|Underlying* operating profit (before JVs and associates)||£22.9m||£19.6m|
|Underlying* operating margin (before JVs and associates)||8.3%||7.5%|
|Underlying* profit before tax||£23.5m||£19.8m|
|Underlying* basic earnings per share||6.4p||5.5p|
|Operating profit (before JVs and associates)||£21.5m||£17.8m|
|Profit before tax||£22.2m||£18.1m|
|Basic earnings per share||6.1p||5.1p|
|Return on capital employed ('ROCE')||16.5%||14.6%|
* The basis for stating results on an underlying basis is set out in the operational highlights. The board believes that non-underlying items should be separately identified on the face of the income statement to assist in understanding the underlying performance of the Group. Accordingly, adjusted performance measures have been used throughout the annual report to describe the Group's underlying performance.
In 2018, we delivered a strong financial performance. Revenue for the year ended 31 March 2018 of £274.2m represents an increase of £12.0m (five per cent) compared with the previous year. This is a result of increase in production activity during the year (we continue to work on four large projects with revenues in excess of £20m), together with an increase in steel prices. The Group's order book at 1 June 2018 of £237m (1 June 2017: £229m) remains in line with our normal order book levels, which typically equate to eight to ten months of annualised revenue.
Underlying operating profit (before JVs and associates) of £22.9m (2017: £19.6m) reflects an increased underlying operating margin (before JVs and associates) of 8.3 per cent (2017: 7.5 per cent). The operating margin has continued to benefit from the embedding of operational efficiencies across the Group through better risk and contract management processes and production process improvements combined with higher profits from certain project completions which mainly benefitted in the first half of the year. The statutory operating profit (before JVs and associates), which includes the Group's non-underlying items, was £21.5m (2017: £17.8m).
The share of results of JVs and associates was a profit of £0.9m (2017: £0.5m) and net finance costs were £0.2m (2017: £0.2m).
Underlying profit before tax, which is management's primary measure of Group profitability, was £23.5m (2017: £19.8m). The statutory profit before tax, reflecting both underlying and non-underlying items, was £22.2m (2017: £18.1m).
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Underlying* profit before tax
Share of results of JVs and associates
The Group's share of results from its Indian joint venture was a profit of £0.5m (2017: £0.2m), reflecting another year of profitability for the business. The profit is the result of a stable operating margin of 9.2 per cent (2017: 9.7 per cent), reflecting continued good operating performance, coupled with lower financing costs following the repayment of the joint venture's term debt in June 2017.
Our specialist cold rolled steel joint venture business, CMF, contributed a Group share of profit of £0.4m (2017: £0.3m). Having successfully integrated the metal decking supply into our operations in the prior year, CMF has invested further during the year. We continue to be the only hot rolled steel fabricator in the UK to have this cold rolled manufacturing capability, which has now been expanded to allow the production of purlins and additional cold formed products. This has further increased the value offering and profit contribution from the business.
Non-underlying items for the year of £1.3m (2017: £1.8m) comprised:
- Amortisation of acquired intangible assets – £1.3m (2017: £2.6m)
- Movement in fair value of derivative financial instruments – £nil (2017: gain of £0.8m)
Non-underlying items are classified as such as they do not form part of the profit monitored in the ongoing management of the Group.
Amortisation of acquired intangible assets represented the amortisation of customer relationships which were identified on the acquisition of Fisher Engineering in 2007. These customer relationships were fully amortised during the 2018 financial year.
In the prior year, a non-cash profit on derivative financial instruments of £0.8m was recognised in relation to the movement in fair values of foreign exchange contracts. No similar items have been recorded in the income statement for the current year following the adoption of hedge accounting at the 2017 financial year-end.
The associated tax impact of the above, together with the impact of a reduction in future corporation tax rates on deferred tax liabilities, was £0.4m (2017: £0.6m).
Net finance costs in the year were £0.2m (2017: £0.2m). The Group has been in a net funds position for the whole of the financial year; consequently, the finance costs of £0.2m primarily represent non-utilisation fees for the revolving credit facility and the amortisation of capitalised transaction costs associated with the refinancing in 2014.
The Group's underlying taxable profits (which excludes results from the JVs and associates) of £22.6m (2017: £19.4m) resulted in an underlying tax charge of £4.4m (2017: £3.3m). This represented an effective tax rate of 19.4 per cent (2017: 17.1 per cent). The lower prior year effective tax rate reflected the recognition of deferred tax assets on historical trading losses. These losses are now fully utilised.
The total tax charge for the year of £4.0m (2017: £2.7m) reflects the underlying tax charge, offset by deferred tax benefits arising from the amortisation of intangible assets in the year, and also the benefit of the future reduction in UK corporation tax to 17 per cent in 2021 for certain deferred tax items. These rate changes are categorised as non-underlying and are included in non-underlying items.
Earnings per share
Underlying basic earnings per share increased by 15 per cent to 6.4p (2017: 5.5p) based on the underlying profit after tax of £19.1m (2017: £16.5m) and the weighted average number of shares in issue of 299.7m (2017: 298.9m). Basic earnings per share, which is based on the statutory profit after tax, was 6.1p (2017: 5.1p), this growth reflects the increased profit after tax and a reduction in non-underlying items. Diluted earnings per share, including the effect of the Group's performance share plan, was 6.0p (2017: 5.1p).
Dividend and capital structure
The Group has a progressive dividend policy. Funding flexibility is maintained to ensure there are sufficient cash resources to fund the Group's requirements. In this context, the board has established the following clear priorities for the use of cash:
- To support the Group's ongoing operational requirements, and to fund profitable organic growth opportunities where these meet the Group's investment criteria;
- To support steady growth in the core dividend as the Group's profits increase;
- To finance other possible strategic opportunities that meet the Group's investment criteria;
- To return excess cash to shareholders in the most appropriate way, whilst maintaining a good underlying net funds position on the balance sheet.
The board is recommending a final dividend of 1.7p (2017: 1.6p) per share payable on 14 September 2018 to shareholders on the register at the close of business on 17 August 2018. This, together with the Group's interim dividend of 0.9p (2017: 0.7p) per share, will result in a total dividend per share for 2018 of 2.6p (2017: 2.3p), an increase on the prior year of 13 per cent. In addition, the board is also recommending a special dividend of 1.7p per share (2017: nil). The final and special dividends are not reflected on the balance sheet at 31 March 2018 as they remain subject to shareholder approval.
Goodwill and intangible assets
Goodwill on the balance sheet is valued at £54.7m (2017: £54.7m). In accordance with IFRS, an annual impairment review has been performed. No impairment was required either during the year ended 31 March 2018 or the year ended 31 March 2017.
Other intangible assets on the balance sheet are recorded at £0.1m (2017: £1.6m). The reduction in the year primarily represents the remaining intangible assets (customer relationships) identified on the acquisition of Fisher Engineering in 2007 being fully amortised. Amortisation of £1.5m (2017: £2.9m) was charged in the year.
The Group has property, plant and equipment of £81.2m (2017: £78.9m).
Capital expenditure of £6.4m (2017: £7.0m) represents the continuation of the Group's capital investment programme. This included continued investment in the painting facilities at Lostock and Ballinamallard, new equipment for our fabrication lines, further enhancement of our in-house fleet of construction site equipment, a new trailer park and improvements to our sites and staff welfare facilities. Depreciation in the year was £3.7m (2017: £3.6m).
The carrying value of our investment in joint ventures and associates was £18.5m (2017: £12.1m) which consists of the investment in India of £10.7m (2017: £4.6m) and in CMF Limited of £7.9m (2017: £7.5m). During the year, we invested additional equity investment of £5.5m in the Indian joint venture business to support the full repayment of the joint venture's term debt of £11.0m in June 2017.
The Group has a defined benefit pension scheme which, although closed to new members, had an IAS 19 deficit of £17.2m at 31 March 2018 (2017: £21.4m). The decrease in the liability is primarily the result of changes to the scheme's demographic assumptions (mainly updated mortality assumptions) and ongoing deficit contributions by the Group during the year. The triennial funding valuation of the scheme is currently ongoing, with a valuation date of 5 April 2017. All other pension arrangements in the Group are of a defined contribution nature.
Shareholders' funds at 31 March 2018 were £169.0m (2017: £154.2m). This equates to a total equity value per share at 31 March 2018 of 56p, compared to 52p at the end of 2017. The increase is primarily due to the increase in profit after tax for the year and a decrease in the IAS 19 deficit on the Group's defined benefit pension scheme.
Return on capital employed
The Group adopts ROCE as a KPI to help ensure that its strategy and associated investment decisions recognise the underlying cost of capital of the business. The Group's ROCE is defined as underlying operating profit divided by the average of opening and closing capital employed. Capital employed is defined as shareholders' equity excluding retirement benefit obligations (net of tax), acquired intangible assets and net funds. For 2018, ROCE was 16.5 per cent (2017: 14.6 per cent) which exceeds the Group's target of 10 per cent through the economic cycle.
|Operating cash flow (before working capital movements)||£26.7m||£25.1m|
|Cash generated from operations||£23.0m||£27.4m|
|Operating cash conversion||77%||112%|
The Group has always placed a high priority on cash generation and the active management of working capital. The Group finished the year with net funds of £33.0m (2017: £32.6m), following dividend payments of £7.5m, capital expenditure of £6.4m and the investment of additional equity into the Indian joint venture of £5.5m.
Operating cash flow for the year before working capital movements was £26.7m (2017: £25.1m). Net working capital increased by £3.7m during the year, mainly as a result of the unwinding of advance payments from customers. Excluding advance payments, year-end net working capital represented approximately two per cent of revenue (2017: two per cent). This is lower than the four to six per cent range which we have been targeting, mainly as a result of good payment terms on certain ongoing contracts and a continued focus on working capital management.
In 2018, our cash generation KPI shows a conversion of 77 per cent (2017: 112 per cent) of underlying operating profit (before JVs and associates) into operating cash (cash generated from operations less net capital expenditure). This is below our target conversion of 85 per cent largely as a result of the unwinding of advance payments as described above.
Net investment during the year was £5.4m, reflecting capital expenditure of £6.4m less proceeds from disposals of £1.0m.
Net funds bridge – year ended 31 March 2018
Bank facilities committed until 2019
The Group has a £25m borrowing facility with HSBC and Yorkshire Bank, with an accordion facility of a further £20m available at the Group's request. There are two key financial covenants, with net debt: EBITDA of <2.5x, and interest cover of >4x. The Group operated well within these covenant limits throughout the year ended 31 March 2018.
Due to the continued strong cash performance of the Group, the facilities were not utilised during the year and continue to provide ongoing funding headroom and financial security for the Group. At the time of this report, the Group has commenced discussions with its lenders to secure new facilities replacing the above facilities which are committed until July 2019.
Group treasury activities are managed and controlled centrally. Risks to assets and potential liabilities to customers, employees and the public continue to be insured. The Group maintains its low-risk financial management policy by insuring all significant trade debtors.
The treasury function seeks to reduce the Group's exposure to any interest rate, foreign exchange and other financial risks, to ensure that adequate, secure and cost-effective funding arrangements are maintained to finance current and planned future activities and to invest cash assets safely and profitably.
The Group continues to have some exposure to exchange rate fluctuations, currently between sterling and the euro. In order to maintain the projected level of profit budgeted on contracts, foreign exchange contracts are taken out to convert into sterling at the expected date of receipt. The Group has now adopted hedge accounting for the majority of transaction hedging positions, thereby mitigating the impact of market value changes in the income statement.
The Group has undertaken a detailed exercise comparing the current revenue recognition policies against the requirements of IFRS 15, the new revenue accounting standard which becomes effective for the Group's 2019 year-end. This assessment involved identifying the significant areas of difference and quantifying their effect on a sample of different types of contract to ensure that the impact of the new standard is fully understood and acted upon in advance of the effective date. The conclusion of this assessment is that the directors are satisfied that no material adjustments will be required on the initial application of the new standard. It is intended that the standard will be implemented with full retrospective application in the Group's 2019 financial statements.
Impact of Brexit
Following the decision to leave the European Union ('EU'), the UK government continues to review and negotiate the terms of the UK's future relationship with the EU. Although this has the potential to change the competitive and commercial landscape for the Group and the construction industry as a whole, the extent of this is likely to remain unclear for some time. To date, the decision to leave the EU has not had a significant impact on the Group but we remain vigilant to respond to any such changes in market conditions.
Group finance director
20 June 2018
In determining whether the Group's annual consolidated financial statements can be prepared on the going concern basis, the directors considered all factors likely to affect its future development, performance and its financial position, including cash flows, liquidity position and borrowing facilities and the risks and uncertainties relating to its business activities. The following factors were considered as relevant:
- The UK order book, and the pipeline of potential future orders;
- The Group's operational improvement programme which has delivered stronger financial performance and is expected to continue doing so in the 2019 financial year and beyond;
- The Group's net funds position and its bank finance facilities which are committed until July 2019, including both the level of those facilities and the covenants attached to them.
Based on the above and having made appropriate enquiries and reviewed medium-term cash forecasts, the directors consider it reasonable to assume that the Group has adequate resources to continue for at least 12 months from the approval of the financial statements and therefore that it is appropriate to continue to adopt the going concern basis in preparing the financial statements.
In accordance with provision C.2.2 of the 2014 revision of the UK Corporate Governance Code (the 'Code'), the directors have assessed the Group's viability over a three-year period ending on 31 March 2021. The starting point in making this assessment was the annual strategic planning process. While this process and associated financial projections cover a period of five years, the first three years of the plan are considered to contain all of the key underlying assumptions that will provide the most appropriate information on which to assess the Group's viability.
This assessment also considered:
- The programmes associated with the majority of the Group's most significant construction contracts, the execution period of which is normally less than three years;
- The good visibility of the Group's future revenues for the next three years which is provided by external forecasts for the construction market, market surveys and our own order book and pipeline of opportunities (prospects).
In making their assessment, the directors took account of the Group's strategy, current strong financial position, recent and planned investments, together with the Group's main committed bank facilities. These committed bank facilities mature in July 2019. Notwithstanding the Group's current net funds position of £33.0m, the directors draw attention to the key assumption that there is a reasonable expectation that the facilities will be renewed at the appropriate time and that there will not be a significant reduction in the level of facilities made available to the Group or a significant change in the pricing.
The directors assessed the potential financial and operational impact of possible scenarios resulting from the crystallisation of one or more of the principal risks described in how we manage risk as well as taking into consideration recent issues (such as recent corporate failures) that are relevant to the industry sector in which the Group operates. In particular, the impact of a reduction in margin of 25 per cent, a reduction in revenue of 25 per cent, a deterioration in working capital (the extension of customer payment terms by one month), a period of business interruption (two months with no factory production) and a significant one-off event resulting in a cost to the Group of £15m. The range of scenarios tested was considered in detail by the directors, taking account of the probability of occurrence and the effectiveness of likely mitigation actions.
Based on this assessment, the directors have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the three-year period of their assessment.