MJGleeson Regulatory News (GLE)

25 Feb 2009 07:00



Wednesday 25 February 2009

MJ GLEESON GROUP PLC - INTERIM ANNOUNCEMENT 

Gleeson (GLE.L) the urban regeneration and strategic land specialist, announces its results for the half year to 31 December 2008. 

During the period, market conditions facing the housebuilding industry, which had been described in the 2008 Annual Report as "the worst in living memory", deteriorated further as the problems associated with a very restricted supply of credit have been increasingly exacerbated by the onset of an exceptionally severe recession. 

Key Points - Financial

Revenue from continuing operations decreased by 37% to £30.6m, substantially reflecting reductions in units sold and average selling price

Excluding exceptionals, the pre-tax loss was £5.4m (2007: £0.3m) 

Exceptional items totalled £18.3m, of which £16.7m relates to write-downs of land and work in progress by Gleeson Regeneration & Homes and Gleeson Strategic Land (£11.0m) and Gleeson Commercial Property Developments (£5.7m). Exceptionals of £7.1m are additional to those announced in the Interim Management Statement on 19 November 2008

The loss before tax is £23.7m (2007: £0.3m) and the loss per share on continuing operations is 44.98p (2007: 0.52p)

Total shareholders' equity of £135.9m at 31 December 2008 compared with £159.2m at 30 June 2008, equating to net assets per share of 260p and 304p, respectively

Net cash at 31 December 2008 totalled £7.1m, a decrease of £14.8m in the period, of which deferred payments for land acquisitions accounted for £10.6m. The Board expects the Group to continue to be cash positive not only at the year end but also well beyond

Key Points - Commercial 

Gleeson Regeneration & Homes and Gleeson Strategic Land recorded an operating loss of £14.7m (2007: £0.7m); excluding exceptionals, the 2008 loss would have been £3.2m

Gleeson Regeneration & Homes recorded units for revenue purposes totalling 150 (2007: 224) , down 33%, at an average selling price of £101,000 (2007: £145,000), down 30%

Gleeson Commercial Property Developments, in run off since March 2007, recorded an operating loss of £6.3m (2007: profit of £0.3m); excluding exceptionals, the 2008 loss would have been £0.6m

Gleeson Strategic Land recorded no material land transactions during the period, as was the case with the comparable period, but planning consent was secured on greenfield housing sites in West Sussex and Essex, which are due to deliver 320 homes 

The Group's headcount since June 2008 (excluding that of Powerminster Gleeson Services, which was unchanged) has been reduced by nearly 60%

The annual run-rate for central costs going forward has been significantly reduced to approximately £2.8m from £6.1m for the year ended 30 June 2008

Dermot Gleeson, Chairman, stated "Although there are some signs of increased interest on the part of potential buyers, the continuing dearth of mortgage finance means that the housing market is likely to remain extremely weak for at least the remainder of 2009. Against this background, the Group's strategy remains to maximise cash inflows without sacrificing value and to minimise cash outflows by restricting building expenditure in the main to the construction of presold social housing projects. The Group continues to invest selectively in its Powerminster Gleeson Services and Gleeson Strategic Land businesses.

The Group has a strong balance sheet and overheads have been substantially reduced, without compromising the quality and effectiveness of the Group's core skill base and competencies. Accordingly, the Group is well-placed to withstand a prolonged downturn in demand and to resume growth once liquidity and confidence return to the market."

Enquiries:

M J Gleeson Group plc 01252-360 300

Chris Holt (GCEO)

Alan Martin (GFD)

Bankside Consultants 

Charles Ponsonby 020-7367 8851 

CHAIRMAN'S STATEMENT

Market and Business Overview 

In the 2008 Annual Report, I described the market conditions facing the housebuilding and commercial property industries as the worst in living memory. They have since deteriorated further as the problems associated with a very restricted supply of credit have been increasingly exacerbated by the onset of an exceptionally severe recession. 

This worsening of the economic climate has inevitably had an adverse financial impact on Gleeson Regeneration & Homes. A review of the carrying value of the Group's residential land and work in progress has led to an £11.0m write down, representing 9% of this asset class.

The Group has also reviewed the values of those commercial developments not yet sold by Gleeson Properties (which is in run-off). As a result, these have been written down by £5.7m, representing 30% of this asset class.

In response to the extraordinary challenges with which housebuilders are confronted, the Group has continued to reduce costs and prioritise cash generation. The Group's headcount since June 2008 (excluding the headcount of Powerminster Gleeson Services which is unchanged) has been reduced by nearly 60%. The consequent reduction in costs, coupled with a very considerable cut back in the rate of housebuilding, means that the Group currently expects to be cash positive not only at the year end but well beyond.

Housing need in the United Kingdom is high and is forecast to grow. The Board therefore remains convinced that in the medium to long term demand in the housing market will return. When it does so, the Group's contracted pipeline of regeneration projects and its substantial strategic land bank will provide it with opportunities for substantial growth.

Results

Revenue from continuing operations decreased by 37% to £30.6m (2007: £48.9m). £14.2m of this decrease is a result of reductions in the number of units sold and in the average selling price.

The Group's continuing operations incurred a loss before exceptional items and tax of £5.4m (2007: £0.3m). Exceptional charges comprised £18.3m, which may be analysed as follows: 

£7.1 m of this provision is additional to that indicated in the Interim Management Statement of 19 November 2008. The additional write down is due to deteriorating market conditions, with £1.7m relating to Gleeson Commercial Property Developments and £5.4m relating to Gleeson Regeneration & Homes and Gleeson Strategic Land.

Discontinued operations produced a post-tax profit of £0.1m (2007: £nil).

The financial results for the six months to 31 December 2008, along with comparables, are as follows: 

Operational Review

Gleeson Regeneration & Homes and Gleeson Strategic Land

An operating loss of £14.7m (2007: £0.7m) was recorded for the period. Included within these results are exceptional costs of £11.5m, with £11.0m relating to the write down of land and work in progress, £0.2m relating to excess property costs and £0.3m relating to the cost of redundancies.

Gleeson Regeneration & Homes recorded units for revenue purposes totalling 150 (2007: 224) at an average selling price of £101,000 (2007: £145,000). Of these, 111 (2007: 178) were from the northern trading regions of the North West and Yorkshire. The balance of 39 (2007: 46) were from the southern trading region. The decrease in unit sales is predominantly a result of the market conditions noted previously. The focus during the period has been to ensure that the build programme for private developments is aligned to the reduced level of consumer demand and to continue to build to contract for Housing Associations. The headcount for the business unit decreased by 70% in the period.

Gleeson Strategic Land recorded no material land transactions during the period under review, as was the case in the comparable period. At 31 December 2008, the Group had 3,793 acres (2007: 3,479 acres) held under 69 (2007: 67) option and development agreements. During the period planning consent was secured on greenfield housing sites in West Sussex and Essex, which are due to deliver 320 homes. In addition, a further 216 acres have been secured under option to be promoted through the planning process.

Gleeson Capital Solutions

An operating loss of £0.5m (2007: profit £0.7m) was recorded for the period. Included within these results are exceptional costs of £0.5m relating to excess property costs and the cost of redundancies. The prior period included the benefits of the financial close on Cheshire Extra Care Homes. 

The business unit remains prominent within its targeted market place and has been shortlisted as one of two bidders on two PFI investment opportunities. If successful, these projects will deliver longߛterm equity returns to this business unit as well as provide Gleeson Regeneration & Homes with housing development opportunities and Powerminster Gleeson Services with long-term facilities management contracts. 

At 31 December 2008, the business held investments in four core PFI projects and one non-core PFI projects. 

Powerminster Gleeson Services 

An operating profit of £0.3m (2007: £0.4m) was recorded for the period. Although the facilities management and maintenance markets have become more competitive, Powerminster Gleeson Services has maintained its order book at £158m and continues to generate positive cash flow.

Group Overheads

Group overheads for the period under review totalled £2.7m (2007: £3.1m), which included £0.6m of exceptional costs to cover redundancies and excess property provisions. Following the redundancies, which affected the Company Secretariat, Group Finance and Human Resources, the annual run rate has been significantly reduced from £6.1m for the year ended 30 June 2008 to approximately £2.8m.

Gleeson Commercial Property Developments 

Although the results of this business are included within operating profit, it is in run-off, as announced in March 2007. 

An operating loss of £6.3m (2007: profit £0.3m) was recorded for the period under review. The result included an exceptional write down of £5.7m on the carrying value of the remaining developments.

Gleeson Construction Services 

The Group sold certain contracts, assets and liabilities of Gleeson Building Contracting Division to Gleeson Building Limited (now re-named GB Building Solutions Limited) in August 2005. Any financial results arising from contracts, assets and liabilities retained by the Group are recorded within operating profit.  A loss of £0.1m was recorded in the period (2007: £nil).

Balance Sheet and Cash Flow

Total shareholders' equity of £135.9m was £23.5m (14.8%) lower than 30 June 2008 of £159.2m, due to the post-tax loss incurred in the period.

The Group's net cash balance at 31 December 2008 was £7.1m, a cash outflow of £14.8m in the period. Included in this cash outflow were payments for land acquisitions which were contracted for on a deferred payments basis totalling £10.6m. The Group has further land payment commitments of £0.1m for the remainder of the financial year. Investing activities generated £4.0m from the disposal of ground rents, interest received and the liquidation of fixed income deposits. Financing activities generated £0.3m.

Board Changes

The Board announced at the Annual General Meeting on 12 December 2008 that Paul Wallwork, the Group Chief Executive, would be resigning with effect from 31 December 2008. Paul was appointed to the Board in January 2006 as Group Finance Director and became Group Chief Executive in January 2007, having previously served as Interim Group Chief Executive since July 2006. The Board would like to thank Paul for his strong and energetic leadership of the Group through an extremely challenging period.

The Board also announced at the Annual General Meeting the appointment, as Group Chief Executive, with effect from 1 January 2009, of Chris Holt who, since May 2007, has been Group Finance Director and prior to that held the position of Interim Group Finance Director from August 2006. To replace Chris Holt, the Board announced the appointment of Alan Martin as Group Finance Director with effect from 1 January 2009. Alan was previously Group Financial Controller, a position he has held since November 2006.

The Board announced on 23 December 2008 the appointment of Christopher Mills as a non-executive Director, with effect from 1 January 2009. Christopher Mills is a Partner and Chief Investment Officer of North Atlantic Value LLP, a substantial shareholder since March 2005, with a current shareholding of 18.2% in the Company.

Dividends

Notwithstanding current expectations for the Group to remain cash positive, given the result for the period, combined with the continuing weakness of the housing market, the absence of visibility as to when stability will return and the Board's commitment to prioritising cash management, the Board has decided not to declare an interim dividend for the year to 30 June 2009.

Risks and Uncertainties

The principal risks and uncertainties that have been identified as being capable of affecting the Group's performance in the second half are set out below:

Employment security, interest rates and mortgage availability 

These factors are the key determinants of house buyers' confidence. With the UK economy in recession, employment prospects have become increasingly uncertain. Although interest rates are now at their lowest ever level, the availability of mortgage finance remains scarce. Until buyer confidence returns to the market and mortgage finance becomes more readily available, the Group will continue to be unable to predict private unit sales with any accuracy. To minimise cash outflows, the Group continues to build in a controlled and limited manner, principally social and affordable housing stock on a pre-agreed contract basis for Housing Associations, thereby reducing its exposure to demand risk to the private sector.

Demand for land with planning consent 

The Group derives profit from the sale to other developers of land which it acquires through the exercise of option agreements when it succeeds in obtaining appropriate planning consents. It is difficult to predict with any precision the date by which options are likely to become exercisable. Moreover, there is inevitably some uncertainty in current circumstances about the appetite of developers for acquiring new sites. The Group will only exercise options over land when it believes that, by doing so, shareholder value will be maximised. 

Demand for commercial property 

Since March 2007, the Group has been engaged in running off its commercial property development portfolio. Demand for small scale commercial properties has been significantly affected by the reduced availability and greater cost of finance and by a lack of confidence in values. When the Group is able to let completed development properties, rather than to sell them at an unacceptable price, it will retain them, benefiting from the rental income until the property investment market improves. 

Prospects

Although there are some signs of increased interest on the part of potential buyers, the continuing dearth of mortgage finance means that the housing market is likely to remain extremely weak for at least the remainder of 2009. Against this background, the Group's strategy remains to maximise cash inflows without sacrificing value and to minimise cash outflows by restricting building expenditure in the main to the construction of presold social housing projects. The Group continues to invest selectively in its Powerminster Gleeson Services and Gleeson Strategic Land businesses.

The Group has a strong balance sheet and overheads have been substantially reduced, without compromising the quality and effectiveness of the Group's core skill base and competencies.  Accordingly, the Group is well-placed to withstand a prolonged downturn in demand and to resume growth once liquidity and confidence return to the market.

Dermot Gleeson

Chairman

Consolidated Income Statement

for the six months to 31 December 2008

Consolidated Balance Sheet

as at 31 December 2008

  Consolidated Cash Flow Statement

for the six months to 31 December 2008

  Consolidated Statement of Recognised Income and Expenses 

for the six months to 31 December 2008 

  NOTES TO THE FINANCIAL STATEMENTS

1. Basis of preparation

The consolidated Interim Report of the Group for the six months ended 31 December 2008 has been prepared in

accordance with IAS 34 "Interim Financial Reporting" and International Financial Reporting Standards ('IFRS') as

adopted for use in the European Union ('EU') and in accordance with the Disclosure and Transparency Rules of the Financial Services Authority.

The Interim Report does not include all the information and disclosures required in annual financial statements, and

should be read in conjunction with the Group's annual financial statements for the year ended 30 June 2008.

The financial information contained in this Interim Report does not constitute statutory accounts as defined in

section 240 of the Companies Act 1985. The financial information contained in this Interim Report has been neither audited nor reviewed by the auditors.

The comparative figures for the year ended 30 June 2008 have been extracted from the 2008 annual financial statement, prepared in accordance with IFRS, as adopted for use in the EU and as applied in accordance with the provision of the Companies Act 1985, which have been filed with the Registrar of Companies. The auditors' report on these accounts was unqualified and did not contain a statement under section 237(2) or 237(3) of the Companies Act 1985.

The following restatement has been made to the 31 December 2007 comparatives:

- reclassification of £850,000 from Trade and other payables to Provisions.

The restatement has no impact on the Income Statement or Net Assets.

This Interim Report was approved for issue by the Board of Directors on 24 February 2009.

2. Accounting policies

The accounting policies adopted are consistent with those of the annual financial statements for the year ended 30 June 2008, as described in those financial statements.

3. Responsibility statement

The Directors confirm that this consolidated Interim Report has been prepared in accordance with IAS34 and that the Chairman's Statement and the notes to the financial statements herein includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year) and DTR 4.2.8R (disclosure of related party transactions and changes therein).

 4. Segmental Analysis

  5. Exceptional costs

Impairment of inventories

During the 6 months to 31 December 2008, the Group conducted reviews of the net realisable value of its land and work in progress carrying values of its sites in the light of the current deterioration in the UK housing and commercial property markets. Where the estimated future net present realisable value of the site is less than its carrying value within the balance sheet, the Group has impaired the land and work in progress value.

Impairment of amounts due from construction contracts

During the 6 months to 31 December 2008, the Group conducted a review of the net realisable value of amounts due from construction contracts in the light of the current deterioration in the UK housing market. Where the estimated future net present realisable value is less than its carrying value within the balance sheet, the Group has impaired the carrying value.

Impairment of loans to joint ventures

During the 6 months to 31 December 2008, the Group conducted a review of the net realisable value of loans to

joint ventures in the light of the current deterioration in the UK commercial property market. Where the value of the property held within the joint venture has decreased due to the deterioration in the commercial property market resulting in the loan not being recoverable in full, the Group has impaired the loan to the recoverable amount.

Restructuring costs

During the 6 months to 31 December 2008, the Group incurred £1.6m of costs in relation to reorganising and restructuring the business, including redundancy costs of £1.1m where existing employees could not be retained within the Group.

These exceptional costs may be summarised as follows:

  6. Discontinued operations

The Group disposed of certain assets and liabilities of the Gleeson Engineering Division of Gleeson Construction Services to Black and Veatch Limited ("B&V") in a prior period and treated this as a Discontinued Operation. A small number of contracts were legally retained but the operations were taken over by B&V on the Group's behalf on a cost plus basis. Consequently, the Group has no involvement in the day to day running of these contracts and acts as an intermediary. At the time of the sale, the remaining costs to complete the contracts were considered insignificant in relation to the separately identifiable division as a whole.

  7. Earnings per share

From continuing and discontinued operations

The calculation of the basic and diluted earnings per share is based on the following data:

8. Related Party Transactions

During the period the Group provided goods and services to related parties totalling £0.5m (six months to

31 December 2007: £1.3m; 12 months to 30 June 2008: £2.0m).

The amounts owed by related parties at 31 December 2008 totalled £25.0m (31 December 2007: £33.2m; 

30 June 2008: £28.6m).