TIDMMER
RNS Number : 7938I
Mears Group PLC
13 August 2019
13 August 2019
Mears Group PLC
("Mears" or "the Group" or "the Company")
Interim Results for the six months ended 30 June 2019
Continued strategic progress and solid operational
performance
Mears Group PLC (LSE: MER), a leading provider of services to
the Housing and Care sectors in the UK, announces its financial
results for the period ended 30 June 2019.
Key highlights
-- Interim results are in line with management expectations and previous guidance.
-- Group revenues were up 10% at GBP480.8m (2018: GBP435.3m),
growth driven by the MPS business, acquired in November 2018.
-- Normalised diluted EPS as expected reduced to 12.27p (2018:
15.04p) impacted by a reduction in profitability in Development
where the Group is scaling back its activity, an increase in shares
issued in the equity placing funding MPS acquisition and the impact
of IFRS 16.
-- Strong working capital performance with average daily net
debt marginally better than expectations at GBP110.7m. (2018 H1:
GBP112.1m, 2018 FY: GBP113.2m)
-- Strong period of new contract bidding, securing 60% of the value of opportunities bid.
-- Order book up 43% to GBP3.0bn (2018: GBP2.1bn) reflecting a
successful period of bidding wins, including the one-off impact of
the Asylum Accommodation and Support Services Contract ('AASC'),
augmented by the acquisition of MPS.
-- The Board has declared an increased interim dividend of 3.65p per share (2018: 3.55p).
Financial highlights
Note: The 2019 figures reflect the impact of IFRS 16; earlier
periods have not been restated
Six months Six months
to to
June 2019 June 2018 Change
Revenue GBP480.8m GBP435.3m +10%
Statutory profit before tax GBP12.5m GBP12.9m -3%
Adjusted profit before tax* GBP17.1m GBP19.0m -10%
Statutory diluted EPS 9.12p 10.44p -13%
Normalised diluted EPS* 12.27p 15.04p -18%
Interim dividend per share 3.65p 3.55p +3%
Average daily net debt GBP110.7m GBP112.1m
---------------------------- ---------- ---------- ------
* Stated before amortisation of acquisition intangibles and
exceptional costs. The normalised diluted EPS measure is further
adjusted to reflect a full tax charge.
Commenting, David Miles, Chief Executive Officer, Mears,
said:
"I am satisfied with the progress made in the first half of
2019. Our financial and market position is robust as we seek to
build on existing strengths and take advantage of new
opportunities. The Board is confident of making further progress
for the full year and over the longer-term.
"A significant amount of time and focused effort has been
directed towards the integration of MPS and the mobilisation of
AASC. I am confident that the Group is well placed to benefit from
this up-front investment.
"The Group will accelerate the evolution of its Care business,
placing increasing emphasis on Housing with Care. We will also
continue the unwinding of the working capital absorbed within
Development activities, reducing the Group's indebtedness whilst
ensuring that we contribute to the housing development needs of our
customers.
"The Board remains confident of delivering its expectations for
the full year, in line with previous guidance."
Analyst presentation
A presentation for analysts will be held at 9.30am today at the
offices of Buchanan, 107 Cheapside, London, EC2V 6DN. Please
contact Buchanan on 020 7466 5000 or e-mail
mears@buchanan.uk.com.
For further information, contact:
Mears Group PLC
David Miles, Chief Executive Tel: +44(0)7778 220 185
Officer
Andrew Smith, Finance Director Tel: +44(0)7712 866 461
Alan Long, Executive Director Tel: +44(0)7979 966 453
www.mearsgroup.co.uk
Buchanan
Mark Court/Sophie Wills Tel: +44(0)20 7466 5000
mears@buchanan.uk.com
About Mears
Mears employs over 10,000 people and provides services in every
region of the UK. In partnership with our Housing clients, we
maintain, repair and upgrade the homes of hundreds of thousands of
people in communities from remote rural villages to large inner
city estates. Mears has extended its activities to provide broader
housing solutions to solve the challenge posed by the lack of
affordable housing and to provide accommodation for the most
vulnerable. Our Care teams provide support to over 15,000 people a
year, enabling the elderly and those living with disabilities to
continue living in their own homes.
We focus on long-term outcomes for people rather than short-term
solutions, and invest in innovations that have a positive impact on
people's quality of life and on their communities' social, economic
and environmental wellbeing. Our innovative approaches and market
leading positions are intended to create value for our customers
and the people they serve while also driving sustainable financial
returns for our providers of capital, especially our
shareholders.
Introduction
Mears has delivered a solid performance in the first half of
2019. Trading in the core Housing division has been in line with
expectations and these operations have been strengthened by the
mobilisation of the new Asylum Accommodation and Support contract
('AASC') and the integration of the business acquired from Mitie in
November 2018 ('MPS').
Group revenue for the six months to 30 June 2019 increased to
GBP480.8m (2018: GBP435.3m) with operating profit before the
amortisation of acquisition intangibles, exceptional costs and
before the impact of the new leasing accounting standard ('IFRS
16'), reducing to GBP19.3m (2018: GBP20.5m). This is in line with
expectations and reflects some margin dilution from the newly
acquired MPS business as well as a reduction in profitability in
Development where the Group is scaling back its activity. Pre-tax
profits, before the amortisation of acquisition intangibles and
exceptional costs reduced to GBP17.1m (2019: GBP19.0m), which is
stated after the impact of IFRS 16. The normalised diluted EPS, on
a similar basis reduced to 12.27p (2018: 15.04p) also impacted by
the increase in shares following the equity placing to fund the MPS
acquisition. Both profit and EPS are in line with expectations. The
MPS acquisition was profitable in the period and, in line with
guidance, is expected to be EPS neutral for the full 2019 financial
year with our programme for driving improvements and realising
synergies improving its performance further in the second half of
2019, reversing its loss making position on acquisition.
The Group delivered a good cash performance in the first six
months, with daily net debt slightly better than expected with the
daily average reducing to GBP110.7m (2018 H1: GBP112.1m, 2018 FY:
GBP113.2m).
The Board is declaring an increased dividend of 3.65p (2018:
3.55p) which reflects the Board's confidence in the future whilst
being mindful of the importance of maintaining a prudent capital
structure. The interim dividend will be payable, on 24 October
2019, to shareholders on the register on 4 October 2019.
Operations
Housing
2019* 2018
----------------------------- -------------------------------
Revenue Operating Margin Revenue Operating Margin
GBPm profit % GBPm profit %
/ (loss) GBPm
GBPm
------------- -------- ---------- ------- -------- ---------- -------
Maintenance 323.3 14.6 4.5% 292.9 14.5 4.9%
Management 78.7 3.9 5.0% 67.9 3.5 5.2%
Development 27.7 (0.9) (3.2%) 14.1 1.0 7.1%
------------- -------- ---------- ------- -------- ---------- -------
Total 429.7 17.6 4.1% 374.9 19.0 5.1%
------------- -------- ---------- ------- -------- ---------- -------
*before the impact of IFRS 16 and share based payments.
Maintenance
Maintenance revenue increased by 10% to GBP323.3m (2018:
GBP292.9m), with the newly acquired MPS business delivering
revenues of GBP57.5m. The core Mears Maintenance business saw
revenues reduce following our previously stated decision to exit a
small number of contracts during the second half of 2018. A number
of new mobilisations secured in the first half should reverse this
trend.
Operating margins reduced from 4.9% to 4.5%, due to margin
dilution from the newly acquired MPS business including the costs
of integration which were absorbed within normal trading.
Underlying margins from Maintenance remain within the historic 5-6%
range.
MPS has made good progress since acquisition in respect of
customer contract retention and operational performance. An
intensive integration programme, migrating all operations onto the
front-line Mears Contract Management system, has now reached an
advanced stage. Each contract migration brings an alignment of back
office processes and controls. A high level of synergy has already
been secured and the Group is confident about the underlying
profitability of the significant majority of contracts within the
business.
The first six months of 2019 has delivered new wins with a total
contract value in excess of GBP250m, an annual value of GBP35m, and
a success rate by value of 60%. Notable wins include Home Group
(South West), London Borough of Hammersmith & Fulham and
Longhurst Group. It is becoming an increasing trend that new
opportunities are created through the early termination of an
incumbent's contract. All three of these new wins have been secured
through this route, rewarding Mears' strict and disciplined bid
approach during the original tender process.
Service delivery remains our key differentiator and our
performance over the last six months has been maintained at
excellent levels.
Management
Management revenues reported an increase in activity, growing
from GBP67.9m to GBP78.7m, partly driven by the new AASC contract
which reported revenues of GBP5.0m in the first half, reflecting
the services delivered in respect of the new contract mobilisation.
The mobilisation of the AASC contract has been the focus of the
Management team.
This new contract adds significant scale to the Group's
Management operation and has also encouraged the Group to carry out
a wider review of its Management activities to ensure that this
area is sufficiently selective when developing new opportunities.
This will lead to an increasing focus on margin, working capital
requirement and risk.
The first half has been a strong period for the Group's
partnership with The Ministry of Housing, Communities and Local
Government in running the National Planning Portal. This service
commenced in 2015 and while it generated operating losses for the
initial period, the Group is now seeing a positive return on its
investment.
Development
The Group made a clear strategic decision to reduce its exposure
to this area of activity and exit from those new build activities
which require the Group to invest significant working capital.
Nevertheless, the revenues within this area have almost doubled in
the period to GBP27.7m, reflecting the phasing of the Group's
existing contractual commitments. As a result of the decision to
reduce our exposure to Development activities, the Group incurred a
small loss in the first half and a similar outcome is expected in
the second half of the year, as stated in previous guidance.
The Group's Development business is relatively small. There were
36 completed units unsold at 30 June 2019, compared with 25 units
at 31 December 2018 and 7 units at 30 June 2018, with a
corresponding increase in working capital absorbed in this area
over the last twelve months. The Group has secured an exit from two
sites where works were due to commence in late 2019. This brings
forward the final unwind of funded development to the first half of
2021. Whilst the number of unsold units is higher than planned, the
absolute numbers are of a sufficiently low level to allow the
Company to continue to withdraw from this activity through a
controlled unwinding of revenue and working capital as sites are
completed and sold.
Whilst the Group is committed to reducing its exposure to this
business, it remains important for the Group to retain a
development capability. Therefore, and as indicated, the Group will
continue to deliver solutions incorporating development where
funding is being provided by a third party. Milton Keynes
represents the best example of this model.
Care
2019* 2018
----------------------------- -------------------------------
Revenue Operating Margin Revenue Operating Margin
GBPm profit % GBPm profit %
GBPm GBPm
------ -------- ---------- ------- -------- ---------- -------
Care 51.0 1.7 3.4% 60.3 1.9 3.1%
------ -------- ---------- ------- -------- ---------- -------
*before the impact of IFRS 16 and share based payments.
Care revenues reported a reduction of 15% to GBP51.0m (2018:
GBP60.3m) as planned. Operating margins rose slightly, reflecting
the Group's disciplined policy to prioritise service quality and
margin ahead of revenue growth. The Group remains highly selective
in respect of bidding for new work but the availability of good
quality careworkers continues to constrain the business, and as a
result, carer retention and recruitment remain key areas of
focus.
Disappointingly, there has been little change in how standalone
care is procured, and even some potential deterioration in
commissioning methods. Continued underfunding and lack of progress
in Central Government policy development has led to short-term
decision making which is rarely positive for commissioners,
providers or service users.
In 2016, Mears took the decision to exit a large number of Care
contracts where Care commissioners had been unwilling to recognise
the cost of delivering excellent care. The Group directed its
activities towards those clients that were like-minded and wanted
to address the challenges being faced by Care providers, and those
whom we believed over time would make further improvements in how
Care is commissioned. This allowed Mears to offer improved pay and
working conditions to its care workers. In particular, the Group
focussed on opportunities to provide a full housing service with
much less focus on those opportunities which provide singular care
services in isolation. Our ability to deliver all elements of that
requirement is seen as a compelling offering.
Three years on, the tough decisions that we have taken have been
shown to be correct, with a smaller, better quality and profitable
Care business that has also played a part in offering an enhanced
Housing proposition and facilitating recent Group tender wins. The
Group continues to see a good pipeline of opportunities from
customers to procure new care services with accommodation, in the
majority of cases to build, manage, maintain and care for those
service users.
Mears continues to review its options around stand-alone care,
whilst extending its capability in housing with care services such
as Extra Care and the Group expects to make further progress over
the second half year. The Group's ability to support vulnerable
customers, many of whom have a Care requirement, has been central
to its success in Housing, and most recently in the Group securing
its Asylum housing contract. This continued bespoke skill set with
a deep understanding of the challenges faced by our service users
will underpin future success.
Business Development and Order Book
The order book stands at GBP3.0bn (2018: GBP2.1bn), having been
bolstered in the last twelve months by securing the AASC contract,
valued in excess of GBP1bn, together with the acquired MPS order
book of circa GBP200m and new orders secured during the first half
adding a further GBP350m.
As previously stated, the next two years are very significant
for the Group's Housing business as a number of existing contracts
come up for renewal, representing around GBP115m of annual revenue
in both 2020 and 2021. The Group has a good track record of
resecuring contracts on re-bid, and is well positioned on all
material opportunities.
The Group has a significant pipeline of new bidding
opportunities, in addition to our existing contracts that are
subject to renewal. A key strategy for the Group is to become a
provider of housing management, maintenance, repairs and upgrades
to the Ministry of Defence (MoD) and within this pipeline are five
housing-focused lots of which any bidder can win a maximum of
three. All lots are being let for an initial seven year period with
an extension option for a further three years. The bidding process
has commenced and is likely to be awarded in the first half of
2020.
Working capital
The Group has reported a reduction in its average net debt, key
to which is the tight control that the Group maintains over its
working capital balances. The working capital allocation of each
activity are set out below:
2019 2018 (full
year)
6-month average 12-month average
working capital working capital
GBPm GBPm
-------------- ------------------ ------------------
Maintenance* 14.5 19.0
Management 3.6 1.7
Development 22.7 15.6
Care 12.7 13.6
-------------- ------------------ ------------------
*Excludes MPS to assist comparability with 2018.
The Maintenance, Management and Care activities are
predominantly high volume and low value and cashflows are typically
uniform. Working capital balances in these three areas have been
maintained at consistent levels and are in line with previous
guidance with only small changes to reflect activity levels.
As highlighted at the 2018 year end, the Group reported a spike
in the working capital balances absorbed by the Development
activities in the second half of 2018. The net working capital
position within Development in the first half of 2019 is broadly
unchanged compared with the opening position, with average working
capital increasing to GBP22.7m compared with the opening spot
position of GBP21.4m. As detailed above, the Directors have
committed to delivering a controlled unwinding of working capital
allocated to this area over the next eighteen months. Cash flows
resulting from realisation of developments are by their nature not
uniform and are thus harder to predict but the expectation for the
full-year is to see a reduction in working capital utilisation,
with a more significant reduction in 2020.
Net debt
Six months Six months Six months
to June 2019 to June to June
before impact 2019 as 2018
of IFRS 16 reported
GBPm GBPm GBPm
------------------------------------------- --------------- ------------ ------------
EBITDA 23.4 42.7 24.6
------------------------------------------- --------------- ------------ ------------
Cash inflow from operating activities
before taxes paid 26.2 45.5 3.4
------------------------------------------- --------------- ------------ ------------
Total average daily net debt (operating)* (110.7) (110.7) (112.1)
*Excludes property acquisition facility
Net debt (operating) at 30 June (48.6) (48.6) (44.5)
Net debt (property acquisition facility)
at 30 June (15.0) (15.0) (30.0)
------------------------------------------- --------------- ------------ ------------
Total net debt at 30 June (63.6) (63.6) (74.5)
------------------------------------------- --------------- ------------ ------------
The Group has delivered a daily average net debt slightly better
than target and it is pleasing that all parts of the business have
reported solid working capital metrics to underpinning this. The
Group anticipates delivering improvements in the working capital
absorbed within the newly acquired MPS business, once it benefits
from the improved Mears IT systems and associated processes.
The property acquisition facility of GBP30m was introduced in
2017 to enable the Group to acquire and build portfolios of
properties prior to their disposal to long term funding partners.
The Board previously indicated its intention to unwind and cancel
this facility during the course of 2019. Good progress has been
made in this area with the facility being reduced to GBP15m during
the first half and there is visibility of a further reduction in
the second half.
The business is on track to deliver its targeted full year daily
average net debt of GBP105m and the Group continues to target a
pre-IFRS 16 average net debt to EBITDA of 1x ratio by the end of
2020.
New accounting standards; IFRS 16 'Leases'
IFRS 16 is a significant change in accounting standards and is
effective for all accounting periods beginning on or after 1
January 2019, meaning that the new standard applies for the 2019
financial year. This has introduced a single, on Balance Sheet
accounting model for leases and whilst there is no pre-tax cash
impact, it does have a significant impact on the Balance Sheet,
Income Statement and classification of cash flows.
Under IFRS 16, a lessee will recognise its right to use a leased
asset along with a lease liability representing its obligation to
make lease payments. The depreciation cost of the newly recognised
'right of use' lease asset will be charged to profit within
administrative costs, whilst the interest cost of the newly
recognised lease liability will be charged to net finance costs. On
the basis that depreciation is required to be charged on a
straight-line basis, whilst the interest element is charged on a
reducing balance basis, this results in a higher overall charge
being applied to the income statement in the early years of a
lease, with this impact reversing over the later years. The profit
impact over the life of a lease is neutral and IFRS 16 has no
impact on pre-tax cash flows.
The impact of IFRS 16 on the Group resulted in the recognition
of a right of use asset and an associated lease obligation of
GBP163.1m and GBP169.7m respectively at 1 January 2019, being the
point of transition. The Group adopted the modified retrospective
approach, meaning that the Group does not restate its comparative
figures, but recognises the cumulative effect of adopting IFRS 16
as an adjustment to equity at the beginning of the current period
as detailed in note 4. The application of IFRS 16 is complex and
sensitive to relatively small changes in the incremental borrowing
rate attached to each class of leased asset. The Group will
continue to review its application of this standard over the second
half year. Any revisions to the transitional adjustments would not
be expected to be material to the Income Statement.
The net debt measure excludes lease obligations which
principally relate to the Group's Housing Management activities,
where properties are a key service provision. Typically, the Group
enjoys nominations and other contractual agreements with its
customers which ensures a high level of occupancy. The Group will
often retain an option to cancel the lease and the Group follows a
disciplined approach to mitigate other associated risks such as
indexation, market rent levels, void properties and end of lease
obligations. Whilst the commitment is measurable under IFRS 16, it
is not appropriate to consider this in the same way as other debt
instruments.
The Group has identified significant growth opportunities
through the provision of Housing. The Group's Key Worker contract
involves the provision of circa 3,500 properties secured on short
term leases. The Group's recent success in securing three areas of
the AASC contract will see a further 4,500 properties secured
through leases with terms of between three and ten years although a
significant proportion of these will allow Mears the ability to
trigger an early break. One cannot estimate the Balance Sheet
impact without an accurate assessment of the mix of lease lengths,
but an increase in right of use assets and associated lease
obligations could be in the region of GBP150m.
IFRS 16 has impacted upon a number of commonly used financial
ratios and performance metrics including gearing, interest cover,
EBITDA, EBIT, operating profit and ROCE. The Group's banking
covenants are not affected by this accounting change as these are
'frozen' and are based on accounting standards at the time the
facility agreements came into force. The Group's bank facility runs
to 2022 which provides ample time for the banking community to
properly digest the impact of IFRS 16 on our performance
metrics.
Corporate Governance
The Chairman's statement in the 2018 Annual Report said that
Mears must be equipped with a Board that can provide a wide range
of views, skills and experience to work with and challenge the
Management team and accordingly that the balance of capabilities
around the Board table would be kept under review so as to ensure
that the Group had what it needed for effective leadership. The
Chairman's letter accompanying the notice of this year's AGM
recorded that the Board had acknowledged observations made by
shareholders in conversation with the Chairman early this year and
accordingly that searches had commenced to identify two new
Non-Executive Directors to add skills and experience in finance,
investor relations and commercial and general management.
The tabling by one of the Company's shareholders of resolutions
to appoint two individuals to the Board afforded the Chairman the
opportunity for further detailed conversations throughout May 2019
with almost all of the company's largest shareholders, representing
between them over 80% of the Company's share capital. Those
discussions were a very valuable interaction. They resulted in
shareholders collectively agreeing that the Board should continue
with its process to select new Non-Executive Directors with the
qualities and experience that Mears requires.
For the first such appointment, the Group sought an individual
with strong finance skills and a good understanding of effective
investor relations, gained as the Finance Director of a UK listed
company. The Board was pleased to announce on 2 July 2019 the
appointment of Jim Clarke as Non-Executive Director. Jim has spent
much of his career in senior finance roles in consumer facing
industries, having been Group Chief Financial Officer of
Countrywide plc for many years and, prior to that, Finance Director
at JD Wetherspoon and David Lloyd Leisure. Jim is also audit
committee Chair at Hansteen Holdings.
For the next appointment, we are seeking strong commercial and
senior general management experience gained from a role as the
Chief Executive of a business of scale. This search is proceeding
well and is now at a very advanced stage. We would expect to be
able to complete it around the end of this month.
Board development is a continuous process and the composition of
the Mears Board will be kept under review in the coming months and
into 2020. The objective remains to ensure that the Board maintains
an optimal balance of skills and experience to ensure effective
leadership and also that it continues to play a leading role in
demonstrating good corporate governance.
Results of AGM
Following the results of the Group's AGM in May 2019, the Group
is required to provide an update in accordance with the 2018 UK
Corporate Governance Code. The Board noted that Resolution 2
(concerning the approval of the remuneration report); Resolutions 6
to 15 (concerning the election or re-election of each of the
Directors); Resolution 17 (concerning the general authority to
allot relevant securities); Resolution 18 to 19 (concerning the
authority to issue ordinary shares without a pre-emptive offer),
Resolution 20 (concerning the holding of General Meetings on 14
days' clear notice); and Resolutions 21 and 22 (which were
requisitioned by PrimeStone Capital Irish Holdco DAC concerning the
appointment of two additional Non-Executive Directors), received
20% or more votes against the Board's recommendation.
The Board recognises that a number of shareholders are
dissatisfied with the performance of the Company and its share
price. Their concerns were acknowledged by the Board in the full
year results announcement and it was made clear that the
composition of the Board would be kept under review to ensure that
it continues to provide effective leadership. Progress on the
appointment of two new Non-Executive Directors has been described
above.
The Board notes that Resolutions 17 to 20 also received 20% or
more votes against the Board's recommendation, despite engagement
with shareholders during the previous year on these matters. These
Resolutions are consistent with the latest investor guidelines and
with the Resolutions approved in previous years. Following
shareholder discussions during the previous year, the Board
understands that some shareholders vote against these resolutions
as a matter of policy. In addition, this year, a small number of
significant shareholders also voted against these Resolutions and,
as a result, they did not reach the threshold required to pass as
special resolutions. The Company is continuing to consult with
shareholders voting against these resolutions to understand their
views in relation to the specific authorities sought.
Social Value
Investing in local communities and our workforce has been
fundamental to Mears for over 25 years. There is increasing
evidence that satisfied customers and strongly motivated staff are
vital success factors for all businesses. For Mears, it is
especially important to demonstrate that it is a responsible and
trusted partner to its increasingly wide ranging public sector
customers. Mears' reputation for excellent service delivery
combined with a strong emphasis on social value is critical to our
business success and to delivering the outputs that create
consistent and long term shareholder value.
The Group's achievements have been recognised by numerous
accolades over the last six months, including:
-- Sunday Times Top 25 Big Companies to work for.
-- One of the highest scoring companies on FTSE4Good
demonstrating our approach to governance and transparency.
-- Achieving Institute of Customer Service (ICS) ServiceMark
& TrainingMark accreditations for our leading approach to
service delivery and colleague development.
-- Achieving Royal Society for the Prevention of Accidents
(ROSPA) Gold Award (16 consecutive years) for our health and safety
standards and training.
-- Achieving a high level of Housing Diversity Network
Accreditation for our work on inclusivity.
The first half of 2019 has seen many notable achievements but
most importantly Mears' ongoing commitment to local communities has
been shown to deliver GBP15.3m of social value across almost 400
activities. Recognising Mears' commitment and best practice, the
Group is delighted to have been invited by Central Government to be
the Social Mobility Pledge Champion for the 'Services' sector.
The Group's workforce commitment is highlighted by the desire to
make Mears a great place to work for everyone and thereby ensure
that it is able to recruit and retain the talent needed to achieve
its ambitious strategic goals. This is signalled by having an
Employee Director on the Group's main Board and equally by the
commitment of every Mears leader to provide opportunity and
positive working conditions for all staff at all levels.
Outlook
The Board commends all employees for their continued commitment
and the enormous part they have played in making Mears the business
that it is.
A significant amount of time and focused effort has been
directed towards the integration of MPS and the mobilisation of
AASC. We are confident that the Group is well placed to benefit
from this up-front investment.
The Group will accelerate the evolution of its Care business,
placing increasing emphasis on Housing with Care. We will also
continue the unwinding of the working capital absorbed within
Development activities and reducing the Group's indebtedness while
continuing to contribute to the housing development needs of our
customers.
The Board remains confident of delivering its expectations for
the full year, in line with previous guidance.
Half-year condensed consolidated income statement
For the six months ended 30 June 2019
Six months Six months Year
ended ended ended
30 June 30 June 31 December
2019 2018 2018
Note GBP'000 GBP'000 GBP'000
---------------------------------------------------- ---- ---------- ---------- -----------
Sales revenue 3 480,755 435,257 869,843
Cost of sales (363,720) (333,924) (662,825)
---------------------------------------------------- ---- ---------- ---------- -----------
Gross profit 117,035 101,333 207,018
Other administrative expenses (93,916) (80,866) (166,177)
---------------------------------------------------- ---- ---------- ---------- -----------
Operating result before amortisation of acquisition
intangibles and exceptional costs 23,119 20,467 40,841
Exceptional costs - (3,975) (5,657)
Amortisation of acquisition intangibles (4,583) (2,159) (4,434)
---------------------------------------------------- ---- ---------- ---------- -----------
Total administrative costs (98,499) (87,000) (176,268)
---------------------------------------------------- ---- ---------- ---------- -----------
Operating profit 3 18,536 14,333 30,750
Finance income 5 660 259 1,154
Finance costs 5 (6,725) (1,737) (3,473)
---------------------------------------------------- ---- ---------- ---------- -----------
Profit for the period before tax, amortisation
of acquisition intangibles and exceptional costs 17,054 18,989 38,522
---------------------------------------------------- ---- -----------
Profit for the period before tax 12,471 12,855 28,431
Tax expense 6 (1,981) (2,044) (3,606)
---------------------------------------------------- ---- ---------- ---------- -----------
Profit for the period 10,490 10,811 24,825
---------------------------------------------------- ---- ---------- ---------- -----------
Attributable to:
Equity holders of the Company 10,121 10,864 24,064
Non-controlling interests 369 (53) 761
---------------------------------------------------- ---- ---------- ---------- -----------
Profit for the period 10,490 10,811 24,825
---------------------------------------------------- ---- ---------- ---------- -----------
Earnings per share
Basic 8 9.16p 10.49p 23.05p
Diluted 8 9.12p 10.44p 22.91p
---------------------------------------------------- ---- ---------- ---------- -----------
Half-year condensed consolidated statement of comprehensive
income
For the six months ended 30 June 2019
Six months Six months Year
ended ended ended
30 June 30 June 31 December
2019 2018 2018
GBP'000 GBP'000 GBP'000
--------------------------------------------------------- ---------- ---------- -----------
Net result for the period 10,490 10,811 24,825
--------------------------------------------------------- ---------- ---------- -----------
Other comprehensive income for the period
Which will be subsequently reclassified to the Income
Statement:
Cash flow hedges:
- (losses)/gains arising in the period (115) 3 -
- reclassification to the Income Statement 7 244 325
Increase / (decrease) in deferred tax asset in respect
of cash flow hedges 21 (35) (45)
Which will not be subsequently reclassified to the
Income Statement:
Actuarial loss on defined benefit pension scheme (1,700) - (9,431)
Increase in deferred tax asset in respect of defined
benefit pension schemes 323 - 1,792
--------------------------------------------------------- ---------- ---------- -----------
Other comprehensive income for the period (1,464) 212 (7,359)
--------------------------------------------------------- ---------- ---------- -----------
Total comprehensive income for the period 9,026 11,023 17,466
--------------------------------------------------------- ---------- ---------- -----------
Attributable to:
Equity holders of the Parent 8,657 11,076 16,705
Non-controlling interests 369 (53) 761
--------------------------------------------------------- ---------- ---------- -----------
Total comprehensive income for the period 9,026 11,023 17,466
--------------------------------------------------------- ---------- ---------- -----------
Half-year condensed consolidated balance sheet
As at 30 June 2019
As at As at As at
30 June 30 June 31 December
2019 2018 2018
Note GBP'000 GBP'000 GBP'000
---------------------------------------------- ---- ------- ------- -----------
Assets
Non-current
Goodwill 197,380 193,642 197,073
Intangible assets 28,257 15,102 31,570
Property, plant and equipment 192,874 24,405 24,956
Pensions and other employee benefits 15,668 27,308 17,368
Deferred tax asset 6,721 8,188 5,500
---------------------------------------------- ---- ------- ------- -----------
440,900 268,645 276,467
---------------------------------------------- ---- ------- ------- -----------
Current
Assets classified as held for sale 12,592 30,886 12,442
Inventories 34,827 26,810 29,751
Trade and other receivables 174,715 132,300 178,194
Current tax assets - - 609
Cash at bank and in hand 40,121 75,495 27,876
---------------------------------------------- ---- ------- ------- -----------
262,255 265,491 248,872
---------------------------------------------- ---- ------- ------- -----------
Total assets 703,155 534,136 525,339
---------------------------------------------- ---- ------- ------- -----------
Equity
Equity attributable to the shareholders of
Mears Group PLC
Called up share capital 11 1,105 1,036 1,105
Share premium account 82,224 60,339 82,224
Share-based payment reserve 2,121 1,844 2,021
Hedging reserve (133) (114) (46)
Merger reserve 46,214 46,214 46,214
Retained earnings 72,820 77,260 79,189
---------------------------------------------- ---- ------- ------- -----------
Total equity attributable to the shareholders
of Mears Group PLC 204,351 186,579 210,707
Non-controlling interest (58) (529) (427)
---------------------------------------------- ---- ------- ------- -----------
Total equity 204,293 186,050 210,280
---------------------------------------------- ---- ------- ------- -----------
Liabilities
Non-current
Long-term borrowing and overdrafts 88,731 70,000 78,780
Pensions and other employee benefits 3,802 4,966 3,802
Deferred tax liabilities 6,823 6,688 7,710
Financing liabilities 76 22 15
Lease obligations 150,049 383 892
Other liabilities 5,849 4,653 6,586
---------------------------------------------- ---- ------- ------- -----------
255,330 86,712 97,785
---------------------------------------------- ---- ------- ------- -----------
Current
Borrowings related to assets classified as
held for sale 15,000 30,000 15,000
Short-term borrowings and overdrafts - 50,000 15,000
Trade and other payables 190,527 171,183 186,856
Lease obligations 25,895 122 377
Financing liabilities 89 126 41
Current tax liabilities 2,243 1,083 -
Dividend payable 9,778 8,860 -
---------------------------------------------- ---- ------- ------- -----------
243,532 261,374 217,274
---------------------------------------------- ---- ------- ------- -----------
Total liabilities 498,862 348,086 315,059
---------------------------------------------- ---- ------- ------- -----------
Total equity and liabilities 703,155 534,136 525,339
---------------------------------------------- ---- ------- ------- -----------
Half-year condensed consolidated cash flow statement
For the six months ended 30 June 2019
Six months Six months Year
ended ended ended
30 June 30 June 31 December
2019 2018 2018
Note GBP'000 GBP'000 GBP'000
---------------------------------------------------- ---- ---------- ---------- -----------
Operating activities
Profit for the period before tax 12,471 12,855 28,431
Adjustments 12 30,688 8,329 15,641
Change in inventories (5,342) (8,105) (11,045)
Change in trade and other receivables 2,575 (9,385) (13,948)
Change in trade and other payables 5,071 (344) (17,490)
---------------------------------------------------- ---- ---------- ---------- -----------
Cash inflow from continuing operating activities
before taxes paid 45,463 3,350 1,589
Net cash outflow from operating activities
of discontinued operations (1,763) (950) (1,610)
Taxes received 52 846 665
---------------------------------------------------- ---- ---------- ---------- -----------
Net cash inflow from operating activities 43,752 3,246 644
---------------------------------------------------- ---- ---------- ---------- -----------
Investing activities
Additions to property, plant and equipment (4,309) (5,069) (7,667)
Additions to other intangible assets (898) (1,308) (3,089)
Proceeds from disposals of property, plant
and equipment - 1 144
Net cash (outflow) / inflow in respect of property
for resale (150) (16,944) 1,499
Acquisition of subsidiary undertaking - (11,163) (27,500)
Net cash acquired with subsidiary undertakings - - (4,185)
Net cash disposed of with subsidiary - (26) (26)
Loans made to other Group entities (non-controlled) (32) (1,006) (139)
Interest received 94 17 389
---------------------------------------------------- ---- ---------- ---------- -----------
Net cash outflow from investing activities (5,295) (35,498) (40,574)
---------------------------------------------------- ---- ---------- ---------- -----------
Financing activities
Proceeds from share issue 1 135 22,089
Receipts from borrowings related to assets
classified as held for sale - 16,059 1,059
Acquisition of non-controlling interests - - (6,163)
Net movement in revolving credit facility (5,049) 69,441 43,221
Discharge of lease liabilities (14,834) (435) (479)
Interest paid (6,330) (1,673) (3,602)
Dividends paid - Mears Group PLC shareholders - - (12,539)
Dividends paid - non-controlling interests - (550) (550)
---------------------------------------------------- ---- ---------- ---------- -----------
Net cash (outflow) / inflow from financing
activities (26,212) 82,977 43,036
---------------------------------------------------- ---- ---------- ---------- -----------
Cash and cash equivalents at beginning of period 27,876 24,770 24,770
Net increase in cash and cash equivalents 12,245 50,725 3,106
---------------------------------------------------- ---- ---------- ---------- -----------
Cash and cash equivalents at end of period 40,121 75,495 27,876
---------------------------------------------------- ---- ---------- ---------- -----------
The Group considers its revolving credit facility
to be an integral part of its cash management:
- cash at bank and in hand 40,121 75,495 27,876
- revolving credit facility (88,731) (120,000) (93,780)
---------------------------------------------------- ---- ---------- ---------- -----------
Cash and cash equivalents, including revolving
credit facility (48,610) (44,505) (65,904)
---------------------------------------------------- ---- ---------- ---------- -----------
Half-year condensed consolidated statement of changes in
equity
For the six months ended 30 June 2019
Attributable to equity shareholders
of the Company
---------------------------------------------------------
Called
up Share Share-based Non-
share premium payment Hedging Merger Retained controlling Total
capital account reserve reserve reserve earnings interests equity
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------------- ------- ------- ----------- ------- ------- -------- ----------- --------
At 1 January 2018 1,036 60,204 1,469 (326) 46,214 100,897 96 209,590
Impact of change in accounting
policies - - - - - (25,641) - (25,641)
------- ------- ----------- ------- ------- -------- ----------- --------
Adjusted balance at 1 January
2018 1,036 60,204 1,469 (326) 46,214 75,256 96 183,949
------- ------- ----------- ------- ------- -------- ----------- --------
Net result for the period - - - - - 10,864 (53) 10,811
Other comprehensive income - - - 212 - - - 212
------------------------------- ------- ------- ----------- ------- ------- -------- ----------- --------
Total comprehensive income
for the period - - - 212 - 10,864 (53) 11,023
------------------------------- ------- ------- ----------- ------- ------- -------- ----------- --------
Issue of shares - 135 - - - - - 135
Share option charges - - 375 - - - - 375
Changes in non-controlling
interests - - - - - - (22) (22)
Dividends - - - - - (8,860) (550) (9,410)
------------------------------- ------- ------- ----------- ------- ------- -------- ----------- --------
At 30 June 2018 1,036 60,339 1,844 (114) 46,214 77,260 (529) 186,050
------------------------------- ------- ------- ----------- ------- ------- -------- ----------- --------
At 1 January 2019 1,105 82,224 2,021 (46) 46,214 79,189 (427) 210,280
Impact of change in accounting
policies* - - - - - (5,335) - (5,335)
------------------------------- ------- ------- ----------- ------- ------- -------- ----------- --------
Adjusted balance at 1 January
2019 1,105 82,224 2,021 (46) 46,214 73,854 (427) 204,945
------------------------------- ------- ------- ----------- ------- ------- -------- ----------- --------
Net result for the period - - - - - 10,121 369 10,490
Other comprehensive income - - - (87) - (1,377) - (1,464)
------------------------------- ------- ------- ----------- ------- ------- -------- ----------- --------
Total comprehensive income
for the period - - - (87) - 8,744 369 9,026
------------------------------- ------- ------- ----------- ------- ------- -------- ----------- --------
Issue of shares - - - - - - - -
Share option charges - - 100 - - - - 100
Changes in non-controlling
interests - - - - - - - -
Dividends - - - - - (9,778) - (9,778)
------------------------------- ------- ------- ----------- ------- ------- -------- ----------- --------
At 30 June 2019 1,105 82,224 2,121 (133) 46,214 72,820 (58) 204,293
------------------------------- ------- ------- ----------- ------- ------- -------- ----------- --------
* The Group has applied IFRS 16 using the modified retrospective
approach on transition. Under this method, the comparative
information is not restated (see note 4).
Notes to the half-year condensed consolidated statements
For the six months ended 30 June 2019
1. Corporate information
Mears Group PLC is a public limited company incorporated in
England and Wales whose shares are publicly traded. The half-year
condensed consolidated financial statements of the Company and its
subsidiaries for the six months ended 30 June 2019 were authorised
for issue in accordance with a resolution of the Directors on 12
August 2019.
2. Basis of preparation and accounting principles
(a) Basis of preparation
The half-year condensed consolidated financial statements for
the six months ended 30 June 2019 have been prepared in accordance
with the Disclosure and Transparency Rules (DTR) of the Financial
Conduct Authority, with IAS 34 'Interim Financial Reporting' and
with the Accounting Standards Board's 2017 statement 'Half-yearly
financial reports'. The half-year condensed consolidated financial
statements do not include all the information and disclosures
required in the annual financial statements and should be read in
conjunction with the Group's annual financial statements as at 31
December 2018, which have been prepared in accordance with IFRS as
adopted by the European Union.
This half-year condensed consolidated financial information does
not comprise statutory accounts within the meaning of Section 434
of the Companies Act 2006. Statutory accounts for the year ended 31
December 2018 were approved by the Board of Directors on 22 March
2019. Those accounts, which contained an unqualified audit report
under Section 495 of the Companies Act 2006 and which did not make
any statements under Section 498 of the Companies Act 2006, have
been delivered to the Registrar of Companies in accordance with
Section 441 of the Companies Act 2006.
The half-year condensed consolidated financial statements for
the six months ended 30 June 2019 have not been audited or reviewed
by an auditor pursuant to the Auditing Practices Board guidance on
the Review of Interim Financial Information.
There have been no significant changes to estimates of amounts
reported in prior financial years.
After reviewing the Group's performance against budget for the
current financial year, and longer-term plans, the Directors
consider that at the date of approving this half-year statement, it
is appropriate to adopt the going concern basis in its
preparation.
(b) Significant accounting policies
The accounting policies adopted in the preparation of the
half-year condensed consolidated financial statements are
consistent with those followed in the preparation of the Group's
annual financial statements for the year ended 31 December 2018,
except for the application of IFRS 16 'Leases'.
IFRS 16 'Leases'
IFRS 16 'Leases' (IFRS 16) replaces existing lease guidance,
including IAS 17, 'Leases'; IFRIC 4, 'Determining whether an
Arrangement Contains a Lease; SIC-15, 'Operating Leases -
Incentives'; and SIC-27, 'Evaluating the Substance of Transactions
Involving the Legal Form of a Lease' ('the former lease accounting
standard'). IFRS 16 is effective for annual periods beginning on or
after 1 January 2019. As stated in the Annual Report and Accounts
2018, the Group are adopting the modified retrospective approach to
transition. Applying the modified retrospective approach in IFRS 16
on transition, a company:
a) is not required to restate comparative information. Instead opening equity is adjusted;
b) can choose, on a lease by lease basis, between two
alternative methods of measuring lease assets. A company can either
measure lease assets as if IFRS 16 had always been applied or at an
amount based on the lease liability;
c) is not required to recognise lease assets and lease
liabilities for leases with a lease term ending within 12 months of
the date of initially applying IFRS 16.
The Group has chosen to measure lease assets as if IFRS 16 has
always been applied.
In addition, applying either transition approach, a company is
not required to reassess whether existing contracts contain a lease
based on the revised definition of a lease.
IFRS 16 introduces a single, on-balance sheet accounting model
for leases and for the most significant part of our leases, we will
recognise a right-of-use asset representing our right to use the
underlying asset, and a lease liability representing our obligation
to make future lease payments.
For the income statement the nature of expenses related to
leases, where the Company leases an asset (lessee), will change as
IFRS 16 replaces the operating lease expense with a depreciation
charge for right-of-use assets and interest expense on lease
liabilities.
Identifying a lease
A contract is, or contains, a lease if the contract conveys the
right to control the use of an identified asset for a period of
time in exchange for consideration. The Group has identified four
categories of lease:
a) Residential property (pertaining to the Group's Rental Income and AASC activities)
b) Commercial property (pertaining to local and central-service offices)
c) Vehicles
d) Office equipment
Lease term
The non-cancellable period of a lease are considered together
with periods covered by an option to extend and terminate the
lease, depending on the intention of the Group to enforce its right
to extend or terminate. The Group records the date of occupation
and expected date of vacation to incorporate the IFRS 16
requirements of lease term. The Group has utilised the practical
expedient IFRS 16 C10 (e) which allows the benefit of hindsight in
the determining the term of lease.
Measurement of right of use assets and lease liabilities
The lease liability is calculated by identifying, all future
lease payments, including variable lease payments, and discounting
these at the rate implicit in the lease. If this rate cannot be
readily determined, the Group's incremental borrowing rate will be
used. The incremental borrowing rate is defined as the rate of
interest that the Group would have to pay to borrow over a similar
term, and with a similar security, the funds necessary to obtain an
asset of a similar value to the right-of-use asset in a similar
economic environment. The Group has calculated the incremental
borrowing rate using the risk free rate, subsequently adjusted to
reflect; entity-specific credit risk, term premium, and asset
risk.
The right of use asset is calculated using the lease liability
plus, where applicable; any lease payments made before commencement
net of incentives, any initial direct costs incurred, an estimate
of costs to dismantle and remove the asset. The right of use asset
is subsequently measured using the cost model. Depreciation is
provided over the term of the lease.
Variable lease payments are defined as the portion of payments
made by the lessee for the right to use the underlying asset during
the lease term that varies because of changes in facts or
circumstances occurring after commencement. Some sub-categories of
residential property leases contain indexation clauses. The
indexation reference is commonly linked to the Groups ability to
increase rental income, such as the prevailing Local Housing
Allowance rate. Less commonly, the index reference is inflationary
or a pre-determined fixed rate.
Transitional adjustment
Under the modified retrospective approach, the Group does not
restate its comparative figures, but recognises the cumulative
effect of adopting IFRS 16 as an adjustment to equity at the
beginning of the current period, as detailed in note 4.
In calculating the lease liability to be recognised on
transition, the Group used a weighted average discount rate of
6.0%. A reconciliation between operating lease commitments as
defined by IAS 17 disclosed in the 2018 Annual Report and Accounts,
and the opening position reported under IFRS 16 is disclosed
below:
GBP'000
Operating lease commitments at 31 December 2018 discounted
at the weighted average incremental borrowing rate at 1
January 2019 137,543
Add: Lease payment increases reflecting future indexation 6,203
Add: Identification of additional lease payments applying
the likelihood of lease extension 25,979
Lease liabilities recognised at 1 January 2019 169,725
------------------------------------------------------------ -------
Significant judgements in the application of this standard
IFRS16 requires The Directors to include within the future lease
payments periods covered by an option to extend and terminate the
lease, depending on the intention of the Group to enforce its right
to extend or terminate.
IFRS16 requires the Group to measure its general incremental
borrowing rate. This is defined as the rate of interest that the
Group would have to pay to borrow over a similar term, and with a
similar security, the funds necessary to obtain an asset of a
similar value to the right-of-use asset in a similar economic
environment. In formulating a methodology to calculate the
incremental borrowing rate, the following factors were considered,
and the judgements applied were:
a) Market-observed risk-free rate of interest.
b) Mears Group-specific credit spread.
c) Entity-specific credit rating where appropriate.
d) Management have applied an increase to certain asset types to
reflect specific circumstances relating to a particular asset
3. Segment reporting
The Group's revenue disaggregated by pattern of revenue
recognition is as follows:
Six months Six months
ended ended
30 June 30 June
2019 2018
GBP'000 GBP'000
--------------------------------------- ---------- ----------
Schedule of rates contracts 129,277 81,183
Contracting and variable consideration 159,271 157,305
Lump sum contracts 83,288 83,279
Rental income 57,875 53,153
Care services 51,044 60,337
--------------------------------------- ---------- ----------
480,755 435,257
--------------------------------------- ---------- ----------
All of the above categories fall exclusively within the Housing
segment with the exception of Care services, which falls
exclusively within the Care segment.
Segment information is presented in respect of the Group's
business segments. Segments are determined by reference to the
internal reports reviewed by the chief operating decision
maker.
The Group operated two business segments during the period:
-- Housing - services within this segment comprise a full
housing maintenance and management service predominately to Local
Authorities and other Registered Social Landlords; and
-- Care - services within this segment comprise personal care
services for people in their own homes.
All of the Group's activities are carried out within the UK and
the Group's principal reporting to its chief operating decision
maker is not segmented by geography.
The principal measures utilised by the chief operating decision
maker to review the performance of the operating segments are that
of revenue growth and operating margins in both core divisions of
Housing and Care. The operating result utilised within the key
performance measures is stated before amortisation of acquisition
intangibles, exceptional costs and costs relating to long-term
incentive plans.
Six months ended Six months
30 June 2019 ended
30 June 2018
-------------------------------- -------------------
Operating
result
before
impact Operating
of IFRS result Operating
Revenue 16 as reported Revenue result
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
---------------------------------------- ------- --------- ------------ ------- ----------
Housing 429,711 17,643 21,222 374,920 18,983
Care 51,044 1,725 1,997 60,337 1,859
---------------------------------------- ------- --------- ------------ ------- ----------
480,755 19,368 23,219 435,257 20,842
Long-term incentive plans (100) (100) (375)
---------------------------------------- ------- --------- ------------ ------- ----------
Operating result before intangible
amortisation and exceptional costs 19,268 23,119 20,467
Exceptional costs - - (3,975)
Amortisation of acquisition intangibles (4,583) (4,583) (2,159)
---------------------------------------- ------- --------- ------------ ------- ----------
Operating profit 14,685 18,536 14,333
Net finance costs (1,432) (6,065) (1,478)
Tax expense (2,130) (1,981) (2,044)
---------------------------------------- ------- --------- ------------ ------- ----------
Profit for the period 11,123 10,490 10,811
---------------------------------------- ------- --------- ------------ ------- ----------
There has been no material change in segment assets and segment
liabilities to those reported at December 2018 except for the
changes as a result of the Group adopting IFRS 16. The right of use
asset and associate lease obligation may be almost entirely
allocated to the Housing segment.
4. Changes in accounting policies
As detailed in note 2, there has been a significant mandatory
accounting change which applies from 1 January 2019: the adoption
of IFRS 16 'Leases'. The impact to retained earnings as a result of
this change is detailed below:
Retained
earnings
GBP'000
Retained earnings as previously stated at 1 January 2019 79,189
Right of use assets recognised 163,139
Lease liabilities recognised (169,725)
Impact of restatement on Deferred tax asset 1,251
Retained earnings as restated at 1 January 2019 73,854
---------------------------------------------------------- ---------
The effect of the application of IFRS 16 on the six months ended
30 June 2019 is detailed below:
As would
have been
reported As reported
before the Impact under
impact of of IFRS new accounting
IFRS 16 16 standards
GBP'000 GBP'000 GBP'000
Income statement for the six months ended
30 June 2019
Cost of sales (366,141) 2,421 (363,720)
Other administration expenses (95,346) 1,430 (93,916)
Finance costs (2,092) (4,633) (6,725)
Tax expense (2,130) 149 (1,981)
Balance sheet as at 30 June 2019
Property, plant and equipment 25,398 167,476 192,874
Deferred tax asset 5,522 1,199 6,721
Retained earnings (78,788) 5,968 (72,820)
Lease obligations (non-current) (892) (149,157) (150,049)
Lease obligations (current) (208) (25,687) (25,895)
Current tax liabilities (2,444) 201 (2,243)
Cash flow statement for the six months ended
30 June 2019
Profit for the period before tax 13,253 (782) 12,471
Adjustments 10,608 20,080 30,688
Discharge of lease liabilities (169) (14,665) (14,834)
Interest paid (1,697) (4,633) (6,330)
---------------------------------------------- ----------- --------- ---------------
IFRS 16 has impacted upon a number of commonly used performance
metrics including PBT, EBIT and EBITDA. The effect of the
application of IFRS 16 on the six months ended 30 June 2019 on
these measures is detailed below:
Six months
ended
30 June
2019 before Six months Six months
impact ended 30 ended 30
of IFRS June 2019 June 2018
16 as reported as reported
GBP'000 GBP'000 GBP'000
-------------------------------------------------- ------------ ------------ ------------
Profit for the period before tax, amortisation
of acquisition intangibles and exceptional costs 17,836 17,054 18,989
Add net finance charge 1,432 6,065 1,478
-------------------------------------------------- ------------ ------------ ------------
EBIT 19,268 23,119 20,467
Add amortisation 1,244 1,244 1,313
Add depreciation 2,923 18,369 2,832
-------------------------------------------------- ------------ ------------ ------------
EBITDA 23,435 42,732 24,612
-------------------------------------------------- ------------ ------------ ------------
The change to IFRS 16 has no impact on the lifetime
profitability of the contracts and there are no cash flow impacts.
The impact of this standard has been to reduce the operating result
for the first half of 2019 by GBP0.8m. Moving forward, it is
expected to have a negative impact in respect of operating profit
in the short term.
Movement in the right of use asset and lease obligation during
the six months to 30 June 2019 is detailed below:
Right of Lease
use asset obligation
GBP'000 GBP'000
---------------------------------------- ---------- -----------
Balance on transition at 1 January 2019 163,139 (169,725)
New leases 19,783 (19,783)
Depreciation (15,446) -
Finance cost - (4,633)
Lease payments - 19,297
----------------------------------------- ---------- -----------
Closing balance at 30 June 2019 167,476 174,844
----------------------------------------- ---------- -----------
The Lease Obligation at 30 June 2019 is allocated to four
categories of leases; residential property GBP148.3m, commercial
property GBP8.4m, vehicles GBP17.8m and office equipment GBP0.3m.
An additional lease obligation of GBP1.1m relating to finance
leases is not included in the table above.
5. Finance costs and finance income
Six months Six months
ended Ended
30 June 30 June
2019 2018
GBP'000 GBP'000
---------------------------------------------------------- ---------- ----------
Interest charge on overdrafts and short-term loans (1,685) (1,393)
Interest charge on lease liabilities (4,633) -
Interest charge on interest rate swap (effective hedges) (7) (244)
Interest charge on defined benefit obligation (400) (100)
---------------------------------------------------------- ---------- ----------
Finance costs (6,725) (1,737)
Interest income resulting from short-term bank deposits 10 9
Interest income resulting from defined benefit obligation 650 250
---------------------------------------------------------- ---------- ----------
Finance income 660 259
---------------------------------------------------------- ---------- ----------
Net finance charge (6,065) (1,478)
---------------------------------------------------------- ---------- ----------
6. Tax expense
The tax charge for the six months ended 30 June 2019 has been
based on the estimated tax rate for the full year.
Tax recognised in the Income Statement:
Six months Six months
ended Ended
30 June 30 June
2019 2018
GBP'000 GBP'000
---------------------------------------------------------------- ---------- ----------
United Kingdom corporation tax and total current tax recognised
in the Income Statement 2,800 348
Adjustment in respect of previous periods - -
---------------------------------------------------------------- ---------- ----------
Total current tax recognised in the Income Statement 2,800 348
Total deferred tax recognised in the Income Statement (819) 1,696
---------------------------------------------------------------- ---------- ----------
Total tax expense recognised in the Income Statement 1,981 2,044
---------------------------------------------------------------- ---------- ----------
7. Dividends
The interim dividend of 3.65p (2018: 3.55p) per share is not
recognised as a liability at 30 June 2019 and will be payable on 24
October 2019 to shareholders on the register of members at the
close of business on 4 October 2019. The dividend disclosed within
the half-year condensed consolidated statement of changes in equity
represents the final dividend of 8.85p (2018: 8.55p) per share
proposed in the 31 December 2018 financial statements and approved
at the Group's Annual General Meeting on 31 May 2019 (not
recognised as a liability at 31 December 2018).
8. Earnings per share
Basic Diluted
---------------------- ----------------------
Six months Six months Six months Six months
ended ended ended Ended
30 June 30 June 30 June 30 June
2019 2018 2019 2018
p p p P
-------------------------------------------------- ---------- ---------- ---------- ----------
Earnings per share 9.16 10.49 9.12 10.44
Effect of amortisation of acquisition intangibles 4.14 2.08 4.13 2.08
Effect of exceptional costs (including tax
impact) - 3.17 - 3.15
Effect of full tax adjustment (0.98) (0.64) (0.98) (0.63)
-------------------------------------------------- ---------- ---------- ---------- ----------
Normalised earnings per share 12.32 15.10 12.27 15.04
-------------------------------------------------- ---------- ---------- ---------- ----------
A normalised earnings per share (EPS) is disclosed in order to
show performance undistorted by amortisation of acquisition
intangibles and adjusted to reflect a full tax charge. The
Directors believe that this normalised measure better allows the
assessment of operational performance, the analysis of trends over
time, the comparison of different businesses and the projection of
future performance.
The profit attributable to shareholders before and after
adjustments for both basic and diluted EPS is:
Six months Six months
ended ended
30 June 30 June
2019 2018
GBP'000 GBP'000
------------------------------------------- ---------- ----------
Profit attributable to shareholders: 10,121 10,864
- amortisation of acquisition intangibles 4,583 2,159
- exceptional costs (including tax impact) - 3,278
- full tax adjustment (1,088) (659)
------------------------------------------- ---------- ----------
Normalised earnings 13,616 15,642
------------------------------------------- ---------- ----------
The calculation of EPS is based on a weighted average of
ordinary shares in issue during the year. The diluted EPS is based
on a weighted average of ordinary shares calculated in accordance
with IAS 33 'Earnings Per Share', which assumes that all dilutive
options will be exercised. The additional normalised basic and
diluted EPS use the same weighted average number of shares as the
basic and diluted EPS.
Six months Six months
ended ended
30 June 30 June
2019 2018
Millions Millions
---------------------------------------------------------- ---------- ----------
Weighted average number of shares in issue: 110.49 103.60
- dilutive effect of share options 0.49 0.40
---------------------------------------------------------- ---------- ----------
Weighted average number of shares for calculating diluted
earnings per share 110.98 104.00
---------------------------------------------------------- ---------- ----------
9. Fair value measurement of financial instruments
IAS 34 requires that interim financial statements include
certain of the disclosures about fair value of financial
instruments set out in IFRS 13 and IFRS 7. These disclosures
include the classification of fair values within a three-level
hierarchy. The three levels are defined, based on the observability
of significant inputs to the measurement, as follows:
-- Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;
-- Level 2: inputs other than quoted prices included within
Level 1 that are observable for the asset or liability, either
directly or indirectly; and
-- Level 3: unobservable inputs for the asset or liability.
The following table shows the levels within the hierarchy of
financial assets and liabilities measured at fair value on a
recurring basis at 30 June 2019, 31 December 2018 and 30 June
2018:
As at As at As at
30 June 30 June 31 December
2019 2018 2018
GBP'000 GBP'000 GBP'000
---------------------------------------------------- --------- --------- -----------
Financial assets
Loans and receivables
Trade receivables 55,555 42,651 63,787
Cash at bank and in hand 40,121 75,495 27,876
95,676 118,146 91,663
---------------------------------------------------- --------- --------- -----------
Financial liabilities
Fair value (Level 2)
Interest rate swaps - effective (165) (148) (56)
Fair value (Level 3)
Contingent consideration in respect of acquisitions (1,250) - (2,000)
Amortised cost
Borrowings related to assets held for sale (15,000) (30,000) (15,000)
Bank borrowings and overdrafts (88,731) (120,000) (93,780)
Trade payables (123,086) (109,847) (100,664)
Lease liabilities (175,944) (505) (1,269)
Other creditors (12,882) (5,197) (10,445)
---------------------------------------------------- --------- --------- -----------
(417,058) (265,697) (223,214)
---------------------------------------------------- --------- --------- -----------
(321,382) (147,551) (131,551)
---------------------------------------------------- --------- --------- -----------
The fair values of interest rate swaps and forward commodity
contracts have been calculated by a third party expert discounting
estimated future cash flows on the basis of market expectations of
future interest rates (Level 2).
The fair values of deferred and contingent consideration have
been calculated by the Directors by reference to expected future
income and expenditure in respect of the acquired businesses.
There were no transfers between Level 1 and Level 2 during the
six-month period to 30 June 2019 or the year to 31 December
2018.
The reconciliation of the carrying values of financial
instruments classified within Level 3 is as follows:
Deferred Contingent Total
GBP'000 GBP'000 GBP'000
--------------------------------------------- -------- ---------- --------
At 1 January 2018 11,163 - 11,163
Paid in respect of acquisitions (11,163) - (11,163)
At 30 June 2018 - - -
Increase due to new acquisitions in the year - 2,000 2,000
--------------------------------------------- -------- ---------- --------
At 31 December 2018 - 2,000 2,000
Released on reassessment - (750) (750)
--------------------------------------------- -------- ---------- --------
At 30 June 2019 - 1,250 1,250
--------------------------------------------- -------- ---------- --------
Contingent consideration represents an estimate of future
consideration likely to be payable in respect of acquisitions.
Contingent consideration is discounted for the likelihood of
payment and for the time value of money. Contingent consideration
becomes payable based upon the profitability of acquired
businesses.
The carrying value of the following financial assets and
liabilities is considered a reasonable approximation of fair
value:
-- trade and other receivables;
-- cash and cash equivalents;
-- trade and other payables; and
-- lease liabilities.
10. Acquisitions
On 30 November 2018 the Group acquired certain business assets
and contracts from the Mitie property services division. The
estimated fair value of net assets acquired remains provisional and
will be finalised before the year end. Adjustments have been made
in the first half as the passage of time has increased the accuracy
of the original estimate. This has resulted in a reduction in the
net assets acquired from GBP7.1m to GBP6.8m and a corresponding
increase in goodwill from GBP3.3m to GBP3.6m.
11. Share capital
As at As at As at
30 June 30 June 31 December
2019 2018 2018
GBP'000 GBP'000 GBP'000
------------------------------------------------------ ------- ------- -----------
Allotted, called up and fully paid
At 1 January 110,487,586 (2018: 103,567,091) ordinary
shares of 1p each 1,105 1,036 1,036
Issue of 2,873 (2018: 54,485) ordinary shares of
1p each on exercise of share options - - 1
Issue of ordinary shares of 1p each as a placement - - 68
------------------------------------------------------ ------- ------- -----------
At 30 June 110,490,459 (2018: 103,621,576) ordinary
shares of 1p each 1,105 1,036 1,105
------------------------------------------------------ ------- ------- -----------
2,873 (2018: 54,485) ordinary 1p shares were issued in respect
of share options exercised. The difference between the nominal
value and the total consideration has been credited to the share
premium account.
12. Notes to the half-year condensed consolidated cash flow
statement
The following non-operating cash flow adjustments have been made
to the pre-tax result for the period:
Six months Six months Year
ended
ended ended 31
30 June 30 June December
2019 2018 2018
GBP'000 GBP'000 GBP'000
-------------------------------------------------- ---------- ---------- --------
Depreciation 18,369 2,832 5,804
Loss on disposal of property, plant and equipment 77 23 37
Loss on disposal of subsidiary - - 44
Intangible amortisation 5,827 3,472 6,843
Share-based payment charges 100 375 552
IAS 19 pension movement - - (655)
Net finance charge 6,315 1,627 3,016
-------------------------------------------------- ---------- ---------- --------
Total 30,688 8,329 15,641
-------------------------------------------------- ---------- ---------- --------
13. Half-year condensed consolidated financial statements
Further copies of the Interim Report are available from the
registered office of Mears Group PLC at 1390 Montpellier Court,
Gloucester Business Park, Brockworth, Gloucester, GL3 4AH or
www.mearsgroup.co.uk.
14. Principal risks and uncertainties
The nature of the principal risks and uncertainties faced by the
Group has not changed significantly from those set out on pages 41
to 42 of the 2018 Annual Report and Accounts and is not expected to
change over the next six months. The four principal risks
identified are: reputation, people, health and safety, and IT and
data.
15. Forward-looking statements
This report contains certain forward-looking statements with
respect to the financial condition, results of operations and
businesses of Mears Group PLC. These statements involve risk and
uncertainty because they relate to events and depend upon
circumstances that will occur in the future. There are a number of
factors that could cause actual results or developments to differ
materially from those expressed or implied by these forward-looking
statements.
The Directors confirm, to the best of their knowledge, that this
condensed set of financial statements has been prepared in
accordance with IAS 34 as adopted by the European Union and that
the Interim report includes a fair review of the information
required by Rules 4.2.4, 4.2.7 and 4.2.8 of the Disclosure and
Transparency Rules of the UK Financial Conduct Authority.
The names and functions of the Directors of Mears Group PLC are
as listed in the Group's Annual Report for 2018 with the exception
of Jim Clark who was appointed as a Non-Executive Director in July
2019.
By order of the Board
D J Miles A C M Smith
Chief Executive Officer Finance Director
david.miles@mearsgroup.co.uk andrew.smith@mearsgroup.co.uk
13 August 2019
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
IR EAEPAFSLNEAF
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