We are well on track with our target to double 2016 underlying profit before tax by 2020.
Acting chief executive officer
The year ended 31 March 2017 has been an excellent year for the Group with benefits coming from strong and good quality order inflow as well as continued improvements in operational performance.
Underlying* profit before tax is up 50 per cent to £19.8m (2016: £13.2m) and revenue has increased by 10 per cent to £262.2m (2016: £239.4m). This performance has converted into cash, with operating cash conversion of 112 per cent (2016: 150 per cent), resulting in net funds at the year-end of £32.6m (2016: £18.7m).
The Indian joint venture delivered another year of stability producing, for the first time, a small profit after tax of £0.2m (2016: loss of £0.3m).
The first full year of Composite Metal Flooring Limited ('CMF') has contributed a Group share of £0.3m profit after tax, which is in addition to the commercial rebates we receive on products used by the Group and that have benefited our operating margin. CMF has integrated well into the Group and is continuing to invest in and develop its product range.
The Group has also exceeded its target ROCE of 10 per cent achieving a good return of 14.6 per cent in the period, bringing the Group more into line with its construction and engineering clients and peers.
The Group has continued to build on the strong commercial and risk management disciplines put in place over the past four years and we maintain our target to double 2016 profit before tax by 2020. Based on the Group's continued progress I am delighted that the board is recommending an increase in the final dividend to 1.6p per share, making a total for the year of 2.3p per share (2016: 1.5p per share) a 53 per cent increase on the prior year.
Revenue is up 10 per cent over the prior year predominantly reflecting an increase in order flow and activity during the year, together with an increase in steel prices. This year we have worked on four large projects in London that have contributed to this increased activity level. The new roof for Wimbledon No. 1 Court, a major new commercial head office building in London, the new stadium for Tottenham Hotspur F.C. and a new commercial office tower at 22 Bishopsgate are all projects with revenues in excess of £20m.
Our operating margins have improved again to 7.5 per cent (2016: 5.7 per cent) resulting in an underlying operating profit (before JVs and associates) of £19.6m (2016: £13.7m). We continue to drive improvements to our operational execution, which includes better risk and contract management and developments to our production processes. These improvements have helped the Group deliver a better return on capital following the extensive investment in the business and we are also delivering real benefits for our clients in terms of the reliability and speed of project delivery, coupled with the quality of service we can offer. Operational improvements this year have included the roll-out of a new material requirements planning system across the Group to allow seamless sharing of production and improved project data, reconfiguration of our Lostock facility and increased fabrication throughput at the Dalton facility.
Following on from the success of our operational improvement programme from 2014 to 2017, this year we launched a further programme of projects under the banner 'Smarter, Safer, more Sustainable', which includes improvements to our business processes, use of technology and operating efficiencies. This continuous improvement enhances the robustness of our processes and controls, drives operational efficiency and maximises productivity across the business.
Continued stability in our organisational structure and management team remains a key strength of the business. We continue to drive improvements in our people and processes and, importantly, embed these improvements in our organisational culture. During the year we introduced another two training programmes: one on 'lean' production techniques, which will lead to many of our employees developing new skills and achieving relevant qualifications; the other, an emerging leaders programme to develop and deepen our management talent. In addition to the direct benefits, these programmes strengthen our ability to retain and attract high quality employees. This is also being reinforced through our apprenticeship and graduate recruitment programmes which have accepted 39 and five recruits this year, respectively.
Our unique capability to deliver complex design solutions, our capacity and speed of fabrication and our management of the integrated construction process is important for our customers. This year we have delivered very challenging programmes for customers, reduced costs through both our pre-tender value engineering and also post-award engineering solutions, and developed innovative building solutions for temporary works and pre-assembled sections to work in live operating environments.
We have continued to work closely with customers across a broad range of sectors and regions. Our customers have included Multiplex, Sir Robert McAlpine, BAM, Skanska, MACE, Laing O'Rourke, Canary Wharf Contractors, McLaren, Winvic, Costain, Morgan Sindall, Carillion, Stanhope, Buckingham, GSE, Vinci, ISG, Interserve, Bowmer and Kirkland, Hochtief and Westfield. The Group worked on over 110 projects with our clients during the year including:
|Major projects – over £20m||Wimbledon (No. 1 Court roof), London|
Tottenham Hotspur F.C., London
London Development Project, London
22 Bishopsgate, London
|Commercial offices||Southbank Place, London|
Principal Place, London
King's Cross S2, London
|Stadia and leisure||Liverpool F.C. (Anfield stadium), Liverpool|
|Industrial and distribution||BAE Barrow, Cumbria|
DHL, East Midlands
Large distribution centre, Tilbury
|Transport infrastructure||Ordsall Chord, Manchester|
London Bridge Station Canopies, London
Ardleigh Green Bridge, London
|Health and education||Kings College Hospital, London|
|Power and energy||Covanta, Dublin|
Gladstone Biomass, Liverpool
Tottenham Hotspur F.C.
Tottenham Hotspur F.C.'s new stadium at White Hart Lane has been designed with an overall capacity of 61,000 and the south stand, which will be the UK's largest single tier stand, will be able to hold up to 17,000 supporters. The completed stadium will also feature a retractable pitch to enable the staging of NFL games and other events.
Severfield is providing connection design, fabrication and construction of 14,000 tonnes of structural steelwork for this complex project which includes the construction of the main stands, the supply of steelwork for the retractable pitch and its storage enclosure and the steelwork for the Tottenham Experience.
The project also involves the construction and erection of two large steel 'trees', each consisting of 160 tonnes of structural steel, in order to support the back of the south stadium and the supply and installation of the complex cable roof structure. Currently, the majority of construction work has been focused on the new north, east and west stands as these are outside of the footprint of the existing stadium.
This year also saw the first full year of trading from our specialist cold-rolled steel joint venture business, CMF. We are the only hot rolled steel fabricator in the UK to have this cold rolled manufacturing capability, which enables us to internalise a greater share of supply chain margin and develop new products to drive Group revenue and margin.
The remedial bolt replacement works at Leadenhall were completed during the year with the total expenditure being in line with the non-underlying charge made back in 2015. Discussions continue with all stakeholders to determine where the financial liability for the remedial costs should rest.
Our steel supply chain has remained stable during the year. The change of ownership at British Steel, previously TATA, has had no impact on service or capability for our steel sections. Our principal plate sourcing remains in continental Europe but we endeavour to source UK plate from re-rollers including the reopened Liberty facility in Dalzell, Scotland.
Order book and market conditions
Whilst the most recent order book has reduced to £229m, the strong and good quality order inflow during 2017 will continue to support improving performance in the current financial year. Our normal order book levels typically equate to eight to ten months of annualised revenue so whilst, as expected, the order book has come off its peak, it remains at a level which supports good progress towards our strategic targets.
We remain pleased with the order book mix, which incorporates a diverse range of projects in the commercial office, industrial and distribution, and infrastructure sectors. Notwithstanding a reduction in new construction orders over the past few months and the impact of the general election, the UK market generally appears to be remaining stable. We have identified a number of significant projects across the commercial office, retail, industrial and distribution, and infrastructure sectors for the upcoming months. Many of these projects play to the Group's core competencies – large complex projects that require high quality, rapid throughput, on-time performance and full co-ordination between stakeholders.
Although pricing will always be an important factor, and remains competitive, we continue to work with customers who recognise the additional value the Group brings to the outcome of projects. Our operational improvement programme is focused on establishing a cost platform that enables us to deliver high quality, value added services to our customers at market prices whilst maintaining our performance target commitments.
Looking further ahead we continue to see a significant increase in infrastructure projects including Hinkley Point nuclear power station, HS2 and the expansion of Heathrow Airport. Our bridge team places us in a strong position for the HS2 bridge work and our historical record in transport infrastructure both in railway stations and airports, and Heathrow in particular, enables us to feel confident about the potential for our involvement in these major projects.
Our Indian joint venture, JSSL, has delivered another year of stability and its first profit after tax, of which the Group's share is £0.2m (2016: loss of £0.3m). JSSL generated strong operating margins which this year were 9.7 per cent (2016: 7.0 per cent). This excellent operating performance has been overshadowed by the high cost of financing the joint venture's local debt. Historically, debt servicing costs have offset most of this operating margin, however a post year-end decision, with our partner JSW, to invest additional equity to repay the joint venture's remaining term debt of £10.6m, means that more of this underlying operating profit will contribute to Group earnings in future years. The immediate impact is expected to increase the Group's share of JSSL's profit by £0.5m per annum.
The JSSL order book has increased significantly over recent months and was £73m at 1 June 2017. During the year, the business has continued to generate a good balance between lower margin, more readily available industrial work and higher margin commercial work, which is generally secured from the conversion of projects from concrete to steel. This conversion remains key to the long term growth and value of the business and good progress continues to be made in persuading more clients of the benefits of steel. As in the UK, the business retains a strong focus on securing appropriate terms and conditions for its projects and some initially attractive projects have been declined on this basis.
Overall, we remain confident in the long term development of the market and of the business and this has led to the agreement with our joint venture partner, JSW, to each invest additional equity of £5.3m to help repay the business's outstanding term debt. The Indian government continues to reshape the economy to stimulate investment and these structural changes will support the long term growth of the business.
The Group has invested £7.0m in capital expenditure during the year (2016: £5.0m) and received £1.2m from the sale of a non-core property.
The capital expenditure has been invested in a range of projects to improve our in-house painting capability in both Lostock and Ballinamallard, develop our bridge fabrication capability, further enhance our in-house fleet of construction site equipment and improve our staff welfare facilities. We also purchased a plot of land at our Dalton facility, which had previously been leased.
Painting has become an increasingly important part of our business in recent years and the investment in our painting capability will reduce our reliance on external suppliers and importantly, reduce product movement and processing times. We have also been developing our commercial capability in the bridge infrastructure market over the past couple of years, a market we see as increasingly important over the coming years. This investment will greatly enhance the speed and efficiency of our bridge fabrication.
The cash generation of the Group remains strong and we will continue to invest £6m to £7m per annum to support the continued development of our client service offering and our operational improvements and efficiencies.
The Group's AFR for the year, which includes our Indian joint venture, was 0.24, a slight improvement on the 0.25 recorded last year. This improvement was driven by our UK operations which reduced from 0.44 to 0.42 in the year. Whilst this performance is industry-leading, we are committed to making further improvements and continue to invest significant amounts of time and money in employee safety.
All members of our board participated in site safety visits during the year and we continue to develop the monitoring and analysis of all safety-related incidents, including near misses. We have started implementing the next phase of our behavioural safety programme and increasing our level of focus on mental and physical health-related issues. In light of this, we are supporting the newly established Mates in Mind charitable programme to improve and promote positive mental health in construction.
Last year we introduced a target to double 2016 profit before tax to £26m over four years and are making good progress towards achieving this target. The core driver of this is the continuation of the operational improvement programme implemented over the previous three years and we are now capturing these ongoing initiatives under the banner of 'Smarter, Safer, more Sustainable'. There is a wide range of activities aimed at improving business processes, operational efficiency, use of technology and new product development all set within a framework of robust risk management and control. Having established a strong foundation over the past few years from which we and our customers have seen the benefits, we are continuing to work with our customer base to improve our ability to meet their evolving requirements. Joint value engineering, programme certainty, innovative engineering solutions and advanced construction management have long been part of what we do, but we are confident that we will deliver further improvements in these areas as we implement our strategy.
We continue to deliver on our additional strategic objectives. CMF has performed very well for the Group providing in-house supply of cold formed products. There are plans in place to develop the product range of CMF and the business is investing accordingly.
After undertaking a significant amount of research into the potential market opportunity in continental Europe we have employed a European business development director based in the Netherlands, who will focus on tailoring our established UK offering for expansion into this market.
Summary and outlook
The business has had an excellent year with revenue and strong profit growth supported by strong cash generation. Overall, this performance represents a significant step towards our 2020 target of doubling profits. The current order book and pipeline, coupled with a continued stable market environment, will support further progress towards this target in the current financial year.
In India, the strong operational performance, the record order book and the repayment of the high cost local debt makes us confident in the joint venture's future financial contribution to the Group and in its profitable growth potential in this large addressable market.
Finally, I would like to thank all of our people for their continued hard work, innovation and commitment over the last year and we look forward together to another successful year in 2018.
Acting chief executive officer
14 June 2017
* The basis for stating results on an underlying basis is set out in our year.