29th Feb 2016 07:00
River and Mercantile Group PLC
Interim Financial Report for the six months ended 31 December 2015
River and Mercantile Group PLC, the advisory and investment management business published its interim results for the six months ended 31 December 2015 on 29 February 2016.
Investment Highlights
· Fee earning AUM/NUM increased by 7%, and Mandated AUM/NUM increased by 5% to £22.5bn during the period. Fee earning and Mandated AUM/NUM increased by 17% and 19% respectively from 31 December 2014.
· Net inflows in the period were £1.5bn with all divisions having net positive flows. Sales in the period included two significant structured equity mandates and our first global equity mandate in Australia.
· Investment performance in the second quarter offset first quarter negative performance demonstrating our ability to defend and protect client assets in volatile markets.
Financial Highlights
· Statutory net profit after tax was £2.7m, compared to £4.2m for the six months ended 31 December 2014, primarily due to lower advisory and performance fees, net of remuneration.
· Statutory basic earnings per share (EPS) was 3.25 pence per share, compared to 5.08 pence for the six months ended 31 December 2014. Statutory diluted EPS was 3.01 pence per share, compared to 4.71 pence for the six months ended 31 December 2014.
· Adjusted profit after tax1 was £4.9m for the six months ended 31 December 2015, compared to £6.3m for the six months ended 31 December 2014.
· Adjusted basic EPS2 was 5.98 pence per share, compared to 7.70 pence for the six months ended 31 December 2014.
· The Board of Directors have declared a total interim dividend of 3.6 pence per share, of which 0.35 pence is a special dividend and relates to net performance fees. The dividend will be paid on 1 April 2016 to shareholders on the register as at 11 March 2016. The ex-dividend date is 31 March 2016.
Operating Highlights
· Net management fees were £17.9m, an increase of 3% over the prior six months and an increase of 3% over the six months ended 31 December 2014. Net management fee margins remained stable.
· Advisory fees were £4.3m, a decrease of 28% from the prior six months and a decrease of 28% from the six months ended 31 December 2014, due to lower project based advisory fees, as previously disclosed.
· Performance fees were £1.2m, compared to £2.8m in the prior six months and £3.1m in the six months ended 31 December 2014, due to lower investment outperformance in the period.
· Adjusted pre-tax margin3 was 26%, compared to 30% in the prior six months and 30% in the six months ended 31 December 2014.
· Adjusted underlying pre-tax margin4 was 25%, compared to 27% in the prior six months and 26% in the six months ended 31 December 2014.
Notes:
1 Adjusted profit after tax represents profit after tax before discontinued operations, adjusted to add back the amortisation of intangible assets and Executive Performance Share Plan (EPSP) costs, net of tax (refer to note 11 in the condensed consolidated interim financial statements).
2 Adjusted basic EPS is the adjusted profit after tax divided by the weighted average number of shares outstanding in the period, excluding shares that are dilutive in the period (refer to note 11 in the condensed consolidated interim financial statements).
3 Adjusted pre-tax margin represents profit before tax, adjusted to add back the amortisation of intangible assets and EPSP costs divided by total revenue (refer to note 11 in the condensed consolidated interim financial statements).
4 Adjusted underlying pre-tax margin represents net management and advisory revenue less the related expense base including remuneration, divided by net management and advisory revenues.
Forward looking statements
This announcement contains certain forward-looking statements with respect to the financial condition, results of operations and businesses of River and Mercantile Group PLC. These statements are made by the Directors in good faith based on the information available to them up to the time of their approval of this report. However, such statements should be treated with caution as they involve risk and uncertainty because they relate to events and depend upon circumstances that will occur in the future.
There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements. The continuing uncertainty in global economic outlook inevitably increases the economic and business risks to which the Group is exposed.
Nothing in this announcement should be construed as a profit forecast.
For further information please contact:
River and Mercantile Group PLC +44 (0)20 3327 5100
Kevin Hayes, Chief Financial Officer
Chris Rutt, Deputy Chief Financial Officer and Investor Relations
Chairman's Statement
Paul Bradshaw
Chairman
I am pleased to present our interim report for the 6 months ending 31 December 2015.
The statutory profit after tax was £2.7m (2014:£4.2m) and the adjusted profit after tax was £4.9m (2014:£6.3m) for the 6 month period.
The Board has declared a total interim dividend of 3.6 pence per share, of which 0.35 pence is a special dividend and relates to net performance fees.
It is important to recognise that we have always seen as a great strength of the business the fact that the disciplines we manage have different exposures at each point in the cycle. In this period our advisory project fees and performance fees, which impact profit immediately, diminished but our assets under management which impact continuously in the future had very strong growth.
Advisory project fees were, I believe in line with the industry, significantly lower. A range of influences are described in more detail in Mike's report. It is a sad fact that at this stage of the cycle cost control is very important to clients, but as the impact of recent market conditions becomes apparent, the need for sophisticated help inevitably increases and historically our consulting revenue has increased at later stages in the cycle. That said, management are well aware of the issues and, as Mike details, have taken action on the cost base through the exit of our Palisades business.
Performance fees were also significantly lower than last year, again reflecting more difficult market conditions. Their transitory nature is reflected in our decision to distribute performance fee profits in special dividend payments.
Equally, in a market many of our competitors found very challenging, the growth of assets under management is extremely strong, which bodes very well for our longer term profitability.
Mike also highlights below our four divisions are performing differently at this point of the cycle, as we envisaged at the IPO, but I would just like to emphasise the fundamental durability in our business model as capital markets endure their current bout of strong volatility.
Uncertainty prevails everywhere at the moment, from Brexit to commodity prices, but the one certainty looking forward for at least the medium term is that low or even negative interest rates will prevail.
We are acutely aware of the challenges for the majority of our clients with fixed long term liabilities that this environment presents and time and again our asset allocation and hedging strategy (sometimes ignoring market consensus as we did last year on "the inevitability" of higher interest rates) has delighted clients measuring the outcome of their investments.
No doubt the balance of the year will see shocks and stresses in the markets, but we remain convinced that our focus on customer outcomes is the overwhelmingly winning strategy and that our young, dynamic and talented team will exploit the opportunities successfully.
Finally, I would like to thank the Board and management for their support over the period. I was forced at short notice to take medical leave and special personal thanks is due to Peter Warry who stepped into the chair at a very busy time for the company.
Report of the Chief Executive Officer
Mike Faulkner
Chief Executive Officer
The first six months of our 2016 financial year have represented a period of significant volatility in financial markets. Our strategy is focused on delivering stable growth in underlying profits to our shareholders. These underlying returns are enhanced, through the payment of special dividends, by performance fees on our fiduciary management and equity solutions business. This focus on stability and returns is, I believe, the reason the underlying performance of our Group asset management activities have been much less exposed to the difficult conditions in markets and asset management in general.
The inforce elements of our revenue - asset management fees and advisory retainers - are broadly flat to up significantly. We are very pleased with this result.
However, the most significant negative effect of the market conditions has been weakness in advisory project fees and performance fees. The latter are simply a direct result of market conditions, and given their more volatile nature we view these as a (potentially significant) added bonus to our financials when they emerge.
The year on year fall in project fees is attributable almost entirely to four influences:
· The fact that the prior period was excellent for advisory fees, with the departure of third-party asset allocation team leading to a very significant amount of project work. No such event happened in this period.
· The performance of Palisades, which is discussed further below and in Kevin's report.
· The choice made by clients engaging with derivatives services to pay higher ongoing (management) fees with no implementation fees. The latter are treated as advisory fees. This is generally a good thing for the business but does not help the numbers in the short run.
· Some seasonality - project fees tend to be weaker over the summer period.
The remainder of my report looks at our performance in terms of individual lines, in the context of what we set out to do.
What we said we would do
Our strategy remains consistent with what we described at our IPO, nearly two years ago. 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.
Our four divisions, or revenue lines, have been deliberately combined because they have useful diversification characteristics, in that they tend to perform differently at different points in the cycle.
In my statement in our Annual Report for 2015, I indicated that I expected some weakness in our Advisory business lines, and to an extent in Fiduciary Management, but that I expected Derivatives and Equity Solutions to perform well. This is what we have seen, as I set out below.
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.
During the first six months of the year, this part of our business has faced some headwinds, although this follows a very strong performance from these businesses in 2015. Demand for advisory services has been lessened due to market conditions. In particular, our project revenue is down significantly year on year. This is partly due to H1 2015 project revenue being very strong, due to a third-party asset allocation team departure, and partly due to current influences, which I described above. We anticipate stronger advisory project fees into H2 2016, given the weakness in markets is offering what are, in our view, some attractive investment opportunities to take to clients.
In December 2015, we exited our Palisades advisory business (part of our US business). This is a business that provides transaction advice on specialist pension situations. Historically, it represented around £2m per annum of our revenue base, but very little of our profit as its ratio of remuneration to revenue was relatively high. The revenue of this business in H1 2016 is significantly down on last year and a key factor in project revenue being down. We had pursued this business line because of the opportunities it afforded us to widen relationships into broader Group relationships, but in practice our ability to do this has been limited. As a result we have agreed to part company with this business. We wish the management team of Palisades well for the future.
Our Fiduciary Management services have performed relatively well in difficult market circumstances, avoiding the losses prevalent in investment markets. But in absolute terms the contribution of investment performance to growth is far less that we would expect in more normal circumstances, and this has therefore also been a headwind. From a longer term perspective, we are excited by the opportunities volatile conditions give us to reposition client portfolios and we therefore expect the current volatility to support the medium to long term growth in the business. We have seen positive net flows in this business, and are continuing to see demand for Fiduciary Management services. An interesting development worth noting is that a very significant proportion of new fiduciary mandates is intermediated, and we believe this is positive.
Derivative Solutions
During the six month period, we have seen growth in Notional under Management (NUM) of 9%, to around £12.7bn. This is 32% up on NUM a year ago. This growth comprises new mandates and rebalancing of existing mandates (this is where clients decide to change the level of hedging employed).
During the six-month period we made significant progress in Derivative Solutions through winning a £1bn mandate for a FTSE100 pension scheme client. This is consistent with our strategy for developing stand-alone derivatives mandates with clients where an intermediary is involved. There continues to be strong interest from prospects of this type in our derivative solutions and we expect this demand to continue with an increasing focus on risk management from clients.
Equity Solutions
Having had a more difficult time during our financial year to the end of June 2015, the performance of our Equity Solutions business has been very strong in both wholesale and institutional lines.
I identified in our 2015 Annual Report that we had developed a global equity product - Global High Alpha - within our Potential, Value and Timing (PVT) team to replace the offering that departed with the closure of our thematic global equity team. The first six months has seen our first business win into this product, in a mandate from an Australian client, representing the majority of our £0.2bn of sales in the period. We have also been informed that an existing client will be converting their UK equity mandate into a Global High Alpha mandate, and adding assets. This is very good news for us and supports the credibility of the offering.
We have continued to see strong demand for our PVT global equity capabilities from institutional clients and are excited by the outlook for this line. The net effect of this is that our institutional equity business has seen AUM grow by nearly 16% in the six months, a very strong growth rate, to close the six month period back above £1bn.
Our wholesale business has also been a strong success in the period. We have successfully raised an additional £20m into our UK Micro Cap Investment Company. Also, we have re-launched our UK Unconstrained Fund as the UK Dynamic Fund, with a change of portfolio manager to Philip Rodrigs. This product is experiencing strong demand, with support from Hargreaves Lansdown. Notable also is that the investment performance contribution on the wholesale business has been positive in the period, remarkable given the conditions and driven primarily by performance within the UK Smaller Companies Fund. Overall the wholesale business has grown by just under 17% in the period, finishing with AUM of around £1.3bn.
New product development
I have mentioned a number of new product developments above already. We also have further products and services in development and will update you as these come on line.
Comments on outlook
The uncertainty theme is occupying the minds of many investors and we are no different. Last year, I spent this section describing how the divisions diversify each other, in order to help us deliver stable returns.
There is lots of uncertainty in financial markets at the moment, and we expect this will persist for some time to come. However, given our business lines offer us diversification, and our client engagement process tends to limit our exposure to significant AUM losses, we tend to view this uncertainty as an opportunity rather than a risk to manage. For us, the absence of risks to manage for a long period of time would arguably be worse!
Our aim is therefore to stick to our stated strategy, and take the opportunities that uncertainty invariably offers to bring good, new investment ideas and products to our clients. The current conditions in the industry create an opportunity to attract talent, particularly in the area of client engagement and accordingly we have increased our remuneration ratio in the medium term to facilitate this investment in the business.
Our client engagement process has resulted in stable share price growth and strong returns to shareholders, both in absolute terms and relative to our sector, during the six month period. We believe this validates our focus on stable profit growth and distributing high percentages of profits to shareholders in a clearly articulated dividend policy.
Summary
In summary, this has been a reasonable six months for the business given the difficult conditions. As we had guided, the strongest growth has been experienced in Derivatives and Equities, and I would expect this to continue in the near term. Nonetheless, I would expect the performance of the Advisory and Fiduciary business lines to improve from here. I am happy to report growth in assets year on year and that we have generated performance fees in difficult conditions.
Finally, I would like to thank our shareholders for their support during this period. We hope to continue delivering strong returns for you.
Key Performance Indicators
(Figures in brackets are for the six months ended 30 June 2015)
1. Growth in Mandated AUM/NUM: 5% / (13%)
Mandated AUM/NUM: £22.5bn, £21.3bn and £18.9bn as at 31 December 2015, 30 June 2015 and 31 December 2014 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: -10% / (1%)
Net management and advisory fees: £22.2m for the six months ended 31 December 2015; £23.4m for the six months ended 30 June 2015; and £23.3m for the 6 months ended 31 December 2014.
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: 25% / (27%)
Adjusted net profit before tax for the six months ended 31 December 2015 was £6.1m. Performance fees and other revenue, net of associated remuneration expense was £0.6m. Adjusted underlying pre-tax profit was £5.5m. Total net management and advisory fees are £22.2m.
Adjusted net profit before tax for the six months ended 30 June 2015 was £8.0m. Performance fees and other revenue, net of associated remuneration expense was £1.6m. Adjusted underlying pre-tax profit was £6.3m. Total net management and advisory fees are £23.4m.
Adjusted underlying pre-tax margin represents net management and advisory revenue less the related expense base including remuneration, divided by net management and advisory revenues.
Adjusted underlying pre-tax margin is an indication of the ability to achieve scale through 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% / (60%)
Adjusted basic earnings per share (EPS) was 5.98 pence per share for the six months ended 31 December 2015. The total interim dividend in respect of the period ended 31 December 2015 is 3.6 pence per share.
Adjusted basic EPS 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 was 4.6 pence per share.
Adjusted basic EPS is the adjusted profit after tax divided by the weighted average number of shares outstanding in the period, excluding shares that are dilutive in the period.
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 for the six months ended 31 December 2015
Assets under Management and Notional under Management (AUM/NUM) for the 6 months ended 31 December 2015
Highlights:
· Fee earning AUM/NUM increased by 7%, and Mandated AUM/NUM increased by 5% to £22.5bn during the period. Fee earning and Mandated AUM/NUM increased by 17% and 19% respectively from 31 December 2014.
· Net inflows in the period were £1.5bn with all divisions having net positive flows. Sales in the period included two significant structured equity mandates and our first global equity mandate in Australia.
· Investment performance in the second quarter offset first quarter negative performance demonstrating our ability to defend and protect client assets in volatile markets.
Assets Under Management (AUM) and Notional Under Management (NUM) | |||||||||||
Equity Solutions | |||||||||||
£'m | Fiduciary Management | Derivative Solutions | Wholesale | Institutional | Total | Total AUM/NUM | |||||
(AUM) | (NUM) | (AUM) | (AUM) | (AUM) | |||||||
Opening Fee earning AUM/NUM (1 July 2015) | 7,401 | 11,634 | 1,083 | 899 | 1,982 | 21,017 | |||||
Sales | 474 | 1,363 | 297 | 205 | 502 | 2,339 | |||||
Redemptions | (329) | (663) | (149) | (29) | (178) | (1,170) | |||||
145 | 700 | 148 | 176 | 324 | 1,169 | ||||||
Net rebalance | - | 332 | - | - | - | 332 | |||||
Net flow | 145 | 1,032 | 148 | 176 | 324 | 1,501 | |||||
Investment performance | (42) | - | 33 | (36) | (3) | (45) | |||||
Fee earning AUM/NUM | 7,504 | 12,666 | 1,264 | 1,039 | 2,303 | 22,473 | |||||
Mandates in transition (31 December 2015) | - | 29 | - | - | - | 29 | |||||
Redemptions in transition (31 December 2015) | - | - | - | - | - | - | |||||
Mandated AUM/NUM | 7,504 | 12,695 | 1,264 | 1,039 | 2,303 | 22,502 | |||||
Increase/ in Fee earning AUM/NUM | 1.4% | 8.9% | 16.7% | 15.6% | 16.2% | 6.9% | |||||
Opening Mandated AUM/NUM (1 July 2015) | 7,561 | 11,804 | 1,083 | 899 | 1,982 | 21,347 | |||||
Increase/(decrease) in Mandated AUM/NUM | (0.8%) | 7.5% | 16.7% | 15.6% | 16.2% | 5.4% | |||||
Fee earning AUM/NUM (31 December 2014) | 7,176 | 9,593 | 955 | 1,414 | 2,369 | 19,138 | |||||
Increase/(decrease) in Fee earning AUM/NUM | 4.6% | 32.0% | 32.4% | (26.5%) | (2.8%) | 17.4% | |||||
Fiduciary Management fee earning AUM has increased 1% as a result of inflows from existing clients and new mandates of £474m, partially offset by client redemptions of £239m and benefit payment outflows of £90m. Investment performance was less than 1% negative in the period, demonstrating our ability to defend and protect client assets in volatile markets. Included under Fiduciary Management is £62m of AUM relating to the Dynamic Asset Allocation Fund.
Derivative Solutions fee earning NUM increased 9%, as a result of £1.4bn of new mandates and £332m of net rebalancing from existing mandates. Redemptions of £663m include a £491m redemption from a single client who rationalised their derivatives strategy on a global basis. Rebalance represents NUM changes as a result of changes in client hedging levels, plus mark-to-market movements.
Equity Solutions - Wholesale AUM is up 17% from net sales in the River and Mercantile UK Micro Cap Investment Company, the UK Smaller Companies Fund and the re launched Dynamic Equity Fund, following strong investment performance.
Equity Solutions - Institutional AUM is up 16% and includes strong inflows into segregated mandates and the recently launched Global High Alpha strategy. The decrease in AUM compared to 2014 reflects the redemptions from the global thematic equity strategy.
Revenue and Margins
Highlights:
· Net management fees were £17.9m for the six months ended 31 December 2015, an increase of 3% over the prior six months and an increase of 3% over the six months ended 31 December 2014. Net management fee margins remained stable.
· Advisory fees were £4.3m for the six months ended 31 December 2015, a decrease of 28% from the prior six month period and a decrease of 28% from the six months ended 31 December 2014, due to lower project based advisory fees, as previously disclosed.
· Performance fees were £1.2m compared to £2.8m in the prior six months and £3.1m in the six months ended 31 December 2014, due to lower investment outperformance in the period.
Margins
|
|
| Equity Solutions |
| |
| Fiduciary Management | Derivative Solutions | Wholesale | Institutional | Total Average |
Average Fee earning AUM/NUM £m | 7,452 | 12,150 | 1,173 | 969 | 21,744 |
Average margin 2016 (bps) | 18-20 | 7-8 | 72-74 | 48-50 | 18 |
Average margin 2015 (bps) | 18-20 | 7-8 | 72-74 | 48-50 | 18 |
Derivatives Solutions includes both Liability Driven Investment (LDI) and Gilts (£10.1bn), and structured equity mandates (£2.6bn). As the level of structured equity mandates increases the average margin may decrease as the structured equity mandates generally have a lower net management fee margin.
Net management and advisory fees
£'000s |
|
| Unaudited 6 months ended 31 December 2015 | Unaudited 6 months ended 30 June 2015 | Unaudited 6 months ended 31 December 2014 |
|
|
|
|
|
|
Net management fees |
|
|
|
|
|
- Fiduciary |
|
| 6,736 | 6,539 | 6,544 |
- Derivatives |
|
| 4,596 | 4,083 | 3,774 |
- Equity Solutions Wholesale |
|
| 4,212 | 3,552 | 3,383 |
- Equity Solutions Institutional |
|
| 2,333 | 3,191 | 3,618 |
Total net management fees |
|
| 17,877 | 17,365 | 17,319 |
|
|
|
|
|
|
Advisory fees |
|
|
|
|
|
- Retainers |
|
| 2,304 | 2,386 | 2,325 |
- Project fees |
|
| 1,993 | 3,619 | 3,640 |
Total net advisory fees |
|
| 4,297 | 6,005 | 5,965 |
|
|
|
|
|
|
Total net management and advisory fees |
|
| 22,174 | 23,370 | 23,284 |
The decrease in Equity Solutions Institutional management fee revenues compared to 2014 reflects the redemptions from the global thematic equity strategy in 2014.
We had previously indicated that Advisory revenues would be lower than 2014 as a result of significant project fees in the prior year.
Palisades - part of our advisory business in the US - was sold on 15 December 2015. Palisades' project fee revenues were £0.5m in the period (£1.2m for the six months ended 30 June 2015 and £0.7m for the six months ended 31 December 2014). The result before tax of the Palisades business in the current period prior to disposal was a loss of £0.1m (profit of £0.1m for the six months ended 30 June 2015 and a profit of £0.1m for the six months ended 31 December 2014).
Performance fee revenue
£'000s |
|
| Unaudited 6 months ended 31 December 2015 | Unaudited 6 months ended 30 June 2015 | Unaudited 6 months ended 31 December 2014 |
Performance fees |
|
|
|
|
|
- Fiduciary Management |
|
| 1,187 | 2,205 | 3,058 |
- Equity Solutions |
|
| - | 616 | - |
Total performance fees |
|
| 1,187 | 2,821 | 3,058 |
Fiduciary Management
The majority of the performance fees in TIGS (the Group's primary fiduciary offering) are subject to a deferral mechanism whereby performance fees are reported to the client at each anniversary date, but are subject to deferral. The deferred amounts can only be realised in full if performance continues above benchmark across the subsequent three years, with a reduced amount realised if performance is below benchmark. If the client were to redeem their mandate, any deferred performance fees would be immediately crystallised. In the period ended 31 December 2015, £1.2m of performance fees were earned, all from previously deferred performance fees.
At December 2015 the amount of deferred performance fees that could be earned in the year ended 30 June 2016 assuming performance continues in line with benchmark, is £0.4m
Equity Solutions
In Equity Solutions, performance fees are earned on outperformance relative to a stated benchmark. Some performance fees are subject to a "cap and roll" structure, which not only caps the maximum possible performance fee in a period but also requires that underperformance in prior periods are rolled into current period outperformance calculations. Performance fees were £nil for the six months ended 31 December 2015 (December 2014: £nil).
At 31 December 2015 total performance fee eligible assets were £387m. Of these assets £83m were above their performance benchmark by more than 5%, £190m were within 1% of their performance benchmark and £114m were below their performance benchmark by 1-5%. The weighted average rate of performance fees in respect of outperformance on the eligible AUM is 17%.
Administrative Expenses
£'000s |
| Unaudited 6 months ended 31 December 2015 | Unaudited 6 months ended 30 June 2015 | Unaudited 6 months ended 31 December 2014 |
|
|
|
|
|
Operating expenses |
| 4,799 | 5,102 | 4,650 |
Depreciation and Amortisation |
| 2,214 | 2,216 | 2,208 |
Administrative expenses |
| 7,013 | 7,318 | 6,858 |
Administrative expenses have decreased compared to the six months ended 30 June 2015 due to reduced fund administration costs in the period.
Administrative expenses have increased compared to the six months ended 31 December 2014 due to increases in marketing, professional and technology costs.
Remuneration
| Unaudited 6 months ended 31 December 2015 | Unaudited 6 months ended 30 June 2015 | Unaudited 6 months ended 31 December 2014 |
|
|
|
|
Fixed remuneration | 9,330 | 9,507 | 8,933 |
Variable remuneration | 3,087 | 3,678 | 4,798 |
Total remuneration (excluding EPSP) | 12,417 | 13,185 | 13,731 |
|
|
|
|
Total revenue (excluding other income) | 23,361 | 26,191 | 26,342 |
Remuneration ratio (total remuneration excluding EPSP/total revenue) | 53% | 50% | 52% |
Remuneration expense includes: (a) fixed remuneration comprising: base salaries, drawings, benefits and associated taxes; (b) variable remuneration comprising: performance bonus and profit share paid to the members of RAMAM LLP and applicable taxes, and the amortisation of the fair value of performance share awards under the Performance Share Plan.
The remuneration ratio applicable to net management and advisory fees was 54% (2014: 54%). Based on the growth in the business and the opportunity to continue to invest in the current environment, particularly in distribution, as noted in the CEO Report, this ratio will be maintained at around 54% of net management and advisory fees in the medium term.
Similarly, the ratio of variable remuneration applicable to performance fees has been increased from 42% to 50%.
Statutory and adjusted profits
Highlights:
· Statutory net profit after tax was £2.7m, compared to a £4.2m for the six months ended 31 December 2014, primarily due to lower advisory and performance fees, net of remuneration.
· Statutory pre-tax margin was 14%, compared to 20% for the six months ended 31 December 2014.
· Adjusted net profit after tax was £4.9m for the six months ended 31 December 2015, compared to £6.3m for the six months ended 31 December 2014.
· Adjusted pre-tax margin was 26%, compared to 30% in the prior six months and 30% in the six months ended 31 December 2014.
· Adjusted underlying pre-tax margin was 25%, compared to 27% in the prior six months and 26% in the six months ended 31 December 2014.
£'000s | Unaudited 6 months ended 31 December 2015 | Unaudited 6 months ended 31 December 2014 |
|
|
|
Statutory profit before tax | 3,312 | 5,251 |
Pre-tax margin | 14% | 20% |
|
|
|
Adjusted profit before tax | 6,120 | 7,936 |
Adjusted pre-tax margin | 26% | 30% |
Adjusted profit after tax | 4,913 | 6,282 |
|
|
|
Adjusted underlying profit before tax | 5,525 | 6,153 |
Adjusted underlying pre-tax margin | 25% | 26% |
Adjusted underlying profit after tax | 4,363 | 4,912 |
Statutory profit before tax is £3.3m, after the charge for the amortisation for intangibles and EPSP costs.
Adjusted profit before tax represents statutory profit adjusted to add back the amortisation of intangible assets and EPSP costs. Adjusted profit after tax represents adjusted profit before tax, less applicable taxes. The Directors believe that adjusted profit after tax is a measure of the post-tax operating profits of the business and gives an indication of the profits available for distribution to shareholders.
Adjusted underlying pre-tax margin represents net management and advisory fees less the related expense base, excluding the amortisation of intangible assets and EPSP costs; divided by net management and advisory fees.
The adjusted underlying pre-tax margin for the period ended 31 December 2015 was 25% (December 2014: 26%). The decrease is the result of the reduction in advisory fees, coupled with the increase in remuneration ratio.
The reconciliation of adjusted and adjusted underlying profits and margins is given in note 11.
Capital, liquidity and regulatory capital
The business remains cash generative at the operating level. For the six months ended 31 December 2015 net cash from operations was £1.4m (December 2014: £1.9m). Net cash used in financing activities represents the £6.9m (December 2014: £1.9m) of dividends paid to shareholders. Cash and cash equivalents at the period end were £14.8m (June 2015: £20.2m, December 2014: £14.3m).
As a business regulated by the UK Financial Conduct Authority, the Group holds prudent levels of capital resource in order to ensure our financial stability. We undergo a continual Internal Capital Adequacy Assessment Process (ICAAP), to ensure that we are holding sufficient levels of equity capital for the scale and nature of our operations and risk. As at 31 December 2015 we have excess qualifying regulatory capital of £14.4m over the minimum required by our ICAAP. We do not anticipate any significant change in our regulatory capital requirements in 2016.
Earnings per share (EPS)
Highlights:
· Statutory basic EPS was 3.25 pence per share, compared to 5.08 pence for the six months ended 31 December 2014.
· Statutory diluted EPS was 3.01 pence per share, compared to 4.71 pence for the six months ended 31 December 2014.
· Adjusted Basic EPS was 5.98 pence per share, compared to 7.70 pence for the six months ended 31 December 2014.
Pence per share | Unaudited 6 months ended 31 December 2015 | Unaudited 6 months ended 31 December 2014 |
|
|
|
Statutory basic EPS | 3.25 | 5.08 |
Statutory diluted EPS | 3.01 | 4.71 |
|
|
|
Adjusted basic EPS | 5.98 | 7.70 |
Adjusted diluted EPS | 5.55 | 7.14 |
The diluted EPS calculation include the dilutive effect of shares that could be issued under the Executive Performance Share Plan as measured at the balance sheet date. These shares would be issued in 2017 (subject to a one year lock-up), if the award conditions are met. The basic earnings per share represent the earnings per share to the existing shareholders that will accrue during the EPSP vesting period on an undiluted basis. PSP awards currently in place will not be dilutive to shareholders.
Dividends
The Board of Directors have declared a total interim dividend of 3.6 pence per share, of which 0.35 pence is a special dividend and relates to net performance fees.
The interim dividend represents 60% of the adjusted underlying profit after tax, with a special component representing 60% of the net performance fee profit after tax for the period.
The dividend will be paid on 1 April 2016 to shareholders on the register as at 11 March 2016. The ex-dividend date is 31 March 2016.
Kevin Hayes
Chief Financial Officer
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 year ended 30 June 2015. 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 26 and 27 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
Chief Executive Officer
Kevin Hayes
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 2015 which comprises the condensed consolidated income statement, condensed consolidated statement of comprehensive income, condensed consolidated statement of financial position, condensed consolidated statement of cash flows and condensed consolidated statement of changes in shareholder's equity; and the related 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 2015 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 2016
BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).
Condensed consolidated interim financial statements
The Interim Report should be read in conjunction with the Annual Report of the Group for the year ended 30 June 2015.
Condensed consolidated income statement
|
| Unaudited | Unaudited |
| Note | 6 months ended 31 December 2015 | 6 months ended 31 December 2014 |
|
| £'000 | £'000 |
Revenue: |
|
|
|
Net management fees | 4 | 17,877 | 17,319 |
Net advisory fees | 4 | 4,297 | 5,965 |
Performance fees |
| 1,187 | 3,058 |
Other income |
| 2 | 9 |
Total revenue |
| 23,363 | 26,351 |
|
|
| |
Operating expenses | 5 | 4,799 | 4,650 |
Depreciation |
| 49 | 41 |
Amortisation |
| 2,165 | 2,167 |
Total operating expenses |
| 7,013 | 6,858 |
|
|
|
|
Remuneration and benefits |
|
|
|
Fixed remuneration and benefits |
| 9,330 | 8,933 |
Variable remuneration |
| 3,087 | 4,798 |
|
| 12,417 | 13,731 |
EPSP Costs | 6 | 643 | 518 |
Total remuneration and benefits |
| 13,060 | 14,249 |
|
|
|
|
Total administrative expenses |
| 20,073 | 21,107 |
|
| ||
Profit before interest and tax |
| 3,290 | 5,244 |
Finance income |
| 23 | 13 |
Finance expense |
| (1) | (6) |
Profit before tax |
| 3,312 | 5,251 |
|
|
| |
Tax charge |
|
| |
Current tax | 9 | 1,249 | 1,587 |
Deferred tax | 9 | (604) | (505) |
|
|
|
|
Profit after tax for the period attributable to owners of the Parent |
| 2,667 | 4,169 |
|
| Unaudited | Unaudited |
| |
| Note | 6 months ended 31 December 2015 | 6 months ended 31 December 2014 |
| |
|
| £'000 | £'000 |
| |
|
|
|
|
| |
Earnings per share |
|
|
|
| |
|
|
|
|
| |
Basic (pence) | 11 | 3.25 | 5.08 |
| |
Diluted (pence) | 11 | 3.01 | 4.71 |
| |
|
|
|
| ||
Condensed consolidated statement of comprehensive income
|
| Unaudited | Unaudited |
| Note | 6 months ended 31 December 2015 | 6 months ended 31 December 2014 |
|
| £'000 | £'000 |
|
|
|
|
Profit for the period |
| 2,667 | 4,169 |
Items that may be subsequently reclassified to profit or loss: |
|
|
|
Change in value of available-for-sale financial assets (net of tax) | 7 | (10) | 15 |
Foreign currency translation differences |
| 7 | 91 |
Total comprehensive income for the period attributable to owners of the Parent |
| 2,664 | 4,275 |
Items in the consolidated statement of comprehensive income are shown net of applicable taxes.
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 |
| Note | 31 December 2015 | 30 June 2015 |
|
| £'000 | £'000 |
|
|
|
|
Assets |
|
|
|
Cash and cash equivalents |
| 14,774 | 20,227 |
Investment management balances |
| 5,585 | 9,104 |
Available-for-sale investments | 7 | 5,142 | 5,155 |
Financial assets at fair value through profit or loss |
| 134 | 130 |
Fee receivables |
| 3,344 | 3,126 |
Other receivables |
| 10,026 | 10,744 |
Deferred tax asset | 9 | 1,743 | 528 |
Property, plant and equipment |
| 148 | 208 |
Intangible assets |
| 43,551 | 45,853 |
Total assets |
| 84,447 | 95,075 |
|
|
|
|
Liabilities |
|
|
|
Investment management balances |
| 5,380 | 9,201 |
Current tax liabilities |
| 1,197 | 1,555 |
Trade and other payables |
| 7,218 | 10,291 |
Deferred tax liability relating to intangible assets | 9 | 5,738 | 6,174 |
Total liabilities |
| 19,533 | 27,221 |
|
|
| |
Net Assets |
| 64,914 | 67,854 |
|
|
|
|
Equity |
|
|
|
Share capital |
| 246 | 246 |
Share premium |
| 14,688 | 14,688 |
Merger reserve |
| 44,433 | 44,433 |
Other reserves | 8 | 4,641 | 4,644 |
Retained earnings |
| 906 | 3,843 |
Equity attributable to owners of the Parent |
| 64,914 | 67,854 |
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 2016.
Mike Faulkner
Chief Executive Officer
Kevin Hayes
Chief Financial Officer
Condensed consolidated statement of cash flows
|
| Unaudited | Unaudited |
| Note | 6 months ended 31 December 2015 | 6 months ended 31 December 2014 |
|
| £'000 | £'000 |
|
|
|
|
Cash flow from operating activities |
|
|
|
Profit before interest and tax |
| 3,290 | 5,244 |
Adjustments for: |
| ||
Amortisation of intangible assets |
| 2,165 | 2,167 |
Depreciation of property, plant and equipment |
| 49 | 41 |
Share-based payment expense |
| 250 | 226 |
Gain on disposal of property, plant and equipment |
| (24) | - |
Disposal of goodwill |
| 169 | - |
Foreign exchange losses on operating activities |
| 6 | 53 |
Operating cash flow before movement in working capital |
| 5,905 | 7,731 |
Decrease/(increase) in operating assets |
| 4,015 | (4,149) |
(Decrease) / increase in operating liabilities |
| (6,893) | 239 |
Cash generated from operations |
| 3,027 | 3,821 |
Tax paid |
| (1,608) | (1,913) |
Net cash generated from operations |
| 1,419 | 1,908 |
|
|
| |
Cash flow from investing activities |
|
|
|
Purchases of property, plant and equipment |
| - | (51) |
Contingent consideration paid on business acquisitions |
| - | (52) |
Investment in seeded fund |
| - | (5,000) |
Net cash generated from/used in from investing activities |
| - | (5,103) |
|
|
| |
Cash flow from financing activities |
|
|
|
Interest received |
| 23 | 13 |
Interest paid |
| (1) | (6) |
Dividends paid | 10 | (6,896) | (1,888) |
Net cash used in financing activities |
| (6,874) | (1,881) |
|
|
| |
Net decrease in cash and cash equivalents |
| (5,455) | (5,076) |
|
|
| |
Cash and cash equivalents at beginning of period |
| 20,227 | 19,388 |
Foreign exchange movement |
| 2 | - |
Cash and cash equivalents at end of period |
| 14,774 | 14,312 |
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 | |
Audited balance as at 30 June 2015 | 246 | 14,688 | 124 | (6) | 44,433 | 84 | 4,442 | 3,843 | 67,854 |
Comprehensive income for the period: | |||||||||
Profit for the period | - | - | - | - | - | - | - | 2,667 | 2,667 |
Other comprehensive income | - | - | (10) | 7 | - | - | - | - | (3) |
Total Comprehensive income | - | - | (10) | 7 | - | - | - | 2,667 | 2,664 |
Contributions by and distributions to owners: | |||||||||
Dividends | - | - | - | - | - | - | - | (6,896) | (6,896) |
Share-based payment expense | - | - | - | - | - | - | - | 250 | 250 |
Deferred tax credit on share-based payment expense | -
| -
| -
| -
| -
| -
| -
| 1,042
| 1,042
|
Unaudited balance as at 31 December 2015 | 246 | 14,688 | 114 | 1 | 44,433 | 84 | 4,442 | 906 | 64,914 |
Audited 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 |
Total Comprehensive income | - | - | 15 | 91 | - | - | - | 4,169 | 4,275 |
Contributions by and distributions to owners: | - | - | |||||||
Dividends | - | - | - | - | - | - | - | (1,888) | (1,888) |
Share-based payment expense | - | - | - | - | - | - | - | 226 | 226 |
Deferred tax credit on share-based payment expense | - | - | - | - | - | - | - | 362 | 362 |
Unaudited 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 informationRiver 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 2015 comprise the Company and its subsidiaries (together referred to as the "Group").
2. Accounting policiesBasis of preparationThese 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 2015 Annual Report. The financial information for the six months ended 31 December 2015 and 31 December 2014 does not constitute statutory accounts within the meaning of Section 434(3) of the Companies Act 2006 and is unaudited.
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 the year ended 30 June 2015 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.
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.
Going concernThe Directors have a reasonable expectation that the Group and Company have adequate resources to continue in operational existence for the foreseeable future.
In reaching this conclusion the Board has considered budgeted and projected results of the business including a formal five year plan for the Group with several scenarios, projected cash flow and regulatory capital requirements, and the risks that could impact on the Group's liquidity and solvency over the next 12 months. Additionally, the capital adequacy of the Group in base and stress scenarios is tested as part of the ICAAP regulatory process.
Accordingly, these condensed financial statements have been prepared on a going concern basis using the historical cost convention, except for the measurement at fair value of certain financial instruments.
Significant judgements and estimatesSome 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:
· 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 and related national insurance liabilities for awards under performance share plans.
There have been no changes in estimates reported in prior periods.
3. Seasonality of revenueThe 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 reportingThe 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 2015 and 31 December 2014 together with the period end AUM and NUM reflect the measure of the products' activities of the respective divisions.
| Unaudited | Unaudited | ||
| December 2015 | December 2014 | ||
| Net revenue | AUM/ NUM | Net revenue | AUM/ NUM |
| £'000 | £'m | £'000 | £'m |
|
|
|
|
|
Fiduciary Management | 6,736 | 7,504 | 6,544 | 7,176 |
Derivative Solutions | 4,596 | 12,666 | 3,774 | 9,593 |
Equity Solutions | 6,545 | 2,303 | 7,001 | 2,369 |
Advisory | 4,297 | N/A | 5,965 | N/A |
Total | 22,174 | 22,473 | 23,284 | 19,138 |
Performance fees of £1.2m (December 2014: £3.1m) were earned by the Fiduciary Management division.
No single client accounts for more than 10% of the revenue or profits of the Group (December 2014: 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 2015 was £2.1m (December 2014: 2.4m). The AUM of the US business was £550m (December 2014: £632m).
Non-current assets held by the US business include £1.2m (December 2014: £1.4m) of intangible assets, and property plant and equipment of £20,000 (December 2014: £49,000).
5. Operating Expenses
|
| Unaudited | Unaudited |
|
| 6 months ended 31 December 2015 | 6 months ended 31 December 2014 |
|
| £'000 | £'000 |
|
|
| |
Marketing |
| 370 | 287 |
Travel and entertainment |
| 200 | 254 |
Office facilities |
| 918 | 889 |
Technology and communications |
| 1,299 | 1,174 |
Professional fees |
| 829 | 775 |
Governance expenses |
| 376 | 427 |
Fund administration |
| 283 | 248 |
Insurances |
| 176 | 262 |
Other |
| 348 | 334 |
Operating expenses |
| 4,799 | 4,650 |
6. Share based paymentsExecutive Performance Share Plan
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 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. These all remain outstanding as at 31 December 2015.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 ending 30 June 2018. 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 ending 30 June 2018. 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 2015, no shares had been granted, forfeited, exercised, expired or vested under either the A or B Awards (December 2014: none).
The fair value of the performance shares was determined by an independent valuation undertaken by EY 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%.
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 and B Awards is estimated at £1.84m and £0.42m respectively. The fair value is amortised into share-based remuneration expense over the vesting period and a charge of £226,000 was recognised for the period ended 31 December 2015 (December 2014: £226,000), which is treated as a non-cash adjusting item. The weighted average contractual remaining life of the A and B awards as at 31 December 2015 is 2.5 years.
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, the number of the shares that the Directors expect to vest and the share price at the reporting date. The movement in the accrual in the period ended 31 December 2015 was £417,000 (31 December 2014: £292,000) and was included in the share-based remuneration expense. This figure assumes that 100% of the awards will vest, which is an estimate subject to uncertainty, whereby less than 100% could vest. The estimate is directly linked to the charge recognised, so a 10% reduction in the number of shares expected to vest would reduce the charge in the year by £42,000.
Performance Share PlanThe 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. The Board of Directors have stated an intention that grants of performance shares under the PSP would not be dilutive to shareholders.
The Directors granted awards to staff the year ended 30 June 2015. It is the intention of the Directors that these shares are not dilutive, as the shares will be purchased by the Group's Employee Benefit Trust.
The awards vest at 30 June 2017 or 30 June 2018, depending on the award. The awards contain a combination of performance measures, including: continued employment; future sales targets; Group total shareholder return; and divisional revenue and AUM.
The fair value of the awards has been estimated using a combination of Monte Carlo simulation and Black-Scholes modelling. The IFRS 2 charge for the period is £24,000 (December 2014: £nil).
7. Available-for-sale investmentsThe Group has invested £5.0m of seed capital in the River and Mercantile Dynamic Asset Allocation Fund (the 'DAA Fund'). 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:
| Unaudited 6 months ended 31 December 2015 £'000 | Unaudited 6 months ended 31 December 2014 £'000 |
|
|
|
At 30 June | 5,155 | - |
Additions | - | 5,000 |
Movement in fair value | (13) | 15 |
At 31 December | 5,142 | 5,015 |
|
|
|
| Unaudited 31 December 2015 | Audited 30 June 2015 |
|
| £'000 | £'000 |
|
| ||
Available-for-sale reserve |
| 114 | 124 |
Foreign exchange reserve |
| 1 | (6) |
Capital redemption reserve |
| 84 | 84 |
Capital contribution |
| 4,442 | 4,442 |
Other reserves |
| 4,641 | 4,644 |
£3,867,000 of the capital contribution is considered distributable (December 2014: £3,867,000).
9. Current and deferred taxThe 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 and PSP share-based payment expenses. The amortisation of the IMA intangible asset is not deductible for corporation tax purposes therefore the deferred tax liability is released into the income statement to match the amortisation of the IMA intangible. At each reporting date the Group estimates the corporation tax deduction that might be available on the vesting of EPSP and PSP shares and the corresponding adjustment to deferred tax asset is recognised in the income statement and equity.
| Unaudited | Unaudited |
| 6 months ended 31 December 2015 | 6 months ended 31 December 2014 |
| £'000 | £'000 |
|
|
|
Current tax | 1,249 | 1,587 |
Deferred tax | (604) | (505) |
Total tax charge | 645 | 1,082 |
The tax assessed for the period is lower (December 2014: lower) than the average standard rate of corporation tax in the UK. The differences are explained below:
| Unaudited | Unaudited |
| 6 months ended 31 December 2015 | 6 months ended 31 December 2014 |
| £'000 | £'000 |
|
|
|
Profit before tax | 3,312 | 5,251 |
Profit before tax multiplied by the average rate of corporation tax in the UK of 20% (December 2014: 21%) | 662 | 1,103 |
Effects of: |
| |
Expenses not deductible for tax purposes | 587 | 464 |
Amortisation of RAMAM IMAs | (433) | (431) |
Income not subject to tax | - | (32) |
Other timing differences | (171) | (22) |
Total tax charge | 645 | 1,082 |
The analysis of deferred tax assets and liabilities is as follows:
| Unaudited | Unaudited |
| 31 December 2015 | 31 December 2014 |
| £'000 | £'000 |
|
|
|
Deferred tax liabilities |
|
|
At beginning of period | 6,174 | 7,010 |
Credit to the income statement | (433) | (462) |
(Credit)/charge to equity - available for sale | (3) | 31 |
At end of period | 5,738 | 6,579 |
|
|
|
Deferred tax assets |
|
|
At beginning of period | 528 | 95 |
(Charge)/credit to the income statement: | ||
- accelerated capital allowances | (2) | (5) |
- deductible temporary differences | 21 | (22) |
- share based payment expense | 154 | 101 |
Credit to equity - share based payment expense | 1,042 | 362 |
At end of period | 1,743 | 531 |
10. Dividends
During the six months ended 31 December 2015 the second interim dividend in respect of the year ended 30 June 2015 of £3,776,000 (4.6 pence per share) was declared and paid. The final dividend for the year ended 30 June 2015 of £3,120,000 (3.8 pence per share) was also paid in the period.
During the six months ended 31 December 2014 a final dividend in respect of the six months ended 30 June 2014 of £1,888,000 (2.3 pence per share) was declared and paid.
11. Earnings per shareThe basic earnings per share is 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 6) 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 2015 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 (December 2014: all).
Earnings per share | Unaudited | Unaudited |
| 6 months ended 31 December 2015 | 6 months ended 31 December 2014 |
|
|
|
|
| |
Profit attributable to owners of the Parent (£'000) | 2,667 | 4,169 |
Weighted average number of shares in issue ('000) | 82,095 | 82,095 |
Weighted average number of diluted shares ('000) | 88,600 | 88,453 |
Earnings per share (pence) | ||
Basic | 3.25 | 5.08 |
Diluted | 3.01 | 4.71 |
Adjusted profit after tax represents profit after tax, adjusted to add back the amortisation of intangible assets and EPSP costs, net of tax.
| Unaudited | Unaudited |
| 6 months ended 31 December 2015 | 6 months ended 31 December 2014 |
| £'000 | £'000 |
|
|
|
Profit before tax | 3,312 | 5,251 |
Adjustments: | ||
Amortisation of intangible assets | 2,165 | 2,167 |
EPSP costs | 643 | 518 |
Adjusted profit before tax | 6,120 | 7,936 |
Adjusted tax charge | (1,207) | (1,618) |
Adjusted profit after tax | 4,913 | 6,318 |
Adjusted EPS: | ||
Basic (pence) | 5.98 | 7.70 |
Diluted (pence) | 5.55 | 7.14 |
Adjusted underlying profit and adjusted underlying earnings per share
Adjusted underlying profit represents net management and advisory revenue less the related expense base including remuneration, net of tax.
| Unaudited | Unaudited |
| 6 months ended 31 December 2015 | 6 months ended 31 December 2014 |
| £'000 | £'000 |
Adjustments to adjusted profit after tax: |
|
|
Performance fees | 1,187 | 3,058 |
Associated remuneration expense at 50% / (42%) | (594) | (1,284) |
593 | 1,774 | |
Other income | 2 | 9 |
595 | 1,783 | |
Tax on adjustments | (119) | (374) |
476 | 1,409 | |
| ||
Adjusted profit after tax | 4,913 | 6,318 |
Adjusted underlying profit after tax | 4,437 | 4,909 |
Adjusted underlying EPS | ||
Basic (pence) | 5.40 | 5.98 |
Diluted (pence) | 5.01 | 5.55 |
Reconciliation between weighted average shares in issue
| Unaudited | Unaudited |
| 6 months ended 31 December 2015 | 6 months ended 31 December 2014 |
| '000 | '000 |
|
|
|
Weighted average number of shares in issue - basic | 82,095 | 82,095 |
Dilutive effect of shares granted under EPSP | 6,505 | 6,358 |
Weighted average number of shares in issue - diluted | 88,600 | 88,453 |
As at 31 December 2015, there were no shares which were antidilutive during the six months ended 31 December 2015 but which may be dilutive in future periods (December 2014: None).
12. Share capital
The Company had the following share capital at the reporting dates.
| Unaudited | Audited | ||
| 31 December 2015 | 30 June 2015 | ||
| 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 |
The ordinary shares carry the right to vote and rank pari passu for dividends.
13. Contingent liabilities
The Directors were not aware of any contingent liabilities of the Group at the reporting date (December 2014: none).
14. Related party transactionsKey management personnel, Punter Southall Group ("PSG"), and Pacific Investments Management Limited, its subsidiary undertakings and controlling shareholder and Sir John Beckwith (together "Pacific Investments") are considered related parties. There have been no changes to the related party transactions or relationships 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 2015.
Significant transactions with Pacific Investments
There have been no significant transactions with Pacific Investments during the period (December 2014: none).
Significant transactions with PSG
Transaction amount | |||
Unaudited | Unaudited | ||
31 December | 31 December | ||
2015 | 2014 | ||
£'000 | £'000 | ||
Transactions - expense/(income) | |||
Administrative recharges from PSG | 693 | 1,206 | |
Advisory fee revenue share | (68) | 32 | |
|
| ||
Balances - due to/(from) related party | |||
Administrative recharges from PSG | 280 | - | |
Advisory fee revenue share | 114 | 154 | |
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 | Unaudited |
|
| 6 months ended 31 December 2015 | 6 months ended 31 December 2014 |
|
| £'000 | £'000 |
|
|
|
|
Short-term employee benefits |
| 3,120 | 4,602 |
Share-based payments |
| 235 | 226 |
Total |
| 3,355 | 4,828 |
15. Financial instruments
Categories of financial instruments
Financial instruments held by the Group are split into the following categories:
Unaudited | Audited | |
31 December | 30 June | |
2015 | 2015 | |
£'000 | £'000 | |
Financial Assets | ||
Cash and cash equivalents | 14,774 | 20,227 |
Investment management balances | 5,585 | 9,104 |
Fee receivables | 3,344 | 3,126 |
Other receivables | 9,232 | 146 |
Total loans and receivables at amortised cost | 32,935 | 32,603 |
Available-for-sale investments | 5,142 | 5,155 |
Total available for sale | 5,142 | 5,155 |
Financial assets at fair value through profit and loss - level 2 | 134 | 130 |
Total assets at fair value through profit and loss | 134 | 130 |
Total financial assets | 38,211 | 37,888 |
Unaudited | Audited | |
31 December | 30 June | |
2015 | 2015 | |
£'000 | £'000 | |
Financial Liabilities | ||
Investment management balances | 5,380 | 9,810 |
Trade and other payables | 5,653 | 1,067 |
Total other liabilities at amortised cost | 11,033 | 10,877 |
Total financial liabilities | 11,033 | 10,877 |
The Directors consider 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 based upon their nature and the relatively short period of time between the origination of the instruments and their expected realisation.
There have been no transfers of financial instruments between levels during the period (December 2014: none).
16. Palisades disposal
On 15 December 2015, the Group disposed of its Palisades Capital Advisors business (Palisades), which operated within P-Solve LLC.
The fair value of consideration was £170,000, which approximated the carrying value of the investment. Due to its size and nature, the Group does not consider that Palisades constitutes a separate major line of business or geographical area of operation. Consequently it has not been presented as a discontinued operation.
17. Events after the reporting periodThe Board of Directors has declared a total interim dividend of 3.6 pence per share, of which 0.35 pence is a special dividend and relates to net performance fees. The total dividend is £2.96m.
Related Shares:
RIV.L