# McCarthy & Stone plc Results in line with expectations

- Link: https://www.directorstalkinterviews.com/mccarthy-stone-plc-results-in-line-with-expectations-2/412804197
- Published: 2020-01-28T07:47:40+00:00
- Author: Giles Arbor

**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 months | FY1812 months | **1****4 months ****change** | 
| Legal completions^([1]) | 2,301 | 2,134 | 8% | 
| Revenue | £725.0m | £671.6m | 8% | 
| Average selling price^([2]) | £308k | £300k | 3% | 
| Gross profit | £104.9m | £104.6m | 0% | 
| Operating profit | £48.4m | £63.5m | (24%) | 
| Underlying operating profit^([3]) | £68.1m | £67.5m | 1% | 
| Profit before tax | £43.4m | £58.1m | (25%) | 
| Underlying profit before tax^(3) | £63.1m | £62.1m | 2% | 
| Basic earnings per share | 6.5p | 8.6p | (2.1p) | 
| Underlying basic earnings per share^([4]) | 9.5p | 9.2p | 0.3p | 
| Net cash^([5]) | £24.7m | £4.0m | £20.7m | 
| Return on capital employed^([6]) (ROCE) | 10% | 10% | 0ppt | 
| Total dividend per share | 5.4p | 5.4p | 0p |

> **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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