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AdEPT Telecom plc  -  ADT   

Final Results

Released 07:01 13-Jul-2017

RNS Number : 9225K
AdEPT Telecom plc
13 July 2017
 

AdEPT Telecom plc

("AdEPT", the "Company" or together with its subsidiaries the "Group")

Final results for the year ended 31 March 2017

AdEPT (AIM: ADT), a leading UK independent provider of award-winning unified communications and IT services, announces its results for the year ended 31 March 2017.

Financial highlights

·      14th consecutive year of increased underlying EBITDA up 27.2% to £7.83m (2016: £6.15m)

·      Revenue increased by 19.2% to £34.4m (2016: £28.9m)

·      Gross margin % increased by 2.0% to 42.3% (2016: 40.3%)

·      Underlying EBITDA margin % increased by 1.4% to 22.7% (2016: 21.3%)

·      20.3% increase to adjusted earnings per share to 23.09p (2016: 19.19p)

·      19.2% increase to dividends declared to 7.75p (Interim 3.75p, Final 4.00p) (2016: 6.50p)

·      Year-end net debt* of £15.5m (2016: £6.0m)

·      New 5 year £30m revolving credit facility in place with Barclays and RBS

Operational highlights

·      Managed services accounted for 55.4% of total revenue (2016: 44.3%)

·      Acquisition of entire issued share capital of Comms Group UK Limited completed in May 2016

·      Acquisition of entire issued share capital of CAT Communications Limited and Progressive Communications Limited in November 2016

·      Acquisition of entire issued share capital of OurIT Department Limited in February 2017

 

* Net debt is defined as cash and cash equivalents less short-term and long-term borrowings and prepaid bank fees

 

Commenting upon these results Chairman Roger Wilson said:

"AdEPT has delivered a 27% increase to underlying EBITDA for the year ended 31 March 2017 and the Group continues to deliver consistently high levels of free cash flow generation.  The continued strong cash generation has funded a 19% increase to dividends declared during the year and the Board is confident that continued focus on underlying profitability and cash generation will support a progressive dividend policy.

Free cash flow generated combined with the new larger debt facility put in place in February 2017 was used by the Company to complete three earnings enhancing acquisitions during the current period.  Following these acquisitions, the Group is able to offer its existing and targeted customer base a fully converged unified communications and IT service.  The acquisitions completed during the year combined with organic sales have increased the rate of transition of the Group towards a complete managed service provider, with revenue from managed services accounting for more than 55% of the total in the year ended 31 March 2017."

 

This announcement contains inside information for the purposes of Article 7 of Regulation 596/2014.

 

For further information on AdEPT please visit www.adept-telecom.co.uk or contact:

 

AdEPT Telecom Plc

Roger Wilson, Chairman

Ian Fishwick, Chief Executive

John Swaite, Finance Director

 

 

07786 111 535

01892 550 225

01892 550 243

 

Northland Capital Partners Limited

Nominated Adviser

Edward Hutton / Gerry Beaney

 

Broking

John Howes

020 3861 6625

 

 

Chairman's statement

Review of operations

The Group has continued to increase underlying EBITDA and maintain strong free cash flow generation, which has been used to fund the progressive dividend policy and earnings-enhancing acquisitions.

The Group's continued strong cash generation resulted in £5.8m of operating cash flow before tax and interest.  AdEPT has used its free cash flow and debt facilities to fund three acquisitions during the year, Comms Group UK Limited (Comms Group), CAT Communications Limited (CAT) and OurIT Department Limited (OurIT), the latter of which has extended the AdEPT product set by adding the delivery of outsourced IT services and managed IT solutions.  The convergence of telecommunications and IT is an increasing requirement for AdEPT's existing and targeted enterprise and public sector customer base.  The highly skilled IT team and product set acquired will complement and enhance AdEPT's existing services, allowing AdEPT to provide a full managed service to customers, incorporating unified communications and IT.  In addition to the numerous telecom and managed service related accreditations and experience, AdEPT now offers a directly employed team of highly skilled certified professionals with qualifications including Microsoft Gold Partner and Business Specialist, Apple Specialist, Cisco Certified Partner, Dell Preferred Partner, AVAYA Partner in Customer Excellence and is focused on providing truly managed unified communications and IT service to customers with a focus across London and the South East.

The acquisitions of Comms Group, CAT and OurIT, combined with organic sales, has increased the rate of transition of the Group towards managed services, which accounted for 55.4% of total revenue in the year ended 31 March 2017.  The teams at Comms Group and OurIT have proved to be an excellent fit with AdEPT and have been successful in jointly working on unified IT and voice communication contracts.  The post-acquisition performance of Comms Group and OurIT has delivered growth and therefore we anticipate the contingent deferred consideration for both to be towards the top end of the range.

The issue of new equity during the year resulted in a cash inflow of £0.2m largely arising from the exercise of the Barclays warrant in March 2017.  The Company repurchased 19,136 of its own shares during the year ended 31 March 2017 at an average price of 318.0p, pursuant to the stock exchange announcement issued on 18 December 2014. The Board believes that share repurchases can improve stock liquidity and increase value to shareholders and therefore the directors will continue to determine if further repurchases remain in shareholders' best interests.

In line with its progressive policy, AdEPT has increased the dividend proposed year-on-year by 19.2%, proposing a final dividend of 4.00p per ordinary share (2016: 3.50p), making total dividends proposed in respect of the year ended 31 March 2017 of 7.75p per ordinary share (2016: 6.50p).

Employees

As a result of the acquisitions completed in the year ended 31 March 2017, the Group now has more than 100 full-time employees.  The improved profitability and free cash flow generation this year was made possible by the continued hard work and focus of all employees at AdEPT. As a Group we are immensely proud of the track record we have created over the last 14 years and, on behalf of the Board, I would like to take this opportunity to thank all of our employees for their continued hard work.

Director changes

In the March 2016 accounts the Group announced that after more than 13 years with AdEPT, its Chief Operating Officer, Amanda Woodruffe, had decided to retire.  After a handover period, Amanda left the Group during August 2016.  The Board would again like to take this opportunity to thank Amanda for her valuable contribution to AdEPT.  Also in the March 2016 accounts, the Group announced that Richard Burbage, former director of Centrix, had been appointed to the Board as Unified Communications director.  Richard continues to be responsible for overseeing the AdEPT Fleet operation and developing the Group's unified communications strategy.

Outlook

The excellent result for this year was delivered through a combination of strategic acquisition and organic contract wins, improving margins on customer contracts and maintaining high levels of operational efficiency. The Board is confident that continued strong cash conversion of operating profit will support its intention of a progressive dividend policy.

The focus for the coming year remains on developing organic sales through leveraging AdEPT's approved supplier status on the various public sector telecom frameworks, maintaining profitability and cash flow conversion, which will be used to reduce net borrowings and/or fund suitable earnings-enhancing acquisitions.

Roger Wilson

Non-executive Chairman

 

Strategic report

 

Principal activities and review of business

The principal activity of the Group is the provision of voice and data communication services to both domestic and business customers. A review of the business is contained in the Chairman's statement and the highlights are summarised in this strategic report.

Summary of three year financial performance:


Year ended March


2017

£'000

 

Year-on-Year %

2016

£'000

 

Year-on-Year %

2015

£'000







Revenue

34,436

19.2%

28,881

30.9%

22,066

Gross margin

14,571

25.2%

11,634

40.2%

8,298

Underlying EBITDA

7,827

27.2%

6,153

34.0%

4,591

Net debt

15,456


5,982


1,539

Revenue

During the year AdEPT has continued its transition from a traditional fixed line service provider towards a managed services provider.  Total revenue generated from managed services represented 55.4% of total revenue in the year ended 31 March 2017 (2016: 44.3%) and the closing monthly run rate for managed services in March 2017 was more than 60% of total revenue.

Total revenue increased by 19.2% to £34.4m (2016: £28.9m):

·      Managed services product revenues increased by £6.3m to £19.1m (2016: £12.8m).  This reflects the impact of the contribution from the acquisitions of Comms Group, CAT and OurIT combined with an increased level of organic contract wins and a lower relative churn rate.  AdEPT has continued to make progress in expanding the number of circuits and connections from new customer additions and through cross-selling into the existing customer base.  As the demand for faster data connectivity speeds continues AdEPT has seen further customer orders for 1-10Gb services.

·      Traditional fixed line revenues decreased to £15.4m (2016: £16.1m), which is a reflection of the organic sales focus of the Group on managed services and IT combined with the substitution impact of existing customers transitioning to new technologies. The Group's reliance on fluctuating call revenues continues to reduce, with call revenue providing only 15.4% of total revenue in the year ended 31 March 2017 (2016: 19.4%).

The proportion of AdEPT revenue being generated from recurring products and services (being all revenue excluding one-offs projects, hardware and software) remains high at 86.4% of total revenue.  Both Comms Group and OurIT product sets include hardware supply and installation services, which, by their nature, are project based and not fixed recurring revenue streams; however, a high proportion of hardware supply and installations are further products and services being supplied to the existing customer base.

AdEPT continued to be highly successful in gaining further traction in the public sector space during the last year through leveraging its approved status on various frameworks.  AdEPT is an approved supplier to the Crown Commercial Service under the RM1045 Network Services framework and the Company has been successful in winning new business through this framework.  This is in addition to AdEPT's existing framework agreement with Ja.net, under which AdEPT is one of only a small number of companies approved to sell data connectivity to UK Colleges and Universities. The total revenue generated from public sector and healthcare customers has increased; however, following the OurIT acquisition, the proportion of Group revenue from public sector and healthcare customers has decreased to 20.5% in March 2017, as OurIT do not currently supply services into public sector or healthcare customers.  We consider the acquisition of OurIT to be an opportunity for the Group to add IT products and services into the AdEPT public sector and healthcare offering. 

The Group is continuing to focus its organic sales efforts on adding and retaining larger customers whilst complementing this with an acquisitive strategy.  AdEPT's largest 1,700 customers (spending £5,000 per annum or more) account for approximately 72% of total revenue at March 2017 (2016: 1,400 customers, 63% of total revenue), with the top ten customers accounting for 24.3% of total revenue (2016: 26.1%).

Gross margin

Gross margin percentage has improved to 42.3% during the year (2016: 40.3%).

Gross margins for fixed line services have increased to 39.5% during the year through close monitoring of customer profitability and supply chain management of wholesale contracts.

Gross margins for managed services and IT, such as installations, support and maintenance, are higher than fixed line; this is a reflection of the headcount costs of supporting the project installations and maintenance being included within operating expenditure.

Underlying EBITDA

Underlying EBITDA is defined as operating profit after adding back depreciation, amortisation, acquisition fees and share-based payment charges.  The Group uses underlying EBITDA as a measure of performance in line with the telecommunications sector's general approach to relative performance measurement.  As the Group operates a capex-light model, the Board considers that underlying EBITDA is the best indication of the underlying cash generation of the business.  Below is a reconciliation of underlying EBITDA to the reported profit after tax:

 


2017

£'000

2016

£'000




Underlying EBITDA

7,827

6,153

Acquisition fees

(703)

(389)

Share option charges

(31)

2

Depreciation

(279)

(188)

Amortisation (restated)

(2,482)

(2,048)

Interest

(928)

(612)

Profit before tax

3,404

2,918

The Group has reviewed the intangible assets acquired during the year ended 31 March 2016 and in accordance with IFRS3 has reallocated some of the intangible assets acquired as part of business combination to goodwill.  As a result of the revised intangible asset value, the corresponding amortisation charge has been adjusted, which has resulted in an increase to retained earnings of £0.17m for the year ended 31 March 2016.  This is purely an accounting adjustment with no impact on underlying profitability or cash.

Underlying EBITDA has increased for the 14th consecutive year since AdEPT's inception in 2003.  The Group has focused on the underlying profitability of customers and revenue streams combined with tight overhead control, industry leading debt collection and wholesale supply chain negotiation.

Finance costs

Total interest costs have increased to £0.93m (2016: £0.61m), arising largely from the increase in the average level of net borrowings which were used to fund the acquisitions of Comms Group, CAT and OurIT.  Included within interest costs is a £0.32m charge, which is non-cash, in relation to the discounted cash flow impact of the contingent deferred consideration payable in relation to the Comms Group, CAT and OurIT acquisitions.  Increases to interest costs have been partially mitigated through treasury management of surplus cash balances to minimise the amount of drawn funds.

Profit before tax

This year profit before tax has increased by £0.48m with a reported £3.40m (2016: £2.92m).  The increase to profit before tax arises from the £1.67m underlying EBITDA improvement, which has been absorbed by the £0.31m increase in finance costs, the acquisition costs of £0.70m and the associated increase in depreciation and amortisation arising from the acquisitions undertaken during the year. The OurIT acquisition had a negative net contribution to reported profit before tax in the current year. OurIT contributed only two months to profit before tax in the current year, amounting to £0.2m, which was lower than the acquisitions fees of £0.3m, giving a net negative contribution to profit before tax of £0.1m.

Profit after tax and earnings per share

Profit after tax for the year amounted to £2.75m (2016: £2.39m). Basic earnings per share was 12.17p (2016: 10.72p).  Adjusted earnings per share, based on the profit for the year attributable to equity holders adding back amortisation and acquisition costs (see Note 27), increased by 20.3% to 23.09p per share (2016: 19.19p).

The Group has applied the principles of IFRS3 and IAS12 and made full provision for the deferred tax liability on future amortisation charges in relation to the company acquisitions undertaken to date.  The deferred tax liability is released as the amortisation is charged to the statement of comprehensive income. The prior year comparatives have been restated to apply this accounting principle as if it had been adopted throughout the periods covered by the financial statements.  This is purely an accounting adjustment with no impact on underlying profitability, adjusted earnings per share or cash flow.

During the year ended 31 March 2017 the Company continued with a small share buyback of its own ordinary shares in order to improve stock liquidity and enhance earnings per share.  The Company repurchased 19,136 shares (2016: 35,000 shares) at an average price of 318.0p (2016: 257.7p); the cost of these repurchases was met from the cash proceeds of share options and warrants exercised during the year.  All shares repurchased by the Company were cancelled prior to the year end.  The directors will continue to monitor the level of cash required for the business and determine if further repurchases remain in shareholders' best interests.

Dividends and dividend per share

On the back of strong cash flow generation AdEPT announced an interim dividend of 3.75p per share, which was paid to shareholders on 7 April 2017.  On 30 March 2017 the directors proposed a final dividend, which was subsequently announced on 4 April 2017 that, subject to shareholder approval at the annual general meeting later in the year, it is proposing a final dividend of 4.00p per ordinary share  (2016: 3.50p). This dividend is expected to be paid on or around 6 October 2017 to shareholders on the register at 22 September 2017.

Total dividends approved and proposed during the year ended 31 March 2017 of 7.75p per ordinary share represent a 19.2% increase year-on-year (2016: 6.50p).  The Board constantly monitors shareholder value and is confident that the continued strong cash generation will support a progressive dividend policy.

Cash flow

The Group benefits from an excellent cash-generating operating model. Low capital expenditure results in a high proportion of underlying EBITDA turning into cash.  The cash impact of transitioning the acquired subsidiaries to payment by income tax instalments in advance has resulted in a one-off increase of £0.5m to cash outflow.  The proportion of underlying EBITDA less acquisition costs which turned into net cash from operating activities after income tax (excluding the £0.5m cost of transitioning the acquired subsidiaries to income tax instalments) was 82.2% (2016: 98.4%). The change from the prior period being a reflection of the timing of supplier payments at year end.  In the prior year this measure was stated after cash interest, this calculation has been adjusted to operating cash flow before interest to reflect the cash conversion performance of the Group with regard to debt service.  The Group continues to manage its credit risk and the collections of trade receivables have been reasonably stable during the year with customer collection periods of 35 days.

Cash interest paid has increased during the year to £0.40m (2016: £0.32m), which arises from the increase in net borrowings to fund the acquisitions of Comms Group, CAT and OurIT.

Cash outflows in the year ended 31 March 2017 in relation to acquisitions amounted to £12.7m (net of cash acquired).  The contingent consideration in respect of the acquisition of Centrix Limited was paid in May 2016 with no further amounts due.  The initial cash consideration for the acquisition of Comms Group of £3.6m (net of cash acquired) was paid in May 2016, £1.0m was paid in November 2016 in relation to the acquisition of CAT and £4.4m (net of the debt acquired) was paid in February 2017 in respect of the acquisition of OurIT.

Dividends paid during the year ended 31 March 2017 absorbed £1.5m of cash (2016: £1.1m). This increase over the prior period arises from the continued application of the progressive dividend policy.

Cash inflows of £0.2m were generated from the issue of new equity during the year largely arising from the exercise of the January 2009 share warrant by Barclays Bank plc.

Following the successful execution of the Company's acquisition strategy the Company had outgrown the previous £15m revolving credit facility, provided by Barclays, relative to the profitability of the Company.  In February 2017 the Company signed a £30m 5 year revolving credit facility agreement.  The new larger facility is provided by Barclays Bank plc and The Royal Bank of Scotland plc on an equal basis and was put in place to fund the strategic acquisition of businesses to leverage benefits from increased scale and a wider product set, and was first drawn down to fund the acquisition of OurIT in February 2017.  The new syndicated debt facility provides increased scale and has a more flexible structure when compared to the Company's previous debt facility agreement.

There was a decrease to cash and cash equivalents during the year of £5.6m. This arises from a net increase in the drawn element of the revolving credit facility at the March 2016 year-end which was used to fund the initial consideration for the acquisition of Comms Group in May 2016.  The Group will continue to apply its treasury management policies to minimise the cost of finance whilst retaining flexibility to meet its growth strategies.

Capital expenditure

The Group operates an asset light strategy and has low capital requirements; therefore, expenditure on fixed assets is low at 0.3% of revenue (2016: 1.0%).

Business combinations

The strategy of the Group is to concentrate organic sales efforts on attracting larger customers, particularly in the public and healthcare sector. Rather than operate a telesales operation aimed at acquiring smaller business customers organically, we instead use our free cash generation to acquire customer bases from other telecommunications suppliers in the industry.

On 1 May 2016 the Company acquired the entire issued share capital of Comms Group, a well-established UK-based provider of complex unified communications, Avaya IP telephony, hosted IP solutions, IT and managed services. Total consideration was an initial £3.6m plus the value of the cash balance of Comms Group at completion (approximately £1.1m) with contingent consideration of up to £3.5m dependent upon the performance of Comms Group post-acquisition. Acquisition related costs of £0.3m have been recognised as an expense in the statement of comprehensive income for the year ended 31 March 2017.

A fair value of £4.3m in relation to the customer contracts for the acquired business has been recognised as intangible asset additions in the year ended 31 March 2017.  Further details on the acquisition during the year are described in Note 27 to the financial statements.

On 1 November 2016 the Company acquired the entire issued share capital of CAT, a well-established UK-based specialist provider of unified communications, Avaya Aura telephony, hosted IP solutions and managed services. Total consideration was an initial £1.0m less the value of the net debt of CAT at completion (approximately £0.07 m) with contingent consideration of up to £1.0m dependent upon the performance of CAT post-acquisition. Acquisition related costs of £0.1m have been recognised as an expense in the statement of comprehensive income for the period ended 31 March 2017.

A fair value of £1.5m in relation to the customer contracts for the acquired business has been recognised as intangible asset additions in the year ended 31 March 2017.  Further details on the acquisition during the year are described in Note 27 to the financial statements.

On 1 February 2017 the Company acquired the entire issued share capital of OurIT.  OurIT, founded in 1993, is is a highly accredited IT services provider with over 20 years' experience, offering award winning 24 hour IT support services and technology solutions.  OurIT has a directly employed team of highly skilled certified professionals with qualifications including Microsoft Gold Partner and Business Specialist, Apple Specialist, Cisco Certified Partner and Dell Preferred Partner, and is focused on providing outsourced IT services to customers in London and the South East.  The acquisition was for an initial consideration of £4.0m (calculated as £4.75m less the £1.20m net debt plus £0.46m working capital of OurIT at completion, payable in cash. Further contingent deferred consideration of up to £3.75m will be payable, also in cash, dependent upon the performance of OurIT post-acquisition.

A fair value of £2.0m in relation to the customer contracts for the acquired business has been recognised as intangible asset additions in the year ended 31 March 2017.  Further details on the acquisition during the year are described in Note 27 of the financial statements.

Net debt and bank facilities

A key strength of AdEPT is its consistent, proven ability to generate strong free cash flow and therefore support net borrowings.  As a result of the Group's focus on underlying profitability and cash conversion, free cash flow after taxes but before bank interest paid of £4.3m was generated during the year ended 31 March 2017 (2016: £4.8m).  Income taxes paid during the year increased from £0.9m to £1.5m. The cash impact of transitioning the acquired subsidiaries to payment by income tax instalments in advance has increased the cash outflow by £0.5m, which is a one-off change. 

Opening cash plus the free cash flow generated in the year and borrowing drawdowns of £4.0m have been used to fund £12.0m acquisition consideration, £1.5m dividends paid and £0.1m of capital expenditure on tangible and intangible assets.  Net cash inflows of £0.2m have arisen from the issue of new equity largely from the exercise of the Barclays warrant, which has been used to fund the share repurchases during the year.  Net debt, which comprises cash balances and bank borrowings, has increased to £15.5m at the year-end (2016: £6.0m) as a result of the acquisition consideration outflows.

On 2 February 2017 the Group signed a new five year £30m revolving credit facility agreement with Barclays Bank plc and The Royal Bank of Scotland plc.  The new syndicated debt facility provides increased scale and has a more flexible structure when compared to the Company's previous debt facility agreement.  The revolving credit facility bears interest at 1.85-2.30% over LIBOR on drawn funds, dependent upon the net debt:EBITDA ratchet, and is repayable in full on the final repayment date of 2 February 2023.

The Group's available banking facilities are described in Note 26 of the financial statements. 

Segmental key performance indicators (KPIs)

The segmental KPIs outlined below are intended to provide useful information when interpreting the accounts.


Fixed




line

Managed



services

services

Total


£'000

£'000

£'000





Year ended 31 March 2017




Revenue

15,365

19,071

34,436

Gross profit

6,074

8,497

14,571

Gross margin %

39.5%

44.6%

42.3%





Year ended 31 March 2016




Revenue

16,089

12,792

28,881

Gross profit

6,194

5,440

11,634

Gross margin %

38.5%

42.5%

40.3%





 

Principal risks and uncertainties

There are a number of potential risks and uncertainties which could have a material impact on the Group's long-term performance and could cause actual results to differ materially from expected results.

Liquidity risk

The Group seeks to manage financial risk by ensuring sufficient liquidity is available to meet foreseeable needs and to invest cash assets safely and profitably. External funding facilities are managed to ensure that both short-term and longer-term funding is available to provide short-term flexibility whilst providing sufficient funding to the Group's forecast working capital requirements.

Credit risk

The Group extends credit of various durations to customers depending on customer credit worthiness and industry custom and practice for the product or service. In the event that a customer proves unable to meet payments when they fall due, the Group will suffer adverse consequences. To manage this, the Group continually monitors credit terms to ensure that no single customer is granted credit inappropriate to its credit risk. Additionally, approximately 67% of our customer receipts are by monthly direct debit. The risk is further reduced by the customer base being spread across all industry and service sectors. The top ten customers account for approximately 24.3% of revenues.

Competitor risk

The Group operates in a highly competitive market with rapidly changing product and pricing innovations. We are subject to the threat of our competitors launching new products in our markets (including updating product lines) before we make corresponding updates and developments to our own product range. This could render our products and services out-of-date and could result in loss of market share. To reduce this risk, we undertake new product development and maintain strong supplier relationships to ensure that we have products at various stages of the life cycle.

Competitor risk also manifests itself in price pressures which are usually experienced in more mature markets. This results not only in downward pressure on our gross margins but also in the risk that our products are not considered to represent value for money. The Group therefore monitors market prices on an ongoing basis.

Acquisition integration execution

The Group has set out that its strategy includes the acquisition of businesses where they are earnings enhancing. The Board acknowledges that there is a risk of operational disturbance in the course of integrating the acquired businesses with existing operations. The Group mitigates this risk by careful planning and rigorous due diligence.

John Swaite

Finance director

 

Consolidated statement of comprehensive income

For the year ended 31 March 2017

 


 

Note

2017

£'000

Restated

2016

£'000

 

 

Revenue

5

34,436

28,881

 

 

Cost of sales


(19,865)

(17,247)

 

 

Gross profit


14,571

11,634

 

 

Administrative expenses


(10,239)

(8,104)

 

 

Operating profit


4,332

3,530

 

 

Total operating profit - analysed:


 


 

Underlying EBITDA


7,827

6,153

 

Share-based payments


(31)

2

 

Depreciation of tangible fixed assets


(279)

(188)

 

Acquisition fees


(703)

(389)

 

Amortisation of intangible fixed assets


(2,482)

(2,048)

 

Total operating profit


4,332

3,530

 

Finance costs

8

(928)

(612)

 

 

Profit before income tax


3,404

2,918

 

 

Income tax expense

10

(655)

(528)

 

 

Profit for the year


2,749

2,390

 

 

Other comprehensive income


-

-

 

 

Total comprehensive income


2,749

2,390

 

 

 




 

 

 

Note

2017

Restated

2016

 

 

Earnings per share




 

 

Basic earnings

27

12.17p

10.72p

 

 

Diluted earnings

27

11.57p

10.15p

 

 

All amounts relate to continuing operations.

Consolidated statement of financial position

As at 31 March 2017

 

 

Note

31 March

2017

£'000

Restated

31 March

2016

£'000

Restated

1 April

2015

£'000

Assets

 

 

 

 

Non-current assets

 

 

 

 

Goodwill

12

11,217

3,614

-

Intangible assets

13

28,559

21,420

14,874

Property, plant and equipment

14

863

524

82


 

40,639

25,558

14,956

Current assets

 

 

 

 

Inventories

17

196

48

3

Trade and other receivables

18

5,514

4,360

2,198

Cash and cash equivalents

 

1,238

6,166

2,095


 

6,948

10,574

4,296

Total assets

 

47,587

36,132

19,252

Current liabilities

 

 

 

 

Trade and other payables

19

13,049

8,753

3,165

Income tax

 

664

430

324

Short-term borrowings

 

706

-

538


 

14,419

9,183

4,027

Non-current liabilities

 

 

 

 

Deferred income tax

16

4,057

3,041

1,702

Long-term borrowings

20

15,988

12,148

3,095

Total liabilities

 

34,464

24,372

8,824

Net assets

 

13,123

11,760

10,428

Equity attributable to equity holders

 

 

 

 

Share capital

21

2,370

2,248

2,230

Share premium

 

479

429

335

Retained earnings

 

10,274

9,083

7,863

Total equity

 

13,123

11,760

10,428

 

Company statement of financial position

As at 31 March 2017

 

 

Note

31 March

2017

£'000

Restated

31 March

2016

£'000

Assets

 

 

 

Non-current assets

 

 

 

Intangible assets

12

11,376

13,255

Investments

13

26,542

11,846

Property, plant and equipment

14

137

204

Deferred income tax

16

43

106


 

38,098

25,411

Current assets

 

 

 

Inventories

17

1

1

Trade and other receivables

18

1,688

1,885

Cash and cash equivalents

 

-

5,489


 

1,689

7,375

Total assets

 

39,787

32,786

Current liabilities

 

 

 

Trade and other payables

19

10,655

6,195

Income tax

 

132

185

Short-term borrowings

 

706

-


 

11,493

6,380

Non-current liabilities

 

 

 

Long-term borrowings

20

15,988

12,148

Total liabilities

 

27,481

18,528

Net assets

 

12,306

14,258

Equity attributable to equity holders

 

 

 

Share capital

21

2,370

2,248

Share premium

 

479

429

Retained earnings

 

9,457

11,581

Total equity

 

12,306

14,258

 

The loss for the financial year dealt with in the financial statements of the parent Company was £566,084 (2016: profit £643,099).

Consolidated statement of changes in equity

For the year ended 31 March 2017

 

 

Attributable to equity holders

 

Share

capital

£'000

Share

premium

£'000

Share

option

reserve

£'000

Capital

redemption

reserve

£'000

(Restated)

Retained

earnings

£'000

(Restated)

Total

equity

£'000

Equity at 1 April 2015

2,230

335

58

12

9,640

12,275

Restatement

-

-

-

-

(1,847)

(1,847)

Equity at 1 April 2015 restated

2,230

335

58

12

7,793

10,428

Profit for the year

-

-

-

-

2,390

 2,390

Other comprehensive income

-

-

-

-

-

-

Total comprehensive income

-

-

-

-

2,390

2,390

Deferred tax on share options

-

-

-

-

(23)

(23)

Dividends

-

-

-

-

(1,059)

(1,059)

Share-based payments

-

-

(2)

-

-

(2)

Issue of share capital

22

94

-

-

-

116

Shares repurchased and cancelled

(4)

-

-

4

(90)

(90)

Equity at 1 April 2016

2,248

429

56

16

9,011

11,760

Profit for the year

-

-

-

-

2,749

2,749

Other comprehensive income

-

-

-

-

-

-

Total comprehensive income

-

-

-

-

2,749

2,749

Deferred tax asset adjustment

-

-

-

-

(69)

(69)

Exercise of warrants

-

-

(53)

-

53

-

Dividends

-

-

-

-

(1,461)

(1,461)

Share-based payments

-

-

31

-

-

31

Issue of share capital

124

50

-

-

-

174

Shares repurchased and cancelled

(2)

-

-

2

(61)

(61)

Equity at 31 March 2017

2,370

479

34

18

10,222

13,123

 

Company statement of changes in equity

For the year ended 31 March 2017

 

 

Attributable to equity holders

 

Share

capital

£'000

Share

premium

£'000

Share

option

reserve

£'000

Capital

redemption

reserve

£'000

Retained

earnings

£'000

Total

equity

£'000

Equity at 1 April 2015

2,230

335

58

12

9,640

12,275

Profit for the year

-

-

-

-

548

548

Dividends received from subsidiary

-

-

-

-

2,493

2,493

Other comprehensive income

-

-

-

-

-

-

Total comprehensive income

-

-

-

-

3,041

3,041

Deferred tax on share options

-

-

-

-

(23)

(23)

Dividends

-

-

-

-

(1,059)

(1,059)

Share-based payments

-

-

(2)

-

-

(2)

Issue of share capital

22

94

-

-

-

116

Shares repurchased and cancelled

(4)

-

-

4

(90)

(90)

Equity at 1 April 2016

2,248

429

56

16

11,509

14,258

Loss for the year

-

-

-

-

(566)

(566)

Dividends received from subsidiary

-

-

-

-

-

-

Other comprehensive income

-

-

-

-

-

-

Total comprehensive income

-

-

-

-

(566)

(566)

Deferred tax asset adjustment

-

-

-

-

  (69)

   (69)

 

Exercise of warrants

-

-

(53)

-

53

-

Dividends

-

-

-

-

(1,461)

(1,461)

Share-based payments

-

-

31

-

-

31

Issue of share capital

124

50

-

-

-

174

Shares repurchased and cancelled

(2)

-

-

2

(61)

(61)

Equity at 31 March 2017

2,370

479

34

18

9,405

12,306

 

Consolidated statement of cash flows

For the year ended 31 March 2017

 

 

2017

£'000

Restated

2016

£'000

Cash flows from operating activities

 

 

Profit before income tax

3,404

2,918

Depreciation and amortisation

2,761

2,235

Profit on sale of fixed asset

-

(2)

Share-based payments

31

(2)

Net finance costs

928

612

Operating cash flows before movements in working capital

7,124

5,761

Decrease in inventories

33

14

Increase in trade and other receivables

(123)

(803)

(Decrease)/increase in trade and other payables

(1,202)

666

Cash generated from operations

5,832

5,638

Income taxes paid

(1,504)

(855)

Net cash from operating activities

4,328

4,783

Cash flows from investing activities

 

 

Interest paid

(405)

(318)

Acquisition of subsidiaries net of cash acquired

(11,987)

(7,058)

Purchase of intangible assets

(26)

(194)

Sale of property, plant and equipment

-

14

Purchase of property, plant and equipment

(146)

(532)

Net cash used in investing activities

(12,564)

(8,088)

Cash flows from financing activities

 

 

Dividends paid

(1,461)

(1,059)

Share capital issued

174

114

Payments made for share repurchases

(61)

(90)

Increase in bank loan

3,950

18,400

Repayment of borrowings

-

(9,988)

Net cash from financing activities

2,602

7,377

Net (decrease)/increase in cash and cash equivalents

(5,634)

4,072

Cash and cash equivalents at beginning of year

6,166

2,094

Cash and cash equivalents at end of year

532

6,166

Cash and cash equivalents

 

 

Cash at bank and in hand

1,238

6,166

Short-term borrowings

(706)

-

Cash and cash equivalents

532

6,166

 

Company statement of cash flows

For the year ended 31 March 2017

 

 

2017

£'000

2016

£'000

Cash flows from operating activities

 

 

(Loss)/profit before income tax

(111)

3,485

Depreciation and amortisation

1,984

1,872

Profit on sale of fixed asset

-

(2)

Share-based payments

31

(2)

Net finance costs

928

612

Operating cash flows before movements in working capital

2,832

5,965

Decrease in inventories

-

3

(Increase)/decrease in trade and other receivables

(326)

217

Increase in trade and other payables

2,372

208

Cash generated from operations

4,878

6,393

Income taxes paid

(513)

(566)

Net cash from operating activities

4,365

5,827

Cash flows from investing activities

 

 

Interest paid

(407)

(315)

Acquisition of subsidiaries net of cash acquired

(12,719)

(9,121)

Purchase of intangible assets

(26)

(194)

Sale of property, plant and equipment

-

14

Purchase of property, plant and equipment

(11)

(193)

Net cash used in investing activities

(13,163)

(9,809)

Cash flows from financing activities

 

 

Dividends paid

(1,461)

(1,059)

Share capital issued

174

114

Payments made for share repurchases

(61)

(90)

Increase in bank loan

3,950

18,400

Repayment of borrowings

-

(9,988)

Net cash from financing activities

2,602

7,377

Net (decrease)/increase in cash and cash equivalents

(6,196)

3,395

Cash and cash equivalents at beginning of year

5,490

2,095

Cash and cash equivalents at end of year

(706)

5,490

Cash and cash equivalents

 

 

Cash at bank and in hand

-

5,490

Short-term borrowings

(706)

-

Cash and cash equivalents

(706)

5,490

 

Notes to the financial statements

For the year ended 31 March 2017

 

1. Nature of operations and general information

AdEPT is one of the UK's leading independent providers of voice and data telecommunication services with award-winning customer service. The Group is focused on delivering a complete telecommunications service for small and medium-sized business customers with a targeted product range including landline calls, line rental, broadband, IT services, mobile and data connectivity services.

AdEPT is incorporated under the Companies Act, domiciled in the UK and the registered office is located at One London Wall, London EC2Y 5AB. The Company's shares are listed on AIM of the London Stock Exchange.

2. Accounting policies

Basis of preparation of financial statements

The financial statements have been prepared in accordance with applicable IFRS as adopted by the EU.

Accounting standards require the directors to consider the appropriateness of the going concern basis when preparing the financial statements. The directors confirm that they consider that the going concern basis remains appropriate. The Group's available banking facilities are described in Note [26] to the financial statements. The Group has adequate financing arrangements which can be utilised by the Group as required. Thus they continue to adopt the going concern basis of accounting in preparing the annual financial statements.

At the date of authorisation of these financial statements, the directors have considered the standards and interpretations which have not been applied in these financial statements that were in issue but not yet effective (and in some cases had not yet been adopted by the EU) and IFRS 15 "Revenue from Contracts with Customers", IFRS 16 "Leases" and IFRS 9 "Financial Instruments" were considered to be relevant.

It is not clear whether the application of IFRS 16 and IFRS 9, once effective, will have a material impact on the results of the Group.

The Group has commenced a detailed assessment to determine the impact of adopting IFRS 15, which introduces for certain contracts significant changes to the timing of revenue, and associated profit, recognition. This assessment is ongoing and the Board will update the shareholders on the impact on transition, and on our ongoing accounting policy, during 2017 as appropriate.

Adoption of the other standards and interpretations are not expected to have a material impact on the results of the Group. Application of these standards may result in some changes in presentation of information within the Group's financial statements.

The financial statements are presented in sterling, which is the Group's functional and presentation currency. The figures shown in the financial statements are rounded to the nearest thousand pounds.

Segmental reporting

The directors have considered the requirements of IFRS 8 "Operating Segments" and have concluded that the Group has two segments. For further information see Note 4 of the financial statements.

Revenue

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and can be reliably measured.

Revenue from calls, which excludes value added tax and trade discounts, is recognised in the income statement at the time the call is made. Calls made in the year, but not billed by year end, are accrued within receivables as accrued income.

Revenue from line rental is recognised in the month that the charge relates to, commencing with a full month's charge in the month of connection. Revenue and related costs from the sales of mobile handsets are recognised at the date of supply or connection.

Revenue arising from the provision of internet and other services is recognised evenly over the periods in which the service is provided to the customer.

Revenue from the sale of goods is recognised when the goods have been fully installed. Income from maintenance services and equipment rentals is recognised over the term of the agreement.

Where customer contracts have multiple components to be delivered (e.g. equipment rental and internet services), the revenue attributable to each component is calculated based on the fair value of each component. 

The whole of the revenue is attributable to the provision of voice and data telecommunication services to both residential and business customers. All revenue arose within the United Kingdom.

Goodwill

Goodwill is recognised separately as intangible assets and carried at cost less accumulated impairment losses. Goodwill is tested for impairment at least annually. Any impairment is recognised immediately in the income statement. Subsequent reversals of impairment losses for goodwill are not recognised.

 

Intangible fixed assets acquired as part of a business combination and amortisation

In accordance with IFRS 3 "Business Combinations", an intangible asset acquired in a business combination is recognised at fair value at the acquisition date.

After initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. Impairment reviews are conducted annually from the first anniversary following acquisition.

The intangible asset 'customer base' is amortised to the income statement over its estimated useful economic life on a straight line basis.

Other intangible assets

Also included within intangible fixed assets are the development costs of the Company's billing and customer management system plus an individual licence. These other intangible assets are stated at cost, less amortisation and any provision for impairment. Amortisation is provided at rates calculated to write off the cost, less estimated residual value of each intangible asset, over its expected useful economic life on the following bases:

Customer management system                        - Three years straight line

Other licences                                                        - Contract licence period straight line

Computer software                                               - Three years straight line

Investments

Shareholdings in subsidiaries are valued at cost less provision for permanent impairment.

Property, plant and equipment and depreciation

Property, plant and equipment are stated at cost, less depreciation and any provision for impairment. Depreciation is provided on all property, plant and equipment at rates calculated to write off the cost, less estimated residual value of each asset, over its expected useful life on the following bases:

Short-term leasehold improvements                - The shorter of five years and the remaining period of the lease     straight line

Fixtures and fittings                                               - Three years straight line

Office equipment                                                   - Three years straight line

Motor vehicles                                                        - Four years straight line

Rental equipment at customer premises        - Contract agreement period straight line

Lease accounting

The Group leases equipment under operating leases to non-related parties. Leases of equipment where the Group retains substantially all risks and rewards incidental to ownership are classified as operating leases. The underlying assets are recognised in tangible fixed assets. Rental income from operating leases (net of any incentives given to the lessees) is recognised in profit or loss on a straight-line basis over the lease term.

Initial direct costs incurred by the Group in negotiating and arranging operating leases are added to the carrying amount of the leased assets and recognised as an expense in profit or loss over the lease term on the same basis as the lease income.

Inventories

Inventories are valued at the lower of cost and net realisable value after making allowance for any obsolete or slow moving items. Full provision is made for any items older than 6 months. Net realisable value is reviewed regularly to ensure accurate carrying values. Cost is determined on a first-in, first-out basis and includes transportation and handling costs.

Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs necessary to make the sale.

Pensions

The Group contributes to personal pension plans. The amount charged to the income statement in respect of pension costs is the contribution payable in the year.

Cash and cash equivalents

Cash and cash equivalents comprise cash at bank, cash in hand and overdrafts.

Income tax

Income tax is the tax currently payable based on taxable profit for the year.

Deferred income tax is generally provided on the difference between the carrying amounts of assets and liabilities and their tax bases. However, deferred income tax is not provided on the initial recognition of goodwill, nor on the initial recognition of an asset or liability unless the related transaction is a business combination or affects tax or accounting profit.

Deferred income tax liabilities are provided in full, with no discounting. Deferred income tax assets are recognised to the extent that it is probable that the underlying deductible temporary differences will be able to be offset against future taxable income. Current and deferred income tax assets and liabilities are calculated at tax rates that are expected to apply to their respective period of realisation, provided they are enacted or substantively enacted at the balance sheet date.

Changes in deferred income tax assets or liabilities are recognised as a component of income tax expense in the income statement, except where they relate to items that are charged or credited directly to equity, in which case the related deferred income tax is also charged or credited directly to equity.

Share-based payments

The cost of equity-settled transactions with employees is measured by reference to the fair value of the award at the date at which they are granted and is recognised as an expense over the vesting period, which ends on the date at which the relevant employees become fully entitled to the award. Fair value is appraised at the grant date using an appropriate pricing model for which the assumptions are approved by the directors.

At each balance sheet date, the cumulative expense is calculated representing the extent to which the vesting period has expired and management's best estimate of the number of equity instruments that will ultimately vest. The movement in the cumulative expense since the previous balance sheet date is recognised in the income statement, with a corresponding entry in equity.

Trade and other receivables

Trade receivables, which generally have 14 to 60 days terms, are initially recognised at fair value and subsequently held at amortised cost. A provision for impairment of trade receivables is established for any amount due in 90 or more days or when it is considered probable that the Group may not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the trade receivable is impaired. The provision is the difference between the asset's carrying amount and the original invoice amount less bad debts written off. The carrying amount of the asset is reduced through the use of the provision and the amount of the loss is recognised in the income statement. When a trade receivable is uncollectible, it is written off against the allowance account for trade receivables.

Subsequent recoveries of amounts previously written off are credited to the income statement.

Cash and cash equivalents

Cash and cash equivalents comprise cash on hand and demand deposits, together with other short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value.

Trade payables

Trade payables are stated at their nominal value, recognised initially at fair value and subsequently valued at amortised cost.

Dividends

Dividend distributions to the Company's shareholders are recognised when payment has been made to shareholders.

Share buybacks

The Company has returned surplus cash to shareholders through a limited share buyback scheme pursuant to the authority given to it at the annual general meeting. Shares purchased for cancellation are deducted from retained earnings at the total consideration paid or payable. The Company will continue to monitor the level of cash required for the business and determine if further repurchases remain in the shareholders' best interests.

Financial instruments

Financial assets and liabilities are recognised on the Group's balance sheet when the Group becomes a party to the contractual provisions of the instrument.

Capital

The capital structure of the Group consists of debt, which includes the borrowings disclosed in Notes 20 and 27, cash and cash equivalents, and equity attributable to equity holders, comprising issued capital, reserves and retained earnings.

Borrowings and borrowing costs

Borrowings are recorded initially at the proceeds received, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost. Any differences between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method.

Borrowing costs are expensed to the income statement as incurred, with the exception of arrangement fees which are deducted from the related liability and released over the term of the related liability in accordance with IAS 39.

3. Critical accounting estimates and judgements

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

Key sources of estimation and uncertainty are:

Measuring the fair value of customer bases on acquisition

The main estimates used to measure the fair value of the customer bases on acquisition are:

•    the churn rate (turnover of customers);

•    discount rate; and

•    gross margins.

Estimating churn, discount rate and gross margins

Churn rates ranging between 2.4% and 15.4% are based upon actual historical churn rates of the revenue stream for each customer base.

The discount rate of 8.0% (2016: 8.0%) used to discount the cash flows is based upon the Group's weighted average cost of capital (WACC), which is the recommended discount rate suggested by IFRS and is a calculated figure using actual input variables where available and applying estimates for those which are not, such as the equity market premium.

Gross margins of 45.8% are based upon actual margins achieved by the customer bases in the current and previous years. The actual outcomes have been materially equivalent.

Estimating the useful life of customer bases

The main estimate used to conduct the impairment review is the churn rate (turnover of customers).

The average useful economic life of all the customer bases has been estimated at 15 years (2016: 14 years) with a range of ten to 30 years.

Measuring the fair value of contingent consideration

The fair value of contingent deferred consideration is determined by reference to the growth rate for the gross margin of the acquired business and applying the contingent deferred consideration matrix as specified in the asset or share purchase agreement and discounting the net present value of the future cash flows. The range of contingent consideration in the current period was £0 to £7.75m; further details are included in Note 27.

Subsequent impairment of customer bases

The Group determines whether intangible assets are impaired on at least an annual basis. This requires an estimation of the 'value in use' of the cash-generating units to which the intangible value is allocated. Estimating a value in use amount requires management to make an estimate of the expected future cash flows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows.

The calculations are sensitive to any movement in the discount rate, margin or churn rate and would therefore result in an impairment charge to the income statement. A 1% change to the discount rate, gross margin and churn rate would result in additional impairment charges of £31,000, £31,000 and £Nil respectively.

More details, including carrying values, are included in Note 13.

Allowance for impairment of receivables

Management reviews are performed to estimate the level of provision required for irrecoverable debt. Provisions are made specifically against invoices where recoverability is uncertain. Further information on the receivables allowance account is given in Note 18.

4. Segmental information

IFRS 8 "Operating Segments" requires identification on the basis of internal reporting about components of the Group that are regularly reviewed by the chief operating decision maker to allocate resources to the segments and to assess their performance.

The chief operating decision maker has been identified as the Board. The Board reviews the Group's internal reporting in order to assess performance and allocate resources. The operating segments are fixed line services (being calls and line rental services) and managed services (which are data connectivity, hardware, IP telephony, support and maintenance services), which are reported in a manner consistent with the internal reporting to the Board. The Board assesses the performance of the operating segments based on revenue, gross profit and underlying EBITDA.

 

Year ended 31 March 2017

 

Year ended 31 March 2016 (Restated)

£'000

Fixed line

services

Managed

services

Central

costs

Total

 

Fixed line

services

Managed

services

Central

costs

Total

Revenue

15,365

19,071

-

34,436

 

16,089

12,792

-

28,881

Gross profit

6,074

8,497

-

14,571

 

6,194

5,440

-

11,634

Gross margin %

39.5%

44.6%

-

42.3%

 

38.5%

42.5%

-

40.3%

Administrative expenses

2,687

4,057

-

6,744

 

2,682

2,799

-

5,481

Underlying EBITDA

3,387

4,440

-

7,827

 

3,512

2,641

-

6,153

Underlying EBITDA %

22.0%

23.3%

-

22.7%

 

21.8%

20.6%

-

21.3%

Amortisation

(1,907)

(575)

-

(2,482)

 

(1,814)

(234)

-

(2,048)

Depreciation

-

-

(279)

(279)

 

-

-

(188)

(188)

Acquisition costs

-

-

(703)

(703)

 

-

-

(389)

(389)

Share-based payments

-

-

(31)

(31)

 

-

-

2

2

Operating profit/(loss)

1,480

3,865

(1,013)

4,332

 

1,698

2,407

(575)

3,530

Finance costs

-

-

(928)

(928)

 

-

-

(612)

(612)

Income tax

-

-

(655)

(655)

 

-

-

(528)

(528)

Profit/(loss) after tax

1,480

3,865

(2,596)

2,749

 

1,698

2,407

(1,715)

2,390

 

The assets and liabilities relating to the above segments have not been disclosed as they are not separately identifiable and are not used by the chief operating decision maker to allocate resources. All segments are in the UK and all revenue relates to the UK.

Transactions with the largest customer of the Group are less than 10% of total turnover and do not require disclosure for either 2016 or 2017.

5. Revenue

 

2017

£'000

2016

£'000

Sale of goods

4,698

2,390

Provision of services

 

 

-   Calls and line rental

15,874

16,614

-   Data networks

8,501

6,121

-   Support services

2,046

1,628

 - Other services

3,317

2,128

 

34,436

28,881

6. Operating profit

The operating profit is stated after charging:

 

2017

£'000

Restated

2016

£'000

Amortisation of customer base, billing system and licence

2,482

2,048

Depreciation of tangible fixed assets:



- owned by the Group

279

188

Share option expense/(credit)

31

(2)

Minimum operating lease payments:



- land and buildings

575

537

- motor vehicles and other equipment

110

103

 

7. Auditors' remuneration

 

2017

£'000

2016

£'000

Fees payable to the Group's auditors for the audit of the Group's annual financial statements

35

33

Fees payable to the Group's auditors and their associates in respect of:



- audit of subsidiaries

31

10

- other services relating to taxation

17

8

8. Finance costs

 

2017

£'000

2016

£'000

On bank loans and overdrafts

424

315

Bank fees

182

95

Finance cost on contingent consideration

322

202

 

928

612

 

The finance costs on contingent consideration arises from the release of the discounted contingent consideration liability evenly across the term of the deferred consideration period in relation to each acquisition.  This is a non-cash item.

9. Employee costs

Staff costs, including directors' remuneration, were as follows:

 

2017

£'000

2016

£'000

Wages and salaries

3,120

Social security costs

483

366

Share option expense

31

(2)

Other pension costs

51

251


4,706

3,735

 

The average monthly number of employees, including the directors, during the year was as follows:

 

2017

Number

2016

Number

Non-executive directors

2

2

Administrative staff

87

60


89

62

 

Key management personnel

The directors are considered to be the key management personnel of the Group, having authority and responsibility for planning, directing and controlling the activities of the Group.

10. Income tax expense

 

2017

£'000

Restated

2016

£'000

Current tax

 

 

UK corporation tax on profit for the year

1,300

820

Adjustments in respect of prior periods

32

(5)

Total current tax

1,332

815

Deferred tax

 

 

Origination and reversal of timing differences:

 

 

- Fixed assets

(4)

39

- Provision for receivables

-

-

- Share options

(10)

21

- Goodwill on business combinations

(633)

(350)

Adjustments in respect of prior periods

(30)

3

Total deferred tax (see Note 16)

(677)

(287)

Total income tax expense

655

528

 

Factors affecting tax charge for the year

The relationship between expected tax expense based on the effective tax rate of AdEPT at 20% (2016: 20%) and the tax expense actually recognised in the income statement can be reconciled as follows:

 

2017

£'000

Restated

2016

£'000

Profit before income tax

3,404

2,918

Tax rate

20%

20%

Expected tax charge

681

584

Expenses not deductible for tax purposes

254

164

Amortisation not deductible for tax purposes

-

289

Adjustments to tax charge in respect of prior periods

2

(2)

Depreciation/amortisation on non-qualifying assets

(2)

-

Difference due to deferred tax rate being lower than the standard tax rate

(272)

(411)

Unprovided deferred tax movement

3

-

Share option relief

(11)

(96)

Actual tax expense net

655

528

 

The change in income tax rates will affect future tax charges.

11. Dividends

On 30 September 2016 the directors approved an interim dividend of 3.75p per ordinary share (2016: 3.00p), which was paid to shareholders on 3 April 2017. On 30 March 2017 the directors proposed a final dividend, subject to shareholder approval at the 2017 annual general meeting, of 4.00p per ordinary share (2016: 3.50p). Total dividends proposed in respect of the year ended 31 March 2017 will absorb £1,836,892 of shareholders' funds in future periods (2016: £1,461,467).

On 5 April 2016 the Company paid dividends of £674,523 in relation to the interim dividend declared in September 2015. On 4 October 2016 the Company paid dividends of £786,944 in relation to the final dividend declared in March 2016. Total dividends paid in the year ended 31 March 2017 absorbed £1,461,467 of cash (2016: £1,059,803).

12. Goodwill

Group

 

 

 

 

Total

£'000

Cost

 

 

 

 

At 1 April 2015

 

 

 

2,085

Additions

 

 

 

3,614

At 1 April 2016

 

 

 

5,699

Additions

 

 

 

7,603

At 31 March 2017

 

 

 

13,302

Impairment

 

 

 

 

At 1 April 2015

 

 

 

2,085

Impairment charge

 

 

 

-

At 1 April 2016

 

 

 

2,085

Impairment charge

 

 

 

-

At 31 March 2017

 

 

 

2,085

Net book value

 

 

 

 

At 31 March 2017

 

 

 

11,217

At 31 March 2016

 

 

 

3,614

 

The goodwill is split by cash generating units as follows:



March 2017

£'000

March 2016

£'000

Centrix Limited

 

£3,614

£3,614

Comms Group UK Limited

 

£2,672

£Nil

CAT Communications Limited

 

£248

£Nil

OurIT Department Limited

 

£4,683

£Nil

 

The assumptions are set out in note 3.  No reasonable change in these assumptions would lead to impairments.

13. Intangible fixed assets

Group

 

Licence

£'000

Computer

software

£'000

Customer

base

£'000

 

Website

£'000

Total

£'000

Cost

 

 

 

 

 

At 1 April 2015

26

1,080

32,045

-

33,151

Additions

-

194

8,399

-

8,593

At 1 April 2016

26

1,274

40,444

-

41,744

Additions

-

26

6,111

1,744

7,881

Acquired with subsidiary

-

-

1,703

-

1,703

At 31 March 2017

26

1,300

48,295

1,744

51,365

Amortisation

 

 

 

 

 

At 1 April 2015

25

1,028

17,224

-

18,277

Charge for the year

1

84

1,918

-

2,003

Impairment charge

-

-

45

-

45

At 1 April 2016

26

1,112

19,186

-

20,324

Charge for the year

-

88

2,208

-

2,296

Impairment charge

-

-

186

-

186

At 31 March 2017

26

1,200

21,580

-

22,806

Net book value

 

 

 

 

 

At 31 March 2017

-

100

26,715

1,744

28,559

At 31 March 2016

-

162

21,258

-

21,420

 

Included within the Group's intangible assets is:


Useful life

March 2017

£'000

March 2016

£'000

Centrix Limited

30 years

£7,946

£8,202

Comms Group UK Limited

17 years

£4,670

£Nil

OurIT Department Limited

17 years

£3,168

£Nil

 

 

 

 

 

The useful lives for the customer base intangible assets are determined by reference to the actual historical churn rates of the revenue stream for each customer base acquired.  Sensitivity of the assumptions are included in note 3.

Company

 

Licence

£'000

Computer

software

£'000

Customer

base

£'000

Total

£'000

Cost

 

 

 

 

At 1 April 2015

26

1,080

32,045

33,151

Additions

-

194

-

194

At 1 April 2016

26

1,274

32,045

33,345

Additions

-

26

-

26

At 31 March 2017

26

1,300

32,045

33,371

Amortisation

 

 

 

 

At 1 April 2015

25

1,028

17,224

18,277

Charge for the year

1

84

1,683

1,768

Impairment charge

-

-

45

45

At 1 April 2016

26

1,112

18,952

20,090

Charge for the year

-

88

1,631

1,719

Impairment charge

-

-

186

186

At 31 March 2017

26

1,200

20,769

21,995

Net book value

 

 

 

 

At 31 March 2017

-

100

11,276

11,376

At 31 March 2016

-

162

13,093

13,255

 

Intangible assets are reviewed annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. The net present value of cash flows for each cash-generating unit is reviewed against the carrying value at the balance sheet date. At the final reporting date of 31 March 2017 the net present value of future cash flows of certain cash-generating units was below the carrying value and an impairment charge of £185,583 (2016: £45,041) has been recorded in respect of one cash generating unit.

14. Investments in subsidiaries

Company

 

 

 

Company

£'000

Total

£'000

Cost

 

 

 

 

1 April 2015

 

 

-

-

Additions

 

 

11,846

11,846

1 April 2016

 

 

11,846

11,846

Additions

 

 

16,157

16,157

Disposals

 

 

(1,461)

(1,461)

At 31 March 2017

 

 

26,542

26,542

Amounts written off

 

 

 

 

At 1 April 2015

 

 

-

-

Written off during the year

 

 

-

-

1 April 2016

 

 

-

-

Written off during the year

 

 

-

-

At 31 March 2017

 

 

-

-

Net book value

 

 

 

 

At 31 March 2017

 

 

26,542

26,542

At 31 March 2016

 

 

11,846

11,846

 

During the year the Company transferred its investment in CAT Communications Limited of £1.46m to Centrix Limited as the customer base is being serviced and managed by Centrix Limited.

Details of the principal subsidiaries of the Company are included in Note 30 to the financial statements.

15. Property, plant and equipment

Group

 

Motor

vehicles

£'000

Short-term

leasehold

improvements

£'000

Fixtures

and

fittings

£'000

Office

equipment

£'000

Total

£'000

Cost

 

 

 

 

 

At 1 April 2015

25

7

139

327

498

Additions

105

-

199

337

641

Disposals

(25)

-

-

(116)

(141)

At 1 April 2016

105

7

338

548

998

Acquired with subsidiary

-

-

11

461

472

Additions

-

-

1

145

146

Disposals

-

-

-

(62)

(62)

At 31 March 2017

105

7

350

1,092

1,554

Depreciation

 

 

 

 

 

At 1 April 2015

9

7

135

265

416

Charge for the year

9

-

17

162

188

Disposals

(14)

-

-

(116)

(130)

At 1 April 2016

4

7

152

311

474

Charge for the year

26

-

56

197

279

Disposals

-

-

-

(62)

(62)

At 31 March 2017

30

7

208

446

691

Net book value

 

 

 

 

 

At 31 March 2017

75

-

142

646

863

At 31 March 2016

101

-

186

237

524

 

Company

 

Motor

vehicles

£'000

Short-term

leasehold

improvements

£'000

Fixtures

and

fittings

£'000

Office

equipment

£'000

Total

£'000

Cost

 

 

 

 

 

At 1 April 2015

25

7

139

327

498

Additions

105

-

69

19

193

Disposals

(25)

-

-

-

(25)

At 1 April 2016

105

7

208

346

666

Additions

-

-

-

10

10

Disposals

-

-

-

-

-

At 31 March 2017

105

7

208

356

676

Depreciation

 

 

 

 

 

At 1 April 2015

9

7

135

265

416

Charge for the year

9

-

11

40

60

Disposals

(14)

-

-

-

(14)

At 1 April 2016

4

7

146

305

462

Charge for the year

26

-

24

27

77

Disposals

-

-

-

-

-

At 31 March 2017

30

7

170

332

539

Net book value

 

 

 

 

 

At 31 March 2017

75

-

38

24

137

At 31 March 2016

101

-

62

41

204

 

16. Deferred taxation

 

2017

Group

£'000

2017

Company

£'000

Restated

2016

Group

£'000

2016

Company

£'000

At 1 April 2016

(3,042)

106

(1,703)

145

Income statement credit/(charge)

700

6

337

(16)

Movement in deferred tax on share options

(69)

(69)

(23)

(23)

Deferred tax on business combination

(1,646)

-

(1,652)

-

At 31 March 2017

(4,057)

43

(3,041)

106

 

The deferred tax (liability)/asset is made up as follows:

 

2017

Group

£'000

2017

Company

£'000

Restated

2016

Group

£'000

2016

Company

£'000

Capital allowances

(7)

6

(43)

7

Short-term timing differences - provision for receivables

17

16

17

17

Deferred tax on business combinations

(4,088)

-

(3,097)

-

Share options

21

21

82

82


(4,057)

43

(3,041)

106

 

17. Inventories

 

2017

Group

£'000

2017

Company

£'000

2016

Group

£'000

2016

Company

£'000

Consumables

196

1

48

1

 

As at 31 March 2017, inventories of £74,036 (2016: £3,095) were fully provided for.  During the year £18,849 has been recognised as an expense in the statement of comprehensive income.

There is no material difference between the replacement cost of inventories and the amount stated above.

18. Trade and other receivables

 

2017

Group

£'000

2017

Company

£'000

2016

Group

£'000

2016

Company

£'000

Trade receivables

3,738

1,178

2,372

1,305

Other receivables

24

7

7

7

Income tax

-

-

-

-

Prepayments

1,432

291

1,615

316

Accrued income

320

212

366

257


5,513

1,688

4,360

1,885

 

As at 31 March 2017, trade receivables of £215,939 (2016: £128,811) were impaired and fully provided for. The ageing of the trade receivables which are past due and not impaired is as follows:

 

2017

Group

£'000

2017

Company

£'000

2016

Group

£'000

2016

Company

£'000

31-60 days

512

147

282

145

61-90 days

182

20

159

8

Over 90 days

162

-

65

2


856

167

506

155

 

All debts which are older than 90 days relate to interim amounts in respect of large customer projects which have not yet fully completed and are considered to be fully recoverable upon completion. The movement of the provision for impairment of trade receivables is as follows:

 

Group

£'000

Company

£'000

At 1 April 2015

131

131

Receivables collected during the year which had been previously written off

(3)

(3)

At 1 April 2016

128

128

Receivables provided for during the year as uncollectable

87

1

At 31 March 2017

215

129

 

The creation and release of a provision for impaired receivables has been included in administration expenses in the income statement. Amounts charged to the allowance account are generally written off when there is no expectation of recovering cash. Management regularly reviews the outstanding receivables and does not consider that any further impairment is required. The other asset classes within trade and other receivables do not contain impaired assets.

19. Trade and other payables

 

2017

Group

£'000

2017

Company

£'000

2016

Group

£'000

2016

Company

£'000

Trade payables

1,706

617

2,757

1,339

Other taxes and social security costs

910

174

665

489

Other payables

67

54

72

45

Amounts owed to Group undertakings

-

2,065

-

474

Accruals and deferred income

3,630

1,009

2,302

891

Contingent consideration

6,736

6,736

2,957

2,957


13,049

10,655

8,753

6,195

 

The contingent consideration liability of £6,735,837 (2016: £2,956,571) represents the year end fair value of the contingent consideration liabilities arising on the acquisitions made during the year.  The fair value of the contingent consideration liability was initially determined by reference to the forecast growth rate for the customer base and applying the contingent consideration matrix as specified in the share purchase agreement.  Further details are included in note 27.

20. Long-term borrowings

 

2017

Group

£'000

2017

Company

£'000

2016

Group

£'000

2016

Company

£'000

Between one and two years

-

-

-

-

Between two and five years

15,988

15,988

12,148

12,148

More than five years

-

-

-

-

Bank loans

15,988

15,988

12,148

12,148

 

The bank loan is secured by a debenture incorporating a fixed and floating charge over the undertaking and all property and assets present and future, including goodwill, book debts, uncalled capital, buildings, fixtures and fixed plant and machinery. Details of the interest rates applicable to the loans are included in Note [26].

Included within bank loans are arrangement fees amounting to £261,635 (2016: £132,000) which are being released over the term of the loan in accordance with IAS 39.

21. Share capital

 

2017

£'000

2016

£'000

Authorised

 

 

65,000,000 ordinary shares of 10p each

6,500

6,500

Allotted, called up and fully paid

 

 

23,701,832 (2016: 22,484,108) ordinary shares of 10p each

2,370

2,248

 

Movement in shares in issue

 

31 March

2017

31 March

2016

Ordinary shares of 10p each

22,484,108

22,297,400

Issued upon exercise of share options and warrants

1,236,860

221,708

Shares repurchased and cancelled

(19,136)

(35,000)


23,701,832

22,484,108

 

Share buyback scheme

On 18 December 2014 the Company announced that it intended to commence a limited share buyback of its own ordinary shares. During the year ended 31 March 2017 the Company repurchased 19,136 shares (2016: 35,000) at an average price of 318p (2016: 257.7p). All shares repurchased by the Company were cancelled prior to the year end.

Share options

At 31 March 2017, the following options and warrants over the shares of AdEPT were in issue:

 

2017

 

2016

 

Number

of shares

under

option

Weighted

average

exercise

price

 

Number

of shares

under

option

Weighted

average

exercise

price

Outstanding at 1 April

1,469,840

49p

 

1,440,759

20p

Granted during the year

159,520

228p

 

250,789

213p

Exercised during the year

(1,236,860)

14p

 

(221,708)

52p

Outstanding at 31 March

392,500

228p

 

1,469,840

49p

 

During the year, pursuant to the warrant instrument dated 21 January 2009, Barclays Bank plc exercised its right to subscribe for 1,204,717 ordinary shares of 10p each.

The weighted average share price at date of exercise for options exercised during the year was 353.6p (2016: 270.0p).

The weighted average remaining contractual life of share options and warrants at 31 March 2017 was two years.

Employee share option schemes have a vesting period of three years and are settled through new equity issues in return for cash consideration and the maximum term of share options is ten years.

The weighted average fair values of options issued during the year have been determined using the Black-Scholes-Merton Pricing Model with the following assumptions and inputs:

 

2017

2016

Risk-free interest rate

0.50%

2.69%

Expected volatility

28.0%

22.0%

Expected option life (years)

3.0

3.0

Expected dividend yield

2.3%

2.9%

Weighted average share price

229p

222p

Weighted average exercise price

229p

222p

Weighted average fair value of options granted

31p

30p

 

The expected average volatility was determined by reviewing historical fluctuations in the share price prior to the grant date of each share instrument. An expected take-up of 100% has been applied to each share instrument. Expected dividend yield is estimated at 2.7%; this is based upon the past dividend yield of AdEPT Telecom plc and in accordance with the guidance in IFRS 2.

 

Exercise

price

 (p)

Expected

option life

 (years)

31 March

2017

31 March

2016

21 January 2009

11

3.0

-

1,197,697

23 August 2013

126

3.0

-

32,143

1 March 2016

222

3.0

240,000

240,000

1 October 2016

238

3.0

152,500

-




392,500

1,469,840

 

The mid-market price of the ordinary shares on 31 March 2017 was 327.5p and the range during the year was 142.5p.

22. Pension commitments

At 31 March 2017 there were no pension commitments (2016: £Nil).

23. Operating lease commitments

At 31 March 2017 the lease commitments were as follows:

Group

 

Land and buildings

 

Other

 

2017

£'000


2017

£'000

2016

£'000

Within one year

382

266


58

53

Between two and five years

413

520


52

51

 

Company

 

Land and buildings

 

Other

 

2017

£'000


2017

£'000

2016

£'000

Within one year

172

173


43

39

Between two and five years

29

187


41

42

 

Land and buildings

The Company leases its offices under non-cancellable operating lease agreements. There is no material contingent rent payable. The lease agreements do not offer security of tenure. The lease terms are for five years.

Other

The Company leases various office equipment and motor vehicles under non-cancellable operating lease agreements. The lease terms are three years.

The lease expenditure charged to the income statement during the year is disclosed in Note [5].

24. Operating lease rentals

At 31 March 2017 the lease rental commitments outstanding from customers were as follows:

Group

 

Land and buildings

 

Other

 

2017

£'000


2017

£'000

2016

£'000

Within one year

-

-


115

97

Between two and five years

-

-


112

137

 

Company

 

Land and buildings

 

Other

 

2017

£'000


2017

£'000

2016

£'000

Within one year

-

-


115

97

Between two and five years

-

-


112

137

 

Other

The Company leases various telecommunications equipment to customers under non-cancellable operating lease agreements. The lease terms are three years.

The lease income is recognised in the income statement evenly during the term of the agreement.

25. Related party transactions

During the year dividends were paid to the following directors:

 

2017

£

2016

£

I Fishwick

78

57

R Wilson

51

37

D Lukic

3

3

A Woodruffe

10

13

R Burbage

7

-

J Swaite

5

3

 

There is no ultimate controlling party.

26. Capital commitments

At 31 March 2017 there were capital commitments of £Nil (2016: £Nil).

27. Earnings per share

Earnings per share is calculated on the basis of a profit of £2,749,130 (2016: £2,390,617) divided by the weighted average number of shares in issue for the year of 22,585,580 (2016: 22,364,213). The diluted earnings per share is calculated on the treasury stock method and the assumption that the weighted average unapproved and EMI share options outstanding during the period are exercised. This would give rise to a total weighted average number of ordinary shares in issue for the period of 23,768,178 (2016: 23,608,713).

Adjusted earnings per share is used to reflect the non-cash nature of certain items which are charged to the income statement and the non-trading items, such as acquisition costs, to give a better indicator of the underlying cash generation of the Group.  Adjusted earnings per share is calculated by adding back amortisation of intangible assets, impairment of goodwill, the taxation deduction on purchased customer contracts, deferred tax credits on amortisation charges, share option charges and acquisition costs to retained earnings, giving £5,213,923 (2016: £4,279,633). This is divided by the same weighted average number of shares as above.

 

2017

£'000

Restated

2016

£'000

Earnings for the purposes of basic and diluted earnings per share

 

 

Profit for the period attributable to equity holders

2,749

2,390

Add: amortisation

2,482

2,048

Less: taxation on amortisation of purchased customer contracts

(118)

(192)

Less: deferred tax credit on amortisation charges

(633)

(353)

Add: share option charges

31

(2)

Add: acquisition costs

703

389

Adjusted profit attributable to equity holders

5,214

4,280

Number of shares

 

 

Weighted average number of shares used for earnings per share

22,585,580

22,364,213

Weighted average dilutive effect of share plans

1,182,598

1,244,500

Diluted weighted average number of shares

23,768,178

23,608,713

Earnings per share

 

 

Basic earnings per share

12.17p

10.72p

Diluted earnings per share

11.57p

10.15p

Adjusted earnings per share

 

 

Adjusted basic earnings per share

23.09p

19.19p

Adjusted diluted earnings per share

21.94p

18.18p

 

Earnings per share is calculated by dividing the retained earnings attributable to the equity holders by the weighted average number of ordinary shares in issue.

Adjusted earnings per share is calculated by dividing the retained earnings attributable to the equity holders (after adding back amortisation, the taxation deduction on purchased customer contracts and acquisition costs) by the weighted average number of ordinary shares in issue.  The prior period adjusted profit attributable to equity holders has been restated to take account of the prior year restatement for the deferred tax credit on amortisation charges, this has been adjusted as it is a non-cash accounting adjustment.

28. Financial instruments

Set out below are the Group's financial instruments. The directors consider there to be no difference between the carrying value and fair value of the Group's financial instruments.

 

2017

Group

£'000

2017

Company

£'000

2016

Group

£'000

2016

Company

£'000

Loans and receivables at amortised cost

 

 

 

 

Cash and cash equivalents

1,238

-

6,166

5,489

Loans and receivables

3,912

1,352

2,584

1,517


5,150

1,352

8,750

7,006

Financial liabilities at amortised cost

 

 

 

 

Liabilities at amortised cost

18,400

17,312

14,905

13,487

Financial liabilities at fair value

 

 

 

 

Contingent consideration

6,426

6,426

2,956

2,956


24,826

23,738

17,861

16,443

Amounts due for settlement

 

 

 

 

Within twelve months

8,838

7,750

5,713

4,295

After twelve months

15,988

15,988

12,148

12,148


24,826

23,738

17,861

16,443

 

On 2 February 2017 the Company signed a new five-year £30m revolving credit facility agreement with Barclays Bank plc and Royal Bank of Scotland plc. The revolving credit facility bears interest at 1.85-2.30% over LIBOR on drawn funds, dependent upon the Net debt : EBITDA ratchet, and is repayable in full on the final repayment date of 2 February 2022.

The financial assets of the Group are cash and cash equivalents and trade and other receivables, which are offset against borrowings under the facility, and there is no separate interest rate exposure.

Barclays Bank plc has a cross guarantee and debenture incorporating a fixed and floating charge over the undertaking and all property and assets present and future, including goodwill, book debts, uncalled capital, buildings, fixtures and fixed plant and machinery.

The bank also holds a charge over the life assurance policy of Ian Fishwick, director of the Company, for £1,500,000.

Contingent consideration obligations

At 31 March 2016 a financial liability of £6,426,040 has been recognised in respect of the fair value of the contingent consideration due in respect of the acquisitions of:

 

 

Fair value as at

 

 

 

 

 

31 March

2016

£'000

31 March

2017

£'000

Fair value hierarchy

Valuation technique(s)
and key input(s)

Significant
unobservable input(s)

Relationship of unobservable inputs to fair value

Centrix Limited

£2,957

-

Level 3

Based upon a multiple of gross margin calculated by the growth rate over a period of twelve months.

Growth rate being
the gross margin
increase as measured
by actual increase of
gross margin over a
twelve-month period.

The higher the growth rate the higher the multiple.

The higher the
gross margin the higher the earn out.

Comms Group UK Limited

-

£3,434

Level 3

Based upon a multiple of gross margin calculated by the growth rate over a period of twelve months.

Growth rate being
the gross margin
increase as measured
by actual increase of
gross margin over a
twelve-month period.

The higher the growth rate the higher the multiple.

The higher the
gross margin the higher the earn out.

CAT Communications Limited

-

£508

Level 3

Based upon a multiple of gross margin calculated by the growth rate over a period of twelve months.

Growth rate being
the gross margin
increase as measured
by actual increase of
gross margin over a
twelve-month period.

The higher the growth rate the higher the multiple.

The higher the
gross margin the higher the earn out.

OurIT Department Limited

-

£2,785

Level 3

The contingent consideration was based upon a multiple of EBITDA calculated over a period of twelve months.

Measured
by actual EBITDA over a
twelve-month period.

The higher the
EBITDA the higher the earn out.

 

All contingent consideration is subject to the maximum value as stated in the share purchase agreement.  The fair value of the estimated deferred consideration liability at 31 March 2017 is not materially different to that estimated at the date of acquisition.  The discount charge which has been recognised as an expense in the statement of comprehensive income in relation to the deferred consideration liability is disclosed in Note 7 to these financial statements.

Reconciliation of the movement in the fair value of contingent consideration:


 

Centrix Limited

£'000

 

Comms Group UK Limited

£'000

CAT Communications Limited

£'000

OurIT Department Limited

£'000

 

 

Total

£'000

As at 1 April 2016

2,957

-

-

-

2,957

Additions

-

3,192

481

2,769

6,442

Discounting of deferred consideration

37

242

27

16

322

Settled in cash

(2,994)

-

-

-

(2,994)

As at 31 March 2017

-

3,434

508

2,785

6,727

 

The earn out for Comms Group UK Limited, CAT Communications Limited, Progressive Communications Limited and OurIT Department Limited had not been achieved by 31 March 2017.

During the year total cash consideration of £11,987,303 was paid in respect of acquisitions, £2,993,341 was in respect of the settlement of deferred consideration and £8,993,962 was in respect of initial consideration (net of cash acquired).

The contingent consideration arising on the acquisition of OurIT is payable to a vendor who remained in employment in the business after acquisition.  In accordance with the requirements of IFRS 3, management has considered the indicators therein and determined that the contingent amounts payable to the vendor represent consideration for the acquisition and not remuneration for post-acquisition services.

Obligations under finance leases

As at 31 March 2017 the Group had no finance lease obligations.

Sensitivity analysis

At 31 March 2017 it was estimated that a movement of 1% in interest rates would impact the Group's profit before tax by approximately £135,000.

Interest rate risk

The Group's current interest rate policy is subject to ongoing review in line with the level of borrowings and potential interest risk exposure. At 31 March 2017, none of the Group's borrowings are at a fixed rate of interest (2016: 0%).

Credit risk

Credit risk associated with cash balances is managed by transacting with financial institutions with high quality credit ratings. Accordingly the Company's associated credit risk is deemed to be limited.

The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at 31 March 2017 was £4,976,694 (2016: £8,757,529).

Loans and receivables

 

2017

Group

£'000

2017

Company

£'000

2016

Group

£'000

2016

Company

£'000

Trade receivables

3,738

1,352

2,371

1,517

Other receivables

21

7

7

7

Cash and cash equivalents

1,238

-

6,166

5,489


4,997

1,359

8,544

7,013

 

Credit risk refers to the risk that the 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 this policy has been implemented by requiring staff to carry out appropriate credit checks on customers before sales commence.

Trade receivables consist of a large number of customers, spread across diverse industries across the United Kingdom. Ongoing credit evaluation is performed on the financial condition of accounts receivable. The Group does not have any significant credit risk exposure to any single counterparty.

Liquidity risk

The Group has an appropriate liquidity risk management framework for the management of the Group's short, medium and long-term funding and liquidity risk management requirements. The Group manages liquidity risk by maintaining adequate banking facilities and through cash flow forecasting, acquisition planning and monitoring working capital and capital expenditure requirements on an ongoing basis.

Amortised cost

Year ended 31 March 2017

Within

1 year

£'000

1-2 years

£'000

2-5 years

£'000

More than

5 years

£'000

Borrowings

706

-

15,988

-

Trade and other payables

1,706

-

-

-


2,412

-

15,988

-

 

Year ended 31 March 2016

Within

1 year

£'000

1-2 years

£'000

2-5 years

£'000

More than

5 years

£'000

Borrowings

-

-

12,148

-

Trade and other payables

2,758

-

-

-


2,758

-

12,148

-

 

Currency risk

The Group's operations are handled entirely in sterling.

Capital risk management

The Group is subject to the risk that its capital structure will not be sufficient to support the growth of the business. The Group's objectives when managing capital are to safeguard the Group's ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. There were no changes to the Group's approach to capital management during the year.

As part of the banking arrangements, the Group is required to comply with certain covenants, including net debt to adjusted EBITA and interest cover.

In order to maintain or adjust the capital structure, the Company may return capital to shareholders, issue new shares or sell assets to reduce debt.

29. Business combinations

On 1 May 2016 the Company acquired the entire issued share capital of Comms Group UK Limited ('Comms') for an initial consideration of £3.6m plus the value of the cash balance of Comms at completion (approximately £1.1m), payable in cash. Further contingent deferred consideration of between £0.5m and £3.5m will be payable in July 2017, also in cash, dependent upon the performance of Comms post-acquisition. The contingent deferred consideration will be determined by reference to the forecast churn/growth rate for the gross margin of the acquired business and applying the contingent deferred consideration matrix as specified in the share purchase agreement. The fair value of contingent deferred consideration has been determined by reference to the growth rate for the gross margin of the acquired business and applying the contingent deferred consideration matrix as specified in the share purchase agreement.  The contingent consideration liability of £3.46m has been discounted at the Group's weighted average cost of capital with the value of the discount of £0.25m being included within finance costs over the deferred consideration period as an interest charge.  Total consideration is expected to be £6.77m (net of the surplus cash acquired).

Comms, based in Northampton, is a well-established UK-based specialist provider of unified communications, Avaya IP telephony, hosted IP solutions, IT and managed services. Comms offers its clients the delivery of unified communications and managed service solutions, which is an increasing requisite for AdEPT's existing and targeted enterprise and public sector customer base. Comms technical skills and product set will complement and enhance AdEPT's existing services. Comms has retained its presence and customer service operation in Northampton. The vendors of Comms are to be retained in their current capacity within the business for a period of at least twelve months post-acquisition.

AdEPT and Comms have both adopted capital asset light strategies and are dedicated to offering a full suite of flexible data and unified communication strategies.


Book cost

£'000

Fair value

£'000

Intangible assets

55

4,904

Property, plant and equipment

28

28

Inventories

145

145

Trade and other receivables

794

794

Cash and cash equivalents

1,055

1,055

Trade and other payables

(935)

(935)

Deferred tax

-

(834)

Income tax

-

-

Net assets

1,142

5,157

Cash


(4,637)

Contingent cash consideration


(3,192)

Fair value total consideration


(7,829)

Goodwill


2,672

The trade and other receivables are all considered recoverable.

Comms contributed revenue and profit after tax of £3.65m and £0.76m respectively for the year ended 31 March 2017 and represents an eleven month contribution. On a full year basis, Comms would have contributed revenue and profit after tax of £4.0m and £0.7m respectively.  Acquisition related costs of £0.3m have been recognised as an expense in the statement of comprehensive income for the year ending 31 March 2017.

 

On 1 November 2016 the Company acquired the entire issued share capital of CAT Communications Limited and Progressive Communications Limited (together referred to as 'CAT') for an initial consideration of £1.05m less the value of the net debt of CAT at completion (approximately £0.09m), payable in cash. Further contingent deferred consideration of between £0.2m and £0.95m will be payable in December 2017, also in cash, dependent upon the performance of CAT post-acquisition. The contingent deferred consideration will be determined by reference to the forecast churn/growth rate for the gross margin of the acquired business and applying the contingent deferred consideration matrix as specified in the share purchase agreement. The fair value of contingent deferred consideration has been determined by reference to the growth rate for the gross margin of the acquired business and applying the contingent deferred consideration matrix as specified in the share purchase agreement.  The contingent consideration liability of £0.53m has been discounted at the Group's weighted average cost of capital with the value of the discount of £0.04m being included within finance costs over the deferred consideration period as an interest charge.  Total consideration is expected to be £1.60m (net of the debt acquired).

CAT, based in Pewsey, Wiltshire, is a well-established UK-based specialist provider of unified communications, Avaya Aura telephony, hosted IP solutions and managed services. CAT offers its clients the delivery of complex unified communications, managed service solutions and specialist inbound call centre management, which is an increasing requisite for AdEPT's existing and targeted enterprise and public sector customer base.  The vendors of CAT are to be retained in their current capacity within the business for a period of at least twelve months post-acquisition.

AdEPT and CAT have both adopted capital asset light strategies and are dedicated to offering a full suite of flexible data and unified communication strategies.


Book cost

£'000

Fair value

£'000

Intangible asset

23

1,460

Investments

-

-

Property, plant and equipment

-

-

Inventories

17

17

Trade and other receivables

140

140

Cash and cash equivalents

20

20

Trade and other payables

(238)

(103)

Deferred tax

-

(248)

Income tax

(73)

(73)

Net assets

(111)

1,213

Cash


(990)

Contingent cash consideration


(471)

Fair value total consideration


(1,461)

Goodwill


248

The trade and other receivables are all considered recoverable.

CAT contributed revenue and profit after tax of £0.51m and £0.15m respectively for the year ended 31 March 2017 and represents a five month contribution. On a full year basis, CAT would have contributed revenue and profit after tax of £1.2m and £0.2m respectively.  Acquisition related costs of £0.09m have been recognised as an expense in the statement of comprehensive income for the year ending 31 March 2017.

 

On 1 February 2017 the Company acquired the entire issued share capital of OurIT Department Limited ('OurIT') and its trading subsidiary called Brightvisions Limited ('Brightvisions'), (together referred to as 'OurIT Group') for an initial consideration of £4.75m less the net debt plus working capital of OurIT Group at completion (approximately £1.20m debt and £0.46m  working capital), payable in cash. Further contingent deferred consideration of between £Nil and £3.75m will be payable in April 2018, also in cash, dependent upon the performance of OurIT Group post-acquisition. The contingent deferred consideration will be determined by reference to the the EBITDA of the acquired business and applying the consideration multiple as specified in the share purchase agreement, less the initial consideration. The fair value of contingent deferred consideration has been determined by reference to the growth/churn rate for the EBITDA of the acquired business and applying the consideration multiple as specified in the share purchase agreement, less the initial consideration.  The contingent consideration liability of £2.98m has been discounted at the Group's weighted average cost of capital with the value of the discount of £0.21m being included within finance costs over the deferred consideration period as an interest charge.  Total consideration is expected to be £7.08m (net of the debt acquired).

OurIT, founded in 1993, is is a highly accredited IT services provider with over 20 years' experience, offering award winning 24 hour IT support services and technology solutions.  OurIT and Brightvisions have a directly employed team of highly skilled certified professionals with qualifications including Microsoft Gold Partner and Business Specialist, Apple Specialist, Cisco Certified Partner and Dell Preferred Partner, and is focused on providing outsourced IT services to customers in London and the South East.

OurIT operates from premises in Chingford, East London and Bevis Marks.  Brightvisions is based in St Neots, near CambridgeOurIT and Brightvisions will retain their current presence and customer service operations in Chingford, Bevis Marks and St Neots.  The vendor of OurIT Group is to be retained in his current capacity within the business for a period of at least 12 months post-acquisition.

AdEPT and OurIT Group have both adopted capital asset light strategies and are dedicated to offering a full suite of flexible voice and IT strategies.


Book cost

£'000

Fair value

£'000

Intangible asset

1,625

3,187

Investments

-

-

Property, plant and equipment

267

267

Inventories

20

20

Trade and other receivables

770

770

Cash and cash equivalents

151

151

Trade and other payables

(1,307)

(1,307)

Deferred tax

-

(542)

Income tax

(364)

(364)

Net assets

1,162

2,182

Cash


(4,097)

Contingent cash consideration


(2,769)

Fair value total consideration


(6,866)

Goodwill


4,684

The trade and other receivables are all considered recoverable.

OurIT Group contributed revenue and profit after tax of £1.09m and £0.19m respectively for the year ended 31 March 2017 and represents a two month contribution. On a full year basis, OurIT Group would have contributed revenue and profit after tax of £5.7m and £0.5m respectively.  Acquisition related costs of £0.32m have been recognised as an expense in the statement of comprehensive income for the year ending 31 March 2017.

 

30. Subsidiaries

 

Country

Registered office

Class of share

% shareholding

Description

Bluecherry Telecom Limited

England & Wales

One London Wall, London EC2Y 5AB

Ordinary

100

Dormant

Centrix Limited

England & Wales

One London Wall, London EC2Y 5AB

Ordinary

100

Trading

Comms Group UK Limited

England & Wales

One London Wall, London EC2Y 5AB

Ordinary

100

Trading

Our IT Department Limited

England & Wales

One London Wall, London EC2Y 5AB

Ordinary

100

Trading

BrightVisions Limited

England & Wales

One London Wall, London EC2Y 5AB

Ordinary

100

Trading

CAT Communications Limited

England & Wales

One London Wall, London EC2Y 5AB

Ordinary

100

Dormant

Progressive Communications Limited

England & Wales

One London Wall, London EC2Y 5AB

Ordinary

100

Dormant

Centrix Limited

England & Wales

One London Wall, London EC2Y 5AB

Ordinary

100

Trading

 

31. Subsequent events

There are no subsequent events after the balance sheet date.

32. Prior year adjustment

Adjustment 1 - The Group has applied the principles of IFRS3 and IAS12 and made full provision for the deferred tax liability on future amortisation charges in relation to the company acquisitions undertaken to date.  The deferred tax liability is released as the amortisation is charged to the statement of comprehensive income. The prior year comparatives have been restated to apply this accounting principle as if it had been adopted throughout the periods covered by the financial statements.  All goodwill created on the deferred tax liability in respect of company acquisitions prior to 1 April 2015 has been fully written down.  This is purely an accounting adjustment with no impact on underlying profitability or cash flow but has resulted in a decrease to the opening retained earnings in the comparative period of £2.08m (as at 1 April 2015) and an increase to retained earnings of £0.35m for the year ended 31 March 2016.

Adjustment 2 - The Group has reviewed the intangible assets acquired during the year ended 31 March 2016 and consider that an error was made when calculating the fair value of the assets purchased. This has resulted in the reallocation of some of the intangible assets to goodwill acquired as part of business combination.  As a result of the revised intangible asset value the corresponding amortisation charge has been adjusted, which has resulted in an increase to retained earnings of £0.17m for the year ended 31 March 2016.  This is purely an accounting adjustment with no impact on underlying profitability or cash flow.

 

 

2016

Opening

Balance

£'000

 

 

Adjustment 1

£'000

Adjustment 2

£'000

2016

Restated balance

£'000

2015

Opening Balance

£'000

 

 

Adjustment 1

£'000

2015

Restated balance

£'000

Statement of financial position:








Goodwill

-

1,603

2,011

3,614

-

-

-

Intangible assets

23,263

-

(1,843)

21,420

14,874

-

14,874

Deferred tax

56

(3,098)

-

(3,042)

145

(1,847)

(1,702)

Income tax

(335)

(95)

-

(430)

324

-

324

Total impact on net assets


(1,590)

169



(1,847)










Statement of comprehensive income:








Amortisation

(2,215)

-

169

(2,048)

(2,169)

-

(2,169)

Write down of deferred tax liability goodwill

-

-

-


-

(2,084)

(2,084)

Income tax expense

(786)

258

-

(528)

(603)

237

(366)

Total impact on retained earnings


258

169



(1,847)










Basic earnings per share

8.78p



10.72p

6.90p


9.84p

 

NOTE TO THE PRELIMINARY RESULTS ANNOUNCEMENT OF ADEPT TELECOM PLC FOR THE YEAR ENDED 31 MARCH 2017

The financial information set out above does not constitute the Group's financial statements for the years ended 31 March 2017 or 2016, but is derived from those financial statements. Statutory financial statements for 2016 have been delivered to the Registrar of Companies and those for 2017 will be delivered following the Group's annual general meeting. The auditors have reported on the 2016 financial statements which carried an unqualified audit report, did not include a reference to any matters to which the auditor drew attention by way of emphasis and did not contain a statement under section 498(2) or 498(3) of the Companies Act 2006.  The audit report on the 2017 financial statements is not yet signed, however an unqualified opinion is expected.

Whilst the financial information included in this preliminary announcement has been computed in accordance with International Financial Reporting Standards (IFRS), this announcement does not in itself contain sufficient information to comply with IFRS. The accounting policies used in preparation of this preliminary announcement are consistent with those in the full financial statements that have yet to be published.

AVAILABILITY OF FINANCIAL STATEMENTS

The annual report containing the full financial statements for the year to 31 March 2017 will be posted to shareholders on or around 19 August 2017, a soft copy of which will be available to download from the Company's website www.adept-telecom.co.uk.


This information is provided by RNS
The company news service from the London Stock Exchange
 
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