Final Results

Panmure Gordon & Co. Plc - Final Results

31-March-2016

PANMURE GORDON & CO. PLC

("Panmure Gordon", the "Group" or the "Company")

Preliminary results for the year ended 31 December 2015

Panmure Gordon & Co. plc, a leading independent institutional stockbroker and investment bank, today announces preliminary results for the year ended 31 December 2015.

Key Points

· As previously advised, the loss after tax from normal operations for the year is £4.1m (2014 profit of £2.0m)

· The operational loss total of £4.1m comprises the total statutory loss of £(16.7m) less the impact of goodwill impairment of £(13.2m) and the write-back of its associated accumulated deferred tax credit of £1.1m and, share based payments charge of £(0.5m)

· International accounting standard IAS36 review of the carrying value of goodwill resulted in a non-cash impairment charge of £13.2m (2014: £nil) and an accompanying reversal of historic accrued deferred tax liabilities of £1.1m (2014: nil)

· Revenue from corporate finance and other fee income down 38% to £12.8m (2014: £20.7m)

· 11.3% increase in net commission and trading income to £10.5m (2014: £9.4m)

· Assisted clients in raising more than £500m in the year

· Successful acquisition and integration of Charles Stanley Securities

· Client numbers at an all-time high of 152 at 31 December 2015 (2014: 123)

· Appointed new Chief Executive, Patric Johnson in February 2016

· Cash at 31 December 2015 was £5.0m (2014: £12.4m)

· £5.0m financing facility made available by QInvest in February 2016

Chief Executive Patric Johnson commented:

"2015 was a disappointing year with regards to our primary markets activities. However, our institutional securities business performed well, we successfully completed the acquisition of Charles Stanley Securities in July 2015, increased our corporate client base to 152 from 123 and we remodelled the business with our corporate-led, sector-driven approach and this strategy is already yielding results. We took the decision to write off the outstanding historic accounting goodwill of £13.2m on the balance sheet, which dates back to 2005, and start 2016 with a clean slate. This results in a statutory loss of £16.7m and a clean and transparent balance sheet going forward. I should make it clear that the relevant impairment charge of £13.2m is non-cash accounting item and has no impact on regulatory capital or on the ongoing operations of the business.

2016 has started positively: In the first three months of the year we have made operational efficiencies and executed 14 deals, and will record a profit. Despite this, we are under no illusion as to the potency of the dangers that lie ahead of us this year and the external factors that will weigh heavily on the fund raising opportunities in our market. Encouragingly, we have an extremely talented team of people and a very supportive shareholder in QInvest - an excellent platform on which to build for the future."

CHAIRMAN'S STATEMENT

2015 was a challenging year in financial markets. Extreme volatility, in large part caused by concerns about Chinese economic growth and attendant collapses in commodity markets, severely constrained the equity capital markets. While it gives the Board no pleasure to report a loss for Panmure Gordon for the year, this should be viewed against this backdrop of constraints to primary equity issuance rather than as a reflection of the underlying strengths of the Company.

In July 2015 the Company completed the acquisition of Charles Stanley Securities, an institutional broking and corporate finance business with highly complementary operations to the core Panmure Gordon activities. We are pleased to welcome the staff and clients of Charles Stanley Securities and believe that the enhanced client list of the enlarged firm provides a solid foundation for future growth. 

Secondary market revenues, comprising brokerage commissions and market making profits, held steady year-on-year, although there was a change in the revenue mix. Commission rates have been under steady downward pressure for many years, and 2015 was no exception, encouraged in part by regulatory change. This was reflected in our own commission revenues. However, this was offset by a rise in trading profits, a function of management and other changes in recent times.

The Company's primary market revenues declined year-on-year, reflecting the difficult market environment. Nevertheless, Panmure Gordon still raised over £500m in equity finance for our clients, underlining the Company's continuing reputation and capabilities. Our corporate client list has grown to 152, boosted by the Charles Stanley Securities acquisition, and providing a firm foundation of retainer income and the prospect of primary revenues in years to come.

Since the year end, management has taken action to ensure that the core Panmure Gordon institutional and corporate business is fit for the continuing challenging market conditions. Costs have been removed from these operations and management responsibilities realigned. In addition, the Company has withdrawn from non-core activities, including the closure of the loss-making office in Nyon, Switzerland.

Also in 2016, Phillip Wale stepped down and was replaced as Chief Executive by Patric Johnson, who had been promoted to the Board in March 2015. Phillip leaves Panmure Gordon with the Board's very best wishes, having been instrumental through his leadership in reshaping the business over the past four years.

Patric's appointment in February was accompanied by the securing of a £5m funding facility from our largest shareholder, QInvest. This facility underlines QInvest's continuing commitment to Panmure Gordon and will provide management with increased flexibility in pursuing their growth plans in the coming years.

I also am pleased to welcome Steven Baldwin who was appointed as a non-executive director on 1 February 2016. Steve brings a wealth of financial services experience with him and we are pleased to have him on board.

Finally, I will be retiring as Chairman at the Company's Annual General Meeting in May. I leave a business well placed to capitalise on its long heritage in the UK stock market and its enduring reputation for integrity in the conduct of business for its clients. 

Ed Warner, OBE

Chairman

30 March 2016

Chief Executive's review

Macro review

UK equity valuations remained subdued during 2015 and into the first part of 2016. Earnings growth failed to materialise for the fourth consecutive year and an overweight commodities sector weighed on headline UK indices. The expected tailwind to global growth from lower energy costs has been uneven and sporadic.

Comparing 2015 against 2014, the UK main market and AIM raised in 2015 a combined total in IPOs of £8.0bn versus £12.0bn in 2014.

Overview

2015 was a disappointing year with regards to our primary markets activities. However, our institutional securities business performed well with the continued success of our distribution & trading activities. We successfully completed the acquisition of Charles Stanley Securities in July 2015 and increased our corporate client base to152 from 123.

The Group experienced a number of pressures and as a result has entered into a post-tax operating loss from operations before the impact of goodwill impairment of £13.2m, the associated write-back of deferred tax liability of £1.1m and share based payments charge of £0.5m led to a post-tax loss from normal operations of £(4.1)m (equivalent for 2014: profit of £2.0m). This loss was due to a reduction in Corporate finance and other fee income by £7.9m to £12.8m. This decline in corporate revenue was driven by a combination of smaller deal size and lower corporate activity. Additionally, administrative costs, relating primarily to the Charles Stanley Securities acquisition, increased by £1.0m to £26.5m. Conversely, the institutional securities side of the business saw an increase in net commission and trading income of £1.1m to £10.5m showing a year-on-year growth of 11.3%. This increase is consistent with our longer term strategy to prepare the business for the incoming regulatory changes represented by MiFID II and a rigorous focus on servicing our institutional client base with high value and substantive research, access to capital and the provision of excellent trading and sales capabilities.

We have remodelled the business with our corporate-led, sector-driven approach with teams of sector experts to support clients and this strategy is already yielding results with the No 1 position by number of clients in Healthcare (ARL Corporate Advisers Ranging Guide Feb 2016), the No1 slot in Consumer goods and 2nd overall position in the number of AIM clients, up from 3rd in 2014.

Key Transactions

Panmure Gordon helped to raise over £500m for corporate clients in over 20 separate transactions throughout the course of the year. Significant corporate financing deals won in 2015 include; the £233m rights issue for RPC Group; a secondary placing on behalf of GLI Finance, the IPO of Gear4Music, the York based musical equipment retailer; a secondary placing for Allergy Therapeutics and, the IPO of Orchard Funding Group.

 The new clients obtained from the acquisition of Charles Stanley Securities and the additional expertise obtained provides a good platform from which to move forward in 2016. Our focus on ensuring that the level of service and advice we provide to our client base continues to be of the highest quality, reflecting the values of Panmure Gordon, should continue to generate opportunities for growth.

Dividend

The Board is not recommending the payment of a dividend (2014: 2.5p per ordinary share).

Goodwill

Management has to make a number of subjective assumptions in respect of goodwill and this year has reflected on the recent losses incurred, the extreme market volatilities being experienced and the appropriateness of the interest rate used to discount the future expected cash flows of the business which it has increased significantly and, as a result, an impairment charge of £13.2m has been taken through the income statement for the year ended 31 December 2015. Whilst the resulting number is significant it is important to note that this has no effect on the day-to-day business but the cleaning up of an historic 2005 pre-financial crisis era accounting entry that was generated by the acquisition of Panmure Gordon (UK) Limited by the Group. This has no impact on cash or the levels of regulatory capital which both remain comfortable.

QInvest

Panmure Gordon enjoys an excellent relationship with its major shareholder, QInvest, and in February 2016 agreed to enter into a £5m financing arrangement that will further assist growth plans for the future whilst providing further liquidity for ongoing business.

2016 Outlook

2016 will benefit from the operational efficiencies made including the closure of our office in Nyon, Switzerland, effective January 2016, and the reduction in overall headcount numbers from a peak of 137 in July 2015 to approximately 100 at the current date. Right-sizing the business is crucial to create a solid platform for growth and we have had to make some tough decisions in our ongoing effort to make this right. However, in order to remain a client centric business, we will continue to invest in individuals and teams that reflect the values of the Company and drive the business forward. We have concentrated our resources around key specialist sector teams and we have continued to move the revenue model to better reflect the future regulatory environment. We will also look to expand our distribution capabilities, particularly in the US.

We are fortunate to have as a key shareholder, QInvest, who is supportive of our business and strategy. Their granting of financing to enhance our financial strength and liquidity will allow us to accelerate our plans for the near future. We look forward to exploring further opportunities for working together.

The start to 2016 has proved to be extremely challenging in all areas of the financial services industry. We have seen volatility spike and a continued decline in trading volumes, all within a macro backdrop of uncertainty regarding Europe and the United Kingdom's continued participation in the EU as well as the US elections and China's economic slowdown. I am pleased to report, however, that we have started the year profitably with 14 transactions by the end of March 2016, compared with six transactions in the first Quarter of 2015, and we continue to see modest, though steady, growth in our secondary business.

Phillip Wale, who served as Chief Executive from 2012 left the business in February 2016. Phillip's direction and leadership allowed us to move with the changing environment and he was instrumental in defining the blueprint of the business going forward. I want to take this opportunity to express our gratitude for his valuable contribution over the past four years.

Finally, although he is with us until the AGM in May, I would like to take this opportunity to thank Ed Warner for his efforts and dedication to the firm over the past seven years, six as Non-Executive Chairman. His presence of mind, advice and general guidance and oversight for the board will be missed by both the executive team and non-executives directors. His contribution has been greatly appreciated, and we wish him all the best for the future.

Patric Johnson

Chief Executive

30 March 2016

Key performance indicators

Financial

Operational

Consolidated income statement

For the year ended 31 December 2015

1 Administrative expenses which total £41.9m (2014: £27.2m) have been presented separately here owing to their individual nature and size

Consolidated statement of comprehensive income & expense

For the year ended 31 December 2015

The notes on pages 32 to 57 form part of these financial statements.

Consolidated statement of financial position

As at 31 December 2015

Approved by the board on 30 March 2016 and signed on its behalf by:

Philip Tansey

Chief Financial Officer

Consolidated statement of cash flow

Consolidated statement of changes in equity for the year ended 31 December 2015

Consolidated statement of changes in equity for the year ended 31 December 2014

1 Segmental analysis

The Group reports its operating segments according to how the Group's chief operating decision maker ("CODM") allocates resources to each segment and assesses performance. In this respect the Group's CODM has been defined as the Group's CEO.

In the segmental table below, the results of the Swiss office appear in the 'Other' column. In January 2016 a decision was taken to cease regulated activity from the Swiss office and it has subsequently been closed.

Segmental analysis for the year ended 31 December 2015 and reconciliation to the statutory income statement is set out below:

All revenue is from external customers. There are no regular major customers that account for more than 10% of revenue.

1 The Swiss business operates as a representative office of the UK business and therefore shares assets with the UK business.

Country-by Country Reporting

The Capital Requirements Regulations 2013 came into effect on 1 January 2014, and have been transposed into UK law to impose certain reporting obligations on institutions, defined as credit institutions and investment firms, within the United Kingdom and within the scope of EU Capital Requirements Directive IV (CRD IV).

Disclosure requirements under article 89 in the Capital Requirements Directive comprise details on the registered office, nature of activities, turnover, profit or loss before tax, tax paid, public subsidies received and the average number of employees of the firm on a country by country basis. This is known as Country-by Country Reporting ("CBCR").

The information contained in this disclosure is based on the scope of consolidation in the financial statements and reflects the data as at the reporting date 31 December 2015.

The table below shows that the vast majority of Group losses or profits are generated in the UK and therefore, a resulting higher amount of corporation tax is incurred in the UK. The Group had a calculated global tax credit of £2.2m (2014 charge: £0.7m). Due to prior and current years' trade losses and double taxation relief effectively no tax payment was required. Panmure Gordon & Co plc. paid in total £23,000 (2014: £16,000) of corporation tax in Switzerland. With a global tax credit of £2.2m and losses before tax of £(18.9)m the effective calculated tax rate charge for 2015 is (11.7)%.

4 Staff costs

The Group operates a defined contribution pension scheme. At the balance sheet date the Group had no outstanding pension contribution liabilities. The charge for the period to 31 December 2015 was £1.1m (2014: £1.0m).

Actual number of persons, including Directors, employed by the Group as at 31 December 2015:

* The UK total includes 1 headcount in Singapore

Average number of persons, including Directors, employed by the Group during the year was:

* The UK total includes 1 headcount in Singapore

Directors' emoluments

Emoluments paid to Directors were as follows:

Three Directors accrued benefits during the year under the Group's defined contribution pension scheme during the year.

The Directors are reimbursed all reasonable expenses incurred solely in relation to their duties as a Director.

5 Income tax expense

The analysis of the total income tax credit/(expense) is as follows:

6 Earnings per share

Earnings per share ("EPS") are calculated on a net basis using the profit on ordinary activities after taxation divided by the weighted average number of shares detailed below.

7 Goodwill and other intangibles

On 15 July 2015 the Group successfully completed the acquisition of Charles Stanley Securities ("CSS"), the investment banking division of Charles Stanley Group Plc. The consideration for the acquisition comprises a cash payment on completion of up to £1.5m in cash and deferred consideration comprising an equal split between the Group and Charles Stanley of retainer and corporate transaction fees which emanate from the transferred business and are earned in the twelve month period following completion, to a maximum of £5m.

The fair value of the intangible has been estimated to be £1.9m which, after grossing up for the impact of deferred tax liabilities at 18% of £0.3m, results in a total value of £2.2m. This has been treated as an intangible asset with no goodwill arising and is shown separately in the table below. Acquisition related costs of £0.1m were incurred and taken as expenses in the year. No other assets or liabilities were recognised as part of the acquisition. The intangible represents customer relationships that were transferred to the Group as part of the CSS acquisition. Intangible assets are amortised over a useful life of five years and the charge for the part-year in 2015 is £0.2m.

Goodwill represents the excess of purchase price paid over net assets acquired, being in respect of the acquisition of Panmure Gordon (UK) Limited in April 2005, which represents the UK cash-generating unit ("CGU"). A charge for goodwill impairment of £13.2m has been taken as explained under Goodwill Impairment below.

Goodwill impairment

Approach to goodwill impairment testing

The process of identifying and evaluating goodwill impairment requires significant management judgment in making a series of estimations, the results of which are highly sensitive to the assumptions used.

If the results of the impairment testing demonstrate that the estimated recoverable amount is lower than the carrying value of the CGU, a charge for impairment of goodwill will be considered for recognition in the Group's income statement for the year.

Goodwill following the acquisition of Panmure Gordon (UK) Limited ("UK CGU")

The recoverable amount of the UK CGU was measured based on value in use. The key assumptions and approach to determine value in use calculations are solely estimates for the purpose of assessing impairment on acquired goodwill. The calculation uses cash flow projections based on budgets and forecasts approved by management covering three years. These projections are then extrapolated using a nominal long-term growth rate appropriate for the CGU.

The review of goodwill impairment represents management's best estimate of the factors below:

· The future expected cash flows of the CGU are sensitive to the cash flows projected for the periods for which detailed forecasts are available and to assumptions regarding the average long-term sustainable cash flows thereafter. Forecasts take into account previous actual performance and externally verifiable economic and market data and expectations both in past and future periods. However, the cash flow forecasts also necessarily and appropriately reflect management's view of future business prospects at the time of the assessment taking into account recent trading performance. The rate used to discount the future expected cash flows is based on the cost of capital assigned to the CGU and has a significant effect on the CGU's valuation. The cost of capital is generally derived from a Capital Asset Pricing Model, which incorporates inputs reflecting a number of financial and economic variables, including the risk-free interest rate in the country concerned and an equity risk premium. The cost of capital is then adjusted to reflect the inherent and specific risks of the business being evaluated, to obtain the discount rates. These variables are subject to fluctuations in external market factors and economic conditions outside of management's control and are therefore established on the basis of management judgment and subject to uncertainty. When the CGU's cost of capital increases, the effect is to reduce the estimated recoverable amount of the CGU.

Key assumptions

The three key assumptions upon which management has based its determination of the recoverable amount of the CGU are: three-year cash flow forecasts, in addition to long-term sustainable cash flows (discussed above); the discount rate (discussed above); and the long-term growth rate, which is based on expected long-term GDP growth for the UK. Further detail regarding the assumptions used and the results of sensitivity analyses performed are outlined below.

Results of impairment review

Management considers that the business and cash flows from Panmure Gordon (UK) Limited are integral to the operations of the Group in the UK. Management has reflected on the recent significant losses incurred in the year ended 31 December 2015 and also the appropriateness of the discount rate used to discount the future expected cash flows of the business and concluded that it should be increased to 12.5%. The resulting present value of these cash flows at this significantly increased discount rate is considerably lower than the carrying value of the CGU and as a result an impairment charge of £13.2m has been taken through the income statement for the year ended 31 December 2015.

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The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 December 2015, but is derived from those accounts. The annual report and statutory accounts will be sent to shareholders and will be made available to the public from the Company's website: www.panmure.com or, upon request, at the registered office of Panmure Gordon & Co. plc, One New Change, London EC4M 9AF.

Panmure Gordon & Co.Plc

Source: Panmure Gordon & Co.Plc