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Net cash increased by £17.2m during the year which, alongside the £21.7m cash generated in 2008, resulted in Group debt levels falling from £70.9m at the start of 2008 to £32.1m at the end of 2009.
We have long established relationships with our three key funding partners, Barclays Bank, Lloyds TSB Bank and Royal Bank of Scotland.
Revenue for the year was significantly lower at £116.5m (2008: £193.7m) as a result of reduced land sales and construction division revenues. This gave rise to a trading profit of £11.5m (2008: £44.0m), however, revaluation deficits on our investment properties and assets in the course of construction resulted in a loss before tax of £11.9m (2008: profit £19.3m). The total property revaluation deficit, including properties under construction, was £22.4m (2008: £22.4m) and largely arose in the first half of the year. On a like-for-like basis the value of the investment portfolio recovered slightly in the second half, which resulted in a deficit of £19.4m compared to the 30 June 2009 figure of £23.6m. In view of this fall in investment values, we revalued five sites held for development down by £3.0m to reflect current market conditions. Realised profits on the sale of investment properties and properties under construction were £0.9m (2008: £0.5m).
Administrative and pension expenses were 12% higher at £16.5m (2008: £14.7m) as IAS 19 pension costs and liability management costs totalling £2.4m were taken in the year. We anticipate the underlying cost base will be lower next year than in either 2008 or 2009 as we actively control our costs and take the full year benefit from reduced headcount and overhead costs resulting from exercises already undertaken in 2009.
The segmental result analysis shows that land development produced a loss of £3.1m (2008: profit £35.5m) and property development and investment activities showed a loss of £16.3m (2008: loss £17.3m). Construction division profits were higher at £16.8m (2008: £9.4m) after the release of provisions of £8.2m in connection with the OFT investigation which were no longer required. Central costs were higher at £7.5m (2008: £5.5m) after higher IAS 19 and liability management project pension costs.
Basic earnings per share were a loss of 5.7p (2008: earnings 10.8p). As referred to at the half year, the total dividend payable for the year is reduced to 2.5p (2008: 5.0p), with the second interim of 1.25p payable on 31 March 2010 rather than in May 2010.
As anticipated, net interest costs fell to £1.8m (2008: £2.8m) as we reduced our overall debt levels and benefited from lower average interest rates during the year. Interest cover, expressed as the ratio of profit from operations (excluding the valuation movement on investment properties and disposal profits) to interest, was six times (2008: 15 times). Interest expenses are likely to reduce further in 2010 as low base rates continue and we anticipate a further modest reduction in debt levels during the year. No interest incurred in either 2009 or the previous year has been capitalised into the cost of developments in progress. It is unlikely that anything other than a small proportion of interest costs will be capitalised into investments in 2010.
The land sales achieved in the year, partially offset by the continued investment in our investment property portfolio, saw borrowings fall by 35% to £32.1m (2008: £49.3m). Gearing on net assets of £176.2m fell by 33% to 18% (2008: net assets £190.1m, gearing 26%). All borrowings continue to be from facilities linked to floating rates or short-term fixed commitments. Included in debtors are over £4m of negotiable instruments which could be discounted if we chose to. During the year, we agreed three year committed bank facilities totalling £94m with our three banking partners which is the same overall level as the pre-existing annual facilities. In the current uncertain market, we feel this longer term facility is more appropriate and throughout the period we operated comfortably within our facility covenants and continue to do so.
The tax credit for the year is £5.9m (2008: charge £3.7m) after the significant change in net profit between the years. Tax on profit for the year is £1.3m (2008: £12.5m) and benefits from the release of a provision which was not taxable and the capital allowances claimed on the completion of several investment properties. The deferred tax credit was £7.0m (2008: £0.9m) and arose largely from the revaluation deficit and change in the IAS 19 pension deficit. Deferred tax has been calculated at 28%, being the rate expected to be applicable at the date the actual tax will arise.
The aim during the year was to further reduce debt levels whilst at the same time completing the opening development work in progress. We were successful in this aim and net cash increased by £17.2m during the year which, alongside the £21.7m cash generated in 2008, resulted in Group debt levels falling from £70.9m at the start of 2008 to £32.1m at the end of 2009. We feel much more comfortable with current debt levels and though we plan certain other investment property sales in 2010, these will only be undertaken on acceptable terms. As noted earlier, it is likely property development investment will be modest in 2010 and therefore, if the sales take place, a further reduction in debt may be anticipated. Net cash inflow from operating activities reduced to £11.1m (2008: £57.2m) after significantly reduced land sales, which in turn reduced inventories and profits. However, these impacts were offset by a £2.0m reduction in interest outflows and lower taxation payments of £1.4m (2008: £13.1m), primarily arising from lower payments on account of taxable profits in 2009 and capital allowances offsetting against payments on account for 2008 profits. These operating cash inflows were augmented by a £14.4m inflow (2008: £27.6m outflow) from investing activities. Cash outflows from asset purchases, largely the completion of developments in progress at the beginning of the year, were reduced to £11.3m (2008: £40.8m). However, property and asset disposals increased to £25.6m, compared to £13.2m in 2008. Dividends paid, including those to minorities, totalled £8.2m (2008: £8.0m).
The Consolidated Statement of Financial Position has a rather different look to it this year as assets in the course of construction have been incorporated within investment property as required by IAS 40. Of the total investment property value of £172.3m, the market value of investment property is £121.3m (2008: £126.3m) after the adjustment for tenant incentives and the value of investment property under construction within investment property was £51.0m (2008: £79.5m) as we completed Saltwood, Port Talbot and the B&Q store at Rotherham and included these for the first time as investment properties. Disposals from investment properties were largely retail units at York and Bromborough and, from investment property in the course of construction, a 186,000 sq ft warehouse and distribution unit at Stoke-on-Trent was the key disposal.
The disclosure of the 2007 Statement of Financial Position is required by IAS 1 because IFRIC 12 required the restatement of that opening balance to reflect the inclusion of the assets within Road Link A69 of £11.5m at 1 January 2008 as an intangible asset. This requirement arose because the underlying road asset reverts to the Highways Agency at the end of the concession period. Property, plant and equipment now comprises Group occupied buildings valued at £7.0m (2008: £9.0m), with the reduction due to the disposal of two Group occupied properties in London and plant and vehicles with a net book value of £8.8m (2008: £11.8m). In total, non-current assets have reduced to £216.1m (2008: £253.0m) with the main variances arising from investment property disposals of £20.9m and revaluation losses of £22.4m.
Within current assets, inventories of £55.4m (2008: £59.0m) were lower due to the partial completion of the Priory Park development site and reduced land holdings where we wrote down land by £6.1m to reflect planning costs incurred where the application or appeal was either turned down or the chances of success are deemed to be negligible. This was offset by a write back of £1.5m where we unexpectedly achieved a consent. Trade and other receivables at £25.1m (2008: £27.2m) reflect slightly lower levels of activity.
Current liabilities have reduced by 19% to £90.0m (2008: £111.7m) as the current portion of debt fell to £31.2m (2008: £45.5m) and provisions fell to £4.0m (2008: £11.1m) as amounts previously held within the construction division for the costs of the OFT investigation were released. Net current liabilities therefore fell to £5.1m (2008: £22.9m). Non-current liabilities also fell to £34.7m (2008: £40.1m) after reductions in deferred tax and trade payables were offset by an increase in pension liabilities.
Net assets were £176.2m (2008: £190.1m) as the retained loss of £7.4m and dividends paid of £6.5m reduced retained reserves.
The annual IAS 19 valuation of the defined benefit pension scheme showed the scheme deficit increasing slightly to £25.7m (2008: £22.6m) at the year end. The deferred tax asset associated with this was £7.2m from £6.3m in 2008. Adding back this net deficit of £18.5m (2008: £16.3m) to net assets, the 2009 deficit equates to 9.5% of equity shareholders' funds (2008: 7.9%). The deficit rose due to a decrease in long-term corporate bond yields, offset by an increase in the value of the scheme's assets, as these began to recover after the unprecedented turmoil in the financial markets. The Scheme Actuary will be performing the triennial valuation as at 1 January 2010 and we anticipate that the results of this will be available later in the year. The previous triennial valuation, performed at 1 January 2007, showed a deficit of £8.8m. Current mortality assumptions and the differential in yields between gilts and corporate bonds indicate that this deficit will have grown at the time the valuation takes place. On receipt of the 2007 triennial valuation, the Company agreed a recovery plan with the scheme trustees which included the provision of an 'on demand' letter of credit for £7.0m and additional annual contributions of £0.7m. The defined benefit scheme is closed to new entrants and new employees are offered a defined contribution scheme. In our defined benefit scheme each 0.1% change in the assumed differential between long-term investment returns and inflation affects the scheme deficit by about £3.0m. The Directors have evaluated a programme of liability management plans, some of which are in progress now and others we hope to implement later in 2010, with the aim of reducing the total liabilities our closed defined benefit scheme faces.
In common with all organisations the Group faces risks which may affect its performance. These are general in nature and include: obtaining business on competitive terms, retaining key personnel, successful integration of new business streams and market competition.
The Group operates a system of internal control and risk management in order to provide assurance that we are managing risk whilst achieving our business objectives. No system can fully eliminate risk and therefore the understanding of operational risk is central to the management process within Henry Boot. The long-term success of the Group depends on the continual review, assessment and control of the key business risks we face. To enable shareholders to appreciate what the business considers are the main operational risks, they are briefly outlined below:
DEVELOPMENT – not developing marketable assets for both tenants and the investment market on time and cost effectively. Rising market yields on completion can make development uneconomic. Construction, funding and tenant risk not matched by commensurate returns on development projects.
LAND – the inability to source, acquire and promote land would have a detrimental effect on our strategic land bank and income stream. Prices may be affected by changes in Government policy, legislation, planning environment and taxation. A dramatic change in house builder funding sentiment and demand for housing can dramatically change the demand and pricing profile for land.
INVESTMENTS – identifying and retaining assets which have the best opportunity for long-term rental and capital growth, or conversely selling those assets where capital values have been maximised. This is an ongoing process with regular reviews of the assets and market conditions and must be undertaken dispassionately to achieve best value.
INTEREST RATES – significant upward changes in interest rates affect interest costs, yields and asset prices and reduce demand for commercial and residential property.
TREASURY – the lack of readily available funding to either the Company or third parties to undertake property transactions can have a significant impact on the marketplace in which we operate. Due to the difficulties within the banking sector, the Group has agreed three year facilities with our three banking partners. Detailed cash requirements are forecast up to 15 months in advance and reviewed and revised monthly. Financial instruments are considered where applicable and any short-term positive cash balances are placed on deposit.
PLANNING – increased complexity, cost and delay in the planning process may slow down the project pipeline. The recent significant change in demand for housing and the attendant decline in land prices may have a detrimental effect on the supply of land being brought to market by landowners. Changes in Government or Government policy towards planning could impact on the speed of the consent process or the value of sites.
PERSONNEL – the attraction and retention of the highest calibre people with the appropriate experience is crucial to our long-term growth in the highly competitive labour markets in which we work. It is anticipated that in the short term this risk will reduce as unemployment rises.
PENSION – the Group operates a defined benefit pension scheme which has been closed to new members for some time. Whilst the trustees have a prudent approach to the mix of return seeking and fixed interest assets, times of economic instability can have an impact on those asset values with the result that the reported pension deficit increases. Whilst pension schemes are a long-term commitment, regulations require us to respond to deficits in the short term.
ENVIRONMENTAL – the Group is inextricably linked to the property sector and environmental considerations are paramount to our success. Therefore our interaction with the environment and the agencies that have an over-arching responsibility has got to be positive at all times in order to achieve best value. Stricter environmental legislation will increase development and house building costs and therefore could impact on profitability if capital and land values do not increase to reflect this more efficient energy performance.
ECONOMIC – we operate solely in the UK and are closely allied to the real estate, house building and construction sectors. A strong economy with strong tenant demand is vital to create long-term growth in rental and asset values, whilst at the same time creating a healthy market for the construction and plant hire divisions. The much published forecast reductions in public spending could have an impact on this side of our business.
COUNTERPARTY – we depend on the stability of our customers, suppliers, funders and development partners to achieve success. In recessionary periods we pay particular attention to the financial strength of counterparties before contracting so as to mitigate financial exposure.
Each business unit within the Group is required to establish targets at the beginning of each financial year against a broad range of financial and non-financial indicators. The Managing Director of each subsidiary reports on progress at Board meetings every two months. The three main Board Executive Directors attend these meetings and are able to assess whether each unit is performing in accordance with its plan throughout the year. The KPIs differ in each subsidiary with the exception of financial targets which focus on profitability growth, cash generation and levels of debt, forecast cash requirements, return on capital employed, shareholder return and asset value created. We also review health and safety matters and how economic conditions and changes in legislation may affect individual business units.
In addition to this we review a range of specific indicators within each business unit, the main ones are as follows:
LAND – the size of the strategic land bank, the split between owned and optioned land, the extent to which we have full or outline planning consent and the number of residential units or commercial space contained in those consents.
DEVELOPMENTS – the expected investment in developments, expected completed values and anticipated yields, rents and rental growth, levels of tenant demand and unlet space, new investment and development opportunities and portfolio sales.
CONSTRUCTION – workload forecasts and capacity utilisation in relation to plan, general activity levels, tender opportunities and wins, health and safety and environmental matters and contract completion, sign off and financial closure.
PLANT HIRE – activity levels by depot and class of asset, health and safety matters and return on capital employed which, in turn, drives asset investment decisions.
GROUP – at Group level the business units' performance against expectations forms an integral part of the reporting criteria. In addition Group performance indicators of cash and facilities, pension scheme performance, shareholder return and return on capital employed along with health and safety matters are reported on at each meeting.
The Group has the following key resources to assist it in the pursuit of its key objectives:
The Group's employees are its foremost asset. Their skill, commitment, drive and enthusiasm are vitally important to the long-term success of our business. We succeed in the delivery of shareholder value because our people, individually, achieve the targets set for them. They source and acquire land; promote planning consents; acquire, develop, manage or sell investment properties; and service constructors, run our PFI project and refurbish and construct buildings.
We have an extensive geographical spread of opportunities within the UK, to develop or redevelop sites across the retail, leisure, office and industrial sectors. The current portfolio should allow us to maintain current activity levels for several years. In the current marketplace completed investments may give a better return than developments and will be considered alongside and as an alternative to development.
At the year end we owned over 1,679 acres and had interests in a further 6,254 acres through option or agency agreements which give us the right to promote a planning consent and share in the benefit created on ultimate disposal. We anticipate that this land bank will grow in future years and represents a significant future profit opportunity to the Group.
The construction business works on an order book of between one and two years, though several of the Framework contracts it has won are spread over several years. Our plant hire business operates from seven locations and has a modern, well maintained, fleet of assets servicing the construction sector. Furthermore we operate our own delivery fleet to ensure that our customers' requirements are satisfied quickly. Our PFI asset is well established, cash generative and efficiently maintained and has 16 years remaining on the concession; furthermore the market for PFI assets remains reasonably strong even in these recessionary times.
We have long established relationships with our three key funding partners, Barclays Bank, Lloyds TSB Bank and Royal Bank of Scotland. The land bank and development opportunities are held at cost and, together with the investment portfolio, have been acquired largely from retained resources ensuring our gearing levels are prudent. In the longer term we aim to achieve a high return on capital employed and a healthy dividend cover level allowing for reinvestment in our core activities which in turn create improving longer-term shareholder returns.
GROUP MANAGING DIRECTOR
1 APRIL 2010
GROUP FINANCE DIRECTOR
1 APRIL 2010
GROUP EXECUTIVE DIRECTOR
1 APRIL 2010
