Interim Results

RNS Number : 6594M

LSL Property Services

01 August 2017

 

For Immediate Release

1st August 2017

LSL Property Services plc ("LSL" or "The Group")

Interim Results For the six months ended 30^th june 2017

LSL Property Services plc, a leading provider of residential property services incorporating both estate agency and surveying businesses, announces its interim results for the six months ended 30^th June 2017.

	2017	2016	change
Group revenue - £m	151.5	151.4	-
Group Underlying Operating Profit1 - £m	15.5	11.3	+37%
Group Underlying Operating Margin - %	10.2	7.5
Group operating profit - £m	14.3	8.9	+61%
Profit before tax - £m	13.2	8.4	+57%
Exceptional gain - £m	1.1	-
Basic Earnings Per Share - pence	10.3	6.3	+63%
Adjusted Basic Earnings Per Share2 - pence	11.5	8.6	+34%
Net Bank Debt3 at 30th June - £m	31.7	61.7	-49%
Interim dividend - pence	4.0	4.0	-

1                      Group Underlying Operating Profit is before exceptional costs, contingent consideration, amortisation of intangible assets and share-based payments (as defined in Note 5)

2                      Refer to Note 6 for the calculation

3                      Refer to Note 13 for the calculation

Strong first half Group financial performance

§ Strong performance with Group Underlying Operating Profit¹ up 37% to £15.5m (2016: £11.3m)

o  Operating profit in Estate Agency up 37% and Surveying up 16%

§ Group revenue in line with 2016 at £151.5m with resilient performance in the context of the market conditions

§ The Estate Agency Division delivered a robust revenue performance in line with the same period last year which benefited from a very strong first quarter ahead of stamp duty changes

§ The Lettings businesses delivered positive income growth of 4% year on year (organic growth 3%)

§ Financial Services income growth of 16% delivered through strong organic growth (12%) and the benefit of the acquisition of Group First during the first quarter of 2016

§ Marsh & Parsons delivered a resilient performance despite a challenging London market with total revenue down 4% whilst Lettings revenue performed positively with growth of 8%

§ The Surveying Division delivered revenue growth of 2% with an EBIT margin of 28.4% (2016: 24.9%)

§ Continued positive progress in addressing historic Professional Indemnity (PI) claims with a £1.1m exceptional provision release

§ Net Bank Debt of £31.7m (2016: £61.7m) with modest gearing of 0.71x EBITDA (2016: 1.26)

§ Interim dividend of 4.0 pence (2016: 4.0 pence)

§ Strong operational cash flow and low level of gearing

§ LSL continues to explore a wide range of options to capitalise on digital opportunities and during the second quarter of 2017 completed the research and planning phase for a new ways of working programme across our Estate Agency business

Commenting on today's announcement, Simon Embley, Chairman, said:

"The Group has delivered a strong first half performance against a challenging residential sales exchange market and as announced in our pre-interim results trading update issued on 17^th July 2017 these results are ahead of the Board's original expectations.  I am particularly pleased with the profit growth in both Estate Agency and Surveying Divisions, as well as the positive Lettings income and Financial Services income growth.  

Whilst we expect Residential Sales volumes to remain suppressed in the second half, trends in other parts of our business are expected to be more resilient. Our Lettings business continues to perform well, now representing 30% of total Estate Agency Division income. Mortgage cost and availability remain positive for the UK housing market with increasing distribution of products through intermediary channels which will support our growing Financial Services businesses which now represents 29% of total Estate Agency Division income.

The Group has strong fundamentals with a robust balance sheet and relatively low levels of gearing. The business is well positioned to navigate the changing market conditions. I am confident LSL will continue to deliver long-term value to our shareholders."

For further information, please contact:

Ian Crabb, Group Chief Executive Officer
Adam Castleton, Group Chief Financial Officer
LSL Property Services plc	0207 382 0360
Richard Darby, Sophie Cowles
Buchanan	0207 466 5000

Notes on LSL:

LSL is a leading provider of residential property services to its key customer groups.  Services to consumers include: residential sales, lettings, surveying, conveyancing and mortgage, pure protection and general insurance brokerage services. Services to mortgage lenders include: valuations and panel management services, asset management and property management services. For further information, please visit LSL's website: www.lslps.co.uk

 

Group Chief Executive's Review

Introduction

The Group has delivered a strong first half financial performance with revenue of £151.5m which is in line with 2016 despite challenging market conditions and a strong first quarter 2016 which benefited from increased activity ahead of stamp duty changes. Profit was significantly up in both Divisions.

The UK residential housing market continues to be challenging with activity remaining subdued as consumer confidence continues to be impacted by uncertainty.  Total mortgage approvals for house purchases were 2.8% lower in the first half of the year compared to the same period in 2016².

Financial Results

Group revenue was flat at £151.5m (2016: £151.4m). Group Underlying Operating Profit¹ was up 37% to £15.5m (2016: £11.3m) and Group Underlying Operating Profit Margin¹ was improved at 10.2% (2016: 7.5%).

Group operating profit was up 61% to £14.3m (2016: £8.9m) reflecting the increase in margin in both Divisions and including a credit to the share based payment reserve as well as an exceptional release of £1.1m in relation to the PI Costs provision. 

During the first half of 2017 net finance costs were £1.2m. In the first half of 2016 net finance costs of £0.5m included a one off credit of accrued interest on loan note liabilities. The effective tax rate for the period was 19.8% (2016: 23.1%), compared to the current headline rate of corporation tax rate of 19.25%. Group profit after tax was £10.6m (2016: £6.4m). Basic Earnings Per Share were 10.3p (2016: 6.3p) and Adjusted Earnings Per Share were 11.5p (2016: 8.6p).

Cash generated by operations was £10.5m (2016: £7.2m). Operating cash flow included PI Costs settlements of £2.0m (2016: £3.8m). Capital expenditure, including intangibles, was £1.8m (2016: £3.6m), including one new Marsh & Parsons branch opened during the period, in Brixton.

Net assets at 30^th June 2017 were £134.5m (2016: £108.4m). Net Bank Debt at 30^th June 2017 was £31.7m compared to £61.7m at 30^th June 2016. Compared to 31^st December 2016, Net Bank Debt has increased by £11.4m driven by the normal seasonality of the Estate Agency Division cash flows, continuing PI Costs claims related payments, the payment of the deferred and contingent consideration in relation to previous acquisitions as well as the payment of dividends, taxes and bonuses. During the first half of 2017 the Group has been cautious in the deployment of capital and there have been no lettings book acquisitions during the period.

On 12^th July 2017 the Group completed the sale of its investment in the Guild of Professional Estate Agents (GPEA) with consideration made up of cash (£3m) and shares in eProp Services plc which is disclosed in this Interim Statement as a post balance sheet event.

The Board remains confident in the underlying fundamentals and prospects of the Group's businesses and has declared an interim dividend payment amounting to 4.0 pence per share (2016: 4.0 pence).  The ex-dividend date for the interim dividend is 10^th August 2017, with a record date of 15^th August 2017 and a payment date of 8^th September 2017. Shareholders have the opportunity to elect to reinvest their cash dividend and purchase existing shares in LSL through a dividend reinvestment plan.

Estate Agency Division

The Estate Agency Division revenue was flat at £118.4m (2016: £118.9m) reflecting growth in both Lettings income and Financial Services income offsetting a fall in residential sales exchange income. The Estate Agency Division Underlying Operating Profit¹ increased by 37% to £9.4m (2016: £6.9m).

Year on year profit comparatives benefited from a Your Move media campaign in the first half of 2016 which was not repeated in the first half of 2017 resulting in lower marketing expenses for the period.  There was also a gain on the sale of a commercial property in Marsh & Parsons in the first half of 2017.

Residential Sales income decreased by 13% to £37.0m (2016: £42.5m) as a result of lower exchange volumes (-10%) in the context of lower market activity and the impact of branch closures in the second half of 2016.  The impact of competition on constrained stock levels impacted Residential Sales exchange fees which fell by 4%. 

The Group's Lettings income continued to grow and was 4% higher than the same period in 2016 at £35.7m (2016: £34.3m after adjusting for a reclassification between income categories in the first half of 2016), with organic growth of 3%. The lettings books acquired in 2016 are performing in line with expectations. No lettings books were acquired during the period.

Marsh & Parsons total revenues were down 4% to £16.4m (2016: £17.1m). Marsh & Parsons Underlying Operating Profit¹ decreased by 23% to £1.7m (2016: £2.2m) with operating margins of 10.4% (2016: 12.9%). Residential Sales were down 16% whilst Lettings performed positively again, up 8% on an underlying basis. One new Marsh & Parsons branch opened during the period, in Brixton, which is trading in line with expectations.  Marsh & Parsons is planning to open a new branch in Islington in September 2017.

Financial Services revenue increased by 16% to £34.1m (2016: £29.5m) with organic growth of 12% driven by the continued investment in increasing the level of Financial Services personnel, as well as growth in the intermediary networks.  This strong growth in the value of mortgage completions represents an increase in LSL's market share to 7.8% in 2017 (2016: 7.1%).  LSL continues to operate as the second largest network (measured by combined numbers of advisors across both networks)⁴.

The Financial Services business continues to display good organic growth across all products which include mortgage and re-mortgage products, pure protection products and general insurance products. Group First, which was acquired in February 2016, continues to perform in line with expectations and has contributed to the strong performance in Financial Services in the first half of 2017.

Asset Management outperformed the market³ for repossessions management with a fall in revenue of 6% in the period to £3.3m (2016: £3.5m) against a repossessions market fall of 10%³.

LSL notes the contents of the Queen's speech in June 2017 which confirmed the Government's intention to bring forward legislation to ban letting agent fees to tenants. LSL continues to monitor the proposed changes and to consider its commercial response to the legislative changes as further details emerge.

Surveying Division

The Surveying Division performed strongly in the first half with revenue up 2% and Underlying Operating Profit¹ up 16%. Revenue per job was up 2% to £207 (2016: £203) reflecting a favourable mix across lenders and the types of jobs performed, with jobs performed remaining at the same level as 2016.

The technology roll-out has continued during the first half of 2017 with additional functionality releases.

Surveyor headcount continues to be a focus for management and investment in graduates continues to ensure business requirements are met with 320 qualified surveyors employed at the end of the period (2016: 335). Profit margin increased to 28.4% (2016: 24.9%) with a continued focus on the cost base and operational efficiency.

At 30^th June 2017, the total provision for PI Costs was £17.9m (2016: £26.2m). In 2017 the Group continued to make positive progress in addressing historic claims and there has been an exceptional release of £1.1m.

Strategy

LSL remains committed to delivering on the stated strategy which is as follows:

·     LSL's continuing Estate Agency strategy is to increase operating profit per branch; expand the number of Marsh & Parsons branches; grow recurring and where market conditions permit, counter-cyclical income streams and evaluate selective acquisitions.

·     LSL's continuing Surveying strategy is to optimise contract performance and revenue generation from B2B customers, achieve further improvement in efficiency and capacity utilisation, use technology to target further improvements in customer satisfaction and performance and continue the graduate training programme.

In total the Group arranged mortgage lending of £9.3bn during the first half of 2017 (2016: £8.3bn). Financial Services remains a clear focus for the Group as LSL sees further growth opportunities in this space to enhance its position as a leading mortgage broker.

Following the extensive independent research carried out in the second half of 2016 to assess customer needs for the future, LSL continues to explore a wide range of options to capitalise on digital opportunities created by the continued growth in consumer acceptance of online and hybrid estate agency business models. LSL has made positive progress in the first half 2017 and a further update will be provided later in 2017.

As part of this assessment process, during the second quarter LSL completed the research and planning phase for a new ways of working programme across our Estate Agency business to respond to the changing landscape and customer demands.  This programme will bring together a number of initiatives including piloting new technology to improve customer experience, streamlining processes (e.g. customer management) and deliver cost efficiencies.

The findings to date of the programme confirm LSL's view that there is an important role for the "traditional" branch led model in the future, but it will evolve over time including the deployment of technology.

Traditional estate agents currently represent the vast majority of the residential sales market. LSL expects this to continue and anticipates that traditional estate agents will continue to represent the substantial majority of the sales market through 2025. Whilst LSL expects to evolve its operating model over time to capitalise on this trend, in the foreseeable future LSL does not expect any rationalisation from the current number of its Estate Agency brands (12) nor any material change to the size of its branch estate.

LSL will also focus on maintaining a robust balance sheet and will continue to use a highly selective and disciplined approach to all investment activity.

Outlook

2017 is expected to see a reduced volume of house purchase transactions compared to the prior year, with modest house price inflation outside prime Central London. However, mortgage costs and availability remain positive and the medium to longer term fundamentals of the UK housing market remain robust.

Trading in the Estate Agency and Surveying Divisions continues to perform well. To date LSL has not seen any material change in market conditions following the triggering of Article 50 on 29^th March 2017 and the outcome of UK General Election on 8^th June 2017.  LSL will continue to monitor market conditions carefully throughout the year and adapt the businesses to any material market changes.

The Board are positive regarding the outlook for the business, committed to driving profitable organic growth, continuing to evaluate selective acquisitions and progress LSL's digital plans. As reported in the pre-interim results trading update issued on 17^th July 2017, the Board expects a more equal weighting between the first and second half financial results compared to prior years.

The Group has a balanced business portfolio including Asset Management, and the Letting and Financial Services businesses are both proving more resilient to residential housing market fluctuations.  LSL will continue to benefit from the increasing proportion of the business represented by these revenue streams.

In Surveying, LSL will continue to use technology to drive further customer enhancements, quality improvements and improvement in efficiency and capacity utilisation. LSL will also continue to optimise contract performance and revenue generation from B2B customers.

 The Group has strong fundamentals, with a robust balance sheet. The business is well positioned to adapt to the evolving market as it has in the past. The Board remains confident LSL will continue to deliver long-term value to shareholders.

Ian Crabb

Group Chief Executive

1^st August 2017

(1)  Group Underlying Operating Profit is before exceptional costs, contingent consideration, amortisation of intangible assets and share-based payments (as defined in Note 5)

(2)  Source: Bank of England for "House Purchase Approvals" January-June 2016/2017 and HMRC for total transactions

(3)  First half market performance estimated. Per first quarter CML market statistics there was a 9.5% decline in the repossession market compared to the same period in 2016

(4)  Source: CML "Gross mortgage lending estimate June 2017"

Principal risks and uncertainties

The key risks and uncertainties relating to the Group's operations remain consistent with those disclosed in the Group's Annual Report and Accounts 2016 on pages 22 to 25. The Annual Report and Accounts 2016 can be accessed on the Group's website: www.lslps.co.uk. Having reconsidered these principal risks and uncertainties which are summarised below, the Board continues to consider them appropriate.

·         UK housing market

·         New UK housing market entrants

·         Acquisitions and growth initiatives

·         Professional services

·         Client contracts

·         Information technology infrastructure

·         Information security

·         Regulatory and compliance

·         Employees

The recent Group Risk Appetite Assessment exercise includes an evaluation of developing areas of key risks and the effectiveness of related business response plans. Recent notable examples include the capture of political and economic developments, continuing uncertainties caused by the outcome of Brexit negotiations, new regulatory changes (such as the implementation of the 4^th Anti-Money Laundering Directive, the proposed ban in relation to tenants fees announced in the Queen's Speech and the implementation of General Data Protection Regulation in May 2018) and the impact of emerging alternative online models for delivery of property related services. The Board has concluded that such aspects are included in the principal risk and uncertainties noted above. Therefore the principal risks and uncertainties of the Group remain the same as those included within the Annual Report and Accounts 2016.

Forward-Looking Statements

This statement may contain forward-looking statements with respect to certain plans, goals and expectations relating to the future financial condition, business performance and results of LSL. By their nature, all forward-looking statements involve risk and uncertainty because they relate to future events and circumstances that are beyond the control of LSL, and they may cause the actual results or performance of LSL to be materially different from the results or performance implied by such statements. Any forward-looking statements will be by reference to the date of this statement only and must not be regarded as guarantees of future performance. Further, nothing in this statement should be construed as a profit forecast. Some of the factors which may affect LSL's actual future financial conditions, business performance and results are contained within the Group's Annual Report and Accounts 2016 on pages 22 to 25 and in this Statement, together with information on the management of the principal risks and uncertainties faced by LSL.

Definitions

Definitions for words and expressions referred to and included in this statement which are not expressly defined within, can be found in LSL's Annual Report and Accounts 2016 (a copy of which is available on LSL's website at: www.lslps.co.uk).  All references to 'note(s)' in this statement, are unless expressly stated otherwise, references to the 'Notes to the Interim Condensed Group Financial Statements' included in this statement.

Responsibility statement of the Directors in respect of the half-yearly financial report

We confirm that to the best of our knowledge:

·     The condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU;

·     The interim management report includes a fair review of the information required by:

(a)  DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

(b)  DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

By order of the Board

Ian Crabb

Director, Group Chief Executive Officer

 

Interim Group Income Statement

for the six months ended 30^th June 2017

		Unaudited Six Months Ended		Audited Year Ended
		30th June 2017	30th June 2016	31st December 2016
	Note	£'000	£'000	£'000
Revenue	3,4	151,520	151,367	307,750
Operating expenses:
Employee and subcontractor costs		(91,778)	(92,631)	(182,687)
Establishment costs		(10,174)	(10,257)	(19,888)
Depreciation on property, plant  and equipment		(2,629)	(2,565)	(5,475)
Other		(33,000)	(35,776)	(67,282)
		(137,581)	(141,229)	(275,332)
Other operating income	3	278	639	1,165
Gain/(Loss) on sale of property, plant and equipment		668	3	(9)
Income from joint ventures		654	535	1,049
Group Underlying Operating Profit	4	15,539	11,315	34,623
Share-based payments		145	(746)	(1,263)
Amortisation of intangible assets		(2,227)	(2,065)	(3,914)
Contingent consideration	7	(230)	365	3,785
Exceptional gains	7	1,100	-	34,531
Exceptional costs	7	-	-	(2,341)
Group operating profit	4	14,327	8,869	65,421
Finance costs		(1,176)	(502)	(1,896)
Net finance costs		(1,176)	(502)	(1,896)
Profit before tax	4	13,151	8,367	63,525
Taxation (charge)
- related to exceptional items and contingent consideration		(212)	(33)	(6,432)
- other		(2,386)	(1,898)	(6,601))
	9	(2,598)	(1,931)	(13,033)
Profit for the period/year		10,553	6,436	50,492
Attributable to:
- Owners of the parent		10,555	6,439	50,493
- Non-controlling interest		(2)	(3)	(1)
Earnings per share expressed in pence per share:
Basic	6	10.3	6.3	49.2
Diluted	6	10.2	6.2	49.0

 

Interim Group Statement of Comprehensive Income

for the six months ended 30^th June 2017

		Unaudited Six Months Ended		Audited Year Ended
		30th June    2017	30th June 2016	31st December 2016
		£'000	£'000	£'000
Profit for the period		10,553	6,436	50,492
Items to be reclassified to profit and loss in subsequent periods:
Reclassification adjustments for disposal of financial assets		-	-	(33,022)
Income tax effect		-	-	5,914
Revaluation of financial assets		2,146	2,998	11,816
Income tax effect		(365)	(469)	(2,015)
Net other comprehensive income to be reclassified to profit and loss in subsequent periods:		1,781	2,529	(17,307)
Total other comprehensive income, net of tax		1,781	2,529	(17,307)
Total comprehensive income, net of tax		12,334	8,965	33,185
Attributable to     - Owners of the parent     - Non-controlling interest		12,336 (2)	8,968 (3)	33,186 (1)

 

Interim Group Balance Sheet

as at 30^th June 2017

		Unaudited Six Months Ended		Audited Year Ended
		30th June 2017	30th June 2016	31st December 2016
	Note	£'000	£'000	£'000
Non-current assets
Goodwill		151,901	152,009	151,901
Other intangible assets		31,185	33,969	33,249
Property, plant and equipment		17,052	20,204	18,842
Financial assets	10	7,473	31,869	4,603
Investments in joint ventures		8,627	8,246	8,762
Total non-current assets		216,238	246,297	217,357
Current assets
Trade and other receivables		37,964	37,452	32,263
Cash and cash equivalents		-	-	-
Total current assets		37,964	37,452	32,263
Total assets		254,202	283,749	249,620
Current liabilities
Financial liabilities	11	(8,501)	(20,409)	(10,739)
Trade and other payables		(52,280)	(50,507)	(50,900)
Current tax liabilities		(2,923)	(1,398)	(7,581)
Provisions for liabilities		(4,220)	(10,887)	(5,742)
Total current liabilities		(67,924)	(83,201)	(74,962)
Non-current liabilities
Financial liabilities	11	(33,762)	(68,219)	(26,469)
Deferred tax liability		(3,887)	(8,623)	(3,801)
Provisions for liabilities	12	(14,141)	(15,331)	(15,622)
Total non-current liabilities		(51,790)	(92,173)	(45,892)
Total Liabilities		(119,714)	(175,374)	(120,854)
Net assets		134,488	108,375	128,766
Equity
Share capital		208	208	208
Share premium account		5,629	5,629	5,629
Share-based payment reserve		4,124	3,773	4,303
Treasury shares		(5,331)	(5,462)	(5,368)
Fair value reserve		5,352	23,407	3,571
Retained earnings		124,324	80,638	120,239
Equity attributable to owners of parent		134,306	108,193	128,582
Non-controlling interests		182	182	184
Total equity		134,488	108,375	128,766

 

Interim Group Cash Flow Statement

for the six months ended 30^th June 2017

		Unaudited 30th June 2017				Unaudited 30th June 2016		Audited 31st December 2016
		£'000		£'000		£'000	£'000	£'000	£'000
Cash generated from operating activities
Profit before tax				13,151			8,367		63,525
Adjustments to reconcile profit before tax to net cash from operating activities
Exceptional operating income and costs and contingent consideration (non-cash)		(870)				(365)		(35,975)
Amortisation of intangible assets		2,227				2,065		3,914
Finance costs		1,176				502		1,896
Share-based payments		(145)				746		1,263
				2,388			2,948		(28,902)
Group underlying operating profit				15,539			11,315		34,623
Depreciation		2,629				2,565		5,475
Dividend income		-				(293)		(492)
Share of results of joint ventures		(654)				(535)		(1,049)
(Gain)/Loss on sale of property, plant and equipment		(668)				(3)		9
				1,307			1,734		3,943
(Increase)/decrease in trade and other receivables		(5,637)				(1,178)		3,265
Increase/(decrease) in trade and other payables		1,280				(1,107)		(614)
(Decrease) in provisions		(2,003)				(3,607)		(8,561)
				(6,360)			(5,892)		(5,910)
Cash generated from operations				10,486			7,157		32,656
Interest paid		(831)				(979)		(1,948)
Tax paid		(7,504)				(3,386)		(8,861)
				(8,335)			(4,365)		(10,809)
Net cash generated from operating activities				2,151			2,792		21,847

 

	Unaudited 30th June 2017		Unaudited 30th June 2016		Audited 31st December 2016
	£'000	£'000	£'000	£'000	£'000	£'000
Cash flows from investing activities
Cash acquired on purchase of subsidiary undertaking	-		1,542		1,593
Acquisition of subsidiaries and other businesses	-		(8,525)		(8,451)
Payment of contingent consideration	(2,088)		(2,352)		(3,537)
Investment in joint venture	-		-		(2)
Cash received on sale of financial assets	-		-		35,991
Dividends received from financial assets	-		579		778
Purchase of property, plant and equipment and intangible assets	(1,765)		(3,580)		(6,064)
Proceeds from sale of property,  plant and equipment	1,500		35		69
Net cash (used in)/ from investing activities		(2,353)		(12,301)		20,377
Cash flows from financing activities
Repayment of loans	-		-		(25,243)
Drawdown of loans	11,420		16,190		-
Repayment of loan notes	-		(1,720)		(7,294)
Payment of deferred consideration	(4,752)		(1,968)		(2,422)
Proceeds from exercise of share options	-		216		48
Dividends paid	(6,466)		(8,812)		(12,916)
Net cash from/(used in) financing activities		202		3,906		(47,827)
Net decrease in cash and cash  equivalents		-		(5,603)		(5,603)
Cash and cash equivalents at the beginning of the year		-		5,603		5,603
Cash and cash equivalents at the end of the year		-		-		-

 

Interim Group Statement of changes in equity

for the six months ended 30^th June 2017                                                                       

Unaudited six months ended 30^th June 2017

	Share capital	Share premium account	Share- based payment reserve	Treasury shares	Fair value Reserve	Retained earnings	Total equity	Non-controlling interest	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 1st January 2017	208	5,629	4,303	(5,368)	3,571	120,239	128,582	184	128,766
Revaluation of financial assets (net of tax)	-	-	-	-	1,781	-	1,781	-	1,781
Other comprehensive income for the period	-	-	-	-	1,781	-	1,781	-	1,781
Profit for the period	-	-	-	-	-	10,555	10,555	(2)	10,553
Total comprehensive income for the period	-	-	-	-	1,781	10,555	12,336	(2)	12,334
Exercise of options	-	-	(34)	37	-	(4)	(1)	-	(1)
Share-based payments	-	-	(145)	-	-	-	(145)	-	(145)
Dividend payment	-	-	-	-	-	(6,466)	(6,466)		(6,466)
At 30th June 2017	208	5,629	4,124	(5,331)	5,352	124,324	134,306	182	134,488

During the six month period to 30^th June 2017 a total of 10,689 share options were exercised relating to LSL's various share option schemes resulting in the shares being sold by the Trust.  LSL received nil on exercise of these options.

Unaudited six months ended 30^th June 2016

	Share capital	Share premium account	Share- based payment reserve	Treasury shares	Fair value Reserve	Retained earnings	Total equity	Non-controlling interest	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 1st January 2016	208	5,629	3,564	(5,988)	20,878	82,880	107,171	185	107,356
Revaluation of financial assets (net of tax)	-	-	-	-	2,529	-	2,529	-	2,529
Other comprehensive income for the period	-	-	-	-	2,529	-	2,529	-	2,529
Profit for the period	-	-	-	-	-	6,439	6,439	(3)	6,436
Total comprehensive income for the period	-	-	-	-	2,529	6,439	8,968	(3)	8,965
Exercise of options	-	-	(441)	526	-	131	216	-	216
Share-based payments	-	-	650	-	-	-	650	-	650
Dividend payment	-	-	-	-	-	(8,812)	(8,812)	-	(8,812)
At 30th June 2016	208	5,629	3,773	(5,462)	23,407	80,638	108,193	182	108,375

During the six month period to 30^th June 2016 a total of 150,082 share options were exercised relating to LSL's various share option schemes resulting in the shares being sold by the Trust.  LSL received £216,000 on exercise of these options.

 

Audited year ended 31^st December 2016

	Share capital	Share premium account	Share- based payment reserve	Treasury Shares	Fair value Reserve	Retained earnings	Total equity	Non-controlling interest	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 1st January 2016	208	5,629	3,564	(5,988)	20,878	82,880	107,171	185	107,356
Disposal of financial assets (net of tax)	-	-	-	-	(27,108)	-	(27,108)	-	(27,108)
Revaluation of financial assets (net of tax)	-	-	-	-	9,801	-	9,801	-	9,801
Other comprehensive income for the year	-	-	-	-	(17,307)	-	(17,307)	-	(17,307)
Profit for the year	-	-	-	-	-	50,493	50,493	(1)	50,492
Total comprehensive income for the year	-	-	-	-	(17,307)	50,493	33,186	(1)	33,185
Exercise of options	-	-	(524)	620	-	(218)	(122)	-	(122)
Share-based payments	-	-	1,263	-	-	-	1,263	-	1,263
Dividend payment	-	-	-	-	-	(12,916)	(12,916)	-	(12,916)
At 31st December 2016	208	5,629	4,303	(5,368)	3,571	120,239	128,582	184	128,766

During the year ended 31^st December 2016, the Trust acquired nil shares.  During the period 176,955 share options were exercised relating to LSL's various share option schemes resulting in the Shares being sold by the Trust.  LSL received £49,000 on exercise of these options.

 

Notes to the Interim Condensed Group Financial Statements

The Interim Condensed Group Financial Statements for the period ended 30^th June 2017 were approved by the LSL Board on 31^st July 2017.  The interim financial statements are not the statutory accounts.  The financial information for the year ended 31^st December 2016 is extracted from the audited statutory accounts for the year ended 31^st December 2016, which have been filed with the Registrar of Companies.  The auditor's report was unqualified and did not contain an emphasis of matter paragraph, and did not make a statement under section 498 (2) or (3) of the Companies Act 2006.

1.     Basis of preparation

The interim condensed consolidated group financial statements for the period ended 30^th June 2017 have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and IAS 34 Interim Financial Reporting (as adopted by the EU).  The interim condensed consolidated group financial statements have been prepared on a going concern basis.

The interim condensed consolidated group financial statements do not include all the information and disclosures required in the annual financial statements, and should be read in conjunction with the Group's annual financial statements as at 31^st December 2016 which are included in LSL's Annual Report and Accounts 2016.

Significant accounting policies

The accounting policies adopted in the preparation of the interim condensed consolidated group financial statements are consistent with those followed in the preparation of the Group's annual financial statements for the year ended 31^st December 2016.

Management continue to evaluate the new standards that that will have an effective date of 1^st January 2018, IFRS 2, IFRS 9 and IFRS 15.  A project is being undertaken in relation to IFRS 15 which will ensure that all revenue contracts have been reviewed, ensure that any changes in the way revenue is recognised have been identified and the impact of this is fully evaluated and quantified. The impact of IFRS 2, IFRS 9 and IFRS 15 will be quantified by the year end and further information disclosed within the annual accounts.  IFRS 16 will become effective from 1^st January 2019 and work has commenced on its implementation.

Judgements and estimates

The preparation of financial information in conformity with IFRS as adopted by European Union requires management to make judgements, estimates and assumptions that affect the application of policies and reporting amounts of assets and liabilities, income and expenses.  The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an on-going 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.

The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next six months are largely the same as those as at 31^st December 2016.  These assumptions are discussed in detail in the Group's Annual Report and Accounts 2016.  The assumptions discussed are as follows:

Judgements

Areas of judgment that have the most significant effect on the amounts recognised in the consolidated financial statements are:

·    Revenue Recognition

·    Exceptional Items

·    Intangible assets

·    Deferred tax

1.     Basis of preparation (continued)

Significant accounting policies (continued)

Estimates

The key assumptions affected by future uncertainty that have a significant risk of causing material adjustment to the carrying value of assets and liabilities within the next financial year are:

·    Lapse provision

·    Assessment of the useful life of an intangible asset

·    Valuation of financial assets

·    Professional Indemnity (PI) claims

·    Valuations in acquisitions

·    Impairment of intangible assets

·    Contingent consideration

·    Income tax

.

New standards and interpretations

There are no accounting standards or interpretations that have become effective in the current reporting period which have had a material effect on the net assets, results and disclosures of the Group.  The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.

Going concern

The Group meets its day to day working capital requirements through a revolving credit facility.  The Group currently has a £100m credit facility which was extended in May 2016 and will now expire in May 2020.  As shown in Note 13, the Group had available £68.3m of undrawn committed borrowing facilities in respect of which all conditions precedent had been met.  The Group's forecasts and projections, taking account of reasonably possible changes in trading performance, show that the Group is expected to operate within the terms of its current facilities and that therefore it is appropriate to use the going concern basis of preparation for this financial information.

2.      Seasonality of operations

Due to the seasonal nature of the residential housing market, turnover and operating profits are normally higher in the second half of the year.  However, as reported in the pre-interim results trading update issued on 17^th July 2017, the Board expects a more equal weighting between the first and second half financial results compared to prior years.

3.      Revenue

                                                   Six months ended             Year Ended

	30th June 2017 £'000	30th June 2016 £'000	31st December 2016 £'000
Revenue from services	151,520	151,367	307,750
Operating revenue	151,520	151,367	307,750
Rental income	278	346	673
Dividend income	-	293	492
Other operating income	278	639	1,165
Total revenue	151,798	152,006	308,915

 

4.             Segment analysis of revenue and operating profit

For management purposes, the Group is organised into business units based on their products and services and has two reportable operating segments as follows:

·      The Estate Agency and Related Services segment provides services related to the sale and letting of residential properties.  It operates a network of high street branches.  As part of this process, the Estate Agency Division also provides marketing and arranges conveyancing services.  In addition, it provides repossession asset management services to a range of lenders.  It also arranges mortgages for a number of lenders and arranges pure protection and general insurance policies for a panel of insurance companies via the estate agency branches, Pink Homes Loans, First Complete, Embrace Mortgage Services, First2Protect, Mortgage First, Insurance Brokers First and Linear Financial Services.  The Financial Services revenue included within the Estate Agency Division includes two mortgage and insurance distribution networks providing products and services for sale via financial intermediaries.  A significant proportion of the results of the Financial Services are inextricably linked to the Estate Agency business.  They have therefore been aggregated with those of Estate Agency and Related Service segment.

·      The Surveying and Valuation Services segment provides a valuations and professional survey service of residential properties to various lenders and individual customers.

Each segment has various products and services and the revenue from these products and services are disclosed in the LSL's Annual Report and Accounts 2016 within the Business Review section of the Strategic Report.

The Management Team monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment.  Segment performance is evaluated based on operating profit or loss which in certain respects, as explained in the table below, is measured differently from operating profit or loss in the Group Financial Statements.  Head office costs, Group financing (including finance costs and finance incomes) and income taxes are managed on a Group basis and are not allocated to operating segments.

 

4.             Segment analysis of revenue and operating profit (continued)

Operating segments

The following tables presents revenue and profit information regarding the Group's operating segments for the six months ended 30^th June 2017, for the six months ended 30^th June 2016 and for the year ended 31^st December 2016.

Six months ended 30^th June 2017

Income statement  information	Estate agency and related services £'000	Surveying and valuation services £'000	Unallocated £'000	Total £'000
Segmental revenue	118,424	33,096	-	151,520
Segmental result:
- before exceptional costs, contingent consideration, amortisation and     share-based payments	9,428	9,390	(3,279)	15,539
- after exceptional costs, contingent	6,921	10,342	(2,936)	14,327
consideration, amortisation and     share-based payments
Finance costs				(1,176)
Profit before tax				13,151
Taxation				(2,598)
Profit for the period				10,553

In the period ended 30^th June 2017, there were no single customers that accounted for 10% or more of the Group's total revenue.

Balance sheet information
Segment assets - intangible	170,528	12,558	-	183,086
Segment assets - other	61,392	7,896	1,828	71,116
Total Segment assets	231,920	20,454	1,828	254,202
Total Segment liabilities	(48,149)	(29,729)	(41,836)	(119,714)
Net assets/(liabilities)	183,771	(9,275)	(40,008)	134,488

All of the joint venture interests of the Group are recorded in the Estate Agency and Related Services segment.  Unallocated net liabilities comprise plant and equipment (£8,000), other assets (£1,820,000), accruals (£1,350,000), financial liabilities (£2,000,000), deferred and current tax liabilities (£6,810,000), overdraft (£6,176,000) and revolving credit facility overdraft (£25,500,000).

 

4.             Segment analysis of revenue and operating profit (continued)

Operating segments

Six months ended 30^th June 2016

Income statement  information	Estate agency and related services £'000	Surveying and valuation services £'000	Unallocated £'000	Total £'000
Segmental revenue	118,894	32,473	-	151,367
Segmental result:
- before exceptional costs, contingent consideration, amortisation and     share-based payments	6,882	8,078	(3,645)	11,315
- after exceptional costs, contingent	4,714	7,749	(3,594)	8,869
consideration, amortisation and     share-based payments
Finance income				-
Finance costs				(502)
Profit before tax				8,367
Taxation				(1,931)
Profit for the period				6,436

In the period ended 30^th June 2016, there were no single customers that accounted for 10% or more of the Group's total revenue.

Balance sheet information
Segment assets - intangible	174,084	11,894	-	185,978
Segment assets - other	87,612	9,131	1,028	97,771
Total Segment assets	261,696	21,025	1,028	283,749
Total Segment liabilities	(55,785)	(38,403)	(81,186)	(175,374)
Net assets/(liabilities)	205,911	(17,378)	(80,158)	108,375

All of the joint venture interests of the Group are recorded in the Estate Agency and Related Services segment.  Unallocated net liabilities comprise plant and equipment (£9,000), other assets (£1,020,000), accruals (£923,000), financial liabilities (£8,553,000), deferred and current tax liabilities (£10,021,000), overdraft (£6,690,000) and revolving credit facility overdraft (£55,000,000).

4.      Segment analysis of revenue and operating profit (continued)

Operating segments

Year ended 31^st December 2016

Income statement  information	Estate agency and related services £'000	Surveying and valuation services £'000	Unallocated £'000	Total £'000
Segmental revenue	243,036	64,714	-	307,750
Segmental result:
- before exceptional costs, contingent consideration, amortisation and     share-based payments	24,500	17,508	(7,385)	34,623
- after exceptional costs, contingent
consideration, amortisation and     share-based payments	22,344	18,030	25,047	65,421
Finance income				-
Finance costs				(1,896)
Profit before tax				63,525
Taxation				(13,033)
Profit for the year				50,492

In the period ended 31^st December 2016, there were no single customers that accounted for 10% or more of the Group's total revenue.

	Estate agency and related  activities £'000	Surveying and valuation services £'000	Unallocated £'000	Total £'000
Balance sheet information
Segment assets - intangible	172,736	12,414	-	185,150
Segment assets - other	56,574	6,873	1,023	64,470
Total Segment assets	229,310	19,287	1,023	249,620
Total Segment liabilities	(53,997)	(32,780)	(34,077)	(120,854)
Net assets/(liabilities)	175,313	(13,493)	(33,054)	128,766

Unallocated net liabilities comprise plant and equipment (£8,000), other assets (£1,015,000), accruals (£436,000), financial liabilities (£5,759,000), deferred and current tax liabilities (£11,382,000), revolving credit facility (£16,500,000).

 

5.     Adjusted performance measures

In addition to the various performance measures defined under IFRS, the Group reports a number of alternative performance measures that are designed to assist with the understanding of the underlying performance of the Group.  The Group seeks to present a measure of underlying performance which is not impacted by the inconsistency in profile of exceptional gains and exceptional costs, contingent consideration, amortisation of intangible assets and share-based payments.  Share based payments are excluded from the underlying performance due to the fluctuations that can impact the charge, such as lapses and the level of annual grants.  The three adjusted measures reported by the Group are:

·      Group Underlying Operating Profit

·      Adjusted Basic EPS

·      Adjusted diluted EPS. 

The Directors consider that these adjusted measures shown below give a better and more consistent indication of the Group's underlying performance.  These measures form part of management's internal financial review and are contained within the monthly management information reports reviewed by the Board.

The calculations of adjusted basic and adjusted diluted EPS are given in Note 6 and a reconciliation of Group Underlying Operating Profit is shown below:

			30th June 2017	30th June 2016	31st December 2016
	Note		£'000	£'000	£'000
Group operating profit	4		14,327	8,869	65,421
Share-based payments			(145)	746	1,263
Amortisation of intangible assets			2,227	2,065	3,914
Exceptional gains	7		(1,100)	-	(34,531)
Exceptional costs	7		-	-	2,341
Contingent consideration	7		230	(365)	(3,785)
Group Underlying Operating Profit			15,539	11,315	34,623

6.     Earnings per share (EPS)

Basic EPS amounts are calculated by dividing net profit for the period attributable to ordinary equity holders of the parent by the weighted average number of Ordinary Shares outstanding during the period.

Diluted EPS amounts are calculated by dividing the net profit attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the period plus the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares.

Six months ended 30^th June

		Profit after tax £'000	Weighted average number of shares	2017 Per share amount Pence	Profit after tax £'000	Weighted average number of shares	2016 Per share amount Pence
	Basic EPS	10,555	102,636,868	10.3	6,439	102,658,362	6.3
	Effect of dilutive share options	-	741,376	-	-	469,387	-
	Diluted EPS	10,555	103,378,244	10.2	6,439	103,127,749	6.2

6.     Earnings per share (EPS) (continued)

Year ended 31st December 2016				Profit after tax £'000	Weighted average number of shares	2016 Per share amount Pence
Basic EPS				50,493	102,575,484	49.2
Effect of dilutive share options				-	519,565	-
Diluted EPS				50,493	103,095,049	49.0

Adjusted basic and diluted EPS

The Directors consider that the adjusted earnings shown below give a better and more consistent indication of the Group's underlying performance:

	Six months ended		Year Ended
	30th June 2017 £'000	30th June 2016 £'000	31st  December 2016 £'000
Group operating profit before contingent consideration, exceptional items, share-based payments and amortisation	15,539	11,315	34,624
Add back non-controlling interest	2	3	1
Group operating profit before contingent consideration, exceptional items, share-based payments and amortisation (excluding non-controlling interest)	15,541	11,318	34,625
Net finance costs (excluding exceptional items and contingent consideration items)	(931)	(335)	(1,410)
Normalised taxation	(2,812)	(2,197)	(6,643)
Adjusted profit after tax1 before exceptional items, share-based payments and amortisation	11,798	8,786	26,572

Six months ended 30^th June

	Adjusted profit after tax1 £'000	Weighted average number of shares	2017 Per share amount Pence	Adjusted profit after tax1 £'000	Weighted average number of shares	2016 Per share amount Pence
Adjusted basic EPS	11,798	102,636,868	11.5	8,786	102,658,362	8.6
Effect of dilutive share options		741,376			469,387
Adjusted diluted EPS	11,798	103,378,244	11.4	8,786	103,127,749	8.5

6.     Earnings per share (EPS) (continued)

Year ended 31^st December 2016

				Adjusted profit after tax1 £'000	Weighted average number of shares	2016 Per share amount Pence
Adjusted basic EPS				26,572	102,575,484	25.9
Effect of dilutive share options				-	519,565	-
Adjusted diluted EPS				26,572	103,095,049	25.8

(1)   This represents adjusted profit after tax attributable to equity holders of the parent.  Tax has been adjusted to exclude the prior year tax adjustments, and the tax impact of exceptional items, amortisation and share-based payments.  The effective tax rate used is 19.25% (30^th June 2016: 20.00%; 31^st December 2016: 20.00%).

7.     Exceptional items and contingent consideration

	Six Months Ended		Year Ended
	30th June 2017	30th June 2016	31st  December 2016
Exceptional costs:	£'000	£'000	£'000
Branch/centre closure and restructuring costs including redundancy costs	-	-	2,341
Total operating exceptional costs	-	-	2,341
Deferred and contingent consideration on acquisitions	230	(365)	(3,785)
	230	(365)	(1,444)
Exceptional gains:
Gain on disposal of Zoopla shares	-	-	(32,931)
Provision for PI claims/notifications (PI Costs)	(1,100)	-	(1,600)
	(1,100)	-	(34,531)
Net exceptional (gain) and contingent consideration	(870)	(365)	(35,975)

Contingent consideration on acquisitions

The contingent consideration recognised in the period relates to a charge of £129,000 in LSLi and a charge of £101,000 in Group First (31^st December 2016 a credit of £3,785,000 and 30^th June 2016: credit of £365,000).

Professional Indemnity

Positive progress in addressing historic PI Costs has resulted in a £1,100,000 release of the provision (31^st December 2016: release of £1,600,000; 30^th June 2016: nil)

 

8.     Dividends paid and proposed

Dividends per share

A final dividend in respect of the year ended 31^st December 2016, of 6.3 pence per share (December 2015: 8.6 pence per share), amounting to £6.5m was paid in the period ended 30^th June 2017.  An interim dividend has been announced amounting to 4.0 pence per share (June 2016: 4.0 pence).

Interim dividends are recognised when paid.

9.     Taxation

The major components of income tax charge in the interim Group income statements are:

	Six Months Ended		Year Ended
	30th June 2017	30th June 2016	31st December 2016
	£'000	£'000	£'000
UK corporation tax:
- current year	2,851	1,881	12,703
- adjustment in respect of prior years	(2)	162	1,009
	2,849	2,043	13,712
Deferred tax:
Origination and reversal of temporary differences	(221)	(85)	(500)
Adjustment in respect of prior year	(30)	(27)	(179)
	(251)	(112)	(679)
Total tax charge in the income statement	2,598	1,931	13,033

Income tax charged directly to other comprehensive income is £365,000 (31^st December 2016: £3,899,000 credit; 30^th June 2016: £469,000 charge) and relates to the revaluation of financial assets.  Income tax credited directly to the share based payment reserve is £29,000 (and 31^st December 2016: £65,000 and 30^th June 2016: £96,000).

The headline rate of corporation tax has decreased from 20% to 19%, effective from 1^st April 2017 resulting in an expected effective corporation tax rate of 19.25% for the year ended 31^st December 2017.  A further decrease in the corporation tax rate to 17% will be effective from 1^st April 2020, and this is the rate at which deferred tax has been provided.

10.  Financial assets

	Six Months Ended		Year Ended
Available-for-sale financial assets	30th June 2017	30th June 2016	31st December 2016
	£'000	£'000	£'000
Unquoted shares at fair value	6,653	1,774	4,603
Quoted shares at fair value	820	30,095	-
	7,473	31,869	4,603
Opening balance	4,603	28,871	28,871
Acquisitions	724	-	-
Disposals	-	-	(36,083)
Fair value adjustment recorded through other comprehensive income	2,146	2,998	11,815
Closing balance	7,473	31,869	4,603

10.  Financial assets (continued)

The financial assets include unlisted equity instruments which are carried at fair value.  Fair value is judgemental given the assumptions required and have been valued using a level 3 valuation techniques (see Note 15). 

Zoopla

Financial assets also include warrants in ZPG Plc (Zoopla).  These were issued in accordance with the 2016 services agreement with Zoopla.  Zoopla's share price at 30^th June 2017 was £3.62 per share.  The Directors consider the best estimate of the fair value of LSL's warrants to be the share price which values the Group's stake in Zoopla at £820,000.  These warrants are therefore valued using a level 1 valuation technique.

Other investments

The carrying value of the Group's investment in Vibrant Energy Matter (VEM) at 30^th June 2017 has been assessed as £912,000 (31^st December 2016: £912,000).

The carrying value of the Group's investment in GPEA Limited (GPEA) at 30^th June 2017 has been assessed as £5,741,000 (31^st December 2016: £3,691,000), reflecting the proposed consideration for the sale of the investment Note 17).

11.  Financial liabilities

	Six Months Ended		Year Ended
	30th June 2017	30th June 2016	31st December 2016
	£'000	£'000	£'000
Current
Overdraft	6,176	6,690	3,756
2% unsecured loan notes	2,000	5,569	-
Deferred consideration	38	5,081	4,790
Contingent consideration	287	3,069	2,193
	8,501	20,409	10,739
Non-current
Bank loans - revolving credit facility (RCF)	25,500	55,000	16,500
2% unsecured loan notes	-	2,000	2,000
Deferred consideration	58	-	66
Contingent consideration	8,204	11,219	7,903
	33,762	68,219	26,469

Contingent consideration -

	Six Months Ended		Year Ended
	30th June 2017	30th June 2016	31st December 2016
	£'000	£'000	£'000
Marsh & Parsons Growth Shares	-	1,746	-
LSLi contingent consideration	1,517	5,002	3,419
LMS	1	530	1
Group First Limited	6,636	6,581	6,339
Other	337	429	337
	8,491	14,288	10,096
Opening balance	10,096	9,886	9,886
Cash paid	(2,088)	(2,352)	(3,537)
Acquisition	-	6,581	6,598
Amounts recorded though income statement	483	173	(2,851)
Closing balance	8,491	14,288	10,096

11.  Financial liabilities (continued)

The £2,000,000 unsecured loan notes, payable to a former Marsh & Parsons director are due in March 2018, subject to certain conditions being satisfied.  The contingent consideration relating to the Marsh & Parsons growth shares is nil (31^st December 2016: nil and 30^th June 2016: £1,746,000).

£1,517,000 (31^st December 2016: £3,419,000 and 30^th June 2016: £5,002,000) of contingent consideration relates to payments to third parties in relation to the acquisition of LSLi and certain of its subsidiaries between 2012 and 2016. This is typically payable between three and five years after the acquisition dates depending on the profitability of those subsidiaries in the relevant years.  

£1,000 (31^st December 2016: £1,000 and 30^th June 2016: £530,000) of contingent consideration relates to payments to third parties in relation to the acquisition of LMS in September 2014.

£6,636,000 of contingent consideration relates to Group First (31^st December 2016: £6,339,000; 30^th June 2016: £6,581,000).  The additional consideration will be calculated on an earnings multiple of between five and six times EBITA (plus excess cash in the business) and has been capped at a maximum of £25 million.

The table below shows the allocation of the contingent consideration balance and income charge between the various categories:

	Six Months Ended		Year Ended
Contingent consideration balances relating to amounts accounted for as:	30th June 2017	30th June 2016	31st December 2016
	£'000	£'000	£'000
Remuneration	-	3,800	2,076
Put options over non-controlling interests	1	530	1
Arrangement under IFRS 3	8,490	9,958	8,019
Closing balance	8,491	14,288	10,096
Contingent consideration profit and loss impact in the period relating to amounts accounted for as:
Remuneration	13	379	(1,412)
Put options over non-controlling interests	-	(268)	(268)
Arrangement under IFRS 3	225	(105)	(1,657)
Unwinding of discount on contingent consideration	245	167	486
Charge/(credit)	483	173	(2,851)

12.  Provisions for liabilities

Six months ended 30^th June:

	2017			2016
	Professional indemnity claim provision	Onerous leases	Total	Professional indemnity claim provision	Onerous leases	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 1st January	20,686	678	21,364	29,672	53	29,725
Acquired in the period	-	-	-	-	17	17
Amount utilised	(2,045)	(148)	(2,293)	(3,954)	-	(3,954)
Amount released	(1,100)	(82)	(1,182)	-	(40)	(40)
Unwinding of discount	100	-	100	100	-	100
Provided in the period	270	2	372	370	-	370
Balance at 30th June	17,911	450	18,361	26,188	30	26,218
Current	4,098	122	4,220	10,871	16	10,887
Non-current	13,813	328	14,141	15,317	14	15,331
	17,911	450	18,361	26,188	30	26,218

Year ended 31^st December 2016

	Professional indemnity claim provision	Onerous leases	Total
	£'000	£'000	£'000
Balance at 1st January	29,672	53	29,725
Amount utilised	(8,126)	(137)	(8,263)
Amount released	(1,600)	(6)	(1,606)
Unwinding of discount	200	-	200
Provided in the period (including exceptional costs)	540	768	1,308
Balance at 31st December	20,686	678	21,364
Current	5,385	357	5,742
Non-current	15,301	321	15,622
	20,686	678	21,364

The PI Cost provision is to cover the costs of claims relating to valuation services for clients which are not covered by PI insurance. The PI Costs provision includes amounts for claims already received from clients, claims yet to be received and any other amounts which may be payable as a result of legal disputes associated with provision of valuation services.

The provision is the Directors' best estimate of the likely outcome of such claims, taking account of the incidence of such claims and the size of the loss that may be borne by the claimant, after taking account of actions that can be taken to mitigate losses. The provision will be utilised as individual claims are settled and the settlement amount may vary from the amount provided depending on the outcome of each claim. It is not possible to estimate the timing of payment of all claims and therefore a significant proportion of the provision has been classified as non-current.

At 30^th June 2017 the total provision for PI Costs was £17.9m. The Directors have considered the sensitivity analysis on the key risks and uncertainties discussed above.

12.  Provisions for liabilities (continued)

Cost per claim

A substantial element of the provision relates to specific claims where disputes are on-going. These specific cases have been separately assessed and specific provisions have been made. The average cost per claim has been used to calculate the IBNR. Should the costs to settle and resolve these claims and future claims increase by 10%, an additional £1.4m would be required.

Rate of claim

The IBNR assumes that the rate of claim for the high risk lending period in particular reduces over time. Should the rate of reduction be lower than anticipated and the duration extend, further costs may arise. An increase of 30% in notifications in excess of that assumed in the IBNR calculations would increase the required provision by £0.3m.

Notifications

The Group has received a number of notifications which have not deteriorated into claims or loss. Should the rate of deterioration increase by 50%, an additional provision of £0.1m would be required.

Onerous leases

The provision for lease obligations relates to obligations under leases on vacant properties. The provision is expected to be fully utilised by January 2021. The final outcome depends upon the ability of the Group to sublet or assign the lease over the related properties.

13.  Analysis of Net Bank Debt

	Six Months Ended		Year Ended
	30th June 2017	30th June 2016	31st December 2016
	£'000	£'000	£'000
Interest bearing loans and borrowings
-       Current	8,501	20,409	10,739
-       Non-current	33,762	68,219	26,469
	42,263	88,628	37,208
Less: 2% unsecured loan notes	(2,000)	(7,569)	(2,000)
Less: deferred and contingent consideration	(8,587)	(19,369)	(14,952)
Net Bank Debt at the end of the period	31,676	61,690	20,256

Net Bank Debt at 30^th June 2017 was £31.7m.

14.  Financial instruments - risk management

The financial risks the Group faces and the methods used to manage these risks have not changed since 31^st December 2016.  Further details of the risk management policies of the Group are disclosed in Note 30 of the Group's Financial Statements for the year ended 31^st December 2016.

The Group has a current ratio of net bank debt (excluding loan notes) to EBITDA of 0.71 (31^st December 2016: 0.51 and 30^th June 2016: 1.26). The business is cash generative with a low level of maintenance capital expenditure requirement.  The Group remains committed to its stated dividend policy of 30% to 40% of adjusted operating profit after interest and tax. In addition, the Group's other main priority is to generate cash to support its operations and to fund any strategic acquisitions.

15.  Fair values of financial assets and financial liabilities

There is no difference in the book amounts and fair values of all the Group's financial instruments that are carried in these financial statements.

Fair value hierarchy

As at 30^th June 2017, the Group held the following financial instruments measured at fair value. The Group uses the following hierarchy for determining and disclosing the fair value of the financial instruments by valuation technique:

·    Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities;

·    Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly; and

·    Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data.

·	30th June 2017	Level 1	Level 2	Level 3
	£'000	£'000	£'000	£'000
Assets measured at fair value
Financial assets	7,473	820	-	6,653
Liabilities measured at fair value
Contingent consideration	8,491	-	-	8,491
Liabilities for which fair values are disclosed
Interest-bearing loans and borrowings: Floating rate borrowings	25,500	-	25,500	-
2% unsecured loan notes	2,000	-	2,000	-
Deferred consideration	96	-	-	96

	30th June 2016	Level 1	Level 2	Level 3
	£'000	£'000	£'000	£'000
Assets measured at fair value
Financial assets	31,869	30,095		1,774
Liabilities measured at fair value
Contingent consideration	14,288			14,288
Liabilities for which fair values are disclosed
Interest-bearing loans and borrowings: Floating rate borrowings	55,000	-	55,000	-
12% unsecured loan notes	7,569	-	7,569	-
Deferred consideration	77			77

·	31st Dec 2016	Level 1	Level 2	Level 3
	£'000	£'000	£'000	£'000
Assets measured at fair value
Financial assets	4,603	-	-	4,603
Liabilities measured at fair value
Contingent consideration	10,096	-	-	10,096
Liabilities for which fair values are disclosed
Interest-bearing loans and borrowings: Floating rate borrowings	16,500	-	16,500	-
2% unsecured loan notes	2,000	-	2,000	-
Deferred consideration	4,856			4,856

15.  Fair values of financial assets and financial liabilities (continued)

Of the investments totalling £7,473,000, £6,653,000 are valued using Level 3 valuation techniques. The Directors reviewed the fair value of the financial assets at 30^th June 2017.  The underlying value of the investments will be driven by the profitability of these businesses.  If this was to drop by 10%, the implied valuation is likely to also drop by around 10%, £0.7m.

The contingent consideration relates to amounts payable in the future on acquisitions.  The amounts payable are based on the amounts agreed in the contracts and based on the future profitability of each entity acquired.  In valuing each provision, estimates have been made as to when the options are likely to be exercised and the future profitability of the entity at this date.  Further details of these provisions are shown in Note 11.

Fair values of the Group's interest-bearing borrowings and loans are determined by using DCF methodology using a discount rate that reflects the issuer's borrowing rate as at the end of the reporting period.  The own non-performance risk as at 30^th June 2017 was assessed to be insignificant.

16.    Acquisitions

There have been no acquisitions in the six month period to 30^th June 2017. The following information relates to the comparative six month period ended 30^th June 2016: 

During the comparative period the Group acquired nine lettings businesses for a total consideration of £4.0m. The fair value of the identifiable assets and liabilities of these businesses as at the date of acquisition were determined as below: 

	Fair value recognised on acquisition
	30th June 2016	31st December 2016
	£'000	£'000
Intangible assets	3,834	3,825
Deferred tax liabilities	-	(688)
Total identifiable net assets acquired	3,834	3,137
Purchase consideration	3,975	3,825
Goodwill	141	688

In February 2016, the Group, through a wholly owned subsidiary, acquired 65% interest in Group First, who provide mortgage and protection brokerage services to the purchasers of new homes through its subsidiaries, Mortgages First Limited and Insurance First Brokers Limited. The consideration for the initial investment was £9.1m cash with 50% paid on completion, and a further 50% paid in the first half of 2017. The remaining 35% is subject to put and call options which are exercisable between 2018 and 2020.  The contingent consideration was management's best estimation of the probable discounted payout (using a rate of 6.5%), based upon current forecasts over the earn-out period (£6,636,000 at 30^th June 2017 - note 11).  Due to the nature of the payment terms, the contingent consideration is considered to be a capital payment for accounting purposes.  The fair value of the identifiable assets and liabilities of as at the date of acquisition were determined as below: 

16.    Acquisitions (continued)

	Fair value recognised on acquisition
	30th June 2016	31st December 2016
	£'000	£'000
Intangible assets	809	809
Property, plant and equipment	847	847
Trade and other receivables (No impairment identified)	127	127
Cash and cash equivalents	1,542	1,542
Trade and other payables	(1,527)	(1,501)
Current tax	(216)	(216)
Deferred tax liabilities	(38)	160
Total identifiable net assets acquired	1,544	1,768
Purchase consideration	15,681	15,681
Goodwill	14,137	13,913

Purchase consideration discharged by:

Cash	4,550	4,550
Deferred consideration	4,550	4,550
Contingent consideration	6,581	6,581
	15,681	15,681

The acquisition accounting above was considered provisional at 30^th June 2016 as LSL was reviewing the estimates of the likely payments under the contract, but the calculation above represented the Directors best estimate at 30^th June 2016.  In addition, work was on-going to identify acquired intangibles in the Group.  This work was finalised in the Group's Financial Statements for the year ended 31^st December 2016 and at that stage any deferred tax liability was recognised.  None of the goodwill was expected to be deductible for tax purposes.

The goodwill of Group First comprises certain intangible assets that cannot be individually separated and reliably measured from the acquiree due to their nature.  These items include an experienced management team with a good record of delivering a quality service to customers, the expected value of synergies and the potential to significantly grow the business. Group First had contributed £795,000 profit before tax and £2,750,000 revenue in the comparative period since acquisition.  If it had been acquired at the beginning of the comparative year then the consolidated revenue would have been £920,000 higher and the consolidated profit before tax would have been £222,000 higher. An analysis of cash-flow on acquisition is given in the table below.

From the date of acquisition to 30^th June 2016, the acquisitions in aggregate, including Group First, had contributed £3,032,000 of revenue and £982,000 profit before tax to the Group, excluding the impact of movements in the contingent consideration recorded through the profit and loss.  If all of these combinations had taken place at the beginning of the year, the consolidated revenue would have been higher by £1,200,000 and the consolidated profit before tax would have been higher by £409,000.  Transaction costs have been expensed.

	£'000
Transaction costs	52
Net cash acquired with the subsidiaries and other businesses	(1,542)
Purchase consideration discharged	8,525
Net Cash outflow on acquisition	7,035

17.  Post Balance Sheet event

Subsequent to the period end the Company has sold it's holding in GPEA for £5.7m, for cash of £3m and shares in eProp Services plc.

 

INDEPENDENT REVIEW REPORT TO LSL PROPERTY SERVICES PLC

Introduction

We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2017 which comprises the Interim Group Income Statement, the Interim Group Statement of Comprehensive Income, the Group Balance Sheet, the Interim Group Cash Flow Statement, the Interim Group Statement of Changes in Equity and the related Notes 1 to 17. We have read the other information contained in the half yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the company in accordance with guidance contained in International Standard on Review Engagements 2410 (UK and Ireland) "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our work, for this report, or for the conclusions we have formed.

Directors' Responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

As disclosed in note 1, the annual financial statements of the group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting", as adopted by the European Union.

Our Responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

Scope of Review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2017 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Ernst & Young LLP

Leeds

1 August 2017

 

END

 

 

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