Half-yearly management report
AEA'S VIEW OF THE MARKET
Global concerns about the economic and environmental impacts of climate
change are creating global agreements between Governments. In December
2007, the UN will host an inter-governmental conference in Bali to set
new targets for emissions with the ambition of restricting the rate of
temperature change. The need for harmonisation of Government action and
increased investment has never been more urgent. In the UK, the Government
has set out a number of ambitious targets and whilst in the short term
there may be some delay in achieving this improvement, the markets in
both Government and private sector work remain encouraging. Increasing
concern about rising energy costs has put a renewed focus on the need
for energy efficiency and behavioural change.
AEA’s growth strategy is to leverage its reputation with UK Government
to enable it to offer similar high quality policy and behavioural change
advice to the EU, US and Chinese Governments. In addition, the Group sees
a number of encouraging opportunities in the UK private sector market
which will be driven by regulation.
AEA has delivered a much improved performance and overall prospects for
the year remain encouraging. Already this year the Group has won a number
of strategically important contracts including Defra’s Market Transformation
Programme. The Programme aims to reduce the environmental impact of products
across the product life cycle by collecting information, building evidence,
and working with industry and other stakeholders. MTP supports the UK
Government’s strategy on Sustainable Development and in particular underpins
the product policy aspect of the framework for Sustainable Consumption
In China the Near Zero Emissions Coal initiative is a three-phase programme
that has the ultimate aim of building a prototype coal power plant with
Carbon Capture and Storage (CCS) in China. AEA is managing the first phase
of this initiative and leads a consortium of 28 UK and Chinese academic
and industrial partners. In addition, AEA is leading on capacity building
and facilitating knowledge transfer between Chinese and UK parties, modelling
the future energy requirements of China and developing a roadmap for CCS
in China, drawing together all the elements analysed under the project.
In London, the Mayor’s innovative Green 500 Scheme will rank the performance
of companies in London, which volunteer to participate in this scheme,
against a basket of criteria designed to measure their impact on the climate.
The sales funnel remains strong and the Group sees significant opportunities
for organic growth in Europe and China. AEA has also started to win work
in the UK private sector providing advice to companies on carbon management,
energy efficiency, transport and resource efficiency. AEA was encouraged
by recent Government focus on improving the performance of the economy
through increased investment in knowledge management. AEA runs the UK
Government’s largest programme in this area.
AEA will seek to make acquisitions that enable it to scale the business
and give good routes to market.
The Group’s focus is on the US because of the opportunity to leverage
AEA's skills and experience into a large and emerging market. In the UK
and Europe it is likely the Group will focus on small bolt-ons, which
enhance its technical base.
Turnover in the first six months increased by 10% to £35.3 million (2006:
£32.1 million) with strong growth in air quality monitoring activities,
resource efficiency and waste management projects and the Group’s transport
sector. Following a deferral of Government spending, new orders decreased
to £23.1 million (2006: £34.0 million). However, at 30 September 2007
secure sales for the year stood at £68.3 million. Operating margin improvements
resulted in adjusted operating profit increasing by 19% to £3.7 million
(2006: £3.1 million). Operating profit for continuing operations was £3.7
million (2006: £6.8 million, including a £4.6 million exceptional pension
past service credit).
The improved operating margin gave rise to a 27% increase in adjusted
profit before tax to £2.8 million (2006: £2.2 million). Profit before
tax for continuing operations was £2.8 million (2006: £5.9 million).
After adjusting for discontinued activities and one-off items the adjusted
earnings per share for the continuing business improved to 2.3 pence (2006:
1.9 pence) per share. Basic earnings per share reduced to 2.3 pence (2006:
19.0 pence) per share.
Net debt and cash flow
Net debt improved from £21.4 million at 31 March 2007 to £20.4 million.
The net movement of £1.0 million reflects net proceeds of £6.4 million from
the equity placing offset by a cash outflow from operations of £4.4 million
(2006: £4.2 million), net interest/tax outflows of £0.8 million (2006: £1.9
million) and capital expenditure of £0.2 million (2006: £1.0 million).
On 26 July 2007 the Company successfully placed 5,814,610 new ordinary shares
at a price of 115.0 pence per share raising £6.4 million after expenses.
The funds raised will be used to help the Company grow the business both
organically and by acquisition and will provide greater financial flexibility.
Since the year end, there have been no major changes in the principal
risks the Group faces or the risk management processes in place and full
details are reported in the March 2007 Annual Report available on the
internet at www.aeat.com.
The principal risks faced by the Group are:
- Achieving organic growth – AEA is in a strong market,
but recognises it is dominant in the UK public sector. While AEA intends
to grow this core work even further, it is of strategic importance that
the Group diversifies. Diversification will be achieved in three ways,
by diversifying its customer base within the UK public sector, seeking
organic growth in the private sector and by acquisitions and organic
growth in other economic areas. The Group would also be impacted, in
the short term, by any delay in Government orders.
- Changes in the competitive environment resulting from
Government policy – Work for UK Government will remain a major component
of AEA’s business. Future changes in Government, its policies, priorities
and expenditure levels could affect the Group’s success.
Recruitment and retention of sufficient high calibre people – The risks associated with absorbing new people, their reward and retention and managing the business changes necessary to respond to market opportunities are regularly under review.
- Retirement benefits – The Company operates both defined
contribution and defined benefit pension schemes. The risk that the
defined benefit scheme assets may not match liabilities is inherent
in defined benefit schemes. At present the scheme has an accounting
deficit of £57.2 million (£92.2 million at March 2007), including £3.5
million of unfunded obligations. The reduction in the net liability
reflects a change to the financial assumptions underlying the calculation
of the liabilities, particularly an increase to the yield on long-term
AA-rated corporate bonds.
- Legacy provisions – As detailed in note
13, the Group has contingent liabilities in respect of disposals
of companies and businesses. Uncertainty exists around the potential
for warranties and indemnities in respect of these disposals with a
number of indemnities continuing for five to ten years post divestment.
AEA has appointed a Managing Director, Risk and Legacy Management to
manage risks around legacy provisions and indemnities and warranties
on disposals. The Group has not become aware of any significant additional
liabilities in respect of disposals.
RELATED PARTY TRANSACTIONS
There have been no related party transactions that have a material effect
on the financial position or performance of the Group in the first six
months of the financial year.
The outlook for the Group remains positive and AEA continues to see many
encouraging possibilities across its various geographical markets. AEA
remains focused on improving its performance and will continue to search
for high quality consultants who can deliver more value to its customers.
By order of the Board
| Bernard Bulkin
|29 November 2007
||29 November 2007
||29 November 2007