TIDMLAKE
RNS Number : 9018U
Lakehouse plc
24 January 2017
Lakehouse plc
Full year results for the year ended 30 September 2016
Restructured business positions Group for turn-around transition
period
Bob Holt, Chairman of Lakehouse, the support services group,
commented:
"FY16 has been a challenging year for Lakehouse but one we
believe will prove to be transformational, having focused on
reviewing the strategy of the Group, stabilising operational
performance with a view to improvement and controlling costs at
every level, whilst retaining a high quality of client service.
We have taken tough decisions to exit some business streams
within Property Services alongside bringing in a new management
team to stabilise operations in the remainder of the division and
reset the dial. The core businesses of Compliance, Energy Services
and Construction are well established, excellent businesses who
have a clear vision of what needs to be delivered.
Looking forward, our strategy will be evolutionary but we are
confident that, with our newly stabilised Group, the long term
fundamentals of the commercial markets in which we operate will
provide us opportunities to deliver consistent performance, grow
sustainably and to return value to shareholders.
The new year has started satisfactorily and current trading is
in line with management expectations."
Financial overview:
As previously reported, revenue and profitability principally
reflect the under-performance of the Property Services division,
formerly Regeneration, together with the impact of carbon pricing
reductions within Energy Services, offset in part by the successful
contribution of recent acquisitions
Ø Underlying(2) revenues of GBP305.8m (2015: GBP336.6m);
statutory revenues of GBP333.8m (2015: GBP340.2m)
Ø Underlying EBITA(1) of GBP10.9m (2015: GBP22.2m), representing
a margin of 3.6% (2015: 6.6%)
Ø Underlying(2) profit before tax of GBP9.9m (2015:
GBP21.6m)
Ø Statutory operating loss of GBP31.7m (2015: profit
GBP4.6m)
Ø Statutory loss before tax of GBP33.3m (2015: profit of
GBP3.2m)
Ø Underlying(2) basic earnings per share of 5.2p (2015: 13.7p);
statutory basic loss per share of 18.6p (2015: earnings per share
1.9p)
Ø Underlying operating cash conversion(3) of 121%; statutory
operating cash outflow 171%
Ø Businesses acquired since IPO have been integrated well and
contributed GBP60.0m of revenues and GBP5.5m of underlying EBITA
year on year
Ø New contract wins in Q4 within Energy Services and Compliance,
securing recurring annual revenues of GBP15m per annum
Ø Group order book of GBP543m (2015:GBP595m) reflects caution in
bidding within Property Services; however value of frameworks
increased from GBP1.3bn to GBP1.6bn in the year
Ø Forward visibility of revenues were 87% of forecast revenue
for FY17 at November 2016 (like for like 2015: 77%)
Ø Net debt of GBP20.6m (2015: net cash GBP6.6m)
Ø Board proposes a final dividend of 0.5p per share, taking the
total to 1.5p for the year (2015: 1.9p)
Outcome of the operating review:
Ø Operating Profit includes GBP12.2m of Exceptional and Other
Items, reflecting management action taken to address the challenges
faced by the Group
Ø In addition, a GBP19.2m Exceptional non-cash goodwill and
intangible assets impairment charge has been incurred,
predominantly in relation to impairment of goodwill in Property
Services
Strategic progress:
Ø Reviews of operations and strategy complete and actions taken
to enable the Group to move forward in a stronger and more focused
state
Ø Substantially new operational management team in place within
Property Services
Enquiries
Lakehouse: Financial Public
Relations:
Bob Holt, Executive Chairman Camarco
Telephone: 07778 798816 Tom Huddart
Jeremy Simpson, Chief Financial Telephone: 020
Officer 3757 4992
Telephone: 01708 758 800
Notes to editors:
Lakehouse plc is an asset and energy support services group that
constructs, improves, maintains and provides services to homes,
schools, public and commercial buildings with a focus on the UK
public sector and regulated markets. The Group was founded in 1988
and is headquartered in Romford, Essex. It employs 2,250 staff from
33 offices throughout the UK. We deliver services through four
divisions:
-- Compliance, which delivers a range of regulated and
legislated services, primarily to local authority and housing
association clients
-- Energy Services, which provides domestic insulation, energy
efficiency products and advice, primarily for social housing
landlords, the "Big Six" key independent energy companies and
Scottish Government
-- Property Services, which provides planned refurbishment,
repair and maintenance and responsive maintenance for social
housing providers
-- Construction, which delivers extension, refurbishment,
rationalisation and new build works, primarily in the education
market and with a particular focus on schools
Definitions
1. EBITA is earnings before interest, tax and amortisation of
acquisition intangibles. Underlying EBITA is defined as operating
profit before deduction of Exceptional and Other Items, as outlined
in note 3 and on the face of the Statement of Comprehensive Income.
Underlying EBITA is the same as "Operating profit before
exceptional and other items" on the face of the Statement of
Comprehensive Income, but used as terminology in light of being a
key performance measurement for management in the Group.
2. As set out in the income statement, other underlying numbers
are stated before Exceptional and Other Items (discussed further in
note 3). In the case of underlying revenue, this excludes amounts
from businesses being exited and, for the current year, revenues
associated with the Smart Meter mobilisation period. Underlying
profit after tax and underlying earnings per share are net of an
imputed tax charge.
3. Underlying operating cash conversion is operating cash flow,
plus the cash impact of Exceptional and Other Items (discussed
further in notes 3 and 12), as a percentage of underlying
EBITA.
Executive Chairman's Statement
Introduction
I was appointed to the Board in July 2016, following the earlier
departure of a number of executive and non-executive directors and
with the business facing a number of operational challenges. Since
my appointment, I have looked to structure the business so as to
continue delivering a quality service to our customers whilst
building a platform for more consistent performance and sustainable
growth. I am pleased to report that the management of the Group
have embraced the changes implemented and I believe that the market
outlook for the range of services the Group provides is strong.
It would be remiss of me not to pay tribute to Steve Rawlings,
the founder of Lakehouse, who sadly passed away in July 2016. Steve
was the architect for the great progress achieved by Lakehouse in
its formative years. I should also like to thank those directors
since departed from the Board for their contribution to the Group
during a difficult period.
My initial focus has been on reviewing the strategy of the Group
and stabilising operational performance with a view to improvement
and controlling costs at every level. We are focusing the
businesses on markets where we can operate effectively and creating
an environment where entrepreneurship is allowed to prosper.
Importantly, I believe a small central function is right for a
group like Lakehouse, where we rely on our leaders in the Group's
Divisions to take decisions and drive the business forward on a day
to day basis.
Our decision to withdraw from self-delivered externals work
within Property Services was clear, as we had fallen short
operationally at a number of levels. Following this restructuring,
I felt that renaming what was known as the "Regeneration" Division
as "Property Services" better reflected the services we will be
offering moving forward. We have brought in new management who
understand the core risks in this market, from pricing, through
operational management to controls and processes and they are doing
an excellent job in returning Property Services to an acceptable
level of performance. This will, however, take time and we took a
very cautious approach to bidding for new work in the second half
of the year in this Division as we sought to stabilise operations.
We are therefore setting modest expectations in the near term.
We are fortunate that the other three Divisions, Compliance,
Energy Services and Construction have excellent business models,
underpinned by strong and experienced management and with a strong
pipeline of opportunity.
Whilst the Group's order book has declined from GBP595m to
GBP543m this reflects our focus on managing risk within Property
Services. Our value of frameworks however increased from GBP1.3bn
to GBP1.6bn which we expect to provide a strong workflow in the
future.
Trading performance
The trading performance for the year was disappointing with
underlying EBITA of GBP10.9m (2015: GBP22.2m) on underlying
revenues of GBP305.8m (2015:GBP336.6m, which includes GBP28.4m of
revenues from businesses being exited, which are reported within
Other Items in the 2016 accounts). Reported total Group statutory
revenues were GBP333.8m (2015: GBP340.2m) with an operating loss of
GBP31.7m (2015: GBP4.6m profit), reflecting a number of significant
one-off cost items in the year.
Businesses acquired since IPO have been integrated well and
contributed GBP60.0m of revenues and GBP5.5m of underlying EBITA
year on year. This includes the results of Aaron Heating Services
and Precision Lift Services which were acquired towards the start
of this financial year for a total consideration of GBP16.8
million.
As part of the operational review, the Board took the decision
that it was not sustainable to continue with the provision of
directly delivered externals work within the Property Services
division and this business is being exited. The GBP6.6m of pre-tax
contract losses from this business are significant and reported
within Other Items in the 2016 accounts. The comparative figure of
GBP2.5m for FY15 relates to the previous exit from our former
Development business.
We also felt it important to highlight the significant GBP2.5m
investment we have made in smart metering within Energy Services,
predominantly training its workforce to the highest standard of
regulation. We see our smart metering business providing
significant growth opportunities in the medium term.
Inevitably with the level of change we have experienced this
year, we have seen one-off events that led to GBP3.1m of net
Exceptional Items. We also recognised a GBP19.2m impairment against
goodwill and intangible assets, predominantly in relation to the
Property Services business, in light of its financial
performance.
I have stressed to the team that the New Year marks a transition
from the old world to the new and I want us to now look forward
collectively with confidence in the future.
Lakehouse has undergone a number of changes during 2016 and I am
pleased that we have come out of a very challenging period as a
strong and focused Group. I have stressed to the Group's leadership
that our overriding objective has to be to deliver on our promises,
financially as a public listed company, but without compromising on
protecting our employees or falling short in levels of customer
service. If we do this, it will give our invested stakeholders -
clients, customers, communities, financial partners, people,
shareholders and suppliers - the confidence to support the Group
and participate in its future growth and success.
Strategy
Lakehouse has an established strategy and although FY16 has been
challenging for the Group, significant elements of our strategy
have been very successful and I am satisfied that the future
strategy for the Group will be one based on evolution rather than
radical change. However, it is critical that everyone within our
business appreciates the importance of delivering on our promises
as without this passion and commitment, any strategy counts for
nothing.
I have been particularly pleased with the performance of the
businesses we have brought into the Group through acquisition,
which, with our existing operations, have allowed us to build
market-leading Compliance and Energy Services divisions. The
services offered by these businesses are complementary and offer
considerable growth potential through increased penetration of our
extensive client base together with the geographic opportunities
offered by a national footprint.
In our Construction division, we have a business that is very
focused on its core education and public buildings markets and is
highly experienced in delivery. This means that we can earn
excellent returns on capital, whilst remaining cost competitive for
clients.
It is important that we deliver on the strategy for these three
Divisions as much of the narrative concerning the Group in the past
year has surrounded Property Services. This Division has had its
historical issues but under new and capable management and with
modest expectations for growth, I am confident we can focus on the
improvements in operational delivery that will allow this business
to thrive in the future and deliver value for all stakeholders.
The Group has a cohesive structure, with leading positions in
key markets, based on delivering a core range of services where
there is sustainable demand. We will look to build on these
strengths in developing the Group moving forward.
Dividend
The Board is looking to adopt a progressive dividend policy
which recognises shareholder need whilst retaining sufficient
capital for future growth. The Board propose a final dividend of
0.5p per share for the year which, subject to shareholder approval,
will be paid on 6 April 2017 to shareholders on the register at 10
March 2017. This represents a total dividend of 1.5p per share for
the year (2015: 1.9p).
People
We continue to invest in our people, giving them the skills they
need to deliver for our customers and advance their own careers.
Without doubt this has been a difficult period for all stakeholders
and I want to thank everyone in Lakehouse for their hard work,
commitment and contribution in difficult circumstances.
Outlook
The Board has now been settled and management have taken action
to address the problems faced by Property Services, which will
comprise a far smaller part of the Group in the future. The Board
looks forward to working together with its staff and wider
stakeholders to build on the significant potential we have across
the Group to deliver future growth and returns for our
investors.
Bob Holt
Executive Chairman
Operational Review
Financial performance
Underlying revenue was 9.2% lower at GBP305.8m (2015: GBP336.6m)
and underlying EBITA declined by 50.9% to GBP10.9m from GBP22.2m in
the prior year, representing a margin of 3.6% (2015: 6.6%). The
self-delivered externals businesses being exited, which are
reported in Other Items in FY16, made a GBP2.4m profit on revenues
of GBP28.4m for the comparative period in FY15, when they were
included within the underlying results. The decline in underlying
EBITA over and above this reflected a GBP8.4m fall in Property
Services, together with the GBP3.0m year on year impact from a
reduction in carbon pricing for energy efficiency measures. The
results included a full year contribution from Orchard Energy
(acquired in July 2015) and Sure Maintenance (acquired in September
2015), together with 11 months from Aaron Heating Services and nine
months from Precision Lift Services. Year on year, the full year
impact of these acquisitions contributed an estimated GBP60.0m in
revenues and GBP5.5m of underlying EBITA.
Statutory revenue was 1.9% lower at GBP333.8m (2015: GBP340.2m).
Operating losses were GBP31.7m (2015: GBP4.6m operating profit),
after Exceptional and Other Items, being Other Items of GBP9.1m
(2015: GBP2.5m), net Exceptional Items of GBP3.1m (collectively
totalling GBP12.2m), impairment of goodwill and intangible assets
acquired of GBP19.2m (2015: GBPnil) and amortisation of acquisition
intangibles of GBP11.2m (2015: GBP6.5m), which are discussed
further in the Financial Review below and Note 3.
Underlying profit before tax was GBP9.9m, down 54.2% (2015:
GBP21.6m) and underlying profit after tax was GBP8.2m (2015:
GBP17.5m), resulting in underlying basic earnings per share of 5.2p
(2015: 13.7p). Loss before tax was GBP33.3m (2015: profit before
tax GBP3.2m) and loss after tax was GBP29.3m (2015: profit after
tax GBP2.4m), resulting in basic losses per share of 18.6p (2015:
earnings of 1.9p).
Looking forward
During the final quarter of the year the Group had a successful
period of contract awards. In our Energy Services and Compliance
businesses we secured recurring revenues of GBP15m per annum and
our contracting businesses were awarded GBP20m of new work. We are
pleased to have visibility over 87% of forecast revenues for the
current year (as at November 2016), compared to 77% at the same
point in FY16.
The Group's order book stood at GBP543m at 30 September 2016, a
9% reduction on the prior year of GBP595m, which reflects our focus
on managing risk within Property Services. Our value of frameworks
however increased from GBP1.3bm to GBP1.6bn which, with a sales
pipeline of GBP3.2bn (2015: GBP2.8bn), we expect to provide a
strong workflow in the future.
As we discuss below, our Compliance, Energy Services and
Construction Divisions are all excellent businesses that have
performed very well in difficult circumstances. We are confident
that under new leadership, improved operational disciplines and
selective bidding, the Property Services business will recover and
prosper.
The Board recognises the Group has performed below investor
expectations this year, however our managers and staff have
continued to listen to clients, win work, deliver excellent service
and pay our supply chain promptly. This shows the resilience of the
Group and the Board would like to register its thanks to staff,
clients, suppliers and our financial partners for their ongoing
support and commitment in the year.
Compliance
(29% of Group Underlying Revenue)
Compliance: year ending 30 September 2016 2015 Change
------------------------------------- ---- ----- -------
Revenue (GBPm) 91.0 36.6 148.5%
Underlying EBITA (GBPm) 6.2 4.5 36.8%
Underlying EBITA margin 6.8% 12.3% -550ppt
------------------------------------- ---- ----- -------
The Compliance Division comprises planned and responsive
maintenance, installation and repair services predominantly to
local authority and housing association clients, in the areas of
gas, fire and electrical, water and air hygiene and lifts. These
services cover clients' social housing and public building assets,
as well as industrial and commercial properties. The Division is
seeing the benefits of a wider pool of clients and mandatory
services that provide significant future opportunities.
Overall, revenue increased by 149% to GBP91.0m (2015: GBP36.6m),
with the contribution from acquisitions an estimated GBP56.1m.
EBITA increased 37% at GBP6.2m (2015: GBP4.5m), resulting in an
underlying EBITA margin of 6.8%, down by 550 ppt, reflecting the
expected mix impact from our new acquisitions and unexpected
performance challenges in our Allied Protection (Fire) business,
discussed further below. We expanded our Gas Compliance services
with the acquisitions of Sure Maintenance in September 2015 and
Aaron Heating Services in November 2015. Precision Lift Services
was acquired in December 2015 to complete the range of services
offered by the Division. Integration is a key focus of the Group
and the acquired businesses are all performing well, contributing
approximately GBP4.2m of EBITA year on year. We are seeing the
benefit of operational improvements and procurement savings in the
enlarged Division, which we expect will see margins improve towards
our long term target of high single to low double digit
percentages.
Gas Compliance
The three Gas Compliance businesses (Sure, Aaron and K&T)
make up some three quarters of the Division and had a strong year,
albeit with differing characteristics. K&T has historically
operated within the dense metropolitan areas of London, while Sure
and Aaron worked in the wider geographic regions of the North West
and East Anglia respectively. K&T has enjoyed higher margins as
a result of higher engineer efficiency and procurement leverage,
which we have carried over into Sure and Aaron with considerable
success during 2016. We have seen an improvement in margins during
the year in both businesses, arising mainly from procurement
savings; keener materials pricing has also allowed us to secure
profitable work that these businesses would have historically
struggled to win.
We are seeing the benefits of the extensive geography served by
the three Gas Compliance businesses and expect future growth to
come from filling in territorial gaps and providing adjacent
services to clients. We also anticipate future margin improvement
through better fleet utilisation, benchmarking engineer performance
and seeking to provide a best in class service.
During the year, Gas Compliance secured a number of notable
wins. These included gas servicing and maintenance for Brighton and
Hove City Council over five years to September 2020; gas servicing
and maintenance and a separate heating installation contract for
Havebury Housing Partnership over three years to May 2019 and
mechanical and electrical maintenance over three years for the
Salvation Army. We also re-secured a key contract installation and
maintenance framework for Flagship Housing (to 2018).
Other Compliance
Our other Compliance businesses represent the balance of the
Division and comprise Allied Protection (Fire), H2O Nationwide (Air
& Water) and Precision Lift Services (Lifts).
H2O Nationwide performed very well as we succeeded in developing
a social housing client base, which was core to our strategy on
acquiring the business. During the year, H2O Nationwide won a key
framework for the South East Consortium which enabled them to
secure works for social housing client Moat Homes; we also secured
a three year water hygiene monitoring contract for the London
Borough of Redbridge in the period. H2O Nationwide has historically
been focused on industrial and commercial clients and management
performed extremely well in mobilising the new social housing
contracts, whilst preserving client service.
Precision Lift Services made a slow start under our ownership as
a small number of new key contracts were delayed but the business
saw significant improvement towards the end of the year as these
contracts were brought on and mobilised. Precision Lift Services
was successful in securing contracts with Brentwood Borough
Council, the London Borough of Wandsworth, South Essex Homes and
Southend Borough Council during the year. We remain optimistic with
regards to the future opportunities for this business.
Allied Protection had a poor year, with a GBP2m adverse movement
in profits. This was largely due to the non-repeat of significant
volumes of project work delivered in 2015 as two key clients
unexpectedly withdrew budgets. We saw some recovery in this work
towards the end of the year, albeit less than expected and in the
absence of sufficient volume, margins were very weak. Given the
nature of the work involved, our service and repair business has
historically been operated at a lower margin and a focus on
operational improvement saw a pleasing improvement in the year. We
tend to secure project work where the Group has a long term service
and repair contract, so this is an important development for
Allied's future. We were successful in securing several key
contracts including a five year emergency lighting and fire alarm
testing contract for London Borough of Hammersmith and Fulham, a
six year contract for Guinness Partnership Ltd providing fire
safety equipment and maintenance and a contract providing door set
installation for Canterbury City Council over three years to
January 2018. These contracts both provide scale for further margin
improvement and opportunity to build the projects pipeline among a
broader base of major clients.
The other Compliance businesses have significant opportunities
to cross-sell within the client base of our Gas Compliance
companies and we saw considerable success to that effect during the
year including a five year fire alarm and emergency lighting
systems for the London Borough of Kensington Chelsea and fire
compartmentation works for Wandle Housing, both K&T Heating
clients. In addition K&T Heating introduced H2O Nationwide and
Lakehouse to Arun District Council, resulting in successful tenders
for works including a renewables and roofing scheme and plant room
Legionella testing. Precision Lift Services is already carrying out
projects for Notting Hill Housing and London Borough of Tower
Hamlets, both existing clients of K&T Heating and Allied
Protection. Additionally the other Compliance businesses are
beginning to secure a broader geographic client base, with Allied
winning a 5 year GBP1m contract with Accord Housing (Nottingham)
and H2O securing a four year contract with Alliance Homes via the
West Works framework.
Looking forward
Compliance now includes 108 frameworks, up considerably from 56
at 30 September 2015, with an aggregate potential value of GBP447m
(30 September 2015: GBP88m). The Compliance Divisional board is now
well established and we believe we have created a market leading
business, offering a range of specialist services which frequently
have important regulatory drivers for the Group's clients. This is
an area where the Group has considerable expertise and capability
and with the benefits of increasing scale and broadening range of
complimentary and adjacent services, the Board expects the
Compliance Division to deliver attractive returns, relative to the
Group average, over time.
Energy Services
(22% of Group Underlying Revenue)
Energy Services: year ending 30 September 2016 2015 Change
------------------------------------------ ----- ----- -------
Revenue (GBPm) 67.4 68.0 -0.9%
Underlying EBITA (GBPm) 8.0 9.6 -16.1%
Underlying EBITA margin 11.9% 14.1% -220ppt
------------------------------------------ ----- ----- -------
Energy Services provides a range of energy efficiency services
for social housing and private homes through its Everwarm
subsidiary. Everwarm also uses these services to deliver carbon
emissions savings for energy companies, enabling them to meet their
legislative targets. In addition, the division offers renewable
technologies, smart metering services through Providor and energy
brokerage and consultancy through Orchard Energy, to customers
throughout the UK.
Revenue decreased by 0.9% to GBP67.4m (2015: GBP68.0m), with the
year on year benefit of the Orchard Energy acquisition
approximately GBP3.9m. EBITA decreased by 16.1% to GBP8.0m (2015:
GBP9.6m), with the Orchard Energy acquisition contributing
approximately GBP1.3m year on year. This resulted in an underlying
EBITA margin of 11.9%, which was 220 ppt lower than last year, the
major factor being the impact of carbon pricing as discussed below.
In addition, we closed the Energy South business during the year,
which was managed by the Property Services team, but reported
segmentally as part of Energy Services in 2015 when we reported
revenues of GBP7.3m and profits of GBP1.1m within underlying
items.
Everwarm
We saw, as expected, 2016 evolving as a transitional year prior
to the new Energy Company Obligation ("ECO") policy commencement in
April 2017. As the current ECO policy moved into its final phase we
saw a stabilisation in carbon prices, with the results and margins
in Everwarm in line with management expectations and resulting in a
GBP3.0m decrease in underlying EBITA year on year.
The Group holds a one-third share in the Warmworks joint
venture, along with Changeworks and the Energy Saving Trust.
Warmworks operates the HEEPS programme, which is now fully
mobilised and performing very well. We discussed at the half year
that whilst volumes have been growing steadily within Warmworks,
referrals to Everwarm were behind expectations. These pleasingly
picked up during the second half and we expect further improvement
in 2017.
Providor Metering
We were delighted to announce in August 2016, the award of a
GBP37m contract with Scottish Power for the installation of
domestic smart meters across Northern Scotland, Wales and North
West England. The Group expects to install more than 450,000 meters
over the course of the contract's five year term. We have also
secured smart meter contracts with Utilita, Ovo and E, the former
two also mobilising during the year. Total mobilisation costs of
GBP2.5m have been reported as an Other Item in the Consolidated
Statement of Comprehensive Income, as highlighted in August. This
has been a complicated logistics process and the Providor team have
done a terrific job in achieving above average levels of
operational performance under our new contracts.
Disappointingly, Providor's major customer acquired two of its
competitors during the year, bringing this capability in house.
This led to the unexpected cancellation of anticipated work, with
the most profitable activities moving first. We have taken a
provision against our exit from those activities and other
non-profitable work streams within Exceptional and Other items,
discussed in the Financial Review and Note 3.
In light of such a rapid transformation for Providor, the Group
expects FY17 to be one of consolidation for its metering activities
as we seek to deliver top quartile performance for our clients on
our smart metering contracts. The Group remains encouraged by
demand in the metering market and expects this to increase as the
challenges faced by utility companies intensify.
Orchard Energy
Orchard Energy, our energy procurement and advisory services
business, had an excellent year with monthly contract brokerage
signings exceeding GBP0.7m per month on average during the second
half of the year. We continue to grow these activities, in addition
to our advisory and water utility services offerings, which we
expect to help drive growth in 2017, along with geographic
opportunities.
Divisional contract position
In addition to the wins in Providor and Orchard discussed above,
Energy Services was awarded places on frameworks during the year
including the provision of energy efficiency measures for the
London Housing Consortium and energy saving measures and insulation
systems for Luton Borough Council (both to 2020). Other notable
wins in the year include a four year framework with the Scottish
Government to provide non-domestic energy works to December 2019, a
solid wall project for Fife Council (Kirkcaldy) and bathroom
replacement works for Aberdeenshire.
Looking forward
Energy Services is now on 36 frameworks, up from 32 at 30
September 2015, with an aggregate value of GBP427m (30 September
2015: GBP294m).
As previously reported, in relation to bidding insulation
contracts, the energy efficiency sector is exceptionally complex.
Everwarm has class-leading levels of compliance in submitting
claims, which is fundamental to earning an adequate return, an
understanding which we do not see among all market participants.
Notwithstanding a slow pace of evolution, we continue to believe
that the English market represents a significant future opportunity
for the Division, given the Group's long standing customer
relationships and experience in delivering these services, not
least Scottish Government's Home Energy Efficiency Programme for
Scotland ("HEEPS").
Energy Services delivers specialist works and has high levels of
expertise in complex markets and should over time, deliver a
consistently high return. Given the transitional nature of the
market and mobilisation of smart metering services, we expect 2017
to be one of consolidation for the Division. We remain optimistic
about the future prospects for Energy Services and expect
opportunities to arise from the new ECO transitional period, prior
to the full programme in 2018, together with the deregulation of
the water market from April 2017. This, with our continuing
involvement in the UK domestic smart meter installation programme,
underpins a sizeable proportion of Divisional revenue growth from
2018.
Property Services
(32% of Group Underlying Revenue)
Property Services: year ending 30 September 2016 2015 Change
-------------------------------------------- ---- ----- -------
Revenue (GBPm) 98.1 161.7 -39.3%
Underlying EBITA (GBPm) 0.8 10.5 -92.6%
Underlying EBITA margin 0.8% 6.5% -570ppt
-------------------------------------------- ---- ----- -------
Property Services provides planned and responsive maintenance
services for social housing clients, which are mainly local
authorities and housing associations. The Division operates through
two businesses:
-- Lakehouse Property Services (formerly Regeneration
South): operates in London and the South East;
-- Foster Property Maintenance ("Foster" - formerly
Regeneration East): operates in East Anglia
At the half year, we highlighted operational challenges in our
directly delivered externals business managing growth in this work,
in particular inventory, staff and site contractors. This business
comprised two departments - Roofing and Energy South (managed by
the Lakehouse Property Services team, but reported in 2015
segmentally as part of Energy Services). In May 2016, we instigated
an operational improvement programme, focused on managing a
balanced position of risk and return on capital. The conclusion was
to close both departments as the risks of delivering this work
directly were too great and, following the operational review, it
was determined by the Board to exit these operations. The total
losses on the contracts within these businesses are expected to
amount to GBP6.6m pre-tax (on revenues of GBP25.3m), which have
been excluded from the underlying result and reported as Other
Items.
Property Services revenue was GBP98.1m in the year, down
GBP63.6m (39.3%). Businesses being exited and reported within Other
Items in 2016, recorded revenues of GBP21.1m within underlying
revenues in the comparative period. Underlying EBITA declined by
GBP9.7m (92.6%) to GBP0.8m, resulting in an underlying EBITA margin
of 0.8%, which was 570 ppt lower than last year. Businesses being
exited in 2016 made profits of GBP1.3m in the comparative period,
where they were reported within the underlying results. The balance
of GBP8.4m related to a deterioration in both performance and the
trading environment during the year.
As reported in February 2016, the 1% rent cap imposed on social
landlords has had a significant impact on our market as clients
sought to cut costs in response. This has taken a number of forms -
some budgets simply were cut, procurement under frameworks delayed
and certain clients sought to fragment frameworks in the
expectation that multiple suppliers on individual lots would
improve competitiveness. We have responded to this change in market
dynamics by challenging the return on capital at a client level and
withdrawing from contracts that are not economic. We have also
taken the opportunity to review our staff base, particularly in
parts of the business where performance was not adequate. With new
leadership in this Division and a focus on those relationships
where we can earn an acceptable return, we expect to move forward
as a smaller, leaner and more focused business.
Lakehouse Property Services
As a result of difficult market conditions, as well as the
previously reported operational issues, Lakehouse Property Services
has had an exceptionally difficult year. The Board has taken action
to address this by withdrawing from some activities and
restructuring the cost base. The focus of the businesses is to
deliver high levels of client service whilst ensuring returns are
acceptable through strong operational management and we are very
encouraged by the approach taken by the new management team.
The major contributors to the reduction in revenues and margins
in the year arose from the previously announced cessation of the
Hackney contract in 2015, together with lower revenues from Camden.
Camden re-procured their planned maintenance framework in multiple
lots during the year, seeking cost savings by directly managing a
wide and diverse supply chain themselves. We were successful in
securing positions on half of the lots but future work will be
subject to successfully tendering individual works; when seeking to
participate, we will ensure this offers an adequate balance of risk
and return for the business.
Notwithstanding a reduction in bidding activity in the year,
Lakehouse Property Services nevertheless had a number of good wins,
including a place on Fusion21's national kitchen and bathroom
installation works framework to March 2020 and places on the major
works framework for the London Boroughs of Southwark (until 2019),
Newham (until 2021) and Barking and Dagenham (until 2021) and
separate internal and external frameworks for the Vale of Aylesbury
Housing Trust. We also won a significant number of contracts
including fire safety works for the London Borough of Ealing, two
one-year contracts with Wandsworth Council for window and roof
renewals and an external refurbishment contract for two social
housing blocks with Portsmouth City Council.
Foster
Foster has faced very different challenges from Lakehouse
Property Services this year. Operational performance and client
service remained good through the year and Foster was successful in
re-securing its position on the key Eastern Procurement framework
for responsive repairs and voids to May 2020, planned internal
works to September 2019 and roofing works to May 2020, which was
important for its future prospects. However, a number of Eastern
Procurement members drastically cut or withdrew budgets and the mix
of remaining work resulted in Foster seeing a significant fall in
profitability during the year.
Whilst it was important for Foster to re-secure its place on the
Eastern Procurement Framework for planned maintenance throughout
the East Anglia region, the management team undertook an active
drive to diversify the service offering to existing and new clients
in the region. Refurbishing student accommodation has been, and
continues to be, a productive work stream, with future works at the
University of East Anglia being negotiated off the back of the
scheme undertaken this year. Similar works have been undertaken in
Cambridge this year at Tripos Court for Flagship Housing
Association on behalf of Cambridge University. There are a large
number of military bases in the region that will provide future
opportunities, such as Bodney Army Camp where we won a programme of
major upgrading works in the year and will continue to be
targeted.
Foster sought also to grow into the Midlands and to expand its
responsive maintenance business. Neither performed as we had hoped,
mainly due to a lack of scale. Recognising this at an early stage,
we reorganised the Midlands business by absorbing ongoing contracts
into existing departments and have become more selective in bidding
within the region. We are reviewing all commercial options to
improve returns from responsive maintenance.
During the year Foster Property Services was awarded places on
ten important frameworks, including Efficiency East Midlands (to
February 2020), South East Consortium (to 2020), Fusion 21 and the
United Lincolnshire NHS trust (to 2018). In addition, Foster
secured several significant works contracts including Central
Bedfordshire Kitchen and Bathroom refurbishment programme and the
design and construction of the Wade House housing block for
Havebury Housing Partnership.
As part of the operational review of Property Services during
the year, we identified a number of areas for potential improvement
in Foster, especially with regard to materials and cash management.
We also concluded there was a need to simplify the management
structure and now have a smaller, ambitious team to take the
business forward.
We conducted a review of the value of capitalised goodwill
attaching to Foster at year end. In light of current trading
performance and the re-basing of the profitability achievable on
key frameworks, such as the Eastern Procurement Framework, we
concluded that the forecast level of profitability in this business
does not support continued recognition of the goodwill balance. We
therefore wrote down the entire goodwill balance of GBP17.4m,
details of which are outlined below in the Financial Review and
notes 3 and 7.
Looking forward
We are being highly selective in taking on further work in
Property Services, which is evidenced in the reduction in the
Group's total order book. Property Services is now on 71
frameworks, up against 53 at 30 September 2015 but with an
aggregate value of GBP370m (down against 30 September 2015:
GBP540m).
With the significant number of challenges and management changes
within the year it is reassuring that we have managed to secure
positions on some key frameworks within our core operating regions
providing future opportunities with clients who have money to
spend. Our new management teams are focused on building on
Lakehouse's reputation for winning and delivering works
successfully for our clients and managing an adequate balance of
risk and return. Property Services is a Division which under the
right leadership, provides the Group with strong customer
relationships and good forward visibility on revenues. Looking
forward, the Board believes that this is a business which under new
management, strong operational control and selective bidding,
should be capable of delivering a consistent mid to high single
digit return.
Construction
(17% of Group Underlying Revenue)
Construction: year ending 30 September 2016 2015 Change
--------------------------------------- ---- ---- ------
Revenue (GBPm) 52.1 73.4 -29.1%
Underlying EBITA (GBPm) 3.6 4.8 -25.5%
Underlying EBITA margin 6.9% 6.6% 30ppt
--------------------------------------- ---- ---- ------
Construction is a public buildings services business that
delivers extension, refurbishment, rationalisation and new build
works, primarily in the education market, with a particular focus
on schools.
Revenue decreased by 29.1% to GBP52.1m (2015: GBP73.4m). EBITA
decreased by 25.5% to GBP3.6m (2015: GBP4.8m). This resulted in an
underlying EBITA margin of 6.9%, which was 30 ppt higher than in
the prior year, reflecting an improved contract mix and tight
commercial management of our contracts.
We discussed at the half year that factors under the control of
our clients had caused a reduction in revenues and this had a
similar impact for the full year. The principal cause has been a
move from single stage to two stage procurement. The difference
between the two contractual structures means that we will be
awarded a contract but can then face a significant period before
mobilising as a result of the need to address a number of project
considerations, which can include planning, review of design /
affordability and project-specific matters such as rights of way,
land purchase and environmental factors. This is good from a risk
management perspective, but very frustrating when reporting
performance as we saw 17 projects delayed by these factors. We
estimate that this directly reduced our revenues by one third in
the year, with a consequential impact on EBITA and cash. These
projects are all live or will be mobilized in the first half of the
new financial year and as a consequence, we head into 2017 with a
very strong order book.
The Construction team has a disciplined approach to bidding and
contract management, with a strong and long-serving workforce who
have an excellent grasp of commercial considerations on their
projects. This allowed us to earn excellent margins of 6.9% on our
contracts during the year and to see few of the commercial disputes
that we have experienced in Property Services.
In light of the opportunities that have presented themselves,
our typical project range has moved upwards in the year, with works
secured having an average value of GBP3.5m to GBP4m (2015: GBP2.5m
to GBP3.0m). We had significant success in securing major
frameworks in the year, including Essex County Council's four-year
school expansion programme to April 2020 and Kent County Council's
education, public buildings and commercial framework to September
2019. Key contract wins in the year included:
-- Orchardside School Enfield - design and construct
of a new specialist GBP7.5m teaching facility for
challenged pupils.
-- Brentside High School - design and construct of a
new GBP8.6m classroom block and dining facility procured
under the LCP framework.
-- Gloucester Archive Building - design and construct
of a new GBP2.0m bespoke archiving facility for the
local authority
-- Isleworth and Sion Boys School - design and construct
of a new GBP5.2m teaching block and science laboratories
for Hounslow Council
-- Lindon Farm - design and construct of a GBP4.2m living
accommodation block for adults with autism for Surrey
CC.
Looking forward
The number of frameworks declined to 29 from 40 as at 30
September 2015, reflecting our plans as we sought to focus on key
clients where we can build predictability into the business model
and to bid selectively on projects where we can earn an adequate
return on capital. The frameworks had an aggregate value of GBP353m
(30 September 2015: GBP420m), representing a 16% higher average
value per framework. These frameworks provide more than enough
opportunity for the Construction Division to continue to grow,
whilst maintaining an acceptable rate of return. We remain excited
about the prospects for Construction in a market with strong
underlying growth fundamentals.
Financial review
The Operational Review provides a detailed overview of our
trading performance during the year. This Financial Review
therefore covers other aspects of the Statement of Comprehensive
Income, Statement of Financial Position and Cash Flows.
Trading overview
Group underlying revenue in the year decreased by 9.2% to
GBP305.8m (2015: GBP336.6m), principally reflecting the year on
year impact of businesses being exited and the wider decline in
Property Services, partially offset by the impact of acquisitions.
Underlying EBITA decreased to GBP10.9m (2015: GBP22.2m). We exclude
Exceptional and Other Items in calculating underlying EBITA to
provide a more appropriate view of underlying operating
performance. Underlying EBITA margins fell to 3.6% in the year
against 6.6% in FY15. The decline in underlying EBITA reflected a
GBP9.7m fall in Property Services (discussed in the Property
Services review above), together with the GBP3.0m year on year
impact from a reduction in carbon pricing for energy efficiency
measures. As discussed in the Operational Review above, the results
for the year included a full year contribution from acquisitions of
an estimated GBP60.0m in revenues and GBP5.5m of underlying
EBITA.
Operating expenses increased 37.1% to GBP32.6m in the year
(2015: GBP23.7m) reflecting the new businesses acquired in the past
18 months. Central costs increased by 6.5% to GBP7.7m (2015:
GBP7.2m), reflecting the full year costs of being a listed company,
together with higher costs associated with the infrastructure
required to accommodate recent acquisitions. As part of the
operational review conducted in May 2016, we concluded that a
number of services historically delivered centrally would be best
managed at a divisional level. This led to more than 100 staff
either being redeployed or exiting the Group, as we seek to
maintain a lean central structure going forward.
We reported an operating loss of GBP31.7m (2015: profit of
GBP4.6m) in light of the charges for Exceptional and Other Items
discussed below. The loss after tax was GBP29.3m (2015: profit of
GBP2.4m).
Exceptional and Other Items, including amortisation of
acquisition intangibles
Exceptional and Other Items in the year reduced the Group's
profit before tax by GBP43.2m (2015: GBP18.4m) and related to the
following items:
2016 2015
GBPm GBPm
--------------------------------------------------------------- ----
Contract losses on businesses being exited 6.6 2.5
Smart metering mobilisation costs 2.5 -
-------------------------------------------------------- ----- ----
Total Other Items 9.1 2.5
-------------------------------------------------------- ----- ----
Exceptional Items:
Acquisition costs 0.6 0.8
Contract costs - 2.9
Impairment of receivables 2.6 -
Restructuring and EGM costs 2.5 0.8
IPO costs - 4.1
-------------------------------------------------------- ----- ----
Total exceptional costs 5.7 8.6
Release of deferred consideration (2.6) -
-------------------------------------------------------- ----- ----
Total net Exceptional Items 3.1 8.6
-------------------------------------------------------- ----- ----
Impairment of goodwill and intangible assets acquired 19.2 -
Amortisation of acquisition intangible assets 11.2 6.5
-------------------------------------------------------- ----- ----
42.6 17.6
-------------------------------------------------------- ----- ----
Unamortised financing costs included in finance expense - 0.4
Unwinding discount of deferred consideration 0.6 0.4
-------------------------------------------------------- ----- ----
Total Exceptional and Other Items 43.2 18.4
-------------------------------------------------------- ----- ----
Contract losses on businesses being exited
At the half year, we highlighted operational challenges in our
directly delivered externals business within Property Services
managing growth in this work, in particular inventory, staff and
site contractors. This business comprised two departments - Roofing
and Energy South (managed by the Lakehouse Property Services team,
but reported in 2015 segmentally as part of Energy Services). In
May 2016, we instigated an operational improvement programme,
focused on managing a balanced position of risk and return on
capital. The conclusion was to close both departments as the risks
of delivering this work directly were too great and, following the
operational review, it was determined by the Board to exit these
operations. The total losses on the contracts within these
businesses are expected to amount to GBP6.6m pre-tax (on revenues
of GBP25.3m), which have been excluded from the underlying result
and reported as Other Items. These activities made a GBP2.4m profit
on revenues of GBP28.4m in 2015, when they were included within the
underlying results.
The comparative figure for 2015 of GBP2.5 million represented
further costs incurred on certain legacy contracts of our now
ceased social housing development business (reported under the
Construction Division).
Smart metering mobilisation costs
The Group made encouraging progress within Providor (acquired in
May 2015) in mobilising its domestic smart meter installation
programme with Scottish Power and other leading utilities. Engineer
efficiency is a key performance indicator in this activity and we
have seen steady improvement each month, since mobilisation in July
2016. The GBP2.5m cost incurred in the year (on revenues of
GBP2.8m) was in line with the expectations set out in August 2016
and represented costs associated with training and retaining
engineers in Providor, along with mobilisation complexities
associated with planning work, documenting installations, inventory
management and systems development. We remain confident of the
future prospects for this business.
Exceptional Items
Acquisition costs comprise legal, professional and other
expenditure in relation to acquisition activity during the year and
amounted to GBP0.6m (2015: GBP0.8m). Contract costs, which were
GBPnil in FY16 (2015: GBP2.9m), represented exceptional remediation
expenses associated with the resolution of historic matters on a
specific contract in 2015 ("The Contract").
Impairment of receivables of GBP2.6m (2015: GBPnil) reflects the
provision taken against receivables in relation to a small number
of contract settlements on which there is a range of possible
outcomes for the Group in terms of both cash flow and impact on the
Income Statement. This predominantly relates to a sum receivable
within Property Services relating to The Contract, discussed above.
This is a matter that has been ongoing since 2014 and does not
reflect underlying trading in the year. A small element related to
the withdrawal from industrial and commercial metering activities,
discussed above in the Energy Services operational review. The
provisions were made in line with the Group's accounting policy for
receivables, but highlighted as an Exceptional Item in light of
their unusual nature. Management will continue to seek a full and
advantageous settlement for the Group.
We incurred a GBP2.5m charge in relation to restructuring and
EGM costs in the year. In May 2016, we indicated an operational
improvement programme would be initiated by the Board to focus
initially on the Property Services Division, in which we made
significant progress during the second half of the year. The Group
recorded a GBP1.0m exceptional cost to cover the costs of
redundancy for over 100 staff associated with this exercise, which
included the rationalisation of certain central functions. There
has also been a great deal of change at Board level this year and
the Group took a charge of GBP1.5m associated with the departure of
former directors, the two Extraordinary General Meetings held
during the year and other one-off expenses. The prior year item of
GBP0.8m related to the write-off of certain fixed assets and legal
fees in relation to reshaping the Group structure.
Release of deferred consideration of GBP2.6m (2015: GBPnil)
represented the renegotiation of sums due to the former owners of
H2O Nationwide Limited (GBP0.6m) and no further sums being due to
the former owners of Providor Limited (GBP1.5m) and Sure
Maintenance Limited (GBP0.5m), in light of the requisite
performance conditions under the Sale and Purchase Agreement not
being met.
IPO costs of GBPnil (2015: GBP4.1m) comprised legal,
professional and incidental expenditure incurred in relation to the
IPO in March 2015.
Impairment of goodwill and intangible assets acquired
Impairment of goodwill and intangible assets acquired was
GBP19.2 million for the year (2015: GBPnil) relating predominantly
to the write-down of GBP17.4m of goodwill in relation to Foster.
The impairment of Foster reflected the reduced actual and expected
performance of this business, discussed above in the Property
Services operational review. The GBP1.8m balance related to value
attaching to the contract with a major industrial and commercial
customer in Providor, who cancelled work unexpectedly during the
year. Although we succeeded in replacing these revenues with the
Scottish Power contract, accounting standards require us to review
carrying values based on the historic customer base alone.
Accordingly, this is not necessarily indicative of management
expectations of the prospects for Providor.
Amortisation of acquisition intangibles was GBP11.2 million
(2015: GBP6.5 million), with the increase reflecting a full year
impact of Providor, Orchard Energy and Sure Maintenance together
with the acquisitions of Aaron Heating Services and Precision Lift
Services during the year.
Accelerated amortisation of financing costs
Finance costs of GBPnil (2015: GBP0.4m) represented the
write-off of unamortised costs on the term loan we replaced with a
new revolving credit facility in December 2014, ahead of the
IPO.
Unwinding discount of deferred consideration
Unwinding discount of deferred consideration reflects the
present value of deferred sums, discounted at a post-tax rate of
8.5%, due on outstanding payments for acquisitions.
All items discussed above in relation to "Exceptional and Other
items" are considered non-trading because they are not part of the
underlying trading of the Group and in the case of Exceptional
Items, impairment of goodwill and accelerated amortisation of
finance costs are not expected to recur year to year. Contract
losses on businesses being exited relate to businesses that have
been closed and smart metering mobilisation costs reflect the
one-off nature of mobilising our new domestic smart metering
programme, which we expect will carry on into the first half of the
year to 30 September 2017.
Finance expense
The total finance expense for the year represented the interest
charged on our debt facilities (net of finance income), together
with the amortisation of debt raising costs, which totalled GBP1.0m
(2015: GBP0.6m).
The total finance expense of GBP1.6m included the unwinding of
discounts on deferred consideration figure of GBP0.6m (2015:
GBP0.4m), discussed above and treated as a non-operating item.
Tax
The tax charge on underlying profit before tax of GBP9.9m was
GBP1.7m, representing an effective rate of 17.3%, which compares
with the statutory corporation tax rate of 20%. The difference was
due to prior year tax adjustments.
The effective tax rate on the statutory loss before tax for the
year was 12.1% which is lower than the UK statutory corporation tax
rate of 20% due to a combination of permanent differences together
with the enacted reductions in the UK corporation tax rate and
prior year credits. The increase in permanent differences from
GBP2.0m to GBP15.2m is due to a non-deductible impairment of
goodwill relating to Foster Property Maintenance of GBP17.4m and
non-taxable income of GBP2.6m relating to a release of deferred
consideration.
Our net cash tax payment for the year was GBP0.3m for continuing
operations (2015: a statutory credit of GBP2.7m), reflecting
carried forward tax losses. During the year, the Group has received
the anticipated cash tax refund from HMRC which formed the
corporation tax receivable on the 30 September 2015 balance sheet.
The Group has also made tax payments on account during the year. As
these payments on account are no longer expected to be required as
the Group has generated a tax loss, this has resulted in a net
receivable with regard to corporation tax as at 30 September
2016.
The net deferred tax asset as at 30 September 2016 was GBP0.2m
(2015: liability of GBP1.9m), with the movement mainly relating to
acquisition intangibles, where a credit of GBP3.1m to the P&L
was offset by an additional GBP1.5m deferred tax liability in
relation to the acquisition intangibles of Aaron Heating Services
and Precision Lift Services.
In the year, the Group has increased its gross tax losses but
due to a reduction in the UK's corporation tax rate, the carried
forward tax credit reduced from GBP3.1m to GBP2.6m. The carried
forward tax losses mainly arose on the exercise of share options at
the time of the IPO and were eligible for Group tax relief. The
credits to set up the deferred tax asset arising on these tax
losses were recognised in equity and as such, the tax charges and
credits relating to the utilisation of these will also be
recognised in equity. Therefore, this should not impact the Group's
effective tax rate. The remaining tax credit relates to four Group
companies and may be utilised over a period of greater than one
financial year.
The Group has recognised a deferred tax asset arising on tax
losses of GBP2.6m on the basis of a combination of taxable
temporary differences (GBP0.1m) and forecast taxable profits
(GBP2.5m) which is consistent with the Board's anticipation of
improving profitability as outlined above.
Year ended 30 September (GBPm) 2016 2015
--------------------------------------------------------------------------- ------ ------
Underlying EBITA 10.9 22.2
Less:
Exceptional and Other Items (42.6) (17.6)
Finance expense (1.6) (1.4)
Tax 4.0 (0.8)
(Loss)/profit for the year attributable to the equity holders of the Group (29.3) 2.4
--------------------------------------------------------------------------- ------ ------
Earnings per share
Underlying basic earnings per share were 5.2p (2015: 13.7p),
based on underlying earnings of GBP8.2m (2015: GBP17.5m).
Underlying earnings are stated after adding back GBP37.4m of
Exceptional and Other Items (after tax).
Our statutory losses for the year were GBP29.3m (2015: statutory
earnings of GBP2.4m). Based on the weighted average number of
shares in issue during the year of 157.5m, this resulted in basic
losses per share of 18.6p (2015: basic earnings per share
1.9p).
Further details are contained in note 6.
Dividend
The Board has proposed a final dividend for the year of 0.5p per
share, which is in addition to the interim dividend of 1.0p paid in
the year. This represents a total dividend payable for the year of
1.5p (2015: 1.9p).
Subject to approval at the AGM, the final dividend will be paid
on 6 April 2017 to shareholders on the register at the close of
business on 10 March 2017.
Cash flow performance
Our underlying operating cash flow for the year was an inflow of
GBP13.2m (2015: GBP25.6m), reflecting a strong underlying cash
conversion of 121% (2015: 115%). We calculate underlying operating
cash conversion as cash generated from operations, excluding the
cash impact of Exceptional and Other Items, divided by underlying
EBITA. We believe this measure provides a consistent basis for
comparing cash generation consistently over time. On a statutory
basis, we saw an operating cash outflow of GBP3.0m (2015: inflow of
GBP19.1m), representing an outflow of 171% (2015: inflow of
97%).
As we highlighted at the half year, the timing of revenues,
method of contract delivery and customer contractual terms can all
have an impact on working capital and consequently, cash
conversion. Generally, as revenues rise under a packaged
subcontractor model, there is a cash benefit, as we are paid more
quickly by our clients than we pay our supply chain (referred to as
"net negative work in progress"); conversely as revenues fall, we
may find payments to subcontractors do not fall in proportion to
lower revenues, resulting in negative work in progress turning
positive and a cash outflow. We therefore felt the cash impact of
the poor performance in Property Services and contract delays in
Construction during the year and whilst the former is likely to be
permanent, we expect the delays in Construction to be temporary and
so see some recovery as revenues pick up. We have also seen
increased financial and resourcing pressure faced by clients,
making it harder to reach reasonable account settlements. After an
operating outflow of GBP11.4m (outflow of GBP8.7m after taking
account of the cash impact of Exceptional and Other Items) in the
first half of the year, we saw a strong cash performance across
every division in the second half, with the net operating outflow
reducing to GBP3.0m for the full year and an underlying inflow of
GBP13.2m after taking account of the cash impact of Exceptional and
Other Items.
After factoring in the matters highlighted above, together with
the impact of the Exceptional and Other Items in the Statement of
Financial Position at the year end, we expect to continue to target
an average annual operating cash conversion of 80% over the long
term.
Net debt
Our net debt balance stood at GBP20.6m at 30 September 2016
(2015: net cash of GBP6.6m). This increase reflected predominantly,
payments for acquisitions of GBP17.7m, the GBP1.1m owed to the
former owner of our Manor Road housing development (discussed in
provisions below) and GBP4.6m in respect of the dividends paid
during the year. The balance was accounted for predominantly by a
GBP3.0m net operating cash outflow, which included a GBP16.2m cash
cost of Exceptional Items, discussed further in note 12.
Banking arrangements
We had drawn GBP21m under our revolving credit facility at the
year end. At the date of issuing this report we had drawn GBP28m,
reflecting our normal winter working capital requirements. Royal
Bank of Scotland ("RBS") remain very supportive of the Group and to
show our commitment to managing our banking arrangements within our
means and also to reduce the cost of non-utilisation fees, we
requested that RBS reduce our Revolving Credit Facility ("RCF") to
GBP40m and further reduce the facility to GBP35m in April 2017. We
agreed this formally in a variation to our RCF in January 2017,
which included a revision to our banking covenants reflecting the
lower earnings expectations of the Group, but at a higher rate of
interest. We retain a GBP5m overdraft facility
These revised arrangements provide the Group with funding
support that will ensure the Group is able to plan for future
growth, particularly in bidding with confidence on new
contracts.
Balance sheet
The principal items in our Balance Sheet are goodwill,
intangible assets and working capital.
30 Sept 30 Sept
2016 2015
GBPm GBPm
---------------------------------------------------------------- -------
Goodwill and intangibles 69.3 83.5
Tangible and other fixed assets 4.7 4.2
-------------------------------------------------------- ------ -------
Total non-current 74.0 87.7
-------------------------------------------------------- ------ -------
Current assets 75.7 85.9
(Debt) / cash (0.3) 6.5
Current liabilities (68.4) (84.2)
-------------------------------------------------------- ------ -------
Net current assets 7.0 8.2
-------------------------------------------------------- ------ -------
Non-current liabilities (9.7) (10.1)
Debt (20.3) (0.3)
-------------------------------------------------------- ------ -------
Net assets 51.0 85.5
-------------------------------------------------------- ------ -------
Net current assets (excluding cash) 7.3 1.7
Net negative work in progress (packaged subcontractors) (12.0) (18.0)
-------------------------------------------------------- ------ -------
The principal movement in net assets reflected a reduction of
GBP14.2m in goodwill and intangibles, reflecting GBP11.2m in
amortisation of acquisition intangibles and GBP19.2m in impairment
charges, discussed above and in notes 3, 7 and 8, offset in part by
GBP15.0m of additional acquired goodwill & intangibles relating
to acquisitions made in the year, discussed in note 13.
Net current assets (excluding cash) rose to GBP7.3m (30
September 2015: GBP1.7m). The acquisitions of Aaron Heating
Services and Precision Lift Services contributed GBP2.3m, with the
balance of the increase relating predominantly to a GBP6.0m
reduction in net negative work in progress relating to packaged
subcontractors to GBP12.0m (30 September 2015: GBP18.0m). This
arose from a reduction in revenues in our Property Services
business and the timing of projects in Construction, both of which
employ packaged subcontractor models and are in line with the
trends highlighted at the half year.
Deferred consideration on acquisitions is analysed below.
Provisions
Provisions as at 30 September 2016 stood at GBP4.9m (30
September 2015: GBP6.4m). During the year, we utilised GBP3.2m of
provisions in line with our expectations, with GBP1.1m due to the
former owner of the land at our Manor Road housing development,
GBP1.5m in relation to specific costs of the Contract (discussed in
Exceptional Items above) and GBP0.6m of other items. We provided a
further GBP0.8m in relation to specific risks and also recognised
GBP0.9m as part of fair value accounting on acquisitions for
potential risks and liabilities.
Further details are set out in note 11.
Acquisitions
The Group made two acquisitions in the year:
-- Aaron Heating Services (November 2015): gross consideration
of GBP9.2m, comprising GBP2.6m of net assets (including
cash of GBP0.3m), GBP3.0m of acquired intangibles
(net of deferred tax) and GBP3.6m of goodwill.
-- Precision Lift Services (December 2015): gross consideration
of GBP7.5m, comprising GBP0.7m of net assets (including
cash of GBP0.5m), GBP3.2m of acquired intangibles
(net of deferred tax) and GBP3.6m of goodwill.
Further details are set out in Note 13.
Deferred consideration
A number of the acquisitions made by the Group in recent years
incorporate deferred consideration as part of the transaction
terms, some of which depend on the performance of the businesses
post-completion.
The table below shows the movement in the total discounted
deferred consideration payable and the amount outstanding at the
year end.
Additions,
At 30 including At 30
September discount Release of September Expected
Payments
2015 in unwind deferred 2016 payment
Acquired business (GBPm) year (GBPm) (GBPm) consideration (GBPm) date
----------------- ---------- ------------ ---------- -------------- ---------- --------
Allied Protection 3.3 (3.0) - - 0.3 Nov 2016
Oct 2016/
H2O Nationwide 2.3 (0.4) - (0.6) 1.3 Nov 2017
Providor 1.5 - - (1.5) - n/a
Orchard Energy 1.6 - 0.6 - 2.2 Dec 2017
Sure Maintenance 0.5 - - (0.5) - n/a
Aaron Heating Services - (1.4) 2.4 - 1.0 Dec 2017
Precision Lift Services - - 1.1 - 1.1 Dec 2018
------------------------ --- ----- --- ----- --- ---------
9.2 (4.8) 4.1 (2.6) 5.9
------------------------ --- ----- --- ----- --- ---------
Risks
The Board considers strategic, financial and operational risks
and identifies actions to mitigate those risks. Key risks and their
mitigation are disclosed in the annual report for the year ended 30
September 2016, discussed in note 1 ("2016 Annual Report").
As we discussed above in Exceptional Items, we provided against
certain receivables under the Group's accounting policy. We are
pursuing legal avenues with regard to full recovery in relation to
these matters, but consider it important to maintain a prudent
basis of accounting.
We are conscious that unbilled balances represent a significant
risk in our industry and we conducted a thorough review of
recoverability at the year end, providing against uncertain items
where necessary.
We continue to manage a number of potential risks and
uncertainties, including claims and disputes, which are common to
other similar businesses which could have a material impact on
short and longer term performance. The Board remains focused on the
outcome of a number of contract settlements on which there is a
range of outcomes for the Group in terms of both cash flow and
impact on the Statement of Comprehensive Income.
Going Concern statement
The Directors acknowledge the Financial Reporting Council's
'Going Concern and Liquidity Risk: Guidance for Directors of UK
Companies' issued in October 2009. The Group's business activities,
together with factors likely to affect its future development,
performance and position are set out in the 2016 Annual Report. The
financial position of the Group, its cash flows, liquidity position
and borrowing facilities are described in the financial review
above and in the 2016 Annual Report. In addition, Note 31 to the
consolidated financial statements within the 2016 Annual Report
includes details of the Group's approach to financial risk
management, details of its financial instruments and hedging
activities, and its exposure to credit risk and liquidity risk. In
assessing the Group's ability to continue as a going concern, the
Board reviews and approves the annual budget and three year plan,
particularly for the following 16 months, including forecasts of
cash flows, borrowing requirements and covenant headroom. The Board
reviews the Group's sources of available funds and the level of
headroom available against its committed borrowing facilities and
associated covenants. The Group's financial forecasts, taking into
account possible sensitivities in trading performance, indicate
that the Group will be able to operate within the level of its
committed borrowing facilities and within the requirements of the
associated covenants for the foreseeable future. RBS remain very
supportive of the Group and to show our commitment to managing
banking arrangements within our means and also reduce the cost of
non-utilisation fees, we requested that RBS reduce our RCF to
GBP40m and further reduce the facility to GBP35m in April 2017. We
agreed this formally in a variation to our RCF in January 2017,
which included a revision to our banking covenants reflecting the
lower earnings expectations of the Group, but at a higher rate of
interest. The facility will mature in December 2018, albeit RBS has
the option to extend this to December 2019. The Directors have a
reasonable expectation that the Group has adequate resources to
continue its operational existence for the foreseeable future.
Accordingly, they continue to adopt the going concern basis of
accounting in preparing the Annual Report and Accounts.
Viability statement
The Directors have considered section C.2.2 of the 2014
Corporate Governance Code and, taking account of the Group's
current position, prospects and principal risks, confirm they have
a reasonable expectation that the Group will continue to operate
and meet its liabilities, as they fall due, over the three year
period to 30 September 2019. A three year period is considered
appropriate in light of the lifecycle of the Group's order book,
beyond which, management has less visibility. This assessment was
performed alongside the Group's consideration of principal risks
and annual three year financial planning process.
The Group performs a series of risk reviews during the year,
managed through a Risk Committee and included in monthly
operational reviews conducted with each division; the outcome is
presented to the Audit Committee twice annually for review and
challenge. This ensures that all matters of significance are
considered and key risks brought to the attention of the Board.
The Group's three year financial plan ('Plan') is built on a
bottom-up basis by business and segment and utilises the data
provided in the Group's order book, framework contracts and
opportunity pipeline. The Plan is reviewed in detail with each
division through a series of reviews and tested for a range of
sensitivities, which quantify the principal risks facing the
business, including contract losses, financial shortfalls and
increased working capital demands. Management consider such risks
insofar as they possess or can determine the information to do so,
and there will always be an element of inherent uncertainty,
particularly as regard matters outside their direct control, such
as Government policy, client procurement policies and potential
claims and disputes brought against the Group by others.
Sensitivities are also tested against available banking facilities
to ensure sufficient headroom and remaining compliant with banking
covenants. In this assessment, we assumed RBS agrees to a renewal
of our banking facilities in December 2018.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
For the year ended 30 September 2016
Responsibility statement of the directors on the annual
report
This responsibility statement below has been prepared in
connection with the company's full annual report for the year ended
30 September 2016. Certain parts thereof are not included within
this announcement.
We confirm to the best of our knowledge that:
1. The financial statements, prepared in accordance with
International Financial Reporting Standards as adopted by the EU,
give a true and fair view of the assets, liabilities, financial
position and profit or loss of the company and the undertakings
included in the consolidation taken as a whole;
2. The strategic report includes a fair review of the
development and performance of the business and the position of the
company and the undertakings included in the consolidation taken as
a whole, together with a description of the principal risks and
uncertainties they face; and
3. The annual report and financial statements, taken as a whole,
are fair, balanced and understandable and provide the information
necessary for shareholders to assess the company's performance,
business model and strategy.
This responsibility statement was approved by the board of
directors on 24 January 2017 and signed on its behalf by:
Jeremy Simpson
Chief Financial Officer
24 January 2017
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 30 September 2016
Underlying Exceptional Underlying Exceptional
results and other results and other
before items before items
exceptional (see exceptional (see
and other note and other note
items 3) items 3)
Notes 2016 2016 2016 2015 2015 2015
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Revenue 2 305,787 28,051 333,838 336,633 3,565 340,198
Cost of sales (265,724) (34,335) (300,059) (290,671) (6,089) (296,760)
Gross profit 40,063 (6,284) 33,779 45,962 (2,524) 43,438
Other operating
expenses (29,691) (2,865) (32,556) (23,738) - (23,738)
Share of results
of joint venture 537 - 537 - - -
Operating profit
before exceptional
and other items 10,909 (9,149) 1,760 22,224 (2,524) 19,700
Exceptional
costs 3 - (5,742) (5,742) - (8,656) (8,656)
Exceptional
income 3 - 2,672 2,672 - - -
Impairment
of goodwill
and intangible
assets acquired 3 - (19,204) (19,204) - - -
Amortisation
of acquisition
intangibles 3 - (11,156) (11,156) - (6,465) (6,465)
-------------------- ----- ------------ ----------- --------- ------------ ----------- ---------
Operating (loss)
/ profit 2 10,909 (42,579) (31,670) 22,224 (17,645) 4,579
Finance expense (1,070) (587) (1,657) (639) (758) (1,397)
Investment
income 46 - 46 20 - 20
------------ ----------- --------- ------------ ----------- ---------
(Loss) / profit
before tax 9,885 (43,166) (33,281) 21,605 (18,403) 3,202
Taxation 4 (1,707) 5,720 4,013 (4,116) 3,300 (816)
------------ ----------- --------- ------------ ----------- ---------
(Loss) / profit
for the year
attributable
to the equity
holders of
the Group 8,178 (37,446) (29,268) 17,489 (15,103) 2,386
============ =========== ========= ============ =========== =========
(Loss) / earnings
per share
Basic 6 (18.6p) 1.9p
Diluted 6 (18.6p) 1.7p
============ =========== ========= ============ =========== =========
Underlying
earnings per
share
Basic 6 5.2p 13.7p
Diluted 6 5.1p 12.3p
============ =========== ========= ============ =========== =========
The accompanying notes are an integral part of this consolidated
statement of comprehensive income.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
At 30 September 2016
2016 2015
Notes GBP'000 GBP'000
Non-current assets
Goodwill 7 47,338 56,267
Other intangible assets 8 21,947 27,199
Property, plant and equipment 2,826 3,126
Interests in joint venture 537 -
Trade and other receivables 1,359 1,131
-------- -------
74,007 87,723
-------- -------
Current assets
Inventories 5,187 4,635
Amounts due from customers under
construction contracts 3,161 2,053
Trade and other receivables 65,633 77,538
Corporation tax receivable 1,451 1,683
Deferred tax asset 229 -
Cash and cash equivalents - 6,934
-------- -------
75,661 92,843
-------- -------
Total assets 149,668 180,566
-------- -------
Current Liabilities
Amounts due to customers under
construction contracts 690 574
Trade and other payables 65,801 80,344
Loans and borrowings 9 71 -
Finance lease obligations 222 403
Provisions 11 1,904 3,279
68,688 84,600
-------- -------
Net current assets 6,973 8,243
-------- -------
Non-current liabilities
Trade and other payables 6,236 5,013
Loans and borrowings 9 20,586 -
Finance lease obligations 164 340
Provisions 11 2,974 3,170
Deferred tax liability - 1,979
-------- -------
29,960 10,502
-------- -------
Total liabilities 98,648 95,102
-------- -------
Net assets 51,020 85,464
======== =======
Equity
Called up share capital 15,753 15,753
Share premium account 25,314 25,314
Share-based payment reserve 776 709
Own shares (290) (290)
Merger reserve 20,067 20,067
Retained earnings (10,600) 23,911
Equity attributable to equity
holders of the company 51,020 85,464
======== =======
The financial statements of Lakehouse plc (registered number
09411297) were approved by the board of directors and authorised
for issue on 23 January 2017. They were signed on its behalf
by:
J J C Simpson
Director
The accompanying notes are an integral part of this consolidated
statement of financial position.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended 30 September 2016
Share Share-based
Share premium payment Own Merger Retained Total
capital account reserve shares reserve earnings equity
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 1 October 2014 - 31,820 1,068 - 1 15,917 48,806
Profit for the
period - - - - - 2,386 2,386
Conversion of
share options - 628 (1,205) - - 1,205 628
Group restructuring 12,382 (32,448) - - 20,066 - -
Issue of share
capital 3,371 25,314 - - - - 28,685
Share-based payment
charge - - 846 - - - 846
Purchase of own
shares - - - (290) - - (290)
Current tax -
Excess tax deductions
related to share-based
payments - - - - - 2,506 2,506
Deferred tax - - - - - 1,897 1,897
-------- -------- ----------- ------- -------- --------- --------
At 30 September
2015 15,753 25,314 709 (290) 20,067 23,911 85,464
Loss for the period - - - - - (29,268) (29,268)
Dividends paid
(note 5) - - - - - (4,568) (4,568)
Share-based payment
charge - - 67 - - (67) -
Current tax -
Excess tax deductions
related to share-based
payments - - - - - (608) (608)
-------- -------- ----------- ------- -------- --------- --------
At 30 September
2016 15,753 25,314 776 (290) 20,067 (10,600) 51,020
======== ======== =========== ======= ======== ========= ========
CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended 30 September 2016
2016 2015
Notes GBP'000 GBP'000
Cash flows from operating activities
Cash (used in) / generated from
operations 12 (3,014) 19,099
Interest paid (808) (460)
Interest received 46 11
Taxation (268) (1,903)
-------- --------
Net cash (used in) / generated
from operating activities (4,044) 16,747
-------- --------
Cash flows from investing activities
Purchase of shares in subsidiary,
net of cash acquired (17,672) (29,745)
Purchase of property, plant
and equipment (819) (1,169)
Purchase of intangible assets (291) (491)
Sale of property and equipment 160 328
Loan to associate (250) -
Disposal of subsidiary business - 40
Net cash used in investing activities (18,872) (31,037)
-------- --------
Cash flows from financing activities
Proceeds from issue of shares - 30,000
Proceeds from issue of pre-existing
shares - 975
Dividend paid to shareholders (4,568) -
Proceeds from bank borrowings 21,000 -
Repayment of bank borrowings - (11,667)
Repayments to finance lease
creditors (357) (237)
Purchase of own shares - (290)
Finance issue costs (164) (472)
Share issue costs paid - (1,315)
Net cash generated from financing
activities 15,911 16,994
-------- --------
Net (decrease) / increase in
cash and cash equivalents (7,005) 2,704
Cash and cash equivalents at
beginning of year 6,934 4,230
Cash and cash equivalents at
end of year (71) 6,934
======== ========
The accompanying notes are an integral part of this consolidated
statement of cash flows.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 September 2016
1. Basis of Preparation and significant accounting policies
Lakehouse plc is a company incorporated in the United Kingdom
under the Companies Act, registered number 09411297. The address of
the registered office is 1 King George Close, Romford, Essex RM7
7LS.
The consolidated financial statements are presented in Pounds
Sterling because that is the currency of the primary economic
environment in which the Group operates.
These results for the year ended 30 September 2016 are an
excerpt from the Annual Report & Accounts 2016 and do not
constitute the Group's statutory accounts for 2016 or 2015.
Statutory accounts for Lakehouse plc for the year to 30 September
2015 have been delivered to the Registrar of Companies, and the
Lakehouse plc statutory accounts for the year to 30 September 2016
will be delivered by 31 January 2017. The Auditor has reported on
both those accounts; their reports were unqualified, did not draw
attention to any matters by way of emphasis and did not contain
statements under Sections 498(2) or (3) of the Companies Act 2006
or equivalent preceding legislation.
Whilst the financial information included in this Annual Results
Release has been prepared in accordance with International
Financial Reporting Standards (IFRS) adopted by the European Union
(EU), this announcement does not itself contain sufficient
information to comply with IFRS. Full financial statements that
comply with IFRS are included in the Annual Report & Accounts
2016 which will be available at www.lakehouse.co.uk.
The accounting policies adopted are consistent with those
followed in the preparation of the Lakehouse plc Group's Annual
Report & Accounts for the year ended 30 September 2015 except
for the adoption of IFRS 10, IFRS 12 and IAS 28 'Investment
entities', IAS 1 'Disclosure Initiative', IAS 27 'Equity Method in
Separate Financial Statements', IAS 16 and IAS 38 'Clarification of
Acceptable Methods of Depreciation and Amortisation', IFRS 11
'Accounting for Acquisitions of Interests in Joint Operations', IAS
16 and IAS 41 'Bearer Plants' and IAS 19 'Defined Benefit Plans:
Employee Contributions'. The adoption of these standards has had no
impact on the results or financial position of the Group.
The Directors have a reasonable expectation that the Company and
the Group have adequate resources to continue in operational
existence for the foreseeable future. The Directors regard the
foreseeable future as no less than 12 months following publication
of its annual financial statements, so in practical terms, 16
months from the statement of financial position date. Please see
further information for the Directors assessment in the financial
review.
Underlying business performance
The Group believes that the measure of underlying EBITA and
presentation of underlying operating profit, profit before tax,
profit after tax and earnings per share provide useful information
on underlying trends to shareholders. These measures are used by
the Group for internal performance analysis and incentive
compensation arrangements for employees.
The terms "underlying EBITA", '"underlying", "contract losses on
businesses being exited" and "exceptional items" are not defined
terms under IFRS and may therefore not be comparable with similarly
titled profit measures reported by other companies. It is not
intended to be a substitute for, or superior to, GAAP measurements
of profit.
The term "underlying" refers to the relevant measure being
reported for continuing operations excluding Exceptional and Other
Items, (which include amortisation of acquisition intangibles).
EBITA is earnings before interest, tax and amortisation of
acquisition intangibles. Adjusted EBITA is stated before
Exceptional and Other Items.
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2016
2. Operating segments
The Group's chief operating decision maker is considered to be
the Board of Directors. The Group's operating segments are
determined with reference to the information provided to the Board
of Directors in order for it to allocate the Group's resources and
to monitor the performance of the Group.
The Board of Directors has determined an operating management
structure aligned around the four core activities of the Group,
with the following operating segments applicable:
-- Compliance: focused on gas, fire, electrics, air and water
and lift compliance activities, where we contract predominantly
under framework agreements. Services comprise the following:
- installation, maintenance and repair-on-demand of gas appliances and central heating systems;
- compliance services in the areas of fire protection and building electrics;
- air and water hygiene solutions; and
- service, repair and installation of lifts
-- Energy Services: we offer a range of services in the energy
efficiency sector, including external, internal and cavity wall
insulation, loft insulation, gas central heating and boiler
upgrades. The services are offered under various energy saving
initiatives including the Energy Company Obligation ("ECO") and the
Scottish Government's HEEPS ("Home Energy Efficiency Programme for
Scotland") Affordable Warmth programme. Clients include housing
associations, social landlords, local authorities and private
householders and we have trading relationships with the "big six"
and other leading utility suppliers. We also provide renewable
technologies, metering services and energy advisory and brokerage
services to customers throughout the UK.
-- Property Services: formerly called "Regeneration" and focused
on planned and responsive maintenance services for social housing.
A significant part of our services is the project managing delivery
and ongoing resident liaison in delivering planned services such as
new kitchens, bathrooms, roofs and windows. The segment also has a
small responsive maintenance business. We contract with customers
predominantly under framework agreements, where the number of
suppliers will vary from one to a small group. The segment formerly
included a directly delivered 'externals' business that the Board
decided to close in 2016.
-- Construction: focused on small to medium sized building
projects, normally under framework agreements with an emphasis on
the education sector. The business targets refurbishment projects
for public buildings with a typical value of GBP3.5m to GBP4.0m and
tends to avoid large scale building projects. The segment also
formerly included a social housing development business, which we
exited in 2015 and in relation to which, contract losses were
disclosed separately in the prior year so as not to distort the
underlying trading position of the Group and the Construction
segment.
The accounting policies of the reportable segments are the same
as those described in the accounting policies section.
All revenue and profit is derived from operations in the United
Kingdom only.
The profit measure the Group used to evaluate performance is
Underlying EBITA. Underlying EBITA is defined as operating profit
before deduction of exceptional and other items, as outlined in
note 3 and on the face of the Statement of Comprehensive
Income.
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2016
2. Operating segments (continued)
The Group accounts for inter-segment trading on an arm's length
basis. All inter-segment trading is eliminated on
consolidation.
The following is an analysis of the Group's revenue and
Underlying EBITA by reportable segment:
2016 2015
GBP'000 GBP'000
Revenue
Compliance 91,023 36,625
Energy Services 67,436 68,047
Property Services 98,143 161,733
Construction 52,051 73,439
------- -------
Total segment revenue 308,653 339,844
Inter-segment elimination (2,866) (3,211)
------- -------
Total underlying revenue 305,787 336,633
------- -------
Mobilisation of smart
metering contract 2,803 -
Contract revenue on businesses
being exited 25,248 3,565
------- -------
Revenue from external
customers 333,838 340,198
======= =======
Intra segment trading comprises services provided by the
Compliance segment for the Property Services segment and are
charged at prevailing market prices.
Reconciliation of underlying
EBITA to (loss) / profit
before taxation
2016 2015
GBP'000 GBP'000
Underlying EBITA by segment
Compliance 6,169 4,509
Energy Services 8,026 9,570
Property Services 780 10,510
Construction 3,606 4,838
Central (7,672) (7,203)
-------- -------
Total underlying EBITA 10,909 22,224
Mobilisation of smart
metering contracts (2,493) -
Contract losses on businesses
being exited (6,656) (2,524)
Exceptional costs (5,742) (8,656)
Exceptional income 2,672 -
Impairment of goodwill
and intangible assets
acquired (19,204) -
Amortisation of acquisition
intangibles (11,156) (6,465)
-------- -------
Operating (loss) / profit (31,670) 4,579
Finance costs (1,657) (1,397)
Investment income 46 20
(Loss) / profit before
taxation (33,281) 3,202
======== =======
The improvement to IFRS 8 issued in April 2009 clarified that a
measure of segment assets should be disclosed only if that amount
is regularly provided to the chief operating decision maker.
None of the Group's major customers accounted for more than 10%
of Group revenue for 2016 or 2015.
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2016
3. Exceptional and other items, including amortisation of acquisition intangibles
2016 2015
GBP'000 GBP'000
Contract losses on businesses being
exited 6,656 2,524
Smart metering mobilisation costs 2,493 -
------- -------
Total Other Items 9,149 2,524
Acquisition costs 642 803
Contract costs - 2,891
Impairment of receivables 2,567 -
Restructuring 2,533 832
IPO costs - 4,130
------- -------
Total exceptional costs 5,742 8,656
Release of deferred consideration (2,672) -
------- -------
Total exceptional costs, net of
exceptional income 3,070 8,656
Impairment of goodwill and intangible
assets acquired 19,204 -
Amortisation of acquisition intangible
assets 11,156 6,465
------- -------
42,579 17,645
Unamortised financing costs included
in finance expense - 355
Unwinding discount of deferred consideration 587 403
------- -------
Total before taxation 43,166 18,403
Taxation (5,720) (3,300)
------- -------
Total after taxation 37,446 15,103
======= =======
Exceptional and other items in the year reduced the Group's
profit after tax by GBP37.5m and relate to the following items:
Contract losses on businesses being exited
At the half year, we highlighted operational challenges in our
directly delivered externals business managing growth in this work,
in particular inventory, staff and site contractors. This business
comprised two departments - Roofing and Energy South (managed by
the Lakehouse Property Services team, but reported in 2015
segmentally as part of Energy Services). In May 2016, we instigated
an operational improvement programme, focused on managing a
balanced position of risk and return on capital. The conclusion was
to close both departments as the risks of delivering this work
directly were too great and, following the operational review, it
was determined by the Board to exit these operations. The total
losses on the contracts within these businesses are expected to
amount to GBP6.6m pre-tax (on revenues of GBP25.3m), which have
been excluded from the underlying result and reported as Other
Items. These activities made a GBP2.4m profit on revenues of
GBP28.4m in 2015, when they were included within the underlying
results. The comparative figure for 2015 was GBP2.5m, representing
further costs incurred on certain legacy contracts of our now
ceased social housing development business (reported under the
Construction division)).
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2016
3. Exceptional and other items, including amortisation of acquisition intangibles (continued)
Smart metering mobilisation costs
Smart metering mobilisation costs of GBP2.5m (revenue of
GBP2.8m) (2015: GBPnil) represent costs associated with training
and retaining engineers, along with mobilisation complexities to do
with planning work, documenting installations, inventory management
and systems development. These are very significant in the context
of the profits of the Energy Division and are non-recurring costs
to be incurred at the start of the contract, as such; they have
been separately highlighted as an 'Other Item'.
Exceptional costs and income
Acquisition costs comprise legal, professional and other
expenditure in relation to acquisition activity during the year and
amounted to GBP0.6m (2015: GBP0.8m).
Contract costs of GBPnil (2015: GBP2.9m) relate to exceptional
remediation expenses associated with the resolution of historic
matters on a specific contract ("The Contract").
Impairment of receivables of GBP2.6m (2015: GBPnil) reflects the
provision taken against receivables in relation to a small number
of contract settlements on which there is a range of possible
outcomes for the Group in terms of both cash flow and impact on the
Statement of Comprehensive Income. This predominantly relates to a
sum receivable within Property Services relating to the Contract,
discussed above. This is a matter that has been ongoing since 2014
and does not reflect underlying trading in the year. A small
element related to the withdrawal from industrial & commercial
metering activities, discussed above in the Energy Services
operational review. The provisions were made in line with the
Group's accounting policy for receivables, but highlighted as an
Exceptional Item in light of their unusual nature. Management will
continue to seek a full and advantageous settlement for the
Group.
We incurred a GBP2.5m charge in relation to restructuring and
EGM costs in the year. In May 2016, we indicated an operational
improvement programme would be initiated by the Board to focus
initially on the Property Services division, in which we made
significant progress during the second half of the year. The Group
recorded a GBP1.0m exceptional cost to cover the costs of
redundancy for the staff associated with this exercise, which
included the rationalisation of certain central functions. There
has also been a great deal of change at the Board level this year
and the Group took a charge of GBP1.5m associated with exiting
former directors, the two Extraordinary General Meetings held
during the year and other one-off expenses. The prior year item of
GBP0.8m related to the write-off of certain fixed assets and legal
fees in relation to reshaping the Group structure.
IPO costs of GBPnil (2015: GBP4.1m) comprise legal, professional
and incidental expenditure incurred in relation to the IPO in March
2015.
Release of deferred consideration of (GBP2.6m) (2015: GBPnil)
relates to the renegotiation of sums due to the former owners of
H2O Nationwide Limited (GBP0.6m) and no further sums being due to
the former owners of Providor Limited (GBP1.5m) and Sure
Maintenance Limited (GBP0.5m), in light of the requisite
performance conditions under the Sale and Purchase Agreement not
being met.
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2016
3. Exceptional and other items, including amortisation of acquisition intangibles (continued)
Impairment of goodwill and intangible assets acquired
Impairment of goodwill and intangible assets acquired was
GBP19.2m for the year (2015: GBPnil) relating to the write-off of
GBP17.4m of Goodwill in relation to Foster Property Maintenance
Limited and GBP1.8m in relation to the contract with a major
industrial & commercial customer, previously recognised in
acquisition intangibles associated with Providor Limited. Further
background is provided in the Financial Review, together with notes
7 and 8.
Amortisation of acquisition intangibles
Amortisation of acquisition intangibles was GBP11.2m for the
year (2015: GBP6.5m), with the increase reflecting a full year
impact of H2O Nationwide, Providor, Orchard Energy and Sure
Maintenance together with the acquisitions of Aaron Heating
Services and Precision Lift Services during the year.
Accelerated amortisation of financing costs
Finance costs of GBPnil (2015: GBP0.4m) represent the write-off
of unamortised costs on the term loan we replaced with a new
revolving credit facility in December 2014, ahead of the IPO.
Unwinding discount of deferred consideration
Unwinding discount of deferred consideration reflects the
present value of deferred sums. Contingent consideration is
discounted at a post-tax rate of 8.5%, due on outstanding payments
for acquisitions. Non-contingent deferred cash consideration is
discounted at a post-tax rate of between 2% and 3%.
All items discussed above in relation to "Exceptional and Other
items" are considered non-trading because they are not part of the
underlying trading of the Group and in the case of Exceptional
Items, impairment of goodwill and accelerated amortisation of
finance costs are not expected to recur year to year. Contract
losses on businesses being exited relate to businesses that have
been closed and smart metering mobilisation costs reflect the one
off nature of mobilising our new domestic smart metering
programme.
Risk Management
We continue to manage a number of potential risks and
uncertainties, including claims and disputes, which are common to
other similar businesses which could have a material impact on
short and longer term performance. The Board remains focused on the
outcome of a number of contract settlements on which there is a
range of outcomes for the Group in terms of both cash flow and
impact on the Statement of Comprehensive Income.
In quantifying the likely out turn for the Group, the key
judgements and estimates will typically include:
-- an estimation of liability based on commercial and / or legal assessment;
-- fair value assessment of a Statement of Financial Position item; and
-- a commercial assessment of potential further liabilities.
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2016
4. Tax on (loss) / profit on ordinary activities
2016 2015
GBP'000 GBP'000
Current tax
Current year 151 2,200
Current tax - prior year adjustment (173) (324)
-------- -------
Total current tax (22) 1,876
Deferred tax (3,991) (1,060)
-------- -------
Total tax on (loss) / profit on ordinary
activities (4,013) 816
======== =======
The tax assessed for the year is lower / higher
than the standard rate of corporation tax in the
UK. The differences are explained below;
2016 2015
GBP'000 GBP'000
(Loss) / profit before tax (33,281) 3,202
Effective rate of corporation tax
in the UK 20.00% 20.50%
(Loss) / profit before tax at the
effective rate of corporation tax (6,656) 657
Effects of:
Expenses not deductible for tax purposes 3,043 419
Adjustment of deferred tax to closing
tax rate (268) 35
Current tax - prior year adjustment (173) (324)
Deferred tax - prior year adjustment (154) 29
Deferred tax asset not recognized 195 -
-------- -------
Tax (credit) / charge for the year (4,013) 816
======== =======
In addition to the amounts charged to the consolidated
statement of comprehensive income, the following
amounts relating to tax have been recognised directly
in equity:
2016 2015
GBP'000 GBP'000
Current tax - excess deductions related
to share-based payments on exercised
options - 2,506
Deferred tax (608) 1,897
-------- -------
Changes in estimated excess tax deductions
relating to share based payments (608) 4,403
======== =======
Factors that may affect future charges
The Finance (No 2) Act 2015, which provides for reductions in
the main rate of corporation tax from 20% to 19% effective from 1
April 2017 and to 18% effective from 1 April 2020, was
substantively enacted on 26 October 2015. Subsequently, the Finance
Act 2016, which provides for a further reduction in the main rate
of corporation tax to 17% effective from 1 April 2020, was
substantively enacted on 6 September 2016. These rate reductions
have been reflected in the calculation of deferred tax at the
statement of financial position date.
The closing deferred tax asset at 30 September 2016 has been
calculated at 17%, reflecting the tax rate at which the deferred
tax asset is expected to be utilised in future periods.
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2016
5. Dividends
The proposed final dividend for the year ended 30 September 2016
of 0.5p per share amounting to GBP0.8m and representing a total
dividend of 1.5p for the full year (2015: 1.9p per share), will be
paid on 6 April 2017 to the shareholders on the register at the
close of business on 10 March 2017. The proposed final dividend is
subject to approval by shareholders at the Annual General Meeting
and has not been included as a liability in these financial
statements.
6. Earnings per share
The calculation of the basic and diluted earnings per share is
based on the following data:
2016 2015
Number Number
Weighted average number of ordinary
shares for the purposes of basic
loss / earnings per share 157,527,103 127,776,310
Diluted
Effect of dilutive potential ordinary
shares:
Share options 2,897,178 14,122,892
----------- -----------
Weighted average number of ordinary
shares for the purposes of diluted
loss / earnings per share 160,424,281 141,899,202
=========== ===========
(Loss) / earnings for the purpose
of basic and diluted earnings per
share being net profit attributable
to the owners of the Company (GBP'000) (29,268) 2,386
Basic (loss) / earnings per share (18.6p) 1.9p
Diluted (loss) / earnings per share (18.6p) 1.7p
Earnings for the purpose of underlying
earnings per share being underlying
net profit attributable to the owners
of the Company (GBP'000) 8,178 17,489
Adjusted basic earnings per share 5.2p 13.7p
Adjusted diluted earnings per share 5.1p 12.3p
The number of shares in issue at 30 September
2016 was 157,527,103.
The weighted average number of Ordinary shares in issue during
the year excludes those accounted for in the own shares
reserve.
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2016
7. Goodwill
GBP'000
At 1 October 2015 56,267
Recognised on acquisition of Aaron
Heating Services Limited 3,667
Recognised on acquisition of PLS
Holdings Limited 3,626
Impairment of Foster Property Maintenance
Limited (17,421)
Adjustment to goodwill of Providor
Limited 446
Adjustment to goodwill of Orchard
(Holdings) UK Limited 602
Adjustment to goodwill of Sure Maintenance
Group Limited 151
--------
At 30 September 2016 47,338
========
Goodwill arising on consolidation represents the excess of the
fair value of the consideration transferred over the fair value of
the Group's share of the net assets of the acquired subsidiary at
the date of acquisition.
The adjustments relating to businesses acquired in the previous
year relate to finalisation of fair value accounting within 12
months of being acquired.
Goodwill is not amortised but is reviewed for impairment on an
annual basis or more frequently if there is an indication that
goodwill may be impaired. Goodwill acquired in a business
combination is allocated to cash generating units ("CGUs")
according to the level at which management monitors that
goodwill.
Goodwill is carried at cost less accumulated impairment
losses.
The carrying value of goodwill is allocated to the following
CGUs:
2016 2015
CGU Segment GBP'000 GBP'000
K&T Heating Services Limited Compliance 3,774 3,774
Allied Protection Limited Compliance 3,717 3,717
Foster Property Maintenance
Limited Property Services - 17,421
Everwarm Ltd Energy services 17,476 17,476
H2O Nationwide Limited Compliance 2,209 2,209
Providor Limited Energy services 3,037 2,591
Orchard (Holdings) UK
Limited Energy services 5,607 5,005
Sure Maintenance Group
Limited Compliance 4,225 4,074
Aaron Heating Services
Limited Compliance 3,667 -
PLS Holdings Limited Compliance 3,626 -
------- -------
47,338 56,267
======= =======
An asset is impaired if its carrying value exceeds the unit's
recoverable amount which is based upon value in use. At each
reporting date impairment reviews are performed by comparing the
carrying value of the CGU to its value in use. At 30 September 2016
the value in use for each CGU was calculated based upon the cash
flow projections of the latest board approved three-year forecasts
together with a further two years estimated and an appropriate
terminal value based on perpetuity. This is discussed further
below.
Future budgeted and forecast profits are estimated by reference
to detailed bottom-up budgeting process undertaken by the
Group.
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2016
7. Goodwill (continued)
The estimated growth rates are based on past experience and
knowledge of the individual sector's markets. The Directors believe
that the Group's core markets of social housing, public buildings,
education and energy services, underpinned by Government policy,
will continue to present strong growth opportunities for the CGUs
outlined above respectively. Management believe that future growth
in these markets is underpinned by a number of factors
including:
-- A pipeline of new tenders
-- Further opportunities to work with other group companies
-- Client demand for safe buildings; and
-- Adjacent market opportunities.
The assumptions used in the impairment reviews at 30 September
2016 are outlined below:
For years one to three the value in use calculation is based on
the latest board approved three-year forecasts, which is adjusted
for non-cash items. The growth rates applied in these first three
years varies by business, but sit in a range between 1% and 29% for
revenue growth. The growth rate applied to the cash flows in years
four and five was 2% (2015: 2%). A terminal growth rate of 1%
(2015: 1%) was applied. The pre-tax discount rate applied was 11.4%
(2015: 10.3%), with the post-tax discount rate being 8.5% (2015:
8.5%). A sensitivity analysis has been completed; this was based on
a reduction in revenue of 20% per year, a reduction in operating
profit margin of between 1 and 3% and an increase in the discount
rate of 1%. The directors consider that reasonably possible changes
in the key assumptions would not cause the carrying amount to
exceed its recoverable amount.
As outlined in our trading statement of 1 February 2016, the
Group is operating against a backdrop of active cost reductions
taking place within client organisations, resulting in part from a
requirement for social landlords to reduce rents by 1% p.a. for the
next four years. This was particularly felt within the Property
Services division. Despite our success in securing positions on key
frameworks, including resecuring Eastern Procurement, the expected
level of tenders from these frameworks has not materialised at the
rate previously expected. On reviewing the expected cash flows for
Foster Property Maintenance, management concluded that they were
not sufficient to maintain any Goodwill. There was no Goodwill
elsewhere in the Property Services division.
Following a detailed review, and based on the latest board
approved three-year forecasts (which assume modest revenue growth
of approximately 1% per year and some marginal EBITA improvement)
and a growth rate in EBITA of 1.5% in years four and five with a
terminal growth rate of 0.75% the goodwill in Foster Property
Maintenance was written off in the year, resulting in a charge of
GBP17.4m; the determined remaining recoverable amount of CGU was
GBP2.9m which was determined with reference to a 'value in use'
basis. The pre-tax discount rate used was 12.5% (2015: 10.3%),
reflecting the increased level of risk associated with the forecast
trading position. A 100 basis point increase in the discount rate
would reduce the value in use by 8%, whereas a 50 basis point
adjustment to the years 4 to 5 growth rates or the terminal growth
rate would have a 3% impact on the value in use.
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2016
8. Other intangible assets
Acquisition intangibles
---------------------------------------
Contracted
customer
Computer order Customer Non-compete
software book relationships agreements Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Cost
At 1 October 2015 1,322 24,338 13,772 2,508 41,940
Recognised upon
acquisition - 2,212 4,588 950 7,750
Additions 291 - - - 291
Disposals (2) - - - (2)
--------- ---------- -------------- ----------- -------
At 30 September
2016 1,611 26,550 18,360 3,458 49,979
--------- ---------- -------------- ----------- -------
Amortisation
At 1 October 2015 702 9,818 4,045 176 14,741
Amortisation charge 352 6,616 3,663 877 11,508
Impairment - 1,783 - - 1,783
At 30 September
2016 1,054 18,217 7,708 1,053 28,032
--------- ---------- -------------- ----------- -------
Carrying value
At 30 September
2016 557 8,333 10,652 2,405 21,947
========= ========== ============== =========== =======
At 30 September
2015 620 14,520 9,727 2,332 27,199
========= ========== ============== =========== =======
Contracted customer order book
The value placed on the order book is based upon the cash flow
projections over the contracts in place when a business is
acquired. Due to uncertainties with trying to forecast revenues
beyond the contract term, the Directors have valued contracts over
the contractual term only. The value of the order book is amortised
over the remaining life of each contract which typically range from
one to five years.
As we outlined in our trading statement of 2 August 2016, the
Group's former major metering customer, in the industrial and
commercial sector, decided to take installation in house during the
year, following a number of acquisitions among our competitors. The
customer contract had been valued at GBP1.8m within the contracted
customer order book in Providor Limited and in light of the
customer's action, this sum was impaired during the year, in light
of no further cash flows being anticipated to arise from this
arrangement.
Customer relationships
The value placed on the customer relationships are based upon
the non-contractual expected cash inflows forecast on the base
business over and above contracted revenues. The value of customer
relationships is amortised over five years.
Non-compete agreement
The value placed on the non-compete agreements are based upon
the non-compete clause and knowledge and know-how of the former
owners of the acquired businesses. The value of non-compete is
amortised over five years.
The annual post-tax discount rate employed in the calculation of
the acquisition intangibles is 13.00% (2015: 13.00%) which is
higher than the Group WACC used for impairment purposes to reflect
the added risks associated with the valuation of an intangible
asset in isolation from a business.
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2016
9. Borrowings
2016 2015
GBP'000 GBP'000
Bank loans and credit facilities
at amortised cost:
Current 71 -
Non-current 20,586 -
------- -------
20,657 -
======= =======
Maturity analysis of bank loans
and credit facilities falling due:
In one year or less, or on demand 71 -
Between one and two years - -
Between two and five years 20,586 -
After more than five years - -
------- -------
20,657 -
======= =======
In December 2014, the Group renegotiated its bank facilities to
provide an overdraft facility of GBP5m together with a Revolving
Credit Facility ("RCF") of GBP30m, which was extended to GBP45m in
December 2015. The Group agreed a variation to the RCF in January
2017 with Royal Bank of Scotland reduce the RCF to GBP40m and
further reduce the facility to GBP35m in April 2017. The variation
to the RCF included a revision to the banking covenants, which
reflect the lower earnings expectations of the Group, and a higher
rate of interest.
10. Net debt
2016 2015
GBP'000 GBP'000
(Overdraft) / cash and cash equivalents (71) 6,934
Bank loans and credit facilities (20,586) -
Unamortised finance costs (included
in other receivables) 414 418
Unamortised finance costs (included
in borrowings) - -
Finance lease obligations (386) (743)
-------- -------
(20,629) 6,609
======== =======
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2016
11. Provisions
Property Legal
development and other Total
GBP'000 GBP'000 GBP'000
At 1 October 2015 1,100 5,349 6,449
Identified on acquisition - 762 762
Additional provision - 885 885
Utilised in the year (1,100) (2,118) (3,218)
------------ ---------- -------
At 30 September 2016 - 4,878 4,878
============ ========== =======
Current provisions - 1,904 1,904
============ ========== =======
Non-current provisions - 2,974 2,974
============ ========== =======
Property development
Property development costs represent sums due to the former
owners of the land relating to the Manor Road housing development
under the terms of the sale. This sum was paid in October 2015.
Legal and other
Other costs relate to property dilapidation obligations,
potential contract settlement costs and other potential legal
settlement costs. The largest figure relates to the potential
contract settlement costs which have been made on management review
of contractual obligations faced on legacy contracts and include
The Contract costs referred to in note 3. These are expected to
result in an outflow of economic benefit over the next one to three
years.
The Group continue to manage a number of potential risks and
uncertainties, including claims and disputes, which are common to
other similar businesses which could have a material impact on
short and longer term performance. The Board remains focused on the
outcome of a number of contract settlements on which there is a
range of outcomes for the Group in terms of both cash flow and
impact on the Statement of Comprehensive Income.
In quantifying the likely out turn for the Group, the key
judgements and estimates will typically include:
-- an estimation of liability based on commercial and / or legal assessment
-- fair value assessment of a Statement of Financial Position item
-- a commercial assessment of potential further liabilities
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2016
12. Cash (used in) / generated from operations
2016 2015
GBP'000 GBP'000
Operating (loss) / profit (31,670) 4,579
Adjustments for:
Depreciation 1,621 1,017
Amortisation of intangible assets 11,479 6,841
Impairment of goodwill and intangible
assets acquired 19,204 -
Equity-settled share based payments - 846
Profit on disposal of property,
plant and equipment (95) (98)
Provisions (2,334) (1,037)
Changes in working capital:
Inventories 478 2,166
Amounts owed by customers under
construction contracts (1,108) 1,194
Amounts owed to customers under
construction contracts 116 (1,736)
Trade and other receivables 16,706 1,692
Trade and other payables (17,411) 3,635
Cash (used in) / generated from
operations (3,014) 19,099
======== ========
Underlying operating cash conversion
calculation
Cash (used in) / generated from
operations (3,014) 19,099
Cash impact of Exceptional and Other
Items in the period 16,226 6,540
-------- --------
Underlying cash generated from operations 13,212 25,639
======== ========
Underlying operating profit before
exceptional items and amortisation
of acquisition intangibles 10,909 22,224
======== ========
Underlying cash conversion 121% 115%
======== ========
Statutory operating cash conversion
calculation
Cash (used in) / generated from
operations (3,014) 19,099
======== ========
Statutory operating profit before
exceptional items and amortisation
of acquisition intangibles 1,760 19,700
======== ========
Statutory cash conversion (171%) 97%
======== ========
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 September 2016
13. Business Combinations
2016 acquisitions:
Aaron Heating Services Limited
On 2 November 2015 the Group acquired the entire share capital
of Aaron Heating Services Limited for consideration as detailed
below. Aaron Heating Services Limited's principal activity is that
of installation and maintenance of plumbing and heating
systems.
The acquisition of Aaron Heating Services complemented the
Group's existing gas compliance businesses: K&T Heating, which
operates in London and the South East, and Sure Maintenance, which
operates in the North of England and the Midlands. The acquisition
will allow Lakehouse to extend its geographic footprint in the gas
servicing and maintenance market to provide national coverage to
key clients, as well as provide opportunities for adjacent
services.
The effect of the acquisition on the Group's assets and
liabilities were as follows:
Fair
value Provisional
Book fair
value adjustments value
GBP'000 GBP'000 GBP'000
Assets
Non-current
Property, plant and equipment 632 (130) 502
Current
Inventories 1,436 (598) 838
Trade and other receivables 4,431 (17) 4,414
Cash and cash equivalents 293 - 293
------- ----------- -----------
Total assets 6,792 (745) 6,047
------- ----------- -----------
Liabilities
Non-current
Deferred tax (74) - (74)
Provisions - (151) (151)
Current
Trade and other payables (3,265) 17 (3,248)
------- ----------- -----------
Total liabilities (3,339) (134) (3,473)
------- ----------- -----------
Net assets acquired 3,453 (879) 2,574
Intangibles acquired 3,679
Deferred tax recognised
in respect of intangibles
capitalised (699)
Goodwill capitalised 3,667
-----------
9,221
===========
Satisfied by:
Cash consideration 6,975
Contingent deferred consideration 2,246
-----------
9,221
===========
Gross contractual receivables invoiced to the customer at the
date of acquisition was GBP1,877,000.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 September 2016
13. Business Combinations (continued)
Contingent deferred consideration has been calculated based on
the expectations of future performance in the Group's three year
plan compared to the calculation methodology set out in the Share
Purchase Agreement. The contingent deferred consideration may vary
depending on the underlying trading performance of the businesses.
The Aaron Heating Services Limited intangible assets are recognised
and valued at GBP3.7m. This represents the expected value to be
derived from the acquired customer related contracts, acquired
customer relationships and the value placed on the non-compete
agreement. The value placed on these customer-related contracts and
relationships is based on the expected post-tax cash inflows over
the estimated remaining life of each contract. The cash flows are
initially reduced by 10% after year 1 with further deductions
thereafter which the Directors consider is commensurate with the
risks associated with capturing returns from the customer
relationships, and then discounted using a post-tax discount rate
of 13%. The estimated life for customer contracts is assumed to be
the remaining life of each contract, and the customer relationships
are estimated to have a life of six years.
The Directors consider the value assigned to goodwill represents
the workforce acquired, expected synergies to be generated, and
access to adjacent business activities as a result of this
acquisition. It is not expected that any goodwill will be
deductible for tax purposes. All costs of the acquisition have been
recognised as an exceptional expense in the statement of
comprehensive income in the period in which it was incurred, the
total cost recognised is GBP239,000.
Post-acquisition results
The results for Aaron Heating Services Limited since the
acquisition date, included within the consolidated statement of
comprehensive income for the period ended 30 September 2016,
are:
GBP'000
Revenue 24,395
-------
Profit from operations 1,122
Interest -
-------
Profit before tax 1,122
Taxation (227)
-------
Profit for the period 895
=======
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 September 2016
13. Business Combinations (continued)
PLS Holdings Limited
On 5 May 2015 the Group acquired the entire share capital of PLS
Holdings Limited for consideration as detailed below. PLS Holdings
Limited's principal activity is providing lift installation,
modernisation and maintenance services.
The acquisition of PLS Holdings provided a complimentary service
offering to the Group's existing Compliance businesses. The
acquisition will create new opportunities for collaboration and the
cross-selling of additional and more comprehensive compliance
services to local authorities and housing associations.
The effect of the acquisition on the Group's assets and
liabilities were as follows:
Fair Provisional
Book Value Fair
value Adjustments Value
GBP'000 GBP'000 GBP'000
Assets
Non-current
Property, plant and equipment 60 (26) 34
Current
Inventories 341 (148) 193
Trade and other receivables 1,975 (148) 1,827
Cash and cash equivalents 506 - 506
------- ------------ -----------
Total assets 2,882 (322) 2,560
------- ------------ -----------
Liabilities
Non-current
Provisions - (182) (182)
Current
Trade and other payables (1,689) (7) (1,696)
------- ------------ -----------
Total liabilities (1,689) (189) (1,878)
------- ------------ -----------
Net assets acquired 1,193 (511) 682
Intangibles acquired 3,996
Deferred tax recognised
in respect of intangibles
capitalised (759)
Goodwill capitalised 3,626
-----------
7,545
===========
Satisfied by:
Cash consideration 6,484
Contingent deferred consideration 1,061
-----------
7,545
===========
Gross contractual receivables invoiced to the customer at the
date of acquisition was GBP1,112,000.
Contingent deferred consideration has been calculated based on
the expectations of future performance in the Group's three year
plan compared to the calculation methodology set out in the Share
Purchase Agreement. The contingent deferred consideration may vary
depending on the underlying trading performance of the
businesses.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 September 2016
13. Business Combinations (continued)
The PLS Holdings Limited intangible assets are recognised and
valued at GBP4.0m. This represents the expected value to be derived
from the acquired customer related contracts, acquired customer
relationships and the value placed on the non-compete agreement.
The value placed on these customer-related contracts and
relationships is based on the expected post-tax cash inflows over
the estimated remaining life of each contract. The cash flows are
initially reduced by 10% after year 1 with further deductions
thereafter which the Directors consider is commensurate with the
risks associated with capturing returns from the customer
relationships, and then discounted using a post-tax discount rate
of 13%. The estimated life for customer contracts is assumed to be
the remaining life of each contract, and the customer relationships
are estimated to have a life of six years.
The Directors consider the value assigned to goodwill represents
the workforce acquired, expected synergies to be generated, and
access to additional customers and markets as a result of this
acquisition. It is not expected that any goodwill will be
deductible for tax purposes. All costs of the acquisition have been
recognised as an exceptional expense in the Statement of
Comprehensive Income in the period in which it was incurred, the
total cost recognised is GBP253,000.
Post-acquisition results
The results for PLS Holdings Limited since the acquisition date,
included within the consolidated statement of comprehensive income
for the period ended 30 September 2016, are:
GBP'000
Revenue 7,277
-------
Profit from operations 183
Interest -
-------
Profit before tax 183
Taxation (18)
-------
Profit for the period 165
=======
Results of all business combinations occurring during the
year
Assuming the acquisition date for all business combinations that
occurred during the year had been 1 October 2015, the consolidated
statement of comprehensive income for Lakehouse plc for the year
ended 30 September 2016, would have been:
GBP'000
Revenue 337,633
--------
Loss from operations (31,507)
Interest (1,635)
--------
Loss before tax (33,142)
Taxation 3,985
--------
Loss for the period (29,157)
========
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 September 2016
14. Summary of consideration paid and payable in respect of acquisitions
The sums below represent sums paid and payable in respect of
acquisitions in the year:
Aaron Bury
Allied H2O Orchard Sure Heating PLS Metering
Protection Nationwide Providor (Holdings) Maintenance Services Holdings Services
Limited Limited Limited UK Limited Limited Limited Limited Limited Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 1 October
2015 3,267 2,384 1,497 1,562 511 - - - 9,221
Total
discounted
consideration
payable
for additions
in the
year ended
30 September
2016 - - - - - 9,221 7,545 75 16,841
Revaluation
of deferred
consideration - (607) (1,504) 408 (561) - - - (2,264)
Unwinding
of discount 13 (3) 107 163 50 163 94 - 587
Paid in
year (2,990) (442) (100) - - (8,368) (6,498) (75) (18,473)
---------- ---------- -------- ---------- ----------- --------- --------- --------- --------
At 30
September
2016 290 1,332 - 2,133 - 1,016 1,141 - 5,912
========== ========== ======== ========== =========== ========= ========= ========= ========
The fair value of the consideration has been assessed in
accordance with the Sale & Purchase Agreements and expected
future trading performance. The non-current element of the expected
settlement has been discounted using a Pre-Tax discount rate that
reflects the time value of money.
The total deferred consideration may vary between GBP3.5m and
GBP6.5m depending on the underlying trading performance of the
businesses.
15. Events after the reporting date
The Group agreed a variation with Royal Bank of Scotland in
January 2017 to reduce the RCF to GBP40m and further reduce the
facility to GBP35m in April 2017. The variation to the RCF included
a revision to the banking covenants, which reflect the lower
earnings expectations of the Group, and a higher rate of
interest.
Since the 30 September 2016 there has been a subsequent
agreement to adjust the deferred consideration, in regards to
Orchard (Holdings) UK Limited, from GBP2.1m to GBP1.8m which will
be paid by 28 February 2017.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR SEFEFDFWSEIF
(END) Dow Jones Newswires
January 24, 2017 02:00 ET (07:00 GMT)
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