REACT Group plc (LON:REAT) Chairman Mark Braund caught up with DirectorsTalk for an exclusive interview to discuss the Aquaflow acquisition, future opportunities, highlights from the latest trading update, and what investors can expect in the coming financial year.
Q1: REACT Group announced the acquisition of Aquaflow this morning. Could you just tell us what they do and who their clients are?
A1: 24hr Aquaflow Services, they are a London and Southeast based commercial drainage and plumbing business. Basically, they deal with incidents, floods, damaged pipe work, but they also have a large chunk of their business is reoccurring or recurring business, about 79% of it, of which just over 40% of that is pre-planned maintenance.
Their customers are facility management companies, the big ones, you can imagine, and also some of the mid-sized ones in that region. I think more than 95% of their revenue is with that part of the market. The small amount of remainder is directly with company’s own facility management departments.
That pretty much mirrors the REACT Group. We have probably about 60% of our revenue is with large FM companies, and we’re dealing with the same sorts of people.
What we’ve combined and now providing is one of the best and certainly one of the broadest propositions for delivering specialist services, specialist FM services into that space.
Q2: What will Aquaflow bring to the business and what do you see as future opportunities?
A2: Well, Aquaflow bring that capability that we currently don’t have, which is to deal with incidents like floods and damaged pipework, and also that pre-planned maintenance side of their business is very similar to our own.
So, they get us into a part of the market that’s very much in demand. It does result often in doing some of our specialist workers, if you imagine a flood, a good proportion of our work can be as a result of dealing with flood damage and the like. So, they deal with a similar customer set and we have a broad range of services now in the group that those customers want to buy. Likewise, we have customers in the region that they service that want to buy their services.
So, this is a straightforward cross sell play and as consolidation, providing customers with a compelling proposition of fairly in demand services, all of which are specialist by nature, and delivering it through one provider, which is obviously REACT Group.
Q3: You’ve stated that Aquaflow will be immediately earnings-enhancing for the business. Could you expand on that for us?
A3: So, basically there’s a couple of analyst notes out there, one from Singer and one from Dowgate that provide the modelling behind this but we’ve used a minimum amount of equity to effect this deal. The owners of Aquaflow have taken about £500,000 worth of group stock as part of their role into the business because they want to stay, they want to grow the business with us. And we’ve just done a placing for around £1 million, which is actually provide working capital.
The business in of itself, though, is being financed by a consolidated debt arrangement with HSBC, and that of operational cash. So, clearly, we’re using very little in the way of dilution to affect the deal that’s going to bring so much value.
We’re buying this business that’s had a trailing 12 month adjusted EBITDA of just over £1.2 million, and when you add that and roll that forward in terms of our overall forecast, you get a very compelling earnings accretion.
At the end of the day, it’s extremely compelling when it comes to an earnings enhancement.
Q4: Now, REACT Group has also announced a positive trading update for the year to the 30th of September. Could you just run us through the highlights, please?
A4: The highlights are revenue just over £20.7 million, gross profit, pleasingly, is margins are up, and both revenue and gross profit is up year on year but we’ve continued to improve our margins, they’re up 100 basis points at 27.5%, which is pretty high for our sector of the market.
We’re suggesting that adjusted EBITDA is expected to be at least £2.4 million for last year. Obviously, we’ve only just finished the financial year end audits yet to come so these are all pre-audit numbers but that’s the statement, that’s where we are.
Q5: Just to finish up, what can investors expect from the group in the next financial year?
A5: If you mean next, you mean the one we’re actually in, of course our year started on the 1st October, but basically more of the same.
We’re an organic growth business, we have an exceptional proposition, we are one of the largest players in this very very fragmented market space, and with the addition of Aquaflow, we now have four key service areas, all of which are in demand by our customers.
We’re anticipating continuing that organic growth story and we’ve obviously got to make sure that we have a smooth integration with Aquaflow. I should add here that the management team that have grown this business over the last 20 years are all staying with the business, and they’re invested, as I’ve just mentioned earlier.
So, the integration is not going to be that difficult. We think there are some things that we can bring to the party, such as our sales and marketing capability and we think there’s some things that they can bring to our overall party that is probably better than we do, such as areas of the 24-hour cover and some of their systems we think are going to be helpful to us.
I should add that the digital technology that we’re putting into LaddersFree to help us there, that is currently in user acceptance testing. That’s gone extremely well, it’s gone to budget, I suspect we’ll start to see customers moving onto that platform in the next couple of months. By the beginning of new calendar year, January, we should have moved completely onto that platform.
So overall, more growth, there’s lots to do and we’ve got a great team doing it. Shareholders can look out for this acquisition being accretive in value to their shareholding, and you can certainly consider the fact that the management team are working hard to continue the organic growth story as well.
