Henry Boot – 2020 Half-Year Report

HIGHLIGHTS

 

· Revenue of £108.7m (30 June 2019: £189.0m) as all operations were impacted by CV-19 and H1 2019 benefited from the final stage of the TECA project, Aberdeen.

· Profit before tax of £7.2m (30 June 2019: £24.1m) – slightly ahead of our revised expectations and supported by our land promotion business

· Earnings per share lower at 4.1p (30 June 2019: 14.2p)

· Strong net cash position increased to £42.3m (30 June 2019: net debt £50.3m)

· Declared interim dividend of 2.2p (30 June 2019: 3.7p), which reflects our current financial position and confidence in our long-term markets

· Net asset value per share robust at 232p (30 June 2019: 233p)

· Land promotion business sold 2,000 plots across 9 sites and increased land portfolio to 15,456 acres

· Developments completed on £42m (GDV) of industrial all pre-sold or let. Further committed development of £296m – 95% pre-sold or let. Strong £1.4bn pipeline with 74% in industrial and logistics, remainder in urban development

· Stonebridge Homes completed on 24 sales in H1, a further 61 forward sales have been secured and on track to hit FY targets

· Construction steadily recovering and operating at nearly 90%, and Plant Hire at 82%, of planned activity

Commenting on the results, Chief Executive Officer Tim Roberts said:

 

“The first half of the year has proved to be very challenging for all of us, but with an agile recovery plan and a robust balance sheet Henry Boot remains in a strong position. Right from the beginning of this pandemic we have focused on our stakeholders' wellbeing and protecting the liquidity of the Group so we can come through this in the best possible way.

 

While CV-19 has affected our interim results and led us to make difficult decisions to reshape and protect the business, we have seen clear improvements in our operations. As this momentum builds, we have been quick to secure selective long-term opportunities and make progress in our key markets – residential, industrial and urban development. We are prepared for uncertain times ahead but where we see good opportunities to invest, without taking undue risk, we will continue to take them.

 

I would like to thank all of the Group's employees for their dedicated hard work during this unprecedented period, whose efforts have helped keep the business viable and produced a robust set of results, which are creditable given the circumstances we are in.” 

CHAIRMAN'S STATEMENT

I am pleased to announce that all the Group's operations remain active and have continued to stabilise following what has been a challenging first half to 2020. COVID-19 (CV-19) has affected our financial performance; nevertheless, we are slightly ahead of our revised expectations for the year and continue to focus on protecting the safety of all our stakeholders and preserving the Group's strong financial position.

The Group started the year positively and was building upon the progress made in 2019 until the UK lockdown forced a temporary pause on all our sites and depots, which in turn, reduced activity across the business. The temporary pause allowed us to adopt necessary protocols that each of our operations required. This ensured employees, supply chains and customers remained safe when interacting with our operations. We have continued to secure long-term opportunities in the markets in which we operate, which have remained resilient against the backdrop of CV-19. In this respect we have increased our strategic land holdings by 558 acres and successfully tendered for a £40m build to rent apartment scheme in Sheffield City Centre. In H2 2020 we have also acquired a site in Manchester for a total price based on phased payments of £10m. We have optionality on either refurbishing the building or promoting a 170,000 sq ft redevelopment. While we consider these options, we will be collecting income from the building.

Following the Board resetting the Group's financial expectations for 2020, we are slightly ahead of current internal forecasts despite the CV-19 impact. We have achieved a profit of £7.2m (June 2019: £24.1m) in the first half of the year, primarily supported by our land promotion business which completed on nine sites in H1. We continue to closely manage our financial position, maintaining a robust balance sheet, with our NAV per share resilient at 232p and as of 30 June 2020 our net cash position stood at £42.3m.

We currently have a minority of employees still on furlough but as activity levels increase, this number is reducing and, by the end of August, we aim to withdraw from the scheme. Although activity levels within our operations are increasing, we are not confident that levels will equal those seen pre-CV-19, for some time. On that basis we have made the difficult decision to undertake restructuring plans, which will result in redundancies in the construction division.

After a successful trial period, we reopened two offices in June and now have a phased reopening plan for most of our regional network. We will continue with this phased approach for offices, to ensure we are returning people in the safe manner that our sites and depots undertook. As we shape our Group for the future and remain agile during this pandemic we are taking an interest in technological developments, which can further advance our services to clients and adopting new working practices that have proved to be effective for our employees. Finally, despite the challenges faced in the current climate, we remain focused on acting as a responsible business. We have maintained contact with all the communities we operate in and have donated to the National Emergencies Trust, who's appeal is supporting people in need of aid during this pandemic.

Dividend

While we recognise the importance of protecting our financial position in these uncertain economic times, we are also keen to take the interest of our shareholders into consideration. Having rebased the full year dividend for 2019 at 5.0p we will be paying a 2.2p (2019: 3.7p) interim dividend. This reflects the Group's current financial performance being slightly ahead of our revised expectations and our confidence in the longer-term outlook for the business. This will be paid on 16 October 2020 to shareholders on the register at the close of business on 18 September 2020.

Business Review

Land Promotion

Despite the pandemic, Hallam Land Management made a solid start to 2020, with 2,000 plots sold across nine sites. At the end of June 2020, we had unconditionally exchanged contracts for the sale of a further 525 plots, which are due to complete either later in the year or early in 2021.

At the half year, Hallam Land held interests in 190 sites equating to 15,456 acres (December 2019: 14,898 acres ), of which 1,683 acres are owned, 2,583 under option and 11,190 are under planning promotion agreements. As in previous periods of uncertainty, we have made good progress, facilitated by the Group's robust balance sheet and we continue to source a selective number of new opportunities in strong market locations.

Significant steps forward have been achieved over the period in relation to our major Didcot project (2,182 plots) where Oxfordshire County Council has now secured the required Homes and Infrastructure Funding (HIF) deal with Homes England. Detailed planning consent has also been granted at Eastern Green in Coventry and £15.6m of funding has been secured for a grade separated junction onto the A45, which is the principal access for this 2,200 plot, and 900,000 sq ft commercial site. Works are expected to commence during 2021.

At 30 June 2020, we held planning consents/resolution to permit consent for 12,939 plots on 31 sites, with a further 10,511 plots subject to planning applications on 23 sites. Our accounting policy is to hold these strategic land purchases as inventory, at the lower of cost or net realisable value, and therefore the assets do not benefit from judgemental valuation gains. The inventory value at 30 June 2020 was £108.2m (December 2019: £101.7m).

Our housebuilder customers are at differing stages in returning to the land market. Nonetheless, we are receiving bids for land at prices not noticeably impacted by CV-19, although we do not expect these deals to contribute to this year's numbers. However, pressure on land pricing and average returns per plot has continued, with the forthcoming changes to building regulations likely to have a growing impact in the medium term. 

As we enter H2 Hallam Land is in a strong position, with all its budgeted business for the current year contractually exchanged. Additionally, we are in advanced negotiations on further disposals of plots, which we expect to complete next year.

Property Investment and Development

Henry Boot Developments (HBD) has resumed work on all sites after a pause during lockdown and continues to make progress on all developments. HBD's performance has been affected during H1 by the slowdown in the commercial market and a fall in the valuation of the investment portfolio. Notwithstanding this, we have successfully completed three industrial and logistic sites, comprising 377,878 sq ft, with a combined GDV of £42m. The completed industrial space includes units at the International Advanced Manufacturing Park, Sunderland (IAMP) for Faltec (124,441 sq ft) and CESAM building (131,622 sq ft), as well as at Airport Business Park, Southend (ABPS), where we were delighted to hand over a design and build unit for IPECO (121,815 sq ft). Capital values fell by 3.0% in our investment portfolio compared to an industry average of 6.9%.

We are now committed to eight schemes with a GDV of £296m over 568,826 sq ft, of which 95% is either pre-sold, pre-let or under offer. Our largest development project, Kampus in Manchester, continues to take shape. The scheme, which comprises 533 build to rent apartments, together with 44,000 sq ft of retail and leisure space, should now complete in mid-2021 after a delay due to the pause in works caused by CV-19. Also, following the implementation of infrastructure works at Wyvern Park, Skipton, we are aiming to complete on the sale of the majority of the land before the end of the year.

In industrial and logistic development, we were pleased to see works commence on site at Butterfields Business Park, Luton (BBP). On this site we are developing a 73,528 sq ft unit pre-let to Eden Farm, which we also intend to hold in our investment portfolio, and at Markham Vale, where we are developing two units totalling 297,018 sq ft, which we have pre-sold to Aver. We also expect practical completion on a new 18,750 sq ft Aldi store in Huyton during H2, which again we intend to hold as an investment.

Committed Schemes
Scheme	GDV (£m)	Share of GDV (£m)	Commercial (sq ft)	Residential (units)	Status
Industrial
Enfield, Montagu 406	16	8	55,530	–	A speculative 50/50 joint venture development, with Enfield Borough council
Pool MKM Building Supplies	4	4	15,000	–	Pre-let
Luton, Eden Farm	10	10	73,528	–	Pre-let
Markham Vale, Aver	23	23	297,018	–	Sold under forward funding contract
Wakefield, Kitwave	7	4	65,000	–	Conditional contract to forward fund
	60	49	506,076	–
Residential
Manchester, Kampus	216	11	44,000	533	Sold under forward funding contract
Wyvern Park, Skipton	14	14	–	184	Sold under conditional contract
	230	25	44,000	717
Retail Huyton, Aldi	6	3	18,750	_	Pre-let
Total for year	296	77	568,826	717

 

We have committed to building on a speculative basis a 55,000 sq ft scheme in the London Borough of Enfield in a JV with the local Council, as we expect encouraging demand in this growing market. Progress is also being made on site in connection with various demolition and infrastructure contracts at Taunton, ABPS, BBP, IAMP and New Horizon, Nottingham, all of which are key industrial and logistics development opportunities within our existing development pipeline. We believe there will be high customer demand for new space at strategic logistics sites for the medium term and by investing in these sites now, we shall be ready to respond quickly to customer requirements in the future.

Post H1, we announced that a further £105m was added to our development pipeline, which now has a potential GDV of c.£1.4bn following the acquisition of the St John's College building in Manchester. We will gain vacant possession of the building in late 2022, following which we will look to either refurbish the existing building or redevelop the site which could deliver up to 170,000 sq ft. While we consider our options we will receive income. This is a site we have monitored for some time, and due to the CV-19 uncertainty, negotiated a total price of c.£10m in phased payments. Also, significant progress has been made on a number of the industrial and logistics sites which currently make up approximately 74% of the development pipeline. We have secured planning consent for a speculative scheme at Preston East, with planning applications for a further speculative scheme at BBP as well as a similar scheme at ABPS due for submission in late 2020. These schemes have a total of 219,000 sq ft. Planning was also secured at Cloverhill, Aberdeen for over 500 residential units and applications will be submitted at Cornwall House, Birmingham (100 residential units) and Island Site, Manchester (c.100,000 sq ft office) in the second half of 2020. 

Following our successful rationalisation of the investment portfolio in 2019, where we completed on the sale of c.£64m of predominately retail assets, we have started the process of rebuilding our portfolio. Additional assets at Huyton, Aldi, and Luton, Eden Farm are set to be added to the portfolio in H2 once completed, with potential to add c.£15m. We hope to be able to identify further ways of growing our investment portfolio over the next 18 months. Unsurprisingly, CV-19 has negatively affected our half-year valuations as well as rent collection. However, we have had, and continue to have, positive conversations with our customers to find a mutually acceptable way through the crisis. We forecast that by the end of the current quarter, we will have received 80% of rent due on the March and June quarter days, which ranks above the property industry average. In addition, our values have fallen by £2.1m (3.0%), which again has outperformed the wider property market.

Our jointly owned housebuilder, Stonebridge Homes, continues to see encouraging activity levels within the housing market after the disruption caused by CV-19. Budgeted sales for 2020 stand at 112 which, as expected, is lower than 2019 due to delays in planning on our land bank. We achieved 24 completions in the first half of the year and a further 61 forward sales have been secured, which will contribute towards the full year target. 11 sales and 20 reservations have been secured during lockdown, achieved by adapting our sales process through the use of virtual technology. This process allows us to keep marketing our homes in the event the Government reintroduces some form of lockdown.

The housing market is showing resilience since activity resumed, and if this continues, we are firmly on track to achieve our full year target. The long-term focus remains on growing output to 500 units per annum and expanding our operations to create a multi-regional premium housebuilder. In this respect, during H1 we are pleased to have secured our first site in the North East region.

Construction

Henry Boot Construction started the year with a healthy order book. We were on track to deliver targeted activity in 2020 prior to pausing on sites to ensure we were meeting the requirements of the Construction Leadership Council Site Operating Procedures. After the initial pause, we commenced a phased reopening plan and are now active on all sites. Subsequently, productivity has continued to increase across all our sites and now stands at nearly 90% of pre-CV-19 planned activity levels. In particular, Glass Works phase II, our £88m flagship town centre regeneration project for Barnsley Metropolitan Borough Council, is progressing in line with our expectations for completion in early 2021. However, the recently acquired affordable housing business, Starfish Commercial Limited, has been materially impacted by the pandemic and is not performing in line with our expectations.

We have seen a reasonable level of construction opportunities in the first half of the year and we are pleased to have recently signed the contract to deliver a £40m built to rent apartment scheme in the centre of Sheffield. We expect to start on site in spring 2021. Nevertheless, due to the impact of CV-19 we are anticipating a reduction in private sector opportunities later in the year, which may lead to a risk of tightening margins and we do not expect activity to achieve pre-pandemic levels in the short term. This, together with the need to ensure the business is fit for the future has resulted, unfortunately, in restructuring plans being implemented within the construction division.

Education remains an important market where we are building schools under both the Department for Education framework and the Leeds local education framework. We are also delivering schemes in the higher education sector for the Universities of Sheffield and Leicester. We continue to deliver health schemes through the Sheffield Teaching Hospitals NHS Foundation Trust framework and have also recently converted university buildings for NHS use in the fight against CV-19. Works are also progressing on the £12m scheme for Opera North in Leeds city centre that is due for completion next year.

We are delivering schemes through the Ministry of Justice Strategic Alliance Agreement for new build and refurbishment schemes for HM Prison Service, HM Court and Tribunals Service, National Probation Service, Home Office and Forensic Science Service in the north of England. Notably, we completed two court buildings earlier in the year, and are currently working on two other schemes and have recently been awarded two further contracts that will start on site later this summer.

Despite CV-19 materially impacting Henry Boot Construction, we are well placed to weather this uncertainty through our substantial public sector client base and our presence on several public sector national and regional frameworks, where we expect spend on construction projects will be maintained in the short term to pump prime the general economy. As always, we adopt a risk-based approach and remain selective in the opportunities we pursue focusing, where possible, on proactively sourcing higher margin business and developing repeat business.

Banner Plant has had a challenging period during this first half, but after a steady increase in work, sales are now at 82% of those achieved in June 2019. Before CV-19, trading started positively and was ahead of 2019 performance. While we will continue to face difficulties, the diversity of our plant hire products leaves us well placed to benefit from a recovery. Road Link (A69) performance has been marginally affected by reduced traffic volumes during the lockdown and we remain alert to the challenges we may face as the year progresses.

Financial review

Income statement

Revenue for the period reduced to £108.7m (30 June 2019: £189.0m). The prior year benefited from property development activity relating to the £333m TECA contract which completed in that year but more broadly all our operations were impacted by the unprecedented CV-19 pandemic and the resultant reduction in activity.

Gross profit was 42.7% lower at £23.1m (30 June 2019: £40.4m) as strong land promotion sales in Q1 were offset by the difficult trading environment in Q2 which impacted all our activities.

Administrative expenses decreased by £0.3m (30 June 2019: increased £1.6m), as we restricted discretionary spend, furloughed a minority of employees, provided for reduced bonuses and decreased main Board salary and fees by 20% from 1 April. These actions were offset by goodwill impairment of £1.8m relating to Starfish Commercial Limited, a company focused on the provision of affordable housing, acquired in December 2019.

Fair value of investment properties decreased by £2.1m (30 June 2019: increase £0.4m) and profit on sale of investment properties of nil (30 June 2019: losses £0.1m) resulted in profit from operations of £5.3m (30 June 2019: £24.7m).

Net financing costs were £0.2m (30 June 2019: £0.7m) reflecting both low interest rates and the overall cash positive position of the Group.

The Group's share of profit of joint ventures and associates of £2.1m (30 June 2019: £0.2m) reflects the increasing amount of property development activities undertaken in partnership and, in particular, the increase in value of investment property and the disposal of land for residential development by our joint ventures and associates.

The resultant profit before tax was £7.2m (30 June 2019: £24.1m) which, in the circumstances, was a creditable result with earnings per share of 4.1p (30 June 2019: 14.2p).

Statement of financial position

Total non-current assets were £134.8m (31 December 2019: £133.3m). Significant movements arose as follows:

– Intangible assets reduced by £1.9m, largely arising from the impairment of goodwill relating to the acquisition of Starfish Commercial Limited in December 2019 driven by a significant reduction in affordable housing construction opportunities arising from the impact of CV-19;

–  a reduction of investment in property, plant and equipment and movements in right of use assets, which together largely relate to our plant hire fleet, of £1.7m (30 June 2019: increase £2.5m) resulting from our decision to restrict capital expenditure in the current year;

– a £0.2m increase (30 June 2019: decrease £41.9m) in the value of investment properties, being a revaluation deficit of £2.1m (30 June 2019: gain £0.4m) offset by investment in investment properties under construction of £2.3m (30 June 2019: £2.2m);

– an increase in trade and other receivables of £2.0m to £19.2m (31 December 2019: £17.2m) relating to deferred land sale debtors due beyond 12 months from disposals in the current period offset by those from prior years becoming due within 12 months and therefore moving to current assets; and

– an increase in deferred tax assets of £3.0m (30 June 2019: £0.3m) arising from the increase in retirement benefit obligations relating to the Group's defined benefit pension scheme.

Current assets were £4.1m lower at £317.8m (31 December 2019: £321.9m) resulting from:

– an uplift in inventories to £173.8m (31 December 2019: £169.7m) mainly resulting from the acquisition of c.100 acres of owned strategic land;

– a decrease in contract assets to £10.9m (31 December 2019: £19.1m) as we concluded existing property developments and paused on commencing new work;

– lower trade and other receivables of £74.2m (31 December 2019: £90.8m) as we collected a number of short-term deferred land sale debtors; and

– cash and cash equivalents which were £16.6m higher at £58.9m (31 December 2019: £42.3m).

Total liabilities rose to £143.3m (31 December 2019: £136.8m) with the most significant changes arising from:

– trade and other payables, including contract liabilities, decreased following current reductions in productivity due to CV-19 to £82.7m (31 December 2019: £86.8m);

– borrowings, including lease liabilities, increased to £16.5m (31 December 2019: £15.3m). Reductions in lease liabilities following restricted capital expenditure were offset by increased borrowings by Stonebridge homes to fund ongoing work in progress and land bank investment; and

– the reduction of the liabilities discount rate applied to the defined benefit pension scheme valuation under IAS 19 to 1.5% (31 December 2019: 2.0%) resulting in an increased deficit of £36.2m (31 December 2019: £23.0m).

Retained earnings, offset by the increased pension deficit, saw net assets decrease to £309.3m (31 December 2019: £318.5m) with the net asset value per share decreasing by 2.9% to 232p (31 December 2019: 239p).

Cash flows

Operating cash inflows before movements in working capital were £9.8m (30 June 2019: £24.5m).

Working capital investment continued with increased inventories while the impact of CV-19 saw a decrease in payables, contract assets and receivables following reduced productivity, resulting in working capital inflows of £12.2m (30 June 2019: £38.2m) which, in turn, meant that operations generated funds of £22.0m (30 June 2019: utilised £13.7m). After interest paid of £0.4m (30 June 2019: £0.6m) and tax paid of £4.4m (30 June 2019: £3.9m) net cash inflows from operating activities were £17.2m (30 June 2019: £18.2m outflow).

Including net property investment of £0.1m (30 June 2019: £1.3m), net cash outflows from investing activities were £0.6m (30 June 2019: £1.7m).

Dividends paid to non-controlling interests reduced by 29% to £1.2m (30 June 2019: £1.7m) while the final dividend for 2019 was not paid until July 2020 following disruption caused by CV-19 and therefore not included in this cash flow.

At 30 June 2020, net cash increased to £42.3m (30 June 2019: net debt of £50.3m). It is likely that anticipated investment in inventories and investment properties during the second half of 2020 will reduce our net cash position by the year end, although we still expect the Group to have little or no debt approaching the end of the year.

Outlook

We are encouraged that our H1 performance shows a slight improvement on our revised forecasts. As a result, the Group will reinstate financial guidance for FY20.

Our strategic focus will evolve as clarity emerges on the impact of CV-19. However, with growing momentum in our operations, we now look ahead to securing further opportunities within the Group's three key long-term markets: residential, industrial and logistics, and urban development.

While cash management will be a priority, we now feel that the Group can continue to look to reinvest in the development pipeline and seek to grow the business. These remain unprecedented times, and we will remain committed to the welfare of our people as we serve all our stakeholders. We do not underestimate the trading challenges we will face in the short term, but Henry Boot remains in a strong position to deliver for the long term.

Lastly, the Board would like to take this opportunity to thank all our employees for their determination through these difficult circumstances. I am immensely proud of their response to CV-19, which has kept the Group in a strong position for the future. 

Jamie Boot

Chairman

24 August 2020