Harvey Nash Group Multifaceted growth

Harvey Nash Group plc

Harvey Nash Group Plc (LON:HVN) has announced full year results for the 12 months ended 31st January 2018. The year has proven transformational for the Group with a successful migration to AIM, completion of two acquisitions and the launch of a savings initiative anticipated to deliver annualised savings of c.£2.0m. The benefit of the restructuring being undertaken is already paying off, with a meaningful pick up in profitability seen in the second half of this year and good trading momentum continuing into FY19. We make no material changes to our forecasts today, adjusting only for an improved effective tax rate and adjusting for the FY18 net debt position. At current levels the shares trade on an FY19 PE of 7.0x time and offer an attractive 4.7% dividend yield.

Full Year Results: Record core revenue of £885.7m, up 12.9% YOY, including contribution from acquisitions PAT and Crimson IT. Core gross profit was broadly flat at £98.1m, but the benefit of the ongoing transformation plan, resulted in a 22.6% improvement in adjusted EBIT to £11.4m, with PBT +24.4% at £10.8m, ahead of the £10.6m we forecast. Net debt of £6.8m has risen from a net cash position of £6.5m in the prior year, reflecting acquisitions, increased working capital requirements and the cost of implementing the Group’s transformation plan. A final dividend of 2.652p has been proposed today, taking the full year dividend to 4.3p, a 5% increase YOY and the 10th successive year of dividend growth.

Regional performance: Regionally, the Group’s UK business saw a 6.5% uplift in gross profits against a challenging backdrop of Brexit related uncertainty. In Europe a 5.0% increase in gross profit was driven by continued strong performance in Benelux. The Rest of the World faced challenges from a skills shortage in the USA as well as restructuring undertaken in Asia Pacific.

Forecasts: Given the strong H2 run rate which delivered 60.7% of overall profit for FY18 and the ongoing momentum noted by management we have made only minor adjustments to our forecasts to reflect the improved effective tax rates seen and revised our net debt assumptions as a result of higher than anticipated exceptional costs associated with the Group’s transformation plan. We also introduce forecasts for FY21 today.

Valuation: At its current share price, Harvey Nash Group Plc trades on an FY18 P/E of 7.0x (falling to 6.9x in 2019E) and an EV/EBITDA of 4.5x (falling to 3.9x in 2019E), a compelling valuation alongside an attractive 4.7% dividend yield. We remain comfortable with our blue-sky analysis in our initiation note (12 September 2017) showing the Group delivering an EBIT of £17.5-20.0m in the medium term, which implies a share price range of 154-172p discounted back by 3 years at 10% applying a modest through the cycle P/E of 12x.

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