Annual Financial Report
Bovis Homes Group PLC - Annual Report and Accounts 2018
Annual Report and Accounts 2018, Notice of Annual General Meeting 2019 and Proxy Card
The Company's Annual General Meeting will be held at 12 noon on Wednesday 22nd May 2019 at The Spa Hotel, Mount Ephraim, Royal Tunbridge Wells, Kent TN4 8XJ.
In order to comply with Listing Rule 9.1.3, copies of Annual Report and Accounts 2018 incorporating the Notice of Annual General Meeting 2019, together with the Proxy Form, have been submitted to the National Storage Mechanism and will shortly be available for inspection at www.morningstar.co.uk/uk/NSM
The documents are being posted to shareholders who have requested hard copies. Copies of the Annual Report and Accounts 2018 and the Notice of Annual General Meeting 2019 and are available on the Company's website at www.bovishomesgroup.co.uk/annualreport2018 and www.bovishomesgroup.co.uk/investors/shareholders/agm/2019 for shareholders receiving web communications.
Annual Report and Accounts 2018 - publication required by DTR 6.3.5
The Company published its Preliminary Results for the year ended 31 December 2018 on 28 February 2019. In order to comply with DTR 6.3.5 it is now publishing, in unedited full text, information contained in the annual financial report of a type required to be disseminated in a half-yearly financial report. To maintain coherence, this repeats some of the information contained in the Preliminary Results announcement.
The full annual financial report is available on the Company's website at www.bovishomesgroup.co.uk/annualreport2018
Bovis Homes Group PLC - Annual Report and Financial Statements 2018
Chairman's statement
I am pleased to report that the Group made significant operational and financial progress in 2018. Following a period of re-setting the business, 2018 has been a year of positive progress across all aspects of the Group. Our focus has remained on delivering high quality new homes in a controlled and disciplined approach with a high level of customer service.
Customers
Our customers remain at the centre of everything we do and delivering a significantly improved level of customer satisfaction was our number one priority for 2018. I am delighted with our 4 star HBF customer satisfaction rating for 2018, up from 2 star in the prior year. We are committed to retaining this rating going forwards reflecting our high quality build, and also have a range of customer facing initiatives including a new Customer Relationship Management system to be rolled out in 2019 to help us build a better Bovis Homes.
People
People remain a key priority and each year we are investing more in training and development than ever before. This is managed through our Bovis Homes Training Centre where a range of training opportunities are designed for all our employees and subcontractors.
Acknowledging the skills shortage in our industry, we are pleased to have signed the HBF's Home Building Skills Pledge, committing us to working with others in the industry to recruit and train more people to the highest industry-agreed standards. We also remain very committed to our Bovis Homes Apprenticeship Scheme and welcomed 37 new recruits in the year.
On behalf of the Board, I would like to thank all of our employees for their dedication, hard work and enthusiasm in driving the operational change through the business and delivering a step change in our financial performance. I would also like to extend my thanks to our subcontractors and suppliers who are such an important and valued component of our business.
The housing market
The fundamentals of the new build housing market remain positive with strong demand across all our regions.
Interest rates remain low by historical standards and the mortgage market continues to be competitive. Increasing the supply of new homes in the UK remains a key priority for Government and their support for purchasers, in particular through the extended Help to Buy Scheme, is enabling them to access the housing market through affordable mortgage finance. Whilst the supply of labour in our market remains challenging,
the planning environment continues to be positive, supporting a rational market for housing land. Brexit has caused a level of consumer and wider uncertainty and we are hopeful of a positive conclusion to it in the near term.
Ordinary dividends and capital return plan
The Board intends to continue its strategy of maintaining an efficient balance sheet and delivering sustainable dividends to shareholders. In setting the level of dividends the Board considers a range of factors including the extent to which the dividend is covered by underlying earnings and free cash flow, the prevailing strength of the balance sheet and general economic circumstances, with particular regard to the cyclicality of the industry.
The Board is pleased to recommend a final ordinary dividend of 38.0p (FY17: 32.5p) per share bringing the total ordinary dividend for FY18 to 57.0p (FY17: 47.5p) per share, representing a 20% increase.
In addition, the Board intends that surplus capital will be returned to shareholders totalling a minimum of £180m or c. 134 pence per share in the three years to 2020, with the first special dividend payment of £60m, equivalent to 45 pence per share paid in November 2018.
The Group expects to continue to be strongly cash generative and the Board is committed to reviewing the capacity for further returns to shareholders over time.
The Board
I would like to thank my colleagues on the Board for their collective support and strong individual contributions during a progressive and successful year in 2018. I was delighted to welcome Katherine Innes Ker as a non-executive director in October 2018, bringing strong experience as a non-executive director across a range of sectors including housebuilding experience, which strengthens the Board.
We value dialogue with all our shareholders, institutional and retail and have maintained ongoing engagement
with our major shareholders during 2018. The Board has been very cognizant of the vote on the Directors' Remuneration Report at the 2018 AGM and was disappointed with the outcome, having made significant efforts to engage with shareholders, institutions and proxy advisors beforehand. Following the vote, we have sought to better understand the rational for the dissent including holding a corporate governance presentation
in October 2018. This was well attended by major shareholders and allowed discussion to further explore and answer specific concerns.
The future
We have set out our clear medium term targets to be achieved by 2020 which will return Bovis Homes Group to being a leading UK housebuilder and deliver significantly improved returns to shareholders. Much progress has been made towards these targets during 2018 with a number already achieved.
I continue to spend a lot of my time with Bovis Homes in the regional offices and on site with the wider leadership team and am delighted to report the positive culture that has evolved over the past 18 months. I expect 2019 to be another year of great progress with a wide range of initiatives being implemented across the business to build an even better Bovis Homes for the future. We expect to deliver a controlled increase in completions volume, maintain our high level of build quality and customer service and drive forward our profitability and return on capital employed in the year ahead.
Ian Tyler
Chairman
Chief Executive's Statement
2018 in review
The changes implemented across all areas of the business over the past two years have resulted in a significant step up in the operational and financial performance of the Group in 2018 and I am pleased to report a record year of profits with our profit before tax up 47.4% to £168.1m.
Customer satisfaction has been at the core of all we have done during 2018 and we expect to achieve our target of a 4 star HBF customer satisfaction rating for 2018, a significant improvement from our 2 star HBF customer satisfaction rating in 2017. This shift in quality is reflected across all of our housing delivery and in the feedback we receive from our private customers and housing association partners.
We have improved our production processes to ensure we consistently deliver high quality new homes for our customers whilst also driving operational efficiency. In the year, we delivered a total of 3,759 (2017: 3,645) units in a controlled and disciplined manner.
We launched our new housing range, the Phoenix collection in 2018 and have made excellent progress with site replans. Our first show homes from the new range have been successfully launched and we are looking forward to delivering our first completions in Spring 2019.
We are focused on controlled volume growth whilst optimising prices and costs, and this is reflected in a 390 basis points improvement in our operating margin to 16.4% for 2018. The benefits from our key margin initiatives are coming through and we expect to achieve further benefits in 2019.
We have a high quality land bank which is well positioned to meet today's demand for new homes. We have excellent forward visibility on our land, with all land for 2019 having detailed planning consent, and 97% of our land for 2020 already secured.
On balance sheet optimisation, our specific actions over the past two years have focused on ensuring we have an efficient land bank to match our strategy, the reduction in our working capital, the disposal of non performing assets and the joint venture of our two largest sites. Overall, we are aiming to achieve in excess of £250m additional net cash benefit, including a c. £68m net cash benefit on the completion of our joint venture at Wellingborough in H1 2019, well ahead of our £180m target.
I am delighted that as a result of the very positive improvements across all areas of the business, we have seen a step up in our return on capital to 19.3% in the year from 13.7% in 2017.
Overall, we have made good progress towards all of our medium term targets with a number achieved in 2018, and we expect to build upon this further in 2019.
I would like to thank all the Group's employees for their hard work and commitment over the past 12 months and to recognise that each one of them has played their part in the very positive turnaround in all aspects of the Group's performance in 2018. We have plenty more opportunities in 2019, and I am looking forward to another year of progress and returning Bovis Homes to being one of the UK's leading housebuilders.
Operational update
Customer service
Customer satisfaction has been central to all that we have done this year and we are pleased that this is reflected in our expected 4 star HBF customer satisfaction rating for 2018, a step change from the 2 star rating received in the prior year. This improvement has been seen across all our regions, with each expected to achieve at least a 4 star rating. The new year has started well with our rating tracking ahead of 2018.
We continue to invest in our customer service function and will see the implementation of a new customer relationship management system rolled out across the business in 2019. This will provide a complete end to end Bovis Homes experience for our customers, making it easier for them to engage with us, whilst driving improved efficiency.
We became a member of the Institute of Customer Service in the year, which has supported our company wide customer service training programmes and provided the opportunity to gain a professional qualification within customer service.
The Bovis Home Buyers Panel continues to meet and provides us with very valuable feedback and opinion on all aspects of our customer experience.
Strong sales position
The Group starts the year with a strong sales position with forward sales representing 48% of consensus FY19 revenues. Our focus remains on optimising prices whilst delivering controlled volume growth.
Our new sales specification, launched in 2018, gives our customers the ability to choose extras within their new home and has been well received. We see further opportunity from this in 2019 with our Select range of customer options now well established and available across a greater proportion of our developments.
The Government sponsored Help to Buy scheme remains important, particularly for first time buyers, and was used for 38% (2017: 37%) of our private completions in 2018.
Part exchange is a positive sales proposition for our customers and during 2018 we reviewed our polices and procedures for the scheme to ensure we operate it efficiently and minimise our levels of part exchange stock. In the year, 8.7% of our private completions used part exchange. We see an increase in its use as a sales opportunity for 2019 and are comfortable for part exchange to be at a similar level as the prior year which was 22.2% of private completions.
Our focus remains on building high quality desirable family homes in prime locations on lower risk greenfield sites. We have structured the business to ensure all our developments are well serviced by our regional offices and have seven well balanced regions operating across the southern half of England. We have no developments within the M25 and apartments account for just 4% of our owned land bank plots. Our strategy, in the medium term, is to reduce the proportion of larger homes we build and increase our offering of two and three bedroom homes and this was reflected in our development replans and land buying during 2018. 96% of our land bank plots have an average selling price of less than £600k with 42% at less than £300k, with the average selling price in our land bank at £305k. Only 1% of the 4,164 plots we acquired in 2018 are expected to have a sales price in excess of £600k.
High build quality
Improving our build quality has been a key priority and we have made further progress during the year. We have high calibre construction directors, site managers and site teams across all our regions, and a far greater hands on approach is now entrenched across the business, with best practice promoted and shared.
We are delighted that in 2018, six of our site managers and site teams were awarded NHBC Pride in the Job Quality awards, an increase from two awards in 2017 and in-line with our highest number since 2004.
Our NHBC Construction Quality Review for 2018 highlighted an 18% improvement in our Group score over the past two years bringing it broadly in line with industry average, with the NHBC noting during a review that 'Bovis Homes has made a significant step-up in build quality and customer satisfaction results in a relatively short time frame.' We have also seen a significant reduction in our NHBC reportable items which are in line with the industry average.
We have invested in our health and safety function and have seen very positive results in terms of more frequent and transparent reporting, a more pro-active culture across the business, and an improved overall health and safety record year on year.
People
People satisfaction is a key strategic priority and we are committed to investing in the development and training of our workforce including our subcontractors. We have a dedicated Learning and Development team which supports the business through a full range of training and development programmes, leveraging our in-house Bovis Homes Training Centre. In 2018 we delivered 4,505 delegate training days, up 14% on the prior year.
A key priority has been the development of our leadership teams with the roll out of our bespoke leadership framework programmes to over 140 leaders across the business. We are also very focused on strengthening our talent pipeline through our annual succession planning review.
In 2018 we launched our trainee assistant site manager programme which lasts 18 months and covers all aspects of site management. We are very committed to our apprenticeship scheme and recruited a further 37 apprentices in the year taking our total to 68.
As part of our commitment to the HBF's Home Building Skills Partnership we continue to offer training opportunities to our subcontractors including the Site Supervisor Safety Training scheme to over 150 people in 2018, as well as mental health training to raise the awareness and importance of personal well-being across the industry.
We are pleased to report an ongoing steady improvement in our employee engagement level as measured by our monthly employee engagement survey.
Phoenix housing range
We launched our new housing range of 28 new house types for both private and affordable housing in April 2018. It is designed to meet our customers' needs today including more open plan living, larger bedrooms and better storage. The range also reflects a complete construction specification review to ensure time, material and labour efficient designs. With our first completions due in Spring 2019, the new range will deliver exciting, high quality new homes as well as drive further price optimisation and a reduction in production costs.
We have made good progress implementing the new range with 34 sites replanned with the new house types and a further 19 developments in the planning process. Our first new show homes launched in January at our Hampton Meadows development in Stadhampton and at our Priory Fields development in Wells with excellent customer feedback, and our first completions will be in H1 19. Overall, we expect up to 15% of our private completions in 2019 to be Phoenix house types and this will increase quickly in future periods.
We expect to replan c. 3,500 plots from our land bank and all new sites are being acquired and designed with the Phoenix product. We anticipate the new range will facilitate an improvement to the embedded gross margin in our land bank of 1% as the positive impact of replanning comes through improving our layouts, optimising pricing and reducing build costs. The range provides significant opportunities and will ensure we remain competitive for the prime sites we are seeking to secure for the future.
Building a better Bovis Homes
The investment in efficient systems and processes and the development of our operational teams is a key priority for the Group and we are now 18 months into a 3.5 year plan of implementing a series of major business change projects, system improvements and upgrading equipment across the Group.
We successfully implemented COINS as our primary business system in Spring 2018 and it is already providing significant improvements in process, reporting and cost control. The second phase will be implemented during 2019 delivering further improvement across our commercial, construction and land activities. A key focus is also to support mobile working, allowing our commercial and technical teams in particular to be active on our development sites and support the site teams as much as possible.
Further process changes are being coordinated across the business including a consistent automated document management system to support our teams as well as our supply chain, and in time, provide information directly to our customers. A new financial planning and modelling tool is being rolled out during 2019, and we are implementing a new integrated HR, payroll and learning management solution. In addition, we continue to invest in our sales website to ensure we build a better Bovis Homes.
These changes alongside the new customer relationships management system, revised customer journey and the new Phoenix housing range represent a significant investment as well as considerable ongoing business development to enable the group to drive further operational improvements and our financial performance forward in the medium term.
Partnership housing
The housing shortage and in particular the need for greater delivery of affordable homes in the UK remains very significant. Housing Associations are seeking new ways to support their traditional affordable housing delivery and following the Letwin review, the Government is focused on facilitating the quicker delivery of larger schemes.
Bovis Homes is exceptionally well placed to play its part and we are delighted to be developing our new Partnership Housing Division during 2019. It is a land led strategy reflecting our valuable and deliverable strategic land bank with a number of sites of significant scale. The Group has significantly improved its relationships with Housing Associations over the last couple of years, and often under resourced the Housing Associations are seeking partnerships with Bovis Homes a partner of choice. The new division will be led by Keith Carnegie as CEO of Partnership Housing who has much experience in this area.
The Group already has successful partnerships with Housing Associations on its sites at Wokingham and Boorley Green, and with Live West for the development of our site at Tavistock. Most recently we have entered into a 50:50 joint venture with Clarion Housing Group for the development of our site at Sherford and we expect to complete the joint venture of our site at Wellingborough with a housing association this year.
There is a strong pipeline of pull-through from our strategic land bank with six sites including North Whitely, Alphington, near Exeter, and Taunton all identified as being suitable for partnership development.
This partnership approach is expected to drive the best returns from our land opportunities, enable good working capital management on key schemes and deliver incremental volume from our sites in future periods.
Land
The Group has a high quality owned land bank with strong fundamentals and excellent forward visibility. All our land for 2019 has detailed planning consent and 97% of our land for 2020 is secured.
We continue to see good opportunities in the land market and increased our land activity in 2018 to ensure we maintain this strong supply, in line with our target of a 3.5 to 4.0 years land bank. In the year we secured a total of 4,164 plots (2017: 2,550) across 19 (2017: 11) sites.
As at 31 December 2018, we had a total of 15,832 (2017: 17,096) owned plots in our land bank representing a 4.0 year owned land supply assuming our target 4,000 completions. We also had 1,496 plots at our development at Sherford which was put into a 50:50 joint venture during H2 2018.
|
As at 31 December |
2017 |
2018 |
|
Total consented land |
17,096 |
17,328 |
|
Joint venture plots |
- |
1,496 |
|
Owned land bank plots |
17,096 |
15,832 |
|
Land bank years(1) |
4.3 yrs |
4.0 yrs |
(1) Land bank years calculated assuming 4,000 completions p.a.
Our strategic landbank remains a very valuable source of high quality land for the Group. We saw a step up in the strategic land pull-through in the year as we made progress on a number of major projects which will form a key part of delivering new homes for years to come. These are exciting high quality developments including North Whitely in the highly desirable borough of Winchester, Alphington, an excellent location on the edge of Exeter, Staplehurst in Kent, and a development at Tavistock, Devon where we have entered into a partnership with Live West, a leading developer of affordable housing in the South West.
Our strategic pipeline is strong with our developments in Taunton (832 plots), Camborne (863 plots) and Collingtree (349 plots) all having received outline planning and ideal for development within our newly formed Partnership Housing division. We continue to pursue new strategic land opportunities that are within our core operating area and in the year optioned 1,415 strategic land plots (2017: 2,338).
As at 31 December 2018, we had a total of 19,278 plots (2017: 20,756) in our strategic land bank across 53 sites (2017: 52).
Balance sheet optimisation
As part of our strategic review in 2017 we set out a clear plan to optimise our balance sheet with a target of realising an additional net cash benefit of £180m from this. Since mid 2017 our focus has been on working capital management, the disposal of non performing assets and optimising the structure of our balance sheet. I am pleased to report that we have delivered £180m of additional net cash benefit to date and are now aiming to realise a total of c. £250m with the completion of our joint venture at Wellingborough. There remain some further opportunities including the disposal of PRS joint ventures, and we will maintain a strong focus on active balance sheet optimisation going forward.
On land optimisation we have realised a total of £81m of net cash benefit to date including £15m from the joint venture of our development at Sherford with Clarion Housing Group. We have disposed of parcels of land on some of our larger sites and also disposed of several sites outside of our operating area. We expect to deliver c. £68m net cash benefit from the completion of our JV of Wellingborough in H1 19 and c. £4m from the disposal of an out of operating area site.
Our initiatives on work in progress have totalled £43m net cash benefit of which the reduction of our part exchange properties contributed £26m. The balance reflects optimisation of our site-by-site WIP and other initiatives such as the sale and leaseback of our show homes.
We have disposed of other non-returning assets to release total net cash of £56m, the largest of which was the sale of our shared equity portfolio in 2017, realising total cash receipts of £30m.
Delivering our medium term targets
The Group set out its medium term targets to be achieved by 2020 and return Bovis Homes to being a leading UK housebuilder whilst significantly improving returns to our shareholders. We have made very good progress against these targets in 2018 with several already achieved.
We expect to make further progress in 2019 with the first completions from our new Phoenix housing range and our on-going specification review. We also expect to further the opportunity from our customer extras Select range, and will continue to drive revenue and cost management, all supported by more effective systems and ways of working.
|
Target |
Progress to date |
Timing / outlook |
|
||
|
4 star HBF customer satisfaction rating |
- 4 star HBF customer satisfaction score for 2018 |
Achieved - Maintain 4 star rating |
|
||
|
4,000 completions p.a. |
- 3% increase in completions in FY18, in-line with expectations |
2020 - Further controlled volume growth expected in FY19 |
|
||
|
3.5 to 4.0 year owned land bank |
- Divestment of sites outside of our core operating areas - Sherford JV completed |
Achieved - Completion of Wellingborough JV in H1 2019 - Maintain 3.5 to 4.0 year owned land bank (ex JVs) |
|
||
|
Min 23.5% gross margin |
- 380 basis point improvement in Group gross margin in FY18 to 21.8% - Margin initiatives delivering progress in FY18 with further opportunities - New land acquired in FY18 at an average gross margin in excess of 26% |
2020 - Margin initiatives underpin and provide upside to 2020 gross margin target - Embedded land gross margin at 24.8% will drive further improvements over time |
|
||
|
5% admin expense as % of revenues |
- Effective operating structure in place with continued investment in process and systems to deliver efficiency - Improvement in admin expense to revenue ratio to 5.3% in FY18 |
2019 |
|
||
|
Min £180m net cash from balance sheet optimisation
|
- In aggregate, balance sheet initiatives aiming for £250m net cash benefit, with £180m achieved to date |
Achieved - Further c. £68m net cash benefit from completion of Wellingborough JV - On-going active balance sheet optimisation and review of capital returns |
|||
|
25% return on capital employed |
- Increase in Group ROCE to 19.3% in FY18 from 13.7% in FY17 |
2020 |
|||
Ordinary dividend and capital return plan
The Board intends to pursue a strategy of maximising sustainable dividends to shareholders. In setting the level of dividend the Board will consider a range of factors including the extent to which the dividend is covered by underlying earnings and free cash flow, the prevailing strength of the balance sheet and general economic circumstances, with particular regard to the cyclicality of the industry.
The Board is recommending a final ordinary dividend of 38.0p per share (FY17: 32.5p) bringing the total ordinary dividend for FY18 to 57.0p per share (47.5p), representing a 20% increase on the prior year.
In 2017, the Board stated that it intended that surplus capital totalling £180m or c. 134p per share will be returned to shareholders in the three years to 2020. We are pleased to report that the first payment of £60m was made via a special dividend of 45p per share in November 2018. The Group will continue to be strongly cash generative and given the balance sheet position the Board is committed to reviewing capacity for further returns to shareholders over time.
|
|
FY18 |
FY19 |
FY20 |
|
Ordinary dividend |
57p per share |
Trend to 2 x cover |
|
|
Surplus cash return |
45p per share |
Total c. 90p per share |
|
Outlook
We have seen strong sales in the first eight weeks of the year with a rate of 0.58 sales per site per week, an increase of 15.7% on the prior year. Given the current increased level of uncertainty surrounding the broader UK economy, we are encouraged by the positive start to the year and are pleased to report our forward sales represent 48% of consensus total 2019 revenues for the Group.
We remain focused on delivering controlled volume growth whilst maintaining our absolute focus on high quality build and customer service.
During 2019 we are implementing a number of initiatives across all areas of the business to build a better Bovis Homes. In particular, we are looking forward to the first completions from our new Phoenix housing range this Spring, with our new house types designed to best meet our customers' needs whilst driving forward Group profitability.
We have excellent visibility on our land with all of our developments for 2019 delivery launched and 97% of our land for 2020 secured.
We are launching our new Partnership Housing division, a land led strategy which will see Bovis Homes helping to address the severe housing shortage in the UK whilst maximising our output and returns.
The Group set out its medium term targets to be achieved by 2020 and return Bovis Homes to being a leading UK housebuilder whilst significantly improving returns to our shareholders. We have made very good progress against these targets in 2018 with several already achieved, and we expect to make additional progress on the Group's operational and financial performance in 2019.
The Board is pleased to recommend a final ordinary dividend of 38.0p per share (FY17: 32.5p) bringing the total ordinary dividend for FY18 to 57.0p per share (47.5p), representing a 20% increase on the prior year. Including the special dividend of 45.0p per share paid in November 2018, dividends for FY18 more than doubled to 102.0p per share (2017: 47.5p).
Greg Fitzgerald
Chief Executive
Financial Review
Trading performance
In line with our strategy, the Group delivered controlled growth during 2018 resulting in a 3% increase to 3,759 legal completions (2017: 3,645). The completions included 1,192 affordable homes representing 32% of our completions (2017: 29%). Total revenue was £1,061.4m, an increase of 3% on the previous year (2017: £1,028.2m).
Housing revenue was £1,026.9m, 3% ahead of the prior year (2017: £992.9m). The average sales price for our private homes increased 1% to £337,400 (2017: £334,500) with our overall average sales price remaining broadly flat at £273,200 (2017: £272,400). The Group's revenue includes sales of private homes to Heylo Housing Association including the impact of the bulk transaction of 275 homes which exchanged in December 2017 with all homes under the deal completing during 2018.
Other revenue was £20.4m (2017: £3.3m) driven by the release of deferred revenue from disposals within our PRS joint ventures and land sales revenue, associated with three land sales, was £14.1m in 2018, compared to five land sales achieved in 2017 with total revenue of £32.0m.
Total gross profit was £230.9m (gross margin: 21.8%), compared with £184.6m (gross margin: 18.0%) in 2017. Housing gross margin was 21.9% in 2018, strongly ahead of the 18.3% achieved in 2017 driven by the increasing embedded margin in our land bank, reduced customer care costs and our ongoing operational improvements including the initial impacts from our margin initiatives.
During 2018, our construction costs increased by 3% per square foot, reflecting the inflationary impact of labour and materials that we estimate to be around 3 - 4% during the year offset by reductions in our cost base as we delivered production in a controlled manner, changes in specification and the under-utilisation of contingency in line with our margin initiative.
The profit on land sales in 2018 was £1.2m (2017: £2.4m) as we continue the strategy of managing our capital base through the disposal of parcels of land on several of our larger sites although these disposals will not impact our delivery in the next 2 to 3 years. The Group also entered into its first major joint venture in December 2018 at Sherford, near Plymouth, with Clarion Housing Group.
Operating profit increased to £174.2m (2017: £128.0m) at an operating profit margin of 16.4% (2017: 12.5%). Overheads were broadly flat in 2018 at £56.7m (2017: £56.6m) reflecting the efficient Group structure put in place during 2017, offset by higher employee costs and the ongoing investment in new processes, systems and training.
The Group delivered a record profit before tax for the year ended 31 December 2018 £168.1m, comprising operating profit of £174.2m and net financing charges of £6.1m. This compares to £114.0m of profit before tax in 2017, which comprised £128.0m of operating profit, exceptional costs of £6.8m and £7.2m of net financing charges.
Financing and Taxation
Net financing charges during 2018 were £6.1m (2017: £7.2m). Net bank charges were £2.7m (2017: £3.0m), because of lower net debt during 2018 than 2017 offset by a higher level of commitment fees and issue costs amortised in 2018. We incurred a £3.6m finance charge (2017: £5.1m charge), reflecting the imputed interest on land bought on deferred terms. The Group had no finance credit during the period (2017: £1.1m) arising from the unwinding of the discount on its available for sale financial assets as the portfolio was sold during 2017. There were also other credits of £0.2m (2017: expenses of £0.2m).
The Group has recognised a tax charge of £31.5m at an effective tax rate of 18.7% (2017: tax charge of £22.7m at an effective rate of 19.9%). The reduced tax rate is driven by the reduced level of corporation tax to 19%. The Group has a current tax liability of £18.1m in its balance sheet as at 31 December 2018 (2017: £16.9m).
Earnings per share and Dividends
Basic earnings per share for the year were 101.6p compared to 68.0p in 2017. This has resulted in a return on equity of 13% (2017: 9%).
As previously communicated, the Board will propose a 2018 final dividend of 38.0p per share. This dividend will be paid on 24 May 2019 to holders of ordinary shares on the register at the close of business on 29 March 2019. Combined with the interim dividend paid of 19.0p and the special dividend of 45.0p, the dividend for the full year totals 102.0p and compares to a total of 47.5p for 2017, an increase of 115%. The dividend reinvestment plan gives shareholders the opportunity to reinvest their dividends in ordinary shares.
Net Assets and Cash flow
As at 31 December 2018 net assets of £1,061.1m were £4.5m higher than at the start of the year. Net assets per share as at 31 December 2018 were 790p (2017: 787p).
Inventories decreased during the year by £1.7m to £1,320.2m. The value of residential land, the key component of inventories, decreased by £54.7m, as we reduced our land investment in line with our medium term strategy. Other movements in inventories included an increase in work in progress of £56.3m driven by the infrastructure investment at our key Wellingborough site in the year. We have also increased the level of housing work in progress which will support controlled delivery in the first half of 2019 as we seek to improve our phasing profile over a period of time. There was also a further reduction in part exchange properties of £3.4m.
Trade and other receivables decreased by £12.4m, including a reduced level of land sales debtors. Trade and other payables totalled £462.5m (2017: £478.2m). Land creditors increased to £293.3m (2017: £246.7m) reflecting increased land investment during the year and the settlement of existing creditors. The second half of 2018 was our strongest period of land acquisition since the start of 2017, including significant strategic land conversion at Whiteley, Hampshire and Exeter which contributed to the year end land creditors. Trade and other creditors decreased to £169.2m (2017: £231.5m), driven by the timing of payments, a reduction in deferred income from our housing association partners and controlled build delivery around our year end.
As at 31 December 2018 the Group's net cash balance was £126.8m. Having started the year with net cash of £144.9m, the Group generated an operating cash inflow before land expenditure of £291.2m (2017: £350.6m). Net cash payments for land investment were reduced at £145.4m (2017: £188.9m), reflecting the deferred payment terms achieved, the timing of acquisitions towards the end of the year and reduction in land sales debtors. Non-trading cash outflow, excluding the fixed asset disposals, increased to £163.9m (2017: £55.4m) with significantly increased dividends and higher corporation tax payments.
Cash flow
|
|
2018 £m |
2017 £m |
|
Net cash at 1 January |
144.9 |
38.6 |
|
Profit in the year |
136.6 |
91.3 |
|
Dividends and taxes paid |
(158.8) |
(79.5) |
|
(Increase)/Decrease in inventories |
(1.9) |
122.1 |
|
Other |
6.0 |
(27.6) |
|
Net cash at 31 December |
126.8 |
144.9 |
We have a committed revolving credit facility of £250m in place which expires in December 2022.
Land Bank
|
|
2018 |
2017 |
|
Consented plots added |
4,164 |
2,550 |
|
Sites added |
19 |
11 |
|
Sites owned at period end |
117 |
117 |
|
Total plots in land bank at period end including joint ventures |
17,328 |
17,096 |
|
Average consented land plot ASP |
£305,000 |
£293,000 |
|
Average consented land plot cost |
£54,900 |
£53,300 |
The Group's total land bank including joint ventures of 17,328 plots as at 31 December 2018 represents 4.6 years of supply based on the 2018 completions volume. If the land bank is adjusted to reflect the joint venture at Sherford, the land bank reflects our strategy to deliver c. 4,000 completions per annum from 2019 onwards and maintain an optimal land bank at 3.5 to 4.0 times. The 3,759 plots that legally completed in the year were replaced by a combination of site acquisitions and conversions from our strategic land pipeline. Based on our appraisal at the time of acquisition, the new additions, on average, are expected to deliver a future gross margin over 26% and a ROCE in excess of 25%.
The average selling price of all units within the consented land bank increased over the year to £305,000, 4% higher than the £293,000 at 31 December 2017. The estimated embedded gross margin in the consented land bank as at 31 December 2018, based on prevailing sales prices and build costs is 24.8% and reflects the initial impact of our margin initiatives.
Strategic land continues to be an important source of supply and during the year 1,958 plots have been converted from the strategic land pipeline into the consented landbank.
Earl Sibley
Group Finance Director
Statement of directors' responsibilities in respect of the annual report and the financial statements
The directors are responsible for preparing the Annual Report, the Directors' Remuneration Report and the financial statements in accordance with applicable law and regulations.
Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have prepared the Group and Parent company financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group for that period.
In preparing these financial statements, the directors are required to:
· select suitable accounting policies and then apply them consistently;
· make judgements and accounting estimates that are reasonable and prudent;
· state whether applicable IFRSs as adopted by the European Union have been followed, subject to any material departures disclosed and explained in the financial statements;
· prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.
The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the financial statements and the Directors' Remuneration Report comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The directors are responsible for the maintenance and integrity of the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
The directors consider that the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess a Company's performance, business model and strategy.
Each of the directors, whose names and functions are listed on pages 62 to 63 of the Annual Report confirm that, to the best of their knowledge:
· the Group financial statements, which have been prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group; and
· the Strategic Report contained in the Annual report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces.
By Order of the Board
M T D Palmer
Group Company Secretary
28 February 2019
Group income statement
|
For the year ended 31 December |
2018 £000 |
2017 £000
|
|
Revenue |
1,061,396 |
1,028,223 |
|
Cost of sales |
(830,505) |
(843,572) |
|
Gross profit |
230,891 |
184,651 |
|
Administrative expenses before exceptional items |
(56,723) |
(56,619) |
|
Exceptional administrative expenses |
- |
(6,812) |
|
Administrative expenses |
(56,723) |
(63,431) |
|
Operating profit before exceptional items |
174,168 |
128,032 |
|
Exceptional items |
- |
(6,812) |
|
Operating profit |
174,168 |
121,220 |
|
Financial income |
481 |
1,337 |
|
Financial expenses |
(6,585) |
(8,536) |
|
Net financing costs |
(6,104) |
(7,199) |
|
Share of profit/(loss) of Joint Ventures |
5 |
(20) |
|
Profit before tax |
168,069 |
114,001 |
|
Income tax expense |
(31,499) |
(22,706) |
|
Profit for the year attributable to ordinary shareholders |
136,570 |
91,295 |
|
|
|
|
|
Earnings per share (pence) |
|
|
|
Basic |
101.6p |
68.0p |
|
Diluted |
101.5p |
67.8p |
Group statement of comprehensive income
|
For the year ended 31 December |
2018 £000 |
2017 £000
|
|
Profit for the year |
136,570 |
91,295 |
|
Other comprehensive (expense) / income |
|
|
|
Items that will not be reclassified to the income statement |
|
|
|
Remeasurements on defined benefit pension scheme |
(5,781) |
9,286 |
|
Deferred tax on remeasurements on defined benefit pension scheme |
1,083 |
(1,630) |
|
Items reclassified to the income statement |
|
|
|
Available for sale reserve reclassified on disposal |
- |
1,696 |
|
Deferred tax on available for sale reserve movement |
- |
(288) |
|
Total other comprehensive (expense) / income |
(4,698) |
9,064 |
|
Total comprehensive income for the year attributable to ordinary shareholders |
131,872 |
100,359 |
Balance sheets
|
As at 31 December |
2018 £000
|
2017 £000
|
|
Assets |
|
|
|
Intangible fixed assets |
1,079 |
- |
|
Property, plant and equipment |
2,181 |
2,603 |
|
Investments |
28,992 |
8,717 |
|
Restricted cash |
1,381 |
1,414 |
|
Trade and other receivables |
611 |
832 |
|
Available for sale financial assets |
- |
- |
|
Retirement benefit asset |
1,381 |
2,111 |
|
Total non-current assets |
35,625 |
15,677 |
|
|
|
|
|
Inventories |
1,320,229 |
1,321,952 |
|
Trade and other receivables |
64,505 |
76,686 |
|
Cash and cash equivalents |
163,217 |
170,062 |
|
Total current assets |
1,547,951 |
1,568,700 |
|
Total assets |
1,583,576 |
1,584,377 |
|
|
|
|
|
Equity |
|
|
|
Issued capital |
67,398 |
67,330 |
|
Share premium |
216,907 |
215,991 |
|
Retained earnings |
776,762 |
773,255 |
|
Total equity attributable to equity holders of the parent |
1,061,067 |
1,056,576 |
|
|
|
|
|
Liabilities |
|
|
|
Bank and other loans |
36,401 |
25,209 |
|
Deferred tax liability |
730 |
570 |
|
Trade and other payables |
183,769 |
93,089 |
|
Provisions |
- |
812 |
|
Total non-current liabilities |
220,900 |
119,680 |
|
|
|
|
|
Trade and other payables |
278,706 |
385,079 |
|
Provisions |
4,843 |
6,187 |
|
Current tax liabilities |
18,060 |
16,855 |
|
Total current liabilities |
301,609 |
408,121 |
|
Total liabilities |
522,509 |
527,801 |
|
|
|
|
|
Total equity and liabilities |
1,583,576 |
1,584,377 |
Group statement of changes in equity
|
|
Total retained earnings £000 |
Issued capital £000 |
Share premium £000 |
Total £000 |
|
Balance at 1 January 2017 |
733,609 |
67,261 |
215,057 |
1,015,927 |
|
Total comprehensive income |
100,359 |
- |
- |
100,359 |
|
Issue of share capital |
- |
69 |
934 |
1,003 |
|
Own shares disposed |
- |
- |
- |
- |
|
Purchase of own shares |
(2,575) |
- |
- |
(2,575) |
|
Deferred tax on other employee benefits |
49 |
- |
- |
49 |
|
Share based payments |
2,243 |
- |
- |
2,243 |
|
Dividends paid to shareholders |
(60,430) |
- |
- |
(60,430) |
|
Total transactions with owners recognised directly in equity |
(60,713) |
69 |
934 |
(59,710) |
|
Balance at 31 December 2017 |
773,255 |
67,330 |
215,991 |
1,056,576 |
|
|
|
|
|
|
|
Balance at 1 January 2018 |
773,255 |
67,330 |
215,991 |
1,056,576 |
|
Total comprehensive income |
131,872 |
- |
- |
131,872 |
|
Issue of share capital |
- |
68 |
916 |
984 |
|
Own shares disposed |
- |
- |
- |
- |
|
Deferred tax on other employee benefits |
(113) |
- |
- |
(113) |
|
Share based payments |
1,413 |
- |
- |
1,413 |
|
Dividends paid to shareholders |
(129,665) |
- |
- |
(129,665) |
|
Total transactions with owners recognised directly in equity |
(128,365) |
68 |
916 |
(127,381) |
|
Balance at 31 December 2018 |
776,762 |
67,398 |
216,907 |
1,061,067 |
Statements of cash flows
|
For the year ended 31 December |
2018 £000 |
2017 £000 |
|
Cash flows from operating activities |
|
|
|
Profit for the year |
136,570 |
91,295 |
|
Depreciation and amortisation |
905 |
1,514 |
|
Revaluation of available for sale financial assets |
- |
1,355 |
|
Available for sale reserve reclassified on disposal |
- |
1,696 |
|
Financial income |
(481) |
(1,337) |
|
Financial expense |
6,585 |
8,536 |
|
Profit on sale of property, plant and equipment |
(450) |
(4,117) |
|
Equity-settled share-based payment expense |
1,413 |
2,243 |
|
Income tax expense |
31,499 |
22,706 |
|
Share of results of Joint Ventures |
(5) |
20 |
|
Profit on sale of assets to joint ventures |
(1,197) |
- |
|
Decrease/(increase) in trade and other receivables |
12,402 |
13,232 |
|
Decrease in available for sale financial assets |
- |
27,577 |
|
(Increase)/decrease in inventories |
(1,891) |
122,097 |
|
Decrease in trade and other payables |
(15,692) |
(104,664) |
|
Decrease in provisions and retirement benefit obligations |
(7,042) |
(3,685) |
|
Cash generated from operations |
162,616 |
178,468 |
|
Interest paid |
(2,773) |
(3,250) |
|
Income taxes paid |
(29,165) |
(19,074) |
|
Net cash inflow from operating activities |
130,678 |
156,144 |
|
|
|
|
|
Cash flows from investing activities |
|
|
|
Interest received |
278 |
142 |
|
Acquisition of intangible fixed assets |
(1,213) |
- |
|
Acquisition of property, plant and equipment |
(1,876) |
(1,371) |
|
Proceeds from sale of property, plant and equipment |
1,977 |
13,237 |
|
Movement of investment in Joint Ventures |
(20,300) |
32 |
|
Dividends received from Joint Ventures |
1,067 |
119 |
|
Reduction in restricted cash |
33 |
- |
|
Net cash (outflow)/generated from investing activities |
(20,034) |
12,159 |
|
|
|
|
|
Cash flows from financing activities |
|
|
|
Dividends paid |
(129,665) |
(60,430) |
|
Proceeds from the issue of share capital |
984 |
1,003 |
|
Purchase of own shares |
- |
(2,575) |
|
Drawdown of bank and other loans |
11,192 |
25,209 |
|
Net cash used in financing activities |
(117,489) |
(36,793) |
|
|
|
|
|
Net (decrease) / increase in cash and cash equivalents |
(6,845) |
131,510 |
|
Cash and cash equivalents at 1 January |
170,062 |
38,552 |
|
Cash and cash equivalents at 31 December |
163,217 |
170,062 |
Notes to the financial statements
1 General information
Bovis Homes Group PLC ('the Company') is a company domiciled in the United Kingdom. The consolidated financial statements of the Company for the year ended 31 December 2018 comprise the Company and its subsidiaries (together referred to as 'the Group') and the Group's interest in associates and joint ventures.
The consolidated financial statements were authorised for issue by the directors on 28 February 2019. The financial statements were audited by PriceWaterhouseCoopers LLP.
The financial information set out above does not constitute the Company's statutory financial statements for the years ended 31 December 2018 or 2017 but is derived from those financial statements. Statutory financial statements for 2016 have been delivered to the registrar of companies, and those for 2017 will be delivered in due course. The auditors have reported on those financial statements; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.
2 Basis of accounting
The consolidated financial statements of the Company and the Group have been prepared in accordance with the International Financial Reporting Standards (IFRS) and IFRS Interpretations Committee (IFRS IC) interpretations as adopted by the European Union and Companies Act 2006 applicable to companies reporting under IFRS.
The Company has elected to take the exemption under section 408 of the Companies Act 2006 to not present the Company income statement and statement of comprehensive income.
The Group has applied the following standards for the first time for its annual reporting period commencing 1 January 2018:
• IFRS9 'Financial instruments'
• IFRS15 'Revenue from Contracts with Customers'
The impact of these changes on the Group's financial statements is described in Note 1.7 of the Annual Report. The accounting policies have been applied consistently to the Company and the Group where relevant.
3 Going concern
The Directors are satisfied that the Group has sufficient resources to continue in operation for the 12 months from date of approval of these financial statements. The Directors reviewed detailed financial and covenant compliance forecasts covering the period to December 2019 and summary financial forecasts for the following two years.
Having started the year with net cash of £144.9 million, the Group generated a strong operating cash flow during 2018 but also made significantly increased dividend payments, decreasing the net cash position to £126.8 million. As at 31 December 2018, the Group held cash and cash equivalents of £163.2 million and had borrowings of £36.4 million. On 3 December 2015, the Group entered into a new £250.0 million committed revolving credit facility that was extended for a further year both during 2016 and early in 2018. This facility now expires in December 2022 and was fully available for drawdown at 31 December 2018.
For these reasons, the Directors consider it appropriate to prepare the financial statements of the Group and the Company on a going concern basis.
4 Basis of consolidation
The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) made up to 31 December. Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.
Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies. The consolidated financial statements include the Group's share of the total recognised gains and losses of associates on an equity accounted basis, from the date that significant influence commences until the date that significant influence ceases.
A joint arrangement is an arrangement over which the Group and one or more third parties have joint control. These joint arrangements are in turn classified as:
• Joint ventures whereby the Group has rights to the net assets of the arrangement, rather than rights to its assets and obligations for its liabilities; and
• Joint operations whereby the Group has rights to the assets and obligations for the liabilities relating to the arrangement
The consolidated financial statements include the Group's share of the comprehensive income and expense of its joint ventures on an equity accounted basis and its share of income and expenses of its joint operation within the corresponding lines of the income statement, from the date that joint control commenced.
5 Critical accounting judgements and key sources of estimation uncertainty
The preparation of financial statements in conformity with adopted IFRSs requires management to make estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of
carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.
No individual judgements have been made that have a significant impact on the financial statements, other than those involving estimates, which are outlined below.
Key sources of estimation uncertainty
Land held for development and housing work in progress
The Group holds inventories which are stated at the lower of cost and net realisable value. To assess the net realisable value of land held for development and housing work in progress, the Group completes a financial appraisal of the likely revenue which will be generated when these inventories are combined as residential properties for sale and sold. Where the financial appraisal demonstrates that the revenue will exceed the costs of the inventories and other associated costs of constructing the residential properties, the inventories are stated at cost. Where the assessed revenue is lower, the extent to which there is a shortfall is written off through the income statement leaving the inventories stated at a realisable value. To the extent that the revenues which can be generated change, or the final cost to complete for the site varies from estimates, the net realisable value of the inventories may be different. A review taking into account estimated achievable net revenues, actual inventory and costs to complete as at 31 December 2017 has been carried out, which has identified no material net movement in the carrying value of the provision. These estimates were made by local management having regard to actual sales prices, together with competitor and marketplace evidence, and were further reviewed by Group management. Should there be a future significant decline in UK house pricing, then further write-downs of land and work in progress may be necessary. Further detail on the carrying value of inventories is laid out in note 3.1 of the Group's Annual Report and Accounts.
Margin recognition
The gross margin from revenue generated on each of the Group's individual sites within the year is recognised based on the latest forecast for the gross margin expected to be generated over the remaining life of that site. The remaining life gross margin is calculated using forecasts for selling prices and all land, build, infrastructure and overhead costs associated with that site. There is inherent uncertainty and sensitivity to external forces (predominantly house prices and labour costs) in these forecasts, which are reviewed regularly throughout the year by management and are addressed on pages 30 to 33 of the Annual Report and Accounts.
Defined benefit pension scheme
The Group has an active defined benefit pension scheme, which is subject to estimation uncertainty. Note 5.7 of the Annual Report and Accounts outlines the way in which this Scheme is recognised in the Group's Financial Statements, the associated risks and sensitivity analysis showing the impact of a change in key variables on the defined benefit obligation.
6 Segment reporting
The Chief Operating Decision Maker, which is the Board, notes that the Group's main operation is that of a housebuilder and it operates entirely within the United Kingdom, there are no separate segments, either business or geographic, to disclose, having taken into account the aggregation criteria provisions of IFRS8.
7 Impact of standards and interpretations effective for the first time
The Group has adopted the following new standards and amendments to standards, including any consequential amendments to other standards, with a date of initial application of 1 January 2018:
• IFRS9 'Financial instruments' replaced IAS39 'Financial Instruments: Recognition and Measurement' and was effective from 1 January 2018. Consistent with the disclosure made in the Group's 2017 Annual Report and Accounts, the implementation of the standard has not had a material impact on the Group's or the Company's 2018 financial statements for the following reasons:
i. The Group disposed of its shared equity available for sale assets during 2017
ii. The Group does not presently hold any complex financial instruments
iii. Any investments in equities for outside of the Bovis Homes Group are immaterial
iv. Any trade debtors are held under standard terms agreed with the customer
v. The Group has experienced a low level of default events on its debtors historically and currently has no reason to expect this to change significantly in future
vi. The Group has no reason to expect any impairment or losses on the intercompany balance held between Bovis Homes Group and Bovis Homes Limited
• IFRS 15, 'Revenue from contracts with customers' replaced IAS 18 'Revenue' and IAS 11 'Construction contracts', setting out new revenue recognition criteria particularly with regard to performance obligations. Consistent with the disclosure made in the Group's 2017 Annual Report and Accounts, the implementation of the standard has not had a material impact on the revenue and cash flows reported by the Group for the year ended 31 December 2018. The reasons for this are outlined by each of the Group's main revenue types below:
i. Private housing: the impact is immaterial as housing revenue is recognised on completion of the single performance obligation of supplying a house
ii. Affordable housing: no or minimal impact as the significant majority of the Group's contracts give the Housing Association control over houses as they are built and the Group the right to payment for work done, and therefore revenue will continue to be recognised over time by reference to the stage of completion of the building works. Contracts continue to be assessed individually as they are entered into to confirm that these criteria are met. Where land sales to Housing Associations are de-linked from housebuilding contracts, land sale revenue will be recognised separately, as was the case prior to the implementation of the new standard
iii. Land Sales: the Group will continue to separate land sales revenue from any significant infrastructure-related performance obligations that may exist within contracts
Properties taken in part exchange as consideration for private house sales and then subsequently sold on by the Group will continue to be recognised through cost of sales within the income statement based on the profit or loss made on the resale as they are seen to be incidental to the operations of the business and not a part of its core activities.
8 Impact of standards and interpretations in issue but not yet effective
A number of new standards and amendments to standards and interpretations are effective for annual periods beginning after 1 January 2018, and have not been applied in preparing these financial statements:
• IFRS16 'Leases' replaces IAS17 'Leases' and is effective from 1 January 2019. The new standard requires all assets held by the Group under lease agreements of greater than 12 months in duration to be recognised as assets within the Balance Sheet, unless they are considered to be of low value. Similarly, the present value of future payments to be made under those lease agreements must be recognised as a liability. The Group incorporated the new standard into its accounting policies from 1 January 2019, with the effect that any lease agreements are reviewed against the criteria within the standard to determine whether identifiable assets exist that should be recognised on the Group balance sheet, along with any associated liabilities. These assets are depreciated over the remaining term of the lease agreement with the cost being taken to the Income Statement, along with service charges and the interest charge calculated on the liability. Any agreements that are short-term (being of less than 12 months duration) or low-value (less than £3,000 in value) in nature are excluded and will continue to be expensed to the Income Statement on a straight-line basis. Only existing agreements considered to contain leases under IAS17 will be reviewed against the new standard; those not considered to be assets under IAS17 will not be impacted by the new standard. Based on the Group's analysis of the lease agreements that are currently in place, it is estimated that the new standard will have the effect of increasing the Group's assets by around £4.5m, with a marginally higher increase in the Group's liabilities, resulting in a small reduction in the Group's net assets. The new standard is also expected to increase the Group's Operating Profit by around £1.5m with an increase of similar magnitude in Financial Expenses. There will not be any impact on the Group's cash flows. The Group will adopt the "modified retrospective" transition approach, whereby an adjustment will be made to equity on 1 January 2019 and prior period financial information will not be restated for the impact of the standard.
• Amendment to IAS 28 'Investments in Associates and joint ventures', effective from 1 January 2019, which is not expected to have a significant impact on the Group's financial statements.
• IFRIC 23 Uncertainty over income tax treatments, effective 1 January 2019, which is not expected to have a significant impact on the Group's financial statements.
9 Accounting Policies
Revenue
Revenue is recognised in the income statement when control of each home has passed to the purchaser, which is when legal title is transferred. Revenue in respect of the sale of residential properties is recognised at the fair value of the consideration received or receivable, net of value added tax and discounts, on legal completion. In certain instances, property may be accepted in part consideration for a sale of a residential property. The fair value is established by independent surveyors, reduced for costs to sell. Net sale proceeds generated from the subsequent sale of part exchange properties are recorded as an adjustment to cost of sales. The original sale is recorded in the normal way, with the fair value of the exchanged property replacing cash receipts. Cash incentives are considered to be a discount from the purchase price offered to the acquirer and are therefore accounted for as a reduction to revenue.
The Group applies its policy on contract accounting when recognising revenue and profit on contracts. Revenue and costs are recognised by reference to the stage of completion of contract activity at the balance sheet date. This is normally measured by surveys of work performed to date. When it is probable that the total costs on a construction contract will exceed total contract revenue, the expected loss is recognised as an expense in the Income Statement immediately. The application of this policy requires judgements to be made in respect of the total expected costs to complete for each site. The Group has in place established internal control processes to ensure that the evaluation of costs and revenues is based upon appropriate estimates.
Revenue is recognised on land sales and commercial property sales from the point of unconditional exchange of contracts as long as there are no significant obligations remaining. Where the Group still has significant obligations to perform under the terms of the contract, revenue is recognised when the obligations are performed.
When the Group makes sales to joint ventures in which it owns an interest, it will only recognise revenue and profit in the period of the initial transaction to the extent of third parties' interests in the joint venture. The unrecognised element of revenue and profit will be deferred and released to the income statement when the joint venture has sold the assets to which the original transaction with the Group related. Rental income is recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives granted are recognised as an integral part of the total rental income.
Inventories
Inventories are stated at the lower of cost and net realisable value. Cost comprises direct materials and, where applicable, direct labour costs and those overheads, not including any general administrative overheads, that have been incurred in bringing the inventories to their present location and condition. Net realisable value represents the estimated net selling price less estimated total costs of completion of the finished units.
Land held for development, including land in the course of development until legal completion of the sale of the asset, is initially recorded at cost along with any expected overage. Where, through deferred purchase credit terms, cost differs from the nominal amount which will actually be paid in settling the deferred purchase terms liability, an adjustment is made to the cost of the land, the difference being charged as a finance cost.
Options purchased in respect of land are capitalised initially at cost and written down on a straight-line basis over the life of the option. Should planning permission be granted and the option be exercised, the option is not amortised during that year and its carrying value is included within the cost of land purchased.
Investments in land without the benefit of planning consent, either through purchase of freehold land or non refundable deposits paid on land purchase contracts subject to residential planning consent, are capitalised initially at cost. Regular reviews are completed for impairment in the value of these investments, and provision made to reflect any irrecoverable element. The impairment reviews consider the existing use value of the land and assesses the likelihood of achieving residential planning consent and the value thereof.
Ground rents are held at an estimate of cost based on a multiple of ground rent income, with a corresponding credit created against cost of sales, in the year in which the ground rent first becomes payable by the leasehold purchaser.
Part exchange properties are held at the lower of cost and net realisable value, and include a carrying value provision to cover the costs of management and resale. Any profit or loss on the disposal of part exchange properties is recognised within cost of sales in the Group Income Statement.
Trade and other receivables
Trade receivables, amounts recoverable on contracts and other debtors do not carry any interest and are stated at their nominal value as reduced by appropriate allowances for estimated irrecoverable amounts. The Group applies the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables and contract assets. To measure the expected credit losses, trade receivables and contract assets have been grouped based on shared credit risk characteristics and the age of the outstanding amounts. The contract assets relate to unbilled work in progress on affordable housing contracts described in note 2.0 of the Annual Report and have a historically low level of default, similar to the Group's low default levels on trade receivables. Other debtors include amounts receivable from the Government in relation to the Help To Buy scheme.
Trade payables
Trade payables on normal terms are not interest bearing and are stated at their nominal value.
Trade payables on extended terms, particularly in respect of land, are recorded at their fair value at the date of acquisition of the asset to which they relate. The discount to nominal value which will be paid in settling the deferred purchase terms liability is recognised over the period of the credit term and charged to finance costs using the effective interest rate method.
Government Grants
Government grants are recognised in the income statement so as to match with the related costs that they are intended to compensate. Government grants are included within deferred income.
Bank and other loans
Interest-bearing bank loans and overdrafts are initially recorded at fair value, net of direct issue costs, and subsequently at amortised cost. Finance charges are accounted for on an accrual basis to the income statement using the effective interest method and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise.
Cash and cash equivalents
Cash and cash equivalents comprises cash balances and call deposits. Bank overdrafts that are repayable on demand and form an integral part of the Group's cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows.
Net financing costs
Finance costs are included in the measurement of borrowings at their amortised cost to the extent that they are not settled in the period in which they arise.
The Group is required to capitalise borrowing costs directly attributable to the acquisition, construction and production of a qualifying asset, as part of the costs of that asset. Inventories which are produced in large quantities on a repetitive basis over a short period of time are not qualifying assets. The Group does not generally produce qualifying assets.
Equity Instruments
Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs.
Own Shares held by ESOP trust
Transactions of the Group-sponsored ESOP trust are included in the Group financial statements. In particular, the trust's purchases of shares in the Company are debited directly to equity through an own shares held reserve.
Income Tax
Income tax comprises the sum of the tax currently payable or receivable and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.
Tax assets and liabilities
The tax currently payable or receivable is based on taxable profit or loss for the year and any adjustment to tax payable or receivable in respect of previous years. Taxable profit or loss differs from net profit or loss as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group's liability or asset for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from non-tax deductible goodwill, from the initial recognition of assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit, and from differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future.
The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to reserves, in which case the deferred tax is also dealt with in reserves.
Share based payments
The Group has applied the requirements of IFRS2: "Share-based payments".
The Group issues equity-settled share-based payments to certain employees in the form of share options over shares in the Parent Company. Equity-settled share-based payments are measured at fair value at the date of grant calculated using an independent option valuation model, taking into account the terms and conditions upon which the options were granted. The fair value is expensed on a straight line basis over the vesting period, based on the Group's estimate of shares that will eventually vest, with a corresponding credit to equity except when the share-based payment is cancelled where the charge will be accelerated.
Fixed asset investments
Investments in subsidiaries are carried at cost less impairment. The Parent Company accounts for the share based payments granted to subsidiary employees as an increase in the cost of its investment in subsidiaries.
Provisions
A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability.
Employee benefits
The Group accounts for pensions and similar benefits under IAS 19 (Revised): "Employee benefits". In respect of defined benefit schemes, the net obligation is calculated by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods, such benefits measured at discounted present value, less the fair value of the scheme assets. The discount rate used to discount the benefits accrued is the yield at the balance sheet date on AA credit rated bonds that have maturity dates approximating to the terms of the Group's obligations. The calculation is performed by a qualified actuary using the projected unit method. The operating and financing costs of such plans are recognised separately in the income statement; service costs are spread systematically over the lives of employees and financing costs are recognised in the periods in which they arise. All actuarial gains and losses are recognised immediately in the Group statement of comprehensive income.
Payments to defined contribution schemes are charged as an expense as they fall due.
10 Reconciliation of net cash flow to net cash
|
|
2018 £000 |
2017 £000 |
|
Net (decrease) / increase in cash and cash equivalents |
(6,845) |
131,510 |
|
(Increase) / decrease in borrowings |
(11,192) |
(25,209) |
|
Net cash at start of period |
144,853 |
38,552 |
|
Net cash at end of period |
126,816 |
144,853 |
|
Analysis of net cash: |
|
|
|
Cash and cash equivalents |
163,217 |
170,062 |
|
Bank and other loans |
(36,401) |
(25,209) |
|
Net cash at end of period |
126,816 |
144,853 |
11 Income taxes
Current tax
Current tax is the expected tax payable or receivable on the taxable income or loss for the year, calculated using a corporation tax rate of 19% applied to the pre-tax income or loss, adjusted to take account of deferred taxation movements and any adjustments to tax payable for previous years.
12 Dividends
The following dividends were paid by the Group:
|
|
2018 £000 |
2017 £000 |
|
Prior year final dividend per share of 32.5p (2017:30.0p) |
43,645 |
40,300 |
|
Special dividend per share of 45.0p (2017: nil) |
60,483 |
- |
|
Current year interim dividend per share of 19.0p (2017:15.0p) |
25,537 |
20,130 |
|
|
129,665 |
60,430 |
The Board has decided to propose a final dividend of 38p per share in respect of 2018.
13 Earnings per share
Basic earnings per share
The calculation of basic earnings per share for the year ended 31 December 2018 was based on the profit for the year attributable to ordinary shareholders of £136,570,000 (2017: £91,295,000) and a weighted average number of ordinary shares outstanding during the year ended 31 December 2018 of 134,355,573 (2017: 134,246,134).
Profit attributable to ordinary shareholders
|
|
2018 £000 |
2017 £000 |
|
Profit for the year attributable to equity holders of the parent |
136,570 |
91,295 |
Weighted average number of ordinary shares
|
|
2018
|
2017
|
|
Weighted average number of ordinary shares at 31 December |
134,355,573 |
134,246,134 |
Diluted earnings per share
The calculation of diluted earnings per share for the year ended 31 December 2018 was based on the profit for the year attributable to ordinary shareholders of £136,570,000 (2017: £91,295,000) and a weighted average number of ordinary shares outstanding during the year ended 31 December 2018 of 134,557,450 (2017: 134,566,722).
The average number of shares is increased by reference to the average number of potential ordinary shares held under option during the year. This reflects the number of ordinary shares which would be purchased using the aggregate difference in value between the market value of shares and the share option exercise price and fair value of future employee services. The market value of shares has been calculated using the average ordinary share price during the year. Only share options which are expected to meet their cumulative performance criteria have been included in the dilution calculation.
Weighted average number of ordinary shares (diluted)
|
|
2018
|
2017
|
|
Basic weighted average number of ordinary shares at 31 December |
134,355,573 |
134,246,134 |
|
Effect of share options in issue which have a dilutive effect |
201,877 |
320,588 |
|
Diluted weighted average number of ordinary shares at 31 December |
134,557,450 |
134,566,722 |
14 Related party transactions
Transactions between fellow subsidiaries, which are related parties, have been eliminated on consolidation, as have transactions between the Company and its subsidiaries during this year.
Transactions between the Group, Company and key management personnel in the year ended 31 December 2018 were limited to those relating to remuneration, which are disclosed in the directors remuneration report.
Mr Greg Fitzgerald, appointed Group Chief Executive on 18 April 2017, is non-executive Chairman of Ardent Hire Solutions ("Ardent"). The Group hires forklift trucks from Ardent and has also undertaken a sale of forklift trucks to Ardent as part of its capital optimisation initiatives. The total net value of transactions with Ardent were as follows:
|
|
2018 £000 |
2017 £000 |
|
Rental expenses paid to Ardent |
2,059 |
1,413 |
|
Income received from Ardent for the sale of forklift trucks |
- |
2,287 |
The balance of rental expenses payable to Ardent at 31 December 2018 was £155,000 (2017: £160,000) and no income was receivable (2017: £nil). There have been no other related party transactions in the financial year which have materially affected the financial performance or position of the Group, and which have not been disclosed.
Transactions with Bovis Peer LLP and IIH Oak Investors LLP
Bovis Homes Limited is contracted to provide property and letting management services to Bovis Peer LLP. Fees charged in the period, inclusive of VAT, were £109,000 (2017: £169,000). None of these fees are outstanding at 31 December 2018 (2017: nil).
In 2014, Bovis Homes Limited entered into a joint venture arrangement with IIH Oak Investors LLP to hold 190 homes under a private rental scheme. As at 31 December 2018, loans of £1,598,319 (2017: £3,714,314) are outstanding with IIH Oak Investors at an interest rate of 6%. Interest charges made in respect of loans were £118,000 (2017: £214,000)
In December 2018, Bovis Homes Limited entered into a joint venture arrangement with Clarion Housing Group, with the joint venture purchasing the Group's interest in its land at Plymouth, near Sherford. Part of this consideration was financed by debt from the Group, with the associated loan balance between the Group and Bovis Latimer (Sherford) LLP being £22,256,000 at 31 December 2018.
15 Post balance sheet events
There are no post balance sheet events to disclose as at 28 February 2019.
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