Preliminary Results

29 January 2016

FORMATION GROUP PLC

('Formation' or 'the Group')

Preliminary Results for the year ended 31 August 2015

Formation Group (AIM: FRM), the property development and project management company, today announces its preliminary results for the year ended 31 August 2015 ("the period").

Business Highlights

· Group revenue growth of 199% to £23.764m (2014: £7.941m) on the back of an increasing workload driven by the current strong London property market;

· Profits before taxation of £2.203m from continuing operations (2014 loss: £0.099m);

· Income of £2.421m recognised from the profit share agreement with Sunbel Development Limited and Pinacle Developments Limited in relation to a development property at Norwich House;

· Receipt of £4.638m in full and final payment of the Group's Aldgate Investment Funds;

· The Group continues to develop its interest in the vibrant property development sector and anticipates profits from its continuing development at 159-161 Iverson Road, London NW6 in the year ending August 2016: and

· The Group strengthened the Board with the appointments of two non-executive directors, David Walsh and Bartholomew O'Keefe, who both have extensive property experience.

Commenting on the results, Willie O'Dea, Chairman of Formation Group, said:

"I am pleased to report on a record year where we achieved material revenue growth of 199%, and the Group has returned to profit. Formation Group is now focused purely on property activities, which includes property development, property investment and professional construction management. The Group has a healthy on-going project stream and intends to use the cash generated from the development at Norwich House and anticipated profits from Iverson Road to source further development opportunities.

"We have seen a strong appetite from the banks again this year to support development funding, and this, coupled with a buoyant London property market, which we intend to exploit, gives reason for the Board to view the future with confidence. We look forward to operating a secure, profitable, capital based property Group going forward."

Enquiries:

Duncan Vasey / Fungai Ndoro

Formation Group Plc (AIM: FRM), headquartered in East London, is an AIM-listed Company focused on property development and project management services for small and medium scale building projects in London and the City periphery.

The Company's portfolio includes both new builds and conversion projects, and is also diversified through a limited exposure to commercial work and the rental sector.

The management team combines significant Plc experience with property expertise. The Company is well positioned to exploit a buoyant London residential property market, and believes that the newly added property development division will form a substantial part of its profitability in the future.

CHAIRMAN'S STATEMENT

I am pleased to report that the year ended 31 August 2015 has been a record year for Formation Group and the Company is well positioned for 2016 and the future. Group revenues continue to increase year on year with an uplift of 199% this year from £7.941m to £23.764m on the back of an increasing workload driven by the current strong London property market. It is expected that revenue will grow over the coming financial year with various work contracts in place and further commitments anticipated over the coming months.

This year has seen a net profit of £1.814m (2014 loss: £0.520m), which is an improvement in the Group's underlying financial performance. The loss for the year from discontinued operations of £0.219m relates largely to a write down of property values at Bradford and Bristol to fair values (2014 loss of £0.421m related largely to the same), which were sold on 2 October 2015 for £3.366m.

The finance income item of £2.421m relates to income recognised from the profit share agreement entered into by Formation Group Plc as announced on the 8 July 2015 with Sunbel Development Limited ('Sunbel') and Pinacle Developments Limited ('Pinacle') in relation to a development property at Norwich House, 9-19 Streatham High Road, London which is being converted from office space to 103 residential units.

The Group is now focused only on property activities, which includes property development, property investment and professional construction management. Every effort is being made to source further development opportunities with the cash resources available to the Group from its participation in the recent development of Norwich House and anticipated profits from its continuing development at Iverson Road, London NW6.

The Group has added and will continue to add to the experienced base of construction and property personnel it has, in order to meet its increasing contract commitments. The Company looks forward to utilising this experience to its advantage over the coming year. It is anticipated that access to future cash incomes and increased banking facilities will enable the Group to drive further improvements, increase profits and enhance shareholder value.

I would like to thank all board members and staff for the enormous efforts and dedicated contributions they have made in achieving a record year, with an enormous uplift in revenues and profits for the Group. I would also like to thank our shareholders for their continued trust and confidence in the Board and in my leadership as Chairman.

The outlook for the Group is exciting and we look forward to operating a secure, profitable, capital based property group going forward and to delivering long-term, sustainable earnings growth to our shareholders.

William O'Dea

Non-Executive Chairman

CHIEF EXECUTIVE OFFICER'S STATEMENT

I am delighted to report that this has been an exceptional year for the Group with a material increase in revenue and return to profits. Formation Group has strengthened its presence in the London property market through a profit share participation at Norwich House, in Streatham, London and through the acquisition of a residential lead development site with planning permission in Iverson Road, West Hampstead. The outlook for the Group is robust and the primary focus of Formation Group will be to take advantage of the buoyant property market that currently exists in the UK.

Results

The trading results for the year have improved with Group revenue from continuing operations increasing to £23.764m (2014 £7.941m) due to the larger amount of contracts in progress, which is in line with management expectations. This has resulted in a pre-tax profit of £2.203m from continuing operations (2014 loss: £0.099m).

The loss for the year from discontinued operations of £0.219m relates largely to a write down of the Bradford and Bristol properties to fair value.

The Group's result for the year after taxation was a profit of £1.814m (2014: loss of £0.520m).

Key Performance Indicators (KPIs)

Gross profit is considered to be the most meaningful KPI. Gross profit margin on professional services was 6.3% in the year to 31 August 2015 (31 August 2014: 11.3%). Turnover has risen by 199% in 2015 to £23.764m (2014 £7.941m). The reduction in the Gross profit margin in the year to 31 August 2015 is mainly due to an overrun on one of the completed projects.

The Group's building companies are listed in the considerate contractor scheme. The Group's aim is to have a zero accident policy. Staff turnover is low due to careful selection of top class personnel and its excellent reputation continues to attract loyal and hardworking staff.

Principal activity and business review

The principal activity of the Group is the provision of professional construction management services with an increasing focus on the more profitable development/investment business.

The Group has continued to project manage a number of central London property developments and has been engaged to provide these project management services by companies which are related parties of Formation Group plc.

The Group has also commenced the development of the Iverson Road site. Construction at the site is on-going and the sales of residential units are anticipated to be recognised in the year ending 31 August 2016. No amounts have been recognised in relation to property development or property sales in the year ended 31 August 2015.

In addition, the Group has invested £2.444m in the Norwich House profit share agreement. 

The Group has received the remaining funds of £4.638m from its joint venture with JV Finance Limited during the year.

The Group have been involved in the construction project management of eleven mainly residential projects during the year. The revenue from these projects were £23.764m in the year to 31 August 2015 (2014 £7.941m involving eight projects). All of the projects are located in Greater London. Two of the schemes have been completed in the year with nine ongoing.

The Group have an investment and financial interest in two of the projects as follows:

Norwich House,9-11 Streatham High Road, London SW16 1DZ

Project management and profit share participation in a development site of 103 residential units, associated car parking, three commercial units and the freehold interest in an adjoining apartment block. As part of its participation in the profit share, the Group advanced a loan of £2.444m.

On 8 July, the Group entered into a profit share agreement with Sunbel Development Limited ('Sunbel') and Pinacle Developments Limited ('Pinacle') in relation to a development property at Cromer Court, 9-19 Streatham High Road, London, which is being converted from office space to 98 residential units.

Under the terms of the agreement, Formation has advanced to Sunbel the sum of £2,443,671 to continue work on the development which commenced in June 2014. The loan attracts no coupon interest but instead Formation will be entitled to receive 40 per cent of the net profit arising on the development (i.e. the profit generated from sales of units after the repayment of debt utilised to purchase the site, the cost of development, taxation and repayment of the loan advanced by the Company). 

The Norwich House profit share arrangement has been accounted for as a loan and receivable. After initial recognition, the loan and receivable is measured at amortised cost being the net present value of the expected future cash flows due to the Group under the profit share arrangement, discounted at the effective rate of interest. Any gain or loss arising from the movement in the loan and receivable is recognised in finance income or cost, less provision for impairment.

During the period, the Group received a cash payment of £400k and repayments in the form of completed development properties of £1,589k. At 31 August 2015, the amortised cost of the loan and receivable was calculated to be £2,885k, resulting in finance income of £2,430k being recognised in the year ended 31 August 2015. £9k of set up costs in relation to the profit share were recognised in the profit and loss account during the year, resulting in net income from the profit share of £2,421k.

David Kennedy and Patrick Kennedy, Chief Executive and Non-executive director of Formation respectively, are directors of both Sunbel and Pinacle and thus the agreement is considered to be a transaction with a related party under the AIM Rules for Companies. The directors of Formation, other than David Kennedy and Patrick Kennedy, having consulted the Company's nominated adviser Northland Capital Partners Limited, consider that the terms of the transaction are fair and reasonable insofar as shareholders are concerned. 

159-161 Iverson Road, London NW6

Acquisition of this development site by Formation Homes (London) Limited (Group subsidiary) in West Hampstead, London. The site has the benefit of a planning approval for 19 residential units and 1 commercial unit. Completion of its purchase was in October 2014 with construction works scheduled to complete in March 2016. The construction and project management works have been financed by borrowings of £5.617m. As the properties were under development at the year end, no property sales were recognised in these financial statements.

We have seen a strong appetite from banks again this year to support development funding and the outlook for the buoyant London property market, the sector in which we operate remains positive.

Investment Property Retained

The Group currently has an interest in the following income producing investment properties:

52-58 Commercial Road, London E1

Rocquefort Properties Limited holds on behalf of Formation Group Plc 11 car parking spaces valued at £25,000 each, a total value of £275,000. The spaces are to be sold or let as directed by Formation Group Plc who will then receive the net proceeds.

Principal Risks and Uncertainties

Potential risks are listed below:-

Outlook

This year the Group delivered a material increase in revenues and returned to profit. Formation Group is confident that its core construction and property activity remains strong and that it will be able to continue to generate substantial revenues. The Group has a healthy on-going project stream that includes the completion of the Iverson Road project, expected to occur during the year ending 31 August 2016, and we anticipate this will generate significant revenues for the Group in the form of property sales. Further cash receivable to the Group under the Norwich House profit share agreement is also due in 2016, with an initial £0.4m received in cash and £1.589m received in properties in the year ended 31 August 2015.

Formation Group's focus is now purely on property activities, which includes property development, property investment and professional construction management. The Board intends to use the cash generated from the development at Norwich House and anticipated profits from Iverson Road to source further development opportunities. We have seen a strong appetite from the banks again this year to support development funding and this, coupled with a buoyant London property market, which we intend to exploit, gives reason for the Board to view the future with confidence.

David Kennedy

Chief Executive Officer

Consolidated statement of financial position

As at 31 August 2015

Consolidated statement of changes in equity

For the year ended 31 August 2015

Consolidated statement of cash flows

for the year ended 31 August 2015

Notes

1. Basis of preparation and going concern

The Directors have prepared working capital forecasts for the period to 28 February 2017 and as a result are satisfied the Group has sufficient resources to continue in operational existence for the next 12 months. The financial statements are therefore prepared on a going concern basis.

2. Earnings/ (loss) per share

The calculation of basic and diluted earnings/ (loss) per share is based on the following losses and numbers of shares:

Profit/ (Loss) per share is calculated by dividing the profit for the year attributable to equity shareholders by the weighted average number of shares in issue during the year.

3. Reconciliation of loss from continuing operations to net cash inflow from operating activities

Cash and cash equivalents (which are presented as a single class of assets on the face of the balance sheet) comprise cash at bank and other short term highly liquid investments with a maturity of three months or less.

4. Related party transactions

Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note.

During the year, Group companies entered into the following transactions with related parties who are not members of the Group:

The Tulip Trust and Kennedy Private Trust Company Limited have an interest in 132,940,954 shares (2014:140,113,704 shares) in the Company. During the year:

· Formation Design and Build Limited and Formation Construction Limited project managed a number of property developments for companies controlled by the Impalip Private Trust Company Limited. Revenue from these contracts totalled £23,764,461 (2014: £7,893,670) in the year. At 31 August 2014, the Group had debtor balances due from these companies of £2,153,000 (2014: £1,941,676).

· Formation Design & Build Limited leased premises from Columbia House Properties (No.6) Limited a company ultimately owned by Kennedy Private Trust Company Limited on a five year lease from 6 September 2012. The terms of the lease include a rental of £29,700 per annum. The charge for the year was £27,871 (2014: £29,286). Balance outstanding as at 31 August 2015 is £8,280 (2014: £0).

· Formation Group Plc leased premises from Columbia House Properties (No.6) Limited a company ultimately owned by Kennedy Private Trust Company Limited on a seven year lease from 1 March 2015. The terms of the lease include a rental of £33,200 per annum. The charge for the year was £16,560 (2014: £nil).

The Group invested in JV Finance Ventures Limited in December 2009 with JV Finance Limited. JV Finance Limited is majority owned by the J V Purpose Trust. Therefore, JV Finance Limited is viewed as a related party given its relationship with the Tulip Trust and Kennedy Family Trust, which are the majority shareholders in the Group.

· On 8 July, the Group entered into a profit share agreement with Sunbel Development Limited ('Sunbel') and Pinacle Developments Limited ('Pinacle') in relation to a development property at Cromer Court, 9-19 Streatham High Road, London which is being converted from office space to 98 residential units.

Under the terms of the agreement, Formation has advanced to Sunbel the sum of £2,443,671 to continue work on the development which commenced in June 2014. The loan attracts no coupon interest but instead Formation will be entitled to receive 40 per cent of the net profit arising on the development (i.e. the profit generated from sales of units after the repayment of debt utilised to purchase the site, the cost of development, taxation and repayment of the loan advanced by the Company).

The Norwich House profit share arrangement has been accounted for as a loan and receivable. After initial recognition, the loan and receivable is measured at amortised cost being the net present value of the expected future cash flows due to the Group under the profit share arrangement, discounted at the effective rate of interest. Any gain or loss arising from the movement in the loan and receivable is recognised in finance income or cost, less provision for impairment. 

During the period, the Group received a cash payment of £400k and repayments in the form of completed development properties of £1,589k. At 31 August 2015, the amortised cost of the loan and receivable was calculated to be £2,885k, resulting in finance income of £2,430k being recognised in the year ended 31 August 2015. £9k of set up costs in relation to the profit share were recognised in the profit and loss account during the year, resulting in net income from the profit share of £2,421k.

David Kennedy and Patrick Kennedy, Chief Executive and Non-executive director of Formation respectively, are directors of both Sunbel and Pinacle and thus the agreement is considered to be a transaction with a related party under the AIM Rules for Companies. The directors of Formation, other than David Kennedy and Patrick Kennedy, having consulted the Company's nominated adviser Northland Capital Partners Limited, consider that the terms of the transaction are fair and reasonable insofar as shareholders are concerned. 

5. Discontinued operations

Discontinued operations relate to the continued treatment of the investment properties of FG (Bradford) Limited and FG (Bristol) Limited results as part of discontinued operations.

Results of discontinued operations

The results of the discontinued operations which have been included in the consolidated income statement, were as follows:

The investment properties are secured by Dunbar Assets Plc under non-recourse financing.

An impairment charge has been recognised on the investment properties which have been written down to its fair value less costs to sell. This is based on current market evidence.

As previously announced the Investment properties held in Formation Group plc 100% owned subsidiaries FG (Bradford) Limited and FG (Bristol) Limited were handed back to Dunbar Assets plc in late 2013 with a view to dispose of the properties. Formation Group Plc is pleased to announce that the sale have now been completed on the 2 October 2015 with a positive write back of £1.076m on the loans secured against these properties by Dunbar Assets Plc. . No further adjustment was required to the carrying value of the investment properties. The balance of this loan on the 31 August 2015 was £4.346m.

6. Annual Report and Accounts

The financial information set out in this preliminary announcement does not constitute statutory accounts as defined by section 434 and 435 of the Companies Act 2006. The financial information for the year ended 31 August 2015 has been extracted from the Group's financial statements upon which the auditor's opinion is unqualified and does not include any statement under section 498(2) or 498(3) of the Companies Act 2006.

The annual report will be sent to shareholders on 5 February, 2016. Additional copies will be available on the Company's website: www.formationgroupplc.com

7. Annual General Meeting

Formation's Annual General Meeting is to be held on the 29 February, 2016 at the offices of Imparando (UK) Limited, 3rd Floor, 52-58 Commercial Road, London E1 1LP at 11 am.