Financial review

In this section

Overview

Although 2010 has been another difficult year for the economy, the Group has delivered robust results in challenging market conditions. The Group has continued to shape its divisions either through internal merger and restructure or through acquisition, to better address the markets in which they operate. The amended structure provides a strong platform from which to exploit opportunities and to provide future growth when conditions in the Group’s markets improve. The Group continues to address its cost base and this has resulted in annualised cost savings of £59m being realised since the start of 2008. Further action will continue to be taken as necessary.

In the year, the Group has significantly extended its Affordable Housing offering through the acquisition of Powerminster in June and, in September, by acquiring from the administrators of Connaught Partnerships Limited the Connaught social housing maintenance business through the ability to pursue the novation of certain contracts, together with invoiced and uninvoiced debts. Provisional goodwill and other intangible assets of £33.9m have arisen on these two acquisitions and the Group believes that these transactions will transform the division, which now provides a unique full affordable housing service covering planned maintenance, response maintenance and new build open market and social housing.

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Non-recurring items

The Group has incurred non-recurring items during the year of £3.9m in acquiring and integrating the Connaught and Powerminster businesses and £3.2m in merging its Construction and Infrastructure Services divisions. These costs were offset by a one-off gain of £2.0m that arose on Urban Regeneration’s purchase of certain joint venture interests.

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Revenue of £2,102m and operating profit of £52.4m

Revenue has fallen by 5% to £2,102m (2009: £2,214m), with the main components being a fall of £263m in Construction & Infrastructure offset by rises of £124m in Fit Out and smaller rises in Affordable Housing and Urban Regeneration. Most of the increase in revenue in Affordable Housing is attributable to the Powerminster and Connaught acquisitions.

Operating profit has risen by £1.9m to £52.4m (2009: £50.5m), with increases in Fit Out (£1.0m), Affordable Housing (£1.2m), Urban Regeneration (£1.3m) and Group Activities (£1.9m) being offset by a decrease of £3.2m in Construction & Infrastructure. The Investments unit incurred an operating loss of £3.3m (2009: £3.0m).

Construction & Infrastructure delivered a stronger operating margin at 2.2% (2009 2.0%). The operating margin in Fit Out has fallen to 3.6% (2009: 4.7%), due to continued tough market conditions and, at Affordable Housing it improved to 4.2% (2009: 4.0%).

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Net finance expense of £1.1m

The net finance expense of £1.1m compares with net finance income of £1.0m in 2009. This change is due to £1.7m of other finance charges being recognised in the net finance expense in 2010. Lower interest rates on what have been higher average cash balances, have also contributed to the impact on net finance cost.

Overall, profit before tax, amortisation and non-recurring items is in line with the previous year at £51.3m (2009: £51.5m). Amortisation in the year was £5.5m (2009: £6.8m).

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Tax

The Group’s tax charge of £10.9m (2009: £11.8m) represents an effective tax rate of 26.8% (2009: 26.4%). The effective tax rate is lower than the standard rate of corporation tax largely due to prior year adjustments of £0.9m (2009: £1.2m). The Group continues to discuss with HMRC the corporation tax treatment of the fair value adjustments which arose following the 2007 acquisition of certain businesses and assets from Amec. As a result of these discussions, the Group reduced the payments of corporation tax which it would otherwise have made to HMRC during 2010 by £3.9m. In 2009, the Group reduced its corporation tax payments by £9.2m and received repayments from HMRC of £9.5m. No benefit has been recognised in the tax charge in the income statement in respect of this matter, as discussions are still progressing and the eventual outcome is unclear.

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Earnings per share

Adjusted basic earnings per share before amortisation and non-recurring items have fallen by 1% from 93.9p to 92.9p, reflecting the slight fall in adjusted profit before tax and the slight increase in the effective tax rate. Basic earnings per share have fallen by 9% from 77.9p to 70.5p.

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Dividend

The Board recommends a final dividend of 30.0p payable on 16 May 2011 to shareholders on the register at the close of business on 26 April 2011. This will give a total dividend for the year maintained at 42.0p (2009: 42.0p). This is covered by adjusted earnings per share 2.2 times (2009: 2.2 times). The Group’s long-term policy remains one of increasing the dividend broadly in line with the growth in earnings, aiming to cover the dividend by earnings between two-and-a-half and three times. Although in the short-term the cover has remained at 2.2 times, the Board is comfortable with this as the dividend is covered by operating cash flows. The Group will seek to re-establish the longer-term level of cover as and when profits increase.

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Continuing balance sheet strength

Total equity increased to £221.7m (2009: £209.3m). The number of shares in issue at 31 December 2010 was 43.2m (2009: 43.2m). The small increase of 28,000 shares was due to the exercise of options under employee share option schemes.

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Group has substantial year end cash balances

The cash position of the Group at the year end was robust at £149m (2009: £118m). Average cash during 2010 increased to £63m (2009: £31m).

The net cash inflow from operating activities was £93.1m (2009: £25.0m). This is primarily the result of the working capital improvement of £53.7m (2009: worsening of £31.3m). Additionally, the Group has £13.9m (2009: £9.0m) of shared equity receivables relating to open market sales in the Affordable Housing and Urban Regeneration divisions. There were net payments of £35.2m to acquire subsidiaries and other businesses (2009: £1.1m), capital expenditure was £3.1m (2009: £7.5m) and payments to increase interests in joint ventures were £4.3m (2009: £4.2m), all of which reflect ongoing investment in the business. Cash dividends of £0.8m (2009: £2.2m) were received from joint ventures. After tax payments, dividends and servicing of finance, the net increase in cash and cash equivalents was £30.9m (2009: £2.6m decrease). It is anticipated that these cash resources will be available for the development of the Group’s businesses, either to fund acquisitions or invest in working capital as required.

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Banking facilities of £100m committed until 2012

The Group has £100m of committed facilities available through to mid-2012. The banking facilities are subject to financial covenants, all of which have been met during the year. These committed facilities supplement the cash balances in providing financial security to the Group.

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Consistent approach to treasury risk management

The Group has clear treasury policies which set out approved counterparties and determine the maximum period of borrowings and deposits. Deposits are restricted to periods of no longer than three months. The Group has very limited exposure to foreign exchange risk because its operations are based almost entirely in the UK; non-UK suppliers are used only occasionally.

Although the Group does not use derivatives, some of its joint venture businesses use interest rate swaps to hedge floating interest rate exposures and Retail Prices Index swaps to hedge inflation exposure. The Group considers that its exposure to interest rate and inflation movements is appropriately managed. Further information on the Group’s use of financial instruments is explained in the consolidated financial statements.

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Going concern

The Group’s business activities, together with the factors likely to affect its future development, performance and position, are set out in this business review. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are also described above. In addition, note 29 to the consolidated financial statements includes the Group’s objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposure to credit risk and liquidity risk. The Board aims to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain the future development of the Group and achieve a suitable balance between higher returns that may be possible through borrowing and the stability afforded by a sound capital position. There were no changes in the Group’s approach to capital management during the year and the Group is not subject to any capital requirements imposed by regulatory authorities.

As at 31 December 2010, the Group had cash of £149m and committed banking facilities of £100m extending until mid-2012.

The Group’s forecasts and projections, taking account of reasonably possible changes in trading performance, show that the Group should be able to operate within the level of its current banking facilities.

The directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Thus, they continue to adopt the going concern basis in preparing the annual financial statements.

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