Final Results
Paragon Group Of Companies PLC
23 November 2005
Under strict embargo until Stock Exchange announcement: 7am, Wednesday
23 November 2005
STRONG GROWTH AT PARAGON
------------------------
The Paragon Group of Companies PLC ('Paragon'), one of the UK's largest
specialist lenders offering buy-to-let mortgages, personal loans, vehicle
finance and retail finance, today announces its Preliminary Results for the year
ended 30 September 2005.
Highlights include
• Profit before tax up 8.2% to £76.8 million (2004: £71.0 million)
• Operating profit (excluding goodwill)* up 10.5% to £72.7 million
(2004: £65.8 million)
• Earnings per share up 11.0% to 53.3p (2004: 48.0p)
• Dividend per share up 31.3% to 12.6p (2004: 9.6p)
• Total loan assets** up 9.7% to £6,528.7 million (2004: £5,950.9 million)
• Buy-to-let loans up 23.8% to £5,031.6 million (2004: £4,064.1 million)
• Cost:income ratio*** reduced to 33.3% (2004: 36.3%)
• Strong start to the new financial year
* - note 5 ** - note 7 *** - note 3
Commenting on the results, Jonathan Perry, Chairman of Paragon, said:
'The Group has performed strongly in 2005, producing growth in profits and loan
assets and further strengthening our franchise in our key lending market.
Paragon's strategy has enabled the buy-to-let business to move forward on a
broad front at a time when many lenders have seen a reduction in volumes because
of lower levels of market activity generally and provides a strong base for
further development going forward. The case for investing in residential
property remains sound and the Group is well placed to benefit from the long
term development of the buy-to-let market.'
For further information, please contact:
The Paragon Group of Companies PLC The Wriglesworth Consultancy
Nigel Terrington, Chief Executive John Wriglesworth / Mark Baker
Nick Keen, Finance Director Tel: 020 7845 7900
Tel: 020 7786 8474 Mobile: 07980 635 243 (MB)
______________________________________________________________________________
THE PARAGON GROUP OF COMPANIES PLC
CHAIRMAN'S STATEMENT
The Group has performed strongly in 2005, despite a more difficult trading
environment, producing growth in profits and loan assets and further
strengthening our franchise in our key lending market.
Excluding the credit to profit and loss account for goodwill, operating profit
increased by 10.5% to £72.7 million (2004: £65.8 million) (note 5). Profit
before tax increased by 8.2% to £76.8 million for the year, compared with £71.0
million for the previous year. Earnings per share increased by 11.0% to 53.3p
from 48.0p.
The Board has declared an increased final dividend of 7.4p per share which, when
added to the interim dividend of 5.2p paid on 29 July, gives a total dividend of
12.6p per share for the year, an increase of 31.3% over last year. This is
consistent with the policy set out in our interim report, to accelerate payments
towards a market level of dividend cover. Subject to approval at the Annual
General Meeting on 9 February 2006, the dividend will be paid on 13 February
2006, by reference to a record date of 13 January 2006.
Total loan assets at 30 September 2005 increased by 9.7% to £6,528.7 million
from £5,950.9 million at 30 September 2004 (note 7). Of these, £6,165.6 million,
or 94.4%, were secured on residential property, providing a base of high quality
assets. Total advances by the Group during the year were £2,025.6 million,
compared with £2,124.3 million in the previous year, the reduction being due to
more subdued consumer lending. Buy-to-let lending volumes remained firm, despite
the general housing market slowdown and were significantly higher in the second
half of the financial year, up 64.2% from the first half.
Net interest income increased by 20.2% to £96.9 million from £80.6 million,
reflecting the growth in the loan book, reductions in funding costs and a
reduced charge for commissions paid in respect of new business generation. The
reduction in other operating income, from £40.2 million to £35.9 million,
reflects the impact of reduced activity on commissions earned, particularly for
the Consumer Finance division.
Operating expenses, excluding the impact of the goodwill credit of £4.1 million,
were £44.2 million compared with £43.9 million (excluding the goodwill credit of
£5.2 million) for 2004 despite an increase in pension costs and costs from share
based payments, totalling £3.3 million during the year. The reduction in the
cost:income ratio to 33.3% (2004: 36.3%) (note 3) reflects the beneficial impact
of operational efficiencies introduced in 2004 and the continuing emphasis by
management on cost efficiency throughout the Group's operations.
The Group has maintained its focus on growing its secured lending, principally
of high quality buy-to-let assets whilst reducing exposure to unsecured consumer
lending. The number of accounts in arrears across the portfolios was lower at
30 September 2005 than a year previously, both numerically and as a percentage
of live accounts. The performance of the buy-to-let book remains exemplary, but
the impact of increased interest rates on the payment performance of the
consumer portfolios was the principal reason for an increase in the charge for
provisions for losses to £15.9 million for the year (2004: £11.1 million).
After providing for corporation tax at a charge rate of 21% and for the dividend
in respect of the year, profits of £46.3 million have been transferred to
shareholders' funds, which were £308.0 million at 30 September 2005 (2004:
£268.4 million).
FIRST MORTGAGES
Total first mortgage lending by the Group was £1,675.7 million for the year, of
which £1,667.8 million was buy-to-let (2004: £1,637.3 million), an increase of
1.9%, evidencing the strong recovery in volumes during the second half of the
year following weaker performance during the first half. The small value of
owner-occupied loan advances relates to the provision of further advances to
existing customers, however this is not a sector being actively targeted.
Housing market activity has been cooler in 2005 than in 2004 as a consequence of
increased interest rates and general concerns over value and affordability. The
rate of house price growth slowed during the year, with evidence still
suggesting that house prices are heading for a soft landing. Recent improvements
in housing activity point to a more stable market.
Buy-to-Let Loans
Paragon's strategy in the buy-to-let sector is to offer a broad range of
products and services meeting the needs of professional and private investors in
residential rental property. The products are offered through Paragon Mortgages
and Mortgage Trust.
The buy-to-let portfolio grew strongly to £5,031.6 million (2004: £4,064.1
million), an increase of 23.8%. The new business pipeline at 30 September 2005
was significantly higher than that at the half year, providing a strong level of
completions at the start of the new financial year, with advances in October
2005 significantly ahead of October 2004. The new business pipeline was also
greater at the end of October 2005 than a year previously.
The Group's multi-brand strategy has delivered well-defined propositions within
the buy-to-let market. Paragon Mortgages, with its focus on larger scale
professional investors, has continued to market to its existing customer base
and its network of individual specialist intermediaries. Product developments
and individual service for large scale landlords, who own, on average, twelve
properties, have maintained strong customer support such that repeat
applications from existing customers still deliver around 70% of new business.
The Mortgage Trust brand has been developed further over the year. Its focus on
smaller scale private investors, who across the portfolio own, on average, seven
properties, has allowed greater utilisation of credit technology, together with
cost-effective processing and administration. Of particular note has been the
delivery of additional intermediary distribution.
This strategy has allowed the Group's buy-to-let business to move forward on a
broad front, without compromising lending standards, at a time when many lenders
have seen a reduction in volumes because of lower levels of market activity
generally and provides a strong base for further development in the future.
The case for investing in residential property remains sound, as uncertainty in
the general housing market has been beneficial to the private rented sector in a
number of respects. Survey data confirms the strength of tenant demand for
private rented property. This has allowed landlords to improve rents, which in
turn has resulted in an increase in yields. At the same time, competition for
property has reduced, providing landlords with the opportunity to secure good
deals on new purchases, again benefiting yields.
Survey evidence continues to suggest that landlords are taking a long-term view
of their investments, rather than seeking to crystallise accrued gains. In our
own buy-to-let portfolio, we have seen little evidence of increased selling
activity. Indeed, compared to the previous year, redemption rates have fallen.
Overall, the prospects for the buy-to-let market remain sound and demand for
private rented property is expected to rise, assisted by the record number of
students in higher education and the number of people migrating to the UK. The
eligibility of residential property for Self-Invested Personal Pensions
('SIPPs') from 2006 may also have a positive effect on demand and we are well
positioned to benefit from any activity in this regard through our joint venture
with James Hay, the UK's leading SIPPs administrator.
Owner-Occupied Loans
The owner-occupied portfolio declined, as expected, to £622.2 million from
£952.2 million at 30 September 2004 and continued to perform in line with
expectations.
CONSUMER FINANCE
Weaker consumer activity in the past twelve months has had an impact on consumer
lending across the market and this weakness is likely to continue into the new
financial year. In the light of this environment, we remain cautious in our
credit policy to ensure the maintenance of high quality lending. In particular,
no unsecured personal loans are now offered and the only loans made by the Group
which are not secured on residential property are the car and retail instalment
credit advances made by the Sales Aid Finance division. As a consequence,
consumer finance lending activity has been lower this year. Aggregate loan
advances were £349.9 million during the year, compared with £450.0 million in
the previous year. As at 30 September 2005 the Consumer Finance book, comprising
secured and unsecured personal loans and sales aid finance, was reduced to
£874.9 million (2004: £934.6 million).
Personal Finance
During the course of the year, higher interest rates impacted on the appetite of
consumers for further borrowing. In addition, the revisions to the Consumer
Credit Act and the introduction of regulation over insurance business, which we
reported at the half year, have adversely affected volumes as introducers
changed systems and working practices to ensure compliance. The effect of these,
combined with the tightening of our credit criteria in anticipation of the
changing economic environment, has been to depress volumes. Secured personal
finance advances by the Group were £233.1 million during the year, compared with
£305.4 million for the previous year. Despite the reduced activity, the secured
book increased slightly by the year end to £511.8 million (2004: £507.1
million).
Looking forward, we expect trading conditions to remain competitive in the more
subdued market environment. Against this background we shall continue our
cautious credit stance whilst developing products to maintain Paragon's presence
in the broker market. In addition we shall seek new distribution sources for our
products over the course of the coming year.
Sales Aid Finance
The performance of the sales aid business was in line with our expectations,
with new business volumes originated by the division decreasing to £116.7
million (2004: £144.2 million).
Substantial progress has been made during the year in refocusing the car and
retail finance businesses to improve profitability. New business initiatives and
product developments have been instrumental in the development of new sources of
distribution and the integration of overlapping administration functions has led
to improvements in cost efficiency.
FUNDING
The Group continued to be an active issuer in the capital markets during the
period. In October 2004, the Group completed a £1.0 billion securitisation by
Paragon Mortgages (No. 8) PLC; in December 2004 a £300 million securitisation of
secured consumer loans was completed by Paragon Secured Finance (No. 1) PLC; in
May 2005, a £450 million securitisation of secured and unsecured consumer loans
was completed by Paragon Personal and Auto Finance (No. 3) PLC; in July 2005 a
£700 million securitisation was completed by Paragon Mortgages (No. 9) PLC; and,
in November 2005, a £1.0 billion securitisation was completed by Paragon
Mortgages (No. 10) PLC.
Funding through securitisation continues to be attractive for the Group, with
demand for the notes issued through the Paragon securitisation programme
remaining high. This strong demand has had a beneficial impact on funding costs,
with the average coupon on Paragon Mortgages (No. 10) PLC being the lowest yet
in the Paragon programme.
In April 2005 the Group issued £120 million 7% Callable Subordinated Notes due
2017. This inaugural transaction provides long term capital at attractive
pricing and improves the flexibility available to the Group in its capital
management.
CAPITAL MANAGEMENT
The Board reviews, periodically, the appropriate level of capital to support its
current loan portfolios and to ensure that its business plans can be met. The
Board has regard to a number of factors, including the capital needed to support
planned business generation over the medium term, the risk characteristics of
the portfolio and the capital being returned to the Group from organic cash
generation.
As a result of such a review in 2002, the Board decided to increase dividends
progressively ahead of earnings growth in order to reduce dividend cover to
market level over the medium term. Since that time, dividends have increased
annually at roughly double the rate of earnings growth.
Whilst our new business generation targets remain stretching, the Group's
portfolio continues to generate capital. We have also reduced the portfolio's
risk profile by our disciplined restructuring of the portfolio from unsecured
towards secured lending, which is less demanding of the Group's capital.
Consumer loans, as a proportion of the portfolio, have been reducing year on
year, from 36% in 2002 to 13.4% as at 30 September 2005. Within this, the
unsecured personal loan book has been declining in absolute terms since the
product was withdrawn and as loans have redeemed, from £319.9 million at
30 September 2002 to £180.0 million at 30 September 2005, representing 2.8% of
the total loan book.
As a result, we announced at the half year that surplus capital was available
for distribution to shareholders. In addition to increasing the dividend for the
year by 31.3%, almost three times growth in earnings per share, thus
accelerating the Group's progress towards the objective of achieving a market
level of dividend cover within two years, the Company has also repurchased
1,790,000 shares at an average price of £4.64 per share and a total cost of £8.3
million as part of a £20 million repurchase programme. This programme is ongoing
and the Board will keep under review the appropriate cost of capital to support
the Group's business activities.
INTERNATIONAL FINANCIAL REPORTING STANDARDS ('IFRS')
The results for the year ended 30 September 2005 are the last to be prepared
under UK Generally Accepted Accounting Principles. The Board expects to provide
a comparative report to shareholders setting out the impact of the introduction
of IFRS on the 2005 results in advance of the 2006 interim results, which will
be prepared under IFRS.
OUTLOOK
The fundamentals of the buy-to-let market remain strong, with increased rental
demand translating into higher rents which, given more stable property prices,
should result in improving yields. As a consequence, landlords are continuing to
take a long term view of their property investments and we expect activity
levels to improve as landlords take advantage of the increased rental demand by
expanding their portfolios.
The development of the Paragon Mortgages and Mortgage Trust brands will
continue, aimed at providing a broad range of products and services to
landlords, thereby ensuring that the Group is well placed to benefit from the
long term development of this market.
Jonathan P L Perry
Chairman
23 November 2005
______________________________________________________________________________
THE PARAGON GROUP OF COMPANIES PLC
CONSOLIDATED PROFIT AND LOSS ACCOUNT
For the year to 30 September 2005
2005 2004
£m £m £m £m
Interest receivable 484.4 412.0
Interest payable and similar (387.5) (331.4)
charges
_________ _________
Net interest income 96.9 80.6
Other operating income 35.9 40.2
_________ _________
Total operating income 132.8 120.8
Operating expenses
Other operating expenses (44.2) (43.9)
Amortisation of negative 4.1 5.2
goodwill
_________ _________
Total operating expenses (40.1) (38.7)
Provisions for losses (15.9) (11.1)
_________ _________
Operating profit being profit on
ordinary activities before taxation 76.8 71.0
Tax charge on profit on ordinary (16.1) (16.3)
activities
_________ _________
Profit on ordinary activities
after taxation for 60.7 54.7
the financial year
Equity dividend (14.4) (11.0)
_________ _________
Retained profit 46.3 43.7
========= =========
Dividend - rate per share 12.6p 9.6p
========= =========
Earnings per share
- basic 53.3p 48.0p
- diluted 51.1p 46.2p
========= =========
The results for the current and preceding years relate entirely to continuing
operations.
There is no material difference between the results as stated above and those
determined on the historical cost basis.
______________________________________________________________________________
THE PARAGON GROUP OF COMPANIES PLC
CONSOLIDATED BALANCE SHEET
30 September 2005
2005 2004
£m £m £m £m
ASSETS EMPLOYED
Fixed assets
Intangible assets
Negative goodwill (9.9) (14.0)
Tangible assets 3.6 3.4
Investments
Assets subject to non-recourse 1,116.0 1,557.7
finance
Non-recourse finance (1,075.2) (1,520.3)
_________ _________
40.8 37.4
Loans to customers 5,497.9 4,492.5
_________ _________
5,538.7 4,529.9
_________ _________
5,532.4 4,519.3
Current assets
Stocks 3.0 3.4
Debtors falling due within one 7.7 8.8
year
Investments 285.7 230.5
Cash at bank and in hand 159.5 172.0
_________ _________
455.9 414.7
_________ _________
5,988.3 4,934.0
========= =========
FINANCED BY
Equity shareholders' funds
Called-up share capital 12.1 12.0
Share premium account 70.2 68.8
Merger reserve (70.2) (70.2)
Profit and loss account 318.7 270.1
_________ _________
318.7 268.7
_________ _________
Share capital & reserves 330.8 280.7
Own shares (22.8) (12.3)
_________ _________
308.0 268.4
Provisions for liabilities and 2.8 5.6
charges
Creditors
Amounts falling due within one 80.6 66.4
year
Amounts falling due after more 5,596.9 4,593.6
than one year
_________ _________
5,677.5 4,660.0
_________ _________
5,988.3 4,934.0
========= =========
The preliminary financial information was approved by the Board of Directors on
23 November 2005.
______________________________________________________________________________
THE PARAGON GROUP OF COMPANIES PLC
CONSOLIDATED CASH FLOW STATEMENT
For year to 30 September 2005
2005 2004
£m £m
Net cash inflow from operating activities 132.3 129.3
Taxation (12.2) (14.6)
Capital expenditure and financial investment (616.7) (685.8)
Acquisitions and disposals 2.0 -
Equity dividends paid (12.4) (8.6)
_________ _________
(507.0) (579.7)
Management of liquid resources (55.2) (85.7)
Financing 550.4 686.5
_________ _________
(Decrease) / increase in cash in the year (11.8) 21.1
========= =========
(a) Reconciliation of operating profit to net cash flows from operating
activities
2005 2004
£m £m
Operating profit 76.8 71.0
Provisions for losses 15.9 11.1
Depreciation 1.3 1.6
Amortisation of brokers' commissions 34.9 37.2
Amortisation of negative goodwill (4.1) (5.2)
Charge for long term incentive plan 1.5 0.9
Profit on sale of subsidiary (0.9) -
(Increase) in stock (0.1) -
Decrease in debtors 1.0 0.7
Increase in creditors 6.0 12.0
_________ _________
Net cash inflow from operating activities 132.3 129.3
========= =========
(b) Analysis of cash flows for headings netted in the cash flow statement
2005 2004
£m £m
Capital expenditure and financial investment
Net decrease in assets subject to non-recourse
funding 441.2 800.2
Net increase in loans to customers (1,056.4) (1,485.2)
Expenditure on other fixed assets (1.7) (1.0)
Proceeds from sales of other fixed assets 0.2 0.2
_________ _________
(616.7) (685.8)
========= =========
(c) Reconciliation of net cash flow to movement in net debt
2005 2004
£m £m
(Decrease) / increase in cash in year (11.8) 21.1
Cash inflow from increase in debt (558.6) (687.2)
Cash movement from change in liquid resources 55.2 85.7
_________ _________
Movement in net debt in year (515.2) (580.4)
Net debt at 1 October 2004 (5,710.6) (5,130.2)
_________ _________
Net debt at 30 September 2005 (6,225.8) (5,710.6)
========= =========
______________________________________________________________________________
THE PARAGON GROUP OF COMPANIES PLC
NOTES TO THE FINANCIAL INFORMATION
For the year ended 30 September 2005
1. A final dividend of 7.4p per share is proposed, payable on 13 February
2006 with a record date of 13 January 2006.
2. The financial information has been prepared using the same accounting
policies as were used in preparing the statutory accounts of the Company
for the year to 30 September 2004.
3. The cost:income ratio for the year is calculated by dividing operating
expenses, excluding amortisation of negative goodwill of £4.1m
(2004: £5.2m), of £44.2m (2004: £43.9m) by total operating income of
£132.8m (2004: £120.8m) to give 33.3% (2004: 36.3%).
4. Earnings per ordinary share is calculated as follows:
2005 2004
Profit for the year £60,700,000 £54,700,000
_____________ _____________
Basic weighted average number of ordinary
shares ranking for dividend during the year 114,055,451 113,942,576
Dilutive effect of the weighted average number
of share options in issue during the year 4,949,671 4,364,990
_____________ _____________
Diluted weighted average number of ordinary
shares ranking for dividend during the year 119,005,122 118,307,566
============= =============
Earnings per ordinary share - basic 53.3p 48.0p
- diluted 51.1p 46.2p
============= =============
5. The operating profit for the period excluding goodwill comprises the
operating profit of £76.8m (2004: £71.0m) less the credit for the
amortisation of negative goodwill of £4.1m (2004: £5.2m).
6. Assets subject to non-recourse finance comprises Loans to Customers of
£1,030.8m (2004: £1,458.4m) and cash of £85.2m (2004: £99.3m).
7. 'Total loan assets' includes Loans to Customers shown on the face of
the balance sheet of £5,497.9m (2004: £4,492.5m) and similar assets
subject to non-recourse finance arrangements of £1,030.8m
(2004: £1,458.4m).
8. The financial information set out in the announcement does not
constitute the Company's statutory accounts for the years ended 30
September 2004 or 30 September 2005, but is derived from those statutory
accounts, which have been reported on by the Company's auditors. Statutory
accounts for the year ended 30 September 2004 have been delivered to the
Registrar of Companies and those for the year ended 30 September 2005 will
be delivered to the Registrar following the Company's Annual General
Meeting. The reports of the auditors in both cases were unqualified and
did not contain an adverse statement under sections 237 (2) or 237 (3) of
the Companies Act 1985.
9. A copy of the Annual Report and Accounts for the year to 30 September
2005 will be posted to shareholders in due course. Copies of this
announcement can be obtained from The Paragon Group of Companies PLC,
St. Catherine's Court, Herbert Road, Solihull, West Midlands, B91 3QE.
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