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20 Jun 2008 13:38
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Friday 20 June 2008
M J GLEESON GROUP PLC
TradingΒ Statement and Outcome of Operational Review
Gleeson (GLE.L), the urban regeneration and strategic land specialist,Β announces both a trading update in respect of the year toΒ 30 June 2008Β and alsoΒ the outcomeΒ and financial impactΒ ofΒ an operational review carried out by the Board.Β This review has sought to determine how shareholders' interests can best be protected in market conditions which have become exceptionally difficult as a result ofΒ the worsening impact of the credit crunch.
Housebuilding Market Conditions
Since the publication of the Group's Interim Management Statement onΒ 15 May 2008, Gleeson Regeneration & Homes, in common with the rest of the housebuilding industry, has experienced a further and marked reduction in reservation rates and an increase in cancellation rates. It now seems likely that the housing market will remain weak for an extended period; indeed, conditions may well worsen before they improve.
Outcome ofΒ theΒ OperationalΒ Review
The Group will undertake a major restructuring in order to achieve three key objectives:
i) a narrowing of the Group's geographical focus, enabling it to concentrate primarily on areas where it enjoys a strong market presence;
ii) a substantial reduction in both the operating costs of Gleeson Regeneration & Homes and Group overheads; and
iii) the generation of additional cash,Β thus further strengthening the Group's strong cash positive balance sheet.
Gleeson Regeneration & Homes
Gleeson Regeneration & Homes operates from four regional offices: Merseyside (Knowsley); North-West (Bury); Yorkshire (Sheffield); and South (Fleet).
North WestΒ and Yorkshire:Β The GroupΒ will beΒ commencing a consultation process with employees in relation to merging theΒ North WestΒ and Yorkshire regions, resulting in the closure of theΒ SheffieldΒ office. This willΒ reduce theΒ cost baseΒ of the Group's housing operationsΒ inΒ YorkshireΒ and align it with market conditions. The GroupΒ will continueΒ to pursue housing development opportunities inΒ Yorkshire, from the Bury office.
The charge to the Income Statement for the year toΒ 30 June 2008Β arising from this restructuring is estimated at Β£1.0m. Of this, Β£0.5m relates to lease costs provided for the remaining lease period of theΒ SheffieldΒ office.
Β Β South:Β The Group will be commencing a consultation process with employees in relation to the run-off of the South region. This region does not enjoy the same level of market presence as its counterparts in the North and the Board has concluded that, in current market conditions, it would not be value enhancing for shareholders to invest in new developments in this region. Most of the operating unit's net current assets will therefore be realised for cash over the next 18 months or so.
The charge to the Income Statement for the year toΒ 30 June 2008Β arising from this restructuring is estimated at Β£3.5m. Of this, Β£2.5m relates to lease costs provided for the remaining lease period of the vacant space in the Fleet office.
Non-Strategic Land and Housebuilding Work in Progress:Β The Group has reviewed the valuation ofΒ this asset classΒ andΒ concluded that it is appropriate to provide for a reduction in value.
The charge to the Income Statement for the year toΒ 30 June 2008Β arising from this reduction is estimated to be Β£6.0m.
Commercial Property
InΒ 2002, the Group sold aΒ refurbishedΒ property inΒ GlasgowΒ and providedΒ a rental guarantee to the purchaserΒ on certain floors untilΒ 30 June 2012.Β In 2007, a break clause was exercised by one of the building'sΒ tenants.Β Accordingly, the Group provided, in the year toΒ 30 June 2007,Β for what it believed would be aΒ limitedΒ period of unoccupied tenancy and commenced a marketing campaign to re-let the vacantΒ space.Β A recentΒ review has indicated that theΒ GlasgowΒ office market has become weaker. TheΒ Group hasΒ thereforeΒ decided that provision should be made for theΒ whole of the cost that will be incurred by the Group if the space remains unlet until the rental guarantee expires.
TheΒ charge to the Income Statement for the year toΒ 30 June 2008Β arising from this lease provision is estimated atΒ Β£1.6m.
Group Overheads
Over the past two years, good progress has been made in resolvingΒ a varietyΒ of legacy issues arising from past corporate transactions, especially with regard to assets and liabilities that were retained following the disposal in 2005 and 2006 of the Group's Building Contracting and Engineering Divisions. In addition, theΒ weakening of the housing marketΒ will resultΒ in a material decrease inΒ the Group's overallΒ expected investment in Gleeson Regeneration & Homes.
Accordingly, the Group will be commencing a consultation process with its Head Office employees to reduce the Head Office cost base to reflect both the reduced continuing workload in relation to legacy issues and the reduced size of the Group going forward.
The charge to the Income Statement for the year toΒ 30 June 2008Β arising from this restructuring is estimated atΒ Β£0.7m.
Gleeson Strategic Land
The Group stated in its Interim Management Statement of 15 May 2008 that, apart from the adjustment required to settle the legacy claim in respect of the Devonshire Green project, a financial outcome for the year to 30 June 2008 in line with market expectations was crucially dependent on the Group's housing and strategic land divisions meeting their most recent forecasts.
Over the intervening period,Β the landΒ transactionsΒ concerned have not progressed sufficiently for the achievement ofΒ unconditionalΒ contractualΒ exchange byΒ 30 June 2008Β to be likely. These transactions remain the subject of active negotiations but, as the Board has repeatedly explained in the past,Β itΒ is not prepared to sell land at a discounted valueΒ merely in order to meet year end targets.
Β Β Powerminster Gleeson ServicesΒ and Gleeson Capital Solutions
The business of Powerminster Gleeson Services is facilities management for regeneration projects, whilst that of Gleeson Capital Solutions is the procurement of regeneration PFI projects.
Both businesses continue to operate as budgeted and there is no impact on either of these businesses as a result of this announcement.
OnΒ 9 June 2008, the Group announced that it had reached financial close on the Leeds Independent Living PFI project, in which the Group has a 33% equity stake, held by Gleeson Capital Solutions. Powerminster Gleeson Services has been awarded a 25 year facilities management contract for this project with estimated revenues of circa Β£46m (at current prices). Powerminster Gleeson Services now has a total facilities management order book with an anticipated value in excess of Β£140m.
ResultsΒ forΒ theΒ YearΒ toΒ 30 June 2008Β from Continuing OperationsΒ
The total charge to the Income Statement for the year toΒ 30 June 2008Β from continuing operations for the above items is estimated at Β£12.8m before tax, of which Β£6.0m relates to reduced asset values, Β£4.6m relates to lease provisions on unoccupied space and Β£2.2m relates to headcount reductions. Coupled with the anticipated shortfall of income from house and land sales, this makes it inevitable that the Group will incur aΒ materialΒ loss before tax for the year to 30 June 2008.
ResultsΒ forΒ theΒ YearΒ toΒ 30 June 2008Β fromΒ Discontinued Operations
In October 2006, the Group disposed of specified assets and liabilities of its Gleeson Engineering Division to Black & Veatch. The retained assets and liabilities are classified as discontinued for accounting purposes.
In this connection, the Group has reached agreement in principle on the disposal of its last non-core PFI investment, a 41% holding in Stirling Water Seafield Holdings Limited. This agreement will eliminate the requirement for any future investment by the Group in the PFI entity and substantially reduce potential liabilities on the Group's construction contract.
The charge to the Income Statement for the year toΒ 30 June 2008Β for discontinued operations arising from this proposed agreement is estimated atΒ Β£1.0m.
Conclusion
The Group's urban regeneration business in the North of England has a very strong market presence. The restructuring of the Group's operations announced today will not only significantly reduce the Group's cost base and improve the ability to generate cash but will also substantially enhance the Group's ability to take advantage of the market's eventual return to more normal conditions that reflect the very high of level of underlying demand for home ownership that continues to exist in the UK.
The Group's strong cash positive balance sheet,Β portfolio of long-term urban regeneration agreements, and high quality strategic land bank of sites held under option mean that it is well equipped to manage the considerable challenges that lie ahead.
Enquiries:
M J Gleeson Group plc 01252-360 300
Paul Wallwork (Group Chief Executive)
Chris Holt (Group Finance Director)
Bankside Consultants Limited
Charles Ponsonby 020-7367 8851
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