Annual results for the year ended 30 June 2016

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Quote
I am delighted to announce excellent results for the year. We have achieved further progress on margins in Linden Homes, increased our mixed-tenure output in Partnerships and Regeneration, and continue to make progress in resolving older contracts in Construction, whilst building and delivering a reliable and high quality order book. We have reorganised management in all three businesses during the year, creating the right platform for future progress in both volume and margin. Reflecting the delivery of record results and our continuing confidence in the business, we are proposing an increase in our full year dividend of 21%.

The decision to leave the European Union inevitably creates a backdrop of uncertainty for the new financial year. However, we have been encouraged by visitor levels and sales rates at Linden Homes through the summer. The balance of our businesses and the strength of our order books mean that we are well-placed to manage the impact of this uncertainty. Quote

Peter Truscott / Chief Executive

Results Centre

Linden Homes

  2016 2015
Revenue (£m) 840.8 779.0
Profit from operations (£m) 147.2 124.3
Operating profit margin (%) 17.5 16.0
Completions 3,078 2,769

Linden Homes benefited from a robust housing market throughout the year, underpinned by supply shortages, an ample availability of low-cost mortgages, and a land market that remained positive. Underlying demand is strong and mortgage availability and affordability remains positive. We increased our revenue and margins, benefitting from a rigorous drive in efficiency, and maintained our landbank at an appropriate level, given our expansion plans and a good supply of new opportunities in all regions. We have restructured and strengthened senior management, and achieved significant overhead savings through process rationalisation.

Linden Homes revenue increased by £61.8 million to £840.8 million, with completions of 3,078 compared with 2,769 in 2015. Excluding our joint venture partners’ share, completions were 2,691 against 2,566 in 2015. Private housing completions accounted for 2,487 of the total (2015: 2,059). The average selling price of these units rose by 2% to £335,000.

Average sales rates in the second half were strong, at 0.68 units per site per week from an increased average number of outlets of 84; for the full year we achieved 0.62 sales per site per week from an average of 80 outlets (2015: 0.61 sales pspw from 62 outlets).

Linden Homes achieved a gross margin of 23.8%, compared with 22.5% in 2015.

Profit from operations increased by 18% to £147.2 million (2015: £124.3 million). The operating margin rose significantly from 16.0% in 2015 to 17.5%. Following an operating margin in the first half of the year of 17.0%, the margin achieved in the second half of the year was 17.9%. Excluding land sales (which mainly represented transfers into strategic joint ventures), the operating margin for the year was 16.2% (2015: 14.7%). Return on net assets calculated under our updated segmental disclosure was 31.7%, compared with 27.9% in 2015, reflecting continued strong working capital management.

Linden Homes’ landbank is 11,700 plots. Including 2,800 plots in Partnerships and Regeneration, our total housebuilding landbank is 14,500 plots (2015: 15,750 plots). The figure represents the number of plots we own and control, including sites under option but excluding longer-term strategic options.

We continued to roll out the Linden Homes Layouts, which provide templates for the interiors of our homes and allow us to benefit from a more standardised procurement and construction process. A significant focus on rationalising our operating processes will generate annualised savings of over £5 million in FY 2017, while retaining capacity to grow unit numbers.

We opened a second business in Yorkshire in July 2016, building on our successful acquisition of Shepherd Homes in 2015.

Given the potential for margin enhancement we have increased our focus in strategic land.

In August we restructured the senior leadership of the business, creating two divisions led by Tom Nicholson (Divisional Chairman East) and Andrew Hammond (Divisional Chairman West). Peter Truscott will chair the board of Linden Homes, and Tom and Andrew have both joined the Group Executive Board.

Partnerships and Regeneration

  2016 2015
Revenue (£m) 300.6 329.4
Profit from operations (£m) 11.7 9.4
Operating profit margin (%) 3.9 2.9
Completions 526 408
Order book (£m) 865 850

Partnerships and Regeneration delivered strong growth in mixed-tenure revenues and margin increases.

There was some disruption to our registered provider clients’ procurement activities in the first half of the year due to the Government’s rent reforms, resulting in a small reduction in revenue from £329.4 million in 2015 to £300.6 million in 2016. Of this, £66.7 million came from mixed-tenure developments (up 19%) and £233.9 million from contracting (down 14%). We continue to be encouraged by our strong position in favourable markets in which we secured a number of major project wins.

The business continued its successful relationship with the ExtraCare Charitable Trust and was contracted to build a £45 million ExtraCare village in High Wycombe, and the £42 million Stoke Gifford Retirement Village. Partnerships was one of six contractors appointed to North Yorkshire County Council’s Extra Care Housing Programme Framework, which has an anticipated value of up to £650 million over six years, and was also selected for five of the eight lots available under the Hyde Housing Group Main Contractor Framework Agreement. The framework is anticipated to be worth up to £1 billion.

Partnerships and Regeneration contributed profit from operations of £11.7 million, up from £9.4 million in 2015. This represented a blended operating margin of 3.9% (2015: 2.9%).

Net debt in the business stood at £12.1 million at 30 June 2016 (2015: £15 million cash), with the movement reflecting our investment of cash to fund mixed-tenure developments.

The contracting order book is £865 million (2015: £850 million). The business has £73 million of unit sales in hand.

We are setting ambitious growth plans for the business. Building on our experience and relationships with public sector commissioners, we will use our skills in housebuilding and place-making to deliver an increase in the number of new homes we provide. Geographical expansion is a key part of our growth strategy. We opened our new office in Bristol in July, giving us six offices across England and South Wales, and plan to open a new Central Southern office this year and further offices over the coming years.

In recognition of the size of the opportunity we perceive for this business, we have strengthened the strategic leadership with the appointment of Stephen Teagle as Chief Executive, Partnerships and Regeneration. Stuart Gibbons continues to lead the operating businesses and to deliver the planned organic growth. We have brought our Affordable Housing & Regeneration teams into a combined business, in order to build upon their respective and complementary knowledge and expertise. This will allow us to strengthen our strategic offering and leadership in this area whilst providing greater clarity to clients and external investors.

CONSTRUCTION

Construction 2016 2015
Revenue (£m) 1,503.4 1,293.2
Profit from operations (£m) 15.8 15.7
Operating profit margin (%) 1.1 1.2
Order book (£bn) 3.5 3.8

During the year, the UK construction market continued to generate an improving pipeline of projects at appropriate margins, supported by the substantial infrastructure renewal required in the UK. Build cost increases moderated, and the availability of skilled labour improved across all regions. The Government’s pipeline of economic and social infrastructure work was positive, covering all the key sectors in which we operate, including the public and regulated sectors where over 90% of our order book is focused. We were pleased with a number of significant framework appointments and contract wins, although the speed of work coming through in the public sector remains overall slower than expected. We continue to follow our strategy of being selective about the work we bid for in order to protect our margins and maintain our focus on cash.

Revenue increased by 16% to £1,503.4 million (2015: £1,293.2 million) benefitting from new contract wins.

Construction achieved a margin of 1.1% compared with 1.2% in 2015. Margins continued to be constrained, in particular in Building, by contracts won in the more difficult economic climate. Due to the finalisation of these contracts and the settlement of their final accounts, these contracts are unlikely to achieve the levels of margin at which we are now winning work and will consequently hold back the reported figure in 2017.

Construction’s result included the sale of our site accommodation portfolio to a third party equipment hirer, achieving a profit of £5.2 million on the disposal, and securing competitive rates going forward.

We continued to manage our cash carefully and had a cash balance in Construction of £161 million at the year-end (2015: £173 million) representing 11% of revenue.

Our order book is £3.5 billion (2015: £3.8 billion). Of the total order book, 74% is in the public sector (2015: 72%), 16% is in regulated industries (2015: 16%) and 10% is in the private sector (2015: 12%).

Importantly, 74% of our order book is in frameworks (2015: 69%), which is an unprecedented position for us. The level of work we generate through frameworks is a significant advantage, as they allow us to work collaboratively with clients, gain a deep understanding of their needs and build up expertise through delivering follow-on projects.

From 1 August 2016, as planned, Bill Hocking became Chief Executive of Construction.

Building

  2016 2015
Revenue (£m) 1,013.8 906.9
Profit from operations (£m) 9.0 8.0
Operating profit margin (%) 0.9 0.9
Order book (£m) 2,340 2,570

During the year, Building secured a number of key projects and continued to implement its framework strategy. It won a place on the Ministry of Defence’s South West and South East Next Generation Estate Contracts regional frameworks, which are worth up to £1 billion in total over four years. Building was also appointed to the YORbuild2 framework, which has a potential pipeline of approximately £1.9 billion over four years.

Education frameworks continue to provide a healthy pipeline of work and Building is now a key contractor to the Education Funding Agency (EFA), reaching financial close with the EFA for the £48.5 million North and North East Lincolnshire batch of schools and the £41.9 million Greenwich, Lewisham and Croydon batch. Other notable wins in the education sector included a contract with Birmingham City University to build the £46 million Conservatoire, a £62 million contract with Newcastle University to construct the Park View Student Village and a £40 million contract to provide student accommodation at Coventry University. The business also secured a place on the four-year £4.0 billion ProCure 22 framework for the Department of Health. The Scottish Hub operations are also busy in education and in healthcare, including the award of the £55 million Anderson High School in the Shetland Islands, the £43.3 million construction of the new Largs education campus for North Ayrshire Council and the £72 million East Lothian Community Hospital.

In the Commercial building sector, Building won a £66 million contract to construct the 2 Arena Central building in Birmingham, which will include 210,000 sq ft of office space. Building was also awarded a £40 million contract to construct 185,000 sq ft of office space in the Forbury Place development in Reading.

Building delivered profit from operations of £9.0 million (2015: £8.0 million), with a margin of 0.9% (2015: 0.9%).

Infrastructure

  2016 2015
Revenue (£m) 489.6 386.3
Profit from operations (£m) 6.8 7.7
Operating profit margin (%) 1.4 2.0
Order book (£m) 1,160 1,230

Infrastructure secured several significant wins during the year. Our joint venture with Costain was appointed as a delivery partner by Highways England for its Smart Motorways programme, which is worth a total of £1.5 billion. The joint venture has been allocated three construction packages, with a value to Galliford Try of more than £180 million. We are working on three of the AMP5 water frameworks in England, Scotland and Wales and we have been awarded a £75 million package of biomass energy plants. In addition, the Manchester Airports Group, Network Rail and Environment Agency frameworks all continue to provide good workstreams.

Infrastructure’s profit from operations was £6.8 million (2015: £7.7 million), representing a margin of 1.4% (2015: 2.0%).

PPP Investments

  2016 2015
Revenue (£m) 25.0 28.8
(Loss)/Profit from operations (£m) (1.4) 3.7
Directors Valuation (£m) 21.5 18.1

During the year, PPP Investments invested £6.6 million in equity and disposed of investments generating an aggregate profit on disposal of £0.5 million compared to a £6.6 million profit on disposal in 2015.

In addition to making its own investments, PPP Investments continued to provide good opportunities for our Construction and facilities management businesses, with projects closed during the year adding over £300 million to the order books for these divisions.

There were delays to closing a number of PPP contracts in Scotland in the first half of the financial year while a public sector accounting classification issue was resolved. We took the opportunity to review opportunities in other markets and have developed new models for the student housing, energy service company and private rented sectors, which see us well positioned for the future.