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Brexit uncertainty plunges London practices into gloom

Architects across the capital have become increasingly despondent about their pipeline of future work, with a lack of clarity around Brexit once again blamed for uncertainty in the marketplace.

According to the latest RIBA Future Trends survey, sentiment among London practices slumped into negative territory from a score of 0 in March to -7 in April, suggesting an overall expectation of decreasing workloads.

With PM May now resigning, a Brexiteer outcome looks favorite.

More uncertainty, with a larger slump to follow.

correction:

Architectural practices aim to achieve a KPI of Fee Revenue/Fee Earning Staff of 100k – 120k /FTE.

Hey Vodka,

“With the Board owning 50% of the stock this business will be sold - its just a matter of when.’

Agreed…..

My previous point is more about ‘why would you buy them’.

If there were a 'strategic' reason, then a valuation of 50% of Revenue would make real sense.

I struggle to find a reason to buy them, considering the risk that the revenue you think you might buy, would more than likely walk straight out the door, as the main fee earners would not be constrained to stay, as they are not the main equity owners. That is a real concern for a new owner: and hence why no one has bought them to date.

Architectural practices aim to achieve a KPI of Fee Earners/Fee Earning Staff of 100k – 120k /FTE. That ensures that you can reward the main Fee Earners at the top of the market range, and provide quality dividends for the shareholders. Admin Staff are kept to an absolute minimum: eg. accounts/personal/marketing/etc

The leading architect in the UK, Fosters + Partners is delivering 168k/FTE.

AUK is half of this amount. That is a pretty appalling KPI.

F+P pay their Architectural Directors 1m pa - AUK pay them 50k! You get what you pay for.....!

AUK often refer to the ‘staff’ in the German offices within their headcount. That looks great for clients looking for a ‘large‘ practice. In reality these ‘staff ‘are not under AUK control, as AUK simply pick up a dividend from these practices, they do not control or contract these staff members.

The reason for the poor KPI in UK & UAE is that AUK most probably can only attract work with poor fees compared with Fosters + Partners. The ‘executive architect’ services company Versetec would also be on very low margins, as it is not highly rewarded work.

As our cities become more crowded we are turning to high rise solutions to deal with the density. There are 100’s of towers planned for London and other cities of the world: AUK is not on any of those projects, as that is not a specialism that they have. That is a huge impediment for growth.

Clients appoint an individual architect for their skill and not simply an Architectural Company. Unfortunately the main fee earners with that skill are not the main 'ageing' shareholders. Why would the limited number of main fee earners wish to have their future profitability sold off by departing ageing shareholders?

Unfortunately AUK do not have quality professional staff. They are poorly paid, compared to competitors.

In the UK, the design led commissions for AUK have crashed alarmingly, and that is due to the lack of skill compared to other competitors.

In the UAE, AUK have purchased a run of third rate practices, and that level of design is not want is expected in Dubai. Revenues there are tumbling too.

Great architectural practices are run by Architects. AUK has been run by accountants for 15 years and unfortunately it shows.

AUK will be sold: but after reading this how much do you think a new owner would pay

Usually people consider purchasing a professional services practice:

• to buy an industry leader [BDP or Watermans]

• to buy a ‘springboard’ into a major market [Quad]

• to expand into a niche like say healthcare [Devereux]

• to buy design skills in key market areas [Perkins + Wills]

Considering AUK, I cannot assess why someone would buy them?

They are not an industry leader, they are no longer a springboard say to the EU after Brexit, they are certainly not a niche, nor do they have any particular design skill. They are predominately in London and Dubai, despite all the blurb in annual reports...

The equity fee owners are ‘very aged’, but as they retired so did the Group’s fee income.

This time last year Aukett were not forecasting a massive loss – yet that is what unfolded. All 2.5m of it. I therefore take whatever is stated in quarterly statements with a pinch of salt.

What we do know is that the massive uncertainty of Brexit continues, RIBA workload figures remain negative, AUK’s secondary market in UAE is less than buoyant, and 2.5m of cash is all but gone.

Someone may 'parachute in' to buy them at some point [perhaps as a white knight], but I find it difficult to understand the rationale for someone to lay out 5m to do so.

'Revenue less sub consultants' is at 13.1m, with Costs at 15.7m. Earnings per Staff is horrendous, and architectural directors paid a pittance. Revenue collapsing, Unforecasted Losses, Millions of Cash drained, Chairman & CFO walk, just surving in rent free digs......

'Juicing Sales' might be a reason to buy AUK, but at what cost? Will the fee earners want to work under new management....or will they all walk too...? You might be buying a complete lemon [without the juice].

You might be correct longer term Vodka, but not for me.....

There has been no buyers in the market for AUK, and I would expect the above reasons is why AUK stay a 'lobster pot': easy to put your money in but very difficult to get it out?

Good luck with it Vodka...

Hi Vod,

Unfortunately AUK provides a poor target for most suitors.

AUK has a declining market share in their home base in London, with revenue halving in recent years.

AUK’s management is not ‘design driven’ and therefore lack any sense of being 'niche': they are run by accountants.

Cash has crashed from 2.5m to next to zip in recent years, and there has been a spinning turntable of board members.

AUK has small businesses in London and in UAE – everything else is simply taking a dividend from other smaller practices that AUK have invested in.

Perkins + Wills would not be interested: P+W already have superior architectural practices in London & UAE.

BDP were bought by NK for being industry leaders: AUK are 'midgets'

Quad were bought as a springboard for BDP onto North America: AUK have no springboard to anywhere

Devereux was a niche purchase of a healthcare specialist: AUK are certainly not niche.

Coupled with this you have a 'second rung' of fee earners failing to win work in both London & UAE.

I am not sure what you are buying at AUK - and why you would want it? As I said, I am not sure who would want to buy a small architectural practice with no particular niche, not design driven, and who is declining in their own market? They might find a 'white knight': but that might be all they get?

WYG steady 150m of revenue is interesting, but they have their problems.....

Waterman Group sold for 43m with a 91m turnover, but they had a reasonable profit @ 4%, cash @ 7%, and net funds @ 6%. WG was/is a very well run engineering group.

WYG might be worth 70m, if management had resolved the issues....so what discount would a purchaser consider to resolve the mess, and bring the company back into sustainable profit?

If AUK can build back to a sustainable 10m turnover in the UK at a reasonable sustained profitability @ 10-20%, then someone might buy them for a PE of 6-8 at some point. It is a long way off....

Hey V,

It certainly shows people will pay over the odds if they want something.

WYG looks like a mess to me:

Revenue steady at 154.4m
Net Debt 6.3m
2018 loss
Net Assets 25m propped up by a very fragile 21m of Goodwill & Intangibles
Marginal Profitability even in a good year

The only positive is their revenue line has been steady, so I would assume someone might believe they can improve the profitability position over time, with better management?

Unfortunately Aukett has a collapsing revenue stream, with the UK HQ halving their modest revenue in recent years, and the UAE revenue stream posting loss after loss. Nothing stable about an architectural practice!

Buying small architectural practices is not a normal past time in the M&A sector. If the main 'Fee Earners' walk, you have nothing.

A ‘Dad’s Army’ of Directors are now deployed to salvage the position, with +70 year old former retired Directors re-employed in UK & UAE to see whether they can stem the carnage. So much for the ‘next generation’ taking control of the future! ‘Captain Mainwaring’ & ‘Sergeant Wilson’ back in the breach! [I have a picture in my mind of ‘George’ & ‘Arthur’ on their ‘zimmer frames’ trying to win new business?]

WYG looks a superior buy than AUK: at least they have a steady revenue base.

Headlines read:

“Brexit malaise fuels slowdown in London and the south, according to RIBA’s latest Future Trends survey.”

Second Half UK Revenue must be under some pressure.

Rent Free Period in UK HQ suggests a May 2019 start, but earlier comments referred to a start in 2018? ......not sure which is true?

UK Revenue has halved in recent years, so Aukett had no other choice than to downsize the UK HQ.

With losses forecast from the Middle East, and little GDP growth in Europe, it seems another tough year for this lot!

Dividends will not feature until they have a Net Cash position back above £1.5m [10% of revenue] - that sounds a long, long way off.

Remember when they had £2.5m Net Cash!.....all gone in the Middle East dust.

Net cash: £200k as at 31 March 2019 [just announced]

Aukett have 4 days supply of Net Cash!! Whoppee!!

Enough 'Net Cash' to get them through to the end of the week……....sorry, make that Friday morning.

12 months to go before cash demands in London increase by 440k pa, as deferred UK rent kicks in.

UAE continuing to make losses and a drain on cash.

Germany narrowly missing a technical recession in March 2019, so cash from the German outposts will be under stress in 2019 & 2020.

Bank reviews facility in May.

Today's press:
AJ100 big hitter Purcell set to lay off staff
Purcell is understood to be on the verge of making up to 15 per cent of its workforce redundant

The concern is that if other UK practices are laying off staff, with a substantial declining revenue base, it is difficult to see how Aukett expect a profit in the 2nd Half.

Last year Aukett obviously put a higher conversion rate on potential workload and new instructions, that ultimately failed to arrive. There was a substantial revenue miss, with Aukett holding staff without revenue to support them. That cost them 2.5m. Might this repeat?

Latest Trading Updates

“we continue to expect the first half to be loss-making, though with such losses much reduced from the prior year figure……we expect the Group overall to be in profit for the 2019 financial year.”

Well, that is exactly what they said last year, and continued saying it March, June & October 2018, before dumping a massive 2.5m loss on the market in January 2019.

Nothing on the ‘Net Funds’ position, that 6 months ago was hovering just above zero. Cash is the major worry, and Aukett has failed to tell us how much they have got.

With another half year loss, it cannot be pretty!

More losses out of Middle East it seems – what a complete disaster that has been!!

Summary of 2018 Trading Updates:

29.3.18 “We expect a larger loss in the first half compared to last year, followed by a profit in the second half.” [ye. 2018]…

28.6.18 “a Group loss for the full year despite a better second half. [ye. 2018]
Shares rose

5.10.18 “In our Interim Statement in June we referred to the Group expecting to make a loss for the year ended 30 September 2018. This continues to be our expectation.” [ye. 2018]

4 months: no revenue or profit warning, then……..

30.1.19 First mention 22% fall in revenue, and the 2.54m loss, with a substantial second half loss, contrary to three 2018 statements.
Shares collapsed to <1p.

Loss: <1.25m
Net Funds: must be under significant pressure to be positive after another loss?
Revenue: must be down significantly once again from 2018?

You sound like a current or past Director with shares that you HODL, so I will tread carefully.

3m share parcels have been sold recently: big shareholders are exiting.

I simply look at the Accounts that are presented, and consider the decisions that Aukett have made.

I sold at the top years ago, but with past experience in professional practices, I have always thought this company was poorly constructed, in that the 60-80 year olds wanted the profit of future generation fee earners.

It was a model doomed to failure, in my mind, as it is impossible to retain and attract the best architectural talent when they can see that their future has already been sold off. In the end you don’t, and the outcome is that you do not win the work as you do not have the best architects. They run off to Fosters et al.

The only solution is to buy other failing businesses in the hope that 1+1= 3, but unfortunately for Aukett 1+1 = 1 [or less]

I make my observations always with an eye on what a High Court Judge stated about the CEO. CEO Nicholas Thompson had made representations to the High Court that were 'made knowingly and deliberately, without belief in its truth, and therefore fraudulent." Google it!

Turning to your considerations:

“I believe the CEO (Accountant not Architect) manages their finances well, all things considered.”

I must say I am at a loss to see how you can make the above statement, when CEO Nicholas Thompson announcement to the market on 28 June 2018 that the market relies upon was so inaccurate. He stated that “a Group loss for the full year despite a better second half". The final result was a massive fist half and second half loss, that ran to $2.5m!! Blind Freddie surely would have done better! Do you think that was a well-crafted statement to the market, or was a meeting with Coutts due?

CEO Nicholas Thompson embarked on a Middle East buying spree buying 3rd rate businesses just prior to the Brexit vote. The first rule in running a multi focal professional business is to ‘protect your base and your cash’. CEO Nicholas Thompson should have bunkered down and protected the cash position and ‘the UK base’. He bought businesses that had 3m bad debt provisions that have collapsed the net cash position from nearly 2000k to 150k. These companies are still making losses. Where was the due diligence? Do you think that was a great idea by the CEO?

Whilst the revenue was plummeting CEO Nicholas Thompson was not reducing the cost base, preferring to erode cash, and post massive losses. Do you think that was a ‘well managed’ outcome?

Everything the CEO has touched has turned to ****.

Architectural practices must be run by Architects. Law Firms by Lawyers. Accountants by Accountants: it was since God was a boy!

My concern primarily is Aukett’s cash position.

Coutt's are reviewing the facility in May: and this is what they will be looking at........

What we know is that the Current Assets plunged last year from 9.1m to 6.7m, whilst their Total Liabilities stayed flat at 6.8m, and now exceed Current Assets. That is a huge 'red flag'!

Net Cash has collapsed from close to $2m to 150k in recent years, and still falling. That is a massive worry.

Provisions against bad debts have been running at close to 1m pa. primarily from their poorly conceived Middle East acquisitions, which deleted their cash pile of 2m. 1m bad debts year on year is horrendous.

Net Assets are propped up by 3.2m of goodwill and intangibles, making the only worthy asset being, oddly enough, their stated value of their shareholding in the private architectural companies in Germany.

The very experience Wright [CFO] is leaving this week, and replaced by Barkwith. He appears to have no experience with a listed company, nor a professional practice. He comes from a small, 2.4m turnover company, with 7 people. The difference between the skill set is vast! The highly experienced Simmons [Chair], with a lifetime of experience in running professional practices, is also departing this week too. Stating this, running a small architectural practice is not 'rocket science' from an accountancy point of view. Accountants cannot win architectural work.

With a collapsing Net Cash position, collapsing Revenue, collapsing Current Assets, Bad Debts running at 1m pa, a dearth of new work, and with delays and cancellations occurring across their two main revenue bases: it looks as bad as you can get.

The Balance Sheet is shot to bits, with the only asset left being the valuation of their long term German investments. Germany Manufacturing PMI plunged this month to 44.7, which has sent a shiver to all markets.

Last year Aukett seriously under forecast their loss position on their 28.6.18 statement, stating, “a Group loss for the full year despite a better second half". Aukett’s ‘better second half’ ended with another 1.2m loss. How the CEO could get it so wrong 3 months from a year end, is a considerable worry.

If Coutt's pulls the plug in May, or if Aukett run out of overdraft facility, then Aukett will need to start selling shares at 1p if they find buyers, diluting the valuation.

'Value Realisation' only happens when you have something to sell. If the cash runs out they have nothing to sell.

I have been presenting the 'bear case' for many years on this stock: I have been proven unfortunately correct. They may hang on, but they will be in a fragile state for years to come.

hey Vodka,

Unless of course Aukett run out of cash?

Record 2.5m loss in 2018 ain't pretty.

157k Net Cash, 6 months ago, so that is the major concern when you are spending 1.3m per month.

Aukett have had to write off nearly 2m of bad debts in the past 2 years.

60% of the Debtor Pile now lives in the UAE, 'home' of the bad debts.

Extracting 1.3m per month from the Debtor Pile will be a huge struggle.

Bank reviews the facility in May, so if there is no cash left, Aukett will be selling shares at 1p, I guess. They will not have any other option.

Current Assets now have crashed to equal Total Liabilities, so you now have to run to Non Current Assets [got to love Goodwill & Intangibles] to prop up Net Assets.

Todays press sums up the current position for their UK business:

"Brexit uncertainty ‘hits home hard’ for architects
Architects have reported a dearth of new enquiries, a reduction in job applications from Europe and pressure on fees as the UK’s laboured withdrawal from the EU continues to exasperate the profession..."

Last year Aukett spent nearly 1m on fee bids, and they failed to win anything.

Chairman & CFO heading out the door this week.

Big 9 shareholders selling stock.

Just commenting on the obvious problems....and high probability of dilution.

Is AUK planning a secondary offering to raise additional capital?

AUK's 1 March Notice stated: Section 551 of 826k .

Perhaps an additional 50% share issue of 82.6m shares @ 1p?

AUK might be looking for new capital to service existing debt or simply cash to keep going, and may be issuing additional shares to raise the funds according to 1 March Notice.

Dilution will drastically impact the share value.

Warning Alarms......

1 March Notice of Meeting noted the following:

826k of additional shares under section 551 of the Companies Act 2006 authorized and 165k under section 570.

As the net assets are principally the poor debtor pile, old computers and old furniture, Net Assets plummeting, and the share price +/- 1p, one can only imagine that if Aukett exercise this additional share offering, it will dilute the value of shares already issued.

55m shares @ say 1.5p = 825k represents 33% of the number of shares issued @ 165.2m.

That is a very large Section 551 placement!

I guess it is the fall back position if the bank withdraws their 1m support, but it would kill the share price?

New London Architecture’s 2019 London Tall Buildings survey has revealed that while the number of planning applications for tall buildings in 2018 fell slightly the number of approvals grew.

The number of applications decreased from 78 in 2017 to 75 in 2018, but the number of tall towers granted planning increased to 72 from 63.

AUK has not been appointed Architect on any of them!

"This year a record number of skyscrapers will be built in London - transforming the iconic skyline of the capital.

A total of 76 buildings with 20 storeys or more are set to be finished in 2019, three times more than last year's total. 121 are under construction"

Aukett Swanke are not appointed on any of these buildings in London.

Aukett Swanke UK income plummeting.

Aukett are now down to Net Cash representing a 3 day supply @ 157k.

AUK cost base is c.1.3m per month, including a c.1.0m per month salary bill.

AUK Debtor Pile is now heavily focused on UAE [60%], where AUK are facing massive bad debt problems from Clients that were inherited through the poorly conceived acquisition process. They are not traditional AUK clients.

AUK Debtor Pile has plummeted 30% in the last year, and the significant problem is cash.

Aukett start out each month without sufficient funds to pay the end of months wages.

Revenue from UK & UAE is plummeting, and redundancy costs will further erode cash.

Former Directors still selling their shares it would appear. Chair & CFO heading out the door.

If AUK have a bad collection month, they are gone.

AUK's only real assets: old computers, old desks, and a very uncertain Debtor Pile.

Bullish?.......pump & dump at best!

'bbr391' you are the only one flying, AUK are hanging on by their fingernails: I'll stick with the former Directors who are selling....

With 9.24m of shares I would well imagine Curiel has his own interests in mind.

A 73 year old returning to a part time role, after 5 years with his feet up, will do nothing. Wheeling him in on his 'zimmer' won't do anything, but appear desperate.

Curiel's client base would have long retired, so it all makes zero difference.

The current Chairman Simmons at least ran a successful accounting firm!

Both Simmons and the CFO are both bailing out in a few weeks: tells you something!

It is unfortunate that the CEO & Chairman positions cannot be held by the next generation of younger Architects, putting the old Dad's Army out to pasture. These old guys seem to have ridden the ship onto the rocks, by very poor decisions in the past.

2m of cash has been eroded and the balance sheet smashed in recent years: and it has all been self inflicted.

The Bank is reviewing their debt & overdraft facility in May '19, so if Aukett do not have their act together by then, by reducing their cost base significantly below earnings, then this LSE Share Discussion might come to an abrupt end!

6m of shares from the Top 9 Shareholders have been sold in recent weeks. These shares were held by former directors: they are starting to liquidate. Gives you a clue!

Chairman going, CFO going, past Directors selling millions of shares....Aukett living off the overdraft.

Check Please!

Architects Journal

22 Feb 2019

"Big practices braced for Brexit job cuts"

"A large number of big architecture practices are preparing to slash staff numbers as the prospect of a no-deal Brexit looms, new research has revealed."

Forget profit, this is more about basic survival.

UK revenue needs to grow from 2018 to break even, so the Annual Report stated: that looks more and more unlikely. If a further loss develops, there will be a potentially big cash drain, with added cash demands paying out redundancies. In 2018 Aukett failed to win work so the Annual Report stated, leaving them with little to do in 2019!

UAE revenue fell in 2018, with big losses. 2019 outlook not promising either so the Annual Report stated, so a potentially larger cash drain, coupled with a very uncertain debtor book. Middle East clients love not to pay consultants.

Europe revenue barely covering the salaries.

The big issue is, will the cash run out, with the bank demanding their [1m] loan and overdraft back?.......delisting, or worse?

Two big 3m sell orders in the recent weeks, that must have come from Top 9 Shareholders: very brave to buy at this point.

5 Year Chart look Reckt!

Aukett should be updating the market more regularly, and not taking 3 months to inform the market of substantial losses, as occurred recently. Aukett would know now what the half year will look like, but by past performance the CEO will inform us in about 4 months time.