30.08.2013

Lavendon boosts profits

UK based international access rental group Lavendon has published its first half results which show a strong improvement in profitability on slightly lower revenues.

Total revenues for the six months were £113.6 million, one percent lower than in the same period last year. The stable numbers mask falls in the UK, Germany and Belgium, offset by gains in France and the Middle East. Pre-tax profits jumped 72 percent to £8.6 million.

In the UK revenues slipped nine percent to £51.9 million, with rental revenues dropping six percent to 49.1 million, due, says the company, to a combination of poor weather earlier in the year, a one percent fall in rental rates and a shift towards smaller machines in terms of utilisation. Operating profits fell 16 percent to £4.9 million.

Its German operations which trade under the Gardemann brand, slipped into third place behind the Middle East in terms of revenues, with a seven percent fall to £21.66 million, however operating income more than tripled to £1.03 million, due to the absence this year of steep restructuring costs. Rental revenues fell six percent due to the company cutting rental rates in order to achieve higher utilisation.

The DK Rental business in Belgium also suffered increased competition with revenues dropping four percent to £7.72 million, while rental revenues fell 11 percent. The higher sales and lower amortisation charge helped boost operating income 25 percent to £1.2 million. The group reacted to the lower rental demand by shifting some of its fleet to other markets.

France maintained its strong improvement, with revenues up six percent to £10.1 million while operating profits jumped 23 percent to £1.1 million.

Finally the Middle East operation saw revenues in local currency grow by 30 percent- or by 32 percent in sterling - to £22.1 million, making this part of the operation the second largest after the UK in terms of revenues and by far the most profitable, as operating income jumped 39 percent to £6.5 million, thanks to higher rates and improved utilisation.

Capital expenditure totalled £27.4 million in the first half, compared to £20.8 million in the same period last year, sales of used equipment totalled £4.9 million – down from £6.1 million this time last year. The company expects that the full year spend will be in the region of £53 million.

Net debt for the period was up 11 percent to £108.3 million, with the company expecting to end the year in a similar position to the end of 2012.

Chief executive Don Kenny said: "The group has made further good progress in the first half of the year with our financial results in line with the Board's expectations. There has been a continued improvement in our profitability from relatively stable revenues. The benefit of the Group's geographic diversification combined with the continued delivery of operational efficiency gains and a more effective capital base has delivered a 50bps year on year improvement in our key performance metric, ROCE (Return On Capital Employed."

"With the first phase of the operational efficiency programme almost complete, the board is now assessing the scope of our next phase of business improvement initiatives with the aim of establishing new targets for delivery in the coming months. At the same time, the disciplined management of our capital base will continue to deploy resources in support of our market positions and to develop growth opportunities as they arise. In particular, we will allocate additional capital to the Middle East business during the second half given the returns available across the region. The board's key priority remains to continue to improve the group's ROCE and then maintain it above our weighted cost of capital over the business cycle, we believe the Group is well positioned to achieve this."

"Trading since the half year has remained in line with the Board's expectations, and, whilst recognising the continuing economic uncertainty, the Board believes that the Group is well positioned to deliver its expectations for 2013 and substantial shareholder value in the medium term."

Vertikal Comment

Financially this is of course a very strong set of numbers, with planned efficiencies really beginning to kick in, while moving equipment to where it can obtain the best returns is helping maintain and even improve profitability
in the face of some local challenges.

However the business could over the longer term become overly dependent on a notoriously volatile and - in our business - highly cyclical geographic region. It does seem though that the company is taking steps address this by reinforcing and expanding its German business, while running with and encouraging the very positive gains in France. So it is clearly 'on the case'. One aspect that it might need to keep a cautionary eye on is the UK, which delivers almost half its revenues and, in many years, the bulk of its profits.

The company says it is gaining market share with its major UK clients, which should yield some excellent results in the years ahead as infrastructure spending picks up again. However it also needs to keep on top of small to medium and regional customers, where it could be in danger of some slippage due to its more 'corporate' structure than some of its smaller rivals.

The company has an exceptional product offering in the UK and is well ahead of the pack when it comes to safety and quality procedures- an increasingly important aspect of the business - not to mention strength of organisation and innovation. But in the past it has lost the 'human touch' and that was only overcome by heavy spending on buying up local companies that brought it back. It is hard to maintain such a major market share as competitors of all types and sizes snip away at your business, but Lavendon has all the ingredients and needs to make sure that it keeps on using them effectively.

Having said all this the company is performing very well and is well placed to benefit in the years ahead as the European market begins to gather pace.

The future for the business is bright.