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LSL Property Services   -  LSL   

Preliminary Announcement

Released 07:00 05-Mar-2019

RNS Number : 8138R
LSL Property Services
05 March 2019
 
                                                                                                                                                       5th March 2019
 
LSL Property Services plc ("LSL" or "The Group")
PRELIMINARY ANNOUNCEMENT
 
LSL Property Services plc, a leading provider of residential property services incorporating estate agency, financial services and surveying and valuation businesses, announces preliminary results for the year ended 31st December 2018.
 

 

2018

2017

% change

Group Revenue  - £m

324.6

311.5

+4

Group Underlying Operating Profit1 - £m

35.9

37.5

-4

Group Underlying Operating Margin -  %

11.1

12.0

 

Group Adjusted EBITDA2

41.6

42.7

-3

Group Operating Profit - £m

25.4

42.1

-40

Profit before tax - £m

23.1

40.1

-42

Net Exceptional (costs) / gain - £m

(3.0)

9.3

 

Basic Earnings Per Share - pence

17.4

32.6

-47

Adjusted Basic Earnings Per Share - pence3

27.2

28.3

-4

Net Bank Debt4 at 31st December - £m

32.1

30.0

+7

Final proposed dividend per Share - pence

6.9

7.3

-5

Full year dividend per Share - pence

10.9

11.3

-4

 

·      Highly resilient Revenue and Underlying Operating Profit performance in the context of challenging residential market conditions. Group Revenue up 4%, Group Underlying Operating Profit1 down 4% to £35.9m (2017: £37.5m) and Group Adjusted EBITDA down 3% to £41.6m (2017: £42.7m).

·      Proposed final dividend of 6.9p bringing full year dividend to 10.9p per share at the upper end of the range of our stated policy.

·      Leading market positions: market leader in Surveying, second largest combined networks in Financial Services, and market leading positions in Estate Agency.

·      Overall Estate Agency Division income up 3% year-on-year and operating profit down 24% reflecting the effect of operational gearing on lower Residential Sales exchange volumes which more than offset the benefits from Financial Services income and Lettings income growth.

·      Overall Surveying Division revenue up 9% year-on-year benefitting from the new Lloyds Bank plc contract with operating profit up 8%.

·      Write-down of LSL investment in Yopa by £12.2m

·      Net Bank Debt of £32.1m (2017: £30.0m) and low level of gearing5 at 0.8x EBITDA (2017: 0.7x).

 

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

 

"The Group delivered a highly resilient revenue and Underlying Operating Profit performance in 2018 despite challenging residential property market conditions. We continue to deliver a range of proactive self-help initiatives demonstrating the breadth of opportunity across the Group.

 

Market conditions in 2019 have been notably softer than the equivalent period in 2018, whilst LSL's financial performance so far in 2019 has been marginally behind the Board's expectations. Nevertheless, at this early stage in the year, the Board's current expectation is that the Group will deliver a full year Underlying Operating Profit in line with its prior expectations, as the business is expected to continue to benefit from the range of LSL's ongoing self-help measures.

 

We continue to remain cautious on the residential property market outlook for 2019 given the current uncertainty over the UK and global political and economic environment and the potential impact on UK consumer confidence.

 

The Group has a robust balance sheet with relatively low levels of gearing and is highly cash generative at an operational level. The Board remain confident of the opportunities for further positive progress for the Group."

 

Estate Agency Financials

 

P&L (£m)

 

2018

2017

Change

Financial Services income

87.4

74.4

17%

Lettings income

76.6

73.9

4%

Residential Sales exchange income

69.9

76.6

-9%

Other Income

20.9

22.5

-7%

Total Revenue

254.8

247.4

3%

Operating Profit

20.6

26.9

-24%

Operating Margin

8.1%

10.9%

 

 

·      Strong growth in Financial Services income of 17% year on year (organic growth 1%) reflecting the acquisition of two mortgage brokers: PTFS and RSC

·      Steady growth of recurring income with Lettings income increasing 4% year-on-year (organic growth: 3%)

·      Six lettings book acquisitions were made during 2018, in line with LSL's stated strategy, for a total consideration of £1.9m

·      Residential Sales exchange revenue down by 9% reflecting challenging residential property market conditions

·      Marsh & Parsons delivered a good revenue performance despite a challenging London market. Total revenue was down 2% year-on-year as Lettings income continued to perform positively with growth of 4% largely offsetting the 13% fall in Residential Sales exchange revenue. Full year operating profit fell to £2.3m (2017: £3.9m). Adjusted EBITDA was £3.4m (2017: £4.9m)

·      Reshaping of the Your Move and Reeds Rains branch networks commenced in February 2019.

·      LSL retains a strong position in its traditional Estate Agency business. We continue to believe that traditional estate agents will represent the substantial majority of the Residential Sales and Lettings markets for the foreseeable future and that Estate Agency branches will continue to remain core to providing the service our customers expect

·      LSL has a 14.7% minority shareholding in Yopa. LSL's previous carrying value of £20.0m for Yopa has been written down through reserves by £12.2m to £7.8m as at 31st December 2018 to reflect the Board's assessment of fair value

 

Surveying Financials

 

P&L (£m)

 

2018

2017

Change

Total Revenue

69.8

64.1

9%

Operating Profit

20.4

18.9

8%

Operating Margin

29.3%

29.4%

 

 

·      The Surveying Division delivered strong revenue and operating profit performance with revenue growth of 9%, operating profit growth of 8% and strong operating margins of 29.3% (2017: 29.4%). Revenues included a material contribution in the second half from the successful commencement of the Lloyds Bank plc surveying and valuation services relationship.

·      Continued positive progress in settling historic Professional Indemnity (PI) claims with an exceptional provision release of £2.2m in 2018 as claims were settled below previous expectations

 

Change to segment reporting

·      To reflect the growth and increased importance of LSL's Financial Services businesses, effective from 1st January 2019, LSL will report three segments: Estate Agency, Financial Services and Surveying

 

This announcement has been determined to contain inside information.

 

For further information, please contact:

 

 

Ian Crabb, Group Chief Executive Officer                        

 

Adam Castleton, Group Chief Financial Officer

 

LSL Property Services plc                                                                                                  

0207 382 0360

 

 

Helen Tarbet, Sophie Wills

 

Buchanan

0207 466 5000

 

          

Notes:

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

2.     Group Adjusted EBITDA is Group Underlying Operating Profit plus depreciation on property, plant and equipment (as defined in Note 4 to the Financial Statements)

3.     Refer to Note 6 to the Financial Statements for the calculation

4.     Refer to Note 10 to the Financial Statements for the calculation

5.     Operational gearing is defined as Net bank Debt divided by Group Adjusted EBITDA2

                                                                                                            

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 support, and mortgage, pure protection and general insurance brokerage services. Services to mortgage lenders include: valuations and panel management services, and asset management and property management services. For further information, please visit LSL's website: lslps.co.uk

 

    

Chairman's Statement
 

Introduction

The Group delivered a highly resilient revenue and operating profit performance in 2018 despite challenging residential property market conditions. Group Underlying Operating Profit1 of £35.9m in 2018 was 4% below the prior year (2017: £37.5m) with Group Adjusted EBITDA2 down 3%. Group Revenue in 2018 grew by 4% to £324.6m (2017: £311.5m) reflecting overall growth in both Divisions.

 

We continue to deliver a range of proactive self-help initiatives demonstrating the breadth of opportunity across the Group. These initiatives included the material contract win for the supply of surveying and valuation services to Lloyds Bank plc, the acquisitions in our Financial Services business of PTFS and RSC, the acquisition of a c.35% holding in Mortgage Gym, a digital mortgage marketplace business, and the recommencement of our lettings book acquisition programme with six lettings books acquired during the period.

 

The changes to the structure of the Your Move and Reeds Rains estate agency branch networks and operations announced on 5th February 2019 demonstrate our commitment to evolve our business model to adapt to changes in the landscape and customer demands in order to drive value for our Shareholders.

 

The Your Move and Reed Rains future focus on 144 keystone branches is to create a platform that will benefit from their larger scale, enabling us to invest in people and technology with the aim of providing enhanced levels of service to our customers whilst ensuring operational performance is optimised by competing more effectively in local markets. Delivering the ways of working programme into Your Move and Reeds Rains is expected to deliver material improvement in Your Move and Reeds Rains operating profit, assuming no material change in market conditions.

 

LSL retains a strong position in its traditional Estate Agency business. We continue to believe that traditional estate agents will represent the substantial majority of the Residential Sales and Lettings markets for the foreseeable future and that Estate Agency branches will continue to remain core to providing the service our customers expect.

 

LSL has a 14.7% minority shareholding in Yopa. LSL's previous carrying value of £20.0m for Yopa has been written down through reserves by £12.2m to £7.8m as at 31st December 2018 to reflect the Board's assessment of fair value.

 

Dividend

The Board continues to support our previously communicated dividend policy, to apply a dividend pay-out ratio of between 30% to 40% of Group Underlying Operating Profit1 after interest and tax.  The Board has reviewed the policy while considering the risks and capital management decisions facing the Group.

 

Adjusted Basic Earnings Per Share for 2018 was 27.2 pence, a decrease of 4% on the prior year (2017: 28.3 pence). The Board has a positive view of the future prospects for the business whilst also being mindful of the uncertain economic and political landscape which has an impact on consumer sentiment. The proposed dividend payment is at the upper end of the range of our stated policy and a final dividend of 6.9 pence per share (2017: 7.3 pence per share) will be proposed to Shareholders at the forthcoming AGM, giving a total dividend for 2018 of 10.9 pence per share (2017: 11.3 pence per share). The ex-dividend date for the final dividend is 21st March 2019 with a record date of 22nd March 2019 and a payment date of 7th May 2019. The last date for election is 5th April 2019.

 

Corporate Governance and Board

The Board remains committed to high levels of corporate governance and during 2018, LSL has complied in all respects with the UK Corporate Governance Code (April 2016 edition).  We note the publication of the revised UK Corporate Governance Code and Guidance on Board Effectiveness which was published in July 2018 and will apply to LSL from 1st January 2019. We have begun the implementation of actions to reflect the 2018 Code in our corporate governance arrangements, including the implementation of measures to support greater stakeholder engagement (including workforce engagement) and the development of LSL's culture, purpose and values.  Further details on the steps we are taking are contained in our Corporate Governance Report.

 

In relation to 2018, as Chairman, I am responsible for leadership of the Board, and I have together with my fellow directors reviewed the effectiveness of the Board and its Committees.  The 2018 annual evaluation exercise had regard to the requirements of both the 2016 and 2018 editions of the Code and its associated guidance.  In particular, we reviewed the composition of the Board and its Committees and our succession arrangements.  Following this review we concluded that we have the appropriate balance of skills, independence and knowledge of the Group together to enable the Board to discharge its duties and responsibilities effectively.  The evaluation also considered other matters such as leadership, division of responsibilities, meeting arrangements, and included a review of the annual evaluation process itself. 

 

Details of our corporate governance arrangements and the recommendations arising from the 2018 evaluation exercise are contained within the Corporate Governance Report of the Annual Report and Accounts 2018 together with details of how we have implemented recommendations which arose from the 2017 evaluation exercise. 

 

I would like to take this opportunity to thank Kumsal Bayazit Besson who has been a Non Executive Director since September 2015 and who intends to resign from the Board and its Committees with effect from the 2019 AGM.  Kumsal has made a significant contribution during her tenure as a Director and she is leaving LSL to focus on her new role as CEO of Elsevier. 

 

I would also like to welcome Darrell Evans, who joined the Board and its Committees as a Non Executive Director on 28th February 2019. Darrell joins LSL with significant experience in Financial Services and he is currently the Chief Commercial Officer at the Co-Operative Bank plc. 

 

The Nominations Committee will, on behalf of the Board, review the Board's composition during 2019.   Details relating to all our Directors are included in The Board section of the Annual Report and Accounts 2018 and our website.

 

Outlook

Market conditions in 2019 have been notably softer than the equivalent period in 2018, whilst LSL's financial performance so far in 2019 has been marginally behind the Board's expectations. Nevertheless, at this early stage in the year, the Board's current expectation is that the Group will deliver a full year Underlying Operating Profit in line with its prior expectations, as the business is expected to continue to benefit from the range of LSL's ongoing self-help measures.

 

We continue to remain cautious on the residential property market outlook for 2019 given the current uncertainty over the UK and global political and economic environment and the potential impact on UK consumer confidence.

 

The Board currently expects to see a material reduction in the volume of house purchase transactions compared to the prior year. Mortgage costs continue to be low by historic standards and mortgage availability remains good. The medium to longer term fundamentals of the UK housing market remain solid.

 

The final arrangements for the planned exit from the European Union are uncertain. In the eventuality that the outcome leads to a changed impact on consumer confidence and our business, we will update our Shareholders.

 

Although Brexit and the current political environment continues to create uncertainty, the Group has a robust balance sheet with relatively low levels of gearing and is very cash generative at an operational level.

 

LSL continues to execute on its stated strategy and we are confident that LSL, with its market leading brands, broad portfolio of residential property services and the benefits from the proactive self-help measures, remains well positioned to perform well given a range of potential market conditions, in order to maximise Shareholder value. The Board remain confident of the opportunities for further positive progress for the Group.

 

Simon Embley

Chairman

5th March 2019

 

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 to the Financial Statements).

Note 2 Group Adjusted EBITDA is Group Underlying Operating Profit plus depreciation on property plant and equipment (as defined in Note 4 to the Financial Statements).

 

 

Group Chief Executive's Review

 

2018 Overview

In the context of challenging market conditions, the Group delivered a highly resilient performance in 2018, underpinned by a continuing range of self-help measures delivered across the Group.

 

Group revenues for the year ended 31st December 2018 increased by 4% to £324.6m (2017: £311.5m) reflecting overall growth in both Divisions, with Estate Agency revenue up 3% and Surveying revenue up 9%.  Group Underlying Operating Profit1 was down 4% to £35.9m (2017: £37.5m), and Group Adjusted EBITDA2 was down 3% to £41.6m (2017: £42.7m).  Profit before tax of £23.1m was down 42% compared to the prior year (2017: £40.1m).

 

The Group has a strong balance sheet with closing Net Bank Debt at 31st December 2018 of £32.1m (2017: £30.0m) and low level of gearing3 at 0.8 times Group Adjusted EBITDA (2017: 0.7 times). The modest increase in Net Debt in 2018 is after incurring total cash consideration of £11.8m for the funding of two Financial Services acquisitions (PTFS and RSC), one Financial Services investment (Mortgage Gym) and six lettings books acquisitions during the year. LSL also maintained the payment of dividends to Shareholders during the year.

 

The Group generated strong cash from operations of £36.9m (2017: £41.5m) converting 103% of Group Underlying Operating Profit to cash-flow from operations (pre PI and exceptionals) (2017: 117%). 

 

In the Estate Agency Division, we continued to invest in the growing parts of our businesses and delivered strong year-on-year revenue growth in Lettings (+4%) and Financial Services (+17%). In the Surveying Division, we delivered strong operating profit growth (+9%) and strong margins (29.3%).

 

During 2018, we continued to execute on our stated strategy and made positive progress across the Group as follows:

 

·      In May 2018, we were pleased to announce the material contract win for the supply of surveying and valuation services to Lloyds Bank plc. The initial performance of this contract is in line with expectations

 

·      During 2018, LSL continued its strategy to evaluate selective acquisitions and completed two Financial Services related acquisitions, PTFS and RSC which are both performing in line with expectations. These acquisitions support LSL's stated strategy of enhancing its position as a leading mortgage distributor and are an excellent fit with our existing Financial Services businesses. LSL also acquired a c.35% holding in Mortgage Gym, a digital mortgage marketplace business in July 2018

 

·      During 2018, LSL restarted its lettings book acquisition programme with six lettings books acquired during the period

 

Reshaping Your Move and Reeds Rains branch networks

The changes to the structure of the Your Move and Reeds Rains estate agency branch networks and operations announced on 5th February 2019 are proceeding in line with expectations. The Your Move and Reeds Rains branch networks have been reduced from 308 to 144 keystone branches following the closure and merging of 81 neighbouring branches into the keystone branch network, the franchising of 39 branches and the closure of 44 branches.

 

Delivering the ways of working programme into Your Move and Reeds Rains is expected to deliver material improvement in Your Move and Reeds Rains operating profit, assuming no material change in residential property market conditions.

 

The Market in 2018

The UK residential property market was subdued in 2018.  Approvals for house purchases4 in 2018 were down by 1.9% with the decline in market transactions continuing to be more substantial in London and the South East5. Total mortgage approvals4 increased by 0.6% in 2018, with the increase in remortgage approvals of 3.9% offsetting the fall in house purchase approvals. The increase in remortgage approvals included strong growth in the first half of 2018 (+7.9%) compared to the same period in 2017 reflecting an increase in remortgage activity due to the widely anticipated interest rate increase announced by the Bank of England in May 2018. Second half mortgage activity in 2018 was broadly flat against the same period in 2017.

 

Average house prices6 in England and Wales grew by 0.1% (2017: 3.9%) to £305,284 with a decline in Greater London (-1.1%). Excluding Greater London and the South East, the average increase was 1.0%.

 

The proportion of residential housing stock available for sale with online and hybrid estate agents sector continued to grow modestly on a year-on-year basis, increasing from 7% in 2017 to 8% in 20187.

 

Total gross mortgage lending in 2018 was £269bn8 (2017: £261bn).  The proportion of mortgage lending in the market placed through intermediaries increased to 71% in 2018 (2017: 68%)9.

 

Following market declines in the repossession market in the past few years, market repossessions volumes declined in 2018, reducing by 9.2% to 6,75010 total repossessions as interest rates remained historically low and this was the lowest number since 1981.

 

Our market position

LSL continues to hold market leading positions in its core Estate Agency business comprising 12 Estate Agency subsidiaries: Your Move, Reeds Rains, LSLi group (9 companies) and Marsh & Parsons. We continue to believe that traditional estate agents will represent the substantial majority of the Residential Sales and Lettings markets for the foreseeable future and that our Estate Agency branches will continue to remain core to providing the service our customers expect.

 

In Your Move and Reeds Rains, the newly established keystone network of 144 branches are situated in core locations across the UK and generally have larger teams of dedicated experts in Residential Sales, Lettings and Financial Services roles than the average Your Move and Reeds Rains branches previously had in place.

 

The ambition for these keystone branches is to create a platform that will benefit from their larger scale, enabling us to invest in people and technology with the aim of providing enhanced levels of service to our customers whilst ensuring operational performance is optimised by competing more effectively in local markets. Our commitment to the new IT platform and investment in enhanced technology is intended to give these Your Move and Reeds Rains branches the opportunity to cover a wider geography and benefit from further scale.

 

Marsh & Parsons continues to implement its well established strategy of expanding its branch network with a focus on locations outside prime Central London. During 2018 we opened one new Marsh & Parsons branch in Chiswick, in outer prime Central London, which is performing in line with expectations.

 

The LSLi group of companies today operate 57 owned branches and they will continue with their existing strategy to develop the nine well established local companies in their existing markets in the South East of England. In addition, in 2019 the LSLi group of companies will continue to actively evaluate opportunities for lettings book acquisitions.

 

LSL has continued to monitor the progress of the Government's review of tenant fees which sets out to ban letting fees paid by tenants in the private rented sector and capping tenancy deposits in England and Wales.  The Government has confirmed that the legislation will come into effect on 1st June 2019. In response to the change in legislation, LSL has made the necessary preparations to ensure these changes will be fully implemented across all of LSL's Estate Agency brands. We have also put in place a range of commercial measures in lettings across our Estate Agency brands to optimise future organic revenue growth.

 

In Financial Services, during 2018 the Group arranged total mortgage lending of £29.0bn (2017: £21.0bn).  Measured by the number of appointed representatives, as at 31st December 2018, LSL's overall combined broker networks are the second largest in the UK11. Financial Services income represented 27% of total Group Revenue in 2018 (2017: 24%) demonstrating LSL's growing position as a leading financial services distributor.

Our Surveying Division became the clear market leader in 2018, maintaining strong relationships with many of the UK's largest lenders.  During 2018 LSL was awarded a material contract to supply surveying and valuation services to Lloyds Bank plc.  The five year contract included the transfer to e.surv of the existing Lloyds Bank plc surveyors and back-office employees. LSL's Surveying Division is the UK's largest provider of residential valuation services nationwide and is the largest employer of surveyors in the UK5 with 503 qualified operational surveyors as at 31st December 2018.

Yopa

LSL retains a strong position in its traditional Estate Agency business. We continue to believe that traditional estate agents will represent the substantial majority of the Residential Sales and Lettings markets for the foreseeable future and that Estate Agency branches will continue to remain core to providing the service our customers expect.

 

LSL has a 14.7% minority shareholding in Yopa. LSL's previous carrying value of £20.0m for Yopa has been written down through reserves by £12.2m to £7.8m as at 31st December 2018 to reflect the Board's assessment of fair value.

 

Change to Segment reporting

LSL's Financial Services revenue has grown materially in recent years, through both organic growth and selective acquisitions. LSL's Financial Services Revenue CAGR over the 5-year period, 2014 to 2018, has been 19%, representing approximately 27% of total Group revenue in 2018, compared to 14% in 2013.

The Board has carried out a review of the structure of the financial information it requires in order to assess the performance of the Group, allocate resources and assist in investor understanding of the underlying performance trends and drivers of value.

To reflect the growth and increased importance of LSL's Financial Services businesses, the Board has decided to update the Group segmental reporting effective from 1st January 2019.

The Group currently reports two segments: Estate Agency and Related Services and Surveying and Valuation. Services. From 1st January 2019 LSL will report three segments: Estate Agency; Financial Services; and Surveying and Valuation Services. The Financial Services segment will incorporate all LSL's Financial Services businesses. The Estate Agency segment will primarily incorporate the results from the Estate Agency networks (Your Move, Reeds Rains, LSLi and Marsh & Parsons) and Asset Management. The Surveying and Valuation Services segment is unchanged.

The 2018 and 2017 financial results contained within this Preliminary announcement are on the previous segment reporting basis.

Strategy

LSL remains committed to delivering on our stated strategy which now includes the separate Financial Services segment:

 

Estate Agency

·      Ambition to achieve £80k-£100k profit per branch12 in the medium term based on the expectation of a normalised level of market transactions

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

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

·      Evaluate selective acquisitions of Residential Sales businesses and Lettings books

 

Financial Services

·      Enhance LSL's position as a leading distributor of mortgage and non-investment insurance products

·      Consistent delivery of appropriate outcomes for consumers with a focus on "best practice" standards of regulatory compliance

·      Enhancement of technology solutions to improve the customer experience and operational efficiency

·      Evaluate further selective Financial Services acquisitions

 

Surveying and Valuation Services

·      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 2018

 

Estate Agency Division

Total Estate Agency income of £254.8m (2017: £247.4m) increased by 3%.  This increase resulted from the consistent execution of our strategies with strong growth in both Lettings income (+4%) and in Financial Services Income (total growth +17%, organic growth +1%). Operating profit being down 24% reflects the effect of operational gearing on lower residential exchange volumes which more than offset the benefits from Financial Services income and Lettings income growth

 

Residential Sales exchange income

Residential Sales exchange income decreased by 9% to £69.9m (2017: £76.6m) due primarily to the final quarter of 2017 residential property market conditions impacting opening 2018 pipelines and subdued activity during 2018. Residential Sales exchange income was also impacted by selective branch closures in the final quarter of 2017 (2% of wholly owned branch network).

 

LSL has remained extremely disciplined in its Residential Sales exchange fee strategy throughout 2018. Average LSL Estate Agency Residential Sales exchange fee (£) per unit increased by 1% to £3,071 (2017: £3,042).

 

Lettings income

In 2018 we delivered growth in Lettings income of 4% (organic growth: 3%). Lettings income represented 30% of total Estate Agency Division income in 2018 (2017: 30%).

 

In line with our stated strategy, we restarted our lettings book acquisition programme during 2018 and acquired six lettings books in 2018 for a total consideration of £1.9m.  The lettings books are performing in line with expectations and have been successfully integrated into the Estate Agency network.

 

Financial Services

Total Financial Services income grew strongly again with 17% year-on-year growth in 2018.  Adjusting for the acquisitions of Personal Touch Financial Services and RSC New Homes in the first quarter of 2018, we delivered organic growth of 1% which was slightly higher than the market as measured by Total Mortgage Approvals. Financial Services income increased as a proportion of the Estate Agency businesses and represented 34% of total Estate Agency Division income in 2018 (2017: 30%) reflecting our continuing strategy to enhance LSL's position as a leading distributor of mortgage and non-investment insurance products.

 

In 2018, LSL further strengthened its position as a leading distributor of mortgage and non-investment insurance products and LSL delivered strong overall growth in the value of mortgage completions which were up 38% to £29.0bn in 2018 (2017: £21.0bn).  LSL's market share is estimated to be 8% of the total market value of mortgage completions13.

 

Marsh & Parsons

LSL estimates that Residential Sales volumes in the prime Central London market reduced by 15% to 20% in 2018 with Greater London house prices falling by 1.1%.  Given the overall challenging prime Central London market, Marsh & Parsons delivered a resilient top line performance with revenue down by 2% in 2018 to £33.5m (2017: £34.3m).

 

Marsh & Parsons Residential Sales income fell by 13% in 2018 which represents a solid performance in light of the overall prime Central London market conditions. We are pleased with the Lettings performance with income growth of 4%.  Lettings revenue now represents 63% of Marsh & Parson's total revenue (2017: 59%). 

 

Expenditure at Marsh & Parsons was broadly flat year-on-year reflecting the increased staff costs of the Chiswick office opened in April 2018 and the full year impact of the two office openings in 2017, being largely offset by lower costs in a number of expenditure categories. Full year operating profit fell to £2.3m (2017: £3.9m). Adjusted EBITDA was £3.4m (2017: £4.9m). Profit in 2017 included a gain on sale of property of £0.7m (2018: £nil).

 

We continued with our branch expansion strategy in 2018, opening one new branch during the year in the outer prime Central London location of Chiswick.  We are pleased with the performance of this new branch.  This takes our total number of Marsh & Parsons branches to 28 as at 31st December 2018.

 

Our ambition remains to expand the number of Marsh & Parsons branches to a total of 36 in the medium term, particularly outside prime Central London. Outer prime Central London has not been as negatively impacted by subdued market conditions as prime Central London and Marsh & Parsons is looking to expand its branch footprint in outer prime Central London locations.

 

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

Operating profit per owned branch in 2018 was £18,300 (2017: £32,000) due to the impact of the challenging residential sales market conditions on Residential Sales exchange income partly offset by growth in Financial Services income and Lettings income.

 

Surveying Division

The Surveying Division delivered strong revenue performance increasing by 9% to £69.8m (2017: £64.1m), which included a material contribution in the second half from the successful commencement of the Lloyds Bank plc surveying and valuation services relationship, up 25% year on year. The first half was down 6% year on year, impacted by market conditions and lender mix.

 

The Surveying Division delivered strong growth in operating profit of 8% to £20.4m (2017: £18.9m) and continued to deliver strong operating margins of 29.3% in 2018 (2017: 29.4%).

 

Total number of jobs performed during the year was 366k (2017: 309k) with income per job of £191 (2017: £207). The total number of qualified operational surveyors at 31st December 2018 was 503, an increase of 182 over 2017 due primarily to the transfer to e.surv of the existing Lloyds Bank plc surveyors as part of the contract awarded to e.surv during May 2018, to supply surveying and valuation services to Lloyds Bank plc. The initial performance of the contract for the supply of surveying and valuation services to Lloyds Bank plc is in line with expectations.

 

Our on-going graduate programme continues to be successful and assists in alleviating the impact of capacity constraints in the market. 

 

In 2018 the Group continued to make positive progress in addressing historic claims and there has been a net £2.2m exceptional gain and reduced PI Costs payments of £1.7m during 2018 compared to the previous year (2017: £3.3m).

 

Our customers

Our continued focus on providing the best service to our customers has been recognised in 2018 with numerous industry awards including:

 

·      Marsh & Parsons: UK Property Awards 2018: Best Estate Agency Marketing, London - Gold Award, Best Real Estate Agency London - Gold Award, Best Lettings Agency, London - Gold Award. International Property Awards 2018: Best Estate Agency Marketing, UK - Gold Award, Best Estate Agency, UK - Gold Award, Best International Real Estate Agency, UK - Gold Award. London Magazine Club Awards 2018: Advertising Campaign of the Year - Silver Award. Creative Pool Awards 2018: Bronze for Photography.

·      Davis Tate: Best Estate Agent Guide 2018: (*) Abingdon, Burghfield, Shinfield and Wantage - Rated Highly (Sales) and Rated Excellent (Lettings),  Henley and Pangbourne - Rated Highly (Sales) and Rated Exceptional (Lettings), Didcot and Reading - Rated Highly (Lettings),  Goring - Rated Excellent (Lettings),  Wallingford - Rated Excellent (Sales) and Rated Excellent (Lettings,  Woodley - Rated Exceptional (Sales) Sonning Common and Twyford - Rated Exceptional (Sales)  and Rated Exceptional (Lettings).    

·      Frost's: The Negotiator Awards: Lettings Agency of the Year (2-5 branches) - Gold Award. The ESTAS - Estate Agency of the Year Awards: Letting Agent (rated by tenants), Hertfordshire and Middlesex  - Silver Award, Letting Agent (rated by landlords), Hertfordshire and Middlesex  - Silver Award.  

·      Thomas Morris: Guild of Property Professionals 2018: Lettings (East Anglia) - Gold Award, Sales (East Anglia) - Gold Award.  Fine & Country Awards 2018:  Best Property Presentation and Best Overall Operator.  The ESTAS - Estate Agency of the Year Awards: Best Local Agency in Central England, Letting Agent (rated by tenants), East of England -  Silver Award.  The 2018 all Agents Awards: Best Estate Agent in East of England - Gold Award. Relocation Agent Network: Best Agent in East Anglia and Essex, Customer Relocation Award - Winner. The Negotiator Awards 2018: Lettings Agency of the Year (6-9 branches) - Gold Award, Estate Agency of the Year (6-9 branches) - Gold Award, Community Champion of the Year - Silver Award, East of England Agency of the Year - Silver Award. Agents Giving Awards 2018:  Best Team/Company Fundraiser. Best Estate Agent Guide 2018(*) :  East of England (Lettings) - Gold Award, East of England (Sales) - Gold Award, Outstanding Contribution To Estate Agency - Simon Bradbury.

·      e.surv Chartered Surveyors: Money Age Awards 2018: Mortgage Surveyor of the Year. Mortgage Introducer Awards 2018: Best Survey/Valuation Business

·      LSL Financial Services: Precise Mortgage Awards:  Best Distribution Group 2018. Lifetime Achievement Award - David Copland.

 

(*) As judged and announced in 2018

 

Post balance sheet events

On 5th February 2019 LSL announced an Estate Agency Strategy: ways of working programme update and work has now commenced on the reshaping of the Your Move and Reeds Rains branch networks. As disclosed on 5th February 2019, LSL expects to incur an exceptional P&L charge of approximately £14m in 2019 and £1m in 2020, with cash costs amounting to approximately £12m over the three years from 2019 to 2021 including approximately £9m cash costs in 2019. 

 

The changes to the structure of the Your Move and Reeds Rains estate agency branch networks announced on 5th February 2019 has reduced the total number of Your Move and Reeds Rains branches from 404 to 279 of which 144 are owned keystone branches and 135 are franchised.

 

Our people

The continued success of our business model is attributable to, and underpinned, by our strong brands and excellence in the delivery of high levels of customer services by our colleagues in our Estate Agency, Financial Services and Surveying businesses.  I would like to take this opportunity to thank all my colleagues across our businesses for their professionalism and dedication during 2018. I look forward to working with my colleagues to deliver a successful year in 2019.

 

Outlook

Market conditions in 2019 have been notably softer than the equivalent period in 2018, whilst LSL's financial performance so far in 2019 has been marginally behind the Board's expectations. Nevertheless, at this early stage in the year, the Board's current expectation is that the Group will deliver a full year Underlying Operating Profit in line with its prior expectations, as the business is expected to continue to benefit from the range of LSL's ongoing self-help measures.

 

We continue to remain cautious on the residential property market outlook for 2019 given the current uncertainty over the UK and global political and economic environment and the potential impact on UK consumer confidence.

 

The Board currently expects to see a material reduction in the volume of house purchase transactions compared to the prior year. Mortgage costs continue to be low by historic standards and mortgage availability remains good. The medium to longer term fundamentals of the UK housing market remain solid.

 

The final arrangements for the planned exit from the European Union are uncertain. In the eventuality that the outcome leads to a changed impact on consumer confidence and our business, we will update our Shareholders.

 

Although Brexit and the current political environment continues to create uncertainty, the Group has a robust balance sheet with relatively low levels of gearing and is very cash generative at an operational level.

 

LSL continues to execute on its stated strategy and we are confident that LSL, with its market leading brands, broad portfolio of residential property services and the benefits from the proactive self-help measures, remains well positioned to perform well given a range of potential market conditions, in order to maximise Shareholder value. The Board remain confident of the opportunities for further positive progress for the Group.

 

Ian Crabb

Group Chief Executive Officer

5th March 2019

 

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 to the Financial Statements).

Note 2 - Group Adjusted EBITDA is Group Underlying Operating Profit plus depreciation on property, plant and equipment (as defined in Note 4 to the Financial Statements)

Note 3 - Operational gearing is defined as Net Bank Debt divided by Group Adjusted EBITDA (Group Adjusted EBITDA is Group Underlying Operating Profit (Note 4 to the Financial Statements) plus depreciation on property plant and equipment).

Note 4 - Bank of England for "House Purchase Approvals" and "Total Mortgage Approvals" - January 2019.

Note 5 - LSL estimates and including Land Registry regional data - February 2019.

Note 6 - LSL Property Services/ACADATA HPI - February 2019.

Note 7 - LSL sources/data analysis.

Note 8 - UK Finance 'New mortgages by purpose of loan' - February 2019 (excluding product transfers).

Note 9 - UK Finance 'New mortgages sold by intermediaries' - February 2019.

Note 10 - UK Finance 'Possessions on mortgaged properties' - February 2019.

Note 11 - Which-Network - network performance figures - January 2019.

Note 12 - The profit per branch methodology has been consistently applied since the profit per branch ambition of £80k-£100k was first announced by LSL in March 2014. Profit per branch is calculated for Your Move, Reeds Rains and the LSLi owned branches and excludes Marsh & Parsons.

Note 13- LSL's market share is calculated using gross mortgage completions excluding product transfers

 

 
Business Review - Estate Agency Division

Financial

 

2018
£m

2017
£m

%
change

Residential Sales exchange income

 

69.9

76.6

-9

Lettings income

 

76.6

73.9

+4

Financial Services income

 

87.4

74.4

+17

Asset Management income

 

5.5

6.3

-13

Other income1

 

15.4

16.2

-5

 

 

 

 

 

Total income

 

254.8

247.4

+3

Operating expenditure

 

(234.2)

(220.5)

-6

Underlying Operating Profit2

 

20.6

26.9

-24

 

 

 

 

 

KPIs

 

2018

2017

%

change

Exchange units

 

22,747

25,176

-10

Underlying Operating Margin (%)

 

8.1

10.9

 

Fees per unit £

 

3,071

3,042

+1

 

 

 

 

 

Market data

 

 

 

 

House purchase approvals (000s)3

 

781

797

-2

Total mortgage approvals (000s)3

 

1,535

1,526

+1

UK housing transactions (000s)4

 

1,195

1,220

-2

Repossessions5

 

6,750

7,430

-9

Notes:

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 4 to the Financial Statements for the calculation.

3     Bank of England for "House Purchase Approvals" and "Total Mortgage Approvals" - January 2019.

4     HMRC Stats "Monthly property transactions completed in the UK with value of £40,000 or above" - January 2019.

5     UK Finance 'Possessions on mortgaged properties' - February 2019.

 

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 performance reflecting market conditions.

 

Residential Sales exchange income 

Residential Sales exchange income decreased by 9% to £69.9m (2017: £76.6m), average fees per unit increased by 1% to £3,071 (2017: £3,042). Residential Sales exchange volumes fell by 10%.

 

Lettings income 

As in 2017, Lettings income grew in each quarter of the year as LSL continued to focus on this recurring revenue stream. Lettings growth for the year was 4% (organic: 3%).

 

Financial Services income

Total Financial Services income is delivered through the Estate Agency Division's branches, Group First, RSC (acquired in March 2018), Personal Touch Financial Services (acquired in January 2018) and the intermediary networks trading as PRIMIS and grew strongly again with 17% year-on-year growth in 2018 (organic: 1%).

 

Other income

Other income fell by 5% year-on-year in large part due to a fall in conveyancing income due to lower Residential Sales transaction volumes.

 

Asset Management

Asset Management maintained its market position in a smaller repossessions market.

 

Estate Agency Division operating margin

The Estate Agency Division Underlying Operating Margin was 8.1% in 2018 (2017: 10.9%).

 

Branch numbers

Breakdown of LSL's Estate Agency branches as at 31st December 2018 and 31st December 2017:

 

Owned

 

Franchise

Total 2018

Total 2017

Your Move

194

58

252

260

Reeds Rains

114

38

152

154

Sub total

308

96

404

414

LSLi

57

2

59

64

Marsh & Parsons

28

-

28

27

Total

393

98

491

505

 

The total number of Estate Agency branches reduced by fourteen in 2018, following the closure of six owned branches and six franchise branches and the opening of one new branch in Marsh & Parsons and the merging of three into existing local branches. 

 

The changes to the structure of the Your Move and Reeds Rains estate agency branch networks announced on 5th February 2019 has at the 5th March 2019 reduced the total number of Your Move and Reeds Rains branches from 404 to 279 of which 144 are owned keystone branches and 135 are franchised.

 

Your Move and Reeds Rains branch summary:

 

 

 

Branch numbers

(31st Dec 18)

 

Branch numbers

 (5th Mar 19)

Total owned branches

308

144

Total Franchise branches

96

135

Total branches (combined)

404

279

 

 

 

 

 

Business Review -Surveying Division

Financial

2018
£m

2017
£m

%
change

Revenue

69.8

64.1

+9

Operating expenditure

(49.4)

(45.2)

-9

Underlying Operating Profit1

20.4

18.9

+8

 

 

 

 

KPIs

2018

2017

%

change

Underlying Operating Margin (%)

29.3

29.4

 

Jobs performed (000s)

366

309

+18

Revenue from private surveys (£m)

2.1

2.4

-13

Income per job (£)

191

207

-8

Historic PI Costs provision (balance sheet) at 31st December (£m)

12.4

15.9

-22

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

503

321

+57

 

 

 

 

Total mortgage approvals ('000s)3

1,535

1,526

+1

Notes:

1          Refer to Note 4 to the Financial Statements for the calculation.

2          Full Time Equivalent (FTE).

3          Bank of England for "House Purchase Approvals" and "Total Mortgage Approvals" - January 2019.

 

Surveying Division performance

Surveying Division revenue increased by 9% to £69.8m (2017: £64.1m), with total number of jobs performed during the year of 365,504 (2017: 309,499).

 

First half revenue was down by -6% year on year, impacted by market conditions and lender mix. In May 2018 the Surveying Division announced the successful negotiation of a material contract to supply surveying and valuation services to Lloyds Bank plc, with e.surv becoming the lead supplier for the Lloyds Bank plc group of companies with instructions commencing from September 2018. This led to an improved second half performance with revenue up 25% year-on-year.

 

The decrease in income per job to £191 (2017: £207), a reduction of 8% year-on-year, was offset by strong cost control leading to improved profit performance.  As a result, the Surveying Division delivered an increase in Underlying Operating Profit1 to £20.4m (2017: £18.9m), maintaining profit margin at 29.3% (2017: 29.4%).

 

The total number of qualified operational surveyors at 31st December 2018 was 5032, an increase of 182 against the 2017 position due to the transfer of Lloyds Bank plc surveyors into e.surv.

 

In 2019 the Surveying Division will continue to focus on its successful graduate training programme, which assists in alleviating the impact of capacity constraints in the market. 

 

At 31st December 2018 the total provision for PI Costs was £12.4m (2017: £15.9m). In 2018 Surveying Division continued to make positive progress in addressing these historic claims.  There was an exceptional gain of £2.2m during the year.

 

 

 

Financial Review

 

Income Statement

Group Revenue

Revenue increased by 4.2% to £324.6m in the year ended 31st December 2018 (2017: £311.5m).

Other operating income

Other income of £557k (2017: £555k) for the year ended 31st December 2018 was in line with previous year and comprised of rental income.

 

Gain on sale of property, plant and equipment

There was a small gain of £34k (2017: £668k) in the year ended 31st December 2018 resulting from the disposal of a commercial property.

 

Income from joint ventures and associates

Income from joint ventures and associates was £259k (2017: £1,583k) as challenging residential property market conditions impacted the financial performance of the joint ventures and LSL recognised its share of the early-stage costs of the newly acquired interest in Mortgage Gym.

 

Total operating expenses

Total operating expenses increased by 4.6% to £289.6m (2017: £276.8m). Increases in the Estate Agency Division were primarily a result of the acquisition of PTFS and RSC in the first quarter of 2018.  Surveying operating expenses were ahead of prior year in the second half of 2018 due primarily to the transfer to e.surv of the existing Lloyds Bank plc surveyors and back-office employees as part of the contract awarded to e.surv during May 2018, to supply surveying and valuation services to the Lloyds Bank plc group.

Group Underlying Operating Profit

Group Underlying Operating Profit1 decreased by 4.3% to £35.9m (2017: £37.5m) with an Underlying Operating Margin of 11.1% (2017: 12.0%). 

On a statutory basis, the Group operating profit decreased to £25.4m (2017: £42.1m) largely reflecting the impact of exceptional items. In 2018 there were net exceptional cost of £3.0m compared to the 2017 financial results which included an exceptional gain on the disposal of LSL's share in GPEA (£5.6m) and a net exceptional gain on historic PI claims (£3.7m).

Group Adjusted EBITDA

Group Adjusted EBITDA2 decreased by 2.7% to £41.6m (2016: £42.7m) with the decreased Group Underlying Operating Profit being slightly offset by an increased depreciation charge of £5.7m (2017: £5.2m).

 

Share-based payments

The share based payment charge of £349k (2017: £47k) in 2018 consists of a charge in the period of £1.3m offset by the lapse of the 2016 LTIP scheme as well as adjustments for leavers in the period.

 

Amortisation of intangible assets

The amortisation charge for 2018 was £5.3m (2017: £4.1m). The increase in 2018 is mainly a result of the amortisation of in-house software in both PTFS and e.surv.

 

Exceptional items

Total 2018 net exceptional cost of £3.0m including a £2.2m PI Costs exceptional provision release (H1: £1.2m, H2 £1.0m) as claims were settled below previous expectations and £5.2m of exceptional costs, the majority of which were in relation to initial one-off transition and integration costs for the contract to supply surveying and valuation services to Lloyds Bank plc (£3.2m) and also restructuring costs in the Estate Agency Division including planned restructuring costs incurred following the acquisition of PTFS (£2.0m).

 

The exceptional gain in 2017 consisted of a £5.6m gain on the sale of the Group's share in GPEA and a £3.7m gain relating to the historic PI Costs provision.

Net financial costs

Net financial costs amounted to £2.3m (2017: £2.0m). The finance costs related principally to interest and fees on the RCF. Additional costs relate to the unwinding of discounts on provisions and contingent consideration.

Taxation

The UK corporation tax rate reduced to 19% with effect from 1st April 2017.   A future UK corporation tax of 17% has been enacted and is effective from 1st April 2020, and this is the rate at which deferred tax has been provided (2017: 17%).  Corporation tax is recognised at the headline UK corporation tax rate of 19% (2017: 19.25%).

 

The effective rate of tax for the year was 22.5% (2017: 16.7%).  The effective tax rate for 2018 is higher than the headline UK tax rate for a number of reasons, including non-deductible costs in relation to contingent consideration and the depreciation of assets which do not qualify for capital allowances.

 

Deferred tax credited directly to other comprehensive income is £0.0m (2017: £0.6m).  Income tax credited directly to the share based payment reserve is £0.0m (2017: £0.0m).

 

In 2018 corporation tax payments of £6.9m (2017: £11.1m) were made which is greater than the current year corporation tax charge of £5.9m (2017: £7.5m).  This is a result of two quarterly payments being made in the year in respect of the year ended 31st December 2017 liability - which is higher than the corporation tax charge for the year ended 31st December 2018.

 

Basic Earnings Per Share

The Basic Earnings Per Share was 17.4 pence (2017: 32.6 pence).  The Adjusted Basic Earnings Per Share3 is 27.2 pence (2017: 28.3 pence), a decrease of 3.9% which is in line with the decrease in Group Underlying Operating Profit1.  

 

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 and share-based payments.  The Directors consider that the adjustments made to exclude the after tax effect of exceptional items, contingent acquisition consideration and amortisation provides a better and more consistent indicator of the Group's underlying performance. 

 

Balance sheet

Goodwill

In 2018 goodwill has increased by £7.8m to £159.7m (2017: £151.9m).  The increase is due to the acquisitions of PTFS (£0.3m), RSC (£7.1m) and the lettings book acquisitions (£0.4m). 

 

Other intangible assets and Property, plant and equipment

Total capital expenditure in the year amounted to £6.0m (2017: £5.6m) which includes expenditure of £1.1m (2017: £0.6m) for new software which has been treated as an intangible asset.

Financial Assets

LSL holds financial assets of £11.6m (2017: £25.3m); the decrease in the year is a result of the revaluation of LSL's shareholding in Yopa and the exercise and subsequent sale of the ZPG warrants in October 2018.

 

LSL has a 14.7% minority shareholding in Yopa. LSL's previous carrying value of £20m for Yopa has been written down by £12.2m to £7.8m as at 31st December 2018 to reflect the Board's accounting assessment of fair value. LSL has elected to recognise any changes to fair value through the Statement of Other Comprehensive Income (i.e. reserves) and not through the P&L account in accordance with IFRS 9.

 

Joint ventures, investments and associates

The Group has two joint ventures and one associate: a 33.3% (2017: 33.3%) interest in TM Group, whose principal activity is to provide property searches, a 50% (2017: 50%) interest in LMS whose principal activity is to provide conveyancing panel management services. LMS and TM Group are held in the balance sheet at £8.2m and £1.5m respectively (2017: £8.3m and £1.2m)

 

During the second half of 2018, LSL acquired a 34.69% interest in Mortgage Gym, a digital mortgage marketplace, for cash consideration of £4.1m.  Mortgage Gym is held in the balance sheet at a value of £3.6m as at 31st December 2018 (2017: nil) reflecting the original investment of £4.1m and the post-tax loss of £0.5m in the period.

 

Financial Liabilities

 

Net Bank Debt

As at 31st December 2018 Net Bank Debt was £32.1m (2017: £30.0m) and Shareholders' funds amounted to £142.6m (2017: £148.6m) with a balance sheet gearing of 22.5% (2017: 20.2%). The increase in Net Bank Debt4 incorporated acquisitions made in the year (PTFS, RSC and six Lettings Books) which totalled £7.7m along with the investment in Mortgage Gym of £4.1m. The 2018 gearing level was 0.8 times5 Group Adjusted EBITDA (2017: 0.70 times).

 

Bank facilities

In January 2018, LSL extended its bank facility until May 2022.  The facility includes a £100m RCF (2017: £100m). During the period under review, the Group complied with all of the financial covenants contained within the facility.

 

Deferred and contingent consideration

Within financial liabilities LSL has £2.1m of deferred consideration (2017: £0.1m) and £15.0m (2017: £9.1m) of contingent consideration.  The deferred consideration relates primarily to the acquisition of PTFS and this has been settled since the balance sheet date. The contingent consideration relates primarily to Group First (£9.5m) and RSC (£4.8m).

 

Provisions for liabilities:

Professional indemnity (PI) claim provision

At 31st December 2018, the total provision for historic PI Costs was £12.4m (2017: £15.9m).  In 2018 the Group continued to make positive progress in addressing historic claims and there has been a net £2.2m exceptional gain.

 

Onerous lease

As at 31st December 2018 LSL held onerous lease provisions of £130k (2017: £210k).

 

Net assets

The Group's net assets as at 31st December 2018 were £142.6m (2017: £148.6m). 

Statement of cash-flows

The Group generated strong cash from operations of £36.9m (2017: £41.5m) converting 103% of Group Underlying Operating Profit to cash-flow from operations (pre PI and exceptionals) (2017: 117%).  The decrease in conversion from 2017 is primarily related to the increase in trade receivables of £3.8m (2017: decrease of £1.7m) resulting from significant growth in the surveying business in quarter four. Provisions also decreased by £3.6m (2017: decrease of £5.4m) due to the positive progress in addressing historic PI claims.

 

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 this Report.

Post balance sheet events

On 5th February 2019 LSL announced an Estate Agency Strategy: ways of working programme update and work has now commenced on the reshaping of the Your Move and Reeds Rains branch networks. As disclosed on 5th February 2019, LSL expects to incur an exceptional P&L charge of approximately £14m in 2019 and £1m in 2020, with cash costs amounting to approximately £12m over the three years from 2019 to 2021 including approximately £9m cash costs in 2019. 

 

 

International Financial Reporting Standards (IFRS)

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

 

Notes:

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

2.       Group Adjusted EBITDA is Group Underlying Operating Profit plus depreciation on property, plant and equipment (as defined in Note 4 to the Financial Statements)

3.       Refer to Note 6 to the Financial Statements

4.       Refer to Note 10 to the Financial Statements for the calculation.

5.       Operational gearing is defined as Net bank Debt divided by Group Adjusted EBITDA2

 

 

Principal Risks and Uncertainties

LSL has an overall framework for the 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 and is supported by the Audit & Risk Committee) on a regular basis identifies, evaluates and manages the principal risks and uncertainties faced by the Group; as well as areas which could adversely affect its business, operating results and financial condition.

 

Management of risk appetite

During 2018, in line with the FRC's Guidance on 'Risk Management, Internal Control and Related Financial and Business Reporting', the Board continued to manage the Group's risk appetite through the risk appetite framework to ensure continued compliance with the 2016 Code and the related FRC guidance (published in 2014).  The Board through its established processes expresses and reviews the types and level of risk which it is willing to take or accept to achieve LSL's strategy and business plans; and to support consistent, risk-informed decision making across the Group.

The risk appetite framework was developed following the approval by the Directors of a risk framework policy which included defining individual risk appetite statements for LSL's principal risks and uncertainties, 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 risk measures and the identification of actions needed to bring any specific outlying areas of risk within target levels.

During 2018, the Group has continued to take steps to enhance the existing risk framework within each of the Group's subsidiary businesses, including the maintenance of risk appetite measures by each subsidiary. Each year, each subsidiary business quantifies their highest ranked risk areas and routinely provide the Audit & Risk Committee with graphical management information to facilitate the tracking of risk status versus tolerance by the subsidiary boards and divisional governance committees. The framework continues to improve the visibility of action plans to address any core risk areas considered outside tolerance.  

Risk management activities in 2018 included a 'deeper-dive' on information security risk and a business-wide questionnaire was issued to enable the Audit & Risk Committee to compare how well risk management practices are embedded at each subsidiary business, with a view to identifying any areas for improvement. These developments have in turn served to provide a more robust means for evaluating the capture and measurement of risk factors within the Group's established risk appetite framework. 

The framework covers 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 2019, LSL will continue to review the framework to ensure it remains in line with emerging best practice and continues to foster the maturity of risk appetite routines at both LSL and its subsidiary businesses.  

The Board has established clear risk parameters, whilst at the same time fostering an environment within which innovation and entrepreneurial activities can thrive.  Where there is any proposal to shift the Group significantly closer to or outside agreed risk parameters, this is discussed and is 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 Audit & Risk Committee and the Board in 2019.  Further, during 2018 the Audit & Risk Committee and Board commenced a review of the Group's risk management framework to ensure it reflects the requirements of the 2018 Code and the FRC's Guidance on Board Effectiveness (also published in 2018) and this work will continue during 2019. 

 

Developing the financial viability statement

Assessment of prospects

The Group's business model and strategy are central to an understanding of its prospects, and details are included in Strategy and Business Model sections of the Annual Report and Accounts 2018.

Through organic growth, selective acquisitions and a delivery of high quality services to customers, the Group's key objective is to build market leading positions and ultimately deliver long-term Shareholder value.

Prospects of the Group are assessed by the Board throughout the year at its meetings, including a particular focus during the strategic planning process. This process includes an annual review of the on-going plan, led by the Group Chief Executive Officer and Group Chief Financial Officer in addition to the relevant business functions involved.

The Directors participate fully in the annual planning process by means of a Board meeting and part of the Board's role is to consider whether the plan continues to take appropriate account of the changing external environment including macroeconomic, political, regulatory and technical changes.

This process allows the Board to produce strategic objectives and detailed financial forecasts over a three year period. The latest updates to the on-going plan were finalised in December 2018. This considered the Group's current position and its prospect of operating over the three year period ending 31st December 2021, and reaffirmed the Group's stated strategy. Furthermore, the Group's future prospects have been further strengthened with the extension of the RCF which was renewed in January 2018 for a period up to May 2022.

Brexit

Since the 2016 EU referendum result, LSL has been monitoring Brexit developments to assess the impact on LSL. 'Brexit' is a subset entry within the Group's risk appetite framework and in addition during 2018 LSL has conducted a specific impact assessment in relation to Brexit which was completed in line with FRC guidance.  

The impact assessment considered whether LSL will be impacted directly by the outcome of the negotiations between the UK and the EU, for example due to regulatory changes or due to changes that may impact our employees or whether the impact would be indirect, i.e. resulting from the broader economic uncertainties.  The Group concluded that whilst LSL is not directly impacted by the Brexit negotiations due mainly to its UK based business model it is indirectly impacted by the impact that the continued economic uncertainty has on the housing market. 

This approach has ensured that Brexit developments are being formally monitored, and the risk status regularly reassessed with reactive action plans identified to respond to the effects of on-going uncertainties and the outcomes of the UK and EU negotiations and any transitional period arrangements. 

These practices will continue throughout 2019 as the UK progresses to the Brexit date of 29th March 2019, along with wider consideration of the likely impacts of other major economic and political events, and their influence on viability assessment modelling.

The Group's principal risks and uncertainties are set out below. The Board reviewed LSL's principal risks and uncertainties when assessing the Group's prospects, and noted that none of these individual risks would, in isolation, compromise the Group's prospects. See the Directors' Report in the Annual Report and Accounts 2018 for details of how Brexit was taken into account in the completing the going concern assessment.

 

Assessment of viability

Although the strategic plan reflects the Directors' best estimate of the prospects of the Group in accordance with provision C.2.2 of the 2016 Code (which is now contained in the 2018 Guidance on Board Effectiveness), the Directors have assessed the viability of the Company over a longer period than the 12 months required by the 'going concern' provision.

 

For the purposes of assessing the viability of the Group, it was determined that a three year period ending on 31st December 2021 should be used, as this corresponds with the Board's strategic planning cycle. This assessment has been made with reference to the Group's current position and prospects, the Board's risk appetite and the Group's principal risks and uncertainties.

 

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

 

The following scenarios were modelled:

 

·      severe downturn in the UK housing market close to the level seen in 2008 during the last recession caused by Brexit and/or political uncertainties; and

·      a data breach causing a regulatory fine and reputational damage, with the potential loss of customers.

 

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 income and counter-cyclical businesses, notably Lettings and Asset Management, and the extent to which some 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 wide geography which allows some protection from the impact of stress scenarios.

 

The results from the stress testing indicated that the Group would be able to withstand the financial impact of each scenario and therefore continue to operate and meet its liabilities, as they fall due, over the three year period ending 31st December 2021.

 

Furthermore the Board also considered it appropriate to prepare the Financial Statements on the going concern basis, as explained in the Basis of Accounting paragraph in the Principal Accounting Policies section contained within the Annual Report and Accounts 2018.

 

The Audit & Risk Committee oversaw the process by which the Directors reviewed and discussed the assessment undertaken by the Management Team in proposing the viability statement.

 

The Directors' financial viability statement is contained in the Report of the Directors section of the Annual Report and Accounts 2018.

 

Risk management and internal controls framework

LSL's risk management and internal controls framework for 2018 included:

•    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, the Head of Risk and Internal Audit and the Group Financial Controller;

•    a network of risk owners in each of LSL's businesses with specific responsibilities relating to risk management and internal controls, including maintenance of detailed risk analyses;

•    the documentation and monitoring of risks are recorded and managed through risk appetite measures which undergo regular reviews and scrutiny by subsidiary boards, divisional governance committees and the Head of Risk and Internal Audit;

•    the Board routinely identifies, reviews and evaluates the principal risks and uncertainties which may impact the Group as part of the planning and reporting cycle to ensure that such risks are identified, monitored and mitigated in addition to carrying out specific risk assessments as part of its decision-making processes;

•    the development and application of LSL's risk appetite statement and associated framework (for further details on steps taken during the year, see the Audit & Risk Committee Report included in the Annual Report and Accounts 2018); and

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

 

The risk framework includes the following:

•    a risk framework policy;

•    a boardroom culture which promotes risk assessment and management in decision-making;

•    determination of risk appetite, with management and mitigation of risks in line with risk appetite tolerances;

•    assessment of prospects and viability;

•    review of the effectiveness of the risk management and internal control systems; and

•    going concern confirmation (for LSL's going concern disclosure see the Report of the Directors included in the Annual Report and Accounts 2018).

 

During 2019 the areas of focus will be to develop underlying subsidiary risk appetite metrics policies.

 

During 2018, the Directors carried out a robust assessment of the principal risks and uncertainties facing the Group, including those that threaten the Group's 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 judgement of the Board and has been supported by the Management Team.

The Directors also carried out a risk appetite assessment exercise which involved the evaluation of continually evolving aspects of risk management. During 2018, this included further strategic responses to the threat of external technology-based business models, integration planning for newly acquired business activities, articulation of risk appetite tolerances with action plans to counter key aspects of information security risk, implementing responses to a fast changing regulatory environment (including new GDPR and tenant welfare requirements) and consideration of major scenarios of further external political and economic change on the UK housing market including the impact of Brexit.

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 uncertainties 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 2016 and 2018 Codes, this Report includes descriptions of principal risks and uncertainties 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.

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

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 Preliminary Results Announcement or the Annual Report and Accounts 2018.  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.

Further information relating to how LSL managed these risks and uncertainties during 2018 is set out in the Audit & Risk Committee Report (Internal Controls) of the Annual Report and Accounts 2018.

 

 

Principal risks 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 housing market is also impacted by changes in national and global political and economic environments (e.g. Brexit).

 

The impact of this risk can be direct (such as changes in Government policy or legislation arising from a change in Government) or indirect (such as changes in consumer behaviour/sentiment arising from changes in Government policy or legislation).

 

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

•  Market share, product mix and segmentation initiatives.

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

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

•  Investment in teams to deliver strategic projects.

•  Balanced UK-wide geographical spread.

•  Monitoring of wider macroeconomic and political developments (including domestic and international developments).

•  Enhanced impact analysis relating to Brexit completed and considered as part of going concern analysis in addition to budgeting and planning processes.

2

New UK housing market entrants

 

 

Traditional business models and pricing structures for residential property services are exposed 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, including exploring options to capitalise on digital opportunities.

•  Infrastructure investment, including investment in innovation and technology, with upgrading, consolidating and replacing core or legacy operating systems to increase functionality, improve customer experience, reduce costs and deliver efficiencies.

•  Service delivery enhancements, product/services differentiation and experimentation.

•  Engagement of specialist external consultative support as necessary.

•  Monitoring of acquisition, investment, associate and joint venture opportunities.

•  Marketing initiatives.

•  Operation of staff incentive schemes to mitigate staff attrition.

3

Investment, acquisitions and growth initiatives

 

Realising appropriate targets for investment, acquisition and major project initiatives, including delivery of appraisals, due diligence and integration/implementation requirements, in line with LSL's strategy to complete selective acquisitions.

•  Monitoring of opportunities which support delivery of Group strategy.

•  Engagement of strategy consultants to support identification and evaluation of strategic investment and acquisition opportunities.

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

•  Establishment of structured authority levels.

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

•  Flexible resource pool to support and deliver investments and acquisitions.

•  Defined due diligence processes completed ahead of all investments and acquisitions.

•  Due diligence is undertaken by in house teams with support from subject specialists as required (e.g. the use of IT experts to carry out technology due diligence or use of strategy consultants to advise on business models).

•  Completion of risk assessments including RCF leverage stress testing ahead of all significant investments and acquisitions.

•  Flexible resource pool to deliver integration/implementation activities following completion of acquisitions.

•  Engagement of specialist external consultative support as necessary.

•  Established integration/implementation planning methodology.

•  Promotion of Group-wide relationships in business arrangements.

•  Post-acquisition and post-integration/implementation review programmes.

•  Risk and Internal Audit engagements.

Sales/distribution:

4

Professional services

 

Exposure to major PI claims arising from any lapses in professional services, including surveying and valuation practices, financial services advice, and estate agency services.

 

 

Surveying Division

Robust framework and monitoring routines to maintain valuation accuracy.

Dedicated surveying risk team.

Timely data capture of all claims and associated trends with regular scenario modelling undertaken.

Utilisation of technology to monitor valuation trends, trigger alerts and 'real time' checks.

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

Integration of new business assets into the established valuation controls framework.

Development of lender on-boarding policy with Board oversight to ensure instructions are within risk-appetite.

Estate Agency Division (including Financial Services)

· Defined responsibilities for claims management and operation of PI insurance together with management of underlying risk areas.

Group-wide

Risk and Internal Audit engagements.

Experienced claims handling personnel supported by legal and compliance experts.

Culture promoting effective sales conduct and open lines of communication with clients with a focus on customer outcomes.

 

5

Client contracts

 

The performance of the Estate Agency and Surveying businesses is dependent on entering into appropriate and relevant agreements and retaining contracts with key clients (e.g. lenders, portfolio landlords and house builders).

 

•  Customer outcomes focused forums and initiatives.

•  Designated senior members of staff with responsibility for relationship management at subsidiary and Group levels.

•  On-going investment in resources, innovation, technology and service standards to ensure LSL has the capacity to meet service level demands.

•  Targeted marketing and training events for corporate clients.

•  Monitoring of client dependency, service delivery, risk and compliance with contractual requirements.

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

In-house legal services and compliance teams, with specialist external legal and compliance support engagement when necessary, together with dedicated claims/customer complaints management teams within business areas.

•  Risk and Internal Audit reviews.

Operations:

6

Business Infrastructure (including IT)

 

The Group has varied operations which require robust internal controls, infrastructures and business continuity arrangements (including in relation to IT).

 

The controls environment needs to remain adaptable to support growth initiatives, harness technological advancements and counter business continuity threats, including in relation to IT systems, malicious and cyber-related attacks

 

LSL's strategy recognises the importance of investing in the Group's infrastructure (including IT) to maintain both competitive advantages and deliver controls and system security - all within the context of changing business models within the residential property services markets.

 

•   Group-wide internal controls processes and policies which are subject to regular review to ensure they are in line with best practice.

•   Group IT governance, policies, base standards and initiatives supported by the Group IT Director and with oversight from the Information Security and Governance Committee.

•   Focus on investment and development of innovation and systems development within the Group's strategies.

•   Combination of dedicated in-house IT teams and engagement with external IT specialist suppliers to deliver efficiencies and market leading service.

•   Maintenance of business infrastructure to ensure effective service delivery with appropriate controls.

•   On-going infrastructure investment and development programmes.

•   Identifying and securing innovation and technology opportunities through the Group's investment and acquisition strategies.

•   Implementing business continuity and disaster recovery solutions (encompassing IT premises, transportation and employees).

•   Monitoring of compliance with relevant contractual and regulatory requirements.

•   Inter-Group IT governance forums.

•   External consultative support as necessary.

•   Risk and Internal Audit engagements.

•   Oversight by the Information Security and Governance Committee, the Audit & Risk Committee and the LSL Board.

7

Information security (including data protection)

 

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

•     LSL Information Security and Governance Committee and IT Teams with policy implementation and oversight responsibilities.

•     Defined Group-wide base policy standards.

•     Dedicated information security and data protection personnel (including DPOs).

•     Group cyber insurance cover in place and reviewed annually to ensure the cover remains appropriate.

Data protection

•     Group data protection policies and training in place supported by in-house legal and compliance teams.

•     Tracking of data assets/data sharing and any breach incidents, in line with authority levels.

•     Implementation of regulatory changes - (e.g. General Data Protection Regulation) via defined project teams with support from in-house legal and compliance teams.

Systems security

•     Penetration testing and intrusion scanning programmes.

•     Benchmarking against and accreditation by best practice standards - e.g. ISO27001 accreditation for e.surv.

•     Second and third-line risk-based thematic reviews.

8

Regulatory and compliance

 

Compliance with legal and regulatory requirements, including relationship with regulators.

 

Regulations govern roles as an employer and as providers of services.

 

Any compliance breaches could result in sanctions and reputational damage (e.g. prosecutions or fines). This includes compliance with existing regulations and implementing new regulations (e.g. Senior Managers Certification Regime).

 

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

 

The market and business operations are also impacted by regulatory reforms (e.g. Government reviews relating to the housing market, including reforms relating to the tenants fees and conveyancing referral fees) which may have an impact on Group revenue and expenditures.

 

Regulatory costs, fees and charges continue to grow due to the growth of LSL's Financial Services businesses and the funding requirements of the Financial Services Compensation Scheme (FSCS).

 

•    Top-down management culture focused on fairness, transparency and delivery of good 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 (i.e. whistleblowing structures, anti-fraud and anti-bribery policies) and employee welfare.

•    Subsidiary businesses have in place health and safety arrangements with an associated Group reporting framework which ensures that the welfare of employees and visitors to Group premises.

•    Group-wide forums with regulatory focus and oversight (e.g. Financial Services Management Committee, Financial Services Risk Committee and Information Security and Governance Committee).

•    Dedicated second line compliance teams in higher risk/regulated functions

•    Investment in recruitment of expertise within the compliance teams to ensure the Group is able to maintain appropriate procedures and risk measures for regulatory compliance.

•    Harmonisation of best practice compliance standards following acquisitions.

•    Evolution and development of IT systems to strengthen oversight routines.

•    Responsive complaints tracking of any emerging themes.

•    In-house legal and compliance teams, with access to specialist external legal and compliance support when necessary.

•      Group Risk and Internal Audit engagements.

•     Membership of industry trade bodies and participation in Government and regulatory consultations.

•     Responsive business model changes to mitigate and address the impact of any regulatory changes.

 

People:

9

Employees

 

Securing and retaining key strategic populations and controlling attrition in key business critical areas (e.g. through e.surv's graduate training program), as well as ensuring the effective management of personnel standards and policy frameworks across varied Group businesses.

 

 

Oversight by LSL Remuneration and Nominations Committees supported by the Company Secretary and Group HR Director.

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

Regular benchmarking and appraisals of Executive Directors and Senior Management.

Succession planning reviews and targeted development programmes for high achievers.

Dedicated in-house talent acquisition teams within Group HR.

Targeted retention and recruitment initiatives.

Employee surveys and Group HR initiatives to monitor culture, attrition, morale, and any areas of pressure.

Group-wide HR IT systems.

Monitoring of statutory reporting requirements and developments (e.g. gender and ethnic pay reporting).

Employee policies and monitoring frameworks in place (e.g. health and safety and lone working arrangements to ensure employee welfare).

Monitoring subsidiary culture, values and ethics and the development of LSL's culture, values and ethics.

Implementation of workforce engagement measures to ensure employee considerations are including in decision-making.

Adoption of reporting arrangements to demonstrate consideration of key stakeholders, including employees in decision-making.

Clear Group policies and whistleblowing procedures to enable employees to confidentially raise or report concerns.

 

         

 

 

 

Group Income Statement

for the year ended 31st December 2018

 

Note 

2018

2017

 

 

£'000

£'000

 

 

 

 

Group Revenue

 

324,640

311,540

 

 

 

 

 

 

 

 

Employee and subcontractor costs

 

(203,095)

(186,307)

Establishment costs

 

(20,614)

(19,057)

Depreciation on property, plant and equipment

 

(5,674)

(5,216)

Other operating costs

 

(60,211)

(66,269)

Total operating expenses

 

(289,594)

(276,849)

 

 

 

 

Other operating income

 

557

555

Gain on sale of property, plant and equipment

 

34

668

Income from joint ventures and associates

 

259

1,583

 

 

 

 

 

 

 

 

Group Underlying Operating Profit

4

35,896

37,497

 

 

 

 

Share-based payments

 

(349)

(47)

Amortisation of intangible assets

 

(5,301)

(4,083)

Exceptional gains

5

2,188

9,337

Exceptional costs

5

(5,234)

-

Contingent consideration

 

(1,783)

(654)

Group operating profit

 

25,417

42,050

 

 

 

 

Finance costs

 

(2,333)

(1,952)

Net financial costs

 

(2,333)

(1,952)

 

 

 

 

Profit before tax

 

23,084

40,098

 

 

 

 

Taxation charge

8

(5,201)

(6,686)

 

 

 

 

Profit for the year

 

17,883

33,412

Attributable to

 

 

 

- Owners of the parent

17,883

33,414

- Non-controlling interest

-

(2)

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share expressed in pence per share:

 

 

 

Basic

6

17.4

32.6

Diluted

6

17.3

32.4

 

Group Statement of Comprehensive Income

for the year ended 31st December 2018

 

 

 

2018

2017

 

Note

£'000

£'000

 

 

 

 

Profit for the year

 

17,883

33,412

 

 

 

 

Items not to be reclassified to profit and loss in subsequent periods:

 

 

 

Revaluation of financial assets not recycled through income statement

 

(12,200)

-

 

 

(12,200)

-

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

 

 

 

Reclassification adjustments for disposal of financial assets

 

-

(5,593)

Income tax effect

8

-

951

Revaluation of financial assets recycled through income statement

 

-

1,885

Income tax effect

8

-

(320)

 

 

-

(3,077)

Net other comprehensive (loss)

 

(12,200)

(3,077)

 

 

 

 

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

 

(12,200)

(3,077)

 

 

 

 

Total comprehensive income for the year, net of tax

 

5,683

30,335

 

 

 

 

Attributable to

 

 

 

    - Owners of the parent

5,683

30,337

    - Non-controlling interest

-

(2)

 

 

 

 

Group balance sheet                                                              Company No. 05114014

as at 31st December 2018

 

 

2018

2017

 

 

£'000

£'000

 

 

 

 

Non-current assets

 

 

 

Goodwill

 

159,723

151,901

Other intangible assets

 

31,960

29,729

Property, plant and equipment

 

16,866

17,763

Financial assets

 

11,566

25,282

Investments in joint ventures and associates

 

13,230

9,556

Contract assets

 

959

-

Total non-current assets

 

234,304

234,231

 

 

 

 

Current assets

 

 

 

Trade and other receivables

 

38,650

31,357

Contract assets

 

262

-

Cash and cash equivalents

 

2,405

-

 

 

 

 

Total current assets

 

41,317

31,357

 

 

 

 

Total assets

 

275,621

265,588

 

 

 

 

Current liabilities

 

 

 

Financial liabilities

 

(10,455)

(6,454)

Trade and other payables

 

(63,980)

(53,418)

Current tax liabilities

 

(2,688)

(3,662)

Provisions for liabilities

 

(6,616)

(2,850)

Total current liabilities

 

(83,739)

(66,384)

 

 

 

 

Non-current liabilities

 

 

 

Financial liabilities

 

(41,156)

(34,654)

Deferred tax liability

 

(2,189)

(2,698)

Provisions for liabilities

 

(5,944)

(13,276)

Total non-current liabilities

 

(49,289)

(50,628)

 

 

 

 

Total Liabilities

 

(133,028)

(117,012)

 

 

 

 

Net assets

 

142,593

148,576

 

 

 

 

Equity

 

 

 

Share capital

 

208

208

Share premium account

 

5,629

5,629

Share-based payment reserve

 

4,129

3,802

Shares held by EBT

 

(5,261)

(5,317)

Fair value reserve

 

(11,727)

494

Retained earnings

 

149,615

143,578

Equity attributable to owners of parent

 

142,593

148,394

Non-controlling interests

 

-

182

 

 

 

 

Total equity

 

142,593

148,576

 

 

The Financial Statements were approved by and signed on behalf of the Board by:

 

 

Ian Crabb                                                                                                 Adam Castleton

Group Chief Executive Officer                                                            Group Chief Financial Officer 

5th March 2019                                                                                       5th March 2019

                                                                                                                                               

 

Group Statement of Cash-Flows

for the year ended 31st December 2018

 

Note

2018

£'000

2017

£'000

Profit before tax

 

23,084

40,098

Adjustments for:

 

 

 

Exceptional operating items and contingent consideration

 

4,829

(7,640)

Depreciation of tangible assets

 

5,674

5,216

Amortisation of intangible assets

 

5,301

4,083

Share-based payments

 

349

47

(Profit) on disposal of fixed assets

 

(34)

(668)

(Profit) from joint ventures

 

(259)

(1,583)

Finance costs

 

2,333

1,952

Dividend income/rebates received via non-cash consideration

 

-

(1,503)

Proceeds received via cash consideration

 

1,529

-

Operating cash-flows before movements in working capital

 

42,806

40,002

 

 

 

 

Movements in working capital

 

 

 

(Increase)/decrease in trade and other receivables

 

(3,815)

1,695

(Decrease)/increase in trade and other payables

 

(111)

5,261

Decrease in provisions

 

(3,608)

(5,440)

 

 

(7,534)

1,516

 

 

 

 

Cash generated from operations

 

35,272

41,518

Interest paid

 

(1,359)

(1,268)

Income taxes paid

 

(6,875)

(11,113)

 Exceptional costs paid

 

(3,310)

-

Net cash generated from operating activities

 

23,728

29,137

 

 

 

 

Cash-flows used in investing activities

 

 

 

Cash acquired on purchase of subsidiary undertaking

 

6,944

-

Acquisitions of subsidiaries and other businesses

 

(7,732)

-

Payment of contingent consideration

 

(1,392)

(2,175)

Investment in joint ventures and associates

 

(4,100)

 

Investment in financial assets

 

(13)

(20,315)

Cash received on sale of financial assets

 

-

3,024

Purchase of property, plant and equipment and intangible assets

 

(5,877)

(5,489)

Proceeds from sale of property, plant and equipment

 

156

1,457

Net cash (expended) on investing activities

 

(12,014)

(23,498)

 

 

 

 

Cash-flows used in financing activities

 

 

 

Drawdown of loans

 

4,521

9,723

Refinance costs

 

(250)

-

Repayment of loan notes

 

(2,000)

-

Payment of deferred consideration

 

-

(4,790)

Proceeds from exercise of share options

 

20

-

Dividends paid

 

(11,600)

(10,572)

Net cash expended in financing activities

 

(9,309)

(5,639)

Net increase  in cash and cash  equivalents

 

2,405

-

Cash and cash equivalents at the end of the year

 

2,405

-

               

Group Statement of Changes in Equity                                                                                                                                                                                         

Year Ended 31st December 2018

 

 

 

Share capital

 

Share premium account

Share- based payment reserve

 

 

Shares held by EBT1

 

 

Fair value Reserve

 

 

Retained earnings

 

 

Total equity

 

Non-controlling interest

 

 

 

Total

 

£'000

£'000

£'000

£'000

£'000

£'000

£'000

£'000

£'000

At 1st January 2018

208

5,629

3,802

(5,317)

494

143,578

148,394

182

148,576

Adjustment on initial application of IFRS 15

-

-

-

-

-

(434)

(434)

-

(434)

Adjustment on initial application of IFRS 9

-

-

-

-

(21)

21

-

-

-

Revised opening balance

208

5,629

3,802

(5,317)

473

143,165

147,960

182

148,142

Other comprehensive income for the period

 

 

 

 

 

 

 

 

 

Total comprehensive (loss) / income for the period

-

-

-

-

(12,200)

17,883

5,683

-

5,683

Exercise of options

-

-

(22)

56

-

(15)

19

-

19

Share-based payments

-

-

349

-

-

-

349

-

349

Acquisition of minority interest

-

-

-

-

-

182

182

(182)

-

Dividend payment

-

-

-

-

-

(11,600)

(11,600)

-

(11,600)

At 31st December 2018

208

5,629

4,129

(5,261)

(11,727)

149,615

142,593

-

142,593

 

 

 

 

 

 

During the year ended 31st December 2018, the Trust acquired nil LSL Shares.  During the period 15,966 share options were exercised relating to LSL's various share option schemes resulting in the Shares being sold by the Trust.  LSL received £20,000 on exercise of these options

 

 

Group Statement of Changes in Equity

Year Ended 31st December 2017

 

                                                                                                         

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 2017

208

5,629

4,303

(5,368)

3,571

120,239

128,582

184

128,766

Disposal of financial assets (net of tax)

-

-

-

-

(4,642)

-

(4,642)

-

(4,642)

Revaluation of financial assets (net of tax)

-

-

-

-

1,565

-

1,565

-

1,565

Other comprehensive income for the year

-

-

-

-

(3,077)

-

(3,077)

-

(3,077)

Profit for the year

-

-

-

-

-

33,414

33,414

(2)

33,412

Total comprehensive income for the year

-

-

-

-

(3,077)

33,414

30,337

(2)

30,335

Exercise of options

-

-

(46)

51

-

(5)

-

-

-

Share-based payments

-

-

(455)

-

-

502

47

-

47

Dividend payment

-

-

-

-

-

(10,572)

(10,572)

-

(10,572)

At 31stDecember 2017

208

5,629

3,802

(5,317)

494

143,578

148,394

182

148,576

 

During the year ended 31st December 2017, the Trust acquired nil LSL Shares.  During the period 14,661 share options were exercised relating to LSL's various share option schemes resulting in the Shares being sold by the Trust.  LSL received nil on exercise of these options.

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 2018 but has been extracted from the Financial Statements included in LSL's Annual Report and Accounts 2018 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 2019 AGM. The auditors have reported on these financial statements. Their report was unqualified and did not contain a statement under section 498 (2), (3) or (4) 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 of  financial information

The Group Financial Statements have been prepared on a going concern basis and on a historical cost basis, except for certain debt and equity financial assets that have been measured at fair value.

The accounting policies which follow set out those significant policies which apply in preparing the Financial Statements for the year ended 31st December 2018. The Group's Financial Statements are presented in pound sterling and all values are rounded to the nearest thousand pounds (£'000) except when otherwise indicated.

3.      Segment analysis of revenue and operating profit

For management purposes, the Group was in 2018 organised into business units based on their products and services and had two reportable segments as follows:

Ø 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.  As part of this process, the Estate Agency Division also provides marketing and arranges 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, PRIMIS, Embrace Financial Services, First2Protect, Mortgages First, Insurance First and Linear Financial Services, Personal Touch Financial Services and RSC New Homes.  The Financial Services revenue included within the Estate Agency Division includes three mortgage and insurance distribution networks providing products and services for sale via financial intermediaries.  A significant proportion of the results of the Financial Services were inextricably linked to the Estate Agency business.  They have therefore been aggregated with those of Estate Agency and Related Service segment for 2018.

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

 

Each reportable segment has various products and services and the revenue from these products and services are disclosed in the Business Review sections of the Strategic Report of the Annual Report and Accounts 2018.

The Management Team monitors the operating results of its 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.

Reportable segments

The following table presents revenue and profit information regarding the Group's reportable segments for the financial year ended 31st December 2018 and financial year ended 31st December 2017 respectively.

To reflect the increased importance of LSL's Financial Services businesses, the LSL Board has decided to update the Group segmental reporting effective from 1st January 2019. From 1st January 2019 LSL will report three segments: Estate Agency; Financial Services; and Surveying and Valuation Services. The Financial Services segment will incorporate all LSL's Financial Services businesses. The Estate Agency segment will primarily incorporate the results from the Estate Agency branch networks (Your Move, Reeds Rains, LSLi and Marsh & Parsons) and Asset Management. The Surveying and Valuation Services segment is unchanged.

 

3.   Segment analysis of revenue and operating profit (continued)

 

 

Year ended 31st December 2018

 

 

Estate Agency and Related Services

Surveying
and Valuation Services

Unallocated

Total

 Income Statement  information

£'000

£'000

£'000

£'000

 

 

 

 

 

Segmental revenue

254,842

69,798

-

324,640

Segmental result:

 

 

 

 

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

20,568

20,426

(5,098)

35,896

 - after exceptional costs, contingent

11,601

19,022

(5,206)

25,417

 consideration, amortisation and share-based payments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Finance costs

 

 

 

(2,333)

Profit before tax

 

 

 

23,084

Taxation

 

 

 

(5,201)

Profit for the year

 

 

 

17,883

 

 

 

 

 

 

Estate Agency and Related Services

Surveying
and Valuation Services

Unallocated

Total

Balance sheet information

£'000

£'000

£'000

£'000

 

 

 

 

 

Segment assets - intangible

179,512

12,171

-

191,683

Segment assets - other

68,443

11,659

3,836

83,938

Total Segment assets

247,955

23,830

3,836

275,621

Total Segment liabilities

(64,889)

(27,828)

(40,311)

(133,028)

 

 

 

 

 

Net assets/(liabilities)

183,066

(3,998)

(36,475)

142,593

 

 

 

 

 

Other segment items

 

 

 

 

Capital expenditure including intangible assets

4,738

1,282

-

6,020

Depreciation

(5,420)

(254)

-

  (5,674)

Amortisation of intangible assets

(4,897)

(404)

-

(5,301)

Share of results of joint venture

259

-

-

259

PI Costs provision

-

(12,430)

-

(12,430)

Exceptional costs

(1,994)

(3,240)

 

(5,234)

Exceptional gains

 

2,188

 

2,188

Onerous leases provision

(130)

-

-

(130)

Share-based payment

(294)

53

(108)

(349)

 

Unallocated net liabilities comprise plant and equipment (£15,000), other assets (£3,822,000), accruals (£922,000), deferred and current tax liabilities (£4,890,000), RCF (£34,500,000)

 

 

 

 

 

 

Year ended 31st December 2017

 

 

Estate Agency and Related Services

Surveying
and Valuation Services

Unallocated

Total

 Income Statement  information

£'000

£'000

£'000

£'000

 

 

 

 

 

Segmental revenue

247,410

64,130

 

311,540

Segmental result:

 

 

 

 

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

26,942

18,877

(8,322)

37,497

 - after exceptional costs, contingent

 

 

 

 

 consideration, amortisation and share-based payments

22,124

22,466

(2,540)

42,050

 

 

 

 

 

Finance costs

 

 

 

(1,952)

Profit before tax

 

 

 

40,098

 

 

 

 

 

Taxation

 

 

 

(6,686)

Profit for the year

 

 

 

33,412

 

 

 

 

 

 

Estate Agency and Related Services

Surveying
and Valuation Services

Unallocated

Total

Balance sheet information

£'000

£'000

£'000

£'000

 

 

 

 

 

Segment assets - intangible

169,113

12,517

-

181,630

Segment assets - other

75,453

7,306

1,200

83,958

Total Segment assets

244,566

19,823

1,200

265,588

Total Segment liabilities

(49,851)

(25,794)

(41,367)

(117,012)

 

 

 

 

 

Net assets/(liabilities)

194,715

(5,970)

(40,167)

148,576

 

 

 

 

 

Other segment items

 

 

 

 

Capital expenditure including intangible assets

5,177

312

-

5,489

Depreciation

(5,036)

(180)

-

(5,216)

Amortisation of intangible assets

(4,013)

(70)

-

(4,083)

Share of results of joint venture

1,583

-

-

1,583

PI Costs provision

-

(15,916)

-

(15,916)

Onerous leases provision

(210)

-

-

(210)

Share-based payment

(152)

(85)

190

(47)

 

Unallocated net liabilities comprise plant and equipment (£9,000), other assets (£1,191,000), accruals (£3,028,000), financial liabilities (£4,979,000), deferred and current tax liabilities (£6,360,000), RCF (£27,000,000).

 

 

4.   APMs (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 four adjusted measures reported by the Group are:

 

·      Group Underlying Operating Profit

·      Adjusted Basic EPS

·      Adjusted diluted EPS

·      Group Adjusted EBITDA 

 

The amortisation of intangibles assets is not representative of the underlying costs of the business, and is therefore excluded from adjusted earnings.

 

The Directors consider that these adjusted measures shown above 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 10 to these interim condensed consolidated Group Financial Statements and a reconciliation of Group Underlying Operating Profit is shown below:

 

 

 

2018

2017

 

 

£'000

£'000

Group operating profit

 

25,417

42,050

Share-based payments

 

349

47

Amortisation of intangible assets

 

5,301

4,083

Exceptional gains

 

(2,188)

(9,337)

Exceptional costs

 

5,234

-

Contingent consideration charge

 

1,783

654

Group Underlying Operating Profit

 

35,896

37,497

Depreciation on property, plant and equipment

 

5,674

5,216

Group Adjusted EBITDA

 

41,570

42,713

         

 

 

5.   Exceptional items

 

2018

2017

 

£'000

£'000

Exceptional costs:

 

 

Transition costs relating to surveying contracts

3,241

-

Branch/centre closures and restructuring costs including redundancy costs

1,993

-

 

5,234

-

 

 

 

Exceptional gains:

 

 

Gain on disposal of Financial Assets

-

(5,593)

Exceptional gain in relation to historic PI Costs

(2,188)

(3,744)

 

(2,188)

(9,337)

 

 

 

 

Exceptional costs

There were £5.2m of exceptional costs in the year (2017: nil), the majority of which were in relation to initial non-recurring transition and integration costs for the contract to supply surveying and valuation services to Lloyds Bank plc (£3.2m).

 

In the Estate Agency Division there were £2.0m (2017: nil) of non-recurring and material exceptional costs relating to the  planned restructuring costs incurred following the acquisition of Personal Touch Financial Services as well as branch / centre closures.

 
Provision for professional indemnity (PI) claims and insurance claim notification

In 2018 the Group continued to make positive progress in addressing the historic PI claims and there has been a release of £2.2m.

 

 

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 Company 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 Company 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

2018

Per share amount

Pence

Profit after tax

 

£'000

 

Weighted average number of shares

2017

Per share amount

Pence

Basic EPS

17,883

102,653,447

17.4

33,414

102,640,363

32.6

Effect of dilutive share options

 

839,935

 

 

635,058

 

Diluted EPS

17,883

103,493,382

17.3

33,414

103,275,421

32.4

 

 

 

 

 

 

 

 

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:

 

 

2018

£'000

2017

£'000

 

 

 

Group operating profit before contingent consideration, exceptional items, share-based payments and amortisation (excluding non-controlling interest):

35,896

37,497

 

 

 

Net finance costs (excluding exceptional and contingent consideration items)

(1,401)

(1,468)

Normalised taxation

(6,554)

(6,936)

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

27,941

29,093

 

Adjusted basic and diluted EPS

 

Adjusted profit after tax1

£'000

Weighted average number of shares

2018

Per share amount
Pence

Adjusted profit after tax1

£'000

Weighted average number of shares

2017

Per share amount
Pence

 

 

 

 

 

 

 

Adjusted Basic EPS

27,941

102,653,447

27.2

29,093

102,640,363

28.3

Effect of dilutive share options

 

839,935

 

 

635,058

 

Adjusted Diluted EPS

27,941

103,493,382

27.0

29,093

103,275,421

28.2

 

Note

1This represents adjusted profit after tax attributable to equity holders of the parent. The normalised tax rate in 2018 is 19% (2017: 19.25%).

 

 

 

 

7.   Dividends paid and proposed

Declared and paid during the year:

 

 

Equity dividends on Ordinary Shares:

 

 

2016 Final: 6.3 pence per share

2017 Interim: 4.0 pence per share

 

 

6,466

4,106

2017 Final: 7.3 pence per share

7,493

 

2018 Interim: 4.0 pence per share

4,107

 

 

11,600

10,572

 

 

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

 

 

 

Equity dividends on Ordinary Shares:

 

 

 

Dividend: 6.9 pence per share (2017: 7.3 pence per share)

7,083

7,493

 

             

 

 

 

8.   Taxation

(a)        Tax on profit on ordinary activities

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

 

2018

2017

 

£'000

£'000

 

 

 

UK corporation tax - current year

5,931

7,537

                                   - adjustment in respect of prior years

(205)

(345)

 

5,726

7,192

Deferred tax:

 

 

Origination and reversal of temporary differences

(322)

(442)

Adjustment in respect of prior year

(203)

(64)

Total deferred tax (credit)

(525)

(506)

Total tax charge in the Income Statement

5,201

6,686

 

The UK corporation tax rate reduced to 20% with effect from 1st April 2015 and 19% with effect from 1st April 2017.  A future UK corporation tax of 17% has been enacted and is effective from 1 April 2020, and this is the rate at which deferred tax has been provided (2017: 17%).  Corporation tax is recognised at the headline UK corporation tax rate of 19% (2017: 19.25%).

 

The effective rate of tax for the year was 22.5% (2017: 16.7%).  The effective tax rate for 2018 is higher than the headline UK tax rate for a number of reasons, but the most significant are non-deductible costs in relation to contingent consideration and the depreciation of assets which do not qualify for capital allowances.

 

Deferred tax credited directly to other comprehensive income is £0.0m (2017: £0.6m).  Income tax credited directly to the share based payment reserve is £0.0m (2017: £0.0m).

 

 

(b)        Factors affecting tax charge for the year

The tax assessed in the profit and loss account is higher (2017: lower) than the standard UK corporation tax rate, because of the following factors:

 

2018

2017

 

£'000

£'000

 

 

 

Profit on ordinary activities before tax 

23,084

40,098

 

 

 

Tax calculated at UK standard rate of corporation tax rate of 19% (2017 - 19.25%)                                                                                                                                              

4,386

7,719

Non-deductible expenditure / (non-taxable income) from joint ventures and associates

56

(153)

Other income not taxable

-

(369)

Other disallowable expenses

550

627

Impact of movement in contingent consideration charged/( credited) to the Income Statement

494

251

Capital gains (lower than)/in excess of accounting profit

-

(1,053)

Share-based payment relief

73

15

Impact of rate change on deferred tax

50

58

Prior period adjustments - current tax

(205)

(345)

Prior period adjustment - deferred tax

(203)

(64)

Total taxation charge

5,201

6,686

 

 

The major component of the disallowable expenditure is a permanent disallowance of depreciation on assets which do not qualify for capital allowances.  This is a recurring adjustment and the tax impact in the year is £421,000.  Another significant adjustment is the impact of deferred and contingent consideration, which is a non-deductible expense within the income statement.  The tax impact of this movement in deferred and contingent consideration is £494,000.

 

 

9.   Acquisitions during the year

 

Year ended 31st December 2018

 

The Group acquired the following businesses during the period to 30th June 2018:

·      Lettings books

During the period the Group acquired six Lettings books for a total consideration of £1,853,000. The fair value 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

1,817

Deferred tax liabilities

(309)

Total identifiable net liabilities acquired

1,508

Purchase consideration

1,853

Goodwill

345

 

 

Purchase consideration discharged by:

£'000

Cash

1,670

Contingent consideration

183

 

1,853

 

 

Analysis of cash-flow on acquisition

£'000

Transaction costs (included in cash-flows from operating activities)

-

Net cash acquired with the subsidiaries and other businesses

-

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

345

Net cash outflow on acquisition

345

 

·      Personal Touch Financial Services

In January 2018, the Group acquired the entire issued share capital of Personal Touch Financial Services and its subsidiary company, Personal Touch Administration Services Limited (PTAS) from Personal Touch Holdings Limited. Personal Touch Financial Services is a financial services business specialising in the provision of mortgage and other financial services products via its network of intermediaries. Personal Touch Financial Services is authorised by the FCA with 200 appointed representative firms and 474 advisers as at 31st December 2108.

 

The consideration for the initial investment was £5.4 million with £3.6 million paid on completion and a present value deferred consideration of £1.8 million in January 2019.  The purchase price allocations for the acquisition made has now been finalised, with no changes made to the provisional purchase price allocations as disclosed below:

 

 

Fair value recognised on acquisition

 

£'000

Intangible assets

4,305

Property, plant and equipment

121

Trade and other receivables

3,617

Cash and cash equivalents

6,795

Deferred tax asset

921

Trade and other payables

(7,974)

Provision for liabilities

(2,034)

Deferred tax liability

(657)

Total identifiable net assets acquired

5,094

Purchase consideration

5,440

Goodwill

346

 

 

Purchase consideration discharged by:

£'000

Cash

3,562

Present value deferred consideration

1,878

 

5,440

 

 

Analysis of cash-flow on acquisition

£'000

Transaction costs (included in cash-flows from operating activities)

518

Net cash acquired with the subsidiaries and other businesses

(6,795)

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

3,562

Net cash outflow on acquisition

(2,716)

 

As defined in IFRS 3 the Group has recognised, separately from goodwill, the identifiable intangible assets acquired in the business combination.  The assets identified include the in-house developed software Toolbox.

From the date of acquisition, Personal Touch Financial Services has contributed £8.7 million of revenue and £1.0 million to the profit before tax from the continuing operations of the Group. If the acquisition had taken place at the beginning of the year, revenue from continuing operations would have been £9.5 million and the profit from continuing operations for the period would have been £0.2 million.

 

·      RSC New Homes

In March 2018, the Group, through wholly owned subsidiary, acquired 60% interest in RSC New Homes, who provide mortgage and protection brokerage services to the purchases of new homes. The consideration for the initial investment was £5.3 million cash, with £2.5 million paid on completion and the remaining subject to put and call options which are exercisable between 2022 and 2023. The contingent consideration is Management Team's best estimation of the probable discounted pay-out (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 purchase price allocations for the acquisition made has now been finalised, with goodwill increasing by £0.2m.

 

 

Fair value recognised on acquisition

 

£'000

Intangible assets

271

Property, plant and equipment

40

Trade and other receivables

403

Cash and cash equivalents

149

Trade and other payables

(340)

Provision for liabilities

(277)

Current tax liability

(200)

Deferred tax liability

(46)

Total identifiable net assets acquired

(2)

Purchase consideration

7,126

Goodwill

7,128

 

 

Purchase consideration discharged by:

£'000

Cash

2,500

Present value deferred consideration

9

Contingent consideration

4,617

 

7,126

 

 

Analysis of cash-flow on acquisition

£'000

Transaction costs (included in cash-flows from operating activities)

29

Net cash acquired with the subsidiaries and other businesses

(149)

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

2,500

Net cash outflow on acquisition

2,380

As defined in IFRS 3 the Group has recognised, separately from goodwill, the identifiable intangible assets acquired in the business combination.  The assets identified include the RSC New Homes brand and the pipeline of work acquired.  As disclosed to the market on acquisition, there are strong customer relationships between RSC New Homes and key house builders, however, these relationships do not qualify as an intangible asset given they do not fulfil either the separability criterion or the contractual-legal criterion.   This has been fully explored by the Management Team who are confident that given that no economic benefit passes between the two parties in this relationship (the housebuilder and RSC New Homes) there is no asset that can be "separated or divided" and "sold, transferred, licensed, rented or exchanged". 

 

From the date of acquisition, RSC New Homes has contributed £3.4 million of revenue and £0.6 million to the net profit before tax from the continuing operations of the Group. If the acquisition had taken place at the beginning of the year, revenue from continuing operations would have been £4.3 million and the profit from continuing operations for the period would have been £0.5 million.

 

The goodwill represents expected synergies and intangible assets that do not qualify for separate recognition. The maximum undiscounted contingent consideration sum payable is capped at £7.5m.

 

 

Year ended 31st December 2017

 

The Group made no acquisitions during 2017.

 

 

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

 

2018

2017

 

£'000

£'000

 

 

 

 

 

11. Post Balance Sheet Events

 

On 5th February 2019 LSL announced an Estate Agency Strategy: ways of working programme update and work has now commenced on the reshaping of the Your Move and Reeds Rains branch networks. As disclosed on 5th February 2019, LSL expects to incur an exceptional P&L charge of approximately £14m in 2019 and £1m in 2020, with cash costs amounting to approximately £12m over the three years from 2019 to 2021 including approximately £9m cash costs in 2019. 

 


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