DJ IFG Group plc: Preliminary Statement
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IFG Group plc (IFP)
IFG Group plc: Preliminary Statement
25-March-2019 / 07:00 GMT/BST
Dissemination of a Regulatory Announcement that contains inside information
according to REGULATION (EU) No 596/2014 (MAR), transmitted by EQS Group.
The issuer is solely responsible for the content of this announcement.
IFG GROUP PLC PRELIMINARY STATEMENT OF RESULTS FOR THE YEAR ENDED 31 DECEMBER
2018
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THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION
The IFG Directors accept responsibility for the information contained in this
announcement To the best of the knowledge and belief of the IFG Directors (who
have taken all reasonable care to ensure such is the case), the information
contained in this announcement is in accordance with the facts and does not
omit anything likely to affect the import of such information. The sources and
bases for the information in this announcement relating to the Acquisition are
set out in Appendix A to the Rule 2.5 Announcement relating to the Acquisition
dated 25 March 2019.
RECOMMENDED OFFER
IFG Group plc ("IFG") is pleased to announce that it has reached agreement
with Epiris GP Limited, as General Partner of the Epiris Funds advised by
Epiris LLP ("Epiris"), on the terms of a recommended cash offer pursuant to
which SaintMichelCo Limited ("Bidco"), a wholly owned indirect subsidiary of
the Epiris Funds, will acquire the entire issued and to be issued share
capital of IFG. Consequently, Bidco has today announced its firm intention to
make an offer for IFG under Rule 2.5 of the Takeover Rules.
Under the terms of the proposed acquisition, IFG shareholders will be entitled
to receive GBP1.93 for each IFG Ordinary Share, valuing the entire issued and to
be issued ordinary share capital of IFG at approximately GBP206 million.
The proposed acquisition represents:
· a premium of approximately 46 per cent to IFG's closing share price of
GBP1.325 on 22 March 2019 (being the last practicable date prior to the
publication of this Announcement);
· a premium of approximately 44 per cent to IFG's volume weighted average
share price of approximately GBP1.34 over the one-month period ended on 22
March 2019;
· a premium of approximately 42 per cent to IFG's volume weighted average
share price of approximately GBP1.36 over the three-month period ended on 22
March 2019; and
· a multiple of approximately 21.4 times IFG's adjusted after tax earnings
for the year ended 31 December 2018.
improved underlying performance
...............................
Financial Highlights
2018 2017 Change
Revenue (GBPm) 87.6 78.4 12%
Adjusted operating profit (GBPm) 12.4 10.5 18%
Operating profit/(loss) (GBPm) 0.3 (0.4) -
Adjusted EPS (p) 9.14 8.34 10%
Basic EPS (p) (0.90) (0.32) -
Free cash flow (GBPm) 6.6 5.7 16%
· Revenue growth of 12% to GBP87.6 million (2017: GBP78.4 million) driven by
repricing and increases in the Bank of England interest rate in James Hay
and strong performance in Saunderson House
· Adjusted operating profit increased 18% to GBP12.4 million (2017: GBP10.5
million) demonstrating the strength of the underlying businesses
· Exceptional costs of GBP9.9 million (2017 GBP8.8 million) including a
provision of GBP4.9 million in relation to the dual trustee review and GBP3.0
million retention payments following the cancelled sales process of
Saunderson House
· Operating profit (after exceptional costs and amortisation) was GBP0.3
million up from a loss of GBP0.4 million in 2017
· A 10% increase in adjusted EPS to 9.14 pence (2017 8.34 pence). Basic loss
per share was 0.90 pence, compared to a loss of 0.32 pence in the prior year
· Based on a more prudent assessment of regulatory capital, the group has
capital resources of GBP25.6 million (2017: GBP49.5 million) which is 502% of
its Pillar 1 requirement (2017: 750%) and surplus to its Pillar 2
requirements
Operational
James Hay
2018 2017
Assets under administration (GBPbn) 25.3 25.5
New Clients 4,651 6,116
Total Clients 58,753 58,551
Retention rate 93% 93%
Adjusted Operating Profit (GBPm) 10.3 6.1
· AUA 1% lower than 2017 at GBP25.3 billion (2017: GBP25.5 billion) with adverse
market movements over the year offsetting net inflows
· James Hay added 4,651 new clients during 2018, down 24% on 2017, driven
largely by the slow-down in the defined benefit ("DB") transfer market
following a significant rise in this market in 2017
· James Hay now serves 58,753 clients (2017: 58,551) of which 55,200 are in
SIPPs with the remaining 3,553 in SSAS and Wrap products. Client retention
remains stable at 93%
· Reviewed c.20% of dual-trustee SSAS schemes and provided GBP4.9 million as a
best estimate of costs to resolve these matters across the whole book
· We have submitted an application under s268 Finance Act 2004 for the
discharge of the HMRC assessment in respect of Elysian Fuels for tax years
ended 5 April 2012 and 5 April 2013 and expect to submit applications in
relation to later tax years in due course. We currently expect that a
process involving appeals to tribunal would be unlikely to complete before
the end of 2019
Saunderson House
2018 2017
Assets under advice (GBPbn) 4.9 5.1
New Clients 239 247
Total Clients 2,342 2,121
Retention rate 99% 96%
Adjusted Operating Profit (GBPm) 7.1 8.6
· AUA 4% lower than 2017 with adverse market movements over the year
offsetting net inflows
· Saunderson House achieved 239 new client wins in 2018, slightly down
compared to 247 in 2017 but a strong result, particularly in light of
distraction from the cancelled sale process
· Continued strong demand for Discretionary Management Services (DMS) making
up c.60% of new client wins
· Saunderson House now serves 2,342 clients (up 10% from 2,121 in 2017) with
client retention improving to 99% (2017: 96%)
Strategic and proposed acquisition
Following a challenging start to 2018, we have made good progress on
identifying and implementing our near-term priorities; building two
self-reliant businesses within an efficient group structure and making
meaningful progress in relation to legacy issues.
During the course of 2018, we have reviewed a range of options available to
the Group to assess whether greater value might be realised for shareholders
through alternative ownership structures. The review considered, amongst other
options, a demerger and the sale of one or both of the subsidiaries.
Having taken into account the relevant factors and applicable risks, the IFG
Board consider the terms of the proposed acquisition to be fair and
reasonable. Accordingly, the IFG Board unanimously recommends that IFG
shareholders vote in favour of the acquisition, as they intend to do in
respect of their own holdings.
Kathryn Purves, Chief Executive of IFG Group plc, commented:
"We are pleased to be announcing this transaction today and believe it is an
excellent outcome for shareholders, for the company, and for our clients. The
offer by Epiris represents a compelling opportunity for shareholders to
realise an immediate and attractive cash value for their shareholding in IFG
today. In addition, our employees and clients will benefit under the ownership
of Epiris which should help broaden and accelerate the delivery of IFG's
strategic objectives and the underlying strategies of James Hay and Saunderson
House."
Contacts:
Kathryn Purves Gavin Howard
Group Chief Executive Group Chief Financial Officer
IFG Group plc IFG Group plc
Tel: +44 20 3887 6181 Tel: +44 20 3887 6181
Media enquiries:
Justin Griffiths Jack Hickey
Powerscourt Powerscourt
Tel: +44 20 7250 1446 Tel: +353 1536 0683
Presentation of results and dial-in
There will be a presentation of these results to analysts and investors/fund
managers at 9.30am today at Macquarie offices, Ropemaker Place, 28 Ropemaker
Street, London EC2Y 9HD. The slides for this presentation can be downloaded
from IFG's website, www.ifggroup.com.
There will also be audio conference access to the presentation. The access
details for the presentation are:
Confirmation Code: 9484905
'
Location Phone Number
United Kingdom +44 (0)330 336 9105
Ireland +353 (0)1 246 5638
France +33 (0)1 76 77 22 74
Germany +49 (0)69 2222 13420
Switzerland +41 (0)22 567 5729
US +1 323-794-2093
Extract from Chairman's Statement
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DELIVERING SHAREHOLDER VALUE
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STRATEGY
I believe we have made substantive progress at IFG Group this year. The
underlying businesses have performed well, in spite of distractions in the
first four months of the year which were dominated by the assessments from
HMRC in relation to Elysian Fuels and the Saunderson House sales process,
which was later cancelled. These issues provided the backdrop against which
the new management team was appointed in April 2018.
Since then, we have focused on operational performance within our businesses
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whilst also pursuing our near-term priorities which will provide a solid base
from which to grow and deliver value to shareholders. As outlined in our
interim statement, these priorities are: the identification and resolution of
legacy issues; developing self-reliant businesses with reduced reliance on
central functions; and delivering a more efficient group cost structure. We
have made good progress in each of these areas and Kathryn Purves provides a
comprehensive update in her Chief Executive's Report.
In our December trading update we highlighted the attractive nature of the
markets in which we operate and set out our ambitious plans for the future.
These are covered in more detail in the business reviews.
performance
The period under review has shown revenue increasing by 12% from GBP78.4 million
last year to GBP87.6 million, with adjusted operating profit increasing by 18%
from GBP10.5 million to GBP12.4 million. It is disappointing that operating profit
was again depressed by exceptional provisions, primarily as a result of costs
in relation to resolution of legacy issues and staff retention costs in
Saunderson House following the cancelled sale. I believe that identifying and
resolving these legacy issues is an important part of building the foundations
for future growth and that the retention payments made to Saunderson House
staff have played an important role in stabilising the business over the
latter part of 2018. Basic loss per share was 0.90 pence, as a result of the
lack of tax relief for sanction charges and settlement costs relating to
legacy matters (2017: loss of 0.32 pence per share).
We believe this is a good set of results at an underlying level, particularly
in the context of the distraction and disruption suffered by the Group in the
early part of 2018 and the broader political and investment market volatility
during the year. Kathryn comments on the key financial results in her Chief
Executive's Report.
BOARD COMPOSITION AND RENEWAL
Alongside implementing increasingly federated governance and more clearly
defining Group's role and responsibilities, we have taken the opportunity to
review the composition of the Group Board. John Gallagher, my predecessor,
stood down in May 2018 and both Colm Barrington and Robin Phipps stood down in
August 2018. I thank each of them for their contribution to the Board and
their support of the Group. We are delighted that John remains a significant,
and supportive, shareholder in the Group.
During the year, John Cotter stepped down from the Group Board upon his
resignation as Group Chief Executive succeeded by Kathryn Purves, previously a
non-executive director of the Group and chair of the Group Risk Committee. I
would like to thank John for his contribution to the Group as CEO and CFO over
the years.
Gavin Howard was appointed Interim Group Chief Financial Officer in April and
subsequently joined the Group Board in August 2018 as Director and Group CFO.
Gavin has also taken on the role of James Hay CFO alongside his Group role.
Changes in the management teams of the businesses are discussed in more detail
in the operational reviews.
I believe that the Group Board, consisting of four non-executive directors and
two executive directors, is now more appropriately sized for its role within a
federated governance framework and operating alongside the boards of both
James Hay and Saunderson House, each of which include experienced, independent
non-executive directors. I would like to thank the members of both boards for
their support in implementing our federated governance.
As a result of the changes to the Group Board, the composition of the Board
committees has also changed during 2018. The Risk Committee and Audit
Committee have now been combined. The members of the Risk and Audit Committee
are: David Paige (chair), Cara Ryan, Peter Priestley and myself. The members
of the Remuneration Committee are: Peter Priestley (chair), Cara Ryan and
myself. The members of the Nominations Committee are: Cara Ryan (chair), Peter
Priestley and myself.
people and culture
My thanks go to the executive leadership of the Group and its subsidiaries,
and to all our employees across both our businesses, for their continuing hard
work, in what has been a challenging year for the Group. Tony Overy, Alastair
Conway and their teams have delivered considerable success in strengthening
their businesses, serving their existing clients and attracting new ones.
These efforts enable us to deliver value to shareholders and I thank them all
for their hard work and commitment.
Our ambition as a Group is to create and grow value for our shareholders,
clients of our businesses and employees across the Group, by supporting our
businesses to help end clients to save, invest and plan for their financial
future. Whilst James Hay and Saunderson House each has their own culture and
clearly defined values that are relevant to their services and clients, our
business principles form a framework within which the Group and its businesses
operate. We will always strive to:
· act with integrity in our dealings with all parties, both internally and
externally, treating people fairly and honestly;
· operate with ambition whilst ensuring compliance with both the letter and
the spirit of law and regulation; and
· take responsibility for our decisions and actions.
These principles inform and support the Group's culture and ensure we and our
businesses deliver excellent client outcomes and contribute positively to our
wider stakeholders.
The Board has also undertaken a review of the 2018 UK Corporate Governance
Code, which was published in July 2018, and how it may impact the Group and
its corporate governance. There are a number of workstreams underway to ensure
the Group continues to operate to a high standard of governance within its
businesses and that it is fully compliant with the new Code in 2019.
DIvidend
In light of the continued uncertainty around the resolution of a number of
legacy matters and the timing and scale of any exposure, the Board has
reluctantly taken the decision to continue with its prudent approach of
retaining cash to cover worst-case outcomes and, as a result, no final
dividend will be paid in respect of 2018 (2017: interim 1.60 pence per share).
The Board remains committed to a progressive dividend policy, with two
businesses which are cash generative. We intend to return to paying dividends
at the earliest possible time, once there is more clarity on these uncertain
potential exposures.
BREXIT
The regulatory challenges, political uncertainty and market volatility
experienced during 2018 are expected to continue in the year ahead. In the
event of a "hard" Brexit or a "no deal" Brexit there could be significant
knock on impacts across the UK economy and markets. The impact of Brexit on
our businesses is difficult to predict. Uncertainty drives an increased need
for financial advice but causes volatility in markets and delays decision
making. Any negative impact on the wider economy could reduce our clients'
ability to invest or increase their need to withdraw funds. The impact on
equity markets and interest rates may also impact our revenue linked to market
rates. Both of our businesses have considered a range of potential scenarios
to ensure they are well prepared and have undertaken extensive planning for
these scenarios. Further detail on the impact of Brexit is discussed in the
Business reviews. Brexit remains a source of considerable uncertainty and a
prolonged period of market turmoil or a significant economic downturn could
potentially have material adverse consequences for either business.
OUTLOOK
Despite a challenging start to 2018, the businesses have performed well,
delivering improved underlying performance and entering 2019 with confidence
and clear and ambitious medium-term plans. Brexit continues to be a source of
considerable uncertainty and the impact on the economy and investment markets
could have implications for both our businesses and their clients.
We are making good progress on the three near-term priorities identified as
part of our strategic review and we are moving towards having two self-reliant
businesses able to deliver on their growth plans. Resolution of legacy issues
will allow our businesses to focus on delivering on their potential and will
allow us to consider strategic options for the Group.
The Board is committed and confident in our ability to create value for you,
our shareholders.
Mark Dearsley
Chairman
22 March 2019
Extract from Group Chief Executive's statement
**********************************************
DEVELOPING TWO SELF-RELIANT BUSINESSES
......................................
2018 in review
The start of 2018 was a difficult period for the Group, with assessments from
HMRC in relation to Elysian Fuels and the cancelled Saunderson House sale
process creating material disruption and distraction, both internally and
externally. Management changes in April 2018 saw the appointment of a new
Chairman, CEO and CFO.
Since April, the new management team has engaged with a wide range of
shareholders and has also undertaken a review of the Group strategy and
structure in order to ensure we can deliver value effectively to shareholders.
Our focus has been on: supporting and stabilising the businesses to deliver
improved operating performance; developing strong relationships with the
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respective management teams; progressing and implementing critical near-term
priorities which are essential building blocks to creating and delivering
value for shareholders and reviewing a range of options around Group strategy.
We believe that addressing our identified near-term priorities, building two
self-reliant businesses within an efficient Group structure and progressing
resolution of legacy issues, enhances the strategic optionality for the Group,
allowing us to consider a range of options to best deliver value to
shareholders.
PERFORMANCE
During 2018 the Group has delivered strong top line growth with Group revenue
of GBP87.6 million up 12% from GBP78.4 million in 2017. We have two strong,
attractively positioned businesses that are performing well, however,
performance was again depressed by exceptional costs, primarily related to the
resolution of legacy matters in James Hay and one-off retention costs
following the cancelled sale process in Saunderson House. Whilst it is
disappointing to report another year of material exceptional cost, we believe
that dealing with legacy is a key priority and we have been focused on
improving clarity around potential issues in a timely manner.
With improved underlying performance in both businesses, we have delivered a
materially improved adjusted operating profit up 18% to GBP12.4 million from
GBP10.5 million in 2017. This, was depressed by GBP9.9 million of exceptional
costs, resulting in operating profit of GBP0.3 million up from a loss of GBP0.4
million in 2017. Basic loss per share was 0.90 pence, compared to a loss of
0.32 pence in the prior year. Adjusted earnings per share improved by 10% to
9.14 pence per share from 8.34 pence per share in 2017. Overall the Group
generated cash of GBP3.1 million during 2018, compared to GBP3.8 million of cash
consumption during 2017. Free cash flows have increased by 16% to GBP6.6 million
from GBP5.7 million in 2017 and Return on Capital Employed improved marginally
to 0.4% from -0.6% in 2017.
James Hay
The platform market continues to be an attractive, growing market supported by
long-term structural growth drivers. James Hay has a strong position within
the high net worth, trusted adviser-led SIPP platform market with
significantly higher than average case sizes and a powerful brand in relation
to pension expertise.
James Hay saw a material increase in revenue in 2018, driven by pricing
changes in 2017 and an increase in margin on cash as interest rates have
increased. It was however, adversely affected by weaker investment markets and
a decline in defined benefit ("DB") transfer volumes which reduced new
business volumes compared to the prior year. Following a comprehensive review
of James Hay's strategy, we remain confident of its ability to develop from
its current position as a trusted SIPP expert to address the wider platform
market, supporting clients through their investment life cycle.
James Hay plans to accelerate its expansion into the GIA and ISA market,
significantly increasing its addressable market and leveraging its strong
brand name and reputation with financial advisers to capture a greater share
of client investment flows. James Hay's management continues to focus on
driving new business into its MiPlan product, improving cost efficiencies,
expanding its product offering and building out its investment platform.
Saunderson House
The UK wealth management sector, particularly in relation to high net worth
clients, remains an attractive and growing market. Saunderson House is well
positioned within this sector and is focused on providing a wholly
independent, full service wealth management offering. It is a leading, trusted
adviser to high-earning professional services executives in which market it
has an attractive and differentiated advisory and discretionary proposition.
During 2018, Saunderson House was required to manage through a sale process
which was subsequently cancelled, creating a degree of disruption for both
clients and employees. Despite this, the business has performed strongly
during 2018, demonstrating the strength of its relationships with clients, its
brand, service and investment proposition.
Following a comprehensive review of its strategy, Saunderson House expects to
see its discretionary proposition continue to grow, enabling the business to
attract younger clients at the wealth accumulation stage of their life. This
strategy is expected to continue to enhance and embed long term value in the
business with clients accumulating wealth with Saunderson House and remaining
clients for a significant period of time.
DELIVERING NEAR-TERM PRIORITIES
Developing autonomous, self-reliant businesses
Over the course of the second half of 2018 we have focused on developing two
self-reliant, independent businesses with the necessary autonomy, resources
and capability to thrive.
A review of Group governance has been undertaken and has resulted in a
revised, increasingly devolved governance model being implemented, with full
support from the business boards.
We have worked with the boards and management teams of both businesses to put
in place comprehensive, long-term business plans, including setting more
granular targets, and we believe that these plans provide a good foundation
for each of the businesses to move forward with clarity and ambition.
The respective management teams within the businesses have been strengthened
and certain centralised responsibilities (in particular compliance and risk)
have been transferred into the businesses. As part of this, Simon Jackson,
previously Group CFO at Brooks MacDonald, joined Saunderson House as Finance
Director in January 2019, and Gavin Howard, Group CFO, has taken on the role
of James Hay CFO alongside his Group role. We have also brought in Stephen
Mohan as Operations Director in James Hay, as of December 2018, supplementing
the James Hay management team with increased platform industry experience.
Group efficiency
As we have further clarified the Group's role and responsibilities, we have
been able to identify cost savings and we continue to focus on delivering
operating and cost efficiencies within the group function. During 2018 we
significantly reduced the size of the Group Board, as set out in detail within
the Chairman's statement. We continue to make further reductions in the costs
of the group executive/central team and are reviewing options to reduce our
property footprint.
These actions have delivered H2 2018 costs of GBP2.3 million, significantly
lower than those incurred in H1 2018 of GBP2.7 million. The Group remains on
track to achieve annual cost savings of GBP1.0 million, with the full impact of
these savings visible in the second half of 2019. In order to achieve these
cost savings, we expect one-off restructuring costs of approximately GBP1.0
million to be incurred during 2019.
Legacy matters
Resolution of legacy matters, particularly within James Hay, has remained a
core focus during 2018 and has consumed considerable management time and
effort. The Group has continued its engagement with HMRC in relation to the
Elysian Fuels matter to attempt to address their concerns (and the associated,
previously reported, protective assessments). However, disappointingly, there
remains significant uncertainty as to potential outcomes and this issue will
take further time to resolve. Further detail is included in note 7 under
contingent liabilities.
In the interim results, the Group highlighted it was undertaking a review of
the legacy dual trustee book in James Hay. Having now reviewed approximately
20% of the book, we are sufficiently progressed to be able to make a provision
of GBP4.9 million as an estimate of potential issues across the book (see note
4). The provision is largely in relation to potential HMRC sanction charges as
a result of unauthorised payments from SSAS schemes and hence is not covered
by insurance. This is our best estimate as to the potential exposure in
relation to this book. It is based on extrapolation from the sample reviewed
to date and, as such, there is a significant level of judgement in reaching
our estimates and further issues may come to light in future as the review of
the complete book progresses over the course of 2019.
The previously disclosed reviews of NSIs and SSAS Loanbacks are now
substantially progressed. Discussions with HMRC in relation to associated
sanction charges are continuing and these are expected to fall within existing
provisions. We expect these to be closed off with HMRC during 2019. James Hay
is undertaking a voluntary redress programme and continues to engage with the
FCA, and its insurers in order to address any potential client detriment. The
remediation of this book is presently expected to be covered by existing
provisions.
Within Saunderson House, we have significantly progressed the remediation
process in relation to the previously reported pension transfers review, which
is expected to be covered in line with the existing provision made in the
prior year and to be completed during 2019.
In December 2018 we agreed a settlement of GBP1.1 million in relation to the
sale of the International Business resulting in an increase to provisions of
GBP0.6 million from GBP0.5 million (see note 4). This agreement closes off this
matter and removes the risk of a potential finding against the Group of GBP1.3m
plus legal costs, which would likely have been significant had the case gone
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to trial.
The Group maintains a strong balance sheet and sufficient regulatory surplus
capital in line with the Group's risk appetite, retaining cash to cover the
worst-case outcomes in respect of Elysian Fuels and other legacy matters that
are yet to be resolved.
STRATEGY
Alongside addressing the near-term priorities highlighted above, we have also
undertaken a full review of the current Group structure and the options
available to the Group to effectively deliver value to shareholders.
Continuing to progress our near-term priorities will result in a
cost-efficient Group, supporting two self-reliant and standalone businesses,
with legacy matters identified and resolved. This will allow us to explore a
range of strategic options for the Group.
PEOPLE
The quality and commitment of our people, both at Group and within the
businesses, supports our success and our ability to deliver value to
shareholders. I would like to thank all of our staff for their continuing hard
work to serve our clients and grow our businesses. Despite a challenging
period over the past two years, they have dealt with uncertainty and
disruption with professionalism and commitment.
BREXIT
The impact of Brexit on our businesses is difficult to anticipate. Whilst
uncertainty drives an increased need for financial advice, it can also cause
volatility in markets which can impact client confidence and cause delays in
decision making for both clients and financial advisers. Any negative impact
on the wider UK economy could reduce our clients ability to invest, or
potentially increase their need to withdraw funds. Both of our businesses have
considered a range of potential Brexit scenarios to ensure they are well
prepared, but it remains difficult to predict the impact with any certainty.
Both businesses' revenue models provide some protection against falls in
market value. Saunderson House's charges are heavily weighted to time and
materials and as a result, the direct impact of a fall in market value is
limited. James Hay's fees, partially driven by market values, are more
vulnerable to both the impact of market volatility and changes in interest
rates which could adversely affect revenue. Despite this uncertainty, we
remain confident in the long-term structural drivers of the demand for
independent financial advice and platform services.
OUTLOOK
Despite a challenging start to 2018, the underlying businesses have performed
well, delivering improved performance and we enter 2019 with confidence. We
continue to believe in the attractiveness of the markets in which both James
Hay and Saunderson House operate, and we have confidence that both can
continue to develop and maximise the opportunities ahead. Both businesses have
now put in place clear and ambitious medium-term plans with targets for growth
and efficiency. Alongside this we continue to improve the efficiency of the
current Group structure and expect to deliver material central cost savings
during 2019.
The Board continues to take a prudent approach to managing the Group's
liquidity and we continue to retain cash to cover any worst-case outcomes in
respect of Elysian Fuels and other legacy matters that are not yet resolved.
As a result, we will not be recommending a final dividend for 2018, however,
the Board remains committed to reinstating dividends as soon as practicable.
Kathryn Purves
Group Chief Executive
22 March 2019
Extract from financial review
*****************************
POSITIVE UNDERLYING PERFORMANCE
...............................
REVIEW AND COMMENTARY On THE RESULTS
The Group's businesses both delivered strong underlying performance in 2018
and both businesses now serve more clients thanks to winning new clients and
continued strong retention. The pricing changes implemented in James Hay in
late 2017 combined with increases in the Bank of England Base Rate have helped
to deliver a 12% increase in Group revenue, and despite the disruption of the
cancelled sale process in Saunderson House, the business performed strongly
during 2018, demonstrating the strength of its relationships with clients, its
brand, service and investment proposition. As a result, adjusted operating
profit (before exceptional costs and amortisation) was up by 18%. These
positives were offset by significant levels of exceptional costs,
predominantly relating to legacy issues within the Group and stabilizing
Saunderson House following the decision to end the sales process. These
exceptional costs led to operating profit being only marginally up on the loss
in 2017.
This financial review provides an overview of the Group's financial
performance for the year to 31 December 2018, and of the Group's financial
position at that date.
In line with our identified near-term priorities of building two self-reliant
businesses, the Group has reviewed the approach to reporting KPIs. At Group
level we focus on key measures of growth and shareholder value, while KPIs
which are specifically relevant to the underlying businesses are reported
under the respective operational reviews. The detailed financial performance
of the Group is covered below. The two businesses are separately disclosed as
segments, with additional disclosure of the central Group costs.
Revenue improved by 12% from GBP78.4 million in 2017 to GBP87.6 million, with
repricing and the increase in the Bank of England interest rates improving the
underlying performance in James Hay and the strong demand for the Saunderson
House discretionary management service contributing to improved revenue.
Adjusted operating profits increased by 18% from GBP10.5 million to GBP12.4
million demonstrating the strength of the two underlying businesses. This is
despite an increase in one-off central costs incurred during the year.
Adjusted EPS increased from 8.34 pence to 9.14 pence.
The results include exceptional costs relating to the ongoing legacy matters,
as well as residual costs associated with the business disposals made in 2014,
costs associated with the cancelled Saunderson House sale process, and
settlement payments relating to the departure of the former CEO. The operating
profit of GBP0.3 million is marginally higher than the loss of GBP0.4 million in
2017 which was also impacted by material exceptional costs.
Loss after tax for the year of GBP1.0 million was primarily as a result of the
lack of tax relief for sanction charges and settlement costs relating to
legacy matters (2017: GBP0.3 million). Consequently, basic loss per share was
0.90 pence (2017: loss per share of 0.32 pence).
Net assets remained stable at GBP74.0 million compared to GBP74.7 million in the
prior year and consequently, with only a marginal improvement in operating
profit, Return on Capital employed improved slightly from -0.6% in 2017 to
0.4% in 2018.
Free cash flow generated in the year improved by 16% from GBP5.7 million to GBP6.6
million, partly due to lower net capital expenditure combined with improved
operating cash flows.
The Group remains well capitalised. Despite an improvement in cash from GBP24.6
million to GBP27.7 million, we continue to conserve cash to ensure that we have
sufficient capital and cash to cover worst-case outcomes in relation to our
legacy issues, particularly in relation to Elysian Fuels, where we have
received protective assessments of approximately GBP20 million, plus interest
payable at HMRC's standard rate. As a result, despite the improved performance
for the Group during the year, we will not be recommending a final dividend
for 2018. We recognise the importance of dividend payments to our shareholders
and the Board remains committed to reinstating dividends as soon as
practicable.
Revenue
2018 2017
GBP'000 GBP'000
Platform 53,295 46,169
Independent wealth management 34,338 32,225
Total revenue 87,633 78,394
Revenue was 12% higher than the prior year at GBP87.6 million (2017: GBP78.4
million), with James Hay improving by 15% from GBP46.2 million to GBP53.3 million,
and Saunderson House increasing by 7% from GBP32.2 million to GBP34.3 million.
In James Hay, the repricing undertaken in H2 2017 and the Bank of England
interest rate increases both contributed to increased revenue, though this
impact was partly offset by a reduction in cash balances over the period,
signalling a behavioural change in investment strategy. The increase in
interest rates in late 2018, positions the business well for further revenue
growth in 2019.
Saunderson House saw revenue improve by 7% and the demand for Discretionary
Management Services contributed 60% of client wins during the year and an
increase in DMS revenue of 68% from GBP1.4 million in 2017 to GBP2.4 million in
2018.
Adjusted operating profit
Adjusted operating profit, before amortisation of intangibles and exceptional
costs, increased by 18% from GBP10.5 million to GBP12.4 million. This was
principally driven by the increased revenues in James Hay which saw its
contribution increase by 69% from GBP6.1 million to GBP10.3 million, and adjusted
operating margin return to prior year levels.
The contribution from Saunderson House decreased by 18% from GBP8.6 million to
GBP7.1 million, excluding one-off retention payments of GBP3.0 million, as
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compensation returned to prior year levels reversing a significant reduction
in 2017.
Group costs include costs associated with our London based Group teams, the
Board of Directors, governance and oversight committees and other costs
associated with being a publicly listed company. Group costs increased from
GBP4.2 million to GBP5.0 million as a result of increased costs in H1 2018 related
to interim resources in senior roles. Group costs normalised in H2 2018 with
further cost savings to be delivered during H1 2019 in line with the overall
cost saving initiatives previously announced.
2018 2017
GBP'000 GBP'000
Platform 10,293 6,079
Independent wealth management 7,092 8,599
Group/other (5,007) (4,179)
Total adjusted operating profit 12,378 10,499
Amortisation of intangibles (2,128) (2,137)
Exceptional costs (9,923) (8,795)
Operating profit/(loss) 327 (433)
Finance income 123 52
Profit/(loss) before income tax 450 (381)
Income tax (expense)/credit (1,404) 43
Loss for the year from operations (954) (338)
Exceptional costs
Exceptional costs of GBP9.9 million (2017: GBP8.8 million), comprise remediation
costs in relation to the ongoing investigation and resolution of legacy issues
in James Hay of GBP5.5 million, retention payments of GBP3.0 million to Saunderson
House staff following the cancelled sale, settlement costs of GBP0.7 million
associated with the departure of the former CEO, GBP0.6 million relating to the
full and final settlement of the matter relating to the sale of the
international business and legal costs associated with the cancelled sale
process of GBP0.1 million. Legacy costs are net of actual and/or assumed
recoveries under the Group's insurance arrangements.
Operating profit
An operating profit of GBP0.3 million, after amortisation of intangibles of GBP2.1
million and exceptional costs of GBP9.9 million, was a marginal improvement on
the prior year (2017 loss: (GBP0.4 million)). Amortisation of intangibles,
principally related to the James Hay acquisition in 2010, remained in line
with 2017 at GBP2.1 million.
Tax
The effective tax rate for the Group increased significantly to 312% from
11.3% in the prior year. The effective increase in rate is primarily due to
significant non-allowable costs in UK subsidiaries, primarily settlement costs
and sanction charges, combined with increased Group plc costs. The prior year
effective tax rate benefited from prior year tax adjustments relating to
dilapidations and amortisation. While mindful of our obligations to
Shareholders to ensure tax efficiency, we use only legitimate tax reliefs for
the purposes for which they were intended and do not take part in aggressive
tax planning or condone tax avoidance as both would contravene our cultural
values. See the table below for a reconciliation of the effective tax rate on
results and note 5 for a full reconciliation of the income tax expense.
Reconciliation of effective tax rate:
Gross Tax Effective
GBP'000 GBP'000 Tax rate
Operating profit before tax 450
Add back non-allowable items 7,030
Taxable profit 7,480 (1,468) 20%
Non-allowable items:
Settlement charges relating to the (627)
sale of the International Business
(see note 4)
Sanction charges (see note 4) (3,706)
Other non-allowable expenses* (2,697)
Total (7,030) -
Prior year tax adjustments - 64
Operating profit before tax/ tax 450 (1,404) 312%
charge
*Other non-allowable items related to non-qualifying depreciation, client
entertainment and losses in Ireland and Netherlands with no tax-benefit.
Adjusted EPS and adjusted earnings
The Group uses adjusted operating profit and adjusted earnings as measures of
performance to eliminate the impact of items it does not consider indicative
of ongoing underlying performance due to their unusual, exceptional or
non-recurring nature. The table below provides a reconciliation of how the
group calculates adjusted and basic operating profit.
Year ended Year ended
31 December 2018 31 December 2017
Per share Earnings Per share Earnings
pence GBP'000 pence GBP'000
Loss (0.90) (954) (0.32) (338)
attributable
to owners of
the Parent
Company
Amortisation 1.64 1,724 1.83 1,933
of
acquisition
related
intangible
assets
Exceptional 7.80 8,235 6.39 6,732
items
Relating to 0.60 627 0.44 469
the sale of
Internationa
l business
Adjusted 9.14 9,632 8.34 8,796
earnings
The table above shows how we calculate adjusted EPS and adjusted earnings. The
above amounts are net of tax, if applicable. An amount of GBP45,000 related to
prior year tax adjustments is included in exceptional items above.
Cash flows
The Group generated GBP10.7 million (2017: GBP10.1 million) from operations,
reflecting adjusted operating profits, offset by movements in working capital.
The Group paid a net corporate tax payment of GBP1.1 million in 2018 (2017: GBP2.3
million) and invested a total of GBP4.0 million in capital expenditure (2017:
GBP4.4 million), compared to depreciation and amortisation of GBP6.4 million
(2017: GBP5.3 million). Total dividends paid during 2018 were GBPnil (2017: GBP5.2
million), resulting in an increase in net cash of GBP3.1 million to
GBP27.7million.
Free cash flow generated in the year is an alternative performance measure
used by management to represent the cash flow generated from adjusted
operating activities less cash used in relation to capital expenditure. Free
cash flow improved by 16% from GBP5.7 million to GBP6.6 million, partly due to
lower net capital expenditure combined with improved operating cash flows.
Free cash flow was reduced due to unusually high balances over the year-end
period, used to fund settlement of client trades which adversely impacted
working capital by GBP2.0 million in James Hay, combined with higher working
capital outflows in Saunderson House which resulted from a requirement to
realign work-in-progress billing, as detailed in cash generated from
operations (note 8). The negative impact caused by mis-matched settlement of
client trades in James Hay was subsequently reversed in January 2019.
Management continues to closely monitor the Group's liquidity and ability to
meet obligations as they fall due.
The Group's total cash is restricted due to regulatory capital requirements
within its subsidiaries and a desire to ensure we retain sufficient cash to
cover worst-case outcomes in relation to the known legacy issues. We expect
the businesses to continue to generate cash to fund ongoing investment,
subject to the resolution of a number of legacy matters. The dividend policy
will be kept under review and, subject to retaining cover for our legacy
issues, the Board will seek to resume the payment of dividends at the earliest
possible date.
2018 2017
GBP'000 GBP'000
Cash flows from operating activities 10,665 10,132
Capital expenditure (4,022) (4,388)
Free cash flow 6,643 5,744
Interest and tax (974) (2,213)
Retention payment (1,500) -
Disposals of subsidiaries 550
Deferred consideration 4,037
Head office restructuring and exceptional costs (1,050) (6,650)
Dividends paid - (5,217)
Cash settlement of share awards - (35)
Net cash inflow/(outflow) 3,119 (3,784)
Use of alternative performance measures
The Group has identified certain measures that it believes will assist in the
understanding of the performance of the business. These measures are not
defined under IFRS but can be used, subject to appropriate disclosure in
conformance with the guidance issued by the European Securities and Markets
Association (ESMA). These alternative performance measures are; adjusted
operating profit, adjusted earnings per share, adjusted operating margin,
Return on Capital Employed and free cash flow as set out in note 2.
Adjusted operating profit, Adjusted EPS and Adjusted operating margin, exclude
acquisition-related amortisation, exceptional items and discontinued
operations. Management believes excluding these items from the calculation of
basic operating profit, Basic EPS and Basic operating margin is useful because
management excludes items that are not comparable when measuring operating
profitability, evaluating performance trends and setting performance
objectives. It allows investors to evaluate the Group's performance for
different periods on a more comparable basis.
The reconciliation of adjusted operating profit to profit before income tax is
disclosed in note 3.
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