26.08.2016

13% boost for Lavendon

UK international rental group Lavendon, has published its first half results which show strong revenue and underlying profit growth.

Total revenues for the six months were £134.2 million, 13 percent higher than for the same period last year. This came from growth in all markets apart from Germany, and further boosted by a favourable exchange rate from Dollars and Euros back to Sterling. Pre-tax profits actually fell 8.5 percent during the period due to one-off restructuring charges mostly in the UK and Germany which totalled £2.4 million. Without this pre-tax profits improved 10 percent to £15.9 million.

Net debt in the period jumped 25 percent to £149.9 million, reflecting the heavy investment in new equipment and Euro/Dollar loans translating back to higher levels of Sterling. Capital expenditure was £54.9 million compared to £39.1 million last year and sales of used equipment from the fleet were 30 percent lower at £3.1 million. The company is stepping up its UK fleet investment in the second quarter adding a further £7 million, which will take the total spend for 2016 to £62 million.

In the UK rental revenues increased seven percent to £57.2 million with underlying operating profit (without the cost of bringing deliveries back in house) increasing eight percent to £9.5 million. In the second quarter revenue growth picked up a little to eight percent, driven, says the company, by market share gains thanks to the larger fleet and a three percent average reduction in rental rates. The company also says that bringing its transport back in-house has provided efficiency gains boosting the fleet available for rent by five percent.

In the Middle East rental revenues jumped 22 percent to $50.1 million while operating profit grew 15 percent to $14.5 million, reflecting the shift away from the higher margin Saudi Arabian business towards the more competitive markets of the UAE, Kuwait, Oman and Qatar. Growth in these countries more than made up for it in volume terms, helped by a larger fleet than last year and compensating for the greater pricing pressures. In Sterling, revenues were 30 percent higher at £35 million and with profit up 22 percent to £10.1 million.

In Germany revenues at Gardemann slipped a further two percent to €22.4 million - although in Sterling this translates to a four percent improvement to £17.4 million. The underlying operating loss - i.e without restructuring costs - was more than halved to €300,000. The company has cut its rental rates, which it says has helped drive volume growth, while the restructuring - which so far this year has seen a nine percent reduction in staff numbers - continues. It expects margins to improve as the year progresses, helping it return to profit in the fourth quarter.

Revenues at the French operation increased 10 percent to €15.8 million with operating profits increasing almost eight percent to €1.8 million. In Sterling terms revenues and profits were 17 percent higher at £12.3 million and £1.4 million respectively. Increased revenues have come from higher utilisation, rather than better rates, with some discounting going on in specific areas. Further resources have added in order to maintain the growth levels.

In Belgium revenues at DK Rental improved three percent to €6.7 million operating profit remaining flat at €700,000. Once again revenue growth has come from improved utilisation, offsetting rate cuts. In Sterling terms revenues increased by eight percent to £5.2 million.

Chief executive Don Kenny said: “The group’s trading performance in the first half has seen the delivery of strong revenue growth that has driven further improvements in our profits and operational cash flows. This growth has built upon the momentum established within the business towards the end of 2015 with the UK, Middle East and France being the primary drivers. The 18 percent rise in the interim dividend reflects this performance and the board’s confidence in the Group’s long-term future."

“Our growth reflects our strategic fleet investment decisions in 2015 and the actions taken in the first half to optimise our fleet deliveries and improve our operational processes. The restructuring of our German business is progressing as planned and is on track to be operational in quarter four. The group’s strong operational cash flows and strength of our balance sheet enables us to develop our market positions with investment, underpinning the positive momentum created within the business, whilst at the same time remaining within our preferred debt leverage range.”

“Trading since the half year has continued to be in line with our expectations and, whilst mindful of the recent increased economic uncertainty, the board remains confident of making further progress in the second half and delivering on its expectations for 2016.”

Vertikal Comment

Overall this is a pretty good set of numbers, boosted of course by the collapse in the Pound following the UK vote to leave the EU on June 23rd. This is likely to have an even greater effect on the second half. One theme that does come across in the half year report is an apparent focus on rate cutting. The company certainly has the power to flex its muscles with rates, to both defend its market share where under attack or where it has erred, and to use it to establish itself in a market in order to demonstrate the quality of its offering. All good and well, but as we all know the ‘strategic’ use of pricing can very easily turn into a general price cutting policy which will inevitably turn ugly down the road.

Lavendon clearly had reason in the first half to use pricing strategically. In the UK it needed to demonstrate that its disastrous attempt to outsource transport had been rectified. In Germany it is under attack and needed to defend itself as it completely reshapes the Gardemann business. In the Middle East is has used pricing very effectively to maintain strong growth in the face of some real challenges in certain countries. All very good, but the toughest part of such strategies is lifting the rates back up once the objective has been achieved. If Lavendon can manage that its results and share price will sparkle.

The sermon aside, this is a very good first half with strong prospects for an excellent year.