Propty Franchis Regulatory News (TPFG)

10 September 2019

THE PROPERTY FRANCHISE GROUP PLC

(the "Company" or the "Group") 

Interim Results for the six months ended 30 June 2019

Profit up 6% and interim dividend up 8%

The Property Franchise Group, one of the UK's largest property franchises, today announces its interim results for the period ended 30 June 2019.

Financial Highlights

·; Revenue of £5.5m (H1 2018: £5.5m), in line with expectations

·; Management Service Fees ("royalties") increased by 5% to £4.6m (H1 2018: £4.4m)

·; Operating margin increased to 37% (H1 2018: 35%)

·; EBITDA increased by 5% to £2.4m (H1 2018: £2.3m)

·; Profit before tax increased 6% to £2.0m (H1 2018: £1.9m)

·; Strong balance sheet with a net cash position of £2.8m (H1 2018: £0.5m)

·; Interim dividend increased by 8% to 2.6p per share (H1 2018: 2.4p)

Operational Highlights 

·; Tenanted managed properties increased 6% to 56,000 (H1 2018: 53,000)

·; 17 acquisitions by franchisees completed year to date, generating annualised Management Services Fees of £0.2m

·; 369 trading offices (H1 2018: 377)

·; 8 new franchisees recruited and 9 new offices opened

·; Group remains heavily weighted towards lettings, accounting for 70% of Management Service Fees (H1 2018: 69%)

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

"We have delivered another strong set of results, with progress in each of our six brands, which have all grown our most important revenue stream, franchise management services fees over the same period last year. Our profit has also grown, driven by the health of our franchisees' businesses and prudent cost management.

"Historically, the Group experiences stronger trading in the second half year, associated with heightened lettings activity in the period from June to September. At this stage we believe that this pattern will be maintained. Our strong balance sheet and our continued confidence in the underlying strength of our business model means that we are pleased to be increasing the interim dividend by 8% to 2.6p in line with our progressive dividend policy.

"Thanks to our franchise business model, diverse brand offering, lettings weighting and high levels of cash generation, resulting in a strong balance sheet, we are well-positioned to outperform our competitors, increase market share and deliver value for all our stakeholders in the immediate and longer term."

For further information, please contact:

Chief Executive's Review

The Property Franchise Group has continued to outperform with all of our six brands' franchisee networks achieving revenue growth over the period, despite challenging market conditions.

Our franchisees added 1,175 tenanted managed properties in the reporting period through our assisted acquisitions programme. These additions, alongside the continued organic growth of the portfolio leaves the Group managing 56,000 properties, as at the period end.

Driving continued growth in our traditional brands

For our traditional brands the growth was driven largely by a robust increase in lettings management service fees (MSF), which outweighed the market weakness faced in sales. We were pleased to see the Group's strategic weighting towards lettings showing its resilience as expected during this time of uncertainty.

Our franchisees continue to invest in our centralised digital marketing and, in the reporting period just pay-per-click delivered 29,490 new business leads compared to 30,474 leads in the whole of 2018. Our capability in this area is improving all the time which means that our traditional high street agents can compete with the perceived threat from online and hybrid competitors.

EweMove

As well as also increasing its lettings revenue our hybrid brand EweMove demonstrated that its unique, highly customer centric offering can defy the challenging sales market, as its sales revenue increased. This was through existing franchisees achieving higher sales conversion rates.

EweMove has 115 franchise territories trading at the end of the reporting period which is broadly flat against the prior year. However property listings have increased to 3,173 in H1 2019 (H1 2018: 3,062), which was pleasing against the backdrop of a falling market. EweMove has improved its cash generation year on year, and tight cost control has delivered a corresponding improvement in profitability. We are on track to materially improve on the 2018 result for the full year.

Having examined the evidence, experienced estate agents initially outperform inexperienced franchise recruits from other sectors, but only in the first two years trading as a EweMove franchisee. Consequently, we have resumed recruiting non-agents as franchisees at EweMove provided that we are satisfied they have transferable sales skills and access to sufficient working capital during the build-up period.

The importance of the franchise business model

The period has been another example of the importance of our business model in allowing us to support franchisees through new regulation and wider macro-economic challenges.

The Government's tenant fee ban took effect on 1 June, with these results reflecting one month's impact of the ban. Pleasingly, post period we have seen July's letting results exceed our expectations, with evidence of pent up tenant demand feeding through. We continue to work closely with our franchisees on mitigating the effects of the ban.

The Government has proposed the creation of a unitary regulatory body for letting agents and the requirement for all practitioners to submit to a test of professional competence. Our Group is particularly well positioned to navigate hurdles such as these. Our founding business, Martin & Co, built its reputation by recruiting franchisees from disparate backgrounds and instilling, through its training programme, all of the skills and knowledge they needed to practise as agents. We have a strong heritage in this capability and are well placed to continue supporting our franchisees through increased regulatory challenges.

Outlook

Whilst we are cognisant of the UK market conditions and the challenges we face, our franchisees are proving highly resilient, taking up the opportunities to outpace their competitors afforded through our centralised digital marketing and assisted acquisitions programme.

As is appropriate, we are consciously risk-adverse at this point in the cycle and continue to manage our operating margin in order to further drive profitability. Notwithstanding this, our strong net-cash position and available bank facility means that we are in an excellent position to capitalise on opportunities in the remainder of 2019 and into 2020. The Board remains confident of delivering on market expectations for the full year.

Ian Wilson, Chief Executive Officer

Financial Review

Revenue

Revenue for the six months ended 30 June 2019 was £5.5m (H1 2018: £5.5m), in line with expectations. This is before the amortisation of assisted acquisition support provided to franchisees to incentivise the purchase of portfolios of managed properties.

Underlying this was a strong performance from our network, outperforming the market in sales and lettings. Management Service Fees ("MSF") grew by 5% to £4.6m accounting for 85% of total revenue, up from 80% this time last year.

Traditional Brands' MSF

Overall, our traditional brands' network continues to prosper. In the traditional brands, lettings MSF grew by 6% to £2.85m and sales MSF declined by 9% to £0.67m in the six months ended 30 June 2019 compared to the same period of 2018. Despite the falling number of lettings instructions and the implementation of the tenant fee ban on 1 June 2019, our network is growing revenue, primarily due to their focus on acquiring portfolios of managed properties with our assistance. Whilst it is disappointing to see sales MSF decline, the weaknesses of the housing market are well documented and 3% of the reduction is due to us reducing the number of CJ Hole offices. We continue to pursue digital marketing initiatives aimed at continuing to outperform the market.

EweMove's MSF

EweMove franchisees pay a monthly licence fee and a completion fee per transaction. The total of the licence fees and completion fees for the six months ended 30 June 2019 was £1.06m (H1 2018: £0.92m), a 15% increase on the same period of 2018. We include these licence fees and completion fees within MSF.

EweMove grew house sales completions in the first six months of 2019 by 16% compared to the same period last year through existing franchisees converting more of the fewer opportunities into sales. Lettings completions in the first six months of 2019 increased by 12% compared to the same period last year.

Franchise Sales

Franchise sales income was £0.1m (H1 2018: £0.2m). New recruits in the first half of this year were 8 compared to 16 for the comparative period. All have joined EweMove so far this year of which 63% are experienced estate agents.

Other

Other income was £0.74m (H1 2018: £0.89m), down 17% on the six months ended 30 June 2018 mainly due to reorganisations in the network generating fewer and lower fees so far this year.

Assisted Acquisitions

In the year to end of August 19, franchisees completed on 17 Assisted Acquisitions with a total deal value of £3.1m (2018 YTD: 20 Assisted Acquisitions with a total deal value of £3.2m). The total number of managed properties acquired was 2,000 (2018 YTD: 2,400). Based on their historic results, these acquisitions added £2.4m to annualised network revenue and increased annualised recurring MSF by £0.2m (2018 YTD: £2.3m of annualised network revenue and additional annualised recurring MSF of £0.2m).

Administrative expenses

Administrative expenses have been reduced by £0.15m to £2.85m due to targeted cost control in what we knew would be a challenging year.

EBITDA

The Group's EBITDA was £2.4m (H1 2018: £2.3m), an increase of 5% over the comparative period. There were no exceptional items or share-based payment charges in the first half of 2019 nor the comparative period.

Operating profit

Operating profit increased 5% to £2.0m (H1 2018 £1.9m) and operating margin was 37% (H1 2018: 35%) helped by the reduction in administrative expenses.

Earnings per share

Earnings per share for the six months ended 30 June 2019 was 6.3p (H1 2018: 5.9p). The income attributable to owners was £1.6m (H1 2018: £1.5m).

Profit before income tax

Profit before tax was £2.0m (2018: £1.9m), an increase of 6%.

Dividends

The Board has pursued a progressive dividend policy since the IPO. Once again, the Company has increased the interim dividend by 8% over last year reflecting the increase in profitability and reconfirming its commitment to that policy. The Company intends to make an interim dividend payment of 2.6p per share on 1 October 2019 to shareholders on the register on 20 September 2019, being the record date. The ex-dividend date will be 19 September 2019.

Cash flow

At an operational level, the Group is highly cash generative and its cash flow has annuity like characteristics. The net cash inflow from operating activities in the first six months of 2019 increased 11% to £2.2m (H1 2018: £2.0m).

The payments of assisted acquisitions support amounted to £0.1m (H1 2018: £0.1m) and are explained by incentives targeted at encouraging franchisees to acquire portfolios of tenanted managed properties.

In the first six months of 2019 the Group made bank loan repayments of £0.45m (H1 2018: £0.45m) and paid a final dividend of £1.5m for the year ended 31 December 2018 (H1 2018: £1.4m for the year ended 31 December 2017).

Overall cash balances increased by £1.3m to £3.9m (H1 2018: £2.6m).

Liquidity

The Group had a net cash balance of £2.8m at the end of the period (H1 2018: net cash £0.5m).

The Group had undrawn bank loan facilities of £3.8m at 30 June 2019 (30 June 2018: £3.0m). These are due for renewal in October 2019 and arrangements are at an advanced stage. Their renewal does not impact the repayment terms for the two existing loans.

Financial position

The Group continues to be strongly cash generative with a significantly enhanced net cash position affording it increasing headroom in its dividend policy as it continues to pursue an attractive yield for investors. At the same time our strong balance sheet enables us to continue to fulfil the acquisition element of our strategic plan and to pursue the fulfilment of EweMove's potential.

David Raggett, Chief Financial Officer

THE PROPERTY FRANCHISE GROUP PLC

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE SIX MONTHS ENDED 30 JUNE 2019

THE PROPERTY FRANCHISE GROUP PLC

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 30 JUNE 2019

THE PROPERTY FRANCHISE GROUP PLC

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE SIX MONTHS ENDED 30 JUNE 2019

THE PROPERTY FRANCHISE GROUP PLC

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED 30 JUNE 2019

THE PROPERTY FRANCHISE GROUP PLC

NOTES TO THE INTERIM RESULTS

FOR THE SIX MONTHS ENDED 30 JUNE 2019

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. The address of its head office and registered office is 2 St Stephen's Court, St Stephen's Road, Bournemouth, Dorset, UK.

2. GOING CONCERN

The interim financial information has been prepared on the basis that the Group is a going concern.

When assessing the foreseeable future the directors have looked at a period of 12 months from the date of approval of the interim financial information. The directors have a reasonable expectation that the Group has adequate resources to continue to trade for the foreseeable future and, therefore, consider it appropriate to prepare the Group's interim financial information on a going concern basis.

3. BASIS OF PREPARATION

The consolidated interim financial information for the six months ended 30 June 2019 was approved by the Board and authorised for issue on 10 September 2019. The results for 30 June 2019 and 30 June 2018 are unaudited. The disclosed figures are not statutory accounts in terms of Section 435 of the Companies Act 2006. Statutory accounts for the year ended 31 December 2018 on which the auditors gave an audit report which was unqualified and did not contain a statement under Section 498(2) or (3) of the Companies Act 2006, have been filed with the Registrar of Companies. The annual financial statements of the Group are prepared in accordance with International Financial Reporting Standards as adopted by the European Union.

This interim report has been prepared on a basis consistent with the accounting policies expected to be applied for the year ending 31 December 2019, and uses the same accounting policies and methods of computation applied for the year ended 31 December 2018. IFRS 16 Leases applies to the financial year beginning 1 January 2019 but has not been applied in this interim report because the impact of IFRS 16 is immaterial to the Group's interim financial information.

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. Currently, the Group holds some non-cancellable operating leases but no finance leases. The non-cancellable operating lease commitments meet the definition of a lease under IFRS 16. Thus, the Group will recognise a right-of-use asset and a corresponding liability in respect of all these leases in its year-end accounts in the order of £0.05m. The charge to be recognised in the consolidated statement of comprehensive income is estimated to be £0.05m for 2019, comprising depreciation and interest and will replace the operating lease rentals which would have been charged had IFRS 16 not been applied.

4. BASIS OF CONSOLIDATION

The Group's interim financial information includes those of the parent company and its subsidiaries, drawn up to 30 June 2019. 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 with the Group's accounting policies.

5. 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.

6. 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 the periods reported.

7. TAXATION

The underlying tax charge is based on the expected effective tax rate for the full year to December 2019. The majority of the tax arises from applying this effective tax rate to the profit on ordinary activities.

8. EARNINGS PER SHARE

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

9. DIVIDENDS

10. INTANGIBLE ASSETS

11. TRADE AND OTHER RECEIVABLES

12. CALLED UP SHARE CAPITAL

Enterprise Management Incentive ("EMI") Share Option Scheme 2017

During the year ended 31 December 2017 the Company implemented an EMI scheme as part of the remuneration for all staff and granted options over 2,290,000 ordinary shares at an exercise price of £0.01 each which included options over 1,500,000 ordinary shares being granted to two Executive Directors.

The options are exercisable after the approval of the financial statements for the year ending 31 December 2019, and subject to meeting an Earnings per Share target.

Enterprise Management Incentive ("EMI") Share Option Scheme 2018

On 1 August 2018 employees including the two Executive Directors with options in the EMI Share Option Scheme 2017 were granted options in a parallel scheme, over the same number of shares, and with the same Earnings per Share target, but these are exercisable one year later, after the approval of the financial statements for the year ending 2020. These participants, therefore, hold two options, one for each Scheme, and are only be able to exercise one of their options. The total number of parallel options granted was 1,965,000.

On 1 August 2018 new employees who did not have options under the 2017 scheme were granted options over 155,000 shares at an exercise price of £0.01 each.

13. OTHER RESERVES

Merger reserve

The merger reserve relates to the acquisition of Martin & Co (UK) Limited by The Property Franchise Group plc. This did not meet the definition of a business combination and therefore, falls outside of the scope of IFRS 3. This transaction was accounted for in accordance with the principles of merger accounting as set out in Financial Reporting Standard 6 - Acquisitions and Mergers.

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.

14. BORROWINGS

The term loan of £1.15m (30 June 2018: £2.05m) is secured with a fixed and floating charge over the Group's assets and a cross guarantee across all companies in the Group.

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'.

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 at 4.08%. The amount outstanding at 30 June 2019 was £0.25m (30 June 2018: £0.75m).

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 interest rate is variable during the term at 2.5% above LIBOR and at 30 June 2019 the rate was 3.3%. The amount outstanding at 30 June 2019 was £0.9m (30 June 2018: £1.3m).

At 30 June 2019 the unutilised amount of the facility was £3.85m (30 June 2018: £2.95m).

15. TRADE AND OTHER PAYABLES