COVID-19, emerging and principal risks, viability statement, going concern, housebuilding

Cairn Homes plc – annual report – 31 December 2019

Industry: housebuilding

Risk Report (extract)
The most significant emerging risk is the ongoing outbreak of COVID-19. The Group is monitoring the situation carefully as it evolves to understand the potential impact on our people and our business. The Company has implemented a number of actions to manage the near-term impact on our people and business as outlined on page 35. Above all, we will maintain our commitment to the health and safety of our employees, subcontractors and customers by putting people first.

Going Concern
The Group’s activities, strategy and performance are explained in the Chief Executive Officer’s Statement on pages 9 to 13 and the Financial Review on pages 40 and 41 of this report. Having assessed the relevant business risks, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. The Directors have therefore continued to adopt the going concern basis in preparing the financial statements.

Viability Statement
In accordance with the UK Corporate Governance Code Provision 31, the Directors have assessed the prospects of the business and its ability to meet its liabilities as they fall due over the medium term. The Directors have concluded that three years is an appropriate period for assessment as this constitutes the Group’s rolling strategic planning horizon.

The Group has developed a financial model as part of our three-year plan, which is updated at least annually and is regularly tested and assessed by the Board. Progress against the three-year plan is regularly reviewed by the Board through presentations from senior management on the performance of the business.

The Group’s Principal Risks and Uncertainties aggregate the risks identified, as well as the mitigation plans implemented as part of this process, and they include the risks that may have short-term impacts as well as those which may threaten the long-term viability of the Group. The Directors have made a robust assessment of the potential impact that these risks would have on the Group’s business model, future performance, solvency and liquidity.

The three-year plan has been tested for a range of scenarios which assess the potential impact of severe but plausible risks to the long-term viability of the Group in the COVID-19 context. These scenarios included the stress testing of the Group’s business model assuming that a combination of events resulted in a substantial reduction in sales, similar to a severe recession, with a deterioration in employment levels and consumer confidence, coupled with a collapse in bank risk appetite, leading to a material reduction in credit availability. In undertaking the stress testing, the Directors assumed a rapid change in circumstances over a relatively short period of time. In assessing these severe downside scenarios, it was assumed that there was a sudden decline in demand leading to materially reduced sales volumes and sales prices, increased cost for materials and labour and increased finance costs, followed by a gradual recovery. The Directors assumed they would make the most appropriate decisions regarding such matters as the following to ensure that the overall financial risk was minimised through this cycle:
– suspending capital returns to shareholders;
– disposing of non-core sites;
– deferring certain planned site commencements;
– short term rental of unsold new units; and
– implementing cost cutting initiatives.

Having reviewed the three-year plan and considered the above stress testing, the Directors confirm that they have a reasonable expectation that the Group will continue to operate and meet its liabilities as they fall due over the aforementioned three-year period.

In reaching the above assessments on going concern and our viability statement, the Board has considered the impact of COVID-19 as outlined on page 35. Inevitably, there will be an adverse impact on the business although the extent is not yet clear. In response to this unprecedented scenario, the Company has implemented a number of near-term measures to protect the business from the potential downside risk of COVID-19, as outlined on page 35.

The Board’s conclusion is that we have implemented the necessary short term measures which we believe will protect and bolster our business and, as of the date of the report, the Board does not expect any reasonably anticipated COVID-19 outcomes to impact the Group’s long-term viability or ability to continue as a going concern.

The principal operating risks and our approach to mitigating those risks are set out in more detail below.