ROL.L Regulatory News (ROL)

22 August 2019

Rotala Plc

("Rotala" or "the Company" or "the Group")

Unaudited Interim Results

Rotala plc (AIM:ROL), a provider of transport solutions across the UK, announces its unaudited interim results for the six months to 31 May 2019.

Highlights

·; Gross profit margin increased to 19.1% (2018: 17.9%)

·; Profit from operations up 4% to £2.33 million (2018: £2.25 million)*

·; Profit before taxation up 2% to £1.53 million (2018: £1.50 million)*

·; Basic adjusted earnings per share up 3% to 2.64 pence per share (2018: 2.56 pence)*

·; Interim dividend increased by 3% to 0.95p per share (2018: 0.92p)

·; Key acquisition in Bolton in second half of the year

·; Recent placing raising £1.15 million

·; Current trading in line with market expectations

*before exceptional items

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Chairman's Statement

I am pleased to present this interim report to shareholders in respect of the six months ended 31 May 2019. However the key event of the current accounting period took place two months into the second half of this year. This was the completion of our acquisition of the Bolton depot of First Manchester Limited on 11 August 2019. Further detail about the acquired business is set out below, but the principal features are that the acquisition will significantly expand Rotala's presence in the Greater Manchester bus market and is in itself an indicator of how the UK bus landscape is beginning to change. The acquisition also demonstrates the Company's ability to capitalise on such opportunities arising out of changes in the UK bus market. This attribute will be important in the successful implementation of the Company's targeted growth strategy. This aspirational goal targets annual revenues in excess of £300 million within a five-year period, while maintaining dividend growth and achieving a minimum return on capital employed of 15 per cent per annum.

Results

Revenues for the Group as a whole during the period were £30.52 million. This was a slight decrease on the £30.99 million recorded in the previous year but resulted from our adherence to group policy, which I highlighted in my statement in the 2018 accounts, of not chasing turnover regardless of profitability. The focus on financial return ensured that the gross profit margin rose to 19.1% for the period (2018: 17.9%). Pre-tax profits before exceptional items rose slightly to £1.53 million (2018: £1.50 million). I believe it is also worth reminding the reader that, before the recent Bolton acquisition, the Group had a strong seasonal bias to the second half of the year. Contract repricing at renewal is also biased to the first half of the year with the benefit arriving only in the second half.

Contracted Services

Revenues in the Contracted Services division fell overall by 4%, when compared to the first half of 2018, to £10.57 million (2018: £10.96 million). Revenues in the local authority bus contracts sector continued to increase as we saw the benefit of the contract gains made in the North West in previous years. We also made further advances in the West Midlands in this sector as we were able to take advantage of the sudden demise of a small local competitor in this area and fulfil the emergency tender requests made by Transport for the West Midlands. In contrast, in the corporate contracts sector, as I highlighted in the 2018 annual report, our concentration on maintaining gross margin ensured that revenues from these types of contracts, particularly in our airline business around Heathrow Airport, reduced considerably.

Commercial Services

Revenues in the Commercial Services division, at £19.18 million were almost identical to those of the first half of 2018, where they were £19.28 million. In the West Midlands we continued to enjoy revenue gains in this sector of our business, whilst revenues in the North West were stable year on year. This was balanced out by a slight fall in traffic at our Heathrow depots which are strongly reliant on passenger movements in and around the airport. This latter business is also particularly subject to seasonal effects and activity increases considerably in the summer months, as it has done this year.

Charter Services

Revenues in the Charter Services division increased by 5% compared to the previous year to £782,000 (2018: £748,000). Although we saw little rail replacement work in the North West, unlike previous years, we did benefit from a sharp increase in the private hire business based at our Heathrow depot.

The board sees the performance of the Group for the first half of the year therefore as entirely satisfactory and we remain well on course to meet market expectations for the year as a whole.

Acquisition of the Bolton Depot of First Manchester Limited

On 27 June 2019 we announced the exchange of contracts on the acquisition from First Manchester Limited ("First") of the Bolton depot of that company and the bulk of the business operating from it. Completion took place on 11 August 2019. The total consideration for the acquisition was £5.3 million, payable in cash on completion, satisfied from the Company's existing bank facilities. The fair value of the assets acquired was £4.3 million, so that the acquisition generated goodwill of approximately £1 million.

The business acquired from First by Rotala turned over about £25 million in the twelve months to 31 March 2019 and in First's hands produced EBITDA and profit before tax of £2.3 million and £0.3 million respectively over the same time period. The business comprises 18 commercial bus routes operating in the Bolton and Bury areas and into the centre of Manchester. The acquisition includes the depot at Weston Street, Bolton, the plant and machinery at that site and the goodwill of the business. The Bolton depot covers an area of 6.7 acres and consists largely of a combination of freehold and long leasehold interests. The depot is a purpose-built bus depot, constructed about 15 years ago, capable of operating up to 200 vehicles. Approximately 500 staff have also transferred to Rotala with the business.

The board believes that the acquisition of this business will strengthen significantly the operations of the Company in the Greater Manchester area. After London, Greater Manchester represents one of the largest bus markets in the country, on a par with the West Midlands where Rotala already has a notable presence. The Bolton acquisition has, taken together with Rotala's existing operations in the area, created a business which has a significant share of the bus market in Greater Manchester. The Group already had two smaller depots in Greater Manchester, in Eccles and in Atherton, operating approximately 90 vehicles between them. The Bolton depot becomes the headquarters of the Rotala Group in the North West and the existing operations of the Group in the region will be re-organised in order to make full use of the facilities and capacity of the Bolton depot. This re-organisation will enable Rotala to benefit from synergies that the directors have identified between the acquired Bolton business and the Company's existing operations in Eccles and Atherton, and enable its expanded services in the Greater Manchester area to operate in the most efficient manner possible.

The board believes that the acquisition provides an exciting opportunity to achieve a significantly larger presence in this key bus market and to improve further the financial performance of the new combined Manchester business in the medium term, once the integration plans we have drawn up have been fully implemented. The acquisition is therefore expected to be earnings enhancing in the first full year following completion and, over time, to improve further its operating profit and profit before tax contributions to the Group.

Under the terms of a separate vehicle leasing agreement, Rotala has agreed with First to lease from it 125 vehicles which are used at the present time to service the 18 commercial bus routes which form the acquired business. These vehicles will be replaced progressively up to 30 June 2021 with more modern vehicles and the leased vehicles will be returned to First by that date. The directors estimate that the capital expenditure to be incurred over that time period in the re-equipment of the business will total approximately £26m, which will be financed using the Group's existing panel of providers of hire purchase finance facilities. However, once fully in place, this capital expenditure programme will have equipped this business with all of its replacement vehicle requirement for at least the next decade.

Placing and Subscription

On 1 August 2019 the Company announced a placing and conditional subscription with new and existing investors to raise up to £1,144,640 (before fees and expenses) by the issue and allotment of up to 2,044,000 ordinary shares at an issue price of 56 pence per share. Of this share issue, the directors and certain persons closely associated with them took up 838,000 ordinary shares.

Following on from the acquisition in Bolton, as described above, the Company will continue to seek out further acquisition opportunities. In that light, the board considered the current capital structure of the Company and its associated ability to support such deals. Whilst the Company has historically funded acquisitions primarily through hire purchase and other debt financing facilities, the board, having consulted its shareholders, concluded that it was appropriate to seek to deleverage the business over time and to target a longer-term net debt to EBITDA ratio of 2.5 times. Accordingly, the Company undertook the placing and subscription so that it could improve its balance sheet through a reduction in net debt.

Dividend

The Company will pay an interim dividend of 0.95 pence per share (2018: 0.92 pence) on 13 December 2019 to all shareholders on the register on 22 November 2019. The board is conscious of the importance of dividend flows to shareholders; the board has set a target for dividend cover of 2.5 times earnings in the longer term.

Fuel hedging

In its budgets for this year and forecasts for next year the Group has assumed a fuel price of £1 a litre. The board constantly monitors the price of fuel and takes action to hedge the Company's exposure as and when it seems opportune to do so. At the present time the Group has the following fuel hedges in place:

·; Almost all of the fuel requirement for the remainder of 2019 is covered at an average price of about £1 a litre;

·; Some 31% of the fuel requirement for 2020 is covered at an average price of about £1 a litre.

Financial review

The following comments on the Condensed Income Statement address the results before any exceptional items. Revenues decreased by 1.5% when compared with the same period in 2018, as explained above. Cost of Sales however decreased by 3%. Consequently Gross Profits increased by 3.5% to £5.83 million (2018: £5.63 million). The gross profit margin rose to 19.1% for the period, as against 17.9% in the prior year. Administrative Expenses increased by 3%. Profit from Operations was therefore up by 4% and reached £2.33 million for the period (2018: £2.25 million). Net finance expense rose by 7%, reflecting the increased HP and bank debt being used by the business, compared to the prior period. Profit before Taxation increased by 2% to £1.53 million (2018: £1.50 million). Note 3 to this statement analyses the exceptional item column in the income statement.

Adjusted basic earnings per share, based on profits after tax and before exceptional items, were 3% up at 2.64 pence per share (2018: 2.56 pence). Basic earnings per share, including all exceptional items, were 1.75 pence per share in the period (2018: 2.62 pence). Exceptional items in the current period include the bulk of the advisory costs incurred to effect the acquisition of the Bolton depot of First which was actually completed in the second half of the year.

The gross assets of the Group were £81.8 million at 31 May 2019, compared to £75.1 million at the same time in the previous year. This change reflects principally the investment in the vehicle fleet and the switch of the defined benefit pension scheme into an asset position from the liability position seen twelve months before. An analysis of the Group's holdings of property, plant and equipment is set out in Note 5 to this statement.

These factors have had their effect on total liabilities, which have risen to £46.5 million at 31 May 2019 (2018: £41.9 million). The net loans and borrowings of the Group, including its obligations under hire purchase contracts, stood at £35.5 million at 31 May 2019 (31 May 2018: £32.7 million). An analysis of these borrowings is set out in Notes 6 and 7 to this statement. Net assets were £35.3 million at the period end (31 May 2018: £33.2 million). A principal cause of this change is the move of the defined benefit pension scheme into an asset position.

Cash flows from operating activities were 7% up on the same period in the previous year and cash generated from operations reached £1.46 million (2018: £0.04 million). Hire purchase interest increased to reflect the larger borrowings via this type of financing arrangement. Plant and equipment purchases, net of sales, totalled £476,000 (2018: £240,000).

Cash flows used in financing activities in the period were not distorted this year, as they were the previous year, by the large flows associated with the change in the Group's bankers. The bank loans repaid consisted largely of a one-off mortgage repayment of £1 million occasioned by the sale of the Avonmouth property in late 2018. Bank loan interest rose to reflect the greater use of bank facilities. The capital element of payments on HP agreements increased somewhat as a consequence of the overall rise in HP borrowings. In summary (adjusting for the mortgage repayment referred to above) there was the usual decrease in cash and cash equivalents in the first half of the year. The profitability, and resultant cash flows, of the Group are customarily weighted towards the second half of the year and this pattern can be expected to be repeated in the second half of 2019.

Outlook

Rotala has a proven track record of steady organic growth supplemented by sensibly priced acquisitions. The Bolton acquisition described above conforms to this strategy but in addition significantly enhances Rotala's market share in a key UK bus market, this time in Greater Manchester. Furthermore the deal is an indicator of how the UK bus landscape is beginning to change. We can expect more divestment by the big bus groups in future years, as has been publically stated by certain of these groups. We undoubtedly have the management skills and the resources to capitalise on these opportunities. This makes us confident about the prospects of the Group in 2019 and beyond.

John Gunn

Non-Executive Chairman

21 August 2019

Notes to the Unaudited Consolidated Interim Financial Statements for the six months ended 31 May 2019

1. Basis of preparation:

The unaudited condensed consolidated interim financial statements have been prepared using the accounting policies set out in the group's 2018 statutory financial statements.

The financial statements of the group for the full year are prepared in accordance with IFRS's as adopted by the European Union and these interim financial statements have been prepared in accordance with IAS 34 "Interim Financial Reporting".

2. Turnover:

Revenue represents sales to external customers excluding value added tax. All of the activities of the group are conducted in the United Kingdom within the operating segment of provision of bus services. Management monitors revenue across the following business streams: contracted services, commercial services and charter services.

3. Profit before taxation:

Profit before taxation includes the following:

The bulk of the costs of acquisition and integration incurred in the six month period to 31 May 2019 in the above table relate to the costs of the acquisition of the Bolton depot of First Manchester Limited, as described in the Chairman's Statement. This transaction completed on 11 August 2019.

4. Earnings per share:

Basic earnings per share have been calculated on the basis of profit after taxation and the weighted average number of shares in issue for the period of 48,026,580 (May 2018: 48,026,580; November 2018: 48,026,580). Diluted earnings per share have been calculated on the basis of profit after taxation and the weighted average number of shares in issue (including such potential issues as are dilutive) for the period of 48,026,580 (May 2018: 48,095,501; November 2018: 48,026,580).

Basic adjusted and diluted adjusted earnings per share before exceptional items have been calculated using the same weighted average numbers of shares in issue, but on the basis of profits after tax and before any exceptional items. This is done in order to aid comparability between the accounting periods.

5. Property, plant and equipment

6. Loans and borrowings:

Secured bank loans are mortgage-type loans secured by reference to the group's freehold property.

7. Obligations under hire purchase agreements:

All finance leases are secured by the lessors' rights over the respective leased assets which consist principally of passenger service vehicles.

8. Dividends:

On 7 December 2018 the company paid an interim dividend of 0.92 pence per share in respect of the year ended 30 November 2018; a final dividend in respect of the year was paid on 28 June 2019 at a rate of 1.78 pence per share. All dividends are payable in cash only.

9. Additional information:

The unaudited Consolidated Interim Report was approved by the Board of Directors on 21 August 2019. The consolidated interim financial information for the six months ended 31 May 2019 and for the six months ended 31 May 2018 is unaudited. The financial information in this interim announcement does not constitute statutory accounts within the meaning of Section 434 of the Companies Act 2006. The statutory accounts of Rotala Plc for the year ended 30 November 2018 have been reported on by the company's auditors and have been delivered to the Registrar of Companies. The report of the auditors on these accounts was unqualified, did not contain an emphasis of matter and did not include a statement under section 498 of the Companies Act 2006.

10. Copies of this statement are available from the registered office of the company at Rotala Group Headquarters, Cross Quays Business Park, Hallbridge Way, Tividale, Oldbury, West Midlands, B69 3HW or the Company's website www.rotalaplc.com.