(MSS) Managed Support Services

FOR IMMEDIATE RELEASE                                                                                    22 December 2011

Managed Support Services plc

INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2011

Managed Support Services plc ("MSS") announces its Interim Results for the six months ended 30 September 2011.

·           Sale of Compliance Division for £3 million

·           Sale of Building Services Division for a headline price of £6.5 million

·           New Investment Policy adopted following disposal of all trading companies

·           Board maximising cash and reducing costs whilst actively pursuing investment opportunities

Commenting on the results, Simon Beart, Chief Executive said:

"We believe the disposal of the Group's trading activities was well timed given the worsening trading environment and the very poor outlook for the Building Services sector. 

The Board is now actively considering alternative proposals for the Group"

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Chief Executive's Review

Summary

The results for the six month period ended 30 September 2011 are primarily of historic interest only, since all the Group's trading activities have now been sold, following completion of the recent sale of the Building Services Division to Initial Rentokil ("Initial"). 

The profit and loss account for the period treats all trading subsidiaries as discontinued, although completion of the Initial sale took place on 5 December 2011.

The Board is now responsible for maximising the value of the deferred consideration payable under the Initial disposal and thereafter reducing Group costs and liabilities.

Trading

It became apparent during the first quarter of the year that those subsidiaries which were dependent on capital expenditure decisions by customers were going to encounter hostile trading conditions.  The Board duly announced in June that material trading losses were being encountered by our small shop fitting subsidiary MSS Interiors, and the larger Installation division of our Building Services operation.

Losses in these units accumulated very rapidly, despite an almost instant reaction to reduce headcount and activity.  As losses continued, the decision to close MSS Interiors was ultimately taken and the unit ceased trading in early November, but not before incurring trading losses in the first half of £211,000.  MSS Interiors was a business acquired by the previous management team for in excess of £5 million, despite being a vendor dependent, low value added shop fitting business, with no likely disposal value.  However, the unit had generated modest profits until this year.

In respect of the Installation activities, this unit represented the already much reduced residual commitment to the high risk, low margin, Installation service formed around an acquisition made by the previous management.  This service was valued by certain customers, and was therefore not closed in 2010, but revenue and profitability remained unpredictable and the business frequently required material working capital funding. 

The Installation activity also required capital expenditure commitments by customers.  Consistent with our experience at MSS Interiors, the Installations unit witnessed a very rapid downturn in activity from April of this year.  Turnover levels were reduced to expectations of less than £3 million per annum, having been at over twice that level in prior years.

In addition, the Group experienced a reduction in the discretionary, maintenance related, expenditure by customers.  This spend made up approximately 50 per cent. of the revenue within the Group's core Building Services business. 

The Building Services recurring revenues held up reasonably well in the half, but profitability was inevitably sensitive to any reduction in the discretionary expenditure element that normally accompanies the planned maintenance revenues.

The core offering of Building Services to our diverse customer base, with a recurring revenue level of approximately £10 million contributed reasonable operating profits in the period, before central costs, although still below management's expectations due to the reduction in discretionary spending.

The Group's Health & Safety Division traded well from acquisition and enjoyed a successful and profitable first half up to the point of disposal at the end of August, to Capita Group plc ("Capita").

Strategic Review

In the light of these market conditions and in particular in the context of larger competitors having to cease trading, it became clear to the Board that the Group's target corporate customers were unlikely to place material new business with smaller suppliers, such as MSS.  This lack of customer confidence in the supply chain was particularly frustrating given the quality of our offering and the recent, material contract wins with existing major customers.

The Board therefore decided that the preferable strategy was to realise value from the Group's assets rather than continue to compete in favourable markets.

It was initially agreed to dispose of the Group's Compliance Division.  In August 2011, the Group received £3.1 million following the sale of the Compliance Division to Capita which represented a small profit on the Group's investment in the Division.  The Compliance Division had traded very well since acquisition, benefitting from improved internal process, the imposition of management disciplines and the appointment of a professional Managing Director.

It was clearly a disappointment to sell the Compliance Division, which was operating in an attractive sector.  However, with insufficient capital to fund the Group's desired buy and build strategy, a profitable disposal represented the correct option.

Immediately following the disposal of the Compliance Division, the Group received unsolicited offers for the Building Services Division and details in respect of the division were circulated to a number of potential acquirers.

The Division was subsequently sold for a headline price of £6.5 million, subject to retentions, working capital adjustments and the novation of customer contracts.  The price again represented a small profit when compared to the acquisition cost of the two subsidiaries making up almost the whole Division, Status and ECS, which were acquired for a combined net price, including fees of £6.1 million. 

It is expected that the majority of the deferred Initial consideration will be received in March 2012 with the final balance to be received in June 2012.

Balance sheet

The Group's balance sheet is presented with the net assets of the trading subsidiaries shown as assets held for sale.  Completion of the Initial transaction took place in the second half.  At year end, it is anticipated that the balance sheet will merely show cash balances and a small level of trade creditors.

In total, the subsidiaries acquired during 2010 were sold for a profit of some £700,000.  The principal diminution of shareholder value over the last two years therefore, reflects the £4.5 million costs of closing the major part of the contracting division during the year ended March 2010 and the funding of losses in that year, during which time the Board was examining the potential for major transactions.  The remaining element of cash losses represents the funding of adverse working capital movements and the trading losses from the legacy units.

In respect of the Loan Note Holders, proposals are being made whereby redemption of the Loan Notes reflects the timing of the receipt of the initial and deferred consideration arising from the sale of the Building Services division.

Investment Policy

The shareholders approved an Investing Policy at the General Meeting on 5 December 2011.  This policy enables the shares to remain trading on AIM and enables the Board to examine a reasonably wide range of transactions and strategies in order hopefully to recover further shareholder value.  The Board is already considering potential acquisitions but such proposals need to be in respect of profitable, cash generative enterprises with competitive positions that are sustainable in a continuing recession.

In the event that no suitable proposal emerges, the Board will ultimately arrange for the residual cash balances to be returned to shareholders in a tax efficient and low cost manner.  It should be noted that any distribution of funds can only take place after the Group's tax computations to 31 March 2012 are agreed with HMRC and the warranty periods arising from the disposals have expired at August 2013.

The Board is also mindful that continued running costs need to be reduced.  A substantial reduction has already been achieved following the closure of the Woking office and the resignation from the Group of Jamie Reynolds.  It is anticipated that further costs savings will be implemented before the financial year end.

Summary

In spite of many, significant new customer wins and the creation of two profitable divisions that were readily sold to two major corporate acquirors, the strategy of creating a substantial building services operator was frustrated by market conditions and the collapse of trading at the Group's legacy subsidiaries.  These legacy subsidiaries at one stage made a reasonable contribution to central costs but proved too frail in current markets.

The Board is conscious that shareholders need to see an improvement in shareholder value.  Every attempt will be made to identify an attractive opportunity whilst controlling costs.

Simon D. Beart

Chief Executive