Hills Limited has reported a statutory net profit after tax attributable to shareholders of $A24.8M for the year ended 30 June 2014, up from a loss of $A91.4 million in the last financial year.
In line with market consensus, the company’s FY14 underlying NPAT1 was $27.3M (before acquisition transaction costs expensed during the period and before one-off income tax credits associated with business sales). According to Hills, this result was achieved in very challenging market conditions across the building and construction sector with improvements in revenue from the Group’s continuing Hills Technologies Segment. Total company revenue was $A737.2m for FY14 with $A415.5m deriving from Hills Technologies, including security, healthcare and home electrical, entertainment and communication solutions.
Hills net cash at 30 June 2104 was $8.5M, with total debt facilities in place of $202.7M (subject to ongoing covenant limitations). The company has capacity for further acquisitions in line with its strategic and financial objectives. Hills is in discussions with its bankers regarding the refinancing of its entire debt facility on better commercial terms and securing a new facility which will provide ample capacity for further acquisitions.
Asset sales and acquisitions during FY14 included Hills completing the sale of Orrcon and Fielders to BlueScope; the sale of UHS Systems to UTC; and Opticomm to Hills joint venture partner. Acquisitions by the Group during the financial year included: Merlon (nurse call); HTR (patient entertainment), Questek (nurse call), Open Platform Systems (security), Intek (security) and APG (audio products).
Hills Group Managing Director and CEO, Ted Pretty, said the FY14 underlying result was in line with guidance provided to the market recently and further reflects success in delivering on Hills new strategy.
“Our restructure of Hills by exiting businesses non-core to its future and closing unprofitable businesses is now largely complete. We continue to drive new initiatives and programs to improve group operations.” Pretty said.
“Hills is now firmly focused on businesses which can deliver higher returns. We are concentrating on opportunities as an integrated solutions provider in the technology and communications market segments, with a particular but not exclusive focus on security and health care technologies.”
Restructure and Transformation Charges
No further net restructuring charges and impairments were taken in respect of ongoing businesses in FY14 as a result of the earlier restructuring and transformation program. Any additional closure, exit costs and or/redundancies not covered by existing provisions have been treated as part of business as usual and allocated against operational savings.
Land and Building
Hills progressed the sale of various company -owned properties during the year converting their asset carrying values to cash which was put towards retiring debt, new acquisitions, other innovation investment and to buy back Hills shares.
Assets Held for Sale and Discontinued Operations
On 28 February 2014 Hills announced the completion of the sale of its Orrcon and Fielders steel assets to BlueScope Limited. Net cash proceeds were approximately $80.0M.
The impact on the Hills FY14 pre-tax result was not material given that the assets are held for sale and carried at fair value.
Dividends
The Board declared a fully franked dividend of 3.60 cents per share which will be paid on 26 September 2014 to registered shareholders as at 12 September 2014. This follows the fully franked dividend of 3.40 cents per share paid to Hills shareholders on 31 March 2014.
The intention of the Hills Board, subject to acquisitions and working capital requirements, is to target on an annual basis, a dividend payout ratio of 50-75 per cent of underlying net profits attributable to owners, franked to the maximum extent possible.
Given the company ’s strong balance sheet, Hills continues to suspend the Dividend Reinvestment Plan and Share Investment Plans.
On-Market Buyback
During the FY14 year, the company completed the buyback of 12.3M ordinary shares for a total consideration of $22.3M. This represents 5% of the issued share capital being bought back in the previous 12 months at an average price of $1.81 per share.
“The Hills Board is of the opinion that the current price for the company’s shares does not necessarily reflect the underlying value of our assets, our business capability and our strong capital position.”
“On 15 August 2014 we announced our intention to refresh the company’s ability to undertake an on-market buyback. The extension of the buyback provides Hills with the option to acquire shares up to ten per cent (10 per cent) of the issued capital during the next 12 months. Any buyback will not affect the dividend policy.”
Safety
Safety is a priority for Hills and the safety performance across the company’s operations for the 12-month period from 1 July 2013 to 30 June 2014 resulted in a Lost Time Injury Frequency Rate of 0.5 and a Total Recordable Incident Frequency Rate (Lost Time Injuries and Medical Treatment Injuries combined) of 1.0. The financial year saw a 9 per cent decrease in Total Recordable Incident Frequency for the group.
Strategy Update
According to Hills, it continues to be a company with a brand that attracts market attention. During FY14 Hills focused on building on this trust, while regularly updating the market on strategy and business model.
The strategy of the company remains based on creating value by being focussed on delivering technology based solutions into trusted government, enterprise, business and residential markets.
This includes supplying access control and video security, automation and control, audio visual and lighting solutions into hospitals, aged care facilities, schools, universities, banks, retailers, public transport and private logistic providers.
Hills says there are 3 key elements to this strategy. First, strengthen core, value-added product distribution business. Second, build a services model creating recurring revenues around those solutions and third, expand in certain high growth segments such as health.
The company recently completed bolt-on acquisitions to support its core security and automation solutions and the first of a number of anticipated acquisitions in the health care segment. Hills has a high conviction that security, well-being and health have strong domestic growth potential. Hills says acquisitions in security and healthcare have been well received, further reflecting the trust and faith placed in Hills.
At the beginning of FY14, the Hills Board confirmed its aspirational settings to be achieved by FY16 including:
* 75% of revenues from technologies and communications
* 20-25% of revenues from services
* Sustained earnings growth
* Return on funds employed (ROFE) of 13-15%
The Board continues with management to tune strategy and objectives and we intend to provide shareholders with an update for the period FY15-17 at this year’s AGM. We are well on the way to meeting these targets. In particular in FY14:
* Revenues from technology and communications were greater than 75%; and We achieved a return on funds employed (ROFE) in excess of 20% in the period.
FY15 Outlook
Pretty noted the Reserve Bank’s recent observation that notwithstanding a pick-up in growth around the turn of 2014, GDP growth was expected to be below trend over the next year or so, rising gradually thereafter.
“While the continuing subdued commercial construction sector does impact building-related technologies, Hills remains very well positioned for the year ahead,” he said.
“We have entered FY15 with a very strong balance sheet, reduced structural and operating complexity and a lower operating risk profile. We have ample capacity for further acquisitions that are accretive to our core and or offer medium to long term growth opportunities.
The outlook for FY15 of necessity must be based on continuing businesses (including FY14 acquisitions and the recently acquired business of APG). Hills current guidance is for an underlying FY15 NPAT attributable to owners of $22-24M (before further acquisitions) reflecting expectations of underlying growth in continuing technologies business. Hills also intends to seek larger acquisitions in the security and healthcare technology sectors.
“We remain committed to delivering sustainable earnings growth and optimising shareholder value as the implementation of the new Hills strategy continues.”
Result Highlights
* Statutory profit after tax attributable to owners of $24.8M, up $118.9M on prior year.
* Underlying FY14 NPAT attributable to owners of $27.3M, up 42.2% on prior year and in line with guidance provided to the market of $26M – $28M.
* Final dividend of 3.60 cents per share declared, fully franked.
* Underlying EPS up 46%.
* Sale of Orrcon and Fielders to BlueScope Steel Limited (“BlueScope”) completed.
* A positive net cash balance of $8.5M at 30 June 2014 i.e. zero net debt.
* Return on funds employed in excess of 20%. ♦
