After considering the principal risks on pages 69 to 75, the Directors have assessed the prospects of the Group over a longer period than the period of at least twelve months required by the “going concern“ basis of accounting. The Directors consider that the Group’s risk management process satisfies the requirements of provision 31 of the UK Corporate Governance Code.
The Board considers annually, and on a rolling basis, a strategic plan, which is assessed with reference to the Group’s current position and prospects, the strategic objectives and the operation of the procedures and policies to manage the principal risks that might threaten the business model, future performance and target capital structure. In making this assessment, the Board considers emerging risks and longer-term risks and opportunities.
The aim is to ensure that the business model is continually reviewed to ensure it is sustainable over the long term. Security, flexibility and efficiency continue to be the guiding principles that underpin the Group’s capital structure objectives. The Group’s funding strategy is to ensure that headroom remains at comfortable levels under all planning scenarios.
For the purposes of the Viability Statement, the Board continues to believe that three years is an appropriate period of assessment as this aligns with the current planning horizon. Although our central forecasting models cover a 5-year period, it remains the case that there is less visibility beyond three years. The Construction Products Association’s forecasts currently go out to 2024. This remains compatible with the five-year Strategy and the longerterm objectives for our strategic growth pillars over a five-year period. The Group’s financial forecast includes an integrated model that incorporates the income statement, balance sheet and cash flow projections.
The detailed stress testing reflects the principal risks that could impact the Group and could conceivably threaten the Group’s ability to continue operating as a going concern. The assessment concluded that the deteriorating macro-economic environment is the key risk for this purpose and, in response to this, two scenarios have been run, namely a “reasonable worst-case scenario” and a “reverse stress test.”
The reasonable worst-case scenario comprises a significant stress test sensitivity run against the base case model. This sensitivity reflects a scenario that is worse than the assumptions in the CPA’s lower scenario from the 2022/2023 Winter forecast. This scenario results in a reduction in Group revenue of 9 per cent in 2023 and 12 per cent in 2024 against the base case forecast. In total this reflects a reduction in revenue of £178 million over the two years. A contribution “drop-through” rate has been applied based on the operational gearing of each business unit. Under the downside model, net debt reduces to £234 million by the end of 2023, and bank covenants are still comfortably met. The net effect of reduced operating profit and increased interest is mitigated by reduced tax and dividend cash flows. Gearing reduces to 34.7 per cent at the end of 2023, and there remains comfortable headroom against bank facilities and bank covenants are still comfortably met with the net debt to EBITDA covenant peaking at 1.9 in December 2023. In this scenario, we would have £27 million headroom against EBITDA and £96 million against net debt.
In practice, such a downside scenario would see the Group instigate certain mitigation measures. These might include significant reductions in fixed overheads, lower capital expenditure and actions to further reduce capacity, for example reducing shifts, production lines and potentially mothballing or closing sites.
The reverse stress test scenario aims to identify a deeper downside trading position that would give rise to a covenant breach. Against the base budget revenue reductions of 18 per cent would be required across 2023 and 2024 (all other things remaining unchanged) to increase the pre-IFRS 16 netdebt: adjusted EBITDA covenant to 3 times at 31 December 2023. This scenario equates to just under twice the reduction in revenue (in percentage terms) assumed in the CPA’s lower scenario from the 2022 Winter forecast.
This reverse stress test scenario reduces revenue by approximately £300 million over 2023 and 2024. Under this scenario, gearing peaks at 41 per cent at the end of 2023. There remains reasonable headroom against bank facilities, but the net debt: EBITDA bank covenant marginally breaches 3 times at 31 December 2023. The model assumes no further cash mitigation (e.g. reduced capital expenditure). Dividends have been reduced in line with the two times cover policy but the Board would retain the ability to further reduce or cancel dividends in order to maintain liquidity.
In undertaking its review, the Board has considered the appropriateness of any key assumptions, taking into account the external environments and the Group’s strategy and risks. Based on this assessment, and taking account of the Group’s principal risks and uncertainties, the Directors confirm that they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due for the next three years.
The reverse stress test scenario provides an indication of the scale of downturn that could be absorbed by the Group without taking action to reduce cash flows on capex and dividends or undertake more severe restructuring. The analysis provides the required evidence that the Directors’ assessment that the going concern assumption remains appropriate and supports a positive conclusion for the longer-term Viability Statement.