TIDMSMS
RNS Number : 5245M
Smart Metering Systems PLC
17 September 2019
17 September 2019
Smart Metering Systems plc
Interim results
Smart Metering Systems plc (AIM: SMS, the Group), the UK's
largest integrated installer for independent energy suppliers and
manager of smart meters, has published its half year results for
the six months ended 30 June 2019.
GBP'000 H1 2019 H1 2018
Group revenue 54,205 46,741
Pre-exceptional EBITDA(1) 25,823 23,626
EBITDA 20,616 23,405
(Loss)/profit before taxation (1,725) 10,124
Underlying profit before
taxation(2) 4,644 11,404
Underlying basic EPS (p)(3) 3.40 8.40
Basic EPS (p) (1.28) 7.45
Dividend per share (p) 2.30 2.00
Net debt 186,592 141,989
------------------------------- -------- --------
(1 Pre-exceptional EBITDA is statutory EBITDA excluding
exceptional items.)
(2 Underlying profit before taxation is profit before taxation
excluding exceptional items and amortisation of intangibles.)
(3 Underlying basic EPS is underlying profit after taxation
divided by the weighted average number of ordinary shares for the
purpose of basic EPS.)
(A reconciliation between reported and underlying performance is
detailed in the Financial Review section below.)
Key points
-- Long term index-linked annualised recurring revenue (ILARR)
growth of 14.1% to GBP85.9m - ahead of the Board's expectations
-- Group's domestic smart portfolio now above 1 million - a net
increase of 156,000 domestic smart meters installed in H1
-- Industry-wide technical issues slowed installation in H1,
signs of expected recovery emerging
-- Significant cash and unutilised debt facility to support rollout of smart meters
-- Financial, technical and human resources in place to support
2 million meter order book as mass SMETS2 rollout commences
-- Revenues and ILARR for the current financial year are
anticipated to be ahead of market expectations whilst
pre-exceptional EBITDA is expected to be marginally below current
market expectations with a consequent impact on underlying profit
before tax
-- In discussions about sale of a minority of meter assets. If
completed, at an appropriate value, this transaction will provide
significant additional liquidity and demonstrate the inherent value
of the Group's metering asset base
Alan Foy, Chief Executive Officer, commented:
"We have continued to grow our annualised recurring revenue, our
key financial metric, ahead of expectations and now have over 3.46
million metering and data assets under management of which over 1
million are smart.
"The widely reported industry-wide installation issues are now
substantially addressed and the mass rollout of SMETS2 can now
commence - this is expected to result in a pick up in the
installation run-rate both in the latter part of 2019 and into
2020.
"With over 500 engineers and significant cash and debt
facilities, we have the engineering and financial resources to
handle our order book of approximately 2 million meter
installations with headroom for further growth.
"We are in discussions about a sale of a minority of our meter
asset portfolio, which, if completed at an appropriate value, would
provide significant additional liquidity and demonstrate the
inherent value of our substantial asset base."
For further information:
Smart Metering Systems plc 0141 249 3850
Alan Foy, Chief Executive Officer
David Thompson, Chief Financial
Officer
Tim Mortlock, Chief Operating Officer
Dilip Kejriwal, Head of Investor
Relations
Cenkos Securities plc (Joint Broker
and Nomad) 0131 220 6939/020 7397 8900
Neil McDonald/Pete Lynch
Investec Bank plc (Joint Broker) 020 7597 5970
Christopher Baird/Henry Reast
Instinctif Partners 020 7457 2077
Adrian Duffield/Kay Larsen/Chantal
Woolcock
Notes to editors
SMS plc (www.sms-plc.com) installs smart meters and data loggers
that facilitate effective energy management and a low carbon
future. Established in 1995, SMS provides a full end-to-end service
for metering financing, installation, management and maintenance,
with a highly skilled workforce and deep engineering expertise.
SMS had installed 3.46 million meter and data assets as of 30
June 2019. SMS's smart meter expertise also enables the Company to
provide consultancy services that allow organisations and
corporates to enhance long term efficiency and effectiveness in the
management of energy.
SMS's energy management and asset installation services also
include infrastructure design, installation, consultancy and
project management services for new gas, electricity, water and
telecoms connections for licensed energy and telecoms suppliers,
end consumers and the UK's licensed electricity Distribution
Network Owners (DNOs).
SMS employs in excess of 1,200 people across the UK who support
the installation and ongoing management of metering assets.
SMS plc is headquartered in Glasgow with 12 locations across the
UK.
SMS's shares are listed on AIM.
Overview
The Group has seen continued growth in its gas and electricity
meter portfolio, with a net increase of 156,000 domestic smart
meters installed in H1 2019, taking the domestic smart meter
portfolio alone through the 1 million meter milestone.
The Group's total number of metering and data assets under
management, including third-party assets, increased by c.10.5% to
3.46 million (31 December 2018: 3.13 million) with 3,023,000 (31
December 2018: 2,658,000) meter assets under management at 30 June
2019, of which 1,002,000 are smart meters (31 December 2018:
846,000).
The UK energy market is changing rapidly and SMS is well placed
to be at forefront of these developments with strong cross-sell
potential into SMS's existing customer base. The Group purchased
Solo Energy to establish new long-term revenue streams from new
asset classes enabled by smart meters; further opportunities
continue to be explored.
Index-linked recurring revenues
The Group's portfolio of meter and data assets generate
index-linked, recurring revenues for its lifetime, supplemented
with the provision of support and other continuing service
opportunities.
ILARR, SMS's key financial metric for long term growth,
increased by c.14.1% to GBP85.9m at 30 June 2019 (31 December 2018:
GBP75.3m). ILARR from the domestic smart meter portfolio grew 19.6%
to GBP32.4m, whilst ILARR from traditional domestic meters grew
14.4% to GBP19.6m. ILARR from industrial and commercial (I&C)
meters grew c.10.6% to GBP21.0m and from data assets grew 5.7% to
GBP12.9m.
This growth in ILARR is supported by continued momentum in
contract wins; most recently the Group secured framework agreements
with both British Gas Business and Opus Energy to install smart
meters across their I&C customer base. Active engagement with
these and other energy suppliers continues to be a key focus of the
Group. The Group has an order book of c.2 million domestic smart
meters which represents a c.GBP40m ILARR opportunity.
Through its existing customers alone, there is an opportunity to
exchange a further c.4 million meters which represents an
additional c.GBP80m ILARR opportunity. Beyond these, there is
further potential ILARR from the ongoing targeting of additional
energy suppliers.
In August, SMS acquired approximately c.72,000 SMETS1 domestic
smart meters from an existing energy supply customer, increasing
the Group's ILARR by c.GBP1.6m.
SMETS2 rollout
As previously announced, the Group's installation run rates in
H1 2019 were behind initial expectations due to wider industry
issues and UK government figures released at the end of August
showed that the rate of domestic smart meter installations had
fallen across the industry in the first six months of 2019.
Specifically, the rollout of SMETS2 meters was slowed by
technical issues, primarily rooted in radiofrequency interference
of smart meters in the North of England and Scotland, which caused
compatibility issues in those regions. As a result, many energy
suppliers have not yet been able to offer SMETS2 meters to all of
their customers, limiting the portfolio available for exchange.
These issues have now been substantially resolved and the
Group's customers are nearing full SMETS2 readiness. The Group is
prepared for further increases through the remainder of the year,
and into 2020 and beyond, as the smart meter programme
progresses.
Positioned for accelerated installations
In line with its longer term growth strategy, the Group has
retained, and continued to invest in, the financial, technical and
human resources necessary to support a substantial increase in
activity in H2 and beyond. SMS now has over 500 full time
engineers.
The Group is therefore well placed to significantly increase the
installation run rate in the latter part of 2019 and into 2020, as
industry-wide activity accelerates. The Group also has ample
financial resources to support such an acceleration with
significant cash and unutilised credit facilities. H1 net debt rose
to GBP186.6m due to increased inventory and capital expenditure, in
line with the management's expectations.
Monetising of a minority of the Group's meter assets
The Group is in discussions with a number of specialist
infrastructure investors with UK expertise about the sale of a
minority of the Group's meter assets. If completed, at an
appropriate value, this transaction will generate significant
proceeds, demonstrate the value of part of the SMS' substantial
asset base and will help fund future growth plans. However, there
is no certainty that SMS will proceed with any such sale. A further
update on the possible sale will be provided as and when
appropriate.
Current trading and outlook
SMS is focused on continuing to deliver the mandated smart meter
rollout on behalf of its energy supplier customers, which have a
significant backlog of end consumers requiring a conversion to
smart. The Group's significant contracted pipeline is for the
conversion of c.2 million meters to smart, with opportunity to
exchange an additional c.4 million meters.
With SMETS2 technical issues now substantially resolved and
customer readiness for a mass rollout of SMETS2 meters, SMS expects
engineering efficiency and installation run rates to continue to
improve during the remainder of H2 2019 and into 2020.
In order to meet this opportunity, SMS has continued to invest
in its engineering capacity. SMS has a scalable and secure data
infrastructure, already operating over 3.46 million meter and data
assets and, as a result of the investment made in H1, the
installation capacity to fit over 50,000 smart meters a month.
SMS is now well positioned to be able to exploit these
substantial opportunities in both the short and medium term.
The Group has an additional carrying cost as a result of the
under utilisation of engineers previously disclosed. However, it is
expected that approximately half of these costs will be mitigated
in FY2019 by additional meter rental income. Overall, whilst
revenues and ILARR are anticipated to be ahead of market
expectations, the Board now expects pre exceptional EBITDA for the
current financial year to be marginally below current market
expectations due to an expected c.GBP3m additional net engineering
cost, with a consequent impact on underlying profit before tax.
SMS's mission remains unchanged, striving to deliver the future
of smart energy. Whilst the immediate focus is on the UK Domestic
smart market opportunity, SMS is continuing to develop its
capabilities to deliver innovative and integrated energy solutions
to its customers, leveraging a growing installed smart meter base
to enhance the Group's service position.
Operational review
Meter assets and data
ILARR has grown to GBP85.9m, largely as a result of the
continued investment in smart meters and, in part, supported by an
increase in traditional meter rental rates for deemed
non-contracted customers to reflect the shorter expected lifespan
for such meters.
There was also continued growth in the Group's customer order
book following contract wins with British Gas Business and Opus
Energy in respect of their I&C smart meter customers.
The Group's contracted pipeline of c.2million smart meters is
expected to generate c.GBP40m additional ILARR, with a potential
further c.4million smart meters generating c.GBP80m available from
opportunities with existing contracted energy suppliers. The Group
is also active within the market, with ongoing targeting of
additional energy suppliers to further enhance the portfolio.
Full ILARR and unit movements from December 2018 to June 2019
are summarised as follows:
By unit type
June 2019 December 2018 Change
----------------------- ----------------------
ARR (GBPm) Units(1) ARR (GBPm) Units(2) ARR (GBPm) Units
---------- ----------- ---------- ----------- ---------
Domestic traditional 19.6 369,000 17.1 377,000 2.5 (8,000)
---------- ----------- ---------- ----------- ---------
I&C 21.0 261,000 19.0 253,000 2.0 8,000
---------------------- ---------- ----------- ---------- ----------- ---------
Smart 32.4 1,002,000 27.1 846,000 5.3 156,000
---------------------- ---------- ----------- ---------- ----------- ---------
Data 12.9 434,000 12.1 477,000 0.8 (43,000)
Total 85.9 2,066,000 75.3 1,953,000 10.6 113,000
(1Excludes 1,391,00 third-party meter management
appointments.)
(2 Excludes 1,181,000 third-party meter management
appointments.)
By utility type
30 June 31 December
2019 2018 Percentage
units units change
--------------------------------------- --------- ----------- -------------
Gas meter portfolio(1) 2,375,000 2,106,000 13%
Electricity meter portfolio 648,000 552,000 17%
Gas data portfolio 133,000 131,000 2%
Electricity data portfolio 301,000 345,000 (13%)
--------------------------------------- --------- ----------- -------------
Total meter portfolio(1) 3,023,000 2,658,000 14%
Total data portfolio 434,000 476,000 (9%)
--------------------------------------- --------- ----------- -------------
Total gas and electricity metering and
data assets 3,457,000 3,134,000 10%
--------------------------------------- --------- ----------- -------------
1 Includes third-party meter management appointments.
With BEIS having confirmed the proposed adoption and enrolment
of SMETS1 meters into the central Data Communications Company
(DCC), the Group continues to support its customers with this
process, which is expected to start at the end of September.
All energy suppliers are mandated to bring such meters forward
for adoption within a 12 month period. The Group's entire SMETS1
portfolio is capable of being adopted into the DCC, whether
operating in smart or traditional mode.
SMS continued to work closely with the industry to resolve the
teething SMETS2 technical issues, primarily associated with
radiofrequency interference of smart meters in the North of England
and Scotland. In addition, SMS has continued to work closely with
its customers, who are at varied states of readiness for the full
rollout of these second-generation meters as a result of the
industry-wide issues outlined above. The issues are reflected in an
8.6% drop in industry-wide smart installations in H1 compared to H2
2018, with small energy suppliers only able to convert 9.4% of
their customer base to smart compared with 29% for larger
suppliers.
An increasing number of energy suppliers are now ready and able
to release their customer portfolio for SMETS2 meter installation
and the UK smart metering industry is anticipating a recovery in
the installation rate.
SMS expects to see an increase in its smart meter installation
run rate now that these technical and energy supplier readiness
issues are largely resolved and has sufficient SMETS2 metering
stock to support these requirements, as well as installation
capacity.
The Group has also seen continued growth in data recurring
revenue to GBP12.9m, largely driven by a focus on half-hourly
services to the electricity I&C market. The Group's overall
data portfolio has decreased as a result of a commercial decision
to step back from appointments to third-party traditional meter
points requiring low margin manual meter reads. This will enable
the Group to focus on delivery of data services to smart and
advanced meter portfolios across both the I&C and Domestic
market segments.
Asset installation
The Group has continued to invest in its engineering work force,
now with over 500 smart trained dual fuel engineers.
The challenges experienced in the transition to SMETS2 meter
installations have impacted on engineering efficiency, such that on
average c.26k smart meters were installed per month in H1 2019.
Coinciding with the SMETS1 end date on 15 March 2019 (with stock
depleted for such installations accordingly), these industry-wide
technical and energy supplier issues have also restricted access to
customer portfolios and impacted on the length of time taken onsite
to install smart meters.
SMS is focused on continuing to fully mobilise its customers
into SMETS2 rollouts, balancing regional engineering capacity with
customer portfolios to maximise installation efficiency, and
working closely with energy suppliers to convert their customers to
smart accordingly.
The Group's training centres remain central to this endeavour,
both to support future increases in engineering capacity and
support the future installation of other asset classes (such as
electric vehicle charging points, PV generation and battery storage
solutions) and the Group remains at the forefront of compliance and
health and safety initiatives within the industry.
Energy services
SMS's Energy services business has performed ahead of
expectations in the first half of the year. Opportunities have
continued to be commercialised to help customers reduce their
energy expenditure and carbon footprint, building on the Group's
half-hourly (HH) data analytics services to identify and deliver
energy-saving opportunities. Trials for HH data management for
water metering are continuing.
Substantial rollout of LED energy-efficiency lighting programmes
has continued, sponsored by a leading UK hotel chain, with over 100
sites completed in H1 2019. The Group is developing these services
for wider energy-efficiency delivery around heating and air
conditioning control and optimisation.
SMS has acquired Solo Energy, a block chain energy flexibility
IT platform. The acquisition enables SMS to utilise Solo's strong
platform to establish new long term revenue streams from new asset
classes. Solo Energy's platform has an established government and
local authority sponsored battery, EV charging and solar
installation energy project for residential and commercial
buildings. Solo is currently working on four residential and
commercial projects, representing c.2,000 homes and businesses.
The Group has also continued to invest in developing SMS's range
of capabilities, using data and technology to drive analytics and
control of both energy usage and, in the future, battery storage,
electric vehicle and generation solutions.
The energy market is already changing and SMS is at the
forefront of these developments. With strategic importance placed
on controlling the data and revenue streams from these new asset
classes, the Group is of the view that, in conjunction with its
engineering installation capability, it has a significant platform
for growth beyond the immediate smart metering rollout
opportunity.
Financial review
Reconciliation of reported to underlying results
SMS uses alternative performance measures, defined at the end of
the financial review, to present users of the accounts with a clear
view of what the Group considers to be the results of its
underlying, sustainable business operations, to enable consistent
period-on-period comparisons.
A reconciliation of these performance measures is disclosed
below:
Period ended Period ended
30 June 30 June
2019 2018 Percentage
GBPm GBPm change
---------------------------------------- ------------ ------------ ----------
Annualised recurring revenue 85.9 69.3 24%
---------------------------------------- ------------ ------------ ----------
Group revenue 54.2 46.7 16%
Statutory profit from operations 2.4 12.3
---------------------------------------- ------------ ------------ ----------
Amortisation of intangibles 1.1 1.1
Depreciation 17.2 10.0
---------------------------------------- ------------ ------------ ----------
Statutory EBITDA 20.6 23.4 (12%)
Exceptional items (EBITDA related) 5.2 0.2
---------------------------------------- ------------ ------------ ----------
Pre-exceptional EBITDA 25.8 23.6 9%
Net interest (excl. exceptional) (4.0) (2.2)
Depreciation (17.2) (10.0)
---------------------------------------- ------------ ------------ ----------
Underlying profit before taxation 4.6 11.4 (59%)
Exceptional items (EBITDA) (5.2) (0.2)
Exceptional items (interest) (0.1) -
Amortisation of intangibles (1.1) (1.1)
---------------------------------------- ------------ ------------ ----------
Statutory (loss)/profit before taxation (1.7) 10.1 (117%)
Taxation 0.3 (1.8)
---------------------------------------- ------------ ------------ ----------
Statutory (loss)/profit after taxation (1.4) 8.3 (117%)
Amortisation of intangibles 1.1 1.1
Exceptional items (EBITDA and interest) 5.3 0.2
Tax effect of adjustments (1.1) (0.2)
---------------------------------------- ------------ ------------ ----------
Underlying profit after taxation 3.9 9.4 (59%)
Weighted average number of ordinary
shares (basic) 112,495,520 112,353,015
Underlying basic EPS (pence) 3.40 8.40
Weighted average number of ordinary
shares (diluted) 113,409,293 113,544,391
Underlying diluted EPS (pence) 3.37 8.32
---------------------------------------- ------------ ------------ ----------
Revenue
30 June 30 June
2019 2018 Percentage
GBP'm GBP'm change
------------------- ------- ------- ----------
Asset management 39.4 31.6 25%
Asset installation 10.2 12.1 (16%)
Energy management 4.6 3.0 53%
------------------- ------- ------- ----------
Group revenue 54.2 46.7 16%
------------------- ------- ------- ----------
Total ILARR increased by 14% to GBP85.9m as at 30 June 2019
compared to 31 December 2018, ahead of expectations. This growth
reflects the flow through impact of new contract wins and growth in
the meter estate, together with the combined effect of increases in
RPI and rental rates for deemed non-contracted customers.
Group revenue rose 16%, driven primarily by performance in the
Asset management and Energy management divisions, offset by a
decline in Asset installation revenues, as explained further below.
Whilst installation run rates have been slower than anticipated,
the domestic smart meter portfolio has still increased, generating
additional revenue.
Together with a favourable increase in the RPI in April 2019,
and a pricing increase on deemed non-contracted customers, revenue
has increased by 25% in the Asset management division to GBP39.4m
(2018: GBP31.6m).
Energy management revenue has increased 53% to GBP4.6m (2018:
GBP3.0m), which continues to be attributable to the
energy-efficient lighting project in progress for a large hotel
chain, with over 100 sites completed in H1 2019.
Asset installation revenue was GBP10.2m (2018: GBP12.1m) due to
legacy installation-only work for third parties coming to an end in
H1, in line with the Group's decision to reallocate internal
engineering resource to fit the SMS portfolio of smart meters.
The decline in Asset installation revenue has been partially
offset by higher volumes of emergency work on SMS's portfolio of
traditional meters, which have required direct replacement whilst
energy suppliers become SMETS2 ready.
EBITDA
Pre-exceptional EBITDA increased to GBP25.8m (2018: GBP23.6m)
with statutory EBITDA decreasing to GBP20.6m (2018: GBP23.4m), with
the increase in revenue offset by specific costs incurred to create
capacity to support future growth.
The Group has continued to invest in its engineer workforce,
through recruitment, training and in the successful set up of a
dedicated contact centre to help drive the business through the
smart meter rollout.
In addition, the Group has continued to develop the IT platforms
that underpin its end-to-end service offering.
Cost of sales and general overheads have increased as a result,
but lower installation volumes and industry-wide radiofrequency
interference issues in the North have reduced engineer utilisation
rates. Despite these additional costs, pre-exceptional EBITDA
continued to grow.
Statutory EBITDA has fallen due to the above factors and the
exceptional costs of GBP5.2m, GBP4.1m of which relate to losses on
the removal of traditional meters and the removal of a proportion
of SMETS1 compliant smart meters, caused by the temporary industry
transition period.
SMS shows these meter removals and the associated termination
income as an exceptional item, as the removal profile is outside
its control and there is inherent volatility in the associated
financial impact. Of these losses, the majority relates to the
removal of SMETS1 meters.
Technical communication issues for some SMETS1 meters on
supplier churn have continued in H1, with the enrolment and
adoption process into DCC due to take place over a 12 month period,
commencing for certain meters on 30 September 2019.
As a result, and consistent with the prior year end, the Group
has continued to treat the loss of these meters as exceptional due
to this temporary industry transition period.
Other material operating exceptional items include payments
relating to deferred remuneration arising from the acquisition of a
subsidiary in 2016, and the subsequent issuance of shares for nil
consideration (GBP0.9m).
Gross margins
The cash gross margin decreased by 8% to 60% (2018: 68%). SMS
includes depreciation on revenue-generating assets within cost of
sales and removing this from the margin analysis provides a better
comparison of underlying trading performance year on year.
The Group's decision to invest in capacity to support the smart
meter rollout and more infrastructure-type projects means sales
activity will grow, albeit at a lower margin, caused by this
changing mix.
The gross profit margin has also been impacted by the higher
than expected proportion of installation costs that are unable to
be capitalised.
The depreciation-adjusted gross margin for Asset management has
increased to 92% (2018: 89%) reflecting the growth in the
underlying asset base. The gross margin, including depreciation,
has decreased by 6% from 59% to 53%, primarily as a result of
changes to depreciation-related accounting estimates, made with
effect from 1 January 2019, in relation to SMS's meter assets.
As a result, there is an additional GBP2.9m, recognised within
depreciation in cost of sales - see note 1(a).
The Asset installation business reported a negative gross profit
margin (2018: positive 26%). This reflects the Group-wide strategy
to focus its internal resources on the smart meter rollout, with
legacy external installation contracts coming to an end at the
beginning of the year. This margin has also been significantly
impacted by the capacity investment detailed above.
The Energy management gross margin has stayed constant at 22%,
as a result of no significant changes in active contracts within
this segment. The Group is continuing to successfully deliver on a
large-scale energy-efficient lighting contract, which delivers a
lower gross margin overall.
Operational and pre-tax losses/profits
Depreciation costs on general property, plant and equipment,
excluding meter assets, have increased by GBP1.3m to GBP1.7m (2018:
GBP0.4m). This is largely driven by the decision to purchase the
Group's fleet of vans, previously leased on an operating basis.
GBP0.5m of additional depreciation has also been recognised as a
result of the implementation of IFRS 16 and the addition of
c.GBP4.4m of right-of-use assets, see Note 10.
The net interest charge is GBP4.1m (2018: GBP2.2m), reflecting
higher average net debt as a result of the continued investment in
assets.
Effective tax rate
The current forecast of the effective tax rate for the full year
is 17.78% (30 June 2018: 17.21%). The increase in the effective
rate is driven primarily by an increase in permanent differences
from disallowable items.
Earnings per share (EPS)
Underlying basic EPS, which excludes exceptional costs,
amortisation and their associated tax effect, is 3.40p (2018:
8.40p), reflecting the underlying profitability of the Group.
As a result of incurring statutory losses after taxation of
GBP1.4m, basic EPS is negative at 1.28p (30 June 2018: +7.45p).
Diluted EPS does not vary significantly from basic EPS; a small
decrease is seen as a result of the dilutive impact of shares
issuable in the future to settle the Group's share scheme
obligations.
Dividend
The Group is paying an interim dividend of 2.30p per ordinary
share (2018: 2.00p), a 15% increase in line with the Group's
progressive dividend policy.
This interim dividend will be paid on 22 November 2019 to
shareholders on the register at 25 October 2019, with an
ex-dividend date of 24 October 2019.
Cash flow
The Group generated an operating cash inflow of GBP15.0m (2018:
GBP21.6m). The decrease in operating cash flow is mainly due to the
higher working capital outflows with an outflow of GBP11.5m in H1
2019 compared to GBP2.2m in H1 2018.
There has been a significant increase in inventory, with the
strategic purchasing of SMETS2 meters to ensure SMS can meet
forecast installations in H2. Several of these purchases were made
close to the period end, concurrently driving an increase in trade
and other payables.
Capital expenditure on property, plant and equipment was
GBP48.4m (2018: GBP80.8m). Of this, GBP43.4m has been used to
purchase revenue-generating assets. This capital expenditure is
lower than the prior period as a result of the decline in
installation run rates but is expected to increase in H2 as
installation demand recovers.
A further GBP3.7m investment has been made in intangible assets.
This includes development of software to support the installations
business, together with investment in a Group-wide Enterprise
Resource Planning system that will consolidate, integrate and
update various systems and processes to ensure that the Group can
effectively manage the increasing volumes of transactions and
complexity of data.
As a result of the refinancing of the loan facility, there has
been a GBP65.4m net cash injection from drawdowns in the period.
GBP5.3m of finance costs have also been paid (2018: GBP2.4m),
including GBP3.1m of arrangement fees in relation to the new
facility.
Financial resources
With further growth anticipated as the UK domestic smart meter
rollout continues, SMS has access to sufficient funding to
accelerate installation in line with market demand.
On 21 December 2018 a new banking facility was signed, providing
the business access to GBP420m on a fully revolving basis over the
next five years therefore removing any amortisation in that period.
The first drawdown under this new facility was on 3 January 2019,
and at that date the Group's obligations under the existing
facility were settled.
At 30 June 2019, utilisation of the new facility totalled
GBP236.3m, net of GBP2.8m arrangements fees which will be amortised
over the term of the facility. No principal repayments are required
until 2022, providing us with greater flexibility during the
current industry transition period.
Net debt was GBP186.6m at 30 June 2019, GBP44.6m higher than at
31 December 2018, as a result of the increase in inventory and
capital expenditure mentioned above and which is consistent with
our own expectations.
At 30 June 2019 the Group's available cash and unutilised
element of the revolving credit facility stood at GBP233.4m (2018:
GBP138.0m). The Group had cash in bank of GBP49.7m at 30 June 2019
(30 June 2018: GBP46.8m).
Definitions of alternative performance measures
Alternative performance
measure Definition
------------------------ --------------------------------------------
Index-Linked Annualised The revenue being generated from meter
recurring revenue rental and data contracts at a point
in time. Includes revenue from third-party
managed meters.
------------------------ --------------------------------------------
Pre-exceptional EBITDA Statutory EBITDA excluding exceptional
items.(1)
------------------------ --------------------------------------------
Underlying profit before Profit before taxation excluding exceptional
taxation items and amortisation of intangibles.
------------------------ --------------------------------------------
Underlying profit after Profit after taxation excluding exceptional
taxation items and amortisation of intangibles
and the tax effect of these adjustments.
------------------------ --------------------------------------------
Underlying basic EPS Underlying profit after taxation divided
by the weighted average number of ordinary
shares for the purposes of basic EPS.
------------------------ --------------------------------------------
Underlying diluted EPS Underlying profit after taxation divided
by the weighted average number of ordinary
shares for the purposes of diluted EPS.
------------------------ --------------------------------------------
(1 Exceptional items are those material items of income and
expense which, because of the nature or expected infrequency of the
events giving rise to them, merit separate presentation on the
consolidated income statement.)
Consolidated interim income statement and statement of
comprehensive income
For the period ended 30 June 2019
Unaudited
------------------------------------------------------------------------------------
Six months ended 30 June
------------------------------------------------------------------------------------
2019 2018
Before 2019 Before 2018
exceptional Exceptional 2019 exceptional Exceptional 2018
items items(1) Total items items(1) Total
Notes GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
---------------------- -------- ------------- -------------- ---------- ------------- -------------- ----------
Revenue 3 54,205 - 54,205 46,741 - 46,741
Cost of sales (37,295) - (37,295) (24,281) - (24,281)
---------------------- -------- ------------- -------------- ---------- ------------- -------------- ----------
Gross profit 16,910 - 16,910 22,460 - 22,460
Administrative
expenses (11,359) (5,207) (16,566) (11,053) (221) (11,274)
Other operating
income 2,019 - 2,019 1,127 - 1,127
---------------------- -------- ------------- -------------- ---------- ------------- -------------- ----------
Profit from
operations 7,570 (5,207) 2,363 12,534 (221) 12,313
Finance costs (4,098) (103) (4,201) (2,332) (2,332)
Finance income 113 - 113 143 - 143
---------------------- -------- ------------- -------------- ---------- ------------- -------------- ----------
Profit/(loss) before
taxation 3,585 (5,310) (1,725) 10,345 (221) 10,124
Taxation (637) 919 282 (1,789) 34 (1,755)
---------------------- -------- ------------- -------------- ---------- ------------- -------------- ----------
Profit/(loss) for
the period and
total comprehensive
income attributable
to owners of the
parent(1) 2,948 (4,391) (1,443) 8,556 (187) 8,369
---------------------- -------- ------------- -------------- ---------- ------------- -------------- ----------
(1 Refer to note 4 for details of exceptional items.)
The profit from operations arises from the Group's continuing
operations.
Earnings per share attributable to owners of the parent during
the period:
Six months Six months
ended ended
30 June 30 June
2019 2018
Notes Unaudited Unaudited
------------------------------------ -------- ----------- -----------
Basic earnings per share (pence) 5 (1.28) 7.45
Diluted earnings per share (pence) 5 (1.27) 7.37
------------------------------------ -------- ----------- -----------
Consolidated interim statement of financial position
As at 30 June 2019
Unaudited Audited
30 June 31 December
2019 2018
Notes GBP'000 GBP'000
-------------------------------------------- -------- ---------- -------------
Assets
Non-current assets
Intangible assets 19,604 17,138
Property, plant and equipment 7 385,636 356,732
Investments 75 75
Trade and other receivables 328 402
-------------------------------------------- -------- ---------- -------------
Total non-current assets 405,643 374,347
-------------------------------------------- -------- ---------- -------------
Current assets
Inventories 17,556 11,261
Other assets - 3,105
Trade and other receivables 39,506 30,640
Income tax recoverable 290 292
Cash and cash equivalents 49,709 30,027
-------------------------------------------- -------- ---------- -------------
Total current assets 107,061 75,325
-------------------------------------------- -------- ---------- -------------
Total assets 512,704 449,672
-------------------------------------------- -------- ---------- -------------
Liabilities
Current liabilities
Trade and other payables 39,320 36,348
Lease liabilities 935 -
Other liabilities - 3,105
Bank loans and overdrafts 8 1,586 172,016
Total current liabilities 41,841 211,469
-------------------------------------------- -------- ---------- -------------
Non-current liabilities
Bank loans 8 234,716 -
Lease liabilities 2,970 -
Deferred tax liabilities 11,963 12,070
-------------------------------------------- -------- ---------- -------------
Total non-current liabilities 249,649 12,070
-------------------------------------------- -------- ---------- -------------
Total liabilities 291,490 223,539
-------------------------------------------- -------- ---------- -------------
Net assets 221,214 226,133
-------------------------------------------- -------- ---------- -------------
Equity
Share capital 1,127 1,125
Share premium 159,702 158,861
Other reserve 9,562 9,562
Own share reserve (668) (588)
Retained earnings 51,491 57,173
-------------------------------------------- -------- ---------- -------------
Total equity attributable to owners of the
parent 221,214 226,133
-------------------------------------------- -------- ---------- -------------
Consolidated interim statement of changes in equity
For the period ended 30 June 2019
Share Share Other Own share Retained
capital premium reserve reserve earnings Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------------------ --------- --------- --------- ---------- ---------- ---------
As at 1 January 2018 1,124 158,592 9,562 (697) 59,040 227,621
Adjustment on initial application
of IFRS 9 - - - - (49) (49)
------------------------------------ --------- --------- --------- ---------- ---------- ---------
Restated as at 1 January 2018 1,124 158,592 9,562 (697) 58,991 227,572
Total comprehensive income for
the period - - - - 8,369 8,369
Transactions with owners in
their capacity as owners
Dividends (note 6) - - - - (3,892) (3,892)
Shares issued 1 269 - - - 270
Movement in own shares - - - (64) - (64)
Share-based payments - - - - 271 271
Income tax effect of share options - - - - (185) (185)
------------------------------------ --------- --------- --------- ---------- ---------- ---------
As at 30 June 2018 1,125 158,861 9,562 (761) 63,554 232,341
Total comprehensive income for
the period - - - - (3,905) (3,905)
Transactions with owners in
their capacity as owners
Dividends (note 6) - - - - (2,251) (2,251)
Shares issued - - - - - -
Movement in own shares - - - 173 (339) (166)
Share-based payments - - - - 937 937
Income tax effect of share options - - - - (823) (823)
------------------------------------ --------- --------- --------- ---------- ---------- ---------
As at 31 December 2018 1,125 158,861 9,562 (588) 57,173 226,133
Total comprehensive income for
the period - - - - (1,443) (1,443)
Transactions with owners in
their capacity as owners
Dividends (note 6) - - - - (4,485) (4,485)
Shares issued 2 841 - - - 843
Movement in own shares - - - (80) (47) (127)
Share-based payments - - - - 386 386
Income tax effect of share options - - - - (93) (93)
------------------------------------ --------- --------- --------- ---------- ---------- ---------
As at 30 June 2019 1,127 159,702 9,562 (668) 51,491 221,214
------------------------------------ --------- --------- --------- ---------- ---------- ---------
Consolidated interim statement of cash flows
For the period ended 30 June 2019
Six months Six months
ended ended
30 June 30 June
2019 2018
Unaudited Unaudited
GBP'000 GBP'000
-------------------------------------------------------- ----------- -----------
Operating activities
Profit before taxation (1,725) 10,124
Finance costs 4,098 2,332
Finance income (113) (143)
Exceptional items(1) 5,131 44
Depreciation 17,195 9,999
Amortisation of intangibles 1,058 1,093
Share-based payment expense 318 271
Loss on disposal of property, plant and equipment 502 177
Movement in inventories (6,032) (2,334)
Movement in trade and other receivables (8,818) (1,616)
Movement in trade and other payables 3,352 1,717
-------------------------------------------------------- ----------- -----------
Cash generated from operations 14,966 21,664
Income tax received/(paid) - (64)
-------------------------------------------------------- ----------- -----------
Net cash generated from operations 14,966 21,600
-------------------------------------------------------- ----------- -----------
Investing activities
Payments to acquire property, plant and equipment (48,421) (80,849)
Proceeds on disposal of property, plant and equipment 1,864 722
Payments to acquire intangible assets (3,713) (2,317)
Finance income received 113 143
-------------------------------------------------------- ----------- -----------
Net cash used in investing activities (50,157) (82,301)
-------------------------------------------------------- ----------- -----------
Financing activities
New borrowings 65,386 70,440
Borrowings repaid - (107,458)
Principal elements of lease payments (614) -
Finance costs paid (5,300) (2,351)
Net proceeds from share issue 13 270
Purchase of own shares (127) (64)
Dividends paid (4,485) (3,892)
-------------------------------------------------------- ----------- -----------
Net cash generated from/(used in) financing activities 54,873 (43,055)
-------------------------------------------------------- ----------- -----------
Net increase/(decrease) in cash and cash equivalents 19,682 (103,756)
Cash and cash equivalents at the beginning of the
period 30,027 150,600
-------------------------------------------------------- ----------- -----------
Cash and cash equivalents at the end of the period 49,709 46,844
-------------------------------------------------------- ----------- -----------
(1 Non-cash material exceptional items include GBP4,115,000 for
losses on our meter portfolio and GBP898,000 of deferred
remuneration arising on the acquisition of a subsidiary in 2016
settled in shares in April 2019.)
Notes to the interim report
For the period ended 30 June 2019
1 Basis of preparation
This condensed consolidated interim financial report for the
half-year reporting period ended 30 June 2019 has been prepared in
accordance with Accounting Standard IAS 34 Interim Financial
Reporting. The Company is a public limited company incorporated and
domiciled in Scotland whose shares are quoted on AIM, a market
operated by the London Stock Exchange.
The financial information contained in this half-yearly
financial report does not constitute statutory accounts as defined
in section 434 of the Companies Act 2006. It does not therefore
include all the information and disclosures required in the annual
financial statements and should be read in conjunction with the
Group's annual financial statements for the year ended 31 December
2018.
The financial information for the six months ended 30 June 2019
is also unaudited.
The comparative information for the year ended 31 December 2018
has been extracted from the Group's published financial statements
for that year, which were prepared in accordance with International
Financial Reporting Standards (IFRSs) as endorsed by the European
Union and have been delivered to the Registrar of Companies. The
report of the auditor on these accounts was unqualified and did not
contain a statement under section 498(2) or (3) of the Companies
Act 2006.
Management prepares budgets and forecasts on a rolling 24-month
basis. These forecasts cover operational cash flows and investment
capital expenditure and are prepared based on management's
estimation of installation run rates through the UK smart meter
rollout.
On 21 December 2018 a new banking facility was signed, providing
the business access to GBP420m over the next five years. The first
drawdown under this new facility was on 3 January 2019, at which
point the Group's obligations under the existing GBP280m facility
of GBP172m were settled. These transactions were settled
concurrently on a net cash basis.
Based on the current projections and facilities in place, the
Directors consider it appropriate to continue to prepare the
financial statements on a going concern basis.
The accounting policies adopted in the preparation of the
interim condensed consolidated financial statements are consistent
with those followed in the preparation of the Group's annual
consolidated financial statements for the year ended 31 December
2018, except for the adoption of new and amended standards as set
out in note 1(b) below. The Group has not early adopted any other
standard, interpretation or amendment that has been issued but is
not yet effective.
1(a) Significant accounting policies
As required in AIM Rule 18, the interim financial report for the
half-year reporting period ended 30 June 2019 is presented and
prepared in a form consistent with that which will be adopted in
the annual statutory financial statements for the year ended 31
December 2019 and having regard to the IFRS applicable to such
annual accounts.
The accounting policies adopted are consistent with those of the
previous financial year and corresponding interim period except for
the adoption of new and amended standards as set out in note 1(b)
below. In addition, the following changes in estimates have been
made with regards to property, plant and equipment:
Changes in estimates with effect from 1 January 2018
The following changes were made in the latter half of the year
ended 31 December 2018, with effect from 1 January 2018. They are
therefore consistent with the accounting estimates applied in the
previous financial year but are not consistent with those applied
in the interim period ended 30 June 2018:
-- A review concluded that there should be a change to the
I&C electric estimate of useful life from 15 years to 20 years
on the basis that these meters are no longer subject to a
certification period and fall under the same considerations as
smart meters.
-- The I&C gas portfolio has seen the estimate of residual
value reduce to 0% to reflect revised customer terms in new
customer contracts.
-- With respect to the domestic traditional meter asset
portfolio, the useful life of all opening assets was extended to
five years to reflect the fact that the expected end date for the
domestic smart meter rollout is likely to be at the end of 2022. It
is accepted that the rate of meter exchange to smart meters will
vary year by year as the rollout proceeds but there is currently no
reliable basis on which to predict the annual profile. Accordingly,
a straight line approach to depreciation of these assets continues
to be adopted.
Changes in estimates with effect from 1 January 2019
-- Subsequent to the impairment review carried out at 31
December 2018, the estimate of residual value on the domestic
traditional meter asset portfolio has been reduced to 0% to reflect
management's updated forecasts and assumptions regarding the
recoverability of value on these assets. As a result, the income
statement has been charged with an additional GBP2.9m, recognised
within depreciation in cost of sales.
1(b) New and amended standards adopted by the Group
Several new or amended standards became applicable for the
current reporting period, and the Group had to change its
accounting policies as a result of adopting IFRS 16 Leases.
The impact of the adoption of IFRS 16 is disclosed in note 10.
The other new and amended standards did not have any impact on the
Group's accounting policies and did not require adjustments.
2 Segmental reporting
For management purposes, the Group is organised into three core
divisions, as follows:
- Asset management, which comprises management of gas meters,
electricity meters and ADM(TM) units within the UK.
- Asset installation, which comprises installation of domestic
and I&C gas meters and electricity meters throughout the
UK.
- Energy management, which comprises the provision of energy consultancy services.
The Group's chief operating decision maker (CODM), being the SMS
plc Board, receives certain management information at a granular
"utility" level. Asset management includes reporting on gas meter
rental, electricity meter rental, gas data and electricity data.
Asset installation includes reporting on gas transactional work and
electricity transactional work. However, whilst the Group has the
ability to analyse its underlying information in this way, this
information is only used to assess performance for the Group as a
whole. These utility levels are thus combined within Asset
management and Asset installation, respectively, on the basis that
they have similar long term economic characteristics - they derive
from the same asset, use similar delivery processes, have
consistent customers and have similar long-term gross margins.
For the purpose of making decisions about resource allocation
and performance assessment, it is the operating results of the
three core divisions listed above that are monitored by management
and the CODM. It is these divisions, therefore, that are defined as
the Group's reportable operating segments.
Segment performance is evaluated based on gross profit.
The following segment information is presented in respect of the
Group's reportable segments together with additional balance sheet
information.
Asset Asset Energy Total
management installation management Unallocated operations
30 June 2019 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
--------------------------------- ------------ -------------- ------------ ------------ ------------
Segment revenue 39,368 28,253 4,617 - 72,238
Inter-segment revenue - (18,033) - - (18,033)
--------------------------------- ------------ -------------- ------------ ------------ ------------
Revenue from external customers 39,368 10,220 4,617 - 54,205
Cost of sales (18,554) (15,156) (3,585) - (37,295)
--------------------------------- ------------ -------------- ------------ ------------ ------------
Segment gross profit/(loss) 20,814 (4,936) 1,032 - 16,910
Other operating costs/income - - - (6,569) (6,569)
Depreciation (661) - - (1,052) (1,713)
Amortisation of intangibles (1,058) - - - (1,058)
Exceptional items (4,114) - - (1,093) (5,207)
--------------------------------- ------------ -------------- ------------ ------------ ------------
Profit/(loss) from operations 14,981 (4,936) 1,032 (8,714) 2,363
Net finance costs: exceptional (103) - - - (103)
Net finance costs: other (3,927) - - (58) (3,985)
--------------------------------- ------------ -------------- ------------ ------------ ------------
Profit/(loss) before tax 10,951 (4,936) 1,032 (8,772) (1,725)
Tax credit - - - 282 282
--------------------------------- ------------ -------------- ------------ ------------ ------------
Profit/(loss) for the period 10,951 (4,936) 1,032 (8,490) (1,443)
--------------------------------- ------------ -------------- ------------ ------------ ------------
Asset Asset Energy Total
management installation management Unallocated operations
30 June 2018 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
--------------------------------- ------------ -------------- ------------ ------------ --------------
Segment revenue 31,642 23,636 2,992 - 58,270
Inter-segment revenue - (11,529) - - (11,529)
Revenue from external customers 31,642 12,107 2,992 - 46,741
Cost of sales (13,013) (8,924) (2,344) - (24,281)
--------------------------------- ------------ -------------- ------------ ------------ --------------
Segment gross profit 18,629 3,183 648 - 22,460
Other operating costs/income - - - (8,370) (8,370)
Depreciation - (48) - (415) (463)
Amortisation of intangibles (1,093) - - - (1,093)
Exceptional items - - - (221) (221)
--------------------------------- ------------ -------------- ------------ ------------ --------------
Profit from operations 17,536 3,135 648 (9,006) 12,313
Net finance costs: exceptional - - - - -
Net finance costs: other (2,189) - - - (2,189)
--------------------------------- ------------ -------------- ------------ ------------ --------------
Profit before tax 15,347 3,135 648 (9,006) 10,124
Tax expense - - - (1,755) (1,755)
--------------------------------- ------------ -------------- ------------ ------------ --------------
Profit for the period 15,347 3,135 648 (10,761) 8,369
--------------------------------- ------------ -------------- ------------ ------------ --------------
Inter-segment revenue relates to installation services provided
by the Asset installation segment to the Asset management
segment.
Depreciation of GBP15.5m (30 June 2018: GBP9.5m) associated with
meter assets has been reported within cost of sales as the meter
assets directly drive revenue.
All revenues and operations are based and generated in the
UK.
Segment assets and liabilities
Asset Asset Energy Total
management installation management Unallocated operations
30 June 2019 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------------- ------------ -------------- ------------ ------------ ------------
Assets reported by segment
Intangible assets 16,106 3,498 - - 19,604
Property, plant and equipment 372,752 5,324 - 7,560 385,636
Inventories 16,810 746 - - 17,556
Contract assets - - 20 - 20
------------------------------- ------------ -------------- ------------ ------------ ------------
405,668 9,568 20 7,560 422,816
Assets not by segment 89,888
------------------------------- ------------ -------------- ------------ ------------ ------------
Total assets 512,704
------------------------------- ------------ -------------- ------------ ------------ ------------
Liabilities by segment
Contract liabilities 1,117 1,795 225 - 3,137
Lease liabilities 1,137 - - 2,768 3,905
Bank loan 236,302 - - - 236,302
------------------------------- ------------ -------------- ------------ ------------ ------------
238,556 1,795 225 2,768 243,344
Liabilities not by segment 48,146
------------------------------- ------------ -------------- ------------ ------------ ------------
Total liabilities 291,490
------------------------------- ------------ -------------- ------------ ------------ ------------
Asset Asset Energy Total
management installation management Unallocated operations
31 December 2018 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------------- ------------ -------------- ------------ ------------ ------------
Assets reported by segment
Intangible assets 13,643 3,495 - - 17,138
Property, plant and equipment 350,360 2,463 - 3,909 356,732
Inventories 10,762 499 - - 11,261
Contract assets 2 20 - - 22
------------------------------- ------------ -------------- ------------ ------------ ------------
374,767 6,477 - 3,909 385,153
Assets not by segment 64,519
------------------------------- ------------ -------------- ------------ ------------ ------------
Total assets 449,672
------------------------------- ------------ -------------- ------------ ------------ ------------
Liabilities by segment
Contract liabilities 1,010 1,801 418 - 3,229
Bank loans 172,016 - - - 172,016
------------------------------- ------------ -------------- ------------ ------------ ------------
173,026 1,801 418 - 175,245
Liabilities not by segment 48,294
------------------------------- ------------ -------------- ------------ ------------ ------------
Total liabilities 223,539
------------------------------- ------------ -------------- ------------ ------------ ------------
3. Disaggregation of revenue from contracts with customers
The Group reports the following segments: Asset management,
Asset installation and Energy management, in accordance with IFRS 8
Operating Segments. We have determined that, to meet the objective
of the disaggregation disclosure requirement in paragraph 114 of
IFRS 15, which is to disaggregate revenue from contracts with
customers into categories that depict how the nature, amount,
timing and uncertainty of revenue and cash flows are affected by
economic factors, further disaggregation is required into the major
types of services offered. The following table thus discloses
segmental revenue by type of service delivered and timing of
revenue recognition, including a reconciliation of how this
disaggregated revenue ties in with the asset management, asset
installation and energy management segments, in accordance with
paragraph 115 of IFRS 15.
Asset Asset Energy Total
management installation management operations
Period ended 30 June 2019 GBP'000 GBP'000 GBP'000 GBP'000
----------------------------------- ---------- ------------ ---------- ----------
Major service lines
Metering 35,750 - - 35,750
Data management 3,618 - - 3,618
Utility connections - 4,113 - 4,113
Transactional meter works - 5,802 - 5,802
Energy management - 305 4,617 4,922
----------------------------------- ---------- ------------ ---------- ----------
39,368 10,220 4,617 54,205
----------------------------------- ---------- ------------ ---------- ----------
Timing of revenue recognition
Services transferred at a point in
time - 5,677 - 5,677
Services transferred over time 39,368 4,543 4,617 48,528
----------------------------------- ---------- ------------ ---------- ----------
39,368 10,220 4,617 54,205
----------------------------------- ---------- ------------ ---------- ----------
Asset Asset Energy Total
management installation management operations
Period ended 30 June 2018 GBP'000 GBP'000 GBP'000 GBP'000
----------------------------------- ---------- ------------ ---------- ----------
Major service lines
Metering 28,214 - - 28,214
Data management 3,429 - - 3,429
Utility connections - 4,100 - 4,100
Transactional meter works - 7,709 - 7,709
Energy management - 297 2,992 3,289
----------------------------------- ---------- ------------ ---------- ----------
31,643 12,106 2,992 46,741
----------------------------------- ---------- ------------ ---------- ----------
Timing of revenue recognition
Services transferred at a point in
time - 6,952 - 6,952
Services transferred over time 31,643 5,154 2,992 39,789
----------------------------------- ---------- ------------ ---------- ----------
31,643 12,106 2,992 46,741
----------------------------------- ---------- ------------ ---------- ----------
4 Exceptional items
There are total exceptional items on the consolidated income
statement of GBP5,310,000. Exceptional material operating costs
comprise GBP4,115,000 for losses on our meter portfolio and
GBP898,000 of deferred remuneration arising on the acquisition of a
subsidiary in 2016 settled in shares in April 2019.
Exceptional finance costs of GBP103,000 include GBP92,000
accelerated amortisation of loan arrangements fees in relation to
the refinancing of the loan facility and GBP11,000 of bank break
fees.
In the period ended 30 June 2018, exceptional items of
GBP221,000 predominantly relate to costs associated with the
reorganisation of the installation business.
5 Earnings per share (EPS)
The calculation of EPS is based on the following data and number
of shares:
Six months Six months
ended ended
30 June 30 June
2019 2018
Unaudited Unaudited
GBP'000 GBP'000
---------------------------------------------------- ---------- ----------
Profit for the period used for calculation of basic
EPS (1,443) 8,369
---------------------------------------------------- ---------- ----------
Six months Six months
ended ended
30 June 30 June
2019 2018
Number of shares Unaudited Unaudited
------------------------------------------------------------ ----------- -----------
Weighted average number of ordinary shares for the purposes
of basic EPS 112,495,520 112,353,015
Effect of potentially dilutive ordinary shares:
- share options 913,773 1,191,376
------------------------------------------------------------ ----------- -----------
Weighted average number of ordinary shares for the purposes
of diluted EPS 113,409,293 113,544,391
------------------------------------------------------------ ----------- -----------
EPS:
- basic (pence) (1.28) 7.45
- diluted (pence) (1.27) 7.37
------------------------------------------------------------ ----------- -----------
6 Dividends
Six months Six months Six months Six months
ended ended ended ended Year ended Year ended
30 June 30 June 30 June 30 June 31 December 31 December
2019 2019 2018 2018 2018 2018
Unaudited Per share Unaudited Per share Unaudited Per share
GBP'000 (pence) GBP'000 (pence) GBP'000 (pence)
----------------------- ----------- ----------- ----------- ----------- -------------- --------------
Paid final dividend 4,485 3.98 3,892 3.46 3,892 3.46
Paid interim dividend - - - - 2,251 2.00
Total dividends 4,485 3.98 3,892 3.46 6,143 5.46
----------------------- ----------- ----------- ----------- ----------- -------------- --------------
An interim cash dividend for 2019 of 2.30p per share (2018:
2.00p) has been declared by the Directors, which has not been
accrued as a liability at 30 June 2019 in accordance with IAS 8.
The dividend will be paid on 22 November 2019.
7 Property, plant and equipment
Fixtures, Right-of-use
Freehold/ Plant fittings assets
leasehold Meter and and Motor (note
property assets machinery equipment vehicles 10) Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
----------------------- ---------- --------- ---------- ----------- --------- ------------ --------
Cost
As at 1 January 2018 2,300 299,815 317 3,065 83 - 305,580
Additions 236 128,173 187 1,230 2,817 - 132,643
Disposals - (17,860) - (47) (86) - (17,993)
----------------------- ---------- --------- ---------- ----------- --------- ------------ --------
As at 31 December 2018 2,536 410,128 504 4,248 2,814 - 420,230
Additions 60 43,412 463 1,497 2,990 4,394 52,816
Disposals (136) (9,099) - (860) (32) - (10,127)
----------------------- ---------- --------- ---------- ----------- --------- ------------ --------
As at 30 June 2019 2,460 444,441 967 4,885 5,772 4,394 462,919
----------------------- ---------- --------- ---------- ----------- --------- ------------ --------
Depreciation
As at 1 January 2018 392 37,820 71 1,868 83 - 40,234
Charge for year 127 20,390 162 794 323 - 21,796
Impairment - 5,612 - - - - 5,612
Disposals - (4,056) - (44) (44) - (4,144)
----------------------- ---------- --------- ---------- ----------- --------- ------------ --------
As at 31 December 2018 519 59,766 233 2,618 362 - 63,498
Charge for period 49 15,482 123 560 477 504 17,195
Impairment - - - - - - -
Disposals (136) (2,402) - (840) (32) - (3,410)
----------------------- ---------- --------- ---------- ----------- --------- ------------ --------
As at 30 June 2019 432 72,846 356 2,338 807 504 77,283
----------------------- ---------- --------- ---------- ----------- --------- ------------ --------
Net book value
As at 30 June 2019 2,028 371,595 611 2,547 4,965 3,890 385,636
----------------------- ---------- --------- ---------- ----------- --------- ------------ --------
As at 31 December 2018 2,017 350,362 271 1,630 2,452 - 356,732
----------------------- ---------- --------- ---------- ----------- --------- ------------ --------
As at 1 January 2018 1,908 261,995 246 1,197 - - 265,346
----------------------- ---------- --------- ---------- ----------- --------- ------------ --------
Meter assets have been disclosed separately, previously
disclosed within plant and machinery in the financial statements at
30 June 2018, to align with management reporting. Included within
the closing meter assets net book value of GBP371,595,000 (31
December 2018: GBP350,362,000) is GBP36,951,000 (31 December 2018:
GBP43,049,000) relating to the traditional domestic meter
portfolio. In accordance with our accounting policy these assets
will be written down to zero by 2022. In the H1 2019 consolidated
financial statements the traditional domestic meter portfolio
generated c.GBP8,296,000 revenue with a corresponding GBP5,489,000
depreciation charge. GBP15,951,000 annualised recurring revenue as
at 30 June 2019 arises from the owned traditional and domestic
meter portfolio.
The assets are secured by a bond and floating charge.
For the purpose of impairment testing the traditional meter
asset portfolio recognised within meter assets is assessed as a
standalone cash-generating unit (CGU) and its carrying amount is
compared with the recoverable amount. The recoverable amount is
determined based on a value in use calculation, which uses the
following key assumptions:
-- estimated future cash flows from rental income, which are
assumed to decline on a straight line basis;
-- estimated future cash flows from termination income, which
are derived using historical data and analysis around the risk of
churn between contracted and non-contracted customers; and
-- a pre-tax discount rate of 2.61%, which reflects the risk
attached to the time value of these specific cash flows and is
deemed to be best represented by the Group's incremental cost of
borrowing on the basis that cash flows are secured by the installed
meter and the risk inherent in the decline of the cash flows is
already accounted for through the assumptions detailed above.
As a result of this impairment test, it was identified that the
value in use exceeded the carrying value of the traditional meter
assets CGU and, therefore, no impairment has been recognised in the
period to 30 June 2019. Whilst no impairment charge was recognised
in the period to 30 June 2018, an impairment charge of GBP5.6m was
recognised in the full year financial statements to 31 December
2018.
No impairment on other meter assets was recognised in the period
to 30 June 2019.
8 Bank loans
30 June 31 December
2019 2018
GBP'000 GBP'000
------------ -------- -----------
Current
Bank loans 1,586 172,016
------------ -------- -----------
1,586 172,016
------------ -------- -----------
Non-current
Bank loans 234,716 -
------------ -------- -----------
234,716 -
------------ -------- -----------
Bank loans at 31 December 2018 relate to the Group's previous
revolving credit facility of GBP280m.
On 21 December 2018, the Group entered into a new revolving
credit facility agreement with a syndicate of banks for GBP420m,
available for five years (the new facility). This new facility
comprises a different banking structure, gives rise to a
significant increase in the Group's borrowing capacity and
discharged the Group's obligations under the previous facility with
effect from the first utilisation on 3 January 2019. It is thus
deemed to be an extinguishment.
On 3 January 2019, the first drawdown was made under the new
facility for GBP200m. This was used to settle the Group's
outstanding obligations under the previous facility of GBP172m and
fund additional capital investment. The drawdown pattern changes
under the new facility to quarterly in advance, rather than monthly
in arrears. The balance of unamortised arrangement fees on the
previous facility of GBP0.09m has been accelerated and recognised
as an exceptional finance cost in the consolidated income statement
for the six months ended 30 June 2019.
Transaction costs on the new facility of GBP3.1m, recognised
within other assets at 31 December 2018, were reclassified to bank
loans on 3 January 2019 and are amortised over the term of the new
facility. At 30 June 2019, GBP0.3m of transaction costs had been
recognised within the consolidated income statement.
The Group had a total outstanding principal of GBP237.5m at 30
June 2019. Accrued interest of GBP1.6m has been recognised as part
of the carrying value of bank loans at 30 June 2019 together with a
deduction of GBP2.8m for unamortised transaction costs.
9 Post balance sheet events
On 8th August 2019 the Group acquired c.72,000 SMETS1 domestic
smart meters. These meters are installed at the time of purchase
and will therefore immediately benefit our annualised recurring
revenue.
On 5th September 2019 the Group acquired the entire share
capital in Solo Energy Limited (company number 566746), a block
chain energy flexibility IT platform. The acquisition enables SMS
to utilise Solo's strong IT platform to establish new long term
revenue streams from a decentralised electricity grid.
10 Changes in accounting policies
This note explains the impact of the adoption of IFRS 16 Leases
on the Group's financial statements and discloses the new
accounting policies that have been applied from 1 January 2019 in
note 10(b) below.
The Group has adopted IFRS 16 retrospectively from 1 January
2019 but has not restated comparatives for the 2018 reporting
period, as permitted under the specific transitional provisions in
the standard. The reclassifications and the adjustments arising
from the new leasing rules are therefore recognised in the opening
balance sheet on 1 January 2019.
10(a) Adjustments recognised on adoption of IFRS 16
The change in accounting policy affected the following items in
the consolidated balance sheet on 1 January 2019:
-- Right-of-use assets - increased by GBP4,050,000, recognised
within property, plant and equipment
-- Lease liabilities - increased by GBP4,098,000 (of which
GBP3,173,000 were non-current), recognised separately on the
consolidated balance sheet
-- Prepayments and accruals - decreased by GBP140,000 and GBP187,000 respectively
On adoption of IFRS 16, the Group recognised lease liabilities
in relation to leases which had previously been classified as
"operating leases" under the principles of IAS 17 Leases. These
liabilities were measured at the present value of the remaining
lease payments, discounted using the lessee's incremental borrowing
rate as of 1 January 2019. The weighted average lessee's
incremental borrowing rate applied to the lease liabilities on 1
January 2019 was 4%.
There was no net impact to retained earnings on 1 January 2019
and thus no impact to taxation on transition.
For the six months ended 30 June 2019 there has been no material
impact on operating profit or EBITDA but a portion of expense
previously recognised within administrative expenses has been
recognised as a finance cost under IFRS 16.
The Group had no leases previously classified as finance leases
at 1 January 2019.
Differences between the operating lease commitments disclosed at
31 December 2018, discounted using the incremental borrowing rate
at the date of initial application of IFRS 16, and the lease
liabilities recognised in the consolidated balance sheet at 1
January 2019 comprise adjustments for prepayments and rent-free
periods together with short term and low-value leases recognised on
a straight line basis as administrative expenses.
The associated right-of-use assets for leases were measured at
the amount equal to the lease liability, adjusted by the amount of
any prepaid or accrued lease payments relating to that lease
recognised in the balance sheet as at 31 December 2018. There were
no onerous lease contracts that would have required an adjustment
to the right-of-use assets at the date of initial application.
The recognised right-of-use assets relate to the following types
of assets:
At 30 June 2019 At 1 January 2019
GBP'000 GBP'000
--------------------------- ---------------- ------------------
Properties 3,715 3,806
Motor vehicles 175 244
--------------------------- ---------------- ------------------
Total right-of-use assets 3,890 4,050
--------------------------- ---------------- ------------------
(i) Impact on segment disclosures and earnings per share
The Asset management EBITDA, segment assets and segment
liabilities for June 2019 all increased as a result of the change
in accounting policy.
Lease liabilities and corresponding right-of-use assets are now
included in the Asset management segment liabilities and assets to
the extent they relate to motor vehicles and properties directly
attributable to the provision and management of meter assets:
Segment
assets at Segment liabilities
30 June at 30 June
2019 2019
GBP'000 GBP'000
------------------------ ---------- -------------------
Asset management impact 1,560 1,137
------------------------ ---------- -------------------
All other right-of-use assets relate to corporate assets that
are not allocated to a segment.
The increase in EBITDA and EPS was not material for the six
months ended 30 June 2019.
(ii) Practical expedients applied
In applying IFRS 16 for the first time, the Group has used the
following practical expedients permitted by the standard:
-- the use of a single discount rate to a portfolio of leases
with reasonably similar characteristics;
-- reliance on previous assessments on whether leases are onerous;
-- the accounting for operating leases with a remaining lease
term of less than twelve months as at 1 January 2019 as short term
leases;
-- the exclusion of initial direct costs for the measurement of
the right-of-use asset at the date of initial application; and
-- the use of hindsight in determining the lease term where the
contract contains options to extend or terminate the lease.
10(b) The Group's leasing activities and how these are accounted for
Group as lessor
Under IAS 17 it was concluded that the Group acts as a lessor in
its arrangements to provide meter assets to energy suppliers. These
leases were classified as operating leases as the Group did not
transfer substantially all the risks and rewards of ownership of
the meter assets. The related meter income was recognised on a
straight line basis per the meter rental income policy.
Upon implementation of IFRS 16, the Group has reassessed these
arrangements under the standard's revised definition of control. It
has been concluded that these no longer contain a lease under IFRS
16, due to other parties taking a significant amount of the output
from the meters and due to the Group being unable to substantially
control either the operation of, or the physical access to, the
meters. This revised management judgement also ensures commonality
with the wider industry. There is no impact on the recognition and
measurement of charges earned from the provision of meter assets as
a result of this change.
Under IFRS 15, the provision of meter assets to energy suppliers
(MAP services), together with the initial installation, is
considered a distinct and single performance obligation on the
basis that, as MAP, the Group has an obligation to its customers to
provide a fitted meter. This is a separately identifiable service
to which a standalone selling price is typically allocated. Over
the course of the contract term, which runs into perpetuity, the
Group delivers a series of monthly services for which benefits are
simultaneously received and consumed by the customer. MAP charges
are calculated daily based on the number of installed meters and
invoiced to customers monthly once validation checks have been
completed. As revenue from MAP charges is attributed to services
provided daily, revenue is always based on the actual level of
service provided and, therefore, any uncertainty at the end of each
reporting period is limited to the extent that validation checks
are still being completed. Revenue is thus recognised over time
based on our right to invoice and includes contract inflation
uplifts.
As a result of industry regulations, and subject to specific
contract terms with a customer, the Group may be required to make
payments to customers for shortfalls in the level of service
provided. These charges are directly related to the service being
provided to the customer and thus recognised as a reduction to
revenue in the month in which the service failure occurred. Where
service levels are set based on annual targets, charges are
estimated monthly and subsequently finalised at the end of the
year. Uncertainty, as it pertains to these payments to customers,
is thus resolved at the end of the reporting period.
In most circumstances, if a MAP contract is cancelled
termination fees are levied on the energy supplier. There has been
no change in the accounting of these termination fees and they
continue to be classified as other operating income unless they
have arisen on the loss of the meter assets, in which case they are
reported within administrative expenses as a component of net gain
or loss on disposal.
Group as a lessee
The Group leases various offices, warehouses and motor vehicles.
Rental contracts are typically made for fixed periods of three to
ten years but may have extension or early termination options.
Lease terms are negotiated on an individual basis and contain a
wide range of different terms and conditions. The lease agreements
do not impose any covenants, but leased assets may not be used as
security for borrowing purposes.
Until 1 January 2019, leases of property, plant and equipment
were classified as either finance or operating leases and, as at 1
January 2019, all leases were classified as operating leases.
Payments (net of any incentives received from the lessor) were
charged to profit or loss on a straight line basis over the period
of the lease.
From 1 January 2019, leases are recognised as a right-of-use
asset and a corresponding liability at the date at which the leased
asset is available for use by the Group. Each lease payment is
allocated between the liability and finance cost. The finance cost
is charged to profit or loss over the lease period so as to produce
a constant periodic rate of interest on the remaining balance of
the liability for each period. The right-of-use asset is
depreciated over the shorter of the asset's useful life and the
lease term on a straight line basis.
In determining the lease term, management considers all facts
and circumstances that create an economic incentive to exercise an
extension option, or not exercise a termination option. Extension
options (or periods after termination options) are only included in
the lease term if the lease is reasonably certain to be extended
(or not terminated). The assessment is reviewed if a significant
event or a significant change in circumstances occurs which affects
this assessment and that is within the control of the lessee.
Assets and liabilities arising from a lease are initially
measured on a present value basis. Lease liabilities include the
net present value of the following lease payments:
-- fixed payments (including in-substance fixed payments), less
any lease incentives receivable;
-- variable lease payments that are based on an index or a rate;
-- amounts expected to be payable by the lessee under residual value guarantees;
-- the exercise price of a purchase option if the lessee is
reasonably certain to exercise that option; and
-- payments of penalties for terminating the lease, if the lease
term reflects the lessee exercising that option.
The lease payments are discounted using the interest rate
implicit in the lease. If that rate cannot be determined, the
lessee's incremental borrowing rate is used, being the rate that
the lessee would have to pay to borrow the funds necessary to
obtain an asset of similar value in a similar economic environment
with similar terms and conditions.
Right-of-use assets are measured at cost comprising the
following:
-- the amount of the initial measurement of lease liability;
-- any lease payments made at or before the commencement date
less any lease incentives received;
-- any initial direct costs; and
-- restoration costs.
Payments associated with short term leases and leases of
low-value assets are recognised on a straight line basis as an
expense in profit or loss. Short term leases are leases with a
lease term of twelve months or less. Low-value assets comprise IT
equipment and small items of office furniture, where the value of
the asset on inception is less than c.US$5,000.
Payments for services are separated from the lease components of
a contract and accounted for as an administrative expense.
11 The half-yearly financial report was approved by the Board of Directors on 17 September 2019.
12 A copy of this half-yearly financial report is available by
visiting our website at www.sms-plc.com.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
IR LFFIIARIRLIA
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