REG - MJ Gleeson Plc - Half-year Report
13 February 2020
MJ GLEESON PLC
Results for the half-year ended 31 December 2019
Strong performance from Homes | Strategic Land deal momentum into H2
Full year expectations unchanged
H1 19/20
H1 18/19
Change
Revenue
Homes
£105.0m
£88.0m
+19.3%
Strategic Land
-
£30.3m
-
Total
£105.0m
£118.3m
(11.2%)
Operating Profit by Division
Homes
£15.9m
£14.0m
+13.6%
Strategic Land
(£0.7m)
£9.0m
-
Profit before tax
£13.3m
£22.3m
(40.4%)
Cash balances
£30.6m
£27.8m
+10.1%
ROCE
19.1%
29.5%
(1040 bp)
EPS
19.6p
33.2p
(41.0%)
Dividend per share
12.0p
11.5p
+4.3%
Gleeson Homes:
· Unit sales increased 17.4% to 811 units (H1 18/19: 691)
· Average selling price increased 1.2% to £128,900 (H1 18/19: £127,400)
· Gross profit increased 13.3% to £31.5m (H1 18/19: £27.8m)
· Operating profit increased 13.6% to £15.9m (H1 18/19: £14.0m)
· Land pipeline of 13,625 plots (June 2019: 13,575 plots)
Gleeson Strategic Land:
· No land sales completed in H1 (H1 18/19: 3 land sales, 483 plots)
· Strong start to H2 with three sites sold of which one unconditional
· Four sites currently in a sale process
· Six new sites added to the portfolio (900 plots)
· Continued strong demand for consented sites
Dermot Gleeson, Chairman of MJ Gleeson plc, commented:
"We are delighted with the performance of our Homes division, with completions up 17.4% at 811 units. Demand remains strong, with January reservations per site up 5% on last year. We see no signs of this abating. Land remains available at sensible prices and we will be opening a significant number of new sites shortly.
"As previously announced, Strategic Land, which saw an exceptionally strong result for the comparator period, did not complete any sales in the first half. However, the anticipated deal flow in the second half is now materialising with three sites sold, of which one was sold unconditionally and legally completed in January. We have a substantial pipeline in place and demand for consented sites, from both large and medium-sized developers, remains very high.
"The strong performance of Gleeson Homes and anticipated deal flow in Strategic Land for the second half underpin the Board's confidence that the Group's results for the full year will be in line with expectations."
This announcement contains inside information. The person responsible for arranging the release of this announcement on behalf of the company is Stefan Allanson, Chief Financial Officer.
LEI: 21380064K7N2W7FD6434
Enquiries:
MJ Gleeson plc
Tel: +44 1142 612900
James Thomson
Chief Executive Officer
Stefan Allanson
Chief Financial Officer
Instinctif Partners
Tel: +44 20 7457 2020
Mark Garraway
James Gray
N+1 Singer
Shaun Dobson
Tel: +44 20 7496 3000
Rachel Hayes
Liberum
Neil Patel
Tel: +44 20 3100 2222
Richard Bootle
CHAIRMAN'S STATEMENT
As expected, following a period of no Strategic Land sales and an exceptionally strong comparator period for the division, Group profit before tax decreased from £22.3m to £13.3m for the interim period. However, the continued strong performance in the Homes division and a return to deal flow with a healthy pipeline of demand in Strategic Land, reaffirm the Board's confidence that the Group is on track to deliver results for the full year in line with expectations.
Gleeson Homes
Gleeson Homes builds and sells low-cost homes to people on lower incomes in the Midlands and North of England. Seven out of eight customers are first time buyers who are highly motivated by the desire to own their own home in areas underserved by traditional housebuilders.
Revenue increased 19.3% to £105.0m (H1 18/19: £88.0m), reflecting a 17.4% rise in the total number of units sold from 691 to 811 and including two minor land sales totalling £0.5m.
The average selling price ("ASP") for units sold in the period increased 1.2% to £128,900 (H1 18/19: £127,400) reflecting strong price increases partly offset by plot mix and development mix.
As expected, the gross margin on units sold in the period returned to more normalised levels against the strong comparator period, decreasing 150 basis points to 30.1% (H1 18/19: 31.6%), reflecting cost increases arising from increased build rates and from changes in development mix. Gross profit on land sales was £0.1m (H1 18/19: £nil)
Operating margin on units sold decreased 90 basis points to 15.1% (H1 18/19: 16.0%), as expected, with operating profit, including land sales, increasing 13.6% to £15.9m (H1 18/19: £14.0m).
During the period, 68% (H1 18/19: 69%) of unit sales benefited from the Government's Help to Buy scheme.
At 31 December 2019, we were selling from 63 active sites, a decrease of four sites on the corresponding period last year. Reflecting the Board's commitment to high build quality, the number of active sites was lower as we took the opportunity to review and tighten up certain areas of our pre-start process, open sites for sales at a later stage and due to delays in obtaining implementable planning permissions. We expect to open a significant number of sites during the coming months and anticipate that the number of active selling sites will be in excess of 70 by June 2020.
The pipeline of owned plots increased during the period by a net 162 plots to 6,687 plots. The total pipeline of owned and conditionally purchased plots was 13,625 plots on 145 sites at December 2019 (June 2019: 13,575 plots on 144 sites). During the period 18 new sites were added to the pipeline, while 17 sites were either merged, completed or did not proceed to purchase.
Demand for our low-cost homes remains strong; we are actively sourcing sites in existing and new areas within our target geographic regions.
In July 2017 we announced our intention to double completions to 2,000 units per annum within five years. We are comfortably on track to achieve this.
Gleeson Strategic Land
Gleeson Strategic Land, our land promotion business, continued to see strong demand from medium and large housebuilders for good quality residential sites in the South of England.
The division was expected to complete several land sales close to the period end. These are now expected in the second half, in part as greater certainty has returned to the market following the result of the General Election.
As a result, the operating loss for the first half was £0.7m (H1 18/19: operating profit £9.0m).
Three sites have already been sold, one unconditionally which completed in January and two conditionally, which are expected to complete in February. A further four sites are currently being progressed for sale including two particularly large sites which are expected to be sold in Q4 of this financial year. Combined these have the potential to deliver 1,894 plots (31 December 2018: seven sites being progressed for sale, 1,454 plots).
At 31 December 2019, there were ten sites in the portfolio with either planning permission or a resolution to grant permission for a total of 3,384 plots (H1 18/19: nine sites, 2,432 plots).
There are a further nine sites where the division is currently awaiting the determination of a planning application (H1 18/19: nine sites).
We continue to invest intelligently in the Gleeson Strategic Land portfolio. Six new sites with the potential to deliver a total of 900 plots were secured in the period, with a significant number of other potential sites currently being progressed.
At 31 December 2019 the portfolio, in which the Group has a beneficial interest of 77%, comprised 66 sites with the potential to deliver more than 22,500 plots (30 June 2019: 60 sites, 21,730 plots).
Dividend and Dividend Timetable
Considering these results and our confidence in the full year outlook, the Board is declaring an interim dividend of 12.0 pence per share, an increase of 4.3% over the prior year (H1 18/19: 11.5 pence per share).
The interim dividend will be paid on 3 April 2020 to shareholders on the register at close of business on 6 March 2020. The ex-entitlement date will be 5 March 2020.
The Board aims to maintain a progressive dividend policy in which the interim dividend represents one third of the total dividend and earnings covers the total dividend between 1.75 times and 2.75 times.
Summary & Outlook
Gleeson Homes remains comfortably on track with its growth plan. We see no signs of customer caution and demand remains robust.
Although Gleeson Strategic Land did not complete any site sales in the first half of the year, the division has made a strong start to the second half and expects to deliver on its full year result. We continue to see strong demand from medium and large housebuilders for good quality residential sites.
Against this background, the Board is confident that the full year results for the Group will be in line with expectations.
Financial Overview
Income Statement
Group revenue reduced 11.2% to £105.0m (H1 18/19: £118.3m).
Gleeson Homes revenue grew 19.3% to £105.0m (H1 18/19: £88.0m) including two minor land sales totalling £0.5m (H1 18/19: £nil). As Gleeson Strategic Land did not complete any land sales in the first half, its revenue for the period was £nil (H1 18/19: £30.3m).
As a result, Group gross profit decreased 17.0% to £31.7m (H1 18/19: £38.2m). The Group's operating profit was £13.3m (H1 18/19: £22.2m).
A net interest charge of £nil (H1 18/19: £0.1m income) resulted in profit before tax of £13.3m (H1 18/19: £22.3m).
The tax charge for the period was £2.4m (H1 18/19: £4.0m) reflecting an effective rate of 18.5% (H1 18/19: 18.0%). The profit after tax from continuing operations was £10.9m (H1 18/19: £18.3m). Discontinued operations recorded a loss of £0.2m (H1 18/19: £0.1m loss). The profit for the period attributable to equity holders was £10.7m (H1 18/19: £18.1m).
Balance Sheet, Cash Flow & Return on Capital Employed
Total shareholders' equity stood at £202.3m at 31 December 2019 compared to £194.3m at 31 December 2018. This equates to net assets per share of 365.5 pence (31 December 2018: 355.9 pence).
Return on capital employed decreased by 1040 basis points to 19.1% due to the timing of land sales in Gleeson Strategic Land.
The Group's net cash balance at 31 December 2019 increased by £2.8m to £30.6m (31 December 2018: £27.8m) reflecting fewer site openings during the period which are now expected in the second half of the year.
Risks and Uncertainties
The Group is subject to a number of risks and uncertainties as part of its activities. The Board regularly considers these and seeks to ensure that appropriate processes are in place to identify, control, and monitor these risks. The Directors consider that the principal risks and uncertainties facing the Group are unchanged from those outlined on pages 32 to 33 of the Annual Report and Accounts for the year ended 30 June 2019.
Dermot Gleeson
Chairman
Condensed Consolidated Income Statement
for the six months to 31 December 2019
Note
Unaudited
Six months to 31 December 2019Unaudited
Six months to 31 December 2018Audited
Year to
30 June2019
£000
£000
£000
Continuing operations
Revenue
105,042
118,349
249,899
Cost of sales
(73,382)
(80,189)
(174,936)
Gross profit
31,660
38,160
74,963
Administrative expenses
(18,483)
(16,123)
(34,256)
Other operating income
147
150
292
Operating profit
13,324
22,187
40,999
Finance income
410
460
906
Finance expenses
(398)
(368)
(693)
Profit before tax
13,336
22,279
41,212
Tax
3
(2,442)
(4,008)
(7,648)
Profit for the period from continuing operations
10,894
18,271
33,564
Discontinued operations
Loss for the period from discontinued operations (net of tax)
(160)
(145)
(297)
Profit for the period
10,734
18,126
33,267
Earnings per share from continuing and discontinued operations
Basic
5
19.62 p
19.32 p
33.22 p
32.85 p
60.97 p
59.84 p
Diluted
5
Earnings per share from continuing operations
Basic
5
19.91 p
33.48 p
61.51 p
Diluted
5
19.61 p
33.11 p
60.37 p
Condensed Consolidated Statement of Comprehensive Income
for the six months to 31 December 2019
Unaudited
Six months to 31 December 2019Unaudited
Six months to 31 December 2018Audited
Year to
30 June2019
£000
£000
£000
Profit for the period
10,734
18,126
33,267
Other comprehensive income
Items that may be subsequently reclassified to profit or loss
Change in value of shared equity receivables at fair value through OCI
30
76
131
Movement in deferred tax on share-based payments taken directly to equity
58
(11)
240
Other comprehensive income for the period, net of tax
88
65
371
Total comprehensive income for the period
10,822
18,191
33,638
Condensed Consolidated Statement of Financial Position
at 31 December 2019
Note
Unaudited
31 December 2019Unaudited
31 December 2018Audited
30 June2019
£000
£000
£000
Non-current assets
Plant and equipment
2,532
1,897
2,343
Right of use assets
10
3,325
-
-
Investment properties
257
258
257
Trade and other receivables
12,403
24,597
16,759
Deferred tax assets
2,232
2,632
2,659
20,749
29,384
22,018
Current assets
Inventories
191,899
178,992
183,121
Trade and other receivables
19,384
21,300
45,795
UK corporation tax
1,463
-
-
Cash and cash equivalents
30,602
27,827
30,306
243,348
228,119
259,222
Total assets
264,097
257,503
281,240
Non-current liabilities
Trade and other payables
(9,126)
(9,759)
(8,774)
Lease liabilities
10
(2,606)
-
-
Provisions
(130)
(110)
(130)
(11,862)
(9,869)
(8,904)
Current liabilities
Trade and other payables
(49,102)
(50,358)
(65,068)
Lease liabilities
10
(840)
-
-
Provisions
-
(49)
-
UK corporation tax
-
(2,954)
(3,372)
(49,942)
(53,361)
(68,440)
Total liabilities
(61,804)
(63,230)
(77,344)
Net assets
202,293
194,273
203,896
Equity
Share capital
1,107
1,092
1,092
Retained earnings
201,186
193,181
202,804
Total equity
202,293
194,273
203,896
Condensed Consolidated Statement of Changes in Equity
for the six months to 31 December 2019
Note
Share capital
Retained earnings
Total
equity
£000
£000
£000
At 1 July 2018 (audited)
1,092
187,007
188,099
Total comprehensive income for the period
Profit for the period
-
18,126
18,126
Other comprehensive income
-
65
65
Total comprehensive income for the period
-
18,191
18,191
Transactions with owners, recorded directly in equity
Contributions and distributions to owners
Sale of own shares
-
51
51
Share-based payments
-
487
487
Dividends
4
-
(12,555)
(12,555)
Transactions with owners, recorded directly in equity
-
(12,017)
(12,017)
At 31 December 2018 (unaudited)
1,092
193,181
194,273
Total comprehensive income for the period
Profit for the period
-
15,141
15,141
Other comprehensive income
-
306
306
Total comprehensive income for the period
-
15,447
15,447
Transactions with owners, recorded directly in equity
Contributions and distributions to owners
Purchase of own shares
-
(19)
(19)
Share-based payments
-
473
473
Dividends
4
-
(6,278)
(6,278)
Transactions with owners, recorded directly in equity
-
(5,824)
(5,824)
At 30 June 2019 (audited)
1,092
202,804
203,896
Total comprehensive income for the period
Profit for the period
-
10,734
10,734
Other comprehensive income
-
88
88
Total comprehensive income for the period
-
10,822
10,822
Transactions with owners, recorded directly in equity
Contributions and distributions to owners
Share issue
15
-
15
Purchase of own shares
-
(33)
(33)
Share-based payments
-
268
268
Reserves adjustment for initial recognition of IFRS 16
10
-
(108)
(108)
Dividends
4
-
(12,567)
(12,567)
Transactions with owners, recorded directly in equity
15
(12,440)
(12,425)
At 31 December 2019 (unaudited)
1,107
201,186
202,293
Condensed Consolidated Statement of Cash Flow
for the six months to 31 December 2019
Unaudited
Six months to 31 December 2019Unaudited
Six months to 31 December 2018Audited
Year to
30 June2019
£000
£000
£000
Operating activities
Profit before tax from continuing operations
13,336
22,279
41,212
Loss before tax from discontinued operations
(160)
(145)
(264)
13,176
22,134
40,948
Depreciation of plant and equipment
657
508
1,108
Share-based payments
268
487
960
Profit on redemption of shared equity receivables
(105)
(119)
(226)
Loss on disposal of plant and equipment
-
24
152
Finance income
(410)
(460)
(906)
Finance expenses
398
368
693
Operating cash flows before movements in working capital
13,984
22,942
42,729
Increase in inventories
(8,778)
(18,475)
(22,604)
Decrease / (increase) in receivables
31,684
(13,198)
(27,133)
(Decrease) / increase in payables
(16,816)
10,837
21,820
Cash generated from operating activities
20,074
2,106
14,812
Tax received
-
-
37
Tax paid
(6,793)
(2,877)
(5,944)
Interest paid
(187)
(211)
(314)
Net cash flow surplus / (deficit) from operating activities
13,094
(982)
8,591
Investing activities
Proceeds from redemption of shared equity receivables
634
599
995
Proceeds from disposal of investment properties
-
-
1
Interest received
23
91
72
Purchase of plant and equipment
(870)
(691)
(1,866)
Net cash flow deficit from investing activities
(213)
(1)
(798)
Financing activities
Proceeds from issue of shares
15
-
-
(Purchase) / sale of own shares
(33)
51
32
Dividends paid
(12,567)
(12,555)
(18,833)
Net cash flow deficit from financing activities
(12,585)
(12,504)
(18,801)
Net increase / (decrease) in cash and cash equivalents
296
(13,487)
(11,008)
Cash and cash equivalents at beginning of period
30,306
41,314
41,314
Cash and cash equivalents at end of period
30,602
27,827
30,306
Notes to the Condensed Consolidated Financial Statements
for the six months to 31 December 2019
1. Basis of preparation and accounting policies
The Interim Report of the Group for the six months ended 31 December 2019 has been prepared in accordance with IAS 34 "Interim Financial Reporting", International Financial Reporting Standards ("IFRS") and IFRS Interpretations Committee ("IFRC IC") interpretations as adopted for use in the European Union ("EU") and in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority.
The Interim Report does not constitute financial statements as defined in Section 434 of the Companies Act 2006 and is neither audited nor reviewed. It should be read in conjunction with the Annual Report and Accounts for the year ended 30 June 2019, which is available either on request from the Group's registered office, 6 Europa Court, Sheffield Business Park, Sheffield, S9 1XE, or can be downloaded from the corporate website www.mjgleesonplc.com.
The comparative figures for the financial year ended 30 June 2019 are not the Group's statutory accounts for that financial year. Those accounts have been reported on by the Company's auditor and delivered to the Registrar of Companies. The report of the auditor was (i) unqualified, (ii) did not include a reference to any matters which the auditor drew attention to by way of emphasis without qualifying their report and (iii) did not contain statements under Section 498 (2) or (3) of the Companies Act 2006.
The preparation of condensed half-yearly financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may subsequently differ from these estimates. In preparing these condensed consolidated financial statements, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the annual consolidated financial statements for the year ended 30 June 2019.
Except as described below, the accounting policies, method of computation, and presentation adopted are consistent with those of the Annual Report and Accounts for the year ended 30 June 2019, as described in those financial statements.
The following new standards and amendments to standards are mandatory for the first time for the financial year beginning 1 July 2019:
· IFRS 16 "Leases" (issued January 2016)
· IFRS 9 (Amended) "Financial Instruments" (issued October 2017)
· Annual Improvements Issued 2015 - 2017 (issued December 2017)
Note 10 sets out the impact of IFRS 16 "Leases". The remaining standards and amendments have had no material impact on the financial statements as explained in note 1 to the Group's Annual Report and Accounts for the year ended 30 June 2019.
Going concern
The Directors have, at the time of approving the interim accounts, a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for at least twelve months from the date of approval of the Interim Report. Thus they continue to adopt the going concern basis of accounting in preparing the Interim Report.
2. Segmental analysis
The Group is organised into the following two operating divisions under the control of the Executive Board, which is identified as the Chief Operating Decision Maker as defined under IFRS 8 "Operating segments":
• Gleeson Homes
• Gleeson Strategic Land
All of the Group's operations are carried out entirely within the United Kingdom. Segment information about the Group's operations is presented below:
Unaudited
Six months to 31 December 2019Unaudited
Six months to 31 December 2018Audited
Year to
30 June2019
Note
£000
£000
£000
Revenue
Continuing activities:
Gleeson Homes
105,042
88,042
197,034
Gleeson Strategic Land
-
30,307
52,865
Total revenue
105,042
118,349
249,899
Profit / (loss) on activities
Gleeson Homes
15,909
14,046
30,068
Gleeson Strategic Land
(705)
9,019
13,013
15,204
23,065
43,081
Group activities
(1,880)
(878)
(2,082)
Finance income
410
460
906
Finance expenses
(398)
(368)
(693)
Profit before tax
13,336
22,279
41,212
Tax
3
(2,442)
(4,008)
(7,648)
Profit for the period from continuing operations
10,894
18,271
33,564
Loss for the period from discontinued operations (net of tax)
(160)
(145)
(297)
Profit for the period
10,734
18,126
33,267
The revenue in the Gleeson Homes segment relates to the sale of residential properties and land. All revenue for the Gleeson Strategic Land segment is in relation to the sale of land interests.
Balance sheet analysis of business segments:
Unaudited 31 December 2019
Assets
Liabilities
Net assets
£000
£000
£000
Gleeson Homes
175,610
(44,169)
131,441
Gleeson Strategic Land
55,343
(14,968)
40,375
Group activities / discontinued operations
2,542
(2,667)
(125)
Net cash
30,602
-
30,602
264,097
(61,804)
202,293
Unaudited 31 December 2018
Assets
Liabilities
Net assets
£000
£000
£000
Gleeson Homes
162,821
(32,214)
130,607
Gleeson Strategic Land
66,393
(28,907)
37,486
Group activities / discontinued operations
462
(2,109)
(1,647)
Net cash
27,827
-
27,827
257,503
(63,230)
194,273
2. Segmental analysis (cont.)
Audited 30 June 2019
Assets
Liabilities
Net assets
£000
£000
£000
Gleeson Homes
171,608
(41,755)
129,853
Gleeson Strategic Land
78,861
(33,520)
45,341
Group activities / discontinued operations
465
(2,069)
(1,604)
Net cash
30,306
-
30,306
281,240
(77,344)
203,896
3. Tax
The results for the six months to 31 December 2019 include a tax charge of 18.5% of profit before tax (31 December 2018: 18.0%; 30 June 2019: 18.8%), representing the best estimate of the average annual effective tax rate expected for the full year, applied to the pre-tax income of the six month period.
Reductions in the UK corporation tax rate from 19% to 17% (effective 1 April 2020) were substantively enacted into law before the balance sheet date. However, following the result of the General Election in December 2019, the headline rate of corporation tax is expected to remain at 19%.
4. Dividends
Unaudited
Six months to 31 December 2019Unaudited
Six months to 31 December 2018Audited
Year to
30 June2019
£000
£000
£000
Amounts recognised as distributions to equity holders:
Final dividend for the year ended 30 June 2018 of 23.0p per share
-
12,555
12,555
Interim dividend for the year ended 30 June 2019 of 11.5p per share
-
-
6,278
Final dividend for the year ended 30 June 2019 of 23.0p per share
12,567
-
-
12,567
12,555
18,833
On 12 February 2020 the Board approved an interim dividend of 12.0 pence per share at an estimated total cost of £6,640,000. The dividend has not been included as a liability as at 31 December 2019.
5. Earnings per share
The calculation of the basic and diluted earnings per share is based on the following data:
Earnings
Unaudited
Six months to 31 December 2019Unaudited
Six months to 31 December 2018Audited
Year to
30 June2019
£000
£000
£000
Profit from continuing operations
10,894
18,271
33,564
Loss from discontinued operations
(160)
(145)
(297)
Earnings for the purposes of basic and diluted earnings per share
10,734
18,126
33,267
5. Earnings per share (cont.)
Number of shares
31 December
201931 December
201830 June 2019
No. 000
No. 000
No. 000
Weighted average number of ordinary shares for the purposes of
basic earnings per share
54,701
54,566
54,566
Effect of dilutive potential ordinary shares:
Share-based payments
847
611
1,027
Weighted average number of ordinary shares for the purposes of
diluted earnings per share
55,548
55,177
55,593
Continuing operations
Six months to 31 December
2019Six months to 31 December
2018Year to
30 June
2019
pence
pence
pence
Basic
19.91
33.48
61.51
Diluted
19.61
33.11
60.37
Continuing and discontinued operations
Basic
19.62
33.22
60.97
Diluted
19.32
32.85
59.84
6. Financial instruments
The fair value of the Group's financial assets and liabilities are not materially different from the carrying values. The following summarises the major methods and assumptions used in estimating the fair values of financial instruments.
Shared equity receivables at fair value through other comprehensive income (FVOCI)
Unaudited
31 December
2019
Unaudited
31 December
2018
Audited
30 June
2019
£000
£000
£000
Balance at start of period
4,436
4,997
4,997
Redemptions
(464)
(415)
(679)
Unwind of discount (finance income)
33
40
77
Fair value movement recognised in other comprehensive income
(35)
10
41
Balance at end of period
3,970
4,632
4,436
Shared equity receivables at FVOCI represent shared equity loans advanced to customers and secured by way of a second charge on the property sold. They are carried at fair value which is determined by discounting forecast cash flows for the residual period of the contract. The difference between the nominal value and the initial fair value is credited over the deferred term to finance income, with the financial asset increasing to its full cash settlement value on the anticipated receipt date.
Redemptions in the period of shared equity receivables carried at £464,000 (H1 18/19: £415,000) generated a profit on redemption of £105,000 (H1 18/19: £119,000) which has been recognised in other operating income in the consolidated income statement.
6. Financial instruments (cont.)
In addition, a net change in value of shared equity receivables at FVOCI of £30,000 (H1 18/19: £76,000) has been recognised in other comprehensive income. This is made up as follows:
Unaudited
31 December
2019Unaudited
31 December
2018Audited
30 June
2019
£000
£000
£000
Fair value movement recognised in other comprehensive income
(35)
10
41
Fair value recycled through profit and loss
65
66
90
Total movement recognised in other comprehensive income
30
76
131
Forecast cash flows are determined using inputs based on current market conditions and the Group's historic experience of actual cash flows resulting from such arrangements. These inputs are by nature estimates and as such the fair value has been classified as Level 3 under the fair value hierarchy laid out in IFRS 13 "Fair value measurement". There have been no transfers between fair value levels in the period.
Significant unobservable inputs into the fair value measurement calculation include regional house price movements based on the Group's actual experience of regional house pricing and management forecasts of future movements, the anticipated period to redemption of loans which remain outstanding and a discount rate based on current observed market interest rates offered to private individuals on secured second loans.
The key assumptions applied in calculating fair value as at the balance sheet date were:
· Forecast regional house price inflation: 2.0%
· Average period to redemption: 5 years
· Discount rate: 8%
The sensitivity analysis of changes to each of the key assumptions applied in calculating fair value, whilst holding all other assumptions constant, is as follows:
Change in assumption
Increase / (decrease) in fair value
£000
Forecast regional house price inflation - increase by 1%
194
Average period to redemption - increase by 1 year
(221)
Discount rate - decrease by 1%
185
7. Group pension scheme
The Group operates a defined contribution pension plan. The assets of the pension plan are held separately from those of the Group in funds under the control of the trustees.
The total pension cost charged to the consolidated income statement in the six months to 31 December 2019 of £466,000 (six months to 31 December 2018: £431,000) represents contributions payable to the defined contribution pension plan by the Group at rates specified in the plan rules. At 31 December 2019, contributions of £179,000 (31 December 2018: £114,000) due in respect of the current reporting period had not been paid over to the pension plan. Since the period end, this amount has been paid.
8. Related party transactions
During the year to 30 June 2019 the Group entered into a conditional agreement to purchase an area of land from Hampton Investment Properties Ltd ("HIPL"). HIPL is a company in which North Atlantic Smaller Companies Investment Trust plc ("NASCIT"), which is a substantial holder in the company, holds a majority investment. In addition, Christopher Mills, a Non-Executive Director of the Company, is considered a related party by virtue of his interest in and directorship of NASCIT and his position as a Director of HIPL. The land, if purchased, will form part of a new Gleeson Homes site being developed in the ordinary course of business. Shareholder approval to proceed with this purchase was given at the AGM on 5 December 2019.
Other than as disclosed above, there have been no material changes to the related party arrangements as reported in note 27 of the Annual Report and Accounts for the year ended 30 June 2019.
9. Seasonality
Reservations in Gleeson Homes are largely unaffected by seasonal variations and tend to be driven more by the timing of site openings than by seasonality. However, the number of completions in the second half of the financial year tends to be higher than the first half.
There is no seasonality in the Gleeson Strategic Land division.
10. Adoption of new accounting standards
IFRS 16 "Leases"
IFRS 16 "Leases" applied to the Group from 1 July 2019 replacing IAS 17 "Leases" and IFRIC 4 "Determining whether an arrangement contains a lease". The new standard has been adopted using the modified retrospective approach, under which the cumulative effect of the initial application is recognised in retained earnings at 1 July 2019. Comparative information has not been restated.
On adoption of IFRS 16, the Group recognised lease liabilities in relation to leases which had previously been classified as "operating leases" under IAS 17. These liabilities are initially measured at the present value of the remaining lease payments, discounted using the Group's incremental borrowing rate as of 1 July 2019. The weighted average incremental borrowing rate applied to lease liabilities on 1 July 2019 was between 3.0% and 3.5%.
The lease term comprises the non-cancellable period of the contract, together with periods covered by an option to extend the lease where the Group is reasonably certain to exercise that option. Subsequently, the carrying value of the lease liability is increased to reflect the interest on the lease liability and reduced to reflect the lease payments made. The lease liability is remeasured if the Group changes its assessment of whether it will exercise an extension or termination option.
Right of use assets are initially measured at cost, comprising the initial measurement of the lease liability, plus any initial direct costs and an estimate of asset retirement obligations, less any lease incentives. Subsequently, right of use assets are measured at cost, less any accumulated depreciation and any accumulated impairment losses, and are adjusted for certain remeasurements of the lease liability. Depreciation is calculated on a straight-line basis over the length of the lease.
In applying IFRS 16 for the first time, the Group has used a number of practical expedients permitted by the standard:
- the use of a single discount rate to a portfolio of leases with reasonably similar characteristics;
- the accounting for leases with a remaining lease term of less than 12 months from the date of initial application as short-term leases;
- the exclusion of initial direct costs from the measurement of right of use assets at the date of initial application;
- the use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease; and
10. Adoption of new accounting standards (cont.)
- the election to not separate non-lease components (e.g. maintenance) from lease components on specific classes of assets, namely vehicles.
The impact on transition to IFRS 16 at 1 July 2019, was that the Group recognised an additional £3,598,000 of right of use assets and £3,706,000 of lease liabilities. The net difference of £108,000 has been recognised in retained earnings.
A reconciliation between operating lease commitments previously reported in the financial statements for the year ended 30 June 2019 discounted at the Group's incremental borrowing rate and the lease liabilities recognised in the balance sheet on initial application of IFRS 16 is shown below:
Reconciliation of operating lease commitments disclosure and IFRS 16 lease liabilities
£000
Operating lease commitments at 30 June 2019 as previously reported
4,261
Discounted at the Group's incremental borrowing rate at 1 July 2019
(527)
Other*
(28)
Lease liability recognised as at 1 July 2019
3,706
*Primarily attributable to short-life leases that do not meet the criteria for capitalisation under the practical expedients detailed above.
Statement of Directors' Responsibility
for the six months to 31 December 2019
The Directors confirm that, to the best of our knowledge:
a) the condensed set of financial statements has been prepared in accordance with IAS 34 "Interim financial reporting" as adopted by the European Union;
b) the interim management report includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and
c) the interim management report includes a fair review of the information required by DTR 4.2.8R (disclosure of related parties' transactions and changes therein).
The Board
The Board of Directors of MJ Gleeson plc at 30 June 2019 and their respective responsibilities can be found on pages 36 and 37 of the MJ Gleeson plc Annual Report and Accounts 2019. Fiona Goldsmith and Andrew Coppel were appointed to the Board as Non-Executive Directors on 1 October 2019.
By order of the Board,
Stefan Allanson
Chief Financial Officer
12 February 2020
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