Propty Franchis Regulatory News (TPFG)

MartinCo PLC ("MartinCo" or the "Group")

Final Results for the Year Ended 31 December 2015

Acquisition contributes significant increase in profits

MartinCo PLC is a property franchise group operating five brands across a network of 287 offices stretching from Falmouth to Inverness and including central London. The Directors believe that MartinCo is the fourth largest residential lettings and estate agency business in the UK by number of offices.

The Directors' vision is to create value for shareholders by leveraging its established franchise platform, strong local and national brands and over 20 years' experience as a franchisor to build a significant share of the UK residential lettings and estate agency market. Through its multi-brand strategy, which allows more than one brand of franchise to operate in a given location, the Group is able to achieve maximum market penetration.

Financial Highlights

· Group revenue increased 38% to £7.1m (2014: £5.2m)

· Management Service Fees increased 53% to £6.2m (2014: £4.1m)

· Operating Profit* increased 42% to £2.9m (2014: £2.0m), margin also strengthened by 2%

· EBITDA* increased 50% to £3.2m (2014: £2.1m)

· Profit before tax increased 42% to £2.7m (2014: £1.9m)

· Net Assets increased 22% to £7.6m (2014: £6.3m)

· Earnings per share 9.8 pence (2014: 6.9 pence)

· Return on equity increased to 31% (2014: 27%)

· Strong cash position of £4.3m at year end with £5m debt facility (£3.0m undrawn at the year-end)

· Proposed final dividend of 4.1 pence, making a total for 2015 of 5.9 pence up 47.5% on 2014 of 4.0 pence

*Before exceptional costs

Operational Highlights

· Xperience acquisition in October 2014 successfully integrated into the centralised franchisor head office infrastructure achieving targeted cost savings

· Number of tenanted managed properties increased from 42,000 to 45,000 at the year end

· Total of 12 new franchisees recruited, 13 new offices opened and three offices preparing to launch in the first quarter of 2016

· 32 offices with annual fee income in excess of £500,000 (2014: 23)

· 256 offices now offering an estate agency service in addition to core letting services

· Group remains heavily weighted toward lettings, accounting for 76% of Management Services Fee revenue

· Under the ten-year agreement with Legal & General, a financial services offering will be rolled out to all our offices during 2016

Ian Wilson, Chief Executive Officer of MartinCo, commented:

"2015 was our most successful year to date demonstrating the power of our multi-brand franchise strategy. It was a year of consolidation and growth for the Group which saw us open 13 new offices across our brand stable, leveraging our expertise in lettings and growing our estate agency services across our expanded network. Despite tax changes relating to buy-to-let investments, the fundamental drivers of the private rented sector remain in place.

 "Looking forward, we expect to launch a national financial services offering during 2016 with our partner Legal & General. We currently generate £1 from financial services for each £100 of revenue and we believe that this can be significantly improved.

"We have put additional resource and vigour into our acquisition programme at the franchisee level and we will continue to explore the acquisition of further master franchise rights having established an efficient and scalable operational model for running multiple property brands from a central hub."

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Chairman's Statement

2015 was another strong year of growth on all fronts for the Group continuing the excellent momentum of recent years.

Key strengths

· Pure franchise business model

· Truly national office footprint through five brands

· Core market (residential lettings) experiencing steady growth

· Cash generative with a strong balance sheet

· Experienced management team

· Acquisition opportunities in a sector ripe for further consolidation

Our performance has benefitted from a clear strategy to consolidate our market leading position as the private rented sector matures. Having successfully integrated Legal & General's property franchise platform (Xperience), which we acquired in 2014, the Group has secured its position as a leading national player managing a portfolio of properties of over 45,000 units. The Group now has an integrated, sustainable and scalable franchise platform encompassing five strong local and national brands from which to grow its franchisee network.

Many factors have influenced and continue to drive the growth of the buy-to-let market in the UK. A rapidly growing population, partly fuelled by record high net migration levels, continues to place growing pressure on housing stock with the volume of new builds failing to meet Government annual targets. Additional factors driving the buy-to-let market include: social mobility and employment instability, increased single occupancy households and the inability of first time buyers to raise mortgage finance.

As the appetite for income from asset purchase remains unrivalled by other sources, we envisage further growth as the private rented sector continues to offer compelling net total returns for investors.

While we continue to build our lettings business, we are delighted now to be able to provide more focus on residential sales and financial services with approximately 90% of our network now offering an estate agency service. Despite the emergence of online low cost estate agency platforms, we see little impact on our business which operates a success-only charging structure from a locally based agent. We strongly believe that the delivery of sales and lettings services has a local element which cannot adequately be addressed through call-centres and centralised service provision.

Regardless of regulatory or fiscal adjustments, the demand for property within the UK -regardless of tenure -has never been greater. I have great confidence in the future for MartinCo.

I would like to thank our management team, our franchisees and my fellow Board members for their outstanding efforts over the last year and continued dedication to the business.

I am delighted to announce that the Board has recommended a final dividend of 4.1 pence per ordinary share for 2015.

Richard Martin

Chairman

4 April 2016

Chief Executive's Statement

As a group, most of our income is derived from lettings and managing properties in the private rental sector. The sector has been resurgent over the last 30 years, and since income from a portfolio of managed properties is predictable, and seasonal fluctuations in letting transactions are modest and predictable, the private rented sector has proven to be the bedrock of our business.

Independent research which we commissioned and published in 2015 to coincide with the pension reforms launch in April 2015 proved that a wholly cash funded investment in a buy-to-let property over the last decade would have outperformed the same cash sum invested in stocks and shares by at least 13 times (max. 26 times).

According to recent research by Savills (Savills Research February 2016), the equity in mortgaged buy-to-let properties now exceeds the equity in mortgaged owner occupied properties. Debt is falling in the buy-to-let sector and more properties are owned mortgage-free. We believe that pressure on the UK housing stock and an appetite for income in retirement from an ageing population will continue to mean that buy-to-let investment remains an attractive proposition.

During 2015 we let more properties than ever before and ended the year managing over 45,000 tenanted homes, which means collecting and accounting for £34m in rents every month.

We are delighted with the four property brands we acquired in October 2014. The brands of Parkers, CJ Hole, Whitegates and Ellis & Co all have great heritage and already enjoy a strong reputation with the public for both estate agency and lettings services.

Our focus in the first part of 2015 was on the successful integration of Xperience into our Group. Head office headcount rose slightly by the end of 2015 to 39 staff, but this is in the context of managing a network of 287 offices; when at the time of the IPO in December 2013 we had 190 offices and a headcount of 31. We operate our national network out of a single head office in Bournemouth and I am delighted to report that all of the costs of re-organisation and assimilation of Xperience into our Group have been absorbed in 2015 and we enter 2016 with a lower cost base than in the corresponding period for 2015.

The vast majority of our franchisees have been active for five years or more. This means that typically their start-up bank loans will have been cleared and their businesses profitable, with experienced owners well placed to raise new funds to acquire competitors. A main focus of 2016 will be to support their efforts to grow their businesses at a local level.

We will also be rolling out a new financial services offering to all our offices during 2016 under our ten-year agreement with Legal & General. The benefits of this strategy will be increased income from financial services (currently just 1% of franchisee revenue and management services fees) and greater understanding of our customers through the data gathered.

In 2015, we achieved our highest number of new franchise recruits in three years and we opened 13 new offices. Furthermore, enquiries from potential franchisees have been on a steep rise during the final quarter of 2015, up 174% year-on-year.

Despite changes to the tax treatment of buy-to-let investors we remain very positive about prospects for the private rentend sector as the fundamental drivers all remain in place. We have a strong balance sheet, five great property brands and an experienced management team leaving us well placed to exceed our strong performance in 2015.

Ian Wilson

Chief Executive

4 April 2016

Chief Financial Officer's Review

Our multi-franchise strategy has delivered improvements in operating margin, EBITDA and PBT.

In what turned out to be a flat housing market in 2015 with 1.2m transactions* (2014: 1.2m transactions) our focus has been on the integration of the acquired brands, realising economies of scale and developing our offerings across five brands.

* HMRC UK Property Transaction Statistics 23 February 2016

Group revenue for the financial year ended 31 December 2015 was £7.1m (2014: £5.2m), an increase of £1.9m (38%) over the prior year. The incorporation of a full year's revenue from the Xperience acquisition in October 2014 contributed £1.7m of this increase.

Management Service Fees represented 87% of Group revenue with the remainder being franchise sales and ancillary services to support Management Service Fees generation.

Management Service Fees from the Martin & Co offices increased by £0.4m (11%) in the year. However, franchise sales activities, whilst on a par with 2014, delivered lower revenues in 2015 of £0.1m and we sold our Saltaire portfolio in January 2015 which had delivered £0.1m of revenue in 2014. Thus, the increase in total revenue from Martin & Co was £0.2m.

Operating Profit

Operating profit before exceptional costs increased from £2.0m to £2.9m (42%) and the margin increased from 39% to 41%.

Administration expenses, including the first full year of the Xperience acquisition, increased by £1.1m (£0.2m of the increase was attributable to amortisation). Cost savings of £0.4m were realised.

EBITDA

EBITDA before exceptional costs for 2015 was £3.2m (2014: £2.1m) an increase of £1.1m (50%) over the prior year.

The exceptional costs for 2015 are £0.2m (2014: £0.2m) and all relate to redundancy payments following the Group's re-organisation (2014: Xperience acquisition costs).

The profit before tax was £2.7m for 2015, an increase of £0.8m (42%) over the prior year.

The effective rate of corporation tax for the year was 20.25% (2014: 21.5%). The total tax charge for 2015 is £539,000 (2014: £416,000).

Earnings per share for the year was 9.8 pence (2014: 6.9 pence), an increase of 42%. The profit attributable to owners increased to £2.2m (2014: £1.5m).

The Board is proposing a final dividend of 4.1 pence per share for 2015 which, together with the interim dividend of 1.8 pence per share paid to shareholders on 30 September 2015, equates to a total dividend for the financial year of 5.9 pence (2014: 4.0 pence), an increase of 47.5%.

The net cash inflow from operating activities in 2015 was £2.4m (2014: £1.5m) before exceptional costs of £0.2m (2014: £0.2m) as the newly expanded Group continues to generate strong operating cash inflows.

The net cash inflow from investing activities was £0.3m (2014: outflow £5.0m) due principally to the disposal of the Saltaire portfolio in this year and the Xperience acquisition in 2014.

Loan repayments totaling £0.5m plus interest payments of £0.1m were made on the Santander UK plc loan during 2015. Dividend payments were £1m in 2015.

The Group had cash balances of £4.3m at 31 December 2015 (2014: £3.4m).

The Group is strongly cash generative which, together with the undrawn facility from Santander UK plc of £3.0m at 31 December 2015, puts it in a strong position with regard to the acquisition element of its strategic plan.

David Raggett

Chief Financial Officer

4 April 2016

The Group's franchise model

Key strengths

· Five-year franchise, exclusive postcode territory

· New franchise territories cumulatively profitable by year three

· Franchise renewal subject to qualifying conditions

· Group control over branding, records and standards

· Very high levels of franchisee retention

Proposition

All franchisees receive initial training and mentoring, followed by ongoing access to regional training programmes, business development advice, legal and IT systems support, marketing campaigns and use of the brand website, assistance with recruiting specialist staff, obtaining start-up and expansion funding and business acquisitions. In return, the Group charges a management service fee of 9% levied on all fee income, in the case of Martin & Co franchisees, and 7.5% (currently) for franchisees of Xperience.

New franchisees at Martin & Co come from a wide variety of backgrounds; Xperience franchisees are typically career estate agents and letting agents who converted to franchisees having formerly run a Legal & General owned estate agency office. Typically a new franchisee launches in branded high street office premises with a member of staff and a branded vehicle.

A franchisee can only exit via a controlled sale to another franchisee approved by the Group (a 'resale') and a resale typically improves fee income at the business by 30% within 12 months of the change of franchisee.

We have built a stable footprint of experienced franchisees with the financial capacity and managerial capability for further business development.

Strategy and progress

Our mission is to be the dominant property franchise group in the UK by expanding our brand stable, range of services, network footprint and client base.

The Group expects to continue to grow its share of the UK private rental market. The Board believes that 55% of UK private rented sector (households) is now contained within territories occupied by the Group's franchisees. The Group now trades from 287 offices and it will continue to recruit new franchisees, convert competitors to join its franchise brands, and make selective acquisitions to move toward its goal of 500 offices.

The Group will continue to develop a supportive environment in which motivated individuals can secure their financial future using a franchise model.

MartinCo PLC - background

The Group operates as a pure franchise model primarily focused on UK residential lettings and property management services offered to private clients. We also have a developing income stream from estate agency services.

Traditionally, Martin & Co recruits new franchisees from a wide pool (83% do not come from a property background) and provide intensive training and "hands-on" support. The focus on lettings emanated from growth in this sector and the attraction of a recurring commission income stream from a portfolio of tenanted managed properties. After the financial crisis of 2008, the business recorded its peak flow of new franchisees and retail banks continued to lend support to its start-ups because of the strength of its franchise model.

The business added a sales-based estate agency service in 2012 principally to service investment property trades by its existing clients. More recently the service has been promoted to the general house buying public with an innovative "online" advertising service as a defensive play against the virtual estate agents who operate without high street premises.

A listing on the Alternative Investment Market in December 2013 raised £4m of fresh capital to invest in a lettings business acquisition programme to supplement organic growth. In October 2014 MartinCo purchased the entire property franchise business of Legal & General, which operated as four franchise brands.

Based on the 2011 census the Group now contains 55% of total UK private rental households within its occupied franchisee territories, and of these it manages 1.58%.

The Group competes for rental instructions against Countrywide, LSL and Foxtons.

The CJ Hole brand is ranked the No.1 agent based on independent customer satisfaction surveys in Bristol (allagents.co.uk) and No. 16 in the whole of the UK.

An independent survey has revealed that 94% of Martin & Co landlord clients would recommend its service.

Key Group operational metrics

Our brand stable

Martin & Co

Martin & Co was established in 1986 and began franchising in 1995. It is a national brand with 195 offices widely distributed across the UK. Martin & Co is predominantly a specialist lettings and property management business with a truly national client base. The first franchise was sold in 1995 and the franchise has grown every year since. The business mix is 90% lettings and 10% estate agency by management services fees revenue. Estate agency revenue grew by 76% year-on-year in 2015.

Xperience

Legal & General established Legal & General Franchising Ltd in 1992 in order to facilitate the transition from a model of directly owned and managed estate agency operations to a franchise model. Thirteen years later the brand "Xperience" was adopted to describe the whole of the property franchise business of Legal & General and selected to communicate the many years' of accumulated experience within its four established regional brands; Ellis & Co, Parkers, CJ Hole and Whitegates.

Ellis & Co

Ellis & Co opened its first office in Swiss Cottage, north-west London in 1850. The business expanded substantially in the 1960's and 70's before a period of retrenchment. It now has 21 offices within the M25 and 1 office in Tonbridge, Kent.

CJ Hole

CJ Hole was founded in Clifton, Bristol by Charles Joseph Hole in 1867 as a rent collection business.

Over the years, the focus of the business changed towards selling property as the company began to expand. Today, CJ Hole is a major force within the estate agency market in the South West with 22 offices throughout Bristol, Somerset and Gloucestershire.

Parkers

Established in Gloucester in 1948, today Parkers is a dominant force in the South of England with a network of 14 offices along the M4 corridor.

Whitegates

Established in 1978, Whitegates is an estate agency with 34 offices across the North of England, including Yorkshire, Midlands, the North East, North West and Wrexham in north Wales. Whitegates derives approximately half of its income from lettings activity.

 Consolidated statement of comprehensive income

for the year ended 31 December 2015

The financial statements were approved and authorised for issue by the Board of Directors on 4 April 2016 and were signed on its behalf by:

David Raggett

Chief Financial Officer

Consolidated statement of changes in equity

for the year ended 31 December 2015

Notes to the consolidated statement of cash flows

for the year ended 31 December 2015

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

2. Purchase of Subsidiary undertakings net of cash acquired

In the prior year the Group obtained control of Xperience Franchising Limited and Whitegates Estate Agency Limited.

Notes to the consolidated financial statements

for the year ended 31 December 2015

1. General information

The principal activity of MartinCo 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 and IFRS Interpretations Committee (IFRS IC) 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. As set out in note 23, the acquisition of Martin & Co (UK) Limited in 2013 was accounted for as if it had been owned for the whole period.

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 relevant new standards, amendments to standards and interpretations have been issued, but are not effective for the financial year beginning on 1 January 2015, as adopted by the European Union, and have not been early adopted:

The directors anticipate that the adoption of these Standards and Interpretations in future periods will have no material impact on the financial statements of the Group when the relevant standards and interpretations come into effect. 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.

The following standards have been issued by the IASB but have not yet been adopted by the EU:

While the above standards have not been adopted by the EU the company is currently assessing their impact.

3. Basis of consolidation

The Group financial statements include those of the parent company and its subsidiaries, drawn up to 31 December 2015. Subsidiaries are all (including Structured 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. The Group recognises any non-controlling interest in the acquiree on an acquisition-by-acquisition basis, either at fair value or at the non-controlling interest's proportionate share of the recognised amounts of acquiree's identifiable net assets. 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 with 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, management service fees, levied to franchisees monthly based on their turnover, and the provision of training and ongoing support to franchisees.

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, with other fees 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.

Intangible assets - goodwill

Goodwill (being the difference between the fair value of consideration paid and the fair value of the identifiable assets at the date of acquisition) is capitalised. Goodwill is not amortised, but subject to an annual review for impairment (or more frequently if necessary). Any impairment is charged to the profit or loss as it arises.

An impairment loss is recognised for the amount by which the carrying value of goodwill exceeds its recoverable amount, which the Directors assess on a 'value in use' basis. To determine the value in use, management estimates expected future cash flows from trading operations, each business being one cash generating unit, and determines a suitable growth rate in order to calculate the present value of those cash flows. The discount factor reflects management's assessment of the risk profile of the business.

Discontinued operations

Non-current assets are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset is available for sale in its immediate condition. Management must be committed to the sale, which should be expected within one year from the date of classification as held for sale.

Immediately before classification as held for sale, the assets are re-measured and recognised at the lower of their carrying amount and their fair value less costs to sell if their carrying amount essentially derives from their sale rather than their continued use. Assets classified as held for sale are not depreciated. Impairment losses on initial classification as held for sale and subsequent gains or losses on re-measurement are included in the income statement. Gains are not recognised in excess of any cumulative impairment loss.

Profit after tax from operations qualifying as discontinued operations are presented separately as a single amount on the income statement. The assets held for resale and the liabilities held for resale are shown separately on the balance sheet. Results from operations qualifying as discontinued operations as of the balance sheet date for the latest period presented, that have previously been presented as results from continuing operations, are represented as results from discontinued operations for all periods presented.