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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Lsl Property Services Plc | LSE:LSL | London | Ordinary Share | GB00B1G5HX72 | ORD 0.2P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 9.00 | 3.15% | 295.00 | 283.00 | 296.00 | 295.00 | 287.00 | 291.00 | 2,511 | 08:27:09 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Real Estate Agents & Mgrs | 323.77M | -63.92M | -0.6148 | -4.80 | 306.75M |
TIDMLSL
RNS Number : 7623G
LSL Property Services
06 March 2018
For Immediate Release 6(th) March 2018
LSL Property Services plc (LSL or Group)
PRELIMINARY ANNOUNCEMENT
LSL Property Services plc, a leading provider of residential property services incorporating both estate agency and surveying businesses, announces preliminary results for the year ended 31(st) December 2017.
Hot Features
Premium
2017 2016 % change
Group Revenue - GBPm 311.5 307.8 +1
Group Underlying Operating Profit(1) - GBPm 37.5 34.6 +8
Group Underlying Operating Margin - % 12.0 11.3
---------------------------------------------- ------ ------ ---------
Group Adjusted EBITDA(2) 42.7 40.1 +7
Group Operating Profit - GBPm 42.1 65.4 -36
Profit before tax - GBPm 40.1 63.5 -37
Net Exceptional gain - GBPm 9.3 32.2 -73
Basic Earnings Per Share - pence 32.6 49.2 -34
Adjusted Basic Earnings Per Share - pence(3) 28.3 25.9 +9
Net Bank Debt(4) at 31(st) December - GBPm 30.0 20.3 -48
Final proposed dividend per share - pence 7.3 6.3 +16
Full year dividend per share - pence 11.3 10.3 +10
---------------------------------------------- ------ ------ ---------
1 Group Underlying Operating Profit is before exceptional costs, contingent consideration, amortisation of intangible assets and share-based payments (as defined in Note 4)
2 Group Adjusted EBITDA is Group Underlying Operating Profit(1) plus depreciation on property plant and equipment (as defined in Note 4)
3 Refer to Note 6 for the calculation 4 Refer to Note 9 for the calculation
-- Robust performance in subdued market conditions with full year Group Underlying Operating Profit(1) up 8% to GBP37.5m (2016: GBP34.6m) and Group Adjusted EBITDA up 7%
-- Continued momentum in the Estate Agency Division with 2% overall revenue growth and Underlying Operating Profit(1) up 10% year on year
-- Strategic acquisition of a shareholding in Yopa (17.3%) for consideration of GBP20m after thorough
market evaluation of digital opportunities -- Continued growth of recurring income with Lettings up 4% year-on-year -- Strong growth in Financial Services income of 16% (organic growth +14%) -- Residential Sales exchange income down by 9%
-- Strong performance at Marsh & Parsons which recorded revenue growth of 2% year on year, including Lettings income up 10% against a challenging London market
-- LSL continued its Marsh & Parsons branch expansion strategy in 2017, opening two new branches in outer prime Central London
-- The Surveying Division delivered strong profit growth of 8% with strong operating margins (29.4%)
-- Contract extensions for surveying and valuation services were signed with two major lenders during 2017
-- 2017 Profit before tax of GBP40.1m was down compared to prior year (2016: GBP63.5m). The 2016 financials included an exceptional gain on the disposal of ZPG plc shares of GBP32.9m
-- 2017 exceptional gain of GBP9.3m. Continued positive progress in settling historic PI claims with a GBP3.7m exceptional gain and in addition a gain of GBP5.6m on the sale of GPEA shares
-- Strong Group operational cash-flows and low level of gearing
Commenting on today's announcement, Simon Embley, Chairman, said:
"The Group delivered a robust financial performance given the subdued market conditions. I am pleased that the business delivered underlying operating profit growth in both the Estate Agency and Surveying Divisions.
The Group has a strong balance sheet with relatively low levels of gearing and is very cash generative at an operational level. The business is well placed to capitalise on market conditions to increase Shareholder value.
LSL's financial performance in 2018 has tracked closely to the Board's expectations and the Group is well placed to deliver a solid performance during the year."
For further information, please contact:
Ian Crabb, Group Chief Executive Officer Adam Castleton, Group Chief Financial Officer LSL Property Services plc 0207 382 0360 David Rydell Sophie Wills Gemma Mostyn-Owen Buchanan 0207 466 5000
Notes on LSL:
LSL is a leading provider of residential property services to its key customer groups. Services to consumers include: residential sales, lettings, surveying, conveyancing and mortgage, pure protection and general insurance brokerage services. Services to mortgage lenders include: valuations and panel management services, asset management and property management services. For further information, please visit LSL's website: www.lslps.co.uk
Chairman's Statement
Introduction
I am pleased to report positive progress for the Group in 2017. Group Underlying Operating Profit(1) of GBP37.5m in 2017 increased 8% compared to the prior year (2016: GBP34.6m) with Group Adjusted EBITDA(2) up 7%. Group Revenue in 2017 grew by 1% to GBP311.5m (2016: GBP307.8m).
The Group's business model and disciplined focus on its strategy has enabled LSL to successfully navigate the challenging residential property market conditions in 2017.
The LSL strategy has been consistently and successfully executed in 2017 and remains unchanged. The Board remain confident of the opportunities for further positive progress for the Group.
Dividend
The Board continues to support our previously communicated dividend policy, to apply a dividend pay-out ratio of between 30% to 40% of Group Underlying Operating Profit after interest and tax. The Board has reviewed the policy while considering the risks and capital management decisions facing the Group.
Adjusted Basic Earnings Per Share for 2017 was 28.3 pence, an increase of 9.3% on the prior year (2016: 25.9 pence). The Board has a positive view of the future prospects for the business whilst also being mindful of the uncertain economic and political landscape which has an impact on consumer sentiment. The proposed dividend payment is at the upper end of the range of our stated policy and a final dividend of 7.3 pence per share (2016: 6.3 pence per share) will be proposed to Shareholders at the forthcoming AGM, giving a total dividend for 2017 of 11.3 pence per share (2016: 10.3 pence per share).
Our market position
LSL holds a market leading position in its core Estate Agency business comprising 12 Estate Agency brands, including Your Move, which is the largest UK single brand estate agent measured by the number of branches(3) . The businesses are organised to deliver integrated Residential Sales, Lettings and Financial Services, as well as a range of additional residential property related services.
Consumer confidence was impacted by rising inflation, subdued wage growth and changes to buy-to-let regulations, leading to reduced housing transactions in 2017. Despite the subdued market backdrop, LSL's focus on its stated strategy delivered growth in both Financial Services income and Lettings income and improved productivity in the Surveying business. These self-help measures have protected LSL from the full impact of the challenging housing market in 2017.
We continued to invest in our brands in 2017 to drive future growth, and increased dedicated headcount to support our successful Lettings and Financial Services income streams and to grow our Land & New Homes business. During 2017 we also opened two new Marsh & Parsons branches in outer prime Central London.
In Financial Services, during 2017 the Group arranged total mortgage lending of GBP21.0bn (2016: GBP17.1bn). Measured by the number of appointed representatives, as at 5(th) March 2018, LSL's overall combined network is the second largest in the UK(4) . Financial Services income represented 24% of total Group Revenue in 2017 (2016: 21%) and demonstrates LSL's growing position as a leading financial services distributor.
During 2017 and into 2018, we have assessed and continued to selectively acquire businesses and make strategic investments:
-- Following LSL's strategic review of digital opportunities in the estate agency market, in September 2017 LSL made a 17.3% strategic acquisition of a shareholding in Yopa, an online hybrid estate agent. Following this investment, LSL and Yopa started collaborative activities as part of a strategic partnership.
-- In January 2018 LSL acquired the entire issued share capital of Personal Touch Financial Services and its subsidiary company, Personal Touch Administration Services. Personal Touch Financial Services is a financial services business specialising in the provision of mortgage and other financial services products via its network of intermediaries. This acquisition supports LSL's stated strategy of enhancing its position as a leading mortgage distributor and is an excellent fit with our existing financial services businesses, which were rebranded to PRIMIS in February 2018. Details of the acquisition are included in this Report as a post balance sheet event.
Following the publication of the draft Tenant Fees Bill in November 2017, setting out the government's approach to banning letting fees paid by tenants, we are monitoring developments. Whilst the exact timing of the introduction of the legislation is uncertain, our current expectation is that it will be introduced in 2019.
Our Surveying Division continues to hold a market leading position, maintaining strong relationships with many of the UK's largest lenders. During 2017 LSL negotiated extensions to its contracts to supply UK residential surveying and valuation services to Barclays Bank PLC and Santander UK Plc. LSL's Surveying Division is one of the country's largest providers of residential valuation services nationwide and is one of the largest employers of surveyors in the UK(4) .
Corporate Governance and Board
The Board remains committed to high levels of corporate governance and during 2017, LSL has complied in all respects with the UK Corporate Governance Code (April 2016 edition). We are also closely monitoring the Government's review of corporate governance and the FRC's consultation in relation to the Code.
As Chairman, with the responsibility for leadership of the Board, I review its effectiveness on all aspects of its role and encourage feedback. During our annual evaluation exercise we reviewed the composition of our Board and its Committees and concluded that we have the appropriate balance of skills, independence and knowledge of the Group to enable the Board to discharge our duties and responsibilities effectively.
Details of our corporate governance arrangements and the recommendations arising from the evaluation exercise are contained within the Corporate Governance Report and details of the Directors are included in The Board section of the Annual Report and Accounts 2017.
Our people
Ultimately the success of our business model is attributable to, and underpinned, by our strong brands and excellence in the delivery of high levels of customer services by our colleagues throughout the Group. The total number of employees as at 31(st) December 2017 was 5,084 (2016: 4,990). I would like to take this opportunity to thank all of our colleagues for the continued hard work and commitment which they have demonstrated throughout 2017.
Outlook
Market conditions in 2018 have been slightly softer than the equivalent period in 2017. LSL's financial performance in 2018 has tracked closely to the Board's expectations and the Group is well placed to deliver a solid performance during the year. LSL continues to execute on its stated strategy and is well placed to deliver increased Shareholder value.
LSL expects to see a modest reduction in the volume of house purchase transactions compared to the prior year, with the rate of House Price Inflation outside Greater London continuing to ameliorate. Mortgage costs continue to be low by historic standards and mortgage availability remains good. The medium to longer term fundamentals of the UK housing market remain solid.
We are positive regarding the outlook for the business, driven in part by LSL's ambition to continue to deliver a programme of self-help measures, including organic growth in Estate Agency in Financial Services Income and Lettings Income, with the aim of optimising organic growth. LSL will also continue to evaluate selective acquisitions and in 2018, LSL's ambition is to restart its lettings book acquisition programme.
The Group has a robust balance sheet with relatively low levels of gearing and is very cash generative at an operational level. The business is well placed to capitalise on market conditions to increase Shareholder value.
Simon Embley
Chairman
6(th) March 2018
Note 1 Group Underlying Operating Profit is before exceptional costs, contingent consideration, amortisation of intangible assets and share-based payments (as defined in Note 4)
Note 2 Group Adjusted EBITDA is Group Underlying Operating Profit plus depreciation on property plant and equipment (as defined in Note 4)
Note 3 Your Move has 260 branches and has been internally verified as the largest single brand estate agent in the UK
Note 4 LSL estimates on the combined networks of PRIMIS and Personal Touch Financial Services
Group Chief Executive's Review
2017 Overview
The Group delivered a robust performance in 2017, particularly against the backdrop of a subdued residential property market during the year. I am pleased to report that in 2017, Group Revenue (+1%), Group Underlying Operating Profit (+8%) and Group Adjusted EBITDA (+7%) were all up year-on-year. Further, at the end of 2017 LSL's Net Bank Debt (GBP30m) and operational gearing(1) ratio (0.7x) both remained modest.
Group Revenue increased by 1% to GBP311.5m (2016: GBP307.8m). Group Underlying Operating Profit(2) was up 8% to GBP37.5m (2016: GBP34.6m). Group Adjusted EBITDA was up 7% to GBP42.7m (2016: GBP40.1m). 2017 Profit before tax of GBP40.1m was down compared to the prior year (2016: GBP63.5m). The 2016 financials included an exceptional gain on the disposal of ZPG plc shares of GBP32.9m.
In the Estate Agency Division, we continued to invest in the growing parts of our businesses and delivered strong year-on-year revenue growth in Lettings (+4%) and Financial Services (+16%). In the Surveying Division, we delivered strong profit growth (+8%), strong margins (29.4%) and we were pleased to announce contract extensions with Barclays Bank PLC (September 2017) and Santander UK Plc (December 2017).
During 2017 LSL completed the exploration and evaluation of options to capitalise on digital opportunities created by the growth in consumer acceptance of online and hybrid estate agency business models. Following this evaluation, in September 2017, LSL announced the strategic acquisition of a 17.3% shareholding in Yopa for a total consideration of GBP20m. LSL and Yopa have started collaborative activities as part of a strategic partnership.
The Market in 2017
The UK residential property sales market was subdued in 2017. Approvals for house purchases(3) in 2017 were down by 1.5% with the drop in market transactions more pronounced in London and the South East(4) .
Approvals for house purchases were down 2.9% in the first half of 2017 compared to the same period in 2016 when an increase in Stamp Duty on 1(st) April 2016 led to a spike in market activity in the period up to the change. In the second half of 2017, approvals for house purchases were broadly flat compared to the same period in 2016. Whilst approvals for house purchases in the third quarter of 2017 were relatively positive (+5.4%) compared to the same period in 2016 when consumer confidence was impacted by the June 2016 EU referendum result, approvals for house purchases were down in the final quarter of 2017 (-5.5%) compared to the same period in 2016.
Total mortgage approvals(3) increased by 2.3% in 2017. This reflected an increase in remortgage approvals in the first half of 2017 (+3.6%) compared to the same period in 2016 reflecting low interest rates and the availability of remortgage products and also the second half of 2017 (+10.2%) reflecting a spike in remortgage activity following the interest rate increase announced by the Bank of England in November 2017.
Average house prices(5) in England and Wales grew by 0.2% (2016: 3.1%) to GBP301,022 annually with a drop in Greater London (-4.3%) and the South East (-0.2%) offsetting increases elsewhere in the country. Excluding Greater London and the South East, the average increase was 2.3%.
Residential property values in Greater London decreased by 4.3%. Within prime Central London (5 prime boroughs) prices fell by 9.5% while the remainder of Greater London experienced a decrease of 1.3% in year-on-year house prices(5) .
The proportion of new sales instructions placed with online and hybrid estate agents has continued to grow, increasing from 3% of the market in the second half of 2015 to 7% in the second half of 2017(6) . Channel dynamics continue to evolve in 2017 with online and hybrid agents share growing in both the first and second half of 2017 compared to the same periods in 2016, to represent circa 7% of new instructions (H216: 6%). Their market share remained broadly flat in the second half of 2017.
Total gross mortgage lending in 2017 was GBP256bn(7) (2016: GBP245bn). The proportion of mortgage lending in the market placed through intermediaries increased to 68% in 2017 (2016: 67%)(8) .
Following market declines in the repossessions market in the past few years, market repossession volumes again declined in 2017, reducing by 4% to 7,400(9) total repossessions as interest rates remained low and was the lowest number since 1982.
Strategy
LSL remains committed to delivering on our stated strategy:
Estate Agency
-- Ambition to drive operating profit per branch to between GBP80,000 and GBP100,000 in the medium term.
-- Ambition to expand the number of Marsh & Parsons branches to a total of 36 in the medium term, particularly outside prime Central London.
-- Grow recurring and where market conditions permit counter-cyclical income streams. -- Complete selective acquisitions of both residential sales businesses and lettings books.
Surveying and Valuation Services
-- Optimise contract performance and revenue generation from business to business customers. -- Achieve further improvement in efficiency and capacity utilisation. -- Use technology to target further improvements in customer satisfaction and performance. -- Continue the graduate training programme.
In addition to delivering on our stated strategy, in the second half of 2017 we launched a new ways of working programme across our Estate Agency business to respond to the changing landscape and customer demands. We expect this to deliver improvements to our operational performance and result in enhancements to the quality of service provided to Estate Agency Division customers over the medium-term.
LSL performance in 2017
Estate Agency Division
Total Estate Agency income of GBP247.4m (2016: GBP243.1m) increased by 2%. This increase resulted from the consistent execution of our strategies with strong growth in both Lettings and in Financial Services income, where we continued to invest in additional people to support growth.
During 2017 eight owned branches and three franchises were selectively closed as part of the ongoing management and optimisation of LSL's branch estate. LSL does not expect either a rationalisation from the current number of its Estate Agency brands or any material change to the size of its branch estate in the foreseeable future.
Residential Sales exchange income
Residential Sales exchange income decreased by 9% to GBP76.6m (2016: GBP83.8m) with average fees per unit down 1%. Exchange volumes fell by 7%, back 19% in the first quarter compared to the increased activity in the first quarter of 2016. This was attributable to the change in Stamp Duty on 1(st) April 2016, followed by a relatively flat second and third quarter in 2017 compared to the same periods in 2016. However the fourth quarter saw a subdued end to the year reflecting on-going market conditions in 2017.
Lettings income
We remain committed to our strategy of increasing recurring Lettings income. In 2017 we delivered growth in Lettings income of 4% (organic growth 3%). Lettings Income increased as a proportion of the Estate Agency business and represented 30% of total Estate Agency Division income in 2017 (2016: 29%).
To drive recurring income growth, we have previously acquired lettings books which have been successfully integrated into our Estate Agency networks. Lettings book acquisitions were paused during the second half of 2016 and into 2017 following the EU referendum. Our ambition is to recommence lettings book acquisitions during 2018.
Financial Services
Total Financial Services income grew strongly again with 16% year-on-year growth in 2017. Adjusting for the acquisition of Group First in February 2016, we delivered organic growth of 14% as we continued to roll out our model across the Estate Agency business and delivered growth from our intermediary networks. Financial Services Income increased as a proportion of the Estate Agency businesses and represented 30% of total Estate Agency Division income in 2017 (2016: 26%) reflecting our continuing strategy to enhance LSL's position as a leading distributor of mortgage and non-investment insurance products.
In 2017, LSL further strengthened its position as a leading distributor of mortgage and non-investment insurance products and delivered strong growth in the value of mortgage completions which were up to GBP21.0bn in 2017 (2016: GBP17.1bn). Further, measured by the number of appointed representatives, as at 5(th) March 2018, LSL's overall combined network is the second largest in the UK(10) .
Marsh & Parsons
LSL estimates that residential sales volumes in the prime Central London market fell by more than 15% in 2017 with prime Central London house prices falling by 9.5%. Given the overall challenging prime Central London market, Marsh & Parsons delivered a positive top line performance with revenue up by 2% in 2017 to GBP34.3m (2016: GBP33.5m).
Marsh & Parsons Residential Sales income fell by 5% in 2017 which represents a solid performance in light of the overall prime Central London market conditions. We are pleased with the Lettings performance with income growth of 10% (9% adjusting for branch openings). Lettings revenue now represents 59% of Marsh & Parson's total revenue (2016: 56%).
Expenditure at Marsh & Parsons increased by 4% during 2017 including the investment in additional Lettings headcount to support revenue growth, additional investment in headcount for New Homes, full year costs for branches opened in 2016 and the opening of two new branches in 2017. These increases have been partly offset by the gain on sale of leasehold premises (GBP0.7m in the first half of 2017). Full year operating profit fell by 12% to GBP3.9m (2016: GBP4.4m).
We continued with our branch expansion strategy in 2017, opening two new branches during the year in the outer prime Central London locations of Brixton and Islington. We are pleased with the performance of these new branches. This takes our total number of Marsh & Parsons branches to 27 as at 31(st) December 2017.
Our ambition is to expand to 36 branches in the medium term. Outer prime Central London has not been as negatively impacted as prime Central London and Marsh & Parsons is looking to expand its branch footprint in outer prime Central London locations. Marsh & Parsons is also planning to open a new branch in Chiswick in the spring of 2018.
Estate Agency profit per branch (Your Move, Reeds Rains and LSLi)
Underlying Operating Profit per owned branch in 2017 increased to GBP32,000 (2016: GBP30,500) reflecting the growth in Financial Services income and Lettings income offset by the impact of the challenging residential sales market conditions on Residential Sales exchange income.
LSL has increased Underlying Operating Profit per owned branch from GBP30,100 in 2013 to GBP32,000 in 2017. Our medium term ambition is to drive Underlying Operating Profit per owned branch to between GBP80,000 and GBP100,000 on the expectation of a normalised level of market transactions in the UK residential property sales market.
Our Lettings growth and Financial Services growth across the network continues to underpin this ambition and we will also focus on our Land & New Homes business. We will also plan to selectively deploy new technology to improve the consumer journey and increase efficiency.
Surveying Division
Surveying revenue was GBP64.1m (2016: GBP64.7m), a decrease of 1% on the previous year with the total number of jobs performed during the year of 309,499 (2016: 318,077) reflecting the overall management of the mix of jobs. Profit growth was strongly influenced by the successful continuation of investment in our IT platform, optimising efficiency and operational performance. This continued focus on optimising efficiency drove an increase in income per job to GBP207, an improvement of 2% year-on-year. We delivered strong growth in Underlying Operating Profit to GBP18.9m (2016: GBP17.5m) with an enhancement of profit margin to 29.4% (2016: 27.1%).
In 2017 we signed contract extensions with two of our largest customers, Barclays Bank PLC and Santander UK Plc.
The total number of qualified surveyors at 31(st) December 2017 was 321(2) , which is broadly in line with 2016. Our on-going graduate programme continues to be successful and assists in alleviating the impact of capacity constraints in the market.
Our customers
Our continued focus on providing the best service to our customers has been recognised in 2017 and 2018 with numerous industry awards including:
-- Marsh & Parsons: International Property Awards (UK) 2017: Best Estate Agent, London - Gold Award, Best Estate Agency Marketing, London - Gold Award. The London Magazine Club Awards 2017: Advertising Campaign of the Year - Gold Award.
-- Your Move: British Property Awards 2017: Gold Award for ten Your Move branches.
-- Reeds Rains: Best Estate Agent Guide 2018 (*): Leamington Spa - Top 100 Agent, Rated Exceptional, Kenilworth Lettings - Rated Highly. British Property Awards 2017: Gold Award for two Reeds Rains branches.
-- Davis Tate: Best Estate Agent Guide 2018 (*): Didcot Lettings - Top 100 Agent, Rated Exceptional, Henley Sales & Lettings - Top 100 Agent, Rated Exceptional (Lettings), Twyford Sales - Top 100 Agent, Burghfield Sales and Lettings - Rated Excellent, Pangbourne, Reading, Wallingford and Wantage Sales - Rated Highly, Abingdon, Reading and Wantage Lettings - Rated Highly. The 2017 allAgents Awards: Best Estate Agent - 17 Gold Awards in various locations, Best Letting Agent - 20 Gold Awards in various locations.
-- Frost's: Best Estate Agent Guide 2018(*): Harpenden Sales and Lettings - Top 100 Agent, Rated Exceptional.
-- Goodfellows: Best Estate Agent Guide 2018(*): Morden Sales - Rated Exceptional, Wimbledon Sales (under Finch & Co - Goodfellows) - Rated Excellent, Carshalton Beeches, Cheam Village, Raynes Park and Mithcam Sales - Rated Highly, Raynes Park Lettings - Rated Highly. The 2017 allAgents Awards - Best Estate Agent - 9 Gold Awards in various locations, Best Letting Agent - 4 Gold Awards in various locations.
-- JNP: Best Estate Agent Guide 2018(*): High Wycombe Sales - Rated Highly, Princes Risborough Sales - Rated Highly, Hazlemere Sales - Rated Excellent, Stokenchurch Sales - Rated Exceptional. British Property Awards 2017: Gold Award for Princes Risborough branch.
-- Thomas Morris: Best Estate Agent Guide 2018(*): Biggleswade Sales - Top 100 Agent, Rated Exceptional, St Neot's Sales - Rated Exceptional, Sawtry Sales - Rated Excellent. The Negotiator Awards: Medium UK Estate Agency of the Year - Gold Award. Relocation Agent Network Awards: Customer Relocation Award - Winner, Best Regional Agent Award - East Anglia and Essex Regional Winner. Agents Giving Awards 2017: Outstanding Contribution Award. The Guild of Property Professionals Awards: East Anglia - Winner. Fine & Country Awards 2017: St.Neots, East Anglia Regional Award - Winner. The 2017 allAgents Awards: Best Estate Agent, East of England - Gold Award.
-- e.surv Chartered Surveyors: Awarded: ISO27001 Information Security Global Standard.
Re-awarded: ISO 9001:2015 Global Quality Management Systems. Awarded: RoSPA Quality Safety Award, Level 3. Awarded: BS 18001 Occupational Health & Safety Award.
-- PRIMIS (Advance Mortgage Funding): Financial Adviser Service Awards 2017 - 5 Star Award. -- LSL Financial Services: Precise Mortgage Awards: Best Distribution Group 2017.
(*) As judged and announced in 2017
Balance Sheet and Exceptionals
The Group has a strong balance sheet with closing Net Bank Debt at 31(st) December 2017 of GBP30.0m (2016: GBP20.3m) and a gearing level at 0.70 times Group Adjusted EBITDA(1) (2016: 0.51 times).
In relation to the PI Costs provision, the Group continued to make positive progress in addressing historic claims and there has been a net GBP3.7m exceptional gain (H117: GBP1.1m, H217: GBP2.6m).
In July 2017 LSL disposed of its investment in GPEA for cash (GBP3m) and shares in eProp Services plc with an exceptional gain of GBP5.6m.
Post Balance Sheet events
In January 2018, LSL acquired the entire issued share capital of Personal Touch Financial Services and its subsidiary company, PTAS. Personal Touch Financial Services is a financial services business specialising in the provision of mortgage and other financial services products via its network of intermediaries.
This acquisition supports LSL's stated strategy of enhancing its position as a leading financial services distributor and growing long-term profitability in the provision of residential property services in the UK by identifying value enhancing opportunities. LSL has deep sector expertise in the provision of financial services and Personal Touch Financial Services is an excellent fit with our existing Financial Services businesses.
In January 2018, LSL extended its banking facility until May 2022. The facility comprises a GBP100m revolving credit facility (RCF) (2016: GBP100m).
Our people
I would like to take this opportunity to thank all my colleagues across our business for their professionalism and dedication during 2017. I look forward to working with my colleagues to deliver a successful year in 2018.
Outlook
Market conditions in 2018 have been slightly softer than the equivalent period in 2017. LSL's financial performance in 2018 has tracked closely to the Board's expectations and the Group is well placed to deliver a solid performance during the year. LSL continues to execute on its stated strategy and is well placed to deliver increased Shareholder value.
LSL expects to see a modest reduction in the volume of house purchase transactions compared to the prior year, with the rate of House Price Inflation outside Greater London continuing to ameliorate. Mortgage costs continue to be low by historic standards and mortgage availability remains good. The medium to longer term fundamentals of the UK housing market remain solid.
We are positive regarding the outlook for the business, driven in part by LSL's ambition to continue to deliver a programme of self-help measures, including organic growth in Estate Agency in Financial Services Income and Lettings Income, with the aim of optimising organic growth. LSL will also continue to evaluate selective acquisitions and in 2018, LSL's ambition is to restart its lettings book acquisition programme.
The Group has a robust balance sheet with relatively low levels of gearing and is very cash generative at an operational level. The business is well placed to capitalise on market conditions to increase Shareholder value.
Ian Crabb
Group Chief Executive Officer
6(th) March 2018
Note 1- Operational gearing is defined as Net Bank Debt divided by adjusted EBITDA (Group Adjusted EBITDA is Group Underlying Operating Profit (Note 4) plus depreciation on property plant and equipment)
Note 2- Group Underlying Operating Profit is before exceptional costs, contingent consideration, amortisation of intangible assets and share-based payments (as defined in Note 4)
Note 3- Bank of England for "House Purchase Approvals" and "Total Mortgage Approvals" - December 2017 released January 2018
Note 4- LSL estimates and including Land Registry regional data (Oct 2017)
Note 5- December 2017 LSL Property Services/ACADATA HPI
Note 6- LSL sources/data analysis
Note 7- UK Finance "Gross mortgage lending estimate" - January 2018
Note 8- UK Finance, new mortgages sold by intermediaries - February 2018
Note 9- UK Finance "Possessions on mortgaged properties" - January 2018, released February 2018
Note 10- Which Network? January 2018
Business Review - Estate Agency Division
2017 2016 %
Financial GBPm GBPm change
--------------------------------- ------- ------- -------
Residential Sales exchange
income 76.6 83.8 -9
Lettings income 73.9 71.4 +4
Financial Services income 74.4 64.1 +16
Asset Management income 6.3 6.6 -4
Other income(1) 16.2 17.2 -6
Total income 247.4 243.1 +2
Operating expenditure (220.5) (218.6) -1
Underlying Operating Profit(2) 26.9 24.5 +10
---------------------------------- ------- ------- -------
KPIs
--------------------------------- ------- ------- -------
Exchange units 25,176 27,193 -7
Underlying Operating Margin
(%) 10.9 10.1
Fees per unit GBP 3,042 3,083 -1
---------------------------------- ------- ------- -------
Market data
--------------------------------- ------- ------- -------
House purchase approvals
(000s)(3) 796 808 -1
Total mortgage approvals
(000s)(3) 1,525 1,530 -
UK housing transactions
(000s)(4) 1,220 1,235 -1
Repossessions(5) 7,400 7,700 -4
---------------------------------- ------- ------- -------
1 'Other income' includes franchising income, conveyancing services, EPCs, Home Reports, utilities and other products and services to clients of the branch network.
2 Refer to Note 4 for the calculation.
3 Bank of England, "Mortgage approvals for house purchases" and "Total mortgage approvals" - December 2017, released January 2018.
4 HMRC Stats, "Monthly property transactions completed in the UK with value of GBP40,000 or above" - December 2017, released January 2018.
5 UK Finance "Possessions on mortgaged properties" January 2018, released February 2018.
Estate Agency Division performance
Year-on-year income growth in the Estate Agency Division was 2%. Lettings income and Financial Services income showed positive growth with Residential Sales performance reflecting market conditions.
Residential Sales exchange income
Residential Sales exchange income decreased by 9% to GBP76.6m (2016: GBP83.8m) with average fees per unit decreased by 1%. Residential Sales exchange volumes fell by 7%.
Lettings income
Lettings income grew in each quarter of the year as LSL continued to focus on this recurring revenue stream. Total Lettings growth for the year of 4% comprised organic growth of 3% and a full year of lettings books acquired in 2016 as well as the positive impact of the opening of additional Marsh & Parsons branches in 2016 and 2017.
Financial Services income
Total Financial Services income is delivered through the Estate Agency Division's branches, Group First (acquired in 2016) and the intermediary networks of PRIMIS. Total Financial Services income grew strongly again with 16% year-on-year growth in 2017, with income growth across all Estate Agency brands, Group First and also in the intermediary network businesses.
Other income
Other income fell by 6% year-on-year in large part due to a fall in conveyancing income due to lower residential transaction volumes.
Asset Management
Asset Management maintained its position in a smaller repossessions market.
Estate Agency Division operating margin
The Estate Agency Division Underlying Operating Margin was 10.9% in 2017 (2016: 10.1%).
Regulation - Financial Services
PRIMIS is the trading name of both First Complete and Advance Mortgage Funding, and both companies are directly authorised by the FCA in relation to the sale of mortgage, pure protection and general insurance products.
Your Move, Reeds Rains, First2Protect, Mortgages First, Insurance First and Embrace Mortgage Services along with the LSLi subsidiaries are all appointed representatives of First Complete.
Linear Financial Solutions is an appointed representative of Advance Mortgage Funding for mortgage and insurance business and also an appointed representative of Openwork for investment business.
In 2018, LSL acquired Personal Touch Financial Services which is also directly authorised by the FCA in relation to mortgage, pure protection, general insurance and investment products.
First Complete acts as principal for most of the estate agency businesses within LSL's Estate Agency Division, enabling their employed financial advisers to offer Financial Services to customers of the branch networks. Advance Mortgage Funding (previously trading as Pink Home Loans) and Personal Touch Financial Services both operate intermediary networks, providing products and services to financial services intermediaries.
LSL's Financial Services businesses are also members of the Association of Mortgage Intermediaries (AMI) which is an industry representative and trade body and the Financial Services businesses are subject to the Financial Ombudsman Service and contribute to the funding of the Financial Services Compensation Scheme through regulatory fees and charges.
The Financial Services businesses have dedicated compliance teams and the Financial Services activities are subject to the oversight of the Financial Services Risk Committee and Financial Services Management Committee.
Regulation - Residential Sales and Lettings
The Estate Agency Division's branches adhere to the Codes of Practice issued by industry professional and regulatory bodies, including The Property Ombudsman (TPO) and/or the Association of Residential Lettings Agents (ARLA)/National Association of Lettings Agents (NALS). Membership of these bodies is in addition to observing compliance with relevant legislation, such as Data Protection, the Consumer Protection Regulations and the Consumer Rights Act; guidance material published by relevant regulators, including the Competition and Markets Authority (CMA) (and its predecessor the Office of Fair Trading (OFT)), the National Trading Standards Agency/Trading Standards Institute (TSI), HMRC; and codes published by other relevant bodies, including the Advertising Standards Authority (ASA).
LSL has also on behalf of all its Estate Agency businesses entered into a primary authority agreement with York Trading Standards Office.
LSL from time to time also enters into direct dialogue with the regulators and consumer groups. During 2017 LSL has been monitoring and responding to the wide range of consultations published by the Government as part of its review of the housing market which commenced at the start of 2017 and will continue during 2018.
The Estate Agency Division has dedicated compliance teams and is subject to oversight by the Estate Agency Management Committee.
Branch numbers
Breakdown of LSL's Estate Agency branches as at 31(st) December 2017 and 31(st) December 2016:
Total Total
Owned Franchised 2017 2016
---------------- ----- ---------- ----- -----
Your Move 198 62 260 267
Reeds Rains 114 40 154 157
LSLi 62 2 64 65
Marsh & Parsons 27 0 27 25
Total 401 104 505 514
The total number of branches reduced by nine in 2017, following the closure of eight owned branches and three franchises and the opening of two new branches in Marsh & Parsons. Of the eight owned branches closed in the year, four were in Your Move, three in Reeds Rains, and one in LSLi. All closed branch operations and employees were transferred into existing local branches.
Business Review-Surveying Division
2017 2016 %
Financial GBPm GBPm change
-------------------------------------- ------ ------ -------
Revenue 64.1 64.7 -1
Operating expenditure (45.2) (47.2) +4
Underlying Operating Profit(1) 18.9 17.5 +8
-------------------------------------- ------ ------ -------
KPIs
-------------------------------------- ------ ------ -------
Underlying Operating Margin
(%) 29.4 27.1
Jobs performed (000s) 309 318 -3
Revenue from private surveys
(GBPm) 2.4 2.3 +3
Income per job (GBP) 207 203 +2
Historic PI Costs provision
(Balance Sheet) at 31(st) December
(GBPm) 15.9 20.7 +23
Number of qualified surveyors
at 31(st) December (FTE)(2) 321 323 -1
Total Mortgage Approvals ('000s)(3) 1,525 1,530 -
-------------------------------------- ------ ------ -------
Notes:
1 Refer to Note 4 for the calculation. 2 Full Time Equivalent (FTE).
3 Bank of England, "Mortgage approvals for house purchases" and "Total mortgage approvals" 2017.
Surveying Division performance
Surveying revenue was GBP64.1m (2016: GBP64.7m), a decrease of 1% on the previous year with a total number of jobs performed during the year of 309,499 (2016: 318,077) reflecting the overall management of the mix of jobs.
Profit performance was enhanced by the on-going investment in the IT platform, as well as optimising efficiency and operational performance and cost control. Continued focus on optimising capacity drove an increase in income per job to GBP207, an improvement of 2% year-on-year. As a result, LSL delivered an increase in Underlying Operating Profit(1) to GBP18.9m (2016: GBP17.5m) with an enhancement of profit margin to 29.4% (2016: 27.1%).
In 2017 LSL successfully negotiated contract renewals with two of its largest lender customers.
The total number of qualified surveyors at 31(st) December 2017 was 321(2) , which was broadly in line with the 2016 position. The on-going graduate programme continues to be successful and assists in alleviating the impact of capacity constraints in the market. In 2018 LSL will continue to focus on its graduate training programme.
At 31(st) December 2017 the total provision for PI Costs was GBP15.9m (2016: GBP20.7m). In 2017 LSL continued to make positive progress in addressing these historic claims. There was an exceptional gain of GBP3.7m during the year.
Financial Review
The key drivers of the financial performance of LSL in 2017 are summarised below:
Income statement
Revenue
Revenue increased by 1% to GBP311.5m in the year ended 31(st) December 2017 (2016: GBP307.8m).
Operating expenses
Operating expenses increased by 0.5% to GBP276.8m (2016: GBP275.3m). Increases in the Estate Agency Division included additional headcount to support the growth of LSL's Financial Services businesses, Lettings and Land & New Homes and increased costs in Marsh & Parsons due to the two new branches opening in Brixton and Islington and the full year costs for the two Marsh & Parsons branches opened in 2016.
Group Underlying Operating Profit
Group Underlying Operating Profit(1) increased by 8.3% to GBP37.5m (2016: GBP34.6m) with an Underlying Operating Margin of 12.0% (2016: 11.3%). On a statutory basis, the Group Operating Profit decreased by 35.7% to GBP42.1m (2016: GBP65.4m). The 2016 financial results included an exceptional gain on the disposal of ZPG plc shares of GBP32.9m.
Group Adjusted EBITDA
Group Adjusted EBITDA(2) increased by 6.5% to GBP42.7m (2016: GBP40.1m) driven by an increased Group Underlying Operating Profit and a slightly reduced depreciation charge of GBP5.2m (2016: GBP5.5m).
Exceptional items
Total exceptional gains in 2017 were GBP9.3m (2016: GBP34.5m) comprising of GBP3.7m of exceptional gain relating to the PI Costs provision and an exceptional gain of GBP5.6m relating to the sale of the Group's share in GPEA in July 2017. The 2016 financials included an exceptional gain on the disposal of ZPG plc shares of GBP32.9m. Total exceptional costs in 2017 were GBPnil (2016: GBP2.3m).
PI Cost provision for PI claims and notifications
At 31(st) December 2017, the total provision for PI Costs was GBP15.9m (2016: GBP20.7m). In 2017 the Group continued to make positive progress in addressing historic claims and there has been a net GBP3.7m exceptional gain.
Contingent consideration
In 2017 contingent consideration in the Income Statement amounted to a charge of GBP0.7m (2016: GBP3.8m credit). This included a charge relating to the Group First acquisition of GBP0.4m (acquired in 2016) and a charge of GBP0.3m in LSLi (2016: credit of GBP1.1m).
Amortisation
The amortisation charge was GBP4.1m (2016: GBP3.9m). This is slightly higher than 2016 as there was a full year charge for lettings book acquisitions made in the first half of 2016.
Net financial costs
Net financial costs amounted to GBP2.0m (2016: GBP1.9m) and are in line with the prior year. The finance costs related principally to interest and fees on the RCF. Additional costs relate to the unwinding of discounts on provisions and contingent consideration.
Taxation
The UK corporation tax rate reduced to 20% with effect from 1(st) April 2015 and subsequently 19% with effect from 1(st) April 2017. A future UK corporation tax of 17% has been enacted and is effective from 1(st) April 2020 and this is the rate at which deferred tax has been provided (2016: 17%). Corporation tax is recognised at the headline UK corporation tax rate of 19.25% (2016: 20%).
The effective rate of tax for the year was 16.7% (2016: 20.5%). The most significant reason that LSL's effective tax rate for 2017 is lower than the headline UK tax rate is that the gain on the disposal of GPEA in the year is not taxable due to the application of the Substantial Shareholding Exemption. Adjusting for this item, the effective 2017 tax rate was 19.4%.
Deferred tax credited directly to other comprehensive income is GBP0.6m (2016: GBP3.8m). This is comprised of a credit of GBP0.9m and a charge of GBP0.3m and relates respectively to the disposal and revaluation of financial assets. Income tax credited directly to the share based payment reserve is GBPnil (2016: GBP0.1m).
In 2017 corporation tax payments of GBP11.1m (2016: GBP8.9m) were made which is greater than the current year corporation tax charge of GBP7.5m (2016: GBP12.7m). This is a result of the timing of the settlement of the corporation tax liability of the ZPG plc shareholding in the second half of 2016 - the corporation tax liability on these disposals was not settled until the quarterly instalment payments made in January and April 2017.
Basic Earnings Per Share
Basic Earnings Per Share was 32.6 pence (2016: 49.2 pence). Adjusted Basic Earnings Per Share(3) is 28.3 pence (2016: 25.9 pence) an increase of 9.3% which is broadly in line with the increase in Group Underlying Operating Profit(1) . The Group seeks to present a measure of underlying performance which is not impacted by the unevenness in profile of exceptional gains and exceptional costs, contingent consideration, amortisation and share-based payments. The Directors consider that the adjustments made to exclude the after tax effect of exceptional items, contingent acquisition consideration treated as remuneration, and amortisation provides a better and more consistent indicator of the Group's underlying performance.
Balance sheet
Joint ventures and other investments
The Group has two joint ventures; a 33.3% (2016: 33.3%) interest in TM Group, whose principal activity is to provide property searches, and a 50% (2016: 50%) interest in LMS whose principal activity is to provide conveyancing panel management services.
During 2017 LSL made three investments:
-- In September 2017, LSL acquired a 17.3% shareholding in Yopa for a total consideration of GBP20m
-- In October 2017 LSL acquired 19,675 ordinary shares in NBC Property Master for a total consideration of GBP65,000
-- In November 2017, LSL invested GBP0.25m by way of a convertible loan note, in Global Property Ventures (trading as Zero Deposit) which distributes a tenancy deposit replacement product.
During the year, LSL disposed of its 18.1% investment (2016: 18.1%) in GPEA, which is a membership organisation with a national network of independently owned estate agents. The investment was disposed of for GBP5.7m (GBP3.0m cash and shares in eProp Services plc) in July 2017 and resulted in an exceptional gain of GBP5.6m.
Capital expenditure
Total capital expenditure in the year amounted to GBP5.0m (2016: GBP4.6m) and an additional GBP0.6m (2016: GBP1.4m) has been spent internally on developing new software which has been treated as an intangible asset.
Bank facilities
In January 2018, LSL extended its bank facility until May 2022. The facility includes a GBP100m RCF (2016: GBP100m). During the period under review, the Group complied with all of the financial covenants contained within the facility.
Net Bank Debt and cash-flows
As at 31(st) December 2017 Net Bank Debt was GBP30.0m (2016: GBP20.3m) and Shareholders' funds amounted to GBP148.6m (2016: GBP128.8m) providing a balance sheet gearing of 20.2% (2016: 15.8%). The increase in Net Bank Debt was primarily the result of the investment in Yopa in September 2017 of GBP20.0m. The 2017 gearing level was 0.7 times(3) adjusted EBITDA (2016: 0.51 times). The Group has a committed RCF until May 2022 and in 2017 the Group generated cash from operations of GBP41.5m (2016: GBP32.7m).
Net assets
The Group's net assets as at 31(st) December 2017 were GBP148.6m (2016: GBP128.8m).
Treasury and risk management
LSL has an active debt management policy. LSL does not hold or issue derivatives or other financial instruments for trading purposes. Further details on the Group's financial commitments as well as the Group's treasury and risk management policies are set out in the Annual Report and Accounts 2017.
Post balance sheet events
In January 2018, LSL acquired the entire issued share capital of Personal Touch Financial Services and its subsidiary company, PTAS. Personal Touch Financial Services is a financial services business specialising in the distribution of mortgage and other financial services products via its network of intermediaries.
This acquisition supports LSL's stated strategy of enhancing its position as a leading financial services distributor and growing long-term profitability in the provision of residential property services in the UK by identifying value enhancing opportunities. LSL has deep sector expertise in the provision of financial services and Personal Touch Financial Services is an excellent fit with the Group's existing financial services businesses.
In January 2018, LSL extended its bank facility until May 2022. The facility includes a GBP100m RCF (2016: GBP100m).
International Financial Reporting Standards (IFRS)
The Financial Statements have been prepared under IFRS as adopted by the European Union.
Note 1 - Group Underlying Operating Profit is before exceptional costs, contingent consideration, amortisation of intangible assets and share-based payments (as defined in Note 4 to the Financial Statements)
Note 2 - Group Adjusted EBITDA is Group Underlying Operating Profit as previously defined plus depreciation on property plant and equipment.
Note 3 - Refer to Note 9 for the calculation
Principal Risks and Uncertainties
LSL has an overall framework for the management of risks and internal controls to mitigate the risks. Through this framework, the Board (which has overall accountability and responsibility for the management of risk and is supported by the Audit & Risk Committee) on a regular basis identifies, evaluates and manages the principal risks and uncertainties faced by LSL; as well as areas which could adversely affect its business, operating results and financial condition.
Development of risk appetite
During 2017, in line with the FRC's Guidance on 'Risk Management, Internal Control and Related Financial and Business Reporting', the Board continued to develop LSL's risk appetite framework to ensure continued compliance with the Code and FRC guidance. The Board has through this process expressed and reviewed the types and level of risk which it is willing to take or accept to achieve LSL's strategy and business plans and to support consistent, risk-informed decision making across the Group.
The development of the risk appetite began with the Directors approving a risk framework policy and defining individual risk appetite statements for LSL's principal risks and uncertainties and for key decisions made by the Board. These statements provide parameters within which the Board typically expect LSL's businesses to operate, facilitating structured consideration of the risk and reward trade-off for the decisions made around how the Group conducts business. This includes monitoring risk measures and identification of actions needed to bring any specific outlying areas of risk within target levels. During 2017, a programme has been progressed to enhance the existing risk framework within each of the Group's subsidiary businesses, including the development of risk appetite measures by each subsidiary. This exercise has included each subsidiary business quantifying their highest ranked risk areas and introduced the use of graphical management information to facilitate the tracking of risk status versus tolerance by the subsidiary boards and divisional governance committees. The framework has also improved the visibility of action plans to address any core risk areas considered outside tolerance. These developments have in turn served to provide a more robust means for evaluating the capture and measurement of risk factors within the established risk appetite framework at Group level.
The framework covers a wide range of risks, which reflect the nature of LSL's businesses and acknowledges that there is not a 'one size fits all' approach to establishing risk parameters. During 2018, LSL will continue to re-visit the status of this framework to ensure it remains in line with emerging best practice and continues to foster the maturity of risk appetite routines at both Group and subsidiary level.
The Board has established clear risk parameters, whilst at the same time fostering an environment within which innovation and entrepreneurial activities can thrive. Where there is any proposal to shift the Group significantly closer to or outside agreed risk parameters, this will be discussed and will be subject to Board approval before commencing any activities to ensure that appropriate mitigation controls are put into place.
On-going evolution of the risk management framework is carried out as part of an on-going cycle of continual improvement, and remains a key priority for the Audit & Risk Committee and the Board in 2018.
Developing the financial viability statement
Assessment of prospects
The Group's business model and strategy are central to an understanding of its prospects, and details are contained in the Annual Report and Accounts 2017.
Through organic growth, selective acquisitions and a delivery of high quality services to customers, the Group's key objective is to build market leading positions and ultimately deliver long term Shareholder value.
Prospects of the Group are assessed by the Board throughout the year at its meetings, including a particular focus during the strategic planning process. This process includes an annual review of the on-going plan, led by the Group Chief Executive Officer and Group Chief Financial Officer in addition to the relevant business functions involved.
The Directors participate fully in the annual planning process by means of a Board meeting and part of the Board's role is to consider whether the plan continues to take appropriate account of the changing external environment including macroeconomic, political, regulatory and technical changes.
This process allows the Board to produce strategic objectives and detailed financial forecasts over a three year period. The latest updates to the on-going plan were finalised in December 2017. This considered the Group's current position and its prospect of operating over the three year period ending 31(st) December 2020, and reaffirmed the Group's stated strategy. Furthermore the Group's future prospects have been further strengthened with the extension of the RCF.
EU Referendum
The Board has been fully aware of the significance of the EU Referendum since the announcement of the referendum result in 2016. Following the referendum, 'Brexit' has been included as a sub-set entry within the Group's risk appetite framework. This process ensures EU Referendum developments are formally monitored, and the risk status is regularly reassessed with reactive action plans identified to respond to the effects of on-going uncertainties and the resolution of the UK/EU negotiations as they crystalise. These practices will continue throughout 2018, with linkage to viability assessment modeling and wider consideration of the likely impacts of other major economic and political events.
The Group's principal risks and uncertainties are set out on below. The Board reviewed LSL's principal risks and uncertainties when assessing the Group's prospects, and noted that none of these individual risks would, in isolation, compromise the Group's prospects.
Assessment of viability
Although the strategic plan reflects the Directors' best estimate of the prospects of the Group in accordance with provision C.2.2 of the Code, the Directors have assessed the viability of the Company over a longer period than the 12 months required by the 'going concern' provision.
For the purposes of assessing the viability of the Group, it was determined that a three year period ending on 31(st) December 2020 should be used, as this corresponds with the Board's strategic planning cycle. This assessment has been made with reference to the Group's current position and prospects, the Board's risk appetite and the Group's principal risks and uncertainties.
A number of severe but plausible scenarios were considered and modelled in detail with input from across a functional group of senior managers, including representatives from the finance teams.
The following scenarios were modelled:
-- Severe downturn in the UK housing market caused by Brexit and/or political uncertainties.
-- A data breach causing a regulatory fine and reputational damage, with the potential loss of customers.
-- Changes to regulation and compliance and the subsequent impact on revenue.
Detailed assumptions for each scenario were built up and modelled by month across the three year period. The models measured the downside impact on revenue and the management action which would be taken to retain cash reserves and maintain the operating capacity of the business as a result of the stress scenarios.
Assumptions were also made for the potential growth of LSL's recurring income and counter-cyclical businesses, notably Lettings and Asset Management, and the extent to which some activities, such as Lettings, tend to be less affected through the cycle. The modelling and assumptions took account of the broad range of services across a wide geography which allows some protection from the impact of stress scenarios.
The results from the stress testing indicated that the Group would be able to withstand the financial impact of each scenario and therefore continue to operate and meet its liabilities, as they fall due, over the three year period ending 31(st) December 2020.
Furthermore the Board also considered it appropriate to prepare the financial statements on the going concern basis, as explained in the Basis of Accounting paragraph in the Principal Accounting Policies section of the Annual Report & Accounts 2017.
The Audit & Risk Committee oversaw the process by which the Directors reviewed and discussed the assessment undertaken by the Management Team in proposing the viability statement.
The Directors' financial viability statement is contained in the Report of the Directors section of the Annual Report & Accounts 2017.
Risk management and internal controls framework
LSL's risk management and internal controls framework for 2017 included:
a. ownership of the risk management and internal controls framework by the Board, including a risk framework policy, supported by the Group Chief Financial Officer, the Company Secretary, Head of Risk and Internal Audit and the Group Financial Controller;
b. a network of risk owners in each of LSL's businesses with specific responsibilities relating to risk management and internal controls, including maintenance of detailed risk analysis;
c. the documentation and monitoring of risks are recorded and managed through risk appetite measures which undergo regular reviews and scrutiny by subsidiary boards, divisional governance committees and the Head of Risk and Internal Audit;
d. the Board regularly identifies, reviews and evaluates the principal risks and uncertainties which may impact the Group as part of the planning and reporting cycle to ensure that such risks are identified, monitored and
mitigated;
e. the development and application of LSL's risk appetite statement and associated framework (for further details on steps taken during the year, see the Audit & Risk Committee Report); and
f. reporting by the Chairman of the Audit & Risk Committee to the Board on any matters which have arisen from the Audit & Risk Committee's review of the way in which LSL's risk management and internal control framework has been applied together with any breakdowns in, or exceptions to, these procedures.
The Group-wide risk appetite statement and risk framework policy will continue to be developed in 2018.
The risk framework includes the following:
a. a risk framework policy;
b. determination of risk appetite, with management and mitigation of risks in line with risk appetite tolerances;
c. assessment of prospects and viability; d. review of the effectiveness of the risk management and internal control systems; and
e. going concern confirmation (for LSL's going concern disclosure see the Report of the Directors).
During 2017, the Directors carried out a robust assessment of the principal risks and uncertainties facing the Group, including those that threaten the Group's business model, future performance, solvency or liquidity. The Directors believe that the assessment which has been completed is appropriate to the complexity, size and circumstances of the Group, which is a matter of judgment of the Board and has been supported by the Management Team.
The Directors also carried out a risk appetite assessment exercise which involved the evaluation of continually evolving aspects of risk management. During 2017, this included responses to the threat of external technology-based business models, articulation of risk appetite tolerances for key aspects of selective external contract renewals, identifying responses to a fast changing regulatory environment and consideration of major scenarios of further external political and economic change on the UK housing market.
The identified risks may change over time due to changes in business models, performance, strategy, operational processes and the stage of development of the Group in its business cycle as well as with changes in the external environment. This robust assessment is focused on the principal risks and uncertainties and it differs from the review of the effectiveness of the systems of risk management and internal controls.
In accordance with the requirements of the Code, this Report includes descriptions of principal risks and uncertainties together with a high level explanation of how they are being managed or mitigated. This includes clear descriptions of the risks together with an evaluation of the likelihood of a typical risk event crystallising and its possible impact. Mitigating steps and any significant changes to specific areas of risk are also referred to within the tabular summary.
As noted above, this robust analysis of principal risks and uncertainties has also contributed to the Group's viability statement which is included within the Report of the Directors. The Directors have also considered the impact if risks coincide, namely a combination of non-principal risks and uncertainties could potentially represent a single compound principal risk or uncertainty.
The Group also faces other risks which, although important and subject to regular review, have been assessed as less significant and are not listed in this statement. This may include some risks which are not currently known to the Group or that LSL currently deems as immaterial, or were included in previous Annual Report and Accounts and, through changes in external factors and careful management, are no longer deemed to be as material to the Group as a whole.
However, these risks may individually or cumulatively also have a material adverse effect together with other risk factors which are beyond the direct control of LSL, and may have a material adverse impact on LSL's business, results of operations and/or financial condition. The risk management framework and procedures in place can only provide reasonable but not absolute assurance that the principal risks and uncertainties are managed to an acceptable level.
Further information relating to how LSL managed these risks and uncertainties during 2017 is set out in the Audit & Risk Committee Report (Internal Controls) of the Annual Report and Accounts 2017.
Principal risks and uncertainties
Risk Description Mitigation
----------------- ------------------------------ ---------------------------------------------------------------
Strategic:
----------------------------------------------------------------------------------------------------------------------
1 UK housing Group performance
market is intrinsically linked * Daily, weekly and monthly monitoring of trading and
to the overall performance market performance data.
of the UK housing
market (including
subsets - e.g. prime * Market share, product mix and segmentation
Central London). initiatives.
The housing market
is also impacted by * Development of counter-cyclical and recurring revenue
changes in national income streams.
and global political
and economic environments
(e.g. Brexit vote * Responsive investment and cost control measures
in 2016). during the housing market cycle.
The impact of this
risk can be direct * Investment in teams to deliver strategic projects.
(such changes in Government
policy or legislation
arising from a change * Balanced UK-wide geographical spread.
in Government) or
indirect (such as
changes in consumer * Monitoring of wider macro-economic and political
behaviour/sentiment developments (including domestic and national
arising from changes developments).
in Government policy
or legislation).
----------------- ------------------------------ ---------------------------------------------------------------
2 New UK housing Traditional business
market entrants models and pricing * Competitor and industry benchmarking.
structures for residential
property services
are exposed to new * Development of strategies in response to market
business models and disrupters, including exploring options to capitalise
technological advancements on digital opportunities.
(e.g. online/hybrid
estate agents, automated
valuation models and * Development of Estate Agency business through new
automated financial ways of working programme.
services operating
models).
* Infrastructure investment, including investment in
innovation, technology and upgrading and
consolidating core operating systems to improve
service delivery and customer experience.
* Service delivery enhancements, product/services
differentiation and experimentation.
* Engagement of specialist external consultative
support as necessary.
* Monitoring of investment, acquisition and joint
venture opportunities.
* Marketing initiatives.
* Operation of staff incentive schemes to mitigate
staff attrition.
----------------- ------------------------------ ---------------------------------------------------------------
3 Investment, Realising appropriate
acquisitions targets for investment, * Defined pre and post-acquisition reporting to the
and growth acquisition and major Board and Audit & Risk Committee.
initiatives project initiatives,
including delivery
of appraisals, due * Establishment of structured authority levels.
diligence and
integration/implementation
requirements, in line * Responsive flexing of risk appetite during the
with LSL's strategy housing market cycle.
to complete selective
acquisitions.
* Flexible resource pool to support and deliver
investments and acquisitions.
* Flexible resource pool to deliver
integration/implementation activities following
completion of acquisitions.
* Ability to selectively dispose of assets to protect
gearing, as required.
* Engagement of specialist external consultative
support as necessary.
* Established integration/implementation planning
methodology.
* Post-acquisition and post-integration/implementation
review programmes.
-- Risk and Internal
Audit engagements.
----------------- ------------------------------ ---------------------------------------------------------------
Sales/distribution:
----------------------------------------------------------------------------------------------------------------------
4 Professional Exposure to major Surveying Division
services PI claims arising * Robust framework and monitoring routines to maintain
from any lapses in valuation accuracy.
professional services,
including surveying
and valuation practices, * Dedicated surveying risk team.
financial services
advice, and estate
agency services. * Timely data capture of all claims and associated
trends with regular scenario modelling undertaken.
* Utilisation of technology to monitor valuation trends,
trigger alerts and 'real time' checks.
* Board-level authorities for PI claims settlement
payments and governance of underlying claims handling
and accounting processes.
Estate Agency Division
(including Financial
Services)
* Defined responsibilities for claims management and
operation of PI insurance together with management of
underlying risk areas.
Group-wide
* Risk and Internal Audit reviews.
* Experienced claims handling personnel supported by
legal experts.
* Culture promoting effective sales conduct and open
lines of communication with clients.
----------------- ------------------------------ ---------------------------------------------------------------
5 Client contracts The performance of
the Estate Agency * Customer outcomes focused forums and initiatives.
and Surveying businesses
is dependent on entering
into appropriate and * Designated senior members of staff with
relevant agreements responsibility for relationship management.
and retaining contracts
with key clients (e.g.
lenders, portfolio * On-going investment in resources, innovation,
landlords and house technology and service standards to ensure LSL has
builders). the capacity to meet service level demands.
* Targeted marketing and training events for corporate
clients.
* Monitoring of client dependency and compliance with
contractual requirements.
* Robust control framework supporting the risk
profiling of prospective clients, contract renewals
(including contract terms) and the quality of
professional services.
* In-house legal services team, with specialist
external legal support engagement when necessary,
together with dedicated claims management teams
within business areas.
* Risk and Internal Audit reviews.
----------------- ------------------------------ ---------------------------------------------------------------
Operations:
----------------------------------------------------------------------------------------------------------------------
6 Information The Group has varied
technology operations which require * Group-wide IT governance, policies and initiatives
infrastructure a robust IT infrastructure. supported by a Group IT Director.
The IT environment
needs to remain adaptable
to support growth * Focus on investment and development of innovation
initiatives, harness within the Group's strategies.
technological advancements
and counter business
continuity threats, * Dedicated in-house IT teams.
including malicious
and cyber related
attacks. * Maintenance of infrastructure to maintain effective
service delivery.
LSL's strategy recognises
the importance of
investing in the Group's * On-going IT investment and development programme.
IT infrastructure
to maintain both competitive
advantages and deliver * Identifying and securing innovation and technology
system security - opportunities through the investment and acquisition
all within the context strategy.
of changing business
models within the
residential property * Implementing business continuity and disaster
services sector. recovery solutions.
* Monitoring of compliance with relevant contractual
and regulatory requirements.
* Inter-Group IT governance forums.
* External consultative support as necessary.
* Risk and Internal Audit reviews.
* Oversight by the Information Security Governance
Group.
----------------- ------------------------------ ---------------------------------------------------------------
7 Information Group operations involve
security the processing of * LSL Information Security and Governance Group and IT
high volumes of personal Teams with oversight responsibilities.
data, with potential
for unintended data
loss and exposure * Defined Group-wide base policy standards.
to increasing levels
of external cyber-crime.
* Dedicated information security and data protection
personnel.
Data security
* Group data protection policies and training in place.
* Tracking of data assets/data sharing, in line with
authority levels.
* Implementation of regulatory changes - (e.g. General
Data Protection Regulation via defined project
teams).
Systems security
* Penetration testing programme.
* Benchmarking against and accreditation by best
practice standards - e.g. ISO27001 accreditation for
e.surv.
* Second and third-line risk-based reviews.
----------------- ------------------------------ ---------------------------------------------------------------
8 Regulatory Compliance with legal
and compliance and regulatory requirements, * Top-down management culture focused on fairness,
including relationship transparency and successful customer outcomes.
with regulators.
Regulations govern * Open dialogue with regulators and monitoring of
roles as an employer emerging developments and regulatory reforms.
and as providers of
services.
* Group risk framework policy incorporating a
Any compliance breaches 'three-lines of defence' model to track compliance
could result in sanctions with regulations.
and reputational damage
(e.g. prosecutions
or fines). This includes * Group policies including ethics (i.e. whistleblowing
compliance with existing structures, anti-fraud and anti-bribery policies) and
regulations and implementing employee welfare.
new regulations (e.g.
GDPR).
* Subsidiary businesses have in place health and safety
Regulatory and compliance arrangements to ensure welfare of employees and
risk extends to oversight visitors to Group premises.
of standards adopted
by business partners
(e.g. franchises, * Group-wide forums with regulatory focus and oversight
appointed representatives, (e.g. Financial Services Management Committee,
joint ventures and Financial Services Risk Committee and Information
minority investments). Security and Governance Group).
The market and business
operations are also * Dedicated second line compliance teams in higher
impacted by regulatory risk/regulated functions. Investment in recruitment
reforms (e.g. Government of expertise within the compliance teams to ensure
reviews relating to the Group is able to put in place procedures for
the housing market, regulatory compliance.
including the proposed
tenant fee ban) which
may have an effect * Evolution and development of IT systems to strengthen
on Group revenue and oversight routines.
expenditures.
Regulatory costs, * Responsive complaints tracking of any emerging
fees and charges continue themes.
to grow due to the
rising funding requirements
of the Financial Services * In-house legal services team, with specialist
Compensation Scheme external legal support engagement when necessary.
(FSCS).
* Group Risk and Internal Audit reviews.
* Membership of industry trade bodies and participation
in Government and Regulator consultations.
* Responsive business model changes to address impact
of regulatory changes.
----------------- ------------------------------ ---------------------------------------------------------------
People:
----------------------------------------------------------------------------------------------------------------------
9 Employees Securing and retaining
key strategic populations * Oversight by LSL Remuneration and Nominations
and controlling attrition Committees supported by the Group HR Director.
in key business critical
areas (e.g through
e.surv's graduate * Group remuneration policies and incentive schemes to
training program), retain key strategic populations.
as well as ensuring
the effective management
of personnel standards * Regular benchmarking and appraisals of senior
and policies frameworks management.
across varied Group
businesses.
* Succession planning reviews and targeted reviews in
some areas.
* Dedicated in-house recruitment team within the Group
HR team which is headed by a Group HR Director.
* Targeted retention and recruitment initiatives.
* Staff surveys and Group HR initiatives to focus on
attrition, improve staff morale, relieve areas of
pressure and improve operational efficiencies.
* Group-wide HR IT systems.
* Monitoring of statutory requirements and developments
(including gender pay reporting).
* Employee policies and monitoring framework (e.g.
health and safety).
* Development of a Group-wide culture, values and
vision statement taking into account subsidiary
company statements.
* Development of employee engagement initiatives as
part of the Group's stakeholder engagement project.
* Clear Group policies and whistleblowing procedures to
enable staff to confidentially raise concerns.
----------------- ------------------------------ ---------------------------------------------------------------
Group Income Statement
for the year ended 31(st) December 2017
2017 2016
Note GBP'000 GBP'000
---------- ----------
Group Revenue 3 311,540 307,750
Employee and subcontractor
costs (186,307) (182,687)
Establishment costs (19,057) (19,888)
Depreciation on property, plant
and equipment (5,216) (5,475)
Other operating costs (66,269) (67,282)
---------- ----------
Total operating expenses (276,849) (275,332)
Other operating income 555 1,165
Gain/(loss) on sale of property,
plant and equipment 668 (9)
Income from joint ventures 1,583 1,049
Group Underlying Operating
Profit 4 37,497 34,623
Share-based payments (47) (1,263)
Amortisation of intangible
assets (4,083) (3,914)
Exceptional gains 5 9,337 34,531
Exceptional cost 5 - (2,341)
Contingent consideration 5 (654) 3,785
Group operating profit 3 42,050 65,421
---------- ----------
Finance costs (1,952) (1,896)
Net financial costs (1,952) (1,896)
Profit before tax 40,098 63,525
Taxation charge 8 (6,686) (13,033)
Profit for the year 33,412 50,492
---------- ----------
Attributable to
- Owners of the parent 33,414 50,493
- Non-controlling interest (2) (1)
Earnings per share expressed
in pence per share:
Basic 6 32.6 49.2
Diluted 6 32.4 49.0
Group Statement of Comprehensive Income
for the year ended 31(st) December 2017
2017 2016
GBP'000 GBP'000
---------- -----------
Profit for the year 33,412 50,492
---------- -----------
Items to be reclassified
to profit and loss in subsequent
periods:
Reclassification adjustments
for disposal of financial
assets (5,593) (33,022)
Income tax effect 951 5,914
Revaluation of financial
assets 1,885 11,816
Income tax effect (320) (2,015)
---------- -----------
Net other comprehensive (loss)
to be reclassified to profit
and loss in subsequent periods: (3,077) (17,307)
Total other comprehensive
(loss) for the year, net
of tax (3,077) (17,307)
---------- -----------
Total comprehensive income
for the year, net of tax 30,335 33,185
---------- -----------
Attributable to
- Owners of the parent 30,337 33,186
- Non-controlling interest (2) (1)
Group Balance Sheet Company No. 05114014
as at 31 December 2017
2017 2016
GBP'000 GBP'000
---------- ----------
Non-current assets
Goodwill 151,901 151,901
Other intangible
assets 29,729 33,249
Property, plant and
equipment 17,763 18,842
Financial assets 25,282 4,603
Investments in joint
ventures 9,556 8,762
Total non-current
assets 234,231 217,357
----------
Current assets
Trade and other receivables 31,357 32,263
Total current assets 31,357 32,263
---------- ----------
Total assets 265,588 249,620
---------- ----------
Current liabilities
Financial liabilities (6,454) (10,739)
Trade and other payables (53,418) (50,900)
Current tax liabilities (3,662) (7,581)
Provisions for liabilities (2,850) (5,742)
---------- ----------
Total current liabilities (66,384) (74,962)
---------- ----------
Non-current liabilities
Financial liabilities (34,654) (26,469)
Deferred tax liability (2,698) (3,801)
Provisions for liabilities (13,276) (15,622)
---------- ----------
Total non-current
liabilities (50,628) (45,892)
---------- ----------
Total Liabilities (117,012) (120,854)
Net assets 148,576 128,766
---------- ----------
Equity
Share capital 208 208
Share premium account 5,629 5,629
Share-based payment
reserve 3,802 4,303
Treasury shares (5,317) (5,368)
Fair value reserve 494 3,571
Retained earnings 143,578 120,239
---------- ----------
Equity attributable
to owners of parent 148,394 128,582
Non-controlling interests 182 184
Total equity 148,576 128,766
---------- ----------
The Financial Statements were approved by and signed on behalf of the Board by:
Ian Crabb Adam Castleton
Group Chief Executive Officer Group Chief Financial Officer
Group Statement of Cash-Flows
for the year ended 31(st) December 2017
2017 2016
GBP'000 GBP'000
--------- ---------
Profit before tax 40,098 63,525
Adjustments for:
Exceptional operating items
and contingent consideration (7,640) (35,975)
Depreciation of tangible assets 5,216 5,475
Amortisation of intangible
assets 4,083 3,914
Share-based payments 47 1,263
(Profit)/loss on disposal of
fixed assets (668) 9
Profit from joint ventures (1,583) (1,049)
Finance costs 1,952 1,896
Dividend income/rebates received
via non-cash consideration (1,503) (492)
Operating cash flows before
movements in working capital 40,002 38,566
-------------------------------------- --------- ---------
Movements in working capital
Decrease in trade and other
receivables 1,695 3,265
Increase / (decrease) in trade
and other payables 5,261 (614)
Decrease in provisions (5,440) (8,561)
1,516 (5,910)
------------------------------------- --------- ---------
Cash generated from operations 41,518 32,656
-------------------------------------- --------- ---------
Interest paid (1,268) (1,948)
Income taxes paid (11,113) (8,861)
Net cash generated from operating
activities 29,137 21,847
-------------------------------------- --------- ---------
Cash flows used in investing
activities
Cash acquired on purchase of
subsidiary undertaking - 1,593
Acquisitions of subsidiaries
and other businesses - (8,451)
Payment of contingent consideration (2,175) (3,537)
Investment in financial assets (20,315) (2)
Cash received on sale of financial
assets 3,024 35,991
Dividends received from financial
assets - 778
Purchase of property, plant
and equipment and intangible
assets (5,489) (6,064)
Proceeds from sale of property,
plant and equipment 1,457 69
Net cash (expended)/generated
on investing activities (23,498) 20,377
-------------------------------------- --------- ---------
Cash flows used in financing
activities
Drawdown/(repayment) of loans 9,723 (25,243)
Repayment of loan notes - (7,294)
Payment of deferred consideration (4,790) (2,422)
Proceeds from exercise of share
options - 48
Dividends paid (10,572) (12,916)
Net cash expended in financing
activities (5,639) (47,827)
-------------------------------------- --------- ---------
Net increase/(decrease) in
cash and cash equivalents - (5,603)
-------------------------------------- --------- ---------
Cash and cash equivalents at
the end of the year - -
-------------------------------------- --------- ---------
Group Statement of Changes in Equity
for the year ended 31(st) December 2017
Share Share Share- Treasury Fair Retained Total Non-controlling Total
capital premium based shares value earnings equity interests
account payment Reserve
reserve
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 1(st)
January
2017 208 5,629 4,303 (5,368) 3,571 120,239 128,582 184 128,766
Disposal
of financial
assets
(net of
tax) - - - - (4,642) - (4,642) - (4,642)
Revaluation
of financial
assets
(net of
tax) - - - - 1,565 - 1,565 - 1,565
-------- -------- -------- --------- -------- --------- --------- ---------------- ---------
Other
comprehensive
income
for the
year - - - - (3,077) - (3,077) - (3,077)
Profit
for the
year - - - - - 33,414 33,414 (2) 33,412
Total
comprehensive
income
for the
year - - - - (3,077) 33,414 30,337 (2) 30,335
Exercise
of options - - (46) 51 - (5) - - -
Share-based
payments - - (455) - - 502 47 - 47
Dividend
payment - - - - - (10,572) (10,572) - (10,572)
At 31(st)
December
2017 208 5,629 3,802 (5,317) 494 143,578 148,394 182 148,576
-------- -------- -------- --------- -------- --------- --------- ---------------- ---------
Group Statement of Changes in Equity
for the year Ended 31(st) December 2016
Share Share Share- Treasury Fair Retained Total Non-controlling Total
capital premium based shares value earnings equity interests
account payment Reserve
reserve
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 1(st)
January
2016 208 5,629 3,564 (5,988) 20,878 82,880 107,171 185 107,356
Disposal
of financial
assets
(net of
tax) - - - - (27,108) - (27,108) - (27,108)
Revaluation
of financial
assets
(net of
tax) - - - - 9,801 - 9,801 - 9,801
-------- -------- -------- --------- --------- --------- --------- ---------------- ---------
Other
comprehensive
income
for the
year - - - - (17,307) - (17,307) - (17,307)
Profit
for the
year - - - - - 50,493 50,493 (1) 50,492
Total
comprehensive
income
for the
year - - - - (17,307) 50,493 33,186 (1) 33,185
Exercise
of options - - (524) 620 - (218) (122) - (122)
Share-based
payments - - 1,263 - - - 1,263 - 1,263
Dividend
payment - - - - - (12,916) (12,916) - (12,916)
At 31(st)
December
2016 208 5,629 4,303 (5,368) 3,571 120,239 128,582 184 128,766
-------- -------- -------- --------- --------- --------- --------- ---------------- ---------
Notes to the Preliminary Results Announcement
The financial information in this preliminary results announcement does not constitute LSL's statutory financial statements for the year ended 31(st) December 2017 but has been extracted from the Financial Statements included in LSL's Annual Report and Accounts 2017 and as such, does not contain all information required to be disclosed in the financial statements prepared in accordance with IFRS.
Statutory financial statements for this year will be filed following the 2018 AGM. The auditors have reported on these financial statements. Their report was unqualified and did not contain a statement under section 498 (2), (3) or (4) of the Companies Act 2006.
1. Directors responsibility statement
Each of the current Directors confirms that, to the best of their knowledge, the financial statements, prepared in accordance with IFRS as adopted by EU standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the issuer and the undertakings included in the consolidation taken as a whole; and the Directors' Report includes a fair review of the development and performance of the business and the position of the issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
2. Basis of preparation of financial information
The Group Financial Statements have been prepared on a going concern basis and on a historical cost basis, except for available-for-sale financial assets that have been measured at fair value.
The accounting policies which follow set out those significant policies which apply in preparing the Financial Statements for the year ended 31(st) December 2017. The Group's Financial Statements are presented in Sterling and all values are rounded to the nearest thousand pounds (GBP'000) except when otherwise indicated.
3. Segment analysis of revenue and operating profit
For management purposes, the Group is organised into business units based on their products and services and has two reportable segments as follows:
-- The Estate Agency and Related Services segment provides services related to the sale and letting of residential properties. It operates a network of high street branches. As part of this process, the Estate Agency Division also provides marketing and arranges conveyancing services. In addition, it provides repossession asset management services to a range of lenders. It also arranges mortgages for a number of lenders and arranges pure protection and general insurance policies for a panel of insurance companies via the estate agency branches, Advance Mortgage Funding, First Complete, Embrace Mortgage Services, Mortgages First, Insurance First, First2Protect and Linear Financial Services. The financial services revenue included within the Estate Agency Division includes two mortgage and insurance distribution networks providing products and services for sale via financial intermediaries. A significant proportion of the results of the Financial Services are inextricably linked to the Estate Agency business; they have therefore been aggregated with those of the Estate Agency and related service segment.
-- The Surveying and Valuation Services segment provides a valuations and professional survey service of residential properties to various lenders and individual customers.
Each reportable segment has various products and services and the revenue from these products and services are disclosed in the Business Review section of the Strategic Report of the Annual Report and Accounts 2017.
The Management Team monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on operating profit or loss which in certain respects, as explained in the table below, is measured differently from operating profit or loss in the Group Financial Statements. Head office costs, Group financing (including finance costs and finance incomes) and income taxes are managed on a Group basis and are not allocated to operating segments.
Reportable segments
The following table presents revenue and profit information regarding the Group's reportable segments for the financial year ended 31(st) December 2017 and financial year ended 31(st) December 2016 respectively.
Year ended 31(st) December 2017
Estate Surveying
Agency and
and Related Valuation
Services Services Unallocated Total
Income Statement GBP'000 GBP'000 GBP'000 GBP'000
information
----------
Segmental revenue 247,410 64,130 311,540
--------------- ----------- ------------ ----------
Segmental result:
- before exceptional
costs, contingent
consideration, amortisation
and share-based payments 26,942 18,877 (8,322) 37,497
- after exceptional
costs, contingent
consideration, amortisation
and share-based payments 22,124 22,466 (2,540) 42,050
--------------- ----------- ------------ ----------
Finance costs (1,952)
Profit before tax 40,098
Taxation (6,686)
Profit for the year 33,412
----------
Estate Surveying
Agency and
and Related Valuation
Services Services Unallocated Total
Balance sheet information GBP'000 GBP'000 GBP'000 GBP'000
--------------- ----------- ------------ ----------
Segment assets -
intangible 169,113 12,517 - 181,630
Segment assets -
other 75,453 7,305 1,200 83,958
Total Segment assets 244,566 19,822 1,200 265,588
Total Segment liabilities (49,851) (25,794) (41,367) (117,012)
----------
Net assets/(liabilities) 194,715 (5,972) (40,167) 148,576
--------------- ----------- ------------ ----------
Other segment items
Capital expenditure
including intangible
assets 5,177 312 - 5,489
Depreciation (5,036) (180) - (5,216)
Amortisation of intangible
assets (4,013) (70) - (4,083)
Share of results
of joint venture 1,583 - - 1,583
Professional indemnity
claim provision - (15,916) - (15,916)
Onerous leases provision (210) - - (210)
Share based payment (152) (85) 190 (47)
--------------- ----------- ------------ ----------
Unallocated net liabilities comprise plant and equipment (GBP9,000), other assets (GBP1,190,000), accruals (GBP3,028,000), financial liabilities (GBP4,979,000), deferred and current tax liabilities (GBP6,326,000), RCF (GBP27,000,000).
Year ended 31(st) December 2016
Estate Surveying
Agency and
and Related Valuation
Services Services Unallocated Total
Income Statement GBP'000 GBP'000 GBP'000 GBP'000
information
----------
Segmental revenue 243,036 64,714 - 307,750
--------------- ----------- ------------ ----------
Segmental result:
- before exceptional
costs, contingent
consideration, amortisation
and share-based payments 24,500 17,508 (7,385) 34,623
- after exceptional
costs, contingent
consideration, amortisation
and share-based payments 22,344 18,030 25,047 65,421
--------------- ----------- ------------ ----------
Finance costs (1,896)
Profit before tax 63,525
Taxation (13,033)
Profit for the year 50,492
----------
Estate Surveying
Agency and
and Related Valuation
Services Services Unallocated Total
Balance sheet information GBP'000 GBP'000 GBP'000 GBP'000
--------------- ----------- ------------ ----------
Segment assets -
intangible 172,736 12,414 - 185,150
Segment assets -
other 56,574 6,873 1,023 64,470
Total Segment assets 229,310 19,287 1,023 249,620
Total Segment liabilities (53,997) (32,780) (34,077) (120,854)
----------
Net assets/(liabilities) 175,313 (13,493) (33,054) 128,766
--------------- ----------- ------------ ----------
Other segment items
Capital expenditure
including intangible
assets (4,927) (1,325) - (6,252)
Depreciation (5,077) (398) - (5,475)
Amortisation of intangible
assets (3,914) - - (3,914)
Share of results
of joint venture 1,049 - - 1,049
Professional indemnity
claim provision - (20,686) - (20,686)
Onerous leases provision (678) - - (678)
Share based payment (200) (562) (501) (1,263)
--------------- ----------- ------------ ----------
Unallocated net liabilities comprise plant and equipment (GBP8,000), other assets (GBP1,015,000), accruals (GBP436,000), financial liabilities (GBP5,759,000), deferred and current tax liabilities (GBP11,382,000), RCF (GBP16,500,000).
4. Adjusted performance measures
In addition to the various performance measures defined under IFRS, the Group reports a number of alternative performance measures that are designed to assist with the understanding of the underlying performance of the Group. The Group seeks to present a measure of underlying performance which is not impacted by the inconsistency in profile of exceptional gains and exceptional costs, contingent consideration, amortisation of intangible assets and share-based payments. Share based payments are excluded from the underlying performance due to the fluctuations that can impact the charge, such as lapses and the level of annual grants. The four adjusted measures reported by the Group are:
-- Group Underlying Operating Profit -- Adjusted Basic EPS -- Adjusted diluted EPS -- Group Adjusted EBITDA
Amortisation of intangibles assets not acquired in a business combination is not representative of the underlying costs of the business, and therefore is excluded from adjusted earnings.
Group Adjusted EBITDA has been introduced as a new alternative performance measurement in 2017 after careful consideration by the Board. The measure has been introduced to assist shareholders and investors when reading the Financial Statements given this is an established measure used across the sector in which LSL operates.
The Directors consider that these adjusted measures shown above give a better and more consistent indication of the Group's underlying performance. These measures form part of management's internal financial review and are contained within the monthly management information reports reviewed by the Board.
The calculations of adjusted basic and adjusted diluted EPS are given in Note 6 and a reconciliation of Group Underlying Operating Profit is shown below:
2017 2016
Note GBP'000 GBP'000
-------- ---------
Group operating profit 3 42,050 65,421
Share-based payments 47 1,263
Amortisation of intangible
assets 4,083 3,914
Exceptional gains 5 (9,337) (34,531)
Exceptional costs 5 - 2,341
Contingent consideration charge
/ (credit) 5 654 (3,785)
-------- ---------
Group Underlying Operating
Profit 37,497 34,623
-------- ---------
Depreciation 5,216 5,475
-------- ---------
Group Adjusted EBITDA 42,713 40,098
-------- ---------
5. Exceptional items
2017 2016
GBP'000 GBP'000
---------- ----------
Exceptional costs:
Branch/centre closure and restructuring
costs including redundancy costs - 2,341
---------- ----------
Exceptional gains:
Gain on disposal of financial assets (5,593) (32,931)
Exceptional gain in relation to
historic Professional Indemnity
costs (3,744) (1,600)
---------- ----------
(9,337) (34,531)
---------- ----------
6. Earnings per share (EPS)
Basic EPS amounts are calculated by dividing net profit for the year attributable to ordinary equity holders of the Parent Company by the weighted average number of Ordinary Shares outstanding during the year.
Diluted EPS amounts are calculated by dividing the net profit attributable to ordinary equity holders of the Parent Company by the weighted average number of Ordinary Shares outstanding during the year plus the weighted average number of Ordinary Shares that would be issued on the conversion of all the dilutive potential Ordinary Shares into Ordinary Shares.
Profit Weighted 2017 Profit Weighted 2016
after average Per after average Per
tax number share tax number share
of shares amount of shares amount
GBP'000 Pence GBP'000 Pence
Basic EPS 33,414 102,640,363 32.6 50,943 102,575,484 49.2
Effect of dilutive
share options 635,058 519,565
Diluted EPS 33,414 103,275,421 32.4 50,943 103,095,049 49.0
--------- ------------- ---------- -------------
There have been no other transactions involving Ordinary Shares or potential Ordinary Shares between the reporting date and the date of completion of the Financial Statements.
The Directors consider that the adjusted earnings shown below give a better and more consistent indication of the Group's underlying performance:
2017 2016
GBP'000 GBP'000
Group operating profit before contingent
consideration, exceptional items,
share-based payments and amortisation
(excluding non-controlling interest): 37,497 34,625
Net finance costs (excluding exceptional
and contingent consideration items) (1,468) (1,410)
Normalised taxation (6,936) (6,643)
--------- ---------
Adjusted profit after tax(1) before
exceptional items, share-based
payments and amortisation 29,093 26,572
--------- ---------
Adjusted basic and diluted EPS
Adjusted Weighted 2017 Adjusted Weighted 2016
profit average Per profit average Per
after number share after number share
tax(1) of shares amount tax(1) of shares amount
GBP'000 Pence GBP'000 Pence
Adjusted Basic
EPS 29,093 102,640,363 28.3 26,572 102,575,484 25.9
Effect of dilutive
share options 635,058 519,565
--------- ------------ --------- ------------ --------
Adjusted Diluted
EPS 29,093 103,275,421 28.2 26,572 103,095,049 25.8
--------- ------------ --------- ------------ --------
Note
(1) This represents adjusted profit after tax attributable to equity holders of the Parent Company. The normalised tax rate in 2017 is 19.25% (2016: 20%).
7. Dividends paid and proposed
2017 2016
GBP'000 GBP'000
Declared and paid during the year:
Equity dividends on ordinary shares:
2015 Final: 8.6 pence per share 8,812
2016 Interim: 4.0 pence per share 4,104
2016 Final: 6.3 pence per share 6,466
2017 Interim: 4.0 pence per share 4,106
10,572 12,916
-------- ---------
Dividends on Ordinary Shares
proposed (not recognised as a
liability as at 31(st) December):
Equity dividends on Ordinary Shares:
Dividend: 7.3 pence per share (2016:
6.3 pence per share) 7,493 6,466
-------- -------
8. Taxation
(a) Tax on profit on ordinary activities
The major components of income tax charge in the Group Income Statements are:
2017 2016
GBP'000 GBP'000
---------- ----------
UK corporation tax - current year 7,537 12,703
- adjustment in respect of prior
years (345) 1,009
----------
7,192 13,712
Deferred tax:
Origination and reversal of temporary
differences (442) (500)
Adjustment in respect of prior year (64) (179)
---------- ----------
Total deferred tax (credit) (506) (679)
---------- ----------
Total tax charge in the Income Statement 6,686 13,033
---------- ----------
The UK corporation tax rate reduced to 20% with effect from 1(st) April 2015 and 19% with effect from 1(st) April 2017. A future UK corporation tax of 17% has been enacted and is effective from 1 April 2020, and this is the rate at which deferred tax has been provided (2016: 17%). Corporation tax is recognised at the headline UK corporation tax rate of 19.25% (2016: 20%).
The effective rate of tax for the year was 16.7% (2016: 20.5%). The effective tax rate for 2017 is lower than the headline UK tax rate for a number of reasons, but the most significant is that the gain on the disposal of GPEA Limited in the year is not taxable due to the application of Substantial Shareholding Exemption.
Deferred tax credited directly to other comprehensive income is GBP0.6m (2016: GBP3.8m). This is comprised of a credit of GBP0.9m and a charge of GBP0.3m and relates respectively to the disposal and revaluation of financial assets. Income tax credited directly to the share based payment reserve is GBP0.0m (2016: GBP0.1m).
(b) Factors affecting tax charge for the year
The tax assessed in the profit and loss account is lower (2016: higher) than the standard UK corporation tax rate, because of the following factors:
2017 2016
GBP'000 GBP'000
---------- --------
Profit on ordinary activities before
tax 40,098 63,525
---------- --------
Tax calculated at UK standard rate
of corporation tax rate of 19.25% (2016
- 20.00%) 7,719 12,705
Non-taxable income from joint ventures
and dividends (153) (95)
Other income not taxable (369) (510)
Other disallowable expenses 627 577
Impact of movement in contingent consideration
charged/( credited) to the Income Statement 251 (757)
Capital gains (lower than)/in excess
of accounting profit (1,053) 183
Share-based payment relief 15 251
Impact of rate change on deferred tax 58 (151)
Prior period adjustments - current
tax (345) 1,009
Prior period adjustment - deferred
tax (64) (179)
---------- --------
Total taxation charge 6,686 13,033
---------- --------
The major component of the disallowable expenditure is a permanent disallowance of depreciation on assets which do not qualify for capital allowances. This is a recurring adjustment with the tax impact of approximately GBP370,000 being broadly consistent with the prior year. Also included in this figure is an adjustment relating to non-recurring items of a disallowable nature, such as client entertaining and legal and professional fees incurred in relation to capital transactions.
9. Analysis of Net Bank Debt (excluding loan notes)
2017 2016
GBP'000 GBP'000
-------- ---------
Interest bearing loans and borrowings
* Current 6,454 10,739
* Non-current 34,654 26,469
-------- ---------
41,108 37,208
Less: Unsecured loan notes (2,000) (2,000)
Less: deferred and contingent
consideration (9,129) (14,952)
-------- ---------
Net Bank Debt at the end of the
year 29,979 20,256
-------- ---------
The 12% unsecured loan notes were issued as part satisfaction of the consideration for the acquisition of Marsh & Parsons in 2011. The total principal amount of the 2011 Loan Note will be paid but at a reduced rate of interest of 2%. The first instalment was paid in July 2016, and a final payment of GBP2m is due in March 2018, subject to certain conditions being satisfied.
10. Acquisitions during the year
Year ended 31(st) December 2017
The Group made no acquisitions during the year.
The purchase price allocations for the acquisitions made in 2016 have now been finalised, with no changes made to the provisional purchase price allocations disclosed below.
11. Post Balance Sheet Events
Acquisition of Personal Touch Financial Services
In January 2018, LSL acquired the entire issued share capital of Personal Touch Financial Services Limited (PTFS) and its subsidiary company, Personal Touch Administration Services Limited (PTAS). PTFS is a financial services business specialising in the provision of mortgage and other financial services products via its network of intermediaries. The consideration for the acquisition is GBP4.8m plus an acquired intercompany debt of GBP0.6m and is made up of a payment of GBP2.8m which was paid on completion and a further payment of GBP2.0m which is deferred for 12 months.
The Group are currently in the process of allocating the purchase price in accordance with IFRS 3, Business Combinations, and as a result the initial accounting for this acquisition is incomplete.
Extension of the RCF
On 30(th) January 2018 announced that it extended the maturity date of its existing GBP100 million banking facility until May 2022; this replaces the existing maturity date of May 2020.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR LLFLAVAIEIIT
(END) Dow Jones Newswires
March 06, 2018 02:00 ET (07:00 GMT)
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