Smart (J) & Co Regulatory News (SMJ)

J. SMART & CO. (CONTRACTORS) PLC ANNOUNCES TODAY, FRIDAY 18 NOVEMBER 2022, ITS FULL YEAR RESULTS FOR THE YEAR TO 31st JULY 2022

The information contained within this announcement is deemed to constitute inside information as stipulated under the

Market Abuse Regulations (EU) No. 596/2014. Upon the publication of this announcement, this inside information is now

considered to be in the public domain.

CHAIRMAN'S REVIEW

ACCOUNTS

Headline Group profit for the year before tax on continuing and discontinued operations, including an unrealised surplus in revalued property and a deficit in revalued financial assets, was £8,192,000, compared with £14,784,000 last financial year.

As in previous years, our view is that disregarding the movement in the revaluation of the commercial property portfolio and adjusting for the revaluation movement on financial assets provides a truer reflection of the Group's performance, which we refer to as underlying profit. The underlying profit before tax for the year was £7,840,000 and was more than last year's figure of £2,367,000.

The Board is recommending a Final Dividend of 2.27p, making a total of 3.23p, which compares with 3.22p for the previous year. The Final Dividend will cost the company no more than £926,000.

TRADING ACTIVITIES

Group construction activities, including private residential sales on continuing operations, decreased by 22%. Headline Group profit on continuing operations decreased substantially this financial year, which was mainly due to the exceptional increase in the value of the commercial property portfolio in the previous financial year to 31st July 2021. Underlying profit before tax on continuing operations increased substantially this year, mainly due to the profit on the sale of the industrial estates: Bilston Glen Industrial Estate, Loanhead, Inchwood Park, Bathgate and West Edinburgh Business Park, Edinburgh.

Trading activities continued to be affected by supply chain issues and the seemingly unstoppable rise in the price of construction materials. These issues, coupled with the continued prolonged process in obtaining not only statutory approvals, but also simple utility approvals and associated infrastructure, has meant that all our construction sites have experienced delays and thereby longer programmes. This has resulted in overall costs being greater than original budgets.

All of the above has caused an increase in aborted site acquisitions and a lack of tender work being acquired in the Housing Association sector. It has again given rise to an erosion of profits of recently completed and soon to be completed projects. 

The private housing development at Winchburgh, Canal Quarter, has experienced delays in progress on site for the reasons noted above, albeit reservations remain encouraging. The first sale has recently concluded at this development, but after the end of the financial year. The majority of the completions will occur prior to the end of the financial year to 31st July 2023.

The residential development at Clovenstone Gardens did not start prior to the end of the financial year due to delays in obtaining statutory approvals. Construction has now started, but the first completions will not take place until the middle of 2024.

Progress in our commercial property portfolio continues to be positive to date, albeit with a note of caution. The sale of the three industrial estates, as mentioned above and reported in the Interim results, completed in January 2022 with a significant profit achieved. It is worth noting that if the same sale took place in the current climate, then the price achieved would have been less. This is reflected in the valuation of the commercial property portfolio being relatively similar to last year indicating a plateau in yields. 

In both our office and industrial properties we have seen a general churn of tenants leaving and new tenants leasing space. There has been no rental growth as in recent years as rents, like yields, have remained static.

As reported in the Interim results, construction completed at the second phase of Gartcosh Industrial Park, developed through the joint venture company, Gartcosh Estates LLP. Whilst interest in the two medium sized units remains promising, we had hoped that a letting would have been achieved by now.

As predicted the small commercial development at Winchburgh was completed after the end of the financial year. There is good interest in the speculative retail units, although the increased programme, due to delays in utility infrastructure delivery, will impact on profit margins.

The second phase at Belgrave Point, Bellshill, a large speculative single user industrial unit, started just after the end of the financial year. The progress in construction is satisfactory to date, but it is too early to gauge demand from any prospective tenants.

FUTURE PROSPECTS

We have substantially more work in hand in our own private housing at this time than we did last year. We do not have any real prospects of external contracts at present. 

We currently have several planning applications stuck in the Scottish planning system totalling over 500 residential units and over 60,000 sq ft of commercial space. Regrettably we may have to utilise the appeal process in order to hopefully obtain planning consent on more than one of these applications. 

The continuing increases in construction costs, interest rates and inflation and the cost of living crisis all contribute to a high degree of uncertainty as to when any of these sites will commence. As mentioned above, there will be private housing sales this year, but what impact the economic problems will have on the level of sales is uncertain.

Due to the above issues, whilst we expect lettings to continue in our commercial property portfolio, it is already evident that rents and yields have already started to plateau and property values in our sectors may drop.

At this stage it is evident that the headline profit will drop for the year to 31st July 2023. Indeed, if commercial property values fall, we may make a headline loss. Profits will continue to be eroded by the lack of external contracting work, the lack of recovery of overhead costs and the increase in material costs.

DAVID W SMART

Chairman

PERFORMANCE REVIEW

Turnover in the year has significantly decreased again this year and this is due to the fact that in the current year there was only one private housing development at The Courtyard, Winchburgh that had sales. This development had 4 detached houses all of which were sold in the year. The only other private housing development currently underway is at Canal View, Winchburgh. This is an ongoing development and in there were no concluded sales in the year. Sales at this development are expected in the year to 31st July 2023. 

There were no social housing projects in the year. 

We completed the work in the year for our Joint Venture, Gartcosh Estates LLP at phase 2 of their development consisting of two industrial units. In one of the completed units we also undertook the work to fit out the unit with office and welfare facilities. To date neither of these units have been let.

The turnover of our civil engineering subsidiary decreased slightly in the year and with tighter margins resulted also in a slight decrease in the overall profit earned by the subsidiary.

Our construction sites remained open for the entire year throughout the Group, although coronavirus still has an impact both operationally and financially on the running of our sites. We continued to follow the legislation and guidance issued by the Scottish Government in relation to coronavirus safe working conditions for all our staff whether they are site or office based. We did not take advantage of the UK Government's Furlough scheme in the year.

Brexit and the impact of increasing inflation rates, impacting the country as a whole, have also had a financial impact on the results for the year via supply chain issues and significant increase in the cost of construction materials and services required by the Group. These increased costs have been borne by the Group resulting in the margins on construction work continuing to be tight, although not to the same level as the previous year due to the level and nature of work undertaken in the year.

The Directors continue to fully appraise contracts, at various stages, prior to acceptance to ascertain the likely outcome of the contract.  These appraisals are also conducted prior to land bank acquisitions.  The contract reporting functions between the finance and surveyor teams relating to the recording of costs have been revised and fully implemented this year and provide the surveyors with increased detail and analysis of costs. The surveyors along with the Directors can then appraise contract performance on a timely basis to analyses areas of contracts where losses are being incurred with the aim to rectify were possible.

Overheads continue to remain relatively constant over time however the Directors continue to monitor these with a view to achieving any savings on costs were possible. The increased energy costs which will impact on the Group this year are been monitored and the Group is entering into supply contracts with the most favourable rates and contract durations it is able to obtain.

Rental income from the Group's investment property portfolio decreased in the year by 6% (2021, increased by 4%) mainly due to reduction in rent following the sale of three of our industrial estates in the year. For our remaining industrial and commercial properties we have experienced increased occupancy but there has been no rental growth as rents have remained static. Recoverability of rental income continues to remain high despite the continuing impact of coronavirus and generally the increase in costs due to inflation.

During the year construction of our office and retail development at Winchburgh continued and was completed and handed over to our investment property company just after the conclusion of our year end. We have a tenant in place for the office however, we have still to lease any of the retail units, although we have received a number of enquires for the units. We commenced work on phase 2 at our industrial site at Bellshill for the construction of one 53,735 square foot unit.

Service charges and insurance receivable income has increased by 4% (2021, decreased by 5%) due mainly to the increased occupancy of our commercial properties. Service charges are dependent on costs incurred in the year that can be recovered and varies from year to year.

As noted above the Group sold three of its industrial estates for £24,032,000 which generated a profit on sale of £6,055,000.

The Group has recorded another surplus on the revaluation of investment property portfolio, however this is significantly down on the level recorded in the previous year due to the sale of three of our industrial estates and the fact that in the previous financial year the yields for our prime industrial stock rose to unprecedented levels. 

Income from our financial assets has risen in the year due to the fact that companies are recommencing the payment of dividends after putting these on hold due to the impact of coronavirus. There were a number of acquisitions is the year to our portfolio and disposals which generated a very profit of £17,000. The impact of world and domestic events on the financial markets has resulted in a deficit of £121,000 on the fair value of our financial assets being recorded this year.

The share of the results in our Joint Ventures is a profit this year of £254,000 which is due to the effect of accounting for the revaluation surplus relating the completed phases 1 and 2 of the development owned by Gartcosh Estates LLP. During the year the Joint Venture company, Northrigg Limited became a wholly owned subsidiary of J. Smart & Co. (Contractors) PLC following Northrigg Limited buying back the share of the other party to the Joint Venture. The Joint Venture company, Duff Street Limited was dissolved on 10th August 2021.

The profit before tax reported by the Group has decreased significantly mainly due to the level of the surplus on valuation of investment properties recorded this year in comparison to the previous year. However, this impact is mitigated by the level of profit on sale of investment properties recorded this year, being £6,055,000 as compared to £37,000 in 2021. If the surplus on revaluation of investment properties, the profit on sale of investment properties and the deficit on the revaluation of the Group's financial assets are excluded the Group generated a profit for the year of £1,735,000 compared to £2,330,000 in the previous year. The movement being the result of the increase in the loss suffered within construction activities and the reduction in rents received from investment properties.

Our net bank position, which comprises monies held on deposit, cash and cash equivalents and the netting of our bank overdraft has increased in the year. This is due to the proceeds received from the sale of investment properties net of the cash outflows on current private housing and own industrial development currently in progress. Also, in the year the Group lent money to its Joint Ventures amounting to £1,440,000 and invested a further £50,000 in them. Overall, the Group continues to be net debt-free.

The Group's net assets have increased overall by £8,939,000, the main impact on this being due to the revision in the accounting for the pension scheme surplus. Further advice on the Group's right to a surplus arising on the pension scheme was sought in the year from a firm of lawyers who specialise in this area. Their advice was that the Group had an unconditional right to the surplus based on the original Trust Deed and Deed of Variation and therefore the full surplus arising on the calculation thereof under IAS 19 (amended): Employee Benefits should be accounted for in the financial statements. This revised advice impacted on the accounts for the year to 31st July 2021 and resulted in that year's accounts having to be revised. Full details of this prior year adjustment can be found in note 35 to the financial statements. The profit earned in the year as discussed above and the accounting for share buy backs and dividends paid to shareholders in the year also impact on the net assets.

PRINCIPAL RISKS AND UNCERTAINTIES

The principal risks and uncertainties faced by the Group and the mitigating factors taken by the Group against these risks are detailed below. The principal risks noted below are not all of the risks faced by the Group but are those risks which the Group perceives as those which could have a significant impact on the Group's performance and future prospects.

Area of principal risk or uncertainty and impact

By focusing external construction activities in the social housing sector, which is a competitive market, failure to win new contracts would impact on our volume of work and therefore the workforce required by the Group.

Mitigating actions and controls

• Maintain long-term relationships with social housing providers, resulting from high standards of service, quality and post construction care thus giving the Group an advantage over other builders when contracts are awarded on criteria other than cost only.

• Identify potential build sites or include the provider within private housing developments in relation to the element of affordable housing required.

• When workload is reduced workforce can be diverted to the Group's own commercial and private residential developments.

• Continue to acquire land for development for either private housing developments or for resale to social housing providers as part of a construction contract.

• Develop new areas of construction activities.

• Develop new joint venture opportunities.

Area of principal risk or uncertainty and impact

Decline in home buyer confidence, due to bank interest rates, availability of affordable mortgages and cost of living crisis resulting in stalling of private house sales.

Mitigating actions and controls

• Building developments in popular residential areas.

• Building high quality specification homes with attention to detail which sets them apart from other new build homes and therefore makes them more attractive to buyers.

• Building a range of homes within a development thus providing choice to buyers.

• Programming commencement of new build housing projects to market conditions.

• Providing sales incentives.

• Considering the letting of built homes at market rates until the market improves.

Area of principal risk or uncertainty and impact

Social housing sector and the housing market in general is highly competitive with tight margins.

Mitigating actions and controls

• We are an 'all trades' contractor who employs our own personnel in all basic building trades who are supervised by site agents who are long serving employees of the Group and who have been promoted through their trades, thus ensuring control of labour costs on contracts.

• We have invested heavily in plant and the maintenance thereof and therefore limit our costs on contracts by utilising own plant as opposed to incurring higher costs of hiring plant.

• Subcontractors employed by the Group are specialists in their fields and in the main subcontractors have previously been used by the Group therefore quality of work and reliability is known. No labour only subcontractors are employed.

• In house architectural technicians and surveyors provide pre-contract design advice to resolve potential technical problems with the build and therefore potential costs.

• Detailed appraisals of contract pre-land acquisition and pre-construction.

Area of principal risk or uncertainty and impact

Reduction in rental demand for investment properties may result in a fall in property valuations.

Mitigating actions and controls

• Only commence speculative developments after careful assessment of the market.

• Restricting our operations to the central belt of Scotland being the area of the country with which we are most familiar.

• Continually maintain and refurbish existing properties to retain existing tenants and attract new tenants and improvements to our properties for improved economic and climate efficiencies.

• Provide necessary financial incentives to retain existing tenants at end of current leases and attract new tenants.

Area of principal risk or uncertainty and impact

Reduction in demand for UK real estate from investors may result in a fall in valuations within our investment property portfolio, this could result in delays in investment decisions which could impact on our activities.

Mitigating actions and controls

• The Directors regularly review the property market to ascertain if changes in the overall market present specific risks or opportunities to the Group.

• Restricting our operations to the central belt of Scotland being the area of the country with which we are most familiar.

Area of principal risk or uncertainty and impact

Political events and policies result in uncertainty until final decisions have been made and the impact of decisions are known, this could result in delays in investment decisions which could impact on our activities.

Mitigating actions and controls

• Before any decisions are taken by the Directors in any area of the Group's activities the level of uncertainty and range of potential outcomes arising from political events and policies are considered.

Area of principal risk or uncertainty and impact

Reduction of financial resources.

Mitigating actions and controls

• Ensure resources are not over committed and only undertake commercial and private housing developments after due consideration for the financial impact on the Group's financial resources.

• Build up resources to ensure the Group has sufficient finance for working capital requirements and financing of commercial and private housing developments.

• Spread cash reserves over several banks taking account of the strength of the bank and interest rates attainable.

• Invest resources in equities also taking account of the security of the investment and the yields attainable.

Area of principal risk or uncertainty and impact

Continuing impact of coronavirus on the Group's operational and financial performance.

Mitigating actions and controls

• Continue to follow all the legislation and guidance issued by Scottish Government for the safe working of our construction sites and offices.

• Helping current tenants in our investment properties with rental payment plans for those facing financial difficulties due to the coronavirus.

Area of principal risk or uncertainty and impact

Failure to evolve business practices and operations in response to climate change.

Mitigating actions and controls

• Continue to monitor all requirements relating to the construction industry in relation to improvements in buildings to ensure they comply with current and emerging requirements.

• Review of designs for new buildings to ensure they are as energy efficient as possible.

• Procurement of building materials from sustainable sources.

• Investment in energy saving measures within our investment property portfolio.

Emerging Risks

The Group faces a number of emerging risks which could have a significant impact on the Group's performance and future prospects. These risks are discussed by the Directors and appropriate actions taken to mitigate these risks as soon as they are considered to be a principal risk of the Group.

CONSOLIDATED INCOME STATEMENT

for the year ended 31st JULY 2022

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the year ended 31st JULY 2022

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

as at 31st JULY 2022

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

as at 31st JULY 2022

CONSOLIDATED STATEMENT OF CASH FLOWS

for the year ended 31st JULY 2022

NOTES

1. ACCOUNTING POLICIES AND ESTIMATION TECHNIQUES

GENERAL INFORMATION

J. Smart & Co. (Contractors) PLC which is the ultimate Parent Company of the J. Smart & Co. (Contractors) PLC Group is a public limited company registered in Scotland, incorporated in the United Kingdom and listed on the London Stock Exchange.

BASIS OF PREPARATION

The financial information in this announcement has been extracted from the Group's Annual Report and Statement of Accounts for the year to 31st July 2022 and is prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and in accordance with UK adopted international accounting standards. Whilst the financial information included in this preliminary announcement has been computed in accordance with International Financial Reporting Standards (IFRS), this announcement does not itself contain sufficient information to comply with IFRS and the financial information set out does not constitute the Company or Groups statutory accounts for the years to 31st July 2022 or 31st July 2021.

The statutory consolidated accounts for the year to 31st July 2022 have been reported on by the Independent Auditor, their report was unqualified and did not draw attention to any matters by way of emphasis and it does not contain a statement under S498 (2) or S498 (3) of the Companies Act 2006. The statutory consolidated accounts for the year to 31st July 20221 will be delivered to the Registrar of Companies following the Company's Annual General Meeting.

The financial information for the year to 31st July 2021 is derived from the statutory accounts for that year which were submitted to the Registrar of Companies and upon which the Company's auditor provided an unqualified audit report. The audit report did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying its report and did not contain a statement under S498 (2) or S498 (3) of the Companies Act 2006.

STANDARDS, AMENDMENTS TO STANDARDS AND INTERPRETATIONS EFFECTIVE IN THE YEAR TO 31st JULY 2022

The following new standards and amendments to standards and interpretations relevant to the Group have been issued by the International Accounting Standards Board and are mandatory for the first time for the financial year to 31st July 2022:

• IFRS1 (amended): Financial Instruments: Disclosures.

• IFRS 9 (amended): Financial Instruments.

• IFRS 16 (amended): Leases.

• IAS 39 (amended): Financial Instruments: Recognition and Measurements.

None of the above amendments to standards had a significant impact on the Group's financial statements.

NEW STANDARDS, AMENDMENTS TO STANDARDS AND INTERPRETATIONS NOT YET APPLIED

The following new standards, amendments to standards and interpretations relevant to the Group have been issued by the International Accounting Standards Board but are not yet effective for the Group at the date of these financial statements, and have not been adopted early:

• IFRS 16 (amended): Leases (effective in the year ending 31st July 2025).

• IAS 12 (amended): Income Taxes (effective in the year ending 31st July 2024).

The Directors do not consider that the application of these amendments to standards will have a material impact on the financial statements.

BASIS OF PREPARATION

The financial statements have been prepared under the historical cost convention except where the measurement of balances at fair value is required as noted below for investment properties, available for sale financial assets and assets held by the defined benefit pension scheme.

The accounting policies set out below have been consistently applied to all periods presented in these financial statements.

The preparation of financial statements requires management to make estimates and assumptions concerning the future that may affect the application of accounting policies and the reported amounts of assets and liabilities and income and expenses. Management believes that the estimates and assumptions used in the preparation of these financial statements are reasonable. However, actual outcomes may differ from those anticipated.

GOING CONCERN

The financial statements have been prepared on a going concern basis. The Directors have prepared a number of cashflows scenarios taking account of trading activities around construction projects in hand and anticipated projects, land acquisitions, rental income, investment property acquisitions and disposals and other capital expenditure. The Directors also have taken account of the continuing impact of the coronavirus on the construction and investment activities of the Group. In each scenario reviewed by the Directors the Group remains cash positive with no reliance on external funding and therefore remains net debt-free. The net assets of the Group are £124,676,000 at 31st July 2022 and the Group's net current assets amount to £33,356,000. Taking all of the information the Directors currently have they are of the opinion that the Company and Group are well placed to manage its financial and business risks and have a reasonable expectation that the Company and Group have adequate financial resources to continue in operational existence for a period of at least twelve months from the date of approval of these financial statements and therefore consider the adoption of the going concern basis as appropriate for the preparation of these financial statements.

CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS

INVESTMENT PROPERTIES

Investment properties are revalued annually by the Directors in accordance with the RICS Valuation Standards. The valuations are subjective due to, among other factors, the individual nature of the property, its location and the expected future rental income. As a result, the valuation of the Group's investment property portfolio incorporated into the financial statements is subject to a degree of uncertainty and is made on the basis of assumptions which may prove to be inaccurate, particularly in periods of volatility or low transaction flow in the property market.

The assumptions used by the Directors are market standard assumptions in accordance with the RICS Valuation Standards and include matters such as tenure and tenancy details, ground conditions of the properties and their structural conditions, prevailing market yields and comparable market conditions. If any of the assumptions used by the Directors prove to be incorrect this could result in the valuation of the Group's investment property portfolio differing from the valuation incorporated into the financial statements and the difference could have a material effect on the financial statements.

REVENUE RECOGNITION

Revenue recognition on construction contracts requires judgement on the stage of completion of the contract at the Statement of Financial Position date to calculate the revenue to be recognised.

LONG-TERM CONTRACT PROVISIONS

Judgement is required in the area of provisions for losses on long-term contracts. The Directors make judgements relating to estimated costs to complete and the percentage stage of completion of current contracts when determining the provision for losses. The Directors consider adequate, but not excessive provisions have been made in this respect.

RETIREMENT BENEFIT OBLIGATION

The valuation of the retirement benefit obligation is dependent upon a series of assumptions, mainly discount rates, mortality rates, investment returns, salary inflation and the rate of pension increases, which are determined after taking expert advice from the Group's Actuary. If different assumptions were used then this could materially affect the results disclosed in the financial statements. These are set out in note 31 to the financial statements.

The Group has concluded that the trust deed relating to the defined benefit scheme grants the unconditional right to any surplus of the scheme on the full settlement of the scheme liabilities to the Group and therefore have concluded that any surplus on the scheme can be incorporated into the Group and Company financial statements. Advice on the Group's right to a surplus arising on the pension scheme was sought in the year from a firm of lawyers who specialise in this area. Their advice was that the Group had an unconditional right to the surplus based on the original Trust Deed and Deed of Variation and therefore the full surplus arising on the calculation thereof under IAS 19 (amended): Employee Benefits should be accounted for in the financial statements. This revised advice impacted on the accounts for the year to 31st July 2021 and resulted in that year's accounts having to be revised. Full details of this prior year adjustment can be found in note 11 to the financial statements.

2. SEGMENTAL INFORMATION

IFRS 8: Operating Segments requires operating segments to be identified on the basis of internal reporting about components of the Group that are regularly reviewed by the chief operating decision maker to allow the allocation of resources to the segments and to assess their performance. The chief operating decision maker has been identified as the Board of Directors. The chief operating decision maker has identified two distinct areas of activities in the Group being construction activities and investment property activities.

All revenue and investment property income arises from activities within the UK and therefore the Board of Directors does not consider the business from a geographical perspective. The operating segments are based on activity and performance of an operating segment is based on a measure of operating results.

Internal revenue relates to own work capitalised and inter group transactions are eliminated on consolidation. The Group had sales from construction activities from two customers amounting to £2,051,000 and £1,387,000 respectively (2021, sales from construction activities from two customers amounting to £1,335,000 and £1,638,000 respectively).

OTHER SEGMENTAL INFORMATION

3. REVENUE

The Group derives its revenue from contracts with customers for the transfer of goods over time in relation to construction contracts and also at point in time in relation to housing sales. This is consistent with the revenue information that is disclosed for Construction Activities segment under IFRS 8: Operating Segments.

Construction contracts are generally for social housing or industrial and commercial properties. The Group provides a complete service including architectural and surveyor services from the pre-contract design through to completion.

The transaction price allocated to unsatisfied performance obligations in respect of construction activities as at 31st July 2022 are as set out below:

The Directors expect that 100% (2021, 100%) of the transaction price allocated to the unsatisfied contracts as at 31st July 2022 will be recognised as revenue in the year to 31st July 2023.

4. OTHER OPERATING INCOME

Direct property costs included £904,000 (2021, £1,011,000) in respect of investment properties that did not generate rental income in the year.

5. TAXATION

The Finance Act 2020, which received Royal assent on 22nd July 2020, states that the corporation tax rate for the financial year commencing 1st April 2020 is 19%. The Finance Act 2021, which received Royal assent on 24th May 2021, states that the corporation tax rate for the financial year commencing 1st April 2023 is 25%.

The effective corporation tax rate is 19.00% (2021, 19.00%) being the average rate applicable over the period. Deferred tax provisions have been calculated using the 25% rate.

In addition to amounts charged to the Income Statement, a deferred tax charge of £1,804,000 (2021 restated, charge £1,476,000) relating to actuarial gains on the defined benefit pension scheme has been recognised directly to Equity.

There are no income tax consequences attached to dividends paid or proposed by the Company to its shareholders.

6. DISCONTINUED OPERATIONS

In the year to 31st July 2019 Concrete Products (Kirkcaldy) Limited ceased trading.

The results of the discontinued operation, which have been included in the profit for the year, were as follows:

During the year, Concrete Products (Kirkcaldy) Limited had cash outflows of £nil (2021, inflow £64,000) in relation to Operating activities and contributed £nil (2021, £nil) in respect of Investing and Financing activities.

7. PROFIT FOR THE FINANCIAL YEAR

The Group uses underlying profit before tax as an alternative performance measure, which is the profit before tax excluding net surplus or deficit on valuation of investment properties and financial assets accounted for through the Income Statement. As the net surplus or deficit on valuation of investment properties and financial assets can fluctuate from year to year and is not a realised surplus or deficit by excluding this amount, the Directors consider that a truer reflection of actual Group performance is obtained. Analysis of this alternative performance measure is as follows:

8. DIVIDENDS

The Board is proposing a Final Dividend of 2.27p per share (2021, 2.27p) which will cost the Company no more than £926,000.

The proposed Final Dividend is subject to approval by the shareholders at the Annual General Meeting and has not been included as a liability in these financial statements.

9. EARNINGS/(LOSS) PER SHARE

Basic earnings per share are calculated by dividing the profit attributable to equity shareholders by the weighted average number of shares in issue during the year.

The weighted average number of shares for the year to 31st July 2022 amounted to 41,638,000 (2021, 42,284,000). There is no difference between basic and diluted earnings per share.

10. INVESTMENT PROPERTIES

Right-of-use Asset relates to a ground lease on which the Group has built investment properties. The rent paid by the Group to the lessee for the ground is a set annual rent and is not contingent on rents received by the Group from tenants and therefore the lease falls within the definition of IFRS 16: Leases.

Valuation Process

The Group's investment properties are valued by David W Smart, MRICS, who is a Director of the Parent Company, on the basis of fair value, in accordance with the RICS Valuation - Global Standards 2017, incorporating the International Valuations Standards, and RICS Professional Standards UK January 2014 (revised April 2015). The Directors also requested a third party external valuer to value the Group's investment property portfolio. The valuations prepared by the Director and the external valuers are compared to ensure that there are no material variations between the valuations.

Investment properties, excluding ongoing developments, are valued using the investment method of valuation. This approach involves applying capitalisation yields to current and estimated future rental streams and then allowing for voids arising from vacancies and rent free periods and associated running costs. The capitalisation yields and rental values are based on comparable property and leasing transactions in the market, using the valuers' professional judgement and market observations. Other factors taken into account in the valuations include the tenure of the property, tenancy details and ground and structural conditions.

In the case of ongoing developments, the approach applied is the residual method of valuation, which is the same as the investment method, as described above, with a deduction for all costs necessary to complete the development, together with a further allowance for remaining risk.

In accordance with IAS 40: Investment Property, net annual surpluses or deficits are taken to the Income Statement and no depreciation is provided in respect of these properties.

The Group considers all of its investment properties fall within 'Level 3' of the fair value hierarchy as described by IFRS 13: Fair Value Measurement. Level 3 valuations are those using inputs for the asset or liability that are not based on observable market data. The main unobservable inputs relate to estimated rental value and equivalent yield. There have been no transfers of properties in the fair value hierarchy in the financial year.

The table below summarises the key unobservable inputs used in the valuation of the Group's Freehold and Leasehold investment properties:

The following table illustrates the impact of changes in the key unobservable inputs (in isolation) on the fair value of the Group's Freehold and Leasehold investment properties:

The Group had commitments of £6,133,000 (2021, £1,442,000) in respect of future developments and repair costs of investment properties at the Statement of Financial Position date.

11. PRIOR YEAR ADJUSTMENT

During the year the Group sought further advice on the Group's right to a surplus arising on the pension scheme from a firm of lawyers who specialise in this area. Their advice was that the Group had an unconditional right to the surplus based on the original Trust Deed and Deed of Variation and therefore the full surplus arising on the calculation thereof under IAS 19 (amended): Employee Benefits should be accounted for in the financial statements. This revised advice impacted on the accounts for the year to 31st July 2021 and resulted in the accounts for that year being revised.

The impact of this new advice is that it is now clear to the Company that the full surplus arising on the pension scheme should be accounted for and should not have been reduced by the asset ceiling adjustment to reduce the surplus to the present value of economic benefits available in the form of reductions in future contributions to the plan.

There has been no impact on the Consolidated Income Statement as the asset ceiling adjustment was only accounted for in the Consolidated Statement of Comprehensive Income. The pension scheme asset in the Consolidated Statement of Financial Position has increased as has deferred tax liability on the asset. 

Details of the impact of the revision on the figures in the financial statements are given below: