RNS Number:4958S
Paragon Group Of Companies PLC
26 November 2003
Under strict embargo until Stock Exchange announcement: 7am Wednesday
26 November 2003
STRONG GROWTH BOOSTS PROFITS FOR PARAGON
The Paragon Group of Companies PLC ("Paragon"), one of the UK's largest
specialist lenders offering buy-to-let mortgages, personal loans, vehicle
finance and retail finance, today announces its Preliminary Results for the year
ended 30 September 2003.
Highlights include
* Acquisition of Britannic Money for #18.8m, a discount to net assets
* Britannic Money now trading profitably
* Strong organic growth and acquisition increase net loan assets to #5.3bn
(2002: #2.5bn)
* Pre-tax profit from ongoing operations, which excludes the effect of the
acquisition, up 15.4% to #53.1m (2002: #46.0m)
* Pre-tax profit, which includes the effect of the acquisition, up 12.8% to
#51.9m (2002: #46.0m)
* Cost to income ratio reduced to 35.3% (2002: 37.0%)
* Dividend up 23.5% to 6.3p (2002: 5.1p)
* Current trading strong; prospects for the year attractive
Commenting on the results, Jonathan Perry, Chairman of Paragon, said:
"The year ended 30 September 2003 was a period of significant development for
the Group, with the strong organic growth of our core business divisions being
augmented by the acquisition of Britannic Money. The acquisition is financially
attractive and strategically significant and both increases our asset base and
provides us with new sources of distribution to complement our prominent
position in the professional buy to let sector. The combined business provides a
strong base for further development in a sector which has excellent long-term
growth prospects."
For further information, please contact:
The Paragon Group of Companies PLC The Wriglesworth Consultancy
Nigel Terrington, Chief Executive John Wriglesworth/Mark Baker
Nick Keen, Finance Director Tel: 020 7620 2228
Tel: 020 7786 8474 Mobile: 07980 635 243 (MB)
CHAIRMAN'S STATEMENT
The year ended 30 September 2003 was a period of significant development for the
Group, with the strong organic growth of our core business divisions being
augmented by the acquisition of Britannic Money, consolidating the Group's
position as a major participant in the buy-to-let lending market.
This acquisition was achieved without the need to issue new equity; as well as
being financially attractive, the purchase of Britannic Money is of major
strategic importance in our aim to expand the Group's influence and presence in
a secured, high quality lending sector with significant growth opportunities.
Profit before tax from ongoing operations, which excludes the impact of the
acquisition, was #53.1 million, an increase of 15.4% from #46.0 million in the
preceding year. Profit before tax after inclusion of the acquisition was #51.9
million, an increase of 12.8%. Earnings per share increased by 10.6% to 35.5p
from 32.1p.
The Group's results consolidate those for Britannic Money (now renamed Mortgage
Trust) for the three months following its acquisition on 30 June 2003 and an
analysis of the results between ongoing operations and the acquisition is
included in note 4 to the financial information. The difference between the fair
value of the net assets acquired and the purchase price of #18.8 million has,
after acquisition costs, given rise to negative goodwill of #20.9 million. This
amount will be amortised to the profit and loss account over the expected period
of benefit and will arise in the form of cash flow as the underlying portfolio
of mortgage loans redeems. During the three months ended 30 September 2003 the
effect of the acquisition was a pre-tax loss of #1.2 million after a charge of
#3.9 million in respect of exceptional reorganisation costs and a credit of #2.1
million in respect of the amortisation of negative goodwill. The acquisition and
our post-acquisition strategy are covered in more detail below.
In view of the sustained growth in profits, and consistent with the progressive
dividend policy outlined last year, your Board has declared an increased final
dividend of 3.7p per share which, when added to the interim dividend of 2.6p
paid on 31 July 2003, gives a total dividend of 6.3p per share for the year, an
increase of 23.5% on last year's dividend of 5.1p. Subject to approval at the
Annual General Meeting on 10 February, the dividend will be paid on 12 February
2004.
Total advances by the Group during the year were #1,477.4 million, compared with
#994.4 million during the previous year, an increase of 48.6%. Net loan assets
at 30 September 2003, inclusive of those held by the off-balance sheet companies
managed by Mortgage Trust, were #5,287.1 million, compared with #2,521.3 million
at 30 September 2002. Net interest income for the year was #76.5 million, an
increase of 4.9% from #72.9 million for the previous year. The charge for
provisions for losses of #15.9 million includes a charge of #1.8 million in
respect of vacant property provisions as a result of a planned rationalisation
of the Group's premises, notably Mortgage Trust's Epsom offices, and compares
with a charge of #12.9 million last year.
Other operating income increased by 50.5% to #31.0 million from #20.6 million,
primarily as a result of greater commissions and fees associated with the
increased volumes of loans administered and of business written in the year.
Operating expenses, excluding the impact of goodwill (#2.1 million) and
reorganisation costs (#3.9 million), were #37.9 million, an increase of 9.5%
from #34.6 million. Excluding the post-acquisition operating costs of Britannic
Money, operating expenses of #33.4 million (note 4) represented a reduction of
3.5% from the previous year.
As reported last year, a Group-wide process improvement initiative was launched
in 2002 aimed at identifying and delivering significant cost efficiencies. This
exercise involved a critical review of each of our operational processes in
order to identify tasks which, after a rigorous cost and benefit analysis, could
be carried out more efficiently by increased automation. As a result the Group
headcount was reduced from 630 at 30 September 2002 to 583 (excluding Mortgage
Trust) at 30 September 2003, a significant reduction when viewed against the
increase in business volumes over the year. As a result the cost to income
ratio, if Mortgage Trust is excluded, decreased from 37.0% to 33.2% during the
year (note 5). Including Mortgage Trust, the ratio decreased to 35.3% (note 5).
The planned restructuring of Mortgage Trust, reported below, should lead to
further improvements going forward.
After providing for corporation tax at a charge rate of 22.4% and for the
dividend in respect of the year, shareholders' funds at 30 September 2003 were
17.0% higher at #234.9 million.
FIRST MORTGAGES
The market for buy-to-let mortgages has remained buoyant throughout much of the
year. The sector accounts for some 6.45% of the gross lending of members of The
Council of Mortgage Lenders (CML) (although it should be noted that not all
lenders to this sector submit their portfolio statistics to the CML) and the CML
reported an increase in volumes in buy-to-let lending to #7.7 billion in the
first six months of 2003 against #6.7 billion in the second half of 2002. CML
figures also demonstrate that the high credit quality that has been apparent
since this class of lending has been the subject of dedicated reporting has
continued with just 0.45% of loans across the buy-to-let sector being three or
more months in arrears compared to just less than 1% for the mortgage market as
a whole.
Housing market data has indicated increasing tenant demand over the year. This
is due in part to a lower level of confidence amongst homebuyers because of
concerns over house prices in the short term and the broader prospects for the
economy. Of particular importance to the buy-to-let market has been the low
level of first time buyer activity which has fallen to approximately 29% of new
purchase transactions. The average age of the first time buyer in the UK is now
33, with many potential first time buyers therefore staying in rented
accommodation longer and increasing pressure on demand. At the more modest end
of the rental market pressure is also building as a result of slow but steady
contraction in the social rented sector caused by a combination of restricted
funding and stock reduction due to tenant right to buy purchases. This
combination of pressures supports the projections made by various housing
analysts that supply in the private rented sector will have to grow
significantly over the next 10 years. Amongst these is the authoritative
"Housing Futures" survey from the Centre for Economics and Business Research
which projects a requirement for a 40% increase in privately rented homes by
2013. We therefore believe that the long term prospects for this sector remain
excellent.
Total first mortgage lending by the Group over the year was #997.6 million, an
increase of 77.0% over the previous year. Total first mortgage assets (including
those managed by Mortgage Trust) grew by 164% to #4.3 billion.
Paragon Mortgages
New lending by Paragon Mortgages grew strongly during the year with loans
advanced totalling #781.3 million, an increase of 38.6% from the previous year's
#563.6 million. At 30 September 2003 the loan book of Paragon Mortgages stood at
#1,934.3 million, up 36.8% from #1,413.9 million at 30 September 2002.
Business performance in the second half of the year was particularly strong,
with new application levels continuing at a high level, pushing the pipeline up
to record levels by the year end, with the result that the business is well
positioned for a strong start to the new financial year.
Throughout the year Paragon Mortgages has been successful in developing
relationships with existing borrowers and intermediaries, with the result that a
very high proportion of new applications are submitted by existing borrowers,
which reduces marketing and processing costs whilst at the same time helping to
maintain margin income.
Paragon Mortgages' strong stance on credit has been maintained during the year,
to ensure prime quality lending across the portfolio. Credit background and
income details are verified for all our borrowers, and rental details as well as
property values are reviewed by our in-house team of surveyors. An important
purpose of the underwriting process is to ensure an adequate margin, for each
property mortgaged, of rent compared to mortgage payments, to ensure that the
landlord has a buffer in case of voids or increasing costs. Our normal
underwriting minimum is for a 130% rent to mortgage cover. On average for the
business written in the course of the year the mortgage payments were
approximately twice covered by rents, giving our landlords a substantial cushion
to cope with anticipated increases in interest rates.
The credit quality of the buy-to-let portfolio remains exemplary.
Mortgage Trust
We reported last year that the Group would be seeking value enhancing
acquisitions. Britannic Money, being a leading UK provider of innovative
flexible and buy-to-let mortgage products, was identified as an excellent
complementary fit to Paragon Mortgages by virtue of its broker relationships,
its focus on the mid-market and emerging professional sector, its strong credit
ethic and its excellent portfolio performance. In common with the Group,
Britannic Money also used securitisation as its principal funding method. The
acquisition was completed on 30 June 2003.
Post acquisition, the business has maintained its focus on the mid-market
buy-to-let sector and has withdrawn its owner-occupied current account mortgage
products on which, in our view, the margins were inadequate. The rebranding as
Mortgage Trust and the launch of a new series of products all took place within
three months of the acquisition. Mortgage Trust had loans under management of
approximately #2.2 billion at 30 September 2003, of which approximately 51% were
buy-to-let loans and the balance owner occupied mortgages. In the three months
from acquisition to 30 September Mortgage Trust advanced new loans of #216.3
million.
Considerable progress has been made since acquisition in integrating a number of
the functions of Mortgage Trust with those of the Group. In September we
announced that up to 160 positions at Mortgage Trust's operations centre in
Epsom will become redundant over the course of the next financial year, with the
majority expected during the first half year, as support and administrative
functions are transferred to the Group's offices in Solihull and London. New
business activity will remain in Epsom. This process has inevitably created
uncertainty and difficulties for staff at Mortgage Trust, who have continued to
display the highest standards of professionalism and commitment.
The entire redundancy costs of approximately #3.9 million associated with the
reorganisation have been expensed in the year ended 30 September 2003. But for
this charge, Mortgage Trust traded profitably in the post-acquisition period and
is currently trading profitably. Completion of the reorganisation will result in
a more cost efficient operation, favourably impacting the Group's cost to income
ratio in future years.
NHL Book
The NHL book had reduced to #176.7 million, from #230.5 million at 30 September
2002. The performance of this book, which we continue to manage carefully, has
remained satisfactory over the year.
CONSUMER FINANCE
At 30 September 2003 the Consumer Finance book stood at #888.9 million, up from
#830.7 million at 30 September 2002. Aggregate loans of #479.8 million were
advanced during the year, compared with #430.8 million in the previous year, an
increase of 11.4%, with the principal focus being on secured loans. As
previously reported, this has been a deliberate policy to develop a higher
quality book with greater defensive properties during a time of rising consumer
indebtedness.
Personal Finance
Over the twelve months to 30 September 2003, Paragon Personal Finance has
significantly enhanced its reputation as a prime participant in the broker
introduced secured loans market through the maintenance of a portfolio of
innovative, competitive products alongside the operation of technologically
advanced application and loan processing systems. In the year to 30 September
2003, the business advanced secured loans of #298.9 million, almost double the
previous year's level of #151.9 million, while unsecured lending declined to
#8.6 million from #40.4 million.
The broker introduced secured loans market remains buoyant; whilst competitive
pressures are expected to increase during the coming months, Paragon Personal
Finance will continue to develop its service proposition and refresh its product
range in response to competitive challenges.
Sales Aid Finance
The retail and car finance divisions are now consolidated under the title of
Sales Aid Finance. As we reported in the post year-end trading statement, in
pursuing the objective of expanding the Group's involvement in the more
credit-defensive secured lending areas, we have continued to limit originations
within the retail and car finance sectors. As a result, new loan advances by the
division were reduced to #172.3 million during the year ended 30 September 2003,
from #238.5 million in the previous year.
We have utilised the opportunity afforded by the limitation on new lending in
these areas to review our operations and associated costs and to make changes
where appropriate. For example, all retail finance administration was
transferred in-house during the year and organisational and processing changes
have been introduced within the car finance area to improve operational
efficiency. As we anticipated at the half year, trading conditions within these
markets remain difficult. Our emphasis remains on managing business volumes
consistent with our overall strategy of maximising the proportion of our
consumer lending which is secured on property.
FUNDING
Conditions in the capital markets deteriorated during the early part of the
financial year as economic and war fears created uncertainty for investors. To
protect margins and avoid issuing at suboptimal coupons, the Group held back on
its securitisation programme for the first half of the financial year, instead
increasing the size of its asset origination warehouse facilities from #450
million to #900 million at 30 September 2003. This allowed the Group to weather
the poorer market conditions without restricting asset origination. Originations
by Mortgage Trust are funded by an additional warehouse facility which, at 30
September 2003, was #450 million and in due course originations by Mortgage
Trust will be consolidated with those by the rest of the Group.
The recovery of the securitisation market enabled the Group to complete, in June
2003, a #250 million securitisation by Paragon Mortgages (No. 5) PLC denominated
in Sterling and, in October 2003, the Group completed a #715 million
securitisation by Paragon Mortgages (No. 6) PLC, its largest to date. The notes
were issued in Sterling, Dollars and Euros. The securitisation contains a #98
million pre-funding reserve to purchase further mortgage assets from the Paragon
warehouse prior to 28 November 2003.
During the year the junior notes on three of our buy-to-let securitisations,
Paragon Mortgages 1, 2 and 3, were upgraded by the rating agencies, reflecting
the exemplary performance of our buy-to-let mortgages.
BOARD COMPOSITION
Andrew Chambers, an independent non-executive director who served on the Board
since 1991, resigned from the Board in August on account of length of service
and Michael Kelly, a director since 1994, resigned shortly after the year end
following a decision to spend more of his time overseas. We wish them both well
and thank them for their significant contributions over the years.
In August 2003 we were pleased to welcome David Beever to the Board as an
independent non-executive director. David is a non-executive director of JJB
Sports plc, London & Continental Railways Limited and Volex Group plc and
Chairman of KPMG Corporate Finance. He was previously Vice -Chairman of SG
Warburg & Co Limited.
Shortly after the year-end, we appointed two new executive directors, John Heron
and Pawan Pandya. John Heron is responsible for the Group's first mortgages
division, Paragon Mortgages and Mortgage Trust and joined the Group in 1986. He
is currently Chairman of the Intermediary Mortgage Lenders Association and is a
member of the Executive Committee of the Council of Mortgage Lenders. Pawan
Pandya joined the Group in 1988 and was appointed Chief Operating Officer in
2002, responsible for all loan administration and processing, collections and
Group technology.
OUTLOOK
The acquisition of Britannic Money during the year, as well as being financially
attractive, was also strategically significant, increasing our asset base and
providing us with new sources of distribution to complement our prominent
position in the professional buy to let sector. The combined business provides a
strong base for further development in a market which has excellent long-term
growth prospects.
Our objectives for the next year are to complete the integration of Mortgage
Trust and to continue to grow profitably our core lending divisions. Within
this, we shall maintain our focus on cost control and our strong stance on
credit quality. By so doing we aim to ensure the continued development of a high
quality book with which the Group is now associated and to support sustained
growth of profits. Whilst the new financial year will not be without its
challenges, we have entered it well placed to take advantage of the
opportunities afforded by the secured lending markets and we look forward to
reporting further progress at the half year.
Jonathan P L Perry
Chairman
26 November 2003
CONSOLIDATED PROFIT & LOSS ACCOUNT
For the year to 30 September 2003 (Unaudited)
2003 2002
#m #m #m
Interest receivable
Ongoing operations 242.8 230.0
Acquisitions 29.2 -
--------- ---------
272.0 230.0
Interest payable and similar charges (195.5) (157.1)
--------- ---------
Net interest income 76.5 72.9
Other operating income 31.0 20.6
--------- ---------
Total operating income 107.5 93.5
Operating expenses
Exceptional reorganisation costs (3.9)
Other operating expenses (37.9)
Amortisation of negative goodwill 2.1
---------
(39.7) (34.6)
Provisions for losses (15.9) (12.9)
--------- ---------
Operating profit being profit on ordinary
activities before taxation
Ongoing operations 53.1
Acquisitions (1.2)
---------
Operating profit being profit on ordinary 51.9 46.0
activities before taxation
Tax charge on profit on ordinary activities (11.6) (9.4)
---------- ----------
Profit on ordinary activities after taxation for 40.3 36.6
the financial year
Equity dividend (7.5) (6.0)
---------- ----------
Retained profit 32.8 30.6
---------- ----------
Dividend - rate per share 6.3p 5.1p
Earnings per share
- basic 35.5p 32.1p
- diluted 34.8p 31.4p
---------- -----------
The results for the current and preceding years relate entirely to continuing
operations.
There is no material difference between the results as stated above and those
determined on the historical cost basis.
CONSOLIDATED BALANCE SHEET
30 September 2003 (Unaudited)
2003 2002
#m #m #m #m
Assets employed
Fixed assets
Intangible assets
Negative goodwill (18.8) -
Tangible assets 4.2 3.4
Investments
Assets subject to non-recourse finance 2,361.6 -
Non-recourse finance (2,285.3) -
--------- ---------
76.3 -
Loans to customers 3,051.3 2,521.3
Own shares 10.8 9.3
--------- ---------
3,138.4 2,530.6
3,123.8 2,534.0
Current assets
Stocks 3.8 5.3
Debtors falling due within one year 9.4 7.7
Investments 144.8 117.3
Cash at bank and in hand 149.2 129.8
--------- ---------
307.2 260.1
--------- ---------
3,431.0 2,794.1
--------- ---------
Financed by
Equity shareholders' funds
Called-up share capital 11.9 11.8
Share premium account 67.6 65.5
Merger reserve (70.2) (70.2)
Profit and loss account 225.6 193.7
--------- ---------
223.0 189.0
----------- ---------
234.9 200.8
Provisions for liabilities and charges 7.6 0.6
Creditors
Amounts falling due within one year 127.9 43.7
Amounts falling due after more than one 3,060.6 2,549.0
year
--------- ---------
3,188.5 2,592.7
--------- ---------
3,431.0 2,794.1
--------- ---------
The preliminary financial information was approved by the Board of Directors on
26 November 2003
CONSOLIDATED CASH FLOW STATEMENT
For the year to 30 September 2003 (Unaudited)
2003 2002
#m #m
Net cash inflow from operating activities 108.1 92.9
Taxation (14.4) (7.8)
Capital expenditure and financial investment (627.9) (419.2)
Acquisitions and disposals (26.7) -
Equity dividends paid (6.6) (5.1)
------------- -------------
(567.5) (339.2)
Management of liquid resources (27.5) 8.2
Financing 613.6 354.8
------------- -------------
Increase in cash in the year 18.6 23.8
------------- -------------
(a) Reconciliation of operating profit to net cash flows from operating
activities
2003 2002
#m #m
Operating profit 51.9 46.0
Provisions for losses 15.9 12.9
Depreciation 1.9 1.1
Amortisation of brokers' commissions 33.6 28.3
Amortisation of negative goodwill (2.1) -
Amortisation of long term incentive plan 0.2 -
Decrease in stock 0.5 0.3
(Increase) in debtors (0.1) (0.2)
Increase in creditors 6.3 4.5
------------- --------------
Net cash inflow from operating activities 108.1 92.9
------------- --------------
(b) Analysis of cash flows for headings netted in the cash flow statement
2003 2002
#m #m
Capital expenditure and financial investment
Net increase in assets subject to non-recourse finance (79.9) -
Net increase in loans to customers (545.2) (413.4)
Other (2.8) (5.8)
------------- -------------
(627.9) (419.2)
------------- -------------
(c) Reconciliation of net cash flow to movement in net debt
2003 2002
#m #m
Increase in cash in year 18.6 23.8
Cash inflow from increase in debt (612.3) (353.6)
Cash movement from change in liquid resources 27.5 (8.2)
------------- -------------
Change in net debt arising from cash flows (566.2) (338.0)
Non-recourse finance acquired with subsidiary (2,212.7) -
Loans acquired with subsidiary (53.4) -
------------- -------------
Movement in net debt in year (2,832.3) (338.0)
Net debt at 1 October 2002 (2,299.2) (1,961.2)
------------- -------------
Net debt at 30 September 2003 (5,131.5) (2,299.2)
------------- -------------
NOTES TO THE FINANCIAL INFORMATION
For The Year to 30 September 2003(unaudited)
1. The financial information set out in this preliminary announcement has not
been audited.
2. A final dividend of 3.7p per share is proposed, payable on 12 February 2004
with a record date of 16 January 2004.
3. The financial information has been prepared using the same accounting
policies as were used in preparing the statutory accounts of the Company for
the year to 30 September 2002.
4. The analysis of operating profit between ongoing operations and acquisitions
is as shown below
Ongoing Acquisitions 2003 2002
Operations
#m #m #m #m
Interest receivable 242.8 29.2 272.0 230.0
Interest payable (170.4) (25.1) (195.5) (157.1)
--------- ---------- --------- ----------
Net interest income 72.4 4.1 76.5 72.9
Other operating income 28.3 2.7 31.0 20.6
--------- ---------- --------- ----------
Total operating income 100.7 6.8 107.5 93.5
Reorganisation costs - (3.9) (3.9) -
Other operating expenses (33.4) (4.5) (37.9) (34.6)
Amortisation of negative goodwill - 2.1 2.1 -
---------- ---------- ---------- ----------
Operating expenses (33.4) (6.3) (39.7) (34.6)
Provisions for losses (14.2) (1.7) (15.9) (12.9)
---------- ---------- --------- ----------
Operating profit 53.1 (1.2) 51.9 46.0
---------- ---------- --------- ----------
5. The cost income ratio for the year excluding Mortgage Trust is calculated by
dividing operating expenses for ongoing operations of #33.4m (2002: #34.6m)
by total operating income from ongoing operations of #100.7m (2002: #93.5m),
to give 33.2% (2002: 37.0%). The cost income ratio for the year including
Mortgage Trust is calculated by dividing operating expenses, excluding
reorganisation costs (#3.9m) and the amortisation of negative goodwill
(#2.1m), of #37.9m (2002: #34.6m) by total operating income of #107.5m
(2002: #93.5m) to give 35.3% (2002: 37.0%).
6. The basic earnings per share figures have been calculated by dividing the
profit attributable to shareholders (being the profit on ordinary activities
after taxation) by the weighted average number of ordinary shares
outstanding during the period. For the year to 30 September 2003 the
weighted average number of ordinary shares outstanding was 113.4 million
(2002: 114.1 million).
7. The diluted earnings per share figures have been calculated by adjusting the
weighted average number of shares outstanding for the effects of all
dilutive potential ordinary shares. For the year to 30 September 2003 the
adjusted weighted average number of ordinary shares outstanding was 115.8
million (2002: 116.4 million).
8. Assets subject to non-recourse finance comprises Loans to Customers of
#2,235.8m (2002: nil) and cash of #125.8m (2002: nil).
9. The financial information set out in the announcement does not constitute the
Company's statutory accounts for the years to 30 September 2002 or 2003. The
financial information for the year to 30 September 2002 is derived from the
statutory accounts for that year. These statutory accounts have been
delivered to the Registrar of Companies, contained an unqualified audit
report and did not contain an adverse statement under sections 237 (2) or
237 (3) of the Companies Act 1985. The statutory accounts for the year to 30
September 2003 will be finalised on the basis of the financial information
presented by the Directors in this preliminary announcement and will be
delivered to the Registrar of Companies following the Company's Annual
General Meeting.
10. A copy of the Annual Report and Accounts for the year to 30 September 2003
will be posted to shareholders in due course. Copies of this announcement
can be obtained from The Paragon Group of Companies PLC, St. Catherine's
Court, Herbert Road, Solihull, West Midlands, B91 3QE.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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