23 October 2014

Stobart Group Limited

("Stobart" or the "Group")

Interim Results for the six months ended 31 August 2014

Stobart Group Limited, the Support Services and Infrastructure Group, today announces its interim results for the six months to 31 August 2014.

Group overview

The Board is pleased to announce the Group's first set of results since the disposal of a controlling interest in its transport and distribution division.  Stobart is organised into five divisions with a clear focus on driving volume growth in its Energy division and passenger growth in its Aviation division.  The Group has created powerful platforms in attractive markets and these results show continued progress towards the Board's medium term objectives.

Group structure

·        Energy - supply and transport of biomass fuel

·        Aviation - operation of London Southend Airport, Carlisle Lake District Airport and Stobart Air*

·        Rail - rail, civil and infrastructure engineering

·        Investments - Eddie Stobart (logistics)* and Propius (aircraft leasing)*

·        Infrastructure - Group infrastructure assets (including airports and energy plants*) and commercial investment properties

* Non-controlling interests

Operational highlights

·        Encouraging increase in biomass tonnages supplied, up 56% to 482,000 tonnes

·        Strong biomass supply pipeline, consolidating market-leading reputation

·        Passenger numbers increased by 19% at London Southend Airport to over 628,000 passengers in the period

·        London Southend Airport rated best UK airport in Which? customer satisfaction survey for second year running

·        Launch of Flybe services and positive discussions with potential new airline partners

·        Investment property realisation programme on track

·        Teesside anaerobic digestion plant investment completed

·        Planning permission secured at Carlisle Lake District Airport and Chelford

·        Board strengthened through appointment of one Executive Director and two Non-Executive Directors

Financial highlights

·        Revenue from continuing operations increased by 17% to £56.2m (2013: £48.1m), due to volume increases in Aviation and Energy

·        Underlying EBITDA* reduced by 20% to £8.7m (2013: £10.9m), impacted by lower investment property realisations and revaluations

·        Underlying profit before tax** up by c110% to £4.4m (2013: £2.1m), reflecting a 80% reduction in interest charges

·        Loss before tax from continuing operations of £8.6m (2013: profit £1.2m), due, principally, to £8.1m separately disclosed finance charges related to debt repayment

·        Loss per share from continuing operations of 2.26p (2013: 0.13p)

·        Profit from discontinued operation of £7.6m (2013: £9.4m) principally relating to loss on operations and partial disposal of the transport and distribution division

·        Maintained interim dividend of 2.0p (2013: 2.0p) per share payable on 5 December 2014

·        £48.0m returned to shareholders in the period; net assets at £414.7m (28 February 2014: £461.1m);

·        Proceeds from realisations of property related assets of £14.7m (2013: £24.0m)

·        £190.6m debt repaid and net debt reduced by 94% to £8.1m (28 February 2014: £127.9m)

Chief Executive Andrew Tinkler commented:

"We have a clear focus on the growth of our Energy and Aviation businesses.  The increased volumes we are reporting, along with strengthening pipelines in both divisions, reinforce our confidence in the Group's prospects."

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Stobart Group Limited

("Stobart" or the "Group")

Interim Results for the six months ended 31 August 2014

HALF YEAR REVIEW

Results summary

Results for the six months to 31 August 2014 were as follows:

Divisional underlying profit summary

*Underlying EBITDA is a non-GAAP measure and comprises the underlying operating profit of £5.6m (2013: £8.1m) plus adding back depreciation of £3.1m (2013: £2.8m).

** Underlying profit before tax is a non-GAAP measure and comprises the underlying operating profit of £5.6m (2013: £8.1m) less other finance costs of £1.5m (2013: £6.3m) plus finance income of £0.3m (2013: £0.3m).

*** Underlying divisional EBITDA is measured before internal rents.

****Separately disclosed items comprise finance costs of £8.1m (2013: £nil), amortisation of acquired intangibles (brands) of £1.9m (2013: £0.2m), restructuring costs of £1.0m (2013: £0.3m), new business and new contract set up costs of £0.1m (2013: £nil), transaction costs of £nil (2013: £0.4m) and separately disclosed items included in share of post-tax profits of associates and joint ventures of £1.9m (2013: £nil).

Strategy

Stobart Group Limited is an entrepreneurial group which has invested in recent years to create strong platforms in exciting growth markets.  The Group's strategy is to leverage its business development capabilities, its logistics heritage and its respected brand to drive volumes through its Aviation and Energy businesses, grow revenues and profits and generate sustainable value for shareholders.  These businesses are complemented by the Group's Infrastructure assets, its Rail and civil engineering operations and its business Investments.  These divisions provide reliable cash flows as well as growth opportunities of their own.

The Board has made the changes in senior management roles and responsibilities required to give our five divisions clear leadership, direction and performance targets.  We expect all of our divisions to create value but resource is focussed particularly on our Aviation and Energy divisions, which have the greatest growth potential.

Business segments

As reported in May 2014, the Group has revised its internal reporting structure, which distinguishes between business operations and asset ownership. The new reporting segments within continuing operations are Stobart Energy, Stobart Aviation, Stobart Rail, Stobart Investments and Stobart Infrastructure, which owns the Group's infrastructure assets. 

Underlying EBITDA is a key financial performance measure for our operating divisions.

Divisional review

Stobart Energy

Stobart Energy's business is the supply and transport of biomass fuel.

The 56% growth in tonnes sold has been driven by the full period effect of the new contracts commenced in 2013 (Iggesund and Helius CoRDe) and an increase in volume supplied to Dalkia Chilton.

The divisional EBITDA is made up of a healthy 35% increase on the supply side of the business to £2.3m with the transport side contributing £0.1m EBITDA.  The low level of transport profitability reflects the historical transfer pricing arrangements between Stobart Energy and Eddie Stobart Logistics, which owned the biomass transport fleet at the time of the partial disposal of Eddie Stobart Logistics.  Those arrangements have since been restructured and the vehicles taken onto the Group's balance sheet.  Had the new arrangements been in place previously, they would have increased Group profits by approximately £2.1m per annum and they will increase biomass transport profits in future periods.

Transport profitability was also impacted, as expected, when a biomass transport contract, which had contributed £2.5m per annum to profits by way of a Management Fee, came to an end at the beginning of the period. 

As Stobart Energy negotiates and signs new long term supply contracts the division's management team develops its supply chain to ensure the availability of fuel supplies to underpin these long term contracts.  As the division builds supply ahead of anticipated demand, and diverts temporary excess supply overseas (at reduced margins) pending the commencement of contracts, the relationship between volume growth and revenue increases will vary from period to period.

New contract wins in the period included a new biomass plant project in Speyside which reached financial close in August 2014, with supply expected to commence in 2016. The minimum contracted volume is 50,000 tonnes per annum with potential for this to rise to 95,000 tonnes.

Outlook

We have seen encouraging year on year growth in biomass tonnages supplied and remain confident of delivering strong returns over the medium term. The second half of the year, which includes the peak seasonal winter months, will also see the full period benefit of new contracts which commenced in the latter stages of the first half.

The medium term strategy for Stobart Energy is to increase supply of biomass to 2m tonnes pa by 2017/2018, and we remain on course to achieve this objective. We are working on a number of key projects and expect to achieve financial close on at least three of these with a combined supply requirement of over 500,000 tonnes per annum by the year end.  Supply under these contracts will commence in 2016/17 once construction and commissioning of the plants is completed.

The ROC legislation timelines are now certain and prospects have been improved by the introduction, by Ofgem, of a grace period, extending the cut-off point for qualifying plants to become operational from March 2017 to September 2018.  Our strategy of selecting those quality projects which involve strong counterparties is working well as finance providers look to back those projects which will either become operational by the March 2017 ROC deadline or which, if not certain of becoming operational by March 2017, are sufficiently advanced and certain of funding such that they will be operational in the 18 month grace period.  We remain confident of achieving our medium term target of supplying in excess of 2m tonnes per annum into the biomass market by 2017/2018 under the current legislative framework.

We are close to securing a number of potential sites for new waste wood processing facilities, as part of our strategy to enhance our control of the supply chain and achieve a target for processing in-house up to 60% of the total material sold.

Stobart Aviation

Stobart's Aviation division comprises the operations of London Southend Airport, Carlisle Lake District Airport and Stobart Air, in which the Group owns a 45% interest.

London Southend Airport

The 19% growth in passenger numbers was boosted by the launch of Flybe flights to six destinations, operated by Stobart Air delivering over 27,000 passengers since commencing operations in June.

For the second year running London Southend Airport has topped the Which? airport passenger customer satisfaction survey with a score of 85% and a maximum five star rating in seven of the ten categories assessed, improving upon our first-place scores from 2013.

Existing routes are performing well with improvements in load factors and yields.  Commercial income streams have continued to deliver with the hotel, car parking and other retail income all showing good year-on-year improvements in revenue per passenger.

Carlisle Lake District Airport

Planning permission has been secured for the development of the airport and we have commenced a business planning exercise designed to attract airlines, passengers and related operations to the airport.  In particular, we are considering a London service and a Dublin route connecting to transatlantic destinations.

Stobart Air

The airline has had a successful summer with record August monthly load factors and passenger numbers and the 14th consecutive month of growth on the Aer Lingus regional network.  While the airline is currently loss-making, the modest investment the Group has made provides it with valuable strategic options and the Board expects it to create value in the medium term.  Julian Carr was appointed as Managing Director in May 2014.

Outlook

An agreement has recently been reached for Skywork to move its operation from London City Airport and to commence operations at London Southend Airport in October 2014.  With the winter season ahead, and from known traffic, we would expect lower volumes in the second half. We anticipate that capacity reduction by easyJet will be partially replaced by the Flybe and Skywork flights.

The Aviation division aims to capitalise further on demand for regional airport capacity, especially at peak times when capacity in London is highly constrained, and grow in both the commercial and executive aviation markets. 94 million journeys are made through London airports annually from destinations within London Southend Airport's target market.  Our medium-term target of 2.5m passengers represents just 2.7% of this figure.  We have been successful in attracting routes and carriers from other London airports but our passenger volume target could be met from demand growth alone, even if growth is far lower than the market generally anticipates.

We are actively marketing the attractions of London Southend Airport to prospective partners, emphasising the highly-rated passenger experience and the total journey time from the point of origin to the City of London. Airlines' lead times can be long but we have positive, ongoing discussions with a good number about bringing routes to London Southend Airport.  Having achieved market-leading customer feedback and as Europe's fastest growing airport we can be confident our approach to the passenger experience is working.

We believe that revenue per passenger can be increased with improved retail offerings and better management information and work is ongoing to address those opportunities.

Stobart Rail

Stobart Rail provides specialist rail, civil and infrastructure engineering and management services to third party customers, including Network Rail, as well as to Group businesses.

Stobart Rail's sales of rail and other engineering works to external customers have increased by 32% in the period and margins on this work have been healthy. Works successfully delivered have included structural strengthening schemes for Skanska, Eden Brow Earthworks and the slab track and permanent way element of the reintroduction of the Chorley Flying Arches for Murphy Rail. 

We have completed the development of a proprietary ballast cleaning machine and begun work with Network Rail using the new machines.  These machines allow ballast to be replaced more cost effectively, without removal of the track, leading to reduced track access times and significant cost savings.  We expect these innovative machines to be very valuable to the Group as their use becomes established.

Internal projects in the first half have been modest but included preparation work at the Group's Widnes site.  This has a direct impact on overhead absorption and means margins on external work are impacted.  We expect internal work will pick up in the second half with some plans to commence in the next few months.

Outlook

Following an intensive period of activity on external third party contracts, these works now exceed Group contracts.  There are further significant opportunities with external projects in the next six months in addition to those on-going or already scheduled to commence in the period.  These include contracts awarded to main contractors through Network Rail's control period 5. The construction of a new warehouse for Crown, a leading company in metal packaging technology, in Botcherby, near Carlisle, is expected to be completed in October.

In the second half of the year we expect work to commence at Carlisle Lake District Airport and a biomass plant development.

Stobart Investments

The assets currently held by Stobart Investments comprise the Group's 49% interest in Eddie Stobart Logistics Limited and our 33% interest in Propius, the aircraft owning and leasing business.

The Eddie Stobart Logistics business is performing in line with management's expectations, although our recorded share of profit has been subject to non-cash charges for amortisation of intangibles recognised in the provisional fair value acquisition accounting, and also subject to transaction costs. The Board is pleased to have completed the transaction to dispose of a majority interest in Eddie Stobart Logistics and is confident that the effect of the resulting debt reduction and the value created from the sale proceeds and from the retained stake in a newly-energised business will benefit the Group's shareholders.

Growth continues in the aircraft leasing business where the eighth aircraft has been delivered and all aircraft are operational.

Stobart Infrastructure

Our Infrastructure division holds our growing portfolio of investments in renewable energy infrastructure, primarily biomass and anaerobic digestion energy plants.  It also owns infrastructure assets, in particular our airports, from which other Group businesses operate, and a portfolio of commercial investment properties.

The leading position of the Group's Energy division in the market for the supply and transport of biomass fuel creates opportunities for investment which can generate attractive returns in their own right as well as enhancing the credentials of the Stobart Energy business.

The biggest influence on the divisional result is the change in property values, recognised on revaluation or disposal, which impact EBITDA but not revenue.  These gains were higher in the corresponding period last year than in the most recent half year.  There were five realisations in the period realising net proceeds of £14.7m.  This included the sale of the final flat at 37 Soho Square, bringing the total proceeds on the completed development to £18.1m, with an overall profit of £5.5m and a return on investment of 43% over a two year period.

Following a period of extensive negotiations, the re-financing of our investment property loan facility was completed in March 2014, and further repayments of debt were made in the period from the proceeds of realisations. In aggregate £72.7m was repaid and at 31 August 2014 the outstanding debt was £2.2m, all of which is now on flexible, variable rate terms.  An early repayment fee and write off of related debt issue costs gave rise to a separately disclosed finance charge in the period of £5.8m.