TIDMHRCO
RNS Number : 3229Y
Hirco plc
29 February 2012
29 February 2012
Hirco plc
Publication of 2011 Annual Report & Accounts and Notice of
AGM
London - Hirco plc (AIM: HRCO), announces the publication of its
2011 Annual Report & Accounts (the "Annual Report") for the
year ended 30 September 2011 and Notice of AGM.
The Chairman's Letter, as set out within the Annual Report, is
reproduced below. To view the full Annual Report (including the
financial statements and notes to the accounts), please paste the
following URL into the address bar of your browser.
http://www.rns-pdf.londonstockexchange.com/rns/3229Y_-2012-2-28.pdf
Chairman's Letter
The year ended 30 September 2011 has been transitional following
significant Board changes. Three Company directors have stepped
down since our last annual report and two new directors, John
Chapman and Eitan Milgram, have joined the Board. John is a New
York based lawyer with extensive experience in both the offshore
closed end fund universe and the property sector while Eitan is a
representative of one of our largest shareholders. We have
appointed new valuers and have retained a respected development
consultant to advise the Board on the progress of the developments.
In June, we completed a placing raising approximately GBP11m after
expenses so the Company could continue to pursue its strategic
objective of realizing shareholder value.
As we have previously reported, the overall development
timelines for the projects have lengthened considerably and the
upstreaming of cash is unlikely for the foreseeable future. Given
this economic reality, the Board has focused on the Company's cost
structure. We have terminated all Company employees, renegotiated
contracts where possible, closed our US office, and centralised
Company administrative functions in the Isle of Man. It is expected
that this cost cutting will save the Company about GBP2m
annually.
During the full year ended 30 September 2011 we reported an
after-tax loss of GBP273.3m, representing a loss per share of
GBP3.30 based on a weighted average of 82.8m shares outstanding.
This loss is primarily non-cash and represents the Board's decision
to write down the Company's investments based on CBRE's new
valuation. Administrative expenses were GBP3.3m and included
GBP0.9m of exceptional restructuring costs and GBP1.1m of operating
costs for subsidiary companies that are no longer active.
Consequently the Company's net asset value declined to GBP251.3m,
or GBP2.50 per share as compared with 2010's NAV of GBP513.5m or
GBP6.71 per share. The Company continues to accrue the 12% return
on the participating preference share interests in the Burke
Companies; however, there is no clear visibility as to when that
accrual will be paid in cash.
This past August we retained CBRE's Mumbai office in place of
Jones Laing LaSalle ("JLL"), who had been the Company's valuers
since its inception. The CBRE valuation of the Company's assets as
at 30 September 2011 was GBP342m as compared with the JLL valuation
as at 30 September 2010 of GBP824m (restated at 2011 exchange
rates). The primary reasons for this considerable difference are:
(i) a general decline in the Indian economy; (ii) different
assumptions regarding the cost of capital (CBRE used a blended rate
of 27% across the two schemes while JLL had used 13%); (iii) delays
in key infrastructure investments; and (iv) a substantially longer
time horizon. Consequently, the Directors have made an impairment
provision against the investments as detailed in note 12 to the
accounts. Note 12 has also been expanded to provide additional
information regarding the underlying net assets of the Burke
companies.
CBRE's valuation of GBP342m is based on the developments'
current anticipated product mix. But, given changes in the Indian
property market since Hirco was admitted to trading, CBRE believes
that the current development plan should be reassessed, in some
areas radically, to optimise likely returns. Under this "best use"
scenario, CBRE is of the view that the developments would be valued
at GBP501m. The developer, Hiranandani Developments Private
Limited, "HDPL", retained Cushman Wakefield International to
conduct their own valuation based on the developer's current plans.
Cushman Wakefield has valued the assets based on the developer's
current plans at GBP550 million. Given this discrepancy, the Board
asked the developer to comment on the CBRE valuation, but never
received any detailed commentary. Consequently, the Board has
considered it prudent to accept CBRE's lower valuation figure of
GBP342m, which assumes the current development mix is maintained.
Shareholders should keep in mind, however, that although third
party valuations are useful (and required by the accounting
standards we have adopted) they are all to some degree speculative
especially given the projects' long time horizons and concomitant
sensitivity to discount rates.
Project Progress
We track the projects' progress primarily by analysing monthly
and quarterly reports HDPL provides. In addition, this past June
the Board visited both Panvel and Chennai to assess for itself the
progress that HDPL has made on these two developments. While in
Mumbai, Panvel and Chennai, we met with HDPL representatives and
Mr. Niranjan Hiranandani to discuss construction progress and other
issues. We have also retained an experienced London-based
construction and development firm to review and analyse the
progression of the projects. They (assisted by their Indian
associates) have spent substantial time both on site in Panvel and
Chennai and meeting with development personnel. They along with the
Board carefully review and analyse the periodic reports HDPL
provides and are in communication with HDPL and its
representatives.
According to the information HDPL has provided, progress on
construction has been substantial while progress on sales has been
modest. Progress on Phase One of the residential components of
Panvel and Chennai may be summarized as follows:
Total Sales Sales Sales % Average
No. Units Sept 2010 Sept 2011 Dec 2011 at Dec Price/ft(2)
At Dec 2011
CHENNAI 2461 1671 1570 1589 65 4244 rupees
PANVEL 2792 2181 2414 2423 87 4947 rupees
Whilst there have been a net reduction at Chennai of 82 units,
the overall average sales price has held firm at 4244 rupees per
square foot ("sqft") with new sales.
Progress continues to be reported at Panvel with 242 new sales
and the average price of sales is up from 4710 rupees per sqft at
September 2010 to 4947 rupees per sqft currently.
Chennai has seen 152 completed units handed over to buyers and
full completion of phase 1 is scheduled for June 2014. At Panvel,
first completions are scheduled in November 2012 and final
completion of phase 1 is scheduled for November 2014.
This year the developer decided to commence construction in
February 2011 of two office buildings at Panvel. The basic details
of these buildings are as follows:
Building Commence Completion No. of Gross Floor
Date Date Storeys Area
Newcastle Feb 2011 May 2013 16 1.1m ft(2)
Edinburgh Feb 2011 Feb 2013 12 0.8m ft(2)
These buildings are being constructed on a speculative basis and
we understand an active letting campaign will commence in the
latter part of 2012.
To give these numbers some context, shareholders should note the
massive size of the two township developments. The overall zoning
that has been achieved comprises over one hundred million square
feet of developable area. By way of reference, London's Canary
Wharf comprises approximately 15 million square feet of developed
space. Currently about eight million square feet is under
development - representing about eight per cent of the total
developable area. Especially with respect to Panvel, the rate of
development, product mix, and the take up are highly dependent on
the development of needed infrastructure, including an
International Airport and better connections with south Mumbai.
Resolution of these issues is difficult to predict.
The economic outlook in India over the last year has been
disappointing and growth in the economy has been below consensus
forecast. The Reserve Bank of India has used successive interest
rate rises to reduce the high levels of inflation, though without
conspicuous success, and the Rupee over the period of this report
has depreciated against most major currencies. There has also been
something of a political impasse, which has resulted in a distinct
lack of progress on economic reforms and on major infrastructure
projects, including those key to the projects in which the Company
has invested. With national elections due in 2014 and against the
very uncertain global economic outlook, it is hard to see a rapid
recovery and progress in all these areas.
The result of this uncertain outlook means that the timelines
for the projects in which the Company is invested will be extended
further and, given that currently less than ten per cent of the
total planned development is currently under construction, it is
clear that Panvel and Chennai will not be completed for at least
another decade. Of more tangible and immediate importance is the
likely financial result of the eight million square feet of
construction that is currently underway and due for total
completion in 2014. Given the advanced rates of residential sales
and data provided in the monthly reports the Board believes that a
sensible projection should be possible as to the likely surplus
(profit and cash) arising from the Phase 1 works. Based on advice
we have received from our development consultant, we have provided
HDPL with an indicative assessment of a likely surplus for
comment.
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