HARWORTH GROUP PLC

Earnings Release • Mar 5, 2019

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RNS Number : 8071R Harworth Group PLC 05 March 2019 HARWORTH GROUP PLC UNAUDITED PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2018 STRONG PERFORMANCE UNDERPINNED BY SOUND MARKETS AND A CLEAR STRATEGY LEAVE HARWORTH WELL POSITIONED FOR THE FUTURE Harworth Group plc ("Harworth" or the "Group"), a leading regenerator of land and property for development and investment, announces its preliminary results for the year ended 31 December 2018. 31 December 2018 31 December 2017 Change (%) Net Asset Value ("NAV") per share (p) (1) 137.5 127.4 7.9 EPRA NNNAV per share (p) (1) 145.2 128.9 12.6 EPRA NAV per share (p) (1) 148.3 131.0 13.2 Operating profit (£'m) 33.0 40.1 (17.7) Operating profit before exceptional items plus joint ventures (£'m) 37.4 43.8 (14.6) Value gains (£'m) 27.6 41.6 (33.6) Value gains (including development properties & overages) (£'m) 51.3 47.4 8.2 Profit excluding value gains (£'m) 9.8 2.2 N/m Harworth's Chief Executive, Owen Michaelson, said: "These are excellent results with Harworth again achieving its long-term objective of double-digit total return, reflecting our ability to seize opportunities to maximise the value of our existing portfolio. This has been achieved whilst simultaneously growing our regional land and property portfolio through selective acquisitions and new lettings, positioning us well for future growth. "With the ongoing under supply of new homes and commercial space across the UK, our focus on the "beds and sheds" sectors in the North of England and the Midlands continues to address a clear economic and social need, evidenced by strong economic and consumer trends in those regions and reinforced by supportive central and local Government policy. This favourable backdrop coupled with our ability to execute a range of deals and our in-house technical expertise has been reflected in the record residential and commercial land sales realised in the year, alongside headline rents being achieved on commercial space that we have directly developed at our flagship sites at Waverley and Logistics North. "2018 was a record year for acquisitions, with c.£60m of carefully selected purchases. These provided both additional long-term recurring income as we continue to improve the breadth and quality of our income base, and added further strategic land growing our pipeline of large complex sites, particularly those requiring regeneration, to deliver future value gains through our market-leading planning and development expertise. "Momentum has been maintained, with a significant quantum of new planning applications already in the system awaiting determination and over 50% of expected 2019 full year sales already agreed. Whilst the outcome of Brexit negotiations remains uncertain, Harworth's property portfolio and balance sheet are strong, resilient and well-positioned to provide a platform for future growth." ANOTHER YEAR OF OUT-PERFORMANCE AGAINST OUR THROUGH THE CYCLE TARGET · Double-digit total return (NNNAV growth per share plus dividends) of 13.3% (2017: 13.2%), which was ahead of our 10% long-run average target · EPRA NNNAV growth per share of 12.6% (2017: 12.5%), as a result of steady progress through the year, with over 80% of value gains generated through active management by progressing planning, lettings and sales activity and seizing commercial opportunities · Profit excluding value gains of £9.8m (2017: £2.2m) reflecting strong growth from the one-off promote fee from successfully letting the remaining M&G forward funded unit at Logistics North and the impact of income acquisitions · Earnings per share down 32.6% to 10.6p (2017: 15.8p) as a result of the beneficial deferred tax movement in 2017 and because the statutory measure, as opposed to the EPRA balance sheet movement, does not fully reflect the improved value gains · Dividend per share increased by 10.0% to 0.911p (2017: 0.828p) in-line with our progressive policy · Net loan to value of 12.3% (2017: 7.0%) or 34.3% when calculated against the income portfolio (2017: 20.8%), maintaining a prudent gearing level within our stated target range EXCELLENT OPERATIONAL DELIVERY AND STRATEGIC EXECUTION · Eleven acquisitions completed for a total of £57.9 million (2017: £26.0m), with the potential for the development of c.2,000 homes and over 1.5m sq. ft of commercial space. Two of the sites generate £3.1m of annual rental income · Planning consent secured during the year for 778 new residential plots in the Midlands and Yorkshire, with 560 of these from Harworth's first three PPA(2) successes · Planning permissions submitted in 2018 for over 3.3m sq. ft of commercial space (2017: 0.3k sq. ft commercial) and nearly 1,000 residential plots (2017: 1,308 residential plots) with the majority due to be determined in 2019 · Record property sales of £93.2m (2017: £54.8m) encompassing land sales of £72.7m and £20.5m of mature income generating sites, with capital recycled into more accretive opportunities. Residential and commercial sales comprised: o 1,049 residential plots sold (2017: 622 residential plots), across nine parcels for £33.6m, at an average value of over £30k per plot, equivalent to their aggregate book value; and o 1.15m sq. ft of consented commercial land sold on three sites (2017: 850k sq. ft), across four parcels for £30.9m, delivering a profit on sale of £1.0m · Over 300k sq. ft of long-term lettings completed on eight new commercial buildings, to manufacturing and logistics occupiers, with many at new headline rents alongside other portfolio rent enhancements to improve the quality of our recurring income WELL-POSITIONED TO CAPITALISE ON OPPORTUNITIES DESPITE WIDER MACRO UNCERTAINTY · Harworth remains well-capitalised, providing resilience in the face of economic and political uncertainty as well as the ability to make selective opportunistic purchases. In April 2018, the Group increased its Revolving Credit Facility to £100m with cash and undrawn facilities of £49.6m at the year-end. At the end of February 2019, headroom increased by £6.8m and net debt fell by £8.0m to £56.5m from £64.4m as at the year-end · Significant latent value given a portfolio of sites with planning consent, standing at 11,077 residential plots (2017: 10,448) and 10.7m sq. ft of commercial space (2017: 12.1m sq. ft). Planning applications for similar numbers to be made from the remainder of the existing portfolio in the future · Harworth's strategic focus remains on large and complex sites, in particular those requiring regeneration, across the "beds and sheds" sectors in the North and the Midlands. To drive growth and to source more acquisitions, we are investing in a regional structure with increased local presence in the Midlands and the North West to complement the Group's existing strength in our Yorkshire and Central region · Selective disposal of more mature income-generating sites, with an annual sales target of c.£20m, and low-yielding agricultural land, to improve the quality and resilience of the income portfolio and to drive overall total return. 2018 sales of £20.5m for Phase 1 of Gateway 36 in Barnsley, Costa Coffee at Logistics North and Harworth Business Park in North Nottinghamshire, which were all at or above book value, as well as the ongoing sales of agricultural and other land (£8.2m in 2018) which offers little further development potential · Acquisitions focus remains on: purchasing major brownfield sites and potential urban extensions from corporates, administrators and the public sector; securing options ideally on medium to long term development opportunities or on adjacent land; and agreeing PPAs of scale in our core regions · Well advanced with 2019 sales with over 50% of budgeted 2019 sales either agreed, in legals or exchanged at a total consideration in excess of the December 2018 book value Footnotes: (1) Harworth discloses both statutory (standard font) and alternative performance measures (italic font) with the most important measures in bold. A full description and reconciliation of the alternative performance measures is set out in Note 2 to the financial information (2) Planning Promotion Agreements ("PPAs") are contracts with landowners by which Harworth incurs the cost and risk of promoting land through planning. If successful, Harworth shares some of the value gain, after first recovering its costs, when the land is sold -ENDS- Enquiries: Harworth Group plc Tel: +44 (0)114 349 3131 Owen Michaelson, Chief Executive Andrew Kirkman, Finance Director Iain Thomson, Head of Communications and IR FTI Consulting Tel: +44 (0)20 3727 1000 | Harworth@fticonsulting.com Dido Laurimore Richard Gotla Eve Kirmatzis Results Presentation Harworth will be holding a presentation for analysts and investors starting at 09.30am today at the offices of FTI Consulting, 200 Aldersgate, Aldersgate Street, London, EC1A 4HD. If you would like to attend, please contact Alex King on 020 3727 1000, or email harworth@fticonsulting.com A live webcast will also be available which can be accessed via the following link http://webcasting.brrmedia.co.uk/broadcast/5c64547ee6e1d92d38f4de5f There will also be a conference call facility available. The dial-in details are as follows: Participants, Local - London, United Kingdom: +44 (0)330 336 9411 Confirmation Code: 1177809 ABOUT HARWORTH GROUP PLC Listed on the main market, Harworth Group plc (LSE: HWG) is a leading regenerator of land and property for development and investment which owns, develops and manages a portfolio of c.21,500 acres of land on around 120 sites located throughout the North of England and the Midlands. The Group specialises in the regeneration of large, complex sites, in particular former industrial sites, into new residential developments and employment areas. (harworthgroup.com) While the financial information included in this announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards as adopted by the EU ("EU IFRSs"), this announcement does not itself contain sufficient information to comply with EU IFRSs. The Group expects to publish full financial statements that comply with EU IFRSs by the end of April 2019. This announcement contains certain forward-looking statements which, by their nature, involve risk, uncertainties and assumptions because they relate to future events and circumstances. Actual outcomes and results may differ materially from any outcomes or results expressed or implied by such forward looking statements. Any forward-looking statements made by, or on behalf of, the Group are made in good faith based on current expectations and beliefs and on the information available at the time the statement is made. No representation or warranty is given in relation to these forward-looking statements, including as to their completeness or accuracy or the basis on which they were prepared, and undue reliance should not be placed on them. The Group does not undertake to revise or update any forward-looking statement contained in this announcement to reflect any changes in its expectations with regard thereto or any new information or changes in events, conditions or circumstances on which any such statement is based, save as required by law and regulations. Nothing in this announcement should be construed as a profit forecast. Chairman's Statement As this is my first statement since assuming the Chair at Harworth in March last year, I would like to start with some reflections on becoming involved with the business. However, may I first express my thanks to my predecessor, Jonson Cox, for everything he did to facilitate a smooth transition from him to me and also my recognition of the considerable contribution he made to the creation of Harworth in its current form as an established, listed development company with a differentiated, and proven, specialism in the regeneration of difficult former industrial sites. A personal perspective My principal previous property experience was serving as Deputy Chairman at Bovis Homes for approaching 10 years before my retirement last May. As a house builder, one is primarily concerned with the sale of a standard product with well-defined production costs and margins, such that progress can be tracked against a generic build process that permits measurement of uniform stages such as "slab" or "roofed-in". Sites may be acquired in different locations but what is produced on each site largely conforms to standard house types. I have rapidly discovered that property at Harworth is very different - every site has its own very individual challenges and opportunities to create value. Of course, one starts off with a site assessment against required average returns but the course the development takes may differ radically from how it was first envisaged. As the team learns more about the site and as market conditions change, so the pace and shape of development may evolve. Parts of the site may be sold earlier or later than planned; parts may be developed by Harworth itself and held within our income generating portfolio rather than sold for others to develop; adjacent land may be added to the masterplan and change the balance of commercial and residential uses; and skilful remediation may bring forward additional areas that were not initially envisaged as suitable for development. Every site has to be understood in great detail by those responsible for its development. There is no such thing as a "cookie cutter" approach to Harworth's sites. Successful development of large, complex and frequently challenging sites requires particular skills and experience, and it is Harworth's people that are at the heart of its differentiation. The well-used adage that an organisation is only as good as its people has never been truer than at Harworth. There may only be 66 people but our ability to create value derives from their ability to: identify land and property opportunities; create deliverable masterplans; negotiate acquisitions, disposals, and leases; develop relationships with local stakeholders; build partnerships with funders, developers, house builders, and commercial clients; devise innovative remediation solutions for complex heavy industrial legacies; identify the right point in the market to offer sites for sale; and manage complex projects requiring the organisation of, and interaction with, multiple professional advisers and contractors. The other notable difference between Bovis and Harworth is time-scale. A house builder will typically look to be in and out of a site in a couple of years. The scale of some of Harworth's developments means that we may be continuing to extract value from a site for up to 20 years or more. A house builder will determine whether or not to buy a site on its assessment of the attractiveness to potential customers of the location and the community of which the site is a part. Harworth will create places and communities where none exist. It is Harworth's vision of the end game on a development that house builders and commercial clients buy into. When our management considers the potential of a development, they have to have a long-term vision of their ability to create value over many years into the future. Each year's results in isolation are an important guide to our commercial effectiveness but average return across the cycle is the most accurate measure of the quality, and sustainability, of our delivery. The structure of Harworth's shareholdings is also very different to the listed companies that I have previously chaired. With the Peel Group and the Pension Protection Fund holding slightly over 50% of Harworth, and represented at the Board table, as Chairman one receives directly and in real time shareholder perspectives on decisions and feedback on issues faced by the Group. This is invaluable. Importantly, by their support for our cashbox placing in early 2017 they demonstrated their alignment with our long-term objectives to grow our business. Equally, I am very grateful for the welcome I have received from our other material institutional shareholders and look forward to seeing institutional participation on our register grow over time as the potential inherent in Harworth becomes more broadly communicated and recognised. Governance Whilst Harworth is a constituent member of the FTSE Small-Cap index, it operates to all intents and purposes as if it were in the FTSE-250 index and aspires to be a member in due course. Its process of corporate governance is well-established and substantially met the Code requirements of a premium-listed company before we made the transition to the Premium List in August 2018. The smoothness of that process is itself a credit to our in-house company secretarial and finance teams and to the many advisers that worked with us on the exercise. When considering joining Harworth I was impressed by the content and clarity of our annual report and broader shareholder and media communications. We have a first-rate Board, as evidenced by our recent external Board Effectiveness Review, with a broad range of skills and relevant experience around the Board table. With such as our non-executive participation on the Group's People Steering Group we are clearly cognisant, and in the vanguard, of developments in corporate best practice. The recruitment of new non-executive directors now allows us to constitute our principal Board committees on a fully independent footing. 2018 - the year The other aspect of Harworth that attracted me to the opportunity was its track-record of delivery and 2018 has been no exception. Once again, the Group has met its objective of over 10% through the cycle total return, this time delivering 13.3% in a year supported by a number of successes, not all of which were envisaged at the start of the year. Owen provides further commentary on this in his Chief Executive's statement. This bears out the capability of our teams to identify and then realise opportunities for value creation. In any one year there may be both upsides and downsides - what is much more important is what the business achieves over the medium-term. That medium-term delivery will be determined by our development pipeline. Hence as important as our in year result was what we did to support our future returns - the £14.2m that we invested in development acquisitions, themselves supported by £43.7m of income-generating acquisitions; our commitment of £33.0m further investment, predominantly infrastructure, in sites we own; the 993 residential plots and 3.3m commercial square feet for which we applied for planning consent; and the 778 residential plots and c.0.1m commercial sq. ft on which we realised outline planning consent during the year. Whilst 2018 was again characterised by substantial investment, this was balanced by significant disposals, realising £93.2m during the year. This enabled us to maintain our commitment to low financial gearing, ending the year with a 12.3% net LTV, well within our target range. Acquiring appropriate new sites is the life-blood of our future growth and a strong understanding of, and relationships with, local markets are, in our view, key to identifying, negotiating, and subsequently developing such sites. Hence our decision during 2018 to move to a regional structure with new regional teams in the Midlands, based out of Birmingham, and the North-West, out of Manchester, complementing our existing Yorkshire and Central area, based at our head office in Rotherham. We are delighted to have secured proven, experienced, regionally-based management to lead these new regions and they are in the process of building out their teams to match the intended growth of their regional portfolios. Our acquisition of 350 acres at the former Ironbridge power station in Shropshire exemplifies this regional expansion within Harworth's existing focus on transforming large, complex development sites. The Board We are adding two new non-executive directors over the next month. This will address both the retirement in September this year of Tony Donnelly after nine years with Harworth, and the need, as a premium-listed company, for at least half the Board, excluding the chair, to comprise independent directors. It will also enable us to add a further independent non-executive to our Remuneration and Audit Committees from which Steven Underwood, the representative of the Peel Group on our Board and, therefore, not independent, will then stand down. In line with our establishing a Midlands region, Ruth Cooke brings us extensive experience in the Midlands real estate sector, having been Chief Executive of Midland Heart, a large regional housing association from 2012-2018, a founder member of the West Midlands Housing Association Partnership, and a Board member at Marketing Birmingham. She is a chartered accountant and a corporate treasurer. Angela Bromfield has extensive commercial strategy, marketing and communications executive experience, having held leadership roles in these areas at Premier Farnell, Anglo American, and Morgan Sindall. She is currently a non-executive director and Remuneration Committee Chair at Churchill China and Zotefoams. Thank you May I finish by thanking everyone who has contributed so much to making 2018 another successful year for Harworth - our management team, our colleagues, our customers, our business partners, advisers and suppliers. As I said at the beginning of my statement, Harworth is all about its people. Alastair Lyons Chairman 5 March 2019 Chief Executive's Statement Harworth Group has once again delivered another year of strong operational performance and a double-digit total return to shareholders, demonstrating the focus and technical skills of the team in creating sustainable, regeneration- led developments. Our focus on "beds and sheds" within the regional markets of the North of England and the Midlands underpins our decision to invest in a regional delivery model with new teams in areas of strong projected growth, to sustain the business moving forward. In 2018, the Group delivered double-digit total return per share growth of 13.3% (2017: 13.2%), with EPRA NNNAV of £466.5m at the year-end (2017: £414.2m). This includes value gains of £51.3m (2017: £47.4m), ahead of our expectations, whilst Profit Excluding Value Gains ("PEVG") rose to £9.8m (2017: £2.2m), which includes £6.8m for the promote fee for the letting of M&G Real Estate's forward-funded LN175 unit at Logistics North. Ongoing delivery of our strategy Our performance is in line with the key strategic aim of the business - to be the leading land and property regeneration specialist in the North of England and the Midlands, delivering double digit total returns to shareholders by providing innovative and sustainable solutions on the land we bring forward for remediation and development. We also aim to be a good neighbour in the communities in which we operate and to provide customer-driven solutions to our end users in a market dominated by standard developments. In simple terms we listen to our customers and key stakeholders in the communities in which we operate, when masterplanning our developments. Our operational focus remains consistent: extracting maximum value from our land and property portfolio in the North of England and the Midlands to grow EPRA NNNAV; building our recurring income base with the aim of covering all operating costs and dividends; acquiring brownfield, and urban edge, land in sustainable locations; whilst at the same time buying and developing income-producing property to underpin the sustainability of our long-term business model. This is underpinned by using our land assembly, masterplanning, technical, placemaking and asset management expertise to transform redundant land and sustainable urban edge locations into places where people want to live and work. We continue to focus on our core regions of Yorkshire & Central, the Midlands and the North West in which to invest our management time and capital whilst maintaining a watching brief on the strong markets immediately to the south of our existing Midlands region. Our strategy and business model remain well-suited to the fundamentals of the "beds and sheds" markets across the North of England and the Midlands. Our ongoing land sales to house builders continue to be driven by steady demand for new homes, supported by their comparative affordability and the continued lack of delivery of the new homes the UK needs to keep pace with the rate of household formation. The rise of e-tailing and increasing demands of consumers supports demand for logistics, distribution and manufacturing space, with the industrial sector forecast to outperform both the office and retail markets in the medium-term. Central and local government support for our business model remains stable, with an extension of Help to Buy confirmed until March 2023 (albeit in more restricted form from 2021) alongside fairly modest changes to the National Planning Policy Framework. With changes to local government funding driving the need for local authorities to work with trusted partners to deliver high-quality development, which can then contribute to Business Rates, Council Tax receipts and the New Homes Bonus, our products remain as economically and socially relevant as they have ever been. Capital Growth Four principal management actions continue to deliver capital growth from our existing land and property portfolio: securing planning consents on major schemes; remediating and providing infrastructure on consented land for redevelopment; placemaking followed by premium land sales to residential and commercial occupiers; and directly developing our own industrial units for either sale or letting. All have underpinned value gains during the year. To maintain the sustainability of our business and support our continued growth it is essential that we continue to replenish the portfolio as we work through our more mature sites. To that end, we aim to grow our strategic land portfolio by at least 10% each year. Planning success and progress across the portfolio remained strong in 2018, with outline planning consent secured for 778 residential plots (2017: 825) and 76k sq. ft of commercial space (2017: over 3m sq. ft) across seven sites. This included three Planning Promotion Agreement ("PPA") successes, including securing outline permission for 400 plots at Market Warsop in Nottinghamshire in April 2018. As at 31 December 2018, total consented residential plots under direct ownership and PPAs/options stood at 11,077 plots and consented commercial space on our land at c.10.7m sq. ft, providing a robust pipeline for sales and direct development opportunities over at least the next decade. 2019 will be a significant year for the business in securing new outline planning consents to increase this pipeline still further. In 2018 we submitted planning applications on our land for 993 new residential plots and over 3.3m sq. ft of commercial space. During 2019 a number of new applications are expected to be submitted for over 3,000 further residential plots. Plot sales for both residential and commercial uses continue to be carefully planned, both to realise further value gains and to reinvest capital into the ongoing development of our wider portfolio and in new acquisitions. A total of 1,049 residential plots were sold across nine parcels for £33.6m to national and regional housebuilders during the year, with repeat customers including Taylor Wimpey, Barratt and Avant Homes showing the popularity of the de-risked engineered land parcels that we make available, and the relative affordability of their products to consumers. Profits on sale were also realised from the disposal of engineered development land for commercial uses totalling 1.15m sq. ft, including the sale in October of the 55-acre Lounge site in Leicestershire for £18.7m and the £10.9m sale of the 18-acre G2 plot at Logistics North in December to Lidl (UK), representing further repeat customers for the business. One of our principal areas of focus is to sustain this momentum by making further land acquisitions and cultivating industry and stakeholder relationships as our operating geography grows. 2018 represented a record year for new acquisitions with eleven land and property purchases made for a consideration (inclusive of costs) of c.£60m in total, supported by the extension of our Revolving Credit Facility to £100m in April. Our acquisitions were a mix of strategic land and income-producing properties with development potential. The largest of these was the purchase in May of the 112-acre Nufarm site at Wyke, Bradford, for £32.45m plus acquisition costs. Less than a mile from Junction 26 of the M62, the site comprises an agrochemical works set over 32 acres alongside 80 acres of unoccupied land. It is let on a 50-year lease (expiring 2055) at a current passing rent of over £2.1m per annum, representing a net initial yield of 6.2% and a reversionary yield of 7.0% based on rental increases. The 80 acres of unoccupied land has long-term potential for commercial development. In the previous month, we also purchased a 22-acre site in Flaxby, North Yorkshire for £8.75m plus acquisition costs. Within half a mile of Junction 47 of the A1(M), the site comprises a c.276k sq. ft commercial unit occupied by Ilke Homes, the modular homes manufacturer. A 14-year lease has been agreed with Ilke at a stabilised rent of £1m per annum, representing a net initial yield of 10.9% and a reversionary yield of 12.1%. The site's very low density of 29% also provides a potential opportunity for further commercial development. In support of our expanding regional presence, we acquired land at two strategic sites in the Midlands in May, totalling 165 acres, for a total consideration of £3.88m plus acquisition costs. At Cinderhill in Derbyshire, we acquired another 112 acres of strategic land across three parcels as part of site assembly to support the promotion through Amber Valley District Council's Local Plan. Cinderhill has the potential to be a substantial, residential-led development across 421 acres that could deliver up to 3,000 new homes and 450k sq. ft of commercial space. We also acquired 53 acres in Bardon, Leicestershire, adjacent to the Group's existing development at Coalville. Close to Junction 22 of the M1, we are already promoting the site through the planning process for a 350k sq. ft scheme of manufacturing, distribution and roadside uses. Our strategic move into the Midlands was further evidenced in June with our acquisition of the 350-acre former Ironbridge coal-fired power station in Shropshire. Located adjacent to Ironbridge town centre, the site comprises around 240 acres of brownfield land and a neighbouring parcel of over 100 acres of agricultural land. We are already promoting the site through the planning process, with the first public consultation held in November. We are targeting a new mixed-use development of at least 1,000 homes alongside commercial development, leisure uses and a significant amount of public open space. Further consultation on our plans will take place in Spring 2019 prior to submission of an outline planning application. The final acquisition of the year represented our first move into residential development in the North West. In November we purchased 56 acres at Moss Nook in St Helens, Merseyside. The site, which was under option for two years, is a brownfield site situated just over a mile away from St Helens town centre with an existing planning consent for 900 new homes. We are already applying our masterplanning, land remediation and infrastructure expertise to create a new vision for the site and to prepare part of the site for a first sale of engineered land. Progress has also been made in securing further land options and new PPAs. As at 31 December 2018, 197 acres of third-party land was secured under option, with PPAs secured to promote 4,919 residential plots and 0.4m sq. ft of new commercial space through the planning system. The evolution of the business and pace of its growth has made implementation of a regional structure the logical next step. As a result, we appointed three Regional Directors in the Autumn to take forward the acquisition, promotion and development of all sites in our core regions of Yorkshire & Central, Midlands and the North West. We believe that this will generate greater management cohesion between the acquisition and delivery functions and will create regional teams embedded in their respective local markets, further increasing the profile of the business and supporting us in securing more developable land and property to grow the business in a sustainable manner. Income Generation Excellent progress continues to be made by our Income Generation team, growing the size and strength of our recurring income base to cover, over time, all operating costs of the business and dividends. The team also makes a significant contribution to our achieved value gains through its work in directly developing new commercial space and asset managing our existing income portfolio. The team's strategy evolved further in 2018, with the sales of mature assets with little further value-add potential, and of low-yielding agricultural land and property with little development potential, in turn supporting the purchase of higher-yielding assets, in many cases with development potential. The team has continued to undertake selective direct development in response to the ongoing undersupply of good quality commercial space in the regions, generating both value gains and new sources of long-term income. The extension of our Revolving Credit Facility to £100m in April, coupled with the sale of Harworth Business Park in North Nottinghamshire in March, enabled the acquisitions of Nufarm and Flaxby referred to above. The additional income headroom these acquisitions provide allowed us to dispose of all five built commercial units, totalling 145k sq. ft, at Phase 1 of our Gateway 36 Business Park in Barnsley, South Yorkshire for £15.8m, reflecting a net initial yield of 4.76% and generating a profit on sale. This was a great result for the business, given the site did not have outline planning consent in place until 2014. Lettings progress has been strong in 2018, with over 787k sq. ft of new and renewed letting activity to a variety of occupiers, at favourable rents. At the end of December, only two of our wholly owned speculative development units in the Business Space portfolio (c.31k sq. ft) remained vacant, reflecting the underlying strength of the industrial property market across the North of England. Strong growth in rental values was also recorded on the three sites where we have directly developed new commercial space. At Logistics North in Bolton, five key lettings were agreed. In January, we agreed a 15-year lease with Vaclensa Limited for our C5 "R-evolution" unit, totalling 28k sq. ft, at a then new headline rent for Logistics North of £7.00psf, reflecting the continued strong demand for high quality industrial assets in the region. Four new leases were also agreed for the "Multiply Logistics North" units that we are developing in joint venture with the Lancashire County Pension Fund. In March, Hardscape, the UK's premier landscaping material supplier, became the scheme's first tenant on a 15-year lease for the 45k sq. ft Unit F2/A. This was followed in October by a 15-year pre-let to rijo42, the UK's leading supplier of commercial coffee machines, coffee beans and coffee ingredients, at a rent of £7.25psf for the 20k sq. ft Unit F2/E. A further six "Multiply" units, totalling 271k sq. ft, were practically completed in the Autumn. In November, UW Homes Services Ltd, a smart meter installation and maintenance business, took a 10-year lease of the 31k sq. ft Unit F2/C at a new headline rent for the North West of £7.75psf. Finally, kitchen supplier PJH Group Limited took 63k sq. ft of space at Multiply's F1/A unit on a ten-year lease. Five remaining units totalling c.275k sq. ft (Harworth's 20% share equating to c.56k sq. ft) remain available at 'Multiply' to let in 2019. At the Advanced Manufacturing Park ("AMP") in Rotherham, the 52k sq. ft "R-evolution Phase 2" is now fully let. With the market for new-build commercial space remaining strong, driven by a lack of good quality existing supply, we undertook construction of the third phase of "R-evolution" at the AMP, comprising 57k sq. ft of commercial space that practically completed at the end of August 2018. The first letting of that space, the c.25k sq. ft Unit 6A-D was completed in October, with Bodycote taking a 15-year lease, leaving two remaining units totalling 31k sq. ft available to let in 2019. In addition to growing income from our own commercial development, the team let M&G Real Estate's LN175 unit, a 175k sq. ft industrial unit at the front of Logistics North, to an advanced manufacturer on a 20-year lease in December. Under the terms of our forward funding agreement with M&G, this triggered a one-off net 'promote fee' of £6.8m, supporting the delivery of stronger than anticipated PEVG across the portfolio. The team also continues to asset manage our 2.7m sq. ft Business Space portfolio to reduce voids and increase rental returns. All of this activity meant that Business Space revenue in 2018 increased to £11.9m (2017: £8.4m). The weighted average unexpired lease term ("WAULT") to expiry across the portfolio now stands at 14.1 years (2017: 7.5 years), whilst the vacancy rate has reduced to 14% (2017: 17%). Our revenues for the period were bolstered by the work of our Natural Resources and Operations teams seeking out new opportunities. A total of 154.2MW (2017: 159.7MW) of energy capacity is now installed on our land, providing a long-term income stream from a combination of ground rents and royalties. The team's focus remains on growing future income from alternative technologies with better short-term prospects and from maintaining income from our tipping operations, which has the added benefit of supporting site remediation. As a by-product of our remediation, engineering and development activities, we continue to generate income from recycled aggregates and coal fines, albeit these will decline in the medium-term. The outlook for the Income Generation business remains positive. Demand for new commercial space in our regions remains solid, with a national vacancy rate of less than 6%, continued growth of on-line retailing and the need for supply chain suppliers to be near original equipment manufacturers on our developments. As a result, the business will continue to undertake selective direct development on key sites to improve further the breadth and quality of our income base and to support NNNAV growth. Our people are central to our success The four successive years of double-digit total returns to shareholders, well in excess of industry averages, is principally due to the innovation, technical expertise, experience, determination and resilience of all our colleagues across the Harworth team. We now comprise a team of 66 people working across three regional offices and on sites. Our people remain committed to increasing the value of our land and property portfolio by creating great new places for people to live and work. My continued thanks go to the entire team, our delivery partners and external professional teams for their hard work in maintaining the Group's growth trajectory, whilst maintaining our values, culture and standards. I have also developed a strong working relationship with our new Chairman, who has brought a fresh challenge and perspective to the business since his appointment in March last year. He shares my view that the core of our success is due to the range and quality of activities we undertake and oversee. I am delighted that we are growing the business, both in terms of size and coverage, in a sustainable manner, whilst retaining our core principles. Alastair has also brought a new perspective to organisational development and the mentoring needed for all senior members of our executive team to support the growth of the business, whilst maintaining our underlying culture. Outlook The quality and attraction of our engineered land and commercial property space, matched with favourable market conditions in our core regional markets, position the business strongly for continued EPRA NNNAV growth and further improvement in the quality and breadth of our recurring income base. Over 50% of this year's budgeted sales have already been agreed, supporting the Group's performance for the year ahead, although we still expect performance to be second half weighted. So far in 2019 we have made two strategic land acquisitions, both in the North West, for residential development and have agreed terms on a number of other sites in all regions which are now moving through the legal process. We also anticipate the majority of our existing planning applications will be determined in 2019. With healthy demand for new lettings and enough strategic land and property opportunities for the business to pursue, the business remains well set up for ongoing growth. We expect the solid economic growth in the North West, Yorkshire and the Midlands to continue into 2019. Whilst Brexit is causing short-term uncertainty at a macro-level and pulling the Government's attention and time away from other important economic and social challenges, the fundamental strengths of, and opportunities in, our core regional markets remain, and we expect them to endure in the medium to long-term. Owen Michaelson Chief Executive 5 March 2019 Financial Review Summary In 2018, Harworth continued to build its track record since re-listing, delivering the fourth consecutive year of over 13% total return; this is ahead of our long-term average ambition of over 10% annual total return. Total return (NNNAV growth plus dividends) per share over the last year was 13.3% (2017: 13.2%). The table below shows the movement in net asset value, and total return, over the last year: As at 31 December 2018 As at 31 December 2017 Growth since 31 December 2017 Per share £'m Per share £'m EPRA NNNAV 145.2p £466.5m 128.9p £414.2m 12.6% EPRA NAV 148.3p £476.5m 131.0p £420.8m 13.2% NAV 137.5p £441.9m 127.4p £409.3m 7.9% Total return 13.3% 13.2% We use a number of Alternative Performance Measures ("APMs") alongside statutory amounts. We believe that these assist in providing stakeholders with additional useful information on the underlying trends, performance and position of the Group. Note 2 to the financial information gives a full description and reconciliation of our APMs. Operating profit before exceptional items contributing to growth in EPRA NNNAV, rose by 23.0% to £61.1m, 19.0p per share (2017: £49.6m, 15.4p per share). As set out in note 2, this is operating profit before exceptionals (2018: £33.6m, 2017: £39.7m) plus profits from joint ventures (2018: £3.8m, 2017: £4.0m) and the revaluation gains on development property (2018: £22.9m, 2017: £5.8m) plus the revaluation gains on overages (2018: £3.5m, 2017: £nil) less gains on development property value released on sale (2018: £2.8m, 2017: £nil) which, because they are held as inventory, are not included in the balance sheet. The operating profit before exceptional items which contributed to growth in EPRA NNNAV growth is best understood as being composed of two elements: · Value gains (£51.3m; 2017: £47.4m) - unrealised revaluation gains on investment and development property plus overages and profits from joint ventures increased by 31.0% to £48.1m (2017: £36.7m) mainly as a result of the achievement of milestones in terms of planning, place-making and lettings together with seizing site-specific opportunities. Realised profits on disposals of investment, development and available for sale properties fell by 70.0% to £3.2m (2017: £10.7m) mainly as a result of previously recognising value gains on prospective investment property sales at the 2017 year-end and 2018 half-year; and · PEVG (£9.8m; 2017: £2.2m) - this represents the ongoing profitability of the business which is not reliant on property value gains or profits from the sales of properties and is, therefore, less susceptible to movements in the property cycle. The significant increase over 2018 reflected the one-off fee from successfully letting the remaining M&G forward funded unit, Logistics 175, at Logistics North and the impact of income acquisitions. Net finance costs rose to £4.0m (2017: £2.3m) as a result of higher levels of debt to fund the growth of the business and the write-off of fees associated with the increase in our Revolving Credit Facility. However, given higher PEVG, interest cover rose to 4.65x (2017: 3.41x). Our tax rate in 2018 remained below the statutory corporation tax rate as a result of ongoing progress with land remediation relief claims and the recognition of previously assumed lost tax losses. Cash tax payments continue to be minimised by the utilisation of historic tax losses. The fall in earnings per share to 10.61p (2017: 15.76p) reflects the impact of the beneficial deferred tax movements in 2017 and the fact that the statutory measure, as opposed to the EPRA balance sheet movement, does not fully reflect the improved value gains since movements on development properties and overages are not included in the balance sheet. The total dividend per share for 2018 has been increased by 10% to 0.911p (2017: 0.828p) consistent with previous years and reflecting our long-run ambition to deliver double digit total return through the cycle. Net debt at £64.4m or 12.3% net loan to value (2017: £32.3m and 7.0%) reflects our prudent gearing approach and is in-line with our stated 10.0% - 15.0% target range. In February 2018, the Group extended the term of its £75.0m Revolving Credit Facility ("RCF") with RBS to February 2023, on the same terms except with an increase in margin from 200 to 210 basis points, and in April 2018 the RCF was increased to £100.0m with Santander joining the facility on the same terms as RBS. Property categorisation Until sites receive planning permission, our view is that the land is held for a currently undetermined future use and should thus be held as investment property. We categorise all properties/land that have received planning permission as development properties. As at 31 December 2017, the balance sheet value of all development sites was £210.5m and the market value of all development was £216.3m reflecting the £5.8m uplift in value of these sites, which is appropriately not reflected in the balance sheet. More detail is set out in the 2017 Annual Report and Accounts. Property categorisation is reviewed as at 30 June and 31 December each year. In 2018 no new properties were re-categorised from investment to development property as a result of planning permissions because: the planning permission granted at Swadlincote was an amendment to an existing planning permission; our part of the site at Athersley which received planning permission has been transferred to assets held for sale as it is now being actively marketed; and the remaining planning permissions received were for our first three PPA successes. There were some minor movements from investment to development properties, and vice-versa, as a result of sub-dividing some sites and the intentions for these smaller parcels. As at 31 December 2018, the balance sheet value of all development sites was £204.2m and their market value was £230.2m reflecting the £26.0m uplift in value of these sites. In order to highlight the market value of development sites, and overages, and to be consistent with our investment properties, we are using EPRA NNNAV, which includes the market value of development properties and overages less notional deferred tax, as our primary net assets metric. We will, however, continue to report EPRA NAV which is EPRA NNNAV excluding deferred tax and the mark to market movement on financial instruments. The table below sets out our top ten sites by value, which represent 47% of the total value of all our properties, split by their categorisation and showing the total acres, currently consented residential plots and commercial space: Housing plots Commercial space Site Type Region Acres Consented Sold/Built Consented Built Waverley Development Yorkshire 454 3,890 1,218/850 - - Coalville Development Midlands 346 2,016 0 - - Nufarm Investment Yorkshire 112 - - 0.30m sq. ft 0.30m sq. ft Waverley (AMP) Investment Yorkshire 113 - - 2.10m sq. ft 1.50m sq. ft Thoresby Development Midlands 460 800 0 0.25m sq. ft 0.00m sq. ft Melton CP Investment Midlands 141 - - 0.30m sq. ft 0.30m sq. ft Rossington Development Yorkshire 307 1,200 522/170 0.10m sq. ft 0.05m sq. ft Gateway 45 Joint Venture Yorkshire 166 - - 2.60m sq. ft 0.00m sq. ft Four Oaks BP Investment North West 19 - - 0.43m sq. ft 0.43m sq. ft Chatterley Development North West 129 - - 1.20m sq. ft 0.00m sq. ft TOTAL 2,247 7,906 1,740/1,020 7.28m sq. ft 2.58m sq. ft Operating profit Revenues in 2018 were £78.1m (2017: £53.7m), split between revenue from operations £33.2m (2017: £23.9m) and revenue from the disposal of development properties £44.8m (2017: £29.8m). Revenue from operations is split between: Income Generation £25.6m (2017: £18.2m), where revenue mainly comprises rental and royalty income together with some sales of coal fines and salvage; and Capital Growth £7.6m (2017: £5.7m). The increase in revenue from Income Generation reflected improved lettings and business space acquisitions made in 2017 and 2018. The revenue from Capital Growth reflected the recognition of promote fees for the lettings of the two units at Logistics North which were forward funded by M&G Real Estate. The two units, LN175 and LN225, were let in 2018 and 2017 respectively. Cost of sales comprises the inventory cost of development property sales and the operating costs for business space, natural resources, agricultural land and coal fines activities. Cost of sales increased to £53.6m (2017: £37.7m) of which £43.1m related to the inventory cost of development property sales (2017: £27.9m). Other costs were primarily the costs associated with coal fines £5.0m (2017: £2.2m). Revenue and cost of sales include amounts relating to the M&G forward funding contract at Logistics North as Harworth acted as principal in this transaction. This principal relationship was as a result of Harworth having exposure to potential construction and credit risks as well as the potential rewards of managing the construction on time and to budget and letting the buildings favourably and early. Total overheads, which include the overhead costs of the Capital Growth and Income Generation segments and central costs, amounted to £12.9m (2017: £12.0m) and were in line with expectations, reflecting increased costs due to the expansion of the business in the regions. The table below shows the results of the business, on an alternative performance measure basis to tie to EPRA NNNAV, split between Capital Growth, Income Generation and Central Overheads: 2018 2017 Capital Growth £m Income Generation £m Central Over- heads £m Total £m Capital Growth £m Income Generation £m Central Over-heads £m Total £m Revenue 52.5 25.6 - 78.1 35.4 18.3 - 53.7 Cost of sales (45.0) (8.6) - (53.6) (32.3) (5.4) - (37.7) Overheads (2.5) (2.2) (8.2) (12.9) (1.9) (1.8) (8.3) (12.0) Notional development property costs (2) (1.7) - - (1.7) (1.9) - - (1.9) Other operating income - - - - - - 0.1 0.1 Profit/(loss) excluding value gains (1) 3.2 14.8 (8.2) 9.8 (0.7) 11.1 (8.2) 2.2 Revaluation gains (2) 9.0 11.7 - 20.7 20.6 6.3 - 26.9 Profit on disposals (2) 1.5 1.7 - 3.2 8.0 2.7 - 10.7 Pension charge - - (0.1) (0.1) - - - - Operating profit/(loss) before exceptional items 13.7 28.2 (8.3) 33.6 27.9 20.0 (8.2) 39.7 Net exceptional items - - (0.6) (0.6) - - 0.3 0.3 Operating profit/(loss) 13.7 28.2 (8.9) 33.0 27.9 20.0 (7.9) 40.1 Joint ventures - 3.8 - 3.8 - 4.0 - 4.0 Operating profit/(loss) before exceptional items plus JVs 13.7 32.0 (8.3) 37.4 27.9 24.0 (8.2) 43.8 Revaluation gains on development properties 22.9 - - 22.9 5.8 - - 5.8 Revaluation gains on overages 3.5 - - 3.5 - - - - Development property value gains attributable to sales (2.8) - - (2.8) - - - - Operating profit/(loss) before exceptional items which contributed to EPRA NNNAV 37.3 32.0 (8.3) 61.1 33.7 24.0 (8.2) 49.6 Value gains (including JVs and development properties) 34.1 17.2 - 51.3 21.0 26.4 - 47.4 Notes: (1) A full description and reconciliation of the alternative performance measures in the above table is included in note 2 to the financial information (2) The income statement has been re-presented to show the profit on development property sales (£3.5m; 2017: £7.7m) within profit on disposals and development property impairment (£1.7m; 2017: £5.8m) within revaluation gains. This notional cost is the reversal of these amounts (3) There are minor differences on some totals due to rounding Set out below are value gains for 2017 and 2018, which comprise profit on disposals, revaluation gains on investment properties (including joint ventures) and revaluation gains on development properties: 2018 2017 £m Revaluation gains Revaluation gains Profit on disposals Management Market Total Profit on disposals Management Market Total Development/Capital Growth Major Developments 0.8 17.7 6.5 25.0 8.0 8.7 4.3 21.0 Strategic Land 0.7 5.8 2.6 9.1 0.0 12.2 1.2 13.4 Investment/Income Generation Business Space (0.0) 7.0 0.1 7.0 0.5 4.4 0.8 5.7 Natural Resources 1.8 8.1 0.7 10.5 2.2 1.4 0.1 3.7 Agricultural Land (0.0) 0.0 (0.3) (0.3) 0.0 2.6 1.0 3.6 Total 3.2 38.5 9.6 51.3 10.7 29.2 7.5 47.4 Notes: (1) A full description and reconciliation of the alternative performance measures in the above table is included in note 2 to the financial information The Group made property sales of £93.2m in 2018 (2017: £54.8m) achieving a profit on disposals of £3.2m (2017: £10.7m). The sales were split between those of residential serviced plots of £33.6m (2017: £23.0m), commercial development of £30.9m (2017: £22.7m) and other, mainly mature income-generating sites and agricultural land, of £28.7m (2017: £9.1m). In addition, Harworth undertook direct development on its sites with a land value of £1.0m (2017: £2.1m) and its share of property sales in its joint ventures was £1.1m (2017: £0.9m). Profits on disposals fell mainly as a result of previously appropriately recognising value gains on prospective investment property sales at the 2017 year-end and 2018 half-year. In addition, the introduction of IFRS 15 has resulted in the recognition of interest receivable on deferred consideration such that interest of £0.2m (2017: £0.0m) will be recognised in future years relating to sales. Cash proceeds from sales were £78.9m (2017: £46.6m) reflecting the sales in the year of £93.2m (2017: £54.8m), less deferred consideration on sales in the period of £22.7m (2017: £14.3m), plus deferred consideration received from sales in the prior year of £8.4m (2017: £6.1m). We have split the revaluation gains of £48.1m (2017: £36.7m) to reflect the contribution from active management through the achievement of milestones of £38.5m (2017: £29.2m) and market movements of £9.6m (2017: £7.5m). Whilst there is a degree of subjectivity in this split, it highlights that the majority of the value gains continue to come from active management. In 2018, the principal revaluation gains across the divisions reflected the following: · Major Developments - Profitable sales, and evidence and progress, across most sites (notably Swadlincote, Lounge, Coalville & Waverley) and a few minor reductions; · Strategic Land - Uplifts at Cinderhill and Wingates ahead of 2019 planning decisions plus increases in the value of our overages; · Business Space - Good lettings secured across our portfolio, particularly our wholly owned and JV direct developments, plus strong sales enquiries at Gateway 45; · Natural Resources - Value uplifts from surface water management and a water abstraction license plus a site increase from securing planning and interest for an Energy from Waste ("EfW") plant. This alongside a good profit achieved on sale of land for another EfW plant; and · Agricultural Land - Minor reductions across a number of sites. Exceptional items Exceptional items in 2018 were a charge of £0.6m (2017: credit £0.3m) and comprised the costs for the step-up from standard to premium listing (see below). Exceptional items in 2017 comprised three separate items which related to sundry receipts and costs from the Group's legacy activities. Tax The income statement credit for taxation for the year was £1.3m (2017: £7.8m credit) which comprised a deferred tax credit of £0.5m (2017: £9.3m credit) and a current year tax credit of £0.8m (2017: £1.5m charge). The movement in deferred tax comprised the following: · the increase in valuation of investment properties has given a rise to £2.8m of deferred tax charge; · a £3.1m credit due to the recognition of tax losses following both disposals in the period and the conclusion of a review regarding the availability of existing tax losses; · following the submission of the tax computations and returns for prior periods, a reduction in the amount of tax attributes utilised in the prior period resulting in a deferred tax credit of £0.5m; · deferred tax recognised in relation to share options resulting in a deferred tax credit of £0.1m; and · the utilisation of tax losses against current year profits resulted in a deferred tax charge of £0.4m. The current tax charge comprised the following: · a current year tax charge of £0.9m (2017: £1.9m) resulting from profits from sale of development properties and rental income in the period; and · the resubmission of the prior year tax computations and returns to reflect the land remediation relief and capital allowances claims following a review resulted in an adjustment in respect of prior years of £1.7m. At 31 December 2018, the Group had deferred tax liabilities of £12.3m (2017: £13.0m) related to unrealised gains on investment properties and had recognised deferred tax assets of £7.3m (2017: £7.5m). The net deferred tax liability was £5.0m (2017: £5.5m). Earnings per share and Dividends Earnings per share fell to 10.61p (2017: 15.76p). This fall reflects the impact of the beneficial deferred tax movements in 2017 and the fact that the statutory measure, as opposed to the EPRA balance sheet movement, does not fully reflect the improved value gains with movements on development properties and overages not included in the balance sheet. Diluted earnings per share fell to 10.53p (2017: 15.68p) for the same reasons. An interim dividend of 0.278p per share (2017 interim: 0.253p) equivalent to £893k (2017 interim: £813k) for the 2018 financial year was paid on 19 October 2018. A final dividend for the 2018 financial year of 0.633p per share (2017 final: 0.575p) is proposed. The total dividend for the year of 0.911p per share (2017: 0.828p) equivalent to £2.928m (2017: £2.66m) is in line with our progressive dividend policy and represents a 10% increase over the prior year, reflecting our long run ambition to deliver double digit total return through the cycle. The final dividend will be paid on 31 May 2019 to shareholders on the register at the close of business on 3 May 2019. The ex-dividend date will be 2 May 2019. Net assets As set out below, EPRA NNNAV increased to £466.5m as at 31 December 2018 from £414.2m as at 31 December 2017. This increase was as a result of movements in the year, being operating profit before exceptionals plus share of profits of joint ventures, overages and development property gains of £61.1m, less exceptional costs of £0.6m, interest costs of £4.0m, tax charges (including overages and development properties notional deferred tax) of £2.7m and dividends of £2.7m plus other movements of £1.2m. 31 December 2018 £m 31 December 2017 £m Investment and development properties (including investments in joint ventures, assets held for sale and occupied properties) 496.1 457.1 Cash 8.6 8.4 Other assets 69.6 31.5 Total assets 574.3 497.0 Gross borrowings 73.0 40.6 Deferred tax liability 5.0 5.5 Derivative financial instruments 0.1 0.1 Other liabilities 54.3 41.5 Net assets 441.9 409.3 Mark to market value of development properties and overages less notional deferred tax 24.6 4.9 EPRA NNNAV 466.5 414.2 Number of shares in issue less Employee Benefit Trust shares 321,314,989 321,250,750 NAV per share 137.5p 127.4p EPRA NNNAV per share 145.2p 128.9p EPRA NAV per share 148.3p 131.0p Notes: (1) A full description and reconciliation of the alternative performance measures in the above table is included in note 2 to the financial information The increase in trade and other receivables to £66.7m (2017: £30.4m) was mainly as a result of £20.5m owing on deals which were agreed in December, which has now been paid, and a £12.0m increase related to higher levels of deferred consideration due from housebuilders reflecting greater sales volume. The increase in current trade and other payables to £52.6m (2017: £38.5m) was mainly as a result of greater levels of VAT payable (c.£7.5m increase) as a result of higher sales and an increase of £2.4m to £25.2m in development spend accruals again reflecting higher activity levels. Financing strategy and funding As has been consistently stated, Harworth's financing strategy is to be prudently geared, in particular not gearing our Capital Growth properties being our Strategic Land and Major Developments sites. We believe this prudence gives the Group a number of advantages: · allows working capital swings to be managed appropriately given that infrastructure spend is usually in advance of sales and thus net debt can increase materially during the year; · gives the Group the ability to complete acquisitions quickly, which is often a differentiating factor in a competitive situation; and · ensures that we do not combine financial gearing with Harworth's existing operational gearing, being the company's exposure to planning, remediation/engineering, letting and sales risks. Harworth's financing strategy also involves the Group seeking in principle to maintain its cash flows in balance by funding infrastructure spend and investment in acquisitions through disposal proceeds. To reduce refinancing risk, on 13 February 2018 Harworth extended the term of its existing £75m Revolving Credit Facility ("RCF") with RBS by two years such that it now expires in February 2023. The extension was on substantially the same terms, the only notable change being a slight increase in margin to 210 basis points ("bps") over LIBOR (from 200bps). To increase financing flexibility, drive continued growth and maintain an efficient balance sheet, on 30 April 2018 Harworth increased the size of its RCF from £75m to £100m, with Santander joining the facility alongside RBS. RBS' commitment remains at £75m with Santander's initial commitment at £25m. There were no other material changes to the terms of the RCF. The Group also uses infrastructure funding, provided by public bodies to promote the development of major sites for employment and housing needs, as part of our funding. At 31 December 2018 the Group had four infrastructure facilities with all-in funding rates of between 3.2% and 4.0%. The Group's hedging strategy is to have roughly half its debt at a fixed rate and half exposed to floating rates. On 20 July 2018, Harworth cancelled its existing £30m fixed rate interest swap which was due to expire on 30 June 2020 (incurring total break costs of £18.5k) and in its place entered into a 4-year, £45m fixed rate interest swap at an all-in cost of 1.235% (including fees) on top of the existing 210bps margin paid under the RCF. The new swap was put in place to reflect increased levels of borrowing and to increase its term commensurate with the extension in the term of the RCF. The interest rate swap is hedge accounted with any unrealised movements going through reserves. As at 31 December 2018, Harworth's gross Loan To Value ("LTV") was 13.9% (2017: 8.8%) and net LTV was 12.3% (2017: 7.0%). This was in-line with our stated 10.0%-15.0% net LTV target range. However, as set out above, Capital Growth sites are deliberately not geared, so if gearing is just assessed against the value of Business Space and Natural Resources properties this equates to a gross LTV of 38.9% (2017: 26.2%) and a net LTV of 34.3% (2017: 20.8%). The Group had borrowings and loans of £73.0m at 31 December 2018 (2017: £40.6m), being the RBS RCF of £58.7m (2017: £23.4m) and infrastructure loans of £14.3m (2017: £17.2m). The Group's cash and cash equivalents at 31 December 2018 were £8.6m (2017: £8.4m). The resulting net debt was £64.4m (2017: £32.3m). The weighted average cost of debt, using 31 December 2018 balances and rates, was 3.3% with a 0.84% non-utilisation fee on undrawn RCF amounts (2017: 3.0% with a 0.8% non-utilisation fee on undrawn RCF amounts). For the twelve months to 31 December 2018 Harworth's interest cover, as calculated by the RBS/Santander RCF covenant calculation, was 4.65x (2017: 3.41x) against a covenant test of 1.5x. As a result of the receipt of cash from December 2018 transactions, cash and undrawn facilities as at the end of February 2019 increased by £6.8m to £56.4m, with net debt falling to £56.5m. Premium listing and FTSE index inclusion On 1 August 2018 Harworth confirmed that it had received approval from the UK Listing Authority for the transfer of the listing category of all of its ordinary shares from a standard listing (shares) to a premium listing (commercial company). Harworth subsequently satisfied the conditions for UK FTSE indices inclusion and joined the indices on 24 September 2018. Andrew Kirkman Finance Director 5 March 2019 Principal risks and uncertainties The Board has ultimate responsibility for determining the risk appetite of the Group and for the implementation and regular review of policies, processes and controls to mitigate and manage risk. The Board recognises that not all risks can be eliminated, or sufficiently mitigated, at an acceptable cost and that there are some risks which, given the nature of the Group's business and the growing track record and experience of the team, it is prepared to accept. The Board also recognises that the Group's insurance programme plays an important part in reducing the impact of certain inherent risks which are neither acceptable nor capable of removal. The Group Risk Register ("GRR") is the principal tool used by the Board and senior management team for monitoring the strategic risk profile of the business and the measures in place at an operational level for mitigating and managing risk. The GRR maps the risk profile of the business, with individual risks currently grouped into eight categories, being: markets; delivery; politics; finance; people; legal and regulatory; governance and internal controls; and communications and stakeholder management. Those categories remain subject to regular review. Risks are scored on a "heat map", from "very low" to "very high", according to residual risk status (after accounting for mitigation measures already in place) and materiality. Emerging risks are also identified, together with steps that have been identified to mitigate them. The GRR is now reviewed quarterly by both the senior management team and the full Board. Updates are made as necessary, both to the profile of certain risks and, in some cases, risk categories, and to the risk mitigation and management measures undertaken and planned, together with the anticipated impact of such measures to reduce risk exposure. Those quarterly reviews are informed by both the Board's high-level assessment of risk and more detailed operational feedback from senior management, following consultation with their respective teams. The risk profile of the business, as reflected in the GRR, is measured against the Board's risk appetite, which is reviewed annually. The Board's objective is to maintain, as far as possible, an alignment between its risk appetite and the risk profile of the business. The executive team, supported by the senior management team, has ultimate responsibility on a day-to-day basis for: the Group's risk profile; the implementation of, and adherence to, risk management controls and procedures; and monitoring the continued effectiveness of the same. Following regionalisation of the business the management of operational risks relies increasingly on a framework of internal controls and processes for: monitoring existing and emerging (but identified) risks; identifying new operational risks; and ensuring the effectiveness of risk mitigation measures. Work is ongoing to evolve those controls and processes in the context of the new regional structure. That said, the business continues to have a relatively small team and short reporting lines and members of the senior management team are, therefore, closely involved in day to day operations and often able themselves to identify new and changing risks. The GRR identifies an "owner" of each risk, being a member of the executive team, who takes responsibility for the status and management of that risk, in some cases with support from other members of the senior management team. All members of the senior management team consult regularly with their teams about, and feed-back (to the Management Board) on, existing and new operational risks, and the effectiveness of risk management measures. This feed-back is reflected in the quarterly updates to the GRR. Alongside maintenance of the GRR: · our Estates, Environment and Safety ("EES") team maintains a site risk register through which we continuously monitor the risk status of each of our sites. Material changes in their risk status are reported to the Board on a monthly basis and changes to the profile of the site risk register are incorporated into the quarterly reviews of the GRR; and · the Chief Executive chairs a quarterly health and safety meeting which is attended by representatives of each regional and centrally operated division, at which: incident briefings are given; site-specific and business-wide issues are identified and discussed, with action points agreed; and best practice is shared. Action points are recorded and monitored by the Associate Director of EES. The Group is currently operating against a backdrop of heightened economic and political turbulence as negotiations continue for the UK's exit from the EU. The Board is mindful that these macro conditions could lead to a downturn in the regional residential and/or commercial property markets in which the Group operates. Alongside the 2019 budget and five-year strategic plan presented to the Board in the fourth quarter of 2018, the executive team modelled a severe market downturn lasting throughout 2019 and 2020. It forecast the potential impact on, and headroom in, the Group's property valuations and cashflow, and the measures available to the Group to mitigate against the same. That analysis has demonstrated that the Group, which is well-capitalised and has low financial gearing, is in a resilient position both to withstand adverse market movements and to capitalise on acquisition opportunities which may arise in a climate of continued economic and political uncertainty. Further detail will be set out in the viability statement in the 2018 Annual Report. Notwithstanding the Group's downside forecasting, the housing, logistics and manufacturing markets in the Group's core regions remain supported by long-term fundamentals and both local and central government policy, and currently do not show signs of a material downturn. That said, there is some limited evidence of a slow-down in the rates of sales by housebuilders. This prompted a short delay to, and a change to the payment structure of, one prospective sale of residential land at the turn of the year, albeit contracts have now been exchanged for that sale. That example apart, we have not experienced any adverse impact on sales. The increased likelihood of a downturn in the residential and/or commercial property markets, set against the current economic and political backdrop, has been reflected in the GRR by an increase in the risk status of the markets risk category, from "medium" to "high" risk (when compared to the 2017 Annual Report). There has also been an increase in the risk status of the governance and internal controls category, from "low" to "medium" risk. This reflects that the Group's framework of internal controls and processes needs to evolve to respond to regionalisation of the business. We expect this category to revert to a "low" risk status over the coming months as controls and processes are embedded into the regional structure, and certain other initiatives connected to cyber security and information security are implemented. Whilst there have been some modest changes to the status of certain other individual risks across the business, there have been no material changes to the overall profile of other risk categories since publication of the 2017 Annual Report, with all other categories scored as either "medium" or "low" risks. The 2018 Annual Report and Financial Statements will include a detailed analysis of the Group's principal risks and uncertainties, similar to that in the 2017 Annual Report, reflecting the latest review of the GRR by the Board and the points referred to above. This analysis will: (A) record the current status of each risk category, after mitigation; (B) list the mitigation measures already in place and those identified for implementation over the next 12 months; and (C) indicate how each risk category could impact our strategic priorities. Unaudited Consolidated Income Statement for the year ended 31 December 2018 Note Unaudited as at 31 December 2018 £000 Audited as at 31 December 2017 £000 Revenue 3 78,055 53,673 Cost of sales 3 (53,612) (37,678) Gross profit 24,443 15,995 Administrative expenses 3 (12,870) (12,020) Other gains 3 22,066 35,658 Other operating (expense)/income 3 (70) 98 Operating profit before exceptional items 33,569 39,731 Exceptional income - 414 Exceptional expense (590) (83) Operating profit 32,979 40,062 Share of profit of joint ventures 3,791 4,039 Net finance costs 4 (3,962) (2,261) Profit before tax 32,808 41,840 Tax 5 1,294 7,843 Profit for the financial year 34,102 49,683 Earnings per share from continuing operations Note pence pence Basic 7 10.6 15.8 Diluted 7 10.5 15.7 Unaudited Consolidated Statement of Comprehensive Income for the year ended 31 December 2018 Unaudited as at 31 December 2018 £000 Audited as at 31 December 2017 £000 Profit for the financial year 34,102 49,683 Other comprehensive income - items that will not be reclassified to profit or loss: Actuarial loss in Blenkinsopp Pension scheme (18) (105) Revaluation of Group occupied property - 12 Deferred tax on other comprehensive expense items (1) (51) Other comprehensive income - items that may not be reclassified to profit or loss: Fair value of financial instruments 13 244 Total other comprehensive (expense)/income (6) 100 Total comprehensive income for the financial year 34,096 49,783 Unaudited Consolidated Balance Sheet as at 31 December 2018 Note Unaudited as at 31 December 2018 £000 Audited as at 31 December 2017 £000 ASSETS Non-current assets Property, plant and equipment 794 802 Other receivables - 2,666 Investment properties 8 254,409 216,560 Investment in joint ventures 25,830 18,838 Trade receivables - 5,250 281,033 244,116 Current assets Inventories 9 207,009 211,618 Trade and other receivables 66,699 25,165 Assets classified as held for sale 10 10,956 7,688 Cash 8,595 8,371 293,259 252,842 Total assets 574,292 496,958 LIABILITIES Current liabilities Borrowings 11 (5,291) (6,145) Trade and other payables (52,555) (38,497) Current tax liabilities 5 (928) (1,538) (58,774) (46,180) Net current assets 234,485 206,662 Non-current liabilities Borrowings 11 (67,747) (34,501) Trade and other payables (300) (760) Derivative financial instruments (109) (122) Deferred income tax liabilities 5 (4,964) (5,521) Retirement benefit obligations (462) (563) (73,582) (41,467) Total liabilities (132,356) (87,647) Net assets 441,936 409,311 SHAREHOLDERS' EQUITY Capital and reserves Called up share capital 12 32,150 32,150 Share premium account 24,351 24,351 Fair value reserve 99,825 85,109 Capital redemption reserve 257 257 Merger reserve 45,667 45,667 Investment in own shares (194) (263) Retained earnings 205,778 172,357 Current year profit 34,102 49,683 Total shareholders' equity 441,936 409,311 Unaudited Consolidated Statement of Changes in Equity for the year ended 31 December 2018 Note Called up share capital £000 Share premium £000 Merger reserve £000 Fair value reserve £000 Capital redemption reserve £000 Investment in own shares £000 Retained earnings £000 Total equity £000 Balance at 1 January 2017 (audited) 29,227 - 45,667 58,279 257 - 201,493 334,923 Profit for the financial year - - - - - - 49,683 49,683 Net fair value gains 3 - - - 32,636 - - (32,636) - Transfer of unrealised loss 3 - - - (5,818) - - 5,818 - Other comprehensive (expense)/income: Actuarial loss in Blenkinsopp Pension Scheme - - - - - - (105) (105) Revaluation of Group occupied property - - - 12 - - - 12 Fair value of financial instruments - - - - - - 244 244 Deferred tax on other comprehensive (expense)/income items - - - - - - (51) (51) Total comprehensive income for year ended 31 December 2017 - - - 26,830 - - 22,953 49,783 Transaction with owners: Purchase of own shares - - - - - (263) 86 (177) Dividend paid 6 - - - - - - (2,492) (2,492) Share issue less costs 2,923 24,142 - - - - - 27,065 Other transaction costs - 209 - - - - - 209 Balance at 31 December 2017 (audited) 32,150 24,351 45,667 85,109 257 (263) 222,040 409,311 Profit for the financial year - - - - - - 34,102 34,102 Net fair value gains 3 - - - 19,483 - - (19,483) - Transfer of unrealised loss 3 - - - (4,767) - - 4,767 - Other comprehensive (expense)/income: Actuarial loss in Blenkinsopp pension scheme - - - - - - (18) (18) Fair value of financial instruments - - - - - - 13 13 Deferred tax on other comprehensive (expense)/income items - - - - - - (1) (1) Total comprehensive income for year ended 31 December 2018 - - - 14,716 - - 19,380 34,096 Transaction with owners: Share-based payments - - - - - 69 1,200 1,269 Dividends paid 6 - - - - - - (2,740) (2,740) Balance at 31 December 2018 (unaudited) 32,150 24,351 45,667 99,825 257 (194) 239,880 441,936 The fair value reserve relates to unrealised gains and losses arising primarily from the revaluation of investment properties and historical gains/losses from investment property that has now been transferred to development property. Unaudited Statement of Cash Flows for the year ended 31 December 2018 Note Unaudited year ended 31 December 2018 Audited year ended 31 December 2017 Cash flows from operating activities £000 £000 Profit before tax for the financial year 32,808 41,840 Net interest payable 4 3,962 2,261 Other gains 3 (22,066) (35,658) Share of profit of joint ventures 3 (3,791) (4,039) Depreciation of property, plant and equipment 9 8 Pension contributions in excess of charge (120) (144) Operating cash inflows before movements in working capital 10,802 4,268 Decrease in inventories 4,609 18,232 Increase in receivables (36,284) (5,970) Increase in payables 13,598 8,394 Cash (used in)/generated from operations (7,275) 24,924 Interest paid (1,581) (1,277) Corporation tax received 99 175 Cash (used in)/generated from operating activities (8,757) 23,822 Cash flows from investing activities Interest received 4 16 Loan arrangement fees paid (566) (214) Acquisition of/investment in joint ventures (2,843) (4,250) Net proceeds from disposal of investment properties, assets held for sale and overages 47,801 24,434 Expenditure on properties (64,124) (60,431) Expenditure on property, plant and equipment (1) (9) Cash used in investing activities (19,729) (40,454) Cash flows from financing activities Net proceeds from issue of ordinary shares - 27,065 Proceeds from other loans 8,650 6,502 Repayment of bank loans (46,730) (57,000) Proceeds from bank loans 81,739 43,000 Repayment of other loans (12,209) (5,111) Investment in own shares - (177) Other transaction costs - 209 Dividends paid 6 (2,740) (2,492) Cash generated from financing activities 28,710 11,996 Increase/(decrease) in cash 224 (4,636) At 1 January Cash 8,371 13,007 Increase/(decrease) in cash 224 (4,636) At 31 December Cash 8,595 8,371 Notes to the financial information for the year ended 31 December 2018 1. Accounting policies The principal accounting policies adopted in the preparation of these unaudited consolidated financial information are set out below. These policies have been consistently applied to all of the years presented, unless otherwise stated. General information Harworth Group plc (the "Company") is a company limited by shares incorporated and domiciled in the United Kingdom. The address of its registered office is Advantage House, Poplar Way, Catcliffe, Rotherham, South Yorkshire, S60 5TR. The Company is listed on the London Stock Exchange. Basis of preparation The preliminary results for the Company and its subsidiaries (the "Group") for the year ended 31 December 2018 are unaudited. The financial information set out in this announcement does not constitute the Group's financial statements for the year ended 31 December 2018 or 31 December 2017 as defined by Section 434 of the Companies Act 2006. This financial information has been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union, IFRS IC interpretations and the Companies Act 2006 applicable to companies reporting under IFRS and therefore complies with Article 4 of the EU IAS regulations. The financial information for the year ended 31 December 2017 is derived from the statutory accounts for that year which have been delivered to the Registrar of Companies. The auditors, PricewaterhouseCoopers LLP, reported on those accounts and their report was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under Section 498 (2) or (3) of the Companies Act 2006. The statutory accounts for the year ended 31 December 2018 will be finalised on the basis of the financial information presented by the Directors in these preliminary results and will be delivered to the Registrar of Companies following the Annual General Meeting of Harworth Group plc. The same accounting policies and methods of computation are followed as in the latest published audited accounts for the year ended 31 December 2017, which are available on the Group's website at http://harworthgroup.com/ except for as described below: Revenue Revenue comprises rental and other land related income arising on investment properties, income from construction contracts, the sale of coal fines and the sale of development properties. Rentals are accounted for on a straight-line basis over the lease term. Income from construction contracts is recognised in line with the accounting policy for construction contracts. Revenue is recognised when the Group is acting as a principal under a contract with primary responsibility for the contract and has exposure to significant risks and rewards of the contract. Revenue from the sale of coal fines is recognised at the point of despatch. Following the adoption of IFRS 15 'Revenue from contracts with customers', revenue is recognised when a customer obtains control of a good or service and thus has the ability to direct the use and obtain the benefits from the good or service. In respect of the sale of development property, control is typically passed to a customer at the point of legal completion and when title has passed. Revenue is recognised to the extent that it is probable that the economic benefit will flow to the Group and the revenue can be reliably measured. All such revenue is reported net of discounts, and value added and other sales taxes. Profit or loss on disposal of investment properties Disposals are accounted for when control of the investment property has been passed to a customer, typically at the point of legal completion and when title has passed. Profits or losses on disposal arise from deducting the asset's net carrying value and where appropriate a proportion of future costs attributable to the development of the overall land area from the net proceeds (being net purchase consideration less any clawback liability arising on disposal) and is recognised in the income statement. Net carrying value includes valuation in the case of investment properties. Any fair value reserve for the property disposed of is treated as realised on disposal of the property and transferred to retained earnings. Changes in accounting policy and disclosures (a) New standards, amendments and interpretations The new standards, amendments or interpretations effective for the first time for the financial year beginning on or after 1 January 2018 are: · IFRS 9, 'Financial instruments', addresses the classification, measurement and recognition of financial assets and financial liabilities. It replaces the guidance in IAS 39 that relates to the classification and measurement of financial instruments. IFRS 9 retains but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets: amortised cost, fair value through OCI and fair value through P&L. The basis of classification depends on the entity's business model and the contractual cash flow characteristics of the financial asset. Investments in equity instruments are required to be measured at fair value through profit or loss with the irrevocable option at inception to present changes in fair value in OCI not recycling through profit or loss. There is now a new expected credit losses model that replaces the incurred loss impairment model used in IAS 39. For financial liabilities there were no changes to classification and measurement except for the recognition of changes in own credit risk in other comprehensive income, for liabilities designated at fair value through profit or loss. IFRS 9 relaxes the requirements for hedge effectiveness by replacing the bright line hedge effectiveness tests. It requires an economic relationship between the hedged item and hedging instrument and for the 'hedged ratio' to be the same as the one management actually uses for risk management purposes. Contemporaneous documentation is still required but is different from that currently prepared under IAS 39. The standard is effective for accounting periods beginning on or after 1 January 2018. The impact of IFRS 9 has been assessed on the financial instruments of the Group and no adjustments have been required. · IFRS 15, 'Revenue from contracts with customers' deals with revenue recognition and establishes principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity's contracts with customers. Revenue is recognised when a customer obtains control of a good or service and thus has the ability to direct the use and obtain the benefits from the good or service. The standard replaces IAS 18 'Revenue' and IAS 11 'Construction contracts' and related interpretations. The standard is effective for annual periods beginning on or after 1 January 2018. The Group performed a detailed assessment of the impact of IFRS 15 on revenue streams and policies for 2017. This highlighted that revenues relating to the sales of development properties, particularly where revenue involves a deferred element or conditions subsequent exist, were specifically affected by the standard as were certain promote agreements. The impact of implementing this standard on revenue would have amounted to £2.1m for 2017. However, the Directors assessed that this impact was not significant enough for restatement. The impact of IFRS 15 on revenue for 2018 has amounted to £2.2m for 2018. (b) New standards, amendments and interpretations not yet adopted A number of new standards and amendments to standards and interpretations are effective for annual periods beginning on or after 1 January 2019 and have not been applied in preparing this preliminary financial information. None of these are expected to have a significant effect on the financial statements of the Group including the following: · IFRS 16, 'Leases' addresses the definition of a lease, recognition and measurement of leases and establishes principles for reporting useful information to users of financial statements about the leasing activities of both lessees and lessors. A key change arising from IFRS 16 is that most operating leases will be accounted for on balance sheet for lessees. The standard replaces IAS 17 'Leases', and related interpretations. The standard is effective for annual periods beginning on or after 1 January 2019 and earlier application is permitted, subject to EU endorsement and the entity adopting IFRS 15 'Revenue from contracts with customers' at the same time. The full impact of IFRS 16 continues to be assessed, however, the Group does not believe it will have a significant impact. Estimates and judgements The significant judgements made by management in applying the Group`s accounting policies and the key sources of estimation were the same as those that applied to the latest published audited accounts for the year ended 31 December 2017. 2. Alternative Performance Measures ("APMs") Introduction The Group has applied the June 2015 European Securities and Markets Authority ("ESMA") guidance on APMs and the November 2017 Financial Reporting Council ("FRC") corporate thematic review of APMs in these results. An APM is a financial measure of historical or future financial performance, position or cash flows of the Group which is not a measure defined or specified in IFRS. Overview of our use of APMs The Directors believe that APMs assist in providing additional useful information on the underlying trends, performance and position of the Group. APMs assist our stakeholder users of the accounts, particularly equity and debt investors, through the comparability of information. APMs are used by the Directors and management, both internally and externally, for performance analysis, strategic planning, reporting and incentive-setting purposes. APMs are not defined by IFRS and therefore may not be directly comparable with other companies' APMs, including peers in the real estate industry. APMs should be considered in addition to, and are not intended to be a substitute for, or superior to, IFRS measurements. The derivations of our APMs and their purpose The primary differences between IFRS statutory amounts and the APMs that we use are as follows: 1. Capturing all sources of value creation - Under IFRS, the revaluation movement in development properties, which are held in inventory, is not included in the balance sheet. Also, overages are not recognised in the balance sheet until they are highly probable. These movements, which are verified by BNP Paribas and Savills (independent external property surveyors), are included within our APMs; 2. Recategorising income statement amounts - Under IFRS, the grouping of amounts, particularly within gross profit and other gains, do not clearly allow Harworth to demonstrate the value creation through its business model. In particular, the statutory grouping does not distinguish value gains (being realised profits from the sales of properties and unrealised profits from property value movements) from the ongoing profitability of the business which is less susceptible to movements in the property cycle. In addition, following the introduction of IFRS 15, profit on disposal also includes the interest received on deferred consideration on residential sales (this was previously recognised as revenue). Finally, the Group includes profits from joint ventures within our APMs as our joint ventures conduct similar operations to Harworth, albeit in different ownership structures; and 3. Comparability with industry peers - Harworth discloses some APMs which are European Public Real Estate Association ("EPRA") measures as these are a set of standard disclosures for the property industry and thus aid comparability for our stakeholder users. Our key APMs The key APMs that the Group focuses on are as follows: · Value gains - This is the realised profits from the sales of properties and unrealised profits from property value movements including joint ventures and the mark to market movement on development properties and overages · Profit excluding value gains - This profit measure represents the ongoing profitability of the business principally in terms of rents and royalties. It is calculated as operating profit before exceptional items, less other gains, gross profit on development properties and pension charges · EPRA NNNAV growth - The movement in EPRA NNNAV per share expressed as a percentage of opening NNNAV per share · Total return - The movement in EPRA NNNAV per share plus dividends paid in the year per share expressed as a percentage of opening NNNAV per share Changes to APMs There have been no changes to the Group's APMs in the year with the same APMs being defined, calculated and used on a consistent basis. Reconciliation of APMs Set out below is a reconciliation of the APMs used in these results to the statutory measures. 1) Reconciliation to statutory measures a. Revaluations gains Note Unaudited year ended 31 December 2018 £000 Audited year ended 31 December 2017 £000 Increase in fair value of investment properties 3 21,483 32,133 (Decrease)/increase in fair value of other receivables 3 (2,000) 586 Decrease in fair value of assets classified as held for sale 3 - (83) Other gains 3 45 - Share of profit of joint ventures 3 3,791 4,039 Net realisable value provision of development properties 3 (4,767) (5,818) Reversal of previous net realisable value provision of development properties 3 3,031 - Amounts derived from statutory reporting 21,583 30,857 Unrealised gains on development properties 22,945 5,846 Unrealised gains on overages 3,541 - Revaluation gains 48,069 36,703 b. Profit on sale Profit on sale of investment properties 3 2,374 2,919 Profit on sale of assets classified as held for sale 3 164 103 Profit on sale of development properties 3 3,469 7,690 Amounts derived from statutory reporting 6,007 10,712 Unrealised gains on development properties released on sale in the year (2,794) - Profit on sale 3,213 10,712 c. Value gains Statutory reporting revaluation gains 21,583 30,857 Statutory reporting profit on sale 6,007 10,712 Amounts derived from statutory reporting 27,590 41,569 Unrealised gains on development properties 22,945 5,846 Unrealised gains on overages 3,541 - Gains on development properties released on sale in the year (2,794) - Value gains (including development properties and overages) 51,282 47,415 d. Profit excluding value gains (PEVG) Operating profit before exceptional items 3 33,569 39,731 Add pension charge 70 39 Less other gains 3 (22,066) (35,658) Less gross profit from development properties 3 (1,733) (1,872) PEVG 9,840 2,240 Unaudited year ended 31 December 2018 £000 Audited year ended 31 December 2017 £000 e. Total property sales Note Revenue from development properties 3 44,825 29,765 Revenue from other property activities 3 7,629 5,671 Revenue from income generation activities 3 25,601 18,237 Amounts derived from statutory reporting 78,055 53,673 Less revenue from other property activities 3 (7,629) (5,671) Less revenue from income generation activities 3 (25,601) (18,237) Add proceeds from sales of investment properties, assets held for sale and overages 48,338 25,008 Total property sales 93,163 54,773 f. Operating profit before exceptional items contributing to growth in EPRA NNNAV Operating profit before exceptional items 3 33,569 39,731 Shares of profit of joint ventures 3 3,791 4,039 Unrealised gains on development properties 22,945 5,846 Unrealised gains on overages 3,541 - Less gains on development properties released on sale in the year (2,794) - Operating profit before exceptional items contributing to growth in EPRA NNNAV 61,052 49,616 g. Portfolio value Land and buildings 787 787 Other receivables - 2,666 Investment properties 8 254,409 216,560 Investments in joint ventures 25,830 18,838 Assets classified as held for sale 10 10,956 7,688 Development properties 9 204,157 210,471 Amounts derived from statutory reporting 496,139 457,010 Cumulative unrealised gains on development properties as at year end 25,997 5,846 Cumulative unrealised gains on overages as at year end 3,541 - Portfolio value 525,677 462,856 h. Net debt Gross borrowings 11 (73,038) (40,646) Cash 8,595 8,371 Net debt (64,443) (32,275) i. Net loan to portfolio value Net debt (64,443) (32,275) Portfolio value 525,677 462,856 Net loan to portfolio value (%) 12.3% 7.0% Unaudited year ended 31 December 2018 £000 Audited year ended 31 December 2017 £000 j. Net loan to income portfolio value Note Net debt (64,443) (32,275) Income portfolio value 187,648 154,877 Net loan to income portfolio value (%) 34.3% 20.8% k. Gross loan to portfolio value Gross borrowings 11 (73,038) (40,646) Portfolio value 525,677 462,856 Gross loan to portfolio value (%) 13.9% 8.8% l. Gross loan to income portfolio value Gross borrowings 11 (73,038) (40,646) Income portfolio value 187,648 154,877 Gross loan to income portfolio value (%) 38.9% 26.2% m. Per share Number of shares in issue at 31 December 12 321,496,760 321,496,760 Employee Benefit Trust Shares (own shares) at 31 December 12 (181,771) (246,010) Number of shares used for per share calculations 12 321,314,989 321,250,750 n. NAV per share NAV £'000 441,936 409,311 Number of shares used for per share calculations 321,314,989 321,250,750 NAV per share (p) 137.5 127.4 2) Reconciliation to EPRA measures a. EPRA NNNAV Note Unaudited year ended 31 December 2018 £000 Audited year ended 31 December 2017 £000 Net assets 441,936 409,311 Cumulative unrealised gains on development properties 25,997 5,846 Cumulative unrealised gains on overages 3,541 - Notional deferred tax on unrealised gains (5,021) (994) EPRA NNNAV 466,453 414,163 b. EPRA NAV EPRA NNNAV 466,453 414,163 Notional deferred tax on unrealised gains 5,021 994 Deferred tax liability 5 4,964 5,521 Mark to market valuation of financial instruments 109 122 EPRA NAV 476,547 420,800 c. EPRA NNNAV per share EPRA NNNAV £'000 466,453 414,163 Number of shares used for per share calculations 321,314,989 321,250,750 EPRA NNNAV per share (p) 145.2 128.9 d. EPRA NAV per share EPRA NAV £'000 476,547 420,800 Number of shares used for per share calculations 321,314,989 321,250,750 EPRA NAV per share (p) 148.3 131.0 e. EPRA NNNAV growth and total return Opening EPRA NNNAV / share (p) 128.9 114.6 Closing EPRA NNNAV / share (p) 145.2 128.9 Movement in the year 16.3 14.3 EPRA NNNAV growth 12.6% 12.5% Dividends paid per share (p) 0.9 0.8 Total return per share 17.2 15.1 Total return as a percentage of opening NNNAV 13.3% 13.2% f. Net loan to EPRA NNNAV Net debt £'000 (64,443) (32,275) EPRA NNNAV £'000 466,453 414,163 Net loan to EPRA NNNAV 13.8% 7.8% 3. Segment information Segmental Income Statement 31 December 2018 Capital Growth Sale of development properties Other property activities Income Generation Central overheads Total Note £000 £000 £000 £000 £000 Revenue 44,825 7,629 25,601 - 78,055 Cost of sales (43,092) (1,922) (8,598) - (53,612) Gross profit (1) 1,733 5,707 17,003 - 24,443 Administrative expenses - (2,473) (2,171) (8,226) (12,870) Other gains (2) - 8,658 13,408 - 22,066 Other operating expense - - - (70) (70) Operating profit/(loss) before exceptional items 1,733 11,892 28,240 (8,296) 33,569 Exceptional expense - - - (590) (590) Operating profit/(loss) 1,733 11,892 28,240 (8,886) 32,979 Share of profit of joint ventures - (5) 3,796 - 3,791 Net finance costs 4 - - - (3,962) (3,962) Profit/(loss) before tax 1,733 11,887 32,036 (12,848) 32,808 Gross profit (1) Gross profit is analysed as follows: Gross profit excluding sales of development properties - 5,707 17,003 - 22,710 Gross profit on sale of development properties 3,469 - - - 3,469 Net realisable value provision on development properties (4,767)‌‌‌‌ - - - (4,767) Reversal of previous net realisable value provision on development properties 3,031 - - - 3,031 1,733 5,707 17,003 - 24,443 Other gains (2) Other gains are analysed as follows: Increase in fair value of investment properties - 9,859 11,624 - 21,483 Decrease in the fair value of other receivables - (2,000) - - (2,000) Profit on sale of investment properties - 799 1,575 - 2,374 Profit on sale of assets classified as held for sale - - 164 - 164 Other gains - - 45 - 45 - 8,658 13,408 - 22,066 Segmental Balance Sheet Note Capital Growth £000 Income Generation £000 Central overheads £000 Total £000 Non-current assets Property, plant and equipment - - 794 794 Investment properties 8 55,019 199,390 - 254,409 Investments in joint ventures 1,087 24,743 - 25,830 56,106 224,133 794 281,033 Current assets Inventories 9 206,635 374 - 207,009 Trade and other receivables 42,976 22,076 1,647 66,699 Assets classified as held for sale 10 2,775 8,181 - 10,956 Cash - - 8,595 8,595 252,386 30,631 10,242 293,259 Total assets 308,492 254,764 11,036 574,292 Financial liabilities and derivative financial instruments are not allocated to the reporting segments as they are managed and measured on a group basis. Segmental Income Statement 31 December 2017 Capital Growth Sale of development properties Other property activities Income Generation Central overheads Total Note £000 £000 £000 £000 £000 Revenue 29,765 5,671 18,237 - 53,673 Cost of sales (27,893) (4,396) (5,389) - (37,678) Gross Profit (1) 1,872 1,275 12,848 - 15,995 Administrative expenses - (1,927) (1,752) (8,341) (12,020) Other gains (2) - 26,924 8,734 - 35,658 Other operating income - - 17 81 98 Operating profit/(loss) before exceptional items 1,872 26,272 19,847 (8,260) 39,731 Exceptional income - - - 414 414 Exceptional expense - - - (83) (83) Operating profit/(loss) 1,872 26,272 19,847 (7,929) 40,062 Net finance costs 4 - - - (2,261) (2,261) Share of profit of joint ventures - 26 4,013 - 4,039 Profit/(loss) before tax 1,872 26,298 23,860 (10,190) 41,840 Gross profit (1) Gross profit is analysed as follows: Gross profit excluding sales of development properties - 1,275 12,848 - 14,123 Gross profit on sale of development properties 7,690 - - - 7,690 Net realisable value provision on development properties (5,818)‌‌‌‌ - - - (5,818)‌‌‌ 1,872 1,275 12,848 - 15,995 Other gains (2) Other gains are analysed as follows: Increase in fair value of investment properties - 26,139 5,994 - 32,133 Increase in fair value of other receivables - 586 - - 586 (Decrease)/increase in fair value of assets classified as held for sale - (113) 30 - (83) Profit on sale of investment properties - 216 2,703 - 2,919 Profit on sale of assets classified as held for sale - 96 7 - 103 - 26,924 8,734 - 35,658 Segmental Balance Sheet Note Capital Growth £000 Income Generation £000 Central overheads £000 Total £000 Non-current assets Property, plant and equipment - - 802 802 Other receivables 2,666 - - 2,666 Investment properties 8 43,132 173,428 - 216,560 Investments in joint ventures 1,042 17,796 - 18,838 Trade Receivables 5,250 - - 5,250 52,090 191,224 802 244,116 Current assets Inventories 9 211,535 83 - 211,618 Trade and other receivables 16,516 6,762 1,887 25,165 Assets classified as held for sale 10 2,782 4,906 - 7,688 Cash - - 8,371 8,371 230,833 11,751 10,258 252,842 Total assets 282,923 202,975 11,060 496,958 Financial liabilities and derivative financial instruments are not allocated to the reporting segments as they are managed and measured on a group basis. 4. Finance income and costs Unaudited Year ended 31 December 2018 £000 Audited Year ended 31 December 2017 £000 Finance costs - Bank interest (1,888) (994) - Facility fees (1,507) (807) - Other interest (618) (476) (4,013) (2,277) Total finance income 51 16 Net finance costs (3,962) (2,261) 5. Tax The income statement credit for taxation for the year was £1.3m (2017: £7.8m credit) which comprised a deferred tax credit of £0.5m (2017: £9.3m credit) and a current year tax credit of £0.8m (2017: £1.5m charge). The movement in deferred tax comprised the following: · the increase in valuation of investment properties has given a rise to £2.8m of deferred tax charge; · a £3.1m credit due to the recognition of tax losses following both disposals in the period and the conclusion of a review regarding the availability of existing tax losses; · following the submission of the tax computations and returns for prior periods, a reduction in the amount of tax attributes utilised in the prior period resulting in a deferred tax credit of £0.5m; · deferred tax recognised in relation to share options resulting in a deferred tax credit of £0.1m; and · the utilisation of tax losses against current year profits resulted in a deferred tax charge of £0.4m. The current tax charge comprised the following: · a current year tax charge of £0.9m (2017: £1.9m) resulting from profits from sale of development properties and rental income in the period; and · the resubmission of the prior year tax computations and returns to reflect the land remediation relief and capital allowances claims following a review resulted in an adjustment in respect of prior years of £1.7m. At 31 December 2018, the Group had deferred tax liabilities of £12.3m (2017: £13.0m) related to unrealised gains on investment properties and had recognised deferred tax assets of £7.3m (2017: £7.5m). The net deferred tax liability was £5.0m (2017: £5.5m). 6. Dividends Unaudited Year ended 31 December 2018 £000 Audited Year ended 31 December 2017 £000 Full year dividend of 0.575p per share for the year ended 31 December 2017 1,847 - Full year dividend of 0.523p per share for the year ended 31 December 2016 - 1,680 Interim dividend of 0.278p per share for the six months ended 30 June 2018 893 - Interim dividend of 0.253p per share for the six months ended 30 June 2017 - 812 2,740 2,492 The proposed final dividend for the year ended 31 December 2018 is 0.633p per share which makes a total dividend for the year of 0.911p per share (2017: 0.828p). This proposed final dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in this financial information. 7. Earnings per share Earnings per share has been calculated by dividing the profit attributable to ordinary shareholders by the weighted average number of shares in issue and ranking for dividend during the financial year. The weighted average number of shares for 31 December 2017 includes the adjustments necessary to reflect the new shares issued on 17 March 2017. Unaudited Year ended 31 December 2018 £000 Audited Year ended 31 December 2017 £000 Profit from continuing operations attributable to owners of the parent 34,102 49,683 Weighted average number of shares used for basic earnings per share calculation 321,284,013 315,296,192 Basic earnings per share (pence) 10.6 15.8 Weighted average number of shares used for diluted per share calculation 323,754,853 316,918,340 Diluted earnings per share (pence) 10.5 15.7 8. Investment properties Investment properties at 31 December 2018 and 31 December 2017 have been measured at fair value by BNP Paribas Real Estate and Savills. Both are independent firms acting in the capacity of external valuers with relevant experience of valuations of this nature. The Group holds five categories of investment property being agricultural land, natural resources, business space, major developments and strategic land in the UK, which sit within the operating segments of Income Generation and Capital Growth. Income Generation Capital Growth Note Agricultural Land £000 Natural Resources £000 Business Space £000 Major Developments £000 Strategic Land £000 Total £000 At 1 January 2017 (audited) 20,106 29,489 96,709 215,650 17,236 379,190 Direct acquisitions - - 5,536 15,281 5,198 26,015 Subsequent expenditure 1,684 1,154 8,960 13,100 4,261 29,159 Disposals (1,963) (782) (486) (2,964) (180) (6,375) Increase in fair value 3 3,660 1,438 896 13,072 13,067 32,133 Transfers between divisions - 277 11,686 4,137 (16,100) - Re-categorisation as other receivables - - - (666) - (666) Re-categorisation as development properties 9 - - - (229,118) - (229,118) Net transfer to assets classified as held for sale 10 (1,160) (276) (3,500) (8,492) (350) (13,778) At 31 December 2017 (audited) 22,327 31,300 119,801 20,000 23,132 216,560 Direct acquisitions - - 43,651 - 10,771 54,422 Subsequent expenditure - 2,014 5,365 73 2,244 9,696 Disposals - (1,429) - (19,336) (120) (20,885) (Decrease)/increase in fair value 3 (308) 8,713 3,219 3,001 6,858 21,483 Transfers between divisions (1,401) 5,533 (12,528) 6,159 2,237 - Re-categorisation as development properties 9 220 182 (1,384) (8) - (990) Net transfer (to)/from assets classified as held for sale 10 (9,096) (834) (15,955) - 8 (25,877) At 31 December 2018 (unaudited) 11,742 45,479 142,169 9,889 45,130 254,409 9. Inventories Unaudited as at 31 December 2018 £000 Audited as at 31 December 2017 £000 Development properties 204,157 210,471 Planning promotion agreements 1,773 1,064 Option agreements 705 - Finished goods 374 83 Total inventories 207,009 211,618 The total cost of inventory recognised as an expense within cost of sales in the year is £42.6m (2017: £28.1m) comprised of: £41.4m (2017: £22.1m) relating to the sale of development properties; £1.7m (2017: £5.8m) net realisable value provision against development properties; and a credit of £0.3m (2017: £0.2m charge) relating to finished goods stocks. Finished goods are stated after a provision of £0.3m (2017: £0.3m). The movement in the development properties is as follows: Note Unaudited as at 31 December 2018 £000 Audited as at 31 December 2017 £000 At 1 January 210,471 - Acquisitions 3,451 - Subsequent expenditure 23,320 2,424 Disposals (32,339) (15,253) Net realisable value provision (1,736) (5,818) Re-categorisation from investment properties 8 990 229,118 At 31 December 204,157 210,471 The movement in the net realisable value provision on development properties is as follows: Unaudited as at 31 December 2018 £000 Audited as at 31 December 2017 £000 At 1 January 5,818 - Net realisable value provision for the year 4,767 5,818 Released on disposals (124) - Reversal of previous net realisable provision (2,907) - At 31 December 7,554 5,818 10. Assets classified as held for sale Assets classified as held for sale relate to investment properties expected to be sold within twelve months. Note Unaudited as at 31 December 2018 £000 Audited as at 31 December 2017 £000 At 1 January 7,688 8,350 Net transfer from investment properties 8 25,877 13,778 Subsequent expenditure 6 159 Decrease in fair value - (83) Disposals (22,615) (14,516) At 31 December 10,956 7,688 11. Borrowings Unaudited as at 31 December 2018 £000 Audited as at 31 December 2017 £000 Current:  Secured - other loans (5,291) (6,145) (5,291) (6,145) Non-current:  Secured - bank loans (58,745) (23,437)  Secured - other loans (9,002) (11,064) (67,747) (34,501) Total borrowings (73,038) (40,646) Loans are stated after deductions of unamortised borrowing costs: Unaudited as at 31 December 2018 £000 Audited as at 31 December 2017 £000 Infrastructure loans Sheffield City Region JESSICA Fund Gateway 36, Rockingham - (2,353) Homes and Communities Agency Village Farm - (141) Leeds LEP Prince of Wales - (396) Homes and Communities Agency Waverley (4,875) (7,205) Sheffield City Region JESSICA Fund Advanced Manufacturing Park, Waverley (2,766) (5,108) North West Evergreen Limited Partnership Logistics North (2,691) (2,006) Homes and Communities Agency Simpson Park (3,961) - Total Infrastructure loans (14,293) (17,209) Bank loan (58,745) (23,437) Total loans (73,038) (40,646) The bank borrowings are part of a £100.0m revolving credit facility ("RCF") from The Royal Bank of Scotland and Santander. On the 13 February 2018 the Group extended the terms of its existing RCF such that it now expires in February 2023 on a non-amortising basis and is subject to financial and other covenants. The interest rate on the RCF is ICE Libor rate plus 2.1%. The infrastructure loans are provided by public bodies in order to promote the development of major sites. The loans are drawn as work on the respective sites is progressed and they are repaid on agreed dates. Loans are stated after deduction of unamortised borrowing costs of £0.4m (2017: £0.8m). The loans are secured by way of fixed equitable charges over certain assets of the Group. These loans have all-in funding rates of between 3.2% and 4.0%. 12. Called up share capital On 17 March 2017, the Group issued 29,226,974 new ordinary shares at 95 pence each, with a nominal value of 10p each. Issued and fully paid Unaudited Audited Unaudited year ended 31 December 2018 £000 Audited year ended 31 December 2017 £000 At 1 January 32,150 29,227 Shares issued - 2,923 At 31 December 32,150 32,150 Own shares held (194) (263) At 31 December 31,956 31,887 Issued and fully paid - number of shares Unaudited year ended 31 December 2018 Audited year ended 31 December 2017 At 1 January 321,496,760 292,269,786 Shares issued - 29,226,974 At 31 December 321,496,760 321,496,760 Own shares held (181,771) (246,010) At 31 December 321,314,989 321,250,750 The own shares represent the number and cost of shares purchased in the market and held by the Harworth Group plc Employee Benefit Trust to satisfy Long Term Incentive Plan awards for Executive Directors and Senior Executives. 13. Related party transactions Unaudited Audited year ended year ended 31 December 31 December 2018 2017 £000 £000 PEEL GROUP Revenue Sale of land 1,600 3,100 Profit on sale from above land sales 1,078 1,200 Cost of sales/administrative expenses Recharges in respect of fees for Steven Underwood, a non-executive director (43) (43) Recharges in respect of expenses for Steven Underwood, a non-executive director (1) - Recharges of shared costs (27) - Payment in respect of a deed of release at Logistics North (148) (800) Payment for the surrender of option to facilitate grant of new lease to third party (934) - Receivables Trade receivables 1,920 - MULTIPLY LOGISTICS NORTH HOLDINGS LIMITED & MULTIPLY LOGISTICS NORTH LP Revenue Sale of land - 8,100 Recharges of costs 256 600 Development management fee 37 200 Asset management fee 348 - Water charges 48 - Shareholder loan made during the year 2,793 3,793 BANKS GROUP Acquisition of land Acquisition of land at Moss Nook 3,000 - Payables Deferred payment in respect of the acquisition of land at Moss Nook (1,000) - WAVERLEY SQUARE LIMITED Shareholder loan made during the year 50 225 This information is provided by RNS, the news service of the London Stock Exchange. 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