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LSL Property Services  -  LSL   

PRELIMINARY ANNOUNCEMENT

Released 07:00 07-Mar-2017

RNS Number : 6739Y
LSL Property Services
07 March 2017
 

For Immediate Release

7th March 2017

 

LSL Property Services plc ("LSL" or "The Group")

PRELIMINARY ANNOUNCEMENT

 

LSL Property Services plc, a leading provider of residential property services incorporating both estate agency and surveying businesses, announces preliminary results for the year ended 31st December 2016.

 

 

2016

2015

% change

Group revenue  - £m

307.8

300.6

+2

Group Underlying Operating Profit1 - £m

34.6

42.9

-19

Group Underlying Operating Margin -  %

11.3

14.3

 

Group operating profit - £m

65.4

41.4

+58

Profit before tax - £m

63.5

38.6

+65

Exceptional gain / (costs) - £m

32.2

(0.3)

 

Basic Earnings Per Share - pence

49.2

29.7

+66

Adjusted Basic Earnings Per Share - pence2

25.9

31.5

-18

Net Bank Debt3 at 31st December - £m

20.3

39.9

 

Final proposed dividend per share - pence

6.3

8.6

 

Full year dividend per share - pence

10.3

12.6

-18

 

1                      Group Underlying Operating Profit is before exceptional costs, contingent consideration, amortisation of intangible assets and share-based payments (as defined in Note 4)

2                      Refer to Note 6 for the calculation

3                      Refer to Note 9 for the calculation

 

·      Group operating profit growth of 58% at £65.4m (2015: £41.4m)

·      Solid performance in a changing market with full year Group Underlying Operating Profit1 of £34.6m (2015: £42.9m)

·      Continued momentum in the Estate Agency Division with 3% overall revenue growth

·      Lettings income growth of 9%, delivered through organic growth and selective acquisitions

·      Growth in Financial Services income of 27% delivered through strong organic growth (13%) and the acquisition of Group First

·      Marsh & Parsons delivered a resilient performance despite a challenging London market with total revenue down 5% whilst Lettings revenue performed strongly with growth of 6%

·      The Surveying Division delivered overall revenue growth of 1%, as the mix of volume and income per job was optimised, with an EBIT margin of 27.1% (2015: 28.3%)

·      Improving PI Costs outlook with £1.6m exceptional provision release

·      Exceptional gain of £32.9m on sale of Zoopla shares

·      Exceptional restructuring costs of £2.3m

·      Strong operational cash flow and low level of gearing

 

Commenting on today's announcement, Simon Embley, Chairman, said:

 

"Following a strong first half performance, the Group delivered a resilient second half performance given the changing market conditions. I am pleased that we maintained revenue growth in both the Estate Agency and Surveying Divisions.

 

The Group reacted decisively to the changing market conditions in the second half by taking selective cost measures and strengthening the balance sheet. The Group has relatively low levels of gearing and is very cash generative at an operational level. The business is well positioned to capitalise on market conditions to increase shareholder value."

 

For further information, please contact:

Ian Crabb, Group Chief Executive Officer                       

 

Adam Castleton, Group Chief Financial Officer

 

LSL Property Services plc                                                                                                  

0207 382 0360

 

 

Richard Darby, Sophie Cowles

 

Buchanan

0207 466 5000

 

                                                                                                                       

Notes on LSL:

LSL is a leading provider of residential property services to its key customer groups.  Services to consumers include: residential sales, lettings, surveying, conveyancing and mortgage, pure protection and general insurance brokerage services. Services to mortgage lenders include: valuations and panel management services, asset management and property management services. For further information, please visit LSL's website: www.lslps.co.uk

 

 

Chairman's Statement

Introduction

Following a strong first half performance, the Group delivered a resilient second half performance given the changing market conditions, with 2016 Group Underlying Operating Profit1 of £34.6m (2015: £42.9m).  Group Operating Profit was £65.4m (2015: £41.4m). Group revenue grew by 2.4% to £307.8m (2015: £300.6m) with growth in both the Estate Agency and Surveying Divisions. Profit before tax grew by 64.6% to £63.5m (2015: £38.6m).

 

Performance

After a strong overall first half performance in the Estate Agency Division, with a notable first quarter acceleration of transactions in the run up to the change in stamp duty regulations on 1st April 2016, we reacted decisively to the changing market conditions in the second half of the year with selective cost reduction measures and branch closures and protected the balance sheet by disposing of the Group's shareholding in Zoopla and pausing acquisition activity. We continued to invest in Lettings and Financial Services headcount during the second half of 2016. As a result, in 2016 we delivered full year growth of 9% in the Lettings business and delivered Financial Services revenue growth of 27%.

 

The Surveying Division delivered a robust performance with 1% revenue growth and a strong operating profit margin of 27.1%.

 

Dividend

Due to the Board's positive view of the future prospects for the business, the proposed dividend payment is at the upper end of our previously stated policy of applying a dividend pay-out ratio of between 30% to 40% of Group Underlying Operating Profit after interest and tax.  The Board has reviewed the policy while considering the risks and capital management decisions facing the Group.

 

A final dividend of 6.3 pence per share (2015: 8.6 pence per share) will be proposed to Shareholders at the forthcoming AGM, giving a total dividend for 2016 of 10.3 pence per share (2015: 12.6 pence per share).

 

The ex-dividend date for the final dividend is 30th March 2017, with a record date of 31st March 2017 and a payment date of 2nd May 2017. Shareholders have the opportunity to elect to reinvest their cash dividend and purchase existing shares in LSL through a dividend reinvestment plan.

 

Our market position

LSL holds a market leading position in its core Estate Agency business comprising 12 Estate Agency brands, including Your Move, which is the largest UK single brand estate agent measured by the number of branches with 267 branches nationwide. The businesses are organised to deliver integrated Residential Sales, Lettings and Financial Services, as well as a range of additional property related services.  

 

We continued to invest in our brands in 2016 to drive future growth, with a national media campaign to support the Your Move brand during the first half of 2016 and by increasing dedicated headcount to support our successful Lettings and Financial Services businesses and growing our Land and New Homes businesses. During 2016 we opened two new Marsh & Parsons branches.

 

We continue to hold a leading market position in Surveying, maintaining strong relationships with many of the major lenders. LSL's Surveying Division is one of the country's largest providers of residential valuation services nationwide and is one of the largest employers of surveyors in the UK2.

 

We operate in a highly competitive residential property market, which is characterised by on-going new entrants and evolving business models. We continue to proactively develop and evolve our offering to ensure our competitiveness in this changing marketplace. We will also take selective cost action as required to underpin our competitiveness, as we did in the second half of 2016.

 

During the second half of 2016 we completed extensive consumer and market research.  In 2017 we will progress the next phase of our strategy by exploring and evaluating LSL's digital opportunities and a further update will be provided to Shareholders during 2017.

 

We continue to selectively acquire businesses. To drive recurring income growth, we acquired nine lettings books in 2016 for £4.1m (2015: 30 lettings books for £9.6m), with internal disciplines in place to ensure successful integration into the Group.

 

In February 2016 we acquired a 65% interest in Group First which provides mortgage and protection brokerage services to the purchasers of new homes. This acquisition supports LSL's strategy to grow long term profitability in the UK residential property services sector.

 

In Financial Services, the Group arranged total mortgage lending of £17.4bn (2015: £14.5bn), representing 7.1% of the overall market3. Measured by the number of appointed representatives, LSL's overall combined network is the second largest in the UK4.

 

LSL notes the publication of the Housing White Paper in January 2017 which confirmed the Government's intent (as announced in the Autumn Statement in November 2016) to bring forward legislation (as soon as Parliamentary time allows) to ban letting agent fees to tenants. LSL will continue to monitor the review and contribute to the consultation as appropriate during the year.

 

Corporate Governance and Board

The Board remains committed to high levels of corporate governance and during 2016, LSL has complied in all respects with the UK Corporate Governance Code (September 2014 edition).  We have also considered the amendments included in the April 2016 edition of the Code to ensure we continue to comply during 2017 and are monitoring the Government's review of corporate governance, which is set out in the Green Paper published in November 2016.

 

There were a number of changes to the Board during the year.  At the 2016 AGM, Mark Morris, who had been a Non Executive Director and Chairman of the Audit Committee since LSL's IPO in 2006, retired from the Board and its Committees.  David Stewart, who joined the Board as a Non Executive Director in May 2015, was appointed Chairman of the Audit Committee. David is also a member of LSL's Remuneration and Nominations Committees.  In January 2017, Adrian Gill stepped down from the Board and on 2nd February 2017 we announced the appointment of Helen Buck as Executive Director - Estate Agency.  Helen had been a Non Executive Director of LSL since December 2011 and has excellent knowledge of the business. Her appointment followed a comprehensive selection process.

 

The Nominations Committee has during the year reviewed the Board's composition, which at the date of this Report includes three independent Non Executive Directors and three Executive Directors and myself as Chairman.  The Board has expertise in strategy, technology, estate agency, surveying, financial services, the residential housing sector, commercial property, retail and marketing, operations, business services, entrepreneurial private and public companies, finance, consumer and employee matters and corporate governance.

 

The Board continues to recognise the benefits of diversity in the boardroom, including gender and racial diversity and the current Board composition includes two female Directors, Helen Buck (Executive Director - Estate Agency) and Kumsal Bayazit Besson (Independent Non Executive Director).  Whilst we continue to remain of the view that the setting of targets for the number of female directors on the Board is not necessary and that we will continue to appoint on merit, I will continue to ensure that our searches for any new directors take into account diversity, including gender and race.

 

In respect of 2016, the Board has conducted an annual review of its effectiveness and that of its Committees, taking into account the balance of skills, experience, independence and knowledge of our businesses.  Following this exercise, we concluded that the Board and its Committees are effective and are able to discharge their respective duties and responsibilities appropriately. The appraisal produced a number of recommendations to further improve the effectiveness of the Board, which will be implemented during 2017. These include reviewing Board meeting planning and reporting arrangements, the development of Executive Director and senior management succession plans, the provision of Director training and an evaluation of the Group's cultures, values and ethics. 

 

In addition, and taking into consideration the revised Code published in April 2016, the Board reviewed the composition of the Audit Committee and confirmed that the Audit Committee as a whole has the competence relevant to the sectors in which LSL operates. Further details relating to the Audit Committee are contained in the Audit Committee Report or the Annual Report and Accounts 2016.

 

As Chairman, with the responsibility for leadership of the Board, I review its effectiveness on all aspects of its role and encourage feedback.

 

Our people

Ultimately the success of our business model has always been underpinned by our strong brands and excellence in delivery by our knowledgeable local colleagues. The number of Group employees as at 31st December 2016 was 4,990 (2015: 5,181).  Our success is attributable to the high levels of customer service provided by our staff in all parts of our business across the entire UK and I would like to thank all of our staff for the continued hard work and commitment which they have demonstrated throughout 2016.

 

Current trading and outlook

We have started the year positively in both the Estate Agency and Surveying Divisions.

 

In the Estate Agency Division, trading is encouraging and in-line with expectations, with quality buyers and good availability of mortgages. Whilst there remains a shortage of stock, our sales conversion remains strong.

 

In our Surveying Division, trading is in line with expectations and the second phase of the technology refresh is progressing well.

 

Whilst it is difficult to accurately predict housing market transaction volumes and consumer confidence for the remainder of the year, 2017 is expected to see a reduced volume of house purchase transactions compared to the prior year, with modest house price inflation outside prime Central London. However, mortgage costs and availability remain positive and the medium to longer term fundamentals of the UK housing market remain robust.

 

Underpinned by a series of strategic initiatives, the business is well placed to deliver a solid performance in 2017. We are positive regarding the outlook for the business, committed to driving profitable organic growth across the business, and will continue to evaluate selective acquisitions.

 

The Group has a robust balance sheet with relatively low levels of gearing and is very cash generative at an operational level. The business is well placed to capitalise on market conditions to increase Shareholder value.

 

 

Simon Embley

Chairman

7th March 2017

 

Note 1 Group Underlying Operating Profit is before exceptional costs, contingent consideration, amortisation of intangible assets and share-based payments (as defined in Note 4)

Note 2 Source: LSL estimates

Note 3 Source: Council of Mortgage Lenders - January 2017

Note 4 Source: Which Network? January 2017

 

 

Group Chief Executive's Review

 

2016 Overview

As reported in the Interims Results announcement in August 2016, the Group delivered a strong first half performance, with the notable acceleration of transactions in the first quarter in the lead up to the change in stamp duty on 1st April 2016. The Group reacted decisively to the changed market conditions in the second half of the year following the EU referendum result.

 

Selective cost measures were taken across the Group and the balance sheet has been strengthened with our operational gearing ratio1 reduced to 0.51 at the end of 2016 (2015: 0.83). We continued to invest in the growing parts of our businesses and delivered strong year-on-year revenue growth in Lettings (up 9%) and Financial Services (up 27%).

 

Group revenue increased by 2.4% to £307.8m (2015: £300.6m). Group Underlying Operating Profit2 was £34.6m (2015: £42.9m) and Group Operating Profit was £65.4m (2015: £41.4m). After strong first half revenue growth of 8% and profit growth of 10%, second half revenue fell by 2.5%, impacted by residential property market trends following the EU referendum, with a subsequent fall in second half profits.  

 

I would like to take this opportunity to thank all my colleagues across our business for their professionalism and dedication. The efforts of my colleagues delivered revenue growth in both Estate Agency and Surveying, which was especially pleasing given the degree of change during the year.

 

The Market in 2016

The UK residential property services market in 2016 was impacted by two main events; the lead up to the stamp duty changes on 1st April 2016 and the EU referendum outcome on 23rd June 2016; and the subsequent impact on consumer confidence and residential property transactions during the second half of the year.

 

Approvals for house purchases3 were ahead 16.5% in the first quarter of the year compared to the same period in 2015 as increases in stamp duty effective from 1st April 2016 led to an acceleration in market activity in the period up to this change. Volumes3 slowed in the second quarter being 1.5% ahead of the comparative period in 2015 as completions slowed following the stamp duty change and ahead of the EU referendum on 23rd June 2016.

 

Following the EU referendum on 23rd June 2016 consumer confidence was impacted and volumes3 fell by 12.4% in the third quarter compared to the same period in 2015. Volumes3 fell again by 4.8% in the fourth quarter of 2016 compared to the same period in 2015.

 

The second half impact on market transactions was more pronounced in London and the South East. Market transactions are estimated to have fallen in prime Central London areas by between 20% to 40% in the third quarter 2016, dependent on the postcode4.

 

Total Mortgage Approvals3 increased by 5.7% in 2016. This reflected an increase in remortgage approvals in the first and second half of 2016 compared to the same periods in 2015 reflecting low interest rates and the availability of remortgage products.

 

Average house prices5 in England and Wales grew 3.1% (2015: 6.6%) to £298,000 annually as stock shortages continued to have an impact. Excluding London and the South East, the average increase was 4.4%.

 

Residential property values in Greater London increased by 0.2%. Prime Central London (5 prime boroughs) prices fell while outer prime Central London experienced an increase in year-on-year house prices5.

 

The proportion of new sales instructions given to online/hybrid estate agents continued to grow, increasing from 3% of the market in the second half of 2015 to 6% in the second half of 20166. While traditional estate agents continue to represent the vast majority of the market (95% of residential sales instructions in 20166), we continue to closely monitor market developments.

 

The proportion of mortgage lending in the market placed through intermediaries continued to increase during the year7.

 

Following market declines in the repossessions market in the past few years, market repossession volumes again declined in 2016, reducing by 25% to 7,7008 total repossessions as interest rates remained low and was the lowest number since 1982.

 

Strategy

We remain committed to delivering on our stated strategy:

 

Estate Agency

·      Ambition to drive operating profit per branch to between £80,000 and £100,000 in the medium term

·      Ambition to expand the number of Marsh & Parsons branches to a total of 36 by 2019, particularly outside prime Central London

·      Grow recurring and where market conditions permit counter-cyclical income streams

·      Complete selective acquisitions of both residential sales businesses and lettings books

 

In addition to delivering on our stated strategy, we are also exploring options to capitalise on digital opportunities created by the growth in consumer acceptance of online/hybrid agency business models. During the second half of 2016 we completed extensive consumer and market research and in 2017 we are progressing to the next phase by exploring and evaluating LSL's digital opportunities. We will provide a further update to Shareholders during 2017.

 

Surveying

·      Optimise contract performance and revenue generation from business to business customers

·      Achieve further improvement in efficiency and capacity utilisation

·      Use technology to target further improvements in customer satisfaction and performance

·      Continue the graduate training programme

 

LSL performance in 2016

 

Estate Agency Division

Total Estate Agency income of £243.1m (2015: £236.5m) increased by 3%. This increase resulted from the consistent execution of our strategy with strong growth in both Lettings and in Financial Services income, where we continued to invest in additional people to support growth.

 

During the second half of the year following the EU referendum we implemented selective cost reduction measures to adapt the Group's costs base and ensure we remain competitive. We closed 21 branches in the second half with little disruption to our business, which is testament to the professionalism and experience of our staff.

 

Residential Sales exchange income

Residential Sales exchange income decreased by 10% to £83.8m (2015: £92.9m) with average fees per unit down 2%. Exchange volumes fell by 8%, with a strong first quarter followed by a slowdown in subsequent quarters following the stamp duty changes and the EU referendum. The fall in fees reflected increased competitive pressure in the second half as volumes reduced.

 

Lettings income

We remain committed to our strategy of increasing recurring Lettings income. In 2016 we delivered growth in Lettings income of 9%. Lettings Income increased as a proportion of the Estate Agency business and represented 29% of total Estate Agency Division income in 2016 (2015: 28%).

 

We delivered organic Lettings growth of 4% with growth across all our brands. In line with our strategy, we continued to invest in lettings book acquisitions, acquiring nine lettings books in 2016 for a total consideration of £4.1m9. The lettings books have been successfully integrated into our networks. Lettings book acquisitions were paused during the second half of the year following the EU referendum.

 

Financial Services

Total Financial Services income grew strongly again with 27% year-on-year growth in 2016. Adjusting for the acquisition of Group First, we delivered organic growth of 13% as we continued to roll out our model across the Estate Agency business and delivered growth from our intermediary networks.

 

In February 2016 we acquired a 65% interest in Group First which provides mortgage and protection brokerage services to the purchasers of new homes. This acquisition supports LSL's strategy to grow long term profitability in the UK residential property services sector.

 

Marsh & Parsons

Given the overall challenging prime Central London market, compounded by the result of the EU referendum which caused transaction levels to drop significantly, Marsh & Parsons revenue fell by 5% in 2016 to £33.5m (2015: £35.3m) and profit fell by 36% to £4.4m (2015: £6.9m).

 

Whilst Residential Sales fell by 12% we believe this to be a solid performance in light of the overall London market conditions. We were pleased with the Lettings performance with Lettings income up 6% against 2015, accounting for more than half of Marsh & Parson's total revenue. 

 

We continued with our branch expansion strategy in 2016, opening two new branches during the year in the outer prime Central London locations of Tooting and Tufnell Park. We have continued with our strategy in 2017 and since the year-end have opened a branch in Brixton. We are pleased with the performance of these new branches. This takes our total number of Marsh & Parsons branches to 26.

 

Our ambition remains to expand to 36 branches by 2019. Outer prime Central London has not been as negatively impacted as prime Central London and Marsh & Parsons is looking to expand its new office footprint in outer prime Central London locations.

 

Estate Agency profit per branch (Your Move, Reeds Rains and LSLi)

The reduction in operating profit per owned branch in 2016 to £30,500 (2015: £42,500) reflects the challenging residential sales market conditions following the EU referendum.

 

LSL has increased operating profit per owned branch from £20,100 in 2012 to £30,500 in 2016. Our medium term ambition is to drive operating profit per owned branch to between £80,000 and £100,000 on the expectation of longer term stability in the UK residential property sector. Our Lettings growth and Financial Services growth across the network continues to underpin this ambition and we will also focus on Land and New Homes. We will also consider further opportunities to re-engineer the cost base.

 

Surveying Division

During 2016 we continued to focus on optimising the profitability of our Surveying business with particular emphasis on delivering a market leading IT system. Total Surveying Division income in 2016 of £64.7m (2015: £64.1m) was 1% higher than 2015, reflecting a good performance in a changing market.

 

During the first half of 2016, implementation started of a new market leading IT system to deliver modern and scalable technology for LSL that provides an improved platform to deliver services to our clients.  Phase one is complete and a roadmap of further developments will be rolled out in 2017. This system will enable our Surveying Division to continue to improve efficiency, operational performance and hence the quality of service to our end customers.

 

Following on from the significant improvements in 2014 and 2015, capacity optimisation has been maintained helping to underpin profit margins of 27.1% (2015: 28.3%). Income per job increased by 4% to £203 (2015: £196) and we performed in total 318,077 jobs in 2016 (2015: 327,267) as we optimised the mix of our business. We have continued with our graduate training programme which continues to be successful.

 

Our customers

Our continued focus on providing the best service to our customers has been recognised in 2016 with numerous industry awards including:

 

·      Marsh & Parsons: Estate Agency of the Year Awards 2016, in association with The Times and The Sunday Times:  Overall Winner of the Estate Agency of the Year Award and Best Large UK Estate Agency - Gold Award.

·      Your Move: Lettings Agency of the Year Awards 2016, in association with The Times and The Sunday Times: Best Property Management (1001+ properties) Lettings Agency - Gold Award.  

·      Davis Tate:  Estate Agency of the Year Awards 2016, in association with The Times and The Sunday Times: Best Medium Estate Agency, South East - Gold Award. The 2016 all Agents Awards: Best Estate Agent - Overall Winner in Reading, Best Estate Agent - Gold Awards in 10 UK postcode regions: Best Letting Agent - Gold Award in 8 UK postcode regions.

·      Frost's Estate Agent: Estate Agency of the Year Awards 2016, in association with The Times and The Sunday Times: Best Small Estate Agency, East of England - Gold Award.

·      Intercounty: Estate Agency of the Year Awards 2016, in association with The Times and The Sunday Times: Best Medium Estate Agency, East of England - Gold Award. Lettings Agency of the Year Awards 2016, in association with The Times and The Sunday Times: Best Medium Lettings Agency, East of England - Gold Award.

·      Thomas Morris: The Negotiator Awards 2016: East of England Agency of the Year - Gold Award. Relocation Agent Network Awards 2016: Best Agent, East Anglia and Essex - Winner, Customer Relocation Award - Winner.  The 2016 all Agents Awards: Best Estate Agent, East of England - Gold Award. Agents Giving: Best Innovative and Creative Fundraising Award - Winner. Agency Mentors: Inspirational Agent 2016 - Winner (Sue Gipson St.Neots).

·      Pink Home Loans: Financial Adviser Service Awards 2016 : 5 star award.

·      Pink Home Loans and First Complete Financial Services: Precise Mortgages Awards 2016: Best Distributor Group.

·      e.surv Chartered Surveyors: Equity Release Awards 2016: Best Surveyor Award - Winner. Mortgage Strategy Awards 2016: Best Surveyor Award, Individual Firms - Winner. Your Mortgage Awards 2016: Best Surveyor Award - Winner.   

 

Balance Sheet and Exceptionals

The Group has a strong balance sheet with closing Net Bank Debt at 31 December 2016 of £20.3m (2015: £39.9m) and a gearing level at 0.51 times 2016 adjusted EBITDA (2015: 0.83 times)1.

 

Between 20th July 2016 and 31st October 2016, we sold our entire holding of 11.3m ordinary shares in Zoopla for total proceeds of £36.1m at an average price per share of £3.19.  The proceeds of the disposal were used to reduce corporate indebtedness.

 

As set out in our 2016 Interim Results announcement, during the second half of 2016, a cost saving programme across the Group and the technological refresh in the Surveying Division resulted in exceptional costs of £2.3m.

 

In relation to the PI Costs provision, the Group continued to make positive progress in addressing historic claims and there has been a net £1.6m exceptional release.

 

Outlook

We have started 2017 in line with our expectations across the Group and are well placed to deliver a solid performance during the year. We continue to consistently execute on our strategy and are well placed to deliver increased Shareholder value.

 

I look forward to working with my colleagues to deliver a successful year in 2017.

 

Ian Crabb

Group Chief Executive Officer

7th March 2017

 

Note 1- Operational gearing is defined as net debt divided by adjusted EBITDA (Adjusted EBITDA is Group Underlying Profit (note 4) plus depreciation on property plant and equipment)

Note 2- Group Underlying Operating Profit is before exceptional costs, contingent consideration, amortisation of intangible assets and share-based payments (as defined in Note 4)

Note 3- Source: Bank of England for "House Purchase Approvals" and "Total Mortgage Approvals" - December 2016 released January 2017

Note 4- Source LSL estimates

Note 5-Source December 2016 LSL Property Services/ACADATA HPI

Note 6- LSL sources/data analysis

Note 7-CML, new mortgages sold by intermediaries - February 2017

Note 8-Source Council of Mortgage Lenders -  January 2017, released February 2017

Note 9- Total consideration of up to £4.1m includes contingent consideration

 

Business Review - Estate Agency Division

Financial

2016
£m

2015
£m

%
change

Residential Sales exchange income

83.8

92.9

-10%

Lettings income

71.4

65.4

+9%

Asset Management income

6.6

7.8

-15%

Financial Services income

64.1

50.5

+27%

Other income1

17.2

19.9

-14%

 

 

 

 

Total income

243.1

236.5

+3%

Operating expenditure

(218.6)

(205.2)

-6%

Underlying Operating Profit2

24.5

31.3

-22%

 

 

 

 

KPIs

 

 

 

Exchange units

27,029

29,311

-8%

Underlying Operating Margin (%)

10.1%

13.2%

 

Fees per unit £

3,102

3,170

-2%

 

 

 

 

Market data

 

 

 

House purchase approvals (000s)3

799

806

-1%

Total Mortgage approvals (000s)3

1,467

1,388

6%

UK Housing Transactions (000s)4

1,235

1,230

1%

Repossessions5

7,700

10,200

-25%

 

1     'Other income' includes franchising income, conveyancing services, EPCs, Home Reports, utilities and other products and services to clients of the branch network.

2     Refer to Note 3 for the calculation

3     Source: Bank of England, "Mortgage approvals for house purchases" and "Total mortgage approvals" - December 2016, released January 2017.

4     Source: HMRC Stats, "Monthly property transactions completed in the UK with value of £40,000 or above" - December 2016, released January 2017

5     Source: Council of Mortgage Lenders -  January 2017, released February 2017

 

Estate Agency Division Performance

Year-on-year income growth in the Estate Agency Division was 3%. Lettings income and Financial Services income showed positive growth with Residential Sales impacted by lower transaction volumes in the second half. First half total income increased by 9% compared to the comparative period in 2015 whilst second half income fell by 3%.

 

Residential Sales exchange income 

Residential Sales exchange income decreased by 10% to £83.8m (2015: £92.9m) with average fees per unit decreased by 2%. Residential Sales exchange volumes fell by 8%. The trend mirrored the general market with a strong first quarter followed by a slowdown in subsequent quarters following the stamp duty changes and the EU referendum. The fall in fee reflected increased competitive pressure in the second half as volumes reduced.

 

The second half reduction in transactions was more pronounced in LSL's London and the South East brands, reflecting the same trends as the general market.

 

Lettings income 

Lettings income grew in each quarter of the year and across all brands as LSL continued to focus on this growing revenue stream.  Organic Lettings growth for the year was 4%. Combined with the Lettings acquisitions, overall growth was strong, at 9% for the full year. LSL continues to focus on this recurring revenue stream which represented 29% of total Estate Agency Division income in 2016 (2015: 28%).

 

 

Financial Services income

Total Financial Services Income delivered through the Estate Agency Division's branches, Group First (acquired during the year) and the intermediary networks of First Complete and Pink Home Loans grew strongly again with 27% year-on-year growth in 2016.

 

Adjusting for the acquisition of Group First, organic Financial Services income growth for 2016 was 13% and growth was achieved across all Estate Agency brands and also the intermediary network businesses. 

 

In total the Group arranged mortgage lending completions of £17.4bn during 2016 (2015: £14.5bn), with an estimated market share of 7.1%5.

 

Other income

Other income fell by 14% year-on-year as conveyancing income fell in line with lower residential transaction volumes.

 

Marsh & Parsons

Marsh & Parsons delivered a resilient performance in a challenging prime Central London market which was impacted by a number of factors including the 2016 stamp duty changes and the result of the EU referendum. Total revenue fell by 5% in 2016 to £33.5m (2015: £35.3m) and Underlying Operating Profit was £4.4m (2015: £6.9m).

 

Whilst Residential Sales income fell by 12% the Board believe this to be a highly robust performance in the light of the overall London market conditions. The Board is very pleased with Lettings performance with Lettings income up 6% against 2015, accounting for more than half of Marsh & Parson's total revenue. 

 

Asset Management

Asset Management delivered a robust performance in a shrinking market with revenues lower by 15% compared to the 25% market fall in repossessions to 7,7005 in 2016.  With a strong market share, the Asset Management business as a counter-cyclical business is well positioned to capitalise on any future increase in repossession volumes.  Asset Management is developing its corporate property management service offering to further enhance recurring revenues in the Group.

 

Estate Agency Division operating margin

The Estate Agency Division Underlying Operating Margin was 10.1% in 2016 (2015: 13.2%) which resulted from the reduction in Residential Sales volumes, a full year overhead charge for Thomas Morris (acquired during 2015), new Marsh & Parsons branches opened during the year and the national media campaign investment in the Your Move brand which was launched during the first half of 2016. Profits were slightly lower in Asset Management as cost measures taken did not fully offset the fall in repossession volumes. 

 

Regulation - Financial Services

First Complete and Pink Home Loans (the trading name of Advance Mortgage Funding) are both directly authorised by the FCA in relation to the sale of mortgage, pure protection and general insurance products. Your Move, Reeds Rains, First2Protect, Mortgages First and Embrace Mortgage Services along with the LSLi subsidiaries are all appointed representatives of First Complete.  Linear Financial Solutions is an appointed representative of Advance Mortgage Funding for mortgage and insurance business and also an appointed representative of Openwork for investment business and Insurance First Insurance Brokers is an appointed representative of Sesame Limited. LSL's Financial Services business are also members of the Association of Mortgage Intermediaries (AMI) which is an industry representative and trade body and the Financial Services businesses are subject to the Financial Ombudsman Service and contribute to the funding of the Financial Services Compensation Scheme through regulatory fees and charges.  LSL is participating in and monitoring the FCA's market study on competition in the mortgage sector which was launched in December 2016.

Regulation - Residential Sales and Lettings

The Estate Agency Division's branches adhere to the Codes of Practice issued by industry professional and regulatory bodies, The Property Ombudsman (TPO) and/or the Association of Residential Lettings Agents (ARLA).  Membership of these bodies is in addition to observing compliance with relevant legislation, such as Data Protection, the Consumer Protection Regulations, the Consumer Rights Act, guidance material published by relevant regulators, including the Competition and Markets Authority (CMA) (and its predecessor the Office of Fair Trading (OFT)), the National Trading Standards Agency/Trading Standards Institute (TSI), HMRC and codes published by other relevant bodies, including the Advertising Standards Authority (ASA). LSL from time to time also enters into direct dialogue with the regulators and consumer groups. LSL has also on behalf of all its Estate Agency businesses entered into a primary authority agreement with York Trading Standards Office.  LSL is monitoring the Government's review of the housing market, which is set out in the Housing White Paper published in January 2016 and is considering the impact of the reforms on LSL's businesses.

 

 

Branch numbers

Breakdown of LSL's Estate Agency branches as at 31st December 2016.

 

 

Owned

Franchised

Totals

Your Move

202

65

267

Reeds Rains

117

40

157

LSLi

63

2

65

Marsh & Parsons

25

0

25

Total

407

107

514

Business Review-Surveying Division

Financial

2016
£m

2015
£m

%
change

Revenue

64.7

64.1

+1%

Operating expenditure

(47.2)

(46.0)

-3%

Underlying Operating Profit1

17.5

18.1

-3%

 

 

 

 

KPIs

 

 

 

Underlying Operating Margin (%)

27.1%

28.3%

 

Jobs Performed (000's)

318

327

-3%

Revenue from private surveys (£m)

2.3

2.4

-4%

Income per job (£)

203

196

+4%

PI Costs provision (Balance Sheet) at 31st December (£m)

20.7

29.7

-30%

Number of qualified surveyors at 31st December (FTE)2

323

347

-7%

 

 

 

 

Total Mortgage Approvals ('000s)3

1,467

1,388

6%

 

1          Refer to Note 3 for the calculation

2          Full Time Equivalent (FTE)

3          Source: Bank of England, "Mortgage approvals for house purchases" and "Total mortgage approvals" 2016.

 

 

Surveying Division Performance

Total mortgage approvals3 increased in the year by 5.7% to 1.467m (2015: 1.388m) with a strong first half followed by a decrease in the second half.  This reflects a strong market for buy to let and second properties in the first quarter, prior to stamp duty changes, and a reduction in consumer confidence post the EU referendum in the second half.

 

Surveying turnover was £64.7m (2015: £64.1m), an increase of 1% on the previous year with the total number of jobs performed during the year of 318,077 (2015: 327,267) reflecting the overall management of the mix of jobs.

 

LSL continued to focus on optimising capacity management in 2016, driving an increase in income per job to £203, an improvement of 4% year-on-year. As a result LSL delivered another strong Underlying Operating Profit result at £17.5m (2015: £18.1m) with an Underlying Operating Margin of 27.1% (2015: 28.3%).

 

The total number of qualified surveyors (FTE) at 31st December 2016 was 3233, a reduction of 7% year-on-year. LSL's on-going graduate training programme continues to be successful and assists in alleviating the impact of skill constraints in the market. In 2017 LSL will continue to focus on improving efficiency through optimising capacity management supported by use of the new technology.

 

At 31st December 2016 the total provision for PI Costs was £20.7m. In 2016 the Group continued to make positive progress in addressing historic claims and there has been a net £1.6m exceptional release.

 

 

Financial Review

The key drivers of the financial performance of LSL in 2016 are summarised below:

 

Income statement

Revenue

Revenue increased by 2.4% to £307.8m in the year ended 31st December 2016 (2015: £300.6m).

Operating Expenses

Operating expenses increased by 5.6% to £275.3m (2015: £260.7m). Increases were primarily in the Estate Agency Division as a result of the acquisition of Group First, a full year charge for Thomas Morris (acquired during 2015), Marsh & Parsons branch openings and the national media campaign investment in the Your Move estate agency brand during the first half of 2016.

The average number of full time equivalent employees during the year was 4,630 (2015: 4,677).

Group Underlying Operating Profit

Group Underlying Operating Profit (as defined in Note 4 to the Financial Statements) decreased by 19.2% to £34.6m (2015: £42.9m) with the Underlying Operating Margin of 11.3% (2015: 14.3%).  On a statutory basis, the Group operating profit increased by 58% to £65.4m (2015: £41.4m).

Exceptional Items

Total exceptional costs in 2016 were £2.3m (2015: £0.3m).  The exceptional costs related to the closure and restructure of 21 branches and the costs relating to the technological refresh in the Surveying Division. In 2015, exceptional costs comprised the closure of an administration centre and the subsequent restructuring costs incurred which included redundancy costs.

Total exceptional gains in 2016 were £34.5m (2015: nil) comprising of £32.9m of gains relating to the sale of the Zoopla shares and a £1.6m exceptional release relating to the PI Costs provision.

PI Cost provision for PI claims and notifications

At 31st December 2016, the total provision for PI Costs was £20.7m.  In 2016 the Group continued to make positive progress in addressing historic claims and there has been a net £1.6m exceptional release.

 

Contingent consideration

The contingent consideration relates primarily to the growth shares (C shares) acquired by the management of Marsh & Parsons subsequent to acquisition, and payments due to third parties in relation to the acquisition of LSLi and certain of its subsidiaries between 2007 and 2016.  Payments are due between three and five years after the acquisition completion and depending on the profitability of those subsidiaries in the relevant calculation years. In 2016 contingent consideration in the Income Statement amounted to a credit of £3.8m (2015: £1.5m credit). This included a credit for consideration on the acquisition (in 2011) of Marsh & Parsons of £1,964,000 (2015: credit £3,002,000), a credit relating to LMS of £268,000 (2015: charge of £2,136,000) and a credit of £1,142,000 in LSLi (2015: credit of £611,000).

 

Amortisation

The amortisation charge was £3,900,000 (2015: £1,800,000).  The increase was the result of the full year impact of the acquisition activity in 2015 and the first half 2016.

 

Net Financial Costs

Net financial costs amounted to £1.9m (2015: £2.8m). The finance costs related principally to interest and fees on the revolving credit facility. Additional costs relate to the unwinding of discounts on provisions and contingent consideration and interest on loan notes. The reduction in the net financial cost results from reduced interest charges in part due to the variation of the 2011 loan notes.

Taxation

Following the 2015 Summer Budget the headline rate of corporation tax in the UK was further reduced from the current rate of 20% to 19% effective from 1st April 2017 and further reduced to 18%, effective from 1st April 2020.  The Budget announcement in March 2016 included a further reduction effective from 1st April 2020, when the proposed corporation tax rate will be lowered further still to 17%. 

 

Following the enactment of Finance Bill 2016 in September 2016, the applicable corporation tax rate is 17% and this is the rate at which deferred tax has been provided (2015: 18%).  Corporation tax is recognised at the headline UK effective rate of 20% (2015: 20.25%).

 

The effective rate of tax for the year was 20.5% (2015: 21.1%).  The effective tax rate for 2016 has decreased as a result of a number of factors, including reducing the rate at which deferred tax is provided resulting from the reduction in the headline rate of corporation tax.

Deferred tax credited directly to other comprehensive income is £3.8m (2015: charge of £0.5m).  This is comprised of a credit of £5.9m and a charge of £2.1m and relates to the disposal and revaluation of financial assets.  Income tax credited directly to the share based payment reserve is £0.1m (2015: £nil).

In 2016 corporation tax payments of £8,900,000 (2015: £5,600,000) were made which is lower than the current year corporation tax charge of £12,700,000 (2015: £7,800,000).  This is a result of the timing of the settlement of the corporation tax liability on the disposal of Zoopla share-holding in the second half of 2016.

Basic Earnings per Share

The Basic Earnings per Share was 49.2 pence (2015: 29.7 pence).  The Adjusted Basic Earnings per Share (as calculated in Note 6 to the Financial Statements) is 25.9 pence (2015: 31.5 pence) a drop of 17.8% which is broadly in line with the decrease in Underlying Group Operating Profit.  The Group seeks to present a measure of underlying performance which is not impacted by the unevenness in profile of exceptional gains and exceptional costs, contingent consideration, amortisation of intangible assets and share-based payments.  The Directors consider that the adjustments made to exclude the after tax effect of exceptional items, contingent acquisition consideration treated as remuneration, and amortisation of acquisition intangibles provides a better and more consistent indicator of the Group's underlying performance. 

 

Balance Sheet

Joint ventures and other investments

The Group has two joint ventures; a 33.3% (2015: 33.33%) interest in TM Group, whose principal activity is to provide property searches, and a 50% (2015: 49.99%) interest in LMS whose principal activity is to provide conveyancing panel management services.

In addition LSL owns an 18.1% (2015: 18.1%) share in the Guild of Professional Estate Agents (GPEA), which is a membership organisation with a national network of independently owned estate agents.  The carrying value of GPEA was assessed as at 31st December 2016 and was revalued to £3.7m (2015: £0.9m).

 

Capital Expenditure

Total capital expenditure in the year amounted to £4.6m (2015: £4.8m) and an additional £1.4m (2015: £3.2m) has been spent internally on developing new software which has been treated as an intangible asset.

Bank Facilities

In May 2016, LSL extended its bank facility until May 2020.  The facility includes a £100m revolving credit facility (2015: £100m) and incorporated more favourable terms for LSL.  During the period under review, the Group complied with all of the financial covenants contained within the facility.

 

Net Bank Debt and Cashflow

As at 31st December 2016 Net Bank Debt was £20.3m (2015: £39.9m) and Shareholders' funds amounted to £128.8m (2015: £107.4m) providing a balance sheet gearing of 15.8% (2015: 37.1%). The decrease in Net Bank Debt was primarily the result of the sale of the Group's entire holding of Zoopla shares and the pause in acquisition activity in the second half of the year. The 2016 gearing level was 0.51 times adjusted EBITDA1 (2015: 0.83 times). The Group has a committed revolving credit facility until May 2020 and in 2016 the Group generated cash from operations of £32.7m (2015: £36.5m).

 

Zoopla

Between 20th July 2016 and 31st October 2016, LSL sold its entire holding of 11.3m ordinary shares in Zoopla for total proceeds of £36.1m at an average price per share of £3.19.  The proceeds of the disposal were used to reduce corporate indebtedness.

 

In January 2017 Zoopla (now known as ZPG) issued the Group with 226,711 warrants in accordance with the 2016 service agreement.

 

Net Assets

The Group's net assets as at 31st December 2016 were £128.8m (2015: £107.4m). 

Treasury and Risk Management

LSL has an active debt management policy.  LSL does not hold or issue derivatives or other financial instruments for trading purposes.  Further details on the Group's financial commitments as well as the Group's treasury and risk management policies are set out in the Annual Report and Accounts 2016.

Post Balance Sheet Events

There have been no post balance sheet events to report.

 

International Financial Reporting Standards (IFRS)

The Financial Statements have been prepared under IFRS as adopted by the European Union.

 

Note 1- Adjusted EBITDA is Group Underlying Operating Profit as previously defined plus depreciation on property plant and equipment

 

Principal Risks and Uncertainties

LSL has an overall framework for management of risks and internal controls to mitigate the risks. Through this framework, the Board, which has overall accountability and responsibility for the management of risk, on a regular basis identifies, evaluates and manages the principal risks and uncertainties faced by LSL, areas which could adversely affect its business, operating results and financial condition.

Development of risk appetite

During 2016, in line with the FRC's Guidance on 'Risk Management, Internal Control and Related Financial and Business Report' which was published in 2014 and which integrated and replaced the FRCs previous guidance on risk management and internal controls, the Board has continued to develop LSL's approach to risk appetite to ensure continued compliance with the Code and FRC guidance. The Board has through this process expressed the types and level of risk which it is willing to take or accept to achieve LSL's plans and to support consistent, risk-informed decision making across the Group.

 

The development of the risk appetite began with the Directors approving a risk framework policy and defining individual risk appetite statements for LSL's principal risks and for key decisions made by the Board. These statements provide parameters within which the Board typically expects LSL's businesses to operate, facilitating structured consideration of the risk and reward trade-off for the decisions made around how the Group conducts business. This includes monitoring of risk measures and identification of actions needed to bring any specific outlying areas of risk within target levels. During 2016, exercises have been initiated for targeted analysis of emerging areas of risk and evaluation of components within individual principal risk areas where management adopt the lowest risk appetite tolerances.

 

The discussions covered a wide range of risks, which reflect the nature of LSL's businesses and acknowledges that there is not a one size fits all approach to establishing risk parameters. During 2017, LSL will continue to develop the framework in line with emerging best practice, including broader development of risk key performance indicators within management information and triggers to be applied in specific areas to adjust levels of risk exposure.

The Board will seek to establish clear parameters, whilst at the same time fostering an environment within which innovation and entrepreneurial activities thrive. Where there is any proposal to shift the Group significantly closer to or outside agreed risk parameters, this will be discussed and subject to Board approval before commencing any activities to ensure that appropriate mitigation controls are put into place.

On-going evolution of the risk management framework is carried out as part of an on-going cycle of continual improvement, and remains a key priority for the Board in 2017.

Developing the financial viability statement

In developing the financial viability statement, it was determined that a three year period, ending on 31st December 2019,  should be used, as this is consistent with Group's budget and strategic planning cycles and is supported by the Group's funding arrangements, which expire in May 2020.

The Executive Committee reviewed LSL's principal risks, and considered which of these risks might threaten the Group's viability.  Each risk was assessed and ranked to differentiate between a critical risk that should be modeled and risks that were less critical and may be modeled as a conflating event.

A number of severe but plausible scenarios were considered and modelled in detail with input from a cross functional group of senior managers, including representatives from the finance teams.

The main focus of the scenario modelling related to the impact of a significant downturn in the property market as occurred in the 2008 to 2009 period. A significant downturn assumed Total Mortgage Approvals falling to 500,000; this compares to 799,000 approvals in 2016. Modelling included the plans LSL put in place during that recessionary period such as reducing dividends and costs in branches. The skills and many of the personnel with experience to manage through such a scenario remain within the business which has helped this process and gives a degree of confidence to manage through a similar future scenario.

The impact on consumer confidence following result of the EU referendum has already been factored into the budgets prepared by the Group which is also the first year of this model; any further uncertainty surrounding the Article 50 could impact the housing market but this is already factored into the heavily reduced number of housing approvals included within this model. 

The current low interest rate market has been considered, and discussed with senior management as to how this may impact the viability of the company.  Given the low gearing of the Group and the absence of financial instruments this is not deemed a material variable.

Detailed assumptions for each scenario were built up and modelled by month across the three year period. The models measured the downside impact on revenue and the management action which would be taken to retain cash reserves and maintain the operating capacity of the business as a result of the stress scenarios.

Assumptions were also made for the potential growth of LSL's recurring revenue and counter-cyclical income businesses, notably Asset Management, and the extent to which recurring revenue activities, such as Lettings, tend to be less affected through the cycle. The modelling and assumptions took account of the broad range of services across a broad geography which allows some protection from the impact of stress scenarios. 
 

As detailed in the Audit Committee's Report, the Directors reviewed and discussed the process undertaken by the Management Team in proposing the viability statement and the Audit Committee oversaw the development of the statementThe Directors' financial viability statement is contained in the Directors' Report.

Risk management and internal controls framework

LSL's risk management and internal controls framework for 2016 included:

a.     ownership of the risk management and internal controls framework by the Board, including a risk framework policy, supported by the Group Chief Financial Officer, the Company Secretary, Head of Risk and Internal Audit and the Group Financial Controller;

b.     a network of risk owners in each of LSL's businesses with specific responsibilities relating to risk management and internal controls;

c.     the documentation and monitoring of risks are recorded and managed through standardised risk registers which undergo regular reviews and scrutiny by local boards and the Head of Risk and Internal Audit;

d.     the Board regularly identifies, reviews and evaluates the principal risks which may impact the Group as part of the planning and reporting cycle to ensure that such risks are identified, monitored and mitigated;

e.     the development and application of LSL's risk appetite statement and associated framework (for further details on steps taken during the year, please see the Audit Committee Report); and

f.      reporting by the Chairman of the Audit Committee to the Board on any matters which have arisen from the Audit Committee's review of the way in which the risk management and internal control framework has been applied together with any breakdowns in, or exceptions to, these procedures.

 

As stated above, LSL has in place a Group-wide risk appetite statement and risk framework policy which will continue to be developed in 2017. 

This risk framework includes the following:

a.     risk framework policy;

b.     determination of risk appetite and management or mitigation of risks in line with risk appetite tolerances;

c.     assessment of prospects and viability;

d.     review of effectiveness of the risk management and internal control systems; and

e.     going concern confirmation (for LSL's going concern disclosure see the Report of the Directors).

 

During the year, the Directors carried out a robust assessment of the principal risks facing the Group, including those that threaten the business model, future performance, solvency or liquidity. The Directors believe that the assessment which has been completed is appropriate to the complexity, size and circumstances of the Group, which is a matter of judgment of the Board and has been supported by the Management Teams.

The Directors also carried out a risk appetite assessment exercise which involved the evaluation of continually evolving aspects of risk management. During 2016, this included the capturing of anticipated impacts following the EU referendum on the residential housing market and the articulation of established 'conduct risk' routines used to support the delivery of appropriate customer outcomes.  These aspects are included in the principal risks and uncertainties summarised in this Report.

The identified risks may change over time due to changes in business models, performance, strategy, operational processes and the stage of development of the Group in its business cycle as well as with changes in the external environment. This robust assessment is focused on the principal risks and it differs from the review of the effectiveness of the systems of risk management and internal controls.



In accordance with the requirements of the Code this Report includes descriptions of principal risks together with a high level explanation of how they are being managed or mitigated. This includes clear descriptions of the risks together with an evaluation of the likelihood of a typical risk event crystallising and its possible impact. Mitigating steps and any significant changes to specific areas of risk are also referred to within the tabular summary.



A
s noted above, this robust analysis of principal risks has also contributed to the Group's viability statement which is set included the Report of the Directors. The Directors have also considered the impact if risks coincide, namely a combination of non-principal risks could potentially represent a single compound principal risk.

The Group also faces other risks which, although important and subject to regular review, have been assessed as less significant and are not listed in this statement. This may include some risks which are not currently known to the Group or that LSL currently deems as immaterial, or were included in previous Annual Report and Accounts and through changes in external factors and careful management, are no longer deemed to be as material to the Group as a whole.



However, these risks may individually or cumulatively also have a material adverse effect together with other risk factors which are beyond the direct control of LSL, and may have a material adverse impact on LSL's business, results of operations and/or financial condition. The risk management framework and procedures in place can only provide reasonable but not absolute assurance that the principal risks and uncertainties are managed to an acceptable level.



F
urther information relating to how LSL managed these risks and uncertainties during 2016 is set out in the Audit Committee Report (Internal Controls).

Principal Risk and Uncertainties

 

 

Risk

Description

Mitigation

 

Strategic:

1

UK housing market

 

Group performance is intrinsically linked to the overall performance of the UK housing market (including subsets - e.g. prime Central London). The market is also impacted by changes in the global political and economic environments (e.g. EU Referendum outcome).

 

•  Daily, weekly and monthly monitoring of trading and market performance data.

•  Market share, product mix and segmentation initiatives.

•  Development of counter-cyclical income and recurring revenue streams.

•  Responsive investment and cost control measures during the housing market cycle.

•  Investment in teams to delivery strategic projects.

•  Balanced UK-wide geographical spread.

•  Monitoring of wider macro-economic and political developments.

2

New UK housing market entrants

 

Traditional business models for property services are exposed increasingly to new business models and technological advancements (e.g. online/hybrid estate agents, Automated Valuation Models and automated financial services operating models).

•  Competitor and industry benchmarking.

•  Development of strategies in response to market disrupters.

•  External consultative support as necessary.

•  Monitoring of potential acquisitions and join venture opportunities.

•  Service delivery enhancements and experimentation.

•  Infrastructure investment, upgrading and consolidation of core operating systems.

•  Marketing initiatives.

•  Staff incentive schemes.

3

Acquisitions and growth initiatives

 

Realising appropriate targets for acquisition and major project initiatives, including delivery of appraisals, due diligence and integration/implementation requirements.

•  Defined pre and post-acquisition reporting to the Board and Audit Committee.

•  Structured authority levels.

•  Responsive flexing of risk appetite during the housing market cycle.

•  Flexible resource pool to support acquisition and integration activities teams.

•  External consultative support as necessary.

•  Established integration planning methodology.

•  Post-acquisition and post-implementation   reviews.

•  Risk and Internal Audit engagements.

 

Sales/distribution:

4

Professional services

 

Exposure to major PI claims arising from any lapses in surveying and valuation practices.

Robust framework and monitoring routines to maintain valuation accuracy.

Dedicated surveying risk team.

Timely data capture of all claims and associated trends.

Utilisation of technology to monitor valuation trends and trigger alerts.

Risk and Internal Audit reviews.

Experienced claims handling personnel supported by legal experts.

Culture promoting effective sales conduct and open lines of communication with clients.

Board-level authorities for PI claims settlement payments and governance of underlying claims handling and accounting processes.

 

5

Client Contracts

 

The performance of the Estate Agency and Surveying businesses are dependent on securing and retaining key contracts (e.g. lenders, portfolio landlords and house builders).

 

•  Customer outcome focused forums and initiatives.

•  Designated senior members of staff with responsibility for relationship management.

•  Ongoing investment in resources, technology and service standards to ensure LSL has the capacity to meet service level demands.

•  Targeted marketing and training events.

•  Monitoring of client dependency and compliance with contractual requirements.

•  Robust control framework supporting the risk profiling of prospective clients, contract renewals and the quality of professional services.

•  Dedicated in-house Legal Services and Claims Management teams

•  Risk & Internal Audit reviews.

 

Operations:

6.

Information technology infrastructure

 

The Group has varied operations which require a robust IT infrastructure. The IT environment needs to remain adaptable to support growth initiatives, harness technological advancements and counter business continuity threats, including malicious and cyber related attacks.

 

•   Board level IT governance, policies and initiatives.

•   Focus on innovation within the Group's strategy.

•   Dedicated in-house IT teams.

•   Maintenance of infrastructure to maintain effective service delivery.

•   On-going IT investment and development programme.

•   Implementable business continuity and disaster recovery solutions.

•   Monitoring of compliance with relevant contractual and regulatory requirements.

•   Inter-Group IT forums.

•   External consultative support as necessary.

•   Risk and Internal Audit reviews.

 

7.

Information security

 

Group operations involve the processing of high volumes of personal data, with potential for unintended data loss and exposure to increasing levels of external cyber-crime.

•     LSL Information Security and Governance Group and Group IT Director in place.

•     Dedicated LSL Information Security personnel.

•     Group data protection policies in place and training delivered.

•     Advice obtained from In house legal and external advisers as appropriate.

•     Tracking of data assets/data sharing, in line with authority levels.

•     Penetration testing programme.

•     Benchmarking versus best practice standards - e.g. ISO27001.

•     Implementation of regulatory changes - e.g. General Data Protection Regulation.

•    Second and third-line risk-based reviews.

 

8.

Regulatory and compliance

 

Relationships with regulators and compliance with legal and regulatory requirements. Any compliance breaches could result in sanctions and reputational damage (e.g. prosecutions or fines).

 

Regulatory and compliance risk extends to oversight of standards adopted by business partners (e.g. franchises, appointed representatives, joint ventures and minority investments).

 

The market and business operations are also impacted by regulatory reforms (e.g. Housing White Paper) which may have an effect on Group revenue and expenditures.

 

Regulatory costs, fees and charges continue to grow due to the rising funding requirements of the Financial Services Compensation Scheme.

•   Top-down culture focused on fairness, transparency and successful customer outcomes.

•   Open dialogue with regulators and monitoring of emerging developments and regulatory reforms.

•   Group risk framework policy incorporating a 'three-lines of defence' model to track compliance with regulations.

•   Group policies including ethics (e.g. whistleblowing structures and anti-fraud and anti-bribery policies) and employee welfare.

•   Group-wide health and safety arrangements to ensure the welfare of employees and visitors to Group premises.

•   Group-level forums with regulatory focus and oversight (e.g. FSMC, FSRC and Information Security and Governance Group).

•   Dedicated compliance teams in higher risk/regulated functions.

•   Evolution of IT systems to strengthen oversight routines.

•   Responsive complaints tracking of any emerging themes.

•   In-house Legal Services team, with external consultative support when needed.

•   Group Risk and Internal Audit reviews.

 

 

People:

9.

Employees

 

Securing and retaining key strategic population and controlling attrition in key business critical areas, ensuring the effective management of personnel standards across varied Group businesses.

Oversight by LSL Remuneration and Nominations Committees.

Group remuneration policies and incentive schemes to retain key strategic population.

Regular benchmarking and appraisals of senior management.

Succession planning reviews and targeted reviews in some areas.

Dedicated in-house recruitment team.

Targeted retention and recruitment initiatives.

Staff surveys and Group HR initiatives to focus on attrition, improve staff morale, relieve areas of pressure and improve operational efficiencies.

Group-wide HR IT systems.

Monitoring of statutory requirements and developments.

Employee policies and monitoring framework (e.g. health and safety).

Culture of transparency, clear Group policies and whistleblowing procedures to enable staff to confidentially raise concerns.

 

           

 

 

 

Group Income Statement

for the year ended 31st December 2016

 

 

2016

2015

 

Note

£'000

£'000

 

 

 

             

Revenue

3

307,750

300,594

 

 

 

 

Operating expenses:

 

 

 

Employee and subcontractor costs

 

(182,687)

(171,216)

Establishment costs

 

(19,888)

(19,012)

Depreciation on property, plant and equipment

 

(5,475)

(5,296)

Other

 

(67,282)

(65,180)

 

 

(275,332)

(260,704)

 

 

 

 

Other operating income

 

1,165

1,865

(Loss) on sale of property, plant and equipment

 

(9)

(44)

 

 

 

 

Group's share of profit after tax in joint ventures

 

1,049

1,156

 

 

 

 

Group operating profit

4

34,623

42,867

 

 

 

 

Share-based payments

 

(1,263)

(871)

Amortisation of intangible assets

 

(3,914)

(1,803)

Exceptional gains

5

34,531

-

Exceptional cost

5

(2,341)

(258)

Contingent consideration

5

3,785

1,477

Group operating profit

3

65,421

41,412

 

 

 

 

Finance income

 

-

5

Finance costs

 

(1,896)

(2,817)

Net financial costs

 

(1,896)

(2,812)

 

 

 

 

Profit before tax

 

63,525

38,600

 

 

 

 

Taxation

 

 

 

  - related to exceptional items and contingent consideration

 

(6,432)

52

  - others

 

(6,601)

(8,190)

 

8

(13,033)

(8,138)

 

 

 

 

Profit for the year

 

50,492

30,462

Attributable to

 

 

 

- Owners of the parent

50,493

30,414

- Non-controlling interest

(1)

48

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share expressed in pence per share:

 

 

 

Basic

6

49.2

29.7

Diluted

6

49.0

29.5

 

 

 

Group Statement of Comprehensive Income

for the year ended 31st December 2016

 

 

2016

2015

 

 

£'000

£'000

 

 

 

 

Profit for the year

 

50,492

30,462

 

 

 

 

Items to be reclassified to profit and loss in subsequent periods:

 

 

 

Reclassification adjustments for disposal of financial assets

 

(33,022)

(440)

Income tax effect

 

5,914

53

Revaluation of financial assets

 

11,816

5,130

Income tax effect

 

(2,015)

(580)

Net other comprehensive (loss)/income to be reclassified to profit and loss in subsequent periods:

 

 

 

(17,307)

4,163

 

 

 

 

Total other comprehensive (loss)/income for the year, net of tax

 

(17,307)

4,163

 

 

 

 

Total comprehensive income for the year, net of tax

 

33,185

34,625

 

 

 

 

Attributable to

 

 

 

    - Owners of the parent

33,186

34,577

    - Non-controlling interest

(1)

48

 

 

 

 

 

 

Group Balance Sheet                                                                                                             

as at 31st December 2016

 

 

 

2016

2015

 

 

£'000

£'000

 

 

 

 

Non-current assets

 

 

 

Goodwill

 

151,901

136,395

Other intangible assets

 

33,249

30,517

Property, plant and equipment

 

18,842

19,393

Financial assets

 

4,603

28,871

Investments in joint ventures

 

8,762

8,778

Total non-current assets

 

217,357

223,954

 

 

 

 

Current assets

 

 

 

Trade and other receivables

 

32,263

35,366

Cash and cash equivalents

 

-

5,603

Total current assets

 

32,263

40,969

 

 

 

 

Total assets

 

249,620

264,923

 

 

 

 

Current liabilities

 

 

 

Financial liabilities

 

(10,739)

(15,777)

Trade and other payables

 

(50,900)

(50,102)

Current tax liabilities

 

(7,581)

(2,525)

Provisions for liabilities

 

(5,742)

(12,100)

Total current liabilities

 

(74,962)

(80,504)

 

 

 

 

Non-current liabilities

 

 

 

Financial liabilities

 

(26,469)

(52,511)

Deferred tax liability

 

(3,801)

(6,927)

Provisions for liabilities

 

(15,622)

(17,625)

Total non-current liabilities

 

(45,892)

(77,063)

 

 

 

 

Total Liabilities

 

(120,854)

(157,567)

 

 

 

 

Net assets

 

128,766

107,356

 

 

 

 

Equity

 

 

 

Share capital

 

208

208

Share premium account

 

5,629

5,629

Share-based payment reserve

 

4,303

3,564

Treasury shares

 

(5,368)

(5,988)

Fair value reserve

 

3,571

20,878

Retained earnings

 

120,239

82,880

Equity attributable to owners of parent

 

128,582

107,171

Non-controlling interests

 

184

185

 

 

 

 

Total equity

 

128,766

107,356

 

 

 

 

 

 

Group Statement of Cash Flows

for the year ended 31st December 2016

 

 

 

 

 

 

31st

December 2016

 

  31st December 2015

 

 

 

£'000

£'000

£'000

£'000

 

Cash generated from operating activities

 

 

 

 

 

 

Profit before tax

 

 

63,525

 

38,600

 

 

 

 

 

 

 

 

Adjustments to reconcile profit before tax to net cash from operating activities

 

 

 

 

 

 

 

 

 

 

 

 

     Exceptional operating items and
     contingent  consideration

(35,975)

 

(1,219)

 

 

     Amortisation of intangible assets

 

3,914

 

1,803

 

 

     Finance income

 

-

 

(5)

 

 

     Finance costs

 

1,896

 

2,817

 

 

     Share-based payments

 

1,263

 

871

 

 

Total adjustments

 

 

(28,902)

 

4,267

 

Group operating profit before amortisation and share-based payments

 

34,623

 

42,867

 

     Depreciation

 

5,475

 

5,296

 

 

     Dividend income

 

(492)

 

(835)

 

 

     Share of results of joint ventures

 

(1,049)

 

(1,156)

 

 

     Loss/(Gain) on sale of property, plant and     

     equipment and financial assets                                                

 

9

 

(253)

 

 

 

 

 

3,943

 

3,052

 

Decrease in trade and other receivables

 

3,265

 

975

 

 

(Decrease) in trade and other payables

 

(614)

 

(1,026)

 

 

(Decrease) in provisions

 

(8,561)

 

(9,345)

 

 

 

 

 

(5,910)

 

(9,396)

 

Cash generated from operations

 

 

32,656

 

36,523

 

 

 

 

 

 

 

 

     Interest paid

 

(1,948)

 

(1,852)

 

 

     Tax paid

 

(8,861)

 

(5,613)

 

 

 

 

 

(10,809)

 

(7,465)

 

Net cash generated from operating activities

 

 

21,847

 

29,058

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

     Cash acquired on purchase of subsidiary
     undertaking

1,593

 

774

 

 

     Acquisitions of subsidiaries and other   

     businesses                    

 

(8,451)

 

(13,202)

 

 

 

 

     Payment of contingent consideration

 

(3,537)

 

(4,015)

 

 

     Investment in financial assets

 

-

 

(1,178)

 

 

     Investment in joint venture

 

(2)

 

-

 

 

     Cash received on sale of financial assets

 

35,991

 

297

 

 

     Dividends received from joint venture

 

-

 

1,499

 

 

     Dividends received from financial assets

 

778

 

549

 

 

     Interest received

 

-

 

5

 

 

     Purchase of property, plant and equipment

     and intangible assets

 

(6,064)

 

(7,991)

 

 

     Proceeds from sale of property, plant and
     equipment

 

69

 

328

 

 

Net cash generated / (expended) on investing activities

 

 

20,377

 

(22,934)

 

Cash flows from financing activities

 

 

 

 

 

 

     Repayment of loans

 

(25,243)

 

-

 

 

     Drawdown of loans

 

-

 

11,500

 

 

     Repayment of overdraft

 

 

 

(718)

 

 

     Repayment of loan notes

 

(7,294)

 

(63)

 

 

     Payment of deferred consideration

 

(2,422)

 

-

 

 

     Proceeds from exercise of share options

 

48

 

1,314

 

 

     Dividends paid

 

(12,916)

 

(12,554)

 

 

 

 

 

 

 

 

 

Net cash used in financing activities

 

 

(47,827)

 

(521)

 

 

 

 

 

 

 

 

Net (decrease) / increase in cash and cash  equivalents

 

 

(5,603)

 

5,603

 

Cash and cash equivalents at the beginning of the year

 

 

5,603

 

-

 

 

 

 

 

 

 

 

Cash and cash equivalents at the end of the year

 

 

-

 

5,603

 

 

 

 

 

 

Group Statement of Changes in Equity

for the year ended 31st December 2016

 

Share capital

Share premium account

Share- based payment reserve

Treasury shares

Fair value Reserve

Retained earnings

Total equity

Non-controlling interests

Total 

 

 

 

 

 

 

 

 

 

 

 

£'000

£'000

£'000

£'000

£'000

£'000

£'000

£'000

£'000

At 1stJanuary 2016

208

5,629

3,564

(5,988)

20,878

82,880

107,171

185

107,356

Disposal of financial assets (net of tax)

-

-

-

-

(27,108)

-

(27,108)

-

(27,108)

Revaluation of financial assets (net of tax)

-

-

-

-

9,801

-

9,801

-

9,801

Other comprehensive income for the year

-

-

-

-

(17,307)

-

(17,307)

-

(17,307)

Profit for the year

-

-

-

-

-

50,493

50,493

(1)

50,492

Total comprehensive income for the year

-

-

-

-

(17,307)

50,493

33,186

(1)

33,185

Exercise of options

-

-

(524)

620

-

(218)

(122)

-

(122)

Share-based payments

-

-

1,263

-

-

-

1,263

-

1,263

Dividend payment

-

-

-

-

-

(12,916)

(12,916)

-

(12,916)

At 31stDecember 2016

208

5,629

4,303

(5,368)

3,571

120,239

128,582

184

128,766

 

 

Year ended 31st December 2015

 

 

Share capital

Share premium account

Share- based payment reserve

Treasury shares

Fair value Reserve

Retained earnings

Total equity

Non-controlling interests

Total 

 

 

 

 

 

 

 

 

 

 

 

£'000

£'000

£'000

£'000

£'000

£'000

£'000

£'000

£'000

At 1stJanuary 2015

208

5,629

3,498

(7,922)

16,715

64,835

82,963

137

83,100

Disposal of financial assets (net of tax)

-

-

-

-

(387)

-

(387)

-

(387)

Revaluation of financial assets (net of tax)

-

-

-

-

4,550

-

4,550

-

4,550

Other comprehensive income for the year

-

-

-

-

4,163

-

4,163

-

4,163

Profit for the year

-

-

-

-

-

30,414

30,414

48

30,462

Total comprehensive income for the year

-

-

-

-

4,163

30,414

34,577

48

34,625

Exercise of options

-

-

(805)

1,934

-

185

1,314

-

1,314

Share-based payments

-

-

871

-

-

-

871

-

871

Dividend payment

-

-

-

-

-

(12,554)

(12,554)

-

(12,554)

At 31stDecember 2015

208

5,629

3,564

(5,988)

20,878

82,880

107,171

185

107,356

 

 

Notes to the Preliminary Results Announcement

The financial information in this preliminary results announcement does not constitute LSL's statutory financial statements for the year ended 31st December 2016 but has been extracted from the Financial Statements included in LSL's Annual Report & Accounts 2016 and as such, does not contain all information required to be disclosed in the financial statements prepared in accordance with IFRS.

Statutory financial statements for this year will be filed following the 2017 AGM. The auditors have reported on these financial statements. Their report was unqualified and did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

1.   Directors responsibility statement

Each of the current Directors confirms that, to the best of their knowledge, the financial statements, prepared in accordance with IFRS as adopted by EU standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the issuer and the undertakings included in the consolidation taken as a whole; and the Directors' Report includes a fair review of the development and performance of the business and the position of the issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

 

2.   Basis of preparation

The accounting policies adopted are consistent with those of the previous financial year except for the adoption of new Standards and interpretations as of 1st January 2016 which are applicable to the Group.  For the Financial Statements for the year ended 31st December 2016, there were no IFRS, amendments or IFRIC interpretations effective for the first time this financial year that had a material impact on the Group. This is with the exception of IFRS 16, for which we continue to evaluate the impact.

3.   Segment analysis of revenue and operating profit

For management purposes, the Group is organised into business units based on their products and services and has two reportable operating segments as follows:

·      The Estate Agency and Related Services segment provides services related to the sale and letting of residential properties.  It operates a network of high street branches and as part of its business model, the Estate Agency Division also provides associated services including arranging conveyancing services.  In addition, it provides repossession asset management services to a range of lenders. It also arranges mortgages for a number of lenders and arranges pure protection and general insurance policies for a panel of insurance companies via the Estate Agency branches, Pink Homes Loans, First Complete, Embrace Mortgage Services, First2Protect, Mortgage First, Insurance Brokers First and Linear Financial Solutions.  The financial services revenue included within the Estate Agency Division includes two mortgage and insurance distribution networks providing products and services for sale via financial intermediaries.  A significant proportion of the results of the Financial Services are inextricably linked to the Estate Agency business, they have therefore been aggregated with those of the Estate Agency and Related Services segment.

·      The Surveying and Valuation Services segment provides a valuations and professional survey service of residential   properties to various lending corporations and individual customers.

 

Each segment has various products and services and the revenue from these products and services are disclosed in the Business Review section of the Strategic Report of the Annual Report and Accounts 2016.

The Management Teams monitor the operating results of each business units separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on operating profit or loss which in certain respects, as explained in the table below, is measured differently from operating profit or loss in the Group Financial Statements. Head office costs, Group financing (including finance costs and finance incomes) and income taxes are managed on a Group basis and are not allocated to operating segments.

Operating segments

The following table presents revenue and profit information regarding the Group's operating segments for the financial year ended 31st December 2016 and financial year ended 31st December 2015 respectively.

 

Year ended 31st December 2016

 

Estate Agency and Related Services

Surveying
and Valuation Services

Unallocated

Total

 Income statement  information

£'000

£'000

£'000

£'000

 

 

 

 

 

Segmental revenue

243,036

64,714

-

307,750

Segmental result:

 

 

 

 

 - before exceptional costs, contingent    consideration, amortisation and share-based payments

24,500

17,508

(7,385)

34,623

 - after exceptional costs, contingent

 

 

 

 

 consideration, amortisation and share-based payments

22,344

18,030

25,047

65,421

 

 

 

 

 

Finance income

 

 

 

-

Finance costs

 

 

 

(1,896)

Profit before tax

 

 

 

63,525

 

 

 

 

 

Taxation

 

 

 

(13,033)

Profit for the year

 

 

 

50,492

 

 

 

Year ended 31st December 2015

 

 

Estate Agency and Related Services

Surveying
and Valuation Services

Unallocated

Total

 Income statement  information

£'000

£'000

£'000

£'000

 

 

 

 

 

Segmental revenue

236,525

64,069

-

300,594

Segmental result:

 

 

 

 

 - before exceptional costs, contingent    consideration, amortisation and share-based payments

31,288

18,104

(6,525)

42,867

 - after exceptional costs, contingent

29,347

17,459

(5,394)

41,412

 consideration, amortisation and share-based payments

 

 

 

 

 

 

 

 

 

Finance income

 

 

 

5

Finance costs

 

 

 

(2,817)

Profit before tax

 

 

 

38,600

 

 

 

 

 

Taxation

 

 

 

(8,138)

Profit for the year

 

 

 

30,462

 

 

4.     Adjusted performance measures

In addition to the various performance measures defined under IFRS, the Group reports a number of alternative performance measures that are designed to assist with the understanding of the underlying performance of the Group.  The Group seeks to present a measure of underlying performance which is not impacted by the inconsistency in profile of exceptional gains and exceptional costs, contingent consideration, amortisation of intangible assets and share-based payments.  Share based payments are excluded from the underlying performance due to the fluctuations that can impact the charge, such as lapses and the level of annual grants.  The three adjusted measures reported by the Group are:

 

·      Group Underlying Operating Profit

·      Adjusted Basic EPS

·      Adjusted diluted EPS. 

 

The Directors consider that these adjusted measures shown below give a better and more consistent indication of the Group's underlying performance.  These measures form part of management's internal financial review and are contained within the monthly management information reports reviewed by the Board.

 

The calculations of adjusted basic and adjusted diluted EPS are given in Note 6 and a reconciliation of Group Underlying Operating Profit is shown below:

 

 

 

2016

2015

 

Note

£'000

£'000

Group operating profit

3

65,421

41,412

Share-based payments

 

1,263

871

Amortisation of intangible assets

 

3,914

1,803

Exceptional gains

5

(34,531)

-

Exceptional costs

5

2,341

258

Contingent consideration

5

(3,785)

(1,477)

Group Underlying Operating Profit

 

34,623

42,867

         

 

5.     Exceptional items and contingent consideration

 

2016

2015

 

£'000

£'000

Exceptional costs:

 

 

Branch closure and restructuring costs including redundancy costs

2,341

258

 

 

 

Contingent consideration on acquisitions

(3,785)

(1,477)

 

 

 

Exceptional gains:

 

 

Gain on disposal of Zoopla shares

(32,931)

-

Provision for PI Costs (claims and notifications)

(1,600)

-

 

(34,531)

-

 

 

6.     Earnings per share (EPS)

Basic EPS amounts are calculated by dividing net profit for the year attributable to ordinary equity holders of the parent by the weighted average number of Ordinary Shares outstanding during the year.

Diluted EPS amounts are calculated by dividing the net profit attributable to ordinary equity holders of the parent by the weighted average number of Ordinary Shares outstanding during the year plus the weighted average number of Ordinary Shares that would be issued on the conversion of all the dilutive potential Ordinary Shares into Ordinary Shares.

 

Profit after tax

 

£'000

 

Weighted average number of shares

2016

Per share amount

Pence

 

Profit after tax

£'000

Weighted average number of shares

2015

Per share amount

Pence

Basic EPS

50,493

102,575,484

49.2

30,414

102,406,770

29.7

Effect of dilutive share options

 

519,565

 

 

791,256

 

Diluted EPS

50,493

103,095,049

49.0

30,414

103,198,026

29.5

 

 

 

 

 

 

 

 

There have been no other transactions involving Ordinary Shares or potential Ordinary Shares between the reporting date and the date of completion of these Financial Statements.

 

The Directors consider that the adjusted earnings shown below give a better and more consistent indication of the Group's underlying performance:

 

2016

£'000

2015

£'000

 

 

 

Group Underlying Operating Profit (excluding non-controlling interest) (Note 4):

34,625

 

 

42,819

 

 

 

Net finance costs (excluding exceptional costs and contingent consideration)

(1,410)

(2,360)

Normalised taxation

(6,643)

(8,193)

Adjusted profit after tax1 before exceptional costs, share-based payments and amortisation

 

26,572

 

32,266

 

 

Adjusted basic and diluted EPS

 

Adjusted profit after tax1

£'000

Weighted average number of shares

2016

Per share amount
Pence

Adjusted profit after tax1

£'000

Weighted average number of shares

2015

Per share amount
Pence

 

 

 

 

 

 

 

Adjusted Basic EPS

26,572

102,575,484

25.9

32,266

102,406,770

31.5

Effect of dilutive share options

 

519,565

 

 

791,256

 

Adjusted Diluted EPS

26,572

103,095,049

25.8

32,266

103,198,026

31.3

 

 

 

Note 1 -This represents adjusted profit after tax attributable to equity holders of the parent. The normalised tax rate in 2016 is 20.00% (2015: 20.25%).

 

 

 

7.     Dividends paid and proposed

 

2016

2015

 

£'000

£'000

Declared and paid during the year:

 

 

Equity dividends on Ordinary Shares:

 

 

2014 Final: 8.3 pence per share

2015 Interim: 4.0 pence per share

 

 

8,458

4,096

2015 Final: 8.6 pence per share

8,812

 

2016 Interim: 4.0 pence per share

4,104

 

 

12,916

12,554

 

Dividends on Ordinary Shares proposed (not recognised as a liability as at 31st December):

 

 

 

Equity dividends on Ordinary Shares:

 

 

Dividend: 6.3 pence per share (2015: 8.6 pence per share)

6,466

8,808

           

 

 

 

 

8.     Taxation

(a)  Tax on profit on ordinary activities

The major components of income tax charge in the Group income statements are:

 

2016

 

£'000

£'000

 

 

 

UK corporation tax - current year

12,703

7,787

                                 - adjustment in respect of prior years

1,009

  391

 

13,712

8,178

Deferred tax:

 

 

Origination and reversal of temporary differences

(500)

(470)

Adjustment in respect of prior year

(179)

 430

Total deferred tax (credit)

(679)

(40)

Total tax charge in the income statement

13,033

8,138

 

The 2015 Summer Budget announced that the headline rate of Corporation Tax in the UK would be further reduced from the current rate of 20% to 19% effective from 1st April 2017, and further reduced to 18%, effective from 1st April 2020.  The Budget of March 2016 announced that from 1st April 2020, the proposed corporation tax will be lowered further still to 17%.  Following the substantive enactment of Finance Bill 2016 in September 2016, the corporation tax rate of 17% has been confirmed.  Accordingly this is the rate at which deferred tax has been provided (2015: 18%).  Corporation tax is recognised at the headline UK effective rate of 20% (2015: 20.25%).

The effective rate of tax for the year was 20.5% (2015: 21.1%).  The effective tax rate for 2016 was decreased as a result of reducing the rate at which deferred tax is provided resulting from the reduction in the headline rate of corporation tax. Deferred tax credited directly to other comprehensive income is £3.8m (2015: charge of £0.5m); this is comprised of a credit of £5.9m and a charge of £2.1m and relates to the disposal and revaluation of financial assets.  Income tax credited directly to the share based payment reserve is £0.1m (2015: £nil).

 

(b)  Factors affecting tax charge for the year

The tax assessed in the profit and loss account is higher (2015: higher) than the standard UK corporation tax rate, because of the following factors:

 

 

  2016

       2015

 

  £'000

      £'000

 

 

 

Profit on ordinary activities before tax 

63,525

 38,600

 

 

 

Tax calculated at UK standard rate of corporation tax rate of20.0% (2015 - 20.25%)                                                                                                                                              

12,705

7,816

Non-taxable income from joint ventures and dividends

(95)

(403)

Other income not taxable

(510)

-

Benefit of deferred tax asset and brought forward losses not previously recognised

-

(32)

Disallowable expenses

577

381

Impact of movement in contingent consideration credited to the Income Statement

(757)

(295)

Capital gains in excess of accounting profit

183

-

Share-based payment relief

251

57

Impact of rate change on deferred tax

(151)

(207)

Prior period adjustments - current tax

1,009

391

Prior period adjustment - deferred tax

(179)

430

Total taxation charge

13,033

8,138

 

 

9.   Analysis of Net Bank Debt (excluding loan notes)

 

 

2016

2015

 

£'000

£'000

 

 

 

Interest bearing loans and borrowings

 

 

-       Current

10,851

15,777

-       Non-current

26,357

52,511

 

37,208

68,288

Less: Unsecured loan notes

(2,000)

(10,033)

Less: cash and short-term deposits

-

(5,603)

Less: deferred and contingent consideration

(14,952)

(12,755)

Net Bank Debt at the end of the year

20,256

39,897

 

During the year, the Group has repaid £29.0m (2015: drawn down £11.5m) of the revolving credit facility. The utilisation of this revolving credit facility may vary each month provided that it does not exceed the maximum £100.0m facility (2015: £100.0m).

10.    Acquisitions during the year

The Group acquired the following businesses during the year:

a.     Lettings books and other

During the period the Group acquired nine lettings books and a two branch estate agency business from a franchisee for a total combined consideration of £4,241,000.  The fair values of the identifiable assets and liabilities of these businesses as at the date of acquisition have been provisionally determined as below:

 

 

Fair value recognised on acquisition

 

£'000

Intangible Assets

4,190

Cash and cash equivalents

51

Deferred tax liabilities

(1,593)

Total identifiable net liabilities acquired

2,648

Purchase consideration

4,241

Goodwill

1,593

 

Purchase consideration discharged by:

Cash

4,241

 

Analysis of cash flow on acquisition

£'000

Transaction costs (included in cash flows from operating activities)

55

Net cash acquired with the subsidiary (included in cash flows from investing activities)

(51)

Purchase consideration discharged in cash (included in cash flows from investing activities)

3,883

Net cash outflow on acquisition

3,887

 

b.     Group First

 

In February 2016, the Group, through a wholly owned subsidiary, acquired 65% interest in Group First, which provides mortgage and protection brokerage services to the purchasers of new homes through its subsidiaries, Mortgages First and Insurance First Brokers. The consideration for the initial investment is £9.1m cash with 50% paid on completion, and a further 50% payable in 2017. The remaining 35% is subject to put and call options which are exercisable between 2018 and 2020.  The contingent consideration is the Director's best estimation of the probable discounted payout (using a rate of 6.5%), based upon current forecasts over the earn-out period.  Due to the nature of the payment terms, the contingent consideration is considered to be a capital payment for accounting purposes.

 

The fair value of the identifiable assets and liabilities as at the date of acquisition have been determined as below: 

 

Fair value recognised on acquisition

 

£'000

Intangible assets

809

Property, plant and equipment

847

Trade and other receivables

127

Cash and cash equivalents

1,542

Trade and other payables

(1,501)

Current tax liabilities

(216)

Deferred tax liabilities

160

Total identifiable net assets acquired

1,768

Purchase consideration

15,681

Goodwill

13,913

 

Purchase consideration discharged by:

Cash

4,550

Deferred consideration

4,550

Contingent consideration

6,581

 

15,681

 

c.     Total Acquisitions

 

At 31st December 2016, the acquisitions in aggregate, including Group First, have contributed £7,979,000 of revenue and £2,609,000 profit before tax to the Group, excluding the impact of movements in the contingent consideration recorded through the profit and loss.  If all of these combinations had taken place at the beginning of the year, the consolidated revenue would have been higher by £1,749,000 and the consolidated profit before tax would have been higher by £593,000.  Transaction costs have been expensed.

 

 

£'000

Transaction costs

55

Net cash acquired with the subsidiaries and other businesses

(1,593)

Purchase consideration discharged

8,433

Net Cash outflow on acquisition

6,895

 

11. Annual General Meeting (AGM)

 

The AGM will be held at the London offices of LSL, 1-3 Sun Street, London EC2A 2EP on 27th April 2017 starting at 4.00pm.

 

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
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