Analysts defend record as Giles downturn continues

Analysts have defended broking group Giles’s performance in 2009/10 despite its sharp deterioration in profitability.

Loss after tax at DMWSL 585, the ultimate holding company for the various divisions of the Giles group, slid to £37.1m in the year to 31 August 2010, from a loss of £22.7m the previous financial year.

The loss caused the group’s shareholders’ deficit to more than double to £70m from £32.9m.

The bulk of the loss came from the broking group’s hefty £30.7m interest payment for the year. However, this payment was broadly in line with the £31.4m the group paid out in 2008/09. Net debt remained largely unchanged at £219.3m compared with £219.7m in 2008/09.

The deterioration came mainly from a decision to shorten the goodwill amortisation period to 12 years from 20 years. Mostly as a result of this change, goodwill amortisation doubled to £23.4m from £11.7m.

This decision could continue to affect the company. In its Companies House filing, it said amortisation charges in future would be higher.

In addition, total turnover fell 3% to £70m in 2009/10 from £72.1m, while administrative expenses excluding goodwill amortisation rose 2% to £53.1m from £52m.

However, according to Deloitte partner Ian Clark, private equity-backed consolidators that rely on debt for financing, such as Giles, should be viewed differently.

“Whenever you are looking at a private equity investment that has a buy-and-build strategy, you need to look beyond the positive or negative number on the balance sheet because the number is negatively impacted by [Giles’s] goodwill write-off policy,” he said.

Referring to Giles’s new shortened amortisation period, he added: “Giles appears to have a very prudent policy, which is affecting its bottom-line numbers.”

But even excluding goodwill amortisation altogether, Giles would still have made an after-tax loss of £13.7m because of the large interest payments.

The typical measure of profitability used by consolidators, which excludes goodwill amortisation, is earnings before interest, tax, depreciation and amortisation (EBITDA). Clark said DMWSL 585’s EBITDA margin – EBITDA as a percentage of turnover – was 24% for 2009/10, “pretty much up there with the industry leaders” (see table).

He added that Giles’s 3% deterioration in turnover looked positive compared with an industry average of 5%-10% reductions because of soft market conditions.

On other metrics, however, Giles is underperforming peers such as Towergate. For example, Towergate’s interest payments made up 16.4% of group turnover for the full year, while Giles’s payments were 44% of turnover for the year to August 2010. And while Towergate turned in an after-tax loss of £14.2m for 2010, stripping out goodwill amortisation of £53.2m would put the company in profit.