Mears Group PLC

("Mears" or "the Group" or "the Company")

Interim Results for the 6 months ended 30 June 2021

Mears Group PLC, the leading provider of services to the Housing sector in the UK, announces its interim financial results for the 6 months ended 30 June 2021 ("H1 2021").

 

Return to normal trading, strong cash performance and re-instated dividend

·      Restoration of dividend payments given the return to normal trading arrangements, continued strong cash performance and positive pipeline outlook

o  Board is recommending an interim dividend of 2.50p per share (FY 2020: nil)   

·      Strong revenue recovery as Covid-19 restrictions eased with Group revenues up 11.8% year-on-year to £443.7m (H1 2020: £396.7m)

o  Maintenance-led revenues of £286.5m (H1 2020: £266.9m) up 7.3%

o  Management-led revenues of £139.5m (H1 2020: £121.2m) up 15.1%

·      Resilient trading performance and successful transition back to normal commercial mechanisms 

·      Profitability strengthened towards normal levels in the first half, delivering £11.1m adjusted profit before tax¹ (H1 2020: £8.1m loss).

·      Excellent cash performance continued with net cash at 30 June 2021 of £47.6m (31 December 2020: £56.9m net cash) and average daily net debt of £8.2m (FY 2020: £97.3m net debt)²

·      Good sell-through in Development portfolio with 41unit sales and working capital utilisation down by £10.4m to £15.9m as at 30 June 2021

·      Solid pipeline conversion with over £150m of contract wins year-to date

o  60% success rate (by value) in Maintenance-led contract bidding

o  Ministry of Justice transitional housing contract award providing further evidence that central Government view housing as a specialist service

·      Group order book stands at £2.5bn (2020: £2.6bn), reflecting the timing of contract renewals

 

Financial summary

Continuing operations4		H1 2021	H1 2020
Revenue		£443.7m	£396.7m
Statutory profit / (loss) before tax		£5.7m	£(13.8)m
Adjusted profit / (loss) before tax1		£11.1m	£(8.1)m
Statutory diluted EPS		4.13p	(10.86)p
Adjusted diluted EPS1		8.01p	(5.83)p
Dividend per share		2.50p	-
Average daily net debt2		£8.2m	£121.2m

 

 

Current trading and outlook

·      The Board is pleased with the resilient trading and liquidity performance of the Group during FY 2021 to date and as lockdown restrictions are finally lifted is confident that this will be reflected in the Group's financial performance in the second half of the year.

·      Cash and working capital management remains very strong and accordingly the Group is updating its guidance for full year average daily net debt to £25m³ down from £50m.

·      While Management and Development revenues are expected to normalise in the second half from their current elevated levels, the Board updates its previous guidance for the full year FY 2021³ to revenue of c. £840m and adjusted profit before tax in the range of £23.0-25.5m.

 

David Miles, Chief Executive Officer of the Group, commented:

"The Group has performed well and traded resiliently through another lock-down impacted reporting period. With the cash performance continuing to exceed expectations as trading conditions normalise, we are delighted to be able to restore Mears' long history of sustainable, progressive dividend payments.

"The business is in good shape and with the long-term challenges of affordable housing, public health and climate change high on the political agenda at local and central Government, we look forward to future growth with confidence."  

1.     Adjusted profit/(loss) before tax stated on continuing activities before non-underlying items (being £1.6m in H1 2021 relating to the repayment of furlough monies received) and before the amortisation of acquired intangibles. The adjusted diluted EPS measure is further adjusted to reflect a full tax charge.

2.     Net cash / (debt) excludes IFRS 16 lease obligations.

3.     Mears previously provided guidance on 12/05/21 for full year FY 2021 showied revenues ranging from £770m - £820m, adjusted profit before tax in the range of £21.3m - £25.5m and average adjusted daily net debt of c.£50m.

4.     All comparatives are stated after adjusting for continuing operations.

 

Certain information contained in this announcement would have constituted inside information (as defined by Article 7 of Regulation (EU) No 596/2014) ("MAR") prior to its release as part of this announcement and is disclosed in accordance with the Company's obligations under Article 17 of those Regulations.

For further information, contact:

 

Mears Group PLC

David Miles, Chief Executive Officer	Tel: +44(0)7778 220 185
Andrew Smith, Finance Director	Tel: +44(0)7712 866 461
Alan Long, Executive Director	Tel: +44(0)7979 966 453
Joe Thompson, Investor Relations	Tel: +44(0)7980 844 580
www.mearsgroup.co.uk

 

About Mears

Mears currently employs around 6,000 people and provides services in every region of the UK. In partnership with our Housing clients, we maintain, repair and upgrade the homes of hundreds of thousands of people in communities from remote rural villages to large inner-city estates. Mears has extended its activities to provide broader housing solutions to solve the challenge posed by the lack of affordable housing and to provide accommodation and support for the most vulnerable.

We focus on long-term outcomes for people rather than short-term solutions and invest in innovations that have a positive impact on people's quality of life and on their communities' social, economic and environmental wellbeing. Our innovative approaches and market leading positions are intended to create value for our customers and the people they serve while also driving sustainable financial returns for our providers of capital, especially our shareholders.
 

CHIEF EXECUTIVE OFFICER'S REVIEW

 

INTRODUCTION

 

The Group maintained its high standards of operational delivery across its contract portfolio and traded resiliently through another period heavily impacted by Covid-19 restrictions. The Group's success was again built upon the 'extra-mile' commitment and engagement of its workforce and the strength of our trusted client relationships established over many years. As trading conditions return to normal, the Board is keen to put on record its appreciation for the on-going dedication and commitment shown by all staff and the co-operation and support received from our clients and customers.

 

Most branches have now transitioned back from the interim financial arrangements and we look forward to normal trading conditions and performance in the second half year. All employees are now returned from furlough and the Mears self-delivery model and strong relationships with our supply chain partners is helping mitigate the impact of labour and material shortages seen across the industry.

 

Longer term, the demand for the services the Group provides is undiminished by Covid-19 and a back-log of lower priority maintenance-led jobs now requires resolution. The health inequalities that the pandemic exposed, and urgent action required by climate change will only add further political pressure to increase and upgrade the affordable and social housing stock in the UK. 

 

FINANCIAL PERFORMANCE

 

Group

 

The financial performance of the Group continued to strengthen in the period, particularly as lock-down restrictions eased through the second quarter.

 

Continuing activities	H1 2021 £m	H2 2020 £m	H1 2020* £m
Revenue
Maintenance-led	286.5	270.0	266.9
Management-led	139.5	132.6	121.2
Development	17.7	6.5	8.6
Total	443.7	409.1	396.7
Operating profit measures:
Statutory operating profit / (loss)	9.7	2.7	(9.0)
Adjusted operating profit / (loss) (pre-IFRS 16)1	13.7	6.2	(5.6)
Adjusted operating profit / (loss) (post-IFRS 16)1	15.6	9.6	(3.0)
Profit before tax measures:
Statutory profit / (loss) before tax	5.6	(1.4)	(13.8)
Adjusted profit / (loss) before tax1	11.1	4.7	(8.1)

*restated as detailed in note 17 to the Interim Results

1.Adjusted operating profit / (loss) and adjusted profit / (loss) before tax is on continuing activities before non-underlying items, the amortisation of acquired intangibles but inclusive of share of profit from associates. Operating profit measures are stated on both a pre and post-IFRS16 basis. See Finance Review for a reconciliation of alternative performance measure

 

The Group recorded H1 revenues of £443.7m, up 11.8% year-on-year, and normalised operating profits (pre-IFRS 16) of £13.7m (H1 2020: £5.6m loss). Adjusted profit before tax was £11.1m against a first half loss in FY 2020 of £8.1m.

 

OPERATING REVIEW

 

Maintenance-led contracts

 

The Group's Maintenance-led contracts saw an improving volume and revenue performance through the first half as restrictions eased and more normalised trading conditions returned to most branches. By the end of June 2021, almost all contracts were back to their original commercial mechanisms.

 

In some areas we are seeing a backlog of lower priority maintenance jobs, delayed by lockdowns, which we are working through with clients and customers. However, social tenants 'Right to Repair' is yet to be fully restored so a national trend remains hard to discern at this stage.  Whilst there is focus on addressing the backlog in maintenance, it is apparent that planned maintenance works will be slower to return in some areas and we expect activity to build-up through the second half of 2021 and running into 2022.

 

In common with other construction sector companies, we have experienced some input price inflation in the period, impacting upon both materials and labour. However, the significant majority of the Group's customer contracts include price uplifts to negate much of this risk and which will protect operating margins over the medium term.   The Mears model has always been to invest in and retain our own staff as much as possible, with lesser reliance than peers on sub-contracted and other short-term labour. Our employee turnover remains low relative to the industry and accordingly, we are better protected from the shortages and accompanying price inflation seen in the broader construction labour markets.

 

Energy efficiency

 

We continued to invest in growing our Sustainability team and developing our offering to help clients with the enormous task of de-carbonising the UK's social housing stock. While the funding challenges for the sector are evident, this remains a key focus and opportunity for the Group.

 

Mears is already helping design and implement a number of carbon reduction schemes, such as in Aberdeenshire where 75% of the Council's 30-year Housing Improvement Plan is currently being spent on energy saving measures such as Photovoltaic systems, wall insulation, energy efficient electric heating systems and replacement windows and doors. Future plans include moving away from Gas Heating installations in favour of lower carbon alternatives. Mears integrate such programmes within on-going maintenance programmes. Mears also provides advice to customers on maximising the energy efficiency benefit of these carbon reduction schemes and advise clients on accessing appropriate funding, where available.

 

Discussions continue with many Maintenance-led clients as to how these critical retrofit and energy efficiency programmes can be integrated into existing work schedules.

 

Management-led contracts

 

Our contracts in the Management-led category continued to perform strongly in the first half, with revenues up 15% year-on-year and 5% from H2 2020. This was largely driven by the Asylum Accommodation and Support Contract ('AASC') which continued to experience elevated volumes across the entire process, with new service users entering the system and few exiting. The process of supporting these vulnerable people into dispersed accommodation has commenced where it is safe to do so. Accordingly, revenues are expected to reduce towards normal levels during the second half. Mears' priority throughout and going forward, will be the safety of staff and the service users. 

 

Mears is pleased to have been awarded a contract with the Ministry of Justice (MoJ) to provide transitional housing services, where we will be supporting low and medium risk prisoners upon their release, from initial accommodation into a settled home. A key aim of this contract is to ensure that no one leaves prison without the offer of a good quality place to live from their first night in the community, and then a clear pathway to a settled long-term home. This is a new customer for Mears who will provide an integrated service including the provision of the property, maintenance, management, and welfare support. The initial interim contract value with the MoJ is circa £10m, but there is a significant opportunity to extend the longevity and scale of this relationship. The contract covers the North East and North West regions. This is a further example of central Government recognising the importance of Housing as a particular specialism and trusting Mears to deliver services to a vulnerable service user group.

 

Development

 

Our few remaining development sites achieved a strong sell-through in the first half benefitting from the positive housing market and stamp-duty exemptions. Of the 49 completed units as at 31 December 2020, 41 were sold in the first half (FY 2020: 29). A further 8 units were completed in the period, meaning that as at 30 June 2021 the Group held 16 completed units and a further 35 units are in the course of construction. Cashflow was also positive in the period, with the spot working capital utilisation as at 30 June 2021 reducing to £15.9m (31 December 2020: £26.3m).  Realised pricing has been in-line with carrying values. The Group expects continued de-leveraging and unit sales in the second half, albeit at a slightly slower rate reflecting lower completed units and as the stamp duty relief tapers.  

 

ESG

 

Environment

 

We continued to invest in our Sustainability Team with a number of new hires during the period. This dedicated team of experienced sustainability professionals are refining and enhancing our full-service client offering to help them de-carbonise the social housing sector. The Social Housing White Paper put the challenge at £105bn of retrofit activity required over the next 30 years to meet the Government's own energy efficiency targets. Most Local Authorities and Housing Associations recognise the importance of this long-term challenge.

 

Our growing Sustainability Team will also bring forward the detailed plans required to de-carbonise our own housing portfolio and our own operations to meet the Board's stated ambition to be carbon net zero by 2030.  

 

 

Social

 

Our Social Value and Diversity Impact Report (now in its sixth year) was published in May 2021 detailing the Group's huge commitment to social value and diversity within the communities we serve. A copy of which can be found on the Group's website. 

 

Independent industry accreditations received during the first half demonstrate how strongly positioned Mears is to benefit from the many opportunities (and challenges) across the UK Affordable Housing sector in the UK. For the 19th consecutive year, the Royal Society for the Prevention of Accidents (RoSPA), has awarded Mears Group the RoSPA Order of Distinction, Gold Award, for its commitment to continuous improvement to health and safety performance. We are accredited as an Investor in People, awarded the Diversity Network Accreditation and are again listed in the Top 75 Social Mobility Index.

The Group is also exceptionally proud that our traditionally high levels of employee engagement, diversity, support and satisfaction have been reflected in no less than six independent 'Best Company to work for' awards, including national (The Sunday Times), regional and industry-specific.

 

Governance

 

The first annual report of the Mears Scrutiny Board, our customer engagement forum (independently supported and verified by the Centre for Governance and Scrutiny) was published in May 2021 and is available on the Company website. This initial assessment recognised: (i) the desire and commitment throughout the organisation to listen, understand and improve the customer experience; (ii) a wealth of positive examples and stories of Mears staff building excellent relationships with tenants and tenant groups; and (iii) that Mears' response to Covid-19 reflected the organisation's flexibility and commitment to protecting vital services and maintaining customer service standards.

 

 

STRATEGY

 

The Board completed its strategic review during the period and has a clear programme for growth across both its Maintenance-led and Management-led Housing activities. We are a leader in the affordable housing market, for which the future demand profile remains positive.

 

 

External drivers for change

·    Increased government investment in the Affordable Housing sector given expanding social housing waiting lists and renewed political focus on housing post-Covid-19

·    Social Housing White Paper and Government policy towards higher standards for safety and customer engagement

·    The commitment to raise the carbon efficiency of all social housing stock by one EPC band by 2030, presents significant investment requirements

·    Increasing Local Authority spend on long-term, cost-effective homelessness solutions

·    On-going demographic pressure on the UK housing shortage particularly in affordable rental and specialist retirement living

Key Enablers for Mears

 

·    Leverage our market leading position in housing maintenance to maximise share of wallet through more effective client planning

·    Continue to evolve our affordable rental, temporary accommodation, and integrated housing offer to meet increasing market demands

·    Participate in larger, integrated housing contracts, across local and central Government

·    Assist new and existing clients to meet their targets for the de-carbonisation of housing stock

·    Continued digital innovation to increase agility of frontline operations whilst continuing to drive operational efficiencies and improvements to the customers experience

·    Operational consistency across the Group

 

 

Mears 2025 Operating Ambitions

 

·    To have strengthened our leadership positions in our core housing maintenance and management sectors

·    To be delivering growth across these core markets

·    To be the trusted partner to local and central Government in affordable housing solutions

·    To be supporting our clients carbon reduction programmes

·    To be the most socially responsible business operating in the affordable and social housing sector in the UK

 

Even with the potential post-Covid economic challenges, Government priorities show Housing is a sector that will be invested in to support economic recovery and indeed to meet longer term challenges, such as those posed by climate change. There is clear opportunity to grow both our maintenance-led and management-led work and indeed we see an increasing number of opportunities that will integrate all of our services.

 

ORDER BOOK AND PIPELINE

 

The order book stands at £2.5bn (31 December 2020: £2.6bn), reflecting the timing of contract renewals over the last twelve months. The Group secured maintenance-led contracts in 2021 valued at over £150m with a win rate (by value) of 60%. The key orders secured are detailed below:

 

Contracts awarded in 2021 to date	Type	Base term (years)	Extension option (years)	Annual value £m	Base contract value £m	New / Retention
London Borough of Redbridge	Maintenance	7	7	5	36	Retention
Angus Council	Maintenance	3	2	2	7	New
Leeds City Council	Maintenance	5	-	13	64	Retention
Ministry of Justice	Management	1	2	10	10	New
Lambeth	Maintenance	6	4 + 4	5	29	Retention

 

In addition, Mears was pleased to secure a five-year extension with Orbit Housing which will see Mears continue to provide services, with an annual value of circa £20m, until at least March 2027.

 

As detailed above, the Group is delighted to secure work with a new central Government client, the Ministry of Justice (MoJ). The contract has an initial value of circa £10m in the first year and the Group is currently bidding further works with this client. This is further evidence of central Government recognising the importance of Housing as a particular specialism and trusting Mears to deliver services to a vulnerable service user group.

 

The Group awaits the outcome of its rebid with the Defence Infrastructure Organisation, providing housing management and relocation services (RLAP). This existing key worker contract is very significant to the Group, with an annual revenue of circa £60m. Mears has been short-listed in the final two candidates and expects to be notified of the outcome imminently.  

 

As previously reported, there were structural impediments to Mears securing the same value of work in both Lambeth and Leeds rebid tenders. Mears is pleased with contracts secured to date with these two important clients.

 

The Group submitted an initial bid for the North Lanarkshire integrated maintenance services contract. This new integrated contract represented over £200m of revenues per annum, of which c. £120-150m is in respect of Housing services.  Mears is the incumbent responsive repairs and maintenance provider to c. 39,000 social homes in North Lanarkshire. That current contract is worth around £55m per annum with the new Housing Services contract providing an opportunity to substantially increase that.  The new contract is expected to be awarded in early 2022 and commence from January 2023. The Group believes it has a very strong offering and service history in North Lanarkshire and has progressed well through the initial round of the tender process.

 

 

CURRENT TRADING, OUTLOOK AND GUIDANCE

 

The Board is pleased with the resilient trading and liquidity performance of the Group during the first half of FY 2021. Cash and working capital management has remained strong to date, and accordingly the Group is updating its guidance for full year underlying average daily net debt to £25m down from £50m.

 

The Group is also confident in updating its previously provided guidance for FY21:

 

	Key measures	Updated Guidance FY 2021
Revenue growth	Annual revenue growth	·      FY 21 Revenues: circa £840m (previous guidance: £770m-£820m)
Adjusted profit before tax	Profit before tax and before non-underlying items and amortisation of acquired intangibles	·      FY 21 Adjusted profit before tax: £23.0m - £25.5m (previous guidance: £21.3m-£25.5m)
Cash conversion	Operating cash inflow as a % of EBITDA	·      100% (previous guidance: 100%) conversion on the combined 2020/2021 results; taking the two-year measure removes the short-term Covid-19 related impacts such as the VAT deferral and client payments received on account ·      £25m of Development working capital unwind over 2 years, of which £10m has been realised in H1 2021
Net debt	Average daily net debt	·      FY 21 Average net debt of £25m (previous guidance £50m)
Capex		·      c. 1.25% of revenue
Capital allocation	Investment   Capital structure     Shareholder distributions	·      Not material in FY21 (or FY22)   ·      Continued average net debt reduction, targeting average daily net cash during 2023   ·      Return to dividend for the 6-month period ended 30 June 2021. Dividend cover in the range 2.0-2.5x ·      Further shareholder distributions to be kept under review over next reporting period

 

 

 DIVIDEND AND CAPITAL ALLOCATION

 

Given the return of normal trading arrangements across much of the business, the strong cash performance and the positive pipeline outlook, the Board has declared an interim dividend of 2.50p per share reflecting its confidence in the prospects of the Company. The Board has resumed its progressive dividend policy, with the view to maintaining dividend cover between 2.0x and 2.5x earnings over the business cycle. In this first full year of returning to dividend distributions, the Group expects to be at the upper end of this range. The Board will continue to review its other capital allocation and distribution options.

 

 

FINANCIAL REVIEW

Alternative performance measures ('APM')

 

The interim results include both statutory and adjusted performance measures, the latter of which is considered to be useful to stakeholders in projecting a basis for measuring the underlying performance of the business and excludes items which could distort the understanding of performance in the year and between periods, and when comparing the financial outputs to those of our peers. The APMs have been set considering the requirements and views of the Group's investors and debt funders amongst other stakeholders. The APMs and KPIs are aligned to the Group's strategy and form the basis of the performance measures for remuneration.

 

These APMs should not be considered to be a substitute for or superior to IFRS measures, and the Board has endeavoured to report both statutory and alternative measures with equal prominence.

 

The APMs used by the Group are detailed below along with an explanation as to why management considers the APM to be useful in helping to understand the Group's underlying performance. A reconciliation is also provided to map each non-IFRS measure to its IFRS equivalent.

 

The Group defines normalised results as excluding the amortisation of acquisition intangibles and before other normalisation adjustments which management believe are infrequent in nature and are considered not to be part of underlying trading. The normalised results are further adjusted to reflect a 19% corporation tax charge. The Directors believe this aids consistency when comparing to historical results and provides less incentive for the Group to participate in schemes where the primary intention is to reduce the tax charge.

 

A reconciliation between the statutory profit measures and the adjusted result on both a pre and post-IFRS 16 basis for the half-year results for 2021 and 2020 and the full year results for 2020 is detailed below.

 

Continuing activities	H1 2021	H1 2020*	FY 2020
	£'000	£'000	£'000
Profit / (loss) before tax	5,645	(13,842)	(15,218)
Amortisation of acquired intangibles	3,827	5,714	9,526
Non-underlying items	1,627	-	2,279
Profit / loss before non-underlying items, amortisation of acquired intangible and tax	11,099	(8,128)	(3,413)
Removal of IFRS 16 profit impact	1,359	820	1,118
Finance costs (non-IFRS 16)	1,260	1,713	2,875
Operating profit pre-IFRS-16 before non-underlying items and amortisation of acquired intangibles	13,718	(5,595)	580
Amortisation of software intangibles	1,090	1,109	2,211
Depreciation and loss on disposal (non IFRS 16)	2,604	2,727	5,677
EBITDA pre-IFRS 16 and before non-underlying items	17,412	(1,759)	8,468
IFRS 16 profit impact	(1,359)	(820)	(1,118)
Finance costs (IFRS 16)	3,249	3,444	7,123
Depreciation and loss on disposal (IFRS 16)	20,896	21,081	42,242
EBITDA post-IFRS-16 before non-underlying items and amortisation of acquired intangibles	40,198	21,946	56,715
Amortisation of software intangibles	(1,090)	(1,109)	(2,211)
Depreciation and loss on disposal (IFRS 16)	(20,896)	(21,081)	(42,242)
Depreciation and loss on disposal (non-IFRS 16)	(2,604)	(2,727)	(5,677)
Operating profit post IFRS 16 and before non-underlying items	15,608	(2,971)	6,585

*restated as detailed in note 17 to the Interim Results

** Operating profit / (loss) and EBITDA measures include share of profits of associates

 

 

The profit impact in respect of IFRS 16 is detailed below:

 

	H1 2021	H1 2020*	FY 2020
	£'000	£'000	£'000
Charge to income statement on a post-IFRS 16 basis	(24,145)	(24,525)	(49,365)
Charge to Income Statement on a pre-IFRS 16 basis	(22,786)	(23,705)	(48,247)
Profit impact from the adoption of IFRS 16	(1,359)	(820)	(1,118)

*restated as detailed in note 17 to the Interim Results

 

 

NON-UNDERLYING ITEMS

 

Non-underlying items are items which are considered outside normal operations. They are material to the results of the Group either through their size or nature. These items have been disclosed separately in the adjusted result above to provide a better understanding as to the underlying performance of the Group.

 

 

 

 

 

 

	H1 2021 £'000	H1 2020* £'000	FY 2020 £'000
Repayment of furlough payments received	1,627	-	-
Impairment of assets in the course of construction	-	-	1,500
Restructure costs	-	-	779
	1,627	-	2,279

*restated as detailed in note 17 to the Interim Results

 

During the first half of 2021, the Directors elected to voluntarily repay to HMRC amounts received or accruing under the Coronavirus Job Retention Scheme ('furlough'), amounting to £1.6m. During the first lockdown, the furlough scheme was essential in safeguarding the financial stability of the Group and protecting employment. However, the Directors believe that the strong performance of the business in the first half, augmented by the disposal of Terraquest, means that to continue to claim furlough is no longer necessary and is not within the spirit of the legislation.

 

The Directors believe that the repayment of furlough should be disclosed within non-underlying items; this voluntary repayment is not a trading item and by its nature is unique and non-recurring. The size of this item is considered material and the Directors believe would distort the readers understanding of the financial results of the Group.

 

All furlough received during FY 2020 was recognised within the Income Statement in normal trading, matched against the associated cost, and no repayment is intended in respect of that earlier period.

 

EARNINGS PER SHARE

 

The calculation of EPS is based on a weighted average of ordinary shares in issue during the period. The diluted EPS is based on a weighted average of ordinary shares calculated which assumes that all dilutive options will be exercised.

 

An adjusted diluted earnings per share is disclosed in order to show performance undistorted by the amortisation of acquisition intangibles and non-underlying items. The Group defines this normalised earnings as excluding the amortisation of acquisition intangibles and exceptional costs and adjusted to reflect a full tax charge. The adjusted measure uses the same weighted average number of shares as the diluted EPS.

 

The profit attributable to shareholders before and after adjustment is detailed below together with a reconciliation between the statutory and normalised diluted EPS measure:

 

	Diluted (continuing)		Diluted (discontinued)		Diluted (continuing and discontinued)
	Six months ended 30 June 2021 p	Six months ended 30 June 2020 p	Six months ended 30 June 2021 p	Six months ended 30 June 2020  p	Six months ended 30 June 2021 p	Six months ended 30 June 2020  p
Earnings per share	4.13	(10.86)	0.78	2.13	4.91	(8.73)
Effect of amortisation of acquisition intangibles	3.38	5.17	-	-	3.38	5.17
Effect of full tax charge adjustment	(0.68)	(0.14)	(0.15)	(0.38)	(0.83)	(0.52)
Effect of non-underlying items	1.18	-	(0.62)	-	0.56	-
Normalised earnings per share	8.01	(5.83)	0.01	1.75	8.02	(4.08)

 

	Normalised (continuing)		Normalised (discontinued)		Normalised (continuing and discontinued)
	Six months ended 30 June 2021 p	Six months ended 30 June 2020  p	Six months ended 30 June 2021 p	Six months ended 30 June 2020  p	Six months ended 30 June 2021 p	Six months ended 30 June 2020  p
(Loss)/profit attributable to shareholders:	4,672	(12,003)	885	2,352	5,557	(9,650)
Effect of amortisation of acquisition intangibles	3,827	5,714	-	-	3,827	5,714
Effect of full tax charge adjustment	(769)	(159)	(168)	(410)	(937)	(570)
Effect of non-underlying items	1,334	-	(696)	-	638	-
Normalised earnings	9,064	(6,448)	21	1,942	9,085	(4,506)

 

BALANCE SHEET

	H1 2021	H1 2020*	FY 2020
	£'000	£'000	£'000
Goodwill, acquisition intangibles and investments	131,212	148,273	135,044
Property, plant and equipment	23,610	25,821	23,600
Right of use asset	194,073	198,907	200,041
Inventories	21,709	39,972	31,258
Trade receivables	146,688	124,124	139,884
Trade payables	(201,058)	(157,972)	(221,029)
Net cash / (debt)	47,591	(62,438)	56,867
Lease obligations	(202,945)	(206,447)	(209,071)
Net pension surplus / (deficit)	9,880	(10,737)	(7,880)
Taxation	1,352	2,078	3,678
Receivables relating to disposal of Terraquest	9,598	-	8,591
Net assets held for resale	-	2,024	-
Other payables	(4,277)	(5,830)	(4,932)
Net assets	177,433	97,775	156,051

*restated as detailed in note 17 to the Interim Results

 

The Group reported an increase in net assets during the last 12 months, driven by the profit generated on the disposal on the sale of Terraquest and the Domiciliary Care businesses. In addition, the Group has enjoyed an improvement in the pension scheme balances, as a result of increasing discount rates (reducing the present value of future obligations) combined with strong performance in the equity markets; the Group reported a net surplus at 30 June 2021 of £9.9m (30 June 2020: £10.7m deficit, 31 December 2020: £7.9m deficit).

 

The Balance Sheet reflects strong cash management; the detailed working capital analysis is covered in fuller detail below.

CASH FLOW AND WORKING CAPITAL MANAGEMENT

 

The Group excludes the financial impact from IFRS 16 from its adjusted net debt measure. This adjusted net debt measure has been introduced to align with the borrowings measure as defined for the Group's banking covenants, which are required to be stated before the impact of IFRS 16. The Group utilises leases as part of its day-to-day business providing over 10,000 residential properties to vulnerable service users and key workers. A significant proportion of these leases have break provisions and the lease terms are aligned to the Group's customer contracts to mitigate risk. The Group does not recognise these lease obligations as traditional debt instruments given the Group's ability to break these leases and in so doing cancel the associated lease obligation. A reconciliation between the reported net cash/(debt) and the adjusted measure is detailed below:

 

	H1 2021	H1 2020*	FY 2020
	£'000	£'000	£'000
Cash and cash equivalents	92,203	61,820	96,220
Long-term borrowings and overdrafts	(44,612)	(124,258)	(39,353)
Adjusted net cash/(debt)	47,591	(62,438)	56,867
Lease liabilities (current)	(34,814)	(37,671)	(42,888)
Lease liabilities (non-current)	(168,131)	(168,776)	(166,183)
Total net (debt)	(155,354)	(268,885)	(152,204)
Less: Lease Obligations (IFRS 16)	202,945	206,447	209,071
Adjusted net cash/(debt)	47,591	(62,438)	56,867

*restated as detailed in note 17 to the Interim Results

 

The Group reported an adjusted net cash position at the period-end of £47.6m (HY 2020: £62.4m net debt, FY 2020: £56.9m net cash). A significant part of this improvement related to the consideration received during 2020 in respect of the Terraquest and Domiciliary Care disposals amounting to £63.9m, whilst this has been enhanced further through excellent working capital management and cash generation.

The Group benefited from a number of temporary cash benefits as a result of Covid-19; notably a deferral of the Group's March 2020 VAT liability of £16.0m which has now been settled in full, together with contract payments received on account of £23.0m relating to interim Covid-19 arrangements, of which around half has subsequently unwound. To remove this temporary impact, a more useful measure of performance is the eighteen-month period to 30 June 2021, reporting operating cash flows as a percentage of EBITDA of 131%. This strong performance is also mirrored in the average daily net debt for the 6 months to 30 June at £8.2m (FY 20: net debt £97.3m).

 

			18 months to
	H1 2021	FY 2020	30 June 2021
	£'000	£'000	£'000
EBITDA on continuing operations	38,571	55,935	94,507
Cash inflow from operating activities of continuing operations before taxes paid	20,969	103,223	124,192
Cash conversion %	54%	185%	131%
Average daily net debt	(8,169)	(97,345)	(67,620)
Adjusted net cash /(debt) at period end	47,591	56,867	47,591

 

Given the strong cash performance, and the significant headroom against the banking facilities, the Group part-cancelled the revolving credit facility, reducing the total commitment from £145m to £90m. The current facilities expire in November 2022 and the Group has commenced the renewal process.

 

The average month end trade receivable and trade payable balance split by Housing category reflects strong working capital management during the period:

 

 

	H1 2021			FY 2020
	Receivables   £m	Payables   £m	Net working capital £m	Receivables   £m	Payables   £m	Net working capital £m
Maintenance-led	141.3	(137.8)	3.5	138.5	(125.7)	12.8
Management-led	20.5	(27.8)	(7.3)	32.4	(25.5)	6.9
Development	25.1	(4.2)	20.9	31.0	(6.0)	25.0
	186.9	(169.8)	17.1	201.9	(157.2)	44.7

 

The core activities of Maintenance and Management have historically absorbed a relatively low level of working capital when compared to the size of the business and the profit generated. This low working capital intensity remains the case and is reflected in the average month end balances detailed above.

 

As discussed above the Development portfolio had a strong sell-through in the period totalling £17.7m of revenues and this broadly equates to a cash proceeds inflow. The working capital absorbed within the Development activity has seen a reduction reflecting excellent progress in unlocking the cash that has been absorbed in this legacy part of the business. The working capital balance absorbed in Development as at 30 June 2021 was £15.9m. Management continue to expect to complete the remaining unwind of the working capital absorbed in this area over the course of the next 18 months.

 

A summary of the consolidated cash flow is detailed below on both a statutory and pre-IFRS 16 basis:

 

	H1 2021	H1 2021	18 months to June 2021	18 months to June 2021
	As reported	Before the impact of IFRS 16	As reported	Before the impact of IFRS 16
	£'000	£'000	£'000	£'000
(Loss) / profit before tax	5,645	7,004	(9,572)	(7,096)
Net finance costs	4,509	1,260	14,507	4,135
Amortisation of acquisition intangibles	3,827	3,827	13,352	13,352
Depreciation and amortisation	24,590	3,694	76,220	13,082
EBITDA	38,571	15,785	94,507	23,473
Other adjustments	173	173	1,781	1,781
Change in inventories	9,548	9,548	14,335	14,335
Change in operating receivables	(6,963)	(6,963)	11,512	11,512
Change in operating payables	(20,360)	(21,545	2,058	2,530
Cash inflow from operating activities	20,969	(3,002)	124,192	53,631
Conversion %	54%	(19%)	131%	228%
Taxes paid	(2,253)	(2,253)	(2,212)	(2,212)
Cash inflow from discontinued operations	67	67	2,594	2,594
Capital expenditure	(3,142)	(3,142)	(9,907)	(9,907)
Cash flows relating to property acquisition activity	-	-	4,618	4,618
Acquisitions and Disposals	-	-	54,612	54,612
Net finance costs	(3,956)	(707)	(14,401)	(4,031)
Discharge of lease liability	(20,962)	(239)	(60,920)	(728)
Change in net debt	(9,276)	(9,276)	98,577	98,577
Opening net debt	56,867	56,867	(50,986)	(50,986)
Closing net debt	47,591	47,591	47,591	47,591

 

RESULTS OF AGM

 

As set out in its announcement of Results of the AGM on 29 June 2021, the Board notes the votes received against some of the resolutions. Whilst all votes were passed with significant majorities, the Board remains committed to continuing an open and transparent dialogue and will accordingly seek to continue to engage with shareholders on these matters.