Swallowfield has now released its final results for the year ended 2016.
Revenues have increased when compared to last year as a £429K fall in ROW revenues was more than offset by a £1.6M growth in UK revenues and a £3.9M increase in EU revenues. Staff costs increased by £1.7M and R&D expenses were up £110K with other cost of sales increasing by £915K which gave a gross profit £2.2M above that of last year. Commercial and admin costs increased by £1.5M but there was a £645K one-off gain from the pension scheme closure which meant that operating profit grew by £1.4M. After finance costs declined somewhat and tax expenses grew by £205K the profit for the year came in at £2M, a growth of £1.3M year on year.
When compared to the end point of last year, total assets increased by £8.4M to £38.6M driven by a £4M growth in trade receivables, a £2.6M increase in inventories, a £650K growth in cash and a £559K increase in prepayments and accrued income. Total liabilities also increased during the year with a £1.8M growth in accruals and deferred income; a £5.3M increase in trade payables and a £1.8M hike in pension obligations. The end result is a net tangible asset level of £11.6M, broadly flat year on year with a decline of just £99K.
Before movements in working capital, cash profits increased by £683K to £2.8M. There was a fairly neutral movement in working capital, compared to a slightly positive cash movement last year but after tax payments fell by £70K, the net cash from operations came in at £2.5M, a growth of £190K year on year. The group spent £1.2M on capex to give a free cash flow £1.4M before £726K was paid back on loans to give a cash flow of £650K and a cash level of £798K at the year-end.
The core contract manufacturing business delivered strong growth in both sales and margin and the group delivered a number of new product launches for some of their global brand owner customers which brought strong sales growth and enhanced their reputation.
The group’s drive and build categories posted sales growth of 17% and 9% respectively and margin growth was ahead of sales growth in both cases. They have reduced their proportion of sales in service categories from 10% to 2% and virtually all new business is now in product categories where they feel they have a strong competitive position with reasonable margins and higher customer loyalty. The next phase of the product category focus will concentrate on investing to further extend their leadership positions across the drive and build categories by strengthening their capabilities in terms of product formulation technology, packaging formats and production cost efficiency.
During the period they introduced a number of new products across a range of key customers and secured agreements for future supply of several haircare products to major premium brand owners which will continue to positively impact business performance in 2017. They have also seen growth in volumes of the plastic aerosol foaming shower gel which was introduced last year.
The group have delivered their first orders under a partnership arrangement entered into with a leading US aerosol manufacturer. This arrangement enables the production of group formulations in the US adapted to US regulatory requirements in a cost effective way to allow European customers to launch their products into North America. The group receives a commission and satisfies an increasingly common customer need.
Within their own brands, the group integrated the Real Shaving Company brand and executed the launches of Bagsy and MR into Debenhams and Boots respectively. Each of these brands are continuing to build their contribution to sales and margin. A new aerosol product was added to the Real Shaving range and launched in October 2015 in the UK and Canada in spring 2016. The group have also secured listings of a range of gift and travel packs with a major high street health and beauty retailer.
Bagsy was rolled out in October 2015 to 38 Debenhams stores on full display units. Sales have been building steadily and they have executed a number of in-store promotions. Further distribution extensions are being worked on, both in the UK and internationally and they have entered into an exclusive agreement with fashion designer Savannah Miller. They will be co-developing a number of new products to be launched in October under the Savannah Miller for Bagsy name and she is now promoting the Bagsy brand on QVC.
MR was launched into 350 Boots stores in October last year and sales have been building steadily. The value brand, Tru, continues to generate sales in existing outlets and the group is seeking to extend its retail distribution further at the same time as exploring other product categories.
There have been a number of projects to increase labour efficiency, line speeds and automation across the manufacturing sites which has contributed to the increased margin seen. The group have also installed a new compressor and boiler system at their Wellington site which has helped reduce energy consumption by 8%.
It is worth noting that the group is still rather susceptible to a small number of large clients with one accounting for 19% and another for 18% of revenues.
During the year the group closed the defined benefit pension scheme to future accrual. After finalising the valuation they entered in to a formal consultation with the members and after this was concluded, they recognised a credit of £870K relating to a curtailment gain which represents a reduction in liabilities on closure to future accrual. One-off costs of £220K were incurred during this process. At the reporting date, the yields on bonds of all types were lower than they were last year and coupled with the volatile market conditions impacting asset valuations, this translated into an increase in the pension deficit in the year.
After the year-end the group acquired Brand Architekts which the broad will prove transformational for their own brand business. The acquisition was financed, in part, through raising £8.6M in a placing with institutional shareholders. The business owns and manages a portfolio of mid-premium beauty and personal care brands. The majority of sales are through major UK high street retailers, many of which are already existing customers. Further sales are made through export, notably in North America, Australia, Scandinavia and Turkey.
Key brands include Dirty Works, Kind Natured, Argan, Happy Naturals, Dr Salts and Senspa and they currently outsource their production to suppliers in the UK and China. Last year, the business generated a pre-tax profit of £2M.
The success in winning a number of new contracts to support product launches in the core contract manufacturing business over the past year and a half provides the group with a strong pipeline as they move into the new financial year, particularly in H1. The integration of Brand Architekts is progressing well and trading across the business is in line with board expectations.
At the current share price the shares are trading on a hefty PE ratio of 19.7 but this is expected to reduce to 11.2 on next year’s consensus forecast. At the year-end, the group has a net debt position of £4.3M compared to £5.4M at the end of last year. After a 55% increase in the dividend the shares are trading on a yield of 1.3% which grows to 2.2% on next year’s forecast.
Overall then this has been a good year for the group. Profits are up, operating cash flow increased and there was a decent amount of free cash generated. Net assets did decline modestly, however, which can be attributed to an increase in the pension deficit. Both manufactured and own brands seem to be growing and there are a lot of initiatives in order to grow in the future. The forward PE of 11.2 seems decent value and the yield of 2.2% is not too bad either, although a high level of growth has been pencilled in. Overall I am relatively happy to hold here.
On the 10th November the group released a statement covering the first four months of the year where they stated trading was in line with expectations. In the manufacturing business, the delivery of significant new product launches for major brand owners will contribute strongly to their performance, particularly in the first half of the year. Further contract wins have been achieved, both with UK and European customers, which will start to contribute from the begging of the next year.
In the branded business, volumes of the Christmas gifting ranges are ahead of previous years and the board expect these to make a strong contribution in the first half. The board anticipate that profitability in the first half of the year will see a small benefit from the recent weakness of Sterling. Long-term they aim to self-hedge by aligning sales and purchases in the same currencies. While they remain conscious of the continuing macro uncertainty both in the UK and internationally, they expect to maintain their positive momentum and are confident of prospects for the year.
This all seems pretty decent, I continue to hold