Pennant International Group PLC 2019 Interim Results (3756N)

TIDMPEN

RNS Number : 3756N

Pennant International Group PLC

24 September 2019

   FOR IMMEDIATE RELEASE                                                         24 September 2019

PENNANT INTERNATIONAL GROUP PLC

Interim Results for the six months ended 30 June 2019

First Half results in line with market guidance;

GBP36m Order Book and Pipeline remains strong;

Continued focus on building recurring revenues whilst delivering major contracts

Pennant International Group plc ("Pennant", the "Group", or the "Company"), the AIM quoted supplier of integrated training and support solutions, products and services which train and assist operators and maintainers in the defence and regulated civilian sectors, announces Interim Results for the six months ended 30 June 2019 (the "First Half", the "Period", or "H1 2019").

Commenting on the results and the Company's prospects, Chairman Simon Moore said:

"Trading in the First Half was in line with management expectations and previous guidance issued by the Company. The First Half saw the Group focused on building a suite of generic training aids and, with this work being recognised as work-in-progress at the end of the Period, a pre-tax loss of GBP1.8 million has been recorded, in line with guidance issued by the Company.

Notwithstanding a number of customer-driven timing challenges on specific projects which were highlighted in last month's Trading Update, the Company's strategy is progressing to plan with two acquisitions already completed so far this year, and with the prior investment in products, people and facilities positioning the Group well to exploit its considerable pipeline which includes over GBP30 million of single-source opportunities."

Key points: Financial

   --      Group revenues for the Period of GBP7.2 million (H1 2018: GBP13.2 million); 
   --      loss before tax of GBP1.8 million (H1 2018: profit before tax of GBP2.0 million);

-- loss before interest, taxation and amortisation of GBP1.5 million (H1 2018: earnings of GBP2.1 million);

   --      gross margin of 25% (H1 2018: 34%); 
   --      cash used in operations of GBP2.7million (H1 2018: cash generated of GBP3 million);

-- trade and other receivables of GBP5.2 million (H1 2018: GBP5.1 million), including GBP2.8 million due from contracts (H1 2018: GBP0.8 million);

-- net debt at Period end excluding finance leases of GBP0.4 million overdrawn (H1 2018: GBP3.0 million);

   --      basic (loss)/earnings per share of (5.07)p per share (H1 2018: 6.17p per share); 
   --      no interim dividend declared (H1 2018: nil);

-- three-year order book (to 30 June 2022) increased to GBP36.1 million (H1 2018: GBP31 million);

   --      unrelieved tax losses of GBP5.3 million carried forward (H1 2018: GBP0.3 million).

Key points: Operational

-- On-schedule production of training aids for Qatar (enabling recognition of revenue and profits for the second half of 2019 (the "Second Half", "H2 2019").

-- Record revenues in the Integrated Logistics Support division (home of OmegaPS), GBP2.42 million for the Period.

-- Official launch of two new products (GenSkills Mk 2 and Generic Fastener Installation Trainer) during the First Half, specifically designed to address gaps in training coverage, with sales achieved during the Period.

-- Successful completion of the acquisition of the Aviation Skills Partnership, a key step in achieving greater involvement in the training delivery and courseware markets.

-- Completion of upgrades and refurbishments to a number of production facilities in readiness for new contract awards and the commencement of the build phase on the Ajax contract.

-- Appointment of Philip Cotton (ex-KPMG) as a non-executive director and Chair of the Audit Committee following the retirement of Christopher Powell.

-- Commencement in post of new Chief Operating Officers for Technical Training business and Integrated Logistics Support division.

Commenting on the Group's prospects for the year as a whole, Simon Moore added:

"The Board anticipates a profitable outcome for the year as a whole. With a contracted order book of GBP36 million scheduled for delivery over the next three years, together with a sizeable pipeline of single-source opportunities, the Board remains confident of future prospects and of building and delivering long-term shareholder value."

Certain information contained in this announcement would have constituted inside information (as defined by Article 7 of Regulation (EU) No 596/2014) ("MAR") prior to its release as part of this announcement and is disclosed in accordance with the Company's obligations under Article 17 of MAR.

Enquiries:

 
 Pennant International Group plc    www.pennantplc.co.uk 
 Philip Walker, CEO 
  David Clements, Commercial & 
  Risk Director                     +44 (0) 1452 714 914 
 
 WH Ireland Limited (Nomad and      www.whirelandcb.com 
  Broker) 
 Mike Coe 
  Chris Savidge                     +44 (0) 117 945 3470 
 
 Walbrook PR (Financial PR)         paul.vann@walbrookpr.com 
 Paul Vann                          +44 (0)20 7933 8780 
  Tom Cooper                         Mob: +44 (0)7768 807631

Pennant International Group plc

Interim Report for the six months ended 30 June 2019

Chairman's Statement

On behalf of the Board of Directors, I can report that the Group recorded a pre-tax loss for the six months ended 30 June 2019 of GBP1.8 million (H1 2018: pre-tax profit of GBP2.0 million).

This result was in line with management expectations and previous guidance issued by the Company. The Group expects to trade profitably for the full year.

Results and dividend

Revenues for the Period were lower than the equivalent period in 2018 at GBP7.2 million (H1 2018: GBP13.2 million).

This was largely attributable to the fact that, under the IFRS 15 accounting standard, the Group is required to recognise the costs incurred in building its generic training aids as work-in-progress when they are incurred, whereas sales revenue and profit is only recognisable on acceptance or delivery of the finished products. Specifically, production costs for the training aids for the Qatar contract were incurred during the First Half and were work-in-progress at Period end, whilst the revenues and profits will flow on acceptance of the products in the Second Half.

The gross profit margin for the Period was 25% (H1 2018: 34%) due to sales mix (particularly a larger-than-typical proportion of consultancy revenues) and prudent margin recognition on the Ajax programme, with the higher-margin generic product sales due to be recognised in the Second Half.

Administrative costs for the Period were GBP3.5 million (H1 2018: GBP2.5 million). The increase is predominantly due to: Pennant 'gearing up' for the 'Major Programme' for which it was down-selected in August 2018; depreciation relating to new facilities; and increased overheads in Aviation Skills Partnership. An update on the Major Programme is provided below.

The basic loss per share for the Half Year was (5.07)p compared to earnings of 6.17p for the same period last year.

Minimal effective tax rate is expected for the full year due to unrelieved tax losses of GBP5.3 million carried forward at the Half Year and with R&D tax credit claims in progress.

The Group has a robust Order Book, with contracted revenues currently scheduled for delivery over the next three years amounting to GBP36.1 million at the Period end (H1 2018: GBP31 million).

The Group ended the Period with net debt excluding finance leases of GBP0.4 million. With significant undrawn overdraft facilities (and forecast cash receipts on invoices due in the Second Half), the Group has sufficient resources to meet its foreseeable working capital requirements.

The Directors have concluded that it is in the best interests of the Company and its shareholders to retain cash at this time for expected working capital requirements. The Board will therefore not be declaring an interim dividend but will continue to review the Group's dividend policy based on performance, cash generation and working capital and investment requirements.

Operational Commentary

Delivering Key Contracts

Ajax Contract

The contract for electro-mechanical trainers for the Ajax armoured fighting vehicle was awarded to the Group in 2015 and was re-scoped in 2018 to baseline the trainers against particular variants of the Ajax vehicle.

During the First Half, the Group successfully passed a design review for the frame of the hull trainer and subcontracted out proto-type builds.

Post-Period end, the Company received a request to re-base its training solution to align with recent additional vehicle updates and this is currently in negotiation with the customer. Further changes may be required to the training solution as the vehicle platform develops which is not uncommon on such programmes.

As announced on 9 August 2019, it has become apparent that the programme schedule may need to be extended, and it is now anticipated that progress on delivering the contract will be slower than budgeted for the Second Half, with material uplift in revenues not envisaged until 2020 after the contract is re-based.

Qatar

The production of training aids for Qatar is on schedule and on budget to enable recognition of revenue and profits for the second half of 2019.

All contractual milestones to date have been achieved in accordance with the agreed schedule with the associated invoices issued to and paid by the customer.

Integrated Logistics Support ("ILS") (home of Omega PS)

The Group's ILS division continued to provide long-term recurring consultancy, support and maintenance services on the Omega PS software product to the Canadian and Australian defence departments and their respective supply bases, contributing revenues for the Period of GBP2.42 million, a record for the division.

Virtual Parachute Training Systems

Customer acceptance was achieved on the upgrade to the RAF's virtual parachute training system at Brize Norton. Other opportunities to sell Pennant's parachute systems are in progress with interest from a number of overseas militaries.

Contract Wins and Pipeline

The key focus during the First Half was on progressing certain larger opportunities with prime contractors for training aids in support of UK defence requirements with a view to securing the conversion of these opportunities (included in the Group's single-source pipeline in excess of GBP30 million) in H2 2019 and 2020.

Orders were also received for multiple GenSkills devices (marks 1 and 2) together with orders for the new GFIT device, as the Group's investment in new products started to pay off. A new support contract with a Middle East customer was also secured, building on the Group's critical mass in the region and generating additional recurring revenues.

Acquisition of ASP

The Company acquired the Aviation Skills Partnership in February 2019 for the key purpose of achieving greater involvement in the training delivery and courseware markets.

Work has been ongoing since the acquisition to progress the opening of new aviation academies in addition to the flagship International Aviation Academy - Norwich which is already managed by ASP.

As detailed in the Group's trading update of 9 August 2019, this expansion of the ASP business is taking longer than initially expected, with public funding of projects being delayed due to the current focus on Brexit.

Post-Period end, ASP launched a Charter for Aviation Skills with the support and direct involvement of several major OEMs and airlines, including Airbus, British Airways and Leonardo Helicopters. Building on the Charter launch and securing academy funding will be key priorities for ASP during the Second Half.

Board Changes

During the Period, Christopher Powell retired as a director and Phil Cotton was appointed as a non-executive director and Chair of the Audit Committee. Mr Cotton is a chartered accountant and former partner at KPMG.

Post-Period End

Major Programme

Further to the announcement of Pennant's 'down-selection' in August 2018 for a Major Programme, the Group continues to work with the prospective customer to progress contract award. The solution to meet the training requirement is currently being refined between Pennant and the prospective customer (informed by the underlying UK defence requirement) and this is expected to be confirmed during the Second Half. Pennant therefore expects to have greater clarity on the scope of the order, likely final aggregate value and expected delivery schedule by the end of the Second Half, with contract award still anticipated for the second half of 2020.

Costs Reduction Exercise

As announced on 2 May 2019, the Group had been incurring significant additional costs in anticipation of work commencing on the Major Programme (circa GBP90,000 per month) during the First Half which was impacting operating margin.

To mitigate the delay in contract award, a costs reduction exercise was initiated prior to that announcement and this was intensified when it became apparent that progress was also slowing on the Ajax contract due to data challenges and the likely contract re-basing (mentioned above). While it is not desirable (or indeed possible) to remove all the additional costs, to date annualised cost savings in the region of GBP430,000 have been achieved, with work ongoing to identify further savings. At the same time, the Group has been very careful to avoid degrading its ability to deliver on new contracts once awarded.

ASP

Post-Period end, the Company agreed an amendment to the share purchase agreement under which Aviation Skills Partnership was acquired, accelerating the earn-out period to end on 31 December 2020. The maximum amount payable under the earn-out is now GBP2.1 million and the Group expects to actually pay in the region of GBP200,000 over the remaining term of the earn-out.

Track Access Services

Post-Period end, the Group acquired the business and assets of Track Access Services ("TAS"). TAS provides safety-critical services to train operating companies and rail infrastructure providers. TAS's current capabilities include rail driver training, rail survey services, laser and video scanning, 3D track models, signal siting and a subscription-based route video and mapping service. Customers include Network Rail and DB Cargo.

Strategy

The Board recognises that the Company's core 'Technical Training Solutions' business is susceptible to lengthy and uncertain gestation periods for contract awards and to revisions on its engineered-to-order programmes.

This recognition drives the Board's ongoing strategy to increase the proportion of the Group's revenues which derive from the sale of software and services, particularly those of a recurring nature. Steps taken so far this year include:

   --      the acquisition of the Aviation Skills Partnership; 
   --      the acquisition of Track Access Services at the start of the Second Half;

-- the ongoing development of a new variant of Omega PS (deployable on a 'software-as-a-service' basis);

   --      promoting unique VR software products in North America; and 
   --      focus on securing additional, long-term product support contracts.

The Group is also progressing other strategic opportunities to partner with or acquire complementary businesses.

Of course, the Technical Training Solutions business remains critically important to the Group, and converting the single-source pipeline (in excess of GBP30 million) is a top priority, with these opportunities expected to crystallise into contracts over the next 12 months.

Outlook

With revenues and profits expected to flow in the Second Half, the Board anticipates that the Group will trade profitably for the year as a whole.

Prospects for next year and beyond remain positive with further organic growth expected through conversion of the Group's active sales pipeline and with opportunities for corporate development under continual consideration. An ongoing key management focus will be on further increasing visibility of long-term earnings by seeking and converting recurring revenue streams, including the further development of maintenance and support services across the Group's activities.

On behalf of the Board, I wish to thank all staff across the Group for their hard work and dedication during the Period and I look forward to providing a further update on the Group's progress in due course.

S A Moore

Chairman