Ashley House has now released its final results for the year ended 2016.
Revenue increased by £12.4M and with a smaller growth in cost of sales, the gross profit saw a £5M improvement on the loss last year. Admin expenses fell by £122K but the share of joint venture results fell by £102K. Depreciation and impairments declined by £6.1M and this year included a write-down of LIFT investment to a book value of £768K, and there was other operating income of £581K which did not occur last year to give an £11.8M improvement in the operating profit. Interest costs came down £377K and tax costs fell by £22M to give a profit for the year of £247K, an improvement of £12.1M year on year.
When compared to the end point of last year, total assets declined by £1.3M driven by a £1.5M fall in the investment in joint ventures reflecting the LIFT impairment, a £1.5M decrease in work in progress, and an £833K decline in cash partially offset by a £2.6M growth in receivables. Total liabilities also declined during the year due to an £873K decrease in bank loans and an £805K fall in payables. The end result was a net tangible asset level of £3.8M, a growth of £283K year on year.
Before movements in working capital, cash profits increased by £5.5M to £2.4M. There was a cash outflow from working capital, with an increase in receivables and after interest payments declined by £377K, the net cash from operations came in at £75K, an improvement of £429K year on year. The group spent £17K on shares in the joint venture and £66K on property, plant and equipment to give a cash outflow of £8K before financing. We then see a net £873K repayment of the loans to give a cash outflow of £833K and a cash level at the year-end of £23K.
The completion of the first Extra Care scheme in Grimsby together with last September’s signing of the Funding and Partnering agreement with FAH and its property advisor SHA Housing were landmark events for the company. December saw the group enter into its first contracts with FAH for the provision of full funding for the design and construction of two Extra Care developments in Essex where upon completion FAH will become the long term owner. These two schemes will generate revenues of about £21M by the end of 2017, of which only £8.9M has been recognised this year.
The Extra Care pipeline is now providing a positive contribution to the group’s results. Previously it was noted that the chancellor had announced in the autumn statement that Housing Benefit for tenants would be limited to the Local Housing Allowance rate from April 2018 for new or renewed tenancies taken out from April 2016. This announcement depressed expected returns on new social housing developments funded with third party finance resulting in delays to new build projects whilst funders and local authorities seek clarity.
It is now clear that the government believes that the LHA rental cap does not work for sheltered and supported housing and is seeking a resolution to this issue. Extensive industry consultations are in progress and a positive solution is currently expected this autumn. This situation has caused delays in pushing forward some of the extra care pipeline and may impact on the coming half year results. The resolution of the cap, or the agreement of capital based models that the group is currently exploring is expected to unlock the Extra Care pipeline and enable the business to grow significantly.
The two extra care schemes on site are progressing well. The first scheme is Harwich which is on schedule to be completed by the end of 2016 and consists of two buildings. The main building will provide 58 self-contained apartments spread over three floors, and will also feature communal facilities including a residents’ lounge, restaurant and private courtyard garden. All of the apartments will be available for affordable rent. The second building will provide twelve self-contained apartments specifically for adults with learning difficulties.
The second scheme is in Walton on the Naze and is due for completion in spring 2017. This independent living complex will feature sixty self-contained one and two bed apartments which will also be available at affordable rent. Both schemes will enable older people with a care need to continue to live independently with the added security of care and support from One Housing Group’s Season Homes. Both developments were supported by a combined £4.1M of grant funding from Essex County Council through its Independent Living programme. In the year they also completed a first scheme for HSN Care for disabled adults and continue to work with the charity Hft on schemes for people with learning difficulties.
After a number of poor years, the group are now beginning to see some activity return in the Health segment. Medical and health professionals agree that there has been significant underinvestment in primary care in recent years and whilst activity has been low this year, it has been profitable as the group positions itself for an upturn in the market. The group completed one GP surgery and two pathology lab schemes for Integrated Pathology Partnerships. They have also signed contracts and gained planning permission and funding for a major new diagnostic and treatment centre in Durham.
The current economic conditions create uncertainty over the level of new schemes required by the company’s social housing clients; the level of new schemes required by the NHS; the contribution earned to cover the cost base; and the availability of finance within the sector. Clearly the resolution of the LHA cap is a key issue for the group, although they continue to work with local authorities and FAH to find alternative ways of working together irrespective of how the issue is resolved.
The Extra Care pipeline now stands at £162.7M across 18 schemes which has increased in value from £148.5M and 19 at the half year point. The Health pipeline shows ten schemes valued at £20.6M compared with £31.9M across 13 schemes in October last year. The current schemes on site (two in Extra Care and one in Health) have a weighted average life of about six months. Where the group is appointed the time frame to move on site is likely to be between six and 36 months.
The group holds investments in seven LIFT companies, a public private partnership in the health sector. In December they completed the novation of the rights under operational management service agreements with all seven LIFT companies to MAMG, a major provider in this area. The group retains its shareholding in the LIFT joint ventures together with its rights as a development partner. As the LIFT investments have an exclusivity period, which at the year-end stood at 8.5 years, and as there is currently limited work coming from LIFT, the board considered a further impairment was necessary which reduced the carrying value of the investment to £768K.
Other than the general uncertainty and impact on government resources and speed of decision making, the result of the EU referendum is expected to have a limited impact on the group as their activities have minimal exposure to clients or suppliers outside the UK. Health and social care are key issues for the UK and property solutions that the group provides are much needed.
At the current share price the shares are trading on a PE ratio of 19.5 which falls to a very cheap-looking 3.2 on next year’s consensus forecast. No dividend was paid during the year, nor is it expected to be paid next year. The net debt at the year-end was £2M, broadly the same as the end of the prior year.
Overall then this has been a year of considerable progress for the group. The profit improved on the loss incurred last year, net assets increased and the operating cash flow improved despite an increase in receivables – no free cash was generated, however. The completion of the first extra care scheme was an important milestone and there remains two on site. The Health division is now contributing and there is one scheme on site in Durham. Despite the strong pipeline, there remains only three schemes on site with an average life of six months – this will obviously not be enough to sustain the group this year so some urgent action is needed on converting the pipeline.
The LHA rental cap is clearly a big issue for the group but it does sound as though the government is interested in solving it. For now, however, it remains a clear headwind. The EU referendum doesn’t really affect the group much but a change in the political situation might. There are no dividends on offer here but a forward PE of 3.2 looks amazingly cheap – it seems the market as a whole doesn’t quite believe the forecasts. I must admit I am considering a punt on this despite the clear risks.