Harworth Group PLC - UNAUDITED PRELIMINARY RESULTS

HARWORTH GROUP PLC

UNAUDITED PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2018

 

STRONG PERFORMANCE UNDERPINNED BY SOUND MARKETS AND A CLEAR STRATEGY LEAVE HARWORTH WELL POSITIONED FOR THE FUTURE

 

Harworth Group plc ("Harworth" or the "Group"), a leading regenerator of land and property for development and investment, announces its preliminary results for the year ended 31 December 2018.

 

 

31 December 2018

31 December 2017

Change (%)

Net Asset Value ("NAV") per share (p) (1)

137.5

127.4

7.9

EPRA NNNAV per share (p) (1)

145.2

128.9

12.6

EPRA NAV per share (p) (1)

148.3

131.0

13.2

 

 

 

 

Operating profit (£'m)

33.0

40.1

(17.7)

Operating profit before exceptional items plus joint ventures (£'m)

37.4

43.8

(14.6)

Value gains (£'m)

27.6

41.6

(33.6)

Value gains (including development properties & overages) (£'m)

51.3

47.4

8.2

Profit excluding value gains (£'m)

9.8

2.2

N/m

 

Chairman's Statement

 

As this is my first statement since assuming the Chair at Harworth in March last year, I would like to start with some reflections on becoming involved with the business. However, may I first express my thanks to my predecessor, Jonson Cox, for everything he did to facilitate a smooth transition from him to me and also my recognition of the considerable contribution he made to the creation of Harworth in its current form as an established, listed development company with a differentiated, and proven, specialism in the regeneration of difficult former industrial sites.

 

A personal perspective

My principal previous property experience was serving as Deputy Chairman at Bovis Homes for approaching 10 years before my retirement last May. As a house builder, one is primarily concerned with the sale of a standard product with well-defined production costs and margins, such that progress can be tracked against a generic build process that permits measurement of uniform stages such as "slab" or "roofed-in".  Sites may be acquired in different locations but what is produced on each site largely conforms to standard house types.

 

I have rapidly discovered that property at Harworth is very different - every site has its own very individual challenges and opportunities to create value. Of course, one starts off with a site assessment against required average returns but the course the development takes may differ radically from how it was first envisaged.  As the team learns more about the site and as market conditions change, so the pace and shape of development may evolve. Parts of the site may be sold earlier or later than planned; parts may be developed by Harworth itself and held within our income generating portfolio rather than sold for others to develop; adjacent land may be added to the masterplan and change the balance of commercial and residential uses; and skilful remediation may bring forward additional areas that were not initially envisaged as suitable for development. Every site has to be understood in great detail by those responsible for its development.  There is no such thing as a "cookie cutter" approach to Harworth's sites.

 

Successful development of large, complex and frequently challenging sites requires particular skills and experience, and it is Harworth's people that are at the heart of its differentiation. The well-used adage that an organisation is only as good as its people has never been truer than at Harworth.  There may only be 66 people but our ability to create value derives from their ability to: identify land and property opportunities; create deliverable masterplans; negotiate acquisitions, disposals, and leases; develop relationships with local stakeholders; build partnerships with funders, developers, house builders, and commercial clients; devise innovative remediation solutions for complex heavy industrial legacies; identify the right point in the market to offer sites for sale; and manage complex projects requiring the organisation of, and interaction with, multiple professional advisers and contractors.

 

The other notable difference between Bovis and Harworth is time-scale. A house builder will typically look to be in and out of a site in a couple of years. The scale of some of Harworth's developments means that we may be continuing to extract value from a site for up to 20 years or more. A house builder will determine whether or not to buy a site on its assessment of the attractiveness to potential customers of the location and the community of which the site is a part. Harworth will create places and communities where none exist. It is Harworth's vision of the end game on a development that house builders and commercial clients buy into. When our management considers the potential of a development, they have to have a long-term vision of their ability to create value over many years into the future.  Each year's results in isolation are an important guide to our commercial effectiveness but average return across the cycle is the most accurate measure of the quality, and sustainability, of our delivery.

 

The structure of Harworth's shareholdings is also very different to the listed companies that I have previously chaired. With the Peel Group and the Pension Protection Fund holding slightly over 50% of Harworth, and represented at the Board table, as Chairman one receives directly and in real time shareholder perspectives on decisions and feedback on issues faced by the Group.  This is invaluable. Importantly, by their support for our cashbox placing in early 2017 they demonstrated their alignment with our long-term objectives to grow our business.  Equally, I am very grateful for the welcome I have received from our other material institutional shareholders and look forward to seeing institutional participation on our register grow over time as the potential inherent in Harworth becomes more broadly communicated and recognised.

 

Governance

Whilst Harworth is a constituent member of the FTSE Small-Cap index, it operates to all intents and purposes as if it were in the FTSE-250 index and aspires to be a member in due course. Its process of corporate governance is well-established and substantially met the Code requirements of a premium-listed company before we made the transition to the Premium List in August 2018. The smoothness of that process is itself a credit to our in-house company secretarial and finance teams and to the many advisers that worked with us on the exercise. When considering joining Harworth I was impressed by the content and clarity of our annual report and broader shareholder and media communications. We have a first-rate Board, as evidenced by our recent external Board Effectiveness Review, with a broad range of skills and relevant experience around the Board table. With such as our non-executive participation on the Group's People Steering Group we are clearly cognisant, and in the vanguard, of developments in corporate best practice. The recruitment of new non-executive directors now allows us to constitute our principal Board committees on a fully independent footing.

 

2018 - the year

The other aspect of Harworth that attracted me to the opportunity was its track-record of delivery and 2018 has been no exception. Once again, the Group has met its objective of over 10% through the cycle total return, this time delivering 13.3% in a year supported by a number of successes, not all of which were envisaged at the start of the year. Owen provides further commentary on this in his Chief Executive's statement. This bears out the capability of our teams to identify and then realise opportunities for value creation. In any one year there may be both upsides and downsides - what is much more important is what the business achieves over the medium-term. That medium-term delivery will be determined by our development pipeline.  Hence as important as our in year result was what we did to support our future returns - the £14.2m that we invested in development acquisitions, themselves supported by £43.7m of income-generating acquisitions; our commitment of £33.0m further investment, predominantly infrastructure, in sites we own; the 993 residential plots and 3.3m commercial square feet for which we applied for planning consent; and the 778 residential plots and c.0.1m commercial sq. ft on which we realised outline planning consent during the year. Whilst 2018 was again characterised by substantial investment, this was balanced by significant disposals, realising £93.2m during the year.  This enabled us to maintain our commitment to low financial gearing, ending the year with a 12.3% net LTV, well within our target range.

 

Acquiring appropriate new sites is the life-blood of our future growth and a strong understanding of, and relationships with, local markets are, in our view, key to identifying, negotiating, and subsequently developing such sites. Hence our decision during 2018 to move to a regional structure with new regional teams in the Midlands, based out of Birmingham, and the North-West, out of Manchester, complementing our existing Yorkshire and Central area, based at our head office in Rotherham. We are delighted to have secured proven, experienced, regionally-based management to lead these new regions and they are in the process of building out their teams to match the intended growth of their regional portfolios. Our acquisition of 350 acres at the former Ironbridge power station in Shropshire exemplifies this regional expansion within Harworth's existing focus on transforming large, complex development sites.

 

The Board

We are adding two new non-executive directors over the next month. This will address both the retirement in September this year of Tony Donnelly after nine years with Harworth, and the need, as a premium-listed company, for at least half the Board, excluding the chair, to comprise independent directors.  It will also enable us to add a further independent non-executive to our Remuneration and Audit Committees from which Steven Underwood, the representative of the Peel Group on our Board and, therefore, not independent, will then stand down.  In line with our establishing a Midlands region, Ruth Cooke brings us extensive experience in the Midlands real estate sector, having been Chief Executive of Midland Heart, a large regional housing association from 2012-2018, a founder member of the West Midlands Housing Association Partnership, and a Board member at Marketing Birmingham.  She is a chartered accountant and a corporate treasurer.  Angela Bromfield has extensive commercial strategy, marketing and communications executive experience, having held leadership roles in these areas at Premier Farnell, Anglo American, and Morgan Sindall. She is currently a non-executive director and Remuneration Committee Chair at Churchill China and Zotefoams.

 

Thank you

May I finish by thanking everyone who has contributed so much to making 2018 another successful year for Harworth - our management team, our colleagues, our customers, our business partners, advisers and suppliers. As I said at the beginning of my statement, Harworth is all about its people. 

 

Alastair Lyons

Chairman

5 March 2019