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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Sureserve Group Plc | LSE:SUR | London | Ordinary Share | GB00BSKS1M86 | ORD 10P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 124.50 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
From Apr 2019 to Apr 2024
TIDMSUR
RNS Number : 7000N
Sureserve Group PLC
22 January 2019
22 January 2019
Sureserve Group plc
("Sureserve" or the "Group")
Preliminary Results for the year ended 30 September 2018
Transformational year, well-positioned for predictable growth
Sureserve, the asset and energy support services group, is pleased to announce its preliminary results for the year ended 30 September 2018.
Bob Holt, Chairman of Sureserve, commented:
"I am pleased to report a strong set of results for Sureserve following a transformational year for the Group. We have streamlined our operations, focusing on our industry-leading Compliance and Energy Services businesses which are profitable and deliver significant cash generation.
"We are confident in the Group's prospects and look forward to leveraging the strong platform we have built at Sureserve.
"I am pleased to announce that the Group has started the year positively and ahead of management expectations."
Financial overview
Hot Features
Premium
-- 5.1% increase in revenue from continuing operations to GBP190.8m (2017: GBP181.5m)
-- Increase in operating profit before exceptional items and amortisation of acquisition intangibles margin to 4.2%
(2017: 4.1%)
-- Profit before tax from continuing operations before exceptional items and amortisation of acquisition intangibles
of GBP6.6m (2017: GBP5.4m)
-- EPS from adjusted continuing operations (defined as the GBP6.6m as noted above, adjusted for tax at a nominal
rate of 19%, divided by the basic weighted average number of shares in issue) of 3.4p (2017: 2.8p)
-- Basic loss per share of 6.6p (2017: 0.0p)
-- Operating cash conversion from continuing operations of 60% (2017: 177%)
Operational highlights - steady progress and strong platform for future growth
-- Sale of our Lakehouse Contracts and Foster Property Maintenance businesses enables us to focus on highly
cash-generative growth markets
-- Acquisition and integration of Just Energy Solutions to complement the current gas compliance activities
-- Increased the number of long-term contracts we service by 11, representing an overall increase in pipeline value
of GBP108m
-- Outstanding record of contract wins:
o GBP55m Arbed 3 programme in a 50/50 joint venture that extends Everwarm's reach into Wales
o GBP44m framework with Aberdeenshire Council providing every facet of housing improvement upgrades in Aberdeenshire
o Appointed by Eastern Procurement to the GBP40m Heating Installations Framework for an initial two-year period
-- Ongoing focus on smart metering, ready for SMETS2 roll out
Outlook
-- At year end, we were participating in a total of 108 frameworks worth a total of GBP633.4m and had in place 157
maintenance contracts worth a total of GBP399.1m.
-- Well-placed to deliver growth in our market-leading gas provision and excellence in Compliance organically and
by acquisition.
-- Good visibility of non-volatile, essential services income streams from activities across our growing national
footprint, with an order book of GBP385m in a fragmented and regional market
Enquiries
Sureserve Group Bob Holt, Chairman 07778 798 816 Michael McMahon, Chief Operating Officer 07787 536 000 Camarco (Financial Public Relations) Ginny Pulbrook 020 3757 4992 Tom Huddart Ollie Head Stockdale Securities (Nominated adviser and broker) Andy Crossley 020 7601 6100 Antonio Bossi
Notes to editors
The Sureserve Group is an asset and energy support services group that improves, maintains and provides services to homes, schools, public, commercial and industrial 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 is headquartered in London. It currently employs some 1,990 staff from 23 offices across the UK.
Executive Chairman's statement
Introduction
Following in-depth planning over a substantial period we successfully concluded the sale of Lakehouse Contracts Limited and Foster Property Maintenance Limited to the Mapps Group in August 2018. This was a significant strategic advance for the Group, enabling us to concentrate on delivering operational excellence in our specialist core growth businesses of Compliance and Energy Services. The divestment included certain contracts yet to be finalised. It is hoped that those outstanding works will be concluded by the time of the Group interim results to March 2019. A further update will be provided at that time.
The Group subsequently changed its name to Sureserve to reflect the renewed focus on these two divisions. These now make up the two operating divisions of today's streamlined and rationalised Group. Both are businesses in which we have strong market positions and a portfolio of leading brands built on the expertise and quality commitment of our people, ensuring our customers are willing to pay a premium for our services.
Both divisions are underpinned by profitable, cash-generative business models that provide the Group with a sound platform for predictable growth. The rationale behind this approach is exemplified by our results from continuing operations for the 2018 financial year and based on the successful implementation of our strategy to create a high-turnover business with regular recurring income streams, a 'blue-collar' client base and highly disciplined financial management, providing stable operating margins.
Trading performance
The Group made excellent trading progress during the year, delivering a number of major initiatives that pave the way for us to fulfil our growth ambitions in the years ahead. The success of these is already demonstrated by an increase across both divisions in the number of long-term contracts, representing an overall increase in pipeline value of GBP108m. The details of the awards are within the Operating Review.
We also experienced a full financial year reaping the benefits of our move away from the official list of the London Stock Exchange to AIM, which took place in May 2017.
Please see the Financial Review in the 2018 Annual Report for full details of our results.
Our growth trajectory
Resolving legacy issues to advance the Group to this stage has taken significant and concerted effort by the Group's management team, and I am confident that we are now on track to deliver sustainable, profitable growth over the years to come.
On top of our plans for organic growth, Sureserve intends to act as a consolidator in a highly fragmented industry by bringing together quality-led organisations with a strong record of compliance in a heavily regulated environment. We continue to seek target businesses that not only match our ambitions, but can embrace the standards and culture within our core growth areas, as well as acquisitions that will enable us to introduce new service lines to our customers.
We purchased Just Energy Services ("JES") in the period, which is a heating and renewables specialist founded in 2011, whose services for large energy companies, retailers and private customers complement the activities of our own gas compliance activities. This acquisition provides us with a low-cost route into the private sector gas and renewables market.
As I have already indicated, organic growth from our existing operations was strong during the year, with important contract wins significantly strengthening our presence across the UK. These include the award of a GBP55m contract to our Everwarm business under the Welsh Government's Arbed 3 Warm Homes programme, which we won in May 2018 and which took us into Wales for the first time.
Increasingly, such acquisitions and wins are further strengthening the national platform on which we base our ability to deliver a high-quality service at a local level. Aspiring to be this kind of business means we must be the supplier or partner of choice in all the markets where we operate.
Our people
Sureserve places a strong emphasis on the importance of the skills, attitude and commitment of the thousands of people who deliver our services. By creating close and mutually beneficial relationships with client personnel responsible for buying facilities management services, based on promises kept and problems solved, they create the sustainable bedrock on which our success is built. I would like to thank each and every one of our excellent people for their commitment and performance over the last year.
To ensure we have access to the skills we need for years to come, in 2018 we launched the Sureserve Academy to train young people in the skills required to become gas and fire engineers. The strategic aim is to ease any issues that may emerge with recruiting qualified engineers as our workforce grows.
There were a number of Board changes during the year. First, I would like to thank Jeremy Simpson, who stood down as Chief Financial Officer in October, for his invaluable contribution to creating the 'new' Sureserve Group. I wish him every success. We hope to bring news of his replacement early in 2019.
I would also like to thank Andrew Harrison for his contribution over the last two years as a non-executive director of the Company. Andrew played a key role in the Group's turnaround, and we wish him well for the future. Derek Zissman was appointed in November 2017 and is Chairman of the Audit Committee. Robert Legget has been appointed interim Chairman of the Remuneration Committee and Derek Zissman has been appointed to the Nomination and Remuneration Committees subsequent to the year end.
Building on our strategy
During the year, we significantly advanced our strategy, with the aim of building upon a specialist focus on compliance and energy services to maximise the opportunities provided by a stable base of regular recurring and predictable revenues and profits.
-- Operational excellence: high performances win work 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 reduced the scale of the Group and now have more focused businesses in the sectors we have targeted. This 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 strong 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 retain a dividend policy that both recognises shareholder needs and expectations while retaining sufficient capital to drive future growth. The board propose a final dividend payment of 0.25p. The board will consider an interim dividend based upon the trading performance of the Group later in the year.
Outlook
Looking ahead, I would like to re-emphasise my confidence in the tremendous opportunity we have to deliver sustainable and predictable growth over the years to come, both organically and by acquisition.
I believe we are now ideally positioned to build strongly on this major achievement, delivered by all our people working as a team. I particularly look forward to continuing and expanding our Arbed 3 activities, building on our work in 2018 to create the necessary infrastructure and consolidating our new presence in Wales.
Going forward, the Sureserve Group is a stable, growing and cash-generative business that delivers operational excellence and builds strong relationships in highly regulated sectors that provide substantial recurring revenues. We have strong relationships with public sector contracting organisations across the UK, and particularly with personnel who are ultimately responsible for purchasing the services we deliver.
We are well placed to build further on our market-leading gas provision and excellence in compliance. Our goal moving forward is to build an even stronger organisation, based on predictable, non-volatile income streams from scale activities across a growing national footprint, that deliver all the stability and financial returns our shareholders seek.
In addition, we will continue to provide secure employment to a growing and increasingly skilled workforce, helping to improve the quality of life for the many thousands of tenants for whose comfort and safety we are ultimately responsible.
I am pleased to announce that the Group has started the year positively and ahead of management expectations.
Bob Holt
Executive Chairman
Operational review
In the six months from 31 March 2018, the value of our frameworks grew from GBP574.3m to GBP633.4m, demonstrating the effectiveness of our more streamlined and focused structure.
Introduction
During 2018, the Group changed its name to the Sureserve Group plc to reflect our position as a focused asset and energy support services group. This followed a restructure, in which we disposed of our Lakehouse Contracts and Foster Property Maintenance businesses and exited our Property Services and Construction divisions.
This strategically important move is now enabling us to concentrate on our cash-generative core growth areas of compliance and energy services, both of which deliver more predictable, recurring and profitable revenue streams.
Financial performance
-- Operating profit before exceptional items and amortisation of acquisition intangibles GBP8.0m (2017: GBP7.4m)
-- Revenue from continuing operations GBP190.8m (2017: GBP181.5m) -- Profit before tax from continuing operations GBP1.9m (2017: restated loss of GBP5.6m) -- Loss from discontinued operations GBP11.5m (2017: restated profit of GBP4.6m)
With an experienced management team in place, a clear strategy for growth and the focused approach of a more streamlined organisation, the Group is profitable in its continuing operations.
Looking forward
During the year, we saw strong underlying growth in our Compliance division (underlying revenues up 11.5%) and a small decrease in our Energy Services division (underlying revenues down 1.6%) and we will continue to focus on both moving forward. We successfully increased the number of long-term contracts we service by 11, representing an overall increase in pipeline value of GBP108m.
At year end, we were participating in a total of 108 frameworks worth a total of GBP633.4m (2017: 258 frameworks worth GBP1.1bn) and had in place 157 maintenance contracts worth a total of GBP399.1m (2017: 152 contracts worth GBP367.9m).
We remain confident in the exciting prospects for both of our divisions.
Compliance division
This 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 cover clients' social housing and public building assets, as well as industrial and commercial properties. The division is seeing the benefits of a wider pool of clients and mandatory services that provide significant future opportunities.
The Group's greatest increase in pipeline value was delivered by this division, and the pipeline grew organically by GBP102m with 13 contract wins. It also grew by acquisition, with the purchase during the year of Just Energy Solutions providing a low-cost route into private-sector gas and renewables.
Compliance: 12 months ended 2018 2017 Change
30 September
Revenue (GBPm) 116.3 104.3 11.5%
------ ------ --------
EBITA (GBPm) 6.1 8.0 -23.6%
------ ------ --------
EBITA margin (GBPm) 5.2% 7.7% -2.5pts
------ ------ --------
Overall, revenue increased by 11.5% to GBP116.3m (2017: GBP104.3m). EBITA decreased 23.6% to GBP6.1m (2017: GBP8.0m), resulting in an underlying EBITA margin of 5.2%, down by 2.5ppt. Revenues were up in all compliance businesses, reflecting increased volumes of and opportunities with clients and offering of mandatory services which we noted in previous reporting. These revenues are often recurring and represent a stable growth in size and scale that we believe gives us a market leading position in gas provision.
In relation to the gas businesses, while not significant, the reduction in margins reflected mobilisation of a major national contract and the transfer of trading provisions out of the centre. Expected improvements to margin from revenue increases were mitigated. We believe this investment is worthwhile as the business looks forward to growth in the future.
In relation to the building compliance businesses, we had a relatively poor operational performance for Fire and Lifts, which has already been addressed in FY19.
Post acquisition impact of Just Energy Services (acquired in May 2018) was GBP0.8m in revenues and a loss of GBP0.2m in EBITA.
-- Gas Compliance
The three Gas Compliance businesses (Aaron Services, K&T Heating and Sure Maintenance) make up 74% of divisional revenues and built on the progress made in FY17 with another excellent year of revenue growth from recurring incomes and new works.
Aaron Services, which delivers gas compliance solutions across East Anglia and the Midlands, had a particularly successful 2018 in terms of new contracts awarded. It has been appointed by Eastern Procurement to the GBP40m Heating Installations Framework for an initial two-year period, with an option to extend this for a further two years. Under the contract it is eligible to work on heating-installation lots for gas, oil, electricity, renewables and all fuels. It has also been appointed by the Hanover Housing Association under a 10-year contract worth GBP5m as sole contractor to install heating systems in its properties across the east of England.
In addition, Suffolk Energy Action, a coalition between the county's seven local authorities to promote domestic energy efficiency and encourage a reduction in energy use within the home, has appointed the company to facilitate the installation of energy-efficiency improvements for domestic properties across Suffolk. As well as installing boiler replacements, first-time central heating systems and heating controls, Aaron is tasked with accessing funding through programmes including the Suffolk Warm Homes Healthy People service and the National Grid's Warm Homes Fund.
Other significant wins by Aaron Services include a two-year domestic maintenance contract worth GBP1.3m from the Accent Housing Association to provide gas-related safety checks, servicing and repairs across 3,000 domestic and commercial properties, and a three-year contract from the Salvation Army for the planned and reactive maintenance of gas, LPG and oil-fired installations in its commercial properties across parts of the region.
K&T Heating, which delivers gas compliance services across London and the South East, has also had a highly successful year. In its biggest win, it was appointed by the London Borough of Havering appointed it to carry out a three-year programme of domestic gas services and associated work, including testing, servicing and repairing gas appliances, central heating systems amongst other things. The programme is worth GBP9.0m, and includes an option to extend for a further two years.
In a GBP4.3m award, Guildford Borough Council has appointed K&T Heating to carry out a range of domestic gas servicing and repair activities over a five-year programme that includes gas safety checks and servicing, checking and maintaining air source heat pump systems, solar thermal installations and other works. The company has also won a one-year contract worth GBP2.0m to install domestic heating and hot water systems for the Metropolitan Thames Valley Housing Association. These wins have seen a significant growth to K&T revenues compared to 2017, and the positive performance of the business is anticipated to continue going forward.
Sure Maintenance, which delivers gas compliance services across the UK, won a three-year contract worth GBP13.5m with Sandwell Metropolitan Borough Council to replace domestic gas appliances and associated ancillary works across 29,000 domestic properties.
Leeds Federated Housing Association has also appointed Sure to install gas boilers and central heating systems in a programme worth GBP2.1m. And Salix Homes, a social housing provider responsible for some 8,500 properties in and around Salford, greater Manchester, awarded the company a GBP1.8m contract to service and maintain central heating installations and miscellaneous gas appliances across its estate.
The gas businesses are in the process of moving to the same operational platform within the business on a phased approach and we believe this will offer ever better internal comparability of performance and benchmarking, to allow the businesses to continue to improve their service performance to our clients.
-- Building Compliance
Our Building Compliance businesses comprise Allied Protection, H2O Nationwide, Precision Lift Services and the newly acquired Just Energy Solutions Limited and makes up 26% of the divisional revenues.
Precision delivers lift installation and maintenance services to local authorities and social housing associations across the UK. During the year, Efficiency East Midlands - an organisation comprising 135 members responsible for more than 1.5m social housing properties - appointed it under a four-year contract to carry out passenger-lift installation, refurbishment and modernisation services.
The Royal Borough of Greenwich also appointed Precision in a five-year contract, with an option to extend for a further five years. Worth GBP8.4m, this engages the company to service, maintain and repair 354 passenger and goods lifts in the residential and public buildings that form the Council's housing and corporate stock. The scope includes a 24/7 breakdown service for all the authority's lifts and 10 annual services of all passenger lifts.
The company has also won a three-year contract worth GBP350,000 to maintain and repair the portfolio of passenger lifts owned by One Housing Group, which manages around 16,000 homes across London and surrounding counties and helps over 11,500 people to live independently.
Allied Protection is the Sureserve Group's specialist provider of fire and electrical compliance services across East Anglia and the South East. Its outstanding year included five contract wins:
-- A four-year contract from Paragon ASRA Housing worth between GBP750,000 and GBP2.0m each year to carry out fire remedial and safety work across around 6,200 of the association's properties
-- Participation in a framework agreement for fire safety issued by the Northern Housing Consortium, estimated at a value of GBP4.0m over four years
-- A c. GBP2.5m share of a framework agreement for fire risk and mitigation from Procure Plus/Re:Allies
-- A four-year programme worth GBP1.6m to install and maintain fire alarms for the South East Consortium
-- A contract from One Direct Maintenance worth GBP750,000 annually over three years, with two one-year extension options, to deliver a fire safety systems maintenance and repair service.
H2O is the Sureserve Group's specialist provider in water and air risk assessments across the UK. Its outstanding year includes two contract wins and repeat works:
-- Year on year contract from Metropolitan for various ad-hoc works which annually is worth GBP413,000
-- Southend Borough Council, continuing routine monitoring and testing worth a total of GBP314,000 a year
-- Optivo, totaling GBP583,000 a year to carry out water risk assessments
Our belief is that an ongoing move towards higher levels of compliance requirements should benefit the compliance division in future periods. Our continuing stable growth should increase our buying power further and improve our ability to deliver revenues at margins. Fleet management continues to be monitored closely and we have or are investing in a number of areas including dashboards to better analyse performance and find additional areas for improvement with options being explored for further development.
Looking forward
We continue to regard Sureserve to be the market leaders in the compliance sector, with a true national reach. 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, where we have seen continued revenue growth and believe this is a non-volatile sector of recurring revenues that underpin these cash generative businesses.
The experienced management teams include a number of Managing Directors who are focused on business growth by operational excellence from a common operating platform, building a stable platform for us to continue to grow and support our client base in the future.
Energy Services division
Our Energy Services businesses provide a range of energy efficiency services including 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. Work has extended in the current year to include energy efficiency projects within non-domestic properties, a recent area of new focus. The division offers domestic smart metering installation and recurring asset management services through Providor to a largely blue-chip utility client base, with that sector growing due to the ongoing UK-wide government roll-out. The division also has an established presence in the installation of electrical vehicle charging points, a further growth sector in which our experienced management team are well placed to deliver.
The Energy Services division also increased pipeline value by GBP6.2m, a further demonstration of opportunities we are seeing in the sector.
Energy Services: 12 months ended 2018 2017 Change
30 September
Revenue (GBPm) 77.7 79.0 -1.6%
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EBITA (GBPm) 4.0 4.0 0.2%
----- ----- -------
EBITA margin (GBPm) 5.2% 5.1% 0.1pts
----- ----- -------
Revenue was GBP77.7m in the period, 1.6% down on the comparative period. This was reflective of a reduction in the Everwarm incomes due to a mix of factors, particularly reduced external wall and kitchen and bathroom works due to lower levels of completed client works. The Providor business saw an increase in revenues compared to 2017 which part mitigated the Everwarm reduction, due to the full year impact of the 2017 additional contract win in the West Midlands with Scottish Power, as previously disclosed in May 2017.
EBITA improved nominally to GBP4.0m (2017: GBP4.0m), with Everwarm seeing reduced overall profitability due to revenue reductions above however still producing an overall strong performance, which we expect to continue with a number of recurring revenue streams remaining. The Warmworks joint venture is included within the Everwarm position - this remains the Scottish Government's flagship Home Energy Efficiency Programme for Scotland ("HEEPS") and it continued to perform well during the full year with a now established level of operational excellence. This also brings a diversified installation portfolio for Everwarm, focusing on central heating, and boiler improvements and other energy efficiency installation measures. The divisional profitability variance was underpinned by the improvement in metering and mitigated the downside from the Everwarm business - further progression will be linked to smart meter programme timing which have been noted below.
Carbon prices remained largely stable during the period, and while the ECO3 commencement period is still ongoing, overall the new obligation is not anticipated to have a significant impact either positively or negatively on pricing in the future period. The Arbed 3 programme as discussed below did not impact on 2018 numbers as this was in a mobilisation phase at year end.
-- Everwarm
The increase in pipeline value achieved by Energy Services was due to the strategically important award of a three-year contract worth up to GBP55.0m by the Welsh Government to Everwarm, our national energy efficiency business. The contract was issued under the Arbed 3 programme, which aims to deliver improvements to more than 6,000 homes throughout Wales where households are most likely to be in severe fuel poverty.
There is potential for a two-year contract extension and we were delighted to secure this work as this opportunity was particularly significant for reasons other than its sheer scale - it would also extend our reach into Wales for the first time, giving Everwarm a truly UK-wide footprint. We have set up the Arbed Am Byth Ltd joint venture to deliver this contract with the Energy Saving Trust, with whom we already collaborate on the Scottish Government's flagship Home Energy Efficiency Programme for Scotland (HEEPS).
Everwarm manages a range of services, including insulation and central heating upgrades, working with local operators to deliver benefits to the local economy. Our approach ensures we have the full range of competencies required, which included drawing on Everwarm's customer service expertise to manage the customer journey from initial assessment through to aftercare and service visits.
In general the year has been an excellent period for contract wins, underpinned by Arbed 3. This was complemented by a number of other strong contract wins in the division. In addition to the significant Renfrewshire (GBP10m) and Fife (GBP6m) wins mentioned in our half year review, these also include a four-year central heating contract from Perth and Kinross Council (GBP5.6m), and HEEPS 2018-19 wins for Aberdeenshire (cGBP7.0m) and West Lothian (GBP2.5m) Councils. We also won a three-year renewable energy contract from North Lanarkshire Council (GBP2.6m), a further phase of EWI for ANCHO (GBP1.6m) and energy-efficient heating for Berwickshire HA (GBP1.4m).
-- Providor
Providor remains in a period of consolidating existing contract delivery following a period of strong growth, however we are seeing many opportunities from a mix of "Big 6" and smaller / "Challenger" utilities particularly linked to the SMETS2 roll out, which we believe will bring us further possibility for growth.
Looking forward
Everwarm's order book is strong with future revenues underpinned by long-term JV arrangements with Warmworks and Arbed, in addition to strong contractual agreements with a number of clients. Carbon pricing remains an ongoing area of importance however we remain confident there is an appetite from the government to continue to provide funding for fuel poverty in this highly regulated sector. Everwarm has a market leading proposition in this area and a huge wealth of management experience, so we believe we remain well placed to react and adapt to any changes in the landscape to continue to provide a quality service to our customers and deliver effectively for our stakeholders. Generally changes in regulations result in increased compliance which we believe is a positive for us as in effect, this can act as a barrier to entry and therefore enhance our position in the market.
For Providor there have been continued delays to the national smart meter roll-out and indeed, there remain further derogations permitting the installation of older SMETS1 meters now to March 2019. This is impacting installation volumes as we have discussed in previous reports. The impact on engineer efficiency requires careful management, both with workforce and our contractual positions. While we continue to seek to provide strong and secure employment for our engineers, uncertainty within the wider industry does not assist churn. The impact of this is that costs will continue to rise and we believe the successful transition to SMETS2 with an achievable timetable allowing consistent volumes is crucial if costs are not to rise further. There is therefore a level of reliance on all stakeholders in the national smart meter roll out to remain committed to this and we remain frustrated our investment supporting the roll-out continues to be ignored by the legislative agencies who ultimately rely on a skilled workforce to deliver the programme.
Michael McMahon
Chief Operating Officer
Financial Review
Trading overview
The Operational review provides a detailed overview of our trading performance during the year. This Financial review therefore covers other aspects of the consolidated statements of comprehensive income, financial position and cash flows.
The Group had a strong year, posting an operating profit before exceptional items and amortisation of acquisition intangibles of GBP8.0m from continuing activities (2017: GBP7.4m).
Group continuing revenue increased by 5.1% to GBP190.8m (2017: GBP181.5m), reflecting an increase in revenues in the Compliance division, whose revenues increased by 11.5% to GBP116.3m (2017: GBP104.3m). Revenues in Energy Services decreased by 1.6% to GBP77.7m (2017: GBP79.0m). Intersegment revenue of GBP3.2m (2017: GBP1.8m) is eliminated on consolidation.
Group operating profit before exceptional items and amortisation of acquisition intangibles increased by 8.7% to GBP8.0m (2017: GBP7.4m), reflecting a decrease in operating profit before exceptional items and amortisation of acquisition intangibles in the Compliance division of 23.6% to GBP6.1m (2017: GBP8.0m), an increase in operating profit before exceptional items and amortisation of acquisition intangibles in Energy Services of 0.2% to GBP4.0m (2017: GBP4.0m).
We exclude exceptional items and amortisation of acquisition intangibles in calculating the figure reported above to provide a more appropriate view of underlying operating performance.
Operating expenses fell 3.9% to GBP19.6m in the year (2017: GBP20.4m) reflecting reductions in the cost base. Central costs fell by 54.6% to GBP2.1m (2017: GBP4.6m), reflecting hiving down costs into the trading subsidiaries as well as the cost reduction programme outlined over the last couple of years.
We reported an operating profit from continuing operations of GBP3.4m (2017: restated loss of GBP3.6m) reflecting a GBP0.3m net exceptional loss (2017: GBP0.5m) and a GBP4.3m charge for amortisation of acquisition intangibles (2017: GBP10.5m). Interest expense was GBP1.5m (2017: GBP2.0m) and taxation was GBP0.8m (2017: GBP0.9m credit). The disposal of Lakehouse Contracts, Foster Property Maintenance and Orchard (in 2017) resulted in a post-tax loss from discontinued operations of GBP11.5m (2017: restated post tax profit of GBP4.6m). The statutory loss after tax was GBP10.4m (2017: profit of GBP10,000).
Exceptional items in the year reduced the Group's profit before tax by GBP0.3m (2017: GBP0.5m) and related to the following items:
2018 2017
GBPm GBP'000
Acquisition costs 0.1 0.0
Restructuring and other costs 1.0 2.1
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Total exceptional costs 1.1 2.1
Release of provisions for deferred consideration (0.8) (1.6)
Total net exceptional costs 0.3 0.5
===== =======
Restructuring and other costs of GBP1.0m (2017: GBP2.1m) relate to a small number of legacy clean-up and restructuring costs during the year.
Release of provisions for deferred consideration of GBP0.8m (2017: GBP1.6m) relate to the final settlement of deferred consideration due to Aaron Heating Services Limited and Precision Lift Services Limited.
Profit on sale of Orchard (Holdings) UK Limited of GBP1.2m (2017: GBP5.4m), relating to the sale of Orchard to World Fuel Services Europe Ltd in September 2017, which was presented as exceptional in the 2017 Financial statements, has been reclassified as discontinued operations in the current year, to ensure consistent presentation of the results (see Note 1 for further details).
Amortisation of acquisition intangibles
Amortisation of acquisition intangibles was GBP4.3m for the year (2017: GBP10.5m), the reduction reflected the fact that we have taken amortisation charges in prior periods, meaning we are amortising a reduced base of intangible assets.
Finance expense
The total finance expense for the year represented the interest charged on our debt facilities (net of finance income), together with the amortisation of debt raising costs, which totaled GBP1.4m (2017: GBP1.7m).
The total finance expense of GBP1.5m (2017: GBP2.0m) included the unwinding of discounts on deferred consideration figure of GBP0.1m (2017: GBP0.3m).
Discontinued operations
Losses from discontinued operations amounted to GBP11.5m (2017: restated profit of GBP4.6m) on associated revenues of GBP71.9m (2017: GBP124.1m). The losses comprised losses up to the date of disposal of GBP5.2m (2017: GBP0.8m) and losses on disposal of GBP6.3m (2017: profit of GBP5.4m) The associated cash outflow for the period was GBP8.0m, discussed also in note 34. Profit on sale of Orchard (Holdings) UK Limited of GBP1.2m (2017: GBP5.4m) has been reclassified as discontinued operations in the current year, to ensure consistent presentation of the results (see Note 1 for further details). The 2018 profit relates to the reassessment of the fair value of the consideration receivable (see Note 3).
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 2018, the Board had regard to the conditions that needed to be met under IFRS5 "Non-current Assets Held for Sale and Discontinued Operations".
Further details of the losses / profit from discontinued operations are in Note 11.
Tax
The tax charge on the profit before tax from continuing operations was GBP0.8m (2017: GBP0.9m credit), representing an effective rate of 40%, which compares with the statutory corporation tax rate of 19%. The difference was due to a combination of permanent differences, which relates in part to deferred consideration, together with prior year tax adjustments.
Our net cash tax payment for the year was GBP0.2m for continuing operations (2017: net cash receipt of GBP0.7m). During the year, the Group has received part of the anticipated cash tax refund from HMRC which formed the corporation tax receivable on the 30 September 2017 balance sheet, with the remaining amount being received in October 2018. The Group has also made tax payments on account during the year.
The net deferred tax liability as at 30 September 2018 was GBP37,000 (2017: asset of GBP2.1m), with the movement mainly relating to acquisition intangibles and the disposal of Lakehouse Contracts and Foster Property Maintenance. Further details are set out in Note 26.
Earnings per share
Earnings per share from continuing operations were 0.7 pence (2017: restated loss per share of 2.9 pence), based on profit after tax from continuing operations of GBP1.2m (2017: restated loss of GBP4.6m).
Our statutory loss for the year was GBP10.4m (2017: profit of GBP10,000). Based on the weighted average number of shares in issue during the year of 157.5m, this resulted in basic loss per share from continuing and discontinued operations of 6.6 pence (2017: earnings of 0.0 pence).
Further details are contained in Note 14.
Dividend
The board has proposed a final dividend for the year of 0.25 pence per share. This represents a total dividend payable for the year of 0.25 pence (2017: 0.5 pence).
Subject to approval at the AGM on 19 March 2019 the final dividend will be paid on 30 April 2019 to shareholders on the register at the close of business on 1 March 2019.
Cash flow performance
Our operating cash flow from continuing operations for the year was an inflow of GBP4.8m (2017: GBP13.1m), discussed in Note 34 and reflecting a operating cash conversion from continuing operations of 60% (2017: 177%). We calculate continuing operating cash conversion as cash generated from continuing operations, excluding the cash impact of exceptional items 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, we saw an operating cash outflow of GBP5.7m (2017: inflow of GBP13.4m), representing a cash conversion of 71% outflow (2017: inflow of 181%).
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 represents a continued challenge. The sale of Lakehouse Contracts Limited and Foster property Maintenance Limited has simplified our volume of "unbilleds" (especially prepaid expenses and accrued project costs) and allowed us to focus on the management of accrued income, debtors and creditors. We will need to manage through one to two seasonal cycles to see the full advantage of the disposal of Lakehouse Contracts Limited and Foster property Maintenance Limited in improving peaks and troughs in working capital. We managed these balances within our banking facilities around year end, however this represents a snapshot in time and the weighted average debt in the year was GBP18.7m (2017: GBP27.3m).
We expect to continue to target an average annual operating cash conversion of 80% over the long term.
Net debt
Our net debt balance was GBP11.4m at 30 September 2018 (2017: GBP1.3m). The increase over FY17 related predominantly to the outflow of cash in relation to Lakehouse Contracts and Foster Property Maintenance, however this represents a snapshot in time and the weighted average debt in the year was GBP18.7m (2017: GBP27.3m).
Banking arrangements
We had drawn GBP13m (2017: GBP27.5m) under our revolving credit facility at the year end. At the date of issuing this report we had drawn GBP14m and National Westminster bank ('Natwest') continue to be an excellent and supportive partner.
The Group had net current liabilities as at 30 September 2018 as a result of the borrowings being due within one year at the reporting date. In December 2018, the Group renewed its bank facilities to provide an overdraft facility of GBP5,000,000 together with a revolving credit facility of GBP25,000,000, which runs to 31 January 2022, so the bank facility is now non-current.
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.
Financial position
The principal items in our balance sheet are goodwill, intangible assets and working capital.
The principal movement in net assets reflected the disposal of Lakehouse Contracts and Foster Property Maintenance. There was a reduction of GBP3.5m in goodwill and intangibles, due to GBP4.3m in amortisation of acquisition intangibles and GBP0.8m increase in goodwill in relation to the acquisition of Just Energy Solutions, discussed above and in Notes 15 and 16.
Net current assets (excluding cash and borrowings) stood at GBP3.2m (2017: liability of GBP1.4m), reflecting a push on working capital management towards the end of the year.
Working capital
2018 2017
GBPm GBPm
Trade receivables 19.0 22.3
Accrued income 15.7 25.4
Trade payables (24.6) (31.8)
Accruals (7.9) (25.0)
The principal movements in working capital are noted in the above table and mainly relate to the disposal of Lakehouse Contracts Limited and Foster Property Maintenance Limited during the year.
Provisions
Provisions as at 30 September 2018 stood at GBP7.7m (2017: GBP4.0m). During the year, we utilised GBP0.3m of provisions. We provided a further GBP4.9m for specific risks in relation to the disposal of Lakehouse Contracts and Foster Property Maintenance and provisions of GBP1.5m were disposed of on the sale of Lakehouse Contracts and Foster Property Maintenance.
Further details are set out in Note 25.
Acquisitions and disposals
The Group acquired Just Energy Solutions on the 15 May 2018 for a gross consideration of GBP0.3m, comprising net liabilities of GBP0.5m and GBP0.8m of goodwill.
On 17 August 2018, we announced the sale of Lakehouse Contracts and Foster Property Maintenance. Please see note 11 in regard to discontinued operations.
Deferred consideration
A number of the acquisitions made by the Group in recent years incorporate deferred consideration as part of the transaction terms, some of which depend on the performance of the businesses post-completion.
The table below shows the movement in the total discounted deferred consideration payable and the amount outstanding at the year end.
Aaron Heating Just Energy
H2O Nationwide Services PLS Holdings Solutions
Limited Limited Limited Limited Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 1 October 2017 1.0 0.3 0.6 - 1.9
Total discounted consideration
payable for addition
in the year - - - 0.3 0.3
Unwinding of discount 0.0 0.0 0.0 0.0 0.0
Revalued in the year - (0.1) (0.6) - (0.7)
Paid in year (1.0) (0.2) - - (1.2)
-------------- ------------- ------------ ----------- -------
At 30 September 2018 - - - 0.3 0.3
============== ============= ============ =========== =======
The fair value of the consideration has been assessed in accordance with the Sale & Purchase Agreements. The non-current element of the expected settlement has been discounted using a Pre-Tax discount rate that reflects the time value of money.
The total deferred consideration may vary between GBP0.0 million and GBP0.3 million depending on the underlying trading performance of the businesses.
The sums due in relation to H20 Nationwide Limited and Aaron Heating Services Limited were settled in full during the year.
Risks
The Board considers strategic, financial and operational risks and identifies actions to mitigate those risks. Key risks and their mitigation are disclosed within the 2018 Annual Report. We 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.
Our year-end review included an assessment of accrued income balances, of which the balance was GBP15.7m at the reporting date (2017: GBP25.4m), which 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. Subsequent to the disposal of Lakehouse Contracts and Foster Property Maintenance the balance sheet risk is significantly reduced in this area.
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 pursuing all claims in full, such that we have a collectively balanced position of risk across all such matters.
Going concern statement
The Directors acknowledge the Financial Reporting Council's 'Guidance on the going concern basis of accounting and reporting on solvency and liquidity risks' issued in April 2016. The Group's business activities, together with factors likely to affect its future development, performance and position are set out in the Strategic Report as referred to within the 2018 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 within the 2018 Annual Report. In addition, Note 32 to the consolidated Financial Statements within the 2018 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 and three-year plan, particularly for the 16 months following year end, including forecasts of cash flows, borrowing requirements and covenant headroom. The Board reviews the Group's sources of available funds and the level of headroom available against its committed borrowing facilities and associated covenants. The Group's financial forecasts, taking into account possible sensitivities in trading performance, indicate that the Group will be able to operate within the level of its committed borrowing facilities and within the requirements of the associated covenants for the foreseeable future. The Group had net current liabilities as at 30 September 2018 as a result of the borrowings being classified as a short term liability at the reporting date. RBS remains very supportive of the Group and in December 2018, the Group renewed its bank facilities to provide an overdraft facility of GBP5,000,000 together with a revolving credit facility of GBP25,000,000, which runs to 31 January 2022. The Directors have a reasonable expectation that the Group and Company has adequate resources to continue its operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis of accounting in preparing the Annual Report and Accounts.
Michael McMahon
Chief Operating Officer
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 30 September 2018
Notes 2018 2017
Restated
GBP'000 GBP'000
Continuing operations
Revenue 4 190,750 181,496
Cost of sales (163,380) (154,530)
--------- ---------
Gross profit 27,370 26,966
Other operating expenses (19,558) (20,358)
Share of results of joint venture 18 226 786
Operating profit before exceptional items
and amortisation of acquisition intangibles 4,5 8,038 7,394
Exceptional costs 7 (1,048) (2,127)
Exceptional income 7 757 1,624
Amortisation of acquisition intangibles 16 (4,325) (10,495)
----------------------------------------------- ----- --------- ---------
Operating profit / (loss) 3,422 (3,604)
Finance expense 8 (1,475) (1,985)
Investment income 8 - 16
--------- ---------
Profit / (loss) before tax from continuing
operations 4 1,947 (5,573)
Taxation 12 (782) 934
--------- ---------
Profit / (loss) after taxation from continuing
operations 1,165 (4,639)
Discontinued operations
(Loss) / profit for the year from discontinued
operations 11 (11,520) 4,649
(Loss) / profit for the year attributable
to the equity holders of the Group (10,355) 10
========= =========
Earnings / (loss) per share from continuing
operations
Basic 14 0.7p (2.9p)
Diluted 14 0.7p (2.9p)
========= =========
(Loss) / earnings per share from continuing
and discontinued operations
Basic 14 (6.6p) 0.0p
Diluted 14 (6.6p) 0.0p
========= =========
The accompanying notes are an integral part of this consolidated statement of comprehensive income.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
At 30 September 2018
2018 2017
Notes GBP'000 GBP'000
Non-current assets
Goodwill 15 42,923 42,169
Other intangible assets 16 4,927 9,233
Property, plant and equipment 17 1,474 1,905
Interests in joint venture 18 865 1,196
Trade and other receivables 21 - 456
Deferred tax asset 26 - 2,085
-------- --------
50,189 57,044
-------- --------
Current assets
Inventories 19 4,222 4,490
Amounts due from customers under construction
contracts 20 - 6,269
Trade and other receivables 21 42,618 59,129
Corporation tax receivable 769 551
Cash and cash equivalents 1,705 26,129
-------- --------
49,314 96,568
-------- --------
Total assets 99,503 153,612
-------- --------
Current liabilities
Amounts due to customers under construction
contracts 20 - 1,786
Trade and other payables 22 39,334 69,178
Loans and borrowings 23 12,926 -
Finance lease obligations 27 83 182
Provisions 25 5,102 893
57,445 72,039
-------- --------
Net current (liabilities) / assets (8,131) 24,529
-------- --------
Non-current liabilities
Trade and other payables 22 269 973
Loans and borrowings 23 - 27,077
Finance lease obligations 27 60 144
Provisions 25 2,593 3,137
Deferred tax liability 26 37 -
-------- --------
2,959 31,331
-------- --------
Total liabilities 60,404 103,370
-------- --------
Net assets 39,099 50,242
======== ========
Equity
Called up share capital 28 15,753 15,753
Share premium account 30 25,314 25,314
Share-based payment reserve 29, 30 776 776
Own shares 30 (290) (290)
Merger reserve 30 20,067 20,067
Retained earnings (22,521) (11,378)
Equity attributable to equity holders
of the company 39,099 50,242
======== ========
The financial statements of Sureserve Group plc (registered number 09411297) were approved by the board of directors and authorised for issue on 21 January 2019. They were signed on its behalf by:
M McMahon
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 2018
Share Share-based
Share premium payment Merger Retained Total
capital account reserve Own shares reserve earnings equity
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 1 October 2016 15,753 25,314 776 (290) 20,067 (10,600) 51,020
Profit for the period - - - - - 10 10
Dividends paid (note
13) - - - - - (788) (788)
-------- -------- ----------- ---------- -------- --------- --------
At 30 September 2017 15,753 25,314 776 (290) 20,067 (11,378) 50,242
Loss for the period - - - - - (10,355) (10,355)
Dividends paid (note
13) - - - - - (788) (788)
-------- -------- ----------- ---------- -------- --------- --------
At 30 September 2018 15,753 25,314 776 (290) 20,067 (22,521) 39,099
======== ======== =========== ========== ======== ========= ========
CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended 30 September 2018
2018 2017
Restated
Notes GBP'000 GBP'000
Cash flows from operating activities
Cash (used in) / generated from operations 34 (5,682) 13,373
Interest paid (1,058) (1,385)
Interest received - 3
Taxation (152) 655
-------- --------
Net cash (used in) / generated from operating
activities (6,892) 12,646
-------- --------
Cash flows from investing activities
Payment of deferred consideration on
prior year acquisitions (1,245) (2,588)
Sale of shares in subsidiary, net of
cash disposed of - 12,044
Purchase of property, plant and equipment (430) (909)
Purchase of intangible assets (449) (462)
Sale of property and equipment 65 153
Net cash (used in) / generated from investing
activities (2,059) 8,238
-------- --------
Cash flows from financing activities
Dividend paid to shareholders (788) (788)
Proceeds from bank borrowings - 6,500
Repayment of bank borrowings (14,500) -
Repayments to finance lease creditors (183) (60)
Finance issue costs (2) (336)
Net cash (used in) / generated from financing
activities (15,473) 5,316
-------- --------
Net (decrease) / increase in cash and
cash equivalents (24,424) 26,200
Cash and cash equivalents at beginning
of year 26,129 (71)
Cash and cash equivalents at end of year 1,705 26,129
======== ========
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 2018
General information
Sureserve Group plc is a company incorporated in the United Kingdom under the Companies Act. The address of the registered office is 50 Liverpool Street, London, EC2M 7PY. On 28 September 2018, Lakehouse plc changed its name to Sureserve Group plc.
These results for the year ended 30 September 2018 are an excerpt from the Annual Report & Accounts 2018 and do not constitute the Group's statutory accounts for 2018 or 2017. Statutory accounts for Sureserve Group plc for the year to 30 September 2017 have been delivered to the Registrar of Companies, and the Sureserve Group plc statutory accounts for the year to 30 September 2018 will be delivered by 25 February 2018. 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) adopted by the European Union (EU), this announcement does not itself contain sufficient information to comply with IFRS. Full financial statements that comply with IFRS are included in the Annual Report & Accounts 2018 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.
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 Financial Reporting Standards ("IFRS") as adopted by the European Union. 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.
Restatement of comparative information
The Group has amended the format of the consolidated statement of comprehensive income to simplify the presentation by presenting a single column for each year instead of separate columns for 'underlying' results and 'exceptional and other items' presented in the 2017 Financial Statements. We have made this change in light of FRC guidance on clear and concise reporting and use of alternative performance measures and because we consider it presents the results in a clearer way. We have also presented all results from discontinued operations in a single line in both 2017 and 2018 in accordance with IFRS 5, which has resulted in a restatement of 2017 exceptional income, profit from continuing operations, taxation, results from discontinued operations, earnings per share and cashflow statement.
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 9 Financial Instruments 1 January 2018
------------------------------- -------------------------
IFRS 15 Revenue from Contracts 1 January 2018
with Customers
------------------------------- -------------------------
IFRS 16 Leases 1 January 2019
------------------------------- -------------------------
Amendments to IFRS Classification and Measurement 1 January 2018
2 of Share Based Payment
Transactions
------------------------------- -------------------------
IFRIC 23 Uncertainty over Income 1 January 2019
Tax Treatments
------------------------------- -------------------------
IFRS 15 Revenue from Contracts with Customers
IFRS 15 sets out the principles to be applied in revenue recognition, replacing those in IAS 18 Revenue, IAS 11 Construction Contracts and their related guidance.
IFRS 15 is effective for accounting periods beginning on or after 1 January 2018 and will be applied by the Group from 1 October 2018. Upon transition to IFRS 15, the Group currently intends to apply the 'Cumulative Catch-Up' method. Under this method, the cumulative impact of the transition to IFRS 15 will be recorded as an adjustment to equity on 1 October 2018 and the comparative figures presented in the financial statements will not be restated.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 September 2018
1. Basis of Preparation (continued)
IFRS 15 Revenue from Contracts with Customers (continued)
A project to assess the full impact of the new standard has now been advanced with the engagement of an independent professional services firm. In order to assess the impact of applying IFRS 15 for the first time, a representative sample of client contracts was selected for analysis. The analysis is continuing but the work performed thus far has enabled management to conclude that the adoption of IFRS 15 will impact the Group's financial statements in the following areas:
Measurement of revenue for those contracts where control of the asset or service is transferred to the customer over time
The Group's contract portfolio comprises a mixture of short term contracts (where works are typically completed within a day or so) and longer term projects (where works may extend over several weeks or months).
-- Short term contracts - the Group will utilise the practical expedient within IFRS15, allowing revenue to be recognised at the amount which the Group has the right to invoice, where that amount corresponds directly with the value to the customer of the Group's performance completed to date. This is aligned with the Group's existing accounting policy and so is not expected to result in any adjustments being required on adoption of IFRS 15.
-- Longer term contracts - under the Group's current accounting policy, the costs of fulfilling longer term contracts are initially recognised in the balance sheet as work-in-progress and are subsequently released to profit and loss as revenue is recognised in line with surveys performed (i.e. an 'outputs' basis). Under IFRS 15, contract fulfilment costs are required to be expensed as incurred unless they can be recognised as an asset under another accounting standard. Having revisited the Group's existing methodology for recognising revenue on longer term contracts, management have determined that recognising revenue in line with costs incurred as a proportion of total expected costs (i.e. an inputs basis) will more faithfully represent the measurement of contract progress over time and so intend to apply this method with effect from 1 October 2018. This is expected to result in a similar pattern for the recognition of revenue as previously with the exception of amounts previously recorded as work-in-progress relating to materials where control has passed to the customer but installation has not yet occurred. Under the inputs method, these amounts will now be recognised in revenue (at nil margin) on the transfer of control of the goods. Had this policy been applied in the year ended 30 September 2018, revenue would have increased by GBP1.0m with a corresponding increase in cost of sales and no impact on gross margin.
Accounting for variable consideration
While issued infrequently, the Group's contracts often provide for credits to be issued in the event of specified service targets not being met. Under the Group's current accounting policy, a provision is made for the value of service credits expected to be granted with the resulting charge being recognised as a cost of sale. Under IFRS 15, service credits represent 'variable consideration' and are required to be accounted for as a reduction in revenue. Had this policy been applied in the year ended 30 September 2018, revenue would have decreased by GBP0.1m with a corresponding decrease in cost of sales and no impact on gross margin.
IFRS 16
We will evaluate the potential impact of IFRS 16 on the FY19 accounts, which will form the comparative figure when the standard is adopted in FY20 and will provide guidance to the market accordingly.
With the exception of IFRS15 and IFRS 16, directors do not expect the adoption of the standards listed above to have a material impact on the financial statements of the Group.
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.
2. Significant accounting policies
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, sixteen 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, and are satisfied that the Group should be able to operate within the level of its current facilities
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 September 2018
2. Significant accounting policies (continued)
and in compliance with the covenants arising from those facilities. The Group had net current liabilities as at 30 September 2018 as a result of the borrowings being classified as a short term liability at the reporting date. In December 2018, the Group renewed its bank facilities to provide an overdraft facility of GBP5,000,000 together with a revolving credit facility of GBP25,000,000, which runs to 31 January 2022. Accordingly, they have adopted the going concern basis in preparing the financial information. Please see further information in the strategic report.
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 at the acquisition date. 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 re-measured at subsequent reporting dates and its subsequent settlement is accounted for within equity. Contingent consideration that is classified as an asset or liability is re-measured at subsequent reporting dates in accordance with IAS 39 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 co-ordinated 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 - 3 years
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 September 2018
2. Significant accounting policies (continued)
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 5 years Expected cash flows receivable
Non-compete agreements 5 years With or without method
De-recognition of intangible assets
An intangible asset is de-recognised on disposal, or when no future economic benefits are expected from use or disposal. The gain or loss from de-recognition 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 de-recognised.
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 de-recognised 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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 September 2018
2. Significant accounting policies (continued)
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 and profit are recognised as follows:
(a) Service contracts
Revenue is recognised when the outcome of a job or contract can be estimated reliably; revenue associated with the transaction is recognised by reference to the stage of completion of work at the balance sheet date. The outcome of the transaction is deemed to be able to be estimated reliably when all of the following conditions are satisfied:
-- The amount of revenue can be measured reliably;
-- It is probable that the economic benefits associated with the transaction will flow to the Group; and
-- The costs incurred for the transaction and the costs to complete the transaction can be measured reliably.
The Group has recognised revenue dependent on the nature of transactions in line with IAS 18 'Revenue'. There are a range of contractual arrangements that require consideration:
(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. The billing arrangements can range from an all-encompassing price for each direct works, including an element of local site overhead, central overhead and associated profit; to the price of the direct works alone, with (where relevant) a separately agreed annual fee for local site and central overheads. The quantum of work performed in each period is captured and valued either against the agreed contract terms or with reference to costs incurred to date as a percentage of total expected costs, and the resulting revenue is recognised.
(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 for maintenance/reactive activities is recognised on a straight line basis over the life of the contract. Revenue for servicing activities is recognised when the service is performed; however when it is impractical for the customer and householder to sign off every job sheet, revenue is recognised on a straight line basis. Where the contract contains servicing and maintenance/reactive elements and the revenue cannot be split reliably between each element of the contract, it is recognised on a basis that most closely reflects the phasing of the servicing provision. Costs are recognised as incurred.
(iii) Formula based income
When income is subject to formulaic valuation, revenue is recognised either when the valuation has been submitted to, and agreed by, the client; or where there are time constraints with the process for receiving agreement from the client, revenue can be recognised if prior experience shows that agreement will be received within one month of providing a valid submission and invoice.
(b) Construction contracts
Revenue arising from construction contracts is recognised in accordance with IAS 11 'Construction contracts'. When the outcome can be assessed reliably, contract revenue is recognised by reference to the stage of completion of the contract activity at the statement of financial position date. The stage of completion of the contract at the statement of financial position date is assessed with reference to the costs incurred to date as a percentage of the total expected costs.
Margin on contracts is calculated in accordance with accounting standards and industry practice. Industry practice is to assess the estimated final outcome of each contract and recognise the revenue and margin based upon the stage of completion of the contract at the statement of financial position date. The assessment of the final outcome of each contract is determined by regular review of the revenues and costs to complete that contract. Consistent contract review procedures are in place in respect of contract forecasting.
The gross amount receivable from customers for contract work is presented as an asset for all contracts in progress for which costs incurred, plus recognised profits (or less recognised losses), exceed progress billings.
The gross amount repayable to or paid in advance by customers for contract work is presented as a liability for all contracts in progress for which progress billings exceed costs incurred plus recognised profits (less recognised losses). Full provision is made for losses on all contracts in the year in which the loss is first foreseen.
All revenue arising from construction contracts is included in the discontinued operations set out in Note 11.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 September 2018
2. Significant accounting policies (continued) (c) Other income (i) Contract variations
Margin associated with contract variations is only recognised when the outcome of the contract negotiations can be reliably estimated. Costs relating to contract variations are recognised as incurred. Revenue is recognised up to the level of the costs which are deemed to be recoverable under the contract.
(ii) Preliminaries income and pre-contract costs
All costs relating to pre-commencement and mobilisation are written off as they are incurred. However where there is a contracted element within the preliminaries income to cover such costs, revenue and margin can be recognised in line with the contractual terms.
In the event that mobilisation costs are incurred in a new and material activity, market and / or territory, such costs will be highlighted on the face of the Consolidated Statement of Comprehensive Income, until such point as we achieve "business as usual". This will typically be defined as the point at which we cease hiring a series of net new staff for the activity and reach a sustainable level of output from those staff we have trained.
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 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. Construction borrowing costs are capitalised where the Group constructs qualifying assets. 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 and recognised as an other item on the face of the statement of comprehensive income.
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 as a trading item. 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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 September 2018
2. Significant accounting policies (continued)
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.
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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 September 2018
2. Significant accounting policies (continued)
Joint ventures
Under IFRS 11 we account for joint ventures under the equity method of accounting. A joint venture is a joint arrangement whereby the parties that 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) Loans and receivables
Trade receivables, loans and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as loans and receivables. Trade receivables do not carry any interest and are stated at their initial value reduced by appropriate allowances for estimated irrecoverable amounts. Provisions against trade receivables and amounts recoverable on contracts are made when objective evidence is received that the Group will not be able to collect all amounts due to it in accordance with the original terms of those receivables. The amount of the write down is determined as the difference between the assets carrying amount and the present value of estimated future cash flows. Individually significant balances are reviewed separately for impairment based on the credit terms agreed with the customer. Other balances are reviewed in aggregate.
(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.
Operating leases
Amounts due under operating leases are charged to the statement of comprehensive income in equal annual installments over the period of the lease.
Finance leases
Assets held under finance leases are recognised as assets of the Group at their fair value or, if lower, at the present value of the minimum lease payments, each determined at the inception of the lease. The corresponding liability to the lessor is included in the statement of financial position as a finance lease obligation.
Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income, unless they are directly attributable to qualifying assets, in which case they are capitalised in accordance with the Group's general policy on borrowing costs.
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 has been 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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 September 2018
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 the accrued revenue on the statement of financial position, details of which are described in Note 21. The accrued income balance as at 30 September 2018 was GBP15.7m (2017: GBP25.4m).
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 Limited in the year, 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 2018 includes GBP4.9m in respect of the disposal of Lakehouse Contracts Limited and Foster Property Maintenance Limited - see Notes 11 and 25 for details of the basis of estimation used.
The total carrying value of provisions as at 30 September 2018 was GBP7.7m (2017: GBP4.0m) - see Note 25 for further details.
Fair value of deferred consideration
The fair value of deferred consideration is considered in line with the terms of the associated Sale and Purchase Agreement and the potential range of likely outcomes.
The carrying value of deferred consideration payable as at 30 September 2018 was GBP0.3m (2017: GBP1.9m) see Note 35 for further details.
The Directors re-assessed the fair value of deferred consideration receivable in the year in respect of the disposal of Orchard (Holdings) UK Limited in September 2017. The assessment of fair value of consideration at 30 September 2017 was made based on the limited information available at that date, taking account of the date of disposal (29 September 2017) and lack of transactional experience with the buyer.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 September 2018
3. Critical accounting judgements and key sources of uncertainty (continued)
Fair value of deferred consideration (continued)
The re-assessment of fair value of deferred consideration receivable resulted in recognition of profit of GBP1.2m in the year (see Note 11) and deferred consideration receivable of GBP1.2m at 30 September 2018 (see Note 21). Of this balance GBP0.9m has been received post year end and the remaining estimation range is nil to GBP0.9m of which a receivable of GBP0.3m has been recognised. The re-assessment of fair value resulted from information that became available within the year. Measurement of fair value of the remaining deferred consideration receivable involves a review of expected receivables on a customer by customer basis, and application of a
percentage probability of an adverse outcome on each based on the past experience of the Orchard team, which we consider to be a reliable base of estimation.
In regards to the disposal of Lakehouse Contracts Limited and Foster Property Maintenance Limited, the consideration receivable in the sale and purchase agreement was GBP0.5m but no consideration has been recognised in these accounts as the Directors regard the fair value of this to be GBPnil.
Critical accounting judgements
The group did not in the period make any critical accounting judgements, other than the estimates involving judgment set out above within key sources of estimation and uncertainty.
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; and - service, repair and installation of lifts.
-- Energy Services: we offer a range of services in the energy efficiency sector, including external, internal and cavity wall insulation, loft insulation, gas central heating, 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 five of the "big six" utility suppliers and many of the leading utility challengers. 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 exceptional and amortisation of acquisition intangibles. Operating profit before exceptional 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:
2018 2017
GBP'000 GBP'000
Revenue
Compliance 116,275 104,319
Energy Services 77,734 78,960
------- -------
Total segment revenue 194,009 183,279
Inter-segment elimination (3,259) (1,783)
------- -------
Total continuing revenue 190,750 181,496
------- -------
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2018
4. Operating segments (continued)
Reconciliation of Operating profit before exceptional
and amortisation of acquisition intangibles
to profit / (loss) before taxation from continuing
operations
2018 2017
GBP'000 GBP'000
Operating profit before exceptional
and amortisation of acquisition
intangibles by segment
Compliance 6,104 7,986
Energy Services 4,025 4,015
Central (2,091) (4,607)
------- --------
Total operating profit before
exceptional and amortisation
of acquisition intangibles 8,038 7,394
Amortisation of acquisition intangibles (4,325) (10,495)
Exceptional costs (1,048) (2,127)
Exceptional income 757 1,624
Investment income - 16
Finance costs (1,475) (1,985)
------- --------
Profit / (loss) before taxation
from continuing operations 1,947 (5,573)
======= ========
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 customers account for more than 10% of Group revenue for 2018 or 2017.
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2018
5. Profit / (loss) before taxation
2018 2017
GBP'000 GBP'000
Profit / (loss) before taxation is stated after
charging / (crediting):
Amount of inventories recognised as an expense 57,133 62,425
Depreciation of property, plant and equipment
- owned 678 1,039
- held under finance leases 180 222
Amortisation of intangible assets (note 16) 4,668 10,931
Impairment of tangible assets (note 17) - 394
Staff costs (note 9) 84,822 87,279
Operating lease rentals:
- land and buildings 933 1,177
- other 4,027 3,270
Profit on disposal of property, plant and equipment (52) (107)
======= =======
6. Auditor's remuneration
2018 2017
GBP'000 GBP'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 54 54
- The audit of the Company's subsidiaries 186 216
------- -------
Total audit fees 240 270
======= =======
Fees payable to the Company's auditor and their
associates for other services to the Group:
- Agreed upon procedures on interim accounts 23 -
- Other assurance services - 14
- Corporate finance services (IPO) - 128
------- -------
Total non-audit fees 23 142
======= =======
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2018
7. Exceptional and other items
2018 2017
Restated
GBP'000 GBP'000
Acquisition costs 34 14
Restructuring and other costs 1,014 2,113
------- --------
Total exceptional costs 1,048 2,127
Release of provisions for deferred consideration (757) (1,624)
Total net exceptional costs 291 503
======= ========
Exceptional items in the year decreased the Group's profit after tax by GBP0.3m and relate to the following items:
Restructuring and other costs of GBP1.0m (2017: GBP2.1m) in the year relating to a small number of legacy clean-up and restructuring costs.
Release of provisions for deferred consideration of GBP0.8m (2017: GBP1.6m) reflecting the final settlement of deferred consideration due to Aaron Heating Services Limited and Precision Lift Services Limited.
Exceptional items are considered non-trading because they are not part of the underlying trade of the Group.
8. Investment income and finance expenses
2018 2017
GBP'000 GBP'000
Investment income
Unwinding of discount on financial assets - 13
Other interest receivable - 3
------- -------
- 16
======= =======
Finance expenses
Interest payable on bank overdrafts and borrowings (1,355) (1,661)
Unwinding of discount on financial liabilities (82) (238)
Other interest payable (38) (86)
------- -------
(1,475) (1,985)
======= =======
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2018
9. Information relating to employees
The average number of employees, including Directors, employed by the Group during the year was:
2018 2017
Number Number
Direct labour and contract management 1,716 1,575
Administration and support 612 841
------- -------
2,328 2,416
======= =======
2018 2017
The aggregate remuneration was as follows: GBP'000 GBP'000
Wages and salaries 75,586 78,161
Social security 8,012 8,163
Pension costs - defined contribution plans 1,224 955
84,822 87,279
======= =======
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 GBP1,224,000 in the year ended 30 September 2018 (2017: GBP955,000). At the reporting date, GBP251,568 of contributions were payable to the funds (2017: GBP143,770).
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2018
11. Discontinued operations
2018 2017
Restated
GBP000 GBP000
Revenue 71,949 124,082
Expenses (78,371) (124,838)
-------- ---------
Loss before tax (6,422) (756)
Taxation 1,220 3
-------- ---------
Loss after tax from discontinued operations (5,202) (753)
-------- ---------
Loss on disposal of Lakehouse Contracts Limited
and Foster Property Maintenance Limited (7,476) -
Profit on disposal of Orchard (Holdings) UK
Limited 1,158 5,402
(11,520) 4,649
======== =========
Below is a breakdown of the discontinued operation by entity:
Orchard (Holdings) UK Limited 2018 2017
GBP000 GBP000
Revenue - 6,052
Expenses - (3,926)
------ -------
Profit before tax - 2,126
Taxation - (435)
------ -------
Profit after tax from discontinued operations - 1,691
------ -------
Lakehouse Contracts Limited and Foster Property
Maintenance Limited 2018 2017
GBP000 GBP000
Revenue 71,949 118,030
Expenses (78,371) (120,912)
-------- ---------
Loss before tax (6,422) (2,882)
Taxation 1,220 438
-------- ---------
Loss after tax from discontinued operations (5,202) (2,444)
-------- ---------
Losses from discontinued operations amounted to GBP11.5m (FY17: profit of GBP4.6m) on associated revenues of GBP71.9m (FY17: GBP124.1m). The associated cash outflow for the period was GBP8.0m, discussed also in Note 34. Profit on sale of Orchard (Holdings) UK Limited of GBP1.1m (2017: GBP5.4m) has been reclassified as discontinued operations in the current year, to ensure consistent presentation of the results.
Discontinued activities represent the Group's Construction and Property Services divisions (the "Activities") which were sold on 17 August 2018, with the comparative period also including Orchard Energy, which was sold in September 2017. In determining the classification of the Activities as discontinued at 30 September 2018, the Board had regard to the conditions that needed to be met under IFRS5 "Non-current Assets Held for Sale and Discontinued Operations".
The 2018 losses from discontinued operations comprise:
-- Disposal costs of Lakehouse Contracts Limited and Foster Property Maintenance Limited (including professional fees) of GBP1.0m (2017: GBPnil)
-- Provisions for liabilities relating to the disposal of GBP4.5m net of tax of GBP0.4m (2017: GBPnil)
-- GBP2.0m loss on disposal of Lakehouse Contracts Limited and Foster Property Maintenance Limited (2017: GBPnil) representing net assets at date of disposal - no consideration receivable has been recognised
-- Losses of Lakehouse Contracts Limited and Foster Property Maintenance Limited prior to disposal of GBP5.2m (2017 GBP0.8m)
-- GBP1.1m profit on sale of Orchard (Holdings) UK Limited from reassessment of the fair value of consideration receivable. (2017: GBP5.4m)
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2018
11. Discontinued operations (continued)
The Group is entitled to recover any net value yielded by the buyer of Lakehouse Contracts Limited and Foster Property Maintenance Limited from the working capital balances of the activities post-sale, together with amounts provided for provisions noted above of GBP4.5m. No sums have been recovered to date and in light of the weak performance of the activities since, the Board has reserved in full, all sums potentially recoverable under this process. The consideration receivable in the sale and purchase agreement was GBP0.5m but no consideration has been recognised in these accounts as the Directors regard the fair value of this to be GBPnil.
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. Further details are not disclosed on the basis that such disclosure would be seriously prejudicial.
12. Tax on profit / (loss) from continuing operations
2018 2017
Restated
GBP'000 GBP'000
Current tax
Current year 1,656 473
Current tax - prior year adjustment (67) 83
------- --------
Total current tax 1,589 556
Deferred tax (Note 26) (807) (1,490)
------- --------
Total tax on profit / (loss) on ordinary activities 782 (934)
======= ========
The tax assessed for the year differs from the standard rate of
corporation tax in the UK. The differences are explained below;
2018 2017
Restated
GBP'000 GBP'000
Profit / (loss) before tax from continuing operations 1,947 (5,573)
Effective rate of corporation tax in the UK 19.00% 19.50%
Profit / (loss) before tax at the effective rate
of corporation tax 370 (1,087)
Effects of:
Expenses not deductible for tax purposes 537 -
Income not taxable - (52)
Adjustment of deferred tax to closing tax rate 65 238
Current tax - prior year adjustment (67) 83
Deferred tax - prior year adjustment (96) (32)
Deferred tax asset not recognised (27) (84)
------- --------
Tax charge / (credit) for the year 782 (934)
======= ========
Factors that may affect future charges
The Finance (No 2) Act 2015, which provides for reductions in the main rate of corporation tax from 20% to 19% effective from 1 April 2017 and to 18% effective from 1 April 2020, was substantively enacted on 26 October 2015. Subsequently, the Finance Act 2016, which provides for a further reduction in the main rate of corporation tax to 17% effective from 1 April 2020, was substantively enacted on 6 September 2016. These rate reductions have been reflected in the calculation of deferred tax at the reporting date.
The closing deferred tax asset at 30 September 2018 has been calculated at 17% reflecting the tax rate at which the deferred tax asset is expected to be utilised in future periods.
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2018
13. Dividends
The final dividend for the year ended 30 September 2017 of 0.5 pence per share amounting to GBP0.8m was paid in the year.
The board has proposed a final dividend for the year of 0.25 pence per share amounting to GBP0.4m and representing a total dividend of GBP0.25 pence for the full year (2017: 0.5 pence).
Subject to approval at the Annual General Meeting on 19 March 2019 the final dividend will be paid on 30 April 2019 to shareholders on the register at the close of business on 1 March 2019 and has not been included as a liability in these Financial Statements.
14. Earnings per share
The calculation of the basic and diluted (loss) / earnings per share is based on the following data:
2018 2017
Number Number
Weighted average number of ordinary shares
for the purposes of basic (loss) / earnings
per share 157,527,103 157,527,103
Diluted
Effect of dilutive potential ordinary shares:
Share options 7,316,715 6,354,933
----------- -----------
Weighted average number of ordinary shares
for the purposes of diluted (loss) / earnings
per share 164,843,818 163,882,036
=========== ===========
(Loss) / earnings for the purpose of basic
and diluted earnings per share being net (loss)
/ profit after tax attributable to the owners
of the Company from continuing and discontinued
operations (GBP'000's) (10,355) 10
Basic (loss) / earnings per share (6.6p) -
Diluted (loss) / earnings per share (6.6p) -
Earnings for the purpose of basic and diluted
earnings per share being net profit / (loss)
after tax attributable to the owners of the
Company from continuing operations (GBP'000's) 1,165 (4,639)
Continuing basic earnings / (loss) per share 0.7p (2.9p)
Continuing diluted earnings / (loss) per share 0.7p (2.9p)
The number of shares in issue at 30 September 2018 was 157,527,103
(2017: 157,527,103).
The weighted average number of ordinary shares in issue during the year excludes those accounted for in the own shares reserve (Note 30).
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2018
15. Goodwill
2018
GBP'000
At 1 October 2016 47,338
Disposal of Orchard (Holdings) UK Limited (5,607)
Other adjustments to goodwill 438
-------
At 30 September 2017 42,169
-------
Disposal of Lakehouse Contracts Limited and
Foster Property Maintenance Limited -
Acquisition of Just Energy Solutions
Limited 754
-------
At 30 September 2018 42,923
=======
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:
2018 2017
CGU Segment GBP'000 GBP'000
K&T Heating Services Limited Compliance 3,774 3,774
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 754 -
------- -------
42,923 42,169
======= =======
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 2018 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; and -- 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 2018 was 2% (2017: 2%). A terminal growth rate of 1% (2017: 1%) was applied. The pre-tax discount rate applied was 10.3% (2017: 10.3%). Three different types of sensitivity analysis have been performed on all entities, including a 20% reduction in revenue, a reduction in the operating profit margin of between 1% and 3% and an increase in the discount rate by 1%.The Directors consider that reasonably possible changes in the key assumptions would not cause the carrying amount to exceed its recoverable amount.
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2018
16. Other intangible assets
Acquisition intangibles
----------------------------------------
Contracted
Computer customer Customer Non-compete
software order book relationships agreements Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Cost
At 1 October 2016 1,611 26,550 18,360 3,458 49,979
Disposal of Orchard
(Holdings) UK Limited (43) (2,216) - (1,788) (4,047)
Additions 462 - - - 462
--------- ----------- -------------- ----------- --------
At 30 September 2017 2,030 24,334 18,360 1,670 46,394
Disposal of Lakehouse
Contracts Limited and
Foster Property Maintenance
Limited (1,533) (5,728) (3,705) - (10,966)
Additions 449 - - - 449
--------- ----------- -------------- ----------- --------
At 30 September 2018 946 18,606 14,655 1,670 35,877
--------- ----------- -------------- ----------- --------
Amortisation
At 1 October 2016 1,054 18,217 7,708 1,053 28,032
Disposal of Orchard
(Holdings) UK Limited (33) (979) - (790) (1,802)
Amortisation charge 436 5,358 4,260 877 10,931
--------- ----------- -------------- ----------- --------
At 30 September 2017 1,457 22,596 11,968 1,140 37,161
Disposal of Lakehouse
Contracts Limited and
Foster Property Maintenance
Limited (1,446) (5,728) (3,705) - (10,879)
Amortisation charge 343 1,243 2,563 519 4,668
--------- ----------- -------------- ----------- --------
At 30 September 2018 354 18,111 10,826 1,659 30,950
--------- ----------- -------------- ----------- --------
Carrying value
At 30 September 2018 592 495 3,829 11 4,927
========= =========== ============== =========== ========
At 30 September 2017 573 1,738 6,392 530 9,233
========= =========== ============== =========== ========
At 30 September 2016 557 8,333 10,652 2,405 21,947
========= =========== ============== =========== ========
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 values 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 agreements is amortised over five years.
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2018
17. Property, plant and equipment
Leasehold Plant & Fixtures
improvements equipment and fittings Motor vehicles Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Cost
At 1 October 2016 1,412 849 1,982 1,507 5,750
Disposal of Orchard
(Holdings) UK Limited (49) - (178) - (227)
Additions 94 112 483 220 909
Disposals (42) (26) (69) (407) (544)
------------- ---------- ------------- --------------- -------
At 30 September 2017 1,415 935 2,218 1,320 5,888
Disposal of Lakehouse
Contracts Limited and
Foster Property Maintenance
Limited (936) (147) (791) (514) (2,388)
Acquisition of Just
Energy Solutions Limited - 32 49 - 81
Additions 52 237 141 - 430
Disposals - (12) (11) (299) (322)
------------- ---------- ------------- --------------- -------
At 30 September 2018 531 1,045 1,606 507 3,689
------------- ---------- ------------- --------------- -------
Depreciation
At 1 October 2016 460 329 1,266 869 2,924
Disposal of Orchard
(Holdings) UK Limited (2) - (96) - (98)
Charge for the year 213 151 490 407 1,261
Impairment in the year 394 - - - 394
Disposals (39) (11) (65) (383) (498)
------------- ---------- ------------- --------------- -------
At 30 September 2017 1,026 469 1,595 893 3,983
Disposal of Lakehouse
Contracts Limited and
Foster Property Maintenance
Limited (893) (150) (751) (524) (2,318)
Charge for the year 77 217 310 254 858
Disposals - (5) (11) (292) (308)
------------- ---------- ------------- --------------- -------
At 30 September 2018 210 531 1,143 331 2,215
------------- ---------- ------------- --------------- -------
Net book value
At 30 September 2018 321 514 463 176 1,474
============= ========== ============= =============== =======
At 30 September 2017 389 466 623 427 1,905
============= ========== ============= =============== =======
At 30 September 2016 952 520 716 638 2,826
============= ========== ============= =============== =======
Included within the net book value of property, plant and equipment is GBP143,000 (2017: GBP326,000) in respect of assets held under finance leases. Depreciation for the year on these assets was GBP180,000 (2017: GBP222,000).
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2018
18. Group entities
Subsidiaries
The Group's subsidiary undertakings are;
Country Class % Principal activity
of incorporation of capital
Aaron Heating Services Limited England Ordinary 100 Intermediate holding
company
Aaron Services Limited England Ordinary 100 Maintenance and
installation of
domestic gas heating
systems
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 England Ordinary 100 Non-trading
Limited
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 England Ordinary 100 Lift installation,
Limited 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 England Ordinary 100 Intermediate holding
Limited company
Sureserve Construction Services England Ordinary 100 Non-trading
Limited
Sureserve Design and Build England Ordinary 100 Non-trading
Limited
Sureserve Energy Services England Ordinary 100 Intermediate holding
Limited company
Sureserve Holdings Limited England Ordinary 100 Intermediate holding
(*) company
Sureserve Property Investments England Ordinary 100 Non-trading
Limited
* Directly held investment
The registered office of all entities above is St James House C/O BPE Solicitors LLP, First Floor, St James Square, Cheltenham, Gloucestershire, United Kingdom, GL50 3PR except for Everwarm whose registered office is 3-5 Melville Street, Edinburgh, EH3 7PE.
Joint ventures
The Group's joint ventures are:
Country Class % Principal activity
of incorporation of capital
Warmworks Scotland LLP Scotland Ordinary 33.33 Energy and insulation
services
Arbed am Byth Wales Ordinary 50 Energy and insulation
services
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2018
18. Group entities (continued)
Details of joint ventures
2018 2017
GBP'000 GBP'000
Carrying value of investment in Arbed am Byth 200 -
Carrying value of investment in Warmworks 665 1,196
------- -------
865 1,196
======= =======
GBP'000
Carrying value of investment in joint ventures
at 1 October 2017 1,196
Income from Warmworks joint venture 226
Investment in Arbed am Byth 200
Cash received from Warmworks (757)
Carrying value of investment in joint ventures
at 30 September 2018 865
=======
Warmworks, a joint venture with Changeworks and the Energy Saving Trust, commenced trading in September 2015, the income for 2018 was GBP226,000 (2017: GBP786,000). 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 2018 was GBPnil (2017: nil). The registered office of Arbed Am Byth is Unit 2 Cefn Coed, Nantgarw, Cardiff, Wales, CF15 7QQ.
19. Inventories
2018 2017
GBP'000 GBP'000
Raw materials and consumables 2,581 3,832
Work in progress 1,641 658
------- -------
4,222 4,490
======= =======
There are no inventories at 30 September 2018 or 30 September 2017 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.
20. Amounts due from and to customers under construction contracts
2018 2017
GBP'000 GBP'000
Contracts in progress at the reporting date:
Contract costs incurred plus recognised profits
less recognised losses to date - 218,556
Less: progress billings - (214,073)
------- ---------
- 4,483
======= =========
Amounts due from construction contract customers - 6,269
Amounts due to construction contract customers - (1,786)
------- ---------
- 4,483
======= =========
Details of retentions held by customers for performance under construction contracts are disclosed in Note 21. Amounts due from and to customers under construction contracts amounted to nil at 30 September 2018 following the Group's disposal of its construction activities in August 2018 (see Note 11).
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2018
21. Trade and other receivables
2018 2017
GBP'000 GBP'000
Current
Trade receivables 19,018 22,283
Construction contract retentions receivables - 3,313
Deferred consideration receivable 1,158 -
Social security and other taxes 965 199
Other receivables 3,192 5,819
Prepayments 2,580 2,106
Accrued income 15,705 25,409
--------- --------
42,618 59,129
========= ========
Other receivables includes sales retentions of GBP2,222,000 (2017;
GBP4,630,000) and rebates receivable of GBP796,000 (2017: GBP772,000).
Non-current
Construction contract retentions receivable - 453
Other receivables - 3
--------- --------
- 456
========= ========
2018 2017
GBP'000 GBP'000
Trade receivables
Trade receivables not due 15,273 20,097
Trade receivables past due 1-30 days 2,748 1,581
Trade receivables past due 31-60 days 227 163
Trade receivables past due 61-90 days 363 86
Trade receivables past due over 90 days 886 833
--------- --------
Gross trade receivables 19,497 22,760
========= ========
Provision for bad debt brought forward (477) (805)
Debtor provision recognised upon acquisition (79) -
Disposal of investments 27 11
Amounts written off receivables ledger 50 329
Debtor provision charged to profit or loss
in the year - (12)
--------
Provision for bad debt carried forward (479) (477)
--------- --------
Net trade receivables 19,018 22,283
========= ========
The entire provision for bad debts of GBP479,000 (2017: GBP477,000) relates to balances 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 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 customer represented GBP1,122,000 of the total balance of trade receivables (2017: zero represented more than 5%).
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2018
22. Trade and other payables
2018 2017
GBP'000 GBP'000
Current
Trade payables 24,607 31,849
Sub-contract retentions 1,068 5,454
Accruals 7,873 24,989
Deferred income 38 894
Social security and other taxes 4,690 5,529
Other payables 1,058 463
------- -------
39,334 69,178
======= =======
Non-current
Sub-contract retentions - 353
Accruals 269 620
------- -------
269 973
======= =======
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 76 days (2017: 55 days). The movement in creditor days is mainly due to the impact on the calculation of the disposal of Lakehouse Contracts Limited and Foster Property Maintenance Limited.
Included in accruals is deferred consideration arising from business combinations analysed as follows:
2018 2017
GBP'000 GBP'000
Current - 1,318
Non-current 269 620
------- -------
269 1,938
======= =======
The fair value of the consideration has been assessed in accordance with the Sale & Purchase Agreements.
23. Borrowings
2018 2017
GBP'000 GBP'000
Bank loans and credit facilities at amortised
cost:
Current 12,926 -
======= =======
Non-current - 27,077
======= =======
Maturity analysis of bank loans and credit
facilities falling due:
In one year or less, or on demand 12,926 -
Between one and two years - 27,077
12,926 27,077
======= =======
In December 2018, the Group renewed its bank facilities to provide an overdraft facility of GBP5,000,000 together with a revolving credit facility of GBP25,000,000, which runs to 31 January 2022.
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2018
24. Net debt
2018 2017
GBP'000 GBP'000
Cash and cash equivalents 1,705 26,129
Bank loans and borrowings (12,926) (27,077)
Finance lease obligations (143) (326)
-------- --------
(11,364) (1,274)
======== ========
25. Provisions
Legal and
other
GBP'000
At 1 October 2016 4,878
Disposal of Orchard (Holdings)
UK Limited (130)
Additional provision 1,497
Utilised in the year (2,215)
---------
At 30 September 2017 4,030
---------
Identified on acquisition 27
Additional provision 5,490
Utilised in the year (344)
Disposal of Lakehouse Contracts
Limited and Foster Property
Maintenance Limited (1,508)
---------
At 30 September 2018 7,695
=========
Current provisions 5,102
=========
Non-current provisions 2,593
=========
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 three years.
Additional provisions in the year include GBP4.9m in respect of the disposal of Lakehouse Contracts Limited and Foster Property Maintenance Limited (see Note 11) such amounts include:
-- GBP2.4m for expected costs of disposal of which GBP2.4m has been settled post year end
-- GBP2.5m for costs of claims under parent company guarantees and bonds which are considered probable following risk assessment of all outstanding parent company guarantees and bonds. The estimated costs have been based on independent third-party estimates.
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2018
26. Deferred taxation
Accelerated Short term
capital timing Share based Acquisition Unutilised
allowances differences payments intangibles losses Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Asset / (provision)
bought forward as
at 1 October 2016 266 966 36 (3,636) 2,597 229
Disposals in the year (10) (4) - 380 - 366
Credit / (debit) to
P&L 53 (309) - 1,784 (38) 1,490
----------- ------------ ----------- ------------ ---------- -------
Asset / (provision)
bought forward as
at 30 September 2017 309 653 36 (1,472) 2,559 2,085
Acquired / disposed
of in the year (206) (183) (36) - (2,504) (2,929)
Credit / (debit) to
P&L 104 (34) - 735 2 807
Asset / (provision)
carried forward as
at 30 September 2018 207 436 - (737) 57 (37)
=========== ============ =========== ============ ========== =======
At 30 September 2018
Non-current asset 207 436 - - 57 700
Non-current liability - - - (737) - (737)
----------- ------------ ----------- ------------ ---------- -------
Net deferred tax asset
/ (liability) 207 436 - (737) 57 (37)
=========== ============ =========== ============ ========== =======
At 30 September 2017
Non-current asset 309 653 36 - 2,559 3,557
Non-current liability - - - (1,472) - (1,472)
----------- ------------ ----------- ------------ ---------- -------
Net deferred tax asset
/ (liability) 309 653 36 (1,472) 2,559 2,085
=========== ============ =========== ============ ========== =======
Deferred tax assets and liabilities are offset where the Group has a legally enforceable right to do so.
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2018
27. Finance lease obligations
Present
Future value of
minimum minimum
lease payments Interest lease payments
GBP'000 GBP'000 GBP'000
At 1 October 2016 469 (83) 386
New obligations 263 (51) 212
Repayments (327) 55 (272)
--------------- -------- ---------------
At 30 September 2017 405 (79) 326
Repayments (220) 37 (183)
--------------- -------- ---------------
At 30 September 2018 185 (42) 143
=============== ======== ===============
Future lease payments are
due as follows:
Present
Future value of
minimum minimum
lease payments Interest lease payments
GBP'000 GBP'000 GBP'000
Less than one year 106 (23) 83
Between two and five years 79 (19) 60
--------------- -------- ---------------
At 30 September 2018 185 (42) 143
=============== ======== ===============
Less than one year 226 (44) 182
Between two and five years 179 (35) 144
--------------- -------- ---------------
At 30 September 2017 405 (79) 326
=============== ======== ===============
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2018
28. Called up share capital
Allotted, called-up and fully paid;
2018 2017 2018 2017
Number Number GBP GBP
Ordinary shares of GBP0.10
157,527,103 157,527,103 each 15,752,710 15,752,710
=========== =========== ========== ==========
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 GBPnil (2017: GBPnil).
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 GBP200 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 GBPnil with the exception of the PSP award to Michael McMahon, which has an exercise price of 10p per share (being the nominal value of a share in the capital of the Company). 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.
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2018
29. Share based payments (continued)
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. Three employees are currently participating in the SIAP.
SIP SAYE CSOP PSP SIAP
Number
At 1 October 2016 196,310 616,408 1,330,741 1,731,911 4,615,385
Granted - 2,622,809 2,424,234 645,000 -
Lapsed (31,144) (817,441) (1,577,285) (393,498) -
-------- ---------- ----------- ----------- ---------
At 30 September 2017 165,166 2,421,776 2,177,690 1,983,413 4,615,385
Granted - 1,634,136 - - 2,000,000
Lapsed (82,555) (814,917) (613,439) (1,074,284) -
-------- ---------- ----------- ----------- ---------
At 30 September 2018 82,611 3,240,995 1,564,251 909,129 6,615,385
======== ========== =========== =========== =========
Weighted average exercise
price (p)
At 1 October 2017 0.00p 36.33p 40.75p 0.00p 0.00p
Granted - 34.00p - - 7.00p
Lapsed 0.00p 37.69p 40.75p 0.00p -
Outstanding at 30
September 2018 0.00p 34.51p 40.75p 0.00p 0.00p
Exercisable at 30 - - - - -
September 2018
Outstanding at 30
September 2017 0.00p 36.33p 40.75p 0.00p 0.00p
Exercisable at 30 - - - - -
September 2017
Fair value of options
granted
Weighted fair value
of one option 87.61p 14.52p 12.13p 51.59p 3.51p
Assumptions used in
estimating the fair
value (blended for
all options in each
scheme)
Share price at date
of grant 99.75p 44.40p 40.00p 72.79p 29.09p
Exercise price - 34.51p 40.75p 0.00p 0.00p
Expected dividend
yield 4.60% 5.12% 7.37% 6.07% 6.56%
Risk free rate 1.21% 0.51% 0.07% 0.64% 0.23%
Expected volatility 40.37% 50.79% 54.50% 43.53% 41.78%
Expected life 3 years 3.14 years 3 years 3 years 2 years
In the year ended 30 September 2018, options were granted in November 2017 in respect of the SIAP, and options were granted in June 2018 in respect of the SAYE.
The weighted average remaining contractual life of outstanding options at 30 September 2018 was 2.5 years (2017: 2.7 years). The aggregate of the estimated fair values of options granted on the above dates was GBP1.3 million (2017: GBP1.8m).
The SIP and SAYE options were valued using a Black-Scholes model and the CSOP and PSP options by a combination of Black-Scholes and Monte Carlo models, weighted according to the performance conditions of both.
The SIAP options were valued using a Monte Carlo model.
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2018
29. Share based payments (continued) The inputs into the Black-Scholes 2018 2017 model are as follows: Share price (p) 40.0 40-46.4 Exercise price (p) 34.00 0.00-40.75 Expected volatility 48.63 53.40-83.00 (%) Expected life (years) 3.00 3.00-3.25 Risk-free rate (%) 0.94 0.07-0.12 Expected dividend 2.63 2.63-7.37 yield (%) The inputs into the Monte Carlo model 2018 2017 are as follows: Share price (p) 42.00 40.00 Exercise price (p) 0.00 0.00 Expected volatility (%) 40.88 83.00 Expected life (years) 1.17 3.00 Risk-free rate (%) 0.46 0.07 Expected dividend yield (%) 6.33 7.37
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 behaviouiral 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.
Share based payment reserve
Equity-settled share-based 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.
Own shares reserve
At IPO, each employee was given GBP200 of free shares, to be held for their benefit in an Employee Benefit Trust. Shares totalling 325,842 were transferred directly to the Employee Benefit Trust on 23 March 2015. The own shares reserve at 30 September 2018 represents the cost of GBP325,842 (2017: GBP325,842) 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 GBP20,067,000.
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2018
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 GBP7,292,000 (2017: GBP10,889,790). A subsidiary of the Group has provided a guarantee of GBP750,000 (2017: GBP750,000) 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
Loans and receivables
-----------------------
2018 2017
Financial assets GBP'000 GBP'000
Current financial assets
Trade receivables, loans and other receivables 39,073 56,824
Cash and cash equivalents 1,705 26,129
40,778 82,953
=========== ==========
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2018
32. Financial instruments (continued)
Financial liabilities
measured at amortised
cost
------------------------
2018 2017
Financial liabilities GBP'000 GBP'000
Current financial liabilities
Trade and other payables 34,606 62,755
Borrowings 12,926 -
Finance lease obligations 83 182
----------- -----------
Total current financial liabilities 47,615 62,937
----------- -----------
Non-current financial liabilities
Trade and other payables 439 973
Borrowings - 27,077
Finance lease obligations 60 144
----------- -----------
Total non-current financial liabilities 499 28,194
----------- -----------
48,114 91,131
=========== ===========
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.
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.
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2018
32. Financial instruments (continued)
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:
2018 2017
GBP'000 GBP'000
Floating rate Sterling borrowings with a capped
interest rate 12,926 27,077
======= =======
At 30 September 2018, the Group had the following interest rate caps in place:
-- A cap of 2.5% on up to GBP15m of debt (2017: GBP12.5m at a cap of 2.5% and GBP2.5m at a cap of 2.0%), expiring on 9 December 2018.
(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, which is partially mitigated by financial instruments in place to cap the interest exposure.
(c) Interest rate sensitivity analysis
The Group's principal borrowings attract floating rate interest. On a weighted average of GBP18.7m of debt in the year, a half per cent increase in the floating interest rate would have been below the interest rate cap and increased annual interest payable by GBP93,333 (2017: GBP136,500). If the floating interest rate had increased to the capped rate, interest payable on the weighted average of GBP18.7m of debt would have increased by GBP332,000 (2017: GBP568,000).
33. Operating lease commitments
The future aggregate minimum lease payments under non-cancellable operating leases are as follows:
2018 2017
Land and Other items Land and Other items
buildings buildings
GBP'000 GBP'000 GBP'000 GBP'000
Within one year 815 2,961 899 3,220
Between two and five years 1,447 2,584 1,862 3,801
Over five years 227 - 374 -
---------- ----------- ---------- -----------
2,489 5,545 3,135 7,021
========== =========== ========== ===========
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.
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2018
34. Cash generated from operations
2018 2017
Restated
GBP'000 GBP'000
Operating profit / (loss) 3,422 (3,604)
Adjustments for:
Depreciation 858 1,261
Amortisation of intangible assets 4,668 10,931
Impairment of goodwill and intangible assets
acquired - 394
Profit on disposal of property, plant and equipment (52) (107)
Changes in working capital:
Inventories 305 697
Amounts owed by customers under construction
contracts 6,269 (3,108)
Amounts owed to customers under construction
contracts (1,786) 1,096
Trade and other receivables 18,010 6,533
Trade and other payables (29,185) 458
Provisions 3,638 (1,136)
Adjustment of loss from discontinued operations (11,829) (42)
-------- --------
Cash (used in) / generated from operations (5,682) 13,373
======== ========
Operating cash conversion calculation
Cash (used in) / generated from operations (5,682) 13,373
Exceptional costs paid in the period 2,448 1,882
Cash impact of net change in working capital
from discontinued operations 8,042 (2,182)
-------- --------
Adjusted cash generated from continuing operations 4,808 13,073
======== ========
Operating profit before exceptional items and
amortisation of acquisition intangibles 8,038 7,394
======== ========
Operating cash conversion % 60% 177%
======== ========
Statutory operating cash conversion calculation
Cash (used in) / generated from operations (5,682) 13,373
Statutory operating profit before exceptional
items and amortisation of acquisition intangibles 8,038 7,394
Statutory operating cash conversion % (71%) 181%
======== ========
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 September 2018
35. Summary of consideration paid and payable in respect of acquisitions
Aaron Heating Just Energy
H2O Nationwide Services PLS Holdings Solutions
Limited Limited Limited Limited Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 1 October 2017 989 329 620 - 1,938
Total discounted consideration
payable for addition
in the year - - - 254 254
Unwinding of discount 6 21 37 15 79
Revalued in the year - (100) (657) - (757)
Paid in year (995) (250) - - (1,245)
-------------- ------------- ------------ ----------- -------
At 30 September 2018 - - - 269 269
============== ============= ============ =========== =======
The fair value of the consideration has been assessed in accordance with the Sale & Purchase Agreements. The non-current element of the expected settlement has been discounted using a Pre-Tax discount rate that reflects the time value of money.
The total deferred consideration may vary between GBP0.0 million and GBP0.3 million depending on the underlying trading performance of the businesses.
36. Business Combinations
Just Energy Solutions Limited
Just Energy Solutions Limited was acquired on 15 May 2018.
On acquisition, the Directors assessed the fair value of assets and liabilities and did not identify any separately identifiable acquisition intangible assets.
The Directors consider the value assigned to goodwill represents the workforce acquired, expected synergies to be generated, and access to additional customers and markets as a result of this acquisition. It is not expected that any goodwill will be deductible for tax purposes. All costs of the acquisition have been recognised as an exceptional expense in the statement of comprehensive income in the period in which it was incurred, the total cost recognised is GBP34,000.
The effect of the acquisition on the Group's assets and liabilities were as follows:
Fair value Provisional
Book value adjustments fair value
GBP'000 GBP'000 GBP'000
Assets
Non-current
Property, plant and equipment 82 - 82
Current
Stock 75 (38) 37
Trade and other receivables 1,289 (514) 775
Total assets 1,446 (552) 894
---------- ----------- -----------
Liabilities
Non-current
Provisions (14) (26) (40)
Current
Overdraft (284) - (284)
Trade and other payables (1,003) (67) (1,070)
---------- ----------- -----------
Total Liabilities (1,301) (93) (1,394)
---------- ----------- -----------
Net assets acquired 145 (645) (500)
Goodwill capitalised 754
-----------
254
===========
Satisfied by:
Contingent Deferred consideration 254
===========
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 September 2016
36. Business Combinations (continued)
Just Energy Solutions Limited (continued)
Contingent deferred consideration has been calculated based on the expectations of future performance in the Group's three year plan compared to the calculation methodology set out in the Share Purchase Agreement. The contingent deferred consideration may vary depending on the underlying trading performance of the businesses.
Post-acquisition results
The results for Just Energy Solutions Limited since the acquisition date, included within the consolidated statement of comprehensive income for the period ended 30 September 2018, are:
GBP'000
Revenue 839
-------
Loss from operations (190)
Interest -
-------
Loss before tax (190)
Taxation 49
-------
Loss for the period (141)
=======
Results of all business combinations occurring during the year
Assuming the acquisition date for all business combinations that occurred during the year had been 1 October 2017, the consolidated statement of comprehensive income for Sureserve Group plc for the year ended 30 September 2018, would have been:
GBP'000
Revenue 193,932
-------
Profit from operations 3,263
Interest (1,475)
-------
Profit before tax 1,788
Taxation (750)
-------
Profit after tax from continuing
operations 1,038
=======
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2018
37. 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, leases premises in Bathgate, West Lothian, from Xafinity Pension Trustees Limited (as corporate trustee of the Everwarm Group SIPP). Mr M McMahon, a director of the Company, is a beneficiary of the Everwarm Group SIPP. The lease was set up on an arm's length basis with annual rentals determined based on an independent rental valuation. GBP130,767 of rents were paid by the Group in 2018 (2017: GBP226,184). The lease terminates in seven years.
The Company's subsidiary, Everwarm Limited, provides services to Warmworks, a joint venture with Everwarm. GBP6,817,509 of services were provided in 2018 (2017: GBP8,424,925). GBP1,645,429 was charged to Everwarm Limited from Warmworks for services provided in 2018 (2017: GBP525,239).
As at 30 September 2018 Everwarm Limited had a receivable owing from Warmworks amounting to GBP363,969 (2017: GBP701,823).
As at 30 September 2018 Arbed am Byth had a loan owed to Everwarm Limited amounting to GBP200,000 (2017: GBPnil). As at 30 September 2018 Everwarm Limited had a receivable owing from Arbed am Byth amounting to GBP91,566 (2017: GBPnil).
Bob Holt provides consultancy services to Sureserve Group plc and other Group companies in relation to advice about the turnaround management strategy of the Group. These consultancy services are provided by a consultancy company of which he is a shareholder. The daily fee payable for such consultancy services is GBP1,595 plus VAT. Such services are provided for two days per week over 47 weeks per year at a total cost of GBP150,000 per annum (plus VAT). The total value of services provided to the Group was GBP150,000 (2017: GBP150,000).
The Company's subsidiary, Sure Maintenance Limited, provides services to Mears Group PLC, an entity of which Bob Holt was chairman during the period. GBP30,056 of services were provided in 2018 (2017: GBP41,580). As at 30 September 2018 Sure Maintenance Limited had a receivable owing from Mears Group PLC amounting to GBP1,298 (2017: GBP6,228).
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.
2018 2017
Number Number
Number of members of the Group Management
Board at each year end 13 9
======= =======
2018 2017
GBP'000 GBP'000
Short-term employee benefits 1,804 1,511
Post-employment benefits 114 128
Compensation for loss of office 315 -
2,233 1,639
======= =======
38. Events after the reporting date
In December 2018, the Group renewed its bank facilities to provide an overdraft facility of GBP5,000,000 together with a revolving credit facility of GBP25,000,000, which runs to 31 January 2022.
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
END
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