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McCarthy & Stone PLC  -  MCS   

Full Year Results

Released 07:00 13-Nov-2018

RNS Number : 1265H
McCarthy & Stone PLC
13 November 2018
 

 

 

McCarthy & Stone plc

Full year results announcement for the year ended 31 August 2018

 

McCarthy & Stone (the 'Group'), the UK's leading developer and manager of retirement communities, announces its financial results for the full year ended 31 August 2018 (FY18).  All comparatives are to the full year ended 31 August 2017 (FY17) unless otherwise stated.

 

 

FY18

FY17

Change

Legal completions1

2,134

2,302

(7%)

Revenue

£671.6m

£660.9m

2%

Average selling price2

£300k

£273k

10%

Gross profit

£104.6m

£130.7m

(20%)

Operating profit

£63.5m

£94.2m

(33%)

Underlying operating profit3

£67.5m

£96.2m

(30%)

Profit before tax

£58.1m

£92.1m

(37%)

Underlying profit before tax3

£62.1m

£94.1m

(34%)

Basic earnings per share

8.6p

13.8p

(38%)

Underlying basic earnings per share3,4

9.2p

14.2p

(35%)

Net cash5

£4.0m

£30.7m

(£26.7m)

Return on capital employed6 (ROCE)

10%

16%

(6ppts)

Total dividend per share

5.4p

5.4p

0p

 

Financial highlights

 

·   Revenue increased by 2% to £672m (FY17: £661m)

 

·   Underlying operating profit3 decreased by 30% to £68m (FY17: £96m) in line with the Group's announcement on 6 September 2018.  Decrease in profitability due to build cost increases, increased usage of part‑exchange to counteract subdued market conditions, additional marketing activity to promote the high level of FY18 sales releases (FY18: 69, FY17: 52) and increased operating costs in support of our previous growth strategy

 

·   Profit before tax decreased by 37% to £58m (FY17: £92m)

 

·   Underlying basic earnings per share3,4 decreased by 35% to 9.2p (FY17: 14.2p)

 

·   Basic earnings per share decreased by 38% to 8.6p (FY17: 13.8p)

 

·   c.£2m of exceptional costs were incurred in FY18 (FY17: £nil), representing mainly third-party advisory fees in relation to our new strategy

 

·   Strong balance sheet, with £4m of net cash5 (FY17: £31m) at year end

 

·   The Directors are proposing a final dividend of 3.5p per share, giving a total dividend for the year of 5.4p per share (FY17: 5.4p per share) reflecting the Board's confidence in the Group's new strategy

 

 

Operational highlights

·    Legal completions1 lower than the prior year at 2,134 units (FY17: 2,302)

·    68 first occupations brought to market (FY17: 49)

·    Average selling price2 increased by 10% to £300k (FY17: £273k)

·    54 high-quality development sites (FY17: 75 sites) added to the land bank

·    Total land bank of 9,797 plots (FY17: 9,967), equivalent to c.4.6 years' supply

·    69 new sales outlets opened during the year (FY17: 52)

·    Awarded Five Star rating for customer satisfaction by the Home Builders Federation ('HBF') for the thirteenth consecutive year - the only UK housebuilder, of any size or type, to achieve this accolade

·   20 Quality awards (FY17: 15) at the 2018 National House Building Council ('NHBC') Pride in the Job awards, underpinning the Group's exceptional build quality

·    Post year end, the Group received Best Retirement Scheme at Housebuilder Awards 2018 for Horizons, Poole

 

 

The Group recognises legal completion at the point of completion of a sale of an apartment to a purchaser

2 Average selling price is calculated as average list price less cash discounts and PX top-ups

3 Underlying operating profit (including underlying operating profit margin and underlying basic earnings per share) and underlying profit before tax are calculated by adding amortisation of brand and exceptional administrative expenses to operating profit and profit before tax respectively. See note 5 of the consolidated financial statements for further information

4 Underlying basic earnings per share have been reconciled within note 5 of the consolidated financial statements

5 Net cash is cash and cash equivalents less total borrowings.  See note 22 of the consolidated financial statements for net cash reconciliation

Return on capital employed ('ROCE') is calculated by dividing underlying operating profit for the previous 12 months by the average tangible gross asset value at the beginning and end of the 12 month period. Tangible gross asset value is calculated as net assets excluding goodwill and intangible assets less net cash. Both metrics have been reconciled within note 5 to the consolidated financial statements

 

 

New business transformation strategy

On 25 September 2018, the Group announced its new business transformation strategy 'creating retirement communities to enrich the quality of life of our customers and their families' with a strong focus on increasing ROCE, margins and cash generation.

Key highlights of the transformation:

·   Shift in business mindset from growth to increasing ROCE and margins

·   Realigning the workflow and rightsizing the operational cost base to deliver steady state volumes

·   Focus on build cost reduction and developing a more efficient sales and marketing model

·   Improved offering through increasing affordability, flexibility and choice for our customers

·   Focus on two core products, Retirement Living and Retirement Living PLUS

·   Change of financial year end to 31 October 2019 to decouple from peak holiday season

 

Capital allocation

The Group's capital allocation policy as a result of its new strategy focuses on the following:

·   Optimising operations for steady state production

·   Continued organic investment subject to market opportunity

·   Maintaining balance sheet strength with continuing focus on careful cash management

·   Investment in 'proof of concept' for strategic initiatives such as multi-tenure

·   Maintaining an ordinary dividend at the current level of 5.4p with intention to grow the ordinary dividend cover to around 2x underlying earnings over the medium-term

·   Subject to market conditions, intention to return surplus capital to shareholders by way of share buy-back or special dividends

 

Ground rent consultation update

On 15 October 2018, the Ministry of Housing, Communities and Local Government ('MHCLG') published an announcement proposing to allow the retirement community sector to continue charging ground rents after they are capped elsewhere, subject to buyers having the choice to either pay a higher sale price at a ground rent of £10 per annum or a lower sale price with a specified economic ground rent.  This proposal recognises the unique way the sector uses ground rents compared to the mainstream housebuilding industry. 

Whilst we are mindful that this proposal still remains at the consultation stage, we see this as a positive step for our customers and a strong indication from Government that our industry has a valuable contribution to make in providing much needed specialist housing for the older generation.  We will continue to work closely with Government throughout the consultation period and are pleased with its initial findings.

 

Change of auditor

The Group announces that, following the conclusion of a formal tender process led by the Group's Risk and Audit Committee, the Board has approved the proposed appointment of Ernst & Young LLP as the Group's auditor for the financial period commencing 1 September 2018.  This appointment remains subject to approval by shareholders of the Group at the Annual General Meeting to be held on 23 January 2019.  Deloitte LLP will resign as auditor of the Group following completion of the audit for the financial year ended 31 August 2018.

 

Current trading

·    Workflow planned to support steady state volumes c.2,100 units per annum

·    Sales lead indicators running moderately ahead of prior year on a per outlet basis

·    Secondary market remains challenging, particularly in the South East with customers continuing to exercise caution due to economic uncertainty

·    House price inflation remains subdued

·    Build cost inflation remains at the expected 3-4% level

·    Forward order book as at 9 November 2018 (week 10) currently in line with management expectations at c. 4% behind prior year at c. £267m (10 November 2017: £277m) reflecting 4 sales releases since 1 September 2018 (FY18: 17 sales releases)

·    Recent trading impacted as expected by organisational design changes within the sales function across the last 6 weeks - collective consultation process now completed

 

Outlook for FY19

·    FY19 out-turn (14 months to 31 October 2019) expected to remain in line with the Board's expectations and the Group reiterates the expected FY19 savings range announced as part of the new strategy of c.20-30% of the FY21 targeted P&L saving of c.£40m. Impact of savings is mainly at gross profit level

·    c. 2,300 units expected due to extended 14 month accounting period in FY19

·    More than 40 first occupations expected in FY19 with all sites currently under construction

·    FRI sales assumed to go ahead as planned in FY19

·    Robust capital structure with continued focus on careful cash management and intention to return surplus cash to shareholders

·    Roll out of new strategy is underway with organisational design and headcount reduction milestones now achieved  

 

 

 

John Tonkiss, Chief Executive Officer commented:

 

"During the year, we conducted a full strategic review of the business and in September 2018 announced our new transformation strategy. This new strategy represents a significant shift in the business mindset away from growth and towards increasing our return on capital employed and operating margin. Our focus now is on creating a more efficient business capable of delivering improved shareholder returns, while leveraging our longer term strategic opportunities. This includes increasing customer appeal by offering a broader choice of tenure options, as well as increased flexibility and affordable offerings.

 

Whilst it has been a challenging year for the Group and we were faced with particularly difficult market conditions with the level of UK monthly housing transactions showing a decline of around 40% since 2015, we delivered full year revenue of £672m (FY17: £661m) and brought 68 (FY17: 49) high-quality developments to market.  

 

We have proactively engaged with Government over the last 10 months on their initial proposal to reduce ground rent charges to zero to demonstrate how the retirement community sector uses fair and stable ground rents to fund the construction costs of its shared areas. We were therefore pleased to see that Government is now proposing to allow the retirement community sector to continue charging ground rents after they are capped at £10 elsewhere. While the proposal remains at the consultation stage, this is a positive step for our customers and we will continue to work closely with Government throughout the remainder of the consultation period."

 

- Ends -

 

This announcement contains certain forward-looking statements about the future outlook for the Group.  Although the Directors believe that these statements are based upon reasonable assumptions, any such statements should be treated with caution as future outlook may be influenced by factors that could cause actual outcomes and results to be materially different.

 

Presentation for analysts and investors:

 

John Tonkiss, Chief Executive Officer and Rowan Baker, Chief Financial Officer will host an analyst and investor meeting at 9.30am GMT today at Deutsche Bank, Winchester House, 75 London Wall, London, EC2N 2DB.  Refreshments will be served from 9.15am. 

 

Webcast for analysts and investors:

A live webcast of the presentation is available via the following link: https://www.mccarthyandstonegroup.co.uk/2018-full-year-results

 

An on demand version of the webcast will be made available later today on the Group's corporate website: https://www.mccarthyandstonegroup.co.uk/2018-full-year-results

 

Conference call details:

A conference call facility is also available.  To access the conference call:

UK Access: 020 3936 2999

International Number: +44 20 3936 2999

Participant Password: 800477

 

Conference call replay facility

A replay facility will be available for 7 days. To access the replay dial in details:

UK Access: 020 3936 3001

All other locations: + 44 20 3936 3001

Replay code: 048410

 

 

For more information, please contact:

 

McCarthy & Stone, 01202 292480

John Tonkiss, Chief Executive Officer

Rowan Baker, Chief Financial Officer

Paul Teverson, Director of Communications

Marina Calero, IR Director

 

Powerscourt, 020 7250 1446 / mccarthy-stone@powerscourt-group.com

Justin Griffiths

Nick Dibden

 

Legal Entity Identifier (LEI): 213800CEJ4OQ5YPU8Z37

Chairman's statement

Overview

The last financial year has been challenging for McCarthy & Stone with the current market environment continuing to have an impact on the business. A sluggish secondary housing market and lower consumer confidence following the outcome of the 2016 EU referendum have all contributed to this more difficult market backdrop.  In light of these continuing headwinds, the Group began a strategic review of the business in April and announced its new transformation strategy on 25 September 2018.

 

Despite these external challenges, the Group delivered a 2% increase in revenue to £672m (FY17: £661m) as it continued to capitalise on the attractive underlying demographic opportunity and structural shortage of supply of retirement communities in the UK. This was driven by a 10% increase in average selling prices to £300k (FY17: £273k) offset by a lower volume of legal completions at 2,134 units (FY17: 2,302).

 

Underlying operating profit decreased to £68m (FY17: £96m) in the year while profit before tax decreased to £58m (FY17: £92m). This reduction in profitability was mainly driven by the slowdown in sales, reduced margins, build cost increases, increased usage of part‑exchange to counteract subdued market conditions, additional marketing activity and an increase in operating costs in support of our previous growth strategy.

 

The Group remains the UK's leading developer and manager of retirement communities, with a significant market share of the private owner-occupied retirement market.  Our strength of brand and continual striving for operational excellence ensures that we can continue to deliver reasonable results even when operating in a challenging market.  We are building a strong and experienced management team that is focused on delivering the Group's new strategic objectives.

 

In addition, McCarthy & Stone continues to lead the sector on customer satisfaction.  We are the only developer of any size or type to have received the full Five Star rating in the Home Builders Federation ('HBF') customer satisfaction survey for 13 consecutive years, in which more than 93% of our customers would recommend us to a friend.

 

Post year end, we were pleased to note that the MHCLG announced that it is proposing to allow the retirement community sector to continue to charge ground rents after they are capped elsewhere, subject to potential buyers having the choice to either pay a higher sale price at a ground rent of £10 per annum or a lower sale price with a specified economic ground rent. This proposal recognises the unique way the sector uses ground rents compared to the mainstream housebuilding industry.  Whilst we are mindful that this proposal still remains at the consultation stage, we see this a positive step for our customers and a strong indication from Government that our industry has a valuable contribution to make in providing much needed specialist housing for the older generation.  We will continue to work closely with Government throughout the consultation period and are pleased with its initial findings in this area.

 

Economic and political environment

 

Since the Company's IPO in November 2015, the business has faced several market headwinds including political uncertainty following the outcome of the vote to leave the EU. These headwinds have resulted in a challenging economic backdrop, lowering consumer confidence and consequently reducing volumes in the secondary housing market with UK housing transactions showing a decline of c.40% since 2015.

 

Despite this backdrop, the market for retirement communities remains highly attractive, underpinned by strong demand. New research by the Office of National Statistics ('ONS') recognises that around 88% of household growth in the UK to 2041 is expected to come from those aged 65 and over1 and McCarthy & Stone remains uniquely placed to capitalise on this unprecedented demographic opportunity.

 

New business transformation strategy

On 25 September 2018, the Group announced its new business transformation strategy 'creating retirement communities that enrich the quality of life of our customers and their families' with a strong focus on increasing ROCE, margins and cash generation.

The key highlights of the transformation are:

·   Shift in business mindset from growth to increasing ROCE and margins

·   Realigning the workflow and rightsizing the operational cost base to deliver steady state volumes

·   Focus on build cost reduction and developing a more efficient sales and marketing model

·   Improved offering through increasing affordability, flexibility and choice for our customers

·   Focus on two core products, Retirement Living and Retirement Living PLUS

·   Change of financial year end to 31 October 2019 to decouple from peak holiday season

 

Dividend

 

We continued our focus on careful cash management throughout the year and this has enabled the Directors to propose a final dividend of 3.5p per share, making the total dividend for the year 5.4p per share.  This payment is in line with the dividend paid in the prior year (FY17: 5.4p per share) despite the Group's lower profits and signals the Board's confidence in its new strategy.

 

Board changes

 

There were a number of Board changes during the year:

 

1 October 2017 - John Carter joined as a Non-Executive Director

3 January 2018 - Paul Lester joined the Board as Chairman designate

24 January 2018 - John White stood down as Chairman at the end of the Annual General Meeting

24 January 2018 - Paul Lester appointed Chairman

17 May 2018 - Arun Nagwaney joined as a Non-Executive Director

31 Aug 2018 - Clive Fenton retired as Chief Executive Officer

25 September 2018 - John Tonkiss appointed as Chief Executive Officer (John was previously Chief Operating Officer)

 

I would like to welcome John as the new Chief Executive Officer of McCarthy & Stone.  John has served on the Board since the Group's IPO in November 2015, became Chief Operating Officer in June 2017 and was previously Chief Operating Officer at Unite Student Housing Group for ten years and before that, Chief Executive Officer of Human Recognition Systems.  He has been instrumental in leading the development of our new strategic plan since April 2018 and is therefore well-placed to lead the Executive team in the delivery of its new strategy 'creating retirement communities to enrich the quality of life for our customers and their families'.  

 

We have continued to strengthen our management team and now have a strong platform from which to take the Group through its transformation from a retirement housebuilder to an efficient developer and manager of retirement communities and to deliver enhanced returns for our shareholders, suppliers, employees and other stakeholders.

1 ONS household projections: 2016-based (2018)

 

Chief Executive Officer's operational review

 

Our results

 

Against a backdrop of a particularly challenging market, the Group delivered full year revenue of £672m (FY17: £661m), supported by a 10% improvement in average selling price, which increased during the year to £300k (FY17: £273k) reflecting improvements in the quality and locations of our developments. 

 

The Group achieved 2,134 legal completions during the year (FY17: 2,302), with volumes constrained, as expected, by the heavy H2 weighting of first occupations, continuing economic uncertainty coupled with a slower secondary market and a softening of pricing, particularly in the South East, during the second half of the year.

 

Market demand

 

The structural imbalance between supply and demand within the housing market continues to provide us with an exceptional market opportunity.  Despite the recent growth in housebuilding activity, there remains a significant and growing shortage of housing supply in the UK.  This imbalance is particularly acute in the market for retirement housing where the demand is estimated at 30,000 retirement units per annum and supply in 2018 is likely to be in the region of just 6,000 units across all tenures2 McCarthy & Stone stands alone among the national housebuilders as the only one that focuses entirely on this market.

 

During four decades as the retirement housing market leader, the Group has formulated a tailored approach to sales, site acquisition, design, securing detailed planning consents and construction that mainstream housebuilders have been unable to replicate.  We also ensure that our customers receive the highest standards of ongoing support through our management services offering which now provides services for c.16,900 homeowners within 379 developments - one of the largest operations of its kind in the UK.  These high barriers to entry in our market ensure that we maintain a unique position as the only developer capable of meeting the nationwide need for high-quality specialist communities for the growing number of older people who are looking to move to properties more suited to their needs and lifestyle. 

 

2 Knight Frank, Retirement Housing (2018)

 

Strategic initiatives   

 

Over the last three years our continued efforts on achieving operational excellence to support our growth objectives by accelerating our working capital cycle have been focused on our three key strategic initiatives: improving sales rates, reducing time taken between securing land and starting build and implementing build programme efficiencies. We made good progress across all three areas during FY18 and our strategic transformation plan announced in September 2018 builds on these previous initiatives.

 

 

Sales initiative

 

The sales initiative sets out to deliver off-plan reservations of 50% or more by the date of first occupation, and then to reserve out all remaining apartments within an average 12-month period.

 

We have consistently delivered our 50% off-plan reservation target over the last few years but delivered a slightly lower result this year at 49% (FY17: 53%). While this is marginally lower than our previous three-year average of 51%, it has been influenced by the increased mix of larger Retirement Living PLUS sites and remains a good performance in the context of the weaker market backdrop - Retirement Living 60% (FY17: 76%), Retirement Living PLUS 28% (FY17: 16%) and Lifestyle Living 12% (FY17: 8%).

 

FY18 was a year of integration for our sales initiative, as our National Training Academy became fully operational, running 50 courses over 120 days, training more than 420 delegates. Our outsourced call handling was also fully embedded.  Furthermore, we were able to build our brand awareness with the introduction of our nationwide multi-channel marketing campaign, 'Retirement Living to the Full' which we launched in January 2018.

 

Our average time to sell out continued to fall behind our 12 month target but was in line with the last two years at 18 months (FY17: 19).  Again, a good performance in light of the current challenging market backdrop.

 

FY18 saw an increase in part-exchange transactions to 35% (FY17: 27%) of total legal completions reflecting the ongoing subdued secondary market and a full year national roll-out of our in-house part-exchange scheme. Our in-house part-exchange scheme has proved to be a valuable tool for the business and delivered a saving of c.£7m (FY17: c.£1m) when compared to the costs associated with using third-party part-exchange providers. As at 31 August 2018, we held 147 properties (FY17: 114 properties) on the balance sheet at a net carrying value of £42m (FY17: £32m). Our in-house part-exchange properties resold on average c.13.1 weeks after buy-in (FY17: c.8.5 weeks), with the slightly longer selling time in line with our 13 week target and a reflection of the full year national roll-out.  

 

Development initiative

 

Our development initiative was established to reduce the development cycle time by reducing the time taken between land exchange and the build start process.  This involved the implementation of a number of process improvements with particular focus on 'ways of working', the planning process and increased standardisation. This has enabled the business to bring forward profitable developments more quickly, accelerate growth plans and improve capital turn.  The initiative is now embedded in all regions and is beginning to produce positive results.

 

A number of changes designed to accelerate this cycle were implemented during the year. In particular, we focused on embedding our FUSION process and improving our development capacity and responsiveness.  FUSION is a development initiative which aims to reduce the time taken between securing land and starting build. Progress on this initiative has translated into a similar development cycle time as last year of 18.3 months (FY17: 18.1 months) for standard sites achieving first-time detailed planning consent. In future years, we will be focusing on the elements within our development initiative that align with our new strategy, ensuring that we are optimising margin on all sites at the design stage.  A consequence of this may be that we achieve fewer first time planning consents, but the returns generated should be higher.

 

Build initiative

 

The build initiative continued to drive improvements to the build process during the year, to accelerate build timescales, reduce build costs and enhance margins. This resulted in build cycle time reduction from 14.4 months in FY17 to 13.9 months in FY18.  Specific focus has been placed on improving our material procurement practices through increased framework agreements and we have plans to introduce stronger competitive tendering processes, particularly for our sub-contractors.  In addition, we introduced DATUM, our industry leading product management platform with technical specification libraries fully established to improve the value engineering around such areas as foundations, balconies, wall structures etc.  This will create a strong foundation for our build cost reduction workstream within our new strategy.

 

New strategic direction

 

Faced with the continued challenging economic backdrop, the Board undertook a strategic review of the business and in September 2018 we announced our new strategy 'creating retirement communities to enrich the quality of life for our customers and their families'. 

 

This new strategy represents a shift in the business mindset from growth to increasing our return on capital employed and margins.  We are positioning the business to succeed in the current challenging market environment and, over the next three years, we will be focusing on increasing returns by optimising our operations to deliver strong financial performance across four fundamental pillars, for the benefit of all our shareholders:

 

·    Workflow realignment is aimed at generating a stable monthly flow of land exchanges, build starts, sales releases and first occupations, all of which are fundamental to our operational efficiency.

We have already completed the necessary planning actions within our Group three year plan, while continuing to maintain land bank optionality.

·    Rightsizing the business seeks to align the operational cost base to reflect steady state volumes, while retaining the ability to respond if market conditions improve.

We have now completed the formal collective consultation process for reducing our footprint from nine to seven regions with the total headcount reduction resulting in an annualised cash saving of c.£10m.

·    Efficient sales and marketing model involves a reorganisation of our sales teams and a centralised approach to Group marketing.

We have now set up the operating model and intend to complete roll out by the end of December. Our new Salesforce CRM system will be piloted in December with full rollout in February 2019. This will allow us to standardise sales processes, leverage customer insights and analytics resulting in improved marketing effectiveness and reduced cost per lead, while allowing us to enhance personalised customer experience.

·    Build cost reduction programme involves increasing standardisation, more efficient designs and optimising subcontract procurement practices.

Design efficiency reviews are currently being undertaken on all FY20 developments and we expect the majority of savings to come through the income statement in FY21.

 

In parallel, we will also aim to leverage our longer term strategic opportunities within our services and product offering.  We will aim to create even deeper and longer relationships with customers to increase our customer appeal, diversify our revenue streams and reduce our exposure to market cyclicality.

 

The long-term aim will be to create retirement communities that enrich the quality of life for our customers and their families and to become the UK's leading developer, manager and owner of retirement communities.

  

The Group's proposition is underpinned by three key principles:

 

·    Flexibility within our services to respond to evolving customer needs and increase revenue.  This will include the introduction of a new tiered service for new and existing homeowners, expanding our care offering, opening up new developments for wider community use and integrating technology enabled services (e.g. motion monitoring, medication control sensors and home automation).

 

·    Choice of ownership through multi-tenure options, including outright ownership, shared ownership and rental.  Moving forward, we believe there is a big opportunity to have a multi tenure offering and our customer research indicated that 50% of customers are interested in a rental proposition. Importantly, as we enter the rental market, we intend to sell our rental properties on to investors whilst retaining an interest. Overtime, there is likely to be an opportunity to bring institutional investment, Real Estate Investment Trust ('REIT') funds and various other vehicles into this space.

 

·    Affordability to maximise the mass market appeal by increasing the affordability of our products.  This will be achieved by reducing build costs, increasing efficiencies and introducing new contemporary and compact designs. 

 

New strategic targets

 

·    Steady state volume of c.2,100 units per annum

·    ROCE improvement of greater than 15% by FY21, increasing to over 20% by FY23

·    Improvement in operating margins to more than 15% by FY21

·    Total cost savings of more than £40m per annum by FY21

·    Total cumulative cash savings in excess of £90m between FY19-FY21

·    The Group will focus on reduction in capital employed by at least £70m between FY18 and FY21

 

Land bank

 

During the year, we invested £112m (FY17: £156m) in land and our landbank now stands at 9,797 units (FY17: 9,967 units), which equates to over 4.6 years' supply (FY17: 4.3 years' supply) based on current unit sales volumes. 54 high quality sites with attractive embedded margins were added to the landbank during the year (FY17: 75) in line with our new strategy focusing on a more measured trajectory and smoother workflow objectives.

 

Our product ranges

 

We sold three products during the year. Our two core products, Retirement Living and Retirement Living PLUS (which will be the focus of our business going forward post our strategy update), alongside our Lifestyle Living offering.

 

During the year we brought to market 41 (FY17: 37) Retirement Living developments and 19 (FY17: 8) Retirement Living PLUS developments, including 72 (FY17: 0) bungalow units. There is a growing need for modern, low-maintenance and well-connected bungalows among the older population and the appropriateness of this form of housing in later life is well-proven.  The particular shortage of bungalows and other houses for older people means they are likely to attract a high level of demand. In response to this demand, we are intending to provide more bungalows and cottages on larger schemes, opening up exciting new possibilities for maximising development potential on certain sites, as well as providing for completely new land opportunities.  As of 31 August 2018, we had 364 (FY17: 222) bungalow units within our land bank.

 

Going forward we will focus on our two core product lines, Retirement Living and Retirement Living PLUS, that best fit our new strategy and enable us to provide customers flexibility and choice through product innovations. Our Lifestyle Living offering will be phased out over time and our bungalow range will be incorporated into our core product offerings.

 

Our Management Services business

 

The rapid growth of our Management Services business continued during the year, adding 68 new developments to its portfolio, which as of 31 August 2018 totals 379 (FY17: 312) managed developments. Providing our own management services allows us to establish a unique relationship with our customers, ensuring that they receive the highest standards of ongoing support, providing personal and efficient services that not only help them, but also support the point of sale, and allow us to deliver industry-leading standards of customer satisfaction. 

 

We now have c.16,900 (FY17: c.14,600) homeowners to whom we provide c.31,000 (FY17: c.24,000) hours of care and support and c.60,900 (FY17: c.60,500) meals per month.

 

In line with our new strategy, we see a Management Services offering that responds to evolving customer needs combined with flexible payment options as the key to delivering an enhanced customer experience.

 

Our customers

 

We are delighted to report that, once again, we achieved the full Five Star rating in the Home Builders Federation ('HBF') customer satisfaction survey for 2018.  This marks the thirteenth consecutive year in which we have achieved a Five Star rating and this year 93.5% of our customers have said that they would recommend us to a friend.  We are the only housebuilder of any size or type to win this award every year since it was introduced in 2005.  This sustained recognition by our customers of the quality of product and service we deliver is a strong endorsement of our continued desire to design, build, sell and manage the very best retirement developments. 

 

Our employees

 

Our performance this year would not have been possible without the dedication, enthusiasm and expertise of our people.  They are critical to the continued evolution of the business.  We are in the process of building a culture of excellence that provides further opportunities for development and recognises achievements by regularly celebrating those employees who go the extra mile for a customer or colleague, through our instant, quarterly and annual PRIDE awards for Passion, Responsibility, Innovation, Determination and Excellence. The Board is mindful that 2018 has been a particularly challenging year for the Group and its employees and would like to place on record their appreciation of the huge efforts undertaken by all employees across the Group, particularly against the backdrop of a difficult market.

 

At the beginning of FY18, we launched our new management development programme which has seen nearly 400 attendees. We also launched our inaugural Future Leaders programme, which is designed to equip our future sector leaders to lead strategy execution and transformational changes.

 

We have also launched an apprenticeship scheme for site management and quantity surveying.

 

Health and safety

 

I am pleased to report that we have continued to make good progress with developing a culture of excellence in health and safety across the Group.  Our vision is not just to achieve health and safety compliance but to lead our sector with a robust and consistent safety culture across our organisation.  Our internal monitoring regime is supported by a rigorous, independent site inspection programme including regular reporting updates to the Board.

 

During FY18 we received 3 BSG Health and Safety awards, including one award for Best Use of Technology for our pioneering work using drones for roof inspection to reduce the need for work at height.

 

Government consultation on ground rents

 

In June 2017, the Government launched a consultation on tackling unfair practices in the leasehold market with particular reference to leasehold housing and unfair escalation clauses for ground rents. We understand and support the need for action in this area and welcome the Government's recent announcement, post the year end, to propose allowing an exemption for the retirement community sector to continue to charge ground rents after they are capped elsewhere. Our ground rents are on fair and stable terms as they are fixed for 15 years and increases are linked to the higher of 2% or RPI. There have undoubtedly been cases where the system has been abused by some, including with ground rents that double every ten years and the sale of leasehold houses, and we understand why the MHCLG is taking action to protect homebuyers.

 

We were therefore pleased that on 15 October 2018, Government announced that it is proposing to allow the retirement community sector to continue charging ground rents after they are capped elsewhere, subject to offering customers a choice between paying a higher sale price or a ground rent.  While the proposal remains at the consultation stage, this is a positive step for our customers and we will continue to work closely with Government for the remainder of the consultation period.

 

Outlook and current trading

 

We are seeing continued resilience within our lead indicators, which are currently running moderately ahead of the prior year on a per outlet basis, but the secondary market remains challenging, especially in the South East, where customers continue to exercise caution due to economic uncertainty.   

 

Our forward order book as at 9 November 2018 (week 10) is in line with management expectations and currently stands c.4% behind the prior year at c. 267m (10 November 2017: £277m) reflecting 4 sales releases since 1 September 2018 (FY18: 17 sales releases). Recent trading has also been impacted as expected by organisational changes within our sales function across the last 6 weeks.

 

We have a 14 month accounting period in FY19, with a new financial year end date of 31 October 2019. Our expected FY19 out-turn assumes that FY19 FRI sales go ahead as planned and remains in line with the Board's expectations. The Group reiterates the FY19 savings range announced as part of our new strategy (c. 20-30% of the FY21 target P&L saving of c.£40m). Our build programmes are currently all on track to deliver more than 40 first occupations in FY19.

 

We will continue to apply a measured approach to land acquisitions at attractive margins to add to our existing quality land bank, in line with the new strategy.

 

Our main focus for FY19 will be on rolling out our new strategy, achieving key milestones and delivering savings in accordance with our new strategic plan.  

 

 

Financial Review

 

Our performance

 

During the last financial year, the business continued to face considerable market headwinds including continuing political and economic uncertainty following the outcome of the vote to leave the EU. These headwinds have resulted in a lowering of consumer confidence, a challenging secondary housing market and some softening of pricing in the South East.  The above external factors, together with our continued investment in operating costs in support of our previous growth strategy, have resulted in a 30% reduction in underlying operating profit and a 33% reduction in operating profit compared the prior year. 

 

Revenue

 

The Group delivered full year revenue of £672m (FY17: £661m), supported by a 10% improvement in average selling price, which increased during the year to £300k (FY17: £273k).  This reflected substantial improvements in the quality and location of our developments. Our revenue for the year included FRI revenue of £29m (FY17: £29m).

 

The Group achieved total legal completions of 2,134 units (FY17: 2,302) during the year, with volumes constrained, as expected, by the heavy H2 weighting of first occupations, continuing economic uncertainty coupled with a slower secondary market, especially in the South East, during the second half of the year.  

 

Our volumes included the sale of 25 units (FY17: 126 units) across 9 developments to PfP Capital as we continued to leverage the opportunity to access the growing rental market.  Additionally, 43 units (FY17: nil) across 23 developments were sold to heylo housing as part of their Homereach product range as a means by which to provide customers with a shared ownership tenure option.

 

Profit

 

Consistent with guidance given in June, underlying operating profit decreased to £68m (FY17: £96m) in the year, whilst operating profit decreased to £64m (FY17: £94m).  Our underlying operating profit margin decreased to 10% (FY17: 15%) and our operating profit margin decreased to 9% (FY17: 14%).  This reduction in profitability and margin percentage was mainly driven by build cost increases, increased usage of part-exchange and incentives to counteract subdued market conditions, additional marketing activity to promote the higher level of current year sales releases (FY18: 69, FY17: 52) and our continued investment in operating costs in support of our previous growth strategy.

 

During the year, we saw an increase in the volume of part-exchange transactions reaching 753, 35% of legal completions (FY17: 627, 27% of legal completions), as a reflection of the ongoing subdued secondary market. 335 of these transactions were on balance sheet PX (FY17: 163) resulting from the national roll-out of in-house part-exchange solutions with tight controls in place to ensure regions do not exceed their capital allocation. This translated into a saving of c.£7m (FY17: c.£1m) compared to use of third-party PX with average capital employed of £27m (FY17: £10m) over the year. 335 properties (FY17: 163 properties) were purchased during the year at an average of 96% (FY17: 96%) of market value with 302 properties (FY17: 49 properties) re-sold within the year. The average time taken to resell these properties was 13.1 weeks (FY17: c.8.5 weeks).

 

Total administrative expenses for the year amounted to £40m (FY17: £37m), excluding exceptional items and amortisation of brand and remained at the same proportion of revenue as last year of 6% (FY17: 6%).

 

Underlying profit before tax decreased to £62m (FY17: £94m) during the year with statutory profit before tax of £58m (FY17: £92m).  This was impacted by a £1m net revaluation loss (FY17: £2m net revaluation gain) of our shared equity portfolio which contributed to an increase in net finance expenses to £5m (FY17: £2m) reflecting an adverse change in the forward looking HPI assumptions.  Statutory profit before tax has been further impacted by £2m (FY17: £nil) of exceptional costs incurred in FY18 as we commenced our business transformation programme.

 

Capital structure and interest

 

The Group saw its tangible gross asset value increase to £692m (FY17: £646m) and its tangible net asset value increase to £696m (FY17: £676m) during the year.  This was primarily driven by a £147m increase in finished stock, excluding in-house part-exchange properties, reflecting 52 first occupations delivered in the second half of FY18 (FY17: 30 first occupations delivered in the second half of FY17).  An increase in trade and other receivables due in less than one year from £10m in FY17 to £22m in FY18 primarily reflects balances due from heylo housing for the bulk sale transaction.   Trade and other payables have increased from £85m in FY17 to £115m in FY18 due to higher deferred income balance reflecting the FRI transaction in August 2018 and high level of accruals due to August build activity.

 

During the year we continued to maintain a robust financial position with net cash of £4m (FY17: £31m) as at 31 August 2018.  This resulted in a negative gearing of 2% (FY17: 4%), reflecting management's ongoing focus on disciplined land acquisition in response to continuing economic uncertainty and was achieved notwithstanding the negative cash impact of increased build spend and our in-house part-exchange tool which resulted in £42m part-exchange assets being held on the balance sheet at the year end (FY17: £32m). 

 

We maintained appropriate headroom against our revolving credit facility ('RCF') throughout the year. This facility was increased from £200m to £250m for 12 months from February 2018. The level of drawdown fluctuated during the year with the maximum draw down of £195m in June 2018 (FY17: £166m in July 2017) reflecting the Group's revenue peak in August and working capital requirements to fund our investment in land, build and sales and marketing expenditure.  The average draw down during the year was £137m (FY17: £100m).

 

The Group incurred net finance expenses of £5m during the year (FY17: £2m), impacted by a £1m net revaluation loss (FY17: £2m net revaluation gain) of our shared equity portfolio which resulted in an increase in finance expenses to £6m (FY17: £4m) reflecting an adverse change in the forward looking HPI assumptions.

 

Exceptional costs

 

Exceptional costs of £2m (FY17: £nil) were recognised within the Consolidated Statement of Comprehensive Income during FY18.  These costs related to advisory fees and redundancies incurred on commencement of the Group's strategic review in the year. 

 

Taxation

 

The effective tax rate was close to the statutory rate during the current financial year.  The total tax charge for the year was £12m (FY17: £18m) which represents an effective tax rate of 20% (FY17: 19%) based on a profit before tax of £58m (FY17: £92m).   The rate of corporation tax was lowered to 19% from 1 April 2017 and will be at 17% with effect from 1 April 2020.

 

Earnings per share and dividend

 

Underlying basic earnings per share decreased by 35% to 9.2p (FY17: 14.2p) reflecting the reduction in underlying profit before tax from £94m in FY17 to £62m in FY18.  Basic earnings per share for FY18 were 8.6p (FY17: 13.8p).  Details of the calculation of underlying earnings per share can be found in note 5 to the financial statements.  Details of the calculation of earnings per share can be found in note 11 to the financial statements.

 

The Directors are proposing a final dividend of 3.5p per share. This follows the interim dividend of 1.9p per share, giving a total dividend for the year of 5.4p per share (FY17: 5.4p per share).  This maintains our dividend at the same level as the prior year despite the lower level of profitability and reflects the Board's confidence in its new strategy.  The proposed total annual dividend is covered 1.6x times by FY18 earnings.  Subject to shareholder approval at the Annual General Meeting ('AGM'), the dividend will be paid on 1 February 2019 to shareholders on the register at 4 January 2019. 

 

The total cost of the final dividend is £19m, resulting in a total dividend cost relating to the year of £29m (FY17: £29m).

  

Target returns

 

Our investment in build to deliver our previous growth strategy resulted in a £157m increase in finished stock (including on balance sheet part exchange properties).  This increase, together with a £29m reduction in underlying operating profit, led to a decrease in ROCE by 6 ppts to 10% (FY17: 16%) and a reduction in capital turn to 1.0x (FY17: 1.1x).  Our new strategy, however, focuses on increasing ROCE, margin and cash generation with the target of delivering greater than 15% ROCE by FY21 and a further 5pp improvement to greater than 20% ROCE by FY23.

 

Our new strategic targets reported on 25 September are as follows:

·    ROCE improvement of greater than 15% by FY21, increasing to over 20% by FY23

·    Improvement in operating margins to more than 15% by FY21

·    Total cost savings of more than £40m per annum by FY21

·    Total cumulative cash savings in excess of £90m between FY19-FY21

·    The Group will focus on a reduction of its capital employed by at least £70m between FY18 and FY21

 

Change of auditors and financial year end

 

In June 2018 the Board completed the external audit tender process in line with the ten year statutory requirement and appointed Ernst & Young LLP as the Group's statutory auditors for the period ending 31 October 2019. This appointment remains subject to approval by shareholders of the Group at the Annual General Meeting to be held on 23 January 2019.  As part of the business transformation strategy announced on 25 September 2018, the Directors decided to change the Group's financial year end from 31 August to 31 October.  This will allow us to decouple our year end activities from the peak August holiday season and will serve to accelerate the process of rebalancing workflow and sales volumes throughout the year.  FY19 will be the first financial year reported to 31 October and therefore will be a 14 month period of account.  Our first half reporting will cover the six months to 28 February 2019 and our second half, the eight months from 1 March to 31 October 2019.

 

Post balance sheet event

 

On 25 September 2018 the Group announced its new business strategy aimed at improving margins, rightsizing the operational cost base and evolving the business model to meet the changing needs of our customers. Total exceptional costs of c.£25m are expected across the life of the business transformation program, with £2m already incurred in FY18. The majority of the exceptional costs are expected to come through in the first half of FY19, representing the cost of land that will no longer be developed, redundancy costs and further consultants' fees.  There were no events after the reporting period that required adjustment in the FY18 financial statements.

 

Risk management

 

The Group maintains a robust risk management framework, providing a clear link between its strategy and the strategic, operational and financial risks faced by the business.  The approach to risk is set by the Board, which maintains a close involvement in identifying and mitigating risk and monitors certain key risk indicators at Board meetings on a regular basis. 

 

As part of managing the financial risk in the business, the potential impact of a downturn in the housing market or the broader UK economic environment is regularly evaluated and we have a number of key risk indicators that are used at Board level in order to assess this. Our geographic coverage and diversified portfolio of land ensures that we are not overly dependent on particular local markets or individual developments.  In addition, our distinct business model helps to insulate our business from a downturn, with land acquisition normally contracted subject to planning and also often subject to commercial viability or by way of option, enabling us to review land acquisition decisions in light of planning outcomes and latest market conditions prior to committing significant capital. 

 

The following risks have been identified by the Board with respect to delivering the new Group strategy:

·    Unit completion pattern continues to be lumpy with a significant proportion delivered towards the year end

·    Land buying and build programmes are not successfully calibrated to deliver a steady state production

·    Failure to deliver required cost savings through changes to the organisational design

·    The build cost reduction programme is not fully achieved

·    Failure to streamline the sales model and centralise the marketing function

 

Liquidity risk is the risk the Group will encounter difficulty in meeting obligations associated with financial liabilities. The Group's strategy in relation to managing liquidity risk is to ensure that the Group has sufficient liquid funds to meet all its potential liabilities as they fall due. The liquidity of the Group is dependant on achieving the level of sales volumes, prices in line with current forecasts and strategic objectives as announced on the 25 September 2018. Liquidity risks are managed through the regular review of detailed short term and long term cash flow forecasts to monitor the expected requirements of the Group against the available facilities, principally the revolving credit facility in place, and by maintaining adequate committed banking facilities to ensure appropriate headroom.
 

Principal risks and uncertainties

 

The principal risks and uncertainties facing the Group include, but not limited to:

 

 

Risk Area

Risk Description

Mitigating Actions

Economic conditions

Housebuilding is cyclical and reliant on the broader

economy. A deterioration in the economic outlook,

including economic growth, inflation, interest rates and buyer confidence, could have a significant impact on the Group's financial performance and ability to sell

both retirement apartments and the properties acquired as part of the in-house part-exchange scheme.

 

The uncertainty in the economy and specifically the

secondary housebuilding market following the EU

referendum is likely to continue in the short to medium-term as the UK exits the EU in March 2019.

The Group closely monitors industry indicators and assesses the potential impact of different economic scenarios. Decisions to allocate new capital to land and build are managed centrally through the Group Investment Committee. The Group aims to maintain a geographical and product spread of developments to ensure that it is not reliant on one locality or product type.

 

The operation of an in-house part-exchange scheme is subject to strict controls and regional and divisional limits.

 

The development of new tenure types, including the rental and shared ownership offerings will help to offset any potential impact of a downturn in the secondary housing market.

Government legislation

Like any other business, the Group is affected by

changes in Government legislation. The Government

consultation on unfair leasehold practices in FY18 had

an adverse impact on the Group's business model.

We welcome the Government's consultation paper on ground rent reform which was published in October 2018 and are pleased with the proposal to exempt the retirement sector from the proposed cap on ground rents. However, the Group notes that this remains a proposal and is subject to further consultation and passage through Parliament. The Group has recently carried out an impact assessment of lower and no ground rents and reviewed its land appraisal process accordingly and is seeking alternative solutions to mitigate the worse adverse impact on the business model should an exemption not be granted.

Delivery of new strategy

Prolonged business disruption and/or failure to achieve the targeted savings could result in further adverse financial deterioration and the level of funding required to support working capital, which may negatively impact the viability of the Group.

Clear and concise strategic objectives have been developed to deliver the cost savings as part of the Group strategy. A Transformation and change office to oversee and closely monitor progress against the objectives has been created.

Land acquisition and planning

Poor-quality land and/or location could result in

programme/cost over-runs and difficulty in selling.

Failure to obtain timely planning consents will

adversely affect workflow, resulting in failure to meet

targeted sales and/or cash flow.

Regional land buying teams are in place across all regions providing local knowledge and expertise. These teams are targeted on land exchange and completion as part of their reward structure.

 

We acquire land with a high-degree of conditionality.

 

Regional planning teams have the support and oversight of the Group Investment Committee.

Build programmes and cost

The Group's financial performance is dependent

on its ability to deliver build programmes on time and

on budget. Build programme or cost over-runs could

result in slower sales or reduced margins.

 

As part of the strategic review the Board have identified significant potential for cost reductions through standardisation, design efficiencies and procurement practices.  Achievement of this build cost reduction programme will be critical to the Group delivering its new strategy.

Build progress and costs are reviewed regularly by

dedicated regional commercial teams, as well as being reported to regional, divisional and Group management. Independent assurance is provided by the internal audit team who perform commercial internal audits of developments under construction. Framework agreements have been established with key subcontractors and suppliers to provide greater certainty of price and supply. In addition, the Group has implemented a tighter control framework over higher risk more complex developments.

 

Workflow

The Group has historically suffered from a bias towards achieving the majority of its completions and profits in the second half of the financial year. Hence, any political uncertainty or adverse market conditions during this period could adversely impact the Group's annual performance. This was evidenced by the EU

Referendum result in 2016 and to a lesser extent the

General Election outcome in 2017.

As part of the new strategy, the Group is re-aligning

workflow towards a steady state production through

the following actions:

• reducing the number of sites in development

• ensuring stable monthly flow of build starts and

first occupations

• introducing an incentive scheme designed to deliver smoothened workflow

• changing the year end away from the peak holiday

season to 31 October

Workflow is closely monitored by regional and divisional management and by the Board.

Sales performance

The Group's business plan assumes selling and

charging of its products and services at attractive

prices. Any volume shortfall or pricing weakness

could have a significant impact on the Group's

financial performance.

Detailed reporting enables the Group to monitor sales and pricing at a site and unit level and regularly review performance against expectation with regional and divisional management.

 

A strict approval process exists for awarding discounts and incentives in excess of certain thresholds.

Employees

The Group's employees are central to the achievement

of the Group's objectives. Failure to recruit and retain

sufficient staff resource of the right quality could

adversely impact the business.

The Group has put in place attractive reward

mechanisms and provides extensive opportunities for personal development and training, both of which are regularly reviewed against peer housebuilders and other employers in local markets. Resource requirements are assessed against annual budgets and recruitment processes are designed to ensure talent attraction and retention to deliver the Group's strategy.

Reputation and customer satisfaction

The Group builds, sells and rents a quality product to

an ageing and sometimes frail customer base and

provides ongoing management and care services.

Any issues with the products or services the Group

provides could impact on reputation or customer

satisfaction to the detriment of the Group.

 

Adverse national publicity with respect to re-sales,

especially older non-managed properties and those

sold just prior to the housing market crash in 2008, can

result in lower resale values, which in turn can adversely impact our ability to sell new retirement apartments.

The Group enforces strict procedures over the handover of developments for occupation and the handover of specific apartments to individual customers. Ongoing management and care services are provided within a robust framework of controls which is closely monitored. The business has a dedicated customer services team and tracks customer satisfaction through NHBC, HBF and internal surveys.

 

An in-house estate agency supports the re-sales process for customers in our managed developments on the general housing market, with the aim of speeding up the sales process and maximising value on resale.

Carrying value of land

The net realisable value of land owned by the Group

may decline due to changes in the property market or

other conditions, or the Group being unable to secure

detailed planning consent on land purchased

unconditionally.

Whenever possible, contracts to purchase land are via option agreement or are conditional on the Group obtaining detailed planning consent and contain a commercial viability clause. The Group performs impairment reviews in line with International Financial Reporting Standards ('IFRS') requirements, on a half yearly basis.

Health and Safety

Construction sites are inherently risky, and could

expose employees/contractors to the risk of serious

injury/fatality.

 

Customers in the developments the Group

manages are ageing and sometimes frail, with the

risk that they can be more susceptible to injury.

The Group strives for excellence in health and safety and considers it to be a top priority. This is supported by a rigorous, independent site inspection process which routinely assesses and reports on standards.

Cyber/data

Failure of any of the Group's IT systems, in particular

those relating to customer data, surveying and

valuation, could adversely impact the performance

and reputation of the Group.

The Group maintains central IT systems and has in

place a fully tested disaster recovery programme. This is supplemented by regular reviews to seek to reduce the risk of successful cyber-attacks and a General Data Protection Regulation ('GDPR') programme to ensure compliance with GDPR legislation.

 

The Salesforce CRM platform due to be rolled out during FY19 will deliver enhanced compliance with GDPR requirements.

 

 

Viability statement

 

ln accordance with provision C.2.2 of the UK Corporate Governance Code 2016, The Directors have to assess the prospects and viability of the Group.

ln response to that, the Directors have assessed the prospects and financial viability of the Group, taking into account both its current position and principal risks. The Directors consider a three-year period was appropriate for this assessment as our capital cycle from land completion to final sell-out of a development, for FYIB build starts, is approximately three years. Our land pipeline also provides us with sufficient land under control to meet sales targets for the next three years. Accordingly, we consider it appropriate that our viability review period is broadly aligned with the expected longevity of our owned land supply.

The Group is subject to a number of principal risks (as set out in more detail overleaf) and the Directors' viability statement review considered the impact that these risks might have on the Group's ability to meet its targets. This was undertaken through the modelling of a combined set of sensitivities, by applying a reasonably possible downside to sales completion volumes, selling prices, FRI income and expected build cost savings. This sensitivity analysis reflects a severe but plausible impact, assuming that the appropriate steps are taken to mitigate the impact of the downside and continuing availability of the RCF throughout the assessment period, which is due for renewal in May 2021. The Directors will continue to review the Group's external funding requirement following the announcement of the strategic review on 25 September 2018 and do not anticipate any issues in securing a renewal of the facility beyond May 2021. Further detail as to how the facility is used, the level of reliance placed, and how the Group's liquidity risk is managed can be found on page 16.

Based on this review, the Directors confirm that they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the three-year assessment period.

 


 

Consolidated Statement of Comprehensive Income

For the year ended 31 August 2018

 

 

Notes

2018

£m

2017

£m

Continuing operations

 

 

 

Revenue

4

671.6

660.9

Cost of sales

 

(567.0)

(530.2)

Gross profit

 

104.6

130.7

Other operating income

7

11.3

8.9

Administrative expenses

 

(44.0)

(38.8)

Other operating expenses

 

(8.4)

(6.6)

Operating profit

 

63.5

94.2

Amortisation of brand

5

(2.0)

(2.0)

Exceptional administrative expenses

5

(2.0)

-

Underlying operating profit

 

67.5

96.2

Finance income

8

0.4

1.6

Finance expense

9

(5.8)

(3.7)

Profit before tax

5

58.1

92.1

Income tax expense

10

(11.6)

(17.7)

Profit for the year from continuing operations and total comprehensive income

 

46.5

74.4

Profit attributable to

 

 

 

Owners of the Company

 

46.2

74.2

Non-controlling interest

 

0.3

0.2

 

 

46.5

74.4

 

Notes 1 to 31 form part of the financial statements shown above. All trading derives from continuing operations.

Earnings per share

 

 

 

Basic (p per share)

11

8.6

13.8

Diluted (p per share)

11

8.6

13.8

Adjusted measures

 

 

 

Underlying operating profit

5

67.5

96.2

Underlying profit before tax

5

62.1

94.1

   

 

 

Consolidated Statement of Financial Position

As at 31 August 2018

 

Notes

2018

£m

2017

£m

Assets

 

 

 

Non-current assets

 

 

 

Goodwill

12

41.7

41.7

Intangible assets

13

26.1

27.6

Property, plant and equipment

14

2.1

2.4

Investments in joint ventures

 

0.4

0.4

Investment properties

 

0.2

0.2

Trade and other receivables

17

27.8

32.1

Total non-current assets

 

98.3

104.4

Current assets

 

 

 

Inventories

16

817.5

760.4

Trade and other receivables

17

22.4

9.5

Cash and cash equivalents

25

57.0

40.7

Total current assets

 

896.9

810.6

Total assets

 

995.2

915.0

Equity and liabilities

 

 

 

Capital and reserves

 

 

 

Share capital

23

43.0

43.0

Share premium

 

101.6

101.6

Retained earnings

 

617.5

600.1

Equity attributable to owners of the Company

 

762.1

744.7

Non-controlling interests

 

1.3

1.0

Total equity

 

763.4

745.7

Current liabilities

 

 

 

Trade and other payables

19

114.9

85.4

UK corporation tax

 

6.5

6.7

Land payables

20

56.9

67.4

Total current liabilities

 

178.3

159.5

Non-current liabilities

 

 

 

Long-term borrowings

21

51.4

8.0

Deferred tax liability

18

2.1

1.8

Total liabilities

 

231.8

169.3

Total equity and liabilities

 

995.2

915.0

 

Notes 1 to 31 form part of the financial statements shown above.

These financial statements were approved by the Board on 12 November 2018 and signed on its behalf by:

 

John Tonkiss                                                           Rowan Baker

Chief Executive Officer                                          Chief Financial Officer

 

 

Consolidated Statement of Changes in Equity

For the year ended 31 August 2018

 

 

Notes

Share

capital

£m

Share premium

£m

Retained earnings

£m

Total

£m

Non-controlling interest

£m

Total

equity

£m

Balance at 1 September 2016

 

43.0

100.8

553.5

697.3

0.8

698.1

Profit for the year

 

-

-

74.2

74.2

0.2

74.4

Total comprehensive income for the year

 

-

-

74.2

74.2

0.2

74.4

Transactions with owners of the Company:

 

 

 

 

 

 

 

Share-based payments

28

-

-

0.9

0.9

-

0.9

Dividends

23

-

-

(28.5)

(28.5)

-

(28.5)

Share issue related costs - tax credit

 

-

0.8

-

0.8

-

0.8

Balance at 31 August 2017

 

43.0

101.6

600.1

744.7

1.0

745.7

Profit for the year

 

-

-

46.2

46.2

0.3

46.5

Total comprehensive income for the year

 

-

-

46.2

46.2

0.3

46.5

Transactions with owners of the Company:

 

 

 

 

 

 

 

Share-based payments

28

-

-

0.8

0.8

-

0.8

Dividends

23

-

-

(29.6)

(29.6)

-

(29.6)

Balance at 31 August 2018

 

43.0

101.6

617.5

762.1

1.3

763.4

                 

 

Notes 1 to 31 form part of the financial statements shown above.

 

 

 

Consolidated Cash Flow Statement

For the year ended 31 August 2018

 

 

Notes

2018

£m

Restated

2017

£m

Net cash flow from operating activities

25

14.8

7.5

Investing activities

 

 

 

Purchases of property, plant and equipment

14

(0.8)

(0.7)

Purchases of intangible assets

13

(1.1)

(0.4)

Proceeds from sale of property, plant and equipment

 

-

0.1

Net cash used in investing activities

 

(1.9)

(1.0)

Financing activities

 

 

 

Issue of long-term borrowings

 

250.0

202.0

Repayment of long-term borrowings

 

(217.0)

(258.3)

Dividends paid

 

(29.6)

(28.5)

Net cash from/(used in) financing activities

 

3.4

(84.8)

Net increase/(decrease) in cash and cash equivalents

 

16.3

(78.3)

Cash and cash equivalents at beginning of year

 

40.7

119.0

Cash and cash equivalents at end of year

 

57.0

40.7

 

Prior year comparatives have been restated whereby the repayment of £11.3m of promissory notes, which are classified as borrowings in the Statement of Financial Position, has been reclassified. Further detail can be seen in note 25.

 

Notes 1 to 31 form part of the financial statements shown above.
 

 

 

Notes to the Consolidated Financial Statements

 

1. Significant accounting policies

The condensed financial information, which comprises the consolidated statement of comprehensive income, consolidated statement of financial position, consolidated statement of changes in equity, consolidated cash flow statement and related notes do not constitute statutory financial statements for the year ended 31 August 2018, but are derived from those statements.  Statutory financial statements for the year ended 31 August 2017 have been filed with the Registrar of Companies and those for the year ended 31 August 2018 will be filed in due course.  The Group's auditors have reported on both years' accounts; their reports were unqualified and did not contain statements under Section 498 (2) or (3) of the Companies Act 2006.

The condensed financial information has been abridged from the statutory financial statements for the year ended 31 August 2018, which have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union ('IFRS') and those parts of the Companies Act 2006 applicable to companies reporting under IFRS and therefore the consolidated financial statements comply with Article 4 of the EU IAS legislation.  The consolidated statement of comprehensive income and related notes represent results for continuing operations, there being no discontinued operations in the years presented.  The condensed financial information has been prepared under the historical cost convention, as modified by the use of valuations for certain financial instruments, share based payments and post-employment benefits.

 The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

Basis of preparation

McCarthy & Stone plc is a public Company limited by shares and incorporated in England and Wales under the Companies Act 2006. The Group financial statements consolidate those of the Company and its subsidiaries (together referred to as the 'Group') and include the Group's interest in certain joint ventures where the Group has power over the relevant activities of the entity through its power to appoint the majority of Directors. The Company financial statements present information about the Company as a separate entity and not about the Group.

The Group financial statements have been prepared and approved by the Directors in accordance with International Financial Reporting Standards as adopted by the European Union ('EU IFRS') and have been prepared under the historical cost convention.

Going concern

The Directors consider that the Group is well placed to manage business and financial risks in the current economic environment and have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future, a period not less than 12 months from the date of this report. In February 2018 the Group extended its Revolving Credit Facility from £200m to £250m for a period of 12 months (existing facility of £200m ends in May 2021). As at the year end date a total of £43.0m (2017: £10.0m) has been drawn down with a further £57.0m (2017: £40.7m) held on the Consolidated Statement of Financial Position in cash, offset by promissory notes of £10.0m (2017: £nil), resulting in net cash of £4.0m (2017: £30.7m). The level of drawdown on the RCF fluctuates during the year however the Group operates within a minimum headroom requirement of £50.0m throughout the year. If headroom were at risk, management can take mitigating action by aborting uncommitted land purchases and related build costs.

In making our assessment as to the Group's ability to continue as a going concern and managing the related funding risk, we have considered forecast net debt levels reflecting on interest cover, gearing and tangible net asset value covenants with no breaches identified. Accordingly, the Directors continue to adopt the going concern basis in preparing these Consolidated Financial Statements. Further information on the Group's borrowings is given in note 21.

Alternative Performance Measures ('APMs')

Within the Annual Report, the Directors have adopted various APMs. These measures are not defined by International Financial Reporting Standards ('IFRS'). 

The Directors are of the opinion that the separate presentation of these items provides helpful information about the Group's underlying business performance.

The key APMs that the Group has used are as follows:

·      Underlying operating profit

·      Net cash

·      Underlying earnings per share

·      Underlying profit before tax

·      Underlying operating profit margin

·      Return On Capital Employed ('ROCE')

 

All 'underlying' items refer to the adjusted measure being reported before 'exceptional' and 'adjusted cost' items. Specifically, the exceptional items are one-off, and their inclusion does not present consistent and comparable results. The amortisation of brand is a non-trading factor and its inclusion is not useful in determining the trading profits of the Group. ROCE is used as a metric to ensure efficient and effective use of capital and is a key metric for determining Director remuneration (including LTIP targets). ROCE is also a comparable metric used by our peer housebuilder group.

A full reconciliation between the statutory results and the underlying measures and a ROCE calculation can be seen within note 5. Net cash has been defined and calculated within note 22. Adjusted cost and exceptional items have been defined within note 5.

 

2. Outlook for adoption of future standards (new and amended)

The following new standards, amendments to standards and interpretations ('Standards') are applicable to the Group and are mandatory for the first time for the financial year which began on 1 September 2017: Amendments to IAS 7 'Statement of Cash Flows - Changes in Liabilities arising from Financing Activities' and Amendment to IAS 12 'Recognition of Deferred Tax Assets for Unrealised Losses'. These Standards have not had a material impact on the results of the Company for the year ended 31 August 2018. 

3. Critical accounting judgements and key sources of estimation uncertainty

In the application of the Group's accounting policies, the Directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

 

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

 

Critical judgements in applying the Group's accounting policies

In applying the Group's accounting policies, one critical judgement has been made in relation to exceptional items. A judgement has been made that the items in FY18 are of significant cost, non-recurring and unusual to the normal activity of the Group and therefore a decision was made to reclassify these items separately on the face of the Consolidated Statement of Comprehensive Income.

 

No other critical judgements are deemed to have been made that have a material effect on the amounts recognised in the financial statements.

 

Assumptions and other sources of estimation uncertainty

The following are assumptions the Group makes about the future, and other sources of estimation uncertainty at the end of the reporting period.

 

Critical assumptions and major sources of estimation uncertainty

The Group does not have any key assumptions concerning the future, or other key sources of estimation uncertainty in the reporting period that may have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year.

 

Other assumptions and sources of estimation uncertainty

These assumptions and sources of estimation uncertainty carry risk of resulting in a material adjustment to the carrying amounts of assets and liabilities over the longer-term.

 

Impairment of goodwill

Goodwill is tested to determine whether the estimation of the value in use of the CGU is greater than the carrying value of the asset. The value in use calculation includes an estimate of the future forecast cash flows and requires the determination of a suitable discount rate in order to calculate the present value of the cash flows. Details of the impairment review calculation and sensitivity analysis performed are included in note 15.

 

 Fair value of shared equity receivables

Shared equity receivables are recognised at the fair value of future anticipated cash receipts that takes into account the Directors' view of an appropriate discount rate, a new build premium, future house price movements and the expected timing of receipts. Shared equity receivables are reviewed at each reporting date using a variety of estimates that anticipate future cash flow from assets. Further information regarding the assumptions and sensitivity effects of a reasonable possible change across all schemes can be seen within note 27. The significant risk is specifically pinpointed to the Group's substantially largest shared equity scheme which was offered between FY12 and FY17 of which the revaluation is driven by changes in discount rates and house price inflation. Should both of these assumptions be impacted by a reasonably possible change of a 1% increase or decrease, the effect has been illustrated below:

 

 

Increase

assumptions by 1%

£m

Decrease

assumptions by 1%

£m

Discount rate

(1.7)

1.9

House price inflation

1.9

(1.7)

 

Cost capitalisation of overheads

Within inventory there are a number of areas of estimation uncertainty, including determination of site margin, of which cost capitalisation of overheads is the most significant. Inventory includes a proportion of design, procurement, construction, health & safety, commercial and planning costs. Costs associated with these functions are reviewed by management to attribute those costs relating directly to the cost of the developments to inventory and those that relate to general business overheads to expenses. The assumptions used are reviewed annually by the function heads before being proposed to the Risk and Audit Committee.

 

Cost capitalisation involves estimates of the proportion of costs that are directly attributable to sites. The key source of

estimation uncertainty in this area relates to the percentage of time spent by our regions on directly attributable site activities. The percentage of their time which is capitalised ranges between 69-85% (2017: 77-93%) for the various functions. Overhead costs capitalised at 31 August 2018 amount to £23.7m (2017: £23.2m). If the prior year cost capitalisation rates were to be used, the value of the overhead costs capitalised would have increased by £0.2m.

 

 

4. Revenue

 

2018

£m

2017

£m

Unit sales

642.8

631.8

FRI revenue

28.8

29.1

 

671.6

660.9

 

All unit sales revenue arose from the sale of properties. All revenue was generated within the UK. No individual customer is significant to the Group's revenue in any period.

 

Proceeds received on the disposal of part-exchange properties, which are not included in revenue were £88.1m (2017: £11.6m). These are recognised on a net basis within cost of sales on the basis that they are incidental to the main revenue-generating activities of the Group. The net loss on disposal of these properties was £1.0m (2017: profit of £0.1m). 

 

 

5. Profit before tax

Profit before tax has been arrived at after charging:

 

Notes

2018

£m

2017

£m

Amortisation of intangibles

13

2.6

2.4

Depreciation of property, plant and equipment

14

1.1

1.1

Operating lease arrangements

24

 

 

  Land and buildings

 

1.7

1.4

  Plant and machinery

 

2.6

2.5

Cost of inventories recognised as an expense

 

480.0

457.1

Staff costs

6

94.0

88.4

Share-based payments charge to profit or loss

28

0.8

0.9

Movement in inventory provision (including part-exchange properties)

 

1.5

1.2

 

Reconciliation to underlying operating profit and profit before tax

The following tables present a reconciliation between the statutory profit measures disclosed on the Consolidated Statement of Comprehensive Income and the underlying measures used by the Board to appraise performance.

 

Exceptional items are items which, due to their one-off, non-trading and non-recurring nature, have been separately classified by the Directors in order to draw them to the attention of the reader.

 

Adjusted cost items are items which are quantitively or qualitatively material and are presented separately within the Consolidated Statement of Comprehensive Income. The Directors are of the opinion that the separate presentation of these items provides helpful information about the Group's underlying business performance. Amortisation of brand has been adjusted in order to reconcile to underlying operating profit and underlying profit before tax given the Directors do not believe this cost reflects the underlying trading of the business.

 

Exceptionals

Year ended 31 August 2018

      Notes

Statutory

£m

Exceptional Administrative costs

£m

Adjusted cost Amortisation

of brand

£m

Underlying

£m

Operating profit

 

63.5

2.0

2.0

67.5

Finance income

8

0.4

-

-

0.4

Finance expense

9

(5.8)

-

-

(5.8)

Profit before tax

 

58.1

2.0

2.0

62.1

Income tax expense

 

(11.6)

(0.4)

(0.4)

(12.4)

Profit for the year

 

46.5

1.6

1.6

49.7

  Attributable to non-controlling interest

 

0.3

-

-

0.3

  Attributable to owners of the Company

 

46.2

1.6

1.6

49.4

Earnings per share

 

 

 

 

 

  Basic (p per share)

 

8.6

0.3

0.3

9.2

  Diluted (p per share)

 

8.6

0.3

0.3

9.2

 

 

 

 

 

 

 

The exceptional administrative costs in 2018 represent third-party advisory fees and redundancy costs incurred in relation to the strategic review. Total costs for the strategic review are expected to be c.£25.0m and therefore deemed to be a material exceptional item (see note 31). The net cash outflow from exceptional administrative expenses described above was £0.4m (2017: £nil).

 

 

 

 

Year ended 31 August 2017

      Notes

Statutory

£m

Exceptional Administrative costs

£m

Adjusted cost Amortisation

of brand

£m

Underlying

£m

Operating profit

 

94.2

-

2.0

96.2

Finance income

8

1.6

-

-

1.6

Finance expense

9

(3.7)

-

-

(3.7)

Profit before tax

 

92.1

-

2.0

94.1

Income tax expense

 

(17.7)

-

(0.4)

(18.1)

Profit for the year

 

74.4

-

1.6

76.0

  Attributable to non-controlling interests

 

0.2

-

-

0.2

  Attributable to owners of the company

 

74.2

-

1.6

75.8

Earnings per share

 

 

 

 

 

  Basic (p per share)

 

13.8

-

0.4

14.2

  Diluted (p per share)

 

13.8

-

0.4

14.2

 

Key profit related metrics, underlying operating profit margin and return on capital employed ('ROCE'), have been reconciled below:

 

Underlying operating profit margin: calculated as underlying operating profit (being operating profit adding amortisation of brand and exceptional administrative expenses) divided by revenue.

 

ROCE: calculated by dividing underlying operating profit by the average of opening and closing Tangible Gross Asset Value ('TGAV' - calculated as tangible net asset value less net cash) in the year.

 

2018

£m

2017

£m

Revenue

671.6

660.9

 

 

 

Operating profit

63.5

94.2

Operating profit margin

9%

14%

 

 

 

Amortisation of brand

2.0

2.0

Exceptional administrative expenses

2.0

       -

 

 

 

Underlying operating profit

67.5

96.2

Underlying operating profit margin

10%

15%

 

 

 

Opening net assets

745.7

698.1

Opening goodwill (note 12)

(41.7)

(41.7)

Opening intangible assets

(27.6)

(29.6)

Opening net cash

(30.7)

(52.8)

Opening tangible gross asset value

645.7

574.0

 

 

 

Closing net assets

763.4

745.7

Closing goodwill (note 12)

(41.7)

(41.7)

Closing intangible assets

(26.1)

(27.6)

Closing net cash

(4.0)

(30.7)

Closing tangible gross asset value

691.6

645.7

 

 

 

Average tangible gross asset value

668.7

609.9

 

 

 

Underlying operating profit

67.5

96.2

 

 

 

ROCE

10%

16%

 

 

Auditor's remuneration

 

2018

£m

2017

£m

Fees payable to the Group's auditor

 

 

  Audit of the Company and Consolidated Financial Statements

0.2

0.2

  Audit of the Company's subsidiaries

-

-

  Audit related assurance services

-

-

  Other services

-

-

 

0.2

0.2

 

Audit of the Company's subsidiaries amounted to £30,000 (2017: £30,000). Audit-related assurance services amounted to £37,500 (2017: £35,000) in respect of a review of the half year results. Other services amounted to £1,600 (2017: £nil) in respect of room hire at the Deloitte Academy. There were no other fees payable to the Group auditor in the year.

 

 

6. Staff costs

Staff costs for the year include Directors' emoluments, which are detailed within this note:

 

2018

£m

2017

£m

Wages and salaries1

79.8

76.2

Social security costs

8.4

8.0

Other pension costs

4.1

2.6

Share-based payments

0.8

0.9

Termination payments

0.9

0.7

 

94.0

88.4

 

1 The 2017 wages and salaries figure has been updated in the table above following the identification of an error reflecting a double counting of an adjustment in the preparation of this note in the prior year.

 

The monthly average number of persons, including Executive Directors, employed by the Group during the year was as follows:

 

2018 Number

2017

Number

Office management and staff

995

902

House managers

1,166

1,024

Construction staff

241

219

 

2,402

2,145

 

Staff costs include an average of 942 persons employed during the year from YourLife Management Services Limited (2017: 823), a 50% subsidiary held by the Group.

 

At 31 August 2018 the Group employed 2,512 people (2017: 2,264).

 

  

Directors' emoluments

Amounts recognised in respect of Board Directors' emoluments:

 

2018

£m

2017

£m

Wages and salaries

1.9

1.7

Social security costs

0.3

0.2

Share-based payments

-

0.3

Other pension costs1

0.2

0.2

Termination payments

0.5

-

 

2.9

2.4

 

1 Includes salary supplements in lieu of pension

 

The emoluments of the highest paid director was £1.3m (2017: £1.0m), including pension contributions of nil (2017: nil). The number of Directors in the Company pension plan was one (2017: two).

 

 

7. Other operating income

 

2018

£m

2017

£m

Net rental income

0.3

0.3

Other income

9.5

7.7

Non-core business revenue

1.5

0.9

 

11.3

8.9

 

Other income arises on the services provided by Group subsidiaries to manage certain developments. Non-core business revenue relates to income such as customer extras. Within net rental income, there are gross ground rents received and paid of £5.6m (2017: £4.4m).

 

 

8. Finance income

 

2018

£m

2017

£m

Gain in fair value of shared equity receivables

0.3

1.5

Interest income received

0.1

0.1

 

0.4

1.6

 

 

9. Finance expense

 

2018

£m

2017

£m

Loans interest and overdraft fees

3.6

3.1

Promissory note interest and fees

0.1

0.1

Refinancing issue costs

0.6

0.5

Loss in fair value of shared equity receivables

1.5

-

 

5.8

3.7

 

The total interest expense, determined using the effective interest method, for financial liabilities that are not classified as at fair value through profit or loss was £3.0m (2017: £2.3m).

 

  

10. Income tax expense

 

Notes

2018

£m

2017

£m

Corporation tax charges

 

 

 

  Current year

 

11.3

17.7

  Adjustments in respect of prior years

 

-

(0.3)

Deferred tax charges

 

 

 

   Current year

18

0.3

0.3

 

 

11.6

17.7

 

The tax charge for each year can be reconciled to the profit before tax per the Consolidated Statement of Comprehensive Income as follows:

 

2018

£m

2017

£m

Profit before tax

58.1

92.1

Tax charge at the UK corporation tax rate of 19.00% (2017: 19.58%)

11.0

18.0

Tax effect of

 

 

  Expenses that are not deductible in determining taxable profit

0.3

0.1

  Income not taxable in determining taxable profit

-

(0.1)

   Adjustments in respect of previous periods

-

(0.3)

   Share options timing difference

0.3

0.2

   Other reconciling items

-

(0.2)

Tax charge for the year

11.6

17.7

 

The rate of corporation tax was lowered to 19% from 1 April 2017 and to 17% with effect from 1 April 2020. The UK deferred tax liabilities at 31 August 2018 have been calculated based on the appropriate rate at which the liability will unwind.

 

 

11. Earnings per share

Basic earnings per share is calculated as the profit for the financial period attributable to owners of the Company divided by the weighted average number of shares in issue during the period. The actual weighted average number of ordinary shares during the full year ended 31 August 2018 was 537.3m for the basic and 538.6m for the diluted calculations, giving a statutory earnings per share for the year ended 31 August 2018 of 8.6p for basic and 8.6p for diluted.

 

 

2018

 

2017

Profit attributable to owners of the Company (£m)

46.2

74.2

Weighted average no. of shares (m)

537.3

537.3

Basic earnings per share (p)

8.6

13.8

 

For diluted earnings per share, the weighted average number of shares in issue is adjusted to assume the conversion of all potentially dilutive ordinary shares. At 31 August 2018, the Company had two categories of potentially dilutive ordinary shares: 5.8m nil cost share options under the LTIP and 4.1m 167.4p share options under the SAYE.

 

A calculation is done to determine the number of shares that could have been acquired at fair value based on the aggregate of the exercise price of each share option and the fair value of future services to be supplied to the Group, which is the unamortised share-based payments charge. The difference between the number of shares that could have been acquired at fair value and the total number of options is used in the diluted earnings per share calculation.

 

 

 

2018

 

2017

Profit used to determine diluted EPS (£m)

46.2

74.2

Weighted average number of shares (m)

537.3

537.3

Adjustments for

 

 

  Share options - LTIP (m)

1.3

0.3

Shares used to determine diluted EPS (m)

538.6

537.6

Diluted earnings per share (p)

8.6

13.8

 

 

12. Goodwill

 

£m

Cost

 

At 1 September 2016 and 31 August 2017 and 2018

41.7

Carrying amount

 

At 1 September 2016 and 31 August 2017 and 2018

41.7

 

No impairment losses have been recognised in any of the reporting periods presented herein.

 

Goodwill arose as a result of an acquisition in 2009 of the assets and liabilities of Monarch Realisations 1 plc. As the goodwill relates to the business as a whole, it is allocated to the CGU, as defined in note 1. For key assumptions in determining recoverable amounts in goodwill impairment testing, refer to note 15.

 

 

13. Intangible assets

 

Brand

£m

Software

£m

Total

£m

Cost

 

 

 

At 1 September 2016

41.4

4.3

45.7

Additions

-

0.4

0.4

At 31 August 2017

41.4

4.7

46.1

Additions

-

1.1

1.1

At 31 August 2018

41.4

5.8

47.2

Amortisation

 

 

 

At 1 September 2016

(15.3)

(0.8)

(16.1)

Charge for the year

(2.0)

(0.4)

(2.4)

At 31 August 2017

(17.3)

(1.2)

(18.5)

Charge for the year

(2.0)

(0.6)

(2.6)

At 31 August 2018

(19.3)

(1.8)

(21.1)

Carrying amount

 

 

 

At 31 August 2017

24.1

3.5

27.6

At 31 August 2018

22.1

4.0

26.1

 

Brand assets represent the McCarthy & Stone brand name purchased as part of the business combination in 2009. Brand assets have 10 years and 7 months of useful life remaining.

All amortisation charged is recognised in administrative expenses in the Consolidated Statement of Comprehensive Income.

 

 

14. Property, plant and equipment

 

£m

Cost

 

At 1 September 2016

7.2

Additions

0.7

Disposals

(0.1)

At 31 August 2017

7.8

Additions

0.8

Disposals

(2.4)

At 31 August 2018

6.2

Accumulated depreciation and impairment

 

At 1 September 2016

(4.3)

Charge for the year

(1.1)

Eliminated on disposals

-

At 31 August 2017

(5.4)

Charge for the year

(1.1)

Eliminated on disposals

2.4

At 31 August 2018

(4.1)

Carrying amount

 

At 31 August 2017

2.4

At 31 August 2018

2.1

 

 

15. Impairment testing

During the periods reported in the financial statements, no impairments have been recognised against the Group's assets. For each reported period, management have performed an impairment review of goodwill, being an indefinitely lived asset. The Group only has one CGU, as defined in note 1.

The recoverable amount (value in use) was determined by discounting the forecast future cash flows of the CGU. Three years of net operating cash flows were calculated using the Group's three year business plan for FY19-21. The cash flows for FY22 reflected additional investment in land and build compared to FY21 and were extrapolated in perpetuity assuming no growth rate in line with the new steady state business strategy.  The key assumptions for the value in use calculation were:

•      Discount rate: this is a pre-tax rate that reflects current market assessments of the time value of money and risks specific to the business.  Accordingly, the rate of 10.0% (FY17: 11.3%) is considered by the Directors to be the appropriate pre-tax risk adjusted discount rate, being the Group's estimated long-term pre-tax weighted average cost of capital

•      Sales completion volumes: these are calculated on a site-by-site basis for the first three years dependent upon regional market conditions, taking into account historic sales curves and expected reservation rates

•      Expected changes in selling prices: these are calculated on a site-by-site basis for the first three years dependent upon regional market conditions, pricing for existing pipeline sites and product type. Consistent with FY18, no house price inflation has been assumed

•      FRI income: this is based on the assumption that the Group will continue selling FRI during FY19-21

•      Expected build costs: these are calculated on a site-by-site basis for the first three years dependent upon the expected costs of completing all aspects of each individual development and management best estimate to deliver build cost reductions as part of the new strategy.  Build cost inflation is expected to continue at 3-4%

 

These assumptions are reviewed and revised annually in light of current economic conditions and the future outlook for the business.

The result of the value in use exercise concluded that the recoverable amount of the CGU exceeded its carrying value by £407.8m and there has been no impairment to goodwill.

Management has modelled two scenarios by applying reasonably possible downsides to each of the key assumptions applied in the value in use calculations. 

Scenario 1: Management have performed a sensitivity analysis based on an increase in the pre-tax discount rate by 1% reflecting a potential change in the market assessments of the time value of money.  This sensitivity analysis showed that no goodwill impairment would arise under this scenario.

Scenario 2: Management have performed a sensitivity analysis by combining several downsides assuming that the appropriate steps are taken to mitigate the impact of the downsides.  These were as follows:

•      Based on continuing subdued secondary housing market and current reservation rates, management have applied 10.3% volume downside in FY19 and 5.4% downside in FY20-21

•      Management have applied a 7.5% downside on pricing in the South East and North London region from March 2019, reflecting pressures in the market in these geographical regions and a 2.5% downside in all other regions in FY20 and FY21

•      Additionally, management have modelled the removal of FRI income in FY20 and FY21 given the uncertainty over the long-term sustainability of this revenue stream

•      All build cost savings targeted as part of the strategic review have been removed from the model

•      Management have assumed that this scenario will be mitigated by aborting uncommitted land purchases and related build costs

 

This sensitivity analysis showed that no goodwill impairment would arise under this scenario.

No impairment charges were recorded on items of property, plant and equipment throughout the current or prior year.

 

16. Inventories

 

2018

£m

2017

£m

Land held for development

99.6

148.6

Sites in the course of construction

290.3

341.2

Finished stock

385.9

238.7

Part-exchange properties

41.7

31.9

 

817.5

760.4

 

Days in inventory amounted to 590 days in 2018 (2017: 582 days).

 

Inventory days are calculated by taking year end inventory (excluding part-exchange properties) divided by cost of inventories recognised as an expense.

 

 

17. Trade and other receivables

 

2018

£m

2017

£m

Trade and other receivables due in less than one year

 

 

Trade receivables

11.9

2.1

Other debtors and prepayments

10.5

7.4

 

22.4

9.5

 

 

2018

£m

2017

£m

Trade and other receivables due in greater than one year

 

 

Secured mortgages

2.8

3.2

Shared equity receivables

25.0

28.9

 

27.8

32.1

 

Secured mortgages disclosed above are classified as loans and receivables and are measured at amortised cost. Shared equity receivables are classified as financial assets measured at fair value through profit or loss.

 

The Directors consider that the carrying amounts of trade and other receivables and non-current receivables approximates their fair value.

 

 

18. Deferred tax

The following are the major deferred tax liabilities recognised by the Group:

 

Other temporary differences

£m

Total

£m

At 1 September 2016

(1.5)

(1.5)

Statement of Comprehensive Income charge

(0.3)

(0.3)

At 31 August 2017

(1.8)

(1.8)

Statement of Comprehensive Income charge

(0.3)

(0.3)

At 31 August 2018

(2.1)

(2.1)

 

The movement in other temporary differences mostly relate to tax and accounting differences in the treatment of share-based payments.

Deferred tax assets of £0.1m (2017: £0.1m) in relation to capital losses carried forward of £0.3m (2017: £0.3m) were not recognised as, despite there being no expiry date for these losses, there is insufficient evidence that they will ever be utilised.

 

 

19. Trade and other payables

 

2018

£m

2017

£m

Trade payables

25.9

22.7

Other taxes and social security costs

2.1

1.9

Accrued expenses

58.0

42.6

Other creditors and deferred income

28.9

18.2

 

114.9

85.4

 

Trade payables and accrued expenses principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit period taken for trade purchases was 18 days during 2018 (2017: 20 days).

 

No material interest costs have been incurred in relation to such payables. The Group policy is to ensure that payables are paid within the pre-agreed credit terms and to avoid incurring penalties and/or interest on late payments. Other creditors include sales taxes, property taxes and customer deposits. The Directors consider that the carrying amount of trade payables approximates their fair value.

 

No trade payables are purchased on extended payment terms.

 

 

20. Land payables

 

2018

£m

2017

£m

Land payables

56.9

67.4

 

Land payables relate to payment due in respect of land which has been purchased under an unconditional contract.

 

 

21. Borrowings

 

Long-term borrowings

2018

£m

2017

£m

Loans (Revolving Credit Facility)

43.0

10.0

Unamortised issue costs

(1.6)

(2.0)

Promissory notes

10.0

-

 

51.4

8.0

 

 

 

Outstanding at 31 August

 

 

Maturity

2018

£m

2017

£m

Revolving Credit Facility

 

May 2021

43.0

10.0

           

 

The Group has in place a Revolving Credit Facility ('RCF') which during the year has been extended from £200m to £250m, maturing in May 2021.

 

The RCF imposes financial covenants which test the Group's 'interest cover', 'net tangible assets' and 'gearing' all of which the Group is compliant with.

 

The nominal interest rate of the £250m RCF is 1, 3 or 6 month LIBOR + 1.6% (2017: 1, 3 or 6 month LIBOR + 1.6%) depending on the length of the drawdown. As at 31 August 2018, £43.0m (2017: £10.0m) was drawn. The RCF is secured by a floating charge over the assets of McCarthy & Stone plc, McCarthy & Stone Retirement Lifestyles Limited, McCarthy & Stone (Developments) Limited, McCarthy & Stone (Extra Care Living) Limited and McCarthy & Stone Total Care Management Limited.

  

A reconciliation of liabilities arising from financing activities has been detailed below:

 

 

 

2017

£m

 

 

 

 

 

 

Cash flow

 

Non-cash changes

 

 

At 1 September 2016

 

Net cash flow

 

Amortisation of issue costs

Issue of promissory notes

 

At 31 August 2017

Long-term borrowings

 

 

 

 

 

 

 

  Loans

55.0

 

(45.0)

 

-

-

10.0

  Unamortised issue costs

(2.5)

 

-

 

0.5

-

(2.0)

 

 

 

 

 

 

 

 

Short-term borrowings

 

 

 

 

 

 

 

  Promissory notes

11.3

 

(11.3)

 

-

-

-

 

 

 

 

 

 

 

 

 

 

Total liabilities from financing activities

 

63.8

 

(56.3)

 

0.5

-

 

8.0

 

 

 

 

2018

£m

 

 

 

 

 

 

Cash flow

 

Non-cash changes

 

 

At 1 September 2017

 

Net cash flow

 

Amortisation of issue costs

Issue of promissory notes

 

At 31 August 2018

Long-term borrowings

 

 

 

 

 

 

 

  Loans

10.0

 

33.0

 

-

-

43.0

  Unamortised issue costs

(2.0)

 

-

 

0.4

-

(1.6)

  Promissory notes

-

 

-

 

-

10.0

10.0

 

 

 

 

 

 

 

 

 

 

Total liabilities from financing activities

 

8.0

 

33.0

 

0.4

10.0

 

51.4

 

 

22. Net cash

 

2018

£m

2017

£m

Loans and borrowings

51.4

8.0

Add back unamortised issue costs

1.6

2.0

Cash and cash equivalents

(57.0)

(40.7)

Net cash

(4.0)

(30.7)

Add back land-related promissory notes

(10.0)

-

Net cash excluding land-related promissory notes

(14.0)

(30.7)

 

Net cash is a non-GAAP measure and is calculated as cash and cash equivalents less long-term and short-term borrowings (excluding unamortised debt issue costs and land-related promissory notes).

  

 

23. Share capital

The Company has one class of ordinary shares which carry no right to fixed income. There is no limit to authorised share capital.

 

Allotted and issued ordinary shares

2018

£m

2017

£m

8p each fully paid: 537,329,434 ordinary shares (2017: 537,329,434)

43.0

43.0

 

Allotted of shares during the year

2018 Number

'000

2017

Number

'000

At 1 September

537,329

537,314

Issuance to satisfy early exercises under Sharesave plan

-

15

At 31 August

537,329

537,329

 

Dividends on equity shares

The interim dividend of 1.9p (2017: 1.8p) was approved by the Board on 10 April 2018 and paid on 8 June 2018 to all ordinary shareholders on the register of members at the close of business on Friday 4 May 2018. The ex-dividend date was 3 May 2018. The final dividend proposed by the Board is 3.5p (2017: 3.6p) per share resulting in a total ordinary dividend for the year of 5.4p (2017: 5.4p).  It will be paid on 1 February 2019 to those shareholders who are on the register at 4 January 2019 subject to approval at the Company's Annual General Meeting. The ex-dividend date is 3 January 2019. These financial statements do not reflect the final dividend payment.

 

The cost of the dividends paid within the financial year amounted to £29.6m (2017: £28.5m).

 

 

24. Operating lease arrangements

 

2018

£m

2017

£m

Minimum lease payments under operating leases recognised as an expense during the year

4.3

3.9

 

At year end the Group had outstanding commitments for future minimum lease payments under non-cancellable operating leases, which fall due as follows:

 

2018

£m

2017

£m

Within one year

4.2

4.3

In the second to fifth years inclusive

5.5

6.9

After five years

1.0

1.1

Outstanding commitments for future minimum lease payments

10.7

12.3

 

Operating lease payments typically represent rentals payable by the Group for its office properties and cars. Rent reviews and break clauses apply to leased property agreements.

  

 

25. Notes to the cash flow statement

 

Notes

2018

£m

Restated

2017

£m

Profit for the financial year

 

46.5

74.4

Adjustments for

 

 

 

  Income tax expense

10

11.6

17.7

  Amortisation of intangible assets

13

2.6

2.4

  Share-based payments charge

28

0.8

0.9

  Depreciation of property, plant and equipment

14

1.1

1.1

  Finance expense

9

5.8

3.7

  Finance income

8

(0.4)

(1.6)

Operating cash flows before movements in working capital

 

68.0

98.6

(Increase)/decrease in trade and other receivables

 

(9.8)

0.1

(Increase) in inventories

 

(47.1)

(74.6)

Increase in trade and other payables

 

19.1

5.4

Cash generated by operations

 

30.2

29.5

Interest received

 

0.1

0.1

Interest paid

 

(4.0)

(2.9)

Income taxes paid

 

(11.5)

(19.2)

Net cash flow from operating activities

 

14.8

7.5

 

Cash and cash equivalents

 

 

Cash and bank balances

57.0

40.7

 

Prior year comparatives have been restated whereby the repayment of £11.3m of promissory notes, which are classified as borrowings in the Statement of Financial Position has been reclassified.

 

Previously the repayment was classified as an operating cash flow incorporated within 'increase in inventories'. The restatement arose following an enquiry by the Financial Reporting Council, as a result of which the Group concluded that, in order to comply with IAS 7 'Statement of Cash Flows', these movements should be classified as financing activities.

 

The review conducted by the FRC was based solely on the Group's published Annual Report and does not provide any assurance that the report and financial statements are correct in all material respects.

 

Cash and cash equivalents comprise cash and bank balances and short-term bank deposits with an original maturity of three months or less, net of outstanding bank overdrafts.

 

The increase in trade and other payables includes the movement in land payables.

 

 

26. Retirement benefit schemes

The Group operates a defined contribution retirement benefit scheme which is open to all employees.

 

Other than amounts that are deducted from employees' remuneration and accrued pending payment to the benefit scheme, no further obligations fall on the Group as the assets of these arrangements are held and managed by third parties entirely separate from the Group.

 

The benefit scheme charge for the period represents contributions payable to the benefit scheme and amounted to £4.1m for the year ended 31 August 2018 (2017: £2.6m). Unpaid contributions amounted to £0.4m as at 31 August 2018 (2017: £0.3m).

  

 

27. Financial risk management

The Group's financial instruments comprise cash, bank loans and overdrafts, trade receivables, other financial assets and trade and other payables.

 

Categories of financial instruments

 

2018

£m

2017

£m

Financial assets

 

 

 

Fair value through profit or loss

 

 

 

  Shared equity receivables

 

25.0

28.9

Loans and receivables

 

 

 

  Cash and cash equivalents

 

57.0

40.7

  Trade and other receivables

 

13.3

2.7

  Secured mortgages

 

2.8

3.2

 

 

98.1

75.5

Financial liabilities

 

 

 

Other financial liabilities

 

 

 

  Trade and other payables

 

89.5

77.2

  Land payables

 

56.9

67.4

  Loans

 

41.4

8.0

  Land-related promissory notes

 

10.0

-

 

 

197.8

152.6

 

Capital risk management

The Group manages its capital (being debt, cash and cash equivalents and equity) to ensure entities within the Group have a strong capital base in order to continue as going concerns, to maintain investor and creditor confidence and to provide a basis for the future development of the business while maximising the return to stakeholders.

 

The RCF imposes financial covenants, which is normal for such agreements, all of which the Group is compliant with. The Group manages a robust internal forecasting and review process to ensure it operates within these capital requirements.

 

The Group does not routinely make additional issues of capital, other than for the purpose of raising finance for the management of the cost of capital of the Group or to fund significant developments designed to grow value in future.

 

Share-based payment schemes allow senior employees of the Group to participate in the ownership of the Group in order to ensure the senior employees are focused on growing the value of the Group to achieve the aims of all shareholders.

 

Financial risk management

The Group's finance function is responsible for all aspects of corporate treasury. It co-ordinates access to financial markets and monitors and manages the financial risks relating to the operations of the Group through internal reports which analyse exposures by degree and magnitude. The risks reviewed include market risk (including currency risk, fair value interest rate risk and price risk), credit risk, liquidity risk and cash flow interest rate risk.

 

Housing market risk management

The Group's activities expose it primarily to macroeconomic risks such as deflation and the cyclical nature of UK property prices. A deterioration in the economic outlook could have a significant impact on the Group's financial performance and the Group has the following procedures which mitigate its market-related operational risk:

 

·     The Group closely monitors industry indicators and assesses the potential impact of different economic scenarios

·     Decisions to allocate new capital to land and build are managed centrally through the Group Investment Committee, membership of which includes the Chief Executive Officer, the Chief Financial Officer and the Land & Planning Director

·     The Group aims to maintain a national and product spread of developments to ensure that it is not reliant on one particular location, development or product

·     The Group undertakes a weekly review of sales, reservations and incentives at regional and Group level

  

The value of the Group's house price linked financial assets is sensitive to UK house prices since the amount repayable is dependent upon the market price of the property to which the asset is linked. At 31 August 2018 if UK house prices were 1% lower for a one-year period and all other variables were held constant, the Group's house price linked financial assets would decrease in value, excluding the effects of tax, by £1.7m (2017: £2.1m) with a corresponding reduction in both the result for the year and equity.

 

Credit risk management

Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. The Group has a low exposure to credit risk due to the nature and legal framework of the UK housing industry.

 

In certain circumstances the Group offers sales incentives resulting in a long-term debt being recognised under which the Group will receive a proportion of the resale proceeds of an apartment. The Group's equity share is protected by a registered entry on the title and usually represents the first interest in the property. A reduction in property values leads to an increase in the credit risk of the Group in respect of such sales.

 

The credit risk relating to shared equity receivables is deemed immaterial as the value is recovered though subsequent disposal of the related asset. As a result, management consider the credit quality of these receivables to be good in respect of the amounts outstanding, resulting in low credit risk. Exposure to house price sensitivity is built into the fair value calculation.

 

The Group does not have any significant credit risk exposure to any single counterparty or group of counterparties having similar characteristics. The Group defines counterparties as having similar characteristics if they are related entities. There is no material concentration of credit risk in respect of one individual customer.

 

The carrying amount recorded for financial assets in the financial statements is net of impairment losses and represents the Group's maximum exposure to credit risk. No guarantees have been given in respect to third parties.

 

Liquidity risk management

Liquidity risk is the risk that the Group will encounter difficulty in meeting obligations associated with financial liabilities. The Group's strategy in relation to managing liquidity risk is to ensure that the Group has sufficient cash flow liquid funds to meet all its potential liabilities as they fall due. The Group produces cash flow forecasts to monitor the expected requirements of the Group against the available facilities. The principal risks with these cash flows relate to achieving the level of sales volumes and prices in line with current forecasts.

 

The maturity of the financial liabilities of the Group at 31 August 2017 and 2018 are as follows:

 

 

2017

 

Carrying

value
£m

Contractual cash flows

£m

Within 1 year

£m

1-5 years

£m

Loans (net of borrowing costs)

8.0

15.2

1.4

13.8

Financial liabilities carrying no interest

144.6

144.6

144.6

-

Total

152.6

159.8

146.0

13.8

 

 

2018

 

Carrying

value
£m

Contractual cash flows

£m

Within 1 year £m

1-5 years

£m

Loans (net of borrowing costs)

41.4

48.7

2.2

46.5

Other financial liabilities carrying interest

10.0

10.3

0.2

10.1

Financial liabilities carrying no interest

146.4

146.4

146.4

-

Total

197.8

205.4

148.8

56.6

 

 

Other financial liabilities carrying interest are promissory notes, which attract availability and discount fees. Financial liabilities carrying no interest are trade and other payables and land payables. The timing and amount of future cash flows given in the table above is based on the year end position.

 

Interest rate risk management

Interest rate risk reflects the Group's exposure to fluctuations to interest rates in the market. The risk arises because the Group's RCF is subject to floating interest rates based on LIBOR.

 

In the year ended 31 August 2018, if UK interest rates had been 0.5% higher or lower, as this is a reasonably possible change, and all other variances were held constant, the Group's pre-tax profit would decrease/increase by £0.7m (2017: £0.5m). Calculations have been based on borrowing values at each month end.

 

Fair value of financial instruments

 

Valuation techniques and assumptions applied for the purposes of measuring fair value

 

Fair value of financial instruments carried at amortised cost

The Directors consider that the carrying amounts of financial assets and financial liabilities recorded at amortised cost in the financial statements approximate their fair values.

 

Bank and other loans

Fair value is calculated based on discounted expected future principal and interest flows.

 

Fair value measurements recognised in the Consolidated Statement of Financial Position

All financial instruments are grouped into Levels 1 to 3 is based on the degree to which their fair value is observable:

 

·    Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities

·    Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices)

·    Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs)

 

The financial instruments held by the Group that are measured at fair value are the shared equity receivables which are measured at fair value through profit or loss using methods associated with Level 3. At the year ended 31 August 2018, these were valued at £25.0m (2017: £28.9m).

 

Financial assets are recorded at fair value, being the estimated amount receivable by the Group, discounted to present day values.

 

The fair value of future anticipated cash receipts takes into account the Directors' views of an appropriate discount rate, a new build premium, future house price movements and the expected timing of receipts. These assumptions cover a variety of different schemes and the range of assumptions used are stated below. The assumptions are reviewed at each period end.

 

Assumptions

2018

2017

Discount rate

3.8 to 4.4%

3.8 to 4.4%

New build premium

0 to 5%

0 to 5%

House price inflation

0 to 6.0%1

0 to 5.75%

Timing of receipt

5 to 11 yrs

5 to 14 yrs

 

1 We apply future HPI over the next five years based on industry forecasts. The 2019 HPI used in the calculation varies between 2.5-3.5% dependant on geographical location.

 

 

Sensitivity-effect on value of other financial assets (less)/more

2018

Increase assumptions by 1%/1 year

£m

2018

Decrease assumptions by 1%/1 year

£m

Discount rate

(2.0)

2.2

New build premium

(0.2)

0.2

House price inflation

1.9

(1.7)

Timing of receipt

(0.4)

0.4

 

The fair value of the shared equity receivable is based on the external available data. The sensitivity-effect of a 1%/1year change is representative of our best estimate of a reasonably possible change based on management's expectations of changes in economic conditions.

 

The Directors review the anticipated future cash receipts from the assets at each reporting date and the difference between the anticipated future receipt and the initial fair value is credited to finance income/expense.

 

The following tables present the changes in Level 3 instruments for the years ended 31 August 2017 and 2018:

 

 

2017

 

Shared
equity receivables

£m

Opening balance

29.3

Additions

0.8

Disposals

(2.7)

Revaluation gains recognised in the statement of comprehensive income

1.5

Closing balance

28.9

 

 

2018

 

Shared

equity receivables

£m

Opening balance

28.9

Additions

-

Disposals

(2.7)

Revaluation gains and (losses) recognised in the statement of comprehensive income

(1.2)

Closing balance

25.0

  

 

28. Share-based payments

Equity-settled share-based payment plans

The Group operates three share-based payment schemes as set out below:

 

Long Term Incentive Plan ('LTIP')

The Group's LTIP is open to key management at the discretion of the Board. Awards under the scheme are granted in the form of nil-priced share options. LTIP awards will normally vest, and LTIP options become exercisable, on the third anniversary of the date of the grant of the LTIP award to the extent that any applicable performance conditions have been satisfied. LTIP options will remain exercisable for ten years after the date of the grant. Awards are to be settled by the issue of new shares or acquisition of shares in the market. The performance conditions for the LTIP grants are earnings per share ('EPS'), comparative total shareholder return ('TSR') and return on capital employed ('ROCE'). The EPS and ROCE performance conditions are priced using the Black-Scholes model. The TSR performance condition is a market-based condition. In order to value the TSR performance conditions against the FTSE 250 and peer group, a Monte Carlo simulation model is required which can simulate correlation between companies.

 

LTIP

FY18 LTIP

FY17 LTIP

FY16 LTIP

Total

Date of grant

17 November 2017

21 December 2016

25 November 2015

 

Options granted

1,916,777

1,933,352

1,930,524

 

Fair value at measurement date* (£)

1.49

1.32

2.12

 

Share price on date of grant (£)

1.65

1.56

2.32

 

Exercise price (£)

-

-

-

 

Vesting period

3 years

3 years

3 years

 

Expected dividend yield

n/a

n/a

n/a

 

Expected volatility

40.00%

29.21%

26.07%

 

Risk free interest rate

0.82% p.a.

0.23% p.a.

0.80% p.a.

 

Valuation model

Black-Scholes

 and Monte Carlo

Black-Scholes

 and Monte Carlo

Black-Scholes

and Monte Carlo

 

 

 

 

 

 

Movements in the year:

 

 

 

 

Options at beginning of the year

-

1,876,209

1,508,310

3,384,519

Granted during the year

1,916,777

-

-

1,916,777

Exercised during the year

-

-

-

-

Lapsed during the year

(43,232)

(153,449)

(183,330)

(380,011)

Expired in the year

-

-

-

-

Options at the end of the year

1,873,545

1,722,760

1,324,980

4,921,285

Exercisable at end of the year

-

-

-

-

 * this is the average fair value for the three tranches of the LTIP scheme

 

For the FY16 LTIP and FY17 LTIP, due to the fact that there was limited share price history for McCarthy & Stone, the Company's share price volatility was estimated as an average of the volatilities of the FTSE 250 over a historic period commensurate with the expected life of each award immediately prior to the date of grant.

 

For the FY18 LTIP, there is now sufficient share price history for McCarthy & Stone and therefore the expected volatility uses the Company's share price volatility between the date of listing (5 November 2015) and the date of grant.

 

 

Sharesave Plan ('SAYE')

The SAYE Plan is an all-employee savings related share option plan. Employees are invited to make regular monthly contributions to a SAYE scheme operated by Link Asset Services. On completion of the contract period (three or five years) employees are able to purchase ordinary shares in the Company based on the average closing middle market price over the three days prior to the award, less 20% discount. There are no performance conditions.

 

SAYE

 

 

Total

Date of grant

10 December 2015

10 December 2015

 

Options granted

2,912,247

1,197,514

 

Fair value at measurement date (£)

0.68

0.75

 

Share price on date of grant (£)

2.34

2.34

 

Exercise price (£)

1.674

1.674

 

Vesting period

3 years

5 years

 

Expected dividend yield

26.20%

28.16%

 

Expected volatility

26.07%

26.07%

 

Risk free interest rate

  0.8% p.a.

1.2% p.a.

 

Valuation model

Black-Scholes

Black-Scholes

 

 

 

 

 

Movements in the year

 

 

 

Options at beginning of the year

1,897,216

926,846

2,824,061

Granted during the year

-

-

-

Exercised during the year

-

-

-

Lapsed during the year

(604,774)

(229,203)

(833,977)

Expired in the year

-

-

-

Options at the end of the year

1,292,441

697,643

1,990,084

Exercisable at end of the year

-

-

-

 

Expected volatility was determined by calculating the average historical volatility over a period commensurate with the expected life of the savings term for the SAYE options, based on the FTSE 250.

 

Share Incentive Plan ('SIP')

The SIP allows all employees to purchase partnership shares each month from pre-tax pay, which are then held in trust. These shares can be sold or taken from the SIP or be left within the trust for as long as the plan remains open. All plan shares and any other assets held by the trustees will be held upon trust for the participants; there is therefore no impact to the Group's financial statements in respect of this plan.

 

Annual and Deferred Bonus Plan ('ABP')

The ABP incorporates the Company's executive bonus scheme as well as a mechanism for the deferral of bonus into awards over ordinary shares. The Committee can determine that part of the bonus under the ABP is provided as an award of deferred shares, which takes the form of a £nil cost option. All employees (including the Executive Directors) of the Group are eligible to participate in the ABP at the discretion of the Board. At 31 August 2018 three Executive Directors were participating in the scheme. For the year ended 31 August 2018, one-third of the bonus earned by the previous CEO and 100% of the bonus earned by the CFO and the newly appointed CEO in the financial year, totalling £0.2m (2017: £0.1m), will be deferred in the form of deferred shares for three years, during which no performance conditions will apply. The amount deferred will be recognised over the three year deferral period.

 

Total share-based payment schemes

Analysis of the income charge:

2018

£m

2017

£m

Equity-settled share-based payments

 

 

  SAYE

0.8

0.5

  LTIP

-

0.4

 

0.8

0.9

  

 

29. Related undertakings

 

The entities listed below are subsidiaries or joint ventures of the Company or Group in accordance with section 409 of the Companies Act 2006. All entities, unless noted below, are registered in England and Wales with a registered address of: 4th Floor, 100 Holdenhurst Road, Bournemouth, Dorset, BH8 8AQ.

Name

Notes

Company number

Principal activity

2018

% of shares owned

2017

% of shares owned

McCarthy & Stone (Developments) Limited

 

06622183

Holding company

100

100

McCarthy & Stone Retirement Lifestyles Limited

 

06622231

Developer

100

100

McCarthy & Stone (Equity Interests) Limited

 

05663330

Property investment

100

100

McCarthy & Stone (Home Equity Interests) Limited

 

05984851

Property investment

100

100

McCarthy & Stone Investment Properties No. 23 Limited

1

06496130

Property investment

100

100

McCarthy & Stone (Total Care Living) Limited

1

06069509

Property investment

100

100

McCarthy & Stone (Alnwick) Limited

1

07517819

Property investment

100

100

McCarthy & Stone (Extra Care Living) Limited

 

06897363

Property investment

100

100

McCarthy & Stone Total Care Management Limited

 

06897301

Property investment

100

100

McCarthy & Stone Rental Interests No. 1 Limited

1

06897272

Property investment

100

100

McCarthy & Stone Management Services Limited

 

07166051

Development management

100

100

McCarthy & Stone Lifestyle Services Limited

1

07165986

Holding company

100

100

McCarthy & Stone Financial Services Limited

1

07798214

Financial services

100

100

Keyworker Properties Limited

 

04213618

Dormant

100

100

McCarthy & Stone Estates Limited

1

07165952

Dormant

100

100

YourLife Management Services Limited

5

07153519

Development management

50

50

McCarthy & Stone Properties Limited

1, 2

01925738

Dormant

100

100

The Planning Bureau Limited

1, 2

02207050

Dormant

100

100

Ortus Homes Limited

1, 2

08658235

Dormant

100

100

McCarthy & Stone Resales Limited

1

10716544

Property resales

100

100

Linden Court Limited

4

04322139

Dormant

n/a

100

Kindle Housing (Christchurch) Limited

3, 5

04737739

Affordable housing rental

50

50

Kindle Housing (Exeter) Limited

3, 5

05692813

Affordable housing rental

50

50

Kindle Housing (Worthing) Limited

3, 5

04239574

Affordable housing rental

50

50

Kindle Housing Limited

3, 5

04088162

Affordable housing management

50

50

Advantage Apartments Limited

2, 3, 5

03697251

Dormant

50

50

Advantage Housing Limited

2, 3, 5

03697230

Dormant

50

50

Advantage Homes Limited

2, 3, 5

03697079

Dormant

50

50

 

1    These subsidiaries will take advantage of the audit exemption set out within section 479A of the Companies Act 2006 for the year ended 31 August 2018.

2    These subsidiaries are considered dormant for the year ended 31 August 2018 and have taken advantage of the section 394A exemption from preparing individual financial statements.

3    These subsidiaries are registered at Cosmopolitan House, Old Fore Street, Sidmouth, Devon, EX10 8LS

4    This subsidiary has been dissolved during the financial year

5    These entities are joint ventures

 

McCarthy & Stone (Developments) is directly owned by the Company. All other subsidiaries and joint ventures are indirectly owned by McCarthy & Stone plc.

 

Each of the shareholdings gives the immediate parent company 100% voting rights unless stated above. YourLife Management Services Limited provides the parent with 50% of the voting rights, but also has the power to appoint the majority of the Directors. Accordingly, this gives the Group power over the relevant activities of this entity. All shares are classified as 'ordinary'.

 

 

30. Related party transactions

Balances and transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Transactions between the Group and other related parties are disclosed below.

 

Remuneration of key management personnel

The key management personnel are the Board and the Executive Board, including Non-Executive Directors. The remuneration that they have received during the year is set out below in aggregate for each of the categories specified in IAS 24 'Related Party Disclosures'.

 

 

2018

£m

2017

£m

Short-term employee benefits

2.8

2.7

Social security costs

0.4

0.4

Share-based payments

-

0.4

Pension contributions

0.4

0.3

Termination payments

0.5

-

 

4.1

3.8

Aggregate emoluments of the highest paid director

1.3

1.0

 

 

31. Events after the balance sheet date

The following events after the reporting period required disclosure in the financial statements:

 

On 25 September 2018 the Group announced its new business strategy aimed at improving margins, rightsizing the operational cost base and evolving the business model to meet the changing needs of our customers. Total exceptional costs of c.£25.0m are expected across the life of the business transformation programme, with £2.0m already incurred in FY18. The majority of the exceptional costs are expected to come through in the first half of FY19, representing the cost of land that will no longer be developed, redundancy costs and further consultants' fees.

 

There were no events after the reporting period that required adjustment in the FY18 financial statements.

 

 

 

Notes to Editors

McCarthy & Stone is the UK's leading developer and manager of retirement communities, with a significant market share.  The Group buys land and then builds, sells and manages high-quality retirement developments.  It has built and sold more than 56,000 properties across more than 1,200 retirement developments since 1977, and is renowned for its focus on the needs of those in later life.

 

There is growing demand for retirement communities.  There are currently 11.8 million people aged 65 or over, rising to 17.3m by 2037, representing a 47% increase1.[3]  For those aged 85 or over, the increase will be larger, from 1.6m to 3.0m, representing an 87.5% increase.  One in four over 60s are interested in retirement living2, yet only c.162,000 units of specialist retirement housing for homeowners have been built3.

 

McCarthy & Stone has two main product ranges - Retirement Living and Retirement Living Plus - which provide mainly one and two bedroom apartments across the country with varying levels of support and care for older homeowners.  Retirement Living developments provide independence in private apartments designed specifically for the over-60s, as well as facilities such as shared lounges and guest suites that support companionship. Retirement Living Plus developments, which are designed specifically for the over-70s, offer all of this plus more on-site facilities such as restaurants, well-being suites and function rooms.  Importantly, they also provide flexible care and support packages to assist those needing additional help. 

 

All developments built since 2010 are managed by the company's in-house management services team, providing peace of mind that it will look after customers and their properties over the long term.  This is a key part of how McCarthy & Stone seeks to enrich its customers' lives.  This commitment to quality and customer service continues to be recognised by homeowners.  In March 2018, the Group received the full Five Star rating for customer satisfaction from the Home Builders Federation for the thirteenth consecutive year - making it the only UK housebuilder, of any size or type, to achieve this accolade.

 

The Group was also pleased to win 20 awards at the 2018 NHBC Pride in the Job awards, marking a 33% increase in awards from 2017.  The scheme recognises construction site managers who achieve the highest standards in housebuilding and has been instrumental in driving up standards in the sector for 38 years.

 

For further information, please visit www.mccarthyandstone.co.uk

 

 

Forward-looking statements 

Some of the information in this document may contain forward-looking statements regarding McCarthy & Stone plc and its subsidiaries (the Group). You may be able to identify forward-looking statements by terms such as "expect", "believe", "anticipate", "estimate", "intend", "will", "could", "may" or "might", the negative of such terms or other similar expressions or by discussions of strategy, plans, objectives, goals, future events or intentions. These forward-looking statements include all matters that are not historical facts. McCarthy & Stone plc (the Company) wishes to caution you that actual events or results may differ materially from those anticipated. The forward-looking statements reflect knowledge and information available at the date of preparation of this document and the Company undertakes no obligation to update these statements to reflect events and circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. Many factors could cause the actual results to differ materially from those contained in forward-looking statements of the Group, including among others, general economic conditions, the competitive environment as well as many other risks specifically related to the Group and its operations. Past performance of the Group cannot be relied on as a guide to future performance. Nothing in this document should be construed as a profit forecast

 

 

1 ONS household projections: 2016-based (2018)

2 ONS (2017, 2014 based figures)

3 Knight Frank, Retirement Housing (2018)

 


This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
 
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