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4 August 2021
MORGAN SINDALL GROUP PLC
(‘Morgan Sindall’ or ‘Group’)
The Construction & Regeneration Group
RESULTS FOR THE HALF YEAR (HY) ENDED 30 JUNE 2021
HY 2021 HY 2020 Change HY 2019 3 Change^3
Revenue £1,559m £1,363m +14% £1,421m +10% Operating profit – adjusted^1 £54.8m £18.1m +203% £37.5m +46% Profit before tax – adjusted^1 £53.1m £15.7m +238% £36.3m +46% Earnings per share – adjusted^1 93.1p 27.4p +240% 64.2p +45% Period end net cash £337m £146m +£191m £114m +£223m Interim dividend per share 30.0p 21.0p^2 +43% 21.0p +43%
Operating profit - reported £54.1m £16.0m +238% £36.7m +47% Profit before tax – reported £52.4m £13.6m +285% £35.5m +48% Basic earnings per share – reported 87.6p 23.7p +270% 62.9p +39%
(^1) 'Adjusted' is defined as before intangible amortisation of £0.7m and (in the case of earnings per share) deferred tax charge for future changes in tax rates of £1.9m
2 (HY 2020: before intangible amortisation of £2.1m, HY 2019: before intangible amortisation of £0.8m) 3 Declared in November 2020 4 HY 2019 and % change against HY 2019 numbers are provided as a more relevant trading comparative Divisional comparatives have been restated to reflect the reorganisation of the Investments business. See Other Financial Information
HY 2021 summary:
- Trading substantially ahead of ‘pre-pandemic’ 2019 3 levels o Revenue up 10% and adjusted profit before tax up 46% on HY 2019 3
- Balance sheet further strengthened
o Net cash of £337m (HY 2020: £146m, HY 2019: £114m) o Average daily net cash increased significantly to £294m (HY 2020: £153m, HY 2019: £123m)
- Well-positioned for future growth o High quality order book with maintained secured workload of £8.3bn, level with year end
- Interim dividend up 43% to 30.0p per share (HY 2020: 21.0p)
- Capital Allocation framework formalised including revised dividend policy with dividend cover expected to be in the range of 2.0x-2.5x on an annual basis
o Operating margin of 2.9% in Construction & Infrastructure ; operating profit up to £22.6m (HY 2019: £13.9m, HY 2020: £11.5m) o Excellent performance from Fit Out ; operating profit up to £19.3m (HY 2019: £16.4m, HY 2020: £10.9m) o Property Services’ volumes back to normalised levels; operating profit 1 of £2.4m (HY 2019: £1.6m, HY 2020: loss of £0.5m) o Partnership Housing demonstrating significant strategic and operational progress; operating margin^4 up to 4.5% (HY 2019: 2.6%, HY 2020: 1.2%) and operating profit 4 of £12.1m (HY 2019: £6.1m, HY 2020: £2.1m) o Good contribution from Urban Regeneration with long-term regeneration schemes progressing; operating profit 4 of £8.7m (HY 2019: £8.3m, HY 2020: £2.2m)
Commenting on today’s results, Chief Executive, John Morgan said:
“We’ve had a very strong first half in which we’ve upgraded our profit guidance three times. We continue to make significant operational and strategic progress across the Group. With such positive momentum across all our activities, I am excited by the opportunities ahead.
As ever, we are extremely focused on our cash generation and cash position. Maintaining a strong balance sheet including a substantial net cash position provides a significant competitive advantage for us. It enables us to continue making the right decisions for the business and to best position us in our markets for continued sustainable long-term growth.
Today’s results, combined with the current visibility for the rest of the year, gives us every confidence of another strong performance by the Group in the second half.”
Group Strategy
The Group’s strategy is focused on its well-established core strengths of Construction and Regeneration in the UK. The Group has a balanced business which is geared toward the increasing demand for affordable housing, urban regeneration and infrastructure and construction investment.
Morgan Sindall’s recognised expertise and market positions in affordable housing (through its Partnership Housing division) and in mixed-use regeneration development (through its Urban Regeneration division) reflect its deep understanding of the built environment developed over many years and its ability to provide solutions for complex regeneration projects. As a result, its capabilities are aligned with sectors of the UK economy which are expected to see increasing opportunities in the medium to long term and which support the UK’s current and future regeneration and affordable housing needs.
Through its Construction & Infrastructure division, the Group is also well positioned to meet the demand for ongoing investment in the UK’s infrastructure, while its geographically diverse construction activities are focused on key areas of education, healthcare and commercial.
The Fit Out business is the market leader in its field and delivers a consistently strong operational performance. Fit Out, together with the Construction & Infrastructure division, generates cash resources to support the Group’s investment in affordable housing and mixed-use regeneration. The Group also has an operation in Property Services which is focused on response and planned maintenance activities provided to the social housing and the wider public sector.
The Group is committed to delivering economic, social and environmental value to its stakeholders. Its approach is embodied in its responsible business strategy, which is built around its Five Total Commitments: Protecting people, Developing people, Improving the environment, Working together with our supply chain and Enhancing communities. These Commitments have been in place since 2008 and are aligned to its purpose, the needs of its stakeholders and its obligations towards society. Its Commitments support the UN Sustainable Development Goals and each Commitment has clear targets and KPIs set to monitor progress which are supported by its divisions.
To provide a framework for future performance, each division operates to a medium-term financial target. These targets were set at the start of 2021 and relate to either operating margin, return on capital employed and/or profit and are referenced in the divisional sections of the Business review.
Group Structure
Under the two strategic lines of business of Construction and Regeneration , the Group is organised into five reporting divisions as follows:
Construction activities comprise the following operations:
- Construction & Infrastructure : Focused on the education, healthcare, commercial, defence, industrial, leisure and retail markets in Construction ; and on the highways, rail, aviation, energy, water and nuclear markets in Infrastructure. Infrastructure also includes the Baker Hicks design activities based out of the UK and Switzerland
- Fit Out : Focused on the fit out of office space with opportunities in commercial, central and local government offices and further education
- Property Services : Focused on response and planned maintenance activities provided to the social housing and the wider public sector
Regeneration activities comprise the following operations:
- Partnership Housing : Focused on working in partnerships with local authorities and housing associations. Activities include mixed-tenure developments, building and developing homes for open market sale and for social/affordable rent, ‘design & build’ house contracting and planned maintenance & refurbishment
- Urban Regeneration : Focused on transforming the urban landscape through partnership working and the development of multi-phase sites and mixed-use regeneration
The prior year results for Partnership Housing, Urban Regeneration and Group Activities have been restated for comparative purposes to reflect revised segmental reporting adopted from 1 January 2021 and as previously disclosed (see Section 8 of Other Financial Information – Reporting Segments).
Capital Allocation Framework
The Board’s single, overarching principle governing capital allocation is a commitment to maintain a strong balance sheet and to hold significant net cash balances at all times.
In support of this principle, the Group’s capital allocation framework comprises:
- Maintaining balance sheet strength to enhance our competitive advantage and win future work
Fundamental to the Group’s organic strategy is engaging in long term partnerships with its public and private sector clients, whether it be through joint ventures or other arrangements in its Regeneration activities, or through frameworks in its Construction activities.
When assessing the suitability of long-term partners, potential clients are increasingly looking for security and assurance of long-term solvency and the availability of cash resources to ensure their partners can fulfil their long-term contractual obligations. A strong balance sheet and significant levels of net cash are considered by the Group as a market differentiator and a competitive advantage when bidding and winning future work to support the future growth of the business.
- Ensuring downside protection - maintaining a ‘buffer’ in the event of a macro downturn
Maintaining significant levels of net cash is considered as key to offsetting any potential consequence of a future downturn in the economy and reduction in revenue in the Construction activities of Construction & Infrastructure and Fit Out.
These activities operate with a negative working capital model, which in turn can lead to cash outflows in the event of declines in revenue. Maintaining a net cash ‘buffer’ therefore allows the Group to continue with its strategy of disciplined contract selectivity and prudent approach to risk management throughout the whole economic cycle.
- Maximising investment in the current business to drive growth
As detailed in the Group Strategy section above, the Group’s capabilities are aligned with sectors of the UK economy which are expected to see increasing opportunities in the medium to long term and which support the UK’s current and future regeneration and affordable housing needs, as well as being
Group Operating Review
Overview
The positive momentum across the Group coming into 2021 following the operational disruption experienced in 2020, has continued throughout the first half and has driven a very strong period of growth.
Group revenue increased by 14% up to £1,559m (HY 2020: £1,363m), while adjusted operating profit increased 203% to £54.8m (HY 2020: £18.1m). Operating margin increased to 3.5%, up 220bps from the prior year period (HY 2020: 1.3%).
Referencing the results to the Group’s 2019 ‘pre-pandemic’ performance provides a more meaningful indicator of the considerable operational and strategic progress made. Against this comparative period, Group revenue was 10% higher (HY 2019: £1,421m), while adjusted operating profit was up 46% (HY 2019: £37.5m) and operating margin increased by 90bps (HY 2019: 2.6%).
On a divisional basis, Construction & Infrastructure made significant progress by continuing its disciplined focus on operational delivery and contract selectivity, with its margin nearly doubling to 2.9% (HY 2020: 1.5%) and operating profit of £22.6m, up 97%. Fit Out delivered another excellent performance, with revenue, profit, and margin all increasing. Revenue grew 20% to £380m, while profit increased by 77% to £19.3m at a margin of 5.1% (HY 2020: 3.4%). Property Services saw its volumes normalise in the period, with revenue increasing 30% to £69m. In turn, this resulted in the operating profit increasing to £2.4m (HY 2020: loss of £0.5m) with an operating margin of 3.5% (HY 2020: -0.9%).
Of the Group’s regeneration divisions, Partnership Housing experienced significant demand across the period, which together with its focus on operational delivery, resulted in operating profit increasing to £12.1m (HY 2020: £2.1m) at an operating margin of 4.5% (HY 2020: 1.2%). Its return on capital improved significantly, up to 17% for the last 12 months. Urban Regeneration made good progress with its development activity, delivering operating profit of £8.7m (HY 2020: £2.2m).
During the first half, there have been some increases in lead times for product deliveries to site and a limited number of significant price increases in certain product categories where there is greatest scarcity of supply. In most instances, the impact of this has been managed at a divisional and local level without any consequent disruption to operations. The additional costs attached to sourcing some materials have generally been offset by a combination of contractual protection, operational efficiencies and (in the case of Partnership Housing) by house sales price inflation. It is expected that these pressures will normalise in the medium term and that any disruption can be minimised through focused sourcing through the supply chain and ongoing operational efficiency.
The net finance expense reduced to £1.7m (HY 2020: £2.4m), primarily as a result of the prior year period including the costs of drawing down the facility in full during the early stages of the pandemic.
This resulted in adjusted profit before tax of £53.1m, up 238% (HY 2020: £15.7m). The statutory profit before tax was £52.4m, an increase of 285% (HY 2020: £13.6m).
The tax charge for the period was £12.0m, an effective rate of 22.9%. The tax charge is based upon the expected effective tax rate for the full year. The expected effective tax rate for the full year is higher than the UK statutory rate of 19% due to the effect of changing the tax rate used to calculate
deferred tax to account for the announced future increase in the UK statutory rate to 25% from 1 April
The adjusted earnings per share increased to 93.1p (HY 2020: 27.4p), with the statutory earnings per share of 87.6p (HY 2020: 23.7p).
Maintaining contract selectivity and bidding discipline to ensure the appropriate risk balance in the order book remains of critical importance to the future success of the Group. The total secured workload for the Group at the period end was £8,324m, level with the year-end position (FY 2020: £8,290m) and 5% higher than at the same time last year (HY 2020: £7,962m). Of particular note was Fit Out’s order book, which was up 42% from the year end position to £581m, an all-time record high for the division.
The Group’s relationships with its supply chain partners are also of major strategic importance and the prompt payment of its suppliers remains a key component of this. Strong supply chain relationships can provide a competitive advantage and support superior operational delivery. For the formal Payment Practices Reporting period of 1 January 2021 to 30 June 2021, Construction & Infrastructure, the largest operating division by revenue, maintained its average time taken to pay invoices at 27 days, with 98% of its invoices paid within 60 days. Fit Out reported its average time taken to pay invoices at 22 days, with 97% of invoices paid within 60 days, while Partnership Housing reported 33 days as its average time to pay, an improvement of 2 days from the last reporting period. 95% of its invoices were paid within 60 days. Property Services reported an average of 38 days to pay invoices, a deterioration of 2 days from the prior reporting period, with 93% of invoices paid within 60 days.
Operating cash for the period was an inflow of £44.1m (HY 2020: outflow of £15.3m). Net cash at the period end increased to £337m, an increase of £191m on the prior year (HY 2020: £146m). Of this total, £64m was held in jointly controlled operations or held for future payment to designated suppliers (JVs/PBAs).
The average daily net cash for the period was £294m (including £71m in JVs/PBAs), up from £153m in the prior year period.
The Group’s cash balances benefited from the introduction of the reverse charge VAT scheme, introduced on 1 st^ March 2021; at the period end, c£67m was the incremental benefit of additional VAT held for payment in the third quarter, while the incremental benefit to the average daily net cash position was c£20m.
Looking ahead, based upon the current anticipated cash movements over the rest of the year, the Group expects that the average daily net cash for the full year will be broadly similar to that reported for the first half.
The interim dividend has been increased by 43% to 30.0p per share (HY 2020: 21.0p). This reflects the increase in profit in the period, the strong balance sheet and the Board’s confidence in the future prospects of the Group. As detailed in the Capital Allocation Framework section above, the Board has formally adopted a dividend policy such that dividend cover is expected to be in the range of 2.0x-2.5x on an annual basis. This revised policy is effective from the current year onwards.
Outlook
These first half results, combined with the current visibility for the rest of the year, gives the Group every confidence of another strong performance in the second half.
Group secured workload^1 by division
The Group’s secured workload^1 at 30 June 2021 was £8,324m, level with the previous year end and up 5% compared to the prior year (HY 2020: £7,962m). The divisional split is shown below.
HY 2021 FY 20 20 Change £m £m Construction & Infrastructure 2,542 2,537 - Fit Out 581 410 +42% Property Services 973 970 - ‘Construction’ secured order book^2 4,096 3,917 +5% Partnership Housing 1,478 1,445^3 +2% Urban Regeneration 2,759 2,929^3 -6% ‘Regeneration’ secured order book^2 4,237 4,374 - 3% Inter-divisional eliminations (9) (1) Group secured workload^1 8,324 8,290 -
(^1) The Group secured workload is the sum of the Construction secured order book and the Regeneration secured order book, less any inter-divisional eliminations
(^2) The ‘Secured order book’ is the sum of the ‘committed order book’, the ‘framework order book’ and (for the Regeneration businesses only) the Group’s share of the gross development value of secured schemes (including the development value of open market housing schemes) The ‘committed order book’ represents the Group’s share of future revenue that will be derived from signed contracts or letters of intent. The ‘framework order book’ represents the Group’s expected share of revenue from the frameworks on which the Group has been appointed. This excludes prospects where confirmation has been received as preferred bidder only, with no formal contract or letter of intent in place.
(^3) FY 2020 comparative numbers have been restated following the change in reporting segments
Construction & Infrastructure
HY 20 21 HY 20 20 Change HY 2019^ %^ Change £m £m £m^ HY 2021 vs 2019 Revenue 774 789 -2% 679 +14% Operating profit 22.6 11.5 +97% 13.9 +63% Operating margin 2.9% 1.5% +140bps 2.0% +90bps
During the period, divisional revenue reduced slightly to £774m (HY 2020: £789m), however operating profit increased significantly to £22.6m, up 97% (HY 2020: £11.5m). Operating margin improved to 2.9%, up 140bps (HY 2020: 1.5%). Both the Construction and Infrastructure ( including Design) 1 activities performed well.
Split by activity, Construction revenue increased 17% to £339m (HY 2020: £290m) and accounted for 44% of divisional revenue. Infrastructure revenue (56% of divisional revenue) reduced 13% to £435m (HY 2020: £499m) primarily due to the timing of its project workload.
In line with the strategy of focusing on contract selection, operational delivery and quality of earnings, both activities delivered significant profit and margin growth. Construction’s operating margin for the period was 2.4%, up 200bps from 0.4% in the prior year period, with operating profit of £8.1m, up from £1.2m in the prior year. Infrastructure delivered operating profit of £14.5m in the period, up 41% despite of the lower revenue, with its operating margin of 3.3%, up 120bps (HY 2020: 2.1%).
The secured order book for the division at the period end was £2,542m, level with both the year end and the prior period end position.
(i) Construction
In Construction , the focus remains on improving its overall quality of earnings through contract selectivity and operational delivery.
Construction’s order book of £648m was up 27% from the year end position and up 17% from the prior year. c100% of the order book value is derived through either negotiated, framework or two- stage bidding procurement processes, in line with the preferred risk profile of work undertaken. In addition to this, Construction also had £648m of work at preferred bidder stage, up 5% compared to the same time last year (HY 2020: £620m in preferred bidder).
Work won in the period included: the £56m facility for the School of Chemistry at Birmingham University where the focus will be on post-graduate research in chemical, environmental and biomolecular science; a £44m secondary school for Kenilworth Multi-Academy Trust; a £39m mixed use scheme as part of the of St Albans District Council city centre redevelopment; a new £37m secondary school for Buckinghamshire County Council; and a £16m joint primary school campus and early years facility in Prestwick.
The medium-term target for Construction is an operating margin of between 2.5% and 3% per annum. Based upon the current operational performance and the quality of its order book, it is expected that the full year margin will be around the top end of this range.
(ii) Infrastructure^1
In Infrastructure , the focus remains on the key sectors of highways, rail, nuclear, energy and water.
Infrastructure’s order book of £1,894m was down 6% compared to the year end and down 5% from the prior year. Around 95% of the order book value is derived through existing frameworks and with 53% of the order book for 2023 and beyond, this demonstrates the long-term nature of the work streams and client relationships.
In Highways, work won in the period included the appointment by Highways England to the Concrete Roads Programme - Reconstruction Works Framework, a four-year programme worth c£130m to repair or replace the concrete surface of motorways or major A roads in England, as well as the detailed design for the Carlisle Southern Link Road by Cumbria County Council.
In Rail, the division secured a position as one of three partners on the London Rail Infrastructure Improvement Framework for Transport for London, and was awarded a project by Network Rail to construct an extension to the rockfall shelter over the railway line between Dawlish and Holcombe in Devon.
In Energy, National Grid awarded the division a place on their RIIO-2 electricity construction Engineer, Procure and Construct (EPC) framework. The initial term of the framework which involves the construction, refurbishment and decommissioning of both overhead line (OHL) and underground cable systems operating between 33kV to 400kV across National Grid’s transmission network is five years, with a further option for a two-year extension. It is estimated that over the lifetime of the framework approximately £1bn to £1.5bn will be invested in delivering these works. Additional work has also been secured as part of the Scottish & Southern Electricity Networks overhead lines framework.
Of the secured order book, £321m (55%) relates to the second half of the year, which was broadly level with the equivalent amount as at 30 June 2020 of £318m. On this basis, the division has a similar level of visibility of second half volumes as it did at the same time last year.
Projects won during the period include; a 366,000 sq. ft. office fit out at Five Bank Street in Canary Wharf; a 186,457 sq. ft. workspace for BT at 3 Snowhill in Birmingham; BP’s new 200,000 sq. ft. space in the North Colonnade building in Canary Wharf; the design and build of Hutchinson 3G UK/Three’s new 117,000 sq. ft. workspace in Longwater, Reading; the Cat A fit out of 180,000 sq. ft. at Campus Reading (one of the largest office developments in the Thames Valley); and, under a framework for The Mayor’s Office for Policing and Crime (MOPAC), 11 projects to the value of £116.3m.
Looking ahead to the second half, based upon the current order book and the level of work at preferred bidder stage, a further strong performance is expected. The medium-term target for Fit Out is for operating profit of c£35m per annum and as previously reported, the division is expected to be materially ahead of this in 2021.
Property Services
HY 202 1 HY 20 20 Change HY 2019^ % Change £m £m £m^ HY 2021 vs 2019 Revenue 69 53 +30% 55 +25% Operating profit/(loss) 1 2.4 (0.5) +580% 1.6 +50% Operating margin^1 3.5% -0.9% +440bps 2.9% +60bps
Volumes in Property Services normalised throughout the first half, with revenue increasing 30% to £69m (HY 2020: £53m). At this level of activity and with the current operating model and overhead structure in place, the operating profit increased to £2.4m (HY 2020: loss of £0.5m) with an operating margin of 3.5% (HY 2020: -0.9%).
During the period, the division has continued to focus on delivering repairs and planned maintenance with a strong social value offering, servicing public sector housing through its integrated contracts with housing associations and local authorities. Ongoing investment is continuing in its technology offering for managing repairs and maintenance and planned activities, with a significant focus on the provision of data insight and the improvement of the all-round customer experience.
At the period end, the secured order book was £973m, level with the year-end position (FY 2020: £970m) and 12% higher than at the same time last year (HY 2020: £867m). Contracts tend to be long term in nature and over 80% of the order book by value is for 2023 and beyond.
The medium-term target for Property Services is to generate a minimum £10m operating profit per annum. Based upon the first half performance and with slightly higher revenue expected in the second half due to higher planned maintenance activity, the division is on track to make good progress towards this target in 2021.
(^1) before intangible amortisation of £0.7m (HY 2020: £0.6m, HY 2019: £0.8m)
Partnership Housing
HY 2021 HY 2020^1 Change HY 2019^1 % Change £m £m £m HY 2021 vs 2019 Revenue 270 176 +53% 239 +13% Operating profit 12.1 2.1 +476% 6.1 +98% Operating margin 4.5% 1.2% +330bps 2.6% +190bps Average capital employed^2 (last 12 months) 158.3^ 169.7^ -£11.4m Capital employed^2 - at period end 146.3 168.7 -£22.4m ROCE 3 (last 12 months) 17% 9%
Partnership Housing has seen high levels of market demand across the first half, with revenue up 53% to £270m (HY 2020 1 : £176m). Split by type of activity, Mixed-tenure revenue was up 79% to £159m (59% of divisional revenue) and Contracting revenue (including planned maintenance and refurbishment) was up 28% to £111m (41% of divisional total) compared to the prior year period.
In Mixed-tenure , 815 units were completed across open market sales and social housing (including through its joint ventures) compared to 412 in the prior year period. The average sales price was £232k compared to the prior year average of £217k.
Operating profit of £12.1m was up 476% on the prior year (HY 2020 1 : £2.1m) and up 98% on the comparative period in 2019 (HY 2019 1 : £6.1m), driven by the higher mixed-tenure revenue. The operating margin increased to 4.5% (HY 2020 1 : 1.2%).
Significant strategic progress is being made with developing and formalising partnerships. During the period, the division commenced or continued joint venture opportunities with Walsall Housing Group, Trafford Housing Group, Hertfordshire County Council, Abri, Together Housing Group, Flagship Housing Group, Riverside and West Sussex County Council.
During the period, the division has experienced some increases in lead times for product deliveries to site and a limited number of significant price increases in certain product categories where there was greatest scarcity of supply. Any additional costs attached to sourcing some materials have generally been offset by a combination of operational savings and sales price inflation.
The secured order book at the period end was £1,478m, an increase of 2% on the prior year end (FY 2020 1 : £1,445m). Of this total, the order book relating to the Mixed-tenure activities was 1% lower than the year end position at £896m (FY 2020 1 : £907m). In addition, the amount of mixed-tenure business in preferred bidder status or already under development agreement but where land has not been drawn down was c£700m at the period end. The Contracting secured order book increased 8% to £582m (FY 2020 1 : £538m).
In mixed-tenure, work won included a £120m joint venture with Abri to build 500 homes in Weymouth and an £85m, 528-unit scheme to build one of Wales largest regeneration schemes on the former Whiteheads steelworks in Newport. Key contracting schemes awarded in the period include: a £50m, 211 unit scheme at Tolworth for Guinness Partnerships, a JV with Together Housing Group to deliver 650 units in Pendleton, Salford; a contract with Norfolk County Council-owned Repton to build 400 plus homes in Norfolk; and the appointment onto the Your Housing Group framework, including the initial award of a £25m, 216 unit scheme at Edge Lane, Openshaw.
- by sector, 52% by value relates to residential, 34% to offices, and the remainder is broadly split between retail, leisure, and industrial.
The medium-term target for Urban Regeneration is to increase its rolling three-year average ROCE 3 up towards 20%. Based upon the current profile of scheme completions throughout the second half, ROCE 3 in the mid-teens is expected for the full year.
(^1) Restated – see Other Financial Information Section 8 - Reporting Segments. All HY 2020, HY 2019 and FY 2020 comparative numbers, including order book and capital employed, have been restated to include the impact of the revised reporting segments (^2) Capital employed is calculated as total assets (excluding goodwill, intangibles and cash) less total liabilities (excluding corporation tax, deferred tax, inter-company financing and overdrafts) (^3) Return On Average Capital Employed = (Adjusted operating profit plus interest from JVs) divided by average capital employed
Other Financial Information
1. Net finance expense. The net finance expense was £1.7m, a reduction of £0.7m compared to HY
HY 2021 HY 202 0 Change £m £m £m Interest payable on drawings on bank facilities - (1.1) 1. Amortisation of bank fees & non-utilisation fees (1.3) (0.5) (0.8) Interest expense on lease liabilities (0.7) (0.8) 0. Interest from JVs 0.4 0.2 0. Other (0.1) (0.2) 0. Total net finance expense (1.7) (2.4) 0.
2. Tax. A tax charge of £12.0m is shown for the period (HY 2020: £2.9m). This equates to an effective tax rate of 22.9% on profit before tax. The adjusted tax charge is £10.2m (HY 2020: £3.3m).
HY 2021 HY 2020
£m £m Profit before tax 52.4 13. Less: share of net (profit)/losses in joint ventures (5.7) 0. Profit before tax excluding joint ventures 46.7 13. Statutory tax rate 19.0% 19.0% Current tax charge at statutory rate (8.9) (2.6) Tax on joint venture profits 1 (1.0) - Effect of change in tax rate used to calculate deferred tax (1.9) - Other adjustments (0.2) (0.3) Tax charge as reported (12.0) (2.9) Tax on amortisation (0.1) (0.4) Effect of change in tax rate used to calculate deferred tax 1.9 (^) - Adjusted tax charge (10.2) (3.3)
(^1) Most of the Group's joint ventures are partnerships where profits are taxed within the Group rather than the joint venture
3. Net working capital. ‘ Net Working Capital’ is defined as ‘Inventories plus Trade & Other Receivables (including Contract Assets), less Trade & Other Payables (including Contract Liabilities)’ adjusted as below and is stated on a constant currency basis.
HY 2021 HY 2020 Change £m £m^ £m Inventories 284.8 352.9 -68. Trade & Other Receivables 1 479.9 410.9 +69.
Trade & Other Payables 2 (947.6) (813.6) -134. Net working capital (182.9) (49.8) -133.
(^1) Adjusted to exclude capitalised arrangement fees of £0.9m (HY 2020: £0.4m) and accrued interest receivable of £nil (HY 2020: £0.1m) (^2) Adjusted to exclude accrued interest payable of £0.4m (HY 2020: £0.4m)
4. Cash flow. The operating cash flow for the 12 months to 30 June 2021 was an inflow of £238.1m and a free cash inflow of £217.0m. For the half year period, there was an operating cash inflow of £44.1m (HY 2020: outflow of £15.3m).
HY 20 21 HY 20 20 Last 12 £m £m months Operating profit - adjusted 54.8 18.1 105. Depreciation 10.0 11.3 20. Share option expense 4.6 0.1 4. Movement in fair value of shared equity loans - - 0. Share of net loss/(profit) of joint ventures (5.7) 0.3 (8.3) Other operating items 1 2.5 6.6 2. Change in working capital 2 (13.2) (42.1) 131. Net capital expenditure (including repayment of finance leases) (9.3) (9.8) (19.0) Dividends and interest received from joint ventures 0.4 0.2 0. Operating cash flow 44.1 (15.3) 238. Income taxes paid (11.3) (13.2) (18.0) Net interest paid (non-joint venture) (1.0) (1.1) (3.1) Free cash flow 31.8 (29.6) 217.
(^1) ‘Other operating items’ includes shared equity redemptions (£1.1m), disposal of investment properties (£1.6m) less gain on disposal of property, plant & equipment (£0.2m) (^2) The cash flow due to change in working capital for the HY 2021 period excludes a total £0.5m of non-cash movements relating to the unwinding of discounting on land creditors and other non-cash working capital movements (Last 12 months: £1.6m)
Reallocation of Investments – 30 June 2020 £m (^) Investments
Partnership Housing
Urban Regeneration
Group Activities Revenue 12 .2 11. 3 0. 9 - Adjusted Operating Loss (3.2) (0.9) 0.1 (2.4) Amortisation of Intangible Assets (1. 5 ) - - (1.5) Operating Loss (4.7) (0.9) 0.1 (3.9)
Capital employed at 30 June 2020 (£m) 27.8 15.2 13.6 (1.0)
Reallocation of Investments – 31 December 2020 £m (^) Investments
Partnership Housing
Urban Regeneration
Group Activities Revenue 34.2 32.5 1.7 - Adjusted Operating Loss (6.9) (0.1) (0.4) (6.4) Amortisation of Intangible Assets (1.9) - - (1.9) Operating Loss (8.8) (0.1) (0.4) ( 8. 3 )
Capital employed at 31 December 2020 (£m) 21.9 8.4 15.7 (2.2)
As a result of this restatement, the revised comparative numbers for Partnership Housing, Urban Regeneration and Group Activities are as follows:
Restated comparatives – 30 June 2020 £m
Partnership Housing
Urban Regeneration
Group Activities Revenue – as reported 165 .0 34 .5 - Revenue – as restated 176.3 35.4 -
Adjusted Operating Profit/(Loss) – as reported 3.0 2.1 (5.7) Adjusted Operating Profit/(Loss) – as restated 2.1 2.2 (8.1)
Capital employed – as reported 153.5 117.3 n/a Capital employed – as restated 168.7 130.9 n/a
Restated comparatives – 31 December 2020 £m
Partnership Housing
Urban Regeneration
Group Activities Revenue – as reported 441 .4 12 2. 8 - Revenue – as restated 473.9 124.5 -
Adjusted Operating Profit/(Loss) – as reported 16.1 9.2 (18.7) Adjusted Operating Profit/(Loss) – as restated 16.0 8.8 (25.1)
Capital employed – as reported 122.2 85.1 n/a Capital employed – as restated 130.6 100.8 n/a
9. Principal risks and uncertainties. The Board continues to take a proactive approach to recognising and mitigating risk with the aim of protecting and safeguarding the interests of the Group and its shareholders in the changing environment in which it operates.
Details of the principal risks facing the Group and mitigating actions are included on pages 38 to 47 of the 2020 Annual Report. These are still considered to be relevant risks and uncertainties for the Group at this time and are summarised below (in no order of magnitude):
Covid-19 - If unanticipated events arise, we must adapt quickly and rapidly to new ways of working and have sufficient financial resources to ensure the business can continue to operate effectively.
Changes in the economy - If profitable opportunities in our chosen markets reduce, we need to ensure that we carefully allocate resources and capital to minimise reductions in our profitability and cash generation.
Exposure to UK housing market - If mortgage availability and affordability are reduced this could make existing schemes difficult to sell and future developments unviable, reducing profitability and tying up capital.
Poor contract selection - Failure to fully understand the risks on projects may lead to poor delivery and ultimately result in reputational damage and loss of opportunities.
Responsible business - Failure to embed our Total Commitments across the business may result in incidents occurring that could lead to legal actions, project delays and damage to the Group’s reputation which could affect our ability to secure future work and achieve targets.
Health and safety - If we fail to protect the health, safety and wellbeing of our key stakeholders, we could hurt individuals which could damage the Group’s reputation as a responsible employer and affect our ability to secure future work.
Climate change - Failure to protect the environment in which we work by reducing carbon emissions and waste and to fully consider potential environmental risks on projects could cause delays to projects and damage the Group’s reputation.
Failure to attract and retain talented people - Talented people are needed to provide excellence in project delivery and customer service. Skills shortages in the construction industry remain an issue for the foreseeable future.
Insolvency of key client, subcontractor, joint venture partner or supplier - An insolvency could disrupt project works, cause delay and incur the costs of finding a replacement, resulting in significant financial loss. There is a risk that credit checks undertaken in the past may no longer be valid.
Inadequate funding - A lack of liquidity could impact our ability to continue to trade or restrict our ability to achieve market growth or invest in regeneration schemes.
Mismanagement of working capital and investments - Poor management of working capital and investments leads to insufficient liquidity and funding problems.
Mispricing a contract - If a contract is incorrectly costed this could lead to contract losses and an overall reduction in gross margin. It might also damage the relationship with the client and supply chain.
Changes to contracts and contract disputes - Changes to contracts and contract disputes could lead to costs being incurred that are not recovered, loss of profitability and delayed receipt of cash.
Poor project delivery - Failure to meet client expectations could incur costs that erode profit margins, lead to the withholding of cash payments and impact working capital. It may also result in reduction of repeat business and client referrals.
