Trading Performance
Turnover
Turnover at £752m was £9m ahead of 2003 (£743m). As we consolidated to focus on improving margins, Housing turnover remained broadly in line with 2003 at £394m, reflecting a combination of fewer completions and a 14% increase in average selling price to £175k. Construction turnover grew £46m to £285m with a significant increase in workload in the second half of the year substantially driven by new public sector contracts. Property turnover decreased in 2004 reflecting changes in the mix of projects sold in the year.
Profit before Interest
Profit before interest increased by £13.4m to £70m. All three of our businesses improved profits compared with 2003, however the increase was driven principally by a 25% rise in operating margins in Housing to 15% (2003: 12%).
The profit on disposal of joint venture relates to the sale of our investment in the Sintra Retail Park in Portugal where, along with our joint venture partner, we sold our shares in the joint venture company rather than selling the completed development directly.
Interest
The interest charge has risen to £17.5m (2003: £16.4m) following increased investment during the year. Interest is 4 times covered by operating profits.
Taxation
The tax charge of £14.6m represents an effective rate of 28% (2003: 28%). A reconciliation of the tax charge is set out in Note 8.
Dividends
The proposed final dividend of 21.9p per share results in a full year dividend of 31.0p per share, an increase of 25% on last year. Dividends are 5.7 times covered by earnings.
Balance Sheet
Capital Employed
Capital employed increased significantly to £462m (2003: £300.4m). We invested heavily in Housing land, principally in support of our new Southern region, whilst in Property we acquired a number of new projects as part of our expanding investment trading strategy. Despite the significant investment during the year, return on capital was maintained at 19% (2003: 19%).
Borrowings
Net debt rose significantly to £256.6m (2003: £125.1m). Core debt increased principally as a result of the investment in Housing land, whilst in Property new properties acquired were, in line with our policy, generally funded through project specific loan facilities.
Group Funding and Treasury Policy
Core Facility
The Group has a committed unsecured five year revolving credit facility of £325m with its principal bankers. This is managed by the Group Treasury function with each division being set prescribed borrowing limits. The primary purpose of this facility is to finance the working capital requirements of our Housing business. A proportion is allocated to Property for use as equity capital in the many single asset and joint venture vehicles they manage.
At the year end, £140m of this facility was undrawn. During the year, facility utilisation averaged £125m although this increased significantly in the second half of the year and we envisage this trend continuing.
In addition, there are non-recourse facilities of £75m to fund wholly owned property specific projects. This will increase going forward as we focus more of our activities on income producing investment trading stock which is appropriate for this type of funding.
Joint Venture Financing
The Group has a small number of major joint venture facilities which finance large commercial development and PPP projects. They have no recourse to the Group. In addition, there are a number of small joint venture facilities in our Housing business.
Hedging
Board policy is to hedge 50-75% of the interest on our anticipated core borrowings. We currently have £100m of borrowings hedged at a weighted cost of funds of 5.0%, on swaps which mature within the next 2 to 6 years.
Foreign Currency
Whilst the Group has overseas operations in Europe, our foreign currency exposure is currently minimal and all trading activities are transacted in sterling or euros. Given our planned increased investment in these markets, the management of foreign currency risk is an area which will be kept under review.
Pensions
We continue to adopt the transitional provisions of FRS17. During 2004, the Group’s defined benefit pension scheme was revalued by our actuaries. The combination of updated mortality assumptions and further reductions in bond yields has resulted in the year-end FRS17 net deficit increasing to £19.9m. We made a further augmentation payment in 2004 bringing the total of such additional contributions to £7m over the last four years.
Accounting Policies
Profit Recognition
The Group continues to adopt a prudent approach to income/profit recognition. In Property and Housing, turnover is recognised following both legal completion and receipt of cash. Cost and income appraisals are performed monthly with prudent assumptions made in relation to both future costs and revenues. In Construction, similarly prudent policies are followed, with profits recognised in line with the completion of the project to the extent the ultimate outturn is foreseeable. Profit outturns reflect conservative assumptions as regards future costs and only income which has been certified is recognised.
Investments and Joint Ventures
All Housing and Property joint ventures and limited partnerships are accounted for in accordance with the gross equity method of accounting in line with FRS 9. Profit recognition policies are consistent with our wholly owned subsidiaries.
PFI/PPP special purpose companies are accounted for as investments. Our financial exposure to these investments is restricted to the capital initially invested. Bid costs for prospective projects are written-off as incurred in accordance with UITF Abstract 34 and subsequent costs are only capitalised on the attainment of preferred bidder status.
International Accounting Standards
Looking ahead, we have a project team in place reviewing the implications of International Accounting Standards, which are effective for listed companies with effect from 2005.
John Richards
Group Finance Director
