Driver Group (DRV:53p), a consultancy that provides clients in the construction and engineering sectors with specialist services including project management and dispute resolution support services, has delivered a strong rebound in its second half trading performance, lifting underlying pre-tax profits from £1.7m to £2.24m on revenue down from £30.9m to £28.7m in the six months to end September 2019.
The much improved margin performance reflects the swift action management took to realign the cost base in light of a first half slowdown in Asia Pacific and Middle East, regions that account for half of revenue. Finance director David Gilgour says that Driver’s break-even revenue point has been lowered by £400,000 per month, or double management’s initial target, at a cost of only £400,000, highlighting how the business can react quickly to cut its cloth. Refreshingly, the one-off item was charged against normal operating costs rather than as an exceptional item.
The second half recovery was driven by strong growth in Europe and North America, the regions accounting for 78 per cent of group operating profit of £5m (pre-central overheads), up from 50 per cent in the 2018 financial year. Revenue gains of £1m from both Canada and Germany reflect the positive impact of management changes made a few years ago and a greater recognition by potential clients of Driver’s business presence.
Admittedly, the stellar second half outcome was not enough to make up all the first half profit shortfall as Driver’s underlying pre-tax profit for the 12 month trading period declined from £3.8m to £3m on 6 per cent lower revenue of £58.5m. However, reported pre-tax profit actually increased by 18 per cent to £3.2m, the difference between the two profit lines being the absence of share based payment charges (still a cost to shareholders) that depressed the 2018 reported figures.
Reassuringly, chief executive Gordon Wilkinson confirmed that the strong momentum has continued into the first two months of the new financial year, noting that the pipeline of business is now 15 per cent higher year-on-year. The higher activity levels are not just being driven by Europe and North America either as he flags up a “significant pipeline increase in Asia Pacific”. This adds weight to expectations of a recovery in a region that reported an annual operating loss of £363,000 on revenue of £9m, down from an operating profit of £0.95m on revenue of £11m the year before. The benefits of a leaner cost base will have an accentuated impact on profitability in the region, too.
The positive trading update also supports analysts’ expectations of the sharp rebound in profits continuing. House broker N+1 Singer’s expects adjusted pre-tax profits to bounce back from £3m to £3.7m on revenue up slightly to £59.9m to deliver fully diluted earnings per share (EPS) of 5.4p, up from 4.8p in the 2019 financial year.
Moreover, the company’s balance sheet is as rock solid as ever. Driver had a closing net cash position of £5.4m (10p a share) which is set to grow to £6.6m (12.2p a share) this year if the company delivers on N+1 Singer’s free cash flow forecasts of £1.9m (3.5p a share). The cash build should enable the board to hike the dividend per share once again, having just lifted the annual payout from 0.5p to 1.25p at a cost of £675,000.
True, Driver is the laggard in my market beating 2019 Bargain Shares portfolio, but I have sound reasons to believe that investors will start to warm to the ongoing recovery in the months ahead especially as the comparables are soft for the first half of the 2019/20 financial year, so expect some eye-catching numbers to grab the headlines.
Importantly, there is value on offer in the shares of the £28m market capitalisation company. Net of cash on the balance sheet, they are trading on a forward cash-adjusted price/earnings (PE) ratio of 8, hardly an exacting rating for a company that has just delivered a post tax return on equity 14 per cent. Bargain buy.
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