Foxtons Group plc

FINAL RESULTS FOR THE FULL YEAR ENDED 31 DECEMBER 2022

7 MARCH 2023

Significant unfulfilled potential, medium-term growth ambition to deliver £25m to £30m operating profit

Strong trading performance driven by significant growth in non-cyclical, recurring Lettings revenue

·    Revenue up 11% to £140.3m with growth across all businesses: +17% in Lettings, +1% in Sales and +8% in Financial Services. 65% of revenue generated from non-cyclical, recurring activities.

·    D&G Lettings, acquired in March 2021, delivered £5.3m of operating profit in 2022 and a 35% return on capital. £10.6m invested in Lettings acquisitions in 2022.

·    Adjusted operating profit up 56% to £13.9m and profit before tax up 115% to £11.9m reflecting high levels of operating leverage driving strong revenue to profit conversion.

·    Net free cash flow of £7.7m (2021: £6.6m) and year end net cash of £12.0m (2021: £19.4m).

·    Final dividend of 0.7p per share declared, total 2022 dividend of 0.9p per share, an increase of 100%. £4.9m returned through share buybacks in 2022.

Business foundations strong, but four core operational failings have negatively impacted historical performance and prevented significant unfulfilled potential being realised:

·      Poor data accessibility and utilisation impeded business decision making and the ability to unlock revenue growth opportunities.

·      Outdated estate agency processes and diluted culture restricted organic growth.

·      Insufficient headcount capacity and experience constrained productivity.

·      No clear customer proposition and brand invisible in core markets limited ability to successfully compete.

Refocused strategic priorities, underpinned by a new purpose, support delivery of medium-term growth ambition to deliver £25m to £30m operating profit

·    New purpose underpins our strategy: to get the right deal done for London's property owners.

·    Refocused strategic priorities, with an emphasis on non-cyclical and recurring revenue streams, support the delivery of £25m to £30m operating profit in the medium term:

-     Lettings: Deliver 3%-5% average annual organic growth and attractive returns on capital from portfolio acquisitions

-     Sales: Achieve 4.5%+ (2022: 3.4%) share in our markets through building capacity and capabilities

-     Financial Services: 7%-10% annual average revenue growth by maximising cross-sell opportunities

Current trading and outlook

·    Trading in January and February in line with our expectations.

·   Lettings market dynamic of low volumes and high rental prices has continued into 2023. Little change to the dynamic expected over the year but year-on-year rental price growth rates likely to normalise.

·    Sales market more challenging as new buyer activity reduced following the September mini-budget, reducing the value of the under-offer sales pipeline entering this year. Due to the time to complete a sales transaction, these effects will be felt through the majority of 2023.

·    Financial Services refinance activity is expected to remain resilient, whilst demand for new purchase mortgages will track performance of the wider sales market. 

·   Mortgage rates have started to reduce in recent weeks and buyer activity is picking up, which may result in a more favourable sales market in the latter part of the year.

·   Operational improvements made in the last 6 months are starting to improve front-end operations including driving property instruction market share growth in both Lettings and Sales.

·   High levels of non-cyclical and recurring revenues, alongside operational improvements to drive growth, will protect Group profitability and limit the impact of a weaker sales market.

·    £7.4m acquisition of Atkinson McLeod announced yesterday, expected to be earnings enhancing in 2023.

Commenting on today's announcement, Guy Gittins, Group Chief Executive said:

"My first six months have flown by and it's great to be at the helm of the most iconic estate agency in London, the place I started my career 20 years ago. 2022 was a year of good financial progress, with revenue growth across Lettings, Sales and Financial Services, and profit before tax up significantly up year-on-year.

"My operational review is complete, whilst Foxtons has strong foundations, core operational failings have throttled historical performance and prevented significant unfilled potential from being realised.

"Operational improvements are being made at pace to rebuild our competitive advantages, including embedding a more confident articulation of our brand, investing in revenue generating headcount and improving our data platform to fully harness the power of our industry leading database.

"With the support of our talented workforce, I am certain we have the collective determination to put Foxtons on top where it belongs, and with a refocused set of strategic priorities, have a medium-term growth ambition to deliver £25m to £30m of operating profit.

"Whilst the macroeconomic backdrop remains uncertain, our resilient Lettings and Financial Services businesses, coupled with the operational improvements we are delivering at pace, should mitigate most of the impact of a potentially lower volume sales market."  

For further information, please contact:

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¹ Both 2021 and 2022 results are presented on a continuing operations basis and exclude the results of the D&G Sales business (disposed of on 11 February 2022).

 ² Adjusted operating profit is defined as profit before tax for the period before finance income, finance cost, other gains/(losses) and adjusted items. Refer to Note 2 for a reconciliation of the measure to statutory measures.

³ Adjusted earnings per share is defined as earnings per share excluding the impact of adjusted items and any significant remeasurements of deferred tax balances as a result of UK corporate tax rate changes. Refer to Note 9 for a reconciliation between earnings/(loss) per share and adjusted earnings per share.

⁴ Total Group includes results from both continuing operations and discontinued operations. Refer to Note 7 for details of the results from discontinued operations.

⁵ Net free cash flow is defined as net cash from operating activities less repayment of IFRS 16 lease liabilities and net cash generated/used in investing activities, excluding the acquisition of subsidiaries (net of any cash acquired), divestments and purchases of investments.

About Foxtons

Foxtons is London's most iconic estate agency. Founded in 1981, the Group operates from a network of interconnected branches, offering a range of residential property related services across Lettings, Sales and Financial Services. The Group seeks to deliver significant shareholder value through its four strategic priorities:

·    Lettings organic growth

·    Lettings acquisitive growth

·    Sales market share growth

·    Financial Services revenue growth

PERFORMANCE AT A GLANCE                                                                                             

¹ Both 2021 and 2022 results are presented on a continuing operations basis and exclude the results of the D&G Sales business (disposed of on 11 February 2022).

² These measures are APMs used by the Group and are defined, and purpose explained within Note 16.

³ Net cash from operating activities and net free cash flow includes continuing and discontinued operations.

CHAIRMAN'S STATEMENT

2022 was an eventful year for Foxtons. Significant Senior Management changes took place, of which the most significant was the appointment of Guy Gittins as CEO. His appointment was announced in late May and after a period of garden leave required by his previous employer, he joined the Company on 5 September 2022.

Peter Rollings, a Non-Executive Director, who had previously spent 20 years at Foxtons, latterly as a Managing Director, took over as interim CEO pending Guy's arrival. I am most grateful to Peter for taking on this responsibility, which he fulfilled with enthusiasm and commitment.

Guy, who began his career at Foxtons and was most recently CEO of Chestertons, has brought to Foxtons considerable experience and success as an estate agent, as well as knowledge of the London residential market.

During his first six months, Guy has reviewed the business and developed a set of priorities to put the business firmly on the front foot and drive revenue and profit growth based upon rebuilding Foxtons' estate agency DNA. Already he's making significant strides in strengthening Foxtons' competitive advantages, enhancing our ability to innovate and lead the industry with our data capabilities, as well as refreshing our purpose and values.

We are prioritising growth in the non-cyclical revenue streams within Lettings and Financial Services to drive resilience and recurring revenues. Growth will be achieved through organic and inorganic growth in Lettings, and by building up our Financial Services business to handle more of the referrals generated from the Sales business.

The Group has set out its medium-term ambitions which will return Foxtons to a leading agency position in London and deliver significantly improved returns to our shareholders. The management incentive schemes are closely aligned to the Group's medium-term ambitions.

Financials

Revenue from continuing operations increased by 11% to £140.3 million, driven largely by Lettings which contributed £86.9 million, an increase of 17%. Adjusted operating profit increased by 56% to £13.9 million with Lettings contributing £18.0 million, enhanced by a full year of contribution from the D&G Lettings portfolio and the additional acquisitions made in 2022. Profit before tax increased by 115% to £11.9 million.

Head office and other administration costs were reduced by streamlining Senior Management, resulting in annualised savings of around £3 million, of which around two thirds were reflected in the 2022 results. In order to grow market share across the business, these savings have been reinvested, by increasing the number of agents and advisers, to drive organic growth in Lettings and Financial Services and return Sales to profitability in the longer term.

Net cash at the year end was £12.0 million, after investing £8.5 million in lettings portfolios and buying back £4.9 million of shares.

In the final quarter, the Group wrote off its £3.4m investment in Boomin which went into liquidation due to the economic slowdown and a decline in funding availability in the technology sector. Investment will now be firmly focused on the core business.

Board

Reflecting a period of change and some tenures coming to an end, there were a number of Board changes during the year, including a full change of the Executive Directors with Nic Budden, Richard Harris and Patrick Franco stepping down and the appointment of Guy Gittins as CEO and Chris Hough as CFO.

Additionally, two of our Non-Executive directors, Alan Giles and Sheena Mackay, have chosen not to stand for re-election at the 2023 AGM given the new Chairman, CEO and wider management team changes are now complete and in place. I would like to thank Alan and Sheena for their great support and contribution as Non-Executive Directors during my chairmanship and wish them well with their new endeavours. Rosie Shapland will take up the position of Senior Independent Director upon Alan Giles' resignation from the Board at the 2023 AGM.

I am pleased to welcome Annette Andrews as Non-Executive Director and Chair of the Remuneration and ESG Committees and Jack Callaway as a Non-Executive Director. Both Annette and Jack joined the Board on 1 February 2023, and Annette will take over as Chair of the Remuneration and ESG Committees at the 2023 AGM.

Dividends and share buybacks

The Board has declared a final dividend of 0.7p per share, making a total in respect of 2022 of 0.9p per share under our policy of returning 35% to 40% of profit after tax in ordinary dividends. In 2022 we bought back 14.8 million shares through our share buyback programme at a cost of £4.9 million. The Board will review the continuation of the programme, bearing in mind our other capital needs, once the current authority, of which  £1.1 million was unspent at 31 December 2022, is fully utilised.

Medium-term outlook

The new leadership team, the strength of the brand, and an enhanced approach to data and better leveraging our IT system, coupled with increasing our salesforce capacity in Lettings and Sales, will enable Foxtons to build market share. We will continue to invest in high quality lettings portfolios that meet our investment criteria. The £7.4 million acquisition of Atkinson McLeod announced yesterday reflects further progress against this strategy. We will also continue to support and grow our Financial Services business.

We believe we are creating a much more competitive and resilient business that is well placed to deliver growth and shareholder value in the medium term.

Nigel Rich CBE

Chairman

6 March 2023

Chief Executive's review

On 5 September 2022 I was delighted to join as the CEO of the most iconic estate agency in London, and the place I started my career 20 years ago.

A lot has been achieved in the six months since I joined, having completed my operational review, a rebuilding programme has begun and we have refocused our strategic priorities to accelerate growth in non-cyclical and recurring areas of the business. A new purpose, to get the right deal done for London's property owners, was launched in December to better reflect our ambitions and underpins our refocused strategic priorities.

There is significant unfulfilled potential to unlock within the business and our growth ambitions demonstrate this. We want to deliver between £25 million and £30 million of operating profit, in the medium term, and improve operating margins to over 15% through maximising the operating leverage in the business.

It is my aim to make Foxtons London's go-to estate agent, and by doing so, create significant value for shareholders.

Results

I am pleased to report that despite a challenging economic backdrop, revenue from continuing operations was up 11% to £140.3 million (2021: £126.5 million), adjusted operating profit was up 56% to £13.9 million and profit before tax was up 115% to £11.9 million. Net cash at the period end was £12.0 million.

Lettings revenue grew 17% to £86.9 million, and the Lettings portfolio now stands at c.26,500 tenancies, an increase of 5% over the prior year. In February 2022 the business integrated the D&G Lettings portfolio onto our scalable operating platform and disposed of the loss-making D&G Sales business, delivering significant profit growth. In May 2022 we acquired another two lettings portfolios, as part of our strategy to deliver attractive total returns on invested capital and improve the resilience of our revenues. Both portfolios have been successfully integrated and are delivering a good level of return.

Sales revenue grew 1% to £43.2 million and market share growth is a key area of our focus over the medium term. Profitability of the Sales business was impacted in the year as we began the investment required to build capability and deliver market share growth over the medium term.

Financial Services revenue grew 8% to £10.2 million. Growth in this segment is especially pleasing given the significant upheaval in mortgage markets, reflecting the strength of our proposition, the expertise of our advisers and the recurring revenues from refinance activity.

Non-cyclical recurring revenues from Lettings and Financial Services, which enhance the Group's earnings resilience, now represent c.65% of Group revenue and reflects significant growth in Lettings.

Operational review

My first six months at Foxtons have been spent reviewing all aspects of the business and its operating model. Alongside this, I have been busy meeting colleagues and visiting each of our branches. I have been incredibly impressed by the shared vision of our people to deliver success and firmly believe their ambition, drive and professionalism remains a key differentiator.

Having completed my operational review, I am able to report that the foundations of the business are strong and the core operating model is sound. However, it is also clear that some of Foxtons' estate agency DNA that I knew so well has been lost; specifically, the innovation, brand prominence and single-minded focus on delivering the best results for customers that Foxtons was once famous for.

The key to rediscovering that DNA is through rebuilding areas of historic competitive advantage - namely our brand, people and culture, and data and technology - which have been eroded over time as a result of some investments made in the wrong areas, leading to an underinvested core business and limiting the ability to deliver any significant organic growth.

In addition, the Company's purpose was confused and our employee values misaligned with the business' focus and ambitions. I have refocused the whole business on what we need to deliver and launched a new purpose and values to reflect our strategic priorities and estate agency DNA.

Our purpose, to get the right deal done for London's property owners, was unveiled to the entire workforce in December 2022 and will act as a cornerstone to everything we do, including delivering the best result for all our stakeholders. It will inspire and focus our teams as we renew the culture and remind customers of why they should appoint Foxtons.

Refocused strategic priorities

We now have a refocused set of strategic priorities to deliver revenue and profit growth and meet our medium-term operating profit ambition.

In Lettings, a core focus will be to grow revenue and profits through organic growth, accelerated further by acquisitive growth. This will significantly enhance the resilience of the Group's earnings and mitigate our exposure to the cyclical sales market.

In Sales, the focus is to drive market share growth, ensuring the business captures the upside from any sales market recovery and delivering good levels of cross-sell into Lettings and Financial Services. We believe this is the right strategy to grow profitability and deliver strong shareholder returns. Our four strategic priorities are as follows:

1.    Lettings: Organic growth

Limited Lettings organic growth has been delivered in recent years. We will reverse this trend by:

·    Winning new property instructions by better leveraging our database and embedding a culture of proactive lead generation both in our central hub and branches.

·    Being the fastest agent to bring new instructions to market and improve our instruction to exchange success rate.

·    Improving landlord retention through post-transaction service excellence in Property Management and back office operational processes.

Medium-term ambition: 3%-5% revenue CAGR

2.    Lettings: Acquisitive growth

We will continue to pursue Lettings acquisitive growth and build on our successful acquisition track record by:

·   Identifying and acquiring high quality portfolios that meet our investment criteria and expand our footprint in existing and untapped markets adjacent to our current footprint.

·    Integrating acquired portfolios into our scalable operating platform to deliver revenue and cost synergies and drive significant margin growth.

·   Delivering recurring revenues and profits through retention of acquired landlords by delivering ongoing excellent customer outcomes.

Medium-term ambition: 20%+ return on capital from lettings portfolio acquisitions

3.    Sales: Market share growth

We have c. 3.4% share of our addressable market, compared to c. 4.5% in 2016. We aim to get back to those levels by:

·    Increasing market share of instructions in our core markets by re-establishing Foxtons' premium brand positioning.

·   Improving rate of sell through from instruction to exchange by maintaining sufficient workforce capacity across our branch network and delivering industry leading training.

·   Improving cross-sell by deepening connectivity with the Financial Services business and in-house conveyancing panel to improve conversion of instructions.

Medium-term ambition: 4.5%+ market share in our addressable markets

4.    Financial Services: Revenue growth

We can better leverage our referral leads to Financial Services by:

·    rowing capacity by increasing adviser headcount to take advantage of existing referral opportunities.

·  Improving adviser productivity by reducing adviser data entry processes and improving customer contact times through the use of paraplanners and investment into technology solutions.

·   Improving cross-sell through an increased emphasis on secondary products, such as protection products, to drive revenue and profit per customer.

Medium-term ambition: 7%-10% revenue CAGR

Rebuilding our competitive advantages

Underpinning these strategic priorities is the work underway to rebuild our competitive advantages:

·      Reinvigorating our iconic brand

We've invested in a new marketing initiative to make clear what Foxtons stands for and why landlords, sellers and those who need finance should choose us. This is embodied in our new brand ethos, 'We Get it Done' which captures the essence of Foxtons' estate agency DNA. We have also reintroduced the iconic Foxtons Mini to re-energise brand visibility on the streets of London, alongside a programme to refurbish our highly visible branch network. There is more to do here, but I'm pleased with the direction of travel.

·      Investing in our people and culture

        We started investing in our people in 2022, including increasing estate agency and adviser headcount. I am particularly pleased with changes we have made to turbocharge a high-performance sales culture, including rewarding success, focusing on training and career progression to support retention, and aligning incentives with our strategic priorities.

·      Enhancing our data and technology

We are overhauling our outdated data architecture to modern standards, with resulting data accessibility and utilisation across the Group supporting the transition towards becoming a data-led business. This will deliver a greater level of insight into the drivers of our own business performance and inform and support business decision making. Furthermore, this will allow us to better leverage our property and customer database to drive property instruction opportunities across Lettings and Sales.

Foxtons was the original property disruptor, but the focus of our in-house experts was being directed towards back office administrative enhancements too often, rather than innovating our core estate agency processes. The focus is now to modernise and revolutionise our core processes, particularly in Lettings where speed is of the essence, to provide a true competitive advantage against the market.

Outlook and current trading

The overall outlook for 2023 is expected to be more challenging than 2022, due to the highly uncertain macroeconomic backdrop, including significantly higher interest rates and inflation levels than in prior years impacting the sales market.

Lettings is expected to remain resilient in 2023, with demand for rental properties expected to continue to outstrip supply over the near term, with rental price growth likely to normalise over the course of 2023. Yesterday, we announced the acquisition of Atkinson McLeod, adding a further c.1,100 tenancies and annualised revenues of around £3 million, demonstrating ongoing progress with our acquisition strategy.

In Sales, we entered 2023 with a smaller under-offer pipeline than the prior year as a result of sales market volatility following the September mini-budget. With the typical property purchase taking over four months to complete, we expect Sales revenue to be adversely impacted through the majority of 2023. While it remains extremely difficult to forecast the sales market, recent reductions in mortgage rates are encouraging buyer enquiries which may result in a more favourable sales market in the latter part of the year.

In Financial Services, refinance volumes are expected to remain resilient, due to their non-cyclical and recurring characteristics, whilst demand for new purchase mortgages will track the performance of the wider sales market.

Trading in the first two months of the year has been in line with our expectations, with recently implemented operational improvements starting to drive our market share of property instructions across Lettings and Sales.

In summary, the business has strong foundations and significant unfulfilled potential. I am confident our refocused strategy is the right one and we have the collective determination to put Foxtons on top where it belongs.

Guy Gittins

Chief Executive Officer

6 March 2023

Financial review

FINANCIAL OVERVIEW - HIGHLIGHTS

1  APMs are defined, purpose explained and reconciled to statutory measures within Note 27 of the financial statements.

2  Net free cash flow is from continuing and discontinued operations.

3  Net cash excludes cash held for sale (only applicable as at 31 December 2021).

Notes:

-  All results and measures within the financial review are presented on a continuing operations basis unless otherwise stated.

-  Values in tables may have been rounded and totals may therefore not be the sum of presented values in all instances.

Revenue increased by 11% to £140.3 million (2021: £126.5 million), with Lettings revenue up 17%, Sales revenue up 1% and Financial Services revenue up 8%. Adjusted operating profit increased by £5.0 million to £13.9 million (2021: £8.9 million), driven by strong profit growth in Lettings. Profit before tax from continuing operations was £11.9 million (2021: £5.6 million) and profit after tax was £9.6 million (2021: £1.3 million loss).

£7.7 million (2021: £6.6 million) of net free cash flow was generated (from continuing and discontinued operations). Net cash at the end of the period was £12.0 million (2021: £19.4 million, excluding cash classified as held for sale). The Group continues to have access to a £5.0 million revolving credit facility (RCF) which expires in June 2024 and remained undrawn throughout 2022.

An interim dividend of 0.2p per share was paid in September 2022. In line with our dividend policy of returning 35% to 40% of profit after tax (excluding one-off non-cash items), the Board has proposed a final dividend of 0.7p per share bringing the total ordinary dividend for the year to 0.9p per share (2021: 0.45p per share).

Revenue

The Group consists of three operating segments: Lettings, Sales and Financial Services. Lettings represents 62% of total revenue (2021: 59%), Sales 31% of total revenue (2021: 34%) and Financial Services 7% of total revenue (2021: 7%).

Lettings revenue

Lettings revenue increased by 17% to £86.9 million (2021: £74.3 million), reflecting a 25% increase in average revenue per transaction (2022: £4,211; 2021: £3,365), partially offset by a 7% reduction in transaction volumes (2022: 20,640; 2021: 22,091). The key drivers of revenue growth are:

·      £7.6 million of organic revenue growth, which excludes incremental revenues from D&G Lettings and the May 2022 acquisitions. This organic revenue growth reflects a 20% increase in average rental prices and longer tenancies being agreed, partially offset by a decrease in transaction volumes reflecting ongoing constraints in the supply of rental properties.

·      £2.0 million of incremental revenue growth from the D&G Lettings portfolio reflecting two additional months of trading in 2022. The D&G Lettings portfolio was fully integrated into the Foxtons infrastructure in February 2022.

·      £3.0 million of incremental revenue from the May 2022 acquisitions.

Sales revenue

Sales revenue increased by 1% to £43.2 million (2021: £42.7 million), reflecting a 2% decrease in average revenue per transaction (2022: £13,431; 2021: £13,668), offset by a 3% increase in transaction volumes (2022: 3,215; 2021: 3,122). The average price of properties sold increased to £590,000 (2021: £577,000). The May 2022 acquisitions contributed £0.5 million of revenue.

Financial Services revenue

Financial Services revenue increased by 8% to £10.2 million (2021: £9.5 million), the increase primarily reflects a 6% increase from mortgage activity from higher average fees and increased loan size, and a 2% increase from protection volumes. In 2022, £4.5 million of Financial Services revenue relates to non-cyclical refinance activity and £5.7 million relates to purchase activity which is more cyclical in nature.

Contribution and contribution margin

1  Certain changes have been made to the presentation of the segmental disclosures, with the 2021 presentation restated accordingly. Refer to Note 2 of the financial statements for further details.

Group contribution, defined as revenue less direct salary costs of front office staff and bad debt charges, increased to £91.3 million (2021: £78.5 million). The increase is attributable to incremental revenue converting to contribution at an improved margin of 65.1% (2021: 62.1%).

Adjusted operating profit and adjusted operating profit margin

1  Certain changes have been made to the presentation of the segmental disclosures, with the 2021 presentation restated accordingly. Refer to Note 2 of the financial statements for further details.

Adjusted operating profit for the period was £13.9 million (2021: £8.9 million). Non-cyclical Lettings revenues have underpinned and driven significant profit growth in 2022, with Lettings revenue increasing by £12.6 million and Lettings adjusted operating margin improving by 750 bps, reflecting the inherent operating leverage of the business.

D&G Lettings contributed £5.3 million of adjusted operating profit (2021: £3.7 million) on £11.2 million of revenue (2021: £10.0 million), reflecting an adjusted operating margin of 47% (2021: 37%).

For the purposes of segmental reporting, shared costs relating to the estate agency businesses are allocated between Lettings and Sales with reference to relevant cost drivers, such as front office headcount in the respective businesses. Corporate costs, which relate to Non-Executive Director and other listed entity costs, are not allocated to the operating segments and are presented separately.

Adjusted operating profit of £13.9 million (2021: £8.9 million) is after charging £126.4 million (2021: £117.5 million) of costs, including the following:

·      Direct operating costs of £49.0 million (2021: £47.9 million) relating to direct salary costs of front office staff and bad debt charges.

·      Other operating costs, excluding adjusted items, of £77.4 million (2021: £69.6 million), which includes the following charges:

-     Depreciation of £12.2 million (2021: £12.2 million).

-     Amortisation of £1.6 million (2021: £1.4 million), including £1.0 million (2021: £0.9 million) relating to acquired intangibles.

-     Share-based payment charges of £0.3 million (2021: £1.6 million).

Profit before tax

Profit before tax has increased by 115% to £11.9 million (2021: £5.6 million). Profit before tax includes £0.1 million of adjusted items charges (2021: £1.4 million) which comprises:

·      £0.4 million property related credits (2021: £0.9 million).

·      £0.3 million reversal of branch asset impairment (2021: £0.5 million charge).

·      £0.2 million transaction related costs (2021: £0.6 million).

·      £0.6 million reorganisation costs (2021: £0.5 million).

·      Nil impairment of interests in associate (2021: £0.7 million).

Net finance costs and other losses of £1.9 million (2021: £2.0 million) were incurred, primarily relating to IFRS 16 lease finance costs.

profit/(Loss) after tax

The profit after tax of £9.6 million (2021: £1.3 million loss) is after a total tax charge of £2.4 million (2021: £6.9 million), of which £0.2 million (2021: £6.4 million) relates to non-cash deferred tax accounting charges and £2.2 million (2021: £0.5 million) relates to current tax.

The effective tax rate for the period was 19.9% (2021: 124.1%), which compares to the statutory corporation tax rate of 19.0% (2021: 19.0%). The 2022 effective tax rate is higher than the statutory corporation tax rate due to non-deductible expenses, including share based payment charges, offset by a reduction due to the recognition of previously unrecognised deferred tax. In 2021, the effective tax rate was impacted by a £6.1 million non-cash accounting re-measurement charge as a result of the UK corporation tax rate increasing from 19% to 25% (effective from 1 April 2023).

The Group's net deferred tax liability at 31 December 2022 totalled £25.7 million (2021: £24.8 million), which includes £27.0 million (2021: £26.5 million) of deferred tax liabilities relating to the Group's intangible assets, offset by deferred tax assets of £1.4 million (2021: £1.7 million). The deferred tax assets relate to tax losses brought forward which are expected to be recovered through future taxable profits.

The Group has a low-risk approach to its tax affairs and all business activities are within the UK and are UK tax registered and fully compliant. The Group does not have any complex tax structures in place and does not engage in any aggressive tax planning or tax avoidance schemes. The Group always sets out to be transparent, open and honest in its dealings with tax authorities. The Group received no tax refunds during the year (2021: none).

Earnings/(loss) per share

Earnings per share (basic) was 3.0p (2021: 0.4p loss) and earnings per share (diluted) was 3.0p (2021: 0.4p loss). On an adjusted basis, earnings per share (basic) was 3.1p (2021: 1.9p) and earnings per share (diluted) was 3.0p (2021: 1.9p). In 2021, the adjusted basis excluded an adjusted items charge of £1.5 million and a £6.1 million deferred tax remeasurement charge, no such adjustments were required in 2022.

Net FREE cash flow and net cash

¹ Excludes £8.5 million (2021: £11.5 million) of cash outflows relating to the acquisition of subsidiaries (net of any cash acquired), £3.7 million (2021: £nil) relating to the disposal of discontinued operations (net of cash disposed) and £0.4 million related to the purchase of investments (2021: £3.0 million).

The £1.2 million working capital outflow in the year is reflective of the billing cycles on longer tenancies. Net free cash flow, from continuing and discontinued operations, of £7.7 million (2021: £6.6 million), was driven by increased profitability.

Net cash at the year end was £12.0 million (2021: £19.4 million, excluding cash classified as held for sale) with no external borrowing (2021: nil).

Acquisitions

Gordon & Co and Stones Residential

On 25 May 2022, the Group acquired the entire issued share capital of two estate agents, Gordon & Co, and Stones Residential. The acquisitions have strong lettings businesses that together generate over 80% of their total combined revenues from lettings across c.2,500 tenancies.

Gross purchase consideration was £9.8 million, with £8.2 million paid in May 2022. Consideration paid in the period, net of cash acquired, was £8.0 million. £1.5 million of contingent cash consideration remains to be paid, deferred for up to a period of 12 months post completion.

Acquired net assets were fair valued at the date of acquisition and include £2.9 million of customer contracts and relationships and £8.3 million of acquired goodwill. The two acquisitions contributed a total of £3.6 million of revenue and £0.4 million of adjusted operating profit during the first seven months of ownership. Refer to Note 13 for further details.

D&G

£0.5 million of deferred consideration, relating to the 1 March 2021 acquisition of D&G, was paid in the period.

Discontinued operations

Discontinued operations relates to D&G Sales, which was acquired alongside D&G Lettings and disposed of on 11 February 2022 to Lochlan Holdings Limited, a company owned by the CEO of Douglas & Gordon Limited, having been approved by shareholders at the General Meeting held on 10 February 2022. 2022 results from discontinued operations reflects trading up to the date of disposal (11 February 2022) and 2021 results from discontinued operations includes 10 months of trading from the date of acquisition (1 March 2021).

On a total Group basis, which includes both continuing and discontinued operations, revenue was £140.9 million (2021: £133.3 million) and adjusted operating profit was £13.3 million (2021: £7.1 million).

Other balance sheet positions

At 31 December 2022 the significant balance sheet positions were:

·      Goodwill of £26.0 million (2021: £17.7 million) and other intangible assets of £109.3 million (2021: £107.3 million), with the increase in goodwill due to the acquisition of Gordon & Co and Stones Residential which contributed £8.3 million of goodwill.

·      Interest in associate and investments of nil (2021: £3.3 million). The nil balance reflects a full write down of the investments in PD Innovations Limited (trading as Boomin) and Global Property Ventures Limited. The write down resulted in a £3.7 million non-cash fair value loss recognised in other comprehensive income, of which £3.4 million relates to Boomin which entered liquidation having not been able to secure sufficient funding in a challenging economic climate.

·      Trade and other receivables of £16.0 million (2021: £16.0 million) and trade and other payables of £16.7 million (2021: £14.5 million).

·      Total contract assets of £7.4 million (2021: £4.6 million) and total contract liabilities of £10.0 million (2021: £9.4 million), with the increase in the contract assets reflecting an increase in average rental prices and longer tenancies.

·      Lease liabilities of £46.5 million (2021: £48.1 million) and right-of-use assets of £42.6 million (2021: £43.8 million).

·      No assets or liabilities were held for sale at 31 December 2022, compared to £7.4 million of assets held for sale and £7.4 million of liabilities held for sale liabilities at 31 December 2021 relating to the D&G Sales business (disposed of on 11 February 2022).

Capital allocation and Dividends

Our approach to capital allocation supports long-term growth and shareholder returns. Our capital allocation priorities are as follows:

·      Maintain balance sheet strength to enable the Group to meet its operational cash requirements and manage through cyclical sales markets

·      Invest in areas that drive organic growth and rebuild our competitive advantages

·      Return 35% to 40% of profit after tax (excluding one-off non-cash items) as an ordinary dividend

·      Deploy capital to acquire high quality lettings books to drive inorganic lettings growth

·      Return excess capital, not used for profitable growth, to shareholders

As shown below, total Group (continuing and discontinued operations) profit after tax was £7.7 million (2021: £3.6 million), after excluding £1.5 million of one-off non-cash credits (net of tax) (2021: £3.7 million of one-off non-cash expenses (net of tax)) and nil non-cash deferred tax charges (2021: £6.1 million).

An interim dividend of 0.2p per share was paid in September 2022. The Board has proposed a final dividend of 0.7p per share bringing the total ordinary dividend for the year to 0.9p per share (2021: 0.45p per share). The proposed dividend will be paid on 31 May 2023 to shareholders on the register at 14 April 2023, subject to shareholder approval at the AGM due to be held on 9 May 2023. The shares will be quoted ex-dividend on 13 April 2023.

Capital returns

A total of £4.9 million (2021: £5.7 million) of shares have been bought back to return excess capital to shareholders. £3.0 million of shares were bought back through the programme announced in March 2022 and £1.9 million through the programme announced in November 2022. The Board will review the continuation of the programme, bearing in mind our other capital needs, once the current authority, which stood at £1.1 million at 31 December 2022, is fully utilised. Since 2020, a total of £10.9 million of shares have been bought back.

Post balance sheet events

On 3 March 2023, the Group acquired the entire issued share capital of Atkinson McLeod Limited, a London lettings agent, for a consideration of £7.4 million, adjusted for current assets less total liabilities at completion. The consideration was fully satisfied in cash, with £0.7 million of the consideration deferred for 12 months.

Unaudited revenue and operating profit for the 12 months ended 31 March 2022 was £3.1 million and £0.9 million respectively. Gross assets as at 31 March 2022 were £2.5m. The acquisition adds a further c.1,100 tenancies and demonstrates further progress against the Group's acquisition strategy.

Related partY transactions

Related party transactions are disclosed in Note [X] of the financial statements. On 11 February 2022, the D&G Sales business was disposed of through the sale of the entire share capital of Douglas & Gordon Limited and Douglas & Gordon (2) Limited, to Lochlan Holdings Limited, a company owned by the CEO of Douglas & Gordon Limited, for nominal consideration of £2. This transaction was a related party transaction due to both the CEO and Lochlan Holdings Limited constituting related parties.

Treasury policies and objectives

The Group's treasury policy is designed to reduce financial risk. Financial risk for the Group is low as the Group is in a net cash position, is entirely UK based with no foreign currency risks and surplus cash balances are held with major UK based banks. As a consequence, the Group has not had to enter into any financial instruments to protect against risk. The Group has access to a £5.0 million RCF which expires in June 2024 and remained undrawn throughout 2022. The Group expects to renew the facility, or access a similar facility, following expiry.

Pensions

The Group does not have any defined benefit schemes in place but is subject to the provisions of auto-enrolment which require the Group to make certain defined contribution payments for our employees.

Risk management

The Group has identified its principal risks and uncertainties and they are regularly reviewed by the Board and Senior Management. Refer to pages 18 and 19 for details of the Group's risk management framework and principal risks and uncertainties.

Going concern, prospects and viability

The financial statements of the Group have been prepared on a going concern basis as the Directors have satisfied themselves that, at the time of approving the financial statements, the Group will have adequate resources to continue in operation for a period of at least 12 months from the date of approval of the financial statements. Furthermore, the Directors have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over a five-year viability period.

Refer to Note 1 of the financial statements for details of the Group's going concern assessment and the going concern statement. The prospects and viability statement is set out on pages 36 and 37 of the 2022 Annual Report and Accounts.

Chris Hough

Chief Financial Officer

6 March 2023