Finance Director's Review
Once again the Group has produced a tremendous set of results which has been the product of a better balanced business model, with an increased amount of housebuilding alongside the sale of a number of consented plots from the land portfolio
Once again the Group has produced a tremendous set of results which has been the product of a better balanced business model, with an increased amount of housebuilding alongside the sale of a number of consented plots from the land portfolio. The recovery within the housebuilding sector is now well recognised and evidenced by the significant improvement in performance reported by the UK's major housebuilders.
Inland Homes generally purchases its sites unconditionally without planning consent and funding for such acquisitions remains very difficult to procure. The debt market for residential development has become more relaxed than it was five years ago, which has also supported the momentum in the sector.
In December 2014, the Group entered into an option arrangement with Wilton Park Developments Ltd (WPDL), a company owned by funding partners, to acquire the land and 76 existing freehold residential properties at Wilton Park in Beaconsfield, over a period of time. The site was acquired by WPDL for £35.0m, of which £29.0m was deferred over a period of three years. As at the balance sheet date, £19.0m of the deferred consideration remains outstanding and is non-recourse to the Group. In accordance with IFRS 10, the Group is required to consolidate WPDL within its financial statements and this has led to the inclusion of that company's results, part of which has then been deducted as a minority interest as they are not attributable to the shareholders of Inland Homes plc. Further information on the treatment of WPDL within the Group accounts is provided in notes 4, 14 and 22 to the accounts.
In June 2015 the Conduct Committee of the Financial Reporting Council (Committee) wrote to the Group requesting information and explanations as to why the Company did not consolidate Drayton Garden Village Limited (DGVL) in the Interim Results for the half year ended 31 December 2014 in accordance with IFRS 10 Consolidated Financial Statements which was effective for the Group for the first time this year.
Following discussions with the Committee, the Board has concluded that the Group controls DGVL because of the following reasons:
- The Group has power over DGVL because it has the practical ability to direct the relevant activities that significantly affect DGVL's returns. Such relevant activities would include obtaining planning permission to develop the site and subsequently managing the property to realise its value. The Group also has an option to acquire the share capital of DGVL which provides it with a mechanism by which it can direct the relevant activities.
- The services that the Group provides to DGVL and the arrangement by which the Group receives its fees are such that it has rights to variable returns as a result of its involvement in delivering the various property services to DGVL. The Group is currently entitled to 90% of the profits from the project at Drayton Garden Village and thus provides it with a very significant part of the returns generated from its involvement with DGVL.
- The Group also has the ability to use its power to affect its returns by virtue of its involvement with DGVL.
In view of the above the Group believes that under the principles of IFRS 10 it had control over DGVL from the date it entered into the agreement with DGVL and has therefore consolidated the results and financial position of DGVL within the Group accounts. Accordingly, the comparatives for earlier financial years have been restated. The profit share attributable to the shareholder of that company has been included within non-controlling interests and more information can be found in notes 4, 14 and 22 to the accounts.
The consolidation of WPDL and DGVL has led to an increase in revenue, inventories and borrowings amongst other items and has had a corresponding effect on reported cash flow movements. These effects are shown in note 32 to the accounts.
The key highlights of our financial performance are:
- Revenue has increased by 94% to £114.2m (2014 restated: £58.9m);
- Profit before tax (including the £14.5m revaluation surplus) has increased by 254% to £34.0m (2014 restated: £9.6m);
- Earnings per share has increased by 324% to 14.67p (2014 restated: 3.46p);
- Total dividend (interim 0.3p plus proposed final 0.7p) per share increased by 67% to 1.0p (2014: 0.6p);
- Net assets per share increased by 48% to 43.92p (2014 restated: 29.63p) excluding any unrealised gains within inventories;
- Year end cash balance of £21.4m (2014 restated: £11.1m);
- Net gearing* of 39% (2014 restated: 68%).
* Total borrowings less cash as a proportion of shareholders' funds.
Group Income Statement
Group revenues have increased significantly by 94% to £114.2m (2014 restated: £58.9m). The main driver of this has been the increased housebuilding activity which generated £66.1m (2014 restated: £29.2m) of revenue from 248 (2014 restated: 114) private residential unit completions of which 123 units were at our development in Ashford, Middlesex. The sale of 440 (2014 restated: 169) plots with planning consent contributed £39.6m (2014 restated: £15.1m) to revenue.
Gross profit has increased by 114%, from £16.1m (restated) to £34.4m and represents a gross margin of 30.1%. The significant increase in the Group's activities has been reflected in an increase in administrative overheads of £1.6m over the previous period.
During the year, the Group acquired part of the land and 76 existing freehold residential properties at Wilton Park in Beaconsfield. It is the Group's intention to hold the existing freehold properties for their rental value and for the longer term. These properties have therefore been revalued at the balance sheet date resulting in a surplus of £14.5m being recognised in the Group income statement. This reflects a change in accounting policy and the effects of this change are explained below in 'Financial position'.
The fair value of the option over the issued share capital of DGVL of £541,000 has been written off during the year as the future profits from Drayton Garden Village that would be available for distribution to the shareholder have decreased.
The Group's loan interest expense has increased significantly to £8.4m (2014 restated: £4.3m) in line with the increased debt funding used in our house building activities. The increase has also been due to some relatively more expensive debt used to acquire land, as funding for unconsented land is still very difficult to procure at competitive rates. A notional interest charge of £1.2m (2014: £57,000) has resulted due to the discount applied to deferred consideration on site acquisitions. £948,000 of this charge relates to WPDL.
The net finance expense is £8.2m and is covered 3.4 times (2014 restated: 2.6 times) by earnings before interest and tax and excluding revaluations of investment properties.
The total tax charge of £5.1m represents 14.9% of the profit before tax. This is lower than the effective tax rate of 20.75% principally due to the unrealised revaluation surplus on investment properties not being subject to any tax in the current year.
As the Group has sufficient capital losses brought forward, a deferred tax charge has been offset against recognition of capital losses in respect of the revaluation surplus on investment properties.
Earnings per Share and Dividends
Basic earnings per share were 324% higher at 14.67p (2014 restated: 3.46p). The Group paid its maiden interim dividend of 0.3p per share in July 2015. The total dividend payable for the year has been increased by 67% to 1.0p per share, with the proposed final dividend also increasing by 17% to 0.7p per share (2014: 0.6p per share) and will be payable on 22 January 2016 subject to shareholders' approval. The dividend will be payable to shareholders on the register as at the close of business on 29 December 2015. The ex dividend date is 24 December 2015.
During the year ended 30 June 2015, we increased net cash inflows from operating activities before movements in working capital by £16.6m to £28.4m and after taking account of movements in working capital, cash flow generated from operations amounted to £36.8m. This is a significant change from the previous year where we experienced net cash outflows of £27.5m. This was due to the 94% increase in turnover and gross profitability mentioned earlier in my report.
Investment in fixed assets, which includes the acquisition of the 76 existing properties at Wilton Park, amounted to £11.5m. The Group also arranged two joint ventures into which we invested £4.9m by way of loans and equity. These investments are included in outflows from investing activities of £16.7m (2014: inflows of £1.9m).
Net cash outflows from financing activities amounted to £9.8m with net inflows from borrowings of £nil, interest paid of £7.2m and £1.2m of dividends paid.
dividend per share
year end cash balances
2014 (restated): £11.1m
Investment properties include our property at Hamworthy, Poole and the 76 residential properties at Wilton Park in Beaconsfield. The property in Poole was valued by the Board at £8.0m, which was the fair value of the property after any transfers to inventories. The 76 residential properties at Wilton Park were professionally valued at £26.0m at the year end resulting in a surplus of £14.5m. This increase was due to a certificate of lawfulness having been obtained by the Group from the local authority as well as an increase in the value of houses in Beaconsfield since the site was purchased from the MoD. During the year the Group changed its accounting policy for investment properties from a deemed cost basis to a fair value basis. This has resulted in a restatement of the figures for the years ended 30 June 2013 and 2014, where both fixed assets and the profit and loss reserve have improved by £4.1m less an associated deferred tax asset of £2.1m, which had been previously recognised.
Investments in and loans to joint ventures of £4.7m represents the fair value of our share of investment into three sites within the two joint ventures, referred to in the Chief Executive's Review.
Inventories have increased by 16.1% to £121.0m, which includes the land and buildings at Wilton Park and DGV which are held for trading. Debtors have decreased from £10.4m (restated) to £8.0m. Cash balances at the balance sheet date were £21.4m (2014 restated: £11.1m) and net debt amounted to £34.9m (2014 restated: £40.9m), which represented a decrease in net gearing by 41.4% to 39.2% (2014 restated: 66.9%). The substantial increase in work in progress within our housebuilding operations and the continuing investment into good land opportunities, particularly into major projects like Wilton Park, has led to an increase in our borrowings after the year end and the Board is comfortable with this position as the underlying asset value of the business has also grown significantly. The increased borrowings are also supported by a strong forward sales position and growing recurring rental income.
Land creditors were £23.5m (2014 restated: £9.3m), of which £16.1m relates to Wilton Park and is non-recourse to the Group.
Net assets attributable to shareholders were £88.8m at 30 June 2015 equating to 43.92p (2014 restated: 29.63p) per share. The major part of the Group's land bank is held as inventories at the lower of cost and net realisable value and it should be noted that the unrealised value within the portfolio of sites is significantly higher than the stated value. NAV is a key performance measure used in the real estate industry. However, IFRS NAV does not provide shareholders with the most relevant information on the fair value of the assets within an ongoing real estate company with a long term strategy. Accordingly, after consultation with our advisers, we have decided to adopt the accounting practices of the European Public Real Estate Association ("EPRA") to address this issue. Specifically, the EPRA NAV measure highlights the fair value of net assets on a long term, ongoing basis. While not recognising unrealised gains due to planning gains in the income statement, the adjusted value of trading assets and land subject to planning gains would reflect their current fair value under EPRA's NAV measure. We intend to introduce this additional disclosure when we report the Group's half year results for the six month period ending 31 December 2015, expected in March 2016.
28 October 2015