Daejan Holdings PLC
Annual Report 2014

Plain-text annual report

163284 Daejan Holdings Plc R&A 2014 COVER_163284 Daejan Holdings Plc R&A 2014 COVER 22/07/2014 21:05 Page 1 163284 Daejan Holdings Plc R&A 2014 COVER_163284 Daejan Holdings Plc R&A 2014 COVER 22/07/2014 21:05 Page 2 163284 Daejan Holdings Plc R&A 2014 Pt1_163284 Daejan Holdings Plc R&A 2014 Pt1 23/07/2014 14:05 Page 1 DAEJAN HOLDINGS PLC Annual Report & Accounts 2014 Chairman’s Introduction Financial Highlights Strategic Report Directors’ Report Directors’ Remuneration Report Corporate Governance Report Directors’ Responsibilities Statement Independent Auditor’s Report to the Members of Daejan Holdings PLC Consolidated Income Statement Consolidated Statement of Comprehensive Income Consolidated Statement of Changes in Equity Consolidated Balance Sheet Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements Company Balance Sheet Notes to the Company Financial Statements Group Five-Year Record Directors and Advisers Notice of Meeting 2 3 4 16 20 24 28 30 34 35 35 36 37 38 61 62 65 66 67 Contents Page 1 163284 Daejan Holdings Plc R&A 2014 Pt1_163284 Daejan Holdings Plc R&A 2014 Pt1 23/07/2014 14:05 Page 2 Daejan Holdings PLC Annual Report & Accounts 2014 Chairman’s Introduction Following the new requirements of the Companies Act 2006, the Annual Report & Accounts include for the first time a Strategic Report which contains much of the information that I have customarily included in my Chairman’s Statement which is therefore much shorter than usual. I am pleased to report on a year which has seen a further significant increase in overall net asset value. The net revaluation gain was £119.6 million which is 45% greater than the previous year’s gain (2013 – £82.7 million). On a like for like basis the UK gain is 9.0% (2013 – 5.5%); in the USA the gain is 7.4% (2013 – 10.2%). Net asset value per share has increased by 12.8% to £68.15 (2013 – £60.44). This year’s valuation has seen a continuation of the trends of recent years with our properties in the London area and the eastern seaboard of the USA generating gains which have been partially offset by some weakness outside London and the South East. In the UK this year, operating conditions have seen modest improvement but the market for office space remains challenging with well covenanted tenants seeking significant rent concessions. In contrast the USA has seen an across the board steady rise in demand and in rent levels, albeit somewhat slower than the increase seen in the immediate post-recession recovery period. The letting of Africa House, WC2 earlier this month has fully justified our decision in 2010 to embark on this major scheme of refurbishment. This year’s revaluation has benefited from a significant uplift in value of this property and following the letting we anticipate a further increase. Dividend As stated in the Strategic Report, it is an objective of the Group to sustain regular increases in the dividend paid to shareholders. I am pleased that we have been able to achieve this objective over many years. This year is no exception and your Board has confidence in proposing an increase in total dividend of 3p to 82p (2013 – 79p). Outlook A word of caution – with a general election due in less than a year, there have been political proposals to regulate rent levels and to change arrangements for shorthold tenancies. By making investment in residential property less attractive such measures are likely to achieve exactly the opposite of their stated purpose. Nevertheless, with the general economic outlook continuing to improve in both the UK and USA, I have confidence that the Group is well placed for another successful year. Further comment is contained in the Strategic Report. Our thanks go to all who have contributed their efforts to deliver these results. B S E Freshwater Chairman Pictures on these pages show the first floor and detail of the stairs of Africa House, 70 Kingsway, London WC2 Page 2 163284 Daejan Holdings Plc R&A 2014 Pt1_163284 Daejan Holdings Plc R&A 2014 Pt1 23/07/2014 14:05 Page 3 Daejan Holdings PLC Annual Report & Accounts 2014 Financial Highlights VALUATION GAIN £119.6 million (2013: £82.7 million) PROFIT BEFORE TAX £164.5 million(2013: £111.7 million) £9.19(2013: £5.50) £1,110.5 million SHAREHOLDERS’ FUNDS EARNINGS PER SHARE (2013: £984.9 million) SHAREHOLDERS’ FUNDS PER SHARE £68.15 (2013: £60.44) PROPOSED TOTAL DIVIDEND PER SHARE 82p (2013: 79p) GEARING 17.6% (2013: 18.9%) Page 3 163284 Daejan Holdings Plc R&A 2014 Pt1_163284 Daejan Holdings Plc R&A 2014 Pt1 23/07/2014 14:05 Page 4 Daejan Holdings PLC Annual Report & Accounts 2014 Strategic Report Objectives For many years we have been single minded in the pursuit of the Group’s objective of achieving long term, low risk growth in net asset value and in prudently growing our dividends. Net asset value per share (£) Dividends per share (p) 90 80 70 60 50 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 70 60 50 40 30 20 10 0 Strategy Our strategy for achieving our objectives has three principal elements: ■ ■ ■ Management of our property portfolio to maximise net rental income and thereby enhance capital values Identification and completion of value enhancing development opportunities within our portfolio Identification and completion of new property acquisitions which have the potential, through development or otherwise, for long term enhancement to net asset value In pursuing this strategy we take the view that property is a long term business which does not always fit conveniently into the annual reporting cycle. Development opportunities, in particular, can take many years from first idea to first letting and will often involve substantial investment over a period of years before any gain is achieved. We carefully monitor our exposure to ensure that the impact on our resources remains manageable. Business model The main activity of the Group, as carried on through its subsidiary companies, is investment in commercial, industrial and residential property in the UK and also on the eastern seaboard of the USA. The Group generally holds its properties for the long term in order to generate rental income and capital appreciation although in the right circumstances any property could be available for sale. The Group operates a substantially outsourced business model. Day to day management of the Group’s properties in the UK is carried out by Highdorn Co. Limited and Freshwater Property Management Limited. These companies also provide the staff who carry out all of the UK functions of the Group. Further details of the relationship with these companies are set out in Note 17 to the financial statements. Similar arrangements with local managing agents operate in the USA. Managing risk Whilst retaining an entrepreneurial culture, the Group has a low appetite for risk. This underpins our approach to all aspects of the business and is appropriate to our strategic objective of delivering long term, low risk growth in net asset value per share. In relation to financial instrument risk, the Group operates a cautious financial policy on a non- speculative and long term basis in order to enable the Group to carry on its business in confidence and with strength. The Group aims to ensure that the cost of capital is kept to a minimum through Pictures on these pages show the foyer and reception area of Africa House, 70 Kingsway, London WC2 Page 4 163284 Daejan Holdings Plc R&A 2014 Pt1_163284 Daejan Holdings Plc R&A 2014 Pt1 23/07/2014 14:05 Page 5 163284 Daejan Holdings Plc R&A 2014 Pt1_163284 Daejan Holdings Plc R&A 2014 Pt1 23/07/2014 14:05 Page 6 Daejan Holdings PLC Annual Report & Accounts 2014 Strategic Report (continued) the maintenance of its many long standing relationships with leading banks and other financial institutions. The Group seeks to minimise the risk of sudden or unexpected rises in finance costs by way of fixed rate debt and financial derivative instruments whilst retaining some flexibility in relation to short term interest rates. As explained in Note 1(g) to the financial statements, the Group does not hedge account. Note 16 to the financial statements details the Group’s exposure to the various financial instrument risks. Managing risk has been central to the success of the Group over many years and in particular gearing has been kept at a relatively low level for the property industry; currently gearing is 17.6%. The Board recognises that, in common with all companies, it can only have limited control over many of the external risks which it faces. The largest of such “uncontrollable” factors is the economic cycle which has a major impact on the demand for and price of property and the ability of the Group to achieve its strategic objectives. The principal risks facing the Group are described in the following paragraphs together with the steps which are taken to mitigate and manage them. External risks Economic outlook The last year has seen a move to growth in both the UK and USA. However, the UK recovery is still at an early stage and not uniformly established across the whole country. A move to recovery and the likelihood of increases in interest rates provides both opportunities and risks for the businesses of our commercial tenants and the demand for space. We seek to mitigate and manage such risk by: ■ ■ ■ Continuous monitoring of the economic outlook Continued maintenance of low gearing Rigorous tenant covenant checks including independent assessments for major lets. In the case of smaller properties we undertake such checking as is appropriate Availability of finance on acceptable terms Reduced availability of finance for property at an acceptable cost for an appropriate period would adversely affect the Group’s ability to undertake acquisitions and major schemes of redevelopment and refurbishment. We seek to mitigate and manage this risk by: ■ ■ Monitoring funding trends and the development of banking regulations Sustaining relationships with our principal financing partners, both banks and other lending institutions Movements in currency rates of exchange With over 20% by value of the Group’s property portfolio located in the USA the Group is at risk from adverse movements in the sterling/dollar exchange rate. We mitigate and manage this risk by: ■ Funding US assets by US dollar borrowings and local retained earnings. This means that the impact of movements in the exchange rate is limited to accounting adjustments in the Group’s consolidated accounts. The overall impact on the results for the current year is immaterial; an accounting loss of £9.9 million arises in reserves on the re-translation of the opening net book value of assets in the USA Above: Entrance of Africa House, 70 Kingsway, London WC2 Page 6 163284 Daejan Holdings Plc R&A 2014 Pt1_163284 Daejan Holdings Plc R&A 2014 Pt1 23/07/2014 14:05 Page 7 Daejan Holdings PLC Annual Report & Accounts 2014 Regulation Regulations aimed at the control of residential rental levels or shorthold tenancy arrangements could have an adverse impact on the Group. Similarly increased regulation on environmental matters could impose additional costs. We seek to mitigate and manage this risk by: ■ Careful monitoring of developments in legislation with the help of our professional advisors Catastrophic events The operations of the Group could be adversely affected by a significant catastrophe such as fire, cyber-attack, civil disturbance or terrorism which resulted in the loss of any of our principal offices and the records therein. We seek to mitigate and manage this risk by: ■ ■ ■ Physical building security Fireproof storage of leases and other documents of title Dispersal of business critical IT systems Internal risks Regional concentration in UK portfolio Within the UK the majority of our properties are situated in and around the London area. In recent years the increase in value of our UK portfolio has been almost entirely derived from the London area which has enjoyed a period of well publicised growth. Clearly this has been a great benefit to the Group but, until growth returns to the country as a whole, any slowdown in the London market could significantly reduce the net annual revaluation uplifts in the UK portfolio. Changes in aggregate property value have a direct impact on the net worth of the Group. We seek to mitigate and manage this risk by: ■ ■ ■ Continuing to invest in the USA Regular monitoring of the property market for opportunities not just in London but throughout the UK Regular professional revaluations by our independent surveyors in the UK and USA Acquisitions The Group seeks well priced acquisitions which will meet the strategic objective of adding long term, low risk growth in net asset value. There is a risk that an inappropriate or ill-judged acquisition could destroy value. We seek to mitigate and manage this risk by: ■ Rigorous pre-acquisition screening of all buying opportunities Tenant default Tenant default constitutes a risk to income and, ultimately, to capital value. The multi-tenanted nature of the portfolio, with rental income derived from numerous properties, provides a natural measure of protection against the risk of individual default. In addition, we seek to mitigate and manage this risk by: ■ ■ Seeking tenants with strong covenants Careful monitoring of tenants showing signs of financial stress Above: Atrium detail of Africa House Page 7 163284 Daejan Holdings Plc R&A 2014 Pt1_163284 Daejan Holdings Plc R&A 2014 Pt1 23/07/2014 14:05 Page 8 Daejan Holdings PLC Annual Report & Accounts 2014 Strategic Report (continued) Development The Group continues to seek development opportunities principally from within the portfolio and also elsewhere. Development provides an opportunity to enhance income and net asset values but carries risk as to planning, construction timing, costs and letting. We seek to mitigate and manage these risks by: ■ ■ ■ Rigorous screening of all development opportunities including external professional advice and, where appropriate, market research Focusing on a limited number of developments at any one time Close monitoring of active developments People The Group relies heavily on the involvement of key directors in both strategic and day-to-day affairs. Loss of this involvement could be disruptive to business. We have sought to mitigate and manage this risk by: ■ The recent appointment of two new directors from the next generation of the Freshwater family Page 8 163284 Daejan Holdings Plc R&A 2014 Pt1_163284 Daejan Holdings Plc R&A 2014 Pt1 23/07/2014 14:05 Page 9 Daejan Holdings PLC Annual Report & Accounts 2014 Left: decoration of the atrium and below: the outdoor terrace on the 8th floor of Africa House, 70 Kingsway, London WC2 Page 9 163284 Daejan Holdings Plc R&A 2014 Pt1_163284 Daejan Holdings Plc R&A 2014 Pt1 23/07/2014 14:05 Page 10 Daejan Holdings PLC Annual Report & Accounts 2014 Strategic Report (continued) Investment properties A professional valuation of all of the Group’s properties was carried out at 31 March 2014. The UK properties were valued by Colliers International, Chartered Surveyors. In the USA, properties were valued by Joseph J. Blake and Associates Inc. and Metropolitan Valuation Services Inc. both of which are Certified General Real Estate Appraisers. The table below shows a summary of the valuation of our investment property at 31March 2014: Commercial property UK USA Residential property UK USA Total Valuation Percentage change in year March 2014 £m 694.4 42.3 +8.7% -5.8% 524.0 289.5 1,550.2 +12.9% +10.3% +9.9% The reduction in the value of USA commercial property results from the re-categorisation of an office building in East Chase Street, Baltimore from commercial to residential, following the completion of its conversion during the year to create 56 high quality residential units. The percentage changes shown above are very largely due to net surpluses arising on revaluation but also include movements attributable to purchases, capital expenditure, disposals and currency rates of exchange. This is shown in the analysis given below: Opening valuation New acquisitions Additions to existing properties Disposals Revaluation gain Foreign exchange (loss)/gain Closing valuation* 2014 £m 1,407.5 26.1 21.7 (1.8) 1,453.5 119.6 (26.4) 1,546.7 2013 £m 1,254.1 37.2 20.5 (0.6) 1,311.2 82.7 13.6 1,407.5 *In this table and in the financial statements, the total valuation of £1,546.7 million (2013 – £1,407.5 million) has been reduced by an amount of £3.5 million (2013 – £3.1 million) relating to lease incentives, as required by accounting standards – see Note 9 to the consolidated financial statements. Work on the extensive refurbishment of Africa House, London, WC2 was completed in the year and has resulted in a substantial uplift in value. The building has recently been let to a single tenant and we anticipate that this will produce a further increase in value. The well-publicised rise in residential property values in the London area, particularly Central London, has also contributed significantly. These uplifts have been partially offset by weakness in some provincial commercial properties. Overall the net UK valuation surplus is 9.0% (2013 – 5.5%). Above: A. C. Moore Arts & Crafts, Lycoming Circle Mall, Pennsylvania, USA The overall growth in the value of our USA properties at 7.4% has been a little lower than that of the previous year which benefited from significant value increases in New York (2013 – 10.2%). This year the growth in New York has cooled somewhat but the rest of the portfolio has shown steady growth. In the USA we still see opportunities to acquire well priced residential property with the potential for value enhancement through careful management. Towards the end of the year we acquired Bucks Page 10 163284 Daejan Holdings Plc R&A 2014 Pt1_163284 Daejan Holdings Plc R&A 2014 Pt1 23/07/2014 14:05 Page 11 Daejan Holdings PLC Annual Report & Accounts 2014 Landing Apartments in Warminster, a suburb of Philadelphia, PA for an adjusted cost of US $41.6 million. This consists of 456 units arranged in 9 three storey blocks in a garden apartment complex. Analysis by property type Property UK Residential £524.0m Commercial £694.4m Property USA Residential £289.5m Commercial £42.3m Commercial Property UK Commercial Property USA Industrial £32.1m Care Homes £14.6m Offices £293.2m Retail £2.6m Offices £39.7m Land & Development £19.4m Leisure £44.2m Retail £290.9m Analysis by location UK Valuations USA Valuations North & Scotland £52.6m Wales & West £48.5m London & South East £993.5m Midlands & East Anglia £123.8m Pennsylvania £29.6m Baltimore £17.5m New York £156.3m New Jersey £28.7m Boston £38.2m Florida £61.5m Page 11 163284 Daejan Holdings Plc R&A 2014 Pt1_163284 Daejan Holdings Plc R&A 2014 Pt1 23/07/2014 14:05 Page 12 Daejan Holdings PLC Annual Report & Accounts 2014 Strategic Report (continued) Results for the year The profit before taxation for the year ended 31 March 2014 amounts to £164.5 million (2013 – £111.7 million). The result includes a net valuation gain of £119.6 million arising on investment properties (2013 – £82.7 million). The table below shows the performance of our core rental business before and after valuation movements: Total rental and related income from investment property Property operating expenses Net rental and related income from investment property Profit on disposals of investment property Administrative expenses Net operating profit before net valuation gains Net valuation gains on investment property Net financing income/(expense) Profit before taxation 2014 £m 112.2 (68.8) 43.4 11.3 (10.5) 44.2 119.6 0.7 164.5 2013 £m 111.0 (67.0) 44.0 6.6 (10.9) 39.7 82.7 (10.7) 111.7 In the UK we have seen the increased rental income on assured shorthold tenancies and new commercial lettings offset by vacancies in some provincial commercial properties. There has also been some slowdown, primarily outside the London area, in the rate of re-letting vacant residential units. We are continuously expending significant sums on modernising older residential properties and we intend that this refurbishment and re-letting programme should continue. It is anticipated that this programme will produce worthwhile increases in future residential rental income. The net effect of these factors has been to hold UK rental income at £64.9 million compared to £65.0 million in 2013. In the USA most properties have seen rental growth and this combined with some improved lettings and the acquisition of Bucks Landing Apartments late in the year gave an increase of £0.8 million. As in recent years, the profits on disposals are derived from leasehold extensions and enfranchisement in the UK. Above: Windsor Court, London W2. Right: The Orchards, Dartford, Kent. Page 12 163284 Daejan Holdings Plc R&A 2014 Pt1_163284 Daejan Holdings Plc R&A 2014 Pt1 23/07/2014 14:05 Page 13 Daejan Holdings PLC Annual Report & Accounts 2014 There has been no material change in interest costs in the year with a small reduction in the USA due to refinancing, offset by an increase in the UK due to higher bank borrowings. However, fair value movements have generated a surplus of £11.1 million (2013 – £0.3 million loss) reflecting market expectations of increases in interest rates. Earnings per share This year has seen continued growth in earnings per share which now stands at £9.19. £ 10 8 6 4 2 0 2010 2011 2012 2013 2014 Underlying profit The profit reported in the financial statements has for some years included property revaluation movements and fair value adjustments to financial instruments. In addition to this measure of performance we also focus on “underlying profits” which do not include these valuation items. Underlying profits for the last two years are set out below: Profit before tax per the income statement Property valuation surplus Financial instruments fair value adjustments Adjustment to measurement of disposal profits Underlying profit before tax 2014 £m 164.5 (119.6) (11.1) 1.2 35.0 2013 £m 111.7 (82.7) 0.3 0.4 29.7 Underlying profit represents that element of our reported results which has actually been realised and is not dependent on valuation judgements. It represents the performance of our core rental business together with disposal profits which tend to fluctuate from year to year. It is our underlying profit which generates the cash we use to re-invest in the business and to pay dividends and taxes. Gearing Gearing, the ratio between our borrowings and the value of our total assets, is 17.6% (2013 – 18.9%) for the Group as a whole. In the UK the ratio is 9.2% whilst in the USA, where each property is financed separately on a ring-fenced basis, it is 46.0%. It has long been fundamental to our strategic approach to avoid the higher level of risk which is associated with excessive levels of gearing. It is Group policy to maintain cash deposits and undrawn facilities at levels which will enable a swift reaction when opportunities arise. At 31 March 2014 cash deposits amounted to £59.1 million (2013 – £63.5 million) and undrawn facilities at £35.0 million (2013 – £20.0 million). Above: 30 Kensington Church Street, London W8 Page 13 163284 Daejan Holdings Plc R&A 2014 Pt1_163284 Daejan Holdings Plc R&A 2014 Pt1 23/07/2014 14:05 Page 14 Daejan Holdings PLC Annual Report & Accounts 2014 Strategic Report (continued) Shareholders’ funds At 31 March 2014 shareholders’ funds amounted £1,110.5 million, an increase of 12.8% on last year’s figure of £984.9 million. Shareholders’ funds have grown in recent years as follows: n o i l l i m £ 1200 1000 800 600 400 200 0 2010 2011 2012 2013 2014 Dividend The proposed total dividend for the year of 82p per share represents an increase of 3.8% (2013 – 79p). Outlook As the recovery in the UK economy becomes more established over the coming months we would hope to see an upturn in the demand for business space. Whilst there have been reports that the London residential property market may be cooling a little, these have also been accompanied by reports of improvement in the rest of the UK. Commercial property in smaller provincial towns and cities is likely to continue to suffer from a basic lack of demand and increased vacancy rates. An ongoing challenge over the coming years will be to establish revenue generative uses for such properties. The successful letting of Africa House, London, WC2 will produce a worthwhile increase in the rent roll for UK commercial properties. In the next year we will continue to progress a number of significant schemes of redevelopment which are currently under consideration. In the USA, the economic recovery is better established, although not immune from temporary setbacks such as was experienced in the first quarter of 2014. We anticipate a continuation of recent conditions with steady rent rises across the portfolio. The immediate focus in the USA will be on completing the letting of the residential units created in East Chase Street, Baltimore and work to enhance the rental value of the newly acquired Bucks Landing Apartments in Philadelphia. Employees As mentioned above, day-to-day activities are outsourced to management companies who are responsible for the provision of the services of the staff on which we rely to run the business. As part of the arrangements with the management companies in the UK, those individuals engaged on the Group’s affairs hold joint employment contracts but the management companies retain sole responsibility for setting recruitment, employment, training, health and safety, diversity and human rights policies for their staff. Whilst the Group supports and encourages good practice in all of these areas, detailed responsibility for the establishment and execution of such policies lies with the management companies. As a result, this report does not contain the kind of information mentioned in The Companies Act 2006 s414C (7)(b)(ii) and (iii). Above: Conduit House, Greenwich, London SE10 Page 14 163284 Daejan Holdings Plc R&A 2014 Pt1_163284 Daejan Holdings Plc R&A 2014 Pt1 23/07/2014 14:05 Page 15 Daejan Holdings PLC Annual Report & Accounts 2014 So far as health and safety is concerned, the Board recognises the importance of ensuring that our properties provide a safe and healthy environment for all users. With this in mind the Board has requested that the management companies ensure that: ■ ■ All its employees receive appropriate training in the identification and management of health and safety risks. Every employee is required to be familiar with health and safety policies and has responsibility for ensuring that they are followed in their area of work Regular cyclical risk assessments are undertaken by external consultants on all properties for which the Group has responsibility. A dedicated team is tasked with resolving issues raised by such assessments and with monitoring policy compliance The Board receives an annual presentation to ensure that awareness of the importance of this issue continues at the highest level within the Group. All Directors of the Company are male and no new recruitment to the Board is planned which would cause this to change in the near future. Community The Group has long recognised the importance of supporting the communities in which we operate. Many companies encourage and facilitate their employees to donate their time and efforts to community projects; because our staffing is outsourced this route is not available to us. Our support therefore takes the following forms: ■ ■ Donations, largely to educational charities; this year the donations amounted to £150,000 (2013 – £150,000) Dividends on donated shares; following the donation some years ago to charities of shares representing 6.3% of the capital of the Company, dividend payments in the year of £919,000 (2013 – £785,000) have passed to charitable companies Environment As mentioned above, all the staff engaged in the business and who control our buildings are provided by management companies. We do not have responsibility for the greenhouse gas emissions related to the employment of those people. The green house gas emissions arising from our let properties are the responsibility of our tenants. In consequence, we have no disclosures to make in relation to greenhouse gas emissions and therefore this report does not contain information of the kind mentioned in the Companies Act 2006 s414C (7)(b)(i). However, when we undertake new developments or major schemes of refurbishment we strive to achieve the highest environmental standards consistent with the nature of the building and the scheme being undertaken. For example the Africa House scheme which was completed during the year achieved a BREEAM excellent rating and included environmental features such as a bio-mass boiler, rainwater harvesting, bio-diverse planting and facilities to encourage cycling to work. The scope for enhancing the environmental standards across the majority of our properties is limited. In the main they were constructed before the advent of modern standards and it would be neither practically nor economically feasible to undertake a complete upgrade to meet modern requirements. However, we do take the opportunities which arise each year as part of programmes of repair and refurbishment to improve the energy efficiency of our buildings and the plant therein. By order of the Board M R M Jenner Company Secretary Above: Langlands House, Harlow, Essex Page 15 163284 Daejan Holdings Plc R&A 2014 Pt2_163284 Daejan Holdings Plc R&A 2014 Pt2 23/07/2014 13:55 Page 16 Daejan Holdings PLC Annual Report & Accounts 2014 Directors’ Report Strategic Report The Company’s Strategic Report for the year ended 31 March 2014 is set out on pages 4 to 15 and contains the following information: ■ ■ ■ ■ ■ The principal activities of the Group The business review of the Group An indication of the future developments of the Group The risks and uncertainties facing the business, including those relating to financial instruments Greenhouse gas emissions disclosure Results and Dividend The profit for the year amounted to £150.2 million (2013 – £89.8 million). An interim dividend of 35p per share was paid on 7 March 2014 and the Directors now recommend the payment of a final dividend of 47p per share, making a total for the year of 82p per share (2013 – 79p per share). Directors The Directors who served throughout the year, and who are still in office, are: Mr B S E Freshwater Mr D Davis Mr S I Freshwater Mr R E Freshwater Mr A M Freshwater (USA) Brief biographies of the Directors are as follows: Mr B S E Freshwater. Aged 66 – Joined the Board in December 1971 with primary responsibility for the Group’s finances. In July 1976 he was appointed Managing Director and, additionally, became Chairman in July 1980. Mr D Davis. Aged 79 – Previously a partner in Cohen Arnold, the Group’s consulting accountants. He relinquished his partnership in 1971 in order to devote more time to his numerous business and other interests. He has been a non-executive Director of the Company since December 1971. Mr S I Freshwater. Aged 63 – Directs the Group’s operations in the USA and also has responsibility for the Group’s UK sales division. He has been a Director of the Company since January 1986. Mr R E Freshwater.Aged 44 – He is currently pursuing an academic career and lectures to graduate students. He is an actual and a potential beneficiary of trusts and a trustee of certain other trusts with substantial holdings of the Company’s equity. He was appointed to the board in 2010. Mr A M Freshwater. Aged 43 – He is resident in the UK and sits as an Arbitrator in complex commercial disputes. He is a potential beneficiary of trusts and a trustee of certain other trusts with substantial holdings of the Company’s equity. He was appointed to the board in 2010. Page 16 163284 Daejan Holdings Plc R&A 2014 Pt2_163284 Daejan Holdings Plc R&A 2014 Pt2 23/07/2014 13:55 Page 17 Daejan Holdings PLC Annual Report & Accounts 2014 The rules governing the election and re-election of Directors are set out in the Corporate Governance Report on page 24. The powers of Directors of the Company are as set out in the Company’s articles of association. During the year, the Company did not purchase any shares. Directors’ Interests in Transactions Day-to-day management of the Group’s properties and its operations in the UK is mainly carried out by Highdorn Co. Limited and by Freshwater Property Management Limited. Mr B S E Freshwater and Mr S I Freshwater are Directors of both companies. They have no beneficial interest in the share capital of Highdorn Co. Limited. Mr B S E Freshwater, Mr S I Freshwater and Mr D Davis are also Directors of the parent company of Freshwater Property Management Limited but have no beneficial interest in either company. Mr R E Freshwater has a beneficial interest in a trust holding interests in shares in Highdorn Co. Limited. Details of the amounts paid for the provision of these services are set out in Note 17 to the financial statements. Share Capital and Substantial Directors’ and other Shareholdings The structure of the Company’s share capital, including the rights and obligations attaching to the shares, is given in Note 13 to the financial statements. Directors’ interests in the share capital of the Company are as follows: D Davis B S E Freshwater S I Freshwater R E Freshwater A M Freshwater (Notes 2 & 3) (Notes 1, 2, 3 & 4) (Notes 2, 3 & 4) (Notes 2 & 3) (Notes 2 & 3) Daejan Holdings PLC Ordinary Shares 31 March 2013 31 March 2014 763 340,033 89,270 – – 763 340,033 89,270 – – Notes: 1. 2. 3. All the above holdings were beneficially owned. Mr B S E Freshwater’s shareholding represents 2.1% of the issued share capital of the Company. A further 2,908,116 shares (2013 – 2,908,116) representing 17.8% of the issued share capital of the Company were held by Freshwater family trusts and by charitable companies in which Mr B S E Freshwater, Mr S I Freshwater, Mr D Davis and Mr A M Freshwater have no beneficial interest. Mr S I Freshwater and Mr A M Freshwater are trustees of a trust which owns 250,000 shares representing 1.5% of the issued share capital of the Company. Mr R E Freshwater has a beneficial interest in certain trusts referred to in this Note 2 which together hold 326,294 shares, representing 2.0% of the issued share capital of the Company. In addition to the holdings shown in the table and in Note 2 above, companies owned and controlled by Mr B S E Freshwater, Mr S I Freshwater, their families and family trusts, held at 31 March 2014 a total of 7,876,431 shares (2013 – 7,876,431) representing 48.3% of the issued share capital of the Company. Mr D Davis and Mr A M Freshwater have a non-beneficial interest in some of these shares, either as a Director of the companies concerned, or as a trustee. Mr R E Freshwater has a beneficial interest in certain trusts included in this Note 3 which indirectly have interests in 3,774,853 shares, representing 23.2% of the issued share capital of the Company. 4. Of these shares 89,270 are held by a company owned jointly by Mr B S E Freshwater and Mr S I Freshwater. Page 17 163284 Daejan Holdings Plc R&A 2014 Pt2_163284 Daejan Holdings Plc R&A 2014 Pt2 23/07/2014 13:55 Page 18 Daejan Holdings PLC Annual Report & Accounts 2014 Directors’ Report (continued) Included in Notes 2 and 3 above are the following holdings at 31 March 2014, each amounting to 3% or more of the Company’s issued share capital: Henry Davies (Holborn) Limited Trustees of the S I Freshwater Settlement Distinctive Investments Limited Quoted Securities Limited Centremanor Limited Mayfair Charities Limited Tabard Property Investment Company Limited Shares 1,934,090 1,560,000 1,464,550 1,305,631 1,000,000 565,000 500,000 % 11.9 9.6 9.0 8.0 6.1 3.5 3.1 In addition, the Company has been notified of the following substantial interests in its issued share capital at 31 March 2014: Valand Investments Limited Silda 2 Limited Shares 1,000,000 705,000 % 6.1 4.3 The Company is not aware of any changes to any of the above interests from 31 March 2014 up to the date of signing this report. Corporate Governance This report combines by reference the Corporate Governance Report on pages 24 to 27, which includes a statement on going concern, and the Directors’ Remuneration Report on pages 20 to 23. Change of Control Part 6 of Schedule 7 of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 requires the Company to identify those significant agreements to which the Company is party that take effect, alter or terminate upon a change of control of the Company following a takeover bid and the effects of any such agreements. The Group has seven bank loan and mortgage facilities which contain change-of-control clauses. Five of these facilities require the prior written consent of the lender to a change of control over the parent company, without which such change of control would constitute an event of default. A change of control under the remaining two facilities would similarly constitute an event of default but no provision is made for the prior written consent of the lender. At 31 March 2014, these facilities represented £118.5 million (2013 – £122.8 million) of the loans and borrowings in the financial statements and all of the undrawn facilities (£35.0 million, 2013 – £20.0 million). Auditor The Company’s auditor, KPMG LLP, has expressed its willingness to continue in office. In accordance with Section 489 of the Companies Act, a resolution for the appointment of KPMG LLP as auditor of the Company, and to authorise the Directors to determine its remuneration, is to be proposed at the forthcoming Annual General Meeting. Page 18 163284 Daejan Holdings Plc R&A 2014 Pt2_163284 Daejan Holdings Plc R&A 2014 Pt2 23/07/2014 13:55 Page 19 Daejan Holdings PLC Annual Report & Accounts 2014 Statement of Disclosure of Information to the Auditor The Directors who held office at the date of approval of this Directors’ Report confirm that, so far as they each are aware there is no relevant audit information of which the Company’s auditor is unaware, and each Director has taken all the steps he ought to have taken as a Director to make himself aware of any relevant audit information and to establish that the Company’s auditor is aware of that information. By order of the Board M R M Jenner Secretary 22 July 2014 Page 19 163284 Daejan Holdings Plc R&A 2014 Pt2_163284 Daejan Holdings Plc R&A 2014 Pt2 23/07/2014 13:55 Page 20 Daejan Holdings PLC Annual Report & Accounts 2014 Directors’ Remuneration Report Directors’ Remuneration Policy Set out below is our remuneration strategy and policy together with other relevant information about the terms and conditions applicable to executive Directors of the Group: 1. Overview Our remuneration strategy is designed to be simple and transparent. In setting levels of remuneration it is important to: ■ ■ ■ ■ ■ Reflect the interests and expectations of shareholders and other stakeholders Take account of pay and employment conditions of employees in the Group Reward the sustained growth and profitability of the business Encourage management to adopt a level of risk which is in line with the risk profile of the business as approved by the board Ensure there is no reward for failure by having no entitlement to compensation for loss of office 2. Executive Directors’ potential remuneration Executive Directors receive basic pay only. There are no bonus or incentive schemes in operation or any form of share option scheme or long term incentive plan. The executive Directors are incentivised by their substantial interests in family shareholdings which more directly align their interests with shareholders generally. 3. Strategy Purpose The salary is set to be competitive, relative to other companies operating in the same sector. Annual review A review of executive Directors’ salaries is carried out each year once the results for the year are known and with reference to a comprehensive peer group of similar companies. The annual review takes into consideration: ■ ■ ■ ■ ■ Individual responsibilities, experience and performance Salary levels for similar positions in comparable businesses The level of pay increases awarded to staff whose services are provided by management companies Economic and market conditions Overall performance of the business There is no overall limit to maximum increases save as to comply with the strategy outlined above. Page 20 163284 Daejan Holdings Plc R&A 2014 Pt2_163284 Daejan Holdings Plc R&A 2014 Pt2 23/07/2014 13:55 Page 21 Daejan Holdings PLC Annual Report & Accounts 2014 Shareholder views The Company welcomes the views of its significant shareholders on remuneration and if received these would be taken into consideration when next reviewing basic salaries. 4. Benefits There are no additional benefits granted to any Director over and above basic pay. 5. Pension The Group does not operate a pension scheme for the Directors and therefore they do not receive either pension contributions or entitlement to pension benefits as part of their remuneration by the Group. 6 Recruitment and executive Directors No new appointments of executive Directors have been made for a number of years but if an appointment was made, base salary would take into account market data for the relevant role, the individual’s experience and the responsibilities expected of them. 7 Service contracts No Director has a service contract. Company policy is to employ executive Directors at will, with no contractual entitlement to compensation for loss of office. Mr B S E Freshwater has served as a Director since 1971 and Mr S I Freshwater has served as a Director since 1986. The non-executive Directors are not appointed for a fixed term but are subject to periodic reviews. Mr D Davis was appointed in 1971 and Mr R E Freshwater and Mr A M Freshwater were appointed in 2010 all of whom receive fees only. Annual Report on Remuneration This section describes all payments to Directors in connection with the year under review and how the Remuneration Policy will be applied over the next three years. KPMG LLP have audited this section of the report to the extent required by legislation. Total remuneration Details of each individual Director’s remuneration are set out below on an accruals basis: Long term 2014 Mr B S E Freshwater Mr D Davis Mr S I Freshwater Mr R E Freshwater Mr A M Freshwater Salary Benefits £ £ pay £ Perfor- mance mance perfor- Pension contri- pay butions £ £ Total £ 870,000 20,000 820,000 20,000 20,000 1,750,000 – – – – – – – – – – – – – – – – – – 870,000 – 20,000 – 820,000 – 20,000 – – 20,000 – 1,750,000 Page 21 163284 Daejan Holdings Plc R&A 2014 Pt2_163284 Daejan Holdings Plc R&A 2014 Pt2 23/07/2014 13:55 Page 22 Daejan Holdings PLC Annual Report & Accounts 2014 Directors’ Remuneration Report (continued) Comparative table 2013 Mr B S E Freshwater Mr D Davis Mr S I Freshwater Mr R E Freshwater Mr A M Freshwater Long term Salary Benefits £ £ pay £ Perfor- mance mance perfor- Pension contri- pay butions £ £ Total £ 820,000 20,000 770,000 20,000 20,000 1,650,000 – – – – – – – – – – – – – – – – – – 820,000 – 20,000 – 770,000 – 20,000 – – 20,000 – 1,650,000 Changes in the year Mr D Davis is the senior non-executive Director with responsibility for setting executive Directors’ remuneration, which is subsequently approved by the full board. Mr BSE Freshwater received an increase in basic salary of £50,000 per annum during the year (2013 – £50,000), equivalent to 6.1% (2013 – 6.7%) and Mr SI Freshwater received an increase in basic salary of £50,000 per annum during the year (2013 – £73,125), equivalent to 6.5% (2013 – 10.5%). Both of these increases were agreed at a meeting of the full Board, but at which the executive Directors did not participate in the discussion or decisions taken. For comparative purposes, the total staff costs borne by the Group under its arrangements with its property and administrative management companies in the UK increased by 2.8% (2013 – 2.4%). Since such staff are employed under these arrangements, no consultations regarding Directors’ remuneration policy or implementation have been held. It is intended that the current practice of annual reviews and the method in which they are carried out will continue unchanged during the current and following years. Non-executive Directors’ remuneration The non-executive Directors receive fees of £20,000 per annum which are reviewed periodically. This entitlement has not changed in recent years. Relative importance of spend on pay The table below demonstrates the relative amounts expended by the Group on staff costs, Directors’ remuneration and dividends to shareholders. The Company did not buy back any shares during the year. Staff costs £000 6,150 6,035 % of total 27.5 30.1 Directors’ remuneration Dividends to shareholders £000 1,750 1,650 % of total £000 % of total 7.8 8.2 14,503 12,384 64.7 61.7 2014 2013 Statement of Directors shareholdings and share interests There is no minimum shareholding requirement for executive or non-executive Directors. The Directors’ share interests are complex and are set out in detail in the Directors’ Report on page 17. Page 22 163284 Daejan Holdings Plc R&A 2014 Pt2_163284 Daejan Holdings Plc R&A 2014 Pt2 23/07/2014 13:55 Page 23 Daejan Holdings PLC Annual Report & Accounts 2014 Approval of Directors’ Remuneration Report At the last Annual General Meeting of the Company, votes cast by shareholders on the resolution to approve the Directors’ Remuneration Report were as follows: For Against 12,592,058 417,371 96.8% 3.2% Total shareholder return The following graph shows the total shareholder returns for the Company (rebased as at 1 April 2004) for each of the last ten financial years compared to the FTSE All Share Real Estate Investment and Services Index and the FTSE 350 Index. The Company is a constituent of both these indices and the Board considers these to be the most appropriate broad market equity indices for illustrating the Company’s relative performance. 300 250 200 % 150 100 50 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 DAEJAN HOLDINGS PLC FTSE 350 FTSE ALL SHARE REAL ESTATE INVESTMENTS AND SERVICES Source: Thomson Reuters Datastream The basic pay of the Chairman and Managing Director during the same period as the graph above is shown as a single figure in the table below: Mr B S E Freshwater 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 By order of the Board D Davis 22 July 2014 £ 520,000 595,000 640,000 670,000 700,000 720,000 740,000 770,000 820,000 870,000 Page 23 163284 Daejan Holdings Plc R&A 2014 Pt2_163284 Daejan Holdings Plc R&A 2014 Pt2 23/07/2014 13:55 Page 24 Daejan Holdings PLC Annual Report & Accounts 2014 Corporate Governance Report Overview The Board is required to report on the extent of its application of the principles and of its compliance with the provisions contained in the UK Corporate Governance Code (the “Code”). Your Board reviews each year the extent to which it is compliant with the Code and considers any changes which might be necessary in the light of developments in the principles and provisions of the Code and in the context of the needs of the Group’s business. We do not comply with the provisions of the Code in connection with non-executive representation on the Board, as we are doubtful that further extending non-executive participation at present would benefit our shareholders. We consider it vital that the principle of a unitary Board of Directors, sharing responsibility for all facets of the Company’s business, should not be undermined by reserving areas of decision making solely for non-executive Directors. For this reason the matters which the Code recommends should be reserved for audit, nomination and remuneration committees are dealt with by the entire Board and it is intended to continue this practice. In view of the fact that the Board comprises only five Directors it is also not considered necessary to split the roles of Chairman and Chief Executive. Executive remuneration is not directly related to performance, but a link is established by the fact that remuneration is not agreed upon until after the results for the year are known. Changes should be made when they are appropriate and in the best interests of the Company, rather than for the sake of change itself. This Company has a successful track record and whilst the Board will continue to keep under review any proposals which may improve the efficiency of its operations, the current structure has stood the Company in good stead over many years and should continue to do so in the future. The Board The Group is controlled through the Company’s Board of Directors. The Board’s main roles are to create value for shareholders, to provide entrepreneurial leadership of the Group, to approve the Group’s strategic objectives and to ensure that the necessary financial and other resources are made available to enable those objectives to be met. The Board meets regularly throughout the year on both a formal and informal basis. Comprehensive management information covering all aspects of the Group’s business is supplied to the Board in a timely manner and in a form and quality which enables it to discharge its duties. The Board’s principal focus, in accordance with the formal schedule of matters referred to it for decision, is on the formation of strategy and the monitoring and control of operations and financial performance. The performance of the Board is kept under constant review by the Chairman and therefore it is not considered necessary to undertake a more formal process of evaluation, either internally or externally. All Directors have access to the Company Secretary who is responsible for ensuring compliance with the Board procedures. The Board has agreed a procedure for Directors in the furtherance of their duties to take independent professional advice, if necessary, at the Company’s expense. The Board consults on a regular basis with the Group’s external auditor and is charged with ensuring that its objectivity and independence is safeguarded. The entire Board is responsible for the selection and approval of candidates for appointment to the Board. There has been no activity in relation to selection or appointment of new Directors during the year. The Board recognizes the growing emphasis placed on criteria such as diversity and gender but continues to believe that appointees should be selected primarily on the basis of a full, balanced Page 24 163284 Daejan Holdings Plc R&A 2014 Pt2_163284 Daejan Holdings Plc R&A 2014 Pt2 23/07/2014 13:55 Page 25 Daejan Holdings PLC Annual Report & Accounts 2014 range of criteria considered to be key to the management of the Group, without any forced emphasis. All Directors retire and submit themselves for re-election to shareholders at the Annual General Meeting each year. During the year there were two full, formal board meetings attended by all Directors. Directors and Directors’ Independence The Board currently comprises the Chairman, who acts in an executive capacity, one further executive Director and three non-executive Directors. The names of the Directors together with their biographical details are set out on page 16. Mr R E Freshwater and Mr A M Freshwater are not independent by virtue of their membership of the Freshwater family. The Board acknowledges that, in view of his length of service, Mr D Davis is not technically independent. In the circumstances there is no senior independent director appointment. Financial Reporting The Board is responsible for all aspects of the Group’s financial reporting obligations. The key aspects of these obligations are as follows: Accounting and significant areas of judgement It is essential to the standard of the Group’s financial reporting that appropriate accounting policies are adopted and applied on a consistent basis. The Board discusses the impact of new and emerging accounting standards with the external auditor and keeps under careful review those areas of its accounting policies requiring subjective or complex judgements or estimates. These areas, particularly in relation to fair value measurements of investment property and the assessment of tax liabilities, are set out in Note 1(u) to the financial statements. In order to conclude on these matters, the Board reviews the valuation reports and discusses these with its valuers and reviews and discusses the tax position of the Group with its advisers. External auditor KPMG LLP, and its predecessor entities, has been the Group’s statutory auditor since the Group in its current form was created by reverse takeover in 1959. The Board keeps under careful review the independence of the auditor and the quality of its services to the Group and is satisfied that KPMG LLP provides a high quality, objective and cost effective service, from the sound base of its understanding of the Group’s business. The Financial Reporting Council is consulting on amendments to the Code in the light of pronouncements by the Competition and Markets Authority and the European Parliament in relation to external auditor rotation. However, under the recent EU Audit Directive and EU Regulation the Company will be required to appoint a different external auditor no later than 2020. It is not the current intention of the Board to put the external audit contract out to tender, but this position will be kept under regular review. The Board has a policy of using KPMG LLP to provide non-audit services to the Group only in relation to matters closely associated with the audit and maintains close scrutiny of its non-audit services and fees in order to safeguard objectivity and independence. Internal Controls The Board is ultimately responsible for the Group’s system of internal control and for reviewing its effectiveness. However, such a system is designed to manage rather than eliminate the risk of failure Page 25 163284 Daejan Holdings Plc R&A 2014 Pt2_163284 Daejan Holdings Plc R&A 2014 Pt2 23/07/2014 13:55 Page 26 Daejan Holdings PLC Annual Report & Accounts 2014 Corporate Governance Report (continued) to achieve business objectives, and can provide only reasonable and not absolute assurance against material misstatement or loss. The Code requires that the Directors review the effectiveness of the Group’s system of internal controls, covering financial, operational and compliance controls and risk management. The Board confirms that there is an ongoing process for identifying, evaluating and managing the significant business risks faced by the Group and that this process has been in place for the year under review and up to the date of approval of the Annual Report & Accounts. This process is reviewed by the Board at regular intervals. The Board has considered the benefits likely to arise from the appointment of an internal audit function and has concluded that this is not currently necessary having regard to other controls which operate within the Group. Key elements of the Group’s system of internal controls These are as follows: Control environment: The Group is committed to the highest standards of business conduct and seeks to maintain these standards across all its operations. The Group has a clear organisational structure for planning, executing and monitoring business operations in order to achieve the Group’s objectives. Lines of responsibility and delegation of authority are well defined. Risk identification and evaluation: Management is responsible for the identification and evaluation of key risks applicable to the areas of the property market which impact its objectives. These risks are assessed on a continual basis and may be associated with a variety of internal and external sources. The Board considers the risk implications of business decisions including those affecting all major transactions. Information and communication: Periodic strategic reviews are carried out which include the consideration of long term financial projections. Financial performance is actively monitored at Board level. Through these mechanisms group performance is monitored, risks identified in a timely manner, their implications assessed, control procedures re-evaluated and corrective actions agreed and implemented. Control procedures: The Group has implemented control procedures designed to ensure complete and accurate accounting for financial transactions and to limit the potential exposure to loss of assets or fraud. Measures include physical controls, segregation of duties, reviews by management and reviews by the Company’s external auditors to the extent necessary to arrive at their audit opinion. Monitoring and corrective action: The Board meets regularly, formally and informally, throughout the year to review the internal controls. This process includes an annual review of the significant business risks and formal consideration of the scope and effectiveness of the Group’s system of internal control. In addition, the executive Directors and senior management staff have a close involvement in the day to day operations of the Group and as such the controls are subject to ongoing monitoring. Page 26 163284 Daejan Holdings Plc R&A 2014 Pt2_163284 Daejan Holdings Plc R&A 2014 Pt2 23/07/2014 13:55 Page 27 Daejan Holdings PLC Annual Report & Accounts 2014 Investor Relations The Board values communication with private and institutional shareholders and with analysts. The Annual General Meeting is used as the primary opportunity for the Board as a whole to meet private shareholders. Other opportunities are taken as they arise during the year to discuss strategic and other issues with institutional shareholders and analysts. The Board continues to support the concept of individual resolutions on separate issues at Annual General Meetings. Details of proxy voting on each resolution are disclosed to the meeting after it has been dealt with by a show of hands. In accordance with the Code, notice of the Annual General Meeting and the Annual Report & Accounts will be sent to shareholders at least twenty working days before the meeting. Compliance Statement The Board considers the Company has complied throughout the year ended 31 March 2014 with the provisions of the Code with the exception of the following paragraphs: Subject Division of Chairman and CEO responsibilities Non-executive directors and composition of the Board Nomination committee and its responsibilities Evaluation of the Board Audit committee and its responsibilities Remuneration committee and its responsibilities Paragraph A.2.1; A.3.1 A.4.1-2; B.1.2 B.2.1-4; B.3.1-2 B.6.1-3 C.3.1-6 D.1.1; D.2.1-2 Going Concern The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic Report on pages 4 to 15, which also refers to the financial position of the Group, its cash flows, liquidity position and borrowing facilities. In addition, Note 16 to the financial statements includes the Group’s objectives, policies and processes for managing its financial risks, together with details of its financial instruments, hedging activities and exposures to credit, liquidity and market risks. As shown in the consolidated statement of cash flows, the Group generated net cash from operating activities of £19.4 million during the year (2013 – £24.0 million). Gearing, on the basis of gross debt to total assets, was 17.6% (2013 – 18.9%). Net debt (total loans and borrowings less cash and cash equivalents) has increased to £232.4 million (2013 – £223.7 million), due principally to the acquisition of and additions to investment property. The Group has undrawn committed facilities of £35.0 million at the balance sheet date (2013 – £20.0 million). The Group has considerable financial resources and very low gearing and therefore, the Directors consider that the Group is well placed to manage its business risks successfully in the current and foreseeable economic conditions. Consequently, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the financial statements. Page 27 163284 Daejan Holdings Plc R&A 2014 Pt2_163284 Daejan Holdings Plc R&A 2014 Pt2 23/07/2014 13:55 Page 28 Daejan Holdings PLC Annual Report & Accounts 2014 Directors’ Responsibilities Statement The Directors are responsible for preparing the Annual Report and the group and parent company financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare group and parent company financial statements for each financial year. Under that law they are required to prepare the group financial statements in accordance with International Financial Reporting Standards as adopted by the EU (“IFRS”) and applicable law and have elected to prepare the parent company financial statements in accordance with UK Accounting Standards and applicable law. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the group and parent company and of their profit or loss for that period. In preparing each of the group and parent company financial statements, the Directors are required to: ■ ■ ■ ■ ■ select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable and prudent; for the group financial statements, state whether they have been prepared in accordance with IFRS; for the parent company financial statements, state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the parent company financial statements; and prepare the financial statements on the going concern basis unless it is inappropriate to presume that the group and the parent company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent company’s transactions and disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the group and to prevent and detect fraud and other irregularities. Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors’ Report, Directors’ Remuneration Report and Corporate Governance Statement that comply with that law and those regulations. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Responsibility statement Each of the Directors, whose names are listed on page 16, confirm that, to the best of their knowledge: ■ the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; Page 28 163284 Daejan Holdings Plc R&A 2014 Pt2_163284 Daejan Holdings Plc R&A 2014 Pt2 23/07/2014 13:55 Page 29 Daejan Holdings PLC Annual Report & Accounts 2014 ■ ■ the strategic report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and this Annual Report & Accounts document, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s performance, business model and strategy. By order of the Board B S E Freshwater Director 22 July 2014 Page 29 163284 Daejan Holdings Plc R&A 2014 Pt2_163284 Daejan Holdings Plc R&A 2014 Pt2 23/07/2014 13:55 Page 30 Daejan Holdings PLC Annual Report & Accounts 2014 Independent Auditor’s Report to the Members of Daejan Holdings PLC Opinions and conclusions arising from our audit Our opinion on the financial statements is unmodified 1 We have audited the financial statements of Daejan Holdings PLC for the year ended 31 March 2014 set out on pages 34 to 64. In our opinion: ■ ■ ■ ■ the financial statements give a true and fair view of the state of the Group’s and of the parent company’s affairs as at 31 March 2014 and of the Group’s profit for the year then ended; the group financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union; the parent company financial statements have been properly prepared in accordance with UK Accounting Standards; and the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the group financial statements, Article 4 of the IAS Regulation. Our assessment of risks of material misstatement 2 In arriving at our audit opinion above on the financial statements the risks of material misstatement that had the greatest effect on our audit were as follows: Valuation of investment properties (£1,546.7 million) Refer to page 10 (Strategic report), page 25 (Accounting and significant areas of judgement), page 42 (Significant accounting policies) and page 47 (Notes to the consolidated financial statements). ■ ■ The risk – The valuation of investment properties is one of the key areas of judgement in preparing the financial statements. Valuation of investment properties is considered a significant audit risk due to the magnitude (93% of total assets) and subjective nature of property valuations which depends on the individual nature of each property, its location and expected future net rental values, market yields and comparable market transactions. Our response – Our audit procedures included, amongst others, meeting with the Group’s external valuers to understand the assumptions and methodologies used in valuing the investment properties and the market evidence used by the external valuers to support these assumptions. We used our own chartered surveyor to assist us in evaluating the assumptions, methodologies, competency, and independence of the external valuers. In addition, for a sample of properties we assessed whether the valuations were performed in accordance with RICS Valuation Professional Standards. We challenged the external valuers’ assumptions by comparing yields on a sample of properties to benchmark indices and evaluated the extent to which the movements in valuations were consistent with our industry knowledge and market comparable transactions. In addition we agreed key inputs used in the valuation model, such as rental income, occupancy and current tenancy contracts, to the Group’s property management system and lease contracts. We also critically assessed the adequacy of the Group’s disclosures including the accuracy of the fair value measurement categorisation and adequacy of the disclosure of the valuation technique and significant unobservable inputs (see note 9). Page 30 163284 Daejan Holdings Plc R&A 2014 Pt2_163284 Daejan Holdings Plc R&A 2014 Pt2 23/07/2014 13:55 Page 31 Daejan Holdings PLC Annual Report & Accounts 2014 Current tax liability (£30.4 million) Refer to page 25 (Accounting and significant areas of judgement), page 42 (Significant accounting policies) and page 46 (Notes to the consolidated financial statements) ■ ■ The risk – Accruals for tax contingencies require the directors to make judgements and estimates in relation to tax issues and exposures. This is one of the key audit risks due to the time taken for tax matters to be agreed with the tax authorities and complexity of tax legislation. Our response – In this area our audit procedures included, among others, the use of our own local tax specialists to assist us in assessing the Group’s tax positions and its correspondence with the relevant tax authorities and analysing and challenging the assumptions used to determine tax provisions based on our knowledge and experiences of the application of local legislation by the relevant authorities and courts. We also assessed the adequacy of the Group’s disclosures in respect of tax and uncertain tax positions by reference to relevant accounting standards. Our application of materiality and an overview of the scope of our audit 3 The materiality for the group financial statements as a whole was set at £15.2m. This has been determined with reference to a benchmark of total assets (of which it represents 0.9%), which we consider to be one of the principal considerations for members of the Company in assessing the financial performance of the Group. We agreed with the Board to report to it all corrected and uncorrected misstatements we identified through our audit with a value in excess of £0.7m, in addition to other audit misstatements below that threshold that we believe warranted reporting on qualitative grounds. Audits for Group reporting purposes were performed by the group audit team in the UK covering 47 components and by a component auditor in one UK component and one component in the USA. These audits covered 100% of total group revenue; 100% of group profit before taxation; and 100% of total group assets. The segment disclosures in Note 2 to the consolidated financial statements set out the individual significance of a specific country. The audits undertaken for group reporting purposes at the key reporting components of the Group were all performed to materiality levels set by, or agreed with, the group audit team. These materiality levels ranged from £2,000 to £2.5 million. Detailed audit instructions were sent to all the auditors in these locations. These instructions covered the significant audit areas that should be covered by these audits (which included the relevant risks of material misstatement detailed above) and set out the information required to be reported back to the group audit team. The group audit team visited the UK and USA locations. Telephone meetings were also held with the component auditors at these locations. Our opinion on other matters prescribed by the Companies Act 2006 is unmodified 4 In our opinion: ■ ■ the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; 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. Page 31 163284 Daejan Holdings Plc R&A 2014 Pt2_163284 Daejan Holdings Plc R&A 2014 Pt2 23/07/2014 13:55 Page 32 Daejan Holdings PLC Annual Report & Accounts 2014 Independent Auditor’s Report to the Members of Daejan Holdings PLC (continued) 5 We have nothing to report in respect of the matters on which we are required to report by exception Under ISAs (UK and Ireland) we are required to report to you if, based on the knowledge we acquired during our audit, we have identified other information in the annual report that contains a material inconsistency with either that knowledge or the financial statements, a material misstatement of fact, or that is otherwise misleading. In particular, we are required to report to you if: ■ ■ we have identified material inconsistencies between the knowledge we acquired during our audit and the directors’ statement that they consider that the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s performance, business model and strategy; or the Corporate Governance Report does not appropriately address matters communicated by us to the Board. Under the Companies Act 2006 we are required to report to you if, in our opinion: ■ ■ ■ ■ adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or the parent company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or certain disclosures of Directors’ remuneration specified by law are not made; or we have not received all the information and explanations we require for our audit. Under the Listing Rules we are required to review: ■ ■ the Directors’ statement, set out on page 27, in relation to going concern; and the part of the Corporate Governance Report on pages 24 – 27 relating to the company’s compliance with the nine provisions of the 2010 UK Corporate Governance Code specified for our review. We have nothing to report in respect of the above responsibilities. Page 32 163284 Daejan Holdings Plc R&A 2014 Pt2_163284 Daejan Holdings Plc R&A 2014 Pt2 23/07/2014 13:55 Page 33 Daejan Holdings PLC Annual Report & Accounts 2014 Scope of report and responsibilities As explained more fully in the Directors’ Responsibilities Statement set out on page 28, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. A description of the scope of an audit of financial statements is provided on the Financial Reporting Council’s website at www.frc.org.uk/auditscopeukprivate. This report is made solely to the Company’s members as a body and is subject to important explanations and at www.kpmg.com/uk/auditscopeukco2013a, which are incorporated into this report as if set out in full and should be read to provide an understanding of the purpose of this report, the work we have undertaken and the basis of our opinions. responsibilities, published on our website regarding our disclaimers Bill Holland (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants 15 Canada Square London, E14 5GL 22 July 2014 Page 33 163284 Daejan Holdings Plc R&A 2014 Pt3_163284 Daejan Holdings Plc R&A 2014 Pt3 23/07/2014 13:13 Page 34 Daejan Holdings PLC Annual Report & Accounts 2014 Consolidated Income Statement for the year ended 31 March 2014 Notes Gross rental income Service charge income Year ended 31 March 2014 £000 Year ended 31 March 2013 £000 97,751 14,451 97,081 13,956 Total rental and related income from investment property Property operating expenses 112,202 3 (68,789) 111,037 (67,017) Net rental and related income from investment property Profit on disposal of investment property Net valuation gains on investment property Administrative expenses Net operating profit before net financing costs Fair value gains/(losses) on fixed rate loans and borrowings Fair value gains/(losses) on derivative financial instruments Fair value (losses)/gains on current investments Other financial income Financial expenses 43,413 11,320 119,648 44,020 6,612 82,694 (10,550) (10,936) 163,831 122,390 8,737 2,375 (14) 705 (36) (321) 8 740 (11,129) (11,098) 9 4 5 5 Net financing income/(expense) 674 (10,707) Profit before taxation Income tax Profit for the year Attributable to: Equity holders of the parent Non-controlling interest Profit for the year 164,505 6 (14,337) 111,683 (21,923) 150,168 89,760 149,772 396 89,601 159 150,168 89,760 Basic and diluted earnings per share 7 £9.19 £5.50 Page 34 163284 Daejan Holdings Plc R&A 2014 Pt3_163284 Daejan Holdings Plc R&A 2014 Pt3 23/07/2014 13:13 Page 35 Daejan Holdings PLC Annual Report & Accounts 2014 Consolidated Statement of Comprehensive Income for the year ended 31 March 2014 Profit for the year Foreign exchange translation differences Year ended 31 March 2014 £000 150,168 (9,678) Year ended 31 March 2013 £000 89,760 3,847 Total comprehensive income for the year 140,490 93,607 Attributable to: Equity holders of the parent Non-controlling interest 140,101 389 93,448 159 Total comprehensive income for the year 140,490 93,607 All comprehensive income may be reclassified as profit and loss in the future. Consolidated Statement of Changes in Equity Share capital £000 4,074 Share premium £000 Translation reserve £000 Retained earnings £000 555 18,620 880,557 – 89,601 Equity Non- shareholders’ controlling interest £000 funds £000 Total equity £000 903,806 89,601 318 159 904,124 89,760 for the year ended 31 March 2014 Balance at 1 April 2012 Profit for the year Foreign exchange translation differences Payments to non-controlling interest Dividends to equity shareholders – – – – – – – – 3,847 – – Balance at 1 April 2013 4,074 555 22,467 Profit for the year Foreign exchange translation differences Payments to non-controlling interest Dividends to equity shareholders – – – – – – – – – (9,671) – – – – 3,847 – 3,847 – (394) (394) (12,384) (12,384) – (12,384) 957,774 149,772 984,870 149,772 83 396 984,953 150,168 – – (9,671) (7) (9,678) – (303) (303) (14,503) (14,503) – (14,503) Balance at 31 March 2014 4,074 555 12,796 1,093,043 1,110,468 169 1,110,637 Page 35 163284 Daejan Holdings Plc R&A 2014 Pt3_163284 Daejan Holdings Plc R&A 2014 Pt3 23/07/2014 13:13 Page 36 Daejan Holdings PLC Annual Report & Accounts 2014 Consolidated Balance Sheet as at 31 March 2014 Assets Investment property Deferred tax assets Total non-current assets Trade and other receivables Current investments Cash and cash equivalents Total current assets Total assets Equity Share capital Share premium Translation reserve Retained earnings Total equity attributable to equity holders of the parent Non-controlling interest Total equity Liabilities Loans and borrowings Deferred tax liabilities Total non-current liabilities Loans and borrowings Trade and other payables Current taxation Total current liabilities Total liabilities Notes 31 March 2014 £000 31 March 2013 £000 9 10 1,546,718 5,433 1,407,544 8,741 11 12 13 15 10 15 14 1,552,151 1,416,285 46,833 2,033 59,149 43,150 236 63,513 108,015 106,899 1,660,166 1,523,184 4,074 555 12,796 1,093,043 4,074 555 22,467 957,774 1,110,468 169 984,870 83 1,110,637 984,953 283,869 182,271 268,943 174,017 466,140 442,960 7,710 45,305 30,374 18,256 41,844 35,171 83,389 95,271 549,529 538,231 Total equity and liabilities 1,660,166 1,523,184 The financial statements on pages 34 to 60 were approved by the Board of Directors on 22 July 2014 and were signed on its behalf by: B.S.E. Freshwater D. Davis Director Director Page 36 163284 Daejan Holdings Plc R&A 2014 Pt3_163284 Daejan Holdings Plc R&A 2014 Pt3 23/07/2014 13:13 Page 37 Daejan Holdings PLC Annual Report & Accounts 2014 Consolidated Statement of Cash Flows for the year ended 31 March 2014 Cash flows from operating activities Cash receipts from rent and service charges Cash paid to suppliers and employees Cash generated from operations Interest received Interest paid Payments to non-controlling interest Tax paid Year ended 31 March 2013 £000 Year ended 31 March 2014 £000 £000 120,455 (88,288) 32,167 1,154 (11,329) (303) (2,304) £000 123,511 (88,132) 35,379 303 (11,014) (394) (294) Net cash from operating activities 19,385 23,980 Cash flows from investing activities Acquisition and development of investment property (47,797) (57,668) Proceeds from sale of investment property 13,093 28,454 Net cash absorbed by investing activities (34,704) (29,214) Cash flows from financing activities Repayment of bank loans New bank loans and overdrafts Repayment of mortgages New mortgages Dividends paid (16,375) – (32,320) 76,050 (14,503) (1,525) 44,611 (24,363) 29,374 (12,384) Net cash generated from financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents brought forward Effect of exchange rate fluctuations on cash held Cash and cash equivalents (Note 12) 12,852 (2,467) 63,513 (1,897) 59,149 35,713 30,479 32,324 710 63,513 Page 37 163284 Daejan Holdings Plc R&A 2014 Pt4_163284 Daejan Holdings Plc R&A 2014 Pt4 23/07/2014 13:16 Page 38 Daejan Holdings PLC Annual Report & Accounts 2014 Notes to the Consolidated Financial Statements 1. Significant Accounting Policies Daejan Holdings PLC is a company domiciled in the United Kingdom. The consolidated financial statements of the Company for the year ended 31 March 2014 comprise the Company and its subsidiaries (together referred to as the “Group”). The consolidated financial statements were authorised for issuance on 22 July 2014. (a) Statement of compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the EU (“IFRS”) and those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The Company has elected to prepare its parent company financial statements in accordance with UK GAAP and these are presented on pages 61 to 64. (b) Basis of preparation The consolidated financial statements are presented in sterling, the Company’s functional currency and the Group’s presentational currency, rounded to the nearest thousand. They are prepared on the historical cost basis except that the following assets and liabilities are stated at their fair value: investment property, derivative financial instruments, fixed rate loans and borrowings and current asset investments. The accounting policies set out in this Note 1 have been applied consistently throughout the Group to all periods presented in the consolidated financial statements, except as described below. The following standards, amendments to standards and interpretations became effective for the year end 31 March 2014, but none of these has had a material impact on the Group: (cid:129) (cid:129) (cid:129) IAS 1 Presentation of Financial Statements (amendment) IFRS 7 Financial Instruments: Disclosures (amendment) IFRS 13 Fair Value Measurement The following standards, amendments to standards and interpretations relevant to the Group have been issued but are not yet effective. None of these has been early-adopted by the Group. (cid:129) (cid:129) (cid:129) IFRS 9 Financial Instruments IFRS 10 Consolidated Financial Statements IFRS 12 Disclosures of Interests in Other Entities The Group is in the process of assessing the impact of these new standards on its financial reporting. The financial statements have been prepared on a going concern basis as explained in the Corporate Governance Report on page 27. The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. Although these estimates are based on management’s best knowledge of the events or amounts involved, actual results ultimately may differ from those estimates. The areas involving a higher degree of complexity, judgement or estimation are set out in Note 1(u) below. Page 38 163284 Daejan Holdings Plc R&A 2014 Pt4_163284 Daejan Holdings Plc R&A 2014 Pt4 23/07/2014 13:16 Page 39 Daejan Holdings PLC Annual Report & Accounts 2014 (c) Subsidiaries Subsidiaries are those entities controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable are taken into account. (d) Transactions eliminated on consolidation Intra-group balances and any unrealised gains and losses arising from intra-group transactions are eliminated in preparing the consolidated financial statements. (e) Income available for distribution Under the articles of association of certain Group investment undertakings, realised capital surpluses are not available for distribution as dividends. (f) Foreign currency translation The assets and liabilities of foreign operations are translated to sterling at the foreign exchange rate ruling at the balance sheet date. The revenues and expenses of foreign operations are translated to sterling at rates approximating to the foreign exchange rates ruling at the dates of the transactions. Foreign exchange differences arising on re-translation are recognised directly in a separate component of equity. The cumulative translation difference for all foreign operations was deemed to be zero as at the date of transition to IFRS. The year end and average rates used for these purposes were as follows: US Dollar (g) Derivative financial instruments Year end Average 2014 1.66 2013 1.52 2014 1.59 2013 1.58 The Group uses derivative financial instruments to hedge its exposure to interest rate risk arising from operational and financing activities. As these derivatives do not qualify for hedge accounting, they are accounted for as trading instruments. Derivative financial instruments are initially recognised, and subsequently recorded, at fair value. The fair value of interest rate swaps is the estimated amount that the Group would recover or pay to terminate the swap at the balance sheet date, taking into account current interest rates and the credit worthiness of the swap counterparties. The gain or loss on re-measurement to fair value is recognised immediately in the income statement. (h) Investment property IFRS defines investment properties as those which are held either to earn rental income or for capital appreciation or both. All of the Group’s property falls within this definition. Investment property is initially recognised at cost and subsequently recorded at fair value. External, independent valuation firms having appropriate recognised professional qualifications and recent relevant experience in the location and category of property being valued, value the portfolio annually at the Company’s year end. The fair values are based on market values, being the estimated amount for which a property could be exchanged on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. The valuations are prepared either by considering the aggregate of the net annual rent receivable from the properties using a market yield which reflects the risks inherent in the net cash flow which is then applied to the net annual rents, Page 39 163284 Daejan Holdings Plc R&A 2014 Pt4_163284 Daejan Holdings Plc R&A 2014 Pt4 23/07/2014 13:16 Page 40 Daejan Holdings PLC Annual Report & Accounts 2014 Notes to the Consolidated Financial Statements (continued) or on a sales comparison basis. Any gains or losses arising from a change in fair value are recognised in the income statement. When the Group begins to redevelop an existing investment property for continued future use as an investment property, the property continues to be treated as an investment property, and is measured based on the fair value model. Interest is capitalised on such developments to the extent that such interest is directly attributable to the cost of redevelopment. A property interest under an operating lease is classified and accounted for as an investment property on a property-by-property basis when the Group holds it to earn rentals or for capital appreciation or both. Any such property interest under an operating lease classified as an investment property is carried at fair value. Where material, the aggregate present value of the minimum future lease payments under such leases is recognised as a liability. Acquisitions and disposals are recognised on the date that the significant risks and rewards of ownership have been transferred. Any resulting gain or loss based on the difference between sale proceeds and valuation is included in the income statement and taxation applicable thereto is shown as part of the taxation charge. (i) Current investments Investments comprise equity securities and other investments held for trading and classified as current assets stated at fair value, with any resultant gain or loss recognised in the income statement. (j) Trade and other receivables Trade and other receivables are initially stated at fair value and subsequently carried at cost less an allowance for impairment. These assets are not discounted as the effect is deemed immaterial. (k) Cash and cash equivalents Cash and cash equivalents comprise cash balances and short term deposits. These short term deposits are highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Bank overdrafts are repayable on demand and form an integral part of the Group’s cash management. Bank overdrafts are therefore included as a component of cash and cash equivalents for the purpose of the statement of cash flows. (l) Dividends Dividends are recognised as a liability in the period in which they are approved. (m) Trade and other payables Trade and other payables are initially stated at fair value and subsequently carried at amortised cost. (n) Net rental income Net rental income comprises rent and service charges receivable less applicable provisions and costs associated with the properties. Rental income from investment property leased out under operating leases is recognised in the income statement on a straight-line basis over the certain term of the lease. Lease incentives granted are recognised as an integral part of the total rental income. Service charge income is recognised as the services are provided. Net rental income is stated net of recoverable VAT. Page 40 163284 Daejan Holdings Plc R&A 2014 Pt4_163284 Daejan Holdings Plc R&A 2014 Pt4 23/07/2014 13:16 Page 41 Daejan Holdings PLC Annual Report & Accounts 2014 The cost of repairs is written off to the income statement in the year in which the expenditure was incurred. Lease payments under operating leases are recognised in the income statement on a straight-line basis over the term of the lease. (o) Dividend income Dividend income is recognised in the income statement on the date the entity’s right to receive payments is established which, in the case of quoted securities, is the ex-dividend date. (p) Taxation Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities (which, in the case of investment property, is assumed to be through sale), using tax rates enacted or substantively enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. (q) Segmental reporting The Company has identified its operating segments on the basis of those components of the Group which engage in business activities from which they may earn revenues and incur expenses and for which discrete financial information is available and regularly reviewed by the Chief Operating Decision Maker in order to allocate resources and assess performance. The Company has determined the Chief Operating Decision Maker to be the Board of Directors. (r) Impairment The carrying amounts of the Group’s assets, other than investment property (see Note 1 (h)) and deferred tax assets (see Note 1 (p)), are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists the asset’s recoverable amount is estimated and an impairment loss recognised whenever the carrying amount of the asset exceeds its recoverable amount. Impairment losses are recognised in the income statement. The recoverable amount of an asset is the greater of its fair value less costs to sell and its value-in- use. The value-in-use is determined as the net present value of the future cash flows expected to be derived from the asset, discounted using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. (s) Provisions A provision is recognised in the balance sheet when the Group has a legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the Page 41 163284 Daejan Holdings Plc R&A 2014 Pt4_163284 Daejan Holdings Plc R&A 2014 Pt4 23/07/2014 13:16 Page 42 Daejan Holdings PLC Annual Report & Accounts 2014 Notes to the Consolidated Financial Statements (continued) expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. (t) Loans and borrowings Floating rate loans and borrowings are initially recognised at fair value and are subsequently recorded at amortised cost. Fixed rate loans and borrowings are initially recognised, and subsequently recorded, at fair value. In the case of floating rate loans and borrowings, transaction costs are deducted from the fair value at recognition and any differences between the amount initially recognised and the redemption value is recognised in the income statement over the period of the borrowings on an effective interest rate basis. (u) Significant judgements, key assumptions and estimates The Group’s significant accounting policies are set out above. Not all of these policies require management to make subjective or complex judgements or estimates. The following is intended to provide further detail relating to those accounting policies that management consider particularly significant because of the level of complexity, judgement or estimation involved in their application and their impact on the consolidated financial statements. (i) Property valuations The valuation of the Group’s property portfolio is inherently subjective, depending on many factors, including the individual nature of each property, its location and expected future net rental values, market yields and comparable market transactions (as set out in Note 9). Therefore the valuations are subject to a degree of uncertainty and are made on the basis of assumptions which may not prove to be accurate, particularly in periods of difficult market or economic conditions. As noted in Note 1 (h) above, all the Group’s properties are valued by external valuers with appropriate qualifications and experience. (ii) Income taxes The tax treatment of some transactions and calculations cannot be determined until a formal resolution has been reached with the relevant tax authorities. In such cases, a best estimate of the relevant tax charge or credit is made, having regard to the extent of uncertainties associated with it. Where the final outcome of such matters is different from the amounts initially recorded, those differences will be reflected in the income and deferred taxes amounts at the time of formal resolution. Additionally, judgement has been exercised in relation to the recognition of deferred tax assets where the utilisation of the underlying tax losses is uncertain. (iii) Fixed interest rate loans and borrowings The treatment of fixed rate debt at fair value through profit and loss reflects the Group’s overall management, on a fair value basis, of its investment property portfolio together with the large majority of the debt which finances it. This treatment also is in order to provide consistency of accounting measurement between fixed rate debt and floating rate debt which has been fixed through the use of interest rate swaps; these two categories of debt comprising the large majority of the Group’s total loans and borrowings. (iv) Valuation of hedging instruments and fixed rate debt The fair value of hedging instruments and fixed rate debt that are not traded in an active market is determined by using valuation techniques. Management, based on independent Page 42 163284 Daejan Holdings Plc R&A 2014 Pt4_163284 Daejan Holdings Plc R&A 2014 Pt4 23/07/2014 13:16 Page 43 Daejan Holdings PLC Annual Report & Accounts 2014 advice, uses its judgement to select appropriate methods and assumptions which are based mainly on market conditions existing at the balance sheet date. (v) Trade receivables Management uses details of the age of trade receivables and the status of any disputes together with external evidence of the credit status of the counterparty in making judgements concerning any need to impair the carrying values. 2. Segmental Analysis The Group is managed through two discrete geographical divisions and has only one product or service, being investment in property for the generation of rental income and/or capital appreciation. This is reflected in the Group’s structure and in the segment information reviewed by the Board. for the year ended 31 March 2014 Rental and related income Property operating expenses Profit/(loss) on disposal of property Net valuation movements on property Administrative expenses Profit before finance costs Fair value gains Other financial income Financial expenses Profit before taxation Income tax charge Profit for the year Capital expenditure Investment property Other assets Total segment assets Total segment liabilities Capital employed UK £000 79,294 (47,790) 11,721 98,942 (9,987) 132,180 4,468 540 (4,390) 132,798 (1,041) 131,757 16,072 USA Eliminations £000 32,908 (20,999) (401) 20,706 (563) 31,651 6,630 491 (7,065) 31,707 (13,296) 18,411 31,725 £000 – – – – – – – (326) 326 – – – – Total £000 112,202 (68,789) 11,320 119,648 (10,550) 163,831 11,098 705 (11,129) 164,505 (14,337) 150,168 47,797 1,215,740 76,357 1,292,097 (303,967) 330,978 45,277 376,255 (253,748) – (8,186) (8,186) 8,186 1,546,718 113,448 1,660,166 (549,529) 988,130 122,507 – 1,110,637 Page 43 163284 Daejan Holdings Plc R&A 2014 Pt4_163284 Daejan Holdings Plc R&A 2014 Pt4 23/07/2014 13:16 Page 44 Daejan Holdings PLC Annual Report & Accounts 2014 Notes to the Consolidated Financial Statements (continued) for the year ended 31 March 2013 Rental and related income Property operating expenses Profit/(loss) on disposal of property Net valuation movements on property Administrative expenses Profit before finance costs Fair value (losses)/gains Other financial income Financial expenses Profit before taxation Income tax charge Profit for the year Capital expenditure Investment property Other assets Total segment assets Total segment liabilities Capital employed UK £000 78,928 (46,578) 7,023 54,420 (10,227) 83,566 (1,180) 646 (4,123) 78,909 (6,888) 72,021 55,202 USA Eliminations £000 £000 32,109 (20,439) (411) 28,274 (709) 38,824 831 422 (7,303) 32,774 (15,035) 17,739 2,466 – – – – – – – (328) 328 – – – – Total £000 111,037 (67,017) 6,612 82,694 (10,936) 122,390 (349) 740 (11,098) 111,683 (21,923) 89,760 57,668 1,101,063 77,273 1,178,336 (307,776) 306,481 46,980 353,461 (239,068) – (8,613) (8,613) 8,613 1,407,544 115,640 1,523,184 (538,231) 870,560 114,393 – 984,953 No single lessee accounted for more than 5% of the Group’s rental and related income in either year. 3. Property Operating Expenses Porterage, cleaning and repairs Insurance Building services Other management costs 2014 £000 32,883 4,622 20,675 10,609 2013 £000 31,407 4,647 20,219 10,744 68,789 67,017 Of the property operating expenses shown above, an amount of £1,646,000 (2013 – £1,959,000) related to properties which generated no income during the year. Page 44 163284 Daejan Holdings Plc R&A 2014 Pt4_163284 Daejan Holdings Plc R&A 2014 Pt4 23/07/2014 13:16 Page 45 Daejan Holdings PLC Annual Report & Accounts 2014 4. Administrative Expenses Staff costs Directors’ remuneration Audit and accountancy Legal and other administrative expenses 2014 £000 6,205 1,779 785 1,781 2013 £000 6,035 1,709 755 2,437 10,550 10,936 Auditors’ remuneration: During the year the Group paid KPMG LLP £31,000 (2013 – £31,000) for the audit of the Company and £371,000 (2013 – £356,000) for the audit of the Group’s subsidiaries, together with £Nil (2013 – £4,000) for audit related assurance services and £35,000 (2013 – £30,000) for other services. Prior year fees were paid to KPMG Audit Plc. In the UK, the staff provided by the property and administrative management companies are engaged under joint employment contracts with the Group. During the year a total of 210 (2013 – 207) persons were employed in this way. The average number of full time equivalents whose staff costs were borne by the Group during the year was 149 (2013 – 147). The aggregate staff cost of these persons is shown above and can be analysed as follows: Salaries NI contributions Pensions 2014 £000 5,270 509 426 2013 £000 5,177 473 385 6,205 6,035 Details of Directors’ remuneration are set out in the Directors’ Remuneration Report. 5. Financial Income and Expenses Financial income: Bank interest receivable Other financial income Financial expenses: Interest payable on bank loans Interest payable on mortgages Other interest payable 2014 £000 2013 £000 225 480 705 497 243 740 2,538 8,577 14 2,445 8,622 31 11,129 11,098 Page 45 163284 Daejan Holdings Plc R&A 2014 Pt4_163284 Daejan Holdings Plc R&A 2014 Pt4 23/07/2014 13:16 Page 46 Daejan Holdings PLC Annual Report & Accounts 2014 Notes to the Consolidated Financial Statements (continued) 6. Taxation Taxation based on the profit for the year of the Company and its subsidiaries: UK corporation tax UK prior year items Overseas taxation Total current tax Deferred tax Deferred tax – reduction in future tax rate Total deferred tax Total tax charge Reconciliation of tax expense Profit before taxation Corporation tax at the standard UK rate of 23% (2013 – 24%) Reduction in future tax rate Prior year items Higher tax rate on overseas operations Indexation and non-taxable items Other Total tax charge 2014 £000 2013 £000 6,853 (9,752) 5,900 (3,014) (2,899) 2,886 405 385 (2,494) 3,271 33,068 (16,237) 23,258 (4,606) 16,831 18,652 14,337 21,923 164,505 111,683 37,836 (16,237) (9,752) 6,004 (3,448) (66) 26,804 (4,606) (3,014) 7,169 (3,976) (454) 14,337 21,923 UK prior year items for the year ended 31 March 2014 shown above includes the release of provisions from prior years following a review by the Directors of the tax treatment of certain transactions, such provisions having previously been made in accordance with the policy set out in Note 1(u)(ii) above. A reduction in the UK corporation tax rate from 24% to 23% (effective from 1 April 2013) was substantively enacted on 3 July 2012. Further reductions to 21% (effective from 1 April 2014) and 20% (effective from 1 April 2015) were substantively enacted on 2 July 2013. This will reduce the company’s future current tax charge accordingly. The deferred tax asset at 31 March 2014 has been calculated based on the rate of 20% substantively enacted at the balance sheet date. 7. Earnings per Share Earnings per share is calculated on the earnings, after taxation and non-controlling interests, of £149,772,000 (2013 – £89,601,000) and the weighted average shares in issue during the year of 16,295,357 (2013 – 16,295,357). Page 46 163284 Daejan Holdings Plc R&A 2014 Pt4_163284 Daejan Holdings Plc R&A 2014 Pt4 23/07/2014 13:16 Page 47 Daejan Holdings PLC Annual Report & Accounts 2014 8. Dividends Amounts recognised as distributions to equity holders in the year: Final dividend for the year ended 31 March 2012, paid 9 November 2012 @ 51p per share Interim dividend for the year ended 31 March 2013, paid 8 March 2013 @ 25p per share Final dividend for the year ended 31 March 2013, paid 8 November 2013 @ 54p per share Interim dividend for the year ended 31 March 2014, paid 7 March 2014 @ 35p per share 2014 £000 2013 £000 8,310 4,074 8,800 5,703 14,503 12,384 The Board has recommended a final dividend for the year ended 31 March 2014 of £7,659,000, representing 47p per share. This dividend has not been included as a liability in these financial statements. 9. Investment Property Long Short Freehold Leasehold Leasehold £000 £000 £000 Total 2014 £000 Total 2013 £000 Balance at 1 April Disposals New acquisitions Additions to existing properties Revaluation (recognised in profit and losss) Reclassification Foreign exchange movements (recognised in other comprehensive income) 1,134,316 256,342 (1,444) 36 1,731 (329) 26,106 19,924 16,886 1,407,544 1,254,094 (580) (1,773) 37,174 26,142 20,494 21,655 – – – 102,462 1,646 11,772 (1,521) 5,414 (125) 119,648 – 82,694 – (22,284) (4,214) – (26,498) 13,668 Balance at 31 March 1,261,841 262,702 22,175 1,546,718 1,407,544 External, independent professional valuations of all the Group’s UK investment properties were carried out by Colliers International Property Advisers UK LLP, RICS Registered Valuers at 31 March 2014. The aggregate amount of £1,218.4 million is based on open market values, assessed in accordance with the RICS Valuation – Professional Standards (2014). The Group’s USA investment properties were also independently professionally valued at 31 March 2014 by Joseph J. Blake and Associates Inc. and Metropolitan Valuation Services, Inc., both USA Certified General Real Estate Appraisers. The aggregate amount of £331.8 million is based on open market values, assessed in accordance with the Standards of Professional Appraisal Practice of the Appraisal Institute. All three valuers have recent experience in the location and category of the property being valued. The aggregate professional valuations included in the above table have been reduced by an amount of £3.5 million (2013 – £3.1 million), relating to lease incentives included in Trade and other receivables. Page 47 163284 Daejan Holdings Plc R&A 2014 Pt4_163284 Daejan Holdings Plc R&A 2014 Pt4 23/07/2014 13:16 Page 48 Daejan Holdings PLC Annual Report & Accounts 2014 Notes to the Consolidated Financial Statements (continued) As explained in Note 1(u)(i), property valuations are inherently subjective, depending on many factors, including the individual nature of each property, its location and expected future net rental values, market yields and comparable market transactions. These fair value measurements are classified as Level 3 as defined by IFRS 13 Fair Value Measurement. There have been no transfers between the levels of fair value hierarchy during the year. Valuation techniques and key inputs The following table sets out the valuation techniques and key inputs for the main categories of property within the Group’s portfolio, together with an indication of the inter-relationships between the key inputs and the fair value measurement. Location and Fair value at 31 March 2014 Significant unobservable inputs Inter- relationship between inputs and fair value Greater London £458.2 million UK – South £61.3 million Sales values (psf): Range £250 – £1,700 Sales values (psf): Range £115 – £430 Estimated fair value would increase if: – sales values increased UK – North £4.5 million Sales values (psf): Range £61 – £116 Category Valuation technique UK Residential Residential apartments and houses Sales valuation approach, derived from recent comparable transactions in the market, adjusted by applying discounts to reflect status of occupation and condition. The largest discounts were applied to those properties subject to registered tenancies, reflecting the relative difference in security of tenure, whilst the smallest discounts were applied to those properties subject to assured shorthold tenancies. Total UK residential £524.0 million UK Commercial Office units The income capitalisation method, requiring the application of an appropriate market based yield to net operating income. Adjustments are made to allow for voids when less than five years are left under the current tenancy and to reflect market rent at the point of lease expiry or rent review. Greater London £240.5 million UK – South £41.2 million Equivalent yield: Average 6.6; range 5.0 – 12.3 Estimated rental value (psf): Average 36.8; range £10 - £65 Equivalent yield: Average 10.6; range 5.1 – 20.5 Estimated rental value (psf): Average 10.2; range £5 - £30 Estimated fair value would increase if: – Net operating income increasing – Estimated yield decreased Page 48 163284 Daejan Holdings Plc R&A 2014 Pt4_163284 Daejan Holdings Plc R&A 2014 Pt4 23/07/2014 13:16 Page 49 Daejan Holdings PLC Annual Report & Accounts 2014 Category Valuation technique UK Commercial (continued) Office units (continued) The income capitalisation method, requiring the application of an appropriate market based yield to net operating income. Adjustments are made to allow for voids when less than five years are left under the current tenancy and to reflect market rent at the point of lease expiry or rent review. Retail units Industrial units Leisure units Inter- relationship between inputs and fair value Estimated fair value would increase if: – Net operating income increasing – Estimated yield decreased Location and Fair value at 31 March 2014 UK – North £11.5 million Greater London £117.0 million UK – South £149.3 million UK – North £24.6 million All UK £32.1 million All UK £44.2 million Significant unobservable inputs Equivalent yield: Average 11.3; range 8.2 – 14.2 Estimated rental value (psf): Average 7.3; range £4 - £13 Equivalent yield: Average 8.0; range 4.5 – 12.6 Estimated rental value (psf): Average 21.0; range £5 - £208 Equivalent yield: Average 7.6; range 4.9 – 20.3 Estimated rental value (psf): Average 15.1; range £3 - £140 Equivalent yield: Average 9.6; range 5.5 – 12.8 Estimated rental value (psf): Average 8.7; range £3 - £23 Equivalent yield: Average 9.4; range 6.8 – 23.8 Estimated rental value (psf): Average 3.7; range £2 - £20 Equivalent yield: Average 8.5; range 6.0 – 11.2 Estimated rental value (psf): Average 14.0; range £4 - £24 Other Total UK commercial All UK £34.0 million £694.4 million Page 49 163284 Daejan Holdings Plc R&A 2014 Pt4_163284 Daejan Holdings Plc R&A 2014 Pt4 23/07/2014 13:16 Page 50 Daejan Holdings PLC Annual Report & Accounts 2014 Notes to the Consolidated Financial Statements (continued) Category Valuation technique USA Residential Residential apartments The application of a capitalisation rate, based on recent arm’s length transactions, to an assessment of stabilised net income, cross-checked to recent comparative sales evidence Unsold co-operative residential apartments The application of a discount rate, based on recent arm’s length transactions, to an assessment of net income over the period to full reversion, cross-checked to recent comparative sales evidence Location and Fair value at 31 March 2014 New York City £106.9 million Florida £61.5 million Other States £71.8 million New York City £49.3 million Significant unobservable inputs Capitalisation rates: Average 5.0; Range 3.5 – 6.0 Estimated rental value (psf): Average £7; range £6 – £20 Capitalisation rates: 6.3 throughout Estimated rental value(psf): Average £7; range £5 – £7 Capitalisation rates: Average 5.9; Range 5.3 – 6.5 Estimated rental value (psf): Average £9; range £8 – £10 Discount rates: Average 10.5%; Range 7.0 – 12.0% Estimated rental value (per room): Average £6,500; range £2,600 – £9,300 Estimated sales value (per room): Average £46,300; range £24,000 – £168,300 Inter- relationship between inputs and fair value Estimated fair value would increase if: – capitalisation rates decreased – estimated rental value increased Estimated fair value would increase if: – discount rates decreased – estimated rental values increased – estimated sales values increased Total USA residential £289.5 million Page 50 163284 Daejan Holdings Plc R&A 2014 Pt4_163284 Daejan Holdings Plc R&A 2014 Pt4 23/07/2014 13:16 Page 51 Daejan Holdings PLC Annual Report & Accounts 2014 Category Valuation technique USA Commercial Commercial offices and retail units The application of a capitalisation rate, based on recent arm’s length transactions, to an assessment of stabilised net income Location and Fair value at 31 March 2014 Significant unobservable inputs Massachusetts, Philadelphia and New Jersey £42.3 million Capitalisation rates: Average 5.9; Range 5.5 – 7.5 Estimated rental value (psf): Average £16; range £5 – £19 Inter- relationship between inputs and fair value Estimated fair value would increase if: – capitalisation rates decreased – estimated rental values increased Total USA commercial £42.3 million There are inter-relationships between the groups of inputs as they are determined by market conditions. Movements in more than one input having the effect of increasing fair value would give rise to a magnifying effect on the valuation. Conversely, movements of inputs having opposite effects on fair value would have a mitigating effect on the valuation. The present value of future minimum lease payments in relation to the leasehold investment properties is not material. Contractual obligations not yet invoiced or paid, for the purchase, construction, development or enhancement of investment properties, amounted to £3.3 million at 31 March 2014 (2013 – £13.2 million). 10. Deferred Tax Assets and Liabilities 2014 2013 Assets £000 Liabilities £000 Net £000 Assets Liabilities £000 £000 Net £000 Investment property Accelerated tax depreciation Financial instruments – – 5,433 (168,155) (168,155) (14,116) (14,116) 5,433 – – (161,848) (12,169) – – 8,741 (161,848) (12,169) 8,741 5,433 (182,271) (176,838) 8,741 (174,017) (165,276) The movement in deferred tax is as follows: Accelerated tax Financial Investment depreci- property £000 ation £000 instru- ments £000 Total 2014 £000 Total 2013 £000 Balance at 1 April Recognised in income Foreign exchange movements (161,848) (12,169) (2,707) 760 (11,348) 5,041 8,741 (165,276) (2,776) (16,831) 5,269 (532) (144,344) (18,652) (2,280) Balance at 31 March (168,155) (14,116) 5,433 (176,838) (165,276) Page 51 163284 Daejan Holdings Plc R&A 2014 Pt4_163284 Daejan Holdings Plc R&A 2014 Pt4 23/07/2014 13:16 Page 52 Daejan Holdings PLC Annual Report & Accounts 2014 Notes to the Consolidated Financial Statements (continued) 11. Trade and Other Receivables Rent and service charges Other debtors and prepayments Mortgages granted repayable within one year 2014 £000 21,865 24,482 486 2013 £000 20,717 21,839 594 46,833 43,150 The ageing of rent and service charge receivables was as follows: Not past due Past due by less than one month Past due by one to three months Past due by three to six months Past due by more than six months 2014 Impair- ment £000 Net £000 Gross £000 – 11,006 6,652 1,588 935 1,684 (508) (633) (886) (5,353) 10,803 5,663 2,200 1,267 9,562 2013 Impair- ment £000 – (222) (705) (585) (7,266) Net £000 10,803 5,441 1,495 682 2,296 Gross £000 11,006 7,160 2,221 1,821 7,037 29,245 (7,380) 21,865 29,495 (8,778) 20,717 The movement in the allowance for impairment in respect of trade and other receivables during the year was as follows: Balance at 1 April Amounts written off Movement in allowance for impairment Balance at 31 March 12. Cash and Cash Equivalents Bank balances Short term deposits 2014 £000 2013 £000 8,778 (1,426) 28 11,069 (3,042) 751 7,380 8,778 2014 £000 2013 £000 36,685 22,464 31,159 32,354 Cash and cash equivalents in the balance sheet and cash flow statement 59,149 63,513 Included within bank balances are tenants’ deposits of £2,943,000 (2013 – £2,624,000) in the UK and £1,767,000 (2013 – £1,884,000) in the USA, which cannot be used in the ordinary course of business. Page 52 163284 Daejan Holdings Plc R&A 2014 Pt4_163284 Daejan Holdings Plc R&A 2014 Pt4 23/07/2014 13:16 Page 53 Daejan Holdings PLC Annual Report & Accounts 2014 13. Share Capital Allotted, called up and fully paid: Ordinary shares of 25 pence per share Number 2014 £000 2013 £000 16,295,357 4,074 4,074 The Company has one class of share, which carries no special rights or rights to fixed income. There are no restrictions on the transfer of these shares or restrictions on voting rights. 14. Trade and Other Payables Rent and service charges charged in advance Other creditors and accruals Derivative financial instruments 15. Loans and Borrowings Non-current liabilities Mortgages Bank loans Current liabilities Mortgages Bank loans Total loans and borrowings Mortgages Bank loans 2014 £000 18,141 23,069 4,095 2013 £000 16,240 19,134 6,470 45,305 41,844 2014 £000 2013 £000 205,102 78,767 173,800 95,143 283,869 268,943 6,335 1,375 16,881 1,375 7,710 18,256 211,437 80,142 190,681 96,518 291,579 287,199 All mortgages and bank loans are secured on specific investment properties owned by subsidiary undertakings. Page 53 163284 Daejan Holdings Plc R&A 2014 Pt4_163284 Daejan Holdings Plc R&A 2014 Pt4 23/07/2014 13:16 Page 54 Daejan Holdings PLC Annual Report & Accounts 2014 Notes to the Consolidated Financial Statements (continued) The maturity profile of the Group’s loans and borrowings was as follows: Due within one year Due within one to two years Due within two to five years Due after more than five years 2014 Bank loans £000 Mortgages £000 1,375 27,986 50,781 – 6,335 18,257 82,655 104,190 Total £000 7,710 46,243 133,436 104,190 2013 Total £000 18,256 18,365 128,342 122,236 80,142 211,437 291,579 287,199 The risk profile of the Group’s loans and borrowings, after taking account of interest rate swaps, was as follows: 2014 Fixed Floating £000 £000 Total £000 Fixed £000 2013 Floating £000 Total £000 Sterling US Dollar 63,331 173,106 55,142 118,473 – 173,106 51,270 164,412 71,517 – 122,787 164,412 236,437 55,142 291,579 215,682 71,517 287,199 Floating rate bank loans bear rates based on LIBOR. The Group’s interest rate swaps are set out in Note 16. The interest rate profile of the Group’s fixed rate mortgages was as follows: Per cent. 3.0-3.5 3.5-4.0 4.0-4.5 4.5-5.0 5.0-5.5 5.5-6.0 6.0-6.5 6.5-7.0 2014 £000 2013 £000 62,191 32,508 22,217 27,881 17,472 30,203 18,965 – 28,984 34,461 25,663 32,312 6,797 22,454 27,908 12,102 211,437 190,681 The weighted average rate and the weighted average term of the Group’s fixed rate loans and borrowings (after taking account of interest rate swaps) were as follows: Sterling US Dollar 2014 Per cent. 2013 Per cent. 5.97 4.19 6.15 4.57 2014 Years 12.5 6.4 2013 Years 11.6 5.7 Page 54 163284 Daejan Holdings Plc R&A 2014 Pt4_163284 Daejan Holdings Plc R&A 2014 Pt4 23/07/2014 13:16 Page 55 Daejan Holdings PLC Annual Report & Accounts 2014 16. Financial Assets and Liabilities The Group’s financial instruments are analysed into category as follows: 2014 2013 Carrying amount £000 2,033 2,033 Financing income/ (expense) £000 (14) (14) Carrying amount £000 236 236 Financing income/ (expense) £000 8 8 Current asset investments Current assets at fair value Derivative financial instruments Fixed rate loans and borrowings (4,095) (211,437) 2,375 160 (6,470) (190,681) (321) (8,658) Current and non-current liabilities at fair value (215,532) 2,535 (197,151) (8,979) Trade and other receivables Cash and cash equivalents Current assets at amortised cost 46,833 59,149 105,982 480 225 705 43,150 63,513 106,663 243 497 740 Trade and other payables Floating rate loans and borrowings (41,210) (80,142) (14) (2,538) (35,374) (96,518) (31) (2,445) Current and non-current liabilities at amortised cost (121,352) (2,552) (131,892) (2,476) Total financial instruments (228,869) 674 (222,144) (10,707) Fair values of financial instruments The Group’s financial instruments are either recorded at fair value or their fair values are not materially different from their carrying amounts. At both the current and preceding year end there were no non-recurring fair value measurements. The Group does not hedge account and all its mortgages and interest rate swaps are initially recognised, and subsequently recorded, at fair value, with any movement being recorded in the consolidated income statement. The fair values of all these financial instruments are determined by reference to observable inputs that are classified as Level 2 in the fair value hierarchy set out in IFRS 13 Fair Value Measurement. Fair values have been determined by discounting expected future cash flows using market interest rates and yield curves over the remaining term of the instrument, as adjusted to reflect the credit risk attributable to the Group and, where relevant, its counterparty. Financial instrument risk management In common with all businesses, the Group is exposed to the following types of risk which arise from its use of financial instruments: Credit risk Liquidity risk Market risk Page 55 163284 Daejan Holdings Plc R&A 2014 Pt4_163284 Daejan Holdings Plc R&A 2014 Pt4 23/07/2014 13:16 Page 56 Daejan Holdings PLC Annual Report & Accounts 2014 Notes to the Consolidated Financial Statements (continued) This note presents information about the nature of the Group’s exposure to such risks, its objectives, policies and processes for measuring and managing risk and the Group’s management of capital. Reference to disclosures given elsewhere in the financial statements is included as appropriate. The Board has overall responsibility for determining the Group’s risk management objectives and policies and, whilst retaining ultimate responsibility for them, has delegated to the finance function the authority for designing and operating processes that ensure the effective implementation of those objectives. The overall objectives of the Board are to set policies that seek to reduce risk as far as possible without unduly affecting the Group’s competitiveness and flexibility. Credit risk The Group’s exposure to credit risk arises from the potential financial loss if a tenant or counterparty to a financial instrument fails to meet its contractual obligations and arises principally from the Group’s trade receivables from tenants. Trade receivables The majority of the Group’s rental income is demanded quarterly in advance and demands are sent out prior to the due date. Management monitors arrears continually and prompt action is taken to address potential defaults as appropriate. The credit worthiness of each tenant is assessed prior to the agreement of the lease. Collateral is generally required by the Group to support lease obligations. In many cases this takes the form of a tenant security deposit but also includes parent company guarantees or bank or other guarantees where appropriate. Provision is made on a sliding scale against any rental arrears where recovery is in doubt or where solicitors have been instructed to recover the debt, with full provision for impairment usually being made where a tenant is in arrears for more than a year. Details of the Group’s trade receivables and the extent of impairment provisions against them are set out in Note 11. Due to the large number of tenants across various sectors and geographical locations, the Board does not consider there to be a significant concentration of credit risk. Cash and derivative financial instruments The credit rating of counterparties to financial instruments is kept under review. The Group’s interest rate swaps are currently out-of-the-money; consequently, counterparty risk on swaps does not represent a major risk at the current time. The counterparty risk on cash and short-term deposits is managed by limiting the aggregate exposure to any institution by reference to their credit rating. Such balances are generally placed with major financial institutions where credit risk is not considered significant. Maximum exposure The aggregate carrying amounts of the Group’s financial assets, which are stated net of impairment provisions, represents the Group’s maximum exposure to credit risk, before taking into account the value of the tenant security deposits held and other collateral. Liquidity risk Liquidity risk is the risk that the Group will encounter difficulty in meeting its financial obligations as they fall due and arises from the Group’s management of its working capital and the finance charges and amortisation of its loans and borrowings. Page 56 163284 Daejan Holdings Plc R&A 2014 Pt4_163284 Daejan Holdings Plc R&A 2014 Pt4 23/07/2014 13:16 Page 57 Daejan Holdings PLC Annual Report & Accounts 2014 The Group’s policy is to seek to maintain cash balances to meet all short and medium term requirements. The Group has a low level of gearing relative to the property investment sector as a whole and has long standing relationships with many leading banks and financial institutions from which the Board expect to be able to raise further funds if required. At 31 March 2014, gearing was 17.6 per cent. (2013 – 18.9 per cent.) on the basis of gross debt to gross assets. Cash and short-term deposits at 31 March 2014, were £59.1 million (2013 – £63.5 million) and £7.7 million of loans and borrowings were repayable within one year (2013 – £18.3 million). In addition, at the same date, the Group had undrawn committed facilities of £35.0 million (2013 – £20.0 million), which expire in 2018. The maturity analysis of the undiscounted cash flows arising from the Group’s financial liabilities at 31 March 2014 was as follows: 2014 Aggregate Due Due Due Due after undiscounted within within within more than cash flows £000 80,142 199,757 69,789 5,926 41,210 one year £000 1,375 3,811 9,700 1,278 41,210 1-2 years £000 27,986 15,762 9,427 1,278 – 5 years 2-5 years £000 £000 50,781 – 79,066 101,118 30,824 19,838 – 3,370 – – Carrying amount £000 80,142 211,437 – 4,095 41,210 336,884 396,824 57,374 54,453 153,055 131,942 Aggregate Due Due Due Due after Carrying undiscounted within within within more than 2013 amount £000 96,518 190,681 - 6,470 35,374 329,043 cash flows £000 96,518 171,407 55,848 7,222 35,374 one year £000 1,375 13,191 9,077 1,281 35,374 1-2 years £000 1,375 13,887 8,205 1,281 - 2-5 years £000 66,986 54,905 18,478 3,843 - 5 years £000 26,782 89,424 20,088 817 - 366,369 60,298 24,748 144,212 137,111 Bank loans Mortgages Interest Interest rate swaps Trade and other payables Bank loans Mortgages Interest Interest rate swaps Trade and other payables Market risk Market risk arises mainly from the impact that changes in interest rates might have on the cost of Group borrowing and the impact that changes in the US dollar/sterling exchange rate might have on the Group’s USA net assets. Interest rates The Group seeks to reduce the interest rate risk by fixing rates on a majority of its loans and borrowings, whilst maintaining some loans at floating rates in order to retain flexibility in relation to short term interest rates. Interest rates are fixed either through the use of fixed rate mortgage finance or through interest rate swaps. The Group does not speculate in treasury products but uses these only to limit exposure to potential interest rate fluctuations. The interest rate profile of the Group’s loans and borrowings is set out in Note 15. Page 57 163284 Daejan Holdings Plc R&A 2014 Pt4_163284 Daejan Holdings Plc R&A 2014 Pt4 23/07/2014 13:16 Page 58 Daejan Holdings PLC Annual Report & Accounts 2014 Notes to the Consolidated Financial Statements (continued) It is estimated that a general increase of one percentage point in interest rates would decrease the Group’s profit before taxation by approximately £0.6 million per annum, on the basis of the floating rate debt outstanding at 31 March 2014, after taking account of the interest swaps in place. There also exists a risk to the income statement arising from the recognition and re-measurement of fixed rate debt and interest rate swaps at fair value. It is estimated that a general increase of one percentage point in interest rates would give rise to a reduction in fair value of fixed rate debt and interest rate swaps outstanding at 31 March 2014 of £11.3 million, together with a corresponding increase in the Group’s profit before taxation. Interest rate swaps The interest rate swaps held by the Group at the year end were as follows: Contracted rate (excluding margin) Notional principal Fair value 2014 2013 2014 Per cent. 5.6 Per cent. 5.6 £000 25,000 2013 £000 25,000 2014 £000 4,095 2013 £000 6,470 Maturing within two to five years Foreign exchange rates The Group seeks to reduce its exposure to foreign currency risk in relation to its USA net assets by funding its USA investment property with US dollar denominated loans and borrowings. As the Group’s investment in USA assets are held for the long term and funds are not usually returned to the UK, the Group’s policy is not to hedge its residual exposure. Management monitors exchange rates on a regular basis and elects to transfer funds only when the rate is favourable to do so. It is estimated that a 10 per cent. depreciation of the US dollar against sterling would cause a decrease in the sterling value of the Group’s USA net assets of £11.1 million. Capital management The capital structure of the Group consists of equity attributable to equity holders of the parent together with net debt. This is kept under constant review to ensure the Group has sufficient capital to fund its operations and that the Group’s strategy of low gearing is maintained. The Group seeks to maintain a balance between longer-term finance appropriate to fund its long-term investment property holding strategy and cost effectiveness, given availability of debt in the market. Equity comprises issued share capital, reserves and retained earnings as set out in the consolidated statement of changes in equity. Net debt comprises a mix of fixed rate mortgages and shorter-term bank loans as set out in Note 15 and cash and short term deposits as set out in Note 12. All loans and borrowings are secured against investment property and the bank loans are drawn against committed facilities. 17. Related Party Transactions Day-to-day management of the Group’s properties and its operations in the UK is mainly carried out by Highdorn Co. Limited and by Freshwater Property Management Limited. Mr B S E Freshwater and Mr S I Freshwater are Directors of both companies. They have no beneficial interest in the share capital of Highdorn Co. Limited. Mr B S E Freshwater, Mr S I Freshwater and Mr D Davis are Directors of the parent company of Freshwater Property Management Limited but have no beneficial interest in either company. Mr R E Freshwater has a beneficial interest in a trust holding interests in shares in Highdorn Co. Limited. Page 58 163284 Daejan Holdings Plc R&A 2014 Pt4_163284 Daejan Holdings Plc R&A 2014 Pt4 23/07/2014 13:16 Page 59 Daejan Holdings PLC Annual Report & Accounts 2014 In their capacity as property managing agents, Highdorn Co. Limited and Freshwater Property Management Limited collect rents and incur direct property expenses on behalf of the Group. At 31 March 2014, the aggregate net amounts due to the Group from Highdorn Co. Limited and Freshwater Property Management Limited in relation to such agency receipts and payments was £5.1 million (2013 – £3.8 million). These amounts are not secured and are payable on demand. No guarantees have been given or received and the amounts are settled in cash. The amounts paid and payable by the Group for the provision of property and other management services by Highdorn Co. Limited and Freshwater Property Management Limited, not included above, were as follows: Balance due to related party managing agents at 1 April Charged during the year Paid during the year Balance due to related party managing agents at 31 March 2014 £000 2013 £000 845 3,629 (3,523) 674 3,925 (3,754) 951 845 The Directors’ interests in the Company and the principal shareholders are described on pages 17 and 18. The Board considers that the Directors are the key management personnel of the Group and their remuneration is disclosed on page 21. 18. Contingent Liabilities The Group is from time to time party to legal actions arising in the ordinary course of business. The Directors are not aware of any current actions which could have a material adverse effect on the financial position of the Group. 19. Operating Lease Agreements The Group earns rental income by leasing its investment properties to tenants under operating leases which vary in terms and provisions between type of property and type of tenure. Leases providing for contingent rents are rare within the Group’s property portfolio and no amounts for contingent rents are included in rental income for the year (2013 – £Nil). At the balance sheet date, future minimum lease payments receivable by the Group under operating leases were as follows: Due within one year Due within one to two years Due within two to five years Due after more than five years 2014 £000 2013 £000 67,206 40,172 78,755 205,734 67,545 40,801 82,280 218,710 391,867 409,336 Many of the Group’s residential properties are let under assured shorthold tenancies which typically are for initial terms of 12 months or less, whereafter they are cancellable at short notice. The Group’s experience is that a significant proportion of such tenancies are held over after the expiry of their initial term. Page 59 163284 Daejan Holdings Plc R&A 2014 Pt4_163284 Daejan Holdings Plc R&A 2014 Pt4 23/07/2014 13:16 Page 60 Daejan Holdings PLC Annual Report & Accounts 2014 Notes to the Consolidated Financial Statements (continued) 20. Principal Subsidiary Undertakings Except where indicated the following are indirect subsidiaries of the Company, where the Company’s direct and indirect interest is in ordinary shares. All are wholly owned property investment companies and are included in the consolidated financial statements. Incorporated in Great Britain and registered in England and Wales Astral Estates (London) Limited Bampton Holdings Limited Bampton (B&B) Limited Bampton (Redbridge) Limited Brickfield Properties Limited City and Country Properties Limited City and Country Properties (Birmingham) Limited City and Country Properties (Camberley) Limited City and Country Properties (Midlands) Limited Coinsun Limited Daejan (Brighton) Limited Daejan (Cambridge) Limited Daejan (Cardiff) Limited Daejan (Care Homes) Limited* Daejan Commercial Properties Limited Daejan (Dartford) Limited Daejan Developments Limited Daejan (Durham) Limited Daejan Enterprises Limited Daejan Estates Limited Daejan (FH 1998) Limited Daejan (FHNV 1998) Limited Daejan (High Wycombe) Limited Daejan Investments Limited Daejan Investments (Grove Hall) Limited Daejan Investments (Harrow) Limited Daejan Investments (Park) Limited Daejan (Kingston) Limited Daejan (Lauderdale) Limited Daejan (NUV) Limited Daejan Properties Limited Daejan (Reading) Limited Daejan Retail Properties Limited Daejan (Taunton) Limited Daejan Traders Limited* Daejan (UK) Limited* Daejan (US) Limited* Daejan (Warwick) Limited Daejan (Watford) Limited Daejan (Worcester) Limited Hampstead Way Investments Limited Inputstock Limited Inputstripe Limited Lawnstamp Limited Limebridge Co. Limited Pegasus Investment Company Limited Rosebel Holdings Limited Seaglen Investments Limited St. Leonards Properties Limited The Bampton Property Group Limited The Cromlech Property Co. Limited The Halliard Property Co. Limited Incorporated in the USA (see note) Daejan Holdings (US) Inc. Daejan (NY) Limited Daejan Enterprises Inc. * Directly owned. Note: Non-controlling interests arise on investments in a US subsidiary. A complete list of subsidiaries will be annexed to the next annual return delivered to the Registrar of Companies. Page 60 163284 Daejan Holdings Plc R&A 2014 Pt5_163284 Daejan Holdings Plc R&A 2014 Pt5 23/07/2014 13:15 Page 61 Daejan Holdings PLC Annual Report & Accounts 2014 Company Balance Sheet as at 31 March 2014 Fixed assets Investment in subsidiary undertakings Current assets Debtors Cash at bank Creditors: amounts falling due within one year Net current liabilities Total assets less current liabilities Creditors: amounts falling due after more than one year Net assets Capital and reserves Called up share capital Share premium account Revaluation reserve Other reserves Profit and loss account Equity shareholders’ funds Notes £000 2014 £000 £000 2013 £000 3 1,395,788 1,244,000 206 18,990 19,196 452 25,789 26,241 4 (237,809) (221,840) (218,613) (195,599) 1,177,175 1,048,401 5 6 7 7 7 7 8 (66,707) 1,110,468 4,074 555 78,187 893 1,026,759 1,110,468 (63,531) 984,870 4,074 555 – 893 979,348 984,870 The financial statements on pages 61 to 64 were approved by the Board of Directors on 22 July 2014 and were signed on its behalf by: B.S.E. Freshwater Director D. Davis Director Page 61 163284 Daejan Holdings Plc R&A 2014 Pt5_163284 Daejan Holdings Plc R&A 2014 Pt5 23/07/2014 13:15 Page 62 Daejan Holdings PLC Annual Report & Accounts 2014 Notes to the Company Financial Statements 1. Accounting Policies The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the Company’s financial statements. (a) Basis of preparation The financial statements have been prepared under the historical cost convention, modified to include the revaluation of investments in subsidiaries, and in accordance with applicable UK accounting standards and applicable law. As permitted by section 408 of the Companies Act 2006, a separate profit and loss account dealing with the results of the Company has not been presented. The Company’s profit for the year after taxation is £71,412,000 (2013 – £132,982,000). (b) Investments in subsidiary undertakings Investments in subsidiary undertakings comprise shares in, and loans to, those undertakings and are stated at fair value in order better to reflect the underlying value of those assets. Fair value has been assessed by the Directors having regard to the underlying net assets of the subsidiary undertakings and the fair values of the investment properties held by those undertakings where such fair value is not included in the net assets. (c) Foreign currencies Transactions in foreign currencies are recorded using the rate of exchange ruling at the date of the transaction and gains and losses on translation are included in the profit and loss account. 2. Profit on Ordinary Activities before Taxation The Company has no staff other than its Directors and their remuneration is set out on page 21 of the Group accounts. The parent company audit fee is disclosed on page 45 of the Group accounts. 3. Investments in Subsidiary Undertakings At 1 April 2013 Loans Revaluation Effect of foreign exchange differences Shares at valuation £000 930,810 – 149,209 (9,899) Loans £000 313,190 12,478 – – Total £000 1,244,000 12,478 149,209 (9,899) At 31 March 2014 1,070,120 325,668 1,395,788 The historical cost of shares in subsidiary undertakings is £992.0 million (2013 – £992.0 million). Page 62 163284 Daejan Holdings Plc R&A 2014 Pt5_163284 Daejan Holdings Plc R&A 2014 Pt5 23/07/2014 13:15 Page 63 Daejan Holdings PLC Annual Report & Accounts 2014 Notes to the Company Financial Statements (continued) 4. Creditors: Amounts falling due within one year Bank loans and overdrafts Amounts owed to subsidiary undertakings Other creditors and accruals Taxation 2014 £000 1,569 229,636 3,870 2,734 2013 £000 1,375 207,678 3,682 9,105 237,809 221,840 5. Creditors: Amounts falling due after more than one year Secured bank loans 6. Share Capital 2014 £000 2013 £000 66,607 63,531 Allotted, called up and fully paid: Ordinary shares of 25 pence per share 16,295,357 4,074 4,074 Number 2014 £000 2013 £000 7. Reserves Share premium account: At 1 April 2013 and 31 March 2014 Other non-distributable reserves: At 1 April 2013 and 31 March 2014 Revaluation reserve: At 1 April 2013 Revaluation surplus At 31 March 2014 Profit and loss account: At 1 April 2013 Foreign exchange movements Profit after tax for the year Dividend paid in the year At 31 March 2014 £000 555 893 – 78,187 78,187 979,348 (9,498) 71,412 (14,503) 1,026,759 Some years ago, the Company sold its shareholdings in certain subsidiary undertakings to intermediate holding companies. As a result of that transaction, the parent company transferred £645.1 million of revaluation gains relating to these investments to the profit and loss reserve. As the Page 63 163284 Daejan Holdings Plc R&A 2014 Pt5_163284 Daejan Holdings Plc R&A 2014 Pt5 23/07/2014 13:15 Page 64 Daejan Holdings PLC Annual Report & Accounts 2014 transfer of these revaluation gains arose as a result of a sale of assets within the Group, it is unlikely that the Company will seek to treat the profit and loss reserve thus arising as distributable. Under the articles of association of certain Group investment undertakings, realised capital surpluses are not available for distribution as dividends. 8. Reconciliation of Movements in Shareholders’ Funds Profit after tax for the year Revaluation surplus Foreign exchange movements Dividend paid in the year Net movement in shareholders’ funds Shareholders’ funds at 1 April 2014 £000 71,412 78,187 (9,498) (14,503) 125,598 984,870 2013 £000 132,982 – 2,239 (12,384) 122,837 862,033 Shareholders’ funds at 31 March 1,110,468 984,870 Page 64 163284 Daejan Holdings Plc R&A 2014 Pt5_163284 Daejan Holdings Plc R&A 2014 Pt5 23/07/2014 13:15 Page 65 Daejan Holdings PLC Annual Report & Accounts 2014 Group Five-Year Record 2010 £000 2011 £000 2012 £000 2013 £000 2014 £000 Total rental and related income Property operating expenses 99,913 (55,983) 102,692 (60,743) 107,094 (68,036) 111,037 (67,017) 112,202 (68,789) Net rental and related income Profit on disposal of investment properties Net valuation gains on investment 43,930 5,073 41,949 9,257 39,058 16,254 44,020 6,612 43,413 11,320 properties Administrative expenses Net operating profit before financing costs Net financing (expense)/income Profit before taxation Income tax Profit for the year Earnings per share Total assets Equity shareholders’ funds Equity shareholders’ funds per share 24,997 (10,013) 52,024 (10,558) 15,683 (11,135) 82,694 (10,936) 119,648 (10,550) 63,987 (2,858) 92,672 (8,309) 59,860 (18,011) 122,390 (10,707) 163,831 674 61,129 (15,474) 84,363 (16,530) 41,849 (8,819) 111,683 (21,923) 164,505 (14,337) 45,655 67,833 33,030 89,760 150,168 £2.80 £4.16 £2.02 £9.19 1,229,715 1,345,941 1,364,905 1,523,184 1,660,166 984,870 1,110,468 903,806 £55.46 £68.15 784,976 £48.17 838,100 £51.43 £60.44 £5.50 Page 65 163284 Daejan Holdings Plc R&A 2014 Pt5_163284 Daejan Holdings Plc R&A 2014 Pt5 23/07/2014 13:15 Page 66 Daejan Holdings PLC Annual Report & Accounts 2014 Directors and Advisers Directors B S E Freshwater Auditor KPMG LLP (Chairman and Managing Director) 15 Canada Square D Davis (non-executive) London E14 5GL S I Freshwater A M Freshwater (non-executive) Consulting Accountants R E Freshwater (non-executive) Cohen Arnold Secretary M R M Jenner F.C.I.S. New Burlington House, 1075 Finchley Road, London NW11 0PJ Registered & Head Office Principal Bankers Freshwater House, Lloyds Banking Group plc 158-162 Shaftesbury Avenue, Barclays Bank PLC The Royal Bank of Scotland Group plc Stockbrokers Nplus1 Brewin LLP 7 Drumsheugh Gardens, Edinburgh EH3 7QH London WC2H 8HR Registered in England No. 305105 Registrars Equiniti Aspect House Spencer Road, Lancing, West Sussex BN99 6DA Page 66 163284 Daejan Holdings Plc R&A 2014 Pt5_163284 Daejan Holdings Plc R&A 2014 Pt5 23/07/2014 13:15 Page 67 Daejan Holdings PLC Annual Report & Accounts 2014 Notice of Meeting Notice is hereby given that the Seventy Ninth Annual General Meeting of Daejan Holdings PLC will be held at The Grand Saloon, Theatre Royal Drury Lane, Catherine Street, London WC2B 5JF, on 11 September at 2.00 p.m. for the following purposes: Ordinary Business To consider and if thought fit, pass the following Ordinary Resolutions: 1. 2. 3. 4. 5. 6. 7. 8. 9. To receive the Financial Statements for the year ended 31 March 2014 together with the Reports of the Directors and the Auditors. (Resolution 1) To approve the Directors’ Remuneration Policy. (Resolution 2) To approve the Remuneration Report for the year ended 31 March 2014. (Resolution 3) To declare a final dividend. (Resolution 4) To re-elect B S E Freshwater as a Director. (Resolution 5) To re-elect S I Freshwater as a Director. (Resolution 6) To re-elect D Davis as a Director. (Resolution 7) To re-elect R E Freshwater as a Director. (Resolution 8) To re-elect A M Freshwater as a Director. (Resolution 9) 10. To appoint KPMG LLP as Auditor, and to authorise the Directors to agree its remuneration. (Resolution 10) By order of the Board M R M Jenner Secretary 22 July 2014 1. Members are entitled to appoint a proxy to exercise all or any of their rights to attend and to speak and vote on their behalf at the meeting and at any adjournment of it. A member may appoint more than one proxy in relation to the meeting provided that each proxy is appointed to exercise the rights attached to a different share or shares held by that member. If a proxy appointment is submitted without indicating how the proxy should vote on any resolution, the proxy will exercise his/her discretion as to whether and, if so, how he/she votes. 2. 3. 4. 5. A proxy need not be a member of the Company. A proxy form which may be used to make such appointment and give proxy instructions accompanies this notice. If you do not have a proxy form and believe that you should have one, or if you require additional forms, please contact the Company’s Registrar, Equiniti Limited, on 0871 384 2203 (international callers: +44 121 415 7047). Calls to this number cost 8p per minute plus network extras. Lines open 8.30 a.m. to 5.30 p.m., Monday to Friday. Members may also appoint a proxy through the CREST electronic proxy appointment service as described in note 13 below. To be valid any proxy form or other instrument appointing a proxy must be received by post or (during normal business hours only) by hand to Equiniti Limited, Aspect House, Spencer Road, Lancing, West Sussex BN99 6DA no later than 2.00 p.m. on 9 September 2014, together with, if appropriate, the power of attorney or other authority (if any) under which it is signed or a duly certified copy of that power or authority. The return of a completed proxy form, other such instrument or any CREST Proxy Instruction (as described in note 13(a) below) will not prevent a member attending the meeting and voting in person if he/she wishes to do so. A vote withheld option is provided on the form of proxy to enable you to instruct your proxy not to vote on any particular resolution. However, it should be noted that a vote withheld in this way is not a ‘vote’ in law and will not be counted in the calculation of the proportion of the votes ‘For’ and ‘Against’ a resolution. Page 67 163284 Daejan Holdings Plc R&A 2014 Pt5_163284 Daejan Holdings Plc R&A 2014 Pt5 23/07/2014 13:15 Page 68 Daejan Holdings PLC Annual Report & Accounts 2014 Notice of Meeting (continued) 6. 7. 8. 9. Any person to whom this notice is sent who is a person nominated under section 146 of the Companies Act 2006 to enjoy information rights (a “Nominated Person”) may, under an agreement between him/her and the shareholder by whom he/she was nominated, have a right to be appointed (or to have someone else appointed) as a proxy for the Annual General Meeting. If a Nominated Person has no such proxy appointment right or does not wish to exercise it, he/she may, under any such agreement, have a right to give instructions to the shareholder as to the exercise of voting rights. The statement of the rights of shareholders in relation to the appointment of proxies in paragraphs 1, 2 and 3 above does not apply to Nominated Persons. The rights described in these paragraphs can only be exercised by shareholders of the Company. To be entitled to attend and vote at the meeting (and for the purpose of the determination by the Company of the votes they may cast), members must be registered in the register of members of the Company at 6:00 p.m. on 9 September 2014 (or, in the event of any adjournment, 6.00 p.m. on the date which is two days before the time of the adjourned meeting). Changes to the register of members after the relevant deadline shall be disregarded in determining the rights of any person to attend and vote at the meeting. In the case of joint holders, where more than one of the joint holders purports to appoint a proxy, only the appointment submitted by the most senior holder will be accepted. Seniority is determined by the order in which the names of the joint holders appear in the Company’s register of members in respect of the joint holding (the first-named being the most senior). 10. If a member submits more than one valid proxy appointment, the appointment received last before the latest time for the receipt of proxies will take precedence. 11. Any member attending the meeting has the right to ask questions. The Company must cause to be answered any such question relating to the business being dealt with at the meeting but no such answer need be given if (i) to do so would interfere unduly with the preparation for the meeting or would involve the disclosure of confidential information or (ii) the answer has already been given on a website in the form of an answer to a question or (iii) it is undesirable in the interests of the Company or the good order of the meeting that the question be answered. 12. As at the date of issue of this notice the Company’s issued share capital consists of 16,295,357 ordinary shares, carrying one vote each. Therefore, the total voting rights in the Company as at the date of issue of this notice are 16,295,357. 13. CREST members who wish to appoint a proxy or proxies through the CREST electronic proxy appointment service may do so for this meeting by using the procedures described in the CREST Manual which can be viewed at www.euroclear.com. CREST personal members or other CREST sponsored members, and those CREST members who have appointed a voting service provider(s), should refer to their CREST sponsor or voting service provider(s), who will be able to take the appropriate action on their behalf. Please note the following: (a) In order for a proxy appointment or instruction made using the CREST service to be valid, the appropriate CREST message (a “CREST Proxy Instruction”) must be properly authenticated in accordance with Euroclear UK & Ireland Limited’s specifications and must contain the information required for such instructions, as described in the CREST Manual. The message, regardless of whether it constitutes the appointment of a proxy or is an amendment to the instruction given to a previously appointed proxy must, in order to be valid, be transmitted so as to be received by the issuer’s agent (ID RA19) by the latest time(s) for receipt of proxy appointments specified in this notice. For this purpose, the time of receipt will be taken to be the time (as determined by the timestamp applied to the message by the CREST Application Host) from which the issuer’s agent is able to retrieve the message by enquiry to CREST in the manner prescribed by CREST. After this time any change of instructions to proxies appointed through CREST should be communicated to the appointee through other means. (b) CREST members and, where applicable, their CREST sponsors or voting service providers, should note that Euroclear UK & Ireland Limited does not make available special procedures in CREST for any particular messages. Normal system timings and limitations will therefore apply in relation to the input of CREST Proxy Instructions. It is the responsibility of the CREST member concerned to take (or, if the CREST member is a CREST personal member or sponsored member or has appointed a voting service provider(s), to procure that his CREST sponsor or voting service provider(s) take(s)) such action as shall be necessary to ensure that a message is transmitted by means of the CREST system by any particular time. In this connection, CREST members and, where applicable, their CREST sponsors or voting service providers are referred in particular to those sections of the CREST Manual concerning practical limitations of the CREST system and timings. (c) The Company may treat as invalid a CREST Proxy Instruction in the circumstances set out in regulation 35(5)(a) of the Uncertificated Securities Regulations 2001. 14. Any corporation which is a member can appoint one or more corporate representatives who may exercise on its behalf all of its powers as a member provided they do not do so in relation to the same shares. 15. A copy of this notice and other information required by Section 311A of the Companies Act 2006 can be found at www.daejanholdings.com. 16. You may not use any fax number, email address or other electronic address provided in this document or on the proxy form to communicate with the Company for any purpose other than expressly stated. Page 68 sterling 163284 Design & Art Direction by Roger Watt 163284 Daejan Holdings Plc R&A 2014 COVER_163284 Daejan Holdings Plc R&A 2014 COVER 22/07/2014 21:05 Page 2 163284 Daejan Holdings Plc R&A 2014 COVER_163284 Daejan Holdings Plc R&A 2014 COVER 22/07/2014 21:05 Page 1 

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