Annual Financial Report
Bovis Homes Group PLC - Annual Report and Accounts 2010
Annual Report and Accounts 2010, Notice of Annual General Meeting, Proxy Card
Copies of the above documents have been submitted to the National Storage Mechanism and will shortly be available for inspection at www.hemscott.com/nsm.do
The documents are being mailed to shareholders and are available on the Company's website at www.bovishomesgroup.co.uk/annualreport2010
Annual Report and Accounts 2010 - publication required by DTR 6.3.5
The Company published its Preliminary Results for the year ended 31 December 2010 on 14 March 2011. In order to comply with DTR 6.3.5 it is now publishing in unedited full text information contained in the annual financial report of a type required to be disseminated in a half-yearly financial report. For coherence, this repeats some of the information contained in the Preliminary Results announcement.
The full annual financial report is available on the Company's website at www.bovishomesgroup.co.uk/annualreport2010
Bovis Homes Group PLC - Annual Report and Accounts 2010
Chairman's statement
Bovis Homes is pleased to report on a successful year in 2010 with strong improvement in profits and earnings and with significant progress in the acquisition of high quality consented land. Importantly, the Group operated successfully and grew its business without reliance on improving general market conditions. The Group's performance during 2010 was particularly positive given the continuation of challenging conditions within the UK housing market, with the constrained level of high loan to value mortgage finance available to new build customers, many of whom have limited deposit funding.
The Group legally completed a greater number of home sales during the year and, in respect of private homes, increased the average sales price achieved, reduced the average construction cost and hence improved the average profit generated per private home by 13%. These achievements have contributed to the strong increase in pre tax profits.
The Group's strategy is to increase investment in quality residential land in order to grow sales outlets and thus volume, revenues and margins. The Group has been successful with land investment in 2010 with the addition of c3,700 high quality consented plots to the land bank. These additions have enhanced the gross profit potential in the land bank. The Group is well positioned for profitable growth into the future.
Results
For the year ended 31 December 2010, the Group generated £298.6 million of revenue from the legal completion of 1,901 homes, as compared to revenues of £281.5 million in 2009 from 1,803 legal completions.
The Group delivered a pre-tax profit of £18.5 million in 2010 (2009: £7.5 million pre exceptional charges and £4.8 million post exceptional charges) with basic earnings per share at 10.6p (2009: 4.4p per share pre exceptional charges and 2.8p per share post exceptional charges). There were no exceptional items for 2010 (2009 exceptional charge: £2.7 million).
The Group achieved an operating margin of 7.2% in 2010, ahead of the prior year's 6.2% pre exceptional items. Pricing improvements combined with build cost savings led to an increase in gross margin. This was partially offset by an increase in the ratio of overheads to revenue year on year.
The Group's net assets increased from £692.6 million at the start of 2010 to £710.8 million at 31 December 2010, equating to a net asset value of £5.33 per share. As at 31 December 2010, the Group had net cash of £52 million. The Group generated operating cash inflows of £93 million before land expenditure of £137 million, leaving the Group well positioned to continue its value enhancing investments in high quality land.
Dividend
In the light of the sustained improvement in the performance of the Group and the Board's confidence in the Group's growth strategy, the Board has proposed a full year dividend of 3.0p per share. This is equivalent to an interim dividend of 1.0p per share and a final dividend of 2.0p per share, had both an interim and a final dividend been declared in 2010. In future years the Board expects to grow dividends progressively, as earnings per share increase.
The Board
During 2010, Neil Cooper, the Group Finance Director, left the Group in order to take up the position of Group Finance Director at William Hill PLC. The Board would like to thank Neil for his significant contribution to the Board and to the robust performance achieved by the Group through an extremely challenging period. The Board would also like to thank Lesley MacDonagh, who stepped down as a non executive director at the last AGM, for her contribution to the success of the Group since 2003.
On 23 August 2010 Jonathan Hill joined as Group Finance Director and became a member of the Board on that date. Jonathan joined Bovis Homes from TUI Travel Group and brings considerable experience and expertise to his new role.
Employees
After a challenging but rewarding year, the Group would like to thank all of its employees for their hard work and commitment during 2010, a year during which the Group made good progress in improving the profitability of the business and undertook significant investment in land to enable the business to grow in the future. The Group would also like to thanks its suppliers and sub-contractors for their efforts and hard work during the year.
Market conditions and prospects
The housing market continued to suffer in 2010 from a lack of mortgage availability at the level of loan to value ratios required by first time buyers, which has constrained demand for new build homes, many of which are small and affordable, targeted at the first time buyer market. Monthly mortgage approval levels appear to have stabilised during 2010, but at levels representative of less than half of a normal market. In tackling the issue of the lack of availability of high loan to value mortgages, the Group has launched Perfect 10, a 90% loan to value mortgage product with Barclays Bank, exclusive to the Group. The Group will continue to find innovative ways to enable its customers to access appropriate mortgage finance.
After having made some positive progress in H1 2010, the Group's sales prices stabilised during H2 2010. Although the market remains challenging and customer confidence and commitment levels remain subdued, the Group currently believes that the pricing environment will be stable for 2011 as a whole. A limited supply of homes for sale will not satisfy demand from purchasers. However, buyers are likely to remain constrained by mortgage availability and continue to struggle to raise finance. It is anticipated that sales prices will be more robust in the south of England compared to the north of England, which will assist the Group given its southern bias of sites.
Based on the continuation of current market conditions, the Group is confident in its ability to grow in 2011 and increase profits, supported by the contribution from new sites. Additionally, the Group has the financial capability to continue its consented land acquisition strategy, enabling it to grow further its output capacity. Finally the Group will selectively sell consented land on some of the Group's larger sites thus contributing to the funding of new land acquisitions. Together these actions will create strong foundations for the Group to create value for our shareholders into the future.
Malcolm Harris
Chairman
Operating review
The Market
During 2010 house prices for the market as a whole were relatively flat with gains in pricing in the first half offset by falls in the second half. The regional picture shows the south east outperforming the other regions in England and Wales.
In terms of demand, a customer's decision to purchase a property is influenced by a range of factors, including the ability to fund a home purchase using a mortgage, affordability, confidence in the direction of future house prices and confidence over future employment prospects.
The pricing stability in 2010 occurred against a backdrop of continuing low mortgage approvals. The Bank of England reported that home purchase loans totalled 572,000 in 2010, a decrease of 3% from 2009 and 54% lower than in 2007. The Bank of England reported that the level of monthly mortgage approvals for home purchases was relatively stable throughout 2010 and was running at c48,000 per month on average for the year as a whole with a peak of 50,000 in April and a low of 43,000 in November. This indicates the mortgage market has found a short term equilibrium which is significantly below historical levels of approvals.
Mortgage approval levels are fundamentally affected by the level of customer deposit required by the lending institution. The effects of the capital adequacy rules relating to mortgages contained within Basel II, aligned to more conservative credit scoring procedures by banks, has led to many purchasers being unable to access mortgage finance. This is particularly an issue for first time buyers, who tend to have lower funds available for a deposit. According to the CML, 194,600 loans were made to first time buyers during 2010, a reduction of 46% from the 360,000 loans advanced in 2007, the year the banking crisis struck. The average deposit for first time buyers is now around 25% compared to 10% prior to the banking crisis. Without these new buyers entering the housing market, overall market activity will remain subdued.
Affordability has improved significantly over the period of the housing market downturn. As house prices have fallen by an average of 20%, earnings have remained stable, and mortgage rates have reduced with the lower base interest rate at 0.5%; according to CLG, affordability as measured by repayments as a percentage of income, has improved by 23% since 2007.
The confidence and thus commitment level of consumers was hit during 2010 in the build up to, and after, the coalition government announced its Comprehensive Spending Review. The expected effects of tax increases and reducing public sector employment lowered consumers' future expectations in terms of their personal financial circumstances. This effect was particularly noticeable in the second half of the year.
In terms of the overall market supply of homes, according to RICS housing market data, new vendor instructions increased for most of the year, until falling away in the last few months of the year. This increase in supply coincided with reduced levels of demand. However, given the historically low levels of interest rates, and thus mortgage payment levels, and the consequential low level of repossessions (36,300 in 2010 equating to 0.3% of all mortgages, compared to 47,800 in 2009), there were limited forced sellers in the market and thus house price falls in the market were limited in the second half of the year.
In terms of new build supply the number of new home completions in England was reported by the Government for 2010 at 102,570. This was a decrease of 13% compared to 2009. However new build housing starts increased by 32% to 103,140 in 2010.
The Government's estimates of household formation numbers, released in March 2009, suggested that English households were expected to grow to 27.8 million by 2031, with annual growth in household formation of 252,000. This is over twice the level of current build volumes.
The scale of the pricing movement is relatively consistent between differing indices. The Nationwide reported that the annual change for all properties in the year to 31 December 2010 was an increase of 0.4%, whereas the Halifax reported a reduction for the year of 1.6%, which is in line with the Hometrack price survey data, which indicated an annual 1.6% decline. This latter survey data includes cash buyers as opposed to the two lender indices which do not.
The Group expects that house prices in 2011 will remain stable. Over the medium term, increasing levels of demand from new household formation, combined with low levels of additional supply from new housing stock will act as a support to house prices. Any improvements to the availability of mortgage finance, particularly to first time buyers, is likely to further boost demand, thus supporting prices.
Competition
The Group continues to view the main competitor for Bovis Homes as the second hand market. In a normal year, the Group would expect around 90% of residential transactions to be second hand, with pricing in the new build sector being set by reference to that market. The de-stocking by the housebuilders in 2008 and 2009 led to new build contributing a greater proportion of residential transactions. This was partially due to the fact that housebuilders had been providing finance by way of shared equity products to home buyers, which had enabled certain buyers to acquire homes with lower levels of equity in the new build market compared to the second hand market. Given the ongoing low level of transactions, the greater contribution from new build homes is expected to have continued in 2010.
Operational priorities for 2010
During 2010 the Group had four key operational priorities:
· Growing revenue and increasing the operating margin
· Investing in new land to generate strong future returns
· Delivering strong health, safety and environmental standards
· Improving the customer service experience for Bovis Homes customers
Growing revenue and operating margin
During 2010 the Group delivered on its priority by generating higher revenues, driven by improved volumes, increased average sales prices, and a stronger gross margin. Taken together with overhead cost control, the Group delivered an enhanced operating margin.
With 1,901 legal completions achieved during 2010, the Group's volume performance was 5% ahead of the previous year (2009: 1,803 legal completions). The volume of private homes in 2010 increased by 4%, with 1,592 legal completions in 2010 versus 1,527 units in 2009. The volume of social homes legally completed increased to 309 units from 276 units (16% of total volume, compared to 15% in 2009).
The Group achieved 1,334 private reservations during 2010 at a rate of 0.39 net reservations per site per week. This compared to 1,586 private reservations in 2009 (excluding the 215 homes sold to the joint venture) at a rate of 0.36 net reservations per outlet per week. The average active sales outlets reduced from 85 in 2009 to 66 in 2010, as a result of the Group's caution in respect of land investment during the pre downturn peak of the market and through the housing market recession.
The Group continues to provide a range of tailored incentives to assist potential customers in buying their new home, in particular, the Group introduced its 'Perfect 10' product during 2010, a 90% loan to value product in conjunction with the Barclays Bank, exclusive to Bovis Homes. The Group's own shared equity mortgage product, 'Jumpstart', has been successful and the Group has also used to a limited extent the Government backed 'Home Buy Direct' scheme. These two schemes offer those buyers who do not possess sufficient equity for the required deposit but who are otherwise credit-worthy, the opportunity to transact. The Group has continued to offer Home Exchange thus allowing the customer to part exchange their existing second hand home at an agreed value in part payment for one of the Group's new homes. This remains an important incentive for customers who are looking to move up the housing ladder.
The Group's average sales price in 2010 increased by 3.9% to £160,700 (2009: £154,600). This was primarily due to the average sales price of the Group's private legal completions increasing to £172,300 in 2010 from £165,500 in 2009. Excluding 215 units sold into the joint venture, which were typically small units in lower price locations, and which were sold at a modest discount to market value, the private average sales price increased by 9.1% to £180,600. Of this increase, the Group considers around 3% to reflect market price movements with the balance delivered through the improving mix of products in terms of size, type and location.
The average size of the Group's private homes grew by 1.0% to 1,004 square feet in 2010 from 993 square feet in 2009 and the sales price per square foot increased by 3.1%. The Group's social homes also increased in average size to 792 square feet in 2010 from 762 square feet in 2009. Overall, the average size of the Group's legally completed homes increased by 1.3% to 970 square feet in 2010 from 958 square feet in 2009 and the sales price per square foot increased by 2.7%.
The Group has achieved its target of substantially matching production with legal completion volumes in 2010. As at 31 December 2010, the Group held housing work in progress equivalent to 1,093 homes (2009: 986 homes). This will facilitate the early legal completion of homes reserved in the first half of 2011 and will support the overall growth aspirations of the Group for the year.In 2010, the Group focused on reducing build costs through making subcontract labour savings. These efforts yielded c20% reductions in such costs on new contract lettings largely associated with new sites and new build phases of existing sites. Therefore, the benefits of such savings were not felt by the Group significantly in 2010, with only initial benefits being delivered to the Group in H2 2010. The Group negotiates national agreements with many of its material suppliers to harness its buying power. With a backdrop of inflationary input costs for material suppliers, the Group was successful in holding its material costs static on average for another year during 2010.
The effects of the sales price increases and the cost savings delivered an improved gross margin of 17.9% in 2010 from 16.1% (pre exceptional gains) in 2009. The margin increase would have been greater, but for the negative impact of a higher cost of land after the Group's 2009 year end land write back. The negative impact of this change in land cost base lowered the achieved gross margin by over one percentage point. With sales prices expected to remain stable during 2011, the positive effect of the build cost savings first felt in the second half of 2010 will continue and contribute to improved gross margin throughout 2011. Subject to current market conditions continuing, this provides confidence that the gross margin achieved in the second half of 2010 of c19% can at least be sustained in 2011.
The Group retained tight control over underlying overheads in 2010, which increased year on year by 3%, notwithstanding that the Group invested in increased resources to support the growing activity levels.
Overall the revenues of the Group grew by 6% and the operating margin increased from 6.2% in 2009 to 7.2% in 2010.
Investing in land
The Group has been successful with land investment in 2010 with the addition of c3,700 high quality consented plots to the land bank at a cost of £203 million. Approximately 80% of these plots are located in the south of England. These plots have an estimated future revenue of £711 million and an estimated future gross profit potential of £181 million based on current sales prices and current build costs, delivering an estimated future gross margin of over 25%. Of the plots added to the consented land bank, 822 plots were delivered through conversion of strategic land.
The Group held a consented land bank of 13,766 plots at 31 December 2010, an increase of 1,724 plots from 12,042 plots held at 31 December 2009. Of the 13,766 plots, 69% are located in the south of England, where the housing market continues to show greater robustness. At the year end, the consented land bank included 3,931 consented plots which have been acquired since the nadir of house prices in the current downturn. The Group estimates that the gross profit potential on the plots within the consented land bank at the 2010 year end, based on current sales prices and current build costs, has increased to £461 million with a gross margin of 20.0%, compared to the position at 30 June 2010, when the gross profit potential was £412 million with a gross margin of 19.2%. The increase of £49 million demonstrates the contribution to the Group's future profits from its land acquisitions.
The average consented land plot cost at the start of 2010 was £35,200. This has increased over the year to £41,000 at 31 December 2010 as a result of a lower number of written down plots held in the land bank at the end of the year (26% of land versus 36% at the start of the year) and the addition of new prime southern traditional housing sites where the average plot cost is higher.
As at 31 December 2010, the Group had agreed terms for the acquisition of an additional c2,500 plots. Of these, 875 plots have been acquired since the year end at a cost of £57 million and with a gross profit potential of £51 million, based on current sales prices and current build costs, delivering a gross margin of over 25%.
The strategic land bank at 31 December 2010 amounted to 17,325 potential plots as compared to 16,363 potential plots at 31 December 2009. The Group added c1,800 potential plots to the strategic land bank during 2010, thus enabling the strategic land bank to grow in size notwithstanding the successful conversion of over 800 plots into the consented land bank. The Group has for a long time recognised the potential of strategic land investment and, as visibility over the effects of the changes to the planning environment improves, the Group intends to increase its investment in strategic land.
Delivering strong health, safety and environmental standards
The Group is committed to delivering strong health and safety standards for its employees, subcontractors and other site visitors and maintains a high level of organisational focus on its health and safety regime through comprehensive staff training, clear and accountable management processes and through regular and transparent reporting of the performance of the Group in all aspects of health and safety.
This is overseen, firstly, through the operational line, which takes day to day accountability for this area and, secondly, via a Group-wide oversight committee with nominated regional directors responsible for safety, run by the Group Director of Health and Safety and chaired by a senior Group manager, thereby maintaining appropriate oversight of these activities. The Group also seeks to ensure that all of its employees and subcontractors who operate at or visit sites carry a CSCS card, indicating its commitment to a fully trained workforce.
Notwithstanding the significant increase in the Group's build activity during 2010, the Group's NHBC risk score for the year was 0.66, which compares favourably to the industry peer group average. Additionally, the incident rate decreased to 31, a 21% reduction from 2009.
During the last 12 months the Group has focused efforts on working at heights, PPE and slips, trips and falls in order to raise awareness in these areas, as the Group strives to make the work environment safer. Whilst the Group's health and safety performance is relatively strong versus external benchmarks, the Group cannot be complacent. Health and safety will remain a key area of focus for regional and Group management.
The Group continues to regard sustainable development as critical to the long term creation of value for its shareholders. The housebuilding industry has an important role to play both in mitigating the impact of its building activities on the local environment and in the evolution of building techniques and advances, which reduce the carbon usage from new build developments.
Ensuring that its developments take place in a manner which mitigates the impact of its operations on its local environment, thereby balancing the needs of local communities for new housing with the requirement to avoid environmental damage, the Group works with a range of external stakeholders to agree and carry out development in a mutually acceptable manner.
Looking forward, the Group is focusing on ways to ensure that its products conform to good environmental standards, includingboth to EcoHomes standards and to emerging standards under the Code for Sustainable Homes. Reflecting the existing contribution that the Group makes to the communities and environments in which it operates, the Group is proud to say that it is a member of the FTSE4Good index.
Further details of the Group's efforts and achievements during 2010 in regards to Corporate Social responsibility will be published in a separate report, available from the Company's website (www.bovishomesgroup.co.uk).
Improving the customer service experience for Bovis Homes customers
The Group continues to invest in delivering its customer charter, which sets the expectations in relation to the quality of the product it delivers and the manner in which the sales transaction is serviced. The Group has been recognised independently by the achievement of a four star builder rating by the Home Builder Federation. Additionally the Group is pleased to see the key internal scoring metrics of 'recommend a friend', 'purchase another Bovis home' and 'overall quality of the new home' continuing to generate strong satisfaction scores during 2010.
The focus of the Group's customer communication has remained web based during 2010, with the Group using the power of the internet to directly market its products to consumers, utilising internally generated mailing lists as well as via intermediaries such as 'smart new homes' or 'right move'. Over 70% of customer enquires now originate via the web.
The sales hub structure has proven successful. Given the prevalence of the web as the primary enquiry origination point for our customers, the Group has been able to provide its customers with the convenience of appointments to view homes at their preferred site. Whilst providing customers with improved convenience, the Group has reduced its cost of sales per transaction and increased its rate of successful sales conversion. Additionally sales hubs are capable of being manned more efficiently on a seven day opening basis and also into the evening cost effectively. This selling process is supported by the Group's bespoke prospect management system, which delivers on-site technology whilst integrating the Group's prospects database with brochure fulfilment.
Outlook
The Group entered 2011 with a forward sales order position of 420 homes for 2011 delivery. The forward sales position at the start of 2010 was 643 homes, including the non-recurring sale of 215 homes, sold to the joint venture. Excluding this from the comparative, the 2011 forward sales position was consistent with the prior year, notwithstanding the lower number of active outlets: 66 on average during 2010 versus 85 on average during 2009.
The Group has made an encouraging start to trading in the first nine weeks of 2011. Sales enquiries and site visitors in the period to 4 March 2011 have increased by 24% and 28% respectively, compared to the same period in 2010 from a similar number of sales outlets. From these enhanced visitor levels, the Group achieved an average private sales rate of 0.45 net reservations per site per week, compared with an average in the first nine weeks of 2010 of 0.41 and an average of 0.36 during H2 2010. The Group has achieved 268 net private reservations in the first nine weeks of 2011 against 242 net private reservations in the comparative period in 2010, an increase of 11%. Pricing has been stable, consistent with levels achieved in the second half of 2010. As at 4 March 2011, the Group held 715 net sales for legal completion in 2011, as compared to 969 net sales at the same point in 2010. Within the current year total, private sales amount to 469 units (2010: 701 units) and social sales amount to 246 units (2010: 268 units).
As a result of the investment in land in 2010, the Group expects to launch 33 new sales outlets during 2011, 23 of which are expected to open in the first half of the year. Taking into account 21 sales outlets which are expected to close through the year, it is anticipated that the Group will trade from an average of 76 sales outlets in 2011 versus 66 sales outlets in 2009, an increase of 15%.
Given the focus on acquiring land in the south of England, it is anticipated that two thirds of the active sales outlets at the end of the 2011 will be southern located versus just over half of the active sales outlets at the start of the year. As new sales outlets are opened by the Group, absolute weekly reservation levels are anticipated to increase and the sales rates on new predominantly southern sites are expected to be stronger than the Group's recent weekly average sales rate. This will contribute to improvements in both volumes and profit margins.
The Group is strongly placed with the financial capability to continue its consented land acquisition strategy, enabling it to grow its output capacity. In 2010 the Group's strategic priority was clear: invest in new land to generate strong outlet growth. The strategic priorities for 2011 are equally clear: open the recently acquired sites quickly, acquire more land, and drive improved efficiency within the Group's capital employed. This will be assisted by selectively selling consented land on some of the Group's larger sites, thus contributing to the funding of new land acquisitions. The resulting improved spread of land assets will lead to the increase in active sales outlets, which will deliver increased volumes, without relying on improving conditions in the housing market, thus increasing revenue, profit and returns in the mid term.
The Board is confident about the Group's prospects for 2011, assuming the continuation of current market conditions, and continues to believe that the growth strategy will materially improve shareholder returns.
David Ritchie
Chief Executive
Strategy and objectives
Following a review in 2010, the Group has refined its strategic objectives as follows:
|
Objective |
Target |
|
Build operating margin: • Invest in new sites at stronger profit margins • Make additional build cost savings • Improve efficiency of overheads |
• Operating margin in the upper quartile of sector peer group |
|
Increase potential gross profit within the land bank: • Acquire and open new sites • Replan and renegotiate existing assets • Pull through of strategic land |
• Annual growth in profits and earnings per share |
|
Improve efficiency of capital employed: • Manage land bank and diversify land holdings with a greater number of sites • Control work in progress |
• ROCE in the upper quartile of sector peer group |
|
Deliver strong customer satisfaction |
• Maintain four star builder status |
|
Deliver strong health and safety and |
• NHBC Risk Score and Incidence Rate in the upper quartile of sector peer group |
Financial performance during the year
Revenue
During 2010, the Group generated total revenue of £298.6 million, compared to total revenue in 2009 of £281.5 million. Housing revenue in 2010 was £305.6 million, 9.6% ahead of the prior year (2009: £278.8 million). Of this revenue, £12.9 million has not been recognised in the financial statements in 2010. This is due to the fact that the Group holds a 50% equity stake in a private rental joint venture into which the Group has sold a portfolio of 215 new homes. This revenue and associated profit will be recognised as and when the joint venture investment is disposed or the homes in the joint venture are sold. As a result the Group's reported housing revenue for 2010 was £292.7 million (2009: £278.8m). Other income was £5.9 million (2009: £2.7 million). The Group chose not to sell any consented residential development land in either 2009 or 2010.
Operating profit
The Group delivered an operating profit for the year ended 31 December 2010 of £21.6 million at an operating margin of 7.2%, as compared to £17.4 million, before exceptional items, in the previous year, at an operating margin of 6.2%. There were no exceptional items in the current year.
Gross margin increased to 17.9% in 2010 from 16.1% (pre exceptional gains) in 2009. Stronger average sales prices combined with the initial benefit of construction cost savings in the second half of 2010 contributed strongly to the gross margin, more than offsetting the negative impact of a higher cost of land after the 2009 year end land write back. The negative impact of this change in land cost lowered the achieved gross margin by over one percentage point. The Group has delivered a materially improved gross margin in H2 2010 of 18.9%, compared to 16.3% in H1 2010.
As anticipated, overheads increased in 2010 by 14%. Underlying overheads increased year on year by 3%, with the remainder of the increase arising from the increase in staff bonus charge, reflecting the strong performance of the Group. As a result, the overheads to revenue ratio increased to 10.6% in 2010 from 9.9% in 2009. Pre the effect of staff bonus, the overheads to revenue ratio was 9.3%, compared to 9.6% in 2009.
Exceptional and non-recurring costs
There were no exceptional items for 2010 (2009 exceptional charge: £2.7 million).
The Group has reviewed the carrying value of its inventory items at the reporting date, comparing the carrying cost of the asset against estimates of net realisable value. Net realisable value has been arrived at using the Board's estimates of achievable sales prices taking into account current market conditions, and after deduction of an appropriate amount for sales and marketing costs. This has given rise to no movement in the carrying value of inventory as at 31 December 2010 (2009: £2.7 million credit).
There were no exceptional items relating to financing charges in 2010 (2009 exceptional charge: £4.2 million). There were no other exceptional items in 2010 (2009 exceptional charge: £1.2 million).
Pre tax profit and earnings per share
The Group achieved profit before tax of £18.5 million, comprising operating profit of £21.6 million, net financing charges of £3.2 million and a profit from the joint venture of £0.1 million. This compares to £17.4 million of pre-exceptional operating profit and £9.9 million of net financing charges in 2009 which generated £7.5 million of pre-exceptional profit before tax in that year. After accounting for exceptional charges, the Group achieved a pre tax profit of £4.8 million in 2009.
Basic earnings per share for the year was 10.6p compared to pre exceptional basic earnings per share of 4.4p and basic earnings per share after exceptional charges of 2.8p in 2009.
Financing
The Group incurred net financing charges of £3.2 million in 2010 (2009: £9.9 million pre exceptional charges). This reduction in finance costs arose, firstly, from the strong average net cash position of the Group throughout 2010 (the Group had an average of £78 million of net cash during 2010, as compared to an average net debt of £9 million in 2009), and, secondly, from the significantly more cost effective bank facilities agreed in January 2010. Net bank charges for 2010 were £2.2 million (2009: £8.6 million), which included the amortisation of arrangement fees (£0.6 million) and commitment fee charges (£2.0 million). The Group incurred a £2.7 million finance charge (2009: charge of £1.7 million), reflecting the difference between the cost and nominal price of land bought on deferred terms which is charged to the income statement over the life of the deferral of the consideration payable.
The Group benefited from a £0.2 million (2009: £0.2 million) net pension financing credit during 2010. This credit arose as a result of the expected return on scheme assets being in excess of the interest on the scheme obligations. The Group also benefited from a finance credit of £1.2 million (2009: £0.6 million) arising from the unwinding of the discount on its available-for-sale financial assets during 2010. There were also £0.3 million of other financing credits during the year (2009: £0.4 million of other charges).
Taxation
The Group has recognised a tax charge of £4.5 million on pre tax profits of £18.5 million at an effective tax rate of 24.1% (2009: tax charge of £1.3 million at an effective rate of 27.1%). The effective rate is below that expected owing to the benefit of land remediation allowances and the finalisation of prior years' tax submissions. The Group has recognised a current tax liability of £1.5 million in its closing balance sheet as at
31 December 2010 (2009: current tax asset of £0.8 million).
Dividends
The Board has proposed a full year dividend of 3.0p per share. This is equivalent to an interim dividend of 1.0p per share and a final dividend of 2.0p per share, had both an interim and a final dividend been declared in 2010. No dividends were proposed by the Board in respect of 2009.
Net assets
At 31 December 2010, the Group's net assets were £710.8 million, £18.2 million higher than the opening net asset position at 31 December 2009. The main drivers of this change have been the profit for the period of £14.0 million and the reduction in the deficit on the Group's pension scheme, leading to an increase in reserves of £3.0 million.
Net assets per share as at 31 December 2010 was £5.33 as compared to £5.20 at 31 December 2009.
Pensions
Following a roll-forward of the valuation of the Group's pension scheme, with latest estimates provided by the Group's actuarial advisors, the Group's pension scheme had a deficit of £2.9 million at 31 December 2010, a decrease of £6.0 million on the opening deficit of £8.9 million at 31 December 2009. Scheme assets grew strongly over the year to £73.5 million from £67.6 million and scheme liabilities decreased to £76.4 million from £76.5 million, reduced by the use of CPI rather than RPI, where relevant, (£4.6 million), offset by a fall in bond yields and improved mortality assumptions. As well as benefiting from a generally stronger stock market in 2010, scheme assets benefited from a £1.5 million special cash contribution made by the Group into the scheme in December 2010.
Cash flow
The Group started the year with £112.3 million of net cash and at 31 December 2010, held £51.7 million of net cash. The net cash outflow of £60.6 million was the result of an operating cash inflow pre land expenditure of £93 million, net cash payments in 2010 for land investment of £137 million and a non-trading cash outflow of £17 million.
Net cash
Having started the year with a net cash balance of £112.3 million, as at 31 December 2010 the Group held £51.7 million of net cash, with £67.0 million of cash in hand, offset by £15.2 million of loans received primarily as part of the Government's Kickstart programme and a £0.1 million interest rate derivative fair value adjustment.
At the end of the year, the Group had in place a £150 million committed syndicated facility, maturing in September 2013, with flexible borrowing terms at a low cost.
Financial risk and liquidity
The Group largely sees three categories of financial risk: interest rate risk, credit risk and liquidity risk. Currency risk is not a consideration as the Group trades exclusively in the UK.
With regard to interest rate risk, the Group from time to time will enter into hedge instruments to ensure that the Group's exposure to excessive fluctuations in floating rate borrowings is adequately hedged. With the commencement of a new banking arrangement in late 2008, the Group entered into a £50 million zero cost cap and floor collar hedge arrangement in February 2009, ensuring that variable rates on up to £50 million of the Group's floating rate debt are held within a pre-determined range. This prevents the Group from suffering material adverse floating rate increases beyond an agreed level ('the cap') in return for which the Group accepts a minimum payment cost ('the floor').
With unprecedentedly low LIBOR rates together with the risk premium on LIBOR rates falling away as liquidity has returned to the market, the variable cost of borrowings is below the floor and therefore ongoing costs are being incurred. As the Group has no debt at present, these hedge instruments are regarded as ineffective and thus all costs are being taken directly through income. At present, this cost is estimated at £0.3 million per annum until expiry in March 2011 which reflects the fair value of the interest rate swap. At the time of the expiry of this hedge, the Group will assess its future expected debt profile and, having quantified its interest rate risk, will make a decision on any future hedging. The Group does not have a defined policy for interest rate hedging.
Credit risk is largely mitigated by the fact that the Group's sales are generally made on completion of a legal contract at which point monies are received in return for transfer of title. During 2010, the Group continued to make a number of sales with the provision of a shared equity investment by the Group as a key part of the Group's sales incentive packages, either via the Government 'Home Buy Direct' scheme or via the Group's own 'Jumpstart' scheme. This has led to an increase in the size of the Group's long term receivable. Available for Sale Financial Asset balance which at 31 December 2010 was £31.1 million versus £21.3 million at 31 December 2009. Whilst this does represent an increase in credit risk in total, each individual credit exposure is small given the high number of counterparties. On average, individual shared equity exposure totals £24,000 (2009: £26,000).
In early 2010, the Group successfully re-refinanced its banking arrangements, putting in place a £150 million syndicated facility which is committed to September 2013. The Group regards this facility as adequate in terms of both flexibility and liquidity to cover its medium term cash flow needs.
Financial reporting
There have been no changes to the Group's accounting policies during 2010.
Jonathan Hill
Finance Director
Principal risks and uncertainties
The Group's financial and operational performance is subject to a number of risks. The Board recognise that the management of these risks is extremely important for the long-term success of the Group. The identification, quantification and mitigation of these risks are assessed on a regular basis by the Board. The key risks facing the Group are as follows:
|
Risk |
Impact |
Mitigation |
|
General Economic Conditions |
Demand for housing is impacted by changes in employment, interest rates and customer confidence. A deterioration in the economy |
• The Group retains a cautious debt position with a conservatively structured balance sheet. • The Group manages its level of work in progress to match sales levels. • The Group is focussing its land acquisition effort primarily in the south of England, where the economy should remain more robust. |
|
Mortgage Availability |
The availability of mortgage finance is fundamental to customer demand. Further restriction on mortgages granted, potentially driven by increased deposits demanded by banks or more stringent credit vetting procedures, could reduce demand for homes and therefore revenues and profits. |
• The Group manages its level of work in progress to match sales levels. • The Group is investing in land with more traditional homes, which are less focussed on the first time buyer. • The Group provides relevant customers with purchase assistance schemes, which are targeted at those buyers with the greatest difficulty in accessing mortgages due to deposit requirements. • The Group continues to innovate to find additional ways to assist customers to purchase a home. |
|
Code for Sustainable Homes ("CSH") Requirements |
The introduction of higher levels of CSH may increase substantially production costs without an offsetting ability to increase sales prices. Assuming councils maintain their social gain packages, land vendors may see insufficient value remaining in their land and therefore the supply of land at traditional margins may erode, thus impeding the growth of sites and therefore volumes going forward. |
• The Group is investing assertively in consented land which is subject to existing regulation standards. • The Group continues to investigate new building techniques and advances, which can reduce the carbon usage from new build developments in increasingly cost effective ways. |
|
Regulation and Legislation |
The Group is subject to large quantities of changing rules and regulations in relation to planning, legislation and health and safety. Complying with the obligations can create costs to the Group or may create delays in building activity. Additionally the quantity and range of obligations create risks for the Group in remaining aware and fully conversant with all of the new developments. |
• The Group maintains a land bank to mitigate against significant impacts from delayed build activity. • The Group operates comprehensive processes to ensure compliance with known regulatory and legal requirements. • The Group carefully monitors changes in legislation and regulation to ensure that changes effecting the business are incorporated within the Group's processes. |
|
Access to Land |
The Group fails to invest effectively in land with a residential planning consent to maintain and grow its consented land bank, thus either limiting expansion or possibly compromising existing activity. |
• The Group operates a rigorous formal process for land acquisitions and defines hurdle return rates which must be achieved. • Management regularly review the pipeline of new land purchases. |
As the activities of the Group evolve, the nature of the risks that it is focused on evolve. For instance, as the Group has acquired land successfully, the operational risk shifts to the progression of these sites into the build and sales phase, with the challenges of gaining detailed planning and of operationally gearing up the Group to increase build and sales activity. This said, it is important to recognise that whilst conditions may have improved, profound uncertainties remain in regards to the UK economy which do suggest that appropriate levels of caution should be maintained.
Statement of directors' responsibilities in respect of the annual report and the financial statements
The directors are responsible for preparing the annual report and the Group and Parent Company financial statements, in accordance with applicable law and regulations.
Company law requires the directors to prepare Group and Parent Company financial statements for each financial year. Under that law the directors are required to prepare the Group financial statements in accordance with IFRSs as adopted by the EU and applicable law and have elected to prepare the Parent Company financial statements on the same basis.
Under company law, the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Parent Company and of their profit or loss for that period.
In preparing each of the Group and Parent Company financial statements, the directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgments and estimates that are reasonable and prudent;
• for the Group and Parent Company financial statements, state whether they have been prepared in accordance with IFRSs as adopted by the EU;
• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the Parent Company will continue in business.
The directors are responsible for keeping proper accounting records that are sufficient to show and explain the Parent Company's transactions and disclose with reasonable accuracy at any time the financial position of the Parent Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the directors are also responsible for preparing a directors' report, report on directors' remuneration and report on corporate governance that comply with that law and those regulations.
The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
We confirm that to the best of our knowledge:
a) the Group and Parent Company financial statements in this report, which have been prepared in accordance with IFRS as adopted by the EU, IFRIC interpretation and those parts of the Companies Act 2006 applicable to companies reporting under IFRS, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and of the Group taken as a whole; and
b) the management report contained in this report includes a fair review of the development and performance of the business and the position of the Company and the Group taken as a whole, together with a description of the principal risks and uncertainties they face.
For and on behalf of the Board
David Ritchie
Chief Executive
Jonathan Hill
Finance Director
11 March 2011
Bovis Homes Group PLC
Group income statement
|
For the year ended 31 December |
2010 |
2009 |
|
||||||||
|
|
|
|
|
Before exceptional items |
|
Exceptional items
|
|
|
|
||
|
|
|
£000 |
|
£000 |
|
£000 |
|
£000 |
|
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Revenue |
|
298,635 |
|
281,505 |
|
- |
|
281,505 |
|
||
|
Cost of sales |
|
(245,218 |
) |
(236,339 |
) |
1,471 |
|
(234,868 |
) |
||
|
Gross profit |
|
53,417 |
|
45,166 |
|
1,471 |
|
46,637 |
|
||
|
Administrative expenses |
|
(31,784 |
) |
(27,769 |
) |
- |
|
(27,769 |
) |
||
|
Operating profit before financing costs |
|
21,633 |
|
17,397 |
|
1,471 |
|
18,868 |
|
||
|
Financial income |
|
2,406 |
|
2,304 |
|
- |
|
2,304 |
|
||
|
Financial expenses |
|
(5,614 |
) |
(12,178 |
) |
(4,197 |
) |
(16,375 |
) |
||
|
Net financing costs |
|
(3,208 |
) |
(9,874 |
) |
(4,197 |
) |
(14,071 |
) |
||
|
Share of profit of joint venture |
|
76 |
|
- |
|
- |
|
- |
|
||
|
Profit/(loss) before tax |
|
18,501 |
|
7,523 |
|
(2,726 |
) |
4,797 |
|
||
|
Income tax (expense)/credit |
|
(4,463 |
) |
(2,070 |
) |
763 |
|
(1,307 |
) |
||
|
Profit/(loss) for the period attributable to equity holders of the parent |
|
14,038 |
|
5,453 |
|
(1,963 |
) |
3,490 |
|
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Earnings/(loss) per share |
|
|
|
|
|
|
|
|
|
||
|
Basic |
|
10.6p |
|
4.4p |
|
(1.6p |
) |
2.8p |
|
||
|
Diluted |
|
10.6p |
|
4.4p |
|
(1.6p |
) |
2.8p |
|
||
|
|
|
|
|
|
|
|
|
|
|
||
Bovis Homes Group PLC
Group statement of comprehensive income
|
For the year ended 31 December |
|
|
|
|
||
|
|
|
|
2010 |
|
2009 |
|
|
|
|
|
£000 |
|
£000 |
|
|
|
|
|
|
|
|
|
|
Profit for the period |
14,038 |
|
3,490 |
|
||
|
Actuarial gains / (losses) on defined benefit pension scheme |
4,320 |
|
(4,210 |
) |
||
|
Deferred tax on actuarial movements on defined benefit pension scheme |
(1,255 |
) |
1,179 |
|
||
|
Total comprehensive income for the period attributable to equity holders of the parent |
17,103 |
|
459 |
|
||
Bovis Homes Group PLC
Group balance sheet
|
At 31 December |
|
|
2010 |
|
2009 |
|
|
|
|
|
£000 |
|
£000 |
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
Property, plant and equipment |
|
|
11,307 |
|
11,574 |
|
|
Investments |
|
|
4,847 |
|
22 |
|
|
Restricted cash |
|
|
138 |
|
- |
|
|
Deferred tax assets |
|
|
3,899 |
|
6,446 |
|
|
Trade and other receivables |
|
|
12,087 |
|
2,213 |
|
|
Available for sale financial assets |
|
|
31,147 |
|
21,291 |
|
|
Total non-current assets |
|
|
63,425 |
|
41,546 |
|
|
Inventories |
|
|
764,360 |
|
630,709 |
|
|
Trade and other receivables |
|
|
37,271 |
|
30,771 |
|
|
Cash and cash equivalents |
|
|
67,003 |
|
114,595 |
|
|
Current tax assets |
|
|
- |
|
831 |
|
|
Total current assets |
|
|
868,634 |
|
776,906 |
|
|
Total assets |
|
|
932,059 |
|
818,452 |
|
|
Equity |
|
|
|
|
|
|
|
Issued capital |
|
|
66,609 |
|
66,570 |
|
|
Share premium |
|
|
210,409 |
|
210,181 |
|
|
Retained earnings |
|
|
433,799 |
|
415,815 |
|
|
Total equity attributable to equity holders of the parent |
|
|
710,817 |
|
692,566 |
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
Bank and other loans |
|
|
15,233 |
|
2,337 |
|
|
Other financial liabilities |
|
|
2,686 |
|
- |
|
|
Trade and other payables |
|
|
56,004 |
|
23,077 |
|
|
Retirement benefit obligations |
|
|
2,870 |
|
8,910 |
|
|
Provisions |
|
|
1,995 |
|
1,700 |
|
|
Total non-current liabilities |
|
|
78,788 |
|
36,024 |
|
|
Bank and other loans |
|
|
92 |
|
- |
|
|
Trade and other payables |
|
|
139,215 |
|
87,698 |
|
|
Provisions |
|
|
1,604 |
|
2,164 |
|
|
Current tax liabilities |
|
|
1,543 |
|
- |
|
|
Total current liabilities |
|
|
142,454 |
|
89,862 |
|
|
Total liabilities |
|
|
221,242 |
|
125,886 |
|
|
|
|
|
|
|
|
|
|
Total equity and liabilities |
|
|
932,059 |
|
818,452 |
|
These accounts were approved by the Board of directors on 11 March 2011 and signed on its behalf by
David Ritchie and Jonathan Hill, Directors.
Bovis Homes Group PLC
Group statement of changes in equity
|
|
Total |
|
Issued |
Share |
Total |
|
|
For the year ended 31 December |
retained earnings |
|
capital |
premium |
|
|
|
|
£000 |
|
£000 |
£000 |
£000 |
|
|
Balance at 1 January 2009 |
414,654 |
|
60,497 |
157,127 |
632,278 |
|
|
Total comprehensive income and expense |
459 |
|
- |
- |
459 |
|
|
Deferred tax on other employee benefits |
(2 |
) |
- |
- |
(2 |
) |
|
Issue of share capital |
- |
|
6,073 |
53,054 |
59,127 |
|
|
Share based payments |
704 |
|
- |
- |
704 |
|
|
Balance at 31 December 2009 |
415,815 |
|
66,570 |
210,181 |
692,566 |
|
|
Balance at 1 January 2010 |
415,815 |
|
66,570 |
210,181 |
692,566 |
|
|
Total comprehensive income and expense |
17,103 |
|
- |
- |
17,103 |
|
|
Deferred tax on other employee benefits |
36 |
|
- |
- |
36 |
|
|
Issue of share capital |
- |
|
39 |
228 |
267 |
|
|
Share based payments |
845 |
|
- |
- |
845 |
|
|
Deferred tax on share based payments |
(160 |
) |
- |
- |
(160 |
) |
|
Current tax on share based payments |
160 |
|
- |
- |
160 |
|
|
Balance at 31 December 2010 |
433,799 |
|
66,609 |
210,409 |
710,817 |
|
Bovis Homes Group PLC
Group statement of cash flows
|
For the year ended 31 December |
|
2010 |
|
2009 |
|
|
|
|
£000 |
|
£000 |
|
|
|
|
|
|
|
|
|
Cash flows from operating activities |
|
|
|
|
|
|
Profit for the year |
|
14,038 |
|
3,490 |
|
|
Depreciation |
|
636 |
|
769 |
|
|
Adjustment for sale of assets to joint venture |
|
963 |
|
- |
|
|
Impairment of available for sale assets |
|
713 |
|
245 |
|
|
Financial income |
|
(2,406 |
) |
(2,304 |
) |
|
Financial expense |
|
5,614 |
|
16,375 |
|
|
Loss on sale of property, plant and equipment |
|
8 |
|
3 |
|
|
Equity-settled share-based payment expense |
|
845 |
|
704 |
|
|
Income tax expense |
|
4,463 |
|
1,307 |
|
|
Share of result of joint venture |
|
(76 |
) |
- |
|
|
Release of inventory provisions |
|
- |
|
(2,664 |
) |
|
Increase in trade and other receivables |
|
(23,951 |
) |
(7,555 |
) |
|
(Increase) / decrease in inventories |
|
(133,650 |
) |
152,762 |
|
|
Increase / (decrease) in trade and other payables |
|
84,335 |
|
(17,173 |
) |
|
Decrease in provisions and employee benefits |
|
(1,731 |
) |
(611 |
) |
|
Cash (outflow) / inflow generated from operations |
|
(50,199 |
) |
145,348 |
|
|
|
|
|
|
|
|
|
Interest paid |
|
(3,028 |
) |
(6,684 |
) |
|
Income taxes (paid) / received |
|
(762 |
) |
21,688 |
|
|
Net cash (outflow) / inflow from operating activities |
|
(53,989 |
) |
160,352 |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
Interest received |
|
660 |
|
1,481 |
|
|
Acquisition of property, plant and equipment |
|
(402 |
) |
(44 |
) |
|
Proceeds from sale of plant and equipment |
|
24 |
|
45 |
|
|
Investment in joint venture |
|
(4,228 |
) |
- |
|
|
Movements in loans with joint venture |
|
(1,451 |
) |
- |
|
|
Investment in restricted cash |
|
(138 |
) |
- |
|
|
Net cash (outflow) / inflow from investing activities |
|
(5,535 |
) |
1,482 |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
Proceeds from the issue of share capital |
|
267 |
|
60,662 |
|
|
Costs associated with share placing |
|
- |
|
(1,535 |
) |
|
Drawdown / (repayment) of borrowings |
|
13,706 |
|
(118,000 |
) |
|
Costs associated with refinancing |
|
(2,041 |
) |
- |
|
|
Net cash inflow / (outflow) from financing activities |
|
11,932 |
|
(58,873 |
) |
|
|
|
|
|
|
|
|
Net (decrease) / increase in cash and cash equivalents |
|
(47,592 |
) |
102,961 |
|
|
Cash and cash equivalents at 1 January |
|
114,595 |
|
11,634 |
|
|
Cash and cash equivalents at 31 December |
|
67,003 |
|
114,595 |
|
Notes to the accounts
1 Basis of preparation
Bovis Homes Group PLC ('the Company') is a company domiciled in the United Kingdom. The consolidated financial statements of the Company for the year ended 31 December 2010 comprise the Company and its subsidiaries (together referred to as 'the Group') and the Group's interest in associates.
The consolidated financial statements were authorised for issue by the directors on 11 March 2011. The accounts were audited by KPMG Audit Plc.
The financial information set out above does not constitute the company's statutory accounts for the years ended 31 December 2010 or 2009 but is derived from those accounts. Statutory accounts for 2009 have been delivered to the registrar of companies, and those for 2010 will be delivered in due course. The auditors have reported on those accounts; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.
2 Statement of compliance
The consolidated financials statements have been prepared in accordance with IFRS as adopted by the EU, and the accounting policies have been applied consistently for all periods presented in the consolidated financial statements. On publishing the Company financial statements in the Group's full Report and Accounts together with the Group financial statements, the Company is taking advantage of the exemption in s408 of the Companies Act 2006 not to present its individual income statement and related notes that form a part of these approved financial statements.
3 Basis of preparation
The financial statements are prepared on the historical cost basis except for derivative financial instruments and available for sale assets.
The preparation of financial statements in conformity with adopted IFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported 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 ongoing 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.
Judgements made by management in the application of adopted IFRSs that have significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are discussed in note 28.
The accounting policies set out below have been applied consistently to all relevant periods presented in these consolidated financial statements. The accounting policies have been applied consistently to the Company and the Group where relevant.
Impact of standards and interpretations effective for the first time
The following new standards, amendments to standards or interpretations are mandatory for the first time for the Company's year ended 31 December 2010. They have had no material impact on the Group's financial statements.
IAS39 'Financial instruments' (Amendment). This standard is amended such that gains or losses on a hedged instrument should be reclassified from equity to profit or loss during the period that the hedged forecast cash flows affect profit or loss. As the Group's current hedged instruments are currently ineffective, movements are currently taken through the income statement so this has had no practical impact.
IFRS 2 'Share-based payment' (Amendment). The definition of vesting conditions in IFRS 2 has been amended to clarify that vesting conditions are limited to service conditions and performance conditions. Conditions other than service or performance conditions are considered non-vesting conditions. The amendment also specifies that all cancellations, whether by the entity or by other parties, should receive the same accounting treatment, i.e. acceleration of the charge, rather than be treated as a reversal. The Board has concluded that there is no significant effect on the Group's financial statements.
IFRIC15 'Agreements for the construction of real estate'. IFRIC15 provides guidance on whether the construction of real estate should be accounted for under IAS11 or IAS18. The Group already accounts for the construction of real estate in accordance with IFRIC15 and accordingly this interpretation has had no impact upon the Group.
The other standards and interpretations that are applicable for the first time in the Group's financial statements for the year ended 31 December 2010, have no effect on these financial statements.
4 Basis of consolidation
The consolidated financial statements incorporate the accounts of the Company and entities controlled by the Company (its subsidiaries) made up to 31 December. Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity.
Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies. The consolidated financial statements include the Group's share of the total recognised gains and losses of associates on an equity accounted basis, from the date that significant influence commences until the date that significant influence ceases.
Entities which are controlled with another party or parties ("joint ventures") are accounted for using the equity method of accounting. The results attributable to the Group's holding in joint ventures are shown separately in the consolidated income statement. The amount included in the consolidated balance sheet is the Group's share of the net assets of the joint ventures plus net loans receivable.
5 Accounting policies
Business combinations
The purchase method of accounting is used to account for the acquisition of subsidiary undertakings by the Group. The cost of or consideration for an acquisition is measured as the fair value of the assets given and liabilities taken on or assumed in return for the acquisition. On acquisition, identifiable assets and liabilities are measured initially at fair value, with any excess of consideration being recognised as goodwill. Accounting policies of subsidiary undertakings have been changed where necessary to ensure consistency with those adopted by the Group.
Revenue
Revenue is recognised in the income statement when the significant risks and rewards of ownership have been transferred to the purchaser. Revenue comprises the fair value of the consideration received or receivable, net of value-added tax, rebates and discounts. Revenue in respect of the sale of residential properties and land is recognised at the fair value of the consideration received or receivable on legal completion of the sale transaction. Revenue does not include the value of the onward legal completion of properties accepted in part exchange against a new property. The net gain or loss arising from the legal completion of these part exchange properties is recognised in cost of sales.
Rental income is recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives granted are recognised as an integral part of the total rental income.
Operating leases
Rentals payable under operating leases are charged to income on a straight-line basis over the term of the relevant lease. Lease incentives received are recognised as an integral part of the total lease expenditure.
Net financing costs
Net finance costs comprise:
• interest payable on borrowings, including any premiums payable on settlement or redemption and direct issue costs, accounted for on an accrual basis
to the income statement using the effective interest method;
• interest receivable on funds invested accounted for on an accrual basis to the income statement using the effective interest method;
• imputed interest on available-for-sale financial assets, fair valued interest free loans and on deferred terms land payables;
• pension finance costs or benefits being the net of interest costs on liabilities and expected return on assets linked to the Defined Benefit Scheme; and
• gains and losses on hedging instruments that are recognised in the income statement.
Finance costs are included in the measurement of borrowings at their amortised cost to the extent that they are not settled in the period in which they arise.
The Group is required to capitalise borrowing costs directly attributable to the acquisition, construction and production of a qualifying asset, as part of the costs of that asset. Inventories which are produced in large quantities on a repetitive basis over a short period of time are not qualifying assets. The Group does not generally produce qualifying assets.
Taxation
Income tax comprises the sum of the tax currently payable or receivable and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.
The tax currently payable or receivable is based on taxable profit or loss for the year and any adjustment to tax payable or receivable in respect of previous years. Taxable profit or loss differs from net profit or loss as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group's liability or asset for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method.
Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from non-tax deductible goodwill, from the initial recognition of assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit, and from differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future.
The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to reserves, in which case the deferred tax is also dealt with in reserves.
Derivative financial instruments and hedge accounting
The Group's activities expose it primarily to the financial risks of changes in interest rates. The Group uses interest rate swap contracts where deemed appropriate to hedge these exposures. The Group does not use derivative financial instruments for speculative purposes. The use of financial derivatives is governed by the Group's policies approved by the Board of directors, which provide written principles on the use of financial derivatives.
Derivative financial instruments are recognised at fair value. The fair value of interest rate swaps is the estimated amount that the Group would receive or pay to terminate the swap at the balance sheet date, taking into account interest rates and the current creditworthiness of the swap counterparties.
Where the derivative instrument, typically an interest rate swap, is deemed an effective hedge over the exposure being hedged, the derivative instrument is treated as a cash flow hedge and hedge accounting applied. Under a cash flow hedge, gains and losses on the effective portion of the change in the fair value of the derivative instrument are recognised directly in other comprehensive income.
Changes in the fair value of derivative financial instruments that do not qualify for hedge accounting and any ineffectiveness in the hedge relationship are recognised in the income statement as they arise.
Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, or exercised, or no longer qualifies for hedge accounting. At that time, any cumulative gain or loss on the hedging instrument recognised in reserves is retained in reserves until the forecasted transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in reserves is transferred to net profit or loss for the period.
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. Certain property that had been revalued to fair value on or prior to 1 January 2004, the date of transition to adopted IFRS, are measured on the basis of deemed cost, this being the revalued amount at the date of that revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Regular reviews of the carrying values of property are completed to assess any impairment in value. When impairment is identified, the asset's recoverable amount is assessed and any shortfall is written off through the income statement.
Depreciation is charged so as to write off the cost less residual value (which is reassessed annually) of assets over their estimated useful lives. Depreciation is charged on property in respect of the value of the building. Land is not depreciated. The basis of depreciation for each class of asset is as follows:
• Buildings straight line over 50 years
• Plant and machinery 33.3% reducing balance
• Computer equipment straight line over 3 years
• Office equipment 25% reducing balance
The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the income statement.
Fixed asset investments
Investments in subsidiaries are carried at cost less impairment. Following the issue of IFRIC11 in 2007, the Parent Company accounts for the share-based payments granted to subsidiary employees as an increase in the cost of its investment in subsidiaries.
Trade and other receivables
Trade receivables do not carry any interest and are stated at their nominal value as reduced by appropriate allowances for estimated irrecoverable amounts.
Receivables on extended terms granted as part of a sales transaction are secured by way of a legal charge on the relevant property, categorised as an available for sale financial asset and are stated at fair value as described in note 15. Gains and losses arising from changes in fair value are recognised directly in equity in retained earnings, with the exceptions of impairment losses, the impact of changes in future cash flows and interest calculated using the 'effective interest rate' method, which are recognised directly in the income statement.
Where the investment is disposed of, or is determined to be impaired, the cumulative gain or loss previously recognised in equity is included in the income statement for the period. Given its materiality, this item is being disclosed separately on the face of the balance sheet.
Inventories
Inventories are stated at the lower of cost and net realisable value. Cost comprises direct materials and, where applicable, direct labour costs and those overheads, not including any general administrative overheads, that have been incurred in bringing the inventories to their present location and condition. Net realisable value represents the estimated net selling price less estimated total costs of completion of the finished goods.
Land held for development, including land in the course of development until legal completion of the sale of the asset, is initially recorded at cost. Where, through deferred purchase credit terms, cost differs from the nominal amount which will actually be paid in settling the deferred purchase terms liability, an adjustment is made to the cost of the land, the difference being charged as a finance cost.
Options purchased in respect of land are capitalised initially at cost. Regular reviews are completed for impairment in the value of these options, and provisions made accordingly to reflect loss of value. The impairment reviews consider the period elapsed since the date of purchase of the option given that the option contract has not been exercised at the review date. Further, the impairment reviews consider the remaining life of the option, taking account of any concerns over whether the remaining time available will allow successful exercise of the option. The carrying cost of the option at the date of exercise is included within the cost of land purchased as a result of the option exercise.
Investments in land without the benefit of planning consent, either through purchase of freehold land or non refundable deposits paid on land purchase contracts subject to residential planning consent, are capitalised initially at cost. Regular reviews are completed for impairment in the value of these investments, and provision made to reflect any irrecoverable element. The impairment reviews consider the existing use value of the land and assesses the likelihood of achieving residential planning consent and the value thereof.
Ground rents are held at an estimate of cost based on a multiple of ground rent income, with a corresponding credit created against cost of sales, in the year in which the ground rent first becomes payable by the leasehold purchaser.
Cash and cash equivalents
Cash and cash equivalents comprises cash balances and call deposits. Bank overdrafts that are repayable on demand and form an integral part of the Group's cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows.
Bank borrowings
Interest-bearing bank loans and overdrafts are initially recorded at fair value, net of direct issue costs, and subsequently at amortised cost. Finance charges are accounted for on an accrual basis to the income statement using the effective interest method and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise.
Joint ventures
Entities which are jointly controlled with another party or parties ("joint ventures") are accounted for using the equity method of accounting. The results attributable to the Group's holding in joint ventures are shown separately in the consolidated income statement. The amount included in the consolidated balance sheet is the Group's share of the net assets of the joint ventures plus net loans receivable.
Government grants
Government grants are recognised in the income statement so as to match with the related costs that they are intended to compensate. Government grants are included within deferred income. The benefit on loans with an interest rate below market is calculated as the difference between interest at a market rate and the below market interest. The benefit is treated as a Government grant. The benefit on loans with an interest rate below market is calculated as the difference between interest at a market rate and the below market interest, and the benefit is treated as a Government grant.
Kickstart
During the year, the Group has been granted assistance for the development of a number of sites under the Homes and Communities Agency ('HCA') 'Kickstart' scheme. Where receipts under the Kickstart scheme relate to grants they are accounted for in accordance with the policy for government grants stated above.
In addition the Group has received cash upon specific sites under the 'Kickstart equity' scheme which may be repayable in future periods, as the sites to which it relates are developed, along with the share of the profits or losses attributable to the HCA arising from the sites. This grant element is included within deferred income to the extent that it is currently estimated that future economic benefit will be derived and will be released to the income statement in line with sales from the relevant site. If part or all the equity schemes are expected to be repaid these are shown in other creditors.
Trade payables
Trade payables on normal terms are not interest bearing and are stated at their nominal value.
Trade payables on extended terms, particularly in respect of land, are recorded at their fair value at the date of acquisition of the asset to which they relate. The discount to nominal value which will be paid in settling the deferred purchase terms liability is recognised over the period of the credit term and charged to finance costs using the effective interest rate method.
Provisions
A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability.
Equity instruments
Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs.
Own shares held by ESOP trust
Transactions of the Group-sponsored ESOP trust are included in the Group financial statements. In particular, the trust's purchases of shares in the Company are debited directly to equity through an own shares held reserve.
Employee benefits
The Group accounts for pensions and similar benefits under IAS 19 (Revised): "Employee benefits". In respect of defined benefit schemes, the net obligation is calculated by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods, such benefits measured at discounted present value, less the fair value of the scheme assets. The discount rate used to discount the benefits accrued is the yield at the balance sheet date on AA credit rated bonds that have maturity dates approximating to the terms of the Group's obligations. The calculation is performed by a qualified actuary using the projected unit method. The operating and financing costs of such plans are recognised separately in the income statement; service costs are spread systematically over the lives of employees and financing costs are recognised in the periods in which they arise.
All actuarial gains and losses are recognised immediately in the statement of recognised income and expense.
Payments to defined contribution schemes are charged as an expense as they fall due.
Share-based payments
The Group has applied the requirements of IFRS2: "Share-based payments". In accordance with the transitional provisions of IFRS1, IFRS2 has been applied to all grants of equity instruments after 7 November 2002 that were unvested as of 1 January 2005.
The Group issues equity-settled share-based payments to certain employees in the form of share options over shares in the Parent Company. Equity settled share-based payments are measured at fair value at the date of grant calculated using an independent option valuation model, taking into account the terms and conditions upon which the options were granted. The fair value is expensed on a straight line basis over the vesting period, based on the Group's estimate of shares that will eventually vest, with a corresponding credit to equity except when the share-based payment is cancelled where the charge will be accelerated.
Segment reporting
As the Group's main operation is that of a housebuilder and it operates entirely within the United Kingdom, there are no separate segments, either business or geographic, to disclose, having taken into account the aggregation testing provisions of IFRS8.
Exceptional items
Items that are both material in size and unusual or infrequent in nature are presented as exceptional items in the income statement. The Directors are of the opinion that the separate recording of exceptional items provides helpful information about the Group's underlying business performance. Examples of events that, inter alia, may give rise to the classification of items as exceptional are the restructuring of existing and newly-acquired businesses, gains or losses on the disposal of businesses or individual assets and asset impairments, including currently developable land, work in progress and goodwill.
Restructuring costs
Restructuring costs are recognised in the income statement when the Group has a detailed plan that has been communicated to the affected parties. A liability is accrued for unpaid restructuring costs.
Impact of standards and interpretations in issue but not yet effective
A number of new standards, amendments to standards and interpretations are not yet effective for the year ended 31 December 2010, and have not been applied in preparing these consolidated financial statements. None of these are expected to have an effect on the consolidated financial statements of the Group. Comments on specific new standards or amendments are as follows:
IFRIC 14 'IAS 19 - The limit on a Defined Benefit Asset, Minimum funding Requirements and their interaction'. This interpretation outlines when refunds or reductions in future contributions can be treated as available under IAS 19 "Employee Benefits" and how a minimum funding requirement affects future contributions or may give rise to a liability. This is effective from the period beginning 1 January 2011.
IFRS 7 'Financial Instruments: Disclosure' (Amendment). The amendment provides clarification of the standard and requires additional disclosures in relation to financial instruments. This is effective for the period beginning 1 January 2011.
The Group has not early adopted any standard, amendment or interpretation.
6 Exceptional items
Inventory carrying value
The Group has reviewed the carrying value of its inventory items at the reporting date, comparing the carrying cost of the asset against estimates of net realisable value. Net realisable value has been arrived at using the Board's estimates of achievable sales prices taking into account current market conditions, and after deduction of an appropriate amount for selling costs. This has given rise to no exceptional items relating to the carrying value of inventory as at 31 December 2010 (2009: £2.7 million net release).
Financing charge
There was no charge in 2010 (2009: £4.2 million).
Other exceptional items
There was no charge in 2010 (2009: £1.2 million).
In total there were no exceptional charges or releases for 2010 (2009 exceptional charge: £2.7 million).
7 Reconciliation of net cash flow to net cash
|
|
|
2010 |
|
2009 |
|
|
|
|
£000 |
|
£000 |
|
|
|
|
|
|
|
|
|
Net (decrease) / increase in net cash and cash equivalents |
|
(47,592 |
) |
102,961 |
|
|
(Drawdown) / repayment of borrowings |
|
(13,706 |
) |
118,000 |
|
|
Fair value adjustments to interest rate swaps |
|
245 |
|
(337) |
|
|
Fair value adjustment to interest free loans |
|
473 |
|
- |
|
|
Movement in financing costs included in loans |
|
- |
|
(8,270 |
) |
|
Net cash / (debt) at start of period |
|
112,258 |
|
(100,096 |
) |
|
Net cash at end of period |
|
51,678 |
|
112,258 |
|
|
Analysis of net cash: |
|
|
|
|
|
|
Cash and cash equivalents |
|
67,003 |
|
114,595 |
|
|
Unsecured loans |
|
(15,233 |
) |
(2,000 |
) |
|
Fair value of interest rate swaps |
|
(92 |
) |
(337 |
) |
|
Net cash |
|
51,678 |
|
112,258 |
|
8 Income taxes
Current tax
Current tax is the expected tax payable or receivable on the taxable income or loss for the year, calculated using a corporation tax rate of 28.0% applied to the pre-tax income or loss, adjusted to take account of deferred taxation movements and any adjustments to tax payable for previous years. Current tax receivable for current and prior years is classified as a current asset.
9 Dividends
There were no dividends paid in the current or prior year by the Group. The Board has decided to propose a full year dividend of 3.0p per share in respect of 2010, subject to shareholder approval, for payment on 27 May 2011 to shareholders on the register at the close of business on 1 April 2011.
10 Earnings or Loss per share
Basic earnings per share
The calculation of basic earnings per share at 31 December 2010 was based on the profit attributable to ordinary shareholders of £14,038,000 (2009: £3,490,000) and a weighted average number of ordinary shares outstanding during the year ended 31 December 2010 of 132,664,656 (2009: 124,179,686), calculated as follows:
Profit attributable to ordinary shareholders
|
|
2010 |
|
2009 |
|
|
|
£000 |
|
£000 |
|
|
Profit for the period attributable to ordinary shareholders |
14,038 |
|
3,490 |
|
Weighted average number of ordinary shares
|
|
2010 |
|
2009 |
|
|
Issued ordinary shares at 1 January |
133,138,968 |
|
120,994,753 |
|
|
Effect of own shares held |
(528,808 |
) |
(621,297 |
) |
|
Effect of shares issued in year |
54,496 |
|
3,806,230 |
|
|
Weighted average number of ordinary shares at 31 December |
132,664,656 |
|
124,179,686 |
|
Basic earnings per ordinary share before exceptional items for the year ended 31 December 2009 was calculated on the pre-exceptional profit after tax of £5,453,000. Basic loss per share on exceptional items for the year ended 31 December 2009 was calculated on the exceptional loss after tax of £1,963,000. In both cases this is expressed on a per share basis using the weighted average share information disclosed above.
Diluted earnings per share
The calculation of diluted earnings per share at 31 December 2010 was based on the profit attributable to ordinary shareholders of £14,038,000 (2009: £3,490,000) and a weighted average number of ordinary shares outstanding during the year ended 31 December 2010 of 132,685,679 (2009: 124,203,192).
Under normal circumstances, the average number of shares is diluted in reference to the average number of potential ordinary shares held under option during the period. This dilutive effect amounts to the number of ordinary shares which would be purchased using the aggregate difference in value between the market value of shares and the share option exercise price. The market value of shares has been calculated using the average ordinary share price during the period. Only share options which have met their cumulative performance criteria have been included in the dilution calculation.
However, as a loss per share cannot be reduced through dilution, this dilution adjustment has not been applied to the calculation of diluted loss per share arising from exceptional items in 2009. This dilution adjustment has been applied to the calculation of diluted earnings per share before exceptional items and diluted earnings per share after exceptional items for 2009.
The calculation of diluted loss on exceptional items per share at 31 December 2009 was based on the exceptional loss attributable to ordinary shareholders of £1,963,000 and a weighted average number of ordinary shares outstanding during the year ended 31 December 2009 of 124,179,686.
Weighted average number of ordinary shares (diluted)
|
|
2010 |
2009 |
|
Weighted average number of ordinary shares at 31 December |
132,664,656 |
124,179,686 |
|
Effect of share options in issue which have a dilutive effect |
21,023 |
23,506 |
|
Weighted average number of ordinary shares (diluted) at 31 December |
132,685,679 |
124,203,192 |
Diluted earnings before exceptional items
Diluted earnings per ordinary share before exceptional items for the year ended 31 December 2009 is calculated on the pre-exceptional profit after tax of £5,453,000 and a weighted average number of ordinary shares outstanding during the year ended 31 December 2009 of 124,203,192.
11 Related Party transactions
Transactions between fellow subsidiaries, which are related parties, have been eliminated on consolidation, as have transactions between the Company and its subsidiaries during this period.
Transactions between the Group, Company and key management personnel in the year ending 31 December 2010 were limited to those relating to remuneration, which are disclosed in the Report on director's remuneration which can be found in the full Report and Accounts available on the Group's website.
Malcolm Harris, a Group Director, is a non-executive Director of the Home Builders Federation (HBF) and was a non-executive Director of the National House Building Council (NHBC) until 26 June 2010.
The Group trades in the normal course of business, on an arms-length basis, with the NHBC for provision of a number of building-related services, most materially for provision of warranties on new homes sold and for performance bonding on infrastructure obligations, The Group pays subscription fees and fees for research as required to the HBF.
Total net payments were as follows: 2010 2009
£000 £000
NHBC 1,454 724
HBF 124 78
There have been no related party transactions in the current financial year which have materially affected the financial performance or position of the Group, and which have not been disclosed.
Transactions with Joint Venture
In the period the Group entered into the following transactions with Bovis Peer LLP. During the financial year, inventory was transferred to Bovis Peer LLP for a cash consideration of £25,859,250. In addition, a loan of £1,450,355 was provided to Bovis Peer LLP on 25 March 2010 at an annual interest rate of LIBOR plus 2.4%.
Bovis Homes Limited are contracted to provide Property and Letting Management services to the Partnership. Fees charged in the period ended 31 December 2010 in respect of these services totalled £99,964 (inclusive of VAT).
This information is provided by RNS
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