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Sureserve Group PLC (SUR)

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Tuesday 02 February, 2021

Sureserve Group PLC

Preliminary Results

RNS Number : 6349N
Sureserve Group PLC
02 February 2021
 

2 February 2021

Sureserve Group plc

 

("Sureserve" or the "Group")

 

 Preliminary Results for the year ended 30 September 2020

 

Strong performance ahead of expectations; stable platform for growth

 

Sureserve, the compliance and energy services Group, is pleased to announce its preliminary results for the year ended 30 September 2020.

 

Bob Holt, Chairman of Sureserve, commented:

 

"I am delighted with Sureserve's performance in what has been an extraordinary year. Our priority throughout the Covid-19 pandemic has been the safety and well-being of our people, whose hard work and commitment has allowed us to post an impressive performance. Even during the pandemic, we have continued to invest in the training and development of our people.  

 

"During 2021 we are focussed on making further gains across both Energy Services and Compliance, particularly given our crucial work in helping the UK reach its commitment to create a net zero carbon economy by 2050. In this vein, it was pleasing that the Group reported carbon neutral operations during FY20. We also remain committed to helping tackling fuel poverty across the UK over the years ahead.

 

"Given our strong performance, healthy balance sheet and confident outlook the Board is recommending a final dividend of 1 pence per share. We have a solid platform for further growth, underpinned by our continued focus on regulatory-driven sustainable revenues and targeting growth both organically and through acquisition. We have started FY21 strongly and, with 77% of revenues covered by our £355.8m order book, we look forward to the business continuing on this growth trajectory."

 

Financial overview

 

· Revenue from continuing operations down 7.7% from £212.1m to £195.7m following significant Covid-19 impact

· Operating profit before exceptional items and amortisation of acquisition intangibles of £10.4m (2019: £9.4m, 11.2% growth despite revenue impact above)

· Profit before tax from continuing operations up 45.9% from £5.3m to £7.8m

· Profit before tax from continuing operations before exceptional items and amortisation of acquisition intangibles of £9.4m (2019: £8.3m)

· Earnings per Share (EPS) from continuing operations up 48.1% to 4.0p (2019: 2.7p)

· EPS excluding amortisation of acquisition intangibles and share based payments of 4.9p (2019: 4.4p)

· Operating cash conversion from continuing operations (pre-IFRS 16) of 126% (2019: 106%)

· Year-end net cash (pre-IFRS 16, and allowing for deferred VAT payments)   £9.8m (2019 net debt: £7.4m)

· Order book of £355.8m(2019: £333.2m)

· Full-year proposed dividend of 1p, an increase of 100% (2019: 0.5p)

Operational overview

 

· Compliance and Energy Services well established, low risk divisions with good visibility and operational leverage

· Outstanding record of 128 contract wins valued at £202.8m

· The Group achieved carbon neutral operations within the period

· Implemented safety measures to ensure the wellbeing of our people and our clients' customers

 

Outlook 

 

· Participating in a total of 94 frameworks worth a total of £382.1m at year end (2019: 96 frameworks worth £592.7m) 

· Well-placed to deliver a clear growth strategy in our market-leading gas services division 

· 77% of FY21 revenue covered by the order book worth £355.8m, providing good visibility of non-volatile revenue streams

· The Group is well-positioned for further organic growth in a fragmented and regional market 

· Strong start to trading in FY21 continuing the Group's momentum 

 

Enquiries

 

Sureserve Group 

 

Bob Holt, Chairman and Chief Executive

07778 798 816

Peter Smith, Chief Financial Officer 

07590 929 431

 

Camarco (Financial Public Relations) 

 

Ginny Pulbrook

020 3757 4992

Ollie Head 

 

 

 

Shore Capital (Nominated adviser and broker)

 

Antonio Bossi

020 7408 4050

Mark Brown

 

Fiona Conroy

 

 

Notes to editors

Sureserve is a leading compliance and energy services group that performs critical functions in homes, public and commercial buildings, with a focus on clients in the UK public sector and regulated markets. Services are delivered through two divisions: Compliance and Energy Services.

 

The Group was founded in 1988 and is headquartered in Basildon. It currently employs some 2,162 staff from 22 offices across the UK.

 

 

Executive Chairman's statement

Introduction  

I am pleased with Sureserve's performance in what has been an extraordinary year, with results ahead of both market expectations and our own internal targets. 

 

Our priority throughout the Covid-19 pandemic has been the safety and well-being of our people, whose hard work and commitment has allowed us to post a good performance. Even during the pandemic, we have continued to invest in our people, their training and development. The Sureserve Academy, the Group's central hub for all learning and development, is available to all staff and provides a wide range of training protocols for individuals at all levels in the business. It was a precondition of supporting our apprentices on full pay that they remain committed to completing their training during lockdown. At the end of the lockdown period we took the view that there would be very few redundancies and have continued to be an employer of choice. In line with Cabinet recommendations we have ensured that all our suppliers and other creditors have been paid in line with their agreed terms. During the first period of lockdown our Scottish Energy and Smart Metering businesses were placed on hold by their clients and only contracted to carry out emergency type services. The joint ventures with the Scottish and Welsh Governments were also subject to significant lockdown restrictions, again carrying out primarily emergency services.

 

Despite these operational constraints, our Energy Services businesses have continued their focus on client relationships and advancing service delivery, making sure their teams are ready when normal services have resumed. In Everwarm we have developed technical expertise in the provision of a range of alternative energy solutions where we see significant growth in future markets. A significant part of the Group's services are provided into the public sector at both local and central Government levels and the Government's announcement in November regarding plans for a green recovery and their detailed ten-point plan present the Group with substantial opportunities in this area. 

With the expertise and skill-sets already in place to deliver services in the sustainability sector, our market leading position in gas testing further provides us with the platform to be at the forefront of the energy transition towards the use of more sustainable, greener energy systems in the future. These businesses performed well within the period, benefitting from key worker status and able to continue services during periods of lockdown.  

Demand for the Group's services continues to be strong, operating in highly regulated public sector energy management sectors. Our water treatment, fire and electrical, and two of the gas testing businesses had record years for revenue and/or profitability. 

Trading performance 

The Group made excellent trading and operational progress throughout the year and exceeded both internal and external trading forecasts.  At the end of July we paid off all outstanding debt to NatWest becoming debt free for the first time in our history as a public company.  Our cash management in the year was excellent, generating 126% operating cash conversion against EBITA (pre-IFRS 16). 

The Group has followed Government guidelines and policy during the Covid-19 pandemic. This includes access to applicable financial support where appropriate. Given the range of impacts seen across the Group following Government-imposed restrictions, we took the decision to participate in the Coronavirus Job Retention Scheme ('CJRS') where operations had been affected by Covid-19.  

Our basic earnings per share from continuing operations increased to 4.0p from 2.7p in 2019 and our basic earnings per share from continuing and discontinued operations grew to 4.0p from 3.2p in 2019. Our normalised basic earnings per share from continuing operations (adjusted to exclude amortisation of acquisition intangibles and share-based payments) are 4.9p, up on 4.4p in 2019. Our bidding pipeline remains strong and we were awarded £202.8m of contracts in the year under review. The Financial Review gives a full review of all these results. 

Our growth trajectory 

We believe we are the leading provider of gas installation and testing services to the public sector in the UK. We also hold long term joint venture contracts with both the Scottish and Welsh Governments. We have first class service level performance which has given the Group an enviable positioning when bidding for larger multi-location contracts for large public sector, regional and national property owners. In addition we hold a number of relationships with clients who buy more than a single Group service. 

Organic growth from continuing operations was strong during the year, with important contract wins strengthening our presence across the UK. These include a contract extension to November 2021 for the Arbed Am Byth contract with the Welsh Government, as well as two significant awards within Smart Metering. 

In the year we successfully bid for and won a number of contracts in our gas services businesses with Homes for Haringey, Southern Housing, Hinckley and Bosworth Council, Stonewater, Colchester Borough Council, Clarion Housing, Ongo Homes and Harrogate Borough Council. 

The UK's commitment to creating a zero-carbon economy presents a strong growth platform for our energy and gas businesses. With an already established presence in the market, our businesses benefit from continued investment in developing newer forms of energy efficiency services and strengthened bid teams to explore new prospects. The Group has also delivered carbon neutral operations in the period thanks to carbon savings delivered via work undertaken by Everwarm, underpinning our plans to help the UK achieve net zero. 

The order book stands at £355.8m demonstrating a strong platform for future work and, pleasingly, the average contract length has increased to four years. 

Our people 

Across the Group, training is an essential platform to further develop our workforce. It allows us to bridge the skills gaps in many of our operational specialisations, as well as provide structured progression opportunities for potential managers and leaders. The Sureserve Academy consolidated its activities across the Group and throughout the Covid-19 pandemic we have invested significant resources into the training and development of the workforce. 

It would be remiss of me to fail to recognise formally the excellent management of the pandemic in the first instance by our human resources and our health and safety teams. Maria McGettigan and Sarah Eddy are to be commended for their commitment to provide the business with daily updates and policy changes on legislation. Without the diligence of those individuals and their teams I do not believe we would have achieved the good trading results and as excellent a record of managing Covid-19 as we have.

Building on our strategy 

During the year we have continued with our growth strategy, focused on Compliance and Energy Services to maximise the opportunities provided by a stable base of regular recurring and predictable revenues and profits. 

· Operational excellence : we achieve a high level of new contract awards and keep our existing clients happy 

· Geography : working in sectors which have traditionally been predominantly regional we have achieved scale and geographical coverage 

· Focused divisions : in our market we believe that focus is the key. We have focused businesses in the sectors we have targeted which means we have a profitable and cash-generative business that is understood by all stakeholders 

· Working together : cross-selling has proved successful in the past and we have good track record at delivering a number of services to the same client 

Dividend

In accordance with the principles of sound financial management and good governance, the Board aims to maintain a dividend that both recognises shareholder needs and expectations while retaining sufficient capital to drive future growth. The Board proposes a final dividend payment of 1 pence per share and it is the Board's intention to continue to consider future dividend payments based upon the trading performance of the Group.

Outlook

We have a solid platform for further growth, underpinned by our continued focus on regulatory-driven sustainable revenues and targeting growth both organically and through acquisition. In December we acquired Vinshire Gas Services Limited, an East Midlands gas testing business, and welcomed 100 new staff into the Group.  With 77% of FY21 revenues secured and a total order book of £355.8m, we look forward to the business continuing on its current growth trajectory. We have started FY21 strongly, though we recognise the impacts of continued Covid-19 lockdowns and their potential disruption to our business

During 2021 we are focused on making further gains across both Energy Services and Compliance, particularly given our crucial work in helping the UK reach its commitment to create a net zero carbon economy by 2050. In this vein, we are looking to repeat our performance in FY20 and report carbon neutral operations once again during FY21. We also remain committed to helping tackle fuel poverty across the UK in the years ahead.  

 

We are focused on being a stable, growing and cash-generative Group that delivers operational excellence and builds strong relationships in highly regulated sectors that deliver significant recurring revenues from a debt free platform. We have a strong platform for growth, based on good relationships with governmental contracting organisations throughout the UK and especially with staff who are ultimately responsible for contracting the services we provide.  

 

We will continue to invest in our growing and increasingly skilled workforce, ensuring that the residents and communities we serve are provided the best the market has to offer, as well as the comfort and safety necessary for their well-being. 

I personally look forward to bringing you further good news in the future. 

Bob Holt OBE

Chairman and Chief Executive

 

 

Operational review

Covid-19 response

As communicated through our half year interim reporting, the unprecedented situation presented by the Covid-19 pandemic and associated Government response measures resulted in significant challenges for Group operations, as with so many others. The safety of our employees and customers has been paramount throughout and will continue to be our absolute priority. Our focus has been serving our customers in the safest manner while protecting the wellbeing of colleagues and minimising virus spread risk. Part of this response has been ensuring 'Covid-Secure' status through NQA verification standards.

Our Human Resources and Health and Safety teams have developed and delivered clear and thorough protocols for all of our people, both home-based and those colleagues out in the field along with our ICT teams having delivered the necessary technological platforms for new work systems to be available where needed. Throughout the pandemic we have witnessed repeated examples of voluntary support and assistance by our key workers to the communities we serve and the individuals within them.

The Group have implemented clear protocols and procedures to ensure that all of our employees are working in a safe and secure environment. This includes ensuring that all our premises have undertaken comprehensive Covid-19 Risk Assessments to ensure that our offices are Covid Secure. We have also had this externally verified by a third party certification body (NQA) at a number of our businesses to give our employees, clients and key stakeholders assurance.

By adhering to Government Guidance and the steps we, as a responsible collective Group have proactively taken, we advocate that all our colleagues stay alert by:

· Maintaining social distancing measures at all times - 2 metres apart where possible;

· Ensuring they thoroughly wash/clean their hands regularly - adequate hand washing facilities and/or sanitising products are made available to all colleagues;

· By agreement with Line Manager and HR Department, work from home where appropriate;

· Limiting contact with other people, where at all possible;

· Office rotas are in place to prevent too many people from being in small spaces;

· Phased working time and/or hours;

· One-way systems around our larger offices with different entry/exit points;

· Wearing a face covering when they are in an enclosed space where it is difficult to socially distance e.g., on public transport

· The mandatory wearing of a face covering or mask in our premises when in communal areas

 

Our Covid-19 Risk Assessments have been developed in consultation with our colleagues and clearly establish the control measures we have put in place. Due to the nature of our organisation and its various geographical locations, each Business has undertaken this Risk Assessment in the desired format - however all assessments have been reviewed and approved by the Senior Management Teams and our Safety, Health, Environment and Quality (' SHEQ') Managers via the ongoing SHEQ Forum. We also have comprehensive RAMS (Risk Assessments/Method Statements) for all field-based works which cover all elements and potential new risks around Covid-19.

The SHEQ Forum consisting of all health and safety professionals across the Group continue to have weekly calls to share best practice, drive continual improvement and ensure that the everchanging Government Guidance is adhered to accordingly. Weekly Safety Updates are also being communicated to all of our colleagues as part of this process, covering general safety elements alongside any Covid related elements.

While the pandemic continues to present new challenges, we remain confident in our ability to proactively manage and respond accordingly to developments. The more streamlined and focused structure of the Group following strategic action taken in previous years has undoubtedly benefited us during this time. While uncertainty continues around the worldwide response to the pandemic, we remain confident in our future with a strong order book value and good visibility on future earnings, underpinning a robust financial outlook.

 

Group Summary

Alongside the critical Covid-19 response actions, the Group has remained focused on strengthening its position as a leading compliance and energy services group. Our cash-generative core delivery areas of Compliance and Energy Services remain well placed to deliver predictable, recurring and profitable revenue streams.

Following a stronger first half to the year including a winter season ahead of expectations, the Compliance division, given the essential nature of its services, was then supported by the 'key worker' classification by the Government during the initial phase of the Covid-19 pandemic. Continued contract wins, the ongoing focus on efficiency, further aided by a mix of works, reduced material usage and improved fleet travel efficiency during lockdown all contributed to an EBITA margin in excess of our expectations. While unfortunately Energy Services saw reduced trading and profit contribution as it was not afforded the same 'key worker' status during the pandemic, it remained profitable for the year. The impact from non-working staff was in part mitigated by utilising the Government Coronavirus Job Retention Scheme where appropriate. We are confident that this was a short-term impact due to the UK-wide lockdown from March as trading within the division returned to normalised levels in the latter months of the financial year.

The overall Group performance was very pleasing against the background of Covid-19 and demonstrates the resilience of the business model, with a basis of predictable and recurring incomes in areas supported by non-discretionary and regulatory led spend. Following the robust trading performance and a continued emphasis on cash conversion, we were also delighted to announce that the business had moved into a net cash position by year end, even allowing for deferred VAT payments in line with HMRC guidelines. Given trading was impacted as a result of the Government pandemic response measures and restrictions, businesses within the Group applied for and received Government support as applicable.

 

Financial performance

· Operating profit before exceptional items and amortisation of acquisition intangibles: £10.4m (2019: £9.4m, 11.2% growth despite revenue impact below)

· Revenue from continuing operations: £195.7m (2019: £212.1m, 7.7% reduction following significant Covid-19 impact)

· Profit before tax from continuing operations: £7.8m (2019: £5.3m, 45.9% growth)

· Year-end net cash (pre-IFRS 16): £9.8m (2019 net debt: £7.4m)

 

We are delighted that our clear strategy and focused approach of a more streamlined structure as previously articulated is proving resilient, despite the unique challenges of the past year.

 

Looking forward

We remain optimistic around opportunities for continued growth within both divisions, which underpin the future strategy of the Group, though we recognise the impacts of continued Covid-19 lockdowns and potential disruption to our business . Compliance revenues increased despite the Covid-19 pandemic and Energy Services, we believe, witnessed a temporary reduction, both suggesting a positive outlook. There are many opportunities for growth ahead, including the Green Homes Grant announced in July 2020 by the Government and an increased focus on the net zero target for carbon emissions by 2050. Both divisions remain a core focus moving forward.

The Board is encouraged by the high bidding success rates continuing to be achieved by the Group with the year-end order book of £355.8m (2019: £333.2m). This provides predictability of our future incomes and allows longer term planning to occur, which helps drive efficiency. Efforts remain targeted on longer term contracts we believe we can deliver effectively and profitably, or, in the case of frameworks, that provide future opportunities to generate returns in our core areas. The order book remains strong across our continuing business lines as we continue to focus on securing contracts with long term visibility and robust value. The investment in strengthening the senior bid team reported earlier this year is aligned to this approach, as the Group looks to maximise opportunities.

This provides us with great certainty over future workstreams and we remain confident in the growth and prospects for both of our core divisions within the Group.

 

Compliance division

The division comprises planned and responsive maintenance, installation and repair services delivered predominantly to local authority and housing association clients in the areas of gas, fire and electrical, water and air hygiene and lifts. These services provide for clients' social housing and public building assets, as well as industrial and commercial properties. The division is seeing the benefits of a wider pool of clients and a number of long term contract wins which underpin the revenue model, with increasing mandatory service requirements that provide significant future opportunities.

The larger component of revenue growth were the Gas Compliance businesses with K&T delivering the most significant increase and now in excess of £40m revenues, and with some growth in Sure mitigating a similar reduction in Aaron. Strong revenue growth was delivered within fire and electrical also, with water services showing a small increase and some significant electrical wins further supporting the positive overall positioning of the division. This was achieved despite the challenges of the pandemic, without which we believe growth would have been more significant and more aligned with H1 levels (12% growth).

Compliance: year ended 30 September

2020

2019

Change

Revenue (£m)

137.2

133.1

3.1%

Adjusted EBITA (£m)

11.8

8.5

39.5%

Adjusted EBITA margin

8.6%

6.4%

2.2ppts

 

Overall, revenue increased by 3.1% to £137.2m (2019: £133.1m). EBITA increased by 39.5% to £11.8m (2019: £8.5m), resulting in an underlying EBITA margin of 8.6%, up by 2.2ppts. Revenues increased in all trading Compliance businesses, with the exception of our lift operations and Aaron as previously noted. The increases continued to reflect greater volumes of work and opportunities with clients driven by contract wins and extensions in addition to increasing regulatory demands in the sector, despite the negative effects seen over the summer months due to the Covid-19 pandemic. The revenues seen are largely recurring and further growth helps to reaffirm our belief we are a market leading provider of services in the gas sector.

As previously communicated, additional revenues helped drive margin improvements through efficiencies in delivery, geographical reach and minimal change in business overhead. A continued growth in higher margin commercial works has increased overall profitability in 2020, alongside the better than expected first half of year performance and some of the mitigating factors during lockdown, including mix of works, material usage and fleet travel efficiency. Together these have resulted in this performance ahead of expectations and driving improved margins.

In relation to the Building Compliance businesses, the reduction in our lift business revenues was small and entirely due to a slowdown in project work during lockdown. Changes previously made to the senior management team have now started to positively impact performance, with the business now into profitability, despite the small decrease in revenues. The fire and water businesses have continued to show strong performance and profit contribution.

The nature of our Compliance businesses is one of core services including vital emergency repair and testing cover to our local authority and housing association customers, to ensure compliance with gas, electricity and building testing regulations. It was therefore crucial they continued to perform their essential services and this is why the Government has recognised many of our employees within their 'key worker' classification throughout the Covid-19 outbreak to date.

The division may continue to experience some delays in accessing certain residential and communal properties to undertake work as a result of the Government measures in response to Covid-19, including physical distancing and travel restrictions. Some local authority customers have, where work is considered of a lower priority or not essential, chosen to defer certain elements at points during the pandemic to date. The division received £2.3m of job retention scheme money from the Government in the year in order to ensure the provision of essential services and retain our workforce despite a reduction in work during the period. We remain in regular contact with all of our clients, making sure we understand their specific challenges and requirements. This has resulted in solutions being found to deliver the works as soon as is reasonably practicable, while ensuring that we do everything we can to prevent the spread of the virus during the delivery of our services.

 

Gas Compliance

The three Gas Compliance businesses (Aaron Services, K&T Heating and Sure Maintenance) make up 74% (2019: 74%) of divisional revenues and further built on the progress made in FY19 with another excellent year of revenue growth from recurring incomes and new works, despite Covid-19 impacts.

Aaron Services, delivering gas compliance, alternate fuel and renewable solutions across East Anglia and the Midlands, saw some reductions in revenue in comparison to the extremely successful 2019, due mainly to the Covid-19 impacts. Wins noted in our interim reporting included up to £8.4m of gas boiler upgrades and electrical testing works with Hinckley and Bosworth council, and Stonewater works of £4.0m for a repair and testing contract. Other significant wins in the year include electrical testing estimated at £5.0m with Colchester Borough Council, £2.7m over five years for renewable and new technology works with Clarion Housing and a further £2.7m of ground source heat pump installation works over two years with Newcastle City Council.

K&T Heating's trading performance has been extremely strong and it maintained its position as the largest of our three gas businesses, with annual revenues now exceeding £40m. The business delivers gas compliance services across London and the South East. The highest single value gas contract win in the year was with Homes for Haringey for up to five years of gas servicing, repairs and installations, worth an estimated maximum of £14.0m, and with numerous other smaller wins and extensions. Wins previously reported include £4.9m with Southern Housing for gas servicing and maintenance works over a five-year term.

Sure Maintenance, which delivers gas compliance services across the UK, saw a number of sizeable wins in excess of £1.0m with Halton Borough Council for mechanical maintenance and servicing and both Ongo Homes and Harrogate Borough Council for servicing, maintenance and repair of heating systems. Sure had previously won a £3.9m award for gas service and testing works with Your Housing.

 

Building Compliance

Our Building Compliance businesses comprise Sureserve Fire & Electrical ('SS F&E', previously Allied Protection), H2O Nationwide and Precision Lift Services and make up 26% (FY19: 26%) of the divisional revenues.

Precision delivers lift installation and maintenance services to local authorities and social housing associations across the UK. Following a challenging 2019, the current year showed more positive progress with the business now into profitability, despite the Covid-19 challenges. The largest win in the year was a five-year lift service, maintenance and repair contract worth £0.8m with the Salvation Army Housing Association, with other smaller service-led contract wins being delivered also, in line with the strategy to grow the business with predictable recurring revenues.

SS F&E remains the Sureserve Group's specialist provider of fire, electrical and sprinkler compliance services and has followed up a successful 2019 with further progress and contract wins. These included £3.0m over four years with Crescent Purchasing Consortium for fire alarm, detection and suppression systems, Stonewater for a £3.0m firefighting equipment repair and maintenance contract and in excess of £4.0m with Newport City Homes for sprinkler installation works.

H2O is our water and air risk assessment specialist provider across the UK. Performance of the business has continued to be strong with a full order book and exceptional client delivery. The business has again driven efforts to grow despite impacts from Covid-19 and delivered a number of wins in the period. This is particularly pleasing as we believe it demonstrates an ability to find other avenues for growth, with some of our more regular clients such as restaurants, hotels and gyms not trading through periods of the pandemic. The largest individual win was a £0.8m contract for the maintenance and repair of water systems including legionella risk assessments with Southend Borough Council over four years. These newer clients, in addition to ongoing works, will continue to support the growth aspirations of the business.

Our belief remains that the ongoing move towards higher levels of compliance requirements should continue to benefit the Compliance division in future periods. Further growth should increase our buying power further and improve our ability to deliver revenues with improved margins. All businesses are performing well and we are delighted with our positive response to the many challenges presented in the current year.

 

Compliance: Looking forward

Our growth continues to strengthen our position in the compliance sector, with a true national reach and market leading Gas Compliance business. We believe we have built the strongest compliance business of its type, well positioned to grow further in what is a fragmented and regional market. The division is showing predictable and deliverable revenue growth and we remain confident that our leadership within this non-volatile sector provides a strong platform to continue our aims of further growth and cash generation.

The continuity of key individuals and consistent growth have provided us with a stable platform to continue to deliver for our client base. In the short term we, like many others, are experiencing ongoing uncertainty caused by the Covid-19 pandemic. However, we believe that following this temporary disruption to the market our mix of customer proposition and services remains strong and longer term the demand for these works and underlying fundamentals will underpin our future prospects when conditions recover. As a market leader in gas and other testing we believe that opportunities may be forthcoming as a result of other failing contractors.

 

Energy Services division

Our Energy Services businesses provide a range of energy efficiency services such as insulation, heating and renewable technologies for social housing and private homes through the Everwarm subsidiary. Everwarm also uses these services to deliver carbon emissions savings for utility companies enabling them to meet their legislative targets from measures delivered. The business also undertakes energy efficiency projects within non-domestic properties. Our Providor business continues to deliver domestic smart metering installation and recurring asset management services to its utility client base. It is well established as one of the market leaders and is experienced in the ongoing UK-wide Government roll-out, extended recently to 2025.

The division also has an established presence in the installation of electrical vehicle charging points, solar PV works and newer technologies such as battery storage projects which all represent likely growth sectors that our experienced management team is well placed to deliver. The Green Homes Grant scheme announced in July is a further UK-wide opportunity for Everwarm and the wider group.

The Energy Services division remains within an active sector with a number of opportunities for delivery, with £171.2m (2019: £65.6m) of long term contracts to provide confidence over future prospects.

Energy Services: year ended 30 September

2020

2019

Change

Revenue (£m)

60.4

82.1

-26.5%

Adjusted EBITA (£m)

0.8

4.3

-81.8%

Adjusted EBITA margin

1.3%

5.3%

-4.0ppts

 

Overall, revenue decreased by 26.5% to £60.4m (2019: £82.1m). Despite revenues and profitability largely in line with prior year at 31 March 2020 as noted in the interim reporting, both were significantly impacted by the Covid-19 lockdown in the second half. EBITA consequentially decreased by 81.9% to £0.8m (2019: £4.3m), resulting in an underlying EBITA margin of 1.3%, down by 4.0ppts.

The key factor in this performance was that the Energy Services division was not afforded the same 'key worker' status as seen in our Compliance businesses. This was due to a combination of our services delivered and devolved Government approaches around continuation of works, particularly during the initial phases of lockdown. This resulted in a short term reduction in trade within both Energy businesses and joint ventures which required careful navigation. This included the application for appropriate Government support , with the division receiving £4.2m of job retention scheme money from the Government in the year, plus customer and supplier negotiations and the implementation of specific cost control procedures to best mitigate the impact of the Covid-19 outbreak.

Both Providor and Everwarm saw significant reductions in revenues, albeit Everwarm saw a far larger impact while Providor's was in part mitigated by contract wins and an underpin of asset management revenues which were not impacted during lockdown months.

EBITA reduced to £0.8m (2019: £4.3m), with the majority of this being seen in Everwarm due to the significant revenue reduction across all departments. The profit contribution levels of Providor and the joint ventures was largely unchanged overall, with offsetting minor variances. While all were negatively impacted by the Covid-19 pandemic and restrictions, performance across the year was pleasing for each.

Results from the Warmworks and Arbed joint ventures are reported within the Everwarm statutory position although are operated autonomously by local management teams, with group and joint venture partner support as necessary. Warmworks delivers the flagship Warmer Homes Scotland initiative for the Scottish Government and saw positive performance during the full year with an ongoing level of operational excellence, particularly satisfying in light of the challenges presented by Covid-19. This contract runs through to 2022 and brings a diversified installation portfolio for Everwarm, focusing on central heating, boiler improvements and other energy efficiency installation measures.

The Arbed 3 programme for the Welsh Government, via our joint venture with the Energy Saving Trust, is focused on improvements to households often living in severe fuel poverty. The monthly measure installation performance has been more variable for a few reasons, including the specific timings of individual area-based schemes and the Covid-19 pandemic interruption. It has however contributed a small profit for the full financial year and we have recently been informed of an additional six-month extension to November 2021, which is pleasing and allows further opportunity for positive delivery.

As we had previously reported during our interim reporting, carbon prices remained largely stable during the year. However, volumes were impacted by Covid-19 and the ongoing challenges with 'ECO3' due to measure types and qualifying properties. We continue to believe we are well placed to deliver on behalf of our utility partners based on our management team's extensive experience in this area.

 

Everwarm

Everwarm continues to deliver a strong record of contract wins, albeit with revenues for FY20 reduced to a little in excess of £40m . The business supports a range of clients in various energy efficiency projects. Our largest new wins include £5.4m of air source heat pump installation works for E.ON, and up to £10.7m with Argyll Community Housing Association for a mix of external wall insulation and air source heat pump installation as mentioned in our half-year review. We have also seen further wins with Falkirk Council (£4.2m) and Wise Group (£4.0m) to deliver the installation of air source heat pumps. These, along with other smaller delivery wins, support our ongoing ECO3 delivery frameworks and longer term contract works delivering for Warmworks until 2022 and Aberdeenshire on its four-year HIP works, as previously communicated.

 

The business continues to seek and explore new prospects as the sector evolves to develop more efficient and newer forms of energy efficiency technology. We believe Everwarm is extremely well placed to deliver work where appropriate opportunities present. The UK's commitment to creating a net zero carbon economy by 2050 will likely drive further focus on energy efficiency. Already signs are being seen with significant proposed investment through the Public Sector Decarbonisation scheme (£1bn) and Green Homes Grant (£2bn), among others. We believe further developments and commitments are likely and a focus on a 'green recovery' in the wake of the Covid-19 pandemic may further accelerate this.

 

 

Providor

Providor remains focused on existing contract delivery but, following commencement of SMETS2 meter technology giving better consistency in anticipated installation volumes, we can now assess new opportunities. We continue to work with significant Utility clients and were pleased to announce, as part of interim reporting, that we were extending our service offering with Scottish Power to include their SPOW region, with a potential to deliver significant growth. We have also more recently increased our work for EDF with an estimated contract award of up to £13m. These agreements, along with other existing contracts and potential extensions, give us confidence for Providor's future performance.

 

Energy Services: Looking forward

Everwarm's order book remains strong with future revenues underpinned by long term contractual agreements with several clients and key frameworks supported by joint venture arrangements with Warmworks and Arbed. Although carbon pricing remains important, we believe that the Government will remain committed to addressing funding for fuel poverty in this highly regulated sector. Our view remains that Everwarm's significant wealth of management experience and client relationships gives our business a market leading proposition in this area. We believe our ECO3 credentials will allow us to continue to service a number of the largest utility and other clients, so we are well placed to provide a quality service to our customers and deliver effectively for our stakeholders through this phase of the scheme until it ends in March 2022. We believe the wider energy efficiency landscape and push towards net zero will create further opportunities once the uncertainty from Covid-19 has reduced.

Providor has extensive experience of the national smart meter roll-out and continues to apply careful management, both to our contractual positions and while seeking to provide strong and secure employment for our engineers. In June 2020 it was announced that the deadline for smart meter installations had been further extended to June 2025, driven by delays as a result of Covid-19. This followed consultation on the introduction of a new regulatory framework for utility retailers beyond 2020, requiring annual installation targets for the utility companies from July 2021. We believe this is positive, as the six-month extension of the rollout and annual target setting should lead to more consistent volumes which should in turn allow us to agree and plan for deliverable installation profiles with our clients. Where existing contracts require extension as a result of the new deadlines, we will continue to evaluate efficiency and cost factors in our pricing going forward, which should allow the business to grow into a sustained phase of profitable delivery. The UK Government has confirmed that it remains committed to the smart meter rollout and aligns with their net zero commitment mentioned above.

Bob Holt OBE

Chairman and Chief Executive

 

 

Financial Review

The Group had a strong year posting an EBITA of £10.4m from continuing activities (2019: £9.4m).

Group revenue decreased by 7.7% to £195.7m (2019: £212.1m), mainly reflecting a reduction in revenues in the Energy division, whose revenues decreased by 26.5% to £60.4m (2019: £82.1m). Revenues in Compliance Services increased by 3.1% to £137.2m (2019: £133.1m). These divisional revenue figures include revenue from intercompany trading which accounts for a total of £1.8m (2019: £3.1m).

Group EBITA increased by 11.2% to £10.4m (2019: £9.4m), reflecting an increase in EBITA in the Compliance division of 39.5% to £11.8m (2019: £8.5m) and a decrease in EBITA in Energy Services of 81.8% to £0.8m (2019: £4.3m). Central costs were £2.2m (H1 2019: £3.5m), of which the substantive movement is related to a reduction in share option charges and a number of one-off items.

We reported an operating profit of £8.8m (2019: £6.4m), after £nil exceptional costs (2019: £0.2m) and £1.6m of amortisation charges for acquisition intangibles (2019: £2.7m).

Net finance expense was £1.0m (2019: £1.1m), taxation was £1.5m (2019: £1.2m) and post-tax profit within discontinued operations was £nil (2019: £0.8m).  The statutory profit after tax was £6.3m (2019: £5.0m).

During the year, the Group adopted IFRS16, using the modified retrospective approach which means that comparatives are not required to be restated.  The impact on the income statement are noted in the table below, with comparability to 2019.

Whilst Group revenue and cash are unaffected by the adoption of IFRS16, the following areas are impacted:

· Operating profit before exceptional and other items has increased by £0.15m.  Lease payments are now reflected as a reduction in the lease liabilities. Conversely there is an increase in depreciation, and interest on finance lease obligations

· Operating expenses (lease costs) have decreased by £4.3m

· Depreciation charges increased by £4.1m

· Finance costs increased by £0.25m such that the overall impact on profit before tax of adopting IFRS16 has been a decrease of £0.1m

· The statement of financial position recognises £8.2m right of use assets and £8.2m lease liabilities on transition.

· Total indebtedness therefore increases, although this does not have an impact on the Group's covenants, which are measured on an historic GAAP basis

A reconciliation of EBITA and adjusted EBITA pre-IFRS16 to profit before tax for the period is provided below:

 

 

 Year ended 30 September 2020

 

 

Year ended 30 September 2019

 

As reported

IFRS16 impact

Pre IFRS16

 

 

 

£'000

£'000

£'000

 

£'000

Operating profit before exceptional items and amortisation of acquisition intangibles

10,404

162

10,242

 

9,354

Exceptional items

-

-

-

 

(225)

Amortisation of acquisition intangibles

(1,600)

  -

(1,600)

 

(2,735)

 

 

 

 

 

 

Operating profit

8,804

162

8,642

 

6,394

 

 

 

 

 

 

Finance expense

(1,047)

(248)

(799)

 

(1,051)

Investment income

39

  -

39

 

-

 

 

 

 

 

 

Profit before tax

 

 

7,796

  (86)

7,882

 

5,343

 

Coronavirus Job Retention Scheme ("CJRS")

The Group has followed Government guidelines and policy during the Covid-19 pandemic. This includes access to applicable financial support where appropriate. Given the range of impacts seen across the Group following Government-imposed restrictions, we took the decision to participate in the CJRS where operations had been affected by Covid-19.

At the height of lockdown measures, the Group saw a peak of approximately 40% of our total workforce on furlough leave. These individuals were predominantly within our Energy Services division, where a mix of both sector and local Government restrictions impacted most significantly. A proportion of colleagues furloughed included our Apprentices, who were not allowed by physical distancing restrictions to work with others in enclosed spaces. Apprentices received 100% of their pay during furlough to recognise their early stage of career development and ability to continue learning through remote self-study during this period. All other furloughed employees received 80% of their normal earnings, in line with the Government policy. Further details are included in the Operational Review.

 

Exceptional items

There were no exceptional items in the year (2019: costs of £0.2m).

 

Amortisation of acquisition intangibles

Amortisation charges for acquisition intangibles was £1.6m for the year (2019: £2.7m); the reduction in amortisation reflected the fact that we have taken amortisation charges in prior periods, meaning we are amortising a reduced base of intangible assets.

 

Finance expense

Net finance expense was £1.0m (2019: £1.1m), which represented the interest charged on our debt facilities (net of finance income), together with the amortisation of debt issue costs, which totalled £0.8m (2019: £1.1m). The 2020 figure includes £0.25m interest in relation to the adoption of IFRS16 (2019: £nil). 

 

Discontinued operations

Profits from discontinued operations amounted to £nil (2019: £0.8m).

Discontinued activities represent the Group's Construction and Property Services divisions which were sold on 17 August 2018 and Orchard (Holdings) UK Limited which was sold in September 2017. The result for the year to 30 September 2020 on disposal of discontinued operations comprise:

· £0.3m profit on sale of Orchard (Holdings) UK Limited from final reassessment of the fair value of consideration receivable

· £0.3m of additional costs relating to legacy transactions

On 20 December 2019, Mapps Group Limited, the acquirer of Lakehouse Contracts Limited and Foster Property Maintenance Limited, went into liquidation.  We are in active dialogue with the liquidators and our advisors.

Further details of discontinued operations are in note 11.

 

Tax

The tax charge on the profit before tax was £1.5m (2019: £1.2m), representing an effective rate of 19.1%, which compares with the statutory corporation tax rate of 19%.

Our net cash tax payment for the year was £0.7m for continuing operations (2019: £34,000). During the year, the Group has received the anticipated cash tax refund from HMRC which formed part of the corporation tax liability as at 30 September 2019. The Group has also made tax payments on account during the year.

The net deferred tax asset as at 30 September 2020 was £0.5m (2019: £0.5m), with the movement mainly relating to acquisition intangibles and accelerated capital allowances. Further details are set out in note 26.

 

Earnings per share

Basic earnings per share from continuing operations were 4.0 pence (2019: 2.7 pence), based on profit after tax from continuing operations of £6.3m (2019: £4.2m).

Adjusted earnings per share from continuing operations excluding amortisation of acquisition intangibles and share based payments were 4.9 pence (2019: 4.4 pence), based on adjusted profit after tax from continuing operations excluding amortisation of acquisition intangibles and share based payments of £7.7m (2019: £6.9m).

Our statutory profit for the year was £6.3m (2019: £5.0m). Based on the weighted average number of shares in issue during the year of 159.0m, this resulted in basic earnings per share of 4.0 pence (2019: 3.2 pence).

 

Dividend

The Board has proposed a final dividend for the year of 1 pence per share. This represents a total dividend payable for the year of 1 pence (2019: 0.5 pence).

Subject to approval at the AGM on 18 March 2021, the final dividend will be paid on 30 April 2021 to shareholders on the register at the close of business on 19 February 2021.

 

Cash flow performance

Our adjusted operating cash flow, before the IFRS16 adjustment, for the period was an inflow of £12.9m (2019: £9.9m), discussed in note 34, reflecting an operating cash conversion of 126% (2019: 106%). We calculate operating cash conversion as cash generated from continuing operations, excluding the cash impact of exceptional items, including VAT payment deferral, and amortisation of acquisition intangibles, divided by operating profit before exceptional items and amortisation of acquisition intangibles. We believe this measure provides a consistent basis for comparing cash generation consistently over time.

On a statutory basis, including the effect of IFRS16, we saw an operating cash inflow of £23.9m (2019: £5.5m), representing a cash conversion of 229% (2019: 59%).

As we highlighted last year, the timing of revenues, method of contract delivery and customer contractual terms can all have an impact on working capital and, consequently, cash conversion.

The management of working capital is a continued focus. This includes accrued income, debtors and creditors. We manage these balances within our banking facilities.  However, we recognise the importance of supporting our supply chain. We have ensured that we have paid our suppliers as normal.

 

Year ended 30 September 2020

 

Post IFRS 16

IFRS 16 impact

Pre IFRS 16

 

£000's

£000's 

£000's

 

 

 

 

Operating profit

8,805

162

8,643

 

 

 

 

Adjustments for:

 

 

 

Depreciation

4,793

4,111

682

Other operating activities

10,271

  - 

10,271

 

 

 

 

Net cash generated from operating activities

23,869

4,273

19,596

 

 

 

 

Interest paid

(957)

(248)

(709)

Taxation

(736)

  - 

(736)

Net cash generated from operating activities

22,176

4,025

18,151

 

 

 

 

Cash flows from investing activities

(199)

  - 

(199)

 

 

 

 

Cash flows from financing activities

 

 

 

Repayments to finance lease creditors

(4,084)

(4,025)

(59)

Other financing activities

(10,666)

  - 

(10,666)

 

 

 

 

Net cash used in financing activities

(14,750)

(4,025)

(10,725)

 

 

 

 

Net increase in cash and cash equivalents

7,227

  - 

7,227

 

Net debt

At 30 September 2020, the Group had net cash excluding the effect of IFRS16 of £9.8m (2019: net debt of £7.4m), which includes deferred VAT payments of £6.1m, in line with Covid-19 related support.  However, this represents a snapshot in time and the weighted average revolving credit facility drawdown in the year was £6.4m (2019: £14.5m).

The total n et cash including the effect of IFRS16 was £3.0m. This is based upon £6.8m adjustment for IFRS 16 relating to lease liabilities.

 

Banking arrangements

We had drawn £nil as at 30 September 2020 (2019: £10.0m) under our revolving credit facility (excluding borrowing costs). At the date of issuing this report we had drawn £nil (excluding borrowing costs); National Westminster Bank ('NatWest') continues to be an excellent and supportive partner.

In December 2018, the Group renewed its bank facilities to provide an overdraft facility of £5,000,000 together with a revolving credit facility of £25,000,000, which runs to 31 January 2022. We will commence the formal refinancing of the RCF, after the preliminary announcement.  Initial discussions have taken place with Natwest and we do not anticipate any challenges.

We are confident that our banking facilities provide sufficient support in managing our corporate affairs and provide sufficient capacity to plan for future growth, particularly in bidding with confidence on new contracts.

 

Statement of financial position

The principal items in our balance sheet are goodwill and working capital.

There was a reduction of £1.4m in goodwill and other intangibles, mainly due to a £1.6m amortisation charge of acquisition intangibles. As at 30 September 2020, there are £nil acquisition intangibles remaining on the statement of financial position.

Net current liabilities (excluding cash, borrowings and lease liabilities) stood at £1.6m (2019: net current assets of £7.8m), with the movement mainly relating to £6.1m deferral of VAT payments.  Net current assets stood at £4.9m (2019: £10.2m). 

The principal movements in working capital are noted below and reflect a continued focus on working capital;

Working capital

 

 

2020

 

2019

 

 

 

£'000

 

£'000

Trade receivables

 

 

16.7

 

17.9

Accrued income

 

 

17.3

 

17.6

Trade payables

 

 

(19.5)

 

(21.1)

Accruals

 

 

(9.9)

 

(8.0)

Risks

The Board considers strategic, financial and operational risks and identifies actions to mitigate those risks.

Our year-end review included an assessment of accrued income, of which the balance was £17.3m at the reporting date (2019: £17.6m). As a Group we review regularly for impairment. Accrued income represents a balance sheet risk in our industry and we continue to ensure a balanced approach between risk and possible outcome on final invoicing.

We continue to manage a number of potential risks and uncertainties, including claims and disputes which are common to other similar businesses which could have a material impact on short and longer term performance. The Board remains focused on the outcome of a number of contract settlements on which there is a range of outcomes for the Group in terms of both cash flow and impact on the consolidated statement of comprehensive income.

In preparing our annual accounts, we have taken a view on the financial risk of pending claims and disputes and seek to provide in full for potential shortfalls, whilst taking account of potential counter-claims , such that we have a collectively balanced position of risk across all such matters.

 

Accounting standards

During the year we adopted IFRS 16 under the modified retrospective approach.

 

Going Concern statement

The Directors acknowledge the Financial Reporting Council's ' Guidance on going concern, risk and viability' issued in June 2020 . The Group's business activities, together with factors likely to affect its future development, performance and position, are set out in the Strategic Report within the 2020 Annual Report. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Financial Review, as part of the Strategic Report of the 2020 Annual Report. In addition, note 32 to the consolidated Financial Statements within the 2020 Annual Report includes details of the Group's approach to financial risk management, its financial instruments and hedging activities, and its exposure to credit risk and liquidity risk.

In assessing the Group and Company's ability to continue as a going concern, the Board reviews and approves the annual budget, three-year plan and a rolling 12 month forecast, including forecasts of cash flows, borrowing requirements and covenant headroom. The Board reviews the Group's sources of available funds and the level of headroom available against its committed borrowing facilities and associated covenants. The Group's financial forecasts, taking into account possible sensitivities in trading performance including the potential impact of Covid-19, indicate that the Group will be able to operate within the level of its committed borrowing facilities and within the requirements of the associated covenants for the foreseeable future. NatWest remains supportive of the Group and in December 2018, the Group renewed its banking facilities to provide an overdraft facility of £5,000,000 together with a revolving credit facility of £25,000,000, which runs to 31 January 2022. We will commence the formal refinancing of the RCF, after the preliminary announcement.  Initial discussions have taken place with Natwest and we do not anticipate any challenges. The Directors have a reasonable expectation that the Group and Company have adequate resources to continue their operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis of accounting in preparing the Annual report.

Peter Smith

Chief Financial Officer

 

 

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 30 September 2020

 

 

 

 

 

 

Notes

2020

 

2019

 

 

£'000

 

£'000

 

 

 

 

 

Continuing operations

 

 

 

 

Revenue

4

195,706

 

212,066

Cost of sales

 

(160,449)

 

(179,188)

Gross profit

 

35,257

 

32,878

 

 

 

 

 

Other operating expenses

 

(24,952)

 

(23,953)

Share of results of joint venture

 

99

 

429

 

 

 

 

 

Operating profit before exceptional items and amortisation of acquisition intangibles

4,5

10,404

 

9,354

 

 

 

 

 

Exceptional costs

7

-

 

(225)

Amortisation of acquisition intangibles

 

(1,600)

 

(2,735)

 

 

 

 

 

Operating profit

 

8,804

 

6,394

 

 

 

 

 

Finance expense

8

(1,047)

 

(1,051)

Investment income

8

39

 

-

 

 

 

 

 

Profit before tax from continuing operations

4

7,796

 

5,343

 

 

 

 

 

Taxation

12

(1,486)

 

(1,154)

 

 

 

 

 

Profit after taxation from continuing operations

 

6,310

 

4,189

 

 

 

 

 

Discontinued operations

 

 

 

 

Profit for the year from discontinued operations

11

-

 

848

 

 

 

 

 

 Profit for the year attributable to the equity holders of the Group

 

6,310

 

5,037

 

 

 

 

 

Earnings per share from continuing operations

 

 

 

 

Basic

14

4.0p

 

2.7p

Diluted

14

3.9p

 

2.6p

Earnings per share from continuing and discontinued operations

 

 

 

 

Basic

14

4.0p

 

3.2p

Diluted

14

3.9p

 

3.2p

 

 

 

The accompanying notes are an integral part of this consolidated statement of comprehensive income.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

At 30 September 2020

 

 

2020

 

2019

 

Notes

£'000

 

£'000

Non-current assets

 

 

 

 

Goodwill

15

42,357

 

42,357

Other intangible assets

16

726

 

2,171

Property, plant and equipment

17

1,212

 

1,344

Right of use assets

18

6,757

 

-

Interests in joint ventures

19

501

 

732

Deferred tax asset

26

517

 

467

 

 

52,070

 

47,071

Current assets

 

 

 

 

Inventories

20

3,022

 

3,059

Trade and other receivables

21

40,054

 

42,068

Cash and cash equivalents

 

9,679

 

2,452

 

 

52,755

 

47,579

Total assets

 

104,825

 

94,650

 

 

 

 

 

Current Liabilities

 

 

 

 

Trade and other payables

22

42,764

 

36,698

Lease liabilities

27

3,167

 

54

Provisions

25

825

 

415

Income tax payable

 

1,073

 

242

 

 

47,829

 

37,409

Net current assets

 

4,926

 

10,170

 

 

 

 

 

Non-current liabilities

 

 

 

 

Loans and borrowings

23

-

 

9,755

Lease liabilities

27

3,669

 

-

Provisions

25

3,221

 

3,195

 

 

6,890

 

12,950

Total liabilities

 

54,719

 

50,359

Net assets

 

50,106

 

44,291

 

 

 

 

 

Equity

 

 

 

 

Called up share capital

28

15,934

 

15,895

Share premium account

30

25,408

 

25,318

Share-based payment reserve

29, 30

650

 

538

Own shares

30

(290)

 

(290)

Merger reserve

30

20,067

 

20,067

Retained earnings

30

(11,663)

 

(17,237)

 

 

 

 

 

Equity attributable to equity holders of the Company

 

50,106

 

44,291

The financial statements of Sureserve Group plc (registered number 09411297) were approved by the Board of Directors and authorised for issue on 1 February 2021.  They were signed on its behalf by:

P D M Smith

Director

 

The accompanying notes are an integral part of this consolidated statement of financial position.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the year ended 30 September 2020

 

Share capital

Share premium account

Share-based payment reserve

Own shares

Merger reserve

Retained earnings

 

Total equity

 

£'000

£'000

£'000

£'000

£'000

£'000

 

£'000

At 1 October 2018

15,753

25,314

776

(290)

20,067

(22,521)

 

39,099

Profit for the year

-

-

-

-

-

5,037

 

5,037

Dividends paid

-

-

-

-

-

(394)

 

(394)

Issue of shares (exercise of options)

142

4

-

-

-

(141)

 

5

Share-based payments

-

-

544

-

-

-

 

544

Reserve transfer

-

-

(782)

-

-

782

 

-

At 30 September 2019

15,895

25,318

538

(290)

20,067

(17,237)

 

44,291

Profit for the year

-

-

-

-

-

6,310

 

6,310

Dividends paid (Note 13)

-

-

-

-

-

(795)

 

(795)

Issue of shares (exercise of options)

39

90

-

-

-

-

 

129

Share-based payments

-

-

171

-

-

-

 

171

Reserve transfer

-

-

(59)

-

-

59

 

-

At 30 September 2020

15,934

25,408

650

(290)

20,067

(11,663)

 

50,106

 

 

 

 

 

 

CONSOLIDATED STATEMENT OF CASH FLOWS

For the year ended 30 September 2020

 

 

 

 

 

 

 

 

2020

 

 

2019

 

Notes

£'000

 

 

£'000

Cash flows from operating activities

 

 

 

 

 

Cash generated from operations

34

23,869

 

 

5,539

Interest paid

 

(957)

 

 

(914)

Taxation

 

(736)

 

 

(34)

Net cash generated from operating activities

 

22,176

 

 

4,591

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Receipt of deferred consideration from acquisitions in prior years

 

930

 

 

910

Purchase of property, plant and equipment

 

(621)

 

 

(631)

Purchase of intangible assets

 

(539)

 

 

(403)

Sale of property and equipment

 

31

 

 

86

Net cash used in investing activities

 

(199)

 

 

(38)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Proceeds from issue of shares

 

129

 

 

5

Dividend paid to shareholders

 

(795)

 

 

(394)

Repayment of bank borrowings

 

(10,000)

 

 

(3,000)

Repayment of lease liabilities

 

(4,084)

 

 

(89)

Finance issue costs

 

-

 

 

(328)

Net cash used in financing activities

 

(14,750)

 

 

(3,806)

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

7,227

 

 

747

 

 

 

 

 

 

Cash and cash equivalents at beginning of year

 

2,452

 

 

1,705

 

 

 

 

 

 

Cash and cash equivalents at end of year

 

9,679

 

 

2,452

 

 

The accompanying notes are an integral part of this consolidated statement of cash flows.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 30 September 2020

General Information

Sureserve Group plc is a company incorporated in England and Wales under the Companies Act.  The address of the registered office is Unit 1 Yardley Business Park, Luckyn Lane, Basildon, Essex SS14 3BZ.

 

These results for the year ended 30 September 2020 are an excerpt from the Annual Report & Accounts 2020 and do not constitute the Group's statutory accounts for 2020 or 2019. Statutory accounts for Sureserve Group plc for the year to 30 September 2019 have been delivered to the Registrar of Companies, and the Sureserve Group plc statutory accounts for the year to 30 September 2020 will be delivered by 31 March 2021. The Auditor has reported on both those accounts; their reports were unqualified, did not draw attention on to any matters by way of emphasis and did not contain statements under Sections 498(2) or (3) of the Companies Act 2006 or equivalent preceding legislation. Whilst the financial information included in this Annual Results Release has been prepared in accordance with International Financial Reporting Standards (IFRS) in conformity with the requirements of the Companies Act 2006, this announcement does not itself contain sufficient information to comply with IFRS. Full financial statements that comply with IFRS are included in the Annual Report & Accounts 2020 which will be available at www.sureservegroup.co.uk.

The consolidated Financial Statements are presented in Pounds Sterling because that is the currency of the primary economic environment in which the Group operates.  The principal activities are discussed in the operational review of the annual report.

1.  Basis of Preparation

Basis of accounting

The Group's consolidated Financial Statements have been prepared and approved by the Directors in accordance with International Accounting Standards in conformity with the requirements of the Companies Act 2006. The Financial Statements have been prepared on the historical cost basis.  Historical cost is generally based on the fair value of the consideration given in exchange for goods and services.  The principal accounting policies adopted are set out below.

The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the Group's Financial Statements except as noted below.

Adoption of new and revised standards

The accounting policies adopted are consistent with those of the previous financial year except for the following new and revised Standards and Interpretations which have been adopted in the current year. Apart from IFRS 16 their adoption has not had any significant impact on the amounts reported in these financial statements.

· IFRS 16 Leases

· IFRIC 23 Uncertainty over Income Tax Treatments

IFRS 16 'Leases' was issued in January 2016 and is effective for accounting periods beginning on or after 1 January 2019. It has  been applied by the Group from 1 October 2019 under the modified retrospective approach, applying the short term and low value lease exemptions.

New standards and interpretations not applied

The International Accounting Standards Board and the International Financial Reporting Interpretations Committee (IFRIC) have issued the following standards and interpretations for annual periods beginning on or after the effective dates as noted below:

 

IAS/IFRS standards

 

Effective for accounting periods starting on or after

IFRS 17 

Insurance Contracts

1 January 2023

IFRS 16 Leases

IFRS 16 'Leases' was issued in January 2016 and is effective for accounting periods beginning on or after 1 January 2019. It has been applied by the Group from 1 October 2019 under the modified retrospective approach, applying the short term and low value lease exemptions. Under IFRS 16, leases have been recognised as a lease liability and a right of use asset. These lease liabilities were measured at the present value of the remaining lease payments based on a range of values approximating the Group's incremental borrowing rate as at 1 October 2019 of 4.01%. The range that is being used is between 3.01% and 4.51% depending on the type of asset. The associated right of use assets for all leases were measured at the amount equal to the lease liability.  A practical expedient was taken to use a single discount rate for a portfolio of leases with similar characteristics.

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 30 September 2020

1.  Basis of Preparation (continued)

The following is a reconciliation of total operating lease commitments at 30 September 2019 (as disclosed in the financial statements to 30 September 2019) to the lease liabilities recognised at 1 October 2019:

 

Land

Vehicles

 

Total

Operating lease commitments at 30 September 2019

  3,035

  5,177

 

  8,212

Effect of discount factor

  (179)

  (249)

 

  (428)

Additional lease costs identified

133

189

 

322

Finance leases recognised at 30 September 2019

  - 

  54

 

  54

IFRS 16 Lease liability at 1 October 2019 (Note 27)

  2,989

  5,171

 

  8,160

 

Basis of consolidation

The consolidated Financial Statements incorporate the assets, liabilities, income and expenses of the Group.  The Financial Statements of the subsidiaries are prepared for the same financial reporting period as the Company.  Where necessary, adjustments are made to the Financial Statements of subsidiaries to bring the accounting policies used into line with those used by the Group.  Intercompany transactions, balances and unrealised gains and losses transitions between Group companies are eliminated on consolidation.

As a consolidated statement of comprehensive income is published, a separate profit and loss account for the parent company is omitted from the Financial Statements by virtue of section 408 of the Companies Act 2006.

Going concern

The Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future.  The Directors regard the foreseeable future as no less than 12 months following publication of its annual Financial Statements, so in practical terms, 16 months from the reporting date.  The Directors have considered the Group's working capital forecasts and projections, taking account of reasonably possible changes in trading performance and the current state of its operating market, including the potential impact of Covid 19, and are satisfied that the Group should be able to operate within the level of its current facilities and in compliance with the covenants arising from those facilities.   In December 2018, the Group renewed its bank facilities to provide an overdraft facility of £5,000,000 together with a revolving credit facility of £25,000,000, which runs to 31 January 2022. We will commence the formal refinancing of the RCF after the preliminary announcement.  Initial discussions have taken place with Natwest and we do not anticipate any challenges.   Accordingly, the directors have adopted the going concern basis in preparing the financial information. Please see further statement in the strategic report.

 

2.  Significant accounting policies

 

Operating segments

The Directors regard the Group's reportable segments of business to be Compliance and Energy Services.  Costs are allocated to the appropriate segment as they arise with central overheads apportioned on a reasonable basis.  Operating segments are presented in a manner consistent with internal reporting, with inter-segment revenue and expenditure eliminated on consolidation.

Business combinations

Acquisitions of subsidiaries are accounted for using the acquisition method.  The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition-date fair values of assets transferred by the Group, liabilities incurred by the Group to the former owners of the acquired company and the equity interest issued by the Group in exchange for control of the acquired company.  Acquisition-related costs are recognised as non-trading exceptional costs in profit or loss as incurred.

At the acquisition date, the identifiable assets acquired and liabilities assumed are recognised at their fair value.  Goodwill is measured as the excess of the sum of the consideration transferred over the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed.  If, after reassessment, the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed exceeds the sum of the consideration transferred, the excess is recognised immediately in profit or loss as a bargain purchase gain.

When the consideration transferred by the Group in a business combination includes an asset or liability resulting from a contingent consideration arrangement, the contingent consideration is measured at its acquisition-date fair value and included as part of the consideration transferred in a business combination.  Changes in fair value of the contingent consideration that qualify as measurement period adjustments are adjusted retrospectively, with corresponding adjustments against goodwill.  Measurement period adjustments are adjustments that arise from additional information obtained during the 'measurement period' (which cannot exceed one year from the acquisition date) about facts and circumstances that existed at the acquisition date.

The subsequent accounting for changes in the fair value of the contingent consideration that do not qualify as measurement period adjustments depends on how the contingent consideration is classified.  Contingent consideration that is classified as equity is not remeasured at subsequent reporting dates and its subsequent settlement is accounted for within equity.  Contingent consideration that is classified as an asset or liability is remeasured at subsequent reporting dates in accordance with IFRS 9 or IAS 37 as appropriate, with the corresponding gain or loss being recognised in profit or loss.

Acquisition costs

Management believe that acquisition costs are exceptional in nature and they are presented as such in the income statement, so as not to distort presentation of the underlying performance of the Group.

Discontinued operations

A discontinued operation is a component of an entity that either has been disposed of, or is classified as held for sale, and

(a)  represents a separate major line of business or geographical area of operations,

(b)  is part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations, or

(c)  is a subsidiary acquired exclusively with a view to resale.

Goodwill

Goodwill is initially recognised and measured as set out above.

 

Goodwill is not amortised but is reviewed for impairment at least annually.  For the purpose of impairment testing, goodwill is allocated to each of the Group's cash-generating units expected to benefit from the synergies of the combination.  Cash-generating units to which the goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired.  If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit.  An impairment loss recognised for goodwill is not reversed in a subsequent period.

On disposal of a subsidiary, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.

Intangible assets acquired separately

Intangible assets with finite useful lives that are acquired separately are carried at cost less accumulated amortisation and accumulated impairment losses.  Amortisation is recognised on a straight line basis over their useful lives.  The estimated useful life and amortisation method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis.

 

The estimated useful life for each asset type is set out below.

Computer software  -  three to five years

Intangible assets acquired in a business combination

Intangible assets acquired in a business combination and recognised separately from goodwill are initially recognised at their fair value at the acquisition date (which is regarded as their cost).  Intangible assets are recognised if they are separable from the acquired entity or give rise to other contractual/legal rights. The amounts ascribed to such intangibles are arrived at by using suitable valuation techniques.

Subsequent to initial recognition, intangible assets acquired in a business combination are reported at cost less accumulated amortisation and accumulated impairment losses, on the same basis as intangible assets that are acquired separately.

The estimated useful economic lives and the methods used to determine the cost of intangibles acquired in a business combination are as follows:

Intangible asset  Useful economic life  Valuation method

Contracted customer order book  Remaining period of the contract  Expected cash flows receivable

Customer relationships  Five years  Expected cash flows receivable

Non-compete agreements  Five years  With or without method

Derecognition of intangible assets

An intangible asset is derecognised on disposal, or when no future economic benefits are expected from use or disposal. The gain or loss from derecognition of an intangible asset, measured as the difference between the net disposal proceeds and the carrying amount of the asset; is recognised in profit or loss when the asset is derecognised.

Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation and any recognised impairment loss.

Depreciation is calculated so as to write off the cost of a tangible asset, less its estimated residual value, over the estimated useful economic life of that asset on the following bases:

Leasehold improvements  -  over the period of the lease

Plant & equipment  -  15% to 33% per annum on a straight line basis

Fixtures & fittings  -  20% to 33% per annum on a straight line basis

Motor vehicles  -  25% per annum on a straight line basis

The estimated useful lives, residual values and depreciation method are reviewed at the end of each reporting period, with the effect of any changes in estimate accounted for on a prospective basis.  Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, over the term of the relevant lease.

An item of property, plant and equipment is derecognised upon disposal, or when no future economic benefits are expected to arise from the continued use of the asset.  The gains or loss arising on the disposal or scrappage of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in profit or loss

Impairment of tangible and intangible assets excluding goodwill

At each reporting date, the Group reviews the carrying amounts of tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss.  If any such indication exists, the recoverable amount of the asset is estimated to determine the extent of the impairment loss (if any).  Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs.  When a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified.

An intangible asset with an indefinite useful life is tested for impairment at least annually and whenever there is an indication that the asset may be impaired.

Recoverable amount is the higher of fair value less costs to sell and value in use.  In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.

Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or cash-generating unit) in prior years.  A reversal of an impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.

Exceptional items

Items which are significant by their size and/or nature require separate disclosure and are reported separately in the statement of comprehensive income.  Details of exceptional items are explained in Note 7.

Revenue

Revenue recognition is determined according to the requirements of IFRS 15 "Revenue from contracts with customers". All revenue is considered revenue from contracts with customers as defined by IFRS 15.  IFRS 15 prescribes a five-step model of accounting for revenue recognition which includes identifying the contract, identifying performance obligations, determining the transaction price, allocating the transaction price to different performance obligations and the timing of recognition of revenue in connection with different performance obligations.

For contracts with multiple components to be delivered such as lift maintenance, servicing and repairs, management applies judgement to consider whether those promised goods and services are: (i) distinct - to be accounted for as separate performance obligations; (ii) not distinct - to be combined with other promised goods or services until a bundle is identified that is distinct; or (iii) part of a series of distinct goods and services that are substantially the same and have the same pattern of transfer to the customer.

At contract inception the total transaction price is estimated, being the amount to which the Group expects to be entitled and has rights to under the present contract. This includes the fixed price stated in the contract and an assessment of any variable consideration resulting from variation orders, discounts, rebates, refunds, performance bonuses, penalties, service credits. Variable consideration is estimated based on the expected value or the most likely outcome method and is only recognised to the extent that it is highly probable that a subsequent change in its estimate would not result in a significant revenue reversal.

Once the total transaction price is determined, the Group allocates this to the identified performance obligations in proportion to their relative stand-alone selling prices and recognises revenue when (or as) those performance obligations are satisfied.

For each performance obligation identified in the contract, the Group determines if revenue will be recognised over time or at a point in time.

Performance obligations satisfied over time

The Group recognises revenue over time on contracts where any of the following criteria is met;

· The customer simultaneously receives and consumes the benefits provided by the Group's performance as the Group performs it; or

· The services provided creates or enhances an asset that the customer controls; or

· The services provided do not create an asset with an alternative use to the Group and the Group has an enforceable right to payment for performance completed to date. 

 

The Group typically recognises revenue on an over time basis for the following:

· Certain energy services

· Gas services

· Fire services

· Water and air hygiene services

· Lift services

 

For each performance obligation to be recognised over time, the Group applies a revenue recognition method that faithfully depicts the Group's performance in transferring control of the goods or services to the customer. This decision requires assessment of the real nature of the goods or services that the Group has promised to transfer to the customer. The Group applies the relevant output or input method consistently to similar performance obligations in other contracts.

Performance obligations satisfied at a point in time

If the criteria for satisfying a performance obligation over time are not met, revenue is recognised at the point in time when control of the goods or services transfers to the customer. This will be at the point when the jobs are completed and there is a right to invoice.

The Group typically recognises revenue on a point in time basis for the following:

· Smart metering

· Certain energy services

 

(i)  Schedule of Rates ("SOR") contracts

SOR contracts are set based on predetermined rates for a list of services and duties required by the customer. 

 

For short term jobs usually completed within a few days, the right to consideration is considered to correspond directly with the value of performance completed to date as measured by the amounts specified for each job set out on the rate card. Revenue is recognised when the jobs are completed or invoiced. Where deemed appropriate, the Group will utilise the practical expedient within IFRS 15 and recognises revenue in line with amounts invoiced. Contract fulfilment costs are expensed as incurred.

 

For longer term jobs, the Group applies the relevant output or input revenue recognition method for measuring progress that depicts the Group's performance in transferring control of the goods or services to the customer.  Contract fulfilment costs are expensed as incurred.

 

Certain longer term jobs use the output method based upon surveys of performance completed or milestones reached which allow the Group to recognise revenue on the basis of direct measurements of the value to the customer of the goods or services transferred to date relative to the remaining goods or services under the contract.

 

Under the input method, revenue is recognised in direct proportion to costs incurred where the transfer of control is most closely aligned to the Group's efforts in delivering the service.

(ii)  Fixed price (or lump sum) service contracts

Certain contracts, in particular for gas servicing and maintenance, are procured on a fixed price basis.  Revenue qualifies for recognition over time as the customer receives and consumes the benefits from the service as it is being provided. Revenue for maintenance/reactive activities is recognised on a straight line basis over the term of the contract.   Where servicing and maintenance activity is expected to take place evenly throughout the performance period, revenue is recognised on a straight-line basis over the contract term.  Where activity is more aligned to periodic service events, then revenue is allocated to those events and recognised over the contract term when those events take place. Contract fulfilment costs are expensed as incurred.

(iii)  Accrued income and deferred income

The Group's customer contracts include a diverse range of payment schedules which are often agreed at the inception of longer term jobs under which it receives payments throughout the term of the contracts.

 

Where revenue recognised at the period end date is more than amounts invoiced, the Group recognises an accrued income contract asset for this difference. Where revenue recognised at the period end date is less than amounts invoiced, the Group recognises a deferred income contract liability for this difference.

Employee benefits

Retirement benefit costs

The Group contributes to the personal pension plans of certain employees of the Group.  The assets of these schemes are held in independently administered funds.  The pension cost charged in the Financial Statements represents the contributions payable by the Group in accordance with IAS 19. 

Share-based payments

The Company has issued equity-settled share-based awards and free shares to certain employees.  The fair value of share-based awards with non-market performance conditions is determined at the date of the grant using a Black-Scholes model.  The fair value of share-based awards with market related performance conditions is determined at the date of grant using the Monte Carlo model.  Share-based awards are recognised as expenses based on the Company's estimate of the shares that will eventually vest, on a straight line basis over the vesting period, with a corresponding increase in the share option reserve.

At each reporting date the Company revises its estimates of the number of options that are expected to vest based on service and non-market performance conditions.  The amount expensed is adjusted over the vesting period for changes in the estimate of the number of shares that will eventually vest. The impact of the revision of the original estimates, if any, is recognised in profit or loss such that the cumulative expense reflects the revised estimate, with a corresponding adjustment to equity reserves.  Options with market-related performance conditions will vest based on total shareholder return against a selected group of quoted market comparators. Following the initial valuation, no adjustments are made in respect of market based conditions at the reporting date.

Employee Benefit Trust

The Company established an Employee Benefit Trust upon its IPO, whose remit is to hold Sureserve Group plc shares on behalf of its employees.  The trust is wholly funded by the Group and although legally independent is deemed to be controlled by the Group as the Trust relies on it for funding and the Company is able to remove and appoint the trustees.  The assets and liabilities of the Trust are therefore consolidated with those of the Group.

Finance income and costs

Interest receivable and payable on bank balances is credited or charged to the statement of comprehensive income as incurred.

Finance arrangement fees and issue costs are capitalised and netted off against borrowings. All other borrowing costs are written off to the statement of comprehensive income as incurred.

Notional interest payable, representing the unwinding of the discount on long term liabilities, is charged to finance costs.

Costs incurred in raising finance

Costs incurred in raising finance are capitalised and amortised through the profit and loss account over the term of the funding.  In the event that the associated finance product is refinanced prior to its expiring, the unamortised costs are treated as an "Other Item" on the face of the statement of comprehensive income, to the extent that they are replaced with fees and costs associated with raising the new finance.

Taxation

The tax expense represents the sum of the tax currently payable and deferred tax.

The current tax payable is based on taxable profit for the year.  Taxable profit differs from net profit as reported in the statement of comprehensive income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible.  The Group's asset for current tax is calculated using tax rates prevailing at the year end.

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the Financial Statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the statement of financial position liability method.  Deferred tax liabilities are generally recognised for all taxable temporary differences; deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised.  Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

The carrying amount of deferred tax assets is reviewed at each statement of financial position date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred tax is calculated at the tax rates that have been enacted or substantively enacted at the statement of financial position date.  Deferred tax is charged or credited in the statement of comprehensive income, except when it relates to items charged or credited in other comprehensive income, in which case the deferred tax is also dealt with in other comprehensive income.

The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.  Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis.

Current and deferred tax are recognised in profit or loss, except when they relate to items that are recognised in other comprehensive income or directly in equity, in which case, the current and deferred tax are also recognised in other comprehensive income or directly in equity, respectively.  When current tax or deferred tax arises from the initial accounting for a business combination, the tax effect is included in the accounting for the business combination.

Inventories

Inventories and work in progress are stated at the lower of cost and net realisable value. Cost comprises direct materials and, where appropriate, labour and overheads which have been incurred in bringing the inventories and work in progress to their present location and condition. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution. Provision is made, where appropriate, to reduce the value of inventory to its net realisable value.

Government grants

The Group recognises a government grant when it is receivable. Government grants are offset against applicable costs where appropriate, as opposed to other income.

Provisions

Provisions are recognised when the Group has a present legal or constructive obligation as a result of a past event, and where it is probable that the Group will be required to settle that obligation and the amount can be reliably estimated.  The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the statement of financial position date, taking into account the risks and uncertainties surrounding the obligation.  Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows (when the time value of money is material). Details of material provisions are disclosed unless it is not practicable to do so or where it could be expected to prejudice seriously the position of the entity.

Contingent liabilities

Where a provision or accrual is deemed to be required it has been included within the consolidated statement of financial position. For contingent liabilities where an economic outflow is possible, it is often not practicable to estimate the financial effect due to the range of estimation uncertainty. For contingent liabilities where the possibility of economic outflow is remote, disclosure of the estimated financial effect is not required.

Contingent liabilities acquired in a business combination are initially valued at fair value at the acquisition date.  At the end of subsequent reporting periods, such contingent liabilities are measured at the higher of the amount that would be recognised in accordance with IAS 37 and the amount initially recognised.

Joint venture

Under IFRS 11 we account for joint ventures under the equity method of accounting. A joint venture is a joint arrangement whereby the parties have joint control of the arrangement have rights to the net assets of the arrangement. Loans receivable and investments in joint venture entities are reviewed for impairment at each year end.

Financial instruments

Financial assets and financial liabilities are recognised on the Group's statement of financial position when the Group becomes a party to the contractual provisions of the instrument.  The principal financial assets and liabilities of the Group are as follows:

(a)  Trade and other receivables

Trade and other receivables are recognised initially at fair value and measured subsequently at amortised cost less any provision for impairment losses including expected credit losses. In accordance with IFRS 9 the Group applies the simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables and accrued income contract assets, estimated using a combination of historical experience and forward-looking information.

(b)  Cash and cash equivalents

Cash and cash equivalents comprise cash balances and call deposits with a maturity of three months or less.  Bank overdrafts are presented as current liabilities to the extent that there is no right of offset with cash balances.

(c)  Trade and other payables

Trade and other payables are not interest bearing and are stated initially at fair value and subsequently held at amortised cost.

(d)  Bank and other borrowings

Interest-bearing bank and other loans are recorded at the fair value of the proceeds received, net of direct issue costs. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are accounted for at amortised cost and on an accruals basis in the statement of comprehensive income using the effective interest method. Interest is added to the carrying value of the instrument to the extent that they are not settled in the period in which they arise.

(e)  Derivative financial instruments

Derivatives are initially recognised at fair value on the date that the contract is entered into and subsequently re-measured in future periods at their fair value.  They are held at fair value through profit or loss and are re-measured at each reporting date with the movement being recognised in the statement of comprehensive income.

(f)  Financial liabilities and equity

Financial liabilities and equity are classified according to the substance of the financial instrument's contractual obligations rather than the financial instrument's legal form.  An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities.

(g)  Equity instruments

Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs.

Leases

The Group assesses whether a contract is a lease at inception of the contract. A lease conveys the right to direct the use and obtain substantially all of the economic benefits of an identified asset for a period of time in exchange for consideration.

A right of use asset and corresponding lease liability are recognised at commencement of the lease. The lease liability is measured at the present value of the lease payments, discounted at the rate implicit in the lease, or if that cannot be readily determined, at the group's incremental borrowing rate specific to the type of asset. The lease liability is subsequently measured at amortised cost using the effective interest rate method. It is remeasured, with a corresponding adjustment to the right of use asset, when there is a change in future lease payments resulting from a rent review, or change in the Group's assessment of whether it is reasonably certain to exercise a purchase, extension or break option. The right of use asset is initially measured at cost, comprising: the initial lease liability and any dilapidation or restoration costs. The right of use asset is subsequently depreciated on a straight-line basis over the shorter of the lease term or the useful life of the underlying asset. The right of use asset is tested for impairment if there are any indicators of impairment. Leases of low value assets and short-term leases of 12 months or less are expensed to the Group income statement .

Nature and purpose of each reserve in equity

Share capital is determined using the nominal value of shares that have been issued.

Share premium represents the difference between the nominal value of shares issued and the fair value of the total consideration receivable at the issue date.

Equity-settled share-based employee remuneration is credited to the share-based payment reserve until the related share options are exercised.  Upon exercise the share-based payment reserve is transferred to retained earnings.

The merger reserve was created in relation to the Group reorganisation under IFRS 3, in which Sureserve Group plc replaced Sureserve Holdings Limited as the Group's ultimate parent company.

 

3.  Critical accounting judgements and key sources of uncertainty

In the application of the Group's accounting policies, which are described in Note 2, the Directors are required to make judgements, estimates and assumptions about the carrying amount of assets and liabilities that are not readily apparent from other sources. These estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or if the period of the revision and future periods if the revision affects both current and future periods.

Key sources of estimation uncertainty

The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that may have a significant risk of causing material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below.

Revenue and profit recognition

Revenue is recognised based on the stage of completion of job or contract activity.  Certain types of service provision pricing mechanisms require minimal estimation and judgement; however service provision lump sum and longer term contracts do require judgements and estimates to be made to determine the stage of completion and the expected outcome for the individual contract. A sum will be recognised in relation to accrued income on the statement of financial position, details of which are described in Note 21. The accrued income balance as at 30 September 2020 was £17.3m (2019: £17.6m). These assessments include a degree of uncertainty and therefore if the key judgements and estimates change, further adjustments of recoverable amounts may be necessary. Following the disposal of Lakehouse Contracts Limited and Foster Property Maintenance in 2018, the Directors consider the risk of material adjustments arising from a revision of estimates to have reduced. Revenue from continuing operations is generated from a large number of contracts with customers, such that there is limited sensitivity to material revisions arising from changes in estimates on individual contracts.

Provisions for legal and other claims

The Group continues to manage a number of potential risks and uncertainties, including claims and disputes, which are common to other similar businesses and which could have a material impact on short and longer term performance. The Board remains focused on the outcome of a number of contract settlements on which there is a range of outcomes for the Group in terms of both cash flow and impact on the statement of comprehensive income.

In quantifying the likely outturn for the Group, the key judgements and estimates will typically include:

· The scope of the Group's assessed responsibility

· An assessment of the potential likelihood of economic outflow

· An estimation of economic outflow (including potential likelihood)

· A commercial assessment of potential further liabilities

 

Estimates of amounts provided take account of legal advice where sought. Details of specific cases are not disclosed due to potential commercial sensitivity. Provisions at 30 September 2020 includes £0.8m (2019: £0.8m) in respect of the disposal of Lakehouse Contracts Limited and Foster Property Maintenance Limited - see note 11 and 25 for details of the basis of estimation used.

The total carrying value of provisions as at 30 September 2020 was £4.0 (2019: £3.6m) - see Note 25 for further details.

Impairment of intangible assets and goodwill

The Group assess whether there are any indicators of impairment for all non-financial assets at each reporting date. Goodwill is tested for impairment annually and at other times when such indicators exist. Other non-financial assets are tested for impairment when there are indicators that the carrying amounts may not be recoverable.

When value-in-use calculations are undertaken, management must estimate the expected future cash flows from the cash-generating unit and choose a suitable discount rate in order to calculate the present value of those cash flows. Further details are given in note 15.

 

4.  Operating segments

The Group's chief operating decision maker is considered to be the Board of Directors. The Group's operating segments are determined with reference to the information provided to the Board of Directors in order for it to allocate the Group's resources and to monitor the performance of the Group.

The Board of Directors has determined an operating management structure aligned around the two core activities of the Group, with the following operating segments applicable:

· Compliance: focused on gas, fire, electrics, air, water and lifts where we contract predominantly under framework agreements.  Services comprise the following:

Installation, maintenance and repair-on-demand of gas appliances and central heating systems

Compliance services in the areas of fire protection and building electrics

Air and water hygiene solutions

Service, repair and installation of lifts

· Energy Services: we offer a range of services in the energy efficiency sector, including external, internal and cavity wall insulation, loft insulation, gas central heating, boiler upgrades and other renewable technologies.  The services are offered under various energy saving initiatives including Energy Company Obligations ("ECO"), Green Deal and the Scottish Government's HEEPs ("Home Energy Efficiency Programme") Affordable Warmth programme. Clients include housing associations, social landlords, local authorities and private householders and we have trading relationships with all of the large  utility suppliers and many of the leading smaller suppliers.  We also provide metering services involving the installation, servicing and administration of devices and associated data.

The accounting policies of the reportable segments are the same as those described in the accounting policies section.

 

All revenue and profit is derived from operations in the United Kingdom only. 

The profit measure the Board used to evaluate performance is operating profit before exceptionals and amortisation of acquisition intangibles. Operating profit before exceptionals and amortisation of acquisition intangibles is defined as operating profit before deduction of exceptional items and amortisation of acquisition intangibles, as outlined in Note 7 and on the face of the income statement. 

The Group accounts for inter-segment trading on an arm's length basis.  All inter-segment trading is eliminated on consolidation.

The following is an analysis of the Group's revenue and Operating profit before exceptional and amortisation of acquisition intangibles by reportable segment:

 

 

 

2020

 

2019

 

 

£'000

 

£'000

Revenue

 

 

 

 

Compliance

 

137,155

 

133,051

Energy Services

 

60,363

 

82,081

Total segment revenue

 

197,518

 

215,132

Inter-segment elimination

 

(1,812)

 

(3,066)

Total revenue

 

195,706

 

212,066

 

 

 

 

Revenue recognised

 

 

Revenue

 

Over time

At a point in time

 

Total

2020

 

£'000

£'000

 

£'000

 

 

 

 

 

 

Gas services

 

102,014

-

 

102,014

Fire and electrical services

 

17,419

-

 

17,419

Water and hygiene services

 

7,031

-

 

7,031

Lift services

 

10,691

-

 

10,691

Compliance segment revenue

 

137,155

-

 

137,155

Energy services

 

33,112

10,043

 

43,155

Smart metering

 

-

17,208

 

17,208

Energy segment revenue

 

33,112

27,251

 

60,363

Inter-segment elimination

 

(1,812)

-

 

(1,812)

Total continuing revenue

 

168,455

27,251

 

195,706

 

 

 

 

 

 

 

 

Revenue recognised

 

 

Revenue

 

Over time

At a point in time

 

Total

2019

 

£'000

£'000

 

£'000

 

 

 

 

 

 

Gas services

 

99,929

-

 

99,929

Fire and electrical services

 

15,098

-

 

15,098

Water and hygiene services

 

6,913

-

 

6,913

Lift services

 

11,111

-

 

11,111

Compliance segment revenue

 

133,051

-

 

133,051

Energy services

 

50,934

11,594

 

62,528

Smart metering

 

-

19,553

 

19,553

Energy segment revenue

 

50,934

31,147

 

82,081

Inter-segment elimination

 

(3,066)

-

 

(3,066)

Total continuing revenue

 

180,919

31,147

 

212,066

 

 

 

Reconciliation of Operating profit before exceptional items and amortisation of acquisition intangibles to profit before taxation from continuing operations

 

 

 

 

 

2020

 

2019

 

 

£'000

 

£'000

Operating profit  before exceptional items and amortisation of acquisition intangibles by segment

 

 

 

Compliance

 

11,813

 

8,470

Energy Services

 

788

 

4,341

Central

 

(2,197)

 

(3,457)

Total operating profit  before exceptional items and amortisation of acquisition intangibles

10,404

 

9,354

Amortisation of acquisition intangibles

 

(1,600)

 

(2,735)

Exceptional costs

 

-

 

(225)

Investment income

 

39

 

-

Finance costs

 

(1,047)

 

(1,051)

Profit before taxation from continuing operations

 

7,796

 

5,343

Only the Group consolidated statement of financial position is regularly reviewed by the chief operating decision maker and consequently no segment assets or liabilities are disclosed here under IFRS 8.

None of the Group's major clients account for more than 10% of Group revenue for 2020 or 2019.

 

5.  Profit before taxation

 

2020

 

2019

 

£'000

 

£'000

Profit before taxation is stated after charging / (crediting):

 

 

 

Amount of inventories recognised as an expense (Note 20)

50,615

 

57,532

Depreciation of property, plant and equipment (Note 17)

682

 

693

Depreciation of right of use assets (Note 18)

4,111

 

-

Amortisation of intangible assets (Note 16)

1,984

 

3,159

Staff costs (Note 9)

75,632

 

78,665

Operating lease rentals:

 

 

 

  -  land and buildings

-

 

816

  -  other

-

 

3,778

Profit on disposal of property, plant and equipment

(10)

 

(40)

 

6.  Auditor's remuneration

 

2020

 

2019

 

£'000

 

£'000

The analysis of the auditor's remuneration is as follows:

 

 

 

 

 

 

 

Fees payable to the Company's auditor and their associates for audit services to the Group:

 

 

 

  -  The audit of the Company's annual accounts

90

 

88

  -  The audit of the Company's subsidiaries

215

 

172

Total audit fees

305

 

260

 

 

 

 

Fees payable to the Company's auditor and their associates for other services to the Group:

 

 

 

  -  Agreed upon procedures on interim results

28

 

28

Total non-audit fees

28

 

28

 

7.  Exceptional and other items

 

2020

 

2019

 

£'000

 

£'000

 

 

 

 

Restructuring costs

-

 

225

Exceptional items in the year reduced the Group's profit before tax by nil (2019: £0.2m) and related to restructuring costs of £nil (2019: £0.2m).

Exceptional items are considered non-trading because they are not part of the underlying trade of the Group.

 

8.  Investment income and finance expenses

 

 

2020

 

2019

 

£'000

 

£'000

Investment income

 

 

 

Other interest receivable

39

 

-

 

 

 

 

Finance expenses

 

 

 

Interest payable on bank overdrafts and loans

652

 

887

Unwinding of discount on financial liabilities

109

 

157

Interest on lease agreements (Note 27)

258

 

-

Other interest payable

28

 

7

 

1,047

 

1,051

 

 

9.  Information relating to employees

The average number of employees, including Directors, employed by the Group during the year was:

 

2020

 

2019

 

Number

 

Number

 

 

 

 

Direct labour and contract management

1,487

 

1,554

Administration and support

573

 

570

 

2,060

 

2,124

 

 

 

 

 

2020

 

2019

The aggregate remuneration was as follows:

£'000

 

£'000

 

 

 

 

Wages and salaries

66,932

 

69,486

Social security

6,811

 

7,112

Pension costs - defined contribution plans

1,718

 

1,523

Equity-settled share-based payments

171

 

544

 

75,632

 

78,665

 

10.  Retirement benefit obligations

The Group contributes to the personal pension plans of certain employees of the Group.  The assets of these schemes are held in independently administered funds.  From 1 February 2014, the Group contributes to a new workplace pension scheme for all employees in compliance with the automatic enrolment legislation.  The Group paid £1,718,000 in the year ended 30 September 2020 (2019: £1,523,000). At the reporting date, £341,000 of contributions were payable to the funds (2019: £460,000).

 

11.  Discontinued operations

Discontinued activities represent the Group's Construction and Property Services divisions which were sold on 17 August 2018 and Orchard (Holdings) UK Limited which was sold in September 2017. In determining the classification of the Activities as discontinued at 30 September 2020, the Board had regard to the conditions that needed to be met under IFRS 5 'Non-current Assets Held for Sale and Discontinued Operations'.

 

2020

 

2019

 

£000's

 

£000's

 

 

 

 

(Loss) / profit on disposal of Lakehouse Contracts Limited and Foster Property Maintenance Limited

(303)

 

470

Profit on disposal of Orchard (Holdings) UK Limited

303

 

378

 

-

 

848

Profits from discontinued operations amounted to £nil (2019: £0.8m).

The result for the year to 30 September 2020 on disposal of discontinued operations comprise:

· £0.3m of additional costs relating to legacy transactions

· £0.3m profit on sale of Orchard (Holdings) UK Limited from reassessment of the fair value of consideration receivable

The 2019 profits on disposal of discontinued operations comprise:

· £0.5m tax credit from settlement of amounts provided on disposal of Lakehouse Contracts Limited and Foster Property Maintenance Limited

· £0.4m profit on sale of Orchard (Holdings) UK Limited from final reassessment of the fair value of consideration receivable

On 20 December 2019, Mapps Group Limited, the acquirer of Lakehouse Contracts Limited and Foster Property Maintenance Limited, went into liquidation. We have held meetings during the year with Liquidator's and advisers to both Mapps Group Limited and Lakehouse Contracts Limited in an effort to progress and resolve any outstanding claims. We are still awaiting the provision of necessary information from the Liquidators in order to progress matters. As at 30 September 2020, the group has provisions for liabilities relating to the disposal of £0.8m (2019: £0.8m). In addition to the amounts provided for above, there are a number of potential contingent liabilities arising from the disposal including:

 

• Potential claims under parent company guarantees and bonds for projects. The value of bonds and guarantees is disclosed in Note 31

 

• Potential claims under clauses in the sale and purchase agreement including working capital adjustments and warranties/indemnities. Resolution of these outstanding claims is in the hands of the Liquidators of Mapps Group Limited and Lakehouse Contracts Limited

 

No claims have been received from the Liquidators to date and the Group has claims against MAPPS for amounts that exceed their best estimate of any amounts that may potentially be due to MAPPS under clauses in the sale and purchase agreement. The Board are in continuing dialogue with all parties.

Further details are not disclosed on the basis that such disclosure would be seriously prejudicial.

 

12.  Tax on profit on ordinary activities

 

 

2020

 

2019

 

£'000

 

£'000

Current tax

 

 

 

Current year

1,637

 

1,492

Current tax - prior year adjustment

(101)

 

22

Total current tax

1,536

 

1,514

Deferred tax (Note 26)

(50)

 

(360)

Total tax on profit on ordinary activities

1,486

 

1,154

 

 

 

 

The tax assessed for the year differs from the standard rate of corporation tax in the UK.  The differences are explained below:

 

 

 

 

 

 

 

 

 

2020

 

2019

 

£'000

 

£'000

 

 

 

 

Profit before tax from continuing operations

7,796

 

5,343

 

 

 

 

Effective rate of corporation tax in the UK

19%

 

19%

 

 

 

 

Profit before tax at the effective rate of corporation tax

1,481

 

1,015

 

 

 

 

Effects of:

 

 

 

Expenses not deductible for tax purposes

(15)

 

224

Adjustment of deferred tax to closing tax rate

(34)

 

2

Current tax - prior year adjustment

(101)

 

22

Deferred tax - prior year adjustment

155

 

(13)

Deferred tax asset not recognised

-

 

(96)

Tax charge for the year

1,486

 

1,154

Factors that may affect future charges

The closing deferred tax provision has been calculated at 19% in accordance with the rate enacted at the statement of financial position date.

In the Spring Budget 2020, the Government announced that from 1 April 2020 the corporation tax rate would remain at 19% (rather than reducing to 17%, as previously enacted). This new law was substantively enacted on 17 March 2020.

 

13.  Dividends

The final dividend for the year ended 30 September 2019 of 0.5 pence per share amounting to £0.8m was paid in the year.

The Board has proposed a final dividend for the year of 1 pence per share amounting to £1.6m and representing a total dividend of 1 pence for the full year (2019: 0.5p per share).

Subject to approval at the Annual General Meeting on 18 March 2021 the final dividend will be paid on 30 April 2021 to shareholders on the register at the close of business on 19 February 2021 and has not been included as a liability in these Financial Statements.

 

14.  Earnings per share

The calculation of the basic and diluted earnings per share is based on the following data:

 

2020

 

2019

 

Number

 

Number

 

 

 

 

Weighted average number of ordinary shares for the purposes of basic earnings per share

159,025,339

 

158,049,310

 

 

 

 

Diluted

 

 

 

Effect of dilutive potential ordinary shares:

 

 

 

Share options

3,200,981

 

595,869

Weighted average number of ordinary shares for the purposes of diluted earnings per share

162,226,320

 

158,645,179

 

 

 

 

Earnings for the purpose of basic and diluted earnings per share being net profit after tax attributable to the owners of the Company from continuing and discontinued operations (£'000's)

6,310

 

5,037

Basic earnings per share

4.0p

 

3.2p

Diluted earnings per share

3.9p

 

3.2p

Earnings for the purpose of basic and diluted earnings per share being net profit after tax attributable to the owners of the Company from continuing operations (£'000's)

6,310

 

4,189

 

 

 

 

Continuing basic earnings per share

4.0p

 

2.7p

Continuing diluted earnings per share

3.9p

 

2.6p

 

 

 

 

 

 

 

 

The number of shares in issue at 30 September 2020 was 159,335,259 (2019: 158,947,467).

The weighted average number of ordinary shares in issue during the year excludes those accounted for in the own shares reserve (Note 30).

 

 

15.  Goodwill

 

 

 

 

 

 

 

 

 

£'000

 

 

 

 

 

At 1 October 2018

 

 

 

42,923

Other adjustments to goodwill - Just Energy Solutions Limited

 

 

(566)

At 30 September 2019 and 30 September 2020

 

 

 

42,357

Goodwill arising on consolidation represents the excess of the fair value of the consideration transferred over the fair value of the Group's share of the net assets of the acquired subsidiary at the date of acquisition.

Goodwill is not amortised but is reviewed for impairment on an annual basis or more frequently if there is an indication that goodwill may be impaired.  Goodwill acquired in a business combination is allocated to cash-generating units ("CGUs") according to the level at which management monitors that goodwill. 

Goodwill is carried at cost less accumulated impairment losses.

The carrying value of goodwill is allocated to the following CGUs:

 

 

2020

 

2019

CGU

Segment

£'000

 

£'000

 

 

 

 

 

K&T Heating Services Limited

Compliance

3,774

 

3,774

Sureserve Fire and Electrical Limited (formerly known as Allied Protection Limited)

Compliance

3,717

 

3,717

Everwarm Limited

Energy services

17,476

 

17,476

H2O Nationwide Limited

Compliance

2,209

 

2,209

Providor Limited

Energy services

3,037

 

3,037

Sure Maintenance Group Limited

Compliance

4,225

 

4,225

Aaron Heating Services Limited

Compliance

3,667

 

3,667

PLS Holdings Limited

Compliance

4,064

 

4,064

Just Energy Solutions Limited

Compliance

188

 

188

 

 

42,357

 

42,357

An asset is impaired if its carrying value exceeds the unit's recoverable amount which is based upon value in use. At each reporting date impairment reviews are performed by comparing the carrying value of the CGU to its value in use.  At 30 September 2020 the value in use for each CGU was calculated based upon the cash flow projections of the latest board approved three-year forecasts together with a further two years estimated and an appropriate terminal value based on perpetuity.

This is discussed further below.

Future budgeted and forecast profits are estimated by reference to the average operating margins achieved in the period immediately before the start of the budget period.

The estimated growth rates are based on past experience and knowledge of the individual sector's markets. The Directors believe that the heating, fire safety and the renewable energy and insulation markets will continue to present strong growth opportunities for the CGUs outlined above. Management believe that future growth in these markets is underpinned by a number of factors including:

· A pipeline of new tenders

· Further opportunities to work with other Group companies

· Client demand for safe buildings

· Adjacent market opportunities

The assumptions used in the impairment reviews are outlined below.

The growth rate applied to the cash flows in years four and five of the impairment review performed at 30 September 2020 was 4% (2019: 2%). The growth rate has increased in line with trading over the recent years. A terminal growth rate of 2% (2019: 2%) was applied. The pre-tax discount rate applied was 7.2% (2019: 8.2%). The discount rate has reduced in line with a reduction in the Group's borrowing rate. Three different types of sensitivity analysis have been performed on entities that showed potential indicators of impairment, including a 20% reduction in revenue, a reduction in the operating profit margin of between 1% and 5% and an increase in the discount rate by 1.5%. The Directors consider that reasonably possible changes in the key assumptions would not cause the carrying amount to exceed its recoverable amount. There is significant headroom in all but one of the CGU's based on the review model. PLS Holdings headroom is £4.5m (2019: £2.1m). A reduction in operating profit of 55% (2019: 33%) over each of the next three years would result in a breakeven position for this CGU.

 

 

16.  Other intangible assets

 

 

Acquisition intangibles

 

 

 

Computer software

Contracted customer order book

Customer relationships

Non-compete agreements

 

Total

 

£'000

£'000

£'000

£'000

 

£'000

Cost

 

 

 

 

 

 

At 1 October 2018

946

18,606

14,655

1,670

 

35,877

Additions

403

-

-

-

 

403

At 30 September 2019

1,349

18,606

14,655

1,670

 

36,280

Additions

539

-

-

-

 

539

Disposals

(15)

-

-

-

 

(15)

At 30 September 2020

1,873

18,606

14,655

1,670

 

36,804

 

 

 

 

 

 

 

Amortisation

 

 

 

 

 

 

At 1 October 2018

354

18,111

10,826

1,659

 

30,950

Amortisation charge

424

411

2,313

11

 

3,159

At 30 September 2019

778

18,522

13,139

1,670

 

34,109

Amortisation charge

384

84

1,516

-

 

1,984

Disposals

(15)

-

-

-

 

(15)

At 30 September 2020

1,147

18,606

14,655

1,670

 

36,078

 

 

 

 

 

 

 

Carrying value

 

 

 

 

 

 

At 30 September 2020

726

-

-

-

 

726

 

 

 

 

 

 

 

At 30 September 2019

571

84

1,516

-

 

2,171

 

 

 

 

 

 

 

At 30 September 2018

592

495

3,829

11

 

4,927

Contracted customer order book

The value placed on the order book is based upon the cash flow projections over the contracts in place when a business is acquired.  Due to uncertainties with trying to forecast revenues beyond the contract term, the Directors have valued contracts over the contractual term only.  The value of the order book is amortised over the remaining life of each contract which typically range from one to five years.

Customer relationships

The values placed on the customer relationships are based upon the non-contractual expected cash inflows forecast on the base business over and above contracted revenues.  The value of customer relationships is amortised over five years.

Non-compete agreements

The value placed on the non-compete agreements are based upon the non-compete clause and knowledge and know-how of the former owners of the acquired businesses.  The value of non-compete is amortised over five years.

 

 

17.  Property, plant and equipment

 

Leasehold improvements

Plant & equipment

Fixtures and fittings

Motor vehicles

 

Total

 

£'000

£'000

£'000

£'000

 

£'000

Cost

 

 

 

 

 

 

At 1 October 2018

531

1,045

1,606

507

 

3,689

Additions

155

268

190

18

 

631

Disposals

-

(89)

(156)

(146)

 

(391)

At 30 September 2019

686

1,224

1,640

379

 

3,929

Additions

10

373

238

-

 

621

Disposals

(20)

(208)

(118)

(203)

 

(549)

At 30 September 2020

676

1,389

1,760

176

 

4,001

 

 

 

 

 

 

 

Depreciation

 

 

 

 

 

 

At 1 October 2018

210

531

1,143

331

 

2,215

Charge for the year

62

269

261

101

 

693

Disposals

-

(63)

(129)

(131)

 

(323)

At 30 September 2019

272

737

1,275

301

 

2,585

Charge for the year

207

236

228

11

 

682

Disposals

(19)

(208)

(107)

(144)

 

(478)

At 30 September 2020

460

765

1,396

168

 

2,789

 

 

 

 

 

 

 

Net book value

 

 

 

 

 

 

At 30 September 2020

216

624

364

8

 

1,212

 

 

 

 

 

 

 

At 30 September 2019

414

487

365

78

 

1,344

 

 

 

 

 

 

 

At 30 September 2018

321

514

463

176

 

1,474

Included within the net book value of property, plant and equipment is £nil (2019: £54,000) in respect of assets held under finance leases.  Depreciation for the year on these assets was £nil (2019: £91,000).

 

 

 

18.  Right of use assets

 

 

 

Leasehold property

Commercial Vehicles

 

Total

 

 

 

£'000

£'000

 

£'000

Cost

 

 

 

 

 

 

At 30 September 2019

 

 

-

-

 

-

Adoption of IFRS16

 

 

2,989

5,171

 

8,160

At 1 October 2019

 

 

2,989

5,171

 

8,160

Additions

 

 

246

2,750

 

2,996

Disposals

 

 

-

(887)

 

(887)

At 30 September 2020

 

 

3,235

7,034

 

10,269

 

 

 

 

 

 

 

Depreciation

 

 

 

 

 

 

At 30 September 2019

 

 

-

-

 

-

Adoption of IFRS16

 

 

-

-

 

-

At 1 October 2019

 

 

-

-

 

-

Charge for the year

 

 

1,111

3,000

 

4,111

Disposals

 

 

-

(599)

 

(599)

At 30 September 2020

 

 

1,111

2,401

 

3,512

 

 

 

 

 

 

 

Net book value

 

 

 

 

 

 

At 30 September 2020

 

 

2,124

4,633

 

6,757

 

 

 

 

 

 

 

At 30 September 2019

 

 

-

-

 

-

 

 

 

19.  Group entities

Subsidiaries

The Group's subsidiary undertakings are;

 

Country of incorporation

Class of capital

%

Principal activity

Aaron Heating Services Limited

England

Ordinary

100

Intermediate holding company

Aaron Services Limited

England

Ordinary

100

Maintenance and installation of domestic gas heating systems

Sureserve Fire and Electrical Limited (formerly known as Allied Protection Limited )

England

Ordinary

100

Fire alarm engineers

Bury Metering Services Limited

England

Ordinary

100

Non-trading

Everwarm Limited

Scotland

Ordinary

100

Energy and insulation services

F J Jones Holdings Limited

England

Ordinary

100

Non-trading

F J Jones Heating Engineers Limited

England

Ordinary

100

Non-trading

H20 Nationwide Limited

England

Ordinary

100

Water hygiene

Just Energy Solutions Limited

England

Ordinary

100

Maintenance and installation of domestic gas heating systems

K & T Heating Services Limited

England

Ordinary

100

Plumbing and heating engineers

PLS GRP Limited

England

Ordinary

100

Intermediate holding company

PLS Holdings Limited

England

Ordinary

100

Intermediate holding company

PLS Industries Limited

England

Ordinary

100

Non-trading

Precision Lift Services Limited

England

Ordinary

100

Lift installation, modernisation and maintenance services

Providor Limited

England

Ordinary

100

Smart Metering

Smart Metering Limited

England

Ordinary

100

Non-trading

Speedfit Limited

England

Ordinary

100

Non-trading

Sure Maintenance Limited

England

Ordinary

100

Maintenance and installation of domestic gas heating systems

Sure Maintenance Group Limited

England

Ordinary

100

Intermediate holding company

Sureserve Compliance Services Limited

England

Ordinary

100

Intermediate holding company

Sureserve VGS Limited (formerly known as Sureserve Construction Services Limited)

England

Ordinary

100

Non-trading

Sureserve Design and Build Limited

England

Ordinary

100

Non-trading

Sureserve Energy Services Limited

England

Ordinary

100

Intermediate holding company

Sureserve Holdings Limited (*)

England

Ordinary

100

Intermediate holding company

Sureserve Property Investments Limited

England

Ordinary

100

Non-trading

 

 

 

 

 

* Directly held investment

 

 

 

 

 

 

 

 

 

The registered office of all entities above is Unit 1 Yardley Business Park, Luckyn Lane, Basildon, Essex, SS14 3BZ except for Everwarm whose registered office is 3 - 5 Melville Street, Edinburgh, EH3 7PE.

 

 

 

 

 

Joint ventures

The Group's joint ventures are:

 

Country of incorporation

Class of capital

%

Principal activity

Warmworks Scotland LLP

Scotland

Ordinary

33.33

Energy and insulation services

Arbed am Byth

Wales

Ordinary

50

Energy and insulation services

 

Details of joint ventures

 

2020

 

2019

 

£'000

 

£'000

 

 

 

 

Carrying value of investment in Arbed am Byth

390

 

294

Carrying value of investment in Warmworks

111

 

438

 

501

 

732

 

Warmworks, a joint venture with Changeworks and the Energy Saving Trust, commenced trading in September 2015, the loss for 2020 was £62,000 (2019: income £135,000). The registered office of Warmworks Scotland LLP is 1 Carmichael Place, Leith, Edinburgh, Midlothian, EH6 5PH.

 

Arbed am Byth, a joint venture with the Energy Saving Trust, commenced trading in August 2018, the income for 2020 was £161,000 (2019: £294,000). The registered office of Arbed am Byth is Unit 2 Cefn Coed, Nantgarw, Cardiff, Wales, CF15 7QQ.

 

 

20.  Inventories

 

2020

 

2019

 

£'000

 

£'000

 

 

 

 

Raw materials and consumables

3,022

 

3,059

There are no inventories at 30 September 2020 or 30 September 2019 carried at fair value less costs to sell.  The Directors consider that the replacement value of inventories is not materially different from their carrying value.  There was no specific security held at either reporting date over inventory.

£50,615,000 (2019: £57,532,000) of inventories were recognised as an expense in the year.

 

 

21.  Trade and other receivables

 

2020

 

2019

 

£'000

 

£'000

Current

 

 

 

Trade receivables

16,667

 

17,858

Deferred consideration receivable

-

 

626

Social security and other taxes

7

 

239

Other receivables

3,708

 

3,685

Prepayments

2,336

 

2,081

Accrued income

17,336

 

17,579

 

40,054

 

42,068

 

 

 

 

Other receivables includes sales retentions of £2,461,000 (2019: £2,396,000), rebates receivable of £714,000 (2019: £677,000), and finance issue costs of £136,000 (2019: £245,000 offset against borrowings).

 

 

 

 

 

2020

 

2019

 

£'000

 

£'000

Trade receivables

 

 

 

Trade receivables not due

15,231

 

15,074

Trade receivables past due 1-30 days

1,088

 

1,988

Trade receivables past due 31-60 days

255

 

104

Trade receivables past due 61-90 days

64

 

161

Trade receivables past due over 90 days

475

 

1,150

Gross trade receivables

17,113

 

18,477

 

 

 

 

Provision for credit losses brought forward

(619)

 

(479)

Amounts written off receivables ledger

312

 

75

Debtor provision charged to profit or loss in the year

(139)

 

(215)

Provision for credit losses carried forward

(446)

 

(619)

Net trade receivables

16,667

 

17,858

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The entire provision for bad debts of £446,000 (2019: £619,000) is past due over 90 days.

The Directors consider that the carrying amount of trade receivables approximates to their fair value. Debts provided for and written off are determined on an individual basis and included in administrative expenses in the financial statements. The Directors believe the credit risk is low due to the majority of the Group's customer base being either public sector or regulated bodies. The Group's maximum exposure on credit risk is fair value on trade receivables as presented above. The Group has no pledge as security on trade receivables.

At the end of the year one client represented over 5% of the total balance of trade receivables (2019: none).

 

 

22.  Trade and other payables

 

2020

 

2019

 

£'000

 

£'000

Current

 

 

 

Trade payables

19,547

 

21,098

Sub-contract retentions

833

 

1,256

Accruals

9,918

 

7,981

Deferred income

920

 

233

Social security and other taxes

10,508

 

5,132

Other payables

1,038

 

998

 

42,764

 

36,698

The Directors consider that the carrying amount of trade payables approximates to their fair value for each reported period.  Trade payables are non-interesting bearing.  Average settlement days are 65 days (2019: 61 days).

 

23.  Borrowings

 

2020

 

2019

 

£'000

 

£'000

Bank loans and credit facilities at amortised cost:

 

 

 

Current

-

 

-

Non-current

-

 

9,755

 

-

 

9,755

 

 

 

 

Maturity analysis of bank loans and credit facilities falling due:

 

 

 

In one year or less, or on demand

-

 

-

Between two and five years

-

 

9,755

 

 

In December 2018, the Group renewed its bank facilities to provide an overdraft facility of £5.0m together with a revolving credit facility of £25.0m, which runs to 31 January 2022. 

 

 

 

24.  Net cash / (debt)

 

 

 

 

 

2020

 

2019

 

£'000

 

£'000

 

 

 

 

Cash and cash equivalents

9,679

 

2,452

Bank loans and credit facilities

-

 

(9,755)

Finance lease obligations

-

 

(54)

Unamortised finance costs (included in other receivables)

136

 

-

Pre IFRS 16 net cash / (debt)

9,815

 

(7,357)

Finance lease obligations

(6,836)

 

-

Total net cash / (debt)

2,979

 

(7,357)

 

 

 

 

 

25.  Provisions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Legal and other

 

 

 

 

 

 

 

£'000

 

 

 

 

 

 

 

 

At 1 October 2018

 

 

 

 

 

 

7,695

Additional provision

 

 

 

 

 

 

172

Utilised in the year

 

 

 

 

 

 

(4,257)

At 30 September 2019

 

 

 

 

 

 

3,610

Additional provision

 

 

 

 

 

 

632

Utilised in the year

 

 

 

 

 

 

(196)

At 30 September 2020

 

 

 

 

 

 

4,046

 

 

 

 

 

 

 

 

Current provisions

 

 

 

 

 

 

825

 

 

 

 

 

 

 

 

Non-current provisions

 

 

 

 

 

 

3,221

 

 

 

 

 

 

 

 

Legal and other

Provisions relate to property dilapidation obligations, potential contract settlement costs and other potential legal settlement costs.  These are expected to result in an outflow of economic benefit over the next one to five years.

 

 

 

 

26.  Deferred taxation

 

Accelerated capital allowances

Short term timing differences

Share based payments

Acquisition intangibles

Unutilised losses

Total

 

£'000

£'000

£'000

£'000

£'000

£'000

 

 

 

 

 

 

 

Asset / (provision) bought forward as at 1 October 2018

207

436

-

(737)

57

(37)

Pre acquisition adjustment

-

-

-

-

144

144

Credit / (debit) to P&L

26

(146)

92

465

(77)

360

Asset / (provision) carried forward as at 30 September 2019

233

290

92

(272)

124

467

Credit / (debit) to P&L

(140)

(61)

(36)

272

15

50

Asset carried forward as at 30 September 2020

93

229

56

-

139

517

 

 

 

 

 

 

 

At 30 September 2020

 

 

 

 

 

 

Non-current asset

93

229

56

-

139

517

Non-current liability

-

-

-

-

-

-

Net deferred tax asset

93

229

56

-

139

517

At 30 September 2019

 

 

 

 

 

 

Non-current asset

233

290

92

-

124

739

Non-current liability

-

-

-

(272)

-

(272)

Net deferred tax asset / (liability)

233

290

92

(272)

124

467

Deferred tax assets and liabilities are offset where the Group has a legally enforceable right to do so.

 

 

 

 

 

27.  Lease liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Present value of minimum lease payments

 

 

 

 

 

 

 

£'000

 

 

 

 

 

 

 

 

At 1 October 2018

 

 

 

 

 

 

143

Repayments

 

 

 

 

 

 

(89)

At 30 September 2019

 

 

 

 

 

 

54

Adoption of IFRS 16

 

 

 

 

 

 

8,106

At 1 October 2019

 

 

 

 

 

 

8,160

Repayments

 

 

 

 

 

 

(4,289)

Interest

 

 

 

 

 

 

258

New obligations

 

 

 

 

 

 

2,996

Obligations cancelled

 

 

 

 

 

 

(289)

At 30 September 2020

 

 

 

 

 

 

6,836

 

 

 

 

 

 

 

 

Future lease payments are due as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Present value of minimum lease payments

 

 

 

 

 

 

 

£'000

 

 

 

 

 

 

 

 

Less than one year

 

 

 

 

 

 

3,167

Between two and five years

 

 

 

 

 

 

3,669

At 30 September 2020

 

 

 

 

 

 

6,836

 

 

 

 

 

 

 

 

Less than one year

 

 

 

 

 

 

54

Between two and five years

 

 

 

 

 

 

-

At 30 September 2019

 

 

 

 

 

 

54

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

28.  Called up share capital

Allotted, called-up and fully paid;

2020

 

2019

 

2020

 

2019

Number

 

Number

 

£

 

£

 

 

 

 

 

 

 

159,335,259

 

158,947,467

Ordinary shares of £0.10 each

15,933,526

 

15,894,747

Details of options granted under the Group's share scheme are contained in Note 29.

Voting rights

The holders of ordinary shares are entitled to receive notice of, attend or participate in any general meeting of the Company and to receive any notice of a written resolution proposed to be passed by the Company.

On a show of hands at a meeting the holders of any such shares shall be entitled to one vote for all such shares held.

On a poll at a meeting, for a written resolution, the holder of such shares shall be entitled to such number of votes as corresponds to the nominal value (in pence) or the relevant shares held.

 

29.  Share-based payments

The Company has established a Share Incentive Plan (SIP), Sharesave Scheme (SAYE), Company Share Option Plan (CSOP), Performance Share Plan (PSP), Deferred Share Bonus Plan (DSBP) and a Special Incentive Award Plan (SIAP).

The net charge recognised for share based payments in the year was £171,000 (2019: £544,000).

Share Incentive Plan (SIP)

The SIP is an HMRC-approved scheme plan open to all UK employees at the date of the IPO, 23 March 2015. Each employee was given £200 of free shares; there were no performance conditions apart from remaining in employment for three years from the date of award. Shares totaling 325,842 were transferred directly to the SIP trust and on 29 April 2015, 236,213 share allotted in relation to the initial award of shares under the SIP.  No further awards have been made under the SIP.

Sharesave Scheme (SAYE)

The SAYE is open to all employees who satisfy certain criteria, particularly relating to period of employment. The exercise price is equal to the average of the closing quoted market price for the preceding three days less a discretionary discount approved by the Board of not less than 80% of the market value of a share. The Scheme is for three years, during which the holder must remain in the employment of the Group. The shares can be exercised within six months from the maturity of the Scheme.

Company Share Option Plan (CSOP)

The CSOP is open to all employees at the discretion of the Remuneration Committee. The exercise price is equal to the average of the closing quoted market price at the date of grant. The vesting period is for three years, during which the holder must remain in the employment of the Group and is conditional on the achievement of a mix of market and non-market performance conditions from the date of granting the option to the date of potential exercise.

Performance Share Plan (PSP)

The PSP is open to certain employees at the discretion of the Remuneration Committee at a limit not exceeding 150% of the individual's base salary at the date of grant. The exercise price is £nil. The vesting period is for three years, during which the holder must remain in the employment of the Group and is conditional on the achievement of a mix of market and non-market performance conditions from the date of granting the option to the date of potential exercise.

Deferred Share Bonus Plan (DSBP)

The DSBP will be operated in conjunction with the Company's (and its subsidiaries') annual discretionary bonus arrangements from time to time and will provide a means by which a proportion of an employee's annual discretionary non-contractual bonus can be deferred. The number of shares placed under an award granted will be such number of shares as has a market value (measured at the grant date) as near to, but not exceeding, the amount of bonus that has been granted under such award. No award was made under the DSBP in the year.

Special Incentive Award Plan (SIAP)

Awards granted under the SIAP take the form of options to acquire Sureserve Shares for nil consideration.  The awards will have no beneficial tax status.  Only employees who are also Directors of the Company may be granted an award under the SIAP.  The Remuneration Committee will have absolute discretion to select the persons to whom awards may be granted and in determining the number of shares to be subject to each award.  Two employee are currently participating in the SIAP.

Long Term Incentive Plan (LTIP)

Awards granted under the LTIP take the form of options to acquire Sureserve Shares either at a price equal to the nominal share price or for nil consideration.  The awards will have no beneficial tax status.  All employees of the Company and any of its subsidiaries ("Group") may be granted an award under the LTIP.  The Remuneration Committee will have absolute discretion to select the persons to whom awards may be granted and in determining the number of shares to be subject to each award.  Awards were granted to two Directors of the Company during the year. Awards were capable of exercise from grant date and were exercised during the year.

 

SIP

SAYE

CSOP

PSP

SIAP

LTIP

Number

 

 

 

 

 

 

At 1 October 2018

82,611

3,240,995

1,564,251

909,129

6,615,385

-

Granted

-

1,574,064

-

-

1,600,000

1,403,846

Lapsed

(16,744)

(1,835,105)

(316,098)

(749,129)

(7,415,385)

-

Exercised

-

(16,518)

-

-

-

(1,403,846)

At 30 September 2019

65,867

2,963,436

1,248,153

160,000

800,000

-

Granted

-

1,818,896

1,880,000

680,000

-

-

Lapsed

-

(583,656)

(15,000)

-

-

-

Exercised

(65,867)

(387,792)

-

-

-

-

At 30 September 2020

-

3,810,884

3,113,153

840,000

800,000

-

 

 

 

 

 

 

 

Weighted average exercise price (p)

 

 

 

 

 

 

At 1 October 2019

0.00p

29.49p

40.75p

0.00p

0.00p

0.00p

Granted

-

32.00p

44.00p

0.00p

-

-

Lapsed

-

30.03p

40.75p

-

-

-

Exercised

0.00p

33.21p

-

-

-

-

Outstanding at 30 September 2020

0.00p

30.22p

42.71p

0.00p

0.00p

0.00p

Outstanding value at 30 September 2019

0.00p

29.49p

40.75p

0.00p

0.00p

0.00p

 

 

 

 

 

 

 

Fair value of options granted

 

 

 

 

 

 

Weighted fair value of one option

87.61p

9.55p

17.49p

39.42p

6.00p

-

 

 

 

 

 

 

 

Assumptions used in estimating the fair value (weighted average)

 

 

 

 

 

 

Share price at date of grant

99.75p

33.62p

42.42p

43.24p

27.10p

-

Exercise price

-

30.22p

42.71p

0.00p

0.00p

-

Expected dividend yield

4.60%

2.78%

4.04%

2.90%

1.00%

-

Risk free rate

1.21%

0.42%

0.05%

(0.03%)

0.71%

-

Expected volatility

40.37%

42.68%

56.61%

57.10%

34.90%

-

Expected life

3 years

3.4 years

5.1 years

3 years

1.5 years

-

In the year ended 30 September 2020, options were granted in respect of the CSOP, PSP and SAYE schemes.

The weighted average remaining contractual life of outstanding options at 30 September 2020 was 1.7 years (2019: 1.9 years).

The SAYE, CSOP and PSP options were valued under the binomial methodology.

The SIAP options were valued using a Monte Carlo model.

 

The inputs into the Binomial model are as follows:

 

2020

2019

 

 

 

 

 

 

 

 

Share price (p)

 

 

 

32.00 - 44.00

29.25

 

Exercise price (p)

 

 

 

0.00 - 44.00

25.00

 

Expected volatility (%)

 

 

 

35.00 - 58.00

48.45

 

Expected life (years)

 

 

 

3 - 6.5

3.43

 

Risk-free rate (%)

 

 

 

(0.05) - 0.20

0.65

 

Expected dividend yield (%)

 

 

 

1.75 - 1.85

2.83

 

 

 

 

 

 

 

 

The inputs into the Monte Carlo model are as follows:

 

2020

2019

 

 

 

 

 

 

 

 

Share price (p)

 

 

 

-

27.1

 

Exercise price (p)

 

 

 

-

0.00

 

Expected volatility (%)

 

 

 

-

34.90

 

Expected life (years)

 

 

 

-

1.50

 

Risk-free rate (%)

 

 

 

-

0.71

 

Expected dividend yield (%)

 

 

 

-

1.00

 

Expected volatility was based upon the historical volatility over the expected life of the schemes.  The expected life is based upon scheme rules and reflect management's best estimates for the effects of non-transferability, exercise restrictions and behavioural considerations.

 

30.  Reserves

Share premium reserve

The share premium account represents amounts received in excess of the nominal value of shares on issue of new shares, net of the direct costs associated with issuing those shares.

Own shares reserve

At IPO, each employee was given £200 of free shares, to be held for their benefit in an Employee Benefit Trust. Shares totaling 325,842 were transferred directly to the Employee Benefit Trust on 23 March 2015.  The own shares reserve at 30 September 2020 represents the cost of £325,842 (2019: £325,842) shares in Sureserve Group plc.

Merger reserve

On 23 March 2015 Sureserve Group plc (then Lakehouse plc) was listed on the Premium Listing segment of the Official List and trading on the Main Market of the London Stock Exchange.  As part of a restructuring accompanying the Initial Public Offering ("IPO") of the Group on 23 March 2015, Sureserve Group plc replaced Sureserve Holdings Limited as the Group's ultimate parent company by way of a share exchange agreement.  Under IFRS 3 this has been accounted for as a group reconstruction under merger accounting. 

Merger accounting principles for this combination gave rise to a merger reserve of £20,067,000.

 

 

31.  Guarantees and contingent liabilities

The Company and certain subsidiaries have, in the normal course of business, given guarantees and performance bonds relating to the Group's contracts totalling £4,621,000 (2019: £5,420,000). A subsidiary of the Group has provided a guarantee of £750,000 (2019: £750,000) to the Warmworks joint venture.

Contingent liabilities in respect of the disposal of Lakehouse Contracts Limited and Foster Property Maintenance Limited are disclosed in Note 11.

 

32.  Financial instruments

Financial instruments comprise both financial assets and financial liabilities. The carrying value of these financial assets and liabilities are assumed to approximate their fair values.

The principal financial assets in the Group comprise trade, loans and other receivables and cash and cash equivalents. The principal financial liabilities in the Group comprise borrowings which are categorised as debt at amortised cost, together with trade and other payables, other long term liabilities and provisions for liabilities, which are classified as other financial liabilities.

Financial risk management

The Group's objectives when managing finance and capital are to safeguard the Group's ability to continue as a going concern in order to provide returns to shareholders and benefits to other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.  The Group is not subject to any externally imposed capital requirements.

The main financial risks faced by the Group are liquidity risk, credit risk and market risk (which includes interest rate risk).  Currently the Group only operates in the UK and only transacts in Sterling.  It is therefore not exposed to any foreign currency exchange risk.  The Board regularly reviews and agrees policies for managing each of these risks.

Categories of financial instruments

 

 

 

Financial assets measured at amortised cost

 

 

 

2020

 

2019

Financial assets

 

 

£'000

 

£'000

Current financial assets

 

 

 

 

 

Trade receivables, loans and other receivables

 

 

37,711

 

39,748

Cash and cash equivalents

 

 

9,679

 

2,452

 

 

 

 

 

 

 

 

 

47,390

 

42,200

 

 

 

 

 

Financial liabilities measured at amortised cost

 

 

 

2020

 

2019

Financial liabilities

 

 

£'000

 

£'000

Current financial liabilities

 

 

 

 

 

Trade and other payables

 

 

31,336

 

31,333

Lease liabilities

 

 

3,167

 

54

Total current financial liabilities

 

 

34,503

 

31,387

 

 

 

 

 

 

Non-current financial liabilities

 

 

 

 

 

Borrowings

 

 

-

 

9,755

Lease liabilities

 

 

3,669

 

-

Total non-current financial liabilities

 

 

3,669

 

9,755

 

 

 

 

 

 

 

 

 

38,172

 

41,142

The Directors consider that the carrying amounts of financial assets and financial liabilities recorded at amortised cost in the financial statements approximate their fair values.

Credit risk

Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group.  The Group has adopted a policy of only dealing with creditworthy counterparties and obtaining sufficient collateral where appropriate, as a means of mitigating the risk of financial loss from defaults.  The Group does not enter into derivatives to manage its credit risk.

The maximum exposure to credit risk at the reporting date is represented by the carrying value of the financial assets in the statement of financial position.  The Group does not have any significant credit risk exposure to any single counterparty or any group of counterparties having similar characteristics.

There has been a minimal history of bad debts as the majority of its sales are to local government councils or housing trust partnerships and as a consequence the Directors do not consider that the Group has a material exposure to credit risk.

Market risk

As the Group only operates in the UK and only transacts in Sterling, the Group's activities expose it primarily to the financial risks of changes in interest rates only and as a consequence of being debt free the Directors do not consider that the Group has a material exposure to interest rate risk.

Liquidity risk

Ultimate responsibility for liquidity risk management rests with the Board, which has established an appropriate liquidity risk management framework for the management of the Group's short, medium and long term funding and liquidity management requirements.  The Group's policy on liquidity is to ensure that there are sufficient committed borrowing facilities to meet the Group's long to medium-term funding requirements.

The Group manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities, by continuously monitoring forecast and actual cash flows, and by matching the maturity profiles of financial assets and liabilities.

A maturity analysis of bank borrowings at each period end is contained in Note 23.

 

(a)  Interest rate of borrowings

The interest rate exposure of the Group's borrowings is shown below:

 

 

 

2020

 

2019

 

 

 

£'000

 

£'000

 

 

 

 

 

 

Floating rate Sterling borrowings with a capped interest rate

 

 

-

 

9,755

The Group's average interest rate was 3.7% (2019: 4.4%) which included LIBOR and margin.

(b)  Interest rate risk.

Due to the floating rate of interest on the Group's principal borrowings, the Group is exposed to interest rate risk.

(c)  Interest rate sensitivity analysis

The Group's principal borrowings attract floating rate interest.  On a weighted average of £6.4m (2019: £14.5m) of debt in the year, a half per cent increase in the floating interest rate would have increased annual interest payable by £32,000 (2019: 72,000). 

 

33.  Operating lease commitments

The future aggregate minimum lease payments under non-cancellable operating leases are as follows:

 

2020

 

2019

 

Land and buildings

Other items

 

Land and buildings

Other items

 

£'000

£'000

 

£'000

£'000

 

 

 

 

 

 

Within one year

-

-

 

1,059

2,758

Between two and five years

-

-

 

1,874

2,419

Over five years

-

-

 

102

-

 

-

-

 

3,035

5,177

Operating lease payments represent rentals payable by the Group for its properties and equipment.  For property, leases are negotiated for an average term of five years and rentals are fixed for an average of five years, with an option to extend for a further period at the then prevailing market rate.  For equipment, leases are negotiated for a term of between three and four years and on completion the equipment is returned to the lessor.

 

34.  Cash generated from operations

 

 

 

Pre IFRS 16

 

 

 

2020

 

2020

 

2019

 

£'000

 

£'000

 

£'000

 

 

 

 

 

 

Operating profit

8,805

 

8,643

 

6,394

Adjustments for:

 

 

 

 

 

Depreciation

4,793

 

682

 

693

Share-based payments

171

 

171

 

544

Amortisation of intangible assets

1,984

 

1,984

 

3,159

Profit on disposal of property, plant and equipment

(10)

 

(10)

 

(40)

Changes in working capital:

 

 

 

 

 

Inventories

37

 

37

 

1,157

Trade and other receivables

1,618

 

1,618

 

199

Trade and other payables

6,035

 

6,035

 

(2,491)

Provisions

436

 

436

 

(4,076)

Cash generated from operations

23,869

 

19,596

 

5,539

 

 

 

 

 

 

Adjusted operating cash conversion calculation

 

 

 

 

 

Cash generated from operations

23,869

 

19,596

 

5,539

 

 

 

 

 

 

VAT deferral

(6,072)

 

(6,072)

 

-

Exceptional (income received) / costs paid in the year

(605)

 

(605)

 

4,364

Adjusted cash generated from continuing operations

17,192

 

12,919

 

9,903

Operating profit before exceptional items and amortisation of acquisition intangibles

10,404

 

10,242

 

9,354

Operating cash conversion %

165%

 

126%

 

106%

Statutory operating cash conversion calculation

 

 

 

 

 

Cash generated from operations

23,869

 

19,596

 

5,539

Statutory operating profit before exceptional items and amortisation of acquisition intangibles

10,404

 

10,242

 

9,354

Statutory operating cash conversion %

229%

 

191%

 

59%

 

 

35.  Related party transactions

Balances and transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this Note.

Trading transactions

The Company's subsidiary, Everwarm Limited, provides services to Warmworks, a joint venture with Everwarm.  £5,285,000 of services were provided in 2020 (2019: £5,932,000). £484,000 was charged to Everwarm Limited from Warmworks for services provided in 2020 (2019: £651,000).

 

As at 30 September 2020 Everwarm Limited had a receivable owing from Warmworks amounting to £1,166,000 (2019: £392,000).

 

As at 30 September 2020 Arbed am Byth had a loan owed to Everwarm Limited amounting to £nil (2019: £400,000).  As at 30 September 2020 Everwarm Limited had a receivable owing from Arbed am Byth amounting to £18,000 (2019: £38,000). £359,000 was charged by Everwarm Limited to Arbed am Byth for services provided in 2020 (2019: £nil).

 

Bob Holt provides consultancy services via a company of which he is a shareholder. The daily fee payable for such consultancy services is £1,595 plus VAT. Such services are provided for four days per week over 47 weeks per year at a total cost of £300,000 per annum (plus VAT).  The total value of services provided to the Group was £285,000 (2019: £150,000).  Sureserve group plc had an amount owing to the company of £nil (2019: £45,000).

 

Remuneration of key management personnel

The remuneration of the Directors and members of the Board, together with other key management personnel of the Group, is set out below in aggregate for each of the categories specified in IAS 24 - Related Party Disclosures. The key management personnel are the members of the Group Management Board.  Further information about the remuneration of individual Group Directors is provided in the audited part of the remuneration report;

 

2020

 

2019

 

Number

 

Number

 

 

 

 

  Number of members of the Group Management Board at each year end

15

 

16

 

 

 

 

 

2020

 

2019

 

£'000

 

£'000

 

 

 

 

  Short-term employee benefits

2,383

 

2,150

  Share-based payment / LTIP

-

 

400

Post-employment benefits

142

 

156

  Compensation for loss of office

-

 

158

 

2,525

 

2,864

In addition to the above dividends were paid to directors of £7,000 (2019: £14,000)

 

36.  Events after the reporting date

On the 3 December 2020, the Group acquired Vinshire Gas Services Limited for a consideration of £200,000.  This has allowed to Group to increase its provision for gas servicing and presence in the Midlands. Further disclosures have not been included as the Directors do not consider them to be material to the Group.

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