Results for the year ended 31 March 2020

RNS Number : 1523Q

Severfield PLC

17 June 2020

 

17 June 2020

Results for the year ended 31 March 2020

Strategic 2020 profit target achieved, good cash generation and strong balance sheet, UK and Europe order book of £271m

Severfield plc, the market leading structural steel group, announces its results for the 12 month period ended 31 March 2020.

£m		12 months to 31 March 2020	12 months to 31 March 2019
Revenue		327.4	274.9
Underlying* operating profit (before JVs and associates)		27.0	23.3
Underlying* operating margin (before JVs and associates)		8.2%	8.5%
Operating profit (before JVs and associates)		24.7	23.3
Underlying* profit before tax		28.6	24.7
Profit before tax		25.8	24.7
Underlying* basic earnings per share		7.7p	6.7p
Basic earnings per share		6.7p	6.7p

* Underlying results are stated before non-underlying items of £2.8m (2019: £nil) consisting of the amortisation of acquired intangible assets of £1.4m and acquisition-related expenses of £1.4m

** The Group excludes IFRS 16 lease liabilities from its measure of net funds / debt as they are excluded from the definition of net debt as set out in the Group's borrowing facilities

Highlights

§ Revenue up 19% to £327.4m (2019: £274.9m)

§ Underlying* profit before tax up 16% to £28.6m (2019: £24.7m), ahead of strategic 2020 profit target of £26m

§ Underlying* basic earnings per share up 15% at 7.7p (2019: 6.7p)

§ Acquisition of Harry Peers for net initial cash consideration of £18.9m, contingent consideration of up to £7m payable in 2021 financial year

§ Good cash generation resulting in year-end net funds (excluding IFRS 16 lease liabilities**) of £16.4m (2019: £25.1m), including the outstanding acquisition loan of £13.1m for Harry Peers

§ Over 100 projects undertaken during the year in the UK, Ireland and continental Europe in diverse market sectors including industrial and distribution, data centres, commercial offices (both in London and the UK regions) and transport infrastructure

§ UK and Europe order book of £271m at 1 June 2020 (1 November 2019: £323m), including £17m for Harry Peers - the expected reduction reflects revenue recognised in H2 on several large ongoing contracts

§ Share of profit from Indian joint venture ('JSSL') up 80% at £2.2m (2019: £1.2m), reflecting both revenue growth and margin improvement

§ India order book of £110m at 1 June 2020 (1 November 2019: £134m), expansion of the Bellary facility is now complete

COVID-19

§ Factories are operational and all of our UK and European construction sites remain open

§ Tendering and pipeline activity remains encouraging but some investment decisions being delayed by clients

§ Strong balance sheet and cash position, sufficient committed funding in place until 2023 and cash generative business model

§ Additional resilience provided by our market sector, geographical and client diversity

§ Future market outlook remains uncertain - dividend payment decisions deferred until greater visibility over the impact of COVID-19

Alan Dunsmore, Chief Executive Officer commented:

'The strong set of results that we are reporting today reflects the further operational and strategic progress that we have made in 2020. Our balance sheet and cash position remain strong, we have continued to drive our 'Smarter, Safer, more Sustainable' initiatives with an increased focus on manufacturing efficiency, and we have entered new UK markets through the acquisition of Harry Peers.

Despite the ongoing uncertainty of COVID-19, we remain well placed to win work in the diverse range of market sectors and geographies in which we operate. This allows us to target a good pipeline of opportunities and provides us with the extra resilience and ability to increase our market share. With our teams on site and operational, we are in a good position to service our clients and manage the potentially challenging market ahead.'

For further information, please contact:

Severfield	Alan Dunsmore Chief Executive Officer	01845 577 896
	Adam Semple Group Finance Director	01845 577 896
Jefferies International	Simon Hardy	020 7029 8000
	Will Soutar	020 7029 8000
Camarco	Ginny Pulbrook	020 3757 4980
	Tom Huddart	020 3757 4980

Notes to editors:

Severfield is the UK's market leader in the design, fabrication and construction of structural steel, with a total capacity of c.150,000 tonnes of steel per annum. The Group has five sites, c.1,400 employees and expertise in large, complex projects across a broad range of sectors. The Group also has an established presence in the expanding Indian market through its joint venture partnership with JSW Steel (India's largest steel producer).

 

OPERATING REVIEW

Group overview

The Group has delivered an excellent set of results in 2020. This reflects a combination of revenue and profit growth in the UK and Europe, good operational and strategic progress, good cash generation and a significantly improved performance from our Indian joint venture.

In 2020, we have increased our revenue by 19 per cent to £327.4m (2019: £274.9m) and are pleased with our profit performance with underlying profit before tax up 16 per cent to £28.6m (2019: £24.7m), exceeding our 2016 strategic profit target of doubling underlying profit before tax to £26m. This improved profit performance has been achieved despite a softer market backdrop in the UK, particularly in the run up to the General Election in December 2019.

The 2020 results include the acquisition of Harry Peers, a leading structural steelwork business within the highly regulated nuclear, process industries and power generation sectors, which is broadening the Group's market exposure and enhancing its areas of expertise. Harry Peers is integrating well into the Group's operations and has contributed revenue of £14.4m and underlying operating profit of £1.3m for the six months since its date of acquisition.

Balance sheet strength and cash generation have remained a high priority for the Group in 2020. Another year of positive cash generation has provided us with the flexibility to invest in our UK businesses whilst further strengthening our balance sheet which provides us with a competitive benefit with both clients and our supply chain. Year-end net funds (excluding IFRS 16 lease liabilities) were £16.4m (2019: £25.1m) - this includes the outstanding term loan of £13.1m for the Harry Peers acquisition.

The Indian joint venture ('JSSL') has also performed very well in 2020. JSSL's strong performance was reflective of the step change in the Indian market position in 2020, and its results have benefitted from significant revenue growth, margin improvements and good operational performance.

We continue to exceed our return on capital employed ('ROCE') target of 10 per cent and have achieved a return of 17.2 per cent in the year (2019: 15.7 per cent), maintaining the Group's alignment with its construction and engineering clients and peers.

COVID-19

Unfortunately, after such an encouraging year in 2020, since the year-end we have been focussing on the challenges which have resulted from the spread of COVID-19. In managing our response to the pandemic, the primary focus has been on the health, safety and wellbeing of all employees, clients and the wider public, together with protecting the financial strength of the Group. To date we have coped well with the challenges presented by COVID-19. The Group's factories are operational and, after some temporary interruptions, all of our construction sites in the UK and Europe remain open. Strict precautions are in place for both the factories and the sites including enhanced levels of cleaning, additional hygiene facilities and social distancing.

At this early point in our financial year it is impossible to predict the full extent of the financial impact of COVID-19 on the 2021 outturn. Despite this, we have a strong balance sheet and are confident that we have sufficient cash and committed funding in place during this unprecedented period of uncertainty.

Notwithstanding our current strong balance sheet position, in order to mitigate the financial impact of COVID-19 and protect our cash position during the current period of uncertainty in a manner that does not compromise our future plans for the Group, a number of precautionary actions have been implemented. These include the deferral of all non-essential and uncommitted capital expenditure, together with restrictions on discretionary operating expenditure, tight management of working capital and the deferral of tax payments (PAYE, NIC and VAT) and quarterly term loan repayments (due in March and June). Furthermore, prior to the year-end, we fully drew down all available amounts under our Revolving Credit Facility (£15m) to provide control over our own cash resources.

Following a successful 2020, the board would ordinarily expect to propose a final dividend in line with our progressive dividend policy. However, the board believes it is prudent to defer any dividend payment decisions until there is greater visibility on the impact of COVID-19.

UK and Europe

Revenue was up 19 per cent over the prior year predominantly reflecting an increase in order flow and higher production activity, particularly in the second half of the year, together with the second half impact on revenue of the Harry Peers acquisition. During the year, we continued to work on the new Google Headquarters at King's Cross, together with other commercial office developments in London and the regions. Other significant revenue contributing projects include large industrial and distribution projects in the UK and Republic of Ireland, large data centres in Finland and the Republic of Ireland, ongoing projects at Heathrow and Manchester airports, and a scientific research facility in Sweden, which was the first significant order won by our European business.

The underlying operating margin (before JVs and associates) was 8.2 per cent (2019: 8.5 per cent), resulting in an underlying operating profit (before JVs and associates) of £27.0m (2019: £23.3m). The 2020 margin remains within our strategic margin range of 8 to 10 per cent and the slight reduction in the margin compared to the prior year reflects the mix of work undertaken during the year and the slightly softer market conditions in the UK, particularly towards the end of the 2019 calendar year.

The UK margin performance continues to reflect improvements to our operational execution. This includes the benefits from our programme of projects categorised under the banner of 'Smarter, Safer, more Sustainable' ('SSS'). These initiatives continue to focus on improving many aspects of our internal operations, including the application of Lean manufacturing techniques, optimisation of factory processes, quality control and cost reduction programmes.

'Smarter, Safer, more Sustainable'

'SSS' is an enduring process for the Group and forms part of a continuous cycle of improvement, with an increased focus on manufacturing efficiency, rather than a one-off programme. We also believe that the successful development and adoption of new technologies across the whole of the Group will be fundamental to our long-term strategic objectives.

During the year, we have overseen further enhancements to our Group-wide production management system (StruMIS), which will help drive productivity improvements, and our contract management system (Workspace), including the use of the system on mobile devices. We have also rolled out a new Group-wide supply chain accreditation process to ensure that our supply chain partners continue to match our expectations of quality, sustainability and commitment to client service.

We continue to devote skilled resource to reviewing and responding to developing technologies (including virtual reality and digital technologies). We have a centralised IT team dedicated to ensuring our IT environment is secure, giving us the confidence to invest in new technology and respond to IT risks. In 2020, we have continued the rollout of new software including data analytics, workflow management and project-specific commercial and operational tools to better inform decision-making and improve efficiencies both in our factories and on our construction sites. We are also continuing to take steps to improve the integration of key systems, better automate work flows and, as part of our digital transformation initiative, reduce our reliance on paper-based information to facilitate more efficient ways of working. In addition, through our engineering forum, we have improved our approach to design, looking at new and innovative ways of working, including the use of enhanced BIM (3D) modelling.

We continue to invest in and streamline our factories, particularly at Dalton, which is increasingly operating as a fulfilment centre for the benefit of the Group as a whole. Actions taken to improve manufacturing cost efficiency include waste elimination initiatives and the upgrade, reconfiguration and ongoing expansion of certain of our fabrication lines to improve the speed and efficiency of these operations, together with further investment in our in-house painting facilities at Ballinamallard. The majority of these improvements form part of the Group's capital investment programme, which has seen an investment in 2020 of £6.5m, taking our capital investment in the Group to nearly £40m over a six-year period. We will continue to invest in our businesses in the future to make them more competitive and operationally efficient and to support the development of our client service offering.

Underpinning our culture of continuous improvement is the ongoing focus on human resources and attracting and retaining the highest calibre of workforce remains fundamental to the Group's strategy. During the year, we have continued to invest in our workforce and have increased our headcount to around 1,400 employees, which includes 61 employees who joined us with the Harry Peers acquisition. Throughout the year we have strengthened a range of disciplines across the Group, particularly within our manufacturing operations team at Dalton. We continue to promote our graduate and apprenticeship schemes, and have successfully on-boarded our first wave of apprentices following our work with the Institute for Apprenticeships through which we collaboratively developed a metal fabricator apprenticeship programme.

Our leadership and talent programmes are now well established at various levels within the business, including the Severfield Development Programme, which brings together talent with the potential for future senior roles. Below this level we have launched an 'early careers' initiative which builds readiness for more senior positions. We have also continued to develop and support our people to apply Lean manufacturing techniques, achieve new qualifications, increase their skills and knowledge, and develop their careers with the Group.

Order book, pipeline and market conditions

The UK and Europe order book at 1 June 2020 stands at £271m (1 November 2019: £323m), of which £243m is for delivery over the next 12 months, providing the Group with a strong future workload during the current period of uncertainty caused by COVID-19. The reduction in the June order book represents the anticipated decrease from the record position of £323m at the time of announcing the half year results, mainly reflecting the higher revenue recorded in the second half of the 2020 financial year.

The order book contains a healthy mix of projects across a diverse range of sectors including industrial and distribution, data centres, commercial offices, and stadia and leisure. Significant orders include a large industrial facility, which includes a bespoke paint package, and a large data centre, both in the Republic of Ireland, a large data centre in Finland, a large distribution facility in the UK, the new stadium works at Fulham F.C. and the redevelopment of Lord's Cricket Ground (Compton and Edrich stands). From a commercial office perspective, the order book also contains the remaining works for the Google Headquarters at King's Cross, together with a number of mid-sized office developments, both in London and the UK regions, successfully secured by our commercial teams during the year. In terms of geographical spread, of the order book of £271m, 54 per cent represents projects in the UK, with the remaining 46 per cent representing projects for delivery in Europe and the Republic of Ireland (1 November: 53 per cent in the UK, 47 per cent in Europe and the Republic of Ireland).

Whilst the conclusive outcome of the 2019 General Election and the UK's eventual exit from the EU in early 2020 has reduced some of the earlier political uncertainty, elements remain as the nature of the UK's future trading relationship with the EU continues to be unresolved. We continue to monitor developments in this area and we have plans in place to mitigate, where possible, the impact of leaving the EU on the fulfilment of orders in the Republic of Ireland and continental Europe and on our supply chain.

Unfortunately, there is now also significant uncertainty over the extent of the impact and longevity of the COVID-19 pandemic and we are now seeing evidence of investment decisions being delayed in some of our sectors as clients and developers appear to be adopting a more cautious approach until greater market clarity returns. Pricing generally remains competitive. Despite this, we remain well-placed to win work in the diverse range of market sectors and geographies in which we operate and across a wide client base, providing us with extra resilience and the ability to increase our market share.

Notwithstanding the current period of uncertainty, we are encouraged by the current level of tendering and pipeline activity across the Group. We continue to see a good number of opportunities in key market sectors, in particular the industrial and distribution and data centre sectors, which remain strong and these projects play to our strengths, requiring high-quality, rapid throughput, on-time performance and full co-ordination between stakeholders. Opportunities exist in these sectors both in the UK and in Europe, where we have demonstrated our ability to win more work, supported by our European business.

We continue to pursue a number of significant infrastructure opportunities, particularly in the transport sector. The UK government's commitment to HS2 and its April announcement to proceed quickly with phase one construction work, which is worth an estimated £12 billion, has provided some much needed certainty to the construction industry. HS2, in combination with the ongoing Network Rail and Highways England investment programmes, the latter having a record budget of £25 billion for the 2020-2025 period, are expected to contribute significantly to the UK government's investment in infrastructure commitment over the coming years. We remain well positioned to win work from these projects, all of which have substantial steelwork content, given the Group's historical track record in transport infrastructure and our in-house bridge capability.

The sale of British Steel to Jingye Group ('Jingye'), China's third largest privately owned steel producer, was completed in March 2020, helping to provide stability to the steel supply market in the UK. Encouragingly, Jingye has announced its intention to invest over £1 billion in British Steel over the next decade. This investment is expected to include a number of furnace upgrades (including the development of an electric arc furnace in Teesside), steelworks improvements and some product range enhancements. Notwithstanding this, we continue to regularly review our steel supply arrangements and already have strong ongoing relationships with other supply chain partners, including those in continental Europe and local stockholders in the UK.

Harry Peers

On 1 October 2019, the Group completed the acquisition of Harry Peers, a leading full service structural steelwork business focussing on the nuclear, process industries and power generation sectors. The net initial cash consideration for the acquisition of £18.9m was funded by a combination of a term loan and Group cash reserves. A performance-based contingent consideration of up to £7m is also payable if certain financial and operational targets are achieved for the period to 31 August 2020.

Harry Peers is integrating well into the Group's operations and we are seeing good opportunities to expand and extend the Group's current capabilities into attractive complementary market sectors, broaden our market exposure and enhance our areas of expertise. Looking further ahead, we believe that there are good opportunities to grow Harry Peers through a number of operational initiatives including business development, European contract opportunities, and investment in technology-driven enhancements. In particular, the nuclear sector, including both the defence and commercial sectors, in which Harry Peers commands a niche, well-established and trusted position with blue chip customers, is forecasted to grow through the UK government's decommissioning investment programme. Harry Peers has also demonstrated capability in modular structural steel offerings, which the Group will look to develop across its wider product range. This acquisition is another step in the implementation of the Group's strategy and will enhance our position as the UK's broadest structural steel services group.

Clients

Our proven ability to work collaboratively and innovatively with clients is fundamental to our success and is critical to securing new work. This involves early contract engagement with clients, anticipating the issues they face, providing problem-solving solutions and delivering the best results to balance time, cost and quality objectives, whilst ensuring that risk and reward are appropriately shared.

Our unique capability to deliver complex design solutions, our capacity and speed of fabrication, the expert capabilities of the Group and its employees and our management and integration of the construction process is important to our clients and a key differentiator for the Group. In particular, engineering solutions are vital to our success, and our ability to deliver for our clients is dependent on us driving excellence throughout our engineering teams. This expertise has been recognised during the year through a number of national awards for our projects including at the 2019 Structural Steel Design Awards (for the new Tottenham Hotspur F.C. stadium, Coal Drops Yard at King's Cross, Wimbledon No. 1 Court and Chiswick Park Footbridge) and also at the 2019 Institute of Structural Engineers' Structural Awards (for the new Tottenham Hotspur F.C. stadium and Coal Drops Yard).

The Group worked on over 100 projects with our clients during the year including:

Major projects - over £20 million	Google King's Cross, London Large industrial facility, Republic of Ireland Large data centres, Republic of Ireland and Finland
Commercial offices - London and regional	One Braham, London 80 Fenchurch Street, London Knightsbridge K1, London King's Cross P2, London Unity Square, Nottingham Assembly Building, Bristol 103 Colmore Row, Birmingham
Industrial and distribution	Large distribution centre, East Midlands Jaguar Land Rover, Logistics Operations Centre  ('LOC') and car park
Transport infrastructure	M8 Footbridge, Glasgow Barking Riverside Bridge, London T2B Apron, Heathrow Airport (baggage handling facility) Multi-storey car park, Manchester Airport
Data centres and other projects	Data centres, Republic of Ireland European Spallation Source, Lund, Sweden (scientific research facility)
Stadia and leisure	Lord's Cricket Ground redevelopment (Compton and Edrich stands) Britannia Leisure Centre and Academy, London

India

JSSL has again performed strongly in the current year. The business has continued to expand and has almost doubled its profit from the previous year, of which the Group's after tax share was £2.2m (2019: £1.2m). This higher profitability reflects an increase in revenue of 30 per cent to £109.3m, compared with £84.1m in the previous year, and an increase in the operating margin to 8.5 per cent, compared with 6.4 per cent in the previous year. The improvement in the margin was anticipated and reflects an increased mix of commercial work compared to the higher level of industrial work, which was delivered in 2019. The expansion of the Bellary facility, which has expanded factory capacity from c.60,000 tonnes to c.90,000 tonnes, is now complete.

The COVID-19 pandemic is impacting JSSL in 2021. In light of the slow easing of the nationwide lockdown announced by the Indian government in March 2020 and the developing impact of COVID-19 on the Indian economy, JSSL's operations have been disrupted in the first quarter of 2021, a situation which is likely to continue over a period of several months. Given the rapidly changing dynamics in the external environment, it is difficult to predict with any accuracy what the extent of this disruption will be on JSSL's profitability in 2021. JSSL's order book was £110m at 1 June 2020  (1 November 2019: £134m), and this contains a good mix of higher margin commercial work. JSSL's pipeline of potential orders continues to include a number of commercial projects for key developers and clients with whom it has established strong relationships.

Despite the current period of uncertainty, we remain positive about the long-term development of the Indian market and of the value creation potential of JSSL, especially considering the political, commercial, social and technological changes made in India over recent years, the government's ongoing focus on simplifying regulations and the 'ease of doing business', and the significant expansion of the business already evidenced to date.

Safety, health and the environment

'Safety first' remains a core value for the Group, being vital to our continued success and a key differentiator in the market, both to our clients and to our employees. This has been particularly important during the COVID-19 pandemic where we have continued to run our operations safely and in line with the guidelines issued by the Construction Leadership Council, Public Health England and by the UK and local governments.

Our executive committee continue to review safety performance monthly. Investigations are completed on all RIDDORs (a reportable accident that results in an employee's absence from work for more than seven consecutive days) and high potential near miss incidents, with input from the Group SHE director, chief operating officer and the relevant business unit managing director. Findings from investigations and 'lessons learned' are shared Group-wide in order to promote a collaborative approach to preventing accidents and incidents. Board members continue to attend safety-focussed site visits, encouraging employees to suggest improvements and share best practice.

We have, once again, achieved our Group safety targets for the year. The Group's accident frequency rate ('AFR'), including our Indian joint venture, was 0.15, which continues to outperform the industry average. This represents a slight increase from the prior year AFR of 0.11, but this was not wholly unexpected given both the significant improvement in the AFR in 2019 (the 2018 AFR was 0.22) and the increased Group activity levels in 2020. During the year, we have shifted our focus to the Group's injury frequency rate ('IFR'), rather than only on the AFR, which is a fairly narrow metric based on the level of RIDDORs only. Instead, IFR focusses on a variety of incidents, ranging from minor to potentially more serious, which allows us to learn lessons from each individual case and to identify process improvements and prevention measures. The Group's IFR has reduced over the course of the year, with targeted reductions in almost all areas of the business.

During the year, we extended our successful behavioural change programme to our subcontractors to ensure that everyone who works for and with us is committed to our safety culture. We are also planning to extend this programme into other areas of our supply chain. In November 2019, we held our inaugural safety awards to celebrate positive safety behaviours and initiatives by apprentices, other employees and teams within all of our businesses. Owing to the success of the event it will now become an annual occasion.

In 2020, a sustainability policy was published by our sustainability committee in line with our commitments to health and safety, environment, the economy and our people. Meeting quarterly, the committee discusses new initiatives and innovations that can minimise the impact of our activities on the environment. The Group has made progress during the year in managing its energy, fuel consumption and emissions, including the switch to 100 per cent green electricity at our two largest production facilities and a reduction in our scope 1 and 2 greenhouse gas ('GHG') emissions to 29.8 tonnes of CO2e/£m revenue compared to 33.5 in 2019. In 2020, we maintained our 'B' rating in the CDP index, also receiving an 'A-' in their new supplier engagement rating, considerably outperforming the industry average of 'D'. We have a new sustainability strategy in development for 2021, as we aim to further reduce our environmental impact and carbon emissions, working collaboratively with customers, industry and the supply chain.

Strategic progress

We are continuing to deliver on our strategic objectives and, in achieving an underlying profit before tax of £28.6m, we have surpassed our 2020 strategic profit target. As part of the ongoing 'SSS' initiatives, we have implemented a number of factory and technological improvements and have improved our supply chain processes, as well as entering new UK markets through our acquisition of Harry Peers.

Our Netherlands-based European business, which is now fully integrated into the main operations of the Group, has continued to deliver its first significant contract, a research facility for the European Spallation Source ('ESS') situated in Lund, Sweden. The steel fabrication for this large contract is mainly being provided from our Dalton facility, together with certain approved subcontractors. The business continues to build on its first two contract wins and is tendering for a number of projects, predominantly in Northern Europe and Scandinavia. It is developing a growing pipeline in a range of sectors, which includes many potentially interesting and high-profile opportunities, although the timing of some of these remains uncertain as a result of COVID-19. The European team's market knowledge and experience continues to be of benefit to our UK business when tendering for and executing projects in Europe, providing us with a commercial advantage and the ability to enhance our reputation through the delivery of excellent client service.

Severfield (Products & Processing) ('SPP'), which is based at our Sherburn facility, allows us to address smaller scale projects and provides a one-stop shop for smaller fabricators to source high quality processed steel and ancillary products, albeit at lower margins. Notwithstanding the softer UK market conditions experienced during 2020, the business has secured and successfully delivered a number of orders to its expanding customer base, together with providing subcontract fabrication packages (including general fabrication, trusses, bracing and stairs) to other Group companies to assist them in the delivery of larger projects. During the year, we have continued to gain better competitor and customer intelligence and have improved factory efficiencies, quality assurance and health and safety processes. We have also maintained our focus on opportunities to grow the business and increase our market share, with a particular emphasis on new customer and product range development. This includes our new 'Severstor' and 'Seversilo' product ranges, which we are developing organically following the closure of the similar operations within the Portakabin group. 'Severstor', for which we have already secured our first orders, is the manufacture of secure, steel storage units and 'Seversilo' is the manufacture and installation of storage and handling systems for dry bulk materials. The development of both of these product ranges plays to our strengths in general fabrication and our previous record in modular construction.

In recent periods, we have also been targeting potential organic opportunities in medium to high-rise residential construction, where we have developed a steel solution in what has traditionally been a concrete-dominated sector. Despite this being more of a 'slow burn' than originally anticipated due to longer than expected client gestation periods, discussions with a number of interested parties remain ongoing and this opportunity continues to be progressed in the background.

Summary and outlook

In 2020, we have increased our profitability, both in the UK and in India, and have exceeded our 2020 strategic profit target of £26m. Our cash position remains strong, we have continued to drive our 'SSS' initiatives with an increased focus on manufacturing efficiency, and we have entered new UK markets through the acquisition of Harry Peers.

The overall impact of COVID-19 remains uncertain. Whilst all of our factories are operational and all of our construction sites in the UK and Europe remain open, it is inevitable that the virus will have an impact on profitability in 2021. However, at this early point in our financial year it is impossible to predict the full extent of this financial impact. Despite the uncertainty caused by COVID-19, we remain well-placed to win work in the diverse range of market sectors and geographies in which we operate and across a wide client base, allowing us to target a good pipeline of opportunities and providing us with extra resilience and the ability to increase our market share.

Finally, I would like to thank all of our employees for their hard work, support and determination in these exceptionally difficult times. From our construction teams to those working in our factories and from home, they have all played a key role in ensuring we can keep our business operating as smoothly as possible at this unprecedented time. As always, their health and wellbeing remains our number one priority.

Alan Dunsmore

Chief Executive Officer

17 June 2020

 

FINANCIAL REVIEW

	2020	2019
Revenue	£327.4m	£274.9m
Underlying* operating profit (before JVs and associates)	£27.0m	£23.3m
Underlying* operating margin (before JVs and associates)	8.2%	8.5%
Underlying* profit before tax	£28.6m	£24.7m
Underlying* basic earnings per share	7.7p	6.7p
Operating profit (before JVs and associates)	£24.7m	£23.3m
Profit before tax	£25.8m	£24.7m
Basic earnings per share	6.7p	6.7p
Return on capital employed ('ROCE')	17.2%	15.7%

*  The basis for stating results on an underlying basis is set out on the highlights page. The board believes that non-underlying items should be separately identified on the face of the income statement to assist in understanding the underlying performance of the Group. Accordingly, certain Alternative Performance Measures ('APMs') have been used throughout this report to supplement, rather than replace the measures provided under IFRS.

Trading performance

2020 has been another successful year for the Group. Revenue for the year of £327.4m represents an increase of £52.5m (19 per cent) compared with the previous year, predominantly reflecting an increase of £38.1m in order flow and higher production activity, particularly in the second half of the year, together with H2 revenue of £14.4m from the Harry Peers acquisition. The Group's order book at 1 June 2020 of £271m represents a decrease of £52m from the record position at the time of announcing the half year results (1 November 2019: £323m), mainly reflecting the higher than normal revenue recorded in the second half of the 2020 financial year.

Underlying operating profit (before JVs and associates) of £27.0m (2019: £23.3m) was £3.7m higher than in the previous year. The underlying operating margin (before JVs and associates) of 8.2 per cent (2019: 8.5 per cent) remains within our strategic margin range of 8 to 10 per cent. The slight reduction in the margin reflects the mix of work undertaken during the year and the slightly softer market conditions in the UK, particularly toward the end of the 2019 calendar year. The statutory operating profit (before JVs and associates), which includes the Group's non-underlying items, was £24.7m (2019: £23.3m).

The share of results of JVs and associates was a profit of £2.4m (2019: £1.6m), reflecting a year of strong performance from our Indian joint venture ('JSSL'). Net finance costs were £0.7m (2019: £0.2m), the increase over the prior year representing interest on the Harry Peers acquisition loan in H2 and finance expenses on the new IFRS 16 lease liabilities.

Underlying profit before tax, which is management's primary measure of Group profitability, was £28.6m (2019: £24.7m). The statutory profit before tax, reflecting both underlying and non-underlying items, was £25.8m (2019: £24.7m).

Acquisition of Harry Peers

On 1 October 2019, the Group completed the acquisition of 100 per cent of the share capital of Harry Peers & Co Limited for a net initial cash consideration of £18.9m, after working capital adjustments of £0.9m, on a cash free, debt free basis. This was funded by a combination of a term loan of £14.0m and cash reserves of £4.9m. The gross initial cash consideration was £30.8m, which included the cash and cash equivalents (excluding payments in advance) of Harry Peers of £11.9m. A performance-based contingent consideration of up to £7m is also payable if certain financial and operational targets are achieved for the period to 31 August 2020. The acquired assets included intangible assets of £8.8m, which were attributed to customer relationships, order books and brand name, and residual goodwill of £16.0m.

 

The business contributed revenue of £14.4m and an operating profit of £1.3m in the year. Interest of £0.1m was payable during the year on the acquisition loan.

Share of results of JVs and associates

The Group's share of results from JSSL was a profit of £2.2m (2019: £1.2m). The improved result is mainly due to an increase in revenue of 30 per cent, together with an increase in the operating margin to 8.5 per cent (2019: 6.4 per cent), reflecting an increased level of commercial work in 2020. JSSL's order book was £110m at 1 June 2020 (1 November 2019: £134m), and this continues to include a good mix of higher margin commercial work.

Our specialist cold rolled steel joint venture business, Construction Metal Forming ('CMF'), contributed a Group share of profit of £0.2m (2019: £0.4m), the business being adversely impacted by the softer UK market conditions during the year. The business has continued to develop its product range to drive organic revenue growth. We continue to be the only hot rolled steel fabricator in the UK to have this cold rolled manufacturing capability.

Non-underlying items

Non-underlying items are classified as such as they do not form part of the profit monitored in the ongoing management of the Group. Non-underlying items for the year of £2.8m (2019: £nil) consisted of the amortisation of acquired intangible assets of £1.4m (2019: £nil) and acquisition-related expenses of £1.4m (2019: £nil).

The amortisation of acquired intangible assets represents the amortisation of customer relationships, order books and brand name, which were identified on the acquisition of Harry Peers. These assets are being amortised over a period of 18 months to five years. The acquisition-related expenses include non-recurring legal and consultancy costs associated with the Harry Peers acquisition and have been expensed in accordance with IFRS 3 (revised).

Taxation

The Group's underlying taxable profits of £26.3m (2019: £23.1m) resulted in an underlying tax charge of £5.0m (2019: £4.5m), which represents an effective tax rate of 19.0 per cent (2019: 19.7 per cent). The total tax charge of £5.4m (2019: £4.5m) also includes adjustments relating to prior years and the deferred tax impact of the future increase in UK corporation tax from 17 per cent to 19 per cent, both of which are categorised as non-underlying and included in non-underlying items.

Earnings per share

Underlying basic earnings per share increased by 15 per cent to 7.7p (2019: 6.7p) based on the underlying profit after tax of £23.7m (2019: £20.2m) and the weighted average number of shares in issue of 305.4m (2019: 303.1m). Basic earnings per share, which is based on the statutory profit after tax, was 6.7p (2019: 6.7p), reflecting the increased underlying profit after tax offset by an increase in non-underlying items. Diluted earnings per share, which includes the effect of the Group's performance share plan, was 6.6p (2019: 6.6p).

Dividend and capital structure

The Group has a progressive dividend policy. Funding flexibility is maintained to ensure there are sufficient cash resources to fund the Group's requirements. In this context, the board has established the following clear priorities for the use of cash:

§ To support the Group's ongoing operational requirements, and to fund profitable organic growth opportunities where these meet the Group's investment criteria;

§ To support steady growth in the core dividend as the Group's profits increase;

§ To finance other possible strategic opportunities that meet the Group's investment criteria; and

§ To return excess cash to shareholders in the most appropriate way, whilst maintaining a good underlying net funds position.

 

The board is not currently recommending a final dividend (2019: 1.8p per share). Given the wide range of potential profit and cash flow outcomes for 2021, the board believes it is prudent to defer any dividend payment decisions until there is greater visibility on the impact of COVID-19.

Goodwill and intangible assets

Goodwill was £70.7m at 31 March 2020 (2019: £54.7m), the increase reflecting the goodwill arising on the Harry Peers acquisition. In accordance with IFRS, an annual impairment review has been performed. No impairment was required either during the year ended 31 March 2020 or the year ended 31 March 2019.

Other intangible assets are recorded at £7.4m (2019: £nil). This represents the net book value of the intangible assets (customer relationships, order books and brand name) identified on the acquisition of Harry Peers.

Property, plant and equipment

The Group has property, plant and equipment of £88.9m (2019: £84.0m). Capital expenditure of £6.5m (2019: £7.2m) represents the continuation of the Group's capital investment programme. This predominantly comprised continued investment in the painting facilities at Ballinamallard, an expansion of our operations at Ballinamallard and Dalton, including new equipment for our fabrication lines, and the purchase of construction site equipment. Depreciation in the year was £5.5m (2019: £3.6m) of which £1.5m relates to new right-of-use assets under IFRS 16.

Joint ventures

The carrying value of our investment in joint ventures and associates was £26.7m (2019: £24.3m), which consists of the investment in India of £18.3m (2019: £16.1m) and in CMF of £8.4m (2019: £8.2m).

Pensions

The Group's defined benefit pension scheme, which is closed to new members, had an IAS 19 deficit of £18.7m at 31 March 2020 (2019: £20.0m). The decrease in the liability is mainly due to lower inflation (RPI) assumptions and the ongoing deficit contributions of £1.5m made by the Group during the year offset by an increase in the scheme's cash commutation factors. The triennial funding valuation of the scheme will be carried out in 2021, with a valuation date of 31 March 2020. All other pension arrangements in the Group are of a defined contribution nature.

Return on capital employed

The Group adopts ROCE as a KPI to help ensure that its strategy and associated investment decisions recognise the underlying cost of capital of the business. The Group's ROCE is defined as underlying operating profit divided by the average of opening and closing capital employed. Capital employed is defined as shareholders' equity excluding retirement benefit obligations (net of tax), acquired intangible assets and net funds. For 2020, ROCE was 17.2 per cent (2019: 15.7 per cent), which exceeds the Group's target of 10 per cent through the economic cycle.

Cash flow

	2020	2019
Operating cash flow (before working capital movements)	£30.2m	£25.8m
Cash generated from operations	£28.0m	£18.0m
Operating cash conversion	81%	50%
Net funds**	£16.4m	£25.1m

**  The Group excludes IFRS 16 lease liabilities from its measure of net funds / debt as they are excluded from the definition of net debt as set out in the Group's borrowing facilities.

The Group's business model has been established to generate surplus cash flows and we have always placed a high priority on cash generation and the active management of working capital. The Group ended the financial year with net funds of £16.4m (2019: £25.1m). Net funds at 31 March 2020 comprised cash of £44.3m offset by borrowings under the Group's revolving credit facility ('RCF') of £15.0m and the outstanding term loan of £13.1m for the Harry Peers acquisition.

Operating cash flow for the year before working capital movements was £30.2m (2019: £25.8m). Net working capital increased by £2.2m mainly due to the impact of increased levels of activity (and step up in revenues) in the second half of the year offset by the partial unwinding of the large working capital outflow from the previous year. Excluding advance payments, year-end net working capital represented approximately three per cent of revenue (2019: four per cent). This is below our well-established target range of four to six per cent, reflecting our continued focus on working capital management.

Our cash generation KPI shows the conversion of 81 per cent (2019: 50 per cent) of underlying operating profit (before JVs and associates) into operating cash (cash generated from operations less net capital expenditure).

Prompt Payment Code

We believe in treating our suppliers and subcontractors fairly and with respect. Our three main businesses are all signatories of the Prompt Payment Code. Our relationships with our supply chain partners are of strategic importance and key to the Group's success, and payment practices will continue to be an area of focus.

Bank facilities committed until 2023

The Group has a £25m revolving credit facility ('RCF') with HSBC Bank and Yorkshire Bank, which matures in October 2023. The RCF, of which £10m is available as an overdraft facility, continues to include an additional accordion facility of £20m, which allows the Group to increase the aggregate available borrowings to £45m. As part of the Harry Peers acquisition, a new amortising term loan of £14m was established as an amendment to the existing RCF. This loan also matures in October 2023. The RCF remains subject to two financial covenants, interest cover (>4x) and net debt to EBITDA (<2.5x), and an additional financial covenant, cash flow cover, which has been included following the drawdown of the new term loan. The Group operated well within these covenant limits throughout the year ended 31 March 2020. Overall cash headroom exceeded £50m at 31 March 2020.

IFRS 16

IFRS 16 'Leases' became effective for the Group from 1 April 2019. The profit before tax impact of IFRS 16 during the year was not material and represented a credit of £0.4m to underlying operating profit and a finance expense of £0.4m on lease liabilities. As at 31 March 2020, the Group has recognised right-of-use assets of £10.1m, lease liabilities of £11.2m and associated deferred tax assets of £0.2m. The adoption of IFRS 16 will not impact the Group's banking covenants as the calculations are prepared based on the accounting treatment required under IAS 17, the previous lease accounting standard.

COVID-19 - focus on cash preservation

To mitigate the financial impact of COVID-19 and to protect the Group's cash position, the following precautionary actions have been implemented:

§ The deferral of all non-essential and uncommitted capital expenditure, together with restrictions on discretionary operating expenditure;

§ Tight management of working capital whilst continuing to support supply chain partners;

§ Taking advantage of the opportunity to defer tax payments including PAYE, NIC and VAT;

§ The agreement with the Group's lenders to defer quarterly term loan repayments (due in March and June) until September 2020; and

§ The drawn down of all available amounts under the RCF facility (£15m) to provide the Group with control over its own cash resources.

 

At this early point in our financial year it is impossible to predict the full extent of the financial impact of COVID-19 over the course of the year and a wide range of profit and cash outcomes are possible. We have modelled a broad range of scenarios including a 'base case' scenario (which captures the Group's most up-to-date 'realistic' forecast position), 'a severe but plausible' scenario (the impact on the 'base case' of a three month delay in our expected (unsecured) orders) and a 'worst case' scenario (the combined impact of securing no further orders for the next twelve months and a second lockdown in the second half of the 2021 financial year). There are many assumptions that sit behind these scenarios, above and beyond the duration of the different stages of lockdown, and there is not necessarily a linear relationship between the duration of COVID-19 and the impact on revenue and costs. However, even in our 'worse case' scenario, with our strong balance sheet, we are confident that we have sufficient cash and committed funding in place to meet our obligations for the foreseeable future.

Impact of Brexit

Following the UK's departure from the European Union ('EU') in January 2020, there is continuing uncertainty concerning the UK government's negotiations on a trade deal and future co-operation with the EU. The Group has taken steps to prepare for the potential outcomes in December 2020 of these trade negotiations and has plans in place to ensure it can continue to deliver on current and future contractual commitments.

Going concern

In determining whether the Group's annual consolidated financial statements can be prepared on the going concern basis, the directors considered all factors likely to affect its future development, performance and its financial position, including cash flows, liquidity position and borrowing facilities and the risks and uncertainties relating to its business activities.

The following factors were considered as relevant:

§ The potential impact of COVID-19 on the Group's profits and cash flows;

§ The UK and Europe order book and the pipeline of potential future orders;

§ The Group's 'SSS' business improvement programme, which has delivered tangible benefits in 2020 and is expected to continue doing so in the 2021 financial year and beyond; and

§ The Group's net funds position and its bank finance facilities, which are committed until October 2023, including both the level of those facilities and the covenants attached to them.

Based on the above, the financial statements have been prepared on a going concern basis. In reaching this conclusion, the directors have reviewed liquidity forecasts for the Group, which have been updated for the expected impact of COVID-19 on trading activities. The directors also considered sensitivities in respect of potential downside scenarios and the mitigating actions available in concluding that the Group is able to continue in operation for a period of at least 12 months from the date of approving the financial statements.

Adam Semple

Group Finance Director

17 June 2020

 

Consolidated income statement

For the year ended 31 March 2020

	Underlying  2020 £000	Non-underlying 2020 £000	Total 2020 £000	Underlying  2019 £000	Non-underlying 2019 £000	Total 2019 £000
Revenue	327,364	-	327,364	274,917	-	274,917
Operating costs	(300,386)	(2,294)	(302,680)	(251,661)	-	(251,661)
Operating profit before share of results of JVs and associates	26,978	(2,294)	24,684	23,256	-	23,256
Share of results of JVs and associates	2,355	-	2,355	1,650	-	1,650
Operating profit	29,333	(2,294)	27,039	24,906	-	24,906
Net finance expense	(712)	(514)	(1,226)	(195)	-	(195)
Profit before tax	28,621	(2,808)	25,813	24,711	-	24,711
Tax	(4,959)	(439)	(5,398)	(4,549)	-	(4,549)
Profit for the year attributable to the equity holders of the parent	23,662	(3,247)	20,415	20,162	-	20,162
Earnings per share:
Basic	7.74p	(1.06)p	6.68p	6.65p	-	6.65p
Diluted	7.70p	(1.06)p	6.64p	6.58p	-	6.58p

All of the above activities relate to continuing operations.

Further details of 2020 non-underlying items are disclosed in note 3.

 

Consolidated statement of comprehensive income

For the year ended 31 March 2020

	Year ended 31 March 2020 £000	Year ended 31 March 2019 £000
Actuarial gain/(loss) on defined benefit pension scheme*	255	(3,702)
(Losses)/gains taken to equity on cash flow hedges	(1,403)	540
Reclassification adjustments on cash flow hedges	(410)	129
Exchange difference on foreign operations	(34)	16
Tax relating to components of other comprehensive income*	(184)	624
Other comprehensive income for the year	(1,776)	(2,393)
Profit for the year from continuing operations	20,415	20,162
Total comprehensive income for the year attributable to equity shareholders	18,639	17,769

* These items will not be subsequently reclassified to the consolidated income statement.

 

Consolidated balance sheet

As at 31 March 2020

	2020   £000	2019   £000
ASSETS
Non-current assets
Goodwill	70,714	54,712
Other intangible assets	7,375	-
Property, plant and equipment	88,864	83,986
Right-of-use asset	10,140	-
Interests in JVs and associates	26,690	24,335
	203,783	163,033
Current assets
Inventories	6,856	8,915
Contract assets, trade and other receivables	74,612	57,117
Derivative financial instruments	-	762
Current tax assets	1,640	-
Cash and cash equivalents	44,338	24,979
	127,446	91,773
Total assets	331,229	254,806
LIABILITIES
Current liabilities
Trade and other payables	(84,366)	(57,661)
Financial liabilities - borrowings	(19,375)	-
Financial liabilities - leases	(1,502)	(49)
Derivative financial instruments	(1,135)	-
Current tax liabilities	-	(928)
	(106,378)	(58,638)
Non-current liabilities
Retirement benefit obligations	(18,688)	(19,972)
Financial liabilities - borrowings	(8,750)	-
Financial liabilities - leases	(9,729)	-
Deferred tax liabilities	(4,009)	(1,189)
	(41,176)	(21,161)
Total liabilities	(147,554)	(79,799)
NET ASSETS	183,675	175,007
EQUITY
Share capital	7,648	7,600
Share premium	87,292	87,254
Other reserves	1,402	3,819
Retained earnings	87,333	76,334
TOTAL EQUITY	183,675	175,007

 

Consolidated statement of changes in equity

For the year ended 31 March 2020

	Share   capital   £000	Share   premium   £000	Other   reserves   £000	Retained   earnings   £000	Total   equity   £000
At 1 April 2019	7,600	87,254	3,819	76,334	175,007
Changes in accounting policy	-	-	-	(895)	(895)
Restated total equity at 1 April 2019	7,600	87,254	3,819	75,439	174,112
Total comprehensive income for the year	-	-	(1,847)	20,486	18,639
Ordinary shares issued *	48	38	-	-	86
Equity settled share-based payments	-	-	(570)	259	(311)
Dividend paid	-	-	-	(8,851)	(8,851)
At 31 March 2020	7,648	87,292	1,402	87,333	183,675

* The issue of shares represents shares allotted to satisfy the 2016 performance share plan award which vested in June 2019 and the 2017 and 2018 Sharesave schemes.

	Share   capital   £000	Share   premium   £000	Other   reserves   £000	Retained   earnings   £000	Total   equity   £000
At 1 April 2018	7,492	85,702	4,749	71,054	168,997
Total comprehensive income for the year	-	-	685	17,084	17,769
Ordinary shares issued **	108	1,552	-	-	1,660
Equity settled share-based payments	-	-	(1,615)	1,549	(66)
Dividend paid	-	-	-	(13,353)	(13,353)
At 31 March 2019	7,600	87,254	3,819	76,334	175,007

** The issue of shares represents shares allotted to satisfy the 2015 performance share plan award which vested in June 2018 and the 2015 Sharesave scheme.

 

Consolidated cash flow statement

For the year ended 31 March 2020

	2020	2019
	Year ended 31 March 2020 £000	Year ended 31 March 2019 £000
Net cash flow from operating activities	21,980	14,616
Cash flows from investing activities
Proceeds on disposal of land and buildings	-	10
Proceeds on disposal of other property, plant and equipment	267	724
Purchases of land and buildings	(1,519)	(485)
Purchases of other property, plant and equipment	(4,945)	(6,516)
Investment in JVs and associates	-	(4,229)
Investment in subsidiary entity, net of cash acquired	(13,390)	-
Net cash used in investing activities	(19,587)	(10,496)
Cash flows from financing activities
Interest paid	(598)	(382)
Dividends paid	(8,851)	(13,353)
Proceeds from shares issued	86	1,660
Proceeds from borrowings	29,000	-
Repayment of borrowings	(875)	-
Repayment of obligations under finance leases	(1,796)	(180)
Net cash generated from/(used in) financing activities	16,966	(12,255)
Net increase/(decrease) in cash and cash equivalents	19,359	(8,135)
Cash and cash equivalents at beginning of year	24,979	33,114
Cash and cash equivalents at end of year	44,338	24,979

 

1)  Basis of preparation

The preliminary announcement has been prepared in accordance with the Listing Rules of the FCA and is based on the 2020 financial statements which have been prepared under International Financial Reporting Standards ('IFRS') as adopted by the European Union and those parts of the Companies Act 2006 applicable to companies reporting under IFRS.

The accounting policies applied in preparing the preliminary announcement are consistent with those used in preparing the statutory financial statements for the year ended 31 March 2019, except as detailed below.

IFRS 16 'Leases'

The Group adopted IFRS 16 'Leases' on 1 April 2019 using the modified retrospective approach and therefore the comparative information has not been restated and continues to be reported under IAS 17 'Leases'. The standard has resulted in many operating leases being recognised as right-of-use assets and lease liabilities on the consolidated balance sheet, as the classification as either operating leases or finance leases has been eliminated.

Within opening balances as at 1 April 2019, the Group has recognised right-of-use assets of £11,195,000 and a corresponding lease liability of £12,305,000, with a consequential deferred tax asset of £215,000, the impact on the opening reserves at 1 April 2019 being £895,000.

The preliminary announcement does not constitute the statutory financial statements of the Group within the meaning of Section 434 of the Companies Act 2006. The statutory financial statements for the year ended 31 March 2019 have been filed with the Registrar of Companies. The auditor has reported on those financial statements and on the statutory financial statements for the year ended 31 March 2020, which will be filed with the Registrar of Companies following the annual general meeting. Both the audit reports were unqualified, did not draw attention to any matters by way of emphasis, without qualifying their report, and did not contain any statements under Section 498(2) or (3) of the Companies Act 2006.

The preliminary announcement has been agreed with the Company's auditor for release.

2)  Segment reporting

Following the adoption of IFRS 8, 'Operating Segments' the Group has identified its operating segments with reference to the information regularly reviewed by the executive committee ((the chief operating decision maker) ('CODM')) to assess performance and allocate resources. On this basis, the CODM has identified one operating segment (construction contracts) which in turn is the only reportable segment of the Group. The constituent operating businesses have been aggregated as they have similar products and services, production processes, types of customer, methods of distribution, regulatory environments and economic characteristics.

 

3)  Non-underlying items
 

	2020 £000	2019 £000
Operating costs	(2,294)	-
Finance expense	(514)	-
Non-underlying items before tax	(2,808)	-
Tax on non-underlying items	(439)	-
Non-underlying items after tax	(3,247)	-

Non-underlying items consisted of the amortisation of acquired intangible assets of £1,421,000 (2019: £nil) and acquisition-related expenses of £1,387,000 (2019: £nil). Amortisation of acquired intangible assets represents the amortisation of customer relationships, order books and brand name, which were identified on the acquisition of Harry Peers. Acquisition-related expenses include non-recurring legal and consultancy costs associated with the Harry Peers acquisition of £873,000 (2019: £nil) and the finance expense associated with the unwinding of the contingent consideration discount rate of £514,000 (2019: £nil).

Non-underlying items have been separately identified to provide a better indication of the Group's underlying business performance. They are not considered to be 'business as usual' items and have a varying impact on different businesses and reporting years. They have been separately identified as a result of their magnitude, incidence or unpredictable nature. These items are presented as a separate column within their consolidated income statement category. Their separate identification results in a calculation of an underlying profit measure in the same way as it is presented and reviewed by management.

4)  Taxation
 

The taxation charge comprises:

	2020 £000	2019   £000
Current tax
UK corporation tax	(3,945)	(3,721)
Adjustments to prior years' provisions	(578)	(378)
	(4,523)	(4,099)
Deferred tax
Current year charge	(706)	(625)
Impact of change in future years' tax rates	(242)	-
Adjustments to prior years' provisions	73	175
	(875)	(450)
Total tax charge	(5,398)	(4,549)

 

5)  Dividends
 

	2020   £000	2019   £000
Amounts recognised as distributions to equity holders in the year:
2019 final - 1.8p per share (2018: 1.7p per share)	(5,493)	(5,158)
2019 special - nil per share (2018: 1.7p per share)	-	(5,158)
2020 interim - 1.1p per share (2019: 1.0p per share)	(3,358)	(3,036)
	(8,851)	(13,353)

The directors are not recommending a final dividend in respect of the financial year ended 31 March 2020.

6)  Earnings per share

Earnings per share is calculated as follows:

	2020 £000	2019   £000
Earnings for the purposes of basic earnings per share being net profit attributable to equity holders of the parent company	20,415	20,162
Earnings for the purposes of underlying basic earnings per share being underlying net profit attributable to equity holders of the parent company	23,662	20,162
Number of shares	Number	Number
Weighted average number of ordinary shares for the purposes of basic earnings per share	305,428,749	303,092,067
Effect of dilutive potential ordinary shares	1,701,466	3,170,237
Weighted average number of ordinary shares for the purposes of diluted earnings per share	307,130,215	306,262,304

Basic earnings per share	6.68p	6.65p
Underlying basic earnings per share	7.74p	6.65p
Diluted earnings per share	6.64p	6.58p
Underlying diluted earnings per share	7.70p	6.58p

 

7)  Business combinations

Summary of acquisition

On 1 October 2019, the Company acquired 100 per cent of the share capital of Harry Peers Group, comprising the parent company, Harry Peers & Co Limited, and the trading company, Harry Peers Steelwork Limited (together 'Harry Peers'). Harry Peers is a leading full-service structural steelwork business operating in the UK and is registered in England and Wales. The board believes that the long-term investment profile of Harry Peers' key market positions in the highly regulated markets of nuclear, process industries and power generation, enhances its areas of expertise and broadens its market exposure.

The net consideration of £24,715,000 comprises:

		2020   £000
Gross initial cash consideration		30,792
Contingent consideration		5,793
Gross consideration		36,585
Net cash acquired (excluding payments in advance)		(11,870)
Net consideration		24,715

The fair value of the assets and liabilities recognised as a result of the acquisition are as follows:

Non-current assets		£000
	Property, plant and equipment	2,545
Current assets
	Contract assets, trade and other receivables	5,227
	Cash and cash equivalents (excluding payments in advance)	11,870
		17,097
Total assets		19,642
Current liabilities
	Trade and other payables	(5,694)
	Current tax liabilities	(179)
		(5,873)
Non-current liabilities
	Deferred tax liabilities	(1,982)
Total liabilities		(7,855)
Net assets		11,787
Net cash acquired (excluding payments in advance)		(11,870)
Net identifiable assets acquired		(83)
Identified intangible assets		8,796
Goodwill		16,002
Net assets acquired		24,715

 

Goodwill of £16,002,000 represents both existing and new end-user customers, which were not recognised separately in accordance with IFRS 3 (Revised) 'Business combinations', the ability and skill of Harry Peers' employees and management, know-how, and the quality of the services provided. The goodwill arising from the acquisition is not expected to be deductible for income tax purposes.

Analysis of amounts disclosed in the cash flow statement in connection with the acquisition:

		2020   £000
Gross initial cash consideration		30,792
Net cash acquired (including payments in advance)		(17,402)
Total cash outflow - investing activities		13,390
Payments in advance		5,532
Net initial cash consideration		18,922

Additional consideration of up to £7,000,000 is also payable if certain conditions are achieved during the eleven month earn-out period from 1 October 2019 to 31 August 2020. These conditions include the profitability of the business, the level of order book trading profit at the end of the earn-out period and other qualitative factors. The contingent consideration will be settled in cash upon achieving the relevant targets. The range of the additional consideration payments is estimated to be between £nil and £7,000,000. The Group has included £5,793,000 as the fair value of the contingent consideration after calculating the present value of the future expected cash flows based on the Group's expectation of what it will pay in relation to the post-acquisition performance of the acquired business, using a risk-adjusted discount rate of 18 per cent (which is based on Harry Peers' internal rate of return).

Acquisition-related costs of £1,387,000 were fully expensed in the period to 31 March 2020 as non-underlying operating costs of £873,000 and a non-underlying finance expense of £514,000 (note 3).

The acquired business contributed revenues of £14,424,000 and profit after tax of £1,176,000 to the Group for the period from 1 October 2019 to 31 March 2020.

 

8)  Net cash flow from operating activities

	2020   £000	2019   £000
Operating profit from continuing operations	27,039	24,906
Adjustments:
Depreciation - property, plant and equipment	3,928	3,649
Depreciation - right-of-use assets	1,585	-
Gain on disposal of other property, plant and equipment	(68)	(129)
Amortisation of intangible assets	1,421	103
Movements in pension scheme	(1,029)	(978)
Share of results of JVs and associates	(2,355)	(1,650)
Share-based payments	(311)	(66)
Operating cash flows before movements in working capital	30,210	25,835
Decrease in inventories	2,059	731
Increase in receivables	(12,174)	(1,969)
Increase/(decrease) in payables	7,898	(6,625)
Cash generated from operations	27,993	17,972
Tax paid	(6,013)	(3,356)
Net cash flow from operating activities	21,980	14,616

9)  Net funds
 

The Group's net funds are as follows:

	2020   £000	2019   £000
Borrowings	(28,125)	-
Cash and cash equivalents	44,338	24,979
Unamortised debt arrangement fees	177	226
Financial liabilities - leases	-	(49)
Net funds	16,390	25,156

The Group excludes IFRS 16 lease liabilities from its measure of net funds / debt as they are excluded from the definition of net debt as set out in the Group's borrowing facilities.

10)  Contingent liabilities
 

Liabilities have been recorded for the directors' best estimate of uncertain contract positions, known legal claims, investigations and legal actions in progress. The Group takes legal advice as to the likelihood of the success of claims and actions and no liability is recorded where the directors consider, based on that advice, that the action is unlikely to succeed, or that the Group cannot make a sufficiently reliable estimate of the potential obligation. The Group also has contingent liabilities in respect of other issues that may have occurred, but where no legal or contractual claim has been made and it is not possible to reliably estimate the potential obligation.
 

Principal risks and uncertainties

The board has carried out a robust assessment of the principal risks and uncertainties which have the potential to impact the Group's profitability and ability to achieve its strategic objectives. This list is not intended to be exhaustive. Additional risks and uncertainties not presently known to management or deemed to be less significant at the date of this report may also have the potential to have an adverse effect on the Group. Risk management processes are put in place to assess, manage and control these on an ongoing basis. Our principal risks are set out below:

Health and safety

Description The Group works on significant, complex and potentially hazardous projects, which require continuous monitoring and management of health and safety risks. Ineffective governance over and management of these risks could result in serious injury, death and damage to property or equipment. Impact A serious health and safety incident could lead to the potential for legal proceedings, regulatory intervention, project delays, potential loss of reputation and ultimately exclusion from future business. Continued changes in legislation can result in increased risks to both individuals and the Group.

Mitigation § Established safety systems, site visits, safety audits, monitoring and reporting, and detailed health and safety policies and procedures are in place across the Group, all of which focus on prevention and risk reduction and elimination. § Thorough and regular employee training programmes. § Director-led safety leadership teams established to bring innovative solutions and to engage with all stakeholders to deliver continuous improvement in standards across the business and wider industry. § Close monitoring of subcontractor safety performance. § Priority board review of ongoing performance and in depth review of both high potential and reportable incidents. § Regular reporting of, and investigation and root cause analysis of accidents and near misses. § Behavioural safety cultural change programme. § Occupational health programme including mental health. § Achievement of challenging health and safety performance targets is a key element of management and staff remuneration.

Commercial and market environment

Description Changes in government and client spending or other external factors could lead to programme and contract delays or cancellations, or changes in market growth. External factors include national or market trends, political or regulatory change (including the UK's exit from the EU) and the impact of pandemics (including the ongoing COVID-19 outbreak). The impact of the COVID-19 pandemic was unforeseen and has affected the whole of the manufacturing, engineering and construction sector (see separate COVID-19 risk below). The risks associated with Brexit remain due to there being no clarity on the long-term trading relationship with the EU. An unfavourable outcome from the ongoing trade negotiations could adversely impact investor and customer confidence. Lower than anticipated demand (including as a result of COVID-19) could result in increased competition, tighter margins and the transfer of commercial, technical and financial risk down the supply chain, through more demanding contract terms and longer payment cycles.   Impact A significant fall in construction activity and higher costs could adversely impact revenues, profits, ability to recover overheads and cash generation.

Mitigation § The mitigating actions undertaken by the Group in response to COVID-19 is set out in the specific 'COVID-19' risk below. § The Group closely monitors Brexit developments and specific risks and related mitigations are kept under review by the executive committee. We have taken steps to prepare for the various potential outcomes of the ongoing trade negotiations with the EU and have plans in place to ensure we can continue to deliver on current and future contractual commitments. § Regular reviews of market trends performed (as part of the Group's annual strategic planning and market review process) to ensure actual and anticipated impacts from macroeconomic risks are minimised and managed effectively. § Regular monitoring and reporting of financial performance, orders secured, prospects and the conversion rate of the pipeline of opportunities and marshalling of market opportunities is undertaken on a coordinated Group-wide basis. § Selection of opportunities that will provide sustainable margins and repeat business. § Strategic planning is undertaken to identify and focus on the addressable market (including new overseas and domestic opportunities). § Development of a pipeline of opportunities in continental Europe and in the Republic of Ireland, supported by our European business venture. § Maintenance and establishment of supply chain in mainland Europe. § Close management of capital investment and focus on maximising asset utilisation to ensure alignment of our capacity and volume demand from clients. § Close engagement with both customers and suppliers and monitoring of payment cycles. § Ongoing assessment of financial solvency and strength of counterparties throughout the life of contracts. § Continuing use of credit insurance to minimise impact of customer failure. § Strong cash position supports the business through fluctuations in the economic conditions of the sector.

COVID-19

Description The recent outbreak and global spread of COVID-19 may have a significant and prolonged impact on global economic conditions, disrupt our clients and suppliers, supply chain, increase employee absenteeism and adversely impact our operations. Governments and public bodies in affected countries have introduced temporary emergency public measures such as travel bans, quarantines and public lockdowns. Should these continue for an extended period of time, they would increase pressure on the operations of the Group. Impact The effect of the disease itself on the health and safety of our people, the financial impact of implementing social distancing measures across our business and the economic slowdown that has resulted from the measures taken in the UK and abroad to combat the virus. A significant fall in demand and higher costs could adversely impact revenues, profits, ability to recover overheads and cash generation.

Mitigation § The safety and wellbeing of our clients and employees continues to be our overriding priority. Our executive committee are monitoring events closely with regular board oversight evaluating the impact and designing appropriate response strategies. § The availability of cash resources and committed facilities together with strong cash flow to support the Group's longer-term viability. § We have implemented a number of precautionary actions including the deferral of all non-essential and uncommitted capital expenditure, together with restrictions on discretionary operating expenditure, tight management of working capital and the deferral of certain tax and quarterly term loan repayments. § Our management teams have implemented specific actions to minimise the disruption on our operations during these challenging times. Our business continuity plans have been mobilised and additional measures have been implemented including changes to procedures at factories and sites (hours worked, additional security, hygiene and social distancing measures), undertaking revised risk assessments in all operating locations to ensure we could continue to operate safely, changed methods of travel to and accommodation at sites and extending support to employees at increased risk.

Information technology resilience

Description Technology failure, cyber-attack or property damage could lead to IT disruption with resultant loss of data, loss of system functionality and business interruption. The Group's core IT systems must be managed effectively, to avoid interruptions, keep pace with new technologies and respond to threats to data and security. Impact Prolonged or major failure of IT systems could result in business interruption, financial losses, loss of confidential data, negative reputational impact and breaches of regulations. If the Group fails to invest in its IT systems, it will ultimately be unable to meet the future needs of the business and fulfil its strategy.

Mitigation § IT is the responsibility of a central function which manages the majority of the systems across the Group. Other IT systems are managed locally by experienced IT personnel. § Significant investments in IT systems which are subject to board approval, including anti-virus software, off-site and on-site backups, storage area networks, software maintenance agreements and virtualisation of the IT environment. § Specific software has been acquired to combat the risk of ransomware attacks. § Group IT committee ensures focussed strategic development and resolution of issues impacting the Group's technology environment. § Robust business continuity plans are in place and disaster recovery and penetration testing are undertaken on a systematic basis. § Data protection and information security policies are in place across the Group. § Cybercrimes and associated IT risks are assessed on a continual basis and additional technological safeguards introduced. Cyber threats and how they manifest themselves are communicated regularly to all employees (including practical guidance on how to respond to perceived risks). § ISO 27001 accreditation achieved for the Group's information security environment and regular employee engagement undertaken to reinforce key messages. § Insurance covers certain losses and is reviewed annually to establish further opportunities for affordable risk transfer with revised cover being purchased in 2019 and 2020 to reduce the financial impact of this risk.

Mispricing a contract (at tender)

Description Failure to accurately estimate and evaluate the contract risks, costs to complete, contract duration and the impact of price increases could result in a contract being mispriced. Execution failure on a high-profile contract could result in reputational damage.   Impact If a contract is incorrectly priced, particularly on complex contracts, this could lead to loss of profitability, adverse business performance and missed performance targets. This could also damage relationships with clients and the supply chain.

Mitigation § Improved contract selectivity (those that are right for the business and which match our risk appetite) has de-risked the order book and reduced the probability of poor contract execution. § Estimating processes are in place with approvals by appropriate levels of management. § Tender settlement processes are in place to give senior management regular visibility of major tenders. § Use of the tender review process to mitigate the impact of rising supply chain costs. § Work performed under minimum standard terms (to mitigate onerous contract terms) where possible. § Use of Group authorisation policy to ensure appropriate contract tendering and acceptance. § New Group-wide project risk management framework ('PRMF') brings greater consistency and embeds good practice in identifying and managing contract risk. § Professional indemnity cover is in place to provide further safeguards.

Failure to mitigate onerous contract terms

Description The Group's revenue is derived from construction contracts and related assets. Given the highly competitive environment in which we operate, contract terms need to reflect the risks arising from the nature or the work to be performed. Failure to appropriately assess those contractual terms or the acceptance of a contract with unfavourable terms could, unless properly mitigated, result in poor contract delivery, poor understanding of contract risks and legal disputes. Impact Loss of profitability on contracts as costs incurred may not be recovered and potential reputational damage for the Group.

Mitigation § The Group has identified minimum standard terms which mitigate contract risk. § Robust tendering process with detailed legal and commercial review and approval of proposed contractual terms at a senior level (including the risk committee) are required before contract acceptance so that onerous terms are challenged, removed or mitigated as appropriate. § Regular contract audits are performed to ensure contract acceptance and approval procedures have been adhered to. § We have worked with the British Constructional Steelwork Association to raise awareness of onerous terms across the industry. § Through regular project reviews we capture early those occasions where onerous terms could have an adverse impact and are able to implement appropriate mitigating action at the earliest stage.

Supply chain

Description The Group is reliant on certain key supply chain partners for the successful operational delivery of contracts to meet client expectations. The failure of a key supplier or a breakdown in relationships with a key supplier could result in some short-term delay and disruption to the Group's operations. There is also a risk that credit checks undertaken in the past may no longer be valid. The sale of British Steel to Jingye Group, China's third largest privately-owned steel producer, was completed in March 2020, helping to provide stability to the steel supply market in the UK. Impact Interruption of supply or poor performance by a supply chain partner, could impact the Group's execution of existing contracts (including the costs of finding a replacement), its ability to bid for future contracts and its reputation, thereby adversely impacting financial performance.

Mitigation § Initiatives are in place to select supply chain partners that match our expectations in terms of quality, sustainability and commitment to client service. New sources of supply are quality controlled. § Implementation of best practice improvement initiatives including automated supplier accreditation processes. § Strong relationships maintained with key suppliers including a programme of regular meetings and reviews. § Contingency plans developed to address supplier and subcontractor failure. § Ongoing reassessment of the strategic value of supply relationships and the potential to utilise alternative arrangements, in particular for steel supply. § Key supplier audits are performed within projects to ensure they are in a position to deliver consistently against requirements. § Monthly review process to facilitate early warning of issues and subsequent mitigation strategies.

Indian joint venture

Description The growth, effective management and performance of our Indian joint venture ('JSSL') is a key element of the Group's overall strategy. The Indian market has continued to expand rapidly in recent years and the factory in Bellary has been expanded to meet current and anticipated future market growth. The COVID-19 pandemic is impacting JSSL in 2021. In light of the slow easing of the nationwide lockdown announced by the Indian government in March 2020 and the developing impact of COVID-19 on the Indian economy, JSSL's operations have been disrupted in the first quarter of 2021, a situation which is likely to continue over a period of several months. Impact Failure to effectively manage our expanding operations in India could lead to financial loss, reputational damage and a drain on cash resources to fund the operations.

Mitigation § In line with the response of the Group, local management in India have implemented a number of precautionary cash conservation actions and are closely monitoring cash flows and debt repayments, together with adopting specific actions to minimise the disruption on the joint venture operations during these challenging times. § Robust joint venture agreement and strong governance structure is in place. § In 2020, senior management team strengthened further, subcontracting capability expanded and workforce upskilled to support expanded operations. § Regular schedule of annual visits to India by UK executive and senior management to review operations and ensure appropriate oversight (suspended during the COVID-19 outbreak and conducted by video conference) § Two members of the Group's board of directors are members of the joint venture board. § Regular formal and informal meetings held with both joint venture management and joint venture partners. § Contract risk assessment, engagement and execution process now embedded in the joint venture. § Operational improvement programmes remain ongoing. § Ongoing review of controls environment and risk management processes undertaken by Group senior management.

People

Description The ability to identify, attract, develop and retain talent is crucial to satisfy the current and future needs of the business. Skills shortages in the construction industry are likely to remain an issue for the foreseeable future and it can become increasingly difficult to recruit capable people and retain key employees, especially those targeted by competitors. Impact Loss of key people could adversely impact the Group's existing market position and reputation. Insufficient growth and development of its people and skill sets could adversely affect its ability to deliver its strategic objectives. A high level of staff turnover or low employee engagement could result in a decrease of confidence in the business within the market, customer relationships being lost and an inability to focus on business improvements.

Mitigation § Training and development schemes to build skills and experience, such as our successful graduate, trainee and apprenticeship programmes. § Second wave of our Severfield Development Programme delivered in 2020 and the launch of an 'early careers' initiative which builds readiness for more senior positions. § Attractive working environments, remuneration packages, technology tools and wellbeing initiatives to help improve employees' working lives. § Annual appraisal process providing two-way feedback on performance. § Internal communications continually improved. § Interviews with leavers and joiners to understand the reasons for their decision.

 

END

 

 

FR FLFSERDIRLII