Final Results and Q1 Trading Update
27 April 2021
THE PROPERTY FRANCHISE GROUP PLC
("TPFG", the "Company" or the "Group")
Final Results and Q1 Trading Update
Resilient business model delivers strong growth in profit
The Property Franchise Group PLC, the leading property franchisor in the UK, is pleased to announce its full year results for the year ended 31 December 2020 ("FY20"). In addition, the Group also provides an update on trading in Q1 2021.
Financial highlights FY20
· Network income increased to £94m (2019: £93m)
· Group revenue increased to £11.5m (2019: £11.4m)
· Management Service Fees of £9.4m (2019: £9.7m)
o 70% Lettings and 30% Sales
· Adjusted EBITDA* increased 8% to £5.8m (2019: £5.3m)
· Profit before tax up 20% to £4.8m (2019: £4.0m)
· Operating margin of 42% (2019: 35%)
· Dividends paid for FY20 of 8.7p (2019: 2.6p)
· The Group maintained a strong balance sheet, with net cash of £8.8m at the year-end (2019: net cash £4.0m). Net debt at 31 March 21 was £7.3m.
Operational highlights
· Sales agreed pipelines at year-end:
o High street-led brands' almost double December 2019 at £10.3m (2019: £5.2m)
o EweMove's more than double December 2019 at £5.6m (2019: £2.5m)
· 11 assisted portfolio acquisitions by franchisees, adding:
o 1,305 managed properties; and
o £0.1m of annualised MSF
· Managing 58,000 rental properties (2019: 58,000)
· Strengthened senior management team to provide franchisees with enhanced support
· Commenced negotiations for the acquisition of Hunters. Effective completion was post-period end on 19 March 2021
· Government Covid-19 financial support received of £0.09m under the Coronavirus Job Retention Scheme to be repaid this month
Q1 Trading update
TPFG high street-led brands
· Network income increased 13% to £23m (2020: £20m)
· Sales agreed pipeline on 31 March up 45% on prior year at £9.4m (2020: £6.4m)
· Sales exchanges up 49% on prior year at 2,553 (2020: 1,594)
· Managing 55,000 rental properties on 31 March (2020: 56,000)
· 7 new satellite offices linked to operational 'hubs' (2020: nil)
· Total offices on 31 March were 235 (2020: 241)
EweMove
· Network income more than doubled to £5m (2020: £2m)
· Sales agreed pipeline on 31 March up 120% on prior year at 1,976 properties (202: 897)
· Sales completions up 102% on prior year at 1,229 (2020: 607)
· Managing 3,000 rental properties on 31 March (2020: 2,000)
· Franchise sales significantly up year on year at 20 (2020: 3)
· Total offices 135 (2020: 123)
Hunters
· Network income increased 69% to £16m (2020: £10m)
· Sales agreed pipeline on 31 March up 45% on prior year at £16.3m (2020: £11.3m)
· Sales exchanges up 65% on prior year at 4,077 (2020: 2,467)
· Managing 15,000 rental properties on 31 March (2020: 14,000)
· Total offices 210 (2020: 204)
*Before exceptional items and share-based payment charges
Chief Executive Officer, Gareth Samples, commented:
"2020 and the year to date has seen the Group achieve many significant milestones and I am very pleased with the results that we have delivered. Whilst navigating the global pandemic we were resourceful in protecting the business in the first half and had the right strategy in place to take advantage of the buoyant housing market throughout the remainder of the year. Our franchisees have worked incredibly hard throughout the year and I would like to thank all our network and the central team for their continued dedication.
"The acquisition of Hunters post-period end and the strategic partnership announced today with LSL has significantly bolstered our position in the market, and I am excited to see what we can achieve in the coming year. Looking forward, we have a strengthened platform to focus on the growth of our Financial Services capability, build upon the success of our hybrid offering, EweMove, and leverage Hunters and TPFG's existing strengths across the enlarged Group. We are confident that our success will be underpinned by our unrivalled management team, scale, excellent stable of brands and strong relationships with our franchisees."
A video of CEO Gareth Samples providing an overview of the results is available to watch here: http://bit.ly/TPFG_FY20_overview
For further information, please contact:
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The Property Franchise Group PLC Gareth Samples, Chief Executive Officer David Raggett, Chief Financial Officer |
01202 405549
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Cenkos Securities plc (Nominated Adviser and Broker) Max Hartley, Callum Davidson Julian Morse, Alex Pollen, Dale Bellis (Sales)
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0207 397 8900
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Alma PR Susie Hudson Justine James Harriet Jackson
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0203 405 0209 |
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About The Property Franchise Group PLC:
The Property Franchise Group PLC (AIM: TPFG) is the largest property franchisor in the UK and manages the second largest estate agency network and portfolio of lettings properties in the UK.
The Company was founded in 1986 and has since grown to a diverse portfolio of nine brands operating throughout the UK, comprising longstanding high-street focused brands and a hybrid, no sale no fee agency.
The Property Franchise Group's brands are Martin & Co, EweMove, Hunters, CJ Hole, Ellis & Co, Parkers, Whitegates, Mullucks & Country Properties.
Headquartered in Bournemouth, UK, the Company was listed on AIM on the London Stock Exchange in 2013. More information is available at www.propertyfranchise.co.uk
Chairman's statement
It has been a remarkable year for us and our network. Despite the challenges we all faced because of the Covid-19 pandemic, I am pleased to report that we have made strong progress as a Group and achieved a significant improvement in profit before tax, up to £4.8m vs last year's £4.0m. We have also delivered revenues ahead of last year and a host of operational achievements.
I am full of admiration for our franchisees, who have demonstrated their local leadership skills and leveraged the strengths of the franchise model to achieve exceptional performance in the face of adversity. I am also very proud of our head office teams, who have worked tirelessly to manage many new and complex situations, providing our network with the highest quality of support. I would like to take this opportunity to sincerely thank all our colleagues across the Group.
An effective franchise model requires both franchisee and franchisor to have a clear understanding of joint goals, ambitions, and responsibilities. Whilst the disruption of the first lockdown created a number of challenges, it also presented an opportunity for us to reset our approach. We moved swiftly to deliver renewed value to our franchisees. The quality, depth and integrity of the support the central team provided was outstanding, and franchisees have been very forthcoming in their gratitude to our response. It is clear that franchisees see the benefits of being part of a strong and capable Group.
Board focus during 2020
Responding to the pandemic understandably took up much of our focus in the early part of the year. The safety of our staff, franchisees and their customers were our primary concern, followed closely by the continuation of our franchisees' business activity. As such, we were quick to roll out equipment and test all systems to ensure our teams could work remotely, completed ahead of the first government lockdown. Thanks to our experience of remote working and established channels of communication, we were able to ensure franchisees and their staff were fully prepared and supported throughout.
The Board met 15 times in the year as the circumstances of those unprecedented and uncharted times dictated. We prioritised stakeholder engagement, briefing major shareholders on our plans to navigate the pandemic regularly alongside our usual periodic presentations to shareholders.
Hunters acquisition and strengthening of our team
Our new CEO, Gareth Samples, joined the Group in February 2020 and formally took up his role in April 2020. He has provided dynamic leadership during a challenging first year in the role. He has not only navigated the pandemic, he has also refreshed our growth strategy and strengthened our operations. On top of this, he has now led the team on the delivery of a major milestone post-period end, with the acquisition of Hunters.
The acquisition of Hunters, effective 19th March 2021, marks a step change in scale and moves us significantly further ahead in the execution of our strategy. With Hunters joining our Group we have become the UK's largest property franchise business, and indeed a significant player in the wider estate agency sector.
As part of the acquisition, we were delighted to welcome several highly experienced and well-regarded new members of the management into our team. Glynis Frew, previously Chief Executive of Hunters, and Dean Fielding, formerly a Non-Executive Director of Hunters, have both joined the TPFG Board, as an Executive Director and an independent Non-Executive Director respectively. This marks a considerable bolstering of our team and we know they will bring significant value to the Group going forward.
Beyond these appointments, and as part of our commitment to our new strategy, we have also expanded our senior management team with the creation of a number of new Managing Director roles which Gareth details further in his statement. The augmented executive team has quickly built relationships and provided valuable support to our network, exploring opportunities with franchise owners, and agreeing courses of action for expanding their businesses in line with our wider growth ambitions.
Market developments
As with many industries, Covid-19 has prompted an accelerated rate of change over the last year. The pent-up demand in the property sector experienced in the second half was fuelled by many new factors, including new job relocations, the stamp duty holiday and changing personal finance positions, along with homeowners reassessing their housing needs during lockdown.
Looking forward, I believe that the housing market represents a strong investment opportunity. The UK government has demonstrated that the housing market is integral to a strong economy and that it will implement initiatives to support its continued strength. We have now seen the stamp duty holiday extension and announcement of 95% mortgages being offered by lenders, which together with the onset of a new era of flexible working, gives us confidence that strong market demand will be maintained for some time.
Our founding brand, Martin & Co, was an early pioneer of franchising in estate agency, and we are pleased to note that the model is today firmly established. We believe, as the industry evolves, it will ultimately become the pre-eminent model and we intend TPFG to be at the forefront of that evolution.
Dividend
In line with the Board's ongoing focus on cash management, and similarly to many quoted companies, we did not pay a final dividend for 2019. However, we were one of the first companies to reinstate dividends with an interim payment of 2.1 pence per TPFG share in September 2020. We also decided to pay a second interim dividend, in lieu of a final dividend for FY 2020, of 6.6 pence on 23 February 2021. Going forward we intend to maintain our progressive dividend policy.
Furlough repayment
Post-period end and aligned to the current strength of the business and its balance sheet, the Board made the decision to repay the £0.09m Government Covid-19 financial support received under the Coronavirus Job Retention Scheme.
Outlook
Trading in the current year has begun well. The primary areas of growth and focus for us in the year ahead will be the increase in franchisees, residential sales activity, portfolio acquisitions, growing our financial services' revenues, improving our digital support channels and integrating Hunters into the Group.
We go into the period ahead closer to our franchisees than ever before, and as a result, stronger as a Group. We are confident that we are very well placed to push forward with our new strategy and long-standing growth plans.
Richard Martin
Non-Executive Chairman
26 April 2021
Chief Executive's statement
I am delighted to be reporting on The Property Franchise Group's full year results; the first in my role as Chief Executive Officer. Since I joined the Group in February 2020, the pandemic has driven a huge amount of change in our market. However, I am pleased to say that the Group has navigated the challenges and seized the opportunities that came with those changes. It has continued to drive growth and, ultimately, delivered a very strong set of results. I would like to take this opportunity to thank the entire team and our franchisees, whose dedication and resourcefulness has underpinned the year's progress.
Following a resilient performance in the more challenging first half, momentum built quickly when restrictions were eased in the summer and the pent-up demand started to flow through. Bolstered further by the stamp duty holiday initiative, the remainder of the year saw activity levels remain very high with the Group delivering record profits in the second half.
We increased our revenue for a seventh consecutive year to £11.5m (FY19: £11.4m) thanks to the acquisition of Auxilium Partnership Ltd and increased our operating margin to 42% (FY19: 35%). The Group achieved a profit before tax of £4.8m (FY19: £4.0m). We have remained cash generative throughout the year and our cash balance increased to £8.8m as at December 2020, with net cash generated from operations of £5.4m (FY19: £4.7m) The strength of our balance sheet provided the stability needed to build further momentum behind our growth strategy.
Strong performance from the high-street led brands
The Group's high-street lettings and estate agency brands operated by our franchisees delivered a strong performance. Whilst sales and lettings activities were suspended by the Government from 16 March to 13 May, our franchisees were proactive in responding to the surge in activity from the pent-up demand following the re-opening of the housing market. They subsequently delivered a record year of activity for the Group. Lettings continues to be our most significant and important source of MSF from these brands accounting for 79% of total MSF.
Our focus on digital marketing remains key, as it is an essential tool in running a successful estate and lettings agency business. Our franchisees' ability to deliver a quick recovery was in part driven by digital marketing and it remains a key part of the Group's core strategy for future growth.
As with the wider industry, our franchisees in our high-street led brands demonstrated that they could adapt to an environment that observed social distancing guidelines. As our market is driven by consumer behaviour, we have ensured that we have embraced digital solutions together as part of their offering to customers' evolving needs and requirements. Virtual viewings and valuations are now an established offering that provide efficiencies that can benefit franchisees and customers alike. We will continue to enhance our own technology in line with that development.
Hybrid model EweMove thrives
EweMove delivered its best ever half year performance in H2 and continues to demonstrate the benefits of its unique, hybrid, highly customer centric and flexible cost-based model.
The hybrid estate agency model continues to be an appealing option for estate agents and buyers alike. EweMove recruited 11 new franchisees in the year, despite being temporarily closed to recruitment for half the year and during a period of significant uncertainty, demonstrating that it is a highly desirable model for people who are looking to become franchisees.
During the period, EweMove was awarded 'Best National Sales Agency' and 'Best National Lettings Agency' at the EA Masters Awards 2020. These are highly regarded awards in the industry and one of the highest accolades that the brand could receive. We are delighted with the recognition the brand is receiving and the traction it is gaining, which positions it well and supports our objective of doubling the size of the network in the next two years.
Our COVID-19 response
With over 330 businesses depending on us to guide and inform them through an unprecedented period, we responded quickly and developed a comprehensive approach to maintaining operations and safeguarding our future. This included getting to grips with the requirements of the furlough scheme and the other government support available, advising franchisees on what actions they should take and working with them to identify how they could reduce costs as much as possible. Though the second half of the year proved to be a lot more positive, we continued to guide our franchisees closely throughout the period and I am proud of the role we played in supporting each and every franchisee across the year.
Supporting our franchisees
Since joining the Group, one area of key focus for me has been the level of support we provide to our franchisees. The pandemic undoubtedly sharpened our focus on strengthening relationships with our franchisees and accelerated the way in which we went about implementing changes. We have now made tangible progress and re-affirmed our internal approach, culture and attitude, clearly recognising that our purpose as a business, and every individual role within that, is to support the franchisees and to help them to become more successful.
In line with this purpose, we enhanced our experienced senior management team, who are focused on understanding which parts of the strategy each franchisee is keen to embrace and ultimately, to help them grow their business. In October we welcomed Eric Walker, as Managing Director of Martin & Co (South and Scotland) shortly followed up by the appointment of Gareth Williams as Managing Director of Martin & Co (Midlands and North). They join Kate Randall, MD of CJ Hole, Ellis & Co, Parkers and Whitegates and Nick Neill, MD of EweMove. Finally, Glynis Frew will continue to lead Hunters as its Managing Director. This represents an extremely experienced and skilled MD team.
Our franchisees have responded very positively to our commitment to support them with such a high calibre new team and feedback on its initial impact has been extremely positive and encouraging. The Managing Directors are regularly communicating with them about the opportunities we perceive for their businesses and helping them to understand the actions needed to realise the opportunities.
Executing on strategic growth opportunities
As part of my recruitment, I was set the task of identifying how to substantially grow the Group. Having achieved buy in from our Board and been appointed, I have been keen to implement that growth strategy held back initially by the pandemic. There are six core areas of focus, where we believe there is a significant opportunity to build on existing foundations, many of which will be further accelerated or enhanced with the acquisition of Hunters in March 2021. The key areas to develop are as follows:
· Lettings growth
o We intend to continue to grow the portfolio of tenanted properties managed by our franchise network through acquisition (our own and assisting franchisees), through more engaging and informing services for our landlords, and by addressing the causes of attrition.
· Develop sales activity in the high street-ledbrands
o Overall, these brands are missing revenue opportunities by their focus on lettings. Through the provision of additional support and training, we believe there is a good opportunity to increase the level of sales activity executed by our high street-led brands.
· Financial services growth
o It is our intention for all our customers to have access to a full-service lettings and estate agency service, and financial services provision is part of that journey.
o It is our intention to grow the number of financial services advisers serving our network to over 100 across all brands by the end of 2021.
· EweMove recruitment
o We are aiming to double the number of territories occupied by EweMove franchisees (115 as at 01/01/2021) by the end of 2022 which involves a significant increase in recruitment.
· Acquisitions (franchisee and franchisor level)
o We support the acquisition by our franchisees of local competitors' lettings books. These acquisitions increase the stability and profitability of their businesses.
o We will also consider the acquisition of other franchise brands where it is clear it would bring value to the Group.
· Digital marketing
o Best-in-class digital marketing is essential to running a successful estate and/or lettings agency business and we continue to invest in our capabilities.
We made good progress against several of these initiatives over the year, and post period end. We have of course, met one of our key acquisition objectives with the completion of our acquisition of Hunters (please see below). This also supports our ambitions to grow our portfolio of managed properties, Hunters having 15,000 at acquisition, and to expand residential sales activity and footprint in the high street-led brands, as we plan to leverage Hunters' existing sales knowledge across the Group.
We have also made strides forward in other areas. We recruited 11 EweMove franchisees in the year, a good performance given the industry backdrop, and have recruited 20 more in Q1 FY21. The total number of territories occupied is now at 135, in line with our 2022 target. We made 11 assisted acquisitions in the year, adding 1,305 managed properties to the Group's portfolio. Our announcement regarding the strategic partnership with LSL will help us significantly on our journey to grow the number of financial service advisers available to the Group and allow franchisees to pursue their own financial services growth ambitions.
Acquisition of Hunters*
We are delighted to have completed the acquisition of Hunters Property PLC on 19th March 2021, a property franchise business with 210 branches nationwide specialising in residential sales and lettings. Hunters is a strong brand in the industry and boasts an extremely experienced management team led by Glynis Frew. The combined businesses create the leading UK property franchisor, with enhanced scale and geographic reach; nine brands and over 550 outlets across the UK.
Through the acquisition our value proposition to franchisees and customers has been enhanced and we now have the additional resources to build a stronger and more efficient franchised network. Moreover, because of our accelerated route to growth and enhanced capabilities, we have been presented with several new growth opportunities.
We see great opportunity ahead and very much look forward to working with Glynis Frew and her team as we continue to grow our market share in the sector.
Strategic Partnership with LSL
We are incredibly excited by the opportunities presented through our strategic partnership with LSL, announced today. This results from the acquisition of Hunters and the work undertaken in 2020 on the delivery of our strategic objective with regards to financial services. It involves the supply of mortgage and protection advice throughout our franchised network to all their customers.
Outlook
We will continue to focus on acquiring businesses that expand our footprint, enhance current revenue streams, and deliver new revenue streams.
We expect the positive increase in market activity seen in the second half of 2020 to continue in 2021 due to the Government's focus on assisting our sector and the quick rollout of vaccines allowing greater freedom of movement. Whilst uncertainties continue, and we have yet to see the full impacts of the pandemic, we see good reasons to believe that the residential housing market will be a beneficiary.
We have set a clear agenda for growth, which both our people and franchisees are fully behind. We have already started delivering on our new strategy and, with the enhanced management team, we will continue to build and invest for the future.
Gareth Samples
Chief Executive
26 April 2021
Acquisition of Hunters
Terms of the Acquisition
Effective on 19th March 2021, The Property Franchise Group Plc acquired the entire issued share capital of Hunters Property Plc in exchange for £14.53m in cash and 5,551,916 ordinary shares of 1p each in TPFG, valuing the acquired group at £26.1m.
About Hunters Group
Hunters opened its first office in York in 1992. It was established on the principles of excellent customer service, unrivalled pro-activity and achieving the best possible results for its customers. It was driven by the goal of being the UK's favourite estate agent.
By the time of its acquisition, Hunters Group had grown to be a top three sales agency brand by residential properties sold subject to contract and had achieved nine consecutive years with customer satisfaction exceeding 90%. Along the way it had won more than 30 awards and been featured in the Sunday Times Best 100 Companies.
2005 saw the start of expansion with the creation of a franchising model which has subsequently led to great success in persuading independent agents to convert to the Hunters brand and system. It has also grown its franchising business through the acquisition of Countrywide Plc's franchising arm in 2011, Country Properties in 2015 and Besley Hill in 2017.
Hunters has added a total of 46 branches through acquisition and, in the seven years to December 2020, opened 153 branches. Network income has steadily increased alongside the growth in the number of offices.
Today Hunters operates through 210 offices in England mainly under the Hunters brand with Country Properties accounting for 15 of the offices and Mullucks for 3 of the offices. It operates 10 of the offices itself.
Financial Performance for 2020
2020 saw a very strong performance despite the enforced lockdowns and disruption caused by the pandemic. Through the central team and franchisees pulling together, the Hunters Group achieved both record profitability and improved its customer service rating to 97%.
The Hunters Group reported consolidated turnover down by 11% year on year, partly due to franchising two owned offices and changes in service charges to franchisees resulting from the pandemic. Once these elements were adjusted for, turnover dropped by only 4% from £13.0m to £12.5m.
Hunters Audited Performance | 2020 | 2019 | Change |
| £'m | £'m | % |
Turnover | 12.46 | 13.99 | (11)% |
EBITDA | 3.47 | 2.76 | 26% |
PBT | 1.53 | 0.9 | 70% |
Adjusted PBT* | 2.81 | 2.06 | 36% |
Basic EPS (pence) | 3.96 | 2.28 | 74% |
Basic adjusted EPS (pence) | 7.87 | 5.86 | 34% |
Net debt | 0.00 | 3.22 | 100% |
* Before exceptional costs, amortisation of acquired intangibles and share-based payment charges.
Following the lifting of the first lockdown in May 2020 significant positive activity was seen in the residential sales market. As can be seen from the KPIs below, this translated into a substantial increase in the sales agreed pipeline which reached a record at the year-end of £17.3m. Furthermore, despite losing almost two months of activity during the first lockdown, fees invoiced by the network for exchanged deals recovered to match the prior year.
Hunters Non- Financial KPIs | 2020 | 2019 | Change |
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| % |
Customer service rating | 97% | 96% | 1% |
Number of offices | 209 | 206 | 1% |
Offices opened | 9 | 20 | (55)% |
Average office turnover | £0.2m | £0.2m | 1% |
Network's exchange fees invoiced | £27.7m | £27.7m | 0% |
Network's lettings income | £15.5m | £14.6m | 7% |
Network's Pipeline (sales agreed) | £17.3m | £9.4m | 83% |
Managed properties | 14,588 | 13,842 | 5% |
The Hunters Group generated an 112% increase in net cash from operations in 2020 at £4.1m (2019: £1.9). This meant that by the year-end, notwithstanding the Covid loan of £3.5m, the business had net debt (excluding lease liabilities) of less than £5,000.
This positive performance also translated into an 20% increase in net assets on 31 December 2020 of £9.0m (2019: £7.6m)
At the same time the opening of branches borne from success with attracting independent agents to Hunters has seen MSF increase by 35% over the period to £3.5m, very similar to the grow of MSF for TPFG at 36%.
Adjusted EBITDA grew by 67% over the period to £3.5m, driven by the opening of new offices and growth in the portfolio of managed properties. This was even faster than TPFG which, over the same period, has generated an increase in adjusted EBITDA of 46%.
2020 was a strong year for profitability and net cash generated from operations as Hunters Group took action to curtail discretionary expenditure and reorganise its resources. Net cash generated was strong at £4.1m.
Hunters Group has grown net assets by 61% over the period to 9.0m compared to 68% growth in TPFG to £20.6m.
Chief Financial Officer's statement - TPFG FY20 Financial Review
Sharp focus on cost and cash management delivers strong results.
In 2020 several key attributes of TPFG's business model came to the fore. The business benefitted from being a financially strong franchised network that was quick to adapt and resourceful. It benefitted from having built a large managed portfolio supported by its franchisors. It benefitted from its franchisors having strong operating margins and an experienced team capable of supporting rapid change. Last but not least, TPFG benefitted from being a Plc with clear views about cash allocation and how to support its stakeholders for long-term benefit.
2020 started with increased sales activity, giving way in March to a two-month lockdown. From 13 May 2020 sales activity picked up, assisted by the stamp duty holiday, however sales revenue was held back by sales taking significantly longer to complete. Lettings transactions went digital and lettings income proved resilient.
Revenue
Group revenue for the financial year to 31 December 2020 was £11.5m (2019: £11.4m), an increase of £0.1m (1%) over the prior year.
Management Service Fees ("MSF"), our key underlying revenue stream, decreased 3% from £9.7m to £9.4m and represented 82% (2019: 85%) of the Group's revenue. The remainder of Group revenue was from franchise sales of £0.2m (2019: £0.2m), ancillary services to support MSF generation of £1.5m (2019: £1.5m) and, new for 2020, revenue from financial services of £0.4m (2019: nil).
Lettings contributed 70% of MSF (2019: 69%), sales contributed 29% of MSF (2019: 30%) and financial services contributed 1% of MSF (2019: 1%). Lettings MSF decreased by 1% in the year, excluding the amortisation of prepaid assisted acquisitions support, and sales MSF decreased by 5%.
Our franchise sales activity was predominantly focused on reselling existing franchises to experienced franchise owners in the high street-led brands, and to encouraging new entrants into EweMove. Resale activity was subdued in 2020 due to the pandemic. Sales to new entrants into EweMove were high, given that recruiting was temporarily paused for six months due to the uncertainty created by the pandemic, with 11 new franchisees gained in the year (2019: 25).
Operating profit
Headline operating profit increased 19% to £4.8m (2019: £4.0m) with an operating margin of 42% (2019: 35%). Adjusted operating profit before exceptional items, amortisation of acquired intangibles and share-based payments charges increased 8% from £5.0m to £5.4m and the resulting operating margin was 47% (2019: 44%).
Given the challenging market conditions caused by the pandemic, cost reductions were sought from all contributors including suppliers, contractors, and our employees in March/April 2020. The latter agreed to a 20% reduction in basic salaries and to the suspension of bonuses, commissions and allowances. A small number of employees were furloughed resulting in financial support of less than £0.1m being received.
No sooner had we restructured the cost base and offices were able to reopen. We saw activity in the sector return. Indeed, it was evident from EweMove that customer demand was increasing rapidly, and this necessitated reinstating third-party suppliers and bringing back from furlough our own employees so that by July we were almost at full strength again.
By the final quarter of 2020 we had settled into a more predictable pattern of costs once more. Cost savings were not as much as we had expected in April 2020, in part because the Board decided to repay the voluntary 20% reduction in salaries agreed to by employees and to fully pay the bonuses and commissions that had been suspended in Q1 2020. This was in recognition of the efforts of the Group's employees and in recognition of the profit before tax achieved. Post year end the Board has also decided to repay the furlough monies received of £0.09m.
As a result, cost of sales was reduced by 13% to £0.9m (2019: £1.1m) and administrative expenses were reduced by 3% to £5.7m (2019: £5.8m).
Share options were issued to the Executive Directors in 2020 over a maximum of 200,000 shares and in 2019 over a maximum of 100,000 shares. However, most of the potential shares available under share options resulted from share options granted to almost all employees in 2017 and 2018. Those granted in 2017 and 2018 have come to the end of their assessment periods. Almost all the options issued in 2018 were "parallel" options whereby the holders could either exercise their options issued in 2017 or their options issued in 2018 but not both. After careful consideration and, for the options issued in 2018, a detailed review of underlying performance in 2020, the vesting percentages for both schemes were determined at 25%.
An assessment of the share-based payment charges resulting from the options granted was made on 31 December 2020 resulting in £0.1m being charged to the profit and loss account (2019: £0.4m). Further details can be found in notes 4, 5 and 27 to the consolidated financial statements.
| 2020 | 2019 |
Revenue | £11.5m | £11.4m |
Management Service Fees | £9.4m | £9.7m |
Administrative expenses | £5.7m | £5.8m |
Adjusted operating profit* | £5.4m | £5.0m |
Operating profit | £4.8m | £4.0m |
Adjusted profit before tax* | £5.4m | £4.9m |
Profit before tax | £4.8m | £4.0m |
Adjusted EBITDA* | £5.7m | £5.3m |
Dividend | 8.7p | 2.6p** |
* Before exceptional costs, amortisation of acquired intangibles and share-based payment charges. ** No final dividend for 2019.
Adjusted EBITDA
Adjusted EBITDA for 2020 was £5.7m (2019: £5.3m), an increase of £0.4m (8%) over the prior year. The high street-led brands contributed £0.2m of this increase through cost reductions offsetting the small reduction in revenue of £0.1m and EweMove contributed £0.2m of this increase again through cost reductions offsetting the reduction in revenue of £0.2m.
Profit before tax
Profit before tax was £4.8m for 2020 (2019: £4.0m) which includes the share-based payment charge of £0.1m in 2020 (2019: £0.4m). Excluding exceptional costs, amortisation arising on acquired intangibles and the share-based payment charges, the adjusted profit before tax increased from £4.9m to £5.4m (9%).
Taxation
The effective rate of corporation tax for the year was 21.1% (2019: 19.1%) due to the Government deciding not to implement the 17% rate of corporation tax which caused a deferred tax adjustment of £0.1m. The total tax charge for 2020 was £1.0m (2019: £0.8m).
Earnings per share
Basic earnings per share ("EPS") for the year was 14.6p (2019: 12.5p), an increase of 17% based on the average number of shares in issue for the period of 25,822,750 (2019: 25,822,750).
Diluted EPS for the year was 14.4p (2019: 12.1p) an increase of 19% based on the average number of shares in issue for the period plus an estimate for the dilutive effect of option grants vesting, being 26,342,567 (2019: 26,692,929).
The increase in EPS for both measures results from the increase in profit before tax year on year caused in the main by the cost reduction measures during the year.
Adjusted basic EPS for the year was 16.8p (2019: 16.2p), an increase of 4% based on the average number of shares in issue for the period of 25,822,750 (2019: 25,822,750).
Adjusted diluted EPS for the year was 16.5p (2019: 15.6p), an increase of 6% based on an estimate of diluted shares in issue of 26,342,567 (2019: 26,692,929).
The adjustments to earnings to derive the adjusted EPS figures total £0.6m (2019: £0.9m) and result from the share-based payment charge and the amortisation of acquired intangibles.
The profit attributable to owners was £3.8m (2019: £3.2m) with the increase of £0.6m mainly due to the impact of the cost reduction measures in 2020 and a lower share-based payment charge in 2020.
Dividends
With the financial picture improving the Board took the decision, despite significant uncertainty created by the pandemic, to reinstate dividend payments in September 2020 at a time when few companies had decided upon such a course of action. It was clear that our business model had proved resilient. An interim dividend of 2.1p per ordinary share was paid on 23rd September 2020.
Due to the proposed acquisition of the entire issued and to be issued share capital in Hunters Property Plc the Board took the decision to pay an interim dividend to existing shareholders of 6.6p per ordinary share in lieu of a final dividend for 2020. This dividend was paid on 23 February 2021.
Cash flow
The Group is strongly operationally cash generative. The net cash inflow from operating activities in 2020 was £5.4m (2019: £4.7m) as the Group continued to generate strong operating cash inflows.
The net cash outflow from investing activities was £0.1m (2019: outflow £0.7m). This consisted of £0.1m for the purchase of Auxilium Partnership Limited in January 2020, £0.2m provided to franchisees to support their acquisitions of managed properties under the assisted acquisitions program and £0.2m repaid by Mark Graves following the purchase of 85% of the ordinary shares in Auxilium Partnership Limited from him (more details in note 15). In 2019, most of the net outflow was due to payments made to franchisees under the assisted acquisitions program and the loan of £0.2m to Mark Graves.
There were no bank loans outstanding in 2020. In 2019 £1.6m in repayments were made to Santander Plc to clear the outstanding loans.
Dividend payments totalling £0.5m were made in the year (2019: £2.2m).
Liquidity
The Group had cash balances of £8.8m on 31 December 2020 (2019: £4.0m) and no bank debt in either year. It entered negotiations with Barclays Bank Plc for a new facility at the year-end of up to £12.5m as part of its proposed acquisition of Hunters Property Plc.
Key performance indicators
The Group uses a number of key financial and non-financial performance indicators to measure performance. The Group also adjusts certain well-known financial performance measures for share-based payment charges, amortisation on acquired intangibles and exceptional items so as to aid comparability between reporting periods.
Financial position
The consolidated statement of financial position remains strong with total assets of £25.2m (2019: £21.1m) due mainly to an increase in cash.
There was an increase of £0.8m in liabilities during the year mainly due to the deferral of £0.5m of VAT under the Government's pandemic support measures and, because of the Board deciding to pay bonuses and commissions that had been suspended at the end of Q1 2020, an increased employment costs accrual of £0.3m.
The Group finished the year with the total equity attributable to owners of £20.6m, an increase of £3.3m or 19% over FY19.
The Group generated stronger cash inflows than ever before in 2020 against a history of strong operational cash inflows due to its operating margins. This provided the opportunity to discuss a facility with Barclays Bank Plc of up to £12.5m and to further pursue its acquisitive strategy in 2021 with the acquisition of Hunters Property Plc (see note 30 of the consolidated financial statements).
David Raggett
Chief Financial Officer
26 April 2021
Consolidated statement of comprehensive income
for the year ended 31 December 2020
| Notes | 2020 £ | 2019 £ |
Revenue | 7 | 11,464,495 | 11,350,327 |
Cost of sales |
| (932,501) | (1,066,849) |
Gross profit |
| 10,531,994 | 10,283,478 |
Administrative expenses | 8 | (5,666,475) | (5,820,277) |
Share-based payments charge | 9, 27 | (68,023) | (441,709) |
Operating profit | 10 | 4,797,496 | 4,021,492 |
Finance income | 11 | 10,701 | 11,012 |
Finance costs | 11 | (3,328) | (38,310) |
Profit before income tax expense |
| 4,804,869 | 3,994,194 |
Income tax expense | 12 | (1,013,107) | (761,788) |
Profit and total comprehensive income for the year from continuing operations |
| 3,791,762 | 3,232,406 |
Profit and total comprehensive income for the year attributable to: |
|
|
|
Owners of the parent |
| 3,782,568 | 3,232,406 |
Non-controlling interest |
| 9,194 | - |
|
| 3,791,762 | 3,232,406 |
|
|
|
|
Earnings per share |
|
|
|
Statutory |
|
|
|
Earnings per share attributable to owners of parent | 13 | 14.6p | 12.5p |
Diluted Earnings per share attributable to owners of parent | 13 | 14.4p | 12.1p |
Adjusted |
|
|
|
Earnings per share attributable to owners of parent | 13 | 16.8p | 16.2p |
Diluted Earnings per share attributable to owners of parent | 13 | 16.5p | 15.6p |
Consolidated statement of financial position
31 December 2020
| Notes | 2020 £ | 2019 £ |
Assets |
|
|
|
Non-current assets |
|
|
|
Intangible assets | 15 | 14,380,282 | 14,786,402 |
Property, plant and equipment | 16 | 66,530 | 77,555 |
Right-of-use assets | 17 | 85,802 | 74,580 |
Prepaid assisted acquisitions support | 18 | 599,952 | 657,948 |
|
| 15,132,566 | 15,596,485 |
Current assets |
|
|
|
Trade and other receivables | 20 | 1,292,549 | 1,483,009 |
Cash and cash equivalents |
| 8,770,884 | 4,011,463 |
|
| 10,063,433 | 5,494,472 |
Total assets |
| 25,195,999 | 21,090,957 |
|
|
|
|
Equity |
|
|
|
Shareholders' equity |
|
|
|
Called up share capital | 21 | 258,228 | 258,228 |
Share premium | 22 | 4,039,800 | 4,039,800 |
Other reserves | 23 | 3,574,915 | 3,506,892 |
Retained earnings |
| 12,689,965 | 9,449,675 |
|
| 20,562,908 | 17,254,595 |
Non-controlling interest |
| 9,194 | - |
Total equity attributable to owners |
| 20,572,102 | 17,254,595 |
|
|
|
|
Liabilities |
|
|
|
Non-current liabilities |
|
|
|
Lease liabilities | 17 | 45,446 | 25,089 |
Deferred tax | 27 | 1,114,544 | 1,140,227 |
|
| 1,159,990 | 1,165,316 |
Current liabilities |
|
|
|
Trade and other payables | 26 | 2,750,348 | 2,000,175 |
Lease liabilities | 17 | 41,085 | 52,660 |
Tax payable |
| 672,474 | 618,211 |
|
| 3,463,907 | 2,671,046 |
Total liabilities |
| 4,623,897 | 3,836,362 |
Total equity and liabilities |
| 25,195,999 | 21,090,957 |
The financial statements were approved and authorised for issue by the Board of Directors on 26 April 2021 and were signed on its behalf by:
David Raggett
Chief Financial Officer
Company statement of financial position
31 December 2020 (Company No: 08721920)
| Notes | 2020 £ | 2019 £ |
Assets |
|
|
|
Non-current assets |
|
|
|
Investments | 19 | 34,082,997 | 33,899,664 |
Deferred tax asset | 25 | 228,217 | 215,293 |
|
| 34,311,214 | 34,114,957 |
Current assets |
|
|
|
Trade and other receivables | 20 | 221,125 | 421,903 |
Cash and cash equivalents |
| 4,600,718 | 1,073,774 |
|
| 4,821,843 | 1,495,677 |
Total assets |
| 39,133,057 | 35,610,634 |
|
|
|
|
Equity |
|
|
|
Shareholders' equity |
|
|
|
Called up share capital | 21 | 258,228 | 258,228 |
Share premium | 22 | 4,039,800 | 4,039,800 |
Other reserves | 23 | 21,564,815 | 21,496,792 |
Retained earnings |
| 13,123,373 | 9,640,327 |
Total equity |
| 38,986,216 | 35,435,147 |
|
|
|
|
Current liabilities |
|
|
|
Trade and other payables | 24 | 146,841 | 175,487 |
Total liabilities |
| 146,841 | 175,487 |
Total equity and liabilities |
| 39,133,057 | 35,610,634 |
As permitted by Section 408 of the Companies Act 2006, the income statement of the Parent Company is not presented as part of these financial statements. The Parent Company's profit for the financial year was £4,025,324 (2019: £3,323,903).
The financial statements were approved and authorised for issue by the Board of Directors on 26 April 2021 and were signed on its behalf by:
David Raggett
Chief Financial Officer
Consolidated statement of changes in equity
for the year ended 31 December 2020
|
|
Attributable to owners |
|
|
||||
|
|
Called up share capital £ |
Retained earnings £ |
Share premium £ |
Other reserves £ |
Total equity £ |
Non-controlling interest £ |
Tptal equity
£ |
|
Balance at 1 January 2019 |
258,228 |
8,438,027 |
4,039,800 |
2,983,861 |
15,719,916 |
- |
15,719,916 |
|
Profit and total comprehensive income |
- |
3,232,405 |
- |
- |
3,232,405 |
- |
3,232,405 |
|
Dividends |
- |
(2,220,757) |
- |
- |
(2,220,757) |
- |
(2,220,757) |
|
Deferred tax on share-based payments |
- |
- |
- |
81,322 |
81,322 |
- |
81,322 |
|
Share-based payments charge |
- |
- |
- |
441,709 |
441,709 |
- |
441,709 |
|
Total transactions with owners |
- |
(2,220,757) |
- |
523,031 |
(1,697,726) |
- |
(1,697,726) |
|
Balance at 31 December 2019 |
258,228 |
9,449,675 |
4,039,800 |
3,506,892 |
17,254,595 |
- |
17,254,595 |
|
Profit and total comprehensive income |
- |
3,782,568 |
- |
- |
3,782,568 |
9,194 |
3,791,762 |
|
Dividends |
- |
(542,278) |
- |
- |
(542,278) |
- |
(542,278) |
|
Share-based payments charge |
- |
- |
- |
68,023 |
68,023 |
- |
68,023 |
|
Total transactions with owners |
- |
(542,278) |
- |
68,023 |
(474,255) |
- |
(474,255) |
|
Balance at 31 December 2020 |
258,228 |
12,689,965 |
4,039,800 |
3,574,915 |
20,562,908 |
9,194 |
20,572,102 |
Company statement of changes in equity
for the year ended 31 December 2020
|
|
Called up share capital £ |
Retained earnings £ |
Share premium £ |
Other reserves £ |
Total equity £ |
|
Balance as at 1 January 2019 |
258,228 |
8,537,181 |
4,039,800 |
20,973,761 |
33,808,970 |
|
Profit and total comprehensive income |
- |
3,323,903 |
- |
- |
3,323,903 |
|
Dividends |
- |
(2,220,757) |
- |
- |
(2,220,757) |
|
Deferred tax on share-based payments |
- |
- |
- |
81,322 |
81,322 |
|
Share-based payments charge |
- |
- |
- |
441,709 |
441,709 |
|
Total transactions with owners |
- |
(2,220,757) |
- |
523,031 |
(1,697,726) |
|
Balance as at 31 December 2019 |
258,228 |
9,640,327 |
4,039,800 |
21,496,792 |
35,435,147 |
|
Profit and total comprehensive income |
- |
4,025,324 |
- |
- |
4,025,324 |
|
Dividends |
- |
(542,278) |
- |
- |
(542,278) |
|
Share-based payments charge |
- |
- |
- |
68,023 |
68,023 |
|
Total transactions with owners |
- |
(542,278) |
- |
68,023 |
(474,255) |
|
Balance as at 31 December 2020 |
258,228 |
13,123,373 |
4,039,800 |
21,564,815 |
38,986,216 |
Consolidated statement of cash flows
for the year ended 31 December 2020
| Notes | 2020 £ | 2019 £ |
Cash flows from operating activities |
|
|
|
Cash generated from operations | A | 6,377,977 | 5,705,243 |
Interest paid |
| - | (41,380) |
Tax paid |
| (971,869) | (973,361) |
Net cash from operating activities |
| 5,406,108 | 4,690,502 |
Cash flows from investing activities |
|
|
|
Purchase of subsidiary net of cash acquired |
| (81,250) | - |
Purchase of intangible assets |
| - | (73,467) |
Purchase of tangible assets |
| (17,259) | (7,960) |
Assisted acquisitions support |
| (155,034) | (386,332) |
Loan made | 29 | - | (200,000) |
Loan repaid | 29 | 200,000 | - |
Interest received |
| 10,701 | 11,012 |
Net cash used in investing activities |
| (42,842) | (656,747) |
Cash flows from financing activities |
|
|
|
Repayment of bank loan |
| - | (1,600,000) |
Equity dividends paid |
| (542,278) | (2,220,757) |
Principal paid on lease liabilities |
| (58,239) | (56,533) |
Interest paid on lease liabilities |
| (3,328) | (2,990) |
Net cash used in financing activities |
| (603,845) | (3,880,280) |
Increase in cash and cash equivalents |
| 4,759,421 | 153,475 |
Cash and cash equivalents at beginning of year |
| 4,011,463 | 3,857,988 |
Cash and cash equivalents at end of year |
| 8,770,884 | 4,011,463 |
Notes to the consolidated statement of cash flows
for the year ended 31 December 2020
A. Reconciliation of profit before income tax to cash generated from operations
| 2020 £ | 2019 £ |
Cash flows from operating activities |
|
|
Profit before income tax | 4,804,869 | 3,994,194 |
Depreciation of property, plant and equipment | 28,284 | 33,989 |
Amortisation of intangibles | 590,546 | 611,820 |
Amortisation of prepaid assisted acquisitions support | 213,030 | 174,149 |
Amortisation of right-of-use assets | 55,799 | 54,769 |
Share-based payments charge | 68,023 | 441,709 |
Finance costs | 3,328 | 38,310 |
Finance income | (10,701) | (11,012) |
Operating cash flow before changes in working capital | 5,753,178 | 5,337,928 |
Increase in trade and other receivables | (18,142) | (186,734) |
Increase in trade and other payables | 642,941 | 554,049 |
Cash generated from operations | 6,377,977 | 5,705,243 |
Company statement of cash flows
for the year ended 31 December 2020
| Notes | 2020 £ | 2019 £ |
Cash flows from operating activities |
|
|
|
Cash generated from operations | C | (659,534) | (812,137) |
Interest paid |
| - | (41,380) |
Net cash used in operating activities |
| (659,534) | (853,517) |
Cash flows from investing activities |
|
|
|
Purchase of subsidiary net of cash acquired |
| (81,250) | - |
Interest received |
| 6 | 22 |
Loan made | 29 | - | (200,000) |
Loan repaid | 29 | 200,000 |
|
Equity dividends received |
| 4,610,000 | 4,670,000 |
Net cash generated from investing activities |
| 4,728,756 | 4,470,022 |
Cash flows from financing activities |
|
|
|
Repayment of bank loan |
| - | (1,600,000) |
Equity dividend paid |
| (542,278) | (2,220,757) |
Net cash used in financing activities |
| (542,278) | (3,820,757) |
Increase in cash and cash equivalents |
| 3,526,944 | (204,252) |
Cash and cash equivalents at beginning of year |
| 1,073,774 | 1,278,026 |
Cash and cash equivalents at end of year |
| 4,600,718 | 1,073,774 |
Notes to the Company statement of cash flows
for the year ended 31 December 2020
C. Reconciliation of profit before income tax to cash generated from operations
| 2020 £ | 2019 £ |
Cash flows from operating activities |
|
|
Profit before income tax | 3,898,029 | 3,390,952 |
Share-based payments charge | 84,690 | 345,931 |
Finance costs | - | 35,320 |
Finance income | (6) | (22) |
Equity dividend received | (4,610,000) | (4,670,000) |
Operating cash flow before changes in working capital | (627.287) | (897,819) |
Increase in trade and other receivables | (162,520) | (25,241) |
Increase in trade and other payables | 130,273 | 110,923 |
Cash used in operations | (659,534) | (812,137) |
Notes to the consolidated and Company financial statements
for the year ended 31 December 2020
1. General information
The principal activity of The Property Franchise Group PLC and its Subsidiaries is that of a UK residential property franchise business. The Group operates in the UK. The Company is a public limited company incorporated and domiciled in the UK and listed on AIM. The address of its head office and registered office is 2 St Stephen's Court, St Stephen's Road, Bournemouth, Dorset, UK.
2. Basis of preparation
These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRSs") in conformity with the requirements of the Companies Act 2006 and, as regards the Parent Company financial statements, as applied in accordance with the provisions of the Companies Act 2006. The consolidated financial statements have been prepared under the historical cost convention.
The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in note 5.
The presentational currency of the financial statements is in British pounds and amounts are rounded to the nearest pound.
Going concern
The Group has produced detailed budgets, projections and cash flow forecasts which incorporate the recently acquired Hunters Property PLC business. These have been stress tested to understand the impacts of reductions in revenue and costs. The Directors have concluded after reviewing these budgets, projections and forecasts, making appropriate enquiries of the business and having considered uncertainties under the current economic environment as a result of the Covid-19 pandemic, that there is a reasonable expectation that the Group has adequate resources to continue in operation for the foreseeable future. Accordingly, they have adopted the going concern basis in preparing the financial statements.
Changes in accounting policies
a) New standards, amendments and interpretations effective from 1 January 2020
The following new or amended standards are mandatory for the first time for the period beginning 1 January 2020 and have been adopted in the annual financial statements for the year ended 31 December 2020:
Standard | Key requirements |
|
IAS 1
IAS 8
| Presentation of Financial Statements (Amendment -Definition of Material)
Accounting Policies, Changes in Accounting Estimates and Errors (Amendment - Definition of Material)
|
|
IFRS 3
| Business Combinations (Amendment - Definition of Business) |
|
| Revised Conceptual Framework for Financial Reporting |
|
b) New standards, amendments and interpretations not yet effective
We do not consider there to be any relevant new standards, amendments to standards or interpretations that have been issued, but are not effective for the financial year beginning on 1 January 2020, which would have a material impact on the financial statements.
The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.
3. Basis of consolidation
The Group financial statements include those of the Parent Company and its Subsidiaries, drawn up to 31 December 2020. Subsidiaries are all entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases.
The Group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred to the former owners of the acquire and the equity interests issued by the Group. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. Acquisition-related costs are expensed as incurred.
Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated. When necessary, amounts reported by Subsidiaries have been adjusted to conform to the Group's accounting policies.
4. Significant accounting policies
Revenue recognition
Performance obligations and the timing of revenue recognition
Revenue represents income, net of VAT, from the sale of franchise agreements, resale fees and Management Service Fees levied to franchisees monthly based on their turnover, and other income being the provision of ad hoc services and ongoing support to franchisees.
Traditional brands:
Fees from the sale of franchise agreements are not refundable. These fees are for the use of the brand along with initial training and support and promotion during the opening phase of the new office. As such the Group has some initial obligations that extend beyond the receipt of funds and signing of the franchise agreement so an element of the fee is deferred and released as the obligations are discharged, usually between 1 to 4 months after receipt of funds, which is the typical period of on-boarding for new franchisees.
Resale fees are recognised in the month that a contract for the resale of a franchise is signed. Upon signing of the contract all obligations have been completed.
Management Service Fees are recognised on a monthly basis and other income is recognised when the services and support is provided to the franchisee. There are no performance obligations associated with levying the Management Service Fees. For ad hoc services and support all performance obligations have been fulfilled at the time of revenue recognition.
EweMove:
Fees from the sale of franchise agreements for the EweMove brand are not refundable. Some new franchisees pay a higher fee to include the first 12 months' licence fee, in this scenario the licence fee element of the initial fee is deferred and released over the first 12 months of trading of the franchise where no monthly licence fees are payable. The franchise fee is for the use of the brand along with initial support and promotion during the opening phase of the new franchise. As such the Group has some initial obligations that extend beyond the receipt of funds and signing of the franchise agreement so an element of the fee is deferred and released as the obligations are discharged, usually between 1 to 4 months after receipt of funds, which is the typical period of on-boarding for new franchisees.
Management Service Fees consist of monthly licence fees and completion fees. Licence fees are recognised on a monthly basis, completion fees are recognised when sales or lettings transactions complete and other income is recognised when the services and support are provided to the franchisee. There are no additional performance obligations associated with levying the licence fee and completion fees beyond providing access to the systems, brand and marketing support. For ad hoc services and support all performance obligations have been fulfilled at the time of revenue recognition.
Financial services commissions:
Financial services commissions received by Auxilium Partnership Limited are recognised upon receipt, being a point in time when the Group has met its obligations in delivering a customer to the insurance partners. A provision is made for the best estimate of future clawbacks resulting from policies being subsequently cancelled, however this is not material to the financial statements. There is no vat applicable to financial services commissions.
Operating profit
Profit from operations is stated before finance income, finance costs and tax expense.
Business combinations
On the acquisition of a business, fair values are attributed to the identifiable assets and liabilities and contingent liabilities unless the fair value cannot be measured reliably in which case the value is subsumed into goodwill. Where the fair values of acquired contingent liabilities cannot be measured reliably, the assumed contingent liability is not recognised but is disclosed in the same manner as other contingent liabilities.
Goodwill is the difference between the fair value of the consideration and the fair value of identifiable assets acquired. Goodwill arising on acquisitions is capitalised and subject to an impairment review, both annually and when there is an indication that the carrying value may not be recoverable.
Intangible assets
Intangible assets with a finite life are carried at cost less amortisation and any impairment losses. Intangible assets represent items which meet the recognition criteria of IAS 38, in that it is probable that future economic benefits attributable to the assets will flow to the entity and the cost can be measured reliably.
In accordance with IFRS 3 Business Combinations, an intangible asset acquired in a business combination is deemed to have a cost to the Group of its fair value at the acquisition date. The fair value of the intangible asset reflects market expectations about the probability that the future economic benefits embodied in the asset will flow to the Group.
Amortisation charges are included in administrative expenses in the Statement of Comprehensive Income. Amortisation begins when the intangible asset is first available for use and is provided at rates calculated to write-off the cost of each intangible asset over its expected useful life, on a straight-line basis, as follows:
Brands - CJ Hole, Parkers, Ellis & Co | Indefinite life |
Brands - EweMove | 21 years |
Customer lists | 5 years |
Master franchise agreements - Whitegates, CJ Hole, Parkers, Ellis & Co | 25 years |
Master franchise agreements - EweMove | 15 years |
Technology - Ewereka | 5 years |
Technology - Websites and CRM system | 3 years |
Acquired trade names are identified as separate intangible assets where they can be reliably measured by valuation of future cash flows. The trade names CJ Hole, Parkers and Ellis & Co are assessed as having indefinite lives due to their long trading histories.
Acquired customer lists are identified as a separate intangible asset as they are separable and can be reliably measured by valuation of future cash flows. This valuation also assesses the life of the particular relationship. The life of the relationship is assessed annually.
Customer lists are being written off over a remaining life of 5 years.
Acquired master franchise agreements are identified as a separate intangible asset as they are separable and can be reliably measured by valuation of future cash flows. The life of the relationship is assessed annually. Master franchise agreements are being written off over a remaining life of 15-25 years as historical analyses shows that, on average, 4% - 10% of franchises will change ownership per annum.
The cost of the new brand websites launched in 2017 have been capitalised and are being amortised over 3 years from launch date, being the expected period over which the websites are expected to generate economic benefit.
The cost of the CRM system was capitalised in 2019 and is being amortised over 3 years from launch date, being the expected period over which the CRM system is expected to generate economic benefit.
Subsequent to initial recognition, intangible assets are stated at deemed cost less accumulated amortisation and impairment charges, with the exception of indefinite life intangibles.
Impairment of non-financial assets
In respect of goodwill and intangible assets that have an indefinite useful lives, management are required to assess whether the recoverable amount of each exceeds their respective carrying values at the end of each accounting period.
In respect of intangible assets with definite lives, management are required to assess whether the recoverable amount exceeds the carrying value where an indicator of impairment exists at the end of each accounting period.
The recoverable amount is the higher of fair value less costs to sell and value in use.
Impairment losses represent the amount by which the carrying value exceeds the recoverable amount; they are recognised in profit or loss. Impairment losses recognised in respect of cash generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash generating unit and then to reduce the carrying amount of the other assets in the unit on a pro-rata basis. Where an indicator of impairment exists against a definite life asset and a subsequent valuation determines there to be impairment, the intangible asset to which it relates is impaired by the amount determined.
An impairment loss in respect of goodwill is not reversed. In respect of other assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount.
An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.
The master franchise agreement is assessed separately for impairment as an independent asset that generates cash inflows that are largely independent of those from other assets.
Investment in subsidiaries
Investments in subsidiaries are stated in the Parent Company's balance sheet at cost less any provisions for impairments.
Property, plant and equipment
Items of property, plant and equipment are stated at cost of acquisition less accumulated depreciation and impairment losses. Depreciation is charged so as to write-off the cost of assets over their estimated useful lives on the following bases:
Fixtures, fittings and office equipment | 15% reducing balance |
Computer equipment | over 3 years |
Short leasehold improvements | over the lease term |
Right-of-use assets
Right of use assets relate to operating leases that have been brought onto the balance sheet under IFRS 16. They are initially measured at the amount of the lease liability, reduced for any lease incentives received, and increased for:
• lease payments made at or before commencement of the lease;
• initial direct costs incurred; and
• the amount of any provision recognised where the group is contractually required to dismantle, remove or restore the leased asset
Subsequent to initial measurement right-of-use assets are amortised on a straight-line basis over the remaining term of the lease or over the remaining economic life of the asset if, rarely, this is judged to be shorter than the lease term.
Lease liabilities
Lease liabilities are measured at the present value of the contractual payments due to the lessor over the lease term, with the discount rate determined by reference to the rate inherent in the lease unless (as is typically the case) this is not readily determinable, in which case the Group's incremental borrowing rate on commencement of the lease is used. Variable lease payments are only included in the measurement of the lease liability if they depend on an index or rate. In such cases, the initial measurement of the lease liability assumes the variable element will remain unchanged throughout the lease term. Other variable lease payments are expensed in the period to which they relate.
On initial recognition, the carrying value of the lease liability also includes:
• amounts expected to be payable under any residual value guarantee;
• the exercise price of any purchase option granted in favour of the group if it is reasonable certain to assess that option;
• any penalties payable for terminating the lease, if the term of the lease has been estimated on the basis of termination option being exercised.
Subsequent to initial measurement lease liabilities increase as a result of interest charged at a constant rate on the balance outstanding and are reduced for lease payments made.
Prepaid assisted acquisitions support
Prepaid assisted acquisitions support represents amounts payable to franchisees in relation to their acquisition of qualifying managed property portfolios and amounts payable to brokers for assisting with the acquisition of those portfolios. The payments are recognised as an asset and amortised to the profit and loss account over 5 years. The amounts payable to franchisees are amortised as a reduction in revenue, whereas amounts payable to brokers are amortised through cost of sales.
Income taxes
Income tax currently payable is calculated using the tax rates in force or substantively enacted at the reporting date. Taxable profit differs from accounting profit either because some income and expenses are never taxable or deductible, or because the time pattern that they are taxable or deductible differs between tax law and their accounting treatment.
The tax expense for the period comprises current and deferred tax. Tax is recognised in profit or loss, except if it arises from transactions or events that are recognised in other comprehensive income or directly in equity.
Deferred tax
Deferred income taxes are calculated using the liability method on temporary differences, at the tax rate that is substantively enacted at the balance sheet date. Deferred tax is generally provided on the difference between the carrying amount of assets and liabilities and their tax bases. However, deferred tax is not provided on the initial recognition of goodwill, nor on the initial recognition of an asset or liability unless the related transaction is a business combination or affects tax or accounting profit. Tax losses available to be carried forward as well as other income tax credits to the Group are assessed for recognition as deferred tax assets.
Deferred tax liabilities are provided in full, with no discounting. Deferred tax assets are recognised to the extent that it is probable that the underlying deductible temporary differences will be able to be offset against future taxable income. Current and deferred tax assets and liabilities are calculated at tax rates that are expected to apply to their respective period of realisation, provided they are enacted or substantively enacted at the balance sheet date. Changes in deferred tax assets or liabilities are recognised as a component of tax expense in the income statement. For share-based payments the deferred tax credit is recognised in the income statement to the extent that it offsets the share-based charge, with any remaining element after offset being shown in the statement of changes in equity.
Cash and cash equivalents
Cash and cash equivalents are defined as cash balances in hand and in the bank (including short-term cash deposits).
Financial assets
The Group and Company only have financial assets comprising trade and other receivables and cash and cash equivalents in the Consolidated Statement of Financial Position.
These assets arise principally from the provision of goods and services to customers (eg. trade receivables), but also incorporate other types of financial assets where the objective is to hold these assets in order to collect contractual cash flows and the contractual cash flows are solely payments of principal and interest. They are initially recognised at fair value plus transaction costs that are directly attributable to their acquisition or issue, and are subsequently carried at amortised cost using the effective interest rate method, less provision. for impairment.
Impairment of financial assets
Impairment provisions for current and non-current trade receivables are recognised based on the simplified approach within IFRS 9 using a provision matrix in the determination of the lifetime expected credit losses. During this process the probability of the non-payment of the trade receivables is assessed. This probability is then multiplied by the amount of the expected loss arising from default to determine the lifetime expected credit loss for the trade receivables. For trade receivables, which are reported net, such provisions are recorded in a separate provision account with the loss being recognised within administrative expenses in the consolidated statement of comprehensive income. On confirmation that the trade receivable will not be collectable, the gross carrying value of the asset is written off against the associated provision.
Impairment provisions for receivables from related parties and loans to related parties are recognised based on a forward looking expected credit loss model. The methodology used to determine the amount of the provision is based on whether there has been a significant increase in credit risk since initial recognition of the financial asset. For those where the credit risk has not increased significantly since initial recognition of the financial asset, 12 month expected credit losses along with gross interest income are recognised. For those for which credit risk has increased significantly, lifetime expected credit losses along with the gross interest income are recognised. For those that are determined to be credit impaired, lifetime expected credit losses along with interest income on a net basis are recognised.
Financial liabilities
Financial liabilities are comprised of trade and other payables, borrowings and other short-term monetary liabilities, which are recognised at amortised cost.
Trade payables, other payables and other short-term monetary liabilities, are initially recognised at fair value and subsequently carried at amortised cost using the effective interest method.
Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently carried at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method.
Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw-down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a pre-payment for liquidity services and amortised over the period of the facility to which it relates.
Share-based payments
The Company issues equity-settled share-based payments to employees. Equity-settled share-based payments are measured at fair value at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments are amortised through the Consolidated Statement of Comprehensive Income over the vesting period of the options, together with a corresponding increase in equity, based upon the Company's estimate of the shares that will eventually vest.
Fair value is measured using the Black-Scholes option pricing model taking into account the following inputs:
· the exercise price of the option;
· the life of the option;
· the market price on the date of the grant of the option;
· the expected volatility of the share price;
· the dividends expected on the shares; and
· the risk free interest rate for the life of the option.
The expected life used in the model has been adjusted, based on management's best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations.
At the end of each reporting period, the Group revises its estimates of the number of options that are expected to vest based on the non-market conditions and recognises the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity.
5. Critical accounting estimates and judgements and key sources of estimation uncertainty
The Company makes certain estimates and assumptions regarding the future. Estimates and judgements are continually evaluated based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. In the future, actual experience may differ from these estimates and assumptions. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.
Impairment of intangible assets
The Group is required to test, where indicators of impairment exist or there are intangible assets with indefinite lives, whether intangible assets have suffered any impairment. The recoverable amount is determined based on value in use calculations. The use of this method requires the estimation of future cash flows and the choice of a discount rate in order to calculate the present value of the cash flows. Key assumptions for the value in use calculation are described in note 15.
Share-based payment charge ("SBPC")
The aggregate fair value expense of each grant is determined through using the Black-Scholes model detailed above and an estimate for the attainment of the non-market based performance conditions in FY20, FY21 and FY22. The estimate of earnings per share ("EPS"), the non-market based performance measure, in FY20 was based on actual financial performance, FY21 was based on budget and FY22 relies on a projection of earnings taking into account available market data and performance trends.
At this juncture 68% of the options based on FY21 performance are expected to vest and 65% of the options based on the FY22 performance are expected to vest.
6. Segmental reporting
Following the acquisition of a majority share in Auxilium Partnership Limited on 7 January 2020 the directors consider there now to be two operating segments, being Property Franchising and Other.
For the year ended 31 December 2020:
|
|
| Property Franchising |
|
Other |
|
Total | ||
|
|
| £ |
| £ |
| £ | ||
Revenue |
|
| 11,016,921 |
| 447,574 |
| 11,464,495 | ||
Segment profit before tax |
|
| 4,766,843 |
| 38,026 |
| 4,804,869 | ||
For the year ended 31 December 2019:
|
|
| Property Franchising |
|
Other |
|
Total | |
|
|
| £ |
| £ |
| £ | |
Revenue |
|
| 11,350,327 |
| - |
| 11,350,327 | |
Segment profit before tax |
|
| 3,994,194 |
| - |
| 3,994,194 | |
The Other segment related to Financial Services. There was no inter-segment revenue in any period.
7. Revenue
| 2020 £ | 2019 £ |
Property Franchising segment:
Management Service Fees | 9,364,702 | 9,661,737 |
Franchise sales | 145,068 | 194,702 |
Other | 1,507,151 | 1,493,888 |
| 11,016,921 | 11,350,327 |
Other segment: |
|
|
Financial Services commissions | 447,574 | - |
| 11,464,495 | 11,350,327 |
All revenue is earned in the UK and no customer represents greater than 10% of total revenue in either of the years reported.
Other revenue relates to ad hoc services and ongoing support to franchisees.
See note 20 for details of accrued income and note 24 for details of deferred income.
See note 18 for the value of prepaid assisted acquisitions support amortised as a deduction from Management Service Fees.
8. Administrative expenses
Administrative expenses relate to those expenses that are not directly attributable to any specific sales activity.
Administrative expenses for the year were as follows:
| 2020 £ | 2019 £ |
Employee costs (see note 9) | 3,737,457 | 3,097,124 |
Marketing and digital costs | 334,459 | 571,931 |
Property costs | 130,271 | 129,082 |
General administrative costs | 817,943 | 1,355,551 |
Amortisation | 646,345 | 666,589 |
| 5,666,475 | 5,820,277 |
9. Employees and Directors
Average numbers of employees (including Directors), employed during the year:
| Group | Company | ||
| 2020 | 2019 | 2020 | 2019 |
Administration | 41 | 39 | - | - |
Management | 10 | 9 | 2 | 2 |
| 51 | 48 | 2 | 2 |
Employee costs (including Directors) during the year amounted to:
| Group | Company | ||
| 2020 £ | 2019 £ | 2020 £ | 2019 £ |
Wages and salaries | 3,267,477 | 2,711,683 | 580,482 | 554,213 |
Social security costs | 398,013 | 328,693 | 66,863 | 62,245 |
Pension costs | 71,967 | 56,748 | 15,166 | 10,544 |
| 3,737,457 | 3,097,124 | 662,511 | 627,002 |
Share-based payments charge | 68,023 | 441,709 | 84,960 | 345,931 |
Key management personnel are defined as Directors and executives of the Group. Details of the remuneration of the key management personnel are shown below:
| 2020 £ | 2019 £ |
Wages and salaries | 1,953,378 | 1,497,467 |
Social security costs | 251,191 | 193,729 |
Pension costs | 42,625 | 30,513 |
| 2,247,194 | 1,721,709 |
Share-based payments charge | 71,954 | 402,498 |
Details of the Directors' emoluments are disclosed in the Directors' remuneration report on pages 42 to 44. The share-based payments charge for the current year has been charged to the Statement of Comprehensive Income, of this £85,451 (2019: £340,697) relates to Directors.
10. Operating profit
| 2020 £ | 2019 £ |
The operating profit is stated after charging: |
|
|
Depreciation | 28,284 | 33,989 |
Amortisation - intangibles | 590,546 | 611,820 |
Amortisation - prepaid assisted acquisitions support | 213,030 | 174,149 |
Amortisation - leases | 55,799 | 54,769 |
Share-based payments charge | 68,023 | 441,709 |
Auditor's remuneration (see below) | 58,000 | 50,000 |
Staff costs (note 9) | 3,737,457 | 3,097,124 |
|
|
|
Audit services |
|
|
- Audit of the Company and consolidated accounts | 58,000 | 50,000 |
|
|
|
| 58,000 | 50,000 |
|
|
|
|
|
|
11. Finance income and costs
| 2020 £ | 2019 £ |
Finance income: |
|
|
Bank interest | 6,227 | 5,696 |
Other similar income | 4,474 | 5,316 |
| 10,701 | 11,012 |
| 2020 £ | 2019 £ |
Finance costs: |
|
|
Bank interest | - | 35,320 |
Interest expense on lease liabilities | 3,328 | 2,990 |
|
|
|
| 3,328 | 38,310 |
12. Taxation
| 2020 £ | 2019 £ |
Current tax | 1,035,649 | 943,765 |
Adjustments in respect of previous periods | 3,141 | (31,329) |
Current tax total | 1,038,790 | 912,436 |
Deferred tax credit on acquired business combinations | (12,759) | (75,557) |
Deferred tax credit on share-based payments | (12,924) | (75,091) |
Deferred tax total | (25,683) | (150,648) |
Total tax charge in statement of comprehensive income | 1,013,107 | 761,788 |
The tax assessed for the period is higher (2019: higher) than the standard rate of corporation tax in the UK. The difference is explained below.
| 2020 £ | 2019 £ |
Profit on ordinary activities before tax | 4,804,869 | 3,994,194 |
Profit on ordinary activities multiplied by the effective standard rate of corporation tax in the UK of 19% | 912,925 | 758,897 |
Effects of: |
|
|
Expenses not deductible for tax purposes | 2,053 | 10,344 |
Depreciation in excess of capital allowances | 12,420 | 23,876 |
Effect of change in deferred tax rate from 17% to 19% | 82,568 | - |
Adjustments in respect of previous periods | 3,141 | (31,329) |
Total tax charge in respect of continuing activities | 1,013,107 | 761,788 |
13. Earnings per share
Earnings per share is calculated by dividing the profit for the financial year by the weighted average number of shares during the year.
| 2020 £ | 2019 £ |
|
|
|
Profit for the financial year attributable to owners of the parent | 3,782,568 | 3,232,406 |
Amortisation on acquired intangibles | 498,441 | 498,441 |
Share-based payments charge | 68,023 | 441,709 |
|
|
|
Adjusted profit for the financial year | 4,349,032 | 4,172,556 |
Weighted average number of shares |
|
|
Number used in basic earnings per share | 25,822,750 | 25,822,750 |
Dilutive effect of share options on ordinary shares | 519,817 | 870,179 |
Number used in diluted earnings per share | 26,342,567 | 26,692,929 |
|
|
|
Basic earnings per share | 14.6p | 12.5p |
Diluted earnings per share | 14.4p | 12.1p |
Adjusted basic earnings per share | 16.8p | 16.2p |
Adjusted diluted earnings per share | 16.5p | 15.6p |
There were options over 2,379,800 ordinary shares outstanding at 31 December 2020; 300,000 had not yet vested and have performance conditions which will determine whether they vest or not in the future; 64,800 vested in a previous year and were exercisable at 31 December 2020, and it can be determined that 503,750 of the remaining 2,015,000 options (25%) will vest based on these financial statements. The average share price during the year ended 31 December 2020 was above exercise price of the options that had either vested or were due to vest based on these financial statements. For these reasons in 2020 there is a dilutive effect of share options on the earnings per share calculation.
In 2019 there were options over 2,209,800 ordinary shares outstanding at 31 December 2019; 2,145,000 had not yet vested and had performance conditions which would determine whether they vest or not in the future. The remaining option over 64,800 ordinary shares was exercisable at 31 December 2019 and the average share price during the year ended 31 December 2019 was above the exercise price. For these reasons in 2019 there is a dilutive effect of share options on the earnings per share calculation.
The charge relating to share-based payments that have a dilutive effect is immaterial and therefore the earnings used in the diluted earnings per ordinary share calculation are the earning per ordinary share calculation before dilution.
14. Dividends
| 2020 £ | 2019 £ |
Final dividend for 2019 |
|
|
No dividend paid (2019: 6.0p per share paid 28 May 2019) | - | 1,549,365 |
Interim dividend for 2020 |
|
|
2.1p per share paid 23 September 2020 (2019: 2.6p per share paid 1 October 2019) | 542,278 | 671,392 |
Total dividend paid | 542,278 | 2,220,757 |
A dividend of 6.6p per share was paid in lieu of a final dividend for 2020 on 23 February 2021, the total amount paid was £1,704,302.
15. Intangible assets
| Master Franchise Agreement £ | Brands £ | Technology £ | Customer lists £ | Goodwill £ | Total £ |
Cost |
|
|
|
|
|
|
Brought forward 1 January 2019 | 7,803,436 | 1,972,239 | 274,210 | 214,940 | 7,226,160 | 17,490,985 |
Additions | - | - | 63,467 | 10,000 | - | 73,467 |
Carried forward 31 December 2019 | 7,803,436 | 1,972,239 | 337,677 | 224,940 | 7,226,160 | 17,564,452 |
Additions (note 29) | - | - | - | - | 184,426 | 184,426 |
Carried forward 31 December 2020 | 7,803,436 | 1,972,239 | 337,677 | 224,940 | 7,410,586 | 17,748,878 |
Amortisation & Impairment |
|
|
|
|
|
|
Brought forward at 1 January 2019 | 1,738,702 | 155,694 | 128,155 | 143,679 | - | 2,166,230 |
Charge for year | 413,174 | 66,726 | 109,642 | 22,278 | - | 611,820 |
Carried forward 31 December 2019 | 2,151,876 | 222,420 | 237,797 | 165,957 | - | 2,778,050 |
Charge for year | 413,174 | 66,726 | 75,810 | 34,836 | - | 590,546 |
Carried forward 31 December 2020 | 2,565,050 | 289,146 | 313,607 | 200,793 | - | 3,368,596 |
Net book value |
|
|
|
|
|
|
At 31 December 2020 | 5,238,386 | 1,683,093 | 24,070 | 24,147 | 7,410,586 | 14,380,282 |
At 31 December 2019 | 5,651,560 | 1,749,819 | 99,880 | 58,983 | 7,226,160 | 14,786,402 |
The carrying amount of goodwill relates to 5 (2019: 4) cash generating units and reflects the difference between the fair value of consideration transferred and the fair value of assets and liabilities purchased.
Business combinations completed in October 2014
Goodwill is assessed for impairment by comparing the carrying value to the value in use calculations. The value in use of the goodwill arising on the acquisitions of Xperience Franchising Limited ("XFL") and Whitegates Estate Agency Limited ("WEAL") is based on the cash flows derived from the actual revenues and operating margins for 2020 and projections through to 31 December 2022. Thereafter projected revenue growth was assumed to decline linearly to a long-term growth rate of 2.2%.
The cash flows arising were discounted by the weighted average cost of capital which included a small companies' risk premium to allow for factors such as illiquidity in the shares. These discount rates were 13.5% for XFL and 15.0% for WEAL, the latter higher rate reflecting WEAL's smaller size and more volatile earnings. This resulted in a total value for each company of the identifiable intangible assets that exceeded the carrying values of the respective companies' goodwill.
The Directors do not consider goodwill to be impaired. The Directors believe that no reasonably possible change in assumptions at the year end will cause the value in use to fall below the carrying value and hence impair the goodwill.
The master franchise agreements are being amortised over 25 years. The period of amortisation remaining at 31 December 2020 was 18 years 10 months.
The brand names under which XFL trades of C J Hole, Parkers and Ellis & Co have been in existence for between 72 years and 170 years. Management see them as strong brands with significant future value and has deemed them to have indefinite useful lives as there is no foreseeable limit to the period over which the assets are expected to generate net cash inflows for the Group. As a consequence, management annually assess whether the carrying value of these brands have been impaired.
The Relief-from-Royalty-Method was used to value the brand names. Looking at independent research of royalty rates, management selected pre-tax royalty rates of between 3% and 5% for the above brand names.
The after tax royalty rates were then applied to the projected cash flows of each brand. The projected cash flows being the forecast growth in current revenues using market data through to 31 December 2022. Thereafter projected revenue growth was assumed to decline linearly to a long-term growth rate of 2.2%. The after tax cash flows determined through this process were then discounted at 13.5% to determine a value for each brand name. This discount rate approximated the Company's WACC as the risk profile of the brand names was seen as commensurate with that of the overall Company. The values derived exceeded their carrying values.
The Directors believe that no reasonably possible change in assumptions at the year end will cause the value in use of the brands names CJ Hole, Parkers and Ellis & Co to fall below their carrying values and hence impair their intangible values.
The Whitegates brand was valued in a similar manner and deemed to have an immaterial value when the acquisition was made principally due to its lack of profitability over preceding years. It is therefore not recognised separately.
Business combination completed in September 2016
Goodwill is assessed for impairment by comparing the carrying value to the value in use calculations. The value in use of the goodwill arising on the acquisition of EweMove Sales & Lettings Ltd ("ESL") is based on the cash flows derived from the actual revenues and operating margins for 2020 and projections through to 31 December 2025. Thereafter projected revenue growth was assumed to be 2.2% per annum.
A period of projected cash flows exceeding 5 years was deemed appropriate because the business has only been operating for 7 years, is continuing to recruit relatively high levels of new franchisees, each new franchisee should grow significantly in the first 5 years of operation and it has yet to develop the operational efficiencies of a mature franchisor.
The revenue growth rates used in the valuation range from 28% in FY21 to 4% in FY25.The growth rate in FY21 is high because revenue was lower in FY20 as a result of Covid-19.
The cash flows arising were discounted by the weighted average cost of capital being 15,35% which included a small companies' risk premium to allow for factors such as illiquidity in the shares. This resulted in the value in use exceeding the carrying value of the goodwill and separately identifiable intangible assets. The enterprise's overall value exceeds the cash generating unit's carrying value.
The useful life of the master franchise agreement was assessed as 15 years and remains unchanged. The period of amortisation remaining at 31 December 2020 was 10 years 8 months.
The remaining useful life of the brand name was also reviewed. It continues to attract and recruit the same level of franchisees as in previous years and to attract higher numbers of customers. Given these 2 factors the remaining useful life of the brand was considered to be unaltered at 21 years. The period of amortisation remaining at 31 December 2020 was 16 years and 8 months.
The carrying value of EweMove the identified cash generating unit, was £9.1m at 31 December 2020 whereas the recoverable amount was assessed to be £11.5m at the same date. Headroom of £2.4m therefore existed at the year end.
The following table reflects the level of movements required in revenue or costs which could result in a potential impairment per the value in use calculation of goodwill. A further percentage (fall)/increase, of the magnitude indicated in the table below, in any one of the key assumptions set out above would result in a removal of the headroom in the value in use calculation for goodwill in 2020. Thus, if the discount rate increased by 24% to 19%, an impairment change would result against goodwill, all other assumptions remaining unchanged.
Assumption | Judgement | Sensitivity |
Discount rate | As indicated above the rate used is 15.35% | 24% |
Revenue - FY21 to FY25 | The range of growth rates for FY21 to FY25 are stated above | (60%) |
Direct costs - all years | Assumed to be 23% of revenue for all years | 36% |
Indirect costs - all years | Assumed to be 45% of revenue in FY21 and then decline linearly to 38% of revenue in FY24 onwards | 23% |
Direct and indirect costs - all years | As indicated above for direct and indirect costs | 14% |
Business combination completed in January 2020
Details of the Acquisition of Auxilium Partnership Limited can be found in note 29.
Goodwill and indefinite life intangible assets have been allocated for impairment testing purposes to the following cash generating units.
The carrying values are as follows:
| Goodwill | Brands | ||
| 2020 £ | 2019 £ | 2020 £ | 2019 £ |
Xperience Franchising Limited | 912,716 | 912,716 | 571,000 | 571,000 |
Whitegates Estate Agency Limited | 400,501 | 400,501 | - | - |
Martin & Co (UK) Limited | 75,000 | 75,000 | - | - |
EweMove Sales & Lettings Ltd | 5,837,943 | 5,837,943 | - | - |
Auxilium Partnership Limited | 184,426 | - | - | - |
| 7,410,586 | 7,226,160 | 571,000 | 571,000 |
Website costs included in technology
In 2017 new websites were launched for each of the 5 traditional brands. The costs associated with these websites have been capitalised as intangible assets as the purpose of the websites is to generate leads and revenue for the network.
Company
No goodwill or customer lists exist in the Parent Company.
16. Property, plant and equipment
Group
| Short leasehold improvements £ | Office equipment £ | Fixtures & fittings £ | Total £ |
Cost |
|
|
|
|
Brought forward 1 January 2019 | 37,034 | 130,340 | 161,107 | 328,481 |
Additions | - | 7,380 | 580 | 7,960 |
Carried forward 31 December 2019 | 37,034 | 137,720 | 161,687 | 336,441 |
Acquisitions | - | 1,613 | 1,082 | 2,695 |
Additions | - | 14,564 | - | 14,564 |
Carried forward 31 December 2020 | 37,034 | 153,897 | 162,769 | 353,700 |
Depreciation |
|
|
|
|
Brought forward 1 January 2019 | 25,575 | 71,383 | 127,939 | 224,897 |
Charge for year | 3,703 | 20,688 | 9,598 | 33,989 |
Carried forward 31 December 2019 | 29,278 | 92,071 | 137,537 | 258,886 |
Charge for year | 3,702 | 19,774 | 4,808 | 28,284 |
Carried forward 31 December 2020 | 32,980 | 111,845 | 142,345 | 287,170 |
Net book value |
|
|
|
|
At 31 December 2020 | 4,054 | 42,052 | 20,424 | 66,530 |
At 31 December 2019 | 7,756 | 45,649 | 24,150 | 77,555 |
17. Leases
The Group's has operating leases for its office premises in Bournemouth and Cleckheaton. Under IFRS16, which was adopted on 1 January 2019 these operating leases are accounted for by recognising a right-of-use asset and a lease liability,
Right-of-use assets
|
| Land and Buildings £ | Total £ |
At 1 January 2019 |
| 74,523 | 74,523 |
Additions |
| 54,826 | 54,826 |
Amortisation |
| (54,769) | (54,769) |
Carried forward 31 December 2019 |
| 74,580 | 74,580 |
Additions |
| 67,021 | 67,021 |
Amortisation |
| (55,799) | (55,799) |
Carried forward 31 December 2020 |
| 85,802 | 85,802 |
Lease liabilities
|
| Land and Buildings £ | Total £ |
At 1 January 2019 |
| 79,456 | 79,456 |
Additions |
| 54,133 | 54,133 |
Interest expenses |
| 2,990 | 2,990 |
Lease payments |
| (58,830) | (58,830) |
Carried forward 31 December 2019 |
| 77,749 | 77,749 |
Additions |
| 67,021 | 67,021 |
Interest expenses |
| 3,328 | 3,328 |
Lease payments |
| (61,567) | (61,567) |
Carried forward 31 December 2020 |
| 86,531 | 86,531 |
Maturity analysis of lease liabilities as at 31 December 2020:
| Up to 3 months | Between 3 and 12 months | Between 1 and 2 years | Between 2 and 5 years |
| £ | £
| £
| £ |
Lease liabilities |
10,271 | 30,814 | 29,556 |
15,890 |
18. Prepaid assisted acquisitions support
Group
|
|
|
| Total £ |
Cost |
|
|
|
|
Brought forward 1 January 2019 |
|
|
| 575,877 |
Additions |
|
|
| 386,332 |
Disposals |
|
|
| (8,071) |
Carried forward 31 December 2019 |
|
|
| 954,138 |
Additions |
|
|
| 155,034 |
Carried forward 31 December 2020 |
|
|
| 1,109,172 |
Amortisation |
|
|
|
|
Brought forward 1 January 2019 |
|
|
| 122,041 |
Charge for year - to revenue |
|
|
| 119,457 |
Charge for year - to cost of sales |
|
|
| 54,692 |
Carried forward 31 December 2019 |
|
|
| 296,190 |
Charge for year - to revenue |
|
|
| 168,510 |
Charge for year - to cost of sales |
|
|
| 44,520 |
Carried forward 31 December 2020 |
|
|
| 509,220 |
Net book value |
|
|
|
|
At 31 December 2020 |
|
|
| 599,952 |
At 31 December 2019 |
|
|
| 657,948 |
Cashback and broker's commission is presented as prepaid assisted acquisitions support
The additions represent sums provided to franchisees that have made qualifying acquisitions to grow their lettings' portfolios. The cashback sum provided is based on a calculation of the estimated increase in MSF as a result of the acquisition and the sum provided for broker's commission is based on the charge payable to the broker. In providing these sums the Group ensures that franchisees are contractually bound to the relevant franchisor for a period in excess of that required for the economic benefits to exceed the sums provided.
Company
No prepaid assisted acquisitions support exists in the Parent Company.
19. Investments
Company
| Shares in Group undertakings £ |
Cost |
|
At 1 January 2019 | 33,803,886 |
Capital contribution to subsidiaries - share options | 95,778 |
At 31 December 2019 | 33,899,664 |
Acquisition of Auxilium Partnership Limited | 200,000 |
Capital contribution to subsidiaries - share options | (16,667) |
At 31 December 2020 | 34,082,997 |
Net book value |
|
At 31 December 2020 | 34,082,997 |
At 31 December 2019 | 33,899,664 |
The Property Franchise Group PLC was incorporated on 7 October 2013. On the 10 December 2013 a share for share exchange acquisition took place with Martin & Co (UK) Limited; 17,990,000 ordinary shares in The Property Franchise Group PLC were exchanged for 100% of the issued share capital in Martin & Co (UK) Limited.
On 31 October 2014 the Company acquired the entire issued share capital of Xperience Franchising Limited and Whitegates Estate Agency Limited for a consideration of £6,110,284.
On 5 September 2016 the Company acquired the entire issued share capital of EweMove Sales & Lettings Ltd, and its dormant subsidiary Ewesheep Ltd, for an initial consideration of £8m. Of the total consideration, £2.1m represented contingent consideration, of which £0.5m was paid out on 30 July 2017 and £0.5m was paid out on 31 December 2017. No further sums are due.
On 7 January 2020 the Company acquired the entire issued share capital of Auxilium Partnership Limited for a total cash consideration of £0.2m.
Martin & Co (UK) Limited, Xperience Franchising Limited, Whitegates Estate Agency Limited, EweMove Sales & Lettings Ltd and Ewesheep Ltd are exempt from the requirements of the Companies Act 2006 relating to the audit of accounts under section 479A of the Companies Act 2006.
At the year-end The Property Franchise Group PLC has guaranteed all liabilities of Martin & Co (UK) Limited, Xperience Franchising Limited, Whitegates Estate Agency Limited and EweMove Sales & Lettings Ltd. The value of the contingent liability resulting from this guarantee is unknown at the year-end.
The carrying value of the investment in EweMove has been considered for impairment through value in use calculations and it was determined that no impairment was required in the year ended 31 December 2020.
The carrying values of the other investments (all companies except for EweMove) have been considered for impairment and it has been determined that the value of the discounted future cash inflows exceeds the carrying value. Thus, there is no impairment charge.
The Company's investments at the balance sheet date in the share capital of companies include the following, which all have their registered offices at the same address as the Company:
Subsidiaries
| Share class | % ownership and voting rights | Country of incorporation |
Martin & Co (UK) Limited | Ordinary | 100 | England |
Xperience Franchising Limited | Ordinary | 100 | England |
Whitegates Estate Agency Limited | Ordinary | 100 | England |
EweMove Sales & Lettings Ltd | Ordinary | 100 | England |
Ewesheep Ltd* | Ordinary | 100 | England |
MartinCo Limited | Ordinary | 100 | England |
Aux Group Limited | Ordinary | 85 | England |
Auxilium Partnership Limited* | Ordinary | 72 | England |
* indirectly owned
20. Trade and other receivables
| Group | Company | ||
| 2020 £ | 2019 £ | 2020 £ | 2019 £ |
Trade receivables | 212,262 | 233,601 | 3,192 | 2,172 |
Less: provision for impairment of trade receivables | (155,668) | (153,814) | - | - |
Trade receivables - net of impairment provisions | 56,594 | 79,787 | 3,192 | 2,172 |
Loans to franchisees | 49,058 | 78,411 | - | - |
Other receivables | 5,287 | 202,607 | 137 | 200,137 |
Amounts due from Group undertakings | - | - | 45,413 | - |
Prepayments and accrued income | 1,181,610 | 1,122,204 | 34,979 | 29,609 |
Tax receivable | - | - | 137,404 | 189,985 |
| 1,292,549 | 1,483,009 | 221,125 | 421,903 |
The Group applies the IFRS 9 simplified approach to measuring expected credit losses using a lifetime expected credit loss provision for trade receivables. To measure expected credit losses on a collective basis, trade receivables are grouped based on similar credit risk and aging. The expected loss rates are based on the Group's historical credit losses experienced over the previous year. Forward looking factors are considered to the extent that they are deemed material.
The Group is entitled to the revenue by virtue of the terms in the franchise agreements and can force the sale of a franchise to recover a debt if necessary.
Ageing of trade receivables
The following is an analysis of trade receivables that are past due date but not impaired. These relate to a number of customers for whom there is no recent history of defaults. The ageing analysis of these trade receivables is as follows:
| 2020 £ | 2019 £ |
Group |
|
|
Not more than 3 months | 31.834 | 33,634 |
More than 3 months but not more than 6 months | - | - |
More than 6 months but not more than 1 year | - | - |
| 31,834 | 33,634 |
The Directors consider that the carrying value of trade and other receivables represents their fair value.
The Group does not hold any collateral as security for its trade and other receivables.
Included within "Prepayments and accrued income" is accrued income of £841k (2019: £704k) in relation to Management Service Fees for some of our brands that are invoiced at the beginning of the month following the month to which they relate and EweMove license fees.
21. Called up share capital
| 2020 | 2019 | ||
| Number | £ | Number | £ |
Group |
|
|
|
|
Authorised, allotted issued and fully paid ordinary shares of 1p each | 25,822,750 | 258,228 | 25,822,750 | 258,228 |
Company |
|
|
|
|
Authorised, allotted issued and fully paid ordinary shares of 1p each | 25,822,750 | 258,228 | 25,822,750 | 258,228 |
22. Share premium
| Number of shares | Share capital £ | Share premium £ |
At 31 December 2019 and 31 December 2020 | 25,822,750 | 258,228 | 4,039,800 |
23. Other reserves
| Merger reserve £ | Share-based payment reserve £ | Other reserve
£ | Total £ |
Group |
|
|
|
|
1 January 2019 | 2,796,984 | 186,877 | - | 2,983,861 |
Share-based payment charge | - | 441,709 | - | 441,709 |
Deferred tax on share-based payments | - | - | 81,322 | 81,322 |
1 January 2020 | 2,796,984 | 628,586 | 81,322 | 3,506,892 |
Share-based payment charge | - | 68,023 | - | 68,023 |
Deferred tax on share-based payments | - | - | - | - |
31 December 2020 | 2,796,984 | 696,609 | 81,322 | 3,574,915 |
Company |
|
|
|
|
1 January 2019 | 20,786,884 | 186,877 | - | 20,973,761 |
Share-based payment charge | - | 441,709 | - | 441,709 |
Deferred tax on share-based payments | - | - | 81,322 | 81,322 |
1 January 2020 | 20,786,884 | 628,586 | 81,322 | 21,496,792 |
Share-based payment charge | - | 68,023 | - | 68,023 |
Deferred tax on share-based payments | - | - | - | - |
31 December 2020 | 20,786,884 | 696,609 | 81,322 | 21,564,815 |
Merger reserve
Acquisition of Martin & Co (UK) Limited
The acquisition of Martin & Co (UK) Limited by The Property Franchise Group PLC did not meet the definition of a business combination and therefore, falls outside of the scope of IFRS 3. This transaction was in 2013 and accounted for in accordance with the principles of merger accounting.
The consideration paid to the shareholders of the subsidiary was £17,990,000 (the value of the investment). As these shares had a nominal value of £179,900, the merger reserve in the Company is £17,810,000.
On consolidation the investment value of £17,990,000 is eliminated so that the nominal value of the shares remaining is £179,900 and, as there is a difference between the Company value of the investment and the nominal value of the shares purchased in the subsidiary of £100, this is also eliminated, to generate a merger reserve in the Group of £179,800.
Acquisition of EweMove Sales & Lettings Ltd
The consideration for the acquisition of EweMove Sales & Lettings Ltd included the issue of 2,321,550 shares to the vendors at market price. A merger reserve of £2,796,984 is recognised in the Group and the Company being the difference between the value of the consideration and the nominal value of the shares issued as consideration.
Share-based payment reserve
The share-based payments reserve comprises charges made to the income statement in respect of share-based payments and related deferred tax impacts under the Group's equity compensation scheme.
24. Trade and other payables
| Group | Company | ||
| 2020 £ | 2019 £ | 2020 £ | 2019 £ |
Trade payables | 176,389 | 741,576 | 36,870 | 38,659 |
Other taxes and social security | 1,274,002 | 575,600 | - | - |
Other payables | 248,229 | 118,546 | - | - |
Accruals and deferred income | 1,051,728 | 564,453 | 109,971 | 22,839 |
|
|
|
|
|
| 2,750,348 | 2,000,175 | 146,841 | 175,487 |
The Directors consider that the carrying value of trade and other payables approximates their fair value.
Included in "Accruals and deferred income" is deferred income of £nil (2019: £7k) in relation to charges levied on franchisees in advance and EweMove licence fees.
25. Deferred tax
| Group | Company | ||
| 2020 £ | 2019 £ | 2020 £ | 2019 £ |
Balance at beginning of year | (1,140,227) | (1,372,196) | 215,293 | 30,101 |
Movement during the year: |
|
|
|
|
Statement of changes in equity | - | 81,322 | - | 81,322 |
Statement of comprehensive income | 25,683 | 150,647 | 12,924 | 75,091 |
Other | - | - | - | 28,779 |
Balance at end of year | (1,114,544) | (1,140,227) | 228,217 | 215,293 |
Deferred taxation has been provided as follows:
| Group | Company | ||
| 2020 £ | 2019 £ | 2020 £ | 2019 £ |
Accelerated capital allowances | 6,951 | (18,956) | 28,779 | 28,779 |
Share-based payments | 199,438 | 186,514 | 199,438 | 186,514 |
Acquired business combinations | (1,320,933) | (1,307,785) | - | - |
| (1,114,544) | (1,140,227) | 228,217 | 215,293 |
26. Financial instruments
Financial instruments - risk management
The Group is exposed through its operations to the following financial risks:
· Credit risk
· Liquidity risk
· Interest rate risk
In common with all other businesses, the Group is exposed to risks that arise from its use of financial instruments. This note describes the Group's objectives, policies and processes for managing those risks and the methods used to measure them.
There have been no substantive changes in the Group's exposure to financial instrument risks, its objectives, policies and processes for managing those risks or the methods used to measure them from previous periods unless otherwise stated in this note.
Principal financial instruments
The principal financial instruments used by the Group and Company, from which financial instrument risk arises, are as follows:
· Receivables
· Loans to franchisees
· Cash at bank
· Trade and other payables
· Borrowings
Financial assets
Financial assets measured at amortised cost:
| Group | Company | ||
| 2020 £ | 2019 £ | 2020 £ | 2019 £ |
Loans and receivables: |
|
|
|
|
Trade receivables | 56,594 | 79,787 | 3,192 | 2,172 |
Loans to franchisees | 49,058 | 78,411 | - | - |
Other receivables | 5,287 | 202,607 | 137 | 200,137 |
Cash and cash equivalents | 8,770,884 | 4,011,463 | 4,600,718 | 1,073,774 |
Accrued income | 840,619 | 703,774 | - | - |
Amount owed by Group undertakings | - | - | 45,413 | - |
| 9,722,442 | 5,076,042 | 4,649,460 | 1,276,083 |
Financial liabilities
Financial liabilities measured at amortised cost:
| Group | Company | ||
| 2020 | 2019 | 2020 | 2019 |
Other financial liabilities: |
|
|
|
|
Trade payables | 176,389 | 741,576 | 36,870 | 38,659 |
Other payables | 248,229 | 118,546 | - | - |
Accruals | 1,051,984 | 557,951 | 109,971 | 22,839 |
Amounts owed to Group undertakings | - | - | - | 113,989 |
| 1,476,602 | 1,418,073 | 146,841 | 175,487 |
All of the financial assets and liabilities above are recorded in the statement of financial position at amortised cost.
General objectives, policies and processes
The Board has overall responsibility for the determination of the Group's risk management objectives and policies and, whilst retaining ultimate responsibility for them, it has delegated the authority for designing and operating processes that ensure the effective implementation of the objectives and policies to the finance function. The Board receives monthly reports from the finance function through which it reviews the effectiveness of the processes put in place and the appropriateness of the objectives and policies it sets.
The overall objective of the Board is to set policies that seek to reduce risk as far as possible without unduly affecting the Group's competitiveness and flexibility. Further details regarding these policies are set out below:
Capital management policy
The Board considers capital to be the carrying amount of equity and debt. Its capital objective is to maintain a strong and efficient capital base to support the Group's strategic objectives, provide progressive returns for shareholders and safeguard the Group's status as a going concern. The principal financial risks faced by the Group are liquidity risk and interest rate risk. The Directors review and agree policies for managing each of these risks. These policies remain unchanged from previous years.
The Board monitors a broad range of financial metrics including growth in MSF, operating margin, EBITDA, return on capital employed, and balance sheet gearing.
It manages the capital structure and makes changes in light of changes in economic conditions. In order to maintain or adjust the capital structure, it may adjust the amount of dividends paid to shareholders.
Credit risk
Credit risk is the risk of financial loss to the Group if a franchisee or counterparty to a financial instrument fails to meet its contractual obligations. It is Group policy to assess the credit risk of new franchisees before entering contracts and to obtain credit information during the franchise agreement to highlight potential credit risks.
The highest risk exposure is in relation to loans to franchises and their ability to service their debt. The Directors have established a credit policy under which franchisees are analysed for creditworthiness before a loan is offered. The Group's review includes external ratings, when available, and in some cases bank references. The Group does not consider that it currently has significant concentration of credit risk with loans extended to franchisees of £49k.
Liquidity risk
Liquidity risk arises from the Group's management of working capital and the finance charges and principal repayments on its debt instruments. It is the risk that the Group will encounter difficulty in meeting its financial obligations as they fall due.
In order to maintain liquidity to ensure that sufficient funds are available for ongoing operations and future development, the Group monitors forecast cash inflows and outflows on a monthly basis.
Interest rate risk
The Group's exposure to changes in interest rate risk relates solely to interest earning financial assets as the Group has repaid all it's borrowings in the year.
Fair values of financial instruments
The fair value of financial assets and liabilities is considered the same as the carrying values.
27. Share-based payments
Enterprise Management Incentive ("EMI") Share Option Scheme 2017 and ("EMI") Share Option Scheme 2018
During the year ended 31 December 2017 the Company implemented an Enterprise Management Incentive scheme as part of the remuneration for all staff and granted options over 2,290,000 ordinary shares at an exercise price of £0.01 each.
The options over 2,290,000 ordinary shares were granted to different classes of employees at different times as follows:
1. Executive Directors were granted options over 1,500,000 ordinary shares on 9 June 2017
2. Staff were granted options over 185,000 ordinary shares on 20 July 2017
3. Leadership team recruits in FY17 were granted options over 605,000 ordinary shares on 14 September 2017
During the year ended 31 December 2017 an option was forfeited over 150,000 shares following the departure of an employee. At 31 December 2017 options over 2,140,000 ordinary shares existed.
During the year ended 31 December 2018 options over 175,000 shares were forfeited following the departure of employees. At 31 December 2018 options over 1,965,000 ordinary shares existed.
These options have a vesting condition based on EPS targets for the year ended 31 December 2019. The share-based payment charge recognised in the year ended 31 December 2017 in respect of these options was reversed in the year ended 31 December 2018 because none of these options were expected to vest because performance of the parallel options (see below) was expected to be better.
On 1 August 2018 employees with options in the EMI Share Option Scheme 2017 were granted options in a parallel scheme, over the same number of shares, and with the same EPS target, but these are exercisable 1 year later, after the approval of the financial statements for the year ending 2020. Participants will only be able to exercise one of their options. The total number of parallel options granted was 1,965,000.
On 1 August 2018 new employees who did not have options in the EMI Share Option Scheme 2017 were granted options over 155,000 shares at an exercise price of £0.01 each.
During the year ended 31 December 2020 options over 30,000 shares were forfeited (2019: 170,000) and no options were granted (2019: 95,000).
At 31 December 2020 options over 2,015,000 (2019: 2,045,000) ordinary shares existed.
These options have a vesting condition based on an EPS target for the year ended 31 December 2020.
The weighted average contractual life remaining of these options is 4 months.
Management has used the actual performance for FY20 to determine that 25% options will vest based the achievement of the EPS condition.It is expected that with an exercise price of £0.01 all holders will exercise as soon as the options vest. The Group announced its results on 27 April 2021.
The estimated fair value of the options over 2,015,000 ordinary shares at 31 December 2020 was £308,792. This fair value, moderated for the extent to which the options are expected to vest, is spread as a charge between grant and the assumed vesting date. Accordingly, a share-based payments charge of £6,038 has been recognised in the Statement of Comprehensive Income in the year ended 31 December 2020, which is the cumulative share-based payments charge at 31 December 2020 of £611,410 less the cumulative share-based payments charge recognised at 31 December 2019 of £605,372.
Enterprise Management Incentive ("EMI") Share Option Scheme 2019
On 6 August 2019 a new EMI Share Option Scheme 2019 was introduced and an option over 100,000 ordinary shares at an exercise price of £0.01 each was granted to a director under this scheme.
This option has a vesting condition based on an EPS target for the year ended 31 December 2021.
The weighted average contractual life remaining of this option is 1 year and 4 months.
It is expected that with an exercise price of £0.01, should the EPS condition be met, the holder will exercise as soon as the option vests. The Group announces its results usually within the first 10 days of April. So, it has been assumed that the options will be exercised on 30 April 2022.
Management has used the budget for FY21, the market outlook and projections for FY22 to determine, at 31 December 2020, the achievement of the EPS condition.
The estimated fair value of the option over 100,000 ordinary shares at 31 December 2020 was £102,296. This fair value, moderated for the extent to which the option is expected to vest, is spread as a charge between grant and the assumed vesting date. Accordingly, a share-based payments charge of £29,369 has been recognised in the Statement of Comprehensive Income in the year ended 31 December 2020 being the difference between the cumulative share based payments charge at 31 December 2020 of £52,583 and the cumulative charge recognised at 31 December 2019 of £23,214.
Enterprise Management Incentive ("EMI") Share Option Scheme 2020
On 23 July 2020 a new EMI Share Option Scheme 2020 was introduced and an option over 100,000 ordinary shares each at an exercise price of £0.01 each was granted to two directors under this scheme.
This option has a vesting condition based on two performance conditions; basic earnings per share adjusted for exceptional income/costs and share based payments ("adjusted EPS") and total shareholder return over the 3 years to 31 December 2022. Each performance condition will apply to 50% of the award being made. In respect of both performance conditions, growth of 15% over the three year period will be required for threshold vesting of the awards, with growth of 35% or higher required for all of the awards to vest. The shares will be awarded on a sliding scale for growth between 15% and 35%. None of the awards will vest for adjusted EPS growth below 15% over the period.
The following principal assumptions were used in the valuation of the grant made in the year ended 31 December 2020 using the Black-Scholes option pricing model:
Assumptions |
|
|
|
| ||||
Date of vesting |
|
|
| 30/04/2023 |
| |||
Share price at grant |
|
|
| £1.80 |
| |||
Exercise price |
|
|
| £0.01 |
| |||
Risk free rate |
|
|
| 0.1% |
| |||
Dividend yield |
|
|
| 4.90% |
| |||
Expected life |
|
|
| 2.77 years |
| |||
Share price volatility |
|
|
| 31.00% |
| |||
The weighted average contractual life remaining of this option is 2 year and 4 months.
Expected volatility is a measure of the amount by which a share price is expected to fluctuate during a period. The assumptions used in valuing each grant are based on the daily historical volatility of the share price over a period commensurate with the expected term assumption.
The risk free rate of return is the implied yield at the date of grant for a zero coupon UK government bond with a remaining term equal to the expected term of the options.
It's expected that with an exercise price of £0.01, should the EPS condition be met, the holder will exercise as soon as the option vests. The Group announces its results usually within the first 10 days of April. So, it has been assumed that the options will be exercised on 30 April 2023.
EPS is measured as the basic earnings per share excluding any exceptional income/costs and any share-based payments charges. Further details can be found in the Directors' remuneration report on pages 42 to 44.
Management has used the budget for FY21, the market outlook and projections for FY22 to determine, at 31 December 2020, the achievement of the EPS condition.
The estimated fair value of the option over 200,000 ordinary shares at 31 December 2020 was £137,016. This fair value, moderated for the extent to which the option is expected to vest, is spread as a charge between grant and the assumed vesting date. Accordingly, a share-based payments charge of £32,616 has been recognised in the Statement of Comprehensive Income in the year ended 31 December 2020.
Enterprise Management Incentive ("EMI") Share Option Scheme 2013
At 31 December 2019 all the conditions for the scheme had been fulfilled.
The maximum term of the vested but unexercised option granted is 10 years from the grant date. The option allows the holder to purchase 64,800 ordinary shares at an exercise price stated of £1.385.
Movement in the number of ordinary shares under options for all schemes was as follows:
| 2020 | 2019 | ||
|
| Weighted average exercise price |
| Weighted average exercise price |
Number of share options |
|
|
|
|
Outstanding at the beginning of the year | 2,209,800 | £0.0503 | 2,184,800 | £0.0508 |
Forfeited | (30,000) | £0.01 | (170,000) | £0.01 |
Granted | 200,000 | £0.01 | 195,000 | £0.01 |
Outstanding at the end of the year | 2,379,800 | £0.0474 | 2,209,800 | £0.0503 |
The outstanding options at 31 December 2020 comprised 2,315,000 options with an exercise price of £0.01 and 64,800 options with an exercise price of £1.385. The 64,800 options were exercisable at 31 December 2020, 2,015,000 are exercisable on the announcement of these financial statements for the year ended 31 December 2020 and the remaining 300,000 options were not yet exercisable.
The outstanding options at 31 December 2019 comprised 2,145,000 options with an exercise price of £0.01 and 64,800 options with an exercise price of £1.385. The 64,800 options were exercisable at 31 December 2019 and the remaining options were not yet exercisable.
The weighted average remaining contractual life of options is 0.39 years (2019: 1.5 years).
28. Related party disclosures
Transactions with Directors
Dividends
During the year the total interim and final dividends paid to the Directors and their spouses were as follows:
| 2020 | 2019 |
Interim and final dividend (ordinary shares of £0.01 each) |
|
|
Richard Martin | 168,839 | 842,536 |
Ian Wilson (retired 30 April 2020) | - | 127,221 |
Paul Latham | 1,050 | 4,300 |
David Raggett | 4,755 | 19,556 |
| 174,644 | 993,613 |
Directors' emoluments
Included within the remuneration of key management and personnel detailed in note 9, the following amounts were paid to the Directors:
| 2020 £ | 2019 £ |
Wages and salaries | 1,040,413 | 729,624 |
Social security costs | 132,923 | 92,363 |
Pension contribution | 19,230 | 20,000 |
| 1,192,566 | 841,987 |
Details of Directors' interests in share options are disclosed in the Directors' remuneration report on pages 42 to 44.
29. Acquisitions
The Board are pursuing a strategy to develop financial services as a revenue stream to complement lettings and sales MSF. In 2019 the opportunity arose to buy a majority share in a Auxilium Partnership Limited, a life assurance buyers club, headed up by Mark Graves, who has a wealth of knowledge and contacts in the financial services industry. The intention was for Mark to help develop a financial services franchise.
On 7 January 2020 the Group took an 85% share in Aux Group Limited, a newly incorporated holding company, which on the same date bought a 85% of the share capital of Auxilium Partnership Limited. The minority shareholder of each of these companies is Mark Graves.
The consideration was £200,000.
The fair value of the identifiable assets and liabilities acquired and the consideration paid and payable are set out below:
| £ |
Office and computer equipment | 2,695 |
Trade and other receivables | 8,600 |
Cash | 118,750 |
Trade and other payables | (114,471) |
Net assets acquired | 15,574 |
Goodwill | 184,426 |
Consideration | 200,000 |
Satisfied by: |
|
Repayment of loan made to Mark Graves in 2019 | 200,000 |
Total | 200,000 |
Post acquisition results
|
|
| Total |
|
|
| £ |
Revenue |
|
| 447,574 |
Profit before tax since acquisition included in the Consolidated statement of comprehensive income |
|
| 38,026 |
30. Events after the reporting date
Effective 19 March 2021 the Group acquired the entire issued share capital of Hunters Property PLC, a competitor property franchisor with a network of 200 offices across the UK. Consideration of £26.1m was paid which comprised of each Hunters shareholder receiving 0.1655 New shares in The Property Franchise Group PLC and 43.2 pence in cash. It is likely that the majority of consideration will be attributed to intangible fixed assets including master franchise agreements, brands, technology and goodwill.
Due to the proximity of the acquisition to the date the financial statements were authorised for issue by the Board, it has not been possible to provide all of the information required for disclosure in accordance with IFRS 3 'Business Combinations'. The main areas of non-disclosure include a qualitative description of the factors which make up goodwill and a fair value of the amounts recognised as of the acquisition date for each major class of assets acquired and liabilities assumed. Further disclosure of the items required under IFRS 3 will be included in the June 2021 half year report.
On 25 March 2021 the Board decided to sell Auxilium Partnership Limited back to Mark Graves (a director and minority shareholder of this company). The business was bought in January 2020, just before the arrival of the new CEO, and the Group has now decided to pursue a different approach to its financial services strategy.
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