Formation Group Plc - Audited Results for the year ended 31 August 2016

27 January 2017

FORMATION GROUP PLC

('Formation' or 'the Group')

Audited Results for the year ended 31 August 2016

Formation Group (NEX: FRM), the property development and project management company, today announces its audited results for the year ended 31 August 2016 ("the period").

Business Highlights

• Group revenue growth of 24% to £29.410m (2015: £23.764m) on the back of an increasing workload driven by the current strong London property market;  
• Profits before taxation of £2.157m from continuing operations (2015 profit: £2.203m);
• Income of £1.424m recognised from the profit share agreement with Sunbel Development Limited and Pinacle Developments Limited in relation to a development property at Norwich House (2015 £2.421m);

• The Group is pleased to report continued sales of its apartments in its completed development at 159-161 Iverson Road, London NW6 in the year ended 31 August 2016.

Commenting on the results, Willie O’Dea, Chairman of Formation Group, said:

I am pleased to report that the year ended 31 August 2016 has been another good year for Formation Group and the Company is well positioned for 2017 and the future. Group revenues have again increased on prior year results, with an uplift of 24% this year.

The Group has added and will continue to add to the experienced base of construction and property personnel it has in order to meet its increasing contract commitments. It looks forward to utilising this experience to its advantage over the coming year. It is anticipated that access to future cash incomes and increased banking facilities will enable the Group to drive further improvements, increase profits and enhance shareholder value

Enquiries:

Formation Group plc David Kennedy, Chief Executive Officer	Tel: [phone]
Peterhouse Corporate Finance Limited (Corporate Advisor)	Tel: [phone]

Mark Anwyl / Fungai Ndoro

Formation Group Plc (NEX: FRM), headquartered in East London, is an NEX Exchange Growth Market traded Company focused on property development and project management services for medium and large scale building projects in London and the City periphery.

The Company’s portfolio includes both new build and conversion projects, and is also diversified through a limited exposure to commercial work and the rental sector.

The management team combines significant Plc experience with property expertise. The Company is well positioned to exploit a buoyant London residential property market, and believes that the newly added property development division will form a substantial part of its profitability in the future.

CHAIRMAN’S STATEMENT

I am pleased to report that the year ended 31 August 2016 has been another good year for Formation Group and the Company is well positioned for 2017 and the future. Group revenues have again increased on prior year results, with an uplift of 24% this year from £23.764m in 2015 to £29.410m in 2016 due to increasing revenues from professional construction services and sales at Iverson Road. It is expected that revenue will grow over the coming financial year with various large work contracts in place and additional sales on the Iverson Road development.

This year has seen a profit after tax of £2.785m (2015 £1.814m) which is an improvement in the Group’s   underlying financial performance. The profit from the year from discontinued operations of £1.022m relates largely to a positive write back of the loans of the properties held at Bradford and Bristol which were sold on 2 October 2015 for £3.366m.

The finance income item of £1.424m relates to income recognised from the profit share agreement entered into by Formation Group Plc as announced on the 8 July 2015 with Sunbel Development Limited ('Sunbel') and Pinacle Developments Limited ('Pinacle') in relation to a development property at Norwich House, 9-19 Streatham High Road. 

The Group is now focused only on property activities which includes property development, property investment and professional construction management. Every effort is being made to source further development opportunities with the cash resources available to the Group from its participation in the recent development of Norwich House and the profits from its finished development at Iverson Road, London NW6.

The Chief Executive Officer’s Report provides further detail on the individual projects, companies and properties within the Group at present.

The Group has added and will continue to add to the experienced base of construction and property personnel it has in order to meet its increasing contract commitments. It looks forward to utilising this experience to its advantage over the coming year. It is anticipated that access to future cash incomes and increased banking facilities will enable the Group to drive further improvements, increase profits and enhance shareholder value.

The Board and Staff

I would like to thank all board members and staff for the enormous efforts and dedicated contributions they have made in achieving a record year, with a significant uplift in revenues and profits for the Group. I would also like to thank our shareholders for their continued trust and confidence in the Board and in my leadership as Chairman.

The outlook for the Group is exciting and we look forward to operating a secure, profitable, capital based property group going forward and to delivering long-term, sustainable earnings growth to our shareholders.

William O’Dea

Non-Executive Chairman

CHIEF EXECUTIVE OFFICER’S STATEMENT

Strategic Report

Introduction

I am delighted to report that this has been another excellent year for the Group with significant increases in revenue and profitability. The Group continues to strengthen its presence in the London property market through a profit share participation at Norwich House, in Streatham, London and the completion of the development in Iverson Road, West Hampstead with a number of the apartments being sold within the financial year.

The outlook for the Group is optimistic as the UK economy comes to terms with the impact of ‘Brexit vote’ in June 2016, and the directors continue to monitor market activity.

Results

The trading results for the year have continued to improve with Group revenue from continuing operations increasing to £29.410m (2015 £23.764m) due to the increased number of contracts in progress and the sales of a number of the apartments on the completed Iverson Road development. This has resulted in a pre-tax profit of £2.157m from continuing operations (2015 £2.203m).

The profit for the year from discontinued operations of £1.022m relates largely to a positive write back of the loans of the properties held at Bradford and Bristol which were sold on 2 October 2015 for £3.366m.

The audited financial statements for the year ended 31 August 2016.The Group’s result for the year after taxation was a profit of £2.785m (2015 profit of £1.814m).

Key Performance Indicators (KPIs)

Gross profit is considered to be the most meaningful KPI. Gross profit on professional services was 9.9% in the year to 31 August 2016 (2015 6.3%). Turnover has risen by 24% in 2016 to £29.410m (2015 £23.764m).

The Group’s building companies are listed in the considerate contractor scheme. The Group’s aim is to have a zero-accident policy however, whilst the Group has an excellent safety record, during the year Formation Construction Limited had a death at one of its construction sites. The accident is currently under investigation by the Health and Safety Executive, however there is no indication at the year end that the Company was negligent in any way. The Group continues to review all of its policies and procedures to ensure that safety remains its top priority.

Staff turnover is low due to careful selection of high calibre personnel and the Group’s excellent reputation continues to attract loyal and hardworking staff.

Principal activity and business review

The principal activity of the Group is the provision of professional construction management services with an increasing focus on the more profitable development/investment business as seen by the sales of some of the apartments on the completed of the Iverson Road development.

The Group continues to project manage a number of central London property developments and has been engaged to provide these project management services by companies which are defined as related parties of Formation Group Plc.

The Group has also completed the development of the Iverson Road site with profits on the sold apartments recognised in the year to 31 August 2016.

The Group has been involved in the construction project management of fifteen, mainly residential, projects during the year. All of the projects are located in Greater London. Eight of the schemes have been completed in the year with seven ongoing.

The Group has an investment and financial interest in two of the projects as follows:-

Norwich House, 9-11 Streatham High Road, London SW16 1DZ

Project management and profit share participation in a development site of 103 residential units, associated car parking, 3 commercial units and the freehold interest in an adjoining apartment block. The profit share arrangement and the related accounting treatment. As part of its participation in the profit share, the Group advanced a loan of £2.444m.

Following the year end, the Group has received payment in full its loan and profit share with Sunbel Developments Limited.

159-161 Iverson Road, London NW6

The Group acquired this development in Formation Homes (London) Limited (Group subsidiary) in the prior financial year. The site benefited from planning approval for 19 residential units and 1 commercial unit. Construction works were completed in March 2016. The construction and project management works were financed by borrowings of £5.617m. The development was completed in March 2016 with profit on apartments sold recognised in the financial year. Further sales took place post year end which enabled the loan to be paid off as per the RNS announcement on 9 November 2016.

Investment Property Retained

The Group currently has an interest in the following income producing investment properties:

52-58 Commercial Road, London E1

Rocquefort Properties Limited holds on behalf of Formation Group Plc 11 car parking spaces valued at £25,000 each, a total value of £275,000. The spaces are to be sold or let as directed by Formation Group Plc which will then receive the net proceeds.

Principal Risks and Uncertainties

Potential risks are listed below:-

Potential Risks	Mitigation
The Group’s activities continue to be primarily based on sales to related parties.  Thus, there is a risk that the related parties may choose not continue to enter into contracts with the Group, or that related party balances may become irrecoverable if the related parties do not have the ability to pay.	The Group’s operational management continue to maintain good and fruitful relationships with the directors of the key related parties, and have regular discussions about potential opportunities.  The ability of related parties to pay amounts outstanding is monitored, and payments are reviewed to ensure that they are received on a timely basis.
The Group’s activities are concentrated in the London residential property market.  This creates the risk that a downturn in the London property market will affect the levels of project management activity and the market value of the Iverson Road properties, and therefore the Group’s profitability. Further uncertainty has arisen since June 2016 the post Brexit vote which has impacted the prices of high value apartments.	Management closely monitor activity in the property market, and assess whether selling prices are appropriate based on current market data.
There is a risk that the properties in the Iverson Road development do not generate the revenues expected, due to either factors specific to the development or due to a downturn in the local or national property market. This would adversely affect the Group’s profitability.	It would appear from the sales achieved that demand for high end value apartments have dropped with some reduction in prices however management is confident that the remaining apartments would be sold.
The Group has recognised a significant loan and receivable in relation to the Norwich House profit share.  There is a risk that the timing or amount of the cash flows received by the Group in relation to the profit share are not consistent with the assumptions made by management in the recognition of the receivable, or that amount owed to the Group is not recoverable.	Management are closely monitoring the progress of the Norwich House development and the recoverability of the receivable and are satisfied that the risk is being managed appropriately. This is supported by the loans repayment in full following the year end.

Outlook

This year the Group delivered a significant increase in revenues. Formation Group continues to be positive that its core property construction activity remains strong and that it will be able to continue to generate substantial revenues. The Group continues to have a healthy on-going project stream that will include the final sales of the Iverson Road apartments, expected to occur during the year ending 31 August 2017. Cash due to the Group under the Norwich House profit share agreement has been received in full following the year end.

Formation Group will continue to focus on property activities, which includes property development, property investment and professional construction management. The Board intends to use the cash generated from the development at Norwich House and profits from Iverson Road to source further development opportunities.

David Kennedy

Chief Executive Officer

Consolidated Income Statement
For the year ended 31 August 2016

		2016	2015
		£’000	£’000
Continuing operations
Revenue		29,410	23,764
Cost of sales		(26,488)	(22,266)
		__________	__________
Gross profit		2,922	1,498
Administrative expenses		(2,189)	(1,716)
		__________	__________
Operating profit/(loss) from continuing operations		733	(218)
Finance income		1,424	2,421
Finance costs		-	-
		__________	__________
Profit before taxation		2,157	2,203
Taxation		(394)	(170)
		__________	__________
Profit for the year from continuing operations		1,763	2,033
Discontinued operations
Profit/(loss) for the year from discontinued operations		1,022	(219)
		__________	__________
Profit for the year		2,785	1,814
		__________	__________
Attributable to:
Equity holders of the parent		2,785	1,814
		__________	__________
		2,785	1,814
		__________	__________
Earnings/(Loss) per share
From continuing operations
Basic and diluted		0.79p	0.91p
From discontinued operations
Basic and diluted		0.46p	(0.09p)
From continuing and discontinued operations
Basic and diluted		1.24p	0.81p

Consolidated statement of comprehensive income
For the year ended 31 August 16

 

		2,016	2,015
		£’000	£’000
Profit for the year		2,785	1,814
		___________	___________
Total comprehensive Income for the year		2,785	1,814
		___________	___________
Attributable to:
Equity holders of the parent
Continued operations
Discontinued operations		1,763	2,033
		1,022	(219)
		__________	__________
		2,785	1,814
		__________	__________

Consolidated statement of financial position
As at 31 August 2016

	2016	2015
	£’000	£’000
Non-current assets
Intangible assets	-	-
Property, plant and equipment	22	26
Investments   Investment accounted for using the equity method   Investment property	- 275	- 275
	__________	__________
	297	301
	__________	__________
Current assets
Inventories Trade and other receivables	7,245 9,888	10,387 5,820
Cash and cash equivalents	330	1,633
	__________	__________
	17,463	17,840
Assets included in disposal group classified as held-for-sale	-	3,311
	__________	__________
Total current assets	17,463	21,151
	__________	__________
Total assets	17,760	21,452
	__________	__________
Current liabilities
Trade and other payables	(4,065)	(3,893)
Bank loans	(3,314)	(9,963)
	__________	__________
Total current liabilities	(7,379)	(13,856)
	__________	__________
Net current assets	10,084	7,295
	__________	__________
Total liabilities	(7,379)	(13,856)
	__________	__________
Net assets	10,381	7,596
	__________	__________
Equity
Share capital	2,205	2,205
Share premium account	2,106	2,106
Capital redemption reserve	61	61
Share option reserve	22	22
Retained earnings	5,987	3,202
	__________	__________
Total equity attributable to the parent's shareholders	10,381	7,596
	__________	__________

Consolidated statement of changes in equity
For the year ended 31 August 2016

	Called up  share   capital	Share premium account	Treasury shares	Capital redemption reserve	Share option reserve	Retained earnings	Total equity
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 1 September 2014	2,205	2,106	-	61	22	1,388	5,782
Profit and total comprehensive income for the financial period						1,814	1,814
Balance at 31 August 2015	2,205	2,106	-	61	22	3,202	7,596
Profit and total comprehensive income for the financial period	-	-	-	-	-	2,785	2,785
Balance at  31 August 2016	2,205	2,106	-	61	22	5,987	10,381

Consolidated statement of cash flows
for the year ended 31 August 2016

		2016	2015
		£’000	£’000
Operating activities
Cash generated/(used) in operations		5,354	(6,752)
Interest paid		-	(154)
		__________	__________
Net cash inflow/(outflow) from operating activities		5,354	(6,906)
		__________	__________
Investing activities
Purchases of property, plant and equipment		(11)	(25)
Cash inflow from Norwich House profit share		-	400
Cash outflow in respect of Norwich House profit share		-	(2,444)
Repayments of investment accounted for using the equity method		-	4,638
		__________	__________
Net cash (used)/generated by investing activities		(11)	2,569
		__________	__________
Financing activities
New loans		(6,646)	5,642
Proceeds on sale of Treasury Shares		-	-
		__________	__________
Net cash (used)/generated by financing activities		(6,646)	5,642
		__________	__________
Net (decrease)/increase in cash and cash equivalents		(1,303)	1,305
Cash and cash equivalents at the beginning of the year		1,633	328
		__________	__________
Cash and cash equivalents at the end of the year		330	1,633
		__________	__________

Notes

1. Basis of preparation and going concern

The Directors have prepared working capital forecasts for the period to 28 February 2018 and as a result are satisfied the Group has sufficient resources to continue in operational existence for the next 12 months. The financial statements are therefore prepared on a going concern basis.

2. Earnings/ (loss) per share

The calculation of basic and diluted earnings/ (loss) per share is based on the following losses and numbers of shares:                                 

			2016	2015
			£’000	£’000
Basic and diluted earnings– continuing operations			1,763	2,033
Basic and diluted earnings/(loss) – discontinued operations			1,022	(219)
			__________	__________
Basic and diluted profits – continuing and discontinued operations			2,785	1,814
			__________	__________
			2016	2015
			Number of shares	Number of shares
			’000	’000
Weighted average number of shares:
Ordinary shares in issue			220,515	220,515
Treasury shares			-	-
			__________	__________
Basic			220,515	220,515
Dilutive effect of share options			3,840	3,212
			__________	__________
Diluted			224,355	223,727
			__________	__________

Profit per share is calculated by dividing the profit for the year attributable to equity shareholders by the weighted average number of shares in issue during the year.

3. Reconciliation of profit/(loss) from continuing operations to net cash inflow from operating activities

	2016	2015
	£’000	£’000
Operating profit/(loss) from continuing operations	733	(218)
Operating profit/(loss) from discontinued operations)	1,022	(64)
Depreciation of property, plant and equipment	15	15
Impairment of assets classified as held for sale	-	193
Disposal of asset classified asset held for sale	3,311	-
Impairment of investment	-	10
	__________	__________
Operating cash flows before movements in working capital	5,081	(64)
Decrease/(increase) in inventories	2,743	(8,091)
(Increase) in receivables	(1,869)	(719)
(Decrease)/increase in payables	(601)	2,122
	__________	__________
Cash generated/(used) in operations	5,354	(6,752)
	__________	__________

Cash and cash equivalents (which are presented as a single class of assets on the face of the balance sheet) comprise cash at bank and other short term highly liquid investments with a maturity of three months or less.

4. Related party transactions

Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note.

During the year, Group companies entered into the following transactions with related parties who are not members of the Group:

Tulip Trust and Kennedy Private Trust Company Limited have an interest in 133,565,954 shares (2015: 132,940,454 shares) in the Company. 

During the year:

• Formation Design and Build Limited and Formation Construction Limited project managed a number of property developments for companies controlled by the Impala Private Trust Company Limited. Revenue from these contracts totalled £25.584m (2015 £23.764m) in the year. At 31 August 2016, the Group had debtor balances due from these companies of £4.387m (2015 £2.153m).
• Formation Design & Build Limited leased premises from Columbia House Properties (No.6) Limited a company ultimately owned by Kennedy Private Trust Company Limited on a five-year lease from 6 September 2012. The terms of the lease include a rental £0.0297m per annum. The charge for the year was £0.033m (2015 £0.028m). Balance outstanding as at 31 August 2016 is £nil (2015 £0.008m).
• Formation Group Plc leased premises from Columbia House Properties (No.6) Limited a company ultimately owned by Kennedy Private Trust Company Limited on a seven-year lease from 1 March 2015. The terms of the lease include a rental of £0.033m per annum. The charge for the year was £0.033m (2015 £0.016m). Balance outstanding as at 31 August 2016 is £nil (2015 £nil).
• The Group invested in JV Finance Ventures Limited in December 2009 with JV Finance Limited. JV Finance Limited is majority owned by the J V Purpose Trust. Therefore, JV Finance Limited is viewed as a related party given its relationship with the Tulip Trust and Kennedy Family Trust, which are the majority shareholders in the Group.

5. Discontinued operations

Discontinued operations relate to proceeds received on investment properties, which were disposed of in the year by FG (Bradford) Limited, FG (Bristol) Limited. Additionally, the non-trading activities of Formation Wealth Solutions Limited and Formation Architectural Design Limited are also included as part of discontinued operations.

Results of discontinued operations

The results of the discontinued operations which have been included in the consolidated income statement, were as follows:

		2016	2015
		£’000	£’000
Revenue		6	234
Cost of sales		(10)	(104)
		__________	__________
Gross (loss)/profit		(4)	130
Administrative expenses		(4)	(2)
Impairment of investment properties – adjustment to fair value less costs to sell		-	(193)
		__________	__________
Operating (loss) from discontinued operations		(8)	(65)
Finance income		1,315	-
Finance costs		(24)	(154)
		__________	__________
Profit (Loss) before taxation		1,283	(219)
Attributable tax expense		(261)	-
		__________	__________
Profit (Loss) for the year from discontinued operations		1,022	(219)
		__________	__________
		2016	2015
		£’000	£’000
Investment properties		-	3,311
		___________	___________

The investment properties had previously been secured by Dunbar Assets Plc under non-recourse financing.

As previously announced the Investment properties held in Formation Group plc 100% owned subsidiaries FG (Bradford) Limited and FG (Bristol) Limited were handed back to Dunbar Assets plc in late 2013 with a view to dispose of the properties. Formation Group Plc is pleased to announce that the sale has now been completed on the 2 October, 2015 for £3.366m with a positive write back of £1.054m on the loans secured against these properties by Dunbar Assets Plc.

In addition, it was agreed with Dunbar Assets Plc that should a Corporation tax charge be trigged by the disposals, this would be covered by them. As a result, finance income also includes and amount of £0.261m relating to amounts due from Dunbar in the form of a Corporation Tax reimbursement.

6. Annual Report and Accounts

The financial information set out in this announcement does not constitute statutory accounts as defined by section 434 and 435 of the Companies Act 2006. The financial information for the year ended 31 August 2016 has been extracted from the Group’s financial statements upon which the auditor’s opinion is unqualified and does not include any statement under section 498(2) or 498(3) of the Companies Act 2006.

The annual report will be sent to shareholders on 3 February, 2017 Additional copies will be available on the Company’s website: www.formationgroupplc.com

7. Annual General Meeting

Formation’s Annual General Meeting is to be held on 27 February 2017 at the offices of Formation Group Plc, 2^nd Floor Oakwood House, London E2 7SY at 11 am.

 

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