Final Results
Paragon Group Of Companies PLC
19 November 2002
The Paragon Group of Companies PLC
PARAGON BOOSTS DIVIDEND
FOLLOWING STRONG GROWTH
The Paragon Group of Companies PLC ('Paragon'), one of the UK's largest
specialist lenders offering buy-to-let mortgages, secured and unsecured personal
loans, vehicle finance and retail finance, today announces its Preliminary
Results for the year ended 30 September 2002.
Highlights include:
• Pre-tax profit up 11.9% to £46.0m (2001 restated: £41.1m)
• Earnings per share up 10.7% to 32.1p (2001 restated: 29.0p)
• Total final dividend up 21.4% to 5.1p (2001: 4.2p)
• New lending up 24.7% to £994.4m (2001: £797.3m)
• Net loan assets up 17.3% to £2.52 billion (2001: £2.15 bn)
• Further reduction in cost income ratio to 37% (2001: 40.1%)
• Current trading activity robust
Commenting on the results, Jonathan Perry, Executive Chairman of Paragon, said:
'We are delighted to report strong results for the past year and a significant
increase in our dividend. Current trading activity is robust and, in our
mortgage business, we are firmly of the view that the prospects for the
buy-to-let market remain good, particularly for the professional landlord. The
performance of this class of asset in our portfolio remains exemplary. Our
consumer finance business is also performing well as we pursue a business mix
commensurate with the uncertainties we still face in the UK economy. We remain
confident of our prospects.'
For further information, please contact:
The Paragon Group of Companies PLC The Wriglesworth Consultancy
Nigel Terrington, Chief Executive Justin Strong
Nick Keen, Finance Director John Wriglesworth
Tel: 020 7786 8474 Tel: 020 7620 2228
Mobile: 07765 253 676 (JS)
CHAIRMAN'S STATEMENT
The year ended 30 September 2002 has seen another period of strong growth for
the Paragon Group. Profit before tax has increased by 11.9% to £46.0 million,
from £41.1 million (restated from £40.5 million) for the preceding year.
Earnings per share has increased by 10.7% to 32.1p from 29.0p (restated from
28.5p).
In view of the sustained improvement in profitability, your Board has declared
an increased final dividend of 3.0p per share which, when added to the interim
dividend of 2.1p paid on 31 July, gives a total dividend of 5.1p per share for
the year, an increase of 21.4% on last year's dividend of 4.2p. This increase is
significant and reflects the level of retentions from profits generated by our
businesses. Our intention is to move progressively towards a dividend cover
ratio more in line with our sector whilst remaining conscious of supporting the
growth aspirations of the Group.
Total advances during the year were £994.4 million, compared with £797.3 million
during the previous year, an increase of 24.7%. Net loan assets at 30 September
2002 were £2,521.3 million, compared with £2,149.2 million (restated from
£2,146.3 million) at 30 September 2001. Net interest income for the year was
£72.9 million, compared with £73.4 million (restated from £72.8 million) for the
previous year, the slight reduction being primarily the result of a change in
the mix of the business as the Group has concentrated more on defensive
products. This is compensated, correspondingly, by a charge for provisions for
losses which, at £12.9 million compares favourably with the £12.0 million charge
for the previous year, given the 17.3% increase in the net loan book over the
year.
Other operating income increased by 34.6% to £20.6 million from £15.3 million,
the increase being largely attributable to increased commissions related to
sales of insurance products and other fees receivable on an increased volume of
business and to higher fees from referrals of declined loans to third parties.
Despite the growth in the business, operating costs were reduced by £1.0
million, to £34.6 million, from £35.6 million for the previous year. The cost to
income ratio, at 37.0% for the year, compares very favourably with 40.1% for the
previous year and reflects the tight cost control exercised throughout the
Group. This has been facilitated by the early results of a Group-wide process
improvement initiative, which is expected to yield further cost benefits and
enhance the cost to income ratio going forward. We aim to reduce this ratio
below 35% in the medium term.
After providing for corporation tax at a charge rate of 20% and for the dividend
in respect of the year, shareholders' funds at 30 September were 18.8% higher at
£200.8 million.
FIRST MORTGAGES
The strong growth by Paragon Mortgages reported for the first half of the year
has continued in the second half. Loans totalling £563.6 million were advanced
during the year, an increase of 47.7% from the previous year's level of £381.6
million. At 30 September 2002 the loan book stood at £1,413.9 million, up 35.6%
from £1,042.7 million at 30 September 2001.
Monthly advances exceeded £50 million in each of the last three months of the
financial year and in October. The volume of business in the pipeline at 30
September 2002 was significantly higher than at the previous year end and
lending activity since the year end remains brisk.
Paragon Mortgages has maintained its focus on servicing the needs of
professional property investors, providing a product range and a service suited
to the sector. Increasingly, customers have a number of properties financed with
Paragon and these customers require a proactive and personal approach that
assists them in building their lettings businesses. In meeting these needs
Paragon has been able to develop a strong brand in this niche market.
It is noteworthy that Paragon Mortgages has recently taken first prize in two
categories of the prestigious commercial finance industry gala awards, being
acknowledged as the buy-to-let lender of the year and one of our products, to
support refurbishment of a property prior to let, as the most innovative new
product.
As our results suggest, Paragon's borrowers have been expanding their property
portfolios over the year and, from the evidence of our survey data, the market
fundamentals remain favourable. This appears at odds with media reports, but may
be a consequence of the greater emphasis of the media on novice property
investors and on high profile metropolitan locations. Recent survey data
indicates that Paragon's professional landlords intend to continue to build
their portfolios over the next year by 16% on average.
Our focus for this business remains on building a first mortgage book of very
high quality centred on the professional landlord sector, benefiting from their
experienced selection of tenants, combined with our security over their
properties. The arrears performance of the book is exemplary with negligible
losses. Looking forward, our view is that the professional landlord sector will
be less prone to volatility in volume levels and arrears performance than the
amateur sector, which is an important factor in underpinning the level of future
earnings from this portfolio.
Paragon Mortgages also earns fees on cases received which do not match our
target customer profile. Under an agreement with a third party lender, Paragon
receives an arrangement fee and an ongoing servicing fee for referred cases
which subsequently complete. During the year £34.3 million of mortgages were
advanced under this arrangement. We expect this area of business to grow
significantly in the current year.
At 30 September 2002 the NHL closed book had reduced to £230.5 million, from
£306.3 million at 30 September 2001. The performance of this book has remained
satisfactory over the year.
CONSUMER FINANCE
At 30 September 2002 the Consumer Finance book stood at £830.7 million, up from
£757.1 million at 30 September 2001. Aggregate loans of £430.8 million were
advanced during the year, compared with £415.7 million in the previous year,
with the emphasis of the lending being on cars and secured loans. As previously
reported, this has been a deliberate policy to deliver a higher quality book
with greater defensive properties.
Personal Finance
In the year to 30 September 2002 advances of secured loans were £151.9 million,
up 36.6% from the previous year's level of £111.2 million. This strong growth
performance has continued into the new financial year with advances in October
the highest for any month since the business was established. The distribution
base has increased in the course of the year, assisted by the delivery of
technology and training to introducers, attracting new brokers and increasing
our share of existing brokers' business. The secured sector remains buoyant,
with introducers increasing marketing activity and the prospect for this
business remains encouraging.
Unsecured loan advances were £40.4 million for the year, compared with £84.1
million for the year ended 30 September 2001. The reduction in volumes was
planned and followed the tightening of credit criteria and the introduction of
improved scorecard technology, designed to target better quality business.
Introducers have remained supportive of Paragon's stance and we anticipate a
modest increase in volumes in the next year.
Retail Finance
New loan advances by this division were £76.1 million, compared with £81.9
million in the previous year, a function of a disappointingly weak instalment
credit market throughout the year combined with a pruning of the retailer base
to remove business which does not meet our profitability requirements. During
the year we have improved our systems support for the business, and in the
coming months expect to bring all administration of this book in-house. As well
as reducing administration costs, this will facilitate improved flexibility and
service and provide a sound platform on which to develop this business. The
system will give us an electronic data interchange (EDI) capability, which we
believe will become increasingly important for information and for applications
delivery in the next financial year.
Car Finance
This business has performed strongly during the year. Advances during the year
were £162.4 million, compared with £138.5 million in the previous year, an
increase of 17.3% in the year. The loan book at 30 September 2002 stood at
£242.8 million, compared with £188.7 million at 30 September 2001, an increase
of 28.7%.
Development of the distribution channel remains a focus, by increasing the
number of authorised dealers in our distribution network and by further
developing our relationships with large car dealers and major account
connections. To this end Paragon Car Finance aims to provide high quality,
flexible products to its customer base, supported by a strong service
proposition.
The further development of Paragon Car Finance's relationships will be assisted
in the coming year by the introduction of EDI technology for its major partners,
speeding up response times and creating administrative efficiencies.
New Initiatives
We previously reported that we were restructuring the arrangements with our
affinity partners to improve the profitability of these schemes. This has now
been completed and new arrangements are in place. A number of other new products
have been launched during the year, including loans for home improvements, such
as conservatories and double glazing, and caravan loans. If these pilot
exercises prove successful, we shall complete the roll out of these products
over the year. Our initiatives include the increasing use of internet based
technology in conjunction with our intermediaries and business partners to
provide enhanced levels of service and greater efficiency.
Distribution and Capital Investment
Since the Group recommenced lending activities in 1995, and dividend payments
restarted, considerable balance sheet and profit growth has been achieved. Each
period's growth target has required significant capital investment and the
maintenance of that growth year on year has meant that the majority of
distributable reserves have been reinvested in the business. As a consequence,
dividend cover has been high.
Whilst plans for growth across the Group remain deliberately stretching, the
level of retentions from profits generated by our businesses is now such that it
is appropriate to begin increasing the dividend relative to profit with a view
to reducing dividend cover, to bring it more in line with our sector over time.
Hence, the Board has declared a dividend this year 21.4% higher than last,
significantly ahead of the growth in profits and earnings per share.
During the course of the year we have also considered a number of opportunities
to invest shareholder funds in acquisitions, as we remain of the view that
profitable additions to the Group's activities could be achieved in this way.
Thus far, we have found that price expectations of vendors have been
unrealistic, but this may change as the economic cycle develops and companies
consider divesting non-core activities to release capital for their own
development. We continue to review opportunities with a measured, value based
approach.
Composition of the Board
At the half year we reported the resignation of Bill Hulton from the Board owing
to ill health. Sadly, Bill passed away in June. Bill brought a keen intelligence
and strong commercial acumen during his nine years at the Board. As a colleague
and friend, he will be missed. Our thoughts are with his family.
Bill's passing has necessitated some reorganisation of the Board. David Hoare
has assumed the role of senior non-executive and head of the remuneration
committee. In October, we were pleased to welcome Gavin Lickley to the Board.
Gavin brings to the Board considerable experience in the financial sector,
further enhancing the breadth and depth of experience within the team.
Conclusion
The Group has achieved much in the year, with strong lending growth now coming
from a business mix commensurate with the uncertainties we still face in the UK
economy. We see no reason at present to change this and would expect to maintain
our emphasis on the more defensive, secured sectors of the business over the
coming year. In each of our chosen areas we see good prospects for further
growth. Contrary to its recent poor press, we are firmly of the view that the
prospects for the buy-to-let market remain good, particularly in the
professional landlord sector.
In addition to organic growth, the review of potential acquisition targets
remains a focus for the Group. Our approach to any acquisition is to apply a
rigorous due diligence process and any such prospect would need to be a good fit
within our business model and represent value for shareholders. Further, our
expectations for future dividend growth should ensure that shareholders may look
forward to greater income as the business develops.
Jonathan P L Perry
Executive Chairman
18 November 2002
CONSOLIDATED PROFIT AND LOSS ACCOUNT
For the year ended 30 September 2002 (Unaudited)
2002 2001
(restated)
£m £m
Interest receivable 230.0 229.7
Interest payable and similar charges (157.1) (156.3)
Net interest income 72.9 73.4
Other operating income 20.6 15.3
Total operating income 93.5 88.7
Operating expenses (34.6) (35.6)
Provisions for losses (12.9) (12.0)
Operating profit being profit on ordinary activities before
taxation 46.0 41.1
Tax charge on profit on ordinary activities (9.4) (8.2)
Profit on ordinary activities after taxation for the financial
year 36.6 32.9
Equity dividend (6.0) (5.0)
Retained profit 30.6 27.9
Dividend - Rate per share 5.1p 4.2p
Basic earnings per share 32.1p 29.0p
Diluted earnings per share 31.4p 28.3p
The results for the current and preceding years relate entirely to continuing
operations.
CONSOLIDATED BALANCE SHEET
At 30 September 2002 (Unaudited)
2002 2001
(restated)
£m £m £m £m
Assets employed
Fixed assets
Tangible assets 3.4 3.2
Loans to customers 2,521.3 2,149.2
Investment in own shares 9.3 4.8
2,534.0 2,157.2
Current assets
Stocks 5.3 8.9
Debtors falling due within one year 7.7 7.9
Investments 117.3 125.5
Cash at bank and in hand 129.8 106.0
260.1 248.3
2,794.1 2,405.5
Financed by
Equity shareholders' funds
Called up share capital 11.8 11.7
Share premium account 65.5 63.5
Merger reserve (70.2) (70.2)
Profit and loss account 193.7 164.0
Reserves 189.0 157.3
200.8 169.0
Provisions for liabilities and charges 0.6 2.3
Creditors
Amounts falling due within one year 43.7 37.6
Amounts falling due after more than one
year 2,549.0 2,196.6
2,592.7 2,234.2
2,794.1 2,405.5
The preliminary financial information was approved by the Board of Directors on
18 November 2002.
CONSOLIDATED CASH FLOW STATEMENT
For the year ended 30 September 2002 (Unaudited)
2002 2001 (restated)
£m £m
Net cash inflow from operating activities 92.9 80.5
Taxation (7.8) (5.7)
Capital expenditure and financial investment (419.2) (322.4)
Acquisitions and disposals - 0.3
Equity dividends paid (5.1) (4.7)
(339.2) (252.0)
Management of liquid resources 8.2 (51.1)
Financing 354.8 339.2
Increase in cash in the year 23.8 36.1
(a) Reconciliation of operating profit to net cash flows from operating
activities
2002 2001 (restated)
£m £m
46.0 41.1
Operating profit
Provision for losses 12.9 12.0
Depreciation 1.1 1.2
Amortisation of broker commissions 28.3 19.5
Decrease in stock 0.3 0.3
(Increase) / decrease in debtors (0.2) 2.9
Increase in creditors 4.5 3.5
Net cash inflow from operating activities 92.9 80.5
(b) Analysis of cash flows for headings netted in the cash flow statement
2002 2001 (restated)
£m £m
Capital expenditure and financial investment
Net increase in loans to customers (413.4) (321.6)
Other (5.8) (0.8)
(419.2) (322.4)
(c) Reconciliation of net cash flow to movement in net debt
2002 2001
£m £m
Increase in cash in year 23.8 36.1
Cash inflow from increase in debt (353.6) (338.1)
Cash movement from change in liquid resources (8.2) 51.1
Change in net debt arising from cash flows (338.0) (250.9)
Loans acquired with subsidiary - (162.4)
Movement in net debt in year (338.0) (413.3)
Net debt at 1 October 2001 (1,961.2) (1,547.9)
Net debt at 30 September 2002 (2,299.2) (1,961.2)
NOTES TO THE FINANCIAL INFORMATION
For the year to 30 September 2002 (Unaudited)
1. The financial information set out in this preliminary announcement has
not been audited.
2. A final dividend of 3.0p per share is proposed, payable on 12 February 2003
with a record date of 17 January 2003.
3. The financial information has been prepared using the same accounting
policies as were used in preparing the statutory accounts of the Company for
the year to 30 September 2001, with the exception that the treatment of
brokers commissions paid on mortgage loans has been changed, so that such
balances are amortised over the penalty period of the related loan, instead
of being treated as an expense at the point of completion of the loan. It is
felt that this treatment is more appropriate as it is more consistent with
the treatment of broker commissions paid on other types of loan, and with
practice within the industry. The balance sheet at 30 September 2001 has
been adjusted to include the unamortised commission balances within 'Loans to
Customers' and the profit and loss account and cash flow statement for the
year then ended have been adjusted to reflect the change in treatment. The
effect of this adjustment is to increase the balance of loans to customers by
£2.9m, and to increase the profit for the year to 30 September 2001 by £0.6m.
The effect of the change on the result for the year to 30 September 2002 is
not considered to be material.
4. The basic earnings per share figures have been calculated by dividing the
profit attributable to shareholders (being the profit on ordinary activities
after taxation) by the weighted average number of ordinary shares outstanding
during the period. For the year to 30 September 2002 the weighted average
number of ordinary shares outstanding was 114.1 million (2001: 113.4 million).
5. The diluted earnings per share figures have been calculated by adjusting the
weighted average number of shares outstanding for the effects of all dilutive
potential ordinary shares. For the year to 30 September 2002 the adjusted
weighted average number of ordinary shares outstanding was 116.4 million
(2001: 116.2 million).
6. The financial information set out in the announcement does not constitute the
Company's statutory accounts for the years to 30 September 2001 or 2002. The
financial information for the year to 30 September 2001 is derived from the
statutory accounts for that year. These statutory accounts have been
delivered to the Registrar of Companies, contained an unqualified audit
report and did not contain an adverse statement under sections 237 (2) or 237
(3) of the Companies Act 1985. The statutory accounts for the year to 30
September 2002 will be finalised on the basis of the financial information
presented by the Directors in this preliminary announcement and will be
delivered to the Registrar of Companies following the Company's Annual
General Meeting.
7. A copy of the Annual Report and Accounts for the year to 30 September 2002
will be posted to shareholders in due course. Copies of this announcement can
be obtained from The Paragon Group of Companies PLC, St. Catherine's Court,
Herbert Road, Solihull, West Midlands, B91 3QE.
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