8th Jun 2006 08:00
McKay Securities PLC08 June 2006 MCKAY SECURITIES PLC PRELIMINARY RESULTS 8th June 2005 ------------------------------------- The Directors of McKay Securities PLC announce the results of the Group for theyear ended 31st March 2006. FINANCIAL HIGHLIGHTS-------------------- * Adjusted net asset value per share up 27.6% to 421p (2005 - 330p) - note 9 * Equity shareholders' funds up 21.9% to £165.96 million (2005 - £136.18 million) * Final dividend up 9.7% to 6.8 pence per share (2005 - 6.2 pence per share). Total dividend for the year of 10.2 pence per share (2005 - 9.4 pence), up 8.5% * Profit before tax of £46.01 million (2005 - £20.95 million) Adjusted profit before tax £6.57 million (2005 - £6.78 million) - note 3 * Net rental income from investment properties up 37.6% to £18.37 million (2005 - £13.35 million) * Revaluation gain of £35.87 million; an increase over book value of 13.4% (2005 - 6.8%) * Diluted adjusted earnings per share up 4.8% to 12.28p (2005 - 11.72p) - note 6 * Weighted average cost of borrowing of 5.9% (2005 - 6.1%) * Total shareholder return of 38.2% (2005 - 26.8%) Eric Lloyd, Chairman, commented: "I am pleased to report a year of substantial progress for the Group duringwhich two major projects in the development programme were successfullycompleted and let. An important acquisition was made in Staines and continuedincome generation from lettings and portfolio management combined to producerecord levels of net rental income from investment properties, with the value ofthe portfolio and shareholders' funds also reaching new highs. With the fullbenefit of income from recent lettings still to come through and further qualityrefurbishments due to be completed during this financial year, we remainconfident of future growth." For further information please contact: McKay Securities PLC - 01189 502333 Simon Perkins (Managing Director)Alan Childs (Finance Director) www.mckaysecurities.plc.uk---------------------------- Details of the programme for the payment of the final dividend on the OrdinaryShares is as follows: Ex dividend date 14th June 2006 Record Date for the final dividend 16th June 2006 Report and Financial Statements dispatched toShareholders and also Notice of AGM 27th June 2006 Annual General Meeting to be held at 12 noon at TheRoyal Thames Yacht Club, 60 Knightsbridge, London SW1 27th July 2006 Final dividend paid 10th August 2006 CHAIRMAN'S STATEMENT-------------------- These are the first annual results to be presented to shareholders underInternational Financial Reporting Standards (IFRS), and show a pre-tax profitfor the year to 31st March 2006 of £46.01 million compared with £20.95 millionfor the same period last year. Adjusted pre-tax profit, excluding non-recurringprofit on sales and surrender premiums, revaluation gains and movement in thefair value of interest rate hedging instruments (note 3) was £6.57 million (2005- £6.78 million). A final dividend of 6.8 pence per ordinary share is recommended by the Board(2005 - 6.2 pence) payable on 10th August 2006. This takes the total dividendfor the year to 10.2 pence (2005 - 9.4 pence); an increase of 8.5%. The annual external valuation of the Group's property portfolio at 31st March2006 totalled £303.18 million, resulting in a surplus of £35.87 million; anincrease over book value of 13.4% (2005 - 6.8%). Net asset value per share, adjusted to exclude deferred tax and the fair valueof derivatives, increased by 27.6% from 330 pence to 421 pence. Total shareholder return for the year, representing dividends paid and growth inshare price, was 38.2% (2005 - 26.8%). Review of the Year------------------ I am pleased to report a year of substantial progress for the Group during whichtwo major projects in the development programme were successfully completed andlet. An important acquisition was made in Staines and continued incomegeneration from lettings and portfolio management combined to produce recordlevels of net rental income from investment properties, with the value of theportfolio and shareholders' funds also reaching new highs. In my interim statement, I noted that the pace of growth in income and profitswould be determined largely by progress in securing tenants for the officedevelopments at Wimbledon (58,690 sq ft) and Westminster (21,875 sq ft) both ofwhich were recently completed. I am pleased to say that, in both cases,negotiations underway at that time have resulted in lettings to tenants ofundoubted covenant on leases with 15 year terms certain and a combinedcontracted rent of £2.60 million pa. As these lettings were completed close tothe year end, they contributed only £280,000 to gross rents, which increasedoverall by £1.34 million to £15.77 million. Next year will see a full rentalcontribution from these top quality buildings, which are valuable additions tothe portfolio. During the year, shareholders' funds grew by 21.9% to £165.96 million from£136.18 million. This increase reflects the strong valuation performanceresulting from the success of the development programme, increased portfoliorents and the continued improvement in capital values, and demonstrates thestrength of the property market in the South East of England, which is the mainfocus of the Group's investment and development activities. In this market, our objective continues to be the generation of longer termcapital and income growth for shareholders by selectively adding properties tothe portfolio in established and improving centres that provide the opportunityto release further value from development, refurbishment and active portfoliomanagement. Our market reputation is for quality buildings in locations favouredby occupiers, which in turn attract quality tenants, providing the opportunityto achieve more resilient rental income on longer leases. The acquisition of Lotus Park in Staines for £27.65 million in July 2005 wasconsistent with this approach, adding four well-specified office buildings tothe portfolio totalling 77,125 sq ft in this first class location close toHeathrow. Since purchase, the tenant has paid a premium of £4.60 million(equivalent in total to 5.5 years' rent) to surrender the leases of two of thebuildings totalling 32,690 sq ft that it no longer occupied, thus enabling us toput in hand a comprehensive refurbishment. £3.7 million of the premium has beentreated under the Group's accounting policies as a one-off contribution toincome this year, effectively providing income in advance of the period duringwhich the buildings will be refurbished and re-let. Elsewhere, the development programme includes refurbishment of the offices atDacre House, SW1 (10,776 sq ft) which is due for completion this summer and thefuture redevelopment of 30/32 Lombard Street, EC3 (36,140 sq ft), where a freshplanning application for an improved office scheme will be submitted shortly. The contribution to pre-tax profit this year from the sale of investmentproperties was £167,000; sales comprised Newminster House, Bristol (27,520 sqft) and the final unit at Burnham (2,195 sq ft), which together released netproceeds of £5.55m. Since the year end, contracts have been exchanged for the sale of the formerdistribution depot in Chobham where, after years of difficulties and aprotracted planning process, planning consent was finally obtained during theyear for 54 residential units. The contracted sale price of £9.75 million wassubstantially in excess of the historical cost of £670,000 and marginally inexcess of the 31st March 2006 valuation, which reflected the level of offersbeing made at the time of the valuation. The letting of Pegasus Three, Crawley(16,400 sq ft) on a 15 year term certain to a substantial Swiss Group and afurther 12,400 sq ft in Chancery House, Sutton is also encouraging progresssince the year end. Real Estate Investment Trusts (REITs)------------------------------------- Following an announcement in the 2006 Budget, the Government has now publisheddraft legislation within the 2006 Finance Bill to bring in a REIT structure fromJanuary 2007. The cost of entering the tax exempt regime has been set at 2% ofthe market value of assets as at the date of transfer, which in our case wouldamount to approximately £6 million based on current year end values. REITs willbe required to pay out at least 90% of the taxable income profits of theproperty letting business to shareholders but will not have to pay corporationtax on income and capital gains. This latter saving would remove the need toprovide for deferred tax on valuation surpluses, adding £19.84 million toshareholders' funds based on the 2006 accounts, with the overall result being anincrease in net asset value per share of approximately 43 pence. Our initialinterpretation of the draft legislation is that the presence of a shareholdingof 10% or more will not be a barrier to entry. Further regulations on this, andother issues raised by the Finance Bill, are due to be published by theGovernment later this year. We are giving serious consideration to the detailsso far published and will monitor further publications closely as this could bean attractive future structure for the Group. Board Changes------------- Iain McKay will be retiring from the Board at the conclusion of this year's AGMin July, after a period of 38 years, which included his position as Chairmanfrom 1986 to 2003. I have personally had the pleasure of working closely withIain over this period of time, both in my former capacity as Managing Directorand latterly as Chairman, and his support and commitment to the Group has beentremendous. As a major shareholder, Iain will continue to take a keen interestin the Group's progress. Ian Menzies, who joined the Board in 1989, retired at the end of March. Ian hasalso made a significant contribution to the Board, particularly as Chairman ofthe Audit Committee, and his astute advice has been of great assistance to theGroup in its expansion over the last 17 years. We shall miss them both greatly and on behalf of the Board I would like to thankthem for their dedication and support over such a long period of time. We are delighted to welcome two new Directors. David Thomas joined us lastSeptember. He is a chartered accountant with an extensive business backgroundand has taken over from Ian Menzies as Chairman of the Audit Committee. NigelAslin joined the Board at the beginning of May. He is a chartered surveyor andthe Partner responsible for Strutt & Parker's Reading office and their CorporateReal Estate department. His thorough knowledge of, and contacts within, theSouth East commercial property market will be of valuable assistance. Future Prospects---------------- Over the last few years the popularity of property as an asset class hasresulted in demand generating a substantial increase in capital values, whilerents in the South East have generally stabilised at a lower base level. Theweight of money available for investment in commercial property shows no sign ofreducing, but future capital growth is likely to be more dependent on improvingrental values now that prime yields are at a level close to the cost of debt.The successful lettings this year confirm that quality buildings will attractoccupiers, and there are now areas in the South East where supply is becominglimited. In this environment, the Group's portfolio of quality buildings is wellpositioned to benefit from rental growth, which will become more apparent as theavailable supply of prime stock continues to fall. Substantial protection frominterest rate rises is in place; balance sheet gearing remains at a reasonablelevel and funds are available for further investment. With the full benefit ofincome from recent lettings still to come through and further qualityrefurbishments due to be completed during this financial year, we remainconfident of future growth. E.S.G. Lloyd PROPERTY AND FINANCIAL REVIEW----------------------------- Portfolio Review---------------- The Group's portfolio consists of 31 properties concentrated in the South Eastwith a value at 31st March 2006 of £303.18 million, representing an increase of13.4%. The portfolio totals 1.24 million sq ft, of which 75% was eitherdeveloped or extensively refurbished by the Group and subsequently held forinvestment purposes rather than traded. Design briefs on projects emphasise theneed for quality in order to maximise the chances of securing longer leases toprime tenants and to minimise potential future obsolescence. The result of thisapproach is a portfolio with a weighted average lease length of 9.9 years andsecurity of income, with 68% of all contracted rents paid by Government tenantsor those with the highest Dun and Bradstreet credit rating of 5A (tangible networth in excess of £35 million). The letting market during the year remained variable, with occupier demandcontinuing to be focused on quality buildings. Generally speaking, rents havebeen steady with letting incentives beginning to show signs of reducing. Incentral London rental values have been moving upwards, particularly in the WestEnd, where demand is beginning to exceed supply. Investors appear to have hadlittle regard to variations in the occupational market and the weight of fundsfrom a wide range of sources has continued to push prices higher for allsectors, resulting in higher levels of risk with lower income returns. Income------ Net rental income from investment properties received during the year increasedby 37.6% to £18.37 million, including a £1.34 million net gain in gross rents to£15.77 million, and an additional one-off surrender premium of £3.70 million inrespect of Lotus Park. After allowing for the loss of £804,000 of rent fromproperties sold or undergoing redevelopment in comparison with the year to 31stMarch 2005, the overall increase in gross rents totalled £2.14 million, of which£1.16 million was attributable to Lotus Park and £984,000 to lettings and rentreviews. Fifteen lettings were completed during the year with a combinedcontracted rent of £3.23 million pa. The most significant of these were inrespect of Wimbledon Gate (offices and retail - 58,690 sq ft) and 1 Old QueenStreet, SW1 (offices - 21,875 sq ft). Refurbishment work within the portfolio has continued to help generate lettings.Thatcham (offices - 16,260 sq ft) is now fully let and take up at Folkestone(industrial - 106,215 sq ft) and Portsoken House, EC3 (offices and retail -48,000 sq ft) leave these properties with minimal voids. At Chancery House,Sutton (offices - 54,615 sq ft) the comprehensive refurbishment of thereception, common areas and a number of office floors was completed in mid 2005.Since then, good progress has been made, with 10,700 sq ft let during the yearand a further 12,400 sq ft let since the year end, leaving 2,400 sq ft beingactively marketed. Lettable area, excluding ongoing development and refurbishment projects,available at the year end totalled 130,500 sq ft, consisting mainly of floorspace at Petersfield, Hook, Crawley and the ground floor retail unit atWimbledon Gate. In the early part of the year, the long-standing tenant of our50,000 sq ft industrial unit in Petersfield vacated at the expiry of its leaseand after minor refurbishment work, the building is being marketed. The groundfloor of Bartley House, Hook (10,650 sq ft) remains vacant, where this part ofthe M3 office market continues to experience oversupply. At Pegasus Place,Crawley (offices - 50,035 sq ft), steady interest in the buildings has continuedand, since the year end, Pegasus Three (16,400 sq ft) has been let to a largeSwiss Group on a 15 year term certain lease at a contracted rent of £377,635 pa.The quality of the tenant and the length of the lease supported our confidencethat the building would eventually let well. This leaves only two floorsavailable in Pegasus One, totalling 9,946 sq ft. Also contributing to rental growth this year was the settlement of a rent reviewin respect of 59,000 sq ft of office floor space occupied by Student LoansCompany Ltd, the Government backed agency, in 100 Bothwell Street, Glasgow(100,270 sq ft). The rent increased by 15%, which together with back rent, added£181,250 to income. At the year end the portfolio's annualised rental income, net of ground rents,was £17.44 million. The total rental value of the portfolio at current marketrents is estimated to be in excess of £20 million pa. Development----------- The two main speculative development projects under construction at the start ofthe year were Wimbledon Gate, SW19 and 1 Old Queen Street, SW1; these werecompleted in September 2005 and January 2006 respectively. At Wimbledon,discussions commenced with Domestic & General Group Plc shortly after buildingworks finished, culminating in a 15 year lease at a contracted rent of £1.55million pa. The tenant of 1 Old Queen Street is also of undoubted covenantstrength. Here the building was let prior to completion on a 20 year lease, witha tenant only break clause at the end of the fifteenth year and a contractedrent of £1.05 million pa. This lease was completed at the end of January. Withthe benefit of strong covenants and a term certain of 15 years in both cases,these two early lettings helped generate a 42% combined return. In Victoria, SW1, the comprehensive refurbishment of Dacre House started inSeptember 2005 following the tenant's vacation of the office floors (10,776 sqft) earlier in the year. Works to upgrade the building include new plant andmachinery, conversion of the redundant plant room at top floor level to gainoffice floor space and the remodelling and enlargement of the existing receptionarea. Completion will be this summer, when a full marketing programme will beimplemented. When Lotus Park, Staines (77,125 sq ft) was acquired last July, two of the fouroffice buildings held by IBM on leases until March 2013 were unoccupied. Thisgave us the opportunity to negotiate a payment from the tenant for the surrenderof these leases and to put in hand refurbishment and improvement works with aview to re-letting into an improving market. In March, a surrender of thebuildings known as Lotus 1 and 2 was finalised and works are due to commenceshortly which will include the addition of striking new reception areas, newexternal glazing and a comprehensive upgrading of the external landscaping andparking areas. Completion of the works is planned for next spring, and theproposals are already generating occupier interest. We anticipate that theprojected opening of Terminal 5 at Heathrow in March 2008, which lies just tothe north of Staines, will increase the popularity of this Thameside / westernM25 location, assisting upward pressure on rents. IBM remain in occupation ofLotus 3 and 4 (44,435 sq ft) until March 2013. Planning consent was finally granted for 54 residential units at Chobham inOctober 2005, after a protracted planning process that has taken 9 years. TheGroup acquired the site in 1970 and developed a 50,000 sq ft distribution depot.With the potential for a significant uplift in value from a planning consent toallow residential development, various schemes were promoted but despite generalplanning policy support for the re-use of brownfield land, the site's greenbeltstatus generated a highly restrictive policy framework. Ultimately consent wasachieved by promoting a detailed scheme with an environmentally innovativedesign. An extensive marketing campaign generated strong interest and contractswere exchanged after the year end at a sale price of £9.75 million for a totalof 10.5 acres, of which 3.9 acres were developable. The Group has retained 8.5acres of woodland next to the scheme which may have some longer term potential. Looking ahead, progress continues to be made in respect of the proposedredevelopment of 30/32 Lombard Street, EC3 (offices - 36,140 sq ft). When thebuilding was purchased in 2000, it had a planning consent in place for an officescheme of 53,280 sq ft, with leases expiring in December 2005. The leases havebeen extended to enable vacant possession to be obtained from January 2008onwards, and a planning application for a more contemporary scheme with anincreased lettable area in the region of 68,000 sq ft is due to be submittedbefore the end of July. Also in the City, studies are continuing in respect ofPortsoken House, EC3 (48,075 sq ft), an attractive period office building in aprominent position on the edge of the eastern City core. Leases expire inDecember 2008 and options include comprehensive refurbishment, redevelopment ora rolling refurbishment. Valuation--------- The annual external valuation of the Group's portfolio as at 31st March 2006 was£303.18 million, generating a £35.87 million surplus over book value, anincrease of 13.4% overall. Strong demand from investors has continued to pushvalues higher, particularly for secure long term income. The benefit of thisyield compression has been seen across the portfolio, particularly where incomehas been increased through lettings and rent reviews. The office portfolioincreased by 11.1% and the development properties let during the year performedparticularly well due to the covenant strength and lease length secured. Theremaining 16 years of the lease at Great Brighams Mead, Reading (offices -84,840 sq ft) was assigned during the year to a tenant with greater covenantstrength which assisted the valuation, and Castle Lane, SW1 (offices - 14,180 sqft) also performed well following last year's refurbishment. Industrialproperties rose by 24.3% with the largest increase being in respect of Chobhamdue to the receipt of planning consent for residential development, and at Egham(industrial - 89,000 sq ft), where the lease was regeared to secure income for afurther 10 years. The total portfolio return of 20% reflects the strong growth in income frominvestment properties and the extent of the valuation surplus. Finance------- The Group adopted International Financial Reporting Standards (IFRS) with effectfrom 1st April 2005. The Group's Interim Statement issued on 14th December 2005explained the changes and presented reconciliations to past results previouslyreported in accordance with UK GAAP. At 31st March 2006, the Group's net debt was £107.94 million (2005 - £78.72million) representing 65% of shareholders' funds (2005 - 58%). The increase indebt in the year was predominantly due to the purchase of Lotus Park, Stainesand capital expenditure of £9.75 million incurred in completing the developmentsof Wimbledon Gate and 1 Old Queen Street. After taking into account thecontribution from sales of £5.55 million (2005 - £4.66 million), net investmentin the portfolio for the year was £36.01 million (2005 - £4.91 million). Total banking facilities available to the Group increased during the year by £35million to £143 million, as a result of the renegotiation of two of the Group'ssix fully revolving facilities. If fully drawn, balance sheet gearing wouldincrease to 86% of shareholders' funds. The loan to value ratio as at 31st March2006 was 36% (2005 - 34%). Net cash flow from operating activities was £9.15million (2005 - £3.89 million). At the year end, 64% (2005 - 71%) of the Group's facilities had a maturity inexcess of 5 years. Short term flexibility is achieved by overdraft and a varietyof interest rate periods. The Group tax charge of £12.72 million can be analysed between deferred tax of£12.01 million and current tax of £712,000 giving an effective rate of 27.6% onthe profit before tax. The current tax charge as a percentage of adjusted profitbefore tax is 10.8% mainly reflecting the benefit of capital allowances claimedon plant and machinery in the investment portfolio and interest capitalised ondevelopments. The deferred tax charge is primarily on the revaluation surplusesarising on investment properties in the year. Under IFRS the cost of the final dividend recommended for the year is no longershown as a deduction from profit in the income statement, but as a deductionfrom reserves. Interest cover, based on adjusted profit before tax plus finance costs as aratio to finance costs, was 2.3 (2005 - 2.7). The average cost of borrowing forthe year was 5.9% (2005 - 6.1%). The main financial risks to the Group are tenant default, liquidity risk andinterest rate risk. Tenant default is monitored by Dun and Bradstreet creditchecks being carried out for each new tenant, together with ongoing creditchecks and strict credit control. Protection against the latter two risks isprovided by financial hedging instruments and at the year end £80 million (74%)of debt was protected by participating swaps compared with £52 million (65.8%)last year. If fully drawn, cover would be 55.9%. This increase was consideredprudent given the Group's increased borrowing levels and provides strategicprotection at competitive levels over the medium to long term in the current lowinterest rate environment. This protection has been extended since the year end,with completion of a further £20 million swap facility at a fixed rate of 3.99%for an initial term of 8 years. The Group does not hedge account its interestrate derivatives and therefore includes the movement in fair value in the incomestatement. S.C. PerkinsA.S. Childs The summary of the consolidated results of McKay Securities PLC and its subsidiaryundertakings (the "Group") for the year ending 31st March 2006 are as follows: GROUP INCOME STATEMENT For the year ended 31st March 2006 2006 2005 ---------------------------------- Notes £'000 £'000 Gross rents and service charges receivable 18,353 17,241 Surrender premiums received 3,700 - --------- --------- 22,053 17,241 Direct property outgoings (3,684) (3,896) --------- --------- Net rental income from investment properties 2 18,369 13,345 Administration costs (3,288) (2,665) --------- --------- Operating profit before gains on investment 15,081 10,680 properties Profit on disposal of investment properties 167 568 Movement on revaluation of investment properties 35,247 13,253 --------- --------- Operating profit 50,495 24,501 Finance costs 4 (5,344) (4,143) Finance income 50 49 Share of results of associated undertaking 807 541 --------- --------- Profit before taxation 46,008 20,948 Taxation 5 (12,719) (4,058) --------- --------- Profit for the period 33,289 16,890 --------- --------- Earnings per share 6 Basic 73.06p 37.16p Diluted 72.43p 36.96p Adjusted earnings per share figures are shown in note 5. Dividends Previous year's final dividend of 6.2p (2004 - 5.9p) paid during the year 2,824 2,670 Interim dividend of 3.4p (2005 - 3.2p) paid during the year 1,549 1,460 Proposed final dividend of 6.8p (2005 - 6.2p) 3,101 2,824 STATEMENT OF RECOGNISED INCOME AND EXPENSEFor the year ended 31st March 2006------------------------------------------ 2006 Group Company £'000 £'000 Actuarial movement on defined benefit pensionscheme 370 370Related deferred tax (111) (111) ---------- ----------Net income recognised directly in equity 259 259Profit for the year 33,289 26,935 ---------- ----------Total recognised income and expense for the year 33,548 27,194Adoption of IAS 39 (note 8) 285 285Deferred tax on adoption of IAS 39 (83) (83) ---------- ----------Total recognised income and expense 33,750 27,396 ---------- ---------- 2005 Group Company £'000 £'000 Actuarial movement on defined benefit pensionscheme (30) (30)Related deferred tax 9 9Exchange gain 8 - ---------- ----------Net income recognised directly in equity (13) (21)Profit for the year 16,890 13,457 ---------- ----------Total recognised income and expense for the year 16,877 13,436 ---------- ---------- GROUP BALANCE SHEETFor the year ended 31st March 2006 2006 2005---------------------------------- Notes £'000 £'000 Non-current assetsInvestment properties 304,687 234,196Plant and equipment 73 64Investments 5,700 5,019 ---------- ---------- 310,460 239,279 ---------- ----------Current assetsTrade and other receivables 7 3,633 2,992Cash and cash equivalents 1,838 2,271 ----------- ----------- 5,471 5,263 ----------- -----------Total assets 315,931 244,542 ----------- ----------- Current liabilitiesLoans and other borrowings 8 (15,016) (792)Corporation tax payable 5 (274) (688)Trade and other payables 8 (8,260) (6,328) ----------- ---------- (23,550) (7,808) ----------- ---------- Non-current liabilitiesLoans and other borrowings 8 (94,543) (80,195)Pension fund liabilities (701) (1,189)Finance lease liabilities (4,469) (4,469)Deferred tax (26,708) (14,697) ----------- ----------- (126,421) (100,550) ---------- -----------Total liabilities (149,971) (108,358) ----------- -----------Net assets 165,960 136,184 ---------- ----------- EquityCalled up share capital 9,122 9,110Share premium account 2,208 2,115Capital reserves 36,065 34,523Revaluation reserve 87,599 64,716Retained earnings 30,966 25,720 ----------- -----------Total Equity 165,960 136,184 ----------- ---------- Net asset value per share 9 364p 299p Adjusted net asset value per share 9 421p 330p GROUP CASH FLOW STATEMENTFor the year ended 31st March 2006 2006 2005---------------------------------- £'000 £'000 Operating activitiesProfit before tax 46,008 20,948Adjustments for:Depreciation and other non-cash movements 417 17Profit on disposals of investment properties (167) (568)Movement in revaluation of investment properties (35,247) (13,253)Net finance costs 5,294 4,094Share of profit of associate undertaking (807) (541) ---------- ----------Cash flow from operations before changes in workingcapital 15,498 10,697Increase in debtors (606) (3)Increase/(decrease) in creditors 1,636 (81) ---------- ---------Cash generated from operations 16,528 10,613Interest paid (6,294) (5,251)Interest received 37 44Corporation tax paid (1,126) (1,519) --------- ---------Cash flows from operating activities 9,145 3,887 --------- -------- Investing activitiesSale of investment properties 5,547 4,663Dividends from sundry investments 1 1Dividends from associated undertaking 126 117Purchase and development of investment properties (39,503) (8,846)Purchase of other fixed assets (52) (21) --------- ---------Cash flows from investing activities (33,881) (4,086) --------- --------- Financing activitiesProceeds from issue of share capital 104 366Increase in borrowings 28,572 4,627Equity dividends paid (4,373) (4,130) --------- ---------Cash flows from financing activities 24,303 863 --------- --------- Net (decrease)/increase in cash and cash equivalents (433) 664Cash and cash equivalents at the beginning of the 2,271 1,607year -------- --------Cash and cash equivalents at the end of the year 1,838 2,271 -------- -------- Notes forming part of the Group financial statements---------------------------------------------------- 1. The financial information set out in this preliminary announcement does not constitute the Company's statutory accounts for the year ended 31st March 2006 but is derived from those accounts. Statutory accounts for 2005 have been delivered to the Registrar of Companies, and those for 2006 will be delivered following the Company's Annual General Meeting. The auditors have reported on those accounts; their reports were unqualified and did not contain statements under section 237 (2) or (3) of the Companies Act 1985. These financial statements are the first to be prepared on the basis of the recognition, measurement and disclosure requirements of applicable International Financial Reporting Standards as adopted by the European Union (IFRS) which have been adopted by the Group and Company and incorporated into the principal accounting policies. From 1st January 2005, all listed companies trading on a regulated market in any European Union member state are required to adopt this basis of accounting in their consolidated accounts. The Interim Statement issued on 14th December 2005 explained the changes and presented reconciliations to past results previously reported in accordance with UK GAAP. In accordance with Section 230 of the Companies Act 1985 a separate income statement for McKay Securities PLC is not presented. The profit after tax of the Company is £27,855,000 (2005 - £13,457,000). 2. Net rental income from investment properties -------------------------------------------- 2006 2005 £'000 £'000 Gross rents receivable 15,150 14,318 SIC 15 adjustment 623 115 --------- --------- Gross rental income 15,773 14,433 Service charges receivable 2,580 2,808 --------- --------- 18,353 17,241 Surrender premium received 3,700 - Direct property outgoings (3,684) (3,896) --------- --------- 18,369 13,345 --------- --------- The Group engages in only one class of business activity, being property investment and development. Rent receivable under the terms of the leases is adjusted, in accordance with SIC 15, for the effect of any incentives given. 3. Adjusted profit before tax -------------------------- Adjusted profit before tax is the Group's preferred measure to provide a clearer picture of recurring profits from core rental activities before tax, adjusted as set out below. 2006 2005 £'000 £'000 Profit before tax 46,008 20,948 Surrender premium received (3,700) - Change in fair value of derivatives 263 - Movement in revaluation of investment properties (35,247) (13,253) Profit on disposal of investment properties (167) (568) Associated undertaking disposals and revaluation movement (588) (347) ---------- ---------- Adjusted profit before tax 6,569 6,780 ---------- ---------- 4. Finance costs ------------- 2006 2005 £'000 £'000 Interest on bank overdraft and loans 5,930 4,640 Finance lease interest on leasehold property obligations 289 289 Change in fair value of derivatives 263 - Amortisation of loan facility costs 15 - Other interest 8 - --------- --------- 6,505 4,929 Capitalised interest (1,161) (786) -------- -------- 5,344 4,143 -------- -------- 5. Taxation -------- 2006 2005 £'000 £'000 Analysis of charge in period: Current tax: UK corporation tax on profits for the period 712 1,070 Adjustments in respect of prior periods - (33) --------- --------- 712 1,037 Total current tax Deferred tax: Origination and reversal of temporary differences 12,007 3,021 --------- -------- Total tax charge in the income statement 12,719 4,058 --------- -------- Reconciliation to effective rate of tax: Current tax reconciliation: Profit before tax 46,008 20,948 --------- --------- Tax on profit at 30% (2005 - 30%) 13,802 6,284 Effects of: Expenses not deductible for tax purposes 11 14 Deferred tax released on sale of investment properties (29) (88) Associated undertaking (242) (162) Chargeable gains on sale of investment property (50) (170) Movement on revaluation of investment properties (773) (1,787) Adjustment to tax charge in respect of prior years - (33) --------- --------- Tax charge for period (as above) 12,719 4,058 --------- --------- Factors affecting future tax rate: Capital allowances are claimed on eligible investment assets and calculated on the reducing balance. The availability of capital allowances in excess of depreciation in future years will depend on the Group's ongoing development and acquisition programme. The current Group corporation tax payable of £274,000 (2005 - £688,000) represents the tax payable for current and prior periods less payments made. 6. Earnings per share ------------------ 2006 2005 p p Earnings per share 73.06 37.16 Deferred tax on capital allowances 2.12 0.87 Surrender premium received (8.12) - Change in fair value of derivatives 0.59 - Movement in revaluation of investment properties (53.59) (24.05) Profit on disposal of investment properties after taxation (0.37) (1.44) Associated undertaking disposals and revaluation movement (1.29) (0.76) --------- --------- Adjusted earnings per share 12.40 11.78 -------- -------- Earnings per share on ordinary shares are based on earnings after tax of £33,289,000 (2005 - £16,890,000) and 45,561,331 (2005 - 45,458,192) shares, being the weighted average number of ordinary shares in issue during the period. Reconciliation of earnings per share to diluted earnings per share: Number EPS EPS of shares 2006 2005 p p Weighted number of ordinary shares in issue 45,561,331 73.06 37.16 Number of shares under option 1,459,968 (2.27) (0.89) Number of shares that would have been issued at fair (1,058,602) 1.64 0.69 value ---------------- -------- -------- 45,962,697 72.43 36.96 ---------------- -------- -------- 2006 2005 p p Diluted earnings per share 72.43 36.96 Deferred tax on capital allowances 2.10 0.87 Surrender premium received (8.05) - Change in fair value of derivatives 0.56 - Movement in revaluation of investment properties (53.12) (23.92) Profit on disposal of investment properties after taxation (0.36) (1.43) Associated undertaking disposals and revaluation movement (1.28) (0.76) --------- --------- Adjusted diluted earnings per share 12.28 11.72 --------- --------- Diluted earnings per share are based on the same earnings after tax and on the weighted average number of shares in issue during the year of 45,962,697 (2005 - 45,704,522) shares, which takes into account the number of potential ordinary shares arising from the exercise of share options. Adjusted earnings per share excludes the after tax effect of profit from the disposal of investment properties, the effect of surrender premium received, the change in the fair value of derivatives and the movement in revaluation of investment properties, as well as the deferred tax provided on capital allowances and investment properties, where no tax payment is expected to crystallise. 7. Trade and other receivables --------------------------- 2006 2005 Group Company Group Company £'000 £'000 £'000 £'000 Rents receivable 221 23 52 52 Amounts due from subsidiary undertakings - 12,903 - 12,465 SIC 15 lease incentives 2,695 2,652 2,071 2,071 Interest rate derivatives 22 22 - - Other debtors and prepayments 695 280 869 364 -------- -------- --------- -------- 3,633 15,880 2,992 14,952 -------- -------- -------- -------- All the above debtors are receivable within one year except for lease incentives of £2,443,000 (2005 - £1,862,000), accrued in accordance with SIC 15. 8. Liabilities ------------ 2006 2005 Group Company Group Company Loans and other borrowings £'000 £'000 £'000 £'000 Bank loans 109,765 103,415 80,940 74,220 Loan notes 13 13 47 47 Bank facility fees (219) (219) - - ----------- ----------- --------- --------- 109,559 103,209 80,987 74,267 ----------- ----------- --------- --------- Analysed as follows: Current liabilities 15,016 14,616 792 422 Non-current liabilities 94,543 88,593 80,195 73,845 ----------- ----------- ---------- ----------- 109,559 103,209 80,987 74,267 ---------- ----------- ---------- ----------- Rent received in advance 3,271 2,392 3,015 2,127 Other taxation and social security costs 848 848 182 182 Amounts owed to subsidiary undertakings - 26,495 - 24,902 Other creditors and accruals 4,141 2,700 3,131 1,469 ---------- ---------- ---------- ---------- Trade and other payables 8,260 32,435 6,328 28,680 ---------- ---------- --------- --------- The analysis of unsecured loan notes and short term loans, and bank loans which are secured on certain of the freehold and leasehold properties of the Group is as follows: 2006 2005 £'000 £'000 Company Secured bank loans repayable at stated dates between 2006 and 2017 at variable rates 103,415 74,220 Unsecured loan notes repayable in April 2006 at variable rates 13 47 Bank facility fee (219) - ---------- --------- 103,209 74,267 Subsidiary undertakings Secured bank loans repayable at stated dates between 2006 and 2007 at variable rates 6,350 6,720 ---------- --------- 109,559 80,987 ---------- --------- The bank loans are secured against land and buildings with a carrying amount of £217,246,000 (2005 - £175,270,000). 2006 2005 Repayable in: Group Company Group Company £'000 £'000 £'000 £'000 Less than 1 year 15,016 14,616 792 422 1-2 years 5,928 (22) 20,975 14,625 2-5 years 24,334 24,334 9,000 9,000 5-10 years 48,281 48,281 13,500 13,500 More than 10 years 16,000 16,000 36,720 36,720 ---------- ---------- ---------- ---------- 109,559 103,209 80,987 74,267 ---------- ---------- --------- --------- Borrowing facilities The Group has various undrawn committed borrowing facilities. The facilities available in respect of which all conditions precedent had been met were as follows: 2006 2005 £'000 £'000 Expiring in less than 1 year - - Expiring in 1 - 2 years - - Expiring in 2 - 5 years 5,600 - Expiring in 5 - 10 years 23,610 20,280 Expiring in more than 10 years 4,000 6,500 --------- --------- 33,210 26,780 -------- -------- Exposure to credit and interest rate risks arise in the normal course of the Group's business. Derivative financial instruments are used to reduce exposure to interest rate fluctuations. There are no material unrecognised gains and losses on instruments used for hedging. Credit risk Credit evaluations are performed on all tenants looking to enter into a lease or pre-lease agreements with the Group. In certain cases the Group will require collateral to support these lease obligations. These might be in the form of cash rental security deposits, bank rental guarantee or a parent company guarantee. At the balance sheet date there were no significant concentrations of credit risk. The maximum exposure to credit risk is represented by the carrying amount of each financial asset including derivative financial instruments on the balance sheet. The group has no exposure to currency risks. Hedging The Group adopts a policy of ensuring that its exposure to interest rate fluctuations is mitigated by the use of financial instruments. Participating swaps have been entered into to achieve this purpose. The swaps mature over the next 14 years, matching the maturity of the related loans and have swap rates ranging from 4.90% to 5.07% and collars ranging from 2.49% to 2.95%. The Group does not hold or issue derivative financial instruments for trading purposes. Participating swaps Fair Hedged Average Fair Value amount Average Maturity value Adjustment £m rate - years £m £m Interest rate swaps 40.0 5.01% 10.41 1.172 (1.172) Interest rate caps 40.0 5.01% 10.41 (1.472) 1.472 Interest rate floors 40.0 2.80% 10.41 0.278 (0.278) -------- -------- (0.022) 0.022 -------- -------- In both 2006 and 2005 there was no difference between the book value and the fair value of all the other financial assets and liabilities of the Group and Company. Set out below is the interest rate profile of the Group after taking into account the interest rate hedging instruments: 2006 2005 £'000 £'000 Fixed rate 6,350 6,720 Floating rate 23,209 24,267 Hedged 80,000 50,000 ---------- --------- 109,559 80,987 ---------- --------- Weighted average cost of borrowing 5.9% 6.1% ------- ------- The Group does not hedge account its interest rate derivatives and therefore states them at fair value in the income statement. The Group has no liabilities at maturity on the above financial instruments. The above fair values are based on quotations from the Group's banks. The fair value adjustment of these instruments as at 1st April 2005 was passed through reserves, in accordance with the transition arrangements allowed by IFRS 1 in relation to adoptions of IAS 39 the figure being as follows: £'000 Loss on interest rate swaps (287) Gain on interest rate caps 650 Loss on interest rate floors (78) ------ 285 ------ 9. Net asset value per share ------------------------- 2006 2005 Net asset Net asset Net value Net Value Assets Shares per share assets Shares per share £'000 '000 p £'000 '000 p Basic 165,960 45,609 364 136,184 45,551 299 Deferred tax on capital allowances 6,308 - 14 5,342 - 12 Deferred tax on revaluation 19,600 - 43 8,771 - 19 Adjustment to fair value of derivatives net of deferred tax (15) - - - - - ----------- --------- ------ ---------- --------- ------ Adjusted 191,853 45,609 421 150,297 45,551 330 ----------- --------- ------ ---------- --------- ------ Number of shares under option 3,104 1,479 (7) 2,228 1,214 (4) ---------- -------- ----- ---------- --------- ----- Adjusted diluted 194,957 47,088 414 152,525 46,765 326 ---------- -------- ----- ---------- --------- ----- 10. The Report and Financial Statements will be posted to shareholders on 27th June 2006 with copies available from the Group's registered office at 20 Greyfriars Road, Reading, RG1 1NL from the same date, and from the Group's website www.mckaysecurities.plc.uk This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
MCKS.L