the 17^th September it was announced that director Dr Dexter purchased 7,655 shares at a value of nearly £100K.

On the 23^rd September, ViiV Healthcare announced data from the phase III SRTIIVING study which evaluated the efficacy, safety and tolerability of switching from an antiretroviral therapy to the once-daily fixed dose Triumeq in virology suppressed adults with HIV. The study met its primary endpoint, demonstrating that viral suppression was non-inferior for patients switching.

On the 24^th September the group announced that the CHMP of the EMA issued a positive opinion recommending marketing authorisation for mepolizumab, which will be commercialised under the brand name Nucala, as an add-on treatment for severe refractory eosinophilic asthma in adult patients. The final decision will be made by the European Commission and is expected before the end of 2015. This drug is not currently approved for use anywhere in the world and regulatory applications have been submitted in the US and Japan also.

On the 20^th October the group announced positive results from two studies comparing the efficacy and safety of Incruse Ellipta to two available bronchodilator treatments (tiotropium and glycopyrronium) when used by patients with COPD. Results from one study achieved a statistically significant improvement in lung function at 12 weeks compared to tiotropium and the other study shows that it was non-inferior to glycopyrronium.

Mission Marketing Share Blog – Final Results Year Ending 2014

Posted on July 30, 2015 by Share Research

Mission Marketing is predominantly a UK based communications agency group. Their board is comprised of the entrepreneurs who run the agencies which is something I have never seen before. They earn project income which is recognised by apportioning the fees billed or billable to the time period for which those fees were earned by relationship to the percentage of completeness of the project to which they relate, which sounds sensible to me. Where recorded turnover exceeds amounts invoiced to clients, the excess is classified as accrued income within receivables and where amounts invoiced to clients exceed recorded turnover, the excess is classified deferred income within accruals. With the exception of the recent acquisition in Asia, the group almost entirely earns its profits in the UK. It has now released its final results for the year ended 2014.

The group has a number of self-contained agencies including April Six, the UK’s leading technology channel marketing agency working with brands on an international basis; Big Dog, a full-service integrated agency creating ideas from insight across all channels with a focus on brand payback; Bray Leino, working with clients through every channel and across the business spectrum and is apparently the number one B2B agency in the country; Proof, a specialist PR agency helping science, engineering and technology organisations communicate complex subjects; RLA, specialising in automotive and also offering the capability of a full-service agency;

Robson Brown, one of the North of England’s major advertising brands; Solaris, a specialist full service medical communications agency for UK, European and Global clients; Speed, a commercially driven PR agency specialising in business and brand transformation with expertise in sport, technology, media, health and wellbeing, food and drink, financial and business services; Splash, based in Singapore with offices in Shanghai, Hong Kong, Malaysia and Vietnam, a digital agency aiding multinational brands build websites and market their products across all digital channels; Story, an award-winning integrated agency working with consumer brands and services from its Edinburg base; and Thinkbdw, the leading property integrated marketing agency in the UK, working with developers across all aspects of their sale support programmes from advertising to show homes.

Overall revenues increased year on year as a £4.5M increase in branding, advertising and digital revenue and a £1.7M growth in PR revenue was partially offset by a £3.5M fall in media revenue and a £1.2M decline in events and learning revenue. Staff costs increased when compared to last year but other cost of sales declined to give a gross profit some £3.4M ahead. We then see a £482K increase in operating lease rentals and a £2.4M growth in other underlying admin expenses but various one-off costs fell year on year with no restructuring costs, impairments on intangible assets or legal disputes so that the operating profit increased by £2.2M year on year. We then see declines in interest from loans counteracted by the acceleration of the amortisation of debt arrangement fees and a tax bill some £375K higher to give a profit for the year of £4.2M, an increase of £1.8M when compared to 2013.

When compared to the end of last year, total assets increased by £11.7M driven by a £4M increase in goodwill and a £3.6M growth in trade receivables with accrued income and cash also increasing year on year. Liabilities also increased due to a £1.9M increase in accruals, a £1.7M growth in trade payables and a £2.3M increase in contingent consideration payable to give a £884K improvement assets excluding goodwill, although they remained a negative £6.8M.

Before movements in working capital, cash profits increased by £1.9M to £7.3M. We then see an increase in payables more than offset by an increase in receivables so that cash from operations was flat year on year at £6.2M. When we take account of lower finance costs and tax, however, the net cash from operations is £808K higher than last year at £5M. The group used this cash to pay for capital expenditure (£2.2M), which was higher than previously due to the relocation of two agencies, and deferred consideration (£815K) and even managed to spend a net £1.1M on new acquisitions and still have a free cash flow of £953K. This was enough to cover the dividends but the group also used cash from the issue of share capital to pay off some debt, including the equity warrants to give a cash flow for the year of £936K and a cash level of £1.5M at the year-end.

Operating profit at the branding, advertising and digital business was £6M, a growth of £300K year on year. Operating profit at the Media business was £949K, a decline of £198K when compared to 2013. Operating profit at the events and learning business was just £89K, flat when compared to last year. Operating profit at the PR business was £632K, a hike of £522K year on year. Within the overall increase in profits, some 5% was delivered through an increase in like for like profit.

Having traditionally focussed on the UK, the group has been expanding its international reach in recent years. The technology agency April Six has opened an office in San Francisco to service their existing and potential clients based there and now they are in Asia with Brey Leino having already opened an office in Singapore and the acquisition of Splash which brought with it offices in Singapore, Shanghai, Hong Kong, Malaysia and Vietnam.

The board structure is really interesting at Mission, the executive board is made up almost entirely from the founders of some of the individual agencies under the Mission umbrella, with the exception of the Finance Director who joined from UK Mail and one non-executive who also heads up Pittards and Pure Wafer. As such, the chairman’s statement is much less formal than I am used to including words like lallygaggers and using cricketing puns – I quite like that! I am not so keen on the lack of information about how each of the agencies are actually doing. This is probably not helped by the lack of a CEO with the group instead opting for an executive chairman structure which I am not really a fan of either.

The shareholder structure is also quite interesting, many of the business founders on the board own considerable numbers of shares with many owning about 1% of the company. Executive chairman David Morgan, along with Robert Day both own about 7.3% of the company each with the other large shareholders being made up of institutional holders that I have not head of – Herald Investment Management, Objectif Investissement Microcaps and the Polar Capital Forager Fund.

The improved economic conditions seen during the year had a largely positive effect on the group and nearly all agencies reported growth in revenues but it was not always possible to maintain profit margins in the face of continued downward pressure on pricing. The boom in the property market perversely resulted in a marked reduction in the level of marketing spend by developers and estate agents as demand outstripped supply. As well as a decline in spend with the property clients, the group also saw a decline in media spend too. Of the 7% growth in operating income, 5% was achieved from the full year’s contribution from Solaris and the various acquisitions with like for like revenue increasing by 2% year on year.

In addition to the myriad acquisitions, the group have also made some internal changes. They have created a sports marketing consultancy to advise clients in that area and have strengthened their technology offerings. More recently, agencies Big and Balloon Dog were combined under the Bigdog brand to create a single business. Overall, client retention has been strong which bodes well for 2015. The group achieved all of its KPI targets during the year which included increasing operating income, achieving operating margins at least in line with industry averages (11% achieved), year on year growth in profit before tax, a ratio of net bank debt to EBITDA of less than 2 (it was 1.5) and a ratio of total debt to EBITDA of under 2.5 (it was 1.7).

During the year there were three main acquisitions. In August the group acquired Proof Communication, a specialist science, engineering and technology PR business to extend the services already being provided by April Six in the technology sector. The group spent £1.5M on the acquisition comprising initial cash of £923K, shares worth £59K and contingent consideration of £511K with a possible maximum of £1M dependent on Proof achieving a profit in 2015. I think I would rather the group provided for the whole possible consideration rather than just about half of it. The acquisition came with £334K of intangible assets and generated goodwill of £576K. Since the acquisition the business has contributed £121K in profit so this looks like a good value purchase to me.

In September the group acquired 70% of the issued share capital of Splash Interactive, a specialist digital agency operating through five territories in Asia in order to support the group’s existing Asia based clients. The group spent £2.6M on the 70% interest comprising initial cash of £443K and contingent consideration of £2.2M. In addition, there is an option to purchase the remaining 30% of the business from 2018 at an estimated future cost of £1M. The maximum contingent consideration is a whopping £6.9M depending on various profit targets to the end of 2017, of which £4.7M has not been provided for. The business came with intangible assets worth £694K and generated goodwill of £2.4M. Since the acquisition date the business has contributed £197K to operating profit so this is another nice purchase, perhaps at the upper end of the appropriate valuation.

At the end of October the group purchased Speed Communications Agency in order to bring greater scale to their existing PR capabilities. The total paid was £815K with £435K in initial cash, £240K in shares and £140K in contingent consideration, which refreshingly is the maximum amount of contingent consideration possible depending on the business achieving certain profit targets to the end of 2015. The acquisition came with £274K of intangible assets and generated goodwill of £601K. Since the date of the acquisition the business contributed an operating loss of £40K on turnover of £327K so some work looks like it needs to be done here. There were also some smaller acquisitions totalling £480K, £225K in cash and £255K in contingent consideration.

After the year-end the group signed new bank facilities replacing those in place at the end of last year which meant that the remaining unamortised bank debt arrangement fees of £126K were fully written off during the year – these fees have already been paid in cash anyway so I am not going to count them as exceptional (unlike the management here). The main risk facing the group is probably the possibility of adverse economic conditions leading to a reduction in client’s marketing budgets and the potential loss of a key client, although none represent more than 10% of group operating income.

As mentioned above, after the year-end the group refinanced its borrowing facilities into an £8M term loan and a revolving credit facility of up to £7M, both repayable by Feb 2019. The interest rate terms on the new loans are improvement on the old ones, being 2.25% as opposed to LIBOR + 2.75% previously. There is no significant exposure to foreign exchange differences but there is no hedging against interest rate rises. Also after the year-end the group acquired Weather Digital and Print Communications, a digital marketing agency based in Edinburgh. The consideration payable is up to £880K in cash and shares, of which a £255K cash payment has been made with a contingent consideration dependent on the business achieving profit targets in 2015. The net assets are estimated to be about £100K.

Going forward, it is expected that 2015 will be another busy year, consolidating the acquisitions made, streamlining some of the existing operations and planning further acquisitions. As usual the profits are expected to be second half weighted (this year profit margins were 8% in H1 and 14% in H2 which exactly matches the pattern seen in 2013). The group expects to see further growth in the coming year in both revenues and profit but in order to underpin this growth, the board has restructured certain activities with the consequence of an extra £600K of costs in Q1 2015.

At the current share price the shares trade on a PE ratio of 8.8 which falls to 8 on next year’s consensus forecast. After a 10% increase in the total dividend for the year, the shares enjoy a yield of 2.4%, increasing to 2.7% on next year’s prediction. Net debt at the year-end stood at £9.4M compared to £10.7M at the end of last year. There were also outstanding operating leases of £3.9M at the end of the year, an increase from the £1.9M at the end of last year.

Overall then, I am warming to this company more than I expected. Profits increased year on year as did operational cash flow. Indeed there was even some free cash left over after the acquisitions were paid for, although a lot of the consideration is deferred and the free cash didn’t cover the debt repayments and dividends. The balance sheet, in common with all marketing companies it seems is wafer thin and stuffed with goodwill. This year net assets improved slightly but remained negative once goodwill is taken out. The board structure is very interesting and what it lacks in corporate experience it should make up for in enthusiasm, with most of the board founders of their own agencies and holding a lot of shares.

It seems that all marketing companies rely on acquisitions for growth and that is certainly the case here – three in one year with another after the year-end. Most of these acquisitions do look decent but I am a little concerned with the contingent consideration being racked up, particularly as not all of the potential consideration has been accounted for. The debt levels look fairly substantial but manageable and there does not seem to be any particularly hefty operating leases outstanding, although they are increasing so something to watch maybe. Operationally the group did OK, although growth was not that amazing as apparently it was too easy to sell houses so estate agents and developers didn’t need to bother paying for marketing which took its toll. Despite this, the shares offer a forward dividend yield of 2.7% and trade on a PE ration of 8.8, falling to 8 which looks very cheap to me.

On the 1^st July the group announced that they were launching Mongoose, a specialist sports and entertainment agency. Focused on brand-led marketing and sponsorship campaigns, the new agency will source, negotiate and manage customised sponsorship and events programmes for B2B and B2C clients. It will be led by Chris O’Donogue, previously MD at WSM Communications, and John Beddington, former tournament director of the Canadian Open Tennis Championships will become chairman. Based in London and Singapore, Mongoose will be working with an impressive line up of major national and international brands including the sponsor of the London Triathlon, AJ Bell; Chestertons Polo in the Park, the O2 sponsor, CEWE photobook and Thomson Reuters which is partner of the LTA.

This is something I like to see, the group is not just buying established agencies but is launching its own, hopefully it will be a success.

On the 22^nd July the group released a statement covering trading in the first half of the year. Revenue and profit are expected to show double digit growth, benefiting from both organic growth and the acquisitions made in the second half of last year. The debt level fell from £9.4M at the year-end to £8.3M at the half year point and the leverage ratios remain comfortably within the limits set by the board. It has been a busy period and the recent focus has been on bedding the new businesses into the group. Going forward, they will seek to exploit the opportunities for further growth the new business bring and in addition will continue to explore opportunities to extend their range further in response to client demand. In all, the board remain confident of meeting market expectations for the full year.

Additionally it was announced that non-executive director Stephen Boyd was stepping down to focus on his other business interests. This is a bit of a shame as Stephen was one of only two board members externally sourced and I felt brought something different to the group. Hopefully he will be replaced with a similar candidate. Overall though, I like the sound of this update and the company as a whole actually. Clearly as soon as the economy takes a dive, the shares will too but for now I am looking to take my maiden position.

The share really haven’t done much over the year, it has been one of consolidation but this update could have been the catalyst to propel them a bit higher?

Johnson Services Group Share Blog – Final Results Year Ended 2014

Posted on July 29, 2015 by Share Research

Johnson Service Group provides textile services to both businesses and the consumer. The two services are textile rental and laundry, along with retail dry cleaning. Textile rental is the supply and laundering of work wear garments, premium linen to the hotel, catering and corporate hospitality markets, linen to the volume hotel market and sale of ancillary items. Dry Cleaning is the provision of dry cleaning, laundry and ironing services, carpet cleaning, upholstery cleaning, wedding dress cleaning and suede and leather cleaning. They are listed on the AIM exchange and have now released their final results for the year ending 2014.

Within the textile rental business the group has a number of brands. Apparelmaster is the UK’s market leading work wear rental, protective wear and workplace hygiene services provider with some 40,000 UK based customers operating in a wide cross section of industries. Stalbridge provides a wide range of products to the premium hotel, catering and corporate hospitality markets, including chef’s wear, linen, towels and a range of table linen. The newly-acquired Bourne business provides linen to various hotels including city and town centre establishments, holiday village resorts and the budget hotel sector.

Within the dry cleaning division, there are two brands. Johnsons Cleaners is the UK’s number one dry cleaner with a network of branches nationwide and Jeeves is a premium dry cleaning service that holds the royal warrant.

Overall revenues increased year on year as a £2M decline in dry cleaning revenue was more than offset by an £18.8M growth in textile rental revenue, benefiting from ten months of trading from Bourne. We then see a big increase in depreciation and a £5.7M growth in staff costs to give a gross profit some £9.7M ahead of last year. Distribution costs then increased by £2.7M and there was an increase in amortisation counteracted by a fall in operating lease payments. Other admin costs then increased by £3.2M and the textile rental restructuring costs that occurred this year were broadly the same as the dry cleaning restructuring costs that occurred last year but a £4.9M pension scheme cost pushed the operating profit down by £2.4M year on year. We then see a much smaller interest on bank loans and the pension liabilities to give a profit before tax just £600K ahead. After tax and the lack of the £9.1M loss from discontinued operations, the profit for the year stood at £8.6M, an increase of £7.9M when compared to 2013.

When compared to the end point of last year, total assets increased by £30.7M to £190.2M driven by a £10.5M increase in plant and equipment, an £8.6M addition to customer contracts, a £4.5M increase in textile rental items, a £3.8M addition to goodwill and a £3.5M growth in freehold property, partially offset by a £3.2M fall in cash levels. Liabilities also increased during the year as a £14.2M increase in pension liabilities, a £2.7M increase in trade payables and a £2.6M growth in accruals was partially offset by a £3M decline in provisions, mostly relating to property provisions. The end result is a £3M fall in net tangible asset to £12.1M.

Before movements in working capital, cash profit increased by £10.2M to £45.5M which became £47.9M and £9.4M higher after modest working capital movements. The group then paid £2M in pension deficit recovery payments and the same amount in interest but tax was very low during the year to give a net cash from operations of £43.8M, an increase of £11.5M year on year. The group then spent £24.9M on textile rental items, £11.6M on property, plant and equipment and £22.4M on business acquisitions to give a cash outflow of £13.1M before financing. We then see £3.9M paid on dividends and a net £4M of loans paid back but clearly they were running out of cash at this point so more shares had to be issued which brought in £14.4M to give a cash outflow of £8.3M during the year and a negative £4.9M of cash at the year end. On this evidence, I don’t think the group could really afford that acquisition.

The operating profit at the textile rental division was £20.3M, an increase of £2M when compared to last year. Apparelmaster had a good year with higher levels of new business wins, increasing sales to existing customers and improving customer retention levels to in excess of 95% resulting in both operating profit and margin improving. A number of large national contracts renewed their agreements during the year resulting in additional spend on textile rental items with a corresponding increase in rental stock depreciation levels. The increased costs associated with this were offset by production efficiencies together with improved energy unit prices and consumption, however.

The business has continued to invest in equipment to drive higher productivity and lower energy consumption and as part of the investment strategy, a new £8.5M work wear processing facility in Leeds has been completed which replaces an existing facility and considerably increases garment processing capability. The business has also continued to invest in IT support which has improved the ability to communicate with customers in a simple manner.

Stalbridge had a strong performance as a result of new sales wins and an improvement in customer retention levels which were aided by productivity and efficiency benefits from the capital investment made in Q1 this year. A further investment of £1.2M in plant and machinery was approved for Q1 2015 which should increase capacity and reduce operating costs. The business continues to focus on the premium hotel, restaurant and catering industries and to improve the customer experience a new extranet and field based mobile technology solution has been developed and a new marketing campaign is planned for the new year.

Bourne traded very strongly throughout the ten months since acquisition, delivering increased volume from existing customers as a result of buoyant hotel occupancy levels and new hotel openings. The business has also made some new sales wins despite some competitive headwinds. It is expected that the business will continue to perform ahead of original expectations throughout 2015 in term of business development, adjusted operating profit and margin.

The operating profit at the dry cleaning division was £1.6M, an increase of £1.2M year on year. The group has attempted to develop their business model away from the high street towards alternative routes to market. During the year, the business developed a front of store presence in Waitrose and following successful trials, Johnson Cleaners had opened facilities in 78 Waitrose locations by the end of the year with the numbers increasing to 122 since the year-end. The business has also established collection and delivery points in a small number of corporate office premises with a high concentration of staff and as a preferred supplier with a number of facilities management companies who offer multiple services to their clients.

In addition to these initiatives, they have also made progress with their website development which now incorporates the capability of online transactions across various services which will enable home collection and delivery of bulky items in the near future. As mentioned elsewhere, the group are closing 109 branches by the end of H1 2015 with the expected net cost expected to be £6.5M with the bulk of that (excluding £1.8M) relating to already contractually committed cash spend in the current and future years such as rents, rates, insurance and dilapidations so I am a bit confused as to why there will be an extra charge for them as surely they are already provided for?

As can be seen there was a number of one-off costs during the year. The restructuring costs in the textile rental division includes part of the relocation costs following the construction of a new processing facility in Leeds to replace an existing textile rental plant and of the £1.3M charge, some £700K relates to the impairment of property plant and equipment. There is expected to be a further £1M charge relating to this in 2015. Acquisition costs of £600K related to professional fees of £400K and stamp duty of £100K following the acquisition of Bourne. The remainder of the cost relates to fees and expenses incurred during negotiations with undisclosed targets. The pension service cost of £4.7M was incurred after the closure of the defined benefit scheme to future accrual. In my view the restructuring and acquisition costs are just costs incurred in the day to day running of the business and I will include them in my calculations but that pension cost can probably be taken off to better ascertain the underlying performance of the group.

The pension scheme could be a potential risk to the group and it showed a deficit of £17.2M on assets of £198.3M this year compared to £3M last year due to a significant reduction in the discount rate applied to liabilities, and the group are expected to make £1.9M of deficit recovery payments next year after paying £2M this year. The group should be able to absorb these costs but there is still potential for further costs despite the closure to further accrual. As well as the pension, the group is also somewhat susceptible to interest rate hikes due to its large debt levels, although it does hedge some of this risk but the biggest risk is probably a slowdown in the UK economy as this would have a substantial effect on the group.

During the year the group acquired Bourne Services group for a cash consideration of £26.7M. The acquisition came with customer lists apparently worth £10.2M and it generated £3.8M in goodwill. Bourne’s operations are focused on the volume hotel linen market and serves customers in the Midlands, South Yorkshire, East Anglia, North London and the Home Counties. Since the start of March, Bourne has generated a profit of £2.4M and had the business been acquired at the start of the year, it would have generated £2.5M. Since the group comes with net intangible assets of £14M, including goodwill, the consideration does not look too stretched.

The dry cleaning business continues to operate in a difficult high street environment and despite several initiatives to reach new customers, like for like sales fell during the year. After a review, some 109 branches were identified, the majority of which have leases expiring within the next two years, where renewal of the leases will not be financially viable. A consultation exercise with affected employees is underway and it anticipated that the affected branches will close during the first half of 2015 which is expected to result in a charge of £6.5M during that year. In the medium term, this has got to be a good move from the company though.

The strong performance of the textile rental business has continued into 2015 and the board has identified areas for further growth and investment, particularly in sectors of the market where they are underrepresented. The streamlined branch network, together with a focus on highly convenient drop off and collection locations should help improve the performance of the dry cleaning business and the board expects that they will deliver a strong performance for 2015.

At the current share price, the shares trade on a PE of 19.1, falling to 15 on Investec’s forecast which seems rather rich to me. After a 41% increase in the total annual dividend, the shares currently yield 2%, increasing to 2.2% on next year’s forecast. At the end of the year the group was in a net debt position of £28.5M compared to £24.5M at the end of last year and there is £64.4M of outstanding operating lease payments off the balance sheet which is quite considerable.

Overall then this has been a decent year for the group with a number of “buts”. Profit was down year on year but this was only due to the one-off pension charge following the closure of the scheme to future accrual so underlying profit did improve during the year. Similarly net tangible assets fell year on year but once again the pension scheme was to blame for this and if we take out the large increase in the deficit then net assets would have improved. Operational cash flow improved year on year and the group managed to generate some £7.3M in free cash but then spent a load more on the acquisition, which I didn’t think the group could really afford – although it seems a quality purchase.

The textile rental business is doing well and despite the relatively low profitability in the dry cleaning that also improved during the year with the new non-high street initiatives looking good to me. I do think that operationally things are going well here, and there could be a bright future but my reservations are on the financing side of things. The pension scheme is becoming a problem and the £2M annual payments to reduce the deficit are being noticed. Similarly the debt levels seem a bit too high for my liking given the fact that the balance sheet is not looking amazing for a company that is actually quite asset-heavy.

On the 1^st May the group announced the acquisition of London Linen Supply, a specialist supplier of table linen and chef’s wear to the restaurant, catering and hospitality market, based in London. The total consideration payable amounts to £69.4M in cash.

London Linen currently supplies some 900 customers at over 3,400 locations and processes about 1.6M pieces of linen a week. The directors believe that there is a 20% additional processing capacity available before any further investment. The company services customers predominantly in the London area but also covers major cities in the Midlands, the North and the West. The profit before tax for the acquired business is £5.5M for the year ended 2014 and the board expects it to be immediately earnings enhancing immediately and significantly earnings enhancing from 2016 onwards.

In order to fund the acquisition the group has opened a new banking facility which is a £100M revolving credit facility which runs to April 2020. In addition there is a year-long short term facility for £20M. The group is also undertaking a placing of just over 30M shares in order to raise £21.1M. The new shares will represent about 10% of the company’s existing share capital and will be priced at 73p per share.

It does seem as though London Linen is a quality outfit but I am getting more concerned about the levels of debt seen here. Following the acquisition the group has a net debt position of £73.7M and the chairman has stated that the group are continuing to look for further acquisitions. I am a bit risk averse by nature and feel that they may be over extending themselves here. In addition, the acquisition also looks a little pricey to me so I am staying on the side lines here.

On the 7^th May the group released a statement covering trading during the first four months of the year. All of their businesses have traded in line with management expectations and they remain confident in the prospects for the full year.

On the 2^nd July the group released a statement covering trading in the first half of the year. They have delivered a strong result for the period and expect the full year results to be slightly ahead of expectations. The acquisition of London Linen is trading as expected and the integration of the wider textile business is underway. Net debt stood at £73M at the half year point which is slightly below the previous estimate, but still too high for my liking!

It has to be said that this is a good looking chart – obviously the market doesn’t share my concerns abut the company.

InternetQ Share Blog – Final Results Year Ended 2014

Posted on July 28, 2015 by Share Research

InternetQ is engaged in the trading and development of software and related products and services used in wireless and telecoms. It has been listed on the AIM exchange for four years now and has now released its final results for the year ended 2014.

Revenues mainly consist of telecoms traffic that is generated from the end users/subscribers and are based on the activity and flow of premium rate telephone minutes and SMS messages. The group also gains revenue from the supply of mobile phone content, entertainment and other services and acts as an intermediate to network operators for branded mobile campaigns.

Revenues increased year on year with a €16.2M growth in B2B revenue and a €11.8M increase in B2C revenue. Cost of sales also increased to give a gross profit some €8.6M ahead of last year. We then see a modest fall in R&D expenditure more than offset by a €1.6M increase in staff costs, an €877K increase in staff share plan expenses, a €212K growth in receivables impairments, a €3.6M increase in amortisation charges and a €967K growth in other operating costs to give an operating profit £1.6M higher than in 2013. There was also an €887K detrimental movement in foreign exchange representing the unrealised foreign exchange losses on inter-company loans between the holding company and various subsidiaries, and an increase in interest which, when combined with a €340K growth in the tax bill (mainly as a result in the reduction of capital allowances for tax incentive plans), meant that the profit for the year, at €8.7M was actually €66K below that of last year.

When compared to the end point of last year, total assets increased by €26.2M driven by a €13.4M increase in purchased software, a €10.9M growth in trade receivables, a €4.3M increase in goodwill and a €2.2M growth in the value of customer relationships partly offset by a €2.3M decline in software under development and a €1.4M fall in the value of internally generated software. For the tangible asset calculation, I have decided that given the nature of the group’s business the software is probably worth something so the “tangible” asset level in this case also includes the software. Liabilities also increased during the year as a €9.2M growth in trade payables and a €3.7M growth in short-term loans was partially offset by €1.5M fall in accrued expenses to give a net tangible asset level of €64.1M, an increase of €7.8M year on year. There are also outstanding operating leases off the balance sheet totalling €1.3M which does not seem particularly material.

Before movements in working capital, cash profits increased by €7.6M to €22.7M which was eroded somewhat by a large increase in receivables and after the Polish fines and tax was paid, the net cash from operations came out at €15.8M, an increase of €3.7M year on year. This was only just enough to cover capital expenditure, with a €14M spend on software relating mainly to the development of Minimob platform, Akazoo music platform and BADABEE mobile portal, and a €695K spent on fixed assets but the €5.2M acquisition meant that before financing there was a €3.9M cash outflow. After new borrowings were received the cash outflow for the year stood at €1.1M to give a cash level of €11.6M which is fine but at some point this company is going to have to start generating free cash flow if it is going to sustain itself without the help of increased borrowings and share placings (as occurred last year).

The operating profit at the Business to Business sector was €13.2M, an increase of €3.3M year on year. Mobile marketing has evolved in recent years and mobile is expected to be the biggest driver of global advertising growth. The group has gained traction across their key geographies during the year with several new clients and contract wins such as Moviestar in Spain and Latin America, Viva in the Dominican Republic and CellC in South Africa which is part of a growing pipeline for mobile network operators’ campaigns that have been integrated with Minimob. The acquisition of UP Mobile also makes the group an important player in the large Mexican market.

The operating loss at the Business to Customer sector was €2.5M, a €1.6M deterioration when compared to last year. Some major contracts with MNOs have helped to drive international expansion with key partnerships with Sony Mobile and Orange Poland secured during the year. The increase in revenues over the year was largely driven by a focus on improving the competitive proposition of Akazoo’s music streaming service with new features being added. The biggest geographic growth was seen in Asia and Europe with multiple new contracts secured in the Asian market including a pilot launch in Thailand, a successful launch with Ninetechnology and the OEM brand partner of Gmobi in Malaysia, the launch of the Blackberry messenger partnership in Indonesia and the launch of a co-marketing initiative with device manufacturer Smartfren Indonesia to promote an add-on service offering.

The group also strengthened Akazoo’s position in Europe through the launch of a bundle agreement with Orange in Poland and the release of a co-branded add-on service offering with MTN in Cyprus. There is good visibility going into 2015, with a strong pipeline of launches and partnerships with leading MNOs, Internet Service Providers and device manufacturers in Indonesia, Singapore and other markets. They also plan to launch Akazoo in another Western European market in the coming months.

The group has a number of software assets. Minimob provides a full suite of messaging and smart ad delivery tools enabling automated alerts, rich media messaging and subscriptions. The technology platform helps app developers maximise the success of their apps, allowing them to build a communication strategy that will bring people back to the apps day after day. For maximising the advertising revenue, the group developed tools and services for precisely targeting the delivery of advertising to the right audience. During the year they invested in phase 5 of the software development as well as the addition of an add delivery end point and total development costs for the year amounted to €7.6M while €2.6M is included as software under development.

In the latest phase the following features have been developed: ad formats – advertisers can choose to deliver their offers in several formats, selecting each time the one that is going to maximise message efficiency and conversion rates; account balance, including reports on daily earnings, payouts and payment methods; and monetisation, developers who open their applications to third-party advertising can earn money depending on app distribution and traffic. At the same time a new form of global advertising demand has emerged, focusing on driving mobile consumers to take action in response to a well-timed offer or a call to action which can be a message, advert or video. In response to this trend, the group is developing the add delivery end point phase of the platform that includes video ad packages, in page video adds and HTML5 adds.

Akazoo is the group’s digital/mobile music social steaming platform, optimised for online and mobile access. At the core of the package lies a music store capable of concurrently serving content with metadata aggregation to millions of users. The music store module is able to use external content delivery networks supporting both http progressive downloads and adaptive media streaming for content distribution to users through all widely accepted channels in multiple music formats and bit rates. The Akamai HD network which is utilised by Akazoo is a live and on demand streaming technology platform that can support the largest online events. The total development costs on the platform during the year were €5.2M with €200K included in software under development.

New features this year included a global content reporting platform, a third party data aggregation platform and A/B engagement metrics analytics. Subsequently the mobile digital streaming radio solution where the Akazoo radio app supports a wide range of radio stations which are constantly being enhanced has been developed.

Badabee is a messaging application for android that allows customers to send SMS to any mobile number via the application interface. This is a subscription based service running in various countries under a daily or weekly model. This year, development costs on this platform totalled €600K in order to update the previous version where the new version offers various methods to send and receive SMS.

The mobile gaming market is becoming a more important focus for the group and Minimob now delivers a significant number of campaigns including games such as Tribal Wars, Puzzle Coin Hunter, Brave Frontier and Dragon Nets. The group’s role has always been to convert a mobile customer into a paying customer but they are now being rewarded with a specific payment by a third party for encouraging a mobile consumer to effect a transaction, be it making an app download or signing up for subscription services. This additional revenue, whether it comes direct from brand names like BBM and WeChat or from third party demand side ad networks and agencies working for major clients, is a line of business that will feature more prominently in 2015.

During the year non-executive director Michael Joliffe announced his retirement. The group is still 46% owned by the CEO and founder Panagiotis Dimitropoulos but also has some heavy weight institutional investors such as Legal & General, Schroder and Standard Life. None of the other directors seem to have significant share holdings, though.

The group seems very reliant on a small number of customers. Three clients with whom the group conducts campaigns in the Middle East, Africa and Russia account for an astonishing 77% of the B2B sector revenues (accounting for the same percentage last year) and two customers accounted for 30% of the total revenues in the B2C sector. There is also some exposure to foreign currency exchange between Sterling and Polish Zloty and Singapore Dollar with a 1% change affecting profits by €137K. Also, given the geographic reach of the group there are some country risks to look out for. Specifically the adverse economic conditions in Greece and Cyprus could affect revenues but with just €2.9M of sales being generated in Greece the risk is not that material and perhaps Russia would be more of a risk given the statement above.

The group has been imposed two fines from Polish regulators amounting to €196K. The first fine of €120K was paid during the year with the rest to be paid shortly. They have also received a number of civil court claims regarding certain mobile marketing campaigns in Poland with some €37K outstanding. In addition, they have received four payment orders from third parties for the total of €165K. No further details are given and whilst these are relatively modest amounts, it is rather concerning to see so many outstanding legal issues which might point towards some dubious practices.

In May the group acquired Up Mobile Holdings, a mobile marketing and interactive TV and radio content provider in Mexico. It is the number one provider of interactive solutions for radio stations and also provides mobile solutions to media organisations and the public sector in Mexico. The key benefits of the acquisition are that it significantly increases the group’s presence in Latin America, it provides an entry into Mexico’s dynamic market and builds increased value by capitalising on the synergies of both company’s clients and services. The total consideration paid is €6.7M and the acquisition generated €4.5M of goodwill and comes with €3.3M of customer relationships so there is a negative net tangible asset level. Initially €3.2M will be paid in cash with a contingent consideration of shares to be issued to a value of €3.5M.

In the seven months since acquisition, the company made a loss of €35K on revenues of €895K. Had the acquisition occurred at the start of the year, Up Mobile would have contributed a loss of €411K. I am sure management know what they are doing with this acquisition but it seems to me that it needs quite a lot of work in order to get it contributing to profits.

Going forward, the group has made a solid start to 2015 and the board is confident of delivering further growth during the year. The increase in mobile advertising and the massive uplift in installed apps are significant drivers for growth.

At the current share price the shares trade on a PE ratio of 16.9 which comes down considerably to 9.5 on Cannaccord’s next year forecast. The group was in a net cash position of €220K at the year-end compared to €4.7M at the end of last year. The current focus is on growing the group so it is not considered appropriate to pay a dividend at this time.

Overall then, this is an interesting company and one I am finding quite hard to value. Profits were broadly flat year on year but were not helped by adverse forex movements. Net tangible assets seem pretty good if we include software and improved year on year but the big increase in receivables could be something to watch as despite the improvement in operating cash flow the group does not produce much free cash and any that is produces is used to go towards further acquisitions. On that subject, I am not sure if the latest acquisition is of a great quality despite the large potential market – it is market leader in Mexico and unable to make a profit!

The B2B business is basically Minimob and this seems to be decently profitable but the B2C business which is Akazoo, a music streaming service, just absorbs investment and I am not sure the group will be able to actually make any money from it. One real stand-out risk is the reliance on three main customers who are located in some rather dicey markets – Russia, the Middle East and Africa to be precise. As I said, this is a difficult one. The product (at least, Minimob) seems to be quite exciting but there are quite some risks with the company – could be an interesting educated punt but not something I am going to put too much money in.

On the 21^st May the group released a trading update covering Q1. The group achieved growth across both mobile marketing and digital entertainment divisions with revenues up 11% to €33.5 and EBITDA (there is a very hefty Amortisation charge to come out of this) up 28% to €6.2M with profit margins higher than expected. In the mobile marketing division the group completed a campaign through Minimob with Foodpanda, an Indian Rocket Internet company which provides entry into ten new geographies; ad agencies accounted for the majority of new campaigns (over 70%, followed by brands and operators; ten new marketing campaigns were started in Latin America, including Claro Chile and Vodacom Lesotho (that sounds like Africa to me…), mobile entertainment subscription services were started in South Africa; and a major new marketing campaign was signed with Andalabs in Indonesia.

In the digital entertainment sector there was a renewal of campaigns with key clients, including Sony Mobile in Malaysia; the Akazoo service was launched with Smartfren Indonesia; and the Akazoo radio streaming platform was developed with a new release on the Akazoo Business Intelligence platform. Apparently going forward there is good visibility with a strong pipeline for both businesses, particularly in Asia and Latin America.

On the 9^th July the group announced a strategic investment into Akazoo by a consortium led by Toscafund Asset Management and Penta Capital. Tosca is investing about €17M in cash into the UK registered entity that will hold the Akazoo business. Also, the shareholders of R&R Music (a company that combines algorithms and behavioural science expertise with social media and human curation to create a profiling and recommendation engine) have agreed to contribute their business to the new Akazoo group. The cash investment will be used to grow Akazoo’s operations and expand the new entity’s proposition across new verticals.

Based on the terms of the new investment, the valuation of the enlarged Akazoo business is about €104M with InternetQ holding just over 69% of the shares with Tosca and R&R Music’s shareholders owning the rest. In all, this sounds like a good development for the group. They were clearly struggling to get Akazoo profitable and this should really help in that goal whilst also enabling InternetQ to retain an interest whilst concentrating on the Minimob platform.

On the 28^th July the group released a trading update for H1 2015. Overall it was a solid first half with increased revenue and EBITDA on last year driven by growth in performance based ad campaigns. The group had growth across both business divisions during the period, revenue increased to €72M, up 10% year on year, mainly fuelled by growth at Minimob, replacing the legacy Mobi Dialogue business which has much lower margins. Adjusted EBITDA increased by 35% to over €13M reflecting higher margins in Minimob and maturity of the Akazoo model. The company has a strong pipeline with good visibility for the coming half year and is on track for even better growth in the historically stronger second half and they are confident that full year results will be in line with market expectations.

In Mobile Marketing there was increased traction for Minimob with new contracts secured with global brands, including Delivery Hero, a food ordering service; Lazada, SE Asia’s leading online shopping platform; and Bravofly, a flight search engine. In all, there were 15,000 new performance-based ad campaigns that were run through Minomob and there were also successful marketing campaigns with leading operator Claro in Paraguay, CellC in South Africa and Zain in Bahrain. In the Digital Entertainment division, the integration of Akazoo and R&R’s operations is already underway and there was strong traction and performance of the product in SE Asia with the growth rate in regional subscriber count exceeding 20%. This all sounds pretty positive to be honest.

It is quite difficult to take anything from this chart, the down trend since March could still be in play or the uptrend since July – who knows?!