Principal risks and uncertainties continued
Viability Statement In accordance with the requirements of the UK Corporate Governance Code, the aim of the Viability Statement is for the Directors to report on the assessment of the prospects of the Group meeting its liabilities over the assessment period, taking into account the current financial position, outlook, principal risks and uncertainties, and key judgements and estimates in preparing the Financial Statements. The Directors have based their assessment of viability on the Group’s current business model and strategic plan, which is updated and approved annually by the Board, in line with our objectives to deliver sustainable and profitable growth, increase shareholder value and offer an improved service and product offering to our customers. This is underpinned by the strategic priorities outlined on pages 28 to 35 of the Strategic Report. The effective management of principal risks and uncertainties is outlined within pages 64 to 72 and this assessment emphasises those risks that could theoretically threaten the Group’s ability to operate, or to continue in existence (with the VR designation). The assessment period The Directors have assessed the viability of the Group over the three year period to May 2025, as this is an appropriate planning time horizon given the speed of change and customer demand in the industry and is in line with the Group’s strategic planning period. Assessment of viability The viability of the Group has been assessed taking into account the Group’s current financial position, available bank facilities, and the Board approved FY23 budget and three year strategic plan. The Directors have produced a base case budget for FY23, which reflects recent growth patterns in the relevant geographical regions and operating segments and relevant growth opportunities for the Group based on existing propositions and factors in current macro- economic factors most specifically increasing inflationary pressures. The Directors have also modelled the impact of certain severe but plausible scenarios arising from the principal risks, which have the
greatest potential impact on viability in the period under review, as set out in the table below. Further details of how these sensitivities have been applied are provided in the going concern disclosures in Note 1 to the Financial Statements. The impact of these sensitivities has been reviewed against the Group’s projected cash flow position, available bank facilities and compliance with financial covenants over the three year viability period. The Group financing arrangements are made up of a revolving credit facility of £100m, which expires in June 2024, and a term loan repayable in instalments with the final payment due in June 2024. As of 31 May 2022, net debt (excluding lease liabilities) 1 amounted to £52.4m, which comprised cash of £73.2m, a drawn revolving credit facility of £71.0m and the term loan of £55.4m, with borrowings offset by arrangement fees of £0.8m. Please see Note 1 of the Financial Statements for further discussion of financial covenants and Note 24 of the Financial Statements for further discussion of the Group’s financing arrangements. The sensitivities applied under stress testing show adequate levels of headroom against available bank facilities and financial covenants and that no mitigating actions are required to address severe but plausible scenarios modelled by management. While noting that no mitigating actions are required to address severe but plausible scenarios modelled by management, options available include a reduction of planned capital expenditure, headcount reduction, freezing pay and recruitment and not paying a dividend to shareholders, all of which are within the Directors’ control and give an additional level of headroom. Some or all of the above options may be utilised in the case of any of the risks outlined in the table below arising. Conclusions Based on these severe but possible scenarios, the Directors have a reasonable expectation that the Group and Company will be able to continue in operation and remain commercially viable over the three year period of assessment.
Viability risk
Risk as applied to viability assessment
Specifics of scenario modelled
Potential impact
The impact of these sensitivities has been reviewed against the Group’s projected cash flow position, available bank facilities and compliance with financial covenants over the three year viability period. The sensitivities applied under stress testing show adequate levels of headroom and that no mitigating actions are required.
All three of these risks are expected to lead to a barrier to future growth, either through lack of key talent, failure to deliver on growth plans or long-term reputational damage from critical systems failures.
Failure to execute business strategy Inability to attract and retain sufficient high calibre colleagues Failure of critical information systems
In order to consider the impact of the risks identified management has modelled various scenarios in isolation and in combination (scenarios 2 and 3 and scenarios 1 and 3) as follows: 1) The performance of FY23 continues to be similar to that of FY22, including the impact on regional and international operations of the Group and a potential reduction in double-digit revenue growth to 9% growth and subsequent impact on margin. 2) Software Resilience performance does not achieve expected revenue growth in all territories and experiences a 1% revenue decline. 3) Further inflationary pressures up to 6% arise over the existing base case of 4% assessment and certain day rate price rises to customers do not occur. Failure of execution of the strategy and loss of key customers resulting in a reduction in revenue and a consequential impact on profitability and cash generation of £22.5m for FY23, rising to £44.0m in FY27.
The impact of these sensitivities has been reviewed against the Group’s projected cash flow position, available bank facilities and compliance with financial covenants over the three year viability period. The sensitivities applied under stress testing show adequate levels of headroom and that no mitigating actions are required. The impact of these sensitivities has been reviewed against the Group’s projected cash flow position, available bank facilities and compliance with financial covenants over the three year viability period. The sensitivities applied under stress testing show adequate levels of headroom and that no mitigating actions are required.
A cyber breach or similar data protection issue would give rise to short-term reputational damage and an inability to do business in the short term, impacting revenue and profits. Without appropriate management information, management may have a lack of clarity over the impact of rising costs and the ability of the business to react to such rising cost levels through price rises.
Failure to maintain control over customer, colleague, commercial and/or operational data Poor quality of Management Information Systems (MIS) and internal business processes
Further inflationary pressures up to 6% arise over the existing base case of 4% assessment and certain day rate price rises to customers do not occur.
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NCC Group plc — Annual report and accounts for the year ended 31 May 2022
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