18 August 2022
By Maynard Paton
Results summary for Andrews Sykes (ASY):
- An encouraging performance, with profit recovering 35% following the pandemic to almost match the record set during FY 2018.
- Additional reporting disclosures revealed ASY’s main UK Hire division enjoyed sales rebounding 17% and a wonderful 34% margin.
- European operations expanded to 27% of group revenue following very strong progress, although Middle Eastern woes included an extra £1m provision.
- The books remain in good shape, with useful cash generation lifting net funds to £29m and perhaps increasing the possibility of another special dividend.
- An estimated 13-14x P/E and near-5% yield hardly seem expensive given the appealing financials, potential for an FY 2022 heatwave bonanza and scope for further European expansion. I continue to hold.
- News link, share data and disclosure
- Why I own ASY
- Results summary
- Revenue, profit and dividend
- Middle East and non-hire
- Financials: margin and return on equity
- Financials: cash flow and working capital
- Financials: pension scheme
- Going concern
News link, share data and disclosure
News: Annual results for the twelve months to 31 December 2021 published 04 May 2022.
Share price: 520p
Share count: 42,174,359
Market capitalisation: £219m
Disclosure: Maynard owns shares in Andrews Sykes. This blog post contains SharePad affiliate links.
Why I own ASY
- Supplies air conditioners, portable heaters and industrial pumps for hire, with success based on a prompt 24/7/365 service, high-quality rental fleet and commercial-only customer base.
- Accounts regularly showcase high margins, generous cash flow, net cash and satisfactory returns on equity.
- Chairman and family are 90%/£198m shareholders and ensure management focuses on “long-term shareholder value creation” (point 10).
Revenue, profit and dividend
- A better-than-expected H1 that signalled improved H2 progress…
“Management remains optimistic that the business will continue to improve as the economy recovers fully but are mindful that we live in uncertain times and circumstances can change very quickly.“.“
- …had already suggested these FY 2021 results would reveal an encouraging performance.
- Annual revenue gained 12% to £75m while annual operating profit surged 35% to £20m to almost match the bumper FYs of 2018 and 2019:
- ASY’s progress did indeed improve during H2, with H2 revenue up 17% to £40m and operating profit up 41% to £12m.
- Extreme weather — particularly cold snaps, heatwaves and extensive rain — typically prompt sudden demand for the group’s hire equipment (primarily heaters, air conditioners and water pumps).
- Progress from one year to the next can therefore fluctuate due to different climatic conditions.
- The FY 2021 performance incurred some pandemic restrictions throughout the group’s UK, European and Middle Eastern operations…
“The group has also achieved a rebound in revenues from our core traditional markets of ‘comfort’ cooling and heating despite various lockdowns and ‘stay at home’ guidance being in effect at multiple different times throughout the year.”
- …but progress was probably helped by fewer restrictions within the UK and Europe versus FY 2020.
- Supplying pumps within the UK warranted a special mention for yet another record effort:
“This year was once again supported by another strong year for our UK pump hire business, which finished the year 16% up on the previous year’s revenue and continues the recent history of setting record levels of revenue yearly.”
- The UK performance meant ASY’s domestic market represented 64% of group revenue, the highest since FY 2016:
- Europe meanwhile contributed 26% of group revenue, the region’s highest-ever proportion.
- Pandemic restrictions and a “lack of significant infrastructure projects” meant the Middle Eastern division suffered a difficult year.
- ASY’s excellent blog continues to showcase the company’s activities. H2 customers included:
- “Distinguished London hospital seeks heater hire for covid testing and vaccination centres“;
- “Eleventh-hour chiller hire ensures the show goes on at London’s Lyceum Theatre“;
- “Independent festival in Hampshire seeks help from Sykes Pumps“;
- “British kitchen manufacturer seeks ventilation for new warehouse fit-out“;
- “Event organisers hire air conditioning for technology exhibition in London“;
- “Yorkshire university hires temporary heating and air-quality control systems“;
- “Air-conditioning system averts television blackout in the north east“;
- “High-performance air-conditioning system keeps aerostructures company operational“;
- “Thames Water seeks emergency pump hire following burst water main“;
- “NHS Trust turns to Andrews Ventilation ahead of mortuary upgrades“, and;
- “Tour of Britain organisers turn to Andrews for comfort heating“.
- ASY’s reported profit was bolstered by government furlough benefits of £151k, hindered by a credit loss provision of £1.5m (see Middle East and non-hire) and excluded additional pension contributions of £1.2m (see Financials: pension scheme).
- After being reduced slightly for FYs 2019 and 2020 following the pandemic, the final dividend was higher than I had anticipated at 12.5p per share:
- The 24.4p full-year payout was ASY’s highest since FY 2008 (33.6p per share).
- These FY results were the first to split both UK and European revenue and Hire and Sales revenue:
- ASY previously lumped UK and European revenue together for Hire and Sales, and judging the progress of the group’s main division — UK Hire — had required subsidiary accounts from Companies House.
- The new disclosure confirmed annual UK Hire revenue gaining 17% to £43m, which helped total UK revenue set a new £48m record:
“The UK… business [including inter-segmental sales] experienced a 16% turnover increase when compared to last year, supported by an exceptional overall year for our pump hire business in the UK. We are pleased to report company turnover surpassed the previous record set in 2018.
- ASY outlined how particular hire products fared within the UK:
“Our core markets of heating and air conditioning (in the traditional markets of “comfort” cooling and heating) recovered strongly from 2020 being 33% and 36%higher respectively in 2021. Chiller and boiler revenue was the only part of the business not to improve on 2020 revenues, being 7% down on 2020.“
- Presumably chiller and boiler revenue (down 7%) represents a significant proportion of UK income, given total UK revenue gained 16% after UK heating and air conditioning revenue jumped 30%-plus.
- The additional reporting disclosure showed the UK Hire and Sales margin at a super 34% (£15.4m / £45.2m).
- Note that ASY’s UK subsidiary accounts show a £12m operating profit versus £15m within the full annual report:
- The difference appears due to an impairment of a loan made to ASY’s French subsidiary:
- I guess the loan impairment within the UK accounts and presumably the corresponding impairment reversal within the French accounts cancelled each other out within the group accounts.
- But writing down a French loan is not ideal, and this FY statement did admit France was ASY’s only loss-making market:
“Whilst France remains the only loss-making geographic location, that operating loss was reduced in 2021. Management continue to focus on revenue growth opportunities and are investing in human resource across the country in order to grow the business further and improve the operating profit performance.”
- Even with the loan impairment and including very low margin UK installation and maintenance income (see Middle East and non-hire), UK profit represented a healthy 27% of UK revenue:
- The UK subsidiary margin has topped 20% since at least FY 2004.
- The UK subsidiary accounts also show the division improving its equipment efficiency following the pandemic.
- Hire revenue (£43m) versus the original cost of the hire equipment (£41m) came to 1.05x — just a fraction below the 1.08x average seen prior to the pandemic:
- UK hire revenue at 1.05 times the value of UK hire equipment alongside a subsidiary margin of 27% means the UK division takes less than four years to recoup the original cost of its equipment (before tax).
- Although ASY’s website lists 32 UK depots, the 2021 annual report says the UK division operates from 26 locations:
“Our main UK trading subsidiary, Andrews Sykes Hire, has 26 locations covering the UK and employing around 300 members of staff.”
- I am not sure why the website and annual report do not agree on depot locations.
- Revenue per UK depot for FY 2021 was therefore £1.4m or £1.8m depending on which depot/location denominator is chosen.
- The number of UK depots looks to have reduced over time. The 2013 annual report said the main UK subsidiary operated from 30 locations, but the 2014 report said 28 locations and the 2018 report then said 26 locations.
- Europe remains ASY’s main opportunity for growth.
- Between FYs 2011 and 2021, European revenue expanded from £9m to £19m to represent 26% of total group sales:
- H2 witnessed European revenue reach 27% of the group’s top line:
- ASY’s European operations consist of:
- Opened FY 1971
- 4 depots (Amsterdam, Bleiswijk, Hoogeveen, Oirschot)
- Opened FY 2007
- 2 depots (Antwerp, Brussels)
- Opened FY 2011
- 3 depots (Bologna, Milan, Verona)
- Opened FY 2012
- 6 depots (Lille, Lyon, Marseille, Nantes, Paris, Toulouse)
- Opened FY 2013
- 2 depots (Geneva, Zurich)
- Opened FY 2014
- 1 depot (Luxembourg)
- Twelve European depots have opened since FY 2011 to take the region’s total to 18.
- Revenue per European depot looks to have decreased during the last decade:
- European revenue of £9m from six depots gave revenue per European depot of £1.5m for FY 2011.
- But European revenue of £19m from 18 depots gave revenue per European depot of £1.1m for FY 2021.
- Reduced revenue per European depot most likely reflects the extended time required to build a notable presence within new markets. ASY has opened depots with Italy, Luxembourg, France and Switzerland during the last ten years.
- Further European depots alongside revenue per European depot one day matching the £1.4m (or even £1.8m) UK equivalent should see Europe become a much more significant contributor to overall group progress.
- Mind you, opening twelve depots during the last decade could mean future European growth will be slow going.
- European progress during FY 2021 nonetheless appeared very satisfactory:
- Netherlands: “This subsidiary performed exceptionally well with total revenue 26% above that of the previous year.”
- Belgium: “Turnover increased 26% as compared to prior year.”
- Luxembourg: “This subsidiary produced 41% growth during the year…”
- Italy: “…this business provided another record result in 2021 with turnover up 20% as compared to 2020″.
- France: “Turnover for 2021 finished the year 13% favourable to the comparable number for 2020.“
- Switzerland: “Following a small operating loss in 2020, our Swiss operation returned to profitability in 2021 with turnover increasing 94% to that achieved in 2020.“
- European operations enjoyed a robust 27% margin during FY 2021.
Middle East and non-hire
- ASY’s Middle Eastern operations suffered from ongoing pandemic restrictions and fewer construction projects.
- Middle Eastern revenue dived 24% while divisional profit — which since FY 2015 had been running at between £2-£3m a year — collapsed to just £301k:
- The paltry Middle Eastern profit was due to the estimate of future unpaid debtors increasing by £1m:
“In 2021, debts written off against the expected credit loss provision were £449,000 compared with £477,000 last year, and there was a net charge of £1,470,000 (2020: £490,000) to the income statement from the expected credit loss provision, which was calculated on a consistent basis each year.
Of these figures, £306,000 (2020: £456,000) of the debts written off and £1,204,000 (2020: £441,000) of the expected credit loss charge related to external debtors of our subsidiary in the Middle East.“
- Group operating profit would have been 5% higher — and set a new record at £21m — were it not for the extra Middle Eastern provision.
- The prospects for ASY’s ‘Other’ operations — which sell, install and maintain equipment — do not appear favourable:
- ‘Other’ revenue had been running at a regular £11m until FY 2016, since when such revenue has dropped to £7m.
- Installation and maintenance services do not generate much profit:
- And equipment sales may not generate much — or any — profit either.
- Such sales came to £4.6m during FY 2021…
- …but the cost of stock (which presumably represents the equipment sold) was £10.2m:
- The cost-of-stock-sold figure may be inflated by ASY reclassifying certain stock as fixed-asset hire equipment (see Financials: cash flow and working capital).
Financials: margin and return on equity
- ASY’s accounts remain in very good shape.
- The aforementioned high margins within the UK and European divisions ensured another year when group revenue converted into more than 20% of profit:
- Return on equity (ROE) also remains at appealing levels:
- Note that the pandemic has limited ASY’s returns on retained profit.
- During the five years to FY 2021, earnings increased by just £1m while net asset value (or shareholder equity) advanced by £15m:
- Reinvesting £15m over five years for an additional £1m is not ideal.
- That said, the largest balance sheet entry for FY 2021 — and for the ten years before that — was cash:
- Cash yielding very close to zero does not enhance ROE calculations.
- Indeed, net cash has increased by £12m to £29m during the five years to FY 2021 — which eases concerns about ASY reinvesting profits at low rates of return.
- Exclude the higher net cash, and ASY has arguably reinvested £3m for extra profit of £1m.
- The concern perhaps is ASY retaining too much cash.
- ASY paid a £10m special dividend during FY 2020 when net cash was £30m:
“As at 22 July 2020, the Company had net cash reserves* of approximately £29.9 million. The Board has assessed the Company’s ongoing cash requirements under a range of forecast scenarios and has concluded that, as a result of the Company’s expected robust cash generation, a portion of these cash reserves is surplus to the Company’s requirements.“
- Wishful thinking perhaps, but net cash now at £29m could mean shareholders will not have to wait too long for another supplementary payment.
Financials: cash flow and working capital
- ASY’s rising cash position reflects controlled capital expenditure and consistent working-capital management.
- Cash flow for FY 2021 was enhanced by spending only a net £1m on tangible assets:
|Year to 31 December||2017||2018||2019||2020||2021|
|Operating profit (£k)||17,589||20,681||19,298||14,756||19,923|
|Net capital expenditure (£k)||(4,929)||(6,198)||(5,522)||(3,538)||(1,357)|
|Working-capital movement (£k)||(1,155)||(4,292)||(5,592)||647||(966)|
|Net cash (£k)||20,293||23,381||23,897||20,521||29,443|
(*excludes IFRS16 depreciation)
- ASY’s capital expenditure is complicated by the company acquiring equipment for resale but then capitalising a proportion of that stock into the hire fleet:
- Such stock-to-fixed-asset transfers are unusual, but presumably reflect ASY offering for hire any equipment that could not be sold direct.
- Between FYs 2017 and 2021, stock with an aggregate £10m value was reclassified into the hire fleet.
- This £10m is arguably capital expenditure rather than working-capital investment.
- The table below adjusts the working-capital movements and capital expenditure for the £10m:
|Year to 31 December||2016||2017||2018||2019||2020|
|Operating profit (£k)||15,815||17,589||20,681||19,298||14,756|
|Working-capital movement (£K)||(2,157)||(1,155)||(4,292)||(5,592)||647|
|Stock transferred (£k)||2,156||1,460||2,407||1,090||2,844|
|Adjusted work-cap movement (£k)||(1)||305||(1,885)||(4,502)||3,491|
|Net capital expenditure (£k)||(4,719)||(4,929)||(6,198)||(5,522)||(3,538)|
|Stock transferred (£k)||(2,156)||(1,460)||(2,407)||(1,090)||(2,844)|
|Adjusted net capex (£k)||(6,875)||(6,389)||(8,605)||(6,612)||(6,382)|
(*excludes IFRS16 depreciation)
- ‘Adjusted’ working capital absorbed aggregate cash of just £3m (and not £13m) during those five years.
- ‘Adjusted’ capital expenditure meanwhile came to £35m — just £2m more than the associated five-year depreciation charge.
- That £2m difference is very acceptable given aggregate operating profit was £88m during the same five years.
- Emphasising a conservative depreciation policy, ASY has recorded a small profit over the book value of sold equipment every year since at least FY 2005:
- Despite the aforementioned problems with Middle Eastern invoices, net trade receivables at £18m remain close to ASY’s typical 23% of revenue:
- ASY revealed a £3m loan was cleared after the year-end to leave the balance sheet free of conventional debt:
“On 30 April 2017, the group took out a new five-year bank loan of £5 million. This loan was repayable in four annual instalments of £0.5 million commencing 30 April 2018, followed by a balloon payment of £3 million on 30 April 2022.“
Financials: pension scheme
- ASY’s defined-benefit pension fund demonstrates how long-term pension accounting does not always reflect the near-term cash reality of a pension scheme.
- Although ASY’s balance sheet continues to show a scheme surplus…
- …these FY 2021 results reiterated the need for additional scheme funding.
- A one-off £600k was paid into the pension during FY 2020…
“The last triennial funding valuation was as at 31 December 2019. A draft funding valuation was presented to the Board of directors in early summer 2020, and the group made a one-off contribution of £600,000 in late May 2020 to largely eliminate the funding deficit as at 31 December 2019 as indicated by that draft valuation.
- …while £1.3m will be paid into the scheme during FY 2022 versus the standard £120k for FYs 2023, 2024 and 2025.
“In accordance with this schedule of contributions and recovery plan,the group will be making regular contributions of £110,000 per month for the period 1 January 2021 to 31 December 2022, and £10,000 per month for the period 1 January 2023 to 31 December 2025, or until a revised schedule of contributions is agreed, if earlier. Consequently, the group expects to make total contributions to the pension scheme of £1,320,000 during 2022.“
- Although paid benefits from the scheme dropped to £1.8m during FY 2021 following three years of paying at least £2m…
- …scheme assets of £48m do not seem enough to sustain annual benefits of £2m (and scheme admin charges of £100k-plus) when contributions drop to £120k a year from FY 2023.
- Unless paid benefits reduce significantly, the scheme may well need much more than £120k a year through employer contributions to limit the chance of the scheme’s assets being eroded.
- Note that extra pension contributions bypass the income statement, with the cash flow statement highlighting the expense that is not charged to earnings:
- ASY provided very detailed and very welcome ‘going concern’ text within its 2019, 2020 and 2021 annual reports.
- ASY’s “reasonable worst-case trading scenario” for FY 2022 included the following assumptions:
- “Normal level of dividends will be maintained during the 12 months subsequent to the date of approving the accounts;
- No new external funding sought;
- Hire turnover and product sales reduced by 12% versus budget—a similar variance when comparing 2021 actual results to 2021 budgets;
- All overheads continue at the base forecast level apart from overtime and commission and repairs and marketing, which are reduced by 5% and travel costs reduced by 2.5%;
- All current vacancies are filled immediately; and
- Capital expenditure is reduced by 5%.“
- “Normal” dividends being maintained during a “reasonable worst-case trading scenario” sounds encouraging.
- Hire turnover and product sales being 12% below budget for FY 2021 suggest actual hire and sales revenue of £72m could have been more like £82m in a pandemic-free year.
- ASY confirmed revenue would have to drop below £50m before any financial concerns arose:
“Given these assumptions, and for modelling purposes only, assuming dividends are maintained at normal levels, group turnover could fall to below £50 million on an annualised basis without any liquidity concerns. Due to the level of confidence the Board has in the future trading performance of the group, this scenario is considered highly unlikely to occur.”
- The £50m level was an improvement on the £55m cited within the 2020 annual report.
- The going concern text did not sound too encouraging about post-year trading:
“Whilst profitability and cash flow performance to the end of February 2022 has been close to expectation…“
- But the 2020 annual report said the exact same thing the previous year…
“Whilst profitability and cash flow performance to the end of February 2021 has been close to expectation…”
- …only for ASY to deliver a better-than-expected H1 and this satisfactory FY 2021 performance.
- ASY did not provide any detail on FY 2022 trading, and limited its outlook comments to the following sentence:
“The group is confident in its core markets, its revenues and its profits.
- But ASY did express “optimism” for the year ahead (by using the same wording contained within the 2020 annual report):
“The Andrews Sykes business remains strong: the experience of our senior management team, coupled with our development plans, provide optimism for further progress in 2022 as we navigate out of the pandemic and adapt to the new environment accordingly. The group continues to develop new sales channels and propositions, which will enable the business to take advantage of favourable market conditions and opportunities as they arise.”
- ASY and its blog were kept busy during H1 2022:
- “Andrews warms guests in Six Nations corporate hospitality“;
- “Swift pump hire ensures sewage treatment maintenance project is completed months ahead of schedule“;
- “Divine intervention from Andrews Sykes keeps soul church warm“;
- “Manufacturing plant maintains output thanks to ventilation hire“, and;
- “Andrews delivers eye-catching performance at this year’s Glastonbury“.
- And H2 2022 may be even busier judging by this “Unprecedented heat prompts us to pull out all the stops!” update:
“It’s fair to say that last week’s record-breaking temperatures put quite a strain on our resources. Staying on top of the online enquiries and inbound telephone calls was challenging enough, without the small matter of having to ensure each air conditioning hire was agreed, coordinated and delivered in as timely a fashion as possible… our teams around the country adopted a siege mentality in a bid to combat the seemingly never-ending flow of requests.“
- Whether this year’s long scorching summer — and the “seemingly never-ending flow of requests” for air conditioners — is just a freak occurrence or becomes the norm within the UK and Europe remains to be seen.
- But extreme weather conditions do seem to be occurring with greater frequency, which ought to be favourable for ASY’s hire services.
- FY 2021 operating profit excluding furlough payments but including IFRS 16 lease financing was £19.4m. Taxed at the upcoming 25% UK standard rate gives earnings of £14.5m or 34.5p per share.
- going-concern text alluding to budgeted revenue of £82m;
- enormous summer demand for air conditioners, and;
- an improved Middle Eastern performance…
- …could easily see FY 2022 register new highs for revenue and profit.
- Revenue of, say £85m, leading to operating profit of say, £23m, could then lead to earnings of approximately 39p per share after 25% tax.
- Subtract the £29m net cash position from the £219m market cap, and the underlying business is arguably valued presently at £190m or 450p per share.
- Whether the entire net cash position is truly ‘surplus to requirements’ is debatable, given ASY has operated with net funds of at least £15m since FY 2012.
- Depending on your view of earnings (trailing 34p per share or possibly 39p per share) and the cash position (truly surplus or not), ASY’s P/E could be 11.5x, 13.1x, 13.3x or 15.1x. The average of 13.3x feels about right.
- A possible 13.3x multiple hardly seems expensive for a high-margin and cash-rich business that proved reasonably resilient during the pandemic, could well be enjoying an FY 2022 heatwave bonanza and may have further expansion opportunities within Europe.
- Bear in mind ASY’s P/E has rarely climbed to a premium rating:
- Keeping a lid on the P/E may be:
- The very limited free float (the chairman and his family control 90% of the shares);
- The profit ups and downs due to the weather, and/or;
- A possible lack of economies of scale.
- ASY’s economies of scale may not be fantastic.
- That earlier chart of UK hire revenue versus UK hire-equipment cost…
- …shows a consistent limit between the cost of the hire equipment and the revenue then generated from that equipment.
- Revenue per employee bobbing within the £100k-£130k range could be further evidence of extra revenue requiring a commensurate level of extra (employee) expense:
- A sustained P/E re-rating may therefore require ASY to discover how to generate more revenue from its existing hire equipment and workforce, rather than relying solely on opening more depots.
- The 24.4p per share full-year dividend meanwhile supplies a 4.7% income at 520p.