Interim Financial Report

27th Feb 2015 07:00

 

 

River and Mercantile Group PLC

Interim Financial Report for the six months ended 31 December 2014

Financial Highlights

 Chairman's statement

 

Report of the Chief Executive Officer

 

Key Performance Indicators

 

Financial Review

 

Principal risks and uncertainties

 

Responsibility statement

 

Independent auditor's review report

 

Condensed consolidated interim financial statements

 

Condensed consolidated income statement

 

Condensed consolidated statement of comprehensive income

 

Condensed consolidated statement of financial position

 

Condensed consolidated statement of cash flows

 

Condensed consolidated statement of changes in shareholders' equity

 

Notes to the condensed consolidation interim financial statements

 

 

Paul Bradshaw

Non-Executive Chairman

 

I am pleased to present our interim report for the 6 months ending 31st December 2014.

 

The Statutory profit after tax was £4.2 million and the Adjusted profit after tax was £6.3 million for the period. The board has declared a total interim dividend of 4.6 pence per share, of which 1.0 pence is a special dividend and relates to net performance fees.

 

The business performed well during a volatile period. Mike's CEO report provides a full overview, but I would just like to highlight:

 

Fiduciary management generated particularly strong client returns through our Total Investment Governance Solution (TIGS) strategy. We are leveraging that expertise in the Dynamic Asset Allocation Fund which we launched in the period and which is beginning to enjoy strong interest. We used capital raised at the IPO to effect swift and effective seeding of that fund.

 

We were pleased to raise just over £50m for the launch of our UK Micro Cap investment company. This is part of our, largely complete, reconfiguration of our equity solutions business where we now have a structure enabling us to focus on our proven Potential, Value and Timing ('PVT') processes long term. Our new global high alpha fund, based on this methodology, is generating interest and more generally, we have been pleased with the manner in which our equities team has found synergy with our derivatives team on recent client presentations. 

 

The next six months to the end of our financial year in June will perhaps provide greater clarity (or conceivably greater confusion) on two key external influences:  

 

 

As Mike highlights in his report, our fundamental strength is in understanding our clients' needs. As the nature and expectation of pensions changes, it is likely that the importance of understanding these specific needs will become greater still. We therefore expect to remain in the vanguard of maximising client outcomes. 

 

As ever, change equals opportunity for a young, talented and responsive company such as ours and, as ever, it is a pleasure to be part of that team.

 

Report of the Chief Executive Officer

Mike Faulkner

Chief Executive Officer

 

The first six months of our financial year have occurred during a period of significant market, economic and political uncertainty. I would therefore like to review the performance of the business in light of this backdrop, and against the strategic objectives we set out at IPO and in our Annual Report. I will also describe how we see opportunities in the near term.

 

What we said we would do

 

We identified four broad themes that would be represented in the execution of our strategy:

 

· Strong organic growth in Fiduciary Management and Advisory;

· Equity mandates to grow - both wholesale and institutional. The focus for wholesale will be specialist products, and outcome-led products for institutional (particularly those combining active equity management and derivatives);

· Derivatives growth further fuelled through consultant relationships; and

· New product launches to accelerate growth.

 

I take each of these in turn in reviewing the performance of the business.

 

Fiduciary Management and Advisory

 

Whilst we represent these revenue lines separately, in practice they are strongly linked. They both represent a basis for client engagement that typically involves applying investment thinking to all or the majority of a client's assets, rather than a component. A significant proportion of Fiduciary Management clients have started as Advisory clients.

 

During the first six months of the year, this part of our business has performed well. The growth in advisory revenue was supported in part by the significant amount of work generated by the departure of the Barings Dynamic Asset Allocation team. It is a facet of our Advisory division that environments of uncertainty can lead to more work in response to changing conditions, be they market driven or at investment organisations appointed by clients.

 

We have seen very significant growth in mandated and fee earning Fiduciary Management Assets under Management (AUM) during the six month period. This growth splits evenly between fund inflows and investment returns. The investment return has been particularly strong, given the volatile market conditions, due to effective rotation of client assets between different asset classes and effective hedging, particularly of interest rate risk. In an environment where bond yields have fallen significantly, interest rate hedging strategies perform well and this is supportive of performance.

 

Our margins on Fiduciary Management business have been trading slightly higher in the six month period. However, this is expected to fall back, due to the effect of recently being appointed by larger fiduciary clients.

 

Our strategy remains to continue the strong growth of existing products, and we are confident in the strength of our pipeline. In particular, this is consistent with industry expectations that demand for fiduciary management will continue to grow.

 

Derivative Solutions

 

During the six month period, we have seen growth in mandated Notional under Management (NUM) of 7%, to around £9.6bn. This growth comprises new mandates and rebalancing of existing mandates (this is where clients decide to change the level of hedging employed).

 

The success of Fiduciary Management has been a significant support to the Derivative Solutions division. However, one of our stated aims is to develop this business through our consultancy partners, and this has been a key focus during the six month period. I am happy to report that we have so far made progress in this regard. We are already buy-rated by a top consultancy, and have been put forward for our first consultant-led pitch during the period.

 

The general level of economic and political uncertainty should be positive for this division, as the desire by institutions to mitigate key financial risks is heightened. Furthermore, we know that equity hedging is a key theme for a number of institutional investors. As a result, we are seeing demand from prospects for structured equity mandates and we are confident about the outlook for this business line.

 

Equity Solutions

 

AUM in the Equity Solutions division is marginally down, as one might expect in more volatile market conditions, particularly when some institutions are expressing concerns over valuation levels and the length of the equity bull market. Equity Solutions - wholesale is the AUM raised via financial intermediaries to the investing public, as opposed to institutions. We had stated that our intention was to grow our wholesale activities through more specialist product. We have seen nearly 13% growth in wholesale AUM during the six month period, a strong result. This includes the successful launch of the River & Mercantile UK Micro Cap Investment Company, where we raised approximately £50 million. In prevailing conditions, we believe this was highly successful and a reflection of the high regard in which R&M's PVT equity team is held. Additional growth has continued as planned in the range of wholesale specialist products we offer.

 

Within the institutional space, we have seen net outflows, primarily as a result of weak performance in our thematic global equity products. We have seen around £200 million of outflows since the end of 2014 and this has led to the closure of the thematic global equity strategies and the departure of the team, the impact of which is discussed in the Financial Review.

 

During the six month period, we have been working to develop a broader-based global equity product to be run by the PVT team, known as Global High Alpha. Design of this product was completed during the six month period, and early marketing has already been conducted. The results of this early marketing are encouraging and we are expecting to see flows into this product and World Recovery (also run by the PVT team) in the next 12 months from institutions.

 

I had identified in our annual report that demand for composite equity mandates - active equity plus derivatives - was a key theme. We still believe this will be an important trend, but expect that demand for Global High Alpha will be more immediate and that is therefore where our time has been spent.

 

New product development

 

New product development is a key strategic theme for us. I have already addressed the development of the Global High Alpha product and the UK Micro Cap Investment Company in the previous section as new product development. In September we also launched the R&M Dynamic Asset Allocation (DAA) fund. This fund was seeded with £5m of Group capital, having previously identified seeding as one of the reasons for the raise on IPO.

 

We have subsequently received commitments into the DAA fund from three clients for a total of around £60m of assets. We will be reporting these inflows for now within the Fiduciary Management division, until the DAA fund has greater scale. We have already begun marketing this fund to consultancies. Given the demand for multi-asset class funds in general, we are optimistic for the fund's outlook in the medium term.

 

Comments on outlook

 

The uncertainty theme is occupying the minds of many investors and we are no different. As a company seeking to deliver strong, stable, long term returns to shareholders, the six month period illustrates some important facets of our business lines that allow us to deliver stable profit growth:

 

· Our divisions are all expected to grow in the medium term, offering products that are in demand and consistent with the direction of travel for investors; and

· We have strong revenue diversification between the business lines, which mitigates volatility. In a period of market volatility, while we see some weakness in the short run from Equity Solutions, we see strength and stability in our derivatives and fiduciary activities. We have also seen growth in our advisory revenues.

 

As a result, I consider that we are well positioned to weather short and even medium term uncertainty if it persists, on the way to longer term growth in a portfolio of services that all have sustainable demand.

 

Summary

 

In summary, this has been a good six months for the business in difficult conditions. We are confident of our near term pipeline in Fiduciary Management and Derivative Solutions, and can see demand for our existing wholesale specialist products, as well as our global PVT strategies from institutions. The launch of our DAA fund has attracted assets and we will continue to work with our consultant partners with the aim of growing this strategy further. As a result, I consider the business to be well placed to grow. Finally, I would like to thank our shareholders for their support during this period.  

Key Performance Indicators

(Figures in brackets are for the six months ended 30 June 2014, which include the merger of RAMAM from 27 March 2014)

 

1. Growth in Mandated AUM/NUM: 5% / (29%)

 

(Mandated AUM/NUM: £18.92 billion, £18.09 billion and £14.07 billion as at 31 December 2014, 30 June 2014 and 31 December 2013 respectively).

 

The growth in Mandated AUM/NUM is a key indicator of the client engagement process. The growth in Mandated AUM/NUM is a function of new mandates, low attrition rates, and aggregate investment performance. New mandates include flows from existing clients where we have increased the breadth of our relationship, or flows from new clients. Low attrition rates result from being able to retain previous client flows as a result of meeting their outcome expectations.

Aggregate investment performance arises from both asset and liability investing. Negative investment performance can occur provided it is within the outcome expectation of the client. The expectation is that, in aggregate, the investment performance has to be positive to sustain the business.

 

2. Growth in net management and advisory fees (annualised): 33% / (30%)

 

(Net management and advisory fees: £23.3 million for the six months ended 31 December 2014; £17.5 million for the six months ended 30 June 2014; and £26.8 million for the year ended 31 December 2013.)

 

Management and advisory fees net of rebates and third party revenue shares, represent the underlying revenues generated by the business. The growth of AUM/NUM at stable management fee margins, and the absolute growth in advisory clients and revenue per client results in growth in management and advisory fees. This metric measures the sustainability of the business.

 

3. Adjusted underlying pre-tax margin: 26% / (23%)

 

Adjusted net profit before tax for the six months ended 31 December 2014 was £7.9 million. Performance fees and other revenue, net of associated remuneration expense was £1.8 million. Adjusted underlying pre-tax profit was £6.1 million. Total net management and advisory fees are £23.3 million.

 

Adjusted net profit before tax for the six months ended 30 June 2014 was £5.6 million. Performance fees and other revenue, net of associated remuneration expense was £1.7 million. Adjusted underlying pre-tax profit was £3.9 million. Total net management and advisory fees are £17.5 million.

 

Adjusted net profit before tax for the year ended 31 December 2013 was £7.8 million. Performance fees and other revenue, net of associated remuneration expense was £2.2 million. Adjusted underlying pre-tax profit was £5.6 million. Total net management and advisory fees are £26.8 million.

 

Adjusted underlying pre-tax margin represents net management and advisory revenue less the related expense base, adjusted for the amortisation of intangible assets, share-based remuneration relating to EPSP and the costs arising from the IPO. Adjusted underlying pre-tax margin is an indication of the ability to achieve scale though increased management and advisory revenues, at a lower marginal increase in related expenses. The progression over time is an indication of the scale achieved. The target in the medium term is to increase the adjusted underlying pre-tax margin to 30%.

 

4. Percentage of adjusted Basic Earnings Per Share distributed: 60%

 

Adjusted Basic Earnings Per Share was 7.70 pence per share for the six months ended 31 December 2014. The total interim dividend in respect of the period ended 31 December 2014 is 4.6 pence per share.

 

 

Adjusted Basic EPS is the Adjusted profit after tax before discontinued operations, adjusted to add back the amortisation of intangible assets, share-based remuneration relating to EPSP, and IPO costs, net of tax, divided by the weighted average number of shares outstanding in the period, excluding shares that are dilutive in period.

 

Distributions to shareholders include cash dividends and the cash value of shares repurchases for cancellation.

 

The Group's dividend policy is to pay at least 60% of the Group's adjusted underlying profits available for distribution by way of ordinary dividends. In addition, the Group expects to generate surplus capital over time, primarily from net performance fee earnings. The Group intends to distribute such available surpluses, after taking into account regulatory capital requirements at the time and potential strategic opportunities, to shareholders primarily by way of special dividends. Whilst the Board considers dividends as the primary method of returning capital to shareholders, it may execute share repurchases, when advantageous to shareholders and where permissible.

 

The distributions as a percentage of adjusted Basic EPS reflects the amount of the earnings per share actually distributed to shareholders.

 

Financial Review

The Assets under Management and Notional under Management for the 6 months ended 31 December 2014 is shown in the table below:

 

	Assets Under Management (AUM) and Notional Under Management (NUM)
£'m	Fiduciary Management	Derivative Solutions (NUM)	Equity Solutions			Total AUM/NUM
			Wholesale	Institutional	Total
Opening fee earning AUM/NUM	6,080	8,863	846	1,563	2,409	17,352
Sales	882	377	285	185	470	1,729
Redemptions	(334)	(132)	(167)	(367)	(534)	(1,000)
Net flow	548	245	118	(182)	(64)	729
Investment performance	548	-	(9)	33	24	572
Net rebalance	-	485	-	-	-	485
Fee earning AUM/NUM	7,176	9,593	955	1,414	2,369	19,138
Mandates in transition (1 July)	617	112	-	125	125	854
Transitions	(617)	(112)	-	(125)	(125)	(854)
Mandates in transition (31 December)	33	-	-	-	-	33
Redemptions in transition (1 July)	(113)	-	-	-	-	(113)
Redemptions	113	-	-	-	-	113
Redemptions in transition (31 December)	(34)	(17)	-	(205)	(205)	(256)
Total mandated AUM/NUM	7,175	9,576	955	1,209	2,164	18,915
Opening mandated AUM	6,584	8,975	846	1,688	2,534	18,093
Percentage change in fee earning AUM/NUM	18%	8%	13%	(9)%	(2)%	10%
Percentage change in Mandated AUM/NUM	9%	7%	13%	(28)%	(15)%	5%

 

AUM/NUM Highlights

 

· Mandated AUM/NUM has increased by 5% from 30 June 2014 to £18.9 billion, with fee earning AUM/NUM increasing by 10% to £19.1 billion.

 

· AUM/NUM inflows from sales in the period were £1.7 billion and positive rebalancing flows in Derivative Solutions were £485 million.

 

· Investment performance increased AUM by £572 million, due to strong performance from Total Investment Governance Solution (TIGS) in Fiduciary Management.

 

· Redemptions were £1.0 billion including £235 million relating to institutional AUM managed by the thematic global equity team and included in Equity Solutions - Institutional. Redemptions in transitions were £256 million, which included £205 million relating to the thematic global equity team.

Fiduciary Management mandated AUM increased 9%. Fee earning AUM has increased 18% as a result of the transition of mandates at the beginning of the period, as well as inflows from existing clients and new mandates of £150 million. Redemptions included five clients that moved into the Pension Protection Fund (PPF) and benefit payments to existing client schemes of £110 million. The investment strategy within Fiduciary Management 'Total Investment Governance Solution' (TIGS), including liability hedging, was up 12%, generating £548 million of positive investment performance. Included under Fiduciary Management is £57 million of AUM relating to the DAA fund, including £33 million of mandates in transition.

 

Derivative Solutions mandated and fee earning NUM increased by 7% and 8%, respectively, as a result of £377 million of new mandates and £485 million of net rebalancing from existing mandates. Redemptions relate to the schemes that transitioned to the PPF.

 

Equity Solutions - Wholesale mandated and fee earning AUM increased 13% and includes £50 million from the new River & Mercantile UK Micro Cap Investment Company. Redemptions include £33 million of redemptions from the World Recovery Fund following strong investment performance.

 

Equity Solutions - Institutional mandated AUM decreased by 28% and fee earning AUM has decreased by 9% primarily due to £440 million of redemptions and redemptions in transition from the thematic global equity team.

 

 

Combined historical financial information

The following tables show the combined historical financial information as if the acquisition of RAMAM had occurred on 1 January 2013. This information is based on the historical information of the separate businesses and does not assume any revenue or cost synergies. It also excludes IPO and reorganisation costs, intangible amortisation, depreciation and share based payments expense.

 

 

Combined historical income statement (£'000)	6 months 31 December 2014	6 months 30 June 2014	6 months 31 December 2013	6 months 30 June 2013
Net management fees	17,319	15,380	13,326	12,398
Net advisory revenue	5,965	5,240	5,738	5,360
	23,284	20,620	19,064	17,758
Performance fees and other income	3,067	2,848	12,162	313
Total revenues	26,351	23,468	31,226	18,071
Administrative expenses	4,650	4,290	3,851	3,715
Remuneration	13,731	12,920	16,626	10,586
	18,381	17,210	20,477	14,301
Pre-tax profit	7,970	6,258	10,749	3,770
Remuneration/revenue	52%	55%	53%	59%
Pre-tax margin	30%	27%	34%	21%

 

 

 

Combined historical net management fees

 

The following tables show the net management fees and margins by business:

 

Net management fees (£'000)	6 months  31 December 2014	6 months 30 June 2014	6 months 31 December 2013	6 months 30 June 2013
Fiduciary Management	6,544	5,560	4,889	5,042
Derivative Solutions	3,774	3,400	3,177	2,643
Equity Solutions - Wholesale	3,383	2,772	1,459	752
Equity Solutions - Institutional	3,618	3,648	3,801	3,961
Total Equity Solutions	7,001	6,420	5,260	4,713
Total management fee revenue	17,319	15,380	13,326	12,398
Closing Fee earning AUM/NUM	19,138	17,352	16,213	14,104
Average Fee earning AUM/NUM	18,245	16,800	15,150	13,660

 

 

Net management fee margin (basis points)	6 months  31 December 2014	6 months 30 June 2014	6 months 31 December 2013	6 months 30 June 2013
Fiduciary Management	20	19	19	19
Derivative Solutions	8	8	8	8
Equity Solutions - Wholesale	77	83	76	68
Equity Solutions - Institutional	46	45	45	47
Average Margin	19	18	18	18

 

Net management fees increased by 13% in line with the growth and mix of fee earning AUM/NUM at stable margins.

 

Closing mandated AUM/NUM is 3% above average fee earning AUM/NUM indicating increasing underlying revenue growth. Annual In-force management and retained advisory revenues is £40.4 million at 31 December 2014, an increase of 5% over 30 June 2014.

 

 

Advisory revenues

 

Advisory revenues (£'000)	6 months  31 December 2014	6 months 30 June 2014	6 months 31 December 2013	6 months 30 June 2013
Retainers	2,077	2,363	2,476	2,585
Project based revenues	3,934	3,035	3,491	2,828
Total net Advisory revenue before revenue share	6,011	5,398	5,967	5,413
Third party revenue share arrangements	(46)	(158)	(229)	(53)
Total net Advisory revenues	5,965	5,240	5,738	5,360

 

 

Advisory revenues before revenue share increased 11% over the previous six months as a result of increased solution implementation fees and additional advisory work for clients relating to their dynamic asset allocation strategies. The decrease in retainer fees reflects the movement of clients from advisory mandates to fiduciary management mandates.

 

Performance Fees

 

Performance fees relate to the realisation of deferred performance fees in TIGS. No performance fees were recorded in Equity Solutions at the 31 December performance fee anniversary date.

 

Combined historical administration expenses

 

Total administration expenses were £4.7 million for the six months ended 31 December 2014, an increase of £0.4m over the previous six months as a result of increased fund administration expense and the inclusion of Governance costs. Fund administration expense increased in the period due to legal costs related to launching new funds, fund closures and settlement costs. Governance costs include incremental costs of £200,000 which were incurred in the period relating to the preparation and audit of the Group's first Annual Report and Accounts. These costs included the full adoption of the UK Corporate Governance Code and the Remuneration Policy of the Group.

 

Combined Historical Remuneration

 

The ratio of fixed and variable remuneration (excluding share based remuneration) to total revenue is 52% compared to 55% and 53% for the six months ended 30 June 2014 and 31 December 2013 respectively. Fixed remuneration expense includes the establishment of an accrual for untaken annual leave of £305,000 which is not expected to fluctuate significantly in future periods.

 

As a result of the operating leverage of the combined business it is anticipated that the remuneration to total revenue ratio will trend to a range of 45-50% of revenues over the next three years.

 

Non-Statutory Accounting measures

 

The Group assesses its performance (including key performance indicators) based upon a number of non-statutory accounting measures, the most significant being adjusted profits, adjusted underlying profits and adjusted EPS. The Directors consider that these measures give investors a better indication of the recurring earnings of the business on a basis which is comparable between periods. A reconciliation between statutory profit, adjusted profit and adjusted underlying profit including the bases by which each is arrived at, can be found in note 11 to the condensed consolidated interim financial statements.

 

Adjusted pre-tax profit and margin

 

Adjusted profit before tax for the six months ended 31 December 2014 was £7.9 million compared to £5.6 million for the six months ended 30 June 2014. The increase is the result of increased revenue from the inclusion of RAMAM for the full period, increased revenue from increased fee earning AUM/NUM, partly offset by increases in administrative expenses. The adjusted pre-tax margin was 30% compare to 28% in the previous period as a result of increased revenue and lower remuneration expense partly offset by increases in administrative expenses. Adjusted pre-tax profit and margin are defined in Note 11 in the condensed consolidated interim financial statements.

 

Adjusted underlying pre-tax margin and profits

 

The adjusted underlying pre-tax profit for the six months ended 31 December 2014 was £6.2million compared to £4.0million in the previous period. The adjusted underlying pre-tax margin was 26% compared to 23% in the previous period. The increase is the result of increased net management and advisory fees and a lower marginal increase in expenses, primarily remuneration. The target in the medium term is to increase the adjusted underlying pre-tax margin to 30%, primarily through increased revenue and a scalable expense base.

 

Net performance fee pre-tax profit was £1.8 million compared to £1.7 million in the previous period. The average remuneration accrual rate on performance fees is approximately 42%.

 

Adjusted underlying pre-tax margin and profits and Net performance fee pre-tax profit are defined in Note 11 in the condensed consolidated interim financial statements.

 

Adjusted Basic Earnings Per Share

 

Adjusted Basic EPS was 7.70 pence per share for the six months ended 31 December 2014, compared with 7.74 pence for the six months ended 30 June 2014. The decrease is primarily due to the increase in the weighted average number of shares which has offset the increase in adjusted profit after tax. Adjusted Basic EPS is defined in Note 11 in the condensed consolidated interim financial statements.

 

Key management personnel compensation

 

Key management personnel compensation has increased due to the inclusion of RAMAM for a full six month period combined with the increased level of executive and non-executive Directors as a result of the IPO (refer to Note 15 in the Condensed Consolidated interim financial statements).

 

Subsequent Events - Equity Solutions thematic global equity team

 

After a prolonged period of underperformance of the strategies operated by the thematic global equity team, the majority of the investors have redeemed and this has led to the departure of the team after the reporting period end. The remaining assets, which total £300 million, have been transferred to other portfolio managers within Equity Solutions. The loss of assets and the departure of the team is not expected to have a significant impact on the Group results or financial position. Approximately £430,000 of non-recurring costs will be incurred in the next reporting period relating to the closure of the thematic global equity strategies, which will be offset by reduced run rate costs of the team over the next reporting period.

 

Dividends

 

As outlined in the Chairman's Report, the Board of Directors have declared a total interim dividend of 4.6 pence per share, of which 1.0 pence is a special dividend and relates to net performance fees.

 

Capital and liquidity

 

At 31 December 2014 the Group had net assets of £67.1 million and cash balances of £14.3 million.

 

The Group operates through three regulated entities, each is capitalised in accordance with the applicable regulatory capital requirements. There are no significant regulatory changes anticipated affecting the Group's regulatory capital requirements. Total excess regulatory capital held at the Group level is £17.0 million; the declared dividend will reduce this amount to £13.2 million.

 

Principal risks and uncertainties

 

There are a number of potential risks and uncertainties which could have a material impact on the Group's performance over the remaining six months of the financial year and could cause actual results to differ materially from expected and historical results. The directors do not consider that the principal risks and uncertainties have changed since the publication of the annual report for the six months ended 30 June 2014. At that date, they were:

 

· We do not fully identify or understand the client's desired investment outcomes;

· The design of the investment strategy does not deliver investment performance consistent with the range of articulated outcomes;

· The execution of the investment strategy is not in accordance with the agreed investment strategy;

· The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events;

· The Group and the investment advisory and investment management industries as a whole are sensitive to adverse economic, political and market factors and volatility in financial markets. A significant deterioration or sustained decline in economic conditions or financial markets could impact investor sentiment and adversely affect the Group's performance;

· The Group operates in an evolving regulatory environment and is subject to wide-ranging legal and regulatory (including capital) requirements and supervision; changes to which may result in additional compliance costs or adverse changes in the Group's business. Failure to comply with such requirements may result in investigations, disciplinary action, fines, reputational damage and the revocation of the Group's licences, permissions, waivers or authorisations;

· The Group is dependent on the continued services of its senior management and key personnel. The loss of key individuals or a failure to have effective succession plans could reduce our ability to service our clients; and

· Damage to the Group's reputation could affect the perception that clients and potential clients have of our abilities as an investment partner.

 

The directors do not expect the principal risks and uncertainties to change for the remainder of the financial year.

 

A more detailed explanation of the risks relevant to the Group is on pages 30 and 31 of the annual report which is available at www.riverandmercantile.com.

 

Responsibility statement

 

The Directors confirm to the best of their knowledge:

 

· The unaudited condensed set of financial statements has been prepared in accordance with IAS 34 "Interim Financial Reporting" as adopted by the EU and gives a true and fair view of the assets, liabilities, financial position and profit or loss of the Group;

· The interim management report includes a fair review of the information required by sections 4.2.7R and 4.2.8R of the Disclosure and Transparency Rules of the UK Financial Conduct Authority.

By order of the Board

 

Mike Faulkner	Kevin Hayes
Chief Executive Officer	Chief Financial Officer

 

 

A copy of this interim report will be posted on the Company's website on the date of this statement at www.riverandmercantile.com

 

Independent auditor's review report

 

Introduction

 

We have been engaged by the company to review the condensed set of financial statements in the interim financial report for the six months ended 31 December 2014 which comprises the condensed consolidated income statement, condensed consolidated statement of financial position, condensed consolidated statement of comprehensive income, condensed consolidated statement of cash flows and condensed consolidated statement of changes in shareholder's equity and the related explanatory notes.

 

We have read the other information contained in the interim financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

 

Directors' responsibilities

 

The interim financial report is the responsibility of and has been approved by the directors. The directors are responsible for preparing the interim financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

 

As disclosed in note 2, the annual financial statements of the group are prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. The condensed set of financial statements included in this interim financial report has been prepared in accordance with International Accounting Standard 34, ''Interim Financial Reporting'', as adopted by the European Union.

 

Our responsibility

 

Our responsibility is to express to the company a conclusion on the condensed set of financial statements in the interim financial report based on our review.

 

Our report has been prepared in accordance with the terms of our engagement to assist the company in meeting its responsibilities in respect of interim financial reporting in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority and for no other purpose. No person is entitled to rely on this report unless such a person is a person entitled to rely upon this report by virtue of and for the purpose of our terms of engagement or has been expressly authorised to do so by our prior written consent. Save as above, we do not accept responsibility for this report to any other person or for any other purpose and we hereby expressly disclaim any and all such liability.

 

Scope of review

 

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, ''Review of Interim Financial Information Performed by the Independent Auditor of the Entity'', issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

 

 Conclusion

 

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the interim financial report for the six months ended 31 December 2014 is not prepared, in all material respects, in accordance with International Accounting Standard 34, as adopted by the European Union, and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

 

BDO LLP

Chartered Accountants

London

United Kingdom

26 February 2015

 

BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).

Condensed consolidated interim financial statements

 

On 27 March 2014, the acquisition of River and Mercantile Asset Management LLP ('RAMAM') was completed in a share for LLP interest exchange by P-Solve Limited. The results of operations of RAMAM have been consolidated as a 100% owned entity from the date of acquisition. P-Solve Limited (P-Solve) changed its name to River and Mercantile Group Limited (R&M) on 9 April 2014 and registered as a public limited company on 2 June 2014. On 26 June 2014 the Group was admitted to the London Stock Exchange as a public listed company. The Group changed its financial year end to 30 June effective 30 June 2014.

 

The Interim Report should be read in conjunction with the Annual Report of the Group for the period ended 30 June 2014.

Condensed consolidated income statement

		Unaudited	Audited	Unaudited
	Note	6 months ended 31 December 2014	6 months ended 30 June 2014	6 months ended 31 December 2013
		£'000	£'000	£'000
Revenue:
Net management fees	4	17,319	12,285	8,076
Net advisory fees	4	5,965	5,240	5,734
Performance fees		3,058	2,350	3,761
Other income		9	287	-
Total revenue		26,351	20,162	17,571
Administrative expenses	6
Marketing		287	269	173
Travel and entertainment		254	242	131
Office facilities		889	772	720
Technology and communications		1,174	930	601
Professional fees		775	614	1,166
Governance expenses		427	159	17
Fund administration		248	96	-
Other		596	641	74
		4,650	3,723	2,882
Expenses associated with the IPO	5	-	4,045	-
Expenses associated with corporate reorganisation and integration	5	-	507	-
		-	4,552	-
Impairment of goodwill		-	-	262
Gains on changes in fair value of contingent consideration		-	-	(207)
Depreciation		41	24	10
Amortisation		2,167	1,087	9
Total administrative expenses		6,858	9,386	2,956
Remuneration and benefits
Fixed remuneration and benefits		8,933	7,180	6,227
Variable remuneration		4,798	3,547	3,297
Share-based remuneration: EPSP	7	518	-	-
Performance share plan expense	7	-	112	13
Total remuneration and benefits		14,249	10,839	9,537
Profit/(loss) before interest and tax		5,244	(63)	5,078
Finance income		13	2	20
Finance expense		(6)	(12)	(74)
Profit/(loss) before tax		5,251	(73)	5,024
Tax charge
Current tax	9	1,587	1,337	1,117
Deferred tax	9	(505)	(176)	11
Profit/(loss) after tax, before discontinued operations		4,169	(1,234)	3,896
Discontinued operations, net of tax		-	-	1,262
Profit/(loss) for the period attributable to owners of the Parent		4,169	(1,234)	5,158

 

		Unaudited	Audited	Unaudited
	Note	6 months ended 31 December 2014	6 months ended 30 June 2014	6 months ended 31 December 2013
		£'000	£'000	£'000
Earnings per share
Continuing operations:
Basic (pence)	11	5.08	(2.22)	11.00
Diluted (pence)	11	4.71	(2.22)	11.00
Discontinued operations:
Basic/diluted (pence)	11	-	-	3.56
Total earnings per share
Basic (pence)	11	5.08	(2.22)	14.6
Diluted (pence)	11	4.71	(2.22)	14.6
Adjusted earnings per share
Adjusted profit before tax	11	7,936	5,566	5,033
Adjusted profit after tax, before discontinued operations	11	6,318	4,299	3,907
Adjusted EPS
Basic (pence)	11	7.70	7.74	11.03
Diluted (pence)	11	7.14	7.39	11.03

 

Condensed consolidated statement of comprehensive income

		Unaudited	Audited	Unaudited
	Note	6 months ended 31 December 2014	6 months ended 30 June 2014	6 months ended 31 December 2013
		£'000	£'000	£'000
Profit/(loss) for the period		4,169	(1,234)	5,158
Items that may be subsequently reclassified to profit or loss:
Change in value of available-for-sale financial assets	8	15	-	-
Foreign currency translation differences		91	(13)	73
Total comprehensive income/(loss) for the period attributable to owners of the Parent		4,275	(1,247)	5,231

 

The notes to the condensed consolidated interim financial statements form part of and should be read in conjunction with these financial statements.

Condensed consolidated statement of financial position

		Unaudited	Audited	Audited
	Note	31 December 2014	30 June 2014	31 December 2013
		£'000	£'000	£'000
Assets
Cash and cash equivalents		14,312	19,388	5,192
Investment management balances		9,942	8,744	-
Available-for-sale investments	8	5,015	-	-
Financial assets at fair value through profit or loss		198	219	-
Fee receivables		4,243	2,664	4,483
Other receivables		11,361	10,022	7,749
Deferred tax asset	9	531	95	135
Property, plant and equipment		240	230	49
Intangible assets		48,012	50,087	1,836
Total assets		93,854	91,449	19,444
Liabilities
Investment management balances		10,639	9,810	-
Current tax liabilities		1,011	1,337	-
Trade and other payables		8,506	9,148	7,418
Borrowings		-	-	9,687
Deferred tax liability relating to intangible assets	9	6,579	7,010	-
Total liabilities		26,735	27,305	17,105
Net Assets		6	64,144	2,339
Equity
Share capital		246	246	86
Share premium		14,688	14,688	292
Available-for-sale reserve		15	-	-
Foreign exchange reserve		(1)	(92)	(79)
Merger reserve		44,433	44,433	-
Capital redemption reserve		84	84	-
Capital contribution		4,442	4,442	575
Retained earnings		3,212	343	1,465
Equity attributable to owners of the Parent		67,119	64,144	2,339

 

The notes to the condensed consolidated interim financial statements form part of and should be read in conjunction with these financial statements.

The financial statements were approved by the Board and authorised for issue on 26 February 2015.

Mike Faulkner Kevin Hayes

Chief Executive Officer Chief Financial Officer

Condensed consolidated statement of cash flows

		Unaudited	Audited	Unaudited
		6 months ended  31 December 2014	6 months ended 30 June 2014	6 months ended 31 December 2013
		£'000	£'000	£'000
Cash flow from operating activities
Profit/(loss) before interest and tax		5,244	(63)	5,078
Adjustments for:
Amortisation of intangible assets		2,167	1,087	9
Depreciation of property, plant and equipment		41	24	10
Impairment of goodwill		-	-	262
Share-based payment expense		226	112	13
Changes in the fair value of contingent consideration		-	-	(207)
Foreign exchange losses/(gains) on operating activities		53	(10)	90
Operating cash flow before movement in working capital		7,731	1,150	5,255
(Increase) /decrease in operating assets		(4,149)	17,168	(926)
Increase /(decrease) in operating liabilities		239	(16,882)	3,763
Cash generated from operations		3,821	1,436	8,092
Tax paid		(1,913)	-	(889)
Net cash generated from operations		1,908	1,436	7,203
Cash flow from investing activities
Interest received		13	-	20
Purchases of property, plant and equipment		(51)	(10)	-
Acquisition of subsidiary, net of cash acquired		-	4,019	-
Contingent consideration paid on business acquisitions		(52)	(71)	(52)
Acquisition of available-for-sale investments		(5,000)	-	-
Loan repayments received from related parties		-	-	6,372
Proceeds from disposal of discontinued operations, net of cash disposed		-	-	1,100
Net cash (used in)/generated from investing activities		(5,090)	3,938	7,440
Cash flow from financing activities
Interest (paid)/received		(6)	2	(74)
Proceeds on issue of shares		-	14,640	142
Dividends paid		(1,888)	-	(20,414)
Drawdown of borrowings		-	-	10,520
Loan repayments paid to related parties		-	(5,820)	(869)
Net cash (used in)/generated from financing activities		(1,894)	8,822	(10,695)
Net (decrease)/increase in cash and cash equivalents		(5,076)	14,196	3,948
Cash and cash equivalents at beginning of period		19,388	5,192	1,244
Cash and cash equivalents at end of period		14,312	19,388	5,192

 

The significant non-cash transaction during the six months ended 30 June 2014 was a capital contribution from the parent company, Punter Southall Group Limited, to discharge a loan liability of £3.9m that was due to it under the intercompany borrowing facility (note 15).

The notes to the condensed consolidated interim financial statements form part of and should be read in conjunction with these financial statements.

 

Condensed consolidated statement of changes in shareholders' equity

	Share Capital	Share premium	Available-for-sale reserve	Foreign exchange reserve	Merger reserve	Capital redemption reserve	Capital contribution	Retained earnings	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Balance as at 1 July 2013	46	14,597	-	(152)	-	-	4,279	(1,403)	17,367
Comprehensive income for the period:
Profit for the period	-	-	-	-	-	-	-	5,158	5,158
Other comprehensive income	-	-	-	73	-	-	-	-	73
Transactions with owners recognised directly in equity:
Dividends	-	-	-	-	-	-	-	(20,414)	(20,414)
Share-based payment expense	-	-	-	-	-	-	-	13	13
Capital reduction	-	(14,407)	-	-	-	-	-	14,407	-
Reserve transfer	-	-	-	-	-	-	(3,704)	3,704	-
Issue of performance shares	40	102	-	-	-	-	-	-	142
Balance as at 31 December 2013	86	292	-	(79)	-	-	575	1,465	2,339
Comprehensive income for the period:
Loss for the period	-	-	-	-	-	-	-	(1,234)	(1,234)
Other comprehensive income	-	-	-	(13)	-	-	-	-	(13)
Transactions with owners recognised directly in equity:
Ordinary shares issued in the year	-	-	-	-	44,433	-	-	-	44,433
Capitalisation of share premium	219	(219)	-	-	-	-	-	-	-
Share-based payment expense	-	-	-	-	-	-	-	112	112
Performance shares converted into deferred shares	(84)	-	-	-	-	-	-	-	(84)
Issue of shares in listing	25	14,975	-	-	-	-	-	-	15,000
Capital contribution from Parent	-	-	-	-	-	-	3,867	-	3,867
Shares purchased for cancellation	-	-	-	-	-	84	-	-	84
Share issue costs	-	(360)	-	-	-	-	-	-	(360)
Balance as at 30 June 2014	246	14,688	-	(92)	44,433	84	4,442	343	64,144
Comprehensive income for the period:
Profit for the period	-	-	-	-	-	-	-	4,169	4,169
Other comprehensive income	-	-	15	91	-	-	-	-	106
Transactions with owners recognised directly in equity:
Dividends	-	-	-	-	-	-	-	(1,888)	(1,888)
Share-based payment expense	-	-	-	-	-	-	-	226	226
Deferred tax credit on share-based payment expense	-	-	-	-	-	-	-	362	362
Balance as at 31 December 2014	246	14,688	15	(1)	44,433	84	4,442	3,212	67,119

 

The notes to the condensed consolidated interim financial statements form part of and should be read in conjunction with these financial statements.

Notes to the condensed consolidation interim financial statements

1. General information

 

River and Mercantile Group PLC (the Company), is a company domiciled in England. The condensed consolidated interim financial statements of the Company for the six months ended 31 December 2014 comprise the Company and its subsidiaries (together referred to as the "Group").

2. Accounting policiesBasis of preparation

These condensed consolidated financial statements have been prepared in accordance with IAS 34, "Interim Financial Reporting", as adopted by the European Union. They do not include all disclosures that would otherwise be required in a complete set of financial statements and should be read in conjunction with the 2014 Annual Report. The financial information for the six months ended 31 December 2014 and 31 December 2013 does not constitute statutory accounts within the meaning of Section 434(3) of the Companies Act 2006 and is unaudited.

 

The financial information for the six months ended 30 June 2014 does not constitute statutory accounts within the meaning of Section 434(3) of the Companies Act 2006 but is audited.

The annual financial statements of River and Mercantile Group PLC are prepared in accordance with IFRSs as adopted by the European Union. The Independent Auditors' Report on that Annual Report and financial statements for 2014 was unqualified, did not draw attention to any matters by way of emphasis, and did not contain a statement under 498(2) or 498(3) of the Companies Act 2006.

 

After making enquiries, the directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the interim condensed consolidated financial statements.

 

The same accounting policies, presentation and methods of computation are followed in these condensed consolidated financial statements as were applied in the Group's latest annual audited financial statements.

 

Significant judgments and estimates

Some of the significant accounting policies require management to make difficult, subjective or complex judgements or estimates. The policies which management consider critical because of the level of complexity, judgement or estimation involved in their application and their impact on the financial statements are:

· The determination of the fair value of consideration exchanged in the acquisition of RAMAM;

· Fair value of the Investment Management Agreements (IMAs) identifiable intangible asset in the acquisition accounting for RAMAM, including the discount rate used and the period over which the IMA intangibles will be amortised;

· Consideration of whether previously recorded goodwill is impaired, including the goodwill arising from the acquisition of RAMAM;

· The revenue recognition of management and performance fees; and

· Share-based payment expense for awards under performance share plans.

 

The significant estimates and judgements made by management in preparing these interim condensed consolidated financial statements were consistent with those applied to the consolidated financial statements for the year ended 30 June 2014. There have been no changes in estimates reported in prior periods.

3. Seasonality of revenue

 

The Group earns net management fees evenly throughout the year based on the AUM/NUM during the month or quarter.

 

The retainer element of net advisory fees are generally earned evenly throughout the year, however implementation and project fees are earned as specific projects are undertaken.

 

Performance fees are earned on crystallisation dates, which vary throughout the year but for the Equity Solutions division are generally on a calendar year basis.

4. Divisional and geographical reporting

 

The business operates through four divisions, however these are not considered as segments for the purposes of IFRS 8. Management however feel that it is useful to the understanding of the period under review to include certain information.

 

The net revenue for the six months ended 31 December 2014, 30 June 2014 and 31 December 2013 together with the period end fee earning assets under management (AUM) and the notional under management (NUM), reflect the measure of the products' activities of the respective divisions.

 

The Equity Solutions division represents the RAMAM business which was acquired on 27 March 2014 and was not part of the group during the six months ended 31 December 2013.

 

	Unaudited		Audited		Unaudited
	December 2014		June 2014		December 2013
	Net revenue	AUM/ NUM	Net revenue	AUM/ NUM	Net revenue	AUM/ NUM
	£'000	£'m	£'000	£'m	£'000	£'m
Fiduciary Management	6,544	7,176	5,561	6,080	4,899	5,645
Derivative Solutions	3,774	9,593	3,400	8,863	3,177	8,433
Equity Solutions	7,001	2,369	3,324	2,409	-	-
Advisory	5,965	N/A	5,240	N/A	5,734	N/A
Total	23,284	19,138	17,525	17,352	13,810	14,078

 

Performance fees of £3.1 million (June 2014: £2.4 million, 2013: £3.7 million) were earned by the Fiduciary Management division.

 

No single client accounts for more than 10% of the revenue or profits of the Group (June 2014: none; 2013: none).

 

On a geographic basis the majority of the revenues are earned in the UK. The Group has an advisory and fiduciary management business in the US and net revenue earned in the US for the six months ended 31 December 2014 was £2.4 million (June 2014: 2.4 million, 2013: £2.5 million). The fee earning AUM/NUM of the US business was £632 million (June 2014: £575 million, 2013: £434 million).

 

Non-current assets held by the US business include £1.4 million (June 2014: £1.4 million, 2013: £1.4 million) of goodwill arising from the acquisition of Cassidy and Palisades, and property plant and equipment of £49,000 (June 2014: £54,000, 2013: £48,000).

5. Expenses associated with the IPO and corporate reorganisation and integration

 

In the six months ended 30 June 2014 the Group incurred £4.0m of professional and commission fees in relation to its listing on the London Stock Exchange and a further £0.5m costs in relation to its corporate reorganisation and integration of RAMAM following its acquisition (note 12).

 

These costs are one-off in nature and do not reflect the underlying performance of the business and therefore have been presented separately on the condensed consolidated income statement.

6. Administrative expenses Administrative expenses for the 6 months ended 31 December 2014 increased compared to the previous periods due to the inclusion of RAMAM from the date of acquisition, 27 March 2014.

 

Governance expenses include the remuneration of Non-Executive Directors and the costs of advisors and legal fees relating to the governance framework of becoming a listed public company. The Group became a public listed company on 26 June 2014. Governance costs include incremental costs of approximately £200,000 which were incurred in the period relating to the preparation and audit of the Group's first Annual Report and Accounts. These costs included the full adoption of the UK Corporate Governance Code and the Board's Remuneration Policy.

 

Fund administration expense increased in the period due to legal costs related to launching new funds, fund closure of certain thematic global equity strategies.

 

Included in Other costs is the cost of insurance, staff training and recruiting and a provision for irrecoverable receivables.

7. Performance Share Plans

Share based remuneration: EPSP

Prior to Group's admission to the London Stock Exchange ("Admission") on 26 June 2014, the Board of Directors established the Executive Performance Share Plan (EPSP) to grant the Executive Directors and certain members of senior management performance shares. At the date of admission two classes of performance shares were awarded: Performance Condition A Awards and Performance Condition B Awards. The maximum aggregate number of Performance Condition A Awards and Performance Condition B Awards which may be issued under the EPSP was limited to 10% of the issued ordinary share capital of the Company on Admission. The Company granted 4,843,626 performance shares under Performance Condition A Awards and 2,462,860 performance shares under Performance Condition B Awards.

 

The vesting of Performance Condition A Awards is conditional upon achieving a total shareholder return of at least 12% compounded over the four-year performance period. Vesting starts at 12% compound annual total shareholder return and 100% vests at 24% compound annual total shareholder return over the four-year period. Vesting will be pro-rated on a straight-line basis between 12% and 24%.

 

The vesting of Performance Condition B Awards is conditional on achieving a total shareholder return of at least 25% compounded over the four-year performance period. Vesting starts at 25% compound annual total shareholder return and 100% vests at 30% compound annual total shareholder return over the four-year period. Vesting will be pro-rated on a straight-line basis between 25% and 30%.

 

Performance Condition A and B Awards are not eligible for dividends during the vesting period.

Any shares which vest are subject to a holding period of 12 months following the vesting date. Shares which do not vest will be forfeited. The vesting is also subject to the participant's continued employment by the Group during the vesting and holding period or, if employment ceases, being classified as a good leaver at the discretion of the Remuneration Committee. As at 31 December 2014, no shares had vested under either the A or B Awards (June 2014: none; 2013: none).

 

The fair value of the Performance shares was determined by a valuation undertaken by an independent advisor on behalf of the Remuneration Committee of the Board. This fair value was based on a Monte Carlo simulation of possible outcomes based on the returns and volatility characteristics of comparable publicly listed investment management businesses in the FTSE.

 

The key assumptions used in the valuation were: a mean expected total shareholder return (TSR) growth rate in line with the risk free rate (1.72%), a TSR volatility derived from the TSR volatilities of listed comparable companies of 30%, and a dividend yield of 4.5%. These assumptions are referred to by IFRS 13 Fair Value Measurement as Level 3 inputs.

 

The fair value of the Performance A shares is 38 pence per share and the fair value of the Performance B shares is 17 pence per share. The total fair value of Performance Condition A Awards is estimated at £1.84 million and Performance Condition B Awards at £0.42 million. The fair value is amortised into share-based remuneration expense over the vesting period and a charge of £226,000 was recognised for the six months ended 31 December 2014 (June 2014: nil: 2013: nil).

The directors expect that any shares that vest will be subject to applicable employer taxes at the date of vesting and at the end of the holding period. An accrual for this cost has been calculated based on the current rate of national insurance of 13.8%, the estimated number of the shares that could vest and the share price at the reporting date. The movement in the accrual in the six months ended 31 December 2014 was £292,000 (June 2014: nil; 2013: nil) and was included in the share-based remuneration expense.

The share-based remuneration expense relating to the EPSP, together with the associated employer taxes are treated as an adjusting item. The treatment of the corporate tax deductions associated with the EPSP is described in note 9.

 

The Performance Share Plan (PSP) was also established prior to Admission. The Plan allows for the grant of: Nil Cost Options, Contingent Share Awards or Forfeitable Share Awards. As at 31 December 2014 no grants had been made under the PSP (June 2014: none). At the date of Admission the Group established an Employee Benefit Trust, at 31 December 2014, the Trust did not hold any ordinary shares of the Company (June 2014: none; 2013: none).

 

Performance Share Plan

 

Prior to 26 June 2014 the Group operated a share based remuneration scheme for employees. Shares granted had performance conditions linked to the growth of the adjusted enterprise value of P-Solve and its subsidiaries. Each vesting was exchanged for shares in Punter Southall Group Limited (PSG). On 20 December 2013 the Plan was modified to provide that performance shares could, at the option of PSG, convert either into PSG shares or P-Solve shares and any unconverted shares would automatically convert on the occurrence of a corporate transaction. On 27 March 2014, upon the completion of the acquisition of RAMAM, all performance shares were converted, at PSG option, into shares in the Group. Details of the Performance Share Plan can be found in the Annual Report: note 22 and note 45.

8. Available-for-sale investments

During the six months ended 31 December 2014, the Group invested £5.0m of seed capital in the River and Mercantile Dynamic Asset Allocation fund (the 'DAA fund'). At 31 December 2014, this investment is recognised as an available-for-sale financial asset, with unrealised fair value movements recognised in Other Comprehensive Income.

The fair value of the Group's investment in the fund is derived from the fair value of the underlying investments which are traded in an active market and therefore IFRS 13 Fair Value Measurement refers to such inputs as Level 2.

 

The movement in the carrying value of the available-for-sale investment is analysed below:

	£'000
At 1 July 2013, 31 December 2013 and 30 June 2014	-
Additions	5,000
Movement in fair value	15
At 31 December 2014	5,015

9. Current and deferred tax

 

Tax charge consists of current tax and deferred tax. Current tax represents the estimated tax payable on the taxable profits for the period. Deferred tax is recognised on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements.

 

The most significant deferred tax items are the deferred tax liability established against the IMA intangible asset arising from the acquisition of RAMAM and the deferred tax asset recognised in respect of the EPSP share-based payment expenses. The amortisation of the IMA intangible asset is not tax deductible for corporate tax purposes therefore the deferred tax liability is released into the Income Statement to match the amortisation of the IMA intangibles. At each reporting date the Group estimates the corporation tax deduction that might be available on the vesting of EPSP shares and the corresponding adjustment to deferred tax asset is recognised in the Income Statement and Equity.

 

	Unaudited	Audited	Unaudited
	6 months ended 31 December 2014	6 months ended 30 June 2014	6 months ended 31 December 2013
	£'000	£'000	£'000
Current tax	1,587	1,337	1,117
Deferred tax	(505)	(176)	11
Total tax charge	1,082	1,161	1,128

 

The current tax charge in respect of the six months ended 31 December 2013 was paid by Punter Southall Group and its subsidiaries (PSG).

 

The tax assessed for the period is lower (June 2014: higher, 2013: lower) than the average standard rate of corporation tax in the UK. The differences are explained below:

 

	Unaudited	Audited	Unaudited
	6 months ended 31 December 2014	6 months ended 30 June 2014	6 months ended 31 December 2013
	£'000	£'000	£'000
Profit/(loss) before tax	5,251	(73)	5,024
Profit/(loss) before tax multiplied by the average rate of corporation tax in the UK of 21% (June 2014: 22%; 2013: 23%)	1,103	(16)	1,156
Effects of:
Transfer pricing adjustments	-	51	(93)
Expenses not deductible for tax purposes	464	1,170	(8)
Amortisation of RAMAM IMAs	(431)	(216)	-
Income not subject to tax	(32)	181	86
Adjustment in respect of prior years	-	(19)	(14)
Other timing differences	(22)	10	1
Total tax charge	1,082	1,161	1,128

 

The analysis of deferred tax assets and liabilities is as follows:

 

	Unaudited	Audited	Audited
	31 December 2014	30 June 2014	31 December 2013
	£'000	£'000	£'000
Deferred tax liabilities
At beginning of period	7,010	-	-
Acquisition of RAMAM (note 12)	-	7,226	-
Credit to the income statement	(431)	(216)	-
At end of period	6,579	7,010	-
Deferred tax assets
At beginning of period	95	135	146
(Charge)/credit to the income statement:
- accelerated capital allowances	(5)	(4)	(5)
- deductible temporary differences	(22)	(36)	(6)
- share based payment expense	101	-	-
Credit to equity - share based payment expense	362	-	-
At end of period	531	95	135

 

10. Dividends

During the six months ended 31 December 2013 two interim dividends in respect of the year ended 31 December 2013 of £5,996,537 (51 pence per share) and £14,416,985 (122 pence per share) were declared.

 During the six months ended 31 December 2014 a final dividend in respect of the six months ended 30 June 2014 of £1,888,193 (2.3 pence per share) was declared. No dividends were declared during the six months ended 30 June 2014.

11. Earnings per share

The basic and diluted earnings per share are calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares of the Company in issue during the period.

 To the extent that any of the EPSP performance shares (Note 7) vest they will have a dilutive effect on the equity holders of the Company. The potential dilution effect of the EPSP performance shares will be considered in the calculation of diluted earnings per shares.

 

The compound return to shareholders is based on share price and dividends received by shareholders from the date of grant until the reporting date and will be compared against the respective performance criteria of the performance shares to determine if the shares are dilutive as of the reporting date.

 

Based on the Group's share price at 31 December 2014 and dividends paid, all of the EPSP performance shares would have met the vesting criteria and were therefore considered dilutive for purposes of calculating diluted earnings per share (June 2014: none; 2013: n/a).

 

Earnings per share

	Unaudited	Audited	Unaudited
	6 months ended 31 December 2014	6 months ended 30 June 2014	6 months ended 31 December 2013
Profit/(loss) from continuing operations attributable to owners of the Parent (£'000)	4,169	(1,234)	3,896
Profit/(loss) attributable to owners of the Parent (£'000)	4,169	(1,234)	5,158
Weighted average number of shares in issue ('000)	82,095	55,560	35,412
Weighted average number of diluted shares ('000)	88,453	58,157	35,412
Earnings per share (pence)
Earnings per share - continuing operations
Basic	5.08	(2.22)	11.00
Diluted	4.71	(2.22)	11.00
Total earnings per share (pence)
Basic	5.08	(2.22)	14.6
Diluted	4.71	(2.22)	14.6

 Adjusted profit after tax before discontinued operations

Adjusted profit after tax represents profit after tax before discontinued operations, adjusted to add back the amortisation of intangible assets, share-based remuneration relating to EPSP, and IPO costs, net of tax.

	Unaudited	Audited	Unaudited
	6 months ended 31 December 2014	6 months ended 30 June 2014	6 months ended 31 December 2013
	£'000	£'000	£'000
Profit/(loss) before tax	5,251	(73)	5,024
Adjustments:
Amortisation of intangible assets	2,167	1,087	9
Share-based remuneration relating to EPSP	518	-	-
Expenses associated with the initial public offering	-	4,045	-
Expenses associated with the corporate reorganisation and integration	-	507	-
Adjusted profit before tax	7,936	5,566	5,033
Adjusted tax charge	(1,618)	(1,267)	(1,126)
Adjusted profit after tax	6,318	4,299	3,907

 

Adjusted earnings per share

	Unaudited	Audited	Unaudited
	6 months ended 31 December 2014	6 months ended 30 June 2014	6 months ended 31 December 2013
	£'000	£'000	£'000
Adjusted profit after tax	6,318	4,299	3,907
Weighted average shares	82,095	55,560	35,412
Weighted average diluted shares	88,453	58,157	35,412
Adjusted EPS:
Basic (pence)	7.70	7.74	11.03
Diluted (pence)	7.14	7.39	11.03

 

Adjusted underlying profit

 

Adjusted underlying profit represents net management and advisory fees less the related expense base, adjusted for the amortisation of intangible assets, share based payments and costs associated with the IPO and restructuring.

 

	Unaudited	Audited	Unaudited
	6 months ended 31 December 2014	6 months ended 30 June 2014	6 months ended 31 December 2013
	£'000	£'000	£'000
Adjustments to adjusted profit after tax:
Performance fees	3,058	2,350	3,761
Associated remuneration expense at 42%	(1,284)	(987)	(1,580)
	1,774	1,363	2,181
Other income	9	287	-
	1,783	1,650	2,181
Tax on adjustments	(374)	(363)	(507)
Net performance fee profit	1,409	1,287	1,674
Adjusted profit after tax	6,318	4,299	3,907
Adjusted underlying profit after tax	4,909	3,012	2,233

 

Adjusted underlying pre-tax profit	6,153	3,916	2,852
Adjusted underlying pre-tax margin	26%	23%	21%

 

Reconciliation between weighted average shares in issue

	Unaudited	Audited	Unaudited
	6 months ended 31 December 2014	6 months ended 30 June 2014	6 months ended 31 December 2013
	'000	'000	'000
Weighted average number of shares in issue - basic	82,095	55,560	35,412
Timing effect of performance share conversion to ordinary shares	-	2,597	-
Dilutive effect of shares granted under EPSP	6,358	-	-
Weighted average number of shares in issue - diluted	88,453	58,157	35,412

 

As at 31 December 2014, there were no shares which were antidilutive during the six months ended 31 December 2014 but which may be dilutive in future periods (June 2014: none; 2013: none). The performance shares which were antidilutive during the six months ended 31 December 2013 were converted to ordinary shares before the period end, at which point they were included in basic shares in issue.

12. Business combinations

There were no acquisitions made during the six months ended 31 December 2014 and 31 December 2013. On 27 March 2014, the acquisition of RAMAM was completed in a share for LLP interest exchange in order to combine RAMAM's equity management with the Group's asset allocation and derivative management capabilities to offer outcome-focused mandates for both the wholesale intermediary and institutional markets.

 

At the date of the acquisition the shares in P-Solve Limited did not have a readily determined market value.

 

As disclosed in the 2014 annual report, the identifiable net assets of RAMAM have only been determined on a provisional basis until the anniversary date of the acquisition.

13. Share capital

The Company had the following share capital at the reporting dates.

 

	Unaudited		Audited		Audited
	31 December 2014		30 June 2014		31 December 2013
	Number	£	Number	£	Number	£
Allotted, called up and fully paid:
Ordinary shares of £0.003/£0.0001 each	82,095,346	246,286	82,095,346	246,286	11,804,027	1,180
A performance shares of £0.01 each	-	-	-	-	1,479,972	14,800
B performance shares of £0.01 each	-	-	-	-	1,479,829	14,798
C performance shares of £0.01 each	-	-	-	-	1,507,229	15,072
D performance shares of £0.01 each	-	-	-	-	3,000,000	30,000
E performance share of £0.01 each	-	-	-	-	1,000,000	10,000
Total	82,095,346	246,286	82,095,346	246,286	20,271,057	85,850

 

The ordinary shares carry the right to vote and rank pari passu for dividends.

 

A, B, C, D and E performance shares and deferred shares carried no right to vote or entitlement to dividend.

 

14. Contingent liabilities

 

The directors were not aware of any events which would give rise to a contingent liability of the Group at the reporting date (June 2014: none; 2013: none).

15. Related party transactions

 

Key management personnel, PSG, and Pacific Investments Management Limited, its subsidiary undertakings and controlling shareholder, Sir John Beckwith (together "Pacific Investments") are considered related parties. There have been no changes to the related party transactions described in the last annual report that could have a material effect on the financial performance or position of the Group in the six months ended 31 December 2014.

 

Significant transactions with Pacific Investments

 

Fund administration costs for the six months ended 31 December 2014 included £56,000 (June 2014: none; 2013: none) paid to Pacific Investments.

 

Significant transactions with PSG

		Transaction amount
		Unaudited	Audited	Unaudited
		31 December	30 June	31 December
		2014	2014	2013
	Note	£'000	£'000	£'000
Sale of CAMRADATA	i	-	-	1,100
Discharge of corporation tax liability	ii	-	-	889
Administrative recharges from PSG	iii	1,206	1,310	1,331
Finance income on intercompany balances		-	2	20
Finance expense on intercompany balances		-	12	65
Advisory fee revenue share		32	109	148
IPO advisory costs		-	600	-

 

i) Sale of CAMRADATA

CAMRADATA Analytical Services Limited was sold to Punter Southall Group Limited on 20 December 2013 for cash consideration of £1.1 million.

 

ii) Corporation tax

The Group was part of PSG's tax group and its tax liabilities were settled by PSG for six months ended 31 December 2013.

 

iii) Administrative recharges from PSG

During the period the following payments were made to PSG which are included in Administrative Expenses:

	Unaudited	Audited	Unaudited
	6 months ended 31 December 2014	6 months ended 30 June 2014	6 months ended 31 December 2013
	£'000	£'000	£'000
Office facilities	482	516	575
Technology and communications	336	342	347
Professional fees:
Accounting services	132	132	157
Legal, compliance and regulatory	176	233	168
Human resources	80	87	84
Total	1,206	1,310	1,331

 

Borrowing facility with PSG

 

On 29 November 2013 the Group agreed an unsecured borrowing facility with Punter Southall Group Limited of £10,520,000 and drew down the full amount immediately. The facility had an interest rate of LIBOR plus 2.99%. The Group repaid £869,000 of the principal and interest by 31 December 2013 and a further £5.82 million during the subsequent period. The balance of the facility was forgiven by Punter Southall Group Limited on 27 March 2014 and the amount was recorded as a capital contribution to the Group. The following table shows the movements in the borrowings:

 

		Unaudited	Audited	Audited
		31 December 2014	30 June 2014	31 December 2013
		£'000	£'000	£'000
At beginning of period		-	9,687	-
Loan received during the year		-	-	10,520
Loan repaid		-	(5,820)	(869)
Interest accrued		-	-	36
Loan forgiveness		-	(3,867)	-
At end of period		-	-	9,687

 

The summary of trading balances at period end is shown below:

 

		Unaudited	Audited	Audited
		31 December	30 June	31 December
		2014	2014	2013
		£'000	£'000	£'000
Punter Southall Group Limited - trading account		-	-	17
Loan to Punter Southall Group Limited		-	-	1,683
Bonneysave Limited		-	-	(2)
Punter Southall Limited		-	-	(309)

 

Key management personnel compensation

 

Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Group, including the directors of the Company.

 

		Unaudited	Audited	Unaudited
		6 months ended 31 December 2014	6 months ended 30 June 2014	6 months ended 31 December 2013
		£'000	£'000	£'000
Wages and salaries		4,384	2,109	1,952
Short-term non-monetary benefits		172	291	14
Share-based payment expense		226	112	13
Defined contribution pension costs		46	42	58
Total		4,828	2,554	2,037

 

 

Key management personnel compensation has increased due to the inclusion of RAMAM for a full six month period combined with the increased level of executive and non-executive Directors as a result of the IPO.

16. Discontinued operations

 

CAMRADATA Analytical Services Limited was sold to Punter Southall Group Limited on 20 December 2013 for cash consideration of £1.1 million. The results of operations of CAMRADATA for the period from 1 July 2013 to 20 December 2013 were a profit of £31,000 which, together with the gain on the sale of £1,231,000 net of tax, has been classified as discontinued operations in the six month period ended 31 December 2013.

The post-tax gain on disposal of discontinued operations was determined as follows:

	£'000
Cash consideration received	1,100
Cash disposed of	(70)
Net cash inflow on disposal of discontinued operation	1,030
Net liabilities disposed of (other than cash):
Goodwill	(639)
Trade and other receivables	(361)
Trade and other payables	1,339
	339
Pre-tax gain on disposal of discontinued operation	1,369
Disposal of goodwill arising on consolidation	(138)
Post-tax gain on disposal of discontinued operation	1,231

 

The following table summarises the statement of financial position, income statement and cash flows for CAMRADATA for the period from 1 July 2013 to the date of disposal:

	Unaudited 6 months ended 31 December 2013
	£'000
Result of discontinued operations for the period:
Revenue	1,265
Expenses other than finance expense	(1,231)
Finance expense	(7)
Tax expense	4
Post-tax gain on disposal of discontinued operation	1,231
Profit for the period	1,262

 

The consolidated statement of cash flows for the six months ended 31 December 2013 includes the following amounts related to discontinued operations:

	Unaudited 6 months ended 31 December 2013
	£'000
Operating activities	(17)
Investing activities	1,100
Financing activities	(7)
Net cash from discontinued operations	1,076

 

 

17. Financial instruments

Categories of financial instruments

Financial instruments held by the Group are split into the following categories:

	Unaudited	Audited	Audited
	31 December	30 June	31 December
	2014	2014	2013
	£'000	£'000	£'000
Financial Assets
Cash and cash equivalents	14,312	19,388	5,192
Investment management balances	9,942	8,744	-
Fee receivables	4,243	2,664	4,483
Other receivables	10,770	9,685	5,770
Total loan and receivables	39,267	40,481	15,445
Available-for-sale investments	5,015	-	-
Total available for sale	5,015	-	-
Financial assets at fair value through profit and loss	198	219	-
Total assets at fair value through profit and loss	198	219	-
Total financial assets	44,480	40,700	15,445

 

	Unaudited	Audited	Audited
	31 December	30 June	31 December
	2014	2014	2013
	£'000	£'000	£'000
Financial Liabilities
Trade and other payables	-	48	106
Total liabilities at fair value through profit and loss	-	48	106
Investment management balances	10,639	9,810	-
Borrowings	-	-	9,687
Trade and other payables	6,688	8,081	5,155
Total other liabilities at amortised cost	17,327	17,891	14,842
Total financial liabilities	17,327	17,939	14,948

 

The directors consider that the carrying amounts of the loan and receivables financial assets and financial liabilities carried at amortised cost to be a reasonable approximation to their fair values.

 

Movement in carrying value of financial assets at fair value

 

As the ACD of the River and Mercantile Funds ICVC, the Group is required to maintain a box position for each share class issued. The box position acts as a float for investors and enables them to make or divest investments denominated as a cash amount, as opposed to a number of shares. The fair value of the box position of each share class is determined by the underlying value of the respective fund as determined by the third party Fund Administrator. These values are the values at which investors would subscribe or redeem their holdings in the funds. In the six month ended 30 June 2014, the directors considered that these inputs were categorised under IFRS 13 Fair Value Measurement as Level 3 inputs. In the six months ended 31 December 2014, a greater significance was put on directly and indirectly observable market data in estimating the fair value of the box position and hence the inputs are now classified as Level 2 inputs.

 

The gain or loss on the value of the box positions is included in Other income in the Income Statement.

 

	Level 3 financial assets
	£'000
Carrying value at 1 July 2013 and 31 December 2013	-
Acquisition of RAMAM	451
Sales of fund units	(227)
Realised gains	3
Unrealised losses in period	(8)
Carrying value at 30 June 2014	219
Sales of fund units	(17)
Realised gains	-
Unrealised losses in period	(4)
Carrying value at 31 December 2014 prior to transfer to Level 2 financial assets	198
Transfer to Level 2 financial assets	(198)
Carrying value at 31 December 2014	-

 

Movement in fair value of other payables

 

Contingent consideration arising on business combinations is measured at fair value and is based on the directors' best estimate of expected profit levels of the acquired businesses. These inputs are not based on observable market data. IFRS 13 Fair Value Measurement refers to such inputs as Level 3 inputs. These estimates are reassessed at each reporting date and adjustments are made to the fair value of the contingent consideration where necessary. Subsequent changes in the fair value of the contingent consideration that is deemed to be an asset or liability is recognised either in profit or loss or as a change to other comprehensive income if required by IAS 39.

	£'000
Fair value at 1 July 2013	357
Settlement	(52)
Gains recognised in profit or loss	(207)
Unwinding of discount	8
Fair value at 31 December 2013	106
Settlement	(71)
Unwinding of discount	13
Fair value at 30 June 2014	48
Settlement	(52)
Unwinding of discount	4
Fair value at 31 December 2014	-

 

18. Events after the reporting period

Equity Solutions - thematic global equity team

 

After a prolonged period of underperformance of the strategies operated by the thematic global equity team, the majority of the investors have redeemed and this has led to the departure of the team. The loss of assets and the departure of the team will not have a significant impact on the Group results or financial position. Approximately £430,000 of non-recurring cost will be incurred in the next reporting period relating to the closure of the Global Equity strategies.

 

Dividends

 

The Board of Directors has declared a total interim dividend of 4.6 pence per share, of which 1.0 pence is a special dividend and relates to net performance fees. The total dividend is £3.8 million.

 

 

ENDIR SEEFAMFISEDE

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Related Shares:

RIV.L