Final Results
THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION AS DEFINED IN ARTICLE 7 OF THE MARKET ABUSE REGULATION NO. 596/2014 ("MAR").
31 March 2020
The Property Franchise Group PLC
("TPFG", the "Company" or the "Group")
Full Year Results
The Property Franchise Group PLC, one of the UK's largest property franchises, today announces its final results for the year ended 31 December 2019.
Financial highlights:
· Group revenue of £11.4m (FY 2018: £11.2m)
· Adjusted EBITDA* increased 5% to £5.3m (FY 2018: £5.1m)
· Profit before tax of £4.0m (FY 2018: £4.3m)
· Profit before tax, after removing the impact of a share-based premium charge, of £4.4m
· Operating margin held at 39% (FY 2018: 39%)
· Management Service Fees increased 3% to £9.7m (FY 2018: £9.4m)
· Strong balance sheet with net cash of £4.0m (FY 2018: £2.3m)
*Before exceptional items and share-based payment charges
Operational highlights:
· Franchisees successfully mitigated much of the impact of the tenant fee ban and achieved a record performance for lettings revenue
· Pay-per-click marketing delivered a 54% increase in leads to c.47,000 (2018: c.30,000)
· 24 acquisitions at the franchisee level added 2,381 managed properties (2018: 3,115)
· 372 trading offices at year end (2018: 377) managing 58,000 rental properties (2018: 55,000)
· Launched Financial Services division, and a ppointed Mark Graves to the new role of Financial Services Director post-period end
· Gareth Samples appointed as CEO Designate post-period end
Current trading and outlook
Following the year end, trading during the first two months of the year was in line with expectations. Throughout March the Group has been responding operationally to the impact of the Government's measures to contain the spread of COVID-19. All our franchisees' high street premises have closed, with property management and client accounting activities being carried out by home-based staff using cloud-based software. At the behest of the Government, all estate agency activity is effectively suspended, temporarily. Revenue at the franchisee level from the portfolio of tenanted managed properties was £3.8m in February representing circa £15k of recurring income per trading office (excluding EweMove), which we expect to prove substantially resilient in the coming months. The Group has temporarily suspended minimum MSF thresholds for franchisees meaning that our revenue will be directly linked to their revenue during this period. We have also agreed to waive franchisees' National Marketing Fund contributions for the duration of the crisis.
Like many companies currently, the COVID-19 pandemic has necessitated a change in the Group's strategy. Our current focus is on securing revenue, as well as cash flow and cost management within the core business. This will include some of our head office roles being furloughed in accordance with the UK Government scheme, so that the key skills of our already lean central team are retained within the Group in the long term. All remaining central office staff, including board directors, are taking a voluntary salary reduction with bonuses and commissions indefinitely postponed. We will also be deferring new growth initiatives for the time being.
In line with this approach, the Board has resolved to suspend the proposal of the final dividend, a decision that will be kept under review. Whilst the Board is committed to the payment of dividends, it recognises that at this time maintaining a strong balance sheet is critical, and there may be acquisition opportunities ahead.
The Board is confident that the Company is well positioned to weather the wider economic damage caused by COVID-19 because of our nil debt, strong balance sheet, and sufficient cash headroom, as well as the fact we are a business heavily weighted towards lettings, with its recurring income streams (c. 49% of all MSF revenues are derived from property management commission). The Company also remains strongly cash generative.
At this stage it is too early to assess how the evolving Government response to COVID-19 will impact the Group over the longer term, and therefore it is not currently possible to provide guidance on future earnings. Despite this the Board is confident that The Property Franchise Group is in a strong position to emerge well-positioned for growth when market conditions begin to return to normality.
Ian Wilson, Chief Executive Officer of The Property Franchise Group, commented:
''With the Group facing a very challenging trading environment we have focused all of our efforts on intensive support to our franchisees, which at this time largely takes the form of advice and guidance rather than tactical financial assistance. We have also been working hard to negotiate with suppliers on franchisees' behalf. Under the leadership of incoming CEO Gareth Samples, the Board's focus in the period ahead will be on navigating the challenges this unprecedented situation brings and supporting our network. Over the longer term we have the utmost confidence that the strength of our franchise model and clear strategy means that we are well positioned to resume a growth trajectory and to add value for all our stakeholders."
For further information, please contact:
The Property Franchise Group PLC 01202 292829
Ian Wilson, Chief Executive Officer
David Raggett, Chief Financial Officer
Cenkos Securities plc 0207 397 8900
Max Hartley, Callum Davidson (Nominated Adviser)
Alma PR 0203 405 0209
Susie Hudson, Justine James, Harriet Jackson
About The Property Franchise Group PLC:
The Property Franchise Group PLC (AIM: TPFG) is one of the largest property franchises in the UK. The Company was founded in 1986 and has since grown to a diverse portfolio of six brands operating throughout the UK, comprising longstanding high-street brands and a hybrid, no sale no fee agency.
The Property Franchise Group's brands include:
· Martin & Co: a national lettings focused brand
· EweMove: a national, digitally enabled, hybrid sales and lettings brand
· CJ Hole: a full-service estate agency serving the West Country for 151 years
· Ellis & Co: a full-service estate agency serving London for 168 years
· Parkers: a full-service estate agency serving the M4 corridor for 70 years
· Whitegates: a full-service estate agency serving the Midlands and North of England for 40 years
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
Our industry is currently facing unparalleled challenges due to the COVID-19 pandemic and the associated preventative measures. The health and safety of our colleagues and their end customers is paramount, and we are therefore responding with a significant change in how the business will operate until conditions normalise.
Whilst the uncertainty we face is very substantial we are in the thankful position of having nil debt, which means no bank covenants to consider at this time, as well as a strong balance sheet. Furthermore, franchisees and their teams are well-equipped to continue working remotely. The business is also heavily weighted towards lettings and within that it is heavily weighted towards revenue from our portfolio of tenanted managed properties. These facts, together with the ingenuity and experience of Management, give us confidence that we will be both a going concern in 12 months' time (see note 2 in our financial statements for more information) and in a position to build momentum in the business again and to seize commercial opportunities, including for financial services, when conditions become more predictable.
Below is a review of our progress in 2019.
Overview
Over 2019 we saw continued political uncertainty, the implementation of the tenant fee ban and downward pressure on estate agency fees arising from hybrid model estate agencies' attempts to capture market share. Notwithstanding these challenges, I am pleased to report that we increased our revenues and gross profit for the sixth successive year since our IPO in December 2013, with profit before tax, after removing the impact of a share-based premium charge, increasing 3% year on year. The Group's network revenue for the period increased to £93m (2018: £92m).
The industry in 2019
The uncertainty of the UK general election and the implication that Britain's exit from the European Union was still not a settled matter was seen to somewhat dampen the housing market in the period. The property market's value decreased by 0.8% in 2019* to £11.5 billion, and 31 January 2020 marked an upsurge in online searches for estate agents.
Political uncertainty for our industry also takes the form of a long-debated intention by politicians of all hues to properly regulate the lettings sector and impose minimum professional standards. We anticipate that such regulation being implemented would benefit groups such as ours, which already acts as a regulator of its franchisees, and which has an excellent track record for training and continuous professional development.
Strengths of the franchise business model
Our progress over the period was underpinned by the strength of the Group's franchise model and its motivated and resourceful franchisees. This was augmented by the foresight and discipline of the management team who run the franchisor business. For example, as the Board had anticipated that the Group's revenue would be put under some pressure in the year, we continued our focus on careful cost management. We had also foreseen that English & Welsh letting agents would be banned from charging tenant fees, following the political success derived from the same measure in Scotland in 2012, and therefore put in place a mitigation strategy which started with workshops with Martin & Co franchisees in the summer of 2017, in order to minimise the impact.
Another demonstration of the strength of our model during the period was the way that we were able to track shifts in consumer behaviour within our sector, and ensure our franchisees adapted their business models to mitigate risks and capitalise on opportunities. New entrants, and particularly hybrid agents, typically provide services 24/7 and charge fixed fees. We responded quickly to ensure our traditional brands were able to compete. We did this by enabling our traditional brand franchisees to extend their "effective" trading hours through devices such as "live chat" and online booking through the relevant brand's website.
Growth Strategy
During the year, we continued to evaluate the acquisition of master rights in other property franchise systems but none of our targets met our strict criteria. Over the longer term we remain committed to expanding our market share of UK property sales and lettings through acquisition at both the corporate and franchisee level, although as previously mentioned growth initiatives such as this are currently deferred.
During 2019 we also reviewed our financial services strategy. As previously communicated, management identified a number of suitable target businesses which could be acquired to enable TPFG to broker mortgage products sourced from lenders, life assurance and general insurance business off the volume of buyer leads being generated by our marketing. With this opportunity presented to us, we made the decision to launch a Financial Services division post-period end, appointed Mark Graves to lead its development and bought a controlling share in Auxilium Partnership Limited (see note 30 to the financial statements). The pursuit of acquisition targets in the division have currently been postponed in response to the increased macro-economic uncertainty associated with COVID-19.
Our People
Mark Graves, a highly experienced figure in financial services, is to be our new head of this division. Otherwise the headcount was kept flat year-on-year at 48 full time employees. We see this efficiency as a key benefit of a franchise business model.
Financial performance
Our performance was underpinned by growth in Management Services Fees from £9.4m to £9.7m, which we delivered notwithstanding the loss of tenant fees from 1 June 2019. This in turn helped generate cash from operations of £4.7m and drove cash up to £4.0m at the year-end after £2.2m of dividend payments.
Dividend
The Board was looking forward to recommending an increased final dividend having considered the results for 2019 in February 2020. However, despite the strong financial position of the Group, given the rising level of uncertainty as to how the situation regarding COVID-19 will develop, alongside the other measures being taken to preserve the Group's cash position, the Board has decided not to recommend a final dividend for 2019. It will review this decision during the year as the outlook becomes clearer.
Outlook
I would like to thank my co-Directors, the dedicated head office teams in both Bournemouth & Cleckheaton, and our many excellent franchisees and their staff for their efforts over the last year. I would also like to take this opportunity to give the Board's sincere thanks to Ian Wilson who has led TPFG since IPO for his hard work, ingenuity and the passion he has always shown for our Company.
Gareth Samples, our incoming CEO, joins us at a challenging time, however from his track record and the short period of time he has been with the Group, I am confident that he has the right experience, tenacity and strength of leadership to guide the Group through the period ahead.
Richard Martin
Chairman
The Property Franchise Group plc
*iProspect research commissioned by TPFG
Chief Executive's statement
2019 was a busy year for the Group, as we navigated a number of challenges and sought out new opportunities for growth. The key activities were conducting a review of our financial services strategy and advising and assisting our franchisees on the appropriate course of action to mitigate the effects of the Government's tenant fee ban.
We moved both revenue and gross profits forward, albeit modestly, and were also pleased to have strengthened our balance sheet, having paid down all debt at the end of 2019.
Reaping the benefits of increased digital marketing investment
Investment in the period by both franchisees and franchisors in a bespoke customer relationship management ('CRM') system and pay-per-click advertising campaigns substantially increased leads generated through digital marketing. In 2019 we generated 49,105 leads for our traditional brands from these channels compared to 30,769 in 2018, a 59.6% year-on-year increase. We also made progress with average pay-per-click cost per lead which fell from £11.20 to £8.29, a 26% year-on-year reduction. Tight management of the programme content to keep it relevant to the recipient has meant that open rates for our CRM delivered emails stood at between 66% to 72% depending on brand and click-through rates varied from 25% to 30%.
Building strong relationships with landlords
The private rented sector is still growing, albeit the pace has slowed. Currently only a minority of private landlords engage an agent to manage their property. In 2019 we surveyed our Martin & Co landlord base. Over 1,500 responses were received and pleasingly 92% of respondents stated that they would recommend Martin & Co to other landlords. The impact of the Government's preventative measures for COVID-19 will make life much more difficult for landlords who do not benefit from the professional assistance of an agent and we believe that there is scope to increase our managed portfolio significantly in future years.
Our tenanted managed portfolio
Our franchisees made 24 acquisitions in 2019, slightly down on 2018, with the market in letting agency businesses for sale quieter than we and the business brokers had expected. Pleasingly we also continued to grow our portfolio organically. By the year end we were serving 58,000 tenanted managed properties, up 3,000 on the previous year.
Tenant fee ban
The tenant fee ban represented a potential loss of £0.5m of revenue in the seven months from its introduction on 1 June 2019. In the event, partly because of the Government allowing some categories of fees to remain chargeable during the "transition period" extending until 31 May 2020, and partly as a result of workshops and training which the franchisors delivered to their franchisees, the impact was lessened and we achieved £0.2m growth in lettings MSF year-on-year.
We were particularly satisfied with this achievement considering that our franchisees banked total tenant fees in the three months to December 2018 of £2.2m, which fell to £0.37m in the same period of 2019. We were also encouraged that at the end of the year 68% of our franchisees in England & Wales had proven to us that they were at least 50% mitigated, 52% were at least 75% mitigated and 43% were 100% or more mitigated.
Hybrid agency model
2019 was a year of consolidation for our hybrid model EweMove. We made incremental progress on network footprint, moving from 118 to 122 occupied franchise territories over the year and despite a reduction in lead volume we increased our productivity per franchise from 2.5 sales and lettings completions per month in 2018 to 2.8 in 2019. This translated into additional revenues of £0.4m and an improvement in adjusted EBITDA to £0.8m in 2019.
Financial Services
As previously announced, post period end the Group launched a new financial services division of which further details exist in the note on events after the reporting date at the end of our Annual Report. We consider financial services to be a logical extension to our core franchise business and are well-placed to capitalise on the opportunity due to the high volume of buyer leads generated by our network, (circa 92,000 annually). Given the increasing level of macro-economic uncertainty we have seen post-period end associated with COVID-19 the pursuit of acquisition targets within this new division has temporarily been paused. We are, however, continuing to develop the division with our first goal to ensure that all of our franchisees have access to either a local broker in their office, or to a call centre broker with a proven track record of converting leads through this channel.
Outlook
This is my last report as the CEO and I'm proud of our achievements and track record since the IPO, delivering what I and my partner on this voyage, CFO David Raggett, promised to investors: expansion, capital growth and (to date) a progressive dividend policy. My successor as CEO, Gareth Samples, has a challenging period ahead of him, but no CEO has experience of managing a business through a worldwide pandemic and Gareth brings fresh energy and insight to the role. His strong property background equips him with the market insight to guide our franchisees in their response to the economic ramifications of COVID-19 and to spot the opportunities as they arise post-pandemic. The business is on a strong footing and we are confident it is well positioned for further sustainable growth in the long-term.
Ian Wilson
Chief Executive Officer
The Property Franchise Group PLC
Financial Review
Over the period, our accelerated mitigation of the tenant fee ban and EweMove's improved earnings kept us on track.
Our focus on our managed properties' portfolio, operating margin and return on capital employed underpins our investment decisions and delivery of growth in shareholder value.
In a flat housing market environment (6th year at circa 1.2m** transactions) and, with the ban on tenants' fees commencing on 1 June 2019, we successfully took action to mitigate the impacts of the tenant fee ban on our traditional brands' franchisees, to continue the growth in our managed properties portfolio (up 5%), and to build EweMove's sustainable profit path.
**HMRC UK Property Transaction Statistics 21 February 2020
Revenue
Group revenue for the financial year to 31 December 2019 was £11.4m (2018: £11.2m), an increase of £0.2m (1%) over the prior year. EweMove contributed £0.4m to the increase as its revenue increased 13% to £3.1m (2018: £2.7m).
Management Service Fees ("MSF"), our key underlying revenue stream, increased 3% from £9.4m to £9.7m and represented 85% (2018: 84%) of the Group's revenue with the remainder being from franchise sales of £0.2m (2018: £0.3m), and ancillary services to support MSF generation of £1.5m (2018: £1.6m).
Lettings contributed 69% of MSF (2018: 68%), sales contributed 30% of MSF (2018: 31%) and financial services contributed 1% of MSF (2018: 1%). Lettings MSF grew by 4% in the year excluding the amortisation of prepaid assisted acquisitions support, of which one-third was derived from assisted acquisitions in the year, and sales MSF grew by 2%.
Our franchise sales activity was predominantly focused on reselling existing franchises to experienced franchise owners in the traditional brands, and to encouraging new entrants into EweMove. Resale activity was subdued in 2019 resulting in eight resales (2018:22). Sales to new entrants into EweMove was buoyant with 25 in the year (2018: 23).
Operating profit
Although headline operating profit declined to £4.0m (2018: £4.3m), operating profit before exceptional items, amortisation of acquired intangibles and share-based payments charges ("Adjusted operating profit") increased from £4.9m to £5.0m (2%) and the resulting operating margin was 44% (2018: 43%).
Given challenging market conditions caused by the uncertainty around Brexit and the tenant fee ban, there was a heightened priority to maintain focused control on costs in 2019. Administrative expenses were unchanged year on year at £5.8m.
Share options are granted to almost all employees, once they have passed the qualifying conditions, to encourage their alignment with our strategy of growing earnings per share and, thereby, dividend per share. Underlying progress was made towards the EPS growth target set for the three years ended 31 December 2020. An assessment of the share-based payment charge resulting from the options granted was made at 31 December 2019 resulting in £0.4m being charged to the profit and loss account. There was a full year's charge in 2019, whereas, in 2018, the charge was for five months from August 2018 (2018: £0.2m before netting with a prior year charge release). Further details can be found in notes 4, 5 and 28 to the consolidated financial statements.
| 2019 | 2018 |
Revenue | £11.4m | £11.2m |
Management Service Fees | £9.7m | £9.4m |
Administrative expenses | £5.8m | £5.8m |
Adjusted operating profit* | £5.0m | £4.9m |
Operating profit | £4.0m | £4.3m |
Adjusted profit before tax* | £4.9m | £4.8m |
Profit before tax | £4.0m | £4.3m |
Adjusted EBITDA* | £5.3m | £5.1m |
Dividend | 2.6p** | 8.4p |
*Before exceptional costs, amortisation of acquired intangibles and share-based payment charges. **Excludes a final dividend for 2019. None recommended by the Board at this time.
EBITDA
Adjusted EBITDA for 2019 was £5.3m (2018: £5.1m) an increase of £0.2m (5%) over the prior year. EweMove contributed £0.4m of this increase through additional gross margin whereas revenue from franchise sales and support services within the traditional brands decreased by £0.2m.
Profit before tax
The profit before tax was £4.0m for 2019 (2018: £4.3m) which includes the share-based payment charge of £0.4m. Excluding exceptional costs, amortisation arising on acquired intangibles and the share-based payments charges, the adjusted profit before tax increased from £4.8m to £4.9m (2%).
Taxation
The effective rate of corporation tax for the year was 19.1% (2018: 19.8%). The total tax charge for 2019 was £0.8m (2018: £0.8m).
Earnings per share
Basic earnings per share ("EPS") for the year was 12.5p (2018: 13.3p), a reduction of 6% based on the average number of shares in issue for the period of 25,822,750 (2018: 25,822,750).
Diluted EPS for the year was 12.1p (2018: 13.1p) a reduction of 8% based on the average number of shares in issue for the period plus an estimate for the dilutive effect of option grants vesting, being 26,692,929 (2018: 26,033,872).
The reduction in EPS for both measures results from the reduction in profit before tax year on year caused by the increased share-based payment charge in 2019 and, for diluted EPS, the additional shares. Adjusted basic EPS for the year was 16.2p (2018: 15.4p), an increase of 5% based on the average number of shares in issue for the period of 25,822,750 (2018: 25,822,750).
Adjusted diluted EPS for the year was 15.6p (2018 15.3p), an increase of 2% based on an estimate of shares in issue of 26,692,929 (2018: 26,033,872).
The adjustments to earnings to derive the adjusted EPS figures total £0.9m (2018: £0.5m) and result from the share-based payment charge and the amortisation of acquired in tangibles.
The profit attributable to owners was £3.2m (2018: £3.4m) with the reduction of £0.2m due to the impact of the share-based payment charge being offset by the increase in revenue.
Dividends
The Board was looking forward to recommending an increased final dividend having considered the results for 2019 in February 2020. However, despite the strong financial position of the Group, given the rising level of uncertainty as to how the situation regarding COVID-19 will develop, alongside the other measures being taken to preserve the Group's cash position, the Board has decided not to recommend a final dividend for 2019. It will review this decision during the year as the outlook becomes clearer.
Cash flow
The Group is strongly operationally cash generative.
The net cash inflow from operating activities in 2019 was £4.7m (2018: £4.5m) as the Group continued to generate strong operating cash inflows.
The net cash outflow from investing activities was £0.7m (2018: outflow £0.3m). This consisted of £0.1m spent on our CRM system, £0.4m provided to franchisees to support their acquisitions of managed properties under the assisted acquisitions program and £0.2m lent to Mark Graves to buyout Auxilium Partnership Limited from his partner (more details in note 30). In 2018, the majority of the net outflow was due to payments made to franchisees under the assisted acquisitions program.
Loan repayments totalling £1.6m (2018: £0.9m) plus interest payments of £0.05m (2018: £0.1m) were made on the Santander UK plc loans during 2019 fully repaying those loans. Dividend payments totalling £2.2m were made in the year (2018: £2.0m).
Liquidity
The Group had cash balances of £4.0m at 31 December 2019 (2018: £3.9m) and no bank debt (2018: £1.6m). It entered into negotiations with Barclays for a new revolving cash facility at the year-end of £5m so as to be able to supplement its cash generated organically in the pursuance of its strategic objectives.
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.
The key financial measures are as follows:
• Management Service Fees
• Adjusted operating profit and margin
• Adjusted EBITDA
• Adjusted profit before tax
• Adjusted earnings per share
These have been discussed above in further detail.
The key non-financial measures focus on some long-standing drivers of financial performance as well as reflecting the Board's continued investment in its assisted acquisitions programme and digital marketing:
• Number of properties listed for sale
• Number of properties let
• Number of properties sold
• Number of leads generated through digital marketing
• Number of managed properties
• Number of managed properties acquired through assisted acquisitions
All bar two of these measures are detailed in my review and all are detailed throughout the Strategic Report. Digital marketing is a relatively new investment for the Group following the acquisition of EweMove in September 2016 and progress with this is detailed on page 14 of the Annual Report.
Financial position
The consolidated statement of financial position remains strong with total assets of £21.1m (2018: £20.8m) due mainly to an increase in prepaid assisted acquisition support of £0.2m. There was a reduction of £1.3m in liabilities during the year. This reduction in liabilities was due to repayments of bank debt totalling £1.6m, an increase in trade payables of £0.5m caused by the timing of invoices from suppliers of services to our national marketing initiatives and from the suppliers of our software licences for 2020 (£0.2m of which is recognised in prepayments) and a reduction in deferred tax of £0.2m.
The Group finished the year with the total equity attributable to owners of £17.3m, an increase of £1.5m or 10% over FY18.
The Group generated strong cash inflows again in 2019 underpinned by the fact that 49% of its Management Service Fees are derived from the management of tenanted properties. This meant it could fully repay its outstanding bank debt a year earlier than scheduled. Thus, it faces the uncertainty created by COVID-19 in a relatively strong position, enabling the Board to substantiate that it has a reasonable prospect of being a going concern beyond 31 March 2021 (see note 2 of the consolidated financial statements on page 45 of the Annual Report) and to take advantage of the opportunities that may present themselves at that time.
David Raggett
Chief Financial Officer
The Property Franchise Group PLC
Consolidated statement of comprehensive income
for the year ended 31 December 2019
| Notes | 2019 £ | 2018 £ |
Revenue | 7 | 11,350,327 | 11,245,613 |
Cost of sales |
| (1,066,849) | (1,080,271) |
Gross profit |
| 10,283,478 | 10,165,342 |
Administrative expenses | 8 | (5,820,277) | (5,783,482) |
Share-based payments charge | 9, 28 | (441,709) | (49,857) |
Operating profit | 10 | 4,021,492 | 4,332,003 |
Finance income | 11 | 11,012 | 8,968 |
Finance costs | 11 | (38,310) | (71,494) |
Profit before income tax expense |
| 3,994,194 | 4,269,477 |
Income tax expense | 12 | (761,788) | (847,041) |
Profit and total comprehensive income for the year attributable to owners |
| 3,232,406 | 3,422,436 |
|
|
|
|
Earnings per share |
|
|
|
Statutory |
|
|
|
Earnings per share attributable to owners | 13 | 12.5p | 13.3p |
Diluted Earnings per share attributable to owners | 13 | 12.1p | 13.1p |
Adjusted |
|
|
|
Earnings per share attributable to owners | 13 | 16.2p | 15.4p |
Diluted Earnings per share attributable to owners | 13 | 15.6p | 15.3p |
Consolidated statement of financial position
31 December 2019
| Notes | 2019 £ | 2018 |
Assets |
|
|
|
Non-current assets |
|
|
|
Intangible assets | 15 | 14,786,402 | 15,324,755 |
Property, plant and equipment | 16 | 77,555 | 103,584 |
Right-of-use assets | 17 | 74,580 | - |
Prepaid assisted acquisitions support | 18 | 657,948 | 453,836 |
|
| 15,596,485 | 15,882,175 |
Current assets |
|
|
|
Trade and other receivables | 20 | 1,483,009 | 1,096,274 |
Cash and cash equivalents |
| 4,011,463 | 3,857,988 |
|
| 5,494,472 | 4,954,262 |
Total assets |
| 21,090,957 | 20,836,437 |
|
|
|
|
Equity |
|
|
|
Shareholders' equity |
|
|
|
Called up share capital | 21 | 258,228 | 258,228 |
Share premium | 22 | 4,039,800 | 4,039,800 |
Other reserves | 23 | 3,506,892 | 2,983,861 |
Retained earnings |
| 9,449,675 | 8,442,960 |
Total equity attributable to owners |
| 17,254,595 | 15,724,849 |
|
|
|
|
Liabilities |
|
|
|
Non-current liabilities |
|
|
|
Borrowings | 24 | - | 700,000 |
Lease liabilities | 17 | 25,089 | - |
Deferred tax | 26 | 1,140,227 | 1,372,196 |
|
| 1,165,316 | 2,072,196 |
Current liabilities |
|
|
|
Borrowings | 24 | - | 900,000 |
Trade and other payables | 25 | 2,000,175 | 1,476,819 |
Lease liabilities | 17 | 52,660 | - |
Tax payable |
| 618,211 | 662,573 |
|
| 2,671,046 | 3,039,392 |
Total liabilities |
| 3,836,362 | 5,111,588 |
Total equity and liabilities |
| 21,090,957 | 20,836,437 |
The financial statements were approved and authorised for issue by the Board of Directors on 30 March 2020 and were signed on its behalf by:
David Raggett
Chief Financial Officer
Company statement of financial position
31 December 2019 (Company No: 08721920)
| Notes | 2019 £ | 2018 £ |
Assets |
|
|
|
Non-current assets |
|
|
|
Investments | 19 | 33,899,664 | 33,803,886 |
Deferred tax asset | 26 | 215,293 | 30,101 |
|
| 34,114,957 | 33,833,987 |
Current assets |
|
|
|
Trade and other receivables | 20 | 421,903 | 361,520 |
Cash and cash equivalents |
| 1,073,774 | 1,278,026 |
|
| 1,495,677 | 1,639,546 |
Total assets |
| 35,610,634 | 35,473,533 |
|
|
|
|
Equity |
|
|
|
Shareholders' equity |
|
|
|
Called up share capital | 21 | 258,228 | 258,228 |
Share premium | 22 | 4,039,800 | 4,039,800 |
Other reserves | 23 | 21,496,792 | 20,973,761 |
Retained earnings |
| 9,640,327 | 8,537,181 |
Total equity |
| 35,435,147 | 33,808,970 |
|
|
|
|
Liabilities |
|
|
|
Non-current liabilities |
|
|
|
Borrowings | 24 | - | 700,000 |
|
| - | 700,000 |
Current liabilities |
|
|
|
Borrowings | 24 | - | 900,000 |
Trade and other payables | 25 | 175,487 | 64,563 |
|
| 175,487 | 964,563 |
Total liabilities |
| 175,487 | 1,664,563 |
Total equity and liabilities |
| 35,610,634 | 35,473,533 |
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 £3,323,903 (2018: £3,420,015).
The financial statements were approved and authorised for issue by the Board of Directors on 30 March 2020 and were signed on its behalf by:
David Raggett
Chief Financial Officer
Consolidated statement of changes in equity
for the year ended 31 December 2019
| Attributable to owners | ||||
| Called up share capital £ | Retained earnings £ | Share premium £ | Other reserves £ | Total equity £ |
Balance at 1 January 2018 | 258,228 | 7,034,699 | 4,039,800 | 2,934,004 | 14,266,731 |
Profit and total comprehensive income | - | 3,422,436 | - | - | 3,422,436 |
Dividends | - | (2,014,175) | - | - | (2,014,175) |
Share-based payments charge | - | - | - | 49,857 | 49,857 |
Total transactions with owners | - | (2,014,175) | - | 49,857 | (1,964,318) |
Balance at 31 December 2018 | 258,228 | 8,442,960 | 4,039,800 | 2,983,861 | 15,724,849 |
Effect of adoption of IFRS 16 (net of tax) (note 17) | - | (4,933) | - | - | (4,933) |
1 January 2019 as restated | 258,228 | 8,438,027 | 4,039,800 | 2,983,861 | 15,719,916 |
Profit and total comprehensive income | - | 3,232,405 | - | - | 3,232,405 |
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 at 31 December 2019 | 258,228 | 9,449,675 | 4,039,800 | 3,506,892 | 17,254,595 |
Company statement of changes in equity
for the year ended 31 December 2019
| Called up share capital £ | Retained earnings £ | Share premium £ | Other reserves £ | Total equity £ |
Balance as at 1 January 2018 | 258,228 | 7,131,341 | 4,039,800 | 20,923,904 | 32,353,273 |
Profit and total comprehensive income | - | 3,420,015 | - | - | 3,420,015 |
Dividends | - | (2,014,175) | - | - | (2,014,175) |
Share-based payments charge | - | - | - | 49,857 | 49,857 |
Total transactions with owners | - | (2,014,175) | - | 49,857 | (1,964,318) |
Balance as at 31 December 2018 | 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 |
Consolidated statement of cash flows
for the year ended 31 December 2019
| Notes | 2019 £ | 2018 £ |
Cash flows from operating activities |
|
|
|
Cash generated from operations | A | 5,705,243 | 5,314,349 |
Interest paid |
| (41,380) | (75,346) |
Tax paid |
| (973,361) | (771,779) |
Net cash from operating activities |
| 4,690,502 | 4,467,224 |
Cash flows from investing activities |
|
|
|
Purchase of intangible assets |
| (73,467) | (20,000) |
Purchase of tangible assets |
| (7,960) | (30,505) |
Assisted acquisitions support |
| (386,332) | (248,050) |
Loan | 30 | (200,000) | - |
Interest received |
| 11,012 | 8,968 |
Net cash used in investing activities |
| (656,747) | (289,587) |
Cash flows from financing activities |
|
|
|
Repayment of bank loan |
| (1,600,000) | (900,000) |
Equity dividends paid |
| (2,220,757) | (2,014,175) |
Principal paid on lease liabilities |
| (56,533) | - |
Interest paid on lease liabilities |
| (2,990) | - |
Net cash used in financing activities |
| (3,880,280) | (2,914,175) |
Increase in cash and cash equivalents |
| 153,475 | 1,263,462 |
Cash and cash equivalents at beginning of year |
| 3,857,988 | 2,594,526 |
Cash and cash equivalents at end of year |
| 4,011,463 | 3,857,988 |
Notes to the consolidated statement of cash flows
for the year ended 31 December 2019
A. Reconciliation of profit before income tax to cash generated from operations
| 2019 £ | 2018 £ |
Cash flows from operating activities |
|
|
Profit before income tax | 3,994,194 | 4,269,477 |
Depreciation of property, plant and equipment | 33,989 | 33,416 |
Amortisation of intangibles | 611,820 | 592,323 |
Amortisation of prepaid assisted acquisitions support | 174,149 | 88,701 |
Amortisation of right-of-use assets | 54,769 | - |
Share-based payments charge | 441,709 | 49,857 |
Loss on disposal of intangible assets | - | 17,989 |
Finance costs | 38,310 | 71,494 |
Finance income | (11,012) | (8,968) |
Operating cash flow before changes in working capital | 5,337,928 | 5,114,289 |
(Increase) / decrease in trade and other receivables | (186,734) | 21,062 |
Increase in trade and other payables | 554,049 | 178,998 |
Cash generated from operations | 5,705,243 | 5,314,349 |
Company statement of cash flows
for the year ended 31 December 2019
| Notes | 2019 £ | 2018 £ |
Cash flows from operating activities |
|
|
|
Cash generated from operations | C | (812,137) | (179,425) |
Interest paid |
| (41,380) | (75,346) |
Net cash used in operating activities |
| (853,517) | (254,771) |
Cash flows from investing activities |
|
|
|
Interest received |
| 22 | 12 |
Loan | 30 | (200,000) | - |
Equity dividends received |
| 4,670,000 | 4,100,000 |
Net cash generated from investing activities |
| 4,470,022 | 4,100,012 |
Cash flows from financing activities |
|
|
|
Repayment of bank loan |
| (1,600,000) | (900,000) |
Equity dividend paid |
| (2,220,757) | (2,014,175) |
Net cash used in financing activities |
| (3,820,757) | (2,914,175) |
(Decrease)/Increase in cash and cash equivalents |
| (204,252) | 931,066 |
Cash and cash equivalents at beginning of year |
| 1,278,026 | 346,960 |
Cash and cash equivalents at end of year |
| 1,073,774 | 1,278,026 |
Notes to the Company statement of cash flows
for the year ended 31 December 2019
C. Reconciliation of profit before income tax to cash generated from operations
| 2019 £ | 2018 £ |
Cash flows from operating activities |
|
|
Profit before income tax | 3,390,952 | 3,257,306 |
Share-based payments charge | 345,931 | 22,046 |
Finance costs | 35,320 | 71,494 |
Finance income | (22) | (12) |
Equity dividend received | (4,670,000) | (4,100,000) |
Operating cash flow before changes in working capital | (897,819) | (749,166) |
(Increase) / decrease in trade and other receivables | (25,241) | 568,037 |
Increase in trade and other payables | 110,923 | 1,704 |
Cash used in operations | (812,137) | (179,425) |
Notes to the consolidated and Company financial statements
for the year ended 31 December 2019
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") as adopted by the European Union and the Companies Act 2006 applicable to companies reporting under IFRS. 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
Due to the uncertainty created by Covid-9, the decision was taken to create a working capital model focused on the potential impacts of Covid-19 and the actions that the Board can take to mitigate those impacts. This uses as its basis the budget for 2020, the management accounts for the first two months of trading in 2020 and the actual results for 2019. The time period reviewed is from 1 March 2020 to 31 March 2021.
Our focus on operating margin, return on capital employed and free cash flow generation means the Group started the period under review with no debt and cash of £4.0m.
Last year the Group spent £6.1m on cost of sales and administrative expenses (excluding depreciation, amortisation and share-based payment charges).
The Board have looked at these costs in detail and identified savings in payments to contractors and general administrative expenses. In addition, with the support of our employees and reshaping ourselves to focus solely on supporting our franchise network during this period the Board estimates that significant savings can be achieved.
Our suppliers have already started to announce financial support mainly by discounting their services. The Group will feed these discounts through to our franchise network. Hence, no account is taken off them in this assessment.
The model assumes that all discretionary expenditure is suspended for the period under review. It was £2.7m in 2019 and included dividend payments of £2.2m. Any such expenditure will only be made if it is clear it can be afforded.
During the period under review it is estimated that there will be a release from working capital of £0.3m.
At the start of the period, the Group owed £1.0m to HMRC. Of this, the next VAT payment will be automatically deferred. Support exists to help with time to pay and the Group will maximise the benefit of this and other Government support as it becomes available.
The Board has concluded, after reviewing the work performed and detailed above that, even without taking into account the cash from revenues that will still to flow into the Group, there is a reasonable expectation that the Group has adequate resources to continue in operation until at least 31 March 2021. Accordingly, they have adopted the going concern basis in preparing these financial statements.
Changes in accounting policies
a) New standards, amendments and interpretations effective from 1 January 2019
The following new or amended standards are mandatory for the first time for the period beginning 1 January 2019 and have been adopted in the annual financial statements for the year ended 31 December 2019:
Standard | Key requirements |
|
IFRS 16 | Leases |
|
IFRIC 23 | Uncertainty over income tax treatments |
|
The Group adopted IFRS 16 and IFRIC 23 with a transition date of 1 January 2019. The Group has chosen not to restate comparatives on adoption of both standards, and therefore, the revised requirements are not reflected in the prior year financial statements. Rather, these changes have
been processed at the date of initial application (i.e. 1 January 2019) and recognised in the opening equity balances. Details of the impact these two standards have had are given below. Other new and amended standards and Interpretations issued by the IASB did not impact the Group as they are either not relevant to the Group's activities or require accounting which is consistent with the Group's current accounting policies
IFRS 16 "Leases"
IFRS 16 requires that almost all leases are brought onto lessees' balance sheets under a single model (except leases of less than 12 months and leases of low-value assets), eliminating the distinction between operating and finance leases. IFRS 16 has been adopted for the first time in these Group consolidated financial statements.
Transition Method and Practical Expedients Utilised
The Group adopted IFRS 16 using the modified retrospective approach, with recognition of transitional adjustments on the date of initial application (1 January 2019), without restatement of comparative figures.
The definition of a lease under IFRS 16 was applied only to contracts entered into or changed on or after 1 January 2019. IFRS 16 provides for certain optional practical expedients, including those related to the initial adoption of the standard. The Group applied the following practical expedients when applying IFRS16 to leases previously classified as operating leases under IAS 17:
(a) Apply a single discount rate to a portfolio of leases with reasonably similar characteristics;
(b) Exclude initial direct costs from the measurement of right-of-use assets at the date of initial application for leases where the right-of-use asset was determined as if IFRS 16 had been applied since the commencement date; and
(c) Reliance on previous assessments on whether leases are onerous as opposed to preparing an impairment review under IAS 36 as at the date of initial application;
As a lessee, the Group previously classified leases as operating or finance leases based on its assessment of whether the lease transferred substantially all of the risks and rewards of ownership. Currently, the Group holds some non-cancellable operating leases but no finance leases. All operating leases relate to office premises. The Group has recognised a right-of-use asset and a corresponding liability in respect of all these leases. The right-of-use asset was recognised at the carrying value that would have resulted from IFRS 16 being applied from the commencement date of the leases. The lease liabilities were measured at the present value of the remaining lease payments, discounted using the Group's incremental borrowing rate as at 1 January 2019.The Group's incremental borrowing rate is the rate at which a similar borrowing could be obtained from an independent creditor under comparable terms and conditions. The weighted-average rate applied was 4%.
See note 17 for details of the accounting entries recognised in these financial statements and the effect of the change in accounting policy.
IFRIC 23 "Uncertainty over income tax treatments"
IFRIC 23 provides guidance on the accounting for current and deferred tax liabilities and assets in circumstances in which there is uncertainty over income tax treatments. The Interpretation requires:
• The Group to determine whether uncertain tax treatments should be considered separately, or together as a group, based on which approach provides better predictions of the resolution;
• The Group to determine if it is probable that the tax authorities will accept the uncertain tax treatment; and
• If it is not probable that the uncertain tax treatment will be accepted, measure the tax uncertainty based on the most likely amount or expected value, depending on whichever method better predicts the resolution of the uncertainty. This measurement is required to be based on the assumption that each of the tax authorities will examine amounts they have a right to examine and have full knowledge of all related information when making those examinations.
b) New standards, amendments and interpretations not yet effective
The following relevant new standards, amendments to standards and interpretations have been issued, but are not effective for the financial year beginning on 1 January 2019, and endorsed by the European Union, and have not been early adopted:
Standard | Key requirements | Effective date as adopted by the EU |
IAS 1
IAS 8
| Presentation of Financial Statements (Amendment -Definition of Material)
Accounting Policies, Changes in Accounting Estimates and Errors (Amendment - Definition of Material)
| 1 January 2020
1 January 2020
|
IFRS 3
| Business Combinations (Amendment - Definition of Business) | 1 January 2020
|
| Revised Conceptual Framework for Financial Reporting | 1 January 2020 |
The Group is currently assessing the impact of these new accounting standards and amendments.
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 2019. 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 acquired business 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.
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 (see note 2a). 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 and FY21. The estimate of earnings per share ("EPS"), the non-market based performance measure, in FY20 relies on the assumptions made regarding the achievement of the current year's budget and, in FY21, relies on a projection of earnings taking into account available market data and performance trends.
At this juncture it's estimated that 48% of the non-market based performance condition will be met for the share option scheme with an FY20 EPS target. This is the main component of the SBPC. However, that percentage attainment is highly sensitive to the earnings and, therefore, profit actually achieved in FY20 and, as Ian Wilson holds an option over a maximum of 1m shares, the assessment made about his entitlement on his retirement.
A £0.1m increase in profit before taxation for FY20 equates to achievement of an estimated 10% increase in attainment to 58%. This causes the estimated fair value of the SBPC from inception until 31 December 19 to increase by £0.1m and the estimated fair value of the lifetime SBPC to increase by £0.24m at 31 December 2019.
Similarly, a £0.1m decrease in profit before taxation in FY20 equates to achievement of an estimated 10% decrease in attainment to 38%. This causes the estimated fair value of the SBPC to reduce from inception until 31 December 2019 by £0.1m and the estimated fair value of the lifetime SBPC to decrease by £0.24m at 31 December 2019
For every month that Ian retires before 31 December 2020, assuming no other leavers, the standard time pro-rata assumption and an attainment of 48%, the estimated fair value of the lifetime SBPC reduces by £0.02m
6. Segmental reporting
The Board of Directors, as the chief operating decision-making body, review financial information for and make decisions about the Group's overall franchising business and have identified a single operating segment, that of property franchising.
7. Revenue
The Directors believe there to be 3 material income streams relevant to property franchising which are split as follows:
| 2019 £ | 2018 £ |
Management Service Fees | 9,661,737 | 9,402,896 |
Franchise sales | 194,702 | 289,808 |
Other | 1,493,888 | 1,552,909 |
| 11,350,327 | 11,245,613 |
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 25 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:
| 2019 £ | 2018 £ |
Employee costs (see note 9) | 3,097,124 | 3,110,452 |
Marketing and digital costs | 571,931 | 617,274 |
Property costs | 129,082 | 129,626 |
General administrative costs | 1,355,551 | 1,333,807 |
Amortisation | 666,589 | 592,323 |
| 5,820,277 | 5,783,482 |
9. Employees and Directors
Average numbers of employees (including Directors), employed during the year:
| Group | Company | ||
| 2019 | 2018 | 2019 | 2018 |
Administration | 39 | 41 | - | - |
Management | 9 | 9 | 2 | 2 |
| 48 | 50 | 2 | 2 |
Employee costs (including Directors) during the year amounted to:
| Group | Company | ||
| 2019 £ | 2018 £ | 2019 £ | 2018 £ |
Wages and salaries | 2,711,683 | 2,737,019 | 554,213 | 502,118 |
Social security costs | 328,693 | 331,577 | 62,245 | 59,381 |
Pension costs | 56,748 | 41,856 | 10,544 | 10,044 |
| 3,097,124 | 3,110,452 | 627,002 | 571,543 |
Share-based payments charge | 441,709 | 49,857 | 345,931 | 22,046 |
Key management personnel are defined as Directors and executives of the Group. Details of the remuneration of the key management personnel are shown below:
| 2019 £ | 2018 £ |
Wages and salaries | 1,497,467 | 1,452,880 |
Social security costs | 193,729 | 187,711 |
Pension costs | 30,513 | 25,736 |
| 1,721,709 | 1,666,327 |
Share-based payments charge | 402,498 | 46,847 |
Details of the Directors' emoluments are disclosed in the Directors' remuneration report on pages 29 to 30 of the Annual Report. The share-based payments charge for the current year has been charged to the Statement of Comprehensive Income, of this £340,697 (2018: £21,772) relates to Directors.
10. Operating profit
| 2019 £ | 2018 £ |
The operating profit is stated after charging: |
|
|
Depreciation | 33,989 | 33,416 |
Amortisation - intangibles | 611,820 | 592,323 |
Amortisation - prepaid assisted acquisitions support | 174,149 | 88,701 |
Amortisation - leases | 54,769 | - |
Share-based payments charge | 441,709 | 49,857 |
Auditor's remuneration (see below) | 50,000 | 45,000 |
Staff costs (note 9) | 3,097,124 | 3,110,452 |
Operating lease expenditure | - | 67,333 |
Audit services |
|
|
- Audit of the Company and consolidated accounts | 50,000 | 45,000 |
- Audit related assurance services | - | - |
Other non-audit services |
|
|
- Corporate finance services | - | - |
- Tax advisory services | - | - |
- IT consultancy services | - | - |
| 50,000 | 45,000 |
Comprising: |
|
|
Audit services | 50,000 | 45,000 |
Non-audit services | - | - |
| 50,000 | 45,000 |
11. Finance income and costs
| 2019 £ | 2018 £ |
Finance income: |
|
|
Bank interest | 5,696 | 6,464 |
Other similar income | 5,316 | 2,504 |
| 11,012 | 8,968 |
| 2019 £ | 2018 £ |
Finance costs: |
|
|
Bank interest | 35,320 | 71,494 |
Interest expense on lease liabilities | 2,990 | - |
|
|
|
| 38,310 | 71,494 |
12. Taxation
| 2019 £ | 2018 £ |
Current tax | 943,765 | 925,702 |
Adjustments in respect of previous periods | (31,329) | 16,740 |
Current tax total | 912,436 | 942,442 |
Deferred tax credit on acquired business combinations | (75,557) | (88,618) |
Deferred tax credit on share-based payments | (75,091) | (6,783) |
Deferred tax total | (150,648) | (95,401) |
Total tax charge in statement of comprehensive income | 761,788 | 847,041 |
The tax assessed for the period is higher (2018: higher) than the standard rate of corporation tax in the UK. The difference is explained below.
| 2019 £ | 2018 £ |
Profit on ordinary activities before tax | 3,994,194 | 4,269,477 |
Profit on ordinary activities multiplied by the effective standard rate of corporation tax in the UK of 19% | 758,897 | 811,200 |
Effects of: |
|
|
Expenses not deductible for tax purposes | 10,344 | 9,412 |
Depreciation in excess of capital allowances | 23,876 | 9,689 |
Adjustments in respect of previous periods | (31,329) | 16,740 |
Total tax charge in respect of continuing activities | 761,788 | 847,041 |
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.
| 2019 £ | 2018 £ |
|
|
|
Profit for the financial year attributable to owners | 3,232,406 | 3,422,436 |
Amortisation on acquired intangibles | 498,441 | 498,441 |
Share-based payments charge | 441,709 | 49,857 |
|
|
|
Adjusted profit for the financial year | 4,172,556 | 3,970,734 |
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 | 870,179 | 211,122 |
Number used in diluted earnings per share | 26,692,929 | 26,033,872 |
|
|
|
Basic earnings per share | 12.5p | 13.3p |
Diluted earnings per share | 12.1p | 13.1p |
Adjusted basic earnings per share | 16.2p | 15.4p |
Adjusted diluted earnings per share | 15.6p | 15.3p |
There were options over 2,209,800 ordinary shares outstanding at 31 December 2019; 2,145,000 had not yet vested and have performance conditions which will 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 exercise price. For these reasons in 2019 there is a dilutive effect of share options on the earnings per share calculation.
In 2018 there were options over 2,184,800 ordinary shares outstanding at 31 December 2018; 2,120,000 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 2018 but the average share price during the year ended 31 December 2018 was below the exercise price. For these reasons in 2018 there is no 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
| 2019 £ | 2018 £ |
Final dividend for 2018 |
|
|
6.0p per share paid 28 May 2019 (2018: 5.4p per share paid 21 May 2018) | 1,549,365 | 1,394,429 |
Interim dividend for 2019 |
|
|
2.6p per share paid 1 October 2019 (2018: 2.4p per share paid 3 October 2018) | 671,392 | 619,746 |
Total dividend paid | 2,220,757 | 2,014,175 |
15. Intangible assets
| Master Franchise Agreement £ | Brands £ | Technology £ | Customer lists £ | Goodwill £ | Total £ |
Cost |
|
|
|
|
|
|
Brought forward 1 January 2018 | 7,803,436 | 1,972,239 | 274,210 | 301,712 | 7,226,160 | 17,577,757 |
Additions | - | - | - | 20,000 | - | 20,000 |
Disposals | - | - | - | (106,772) | - | (106,772) |
Carried forward 31 December 2018 | 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 |
Amortisation & Impairment |
|
|
|
|
|
|
Brought forward at 1 January 2018 | 1,325,528 | 88,968 | 49,118 | 201,846 | - | 1,665,460 |
Charge for year | 413,174 | 66,726 | 79,037 | 33,386 | - | 592,323 |
Eliminated on disposals | - | - | - | (91,553) | - | (91,553) |
Carried forward 31 December 2018 | 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 |
Net book value |
|
|
|
|
|
|
At 31 December 2019 | 5,651,560 | 1,749,819 | 99,880 | 58,983 | 7,226,160 | 14,786,402 |
At 31 December 2018 | 6,064,734 | 1,816,545 | 146,055 | 71,261 | 7,226,160 | 15,324,755 |
The carrying amount of goodwill relates to 4 (2018: 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 2019 and projections through to 31 December 2021. 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 2019 was 19 years 10 months.
The brand names under which XFL trades of C J Hole, Parkers and Ellis & Co have been in existence for between 71 years and 169 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 2021. 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 2019 and projections through to 31 December 2024. 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 6 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 14% in FY20 to 4% in FY24.
The cash flows arising were discounted by the weighted average cost of capital being 13.77% 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 2019 was 11 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 2019 was 17 years and 8 months.
The carrying value of EweMove the identified cash generating unit, was £9.6m at 31 December 2019 whereas the recoverable amount was assessed to be £12.2m at the same date. Headroom of £2.6m 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 2019. Thus, if the discount rate increased by 31% to 18%, an impairment change would result against goodwill, all other assumptions remaining unchanged.
Assumption | Judgement | Sensitivity |
Discount rate | As indicated above the rate used is 13.77% | 31% |
Revenue - FY20 to FY25 | The range of growth rates for FY20 to FY25 are stated above | (27%) |
Direct costs - all years | Assumed to be 24% of revenue for all years | 42% |
Indirect costs - all years | Assumed to be 48% of revenue in FY20 and then decline linearly to 38% of revenue in FY23 onwards | 31% |
Direct and indirect costs - all years | As indicated above for direct and indirect costs | 18% |
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 | ||
| 2019 £ | 2018 £ | 2019 £ | 2018 £ |
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 | - | - |
| 7,226,160 | 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 2018 | 37,034 | 107,885 | 157,124 | 302,043 |
Additions | - | 26,522 | 3,983 | 30,505 |
Disposals | - | (4,067) | - | (4,067) |
Carried forward 31 December 2018 | 37,034 | 130,340 | 161,107 | 328,481 |
Additions | - | 7,380 | 580 | 7,960 |
Carried forward 31 December 2018 | 37,034 | 137,720 | 161,687 | 336,441 |
Depreciation |
|
|
|
|
Brought forward 1 January 2018 | 21,872 | 53,125 | 117,780 | 192,777 |
Charge for year | 3,703 | 19,554 | 10,159 | 33,416 |
Disposals | - | (1,296) | - | (1,296) |
Carried forward 31 December 2018 | 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 |
Net book value |
|
|
|
|
At 31 December 2019 | 7,756 | 45,649 | 24,150 | 77,555 |
At 31 December 2018 | 11,459 | 58,957 | 33,168 | 103,584 |
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, there has been no restatement of comparative figures. For an explanation of the transitional requirements that were applied as at 1 January 2019 see note 2a.
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 |
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 |
Maturity analysis of lease liabilities as at 31 December 2019:
| Up to 3 months | Between 3 and 12 months | Between 1 and 2 years | Between 2 and 5 years |
| £ | £
| £
| £ |
Lease liabilities |
16,050 | 36,610 | 18,755 |
6,334 |
The following table reconciles the minimum lease commitments disclosed in the Group's 31 December 2018 annual financial statements to the amount of lease liabilities recognised on 1 January 2019:
|
|
| 1 January 2019 £ |
Minimum lease commitments at 31 December 2018 |
|
| 81,200 |
Effect of discounting using incremental borrowing rate at date of initial application |
|
| (1,744) |
|
|
|
|
Lease liability at 1 January 2019 |
|
| 79,456 |
18. Prepaid assisted acquisitions support
Group
|
|
|
| Total £ |
Cost |
|
|
|
|
Brought forward 1 January 2018 |
|
|
| 325,792 |
Additions |
|
|
| 250,085 |
Disposals |
|
|
| - |
Carried forward 31 December 2018 |
|
|
| 575,877 |
Additions |
|
|
| 386,332 |
Disposals |
|
|
| (8,071) |
Carried forward 31 December 2019 |
|
|
| 954,138 |
Amortisation |
|
|
|
|
Brought forward 1 January 2018 |
|
|
| 33,340 |
Charge for year - to revenue |
|
|
| 61,492 |
Charge for year - to cost of sales |
|
|
| 27,209 |
Carried forward 31 December 2018 |
|
|
| 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 |
Net book value |
|
|
|
|
At 31 December 2019 |
|
|
| 657,948 |
At 31 December 2018 |
|
|
| 453,836 |
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 2018 | 33,776,075 |
Capital contribution to subsidiaries - share options | 27,811 |
At 31 December 2018 | 33,803,886 |
Capital contribution to subsidiaries - share options | 95,778 |
At 31 December 2019 | 33,899,664 |
Net book value |
|
At 31 December 2019 | 33,899,664 |
At 31 December 2018 | 33,803,886 |
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.
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 2019.
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 |
* indirectly owned
20. Trade and other receivables
| Group | Company | ||
| 2019 £ | 2018 £ | 2019 £ | 2018 £ |
Trade receivables | 233,601 | 217,040 | 2,172 | 3,191 |
Less: provision for impairment of trade receivables | (153,814) | (103,574) | - | - |
Trade receivables - net of impairment provisions | 79,787 | 113,466 | 2,172 | 3,191 |
Loans to franchisees | 78,411 | 36,523 | - | - |
Other receivables | 202,607 | 8,539 | 200,137 | 5,556 |
Amounts due from Group undertakings | - | - | - | 160,782 |
Prepayments and accrued income | 1,122,204 | 937,746 | 29,609 | 23,011 |
Tax receivable | - | - | 189,985 | 168,980 |
| 1,483,009 | 1,096,274 | 421,903 | 361,520 |
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:
| 2019 £ | 2018 £ |
Group |
|
|
Not more than 3 months | 33,634 | 70,149 |
More than 3 months but not more than 6 months | - | 18,080 |
More than 6 months but not more than 1 year | - | 4,585 |
| 33,634 | 92,814 |
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.
In the year ended 31 December 2019 the Group made two new loans to franchisees. Loan 1 was for £50k and is secured by way of a fixed and floating charge over their assets. At the 31 December 2019 £50k was outstanding in relation to this loan. Capital repayments will commence 12 months from issue. Loan 2 for £14k which is secured by a personal guarantee. At the 31 December 2019 £13k was outstanding in relation to this loan.
In a prior year a loan was made to another franchisee for £30k and as at 31 December 2019 £16k (2018: £23k) was outstanding in relation to this loan.
Included within "Prepayments and accrued income" is accrued income of £704k (2018: £663k) 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.
21. Called up share capital
| 2019 | 2018 | ||
| 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 2018 and 31 December 2019 | 25,822,750 | 258,228 | 4,039,800 |
23. Other reserves
| Merger reserve £ | Share-based payment reserve £ | Other reserve
£ | Total £ |
Group |
|
|
|
|
1 January 2018 | 2,796,984 | 137,020 | - | 2,934,004 |
Share-based payment charge | - | 49,857 | - | 49,857 |
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 |
31 December 2019 | 2,796,984 | 628,586 | 81,322 | 3,506,892 |
Company |
|
|
|
|
1 January 2018 | 20,786,884 | 137,020 | - | 20,923,904 |
Share-based payment charge | - | 49,857 | - | 49,857 |
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 |
31 December 2019 | 20,786,884 | 628,586 | 81,322 | 21,496,792 |
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. Borrowings
| Group | Company | ||
| 2019 £ | 2018 £ | 2019 £ | 2018 £ |
Repayable within 1 year: |
|
|
|
|
Bank loan (term loan) | - | 900,000 | - | 900,000 |
Repayable in more than 1 year: |
|
|
|
|
Bank loan (term loan) | - | 700,000 | - | 700,000 |
Bank loans due after more than 1 year are repayable as follows: |
|
|
|
|
Between 1 and 2 years | - | 700,000 | - | 700,000 |
|
|
|
|
|
As at 31 December 2019 the Company had no loans outstanding. During the year all outstanding loans were repaid.
In 2018 the Company had a loan facility of £5m, and had drawn down 2 term loans under this facility, referred to below as 'Loan 1' and 'Loan 2'. The loans were secured with a fixed and floating charge over the Group's assets and a cross guarantee across all companies in the Group.
Loan 1 - £2.5m drawn down on 30 October 2014 and was repayable over 5 years in equal instalments. Interest was charged quarterly on the outstanding amount and the rate is fixed during the term at 4.08%. The loan was repaid in full on 30 October 2019
Loan 2 - £2m drawn down on 5 September 2016 and was repayable over 5 years in equal instalments. Interest was charged quarterly on the outstanding amount; the rate is variable during the term at 2.5% above LIBOR. The loan was repaid in full on 24 October 2019.
The cash outflow for borrowings arising from financing activities during the year was £1.6m (2018: £0.9m).
25. Trade and other payables
| Group | Company | ||
| 2019 £ | 2018 £ | 2019 £ | 2018 £ |
Trade payables | 741,576 | 164,181 | 38,659 | 15,596 |
Other taxes and social security | 575,600 | 619,119 | - | - |
Other payables | 118,546 | 28,113 | - | - |
Accruals and deferred income | 564,453 | 665,406 | 22,839 | 48,967 |
Amounts owed to Group undertakings | - | - | 113,989 | - |
| 2,000,175 | 1,476,819 | 175,487 | 64,563 |
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 £7k (2018: £36k) in relation to charges levied on franchisees in advance and EweMove licence fees.
No trade payables at 31 December 2019 were overdue for payment. One supplier invoiced a full year's worth of costs at the end of the year amounting to £356k and one supplier invoiced its software licence costs of £200k early (this is matched by a prepayment of £200k).
26. Deferred tax
| Group | Company | ||
| 2019 £ | 2018 £ | 2019 £ | 2018 £ |
Balance at beginning of year | (1,372,196) | (1,467,598) | 30,101 | 23,318 |
Movement during the year: |
|
|
|
|
Statement of changes in equity | 81,322 | - | 81,322 | - |
Statement of comprehensive income | 150,647 | 95,402 | 75,091 | 6,783 |
Other | - | - | 28,779 | - |
Balance at end of year | (1,140,227) | (1,372,196) | 215,293 | 30,101 |
Deferred taxation has been provided as follows:
| Group | Company | ||
| 2019 £ | 2018 £ | 2019 £ | 2018 £ |
Accelerated capital allowances | (18,956) | (5,895) | 28,779 | - |
Share-based payments | 186,514 | 30,101 | 186,514 | 30,101 |
Acquired business combinations | (1,307,785) | (1,396,402) | - | - |
| (1,140,227) | (1,372,196) | 215,293 | 30,101 |
27. 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 | ||
| 2019 £ | 2018 £ | 2019 £ | 2018 £ |
Loans and receivables: |
|
|
|
|
Trade receivables | 79,787 | 113,466 | 2,172 | 3,191 |
Loans to franchisees | 78,411 | 36,523 | - | - |
Other receivables | 202,607 | 8,539 | 200,137 | - |
Cash and cash equivalents | 4,011,463 | 3,857,988 | 1,073,774 | 1,278,026 |
Accrued income | 703,774 | 663,089 | - | - |
Amount owed by Group undertakings | - | - | - | 70,428 |
| 5,076,042 | 4,679,605 | 1,276,083 | 1,351,645 |
Financial liabilities
Financial liabilities measured at amortised cost:
| Group | Company | ||
| 2019 | 2018 | 2019 | 2018 |
Other financial liabilities: |
|
|
|
|
Bank loan | - | 1,600,000 | - | 1,600,000 |
Trade payables | 741,576 | 164,181 | 38,659 | 15,596 |
Other payables | 118,546 | 28,112 | - | - |
Accruals | 557,951 | 629,200 | 22,839 | 48,969 |
Amounts owed to Group undertakings | - | - | 113,989 | - |
| 1,418,073 | 2,421,493 | 175,487 | 1,664,565 |
Maturity analysis of financial liabilities
| Group | Company | ||
| 2019 | 2018 | 2019 | 2018 |
In less than one year: |
|
|
|
|
Bank loan | - | 940,519 | - | 940,519 |
Trade payables | 741,576 | 164,181 | 38,659 | 15,596 |
Other payables | 118,546 | 28,112 | - | - |
Accruals | 557,951 | 629,200 | 22,839 | 48,969 |
Amount owed to Group undertakings | - | - | 113,989 | - |
| 1,418,073 | 1,762,012 | 175,487 | 1,005,084 |
In more than one year: |
|
|
|
|
Bank loan | - | 722,715 | - | 722,715 |
| - | 722,715 | - | 722,715 |
All of the financial assets and liabilities above are recorded in the statement of financial position at amortised cost. The above maturity analysis amounts reflect the contractual undiscounted cash flows, including future interest charges, which may differ from carrying values of the liabilities at the reporting date.
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 £78k.
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.
28. Share-based payments
Enterprise Management Incentive ("EMI") Share Option Scheme 2017
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.
Enterprise Management Incentive ("EMI") Share Option Scheme 2018
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 2019 options over 95,000 were granted and options over 170,000 were forfeited.
At 31 December 2019 options over 2,045,000 (2018: 2,120,000) ordinary shares existed.
These options have a vesting condition based on an EPS target for the year ended 31 December 2020.
The following principal assumptions were used in the valuation of each of the grants made in the year ended 31 December 2019 using the Black-Scholes option pricing model:
Assumptions |
|
|
|
| ||||
|
|
|
|
| ||||
Date of grant | 31/01/2019 |
| 22/05/2019 | 06/08/2019 |
| |||
Date of vesting | 30/04/2021 |
| 30/04/2021 | 30/04/2021 |
| |||
Share price at grant | £1.215 |
| £1.775 | £1.735 |
| |||
Exercise price | £0.01 |
| £0.01 | £0.01 |
| |||
Risk free rate | 0.57% |
| 0.57% | 0.45% |
| |||
Dividend yield | 5.70% |
| 5.70% | 4.90% |
| |||
Expected life | 2.25 years |
| 1.92 years | 1.73 years |
| |||
Share price volatility | 31.00% |
| 31.00% | 31.00% |
| |||
The weighted average contractual life remaining of these options is 1 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, all holders will exercise as soon as the options vest. The Group announces its results usually within the first 10 days of April. So, it has been assumed that all options will be exercised on 30 April 2021.
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 29 and 30 of the Annual Report.
Management has used the budget for FY20 and the market outlook to determine, at 31 December 2019, the achievement of the EPS condition.
The estimated fair value of the options over 2,045,000 ordinary shares at 31 December 2019 was £1,189,467. 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 £418,495 has been recognised in the Statement of Comprehensive Income in the year ended 31 December 2019, which is the cumulative share-based payments charge at 31 December 2019 less the cumulative share-based payments charge recognised at 31 December 2018 of £186,877.
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 following principal assumptions were used in the valuation of the grant made in the year ended 31 December 2019 using the Black-Scholes option pricing model:
Assumptions |
|
|
|
| ||||
Date of vesting |
|
|
| 30/04/2022 |
| |||
Share price at grant |
|
|
| £1.735 |
| |||
Exercise price |
|
|
| £0.01 |
| |||
Risk free rate |
|
|
| 0.45% |
| |||
Dividend yield |
|
|
| 4.90% |
| |||
Expected life |
|
|
| 2.73 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 2022.
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 29 and 30 of the Annual Report.
Management has used the budget for FY20, the market outlook and projections for FY21 to determine, at 31 December 2019, the achievement of the EPS condition.
The estimated fair value of the option over 100,000 ordinary shares at 31 December 2019 was £149,600. 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 £23,214 has been recognised in the Statement of Comprehensive Income in the year ended 31 December 2019.
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:
| 2019 | 2018 | ||
|
| Weighted average exercise price |
| Weighted average exercise price |
Number of share options |
|
|
|
|
Outstanding at the beginning of the year | 2,184,800 | £0.0508 | 2,204,800 | £0.0504 |
Forfeited | (170,000) | £0.01 | (175,000) | £0.01 |
Granted | 195,000 | £0.01 | 155,000 | £0.01 |
Outstanding at the end of the year | 2,209,800 | £0.0503 | 2,184,800 | £0.0508 |
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 outstanding options at 31 December 2018 comprised 2,120,000 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 2018 and the remaining options were not yet exercisable.
The weighted average remaining contractual life of options is 1.5 years (2018: 2.5 years).
29. 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:
| 2019 | 2018 |
Interim and final dividend (ordinary shares of £0.01 each) |
|
|
Richard Martin | 842,536 | 838,556 |
Ian Wilson | 127,221 | 115,378 |
Paul Latham | 4,300 | 1,950 |
David Raggett | 19,556 | 16,957 |
| 993,613 | 972,841 |
Directors' emoluments
Included within the remuneration of key management and personnel detailed in note 9, the following amounts were paid to the Directors:
| 2019 £ | 2018 £ |
Wages and salaries | 729,624 | 715,502 |
Social security costs | 92,363 | 90,224 |
Pension contribution | 20,000 | 10,703 |
| 841,987 | 816,429 |
Details of Directors' interests in share options are disclosed in the Directors' remuneration report on pages 29 and 30 of the Annual Report.
30. Events after the reporting date
In December 2019 we decided to offer Mark Graves the role of CEO of our financial services division after an introduction in the Spring of 2019. Mark has 30 years of experience in financial services provision to the residential property sector. He has held roles as Managing Director of Sesame Bankhall Group, Head of Network at Pink Network and Managing Director of Linear Financial Services. Mark was in the process of buying Auxilium Partnership Limited from his partner and we offered to lend him £0.2m repayable by 31 March 2020 at the latest. This loan was made in December 2019 and settled through equity in the acquired business in January 2020. The outflow is shown in the Consolidated Statement of Cash Flows under investing activities on page 41.
On 1 January 2020 Mark took up his role with us and we began negotiations to affect the sale of Auxilium Partnership Limited to our Group. We decided to create a financial services holding company to hold all our investments into financial services. On 7 January 2020 that new company, Aux Group Limited (registered in England and Wales under company number 12389325) was incorporated. The Property Franchise Group Plc took an 85% holding in its share capital. The remaining 15% was acquired by Mark Graves. On 7 January 2020 Aux Group Limited acquired 85% of the share capital of Auxilium Partnership Limited (registered in England and Wales under company number 11703495) from Mark Graves for £0.2m, which is anticipated to be presented as goodwill in the financial statements for the year ending 31 December 2020. Thus, the loan was repaid in full. Aux Group Limited has an option to buy Mark's remaining 15% shareholding in Auxilium Partnership Limited.
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