Final Results
Highcroft Investments PLC
21 March 2007
Highcroft Investments PLC
Preliminary results for the year ended 31 December 2006
Key highlights
• Gross property income up 6.3% to £2,038,000
• Profit for the year on revenue activities up 9.8% to £1,500,000
• Basic earnings per share on all activities down 17.1% to 84.8p
• Adjusted earnings per share (on revenue activities) up 10.2% to 29.0p
• Net asset value per share up 9.5% to 830p
• Total dividends up 8.3% to 13.7p per share
• Final dividend of 9.0p payable on 6 June 2007
Enquiries:
John Hewitt, Chairman 01865 840 023
Highcroft Investments plc
Freddy Crossley 020 7149 6000
Charles Stanley Securities
Chairman's Statement
Financial results - revenue activities
Profit before taxation on revenue activities increased to £1,956,000 from
£1,825,000 in 2006, an increase of 7.2%. Gross income was £2,527,000 as
compared with £2,256,000 in 2005. Gross property income rose from £1,917,000 to
£2,038,000, an increase of 6.3%, arising from the expansion of the portfolio,
partly funded by medium term loans.
Financial results - capital activities
During 2006, £7,437,000 was invested in property acquisitions (2005 Nil) and
£1,029,000 was invested in equities (2005 £958,000). The proceeds from property
disposals during the year amounted to £2,032,000 (2005 £469,000) while equity
disposals generated £1,000,000 (2005 £675,000).
The net gains on these disposals amounted to £201,000 (2005 £40,000), comprising
£287,000 of gains on property disposals and £86,000 of losses on disposal of
investments. The net gain after taxation of £118,000 (2005 £32,000) was
transferred to realised capital reserve.
Property
The property valuation showed a rise from £33.5 million to £41.5 million.
In February 2006 we purchased a terrace of three retail units in Staines at a
cost including stamp duty and fees of £2.99m. The property benefits from
planning and other consents to extend upwards to create nine new apartments.
Initially the intention had been to develop these new apartments ourselves.
However strong interest from developers specialising in such schemes, along with
favourable ground rent terms which will add further value encouraged the board
simply to dispose of the development site by way of a long lease, and this
transaction will be concluded in 2007.
In October 2006 the company purchased a five storey office building in Victoria,
London for £4.33m including stamp duty and fees. This represented a rare
opportunity to participate in the important central London market where
generally the large lot sizes would put the majority of property out of
Highcroft's reach. Initially the yield of 5.77% is a reflection of a moderately
over-rented position, but the directors are confident further rental growth and
continuing investor demand will ensure that this property will be a strong
performer over the medium term. Taken with the disposal of the office building
at Solihull and other disposals of smaller office buildings in Oxford and
Abingdon, the directors believe that they have completed a modest but
significant shift in emphasis within the office sector of the portfolio.
Listed investments
The All Share Index rose by 13.1% during 2006 and we made several disposals from
the equity investment portfolio which gave a net loss in the income statement.
During the course of 2006 there was a net investment in the equity investment
portfolio of £283,000.
Summary
We are pleased to report that the net asset value per share has risen by 9.5% to
830p (2005 758p). Total shareholders funds were £42,875,000 (2005 £39,164,000).
The continuing increase in income and operating profits enables us to meet our
target of an increase in dividends well above the rate of inflation. Proposed
dividends for 2006 are up 8.3% on 2005. Basic earnings per share, which take
account of capital activities, are down 17.1% to 84.8p per share but adjusted
earnings per share, adjusted to take out the effect of capital activities, are
up 9.8% to 29.0p per share.
Current trading and prospects
The board has monitored the development of the REITs (Real Estate Investment
Trusts) legislation over recent years in the hope that this would represent an
opportunity for Highcroft and its shareholders. The legislation is not simple
and, more significantly, the proposed provisions in respect of substantial
shareholders (those with shareholdings greater than 10%) changed regularly.
However, we are now optimistic that during 2007 we will be in a position to call
an Extraordinary General Meeting at which we will invite shareholders to approve
the conversion of the company to a REIT. This will reduce significantly the tax
liabilities of the group, thus increase net asset value, and substantially
increase the dividend returns for shareholders.
The property market has steadily risen in recent years contradicting those
earlier forecasts which suggested it was peaking. The directors believe that
certain property sectors may already have peaked and that there may well be a
short-term flattening in values. We continue to look for investments which will
give financial return in the medium term while remaining conscious of the forces
affecting the market in which we operate.
Equity markets rose in 2006 and we expect further advances in 2007 although not
at the same rate. Our activities in these markets may be more short term,
although we predominantly seek return in the medium term. If we are successful
in converting to a REIT, our equity investment portfolio will be limited to a
maximum of 25% of the total portfolio.
We look forward to seeing as many shareholders as possible at the Annual General
Meeting on Wednesday 23 May 2007 which will provide an opportunity for an
exchange of views and an update on the issue of REITs.
J HEWITT
Chairman
21 March 2007
Consolidated income statement
for the year ended 31 December 2006
Note 2006 2005
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Gross rental revenue 2,038 - 2,038 1,917 - 1,917
Property operating expenses (136) - (136) (125) - (125)
Net rental revenue 1,902 - 1,902 1,792 - 1,792
Realised gains on investment property - 320 320 - 44 44
Realised losses on investment property - (33) (33) - (36) (36)
Net realised gain on investment property - 287 287 - 8 8
Valuation gains on investment property - 2,732 2,732 - 3,464 3,464
Valuation losses on investment property - (398) (398) - (65) (65)
Net valuation gains on investment - 2,334 2,334 - 3,399 3,399
property
Dividend income 489 - 489 339 - 339
Gains on investments - 1,455 1,455 - 1,748 1,748
Losses on investments - (309) (309) - (142) (142)
Net investment income 489 1,146 1,635 339 1,606 1,945
Administration expenses (247) - (247) (222) - (222)
Net operating profit before net finance 2,144 3,767 5,911 1,909 5,013 6,922
expenses
Finance income 13 - 13 8 - 8
Finance expenses (201) - (201) (92) - (92)
Net finance expenses (188) - (188) (84) - (84)
Profit before tax 1,956 3,767 5,723 1,825 5,013 6,838
Income tax expense 1 (456) (884) (1,340) (459) (1,092) (1,551)
Profit for the year 1,500 2,883 4,383 1,366 3,921 5,287
Basic and diluted earnings per share 3 29.0p 55.8p 84.8p 26.4p 75.9p 102.3p
The total represents the income statement as defined in IAS1.
Consolidated balance sheet
at 31 December 2006
Note 2006 2005
£'000 £'000
Assets
Non-current assets
Investment property 4 41,487 33,461
Equity investments 5 11,794 10,620
Total non-current assets 53,281 44,081
Current assets
Trade and other receivables 489 301
Cash and cash equivalents 281 725
Total current assets 770 1,026
Total assets 54,051 45,107
Liabilities
Current liabilities
Interest-bearing loans and borrowings 246 71
Current income tax 196 358
Trade and other payables 838 725
Total current liabilities 1,280 1,154
Non-current liabilities
Interest-bearing loans and borrowings 5,685 1,429
Deferred tax liabilities 4,211 3,360
Total non-current liabilities 9,896 4,789
Total liabilities 11,176 5,943
Net assets 42,875 39,164
Equity
Issued share capital 1,292 1,292
Revaluation reserve - property 10,169 8,734
- other 4,601 3,902
Capital redemption reserve 95 95
Realised capital reserve 16,055 15,306
Retained earnings 10,663 9,835
Total equity 42,875 39,164
Consolidated statement of cash flows
for the year ended 31 December 2006
2006 2005
£'000 £'000
Operating activities
Profit for the year 4,383 5,287
Adjustments for:
Net valuation gains on investment property (2,334) (3,399)
Profit on disposal of investment property (287) (8)
Gains on investments (1,146) (1,606)
Finance income (13) (8)
Finance expense 201 92
Income tax expense 1,340 1,551
Operating cash flow before changes in working capital and 2,144 1,909
provisions
(Increase)/decrease in trade and other receivables (188) 68
Increase in trade and other payables 113 46
Cash generated from operations 2,069 2,023
Finance income 13 8
Finance expenses (201) (92)
Income taxes paid (650) (564)
Cash flows from operating activities 1,231 1,375
Investing activities
Purchase of non-current assets - investment property (7,437) -
- equity investments (1,029) (958)
Sale of non-current assets - investment property 2,032 469
- equity investments 1,000 675
Cash flows from investing activities (5,434) 186
Financing activities
New medium term loans 4,470 -
Loan repayments (39) (70)
Dividends paid (672) (620)
Cash flows from financing activities 3,759 (690)
Net increase in cash and cash equivalents (444) 871
Cash and cash equivalents at 1 January 2006 725 (146)
Cash and cash equivalents at 31 December 2006 281 725
Notes
for the year ended 31 December 2006
1 Taxation
2006 2005
£'000 £'000
Current tax:
On revenue profits 363 461
On capital profits 83 8
Prior year overprovision (11) (1)
435 468
Deferred tax 905 1,083
1,340 1,551
The tax assessed for the year differs from the standard rate of corporation tax
in the UK of 30% (2005 30%). The differences are explained as follows:
2006 2005
£'000 £'000
Profit before tax 5,723 6,838
Profit before tax multiplied by standard rate of corporation 1,716 2,051
tax in the UK of 30% (2005 30%).
Effect of:
Tax exempt revenues (119) (87)
Chargeable gains less than accounting profit (246) (411)
Adjustments to tax charge in respect of prior periods (11) (2)
Income tax expense 1,340 1,551
2 Dividends
On 21 March 2007, the directors declared an ordinary dividend of 9.0p per share
(2005 8.3p) payable on 6 June 2007 to shareholders registered at 4 May 2007.
The following dividends have been paid by the company.
2006 2005
£'000 £'000
2005 Final: 8.30p per ordinary share (2004 7.65p) 429 395
2006 Interim: 4.70p per ordinary share (2005 4.35p) 243 225
672 620
3 Earnings per share
The calculation of earnings per share is based on the profit for the year of
£4,383,000 (2005 £5,287,000) and on 5,167,240 shares (2005 5,167,240) which is
the weighted average number of shares in issue during the year ended 31 December
2006 and throughout the period since 1 January 2005.
In order to draw attention to the impact of valuation gains and losses which are
included in the income statement but not available for distribution under the
company's articles of association, an adjusted earnings per share based on the
profit available for distribution of £1,500,000 (2005 £1,366,000) has been
calculated.
2006 2005
£'000 £'000
Earnings:
Basic earnings (profit for the year) 4,383 5,287
Adjustments for:
Net valuation gains on investment property (2,621) (3,407)
Gains and losses on investments (1,146) (1,606)
Income tax on gains and losses 884 1,092
Adjusted earnings (operating profit) 1,500 1,366
Per share amount:
Basic earnings per share 84.8p 102.3p
Adjustments for:
Net valuation gains on investment property (50.7)p (65.9)p
Gains and losses on investments (22.2)p (31.1)p
Income tax on gains and losses 17.1p 21.1p
Adjusted earnings per share 29.0p 26.4p
4 Investment property
2006 2005
£'000 £'000
Valuation at 1 January 2006 33,461 30,523
Additions 7,437 -
Disposals (1,745) (461)
Surplus on revaluation 2,334 3,399
Valuation at 31 December 2006 41,487 33,461
In accordance with IAS 40, Jones Lang LaSalle have valued freehold and leasehold
properties. The valuation has been conducted by them as external valuers and
has been prepared as at 31 December 2006, in accordance with the Appraisal &
Valuation Standards of the Royal Institution of Chartered Surveyors, on the
basis of market value. This value has been incorporated into the financial
statements.
In accordance with IAS40, a property interest under an operating lease is
classified and accounted for as an investment property on a property-by-property
basis when the group holds it to earn rentals or for capital appreciation or
both. Any such property interest under an operating lease classified as an
investment property is carried at fair value.
5 Equity investments
2006 2005
£'000 £'000
Valuation at 1 January 2006 10,620 8,731
Additions 1,029 958
Disposals (1,087) (643)
Surplus on revaluation 1,232 1,574
Valuation at 31 December 2006 11,794 10,620
6 Basis of preparation
The preliminary announcement has been prepared in accordance with applicable
accounting standards as stated in the financial statements for the year ended 31
December 2005.
7 Annual General Meeting
The Annual General Meeting will be held on 23 May 2007.
8 Final ordinary dividend
A final ordinary dividend of 9.00p per share will be paid on 6 June 2007 to
shareholders registered at the close of business on 4 May 2007.
9 Publication of non-statutory accounts
The above does not constitute statutory accounts within the meaning of
section 240 of the Companies Act 1985. It is an extract from the full accounts
for the year ended 31 December 2006 on which the auditor has expressed an
unqualified opinion. The accounts will be posted to shareholders on or before
24 April 2007 and subsequently filed at Companies House.
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