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RNS

Annual Financial Report

Released 07:00 25-Sep-2017

RNS Number : 6353R
River and Mercantile Group PLC
25 September 2017
 



25 September 2017

River and Mercantile Group PLC

Year-End Preliminary Results Announcement

Year ended 30 June 2017

River and Mercantile Group PLC ("the Group"), the advisory and investment solutions business, today releases its unaudited preliminary results and management report for the year ended 30 June 2017.

Highlights for the year ended 30 June 2017

·      Fee-earning AUM/NUM increased by 22% year on year, to £31.0bn;

·      Net flows for the year were £3.8bn;

·      Investment performance increased AUM by £1.7bn;

·      Net management and advisory fees increased by 22% year on year to £55.9m;

·      Performance fees were £12.5m, compared to £1.5m in the prior year. This reflects strong investment performance and more stable fixed income yields;

 

·      Statutory net profit after tax was £13.4m, compared to £5.9m in the prior year;

·      Statutory basic earnings per share were 16.45 pence per share, compared to 7.15 pence per share in the prior year;

·      Adjusted underlying profit before tax1 was £16.4m, compared to £11.1m in the prior year;

·      Adjusted profit after tax2 was £18.6m, compared to £9.5m in the prior year;

·      Adjusted basic earnings per share3 was 22.90 pence per share, compared to 11.62 pence per share in the prior year;

 

·      The Board of Directors have declared a second interim dividend of 8.1p per share, of which 2.8p is a special dividend and relates to net performance fees. The dividend will be paid on 3 November 2017 to shareholders on the register as at 13 October 2017. The ex-dividend date is 12 October 2017;

·      The Board of Directors have proposed a final dividend for the year ended 30 June 2017 of 6.0p per share, of which 2.8p is a special dividend and relates to net performance fees. The dividend will be paid on 15 December 2017 to shareholders on the register as at 24 November 2017, subject to approval by shareholders at the Group's AGM. The ex-dividend date is 23 November 2017;

·      The total dividends paid, declared and proposed are 19.7p per share, representing 80% of the adjusted underlying profit after tax and 100% of the net performance fee profit after tax.

 

Peter Warry, Acting Chairman said:

"Despite a period of unprecedented global change and uncertainty, the year ended 30 June 2017 has been a successful year for the Group, with our strongest set of results to date.

We have seen strong positive flows in all divisions, continuing our track record of 13 consecutive quarters of positive net flows. This combined with strong investment performance has led to a significant increase in AUM/NUM and similarly high levels of growth in net management fees.

This year has also seen us continue to use our scalable operating platform to grow our profit margins, which combined with a continuation of our high dividend payout ratios has led to increased dividends. In addition to the 5.6p already paid, I am pleased to announce that we are declaring a second interim dividend of 8.1p and proposing a final dividend of 6.0p, both dividends containing 2.8p which relates to net performance fees. These will be paid to shareholders on 3 November and 15 December 2017 respectively and take total dividends proposed and declared for 2017 to 19.7p, which is 86% of adjusted profit after tax."

Mike Faulkner, Chief Executive Officer said:

"The Group's 2017 results, our best ever, show continued progress towards our stated growth aspirations.  We remain true to the central idea of understanding our clients' problems and needs, and using our investment skills to solve them. This principle has allowed us to grow strongly in the three years since IPO, in a way that has been consistent with the strategy we set out at the time.

As a business we are now far stronger in every way - depth of people, scale and skills, and breadth of clients - and as a result we have refreshed our strategy to reflect this. Our ambition for growth continues, but we will remain focused on our central idea, just applied to a broader range of markets, and with an emphasis on delivering returns."

Notes

1 Adjusted underlying profit represents net management and advisory fees less associated remuneration, recurring administrative expenses (excluding IT transition costs), depreciation, and finance income and expense.

2 Adjusted profit comprises adjusted underlying profit, plus performance fees net of associated remuneration and the gain on disposal of the DAA fund seed position.

3 Adjusted basic earnings per share represents adjusted profit after tax divided by the weighted average number of shares outstanding in the period.

The financial information set out in this annual results release does not constitute the Group's statutory accounts for the year ended 30 June 2017 or 2016. Statutory accounts for the year ended 30 June 2016 have been delivered to the Registrar of Companies. The auditor's report on those accounts 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 financial information for the year-ended 30 June 2017 is unaudited. The statutory accounts for the year ended 30 June 2017 will be delivered to the Registrar following the Group's annual general meeting.

The 2017 Annual Report and Accounts will be published in October 2017 and a copy will be posted on the Group's website.

This RNS has been approved on behalf of the Board.

Peter Warry - Acting Chairman, 25 September 2017

Electronic copy

A PDF version of this announcement is available through the link on RNS, and from the Group's website http://riverandmercantile.com/Asp/uploadedFiles/file/Investor_relations/RandM_Preliminary_Results_2017.pdf

For further information please contact:

River & Mercantile Group PLC                                                                          +44 (0)20 3327 5100

Kevin Hayes, Chief Financial Officer

MHP Communications

Tim Rowntree / Giles Robinson                                                                       +44 (0)20 3128 8100

Forward Looking Statements

This announcement contains forward looking statements with respect to the financial conditions, results and business of the Group. By their nature forward looking statements relate to events and circumstances that could occur in the future and therefore involve the risk and uncertainty that the Group's actual results may differ materially from the results expressed or implied in the forward looking statements. Nothing in this announcement should be construed as a profit forecast. 

 

 

River and Mercantile Group PLC

 

Unaudited preliminary results and management report 2017

Contents

Chairman's statement

Chief Executive's review

Investment performance

Financial review

Consolidated income statement

Consolidated statement of financial position

Consolidated statement of cash flows

Consolidated statement of changes in shareholders' equity

Notes to the consolidated financial statements

Company statement of financial position

Company statement of cash flows

Company statement of changes in shareholders' equity

Notes to the Company financial statements

Other information

 

Chairman's statement

A year of strong growth in many areas

Dear Shareholder,

I am pleased to report that despite a period of unprecedented global change and uncertainty, the year ended 30 June 2017 has been a successful one for the Group, with our strongest set of results to date.

We have seen strong positive flows in all divisions, continuing our track record of 13 consecutive quarters of positive net flows. This, combined with strong investment performance has led to a significant increase in AUM/NUM and similarly high levels of growth in net management fees.

In June, we welcomed the Emerging Markets ILC team from Credit Suisse in the US. They bring important additional capability to the Group which we hope will further enhance our performance and we look forward to working together.

The Group prides itself on its outcome-oriented approach, where we concern ourselves primarily with the needs of our clients and how single products or combinations of products can help solve these needs. We aim to ensure that our clients understand the role that our solutions play in their broader objectives. This not only continues to benefit our clients, but also contributes to our low levels of attrition alongside our positive client feedback.

This low attrition, combined with the diversified nature of the divisions within the Group, gives rise to a more stable revenue base over time compared to many in our industry.

From a regulatory perspective, the rate of change in our market has been fierce, with no sign of it slowing in the coming months. The landscape is being shaped by MiFID II and the Senior Managers and Certification Regime amongst others, not to mention the FCA's Asset Management Market Study, which reported in June and has been followed by a reference to the Competition and Markets Authority. We welcome the FCA's findings, and the remedies aimed at improving transparency and improved outcomes for investors.

2017 has seen our highest level of performance fees since our IPO in 2014. We had given guidance that our Fiduciary Management performance fees would be depressed in times of falling interest rates as seen in 2015 and 2016, and it is pleasing to see that they have risen once the rate headwinds have eased. Our view that rates will remain low for longer remains unchanged.

This year has also seen us continue to use our scalable operating platform to grow our profit margins, which combined with a continuation of our high dividend payout ratios has led to increased dividends. In addition to the 5.6p already paid, I am pleased to announce that we are declaring a second interim dividend of 8.1p and proposing a final dividend of 6.0p, both dividends containing 2.8p which relates to net performance fees. These will be paid to shareholders on 3 November and 15 December 2017 respectively and take total dividends proposed and declared for 2017 to 19.7p, which is 86% of adjusted profit after tax.

June 2017 marked three years since our IPO and admission to the premium section of the London Stock Exchange. We feel that our revenue growth, margin expansion and dividend levels are important proof-points against the statements we made at the IPO three years ago and we now turn our attention to continuing the strong results for the next three years.

I write this report as Acting Chairman, following the sad death of Paul Bradshaw earlier this year. He was an asset to the business and is sorely missed. I would, however, like to take this opportunity to welcome Jonathan Dawson, our incoming Chairman who will pick up the baton from 1 October. He brings a wealth of experience to the role which I am confident will prove invaluable to the Group as it navigates its next three years as a PLC.

Peter Warry

Acting Chairman

 

Chief Executive's review

This Report marks three years since we brought River and Mercantile to the public markets. While a single year can be a short period of time over which to evaluate a strategy, three years can give a much greater perspective. I therefore want to focus my statement on this by:

·      Re-visiting what we are trying to do as a firm;

·      Looking at how we have performed in the last three years including returns to shareholders, particularly in light of our stated aims set out in my 2014 statement; and

·      Describing our future strategy.

What we are trying to do as a Group

Our purpose is simple - to identify our clients' actual financial problems and needs, and solve them as effectively as possible. The Group's outcome orientated approach, which focuses on tailoring solutions using our various skillsets in order to achieve client outcomes, has conduct at its core. This involves us doing two things well:

·      Understanding our clients in great depth - in order that we can define their need in the right level of detail so that we can solve it fully. This involves us understanding clearly the environment within which they operate. For example, how defined benefit funding works, or the influence of Solvency II on insurance clients, are important to understand if we are to appreciate properly the investment need; and

·      Developing and maintaining very strong investment skills - that can be deployed in various ways to solve these investment problems.

Obviously, these are supported by infrastructure and a broader control environment, but these two activities really define the essence of who we are. Our contention is that this is good for clients, shareholders and employees simultaneously. It makes it more likely that clients will have their needs met and therefore that we will add value for them. Firstly, because if our clients are experiencing value, they are more likely to remain with the firm, which in turn produces high quality earnings for shareholders. Secondly, because we operate in a wide range of environments, we get to work on a wide variety of interesting and challenging problems, which improves staff retention and is better in the long-run for clients.

This simultaneous win for our three key stakeholder groups is critical to our model and is the reason we don't deviate from the idea.

Critically, we do tend to stick to problems that are relatively hard to solve, and that therefore require a relatively high level of intellectual content. There are two reasons for this. First, culturally we prefer the challenge of things that are hard to do. Second, it tends to mean we will be less subject to competitive pressures than if we were offering something that is inherently commodity-like in nature.

This approach to working with clients has also driven the initiatives on which we are focusing in the coming years. 

How we performed over the last three years

The table below shows some key metrics illustrating how the business has performed in the last three years.


2014

2015

2016

2017

CAGR

Growth in Fee-earning AUM/NUM

n/a

21%

22%

22%

21%

Growth in net management and advisory fees

n/a

33%

-2%*

22%

12%

Adjusted underlying pre-tax margin

22%

27%

24%

29%


Regretted institutional attrition

3%

1%

4%

3%


*2016 revenues were impacted by the closure of the global thematic equity team and the disposal of part of the US business, Palisades.

The table shows a number of important elements. We have succeeded in growing net management and advisory fees at around 12% per annum. This is around the minimum level of medium term growth we tend to expect across the business, and is lower because we have had to close two activities during the three year period that were revenue generative (our global thematic equities business and our US pensions transaction business Palisades). Prospectively, we expect our growth rate to be in excess of this level.

Our adjusted underlying profit margin has widened from 22% to 29% over the three years. On the basis of revenue growth, this implies our underlying profit growth is 86% over the three year period, or 23% per annum.

Our regretted institutional attrition rate has been relatively low during the period, and is a function of our client outcome-led approach to engaging, as I described earlier. As a result, our AUM/NUM growth has been strong. This, coupled with investment performance, has led AUM/NUM growth in the three years to be 21% per annum. This has outpaced revenue, partly because we have seen a small amount of margin contraction (mainly a mix-of-business effect), but mostly because advisory fees have been relatively flat over the three year period.

But how does this growth achieved compare with our strategy? In our 2014 Report, I made a series of statements about our strategic intent. The table below lists them, what happened, and identifies whether we achieved the objective or not.

Statement

Outcome

Evaluation

Strong organic growth in Fiduciary Management

Organic growth achieved in Fiduciary Management AUM of 20% pa over the three years

Strong perform

Advisory also to grow

Advisory revenue 1% pa down over the three years, but slightly up excluding the effect of Palisades (which was closed)

Under perform

Equity mandates to grow through wholesale…

Wholesale equity growth of 29% p.a. over the three years

Strong perform

…and outcome-led institutional

Global high alpha was developed as a result of a client led outcome and has been a great success

Strong perform

Derivative growth further fuelled through consultant relationships

Additional derivative assets through intermediary-led relationships of £3.2bn, representing 20% of current NUM

Strong perform

New product launch to accelerate growth

·      DAA fund - £141m

·      UK Micro Cap - £100m (Capacity)

·      UK Dynamic Fund £200m

·      Global High Alpha £600m

 

Total new product assets - >£1bn

Strong perform

 

The table shows that we have performed strongly on five measures, and underperformed on one. In general, assuming we all accept that strategies are rarely delivered perfectly (or else they are unlikely to be sufficiently ambitious!) the business has performed well - we have grown significantly and done it consistently with our intent.

Underlying this is our investment platform, which has delivered strong performance across all of our service offerings. I believe it is rare for any investment firm to have this consistency across product offerings, and that is testament to both the quality of our people and the focus of the business on those things we are confident we can do well.

The table immediately after this report shows the investment performance we have achieved across our various strategies and the key thing I would draw out from this analysis is this is not a statement of the percentage of strategies outperforming - such an objective can be achieved by everything outperforming by 0.1% per annum, which is of relatively little value to a client. Rather, our strategies aim to add meaningful value for clients, in a way that makes a significant difference to their circumstances. All of our solutions are ahead of their benchmark since inception.

It is this consistency that led to FundCalibre ranking our Equity Solutions division top for relative outperformance across our range of products over a five year period. The award was well deserved as it reflects the strength of the PVT investment process, and this consistency is reflected across the whole firm.

Returns to shareholders over recent years

Notwithstanding that markets can, from time to time, value different things other than financials, our returns to shareholders have to date been relatively strong, both in absolute terms and compared to our sector.

Group share price and TSR since IPO vs financial services

http://www.rns-pdf.londonstockexchange.com/rns/6353R_-2017-9-23.pdf 

 

In truth though, we do not pay substantial attention to the performance of our sector. Rather, we are focused on the delivery of strong absolute economic returns to shareholders.

Nonetheless, I think that in one respect we need to communicate our story better. As I showed earlier, our attrition rate is very low compared to peers within our industry (a number of our competitors have stopped disclosing the components of client flows, showing only net flows). Our client base is very diversified, as is our revenue exposure by asset class, which we are disclosing regularly in our Revenue-weighted asset attribution (RWAA).

Our RWAA is shown in the Financial Review which appears later in this document. The point we are making in disclosing this information on attrition and diversification is that the quality of our revenue is very strong and stable, much more so than most traditional asset management firms (that is not a criticism of those firms - just an observation of the difference between our business models).

I am not yet convinced that these factors are reflected in our valuation, so we will continue to communicate this differentiation to investors.

Our strategy for the next three to five years

During the last three years, we have significantly developed the depth of our resources and our effectiveness in operating in different distribution channels. Immediately following the IPO, there were channels we aspired to access - specifically the consultant channel. These have been established and we have effective client relationships in these areas. This gives us strategic options that we did not have three years ago and therefore it is right that we refresh our strategy.

I am a great believer in the idea that strategy is "the evolution of a central idea through changing circumstances".

Our central idea is this concept of understanding client needs, and solving them well, where we are focused on solving difficult problems. I believe this strength is a competitive advantage in our industry and we work hard for it to remain so.

For the next three to five years, the emphasis in selecting "difficult" problems will be towards the generation of return, rather than other types of difficulty. Markets seek what they don't have, and markets value growth most highly in those that have it when growth is more generally not present. Similarly, one of the challenges in our industry is that the price of risk management in a wide range of investment products has been very low levels of return. I addressed this in my statement last year, and it remains central to our strategy. I believe investors will observe, progressively, that if the price of risk management is no return, then that price is too high and they will look for alternative solutions.

Therefore, the selection of strategies we offer to meet particular needs will tend to have the characteristics of being significant-return focused, and delivering this return in a way that is consistent with a particular desirable outcome. The strategies and their desired outcomes will be dependent on the channel desiring them. We currently operate in seven channels as shown in the table below.

Channel

Current strategies represented

UK long term savings

·      Fiduciary management

·      Advice (investment)

US pensions

·      Fiduciary management

·      Advice (actuarial/investment)

·      Pension risk transfer

UK institutional

·      Structured equity

·      LDI

·      High alpha (Global and UK)

·      Recovery

Wholesale

·      Small cap equities

·      Value equities

·      Income/dynamic equities

US institutional

·      Value equities

·      Derivatives

Insurance

·      Fiduciary management

·      Advice

Asia Pacific Institutional

·      Global high alpha

 

We believe there is opportunity to widen the range of strategies offered through each channel, as well as adding to the channels.

Importantly, we have significant capacity to grow. Shown in the table below is our remaining capacity to take on assets in our existing asset management strategies, along with estimated total management fees when capacity is reached (ignoring performance fees, advisory fees and new products). This shows clearly that we still have very significant room to grow our business through the above channels.

Area/fund

Current AUM

£bn

Estimated capacity £bn

Revenue at estimated capacity1 £m

Fiduciary Management including DAA Fund

10.5

40

65-75

Derivatives - LDI

13.2

>30

20-25

Derivatives - Structured equity

3.6

>20

10-15

Equities

3.6

15

75-85

Total



170-200

1.     Revenue is estimated by taking margin ranges multiplied by estimated capacity.

The above tables identify our specific focus to grow the current business, and that we have very significant capacity to grow the business if we are successful.

Given we have developed the number of channels through which we operate, and have significant remaining capacity to support growth in these channels, it makes sense to refresh our strategic objectives for the next three to five years. I therefore codify these growth objectives into the following measurable statements, against which I will report on progress in subsequent statements:

·      We intend to grow our net management and advisory revenue, organically, at a minimum of 12% per annum;

·      We may make acquisitions to grow faster, but only if it takes us faster in the above direction and in a way consistent with our central idea;

·      We will aim to increase returns to shareholders through performance fees;

·      We will aim to grow the smaller channels faster, in order to be significantly more diversified by channel in the next three to five years;

·      We will launch Global Macro, International (ex US) equity and international (ex US) smaller companies products, along with other products, to support this growth strategy;

·      We will aim to focus growth by channel, in the first instance, on those products and services identified in the above table; and

·      We will continue to grow our underlying operating margins to 30%-35% over the medium term, by growing remuneration and admin expenses at a lower rate than net management and advisory fees.

With this in mind, I would re-emphasise our central idea - I would expect us in the coming years to launch products that are not on the above list, that emerge as a result of client need-led demand. We will certainly add investment capability we do not currently already have in-house, should the right individual or team become available. For example, we would very much like to add capabilities in credit and private markets, should the right opportunities come along. If they do not, we will not add them for the sake of it.

Summary

We remain true to our central idea of understanding our clients' problems and needs, and using our investment skills to solve them. This principle has allowed us to grow strongly in the three years since IPO, in a way that has been consistent with the strategy we set out at the time.

As a business we are now far stronger in every way - depth of people, scale and skills, and breadth of clients - and as a result we have refreshed our strategy to reflect this. Our ambition for growth continues, but we will remain focused on our central idea, just applied to a broader range of markets, and with an emphasis on delivering returns.

Finally, on behalf of everyone in the company, I would like to thank all of you for your continued support - we are grateful for it.

Mike Faulkner

Chief Executive Officer

 

Investment performance

Annualised Investment Performance

AUM

£bn

Estimated Capacity
£bn

1 Year (%)

3 Years (% p.a.)

5 Years (% p.a.)

Since Inception (% p.a.)

By Investment Strategy

Jun-17

Abs.

Rel.

Abs.

Rel.

Abs.

Rel.

Abs.

Rel.

Date

TIGS

9.4

30.0

14.1%

11.3%

14.5%

2.5%

12.4%

4.4%

10.7%

2.7%

Jan-04

PIL Stable Growth Fund

13.8%

10.4%

7.7%

4.2%

8.6%

5.1%

9.0%

5.2%

Dec-08

Inflation Plus Fund

12.5%

9.0%

8.0%

6.0%

8.0%

5.6%

7.2%

4.2%

Mar-04

Fiduciary DC*

0.2

12.5%

6.1%

9.1%

4.4%

9.5%

4.2%

9.5%

4.2%

Oct-11

Fiduciary Insurance

0.1

n/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a

Apr-16

Dynamic Asset Allocation Fund

0.1

10.0

11.1%

10.7%

n/a

n/a

n/a

n/a

6.3%

5.8%

Sep-14

US Fiduciary

0.6

n/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a


Total Solutions

10.5

40.0










Structured Equity

3.6

>20.0

10.6%

(6.3%)

6.4%

(0.3%)

7.7%

(1.9%)

6.8%

0.6%

Dec-05

LDI

13.2

>30.0

n/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a

Dec-05

Total Derivatives

16.9

>50.0










UK Income

0.3

1.5

19.6%

1.5%

8.2%

0.8%

13.6%

3.0%

14.0%

1.7%

Feb-09

UK Smaller Companies

0.8

0.8

37.3%

5.5%

14.2%

5.1%

25.5%

11.5%

13.4%

6.6%

Nov-06

UK Long Term Recovery

0.2

0.3

33.2%

15.1%

8.9%

1.5%

20.6%

10.0%

14.5%

6.1%

Jul-08

World Recovery

0.3

1.0

38.2%

16.0%

13.2%

(1.7%)

n/a

n/a

19.1%

6.5%

Mar-13

World Recovery Focus

0.1

1.0

51.5%

32.7%

6.4%

1.6%

21.2%

10.6%

18.8%

9.1%

Feb-12

UK High Alpha

0.3

1.0

29.1%

11.0%

9.6%

2.2%

17.0%

6.4%

8.8%

2.6%

Nov-06

UK Core Segregated

0.2

0.5

21.9%

3.8%

8.1%

0.7%

11.8%

1.3%

9.7%

1.7%

Nov-10

UK Dynamic Equity

0.2

2.0

25.5%

7.4%

10.4%

3.0%

16.7%

6.1%

7.8%

2.1%

Mar-07

UK Equity Micro Cap Investment Company

0.1

0.1

65.2%

33.4%

n/a

n/a

n/a

n/a

28.8%

15.7%

Dec-14

Global High Alpha*

0.1

7.0

35.7%

13.5%

n/a

n/a

n/a

n/a

19.5%

5.1%

Dec-14

Segregated Mandates

1.1

n/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a


Total Equity Solutions

3.6

15.2


Total AUM

31.0

>100


* Composite performance

Financial review

Strong improvements across the business

·      Fee earning AUM/NUM increased by 22%

·      Positive net flows in every quarter since IPO - total net flows for the year of £3.8bn

·      Positive investment performance of £1.7bn

·      Regretted institutional attrition of 3%

·      Net management and advisory fees up 22%

·      Growth in adjusted underlying margin to 29%

·      Adjusted EPS growth of 97%, dividend growth of 107%

·      Total shareholder return since IPO of 26.1%

Key Performance Indicators

Fee earning AUM/NUM





Year

2014

2015

2016

2017

£'m

17,352

21,017

25,548

31,049

1) Growth in fee earning AUM/NUM

7%

21%

22%

22%

 

The growth in AUM/NUM is a key indicator of the client engagement process and is the driver for growth in net management fees. The growth in AUM/NUM is a function of new mandates, low attrition rates, aggregate investment performance and net rebalance.

Previously, the Group reported growth in mandated AUM/NUM as its KPI. This has been changed to fee earning AUM/NUM as a more objective measure. The KPI results on the basis of mandated AUM/NUM were 29%, 18%, 17% and 22% for the years 2014-2017 respectively.

Regretted institutional attrition (RIA)





Year

2014

2015

2016

2017

2) Client attrition

3%

1%

4%

3%

 

The Group's regretted institutional attrition varies from year to year but continues to be exceptionally low when compared to traditional asset managers.

 

RIA is the opening AUM/NUM of lost institutional clients, divided by total opening AUM/NUM. It excludes pension clients which have entered the Pension Protection Fund due to sponsor default or pensions who have moved to buy-in or buy-out, and redemptions arising fund benefit payments.

 

RIA is not directly measured for Equity Solutions - Wholesale as investor redemption decisions tend to be driven by their asset allocation and investment performance outcomes.

 

Low client attrition is a direct result of our client engagement process.






Net management and advisory fees





Year

2014

2015

2016

2017

£'m

35.1

46.7

45.7

55.9

3) Growth in net management and advisory fees

31%

33%

-2%

22%

 

Following impacts in the prior year from the closure of the global thematic equity team in 2015 and the disposal of the Group's Palisades business in the US in 2016, this year has seen strong growth in this KPI.

 

Management and Advisory fees represent the underlying revenues generated by the business. This metric measures the sustainability of the business.

 

 

 

Adjusted underlying pre-tax margin





Year

2014

2015

2016

2017

4) Adjusted underlying pre-tax margin

22%

27%

24%

29%

 

The strong revenue growth in the year combined with the scalable operating platform, has led to further growth towards management's previously stated target of underlying margins in excess of 30%.

 

Adjusted underlying pre-tax margin is an indication of the ability to achieve scale through increased AUM/NUM and revenues, at a lower marginal increase in related expenses.

 

Dividends



Interim dividend paid:

5.6p


Declared second interim dividend:

8.1p


Proposed final dividend:

6.0p


Total dividend for the year:

19.7p




2015

2016

2017

5) Percentage of adjusted earnings per share distributed


83%

82%

86%

 

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.

 

AUM/NUM and margins

The growth of our net management fee revenue results from the growth of our assets and notional under management and the stability of our management fee margins charged to clients.

Positive net flows are an indication of both our ability to retain previously won assets; and our ability to win new mandates and increase allocations from existing client mandates.

The following table shows the AUM/NUM for the year ended 30 June 2017.


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

9,287

13,903

1,171

1,187

2,358

25,548

Sales

969

2,800

666

656

1,322

5,091

Redemptions

(650)

(1,443)

(407)

(413)

(820)

(2,913)


319

1,357

259

243

502

2,178

Net rebalance

-

1,628

-

-

-

1,628

Net flow

319

2,985

259

243

502

3,806

Investment performance

922

-

391

382

773

1,695

Closing fee earning

AUM/NUM

10,528

16,888

1,821

1,812

3,633

31,049








Mandates in transition

-

-

-

-

-

-

Redemptions in transition

(2)

(572)

-

-

-

(574)

Total mandated

AUM/NUM

10,526

16,316

1,821

1,812

3,633

30,475

Opening mandated AUM/NUM

9,238

13,483

1,171

1,187

2,358

25,079








Increase/(decrease) in fee earning assets

13%

21%

56%

53%

54%

22%

Increase/(decrease) in M

mandated assets

14%

21%

56%

53%

54%

22%







Average fee earning AUM/NUM

10,236

15,735

1,502

1,470

2,972

28,943

Average margin 2017 (bps)

17-18

6-7

71-72

41-42

56-57

16

Average margin 2016 (bps)

17-18

7-8

73-74

47-48

61-62

16

Medium term margin guidance (bps)

16-17

6-7

66-68

39-40



Net management fees 2017 £m

10.9

10.7

6.1

16.8

45.4

* Includes £141m relating to the DAA Fund.

Total sales for the year increased by 16% to £5.1bn. Of these sales, £1.7bn were from new client mandates and £3.4bn were increased allocations and new mandates from existing clients. The ability to grow through our existing clients is an indication of positive client satisfaction through delivering against outcomes and gives the business an overall lower cost of client engagement.

Investment performance added £1.7bn to AUM. Within Fiduciary Management, 33% of the performance was generated from the bond-based matching fund and 67% from the risk assets.

Overall margins have remained stable reflecting slight reductions in individual businesses, offset by an increase in higher margin strategies. Our medium term management fee margin guidance reflects increasing client mandate sizes and anticipated mix effects.

Regretted institutional attrition (RIA)

Our business model is focused on clients' needs and desired investment outcomes, rather than a product-led approach to engagement. This approach results in higher client satisfaction and therefore low redemption rates. We measure this by RIA.

RIA is the opening fee earning AUM/NUM of lost institutional clients, divided by total opening fee earning AUM/NUM. It excludes pension clients which have entered the Pension Protection Fund due to the sponsors default or pensions who have moved to buy-in or buy-out, and redemptions arising for operational cash flows such as fund benefit payments.

RIA is not directly measured for Equity Solutions - Wholesale as investor redemption decisions tend to be driven by their asset allocation and investment performance outcomes. We closely monitor these outcomes in particular investment performance against benchmarks to determine whether the causes for wholesale attrition are negative client outcomes.

£m

Fiduciary Management

Derivative Solutions

Equity Solutions - Institutional

Total






Gross outflows

650

1,443

413

2,506

Opening fee earning AUM/NUM

9,287

13,903

1,187

24,377

Outflow %

7%

10%

35%

10%

RIA 2017

1.1%

3.6%

11.6%

3.0%

RIA 2016

3.5%

4.2%

0.5%

3.5%

 

This year saw an increase in Equity Solutions - Institutional as the result of a single mandate which was redeemed following a change in investment allocation decision. The overall level remains low, emphasising the stability of the Group's client base.

Revenue

£'000

2017 

2016

Increase/ (decrease)





Net management fees




- Fiduciary Management

17,677

13,871

27%

- Derivatives

10,883

9,481

15%

- Equity Solutions Wholesale

10,668

8,750

22%

- Equity Solutions Institutional

6,143

4,662

32%

Net management fees

45,371

36,764

23%





Advisory fees

10,522

8,905

18%


 

 

 

Total net management and advisory fees

55,893

45,669

22%





Performance fees




- Fiduciary Management

6,585

1,227

437%

- Equity Solutions

5,964

299

1,895%

Total performance fees

12,549

1,526

722%


 

 

 

Total revenue

68,442

47,195

45%

Net management fees

Management fees are generally charged as a percentage of the AUM/NUM we manage for the clients and are negotiated with clients based on a number of factors including the size of mandate. Net management fees reflect rebates and other payments to external distributors.

This year, we have seen strong growth in net management fees, with an increase of 23%. This is an excellent result, reflecting the strong growth in AUM/NUM at stable management fee margins.

Fiduciary Management

Closing fee earning AUM £m

Growth in fee earning AUM

Average AUM £m

Average margin (bps)

Revenue £m

Growth in revenue YoY







10,528

13%

10,236

17-18

17.7

27%

 

Fiduciary Management has once again enjoyed a successful year, with particularly strong investment performance in the early part of the year, which follows its success last year during the market reaction to Brexit. While the resulting growth in AUM in June last year had minimal impact on revenue in 2016, it had a full year impact this year.

Multi Asset Solutions

During the year, the Dynamic Asset Allocation (DAA) Fund has continued to attract investors and at year-end its AUM was £141m (2016: £64m). As the fund has a three year track record and has reached a sustainable level of AUM, the Group redeemed its £5m seed capital position, realising a gain of £0.8m. The DAA Fund uses the same investment processes as TIGS in Fiduciary Management. Its launch and seeding in 2015 was a strategic priority to give access to the TIGS investment strategy in daily dealing fund format to a broader range of investors, both wholesale and institutional.

Derivative Solutions

Closing fee earning NUM £m

Growth in fee earning NUM

Average NUM £m

Average margin (bps)

Revenue £m

Growth in revenue YoY







16,888

21%

15,735

6-7

10.9

15%

 

Derivative Solutions comprises Liability Driven Investing (LDI including gilt collateral management) and structured equity products.

Derivatives by type:

£m

Structured equity

Gilts and LDI

Total NUM





Opening fee earning NUM

2,737

11,166

13,903

Sales

1,374

1,426

2,800

Redemptions

(511)

(932)

(1,443)

Net rebalance

43

1,585

1,628

Net flow

906

2,079

2,985

Closing fee earning NUM

3,643

13,245

16,888





Mandates in transition

-

-

-

Redemptions in transition

(572)

-

(572)

Total mandated NUM

3,071

13,245

16,316

Derivatives' structured equity capabilities provide strategies to shape the return profile of clients' equity portfolios.

The majority of structured equity redemptions during the year - and in transition at the year-end - relate to clients repositioning their exposures, due to equity market performance or changes in the underlying asset portfolios.

LDI relates to the management of interest rate and inflation risk in the underlying pension liabilities. We continued to see strong flows from existing clients who increased their level of hedging to respond to market and scheme funding levels. These hedges generally increase in value as interest rates fall, helping to defend clients from increases in their liabilities.

As structured equity products are usually sold at a lower margin than LDI, the average margins of the Derivative Solutions division will fall over time if structured equity continues to sell strongly, due to mix-shift effects.

Equity Solutions - Wholesale and Institutional

Closing fee earning AUM £m

Growth in fee earning AUM

Average AUM £m

Average margin (bps)

Revenue £m

Growth in revenue YoY







3,633

54%

2,972

56-57

16.8

25%

 

The Equity Solutions division provides long-only equity funds and strategies to institutional clients and wholesale intermediaries. Institutional clients can access the strategies through funds or segregated mandates. The funds are available to wholesale intermediaries who distribute to their retail clients.

2017 has been a strong year for the Equity Solutions division and its PVT (Potential, Valuation and Timing) investment team with strong sales and investment performance driving AUM above £3.6bn.

The successful globalisation of the PVT process has continued, with mandate wins in the UK, US, Australia and New Zealand. Other significant wins include the £200m mandate from Alliance Trust.

In an environment of increasing client focus on value-for-money, demonstrating strong and sustained investment performance is key to demonstrating positive client outcomes. Across the entire Equity Solutions fund range the inception-to-date investment performance is above benchmark. This was recently recognised when the division was named as the top performing manager in the FundCalibre Fund Management Equity Index 2017, with 5 year average outperformance of greater than 50% above the comparable peer group. The performance of the individual funds can be seen in the investment performance table.

With the exception of the UK Smaller Companies Fund and the UK Micro Cap Investment Company all strategies have significant additional capacity. The pipeline remains strong from institutional clients. Retail markets have been buoyant during the year, with strong wholesale flows, however we remain cautious on the outlook for equity markets in 2018.

In June 2017, we signed a heads of terms and sub-IAA with Credit Suisse Asset Management (CSAM) whereby an emerging market equity investment team (the ILC team), who managed $352m of assets, transferred to the Group. These strategies are being managed under an investment advisory agreement with CSAM until the Luxembourg registered UCITS funds are transferred to the Group, which is anticipated to occur in the first half of the 2018 financial year. The addition of the ILC team, who have a similar life cycle investment philosophy to the PVT Team, expands our equity solutions expertise into emerging market equities. The assets will be shown in AUM once the underlying funds are transferred to the Group under an IMA.

Advisory revenues

The Solutions division earns revenues from clients who engage us on a retained fee basis or from specific projects. This year has seen an 18% increase in advisory revenues driven by increased project fees.

Part of this is due to the market environment, with events like Brexit and other change generating more project work over the year. The strong equity market returns (and improving funding levels) resulted in more client activity, particularly in introducing more downside protection to equity mandates and other de-risking strategies.

Revenue-weighted asset attribution

The revenues of traditional asset management firms have a high correlation to equity markets. However, the relative diversification of the Group's revenue streams compared to many of our peers mean they display greater stability and resilience to negative equity market movements.

Revenue-weighted asset attribution (RWAA) classifies our management and advisory revenues by the respective driver of the revenue. Management fees from Equity Solutions and Fiduciary Management that relate to equity allocations are classified as having an equity market driver. Likewise, the components of Fiduciary Management that relate to bond and interest rate allocations are classified as having an interest rate driver. Advisory revenues are not market sensitive and therefore are classified as being "independent".

In Derivative Solutions, while the underlying revenue is generated on hedging strategies in interest rates, inflation and equities, the revenue is not linked to the mark-to-market valuation but to the contractual notional amount of the derivative instrument. As a result, these revenues are also considered independent or cash-like in their characteristics

http://www.rns-pdf.londonstockexchange.com/rns/6353R_1-2017-9-23.pdf 

 

We believe this shows that the Group is well diversified in its revenue base, with over 50% of revenue derived from sources which will not decrease as a direct result of an equity market downturn. This is not to say that a prolonged downturn would not have an impact on our business over time, but our revenues should show lower volatility than other traditional asset managers.

Within Equity Solutions, while the underlying revenue is related to equity market performance we have a range of strategies that play to different parts of the equity market cycle which forms part of our investment philosophy and process. The income strategies play to the stability of large cap quality companies; the smaller company and micro-cap strategies plays to growth cycle; the recovery funds, both UK and World, play to a recovery cycle after a market correction; and the globalisation of the PVT process and the addition of the emerging market team allows us to offer strategies linked to different geographic regions.

RWAA measures a differentiating attribute of our business which is a source of competitive advantage. The cross-cycle stability of our revenue base and therefore our net economics allows us to take a longer term view in hiring, retaining and developing our staff. This gives us a consistency of client engagement and allows us to build long term trusted relationships with our clients so that we understand their expected outcomes.

Performance fee revenue

This year has seen a significant increase in performance fees as a result of the strong underlying performance generated by the investment teams, coupled with the more stable interest rate environment in the case of Fiduciary Management.

Fiduciary Management

Investment performance in TIGS (the main investment strategy within Fiduciary Management) above a benchmark generates performance fees for some clients. During the year, TIGS generated 14% performance including liability hedging.

As we have previously guided, in a stable to rising interest rate environment we would expect to earn higher performance fees from Fiduciary Management. During the year interest rates were more stable. This rate environment combined with the investment performance from assets in the risk portfolios generated investment performance of £0.9bn for clients which resulted in gross performance fees of £6.6m.

The majority of the performance fees in TIGS are subject to a deferral mechanism whereby performance fees are recorded one third in the year the investment performance occurs, and two thirds deferred and spread over two further years. If the performance hurdle is exceeded on an annual basis, the next third of the deferred fees becomes payable in each of the subsequent years. Underperformance in the deferral period is required to be made up in subsequent periods before performance fees can be earned. In the event that the client redeems its investment, deferred fees become immediately payable.

Performance fees are recorded on the anniversary dates of each mandate, which fall throughout the year.

In the year ended 30 June 2017, of the £6.6m of performance fees earned, £0.2m were from previously deferred performance fees.

In the last two years, TIGS has strongly outperformed its performance hurdles. As a result there are a number of clients who, if performance continues, will crystallise performance fees where previously they did not.

The table below shows the level of performance fees the Group would crystallise at different outperformance levels. It is based upon the following assumptions

1)   Outperformance is consistent each year;

2)   The current performance fee eligible AUM is as at 30 June 2017 without change over the period; and

3)   The 30 June 2017 performance level is the starting point.



Estimated TIGS performance fees £m

Outperformance each year


June 2018

June 2019

June 2020






0%


7

14

4

2%


11

24

17

4%


13

32

30

 

Equity Solutions

In Equity Solutions, performance fees are earned on outperformance relative to a stated benchmark. The majority of performance fees are realised based on a calendar year performance period, with the exception of the River and Mercantile UK Microcap Investment Company Limited ("RMMIC"). The RMMIC is structured as a closed-ended vehicle. If the net asset value rises above a prescribed value, the independent board of directors of the RMMIC will consider a redemption of shares and return of capital to investors. At this point, the Group will crystallise a performance fee.

Performance fees were £6.0m for the year ended 30 June 2017, including £4.9m from the RMMIC.

At 30 June 2017, total performance fee eligible assets (excluding RMMIC) were £358m. Of these assets, £302m were above their benchmark by less than 5% and £56m were above their benchmark by more than 5%. The weighted average rate of performance fees in respect of outperformance on the eligible AUM is 16%.

Administrative Expenses

£'000

2017

2016




Administrative expenses excluding governance

10,007

9,084

Governance costs

413

706

Non-recurring IT project costs

1,142

-

Administrative expenses

11,562

9,790




Total net management and advisory fees

55,893

45,669




Recurring admin expenses vs net management and advisory fees

18.6%

21.4%

 

While administrative expenses grew at a lower rate than underlying revenues, which is evidence of the scalable operating platform within the business, total administrative expenses did increase. This increase related to market data costs as we expanded our coverage of global market indices to support the growth in the geographical spread of Group offerings, as well as previously guided IT cost increases and a half-year impact of rent increases.

Governance costs fell as a result of the reduction in the number of Non-Executive Directors during the year, plus certain project costs in 2016 which were not incurred in 2017.

As previously indicated, the Group has invested in technology in the year, with the move away from PSG for IT infrastructure provision to a new third party provider and the refresh of our hardware and communication links to make the business more resilient. The migration has been completed on budget of £1.1m, and has delivered increases in performance and resilience of Group IT systems.

Management recognise the importance of cost efficiency, and remain committed to continuing growth in pre-tax margins as outlined in Mike's CEO Report.

However in 2018, we anticipate that administrative expense to underlying revenue will be in the range of 20-21%, driven by the following areas of increased spend: occupancy; IT and legal costs relating to investment in the funds platform including the Global Macro Fund; regulatory compliance; and the new ILC team based in Chicago.

In 2016 we increased our footprint in our office on Coleman Street and in the next year we will be adding additional space to provide for expansion. The lease on our Strand office will end in December 2021 and we have taken the opportunity to align all leases to the same end date. In 2018 we will have a full year impact of the rent review on the Strand and increases in business rates.

We will incur the cost increase of the new IT infrastructure of £0.3-£0.4m per annum, consistent with our statements in the prior year. In 2017 we incurred additional legal expenses to establish an Irish UCITS umbrella fund for the launch of the Global Macro Fund. In 2018 we will transition from Credit Suisse the Luxembourg UCITS platform to a new platform provider for the ILC Team. In addition we intend to establish a Delaware LLC and Collective Investment Trust in the US to launch Equity Solutions strategies for the PVT and ILC teams. The expansion of our funds platform will allow us to attract a broader investor base both in the US and Europe.

In 2017 we incurred additional legal costs relating to a number of regulatory and compliance initiatives as a result of changes in the UCITS remuneration regime, market abuse and competition regulations and started the work on the implementation of MiFID II. We anticipate that we will incur additional legal costs ahead of the implementation in the first half of FY 2018.

Remuneration

£'000

2017

2016




Fixed remuneration

20,114

18,423

Variable remuneration

15,201

7,111

Total remuneration (excluding EPSP costs)

35,315

25,534




Total revenue (excluding other income)

68,442

47,195

Remuneration ratio

(total remuneration excluding EPSP/total revenue)

52%

54%

 

Remuneration expense includes: (a) fixed remuneration comprising: base salaries, drawings, benefits and associated taxes and; (b) variable remuneration comprising: performance bonus and profit share paid to the partners of RAMAM LLP and applicable taxes; and (c) the amortisation of the fair value of performance share awards under the Performance Share Plan.

Fixed remuneration is allocated to net management and advisory fees. Variable remuneration is accrued on net management and advisory fees, and performance fees.

We had previously stated that we expected the accrual rate of remuneration to be around 54% on net management and advisory fees and 50% on performance fees for the year. However, the strong growth in revenue during the year has allowed us to reduce the accrual rate on net management and advisory fees to 52%, earlier than expected. It is management's intention to reduce this ratio over the medium term, although the level in any given year may be affected by the level of investment in new teams. To the extent that the Group generates significant performance fees, the Directors will also look to lower the remuneration ratio associated with them.

Executive Performance Share Plan (EPSP)

The EPSP was established at the IPO and Executive Directors were given awards over a maximum total of 7.3m shares, which they would be entitled to receive based upon achieving a compound total shareholder return of between 12% and 30% during the period from IPO to 30 June 2018, with a one-year holding period after vesting until 30 June 2019.

The EPSP costs in the income statement comprise the IFRS 2 accounting charge for the scheme and the accrued payroll tax costs related to the awards. The IFRS 2 charge is £452k per annum irrespective of the expected or actual outcome of the scheme. The payroll tax costs vary as a function of the number of shares expected to vest and the expected share price on vesting.

Based upon the TSR as at 30 June 2017, which was 26%, 5.4m shares would vest. However, as the performance period ends on 30 June 2018, the Directors believe that a reasonable estimate of the number of shares which will vest is 4.8m, representing a TSR of 24%. This generates a charge for the year for payroll tax of £1.1m.

Whilst the actual timing of dividends impacts the result, assuming a dividend yield of 5% per annum, full vesting would occur at a share price of approximately £4.30. At a payroll tax rate of 14.3%, this would generate a payroll tax cost of £4.5m and a corporate tax deduction of £6.0m.

Statutory and adjusted profits

£'000

2017

2016

2015





Statutory profit before tax

16,389

7,236

10,525

Statutory pre-tax margin

24%

15%

20%





Adjusted profit before tax

23,428

11,849

15,895

Adjusted pre-tax margin

34%

25%

30%





Adjusted underlying profit before tax

16,360

11,084

12,429

Adjusted underlying pre-tax margin

29%

24%

27%





Adjusted profit after tax

18,589

9,536

12,693

 

Adjusted underlying profit represents net management and advisory fees less associated remuneration, recurring administrative expenses (excluding IT transition costs), depreciation, and finance income and expense.

Adjusted profit comprises adjusted underlying profit, plus performance fees net of associated remuneration and the gain on disposal of the DAA Fund seed position.

The Directors believe that adjusted profit is a measure of the cash operating profits of the business and gives an indication of the profits available for distribution to shareholders.

Adjusted underlying pre-tax margin represents adjusted underlying profit before tax, divided by net management and advisory fees.

Management have previously stated an objective to grow the adjusted underlying pre-tax margin to above 30% in the medium term. In the prior year, the Group's margin fell as the result of several structural changes made by management including the closure of the global thematic equity strategy with the loss of £0.8bn of AUM, plus a fall in project revenue and other advisory business changes.

Capital, liquidity and regulatory capital

The business is strongly cash generative, generating net cash from operations of £24m. Cash and cash equivalents at year end were £31m.

As a business regulated by the UK Financial Conduct Authority, we hold prudent levels of capital resource in order to ensure our financial stability. We undergo an ongoing 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 30 June 2017, adjusting for the effect of the interim and proposed final dividends, and EBT purchases in respect of PSP awards, we have excess qualifying regulatory capital of £8m.

Employee Benefit Trust

The Group's EBT purchases Group shares in the open market to meet the potential vesting of share awards granted under the Group's PSP and DEP share plans, as the Board has stated that grants under these plans will not be dilutive to shareholders.

During the year, the Group's EBT purchased 1.3m shares relating to the previous years' share awards, with a de minimis number being sold as a result of award vestings. The net cost of these transactions was £3.5m and is shown in the statement of changes in equity. As at 30 June 2017, the EBT held 1.9m shares, which broadly corresponds to the number of shares subject to award up to 30 June 2017. The weighted average number of shares in issue has reduced as a result of purchases of own shares by the EBT. The EBT has waived the right to dividends on the shares which it holds.

As at 30 June 2017, the Group had granted share awards which were either expected to vest, or could possibly vest, over 0.6m shares. During the Group's end of year remuneration process, the Group granted share awards over a further 1.0m shares, based upon an estimated grant price. All such share awards are not intended to be dilutive.

Regulatory matters

MiFID II

The changes following from MiFID II and MiFIR (together 'MiFID II') come into effect in January 2018. In broad terms, MiFID II will significantly impact how trading activities are carried on, associated transparency, and also how firms are required to organise and conduct their regulated activities. For the Group, two of the main areas in which MiFID II has an impact relate to enhanced transaction reporting and the charging of research to investors.

The Group's plans to implement enhanced transaction reporting are in place and there is no anticipated increase in administrative costs as a result of this change.

Access to third party research is a critical component in our investment process and is additive to our internal research and screening processes in stock selection and portfolio construction. Third party research provides an important verification process in the development of our investment themes on individual companies and has supported the significant outperformance across our whole range of equity investment strategies.

Historically, the cost of third party research in Equity Solutions has been charged to clients within the expenses of the funds or mandates.

We have reviewed the FCA positon papers with regards to research costs and note the approach taken by our industry peers. We are consulting with our clients to determine how they wish to engage with us with regards to research costs. Once this consultation is complete we will provide an update as to our agreed final position.

CMA Review of advisory and investment management

As part of the Financial Conduct Authority (FCA) Asset Management Market Study the FCA has made a referral to the Competition and Markets Authority (CMA) to carry out a market investigation into the supply and acquisition of investment consultancy services and fiduciary management services to and by institutional investors and employers in the UK.

The CMA has contacted P-Solve Investments Limited and requested information and documents with regards to its investment consulting and fiduciary management business. We are cooperating with these information requests. The review is at an early stage and it is not clear what the outcomes will be.

FCA competition investigation

The Group's subsidiary RAMAM is co-operating with an investigation by the FCA under its concurrent competition powers (note 24). The matter does not affect any clients of the Group or the NAV of any fund or segregated mandate. The Group has not been notified of the outcome of this investigation however, in the event of a financial impact, the Directors do not expect the net outcome to be material to the financial statements.

Dividends

On 31 March 2017, an interim dividend of 5.6p per share was paid which included a special dividend of 1.4p relating to net performance fees. The Directors have declared a second interim dividend of 8.1p per share, of which 2.8p is a special dividend relating to net performance fees to be paid on 3 November 2017. In addition the Directors are proposing to shareholders a final dividend of 6.0p per share, of which 2.8p per share is a special dividend relating to net performance fees.

Total dividends per share paid, declared or proposed for the year ended 30 June 2017 are 19.7p per share, representing 80% of the adjusted underlying profit after tax and 100% of the net performance fee profit after tax. This is an increase in dividends of 107% compared to the prior year.

 

Kevin Hayes

Chief Financial Officer

 

 

Consolidated income statement



 

 

 

Note

Year ended 30 June

2017

Year ended 30 June

2016




£'000

£'000





Revenue


3



Net management fees



45,371

36,764

Net advisory fees



10,522

8,905

Performance fees



12,549

1,526

Other income



-

2

Total revenue



68,442

47,197






Administrative expenses


5

11,562

9,790






Depreciation


8,19

116

103

Amortisation


8,9

4,330

4,330

Total operating expenses



16,008

14,223






Remuneration and benefits





Fixed remuneration and benefits



20,114

18,423

Variable remuneration



15,201

7,111

Total remuneration and benefits


6

35,315

25,534

EPSP costs


7

1,566

283

Total remuneration and benefits including EPSP



36,881

25,817






Total expenses



52,889

40,040

Gain on disposal of available-for-sale assets


16

793

-

Profit before interest and tax



16,346

7,157






Finance income


10

46

81

Finance expense



(3)

(2)

Profit before tax



16,389

7,236






Tax charge/(credit)


11



Current tax



4,877

2,411

Deferred tax



(1,844)

(1,040)




 

 

Profit for the year attributable to owners of the parent



13,356

5,865






Earnings per share:


12



Basic (pence)



16.45

7.15

Diluted (pence)



15.99

7.15

 

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

 

 

Consolidated statement of comprehensive income




Year ended 30 June

2017

Year ended 30 June

2016




£'000

£'000






Profit for the year



13,356

5,865

Items that may be subsequently reclassified to profit or loss:





Foreign currency translation adjustments



66

320

Change in value of available-for-sale investments


16

445

195

Tax on change in value of available-for-sale investments


11

(90)

(39)

Gain on disposal of available-for-sale investments


16

(793)

-

Tax on gain on disposal of available-for-sale investments


11

159

-




 

 

Total comprehensive income for the year attributable to owners of the parent



13,143

6,341

 

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

 

Consolidated statement of financial position








Note

30 June

2017

30 June

2016




£'000

£'000






Assets





Cash and cash equivalents


14

30,759

14,147

Investment management balances


15

62,138

15,448

Available-for-sale investments


16

12 

5,350

Fee receivables


17

5,619 

6,488

Other receivables


18

14,898 

10,766

Deferred tax asset


11

3,421 

609

Property, plant and equipment


19

263 

377

Intangible assets


9

37,353 

41,552

Total assets



154,463

94,737






Liabilities





Investment management balances


15

60,317 

14,655

Current tax liabilities



3,111

1,168

Trade and other payables


20

18,699

9,831

Deferred tax liability


11

3,969

5,347

Total liabilities



86,096 

31,001




 

 

Net Assets



68,367

63,736






Equity





Share capital


21

246 

246

Share premium



14,688 

14,688

Other reserves


22

49,340

49,553

Own shares held by EBT


21

(4,766)

(1,283)

Retained earnings



8,859

532

Equity attributable to owners of the parent



68,367

63,736

 

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

 

The preliminary report was approved by the Board on 22 September 2017.

 

                                               

Consolidated statement of cash flows




Year ended 30 June

2017

Year ended 30 June

2016



Note

£'000

£'000






Cash flow from operating activities





Profit before interest and tax



16,346

7,157






Adjustments for:

                     




Amortisation of intangible assets


9

4,330

4,330

Depreciation of property, plant and equipment


19

116

103

Share-based payment expense


7

2,039

768

Gain on disposal of available-for-sale investments



(793)

(4)

Operating cash flow before movement in working capital



22,038

12,354

Increase in operating assets



(49,952)

(9,417)

Increase in operating liabilities



54,533

4,547

Cash generated from operations



26,619

7,484

Tax paid



(2,934)

(2,798)

Disposal of assets held at fair value through profit and loss



-

134

Net cash generated from operations



23,685

4,820






Cash flow from investing activities





Purchase of intangible assets


9

(79)

-

Purchases of property, plant and equipment


19

(2)

(267)

Interest received



15

41

Investment in available-for-sale investments


16

(10)

-

Proceeds from disposal of available-for-sale investments


16

5,793

-

Net cash generated from/(used) in investing activities



5,717

(226)






Cash flow from financing activities





Interest paid


10

-

(2)

Dividends paid


13

(9,345)

(9,851)

Purchase of own shares


21

(3,483)

(945)

Net cash used in financing activities



(12,828)

(10,798)

Net increase/(decrease) in cash and cash equivalents






16,574

(6,204)






Cash and cash equivalents at beginning of year



14,147

20,227

Effects of exchange rate changes on cash and cash equivalents



38

124

Cash and cash equivalents at end of year


14

30,759

14,147

 

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

 

 

 

 

 

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

 

Own shares held by EBT

Retained earnings

Total


£'000

£'000

£'000

£'000

£'000

£'000

£'000

£'000

£'000

£'000












Balance as at 30 June 2015

246

14,688

124

(6)

44,433

84

4,442

-

3,843

67,854

Comprehensive income for the year:











Profit for the year

-

-

-

-

-

-

-

-

5,865

5,865

Other comprehensive income

-

-

195

320

-

-

-

 

-

-

515

Deferred tax credit on available-for-sale investments

-

-

(39)

-

-

-

-

-

-

(39)

Total comprehensive income for the year

-

-

156

320

-

-

-

-

5,865

6,341

Transactions with owners:











Dividends

-

-

-

-

-

-

-

-

(9,851)

(9,851)

Share-based payment expense

-

-

-

-

-

-

-

-

768

768

Deferred tax credit on share-based payment expense

-

-

-

-

-

-

-

-

(93)

(93)

Purchase of own shares by EBT

-

-

-

-

-

-

-

(1,283)

-

(1,283)


 

 

 

 

 

 

 

 

 

 

Total transactions with owners:

-

-

-

-

-

-

-

(1,283)

(9,176)

(10,459)

Balance as at 30 June 2016

246

14,688

280

314

44,433

84

4,442

(1,283)

532

63,736

Comprehensive income for the year:











Profit for the year

-

-

-

-

-

-

-

-

13,356

13,356

Other comprehensive income

-

-

(189)

66

 

-

 

-

 

-

 

-

-

(123)

Deferred tax credit on available-for-sale investments

-

-

(90)

-

-

-

-

-

 

(90)

Total comprehensive income for the year

-

-

(279)

66

-

-

-

-

13,356

13,143

Transactions with owners:











Dividends

-

-

-

-

-

-

-

-

(9,345)

(9,345)

Share-based payment expense

-

-

-

-

-

-

-

-

2,039

2,039

Deferred tax credit on share-based payment expense

-

-

-

-

-

-

-

-

2,277

2,277

Purchase of own shares by EBT

-

-

-

-

-

-

-

(3,483)

-

(3,483)


 

 

 

 

 

 

 

 

 

 

Total transactions with owners:

-

-

-

-

-

-

-

(3,483)

(5,029)

(8,512)

Balance as at 30 June 2017

246

14,688

1

380

44,433

84

4,442

(4,766)

8,859

68,367

 

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

 

 

Notes to the consolidated financial statements

1.     Basis of preparation

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards, International Accounting Standards, International Financial Reporting Interpretation Committee interpretations, and with those parts of the 2006 Act applicable to groups reporting under IFRS as issued by the International Accounting Standards Board and adopted by the European Union ("IFRS") that are relevant to the Group's operations and effective for accounting periods beginning on 1 July 2016.

 

Going concern

The 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 2018 budget and 3 year forecast 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 from the date of approval of the financial statements. Additionally, the capital adequacy of the Group in base and stress scenarios is tested as part of the ICAAP and viability statement process.

 

Accordingly, the Group and Company 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 that are held at fair value.

 

Basis of consolidation

The consolidated financial statements include the Company and the entities it controls (its subsidiaries). Subsidiaries are considered to be controlled where the Group has exposure to variable returns from the subsidiary, the power to affect those variable returns and power over the subsidiary itself. Control is reassessed whenever facts and circumstances indicate that there may be a change in any of these elements of control.

 

Subsidiaries are consolidated from the date that the Group gains control, and de-consolidated from the date that control is lost.

 

The consolidated financial statements incorporate the results of business combinations using the acquisition method. In the statement of financial position, the subsidiaries' identifiable assets, liabilities and contingent liabilities are initially recognised at their fair values at the acquisition date. The results of acquired operations are included in the consolidated statement of comprehensive income from the date on which control is obtained. The consolidated financial statements are based on the financial statements of the individual companies drawn up using the standard Group accounting policies. Accounting policies applied by individual subsidiaries have been revised where necessary to ensure consistency with Group policies for consolidation purposes.

 

All transactions and balances between entities within the Group have been eliminated in the preparation of the consolidated financial statements.

 

The Employee Benefit Trust is included in the consolidated financial statements of the Group. The trust purchases shares pursuant to the non-dilutive equity awards granted to employees. These purchases and the operating costs of the trust are funded by the Company. The trust is controlled by independent trustees and its assets are held separately from those of the Group.

 

The consolidated statement of financial position has been presented on the basis of the liquidity of assets and liabilities.

 

The Group's relationship with fund entities

The Group entities act as the investment managers to funds and segregated managed accounts, and RAMAM is the Authorised Corporate Director (ACD) of River and Mercantile Funds ICVC (collectively 'Investment Management Entities' (IMEs)).

 

Considering all significant aspects of the Group's relationship with the IMEs, the Directors are of the opinion that although the Group manages the investment resources of the IMEs, the existence of: termination provisions in the Investment Management Agreements (IMAs) which allow for the removal of the Group as the investment manager; the influence exercised by investors in the control of their IME and the arm's length nature of the Group's contracts with the IME; and independent Boards of Directors of the IME, the Group does not control the IME and therefore the assets, liabilities and net profit are not consolidated into the Group's financial statements.

 

Foreign currencies

The majority of revenues, assets, liabilities and funding are denominated in UK Pounds sterling (GBP/£), and therefore the presentation currency of the Group is GBP. All entities within the Group have a functional currency of GBP, except for those based in the US.

 

 

 

 

Monetary items which are denominated in foreign currencies are translated at the rates prevailing at the reporting date. Non-monetary items are measured at the rates prevailing on the date of the transaction and are not subsequently re-translated.

 

The functional currency of the US-based entities is US Dollars and is translated into the presentational currency as follows:

 

·      Assets and liabilities are translated at the closing rate at the date of the respective statement of financial position;

·      Income and expenses are translated at the daily exchange rate for the date on which they are incurred; and

·      All resulting exchange differences are recognised in other comprehensive income.

 

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. Exchange differences arising are recognised in other comprehensive income.

 

2.     Significant accounting policies and significant judgements and estimates

As detailed in note 1, these financial statements are prepared in accordance with IFRS. The significant accounting policies of the Group which impact these financial statements are:

 

·      Impairment of intangible assets, goodwill and investments recorded in previous acquisitions. This involves judgments including business growth and estimates including discount rates, which are described in note 9;

·      Recognition of management and performance fee revenues. This involves estimates of AUM/NUM positions for the purposes of accruing revenue, which are described in note 3;

·      Provisions are recognised when the Group has a present obligation as a result of a past event, and it is probable that the Group will be required to settle that obligation. Determining whether provisions are required and at what level, requires both judgment and estimates;

·      The accounting for share-based remuneration. This involves estimates of future share prices for national insurance cost and judgments relating to forfeiture rates and business outcomes, which are described in note 7.

 

3.     Revenue

Net management fees

Net management fees represent the fees charged pursuant to an IMA with clients. They are reported net of rebates to clients and commissions paid to third parties and are charged as a percentage of the client's Assets under Management (AUM) or Notional under Management (NUM). The fees are generally accrued on a daily basis and charged to the client either monthly or quarterly. During the year ended 30 June 2017, rebates and commissions totalling £2,094,000 (2016: £1,971,000) were paid to clients and third parties in respect of management fees.

 

Net advisory fees

Net advisory fees represent fees charged under Investment Advisory Agreements (IAA) and are typically charged on a fixed retainer fee basis or through a fee for the delivery of a defined project. Advisory revenue is reported net of revenue share arrangements with other advisory partners. During the year ended 30 June 2017, £nil was paid to (2016: £68,000 was reclaimed from) a subsidiary of PSG (see related party note 25) and £nil was paid to (2016: £2,000 was reclaimed from) a third party, under revenue sharing arrangements relating to Palisades, which was part of the Group's US business and was disposed of in the prior year. Fees are accrued monthly and charged when the work has been completed.

 

Performance fees

Performance fees are fees paid under the IMAs for generating excess investment performance either on an absolute basis subject to a high water mark, or relative to a benchmark. Performance fees are calculated as a percentage of the investment performance generated and may be subject to deferral and continued performance objectives in future periods. Performance fees are recognised in income when the quantum of the fee can be estimated reliably and it is probable that the fee will be realised. This occurs once the end of the performance period has been reached. The client is invoiced for the performance fee at the end of the performance period which is generally annually either on the anniversary of their IMA or on a calendar year basis.

 

Other income

Other income in the prior year included the realised gains and fair value movements relating to fund units held by the ACD (note 26).

 

 

4.     Divisional and geographical reporting

 

The business operates through four divisions, however these are not considered as segments for the purposes of IFRS 8 on the basis that resource allocation decisions are not made on the basis of segmental reporting and results not analysed to a profit level. Despite this, the Directors feel that it is useful to the understanding of the results of operations to include certain information.

 

The net revenue for the year ended 30 June 2017 and 30 June 2016 together with the year-end AUM and NUM, reflect the activities of the respective divisions.

 



Year ended

30 June 2017

Year ended

30 June 2016



Net revenue

Fee Earning AUM/

NUM

Net revenue

Fee Earning AUM/

NUM



£'000

£'m

£'000

£'m







Net management and advisory fees






Fiduciary Management division


17,677

10,528

13,871

9,287

Derivative Solutions division


10,883

16,888

9,481

13,903

Equity Solutions division


16,811

3,633

13,412

2,358

Advisory division


10,522

N/A

8,905

N/A

Total


55,893

31,049

45,669

25,548

 

In addition, performance fees of £6.6m (2016: £1.2m) were earned by the Fiduciary Management division and £6.0m (2016: £0.3m) earned by the Equity Solutions division.

 

No single client accounts for more than 10% of the revenue of the Group (2016: none).

 

On a geographic basis the majority of the revenues are earned in the UK. The Group has an advisory, derivatives and fiduciary management business in the US and net revenue earned in the US for the year ended 30 June 2017 was £4.8m (2016: £4.2m). The AUM/NUM of the US business was £630m (2016: £648m).

 

Non-current assets held by the US business include £1.5m (2016: £1.4m) of goodwill.

5.     Administrative expenses




Year ended

30 June

2017

Year ended

30 June

2016




£'000

£'000






Marketing



839 

825

Travel and entertainment



498

467

Office facilities



2,192 

1,822

Technology and communications



3,720 

2,692

Professional fees



1,027

1,266

Governance expenses



413 

706

Fund administration



481 

612

Other costs



1,250 

1,400

Total administrative expenses (recurring)



10,420

9,790

IT migration expenses



1,142

-

Total administrative expenses



11,562

9,790

 

Included in other costs is the cost of insurance of £234,000 (2016: £345,000), staff training and recruitment of £217,000 (2016: £447,000) irrecoverable VAT of £226,000 (2016: £281,000), and bad and doubtful debt expense of £305,000 (2016: £24,000).

 

Administrative expenses include the remuneration of the external auditors for the following services:

 


Year ended

30 June

2017

Year ended

30 June

2016


£'000

£'000




Audit of the Company's annual accounts

95

108

Audit of the Company's subsidiaries

80

82

Audit related assurance services

55

46

Tax compliance services

19

18


249

254

 

 

The tax compliance remuneration relates to services provided in respect of the period to 30 June 2016. Tax compliance services are no longer provided by the Group's auditor.

6.     Remuneration and benefits

Fixed remuneration represents contractual base salaries, RAMAM LLP member drawings and employee benefits. The Group operates a defined contribution plan under which the Group pays contributions to a third party.

 

Variable remuneration relates to discretionary bonuses, variable profit share paid to the members of RAMAM LLP and associated payroll taxes.

 

Variable remuneration also includes a charge of £1,515,000 (2016: £316,000) relating to the amortisation of the Group's non-dilutive share awards and £409,000 (2016: £52,000) of associated social security costs.

 


Year ended

30 June

2017

Year ended

30 June

2016


No.

No.




The average number of employees (including Directors) employed was:



Advisory division

68

63

Fiduciary Management division

55

51

Derivative Solutions division

24

22

Equity Solutions division

20

16

Distribution

12

13

Corporate

29

29

Total average headcount

208

194

 


Note

Year ended

30 June

2017

Year ended

30 June

2016



£'000

£'000





The aggregate remuneration of employees (including Directors) comprised:




Wages and salaries


29,788

22,298

Social security costs


3,326

2,276

Pension costs (defined contribution)


686

644

Share-based payment expense

7

1,515

316

Total remuneration and benefits (excluding EPSP)


35,315

25,534





Fixed remuneration


20,114

18,423

Variable remuneration


15,201

7,111



35,315

25,534





EPSP costs:




Share-based payment expense

7

452

452

Social security costs

7

1,114

(169)

Total EPSP costs


1,566

283

 

Directors' remuneration

The aggregate remuneration and fees payable to Executive and Non-Executive Directors for the year ended 30 June 2017 was £3,568,000 (2016: £2,582,000). Fees payable for the year ended 30 June 2017 to Directors of PSG and Pacific Investments totalled £43,000 and £nil (2016: £49,000 and £16,000) respectively.

 

The remuneration of the Executive Directors (which includes the highest paid Director) is included in the other information section at the end of this report.

 

Key management remuneration

Key management includes the Executive and Non-Executive Directors and Executive Committee members. The remuneration paid or payable to key management for employee services is shown below:

 

 


Year ended

30 June

2017

Year ended

30 June

2016


£'000

£'000




Short-term employee benefits

9,069

6,014

Post employment benefits

111

92

Share-based payment expense

1,586

600


10,766

6,706

 

Details of share awards granted to Executive Directors for future performance periods are included in the other information section at the end of this report.

 

7.     Share-based payments

Where share options are awarded to employees, the fair value of the options at the date of grant is charged to the consolidated income statement over the vesting period. Non-market vesting conditions are taken into account by adjusting the number of equity instruments expected to vest at each year end date so that, ultimately, the cumulative amount recognised over the vesting period is based on the number of options that eventually vest. Market vesting conditions are factored into the fair value of the options granted. As long as all other vesting conditions are satisfied, a charge is made irrespective of whether the market vesting conditions are satisfied. The cumulative expense is not adjusted for failure to achieve a market vesting condition.

 

Where the terms and conditions of options are modified before they vest, the change in the fair value of the options, measured immediately before and after the modifications, is recognised in the consolidated income statement over the remaining vesting period.

 

Executive 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 share awards. At the date of admission two classes of performance share awards were made: Performance Condition A awards and Performance Condition B awards. 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 exercise price for the EPSP share awards is £0.003. These all remain outstanding as at 30 June 2017.

 

The vesting of Performance Condition A awards is conditional upon achieving a total shareholder return (TSR) of at least 12% compounded over the four-year performance period ending 30 June 2018. Vesting starts at 12% compound annual TSR and 100% vests at 24% compound annual TSR 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 TSR of at least 25% compounded over the four-year performance period ending 30 June 2018. Vesting starts at 25% compound annual TSR and 100% vests at 30% compound annual TSR 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 awards are 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 30 June 2017, no shares had been granted, forfeited, exercised, expired or vested under either the A or B awards (2016: 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 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 Condition A awards is 38p per share and the fair value of the Performance Condition B awards is 17p per share. The total fair value of Performance Condition A and B awards is estimated at £1.8m and £0.4m respectively. The fair value is amortised into EPSP costs over the vesting period and a charge of £452,000 was recognised for the year ended 30 June 2017 (2016: £452,000), which is treated as a non-cash adjusting item. The weighted average contractual remaining life of the A and B awards as at 30 June 2017 is one year.

 

The Directors expect that any shares that vest will be subject to applicable employers national insurance 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 year ended 30 June 2017 was a charge of £1,114,000 (2016: credit £169,000) and is included in the share-based payment expense. This figure assumes that 100% (2016: 43%) of the Performance Condition A awards will vest, which is an estimate subject to uncertainty.

 

Performance Share Plan

 

The Group's Performance Share Plan and Deferred Equity Plan (collectively PSP) allows for the grant of: nil cost options, contingent share awards or forfeitable share awards.

 

The Directors have stated an intention that vested performance share awards under the PSP would not be dilutive to shareholders, as the shares will be purchase by the Employee Benefit Trust.

 

The charge recognised in remuneration expense in respect of PSP awards in the year ended 30 June 2017 is £1,515,000 (2016: £316,000). Additionally, an accrual of £361,000 (2016: £52,000) for national insurance on vesting has been established.

 

2015 awards

 

The Directors granted awards to staff in respect of the year ended 30 June 2015. The awards totalled £1,070,000 and were converted into a number of shares subject to award based upon the share price following the announcement of the Group's results for the year.

 

The awards vest on 30 June 2017 or 30 June 2018, depending on the specific award. These awards are in respect of employee services during the year ended 30 June 2015 and in future periods.

 

The awards contain a combination of performance measures, including: continued employment; future sales targets; Group TSR; and divisional revenue and AUM/NUM.

 

The fair value of the awards has been estimated using a combination of Monte Carlo simulation and Black-Scholes modelling.

 

2016 awards

 

The Directors granted awards to staff in respect of the year ended 30 June 2016. These awards totalled £354,000 and were converted into a number of shares subject to award based upon the share price following the announcement of the Group's results for the year.

 

The awards vest on 30 June 2017, 30 June 2018 or 30 June 2019. These awards are in respect of employee services during the year ended 30 June 2016 and in future periods.

 

In addition, approximately 1.2m shares were awarded to staff and Executive Directors for future periods. These awards are in respect of employee services during the year ended 30 June 2017 and in future periods.

 

The awards contain a combination of performance measures, including: continued employment; Group TSR; achieving strategic priorities and divisional revenue and AUM/NUM.

 

The fair value of the awards has been estimated using a combination of Monte Carlo simulation and Black-Scholes modelling.

 

2017 awards

 

The Directors granted awards to Executive Directors and employees in respect of the year ended 30 June 2017. These awards total £1,533,000 and will be converted into a number of shares subject to award based upon the share price following the announcement of the Group's results for the year.

The awards vest on 30 June 2018, 30 June 2019 or 30 June 2020. These awards are in respect of employee services during the year ended 30 June 2017 and in future periods. Therefore the accounting charge in respect of the awards is recognised in part in the year ended 30 June 2017.

 

In addition, approximately 272,000 shares were awarded to employees for future periods and are therefore not recognised in the current year. The awards contain a combination of performance measures, including: continued employment; Group TSR; achieving strategic priorities and divisional revenue.

 

The fair value of the awards has been estimated using a combination of Monte Carlo simulation and Black-Scholes modelling. For the purposes of these financial statements the figures have been estimated using the share price as at 9 August 2017, being £3.35.

 

The key inputs used in determining the fair value of the PSP awards are:



Share plan 1

Share plan 2

Share plan 3

Share plan 4

Share plan 5

Share plan 6

Share Plan 7

Share plan 8











 

Financial year of award


2015

2015

2015

2016

2016

2016

2017

2017

 

Grant date award value £


619,735

375,000

47,665

365,825

1,971,154

685,000

576,821

956,000

 

Grant date share price £


2.22

2.22

2.22

2.21

2.21

2.21

3.35

3.35

 











 

Number of shares:










 

Number of shares outstanding at 30 June 2015


279,160

168,919

21,471

-

-

-

-

-

Number of shares granted during the year


-

-

-

165,525

-

-

-

-

Number of shares forfeited in the year


(33,692)

-

(4,955)

-

-

-

-

-

Number of shares exercised during the year


-

-

-

-

-

-

-

-

Number of shares outstanding at 30 June 2016


245,468

168,919

16,516

165,525

-

-

-

-

Number of shares granted during the year


-

-

-

-

891,889

309,943

256,365

424,889

Number of shares forfeited during the year


-

-

-

(40,000)

(30,189)

-

-

-

Number of shares exercised during the year


-

-

-

-

-

-

-

-

 

Number of shares outstanding at 30 June 2017


245,468

168,919

16,516

125,825

861,700

309,943

256,365

424,889

 











 

Fair value assumptions:










 

Exercise price


£nil

£nil

£nil

£nil

£nil

£nil

£nil

£nil

 

Risk free rate


0.94%

0.94%

0.94%

0.94%

1.00%

1.00%

1.00%

1.00%

 

Share price volatility


26.08%

26.08%

26.08%

27.40%

27.40%

27.40%

27.90%

27.90%

 

Dividend yield


5%

5%

5%

5%

5%

5%

5%

5%

 











 


 

Key terms:

 

Vesting period


01/07/2014

01/07/2014

01/07/2014

01/07/2015

01/07/2016

01/07/2016

01/07/2016

01/07/2016

 

- 30/06/17

-30/06/18

-30/06/2017

 -30/06/18

-30/06/2019

-30/06/2019

-30/06/2019

-30/06/2020

 

Weighted average remaining contractual life


<1 year

1 year

<1 year

1 year

2 years

2 years

2 years

3 years

12% compounded TSR Hurdle over vesting period


Yes

Yes

No

No

Yes

Yes

No

Yes

Continued employment required (subject to good leaver provisions)


Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes











 

Other key terms


1 - see below

None

None

None

2 - see below

None

None

None










 

 

Vesting profile per individual


3 - see below

All or nothing

All or nothing

All or nothing

Measured at the end of each year

All or nothing

All or nothing

All or nothing

Grant date fair value per share (pence)


60.69

51.71

204.69

175.79

175.79

175.79

305

255

 

No of shares expected to vest


78,550

168,919

16,516

116,799

473,936

309,943

453,007

346,075

 

 

 

1.     Achievement of specified divisional AUM/NUM and revenue targets within a range

2.     Achievement of specified revenue targets within a range

3.     Straight-line between minimum and maximum divisional AUM/NUM and revenue targets

 

The volatility for awards granted in the year has been calculated based upon the annualised daily return on the Company's share price from IPO to year-end. All awards exercise at the end of the vesting period subject to the approval of the Remuneration Committee. As at the reporting date 556,159 of the awards were exercisable (2016: none).

8.     Depreciation and Amortisation

Depreciation charges primarily relate to IT and communications equipment, and leasehold improvements. The property, plant and equipment, and the depreciation accounting policies are described in note 19.

 

The amortisation charge primarily relates to the IMAs recorded in the acquisition of RAMAM as described in note 9. The RAMAM IMA intangibles are amortised over their expected useful life of between five and ten years based on an analysis of the respective client channels. The amortisation is not deductible for tax purposes. At the date of the acquisition a deferred tax liability was recognised and is being charged to taxes in line with the amortisation of the related RAMAM IMAs (note 9).

9.     Intangible assets

Business combinations and goodwill

All business combinations are accounted for using the acquisition method. The cost of a business combination is the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed and equity instruments issued by the acquirer. The fair value of a business combination is calculated at the acquisition date by recognising the acquired entity's identifiable assets, liabilities and contingent liabilities that satisfy the recognition criteria, at their fair values at that date. The acquisition date is the date on which the acquirer effectively obtains control of the acquired entity. The cost of a business combination in excess of fair value of net identifiable assets or liabilities acquired, including intangible assets identified, is recognised as goodwill. Any costs incurred in relation to a business combination are expensed as incurred.

 

Goodwill arises on the acquisition of subsidiaries and represents the excess of the consideration transferred over the Group's interest in the fair value of the net identifiable assets, liabilities and contingent liabilities of the acquiree.

 

Goodwill is not amortised but is reviewed for impairment annually, or more frequently when there is an indication of impairment. For the purpose of impairment testing, goodwill acquired in a business combination is allocated to each of the Group's cash generating units (CGUs) expected to benefit from the synergies of the combination. Each CGU to which the goodwill is allocated represents the lowest level within the entity at which the goodwill is monitored for internal management purposes. If the recoverable amount of the CGU is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying value of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised is not reversed in a subsequent period.

 

Identifiable intangible assets

 

Investment Management Agreements and customer relationships

IMAs and customer relationships acquired in a business combination are recognised separately from goodwill at their fair value at the acquisition date. Customer relationships have an estimated useful life of 20 years and IMAs have estimated useful lives of five to ten years. The identified intangible assets are carried at cost less accumulated amortisation calculated on a straight-line basis.

 

Impairment of intangible assets, excluding goodwill

At each statement of financial position date or whenever there is an indication that the asset may be impaired, the Group reviews the carrying amounts of its intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the CGU to which the asset belongs. The recoverable amount is the higher of the fair value less costs to sell, and the value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

 

If the recoverable amount of an asset (or CGU) is estimated to be less than its carrying amount, an impairment loss is recognised as an expense immediately. For assets other than goodwill, where conditions giving rise to impairment subsequently reverse, the effect of the impairment charge is also reversed as a credit to the income statement, net of any depreciation or amortisation that would have been charged since the impairment.

 


          

Goodwill

Customer lists and IMAs

 

Software

Total


£'000

£'000

£'000

£'000

Cost:










At 1 July 2015

15,201

36,510

-

51,711

Disposals

(169)

-

-

(169)

Exchange difference

198

-

-

198

At 30 June 2016

15,230

36,510

-

51,740

Additions

-

-

79

79

Disposals

-

-

-

-

Exchange difference

101

-

-

101

At 30 June 2017

15,331

36,510

79

51,920






Accumulated amortisation and impairment:










At 1 July 2015

(395)

(5,463)

-

(5,858)

Amortisation charge

-

(4,330)

-

(4,330)

At 30 June 2016

(395)

(9,793)

-

(10,188)

Amortisation charge

-

(4,330)

-

(4,330)

Exchange difference

-

(49)

-

(49)

At 30 June 2017

(395)

(14,172)

-

(14,567)






Net book value:










At 30 June 2016

14,835

26,717

-

41,552

At 30 June 2017

14,936

22,338

79

37,353






There was £79,000 of software acquisitions in the year ended 30 June 2017 (2016: none). The disposal of goodwill in the prior year relates to the disposal of the Palisades business.

 

Credit Suisse co-operation agreement

 

On 26 June 2017, the Group announced a co-operation agreement with Credit Suisse, under which the Emerging Markets Industrial Lifecycle (ILC) team would join the Group. This agreement is non-binding and so does not represent a business combination in the year ended 30 June 2017. The Directors expect that the transition of assets under management to the Group will be completed in the year ended 30 June 2018.

 

Impairment review

 

Goodwill includes the goodwill arising on the acquisition of RAMAM and Cassidy Retirement Group Inc. (Cassidy). Included in the year-end balance is £13.2m (2016: £13.2m) in respect of RAMAM, £1.5m (2016: £1.4m) in respect of Cassidy and £0.2m (2016: £0.2m) in respect of P-Solve Investments.

 

The Directors estimated the recoverable amount of the RAMAM goodwill based upon the value in use of the business. The value in use was measured using internal budgets and forecasts to generate a 5 year view. A 15% revenue growth rate was assumed until 2022 with zero growth in to perpetuity and a pre-tax discount rate of 12%.

 

The key assumptions included in the estimate besides revenue are expenses including remuneration for staff and partners. These were determined through a review of current levels of revenue and cost, known changes, contractual provisions and sales plans.

 

Sensitivity analysis was performed on the key inputs of the valuation, being the growth and discount rates and future cash flows. It was determined that a growth rate of 8% or a discount rate of 19% would still result in a positive NPV and the overall assessment is therefore that there is no indication of impairment.

 

The Directors estimated the recoverable amount of the Cassidy goodwill based upon the value in use of the business. The value in use was measured using internal budgets and forecasts covering a period of 3 years, with a 2% revenue growth rate assumption for perpetuity cash flows and a pre-tax discount rate of 13%. There were also no significant client losses in the period which could otherwise have been an indicator of possible impairment.

 

The key assumptions included in the estimate are revenue, and expenses including remuneration. These were determined through a review of current levels of revenue and cost, known changes, contractual provisions and sales plans.

 

Sensitivity analysis was performed on the key inputs of the valuation, using several scenarios. A greater than 10% increase in the discount rate was required to indicate impairment.

10.   Finance income and expense

Finance income and expense are recognised in the period to which they relate on an accruals basis.

 

Finance income comprises £14,000 of bank interest (2016: £28,000), £22,000 of interest earned from a loan to Palisades (2016: £13,000) £8,000 of foreign exchange gain (2016: £41,000) and £2,000 of other finance income (2016: £2,000).

11.   Current and deferred tax

The tax charge consists of current tax and deferred tax. Current tax represents the estimated tax payable on the taxable profits for the period. Taxable profit differs from profit before tax reported in the consolidated income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. 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, and is measured using the substantively enacted rates expected to apply when the asset or liability will be realised or settled.

 

Deferred tax assets and liabilities are not offset unless the Group has legal right to offset which it intends to apply. Deferred tax assets are recognised only to the extent that the Directors consider it probable that they will be recovered.

 

Deferred tax is recognised in the income statement, except that a charge attributable to an item of income or expense recognised as other comprehensive income or to an item recognised directly in equity is also recognised in other comprehensive income or directly in equity.

 

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 expense. The amortisation of the IMA intangible asset is not tax deductible for corporate tax purposes therefore the deferred tax liability is released into the consolidated 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 shares and the corresponding adjustment to deferred tax is recognised in the income statement and equity.

 


Year ended

30 June

2017

Year ended

30 June

2016


£'000

£'000

Current tax:



Current tax on profits for the year

4,874

2,483

Adjustments in respect of prior years

3

(72)

Total current tax

4,877

2,411

Deferred tax - origination and reversal of timing differences

(1,844)

(1,040)

Total tax charge

3,033

1,371

 

The total tax charge assessed for the year is £203,000 lower (2016: £76,000 lower) than the average standard rate of corporation tax in the UK. The differences are explained below:

 


Year ended

30 June

2017

Year ended

30 June

2016


£'000

£'000




Profit before tax

16,389

7,236

Profit before tax multiplied by the average rate of corporation tax in the UK of 19.75% (2016: 20%)

3,236

1,447




Effects of:



Expenses not deductible for tax purposes

1,638

1,036

Deferred tax on amortisation of RAMAM IMAs

(1,306)

(866)

Income not subject to tax

-

(10)

Adjustment in respect of prior years

3

(72)

Other timing differences

(538)

(164)

Total tax charge

3,033

1,371

 

 

Effective from 1 April 2017, the applicable UK corporation tax rate was reduced from 20% to 19%.

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


Year ended

30 June

2017

Year ended

30 June

2016


£'000

£'000

Deferred tax assets



At beginning of year

609

528

(Charge)/credit to the income statement:

            


 - accelerated capital allowances

12

(12)

 - deductible temporary differences

(25)

15

 - share-based payment expense

548

171

Credit/(debit) to equity - share-based payment expense

2,277

(93)

At end of year

3,421

609

 

 



Deferred tax liabilities



At beginning of year

5,347

6,174

Credit to the income statement:



 - amortisation of intangibles

(849)

(866)

 - adjustment to deferred tax on intangibles due to changes in tax rates

(460)

-

Credit/(debit) to equity:



 - movement on fair value of available-for-sale investments

90

39

 - recycling of deferred tax on disposal of available-for-sale investments

(159)

 

At end of year

3,969

5,347

 

12.   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 year.

 

To the extent that any of the EPSP awards (note 7) vest they will have a dilutive effect on the equity holders of the Company. The potential dilution effect of the EPSP awards is considered in the calculation of diluted earnings per share.

 

The dilutive effect of the EPSP awards is measured based on the share price and dividends received by shareholders from the date of grant until the reporting date and is compared against the respective performance criteria of the performance shares to determine if the shares are dilutive as of the reporting date. No consideration is given to future performance.

 

Based on the Group's share price at 30 June 2017 and dividends paid, 100% (2016: none) of the EPSP Performance Condition A shares and 21% (2016: none) of the EPSP Performance Condition B shares would have met the vesting criteria. As a result, 5,029,000 shares were dilutive. There were no share awards that were anti-dilutive in the year but which may be dilutive in future periods (2016: none).

 

 



Year ended

30 June

2017

Year ended

30 June

2016





Profit attributable to owners of the parent (£'000)


13,356

5,865

Weighted average number of shares in issue ('000)


81,149

82,048

Weighted average number of diluted shares ('000)


86,288

82,048





Earnings per share:




Earnings per share




Basic (pence)


16.45

7.15

Diluted (pence)


15.48

7.15





Reconciliation between weighted average number of shares in issue



Year ended

30 June

2017

Year ended

30 June

2016



'000

'000





Weighted average number of shares in issue - basic


81,149

82,048

Dilutive effect of shares granted under EPSP and save as you earn


5,138

-

Weighted average number of shares in issue - diluted


86,288

82,048

 

The weighted average number of shares in issue has reduced as a result of purchases of own shares by the EBT (note 21). At 30 June 2017, the EBT held 1,884,000 shares (2016: 564,000). The weighted average number held by the EBT during the year was 899,000 (2016: 239,000).

 

Adjusted profit

 

Adjusted profit comprises adjusted underlying profit and performance fee profit.

 

Adjusted underlying profit represents net management and advisory fees less associated remuneration, recurring administrative expenses (excluding IT transition costs), depreciation, and finance income and expense.

 

Performance fee profit represents performance fees, less the associated remuneration costs. In the current year, it also includes the gain on disposal of the Group's DAA fund.

 



Year ended

30 June

2017

Year ended

30 June

2016



£'000

£'000

Adjusted underlying profit




Net management and advisory fees


55,893

45,669

Administrative expenses - recurring


(10,420)

(9,790)

Underlying remuneration at 52%/54%


(29,040)

(24,771)

Depreciation


(116)

(103)

Finance income/expense


43

79

Adjusted underlying profit before tax


16,360

11,084

Taxes


(3,443)

(2,158)

Adjusted underlying profit after tax


12,917

8, 926

Adjusted underlying pre-tax margin


29%

                       24%





Performance fee profit




Performance fees


12,549

1,526

Other income


-

2

Less remuneration at 50%/50%


(6,275)

(763)

Plus gain on disposal of available-for-sale assets


793

-

Performance fee profit before tax


7,068

765

Taxes


(1,396)

(155)

Performance fee profit after tax


5,672

610





Adjusted profit before tax


23,428

11,849

Adjusted profit after tax


18,589

9,536





 

Reconciliation to statutory profit

 



Year ended

30 June

2017

Year ended

30 June

2016



£'000

£'000





Profit before tax


16,389

7,236

Adjustments:




Amortisation of intangible assets and IMA


4,330

4,330

IT migration costs


1,142

-

EPSP costs


1,566

283

Adjusted profit before tax


23,427

11,849

 

IT migration costs are the non-recurring costs of transitioning the Group's IT infrastructure from PSG and represent the final part of the separation from Punter Southall Group (PSG) under the Transitional Services Agreement (TSA).

 

 

Adjusted earnings per share



Year ended

30 June

2017

Year ended

30 June

2016



£'000

£'000





Adjusted profit after tax


18,589

9,536





Weighted average shares


81,149

82,048

Weighted average diluted shares


86,288

82,048





Adjusted EPS:




Basic (pence)


22.90

11.62

Diluted (pence)


21.54

11.62

 

13.   Dividends

 

The Group recognises dividends when an irrevocable commitment to pay them is incurred. In the case of interim dividends, this is generally the payment date. In the case of final dividends, this is the date upon which the dividend is approved by shareholders.

 

During the year, the following dividends were paid:






Year ended

30 June

2017

Year ended

30 June

2016


Ordinary (p)

Special (p)

Total (p)


£'000

£'000

2015 second interim

3.6

1.0

4.6


-

3,776

2015 final

3.8

n/a

3.8


-

2016 first interim

3.25

0.35

3.6


-

2016 second interim

3.3

0.1

3.4


2,771

2016 final

2.5

n/a

2.5


2,034

2017 first interim

4.2

1.4

5.6


4,540






9,345

 

 

A second interim dividend in respect of the year of 8.1p per share has been declared by the Directors, of which 2.8p is a special dividend relating to net performance fees. The Directors have proposed to shareholders a final dividend in respect of the year of 6.0p per share, of which 2.8p is a special dividend relating to net performance fees. Based upon the number of shares held by the EBT at the year-end (upon which dividends are waived), the expected total payments are £6.5m and £4.8m for the second interim and final dividends respectively.

 

14.   Cash and cash equivalents

Cash and cash equivalents comprise cash on hand and demand deposits. At year end all cash balances were held by banks with credit ratings as detailed below.

 

Bank

£'000

Credit Rating

Rating Body





Barclays Bank

20,677

A1 -

Moody's

Lloyds Bank

9,695

Baa1

Moody's

BMO Harris Bank

26

Baa1

Moody's

First Republic Bank

361

A1

Moody's

Total cash and cash equivalents

30,759



 

15.   Investment management balances



30 June

2017

30 June

2016



£'000

£'000





Investment management receivables


62,138

15,448

Investment management payables


60,317

14,655

 

 

As ACD of River and Mercantile Funds ICVC (the Fund) the Group is required to settle transactions between investors and the depositary of the Fund. The Group is exposed to the short-term liquidity requirements to settle with the depositary of the Fund before receiving payments from the investor and mitigates this risk by holding cash in its ACD account. The credit risk associated with the investment management balances is discussed in note 26.

 

The investment management balances are recorded as loans and receivables and financial liabilities held at amortised cost. They are initially recognised based upon the values given by the administrator of the ICVC and are subsequently recognised at amortised cost. Due to their short-term nature (typically less than a week), amortised cost closely approximates fair value. If any investment management receivable was to remain unpaid significantly past its term, the Directors would consider a provision for impairment. No provisions were made as at 30 June 2017 (2016: £nil).

 

The investment management assets and liabilities are valued at the contractually agreed subscription or redemption values.

16.   Available-for-sale investments

In December 2016, the Group redeemed its £5.0m seed capital investment in the River and Mercantile Dynamic Asset Allocation Fund (the 'DAA Fund'). The investment was made in 2014 and was recognised as an available-for-sale financial asset up to the point of sale, with unrealised fair value movements recognised in other comprehensive income. The fair value of the Group's investment in the DAA Fund was derived from the fair value of the underlying investments, some of which are not traded in an active market and therefore the investment was classified as Level 2 under IFRS 13 Fair Value Measurement. The DAA Fund is an unlisted equity vehicle based in the UK.

 

A gain of £793,000 was realised on redemption of the Group's position in the fund which is shown in the income statement. During the year, the Group invested £10,000 of seed capital in the River and Mercantile Global High Alpha fund.

 

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


£'000



At 1 July 2015

5,155

Movement in fair value

195

At 30 June 2016

5,350

Additions

10

Movement in fair value

445

Disposals

(5,793)

At 30 June 2017

12

 

17.   Fee receivables

Fee receivables are recorded initially at the invoiced value, which is the estimated fair value of the receivables and are subsequently held at amortised cost. The Group's policy on financial instruments can be found in note 26.

 

The collectability of the fee receivables is reviewed periodically and if there is evidence to indicate that an amount may not be collectable a specific provision is established against the receivable. At 30 June 2017, a provision of £55,000 (2016: £82,000) has been established against potentially irrecoverable receivable balances and the total balance is reported in the consolidated statement of financial position net of this provision. On confirmation that the fee receivables will not be collectable, the gross carrying value of the asset is written off against the associated provision.

 

The ageing of fee receivables is shown below:



30 June

2017

30 June

2016



£'000

£'000





Neither past due nor impaired


4,254

4,668

Past due but not impaired:




-       Less than three months


995

1,057

-       More than three months


370

763

Impaired:




-       More than three months


55

82

-       Provision for impairment


(55)

(82)

Total fee receivables


5,619

6,488

 

 

The average credit period on fee receivables is 27 days (2016: 46 days). The Directors believe that the carrying value of fee receivables, net of impairment, represents their fair value due to their short term nature and is the maximum credit risk value. The Directors are satisfied with the credit quality of counterparties.

 

18.   Other receivables

 



30 June

2017

30 June

2016



£'000

£'000





Accrued income


13,088

9,239

Prepayments


1,080

808

Other assets


730

719



14,898

10,766

 

Accrued income includes management, advisory and performance fees that have been recognised in the consolidated income statement in line with the Group's accounting policies on revenue recognition, but have not yet been invoiced to clients. Clients are generally invoiced in arrears on a quarterly basis.

 

The Group's policy on financial instruments can be found in note 26.

19.   Property, plant and equipment

Property, plant and equipment is carried at historical cost less accumulated depreciation. Depreciation charges the cost of the assets to the consolidated income statement over their expected useful lives. Office equipment includes computer equipment which is depreciated over three years, and fixtures, fittings and equipment which is depreciated over seven years. Leasehold improvements are amortised over the remaining term of the leases. The depreciation period and method is reviewed annually.

 


Office equipment

Leasehold improvements

Total


£'000

£'000

£'000

Cost:




At 1 July 2015

606

182

788

Additions

82

185

267

At 30 June 2016

688

367

1,055

Additions

2

-

2

At 30 June 2017

690

367

1,057





Accumulated depreciation:




At 1 July 2015

528

52

580

Depreciation charge

53

50

103

Exchange difference

(5)

-

(5)

At 30 June 2016

576

102

678

Depreciation charge

73

43

116

At 30 June 2017

649

145

794





Net book value:




At 30 June 2016

112

265

377

At 30 June 2017

41

222

263

 

20.   Trade and other payables

 



30 June

2017

30 June

2016



£'000

£'000





Trade payables


1,042

450

VAT payable


697

401

Remuneration accruals


14,210

6,714

Other accruals and payables


2,750

2,266



18,699

9,831

 

The Group's policy on financial instruments can be found in note 26.

 

21.   Share capital

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

 



30 June 2017

30 June 2016



Number

£

Number

£

Allotted, called up and fully paid:






Ordinary shares of £0.003 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.

 

The share premium account arises from the excess paid over the nominal value of the shares issued.

 

During the year, the Group's EBT purchased Group shares in relation to the PSP scheme (note 7). The shares held are measured at cost.

 

 


£'000

Opening balance at 1 July 2016

(1,283)

Acquisition of shares by the EBT

(3,483)

Balance as at 30 June 2017

(4,766)

 

22.   Other reserves



30 June

2017

30 June

2016



£'000

£'000





Available-for-sale reserve (including deferred tax)


1

280

Foreign exchange reserve


380

314

Capital redemption reserve


84

84

Merger reserve


44,433

44,433

Capital contribution reserve


4,442

4,442



49,340

49,553

 

The available-for-sale reserve represents the unrealised fair value movements in available-for-sale financial assets. On disposal the cumulative fair value changes in reserves are reclassified to the income statement.

 

The foreign exchange reserve represents the cumulative foreign exchange differences arising on US Dollar denominated businesses in the Group as well as currency differences on goodwill and fair value adjustments on the acquisition of foreign subsidiaries, as listed in note 27. On disposal of the US Dollar denominated business, the associated cumulative foreign exchange differences are recycled through the consolidated income statement.

 

The capital contribution reserve arose from forgiveness of a dividend by the Group's then parent, PSG (£3,867,000) and from an historic acquisition whereby the Group's then parent, PSG, settled part of the consideration in its own shares (£575,000).

 

The merger reserve arose on the acquisition of RAMAM in March 2014.

 

The movement in all reserves is detailed in the consolidated statement of changes in shareholders' equity.

 

23.   Operating leases

Office facilities are leased under operating leases. The rental cost is charged to the consolidated income statement on a straight-line basis over the lease term. Rent rebates are accounted for over the period of the lease term.

 

The Group entered into a non-cancellable operating lease on 26 June 2014 with PSG for the Group's primary office facilities in London until December 2021.

 

The future aggregate minimum lease payments under all non-cancellable operating leases, net of rent rebates are as follows:

 



30 June

2017

30 June

2016



£'000

£'000





No later than one year


724

809

Later than one year and no later than five years


2,426

2,745

Later than five years


513

919



3,663

4,473

 

24.   Contingent liabilities

The Group's subsidiary RAMAM is co-operating with an investigation by the FCA under its concurrent competition powers relating to the participation of RAMAM in two transactions. The matter does not affect any clients of the Group or the NAV of any fund or segregated mandate. The Group has not been notified of the outcome of this investigation and so it remains uncertain whether there will be any impact on the Group. However, in the event of a financial impact, the Directors do not expect the net outcome to be material to the financial statements.

25.   Related party transactions

Related parties to the Group are:

 

·      Key management personnel;

·      PSG who hold 38.1% of the issued share capital of the Group; and

·      Pacific Investments Management Limited, its subsidiary undertakings and controlling shareholder, Sir John Beckwith were considered to be related parties as they held significant influence over the Group by virtue of holding more than 10% of the issued share capital of the Group. Following a disposal by Group in March 2017, they now hold less than 10% and are therefore no longer considered a related party.

 

Significant transactions with Pacific Investments

There have been no significant transactions with Pacific Investments during the year (2016: none).

 

Significant transactions with PSG

 



                        




30 June

30 June


2017

2016




£'000

£'000






Administrative charges from PSG:





 Office facilities



931

875

 Technology and communications



470

686

Professional fees:





 Accounting services



-

68

Total administrative charges and professional fees



1,401

1,629











Advisory fee revenue share received related to Palisades



-

68

 

 

Receivables and payables with related parties




30 June

30 June


2017

2016




£'000

£'000






Amount (due to)/due from related party:





PSG



(224)

(35)

Total



(224)

(35)






 

 

Key management personnel compensation

Details of key management personnel compensation can be found in note 6.

 

26.   Financial instruments

Financial assets and financial liabilities are recognised in the Group's consolidated statement of financial position when the Group becomes party to the contractual provisions of the instrument. Financial assets are de-recognised when the contractual rights to the cash flows from the financial asset expire or when the contractual rights to those assets are transferred. Financial liabilities are de-recognised when the obligation specified in the contract is discharged, cancelled or expires.

 

Financial assets at fair value through profit or loss ('FVTPL')

Financial assets are classified as FVTPL when the asset is a trading instrument, or by designation if not. A financial asset may be designated as FVTPL upon initial recognition if:

·      such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or

·      the financial asset forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Group's documented risk management strategy, and information about the grouping is provided internally on that basis;

 

Financial assets at FVTPL are stated at fair value, with any gains or losses arising on re-measurement recognised in profit or loss.

 

Trade and other receivables

Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method less provision for impairment. Interest income is recognised by applying the effective interest rate, except for short term trade and other receivables when the recognition of interest would be immaterial.

 

Impairment provisions are recognised when there is objective evidence (such as significant financial difficulties on the part of the counterparty or default or significant delay in payment) that the Group will be unable to collect all of the amounts due. For trade and other receivables, which are reported net, such provisions are recorded in a separate account with the loss being recognised in the consolidated income statement. On confirmation that the trade and other receivables will not be collectable, the gross carrying value of the asset is written off against the associated provision.

 

Cash and cash equivalent balances

Cash and cash equivalents balances comprise cash in hand, cash at agents, demand deposits, and other short-term highly liquid investments that have maturities of three months or less from inception, are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value.

 

Available-for-sale financial assets

Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories.

 

Available-for-sale investments are held at fair value if this can be reliably measured. If the investments are not quoted in an active market and their fair value cannot be reliably measured, the available-for-sale investment is carried at cost, less accumulated impairment. Unless the valuation falls below its original cost, gains and losses arising from changes in fair value of available-for-sale assets are recognised directly in equity through other comprehensive income. On disposal the cumulative net gain or loss is transferred to the statement of comprehensive income. Valuations below cost are recognised as impairment losses in the income statement. Dividends are recognised in the income statement when the right to receive payment is established.

 

Trade and other payables

Trade and other payables are initially measured at their fair value and are subsequently measured at their amortised cost using the effective interest method. Interest expense is recognised by applying the effective interest rate, except for short term trade and other payables when the recognition of interest would be immaterial.

 

Categories of financial instruments

 

Financial instruments held by the Group are categorised under IAS 39 as follows:

 



30 June

30 June


2017

2016



£'000

£'000





Financial Assets




Cash and cash equivalents


30,759

14,147

Investment management balances


62,138

15,448

Fee receivables


5,619

6,488

Other receivables


13,818

9,958

Total loan and receivables


112,334

46,041





Available-for-sale investments


12

5,350

Total available-for-sale


12

5,350



 

 

Total financial assets


112,346

51,391

 

Other receivables exclude prepayments.

 



30 June

30 June



2017

2016



£'000

£'000





Financial Liabilities




Investment management balances


60,317

14,655

Trade and other payables


17,439

8,933

Total other liabilities at amortised cost


77,756

23,588



 

 

Total financial liabilities


77,756

23,588

 

Trade and other payables exclude deferred income.

 

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 due to the short term nature of the instruments.

 

Financial risk management

The risks of the business are measured and monitored in accordance with the Board's risk appetite and policies and procedures covering specific risk areas, such as: credit, market and liquidity risk.

 

The Group is exposed to credit risk, market risk (including interest rate and foreign currency risks) and liquidity risks from the financial instruments identified above. This note describes the objectives, policies and processes of the Group for managing those risks and the methods used to measure them.

 

 

Credit risk management

Credit risk refers to the risk that a counterparty defaults on their contractual obligations resulting in financial loss to the Group. The carrying amount of loans and receivables recorded in the financial statements represents the Group's maximum exposure to credit risk. The Group held no collateral as security against any financial asset. Credit risk arises principally from the Group's fee receivables, investment management balances, other receivables and cash balances. The Group manages its credit risk through monitoring the aging of receivables and the credit quality of the counterparties with which it does business.  

 

The aging of outstanding fee receivables at the reporting date is given in note 17. The Group had no single fee receivable balance at year-end that is material to the Group (2016: none).

 

The banks with whom the Group deposits cash and cash equivalent balances are monitored, including their credit ratings (note 14).

 

The Group bears risk in relation to the investment management balances held in respect of the River and Mercantile Funds ICVC. If any debtor failed to pay, the Group would redeem the underlying fund units in respect of that debtor, however it would be subject to risk that the value of the underlying fund units had fallen. The maximum theoretical risk exposure is the full £62.1m (2016: £15.4m) value of the receivables multiplied by the percentage decrease in the underlying ICVC position during the period between default and redemption. In order to mitigate the risk of losses arising from late receipt, the Group will seek specific indemnity from counterparties in certain cases. Management monitor the performance and aging of the investment management positions and take recovery action as appropriate.

 

Market risk - foreign currency risk management

The Group has foreign currency denominated assets and liabilities primarily arising from the US business (including intra-Group balances) and is therefore exposed to exchange rate fluctuations on these balances. The carrying amount of the Group's foreign currency denominated monetary assets and liabilities all in US Dollars, are shown below in GBP:

 




Year ended

30 June

2017

Year ended

30 June

2016




£'000

£'000






Fee receivables



643

259

Cash and cash equivalents



615

654

Payables



(868)

(622)

Total



390

291

 

 

A 10% fluctuation in the exchange rate between US Dollars and UK Pound Sterling on the outstanding foreign currency denominated monetary items at year end balances would result in a post-tax increase/decrease in profit of £39,000 (2016: £29,000).

 

The majority of the Group's other foreign currency exposure is with its US based subsidiary P-Solve LLC. As at 30 June 2017, P-Solve LLC had net assets of $1,895,000 (2016: $720,000) thus any future fluctuations in the exchange rate will have a limited impact on the Group and are therefore considered a low risk.

 

Foreign exchange risk arising from transactions denominated in foreign currencies are monitored and where appropriate the currency required to settle the transaction may be purchased ahead of the settlement date.

 

Market risk - interest rate risk management

The Group has minimal exposure to interest rate risk. The Group has no external borrowings, cash deposits with banks earn a floating rate of interest and the interest income is not significant in either year.

 

Liquidity risk management

Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. This risk relates to the Group's prudent liquidity risk management and implies maintaining sufficient cash reserves to meet the Group's working capital requirements. Management monitors forecasts of the Group's liquidity and cash and cash equivalents on the basis of expected cash flow.

 

The Group is cash generative before the payment of dividends and has cash and cash equivalent balances that support the Group's working capital requirements. The fee receivable invoicing cycle is generally quarterly; as a result working capital balances are maintained to meet the ongoing expenses of the business during the quarterly cycles. The Group's capital expenditure requirements have not been significant and have been limited to office and IT equipment.

 

Prior to significant cash outflows (or entering into commitments which would result in significant cash outflows), including dividends, the Group undertakes liquidity and capital analysis.

 

The Group has entered into operating leases over its premises. Note 23 discloses the future aggregate minimum lease payments at the Balance Sheet date, net of rebates over the life of the contracts.

 

At 30 June 2017 the Group had cash and cash equivalents of £30.8m (2016: £14.1m).

 

As ACD of River and Mercantile Funds ICVC (the Fund), some of the operating cash balance of RAMAM is held in the ACD operating account into which the management fees from the ICVC are paid on a monthly basis. Of the ACD operating account balance at each year end, the proportion not attributable to client fund transactions, can be utilised by RAMAM within a 24 hour notice period and thus the account is considered liquid. At 30 June 2017 £1.1m (2016: £1.3m) of the cash and cash equivalents balance relating to the ACD account was held.

 

Liquidity gap analysis

The table below presents the cash flows receivable and payable by the Group under non-derivative financial assets and liabilities by remaining contractual maturities at the reporting date. The amounts disclosed in the table are the contractual, undiscounted cash flows.

 

The net liquidity positions in the table below relate to cash flows on contractual obligations existing at the reporting date and does not take account of any cash flows generated from profits on normal trading activities.

 


On demand £'000

< 3 months £'000

3-12 months £'000

As at 30 June 2017




Assets




Cash and cash equivalents

30,759

-

-

Investment management balances

-

62,138

-

Fee income receivables

-

5,249

370

Other receivables

-

13,818

-

Total financial assets

30,759

81,205

370





Liabilities




Investment management balances

-

60,317

-

Trade and other payables

-

17,439

-

Total financial liabilities

-

77,756

-


 

 

 

Net liquidity surplus

30,759

3,449

370

 

 


On demand £'000

< 3 months £'000

3-12 months £'000

As at 30 June 2016




Assets




Cash and cash equivalents

14,147

-

-

Investment management balances

-

15,448

-

Fee income receivables

-

5,667

821

Other receivables

-

9,958

-

Total financial assets

14,147

31,073

821





Liabilities




Investment management balances

-

14,655

-

Trade and other payables

-

8,933

-

Total financial liabilities

-

23,588

-


 

 

 

Net liquidity surplus

14,147

7,485

821

 

Capital management

The Group operates its subsidiaries as self-sufficient entities, which are expected to be able to meeting their funding and capital requirements without recourse to the parent.

 

The Group's capital structure consists of equity (share capital and share premium) and its retained earnings; capital is managed on a consolidated and individual entity basis to ensure that each entity is able to continue as a going concern. Three of the Group's subsidiaries are regulated entities (two in the UK and one in the US). The Group scrutinises its capital adequacy using the Pillar 2 and ICAAP frameworks which are regulated by the FCA to maintain adequate capital requirements. The Group has complied with its regulatory capital required throughout the period covered by these financial statements.

27.   Ultimate controlling party and subsidiary undertakings

The Group became publicly listed on 26 June 2014 and remains publicly listed.

 

Subsidiary undertakings

The following subsidiaries have been included in the consolidated financial information of the Group:

 

Name

Country of incorporation

of registration

Proportion of voting rights / ordinary share capital held %

          

 

 

 

Registered office address

Nature of business

P-Solve Investments Limited ¹

UK

100/100

11 Strand, London, WC2N 5HR

Investment management

P-Solve Holdings Limited ¹ 

UK

100/70

11 Strand, London, WC2N 5HR

Holding company for the US business

P-Solve LLC  ¹ ²

US

100/100

200 West St, Waltham, MA 02451, US

Actuarial and consulting

River and Mercantile Holdings Limited

UK

100/100

11 Strand, London, WC2N 5HR

Holding company

River and Mercantile Asset Management LLP ¹

UK

100/100

30 Coleman St, London, EC2R 5AL

Investment management

River and Mercantile Asset Management LLC ¹ ²

US

100/100

1521 Concord Pike ,

Wilmington, 19803, US

Marketing

River and Mercantile Group Services Limited ¹ ²

UK

100/100

11 Strand, London, WC2N 5HR

Dormant service company

River and Mercantile Group Trustees Limited ¹ ²

UK

100/100

11 Strand, London, WC2N 5HR

Dormant service company

River and Mercantile Group Employee Benefit Trust

UK

0/0


Employee Benefit Trust

 

¹ Indirect holding

² exempt from audit requirements

 

The Company indirectly holds 20,250,896 ordinary shares in P-Solve Holdings Limited which carry 100% of the voting rights. A further 8,793,056 A ordinary shares of P-Solve Holdings Limited (representing 30% of the total issued ordinary share capital) are held by employees and ex-employees of P-Solve LLC. The A ordinary shares of P-Solve Holdings Limited do not carry any voting rights, but rank equally with the ordinary shares in respect of dividend rights; and capital rights above a hurdle of £1.8m.

 

River and Mercantile Asset Management LLP and LLC have reporting years ending 31 March and 31 December respectively on a standalone basis. These were the existing year end dates as at acquisition and no change is expected.

 

28.   New standards and interpretations

There have been no new standards having a material impact on the financial statements for the year.

 

The following standards and amendments to existing standards have been published and are mandatory from the financial period beginning on or after the effective dates shown below but are not currently relevant to the Group (although they may affect the accounting for future transactions and events).

 

Topic

Key requirements

Effective date

 




 




 

Applying IFRS 9 Financial Instruments

 

The objective of the amendments is to address the temporary accounting consequences of the different effective dates of IFRS 9 Financial Instruments and the forthcoming insurance contracts Standard (expected to be IFRS 17).

1 January 2018

 

Annual improvements to IFRSs (2014-2016 Cycle)

IFRS 1 has been amended to remove short-term exemptions dealing with IFRS 7 Financial Instruments: Disclosures, IAS 19 Employee Benefits and IFRS 10 Consolidated Financial Statements.

IFRS12 Disclosure of interests in Other Entities - Amendments have been made to clarify the scope of IFRS 12 in respect of interests in entities within the scope of IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.

IAS 28 Investments in Associates and Joint Ventures. Clarified that the election to measure at fair value through profit or loss an investment in an associate or joint venture that is held by an entity that is a venture capital organisation, or other qualifying entity, is available for each investment in an associate or joint venture or an investment-by-investment basis, upon initial recognition.

1 January 2017 and

1 January 2018

 

IFRIC 22 Foreign Currency Translations and Advance Consideration

 

IFRIC 22 addresses how to determine the date of the transaction for the purpose of determining the exchange rate to use on an initial recognition of the related asset, expense or income (or part of it) on the de-recognition of a non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration in a foreign currency (e.g. a prepayment or deferred income)

1 January 2018

 




 

Amendments to IAS 40; Transfers of Investment Property

 

 

 

IFRS 16 Leases

IAS 40 requires a property to be transferred to, or from, investment property only when there is a change in use. The amendment clarifies that a change in management's intentions for the use of a property does not in isolation provide evidence of a change in use. This is because management's intentions, alone, do not provide evidence of a change in use.

 

IFRS 16 replaces the outgoing IAS 17 and makes a significant change to how leases are accounted for, in that it removes the distinction between operating and finance leases. Under IAS 17, leases classified as finance leases led to the capitalisation of the underlying asset being leased, and the recording of a liability reflecting future lease payments. Operating leases (such as building rent), are simply expensed to the income statement. R&M Group only has operating leases under IAS 17.

Under IFRS 16, all lease contracts are accounted for more in line with the previous finance lease approach where lessees have to recognise a lease liability reflecting future lease payments and a 'right-of-use asset' for almost all lease contracts.

In the income statement lessees will have to present interest expense on the lease liability and depreciation on the right-of-use asset. In the cash flow statement the part of the lease payments that reflects interest on the lease liability can be presented as an operating cash flow (if it is the entity's policy to present interest payments as operating cash flows). Cash payments for the principal portion of the lease liability are classified within financing activities. Payments for short-term leases, for leases of low-value assets and variable lease payments not included in the measurement of the lease liability are presented within operating activities.

1 January 2018

 

 

 

 

 

1 January 2019

 

IFRS 15 Revenue recognition

IFRS 15 replaces the outgoing IAS 18 with the objective of establishing the principles that an entity shall apply to report information to users of financial statements about the nature, amounts, timing and uncertainty of revenue and cash flow arising from a contract with a client. The introduction of IFRS 15 is to close the gap between IFRS and US GAAP.

1 January 2018

 




The Directors have assessed the impact that the adoption of these Standards and Interpretations will have on future periods and have concluded that none aside from IFRS 16 are likely to have a material impact on the financial statements of the Group. IFRS 16 will lead to an increase in non-current assets to reflect lease right-of-use assets and in increase in liabilities to reflect future lease payments.

 

29.   Events after the reporting date

Since the end of the financial year, the Directors are not aware of any other matter or circumstance not otherwise dealt with in this report or the financial statements that has significantly or will significantly affect the operations of the Group, the results of those operations or the state of affairs of the Group. 

 

A second interim dividend in respect of the year of 8.1p per share has been declared, of which 2.8p is a special dividend relating to net performance fees. The Directors have proposed a final dividend in respect of the year of 6.0p per share, of which 2.8p is a special dividend relating to net performance fees. Based upon the number of shares held by the EBT at the year-end (upon which dividends are waived), the expected total payments are £6.5m and £4.8m for the second interim and final dividends respectively.

 

Pursuant to the ILC team joining the Group, in July 2017 the Group entered into a new operating lease for office facilities in Chicago. In August 2017, the Group entered into new operating leases for an existing floor and an additional floor of its Coleman Street offices.

 

Company statement of financial position

 








Note

30 June

2017

30 June

2016




£'000

£'000






Assets





Cash and cash equivalents


2

15,182

7,633

Other receivables


3

5,663

10,094

Deferred tax asset


4

2,629

437

Property, plant and equipment


5

19

38

Intangible assets


6

79

-

Investments


7

56,941

55,756

Total assets



80,513 

    73,958






Liabilities





Payables


8

5,980

1,543

Deferred tax liability



-

-

Total liabilities



5,980

1,543




 

 

Net assets



74,533

72,415






Equity





Share capital


9

246

246

Share premium


10

14,688

14,688

Other reserves


11

48,384

48,384

Retained earnings



11,215

9,097

Equity attributable to owners



74,533

72,415






 

 

The Company's profit for the year was £7,461,000 (2016: £11,435,000).

Company statement of cash flows




Year ended 30 June

2017

Year ended 30 June

2016




£'000

£'000






Cash flow from operating activities





Loss before interest, tax and dividends from subsidiaries



(9,696)

(2,636)






Adjustments for:

                     




Depreciation of property, plant and equipment



20

2

EBT funding



3,582

1,283

Share-based payment expense



856

665

Operating cash flow before movement in working capital



(5,238)

(686)

Decrease/(Increase) in operating assets



4,171

(4,020)

Increase in operating liabilities



4,281

291

Cash generated by/(used in) operations



3,214

(4,415)

Taxation received



788

106

Net cash generated by/(used in) operations



4,002

(4,309)






Cash flow from investing activities





Purchase of intangible assets



(79)

-

Purchases of property, plant and equipment



(2)

(40)

Interest (paid)/received



(7)

96

Dividends received from subsidiaries



16,550

13,749

Net cash generated by investing activities



16,462

13,805






Cash flow from financing activities





EBT funding settled



(3,570)

(945)

Dividends paid



(9,345)

(9,851)

Net cash used in financing activities



(12,915)

(10,796)

Net increase/(decrease) in cash and cash equivalents






7,549

(1,300)






Cash and cash equivalents at beginning of year



7,633

8,933

Effects of exchange rate changes on cash and cash equivalents



-

-

Cash and cash equivalents at end of year



15,182

7,633

 

 

Company statement of changes in shareholders' equity


Share

Capital

Share

Premium

Merger reserve

Capital redemption reserve

Capital contribution

Retained earnings

Total


£'000

£'000

£'000

£'000

£'000

£'000

£'000









Balance as at 30 June 2015

246

14,688

44,433

84

3,867

6,805

70,123

Comprehensive income for the year:








Profit for the year

-

-

-

-

-

11,435

11,435

Total comprehensive income for the year

-

-

-

-

-

11,435

11,435

Transactions with owners:








Dividends

-

-

-

-

-

(9,851)

(9,851)

Share-based payment expense

-

-

-

-

-

786

786

Deferred tax credit on share-based payment expense

-

-

-

-

-

(78)

(78)


 

 

 

 

 

 

 

Total Transactions with owners:

-

-

-

-

-

(9,143)

(9,143)

Balance as at 30 June 2016

246

14,688

44,433

84

3,867

9,097

72,415

Comprehensive income for the year:








Profit for the year

-

-

-

-

-

7,461

7,461

Total comprehensive income for the year

-

-

-

-

-

7,461

7,461

Transactions with owners:








Dividends

-

-

-

-

-

(9,345)

(9,345)

Share-based payment expense

-

-

-

-

-

2,039

2,039

Deferred tax credit on share-based payment expense

-

-

-

-

-

1,963

1,963

Total transactions with owners:

-

-

-

-

-

(5,343)

(5,343)

Balance as at 30 June 2017

246

14,688

44,433

84

3,867

11,215

74,533

 

 

 

 

Notes to the Company financial statements

1.     Basis of preparation

The Company's financial statements have been prepared in accordance with International Financial Reporting Standards, International Accounting Standards and interpretations, International Financial Reporting Interpretation Committee interpretations, and with those parts of the 2006 Act applicable to companies reporting under IFRS as issued by the International Accounting Standards Board as adopted by the European Union (IFRS) that are relevant to its operations and effective for accounting periods beginning on 1 July 2016.

 

Principal place of Business

The Company's principle place of business is the same as the company's registered office.

 

Result for the year

The profit after tax for the year ended 30 June 2017 was £7,461,000 (2016: £11,435,000). This includes a charge of £3,582,000 relating to funding provided to the Group's EBT (2016: £1,283,000).

 

In accordance with s408 of the Companies Act 2006 a separate income statement has not been presented for the Company. There are no items of comprehensive income other than the result for the year and therefore no statement of comprehensive income has been prepared for the Company.

 

Foreign currencies

To the extent that the Company undertakes transactions in currencies other than GBP, the transactions are translated into GBP using the exchange rate prevailing at the date of the transaction. Balances denominated in foreign currencies are translated into GBP using the exchange rate prevailing at the balance sheet date. All foreign exchange differences arising from the settlement of transactions or the translation of balances are recognised in operating expenses in the income statement.

 

Employees

The Company had 16 employees during the year (2016: 8). Total remuneration costs were £8,060,000 (2016: £2,810,000). This change reflects restructuring of the location of staff for the Group's central functions.

 

Dividends

See note 13 of the consolidated financial statements.

 

2.     Cash and cash equivalents

Cash and cash equivalents balances comprise cash in hand, cash at agents, demand deposits, and other short-term highly liquid investments that have maturities of three months or less from inception, are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. Below is a table detailing the credit risk rating of the banks with which the Company holds its cash, and the balance held at year-end.

 

 

Bank

£,000

Credit Rating

Rating Body

Barclays Bank

15,182

A1 -

Moody's

 

3.     Other receivables


Year ended

30 June

2017

Year ended

30 June

2016


£'000

£'000




Taxes and social security

202

171

Prepayments and accrued income

336

271

Amounts owed from Group undertakings

5,029

9,642

Other debtors

96

10


5,663

10,094

 

 

Amounts owed from Group undertakings represent balances incurred in the course of trade and are payable on demand.

 

 

 

 

 

4.     Tax

The Company's accounting policy in respect of tax is the same as that of the Group as detailed in note 11 of the consolidated financial statements.

 


Year ended

30 June

2017

Year ended

30 June

2016


£'000

£'000

Current tax on profits for the year

(332)

(111)

Adjustments in respect of prior years

-

-

Total current tax

(332)

(111)

Deferred tax on origination and reversal of timing differences

(229)

(114)

Total tax credit

(561)

 (225)

 

 

The tax assessed for the years is lower (2016: lower) than the average standard rate of corporation tax in the UK. The differences are explained below:

 


Year ended

30 June

2017

Year ended 30 June

2016


£'000

£'000




Profit before tax

10,381

12,493

Profit before tax multiplied by the average rate of corporation tax in the UK of 19.75% (2016: 20%)

2,050

2,499

Effects of:



Income not assessable to tax

(3,268)

(2,750)

Group relief

1,218

-

Other timing differences

(561)

23

Expenses not deductible for tax purposes

-

3

Total tax credit

(561)

 (225)

 

 


Year ended

30 June

2017

Year ended 30 June

2016


£'000

£'000

Deferred tax assets:



At beginning of year

437

399

Credit to the income statement - share-based payment expense

229

116

Debit/(credit) to equity - share-based payment expense

1,963

(78)

At year end

2,629

437

 

5.     Property plant and equipment

Property, plant and equipment is carried at historical cost less accumulated depreciation. Depreciation charges the cost of the assets to the consolidated income statement over their expected useful lives.

 




Leasehold improvements

Total




£'000

£'000

Cost:





At 1 July 2015 and 30 June 2016



40

40

Additions



2

2

At 30 June 2017



42

42






Accumulated depreciation:





At 1 July 2015 and 30 June 2016



2

2

Depreciation charge



21

21

At 30 June 2017



23

23






Net book value:





At 1 July 2016



38

38

At 30 June 2017



19

19

 

 

6.     Intangible assets

Intangible assets are carried at historical cost less accumulated amortisation and impairment. Amortisation charges the cost of the assets to the consolidated income statement over their expected useful lives.

 

 




Software

Total




£'000

£'000

Cost:





At 1 July 2015 and 30 June 2016



-

-

Additions



79

79

At 30 June 2017



79

79






Accumulated amortisation and impairment:





At 1 July 2015 and 30 June 2016



-

-

Depreciation charge



-

-

At 30 June 2017



79

79






Net book value:





At 1 July 2016



-

-

At 30 June 2017



79

79

 

 

7.     Investments in subsidiaries


Year ended

30 June

2017

Year ended 30 June

2016


£'000

£'000




At start of year

55,756

55,635

Additions - share-based payments in subsidiaries

1,185

121

At end of year

56,941

55,756

 

 

The Company's investments in subsidiaries are stated at cost less provision for any impairment incurred.

 

 

8.     Payables


Year ended

30 June

2017

Year ended 30 June

2016


£'000

£'000




Trade payables

636

315

Accruals and deferred income

5,344

1,228


5,980

1,543

 

Amounts owed to Group undertakings represent balances incurred in the course of trade and are payable on demand.

 

9.     Share capital

Full details of the Company's share capital can be found in note 21 of the consolidated financial statements.

 

10.   Share premium

A reconciliation of the movements in share premium can be found in the Company statement of changes in equity.

 

11.   Other reserves

A reconciliation of the movements in reserves can be found in the Company statement of changes in equity. Full details on the nature of the other reserves in the Company can be found in note 22 of the consolidated financial statements.

 

A breakdown of other reserves is detailed below.

 



30 June

2017

30 June

2016



£'000

£'000





Merger reserve


44,433

44,433

Capital contribution reserve


3,867

3,867

Capital redemption reserve


84

84



48,384

48,384

 

As at 30 June 2017, the Company had £15,082,000 of distributable reserves (2016: £12,964,000)

12.   Financial instruments

A discussion of the financial risks and associated financial risk management, which applies to all of the companies in the Group, can be found in note 26 of the consolidated financial statements, along with the Group's accounting policy in respect of financial instruments

 

The financial assets and liabilities of the Company are categorised under IAS 39 as follows.

 

 



30 June

30 June



2017

2016



£'000

£'000





Financial assets classified as loans and receivables




Cash and cash equivalents


15,182

7,633

Other receivables


3,133

9,653

Total financial assets


18,315

17,286

 

Other receivables exclude prepayments and accrued income.

 

 



30 June

30 June



2017

2016



£'000

£'000





Financial liabilities held at amortised cost




Payables


636

315

Total financial liabilities


636

315

 

 

Payables exclude accruals and deferred income.

 

Credit risk management

Credit risk refers to the risk that counterparty defaults on their contractual obligations resulting in financial loss to the Company. The carrying amount of loans and receivables recorded in the financial statements represents the Company's maximum exposure to credit risk. The Company held no collateral as security against any financial asset. Credit risk arises principally from the Company's intercompany and cash balances. The Company manages its credit risk through monitoring the credit quality of the counterparties with which cash is held and the Company's subsidiaries resources.

 

The banks with whom the Company deposits cash and cash equivalent balances are monitored, including their credit ratings (note 2).

 

Market risk - Interest rate risk management

The Company has minimal exposure to interest rate risk. The Company has no external borrowings and cash deposits with banks earn a fixed rate of interest. Interest income is not significant in either year.

 

Liquidity gap analysis

The table below presents the cash flows receivable and payable by the Company under non-derivative financial assets and liabilities by remaining contractual maturities at the balance sheet date. The amounts disclosed in the table are the contractual, undiscounted cash flows.

 

The net liquidity positions in the table below relate to cash flows on contractual obligations existing at the balance sheet date and does not take account of any cash flows generated from profits on normal trading activities.

 

 

 


On demand £'000

< 3 months £'000

3-12 months £'000

As at 30 June 2017




Assets




Cash and cash equivalents

15,182

-

-

Other receivables

3,133

-

-

Total financial assets

18,315

-

-





Liabilities




Payables

636

-

-

Total financial liabilities

636

-

-


 

-

-

Net liquidity surplus

17,679

-

-

 

 


On demand £'000

< 3 months £'000

3-12 months £'000

As at 30 June 2016




Assets




Cash and cash equivalents

7,633

-

-

Other receivables

9,653

-

-

Total financial assets

17,286

-

-





Liabilities




Payables

315

-

-

Total financial liabilities

315

-

-


 

-

-

Net liquidity surplus

16,971

-

-

 

 

Other receivables excludes prepayments and payables excludes deferred income.

 

13.   Directors' remuneration

Details of the individual Directors' remuneration is given in the Directors' Remuneration Report.

 

14.   Related parties

Related parties to the Company are:

 

·      Other River and Mercantile Group undertakings;

·      Key management personnel;

·      PSG who hold 38.1% of the issued share capital of the Group and is thus a controlling shareholder; and

·      Pacific Investments Management Limited, its subsidiary undertakings and controlling shareholder, Sir John Beckwith were considered to be related parties as they held significant influence over the Group by virtue of holding more than 10% of the issued share capital of the Group. Following a disposal by Group in March 2017, they now hold less than 10% and are therefore no longer considered a related party.

 

 

The Company entered into the following transactions with related parties:

 

 

 



Transaction amount

Balance owed/(owing)

Related party

Type of transaction

30 June 2017

£'000

30 June

2016

£'000

30 June

2017

£'000

30 June

2016

£'000


Punter Southall Group

Admin expense

60

66

(224)

(35)



Balances

-

-

-

(22)


River and Mercantile Group undertakings

Inter-company balances

-

-

2,836

9,651



Group cost sharing

2,983

3,382

-

-



Dividends received

16,550

13,749

-

-


 

 

Key management personnel compensation

Details of key management personnel compensation can be found in note 25 of the consolidated financial statements.

 

15.   Other information

The Company has taken the exemption under s408(2) of the Companies Act 2006 to not present their remuneration separately in these financial statements.

A second interim dividend in respect of the year of 8.1p per share has been declared, of which 2.8p is a special dividend relating to net performance fees. The Directors have proposed a final dividend in respect of the year of 6.0p per share, of which 2.8p is a special dividend relating to net performance fees. Based upon the number of shares held by the EBT at the year-end (upon which dividends are waived), the expected total payments are £6.5m and £4.8m for the second interim and final dividends respectively.

 

The Company has not entered into any significant commitments or contingent liabilities after the balance sheet date.

Other information

Executive Director remuneration

The summary of the key Remuneration Committee decisions in respect of Executive Directors for the year-ended 30 June 2017 are as follows:

£

Base salary

Taxable benefits1

Annual bonus2

Performance shares award4

Pension contribution5

Total

New salary from 1 July

 

 

 

 

 

 

 

 

Mike Faulkner

306,800

2,821

613,600

584,000

-

1,507,221

337,480

Jack Berry

280,800

2,821

504,000

-

28,080

815,701

280,800

James Barham

250,000

3,961

500,0003

251,0003

7,500

1,012,461

275,000

Kevin Hayes

250,000

2,821

500,0003

245,0003

25,000

1,022,821

275,000

 

1.     Taxable benefits consist of life assurance, critical illness cover and private medical insurance.

2.     Annual bonus is gross cash paid or payable in respect of the financial year.

3.     Annual bonus and performance shares award include deferred awards pursuant to UCITS V, subject to shareholder approval at the Group's 2017 AGM.

4.     Performance shares award is the face value of awards made in respect of the year. The awards shall vest in full in June 2020 if the Group's shares deliver a compound annual TSR of at least 12% per annum between 1 July 2017 and 30 June 2020.

5.     Pension contribution includes cash allowances and contributions made to self-invested personal pensions.

 

Viability statement

The Directors have assessed the viability of the Group over the next three years and confirm that they have a reasonable expectation that the Group will continue in operation and meet its liabilities as they fall due during this period.

The Directors reviewed the viability assessment period of three years, and have confirmed that it remains appropriate as it most closely corresponds to the planning horizons used within the Group.

Whilst the Directors have no reason to believe that the Group will not be viable over a longer period from its assessments, this period is the timeframe which best aligns with the Group's planning view and corresponds to the ICAAP. The assessment of viability has been made with reference to the Group's current position and future prospects as well as its strategy, market conditions, and its principal risks.


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Annual Financial Report - RNS