Galiford Try has now released their interim results for the year ending 2017.
Revenues increased when compared to the first half of last year as a £25.7M decline in building construction revenue and a £7.9M fall in partnerships and regeneration revenue were more than offset by a £51.7M growth in Linden Homes revenue and a £34.2M increase in infrastructure construction revenue. Cost of sales also increased to give a gross profit £15.3M above that of last time. Share based payments grew by £600K, offset by a £600K reduction in amortisation but other admin expenses increased by £1.5M and there was a £4M reduction in the share of profit from joint ventures so that the operating profit was £9.9M higher. There was a slight reduction in finance charges, mainly due to a lower unwinding of discounted payables but tax expenses grew by £1.9M to give a profit for the period of £51M, a growth of £8.2M year on year.
When compared to the end point of last year, total assets declined by £11.9M driven by a £123.6M fall in cash partially offset by a £37.7M growth in amounts due from joint ventures, a £26.6M increase in prepayments and accrued income, an £18.3M growth in the amounts due from construction contracts, a £14.9M increase in the value of land and an £11.6M growth in work in progress. Total liabilities also fell during the period as a £59.7M decline in accruals and deferred income, a £9.5M fall in development land payables and an £18.4M decrease in borrowings were partially offset by a £46.9M growth in trade payables and a £12.8M increase in other payables. The end result was a net tangible asset level of £447.6M, broadly flat over the past six months.
Before movements in working capital, cash profits increased by £13.7M to £69.2M. There was a big cash outflow from working capital, however, and even after tax payments declined by £5.7M there was a net cash outflow from operations of £51.1M, an increase of £23.4M year on year. The group received £7M in dividends from joint ventures but spent £7.2M on available for sale financial assets. After a further £5.1M was spent on capex, there was a cash outflow of £56.4M. The group then repaid £19.1M of borrowings and paid out £46.4M in dividends to give a cash outflow of £123.6M in the period and a cash level of £42.7M at the period-end.
The profit at Linden Homes was £49.4M, a growth of £14.3M year on year. Housing market conditions have remained robust in all regions and demand has continued at a healthy level, supported by food mortgage availability. Unit completions increased from 1,171 to 1,391 but the average selling price declined by £8K to £287K due to a higher proportion of affordable homes being build – the underlying prices remained broadly flat.
The average number of outlets was similar to the same period last year and the rate of sale decreased marginally to 0.56, although since the start of the second half this has increased to 0.7 units per outlet per week. Overheads reduced during the period, giving rise to an increased margin of 18.2%.
The business continued to generate recurring revenue from land sales, mainly into joint venture projects. These profits represent the partner’s contribution to the uplift in land value at the point of entry into the joint venture, with Linden Homes’ share deferred until the units are sold. During the period they sold land totalling £10.3M, up from £5.6M last time. In response to increased market risk following the referendum they accelerated several joint venture sales which they had planned for the current year so the first half total is higher than expected in the second half.
Sales reserved, exchanged or completed are currently at £857M compared to £793M last time, of which £699K is for the current year, representing 72% of projected sales (broadly in line with last year). The total land bank is currently 14,250 plots compared to 15,500 at this point in 2016 and strategic land totalled 1,992 acres which is expected to generate around 11,400 plots – the land market remains benign.
The profit in the Partnerships and Regeneration business was £3.6M, a decline of £800K when compared to the first half of last year on lower revenues, driven by a decline in contracting revenue as some larger contracts concluded in the period.
Demand for affordable homes outpaces supply and client sentiment for mixed tenure investment has strengthened. The business secured an award of £18.8M under the Affordable Homes Programme to deliver shared ownership homes and they have extended their joint venture activity with provider clients. The business also continued to strengthen its relationship with the Extra Care charitable trust, agreeing two contracts, both worth £44M, to build new retirement villages near Bristol and in Bedfordshire. During the period the division also finished a contract with St. Mowden to build a £21M accommodation facility for staff at the Royal Centre for Defence Medicine in Birmingham.
The geographical expansion of the business continues with the new office in Bristol securing mixed tenure regeneration and contracting opportunities at good margins and the plans to open a new Southern and Midlands business are underway. The contracting order book increased 6% to £925M and mixed tenure sales currently reserved, exchanged or completed improved to £92M. The division’s land bank is 2,750 plots, an increase of 50.
The construction market remains stable with a pipeline of opportunities in the public and regulated sectors. The infrastructure pipeline is encouraging but the board remain cautious about the amount of time it takes to progress these projects. In Building, the number of opportunities from the public sector remains stable. Commercial projects suspended following the referendum have now been reactivated although for the medium term there remains a risk of weaker demand from private clients as businesses assess investments in the context of the current uncertainty. The order book fell £300M to £3.4BN with £500M of future work at the preferred bidder stage.
The profit in the Building Construction business was £800K, a decrease of £1.7M when compared to the first half of 2016. The group are making good progress on completing historical contracts and are working through closing remaining final accounts. These projects, won in a more difficult economic environment, continue to weigh down on profitability. Margins on new work are more robust with cost estimates reflecting the inflationary effect of weaker Sterling.
In the period the business won contracts worth over £250M including the £72M contract for the East Lothian Community Hospital; the £68M Park View Student Village for Newcastle Uni; the £40M private rental sector scheme for Dandara in Birmingham; and a £47M contract to build a commercial office space development in Cambridge on behalf of Brookgate. The business was also confirmed as one of six principal supply chain partners under the Department of Health’s new framework. The order book is currently £2.418BN, an increase of £15M.
The profit in the Infrastructure Construction business was £1.3M, a decline of £3.6M year on year. The market outlook remains positive across transport, energy and water with the business steadily increasing its portfolio of framework positions during the period. They have a position in the Natural Resources Wales framework delivering coastal and river defence schemes (up to £45M over four years); North Yorkshire Council’s carriageway planning and surfacing framework (up to £200M over two years); and was confirmed as a Tier 1 alliance partner to Scottish Water responsible for delivering its quality and standards capital investment programme up to 2021 (about £50M in value). In addition the business was appointed to Gatwick Airport’s capital delivery framework on three lots value up to £300M. The order book currently stands at £992M, a decrease of £320M.
PPI Investments made a loss of £200K, an improvement of £1.5M year on year. They continue to be active in Scotland on a wide array of hub projects. During the period they financially closed a number of schemes including East Lothian Community Hospital, West Calder High School and Inverurie and Foresterhills Health Centres. The business continues to monitor PF2 opportunities in England and they expect a programme of projects will be brought to market in the 2017 calendar year. They handed over all schools in the PSBP North East project and are therefore well placed when pipeline announcements are made. In addition they have been working on a number of student residencies schemes and more general development opportunities which will generate pipeline for the group’s construction business.
The construction business’ cash balance was lower than normal. This reflected the deferral of several contracts in the buildings division following the Brexit vote which will unwind as these projects get underway; also delayed receipts from some legacy projects, which caused the group to finance a higher than planned level of working capital by about £40M, and which will continue for several months pending resolution.
Going forward, Linden Homers has entered the second half with a strong forward order book, with total sales currently reserved, contracted and completed increasing by 8%. Following the strong first half operating margin the board expect to see a full year improvement in operating margin against 2016. The land market remains benign for all regions and the business continues to pursue opportunities to acquire prime sites in good locations at attractive hurdle rates while remaining disciplined in their expansion.
The housing white paper reaffirmed the significant opportunity the group see in their partnerships and regeneration business, underlining that affordable housing remains high on the political agenda. Over the remainder of the year, they expect the business to deliver revenue growth as they benefit from their geographic expansion and further margin improvement from a higher proportion of mixed-tenure revenue. The full year expectations remain unchanged.
Construction remains focused on risk management and the quality of its order book. Full year revenue is expected to be broadly in line with last year, underpinned by secured turnover of 94%. The board expect that the second half margin will continue to show the drag from legacy contracts but are encouraged by the performance of the newer work, which supports their target margins and should begin to improve reported results from 2018.
At the current share price the shares are trading on a PE ratio of 11.7 which falls to 10.2 on the full year consensus forecast. After a 23% increase in the interim dividend, the shares are yielding 5.7% which increases to 6.1% on the full year forecast. At the period-end the group had a net debt position of £113.8M compared to £95.7M at the same point of last year.
Overall then this has been a mixed period for the group. Profits did increase but net assets remained flat and there was an operating cash outflow, although this was due to working capital movements and cash profits increased. The business is basically being driven by the housebuilding arm which is enjoying a decent rise in profitability. This is being offset by a partnerships and regeneration business that saw the end of some larger contracts and the construction arm which is suffering due to low margin work being won when the market was poor. The partnerships business looks to be picking up but the construction division will be subdued for a while yet.
The shares are not expensive with a forward PE of 10.2 and yield of 6.1% but this is for a good reason in a highly cyclical business that is still struggling with legacy contracts. If the market holds following Brexit, these could be a bargain otherwise a value trap – could go either way really! I’m leaning towards the idea that one of the pure housebuilders would be a better bet.
On the 13th March the group announced that it had approached the board of Bovis to propose a merger. They have proposed that the equity would be split 52.25% to Galliford Try shareholders which would value Bovis at £1.191BN or 886p per share, a premium of 7% on the closing price on the prior day. This approach was later rejected with Bovis preferring to go it alone.
On the 3rd May the group announced a trading update for the first four months of the second half. There was a strong performance but the overall result will be impacted by non-recurring costs in construction of about £98M following a reappraisal of costs to complete and recoveries from legacy contracts. Otherwise the group outlook for the year is unchanged.
A reappraisal of costs to complete and recoveries from two major infrastructure joint venture projects has substantially increased the anticipated liability to conclude the legacy contracts in the group’s construction business. They estimate costs of about £98M, some 80% of which relates to their share of the two joint venture projects. One of these projects will finish on site in the summer of this year while the other, which represents the larger proportion of the costs, is scheduled to complete in mid-2018.
Linden homes is enjoying good trading conditions and continues to perform well. Sales rates for the period were 0.75, up from 0.56 sales per outlet in H1. The business enters the final months of the year with a strong forward order book. Sales reserved, exchanged or completed are currently £1,128M of which £893M relates to the current year, up 5% over last year. The business’ land bank is 11,300, down from 12,400 in line with the strategy to hold a shorter land bank equivalent to 3.5 years. Some 97% of plots have been secured for 2018, together with 76% for 2019.
The performance in Partnerships and Regeneration strengthened in the period. The order book increased by 6% to £980M with several new contract awards, including their largest ever contract at Great Eastern Quays worth £128M. Reflecting good growth in higher margin mixed tenure revenue they expect to report an increased operating margin. In line with their strategy of national expansion, they have agreed terms to acquire a mixed tenure developer in Hampshire with strong contracting, housebuilding and land acquisition capabilities. Sales reserved, contracted or completed stand at £127M, up 35% year on year. The land bank has increased from 2,700 plots to 2,900 plots.
Whilst construction’s result will be impacted by the non-recurring charge, the underlying business continues to perform well. Significant progress has been made through a strong focus on selective bidding and ensuring that new work contains sufficient allowances for risk, margin and inflation. Some 85% of the workload is now within these frameworks, lower risk public and regulated sector, and two-stage negotiated work. This focus is expected to deliver turnover growth by 2021 to £1.8BN, with an improvement in the operating margin to over 2%. The order book is up slightly to £3.5BN with 73% of next year’s revenue secured compared to 76% in the prior period.
Overall then, Linden Homes is expected to report an improvement in the full year operating margin, partnerships & regeneration remains on track to deliver revenue growth as the business benefits from geographic expansion and further margin improvement from a higher proportion of mixed tenure revenue; and construction’s underlying portfolio continues to perform well. The group is no longer undertaking large infrastructure jobs on fixed price contracts and there are no more similarly procured major projects in the current portfolio. This notwithstanding, there must remain some uncertainty over the final price to be paid for the current underperforming contracts.
On the 11th July the group released a trading update covering the year as a whole where they are predicting profits towards the upper end of market forecasts. The group had a modest net cash position at the year-end and expect to pay dividends in line with previous guidance.
Linden homes is expected to report a strong performance. Revenue growth has accelerated in the second half, driven by solid growth in volumes, with total completions up 7% to 3,296 units. Average sales rates in the second half were strong at 0.68 unites per week, up from 0.56 in the first half and the average private sales price was up 6% to £354K. The business had a strong forward order book at the end of the year with sales carried forward of £373M, although this was slightly lower than the £380M last time. All land plots have been secured for 2018 with 83% of plots secured for 2019 with the land bank standing at 10,650 plots.
Performance in Partnerships and Regeneration continued to improve with both revenue and margin increased over 2016, helped by growth in higher margin mixed tenure projects. The acquisition of the mixed tenure developer Drew Smith is expected to accelerate growth across the Southern region. As of the year-end, the contracting order book is up 23% at £1.05BN and the land bank remained stable at 2,700 plots.
In Construction, the underling portfolio of newer contracts continued to perform well. As announced, the division’s reported performance will be impacted by £98M non-recurring costs following a reappraisal of costs to complete, principally from two large legacy contracts. These also affected the business’ cash position which fell from £160M to £136M. They no longer undertake these types of fixed price contracts on large infrastructure projects. The business enters the new financial year with a stable order book of £3.5BN which includes 84% of projected revenue for 2018.
The group’s outlook for 2018 is unchanged. Linden Homes is expected to deliver further volume growth and improvement in the operating margin. Partnerships and Regeneration continues to enhance its position to benefit from the demand for affordable housing and Construction’s margin is expected to increase as they close out legacy positions.
Overall this all looks fairly decent, although the one-off issues surrounding legacy construction contracts continue to weigh on the group. This is certainly high risk at this point but if the price is right it might be worth a look.