Final Results
Paragon Group Of Companies PLC
25 November 2004
STRONG PROFIT GROWTH FOR PARAGON
The Paragon Group of Companies PLC ('Paragon'), one of the UK's largest
specialist lenders offering buy-to-let mortgages, personal loans, vehicle
finance and retail finance, today announces its Preliminary Results for the year
ended 30 September 2004.
Highlights include
• Profit before tax up 36.8% to £71.0 million (2003: £51.9 million)
• Earnings per share up 35.2% to 48.0p (2003: 35.5p)
• Dividend per share up 52.4% to 9.6p (2003: 6.3p)
• Total advances up 43.8% to £2,124.3 million (2003: £1,477.4 million)
• Net loan assets increased to £5,950.9 million (2003: £5,287.1 million)
• Mortgage Trust fully integrated and trading profitably
• Strong start to the new financial year
• Long term prospects for buy-to-let sector remain attractive
Commenting on the results, Jonathan Perry, Chairman of Paragon, said:
'The Group has had an outstanding year. Volumes and profits have continued to
increase strongly and the integration of Mortgage Trust, which traded profitably
during the year, has been completed successfully. We have seen a good start to
the new financial year with a higher opening pipeline and completions in line
with plan.
It is still too early to say whether slowing housing activity will lead to a
soft or a hard landing for house prices and this uncertainty is weighing down
sentiment for housing. Whilst this has beneficial consequences for the
landlord, in the form of improved tenant demand and rising rents, the impact of
this sentiment on buy-to-let activity over the coming months remains to be seen.
In the longer term, we remain convinced that prospects for the private rented
sector remain strong
The acquisition of Mortgage Trust at a significant discount to net assets has
provided a new profit stream for the Group in the core buy-to-let area of our
business activities. The rapid and successful turnaround of this business has
added significant value for shareholders. Looking forward, we shall continue to
seek actively acquisition opportunities to supplement organic business flows.'
For further information, please contact:
The Paragon Group of Companies PLC The Wriglesworth Consultancy
Nigel Terrington, Chief Executive John Wriglesworth/Mark Baker
Nick Keen, Finance Director Tel: 020 7845 7900
Tel: 020 7786 8474 Mobile: 07980 635 243 (MB)
CHAIRMAN'S STATEMENT
I am pleased to report that the performance of the Group during the year ended
30 September 2004 was exceptionally strong, evidenced by the growth seen in
lending volumes and profits.
Profit before tax increased by 36.8% to £71.0 million for the year, compared
with £51.9 million for the previous year and earnings per share increased by
35.2% to 48.0p from 35.5p. Mortgage Trust (formerly Britannic Money) which was
acquired in June 2003, is now fully integrated and contributed £15.1 million to
profits before taxation for the year (2003: £1.2 million loss) after a credit
of £5.2 million in respect of the amortisation of negative goodwill (2003: £2.1
million).
In view of these strong results and consistent with our intention to reduce
dividend cover progressively, your Board has declared an increased final
dividend of 5.7p per share which, when added to the interim dividend of 3.9p
paid on 2 July, gives a total dividend of 9.6p per share for the year, an
increase of 52.4% over last year. Subject to approval at the Annual General
Meeting on 9 February, the dividend will be paid on 11 February 2005, by
reference to a record date of 14 January 2005.
Total advances by the Group during the year were £2,124.3 million, compared with
£1,477.4 million during the previous year, an increase of 43.8%. Net loan
assets at 30 September 2004, inclusive of those held by the off-balance sheet
companies managed by Mortgage Trust, were £5,950.9 million, compared with
£5,287.1 million at 30 September 2003. Of these £5,523.4 million or 92.8% were
secured on residential property, providing a base of high quality assets.
The modest increase in net interest income to £80.6 million from £76.5 million
reflects both the move away from higher risk assets towards secured, and thus
low risk, lending and the normal lag in loan rates following the increases in
LIBOR during the year which resulted in a tightening of margins. If interest
rates fall, as a number of economists expect, this effect should reverse.
Other operating income rose to £40.2 million from £31.0 million, an increase of
29.7%, as a result of commissions and fees earned on the larger portfolio and on
the higher volume of business written during the year.
Operating expenses, excluding the impact of the goodwill credit of £5.2 million
were £43.9 million, compared with £37.9 million (excluding the goodwill credit
of £2.1 million and exceptional costs of £3.9 million) in the previous year. At
36.3% (2003: 35.3%) the cost : income ratio increased slightly as a result of
the inclusion of the full costs of Mortgage Trust during the period (note 5).
However, this represents a reduction from the rate of 37.8% reported at the half
year, the cost savings from the introduction of operational efficiencies earlier
in the year having impacted favourably on the cost : income ratio in the second
half of the year. Excluding Mortgage Trust, the cost : income ratio decreased
to 32.2% from 33.2% last year.
The charge for provisions for losses of £11.1 million for the year compares with
£15.9 million for the previous year. The reduction reflects the significant
shift in the Group's lending activities in recent years towards secured lending,
where margins are lower but the credit profile is better. The relatively low
level of charge is also attributable to the high credit standards required by
all lending divisions and the high quality of underwriting applied.
After providing for corporation tax at a charge rate of 23% and for the dividend
in respect of the year, profits of £43.7 million have been transferred to
shareholders' funds.
FIRST MORTGAGES
The performance of the first mortgage business was exceptionally strong in 2004.
Total first mortgage lending by the Group was £1,674.3 million for the year, an
increase of 67.8% over the previous year. The buy-to-let portfolio, including
those assets managed by Mortgage Trust, increased by 34.8% to £4,052.0 million
(2003: £3,006.7 million), whilst total first mortgage assets, including those
managed by Mortgage Trust, increased by 15.2% to £5,002.9 million (2003:
£4,341.1 million). The credit performance of the buy-to-let portfolio remains
exemplary, with arrears levels running at a fraction of market levels for
owner-occupied lending. The new business pipeline at 30 September 2004 was
significantly higher than a year earlier, providing a strong start to
completions in the new financial year.
The succession of interest rate increases by the Monetary Policy Committee over
the past year appears to have had the desired effect on the housing market. At
the same time the need for intermediaries and lenders to meet the requirements
of the new mortgage regulations from 1 November 2004 has diverted attention away
from business generation. Evidence of slower activity and of softer prices has
been well documented. Less well covered has been evidence of the consequential
improvement in demand for rented accommodation, with surveys from RICS, ARLA
and, indeed, Paragon Mortgages reporting increasing tenant demand, reducing
stocks of unlet property and improving rents. These are all factors which
underpin the credit quality of buy-to-let lending.
It seems likely that we are at or near the peak of the present interest rate
cycle, with a number of economists suggesting that rates could begin to fall
next year. It is, however, too early to say whether the slowing housing
activity will lead to a soft or a hard landing for house prices and this
uncertainty is weighing down sentiment for housing. Whilst we have seen a strong
start to the new financial year, the impact of this sentiment on buy-to-let
activity over the coming months remains to be seen.
Despite some speculation to the contrary, we have seen no evidence of buy-to-let
investors disposing of their properties in response to house price uncertainty.
Indeed, our experience of buy-to-let loans having a lower redemption rate than
owner-occupied mortgages has continued. In addition, survey data has confirmed
the view that the majority of landlords in the buy-to-let market take a
long-term view of their investment portfolios.
In the longer term, we remain convinced that the prospects for the private
rented sector remain strong, with demographic factors contributing to increasing
demand for tenanted accommodation. We note that it was during the last
significant housing slowdown, in the early 1990s, that the private rented sector
saw its largest increase in rental units. Further, recent research by Mintel
found that 3.3 million people are considering purchasing buy-to-let properties
over the next twelve months, whilst 75% of existing landlords are expecting to
rent out more property in the next decade. The attractiveness of buy-to-let as
an investment may be further enhanced when residential property becomes eligible
for inclusion in pension schemes from April 2006.
Mortgage Trust Services plc, a subsidiary company, has been successful in its
application for permission under Part IV of the Financial Services and Markets
Act 2000 to become authorised to carry on mortgage and/or general insurance
business.
Paragon Mortgages
Paragon Mortgages enjoyed significant growth in its lending during the year with
loans advanced totalling £1,106.5 million, an increase of 41.6% from the
previous year's £781.3 million. At 30 September 2004 the loan book of Paragon
Mortgages Limited stood at £2,638.1 million, an increase of 36.4% from £1,934.3
million at 30 September 2003. In an increasingly competitive market Paragon
Mortgages has continued to make strong progress by focusing on the specialist
needs of professional landlords.
Paragon Mortgages has received, for the third year running, the highly-prized
accolade of 'Buy-to-Let Lender of the Year' from the National Association of
Commercial Finance Brokers.
Mortgage Trust
Mortgage Trust advanced £567.8 million (2003 3 months: £216.3 million) with
volumes recovering strongly from the temporary reduction which followed the
rationalisation of the new business product range in favour of more profitable
buy-to-let products, the focus now being on the mid-market buy-to-let sector.
At 30 September 2004 Mortgage Trust had loans under management of £2,229.1
million (2003: £2,230.1 million) of which £1,450.4 million related to
buy-to-let (2003: £1,127.5 million) and £778.7 million related to
owner-occupied mortgages (2003: £1,102.6 million).
Since the acquisition of Britannic Money in June 2003, the business has been
successfully turned from loss making into profit. In addition to the
re-focusing of new business activity mentioned above, which has improved the
profitability of new advances, a significant operational restructuring has
resulted in substantial cost savings. By combining support functions and
relocating administration activities to our operational centre in Solihull,
staff at Mortgage Trust's Epsom office have been reduced from 247 at the time of
the acquisition to 86 at 30 September 2004.
An attractive feature of Mortgage Trust when we acquired the business was the
quality of its systems infrastructure, as this had seen considerable investment
in the period prior to our acquisition. A major project is currently underway
to migrate the Group's other businesses to the Mortgage Trust platform. The
first phase of this project, which will see all first mortgage activities
operating on the new common platform, is expected to be completed in the current
financial year.
NHL Book
The NHL book reduced to £135.7 million at 30 September 2004, from £176.7 million
at 30 September 2003 and recorded a satisfactory performance over the period.
CONSUMER FINANCE
At 30 September 2004 the Consumer Finance book, comprising secured and unsecured
personal loans and sales aid finance stood at £891.3 million, (2003: £888.9
million). Aggregate loan advances were £450.0 million during the year, compared
with £479.8 million in the previous year. The credit performance of our consumer
books has been satisfactory and, assuming relatively full employment, is
expected to remain so.
Personal Finance
Secured personal finance advances were £305.4 million during the year, compared
with £298.9 million for the previous year. At the year end, the secured book
totalled £476.0 million (2003: £384.9 million). Volumes for the year were in
line with plan and were achieved in an increasingly competitive environment
following a very strong performance in the second half of the previous year.
Paragon Personal Finance has consolidated its position as a leading supplier of
loans to the broker market with confidence in the brand remaining strong. During
the period the level of new unsecured personal loan advances was negligible.
We expect competitive pressures in the secured loans market to increase over the
next year as a result of new entrants to the market and a cooling of the housing
market. Nevertheless, Paragon Personal Finance will maintain its position on
credit quality and seek further growth through prudent innovation and improved
service through new technology.
Sales Aid Finance
During the year ended 30 September 2004, new business of £144.2 million was
advanced by this division, compared with £172.3 million in the previous year.
At the year end the Sales Aid Finance book totalled £208.6 million (2003:
£254.6 million).
As we have reported previously, we have limited lending volumes in our retail
and car finance business as a result of less than adequate returns from some of
this business. Following the removal of unprofitable distribution sources and
products, the profitability of new business written has risen significantly. We
have focused on streamlining the car finance distribution channels and reducing
unprofitable business relationships, and have integrated the front-end
administration of the retail finance business to improve service levels and
reduce costs.
As a result of these initiatives the profitability of our sales aid finance
businesses has improved. We will strive for further improvement before
increasing the capital devoted to this area.
FUNDING
The Group has been active in the securitisation market throughout the year and
most of the transactions contain tranches denominated in US dollars and/or euros
as well as in sterling.
In October 2003 a £715 million securitisation of mortgage assets was completed
by Paragon Mortgages (No. 6) plc; in January 2004 a £500 million securitisation
of Mortgage Trust originated assets was completed by First Flexible No. 6 plc;
in May 2004 a £900 million securitisation of Paragon Mortgages and Mortgage
Trust originations was completed by Paragon Mortgages (No. 7) plc; and in
October 2004 a £1.0 billion securitisation, the largest Paragon transaction to
date, of assets originated by Paragon Mortgages and Mortgage Trust, was
completed by Paragon Mortgages (No. 8) plc. This last transaction also carried
the lowest coupon of any of our buy-to-let issues to date.
During the year we replaced the Group's corporate banking facility with a £280
million facility to provide funding to support planned new business generation.
In addition, we have increased the capacity of our warehouse funding line,
through which we finance all newly originated assets prior to securitisation,
from £900 million to £1.3 billion. An additional warehouse facility of £225
million is used for most of the originations by Mortgage Trust but in due course
the majority of originations by Mortgage Trust will be consolidated with those
by the rest of the Group.
The Group has been voted Best Issuer for Investor Reporting in the 2003
Structured Finance International Awards, from over twenty issuers nominated.
BOARD COMPOSITION
In October 2003, as referred to in my statement last year, we appointed two new
executive directors, John Heron and Pawan Pandya. John Heron is responsible for
the Group's first mortgages division, encompassing Paragon Mortgages and
Mortgage Trust, and joined the Group in 1986. He is a member of the Executive
Committee of the Council of Mortgage Lenders.
Pawan Pandya joined the Group in 1988 and was appointed Chief Operating Officer
in 2002. He is responsible for all loan administration and processing,
collections and Group technology.
In September 2004 we were pleased to welcome Bob Dench to the Board as an
independent non-executive director. Bob previously held various senior
positions with Barclays where, following a number of overseas appointments, he
returned to the UK and served on the boards of Barclays' Retail Financial
Services and Private Client businesses. He played a leading role in Barclays'
acquisition of Woolwich plc and in recent years was Managing Director of
Barclays' General Insurance, Life and Mortgage businesses before leaving the
organisation in 2003. Bob is a non-executive director of AXA UK plc and of
Clipper Ventures plc.
OUTLOOK
The Group has had an outstanding year. Volumes and profits have continued to
increase strongly, arrears performance has remained in accordance with plan and
the integration of Mortgage Trust, which traded profitably during the year, has
been completed. The opening pipeline is up year on year and trading activity
since the year end has been in line with our expectations.
There is little doubt that the housing market has started to soften and the
prospect for house prices has become uncertain. Whilst the fundamentals remain
strong for the landlord, how this uncertainty will affect landlords' buying
decisions in the short-term is difficult to predict. Should there be a
deterioration in market conditions, we are confident that the robustness of our
business model, with the comparatively low loan to value ratio across our
buy-to-let portfolio, the high rental cover and direct landlord obligation, will
ensure that this portfolio will outperform other residential mortgage
portfolios, in particular owner-occupied residential mortgage portfolios.
The acquisition of Mortgage Trust at a significant discount to net assets has
provided a new profit stream for the Group in the core buy-to-let area of our
business activities. The rapid and successful turnaround of this business has
added significant value for shareholders. Looking forward, we shall continue to
seek actively acquisition opportunities to supplement organic business flows.
Jonathan P L Perry
Chairman
25 November 2004
CONSOLIDATED PROFIT AND LOSS ACCOUNT
For the year to 30 September 2004 (Unaudited)
2004 2003
£m £m £m £m
Interest receivable 412.0 272.0
Interest payable and similar charges (331.4) (195.5)
Net interest income 80.6 76.5
Other operating income 40.2 31.0
Total operating income 120.8 107.5
Operating expenses
Exceptional reorganisation costs - (3.9)
Other operating expenses (43.9) (37.9)
Amortisation of negative goodwill 5.2 2.1
Total operating expenses (38.7) (39.7)
Provisions for losses (11.1) (15.9)
Operating profit being profit on
ordinary activities before taxation 71.0 51.9
Tax charge on profit on ordinary
activities (16.3) (11.6)
Profit on ordinary activities after
taxation for the financial year 54.7 40.3
Equity dividend (11.0) (7.5)
Retained profit 43.7 32.8
Dividend - rate per share 9.6p 6.3p
Earnings per share
- basic 48.0p 35.5p
- diluted 46.2p 34.8p
The results for the current and preceding years relate entirely to continuing
operations.
There is no material difference between the results as stated above and those
determined on the historical cost basis.
CONSOLIDATED BALANCE SHEET
30 September 2004 (Unaudited)
2004 2003
(restated)
£m £m £m £m
Assets employed
Fixed assets
Intangible assets
Negative goodwill (14.0) (18.8)
Tangible assets 3.4 4.2
Investments
Assets subject to non-recourse finance 1,557.7 2,361.6
Non-recourse finance (1,520.3) (2,285.3)
37.4 76.3
Loans to customers 4,492.5 3,051.3
4,529.9 3,127.6
4,519.3 3,113.0
Current assets
Stocks 3.4 3.8
Debtors falling due within one year 8.8 9.4
Investments 230.5 144.8
Cash at bank and in hand 172.0 150.5
414.7 308.5
4,934.0 3,421.5
Financed by
Equity shareholders' funds
Called-up share capital 12.0 11.9
Share premium account 68.8 67.6
Merger reserve (70.2) (70.2)
Profit and loss account 270.1 225.8
268.7 223.2
Share capital & reserves 280.7 235.1
Own shares (12.3) (9.8)
268.4 225.3
Provisions for liabilities and charges 5.6 7.6
Creditors
Amounts falling due within one year 66.4 128.0
Amounts falling due after more than one year 4,593.6 3,060.6
4,660.0 3,188.6
4,934.0 3,421.5
The preliminary financial information was approved by the Board of Directors on
25 November 2004.
CONSOLIDATED CASH FLOW STATEMENT
For the year to 30 September 2004 (Unaudited) 2004 2003
(restated)
£m £m
Net cash inflow from operating activities 129.3 108.2
Taxation (14.6) (14.4)
Capital expenditure and financial investment (685.8) (626.2)
Acquisitions and disposals - (26.7)
Equity dividends paid (8.6) (6.6)
(579.7) (565.7)
Management of liquid resources (85.7) (27.5)
Financing 686.5 612.6
Increase in cash in the year 21.1 19.4
(a) Reconciliation of operating profit to net cash flows from operating
activities
2004 2003
(restated)
£m £m
Operating profit 71.0 51.9
Provisions for losses 11.1 15.9
Depreciation 1.6 1.9
Amortisation of brokers' commissions 37.2 33.6
Amortisation of negative goodwill (5.2) (2.1)
Charge for long term incentive plan 0.9 0.2
Decrease in stock - 0.5
Decrease / (increase) in debtors 0.7 (0.1)
Increase in creditors 12.0 6.4
Net cash inflow from operating activities 129.3 108.2
(b) Analysis of cash flows for headings netted in the cash flow statement
2004 2003
(restated)
£m £m
Capital expenditure and financial investment
Net decrease / (increase) in assets subject to non-recourse
funding
800.2 (78.2)
Net increase in loans to customers (1,485.2) (546.9)
Expenditure on other fixed assets (1.0) (1.3)
Proceeds from sales of other fixed assets 0.2 0.2
(685.8) (626.2)
(c) Reconciliation of net cash flow to movement in net debt
2004 2003
(restated)
£m £m
Increase in cash in year 21.1 19.4
Cash inflow from increase in debt (687.2) (612.3)
Cash movement from change in liquid resources 85.7 27.5
Change in net debt arising from cash flows (580.4) (565.4)
Non-recourse finance acquired with subsidiary - (2,212.7)
Loans acquired with subsidiary - (53.4)
Movement in net debt in year (580.4) (2,831.5)
Net debt at 1 October 2003 (5,130.2) (2,298.7)
Net debt at 30 September 2004 (5,710.6) (5,130.2)
NOTES TO THE FINANCIAL INFORMATION
For the year to 30 September 2004 (Unaudited)
1. The financial information set out in this preliminary announcement has not
been audited.
2. A final dividend of 5.7p per share is proposed, payable on 11 February 2005
with a record date of 14 January 2005.
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 2003, except as stated in Note 4.
4. The balance sheet as at 30 September 2003 has been restated to reflect the
implementation of UITF Abstract 38 - 'Accounting for ESOP Trusts' which
requires that shares held by the trustee of the Group's share option
schemes are shown on the balance sheet as a deduction in arriving at Equity
Shareholders' Funds, rather than as investment in own shares within fixed
assets, as was required by the previous UITF Abstract 13, which has now
been withdrawn. The impact of this change on the profit and loss account
and the cash flow statement is immaterial for both periods.
5. The cost income ratio for the year is calculated by dividing operating
expenses, excluding reorganisation costs of £nil (2003: £3.9m) and the
amortisation of negative goodwill of £5.2m (2003: £2.1m), of £43.9m (2003:
£37.9m) by total operating income of £120.8m (2003: £107.5m) to give 36.3%
(2003: 35.3%).
6. Earnings per ordinary share is calculated as follows:
2004 2003
Profit for the year £54,700,000 £40,300,000
Basic weighted average number of ordinary shares ranking for
dividend during the year 113,942,576 113,362,439
Dilutive effect of the weighted average number of share options
in issue during the year 4,364,990 2,397,769
Diluted weighted average number of ordinary shares ranking for
dividend during the year 118,307,566 115,760,208
Earnings per ordinary share - basic 48.0p 35.5p
- diluted 46.2p 34.8p
7. Assets subject to non-recourse finance comprises Loans to Customers of
£1,458.4m (2003: £2,235.8m) and cash of £99.3m (2003: £125.8m).
8. The financial information set out in the announcement does not constitute
the Company's statutory accounts for the years to 30 September 2003 or
2004. The financial information for the year to 30 September 2003 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 2004 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.
9. A copy of the Annual Report and Accounts for the year to 30 September 2004
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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