Trading Performance

2003 was another record year for the Group with all divisions making significant contributions.

Turnover

Turnover of £743m was £86m (13%) ahead of last year fuelled by growth in our Housing division which reported an increase of £118m (42%) to £399m. This was achieved through a 25% increase in completions and an 18% rise in the average selling price per unit. The increase in completions reflects a strong contribution from our joint venture business which more than doubled sales to 628 units. A change in sales mix towards higher value properties, together with favourable market conditions, were responsible for the growth in average selling price.

Operating Profit

Operating profit has increased by £14m (33%) to £56.6m. This reflects both the increased turnover referred to above but also, more importantly, an increase in operating margins in Housing from 10% to 12%. Margins in Construction Services rose to 2.5%, whilst in Property the result was impacted by expensing pre-development costs on several long-term projects.

Interest

The interest charge is up 9% to £16.4m. This is largely due to an increase in our share of joint venture interest reflecting the growth of our joint venture housing business and several significant property development projects. The interest charge is six times covered by operating profits (2002 – 4.0 times).

Taxation

The tax charge of £11.3m represents an effective rate of 28%. A reconciliation of the tax charge is set out in Note 8.

Dividends

The proposed final dividend of 17.5p per share results in a full year dividend of 24.8p per share, an increase of 16% on last year. Dividends are 5.5 times covered by earnings.

Balance Sheet

Capital Employed

Return on capital employed is one of the Group’s key performance indicators and with the significant rise in Group operating profits, the return on capital employed has increased markedly to 19% (2002 – 15%).

The marginal increase in year end capital employed is a reflection of record investment in our Housing landbank offset by disposals from our Property portfolio. In relation to land purchases, we strive to negotiate deferred payment terms wherever possible. Of the £140m invested in our Housing landbank during the year, £51m was contracted on deferred terms.

Borrowings

At 31 December 2003, year end borrowings (net of cash balances) have increased slightly to £125. 1m (2002 – £116.9m). Gearing has fallen to 68% (2002 – 73%). The Group is therefore well positioned to take advantage of increasing opportunities expected as the commercial property market recovers as well as funding continued growth in the Housing landbank across existing regions and for our new Southern business.

Group Funding and Treasury Policy

Core Facility

The Group has an unsecured but committed five-year revolving credit facility of £225m with its principal bankers. This is managed by the Group Treasury function with each division being set prescribed borrowing limits. Cash flow forecasts are performed on a monthly basis to monitor headroom and to realign divisional borrowing limits to ensure each division has appropriate funding.

At the year end, £150m of this facility was undrawn. During the year, facility utilisation averaged £110m although this is forecast to rise in 2004 as we increase investment in both our Housing and Property divisions. In addition, there are non-recourse facilities of £50m to fund wholly owned property-specific projects.

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, which have limited recourse to the Group, and only crystallize in the event of our joint venture partner defaulting on his obligations.

Hedging

Our policy is to hedge 50-75% of the interest on our anticipated borrowings. We currently have £100m of borrowings hedged at a weighted cost of capital of 5.2% on swaps which mature within the next two to seven years. Interest on our remaining borrowings is at floating rates.

Foreign Currency

While the Group has overseas operations in Spain and Portugal, our foreign currency exposure is currently minimal. Given our planned increased investment in these markets, the management of foreign currency risk is an area which will be kept under review.

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 Services, similarly prudent policies are followed, with profits recognised in line with the completion of the project to the extent the ultimate out-turn is foreseeable. Profit out-turns reflect conservative assumptions as regards future costs and only income which has been certified is recognised.

Investments, Joint Ventures and Joint Arrangements

All Housing and Property joint ventures 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 small amounts of 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.

The Group has several unincorporated joint arrangements, established for construction projects. The share of assets, liabilities, profits/losses and cash flow are consolidated proportionately on a line by line basis.

Details of major joint ventures, investments and joint arrangements are given in Note 27.

International Accounting Standards

Looking to the future, plans are in place to review the implications of the harmonised International Accounting Standards (IAS) which are anticipated to be effective in 2005 for listed companies.

Pensions

We continue to adopt the transitional provisions of FRS 17. Under these provisions, the pension charge continues to be calculated in line with SSAP 24.

Ten-Year Performance Summary

The Group’s strategy is to maximise shareholder value over the long-term. Over the last 10 years we have grown net asset value per share from £3.03 to £8.13 which represents compound growth of 10.5% per annum.

John Richards
Fianance Director