Propty Franchis Regulatory News (TPFG)

10 April 2018

The Property Franchise Group plc

("TPFG", the "Company" or the "Group")

Final Results

The Property Franchise Group PLC, one of the UK's largest property franchises, today announces its final results for the year ended 31 December 2017.

Financial highlights:

· Group revenue increased 23% to £10.2m (2016: £8.3m)

· Adjusted EBITDA* increased 14% to £4.4m (2016: £3.9m)

· Adjusted operating profit* increased 8% to £3.8m (2016: £3.5m)

· Profit before tax increased 33% to £4.3m (2016: £3.2m)

· Management Service Fees increased 20% to £8.3m (2016: £6.9m)

· EPS increased 9% to 14.2p (2016: 13.0p)

· Cash at year end of £2.6m (2016: £2.0m) and bank debt of £2.5m (2016: £3.4m)

· Proposed final dividend of 5.4p, for a total 2017 dividend of 7.5p, a 15% increase over last year (2016: 6.5p)

*Before exceptional items and share-based payment charges

Operational highlights:

· Company name changed to reflect the transition to a multi-brand franchisor

· Despite unexpected management disruption EweMove traded profitably in H2

· New brand leadership team appointed

· Expanding UK network with 403 offices (2016: 377), comprising 283 traditional brands and 120 EweMove

· Serving c.52,000 tenanted managed properties at the year end (2016: c.48,000)

· Recruited six new franchisees for the traditional brands, and 31 new franchisees for EweMove

· Lettings accounts for 70% of Management Service Fees (2016: 74%)

· New websites for the traditional brands delivered a 265% increase in leads Q4 2017 versus Q4 2016

Ian Wilson, Chief Executive Officer of The Property Franchise Group, commented:

"We are very pleased to have delivered another year of strong growth for our stakeholders, particularly as the property industry has continued to be a tough environment to operate in. Our traditional brands have performed well across sales and lettings, and it is pleasing that this lettings growth was achieved both organically and through the assisted acquisition of local competitors' portfolios by our franchisees.

"Our decision to acquire the online player EweMove has proven to be rewarding, with the business delivering significant revenue growth to the Group this year, as well as providing us with the digital marketing insight to leverage better performance in our traditional high street brands. EweMove remains a highly trusted brand, its 'no sale, no fee' model is popular with customers and provides a differentiator in the online market. As we continue to add experienced estate agents to the EweMove network, we are excited by the opportunity to build up our share of the online estate agency market.

"Our financial position is robust with a strong balance sheet, a relatively low level of gearing and high levels of cash generation. This together with our franchise model, weighting towards lettings and multifaceted growth strategy leaves the Group well-positioned to withstand developments within the industry and to capitalise on opportunities that arise."

For further information, please contact:

Chairman's statement

Strong progress despite market headwinds

The consensus view of the residential property market was that 2017 was a disappointing year compared to 2016. However, 2017 was a strong year of growth for The Property Franchise Group, demonstrating the resilience of its business model in a challenging market. All of our brands increased revenues year-on-year. This growth was supported by the "assisted acquisitions" programme, which assisted our lettings agents both operationally and financially to purchase independent competitors' lettings businesses. In the first full year of the programme we added 2,012 tenanted managed properties. I'm delighted to report that this was matched by an almost identical increase in our managed portfolio through organic growth.

Tenant Fee Ban

The Government has provided a degree of clarity on its intention to ban tenant fees in England & Wales. A ban in Scotland has been in existence since 2012.

The intention appears to be an outright ban, rather than a cap, on landlords and their letting agents charging any type of pre-tenancy fee. It's not clear whether certain in-tenancy fees will be allowed.

The timing of the implementation of the ban appears to be Q1 2019 which means that the Group's trading for 2018 would be unaffected by the ban. The Group is already taking action to mitigate the effects of the ban which is expected to put at risk 16% of our franchisees' lettings revenue, and at a Group level 9% of total revenue, if annualised*. Mitigation factors include; through organic means and by acquisition, accelerating the size of the tenanted managed portfolio, developing income from financial services & conveyancing referrals. The Group will continue to closely monitor any developments associated with the Tenant Fee Ban and the associated potential impact.

*Both percentages quoted based on 2017 trading

Brand website re-development

One of our objectives when we purchased EweMove was to translate some of its digital marketing capabilities into better performance for our traditional brands. During 2017 we re-developed each of our five traditional brand websites, starting with Whitegates. Although the technology platform is common, the look and feel of each site is different, to reflect the heritage and values of the particular brand. There is divergence on functionality, with Whitegates embracing all of the tried and tested EweMove concepts such as web pages optimised for lead conversion, Google "pay-per-click", "live chat", downloadable property valuations and functionality to book a valuation appointment. Overall, the website project generated nearly 17,000 new business leads at an average cost to our franchisees of £24 per lead. The board believes that the new websites delivered a competitive advantage in H2 2017.

Name Change

On 16 March 2017 the Company changed its name from MartinCo PLC to The Property Franchise Group PLC. It was time to recognise the transformation from a single franchisor to a multi-franchisor of residential agents.

Outlook

The Group's intention is to be well-positioned for all eventualities and developments in the estate agency and letting agency space. Despite the market challenges, the Group delivered another strong set of results in this, its fourth full year on AIM.

My thanks go to the executives, their teams and my fellow Board members for their outstanding efforts over the last year.

I am delighted to announce that the Board has recommended an increased final dividend of 5.4p per ordinary share for 2017.

Richard Martin

Chairman

Chief Executive's statement

Benefits of a genuine multi-brand strategy in a changing industry landscape

In 2017 we concentrated on further development of the six property brands which we already own, continuing to build upon our genuine multi-brand strategy which sees us invested in competing businesses. An important part of this was to recruit a new brand leadership team to see us through the next growth phase, which we achieved this year.

After our acquisition of Xperience Franchising and Whitegates in 2014, we focused on consolidation, driving out duplicate costs and leveraging economies of scale. By 2016 we had reaped the fruits of that approach; the combined businesses delivered £1.0m of after tax earnings against a net cash consideration of £5.1m.

However, EweMove is a very different proposition. It is a fully-functioning franchisor with its own proprietary technology "EweReka" sitting on an industrial scale platform. Its HQ staff are based in Cleckheaton, Bradford and culturally, it is very different from our traditional high street brands. Consequently, our intention was always to keep EweMove separate from our existing brands and benefit from some of its digital marketing expertise, without needing to fold it into our traditional support infrastructure.

The key to success with EweMove is to drive the numbers of "local representatives", to continue to recruit franchisees at current levels, to encourage more experienced estate agents to join the brand and to reduce its franchisee attrition rate.

EweMove incurred losses in H1 trading. However with the departure of the founders at the end of June 2017, and the arrival of the new Managing Director, the business returned to profit in H2 trading, and, pleasingly, the number of franchises rose to 120 by year end.

The online or hybrid space is very topical in the property industry. It has been estimated that circa £250m has been raised by our competitors since they launched, with a number of the top players becoming increasingly high profile.

Unlike those companies where the customer proposition is focused on saving commission, EweMove's promise is above all to get the customer's property sold. However, EweMove does share several characteristics with the best-known brands; it is nationally recognised, does not rely on high street offices, and operates 24/7 for customer convenience.

A genuine multi-brand strategy is more than just a collection of brands. EweMove shows the clarity of our thinking as it gives us an exciting play in the online, hybrid space and hedges against deterioration in trading conditions for our traditional high street model. We have crystallised the price we paid for EweMove, which is relatively modest compared to the sums invested in competing businesses, and have management in place to see us through the next growth phase.

As well as progressing with EweMove we achieved satisfying network revenue growth at all of our traditional brands, Whitegates leading with 14%, CJ Hole 9%, Parkers 6%, Martin & Co 5% and Ellis & Co 3%. These figures are not quoted on a "like-for-like" basis. In all 178 traditional brand offices grew their revenue year-on-year and 105 offices had static or shrinking revenue. We had 3 franchisees managing 800+ properties, 21 franchisees managing 500+ and 59 franchisees managing 300+. The overall pattern was of pleasing revenue growth, in a marketplace where many competitors were reportedly in reverse gear. However, we cannot be complacent. Whilst our best franchisees made good progress, other franchisees found trading conditions difficult. Management are alive to the possibility that there will be both opportunities for our franchisees to act as consolidators at their local level, buying up competitor's letting portfolios, but there will also be consolidation opportunities within the Group, with strong and capable franchisees buying out their weaker neighbours.

Ian Wilson

Chief Executive Officer

Financial Review

Improved use of digital marketing and support for franchisee acquisitions delivers increased profits.

In a flat housing market environment (fourth year at circa 1.2m** transactions) and with challenges for the lettings market starting to crystallise, we focused on winning more sales instructions (up 23%), growing our managed properties portfolio (up 8%) and putting EweMove on a sustainable profit path.

**HMRC UK Property Transaction Statistics 21 February 2018.

Revenue

Group revenue for the financial year to 31 December 2017 was £10.2m (2016: £8.3m), an increase of £1.9m (23%) over the prior year. The first full year of EweMove contributed £1.5m (79%) of this increase.

Management Service Fees ("MSF") increased 20% from £6.9m to £8.3m and represented 81% (2016: 83%) of Group revenue with the remainder being from franchise sales and ancillary services to support MSF generation.

Lettings contributed 70% of MSF (2016: 74%), sales contributed 29% of MSF (2016: 25%) and financial services contributed 1% of MSF (2016: 1%). Lettings MSF grew by 13% in the year and sales MSF grew by 47%.

Operating profit

Adjusted operating profit increased from £3.5m to £3.8m (8%) and the margin decreased from 42% to 37%.

*Before exceptional costs and share-based payment charges.

Administration expenses, including the first full year of EweMove, increased by £1.1m. EweMove's administration expenses contributed all of this increase.

EBITDA

Adjusted EBITDA for 2017 was £4.4m (2016: £3.9m) an increase of £0.5m (14%) over the prior year. The traditional brands contributed all of this increase mainly through growth in turnover of £0.4m.

Exceptional items

The net exceptional gain for 2017 was £0.7m (2016: exceptional cost £0.3m) and relates entirely to EweMove being the reduction in deferred consideration payable of £1.2m and an impairment charge of £0.5m against the master franchise agreement (2016: acquisition costs for EweMove and redundancy payments). For further details of the impairment please see note 16 to the financial statements.

Profit before tax

The profit before tax was £4.3m for 2017, an increase of £1.1m (33%) over the prior year, of which the net exceptional gain contributed £0.7m.

Taxation

The effective rate of corporation tax for the year was 19.25% (2016: 20%). The total tax charge for 2017 was £0.6m (2016: £0.2m). The increase of £0.4m is due to the growth in profits from ordinary activities which contributed £0.2m and the reduction in relief on share-based payments of £0.2m. Management exercised options over 979,200 ordinary shares in FY16 generating a notional gain of £1.5m and tax relief of £0.3m whereas in 2017 they exercised options over 522,000 ordinary shares generating a notional gain of £0.7m and tax relief of £0.1m.

Earnings per share

Earnings per share for the year was 14.2p (2016: 13.0p), an increase of 9%. The profit attributable to owners increased to £3.7m (2016: £3.0m).

Dividends

The Board is recommending a final dividend of 5.4p per share for 2017 which, together with the interim dividend of 2.1p per share paid to shareholders on 6 October 2017, equates to a total dividend for the financial year of 7.5p (2016: 6.5p) an increase of 15%. If approved, it will be paid on 21 May 2018 to all shareholders on the register on 20 April 2018. Our shares will be marked ex-dividend on 19 April 2018.

Cash flow

The Group is strongly operationally cash generative.

The net cash inflow from operating activities in 2017 was £4.4m (2016: £2.4m) as the Group continues to generate strong operating cash inflows.

The net cash outflow from investing activities was £1.4m (2016: outflow £4.8m) due to £1.0m of consideration paid to the founders of EweMove in return for them forgoing any rights to deferred consideration, £0.2m invested in new websites and £0.2m paid to acquire rights to income from customer lists (2016: acquisition of EweMove).

Loan repayments totalling £0.9m (2016: £0.6m) plus interest payments of £0.1m (2016; £0.1m) were made on the Santander UK plc loans during 2017 leaving £2.5m (2016: £3.4m) outstanding. Dividend payments were £1.7m (2016: £1.4m).

Liquidity

The Group had cash balances of £2.6m at 31 December 2017 (2016: £2.0m).

Financial position

The balance sheet remains strong with total assets of £20m (2016: £20m) and a reduction of £2.5m in liabilities during the year. This reduction in liabilities was due to repayments of bank debt totaling £0.9m, a £2.2m reduction in deferred consideration as a result of the settlement reached with the founders of EweMove, an increase in tax payable of £0.4m partly due to increased profitability but also due to lower tax deductions for options exercised and an increase in other payables of £0.2m of which deferred income accounted for £0.1m.

The Group finished the year with the total equity attributable to owners of £14.3m, an increase of £2.1m or 17% over FY16.

The Group is strongly operationally cash generative which, together with the undrawn facility from Santander UK plc of £2.5m, puts it in a strong position to continue to fulfil its strategic plan.

David Raggett

Chief Financial Officer

Consolidated statement of comprehensive income

for the year ended 31 December 2017

Consolidated statement of financial position

31 December 2017

The financial statements were approved and authorised for issue by the Board of Directors on 9 April 2018 and were signed on its behalf by:

David Raggett

Chief Financial Officer

Company statement of financial position

31 December 2017

(Company No: 08721920)

As permitted by Section 408 of the Companies Act 2006, the income statement of the parent company is not presented as part of these financial statements. The Parent Company's profit for the financial year was £4,393,361 (2016: £5,840,528).

The financial statements were approved and authorised for issue by the Board of Directors on 9 April 2018 and were signed on its behalf by:

David Raggett

Chief Financial Officer

Consolidated statement of changes in equity

for the year ended 31 December 2017

Company statement of changes in equity

for the year ended 31 December 2017

Consolidated statement of cash flows

for the year ended 31 December 2017

Notes to the consolidated statement of cash flows

for the year ended 31 December 2017

A. Reconciliation of profit before income tax to cash generated from operations

B. Purchase of Subsidiary undertakings net of cash acquired

On 5 September 2016 the Group obtained control of Ewemove Sales & Lettings Ltd "ESLL" and its dormant subsidiary Ewesheep Ltd "EL".

Company statement of cash flows

for the year ended 31 December 2017

Notes to the Company statement of cash flows

for the year ended 31 December 2017

C. Reconciliation of profit before income tax to cash generated from operations

Notes to the consolidated and Company financial statements

for the year ended 31 December 2017

1. General information

The principal activity of The Property Franchise Group PLC and its Subsidiaries is that of a UK residential property franchise business. The Group operates in the UK. The Company is a public limited company incorporated and domiciled in the UK and listed on AIM. The address of its head office and registered office is 2 St Stephen's Court, St Stephen's Road, Bournemouth, Dorset, UK.

2. Basis of preparation

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated financial statements have been prepared under the historical cost convention.

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in note 5.

The presentational currency of the financial statements is in British pounds and amounts are rounded to the nearest pound.

Going Concern

The Group has produced detailed budgets, projections and cash flow forecasts. The Directors have concluded after reviewing these budgets, projections and forecasts, making appropriate enquiries of the business and having considered uncertainties under the current economic environment, that there is a reasonable expectation that the Group has adequate resources to continue in operation for the foreseeable future. Accordingly, they have adopted the going concern basis in preparing the financial statements.

New standards, amendments and interpretations issued

The following new or amended standards are mandatory for the first time for the period beginning 1 January 2017:

The following relevant new standards, amendments to standards and interpretations have been issued, but are not effective for the financial year beginning on 1 January 2017, and endorsed by the European Union, and have not been early adopted:

IFRS 9 'Financial Instruments' 

IFRS 9 will supersede IAS 39 in its entirety, and is effective for accounting periods commencing on or after 1 January 2018. Any changes to recognition and measurement will be applied retrospectively by adjusting the opening balance sheet at that time.

The core areas addressed within IFRS 9 are as follows:

· Classification and measurement of financial assets and liabilities

· Impairment of financial assets

· Hedge accounting.

The Group does not expect any material changes in relation to the classification and measurement of financial assets and liabilities, nor the impairment of financial assets, nor for hedge accounting.

IFRS 15 'Revenue from Contracts with Customers' 

IFRS 15 will be effective for the Group from 1 January 2018, replacing IAS 18 'Revenue', IAS 11 'Construction contracts' and related interpretations. Any changes to the recognition and measurement will be applied retrospectively by adjusting the opening balance sheet at that time.

The standard establishes a principles-based approach for revenue recognition and is based on the concept of recognising revenue for obligations only when they are satisfied and the control of goods and services is transferred. It applies to all contracts with customers, except those in the scope of other standards.

The Group has performed an assessment which has highlighted that the new standard will impact on franchise sales revenue recognition but not Management Service Fee recognition or the recognition of other income. Franchise sales revenue currently consists of four elements:-

1. a fee to buy a new franchise territory which is recognised upon the earlier of receipt of funds or signing of the franchise agreement

2. a fee to buy a franchise territory that is being sold through the exit of the current franchisee which is recognised upon the earlier of receipt of funds or signing of the franchise agreement

3. a fee paid by the seller of the franchise which is recognised in the month that a contract for the resale of a franchise is signed

4. a fee paid upfront by franchisees for the first 12 months use of its systems which is deferred and released over the first 12 months as the obligations are discharged.

For the fees described at points 1 and 2 above the franchisors have some initial obligations that extend beyond the receipt of funds and the signing of a franchise agreement. It is likely that some of the revenue will be deferred and released as the Group discharges its initial obligations to new franchisees, including the provision of training and initial support. Current estimates are that the period of release will be between 1 to 4 months with the majority released by month 2. From the work performed to date the Group believes that the adoption of IFRS 15 will not have a material impact on the consolidated financial statements.

IFRS 16 'Leases '

IFRS 16 requires that almost all leases will be brought onto lessees' balance sheets under a single model (except leases of less than 12 months and leases of low-value assets), eliminating the distinction between operating and finance leases. The Directors anticipate that IFRS 16 will be adopted in the Group's consolidated financial statements when it becomes mandatory. Currently, the Group holds some non-cancellable operating leases but no finance leases. For the Group's non-cancellable operating lease commitments of £0.1m as at 31 December 2017 (Note 25), a preliminary assessment indicates that these arrangements will continue to meet the definition of a lease under IFRS 16. Thus, the Group will have to recognise a right-of-use asset and a corresponding liability in respect of all these leases - unless they qualify for low value or short-term leases upon the application of IFRS 16. The Group believes that the adoption of IFRS 16 will not have a material impact on the consolidated financial statements.

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

3. Basis of consolidation

The Group financial statements include those of the Parent Company and its subsidiaries, drawn up to 31 December 2017. Subsidiaries are all entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases.

The Group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Group. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. Acquisition-related costs are expensed as incurred.

Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated. When necessary amounts reported by subsidiaries have been adjusted to conform to the Group's accounting policies.

4. Significant accounting policies

Revenue recognition

Revenue represents income, net of VAT, from the sale of franchise agreements, resale fees and management service fees levied to franchisees monthly based on their turnover, and other income being the provision of training and ongoing support to franchisees.

Traditional brands: Fees from the sale of franchise agreements are not refundable and are recognised upon the earlier of the receipt of funds or the signing of the franchise agreement. These fees are for the use of the brand along with initial training and support and promotion during the opening phase of the new office. Resale fees are recognised in the month that a contract for the resale of a franchise is signed. Management service fees are recognised on a monthly basis and other income is recognised when the training and support is provided to the franchisee.

EweMove: Fees from the sale of franchise agreements for the Ewemove brand are treated differently to the other brands, because an element of the initial fee is deferred and released over the first 12 months of trading of the franchise, where no monthly license fees are payable. Management service fees consist of monthly license fees and completion fees. License fees are recognised on a monthly basis, completion fees are recognised when sales or lettings transactions complete and other income is recognised when the training and support is provided to the franchisee.

Operating profit

Profit from operations is stated before finance income, finance costs and tax expense.

Business combinations

On the acquisition of a business, fair values are attributed to the identifiable assets and liabilities and contingent liabilities unless the fair value cannot be measured reliably in which case the value is subsumed into goodwill. Where the fair values of acquired contingent liabilities cannot be measured reliably, the assumed contingent liability is not recognised but is disclosed in the same manner as other contingent liabilities.

Goodwill is the difference between the fair value of the consideration and the fair value of identifiable assets acquired. Goodwill arising on acquisitions is capitalised and subject to an impairment review, both annually and when there is an indication that the carrying value may not be recoverable.

Intangible assets

Intangible assets with a finite life are carried at cost less amortisation and any impairment losses. Intangible assets represent items which meet the recognition criteria of IAS 38, in that it is probable that future economic benefits attributable to the assets will flow to the entity and the cost can be measured reliably.

In accordance with IFRS 3 Business Combinations, an intangible asset acquired in a business combination is deemed to have a cost to the Group of its fair value at the acquisition date. The fair value of the intangible asset reflects market expectations about the probability that the future economic benefits embodied in the asset will flow to the Group.

Amortisation charges are included in administrative expenses in the Statement of Comprehensive Income. Amortisation begins when the intangible asset is first available for use and is provided at rates calculated to write off the cost of each intangible asset over its expected useful life, on a straight line basis, as follows:

Acquired trade names are identified as separate intangible assets where they can be reliably measured by valuation of future cash flows. The trade names CJ Hole, Parkers and Ellis & Co are assessed as having indefinite lives due to their long trading histories.

Acquired customer lists are identified as a separate intangible asset as they are separable and can be reliably measured by valuation of future cash flows. This valuation also assesses the life of the particular relationship. The life of the relationship is assessed annually. Cashback given to franchisees who have made an eligible acquisition is capitalised as an intangible asset and amortised over 5 years, being the typical length of a franchise agreement.

Customer lists are being written off over a remaining life of 5 years.

Acquired master franchise agreements are identified as a separate intangible asset as they are separable and can be reliably measured by valuation of future cash flows. The life of the relationship is assessed annually. Master franchise agreements are being written off over a remaining life of 15-25 years as historical analyses shows that, on average, 4% - 10% of franchises will change ownership per annum.

The cost of the new brand websites launched in 2017 have been capitalised and are being amortised over 3 years from launch date, being the expected period over which the websites are expected to generate economic benefit.

Subsequent to initial recognition, intangible assets are stated at deemed cost less accumulated amortisation and impairment charges.

Impairment of non-financial assets

The carrying amounts of the Group's non-current assets are reviewed for impairment annually or whenever events and changes in circumstances indicate that the carrying amount may not be recoverable. If any such indication exists, the asset's recoverable amount is estimated.

In respect of goodwill and intangible assets that have indefinite useful lives, management are required to assess whether the recoverable amount of each exceeds their respective carrying values at the end of each accounting period.

In respect of intangible assets with definite lives, management are required to assess whether the recoverable amount exceeds the carrying value where an indicator of impairment exists at the end of each accounting period.

The recoverable amount is the higher of fair value less costs to sell and value in use.

Impairment losses represent the amount by which the carrying value exceeds the recoverable amount; they are recognised in profit or loss. Impairment losses recognised in respect of cash generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash generating unit and then to reduce the carrying amount of the other assets in the unit on a pro-rata basis. Where an indicator of impairment exists against a definite life asset and a subsequent valuation determines there to be impairment, the intangible asset to which it relates is impaired by the amount determined.

An impairment loss in respect of goodwill is not reversed. In respect of other assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount.

An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

Investment in subsidiaries

Investments in subsidiaries are stated in the parent company's balance sheet at cost less any provisions for impairments.

Property, plant and equipment

Items of property, plant and equipment are stated at cost of acquisition less accumulated depreciation and impairment losses. Depreciation is charged so as to write off the cost of assets over their estimated useful lives on the following bases:

Income taxes

Income tax currently payable is calculated using the tax rates in force or substantively enacted at the reporting date. Taxable profit differs from accounting profit either because some income and expenses are never taxable or deductible, or because the time pattern that they are taxable or deductible differs between tax law and their accounting treatment.

The tax expense for the period comprises current and deferred tax. Tax is recognised in profit or loss, except if it arises from transactions or events that are recognised in other comprehensive income or directly in equity

Deferred tax

Deferred income taxes are calculated using the liability method on temporary differences, at the tax rate that is substantively enacted at the balance sheet date. Deferred tax is generally provided on the difference between the carrying amount of assets and liabilities and their tax bases. However, deferred tax is not provided on the initial recognition of goodwill, nor on the initial recognition of an asset or liability unless the related transaction is a business combination or affects tax or accounting profit. Tax losses available to be carried forward as well as other income tax credits to the Group are assessed for recognition as deferred tax assets.

Deferred tax liabilities are provided in full, with no discounting. Deferred tax assets are recognised to the extent that it is probable that the underlying deductible temporary differences will be able to be offset against future taxable income. Current and deferred tax assets and liabilities are calculated at tax rates that are expected to apply to their respective period of realisation, provided they are enacted or substantively enacted at the balance sheet date. Changes in deferred tax assets or liabilities are recognised as a component of tax expense in the income statement. For share based payments the deferred tax credit is recognised in the income statement to the extent that it offsets the share based charge, with any remaining element after offset being shown in the statement of changes in equity.

Operating lease commitments

Rentals applicable to operating leases where substantially all of the benefits and risks of ownership remain with the lessor are charged to profit/loss on a straight-line basis over the period of the lease.

Cash and cash equivalents

Cash and cash equivalents are defined as cash balances in hand and in the bank (including short-term cash deposits).

Financial assets

The Group and Company only have financial assets classified as loans and receivables. The loans and receivables comprise trade and other receivables and cash and cash equivalents in the Consolidated Statement of Financial Position. Cash and cash equivalents (which exclude any client account monies) include cash in hand and deposits held at call with banks.

Impairment of financial assets

Impairment provisions are recognised when there is objective evidence (such as significant financial difficulties on the part of the counterparty or default or significant delay in payment) that the Group will be unable to collect all of the amounts due under the terms receivable, the amount of such a provision being the difference between the net carrying amount and the present value of the future expected cash flows associated with the impaired receivable.

For trade receivables and loans to franchisees, which are reported net of provisions, such provisions are recorded in a separate provision account with the loss being recognised within other operating costs in the income statement. On confirmation that the trade receivable will not be collectable, the gross carrying value of the asset is written off against the associated provision.

Loans and receivables

These assets are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise principally through the provision of services to franchisees (e.g. trade receivables), but also incorporate other types of contractual monetary asset. They are initially recognised at fair value plus transaction costs that are directly attributable to their acquisition or issue, and are subsequently carried at amortised cost using the effective interest rate method, less provision for impairment.

Impairment provisions are recognised when there is objective evidence (such as significant financial difficulties on the part of the counterparty or default or significant delay in payment) that the Group will be unable to collect all of the amounts due under the terms of the receivable, the amount of such a provision being the difference between the net carrying amount and the present value of the future expected cash flows associated with the impaired receivable. For trade receivables, which are reported net, such provisions are recorded in a separate provision account with the loss being recognised within administrative expenses in the income statement. On confirmation that the trade receivable will not be collectable, the gross carrying value of the asset is written off against the associated provision.

Financial liabilities

Financial liabilities are comprised of trade and other payables, borrowings and other short-term monetary liabilities, which are recognised at amortised cost.

Trade payables, other payables and other short-term monetary liabilities, are initially recognised at fair value and subsequently carried at amortised cost using the effective interest method.

Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently carried at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method.

Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw-down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a pre-payment for liquidity services and amortised over the period of the facility to which it relates.

Share-based payments

The Company issues equity-settled share-based payments to employees. Equity-settled share-based payments are measured at fair value at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments are amortised through the consolidated statement of comprehensive income over the vesting period of the options, together with a corresponding increase in equity, based upon the Company's estimate of the shares that will eventually vest.

Fair value is measured using the Black-Scholes option pricing model taking into account the following inputs:

· the exercise price of the option;

· the life of the option;

· the market price on the date of the grant of the option;

· the expected volatility of the share price;

· the dividends expected on the shares; and

· the risk free interest rate for the life of the option.

The expected life used in the model has been adjusted, based on management's best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations.

At the end of each reporting period, the Group revises its estimates of the number of options that are expected to vest based on the non-market conditions and recognises the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity.

Deferred consideration

A provision is recognised in the Statement of Financial Position when the Group has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. The increase in the provision due to the passage of time is recognised in finance costs.

5. Critical accounting estimates and judgements and key sources of estimation uncertainty

The Company makes certain estimates and assumptions regarding the future. Estimates and judgements are continually evaluated based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. In the future, actual experience may differ from these estimates and assumptions. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

Impairment of intangible assets

The Group is required to test, where indicators of impairment exist, whether intangibles assets have suffered any impairment. The recoverable amount is determined based on value in use calculations. The use of this method requires the estimation of future cash flows and the choice of a discount rate in order to calculate the present value of the cash flows. Key assumptions for the value in use calculation are described in note 16. The result of these calculations was that for EweMove, whilst the value in use exceeded the carrying value of the intangible assets it had reduced by £0.5m over the original calculation at acquisition. This reduction was traced to a reduction in the value in use of the master franchise agreement. Accordingly, an impairment of £0.5m was made against the carrying value of the master franchise agreement of EweMove.

Valuation of separable intangibles on acquisition

When valuing the intangibles acquired in a business combination, management estimate the expected future cash flows from the asset and choose a suitable discount rate in order to calculate the present value of those cash flows. Separable intangibles valued on acquisitions made in year were £nil (2016: £5.2m) as detailed further in note 16.

Share-based payment charge

The aggregate fair value expense of each grant is determined through using the Black-Scholes model detailed above and an estimate for the attainment of the non-market based performance condition in FY19. The estimate of earnings per share, the non-market based performance measure, relies on the assumptions regarding the achievement of the current year's budget and a projection of earnings for FY19, taking into account available market data and performance trends. At this juncture it's estimated that 26.5% of the non-market based performance condition will be met.

6. Segmental reporting

The Board of Directors, as the chief operating decision-making body, review financial information for and make decisions about the Group's overall franchising business and have identified a single operating segment, that of property franchising.

7. Revenue

The Directors believe there to be three material income streams relevant to property franchising which are split as follows:

All revenue is earned in the UK and no customer represents greater than 10 per cent of total revenue in either of the years reported.

Other revenue relates to training and ongoing support to franchisees.

8. Administrative expenses

Administrative expenses relate to those expenses that are not directly attributable to any specific sales activity.

Administrative expenses for the year were as follows:

9. Employees and Directors

Average numbers of employees (including Directors), employed during the year:

Employee costs (including Directors) during the year amounted to:

Key management personnel are defined as Directors and executives of the Group. Details of the remuneration of the key management personnel are shown below:

Details of the Directors' emoluments are disclosed in the Directors' remuneration report on pages 28 to 29. The share-based payments charge for the current year has been charged to the Statement of Comprehensive Income of this £110,452 relates to Directors. In the prior year, as it was immaterial, no charge was made to the Statement of Comprehensive Income.

10. Exceptional items

The net exceptional income in the year ended 31 December 2017 of £701,463 all relates to EweMove. It consists of the reduction in deferred consideration payable of £1,179,146 and the associated unwinding of discounting on deferred consideration in the year (see note 12) and an impairment charge of £500,000 against the master franchise agreement following a revaluation due to evidence suggesting that the business's value may have been impaired (see note 5).

The exceptional costs in the year ended 31 December 2016 consist of £149,598 acquisition costs for EweMove and £105,347 redundancy costs as a result of restructuring the Group.

11. Operating profit

12. Finance income and costs

13. Taxation

The tax assessed for the period is lower than the standard rate of corporation tax in the UK. The difference is explained below.

14. Earnings per share

Earnings per share is calculated by dividing the profit for the financial year by the weighted average number of shares during the year.

Diluted earnings per ordinary share

The charge relating to share-based payments is immaterial and therefore the earnings used in the diluted earnings per ordinary share calculation are the same as that shown above.

There were options over 2,204,800 ordinary shares outstanding at 31 December 2017; 2,140,000 had not yet vested and have performance conditions which will determine whether they vest or not in the future. The remaining option over 64,800 ordinary shares was exercisable at 31 December 2017 but the average share price during the year ended 31 December 2017 was below the exercise price. For these reasons in 2017 there is no dilutive effect of share options on the earnings per share calculation.

In 2016 all options outstanding at 31 December 2016 had met their vesting conditions, therefore there was a dilutive effect of all share options on the earnings per share calculation.

15. Dividends

The Directors propose a final dividend for 2017 of 5.4p per share totalling £1,394,429, which they expect will be paid on 21 May 2018. As this is subject to approval by the shareholders no provision has been made for this in these financial statements.

16. Intangible assets

The carrying amount of goodwill relates to four (2016: four) cash generating units, and reflects the difference between the fair value of consideration transferred and the fair value of assets and liabilities purchased.

Business combinations acquired October 2014

Goodwill is assessed for impairment by comparing the carrying value to the value in use calculations. The value in use of the goodwill arising on the acquisitions of Xperience Franchising Limited ("XFL") and Whitegates Estate Agency Limited ("WEAL") is based on the cash flows derived from the actual revenues and operating margins for 2017 and projections through to 31 December 2019. Thereafter projected revenue growth was assumed to decline linearly to a long-term growth rate of 2.2%.

The cash flows arising were discounted by the weighted average cost of capital which included a small companies' risk premium to allow for factors such as illiquidity in the shares. These discount rates were 13.5% for XFL and 15.0% for WEAL, the latter higher rate reflecting WEAL's smaller size and more volatile earnings. This resulted in a total value for each company of the identifiable intangibles assets that exceeded the carrying values of the respective companies' goodwill.

The Directors do not consider goodwill to be impaired. The Directors believe that no reasonably possible change in assumptions at the year end will cause the value in use to fall below the carrying value and hence impair the goodwill.

The master franchise agreements are being amortised over 25 years. The period of amortisation remaining at 31 December 2017 was 21 years 10 months.

The brand names under which XFL trades of C J Hole, Parkers and Ellis & Co have been in existence for between 70 years and 168 years. Management see them as strong brands with significant future value and has deemed them to have indefinite useful lives as there is no foreseeable limit to the period over which the assets are expected to generate net cash inflows for the Group. As a consequence, management annually assess whether the carrying value of these brands have been impaired.

The Relief-from-Royalty-Method was used to value the brand names. Looking at independent research of royalty rates, management selected pre-tax royalty rates of between 3% and 5% for the above brand names.

The after tax royalty rates were then applied to the projected cash flows of each brand. The projected cash flows being the forecast growth in current revenues using market data through to 31 December 2019. Thereafter projected revenue growth was assumed to decline linearly to a long-term growth rate of 2.2%. The after tax cash flows determined through this process were then discounted at 13.5% to determine a value for each brand name. This discount rate approximated the company's WACC as the risk profile of the brand names was seen as commensurate with that of the overall company. The values derived exceeded their carrying values.

The Directors believe that no reasonably possible change in assumptions at the year end will cause the value in use of the brands names CJ Hole, Parkers and Ellis & Co to fall below their carrying values and hence impair their intangible values.

The Whitegates brand was valued in a similar manner and deemed to have an immaterial value when the acquisition was made principally due to its lack of profitability over preceding years. It is therefore not recognised separately.

Business combination acquired September 2016

Goodwill is assessed for impairment by comparing the carrying value to the value in use calculations. The value in use of the goodwill arising on the acquisition of Ewemove Sales & Lettings Ltd ("ESL") is based on the cash flows derived from the actual revenues and operating margins for 2017 and projections through to 31 December 2024. Thereafter projected revenue growth was assumed to 2.2% per annum.

A period of projected cash flows exceeding 5 years was deemed appropriate because the business has only been operating for four years, is continuing to recruit relatively high levels of new franchisees, each new franchisee should grow significantly in the first 5 years of operation and it has yet to develop the operational efficiencies of a mature franchisor.

Various events since acquisition, notably the founders deciding to leave the business, the decision to actively recruit experienced estate agents and the decision to change the licence fee, have caused a higher than originally projected attrition rate of franchisees who existed at acquisition. There has also been more development support required for franchisees without experience of the sector than was originally expected. As a result the business failed to achieve the projected EBITDA of £0.8m (achieved negative EBITDA of £0.1m). The revenue growth rates used in the valuation have been reduced and now range from 47% in FY18 to 5% in FY24.

The cash flows arising were discounted by the weighted average cost of capital being 16.39% which included a small companies' risk premium to allow for factors such as illiquidity in the shares. This resulted in the value in use exceeding the carrying value of the goodwill and separately identifiable intangible assets. However, the calculations did indicate that the enterprise's overall value had reduced by £0.5m compared to the value at acquisition.

The above events and the reduction in the enterprise's value suggested that the value of the master franchise agreement may have reduced. A re-valuation was performed. This used the:-

a) projections of revenue decline until no franchisees, existing at acquisition, remain; and

b) projections of operating margin until 2024 where thereafter they remain unaltered.

As these revenue streams represent the return from all the assets employed in generating those revenues, the fair value and expected rate of return of these other assets, known as the contributory asset charge, was determined and deducted. A discount rate of 16.39% was then applied.

The resulting value of the master franchise agreement was £0.5m lower than the carrying value. As a result an impairment of £0.5m has been charged to the master franchise agreement's carrying value.

The recent attrition rate of franchisees existing at acquisition implies that the remaining useful life of the master franchise agreement may be shorter than that originally assumed of 21 years. For this reason, the remaining useful life of the master franchise agreement has been reduced to 15 years. The period of amortisation remaining at 31 December 2017 was 13 years 8 months.

The remaining useful life of the brand name was also reviewed. It continues to attract and recruit the same level of franchisees as in previous years and to attract higher numbers of customers. Given these two factors the remaining useful life of the brand was considered to be unaltered at 21 years. The period of amortisation remaining at 31 December 2017 was 19 years and 8 months.

The following table reflects the level of movements required in revenue or costs which could result in a potential impairment per the value in use calculation of goodwill. A further percentage (fall)/increase, of the magnitude indicated in the table below, in any one of the key assumptions set out above would result in a removal of the headroom in the value-in-use calculation for goodwill in 2017. Thus, if the discount rate increased by more than 14.5% to above 18.77%, an impairment change would result against goodwill, all other assumptions remaining unchanged.

Goodwill and indefinite life intangible assets have been allocated for impairment testing purposes to the following cash-generating units.

The carrying values are as follows:

Website Costs included in Technology

In 2017 new websites were launched for each of the five traditional brands. The costs associated with these websites have been capitalised as intangible assets as the purpose of the websites is to generate leads and revenue for the network.

Cashback included in Customer lists

The additions in customer lists in 2017 represent sums provided to franchisees that have made qualifying acquisitions to grow their lettings portfolios. The sum provided is based on a calculation of the estimated increase in MSF as a result of the acquisition. In providing these sums the group ensures that franchisees are contractually bound to the relevant franchisor for a period in excess of that required for the economic benefits to exceed the sums provided.

Company

No goodwill or customer lists exist in the parent company.

17. Property, plant and equipment

Group

18. Investments

Company

The Property Franchise Group PLC was incorporated on 7 October 2013. On the 10 December 2013 a share for share exchange acquisition took place with Martin & Co (UK) Limited; 17,990,000 ordinary shares in The Property Franchise Group PLC were exchanged for 100% of the issued share capital in Martin & Co (UK) Limited.

On 31 October 2014 the Company acquired the entire issued share capital of Xperience Franchising Limited and Whitegates Estate Agency Limited for a consideration of £6,110,284.

On 5 September 2016 the Company acquired the entire issued share capital of Ewemove Sales & Lettings Ltd, and its dormant subsidiary Ewesheep Ltd, for a consideration of £8,000,000 plus £500,000 paid on 30 July 2017 and £500,000 paid on 31 December 2017 (see note 28).

Martin & Co (UK) Limited, Xperience Franchising Limited, Whitegates Estate Agency Limited, Ewemove Sales & Lettings Ltd and Ewesheep Ltd are exempt from the requirements of the Companies Act 2006 relating to the audit of accounts under section 479A of the Companies Act 2006.

At the year-end The Property Franchise Group PLC has guaranteed all liabilities of Martin & Co (UK) Limited, Xperience Franchising Limited, Whitegates Estate Agency Limited, Ewemove Sales & Lettings Ltd and Ewesheep Ltd. The value of the contingent liability resulting from this guarantee is unknown at the year-end.

The carrying value of the investment in EweMove has been considered for impairment through value in use calculations and it was determined that an impairment of £500,000 against the carrying value of the master franchise agreement was appropriate(see note 5 - Impairment of intangible assets), this has been accounted for in the year ended 31 December 2017.

The carrying values of the other investments (all companies except for EweMove) have been considered for impairment and it has been determined that the value of the discounted future cash inflows exceeds the carrying value. Thus, there is no impairment charge.

The Company's investments at the balance sheet date in the share capital of companies include the following, which all have their registered offices at the same address as the Company:

Subsidiaries

* indirectly owned

19. Trade and other receivables

Trade receivables are stated net of impairment provisions of £116,862 (2016: £43,325).

Ageing of trade receivables

The following is an analysis of trade receivables that are past due date but not impaired. These relate to a number of customers for whom there is no recent history of defaults. The ageing analysis of these trade receivables is as follows:

An allowance has been made against the overdue receivables based on historic default experience. The Directors consider that the carrying value of trade and other receivables represents their fair value.

The Group does not hold any collateral as security for its trade and other receivables. In the prior year a loan was made to a franchisee for £50k and is secured by way of a fixed and floating charge over their assets. At 31 December 2017 £20k (2016: £36k) was outstanding in relation to this loan. In a prior year a loan was made to another franchisee for £147k and £19k was outstanding at 31 December 2017 in relation to this loan.

20. Called up share capital

Movements in shares are summarised below:

21. Share premium

For further details of share issues refer to note 20.

22. Other reserves

Merger reserve

The acquisition of Martin & Co (UK) Limited by The Property Franchise Group PLC did not meet the definition of a business combination and therefore, falls outside of the scope of IFRS 3. This transaction was in 2013 and accounted for in accordance with the principles of merger accounting.

The consideration paid to the shareholders of the Subsidiary was £17,990,000 (the value of the investment). As these shares had a nominal value of £179,900, the merger reserve in the Company is £17,810,100.

On consolidation the investment value of £17,990,000 is eliminated so that the nominal value of the shares remaining is £179,900 and, as there is a difference between the Company value of the investment and the nominal value of the shares purchased in the Subsidiary of £100, this is also eliminated, to generate a merger reserve in the Group of £179,800.

Share-based payment reserve

The share-based payments reserve comprises charges made to the income statement in respect of share-based payments and related deferred tax impacts under the Group's equity compensation scheme.

23. Borrowings

The Company has a loan facility of £5m, and has drawn down two term loans under this facility, referred to below as 'Loan 1' and 'Loan 2'. The loans are secured with a fixed and floating charge over the Group's assets and a cross guarantee across all companies in the Group.

Loan 1 - £2.5m drawn down on 30 October 2014 and is repayable over 5 years in equal instalments. Interest is charged quarterly on the outstanding amount and the rate is fixed during the term at 4.08%. The amount outstanding at 31 December 2017 was £1m (2016: £1.5m).

Loan 2 - £2m drawn down on 5 September 2016 and is repayable over 5 years in equal instalments. Interest is charged quarterly on the outstanding amount, the rate is variable during the term at 2.5% above LIBOR, at 31 December 2017 the rate was 3.02% (2016: 2.88%). The amount outstanding at 31 December 2017 was £1.5m (2016: £1.9m).

At 31 December 2017 the unutilised amount of the facility was £2.5m (2016: £1.6m).

The cash flow movement in borrowings arising from financing activities during the year was £0.9m outflow (2016: £1.4m net inflow).

24. Trade and other payables

The Directors consider that the carrying value of trade and other payables approximates their fair value.

25. Leasing agreements

At the balance sheet date, the Group had outstanding commitments for future minimum lease payments under non-cancellable operating leases, which fall due as follows:

The lease arrangements above consist of those relating to land and buildings and office equipment.

Company

No leases exist in the parent company.

26. Deferred tax

Deferred taxation has been provided as follows:

27. Financial instruments

Financial instruments - Risk Management

The Group is exposed through its operations to the following financial risks:

· Credit risk

· Liquidity risk

· Interest rate risk

In common with all other businesses, the Group is exposed to risks that arise from its use of financial instruments. This note describes the Group's objectives, policies and processes for managing those risks and the methods used to measure them.

There have been no substantive changes in the Group's exposure to financial instrument risks, its objectives, policies and processes for managing those risks or the methods used to measure them from previous periods unless otherwise stated in this note.

Principal financial instruments

The principal financial instruments used by the Group and Company, from which financial instrument risk arises, are as follows:

· Receivables

· Loans to franchisees

· Cash at bank

· Trade and other payables

· Borrowings

Financial assets

Financial assets measured at amortised cost: