Farmer Business Developments plc, the founding company of FBD Holdings plc, which holds a 25% stake in the insurer and now also includes the FBD Hotels business, saw its profits before tax fall 46% to €6.2m in 2016.

The fall in profits was driven by the continued suspension of the FBD Holdings dividend and the cost of servicing the loans relating to the acquisition of the hotels business from FBD Holdings.

Despite the fall in profits, the investment company’s balance sheet, which is an important indicator of performance, grew €5m to €183m at the end of 2016. Farmer Business Developments took full control of FBD Hotels after it purchased the remaining 50% stake from FBD Holdings for €48.5m at the end of 2015. As such, this is the company’s first year including this business.

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It is its largest single investment at €86m, representing 47% of the balance sheet. This business had a strong year, with earnings (EBITDA) of €9.9m, and contributed €8.4m to profits. This included a €1.6m profit from the sale of the Tower Hotel, which sold for €11m during the year.

Its joint venture with Taylor Wimpey to develop lands at La Cala, Spain, is currently in its third round where phase one has sold out, phase two is 42% sold and phase three is launching. During the year, the company received €5.8m from its share of development sales, which realised a profit of €2.2m. The company also sold its investment in a shopping centre in Geneva which realised a profit of €1m.

The board remains confident that patience on lands adjacent to a new airport in Berlin, valued at almost €20m will pay off. While it holds some lands for sale currently, it aims to retain the most valuable land for when the airport opens, which now looks set to be mid-2018.

Investment

The company’s investment in FBD Holdings was valued at €61m at year end when the share price was €6.89. FBD Holdings’ share price has since improved 20%, valuing the investment in FBD at €73m today. The company said “the board’s policy is to maintain its stake in the insurer as a long-term investment in the expectation of both a return to dividend income and capital appreciation”. Dividend income from this investment fell from €2.9m in 2015 to €72,000 in 2016 following the suspension of FBD’s dividend.

Comment

With the hotels business now fully owned and the lack of a dividend from the insurance company, the hotels are providing the main income stream to Farmer Business Developments. Given the additional debt taken on to fund the hotels acquisition, which leaves net debt at year end at €38m, the biggest question for shareholders is where the cash will come from to service these loans.

Firstly, the hotels performance is strong and improving driven by the growing economy, increasing room rates and occupancy levels. Secondly, the property development at LaCala is providing welcome additional income streams that are growing as each phase rolls out and adding to profits. The Spanish property market is also recovering.

While the dividend from FBD Holdings, which was in the region of €3-4m in the past would be welcome, Farmer Business Developments has been able to continue to pay a dividend to its shareholders of €2.7m per year. Given the value of its investments and development lands, and the income from the hotels, the level of debt is manageable while patience will reap the reward of its development assets over time.