Harvey Nash Group Plc (LON:HVN) has delivered a robust set of H1 results, with adjusted EPS +17% YOY. The underlying business is performing to plan, albeit market conditions across its divisions are mixed. In addition, cost savings are being delivered to plan, and the acquisitions appear to be integrating well. We are maintaining our headline forecasts on the back of these results, and continue to believe the valuation remains compelling at this juncture.
H1 Results: Revenues were +12.6% or +9.2% on a constant currency basis, with gross profit +2.0% or -3.7% on a constant currency basis. Operating profit (pre non-recurring items) was +1.2% in actual currency, with adjusted PBT coming in at £4.0m vs. £3.8m last year with interest costs -30% YOY to £0.3m reflecting lower average borrowing during the period. Adjusted EPS was +17.4% YOY in actual currency, with the effective tax rate falling from 31.3% to 26.9% during the period. A H1 dividend of 1.6p was also declared, which was +5% YOY, with cover running at 2.7x vs. 2.3x last year.
Performance drivers: The UK saw NFI -1.2% YOY with operating profit broadly flat at £1.6m. We regard this as a good outcome given the weaker market backdrop during the period. Europe saw NFI growth of 9.2% during the period on the back of 15.9% revenue growth. The overall macro environment appears to be improving here, albeit there was a varied performance within the mix. Rest of World saw NFI fall by 4.4% with operating profit increasing by 20.5% though this was off a low base to £0.1m. Headcount did fall by 8% during the period, with USA -13% and Asia Pacific -8%. The acquisitions of PAT and Crimson are currently going to plan and integrating in line with management expectations. The Group transformation plan is also going well, and we are comfortable with the cost saving assumptions made in our forecasts.
Forecast assumptions: We leave our income statement forecasts unchanged today but have adjusted our working capital assumptions to reflect trends seen at the half year with the main driver being an increase in debtors, reflecting the rise in activity levels.
Valuation: At its current share price, Harvey Nash Group Plc trades on an FY18 P/E of 8.1x (falling to 6.4x in 2019E) and an EV/EBITDA of 5.3x (falling to 4.0x in 2019E), a compelling valuation alongside an attractive 4.9% dividend yield. We remain comfortable with our blue sky analysis in our initiation note (12 September) showing the Group delivering an EBIT of £17.5-20.0m in the medium term, which implies a share price range of 154-172p discounted back by 3 years at 10% applying a modest through the cycle P/E of 12x
