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RNS
Sureserve Group PLC   -  SUR   

Preliminary Results

Released 07:00 22-Jan-2019

RNS Number : 7000N
Sureserve Group PLC
22 January 2019
 

22 January 2019

Sureserve Group plc

 

                                                                    ("Sureserve" or the "Group")

 

 Preliminary Results for the year ended 30 September 2018

Transformational year, well-positioned for predictable growth

Sureserve, the asset and energy support services group, is pleased to announce its preliminary results for the year ended 30 September 2018.

Bob Holt, Chairman of Sureserve, commented:

 

"I am pleased to report a strong set of results for Sureserve following a transformational year for the Group. We have streamlined our operations, focusing on our industry-leading Compliance and Energy Services businesses which are profitable and deliver significant cash generation.

                                                            

"We are confident in the Group's prospects and look forward to leveraging the strong platform we have built at Sureserve.

 

"I am pleased to announce that the Group has started the year positively and ahead of management expectations."

 

Financial overview

 

 

Operational highlights - steady progress and strong platform for future growth

£55m Arbed 3 programme in a 50/50 joint venture that extends Everwarm's reach into Wales

£44m framework with Aberdeenshire Council providing every facet of housing improvement upgrades in Aberdeenshire

Appointed by Eastern Procurement to the £40m Heating Installations Framework for an initial two-year period

 

 

Outlook

 

Enquiries

                       

Sureserve Group

 

Bob Holt, Chairman

07778 798 816

Michael McMahon, Chief Operating Officer

07787 536 000

 

 

Camarco (Financial Public Relations)

 

Ginny Pulbrook

020 3757 4992

Tom Huddart

 

Ollie Head

 

 

 

Stockdale Securities

(Nominated adviser and broker)

 

Andy Crossley

020 7601 6100

Antonio Bossi

 

 

 

 

Notes to editors

The Sureserve Group is an asset and energy support services group that improves, maintains and provides services to homes, schools, public, commercial and industrial buildings with a focus on clients in the UK public sector and regulated markets. Services are delivered through two divisions: Compliance and Energy Services.

 

The Group is headquartered in London. It currently employs some 1,990 staff from 23 offices across the UK.

 

 

Executive Chairman's statement

Introduction

Following in-depth planning over a substantial period we successfully concluded the sale of Lakehouse Contracts Limited and Foster Property Maintenance Limited to the Mapps Group in August 2018. This was a significant strategic advance for the Group, enabling us to concentrate on delivering operational excellence in our specialist core growth businesses of Compliance and Energy Services. The divestment included certain contracts yet to be finalised. It is hoped that those outstanding works will be concluded by the time of the Group interim results to March 2019. A further update will be provided at that time.

The Group subsequently changed its name to Sureserve to reflect the renewed focus on these two divisions. These now make up the two operating divisions of today's streamlined and rationalised Group. Both are businesses in which we have strong market positions and a portfolio of leading brands built on the expertise and quality commitment of our people, ensuring our customers are willing to pay a premium for our services.

Both divisions are underpinned by profitable, cash-generative business models that provide the Group with a sound platform for predictable growth. The rationale behind this approach is exemplified by our results from continuing operations for the 2018 financial year and based on the successful implementation of our strategy to create a high-turnover business with regular recurring income streams, a 'blue-collar' client base and highly disciplined financial management, providing stable operating margins.

Trading performance

The Group made excellent trading progress during the year, delivering a number of major initiatives that pave the way for us to fulfil our growth ambitions in the years ahead. The success of these is already demonstrated by an increase across both divisions in the number of long-term contracts, representing an overall increase in pipeline value of £108m. The details of the awards are within the Operating Review.

We also experienced a full financial year reaping the benefits of our move away from the official list of the London Stock Exchange to AIM, which took place in May 2017.

Please see the Financial Review in the 2018 Annual Report for full details of our results.

Our growth trajectory

Resolving legacy issues to advance the Group to this stage has taken significant and concerted effort by the Group's management team, and I am confident that we are now on track to deliver sustainable, profitable growth over the years to come.

On top of our plans for organic growth, Sureserve intends to act as a consolidator in a highly fragmented industry by bringing together quality-led organisations with a strong record of compliance in a heavily regulated environment. We continue to seek target businesses that not only match our ambitions, but can embrace the standards and culture within our core growth areas, as well as acquisitions that will enable us to introduce new service lines to our customers.

We purchased Just Energy Services ("JES") in the period, which is a heating and renewables specialist founded in 2011, whose services for large energy companies, retailers and private customers complement the activities of our own gas compliance activities. This acquisition provides us with a low-cost route into the private sector gas and renewables market.

As I have already indicated, organic growth from our existing operations was strong during the year, with important contract wins significantly strengthening our presence across the UK. These include the award of a £55m contract to our Everwarm business under the Welsh Government's Arbed 3 Warm Homes programme, which we won in May 2018 and which took us into Wales for the first time.

Increasingly, such acquisitions and wins are further strengthening the national platform on which we base our ability to deliver a high-quality service at a local level. Aspiring to be this kind of business means we must be the supplier or partner of choice in all the markets where we operate.

Our people

Sureserve places a strong emphasis on the importance of the skills, attitude and commitment of the thousands of people who deliver our services. By creating close and mutually beneficial relationships with client personnel responsible for buying facilities management services, based on promises kept and problems solved, they create the sustainable bedrock on which our success is built. I would like to thank each and every one of our excellent people for their commitment and performance over the last year.

To ensure we have access to the skills we need for years to come, in 2018 we launched the Sureserve Academy to train young people in the skills required to become gas and fire engineers. The strategic aim is to ease any issues that may emerge with recruiting qualified engineers as our workforce grows.

There were a number of Board changes during the year. First, I would like to thank Jeremy Simpson, who stood down as Chief Financial Officer in October, for his invaluable contribution to creating the 'new' Sureserve Group. I wish him every success. We hope to bring news of his replacement early in 2019.

I would also like to thank Andrew Harrison for his contribution over the last two years as a non-executive director of the Company. Andrew played a key role in the Group's turnaround, and we wish him well for the future. Derek Zissman was appointed in November 2017 and is Chairman of the Audit Committee. Robert Legget has been appointed interim Chairman of the Remuneration Committee and Derek Zissman has been appointed to the Nomination and Remuneration Committees subsequent to the year end.

Building on our strategy

During the year, we significantly advanced our strategy, with the aim of building upon a specialist focus on compliance and energy services to maximise the opportunities provided by a stable base of regular recurring and predictable revenues and profits.

·      Operational excellence: high performances win work and keep our existing clients happy

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

·      Focused divisions: in our market we believe that focus is the key. We have reduced the scale of the Group and now have more focused businesses in the sectors we have targeted. This means we have a profitable and cash generative business that is understood by all stakeholders

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

Dividend

In accordance with the principles of sound financial management and good governance, the Board aims to retain a dividend policy that both recognises shareholder needs and expectations while retaining sufficient capital to drive future growth. The board propose a final dividend payment of 0.25p. The board will consider an interim dividend based upon the trading performance of the Group later in the year.

Outlook

Looking ahead, I would like to re-emphasise my confidence in the tremendous opportunity we have to deliver sustainable and predictable growth over the years to come, both organically and by acquisition.

I believe we are now ideally positioned to build strongly on this major achievement, delivered by all our people working as a team. I particularly look forward to continuing and expanding our Arbed 3 activities, building on our work in 2018 to create the necessary infrastructure and consolidating our new presence in Wales.

Going forward, the Sureserve Group is a stable, growing and cash-generative business that delivers operational excellence and builds strong relationships in highly regulated sectors that provide substantial recurring revenues. We have strong relationships with public sector contracting organisations across the UK, and particularly with personnel who are ultimately responsible for purchasing the services we deliver.

We are well placed to build further on our market-leading gas provision and excellence in compliance. Our goal moving forward is to build an even stronger organisation, based on predictable, non-volatile income streams from scale activities across a growing national footprint, that deliver all the stability and financial returns our shareholders seek.

In addition, we will continue to provide secure employment to a growing and increasingly skilled workforce, helping to improve the quality of life for the many thousands of tenants for whose comfort and safety we are ultimately responsible.

I am pleased to announce that the Group has started the year positively and ahead of management expectations.

 

Bob Holt

Executive Chairman

 

Operational review

 

In the six months from 31 March 2018, the value of our frameworks grew from £574.3m to £633.4m, demonstrating the effectiveness of our more streamlined and focused structure.

Introduction

During 2018, the Group changed its name to the Sureserve Group plc to reflect our position as a focused asset and energy support services group. This followed a restructure, in which we disposed of our Lakehouse Contracts and Foster Property Maintenance businesses and exited our Property Services and Construction divisions. 

This strategically important move is now enabling us to concentrate on our cash-generative core growth areas of compliance and energy services, both of which deliver more predictable, recurring and profitable revenue streams.

Financial performance

·      Operating profit before exceptional items and amortisation of acquisition intangibles £8.0m (2017: £7.4m)

·      Revenue from continuing operations £190.8m (2017: £181.5m)

·      Profit before tax from continuing operations £1.9m (2017: restated loss of £5.6m)

·      Loss from discontinued operations £11.5m (2017: restated profit of £4.6m)

With an experienced management team in place, a clear strategy for growth and the focused approach of a more streamlined organisation, the Group is profitable in its continuing operations.

Looking forward

During the year, we saw strong underlying growth in our Compliance division (underlying revenues up 11.5%) and a small decrease in our Energy Services division (underlying revenues down 1.6%) and we will continue to focus on both moving forward. We successfully increased the number of long-term contracts we service by 11, representing an overall increase in pipeline value of £108m.

At year end, we were participating in a total of 108 frameworks worth a total of £633.4m (2017: 258 frameworks worth £1.1bn) and had in place 157 maintenance contracts worth a total of £399.1m (2017: 152 contracts worth £367.9m).

We remain confident in the exciting prospects for both of our divisions.

Compliance division

This division comprises planned and responsive maintenance, installation and repair services, delivered predominantly to local authority and housing association clients in the areas of gas, fire and electrical, water and air hygiene and lifts. These services cover clients' social housing and public building assets, as well as industrial and commercial properties. The division is seeing the benefits of a wider pool of clients and mandatory services that provide significant future opportunities.

The Group's greatest increase in pipeline value was delivered by this division, and the pipeline grew organically by £102m with 13 contract wins. It also grew by acquisition, with the purchase during the year of Just Energy Solutions providing a low-cost route into private-sector gas and renewables.

Compliance: 12 months ended 30 September

2018

2017

Change

Revenue (£m)

116.3

104.3

11.5%

EBITA (£m)

6.1

8.0

-23.6%

EBITA margin (£m)

5.2%

7.7%

-2.5pts

 

Overall, revenue increased by 11.5% to £116.3m (2017: £104.3m). EBITA decreased 23.6% to £6.1m (2017: £8.0m), resulting in an underlying EBITA margin of 5.2%, down by 2.5ppt.  Revenues were up in all compliance businesses, reflecting increased volumes of and opportunities with clients and offering of mandatory services which we noted in previous reporting.  These revenues are often recurring and represent a stable growth in size and scale that we believe gives us a market leading position in gas provision.

 

In relation to the gas businesses, while not significant, the reduction in margins reflected mobilisation of a major national contract and the transfer of trading provisions out of the centre. Expected improvements to margin from revenue increases were mitigated.  We believe this investment is worthwhile as the business looks forward to growth in the future.  

In relation to the building compliance businesses, we had a relatively poor operational performance for Fire and Lifts, which has already been addressed in FY19.

Post acquisition impact of Just Energy Services (acquired in May 2018) was £0.8m in revenues and a loss of £0.2m in EBITA.

·      Gas Compliance

The three Gas Compliance businesses (Aaron Services, K&T Heating and Sure Maintenance) make up 74% of divisional revenues and built on the progress made in FY17 with another excellent year of revenue growth from recurring incomes and new works. 

Aaron Services, which delivers gas compliance solutions across East Anglia and the Midlands, had a particularly successful 2018 in terms of new contracts awarded. It has been appointed by Eastern Procurement to the £40m Heating Installations Framework for an initial two-year period, with an option to extend this for a further two years. Under the contract it is eligible to work on heating-installation lots for gas, oil, electricity, renewables and all fuels. It has also been appointed by the Hanover Housing Association under a 10-year contract worth £5m as sole contractor to install heating systems in its properties across the east of England.

In addition, Suffolk Energy Action, a coalition between the county's seven local authorities to promote domestic energy efficiency and encourage a reduction in energy use within the home, has appointed the company to facilitate the installation of energy-efficiency improvements for domestic properties across Suffolk. As well as installing boiler replacements, first-time central heating systems and heating controls, Aaron is tasked with accessing funding through programmes including the Suffolk Warm Homes Healthy People service and the National Grid's Warm Homes Fund.

Other significant wins by Aaron Services include a two-year domestic maintenance contract worth £1.3m from the Accent Housing Association to provide gas-related safety checks, servicing and repairs across 3,000 domestic and commercial properties, and a three-year contract from the Salvation Army for the planned and reactive maintenance of gas, LPG and oil-fired installations in its commercial properties across parts of the region.

K&T Heating, which delivers gas compliance services across London and the South East, has also had a highly successful year. In its biggest win, it was appointed by the London Borough of Havering appointed it to carry out a three-year programme of domestic gas services and associated work, including testing, servicing and repairing gas appliances, central heating systems amongst other things. The programme is worth £9.0m, and includes an option to extend for a further two years.

In a £4.3m award, Guildford Borough Council has appointed K&T Heating to carry out a range of domestic gas servicing and repair activities over a five-year programme that includes gas safety checks and servicing, checking and maintaining air source heat pump systems, solar thermal installations and other works. The company has also won a one-year contract worth £2.0m to install domestic heating and hot water systems for the Metropolitan Thames Valley Housing Association.   These wins have seen a significant growth to K&T revenues compared to 2017, and the positive performance of the business is anticipated to continue going forward.

Sure Maintenance, which delivers gas compliance services across the UK, won a three-year contract worth £13.5m with Sandwell Metropolitan Borough Council to replace domestic gas appliances and associated ancillary works across 29,000 domestic properties.

Leeds Federated Housing Association has also appointed Sure to install gas boilers and central heating systems in a programme worth £2.1m. And Salix Homes, a social housing provider responsible for some 8,500 properties in and around Salford, greater Manchester, awarded the company a £1.8m contract to service and maintain central heating installations and miscellaneous gas appliances across its estate.

The gas businesses are in the process of moving to the same operational platform within the business on a phased approach and we believe this will offer ever better internal comparability of performance and benchmarking, to allow the businesses to continue to improve their service performance to our clients.

·      Building Compliance 

Our Building Compliance businesses comprise Allied Protection, H2O Nationwide, Precision Lift Services and the newly acquired Just Energy Solutions Limited and makes up 26% of the divisional revenues. 

Precision delivers lift installation and maintenance services to local authorities and social housing associations across the UK. During the year, Efficiency East Midlands - an organisation comprising 135 members responsible for more than 1.5m social housing properties - appointed it under a four-year contract to carry out passenger-lift installation, refurbishment and modernisation services.

The Royal Borough of Greenwich also appointed Precision in a five-year contract, with an option to extend for a further five years. Worth £8.4m, this engages the company to service, maintain and repair 354 passenger and goods lifts in the residential and public buildings that form the Council's housing and corporate stock. The scope includes a 24/7 breakdown service for all the authority's lifts and 10 annual services of all passenger lifts.

The company has also won a three-year contract worth £350,000 to maintain and repair the portfolio of passenger lifts owned by One Housing Group, which manages around 16,000 homes across London and surrounding counties and helps over 11,500 people to live independently.

Allied Protection is the Sureserve Group's specialist provider of fire and electrical compliance services across East Anglia and the South East. Its outstanding year included five contract wins:

·      A four-year contract from Paragon ASRA Housing worth between £750,000 and £2.0m each year to carry out fire remedial and safety work across around 6,200 of the association's properties

·      Participation in a framework agreement for fire safety issued by the Northern Housing Consortium, estimated at a value of £4.0m over four years

·      A c. £2.5m share of a framework agreement for fire risk and mitigation from Procure Plus/Re:Allies

·      A four-year programme worth £1.6m to install and maintain fire alarms for the South East Consortium

·      A contract from One Direct Maintenance worth £750,000 annually over three years, with two one-year extension options, to deliver a fire safety systems maintenance and repair service.

H2O is the Sureserve Group's specialist provider in water and air risk assessments across the UK. Its outstanding year includes two contract wins and repeat works:

·      Year on year contract from Metropolitan for various ad-hoc works which annually is worth £413,000

·      Southend Borough Council, continuing routine monitoring and testing worth a total of £314,000 a year

·      Optivo, totaling £583,000 a year to carry out water risk assessments

Our belief is that an ongoing move towards higher levels of compliance requirements should benefit the compliance division in future periods.  Our continuing stable growth should increase our buying power further and improve our ability to deliver revenues at margins.  Fleet management continues to be monitored closely and we have or are investing in a number of areas including dashboards to better analyse performance and find additional areas for improvement with options being explored for further development.

Looking forward

We continue to regard Sureserve to be the market leaders in the compliance sector, with a true national reach. We believe we have built the strongest compliance business of its type, well positioned to grow further in what is a fragmented and regional market, where we have seen continued revenue growth and believe this is a non-volatile sector of recurring revenues that underpin these cash generative businesses.

The experienced management teams include a number of Managing Directors who are focused on business growth by operational excellence from a common operating platform, building a stable platform for us to continue to grow and support our client base in the future.

 

Energy Services division

Our Energy Services businesses provide a range of energy efficiency services including insulation, heating and renewable technologies for social housing and private homes through the Everwarm subsidiary. Everwarm also uses these services to deliver carbon emissions savings for utility companies, enabling them to meet their legislative targets. Work has extended in the current year to include energy efficiency projects within non-domestic properties, a recent area of new focus. The division offers domestic smart metering installation and recurring asset management services through Providor to a largely blue-chip utility client base, with that sector growing due to the ongoing UK-wide government roll-out.  The division also has an established presence in the installation of electrical vehicle charging points, a further growth sector in which our experienced management team are well placed to deliver.

The Energy Services division also increased pipeline value by £6.2m, a further demonstration of opportunities we are seeing in the sector.

Energy Services: 12 months ended 30 September

2018

2017

Change

Revenue (£m)

77.7

79.0

-1.6%

EBITA (£m)

4.0

4.0

0.2%

EBITA margin (£m)

5.2%

5.1%

0.1pts

 

Revenue was £77.7m in the period, 1.6% down on the comparative period. This was reflective of a reduction in the Everwarm incomes due to a mix of factors, particularly reduced external wall and kitchen and bathroom works due to lower levels of completed client works. The Providor business saw an increase in revenues compared to 2017 which part mitigated the Everwarm reduction, due to the full year impact of the 2017 additional contract win in the West Midlands with Scottish Power, as previously disclosed in May 2017.

EBITA improved nominally to £4.0m (2017: £4.0m), with Everwarm seeing reduced overall profitability due to revenue reductions above however still producing an overall strong performance, which we expect to continue with a number of recurring revenue streams remaining.  The Warmworks joint venture is included within the Everwarm position - this remains the Scottish Government's flagship Home Energy Efficiency Programme for Scotland ("HEEPS") and it continued to perform well during the full year with a now established level of operational excellence.  This also brings a diversified installation portfolio for Everwarm, focusing on central heating, and boiler improvements and other energy efficiency installation measures.  The divisional profitability variance was underpinned by the improvement in metering and mitigated the downside from the Everwarm business - further progression will be linked to smart meter programme timing which have been noted below. 

Carbon prices remained largely stable during the period, and while the ECO3 commencement period is still ongoing, overall the new obligation is not anticipated to have a significant impact either positively or negatively on pricing in the future period. The Arbed 3 programme as discussed below did not impact on 2018 numbers as this was in a mobilisation phase at year end.

·      Everwarm

The increase in pipeline value achieved by Energy Services was due to the strategically important award of a three-year contract worth up to £55.0m by the Welsh Government to Everwarm, our national energy efficiency business. The contract was issued under the Arbed 3 programme, which aims to deliver improvements to more than 6,000 homes throughout Wales where households are most likely to be in severe fuel poverty.

There is potential for a two-year contract extension and we were delighted to secure this work as this opportunity was particularly significant for reasons other than its sheer scale - it would also extend our reach into Wales for the first time, giving Everwarm a truly UK-wide footprint. We have set up the Arbed Am Byth Ltd joint venture to deliver this contract with the Energy Saving Trust, with whom we already collaborate on the Scottish Government's flagship Home Energy Efficiency Programme for Scotland (HEEPS).

Everwarm manages a range of services, including insulation and central heating upgrades, working with local operators to deliver benefits to the local economy. Our approach ensures we have the full range of competencies required, which included drawing on Everwarm's customer service expertise to manage the customer journey from initial assessment through to aftercare and service visits.

In general the year has been an excellent period for contract wins, underpinned by Arbed 3. This was complemented by a number of other strong contract wins in the division.  In addition to the significant Renfrewshire (£10m) and Fife (£6m) wins mentioned in our half year review, these also include a four-year central heating contract from Perth and Kinross Council (£5.6m), and HEEPS 2018-19 wins for Aberdeenshire (c£7.0m) and West Lothian (£2.5m) Councils.   We also won a three-year renewable energy contract from North Lanarkshire Council (£2.6m), a further phase of EWI for ANCHO (£1.6m) and energy-efficient heating for Berwickshire HA (£1.4m).

·      Providor

Providor remains in a period of consolidating existing contract delivery following a period of strong growth, however we are seeing many opportunities from a mix of "Big 6" and smaller / "Challenger" utilities particularly linked to the SMETS2 roll out, which we believe will bring us further possibility for growth.

Looking forward

Everwarm's order book is strong with future revenues underpinned by long-term JV arrangements with Warmworks and Arbed, in addition to strong contractual agreements with a number of clients. Carbon pricing remains an ongoing area of importance however we remain confident there is an appetite from the government to continue to provide funding for fuel poverty in this highly regulated sector.  Everwarm has a market leading proposition in this area and a huge wealth of management experience, so we believe we remain well placed to react and adapt to any changes in the landscape to continue to provide a quality service to our customers and deliver effectively for our stakeholders. Generally changes in regulations result in increased compliance which we believe is a positive for us as in effect, this can act as a barrier to entry and therefore enhance our position in the market.

For Providor there have been continued delays to the national smart meter roll-out and indeed, there remain further derogations permitting the installation of older SMETS1 meters now to March 2019.  This is impacting installation volumes as we have discussed in previous reports.  The impact on engineer efficiency requires careful management, both with workforce and our contractual positions.  While we continue to seek to provide strong and secure employment for our engineers, uncertainty within the wider industry does not assist churn.   The impact of this is that costs will continue to rise and we believe the successful transition to SMETS2 with an achievable timetable allowing consistent volumes is crucial if costs are not to rise further.  There is therefore a level of reliance on all stakeholders in the national smart meter roll out to remain committed to this and we remain frustrated our investment supporting the roll-out continues to be ignored by the legislative agencies who ultimately rely on a skilled workforce to deliver the programme.

Michael McMahon

Chief Operating Officer

 

Financial Review

 

Trading overview

The Operational review provides a detailed overview of our trading performance during the year. This Financial review therefore covers other aspects of the consolidated statements of comprehensive income, financial position and cash flows.

The Group had a strong year, posting an operating profit before exceptional items and amortisation of acquisition intangibles of £8.0m from continuing activities (2017: £7.4m). 

Group continuing revenue increased by 5.1% to £190.8m (2017: £181.5m), reflecting an increase in revenues in the Compliance division, whose revenues increased by 11.5% to £116.3m (2017: £104.3m). Revenues in Energy Services decreased by 1.6% to £77.7m (2017: £79.0m). Intersegment revenue of £3.2m (2017: £1.8m) is eliminated on consolidation.

Group operating profit before exceptional items and amortisation of acquisition intangibles increased by 8.7% to £8.0m (2017: £7.4m), reflecting a decrease in operating profit before exceptional items and amortisation of acquisition intangibles in the Compliance division of 23.6% to £6.1m (2017: £8.0m), an increase in operating profit before exceptional items and amortisation of acquisition intangibles in Energy Services of 0.2% to £4.0m (2017: £4.0m).

We exclude exceptional items and amortisation of acquisition intangibles in calculating the figure reported above to provide a more appropriate view of underlying operating performance.

Operating expenses fell 3.9% to £19.6m in the year (2017: £20.4m) reflecting reductions in the cost base. Central costs fell by 54.6% to £2.1m (2017: £4.6m), reflecting hiving down costs into the trading subsidiaries as well as the cost reduction programme outlined over the last couple of years.

We reported an operating profit from continuing operations of £3.4m (2017: restated loss of £3.6m) reflecting a £0.3m net exceptional loss (2017: £0.5m) and a £4.3m charge for amortisation of acquisition intangibles (2017: £10.5m). Interest expense was £1.5m (2017: £2.0m) and taxation was £0.8m (2017: £0.9m credit). The disposal of Lakehouse Contracts, Foster Property Maintenance and Orchard (in 2017) resulted in a post-tax loss from discontinued operations of £11.5m (2017: restated post tax profit of £4.6m). The statutory loss after tax was £10.4m (2017: profit of £10,000).

Exceptional items in the year reduced the Group's profit before tax by £0.3m (2017: £0.5m) and related to the following items:

 

 

 

 

2018

 

2017

 

£m

 

£'000

 

 

 

 

Acquisition costs

0.1

 

0.0

Restructuring and other costs

1.0

 

2.1

Total exceptional costs

1.1

 

2.1

Release of provisions for deferred consideration

(0.8)

 

(1.6)

Total net exceptional costs

0.3

 

0.5

 

Restructuring and other costs of £1.0m (2017: £2.1m) relate to a small number of legacy clean-up and restructuring costs during the year.

Release of provisions for deferred consideration of £0.8m (2017: £1.6m) relate to the final settlement of deferred consideration due to Aaron Heating Services Limited and Precision Lift Services Limited. 

Profit on sale of Orchard (Holdings) UK Limited of £1.2m (2017: £5.4m), relating to the sale of Orchard to World Fuel Services Europe Ltd in September 2017, which was presented as exceptional in the 2017 Financial statements, has been reclassified as discontinued operations in the current year, to ensure consistent presentation of the results (see Note 1 for further details). 

Amortisation of acquisition intangibles

Amortisation of acquisition intangibles was £4.3m for the year (2017: £10.5m), the reduction reflected the fact that we have taken amortisation charges in prior periods, meaning we are amortising a reduced base of intangible assets.

Finance expense

The total finance expense for the year represented the interest charged on our debt facilities (net of finance income), together with the amortisation of debt raising costs, which totaled £1.4m (2017: £1.7m).

The total finance expense of £1.5m (2017: £2.0m) included the unwinding of discounts on deferred consideration figure of £0.1m (2017: £0.3m).

Discontinued operations

Losses from discontinued operations amounted to £11.5m (2017: restated profit of £4.6m) on associated revenues of £71.9m (2017: £124.1m).  The losses comprised losses up to the date of disposal of £5.2m (2017: £0.8m) and losses on disposal of £6.3m (2017: profit of £5.4m) The associated cash outflow for the period was £8.0m, discussed also in note 34.  Profit on sale of Orchard (Holdings) UK Limited of £1.2m (2017: £5.4m) has been reclassified as discontinued operations in the current year, to ensure consistent presentation of the results (see Note 1 for further details). The 2018 profit relates to the reassessment of the fair value of the consideration receivable (see Note 3).  

Discontinued activities represent the Group's Construction and Property Services divisions which were sold on 17 August 2018 and Orchard (Holdings) UK Limited, which was sold in September 2017.  In determining the classification of the activities as discontinued at 30 September 2018, the Board had regard to the conditions that needed to be met under IFRS5 "Non-current Assets Held for Sale and Discontinued Operations".

Further details of the losses / profit from discontinued operations are in Note 11.

 

Tax

The tax charge on the profit before tax from continuing operations was £0.8m (2017: £0.9m credit), representing an effective rate of 40%, which compares with the statutory corporation tax rate of 19%. The difference was due to a combination of permanent differences, which relates in part to deferred consideration, together with prior year tax adjustments.

Our net cash tax payment for the year was £0.2m for continuing operations (2017: net cash receipt of £0.7m). During the year, the Group has received part of the anticipated cash tax refund from HMRC which formed the corporation tax receivable on the 30 September 2017 balance sheet, with the remaining amount being received in October 2018. The Group has also made tax payments on account during the year.

The net deferred tax liability as at 30 September 2018 was £37,000 (2017: asset of £2.1m), with the movement mainly relating to acquisition intangibles and the disposal of Lakehouse Contracts and Foster Property Maintenance. Further details are set out in Note 26.

Earnings per share

Earnings per share from continuing operations were 0.7 pence (2017: restated loss per share of 2.9 pence), based on profit after tax from continuing operations of £1.2m (2017: restated loss of £4.6m).

Our statutory loss for the year was £10.4m (2017: profit of £10,000). Based on the weighted average number of shares in issue during the year of 157.5m, this resulted in basic loss per share from continuing and discontinued operations of 6.6 pence (2017: earnings of 0.0 pence).

Further details are contained in Note 14.

Dividend

The board has proposed a final dividend for the year of 0.25 pence per share.  This represents a total dividend payable for the year of 0.25 pence (2017: 0.5 pence).

Subject to approval at the AGM on 19 March 2019 the final dividend will be paid on 30 April 2019 to shareholders on the register at the close of business on 1 March 2019.

 

Cash flow performance

Our operating cash flow from continuing operations for the year was an inflow of £4.8m (2017: £13.1m), discussed in Note 34 and reflecting a operating cash conversion from continuing operations of 60% (2017: 177%). We calculate continuing operating cash conversion as cash generated from continuing operations, excluding the cash impact of exceptional items and amortisation of acquisition intangibles, divided by operating profit before exceptional items and amortisation of acquisition intangibles. We believe this measure provides a consistent basis for comparing cash generation consistently over time. On a statutory basis, we saw an operating cash outflow of £5.7m (2017: inflow of £13.4m), representing a cash conversion of 71% outflow (2017: inflow of 181%).

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

The management of working capital represents a continued challenge.  The sale of Lakehouse Contracts Limited and Foster property Maintenance Limited has simplified our volume of "unbilleds" (especially prepaid expenses and accrued project costs) and allowed us to focus on the management of accrued income, debtors and creditors.  We will need to manage through one to two seasonal cycles to see the full advantage of the disposal of Lakehouse Contracts Limited and Foster property Maintenance Limited in improving peaks and troughs in working capital.  We managed these balances within our banking facilities around year end, however this represents a snapshot in time and the weighted average debt in the year was £18.7m (2017: £27.3m).

We expect to continue to target an average annual operating cash conversion of 80% over the long term.

Net debt

Our net debt balance was £11.4m at 30 September 2018 (2017: £1.3m). The increase over FY17 related predominantly to the outflow of cash in relation to Lakehouse Contracts and Foster Property Maintenance, however this represents a snapshot in time and the weighted average debt in the year was £18.7m (2017: £27.3m).

Banking arrangements

We had drawn £13m (2017: £27.5m) under our revolving credit facility at the year end. At the date of issuing this report we had drawn £14m and National Westminster bank ('Natwest') continue to be an excellent and supportive partner.

The Group had net current liabilities as at 30 September 2018 as a result of the borrowings being due within one year at the reporting date.  In December 2018, the Group renewed its bank facilities to provide an overdraft facility of £5,000,000 together with a revolving credit facility of £25,000,000, which runs to 31 January 2022, so the bank facility is now non-current. 

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

Financial position

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

The principal movement in net assets reflected the disposal of Lakehouse Contracts and Foster Property Maintenance. There was a reduction of £3.5m in goodwill and intangibles, due to £4.3m in amortisation of acquisition intangibles and £0.8m increase in goodwill in relation to the acquisition of Just Energy Solutions, discussed above and in Notes 15 and 16.

Net current assets (excluding cash and borrowings) stood at £3.2m (2017: liability of £1.4m), reflecting a push on working capital management towards the end of the year.

Working capital

 

2018

 

2017

 

£m

 

£m

Trade receivables

19.0

 

22.3

Accrued income

15.7

 

25.4

Trade payables

(24.6)

 

(31.8)

Accruals

(7.9)

 

(25.0)

 

The principal movements in working capital are noted in the above table and mainly relate to the disposal of Lakehouse Contracts Limited and Foster Property Maintenance Limited during the year.  

Provisions

Provisions as at 30 September 2018 stood at £7.7m (2017: £4.0m). During the year, we utilised £0.3m of provisions.  We provided a further £4.9m for specific risks in relation to the disposal of Lakehouse Contracts and Foster Property Maintenance and provisions of £1.5m were disposed of on the sale of Lakehouse Contracts and Foster Property Maintenance.

Further details are set out in Note 25.

Acquisitions and disposals

The Group acquired Just Energy Solutions on the 15 May 2018 for a gross consideration of £0.3m, comprising net liabilities of £0.5m and £0.8m of goodwill.

On 17 August 2018, we announced the sale of Lakehouse Contracts and Foster Property Maintenance. Please see note 11 in regard to discontinued operations.

Deferred consideration

A number of the acquisitions made by the Group in recent years incorporate deferred consideration as part of the transaction terms, some of which depend on the performance of the businesses post-completion.

The table below shows the movement in the total discounted deferred consideration payable and the amount outstanding at the year end.

 

H2O Nationwide Limited

Aaron Heating Services Limited

PLS Holdings Limited

Just Energy Solutions Limited

Total

 
 
 
 

 

£'000

£'000

£'000

£'000

£'000

 

At 1 October 2017

1.0

0.3

0.6

-

1.9

 

Total discounted consideration payable for addition in the year

-

-

-

0.3

0.3

 

Unwinding of discount

0.0

0.0

0.0

0.0

0.0

 

Revalued in the year

-

(0.1)

(0.6)

-

(0.7)

 

Paid in year

(1.0)

(0.2)

-

-

(1.2)

 

At 30 September 2018

-

-

-

0.3

0.3

 

 

The fair value of the consideration has been assessed in accordance with the Sale & Purchase Agreements.  The non-current element of the expected settlement has been discounted using a Pre-Tax discount rate that reflects the time value of money.

The total deferred consideration may vary between £0.0 million and £0.3 million depending on the underlying trading performance of the businesses.

The sums due in relation to H20 Nationwide Limited and Aaron Heating Services Limited were settled in full during the year.

Risks

The Board considers strategic, financial and operational risks and identifies actions to mitigate those risks. Key risks and their mitigation are disclosed within the 2018 Annual Report. We manage a number of potential risks and uncertainties, including claims and disputes, which are common to other similar businesses which could have a material impact on short and longer term performance.

Our year-end review included an assessment of accrued income balances, of which the balance was £15.7m at the reporting date (2017: £25.4m), which as a Group we review regularly for impairment. Accrued income represents a balance sheet risk in our industry and we continue to ensure a balanced approach between risk and possible outcome on final invoicing.  Subsequent to the disposal of Lakehouse Contracts and Foster Property Maintenance the balance sheet risk is significantly reduced in this area.

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

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

Going concern statement

The Directors acknowledge the Financial Reporting Council's 'Guidance on the going concern basis of accounting and reporting on solvency and liquidity risks' issued in April 2016. The Group's business activities, together with factors likely to affect its future development, performance and position are set out in the Strategic Report as referred to within the 2018 Annual Report. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Financial Review, as part of the Strategic Report within the 2018 Annual Report. In addition, Note 32 to the consolidated Financial Statements within the 2018 Annual Report includes details of the Group's approach to financial risk management, its financial instruments and hedging activities, and its exposure to credit risk and liquidity risk. In assessing the Group and Company's ability to continue as a going concern, the Board reviews and approves the annual budget and three-year plan, particularly for the 16 months following year end, including forecasts of cash flows, borrowing requirements and covenant headroom. The Board reviews the Group's sources of available funds and the level of headroom available against its committed borrowing facilities and associated covenants. The Group's financial forecasts, taking into account possible sensitivities in trading performance, indicate that the Group will be able to operate within the level of its committed borrowing facilities and within the requirements of the associated covenants for the foreseeable future. The Group had net current liabilities as at 30 September 2018 as a result of the borrowings being classified as a short term liability at the reporting date.  RBS remains very supportive of the Group and in December 2018, the Group renewed its bank facilities to provide an overdraft facility of £5,000,000 together with a revolving credit facility of £25,000,000, which runs to 31 January 2022. The Directors have a reasonable expectation that the Group and Company has adequate resources to continue its operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis of accounting in preparing the Annual Report and Accounts.

Michael McMahon

Chief Operating Officer

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 30 September 2018

 

 

 

 

 

 

Notes

2018

 

2017

 

 

 

 

Restated

 

 

£'000

 

£'000

 

 

 

 

 

Continuing operations

 

 

 

 

Revenue

4

190,750

 

181,496

Cost of sales

 

(163,380)

 

(154,530)

Gross profit

 

27,370

 

26,966

 

 

 

 

 

Other operating expenses

 

(19,558)

 

(20,358)

Share of results of joint venture

18

226

 

786

 

 

 

 

 

Operating profit before exceptional items and amortisation of acquisition intangibles

4,5

8,038

 

7,394

 

 

 

 

 

Exceptional costs

7

(1,048)

 

(2,127)

Exceptional income

7

757

 

1,624

Amortisation of acquisition intangibles

16

(4,325)

 

(10,495)

 

 

 

 

 

Operating profit / (loss)

 

3,422

 

(3,604)

 

 

 

 

 

Finance expense

8

(1,475)

 

(1,985)

Investment income

8

-

 

16

 

 

 

 

 

Profit / (loss) before tax from continuing operations

4

1,947

 

(5,573)

 

 

 

 

 

Taxation

12

(782)

 

934

 

 

 

 

 

Profit / (loss) after taxation from continuing operations

 

1,165

 

(4,639)

 

 

 

 

 

Discontinued operations

 

 

 

 

(Loss) / profit for the year from discontinued operations

11

(11,520)

 

4,649

 

 

 

 

 

(Loss) / profit for the year attributable to the equity holders of the Group

 

(10,355)

 

10

 

 

 

 

 

Earnings / (loss) per share from continuing operations

 

 

 

 

Basic

14

0.7p

 

(2.9p)

Diluted

14

0.7p

 

(2.9p)

(Loss) / earnings per share from continuing and discontinued operations

 

 

 

 

Basic

14

(6.6p)

 

0.0p

Diluted

14

(6.6p)

 

0.0p

 

 

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

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

At 30 September 2018

 

 

2018

 

2017

 

Notes

£'000

 

£'000

Non-current assets

 

 

 

 

Goodwill

15

42,923

 

42,169

Other intangible assets

16

4,927

 

9,233

Property, plant and equipment

17

1,474

 

1,905

Interests in joint venture

18

865

 

1,196

Trade and other receivables

21

-

 

456

Deferred tax asset

26

-

 

2,085

 

 

50,189

 

57,044

Current assets

 

 

 

 

Inventories

19

4,222

 

4,490

Amounts due from customers under construction contracts

20

-

 

6,269

Trade and other receivables

21

42,618

 

59,129

Corporation tax receivable

 

769

 

551

Cash and cash equivalents

 

1,705

 

26,129

 

 

49,314

 

96,568

Total assets

 

99,503

 

153,612

 

 

 

 

 

Current liabilities

 

 

 

 

Amounts due to customers under construction contracts

20

-

 

1,786

Trade and other payables

22

39,334

 

69,178

Loans and borrowings

23

12,926

 

-

Finance lease obligations

27

83

 

182

Provisions

25

5,102

 

893

 

 

57,445

 

72,039

Net current (liabilities) / assets

 

(8,131)

 

24,529

 

 

 

 

 

Non-current liabilities

 

 

 

 

Trade and other payables

22

269

 

973

Loans and borrowings

23

-

 

27,077

Finance lease obligations

27

60

 

144

Provisions

25

2,593

 

3,137

Deferred tax liability

26

37

 

-

 

 

2,959

 

31,331

Total liabilities

 

60,404

 

103,370

Net assets

 

39,099

 

50,242

 

 

 

 

 

Equity

 

 

 

 

Called up share capital

28

15,753

 

15,753

Share premium account

30

25,314

 

25,314

Share-based payment reserve

29, 30

776

 

776

Own shares

30

(290)

 

(290)

Merger reserve

30

20,067

 

20,067

Retained earnings

 

(22,521)

 

(11,378)

 

 

 

 

 

Equity attributable to equity holders of the company

 

39,099

 

50,242

The financial statements of Sureserve Group plc (registered number 09411297) were approved by the board of directors and authorised for issue on 21 January 2019.  They were signed on its behalf by:

M McMahon

Director

 

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

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the year ended 30 September 2018

 

Share capital

Share premium account

Share-based payment reserve

Own shares

Merger reserve

Retained earnings

 

Total equity

 

£'000

£'000

£'000

£'000

£'000

£'000

 

£'000

At 1 October 2016

15,753

25,314

776

(290)

20,067

(10,600)

 

51,020

Profit for the period

-

-

-

-

-

10

 

10

Dividends paid (note 13)

-

-

-

-

-

(788)

 

(788)

At 30 September 2017

15,753

25,314

776

(290)

20,067

(11,378)

 

50,242

Loss for the period

-

-

-

-

-

(10,355)

 

(10,355)

Dividends paid (note 13)

-

-

-

-

-

(788)

 

(788)

At 30 September 2018

15,753

25,314

776

(290)

20,067

(22,521)

 

39,099

 

 

 

CONSOLIDATED STATEMENT OF CASH FLOWS

For the year ended 30 September 2018

 

 

2018

 

2017

 

 

 

 

Restated

 

Notes

£'000

 

£'000

Cash flows from operating activities

 

 

 

 

Cash (used in) / generated from operations

34

(5,682)

 

13,373

Interest paid

 

(1,058)

 

(1,385)

Interest received

 

-

 

3

Taxation

 

(152)

 

655

Net cash (used in) / generated from operating activities

 

(6,892)

 

12,646

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

Payment of deferred consideration on prior year acquisitions

 

(1,245)

 

(2,588)

Sale of shares in subsidiary, net of cash disposed of

 

-

 

12,044

Purchase of property, plant and equipment

 

(430)

 

(909)

Purchase of intangible assets

 

(449)

 

(462)

Sale of property and equipment

 

65

 

153

 

 

 

 

 

Net cash (used in) / generated from investing activities

 

(2,059)

 

8,238

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

Dividend paid to shareholders

 

(788)

 

(788)

Proceeds from bank borrowings

 

-

 

6,500

Repayment of bank borrowings

 

(14,500)

 

-

Repayments to finance lease creditors

 

(183)

 

(60)

Finance issue costs

 

(2)

 

(336)

 

 

 

 

 

Net cash (used in) / generated from financing activities

 

(15,473)

 

5,316

 

 

 

 

 

Net (decrease) / increase in cash and cash equivalents

 

(24,424)

 

26,200

 

 

 

 

 

Cash and cash equivalents at beginning of year

 

26,129

 

(71)

 

 

 

 

 

Cash and cash equivalents at end of year

 

1,705

 

26,129

 

 

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

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 30 September 2018

General information

Sureserve Group plc is a company incorporated in the United Kingdom under the Companies Act.  The address of the registered office is 50 Liverpool Street, London, EC2M 7PY.  On 28 September 2018, Lakehouse plc changed its name to Sureserve Group plc.

These results for the year ended 30 September 2018 are an excerpt from the Annual Report & Accounts 2018 and do not constitute the Group's statutory accounts for 2018 or 2017. Statutory accounts for Sureserve Group plc for the year to 30 September 2017 have been delivered to the Registrar of Companies, and the Sureserve Group plc statutory accounts for the year to 30 September 2018 will be delivered by 25 February 2018. The Auditor has reported on both those accounts; their reports were unqualified, did not draw attention on to any matters by way of emphasis and did not contain statements under Sections 498(2) or (3) of the Companies Act 2006 or equivalent preceding legislation. Whilst the financial information included in this Annual Results Release has been prepared in accordance with International Financial Reporting Standards (IFRS) adopted by the European Union (EU), this announcement does not itself contain sufficient information to comply with IFRS. Full financial statements that comply with IFRS are included in the Annual Report & Accounts 2018 which will be available at www.sureservegroup.co.uk.

The consolidated financial statements are presented in Pounds Sterling because that is the currency of the primary economic environment in which the Group operates.

1.    Basis of preparation

Basis of accounting

The Group's consolidated financial statements have been prepared and approved by the directors in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union.  The financial statements have been prepared on the historical cost basis.  Historical cost is generally based on the fair value of the consideration given in exchange for goods and services.  The principal accounting policies adopted are set out below.

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

Restatement of comparative information

The Group has amended the format of the consolidated statement of comprehensive income to simplify the presentation by presenting a single column for each year instead of separate columns for 'underlying' results and 'exceptional and other items' presented in the 2017 Financial Statements.  We have made this change in light of FRC guidance on clear and concise reporting and use of alternative performance measures and because we consider it presents the results in a clearer way.  We have also presented all results from discontinued operations in a single line in both 2017 and 2018 in accordance with IFRS 5, which has resulted in a restatement of 2017 exceptional income, profit from continuing operations, taxation, results from discontinued operations, earnings per share and cashflow statement. 

New standards and interpretations not applied

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

 

IAS/IFRS standards

 

Effective for accounting periods starting on or after

IFRS 9

Financial Instruments

1 January 2018

 

IFRS 15

Revenue from Contracts with Customers

1 January 2018

 

IFRS 16

Leases

1 January 2019

 

Amendments to IFRS 2

Classification and Measurement of Share Based Payment Transactions 

1 January 2018

IFRIC 23

Uncertainty over Income Tax Treatments 

1 January 2019

 

IFRS 15 Revenue from Contracts with Customers

IFRS 15 sets out the principles to be applied in revenue recognition, replacing those in IAS 18 Revenue, IAS 11 Construction Contracts and their related guidance.

IFRS 15 is effective for accounting periods beginning on or after 1 January 2018 and will be applied by the Group from 1 October 2018.  Upon transition to IFRS 15, the Group currently intends to apply the 'Cumulative Catch-Up' method.  Under this method, the cumulative impact of the transition to IFRS 15 will be recorded as an adjustment to equity on 1 October 2018 and the comparative figures presented in the financial statements will not be restated. 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 30 September 2018

1.    Basis of Preparation (continued)

IFRS 15 Revenue from Contracts with Customers (continued)

A project to assess the full impact of the new standard has now been advanced with the engagement of an independent professional services firm. In order to assess the impact of applying IFRS 15 for the first time, a representative sample of client contracts was selected for analysis.  The analysis is continuing but the work performed thus far has enabled management to conclude that the adoption of IFRS 15 will impact the Group's financial statements in the following areas:

Measurement of revenue for those contracts where control of the asset or service is transferred to the customer over time

The Group's contract portfolio comprises a mixture of short term contracts (where works are typically completed within a day or so) and longer term projects (where works may extend over several weeks or months). 

·      Short term contracts - the Group will utilise the practical expedient within IFRS15, allowing revenue to be recognised at the amount which the Group has the right to invoice, where that amount corresponds directly with the value to the customer of the Group's performance completed to date.  This is aligned with the Group's existing accounting policy and so is not expected to result in any adjustments being required on adoption of IFRS 15.

·      Longer term contracts - under the Group's current accounting policy, the costs of fulfilling longer term contracts are initially recognised in the balance sheet as work-in-progress and are subsequently released to profit and loss as revenue is recognised in line with surveys performed (i.e. an 'outputs' basis).  Under IFRS 15, contract fulfilment costs are required to be expensed as incurred unless they can be recognised as an asset under another accounting standard.  Having revisited the Group's existing methodology for recognising revenue on longer term contracts, management have determined that recognising revenue in line with costs incurred as a proportion of total expected costs (i.e. an inputs basis) will more faithfully represent the measurement of contract progress over time and so intend to apply this method with effect from 1 October 2018.  This is expected to result in a similar pattern for the recognition of revenue as previously with the exception of amounts previously recorded as work-in-progress relating to materials where control has passed to the customer but installation has not yet occurred. Under the inputs method, these amounts will now be recognised in revenue (at nil margin) on the transfer of control of the goods. Had this policy been applied in the year ended 30 September 2018, revenue would have increased by £1.0m with a corresponding increase in cost of sales and no impact on gross margin.

Accounting for variable consideration

While issued infrequently, the Group's contracts often provide for credits to be issued in the event of specified service targets not being met.  Under the Group's current accounting policy, a provision is made for the value of service credits expected to be granted with the resulting charge being recognised as a cost of sale.  Under IFRS 15, service credits represent 'variable consideration' and are required to be accounted for as a reduction in revenue.  Had this policy been applied in the year ended 30 September 2018, revenue would have decreased by £0.1m with a corresponding decrease in cost of sales and no impact on gross margin.

 

IFRS 16

 

We will evaluate the potential impact of IFRS 16 on the FY19 accounts, which will form the comparative figure when the standard is adopted in FY20 and will provide guidance to the market accordingly.

 

With the exception of IFRS15 and IFRS 16, directors do not expect the adoption of the standards listed above to have a material impact on the financial statements of the Group.

Basis of consolidation

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

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

 

2.    Significant accounting policies

Going concern

The Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future.  The Directors regard the foreseeable future as no less than 12 months following publication of its annual financial statements, so in practical terms, sixteen months from the reporting date.  The Directors have considered the Group's working capital forecasts and projections, taking account of reasonably possible changes in trading performance and the current state of its operating market, and are satisfied that the Group should be able to operate within the level of its current facilities

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 30 September 2018

2.    Significant accounting policies (continued)

and in compliance with the covenants arising from those facilities.  The Group had net current liabilities as at 30 September 2018 as a result of the borrowings being classified as a short term liability at the reporting date.  In December 2018, the Group renewed its bank facilities to provide an overdraft facility of £5,000,000 together with a revolving credit facility of £25,000,000, which runs to 31 January 2022.  Accordingly, they have adopted the going concern basis in preparing the financial information.  Please see further information in the strategic report.

Operating segments

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

Business combinations

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

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

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

The subsequent accounting for changes in the fair value of the contingent consideration that do not qualify as measurement period adjustments depends on how the contingent consideration is classified.  Contingent consideration that is classified as equity is not re-measured at subsequent reporting dates and its subsequent settlement is accounted for within equity.  Contingent consideration that is classified as an asset or liability is re-measured at subsequent reporting dates in accordance with IAS 39 or IAS 37 as appropriate, with the corresponding gain or loss being recognised in profit or loss.

Acquisition costs

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

Discontinued operations

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

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

(b)is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations or

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

Goodwill

Goodwill is initially recognised and measured as set out above.

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

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

Intangible assets acquired separately

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

Computer software                 -               3 years

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 30 September 2018

2.    Significant accounting policies (continued)

Intangible assets acquired in a business combination

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

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

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

Intangible asset                                      Useful economic life                                               Valuation method

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

Customer relationships                           5 years                                                    Expected cash flows receivable

Non-compete agreements                       5 years                                                    With or without method

De-recognition of intangible assets

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

Property, plant and equipment

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

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

Leasehold improvements                        -               over the period of the lease

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

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

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

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

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

Impairment of tangible and intangible assets excluding goodwill

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

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

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

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

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 30 September 2018

2.    Significant accounting policies (continued)

Exceptional items

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

Revenue

 

Revenue and profit are recognised as follows:

(a)   Service contracts

Revenue is recognised when the outcome of a job or contract can be estimated reliably; revenue associated with the transaction is recognised by reference to the stage of completion of work at the balance sheet date.  The outcome of the transaction is deemed to be able to be estimated reliably when all of the following conditions are satisfied:

 

·      The amount of revenue can be measured reliably;

·      It is probable that the economic benefits associated with the transaction will flow to the Group; and

·      The costs incurred for the transaction and the costs to complete the transaction can be measured reliably.

The Group has recognised revenue dependent on the nature of transactions in line with IAS 18 'Revenue'.  There are a range of contractual arrangements that require consideration:

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

SOR contracts are set based on predetermined rates for a list of services and duties required by the customer.  The billing arrangements can range from an all-encompassing price for each direct works, including an element of local site overhead, central overhead and associated profit; to the price of the direct works alone, with (where relevant) a separately agreed annual fee for local site and central overheads. The quantum of work performed in each period is captured and valued either against the agreed contract terms or with reference to costs incurred to date as a percentage of total expected costs, and the resulting revenue is recognised.

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

Certain contracts, in particular for gas servicing and maintenance, are procured on a fixed price basis.  Revenue for maintenance/reactive activities is recognised on a straight line basis over the life of the contract.  Revenue for servicing activities is recognised when the service is performed; however when it is impractical for the customer and householder to sign off every job sheet, revenue is recognised on a straight line basis. Where the contract contains servicing and maintenance/reactive elements and the revenue cannot be split reliably between each element of the contract, it is recognised on a basis that most closely reflects the phasing of the servicing provision.  Costs are recognised as incurred.

(iii)         Formula based income

When income is subject to formulaic valuation, revenue is recognised either when the valuation has been submitted to, and agreed by, the client; or where there are time constraints with the process for receiving agreement from the client, revenue can be recognised if prior experience shows that agreement will be received within one month of providing a valid submission and invoice.

(b)   Construction contracts

Revenue arising from construction contracts is recognised in accordance with IAS 11 'Construction contracts'.  When the outcome can be assessed reliably, contract revenue is recognised by reference to the stage of completion of the contract activity at the statement of financial position date.  The stage of completion of the contract at the statement of financial position date is assessed with reference to the costs incurred to date as a percentage of the total expected costs.

Margin on contracts is calculated in accordance with accounting standards and industry practice. Industry practice is to assess the estimated final outcome of each contract and recognise the revenue and margin based upon the stage of completion of the contract at the statement of financial position date. The assessment of the final outcome of each contract is determined by regular review of the revenues and costs to complete that contract. Consistent contract review procedures are in place in respect of contract forecasting.

The gross amount receivable from customers for contract work is presented as an asset for all contracts in progress for which costs incurred, plus recognised profits (or less recognised losses), exceed progress billings.

The gross amount repayable to or paid in advance by customers for contract work is presented as a liability for all contracts in progress for which progress billings exceed costs incurred plus recognised profits (less recognised losses). Full provision is made for losses on all contracts in the year in which the loss is first foreseen.

 

All revenue arising from construction contracts is included in the discontinued operations set out in Note 11.

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 30 September 2018

2.    Significant accounting policies (continued) 

(c)   Other income

(i)    Contract variations

Margin associated with contract variations is only recognised when the outcome of the contract negotiations can be reliably estimated. Costs relating to contract variations are recognised as incurred. Revenue is recognised up to the level of the costs which are deemed to be recoverable under the contract.

(ii)  Preliminaries income and pre-contract costs

All costs relating to pre-commencement and mobilisation are written off as they are incurred.  However where there is a contracted element within the preliminaries income to cover such costs, revenue and margin can be recognised in line with the contractual terms.

In the event that mobilisation costs are incurred in a new and material activity, market and / or territory, such costs will be highlighted on the face of the Consolidated Statement of Comprehensive Income, until such point as we achieve "business as usual".  This will typically be defined as the point at which we cease hiring a series of net new staff for the activity and reach a sustainable level of output from those staff we have trained.    

Employee benefits

Retirement benefit costs

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

Share-based payments

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

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

Employee Benefit Trust

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

Finance income and costs

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

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

Notional interest payable, representing the unwinding of the discount on long-term liabilities, is charged to finance costs and recognised as an other item on the face of the statement of comprehensive income.

Costs incurred in raising finance

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

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 30 September 2018

2.    Significant accounting policies (continued)

Taxation

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

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

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

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

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

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

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

Inventories

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

Provisions

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

Contingent liabilities

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

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

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 30 September 2018

2.    Significant accounting policies (continued)

Joint ventures

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

Financial instruments

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

(a)   Loans and receivables

Trade receivables, loans and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as loans and receivables. Trade receivables do not carry any interest and are stated at their initial value reduced by appropriate allowances for estimated irrecoverable amounts.  Provisions against trade receivables and amounts recoverable on contracts are made when objective evidence is received that the Group will not be able to collect all amounts due to it in accordance with the original terms of those receivables.  The amount of the write down is determined as the difference between the assets carrying amount and the present value of estimated future cash flows.  Individually significant balances are reviewed separately for impairment based on the credit terms agreed with the customer.  Other balances are reviewed in aggregate. 

(b)   Cash and cash equivalents

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

(c)   Trade and other payables

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

(d)   Bank and other borrowings

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

(e)   Derivative financial instruments

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

(f)    Financial liabilities and equity

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

(g)   Equity instruments

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

Operating leases

Amounts due under operating leases are charged to the statement of comprehensive income in equal annual installments over the period of the lease.

Finance leases

Assets held under finance leases are recognised as assets of the Group at their fair value or, if lower, at the present value of the minimum lease payments, each determined at the inception of the lease.  The corresponding liability to the lessor is included in the statement of financial position as a finance lease obligation.

Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability.  Finance charges are charged directly against income, unless they are directly attributable to qualifying assets, in which case they are capitalised in accordance with the Group's general policy on borrowing costs.

Nature and purpose of each reserve in equity

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

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

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

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

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 30 September 2018

3.    Critical accounting judgements and key sources of uncertainty

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

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

Key sources of estimation uncertainty

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

 

Revenue and profit recognition

Revenue is recognised based on the stage of completion of job or contract activity.  Certain types of service provision pricing mechanisms require minimal estimation and judgement; however service provision lump sum and longer term contracts do require judgements and estimates to be made to determine the stage of completion and the expected outcome for the individual contract.  A sum will be recognised in relation to the accrued revenue on the statement of financial position, details of which are described in Note 21.  The accrued income balance as at 30 September 2018 was £15.7m (2017: £25.4m).

These assessments include a degree of uncertainty and therefore if the key judgements and estimates change, further adjustments of recoverable amounts may be necessary.  Following the disposal of Lakehouse Contracts Limited and Foster Property Maintenance Limited in the year, the Directors consider the risk of material adjustments arising from a revision of estimates to have reduced.  Revenue from continuing operations is generated from a large number of contracts with customers, such that there is limited sensitivity to material revisions arising from changes in estimates on individual contracts.

Provisions for legal and other claims

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

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

Estimates of amounts provided take account of legal advice where sought.  Details of specific cases are not disclosed due to potential commercial sensitivity.  Provisions at 30 September 2018 includes £4.9m in respect of the disposal of Lakehouse Contracts Limited and Foster Property Maintenance Limited - see Notes 11 and 25 for details of the basis of estimation used.

The total carrying value of provisions as at 30 September 2018 was £7.7m (2017: £4.0m) - see Note 25 for further details.

Fair value of deferred consideration

The fair value of deferred consideration is considered in line with the terms of the associated Sale and Purchase Agreement and the potential range of likely outcomes. 

The carrying value of deferred consideration payable as at 30 September 2018 was £0.3m (2017: £1.9m) see Note 35 for further details.

The Directors re-assessed the fair value of deferred consideration receivable in the year in respect of the disposal of Orchard (Holdings) UK Limited in September 2017.  The assessment of fair value of consideration at 30 September 2017 was made based on the limited information available at that date, taking account of the date of disposal (29 September 2017) and lack of transactional experience with the buyer.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 30 September 2018

3.    Critical accounting judgements and key sources of uncertainty (continued)

Fair value of deferred consideration (continued)

The re-assessment of fair value of deferred consideration receivable resulted in recognition of profit of £1.2m in the year (see Note 11) and deferred consideration receivable of £1.2m at 30 September 2018 (see Note 21). Of this balance £0.9m has been received post year end and the remaining estimation range is nil to £0.9m of which a receivable of £0.3m has been recognised. The re-assessment of fair value resulted from information that became available within the year. Measurement of fair value of the remaining deferred consideration receivable involves a review of expected receivables on a customer by customer basis, and application of a

percentage probability of an adverse outcome on each based on the past experience of the Orchard team, which we consider to be a reliable base of estimation.

In regards to the disposal of Lakehouse Contracts Limited and Foster Property Maintenance Limited, the consideration receivable in the sale and purchase agreement was £0.5m but no consideration has been recognised in these accounts as the Directors regard the fair value of this to be £nil.

Critical accounting judgements

The group did not in the period make any critical accounting judgements, other than the estimates involving judgment set out above within key sources of estimation and uncertainty.

4.    Operating segments

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

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

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

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

-      compliance services in the areas of fire protection and building electrics;

-      air and water hygiene solutions; and

-      service, repair and installation of lifts.

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

 

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

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

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

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

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

 

 

2018

 

2017

 

 

£'000

 

£'000

Revenue

 

 

 

 

Compliance

 

116,275

 

104,319

Energy Services

 

77,734

 

78,960

Total segment revenue

 

194,009

 

183,279

Inter-segment elimination

 

(3,259)

 

(1,783)

Total continuing revenue

 

190,750

 

181,496

 

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 30 September 2018

4.    Operating segments (continued)

 

Reconciliation of Operating profit before exceptional and amortisation of acquisition intangibles to profit / (loss) before taxation from continuing operations

 

 

 

 

 

2018

 

2017

 

 

£'000

 

£'000

Operating profit before exceptional and amortisation of acquisition intangibles by segment

 

 

 

 

Compliance

 

6,104

 

7,986

Energy Services

 

4,025

 

4,015

Central

 

(2,091)

 

(4,607)

Total operating profit before exceptional and amortisation of acquisition intangibles

 

8,038

 

7,394

Amortisation of acquisition intangibles

 

(4,325)

 

(10,495)

Exceptional costs

 

(1,048)

 

(2,127)

Exceptional income

 

757

 

1,624

Investment income

 

-

 

16

Finance costs

 

(1,475)

 

(1,985)

Profit / (loss) before taxation from continuing operations

 

1,947

 

(5,573)

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

None of the Group's major customers account for more than 10% of Group revenue for 2018 or 2017.

 

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 30 September 2018

5.    Profit / (loss) before taxation

 

2018

 

2017

 

£'000

 

£'000

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

 

 

 

Amount of inventories recognised as an expense

57,133

 

62,425

Depreciation of property, plant and equipment

 

 

 

     -   owned

678

 

1,039

     -   held under finance leases

180

 

222

Amortisation of intangible assets (note 16)

4,668

 

10,931

Impairment of tangible assets (note 17)

-

 

394

Staff costs (note 9)

84,822

 

87,279

Operating lease rentals:

 

 

 

     -   land and buildings

933

 

1,177

     -   other

4,027

 

3,270

Profit on disposal of property, plant and equipment

(52)

 

(107)

6.    Auditor's remuneration

 

2018

 

2017

 

£'000

 

£'000

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

 

 

 

 

 

 

 

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

 

 

 

     -   The audit of the Company's annual accounts

54

 

54

     -   The audit of the Company's subsidiaries

186

 

216

Total audit fees

240

 

270

 

 

 

 

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

 

 

 

     -   Agreed upon procedures on interim accounts

23

 

-

     -   Other assurance services

-

 

14

     -   Corporate finance services (IPO)

-

 

128

Total non-audit fees

23

 

142

 

 

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 30 September 2018

7.    Exceptional and other items

 

2018

 

2017

 

 

 

Restated

 

£'000

 

£'000

 

 

 

 

Acquisition costs

34

 

14

Restructuring and other costs

1,014

 

2,113

Total exceptional costs

1,048

 

2,127

Release of provisions for deferred consideration

(757)

 

(1,624)

Total net exceptional costs

291

 

503

Exceptional items in the year decreased the Group's profit after tax by £0.3m and relate to the following items:

Restructuring and other costs of £1.0m (2017: £2.1m) in the year relating to a small number of legacy clean-up and restructuring costs.

Release of provisions for deferred consideration of £0.8m (2017: £1.6m) reflecting the final settlement of deferred consideration due to Aaron Heating Services Limited and Precision Lift Services Limited. 

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

8.    Investment income and finance expenses

 

 

2018

 

2017

 

£'000

 

£'000

Investment income

 

 

 

Unwinding of discount on financial assets

-

 

13

Other interest receivable

-

 

3

 

-

 

16

 

 

 

 

Finance expenses

 

 

 

Interest payable on bank overdrafts and borrowings

(1,355)

 

(1,661)

Unwinding of discount on financial liabilities

(82)

 

(238)

Other interest payable

(38)

 

(86)

 

(1,475)

 

(1,985)

 

 

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 30 September 2018

9.    Information relating to employees

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

 

2018

 

2017

 

Number

 

Number

 

 

 

 

Direct labour and contract management

1,716

 

1,575

Administration and support

612

 

841

 

2,328

 

2,416

 

 

 

 

 

2018

 

2017

The aggregate remuneration was as follows:

£'000

 

£'000

 

 

 

 

Wages and salaries

75,586

 

78,161

Social security

8,012

 

8,163

Pension costs - defined contribution plans

1,224

 

955

 

84,822

 

87,279

10.    Retirement benefit obligations

The Group contributes to the personal pension plans of certain employees of the Group.  The assets of these schemes are held in independently administered funds.  From 1 February 2014, the Group contributes to a new workplace pension scheme for all employees in compliance with the automatic enrolment legislation.  The Group paid £1,224,000 in the year ended 30 September 2018 (2017: £955,000). At the reporting date, £251,568 of contributions were payable to the funds (2017: £143,770). 

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 30 September 2018

11.    Discontinued operations

 

2018

 

2017

 

 

 

Restated

 

£000

 

£000

 

 

 

 

Revenue

71,949

 

124,082

Expenses

(78,371)

 

(124,838)

Loss before tax

(6,422)

 

(756)

Taxation

1,220

 

3

Loss after tax from discontinued operations

(5,202)

 

(753)

Loss on disposal of Lakehouse Contracts Limited and Foster Property Maintenance Limited

(7,476)

 

-

Profit on disposal of Orchard (Holdings) UK Limited

1,158

 

5,402

 

(11,520)

 

4,649

 

Below is a breakdown of the discontinued operation by entity:

Orchard (Holdings) UK Limited

2018

 

2017

 

£000

 

£000

 

 

 

 

Revenue

-

 

6,052

Expenses

-

 

(3,926)

Profit before tax

-

 

2,126

Taxation

-

 

(435)

Profit after tax from discontinued operations

-

 

1,691

 

Lakehouse Contracts Limited and Foster Property Maintenance Limited

2018

 

2017

 

£000

 

£000

 

 

 

 

Revenue

71,949

 

118,030

Expenses

(78,371)

 

(120,912)

Loss before tax

(6,422)

 

(2,882)

Taxation

1,220

 

438

Loss after tax from discontinued operations

(5,202)

 

(2,444)

Losses from discontinued operations amounted to £11.5m (FY17: profit of £4.6m) on associated revenues of £71.9m (FY17: £124.1m).  The associated cash outflow for the period was £8.0m, discussed also in Note 34.  Profit on sale of Orchard (Holdings) UK Limited of £1.1m (2017: £5.4m) has been reclassified as discontinued operations in the current year, to ensure consistent presentation of the results. 

Discontinued activities represent the Group's Construction and Property Services divisions (the "Activities") which were sold on 17 August 2018, with the comparative period also including Orchard Energy, which was sold in September 2017.  In determining the classification of the Activities as discontinued at 30 September 2018, the Board had regard to the conditions that needed to be met under IFRS5 "Non-current Assets Held for Sale and Discontinued Operations".

The 2018 losses from discontinued operations comprise:

·      Disposal costs of Lakehouse Contracts Limited and Foster Property Maintenance Limited (including professional fees) of £1.0m (2017: £nil)

·      Provisions for liabilities relating to the disposal of £4.5m net of tax of £0.4m (2017: £nil)

·      £2.0m loss on disposal of Lakehouse Contracts Limited and Foster Property Maintenance Limited (2017: £nil) representing net assets at date of disposal - no consideration receivable has been recognised

·      Losses of Lakehouse Contracts Limited and Foster Property Maintenance Limited prior to disposal of £5.2m (2017 £0.8m)

·      £1.1m profit on sale of Orchard (Holdings) UK Limited from reassessment of the fair value of consideration receivable. (2017: £5.4m)

 

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 30 September 2018

11.    Discontinued operations (continued)

The Group is entitled to recover any net value yielded by the buyer of Lakehouse Contracts Limited and Foster Property Maintenance Limited from the working capital balances of the activities post-sale, together with amounts provided for provisions noted above of £4.5m.  No sums have been recovered to date and in light of the weak performance of the activities since, the Board has reserved in full, all sums potentially recoverable under this process.  The consideration receivable in the sale and purchase agreement was £0.5m but no consideration has been recognised in these accounts as the Directors regard the fair value of this to be £nil.

In addition to the amounts provided for above there are a number of potential contingent liabilities arising from the disposal including:

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

·      Potential claims under clauses in the sale and purchase agreement including working capital adjustments and warranties / indemnities. Further details are not disclosed on the basis that such disclosure would be seriously prejudicial.

12.    Tax on profit / (loss) from continuing operations

 

2018

 

2017

 

 

 

Restated

 

£'000

 

£'000

Current tax

 

 

 

Current year

1,656

 

473

Current tax - prior year adjustment

(67)

 

83

Total current tax

1,589

 

556

Deferred tax (Note 26)

(807)

 

(1,490)

Total tax on profit / (loss) on ordinary activities

782

 

(934)

 

 

 

 

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

 

 

 

 

 

 

 

 

 

2018

 

2017

 

 

 

Restated

 

£'000

 

£'000

 

 

 

 

Profit / (loss) before tax from continuing operations

1,947

 

(5,573)

 

 

 

 

Effective rate of corporation tax in the UK

19.00%

 

19.50%

 

 

 

 

Profit / (loss) before tax at the effective rate of corporation tax

370

 

(1,087)

 

 

 

 

Effects of:

 

 

 

Expenses not deductible for tax purposes

537

 

-

Income not taxable

-

 

(52)

Adjustment of deferred tax to closing tax rate

65

 

238

Current tax - prior year adjustment

(67)

 

83

Deferred tax - prior year adjustment

(96)

 

(32)

Deferred tax asset not recognised

(27)

 

(84)

Tax charge / (credit) for the year

782

 

(934)

Factors that may affect future charges

The Finance (No 2) Act 2015, which provides for reductions in the main rate of corporation tax from 20% to 19% effective from 1 April 2017 and to 18% effective from 1 April 2020, was substantively enacted on 26 October 2015. Subsequently, the Finance Act 2016, which provides for a further reduction in the main rate of corporation tax to 17% effective from 1 April 2020, was substantively enacted on 6 September 2016. These rate reductions have been reflected in the calculation of deferred tax at the reporting date.

The closing deferred tax asset at 30 September 2018 has been calculated at 17% reflecting the tax rate at which the deferred tax asset is expected to be utilised in future periods.

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 30 September 2018

13.    Dividends

The final dividend for the year ended 30 September 2017 of 0.5 pence per share amounting to £0.8m was paid in the year.

The board has proposed a final dividend for the year of 0.25 pence per share amounting to £0.4m and representing a total dividend of £0.25 pence for the full year (2017: 0.5 pence).

Subject to approval at the Annual General Meeting on 19 March 2019 the final dividend will be paid on 30 April 2019 to shareholders on the register at the close of business on 1 March 2019 and has not been included as a liability in these Financial Statements.

14.    Earnings per share

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

 

2018

 

2017

 

Number

 

Number

 

 

 

 

Weighted average number of ordinary shares for the purposes of basic (loss) / earnings per share

157,527,103

 

157,527,103

 

 

 

 

Diluted

 

 

 

Effect of dilutive potential ordinary shares:

 

 

 

Share options

7,316,715

 

6,354,933

Weighted average number of ordinary shares for the purposes of diluted (loss) / earnings per share

164,843,818

 

163,882,036

 

 

 

 

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

(10,355)

 

10

 

 

 

 

Basic (loss) / earnings per share

(6.6p)

 

-

Diluted (loss) / earnings per share

(6.6p)

 

-

 

 

 

 

 

 

 

 

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

1,165

 

(4,639)

 

 

 

 

Continuing basic earnings / (loss) per share

0.7p

 

(2.9p)

Continuing diluted earnings / (loss) per share

0.7p

 

(2.9p)

 

 

 

 

The number of shares in issue at 30 September 2018 was 157,527,103 (2017: 157,527,103).

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

 

 

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 30 September 2018

15.    Goodwill

 

 

 

 

2018

 

 

 

 

£'000

 

 

 

 

 

At 1 October 2016

 

 

 

47,338

Disposal of Orchard (Holdings) UK Limited

 

 

(5,607)

Other adjustments to goodwill

 

 

438

At 30 September 2017

 

 

 

42,169

Disposal of Lakehouse Contracts Limited and Foster Property Maintenance Limited

 

 

-

Acquisition of Just Energy Solutions Limited

 

 

 

754

At 30 September 2018

 

 

 

42,923

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

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

Goodwill is carried at cost less accumulated impairment losses.

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

 

 

2018

 

2017

CGU

Segment

£'000

 

£'000

 

 

 

 

 

K&T Heating Services Limited

Compliance

3,774

 

3,774

Allied Protection Limited

Compliance

3,717

 

3,717

Everwarm Limited

Energy services

17,476

 

17,476

H2O Nationwide Limited

Compliance

2,209

 

2,209

Providor Limited

Energy services

3,037

 

3,037

Sure Maintenance Group Limited

Compliance

4,225

 

4,225

Aaron Heating Services Limited

Compliance

3,667

 

3,667

PLS Holdings Limited

Compliance

4,064

 

4,064

Just Energy Solutions Limited

Compliance

754

 

-

 

 

42,923

 

42,169

An asset is impaired if its carrying value exceeds the unit's recoverable amount which is based upon value in use. At each reporting date impairment reviews are performed by comparing the carrying value of the CGU to its value in use.  At 30 September 2018 the value in use for each CGU was calculated based upon the cash flow projections of the latest board approved three-year forecasts together with a further two years estimated and an appropriate terminal value based on perpetuity.

This is discussed further below.

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

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

·      A pipeline of new tenders

·      Further opportunities to work with other group companies

·      Client demand for safe buildings; and

·      Adjacent market opportunities.

The assumptions used in the impairment reviews are outlined below.

The growth rate applied to the cash flows in years four and five of the impairment review performed at 30 September 2018 was 2% (2017: 2%).  A terminal growth rate of 1% (2017: 1%) was applied. The pre-tax discount rate applied was 10.3% (2017: 10.3%). Three different types of sensitivity analysis have been performed on all entities, including a 20% reduction in revenue, a reduction in the operating profit margin of between 1% and 3% and an increase in the discount rate by 1%.The Directors consider that reasonably possible changes in the key assumptions would not cause the carrying amount to exceed its recoverable amount.  

 

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 30 September 2018

16.    Other intangible assets

 

 

Acquisition intangibles

 

 

 

Computer software

Contracted customer order book

Customer relationships

Non-compete agreements

 

Total

 

£'000

£'000

£'000

£'000

 

£'000

Cost

 

 

 

 

 

 

At 1 October 2016

1,611

26,550

18,360

3,458

 

49,979

Disposal of Orchard (Holdings) UK Limited

(43)

(2,216)

-

(1,788)

 

(4,047)

Additions

462

-

-

-

 

462

At 30 September 2017

2,030

24,334

18,360

1,670

 

46,394

Disposal of Lakehouse Contracts Limited and Foster Property Maintenance Limited

(1,533)

(5,728)

(3,705)

-

 

(10,966)

Additions

449

-

-

-

 

449

At 30 September 2018

946

18,606

14,655

1,670

 

35,877

 

 

 

 

 

 

 

Amortisation

 

 

 

 

 

 

At 1 October 2016

1,054

18,217

7,708

1,053

 

28,032

Disposal of Orchard (Holdings) UK Limited

(33)

(979)

-

(790)

 

(1,802)

Amortisation charge

436

5,358

4,260

877

 

10,931

At 30 September 2017

1,457

22,596

11,968

1,140

 

37,161

Disposal of Lakehouse Contracts Limited and Foster Property Maintenance Limited

(1,446)

(5,728)

(3,705)

-

 

(10,879)

Amortisation charge

343

1,243

2,563

519

 

4,668

At 30 September 2018

354

18,111

10,826

1,659

 

30,950

 

 

 

 

 

 

 

Carrying value

 

 

 

 

 

 

At 30 September 2018

592

495

3,829

11

 

4,927

 

 

 

 

 

 

 

At 30 September 2017

573

1,738

6,392

530

 

9,233

 

 

 

 

 

 

 

At 30 September 2016

557

8,333

10,652

2,405

 

21,947

Contracted customer order book

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

Customer relationships

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

Non-compete agreements

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

 

 

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 30 September 2018

17.    Property, plant and equipment

 

Leasehold improvements

Plant & equipment

Fixtures and fittings

Motor vehicles

 

Total

 

£'000

£'000

£'000

£'000

 

£'000

Cost

 

 

 

 

 

 

At 1 October 2016

1,412

849

1,982

1,507

 

5,750

Disposal of Orchard (Holdings) UK Limited

(49)

-

(178)

-

 

(227)

Additions

94

112

483

220

 

909

Disposals

(42)

(26)

(69)

(407)

 

(544)

At 30 September 2017

1,415

935

2,218

1,320

 

5,888

Disposal of Lakehouse Contracts Limited and Foster Property Maintenance Limited

(936)

(147)

(791)

(514)

 

(2,388)

Acquisition of Just Energy Solutions Limited

-

32

49

               - 

 

81

Additions

52

237

141

               - 

 

430

Disposals

-

(12)

(11)

(299)

 

(322)

At 30 September 2018

531

1,045

1,606

507

 

3,689

 

 

 

 

 

 

 

Depreciation

 

 

 

 

 

 

At 1 October 2016

460

329

1,266

869

 

2,924

Disposal of Orchard (Holdings) UK Limited

(2)

-

(96)

-

 

(98)

Charge for the year

213

151

490

407

 

1,261

Impairment in the year

394

-

-

-

 

394

Disposals

(39)

(11)

(65)

(383)

 

(498)

At 30 September 2017

1,026

469

1,595

893

 

3,983

Disposal of Lakehouse Contracts Limited and Foster Property Maintenance Limited

(893)

(150)

(751)

(524)

 

(2,318)

Charge for the year

77

217

310

254

 

858

Disposals

-

(5)

(11)

(292)

 

(308)

At 30 September 2018

210

531

1,143

331

 

2,215

 

 

 

 

 

 

 

Net book value

 

 

 

 

 

 

At 30 September 2018

321

514

463

176

 

1,474

 

 

 

 

 

 

 

At 30 September 2017

389

466

623

427

 

1,905

 

 

 

 

 

 

 

At 30 September 2016

952

520

716

638

 

2,826

Included within the net book value of property, plant and equipment is £143,000 (2017: £326,000) in respect of assets held under finance leases.  Depreciation for the year on these assets was £180,000 (2017: £222,000).

 

 

 

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 30 September 2018

18.    Group entities

Subsidiaries

The Group's subsidiary undertakings are;

 

Country of incorporation

Class of capital

%

Principal activity

Aaron Heating Services Limited

England

Ordinary

100

Intermediate holding company

Aaron Services Limited

England

Ordinary

100

Maintenance and installation of domestic gas heating systems

Allied Protection Limited

England

Ordinary

100

Fire alarm engineers

Bury Metering Services Limited

England

Ordinary

100

Non-trading

Everwarm Limited

Scotland

Ordinary

100

Energy and insulation services

F J Jones Holdings Limited

England

Ordinary

100

Non-trading

F J Jones Heating Engineers Limited

England

Ordinary

100

Non-trading

H20 Nationwide Limited

England

Ordinary

100

Water hygiene

Just Energy Solutions Limited

England

Ordinary

100

Maintenance and installation of domestic gas heating systems

K & T Heating Services Limited

England

Ordinary

100

Plumbing and heating engineers

PLS GRP Limited

England

Ordinary

100

Intermediate holding company

PLS Holdings Limited

England

Ordinary

100

Intermediate holding company

PLS Industries Limited

England

Ordinary

100

Non-trading

Precision Lift Services Limited

England

Ordinary

100

Lift installation, modernisation and maintenance services

Providor Limited

England

Ordinary

100

Smart Metering

Smart Metering Limited

England

Ordinary

100

Non-trading

Speedfit Limited

England

Ordinary

100

Non-trading

Sure Maintenance Limited

England

Ordinary

100

Maintenance and installation of domestic gas heating systems

Sure Maintenance Group Limited

England

Ordinary

100

Intermediate holding company

Sureserve Compliance Services Limited

England

Ordinary

100

Intermediate holding company

Sureserve Construction Services Limited

England

Ordinary

100

Non-trading

Sureserve Design and Build Limited

England

Ordinary

100

Non-trading

Sureserve Energy Services Limited

England

Ordinary

100

Intermediate holding company

Sureserve Holdings Limited (*)

England

Ordinary

100

Intermediate holding company

Sureserve Property Investments Limited

England

Ordinary

100

Non-trading

 

 

 

 

 

* Directly held investment

 

 

 

 

 

 

 

 

 

The registered office of all entities above is St James House C/O BPE Solicitors LLP, First Floor, St James Square, Cheltenham, Gloucestershire, United Kingdom, GL50 3PR except for Everwarm whose registered office is 3-5 Melville Street, Edinburgh, EH3 7PE.

Joint ventures

The Group's joint ventures are:

 

Country of incorporation

Class of capital

%

Principal activity

Warmworks Scotland LLP

Scotland

Ordinary

33.33

Energy and insulation services

Arbed am Byth

Wales

Ordinary

50

Energy and insulation services

 

 

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 30 September 2018

18.    Group entities (continued)

Details of joint ventures

 

2018

 

2017

 

£'000

 

£'000

 

 

 

 

Carrying value of investment in Arbed am Byth

200

 

-

Carrying value of investment in Warmworks

665

 

1,196

 

865

 

1,196

 

 

 

 

 

£'000

Carrying value of investment in joint ventures at 1 October 2017

 

 

1,196

Income from Warmworks joint venture

 

 

226

Investment in Arbed am Byth

 

 

200

Cash received from Warmworks

 

 

(757)

Carrying value of investment in joint ventures at 30 September 2018

 

 

865

 

Warmworks, a joint venture with Changeworks and the Energy Saving Trust, commenced trading in September 2015, the income for 2018 was £226,000 (2017: £786,000). The registered office of Warmworks Scotland LLP is 1 Carmichael Place, Leith, Edinburgh, Midlothian, EH6 5PH.

Arbed am Byth, a joint venture with the Energy Saving Trust, commenced trading in August 2018, the income for 2018 was £nil (2017: nil). The registered office of Arbed Am Byth is Unit 2 Cefn Coed, Nantgarw, Cardiff, Wales, CF15 7QQ.

19.    Inventories

 

2018

 

2017

 

£'000

 

£'000

 

 

 

 

Raw materials and consumables

2,581

 

3,832

Work in progress

1,641

 

658

 

4,222

 

4,490

There are no inventories at 30 September 2018 or 30 September 2017 carried at fair value less costs to sell.  The Directors consider that the replacement value of inventories is not materially different from their carrying value.  There was no specific security held at either reporting date over inventory.

20.    Amounts due from and to customers under construction contracts

 

2018

 

2017

 

£'000

 

£'000

Contracts in progress at the reporting date:

 

 

 

Contract costs incurred plus recognised profits less recognised losses to date

-

 

218,556

Less: progress billings

-

 

(214,073)

 

-

 

4,483

 

 

 

 

Amounts due from construction contract customers

-

 

6,269

Amounts due to construction contract customers

-

 

(1,786)

 

-

 

4,483

Details of retentions held by customers for performance under construction contracts are disclosed in Note 21.  Amounts due from and to customers under construction contracts amounted to nil at 30 September 2018 following the Group's disposal of its construction activities in August 2018 (see Note 11).

 

 

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 30 September 2018

21.    Trade and other receivables

 

2018

 

2017

 

£'000

 

£'000

Current

 

 

 

Trade receivables

19,018

 

22,283

Construction contract retentions receivables

-

 

3,313

Deferred consideration receivable

1,158

 

-

Social security and other taxes

965

 

199

Other receivables

3,192

 

5,819

Prepayments

2,580

 

2,106

Accrued income

15,705

 

25,409

 

42,618

 

59,129

Other receivables includes sales retentions of £2,222,000 (2017; £4,630,000) and rebates receivable of £796,000 (2017: £772,000).

 

 

 

 

Non-current

 

 

 

Construction contract retentions receivable

-

 

453

Other receivables

-

 

3

 

-

 

456

 

 

 

 

 

2018

 

2017

 

£'000

 

£'000

Trade receivables

 

 

 

Trade receivables not due

15,273

 

20,097

Trade receivables past due 1-30 days

2,748

 

1,581

Trade receivables past due 31-60 days

227

 

163

Trade receivables past due 61-90 days

363

 

86

Trade receivables past due over 90 days

886

 

833

Gross trade receivables

19,497

 

22,760

 

 

 

 

Provision for bad debt brought forward

(477)

 

(805)

Debtor provision recognised upon acquisition

(79)

 

-

Disposal of investments

27

 

11

Amounts written off receivables ledger

50

 

329

Debtor provision charged to profit or loss in the year

-

 

(12)

Provision for bad debt carried forward

(479)

 

(477)

Net trade receivables

19,018

 

22,283

The entire provision for bad debts of £479,000 (2017: £477,000) relates to balances past due over 90 days.

The Directors consider that the carrying amount of trade receivables approximates to their fair value. Debts provided for and written off are determined on an individual basis and included in administrative expenses in the financial statements. The Group's maximum exposure on credit risk is fair value on trade receivables as presented above. The Group has no pledge as security on trade receivables.

At the end of the year one customer represented £1,122,000 of the total balance of trade receivables (2017: zero represented more than 5%).

 

 

 

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 30 September 2018

22.    Trade and other payables

 

2018

 

2017

 

£'000

 

£'000

Current

 

 

 

Trade payables

24,607

 

31,849

Sub-contract retentions

1,068

 

5,454

Accruals

7,873

 

24,989

Deferred income

38

 

894

Social security and other taxes

4,690

 

5,529

Other payables

1,058

 

463

 

39,334

 

69,178

 

 

 

 

Non-current

 

 

 

Sub-contract retentions

-

 

353

Accruals

269

 

620

 

269

 

973

The Directors consider that the carrying amount of trade payables approximates to their fair value for each reported period.  Trade payables are non-interesting bearing.  Average settlement days are 76 days (2017: 55 days).  The movement in creditor days is mainly due to the impact on the calculation of the disposal of Lakehouse Contracts Limited and Foster Property Maintenance Limited.

Included in accruals is deferred consideration arising from business combinations analysed as follows:

 

2018

 

2017

 

£'000

 

£'000

 

 

 

 

Current

-

 

1,318

Non-current

269

 

620

 

269

 

1,938

The fair value of the consideration has been assessed in accordance with the Sale & Purchase Agreements. 

23.    Borrowings

 

2018

 

2017

 

£'000

 

£'000

Bank loans and credit facilities at amortised cost:

 

 

 

Current

12,926

 

-

 

 

 

 

Non-current

-

 

27,077

 

 

 

 

Maturity analysis of bank loans and credit facilities falling due:

 

 

 

In one year or less, or on demand

12,926

 

-

Between one and two years

-

 

27,077

 

12,926

 

27,077

In December 2018, the Group renewed its bank facilities to provide an overdraft facility of £5,000,000 together with a revolving credit facility of £25,000,000, which runs to 31 January 2022. 

 

 

 

 

 

 

 

 

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 30 September 2018

24.    Net debt

 

 

 

 

 

2018

 

2017

 

£'000

 

£'000

 

 

 

 

Cash and cash equivalents

1,705

 

26,129

Bank loans and borrowings

(12,926)

 

(27,077)

Finance lease obligations

(143)

 

(326)

 

(11,364)

 

(1,274)

 

 

 

 

25.    Provisions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Legal and other

 

 

 

 

 

 

 

£'000

 

 

 

 

 

 

 

 

At 1 October 2016

 

 

 

 

 

 

4,878

Disposal of Orchard (Holdings) UK Limited

 

 

 

 

 

 

(130)

Additional provision

 

 

 

 

 

 

1,497

Utilised in the year

 

 

 

 

 

 

(2,215)

At 30 September 2017

 

 

 

 

 

 

4,030

Identified on acquisition

 

 

 

 

 

 

27

Additional provision

 

 

 

 

 

 

5,490

Utilised in the year

 

 

 

 

 

 

(344)

Disposal of Lakehouse Contracts Limited and Foster Property Maintenance Limited

 

 

 

 

 

 

(1,508)

At 30 September 2018

 

 

 

 

 

 

7,695

 

 

 

 

 

 

 

 

Current provisions

 

 

 

 

 

 

5,102

 

 

 

 

 

 

 

 

Non-current provisions

 

 

 

 

 

 

2,593

 

 

 

 

 

 

 

 

Legal and other

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

Additional provisions in the year include £4.9m in respect of the disposal of Lakehouse Contracts Limited and Foster Property Maintenance Limited (see Note 11) such amounts include:

·      £2.4m for expected costs of disposal of which £2.4m has been settled post year end

·      £2.5m for costs of claims under parent company guarantees and bonds which are considered probable following risk assessment of all outstanding parent company guarantees and bonds. The estimated costs have been based on independent third-party estimates.

 

 

 

 

 

 

 

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 30 September 2018

26.    Deferred taxation

 

Accelerated capital allowances

Short term timing differences

Share based payments

Acquisition intangibles

Unutilised losses

Total

 

£'000

£'000

£'000

£'000

£'000

£'000

 

 

 

 

 

 

 

Asset / (provision) bought forward as at 1 October 2016

266

966

36

(3,636)

2,597

229

Disposals in the year

(10)

(4)

-

380

-

366

Credit / (debit) to P&L

53

(309)

-

1,784

(38)

1,490

Asset / (provision) bought forward as at 30 September 2017

309

653

36

(1,472)

2,559

2,085

Acquired / disposed of in the year

(206)

(183)

(36)

-

(2,504)

(2,929)

Credit / (debit) to P&L

104

(34)

-

735

2

807

207

436

-

(737)

57

(37)

 

 

 

 

 

 

 

At 30 September 2018

 

 

 

 

 

 

Non-current asset

207

436

-

-

57

700

Non-current liability

-

-

-

(737)

-

(737)

Net deferred tax asset / (liability)

207

436

-

(737)

57

(37)

At 30 September 2017

 

 

 

 

 

 

Non-current asset

309

653

36

-

2,559

3,557

Non-current liability

-

-

-

(1,472)

-

(1,472)

Net deferred tax asset / (liability)

309

653

36

(1,472)

2,559

2,085

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

 

 

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 30 September 2018

27.    Finance lease obligations

 

 

 

 

 

 

 

 

 

 

 

Future minimum lease payments

 

Interest

 

Present value of minimum lease payments

 

 

 

£'000

 

£'000

 

£'000

 

 

 

 

 

 

 

 

At 1 October 2016

 

 

469

 

(83)

 

386

New obligations

 

 

263

 

(51)

 

212

Repayments

 

 

(327)

 

55

 

(272)

At 30 September 2017

 

 

405

 

(79)

 

326

Repayments

 

 

(220)

 

37

 

(183)

At 30 September 2018

 

 

185

 

(42)

 

143

 

 

 

 

 

 

 

 

Future lease payments are due as follows:

 

 

 

 

 

 

 

 

 

 

Future minimum lease payments

 

Interest

 

Present value of minimum lease payments

 

 

 

£'000

 

£'000

 

£'000

 

 

 

 

 

 

 

 

Less than one year

 

 

106

 

(23)

 

83

Between two and five years

 

 

79

 

(19)

 

60

At 30 September 2018

 

 

185

 

(42)

 

143

 

 

 

 

 

 

 

 

Less than one year

 

 

226

 

(44)

 

182

Between two and five years

 

 

179

 

(35)

 

144

At 30 September 2017

 

 

405

 

(79)

 

326

 

 

 

 

 

 

 

 

 

 

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 30 September 2018

28.    Called up share capital

Allotted, called-up and fully paid;

2018

 

2017

 

2018

 

2017

Number

 

Number

 

£

 

£

 

 

 

 

 

 

 

157,527,103

 

157,527,103

Ordinary shares of £0.10 each

15,752,710

 

15,752,710

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

Voting rights

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

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

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

29.    Share based payments

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

The net charge recognised for share based payments in the year was £nil (2017: £nil).

Share Incentive Plan (SIP)

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

Sharesave Scheme (SAYE)

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

Company Share Option Plan (CSOP)

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

Performance Share Plan (PSP)

The PSP is open to certain employees at the discretion of the Remuneration Committee at a limit not exceeding 150% of the individual's base salary at the date of grant. The exercise price is £nil with the exception of the PSP award to Michael McMahon, which has an exercise price of 10p per share (being the nominal value of a share in the capital of the Company). The vesting period is for three years, during which the holder must remain in the employment of the Group and is conditional on the achievement of a mix of market and non-market performance conditions from the date of granting the option to the date of potential exercise.

Deferred Share Bonus Plan (DSBP)

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

 

 

 

 

 

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 30 September 2018

29.    Share based payments (continued)

Special Incentive Award Plan (SIAP)

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

 

SIP

SAYE

CSOP

PSP

SIAP

Number

 

 

 

 

 

At 1 October 2016

196,310

616,408

1,330,741

1,731,911

4,615,385

Granted

-

2,622,809

2,424,234

645,000

-

Lapsed

(31,144)

(817,441)

(1,577,285)

(393,498)

-

At 30 September 2017

165,166

2,421,776

2,177,690

1,983,413

4,615,385

Granted

-

1,634,136

-

-

2,000,000

Lapsed

(82,555)

(814,917)

(613,439)

(1,074,284)

-

At 30 September 2018

82,611

3,240,995

1,564,251

909,129

6,615,385

 

 

 

 

 

 

Weighted average exercise price (p)

 

 

 

 

 

At 1 October 2017

0.00p

36.33p

40.75p

0.00p

0.00p

Granted

-

34.00p

-

-

7.00p

Lapsed

0.00p

37.69p

40.75p

0.00p

-

Outstanding at 30 September 2018

0.00p

34.51p

40.75p

0.00p

0.00p

Exercisable at 30 September 2018

-

-

-

-

-

 

 

 

 

 

 

Outstanding at 30 September 2017

0.00p

36.33p

40.75p

0.00p

0.00p

Exercisable at 30 September 2017

-

-

-

-

-

 

 

 

 

 

 

Fair value of options granted

 

 

 

 

 

Weighted fair value of one option

87.61p

14.52p

12.13p

51.59p

3.51p

 

 

 

 

 

 

Assumptions used in estimating the fair value (blended for all options in each scheme)

 

 

 

 

 

Share price at date of grant

99.75p

44.40p

40.00p

72.79p

29.09p

Exercise price

-

34.51p

40.75p

0.00p

0.00p

Expected dividend yield

4.60%

5.12%

7.37%

6.07%

6.56%

Risk free rate

1.21%

0.51%

0.07%

0.64%

0.23%

Expected volatility

40.37%

50.79%

54.50%

43.53%

41.78%

Expected life

3 years

3.14 years

3 years

3 years

2 years

In the year ended 30 September 2018, options were granted in November 2017 in respect of the SIAP, and options were granted in June 2018 in respect of the SAYE.

The weighted average remaining contractual life of outstanding options at 30 September 2018 was 2.5 years (2017: 2.7 years).  The aggregate of the estimated fair values of options granted on the above dates was £1.3 million (2017: £1.8m).

The SIP and SAYE options were valued using a Black-Scholes model and the CSOP and PSP options by a combination of Black-Scholes and Monte Carlo models, weighted according to the performance conditions of both.

The SIAP options were valued using a Monte Carlo model.

 

 

 

 

 

 

 

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 30 September 2018

29.    Share based payments (continued)

 

The inputs into the Black-Scholes model are as follows:

 

2018

2017

 

 

 

 

 

 

Share price (p)

 

 

 

40.0

40-46.4

Exercise price (p)

 

 

 

34.00

0.00-40.75

Expected volatility (%)

 

 

 

48.63

53.40-83.00

Expected life (years)

 

 

 

3.00

3.00-3.25

Risk-free rate (%)

 

 

 

0.94

0.07-0.12

Expected dividend yield (%)

 

 

 

2.63

2.63-7.37

 

 

 

 

 

 

The inputs into the Monte Carlo model are as follows:

 

2018

2017

 

 

 

 

 

 

Share price (p)

 

 

 

42.00

40.00

Exercise price (p)

 

 

 

0.00

0.00

Expected volatility (%)

 

 

 

40.88

83.00

Expected life (years)

 

 

 

1.17

3.00

Risk-free rate (%)

 

 

 

0.46

0.07

Expected dividend yield (%)

 

 

 

6.33

7.37

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

30.    Reserves

Share premium reserve

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

Share based payment reserve

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

Own shares reserve

At IPO, each employee was given £200 of free shares, to be held for their benefit in an Employee Benefit Trust. Shares totalling 325,842 were transferred directly to the Employee Benefit Trust on 23 March 2015.  The own shares reserve at 30 September 2018 represents the cost of £325,842 (2017: £325,842) shares in Sureserve Group plc. 

Merger reserve

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

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

 

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 30 September 2018

31.    Guarantees and contingent liabilities

The Company and certain subsidiaries have, in the normal course of business, given guarantees and performance bonds relating to the Group's contracts totalling £7,292,000 (2017: £10,889,790). A subsidiary of the Group has provided a guarantee of £750,000 (2017: £750,000) to the Warmworks joint venture.

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

32.    Financial instruments

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

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

Financial risk management

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

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

Categories of financial instruments

 

Loans and receivables

 

2018

 

2017

Financial assets

£'000

 

£'000

Current financial assets

 

 

 

Trade receivables, loans and other receivables

39,073

 

56,824

Cash and cash equivalents

1,705

 

26,129

 

 

 

 

 

40,778

 

82,953

 

 

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 30 September 2018

32.    Financial instruments (continued)

 

Financial liabilities measured at amortised cost

 

2018

 

2017

Financial liabilities

£'000

 

£'000

Current financial liabilities

 

 

 

Trade and other payables

34,606

 

62,755

Borrowings

12,926

 

-

Finance lease obligations

83

 

182

Total current financial liabilities

47,615

 

62,937

 

 

 

 

Non-current financial liabilities

 

 

 

Trade and other payables

439

 

973

Borrowings

-

 

27,077

Finance lease obligations

60

 

144

Total non-current financial liabilities

499

 

28,194

 

 

 

 

 

48,114

 

91,131

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

Credit risk

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

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

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

Market risk

As the Group only operates in the UK and only transacts in Sterling, the Group's activities expose it primarily to the financial risks of changes in interest rates only.

Liquidity risk

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

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

 

 

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 30 September 2018

32.    Financial instruments (continued)

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

(a)   Interest rate of borrowings

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

 

2018

 

2017

 

£'000

 

£'000

Floating rate Sterling borrowings with a capped interest rate

12,926

 

27,077

At 30 September 2018, the Group had the following interest rate caps in place:

·      A cap of 2.5% on up to £15m of debt (2017: £12.5m at a cap of 2.5% and £2.5m at a cap of 2.0%), expiring on 9 December 2018. 

(b)   Interest rate risk.

Due to the floating rate of interest on the Group's principal borrowings, the Group is exposed to interest rate risk, which is partially mitigated by financial instruments in place to cap the interest exposure.

(c)   Interest rate sensitivity analysis

The Group's principal borrowings attract floating rate interest.  On a weighted average of £18.7m of debt in the year, a half per cent increase in the floating interest rate would have been below the interest rate cap and increased annual interest payable by £93,333 (2017: £136,500).  If the floating interest rate had increased to the capped rate, interest payable on the weighted average of £18.7m of debt would have increased by £332,000 (2017: £568,000).

33.    Operating lease commitments

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

 

2018

 

2017

 

Land and buildings

Other items

 

Land and buildings

Other items

 

£'000

£'000

 

£'000

£'000

 

 

 

 

 

 

Within one year

815

2,961

 

899

3,220

Between two and five years

1,447

2,584

 

1,862

3,801

Over five years

227

-

 

374

-

 

2,489

5,545

 

3,135

7,021

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

 

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 30 September 2018

34.    Cash generated from operations

 

2018

 

2017

 

 

 

Restated

 

£'000

 

£'000

 

 

 

 

Operating profit / (loss)

3,422

 

(3,604)

Adjustments for:

 

 

 

Depreciation

858

 

1,261

Amortisation of intangible assets

4,668

 

10,931

Impairment of goodwill and intangible assets acquired

-

 

394

Profit on disposal of property, plant and equipment

(52)

 

(107)

Changes in working capital:

 

 

 

Inventories

305

 

697

Amounts owed by customers under construction contracts

6,269

 

(3,108)

Amounts owed to customers under construction contracts

(1,786)

 

1,096

Trade and other receivables

18,010

 

6,533

Trade and other payables

(29,185)

 

458

Provisions

3,638

 

(1,136)

Adjustment of loss from discontinued operations

(11,829)

 

(42)

Cash (used in) / generated from operations

(5,682)

 

13,373

 

 

 

 

Operating cash conversion calculation

 

 

 

Cash (used in) / generated from operations

(5,682)

 

13,373

Exceptional costs paid in the period

2,448

 

1,882

Cash impact of net change in working capital from discontinued operations

8,042

 

(2,182)

Adjusted cash generated from continuing operations

4,808

 

13,073

 

 

 

 

Operating profit before exceptional items and amortisation of acquisition intangibles

8,038

 

7,394

 

 

 

 

Operating cash conversion %

60%

 

177%

 

 

 

 

Statutory operating cash conversion calculation

 

 

 

Cash (used in) / generated from operations

(5,682)

 

13,373

Statutory operating profit before exceptional items and amortisation of acquisition intangibles

8,038

 

7,394

 

 

 

 

Statutory operating cash conversion %

(71%)

 

181%

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 30 September 2018

35.    Summary of consideration paid and payable in respect of acquisitions

 

H2O Nationwide Limited

Aaron Heating Services Limited

PLS Holdings Limited

Just Energy Solutions Limited

Total

 
 
 
 

 

£'000

£'000

£'000

£'000

£'000

 

At 1 October 2017

989

329

620

-

1,938

 

Total discounted consideration payable for addition in the year

-

-

-

254

254

 

Unwinding of discount

6

21

37

15

79

 

Revalued in the year

-

(100)

(657)

-

(757)

 

Paid in year

(995)

(250)

-

-

(1,245)

 

At 30 September 2018

-

-

-

269

269

 

 

The fair value of the consideration has been assessed in accordance with the Sale & Purchase Agreements.  The non-current element of the expected settlement has been discounted using a Pre-Tax discount rate that reflects the time value of money.

The total deferred consideration may vary between £0.0 million and £0.3 million depending on the underlying trading performance of the businesses.

36.    Business Combinations

Just Energy Solutions Limited

Just Energy Solutions Limited was acquired on 15 May 2018.

On acquisition, the Directors assessed the fair value of assets and liabilities and did not identify any separately identifiable acquisition intangible assets. 

The Directors consider the value assigned to goodwill represents the workforce acquired, expected synergies to be generated, and access to additional customers and markets as a result of this acquisition.  It is not expected that any goodwill will be deductible for tax purposes.  All costs of the acquisition have been recognised as an exceptional expense in the statement of comprehensive income in the period in which it was incurred, the total cost recognised is £34,000.

The effect of the acquisition on the Group's assets and liabilities were as follows:

 

 

 

 

Fair value

 

Provisional

 

 

Book value

 

adjustments

 

fair value

 

 

£'000

 

£'000

 

£'000

Assets

 

 

 

 

 

 

Non-current

 

 

 

 

 

 

Property, plant and equipment

 

82

 

-

 

82

Current

 

 

 

 

 

 

Stock

 

75

 

(38)

 

37

Trade and other receivables

 

1,289

 

(514)

 

775

Total assets

 

1,446

 

(552)

 

894

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Non-current

 

 

 

 

 

 

Provisions

 

(14)

 

(26)

 

(40)

Current

 

 

 

 

 

 

Overdraft

 

(284)

 

-

 

(284)

Trade and other payables

 

(1,003)

 

(67)

 

(1,070)

Total Liabilities

 

(1,301)

 

(93)

 

(1,394)

 

 

 

 

 

 

 

Net assets acquired

 

145

 

(645)

 

(500)

Goodwill capitalised

 

 

 

 

 

754

 

 

 

 

 

 

254

 

 

 

 

 

 

 

Satisfied by:

 

 

 

 

 

 

Contingent Deferred consideration

 

 

 

 

 

254

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 30 September 2016

36.    Business Combinations (continued)

Just Energy Solutions Limited (continued)

Contingent deferred consideration has been calculated based on the expectations of future performance in the Group's three year plan compared to the calculation methodology set out in the Share Purchase Agreement.  The contingent deferred consideration may vary depending on the underlying trading performance of the businesses.

Post-acquisition results

The results for Just Energy Solutions Limited since the acquisition date, included within the consolidated statement of comprehensive income for the period ended 30 September 2018, are:

 

 

 

 

 

 

£'000

Revenue

 

 

 

 

 

839

Loss from operations

 

 

 

 

 

(190)

Interest

 

 

 

 

 

-

Loss before tax

 

 

 

 

 

(190)

Taxation

 

 

 

 

 

49

Loss for the period

 

 

 

 

 

(141)

Results of all business combinations occurring during the year

Assuming the acquisition date for all business combinations that occurred during the year had been 1 October 2017, the consolidated statement of comprehensive income for Sureserve Group plc for the year ended 30 September 2018, would have been:

 

 

 

 

 

 

£'000

Revenue

 

 

 

 

 

193,932

Profit from operations

 

 

 

 

 

3,263

Interest

 

 

 

 

 

(1,475)

Profit before tax

 

 

 

 

 

1,788

Taxation

 

 

 

 

 

(750)

Profit after tax from continuing operations

 

 

 

 

 

1,038

 

 

 

 

 

 

 

 

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 30 September 2018

37.    Related party transactions

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

Trading transactions

The Company's subsidiary, Everwarm Limited, leases premises in Bathgate, West Lothian, from Xafinity Pension Trustees Limited (as corporate trustee of the Everwarm Group SIPP). Mr M McMahon, a director of the Company, is a beneficiary of the Everwarm Group SIPP. The lease was set up on an arm's length basis with annual rentals determined based on an independent rental valuation.  £130,767 of rents were paid by the Group in 2018 (2017: £226,184). The lease terminates in seven years.

The Company's subsidiary, Everwarm Limited, provides services to Warmworks, a joint venture with Everwarm.  £6,817,509 of services were provided in 2018 (2017: £8,424,925). £1,645,429 was charged to Everwarm Limited from Warmworks for services provided in 2018 (2017: £525,239).

As at 30 September 2018 Everwarm Limited had a receivable owing from Warmworks amounting to £363,969 (2017: £701,823).

As at 30 September 2018 Arbed am Byth had a loan owed to Everwarm Limited amounting to £200,000 (2017: £nil).  As at 30 September 2018 Everwarm Limited had a receivable owing from Arbed am Byth amounting to £91,566 (2017: £nil).

Bob Holt provides consultancy services to Sureserve Group plc and other Group companies in relation to advice about the turnaround management strategy of the Group. These consultancy services are provided by a consultancy company of which he is a shareholder. The daily fee payable for such consultancy services is £1,595 plus VAT. Such services are provided for two days per week over 47 weeks per year at a total cost of £150,000 per annum (plus VAT).  The total value of services provided to the Group was £150,000 (2017: £150,000).

The Company's subsidiary, Sure Maintenance Limited, provides services to Mears Group PLC, an entity of which Bob Holt was chairman during the period.  £30,056 of services were provided in 2018 (2017: £41,580).  As at 30 September 2018 Sure Maintenance Limited had a receivable owing from Mears Group PLC amounting to £1,298 (2017: £6,228).

Remuneration of key management personnel

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

 

2018

 

2017

 

Number

 

Number

 

 

 

 

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

13

 

9

 

 

 

 

 

2018

 

2017

 

£'000

 

£'000

 

 

 

 

Short-term employee benefits

1,804

 

1,511

Post-employment benefits

114

 

128

Compensation for loss of office

315

 

-

 

2,233

 

1,639

38.    Events after the reporting date

In December 2018, the Group renewed its bank facilities to provide an overdraft facility of £5,000,000 together with a revolving credit facility of £25,000,000, which runs to 31 January 2022. 


This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
 
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