Swallowfield have now released their statement for their half year results.

 

After warnings to the market, this was not totally unexpected.  A massive loss of work from one of their largest clients has caused UK revenue to crash £8.4M to £16.7M.  This is slightly mitigated from increased revenues from the other territories.  Cost of sales also fell, but by not so much – they were down £4.7M to £23.5M.  After slightly reduced commercial costs and a one-off charge of £175K relating to restructuring and cost cutting, the operating loss was £700K, £1.4M worse than last year.

Due to the loss, the group achieved a tax rebate and the loss for the period was £606K, £1.1M worse than last year.  It is disappointing to see the group making a loss for the half year and the loss of business is a big problem but I do think a loss of £606K is not that bad going considering the 34% reduction in UK revenue.

 

There is not a huge amount of change here.  As would be expected given the loss of business, the largest reduction in the assets are for trade and receivables – down £3.4M to £10.2M.  The other big reduction is the £662K fall in cash reserves, which indicates a negative cash flow.  That held for sale warehouse seems to have been held for sale for some time now.  In liabilities, trade and payables have also fallen, down by £2.7M to £15M.  (is it normal for payables to be higher than receivables?  Doesn’t seem right…  I suppose we have the value of inventories to take into account too).  Overall liabilities are down nearly £3M at £18.1M.  They have not reduced by as much as the assets, though, so net tangible assets are £833K lower at £12.7M.

 

As we have already seen, the crash in revenues has caused the cash from operations, after movements in working capital, to be a negative £283K.  After tax and finance charges, the cash outflow is £470K.  There is a much reduced capital expenditure and a net £765K of new borrowings.  However, after dividends are paid, the outcome is still a net cash outflow of£662K for the half year, compared to a very similar £569K in the same period of last year.  However, taken in context of the net £765K of new borrowings compared to the net payback last half year of £1.4M, this is a weak cash flow.

In this period, the group had three customers that exceeded 10% of total revenues (12.5%, 11.7% and 10.2%) compared to two customers accounting for 29% and 18%.

It was announced prior to these results that Ian Mackinnon, the CEO for 13 years has decided to resign.  It has been a difficult couple of years at a board level with the largest shareholders looking to place their own people in roles at the board.  No doubt it was this pressure combined with the loss of an important contract as reported previously that led to his decision.  In the short term, this will lead to some volatility for the group.

During the downturn, the group has seen its clients become more cautious with new launches and demand in general has been somewhat supressed. This has led to at least one of their important clients to bring some of the work that Swallowfield used to do in house in order to achieve greater efficiencies, and presumably, greater control.  This process has been dealt with quite a lot of spin by Swallowfield and is being called “customer rebalancing” as if it is something that they have a great deal of control over.

Much has been made of the fact that this time last year, their top two customers made up 47% of total revenues whereas this year, the top two make up just 24%. Whilst this diversification is good going forward, I find the positive spin put on this by the board a bit worrying – the reason the top two clients account for much less percentage of the total revenue is because they have lost some business with them – this is not a good thing!  Also, a big deal is made out of the fact that export percentage is increasing and now accounts for 35% of revenues compared to 21% last year.  Again, it is great that exports are increasing (and they are) and exports are very much an important part of diversification going forward but comparing them to the proportions last year is not very helpful as if business was lost with a large UK client, of course the proportion of exports will be up.

Pleasingly the Chinese investment has increased in value and this must be viewed as an important asset going forward.  In other areas abroad, both the US and the French offices have won new contracts and business, which is an exciting development as these areas have struggled somewhat in the past.

There has been a decent control of costs, with the restructuring that has taken place and the group believe that the worst of the raw material inflation is over and there is an announcement that new contracts have been secured, which will start to take effect in the second half of the year (if this is the case, then the results for the full year should be a bit better).  Going forward, there is not anticipated to be any more “customer Rebalancing” and there do seem to be a number of product launches and new business wins that will go some way to mitigate the loss of the business in this past half year so although this is a pretty poor set of results, there seems to be a bit of optimism.

So, we have seen UK revenues collapse, leading to a £606K loss in the half year and there was a negative cash flow even with new borrowing coming on line.  However, the increase in overseas revenue is pleasing to see.  Net debt for the year increased by £1.4M in the period and remarkably the interim dividend remains unchanged, which means that at the current share price the shares are yielding 6.8%.  I do feel, however, that there are too many warning signs here.  There is definite evidence of Swallowfield’s clients taking business in-house, the long standing CEO has resigned, there is s worrying trend of what I believe to be over-optimism in the update and it will take a huge amount of new business to counteract the effect of the lost contract(s).  For now, I have sold out of these shares.