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McCarthy & Stone plc Results in line with expectations

McCarthy & Stone (LON: MCS), the UK’s leading developer and manager of retirement communities, announces its financial results for the 14 month period ended 31 October 2019. All comparatives are to the 12 month financial year ended 31 August 2018 unless otherwise stated.

Key Highlights

· Results in line with expectations against the backdrop of a challenging market and strategic structural changes

· Significant progress with both stages of the transformation strategy

· New rental proposition gaining momentum

 FY1914 monthsFY1812 months14 months change
Legal completions[1]2,3012,1348%
Revenue£725.0m£671.6m8%
Average selling price[2]£308k£300k3%
Gross profit£104.9m£104.6m0%
Operating profit£48.4m£63.5m(24%)
Underlying operating profit[3]£68.1m£67.5m1%
Profit before tax£43.4m£58.1m(25%)
Underlying profit before tax3£63.1m£62.1m2%
Basic earnings per share6.5p8.6p(2.1p)
Underlying basic earnings per share[4]9.5p9.2p0.3p
Net cash[5]£24.7m£4.0m£20.7m
Return on capital employed[6] (ROCE)10%10%0ppt
Total dividend per share5.4p5.4p0p

John Tonkiss, McCarthy & Stone Chief Executive Officer commented:

“The Group’s new strategy has driven a solid FY19 trading performance in a difficult market. We have a strong balance sheet, a continued focus on delivery of operational improvements across our business and an ongoing commitment to delivering high quality developments and five star customer satisfaction.”

“We are also making excellent progress across our key strategic initiatives as set out in September 2018, particularly rental, where our initial pilots have confirmed strong demand for renting in later life. This is a hugely positive step for the business as it enables our business model to become more resilient and ensures we are in a strong position to capitalise on future market recovery.”

Financial highlights

· During the 14 month period ended 31 October 2019 revenue increased to £725m (2018: £672m) supported by a c.3% increase in average selling price2 to c.£308k (2018: £300k) and total legal completions of 2,301 units1 (2018: 2,134).

· Underlying operating profit3 was at £68m (2018: £68m), while the underlying operating profit margin decreased to 9.4% (2018: 10.1%). This reduction in margin percentage was mainly driven by an increased usage of part-exchange and incentives to counteract subdued market conditions.

· Profit before tax decreased to £43m (2018: £58m), with c.£17m of exceptional costs incurred during the period, mainly representing the cost of land which will no longer be developed net of any residual land value to be recovered, redundancy costs and consultants’ fees in relation to the strategic review.

· Underlying basic earnings per share3,4 marginally increased to 9.5p (2018: 9.2p).

· Basic earnings per share decreased to 6.5p (2018: 8.6p).

· Strong balance sheet, with year-end net cash of £25m (2018: £4m) notwithstanding the increased level of in-house part-exchange transactions and the seed portfolio of rental properties currently held on the balance sheet prior to their onward sale to a strategic rental partner.

· The Directors are proposing a final dividend of 3.5p per share, maintaining a total dividend for the year at 5.4p per share (2018: 5.4p per share) reflecting the Board’s confidence in the Group’s strategy.

· As at 31 October 2019, the Group held a portfolio of 101 let retirement rental units. This portfolio of rental assets has been accounted on the balance sheet as investment properties and valued at £27.6m based on a valuation carried out by independent valuation consultants. The associated revaluation uplift of £5.9m (2018: nil) has been recognised within ‘other operating income’ on the income statement.

Operational highlights

· 169 multi-tenure transactions were completed during the period (101 rental units, 47 part buy part rent transactions and 21 under rent to buy).

· At 26 January 2020, the multi-tenure offering was live across all our developments with a total of 175 rental, 43 rent to buy and 75 part buy part rent reservations achieved since commencement of this initiative.

· Good progress on the Group’s Build Cost Reduction initiative with identified savings of £10k per unit on FY21 schemes

· 53 first occupations brought to market (2018: 68).

· 34 high-quality development sites added to the land bank (2018: 54 sites).

· Total land bank of 7,695 plots (2018: 9,797), equivalent to c. 3.7 years’ supply (2018: 4.6 years’ supply).

· 45 new sales outlets opened during the year (2018: 69).

· Awarded the full five star rating for customer satisfaction by the Home Builders Federation (‘HBF’) for the fourteenth consecutive year – the only UK developer, of any size or type, to achieve this accolade

· 10 Quality awards (2018: 20) at the 2019 National House Building Council (‘NHBC’) Pride in the Job awards (based on a lower number of schemes delivered), underpinning the Group’s exceptional build quality.

Strategy update

On 25 September 2018, the Group announced its new two-stage business transformation strategy ‘creating retirement communities to enrich the quality of life of our customers and their families’.

Stage 1 FY19-FY21: Optimisation of operations

The Group’s main priority this year was to start delivering on its three-year programme of business optimisation with focus on delivering >15% ROCE, >15% operating profit margin by FY21 and cumulative cash savings of >£90m across the life of the plan. The Group’s strategy is being delivered through four key workstreams – workflow realignment, rightsizing the business, establishing an efficient sale and marketing model and delivering build cost reductions. This strategy remains on track and is expected to deliver c.£40m cost savings which will be weighted towards delivery in FY21 due to its focus on build cost savings.

Stage 2 FY19-FY23: Leveraging strategic opportunities

Good progress has also been made with the Group’s three long-term strategic initiatives designed to leverage the long-term opportunities in this sector; Choice of tenure, where the new rental proposition is gaining significant momentum; Flexibility of services, where the Group has now taken full ownership of its care and services operation and is therefore now one of the largest operators in the Housing with Care Sector; and Affordability of product, with the Group’s first development using Modern Methods of Construction (MMC) set to start construction during FY20.

Current trading

· New sales leads and visitors ahead of prior year driven by increased marketing activity

· Reservations during November and December impacted by uncertainty caused by the General Election

· Conversion assisted by broader range of available sales tools (e.g. part-exchange and new rental offering)

· Improvement seen across sales leads, visitors and net reservations, including rental, metrics in January

· Rental reservations at c.12 per week in January

Summary and outlook

· A solid performance in line with market expectations in the face of continued challenging economic backdrop

· Significant progress in both stages of transformation strategy launched in September 2018

· Group now has a more resilient business model and is well positioned to capitalise on future market recovery

· Increased political stability following the General election, but ongoing economic uncertainty likely to continue throughout FY20

· Focus will continue to be on optimising financial performance and cash generation as the Group’s new strategy develops throughout FY20. Net cash position is expected to be in excess of FY19

· Increased proportion of c.2,100 target volumes expected to come from rental offering during FY20

· H1 out-turn expected to be lower than prior year, impacted by slower start to the financial year due to the General Election

· Full year out-turn remains in line with expectations, weighted towards H2

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