East Imperial plc (LON:EISB) US Commercial Director Jaron Berkhemer caught up with DirectorsTalk for an exclusive interview to discuss ramping up in the US market and its potential, what Cocktail Courier brings to the company, partnerships, consumer trends, and the importance of high-quality ingredients.
Q1: Jaron, with you coming on board, the company seems to be really ramping up its focus on the US market. Could you tell us more about the new team, its experience and focus?
A1: Absolutely, I’ll start with myself.
I have a fairly extensive history in the area of premium mixers. I joined a company called Q Mixers in early 2017 and helped run that and build that through to late 2019. We discovered very quickly that as everything else in the spirit space was premiumising in every single way, the mixer category fell behind quite a bit, and it was purely because nobody was really talking about it.
The gin and tonic and generally the mixed drink trend is a lot further along the way in other parts of the world where it’s the quality of the gin that is very important, but it’s also what comes after the end, right? It’s the tonic and the soda and some of the other carbonated mixers that are also seen as a very valuable and important component to the final product, which is your drink.
Whereas in the United States at the time, awareness around spirits was very high, however, the awareness and also the engagements with the premium mixer category was very low. This was not in line with what I saw and I think what other people saw anecdotally.
So, if you were to hang around in a liquor store, for example, and you ask somebody who picked up a premium bottle of gin, and we define that here as anything above 1999, you would ask them, for example, what are you doing with this gin? Well, I’m mixing it with tonic. So you pick this gin, it says something about you and what tonic are you grabbing? Oh, I don’t know, whatever is available because tonic is tonic. Of course, if you say, well, sure, but how about a tonic that doesn’t have artificial ingredients and all sorts of sugars and other masking agents, because that’s what happens. The more sugar you add in a mixer, which you add into a drink, it really kills a lot of the nuances in the flavours, you lose a lot of the subtleties that make the spirit special.
Usually when people have already spent more than $20 on a base spirits, and then you tell them there’s a better way to create your finished products just by having a better mixer, 9 times out of 10, people would say, oh yeah, never thought about this, you’re right. It’s then a very easy conversion, and once people see that, they never look back.
So, we really looked at this as primarily just an awareness play and we decided to take a very aggressive approach in the own trade, and we built a very strong company and a very strong brand with Q Mixers.
I will say anecdotally as well, that in the time that we started to get very aggressive with Q Mixers, there was really one brand out there that we couldn’t touch, especially in some of the more super premium accounts and also within a pretty loyal own trade community, and that was a brand called East Imperial. I found the level of loyalty that people had to a brand in a category, which at the time still had very low engagement, I found it remarkable and never forgot about that.
Today in our Group, you have myself, and one of the first things that I did was to gather some of the best people that I have worked with over the years in the mixer space, also in some other areas, and that’s where we can honestly say that we are the team that’s, I think, pioneered the growth of this category in the United States.
When we started, Fever-Tree was already here, Fever-Tree was imported by a company called Brands of Britain and not as active in the markets so we came in, we started outpacing our competitors and looking at strategic geographic areas in the United States like Florida, Colorado, Nevada. That’s where we brought in some of the best people that I have gotten the pleasure to work with who know how to do this.
We are excited to have everybody on board and go back to what we know best, which is how to build brands specifically in this category.
Q2: You announced in October last year an agreement with Cocktail Courier. How is that progressing now? How does that fit with your US position and expansion plans?
A2: It’s a very exciting partnership for us, especially as Cocktail Courier is integrating more and more into some very high profile consumer events.
For us, aligning with premium spirits is very important. Again, the big opportunity is, of course, as I always say, what comes up after the end, right? We know that 30/35% of drinks are mixed with a carbonated mixture so you have the gin and tonic, the Moscow Mule, which is of course a vodka and ginger beer, the whiskeys and sodas. and so on and so forth.
So, Cocktail Courier allows us to leverage a lot of those partnerships because they work with the best brands out there. Even more interestingly than that, Cocktail Courier is expanding heavily into the area of consumer events, like the Grammys and the Oscars and New York Fashion Week and a lot of those.
For us, it’s a dual opportunity. As I said, partnering with brands, but then also getting in front of, I think, a much more discerning consumer who simply got them to expect much more out of the full product, the full cocktail so not just the spirit, but equally high expectations around everything else, the mixer, and it doesn’t end with the mixer either. People care more about the quality of ice, for example, and the quality of glassware so this partnership really allows us to dive into those areas in a very strategic and a very targeted way.
We’re working on some very exciting programmes which we look forward to announcing over the course of this period.
Q3: How do you view the potential size of the US opportunity and what could it contribute to the overall business?
A3: I think the US is a phenomenal market to play in, it certainly isn’t an easy market to play in. I think we do have a tremendous opportunity because there isn’t a lot of differentiation here in the markets, I also think that the range of mixers and the range of capabilities that you have with mixers is generally broader than in other regions.
We know that in the UK, for instance, a lot of the mixer consumption happens with gin, and that is a relatively finite category, of course, because there’s only so many gin and tonic varieties that you can have. In other markets, you have, of course, some other focuses and some other beverage and consumption trends.
I think, in the United States because of the popularity of cocktails like the Paloma, which is tequila and grapefruits soda, the way we consume brown spirits, whiskeys with ginger ale, whiskeys with ginger beer, certainly vodka with ginger beer, I think there’s a lot more variety overall. So, I think in that sense also, and also given how I think broad the US market is and how dynamic it is, it’s an interesting field to play in.
For East Imperial, in particular, again, there isn’t a lot of differentiation in the space. I think you really see two primary categories when it comes to mixers, we look at the value brands, you have brands like Schweppes and Canada Dry, you have the more mainstream ones that have come onto the scene in recent years so Fever-Tree is one, Q Mixers is one. But if you look at some of the other entrants, they seem to really, really play into that mainstream space as well so you see very similar price points, you see very similar packaging, you see very similar styles of mixers.
What I think is very interesting for our business is the true premium positioning, which really helps the brand stand out and differentiate and also allows it to take a very targeted approach with our account partners. When we speak to some of the best and most refined hotel groups and restaurants in the world, it’s something that truly sells itself in a sense. You make the argument that, okay, if you’re a super-premium company and you do have a very sophisticated audience that truly pays attention to details and has certain expectations, having, frankly, the only super premium mixer in the market makes it a relatively easy conversation.
I think with that level of differentiation and the level of diversity in terms of where you can go with this, it makes it such an interesting opportunity, and I think there’s a tremendous upside for us here in the United States, and generally.
You see that in the trends, you see how premium and super-premium continues to be very strong as a category, you see that in spirits, you see that in luxury goods, you certainly see that in the premium mixer space, and that’s also the least crowded space.
So for us to really, having built a team, having built some phenomenal strategic partnerships, I think it puts us in a really good position.
Q4: Just before we finish, do you have any closing thoughts?
A4: Again, I think it’s very exciting for me to see how this category has been evolving. I will certainly say that we as a community of former bartenders and people who have built a lot of brands and invested heavily in the own trades, we’ve always operated under this philosophy of let’s invest in the own trades. That’s where you build trends, that’s where you build a lot of value and the hope and the goal has always been to build a trend and have it carry over to the consumer.
What I think has been one of the biggest changes over the past few years that I think is becoming really evident is that now the consumers are really picking upon what those trends are.
I think in general, especially with premium mixers, which is why I love the space so much, consumers are less intimidated to experiment and make things at home. There used to be a very hard separation between what you could have out in the bar and what you could make at home. Something like a Paloma or something like even a Moscow Mule would generally be perceived as something that you would order at a bar, you would leave that to the mixologist because making it at home, well, a Moscow Mule sounds quite complex, a Paloma sounds complex. When you realise that it’s really just about mixing two really good things and finding interesting garnishes and again, playing around with some interesting glassware in different styles of ice, now you’re seeing consumers get a lot more confident about their abilities to make cocktails.
Paloma is a cocktail, a Mule is also a cocktail, a gin and tonic is essentially also a cocktail, and I think watching the consumers pick that up, engage with this culture as we have always engaged with it, more and more and more, I think every day, that to me is a really exciting trend.
I think that is very, very good for the category at large. I think it’s very good for the brands like East Imperial, which I think has flown under the radar, but certainly watching the responses, seeing how buyers, but also consumers are responding to it is very encouraging. Of course, looking at how it fits within the trends of something that is very low sugar, extremely high quality, very, very deliberate in its design and its aesthetic.
Myself and my team, we are very, very bullish on the opportunity here.
Avation plc (LON:AVAP) Chief Commercial Officer Soeren Ferre caught up with DirectorsTalk for an exclusive interview to discuss the atmosphere in the airline industry, the regional aircraft market, ATR demand, the broader market, and areas of growth for the future.
Q1: Avation has attended the biggest leasing conference on the calendar, which was in Dublin last month, what was the general atmosphere in the airline leasing market and what is it at the moment?
A1: The atmosphere was actually surprisingly extremely good, it’s probably been one of the most optimistic conferences I’ve ever attended in a long, long time so it was a nice surprise. Interestingly enough, it came from actually almost every region in the world that’s good news.
Q2: In particular then, how do you see the regional aircraft market in terms of turboprops and small narrowbodies, A220s and e-jets?
A2: On the turboprop, I think we already addressed that matter in our last fall but I think since, the situation has actually improved even further. I think we have reached a stage now where there are basically almost no used ATR’s in the market available and we see that many operators now are looking at securing new planes are willing to pay higher rates because there’s nothing else available. So, that’s going well.
We also see that on the small narrowbodies, or even all the narrowbodies, I think the demand is there, we see definitely renewed interest from airlines but also from lessors or investors into the A220.
The market is actually so bullish today that also we see some genuine interest on aircraft which in my opinion are less marketable like the e-jets, which traditionally have a smaller customer base. Even for those aircraft, we see that there is a significant amount of demand.
Q3: So, especially for the ATR market in which the group is strong, how do you see demand, supply production rates, and what’s visible in the future?
A3: The supply is basically inexistent, there’s nothing available. If you’re looking for aircraft, we were actually talking about potentially taking two aircraft from one of our existing customers and we discussed that with some operators in in Dublin. Almost within two days, we had two interested parties willing to take the aircraft for a long time so that’s how desperate the market is.
We know of a number of parties who are looking for anywhere between six to ten aircraft in the next two or three years which, in the regional market, is actually a big fleet so it’s going very well. The demand is there for sure, there is no supply, there is no actual supply of used aircraft, every aircraft which is supposedly coming back on the market will be probably extended by the existing lessees and there are only just a few available slots coming from the manufacturer.
On top of that ATR, because of the outcome of COVID and the decisions it took during COVID, is having a fair amount of issues with its supply chain so their targets in terms of increased production is actually falling short. They were hoping to deliver more than 40 aircraft this year, they end up at 36, they were hoping to deliver 50 aircraft in 2024, the numbers I’m hearing is between 40 to 45 so they’re falling behind. When you talk to suppliers of critical parts, such as engines landing gear, it’s quite clear that this lack of availability from the manufacturer is going to last two or three years.
Q4: Are there any clouds on the horizon for the broader market?
A4: Well, the broader market the answer is no. Obviously you always face issues like a geopolitical risk with the situation escalating between Russia and Ukraine, in the Middle East, why not China, so that can always happen but in terms of pure market, I think it’s going fairly well.
Obviously, one has to be a bit concerned with the level of inflation, if there is too much inflation, it could have actually an impact on the number of people who are traveling because air travel is actually fairly price sensitive.
I think the main issue we have seen occurring, I would say in the last six months, is actually more related to currency. There are a number of countries in emerging markets that currency have issues with getting US dollars, our lessors are expressed in US dollars so we need to be paid in that currency. Some countries like Bangladesh, Nepal, Myanmar, smaller countries, struggle to get their hands on foreign currency. The airlines have money but they cannot export.
Q5: Are you seeing any particular areas of growth over the next few years?
A5: Yes, I think we’re going to get more of the same but I think in in the context of the ATR market, because ATR is more or less in the monopoly situation.
I think basically the only 70-seater turboprop in the marketplace, there are a number of airlines who are operating its natural competitor the Q400 and many airlines who are operating Q400s cannot find additional aircraft because the aircraft is not being manufactured anymore. So, it’s fair to assume that there will be a large number of
operators whose fleet is aging, who are going to look for a replacement and the natural replacement for the Q400 will be the ATR, as long as range is not required.
So, I think we could see some airlines Quantas, Icelandair, they’re some airlines who are operating big fleets of Q400s, transiting to a different turboprop.
Q6: Now, for Avation investors, which parts of the market are you being cautious about and which parts do you see as being attractive?
A6: In current markets, I think it’s very hard to make a mistake because the market is very bullish so we’re going to see that probably aircraft values going forward are going to increase. They’re going to increase naturally for two reasons:
The first one is because investing in aircraft actually is a protection against inflation because your aircraft residual value or end of lease value is going to be inflated, together with inflation. At the same time because the lease rates keep on increasing, the lease attached and the value attached to the aircraft with the lease is going to increase so I think it’s going to go well.
I think the main thing where an investor has to be careful is basically not to be over optimistic, looking at some particular aircraft types where if there is a downturn, some aircraft are going to suffer more than the others. So, you have to be careful investing in aircraft types which are not produced anymore, you have to be careful about investing in aircraft types which do not have a very large and diverse customer base, so it’s basically you have to be worried about the basics of investing in aircraft.
H&T Group plc (LON:HAT) is the topic of conversation when Hardman & Co’s Analyst Mark Thomas caught up with DirectorsTalk for an exclusive interview.
Q1: You called your recent piece ‘Growing pawnbroking core will drive other services’, what can you tell us about it?
A1: In our 15 March 2023 initiation, ‘Pawnbroking royalty, with strong, profitable growth’, and later notes, we have highlighted the strong market for pawnbroking and why the Group, as the market leader, is uniquely placed to take advantage of these opportunities.
Subsequent to the initiation, we had raised our pledge book forecast twice, and we do so again with the latest trading statement. In this note, we explore how pawnbroking growth is a key driver to the retail offering, pawnbroking scrap and gold purchase, with varying degrees of time lag.
Like many in the retail space, the company faced the challenge of customers focusing on lower-value, lower-margin items in the key run-up to Christmas 2023. We have cut 2023E PBT by £3m (11%).
Q2: You highlight the growth in the pledge book as a key driver to bottom-line growth, what is driving that growth?
A2: The 2023 pledge book was up 30% on end-2022, which is nearly twice our original 17% forecast for the year. Importantly demand continued to gather momentum through 2023, at a time of reduced market supply. We believe their strong balance sheet, continued investment in its stores and economies of scale mean it is well-placed to seize opportunities.
Looking at the drivers, most customers use pawnbroking loans to fund day-to-day living expenses – so demand for H&T loans is growing, because the cost-of-living crisis is putting greater pressures on customer cashflows. This positive dynamic has come at a time of real constraints on the supply of short-term, small-sum credit.
Some competitors have been killed by claims management companies (CMCs) – a risk to which H&T is only marginally exposed. Credit unions have moved to larger lending, and most branch-based, small-sum, short-term lenders have closed. The company has also been growing its market share of pawnbroking.
At a time of growing demand, their long-term, competitive, positive position has never been stronger. In our note we explore how pawnbroking growth should feed through, with a time lag, to other divisions.
Q3: And the short-term challenge in retail?
A3: Many jewellery and watch retailers are facing challenges, as shown by the Watches of Switzerland profit warning.
For the Group, while volumes rose 3% 4Q’23 on 4Q’22, the value fell 3% with a shift towards lower-priced, lower margin items, especially new jewellery (33% of sales value, up from 25%). The absolute performance was OK and has seen an increase in customer numbers which bodes well for the future but it was below the market expectations.
Q4: And the pressure from costs?
A4: We flagged in the January monthly, that “In November, the government announced the National Living Wage (minimum wage) for adults will rise by 9.8% from April. We had been expecting an increase closer to expected inflation.”
In addition to the direct impact on the lowest paid staff, investors should bear in mind i) there is a need to ensure appropriate differentials between experienced and inexperienced employees, and ii) an increase well above inflation in 2024 increases the probability of further above-inflation increases in the future.
A change of government may increase this probability even further. There is, therefore, a swing in the growth rate of costs in addition to the first-year impact.
Q5: And finally what about the risks?
A5: H&T Group’s customers are cash constrained. Their business risk from money laundering and stolen goods is above average, but our detailed review of their controls shows them to be good.
We believe sentiment to the industry is a specific risk, and the Group has a strong, ongoing communication programme to address what are often outdated or simply incorrect assumptions. Inflation risk to the cost base is also a specific short-term consideration. We have a whole section in the initiation report explaining our view that the Group is low risk.
JPMorgan Japan Small Cap Growth & Income plc (LON:JSGI) has now published its January 2024 factsheet which can be found below.
Month in review – As of 31/01/2024
News of strong data in the US decreased the likelihood of rate cuts by the US Federal Reserve, which led the TOPIX Index to rally by 7.8% in Japanese yen terms. In terms of style tilts, value outperformed growth. At its January meeting, the Bank of Japan (BoJ) kept the policy rates unchanged in line with consensus. The BoJ has maintained its commitment to stabilise inflation with an increased optimism on achieving the target. Shunto wage hike negotiations started over the month, with negotiators pushing for positive real wage growth and increases to be persistent.
The trust performed in line with the benchmark over the month, with both sector allocation and stock selection contributing mildly to performance. At the stock level, overweight positions in Lifedrink (nonalcoholic beverages) and Genky Drugstores (convenience stores) were among the top contributors to performance. The share price of Lifedrink rose on results, which were ahead of expectations. The share price of Genky Drugstores rose on expectations that the aggressively priced products of the company would help performance in an inflationary environment.
On the other hand, overweight positions in Warabeya Nichiyo (packaged meals) and Infomart Corporation (business process software) were among the top detractors. The share price of Warabeya Nichiyo fell due to increasing competition from larger peers having an impact on the outlook for the business. The share price of Infomart Corporation fell on concerns of a potential slowdown in their invoicing business after a strong performance over the previous year.
Looking ahead – As of 31/01/2024
A structurally tight labour market is expected to support the nascent positive trends in wage growth. Wage growth, currently driven primarily by large corporates, is expected to persist. This should help end Japan’s long period of damaging and seemingly intractable deflation and have a positive impact on consumption and the overall economy.
Structural improvements in corporate governance and balance sheet management witnessed over 2023, are expected to continue providing a solid tailwind for stock selectors identifying companies starting to change. The Tokyo Stock Exchange, which has been encouraging Japanese companies to improve their capital allocation, recently released a list of companies, accounting for 40% of the Prime section, who have created plans to improve their capital efficiency.
We believe it is more important than ever to focus on companies with solid balance sheets that have the flexibility to cope with any macroeconomic environment and where earnings are structurally growing.
In our view, the combination of structural changes taking place in the Japanese corporate sector, combined with the country’s political stability, offers attractive investment opportunities for investors. As of the end of January, valuations in Japan remain reasonable, trading at 15.8x price to 1-year forward earnings and 1.4x price-to-book ratio.
JPMorgan Japan Small Cap Growth & Income Investment Trust (LON: JSGI) is actively managed by a Tokyo-based investment team and provides access to the innovative and fast-growing small and medium-sized companies that are at the core of the Japanese economy, while paying a regular quarterly income.
JPMorgan European Discovery Trust plc (LON:JEDT) has announced its January commentary.
JEDT’s share price and NAV rose 19.03% and 15.05% respectively on a cumulative basis to 31 January 2024
Month in review – As of 31/01/2024
The trust outperformed its benchmark over January.
Positive contributors to relative returns included stock selection in industrial engineering and stock selection and an overweight position in industrial support services.
Detractors included stock selection and an underweight position in industrial transportation and stock selection in technology hardware and equipment.
At the stock level, an overweight position in Kindred, a Swedish gambling company, outperformed after receiving a takeover offer from Francaise des Jeux.
An overweight position in SPIE, a French multi-technical services company, outperformed as the company continued to benefit from strong investments into electrification & energy efficiency.
Conversely, an overweight position in Forvia, a French auto parts supplier, underperformed as concerns emerged around their ability to pass on price increases while demand for autos seems to be slowing.
An overweight position in Melexis, a Belgian automotive chip designer, also underperformed as the inventories of chips have started to increase at auto original equipment manufacturers (OEMs), signaling a potential slowdown in demand.
Looking ahead – As of 31/01/2024
On top of the macroeconomic uncertainties, there are numerous political uncertainties arising out of the ongoing geopolitical tensions and the imminent national elections.
European equities trade on an extreme discount to US equities, a discount that has grown following strong 2023 technology-led gains in the US. This argument may not be new to prospective investors; however, the European equity market today can offer comparable levels of quality and growth potential.
While the short-term outlook remains uncertain, we believe European equities offer an attractive entry point to the long-term investor, and we remain focused on selecting companies with pricing power, strong balance sheets and the ability to grow significantly over the long term.
JPMorgan European Discovery Trust plc (LON:JEDT) is an investment trust company. The Investment Trust JEDT objective is to achieve capital growth from a portfolio of quoted smaller companies in Europe, excluding the United Kingdom.
We last reviewed Real Estate Credit Investments Limited (LON:RECI) operations in France, 25% of the latest portfolio, in our note, Vive la difference, published 15 February 2022. The core approach is unchanged, but, following the December 2023 factsheet report of an unrealised hit of 1.6p to the NAV from a prime Grade A Paris office exposure, we thought we would review them again. Also, with the November Factsheet reporting a 1.1p NAV hit from a legacy mezzanine position exposed to a Berlin asset, we have considered the de minimis German exposure. While the unrealised losses were unexpected, we show how conservative RECI’s accounting has been and the portfolio resilience.
Conservative approach: Our note, Marks taken in uncertainty, released thereafter, highlighted RECI’s record of taking MTM hits in periods of uncertainty, only to be followed by subsequent releases. This conservative accounting is on top of robust risk assessment, monitoring, problem account management and portfolio diversification.
January 2024 factsheet: Underlying NAV rose 1.3p, due to recurring interest income (1.1p). Cash was £23m, and gross leverage £62m. The book has 34 positions (28 loans, gross drawn value £394m, and 6 bonds, fair value £8m – down from 26 and £90m, respectively, at end-March). The weighted average LTV is 60.3%, and the yield is 10.3%.
Valuation: In the five-year, pre-pandemic era, on average, Real Estate Credit Investments traded at a premium to NAV. In periods of market uncertainty, it has traded at a discount. It now trades at a 17% discount, a level not seen since late 2020. RECI paid its annualised 12p dividend in 2022, which generated a yield of 10% ‒ expected to be covered by interest alone.
Risks: Credit cycle and individual loan risk are intrinsic. All security values are currently under pressure. We believe RECI has appropriate policies to reduce the probability of default and has a good track record in choosing borrowers. Some assets are illiquid. Much of the book is development loans.
Investment summary: Real Estate Credit Investments generates an above-average dividend yield from well-managed credit assets. Income from its positions covers the dividends. Sentiment to market-wide credit risk is difficult currently, but their strong liquidity and debt restructuring expertise provide extra reassurance. Where needed, to date, borrowers have injected further equity into deals.
Reckitt Benckiser Group PLC (LON:RKT) has announced its final results.
Adjusted1
IFRS
Unaudited £m
2023
vs 20222
Unaudited £m
2023
vs 20222
Full Year
Like-for-like (LFL) net revenue growth3
+3.5%
Net revenue
14,607
+1.1%
Hygiene
+5.1%
Hygiene
6,135
+2.9%
Health
+5.0%
Health
6,062
+1.2%
Nutrition
-4.0%
Nutrition
2,410
-3.6%
Gross profit margin
60.0%
+220bps
Gross profit margin
60.0%
+220bps
Operating profit
3,373
-1.9%
Operating profit
2,531
-22.1%
Operating profit (constant FX)3
+0.9%
Operating profit margin
23.1%
-70bps
Operating profit margin
17.3%
-520bps
Diluted EPS
323.4p
-5.4%
Diluted EPS
228.7p
-29.6%
Free cash flow
2,258
+11.2%
Cash generated from operating activities
2,636
+10.0%
Cash returns to shareholders4
1,546
+23.8%
Q4
LFL net revenue growth
-1.2%
Net revenue
3,561
-7.0%
1. Adjusted measures are defined on page 27.
2. All growth rates are presented on an actual basis, except for LFL net revenue growth and where separately noted.
3. LFL net revenue and adjusted operating profit growth is measured on a constant exchange rate basis (see page 27).
4. Cash returns to shareholders represents dividend paid during the year plus cash returned to shareholders through share buybacks.
Commenting on the results, Kris Licht, Chief Executive Officer, said:
“2023 was a year of progress for Reckitt. We delivered a good trading performance in Health and Hygiene. Nutrition began rebasing and held market leadership in the US. Our innovation platforms proved that they can deliver meaningful growth through premiumisation, household penetration and category creation. We drove our gross margins back to historical levels, increased investment behind our brands and innovation and launched our fixed cost optimisation programme. We generated strong free cashflow and significantly increased cash returns to shareholders, enhanced by our new, sustainable share buyback programme.
The organisation is fully focused on executing the strategy which I outlined in October, including strengthening our product superiority, optimising our fixed cost base and improving our in-market execution.
While our performance in Q4 was unsatisfactory, we look to 2024 and beyond with confidence. We target another year of mid-single-digit growth in Health and Hygiene, driven by a more balanced contribution from price, mix and volume. We expect Nutrition to return to growth late in the year. We will continue to invest in, and harness the growth from, our strengthened pipeline. We will advance our fixed cost optimisation programme, and we will further increase cash returns to shareholders, aiming to double what we returned in 2019.”
FY Highlights:
· A year of continued progress, focused on executing on our strategy, revenue growth, driving product superiority through innovation, increased investment behind brands and cash returns to shareholders.
· Innovations delivering, including Lysol Air Sanitiser, Finish Ultimate Plus All-in-One, Mucinex InstaSoothe, Dettol Laundry Pods and Enfamil NeuroPro, driving category growth and premiumisation.
· Group LFL net revenue growth of +3.5%. For the full year, growth was broad-based, with mid-single-digit growth across Hygiene and Health at +5.1% combined. Nutrition declined by -4.0% as the US laps the prior year competitor supply issue. Our strong performance in the first three quarters was partially offset by a weaker fourth quarter.
· Group reported net revenue growth of +1.1%. LFL growth of +3.5% offset by FX headwinds of -2.1% and a net M&A impact of -0.3%.
· Gross margins returned to historic strength. Gross margin of 60.0% (+220bps) returns to historically strong levels, which funded increased investment behind brands (BEI +13.2% on a constant FX basis).
· Adjusted operating profit margin of 23.1%. Expansion of +10bps when adjusting for US Nutrition competitor impact last year. -70bps on a reported basis.
· +24% increase in cash returns to shareholders. A full year dividend of 192.5p (+5%) and £0.2bn from initial share buyback programme enabled by strong free cashflow generation of£2.3bn (+11.2% versus 2022).
Q4 Performance
· Like-for-like (LFL) net revenue decline of -1.2%, led by growth of +5.2% across Hygiene. Health declined -2.0% driven by the phasing and shape of the cold and flu season. Nutrition LFL net revenue declined -14.8%, as our North America business continued to rebase due to lapping of the prior year competitor supply issue, in addition to the voluntary recall of Nutramigen.
· Late inouryear end close process we identified, through our on-going compliance procedures, an understatement of trade spend in two Middle Eastern markets related to the fourth quarter and prior quarters of 2023. As a result, our full year net revenue performance was £55m lower than previously expected which is fully reflected in our Q4 results (adjusted operating profit impact of £35m). Following investigation, we concluded a small group of employees had acted inappropriately and we are taking necessary disciplinary action. We are confident this is an isolated incident specific to these two markets and does not impact our 2024 outlook and medium-term goals.
Other
· Full year IFRS operating profit of £2,531m (2022: £3,249m) including IFCN goodwill impairment of £810m reflecting higher interest rates and changes in the regulatory environment.
2024 OUTLOOK
Our outlook is as follows:
· We are confident in the year ahead and expect LFL net revenue growth of +2% to +4% for the Group, with mid-single-digit growth for our Health and Hygiene portfolios.
· We expect a mid- to high-single-digit decline for our Nutrition business as it continues to rebase in the first half of the year and returns to growth late in the year.
· We expect adjusted operating profit to grow ahead of net revenue growth.
· Revenue and profit growth will be second half weighted as we lap high OTC comparatives from Q1 last year and will see the majority of the rebasing of our US Nutrition business in H1.
Other technical guidance
· Adjusted net finance expense is expected to be in the range of £300m to £320m (2023: £247m).
· The adjusted tax rate is expected to be 25-26% (2023: 25.2%).
· Capital expenditure is expected to be 3-3.5% of net revenue (2023: 3.1%).
GROUP OVERVIEW
Net RevenueUnaudited
£m
Volume
Price / Mix
LFL1
Net M&A
FX
Actual
FY 2023
14,607
-4.3%
+7.8%
+3.5%
-0.3%
-2.1%
+1.1%
Q4 2023
3,561
-4.3%
+3.1%
-1.2%
-0.1%
-5.7%
-7.0%
1. Adjusted measures are defined on page 27
Group net revenue
· Group net revenue of £14,607m grew by +3.5% on a LFL basis in the year, reflecting price / mix improvements of +7.8% and a volume decline of -4.3%. Our Hygiene brands delivered broad-based growth (+5.1%) across our brand portfolio with improving volume trends throughout the year. Health growth (+5.0%) was led by our OTC and Intimate Wellness portfolios, and Nutrition declined (-4.0%) as the US lapped the prior year competitor supply issue.
· Total net revenue on an IFRS basis was up +1.1%, reflecting net M&A impact of -0.3% and foreign exchange headwinds of -2.1%.
· 44% of our Core Category Market Units (CMUs) held or gained share, with 47% in Hygiene, 46% in Health and 37% in Nutrition (weighted by net revenue).
· E-commerce net revenue grew by +9% in 2023 and now accounts for 15% of Group net revenue.
· Q4 LFL net revenue growth was -1.2%. Price / mix improvements were +3.1% and volume declined by -4.3% with further sequential improvement in Hygiene (-2.6%). Health volumes (-2.2%) remained robust but were impacted by seasonal OTC declines. Nutrition volumes (-14.3%) declined due to the rebasing of our US business, and category-led volume declines in Developing Markets.
· In Q4 our Hygiene GBU grew +5.2%, led by Lysol and Finish. Our Health GBU declined -2.0%, with growth across our Intimate Wellness, VMS and non-seasonal OTC portfolios more than offset by high seasonal comparatives in our cough, cold and flu OTC portfolio. Nutrition declined -14.8% as the US business continues to rebase as it laps strong prior year comparatives.
· Late in our year end close process we identified, through our on-going compliance procedures, an understatement of trade spend in two Middle Eastern markets related to the fourth quarter and prior quarters of 2023. As a result, our full year net revenue performance was £55m lower than previously expected which is fully reflected in our Q4 results (adjusted operating profit impact of £35m).
Group operating margins and profit
· Adjusted gross margin was 60.0% (2022: 57.8%), an increase of +220bps, driven by pricing and productivity efficiencies – predominantly across revenue growth management and procurement. These levers more than offset inflation of mid-single digits in the year.
· Brand equity investment (BEI) increased by +13.2% (+£0.2bn) on a constant FX basis as we invest behind innovation launches and the long-term strength of our brands. BEI percentage of net revenue was up +130bps to 13.1% (2022: 11.8%).
· Adjusted operating profit was £3,373m (2022: £3,439m) at an adjusted operating margin of 23.1% (2022: 23.8%), -70bps lower than prior year, with gross margin expansion offset by increased brand equity investments and inflation-led cost base increases. When excluding the one-off benefits of circa 80bps in 2022 related to US Nutrition, adjusted operating profit margin grew +10bps.
· IFRS operating profit was £2,531m (2022: £3,249m) at an operating profit margin of 17.3% (2022: 22.5%). This was impacted by the IFCN goodwill impairment of £810m (2022: £nil), reflecting higher interest rates and changes in the regulatory environment. Refer to Note 6 for further details.
EPS and dividends
· Total adjusted diluted EPS was 323.4p in 2023 (2022: 341.7p), -5.4% below 2022 as higher adjusted operating profit at constant exchange rates was more than offset by adverse foreign exchange and a higher adjusted effective tax rate in 2023. Total IFRS diluted EPS was 228.7p (2022: 324.7p).
· Full year dividend increased by 5% to 192.5p (2022: 183.3p) per share, in line with our policy to deliver sustainable dividend growth. The final proposed dividend is 115.9p (2022: 110.3p) per share.
Free cash flow
· Free cash flow was £2,258m in 2023 (2022: £2,031m) a +11% increase year on year driven by an improvement in net working capital.
· Net debt ended the year 1.9x adjusted EBITDA (2022: 2.1x adjusted EBITDA).
OPERATING SEGMENT REVIEW
Hygiene – 42% of net revenue in 2023
Net RevenueUnaudited
£m
Volume
Price / Mix
LFL1
Net M&A
FX
Actual
FY 2023
6,135
-6.0%
+11.1%
+5.1%
–
-2.2%
+2.9%
Q4 2023
1,531
-2.6%
+7.8%
+5.2%
–
-6.7%
-1.5%
Operating Profit (Unaudited)
£m
Constant FX (CER)1
Actual
Adjusted Operating Profit1
1,236
+4.7%
+1.8%
Adjusted Operating Profit Margin1 %
20.1%
-30bps
1. Adjusted measures are defined on page 27
Full Year Performance
Hygiene net revenue grew +5.1% on a LFL basis to £6,135m for the full year. Innovation-led pricing and favourable mix (price / mix +11.1%) were the key drivers partially offset by volume decline of 6%. Importantly, our volume trend substantially improved quarter by quarter throughout the year. Net revenue growth was broad-based across all major brands delivering positive LFL net revenue growth and total Hygiene market share momentum improving in Q4 driven by continued momentum in Auto Dish (Finish). We successfully launched innovations in most categories that improved consumer delight, delivered more premium solutions for our consumers and grew penetration, in line with our category growth strategy.
47% of Core Hygiene CMUs (weighted by net revenue) gained or held share during the year.
Within Auto Dish, our market leading brand Finish, grew low-double digits LFL net revenue and grew market share driven by the successful launch of our new super premium tier, Finish Ultimate Plus All-in-One, delivering more superior solutions to consumers and driving premiumisation in the category.
Lysol returned to growth in the year driven by strengthened brand equity and the broadening of the brand’s shoulders with continued strong growth in Laundry Sanitiser expanding household penetration and the recent creation of the Air Sanitisation category with the launch of Lysol Air Sanitisers in the US, the first and only antimicrobial product approved by the EPA that kills 99.9% of airborne viruses and bacteria while eliminating odours.
Adjusted operating profit for Hygiene at £1,236m was up +4.7% on a constant FX basis and +1.8% on an actual basis. Adjusted operating profit margin was 20.1%, down -30bps. Strong gross margin expansion was offset by increased investment behind innovation launches and brand building initiatives, and inflation-led fixed costs.
Fourth Quarter Performance
Hygiene net revenue grew +5.2% in the quarter on a LFL basis, with price / mix improvements of +7.8% and an improving sequential volume performance of -2.6%. Auto Dish (Finish) and Disinfectants (Lysol) were the key growth drivers in the quarter, led by premiumisation in Finish and broad-based growth across all Lysol segments. Lavatory Care (Harpic) and Pest (Mortein, SBP, Aeroguard) delivered strong growth in the quarter.
Health – 42% of net revenue in 2023
Net RevenueUnaudited
£m
Volume
Price / Mix
LFL1
Net M&A
FX
Actual
FY 2023
6,062
-0.3%
+5.3%
+5.0%
-0.6%
-3.2%
+1.2%
Q4 2023
1,507
-2.2%
+0.2%
-2.0%
-0.1%
-6.0%
-8.1%
Operating Profit (Unaudited)
£m
Constant FX (CER)1
Actual
Adjusted Operating Profit1
1,690
+6.3%
+2.5%
Adjusted Operating Profit Margin1 %
27.9%
+40bps
1. Adjusted measures are defined on page 27
Full Year Performance
Health net revenue grew +5.0% on a LFL basis to £6,062m for the full year. This reflected price / mix improvements of +5.3% and volume decline of -0.3%.
46% of Core Health CMUs (weighted by net revenue) gained or held share during the year.
Our OTC portfolio grew low-double digits on a LFL net revenue basis behind a combination of both volume and price / mix growth. Nurofen, Strepsils, Gaviscon and Biofreeze all grew-double digits, driven by innovation launches, premiumisation and pricing actions, brand whitespace expansion (Biofreeze Overnight Relief in the US and Nurofen Liquid caps into a number of European markets), as well as some retailer inventory rebuilding in Europe in Q1. Mucinex delivered low-single-digit growth which laps a very strong and earlier cold & flu season in Q4 2022. Mucinex added a new medicated throat spray to its Instasoothe product range, further extending its presence in the $1bn US sore throat market.
Intimate Wellness delivered high single-digit growth in the year. Growth was broad-based across Europe, following the rebranding of the product range during 2022. Our portfolio in China benefitted from the end of COVID-related lockdowns and innovation, including Durex Fetherlite, our new hyaluronic acid condom with water-based lubricant providing a natural moisturisation experience. Growth was also strong across LATAM, and India where we increased total distribution points share during the year by around +400bps.
Dettol declined mid-single digits in the year, with a mixed performance across markets. A number of markets delivered growth and market share gains, underpinned by innovations, including an extension of Dettol Cool in India, Dettol Washing Machine Cleaner and Dettol Laundry Pods in China. However, growth was offset by declines in ASEAN due to category weakness and specific in-market challenges. The actions taken during the second half of the year to address these challenges have driven an improved performance in Q4.
Adjusted operating profit for Health at £1,690m was up +6.3% on a constant FX basis and +2.5% on an actual basis. Adjusted operating margin was 27.9%, an increase of +40bps, with gross margin expansion more than offsetting increased investment behind our brands and inflation-led fixed cost increases.
Fourth Quarter Performance
Net revenue declined by -2.0% on a LFL basis in the quarter with price / mix improvements of +0.2% and volume decline of -2.2%. As expected, our cough, cold and flu related OTC portfolio declined high-single digits as we lapped an early and strong season in Q4 last year. Dettol declined by low double-digits with growth in India more than offset by high comps in China and declines in the Middle East. These declines were partially mitigated by double-digit growth in our Intimate Wellness and VMS portfolios, and mid-single-digit growth in our non-seasonal OTC portfolio.
Nutrition – 16% of net revenue in 2023
Net RevenueUnaudited
£m
Volume
Price / Mix
LFL1
Net M&A
FX
Actual
FY 2023
2,410
-10.0%
+6.0%
-4.0%
-0.1%
+0.5%
-3.6%
Q4 2023
523
-14.3%
-0.5%
-14.8%
-0.1%
-3.0%
-17.9%
Operating Profit (Unaudited)
£m
Constant FX (CER)1
Actual
Adjusted Operating Profit1
447
-22.4%
-22.5%
Adjusted Operating Profit Margin1 %
18.5%
-460bps
1. Adjusted measures are defined on page 27
Full Year Performance
Nutrition net revenue declined -4.0% on a LFL basis to £2,410m for the full year. Volume declined -10.0% due to the lapping of peak market shares in the US from the competitor supply shortage in the prior year and category-led volume declines in LATAM and ASEAN. Price / mix improvements were +6.0% with pricing actions partially offset by more normalised trade conditions in the US.
37% of Core Nutrition CMUs (weighted by net revenue) gained or held share during the year.
IFCN US net revenue declined high-single digits on a LFL basis in the year with non-WIC market shares rebasing during the second half as we lap the prior year competitor supply issue. Throughout the year, we maintained our leading volume and value market share position in the non-WIC stage 1-3 segments where we operate. Our Enfamil brand remain the number one recommended infant formula by paediatricians in the US.
Our Developing Markets business declined mid-single digits with category-led volume declines partially offset by premiumisation and growth in both the specialty and adult segments. A reduction in our transitional service arrangement (TSA) contract manufacturing volume relating to our disposed China business, contributed around 60bps to the year-on-year decline. LATAM grew mid-single digits, offset by market challenges across certain ASEAN markets.
Adjusted operating profit for Nutrition at £447m was down -22.4% on a constant FX basis and -22.5% on an actual basis. Adjusted operating margin was 18.5%, down -460bps, reflecting the year-on-year volume deleverage as we lap the competitor supply issue in the US, and negative mix as we lose the benefit from WIC sales in states where Reckitt does not hold the government contract.
Fourth Quarter Performance
Nutrition net revenue declined by -14.8% on a LFL basis in the quarter. This performance was driven by double-digit decline in North America due to lapping the impact of the competitor supply issue in the US. We exited the year with a non-WIC value market share in the low 40s. This compares to an average value market share for 2023 of around 47%.
Developing Markets declined high-single digits with growth in LATAM more than offset by category weakness across certain ASEAN markets.
The Q4 net revenue was negatively impacted by approximately -200bps due to a returns provision made in respect of the voluntary Nutramigen recall in late December.
Performance by Geography
Net RevenueUnaudited
£m
Volume
Price / Mix
LFL1
Net M&A
FX
Actual
FY 2023
North America
4,919
-4.9%
+5.7%
+0.8%
-0.1%
-0.9%
-0.2%
Europe / ANZ
4,849
-3.4%
+11.6%
+8.2%
-0.5%
-2.6%
+5.1%
Developing Markets
4,839
-4.6%
+6.5%
+1.9%
-0.2%
-3.1%
-1.4%
Total
14,607
-4.3%
+7.8%
+3.5%
-0.3%
-2.1%
+1.1%
Q4 2023
North America
1,217
-6.7%
+1.1%
-5.6%
-0.1%
-5.0%
-10.7%
Europe / ANZ
1,193
-4.8%
+9.2%
+4.4%
–
-5.9%
-1.5%
Developing Markets
1,151
-1.4%
-0.5%
-1.9%
–
-6.5%
-8.4%
Total
3,561
-4.3%
+3.1%
-1.2%
-0.1%
-5.7%
-7.0%
1. Adjusted measures are defined on page 27
North America LFL net revenue grew +0.8% for the full year. Our Hygiene brands grew mid-single digits offset by a broadly stable performance in Health and our US Nutrition business declined as we lap the competitor supply shortage in the prior year. In Q4 North America saw strong growth in Lysol which was more than offset by further US Nutrition rebasing and tough comps in our seasonal OTC portfolio.
In Europe / ANZ LFL net revenue grew +8.2% for the full year, with broad-based growth across Western European markets and Turkey. From a category perspective, growth was led by Finish and our OTC portfolio.
Developing Markets LFL net revenue grew +1.9% for the full year. China, India and LATAM saw good growth in both Q4 and the full year. The Middle East declined in both the full year and Q4. ASEAN declined due to specific in-market challenges but saw improved volume trends improved in Q4 due to pricing actions taken in certain key Dettol markets.
FY 2023 RESULTS PRESENTATION TODAY
There will be a results presentation for analysts and investors at 08:30 GMT which will be held at The Auditorium, Bank of America, 2 King Edward Street, London, EC1A 1HQ.
To attend in person, please email your details to [email protected] to register.
For those wishing to follow the webcast please click on the link below: https://www.reckitt.com/investors/results-and-presentations/
Taylor Wimpey plc (LON:TW) has announced its full year results for the year ended 31 December 2023.
Jennie Daly, Chief Executive, commented:
“We delivered a good full year performance in line with expectations despite a challenging market, benefiting from our sharp operational focus, the quality of our homes and locations and a continued proactive sales effort. I would like to thank all our teams and supply chain partners for their ongoing hard work and commitment.
It is still early in the year and the macroeconomic backdrop remains uncertain, however it is encouraging to see some signs of improvement in the market, with reduced mortgage rates positively impacting affordability and customer confidence.
While the planning environment remains challenging, we have a high-quality, well-invested landbank and a strong financial position which underpins our ability to provide investors with a reliable income stream via our differentiated Ordinary Dividend Policy. Looking ahead we are well-positioned in an attractive market, with significant underlying demand for our quality homes and are poised for growth from 2025, assuming supportive market conditions.”
Group financial highlights:
2023
2022
Change
Revenue £m
3,514.5
4,419.9
(20.5)%
Operating profit* £m
470.2
923.4
(49.1)%
Operating profit margin*† %
13.4%
20.9%
(7.5)ppt
Profit before tax £m
473.8
827.9
(42.8)%
Profit before tax and exceptional items £m
473.8
907.9
(47.8)%
Profit for the year £m
349.0
643.6
(45.8)%
Basic earnings per share pence
9.9
18.1
(45.3)%
Adjusted basic earnings per share pence††
9.9
19.8
(50.0)%
Ordinary dividend per share pence1
9.58
9.40
1.9%
Tangible net assets value per share pence†
127.1
126.5
0.5%
Net cash ‡ £m
677.9
863.8
(21.5)%
1. 2023 Final ordinary dividend of 4.79 pence per share, subject to shareholder approval and 2023 Interim dividend of 4.79 pence per share.
N.B. Definitions can be found at the end of the Group financial review
Operational highlights:
· Group completions (including JVs) of 10,848 (2022: 14,154)
· UK net private sales rate for the year of 0.62 homes per outlet per week (2022: 0.68)
· UK average selling prices on private completions up 5.1% to £370k (2022: £352k) with the overall average selling price up 3.5% to £324k (2022: £313k)
· Aligned build rates to demand changes and delivered annualised cost savings of £19 million, as announced in January 2023 to improve operating efficiency
· Opened 47 new outlets and ended the year with 237 UK outlets (31 December 2022: 259)
· Established a new timber frame facility in Peterborough to drive efficiencies and enhance security of supply
Responsible business and a leader in sustainability:
· Rated five-star for customer service in the Home Builders Federation (HBF) survey
· Continued to improve build quality with a Construction Quality Review score of 4.89 (2022: 4.81)
· Continued focus on health and safety with Annual Injury Incidence Rate (AIIR) per 100,000 employees and contractors reducing to 151 (2022: 166)
· Delivered the UK’s first zero carbon ready homes scheme on a live development site in Sudbury
· Overall employee engagement score of 93% (2022: 93%), with a 69% response rate
· Contributed £405 million to our local communities across the UK (2022: £455 million)
· Reduced absolute operational carbon emissions by 35% from a 2019 baseline
· Published a Net Zero Transition Plan and our net zero targets have been independently validated by the Science Based Targets initiative
· Recognition of ESG progress: included in the Dow Jones Sustainability Europe Index and S&P Sustainability Yearbook, The Financial Times Europe’s Climate Leaders list, rated A- by CDP Climate Change, AAA rating from MSCI
Current trading and outlook
Whilst still early in the year and at the beginning of the Spring selling season, current trading shows some encouraging signs of improvement with reduced mortgage rates positively impacting affordability and confidence in our customer base.
The year-to-date net private sales rate (w/e 25 February 2024) is 0.67 per outlet per week (2023 equivalent period: 0.62). The cancellation rate is 12% (2023 equivalent period: 17%) and the level of down valuations remains low.
Appointments and overall customer interest in our homes remain at good levels, supported by our quality product, site locations and focused sales and marketing efforts. However, conversions from enquiry to reservation continue to take longer when compared to pre Q2 2023.
As previously noted, we came into 2024 with a lower order book against a strong comparator. As at 25 February 2024, our total order book excluding joint ventures was £1,949 million (2023 equivalent period: £2,154 million), comprising 7,402 homes (2023 equivalent period: 8,078 homes).
Accordingly, and given prevailing market conditions, we remain focused on optimising value and currently expect 2024 UK completions (excluding JVs) to be in the range of 9.5k to 10k homes, with completions weighted 45 / 55% in favour of the second half of the year. First half operating profit margin will reflect slightly lower pricing in the order book, build cost inflation embedded in work in progress of around 4% and investment in IT and timber frame to drive operational efficiencies.
The prevailing underlying annualised build cost inflation on new tenders is c.1% and reduces to zero when taking into account the savings arising from our value improvement programme.
Despite significantly reduced land approvals over the last 18 months, our landbank as at 31 December 2023, remains very strong at c.80k plots (2022: c.83k plots) and is underpinned by the supply of our industry leading strategic land pipeline. We will remain selective in our approach to land but will be active where we see opportunities that balance risk, reward and returns to create shareholder value. We have approved an additional c.1k plots in the year-to-date as we have crystallised deals that our teams have been working on for some time.
While the constraining impact of planning on site openings is unlikely to abate in the near-term for the sector, our strong landbank and highly experienced teams who take a proactive approach to generating high-quality planning applications, ensure we are well positioned for growth from 2025, assuming supportive market conditions. As a business in a strong financial position, we also continue to provide a reliable income stream to our investors via our differentiated Ordinary Dividend Policy to return 7.5% of net assets per annum, or at least £250 million annually, throughout the cycle.
Looking ahead, Taylor Wimpey is a strong and resilient business with a strategy to manage the cycle over the longer term. We operate in an attractive market, with a significant underlying demand for the quality homes we build. We have a clear strategy focused on driving value and operational excellence while investing in the long term success and sustainability of the business.
A presentation to analysts will be hosted by Chief Executive Jennie Daly and Group Finance Director Chris Carney, at 9am on Wednesday 28 February 2024. This presentation will be webcast live on our website: www.taylorwimpey.co.uk/corporate
An on-demand version of the webcast will be available on our website in the afternoon of 28 February 2024.
2023 performance overview
2023 saw UK total housing transactions reduce substantially due to higher mortgage costs, cost of living pressures and lower consumer confidence. Trading in the first quarter of 2023 was encouraging as mortgage rates eased back from the peak of 2022. However, higher than expected inflation in the second quarter led to rate increases culminating in the base rate rising to 5.25%, well above initial market expectations. Whilst remaining high compared to recent years, mortgage rates started to fall towards the end of the year.
During 2023, we maintained strong operational focus and delivered a good financial performance against a challenging backdrop. Total Group completions (incl. JVs) were 10,848 (2022: 14,154). UK home completions (incl. JVs) were 10,438 (2022: 13,773), which included 2,388 affordable homes (2022: 2,920) equating to 23% of total completions (2022: 21%). UK average selling prices on private completions increased by 5.1% to £370k (2022: £352k) with the overall average selling price increasing by 3.5% to £324k (2022: £313k).
Group operating profit of £470.2 million, was at the top end of our guidance range. Operating profit margin of 13.4% (2022: 20.9%), reflects the pressure from rising build costs, at 8.5% year on year, that were not fully offset by price growth, as well as the impact of overhead costs being recovered across fewer completions.
Profit for the year was £349.0 million (2022: £643.6 million). We continue to be highly cash generative with year end net cash of £677.9 million (2022: £863.8 million), after returning £337.9 million to investors by way of dividend.
We opened 47 new outlets in 2023 and ended the year with 237 UK outlets (31 December 2022: 259).
Competition and Markets Authority (CMA) housebuilding market study
Taylor Wimpey welcomes the CMA’s final report, published on 26 February 2024, from its housebuilding market study with its focus on improving the planning system, adoption of amenities and outcomes for house buyers. Taylor Wimpey notes the new investigation opened by the CMA under the Competition Act 1998, and we will cooperate fully in relation to this.
Our purpose
Our purpose is to build great homes and create thriving communities. We believe having a shared purpose across our whole business and value chain is critical and you can see this in action every day on our sites and in our local businesses. Our purpose is not only vital for our customers but also has far reaching societal impacts of which we are extremely proud.
We build much needed homes and infrastructure, create new and enhance existing communities and strive to make a significant social and economic contribution to local economies across the UK. New housing can contribute to improved economic and social mobility, community cohesion, better health outcomes and increased educational attainment.
As a national builder operating at a local level throughout the UK, we strive to be a valuable partner to the communities we work in and welcome the responsibility that goes with this. We work hand in hand with local residents and other businesses to demonstrate the value of what we bring, hear their aspirations and concerns and, where we can, fulfil and address these. A key part of this is a commitment to deliver on our promises and to address the things that have not gone as hoped, promptly and in the right way.
Our strategy: Building for the future
We operate in a cyclical industry, therefore the ability to navigate changing economic conditions is central to our success and we are pleased that we have been able to perform strongly in a weaker market. Our strategy is to build a stronger and more resilient business and deliver superior returns. This has been a consistent strategy for the Group over several years as we seek to manage the business through the cycle for the benefit of all stakeholders. Our strategy is centred on four strategic cornerstones: land, operational excellence, sustainability and capital allocation. These strategic cornerstones guide our principles of working but allow us to be flexible and agile even during challenging and volatile market conditions.
This approach enables us to optimise value for our stakeholders and, through our differentiated Ordinary Dividend Policy, to provide a reliable income stream for our investors through the cycle.
Given challenging market conditions in 2023, our highly experienced teams focused on driving value through all the levers available to us. Cost discipline was a core focus given the inflationary environment, and we took appropriate actions across all areas of our operations. In particular, we tightened controls across our work in progress and restricted all discretionary spend, including recruitment.
In early 2023, we delivered annualised cost savings of £19 million with a one off cost to achieve these of £8 million. We conducted a detailed review to ensure our customer offering remains competitive which targeted cost savings. We also significantly reduced land approvals in 2023. However, with our sector leading strategic land pipeline and the expertise of our teams, we benefitted from a high level of strategic conversion in the year at c.8k plots (2022: c.4k plots). Our strategic land pipeline is a key competitive advantage in a challenging planning environment and, accordingly, our short term landbank remains strong at c.80k plots (2022: c.83k plots).
While much of our focus in 2023 was on protecting value, we have continued to invest in areas that matter for the long term success and sustainability of the business.
During 2023, we opened our own timber frame facility located adjacent to our logistics function in Peterborough, to drive efficiencies, environmental benefits and enhance security of supply. In combination with our existing suppliers, our own facility will help us in our goal to increase timber frame usage to 30% of our production by 2030.
In addition, we launched our zero carbon ready prototype homes trial in Sudbury, the first trial of its kind on a live development site testing low carbon technologies.
Continuous business improvement remains fundamental to how we protect stakeholder value against a backdrop of increasing regulatory and economic demands. This includes componentisation, standardisation and modern methods of construction such as timber frame.
We are also ensuring a positive approach to continued innovation and R&D and we are pushing ourselves to be more ambitious than we have been historically in some areas, such as IT which will benefit the business in the longer term.
As we look forward in 2024 and beyond, we will continue to prioritise value over volume. Driving increased operating efficiency, cost savings and value improvement will remain a key focus for our business, but we will also continue to invest in areas that matter for the long term success and sustainability of the business to ensure we are poised for growth from 2025, assuming a supportive market.
Commitment to sustainability
Environment and net zero by 2045
We published our Net Zero Transition Plan in early 2023, with our goal to be net zero aligned in our operations by 2035 and to reach net zero carbon emissions across our value chain by 2045, ahead of the UK Government’s target. Since then our net zero targets have been independently validated by the Science Based Targets initiative (SBTi), only the second housebuilder to achieve this.
We have achieved certification to the Carbon Trust’s Route to Net Zero Standard, Advancing level, one of the first organisations to gain this new standard and the only housebuilder. A scope 1 and 2 carbon reduction measure was included in the incentive plans for senior leadership and regional management in 2023 to support progress on our near term carbon reduction targets.
We have been included in the Dow Jones Sustainability Europe Index and the S&P Sustainability Yearbook 2024, rated A- by CDP Climate Change and received a AAA rating from MSCI. We are a member of Next Generation, the sustainability benchmark for UK housebuilders, and received a gold rating in 2023.
Cladding fire safety
It is our long held view that leaseholders should not have to pay for the cost of remediation and our programme started several years prior to signing the Government Building Safety pledge. We voluntarily signed the Government’s Building Safety Pledge for Developers in April 2022, the Welsh Government’s Pact in September 2022, and the commitment letter to the Scottish Accord in June 2023.
In total, we have made provisions amounting to £245 million, which remains our best estimate of the cost of our commitments to bring affected buildings in line with the standards as set out in the agreements reached with the governments.
We have identified 214 buildings that are within the scope of our provisions, around half of which we have either remediated, started work on or expect to commence work on this year. To date, we have fully completed 38 buildings with another nine remediated and awaiting paperwork. A further 19 buildings had works underway at the end of 2023.
We have a dedicated team in place to manage our remediation programme, progress our work on these buildings as quickly as possible and to ensure high-quality delivery. It is expected, given the size and nature of the projects, the multiple stakeholders involved and the availability of appropriately qualified consultants and contractors, that work will take around five years to complete in its entirety.
Capital allocation framework
Our priority is to maintain a strong balance sheet with low adjusted gearing. We use cash generated by the business to fund our investment in land and work in progress to support and drive future growth. Thereafter, our aim is to provide an attractive and reliable income stream to our shareholders throughout the cycle, including during a normal downturn, via an ordinary cash dividend linked to group net assets.
In line with our Ordinary Dividend Policy to return 7.5% of net assets, or at least £250 million annually, we have today announced a final ordinary dividend payment of 4.79 pence per share, which is subject to shareholder approval at the Annual General Meeting. With the 2023 interim dividend payment of 4.79 pence per share, the total ordinary dividend for the year is 9.58 pence per share or approximately £339 million.
Operational review
Our operational review focuses on the UK (unless stated otherwise) as the majority of metrics are not comparable in our Spanish business. There is a short summary of the Spanish business in the Group financial review. The financial review is presented at Group level, which includes Spain, unless otherwise indicated. Joint ventures are excluded from the operational review and are separated out in the Group financial review, unless stated otherwise.
Our Key Performance Indicators (KPIs)
Our key performance indicators align to our strategic cornerstones.
UK
2023
2022
Change
Land
Land cost as % of ASP on approvals
15.2%
19.0%
(3.8)ppt
Landbank years
c.7.7
c.6.0
28.3%
% of completions from strategically sourced land
45%
52%
(7.0) ppt
Operational excellence
Construction Quality Review (average score / 6)
4.89
4.81
1.7%
Average reportable items per inspection
0.28
0.32
(0.04)
Health and Safety Injury Incidence Rate (per 100,000 employees and contractors) rolling 12 months†***
151
166
(9.0)%
Employee engagement (annual survey)
93%
93%
–
Sustainability
Customer satisfaction 8-week score’Would you recommend?’
92%
90%
2.0 ppt
Customer satisfaction 9-month score’Would you recommend?’
77%
78%
(1.0) ppt
Reduction in operational carbon emissions intensity against our 2019 baseline
5%
15%
(10.0) ppt
N.B. The 8-week ‘would you recommend’ score for 2023 relates to customers who legally completed between October 2022 and September 2023, with the comparator relating to the same period 12 months prior. The 9-month ‘would you recommend’ score for 2023 relates to customers who legally completed between October 2021 and September 2022, with the comparator relating to the same period 12 months prior.
2023 sales, completions and pricing
Total Group completions (including joint ventures) were 10,848 (2022: 14,154). UK home completions (including joint ventures) were 10,438 (2022: 13,773), which included 2,388 affordable homes (2022: 2,920) equating to 23% of total completions (2022: 21%). Completions from joint ventures in the year were 82 (2022: 222). Our net private reservation rate for 2023 was 0.62 homes per outlet per week (2022: 0.68). The cancellation rate for the full year was 18% (2022: 18%).
UK average selling prices on private completions increased by 5.1% to £370k (2022: £352k) with the overall average selling price increasing by 3.5% to £324k (2022: £313k).
We estimate that market-led house price growth for our regional mix was c.1% for completions in the 12 months to 31 December 2023 (2022: c.8%).
Underlying build cost inflation in 2023 was c.8.5% (2022: c.8%). At the start of 2024, prevailing build cost inflation is running at around 1% and reduces to zero when taking into account the savings arising from our value improvement programme.
During 2023, we continued to focus on using the levers within our control to reduce cost including retendering of site phases and a full review of specification to identify savings without impacting health and safety, quality or customer satisfaction.
We ended the year with an order book valued at £1,772 million (31 December 2022: £1,941 million), excluding joint ventures, which represents 6,999 homes (31 December 2022: 7,499 homes). In the UK, we traded from an average of 238 outlets in 2023 (2022: 232). We ended the year with 237 outlets (31 December 2022: 259).
Land
We have a strong short term landbank of c.80k plots as at 31 December 2023 (31 December 2022: c.83k). During 2023 we acquired 1,572 plots (2022: 7,716) for the short term landbank. The average cost of land as a proportion of average selling price within the short term owned landbank remains low at 13.7% (2022: 14.0%).
The average selling price in the short term owned landbank in 2023 increased by 1.6% to £327k (2022: £322k). Our focus is on progressing planning in our short term landbank to open new outlets and secure delivery from our strategic land pipeline, transferring assets to the operational business.
As at 31 December 2023, we were building on, or due to start in the first quarter of 2024, on 99.6% of sites with implementable planning.
Our strong land position has benefitted from conversions from our strategic pipeline. We saw fewer opportunities to buy land at attractive valuations in 2023 and accordingly were highly selective in land acquisition with approvals at c.3k plots (2022: c.7k). The quality of our strategic pipeline of c.142k potential plots (31 December 2022: c.144k), continues to provide differentiation offering optionality and flexibility for the foreseeable future.
Our success in developing our strong strategic pipeline means that 54% of our short term landbank has originated from this source (2022: 50%). In the year, 45% of our completions were sourced from the strategic pipeline (2022: 52%).
During 2023, we converted a further c.8k plots from the strategic pipeline to the short term landbank (2022: c.4k plots) and added a net c.6k new potential plots to the strategic pipeline (2022: c.3k).
Despite continuing delays in plan-making across the country, our high-quality strategic land pipeline remains a key strength, both as an important input to the short term landbank and in providing an enhanced supply of land with greater control over the planning permissions we receive.
Central and local government
During 2024, the UK will be holding local and mayoral elections across the country, in addition to a General Election expected in the second half of the year. We welcome the recognition from both main political parties of the importance of housebuilding to economic growth and prosperity in the UK and continue to engage with the full range of political stakeholders at every level of the business.
The planning environment continues to be very challenging with delays and resource pressures impacting housing land supply. Amendments to the National Planning Policy Framework (NPPF) announced by the Government in December include positive measures to support improved quality of design and placemaking. However, other changes, including softening of the requirement to meet local planning targets, the relaxation of the soundness test for plan-making and the removal of the need for planning authorities to maintain a five-year supply of deliverable housing sites, could result in further delays and a shortfall in the supply of sites.
We continue to engage with industry, water authorities and central and local government on the issue of Nutrient Neutrality. We have established our internal Nutrient Working Group to help our regional businesses develop effective responses to this issue.
During 2023, Biodiversity Net Gain (BNG) requirements in England were published and came into effect in February 2024. We have published guidance and have held training sessions for our regional businesses to support them to manage the risks, costs and opportunities associated with the requirements. BNG was effectively introduced via changes to the NPPF in 2018 so we have factored the associated costs into our land acquisition since that time.
Customers
Customer service was a major focus for 2023 and we are delighted to have increased our Home Builders Federation (HBF) 8-week ‘would you recommend?’ score to 92% (2022: 90%) and retained our five star rating. However, we have not yet seen the same increase in our 9-month score which gives us insight into how customers feel about the homes and places we build over the longer term. Our score for 2023 was 77% (2022: 78%) and we will be prioritising improvements in this area in 2024.
We encourage customers to leave reviews on Trustpilot. At the end of 2023, with 8,950 reviews, we had a 4 out of 5 star rating (end of 2022: 4 out of 5) with a trust score of 3.9 out of 5 (2022: 3.9 out of 5).
We have prioritised working with all our partners to deliver excellent customer service and leverage our customer database capabilities, in order to build a strong order book. In a more challenging market, understanding our customers is more important than ever.
We are using the data insights provided by our fully integrated customer relationship management system to better support our customers and align our marketing strategy. Our systems enable us to identify potential new leads and be proactive with our current customers, with visibility of key customer and plot dates as well as enabling us to pre-empt potential issues.
Build quality
We continue to see improvements in our build quality as measured by the NHBC CQR score, which measures build quality at key build stages. In 2023, we scored an average of 4.89 (2022: 4.81) from a possible score of six. This compares with an industry benchmark group average score of 4.67.
We aim to further improve this by ensuring our quality assurance processes are embedded at every stage of the build. We clearly communicate our quality standards to subcontractors and invest in training, process improvements and regular inspections throughout the build process to ensure consistently high standards and prevent quality issues from occurring.
Placemaking
Good placemaking ensures our teams plan, design and deliver schemes that become successful and sustainable new communities, where our customers can enjoy a good quality of life.
Access to transport and local infrastructure and facilities contributes to the success of our schemes. In 2023, we contributed £405 million to local communities in which we build across the UK via planning obligations (2022: £455 million). This funded a range of infrastructure and facilities including affordable housing, green space, community facilities, commercial and leisure facilities, transport infrastructure, heritage buildings and public art. We aim to install infrastructure at an early stage of the build process to enhance our schemes and help the new community become established quickly. We also invest in public and community transport, walkways and cycle paths. In 2023, 70% of our UK completions were within 500 metres of a public transport node and 90% were within 1,000 metres.
Employees
Health and safety
Health and safety remains our number one priority in all markets and it is the first topic covered in every Board, Group Management Team (GMT) and regional management team meeting across the country. Building sites are inherently dangerous places and so it is essential that strict safety protocols are identified, embedded, monitored and enforced and a clear, consistent and disciplined approach to safety is paramount throughout the organisation. 98% of our employees agree that we take health and safety seriously (2022: 98%).
Our Annual Injury Incidence Rate (AIIR) for reportable injuries per 100,000 employees and contractors was 151 in 2023 (2022: 166), remaining well below both the HBF Home Builder Average AIIR of 241 and the Health and Safety Executive construction industry average AIIR of 296.
However, our commitment goes beyond industry benchmarks and we will continue to seek to improve this. Around 37% of accidents are slips, trips and falls. Our AIIR for major injuries per 100,000 employees and contractors was 65 in 2023 (2022: 68).
Culture and people
We have a strong culture at Taylor Wimpey which we and our employees are proud of. This is demonstrated in our latest employee survey with an overall employee engagement score of 93% (2022: 93%), with a 69% response rate. Our overarching value is ‘do the right thing’. Our Taylor Wimpey Inspire Awards recognise our employees who go above and beyond.
We are proud of how committed our employees are to the long term success of the Company and we seek feedback from and engagement with all employees. This includes regular email updates from the Chief Executive as well as updates from the GMT and other senior management.
It is important that management is accessible and visible so in addition to regular visits to the regional businesses we operate a National Employee Forum, National Young Person’s Forum and Local Employee Forums in our regional businesses, where employee representatives are able to feedback to and ask questions of members of the Board and other senior management directly.
During 2023, our voluntary employee turnover rate was 14.2% (2022: 17.7%).
We are pleased to report that Taylor Wimpey was once again recognised in the NHBC Pride in the Job Awards, achieving a total of 51 Quality Awards (2022: 62) and 13 Seal of Excellence Awards (2022: 15).
Skills
During 2023, we directly employed, on average, 4,618 people across the UK (2022: 5,140) and provided opportunities for, on average, a further 9.3k operatives (2022:11.1k) on our sites.
We recognise that building the skills of our current and future workforce is essential to address current and potential future skills gaps in our industry and subcontractor base. We continue to work closely with our partners, peer companies, industry associations and educational organisations to identify and address skills gaps and upskill our workforce and also share best practice within the industry bodies.
In 2023, we led a collaboration with five other major housebuilders to identify tangible ways in which we could address the skills shortage facing our sector, leading to the creation of a Sector Skills Plan.
We are proud of our approach to talent development at Taylor Wimpey. 45% of our regional management teams have been promoted internally and 62% of Site Managers were promoted from within the business.
We support our regional businesses to develop local links with colleges, universities and schools and encourage a diverse range of candidates to consider careers in housebuilding. In 2023, we strengthened our schools outreach programme working with a specialist company and developed our career convertors programme for ex-service personnel.
Equality, diversity and inclusion (ED&I)
We remain committed to creating a more diverse workforce and will publish our second Diversity and Inclusion Report in 2024. We have set quantitative targets to improve gender balance at all levels and to increase ethnic minority representation. Our targets are aspirational, but we believe that it is important to be ambitious and hold ourselves to account.
Our aim is to create a workplace where colleagues feel championed and supported regardless of their background and identity. By truly embracing our colleagues’ diverse perspectives we can deepen our understanding of our customers and stakeholders, enhance innovation and creative thinking and continue to drive the business forward and achieve success.
Investment in ED&I is a long term commitment for Taylor Wimpey, supported by our Board, and all levels of our leadership. Alongside our successes, we remain focused on the areas we still need to progress.
Our workforce is not yet reflective of the UK’s ethnic diversity. As at 31 December 2023, 5.7% of our employees were from a Black, Asian or other minority ethnic background (2022: 5.0%) and 3.7% at regional business management level (2022: 2.5%).
We had a gender mix of 66% male (2022: 67%) and 34% female (2022: 33%) across the Company. Our GMT was 33% female (2022: 38%) and our Board of Directors was 44% female (2022: 44%). Women in the GMT and direct reports to GMT rose to 28% (2022: 21%). The proportion of women in management roles across the Group rose to 38% from 30% in 2022.
We have more work to do in our regional business management teams to address gender balance. Women made up 27% of these roles in 2023 (2022: 31%). Whilst the employment freeze impacted our efforts in terms of graduate and trainee manager recruitment, our pipeline is strong, with females accounting for 62% of our graduate programme (2022: 64%).
In line with the Gender Pay Gap regulations, we calculated our 2023 gender pay gap based on data at the ‘snapshot date’ of 5 April 2023 and bonuses paid over the preceding 12 months. The calculations cover all staff employed by Taylor Wimpey UK Limited as at 5 April 2023. Our latest data shows that our mean gender pay gap was 6% in favour of men (2022: 2% in favour of women) and median pay gap 2% in favour of men (2022: 1% in favour of men).
The shift in our pay gap this year reflects a number of factors, including a reduction in the overall size of our workforce, more highly paid women than men leaving the business, and a reduction in commission due to market conditions which affects our sales function, which is 83% women. We will continue to focus on our programmes to increase female representation across different functions and levels of the business which will reduce the pay gap over time. More information is available online in our Diversity and Inclusion Report.
Charity partnerships
During 2023, we continued our partnership with our national charities as well as local charity partners across the UK. Our national partners are Youth Adventure Trust, Every Youth (previously End Youth Homelessness), Crisis, Magic Breakfast, and St Mungo’s. In total, during 2023, we donated and fundraised c.£1 million for registered charities (2022: c.£1 million). This included supporting St Mungo’s Construction Skills Training Centres to help people recovering from homelessness to gain new skills and find employment in the construction industry.
Sustainability
We recognise the importance of sustainability which is integrated throughout our business and has been incorporated as one of our four key cornerstones of strategy. Our approach encompasses environmental, social, economic and governance aspects.
Our Environment Strategy, Building a Better World, is our response to the environmental crisis and the physical and transitional risks posed by climate change. It sets out how we will play our part in creating a greener, healthier future for our customers, colleagues and communities, with ambitious targets up to 2030 focusing on climate change, increasing nature on our developments, cutting waste and improving resource efficiency.
Environment Strategy performance update
Our strategic objectives
Performance update
Climate changeAchieve our science-based carbon reduction target:- Reduce operational carbon emissions intensity by 36% by 2025 from a 2019 baseline- Reduce scope 3 emissions by 52.8% per 100 sqm of completed floor area from a 2019 base year (based on a reduction of 46.2% in absolute emissions against the base year). (New Target)
Since 2019, our operational emissions intensity has decreased by 5% and absolute operational emissions have fallen by 35%. We need to re-baseline our scope 3 footprint to reflect improvements to our measurement methodology. Once this is complete we will report progress against our scope 3 target. We were not able to complete this process in 2023 but plan to do so in 2024.
NatureIncrease natural habitats by 10% on new sites from 2023 and include our priority wildlife enhancements from 2021.
We have prepared our teams for the Biodiversity Net Gain (BNG) requirements which came into force in England in February 2024 with training and guidance for our land and planning, technical and strategic land teams. Some of our sites had already integrated a BNG approach ahead of 2024.We integrate nature enhancements on all suitable new sites and have started with hedgehog highways, bee bricks and bug hotels, bird and bat boxes. Since 2021, we have installed c.3.5k wildlife enhancements such as bee bricks, bug hotels, bird and bat boxes, to support native species and 279 sites included hedgehog highways.
Resources and wasteCut our waste intensity by 15% by 2025 and use more recycled materials.By 2022, publish a ‘Towards Zero Waste’ strategy for our sites.
The volume of waste produced in 2023 was 28% lower than in 2019, however our waste intensity increased by 9.8% against our 2019 baseline. We have launched our Towards Zero Waste Strategy and Action Plan to guide our approach to reducing waste.
N.B. At the time of publication, our waste data was undergoing audit by the Carbon Trust. We will publish the final audited figures on our website on completion of this process which could differ from those reported
A full summary of our Environmental Strategy and progress against targets will be published in our Annual Report and Accounts 2023 and Sustainability Summary and Data document 2023.
Climate change and net zero
Our approach to climate change aims to reduce emissions from our business and value chain, to manage the business risk, and to prepare for the impacts of climate change on our business, supply chain and customers. We take a science-based approach and aim to continually review and improve performance.
Our Net Zero Transition Plan commits us to reduce our climate footprint ahead of the UK’s 2050 target. The two key commitments in our strategy are:
– Net zero aligned in our operations by 2035 (scope 1 and 2).
– Net zero emissions across our value chain by 2045 (scope 1, 2 and 3) (comprising at least a 90% absolute reduction and neutralising residual emissions).
Our target was developed with the Carbon Trust in line with the requirements of the SBTi Corporate Net Zero Standard. Our net zero target for 2045 has been validated by the SBTi confirming that it is aligned with the SBTi’s 1.5°C mitigation pathways for reaching net zero by 2050 or sooner. This is currently the most ambitious designation available through the SBTi process. Our near term targets have also been validated by the SBTi. We have achieved certification to the Carbon Trust’s Route to Net Zero Standard, Advancing level, and are one of the first organisations to gain this new standard and the first housebuilder.
Our Net Zero Transition Plan comprises a four-stage roadmap detailing the actions we will take to achieve our overall commitment and supporting targets, incorporating both new and existing workstreams such as the construction of low and zero carbon ready homes, increasing the use of construction materials with lower embodied carbon including timber frame, transitioning to 100% renewable electricity, reducing or replacing fossil fuels and decarbonising our fleet.
In 2023, we reduced absolute operational emissions (scope 1 and 2) by 35% against our 2019 baseline, with operational emissions intensity falling by 5% over the same period. The reduction in absolute emissions is due to a reduction in the number of completions in 2023 as well as carbon reduction measures including our use of green electricity and hybrid generators, and decarbonisation of the UK’s national grid. Our emissions intensity increased by 12% year on year. While we completed fewer homes, there was only a small reduction in the number of outlets which meant we continued to use energy for site compounds, street lighting and pumping stations as well as our fixed facilities such as IT systems, offices and our logistics warehouse. We added a carbon reduction measure to the incentive schemes for our senior and regional leadership to help drive further progress.
We report against the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) in our Annual Report and Accounts. We also publish a Sustainability Summary and Data document with additional data including the Sustainability Accounting Standards Board (SASB) recommended disclosures for our sector.
Nature and resource efficiency
Our Environment Strategy targets include Biodiversity Net Gain requirements and go beyond regulation to deliver priority wildlife enhancements and wildlife friendly planting. Since 2021, we have installed c.3.5k wildlife enhancements such as bee bricks, bug hotels, bird boxes and bat boxes to support native species, and 279 sites included hedgehog highways.
Our Towards Zero Waste Strategy and action plan sets out a three year programme of action and capacity building in relation to resource use and waste across all stages of development. We are working with our suppliers to reduce waste from packaging, increase recycling and identify opportunities to increase use of sustainable and recycled materials.
ESG credentials
We participate in several global and sectoral benchmarks. We are a constituent of the Dow Jones Sustainability Europe Index and included in the S&P Sustainability Yearbook 2024. We are a part of FTSE4Good, have an AAA rating from MSCI and have received an ESG Risk Rating of Low from Sustainalytics and been included in its 2023 Top-Rated ESG Companies List. We are a member of Next Generation, the sustainability benchmark for UK housebuilders, and received a gold rating in 2023. We disclose our performance to CDP and received the following scores: CDP Climate Change A- (2022: A-), CDP Water B (2022: B), and CDP Forests C for deforestation and forest risk commodities (2022: B-).
Opportunities in green building
Over the next five years there will be significant changes to new build homes in the UK reflecting the UK’s climate change targets. Our target is to reduce emissions from customer homes in use by 75% by 2030, and we are testing a range of technologies and enhanced fabric standards to achieve this.
Following the phasing in of the new Parts L, F & O of the Building Regulations in England from June 2022, Parts L & F from November 2022 for Wales and Section 6 in Scotland from February 2023, our homes have enhanced fabric standards with additional features that include wastewater heat recovery systems, triple glazing and PV panels. Collectively, this will achieve a 31% reduction in carbon emissions compared with our previous specification.
We are also preparing for the phase-out of gas central heating systems from 2025 in England and Wales, and 2024 in Scotland. In 2023, at our future homes trial in Sudbury, Suffolk, we built five zero carbon ready and fully electric homes, fitted with a range of energy efficient and low carbon technologies. We believe this is the first trial of its type in a live construction site setting. The trial also produced industry leading interactive models which will help communicate the benefits of the new technology to customers.
Over 450 stakeholders have visited the site and we have shared best practice and our lessons learnt with SMEs. Feedback from the visits and a customer focus group showed that 81% of visitors felt that the use of low carbon technologies enhances the value of new homes.
Developing our own timber frame production
A key part of our strategy is to increase the use of timber frame in our construction to 30% of our production by 2030. Alongside efficiency benefits, use of timber frame can reduce embodied carbon in materials by around 15%, compared to traditional brick and block building techniques, supporting progress towards our net zero target.
In establishing our own facility, we aim to improve the visibility and reliability of our supply and to hold our own buffer stock which can mitigate future supply chain challenges. This year the facility will produce several hundred kits and, at full capacity will be expected to produce around 3,000 kits per year.
Taylor Wimpey Logistics (TWL)
TWL provides value added services to our regional businesses primarily by providing pre-kitted build packs of products when they are needed at each build-stage of production on site. This aids production, improves speed of build and significantly reduces site traffic. The benefits of TWL can be seen in our site deliveries. TWL supplies our regional businesses 99% on time in full (OTIF), compared to receiving its supplies 87% OTIF.
Group financial review
Income statement
Group revenue was £3,514.5 million in 2023 (2022: £4,419.9 million), with Group completions, excluding JVs, being 22.7% lower at 10,766 (2022: 13,932). The UK average selling price on private completions increased by 5.1% to £370k (2022: £352k), due to both house price inflation and positive mix. The increase in the total UK average selling price was 3.5% to £324k (2022: £313k) as a result of the greater proportion of affordable housing in 2023 (23%) than the prior year (2022: 21%), and a small increase in the UK average selling price on affordable housing to £168k (2022: £166k).
Group gross profit decreased to £716.5 million (2022: £1,132.4 million), the impact of build cost inflation and fixed build and selling costs being absorbed over fewer completions, resulting in a gross margin of 20.4% (2022: 25.6%).
Net operating expenses were £248.7 million (2022: £304.9 million), the comparative including £80.0 million of exceptional costs relating to the cladding fire safety provision following the signing of the Government’s Building Safety Pledge for Developers in April 2022, with no such amount in the current year. Excluding exceptional costs, the net operating expenses were £248.7 million (2022: £224.9 million), which was predominantly made up of administrative costs of £232.7 million (2022: £220.7 million). The increase in administrative costs over the comparative period was driven mainly by the non-recurring costs associated with the change programme announced at the start of the year and the annual pay review process, partially offset by a portion of the savings associated with the change programme. This resulted in a profit on ordinary activities before financing of £467.8 million (2022: £827.5 million), £467.8 million (2022: £907.5 million) excluding exceptional items.
Completions from joint ventures in the year were 82 (2022: 222). The lower level was a result of both the current market and the status of the joint ventures’ developments. As a result of the decreased joint venture completions, the share of joint ventures’ profit in the period was £2.4 million (2022: £15.9 million). When including this in the profit on ordinary activities before financing, the resulting operating profit was £470.2 million (2022: £923.4 million), delivering an operating profit margin of 13.4% (2022: 20.9%). The total order book value of joint ventures as at 31 December 2023 decreased to £6 million (31 December 2022: £26 million), representing nine homes (31 December 2022: 56).
The net finance income of £3.6 million (2022: £15.5 million expense) represents interest earned on deposits in the current year, more than offsetting the imputed interest on land acquired on deferred terms, bank interest and interest on the pension scheme.
Profit on ordinary activities before tax decreased to £473.8 million (2022: £827.9 million). The total tax charge for the period was £124.8 million (2022: £184.3 million), a rate of 26.3% (2022: 22.3%); the prior year included a credit of £17.6 million in respect of the exceptional charge recognised in that year and a £1.7 million credit arising from the remeasurement of the Group’s UK deferred tax assets following the introduction of the new Residential Property Developer Tax. The pre-exceptional tax charge was £124.8 million (2022: £201.9 million), representing an underlying tax rate of 26.3% (2022: 22.2%).
As a result, profit for the year was £349.0 million (2022: £643.6 million).
Basic earnings per share was 9.9 pence (2022: 18.1 pence). The adjusted basic earnings per share was 9.9 pence (2022: 19.8 pence).
Spain
Our Spanish business primarily sells second homes to European and other international customers, with a small proportion of sales being primary homes for Spanish occupiers. The business completed 410 homes (2022: 381) with the average selling price increasing to €400k (2022: €383k), due to regional mix. The total order book as at 31 December 2023 increased to 490 homes (31 December 2022: 448 homes).
Gross margin decreased to 28.1% (2022: 29.7%), due to timing variances on the recognition of sales commissions that had a positive impact on the prior year; this flowed through to an operating profit of £35.3 million (2022: £32.6 million) and an operating profit margin of 24.7% (2022: 26.2%).
The total plots in the landbank stood at 2,755 (31 December 2022: 2,544), with net operating assets** of £94.0 million (31 December 2022: £89.8 million).
Balance sheet
Net assets at 31 December 2023 increased marginally to £4,523.4 million (31 December 2022: £4,502.1 million), with net operating assets increasing by £204.2 million, 5.6%, to £3,823.7 million (31 December 2022: £3,619.5 million). Return on net operating assets** decreased to 12.6% (31 December 2022: 26.1%) primarily due to the reduction in Group operating profit in the year, and to a lesser extent by the increase in average net operating assets. Group net operating asset turn†* was 0.94 times (31 December 2022: 1.25), reflecting the decreased revenue in the year.
Land
Land as at 31 December 2023 decreased by £158.8 million in the year to £3,269.5 million as the highly selective approach to acquiring new land continued throughout the year, resulting in land creditors decreasing to £516.1 million (31 December 2022: £725.6 million). Included within the gross land creditor balance is £44.9 million of UK land overage commitments (31 December 2022: £43.0 million). £301.2 million of the land creditors is expected to be paid within 12 months and £214.9 million thereafter.
As at 31 December 2023, the UK short term landbank comprised 80,323 plots (31 December 2022: 82,830), with a net book value of £2.8 billion (31 December 2022: £2.9 billion). Short term owned land had a net book value of £2.7 billion (31 December 2022: £2.8 billion), representing 61,190 plots (31 December 2022: 63,088). The controlled short term landbank represented 19,133 plots (31 December 2022: 19,742).
The value of long term owned land decreased to £242 million (31 December 2022: £311 million), representing 34,319 plots (31 December 2022: 36,646), with a further total controlled strategic pipeline of 107,676 plots (31 December 2022: 107,739). Total potential revenue in the short and long term owned and controlled landbank was £61 billion (31 December 2022: £61 billion).
Work in progress (WIP)
Total WIP investment, excluding part exchange and other, increased to £1,871.0 million (31 December 2022: £1,725.9 million) due primarily to build cost inflation. This also resulted in average WIP per UK outlet to increase to £7.6 million (31 December 2022: £6.4 million).
Provisions and deferred tax
Provisions decreased to £286.7 million (31 December 2022: £290.3 million), primarily due to utilisation of the cladding fire safety provision (£16.8 million) as works have been carried out, which was offset by increases in other provisions which largely relate to remedial works on a limited number of sites around the Group.
Our net deferred tax asset of £23.4 million (31 December 2022: £26.0 million) relates to our pension deficit and UK and Spanish provisions that are tax deductible when the expenditure is incurred.
Pensions
As a result of the 31 December 2019 triennial valuation, a funding arrangement was agreed with the Trustee of the Taylor Wimpey Pension Scheme (TWPS) that committed the Group to paying up to £20.0 million per annum into an escrow account between April 2021 and March 2024. Following an initial contribution totalling £10.0 million, all further payments into the escrow account are subject to a quarterly funding test, effective from 30 September 2021. Should the TWPS Technical Provisions funding position at any quarter end be 100% or more, payments into the escrow account are suspended and would only restart should the funding subsequently fall below 98%. The funding test at 30 September 2021 showed a funding level of 103% and has remained above 100% since then and therefore escrow payments were suspended on, and from, 1 October 2021. The most recent funding test at 31 December 2023 showed a surplus of £54 million and a funding level of 103.3% and as a result no payment into escrow is due in the first quarter of 2024.
The Group continues to provide a contribution for Scheme expenses (£2.0 million per year) and also makes contributions via the Pension Funding Partnership (£5.1 million per year). Total Scheme contributions and expenses in the period were £7.1 million (2022: £7.1 million) with no further amounts paid into the escrow account (2022: nil). At 31 December 2023, the IAS 19 valuation of the Scheme was a surplus of £76.7 million (31 December 2022: £76.6 million). Due to the rules of the TWPS, any surplus cannot be recovered by the Group and therefore a deficit has been recognised on the balance sheet under IFRIC 14. The deficit is equal to the present value of the remaining committed payments under the 2019 triennial valuation. Retirement benefit obligations of £26.5 million at 31 December 2023 (31 December 2022: £29.9 million) comprise a defined benefit pension liability of £26.3 million (31 December 2022: £29.6 million) and a post-retirement healthcare liability of £0.2 million (31 December 2022: £0.3 million).
The Group continues to work closely with the Trustee in managing pension risks, including management of interest rate, inflation and longevity risks. The triennial valuation of the TWPS with a reference date of 31 December 2022 is in progress. Legislation requires that the valuation must be concluded by 31 March 2024.
Net cash and financing position
Net cash decreased to £677.9 million at 31 December 2023 from £863.8 million at 31 December 2022, due to the settlement of land creditors and payment of dividends in the year. Average net cash for the year was £606.6 million (2022: £595.7 million).
The decrease in completions caused cash generated from operations to decrease in the year and resulted in a cash conversion‡‡ of 61.4% of operating profit for the year ended 31 December 2023 (2022: 76.3%).
Net cash, combined with land creditors, resulted in an adjusted gearing‡‡‡‡ of (3.6)% (31 December 2022: (3.1)%).
At 31 December 2023, our committed borrowing facilities were £687 million, of which the revolving credit facility was undrawn throughout the year. In July 2023, the Group renewed its revolving credit facility, increasing it to £600 million with a maturity of July 2028 and the option to request an extension for two further years. In December 2022, the Group entered into an agreement to refinance the €100 million 2.02% senior loan notes due June 2023 with €100 million 5.08% senior loan notes due June 2030. The weighted average maturity of the committed borrowing facilities at 31 December 2023 was 4.8 years (31 December 2022: 1.9 years). The new revolving credit facility includes three sustainability-linked performance targets, which adjust the margin by a small amount. The three performance targets are: (1) reductions in scope 1 and 2 GHG emissions; (2) reductions in waste; and (3) reductions in carbon emissions of the homes we build.
Dividends
Subject to shareholder approval at the AGM scheduled for 23 April 2024, the 2023 final ordinary dividend of 4.79 pence per share will be paid on 10 May 2024 to shareholders on the register at the close of business on 2 April 2024 (2022 final dividend: 4.78 pence per share). In combination with the 2023 interim dividend of 4.79 pence per share, this gives total ordinary dividends for the year of 9.58 pence per share (2022 ordinary dividend: 9.40 pence per share).
The dividend will be paid as a cash dividend, and shareholders have the option to reinvest all of their dividend under the Dividend Re-Investment Plan (DRIP), details of which are available on our website www.taylorwimpey.co.uk/corporate.
Going concern
The Directors remain of the view that the Group’s financing arrangements and balance sheet strength provide both the necessary liquidity and covenant headroom to enable the Group to conduct its business for at least the next 12 months. Accordingly, the financial statements are prepared on a going concern basis, see Note 1 of the Condensed Consolidated Financial Statements for further details of the assessment performed.
Assessment of prospects
We consider the long term prospects of the Group in light of our business model. Our strategy to deliver sustainable value is achieved through delivering high-quality homes for our customers, in the locations where people want to live, whilst carefully managing our cost base and the Group’s balance sheet.
In assessing the Group’s prospects and long term viability, due consideration is given to:
• The Group’s current performance and the Group’s financing arrangements.
• The wider economic environment and mortgage market, as well as changes to government policies and regulations, including those influenced by sustainability, climate change and the environment, that could impact the Group’s business model.
• Strategy and business model flexibility, including customer dynamics and approach to land investment.
• Principal Risks associated with the Group’s strategy and business model, including those which have the most impact on our ability to remain in operation and meet our liabilities as they fall due.
Further detail is provided in our Annual Report and Accounts 2023.
Viability disclosure
In accordance with the 2018 UK Corporate Governance Code, the Directors and the senior management team have assessed the prospects and financial viability of the Group for a period longer than the 12 months required for the purpose of the ‘going concern’ assessment.
Time period
The Directors have assessed the viability of the Group over a five-year period, taking account of the Group’s current financial position, current market circumstances and the potential impact of the Principal and Emerging Risks facing the Group. The Directors have determined this as an appropriate period over which to assess the viability based on the following:
– It is aligned with the Group’s bottom-up five-year budgeting and forecasting cycle.
– Five years represents a reasonable estimate of the typical time between purchasing land, its progression through the planning cycle, building out the development and selling homes to customers from it.
Five years is also a reasonable period for consideration given the following broader external trends:
– The cyclical nature of the market in which the Group operates, which tends to follow the economic cycle.
– Consideration of the impact of government policy, planning regulations and the mortgage market.
– Long term supply of land, which is supported by our strategic land pipeline.
– Changes in technology and customer expectations.
Principal Risks
The Principal Risks, to which the Group are subject, have undergone a comprehensive review by the GMT and Board in the current year. Consideration is given to the risk likelihood based on the probability of occurrence and potential impact on our business, together with the effectiveness of mitigations.
The Directors identified the Principal Risks that have the most impact on the longer term prospects and viability of the Group, and as such these have been used in the modelling of a severe but plausible downside scenario, as:
· Government policies, regulations and planning (A).
· Mortgage availability and housing demand (B).
· Availability and costs of materials and subcontractors (C).
· Quality and reputation (F).
· Cyber security (I).
A range of sensitivity analyses for these risks together with likely mitigating actions that would be adopted in response to these circumstances were modelled, including a severe but plausible downside scenario in which the impacts were aggregated together.
The impact from ‘Natural resources and climate change’ (H) is not deemed to be material within the five-year forecast period, as costs associated with the regulatory changes have been included in the modelling.
Assessment of viability
The Group adopts a disciplined annual business planning process involving the management teams of the UK regional businesses and Spain, and the Group’s senior management, and is built on a bottom-up basis. This planning process covers a five-year period comprising a detailed budget for the next financial year, together with a forecast for the following four financial years (‘forecast’).
The financial planning process considers the Group’s profitability and Income Statement, Balance Sheet including landbank, gearing and debt covenants, cash flows and other key financial metrics over the forecast period. These financial forecasts are based on a number of key assumptions, the most important of which include:
– Timing and volume of legal completions of new homes sold, which includes annual production volumes and sales rates over the life of the individual developments.
– Average selling prices achieved.
– Build costs and cost of land acquisitions, including the impact from the Future Homes Standard.
– Working capital requirements.
– Capital repayment plan, where we have assumed the payment of the ordinary dividend in line with the current policy, which is a minimum of £250 million or 7.5% of the Group’s net assets per annum, throughout the period.
Stress testing our risk resilience
The assessment considers sensitivity analysis on a series of realistically possible, but severe and prolonged, changes to principal assumptions. In determining these we have included macroeconomic and industry-wide projections as well as matters specific to the Group.
The severe but plausible downside scenario reflects the aggregated impact of sensitivities, taking account of a further decline in customer confidence, disposable incomes and mortgage availability than has been experienced during 2023. To arrive at our stress test we have drawn on experience gained from managing the business through previous economic downturns and the COVID-19 pandemic.
We have applied the market dynamics encountered at those times, as well as the mitigations adopted, to our 2024 expectations in order to test the resilience of our business. As a result, we have stress tested our business against the following severe but plausible downside scenario, which can be attributed back to the Group’s Principal Risks that have been identified as having the most impact on the longer term prospects and viability of the Group.
Volume (Principal Risk: A, B, C, F) – a further decline in total volumes of 10% in 2024 from 2023 levels, before recovering back to 2023 levels by 2026.
Price (Principal Risk: B) – a reduction to current selling prices of 10%, remaining at these levels across 2024 and 2025 before recovering to 2023 levels by 2026.
One-off costs (Principal Risk: A, F, I) – a one-off exceptional charge and cash cost of £150 million for an unanticipated event, change in government regulations or financial penalty has been included in 2024.
Within the scenario, build costs are forecast to reduce across 2024 and 2025 with lower volumes reducing demand for materials and resources and land cost remaining broadly flat as the possible increase in availability due to lower volumes is offset by a restriction in supply. An estimate for the cost of the Future Homes Standard has been assumed.
The mitigating actions considered in the model include a continued reduction in land investment, a reduction in the level of production and work in progress held and further reducing our overhead base to reflect the lower volumes.
If this scenario were to occur, the Directors also have a range of additional options to maintain financial strength, including: a more severe reduction in land spend and work in progress, the sale of assets, reducing the dividend, and/or raising debt.
At 31 December 2023, the Group had a cash balance of £765 million and access to £600 million from a fully undrawn revolving credit facility, together totalling £1,365 million. The combination of both of these is sufficient to absorb the financial impact of each of the risks modelled in the stress and sensitivity analysis, individually and in aggregate.
Confirmation of viability
Based on the results of this analysis, the Directors have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the five-year period of their assessment.
Definitions
* Operating profit is defined as profit on ordinary activities before financing, exceptional items and tax, after share of results of joint ventures.
*† Operating profit margin is defined as operating profit divided by revenue.
** Return on net operating assets (RONOA) is defined as rolling 12 months’ operating profit divided by the average of the opening and closing net operating assets of the 12-month period, which is defined as net assets less net cash, excluding net taxation balances and accrued dividends.
† Tangible net assets per share is defined as net assets before any accrued dividends excluding intangible assets divided by the number of ordinary shares in issue at the end of the period.
†† Adjusted basic earnings per share represents earnings attributed to the shareholders of the parent, excluding exceptional items and tax on exceptional items, divided by the weighted average number of shares in issue during the period.
†* Net operating asset turn is defined as 12 months’ rolling total revenue divided by the average of opening and closing net operating assets of the 12-month period.
†*** The Annual Injury Incidence Rate (AIIR) is defined as the number of incidents per 100,000 employees and contractors, calculated on a rolling 12-month basis, where the number of employees and contractors is calculated using a monthly average over the same period.
‡ Net cash is defined as total cash less total borrowings.
‡‡ Cash conversion is defined as operating cash flow divided by operating profit or loss on a rolling 12-month basis, with operating cash flow defined as cash generated by operations (which is before income taxes paid, interest paid and payments related to exceptional charges).
‡‡‡‡ Adjusted gearing is defined as adjusted net debt divided by net assets. Adjusted net debt is defined as net cash less land creditors.
The Group uses Alternative Performance Measures (APMs) as important financial performance indicators to assess underlying performance of the Group. The APMs used are widely used industry measures and form the measurement basis of the strategic financial metrics (operating margin, return on net operating assets, and cash conversion). A portion of executive remuneration is also directly linked to some of the APMs. Definitions and reconciliations to the equivalent statutory measures are included in Note 14 of the Condensed Consolidated Financial Statements.
Shareholder information
The Company’s 2024 Annual General Meeting (AGM) will be held at 10:30am on 23 April 2024 in the Gerrards Suite at the Crowne Plaza Gerrards Cross, Oxford Road, Beaconsfield, HP9 2XE.
Copies of the Annual Report and Accounts 2023 will be available from 20 March 2024 on the Company’s website www.taylorwimpey.co.uk/corporate. Hard copy documents will be posted to shareholders who have elected to receive them and will also be available from our registered office at Gate House, Turnpike Road, High Wycombe, Buckinghamshire, HP12 3NR from 22 March 2023.
A copy of the Annual Report and Accounts 2023 will be submitted to the National Storage Mechanism and will be available for inspection at: https://data.fca.org.uk/#/nsm/nationalstoragemechanism
Directors’ responsibilities
The responsibility statement below has been prepared in connection with the full Annual Report and Accounts for the year ended 31 December 2023. Certain parts thereof are not included within this announcement.
We confirm to the best of our knowledge that:
· the Group financial statements, which have been prepared in accordance with UK-adopted international accounting standards, give a true and fair view of the assets, liabilities, financial position and profit of the Group; and
· the Strategic report includes a fair review of the development and performance of the business and the position of the Group and Company, together with a description of the Principal Risks and uncertainties that it faces.
This responsibility statement was approved by the Board of Directors on 27 February 2024 and is signed on its behalf by:
Renewables Infrastructure Group (LON:TRIG) has announced its Annual Results for the Company for the year ended 31 December 2023. The Annual Report and Accounts are available on the Company’s website: www.trig-ltd.com
Highlights
For the year ended 31 December 2023
Strong underlying performance with modest decline in valuation
– Robust pro-forma portfolio EBITDA of £610m1 (2022: £677m) reflecting strong achieved power prices.
– Healthy cash flow generation with dividend cover of 1.6x (2022:1.5x); or 2.8x (2022: 2.6x) before the repayment of £219m of project-level debt.
– 6.9p reduction in NAV per share2 to 127.7p (31 December 2022: 134.6p) driven by lower power price forwards and higher valuation discount rates.
– Power prices trended down during 2023 following reductions in gas prices. Since the balance sheet date, forwards for 2024-2026 have further reduced by c. 20%. Over a five-year horizon, a 10% reduction in power prices would reduce the Company’s NAV by 2.2p/share4.
– The weighted average Portfolio Valuation3 discount rate as at 31 December 2023 has increased to 8.1% (31 December 2022: 7.2%), reflecting the higher return environment.
Disciplined capital allocation
– Reduction in project-level gearing to 37% (31 December 2022: 38%), following debt repayment of £219m. Project-level debt is fixed rate and amortises over the subsidy periods.
– Retained cashflows and disposals helped reduce Revolving Credit Facility (“RCF”) drawings by £34m. In 2024, the Company expects to be able to reduce RCF drawings to about £150m.
– Construction projects completed, with 301MW of capacity delivered during the year across five projects. All construction spend in 2023 was funded from retained cash flows.
– 2024 dividend target5 set at 7.47p/share, a 4% increase on 2023’s achieved dividend of 7.18p/share, balancing the strength of the Company’s inflation-correlated cash flows with moderating power prices and inflation.
Opportunity for capital growth
– TRIG has an exclusive development pipeline of 1GW by 2030 from repowering, co-location & extensions and new site developments.
– Investing in development activities offers strong prospective risk-adjusted returns, significantly ahead of the portfolio weighted average discount rate, and provides optionality to take projects forward through build and into operations.
– Investment decisions consider an elevated return hurdle rate, which includes the return offered by the buying back the Company’s own shares, portfolio construction and the Company’s funding position.
– TRIG has the potential to fund the delivery of the development pipeline without the need for equity issuance, through retained cash, divestment proceeds and structural debt capacity. Company’s durable balance sheet and amortising debt is projected to see portfolio gearing reduce to 23% by 2030 on the current portfolio, whilst 38% of the portfolio remains ungeared.
– Operational and technical enhancements deliver capital growth through improving the generation output of TRIG’s existing portfolio. Examples include AeroUp, which has delivered a 5% energy yield increase at the initial trial site.
1 The unaudited EBITDA figures presented are based upon the aggregation of SPV-level revenues and operating costs measured on a consistent basis across regions.
2 The NAV per share as at 31 December 2023 is calculated on the basis of the 2,484,343,784 Ordinary Shares in issue as at 31 December 2023 (see Note 11 of TRIG’s 2023 Annual Report) plus a further 800,776 Ordinary shares to be issued to the Managers in relation to part payment of the Managers fee for H2 2023 (see Note 18 of TRIG’s 2023 Annual Report).
3 On an Expanded basis. Please refer to the Financial Review section of TRIG’s 2023 Annual Report for an explanation of the Expanded basis.
4 Sensitivity as set out in the Valuation of the Portfolio section of the 2023 Annual Report
5 This is a target only and not a profit forecast. There can be no assurance that this target will be met.
Richard Morse, Chairman of TRIG, said:
“It has been an important year in the Company’s history. The underlying performance of the Company is strong and cash generation has never been healthier, whilst the Managers have been working hard to create additional value from within portfolio. This is against a challenging backdrop for the share price, with tighter monetary conditions contributing to a decline in the Company’s valuation and a sustained discount to net asset value as market return requirements have increased. If the interest rate cycle continues as expected, the coming year is showing signs of a more benign macroeconomic environment for the Company.
It is also an important year from a personnel perspective. After a decade at the helm of TRIG’s investment management team, Richard Crawford is retiring from full time duties in the summer and will be handing over the reins to Minesh Shah at InfraRed with effect from 1st July 2024. My Board colleagues and I are extremely grateful for Richard’s contribution to TRIG’s success over all these years and we’re very pleased to continue with Minesh, with whom the Board has worked closely over the last few years. We are pleased that TRIG will continue to benefit from Richard’s long history with the Company as he remains a key part of TRIG’s investment and advisory committees.”
The Renewables Infrastructure Group (LON: TRIG) is a leading London-listed renewable energy infrastructure investment company. The Company seeks to provide shareholders with an attractive long-term, income-based return with a positive correlation to inflation by focusing on strong cash generation across a diversified portfolio of predominantly operating projects.
TRIG is invested in a portfolio of wind, solar and battery storage projects across six countries in Europe with aggregate net generating capacity of over 2.8GW; enough renewable power for the equivalent of 1.9 million homes and to avoid 2.3 million tonnes of carbon emissions per annum. TRIG is seeking further suitable investment opportunities which fit its stated Investment Policy.
Performance at month end with net income reinvested
OneMonth
ThreeMonths
SixMonths
OneYear
ThreeYears
Five Years
Net asset value
0.8
9.2
4.0
0.6
35.9
55.2
Share price
-1.8
8.3
-0.2
-3.1
29.1
37.0
Russell 1000 Value Index
0.2
8.3
3.6
2.6
40.5
61.0
At month end
Net asset value – capital only:
208.42p
Net asset value – cum income:
209.18p
Share price:
186.50p
Discount to cum income NAV:
10.8%
Net yield1:
4.3%
Total assets including current year revenue:
£165.7m
Net gearing:
0.4%
Ordinary shares in issue2:
79,208,241
Ongoing charges3:
1.03%
1 Based on four quarterly dividends of 2.00p per share declared on 22 March 2023, 11 May 2023, 3 August 2023 and 2 November 2023 for the year ended 31 October 2023 and based on the share price as at close of business on 31 January 2024.
² Excluding 21,153,064 ordinary shares held in treasury.
³ The Company’s ongoing charges calculated as a percentage of average daily net assets and using the management fee and all other operating expenses excluding finance costs, direct transaction costs, custody transaction charges, VAT recovered, taxation and certain non-recurring items for the year ended 31 October 2023.
Sector Analysis
Total Assets (%)
Financials
20.1
Health Care
18.1
Information Technology
13.2
Consumer Discretionary
10.7
Industrials
9.6
Energy
7.7
Consumer Staples
6.8
Communication Services
5.0
Materials
4.1
Utilities
3.3
Real Estate
1.7
Net Current Liabilities
-0.3
—–
100.0
=====
Country Analysis
Total Assets (%)
United States
89.5
United Kingdom
4.1
France
2.2
Australia
1.7
Switzerland
1.0
Japan
0.9
Canada
0.9
Net Current Liabilities
–0.3
—–
100.0
=====
Top 10 Holdings
Country
% Total Assets
Citigroup
United States
3.3
Verizon Communications
United States
3.1
Cisco Systems
United States
2.8
American International
United States
2.8
Kraft Heinz
United States
2.7
Willis Towers Watson
United States
2.6
Shell
United Kingdom
2.6
Sony
United States
2.6
Cardinal Health
United States
2.5
Baxter International
United States
2.3
Tony DeSpirito, David Zhao and Lisa Yang, representing the Investment Manager, noted:
For the one-month period ended 31 January 2024, the Company’s NAV increased by 0.8% and the share price fell by 1.8% (all in sterling). The Company’s reference index, the Russell 1000 Value Index, returned +0.2% for the period.
The largest contributor to relative performance stemmed from stock selection in industrials; specifically selection decisions in electrical equipment boosted relative performance. Selection decisions in communication services also boosted relative performance, with investment decisions in diversified telecom proving beneficial. Other modest contributors during the period at the sector level included selection decisions in both information technology and consumer discretionary.
The largest detractor from relative performance stemmed from stock selection in consumer staples; notably at the industry level stock selection in consumer staples distribution and retail was costly to relative performance. Selection decisions in energy detracted from relative performance, specifically in oil, gas and consumables. Other modest detractors during the period included stock selection in health care at the sector level and life sciences tools and services at the industry level.
Transactions
During the month, the portfolio’s largest purchases included Westinghouse Air Brake Technologies, PG&E and Sensata Tech. The portfolio exited its position in Transunion, First American Financial and Mattel.
Positioning
As of the period end, the Company’s largest overweight positions relative to the reference index were in the consumer discretionary, health care and financials sectors. The Company’s largest underweight positions relative to the reference index were in the industrials, real estate and utilities sectors.
Derwent London Plc (LON:DLN) have published results today for the year ended 31 December 2023.
Paul Williams, Chief Executive of Derwent London, said:
“We had a strong year for leasing in 2023, achieving over £28m of new rent, on average 8% ahead of ERV. Today we are upgrading our rental growth guidance for 2024. Despite macro uncertainty, businesses are prioritising quality, amenity and sustainability, supporting good demand for the right product in the right location. This plays well to our strengths and reflects London’s diverse and robust occupational market, particularly in the West End. After a year of substantial outward yield movement, investment opportunities are starting to emerge and our balance sheet positions us well.“
Letting activity
· Lettings in 2023 of £28.4m compared to £9.8m in 2022
o 8.0% above December 2022 ERV
o Activity spread across our villages
o Includes £16.0m of pre-lets at 25 Baker Street W1, 13.4% above ERV; office element now 75% pre-let
· 2024 lettings to date of £1.8m, with a further £2.7m under offer
Financial highlights
· EPRA net tangible assets1 (NTA) 3,129p per share, down 13.8% from 3,632p at 31 December 2022
· Gross rental income of £212.8m, up 2.8% from £207.0m in 2022; +1.7% like-for-like
· EPRA earnings1 £114.5m or 102.0p per share, down 4.6p from 106.6p in 2022, H2 6% higher than H1
· IFRS loss before tax £475.9m (2022: £279.5m loss)
· Total return -11.7% from -6.3% in 2022
· Full year dividend of 79.5p, up 1.3% from 78.5p
· Interest cover of 4.1 times and EPRA loan-to-value ratio of 27.9%
· Net debt increased to £1,356.8m (December 2022: £1,257.2m); undrawn facilities and cash2 of £480m
Portfolio highlights
· EPRA vacancy reduced to 4.0% (December 2022: 6.4%)
· £41.5m of asset management transactions, 1.7% above December 2022 ERV
· Portfolio valued at £4.9bn, an underlying decline of 10.6% (2022: -6.8%)
o Development valuations up 8.1% principally due to pre-letting activity at 25 Baker Street W1
o West End properties outperformed, with values down 8.6%
· Portfolio valuation ERV growth of 2.1%, towards the top end of guidance
· True equivalent yield of 5.55% compared to 4.88% at December 2022
· Total property return -7.3% outperforming our industry benchmark3 at -7.9%
· Two on-site major developments totalling 437,000 sq ft on programme for completion in 2025
o 25 Baker Street W1 (298,000 sq ft) and Network W1 (139,000 sq ft)
Outlook
· Our upgraded 2024 guidance is for average ERVs across our portfolio to increase by 2% to 5%
· High quality space to remain in demand, with better buildings to outperform
· Inflation significantly reduced and expected to fall further; yields to respond
1 Explanations of how EPRA figures are derived from IFRS are shown in note 25
2 Excludes restricted cash
3 MSCI Central London Offices Quarterly Index
Webcast and conference call
There will be a live webcast together with a conference call for investors and analysts at 09:00 GMT today.
To participate in the call or to access the webcast, please register at www.derwentlondon.com. A recording of the webcast will also be made available following the event on the Derwent London website.
CHAIRMAN’S STATEMENT
· A year of operational progress against a challenging market backdrop· Strong balance sheet and long-term strategy means we are well positioned as opportunities emerge· Annual dividend 79.5p, up 1.3%; uninterrupted annual growth since 2007
Our long-term strategic approach has ensured that the Group remains well-positioned against an uncertain and challenging backdrop. While our total property return was negative in 2023, we outperformed the MSCI IPD Central London Office benchmark. Our total return was -11.7%, taking the NTA to 3,129p. The Group’s balance sheet remains robust with EPRA LTV of 27.9% and interest cover of 4.1 times, giving us capacity to continue investing in our pipeline.
The occupational market continues to polarise with good rental growth prospects for high quality, sustainable buildings where there is deep demand and constrained supply, particularly in the West End where 72% of our portfolio is located. In 2023, we agreed £28.4m of new leases, on average 8% ahead of December 2022 ERV, which includes pre-letting 75% of the offices at 25 Baker Street W1 ahead of completion in H1 2025. This gives us confidence in the letting prospects for our Network W1 project as well as the next phase of our development pipeline.
The London office investment market has been adversely impacted by higher inflation and the subsequent upward movement in interest rates. We expect to see a rise in the number of motivated sellers, and we have the balance sheet capacity to explore these opportunities as they emerge.
Our experienced management team has a strong track record of value creation across the economic cycle. We recognise the importance of investing in our people and planning ahead. Over the last three years, there have been eight promotions to the Executive Committee with representation from across the business. This diversity of skills and expertise helps position us well as the macroeconomic environment starts to recover.
The Group has been impacted by global inflationary pressures and we have also invested more in the amenity we offer our occupiers. As a result, EPRA EPS is down slightly year-on-year to 102.0p. However, we have substantial reversionary potential from a combination of on-site projects (requiring £223m of capex to complete), underlying rental uplifts and vacant space. In addition, we expect only a modest impact on our cost of debt from near-term refinancing.
I am therefore pleased to confirm a 1.3% increase in the full year dividend to 79.5p in line with our progressive and well covered dividend policy, with the final dividend raised by 0.5p to 55.0p. It will be paid on 31 May 2024 to shareholders on the register of members at 26 April 2024. EPRA earnings covered the 2023 interim and final dividends 1.28 times.
We greatly value and nurture relationships with stakeholders, including the local communities in which we operate. Working alongside external consultants, we have strengthened our commitment to social value, our primary goals and how they will be measured and achieved. At the end of 2023, we published our new Social Value Strategic Framework.
After nine years on the Board, Claudia Arney will step down at the 2024 AGM from her position as a Non-Executive Director of the Company and Chair of the Remuneration Committee. The Board thanks Claudia for her significant contribution to the business and wishes her every success in the future. Sanjeev Sharma, currently a Non-Executive Director and member of the Remuneration Committee, will become Remuneration Committee Chair.
PwC was appointed as the Group’s external auditor in 2014 and, in accordance with the Competition and Markets Authority’s (CMA) requirements, we conducted a competitive tender in 2023. Following a comprehensive process, the Board has approved PwC’s ongoing appointment, subject to annual shareholder approval.
Despite the challenging global environment over the last few years, the Group is well positioned with an outstanding central London portfolio and a strong team.
CEO STATEMENT
· Strong leasing activity of £28.4m, on average 8% above December 2022 ERV· LTV remains amongst lowest in UK REIT sector, despite 10.6% decline in capital values in 2023· 2023 ERV growth of 2.1%, towards top end of guidance range· 2024 guidance:o ERVs to increase 2% to 5%o Inflation significantly reduced and expected to fall further; yields to respond
Overview
London is maintaining its long-term reputation as a world-leading city with broad appeal to a diverse range of businesses and investors despite the ongoing macroeconomic challenges. Following its peak at 11.1% in October 2022, CPI inflation declined significantly through the course of 2023, ending the year at 4.0%. The hike in UK interest rates appears to have concluded, with base rate on hold at 5.25% since August. On the assumption that inflation slows further towards the 2% target, the consensus expectation is for a series of base rate cuts in 2024 and beyond.
Market interest rates have responded positively to slowing inflation but remain volatile. The yield on the 10-year UK gilt, which started 2023 at 3.7%, ended the year at 3.6%, having peaked at 4.7% in August. However, since the start of 2024, it has increased again to 4.1%. This reflects both a small rise in inflation in December and more cautious ‘higher for longer’ commentary from central banks.
Combined with the higher cost and restricted availability of debt, sentiment in the investment market was subdued in 2023. Meanwhile, the occupational market has remained strong for the right product in the right location. Businesses are focused on their longer-term real estate strategies and the flight to quality is continuing. With constrained availability and a thin forward development pipeline, rents for the best space are rising.
Strong operational performance
We enjoyed an excellent year for leasing in 2023 with £28.4m of new rent agreed, on average 8.0% above December 2022 ERV. This included 155,500 sq ft of pre-lets at 25 Baker Street W1, 13.4% ahead of ERV as well as 19 ‘Furnished + Flexible’ units leased at an average 9.2% premium to the adjusted ERV.
Key transactions in the year include:
· 25 Baker Street W1: Two pre-lets – to PIMCO and Moelis – at our on-site major development which completes in H1 2025, with total rent of £16.0m; the offices are now 75% pre-let; and
· The Featherstone Building EC1: Four further lettings with combined rent of £4.3m in line with ERV; the building is now 80% leased, with further occupier interest.
Since the start of 2024, new leases totalling £1.8m have been signed, 5.6% ahead of December 2023 ERV, with a further £2.7m of space under offer.
Lease length is an important indicator for the Group. At year end, our ‘topped-up’ WAULT (to break) was 7.4 years (2022: 7.2 years). Overall, our EPRA vacancy rate reduced 2.4% to 4.0% as we leased space across the portfolio in both the West End and the City Borders.
Property valuations
Underlying capital values reduced by a further 10.6% in 2023 and we believe valuations are now approaching this cycle’s lows. The decline in capital values has been predominantly yield driven with our equivalent yield up 67bp to 5.55% in the year. By comparison, our valuation ERV was up 2.1% in the year, towards the top end of our guidance range for 2023 of 0% to +3%. Capital values across the UK real estate sector have declined, with the MSCI Central London Office index down 11.1% and the MSCI UK All Property index down 5.6% in the year.
This headline movement masks a broad range of outcomes, with our higher quality buildings and developments delivering a more resilient performance, supporting the nuanced change we made to our strategy in 2021 to retain our better buildings for longer. The value of our on-site developments increased 8.1% in 2023 and properties valued at ≥£1,500 psf, generally the higher quality buildings, reduced by 7.1%, which is a 350bp outperformance of the portfolio average. By comparison, buildings valued at <£1,000 psf (our ‘raw material’ for future regeneration) fell 14.3%. Impacted by these valuation movements, EPRA NTA per share declined 13.8% to 3,129p.
Our portfolio delivered a total property return of -7.3% compared to the MSCI Central London Office index of -7.9%.
Derwent’s differentiators
At Derwent London, we have long recognised the importance of providing best-in-class space to maximise the appeal of our buildings to occupiers. Modern offices need to be high quality and well-designed to inspire innovation, collaboration and collective productivity. Good design has always been in our DNA, but in today’s market this increasingly extends beyond the individual building to our broader portfolio approach, which includes a commitment to service and amenity as well as net zero carbon ambitions.
With over 50,000 people estimated to work in our buildings, we focus on the end user. Each individual is able to benefit from the full DL/Member offering which provides amenity and service to the whole London portfolio. This includes access to our two strategically located Member Lounges in Fitzrovia (DL/78) and Old Street (the recently opened DL/28), the App and the Experience team.
Given every business has its own unique space requirements, we design our buildings to be as adaptable as possible – ‘long-life, low carbon, intelligent’ – which increases tenant demand while also reducing obsolescence. Our buildings are designed to be desirable over the long-term. We offer a range of leasing options, from large-scale HQ space on long leases to smaller ‘Furnished + Flexible’ units on shorter leases.
Taken together, and as the bifurcation between prime and secondary properties continues to evolve, we expect this relationship-driven approach to result in reduced vacancy, shorter void periods, increased occupier retention and strong rental growth.
London office market
The vacancy rate across central London rose 1.7% in 2023 to 9.1%. However, averages do not show the full picture. West End vacancy is 4.4%, compared to the City at 11.9% and Docklands at 16.7%, while availability of new space rose more slowly than secondary space. We believe that the supply of new buildings has rarely been more constrained, particularly in the West End, which helps to explain why rents here are rising.
According to CBRE, the amount of space currently under construction across London is relatively low with 12.9m sq ft due to complete by 2027, of which 7.9m sq ft (62%) is currently available. Compared to long-term take-up, this equates to eight months’ supply (and 11 months’ supply in the West End) of new space being delivered over the coming four years.
London has broad appeal to a diverse range of businesses, both by sector and by size. We are encouraged by the substantial 74% increase in overall active demand to 9.9m sq ft at the end of 2023, which indicates a rapid rise in interest from a range of sectors.
Take-up in the year was 16% lower when compared to the prior year at 10.5m sq ft, with the West End down 27% at 3.6m sq ft. The City, however, benefitted from a number of high profile pre-lets, including HSBC and Clifford Chance returning from Docklands to more central locations, and year-on-year take-up was in line at 5.3m sq ft. Activity in 2023 was dominated by the banking & finance (31%) and business services (19%) sectors.
Economic prospects are an important demand driver for offices. Growth in jobs, population and the economy, alongside inflation prospects all have an impact. According to CBRE, following a boom in office job creation over the last three years (+415k new jobs), a further c.165k (net) positions are expected to be created over the next five years and there is a continuing increase in the number of companies requiring staff to come back to the office. The demand outlook for London offices remains positive. London real GDP growth of 1-2% pa is forecast to continue outperforming the UK and there is an ongoing increase in the population of c.0.9m to 10.6m by 2035.
Strong balance sheet and capital allocation
The Group aims, over the long-term, to operate with modest leverage and a simple financial structure to ensure resilience through the economic cycle. We believe that having a strong balance sheet has rarely been more important than at present.
We are well positioned. Our EPRA LTV ratio is 27.9% (December 2022: 23.9%) and interest cover is both strong and stable at 4.1 times (2022: 4.2 times). At the end of 2023, 98% of our debt was either fixed or hedged, with an average interest rate on a cash basis of 3.17%. In addition, we have limited refinancing in 2024 and 2025, with an £83m 3.99% secured facility maturing in October 2024 and a £175m 1.5% convertible bond maturing in June 2025.
Over the medium-term, we seek to balance disposals against capital expenditure and acquisitions. This has helped to contain the increase in our net debt and ensure we can continue to invest into our regeneration pipeline, which includes the acquisition of the exciting Old Street Quarter EC1 project which is likely to complete from 2027.
With the investment market slowdown seen in 2023, we completed a lower than normal £66m of disposals. This compared to £173m of acquisitions and capital expenditure on major projects, smaller refurbishments and our second Member Lounge, DL/28.
Sustainability
Our plans for an 18.4 MW solar park in Scotland came a step closer with planning consent now received. We expect green electricity generation to commence on completion in 2025, providing c.40% of the electricity needs of our London managed portfolio. We are also exploring other sustainability-related opportunities across our Scottish portfolio.
In accordance with our stated ambition, we rebased our SBTi-verified targets to align with a 1.5°C climate scenario. Our revised target commits us to a 42% reduction in Scope 1 & 2 carbon emissions by 2030 from our 2022 baseline. We are committed to managing our carbon footprint and building in climate resilience while collaborating across the industry and with our supply chain.
Our strong team
We were pleased to recognise the achievements of our employees, with 18 internal promotions in 2023 which included two promotions to the Executive Committee: Richard Dean, Director of Investment, joined the Committee from 1 July 2023 and Matt Cook, Head of Digital Innovation & Technology, with effect from 1 January 2024. We were also delighted to be recognised externally, being included on The Sunday Times ‘Best Places to Work 2023’ list where we scored highly in many categories against industry and global comparisons, and also winning ‘Employer of the Year’ at both the Westminster Business Council and EG (Estates Gazette) Awards.
Outlook and guidance
We have previously anticipated an acceleration in rental growth for the best buildings. Occupier demand continues to focus on well-located space with best-in-class amenity and service, while existing supply and the development pipeline are restricted. We expect these conditions to become increasingly favourable through 2024 and as such increase our portfolio rental guidance for the year to a range of 2% to 5%, with our better buildings to outperform.
Over the last few years, we have reduced our exposure to buildings which can no longer meet evolving occupier requirements and have invested significant capital upgrading our remaining portfolio. With inflation continuing to reduce and the cost and availability of finance improving, property yields are expected to respond, following a period of substantial increases. We believe we are now approaching the end of this yield cycle, with transaction volumes expected to increase and for opportunities to emerge.
CENTRAL LONDON OFFICE MARKET
· Take-up 10.5m sq ft; acceleration in Q4 to 3.4m sq ft (Q1 to Q3 average: 2.4m sq ft)· Space under offer up 19% to 3.0m sq ft; active demand up 74% to 9.9m sq ft· Vacancy elevated at 9.1%: West End remains tight at 4.4%· Development pipeline 38% pre-let; eight months’ speculative supply· Prime yields in West End at 4.0% (up 25bp in 2023) compared to the City at 5.75% (up 125bp)· Investment transactions £5.2bn, 59% below 10-year average
Overview and macro backdrop
The global economy has experienced significant uncertainty and volatility since 2020. The resulting supply chain disruption and global conflicts led to a rise in inflation which started three years ago and peaked in late 2022. In response, there has been a substantial increase in benchmark interest rates around the world, leading to a significant hike in the cost of debt and reduced availability. For the commercial property sector, this has resulted in a material adjustment in property yields.
Softening inflation data through 2023, however, has raised market expectations that the interest rate cycle has peaked, with cuts now forecast in 2024. This is feeding through into lower market interest rates and narrower credit spreads and there are signs of improving credit availability.
Whilst GDP growth in the UK has plateaued for the time being, London is outperforming, with economic growth to 2028 forecast to average c.2% pa. Combined with a positive outlook for both jobs (c.165k net new jobs to be created by 2028 according to CBRE) and population growth (c.0.9m increase by 2035 to 10.6m according to Macrotrends), the macro demand drivers for London offices are encouragingly robust.
In line with long-term trends, foreign direct investment (FDI) into London remains higher than other core global cities including Paris, New York and Hong Kong. Throughout 2023 there was an increase in the number of FDI projects to 103 in London which compares to a reduction in other global cities.
In a continuation of the trend seen over the last few years, businesses are becoming increasingly strategic around their real estate planning and more selective in both the building and the landlord they choose. Against a backdrop of restricted supply of high quality space, landlords that provide great space in the right location, with best in class amenity and service are seeing attractive rental growth as the flight to quality continues. According to Knight Frank, the office now fulfils five key purposes in the post-Covid era, underlining its importance: talent attraction and retention; increased collaboration; cost management and mitigation; corporate brand and image; and employee wellbeing.
London’s broad appeal to a diverse range of businesses continues to serve it well. It is not overly dependent on any one sector and the diversity of scale and occupational requirements supports demand across a wide spectrum, from large global HQs let on long leases to space for SMEs on more flexible terms. In recent years, there has been a convergence in the space needs across business sectors, as the importance of quality has risen and there is a more unified approach to what an office needs to provide.
Location and connectivity have also been important factors in the market and data from a number of agents shows a clear preference among occupiers for centrally located offices. Over the last few years, a significant number of businesses have returned to London’s core markets. The trend is widely expected to continue.
Over the course of 2023, there has been a shift in the number of companies issuing clearer guidance to employees around working policies. A recent study of 400 global companies by VTS found that over the last six months, 60% of European respondents have either ‘mandated’ or ‘encouraged’ more time in the office. Looking forward to 2024, a similar pattern is seen, with 52% planning to further ‘mandate’ or ‘encourage’ more time in the office. On a global basis, only 10% of respondents have adopted a remote-first approach and 1% of companies have gone fully remote.
Occupational market
London is not a homogenous market. Rather, it comprises a series of sub-markets, each with its own characteristics and nuances – it is a tale of three cities. This is particularly apparent when looking at vacancy levels. Overall, central London vacancy is elevated at 9.1% against the 10-year average (10YA) of 5.2%. This compares to the West End at 4.4% (10YA: 3.4%), City at 11.9% (10YA: 6.7%) and Docklands at 16.7% (10YA: 8.9%).
While market dynamics vary by location, there is also a difference in occupier demand between prime and secondary space. As a result, the composition of vacancy is more relevant than the headline. Across London, there is 26.1m sq ft of available space, of which 18.1m sq ft (69%) is secondhand, 4.0m sq ft is newly completed space and 4.0m sq ft is under construction. Applying this to the market, ‘competing supply’ for our high quality portfolio is meaningfully lower than the headlines suggest, supporting our positive outlook for rental growth.
According to CBRE, the pull back by Big Tech impacted take-up in 2023, which was down 16% relative to 2022 at 10.5m sq ft. West End take-up was down 27% to 3.6m sq ft, against a supply-constrained backdrop, but City take-up was up 1% to 5.3m sq ft, buoyed by several large pre-lets, including HSBC and Clifford Chance, both of whom will vacate their existing space in Canary Wharf. However, active demand is high, rising from 5.7m sq ft at December 2022 to 9.9m sq ft at December 2023 suggesting substantial pent-up requirements.
Another important market indicator is the development pipeline, which remains restricted as a result of increases in construction and finance costs, coupled with a more difficult planning backdrop. Across central London, CBRE estimates 12.9m sq ft of space will complete between 2024 and 2027, 31% lower than the total over the preceding four years. 5.0m sq ft (38%) is pre-let and 7.9m sq ft is speculative. Relative to average take-up over the last 10 years (12.1m sq ft), speculative completions equate to just eight months’ supply.
Investment market
Investment activity was subdued in 2023 with investor sentiment impacted by the limited availability and high cost of debt. Transactions in the year totalled £5.2bn, which compares to the 10-year average of £12.7bn.
In the West End, smaller assets (typically sub-£100m) were the most liquid and robust in terms of pricing, with purchasers less reliant on debt financing. In the City, where the average lot size is larger and investors are generally more leverage-dependent, pricing showed greater weakness, in particular for buildings in more secondary locations.
Well-located, value-add assets have continued to find a market, albeit at repriced levels. By contrast, demand for secondary assets and leaseholds remains constrained.
With the pace of inflation continuing to slow in the UK and the hike in interest rates appearing to have concluded, the cost of debt is starting to moderate as lender risk appetite shows signs of recovery. Consequently, there are early signals that investor sentiment is starting to turn a corner. London, and in particular the West End, remains an attractive location for domestic and international investors and is likely to benefit from any positive shift in momentum.
The number of potential investors has started to increase, and we expect 2024 and 2025 will present interesting acquisition opportunities for well-capitalised investors that can move quickly, for several reasons. The number of refinancings is gathering pace, with many borrowers facing both increased debt costs and an equity gap. At the same time, a number of funds are having to deal with ongoing redemption requests which is leading to them selling their more liquid assets.
VALUATION
· Portfolio underlying capital value movement -10.6%o On-site developments +8.1%, principally due to pre-letting activity at 25 Baker Street W1o Portfolio excluding developments -11.9%o Buildings valued at ≥£1,500 psf outperformed with values -7.1%· EPRA valuation ERV growth 2.1%· True equivalent yield up 67bp to 5.55%
The UK economy remained sluggish in 2023, with elevated interest rates and inflation impacting confidence. In the real estate sector, higher debt costs and lower investor confidence fed through to a substantial slowdown in investment turnover. In central London, the £5.2bn of transactions was 59% below the 10-year average. Although the second half of the year saw inflation decrease and interest rates stabilise, the outward movement in property valuation yields, which began in H2 2022, continued throughout 2023.
Against this backdrop the Group’s investment portfolio was valued at £4.9bn as at 31 December 2023 compared to £5.4bn at the end of 2022. There was a deficit for the year of £583.3m which, after accounting adjustments of £11.7m, produced a decline of £595.0m, including our share of joint ventures. The portfolio valuation, including developments, decreased 10.6%, following a 6.8% decline in 2022. This takes the writedown since June 2022 to 17.8% and we believe valuations are now approaching this cycle’s lows.
Our portfolio valuation movement outperformed the MSCI Central London Offices Quarterly Index which was -11.1% (and -21.6% since June 2022). This outperformance was driven by the quality of our portfolio, balanced between core income properties and value add opportunities. The wider UK All Property Index was down by 5.6%.
The EPRA initial yield is 4.3% (December 2022: 3.7%) which, after allowing for the expiry of rent-free periods and contractual uplifts, rises to 5.2% on a ‘topped-up’ basis (December 2022: 4.6%).
The occupier market remained more resilient for better quality buildings. Our EPRA valuation rental values were up 2.1%, an improvement on the 1.3% uplift in 2022, and towards the top end of our guidance range for 2023 of 0% to +3%. Leasing activity was particularly buoyant, with £28.4m of transactions during the year.
Our central London properties, which represent 98% of the portfolio, declined by 10.7%. West End values were down 8.6% outperforming the City Borders, where values reduced 15.8%, with the latter seeing greater outward yield movement. The balance of the portfolio, our Scottish holdings, was down 4.9%.
During the year, our two on-site developments were 25 Baker Street W1 and Network W1. Both are in the West End where occupier demand is strongest. They were valued at £394.6m, up 8.1% after adjusting for capex invested during the year and represent 8% of the portfolio. This overall strong performance mainly came from 25 Baker Street where there was significant pre-letting during the year, despite an outward movement in valuation yields. In addition, the valuers released some development surpluses following good progress on site. Both developments are due for delivery in 2025 and require £223m of capex to complete. Excluding these, the portfolio valuation decreased by 11.9% on an underlying basis.
The core income element of our portfolio is largely buildings where refurbishment or redevelopment has been undertaken, providing quality well-designed office space to meet current occupier trends. These properties generally have a higher capital value per square foot and, as illustrated below, proved more resilient. Our lower value properties mostly provide future repositioning opportunities where we can deliver the next generation of high quality space.
Valuation movement by capital value banding
Capital value banding (£psf)
Weighting by value (%)
Capital value change (%)
≥£1,500
22
-7.1
£1,000 – £1,499
23
-11.4
<£1,000
47
-14.3
Sub-total
92
-11.9
On-site developments
8
+8.1
Portfolio
100
-10.6
Derwent London’s total property return for 2023 was -7.3%, which compares to the MSCI Quarterly Index of -7.9% for Central London Offices and -1.0% for UK All Property.
Further details on the progress of our projects are in the ‘Developments and refurbishments’ section below and additional guidance on the investment market is laid out in the ‘Outlook and guidance’ section above.
Portfolio reversion
Our contracted annualised cash rent as at 31 December 2023 was £206.5m, a 1.1% increase over the last twelve months. With a portfolio ERV of £309.6m there is £103.1m of potential reversion. Within this, £44.6m is contracted through a combination of rent-free expiries and fixed uplifts, all of which is straight-lined in the income statement under IFRS accounting standards; our IFRS accounting rent roll at 31 December 2023 was £211.0m.
On completion, our on-site developments could add £33.0m at the current ERV, of which £15.6m or 47% of this is pre-let. There are then £7.5m of smaller refurbishment projects. This is up from £2.7m a year ago, however, c.80% of this came from expiries and breaks in the last four months of the year. These units will be upgraded during 2024. The ERV of ‘available to occupy’ space is £10.9m, the main elements of which are £4.1m at The White Chapel Building E1, £1.8m at The Featherstone Building EC1 and £1.3m at 230 Blackfriars Road SE1. Since year end, £3.3m of available space has been let or is under offer. The balance of the potential reversion of £7.1m comes from future reviews and expiries.
LEASING AND ASSET MANAGEMENT
Lettings· £28.4m of new leases, on average 8.0% above December 2022 ERVo Includes £16.0m of pre-lets at 25 Baker Street W1, 13.4% above ERV· Strong demand across all villages, split 77% West End and 23% City BordersAsset management· 81 asset management transactions with rent of £41.5m, 3.5% above the previous income· Average 1.7% above December ERVEPRA vacancy rate· Down 2.4% through 2023 to 4.0%
Lettings
We saw strong occupier demand across all our villages, with total letting activity in 2023 of £28.4m across 50 transactions and covering 340,500 sq ft. This is a significant increase compared to the £9.8m of lettings in the prior year. On average, new leases (including pre-lets) were agreed 8.0% above December 2022 ERV. Pre-lets at 25 Baker Street W1 to PIMCO and Moelis, which together total £16.0m of headline rent, were signed 13.4% above ERV with the remaining open market lettings 4.4% above ERV.
The average WAULT (to break) of new leases in 2023 was 9.9 years, rising to 10.8 years excluding the £3.6m (51,100 sq ft) of ‘Furnished + Flexible’ lettings, and we currently operate 144,400 sq ft of these smaller units with a further 21,500 sq ft on site or committed.
Since the start of 2024, £1.8m of new leases have been agreed on average 5.6% above December 2023 ERV, and there is £2.7m under offer.
Leasing in 2023 and 2024 to date
Let
Performance against Dec-22 ERV (%)
Area sq ft
Income £m pa
WAULT1 yrs
Open market
Overall2
H1 2023
228,000
19.3
11.0
8.9
7.3
H2 2023
112,500
9.1
7.5
10.4
9.5
2023
340,500
28.4
9.9
9.4
8.0
2024 to date
32,000
1.8
8.8
7.43
5.63
1 Weighted average unexpired lease term (to break)
2 Includes short-term lettings at properties earmarked for redevelopment
3 Performance against December 2023 ERV
Leasing by location in 2023
Location
Pre-let income £m
Non pre-let income £m
Total income £m
Total income %
West End
16.3
5.6
21.9
77
City Borders
–
6.5
6.5
23
Total
16.3
12.1
28.4
100
Principal lettings in 2023
Property
Tenant
Area
Rent
Total annual rent
Lease term
Lease break
Rent-free equivalent
sq ft
£ psf
£m
Years
Year
Months
H1
25 Baker Street W1
PIMCO
106,100
103.40
11.0
15
–
37
The Featherstone Building EC1
Buro Happold
31,100
74.40
2.3
15
101
24, plus 12 if no break
One Oxford Street W1
Uniqlo
22,200
Conf 2
Conf 2
10
5
12
Tea Building E1
Jones Knowles Ritchie
8,100
60.00
0.5
10
5
12, plus 12 if no break
The White Chapel Building E1
Comic Relief
5,000
61.903
0.3
5
3
6, plus 1 if no break
Middlesex House W1
Zhonging Holding Group
4,200
81.003
0.3
3
1.5
–
H2
25 Baker Street W1
Moelis
49,400
101.25
5.0
15
10
24, plus 9 if no break
The Featherstone Building EC1
Tide
14,400
71.00
1.0
10
5
15, plus 11 if no break
The Featherstone Building EC1
Avalere Health
10,900
81.003
0.9
10
5
5, plus 5 if no break
Tea Building E1
Gemba
7,100
63.803
0.5
5
–
8
Tottenham Court Walk W1
Sostrene Greene
6,400
54.90
0.4
10
6
12
The White Chapel Building E1
Asthma & Lung UK
7,000
45.00
0.3
10
3
7, plus 8 if no break
1 There is an additional break at year 5 on level eight subject to a 12-month rent penalty payable by the tenant
2 Uniqlo will pay a base rent (subject to annual indexation) plus turnover top-up
3 ‘Furnished + Flexible’ (Cat A+) lettings
Asset management
As the shortage of quality supply across the London office market becomes increasingly apparent, businesses are having to plan their occupational requirements earlier. Consequently, we engaged with several occupiers who have already begun planning for lease breaks/expiries in 2026/27. The opening of our two Member Lounges – DL/78 in 2021 and DL/28 in 2023 – is having a positive impact on these early conversations, with many occupiers valuing the additional amenity and level of service they provide.
Overall, asset management activity in 2023, excluding two short-term development-linked regears, totalled 670,000 sq ft, 30% higher than in 2022 (516,900 sq ft).
The key transactions were:
· Brunel Building W2: Paymentsense took an additional 49,600 sq ft on a lease assignment from Splunk, increasing its occupancy by 150% to 82,600 sq ft. Simultaneously the lease break on their existing space was removed and the term across all five floors was extended to 2036, with a minimum rental uplift at next review. The WAULT on these five floors increased to 12.7 years from 6.9 years.
· 1 Stephen Street W1: As part of a wider asset management transaction, Fremantle agreed the removal of its lease break in September 2024 on levels 3 to 6 adding five years’ term certain alongside a 7.2% uplift in rent in September 2024, and the hand back of level 7. The space will be refurbished this year unlocking a substantial rental uplift. Also within the building, Freud Communications agreed the removal of its lease break in September 2024, adding five years’ term certain to the lease.
· White Collar Factory EC1: rent review on 28,400 sq ft to AKTII settled 15% ahead of the previous rent, and in line with December 2022 ERV.
· Tea Building E1: Monkey Kingdom renewed its lease on 7,500 sq ft at £0.5m, a level 9.1% above the previous rent and 4.3% above December 2022 ERV.
Asset management in 2023
Number
Area ‘000 sq ft
Previous rent £m pa
New rent2 £m pa
Uplift %
New rent vs Dec-22 ERV %
Rent reviews
28
381.0
22.1
23.4
5.8
2.4
Lease renewals
39
62.8
3.1
3.2
3.3
6.7
Lease regears1
14
226.2
14.9
14.9
0.1
-0.3
Total
81
670.0
40.1
41.5
3.5
1.7
1 Excludes two development-linked regears. 2 Headline rent, shown prior to lease incentives.
The WAULT (to break) across the portfolio was broadly stable at 6.5 years (December 2022: 6.4 years) despite the passage of time, reflecting our leasing and asset management activity. This is split 7.5 years in the West End and 4.6 years in the City Borders.
Our ‘topped-up’ WAULT (adjusted for pre-lets and rent-free periods) was also stable at 7.4 years (December 2022: 7.2 years).
At the start of 2023, 10% of passing rent was subject to break or expiry in the year. After adjusting for disposals and space taken back for larger schemes, 65% of income exposed to breaks and expiries was retained or re-let by year end. This is lower than the rate reported at H1 2023 because units with a passing rent of £6.0m were vacated in the final four months of the year and there was insufficient time to complete our asset improvement plans prior to year end. 1-2 Stephen Street W1 (units previously let to BrandOpus and G-Research on low rents of £43.75 psf and £50 psf respectively) and 20 Farringdon Road EC1 (unit previously let to Indeed at a rent of £57.50 psf) comprised 67% of this and improvement works have already commenced at these units ahead of re-letting.
Vacancy
The portfolio EPRA vacancy (which is space ‘available to occupy’) decreased by 2.4% through 2023 to 4.0% (December 2022: 6.4%) with an ERV of £10.9m. The decrease primarily reflects leasing progress at The Featherstone Building EC1 (58,600 sq ft leased in 2023), The White Chapel Building E1 (15,200 sq ft leased in 2023) and Soho Place W1 (23,100 sq ft of retail space leased in 2023).
Within our EPRA portfolio, there is project space with an ERV of £7.5m which is excluded from the EPRA vacancy rate. This includes space vacated in the last four months of the year where projects are at an early stage. Once complete, EPRA vacancy would increase to 6.8%, a 0.3% reduction compared to the comparable rate at December 2022 (7.1%).
Rent and service charge collection
Rent and service charge collection rates remain high at 98% for the December 2023 quarter.
SUSTAINABILITY
· Planning consent secured for 18.4 MW solar park on Scottish land· Energy usage increased to 56.7million kWh (+12.5%)o Soho Place W1 and The Featherstone Building EC1 completed and became operational in mid-2022· Energy intensity increased to 149 kWh/sqm (+4.9%)· Embodied carbon intensity of both on-site developments are in-line with 2025 targets (≤600 kgCO2e/sqm)
Our plans for an 18.4 MW solar park on our Scottish land, that we expect will generate in excess of 40% of the electricity needs of our London managed portfolio, came a step closer following receipt of planning consent in the year. Construction is scheduled to start through the second half of 2024, with generation of green electricity to commence through 2025. We also continue to explore other self-generation and carbon removal opportunities, including further tree planting.
In 2019, we published our original SBTi-verified targets which were aligned with a 2°C climate warming scenario. Following publication by SBTi of its 1.5°C-aligned pathway, we have rebased our near-term targets to align with this new methodology. We are committed to reducing our Scope 1 & 2 carbon footprint by 42% by 2030 from our 2022 baseline. We are finalising our long-term SBTi net zero carbon target, which will commit us to reducing our overall carbon footprint across all Scopes by 90% by 2040 against our 2022 baseline.
In 2023, 99% of energy used in the year was purchased on renewable tariffs backed by REGOs (electricity) or RGGOs (gas).
Whilst energy usage across the London managed portfolio increased 12.5% in 2023 to 56.7million kWh, this was principally due to Soho Place W1 and The Featherstone Building EC1 became operational in mid-2022. Consequently, energy intensity increased year on year to 149 kWh/sqm which is above the ‘target’ of 138 kWh/sqm. Although an increase, we remain on track to meet our longer-term target of 90 kWh/sqm in 2030, which equates to a 46% reduction compared to our 2019 baseline (166 kWh/sqm).
Our overall carbon footprint reduced in the year to 15,169 tCO2-e (2022: 44,183 tCO2e). There were no large completions in 2023, compared to two major project completions in the prior year. Consequently, our embodied carbon (Scope 3, Category 2) fell from 32,869 tCO2e in 2022 to 799 tCO2e in 2023, and has been offset. Our operational carbon footprint (Scopes 1, 2 & 3, excluding embodied carbon; location-based) increased 27% to 14,370 tCO2e.
At December 2023, 68% of our London commercial portfolio by ERV (including on-site projects) had an EPC rating of ‘A’ or ‘B’ and was compliant with proposed 2030 legislation. A further 19% was rated EPC ‘C’. The costs and likely timing of upgrading the remainder of the portfolio to ensure ongoing legislative compliance have been integrated into our asset management and financial planning.
INVESTMENT
Developments· £169.3m of project expenditure· Two major projects on site – 25 Baker Street W1 (298,000 sq ft) and Network W1 (139,000 sq ft)o Combined 5.8% yield on cost and 13% development profito 25 Baker Street offices 75% pre-let (13.4% above December 2022 ERV)· Medium and longer-term pipeline totals over 1.3m sq ft Disposals· Total disposals £66m; major sales were 19 Charterhouse Street EC1 (Q1: £53.6m; 4.6% yield) and 12-16 Fitzroy Street W1 (Q2: £6.7m; 6.9% yield)
Over the last five years, we have sold £894.0m of property, primarily focused on smaller non-core buildings where there was limited capacity for extra floor area and amenity. Disposal proceeds have largely been recycled into our development pipeline, with £855.4m of capital expenditure and acquisitions of £468.6m. This has helped us maintain a strong balance sheet with conservative levels of gearing, despite the valuation declines seen, and provides firepower for future acquisition opportunities that we expect to arise over the coming 12-24 months.
The Group’s capital allocation decisions in 2023 were focused on its exciting development and refurbishment pipeline. We incurred total project expenditure (including our share of the 50 Baker Street W1 JV) of £162.8m, plus £6.5m of capitalised interest. Of this, £117.4m was at our two on-site major projects.
We remain committed to owning a portfolio balanced between core income properties and those that offer future regeneration potential. At 31 December 2023, the portfolio was split 56% ‘core income’ and 44% ‘future opportunity’. This excludes Old Street Quarter EC1, with an existing floor area of c.400,000 sq ft, where our conditional acquisition is expected to complete from 2027 and offers significant potential to create a mixed-use campus.
Developments and refurbishments
Major on-site projects – 437,000 sq ft
Significant progress was made through 2023 at our two on-site projects, 25 Baker Street W1 and Network W1, which together total 437,000 sq ft and are both in the West End. The construction costs are now fixed and we have substantially de-risked delivery at 25 Baker Street. With limited competing supply in either the Marylebone or Fitzrovia sub-markets, we are confident in the leasing prospects for the remainder of the available space. We currently expect them to deliver a combined 5.8% yield on cost and 13% development profit.
· 25 Baker Street W1 (298,000 sq ft) – an office-led scheme in Marylebone, which is expected to complete in H1 2025, comprising 218,000 sq ft of best-in-class offices, 28,000 sq ft of new destination retail around a central landscaped courtyard (which is being delivered for the freeholder, The Portman Estate) and 52,000 sq ft of residential, of which 45,000 sq ft is private. Occupier demand for the office space is high, with 155,500 sq ft pre-let through 2023 at an average headline rent of £103 psf, 13.4% ahead of December 2022 ERV. In addition, seven of the 41 private residential units have exchanged for £38.9m, reflecting an average capital value of £3,560 psf, and a further three are under offer. The office and residential structures have now completed and the façade installation is making good progress. The mid-Stage 5 embodied carbon estimate is c.600 kgCO2e/sqm.
· Network W1 (139,000 sq ft) – an office-led scheme in Fitzrovia, targeted for completion in H2 2025, comprising 134,000 sq ft of adaptable offices and 5,000 sq ft of retail. The project is being delivered on a speculative basis. Ground and basement works have completed and construction of the core and upper slabs has reached level six. The Stage 4 design embodied carbon estimate is c.530 kgCO2e/sqm.
Major on-site development pipeline
Project
Total
25 Baker Street W1
Network W1
Completion
H1 2025
H2 2025
Office (sq ft)
352,000
218,000
134,000
Residential (sq ft)
52,000
52,000
–
Retail (sq ft)
33,000
28,000
5,000
Total area (sq ft)
437,000
298,000
139,000
Est. future capex1 (£m)
223
139
84
Total cost2 (£m)
734
486
248
ERV (c.£ psf)
–
95
90
ERV (£m pa)
33.0
20.43
12.6
Pre-let/sold area (sq ft)
201,300
201,3004
–
Pre-let income (£m pa, net)
15.6
15.6
–
Embodied carbon intensity (kgCO2e/sqm)5
c.600
c.530
Target BREEAM rating
Outstanding6
Outstanding
Target NABERS rating
4 Star or above6
4 Star or above
Green Finance
Elected
Elected
1 As at 31 December 2023. 2 Comprising book value at commencement, capex, fees and notional interest on land, voids and other costs. 25 Baker Street W1 includes a profit share to freeholder, The Portman Estate. 3 Long leasehold, net of 2.5% ground rent. 4 Includes PIMCO and Moelis pre-lets, five private residential units at year end, the pre-sold affordable housing plus the courtyard retail and Gloucester Place offices pre-sold to The Portman Estate. 5 Embodied carbon intensity estimate as at stage 4 or mid-stage 5. 6 Excludes offices at 30 Gloucester Place.
Future development projects – Four schemes totalling c.1.3m sq ft
Our medium-term pipeline comprises c.390,000 sq ft (at 100%) of high quality office-led space.
· Holden House W1 (c.150,000 sq ft) – from mid-2025: we are updating our plans which will have a higher office weighting and better sustainability credentials than the existing planning consent.
· 50 Baker Street W1 (c.240,000 sq ft at 100%) – from early 2026: held in a 50:50 joint venture with Lazari Investments, we have submitted a planning application, the outcome of which is expected in H1 2024. This leasehold property is on The Portman Estate and includes another building in their ownership.
Our longer-term pipeline could deliver 950,000+ sq ft of mixed-use, office-led space.
· Old Street Quarter EC1 (750,000+ sq ft) – from 2027/28: we continue to progress plans for this 2.5-acre island site which our studies suggest has potential for a significant mixed-use campus development, potentially incorporating both office and ‘living’ components. We have had constructive engagement with the London Borough of Islington. Our acquisition of the site is expected to complete from 2027, conditional on delivery of the new eye hospital at St Pancras and subsequent vacant possession of the existing site.
· 230 Blackfriars Road SE1 (200,000+ sq ft) – from 2030: our early appraisals show capacity for a large office-led development for this 1960s building, more than three times the existing floor area.
Refurbishments
Refurbishment projects will comprise an increasing proportion of capital expenditure over the coming years as we continue to upgrade the portfolio to meet the evolving requirements of an increasingly selective occupier base. Through improving the amenity offer and overall quality, as well as upgrading EPCs, we expect these projects to deliver an attractive rental uplift. Smaller units, typically <10,000 sq ft, will be appraised for our ‘Furnished + Flexible’ product where occupiers are willing to pay a premium rent for flexible, high quality space.
Acquisitions and disposals
There was limited investment activity in 2023. Disposals totalled £65.6m at a blended capital value of £845 psf and yield of 4.4% (excluding the forward sale of residential units at 25 Baker Street W1), compared to acquisitions of £3.8m.
JPMorgan Global Growth & Income plc (LON:JGGI) has announced that a third interim dividend of 4.61p per Ordinary share, for the financial year ending 30th June 2024, will be paid on 16 April 2024 to shareholders on the register at the close of business on 8th March 2024. The ex-dividend date is 7th March 2024.
JPMorgan Global Growth & Income offers the option for shareholders to invest their dividend in a Dividend Reinvestment Plan, which is managed by the Company’s registrar. For details on the DRIP, please contact the Company’s Registrar, Equiniti Limited.
The key dates relating to this dividend are given below:
BlackRock Frontiers Investment Trust plc (LON:BRFI) has announced its portfolio update.
All information is at 31 January 2024 and unaudited.
You can discover more about the BlackRock Frontiers Investment Trust at blackrock.com/uk/brfi
Performance at month end with net income reinvested.
One month %
Three months %
One year %
Three years %
Five years %
Since Launch* %
Sterling:
Share price
3.6
10.1
10.8
37.0
33.1
136.8
Net asset value
-0.4
6.2
11.9
46.2
45.5
157.3
Benchmark (NR)**
-0.8
4.2
-0.8
21.5
8.3
81.2
MSCI Frontiers Index (NR)
1.1
6.2
4.3
6.8
17.3
70.7
MSCI Emerging Markets Index (NR)
-4.5
2.0
-6.2
-14.7
8.5
47.8
US Dollars:
Share price
3.5
15.6
14.6
27.1
28.9
94.4
Net asset value
-0.5
11.5
15.8
35.6
40.9
110.8
Benchmark (NR)**
-0.9
9.4
2.6
12.6
4.8
49.2
MSCI Frontiers Index (NR)
1.0
11.5
7.9
-0.9
13.6
39.4
MSCI Emerging Markets Index (NR)
-4.6
7.0
-2.9
-20.9
5.1
20.7
Sources: BlackRock and Standard & Poor’s Micropal
* 17 December 2010.
** The Company’s benchmark changed from MSCI Frontier Markets Index to MSCI Emerging ex Selected Countries + Frontier Markets + Saudi Arabia Index (net total return, USD) effective 1/4/2018.
At month end
US Dollar
Net asset value – capital only:
196.15c
Net asset value – cum income:
197.64c
Sterling:
Net asset value – capital only:
154.04p
Net asset value – cum income:
155.21p
Share price:
144.25p
Total assets (including income):
£293.8m
Discount to cum-income NAV:
7.1%
Gearing:
Nil
Gearing range (as a % of gross assets):
0-20%
Net yield*:
4.4%
Ordinary shares in issue**:
189,325,748
Ongoing charges***:
1.38%
Ongoing charges plus taxation and performance fee****:
3.78%
*The Company’s yield based on dividends announced in the last 12 months as at the date of the release of this announcement is 4.4% and includes the 2023 interim dividend of 3.10 cents per share, declared on 6 June 2023, and paid to shareholders on 7 July 2023 and the 2023 final dividend of 4.90 cents per share, declared on 30 November 2023, and payable to shareholders on 14 February 2024.
** Excluding 52,497,053 ordinary shares held in treasury.
***The Company’s ongoing charges are calculated as a percentage of average daily net assets and using the management fee and all other operating expenses excluding performance fees, finance costs, direct transaction costs, custody transaction charges, VAT recovered, taxation and certain non-recurring items for Year ended 30 September 2023.
**** The Company’s ongoing charges are calculated as a percentage of average daily net assets and using the management fee and all other operating expenses and including performance fees but excluding finance costs, direct transaction costs, custody transaction charges, VAT recovered, taxation and certain non-recurring items for Year ended 30 September 2023.
Sector Analysis
Gross market value as a % of net assets
Country Analysis
Gross market value as a % of net assets
Financials
45.4
Saudi Arabia
17.4
Energy
14.0
Indonesia
13.8
Materials
11.5
United Arab Emirates
8.6
Consumer Staples
10.4
Philippines
8.2
Industrials
10.1
Poland
7.6
Consumer Discretionary
8.8
Kazakhstan
7.5
Real Estate
7.4
Hungary
7.1
Communication Services
5.7
Vietnam
5.7
Information Technology
5.6
Thailand
5.6
Health Care
0.6
Chile
4.5
—–
Colombia
4.3
119.5
Qatar
4.0
—–
Czech Republic
4.0
Short positions
-3.6
Greece
3.4
=====
Multi-International
2.7
Turkey
2.7
Argentina
2.2
Georgia
2.1
Peru
1.8
Malaysia
1.5
RomaniaUkraineCambodiaBangladeshKenyaKuwaitOman Total
1.31.00.70.50.50.5 0.3—–119.5
—–
Short positions
-3.6
=====
*reflects gross market exposure from contracts for difference (CFDs).
Market Exposure
28.02 2023 %
31.03 2023 %
30.04 2023 %
31.05 2023 %
30.06 2023 %
31.07 2023 %
31.08 2023 %
30.09 2023 %
31.10 2023 %
30.11 2023 %
31.12 2023 %
31.01 2024 %
Long
111.9
106.3
108.5
112.9
116.9
113.0
113.3
114.9
118.8
113.1
116.6
119.5
Short
3.9
3.9
3.8
3.6
4.0
3.0
3.0
3.0
3.1
4.6
4.7
3.6
Gross
115.8
110.2
112.3
116.5
120.9
116.0
116.3
117.9
121.9
118.0
121.3
123.1
Net
108.0
102.4
104.7
109.3
112.9
110.0
110.3
111.9
115.7
108.8
111.9
115.9
Ten Largest Investments
Company
Country of Risk
Gross market value as a % of net assets
Saudi National Bank
Saudi Arabia
5.1
Bank Central Asia
Indonesia
4.3
Emaar Properties
United Arab Emirates
3.3
Abdullah Al Othaim Markets
Saudi Arabia
3.3
Ayala Land
Philippines
3.3
FPT
Vietnam
2.8
Epam Systems
Multi-International
2.7
Eldorado Gold
Turkey
2.7
Advanced Info Service
Thailand
2.7
Wizz Air Holdings
Hungary
2.6
Commenting on the markets, Sam Vecht, Emily Fletcher and Sudaif Niaz, representing the Investment Manager noted:
The Company’s NAV fell by 0.5% in January, outperforming its benchmark the MSCI Emerging ex Selected Countries + Frontier Markets + Saudi Arabia Index (“Benchmark Index”) which returned -0.9%. For reference, the MSCI Emerging Markets Index was down -4.6% while the MSCI Frontier Markets Index was up 1.0% over the same period. All performance figures are on a US Dollar basis with net income reinvested.
Emerging markets had a tough start to the year, with many of our markets down in January. In Latin America, all markets except Colombia (+1.9%) posted negative returns. Chile was the weakest market within the region as metals prices declined and the pace of interest rate cuts was slower than expected. In Asia, the Philippines (+1.0%) was the only equity market in our universe to finish the month in positive territory. On the other hand, a selection of markets in EMEA were bright spots over the month where performance was led by Turkey (+10.3%). Egypt (+19.7%) and Greece (+5.9%) were also up, the latter helped by positive earnings revisions.
Several stock picks did well in January. Indonesian bank Bank Syariah (+30.7%) was the top performing stock, having delivered strong profit growth in the last quarter of 2023. MBC Group (129.6%), the Saudi state-owned media conglomerate, was another contributor as the shares jumped following the company’s IPO earlier in the month. Portfolio performance was also supported by our holding in Bloomberry Resorts (11.8%), a Philippines based resort and casino operator. The company’s share price increased in anticipation of a new resort opening. Argentina exposure through energy company Vista (+11.0%) also helped performance.
On the flipside, Chilean lithium producer SQM (-30.1%) was the largest detractor. Lithium prices continue to struggle due to oversupply, but we believe that they have reached cash cost support levels, which should lead to supply curtailments. In addition, SQM faced disruptions in its operations due to roadblocks caused by local community protests, which have now been resolved. Hungarian low-cost carrier Wizz Air (-10.1%) also detracted, pulling back some of its more recent gains. Astra International (-11.5%), the Indonesian conglomerate, also weighed on portfolio performance in January.
Over the course of January, we made some changes to the portfolio. We rotated some of our Indonesian exposure by exiting food industry company Indofoods and initiated a position in Ciputra, an Indonesian property developer with broad based exposure to the country. We reduced our underweight to Saudi Arabia by topping up our holding in grocery operator Al Othaim as the name has lagged the broader Saudi market. We exited our holding in Malaysia Airports as the size of the anticipated tariff hike and the recovery in passengers may disappoint the market.
We believe global markets are starting to feel the impact of higher interest rates, noting slowing credit growth in particular as evidence that a demand slowdown is ongoing in developed markets. When combined with a Chinese economy which is struggling to find its footing we find it difficult to see where a meaningful pick up in global growth will come from. In contrast we see better fundamentals in frontier and smaller emerging markets. Monetary tightening across much of our universe was ahead of that in developed markets, particularly in Latin America and Eastern Europe. With inflation falling across many countries within our universe, rate cuts have started to materialize. This is a good set up for domestically oriented economies to see a cyclical pick up. Our investment universe, in absolute and relative terms, remains under-researched and we believe this should enable compelling alpha opportunities.
Sources:
1BlackRock as at 31 January 2024
2MSCI as at 31 January 2024
You can discover more about the BlackRock Frontiers Investment Trust at blackrock.com/uk/brfi
Supermarket Income REIT plc (LON:SUPR), the real estate investment trust providing secure, inflation-linked, long income from grocery property in the UK, has stated that it will announce its half year results for the six months ended 31 December 2023 on Wednesday, 13 March 2024.
An in-person presentation for analysts and investors will be held at 8:30 a.m. on the day of the results. The presentation will also be broadcast via a webcast with a Q&A function for those unable to attend.
Those wishing to attend in person or virtually via the webcast should contact FTI Consulting on the details below.
Further information regarding the results and presentation will also be made available on the Supermarket Income REIT website here: www.supermarketincomereit.com.
Supermarket Income REIT plc (LON: SUPR) is a real estate investment trust dedicated to investing in grocery properties which are an essential part of the UK’s feed the nation infrastructure. The Company focuses on grocery stores which are omnichannel, fulfilling online and in-person sales. All the Company’s supermarkets are let to leading UK supermarket operators, diversified by both tenant and geography.
The Company provides investors with attractive, long-dated, secure, inflation-linked, growing income with the potential for capital appreciation over the longer term.
The Company is listed on the premium segment of the Official List of the UK Financial Conduct Authority and its Ordinary Shares are traded on the Main Market of the London Stock Exchange, having listed initially on the Specialist Fund Segment of the Main Market on 21 July 2017.
Primary Health Properties PLC (LON:PHP), one of the UK’s leading investors in modern primary healthcare facilities, has announced today the appointment of Dr Bandhana (Bina) Rawal as an independent Non-executive Director of the Company with effect from 27 February 2024.
Bina is a medical professional with 25 years’ senior executive experience in healthcare, including with blue chip pharmaceutical companies such as Roche and global research funding charity Wellcome Trust. She is currently Senior Independent Director at Worldwide Healthcare Trust PLC, a FTSE 250-listed investment trust specialising in healthcare and life sciences companies where she is board lead for ESG and chairs the nominations committee. She is also a non-executive director of Central London Community Healthcare NHS Trust.
Bina has a wide breadth of experience spanning patient care, digital and population health, ESG, strategy, partnerships, risk management and equality, diversity and inclusion (EDI), alongside extensive networks in UK healthcare through her senior level executive and non-executive roles to date in large, complex organisations within the public, private and not-for-profit sectors.
The Company’s Board now comprises seven directors, with a majority of independent non-executive directors.
There are no other details to disclose under Listing Rule 9.6.13 in respect of the appointment of Dr Bina Rawal.
Steven Owen, Chairman, commented:
“On behalf of the Board, I am delighted that Bina is joining the Group as an independent Non-executive Director. She brings a wealth of experience from senior executive and non-executive roles across healthcare, including in strategy, partnerships, governance and risk management, from which the Company will benefit as it continues to fulfil its purpose to facilitate the NHS, the HSE, GPs and our other customers in delivering health services for the communities that they serve.”
More information on Primary Health Properties PLC can be found on www.phpgroup.co.uk
Avingtrans PLC (LON:AVG), the international engineering group which designs, manufactures and supplies original equipment, systems and associated aftermarket services to the energy, medical and industrial sectors, has announced its interim results for the six months ended 30 November 2023.
Financial Highlights
· Group Revenue increased by 30.4% to £65.2m (2023 H1: £50.0m) in line with management expectations.
· Gross Margin reduced slightly to 31.6% (2023 H1: 32.6%) as a result of OEM versus aftermarket mix.
· Adj.*EBITDA increased by 14.1% to £7.3m, as a result of higher revenues (2023 H1: £6.4m).
· Adj.*EBITDA margin reduced to 11.2% (2023 H1: 12.8%), mainly due to higher OEM sales, and increased investment in the Medical division.
· Adj. Profit before tax £4.4m (2023 H1: £4.0m).
· Adj. Diluted Earnings Per Share from continuing operations increased to 11.7p (2023 H1: 9.8p).
· Cash outflow from operating activities of £3.6m (2023 H1: inflow £4.1m).
· Net debt (excl IFRS16 debt) at 30 November 2023 of £2.2m, (31 May 2023: £13.0m net cash) driven by:
o the investment in Slack & Parr (“S&P”);
o acquisition of remaining 82% of Adaptix;
o ongoing investment in Magnetica; and
o a working capital outflow due to the timing of milestones of certain contracts and on-going supply chain disruption.
· Interim Dividend of 1.8 pence per share (2023 H1: 1.7 pence).
*Adjusted to add back amortisation of intangibles from business combinations, acquisition costs and exceptional items and discontinued operations.
Operational Highlights
Advanced Engineering Systems Division
· Revenue increased by 31.3% to £63.7m, with continuing robust order cover.
· EBITDA increased by 20.0% to £8.5m (2023 H1: £7.1m), driven by increased revenue
· Post period end, EPM and PSRE merged, to form new AES division, led by Austen Adams.
· Acquisition of the assets of S&P in August 2023 for £4.1m, including plant lease debt absorbed.
· Successful full integration of HES/Hevac into Ormandy Bradford.
· Two new nuclear decommissioning contracts for Metalcraft worth £14.5m combined.
· HT Luton wins £2.5m defence contracts from Rolls Royce and a further £3.0m from Forsmark.
· HT Inc wins $10.0m contract from TerraPower for next gen nuclear power station.
Medical and Industrial Imaging Division
· Revenue steady year on year at £1.5m, pending the volume build-up of new MRI and X-ray products.
· LBITDA increased to (£0.6m), vs 2023 H1: (£0.2m) as MRI and X-ray development projects gathered pace
· Acquisition of Adaptix for a total of £7.2m, including absorbed and repaid debts.
· Magnetica appointed first US distributor, Televere Systems.
· Adaptix also appointed Televere as first US distributor, post period end.
· Positive launch at RSNA imaging conference – demonstrating market demand for both products.
· Adaptix equipping Scottish facility to manufacture key system components for Vet and Ortho products.
· Magnetica expanded into a bigger factory, to facilitate volume MRI system production, starting in FY25.
· Tecmag moved into improved premises, to gear up for Magnetica and Adaptix product sales in the USA.
· Adaptix commenced sales of Vet products in the UK and USA. Volumes expected to increase in next FY.
Commenting on the results, Roger McDowell, Chairman, said:
“Despite some continuing supply chain instability and inflationary pressures, our tried-and-tested Pinpoint-Invest-Exit (“PIE”) approach produced strong results during the period, as evidenced by increased revenue and stable gross margins, resulting in a double-digit percentage growth in adjusted EBITDA.
“The Group has restructured itself, with the mature engineering business now all in one Advanced Engineering Systems (AES) division. We continue to invest in AES and also in the Medical and Industrial Imaging (MII) division. We are now deliberately structured for future exits that should maximise shareholder value. The marketing of the 3D X-ray systems at Adaptix and the development of MRI system at Magnetica are proceeding to plan, to hit key milestones in 2024. The first half results again demonstrate that we are proactively managing continuing progress in the AES division. Our value creation goals are on track, supported by a conservative approach to debt, which the Board deem to be prudent at this time..
“Our markets are always changing and Avingtrans continues to prioritise taking advantage of selected M&A opportunities, with the shrewd acquisitions of the assets of Slack and Parr and Adaptix in the first half, the latter greatly contributing to our exciting Medical division. We believe that the MII business will command a substantial valuation in due course. We remain optimistic about our prospects and the potential future opportunities across our markets.
We have solid visibility over H2 FY24 revenue and profits, thanks to a strong order intake and timely contract revenue recognition. Additionally, there are no destocking issues, since Group products are “make to order”. Thus, the Board continues to be confident about our expectations for the full year and views the future positively.”
Chairman’s Statement
Despite some ongoing supply chain difficulties caused by various geopolitical events, we are happy to report another strong first half performance by Avingtrans. An improved EBITDA result has once again complemented a robust revenue performance compared to H1 FY23, primarily as a result of higher revenue and profit in the AES division. However, due to a higher level of OEM sales in the mix, the gross margin decreased slightly year on year. Even after the previously communicated significant additional investments in Magnetica and Adaptix and cash being utilised on acquiring Adaptix and the assets of Slack and Parr, our net debt position remains modest.
Both divisions’ order cover for the remainder of FY24 remain strong and important new orders were booked in the period, including £14.5m of additional nuclear decommissioning orders for Metalcraft and a new design and development $10m order from TerraPower, for Hayward Tyler in the USA. In addition, there are no “destocking” issues for the Group, since our products are “make to order”.
Our well-established Pinpoint-Invest-Exit (“PIE”) model continues to yield positive outcomes, with ongoing improvement observed at Booth in particular. Advancements in our medical imaging strategy are evident as the Magnetica teams make significant progress in designing and building our proprietary compact MRI product for the orthopaedics market. Our overall stake in Magnetica is over 74%. Additionally, we completed the acquisition of the remaining 82% of Adaptix for an additional consideration of £7.2m (including absorbed and repaid debts). Its 3D X-ray systems are now being actively marketed, focused on the UK and the USA, in the orthopaedics, veterinary and non-destructive evaluation arenas. In the period, we also bought the assets of specialist pumps manufacture, Slack and Parr (S&P), out of administration, for £4.1m (including assumed plant lease debt. It is early in the recovery cycle, but the signs are positive for S&P so far. Investors will recall that Ormandy acquired the assets of local competitors HEVAC and HES for £852k, in early 2023. This has been successful, with Ormandy reporting significant results improvement, year on year.
Notwithstanding some supply chain disruptions still affecting the Group, our divisional management teams have demonstrated resilience in addressing these challenges. Signs of relief from this issue are gradually emerging. Positive progress continues in our aftermarket plans for AES, where we aim to outperform competitors by securing a larger share of the installed base service and support business, both for our products and third-party offerings. Enhanced end-user access provides a reliable and repeatable pipeline, contributing to increased profitability. We remain focused on maximising revenue opportunities arising from aftermarket access, both from our own businesses and through strategic partnership deals.
The AES division experienced a robust first-half, with revenue up by 31.3% year-on-year. Divisional margins decreased slightly, despite improving performances at Booth and Ormandy, due to the increased OEM sales. The Sellafield 3M3 box contract continues to progress in the second phase at Metalcraft, with a steady monthly delivery of boxes. Hayward Tyler (HT) continues to enjoy strong aftermarket sales, notably in the USA and in China. Although the Luton site sale process faced obstacles due to the pandemic and current economic challenges, active negotiations are ongoing.
In the Medical division, Magnetica continues steady progress in developing its compact MRI system, a prototype of which we were able to exhibit in the period. Magnetica expects to receive FDA 510(k) approval for its product early in FY25. Also, during the period, we completed the acquisition of Adaptix and we have begun to build up the necessary channels to market for their novel 3D x-ray systems, as well as equipping its Scottish facility for volume production.
Following this solid performance, the Board is announcing an increase of c6% in the interim dividend to 1.8 pence per share, reflecting our commitment to delivering long-term shareholder returns. This decision is underpinned by our positive outlook on Group prospects and supported by a prudent fiscal position.
In conclusion, the Board and I express our gratitude to all Avingtrans employees for their determination and resilience during another challenging period. We approach the future with cautious optimism and enthusiasm for the times ahead.
Roger McDowell
Chairman
27 February 2024
Note 1: A 510(k) is a premarket submission made to the FDA in the USA, to demonstrate that the device to be marketed is safe and effective.
Strategy and business review
Group Performance
Avingtrans has a proven Pinpoint-Invest-Exit (PIE) business model, which drives improvements in design, original equipment manufacturing (OEM) and associated aftermarket services, affording the Group an improving margin mix, both in the near and longer term. The Group has progressively shifted to a product-based strategy over time, away from “build to print”. Our Advanced Engineering Systems division forms the bulk of Avingtrans’ operations. Effective longer-term development of the Group’s nascent Medical and Industrial Imaging division is also a core focus for management, to create further shareholder value.
Strategy
Avingtrans is an international precision engineering group, operating in differentiated, specialist markets, within the supply chains of many of the world’s best known engineering original equipment manufacturers (OEMs), as well as positioning itself as an OEM to end users. Our core strategy is to build market-leading niche positions in our chosen market sectors – currently focused on the Energy, Infrastructure and Medical sectors. Over the longer term, our acquisition strategy has enabled our businesses to develop the critical mass necessary to achieve leading positions in our chosen markets.
Our strategy remains consistent with previous statements. The Group’s unrelenting objective is to continue the proven strategy of “buy and build” in regulated engineering markets, where we see consolidation opportunities, potentially leading to significantly increased shareholder returns over the medium to long term. At the appropriate time, we will seek to crystallise these gains with periodic sales of businesses at advantageous valuations and return the proceeds to shareholders. We call this strategy PIE – “Pinpoint-Invest-Exit”. Previous transactions, such as the disposal of Peter Brotherhood in 2021, have clearly demonstrated the success of this approach, producing substantial increases in shareholder value. We have built strong brands and value from smaller constituent parts and we have demonstrated well-developed deal-making skills and prudence in the acquisition of new assets.
The Board continues to focus on improvements in Hayward Tyler’s operations, along with driving the performance of Booth, Ormandy and Metalcraft. This programme is progressing to plan. We are also focused on the opportunity to transform the medical imaging division’s performance, via novel MRI products at Magnetica, as well as the more recent acquisition of Adaptix with its novel X-ray systems. The objective for the Group is to become a leading supplier in targeted energy, infrastructure and medical markets, of operation critical products and services, with a reputation for high quality and delivery on-time and on-budget. The Group has production facilities in its three key geographical regions (the Americas, Asia and Europe) with lower cost facilities in Asia (where appropriate) and product development and realisation in the UK, the USA and Australia. The Group will continue to invest in breakthrough and disruptive technologies in its chosen markets.
Avingtrans’ primary focus in Energy is the nuclear sector – harvesting opportunities in decommissioning, life extension and next generation nuclear markets. We are also engaged with a variety of other niches in the renewable energy sector. The management will continue to build on our footprint in the wider power and energy sectors.
In order to maximise long term shareholder value via our PIE model, we reorganised the engineering businesses of the Group under a single division: Advanced Engineering Systems (AES) comprising of:
· Hayward Tyler’s units in the UK (in Luton and East Kilbride), USA (in Vermont and Michigan), China and India.
· Metalcraft, Ormandy, Composite Products, Booth Industries and the recently acquired Slack and Parr assets.
In parallel, the focus of the Group’s Medical Imaging division (MII) is to become a market leader in the production of compact, superconducting, cryogen-free MRI systems, targeted at specific applications including orthopaedic imaging and veterinary imaging. Production of certain existing products continues to support the division overall. This division now consists of Magnetica in Australia (the majority stake was acquired in January 2021) which has been successfully integrated with Scientific Magnetics, UK and Tecmag in the USA. More recently, we have sought to further strengthen our medical imaging strategy, via the acquisition of Adaptix, in Oxford, UK, which specialises in 3D X-ray technology, with the main target markets being orthopaedic and veterinary imaging.
Our businesses have the capability to engineer products in developed markets and to produce those products partly, or wholly, in low-cost-countries, where appropriate. This allows us and our customers to access low-cost sourcing at minimum risk, as well as positioning us neatly in the development of Chinese, Indian and other Asian markets for our products. Hayward Tyler is well established in China and India, providing integrated supply chain options for our blue-chip customers.
A central strategic theme for Avingtrans is to proactively nurture and grow the proportion of our business stemming from aftersales. We are targeting both our own installed base and the wider competitive installed bases of such equipment, in areas where we can offer an advantage to our end-user customers. This focus now applies mainly to our AES division, with the Medical division having pivoted to novel medical imaging products and services.
Energy and Infrastructure – Advanced Engineering Systems (“AES”)
For Hayward Tyler (“HT”), the main priorities remain to strengthen its aftermarket capabilities and to maximise opportunities in the nuclear life extension market. HT was able to deliver a robust result in H1, with a strong order book and prospects for the year ahead.
At HT Luton, aftermarket activities remain the focus, including the servicing of third-party equipment. A follow on £3m contract in Sweden with Vattenfall for the Forsmark plant (for nuclear life extension) commenced in the period. Further defence orders have also been received from Rolls Royce and are being executed as planned.
Hydrocarbon related orders from the UK North Sea sector remained robust. We are still steadfastly progressing with the sale of the Luton site, albeit that this process has, as previously noted, been elongated, first by Covid-19 and now by macroeconomic disruption.
The HT Fluid Handling business in Scotland has been a consistently good performer and has fitted well into our ambitions to build a wider nuclear capability. The business has maintained a strong order book and the Transkem industrial mixers business has again contributed positively.
HT Inc in Vermont (USA) continues to see solid order intake in the nuclear life extension market in the USA. HT Inc’s new R&D opportunities in next generation nuclear power have made good progress, with a further $10m design and development TerraPower contract booked in the period.
HT Kunshan (China) has developed a healthy order book, including an improving position in the aftermarket business, with new orders coming from Chinese electricity producers working on reducing the environmental impact of electricity production.
In India, the local team again delivered a solid H1 performance.
Energy Steel (‘ES’) in Michigan (USA) has sustained its positive momentum, with a good H1 order intake, albeit that some key orders slipped into H2.
Metalcraft has made good progress with Phase 2 of the Sellafield 3M3 (“three-cubic-metres”) box contract and confirmed additional nuclear decommissioning orders of over £14m in the period, including the first contract from Magnox. The next follow-on 3M3 box contract tender, expected to be worth over £900m, is expected to be tendered in 2025 by Sellafield. The new apprentice training centre continues to build momentum.
Ormandy’s performance improved year on year and order intake remains strong. The acquisition of HEVAC and HES at the start of 2023 has been central to the performance improvement.
Booth Industries maintained its strong growth trajectory. Booth has a record order book, including the £36m order for HS2 cross-tunnel doors, which was not affected by the recent HS2 phase 2 cancellation. The business is close to completing the giant proscenium doors for “The Factory” building in Manchester.
Composite Products had a reasonably good first half, boosted by new orders from Rapiscan.
Recently acquired Slack and Parr is showing early positive signs of recovery, as it begins its journey within the Group.
Medical and Industrial Imaging (“MII”)
Magnetica, Scientific Magnetics (SciMag) and Tecmag are working effectively together to make good progress on our exciting development of compact, superconducting, helium-free MRI systems entirely in-house. Magnetica was able to exhibit its prototype system in the period and the FDA 510(k) approval is anticipated in early FY25. The business also appointed its first US distributor, Televere Systems, in the period.
Our initial estimate of the addressable orthopaedic imaging market is circa £1.7bn p.a. (by 2030). This is assuming a capital sale model. Our intended longer term “pay per scan” business model could mean that the opportunity is significantly larger. It is more difficult to quantify other potential market segments (e.g. veterinary imaging) at this stage because equivalent, dedicated products do not exist. Avingtrans has increased its investment in Magnetica, bringing its shareholding to over 74% of the issued share capital. We believe that materially reducing the size and total costs of these dedicated MRI systems, coupled with them being much easier to set up in a variety of locations, as well as increasing the scan rate by up to 300%, will produce a compelling sales proposition, ratified by interest from Key Opinion Leaders at the prestigious Radiological Society of North America conference, in Chicago. In addition, these dedicated systems could free-up capacity on the existing MRI system installed base, which should be a major benefit to healthcare organisations.
SciMag and Tecmag will rebrand in due course, to present a seamless image for the business. However, there is still merit in continuing with various existing products and services at SciMag and Tecmag, so long as they do not detract from our core vision for MRI, which holds out the prospect of materially increasing the value of Magnetica over the coming years. Orders for existing SciMag and Tecmag products were solid in the period.
In H1, Avingtrans acquired the remaining 82% of the share capital of Adaptix, Oxford, UK for £2.5m in Avingtrans shares. We also adopted (or settled) various debts, amounting to a further £4.7m. Adaptix launched its compact 3D x-ray system for orthopaedics in the USA, following receipt of its 510(k) approval by the FDA. Adaptix has also launched its veterinary version of the 3D x-ray product and initial orders for a non-destructive evaluation product were also booked in the period. We estimate that the Total Addressable Market value of these three segments is $6.8bn pa.
The strategies of Magnetica and Adaptix are convergent and we see potentially large benefits in combining their approaches to market in technology, software and distribution channels amongst others.
Markets – Energy
Although worldwide energy demand witnessed a pause amid the pandemic, there has been a steady resurgence in growth in recent times. The Russia/Ukraine conflict has caused energy security concerns in many countries, which may accelerate the global shift towards enhanced efficiency and decarbonisation. This trajectory holds the potential to positively impact our ventures in the nuclear and renewables industries.
End User/Aftermarket
Operators and end-users seek a combination of prompt local support and a necessity for progress through equipment upgrades and modernisation. Particularly in Western economies, where facilities exceed their intended design lifespans, there is a notable demand for solution providers within the supply chain to establish enduring partnerships with end-users. The Avingtrans AES division is strategically positioned to thrive in this market space focused on long-term collaborations with end-users.
Nuclear
Due to the Russia/Ukraine conflict, global government perspectives on nuclear power have experienced a resurgence, emerging resiliently from prior concerns about energy security. Despite being a low-carbon, baseload power source, the nuclear energy market remains asymmetric in terms of future growth. The majority of opportunities for new builds exceeding 1GW are presently concentrated in Asia, with limited prospects in the UK and proposed programmes in France. Nonetheless, certain market segments remain robust, including the support of operational fleets, life extensions, decommissioning, and reprocessing.
Our focus extends to the long-term development of next-generation technologies such as Small Modular Reactors (SMRs) and Advanced Generation IV Reactors, exemplified by our collaboration with TerraPower in the USA. These segments suffer from a consolidating supply chain and a scarcity of expert knowledge. The USA, boasting the largest civil nuclear fleet globally, coupled with the presence of heritage Westinghouse technology in Europe and Asia, positions our Hayward Tyler businesses for further growth.
Addressing obsolescence and life extension is crucial for nuclear operators worldwide and the AES division is well-equipped to support operators in managing this critical risk. Our Energy Steel business also enhances the Group’s capabilities in this domain.
The UK maintains a leading role in decommissioning, characterised by innovative technology and substantial expenditures. Our Group plays a pivotal role in the future manufacture of waste containers for Sellafield, anticipating continued expansion in the UK and global markets over the long term. Ongoing development of new nuclear technologies is evident in the UK, South Korea, the USA, and China. The Group sees these innovations as an attractive avenue for growth and is poised to evolve as a global industry partner.
Power Generation
The global trend towards electrification persists, directing an increasing share of primary energy toward the power sector, a central focus within the Group’s engineering division. Apart from nuclear, key sub-sectors encompass:
Coal: Despite a global decline in the establishment of new power stations, the Group continues to witness robust aftermarket activity from coal-fired power stations. Opportunities persist in regions such as India, China, Southeast Asia, Eastern Europe, and the Middle East. Hayward Tyler is actively diversifying its product applications, such as the introduction of Selective Catalytic Reduction (SCR) systems, aimed at reducing emissions from power stations.
Gas: The growing market for natural gas, particularly in the form of combined cycle gas turbine power plants, is predominantly observed in the West. The Group has a modest position in this market, with both existing and new product lines.
Renewables: The global market for renewable technologies and their associated infrastructure is expanding. The Group possesses a range of products applicable to this market segment. Furthermore, the Group’s expertise can be leveraged to develop new products, including innovations like molten salt pumps for concentrated solar power applications.
Hydrocarbons
Oil demand picked up following both the pandemic easing and then being driven by the Russia / Ukraine conflict, despite weakness in the Chinese economy. The Brent crude price is now trading in the range of $75 to $85 per barrel. As a result, new capital expenditure in the sector has recovered and we continue to see momentum building in aftermarket orders.
Markets – Medical
The diagnostic imaging market is a large global sector, dominated by a few large systems manufacturers. The total Diagnostic Imaging Market is estimated to be worth $47.4bn , according to Global Data, mainly driven by an increase in the prevalence of chronic diseases and increased demand for imaging procedures from an ageing population. The largest market is the USA, followed by Europe and Japan. The fastest growing markets are China and India.
After the acquisition of a majority stake in Magnetica (AUS) in January 2021, we merged Magnetica with Scientific Magnetics (UK) and Tecmag (US), to create an innovative, niche-MRI systems supplier, which can address specific parts of the market, not well served by dedicated products at present. This includes, for example, orthopaedic and veterinary imaging. Although Magnetica is primarily targeting the Magnetic Resonance Imaging (MRI) market, Nuclear Magnetic Resonance (NMR) and magnets for physics continue to be of interest, due to the similar requirements for spectrometers, superconducting magnets and cryogenics.
Following the acquisition of Adaptix in the period, we are now targeting X-ray imaging, also in the orthopaedic and veterinary imaging market segments.
According to ResearchAndMarkets, MRI itself is approximately 18% by value of the total diagnostic imaging market and is projected to grow at 5% p.a. X-ray itself represents circa 33% of the total market. For both Magnetica and Adaptix, the addressable portion of the X-ray and MRI markets we believe we can access is now estimated to be over $7bn (including veterinary applications).
End User/Aftermarket
The MRI market segment is dominated by a handful of manufacturers, including titans like GE, Siemens, Philips and Canon, who account for circa 80% of revenue globally. These players also dominate the aftermarket, although there are a few independent MRI service businesses in existence. Magnetica and Adaptix are not present in the MRI aftermarket at this time, but both will naturally service the aftermarket for their own products.
Magnetica and Adaptix are planning to create new niche markets for MRI and X-ray. Our first target is orthopaedic imaging, where the development of Magnetica’s system is on-going and Adaptix is now working on scaling up production of its system, as well as a related system for veterinary imaging.
Infrastructure and Security
Global safety and security concerns, as well as risk mitigation on large infrastructure projects, are key drivers for growth at Booth and we are cultivating these opportunities carefully. Thus far, the vast majority of Booth’s sales are in the UK but the business is building up a prospect pipeline overseas. We have also continued to build the aftermarket order book, with good prospects.
Threat detection standards for baggage handling at airports and package scanning have been tightened everywhere around the world – especially in Europe and the USA. With many millions of bags and packages flowing across border crossings every day, screening devices have to comply with threat detection standards without impacting throughput. Rapiscan, the biggest customer for Composite Products, is a market leader in this sector, whose presence is increasing as new standards are rolled out.
Following the acquisition of Adaptix, we are exploring various possible security applications of their 3D X-ray technology products as tools in various Non-Destructive Evaluation (NDE) markets, with an estimated addressable market of c$1.4bn.
Financial Performance
Key Performance Indicators
The Group uses a number of financial key performance indicators to monitor the business, as set out below. The Company publishes more detailed and operational KPIs in its annual report. The figures relate only to continuing operations.
Revenue: increase year on year largely driven by additional OEM business at Hayward Tyler
Overall Group revenue increased by 30.4% to £65.2m (2023 H1: £50.0m). The principal reason for the increase was additional OEM business at Hayward Tyler, and aided by sales in S&P.
Gross margin (‘GM’) – a modest reduction, primarily due to OEM and aftermarket mix
GM decreased to 31.6% (2023 H1: 32.6%), primarily a result of the increased OEM sales in the mix and lower GM contribution by the recently acquired S&P as it recovers its trading position.
Profit margin: EBITDA increase driven by increased revenue.
Adjusted EBITDA (note 4) increased by 14.1%, to £7.3m, on higher revenues (2023 H1: £6.4m) mainly due to increased revenue and profit in the AES division, in turn driven by improved results at Hayward Tyler, Booth and Ormandy. However, this was subdued by the initial post-acquisition EBITDA break-even at S&P and the pre commercialisation costs at Adaptix (£1.0m) in the period. If these were excluded the underlying EBITDA would be £8.3m – a c.30% increase in EBITDA.
Tax: future profits and cash still protected by available losses
The effective rate of taxation at Group level was a 15.6% tax charge. A higher R&D tax credit than forecasted and the use of Group losses kept the rate lower than expected in the UK. The Group tax position will continue to be aided in the coming years by the utilisation of historic losses available in the UK.
Adjusted Earnings per Share (EPS): c8% improvement.
Adjusted diluted earnings per share from continuing operations was up at 11.7p (2023 H1:10.8p) subdued by the impact of Adaptix and S&P acquisition in H1.
Basic and diluted earnings per share from continuing operations remained at 8.8p (2023 H1: 8.8p) and 8.6p (2023 H1: 8.6p), due to acquisition, and restructuring costs and the impact of the acquisitions in the period.
Funding and Liquidity: net debt position after investment but remains modest.
Net debt decreased to £2.2m, excluding IFRS16 debt (31 May 2023: £13.0m net cash), following the acquisition of, and investment in Adaptix and S&P, further investment in Magnetica and a working capital outflow resulting from timing milestones of certain contracts. Cash outflow from operating activities in the period was £3.6m (2023 H1: inflow £4.1m) – although this includes operating cash outflow for the acquired S&P and Adaptix of £2.6m and exceptional acquisition and restructuring costs of £0.5m.
The Board is continuing with its policy of gradual increases in dividends. The dividend is 1.8 pence per share (2023 H1: 1.7 pence). The dividend will be paid on 21 June 2024, to shareholders on the register as at 24 May 2024.
ESG (Environmental, Social, and Governance)
Avingtrans is endeavouring to attain a high level of clarity on ESG matters. We will be reporting on this task more fully, in our next Annual Report. However, we comment on some ESG related matters below, to keep our investors informed.
People
There were no personnel changes at Board level. Notably, at Board level, we have now set up an ESG Committee, chaired by Jo Reedman.
At divisional management level, we merged the EPM and PSRE divisions to create the AES division. Consequently, Austen Adams, formerly the managing director of the PRSE division, has assumed leadership of this newly integrated division. The Board would like to extend its sincere best wishes and gratitude to Mike Turmelle, the former head of the EPM division, who has stepped down from his role and left the Company. His contributions during his tenure at Avingtrans are highly appreciated.
Despite a currently tight labour market in the UK and the USA, we continue to strengthen the management teams in the divisions, with further appointments being made in the period and with an emphasis on aftermarket opportunities, where applicable. Skills availability is always challenging, especially so this year but we do not expect to be materially disadvantaged in the market. We continue to invest significant effort in developing skills and talent, both through structured apprenticeship programmes and graduate development plans, across a number of business units. The apprentice training school based at Metalcraft continues to develop, with West Suffolk College (WSC) as the operator and training provider at the centre. The Group continues to be recognised nationally for the strength of its apprenticeship training schemes.
Sustainability
We have developed a robust governance structure which supports proactive and collaborative working aimed at addressing Environmental, Social and Governance (ESG) risks and opportunities across the Group.
Our approach to sustainability is aligned with the UN’s Sustainable Development Goals (SDGs) and our priorities are: · Health, safety, and wellbeing
· Operational eco-efficiency
· Development of cleaner technologies
Health, safety and wellbeing
As frequent acquirers, we encounter varying levels of capability and knowledge among different businesses. In smaller acquisitions, a common investment focus is disseminating Health, Safety, and Environment (HSE) best practices from other Group businesses, elevating local processes to meet required standards. Larger acquisitions, such as HTG in the past, typically have well-established HSE practices, and we actively seek to incorporate these learnings into other business units. Health and Safety incident reporting has shown improvement across the Group, with incident trends generally on a positive trajectory in recent years. We encourage near miss reporting and foster knowledge exchange to facilitate learning and continuous improvement. At the Board level, Les Thomas oversees HSE matters, conducting inspections and reviews with local management as needed. The Board takes an active interest in progress during site visits around board meetings.
Operational eco-efficiency
We are pleased to report a significant reduction in carbon intensity at our UK sites during FY23, with Scope 1 and 2 emissions decreasing by 21% to 2,104 tCO2e compared to the previous year, despite the growth in revenues. This achievement is a testament to the focused efforts of our employees and the development of a culture that prioritizes waste reduction.
To drive further improvements in FY24, we have established an ESG Committee chaired by Jo Reedman, a Non-Executive Director. This committee will be responsible for defining the Group’s ESG strategy, as well as setting objectives and key performance indicators.
Development of cleaner technologies
Our Hayward Tyler business continues to have success winning work for new nuclear projects, securing a $10m contract during the period, relating to the development of high-temperature molten salt pumps destined for a state-of-the-art Integrated Effects Test facility, under development by Southern Company and TerraPower, to advance development of the Molten Chloride Fast Reactor.
Magnetica’s helium-free, compact MRI product development is proceeding to plan, with sales expected to commence during 2024. Helium is a scarce, non-renewable resource, mostly obtained as a by-product of oil extraction.
Social Responsibility
The Group maintains the highest ethical and professional standards across all of its activities and social responsibility is embedded in operations and decision making. We understand the importance of managing the impact that the business can have on employees, customers, suppliers and other stakeholders. The impact is regularly reviewed to sustain improvements, which in turn supports the long-term performance of the business. Our focus is to embed the management of these areas into our business operations, both managing risk and delivering opportunities that can have a positive influence on our business.
The Group places considerable value on the involvement of its employees and has continued to keep them informed on matters affecting them directly and on financial and broader economic factors affecting the Group. Avingtrans regularly reviews its employment policies. The Group is committed to a global policy of equality, providing a working environment that maintains a culture of respect and reflects the diversity of our employees. We are committed to offering equal opportunities to all people regardless of their sex, nationality, ethnicity, language, age, status, sexual orientation, religion, or disability.
We believe that employees should be able to work safely in a healthy workplace, without fear of any form of discrimination, bullying or harassment. We believe that the Group should demonstrate a fair gender mix across all levels of our business, whilst recognising that the demographics of precision engineering and manufacturing remain predominantly male, which is, to an extent, beyond our control.
Ethical policy
The Group complies with the Bribery Act 2010. We do not tolerate bribery, corruption, or other unethical behaviour on the part of any of our businesses, or business partners, in any part of the world. Employee training has been refreshed in all areas of the business, to ensure that the Act is complied with.
Outlook
The Group is actively investing in both of its divisions, concentrating on the global energy, infrastructure and medical markets to optimise shareholder value through future exits. Magnetica is advancing well in the development of compact MRI systems, as is Adaptix in deploying its 3D X-ray technology. Positive results are evident in various business units, notably at Booth and Ormandy, as highlighted by the first-half outcomes. Our value creation goals are on track, supported by a conservative approach to debt, especially crucial during the current macroeconomic challenges.
The AES division maintains a robust focus on nuclear power, thermal, and hydrocarbon markets, along with their associated aftermarkets. The MII division is fully focussed on innovative compact MRI systems and 3D X-ray solutions for niche applications. Each division has a clear strategy to support end-user aftermarket operations, servicing their equipment and relevant third-party equipment where appropriate, to capitalise on the ongoing demand for efficient, reliable, and safe facilities.
Whilst ongoing disruptions in supply chains remain a primary uncertainty, we believe that the situation will now gradually ease looking forward. Inflationary pressures continue to impact our businesses, but we are actively working to mitigate these risks, maintaining stable margins through considerable proactive efforts by our business units. Conversely, the Group does not suffer from destocking issues seen elsewhere, since our products are “make to order”.
Our markets are dynamic, and we prioritise strategic M&A opportunities. We are particularly interested in turnaround prospects and long-term buy-and-build scenarios, recognising that businesses like ours can achieve high valuations at the point of exit. While the Board remains vigilant, we are confident in the current direction and potential future opportunities across our markets. We will refine our strategy by pinpointing specific acquisitions as opportunities arise, building businesses that generate sustainable shareholder value, all while maintaining a prudent level of financial flexibility to mitigate unforeseen risks. With a strong first-half performance and a robust order book, the Group is well-positioned to meet market expectations for the full year.
