Headlines
- Sales increased by 12.6% over the previous year to £10.77 million;
- Operating profit of Diffusion increased by 23.6% over the previous year to £1.12 million;
- Group profit before tax increased by 19.6% over the previous year to £776,000;
- EPS growth of 61.7% over the previous year to 29.1 pence per share;
- Final dividend increased by 12.5% to 2.25 pence per share;
- Total dividends for the year increased by 36.4% to 3.75 pence per share;
- Further improvement in net cash to £1.38 million at 31 March 2015 and net assets to £2.22 million;
- High enquiry levels and order intakes produced strong start for the year ending 31 March 2016.
Chairman’s statement
Introduction
I am very pleased to report a continuation of profit improvement for the year ended 31 March 2015. Sales increased by 12.6% over the previous year to £10.77 million, generating improved operating profit for the Company’s trading business, Diffusion, to £1.12 million and of group profit before tax to £776,000. This is the fourth consecutive year of both sales and profit growth, representing another solid set of trading results ahead of management’s expectations.
Fan coils provided the growth driver, attributed to a continuation of stronger UK fan coil market demand and to Diffusion’s premium branded product offering. UK fan coil market demand started to improve two years ago and this continued for the year ended 31 March 2015. The number and size of commercial and high-end residential developments and refurbishments currently being carried out and planned by the leading property owning companies are providing ideal trading conditions for Diffusion.
Group trading performance
Sales in the year ended 31 March 2015 increased by 12.6% to £10.77 million (2014: £9.56 million). Fan coil sales of £8.74 million (2014: £7.45 million) achieved particularly strong sales growth of 17.3%, arising from a good balance of commercial and high-end residential projects. Sales of the smaller commercial heating range fell marginally to £1.52 million (2014: £1.65 million), consistent with continued difficult trading conditions on the UK high street.
Diffusion’s operating profit increased by 23.6% to £1.12 million (2014: £906,000), representing an improved operating profit margin of 10.4% (2014: 9.5%), equivalent to a return on capital employed of 68.8% for the year. Notwithstanding downward market price pressures, gross profit margins remained stable at 34.2% (2014: 34.6%), due to lean manufacturing methods and a well-balanced sales mix.
Group profit before tax increased by 19.6% to £776,000 (2014: £649,000), after charging Central costs of £320,000 (2014: £210,000) and interest of £24,000 (2014: £47,000). Central costs increased in the year due to one-off costs of £90,000 incurred in pursuing a global franchising strategy. The taxation charge of £81,000 (2014: £143,000) represents non-cash deferred tax. EPS growth showed a very healthy increase of 61.7% to 29.1 pence per share.
Diffusion’s business model
The Company’s trading subsidiary, Diffusion, enjoys a leading market position as a manufacturer of premium quality fan coils and commercial heating products to the UK commercial and high-end residential sectors, combined with a blue-chip client base, renowned brand and over 50 years trading experience. Diffusion and Energy Technique brands are recognised by the UK heating ventilation and air conditioning sector (“HVAC”) as highly engineered, quality products providing leading edge performance and energy efficiency.
Diffusion’s products are supplied into commercial offices, hotels, airports, retail outlets, schools, and high-end residential developments. Business risk is reduced by third-party M&A contractors installing Diffusion’s products. Fan coils are supplied to developments of the major property owning companies, including Land Securities, Stanhope Properties, Grosvenor Estates and British Land. Commercial heating end users include Marks & Spencer, Sainsbury’s, Tesco, New Look, Boots, ASDA, John Lewis, Fat Face, Lloyds Bank and TK Maxx.
Diffusion’s management team has a demonstrable track record of success, working closely with designers, technicians, support staff and clients across all UK geographical locations to deliver bespoke HVAC solutions of the highest standard. Diffusion operates from a 30,000 sq. ft. facility in West Molesey, Surrey, ideally placed to serve its principal London and South East market by providing a highly valued just-in-time service.
Diffusion’s operating performance
This is the fourth consecutive year of sales and profit growth, with fan coils providing the growth driver for the year ended 31 March 2015. Diffusion’s experienced sales and marketing team exploited the continuation of improved UK fan coil market demand by achieving a 17.3% growth in fan coil sales. The recently launched ECO 270 fan coil range offering 25% energy savings for no additional capital cost gained further market traction. Agreement has been reached with the motor supplier to further protect the competitive advantage of this product with a five year extension to the existing exclusivity agreement, including wider geographical coverage.
Following successful entry into the high-end residential sector, Diffusion had a well-balanced sales mix between its commercial and high-end residential sectors. Fan coils were supplied into a number of landmark developments and to over 350 different projects in total. Serving this high number of projects spread business risk and contributed to maintaining overall target selling margins.
Fan coils were supplied into the three current London skyline developments of the Shard, Cheesegrater and Walkie-Talkie, together with the high-end residential Riverlight development. Other major commercial developments included American Express, London Bridge Place, Nations House, Hyde Park Hayes and 207-211 Old Street. Other major high-end residential developments included the Shard (mixed commercial/residential), Holland Green and 1 Tower Bridge.
Commercial heating sales fell marginally on the previous year to £1.52 million. Sales of commercial heating products are suffering from weak demand from the UK high street. Despite this, Diffusion continued to serve its long list of blue-chip clients/end users, including Waitrose, Marks & Spencer, Boots, H&M, Superdry and Next.
Franchising Diffusion brand
Central costs include one-off costs of £90,000 incurred in pursuing franchises for overseas territories, where franchisees can capitalise on Diffusion’s strong brand name, product innovation and engineering excellence. Heads of terms were reached with Unico Inc. of St Louis, Missouri to manufacture and distribute Diffusion fan coils in the USA, Canadian and Caribbean markets. In a complementary manner, Diffusion is to be appointed Unico’s main sales representative in the UK for its small duct high velocity heating and cooling systems. Route to market plans and legal agreements are currently being drawn up.
Cash flow and net cash
Net cash generated by operating activities increased by 10.1% to £863,000 (2014: £784,000). This was partially applied in funding capital expenditure of £264,000 and dividends paid of £84,000. Net cash growth during the year was £507,000 (2014: £283,000), resulting in an improved cash position at 31 March 2015 of £1.38 million (2014: £873,000). The Group remains soundly financed with this level of cash and net assets at 31 March 2015 of £2.22 million (2014: £1.60 million). Cash flow for the current year ending 31 March 2016 will benefit from a six month’s rent free period on the West Molesey lease worth £96,000.
Capital expenditure
Further investment in the West Molesey manufacturing facility was incurred during the year to maintain Diffusion’s competitive market position. Capital expenditure amounted to £264,000, with the largest projects comprising £118,000 on refurbishing and extending the office suites and £65,000 on a new brake press to upgrade metal punching and folding capability. Most of this capital expenditure was of a discretionary nature and the Board does not consider there is a requirement for any significant capital expenditure in the year ending 31 March 2016.
Dividends
The Board recommends payment of a final dividend of 2.25 pence per share, payable on 7 August 2015 to shareholders on the share register on 17 July 2015. The Company paid an interim dividend of 1.50 pence per share on 12 December 2014, taking total dividends for the year ended 31 March 2015 to 3.75 pence per share, an increase of 36.4% over the previous year.
Business strategy
On 26 February 2015, the Board announced it had resolved to offer the Company for sale by means of a formal sale process in accordance with Note 2 on Rule 2.6 of the City Code on Takeovers and Mergers. Whilst the Board believes the Company has a secure future as an independent business, the Board took this decision to seek to unlock and crystallise value for shareholders. The Company appointed Cavendish Corporate Finance LLP as financial adviser to conduct the sale process. Further announcements about the progress of this formal sale process will be made in due course.
Current trading and prospects
Whilst this formal sale process proceeds, the Board is managing the Company for further growth. Trading in the current year ending 31 March 2016 has started well, with sales in April and May in line with management’s expectations. Enquiry levels are high and the order book is strong. Improved UK fan coil market demand that started two years ago is expected to continue for the year ending 31 March 2016 and beyond.
