The directors present the strategic report for the year ended 31 January 2024.
The directors are pleased with the performance the company has had for the year ending 31 January 2024. The year was the second consecutive year of breaking performance records with private plot completions at 59 units which is better than the previous record set during the year ending 31 January 2023 of 59 private plots sold. Also, during the year a further 14 units of affordable housing were built and sold.
Surprisingly, these exceptional results all stem off the continued back drop of the Covid 19 pandemic and is largely down to the support and expertise that all staff have demonstrated during these challenging times.
This has led to year-on-year growth and key financial metrics can be seen below.
£’000 | 2024 | 2023 |
Turnover | £21,315 | £25,229 |
Retained Earnings | -£1,927 | -£227 |
Net Assets | £21,786 | £23,713 |
Return on Capital Employed | -8.85% | -0.96% |
Issues continue to present themselves with pressures on supply chains leading to increased prices and delivery times, but our dedicated procurement team tirelessly work closely with key suppliers to overcome this and keep construction sites operational.
Planning consents remain challenging with local authorities struggling with resource constraints coupled with demonstrating nutrient neutrality on development sites blocking the approval of planning permissions. These issues continue to be considered and solutions are well underway to mitigate any future problems.
On consented sites, construction activity is at full capacity as the group tries to fulfil the sales demand which are currently outstripping supply which has pushed house prices up not only in the new build sector but across the whole market place. These increased sales prices have mitigated the cost pressures arising from the Covid 19 pandemic but will undoubtedly continue as a result of the war in Ukraine pushing energy prices up amongst other things.
Our long-term strategy is to develop strategic land interests by obtaining planning consents on larger housing developments to allow the continued throughput of stock in a consistent and well managed basis. A number of strategic sites are currently well progressed with planning submissions having been submitted. This will allow us to maintain our strong cash position allowing us to be resilient to any adverse macro-economic changes.
The directors are confident that the profitability of the group will continue and will adapt to ever changing challenges as they present themselves.
As with any business, Pennyfarthing faces risks and uncertainties in the course of its operations. It is only by timely identification and effective management of these risks that we are able to deliver our strategy and grow the business.
The board have considered the prospects of the company and have taken into account its current financial position and its principal risks. Fundamentally, these arise from the deterioration of the health of the UK economy, brought about by uncertainty, loss of consumer confidence, higher interest rates and increasing unemployment, leading to decreased affordability, reducing demand for housing and falling house prices.
The main activities of the group is that of building and development of private dwelling houses for sale. With this comes the potential risks such as:
The adverse effects on consumer confidence could significantly impact the demand for new homes resulting in lower revenues and profits. Continually monitoring supply and demand trends as well as forward looking forecast will allow the Company to navigate any challenges it may face.
Government policy and planning regulations pose a significant risk to the business. There continues to be a relatively complex, time consuming and expensive planning system in the UK. This is compounded by Local Authorities not putting in place or delaying their housing supply plans required under the National Planning Policy Framework (NPPF) which aims to address the UK housing crisis. Any further changes to Government policy could delay site starts which may impact the number of homes the Group is able to sell.
The Government's Help to Buy scheme, since its launch in April 2013 has been a considerable incentive for homeowners and one that Housebuilders have taken full advantage of.
The decision to change the scheme, bringing in eligibility criteria is now known with regional caps also being placed on house prices that qualify. In addition, it is only available for first time buyers and currently is expected to end in March 2023 which supports a controlled unwind of the scheme.
Consideration needs to be given to the pricing strategies, locations and land purchases in which the company operates due to the lending cap differentials in the regions we operate. Our operations border the South East and South West where the caps are £437,600 and £349,000 respectively which could influence consumer demand considering over a third of buyers use Help to Buy.
The cost of servicing a mortgage remains a risk to the business particularly as interest rates continue to rise to tackle inflation, making affordability one of the fundamentals of buying houses. The majority of house sales are bought using mortgages to finance the purchase.
Continuing to operate best practise with our Health and Safety to best protect those on potentially dangerous construction sites which is of paramount importance to us. Any legislative changes to these practises would filter through our external advisors to all relevant personnel via tool box talks, site inductions and formal training sessions.
The challenges as a result of Covid 19 still continue to manifest themselves into supply chains with demand for materials outweighing supply increasing prices as well as increasing lead times. Managing and working with key suppliers is paramount in ensure continuity of operations on our construction sites. This has been further compounded by the unfortunate war in the Ukraine which is putting further pressure on prices and supply which again relies on the continued support of our supplier base.
Being able to attract and retain high calibre employees to meet the demands of the business as it grows is of paramount importance. As the business grows, the demands and skillsets of individuals need to change to cater for ever changing dynamics of the house building industry. Training and recruitment alongside other factors such as remuneration are constantly reviewed and monitored to ensure the group remains competitive when attracting and retaining staff. Learning what works well and what can be improved through employee feedback sit alongside our recruitment and retention processes.
Planning consents remain challenging with local authorities struggling with resource constraints coupled with demonstrating nutrient neutrality on development sites. Issues surrounding Nitrates flowing into the Solent and Phosphates into the River Avon has been a challenge for all development areas affected, practically grinding planning permissions to a halt. Buying into third party schemes has provided a much needed solution in relation to Nitrates. We have resolved the Phosphates problem by being one of the first in the UK to create a Phosphate mitigation scheme
Given the straightforward nature of the business, the directors are of the opinion that an analysis using KPI's is not necessary for an understanding of the development, performance or position of the company.
The company is funded by a mix of retained earnings and group funding.
Long term and short term cashflow forecasts are prepared and monitored ensuring the company has adequate funds in place to meet its working capital requirements.
It has a proud track record of paying suppliers on time and this has resulted in suppliers offering further credit terms supporting the future growth of the company. Payment terms are currently 30 days from the end of the month.
In addition, should the business fail to adhere to the stringent demand of the regulatory planning and technical requirements there is the potential for increased costs, disruption and reputational damage which all potentially have financial impacts. Constant review of the planning cycle, keeping up to date with regulatory or technical changes through on-going training as well as planning for at least 3 years ahead help mitigate these impacts.
Health and Safety
The company places particular emphasis on the health and safety of its employees, subcontractors, customers and others on its sites during the construction process and is working towards zero accidents through an improving safety culture.
Additional measures have and will continue to be in place following Government advice on Covid-19 best practices.
Environment
All companies and staff within the business and wider group are encouraged to be environmentally aware and committed to environmental improvements. The business continues to focus on environmental improvements in the design of its developments and dealing with waste. In addition, the group's housing developments have to provide Biodiversity Net Gain (BNG) which is a concept proposed in the 25 Year Environmental Plan and mandated as a condition of planning permission in the 2019 Environmental Bill. BNG requires a 10% increase in biodiversity after development, compared to the level of biodiversity prior to development taking place. Also and specific to the geographical area in which we develop some of our developments in the Solent catchment area are required to provide nitrate neutrality and within the Avon River catchment phosphate neutrality. Furthermore, the company continues to provide Alternative Natural Recreational Greenspace (ANRG) (which is also referred to by some Local Authorities as Suitable Alternative Natural Greenspace (SANG)) which gives lots of open space for our developments to enjoy as well as the local communities where we operate.
The Board of Directors confirm that during the year under review, It has acted to promote the long term success of the Company for the benefit of the shareholders, while having due regard to matters set out in section 172 (1) of the Companies Act 2006.
The likely consequences of any decision in the long term;
The interest’s of the Company employees;
The need to foster the Company’s business relationships with suppliers, customers and others;
The impact of the Company’s operations on the community and the environment;
The desirability of the Company maintaining a reputation for high standards of business conduct; and
The need to act fairly as between members of the Company
The Company reviews its approach to corporate governance and decision making, engagement with stakeholders and the Company’s impact on the environment.
The Company has demonstrated this by their strategic approach underpinned by the operational and functional business plans in their duty to fulfil Section 172.
The Company has a clear Purpose underpinned by its core values in its approach to its multi stakeholder model, to include Employees, Consumers, Customers, Suppliers and Distributors, and in its approach to Environmental sustainability, The wider society, and its shareholders.
This has been managed through Employee development and reward initiatives supported by employee engagement reviews and employee metrics including robust Health and Safety operating procedures.
The Company’s ethos is to embed long term partnership agreements, with all parties within the supply chain who are expected to uphold the same high standards of business ethics and agreement charters to ensure adherence to modern slavery, human rights and corruption policies.
Corporate social responsibility, environmental sustainability, and charitable endeavours around the globe is at the very core of the Cultures and Values of the organisation and will continue to be so.
On behalf of the board
The directors present their annual report and financial statements for the year ended 31 January 2024.
The results for the year are set out on page 10.
No ordinary dividends were paid. The directors do not recommend payment of a final dividend.
The directors who held office during the year and up to the date of signature of the financial statements were as follows:
The Group has chosen in accordance with Companies Act 2006, s. 414C(11) to set out in the groups Strategic Report information required by Large and Medium-sized companies and Groups (Accounts and Reports) Regulations 2008, sch. 7 to be contained in the Directors’ Report. It has done so in respect of future developments
The auditors, HJS (Reading) Limited, will be proposed for re-appointment at the forthcoming Annual General Meeting.
Basis for opinion
Conclusions relating to going concern
In auditing the financial statements, we have concluded that the directors' use of the going concern basis of accounting in the preparation of the financial statements is appropriate.
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the company's ability to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue.
Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report.
Other information
Opinions on other matters prescribed by the Companies Act 2006
In our opinion, based on the work undertaken in the course of our audit:
the information given in the strategic report and the directors' report for the financial year for which the financial statements are prepared is consistent with the financial statements; and
the strategic report and the directors' report have been prepared in accordance with applicable legal requirements.
As explained more fully in the directors' responsibilities statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the company or to cease operations, or have no realistic alternative but to do so.
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
The extent to which our procedures are capable of detecting irregularities, including fraud, is detailed below.
Based on our understanding of the company and industry, we identified that the principal risks of non-compliance with laws and regulations related to breaches of UK regulatory principles, such as those governed by the relevant construction authorities. We also considered the laws and regulations which have a direct impact on the financial statements such as the Companies Act 2006.
We evaluated management's incentives and opportunities for fraudulent manipulation of the financial statements (including the risk of override of controls), and determined that the principal risks were related to management bias in accounting estimates and judgmental areas of the financial statements.
Audit procedures performed by the audit engagement team included:
Discussions with senior management, including consideration of known or suspected instances of noncompliance with laws and regulations or instances of fraud;
Identifying and testing journal entries based on risk criteria;
Designing audit procedures to incorporate unpredictability around the nature, timing or extent of our testing;
Testing transactions entered into outside of the normal course of the company's business;
Reviewing any potential litigation or claims against the entity which indicate any potential noncompliance issues.
There are inherent limitations in the audit procedures described above. We are less likely to become aware of instances of non-compliance with laws and regulations that are not closely related to events and transactions reflected in the financial statements. Also, the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or though collusion.
The extent to which our procedures are capable of detecting irregularities, including fraud, is detailed below.
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud, is detailed below.
We obtained an understanding of the legal and regulatory frameworks that are applicable to the company and determined that the most significant frameworks which are directly relevant so specific assertions in the financial statements are those that relate to the reporting framework (UK GAAP and the Companies Act 2006) and the relevant tax compliance regulations in the UK.
We understood how the company is complying with those frameworks by making enquiries of management and those responsible for legal and compliance procedures. We corroborated our enquiries through review of board minutes and discussions with those charged with governance.
We assess the susceptibility of the company's financial statements to material misstatement, including how fraud might occur, by discussion with management from various parts of the business to understand where they considered there was a susceptibility to fraud. We considered the procedures and controls that the company has established to prevent and detect fraud, and how these are monitored by management, and also any enhanced risk factors such as performance targets.
Based on our understanding, we designed our audit procedures to identify any non-compliance with laws and regulations identified in the paragraphs above.
We also performed audit work over the risk of management override of controls, including testing of journal entries and other adjustments for appropriateness, evaluating the business rationale of significant transactions outside the normal course of business and reviewing accounting estimates for bias.
A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at: http://www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.
Use of our report
This report is made solely to the company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's members as a body, for our audit work, for this report, or for the opinions we have formed.
The profit and loss account has been prepared on the basis that all operations are continuing operations.
Pennyfarthing Homes Limited is a private company limited by shares incorporated in England and Wales. The registered office is Pennyfarthing House, South Drive, Ossemsley, New Milton, Hampshire, England, BH25 5TL.
The financial statements are prepared in sterling, which is the functional currency of the company. Monetary amounts in these financial statements are rounded to the nearest £.
This company is a qualifying entity for the purposes of FRS 102, being a member of a group where the parent of that group prepares publicly available consolidated financial statements, including this company, which are intended to give a true and fair view of the assets, liabilities, financial position and profit or loss of the group. The company has therefore taken advantage of exemptions from the following disclosure requirements:
Section 7 ‘Statement of Cash Flows’: Presentation of a statement of cash flow and related notes and disclosures;
Section 11 ‘Basic Financial Instruments’ and Section 12 ‘Other Financial Instrument Issues: Interest income/expense and net gains/losses for financial instruments not measured at fair value; basis of determining fair values; details of collateral, loan defaults or breaches, details of hedges, hedging fair value changes recognised in profit or loss and in other comprehensive income;
Section 26 ‘Share based Payment’: Share-based payment expense charged to profit or loss, reconciliation of opening and closing number and weighted average exercise price of share options, how the fair value of options granted was measured, measurement and carrying amount of liabilities for cash-settled share-based payments, explanation of modifications to arrangements;
Section 33 ‘Related Party Disclosures’: Compensation for key management personnel.
The financial statements of the company are consolidated in the financial statements of Pennyfarthing Developments Limited. These consolidated financial statements are available from its registered office,
Other financial assets, including investments in equity instruments which are not subsidiaries, associates or joint ventures, are initially measured at fair value, which is normally the transaction price. Such assets are subsequently carried at fair value and the changes in fair value are recognised in profit or loss, except that investments in equity instruments that are not publicly traded and whose fair values cannot be measured reliably are measured at cost less impairment.
Financial assets are derecognised only when the contractual rights to the cash flows from the asset expire or are settled, or when the company transfers the financial asset and substantially all the risks and rewards of ownership to another entity, or if some significant risks and rewards of ownership are retained but control of the asset has transferred to another party that is able to sell the asset in its entirety to an unrelated third party.
Derivatives, including interest rate swaps and forward foreign exchange contracts, are not basic financial instruments. Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair value. Changes in the fair value of derivatives are recognised in profit or loss in finance costs or finance income as appropriate, unless hedge accounting is applied and the hedge is a cash flow hedge.
Debt instruments that do not meet the conditions in FRS 102 paragraph 11.9 are subsequently measured at fair value through profit or loss. Debt instruments may be designated as being measured at fair value through profit or loss to eliminate or reduce an accounting mismatch or if the instruments are measured and their performance evaluated on a fair value basis in accordance with a documented risk management or investment strategy.
Financial liabilities are derecognised when the company’s contractual obligations expire or are discharged or cancelled.
Preparation of the financial statements requires the directors to make significant judgements, estimates and assumptions. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.
The estimates and associated assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised where the revision affects only that period, or in that period and future periods where the revision affect both the current and future periods.
The main accounting estimates are:
Land stock values - The company establishes a reliable estimate of the market value of the land which it holds in stock for future development and provides for any loss in value based on internal valuations and the directors expertise in this area.
Assessment of costs to complete - This involves estimating final development costs and selling prices and impacts profit recognised in allocating costs to sales completions before and after the year end.
Accrued costs - involving a degree of estimation uncertainty in respect of final account settlement.
The actual credit for the year can be reconciled to the expected credit for the year based on the profit or loss and the standard rate of tax as follows:
The bank loans are secured by first charges over certain land and properties included in work in progress.
The following are the major deferred tax liabilities and assets recognised by the company and movements thereon:
The deferred tax asset set out above is expected to reverse within 12 months and relates to the utilisation of tax losses against future expected profits of the same period.
The company is registered with the NHBC and Premier Guarantee. As such, it guarantees to make structural repairs to the properties built where such defects manifest themselves within the first two years after the sale. The guarantee may be claimed up to ten years after the sale of the property.
The company has acquired land on terms which may require an addition to the purchase consideration if the gross development value of units on that land exceeds a certain amount. Any increase in land purchase consideration is a function of the increase in gross development value, usually a fixed percentage, and any increase in land cost will be outweighed by the increase in gross development value.
In the normal course of business the company has given counter indemnities in respect of performance bonds and financial guarantees amounting to £432,308 (2022 - £451,659).
During the year the company entered into the following transactions with related parties:
The directors’ have carried out an assessment of work in progress balance recoverability and as such have undertaken to adjust the prior period reserves by £2,004,301 in 2022 and £1,664,278 in 2023, these balances are inclusive of corporation tax and deferred tax movements.