Water Hall Group plc

Interim Results for the half-year ended 30 June 2008

Chairman's Statement

Overview

In my statement at the AGM held on 4 June 2008, I informed shareholders that 2008 would be a year of transition. I also provided an update on the key challenges facing the board now that a significant proportion of the Group's trading activities have ceased and on the actions being taken by your board to develop the Group and mitigate the impact of the current reduced scale of activities.

On the positive side, I am pleased to report that at a meeting of Hertfordshire County Council's ("HCC") planning and development committee held on 23 September 2008, members approved the Company's resubmitted application to vary an existing planning consent. The existing consent linked the Materials Recovery Facility ("MRF") activities to the Southfield Wood Landfill ("SFW") which is now closed. The variation amends the consent to link the MRF to the operations of the Bunkers Landfill ("Bunkers") for which the consented period runs to 2014. The recently approved planning application permits the Company to construct a modern recycling facility.

Trading conditions during the first half of the year were difficult reflecting the impact of the well documented 'credit crunch', increasing fuel prices, poor weather conditions and the downturn in the construction industry. 

In June the inert soil recycling activity ceased due to poor operating results and this has been treated in these accounts as a discontinued operation. The board expects tonnages in the remaining continuing operation, Bunkers, to be lower than last year. As a consequence of both these factors measures were implemented, during the first half and after the period end, which have significantly reduced the head count, reduced the operational cost base and resulted in the disposal of surplus plant and equipment.

In spite of these poor trading conditions, the Group's balance sheet remained strong with cash and available-for-sale-assets at similar levels to those at 31 December 2007.

It remains your board's objective to make an acquisition capable of providing sustained earnings coupled with the potential to achieve further growth. I am pleased to report that a number of targets are presently under review. Your board is encouraged that vendors appear to be taking a much more realistic attitude in assessing the valuations placed on their businesses, recognising that they are operating in a more difficult trading environment than over the past few years and also the reduced availability of acquisition finance.

The board also continues to monitor the Company's investment in Petards Group plc ("Petards") whose shares, which are quoted on AIM, have been suspended since 25 June 2008 pending the release of the accounts for the year to 31 December 2007. The board of Petards announced on 31 July 2008 that it expected to be in a position to make proposals to shareholders relating to a possible offer or refinancing in September 2008. In light of the suspension of Petards shares, provision has been made to write down the carrying value of this asset to £70,000, pending clarification of Petards financial position, giving rise to a charge in the income statement for the period of £168,000.

Discussions continue with HCC over the restoration of SFW, the Group's objective being to return the restored areas to prime agricultural land. In the meantime, as part of the restoration programme, the capping of Cell 5 has been largely completed and the capping of Cell 2 has commenced.  The capping will enable a gas collection system to be installed which in turn will provide the Group with better information on the potential for commercial use of the gas.

The board continues to keep under review the opportunities for the development of other parts of the Group's estate, in particular the exploitation of the gravel reserves in Bunkers South and its potential restoration with inert waste, both presently held under a royalty option. The date for the public inquiry into HCC's Waste Plan has yet to be set and there is little in this area that can be done at this stage. In regard to the HCC adopted Hertfordshire Local Minerals Plan ("Minerals Plan"), the board is presently reviewing it for any deficiencies in the County Council's statutory obligations. If, on advice, the board feels that the Minerals Plan is flawed and the Group's mineral reserves could become consented, then a planning application will be considered during 2009.

Results

Sales for continuing operations for the half-year were £880,000 (2007 - £575,000). Cost of sales was £452,000 (2007 - £246,000) resulting in a gross profit of £428,000 (2007 - £329,000) representing 48.64% (2007 - 57.22%) of sales, the fall mainly reflecting the additional costs of processing soils after receipt. After administrative expenses of £674,000 (2007 - £610,000) and other losses of £145,000 (2007 - £nil), mainly the Petards impairment provision, the operating loss for the period was £391,000 (2007 - £281,000). Finance income was £89,000 (2007 - £29,000), resulting in a pre-tax loss from continuing operations of £302,000 (2007 - £252,000). Discontinued operations incurred a loss of £6,000 (2007 - profit of £362,000) arising from the trading losses of the soil recycling activity discontinued in the period and from the losses and closure costs of the skip collections business discontinued in 2007. These losses and costs were mostly offset by the gains on the sale of plant and equipment used in those activities discontinued in 2007. The result of all operations for the period was a loss of £308,000 (2007 - profit £110,000).   

No tax is payable in respect of either period. 

Basic earnings per share were a loss of 0.54p for the period (2007 - profit of 0.20p per share) and fully diluted earnings per share were a loss of 0.51p per share (2007 - profit of 0.18p per share).

As it remains the board's objective to make an acquisition which would be expected to provide sustainable earnings growth, no dividend has been declared in respect of the period.

Cash outflow from operating activities of £310,000 (2007 - inflow of £87,000) was offset by income from investing activities of £401,000 (2007 - expenditure of £182,000). The cash inflow during 2008 primarily arose from the disposal of surplus plant and equipment which generated income of £441,000 (2007 - £nil) Capital expenditure of £140,000 (2007 - £55,000) includes planning costs of £121,000 (2007 - £nil) in respect of the MRF planning application.  The increase in free cash and cash equivalents during the half-year was £91,000 (2007 - decrease of £95,000).

At 30 June 2008, the Group had cash and cash equivalents of £5.312m (31 December 2007 - £5.187m) including balances held in escrow accounts of £1.289 million (31 December 2007 - £1.255 m). 

Total equity at 30 June 2008 was £4.521 million (31 December 2007 - £4.800 million), equating to basic net assets of 7.97p per ordinary share (31 December 2007 - 8.47p), the reduction reflecting the loss for the period. 

Risks & Uncertainties

The principal risks and uncertainties affecting the business activities of the Group remain those detailed on page 11 of the 2007 Annual Report. In the view of the Board these properly reflect the uncertainties which may have a material effect on the Group's performance in the second-half of the year.

Future

While the board believes that any significant recovery in the construction industry is likely to be slow, it is actively reviewing plans designed to accelerate the cash flow from Bunkers, the sole remaining activity.

The Group's strong asset base and cash resources place it in a good position to acquire a business provided other factors relating to quality, profitability and sustainability are met. The board's view is that any acquisition should be funded from its cash resources as far as is realistic and that debt to equity ratios should be consistent with available free cash flow on a conservative basis. During the intervening period the board will continue to make short to medium term investments where it believes the returns will be greater than from cash on deposit. The board is also looking at suitable alternatives to holding cash in escrow accounts, in particular that in respect of SFW which represents the majority of funds held in such accounts. 

Trading for the first three months of the second half has been poor and is below the board's expectations. It is anticipated that there will be some asset sales in the second half of the year but they will be less than those in the first half of the year. Being a single site operation, current market conditions make it difficult for the board to predict with any degree of accuracy the outcome for the year. However, the substantial reduction in the cost base and the enthusiasm of the remaining employees lead the board to believe that the Group is now better positioned to cope in the present economic climate.

Raschid Abdullah

Chairman

25 September 2008

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