Half year results for the six months ended 31 December 2016

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Quote
The Group delivered another strong performance in the first half. Our reorganised management teams have settled well and are making positive strides towards their respective operating and financial targets.

We continue to see robust demand and pricing in residential markets, for both Linden Homes and Partnerships and Regeneration, driving good rates of sale, and the land market remains benign in all regions. Linden Homes continues to achieve margin improvement, including much improved overhead efficiency. Partnerships achieved a higher proportion of mixed tenure development revenue, resulting also in first-half margin growth. Construction is making steady progress in resolving legacy contracts, and the contribution from newer work is encouraging, demonstrating that the underlying business is strong. Quote

Peter Truscott / Chief Executive

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Linden Homes

  H1 2017 H1 2016 Change
Revenue (£m) 407.6 362.7 12%
Profit from operations (£m) 74.3 61.5 21%
Operating profit margin (%) 18.2 17 + 1.2% pts

Housing market conditions, both private and affordable, have remained robust in all our regions. Demand has continued at a healthy level, supported by good mortgage availability.

Revenue during the six months to 31 December 2016 increased to £407.6 million (H1 2016: £362.7 million). Within this total, affordable sales were £34 million (H1 2016: £23 million). Unit completions were 1,491, 1,319 net of joint venture partners’ share (H1 2016: 1,357 and 1,171 respectively). The total includes 1,155 private and 336 affordable sales (H1 2016: 1,124 and 233 respectively).

Average selling price on private sales increased to £338,000 (H1 2016: £334,000). The average selling price for affordable sales was £114,000 (H1 2016: £110,000) leading to a combined average selling price of £287,000 (H1 2016: £295,000). Cancellation levels continue to remain around the long term average at 19% (H1 2016: 17%).

The average number of outlets during the period was 75, broadly in line with 76 in the six months to 31 December 2015, but having decreased marginally from 80 in the 12 months to 30 June 2016. During the six months to 31 December 2016 we achieved a rate of sale of 0.56 unit sales per outlet per week (H1 2016: 0.57). Since 1 January 2017 we have achieved a rate of sale of 0.70 unit sales per outlet per week.

Profit from operations was up 21% to £74.3 million over the same period last year. The business is making good progress on implementing initiatives to rationalise operating processes. Overheads reduced to 5.3% of revenue achieving an operating margin of 18.2% (H1 2016: 17.0%).

The business continues to generate recurring revenues and profits from land sales, mainly into co-funded (joint venture) projects. These profits represent the partner’s contribution to the uplift in land value at the point of entry into the joint venture, with Linden Homes share of such uplift deferred until the units are sold. During the six months to 31 December 2016 we sold land totalling £10.3 million (H1 2016: £5.6 million). In response to perceived increased market risk following the referendum, we accelerated several joint venture sales which we had planned for the current year; hence the first half level was higher than we anticipate for the second half. The operating margin of 18.2% includes the effect of these land sales. Excluding profits from land sales, the operating margin in the period was 16.3% (H1 2016: 15.8%).

Sales reserved, exchanged or completed are currently at £857 million (H1 2016: £793 million) of which £699 million is for the current financial year representing 72% of projected sales for the year (H1 2016: £620 million, 71%).

Linden Homes has 97% of land secured for the financial year to 30 June 2018 and 74% secured for 2019 (H1 2016: 100% and 75% respectively). The Group’s total landbank including Partnerships and Regeneration is currently 14,250 plots (H1 2016: 15,500). Strategic land totals 1,992 acres, from which we expect to generate around 11,400 plots. The land market remains benign.

Partnerships and Regeneration

  H1 2017 H1 2016 Change
Revenue (£m) 144.3 150.2 -4%
Profit from operations (£m) 4.9 4.5 9%
Operating profit margin (%) 3.4 3 +0.4% pts

Revenue from mixed tenure development increased by 16% to £34.6 million (H1 2016: £29.7 million), while contracting revenue of £109.7 million was down 9% (H1 2016: £120.5 million), as some larger contracts concluded in the period. Overall revenue during the six months to 31 December 2016 decreased by 4% to £144.3 million (H1 2016: £150.2 million). Our full year growth expectations remain unchanged.

Demand for affordable homes outpaces supply and client sentiment for mixed tenure investment has strengthened, providing opportunities for both Partnerships and Regeneration and Linden Homes. The business secured an award of £18.8 million under the Home and Communities Agencies Affordable Homes Programme to deliver shared ownership homes and we have extended our joint venture activity with financially robust Registered Provider clients. Partnerships and Regeneration continued to strengthen its relationship with the ExtraCare Charitable Trust, agreeing two contracts, both worth £44 million, to build new retirement villages at Stoke Gifford, near Bristol and Wixams in Bedfordshire. During the period the Division also concluded a contract with the developer St Modwen to build a £21 million accommodation facility for personnel at the Royal Centre for Defence Medicine in Longbridge, Birmingham.

The geographical expansion of our Partnerships and Regeneration business continues with the new office in Bristol securing mixed tenure regeneration and contracting opportunities at good margins and our plans for new Southern and Midlands businesses are under way.

The contracting order book increased 6% to £925 million (H1 2016: £875 million) and mixed tenure sales currently reserved, exchanged or completed improved to £92 million (H1 2016: £79 million). Partnerships and Regeneration’s landbank is 2,750 plots (H1 2016: 2,700).

CONSTRUCTION

Construction H1 2017 H1 2016 Change
Revenue (£m) 742 738.6 0.40%
Profit from operations (£m) 2.7 8.5 -68%
Operating profit margin (%) 0.4 1.2 -0.8% pts

The construction market remains stable with a pipeline of opportunities in the public and regulated sectors. The infrastructure pipeline is encouraging but we remain cautious about the amount of time it takes to progress these projects. In Building, the number of opportunities from the public sector remains stable. Commercial projects suspended following the referendum have now been reactivated although for the medium term there remains a risk of weaker demand from private clients as businesses assess investments against the context of current macroeconomic uncertainty. Our strong focus on public and regulated sectors and framework opportunities is important in these conditions.

Construction delivered revenue of £742.0 million and margin of 0.4%. Cash balance held at 31 December 2016 was £110.8 million (H1 2016: £154.7 million), as set out in the Financial Review above. Order book is solid at £3.4 billion (H1 2016: £3.7 billion) comprising 14% in the regulated sector, 74% in public and 12% in the private sector. The Division has secured 94% of projected revenue for the current financial year and 62% for the next financial year (H1 2016: 99% and 71% respectively). In addition we have over £0.5 billion of future work at preferred bidder stage.

We continue to focus on robust project selection and risk management in the pre-construction phase targeting projects that have reasonable contract terms and risk profile. A selection of project wins in our Building and Infrastructure businesses in the period are summarised below.

Building

Building serves a range of clients across the whole of the UK including a substantial presence in Scotland. Profit from operations of £1.5 million was achieved on revenue of £492.2 million, representing a margin of 0.3% (H1 2016: £3.7 million, £517.8 million and 0.7% respectively). We are making good progress on completing historical contracts and are working through closing remaining final accounts. These projects, won in a more difficult economic climate, continue to constrain our result. Margins on new work are more robust, with cost estimates appropriately reflecting the inflationary effect of a weaker pound.

In the first six months of the current financial year Building won contracts worth over £250 million including the £72 million contract for the East Lothian Community Hospital in Haddington, Scotland, the £68 million Park View Student Village for Newcastle University, the £40 million 323-apartment private rental sector scheme for Dandara on the Arena Central site in Birmingham, and a £47 million contract to build the 50-60 Station Road commercial office space development in Cambridge on behalf of developer Brookgate. Building was also confirmed as one of six principal supply chain partners under the Department of Health’s new ProCure 22 framework.

Building’s order book is currently £2,418 million (H1 2016: £2,403 million).

Infrastructure

Infrastructure carries out civil engineering projects in highways, rail and aviation, environmental, water and waste, power and security markets. Profit from operations was £1.2 million on revenue of £249.8 million, representing a margin of 0.5% (H1 2016: £4.8 million on £220.8 million, representing a margin of 2.2%).

The Infrastructure market outlook remains positive across transport, energy and water with the business steadily increasing its portfolio of framework positions during the period. The business has a position in the Natural Resources Wales framework delivering coastal and river defence schemes (up to £45 million over four years), North Yorkshire County Council’s carriageway planning and surfacing framework (up to £200 million over two years) and was confirmed as a Tier 1 alliance partner to Scottish Water responsible for delivering its Quality and Standards IV Capital Investment Programme for the regulatory period 2015-2021 (approximately £50 million in value). In addition, the business was appointed to Gatwick Airport’s Capital Delivery Framework on three lots valued up to £300 million.

Infrastructure’s order book currently stands at £992 million (H1 2016: £1,312 million).

PPP Investments

PPP Investments specialises in delivering major building and infrastructure projects through public private partnerships. The business leads bid consortia and arranges finance, making equity investments and managing construction through to operations. Revenue was £12.8 million on which the loss from operations was £0.2 million (H1 2016: revenue £12.9 million and loss from operations £1.7 million).

PPP Investments continues to be active in Scotland on a wide variety of Hub projects. During the period we financially closed a number of schemes including East Lothian Community Hospital, West Calder High School and Inverurie and Foresterhills Health Centres. The business continues to monitor PF2 opportunities in England and we anticipate a programme of projects will be brought to market in the 2017 calendar year. We successfully handed over all schools in the PSBP North East project and are therefore well placed when pipeline announcements are made. In addition we have been working on a number of Student Residencies schemes and more general development opportunities which will generate pipeline for the Group's construction businesses.