Interim Results - 6 Months to 31 March 2000
Paragon Group Of Companies PLC
22 May 2000
The Paragon Group of Companies PLC
Interim results for the six months ended 31 March 2000
PARAGON ANNOUNCES DOUBLE DIGIT PROFITS GROWTH
The Paragon Group of Companies PLC ('Paragon'), one of the UK's largest
specialist lenders offering first mortgages, secured loans, unsecured loans
and vehicle finance, today announces its Interim results for the six months
ended 31 March 2000.
Highlights include:
- Pre-tax profit up 11% to £16.3m (1999: £14.7m)
- Interim dividend up 13.3% to 1.7p per share (1999: 1.5p)
- Operating expenses down 10.5% to £15.4m (1999: £17.2m)
- Total new loan originations up 19.5% to £224.1m (1999: £187.5m)
- All lending divisions showing strong growth
- Mortgage loans up 32% to £703.3m
- Car loans up 88% to £96.4m
- Personal finance balances up 21% to £298.7m
- New five year £140m corporate banking facility put in place to finance
planned long term volumes
- eCommerce developing new channels
Commenting on the results, Jonathan Perry, Executive Chairman of Paragon said:
'In the last six months the Group has continued to progress, with growth in
our distribution base, in the products we offer and in overall business
volumes. We continue to focus on prudent underwriting of all lending and on
tight cost control. We look forward to further growth and the further
development of the Group in all of its business activities.'
For further information, please contact:
The Paragon Group of Companies PLC The Wriglesworth Consultancy
Nigel Terrington, Chief Executive John Wriglesworth
Nick Keen, Finance Director Olivia Cundy
Tel: 020 7957 9753 Tel: 020 7620 2228
Mobile: 07774 988 275
CHAIRMAN'S STATEMENT
I am pleased to report further strong growth in the first half of the
current financial year. In the six months to 31 March 2000 we have
increased profit before tax by 11% to £16.3 million (1999 H1: £14.7
million), increased loan completions by 19.5% and put in place the funding
arrangements to finance our planned long-term business volumes.
Given the progress made by the Group I am pleased to report that your Board
has declared an interim dividend, payable on 31 July 2000 to shareholders on
the register at 30 June 2000, of 1.7p per share, (1999 H1: 1.5p), an
increase of 13.3% from last year's interim dividend.
We have continued to build our asset base by the consistent application of
our prudent lending criteria. During the six months, total new loan
originations were £224.1 million (1999 H1: £187.5 million) and at 31 March
2000 loans to customers, net of provisions, were £1,548.1 million, compared
with £1,419.4 million at 31 March 1999, an increase of 9% in the year. The
high growth in originations was achieved despite the prolonged Christmas and
Millennium celebrations resulting in a longer than usual winter lull in
business volumes. The increase in assets, combined with careful margin
management, has increased net interest income to £31.1 million (1999 H1:
£27.4 million) for the period, an increase of 13.5%.
Other operating income, at £6.5 million, is broadly unchanged from the first
half of 1999 (£6.6 million), despite the loss of rental income following the
disposal of the Group's freehold property in Solihull in April 1999. If net
rental income is excluded, other operating income for the first half of 1999
was £5.8 million, an increase of 12% from the first half of 1999 on a like
for like basis, reflecting an increase in insurance commissions and in fees
for third party servicing.
Operating expenses, at £15.4 million, are 10.5% lower than for the first
half of 1999 (£17.2 million) and reflect our continuing focus on cost
efficiencies in each of our business areas.
The charge for provisions for losses, at £5.9 million (1999 H1: £2.1
million), was in line with our expectations and relates primarily to the
unsecured loan book. These loans, particularly the older unsecured loan
accounts acquired with the purchase of Universal Credit from Lloyds TSB,
carry higher margins in order to offset the increased risks of default from
this type of lending. As such, an element of the provision relates to
interest which we consider to be irrecoverable, but which has been charged
to accounts, and which is, therefore, included in interest income.
As I reported in my interim report last year, the profitability of the Group
has reduced brought forward tax losses to the point where the charge is now
rising towards full corporation tax rates. Consequently a charge of £3.2
million is included in respect of the period, an effective tax rate of 20%.
The Group remains active in the securitisation market and in February
successfully completed a £185 million issue through a subsidiary company,
Paragon Mortgages (No 2) PLC on competitive terms. This was the thirty-
third public securitisation by the Group.
In my full year statement I commented that we would be addressing the long-
term funding implications of our planned business levels. In March we
replaced our corporate banking facility with a new five year £140 million
facility, which now gives us the funding to support our planned asset growth
for the foreseeable future.
Year 2000
In our annual report for the year ended 30 September 1999 we reported that
we had completed all necessary upgrading and testing of in-house systems
required to address the effects of the year 2000 date change and undertaken
a review of our key business relations.
I am pleased to report that the Group encountered no problems with its
systems as a result of the change of date, and we do not foresee any such
occurrences in the future.
The total cost for this exercise was £759,000, of which £65,000 was incurred
in the half year ended 31 March 2000. No further costs are expected and this
expenditure represents a saving of £41,000 on the estimate in the annual
report.
Business Review
First Mortgages
At 31 March 2000 the Paragon Mortgages book stood at £703.3 million (a 31.8%
increase on the balance of £533.8 million at 31 March 1999) after advances
of £110.2 million during the six months then ended (1999 H1: £121.9
million). While a number of our competitors have reduced their pricing and
credit standards, it is our view that in seeking to achieve sustained long-
term profitability we should maintain our margins and continue the
application of high credit and underwriting standards, a policy which
continues to be borne out by excellent arrears performance.
As mentioned above, the traditional Christmas and New Year dip in
application and completion levels was more prolonged this year but
completions recovered strongly towards the end of the period. There is
anecdotal evidence that the mortgage market, generally, has been adversely
affected by increased interest rates and uncertainties as to their future
course, although that is not yet evidenced in market statistics which tend
to lag the current experience. Again, in the private rented sector, the
combination of increasing interest rates and rising house prices has had a
dampening effect on demand, particularly amongst amateur landlords. However,
the long-term fundamentals of the buy to let market, which now accounts for
the majority of the Group's mortgage lending, are sound and we expect
current uncertainties to be temporary.
There have been a number of developments in the use of eCommerce by Paragon
Mortgages for enhancing product distribution. These are described more
fully below. In addition we are currently considering a number of new
opportunities, including products aimed at the more professional investor,
which we expect to be launching shortly. We remain very confident, however,
in the long-term prospects for the private rented sector as a significant
contributor to our future business volumes.
We continue to be encouraged by the market's views of our service quality.
Recent results from our regular intermediary surveys record an improvement
in Paragon's service delivery against a number of our key competitors.
The announcement by the Treasury on mortgage regulation during the period
has created an element of confusion. Mortgage lenders will have to contend
with a patchwork of rules and regulations while mortgage advice will remain
unregulated. However, in view of the high standards that we adopt, we remain
confident that the regulatory requirements will be accommodated by Paragon
with relative ease. More than half of our front line staff have either
qualified, or are in the course of qualifying for, the new Certificate in
Mortgage Advice and Practise (CeMAP) which is likely to become the benchmark
qualification for mortgage professionals in future.
The NHL portfolio, the balances on which were £444.6 million at 31 March
2000, continues to decline in importance to the Group's accounts, now
representing less than one third of the Group's loan assets. The ratio of
payments received to those contractually due averaged 106% on the arrears
book during the period.
Car Finance
During the period, Paragon Car Finance advanced £40.5 million (1999 H1:
£27.7 million), despite it being a period in which the car market has been
depressed and plagued with uncertainties over the future direction of car
prices. The book total increased by 88% to £96.4 million over the twelve
months since 31 March 1999.
The long-awaited report by the Competition Commission following its study of
new car prices has done little to remove the uncertainties over the future
trend in car prices in both the new and used car sectors, although it is
considered that it may serve to underpin residual values going forward. We
are confident that with our strong and developing dealer network and our
procedures for monitoring dealer performance, we can continue the profitable
growth of this business.
We have removed unproductive dealers from our panel with the effect that, in
combination with increased business levels from our major dealers,
application levels rose strongly towards the end of the period and the
conversion rate from applications to completions has improved significantly,
with a consequential operating cost benefit. We will continue to
reconfigure the dealer network regularly to maximise the quality of business
received.
Personal Finance
During the period Paragon Personal Finance advanced £73.4 million (1999 H1:
£37.9 million). After a temporary reduction in volumes over the Christmas
and New Year period, volumes grew strongly towards the end of the period.
By 31 March 2000 the net loan book was, at £298.7 million, 21% higher than
at 31 March 1999.
During the period a number of changes were made to our processes to improve
the system links with our brokers with the objective of reducing the amount
of effort wasted in underwriting cases which are subsequently declined.
This has led to improved operating efficiencies and to an improved rate of
conversion from application to offer.
The Paragon Personal Finance web site has now been established and we are
now rolling out affinity branded sub-sites linked to some of our affinity
business partners. The first successful deal was with Chelsea Football Club
and we anticipate that others will follow in coming months.
The secured loan product which was launched last summer has been successful,
completing £28 million of new business in the period. We aim to improve our
penetration of the market by growing the support from our main relationship
brokers and adding new ones.
During the next six months we will be moving the new business areas of the
unsecured lending business, which currently are located in Victoria, so that
the entire operation will be located at new office space in Solihull. The
cost of this exercise was provided for in the accounts for the year ended 30
September 1999. This will complete the operational integration of the
personal finance business and will enable further cost efficiencies.
eCommerce
The focus of the Group's eCommerce initiative, since we launched the
original Paragon Mortgages web site in 1996, has been to use the new medium
as a means of building on and delivering to our customers more efficiently
the existing strengths of the business.
Our overall eCommerce strategy is threefold, to establish electronic
integration and improve processes in our new business divisions, so as to
enable volume growth without corresponding cost increases, to develop new
channels making full use of the Internet (such as the link with Chelsea FC,
mentioned earlier and the Rapid Remortgage on which I report below), and to
work on new value adding initiatives which reflect our core competencies.
The revised Group web site was launched in November 1999 and covers a wide
range of information in respect of the Group. Paragon Mortgages, Paragon
Car Finance and Paragon Personal Finance all offer the facility for online
quotations, applications and related tools. From 1 April 2000, all Paragon
Mortgages customers have had the facility to obtain their mortgage
statements on-line.
Paragon Mortgages now has arrangements in place with a number of Internet
sites, in particular Eloan, Charcolonline, Fish4, IFonline and Assuresoft.
In addition, we launched a new product during the period, the Rapid
Remortgage, direct to the public through a dedicated web site, www.rapid-
remortgages.com. The Rapid Remortgage is the first mortgage product where
we use a genuine on-line application form in preference to printed forms and
where we see the web site as the primary means of providing introducers and
direct customers with product details, illustrations and an application
process. Surveys have reported a significant increase in intermediaries
with access to the Internet over the last six months.
Currently we are working on an Internet portal focused on the private rented
sector, offering a full range of services to landlords and tenants. The
main purposes of this portal will be to give landlords access to a range of
services, the development of a tenant site on which properties will be
registered by landlords and the provision of additional services to both
landlords and tenants.
A number of further initiatives are being worked on in connection with the
three business areas.
Conclusion
In the last six months the Group has continued to progress, with growth in
our distribution base, in the products we offer and in overall business
volumes. We continue to focus on prudent underwriting of all lending and on
tight cost control. We are excited by the opportunities and challenges
presented in our market place, particularly in the area of eCommerce. We
look forward to further growth and the further development of the Group in
all of its business activities.
Jonathan Perry
Executive Chairman
22 May 2000
CONSOLIDATED PROFIT AND LOSS ACCOUNT
For the six months ended 31 March 2000 (Unaudited)
Six months to Six months to Year to
31 March 31 March 30 September
2000 1999 1999
£m £m £m
Interest receivable 88.6 86.4 167.6
Interest payable and similar (57.5) (59.0) (112.2)
charges
Net interest income 31.1 27.4 55.4
Other operating income 6.5 6.6 12.7
Total operating income 37.6 34.0 68.1
Operating expenses (15.4) (17.2) (31.0)
Provisions for losses (5.9) (2.1) (5.8)
Operating profit 16.3 14.7 31.3
Profit on sale of fixed assets - - 2.5
Profit on ordinary activities before
taxation 16.3 14.7 33.8
Tax charge on profit on ordinary (3.2) (1.5) (3.5)
activities
Profit on ordinary activities after
taxation 13.1 13.2 30.3
Dividend (2.0) (1.7) (4.0)
Retained profit 11.1 11.5 26.3
Dividend - Rate per share 1.7p 1.5p 3.4p
Basic earnings per share 11.3p 11.4p 26.1p
Diluted earnings per share 11.2p 11.3p 25.8p
There have been no recognised gains or losses other than the profit for the
periods shown.
The results for the periods shown above relate entirely to continuing
operations.
CONSOLIDATED BALANCE SHEET
At 31 March 2000 (Unaudited)
31 March 31 March 30 September
2000 1999 1999
(restated)
ASSETS EMPLOYED £m £m £m
Fixed assets
Tangible assets 3.2 21.9 3.6
Loans to customers 1,548.1 1,419.4 1,482.5
Investment in own shares 2.8 2.8 2.8
1,554.1 1,444.1 1,488.9
Current assets
Stocks 13.1 15.0 14.5
Debtors falling due within one 26.2 17.7 22.8
year
Cash at bank and in hand 175.9 111.1 147.2
215.2 143.8 184.5
1,769.3 1,587.9 1,673.4
FINANCED BY
Equity shareholders' funds 124.6 98.7 113.5
Provisions for liabilities and charges 3.8 2.2 4.2
Creditors:
Amounts falling due within one year 27.3 27.9 27.0
Amounts falling due after more than
one year 1,613.6 1,459.1 1,528.7
1,769.3 1,587.9 1,673.4
The interim financial information was approved by the Board of Directors on
22 May 2000.
CONSOLIDATED CASH FLOW STATEMENT
For the six months ended 31 March 2000 (Unaudited)
Six months to Six months to Year to
31 March 31 March 30 September
2000 1999 1999
£m £m £m
Net cash inflow from operating 18.2 14.8 33.2
activities
Taxation - (1.3)
Capital expenditure and financial
investment :
Net increase in loans to customers (71.5) (42.7) (109.5)
Other (0.1) (1.0) 19.1
Equity dividends paid (2.3) - (3.8)
Management of liquid resources (47.8) (13.7) 23.7
Financing 84.5 (23.6) 45.2
(Decrease) / increase in cash in the
period (19.0) (66.2) 6.6
1. Reconciliation of operating profit to net cash inflow from operating
activities
Operating profit 16.3 14.7 31.3
Provision for losses 5.9 2.5 5.8
Depreciation 0.5 0.9 1.6
Payments against provisions (0.4) - -
Decrease in stock 1.2 0.4 1.1
Increase in debtors (3.4) (1.0) (6.9)
(Decrease) / increase in (1.9) (2.7) 0.3
creditors
18.2 14.8 33.2
2. Reconciliation of movement in cash with movement in net debt
(Decrease) / increase in cash in the (19.0) (66.2) 6.6
period
Cash (inflow) / outflow from
(increase) / decrease in debt (84.5) 24.0 (44.8)
Cash movement from change in liquid
resources 47.8 13.7 (23.7)
Movement in net debt (55.7) (28.5) (61.9)
Opening net debt (1,374.3) (1,312.4) (1,312.4)
Closing net debt (1,430.0) (1,340.9) (1,374.3)
NOTES TO THE INTERIM FINANCIAL INFORMATION
For the six months ended 31 March 2000 (Unaudited)
1. The interim financial information, which has not been audited, has
been prepared on the basis of the accounting policies set out in the group
accounts for the year ended 30 September 1999.
2. The balance shown as provisions in the balance sheet at 31 March 1999
has been restated by being disclosed separately from creditors in
accordance with Financial Reporting Standard 12 - 'Provisions, contingent
liabilities and contingent assets'.
3. An interim dividend of 1.7p per share is proposed, payable on 31 July
2000 with a record date of 30 June 2000.
4. The basic earnings per share figures have been calculated by dividing
the profit attributable to shareholders (being the profit on ordinary
activities after taxation) by the weighted average number of ordinary
shares outstanding during the period. For the six months ended 31 March
2000 the weighted average number of ordinary shares outstanding was 116.3
million(1999:115.7 million). For the year ended 30 September 1999 the
weighted average was 116.0 million.
5. The diluted earnings per share figures have been calculated by
adjusting the weighted average number of shares outstanding for the effects
of all dilutive potential ordinary shares. For the six months ended 31
March 2000 the adjusted weighted average number of ordinary shares
outstanding was 117.1 million, (1999: 116.7 million). For the year ended 30
September 1999 the adjusted weighted average was 117.0 million.
6. The figures shown above for the year ended 30 September 1999 are not
statutory accounts. A copy of the statutory accounts has been delivered to
the Registrar of Companies, contained an unqualified audit report and did
not contain an adverse statement under sections 237 (2) or 237 (3) of the
Companies Act 1985.
7. A copy of the Interim Statement will be posted to shareholders and
additional copies can be obtained from The Paragon Group of Companies PLC,
St. Catherine's Court, Herbert Road, Solihull, West Midlands, B91 3QE.