Harworth Gp Regulatory News (HWG)

HARWORTH GROUP PLC

UNAUDITED PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2017

STRONG DEVELOPMENT AND INVESTMENT ACTIVITY DRIVES DOUBLE DIGIT GROWTH

Harworth Group plc ("Harworth" or the "Group"), the brownfield land and property developer & investor, announces its preliminary results for the year ended 31 December 2017.

Harworth's Chief Executive, Owen Michaelson, said:

"These are another strong set of results where we have again delivered double digit EPRA NNNAV growth, reflecting our continued ability to maximise the value of our portfolio whilst simultaneously growing our strategic landbank and income base through acquisitions and new lettings.

"Our focus, on the "beds and sheds" sectors in the North of England and the Midlands, is firmly underpinned by strong economic and consumer trends in the regions, and reinforced by supportive Government policy. This favourable backdrop coupled with active management has been reflected in 2017's planning successes and the sales and lettings achieved at our major developments such as Waverley and Logistics North.

"Whilst our existing sites continue to perform well and have plenty of future potential, we are also pleased with the progress of the five new acquisitions to our strategic landbank, which were acquired with the cash proceeds from new equity raised last March. These acquisitions delivered significant revaluation gains in 2017 and provide a substantial pipeline for us to deliver further value gains through our market-leading planning and development expertise.

"2018 has started strongly, with over 50% of expected full year sales already agreed since the year-end and the completion of three new lettings generating additional recurring income, further demonstrating the success of our proven and robust strategy. This performance, together with the supportive market fundamentals in the areas in which we operate, means we look to the future with confidence."

GOOD OPERATIONAL PERFORMANCE REFLECTED IN ALL KEY FINANCIAL METRICS

LAND BANK STRENGTH PROVIDING PLATFORM FOR CONTINUED TOTAL RETURN OUTPERFORMANCE

ALL AREAS OF THE BUSINESS SUPPORTING GROWTH STRATEGY AND 2018 PROGRESS

Footnotes: (1) Following the March 2017 equity capital raise to accelerate the acquisition of strategic land for development and the further evolution of our strategy, £229.1m of property has been re-categorised from investment to development in the year. Balance sheet measures include NAV and EPRA NNNAV which, is now our primary metric and, includes the mark to market value of development properties (£5.8m) less notional deferred tax on development properties (£1.0m). EPRA NAV is EPRA NNNAV excluding deferred tax (£5.5m), notional deferred tax on development properties (£1.0m) and the mark to market movement on financial instruments (£0.1m)

(2) Value gains comprise profits on sale of: investment properties (£2.9m); development properties (£7.7m); and assets held for sale (£0.1m), plus the increase in the fair value of investment properties (£32.1m), joint ventures (£4.0m) and overages (£0.6m) less the impairment of development properties (£5.8m)

(3) Value gains (including development properties) comprises value gains (£41.6m) plus the increase in the fair market value of development properties (£5.8m)

(4) Profit excluding value gains is operating profit before exceptional items plus joint ventures (£43.8m) less value gains (£41.6m) and pension costs (£nil)

(5) The 2016 EPS has been restated following discussions with the Financial Reporting Council and their review of the 2016 Financial Statements, which did not correctly reflect the effect of the May 2016 1 for 10 share consolidation on EPS.

-ENDS-

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ABOUT HARWORTH GROUP PLC

Listed on the main market, Harworth Group plc (LSE: HWG) is a leading brownfield land and property developer & investor which owns and manages a portfolio of c.21,000 acres of land on around 135 sites located throughout the Midlands and North of England. The Group specialises in the regeneration of former coalfield sites and other brownfield land into new residential developments and employment areas. (http://www.harworthgroup.com)

While the financial information included in this announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards as adopted by the EU ("EU IFRSs"), this announcement does not itself contain sufficient information to comply with EU IFRSs. The Group expects to publish full financial statements that comply with EU IFRSs by the end of April 2018.

This announcement contains certain forward-looking statements which, by their nature, involve risk, uncertainties and assumptions because they relate to future events and circumstances. Actual outcomes and results may differ materially from any outcomes or results expressed or implied by such forward looking statements. Any forward-looking statements made by or on behalf of the Group are made in good faith based on current expectations and beliefs and on the information available at the time the statement is made. No representation or warranty is given in relation to these forward-looking statements, including as to their completeness or accuracy or the basis on which they were prepared, and undue reliance should not be placed on them. The Group does not undertake to revise or update any forward-looking statement contained in this announcement to reflect any changes in its expectations with regard thereto or any new information or changes in events, conditions or circumstances on which any such statement is based, save as required by law and regulations. Nothing in this announcement should be construed as a profit forecast. 

Chairman's Statement

I am pleased to present the Group's preliminary results for the financial year ended 31 December 2017, which reflect another strong year of growth for the business. EPRA NNNAV is now the Group's principal financial measure following the evolution of our business model and the re-categorisation of properties from investment to development. EPRA NNNAV grew by 12.5% per share (2016: 12.5% per share) to 128.9p (£414.2m (includes £27.1m equity capital raised during 2017 which has been fully deployed)) from 114.6p per share in 2016 (2016: £334.9m).

STRATEGY AND PERFORMANCE OVERVIEW

Following this year's review of the strategy the Board has reaffirmed our vision: to be the UK's leading developer and brownfield land regeneration partner of choice. Alongside this, we have refined the way we articulate our strategic priorities which are now identified under six headings (development, investment, sectors, regions, acquisitions and financing). We have also highlighted the direct links to the business model, key performance indicators and risks. This will be reflected in future communications with investors, including in the 2017 Annual Report and Financial Statements.

DevelopmentThe Group continues to meet its target to grow EPRA NNNAV by at least 10% per annum as a consistent average. Growth is driven principally by the development activities of our Capital Growth team, including planning promotion, land remediation, engineering and infrastructure development, and, finally, profitable sales. 

The Group achieved a number of significant planning successes during the year for the future delivery of 825 residential plots and over 3m sq. ft of commercial space across four sites, with the most notable achievements at our sites at Thoresby and Kellingley. Residential and commercial sales have remained strong, both in terms of volumes and pricing, underpinning and realising value gains. We continued to sell to both new and repeat housebuilders.  The first sale of land for commercial use at Wheatley Hall Road to Arnold Clark illustrates our increasing points of sale across the portfolio. The sale to Exeter/First Industrial at Logistics North, generating a healthy profit on sale, shows the continuing demand for space at our most mature sites.

InvestmentOur ambition remains to cover the Group's operating costs, interest, tax and dividends from ongoing rental and other operating income. We have continued to make good progress towards meeting that commitment, led by the investment returns delivered by our Income Generation team. In 2017, those investment returns have contributed 27% of value gains and yields of 7.0%.

During the year we secured over 360,000 sq. ft of major new commercial lettings, including to McLaren Automotive at the Advanced Manufacturing Park ("the AMP") and to Whistl at Logistics North, the latter on behalf of M&G Real Estate, our forward funding partner. We undertook direct development at the AMP and at Logistics North, both in joint venture with Lancashire County Pension Fund ("LCPF") and on our own account. Following further progress on lettings at the start of 2018, all of the wholly owned direct developments in our Business Space portfolio are now let. 

Sectors and regions

We continue to see strong demand for our "oven-ready" residential and commercial sites, and direct developments in our core markets in the North of England and the Midlands. This has been affirmed by the sales and lettings we have completed during the year alongside the volume of interest in our sites and units. 

AcquisitionsWe recognise the importance of sustained momentum in the business. By the end of 2017 we had successfully deployed the £27.1m of equity raised in March 2017 through the acquisition of five new sites with residential and commercial development potential. Those acquisitions have already produced significant revaluation gains during the year, cementing our record of growth from the sites we have acquired since 2014, when the business began to replenish its portfolio.

We have a healthy pipeline, with six options now in place on circa 417 acres of potential development land and a number of acquisition opportunities being explored, including a substantial brownfield site on which we are preferred bidder.

FinancingIn February 2018, we extended the availability of our debt funding by agreeing a two-year extension to our £75.0m revolving credit facility with RBS to February 2023 with only a 10 bps increase in margin to 210 bps. In 2017 we also secured a £5.0m increase in our bonding facility to £15.0m. We have continued to use public infrastructure loans to accelerate development. Our net loan to value remains low at 7.0% (2016: 9.9%) or 20.8% when calculated against the income portfolio (2016: 31.3%). We believe our policy of prudent gearing is well suited for land-focussed development businesses such as ourselves.  

DIVIDEND 

The Company's policy is to grow the dividend in line with the growth of the business, and pay it from recurring income and realised value gains from disposals. The Board will not distribute unrealised gains recognised on the revaluation of property and will retain a proportion of its recurring income and realised gains for reinvestment in acquisitions. We declared and paid an interim dividend of 0.253p per share in October 2017. The Board is recommending a final dividend of 0.575p per share (2016 final dividend: 0.523p). This gives a total dividend of 0.828p per share (2016: 0.753p) being a 10% growth in dividend per share for the year. Subject to shareholder approval at the 2018 Annual General Meeting, the final dividend will be paid on 1 June 2018 to shareholders on the register as at close of business on 4 May 2018. The ex-dividend date will be 3 May 2018.

SUCCESSION 

I have now been Chairman for more than seven years, during which time I am pleased that Harworth has grown into the respected regeneration business it is today. In the five years since Harworth became a standalone business, following our solvent restructuring of UK Coal plc, the Group's NNNAV, including capital raised, has grown by an average of c.14% per annum to £414.2m.

With strong foundations in place, now is the right time to hand the reins to my successor, for the next stage of Harworth's growth and development. As previously announced, I will not be standing for re-election at this year's Annual General Meeting and I welcome Alastair Lyons CBE as my successor. Alastair's appointment will take effect after the announcement of these results on 7 March 2018, at which time I will step down as Chairman, retiring from the Board at the end of March.

OUR PEOPLE AND PARTNERS

I feel privileged to have worked with a talented and hardworking team at Harworth, supported also by our advisors and partners. The team continues to grow and mature with the business. In the last year, we recruited six new roles and made a number of promotions. Half of our recruits were women, confirming that promoting diversity across the business remains a priority. 

I would like to take this opportunity to thank all of the Harworth team and my Board colleagues for their hard work and contribution throughout the time I have been Chairman. I would also like to extend my thanks to our investors and wider stakeholders for their support through the transformation of Harworth over the last seven years. 

OUTLOOK

Harworth is well positioned for the future. We have a robust strategy and business model, a proven track record and a pipeline of opportunities for replenishing our strategic land bank and property portfolio. Our core markets in the North of England and the Midlands continue to perform well. There continues to be a shortage of housing in the areas in which we operate and strong fundamentals underpinning growth in the logistics and advanced manufacturing sectors. Government policy remains supportive, with strong backing for brownfield development, prominent housing initiatives including the extension of Help to Buy, and a continued focus on regional investment and devolution. 

Against this backdrop, the outlook for the business remains favourable. I wish the entire Harworth team the very best for the future.

Jonson CoxChairman6 March 2018 

Chief Executive's Statement

This is another excellent set of results reflecting a strong year of progress for the business. The Group once again delivered a year of double-digit NNNAV per share growth of 12.5% (2016: 12.5%), with a NNNAV of £414.2m at the year-end (2016: £334.9m). This includes value gains of £47.4m(3) (2016: £43.7m), ahead of our expectations, and profit excluding value gains rose marginally to £2.24m(4) (2016: £2.21m).

DELIVERing Our STRATEGY

Against the backdrop of our strategic priorities, our operational focus also remains unchanged: extracting maximum value from our predominantly brownfield land portfolio in the North of England and the Midlands to grow EPRA NNNAV; building our recurring income base to cover operating costs; and acquiring brownfield and urban extension land and property to underpin the sustainability of our long-term business model. We do this by continuing to use our masterplanning, technical, placemaking and asset management expertise to transform redundant land into places where people want to live and work, whilst applying the same skills in targeting future areas in which to invest our management time and capital.

Our core markets across the North of England and the Midlands are well suited to our strategy and business model. Demand for new homes in our markets remains steady, reflected by both the rate of sales achieved by our housebuilding partners on our sites and a continued deficit in the number of new homes built versus the official national target of 300,000 new homes per year. The rise of e-tailing and the increasing demands of consumers also continues to support demand for logistics and distribution space, with the industrial sector forecast to outperform both the office and retail markets over the next few years. This is further augmented by a supportive legislative framework and a number of recent Government announcements, including the publication of the Industrial Strategy White Paper and further financial support made available within the Chancellor's Autumn Statement to accelerate housebuilding across the UK.

CAPITAL GROWTH

Our Capital Growth team has continued to make good progress in maximising value from our portfolio through three principal management actions: securing planning consents on major schemes; preparing land for redevelopment; and delivering sales above book value for future residential and commercial development. All have underpinned value gains made during the year.

During the year we achieved planning successes on four sites for the delivery of 825 residential plots and over 3m sq. ft of commercial space. Two of these are worthy of particular highlight. In April, we secured consent for 1.45m sq. ft of new commercial space at Kellingley in Selby, North Yorkshire, less than eighteen months after the UK's last deep mine operations ended there. Further planning success was achieved in October, when we received consent at the former Thoresby Colliery site in Nottinghamshire for 800 new homes alongside 250,000 sq. ft of new commercial space, just over two years after mining ended there. Both sites now form part of our Major Developments segment. As at 31 December 2017, total consented residential plots under ownership stood at 10,448 plots and consented commercial space on our land at 12.13m sq. ft.

We also have live applications in the planning system for 1,308 new plots and 325,000 sq. ft of commercial space. These form part of a wider pipeline of planning applications for the next three years, comprising more than 4,500 residential plots (of which c.1,500 plots are for Planning Promotion Agreements ("PPAs") on third-party land) and 5.9m sq. ft of commercial space to underpin the Group's future disposals programme.

The team continues to plan carefully whether and when to dispose of sites to maximise the return from our portfolio. In 2017 we achieved receipts in excess of book value, realising cash which can be reinvested in bringing other sites and acquisitions forward. A total of 622 residential plots were sold across six parcels to national and regional housebuilders during the year. This included sales to longstanding partners including Taylor Wimpey and Avant Homes alongside new partners such as Keepmoat Homes and SkyHouse, demonstrating the popularity of our product.

We also sold land with planning consent for over 850,000 sq. ft of commercial space across five parcels, including three headline deals. In May, we entered into a joint venture with Lancashire County Pension Fund ("LCPF") to develop the next phase of Logistics North in Bolton. Land totalling 31.2 acres was conditionally sold to the Multiply Logistics North Limited Partnership, our joint venture, for the development of 564,000 sq. ft of commercial space over the next two years. Harworth retains a 20% stake in the joint venture and will also undertake development and asset management for separate management and promote fees. As at 31 December 2017, two of the three phases had been sold into the joint venture for the direct development of c. 435,000 sq. ft of new commercial space.

The final quarter of 2017 included two further key commercial land transactions. We executed a land sale of 18.3 acres at Logistics North to Exeter/First Industrial for £10.1m, representing their second major investment in the site over the past two years and setting a new benchmark price per acre for the site. In addition, we sold a 6-acre plot at Riverdale Park, Doncaster to Arnold Clark Ltd for £2.5m, representing the first land sale at the 112-acre site since its purchase for £8.5m in December 2015.

Income Generation

During the year, our Income Generation team has maintained its push to grow resilient, recurring income. This has included increased direct development space which we intend to hold for long-term rents, in response to a continued undersupply of good quality new units in the regions. The team continues to asset manage our existing Business Space portfolio to reduce voids and increase rental returns, whilst also deriving rental returns and royalties from energy generation, environmental technologies and the agricultural portfolio. As a by-product of our remediation, engineering and development activities, we also seek to generate income from recycled aggregates.

Lettings progress was strong during the year, including the long-term letting of over 360,000 sq. ft of directly developed industrial space with a number of new headline rents being set. The year began with Whistl taking a ten-year lease in January for a 225,000 sq. ft unit at Logistics North, just six weeks after we had overseen practical completion of the unit on behalf of M&G Real Estate, our forward funding partner. This was followed in May by the start of construction of five further commercial units at Logistics North: three as the first phase of the 'Multiply Logistics North' joint venture with LCPF totalling c. 164,000 sq. ft; and two units (C4 and C5) totalling c.52,800 sq. ft using internal funds. All five units practically completed in the fourth quarter of 2017. Within two weeks of practical completion of units C4 and C5 at Logistics North, we agreed a ten-year lease for C4 at a new headline rent for Logistics North.

We have also undertaken direct development at the AMP to meet growing occupier interest. In April, we achieved practical completion on six new units totalling 51,750 sq. ft, with a leading advanced manufacturer becoming our first tenant for a c.11,000 sq. ft unit at a headline rent of £7.25psf on a 15-year lease. This was followed in December by Spendor Audio taking a 15-year lease on a c. 26,000 sq. ft unit as part of their UK expansion. The strength of the AMP as a business location was further demonstrated in July, with McLaren Automotive taking a 20-year lease on a new 75,000 sq. ft unit that we will be constructing on its behalf. McLaren will take occupation in the spring following practical completion. The space will be used to house McLaren's new Composites Technology Centre, which will be used to build carbon-fibre chassis for sports cars from 2019.

During the year, our team also increased income from other underlying assets within our c.1.9m sq. ft Business Space portfolio, with a total of over 50 new, renewed and reviewed commercial lettings being completed in the year. This was further bolstered by the purchase in November of a DHL distribution unit in Droitwich, Worcestershire with an annualised rent roll of £450,000. Asset management opportunities have already been identified to grow the underlying value of this site in future, alongside longer-term development plans. All of this activity led to Business Space revenue in 2017 of £8.4m (2016: £6.2m). The weighted average unexpired lease term ("WAULT") across the portfolio stands at 7.5 years (2016: 7.5 years).

Our revenues for the period were also bolstered by the work of our Natural Resources and Operations teams. A total of 159.7MW of energy capacity is now installed on our land, providing a long-term income stream from a combination of ground rents and royalties. The team's focus remains on growing future income from alternative technologies with better short-term prospects and from maintaining income from our tipping operations, which has the added benefit of supporting site remediation.

Acquisitions

The successful completion of our £27.1m equity raise in March to accelerate the continued expansion of our strategic landbank was a key milestone for funding our future growth prospects. Our Acquisitions team deployed the proceeds in 2017 through the acquisition of five sites which have supplemented our strategic landbank and will improve the quality of our recurring income base. These five transactions plus acquisition costs, allied with initial planning and infrastructure costs, account for the full £27.1m of new equity raised. All are forecast to support our ongoing delivery of a double digit internal rate of return, with the December 2017 valuation already reflecting significant value growth from these acquisitions during the year.

The two most notable acquisitions were identified at the time of the placing and were adjacent to our existing landholdings, thus realising significant marriage value as part of our year-end valuation process. The first, Coalville in Leicestershire, is a 145-acre site purchased for £11.8m plus costs. It neighbours our existing Coalville development and already benefits from an existing planning permission for 914 new homes. This acquisition has created a combined site with planning permission for the delivery of over 2,000 new residential plots and associated community facilities over a likely 15-year development pipeline.

The second, Chatterley Valley in Staffordshire, is an 88-acre site purchased for £2.6m plus costs that borders our existing 24-acre freehold site. The entire site benefits from Government Enterprise Zone status and an extant planning permission to deliver up to 1.2m sq. ft of new commercial development.

Replenishing and growing our strategic landbank is essential to maintain delivery of our target of double-digit EPRA NNNAV growth through the property cycle. With this in mind, we have entered into six option agreements to acquire strategic land sites that extend to approximately 250 acres, comprising a mixture of potential residential and commercial sites located in, and adjacent to, our core regions. These sites have the potential to deliver a further 1,500 residential plots and 1.3m sq. ft of new commercial space should these options be taken up.

STRONG BUSINESS momentum

The continuing strong performance of the business, coupled with the robust nature of the markets we operate in, means that we already have significant momentum in 2018. We have agreed over 50% of the year's expected sales, underpinning the Group's performance for the year ahead, although we still expect performance to be second half weighted.

In the first two months of 2018, we have secured a number of long-term lettings which will bolster our income portfolio, at headline rents for each development, clearly reflecting industrial rental growth and supporting ongoing valuation uplifts. At Logistics North, a ten-year lease was agreed in January with Vaclensa Ltd for unit C5, achieving a new headline rent of £7psf. This was followed in February by two further lettings across the portfolio. The first was to British Steel Ltd who completed a 15-year lease on the remaining Phase 2 R-evolution unit, totalling c. 15,000 sq. ft, at the AMP at a new headline rate of £7.50psf. The second letting in February saw leading motor retailer Motor Depot Ltd taking a 15-year lease on our Helix unit at Gateway 36 at a new headline rent at the development of £5psf.

This lettings progress has underpinned our decision to proceed on two further direct developments which will grow our recurring income base. Construction of Phase 3 of R-evolution at the AMP, c. 56,000 sq. ft of new commercial space, has now begun alongside the second phase of the 'Multiply Logistics North' development that will deliver a further c. 270,000 sq. ft of commercial space at Logistics North. Interest in our future commercial pipeline is already strong, driven by both the maturity of our developments such as Logistics North and the AMP, and a continued lack of supply of high-quality units in the regions in which we operate.

Our reputation for being straightforward and acting swiftly in making new acquisitions also stands us in good stead in identifying an acquisitions pipeline, with no shortage of opportunities currently. Prior to the end of February, we signed a Planning Promotion Agreement ("PPA") for a key site in Derbyshire that unifies eight separate landowners in attempting to secure a major new residential consent. The Cinderhill site totals 421 acres and benefits from a draft housing allocation within the emerging Amber Valley Local Plan for up to 3,000 new homes, alongside 500,000 sq. ft of commercial space. This draft plan has now been submitted to the Government for further examination in the Spring.

With clear momentum in place across all aspects of the business, alongside favourable market conditions and positive Government sentiment towards residential and commercial development on brownfield land, we remain confident in our ability to grow NNNAV across our portfolio and to increase our recurring income base to cover the operating costs of the business.

PEOPLE

Our continued strong performance has necessitated growing our team in line with the increasing workload of the business. Our people remain as committed, diligent and steadfast as ever in maximising the value of our portfolio and creating great new places for people to live and work. My thanks goes out to the team, our trusted delivery partners and professional teams for their hard work in making the Group what it is today.

Finally, on behalf of the Board and the Harworth team, I would like to express my thanks to Jonson Cox who has served as our Chairman since November 2010 and helped us navigate through many challenges in creating the business we have today. Successful businesses do not just happen. They require a combination of skill, leadership and good market judgements. I would like to express my sincere thanks for Jonson's leadership and guidance over the past seven years. I would also like to welcome Alastair Lyons as our incoming Chairman.

Owen MichaelsonChief Executive6 March 2018

Financial Review

OVERVIEW 

Further significant progress was made across the business in 2017, which resulted in another year of double digit growth in EPRA NNNAV. This growth was after including the impact of the March 2017 equity capital raise which had the impact of a c.2.0% dilution in net assets per share. EPRA NNNAV rose by 12.5% to 128.9p per share (£414.2m) compared to 114.6p per share as at 31 December 2016 (£334.9m). NAV per share increased to 127.4p (£409.3m) as at 31 December 2017, which is an 11.2% increase on the NAV per share as at 31 December 2016 of 114.6p (£334.9m).

Operating profit before exceptional items in 2017 was £39.7m (2016: £45.2m). However, the statutory measure does not now capture the growth and profitability of the business fully as we are conducting some of our activities through joint ventures (2017: £4.0m, 2016: £0.6m) and, as set out below, the revaluation gains on development properties post re-categorisation (2017: £5.8m, 2016: £nil) fall outside of this measure. Taking account of both of these additional sources of value creation, operating profits which contributed to EPRA NNNAV rose by 8.1% to £49.6m (2016: £45.8m) reflecting active management across our portfolio.

We consider that the operating profits which contributed to EPRA NNNAV growth of £49.6m (2016: £45.8m) can best be understood as being composed of two elements:

Earnings per share rose by 15.4% to 15.8p (2016: 13.7p (5)) reflecting the progress in profits as well as the recognition of previously unrecognised deferred tax assets following greater certainty of their recoverability. The total dividend per share for 2017 rose by 10% to 0.828p (2016: 0.753p) reflecting the long-run ambition to deliver through the cycle double-digit growth in NNNAV.

Net debt at £32.3m or 7.0% net loan to value (2016: £39.5m and 9.9%) reflects Harworth's continuing prudent gearing policy. In February 2018, the Group extended the term of its £75.0m revolving credit facility with RBS, such that it now ends in February 2023.

BUSINESS MODEL AND PROPERTY CATEGORISATION

Harworth has become more firmly established in recent years, particularly as a result of the effective re-listing in March 2015 and the development of a successful track record. At the same time, our business model has matured and evolved, notably with moves into adjacent activities such as direct development and forward funding deals. As a consequence, following the capital raise in March 2017, which was to accelerate the acquisition of strategic land for development, we reviewed our most advanced and active sites and re-categorised certain properties to reflect the intentions for the sites. The majority of Waverley, Logistics North and Prince of Wales were re-categorised as development sites and as such are now disclosed within inventory. Development sites are held on the balance sheet at cost rather than fair/market value, albeit at the point of re-categorisation the property is transferred at fair value. The balance sheet value of these three development sites at the point of re-categorisation was £77.7m.

Following further evolution of Harworth's business model during 2017, we have refined our thinking in the light of site and market opportunities, and concluded that it is appropriate, on the whole, to re-categorise all properties which have received planning permission as development properties. For until sites receive planning permission, our view is that the land is held for a currently undetermined future use and should thus be held as investment property. The only site within Major Developments that has not been re-categorised as a development property is Lounge in Leicestershire for which its future use is undetermined as a result of the proposed HS2 Phase 2b route.

Property categorisation is reviewed as at 30 June and 31 December each year. Following the 2017 year-end review, a further £151.4m has been re-categorised from investment property. The balance sheet value of all development sites as at 31 December 2017 was £210.5m (reflecting sales and development expenditure at the three sites re-categorised in the first half). The market value of all development sites as at 31 December 2017 was £216.3m reflecting the £5.8m uplift in value of these sites, which is appropriately not reflected in the balance sheet. In order to highlight the market value of development sites and be consistent with our investment properties, we are using EPRA NNNAV, which includes the market value of development properties, less notional deferred tax, as our primary metric. We will continue to report EPRA NAV which is EPRA NNNAV excluding deferred tax and the mark to market movement on financial instruments.

The table below sets out our top ten sites by value, split by their categorisation and showing the total acres, residential plots and commercial space:

MARCH 2017 EQUITY PLACING 

Following the publication of our preliminary results on 6 March 2017, we successfully undertook an equity placing that raised £27.1m (net of expenses). This involved placing 29,226,974 Ordinary Shares (representing 9.9% of Harworth's share capital prior to the placing) at a price of 95.0 pence per share (representing a discount of approximately 1.6% to the closing mid-market price of Harworth's shares on the day before the announcement of the placing) to accelerate the continued expansion of our strategic land bank.

During 2017, we have invested all of the proceeds from the equity placing in five acquisitions at: Chatterley Valley near Stoke; Coalville in Leicestershire; Wingates near Bolton; a strategic site near Doncaster; and a DHL depot in Droitwich. The first three sites were all adjacent to existing Harworth properties. The total consideration including costs was £26.0m with additional spend expected on these sites during 2018 for planning and initial development expenditure.

OPERATING PROFIT

Revenues in 2017 were £53.7m (2016: £33.7m) split between revenue from operations £23.9m (2016: £33.7m) and revenue from the disposal of development properties £29.8m (2016: £nil). Revenue from operations is split between: Income Generation £18.2m (2016: £17.4m), where revenue mainly comprises rental and royalty income together with some sales of coal fines and salvage; and Capital Growth £5.7m (2016: £16.3m). The increase in revenue from Income Generation reflected improved lettings and business space acquisitions made in late 2016 and in 2017. The reduction in revenue from Capital Growth reflected the completion in December 2016 of the two units at Logistics North which were forward funded by M&G Real Estate. The revenue in 2017 reflected amounts received on completion of the work including a promote fee on the letting of the larger 225,000 sq. ft unit to Whistl in January 2017. The smaller 175,000 sq. ft unit continues to be actively marketed on behalf of M&G Real Estate.

Revenue and cost of sales include amounts for the M&G forward funding contract at Logistics North as Harworth acted as principal in this transaction. This principal relationship was as a result of Harworth having exposure to potential construction and credit risks as well as the potential rewards of managing the construction on time and to budget, and letting the buildings favourably and early.

Cost of sales now comprises three elements being: sales of development properties; operating costs for business space, natural resources, agricultural land and coal fines activities; and costs in relation to the M&G contract for the construction and letting of units. Cost of sales increased to £37.7m (2016: £20.9m) including some large movements being the first-time recognition of sales of development property of £27.9m (2016: £nil) and a reduction in costs associated with the M&G contract to £3.7m (2016: £15.6m).

Total overheads, which include the overhead costs of the Capital Growth and Income Generation segments and central costs, amounted to £12.0m (2016: £10.6m). The increase in costs reflected an increased accrual for the 2012 Harworth Estates Long Term Incentive Plan, which concluded at the end of 2017, as a result of NNNAV outperformance, as well as increased staffing and business costs reflecting greater, and more productive, operational activity. The table below shows the results of the business split between Capital Growth, Income Generation and Central Overheads:

Notes: (1) The income statement has been re-presented to show development property sales (£7.7m) within profit on disposals and development property impairment (£5.8m) within revaluation gains. This notional cost is the net amount

(2) Profit excluding value gains comprises operating profit before exceptional items of £39.7m (2016: £45.2m) less pension costs of £nil (2016: £0.1m) and value gains of £37.6m (2016: £43.0m). Value gains comprise profit/(loss) on disposals (being profits on sale of investment properties of £2.9m (2016: £9.2m), assets held for sale of £0.1m (2016: loss of £0.4m) and development properties of £7.7m (2016: £nil) plus increase in fair value of investment properties of £26.9m (2016: £34.2m)

(3) This is the unrecognised mark to market gain since the properties were re-categorised into development properties

(4) There are minor differences on some totals due to rounding

Set out below are value gains for 2016 and 2017, which comprise profit on disposals, revaluation gains on investment properties (including joint ventures) and revaluation gains on development properties: 

The Group made sales of properties of £54.8m in 2017 (2016: £58.9m). The sales were split between residential serviced plots of £23.0m (2016: £20.5m), commercial development of £22.7m (2016: £26.8m) and other, essentially agricultural land of £9.1m (2016: £11.6m). Harworth made profit on disposals of £10.7m (2016: £8.8m), with all segments of the business achieving a profit on disposals with the two largest profits being from sales of land for residential and commercial occupiers at our flagship sites of Waverley and Logistics North respectively. In addition, Harworth undertook direct development on its sites with a land value of £2.1m and its share of property sales in its joint ventures was £0.9m.

Cash proceeds from sales were £46.6m (2016: £53.4m) reflecting the sales in the year of £54.8m (2016: £58.9m) less deferred consideration on sales in the year of £14.3m (2016: £10.9m) plus deferred consideration received from sales in prior year of £6.1m (2016: £5.4m).

In 2017, the Group achieved revaluation gains of £36.7m (2016: £34.9m) comprising: revaluation gains from investment properties, including overages of £32.7m (2016: £34.3m), revaluation gains from joint ventures of £4.0m (2016: £0.6m), revaluation gains from development properties of £5.8m (2016: £nil) less impairment of development properties of £5.8m (2016: £nil). All of the revaluation gains for development properties relate to Major Developments sites.

We have split the revaluation gains of £36.7m (2016: £34.9m) to reflect the contribution from active management of £29.2m (2016: £29.2m) and market movements of £7.5m (2016: £5.7m). Whilst there is a degree of subjectivity in this split, it highlights that the majority of the value gains continue to come from active management. The principal 2017 revaluation gains across the divisions were as follows:

EXCEPTIONAL ITEMS

Exceptional items in 2017 comprised three separate items which, as before, relate to sundry receipts and costs from the Group's legacy activities. The total amounts in 2017 were a credit of £0.3m (2016: £nil).

TAXATION 

The income statement credit for taxation in the year was £7.8m (2016: £3.6m charge) which comprised a deferred tax credit of £9.3m (2016: £3.6m charge) and a current year tax charge of £1.5m (2016: £nil). The movement in deferred tax comprised the following:

The current tax charge comprised the following:

The Group is still utilising brought forward tax losses but as a result of categorising sites from investment to development, Harworth has started to pay tax on development property sales. In the current period, in terms of cash tax paid or received, Harworth received cash in respect of the land remediation relief claim and recovery of VAT on deal fees of £0.3m (2016: £nil).

At 31 December 2017, the Group had deferred tax liabilities of £13.0m (2016: £23.4m), related to unrealised gains on investment properties and had recognised deferred tax assets of £7.5m (2016: £8.5m). The net deferred tax liability was £5.5m (2016: £14.9m). Full details of the movements in tax are set out in note 6.

Due to recent changes in tax legislation, there is much greater flexibility in the utilisation of tax losses arising after 1 April 2017. However, these losses, and those losses accrued historically are subject to a 50% restriction. Whilst the Group has a significant level of accrued tax losses, these are in the form of capital losses which fall outside of these rules. As such, these rules are likely to have a limited impact on the group's tax profile going forward.

Recent legislation has aligned the computation of capital gains on disposals of properties between individuals and corporates by removing the benefit to corporates of indexation. This will have the impact of increasing the tax liabilities in future periods.

EARNINGS PER SHARE AND DIVIDENDS 

Earnings per share increased to 15.76p (2016: 13.65p(5)) and underlying earnings per share, excluding exceptional items, increased to 15.65p (2016: 13.65p). These increases reflect the positive progress made in the year with respect to profits and tax. The 2016 EPS has been restated following discussions with the Financial Reporting Council and their review of the 2016 Financial Statements, which did not correctly reflect the effect of the May 1 for 10 share consolidation on EPS.

An interim dividend of 0.253p per share (2016 interim: 0.230p) equivalent to £813k (2016 interim: £672k) for the 2017 financial year was paid on 13 October 2017. A final dividend for the 2017 financial year of 0.575p per share (2016 final: 0.523p) is proposed. The total dividend for the year of 0.828p per share (2016: 0.753p) is in line with our progressive dividend policy and represents a 10% increase over the prior year, reflecting ongoing growth and confidence in the business. The total dividend of £2.7m (2016: £2.2m) is due to the 10% growth in the dividend and the c.10% increase in the number of shares following the March 2017 equity capital raise. The final dividend will be paid on 1 June 2018 to shareholders on the register at the close of business on 4 May 2018. The ex-dividend date will be 3 May 2018.

NET ASSETS

As set out below, NAV increased to £409.3m as at 31 December 2017 from £334.9m as at 31 December 2016. This increase was as a result of movements in the year, being operating profit before exceptionals plus joint ventures of £43.8m, the March 2017 equity capital raise of £27.1m, a tax credit of £7.8m, less interest costs of £2.3m and dividends of £2.7m plus other movements of £0.7m.

FINANCING STRATEGY AND FUNDING

Harworth's financing strategy is to be prudently geared as we believe that this gives the Group a number of advantages:

Harworth's financing strategy also involves the Group trying to balance its cash flows by funding infrastructure spend and investment in acquisitions through disposal proceeds. In 2017, Harworth achieved sales which were slightly ahead of Group expectations and the expected partial acquisition of a site was delayed from before the year-end until 2018 resulting in a slight decrease in net debt.

As at 31 December 2017 Harworth's gross Loan To Value ("LTV") was 8.8% (2016: 13.1%) and net LTV was 7.0% (FY 2016: 9.9%). However, as set out above Capital Growth sites are deliberately not geared, so if gearing is just assessed against the value of Business Space and Natural Resources properties this equates to a gross LTV of 26.3% (2016: 41.6%) and a net LTV of 20.8% (2016: 31.3%).

On 13 February 2018, Harworth extended the term of its existing £75m Revolving Credit Facility ("RCF") with RBS by two years such that it now expires in February 2023. The extension was on substantially the same terms with the only notable change being a slight increase in margin to 210bps over LIBOR (from 200bps). The Group's hedging strategy is to have roughly half of its debt at a fixed rate and half of its debt exposed to floating rates. As a consequence, Harworth has a £30m fixed rate swap at an all-in rate of 2.955% (including fees) until June 2020. The interest rate swap is hedge accounted with any unrealised movements going through reserves.

The Group also uses infrastructure funding, provided by public bodies to promote the development of major sites for employment and housing needs, as part of our funding. At 31 December 2017 the Group had six infrastructure facilities with all-in funding rates of between 2.5% and 4.7%. During the year, to assist with funding requirements associated with greater activities and continued growth, we secured an increase in our bonding line from £10.0m to £15.0m.

The Group had borrowings and loans of £40.6m at 31 December 2017 (2016: £52.5m), being the RBS RCF of £23.3m (2016: £37.0m) and infrastructure loans of £17.3m (FY 2016: £15.5m). The Group's cash and cash equivalents at 31 December 2017 were £8.4m (2016: £13.0m). The resulting net debt was £32.3m (2016: £39.5m). The weighted average cost of debt, using 31 December 2017 balances and rates, was 3.0% with a 0.8% non-utilisation fee on undrawn RCF amounts (2016: 2.9% with a 0.8% non-utilisation fee on undrawn RCF amounts). For the twelve months to 31 December 2017 Harworth's interest cover, as calculated by the RBS RCF covenant calculation, was 3.41x against a covenant test of 1.5x.

PREMIUM LISTING

Reflecting Harworth's continuing development since its relisting in 2015, the Board has engaged advisers on the workstreams to be completed to move the Company's shares from the Standard segment to the Premium segment of the Official List. This work is expected to be completed over the coming months with the move taking place in the second half of the year, subject to the approval of the UK Listing Authority. The Board believes that this will position the Company for potential future admission to the UK FTSE indices.

Andrew Kirkman

Finance Director

6 March 2018

Principal risks and uncertainties

During 2017, as part of its ongoing continual improvement programme, the Group undertook another detailed review of its principal risks and uncertainties. These are the risks identified by the Board which could have a material impact on the Group's strategic priorities, business model, future performance, solvency and/or liquidity. This review was led by our Company Secretary in conjunction with the Board, the Audit Committee, the Executive Committee and the senior management team which reports directly to the Executive Committee. 

The Group's current risk profile was mapped, with individual risks grouped into eight categories, being: (1) markets; (2) delivery; (3) politics; (4) finance; (5) people; (6) legal and regulatory; (7) governance and internal controls; and (8) communications and stakeholder management. Risks were scored on a "heat map", from "very low" to "very high", according to residual risk status (after accounting for mitigation measures already in place), materiality and anticipated movement in risk over the next 12 months. This has led to further refinement of the Group's Risk Register. This detailed review has confirmed that there has been no material change in the Group's overall risk profile since publication of the 2016 Annual Report and Financial Statements and the profile remains in line with the Board's risk appetite, with all categories scored as either medium or low risk at the date of this preliminary results announcement.

The Group is subject to both external and internal risk factors which could have a material effect, both positive and negative, on the operation and performance of the business. External factors, which are largely outside of the Group's control, include macro-economic and political factors. As negotiations continue for the UK's withdrawal from the EU, the Board expects that the Group will continue to operate in an uncertain economic and political climate in the short to medium term. Whilst the Group is not immune to that uncertainty, it is mitigated by the positive economic and consumer trends in our core markets, with the residential, logistics and manufacturing sectors in the North of England and the Midlands continuing to have solid fundamentals and favourable performance.

The 2017 Annual Report and Financial Statements will include a detailed analysis of the Group's principal risks and uncertainties, reflecting the detailed review and evolution of the Group Risk Register referred to above. This analysis will (A) record the current status of each risk category, after mitigation; (B) list the mitigation measures already in place and those identified for implementation over the next 12 months; and (C) indicate how each risk category could impact our strategic priorities.

Unaudited Consolidated Income Statement

for the year ended 31 December 2017

\* The 2016 Earnings per share has been restated to reflect the impact of the May 2016 1 for 10 share consolidation 

Unaudited Consolidated Statement of Comprehensive Incomefor the year ended 31 December 2017

Unaudited Consolidated Balance Sheet

as at 31 December 2017

Unaudited Consolidated Statement of Changes in Equity

for the year ended 31 December 2017

Unaudited Statement of Cash Flows

for the year ended 31 December 2017

Notes to the financial statements

for the year ended 31 December 2017

1. Accounting policies

The principal accounting policies adopted in the preparation of these unaudited consolidated financial statements are set out below. These policies have been consistently applied to all of the years presented, unless otherwise stated.

General information

Harworth Group plc (the "Group") is a limited liability company incorporated and domiciled in the UK. The address of its registered office is Advantage House, Poplar Way, Catcliffe, Rotherham, South Yorkshire, S60 5TR. The Group is listed on the London Stock Exchange.

Basis of preparation

The preliminary results for the year ended 31 December 2017 are unaudited. The financial information set out in this announcement does not constitute the Group's financial statements for the year ended 31 December 2017 or 31 December 2016 as defined by Section 434 of the Companies Act 2006.

This financial information has been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union, IFRS IC interpretations and the Companies Act 2006 applicable to companies reporting under IFRS and therefore complies with Article 4 of the EU IAS regulations.

The financial information for the year ended 31 December 2016 is derived from the statutory accounts for that year which have been delivered to the Registrar of Companies. The auditors, PricewaterhouseCoopers LLP, reported on those accounts and their report was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under Section 498 (2) or (3) of the Companies Act 2006.

The statutory accounts for the year ended 31 December 2017 will be finalised on the basis of the financial information presented by the Directors in these preliminary results and will be delivered to the Registrar of Companies following the Annual General Meeting of Harworth Group plc.

The same accounting policies and methods of computation are followed as in the latest published audited accounts for the year ended 31 December 2016, which are available on the Group's website at http://harworthgroup.com/ except for as described below:

Inventories

Inventories comprise development properties, land held for development, options to purchase land, planning promotion agreements and coal slurry that has been processed and is ready for sale.

Development properties are included in the consolidated balance sheet at the lower of cost and net realisable value. Net realisable value is the expected net sales proceeds of the developed property in the ordinary course of business less estimated costs to complete and anticipated selling costs. Properties re-categorised to development properties from investment properties are transferred at deemed cost, being the fair value at the date of re-categorisation. Properties are re-categorised as development properties once planning is secured and the intention to bring those properties forward for development and sale has been agreed.

Land held for development is land that has planning permission and is being developed for onward sale.

Options to purchase land are agreements that the Group has entered into with the landowners whereby the Group has the option to purchase the land within a limited timeframe. The landowners are not generally permitted to sell to any other party during this period, unless agreed by the Group. All costs, including the cost of entering the option, are capitalised. At each reporting date, the recoverability of the costs are considered by management, and where required provisions are made such that the agreements as held at the lower of cost and net realisable value.

Planning promotion agreements are agreements that the Group has entered into with the landowners whereby the Group acts as an agent to the landowners in exchange for a fee of a set percentage of the proceeds or profit of the eventual sale. The Group promotes the land through the planning process at its own expense. If the land is sold the Group will receive a fee for its services.

Inventories (continued)

The Group incurs various costs in promoting land held under promotion planning agreements, in some instances the agreements allow for the Group to be reimbursed certain expenditure following the conclusion of a successful sale. These costs are held in inventory at the lower of cost and net realisable value. Upon reimbursement, inventory is reduced by the value of the reimbursed cost.

Coal fines that have been processed and are ready for sale are stated at the lower of cost and estimated net realisable value. Inventories comprise all of the direct costs incurred in bringing the coal fines to their present state.

Investment properties

Investment properties are those properties which are not occupied by the Group and which are held for long term rental yields, capital appreciation or both. Investment property also includes property that is being developed or constructed for future use as investment property by the Group. Investment properties comprise freehold land and buildings and are measured at fair value. At the end of a financial year the fair values are determined by obtaining an independent valuation prepared in accordance with the current edition of the Appraisal and Valuation Standards published by the Royal Institution of Chartered Surveyors. External, independent valuation firms having appropriate, recognised professional qualifications and recent experience in the location and category of property being valued are used.

Investment properties are re-categorised as development properties and moved to inventory once planning is secured and the intention to bring those properties forward for development and sale has been agreed.

At each subsequent reporting date, investment properties are re-measured to their fair value. Movements in fair value are included in the income statement.

Where specific investment properties have been identified as being for sale within the next twelve months, a sale is considered highly probable and the property is immediately available for sale, their fair value is shown under assets classified as held-for-sale within current assets, measured in accordance with the provisions of IAS 40 'Investment Property'.

Revenue recognition

Revenue comprises rental and other land related income arising on investment properties, income from construction contracts, the sale of coal fines and the sale of development properties.

Rentals are accounted for on a straight-line basis over the lease term.

Income from construction contracts is recognised in line with the accounting policy for construction contracts. Revenue is recognised when the Group is acting as a principal under a contract with primary responsibility for the contract and has exposure to significant risks and rewards of the contract.

Revenue from the sale of coal fines is recognised at the point of despatch.

Revenue from the sale of development properties is recognised at the point of legal completion and where title has passed.

Revenue is recognised to the extent that it is probable that the economic benefit will flow to the Group and the revenue can be reliably measured. All such revenue is reported net of discounts, and value added and other sales taxes.

Changes in accounting policy and disclosures

(a) New standards, amendments and interpretations

No new standards, amendments or interpretations, effective for the first time for the financial year beginning on or after 1 January 2017 have had a material impact on the Group.

(b) New standards, amendments and interpretations not yet adopted

A number of new standards and amendments to standards and interpretations are effective for annual periods beginning after 1 January 2017, and have not been applied in preparing these preliminary financial statements. None of these is expected to have a significant effect on the financial statements of the Group, except the following, set out below:

· IFRS 9, 'Financial instruments', addresses the classification, measurement and recognition of financial assets and financial liabilities. It replaces the guidance in IAS 39 that relates to the classification and measurement of financial instruments. IFRS 9 retains but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets: amortised cost, fair value through OCI and fair value through P&L. The basis of classification depends on the entity's business model and the contractual cash flow characteristics of the financial asset. Investments in equity instruments are required to be measured at fair value through profit or loss with the irrevocable option at inception to present changes in fair value in OCI not recycling. There is now a new expected credit losses model that replaces the incurred loss impairment model used in IAS 39. For financial liabilities there were no changes to classification and measurement except for the recognition of changes in own credit risk in other comprehensive income, for liabilities designated at fair value through profit or loss. IFRS 9 relaxes the requirements for hedge effectiveness by replacing the bright line hedge effectiveness tests. It requires an economic relationship between the hedged item and hedging instrument and for the 'hedged ratio' to be the same as the one management actually uses for risk management purposes. Contemporaneous documentation is still required but is different from that currently prepared under IAS 39. The standard is effective for accounting periods beginning on or after 1 January 2018. Early adoption is permitted, subject to EU endorsement. The impact of IFRS9 has been assessed on the financial instruments of the Group. At present, based on these assessments the Group does not believe that any significant adjustments are required.

· IFRS 15, 'Revenue from contracts with customers' deals with revenue recognition and establishes principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity's contracts with customers. Revenue is recognised when a customer obtains control of a good or service and thus has the ability to direct the use and obtain the benefits from the good or service. The standard replaces IAS 18 'Revenue' and IAS 11 'Construction contracts' and related interpretations. The standard is effective for annual periods beginning on or after 1 January 2018. The Group has performed a detailed assessment of the impact of IFRS 15 on existing revenue streams and policies. This review has analysed all revenue generated during 2017 and has highlighted that revenues relating to the sales of development properties, particularly where revenue involves a deferred element or conditions subsequent exist, are specifically affected by the standard as are certain promote agreements. The Group expects the impact of implementing this standard on revenue to amount to £2.1m for 2017.

· IFRS 16, 'Leases' addresses the definition of a lease, recognition and measurement of leases and establishes principles for reporting useful information to users of financial statements about the leasing activities of both lessees and lessors. A key change arising from IFRS 16 is that most operating leases will be accounted for on balance sheet for lessees. The standard replaces IAS 17 'Leases', and related interpretations. The standard is effective for annual periods beginning on or after 1 January 2019 and earlier application is permitted, subject to EU endorsement and the entity adopting IFRS 15 'Revenue from contracts with customers' at the same time. The full impact of IFRS 16 continues to be assessed, however, the Group does not believe it will have a significant impact.

Estimates and judgements

The significant judgements made by management in applying the Group`s accounting policies and the key sources of estimation were the same as those that applied to the latest published audited accounts for the year ended 31 December 2016, with the exception of the estimation management have made to assess the extent to which, now former, mining tenants would fall short of meeting their restoration liabilities. At 31 December 2017, management estimate this shortfall to amount to £3.2m (2016: £6.0m). This has been treated as a reduction in the valuation of the properties, which these former tenants occupied.

2. Operating profit

Operating profit is stated after charging:

3. Segment information

31 December 2017

Segmental assets

Financial liabilities are not allocated to the reporting segments as they are managed and measured on a Group basis.

31 December 2016

* No activity relating to sales of development properties occurred in the year ended 31 December 2016

Segmental assets

Financial liabilities are not allocated to the reporting segments as they are managed and measured on a Group basis.

4. Exceptional items

5. Finance income and costs

6. Tax (credit)/charge

6. Tax (credit)/charge (continued)

The tax for the year is different to the standard rate of corporation tax in the UK of 19.25% (2016: 20.00%). The differences are explained below:

The movement within the tax reconciliation of £15.2m (2016: £nil) relating to the utilisation of unrecognised deferred tax is a result of the crystallisation of a number of gains in respect of investment property due to the disposal or transfer of these properties to development property (held in inventory). The gains, on which deferred tax liabilities have been recognised and were crystallised in the year have been offset against previously unrecognised tax losses.

The tax losses remaining at the end of the year have largely been recognised as a result of the execution of a contract that related to increased certainty that the losses would not be lost. As such these losses have been recognised in the year to reflect an increased deferred tax asset carried forward. This gives rise to the £6.6m disclosed in the tax reconciliation.

As part of the filing of the prior year tax computations and returns, tax attributes were utilised to shelter chargeable gains arising on the disposal of properties and the transfer of properties held for sale. This gave rise to a deferred tax charge of £3.9m compared to the original tax provision prepared for inclusion within the prior year accounts.

6. Tax (credit)/charge (continued)

Deferred tax

The following is the analysis of deferred tax assets/(liabilities) presented in the consolidated statement of financial position:

The movement on the deferred income tax account is as follows:

There are UK corporation tax losses carried forward of £15.9m; these may be carried forward indefinitely as there is no time limit in respect of using these deferred tax assets.

Deferred tax is calculated in full on temporary differences under the liability method using a tax rate of 17% (2016: 17%). A reduction in the UK corporation tax rate from 20% to 19% (effective from 1 April 2017), and a further reduction to 17% (effective from 1 April 2020) were enacted as part of the Finance Act 2015. The deferred tax liabilities are shown at 17% (2016: 18%) being the rate expected to apply to the reversal of the liability.

Deferred tax assets and liabilities are offset when there is a legally enforced right to offset current tax assets against current tax liabilities and when the deferred taxes relate to the same fiscal authority.

Deferred tax assets of £6.1m at 31 December 2017 have not been recognised owing to the uncertainty as to their recoverability, deferred tax assets of £19.7m were not recognised at 31 December 2016.

7. Dividends

The Board recommended and shareholders approved a full year dividend for financial year 2016 of £1.7m (0.523p per share) which was paid on 30 May 2017 and an interim dividend of £0.8m (0.253p per share) for the six months ended 30 June 2017 which was paid on 13 October 2017. The Company is proposing to recommend a final dividend of 0.575 pence per share (£1.8m in total) for the year ended 31 December 2017 at the Annual General Meeting in May.

8. Earnings per share

Earnings per share has been calculated by dividing the profit attributable to ordinary shareholders by the weighted average number of shares in issue and ranking for dividend during the year. The weighted average number of shares for 31 December 2017 includes the adjustments necessary to reflect the new shares issued on 17 March (See note 17).

*The 2016 EPS has been restated following discussions with the Financial Reporting Council and their review of the 2016 Financial Statements, which did not correctly reflect the effect of the May 2016 1 for 10 share consolidation on EPS.

9. Investment properties

Investment property at 31 December 2017 and 31 December 2016 has been measured at fair value. The Group holds five categories of investment property being agricultural land, natural resources, business space, major developments and strategic land in the UK, which sit within the operating segments of Income Generation and Capital Growth.

Included within investment properties (agricultural land) is a provision of £3.2m (2016: £6.0m) relating to the restoration liability on sites formerly rented to mining tenants. This provision is treated as a reduction of the individual property valuations.

During the year £229.1m of investment property was re-categorised to development properties. Properties that have obtained planning permission and are being taken forward for development are now held in inventory. Following further evolution of Harworth's business model during 2017, we have refined our thinking in the light of site and market opportunities, and concluded that it is appropriate, on the whole, to re-categorise all properties which have received planning permission as development properties. For until sites receive planning permission, our view is that the land is held for a currently undetermined future use and should thus be held as investment property.

9. Investment properties (continued)

Valuation process

The properties were valued in accordance with the Royal Institute of Chartered Surveyors (RICS) Valuation - Professional Standards (the "Red Book"), by BNP Paribas Real Estates and Savills both independent firms acting in capacity of external valuers with relevant experience of valuations of this nature. The valuations are on the basis of Market Value as defined within the Red Book, which RICS considers meets the criteria for assessing Fair Value under International Financial Reporting Standards. The valuations are based on what is determined to be the highest and best use. When considering the highest and best use a valuer will consider, on a property by property basis, its actual and potential uses which are physically, legally and financially viable. Where the highest and best use differs from the existing use, the valuer will consider the cost and the likelihood of achieving and implementing this change in arriving at its valuation. Most of the Group's properties have been valued on the basis of their development potential which differs from their existing use.

At each financial year end, Management:

o verifies all major inputs to the independent valuation report;

o assesses property valuation movements when compared to the prior year valuation report; and

o holds discussions with the independent valuer.

The different valuation levels are defined as:

o Level 1: valuation based on quoted market prices traded in active markets.

o Level 2: valuation based on inputs other than quoted prices included within Level 1 that maximise the use of observable data either directly or from market prices or indirectly derived from market prices.

o Level 3: where one or more inputs to valuation are not based on observable market data.

The Directors determine the applicable hierarchy that each investment property falls into by assessing the level of unobservable inputs used in the valuation technique. As a result of the specific nature of each investment property, valuation inputs are not based on directly observable market data and therefore all investment properties were determined to fall into Level 3.

The Group's policy is to recognise transfers into and out of fair value hierarchy levels as at the date of the event or change in circumstance that caused the transfer. There were no transfers between hierarchy in the year ended 31 December 2017 (2016: zero).

Valuation techniques underpin management's estimation of fair value.

Agricultural Land

Most of the agricultural land is valued using the market comparison basis, with an adjustment made for the length of remaining term on the tenancy and the estimated cost to bring the land to its highest and best use. Where the asset is subject to a secure letting, this is valued on a yield basis, based upon sales of similar types of investment.

Natural Resources

Natural resources sites in the portfolio are valued based on a discounted cashflow for the operating life of the asset.

Major Developments

Major developments sites are generally valued using residual development appraisals, a form of discounted cash flow which estimates the current site value from future cash flows measured by observable current land and/or completed built development values, observable or estimated development costs, and observable or estimated development returns.

Where possible development sites are valued by direct comparison to observable market evidence with appropriate adjustment for the quality and location of the property asset, although this is generally only a reliable method of measurement for the smaller development sites.

9. Investment properties (continued)

Strategic Land

Strategic land is valued on the basis of discounted cash flows, with future cash flows measured by current land values adjusted to reflect the quality of the development opportunity, the potential development costs estimated by reference to observable development costs on comparable sites, and the likelihood of securing planning consent. The valuations are then benchmarked against observable land values reflecting the current existing use of the land, which is generally agricultural and where available, observable strategic land values.

Business Space

The business parks are valued on the basis of market comparison with direct reference to observable market evidence including rental values, yields and capital values and adjusted where required for the estimated cost to bring the property to its highest and best use. The evidence is adjusted to reflect the quality of the property assets, the quality of the covenant profile of the tenants and the reliability/volatility of cash flows.

10. Investments

Investment in joint ventures

On 26 April 2017, the Group entered into a joint venture agreement with Lancashire County Pension Fund to establish Multiply Logistics North Holdings Limited and Multiply Logistics North LP, to develop part of the site at Logistics North, near Bolton.

On 16 December 2016 the Group entered into a joint venture agreement with Dransfield Properties Limited for a 50% share of Waverley Square Limited.

The Group purchased a 50% share of Aire Valley Land LLP from Keyland Developments Limited for a consideration of £8.5m plus costs of £0.5m on 14 March 2016. The Aire Valley Land LLP is a joint venture company. It controls 165 acres of land in Leeds that abuts an existing landholding of the Group on the former Skelton Grange power station site.

The Group holds 50% of the issued ordinary shares of Bates Regeneration Limited, a joint venture with Banks Property Limited for the development of an investment property at Blyth, Northumberland.

11. Other receivables

The benefit of overages is recorded as a non-current receivable as follows:

Overages were valued at 31 December 2017 and 2016 in accordance with the RICS Red Book valuation by BNP Paribas Real Estate. The same valuation process is used to value overages as investment properties as described in note 9.

12. Inventories

The cost of inventory is recognised as an expense within cost of sales in the year of £28.1m (2016: £0.4m). Finished goods are stated after a provision of £0.3m (2016: £0.3m)

The movement in the development properties is as follows:

13. Trade and other receivables

All of the Group's receivables are denominated in sterling. The non-current receivable of £5.3m relates to deferred consideration on the sale of development properties due after more than one year.

14. Assets classified as held for sale

The assets classified as held for sale at each year end relate to investment properties expected to be sold within twelve months.

15. Borrowings

The other loans relate to infrastructure loans. These are provided by public bodies in order to promote the development of major sites. The loans are drawn as work on the respective sites is progressed and they are repaid on agreed dates or when disposals are made from the sites.

The bank borrowings are part of a £75.0m (2016: £75.0m) revolving credit facility from The Royal Bank of Scotland. The facility is repayable on 13 February 2023 (five-year term) after being extended by two years on 13 February 2018. The facility is non-amortising and subject to financial and other covenants.

16. Trade and other payables

Current liabilities

Non-current liabilities

Accruals and deferred income include £17.2m (2016: £15.4m) of liabilities relating to parcels of land that have been sold but where infrastructure costs are yet to be incurred. Non-current other creditors relate to deferred consideration due on land purchases after one year.

17. Share Capital and Share Premium

On 17 March 2017, the Group issued 29,226,974 new ordinary shares at 95 pence each, with a nominal value of 10 pence each. On 26 April 2016 3 ordinary shares were issued at 1 pence each and all shares in issue were consolidated from 1 pence shares into 10 pence shares.

On 18 May 2016 approval was granted from the High Court to cancel the £129.1m share premium account of the Group and for it to be re-designated as distributable reserves.

18. Derivative Financial Instruments

On 21 June 2016, the Group entered into a four-year swap to fix £30.0m of borrowings at an all-in rate of 2.955% including fees. The interest rate swap has been measured at fair value which is determined using forward interest rates extracted from observable yield curves. The fair value of the interest rate swap at 31 December 2017 was a loss of £0.1m (2016: £0.4m).

The following gain/(loss) was recognised in the other comprehensive income statement in relation to the interest rate swap:

19. Related party transactions

Peel Group

The Peel Group charged £42,500 (2016: £42,500) in respect of fees for Steven Underwood in his position as a non-executive director.

The Group paid £0.8m to Peel Group in respect of a deed of release at Logistics North (2016: £nil). £0.3m (2016: £nil) of this was subsequently re-charged to Multiply Logistics North LP.

During the year the Group made two land sales to Peel Environmental Limited amounting to £3.1m (2016: £nil) resulting in a £1.2m (2016: nil) profit on sale.

Multiply Logistics North LP

The Group made two land sales to Multiply Logistics North LP during the year amounting to £8.1m (2016: £nil), recharged costs of £0.6m (2016: £nil) and charged a development manager fee of £0.2m (2016: £nil).

Scratching Cat

Geoff Mason, our former Company Secretary, supplied his services through Scratching Cat Limited, a company of which he is a director. During the year charges were made in relation to company secretarial duties of £nil (2016: £73,000).