Financial
Overview 2010
The Group reported a profit before tax and exceptional items in 2010 of £8.2m, (2009: £6.0m). The reported profit has improved by £2.2m demonstrating that the underlying trading performance of the Group continues to remain strong notwithstanding continuing difficult economic conditions in both construction and commercial property. This relative resilience has been borne by a number of successful partnering arrangements and a rigorous approach to managing risk.
After charging exceptional items of £3.2m, (2009: £1.7m), the Group has reported a profit before tax of £5.0m. The exceptional item relates primarily to a settlement figure agreed in 2011 following mediation over a dispute arising from a land remediation contract undertaken in 2003 by the civil engineering division. The remainder being adjustments to certain asset values in what continues to be a very difficult market.
Reported Group turnover is £124m compared to £128m reported in 2009. The marginal decrease in turnover is due in part to inclusion in 2009 of the Blackpool PFI project. Its disposal to the Primary Care Trust under a sale and leaseback arrangement accounted for £20.9m of the 2009 turnover, which if excluded turnover shows a like for like growth in 2010 of £17m.
The year was primarily characterised for us by the changes in the political landscape and the resulting impact on some of our key workstreams such as BSF and LIFT. The austerity measures implemented by the Coalition Government both before, and as a result of, the Comprehensive Spending Review were far reaching and contributed to an already challenging business environment. Notwithstanding these changes however It is clear that in both the education and health sectors the fundamental needs have not and will not disappear and whilst there have been some fundamental shifts in procurement thinking the Group is adapting its operations so as to remain closely aligned to the market requirements.
Despite the challenges however, the Group saw notable successes across many of the key business streams during the year and they are set out below by division.
Property Investment
Rental income £5.7m (2009: £6.2m). Portfolio value £57m (2009: £62m) The value of the portfolio reduced marginally in 2010 following disposals, £1.7m, combined with a year end adjustment of £3m resulting in a closing portfolio value of £57m. Overall performance remained above market comparators however and our portfolio management team continue to work closely with tenants under financial pressure by offering flexibility where appropriate in order to mitigate void exposure. Despite the difficult market, the Group's long term strategy remains that of retaining a substantial investment portfolio of commercial property. In order to provide both a stable platform against which the Group can secure much of its core borrowings and a regular income to underpin the cashflow. as markets recover.
Eric Wright Construction
Turnover £83m (2009: £70m), profit before tax £2.9m (2009: 2.8m). The construction market saw little sign of improving during 2010 with competition for work becoming more intense and successful tender prices often falling well below economically viable levels. Notwithstanding this however, the company managed to sustain a balanced portfolio of work mitigating any effects from over reliance on tender won work and as a consequence margins remained relatively strong during this year. Notable contracts awarded during the year were two secondary schools in Blackpool value, £42m, a sixth form college in Barrow value, £22m and various works for BAE cira £11m.
Eric Wright Civil Engineering
Turnover £23m (2009: £19m), profit before tax and exceptional items £0.25m (2009: £0.56m). Loss after exceptional items £1.85m. The Civil Engineering division continues to represent an important part of the Group’s portfolio of activity. It has strengthened its presence considerably in the utilities and water sectors through ongoing work secured on various frameworks and the acquisition of a specialist water industry M&E contracting business in August of last year of a company with a specialist reputation in the water industry has provided a step change in the capital maintenance services we can offer and enhances the opportunities available from a sector that remains resilient to the broader economic difficulties. Alongside the utilities work, the business also remains extremely active in general civil engineering work undertaking work for a variety of clients on highways, bridges, waterways and rail. Margins in these sectors however remain under considerable pressure and management tendering strategy remains focused on inherent risk to ensure that only an economically sustainable pipeline of work is secured.
Property Development
Turnover £8.2m (2009: £2.5m), operating loss before tax £1.18m after exceptional items of £0.86m (2009: operating loss of £2.17m after exceptional items of £0.95m). Commercial development 2010 saw a continued focus on opportunities in the food retail sector. Construction started on the Booths development at Penrith and at Padiham, planning consent was secured, on appeal, for a new Tesco store. A number of other food retail based developments are also being pursued as this sector remains resilient through the difficult economic conditions. With respect to commercial property, however, progress remains difficult, reflecting a continuing over supply of office accommodation In 2010 two residential developments commenced at Hornby and Natland reflecting the Group’s long term commitment to developing a workstream in this sector. Hornby is the conversion of a listed former coaching house and adjoining buildings, acquired some time ago, to provide six residential units and a restaurant with letting rooms. At Natland a former garden centre was acquired for a new build scheme of 12 units. This year also saw the completion of our first affordable housing development in Lancaster and an option was secured on another affordable housing site in the city. Affordable housing remains a particular area of focus, despite reductions in the availability of grant funding for such development.
Public Sector Procurement
In terms of public sector work generation, despite the governments strict financial restraints and the rapidly changing political landscape, the PPP team secured two notable successes in 2010. Firstly, securing the Blackpool BSF programme which represented the largest single project success of the Group to date and secondly, securing the Buckshaw Village 3PD scheme which will create a model for similar projects in a changing healthcare market. The team is also now pursuing opportunities in the Extra Care and Social housing sectors alongside Housing Association strategic partners. This is a sector which reflects a natural extension of the teams existing skillsets around long term partnering, with both public sector and non-profit making bodies
Facilities Management
Turnover in 2010 was £6.8m (2009: £6.1m) with profits before tax £1.3m (2009: £1.5m). Eric Wright Facilities Management continued to further establish its presence across the region, increasing its portfolio of managed properties across the North West to 280,000 sqm across 75 individual premises and sites. Its principal workload in 2010 remained the ongoing management of healthcare and education facilities delivered under long term partnering arrangements. Although these will be affected by the political changes FM’s pipeline of future work includes a number of substantial projects which are currently on site and are due to become operational during 2011 and 2012.These include 2 secondary schools procured under BSF and healthcare facilities in Bolton and Blackburn procured under LIFT. A key area of opportunity for FM will arise from the public sectors move away from new build capital programmes, towards better use of existing estates .In achieving this outcome, a range of services from energy management and condition surveys to refurbishment and remodelling will be required.FM is extremely well placed with the necessary skillsets to be able to offer these services both to existing long term partners and new clients alike.
2011 Outlook
The Group outlook for 2011 remains extremely positive despite difficult market conditions. Construction turnover is likely to increase on 2010 underpinned by an order book in excess of £80m and margins should hold steady due to limited dependence on the competitive tender market. There remains a good deal of uncertainty however as the true impact of political decisions taken in 2010 will only really be felt once existing projects are built out.. The construction team is very alive to these changes and is implementing initiatives to develop new workstreams and ensure the business is structured in such a way to maximise all potential value from its changing portfolio of contracts. Our FM business will see continued growth underpinned by the pipeline of facilities currently under construction and its management team will continue to develop its service offer to ensure it is well placed to deliver the evolving needs of its public sector partners. Civil Engineering will see its water business expand both in size and geographically following the business acquisition and value will no doubt start to be realised as it becomes an integrated part of the Group’s offer in this sector. Emphasis will be on developing long term relationships with our clients, firmly establishing our presence on frameworks and ensuring that we are well placed to continue to secure our share of capital and maintenance work within both the utilities and private developer sectors. Property development in both residential and commercial sectors will remain challenging although the Group is now progressing some excellent schemes, restoring some of the momentum and market presence it enjoyed before the downturn. Funding will continue to be an issue but the Group is fortunate to have long standing relationships with its funders and has been able to secure required facilities to take projects forward. In summary, 2011 will see improvements across almost all aspects of the Group’s activities but against this backdrop, there are clearly some challenges ahead. The focus of the board is to use the time wisely in 2011 to consider future strategies and implement the necessary initiatives to ensure it moves with the changing markets and maximises any opportunities therein. Business development has a clearly defined focus and all aspects of commercial and operational delivery are subject to review. We are also fortunate to have to long standing relationships and strategic partnerships through which we can commit time and effort in finding creative solutions. The emphasis is on long term focus rather than reactive management decisions driven by the need for quick wins.
Looking to the future, particularly in the challenging economic conditions we now face, we believe that the Group's long term focus is immune from short term pressure of remote investors. This, together with its strong partnering ethos around shared visions, are key strengths of increasing value to potential customers and suppliers alike.