REG - LSL Property ServPLC - Replacement - INTERIM RESULTS <Origin Href="QuoteRef">LSL.L</Origin> - Part 3
29/10/2014 10:18
- Part 3: For the preceding part double click ID:nRSE2260Ob
Current 8,378 80 8,458
Non-current 17,486 395 17,881
25,864 475 26,339
The PI Cost provision is to cover the costs of claims relating to valuation services for clients which are not covered by
PI insurance. The PI Cost provision includes amounts for claims already received from clients, claims yet to be received
and any other amounts which may be payable as a result of legal disputes associated with provision of valuation services.
The provision is the Directors' best estimate of the likely outcome of such claims, taking account of the incidence of
claims and the size of the loss that may be borne by the claimant, after taking account of actions that can be taken to
mitigate losses. The provision will be utilised as individual claims are settled and the settlement amount may vary from
the amount provided depending on the outcome of each claim. It is not possible to estimate the timing of payment of all
claims and therefore a significant portion of the provision has been classified as non-current.
An additional exceptional charge of £12.0m (c£9.2m after tax) was made in the year ending 31st December 2013 in order to
increase the PI Cost provision. Since December 2013, the rate of new claims and cost per claim has overall been consistent
with the assumptions behind the provision. This additional provision represents the Directors' current best estimate of
likely claims costs but the process of resolving open claims and estimating future claims is on-going. A number of risks
and uncertainties remain, in particular the actual monthly run rate of new claims, the date at which the high rate of
claims will significantly reduce, and the average cost per case both for existing open claims and for claims yet to be
received. The cost of these factors could differ materially from the Directors' estimates, which could result in a further
provision being required.
12. Provisions for liabilities (continued)
At 30th June 2014 the total provision for PI Costs was £20.8m. The Directors have considered sensitivity analysis on the
key risks and uncertainties discussed above. If the rate of new claims relating to the 2004 to 2008 high risk lending
period experienced during the second quarter of 2014 were to continue through to June 2015 (rather than reduce during the
second half of 2014 and then fall to zero in 2015) an additional provision of £2.4m would be required. If the average cost
per case for both existing open claims and for claims yet to be received was 10% higher or lower than assumed in the year
end provision of £20.8m, an additional or lower provision of £3.2m would be required.
The provision for lease obligations relates to obligations under leases on vacant properties. The provision is expected to
be fully utilised by June 2020. The final outcome depends upon the ability of the Group to sublet or assign the lease over
the related properties.
13. Analysis of Net Bank Debt
Six Months Ended Year Ended
30th June 2014 30th June 2013 31st December 2013
£'000 £'000 £'000
Interest bearing loans and borrowings
- Current 4,218 1,969 5,113
- Non-current 37,882 49,542 43,749
42,100 51,511 48,862
Less: 12% unsecured loan notes (9,507) (9,172) (9,339)
Add: cash and short-term deposits (1,025) (218) (469)
Less: deferred and contingent consideration (12,832) (10,429) (12,745)
Net Bank Debt at the end of the year 18,736 31,692 26,309
Net Bank Debt excluding the net sale proceeds from the sale of Zoopla shares and reinvestment into Zoopla totalling of
£17.8m was £36.5m.
14. Financial instruments - risk management
The financial risks the Group faces and the methods used to manage these risks have not changed since 31st December 2013.
Further details of the risk management policies of the Group are disclosed in Note 29 of the Group's Financial Statements
for the year ended 31st December 2013.
In 2009 the Group entered into interest rate swap agreements to fix interest rates on £25m of the Group's bank borrowings.
The interest rate swap agreements fix LIBOR to approximately 2.9% until April / May 2014 and so have expired at 30th June
2014. At 30th June 2014, after taking into account the effect of interest rate swaps, none of the Group's RCF is at a fixed
rate of interest ( 31st December 2013: 94% and 30th June 2013: 80%).
The Group has a current ratio of Net Bank Debt (excluding loan notes) to EBITDA of 0.41 (31st December 2013: 0.63 and 30th
June 2013: 0.87). The business is cash generative with a low capital expenditure requirement. The Group remains committed
to its stated dividend policy of 30% to 40% of Underlying Operating Profit after interest and tax. In addition, the Group's
other main priority is to generate cash to support its operations and to fund any strategic acquisitions.
15. Fair values of financial assets and financial liabilities
Set out below is a comparison by category of carrying amounts and fair values of all of the Group's financial instruments
that are carried in these financial statements:
June 2014 June 2013 Dec 2013
Book and Fair value Book and Fair value Book and Fair value
£'000 £'000 £'000
Financial assets
Cash and cash equivalents 1,025 218 469
Available-for-sale financial assets 28,863 13,096 36,574
Financial liabilities
Interest-bearing loans and borrowings:
Floating rate borrowings (19,761) (31,382) (26,548)
Fixed rate borrowings - - -
Derivative financial liabilities - interest rate swaps - (528) (230)
Contingent consideration (12,386) (10,028) (12,299)
Deferred consideration (446) (401) (446)
12% unsecured loan notes (9,507) (9,172) (9,339)
The fair value of the Zoopla investment is made with reference to the latest share price as this is a listed investment
(listed on the London Stock Exchange). The fair value of the remaining available for sale financial assets have been
calculated with reference to the last trades in these assets. The fair values of the interest rate swaps were determined by
reference to market values for similar instruments. The fair values for the remaining financial instruments have been
calculated by discounting the expected future cash flows at interest rates prevailing for a comparable maturity period for
each instrument
Fair value hierarchy
As at 30th June 2014, the Group held the following financial instruments measured at fair value. The Group uses the
following hierarchy for determining and disclosing the fair value of the financial instruments by valuation technique:
· Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities;
· Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are
observable, either directly or indirectly; and
· Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on
observable market data.
· June 2014 Level 1 Level 2 Level 3
£'000 £'000 £'000 £'000
Assets measured at fair value
Financial assets 28,863 27,176 - 1,687
Liabilities measured at fair value
Contingent consideration 12,386 - - 12,386
Liabilities for which fair values are disclosed
Interest-bearing loans and borrowings:Floating rate borrowings 19,761 - 19,761 -
12% unsecured loan notes 9,507 - 9,507 -
· June 2013 Level 1 Level 2 Level 3
£'000 £'000 £'000 £'000
Assets measured at fair value
Financial assets 13,096 - - 13,096
Liabilities measured at fair value
Interest rate swaps 528 - 528 -
Contingent consideration 10,028 - - 10,028
Liabilities for which fair values are disclosed
Interest-bearing loans and borrowings:Floating rate borrowings 31,382 - 31,382 -
12% unsecured loan notes 9,172 - 9,172 -
15. Fair values of financial assets and financial liabilities (continued)
· Dec 2013 Level 1 Level 2 Level 3
£'000 £'000 £'000 £'000
Assets measured at fair value
Financial assets 36,574 - - 36,574
Liabilities measured at fair value
Interest rate swaps 230 - 230 -
Contingent consideration 12,299 - - 12,299
Liabilities for which fair values are disclosed
Interest-bearing loans and borrowings:Floating rate borrowings 26,548 - 26,548 -
12% unsecured loan notes 9,339 - 9,339 -
As disclosed in note 9, Zoopla completed an IPO on 18th June 2014. Immediately prior to IPO, the fair value of the
investment in Zoopla was revalued to £44,039,000. These financial assets are now valued based on a price in an active
market, representing a transfer from a Level 3 to a Level 1 valuation technique. At 30th June 2014, the remaining stake in
Zoopla was revalued to £27,176,000 based on the Zoopla share price at that date of £2.305 per share.
The other investments totalling £1,687,000 are still valued using Level 3 valuation techniques. The Directors reviewed the
fair value of the financial assets at 30th June 2014. The methods used to determine the fair value are disclosed in more
detail in note 9. The underlying value of the business will be driven by the profitability of these businesses. If this
was to drop by 10%, the implied valuation is likely to also drop by around 10%, £0.2 million.
The contingent consideration relates to amounts payable in the future on acquisitions. The amounts payable are based on
the amounts agreed in the contracts and based on the future profitability of each entity acquired. In valuing each
provision, estimates have been made as to when the options are likely to be exercised and the future profitability of the
entity at this date. Further details of these provisions are shown in note 11. If the future profitability of the
entities was to decline by 10%, the size of the contingent consideration would decrease by approximately £1.2 million.
Fair values of the Group's interest-bearing borrowings and loans are determined by using DCF methodology using a discount
rate that reflects the issuer's borrowing rate as at the end of the reporting period. The own non-performance risk as at
30th June 2014 was assessed to be insignificant.
16. Acquisitions
During the period the Group acquired three lettings businesses for a total consideration of £695,000. The entire purchase
price for the acquisitions has been assumed to be goodwill except £180,000 assigned to fixed assets.
In March 2014, the Group acquired 65% of Hawes & Co, a 6 branch estate agency chain based in Wimbledon for an initial
consideration of £3.2m. The remaining 35% is subject to put and call options which are exercisable between 2016 and 2019
dependent on profit performance. Due to the nature of the payment terms, the contingent consideration is considered to be a
capital payment for accounting purposes.
The fair value of the identifiable assets, except for cash and cash equivalents, and liabilities of Hawes & Co as at the
date of acquisition have been determined as below:
Fair value recognised on acquisition
£'000
Intangible assets 942
Property, plant and equipment 58
Trade and other receivables 384
Cash and cash equivalents 250
Trade and other payables (466)
Current tax liabilities -
Total identifiable net assets acquired 1,168
Purchase consideration 5,442
Goodwill 4,274
Purchase consideration discharged by:
Cash 3,192
Contingent consideration 2,250
5,442
The acquisition accounting above is considered provisional as LSL is still reviewing our estimates of the likely payments
under the contract, but the calculation above represents our best estimate at 30th June 2014.
The goodwill of Hawes & Co comprises certain intangible assets that cannot be individually separated and reliably measured
from the acquiree due to their nature. These items include an experienced management team with a good record of delivering
a quality service to customers against the backdrop of challenging market conditions, the expected value of synergies and
the potential to significantly grow the business. No determination has been made yet as to what proportion, if any, of the
goodwill will be tax deductible.
From the date of acquisition to 30th June 2014, the acquisitions in aggregate have contributed to £1.3m of revenue and
£0.2m profit before tax of the Group, excluding the impact of movements in the contingent consideration recorded through
the profit and loss. If all of these combinations had taken place at the beginning of the year, the consolidated revenue
would have been higher by £1.2m and the consolidated profit before tax would have been higher by £0.2m.
Transaction costs have been expensed and are included under exceptional costs (see note 6)
INDEPENDENT REVIEW REPORT LSL PROPERTY SERVICES PLC (Company)
Introduction
We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report
for the six months ended 30th June 2014 which comprises the Interim Group Income Statement, the Interim Group Statement of
Comprehensive Income, the Interim Group Balance Sheet, the Interim Group Cash Flow Statement, the Interim Group Statement
of Changes in Equity and the related notes 1 to 16. We have read the other information contained in the half yearly
financial report and considered whether it contains any apparent misstatements or material inconsistencies with the
information in the condensed set of financial statements.
This report is made solely to the company in accordance with guidance contained in International Standard on Review
Engagements 2410 (UK and Ireland) "Review of Interim Financial Information Performed by the Independent Auditor of the
Entity" issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the company, for our work, for this report, or for the conclusions we have formed.
Directors' Responsibilities
The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are
responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the
United Kingdom's Financial Conduct Authority.
As disclosed in note 1, the annual financial statements of the group are prepared in accordance with IFRSs as adopted by
the European Union. The condensed set of financial statements included in this half-yearly financial report has been
prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting", as adopted by the European
Union.
Our Responsibility
Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the
half-yearly financial report based on our review.
Scope of Review
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, "Review of
Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board
for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons
responsible for financial and accounting matters, and applying analytical and other review procedures. A review is
substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland)
and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be
identified in an audit. Accordingly, we do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial
statements in the half-yearly financial report for the six months ended 30th June 2014 is not prepared, in all material
respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and
Transparency Rules of the United Kingdom's Financial Conduct Authority.
Ernst & Young LLP
Leeds
4thAugust 2014
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