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Mattioli Woods PLC   -  MTW   

Final Results

Released 07:00 03-Sep-2019

RNS Number : 9760K
Mattioli Woods PLC
03 September 2019
 

 

 

 

3 September 2019

 

Mattioli Woods plc

 

("Mattioli Woods", "the Company" or "the Group")

 

Final results

 

Mattioli Woods plc (AIM: MTW.L), the specialist wealth management and employee benefits business, today reports its final results for the year ended 31 May 2019. 

 

Financial highlights

 

·     Revenue £58.5m (2018: £58.7m)

·     Recurring revenues1 represent 90.2% (2018: 84.8%)

·     Operating profit before financing up 2.1% to £9.8m (2018: £9.6m):

£0.1m (2018: £0.5m) gain on revaluation of Amati option

·     Adjusted EBITDA2 up 16.0% to £14.5m (2018: £12.5m):

Adjusted EBITDA margin3 of 24.8% (2018: 21.3%)

·     Profit before tax up 4.1% to £10.2m (2018: £9.8m)

·     Adjusted profit before tax4 up 8.8% to £12.3m (2018: £11.3m)

·     Basic EPS 30.8p (2018: 30.8p)

·     Adjusted EPS5 up 8.4% to 37.3p (2018: 34.4p)

·     Proposed total dividend up 17.6% to 20.0p (2018: 17.0p)

·     Strong financial position with net cash6 of £23.2m (2018: £20.2m)

 

 

 

Operational highlights and recent developments

 

·     Revenue mix remains primarily fee based

·     Improving margin through operational efficiencies whilst lowering clients' costs by £3.1m

·     Total client assets of the Group and its associate7 up 7.4% to £9.38bn (2018: £8.73bn)

·     Gross discretionary AuM8 up 9.8% to £2.57bn (2018: £2.34bn)

·     Recent acquisitions performing and integrating well

·     Continued investment in technology, compliance and training

 

Commenting on the results, Ian Mattioli MBE, Chief Executive Officer, said:

 

"I am pleased to report another successful year, with operating profit before financing up 2.1% to £9.8m (2018: £9.6m) and profit before tax up 4.1% to £10.2m (2018: £9.8m), enhanced by an increased share of profit of £0.5m (2018: £0.2m) from our 49% associate Amati.  

 

"Adjusted EBITDA was up 16.0% to £14.5m (2018: £12.5m), primarily driven by the economies of scale and operational efficiencies our integrated model offers, which we have used to reduce clients' costs, while delivering sustainable returns for our shareholders. 

 

"Adjusted EPS increased 8.4% to 37.3p (2018: 34.4p).  Accordingly, the Board is pleased to recommend the payment of an increased final dividend of 13.67 pence per share (2018: 11.5 pence).  This makes a proposed total dividend for the year of 20.0 pence (2018: 17.0 pence), a year-on-year increase of 17.6% (2018: 20.6%), demonstrating our desire to deliver value to shareholders and confidence in the outlook for our business.

 

"Recent acquisitions are performing and integrating well, with the financial result for the year including positive contributions from Broughtons and SSAS Solutions, which were acquired in August 2018 and March 2019 respectively.  With continuing consolidation across the key markets in which we operate, we expect there will be further opportunities to accelerate our growth by acquisition. 

 

"We continue to streamline our business, drive increased efficiency and reinforce our purpose to grow and preserve our clients' assets, while giving them control and understanding of their overall financial position.  Uncertainty around Brexit will continue to impact investor and consumer sentiment in the short-term, but we are confident that our focus on addressing the changing needs of our clients will position us well to deliver future growth and continued sustainable shareholder returns."

 

For further information please contact:

Mattioli Woods plc

 

Ian Mattioli MBE, Chief Executive Officer

 

Nathan Imlach, Chief Financial Officer

Tel: +44 (0) 116 240 8700

Simon Gibson, Chief Investment Officer

www.mattioliwoods.com

 

Canaccord Genuity Limited (Nominated Adviser and Joint Broker)

 

Sunil Duggal

 

David Tyrrell

Tel: +44 (0) 20 7523 8000

 

www.canaccordgenuity.com

 

 

N+1 Singer (Joint Broker)

 

Richard Lindley, Corporate Finance

 

Justin McKeegan, Corporate Finance

Tel: +44 (0) 20 7496 3000

Tom Salvesen, Corporate Broking

www.n1singer.com

 

Media enquiries:

Camarco

 

Ed Gascoigne-Pees

Tel: +44 (0) 20 3757 4984

 

www.camarco.com

 

Analyst presentation

 

There will be an analyst presentation to discuss the results at 09:30am today at Canaccord Genuity Limited, 88 Wood Street, London, EC2V 7QR. 

 

Those analysts wishing to attend are asked to contact Ed Gascoigne-Pees at Camarco on +44 (0) 20 3757 4984 or at ed.gascoigne-pees@camarco.co.uk

 

 

 

Strategic report

Chairman's statement

 

I am pleased to report another successful year for Mattioli Woods.  Profit before tax was up 4.1% to £10.2m (2018: £9.8m), with adjusted profit before tax up 8.8% to £12.3m (2018: £11.3m) and adjusted EBITDA up 16.0% to £14.5m (2018: £12.5m).  This performance has been achieved despite the ongoing political and economic uncertainties and generally poor investor sentiment during the year ended 31 May 2019.  

 

Throughout the year we maintained our focus on client service and developing our customer proposition.  As highlighted in our July trading update, a combination of the Group reducing costs for our clients by £3.1m and the general market conditions, which resulted in reduced levels of investment by clients, led to marginally lower than expected revenue of £58.5m (2018: £58.7m).  However, the financial impact of this was more than offset by the realisation of operational efficiencies and other planned administrative cost savings, resulting in an increased operating margin9 of 16.8% (2018: 16.4%) and adjusted EBITDA margin of 24.8% (2018: 21.3%), meaningfully ahead of our 20%+ target. 

 

Our integrated business model allows us to address more of the value chain across advice, administration, platform, investment management and product provision.  We have used the resultant economies of scale and operational efficiencies to reduce clients' costs, while delivering the sustainable returns for our shareholders that we are proud to have delivered over many years.  

 

We remain committed to growing the dividend, while maintaining an appropriate level of dividend cover.  Accordingly, the Board is pleased to recommend the payment of an increased final dividend of 13.67 pence per share (2018: 11.5 pence).  This makes a proposed total dividend for the year of 20.0 pence (2018: 17.0 pence), a year-on-year increase of 17.6%

 

Our strategy

 

Previously, we have set out our ambitions to grow revenue to £100m and total client assets to £15bn, while maintaining an EBITDA margin of 20%+.  As we work towards these goals our strategy remains focused on achieving sustainable levels of organic growth, supplemented by strategic acquisitions that enhance value and broaden or deepen our expertise and services to better serve our clients

 

In March, we were delighted to announce the acquisition of SSAS Solutions (UK) Limited ("SSAS Solutions"), which is based in Belfast and acts as SSAS practitioner to over 350 schemes with approximately £380m of assets under administration.  This followed the acquisition of Broughtons Financial Planning Limited ("Broughtons") in the first half of the financial year, which has integrated well and contributed positively to our trading results since acquisition. 

 

We will seek to build on our track record of successful acquisitions by continuing to assess a diverse pipeline of potential acquisition opportunities that meet our strict criteria, believing further consolidation within our core markets remains likely. 

 

Our people

 

We are a business built on the integrity and expertise of our people.  By putting clients first we are able to continue building a business that is sustainable over the long-term and our people have responded positively as the business has evolved and the financial services industry continues to go through a period of unprecedented change.  Operational achievements over the past year include:

 

·     A seamless move to our new freehold office at New Walk in Leicester, incurring significantly lower relocation costs than anticipated.  This development allows us to benefit from future rental savings of approximately £0.85m per annum, whilst providing a modern office facility with the capacity for growth; 

·     The successful implementation of a cloud-hosted IT architecture across the Group;

·     The introduction of an integrated human resource management and payroll system;

·     The launch of a refreshed Mattioli Woods brand;

·     Implementation of changes to the regulatory regime (General Data Protection Regulations ("GDPR") and the Markets in Financial Instruments Directive II ("MiFID II")) and preparation for the introduction of the Senior Managers and Certification Regime; and

·     Continued investment to improve our client and service proposition. 

 

We are committed to developing our staff and building the capacity to deliver sustainable growth over the long-term.  As part of our normal planning, we monitor the Group's capabilities and assess what new skills are necessary to strengthen the business over time, taking account of the existing balance of knowledge, experience and diversity. 

 

We are dedicated to maintaining our culture of putting clients first, encouraging a collegiate approach and preserving our integrity.  I would like to thank all our staff for their continued commitment, enthusiasm and professionalism in dealing with our clients' affairs.  

 

 

Governance and the board

 

Good corporate governance continues to be a priority for us.  We strive for high standards in our own corporate governance and disclosure, and in July 2018 we adopted the QCA Corporate Governance Code. 

 

The Board remains committed to developing the corporate governance and management structures of the Group to ensure they continue to meet the changing needs of the business.  Murray Smith, Group Managing Director, has decided to stand down from the Board at the Company's next Annual General Meeting ("AGM") on 21 October 2019 to continue in a full-time role as Founder Director to the Group, where his focus will be on his client portfolio, acquisitions and acting as an ambassador for Mattioli Woods. 

 

Murray has been instrumental to the success of the Group and we will continue to benefit from his experience and insight in this new role, with Murray's management responsibilities being handed over to our Deputy Group Managing Director, Michael Wright. 

 

Following Murray's cessation as a director, the Company will have a Board with a majority of independent directors, which we believe represents the right governance structure for the business. 

 

Shareholders

 

During the year we have engaged with shareholders through various channels, including company-hosted events, group meetings and one-to-one meetings.  We are fortunate to have a number of supportive institutional shareholders with a significant investment in the Group and welcome opportunities to talk to all our shareholders, large and small.  We will continue to maintain a regular and constructive dialogue with them, while seeking to broaden our shareholder base. 

 

Outlook

 

Investment markets look likely to remain volatile but we believe the opportunity for Mattioli Woods is significant, as people seek to take charge of their money and manage it through the generations.  At the same time, savings and investments are becoming more complicated and regulatory requirements continue to increase.  The inherent agility within our business model allows us to adapt to the changing wealth and asset management marketplace.  Clients need long-term advice and personalised strategies more than ever before.  We will continue to focus on reducing clients' costs without compromising client service, whilst delivering high quality solutions. 

 

We continue to streamline our business, drive increased efficiency and reinforce our purpose to grow and preserve our clients' assets, while giving them control and understanding of their overall financial position.  Uncertainty around Brexit will continue to impact investor and consumer sentiment in the short-term, but we are confident that our focus on addressing the changing needs of our clients will position us well to deliver future growth and continued sustainable shareholder returns. 

 

 

 

Joanne Lake

Chairman

2 September 2019

 

 

Strategic report

Chief Executive's review

 

Introduction

 

I am pleased to report another successful year, with operating profit before financing up 2.1% to £9.8m (2018: £9.6m) and profit before tax up 4.1% to £10.2m (2018: £9.8m), enhanced by an increased share of profit of £0.5m (2018: £0.2m) from our 49% associate Amati.  

 

Given the success of this relationship, which in the year ended 31 May 2019 also contributed a £0.1m (2018: £0.5m) gain on the revaluation of our option to acquire the other 51% of Amati, we believe the Group retaining a 49% minority interest is the optimal structure for all stakeholders and in June 2019 we cancelled our option in return for a £0.75m payment from the Amati management team, as agreed in the heads of terms signed prior to the year end. 

 

Adjusted EBITDA was up 16.0% to £14.5m (2018: £12.5m), primarily driven by the economies of scale and operational efficiencies our integrated model offers, which we have used to reduce clients' costs, while delivering sustainable returns for our shareholders.  In recent years we have demonstrated that one of the key benefits of operating an integrated model is the ability to reduce our fees and charges where possible, including:

 

·     Reducing the custody charge for all those clients using our core investment platform;

·     Reducing the rate of Custodian Capital's property management fees charged to Custodian REIT, plus a step down in the rate of administrative fees charged;

·    The launch of the Mattioli Woods Structured Products Fund, charging significantly less than individual structured product plans had done historically; and

·    Reducing adviser charges on our clients' investments in Custodian REIT and the Mattioli Woods' Structured Products Fund. 

 

The aggregate impact of these changes in the year ended 31 May 2019 was a £3.1m (2018: £2.4m) reduction in clients' costs, with the negative revenue impact of this, more volatile market conditions and an increase in the number of clients focusing on wealth preservation being partially offset by £1.1m of revenue from acquisitions in the year.  Revenue was £58.5m (2018: £58.7m), with growth in prior periods primarily driven by increased client activity following the pension freedoms coming into effect in 2015.  Although the flow of new business generated by our consultancy team was impacted by ongoing political and economic uncertainties and generally poor investor sentiment throughout the period, a total of 762 (2018: 1,335) new SIPP, SSAS and personal clients chose to use Mattioli Woods during the year.  

 

We have previously stated our belief that fees for financial services in the UK are generally too expensive.  The Financial Conduct Authority ("FCA") is reviewing the impact of the Retail Distribution Review ("RDR") and the Financial Advice Market Review ("FAMR"), and recently published a consultation paper proposing new rules to avoid consumers being hit with unnecessary ongoing advice charges.  The FCA has expressed its concern that when combined with multiple layers of charging such as platform charges, fees for discretionary fund management and product charges, advisers are not giving sufficient attention to value for money.  This may lead to regulatory pressure on the sector to reduce the cost to consumers.  Given the work we've done to date and our long-term aim to reduce clients' total expense ratios ("TERs") towards 1%, we believe we are well-positioned as the market changes and evolves. 

 

We have also sought ways to reduce our clients' costs elsewhere in the value chain, including:

 

·     Reducing ongoing charges within our clients' discretionary portfolios;

·     Creating a range of multi asset funds to further reduce costs and improve investment efficiency, administration and reporting for clients; and

·    Securing a VAT exemption for the management of certain clients' pension schemes that constitute a 'special investment fund', reclaiming £3.5m of VAT on their behalf. 

 

In addition to adding new clients, we continue to enjoy strong client retention and anticipate that there will be sustained demand for advice from clients, driven by lifestyle, increasing longevity, tax and other legislative changes, particularly when the implications of the UK's withdrawal from the European Union become clear. 

 

Our success has been based upon the delivery of quality advice, growing our clients' assets and enhancing their financial outcomes.  Total client assets under management, administration and advice by the Group and its associate increased by 7.4% to £9.38bn (2018: £8.73bn) notwithstanding the negative market movements during the year. 

 

In meeting our clients' investment needs we generally use third parties' funds, but where we have the particular expertise and a more appropriate investment product, we look to meet those needs in-house.  This has led to the innovative development of our Private Investors Club, Custodian REIT and the Mattioli Woods Structured Products Fund, in addition to the funds managed by Amati. 

 

These bespoke investment services enjoyed aggregate net inflows (before market movements) of £265.2m (2018: £452.1m), with gross discretionary assets under management by the Group and its associate increasing to £2.57bn (2018: £2.34bn) at the year end.  The value of assets held within our Discretionary Portfolio Management service increased by 3.7% to £1.39bn (2018: £1.34bn), of which £132.3m or 9.5% (2018: £121.0m or 9.0%) is invested within funds managed by the Group and its associate.  We plan to continue developing new products and services to better deal with our clients' needs, using the best of what we have and the best of what other providers can offer. 

 

Recent acquisitions are performing and integrating well, with the financial result for the year including positive contributions from Broughtons and SSAS Solutions, which were acquired in August 2018 and March 2019 respectively. 

 

We believe securing economies of scale, such as rebates on fund managers' charges and other benefits of operating our integrated model will allow us to improve client outcomes and reduce clients' TERsBy putting our clients first and building our reputation of integrity through the cycle, we have created a business focused on positive client outcomes that can deliver sustainable shareholder returns over the long-term. 

 

Market overview

 

Mattioli Woods operates within the UK's financial services industry, which is subject to the effects of volatile markets, economic conditions and regulatory changes.  Our markets are highly fragmented and serviced by a wide range of suppliers offering diverse services to both individual and corporate clients.  These markets remain highly competitive and in recent years we have seen a period of unprecedented change in regulation and legislation. 

 

As the demand for high-quality, personalised advice and the potential market for our products and services continue to grow, so do the costs of regulation, with the Financial Services Compensation Scheme ("FSCS") announcing an increase in its levy for 2019/20 after an uplift in claims against SIPP operators, resulting in the Group's regulatory fees and levies for the 12 months ending 31 March 2020 almost doubling to £0.7m. 

 

Pricing fairness and competition continue to attract regulatory scrutiny and we believe our focus on client service and the inherent flex within our business model will allow us to continue to adapt to the changing wealth and asset management marketplace. 

 

Both MiFID II and the GDPR came into effect last year and we continue to prepare for other regulatory and legislative changes already in train, including the Senior Managers and Certification Regime ("SM&CR"). 

 

Considerable uncertainty remains across the financial services sector: the outcome of Brexit is still unknown and the impact of new rules on markets will take time to become clear as we shift from a period of implementing new regulations to one of ongoing supervision. 

 

While there remains uncertainty around Brexit it will continue to impact markets and consumer confidence.  Financial decision making is more difficult and clients may be reluctant to make decisions or to invest in more volatile markets, preferring to sit on the side-lines.  Our diversified model means we are well-positioned to proactively advise our clients whilst protecting returns through the cycle.  We anticipate that we may see increased investment activity and an increased demand for advice once the shape of Brexit becomes clearer. 

 

However, we are conscious the UK's exit from the European Union might raise unexpected challenges, including those arising from any broader impact that Brexit might have on the UK economy, politics or on the operation of European-based funds, such as the Mattioli Woods Structured Products Fund. 

 

The FAMR published by the FCA and HM Treasury in 2016 made a series of recommendations designed to tackle barriers to consumers engaging with financial advice, particularly through the use of technology.  We continue to invest in the development of our IT platform and completed several projects during the year, including the implementation of a cloud-hosted IT architecture, which offers the Group enhanced data security, business continuity and scalability for future growth, and the introduction of an integrated human resource management and payroll system that allows us to engage with all of our people through one platform. 

 

Our services

 

Our core pension and wealth management offering serves the higher end of the market, including controlling directors and owner-managed businesses, professionals, executives and retirees.  Our broad range of employee benefit services is targeted towards medium-sized and larger corporates.  The Group has developed a broader wealth management proposition in recent years, which has grown from its strong pensions advisory and administration expertise.  The mix of income derived from the Group's four key revenue streams changed slightly during the year, summarised as follows:

 

·     44.4% investment and asset management (2018: 42.7%);

·     34.9% pension consultancy and administration (2018: 37.1%);

·     11.1% property management (2018: 10.1%); and

·     9.6% employee benefits (2018: 10.1%). 

 

We aim to operate a seamless structure, allowing us to cover all aspects of wealth management and employee benefits.  Our key objectives are:

 

·     Maintaining long-term relationships and delivering great outcomes for our clients;

·     Proactively anticipating our clients' needs to deliver on their expectations;

·     Investing in our people and technology to service greater business volumes at a lower cost;

·     Sharing knowledge and ideas between ourselves and others for mutual benefit;

·     The development of our market standing through the integrity and expertise of our people;

·     Extending our range of products and services, seeking to attract new clients both organically and via strategic acquisitions; and

·     Being proud of our charitable and community spirit, supporting staff and local and national charities. 

 

Assets under management, administration and advice

 

Unlike many wealth managers, the majority of the Group's revenues are fee-based, rather than being linked to the value of assets under management, administration or advice10, giving our business a revenue profile that is less sensitive to market performance.  Acquisitions during the year added £0.50bn of client assets, with Group and its associate's total client assets increasing by 7.4% to £9.38bn at 31 May 2019 (2018: £8.73bn) as follows:

 

Assets under management, administration and advice11

SIPP and SSAS12

£m

Employee benefits

£m

Personal wealth

and other assets

£m

Sub-total

£m

Amati13

£m

Total

£m

 

 

 

 

 

 

 

At 1 June 2018

5,485.9

1,237.9

1,719.4

8,443.2

286.0

8,729.2

 

 

 

 

 

 

 

Broughtons

-

-

120.5

120.5

-

120.5

SSAS Solutions

380.0

-

-

380.0

-

380.0

 

 

 

 

 

 

 

Acquisitions during the year

380.0

-

120.5

500.5

-

500.5

Net inflows/(outflows), including market movements

185.7

(41.2)

(114.7)

29.8

123.0

152.8

 

 

 

 

 

 

 

At 31 May 2019

6,051.6

1,196.7

1,725.2

8,973.5

409.0

9,382.5

 

The £653.3m increase in total client assets during the year is analysed as follows:

 

·     A £565.7m increase (2018: £454.6m) in SIPP and SSAS funds under trusteeship, with a 5.6% (2018: 5.1%) increase in the number of schemes being administered at the year end, comprising a 3.7% (2018: 13.5%) increase in the number of direct14 schemes to 6,051 (2018: 5,834) and a 7.9% increase (2018: 3.7% decrease) in the number of schemes the Group operates on an administration-only basis to 5,068 (2018: 4,699) following the acquisition of SSAS Solutions.  In recent years we have been appointed to operate or wind-up a number of SIPP portfolios following the failure of their previous operators, with lost schemes including the transfer of certain members of these distressed portfolios to more appropriate arrangements;

·     A £41.2m decrease (2018: £135.6m increase) in the value of assets held in the corporate pension schemes advised by our employee benefits business, following the loss of some larger corporate clients in the year.  Revenues in our employee benefits business are not linked to the value of client assets in the way certain of our wealth management revenue streams are;

·     A £5.8m (2018: £81.3m) increase in personal wealth and other assets under management and advice, with the acquisition of Broughtons and 254 (2018: 291) new personal clients won during the year driving a 2.5% (2018: 1.5%) increase in the total number of personal clients15 to 6,052 (2018: 5,902); and

·     A £123.0m (2018: £132.2m) increase in Amati's funds under management (excluding Mattioli Woods' client investments), primarily through the growth of the TB Amati UK Smaller Companies Fund to £291.1m (2018: £166.3m) at 31 May 2019.  

 

I would like to congratulate the Amati team on being named 'Fund Manager of the Year' at the Investment Week Fund Manager of the Year Awards in June 2019Amati is an excellent fund manager that has performed strongly since Mattioli Woods' investment, seeing gross funds under management16 increase from circa £120.0m to £452.8m (2018: £325.1m) at the year end, winning numerous industry awards and having the TB Amati UK Smaller Companies fund rated by three major fund research houses.  As a result of Amati's strong performance the Group's share of its profits increased to £0.5m (2018: £0.2m). 

 

Key performance indicators

 

The directors consider the key performance indicators ("KPIs") for the Group are as follows:

 

Strategy/objective

Performance indicator

Further explanation

Organic growth and growth by acquisition

 

Revenue - total income (excluding VAT) from all revenue streams. 

 

See 'Revenue'. 

Operating efficiency

Adjusted EBITDA margin - profit generated from the Group's operating activities before financing income or costs, taxation, depreciation, amortisation, impairment, changes in valuation of derivative financial instruments and acquisition-related costs, including share of profit from associates (net of tax), divided by revenue. 

 

See 'Profitability and earnings per share'. 

Shareholder value and financial performance

Adjusted Earnings Per Share ("EPS") - total comprehensive income for the year, net of taxation, attributable to equity holders of the Company, adjusted to add back acquisition-related costs, gain on revaluation of derivative financial assets, non-cash interest charges on the unwinding of discounts on long‑term provisions and the amortisation of acquired intangible assets, divided by the weighted average number of ordinary shares in issue. 

 

See 'Profitability and earnings per share'. 

Growth in the value of assets under management, administration and advice

 

Assets under management, administration and advice - the value of all client assets the business gives advice upon, manages or administers. 

 

See 'Assets under management, administration and advice'. 

Excellent client service and retention

Client attrition - the number of direct SSAS and SIPP schemes lost as a result of death, annuity purchase, external transfer or cancellation as a percentage of average scheme numbers during the period). 

 

See 'Segmental review'. 

Financial stability

Debtors' days - this is the average number of days' sales outstanding in trade receivables at any time. 

 

See 'Cash flow'. 

Financial stability

Surplus on regulatory capital requirement - this is the aggregate surplus on the total regulatory capital requirement of the Group. 

 

See 'Regulatory capital'. 

 

Financial performance and future developments

 

Revenue

 

Total Group revenue was £58.5m (2018: £58.7m), with the changing revenue mix across each of the Group's operating segments explained in more detail below.  With effect from 1 June 2018 the Group adopted the new accounting standard IFRS 15 'Revenue from Contracts with Customers', with there being no material differences between the results for the year ended 31 May 2019 under IAS 18 'Revenue', had it applied, and those reported under IFRS 15. 

 

Revenue included £1.1m (2018: £nil) from the Broughtons and SSAS Solutions businesses acquired during the year.  We have identified a number of key strategic objectives to drive efficiency and effectiveness across the Group, streamlining processes, building a scalable operating model and making Mattioli Woods easier to do business with.  We expect these changes will deliver further material cost savings for us and our clients. 

 

Our focus remains on delivering great outcomes for our clients as we address their changing needs, with our ambition being to see our brand become an even stronger force in the UK financial services sector.   

 

Employee benefits expense

 

As in previous years, the major component of the Group's operating costs is our employee benefits expense of £31.2m (2018: £32.1m) representing 53.3% of revenue (2018: 54.7%).  Securing economies of scale and operational efficiencies, particularly through the integration of acquired businesses and clients, are key elements of our aim to reduce clients' TERs and we are pleased to have increased average consultant and client relationship manager caseloads during the year. 

 

Due to the lease on the Group's office in Hampton-in-Arden expiring in June 2019 and the proximity of this location to Leicester, we relocated our MC Trustees business to our new Leicester office in the first half of the financial year, resulting in some voluntary redundancies and the Group's average headcount during the year falling to 600 (2018: 618) at 31 May 2019. 

 

We have also reviewed our approach to consultancy development, with the number of consultants reducing to 115 (2018: 133) at the year end, following the retirement of several vendors of acquired businesses on completion of their earn-outs, restructuring of our employee benefits business and a new consultancy development programme going live in December 2018.  We continue to invest in our IT systems, compliance and training across all parts of the Group, with the aim of delivering further operational efficiencies and benefiting from further economies of scale. 

 

Other administrative expenses

 

Other administrative expenses fell to £11.7m (2018: £12.6m), with the impact of additional regulatory and compliance costs following the introduction of MiFID II, increased IT costs after moving to a cloud-hosted infrastructure and changes in revenue mix increasing irrecoverable VAT being more than offset by the impact of lower headcount on variable costs and significantly lower than anticipated costs incurred on the Group's exit from its previous premises at Grove Park. 

 

We completed a seamless move to the new office.  This more flexible working environment allows us to continue growing the business and realise further operational efficiencies, whilst ensuring our client services remain first class.  In addition, we will benefit from future rental savings of approximately £0.85m per annum. 

 

With effect from 1 June 2018 the Group adopted the new accounting standard IFRS 9 'Financial Instruments', which replaced IAS 39 'Financial Instruments: Recognition and Measurement' and introduces changes to the classification of financial assets and a new impairment model for financial assets, resulting in earlier recognition of impairment losses.  The impact, net of tax, of the transition to IFRS 9 on the opening balance of consolidated retained earnings was a reduction in value of £0.25m. 

 

Share based payments

 

Share based payments costs fell to £1.1m (2018: £1.5m) following the settlement of all outstanding cash-settled options in the prior year, with strong share price growth in previous periods having increased the costs associated with the cash-settled options. 

 

Loss on disposal of property, plant and equipment

 

The loss on disposals of property, plant and equipment of £0.1m (2018: £0.1m) was incurred primarily on the disposal of consultants' cars. 

 

Gain on revaluation of derivative financial instrument

 

The gain of £0.1m (2018: £0.5m) represents the increase in value of the Group's option to acquire a further 51% of Amati, which was cancelled following the year end in return for a £0.75m payment from the management team

 

Net finance costs

 

The Group has maintained a positive net cash position throughout the year, with net finance costs of £0.03m (2018: £0.08m) reflecting credit interest of £0.06m (2018: £0.07m) being offset by £0.09m (2018: £0.15m) of non-cash interest charges on the unwinding of discounts on long‑term provisions. 

 

Taxation

 

The effective rate of taxation on profit on ordinary activities was 20.0% (2018: 16.2%), above (2018: below) the standard rate of tax of 19.0% (2018: 19.0%), primarily due to certain expenses associated with sponsorship and other business development activities not being deductible for tax purposes. 

 

The lower effective rate in the prior year was due to research and development relief claimed in respect of the two years ended 31 May 2017.  The net deferred taxation liability carried forward at 31 May 2019 was £3.8m (2018: £2.8m). 

 

Alternative performance measures

 

The Group has identified certain measures that it believes will assist in the understanding of the performance of the business.  Adjusted EBITDA, adjusted profit before tax ("adjusted PBT"), adjusted profit after tax ("adjusted PAT") and adjusted EPS are non-GAAP alternative performance measures, considered by the Board to provide additional insight on business performance compared to looking at the Group's results on a statutory basis only. 

 

These alternative performance measures may not be directly comparable with other companies' adjusted measures and are not intended to be a substitute for, or superior to, any IFRS measures of performance.  However, the Board considers them to be important measures for assessing performance, used widely within the business and by research analysts covering the Company. 

 

Supporting calculations for alternative performance measures and reconciliations between alternative performance measures and their IFRS equivalents are set out in the Alternative performance measure workings section of the Annual Report. 

 

Profitability and earnings per share

 

Profit before tax was up 4.1% to £10.2m (2018: £9.8m), with adjusted profit before tax up 8.8% to £12.3m (2018: £11.3m).  A continued focus on operational efficiencies and the realisation of one-off and recurring administrative cost savings translated into strong growth in adjusted EBITDA up 16.0% to £14.5m (2018: £12.5m), with adjusted EBITDA margin of 24.8% (2018: 21.3%). 

 

The Board considers adjusted EBITDA to be a relevant measure for investors who want to understand the underlying profitability of the Group, adjusting for items that are non-cash or affect comparability between periods as follows:

 

 

 

 

2019

2018

 

 

 

£m

£m

 

 

 

 

 

Statutory operating profit before financing

 

 

9.8

9.6

Amortisation of acquired intangibles

 

 

1.9

1.8

Amortisation of software

 

 

1.0

0.5

Depreciation

 

 

1.3

0.8

 

 

 

 

 

EBITDA17

 

 

14.0

12.7

 

 

 

 

 

Share of associate profits (net of tax)

 

 

0.5

0.2

Acquisition-related costs

 

 

0.1

0.1

Gain on revaluation of Amati option

 

 

(0.1)

(0.5)

 

 

 

 

 

Adjusted EBITDA18

 

 

14.5

12.5

 

Adjusted PBT, adjusted PAT and adjusted EPS are additional measures the Board considers to be relevant for investors who want to understand the underlying earnings of the Group, excluding items that are non-cash or affect comparability between periods as follows:

 

 

Profit

2019

EPS

2019

Profit

2018

EPS

2018

 

£m

pps

£m

pps

 

 

 

 

 

Statutory profit before tax

10.2

38.5

9.8

36.8

Income tax expense

(2.0)

(7.7)

(1.6)

(6.0)

 

 

 

 

 

Statutory profit after tax / Basic EPS

8.2

30.8

8.2

30.8

 

 

 

 

 

Statutory profit before tax

10.2

38.5

9.8

36.8

Amortisation of acquired intangibles

1.9

7.2

1.8

6.6

Gain on revaluation of Amati option

(0.1)

(0.4)

(0.5)

(2.0)

Non-cash interest charges on provisions

0.1

0.3

0.2

0.6

Acquisition-related costs

0.1

0.5

0.1

0.5

 

 

 

 

 

Adjusted PBT

12.3

46.1

11.3

42.5

Income tax expense at standard rate

(2.3)

(8.8)

(2.1)

(8.1)

 

 

 

 

 

Adjusted PAT / Adjusted EPS19

9.9

37.3

9.1

34.4

 

As explained in Note 9, client portfolios acquired through business combinations are recognised as intangible assets.  The amortisation charge for the year of £1.9m (2018: £1.8m) associated with these intangible assets has been excluded from adjusted PAT and adjusted EPS because the Board reviews the performance of the business before these charges, which are non-cash and do not apply evenly to all business units. 

 

Adjusted EPS20 increased 8.4% to 37.3p (2018: 34.4p), while basic EPS was 30.8p (2018: 30.8p), with profits for the year stated after recognising a smaller gain on revaluation of the Amati option and £0.6m of accelerated amortisation on existing IT systems.  EPS was also impacted by the higher effective tax rate of 20.0% (2018: 16.2%) and the issue of 380,766 shares under the Company's share plans, 77,171 shares as part of the initial consideration for the Broughtons acquisition and 162,654 shares as part of the initial consideration for the SSAS Solutions acquisition.  Diluted EPS was 30.7p (2018: 30.8p). 

 

Dividends

 

The Board is pleased to recommend the payment of an increased final dividend of 13.67 pence per share (2018: 11.5 pence).  This makes a proposed total dividend for the year of 20.0 pence (2018: 17.0 pence), a year-on-year increase of 17.6% (2018: 20.6%), demonstrating our desire to deliver value to shareholders and confidence in the outlook for our business.  The Board remains committed to growing the dividend, while maintaining an appropriate level of dividend cover.  If approved, the final dividend will be paid on 25 October 2019 to shareholders on the register at the close of business on 13 September 2019, having an ex-dividend date of 12 September 2019. 

 

The Company offers shareholders the option to invest their dividends in a Dividend Reinvestment Plan ("DRIP").  The DRIP is administered by the Company's registrar, Link Asset Services ("Link"), which uses cash dividend payments to which participants in the DRIP are entitled to purchase shares in the market, which means the Company does not need to issue new shares and avoids diluting existing shareholdings. 

 

For the DRIP to apply to the proposed final dividend for the year ended 31 May 2019, shareholders' instructions must be received by Link by 27 September 2019. 

 

Cash flow

 

Opening cash balances of £23.7m (2018: £23.0m) included £3.5m of VAT reclaimed on behalf of clients, of which £3.4m was distributed during the year, with cash generated from operations falling to £11.0m or 78% of EBITDA (2018: £18.2m or 143%).  An improvement in operating profit margin before changes in working capital and provisions to 25.8% (2018: 23.3%) was offset by a £4.1m increase (2018: decrease of £4.5m) in the Group's working capital requirement, comprising:

 

·     A £4.2m decrease (2018: £5.1m increase) in trade and other payables, excluding £0.7m of trade and other payables added on the acquisition of Broughtons and SSAS Solutions, due to:

a £3.4m decrease in other payables due to VAT reclaimed on behalf of clients in the prior financial year being repaid to clients this year;

a £0.6m decrease in trade payables, primarily due to the timing of stage payments on the internal fit-out of the Group's new office in Leicester;

a £0.4m decrease in current income tax liabilities outstanding at the year end, with a £0.4m increase in corporation tax paid during the year; and

a £0.2m increase in social security and other taxes outstanding at the year end;

·     A £0.7m decrease (2018: £1.0m increase) in trade and other receivables, due to:

a £1.2m decrease in other receivables (excluding £0.4m added with recent acquisitions), with £0.8m due to client insurance costs being recharged prior to the year end this year and a £0.3m net repayment of loans advanced to investment syndicates;

a £0.3m increase in prepayments, excluding £0.1m added with recent acquisitions, due to an increasing volume of service contracts as the Group expands; and

a £0.2m increase in trade receivables, excluding £0.1m added on the acquisition of Broughtons and SSAS Solutions; plus

·     A £0.6m decrease (2018: £0.4m increase) in provisions, following the settlement of contingent consideration on prior period acquisitions and the release of dilapidations and onerous contract provisions on the Group's exit from its premises at Grove Park in Leicester. 

 

Cash balances at 31 May 2019 totalled £23.2m (2018: £23.7m), with £4.5m of initial consideration on the two acquisitions completed during the year and £0.8m (2018: £3.5m) of contingent consideration on historic acquisitions paid during the year. 

 

Outstanding trade receivables remained at 32 days' sales (2018: 32 days), with a continued focus on credit control.  Trade payables increased to 40 days' purchases (2018: 37 days) with balances at the year end inflated due to the Group being invoiced clients' annual property insurance premiums in May, which are subsequently recharged to clients and paid monthly over the next 12 months. 

 

Capital expenditure of £2.0m (2018: £8.8m) comprised £0.8m incurred on the fit-out of the Group's new offices in Leicester, £0.5m on the purchase of new company cars, £0.4m investment in new computer hardware and office equipment and £0.3m on software development. 

 

In the first half we reviewed our capital investment in IT, which resulted in the accelerated amortisation of some of our existing IT systems.  We intend to continue investing in technology to develop our client relationship platforms and improve our client service propositions.

 

Bank facilities

 

The Group does not have an overdraft or other bank facility due to the headroom the Group's current cash balances provide on its working capital requirements. 

 

Capital structure

 

The Group's capital structure is as follows:

 

 

2019

£000

2018

£000

 

 

 

Cash and short-term deposits

(23,248)

(23,668)

Shareholders' equity

85,593

78,950

 

 

 

Capital employed

62,345

55,282

 

The Group continues to maintain a strong cash position, with cash balances of £23.2m (2018: £23.7m). 

 

 

Regulatory capital

 

The Group's regulatory capital requirement has increased in recent years.  In addition, the Group's capital is reduced when it makes acquisitions due to the requirement for intangible assets arising on acquisition to be deducted from Tier 1 Capital.  

 

However, the Group continues to enjoy significant headroom on its increased regulatory capital requirement, allowing us to pursue further acquisition opportunities.

 

Segmental review

 

Investment and asset management

 

Investment and asset management revenues generated from advising clients on both pension and personal investments increased 3.6% to £26.0m (2018: £25.1m), representing 44.4% (2018: 42.7%) of total Group revenues. 

 

The Group's gross discretionary assets under management ("AuM"), including the multi asset funds which now sit at the heart of our discretionary portfolio management service ("DPM"), Custodian REIT, the Mattioli Woods Structured Products Fund ("MW SPF") and the funds managed by our associate company, Amati, increased by 9.8% to £2.57bn (2018: £2.34bn) as follows:

 

Assets under management

DPM

£m

Custodian REIT

£m

MW SPF

£m

Amati

£m

Gross AuM

£m

Cross-holdings in DPM21

Cross-holdings in Amati funds22

Net AuM

£m

 

 

 

 

 

 

 

 

 

At 1 June 2018

1,341.1

462.6

213.8

325.1

2,342.6

(121.0)

(12.1)

2,209.5

 

 

 

 

 

 

 

 

 

Inflows

174.8

22.8

45.9

154.9

398.4

(11.3)

-

387.1

Outflows

(114.5)

-

(9.9)

(8.8)

(133.2)

-

0.2

(133.0)

Market movements

(7.4)

(2.1)

(7.3)

(18.4)

(35.2)

-

-

(35.2)

 

 

 

 

 

 

 

 

 

At 31 May 2019

1,394.0

483.3

242.5

452.8

2,572.6

(132.3)

(11.9)

2,428.4

 

Income from both initial and ongoing portfolio management charges increased to £15.0m (2018: £14.2m), with £174.8m (2018: £273.7m) of inflows into our discretionary portfolio management service during the year. 

 

Fees for services provided by Custodian Capital to Custodian REIT are included in the 'Property management' segment.  The Mattioli Woods' Structured Products Fund was named Retail Investment Product of the Year at the Risk Awards 2018, with the fund offering investors the benefits of collateralisation, instant diversification, continuous availability and liquidity.  A combination of new client investment and money from maturing individual structured product plans increased the fund's value to £242.5m at 31 May 2019 (2018: £213.8m), with annual management charges increasing to £1.3m (2018: £0.8m). 

 

Adviser charges based on gross assets under advice of £2.03bn (2018: £2.04bn) fell to £9.7m (2018: £10.1m), with the lower revenue margin illustrating how we are reducing clients' charges and TERs, particularly on those assets invested in Custodian REIT, the MW SPF and Amati funds.  Broughtons contributed £0.9m of adviser charges during the year, following its acquisition in August 2018.  We continue to see some migration of assets under advice to AuM as clients from acquired portfolios engage with our DPM service. 

 

Growth in total assets under management and advice continues to enhance the quality of earnings through an increase in recurring revenues, with the proportion of investment and asset management revenues which are recurring being 88.9% (2018: 81.7%).  Notwithstanding our fee-based advisory model, as with other firms, these income streams are linked to the value of funds under management and advice, and are therefore affected by the performance of financial markets. 

 

We extended our asset management business through our purchase of 49% of Amati, an award-winning specialist fund management business focusing on UK small and mid-sized companies, in February 2017.  Amati is the manager of the TB Amati UK Smaller Companies Fund; Amati AIM VCT plc and an AIM IHT portfolio service. 

 

Pension consultancy and administration

 

The introduction of the pensions freedoms has combined with a period of political and economic uncertainty, driving a broader market shift away from accumulation and steady savings towards wealth preservation and decumulation.  Pension consultancy and administration revenues were down 6.4% to £20.4m (2018: £21.8m), representing 34.9% (2018: 37.1%) of Group revenues of which 93.6% (2018: 87.7%) were recurring, with a lower level of client activity partially offset by the total number of SIPP and SSAS schemes administered by the Group increasing 5.6% to 11,119 (2018: 10,533), including the 354 schemes administered by SSAS Solutions. 

 

Direct23 pension consultancy and administration fees fell 6.6% to £15.5m (2018: £16.6m).  Retirement planning remains central to many of our clients' wealth management strategies and the number of direct schemes increased to 6,051 (2018: 5,834), with 471 new schemes gained in the year (2018: 875).  Our focus remains on the quality of new business, with the value of a new scheme averaging £0.3m (2018: £0.4m).  We continue to enjoy strong client retention, with an increase in the external loss rate24 to 2.2% (2018: 1.5%) and the overall attrition rate25 to 3.4% (2018: 2.6%). 

 

The number of SSAS and SIPP schemes the Group operates on an administration-only basis increased to 5,068 (2018: 4,699) at the year end, with scheme numbers enhanced by the acquisition of SSAS Solutions during the year.  In prior years the Group has been appointed to administer a number of SIPPs following the previous operators' failure and work continues in connection with certain schemes previously administered by Stadia Trustees Limited, HD Administrators, Pilgrim Trustees Services Limited and The Freedom SIPP Limited.  Lost schemes include the transfer of some members of these portfolios to alternative arrangements.  Overall, third party administration fees fell 10.4% to £4.3m (2018: £4.8m), with £0.2m of revenue generated by SSAS Solutions since its acquisition at the end of March 2019. 

 

The Group's banking revenue was £0.6m (2018: £0.4m), reflecting the increase in the Bank of England base rate to 0.75% at the start of August 2018. 

 

The pension market continues to evolve, with historic restrictions on annual contributions and annual allowances meaning that gross inflows predominantly come from customers of other operators choosing to move their existing arrangements to Mattioli Woods.  There has also been some negative publicity for the pension market over the last few years, with certain SIPP and SSAS operators in the spotlight due to issues with esoteric and non-standard investments, while the general economic environment has reduced some consumers' focus on pension savings.  

 

While we anticipate continued regulatory scrutiny of the pension market, the market opportunity remains strong, with SIPP and SSAS arrangements still benefitting from the introduction of the pension freedoms and being favoured as a way of allowing individuals to have greater access, control, flexibility and responsibility over their pension savings.  SIPPs are increasingly the pension vehicle of choice for the mass affluent and having been appointed to administer SIPPs previously operated by a number of failed operators in recent years we anticipate there may be some similar opportunities for the Group over the next few years

 

We like to see our clients withdrawing funds to enjoy in their retirement and anticipate there will continue to be natural outflows from our clients' SIPP and SSAS schemes, particularly as the "baby boom" generation reaches retirement.  We expect any such decumulation to have a positive impact on the Group's results, linking-in with the provision of advice around the cascading of wealth through the generations, inheritance tax and other planning. 
 

Property management

 

Property management revenues increased 10.2% to £6.5m (2018: £5.9m), representing 11.1% of total revenue (2018: 10.1%), with our subsidiary Custodian Capital having assets under management and administration of £585.6m (2018: £542.9m) at 31 May 2019.  Recurring annual management charges represented 90.6% (2018: 89.8%) of property management revenues, the majority of which are derived from the services provided by Custodian Capital to Custodian REIT, which currently offers a fully-covered dividend yield of 5.6%, one of the highest26 among its UK property investment company peer group, coupled with the potential for capital growth from a balanced portfolio of real estate assets. 

 

In addition, Custodian Capital continues to facilitate direct property ownership on behalf of pension schemes and private clients and manages our Private Investors Club, which offers alternative investment opportunities to suitable clients by way of private investor syndicates.  This initiative continues to be well supported, with £27.9m (2018: £26.3m) invested in seven (2018: eight) new syndicates during the year, one of which remained open to further investment following the year end. 

 

Employee benefits

 

Employee benefits revenues fell 5.1% to £5.6m (2018: £5.9m), due to fewer auto-enrolment pension projects compared to previous years as the market approached 'steady state' under the regulations in April 2019, coupled with the loss of some larger corporate clients in the year.  Employee benefits revenues now represent 9.6% of total revenue (2018: 10.1%).  In June 2018 we were delighted to announce the appointment of Saira Chambers to lead our employee benefits team as Employee Benefits Director and we have progressed a number of strategic projects during the year, including a review of the services provided to smaller clients, resulting in some loss of revenue but improved profitability within this business segment. 

 

Employers are increasingly encouraging staff wellbeing and retirement savings, which we expect to drive a period of steady growth in the UK employee benefits market, and we believe the Government's emphasis on workplace advice presents new opportunities for us to realise further synergies between our employee benefits and wealth management businesses. 

 

Acquisitions

 

We have invested over £54m since our admission to AIM in 2005 in bringing 22 businesses or client portfolios into the Group, developing considerable expertise and a strong track record in the execution and subsequent integration of such transactions. 

 

The two businesses acquired during the year are integrating well and have contributed positively to the Group's trading results since acquisition, increasing earnings and enhancing value. 

 

With continuing consolidation across the key markets in which we operate, we expect there will be further opportunities to accelerate our growth by acquisition.  Our strong balance sheet gives us the flexibility to make further value-enhancing acquisitions. 

 

Relationships

 

The Group's performance and shareholder value are influenced by other stakeholders, principally our clients, suppliers, employees, the Government and our strategic partners.  Our approach to all these parties is founded on the principle of open and honest dialogue, based on a mutual understanding of needs and objectives. 

 

Relationships with our clients are managed on an individual basis through our client relationship managers and consultants.  Employees have performance development reviews and employee forums also provide a communication route between employees and management.  Mattioli Woods also participates in trade associations and industry groups, which give us access to client and supplier groups and decision-makers in Government and other regulatory bodies.  Mattioli Woods is a member of the Association of Member-directed Pension Schemes and the Quoted Companies Alliance. 

 

Resources

 

The Group aims to safeguard the assets that give it competitive advantage, including its reputation for quality and proactive advice, its technical competency and its people.  

 

Our core values provide a framework for integrity, leading to responsible and ethical business practices.  Structures for accountability from our administration and consultancy teams through to senior management and the Group's Board are clearly defined.  The proper operation of the supporting processes and controls are regularly reviewed by the Audit Committee and the Risk and Compliance Committee and take into account ethical considerations, including procedures for 'whistle-blowing'. 

 

Our people

 

I thank all our staff for their continued commitment, enthusiasm and professionalism in dealing with our clients' affairs.  Our culture is based on professionalism, putting clients first and adopting a collegiate approach.  Retaining the integrity, expertise and passion of our people remains a priority of the board and at the heart of our success.  We are committed to developing our people and maintaining the capacity to deliver sustainable growth. 

 

As our business grows, the board recognises the continued importance of good communication and will ensure that the strong client-centric behaviours that are embedded within the business are preserved. During the year the board had particular focus on the impact of growth on our culture. Outside of board meetings, non-executive directors have held a number of meetings with employees across the business to share experiences more directly. 

 

Our total headcount at 31 May 2019 had decreased to 586 (2018: 622) and we continue to invest in our graduate and apprenticeship recruitment programmes.  During the year 18 (2018: 20) new graduates and 17 (2018: 24) apprentices joined the Group, which was recognised for creating opportunities for young people by being highly commended in the Large Employer of the Year Award category at the National Apprenticeship Awards 2018.  We also offer programmes for 'life served' people seeking exciting opportunities for a change in career or a return to work. 

 

We enjoy a strong team spirit and facilitate employee equity ownership through the Mattioli Woods plc Share Incentive Plan ("the Plan") and other share schemes.  At the end of the year 57% of eligible staff had invested in the Plan (2018: 58%) and we continue to encourage broader staff participation. 

 

In May 2019 the Mattioli Woods Employee Benefit Trust ("the Trust") commenced making market purchases of the Company's shares.  The Trust holds shares for the benefit of the Group's employees and, in particular, to satisfy the vesting of awards made under the Company's various share schemes.  The acquisition of shares by the Trust helps to avoid dilution of shareholders by reducing the need for the Company to issue new shares, 

 

Forward-looking statements

 

The strategic report is prepared for the members of Mattioli Woods and should not be relied upon by any other party for any other purpose.  Where the report contains forward-looking statements these are made by the directors in good faith based on the information available to them at the time of their approval of this report.  Consequently, such statements should be treated with caution due to the inherent uncertainties, including both economic and business risks underlying such forward-looking statements and information.  The Group undertakes no obligation to update these forward-looking statements. 

 

Principal risks and uncertainties

 

The Board is ultimately responsible for risk management and regularly considers the most significant and emerging threats to the Group's strategy, as well as establishing and maintaining the Group's systems of internal control and risk management and reviewing the effectiveness of those systems.  The Board and senior management are actively involved in a continuous risk assessment process as part of our risk management framework, supported by the annual Internal Capital Adequacy Assessment Process ("ICAAP"), which assesses the principal risks facing the Group.  Stress tests include consideration of the impact of a number of severe but plausible events that could impact the business.  The work also takes account of the availability and likely effectiveness of mitigating actions that could be taken to avoid or reduce the impact or occurrence of the underlying risks. 

 

Day-to-day, our risk assessment process considers both the impact and likelihood of risk events which could materialise and affect the delivery of the Group's strategic goals.  Throughout the Group, all employees have a responsibility for managing risk and adhering to our control framework. 

 

There are a number of potential risks which could hinder the implementation of the Group's strategy and have a material impact on its long‑term performance.  These arise from internal or external events, acts or omissions which could pose a threat to the Group.  The principal risks identified as having a potential material impact on the Group are detailed below, together with the principal means of mitigation.  The risk factors mentioned do not purport to be exhaustive as there may be additional risks that materialise over time that the Group has not yet identified or deemed to have a potentially material adverse effect on the business:

 

Industry risks

 

 

 

Risk type

Description

Mitigating factors

Chance

Impact

Change in risk

Changes in investment markets and poor investment performance

Volatility may adversely affect trading and/or the value of the Group's assets under management, administration and advice, from which we derive revenues. 

·      Majority of clients' funds held within registered pension schemes or ISAs, where less likely to withdraw funds and lose tax benefits. 

·      Broad range of investment solutions enables clients to shelter from market volatility through diversification, while continuing to generate revenues for the Group. 

·      Market volatility is closely monitored by the Investment Committee.

Medium

Medium

No change

Changing markets and increased competition

The Group operates in a highly competitive environment with evolving characteristics and trends. 

·      The Group seeks to maintain strong working relationships with clients underpinned by high levels of service, quality products and a continued focus on product development and innovation.

·      Consolidating market position develops the Group's pricing power.

·      Control over scalable and flexible bespoke pension administration platform.

·      Experienced management team with a strong track record. 

·      Loyal customer base and strong client retention.

·      Broad service offering gives diversified revenue streams.

High

High

No change

Evolving technology

The Group's technology could become obsolete if we are unable to develop our systems to accommodate changing client needs, new products and the emergence of new industry standards.

·      We partner with leading software providers to assist in our systems development.

·      High awareness of the importance of technology at Board level.

·      Expanded systems development with phased implementation of Group-wide platform.

Medium

High

No change

Regulatory risk

The Group may be adversely affected as a result of new or revised legislation or regulations or by changes in the interpretation or enforcement of existing laws and regulations.

·      Strong compliance culture, with appropriate oversight and reporting supported by training. 

·      External professional advisers are engaged to review and advise upon control environment. 

·      Business model and culture embraces FCA principles, including treating clients fairly. 

·      Decision to withdraw from providing advice on safeguarded pensions. 

·      Financial strength provides comfort should capital resource requirements be increased. 

Medium

Medium / High

No change

Changes in tax law

Changes in tax legislation could reduce the attractiveness of long-term savings via pension schemes, particularly SSASs and SIPPs. 

·      The Government has a desire to encourage long-term savings to plan for an ageing population, which is currently under-provided for. 

·      Changes in pension legislation create the need for clients to seek advice. 

·      The development of the Group's investment and asset management services has reduced dependency on pension planning. 

Low

Medium

No change

 

Operational risks

 

 

 

Risk type

Description

Mitigating factors

Chance

Impact

Change in risk

Damage to the Group's reputation

There is a risk of reputational damage as a result of employee misconduct, failure to manage inside information or conflicts of interest, fraud, improper practice, poor client service or advice.

·      Strong compliance culture with a focus on positive customer outcomes.

·      High level of internal controls, including checks on new staff. 

·      Well-trained staff who ensure the interests of clients are met in the services provided. 

Medium

High

No change

Errors, breakdown or security breaches in respect of the Group's software or information technology systems

Serious or prolonged breaches, errors or breakdowns in the Group's software or information technology systems could negatively impact customer confidence.  It could also breach contracts with customers and data protection laws, rendering us liable to disciplinary action by governmental and regulatory authorities, as well as to claims by our clients.

·      Ongoing review of data security, including penetration testing and "phishing" exercises. 

·      IT performance, scalability and security are deemed top priorities by the Board.

·      Experienced in-house team of IT professionals and established name suppliers. 

High

High

No change

Data quality

Inaccurate data or voids in our data could result in inaccurate regulatory and/or client reporting

·      Ongoing initiatives to clean data.

·      Development of data warehouse to standardise data tables and create 'one source of truth'.

High

Medium

No change

Business continuity

In addition to the failure of IT systems, there is a risk of disruption to the business as a result of power failure, fire, flood, acts of terrorism, re-location problems and the like.

·      Periodic review of Business Continuity Plan, considering best practice methodologies.

·      Disaster recovery plan and a disaster recovery team in place.  Business impact analysis has been conducted by department. 

·      Business interruption insurance. 

Medium

Medium

No change

Fraud risk

There is a risk an employee or third party defrauds either the Group or a client. 

·      The Group ensures the control environment mitigates against the misappropriation of client assets.

·      Strong corporate controls require dual signatures for all payments and Board approval for all expenditure greater than £100,000. 

·      Assessment of fraud risk every six months discussed with the Audit Committee, Risk and Compliance Committee and external auditors. 

·      Clients have view-only access to information. 

·      Ongoing review of risk of fraud due to external attack on the Group's IT systems. 

Medium

Medium

No change

Key personnel risk

The loss of, or inability to recruit, key personnel could have a material adverse effect on the Group's business, results of operations or financial condition.

·      Succession planning is a key consideration throughout the Group.

·      Success of the Group should attract high calibre candidates.

·      Share-based schemes in operation to incentivise staff and encourage retention.

·      Recruitment programmes in place to attract appropriate new staff. 

·      Cross functional acquisition team brought into acquisition projects at an early stage.

Low

Medium

No change

Litigation or claims made against the Group

Risk of liability related to litigation from clients or third parties and assurance that a claim or claims will not be covered by insurance or, if covered, will exceed the limits of available insurance coverage, or that any insurer will become insolvent and will not meet its obligations to provide the Group with cover. 

·      Appropriate levels of Professional Indemnity insurance cover regularly reviewed with the Group's advisers. 

·      Comprehensive internal review procedures, including compliance sign-off, for advice and marketing materials. 

·      Maintenance of three charging models; time cost, fixed and asset based, which are aligned to specific service propositions and agreed with clients. 

·      Restricted status for our consultants to enable the recommendation of our own products and others in the market. 

High

Medium

No change

Reliance on third parties or outsourcing risk

Any regulatory breach or service failure on the part of an outsourced service provider could expose the Group to the risk of regulatory sanctions and reputational damage.

·      Due diligence is part of the selection process for key suppliers.

·      Ongoing review of relationships and concentration of risk with key business partners. 

·      Review of outsourcing is a key area of focus in Internal Audit plan. 

Medium

High

Increase

Strategic risk

Risk that management will pursue inappropriate strategies or implement the Group's strategy ineffectively.

·      Experienced management team with successful track record to date.

·      Management has demonstrated a thorough understanding of the market and monitors this through regular meetings with clients.

Low

Low

No change

Corporate manslaughter risk

The risk of breaching corporate manslaughter laws as a result of management breach in duty of care.

·      Policies and procedures in place to provide employee guidance when driving on company business.

·      Company cars regularly maintained and serviced with reputable and vetted companies.

·      Adequate insurance cover.

·      Responsible employees.

High

Medium

No change

Conduct risk

The risk that we fail our clients through the flawed design or mis-selling of our products or services, or poor business conduct results in client outcomes that do not meet their needs and circumstances. 

·      Only appropriately authorised consultants can provide advice. 

·      Robust training and competence scheme in place.

·      Operation of 'three lines of defence' model, including internal and external reviews of to monitor suitability of advice being given to clients. 

Medium

Medium

New risk

Information security risk

The risk that the security controls over our IT systems are compromised by internal or external influences, resulting in unauthorised access to our client or corporate confidential data.

·      Robust firewalls and patches maintained to prevent unauthorised access to IT systems, including utilisation of third party providers to protect corporate networks. 

·      Electronic data is protected by user access controls.  Data privacy training is provided across the Group.

·      Compliance with the Data Protection Act and registration with the Information Commissioner's Office. 

Medium

High

New risk

 

Financial risks

 

 

 

Risk type

Description

Mitigating factors

Chance

Impact

Change in risk

Counterparty default

That the counterparty to a financial obligation will default on repayments. 

·      The Group trades only with recognised, creditworthy third parties. 

·      Customers who wish to trade on credit terms are subject to credit verification procedures. 

·      All receivables are reviewed on an ongoing basis for risk of non-collection and any doubtful balances are provided against. 

Medium

Medium

No change

Bank default

The risk that a bank could fail.

·      We only use banks with strong credit ratings. 

·      Client deposits spread across multiple banks. 

·      Regular review and challenge of treasury policy by management.

Medium

High

No change

Concentration risk

A component of credit risk, arising from a lack of diversity in business activities or geographical risk. 

·      The client base is broad, without significant exposure to any individual client or group of clients.

·      Broad service offering gives diversified revenue streams. 

Medium

Medium

No change

Liquidity risk

The risk the Group is unable to meet liabilities as they become due because of an inability to liquidate assets or obtain adequate funding.

·      Cash generative business.

·      Group maintains a surplus above regulatory and working capital requirements.

·      Treasury management provides for the availability of liquid funds at short notice.

Low

Low

No change

Interest rate risk

Risk of decline in earnings due to a decline in banking margin or deposit rates received on surplus cash. 

Low interest rates make it harder to structure compelling capital-protected products for clients.

·      Market expectation that interest rates will rise. 

·      Good relationships with key banking partners. 

·      Access to competitive interest rates due to scale of business. 

Low

Medium

No change

Underwriting risk

When arranging new products for promotion to the Group's clients, the Group may need to guarantee a minimum aggregate investment to secure appropriate terms for the product. 

 

If actual client investment is less than the underwritten amount, we would incur the cost of either acquiring the unsold element of the product or unwinding any hedges underlying the unsold element of the product. 

·      New products created in line with client demand.

·      Potential costs are carefully considered by the Investment Committee prior to the launch of each product.

Low

Low

No change

               

 

Emerging risks, including legislative and regulatory change, have the potential to impact the Group and its strategy.  The Board, Audit Committee and Risk and Compliance Committee continue to monitor emerging risks and threats to the financial services sector including, for example, cyber threats, regulatory change and scenarios potentially arising from geopolitical developments, including Brexit, and intend to focus on operational resilience and enhancing the control environment over the next 12 months.  

 

Brexit is likely to be one of the most significant political and economic events to impact the UK in our lifetimes.  The lack of consensus on the UK's strategy creates uncertainty and the longer term implications will not be clear for some time. 

 

We continue to monitor Brexit-related developments closely.  As a UK business with no operations in other European Union ("EU") countries, no material dependencies on goods or people from other EU countries and a predominantly UK client base, we anticipate that the operational impacts on our business will be relatively small.  In particular Brexit will bring no changes to the basis or nature of the services we provide to the vast majority of our clients and investors who are based in the UK.  However, we recognise the impact of Brexit more generally, which could affect the value of our clients' funds under management, advice and administration.

 

Investors in the Mattioli Woods Structured Product Fund (which is a Luxembourg-based SICAV) are likely to see some changes to the basis on which this fund is delivered.  It is also possible that there may be some implications for the small number of our private clients based in other EU countries, depending on the exact nature of the services they receive and regulatory framework agreed in the transitional period or in the event of an exit from the EU without agreement.  We continue to review the investment implications of Brexit for client portfolios and our range of funds, and regularly communicate our views through formal and informal briefings to clients and our consultants. 

 

Corporate social responsibility

 

Our commitment to operating responsibly

 

We believe that running a profitable and growing business, which creates jobs and contributes to the economic success of the areas in which it operates, is a good platform for good corporate social responsibility. 

 

We have a long-standing commitment to support our staff in engaging with their local communities and charities.  This social awareness is present throughout the business, from our employees to our clients, our professional connections and the suppliers we use.  Our continued contribution through the commitment of our people continues to improve lives and build communities. 

 

Sustainability

 

To deliver strong, sustainable shareholder returns over the long-term the operation of a profitable business is a priority and that means investing for growth.  To achieve this, the Group recognises that it needs to operate in a sustainable manner and therefore has adopted core principles to its business operations which provide a framework for both managing risk and maintaining its position as a good 'corporate citizen'. 

 

Charities and communities

 

We have a high level of engagement within our local communities.  Each year, we sponsor business, sports and community awards.  Our business has benefited greatly from winning numerous awards and we feel it's right to help other businesses reap the rewards of such accolades.  In addition, we sponsor a variety of local clubs, business and sports related events across the country.  We believe this brings many benefits to the local community and beyond. 

 

In 2015 we chose our first national charity, Breast Cancer Now, the UK's largest breast cancer charity dedicated to funding research into this devastating disease, raising over £200,000 for the charity.  This year, we have launched a new national partnership with Alzheimer's Research UK focused, on boosting research, improving treatments and raising awareness about dementia. 

 

Alzheimer's Research UK will become the Group's charity of the year for the next two years with the aim to raise £150,000 during this partnership to help transform lives, identify life-changing treatments and eventually a cure.  We intend to engage employees, clients and partners to raise money for the charity through a series of fundraising events, from bucket collections to payroll giving, sporting events, dinners and seasonal activities. 

 

We believe that dementia is one of the biggest problems facing health services today and one that is impacting the lives of many of our employees and clients.  The money raised over the next two years is going to fund ground-breaking research that will change the lives of people impacted by it. 

 

In addition, almost 80 charities throughout the UK benefitted after Mattioli Woods urged its staff to nominate worthy causes as part of a new initiative.  Chief Executive Ian Mattioli asked for nominations to help continue a charitable tradition started by the Group's associate company, Amati. 

 

Every year, Amati has a commitment to donate 10% of its profits to good causes and sharing similar values, we want to further that tradition and continue the good work Amati started. 

 

Staff throughout the Group were asked to suggest causes they felt deserving of a pay-out.  The money was distributed after Ian received a "truly heart-warming" response from employees, with decision to split awards between the requests received resulting in 77 organisations and individuals sharing over £32,800. 

 

Rothley 10k

 

Over 1,000 runners from Leicestershire and beyond took to the streets of Rothley in June 2019 for the annual Mattioli Woods Rothley 10k.  The race has grown year-on-year and is now the largest 10k road race in the county, which is a great showcase of local community spirit. 

 

Rainbows, LOROS, Air Ambulance Service, Age UK, Eye Camps, Vista and RNLI are among the charities to benefit from over £25,000 of funds raised through sponsorship and race entry fees to become the largest fund raising event in its history.  Over the years, the race has now generated more than £300,000 for local causes. 

 

Sammi Kinghorn

 

We have sponsored world champion wheelchair racer Sammi Kinghorn for the past five years.  Sammi - now 23 - has gone on to achieve international success, winning three European Championship gold medals in 2014, a bronze in 2015 at the Doha World Championships and two gold medals and a bronze medal at the London 2017 World Championships. 

 

Mattioli Woods has been one of her main sponsors from the start of her wheelchair racing career and, following her recent successes, Sammi and coach Ian Mirfin said the Company's support had been vital to her progress.  After returning to shorter distance track racing for the first time in almost two years in May 2019, Sammi has her sights firmly set on the 2019 World Para Athletics Championships in Dubai and the 2020 Paralympics in Tokyo.  

 

Developing our people

 

The Group continues to create opportunities for young people and has launched a new trainee consultant programme for aspiring advisors.  We have introduced a 26-week plan to foster small groups of trainee advisers in a classroom setting, two days a week.  

 

Each week is themed, including topics such as tax, pensions and investments, and aims to get trainees who have been with the company for 18 months and have completed their level 4 qualification to the point where they are able to develop financial plans.  

 

Mattioli Woods' graduate and apprenticeship schemes have been running for a number of years, with this new programme highlighting the firm's motivation to 'grow our own'.  Trainees work alongside consultants in administrative roles and attend consultant-led client meetings.  The scheme will continue to be rolled out for new groups of employees who demonstrate the potential to move into consultant roles at the firm. 

 

Diversity and inclusion

 

We are an equal opportunities employer and it is our policy to ensure that all job applicants and employees are treated fairly and on merit regardless of race, sex, marital/civil partnership status, age, disability, religious belief, pregnancy, maternity, gender reassignment or sexual orientation. 

 

Modern slavery

 

Mattioli Woods is committed to preventing modern slavery and human trafficking in all its activities, and to ensuring its supply chains are free from modern slavery and human trafficking.  We welcomed the introduction of the Modern Slavery Act 2015 and publish a Modern Slavery and Human Trafficking Statement on our website.  We have also developed policies, reviewed our due diligence processes for suppliers and provided training to staff. 

 

A copy of our Modern Slavery and Human Trafficking Statement can be found on our website. 

 

Anti-bribery policy

 

We value our reputation for ethical behaviour and upholding the utmost integrity and we comply with the FCA's clients' best interests rule.  We understand that in addition to the criminality of bribery and corruption, any such crime would also have an adverse effect on our reputation and integrity. 

 

Mattioli Woods has a zero tolerance approach to bribery and corruption and we ensure all our employees and suppliers are adequately trained as to limit our exposure to bribery by:

 

·     Setting out clear anti-bribery and corruption policies;

·     Providing mandatory training to all employees;

·     Encouraging our employees to be vigilant and report any suspected cases of bribery in accordance with the specified procedures; and

·   Escalating and investigating instances of suspected bribery and assisting the police or other appropriate authorities in their investigations.

 

 

 

Gender pay reporting

 

The Equality Act 2010 (Gender Pay Gap Information) Regulations 2017 requires all employers with 250 or more employees in the UK to publish details of their gender pay gap.  Its aim is to achieve greater transparency about gender pay difference.  The analysis is based on data as at 5 April of each year and shows the differences in the average pay between men and women.  The Group has submitted its data on gender pay to the government and published these details on our website. 

 

Approval

 

The strategic report contains certain forward-looking statements, which are made by the Directors in good faith based on the information available to them at the time of their approval of this annual report.  Statements contained within the strategic report should be treated with some caution due to the inherent uncertainties (including but not limited to those arising from economic, regulatory and business risk factors) underlying any such forward-looking statements.  The strategic report has been prepared by Mattioli Woods to provide information to its shareholders and should not be relied upon for any other purpose. 

 

The strategic report in its entirety has been approved by the Board of Directors and signed on its behalf by:

 

 

 

Ian Mattioli MBE

Chief Executive Officer

2 September 2019

 

 

 

Going concern

 

The directors believe the Group is well placed to manage its business risks successfully.  The Group's forecasts and projections show that the Group should continue to be cash generative, maintain a surplus on its regulatory capital requirements and be able to operate within the level of its current financing arrangements.  Accordingly, the directors continue to adopt the going concern basis for the preparation of the financial statements.  

 

Directors' responsibilities for the financial statements

 

The directors are responsible for preparing the Directors' Report, Strategic Report and the financial statements in accordance with applicable law and regulations. 

 

UK company law requires the directors to prepare Group and Company financial statements for each financial year.  The directors are required by the AIM Rules of the London Stock Exchange to prepare Group financial statements in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union ("EU") and have elected to prepare the Company financial statements in accordance with IFRS as adopted by the EU. 

 

The financial statements are required by law and IFRS adopted by the EU to present fairly the financial position of the Group and Company and the financial performance of the Group.  The Companies Act 2006 provides in relation to such financial statements that references in the relevant part of that Act to financial statements giving a true and fair view are references to their achieving a fair presentation. 

 

Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group for that period.  In preparing each of the Group and Company financial statements, the directors are required to:

 

·     Select suitable accounting policies and then apply them consistently;

·     Make judgements and estimates that are reasonable and prudent;

·     State whether they have been prepared in accordance with IFRSs adopted by the EU; and

·     Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the Company will continue in business. 

 

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group's and the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Group and Company and enable them to ensure the financial statements comply with the Companies Act 2006.  They are also responsible for safeguarding the assets of the Group and Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. 

 

The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Mattioli Woods plc website. 

 

Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 
 

Consolidated Statement of Comprehensive Income

For the year ended 31 May 2019

 

 

Note

 

 

2019

£000

 

 

2018

£000

 

 

 

 

Revenue

4

58,464

58,669

 

 

 

 

Employee benefits expense

 

(31,239)

(32,148)

Other administrative expenses

 

(11,741)

(12,560)

Share based payments

11

(1,060)

(1,497)

Amortisation and impairment

9

(2,962)

(2,225)

Depreciation

8

(1,288)

(822)

Impairment loss on trade receivables

 

(358)

(273)

Loss on disposal of property, plant and equipment

 

(125)

(67)

Gain on revaluation of derivative financial instrument

10

100

540

 

 

 

 

Operating profit before financing

 

9,791

9,617

 

 

 

 

Finance revenue

 

60

73

Finance costs

 

(86)

(154)

 

 

 

 

Net finance costs

 

(26)

(81)

 

 

 

 

Share of profit from associate, net of tax

10

480

240

 

 

 

 

Profit before tax

 

10,245

9,776

Income tax expense

 

(2,048)

(1,586)

 

 

 

 

 

 

 

 

Profit for the year

 

8,197

8,190

Other comprehensive income for the year, net of tax

 

6

9

 

 

 

 

Total comprehensive income for the year, net of tax

 

8,203

8,199

 

 

 

 

Attributable to:

 

 

 

Equity holders of the parent

 

8,203

8,199

 

 

 

 

 

 

 

 

Earnings per ordinary share:

 

 

 

 

 

 

 

Basic (pence)

6

30.8

30.8

Diluted (pence)

6

30.7

30.8

 

 

 

 

Proposed total dividend per share (pence)

7

20.0

17.0

 

The operating profit for each period arises from the Group's continuing operations.  The parent company has taken advantage of section 408 of the Companies Act 2006 and has not included its own statement of comprehensive income in these financial statements. 

 

 

Consolidated and Company Statements of Financial Position          Registered number: 3140521

As at 31 May 2019

 

 

2019

2018

 

 

Group

Company

Group

Company

 

Note

£000

£000

£000

£000

Assets

 

 

 

 

 

Property, plant and equipment

8

16,665

3,469

16,483

2,892

Intangible assets

9

48,734

38,505

43,199

40,931

Deferred tax asset

 

512

509

674

664

Investments in subsidiaries

 

-

12,803

-

18,572

Investment in associate

10

4,211

4,211

3,725

3,725

Derivative financial asset

12

750

750

650

650

 

 

 

 

 

 

Total non-current assets

 

70,872

60,247

64,731

67,434

 

 

 

 

 

 

Trade and other receivables

 

16,384

28,111

16,946

28,906

Investments

 

80

80

81

81

Cash and short-term deposits

13

23,248

14,095

23,668

17,880

 

 

 

 

 

 

Total current assets

 

39,712

42,286

40,695

46,867

 

 

 

 

 

 

Total assets

 

110,584

102,533

105,426

114,301

 

 

 

 

 

 

Equity

 

 

 

 

 

Issued capital

14

268

268

261

261

Share premium

14

32,137

32,137

31,283

31,283

Merger reserve

14

10,639

10,639

8,781

8,781

Equity - share based payments

14

2,356

2,356

3,010

3,010

Capital redemption reserve

14

2,000

2,000

2,000

2,000

Own shares

14

(99)

-

-

-

Retained earnings

14

38,292

33,883

33,615

28,468

 

 

 

 

 

 

Total equity attributable to equity holders of the parent

 

85,593

81,283

78,950

73,803

 

 

 

 

 

 

Non-current liabilities

 

 

 

 

 

Deferred tax liability

 

4,345

3,150

3,455

3,218

Financial liabilities and provisions

15

1,976

1,951

596

17,506

 

 

 

 

 

 

Total non-current liabilities

 

6,321

5,101

4,051

20,724

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

Trade and other payables

 

14,527

12,806

17,988

15,972

Income tax payable

 

536

-

695

101

Financial liabilities and provisions

15

3,607

3,343

3,742

3,701

 

 

 

 

 

 

Total current liabilities

 

18,670

16,149

22,425

19,774

 

 

 

 

 

 

Total liabilities

 

24,991

21,250

26,476

40,498

 

 

 

 

 

 

Total equities and liabilities

 

110,584

102,533

105,426

114,301

 

The profit of the Company for the financial year, after taxation, was £8.9m (2018: £7.8m).  

The financial statements were approved by the Board of directors and authorised for issue on September 2019 and are signed on its behalf by: 

 

Ian Mattioli MBE                                                        Nathan Imlach

Chief Executive Officer                                                           Chief Financial Officer

 

Consolidated and Company Statements of Changes in Equity

For the year ended 31 May 2019

Group

Issued capital
(Note 14)

£000

Share premium (Note 14)

£000

Merger reserve
(Note 14)

£000

Equity - share based payments
(Note 14)

£000

Capital redemption reserve

(Note 14)

£000

Own shares

(Note 14)

£000

Retained earnings

(Note 14)

£000

Total equity

£000

 

 

 

 

 

 

 

 

 

As at 1 June 2017

258

30,314

8,781

2,571

2,000

-

28,671

72,595

Profit for the year

-

-

-

-

-

-

8,190

8,190

Total comprehensive income

-

-

-

-

-

-

8,190

8,190

Transactions with owners of the Group, recognised directly in equity

 

 

 

 

 

 

 

 

Share of other comprehensive income from associates

-

-

-

-

-

-

9

9

Issue of share capital

3

969

-

-

-

-

-

972

Share-based payment transactions

-

-

-

1,020

-

-

-

1,020

Deferred tax recognised in equity

-

-

-

(62)

-

-

-

(62)

Current tax taken to equity

-

-

-

92

-

-

-

92

Reserves transfer

-

-

-

(611)

-

-

611

-

Dividends

-

-

-

-

-

-

(3,866)

(3,866)

 

 

 

 

 

 

 

 

 

As at 31 May 2018

261

31,283

8,781

3,010

2,000

-

33,615

78,950

 

 

 

 

 

 

 

 

 

Adjustment on initial application of IFRS 9 (net of tax)

-

-

-

-

-

-

(250)

(250)

Adjusted balance at 1 June 2018

261

31,283

8,781

3,010

2,000

-

33,365

78,700

Profit for the year

-

-

-

-

-

-

8,197

8,197

Total comprehensive income

-

-

-

-

-

-

8,197

8,197

Transactions with owners of the Group, recognised directly in equity

 

 

 

 

 

 

 

 

Share of other comprehensive income from associates

-

-

-

-

-

-

6

6

Issue of share capital

7

854

1,858

-

-

-

-

2,719

Share-based payment transactions

-

-

-

799

-

-

-

799

Deferred tax recognised in equity

-

-

-

(160)

-

-

-

(160)

Current tax taken to equity

-

-

-

134

-

-

-

134

Reserves transfer

-

-

-

(1,427)

-

-

1,427

-

Own shares

-

-

-

-

-

(99)

-

(99)

Dividends

-

-

-

-

-

-

(4,703)

(4,703)

 

 

 

 

 

 

 

 

 

As at 31 May 2019

268

32,137

10,639

2,356

2,000

(99)

38,292

85,593

 

 

Consolidated and Company Statements of Changes in Equity

For the year ended 31 May 2019 (continued)

Company

Issued capital
(Note 14)

£000

Share premium (Note 14)

£000

Merger reserve

(Note 14)

£000

Equity - share based payments (Note 14)

£000

Capital redemption reserve

(Note 14)

£000

Retained earnings

(Note 14)

£000

Total equity

£000

 

 

 

 

 

 

 

 

As at 1 June 2017

258

30,314

8,781

2,571

2,000

23,892

67,816

Profit for the year

-

-

-

-

-

7,822

7,822

Total comprehensive income

-

-

-

-

-

7,822

7,822

Transactions with owners of the Company, recognised directly in equity

 

 

 

 

 

 

 

Share of other comprehensive income from associates

-

-

-

-

-

9

9

Issue of share capital

3

969

-

-

-

-

972

Share-based payment transactions

-

-

-

1,020

-

-

1,020

Deferred tax recognised in equity

-

-

-

(62)

-

-

(62)

Current tax taken to equity

-

-

-

92

-

-

92

Reserves transfer

-

-

-

(611)

-

611

-

Dividends

-

-

-

-

-

(3,866)

(3,866)

 

 

 

 

 

 

 

 

As at 31 May 2018

261

31,283

8,781

3,010

2,000

28,468

73,803

 

 

 

 

 

 

 

 

Adjustment on initial application of IFRS 9 (net of tax)

-

-

-

-

-

(230)

(230)

Adjusted balance at 1 June 2018

261

31,283

8,781

3,010

2,000

28,238

73,573

Profit for the year

-

-

-

-

-

8,915

8,915

Total comprehensive income

-

-

-

-

-

8,915

8,915

Transactions with owners of the Company, recognised directly in equity

 

 

 

 

 

 

 

Share of other comprehensive income from associates

-

-

-

-

-

6

6

Issue of share capital

7

854

1,858

-

-

-

2,719

Share-based payment transactions

-

-

-

799

-

-

799

Deferred tax recognised in equity

-

-

-

(160)

-

-

(160)

Current tax taken to equity

-

-

-

134

-

-

134

Reserves transfer

-

-

-

(1,427)

-

1,427

-

Dividends

-

-

-

-

-

(4,703)

(4,703)

 

 

 

 

 

 

 

 

As at 31 May 2019

268

32,137

10,639

2,356

2,000

33,883

81,283

 

As permitted by s408 of the Companies Act 2006, no separate profit or loss account or statement of comprehensive income is presented in respect of the parent Company.  The profit attributable to the Company is disclosed in the footnote to the Company's statement of financial position. 

Consolidated and Company Statements of Cash Flows

For the year ended 31 May 2019

 

 

Group

2019

Company

2019

Group

2018

Company

2018

 

Note

£000

£000

£000

£000

Operating activities

 

 

 

 

 

Profit for the year

Adjustments for:

 

8,197

8,915

8,190

7,822

Depreciation

8

1,288

840

822

815

Amortisation

9

2,962

2,723

2,225

2,004

Impairment

 

-

14,935

-

 

Investment income

 

(60)

(512)

(73)

(458)

Interest expense

 

86

691

154

551

Share of profit from associate

10

(480)

(480)

(240)

(240)

Gain on revaluation of derivative financial asset

10,18

(100)

(100)

(540)

(540)

Loss on disposal of property, plant and equipment

 

125

114

67

68

Equity-settled share-based payments

11

1,060

1,060

1,378

1,378

Cash-settled share-based payments

 

-

-

119

119

Dividend income

 

-

(18,835)

-

(2,500)

Income tax expense

 

2,048

1,116

1,586

886

Cash flows from operating activities before changes in working capital and provisions

 

15,126

10,467

13,688

9,905

Decrease/(increase) in trade and other receivables

 

656

1,101

(957)

(5,043)

(Decrease)/increase in trade and other payables

 

(4,231)

(3,580)

5,100

5,187

(Decrease)/increase in provisions

 

(537)

(687)

344

325

Cash generated from operations

 

11,014

7,301

18,175

10,374

Interest paid

 

(1)

-

(1)

(1)

Income taxes paid

 

(2,221)

(1,640)

(1,840)

(1,419)

Net cash flows from operating activities

 

8,792

5,661

16,334

8,954

Investing activities

 

 

 

 

 

Proceeds from sale of property, plant and equipment

 

117

117

72

68

Purchase of property, plant and equipment

8

(1,680)

(1,648)

(7,773)

(1,627)

Purchase of software

9

(297)

(297)

(980)

(980)

Contingent consideration paid on acquisition of subsidiaries

15

(763)

(763)

(3,506)

(3,506)

Acquisition of subsidiaries

3

(4,537)

(4,537)

-

-

Cash transferred on hive up of group companies

 

-

-

-

3,765

Cash received on acquisition of subsidiaries

3

1,845

-

-

-

Other investments

 

-

-

9

9

Loans advanced to property syndicates

 

(211)

(211)

(2,332)

(2,332)

Loan repayments from property syndicates

 

467

467

2,032

2,032

Interest received

 

54

34

73

65

Dividends received

 

-

1,500

-

2,500

Net cash flows from investing activities

 

(5,005)

(5,338)

(12,405)

(6)

Financing activities

 

 

 

 

 

Proceeds from the issue of share capital

 

595

595

626

626

Cost of own shares acquired

 

(99)

-

-

-

Dividends paid

7

(4,703)

(4,703)

(3,866)

(3,866)

Net cash flows from financing activities

 

(4,207)

(4,108)

(3,240)

(3,240)

 

 

 

 

 

 

Net (decrease)/increase in cash and cash equivalents

 

(420)

(3,785)

689

5,708

Cash and cash equivalents at start year

13

23,668

17,880

22,979

12,172

Cash and cash equivalents at end of year

13

23,248

14,095

23,668

17,880

 

Notes to the financial statements

 

1       Corporate information

 

Mattioli Woods plc ("the Company") is a public limited company incorporated and domiciled in England and Wales, whose shares are publicly traded on the AIM market of the London Stock Exchange plc.  The nature of the Group's operations and its principal activities are set out in the Chief Executive's Review. 

 

2       Basis of preparation and accounting policies

 

2.1    Basis of preparation

 

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union ("EU") and in accordance with the requirements of the Companies Act applicable to companies reporting under IFRS. 

 

The financial statements comprise the financial statements of Mattioli Woods plc and its subsidiaries ("the Group") as at 31 May each year.  The financial statements have been prepared on the historical cost basis, except for certain financial instruments that are measured at fair value and are presented in pounds, with all values rounded to the nearest thousand pounds (£000) except when otherwise indicated. 

 

The principal accounting policies adopted are set out in this note and, unless otherwise stated, have been applied consistently to all periods presented in the financial statements.  The financial statements were authorised for issue in accordance with a resolution of the directors on 2 September 2019. 

 

2.2    Developments in reporting standards and interpretations

 

Standards affecting the financial statements

 

This is the first set of the Group's financial statements where IFRS 9 and IFRS 15 have been applied.  These new standards were adopted from 1 June 2018.  Under the transition methods chosen, comparative information is not restated.  Changes to significant accounting policies are described in Note 2. 

 

IFRS 9 Financial Instruments

 

IFRS 9 'Financial instruments' replaces IAS 39 and introduces changes to the classification of financial assets and a new impairment model for financial assets, which will result in earlier recognition of impairment losses. 

 

Transition

 

The Group has taken advantage of the exemption from restating comparative information for prior periods with respect to classification and measurement (including impairment) requirements.  Differences in the carrying amounts of financial assets and financial liabilities resulting from the adoption of IFRS 9 are recognised in retained earnings and reserves as at 1 June 2018.  Accordingly, the information presented for the year ended 31 May 2018 does not generally reflect the requirements of IFRS 9 but rather those of IAS 39.

 

The impact, net of tax, of transition to IFRS 9 on the opening balance of consolidated retained earnings was a reduction in value of £250,000 (Company: £230,000).  Our provisional evaluation of the application of IFRS 9 indicated an expected reduction in value of £400,000 but on further review of our methodology for measuring historic credit losses we adopted a methodology using specific rates for each Group company, to better reflect the historic loss rates experienced by each company. 

 

Classification and measurement of financial assets and financial liabilities

 

The basis of classification for financial assets under IFRS 9 is different from that under IAS 39.  Financial assets are classified into one of three categories: amortised cost, fair value through profit or loss ("FVTPL") or fair value through other comprehensive income ("FVOCI").  The held to maturity, loans and receivables and available for sale categories available under IAS 39 have been removed.

 

The classification criteria for allocating financial assets between categories under IFRS 9 require the Group to document the business models under which its assets are managed, distinguishing whether:

 

·     its objective is to hold assets to collect contractual cash flows;

·     its objective is both to collect contractual cash flows and to sell the asset; or

·     it represents another type of business model (e.g. trading).

 

The Group is also required to review contractual terms and conditions to determine whether the cash flows arising on these assets are solely payments of principal and interest on the principal amount outstanding.

 

All of the Group's financial assets as at 1 June 2018 were managed within business models whose objective is solely to collect contractual cash flows, except derivative financial instruments which are classified as FVTPL. 

 

The effect of adopting IFRS 9 on the carrying amounts of financial assets at 1 June 2018 relates solely to new impairment requirements, described further below.  The following tables explain the original measurement categories under IAS 39 and the new measurement categories under IFRS 9 for each class of the Group and Company's financial assets as at 1 June 2018:

 

Group financial assets

Original

classification

under IAS39

Carrying value under IAS39

£000

New

classification

under IFRS 9

Carrying value under IFRS9

£000

 

 

 

 

 

Cash and short-term deposits

Loans and receivables

23,668

Amortised cost

 

23,668

Derivative financial asset

FVTPL

650

FVTPL

650

Investments

Held to maturity investments

81

Amortised cost

81

Other financial assets

Loans and receivables

16,016

Amortised cost

15,708

 

 

 

 

 

Total

 

40,415

 

40,107

 

Company financial assets

Original

classification

under IAS39

Carrying value under IAS39

£000

New

classification

under IFRS 9

Carrying value under IFRS9

£000

 

 

 

 

 

Cash and short-term deposits

Loans and receivables

17,880

Amortised cost

 

17,880

Derivative financial asset

FVTPL

650

FVTPL

650

Investments

Held to maturity investments

81

Amortised cost

81

Other financial assets

Loans and receivables

12,377

Amortised cost

12,092

 

 

 

 

 

Total

 

30,988

 

30,703

 

The basis of classification for financial liabilities under IFRS 9 remains unchanged from under IAS 39.  Financial liabilities are classified as measured at amortised cost or at FVTPL.  Trade and other payables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method. 

 

The only financial liability recorded by the Group as FVTPL is contingent consideration payable on acquisitions, which remains as FVTPL on the application of IFRS 9 and so no change in carrying value has been recorded on adopting IFRS 9.  The Group holds no liabilities as held for trading. 

 

Impairment of financial assets

 

Under IFRS 9, an expected credit loss ("ECL") model replaces the incurred loss model, meaning there no longer needs to be a triggering event to recognise impairment losses.  A credit loss provision must be made for the amount of any loss expected to arise, whereas under IAS 39, credit losses are recognised when they are incurred.

 

Under the ECL model, a dual measurement approach applies whereby a financial asset will attract an ECL allowance equal to either:

 

·     12 month ECLs (losses resulting from possible defaults within the next 12 months); or

·     Lifetime ECLs (losses resulting from possible defaults over the remaining life of the financial asset).

 

The latter applies if there has been a significant deterioration in the credit quality of the asset, albeit lifetime ECLs will always be recognised for assets without a significant financing component.  The maximum period considered when estimating ECLs is the maximum contractual period over which the Group is exposed to credit risk.

 

Measurement of ECLs

 

The Group's trade and other receivables are generally short-term and do not contain significant financing components.  Therefore, the Group has applied a practical expedient by using a provision matrix to calculate lifetime ECLs based on actual credit loss experience over the past 12 months and will consider forward looking factors where relevant.  Adoption of this practical expedient is only available for trade receivables and amounts receivable under contracts.  Applying this methodology as at 1 June 2018 resulted in an impairment loss provision of £1,422,000 under IFRS 9 relating to trade and other receivables (31 May 2018: £1,114,000 under IAS 39).  This methodology was also applied at the interim reporting date. 

 

The following tables set out the original measurement categories under IAS 39 and the new measurement categories under IFRS 9 for each class of the Group and Company's financial assets as at 1 June 2018:

 

Group financial assets - Trade and other receivables

Carrying value under IAS39

£000

Carrying value under IFRS9

£000

Additional ECL provision

£000

 

 

 

 

Other trade receivables

5,133

4,912

221

Accrued income

3,927

3,865

62

Accrued time costs and disbursements

5,556

5,542

14

Other receivables

1,400

1,389

11

 

 

 

 

Total

16,016

15,708

308

 

 

 

Company financial assets - Trade and other receivables

Carrying value under IAS39

£000

Carrying value under IFRS9

£000

Additional ECL provision

£000

 

 

 

 

Other trade receivables

5,043

4,826

217

Accrued income

1,245

1,191

54

Accrued time costs and disbursements

5,556

5,542

14

Other receivables

533

533

-

 

 

 

 

Total

12,377

12,092

285

 

Presentation of impairment

 

Loss allowances for financial assets measured at amortised cost are deducted from the gross carrying amount of the assets.  Impairment losses are presented separately on the statement of comprehensive income. 

 

IFRS 15 Revenue from Contracts with Customers

 

IFRS 15 brings a new and detailed approach to how and when revenue is recognised from contracts with customers and the treatment of the costs of obtaining a contract with a customer.  The standard requires that the recognition of revenue is linked to the fulfilment of identified performance obligations that are enshrined in the customer contract.  It also requires that the incremental cost of obtaining a customer contract should be capitalised if that cost is expected to be recovered.  The standard replaces existing revenue recognition guidance, particularly that under IAS 18.

 

Transition

 

The Group has adopted IFRS 15 using the cumulative effect method, with the effect of applying the standard recognised at the date of adoption, with no restatement of the comparative period.  The impact, net of tax, of transition to IFRS 15 on the opening balance of retained earnings was £nil.  There are no material differences between the results for the year ended 31 May 2019 under IAS 18, had it applied, and IFRS 15. 

 

Impact on financial statements for the year ended 31 May 2019

 

The Group has considered the impact of adopting IFRS 15 on its existing revenue streams, as well as on its policy of capitalising the cost of obtaining customer contracts.  Subsequent to the assessment of the Group's revenue recognition policies, the majority are the same under IFRS 15 and IAS 18.  The matters below were considered in more detail as potential differences, but did not impact the financial statements for the year ended 31 May 2018. 

 

Property management fees and adviser charges

 

Included within property management fees are initial fees charged on the establishment of private investment syndicates.  Under IFRS 15, the Group has identified the only performance obligation is the establishment of the private investment syndicate and hence these fees can be recognised when the performance obligation has been satisfied. 

 

Included within adviser charges are initial adviser charges, which are recognised on a 'point in time' basis as being earned at the point when an investment of funds has been made by the client and submitted to the product provider, which can include private investment syndicates. 

 

Costs to obtain a contract

 

The Group pays certain employees bonuses partly based on the revenues generated from their client portfolios and incurs various direct marketing costs.  IFRS 15 requires incremental costs to obtain any contract with a customer to be capitalised if those costs relate directly to a contract or anticipated contract, generate or enhance the resources of the entity, and the entity expects to recover them.

 

The Group has elected to apply the optional practical expedient for costs to obtain a contract which allows the Group to immediately expense bonus and marketing costs (£1,756,000 included under employee benefits expense and £1,092,000m included in other administrative expenses respectively) because the amortisation period of the asset that the Group otherwise would have used is one year or less.  

 

Standards not affecting the financial statements

 

In addition to IFRS 9 and IFRS 15 the following new and revised standards and interpretations have been adopted in the current year:

 

Standard or interpretation

Periods commencing on or after

 

 

Annual Improvements to IFRSs 2014-2016 Cycle

1 January 2018

IAS 40 amended

Transfers of Investment Property

1 January 2018

IFRIC 22

Foreign Currency Transactions and Advance Consideration

1 January 2018

IFRS 2 (amended)

Classification and Measurement of Share-based Payments

1 January 2018

 

Their adoption has not had any significant impact on the amounts reported in these financial statements but may impact the accounting for future transactions and arrangements, or give rise to additional disclosures. 

 

 

 

Future new standards and interpretations

 

A number of new standards and amendments to standards and interpretations will be effective for future annual periods and, therefore, have not been applied in preparing these consolidated financial statements.  At the date of authorisation of these financial statements, the following standards and interpretations which have not been applied in these financial statements were in issue but not yet effective:

 

Standard or interpretation

Periods commencing on or after

 

 

Annual Improvements to IFRSs 2015-2017 Cycle

1 January 2019

IFRS 9 (amended)                     Financial Instruments

1 January 2019

IFRS 16                                      Leases

1 January 2019

IFRIC 23                                    Accounting for uncertain tax treatments

1 January 2019

IAS 28 (amended)                      Long-term Interests in Associates and Joint Ventures

1 January 2019

IAS 19 (amended)                      Plan Amendment, Curtailment or Settlement

1 January 2019

Amendments to References to the Conceptual Framework in IFRS Standards

1 January 2020

IFRS 3 (amended)                     Business Combinations

1 January 2020

IAS 1 and IAS 8 (amendments) Definition of Material

1 January 2020

IFRS 17                                      Insurance Contracts

1 January 2021

 

IFRS 16 'Leases' is expected to have a significant effect on the financial statements of the Group, as explained below.  Other than to expand certain disclosures within the financial statements, the Directors do not expect the adoption of the other standards and interpretations listed above will have a material impact on the financial statements of the Group in future periods. 

 

IFRS 16 Leases

 

IFRS 16 'Leases' was issued in January 2016 and is effective for accounting periods beginning on or after 1 January 2019.  IFRS 16 primarily changes lease accounting for lessees.  Lease agreements will give rise to the recognition of an asset representing the right to use the leased item and a loan obligation for future lease payables.  Lease costs will be recognised in the form of depreciation of the right-of-use asset and interest on the lease liability.  Lessee accounting under IFRS 16 will be similar in many respects to existing IAS 17 accounting for finance leases, but will be substantially different to existing accounting for operating leases where rental charges are currently recognised on a straight-line basis and no lease asset or lease loan obligation is recognised. 

 

Lessor accounting under IFRS 16 is similar to existing IAS 17 accounting and is not expected to have a material impact for the Group. 

 

The Group has estimated the impact of the following accounting changes that will arise under IFRS 16:

 

·     Right-of-use assets with an estimated value of £3,500,000 as at 31 May 2019 will be recorded for assets that are leased by the Group.  Currently, no leased assets are included on the Group's consolidated statement of financial position for operating leases.  These assets primarily comprise office properties with lease periods between one and ten years and multifunction printers.

·     Estimated liabilities of £3,500,000 as at 31 May 2019 will be recorded in the Group's consolidated statement of financial position, representing the present value of future cash flows the Group will pay over the "reasonably certain" period of the lease, which may include future lease periods for which the Group has extension options.  A critical accounting judgement is determining appropriate discount rate assumptions.  IFRS 16 sets out that the lease payments shall be discounted using the interest rate implicit in the lease, if that rate can be readily determined, or the lessee's incremental borrowing rate.  The Group does not have the necessary historical data to determine the interest rates implicit in the leases and hence the estimated liabilities at transition have been calculated using the Group's estimated incremental borrowing rates, which are the rates of interest the Group would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use assets in a similar economic environment.  Currently, liabilities are generally not recorded for future operating lease payments, which are disclosed as commitments unless they are considered onerous.  At 31 May 2019, the Group has recognised provisions of £348,000 for dilapidations (see Note 26).

·     In the year ending 31 May 2020 we expect to recognise estimated depreciation on right-of-use assets of £839,000 and estimated interest costs on the unwinding of discounted lease liabilities of £135,000.  These total costs of £974,000 are £54,000 higher than the expected rental costs of £920,000 that would be recognised under IAS 17, where operating lease rentals are expensed on a straight-line basis over the lease term within other administrative expenses, because interest will typically be higher in the early stages of a lease and reduce over the term.

·     Operating lease cash flows are currently included within operating cash flows in the consolidated statement of cash flows.  Under IFRS 16 these will be recorded as cash flows from financing activities reflecting the repayment of lease liabilities (borrowings) and related interest. 

 

The Group expects the accounting changes that will arise under IFRS 16 to have a material impact on the consolidated income statement, consolidated statement of financial position and consolidated statement of cash flows from 1 June 2019:

 

·     EBITDA is expected to rise because the lease expense under IAS 17 for operating leases will be removed and replaced with additional depreciation and finance costs.  The profit profile of the business will also change as more expense is recognised in earlier periods and less in later periods compared to the straight-line amount recognised under IAS 17. 

·     For leases classified as operating leases under IAS 17, there will be a significant impact on the Statement of Financial Position as these assets and corresponding liabilities have to be recognised.  This will impact on gearing levels and potentially on any covenants provided to prospective lenders and others. 

 

IFRS 16 was adopted by the Group on 1 June 2019 and therefore will impact the Group's financial statements for the year ending 31 May 2020.  The group plans to use the modified retrospective approach.  Therefore, the cumulative effect of adopting IFRS 16 will be recognised as an adjustment to the opening balance sheet at 1 June 2019, with no restatement of comparative information. 

 

The Group plans to apply the practical expedient to grandfather the definition of a lease on transition.  This means that it will apply IFRS 16 to all contracts entered into before 1 June 2019 and identified as leases in accordance with IAS 17. 

 

2.3       Principal accounting policies

 

Basis of consolidation

 

Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date that such control ceases.  The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies.  All intra-group balances, income and expenses and unrealised gains and losses resulting from intra-group transactions are eliminated in full. 

 

Business combinations

 

Business combinations are accounted for using the purchase accounting method.  This involves assessing whether any assets acquired meet the criteria for recognition as separately identifiable intangible assets.  Intangible assets are measured on initial recognition at their fair value at the date of acquisition.  Client portfolios are valued by discounting their expected future cash flows over their expected useful lives, based on the Group's historical experience.  Expected future cash flows are estimated based on the historical revenues and costs associated with the operation of that client portfolio.  The discount rates used estimate the cost of capital, adjusted for risk. 

 

Associates

 

The Company's share of profits from associates is reported separately in the Statement of Comprehensive income and the investment is recognised in the Statement of Financial Position using the equity method.  The investment is initially recorded at cost and subsequently adjusted to reflect the Company's share of the cumulative profits of the associate since acquisition.  Appropriate adjustments to the Company's share of the profits or losses after acquisition are made to account for additional amortisation of the associate's amortisable assets based on the excess of their fair values over their carrying amounts at the time the investment was acquired. 

 

Group re-organisations

 

On 31 December 2017 the trade and assets of the Boyd Coughlan Limited were transferred to the Company.  The trade and assets were exchanged for loan notes equal to the book value of the assets and assumed liabilities of Boyd Coughlan Limited as at 31 December 2017, attracting annual interest on the outstanding principal at a rate of 3% above the Bank of England base rate.

 

On 31 August 2016 the trade and assets of the Taylor Patterson Group Limited and its subsidiaries Taylor Patterson Financial Planning Limited and Taylor Patterson Associates Limited (together "the Business") were transferred to the Company.  The trade and assets were exchanged for loan notes equal to the book value of the assets and assumed liabilities of the Business as at 31 August 2016, attracting annual interest on the outstanding principal at a rate of 3% above the Bank of England base rate.

 

On 31 May 2019 the loan notes were waived by way of in-specie dividend and the capital and reserves of Boyd Coughlan Limited, Taylor Patterson Group Limited and its subsidiaries were each reduced to £2.  The net impact on the consolidated financial position of the Group was £nil.  The net impact on the financial position of the Company was a gain of £2,400,000, comprising a gain on the waiver of the loan notes of £17,335,000, offset by impairment of the Company's investment in these subsidiaries of £14,935,000. 

 

Own shares

 

Own shares consist of shares held within an employee benefit trust.  The Company has an employee benefit trust for the granting of shares to applicable employees.  

 

Own shares are recognised at cost as a deduction from equity shareholders' funds.  Subsequent consideration received for the sale of such shares is also recognised in equity, with any difference between the sale proceeds and the original cost being taken to retained earnings. 

 

Revenue recognition

 

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured.  Revenue is measured at the fair value of the consideration receivable for each contractual obligation, excluding discounts, rebates, and other sales taxes or duty.  Terms of business with customers typically include payment periods of up to 60 days, although specific payment terms can be agreed between the parties.  The following information details the nature and timing of the satisfaction of performance obligations in contracts with customers. 
 

Investment and asset management

 

Commission income and adviser charges are recognised as follows:

 

·     At a point in time: Initial commission (less provision for clawbacks, as explained in Note 15) and initial adviser charges are recognised on a 'point in time' basis as being earned at the point when an investment of funds has been made by the client and submitted to the product provider. 

·     Over time: Ongoing adviser charges, based on the value of assets invested, are recognised on an 'over time' basis during the period the assets are held in the portfolio or investment fund and have been compared to observable rates from other providers on a stand-alone basis, with initial charges recognised by the residual approach to ensure that the allocation of the selling price remains appropriate. 

 

Discretionary portfolio management ("DPM") charges are recognised as follows:

 

·     At a point in time: Initial charges on the placing of investments are recognised on a 'point in time' basis as being earned at the point when an investment of funds has been made by the client and submitted to the product provider. 

 

·     Over time: Ongoing DPM charges based on the value of assets invested are recognised on an 'over time' basis during the period the assets are held in the portfolio or investment fund. 

 

Our ongoing adviser and DPM charges have been compared to observable rates from other providers on a stand-alone basis, with initial charges being recognised by the residual approach, to ensure that the allocation of the selling price remains appropriate. 

 

Pension consultancy and administration

 

Pension consultancy and administration fees are recognised as follows:

 

·     At a point in time: Mattioli Woods generally invoices pension clients on a six monthly basis in arrears for costs incurred in advising on and administering their affairs.  Where revenue is contingent on completion of a service, revenue is recognised on a 'point in time' basis at the point that those contractual performance conditions are satisfied.  No revenue is recognised if there are significant uncertainties regarding recovery of the time incurred. 

 

·     Over time: To the extent that the Group has a contractual right to invoice for services rendered, revenue is recognised on an 'over time' basis as time is incurred on the provision of services, with an estimate being made of what proportion of uninvoiced time costs will be recoverable.  Recoverability is measured as a percentage of the total time costs incurred on clients' affairs compared to the proportion of historical time costs actually invoiced. 

 

Pension consultancy and administration fees have been compared to observable rates from other providers on a stand-alone basis, with establishment charges being recognised by the residual approach, to ensure that the allocation of the selling price remains appropriate. 

 

Property management

 

Property management fees are recognised as follows:

 

·     At a point in time: Initial charges on the establishment of a private investment syndicate are recognised on a 'point in time' basis when the syndicate completes its investment. 

 

·     Over time: Fund management and private investment syndicate charges, including charges based on the value of assets held, are recognised on an 'over time' basis during the period the assets are held in the fund or syndicate. 

 

Employee benefits

 

Employee benefits fees are recognised as follows:

 

·     At a point in time: Fee income from services provided on the set up of an employee benefits scheme or provision of non-recurring employee benefits services are recognised on a 'point in time' basis on completion of rendering those services, being the point that those contractual performance conditions are satisfied. 

·     Over time: Ongoing management charges on employee benefits schemes are recognised on an 'over time' basis over the period to which they relate. 

 

Interest income

 

Revenue is recognised as interest accrues (using the effective interest method that is the rate that exactly discounts estimated future cash receipts through the expected life of the financial instrument to the net carrying amount of the financial asset).  

 

2.4       Critical accounting judgements and sources of significant estimation uncertainty

 

The preparation of the financial statements requires management to make estimates and assumptions that affect the reported amount of revenues, expenses, assets and liabilities and the disclosure of contingent liabilities.  If in the future such estimates and assumptions, which are based on management's best judgement at the date of preparation of the financial statements, deviate from actual circumstances, the original estimates and assumptions will be modified as appropriate in the period in which the circumstances change.  The areas where a higher degree of judgement or complexity arises, or where assumptions and estimates are significant to the consolidated financial statements, are discussed below. 

 

Critical accounting judgements

 

Interests in associates

 

Associates are entities in which the Group owns less than 100% of voting rights and has significant influence, but not control or joint control over the financial and operating policies.  In determining whether control exists, this requires significant judgements in assessing factors such as the structure of the investment and the contractual agreement.  The only associate at 31 May 2019 is Amati, in which the Group owns 49% of the voting rights, with the controlling 51% owned by Amati Global Partners LLP.  The existence of significant influence is evidenced by the Group having representation on the board and the ability to participate in decisions but not being able to control the vote.  The carrying amount of the investment in associate at 31 May 2019 was £4.2m (2018: £3.7m). 

 

Sources of significant estimation uncertainty

 

Impairment of acquired client portfolios and goodwill

 

For the purposes of impairment testing, acquired client portfolios and goodwill are allocated to the group of cash-generating units ("CGUs") that are expected to benefit from the business combination. 

 

The Group reviews whether acquired client portfolios are impaired on an annual basis, or more frequently if events or changes in circumstances indicate that the carrying value may be impaired.  This comprises an estimation of the fair value less cost to sell and the value in use of the acquired client portfolios. 

 

The key assumptions used in arriving at a fair value less cost of sale are those around valuations based on earnings multiples and values based on assets under management.  These have been determined by looking at valuations of similar businesses and the consideration paid in comparable transactions.  Management has used a range of multiples resulting in an average of 7.5x EBITDA to arrive at a fair value. 

 

Value in use calculations are utilised to calculate recoverable amounts of a CGU.  Value in use is calculated as the net present value of the projected pre-tax cash flows of the CGU in which the client portfolio is contained.  The net present value of cash flows is calculated by applying a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to that asset, based on the Group's pre-tax Weighted Average Cost of Capital ("WACC").  The Group has applied a WACC of 10.2% to each of its operating segments. 

 

The key assumptions used in respect of value in use calculations are those regarding growth rates and anticipated changes to revenues and expenses during the period covered by the calculations.  Changes to revenue and costs are based upon management's expectation.  The Group prepares its annual budget and five-year cash flow forecasts derived therefrom, thereafter extrapolating these cash flows using a terminal growth rate of 2.5% (2018: 2.5%), which management considers conservative against industry average long-term growth rates. 

 

The carrying amount of client portfolios at 31 May 2019 was £26.8m (2018: £23.5m).  No impairment provisions have been made during the year (2018: £nil) based upon the Directors' review. 

 

The Group determines whether goodwill is impaired at least on an annual basis.  This requires an estimation of the value in use of the CGUs to which the goodwill has been allocated.  In assessing value in use, the estimated future cash flows expected to arise from the CGU are discounted to their present value using a pre-tax discount rate of 10.2%, reflecting current market assessments of the time value of money and the risks specific to that asset, based on the Group's WACC. 

 

The key assumptions used in respect of value in use calculations are those regarding growth rates and anticipated changes to revenues and costs during the period covered by the calculations, based upon management's expectation.  The carrying amount of goodwill at 31 May 2019 was £20.2m (2018: £17.3m).  No impairment provisions have been made during the year (2018: £nil) based upon the Directors' review. 

 

Recoverability of accrued time costs and disbursements

 

The Group recognises accrued income in respect of time costs and disbursements incurred on clients' affairs during the accounting period, which have not been invoiced at the reporting date.  This requires an estimation of the recoverability of the time costs and disbursements incurred but not invoiced to clients.  The carrying amount of accrued time costs and disbursements at 31 May 2019 was £4.6m (2018: £5.6m). 

 

The sensitivity of a 1.0% change in the estimated recoverability of time costs and disbursements incurred but not invoiced to clients, with all other variables held constant, is £0.1m of the Group's profit before tax.  There is no material impact on the Group's equity.

 

 

 

Acquisitions and business combinations

 

When an acquisition arises the Group is required under IFRS to calculate the Purchase Price Allocation ("PPA").  The PPA requires companies to report the fair value of assets and liabilities acquired and it establishes useful lives for identified assets.  The identification and the valuation of the assets and liabilities acquired involves estimation and judgement when determining whether the recognition criteria are met.  The classification of consideration payable as either purchase consideration or remuneration is an area of judgement and estimate. 

 

Subjectivity is also involved in the PPA with the estimation of the future value of brands, technology, customer relationships and goodwill.  The fair value of separately identifiable intangible assets acquired during the year was £5.2m (2018: £nil), with the key assumptions used to calculate these fair values being those around the estimated useful lives of the acquired customer relationships, the estimated future cash flows expected to arise from these relationships and the appropriate discount rate to be used to discount these cash flows to their present value. 

 

Contingent consideration payable on acquisitions

 

The Group has entered into certain acquisition agreements that provide for a contingent consideration to be paid.  A financial instrument is recognised for all amounts management anticipates will be paid under the relevant acquisition agreement.  This requires management to make an estimate of the expected future cash flows from the acquired business and determine a suitable discount rate for the calculation of the present value of any contingent consideration payments. 

 

Using cash flows approved by the Board covering the contingent consideration period the Board expects the maximum contingent consideration will be payable.  A material change to the carrying value would only occur if the acquired business achieved 80% or less of the target earnings.  The carrying amount of contingent consideration provided for at 31 May 2019 was £2.7m (2018: £0.9m). 

 

Provisions

 

As detailed in Note 15, the Group recognises provisions for client claims, contingent consideration payable on acquisitions, commission clawbacks, dilapidations, onerous contracts and other obligations which exist at the reporting date.  These provisions are estimates and the actual amount and timing of future cash flows are dependent on future events.  Management reviews these provisions at each reporting date to ensure they are measured at the current best estimate of the expenditure required to settle the obligation.  Any difference between the amounts previously recognised and the current estimate is recognised immediately in the statement of comprehensive income

 

3. Business combinations

 

The Group completed two acquisitions during the year.  Transaction costs of £0.1m (2018: £0.1m) incurred during the course of the acquisitions have been expensed and are included in administrative expenses in the consolidated statement of comprehensive income and operating cash flows in the consolidated statement of cash flows in the period in which they were incurred. 

 

Acquisition of Broughtons Financial Planning Limited

 

On 8 August 2018, Mattioli Woods acquired the entire issued share capital of Broughtons Financial Planning Limited ("Broughtons"), a financial planning and wealth management business based in Oldbury in the West Midlands.  The fair values of the identifiable assets and liabilities of Broughtons as at the date of acquisition are set out in the table below:

 

Fair value recognised on acquisition

£000

Fair value adjustments

£000

Previous carrying value

£000

 

 

 

 

Property, plant and equipment

10

-

10

Client portfolio

2,296

2,296

-

Cash at bank

757

-

757

Prepayments and accrued income

110

-

110

Other receivables

304

-

304

 

 

 

 

Assets

3,477

2,296

1,181

 

 

 

 

Trade and other payables

(27)

-

(27)

Accruals and deferred income

(31)

-

(31)

Other taxation and social security

(3)

-

(3)

Income tax

(147)

-

(147)

Provisions

(25)

-

(25)

Deferred tax liability

(390)

(390)

-

 

 

 

 

Liabilities

(623)

(390)

(233)

 

 

 

 

Total identifiable net assets at fair value

2,854

 

 

Goodwill

1,493

 

 

 

 

 

 

Total acquisition cost

4,347

 

 

 

 

 

 

Analysed as follows:

 

 

 

Initial cash consideration

2,100

 

 

Acquired net assets adjustment to initial consideration

448

 

 

New shares in Mattioli Woods

600

 

 

Contingent consideration

1,300

 

 

Discounting of contingent consideration

(101)

 

 

 

 

 

 

Total acquisition cost

4,347

 

 

 

 

 

 

Cash outflow on acquisition

 

 

 

 

 

 

 

Cash paid

2,100

 

 

Cash acquired

(757)

 

 

Acquired net assets adjustment paid

387

 

 

Acquisition costs

70

 

 

 

 

 

 

Net cash outflow

1,800

 

 

 

Broughtons specialises in the provision of bespoke wealth management services and impartial advice.  It is an excellent cultural and strategic fit with Mattioli Woods' existing business, providing services to clients with over £120m of assets under advice.  The acquisition brings additional scale to Mattioli Woods' existing operations and offers the opportunity to promote additional services to existing and prospective clients of Broughtons. 

 

In addition, the acquisition adds further specialist expertise to the Group and Broughtons experienced staff have remained with the business.  The goodwill recognised above is attributed to the expected benefits from combining the assets and activities of Broughtons with those of the Group.  The primary components of this residual goodwill comprise:

 

·     Revenue synergies expected to be available to Mattioli Woods as a result of the transaction;

·     The workforce;

·     The knowledge and know-how resident in Broughtons' modus operandi; and

·     New opportunities available to the combined business, as a result of both Broughtons and the existing business becoming part of a more sizeable listed company. 

 

None of the recognised goodwill is expected to be deductible for income tax purposes.  The client portfolio will be amortised on a straight-line basis over an estimated useful life of 15 years based on the Group's historical experience.

 

From the date of acquisition Broughtons has contributed £0.9m to revenue and £0.4m to the Group profit for the period.  If the combination had taken place at the beginning of the period, Group revenue from continuing operations would have been £58.7m and the profit for the period would have been £8.3m. 

 

Acquisition of SSAS Solutions (UK) Limited

 

On 27 March 2019, Mattioli Woods acquired the entire issued share capital of SSAS Solutions (UK) Limited ("SSAS Solutions"), a bespoke, specialist pension advisory business acting as SSAS practitioner based in Belfast, Northern Ireland. 

 

The fair values of the identifiable assets and liabilities of SSAS Solutions as at the date of acquisition are set out in the table below:

 

 

 

Fair value recognised on acquisition

£000

Fair value adjustments

£000

Previous carrying value

£000

 

 

 

 

Property, plant and equipment

20

-

20

Client portfolio

2,893

2,893

-

Cash at bank

1,088

-

1,088

Prepayments and accrued income

68

-

68

Other receivables

171

(2)

173

 

 

 

 

Assets

4,240

2,891

1,349

 

 

 

 

Trade and other payables

(24)

-

(24)

Accruals and deferred income

(148)

-

(148)

Other taxation and social security

(74)

-

(74)

Income tax

(106)

-

(106)

Provisions

(43)

(43)

-

Deferred tax liability

(495)

(492)

(3)

 

 

 

 

Liabilities

(890)

(535)

(355)

 

 

 

 

Total identifiable net assets at fair value

3,350

 

 

Goodwill

1,469

 

 

 

 

 

 

Total acquisition cost

4,819

 

 

 

 

 

 

Analysed as follows:

 

 

 

Initial cash consideration

1,250

 

 

Acquired net assets adjustment to initial consideration

915

 

 

New shares in Mattioli Woods

1,260

 

 

Contingent consideration

1,500

 

 

Discounting of contingent consideration

(106)

 

 

 

 

 

 

Total acquisition cost

4,819

 

 

 

 

 

 

Cash outflow on acquisition

 

 

 

 

 

 

 

Cash paid

1,250

 

 

Cash acquired

(1,088)

 

 

Estimated net assets adjustment paid on completion

800

 

 

Acquisition costs

157

 

 

 

 

 

 

Net cash outflow

1,119

 

 

 

SSAS Solutions was established in 2009 and provides a bespoke, specialist pension advisory service for the operation of small self-administered pension schemes.  Based in Belfast and employing 12 staff, the business provides personal service and expert technical advice to owner-managed businesses throughout the UK, acting as SSAS practitioner to 350 schemes with approximately £380m of assets under administration.

 

 

 

The acquisition adds further specialist expertise to the Group and SSAS Solutions' experienced staff have remained with the business.  The goodwill recognised above is attributed to the expected benefits from combining the assets and activities of SSAS Solutions with those of the Group.  The primary components of this residual goodwill comprise:

 

·     Revenue synergies expected to be available to Mattioli Woods as a result of the transaction;

·     The workforce;

·     The knowledge and know-how resident in SSAS Solutions' modus operandi; and

·     New opportunities available to the combined business, as a result of both SSAS Solutions and the Group's existing business becoming part of a more sizeable listed company. 

 

None of the recognised goodwill is expected to be deductible for income tax purposes.  The client portfolio will be amortised on a straight-line basis over an estimated useful life of 20 years based on the Group's historical experience.

 

From the date of acquisition SSAS Solutions has contributed £0.17m to revenue and £0.06m to the Group profit for the period.  If the combination had taken place at the beginning of the period, Group revenue from continuing operations would have been £59.3m and the profit for the period would have been £8.5m. 

 

Contingent consideration

 

The Group has entered into certain acquisition agreements that provide for contingent consideration to be paid.  These agreements and the basis of calculation of the net present value of the contingent consideration are summarised below.  While it is not possible to determine the exact amount of contingent consideration (as this will depend on the performance of the acquired businesses during the period), the Group estimates the fair value of the remaining contingent consideration payable is £2.7m (2018: £0.9m) (see Note 15). 

 

On 27 March 2019 the Group acquired SSAS Solutions for total consideration of up to £4.9m, comprising initial consideration of £1.25m in cash plus 162,654 new ordinary shares of 1p each in Mattioli Woods plus contingent consideration of up to £1.5m payable in cash in the two years following completion if certain financial target based on growth in earnings before interest, tax, depreciation and amortisation are met.  The Group estimates the fair value of the remaining contingent consideration at 31 May 2019 to be £1.4m (2018: £nil) using cash flows approved by the Board covering the contingent consideration period and expects the maximum contingent consideration will be payable.

 

 

 

On 8 August 2018 the Group acquired Broughtons for total consideration of up to £4.4m, comprising initial consideration of £2.5m in cash plus 77,171 new ordinary shares of 1p each in Mattioli Woods plus contingent consideration of up to £1.3m payable in cash in the two years following completion if certain financial target based on growth in earnings before interest, tax, depreciation and amortisation are met.  The Group estimates the fair value of the remaining contingent consideration at 31 May 2019 to be £1.3m (2018: £nil) using cash flows approved by the Board covering the contingent consideration period and expects the maximum contingent consideration will be payable.

 

Contingent consideration payable on the previous acquisitions of MC Trustees and Taylor Patterson was settled in full during the year (see Note 15).

 

4. Revenue

 

The Group derives its revenue from the rendering of services over time and at a point in time across all operating segments.  The timing of recognition of the revenues of each operating segment is analysed as follows:

 

Timing of revenue recognition

2019

£000

2018

£000

 

 

 

At a point in time:

 

 

Investment and asset management

2,873

4,633

Pension consultancy and administration

1,276

2,639

Property management

620

570

Employee benefits

973

1,087

 

 

 

 

5,742

8,929

 

 

 

Over time:

 

 

Investment and asset management

23,124

20,463

Pension consultancy and administration

19,129

19,183

Property management

5,823

5,348

Employee benefits

4,646

4,746

 

 

 

 

52,722

49,740

 

 

 

 

58,464

58,669

 

The following table shows the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied (or partially unsatisfied) as at the end of the reporting period:

 

 

 

Contract liabilities

Group

2019

£000

Company

2019

£000

 

 

 

Investment and asset management

-

-

Pension consultancy and administration

2,353

1,205

Property management

36

-

Employee benefits

491

491

 

 

 

 

2,880

1,696

 

The Group expects that 100% of the transaction price allocated to the unsatisfied contracts as at 31 May 2019 will be recognised as revenue during the next reporting period, amounting to £2,880,000. 

The following table shows the movement in contract liabilities in the period:

 

Contract liabilities

Group

£000

Company

£000

 

 

 

At 1 June 2018

2,253

1,644

 

 

 

Revenue recognised on completion of performance obligations

(2,253)

(1,644)

Consideration received allocated to performance obligations that are unsatisfied at the period end

2,880

1,696

 

 

 

At 31 May 2019

2,880

1,696

 

5. Segment information

 

The Group's objective is to fully integrate the businesses it acquires, to enable it to deliver holistic solutions across its wide and diverse client base.  During the year ended 31 May 2018, the Group transferred the trade and assets of Boyd Coughlan Limited into Mattioli Woods.  The Group's operating segments comprise the following:

 

·   Pension consultancy and administration - fees earned by Mattioli Woods for setting up and administering pension schemes.  Additional fees are generated from consultancy services provided for special one-off activities and the provision of bespoke scheme banking arrangements;

·     Investment and asset management - income generated from the management and placing of investments on behalf of clients;

·   Property management - income generated where Custodian Capital manages private investor syndicates, facilitates direct commercial property investments on behalf of clients or acts as the external discretionary manager for Custodian REIT plc; and

·     Employee benefits - income generated by the Group's employee benefits operations.  

 

Each segment represents a revenue stream subject to risks and returns that are different to other operating segments, although each operating segment's products and services are offered to broadly the same market.  The Group operates exclusively within the United Kingdom. 

 

Operating segments

 

The operating segments defined above all utilise the same intangible assets, property, plant and equipment and the segments have been financed as a whole, rather than individually.  The Group's operating segments are managed together as one business.  Accordingly, certain costs are not allocated across the individual operating segments, as they are managed on a group basis.  Segment profit or loss reflects the measure of segment performance reviewed by the Board of Directors (the Chief Operating Decision Maker). 

The following tables present revenue and profit information regarding the Group's operating segments for the two years ended 31 May 2019 and 2018 respectively. 

 

Year ended 31 May 2019

Investment

and

asset management

£000

Pension consultancy and administration

£000

 

Property management

£000

 

Employee benefits

£000

 

Total

segments

£000

 

Corporate costs

£000

 

 

Consolidated

£000

 

 

 

 

 

 

 

 

Revenue

External client

 

25,997

 

20,405

 

6,443

 

5,619

 

58,464

 

-

 

58,464

 

 

 

 

 

 

 

 

Total revenue

25,997

20,405

6,443

5,619

58,464

-

58,464

 

 

 

 

 

 

 

 

Results

Segment profit before tax

 

7,085

 

4,355

 

1,463

 

677

 

13,580

 

(3,335)

 

10,245

 

Year ended 31 May 2018

Investment

and

 asset management

£000

Pension consultancy and administration

£000

 

Property management

£000

 

Employee benefits

£000

 

Total

segments

£000

 

Corporate costs

£000

 

 

Consolidated

£000

 

 

 

 

 

 

 

 

Revenue

External client

 

25,096

 

21,822

 

5,918

 

5,833

 

58,669

 

-

 

58,669

 

 

 

 

 

 

 

 

Total revenue

25,096

21,822

5,918

5,833

58,669

-

58,669

 

 

 

 

 

 

 

 

Results

Segment profit before tax

 

8,306

 

3,714

 

1,016

 

113

 

13,149

 

(3,373)

 

9,776

Segment assets

 

The following table presents segment assets of the Group's operating segments:

 

 

 

 

31 May

2019

 

31 May

2018

 

 

£000

£000

 

 

 

 

Pension consultancy and administration

 

26,825

23,790

Investment and asset management

 

28,092

23,023

Property management

 

1,559

1,159

Employee benefits

 

9,626

11,177

 

 

 

 

Segment operating assets

 

66,102

59,149

 

 

 

 

Corporate assets

 

44,482

46,277

 

 

 

 

Total assets

 

110,584

105,426

 

Segment operating assets exclude property, plant and equipment, certain items of computer software, investments, current and deferred tax balances and cash balances, as these assets are considered corporate in nature and are not allocated to a specific operating segment. 

 

 

 

31 May

2019

 

31 May

2018

Reconciliation of assets

 

£000

£000

 

 

 

 

Segment operating assets

 

66,102

59,149

 

 

 

 

Property, plant and equipment

 

16,665

16,483

Intangible assets

 

1,766

2,475

Deferred tax asset

 

512

674

Derivative financial asset

 

750

650

Prepayments and other receivables

 

1,461

2,246

Investments

 

80

81

Cash and short-term deposits

 

23,248

23,668

 

 

 

 

Total assets

 

110,584

105,426

 

Acquired intangibles and amortisation thereon relate to a specific transaction and are allocated between individual operating segments based on the headcount or revenue mix of the cash generating units at the time of acquisition.  The subsequent delivery of services to acquired clients may be across a number or all operating segments, comprising different operating segments to those the acquired intangibles have been allocated to. 

 

Liabilities have not been allocated between individual operating segments, as they cannot be allocated on anything other than an arbitrary basis. 

 

Corporate costs

 

Certain administrative expenses including acquisition costs, amortisation of software, depreciation of property, plant and equipment, irrecoverable VAT, legal and professional fees and professional indemnity insurance are not allocated between segments that are managed on a unified basis and utilise the same intangible and tangible assets. 

 

Finance income and expenses, gains and losses on the disposal of assets, taxes, intangible assets and certain other assets and liabilities are not allocated to individual segments as they are managed on a group basis.  Capital expenditure consists of additions of property, plant and equipment and intangible assets.  

 

 

 

31 May

2019

31 May

2018

Reconciliation of profit before tax

 

£000

£000

 

 

 

 

Total segments

 

13,580

13,149

 

 

 

 

Depreciation

 

(1,288)

(822)

Amortisation and impairment

 

(1,054)

(469)

Irrecoverable VAT

 

(868)

(829)

Professional indemnity insurance

 

(513)

(466)

Finance costs

 

(321)

(154)

Loss on disposal of assets

 

(125)

(67)

Acquisition-related costs

 

(123)

(132)

Bank charges

 

(18)

(18)

Gain on revaluation of derivative financial asset

 

100

540

Finance income

 

292

73

Decrease/(Increase) in provisions

 

583

(1,029)

 

 

 

 

Group profit before tax

 

10,245

9,776

 

Country-by-country reporting

 

HM Treasury has transposed the requirements set out under the Capital Requirements Directive IV ("CRD IV") and issued the Capital Requirements Country-by-Country Reporting Regulations 2013, effective 1 January 2014.  The legislation requires Mattioli Woods plc (together with its subsidiaries) to publish certain additional information split by country, on a consolidated basis, for the year ended 31 May 2019.

 

Mattioli Woods plc and its subsidiaries are all incorporated in and operate from the United Kingdom.  All employees of the Group hold contracts of employment in the United Kingdom.  All turnover (revenue) and profit before tax is recognised on activities based in the United Kingdom.  All tax paid and any subsidies received are paid to and received from UK institutions. 

 

 

 

6. Earnings per ordinary share

 

Basic earnings per share amounts are calculated by dividing net profit for the year attributable to ordinary equity holders of the Company by the weighted average number of ordinary shares outstanding during the year, excluding own shares of 12,248 (2018: nil).  

 

Diluted earnings per share amounts are calculated by dividing the net profit attributable to ordinary equity holders of the Company by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares. 

 

The income and share data used in the basic and diluted earnings per share computations is as follows:

 

 

2019

£000

2018

£000

 

 

 

Net profit and diluted net profit attributable to equity holders of the Company

8,197

8,190

 

 

 

 

 

 

Weighted average number of ordinary shares:

000s

000s

 

 

 

Issued ordinary shares at start of period

26,150

25,789

Effect of shares issued during the year ended 31 May 2018

-

455

Effect of shares issued during the year ended 31 May 2019

440

317

 

 

 

Basic weighted average number of shares

26,590

26,561

 

 

 

Effect of dilutive options at the statement of financial position date

77

9

 

 

 

Diluted weighted average number of shares

26,667

26,570

 

The Company has granted options under the Share Option Plan, the Consultants' Share Option Plan and the LTIP to certain of its senior managers and directors to acquire (in aggregate) up to 2.83% of its issued share capital (see Note 11).  Under IAS 33 'Earnings Per Share', contingently issuable ordinary shares are treated as outstanding and included in the calculation of diluted earnings per share if the conditions (the events triggering the vesting of the option) are satisfied.  At 31 May 2019 the conditions attached to 680,440 options granted under the LTIP were not satisfied (2018: 787,202).  If the conditions had been satisfied, diluted earnings per share would have been 30.0p per share (2018: 29.9p). 

 

Since the reporting date and the date of completion of these financial statements the following transactions have taken place involving ordinary shares or potential ordinary shares:

 

·     The issue of 8,693 ordinary shares to satisfy the exercise of options under the LTIP; and

·     The issue of 18,932 ordinary shares under the Mattioli Woods plc Share Incentive Plan. 

 

7. Dividends paid and proposed

 

2019

£000

2018

£000

 

 

 

Declared and paid during the year:

 

 

Equity dividends on ordinary shares:

 

 

- Final dividend for 2018: 11.5p (2017: 9.4p)

3,024

2,430

- Interim dividend for 2019: 6.33p (2018: 5.5p)

1,679

1,436

 

 

 

Dividends paid

4,703

3,866

 

Proposed for approval by shareholders at the AGM:

 

 

Final dividend for 2019: 13.67p (2018: 11.5p)

3,664

3,022

 

8. Property, plant and equipment

 

 

Assets
under construction

Land and buildings

Computer and office equipment

Fixtures and fittings

Motor vehicles

Total

£000

£000

£000

£000

£000

£000

 

 

 

 

 

 

7,438

-

2,024

930

1,211

11,603

 

 

 

 

 

 

 

7,019

-

229

30

495

7,773

-

-

(116)

-

(214)

(330)

 

 

-

 

 

 

 

14,457

-

2,137

960

1,492

19,046

 

 

 

 

 

 

 

790

27

323

72

468

1,680

-

-

5

25

-

30

-

-

(144)

(2)

(394)

(540)

(15,247)

10,753

27

4,467

-

-

 

 

 

 

 

 

 

At 31 May 2019

-

10,780

2,348

5,522

1,566

20,216

 

 

 

 

 

 

 

 

 

 

 

 

 

-

-

977

576

379

1,932

 

 

 

 

 

 

 

-

-

391

192

239

822

-

-

(52)

-

(139)

(191)

 

 

 

 

 

 

 

-

-

1,316

768

479

2,563

 

 

 

 

 

 

 

-

168

259

597

264

1,288

-

-

(92)

-

(208)

(300)

 

 

 

 

 

 

 

At 31 May 2019

-

168

1,483

1,365

535

3,551

 

 

 

 

 

 

 

 

 

 

 

 

 

At 31 May 2019

-

10,612

865

4,157

1,031

16,665

 

 

 

 

 

 

 

14,457

-

821

192

1,013

16,483

 

 

 

 

 

 

 

7,438

-

1,047

354

832

9,671

 

 

 

 

Assets under construction

Leasehold improvements

Computer and office equipment

Fixtures and fittings

Motor vehicles

Total

£000

£000

£000

£000

£000

£000

 

 

 

 

 

 

-

56

1,868

796

1,202

3,922

 

 

 

 

 

 

 

-

-

7

-

-

7

-

(56)

-

56

-

-

877

-

225

30

495

1,627

-

-

(116)

-

(199)

(315)

 

 

 

 

 

 

 

877

-

1,984

882

1,498

5,241

 

 

 

 

 

 

 

790

-

321

69

468

1,648

-

-

(137)

-

(394)

(531)

(1,667)

-

27

1,640

-

-

 

 

 

 

 

 

 

At 31 May 2019

-

-

2,195

2,591

1,572

6,358

 

 

 

 

 

 

 

 

 

 

 

 

 

-

1

838

501

373

1,713

 

 

 

 

 

 

 

-

(1)

-

1

-

-

-

-

386

190

239

815

-

-

(52)

-

(127)

(179)

 

 

 

 

 

 

 

-

-

1,172

692

485

2,349

 

 

 

 

 

 

 

-

-

255

321

264

840

-

-

(92)

-

(208)

(300)

 

 

 

 

 

 

 

At 31 May 2019

-

-

1,335

1,013

541

2,889

 

 

 

 

 

 

 

 

 

 

 

 

 

At 31 May 2019

-

-

860

1,578

1,031

3,469

 

 

 

 

 

 

 

877

-

812

190

1,013

2,892

 

 

 

 

 

 

 

-

55

1,030

295

829

2,209

 

 

 

9. Intangible assets

 

Group

Internally generated software

£000

Software

£000

Client portfolios

£000

Goodwill

£000

Other

£000

Total

£000

Gross carrying amount:

 

 

 

 

 

 

At 1 June 2017

1,589

1,541

33,354

17,253

35

53,772

 

 

 

 

 

 

 

Additions

104

876

-

-

-

980

 

 

 

 

 

 

 

At 31 May 2018

1,693

2,417

33,354

17,253

35

54,752

 

 

 

 

 

 

 

Arising on acquisitions

-

-

5,190

2,962

-

8,152

Additions

97

248

-

-

-

345

Disposals

(217)

(738)

-

-

-

(955)

 

 

 

 

 

 

 

At 31 May 2019

1,573

1,927

38,544

20,215

35

62,294

 

 

 

 

 

 

 

Amortisation and impairment:

 

 

 

 

 

 

At 1 June 2017

494

671

8,128

-

35

9,328

 

 

 

 

 

 

 

Amortisation during the year

162

307

1,756

-

-

2,225

 

 

 

 

 

 

 

At 31 May 2018

656

978

9,884

-

35

11,553

 

 

 

 

 

 

 

Amortisation during the year

270

785

1,907

-

-

2,962

Disposals

(217)

(738)

-

-

-

(955)

 

 

 

 

 

 

 

At 31 May 2019

709

1,025

11,791

-

35

13,560

 

 

 

 

 

 

 

Carrying amount:

 

 

 

 

 

 

At 31 May 2019

864

902

26,753

20,215

-

48,734

 

 

 

 

 

 

 

At 31 May 2018

1,037

1,439

23,470

17,253

-

43,199

 

 

 

 

 

 

 

At 31 May 2017

1,095

870

25,226

17,253

-

44,444

 

 

 

 

 

 

 

 

 

Company

Internally generated software

£000

Software

£000

Client portfolios

£000

Goodwill

£000

Total

£000

Gross carrying amount:

 

 

 

 

 

At 1 June 2017

1,589

1,430

25,260

14,891

43,170

 

 

 

 

 

 

Transfer from group companies

-

-

3,719

1,493

5,212

Additions

104

876

-

-

980

 

 

 

 

 

 

At 31 May 2018

1,693

2,306

28,979

16,384

49,362

 

 

 

 

 

 

Additions

97

200

-

-

297

Disposals

(217)

(738)

-

-

(955)

 

 

 

 

 

 

At 31 May 2019

1,573

1,768

28,979

16,384

48,704

 

 

 

 

 

 

Amortisation and impairment:

 

 

 

 

 

At 1 June 2017

494

591

5,342

-

6,427

 

 

 

 

 

 

Amortisation during the year

162

287

1,555

-

2,004

 

 

 

 

 

 

At 31 May 2018

656

878

6,897

-

8,431

 

 

 

 

 

 

Amortisation during the year

270

774

1,679

-

2,723

Disposals

(217)

(738)

-

-

(955)

 

 

 

 

 

 

At 31 May 2019

709

914

8,576

-

10,199

 

 

 

 

 

 

Carrying amount:

 

 

 

 

 

At 31 May 2019

864

854

20,403

16,384

38,505

 

 

 

 

 

 

At 31 May 2018

1,037

1,428

22,082

16,384

40,931

 

 

 

 

 

 

At 31 May 2017

1,095

839

19,918

14,891

36,743

 

Software

 

Software is amortised over its useful economic life of four years on a reducing balance basis.  Internally generated software represents the development costs of the Group's bespoke customer relationship management, administration and trading platform.  The directors believe this technology will be the principal technology platform used throughout the Group for the foreseeable future.  Internally generated software is amortised on a straight-line basis over an estimated useful life of 10 years. 

 

Client portfolios

 

Client portfolios represent individual client portfolios acquired through business combinations.  Client portfolios are amortised on a straight-line basis over an estimated useful life of between 10 and 25 years, based on the Group's historic experience. 

 

 

Goodwill

 

Goodwill arises where the price paid for an acquisition is greater than the fair value of the net assets acquired.  Goodwill arising on business combinations is subject to annual impairment testing.

 

Other intangibles

 

Other intangibles represent external costs incurred in obtaining a licence.  Other intangibles are amortised on a straight-line basis over a useful economic life of three years. 

 

10. Investment in associate and related derivative

 

Investment in associate

 

On 6 February 2017 the Group acquired 49% of the ordinary share capital of Amati Global Investors Limited ("Amati") from Amati Global Partners LLP plus an option to acquire the remaining 51% ordinary share capital of Amati in the two years commencing 6 February 2019 for a total consideration of £3.39m, comprising £1.65m in cash and £1.74m of new ordinary shares in Mattioli Woods. 

 

Amati is a fund management firm founded in 2010 following the management buyout of Noble Fund Managers Limited.  Amati's principal place of business is the United Kingdom.  It focuses on small and mid-sized companies, with a universe ranging from fully listed constituents of the FTSE Mid 250 and FTSE Small Cap indices, to stocks quoted on AIM.  At the date of investment Amati had approximately £120m of assets under management, including the TB Amati UK Smaller Companies Fund; two AIM Venture Capital Trusts (Amati VCT plc and Amati VCT 2 plc); and an AIM IHT portfolio service. 

 

During the year the shareholders of Amati VCT plc voted to approve its merger with Amati VCT 2 plc, which has been renamed Amati AIM VCT plc.  Amati's gross assets under management at 31 May 2019 had increased to over £453m.  

 

The Group exercises significant influence by virtue of its contractual right to appoint a minority of directors to Amati's board of directors.  The option held by the Group to acquire the remaining shares in Amati was not exercised at 6 February 2019 as the Company had agreed heads of terms with the counterparty to cancel the option in exchange for a payment of £750,000 from the counterparty.  The agreement completed after the year end (Note 18).  The Group has no other rights which would allow it to exercise control over Amati's operations.  Therefore, the Group is not judged to control Amati and it is not consolidated. 

 

The movement in the Group's investment in associate is as follows:

 

Investment in associate - Group and Company

2019

£000

2018

£000

 

 

 

At 1 June

3,725

3,476

 

 

 

Investment in Amati Global Investors Limited

-

-

 

 

 

Share of profit for the year

548

308

Amortisation of fair value intangibles

(68)

(68)

 

 

 

Share of profit from associates in statement of comprehensive income

480

240

Share of other comprehensive income

6

9

 

 

 

At 31 May

4,211

3,725

 

Other comprehensive income represents a movement in Amati's revaluation reserve recognised directly in equity. 

 

The results of Amati and its aggregated assets and liabilities as at 31 May 2019 are as follows:

 

Name

Country of incorporation

Assets

£000

Liabilities

£000

Revenue

£000

Profit

£000

Interest held

 

 

 

 

 

 

 

Amati Global Investors Limited

Scotland

4,504

1,364

4,418

1,116

49%

 

 

 

 

 

 

 

Group's share of profit

 

 

 

 

548

 

 

The net assets of Amati as at 31 May 2018 were £2,011,000.  At 31 May 2019 the net assets of Amati had increased by £1,130,000 to £3,140,000, increasing the Group's interest in the associate (net of tax) by £553,000 during the year, comprising Mattioli Woods' share of Amati's profit after tax recognised in the statement of comprehensive income and Mattioli Woods' share of the movement in Amati's revaluation reserve recognised directly in equity. 

 

Derivative financial instruments

 

As part of the transaction to acquire its holding in Amati, Mattioli Woods also entered into an option agreement with the Seller which entitles Mattioli Woods to acquire the remaining 51% of Amati in the two years commencing 6 February 2019 for a mixture of cash and Mattioli Woods' ordinary shares ("the Option").  If Mattioli Woods does not exercise the Option to acquire the remaining stake from the Seller, the Seller has an option to buy Mattioli Woods' shareholding back for the original consideration paid. 

 

The fair value of the option contract at the date of acquisition was £17,000.  During the year the Company signed heads of terms to cancel the option agreement in exchange for £750,000.  The cancellation of the agreement was completed after the year end (Note 18).  At 31 May 2019, the fair value of the option contract was £750,000 (2018: £650,000) (Note 12) with a gain of £100,000 recognised during the year (2018: £540,000). 
 

11. Share based payments

 

Consultants' Share Option Plan

 

The Company operates the Consultants' Share Option Plan by which certain senior executives are able to subscribe for ordinary shares in the Company.  Options granted under the Consultants' Share Option Plan are summarised as follows:

Date of grant

Exercise price

£

At 1 June

2018

No.

Exercised during the year

No.

At 31 May 2019

No.

 

 

 

 

 

8 September 2009

2.16

46,861

(46,861)

-

 

 

 

 

 

Outstanding

 

46,861

(46,861)

-

 

 

 

 

 

Exercisable

 

46,861

(46,861)

-

 

The exercise price of the options is equal to the market price of the shares at the close of business on the day immediately preceding the date of grant.  The options vest when the option holders achieve certain individual performance hurdles.  No options vested during the year as a result of the associated performance conditions being fulfilled.  If the performance hurdles, which are linked to individual sales revenues, are not met over the five financial years commencing on 1 June before the date of grant, the options lapse. 

 

Long‑Term Incentive Plan

 

During the year, Mattioli Woods granted awards to the Company's executive directors and certain senior employees under the LTIP.  Conditional share awards ("Equity-settled") grant participating employees a conditional right to become entitled to options with an exercise price of 1 pence over ordinary shares in the Company.  Conditional cash awards ("Cash-settled") grant participating employees a conditional right to be paid a cash amount based on the proceeds of the sale of a specified number of Ordinary Shares following the vesting of the award.  Movements in the LTIP scheme during the period were as follows:

 

LTIP options

 

 

2019

Equity-settled

No.

2019

Cash-settled

No.

2018

Equity-settled

No.

2018

Cash-settled

No.

 

 

 

 

 

 

 

Outstanding as at 1 June

 

 

806,489

-

807,445

118,501

Granted during the year

 

 

241,756

-

238,825

-

Exercised during the year

 

 

(233,718)

-

(203,194)

(118,501)

Forfeited during the year

 

 

(57,064)

-

(36,587)

-

 

 

 

 

 

 

 

Outstanding at 31 May

 

 

757,463

-

806,489

-

Exercisable at 31 May

 

 

77,023

-

19,287

-

 

The LTIP awards are subject to the achievement of corporate profitability targets measured over a three year performance period and will vest following publication of the Group's audited results for the final performance year.  The amounts shown above represent the maximum opportunity for the participants in the LTIP.  

 

Share Incentive Plan

 

The Company operates the Mattioli Woods plc Share Incentive Plan ("the SIP").  Participants in the SIP are entitled to purchase, at market value, up to a prescribed number of new 1p ordinary shares in the Company each year for which they will receive a like for like conditional 'matching share', subject to their continued employment for the three years following award of the matching share.  These ordinary shares rank pari passu with existing issued ordinary shares of the Company.  Movements in the shares held in the SIP on behalf of employees during the year were as follows:

 

SIP shares

 

 

 

31 May 2019

No.

31 May 2018

No.

 

 

 

 

 

 

Scheme shares as at 1 June

 

 

 

593,019

553,658

Employee shares purchased

 

 

 

50,989

50,216

Matching shares awarded

 

 

 

50,989

50,216

Matching shares recycled

 

 

 

(16,072)

(7,000)

Reinvestment of dividends

 

 

 

14,281

10,492

Shares transferred out

 

 

 

(106,807)

(64,563)

 

 

 

 

 

 

Scheme shares at 31 May

 

 

 

586,399

593,019

 

 

 

 

 

 

Conditional matching shares at 31 May

 

 

 

117,817

105,385

 

A total of 359 (2018: 363) employees participated in the SIP during the year. 

 

Share based payments expense

 

The expense for share based payments made in respect of employee services under the LTIP is recognised over the expected vesting period of the awards.  The expense recognised during the year ended 31 May 2019 is £825,000 (2018: £1,150,000), of which £825,000 arises from equity-settled share based payment transactions (2018: £1,031,000) and £nil arises from cash-settled share based payment transactions (2018: £119,000). 

 

The expense for share based payments made in respect of employee services under the Consultants' Share Option Plan is recognised over the expected vesting period of the awards.  The expense recognised during the year ended 31 May 2019 was £nil (2018: £nil), which arises entirely from equity-settled share based payment transactions. 

 

The expense for share based payments in respect of matching shares issued under the SIP is recognised over the expected vesting period of the shares granted to the participating employee (see Note 14).  The expense recognised during the year ended 31 May 2019 is £235,000 (2018: £347,000), which arises entirely from equity-settled share based payment transactions. 

 

Reserves transfer

 

The Group has reduced the value of the Equity - share based payments reserve by £359,000, reduced deferred tax assets by £68,000 and increased retained earnings by £291,000 in the year ended 31 May 2019 to reflect the impact of recognising the cost of 'matching shares' awarded under the Mattioli Woods plc Share Incentive Plan ("SIP") over the expected vesting period of the shares and the associated impact on deferred tax assets.  Matching shares awarded under the SIP are subject to a three year continued employment condition.  Previously, the cost of matching shares was recognised in full at the date of the award. 

 

Summary of share options

 

The following table illustrates the number and weighted average exercise prices ("WAEP") of, and movements in, share options during the year.

 

 

 

Share options

 

2019

No.

2019

WAEP

£

 

2018

No.

2018

WAEP

£

 

 

 

 

 

Outstanding as at 1 June

853,350

1.53

907,798

0.27

 

 

 

 

 

Granted during the year

241,756

0.01

238,825

0.01

Exercised

(280,579)

0.37

(256,686)

0.55

Forfeited during the year

(57,064)

0.01

(36,587)

0.01

 

 

 

 

 

Outstanding at 31 May

757,463

0.01

853,350

0.13

 

 

 

 

 

Exercisable at 31 May

77,023

0.01

66,148

1.53

 

The weighted average share price at the date of exercise for share options exercised during the year was £7.27 (2018: £7.96).  For the share options outstanding at 31 May 2019, the weighted average remaining contractual life is 4.0 years (2018: 4.0 years).  The WAEP for options outstanding at the end of the year was £0.01 (2018: £0.13). 

 

The fair value of equity-settled share options granted is estimated as at the date of grant using the Black Scholes Merton model, taking into account the terms and conditions upon which the options were granted.  The following table lists the inputs to the model used to estimate the fair value of options granted during the year ended 31 May 2019:

 

LTIP

 

 

£8.32

£0.01

4.5

17.5

2.04

0.76

 

The share price at date of grant for options issued under the LTIP is based on the market value of the shares on that date.  The expected life of the options is based on historical data and is not necessarily indicative of exercise patterns that may occur.  The expected volatility reflects the assumption that the historical volatility is indicative of future trends, which may also not necessarily be the actual outcome.  No other features of options grant were incorporated into the measurement of fair value.

 

12. Derivative financial asset

 

Group

2019

Company

2019

Group

2018

Company

2018

 

£000

£000

£000

£000

 

 

 

 

 

Derivative financial asset (Notes 10 and 18)

750

750

650

650

 

 

 

 

 

 

750

750

650

650

 

The only derivative financial instrument held by the Group is an option contract over shares in the Group's associate.  The option contract is carried at fair value. 

 

13. Cash and short-term deposits

 

For the purpose of the statement of cashflows, cash and cash equivalents comprise the following at 31 May 2019:

 

 

Group

2019

£000

Company

2019

£000

Group

2018

£000

Company

2018

£000

 

 

 

 

 

Cash at banks and on hand

23,248

14,095

23,668

17,880

Bank overdrafts

-

-

-

-

 

 

 

 

 

Cash and cash equivalents

23,248

14,095

23,668

17,880

 

Cash at banks earns interest at floating rates based on daily bank deposit rates.  Short-term deposits are made for varying periods of between one day and three months, depending on the immediate cash requirements of the Group, and earn interest at the respective short-term deposit rates.  The fair value of cash and short-term deposits is £23.2m (2018: £23.7m). 

 

Due to the headroom the Group's current cash balances provide on its projected working capital requirements, the Group has not renewed its overdraft facility.  Management will continue to review the level of bank facilities the Group may require. 

 

14. Issued capital and reserves

 

Group and Company

Ordinary shares

 of 1p

Share capital

£000

Share premium

£000

Merger reserve

£000

 

 

 

 

 

Authorised

 

 

 

 

 

 

 

 

 

At 1 June 2017, 31 May 2018 and 31 May 2019

30,000,000

300

-

-

 

 

 

 

 

Issued and fully paid

 

 

 

 

 

 

 

 

 

At 1 June 2017

25,789,164

258

30,314

8,781

 

 

 

 

 

Exercise of employee share options

256,686

2

139

-

Shares issued under the SIP

103,924

1

830

-

Shares issued for consideration

-

-

-

-

 

 

 

 

 

At 31 May 2018

26,149,774

261

31,283

8,781

 

 

 

 

 

Exercise of employee share options

280,579

3

101

-

Shares issued under the SIP

100,187

1

753

-

Shares issued for consideration

239,825

3

-

1,858

 

 

 

 

 

At 31 May 2019

26,770,365

268

32,137

10,639

 

Rights, preferences and restrictions on shares

 

All ordinary shares carry equal rights and no privileges are attached to any shares in the Company.  All the shares are freely transferable, except as otherwise provided by law.  However:

 

·     The former shareholder of Broughtons ("the Broughtons Seller") has entered into a lock-in deed with Mattioli Woods and its nominated adviser and broker, Canaccord Genuity Limited, restricting sales of that part of the consideration comprising 77,171 ordinary shares in Mattioli Woods during the two years ending 8 August 2020; and

·     The former shareholders of SSAS Solutions ("the SSAS Solutions Sellers") have entered into a lock-in deed with Mattioli Woods and its nominated adviser and broker, Canaccord Genuity Limited, restricting sales of that part of the consideration comprising 162,654 ordinary shares in Mattioli Woods during the two years ending 27 March 2021.

 

The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company.  All shares rank equally with regard to the Company's residual assets.

 

Share schemes and share incentive plan

 

The Company has two share schemes under which options to subscribe for the Company's shares have been granted to certain executives and senior employees (Note 11).

 

The Company also operates a share incentive plan.  Participants in the SIP are entitled to purchase up to a prescribed number of new ordinary shares in the Company in any year.  At the Directors' discretion, the Company may also award additional shares to participants in the SIP.  Ordinary shares issued under the SIP rank pari passu with existing issued ordinary shares of the Company.  Dividends paid on shares held within the SIP are used to buy new ordinary shares in the Company of 1p each. 

 

Own shares

 

The following movements in own shares occurred during the year:

 

 

 

 

 

 

Number of shares

Own shares

£000

 

 

 

 

 

 

 

At 1 June 2017 and 1 June 2018

 

 

 

-

-

Acquired during the year

 

 

 

 

12,248

99

 

 

 

 

 

 

 

At 31 May 2019

 

 

 

 

12,248

99

 

Own shares represent the cost of the Company's own shares, either purchased in the market or issued by the Company, that are held by the Company or in an employee benefit trust to satisfy future awards under the Group's share-based payment schemes (Note 11).  At 31 May 2019 12,248 (2018: nil) shares were held in the Mattioli Woods Employee Benefit Trust.

 

Other reserves

 

Movements recognised in other reserves in the year are disclosed in the statement of changes in equity.  The following table describes the nature and purpose of each reserve within equity:

 

 

 

Reserve

Description and purpose

 

 

Share premium

Amounts subscribed for share capital in excess of nominal value less any associated issue costs that have been capitalised. 

Merger reserve

Where shares are issued as consideration for >90% of the shares in a subsidiary, the excess of the fair value of the shares acquired over the nominal value of the shares issued is recognised in the merger reserve. 

Capital redemption reserve

Amounts transferred from share capital on redemption of issued shares. 

Equity - share based payments

The fair value of equity instruments granted by the Company in respect of share based payment transactions less options exercised. 

Own shares

The cost of the Company's own shares, purchased in the market, that are held in an employee benefit trust to satisfy future awards under the Group's share-based payment schemes (Note 11).

Retained earnings

All other net gains and losses and transactions with owners (e.g. dividends) not recognised elsewhere.

 

The Company has issued options to subscribe for the Company's shares under two employee share schemes (Note 11).  The cost of exercised or lapsed share options has been derecognised from equity-share based payments and re-allocated to retained earnings as required by IFRS2 'Share-based Payments'. 

15. Financial liabilities and provisions

 

Group

Contingent consideration

£000

Client claims

£000

Dilapidations

£000

Clawbacks

£000

Employers' NIC on share options

£000

Onerous contracts

£000

 

LTIP

cash liability

£000

FSCS levy

£000

 

Total

£000

 

 

 

 

 

 

 

 

 

 

At 1 June 2017

4,418

527

517

124

737

75

844

-

7,242

 

 

 

 

 

 

 

 

 

 

Unwinding of discount

142

-

12

-

-

-

13

-

167

Arising during the year

-

697

122

181

315

913

132

100

2,460

Paid during the year

(3,506)

(225)

(13)

(181)

(401)

-

(989)

-

(5,315)

Unused amounts reversed

(168)

(17)

(7)

-

(24)

-

-

-

(216)

 

 

 

 

 

 

 

 

 

 

At 31 May 2018

886

982

631

124

627

988

-

100

4,338

 

 

 

 

 

 

 

 

 

 

Unwinding of discount

75

-

10

-

-

-

-

-

85

Arising during the year

2,657

728

102

141

278

145

-

50

4,101

Arising on acquisitions

-

43

25

-

-

-

-

-

68

Paid during the year

(763)

(230)

(376)

(142)

(263)

(368)

-

-

(2,142)

Unused amounts reversed

-

(245)

(44)

 

(40)

(545)

-

-

(874)

Reclassification

(200)

207

-

-

-

-

-

-

7

 

 

 

 

 

 

 

 

 

 

At 31 May 2019

2,655

1,485

348

123

602

220

-

150

5,583

 

 

 

 

 

 

 

 

 

 

Current 2018

886

982

316

124

346

988

-

100

3,742

Non-current 2018

-

-

315

-

281

-

-

-

596

 

 

 

 

 

 

 

 

 

 

At 31 May 2018

886

982

631

124

627

988

-

100

4,338

 

 

 

 

 

 

 

 

 

 

Current 2019

1,260

1,485

-

123

369

220

-

150

3,607

Non-current 2019

1,395

-

348

-

233

-

-

-

1,976

 

 

 

 

 

 

 

 

 

 

At 31 May 2019

2,655

1,485

348

123

602

220

-

150

5,583

Company

 

 

 

Loan note

£000

Contingent consideration

£000

Client claims

£000

Dilapidations

£000

Clawbacks

£000

Employers' NIC on share options

£000

Onerous contracts

£000

LTIP

cash liability

£000

FSCS levy

£000

 

Total

£000

 

 

 

 

 

 

 

 

 

 

 

At 1 June 2017

8,525

4,418

452

487

106

737

75

844

-

15,644

 

 

 

 

 

 

 

 

 

 

 

Finance costs

397

142

-

12

-

-

-

13

-

564

Arising during the year

8,018

-

698

89

177

315

913

132

100

10,442

Transfer from Group companies

-

-

25

33

13

-

-

-

-

71

Paid during the year

-

(3,506)

(212)

(13)

(177)

(401)

-

(989)

-

(5,298)

Unused amounts reversed

-

(168)

(17)

(7)

-

(24)

-

-

-

(216)

 

 

 

 

 

 

 

 

 

 

 

At 31 May 2018

16,940

886

946

601

119

627

988

-

100

21,207

 

 

 

 

 

 

 

 

 

 

 

Finance costs

606

75

-

10

-

-

-

-

-

691

Arising during the year

-

2,657

641

102

137

278

145

-

50

4,010

Paid during the year

 

(763)

(194)

(376)

(137)

(263)

(368)

-

-

(2,101)

Unused amounts reversed

-

-

(168)

(14)

-

(40)

(545)

-

-

(767)

Waiver of loan note

(17,335)

-

-

-

-

-

-

-

-

(17,335)

Reclassification

(211)

(200)

-

-

-

-

-

-

-

(411)

 

 

 

 

 

 

 

 

 

 

At 31 May 2019

-

2,655

1,225

323

119

602

220

-

150

5,294

 

 

 

 

 

 

 

 

 

 

 

Current 2018

-

886

946

316

119

346

988

-

100

3,701

Non-current 2018

16,940

-

-

285

-

281

-

-

-

17,506

 

 

 

 

 

 

 

 

 

 

 

At 31 May 2018

16,940

886

946

601

119

627

988

-

100

21,207

 

 

 

 

 

 

 

 

 

 

 

Current 2019

-

1,260

1,225

-

119

369

220

-

150

3,343

Non-current 2019

-

1,395

-

323

-

233

-

-

-

1,951

 

 

 

 

 

 

 

 

 

 

 

At 31 May 2019

-

2,655

1,225

323

119

602

220

-

150

5,294

Loan notes due to subsidiary undertakings

 

On 31 December 2017 the trade and assets of Boyd Coughlan Limited were transferred to the Company.  The trade and assets were exchanged for loan notes equal to the book value of the assets and assumed liabilities of Boyd Coughlan Limited as at 31 December 2017, attracting annual interest on the outstanding principal at a rate of 3% above the Bank of England base rate.

 

On 31 August 2016 the trade and assets of the Taylor Patterson Group Limited and its subsidiaries Taylor Patterson Financial Planning Limited and Taylor Patterson Associates Limited (together "the Taylor Patterson Group") were transferred to the Company.  The trade and assets were exchanged for loan notes equal to the book value of the assets and assumed liabilities of the Taylor Patterson Group as at 31 August 2016, attracting annual interest on the outstanding principal at a rate of 3% above the Bank of England base rate. 

 

On 31 May 2019 the loan notes were waived and the capital and reserves of Boyd Coughlan Limited, Taylor Patterson Group Limited and its subsidiaries were each reduced to £2.

 

During the year the Company reclassified £0.2m of residual loan note balances owed to the subsidiary undertakings against current receivables due to the Company from them. 

 

Contingent consideration

 

The Group has entered into certain acquisition agreements that provide for contingent consideration to be paid.  Details of these agreements and the basis of calculation of the net present value of the contingent consideration are summarised in Note 3.  The Group estimates the net present value of the financial liability payable within the next 12 months is £1.3m (2018: £0.9m) and the Group expects to settle the non-current balance of £1.4m (2018: £nil) within the next two years. 

 

The balance reclassified in the year of £0.2m represents consideration which is no longer considered contingent but has yet to be paid, which is therefore recognised within Other Payables. 

 

Client claims

 

A provision is recognised for the estimated potential liability when the Group becomes aware of a possible client claim.  The value of the provision recognised is determined based on the nature of the potential liability, the Group's historic experience and any insurance recovery expected.  No discount rate is applied to the projected cash flows due to their short-term nature. 

 

The balance of £0.2m reclassified in the year represents potential liabilities of the Group recoverable under indemnities provided by the vendor of an acquired subsidiary, which are now recognised within Other Receivables. 

 

Dilapidations

 

Under the terms of the leases for the Group's premises, the Group has an obligation to return the properties in a specified condition at the end of the lease term.  The Group provides for the estimated fair value of the cost of any dilapidations.  The discount rate applied to the cash flow projections is 5.0%. 

 

Clawbacks

 

The Group receives certain initial commissions on indemnity terms and hence the Group provides for the expected level of clawback, based on past experience.  No discount rate is applied to the projected cash flows due to their short-term nature. 

 

Onerous contracts

 

Onerous lease provisions on property leases are recognised when a leased property is expected to become vacant and no longer used in the Group's operations.  Amounts recognised in the prior period represented the Group's best estimate of the unavoidable costs committed to under three commercial leases for its previous premises at Grove Park, Leicester, based on the expected void period between the premises being vacated and subsequently sub-let after the Group took occupation of its new office at New Walk (see Note 8). 

 

The Group acquired onerous contracts for the provision of certain IT systems on the acquisition of Ashcourt Rowan's pension business and on the acquisition of UKWM Pensions.  Management has assessed the expected benefits and costs associated with these contracts and concluded that the costs of the obligation exceed the benefits to the extent that it is appropriate to provide against these contracts in full.

 

LTIP cash liability

 

In prior periods the Group has granted cash settled options to certain Executive Directors.  The amounts of any cash entitlement on vesting of an award will be directly linked to the value of a specified number of the Company's shares at the vesting date.  At 31 May 2019 there were no cash awards outstanding (2018:  nil).

 

 

 

FSCS levy

 

The arrangements put in place by the Financial Services Compensation Scheme ("FSCS") to protect depositors and investors from loss in the event of failure of financial institutions have resulted in significant levies on the industry in recent years.

 

There is uncertainty over the level of future FSCS levies as they depend on the ultimate cost to the FSCS of industry failures. The Group contributes to the investment intermediation levy class and accrues levy costs for future levy years when the obligation arises.  A provision of £150,000 has been made in these financial statements for FSCS interim levies expected in the year ending 31 May 2020 (2018: £100,000).

 

16. Commitments and contingencies

 

Operating lease agreements - Group as lessee

 

Mattioli Woods plc had previously entered into three commercial leases for its premises at Grove Park, Enderby.  The first lease for part of the ground floor of Gateway House had a duration of ten years from 1 February 2008.  A second lease for part of the ground floor of Gateway House has a duration of ten years from 1 December 2009.  In August 2018, the Company served notice under the first Gateway House lease to vacate the premises by 31 October 2018.  In addition, the Company surrendered the second Gateway House lease on 31 October 2018 by way of a surrender premium payment to the landlord reflecting all rent and business rates due from the surrender date to lease expiry, along with the cost of dilapidations. 

 

On 26 November 2018, the Company assigned the MW House lease to a third party sub-tenant for the remainder of the lease term.  Under the terms of the assignment, no further rent should be paid to Custodian REIT plc, but in the event of default by the assignee, the Group retains the liability for rents due over the remaining lease term. 

 

Mattioli Woods plc has entered into an intra-group lease, with subsidiary Mattioli Woods (New Walk) Limited as lessor, for its premises at New Walk, Leicester.  The lease carries an annual rental of £875,000 and is renewed on an annual rolling basis.

 

Mattioli Woods plc has also entered into commercial leases for its premises at:

 

·     Aberdeen, 8 Queens Terrace, which expires on 31 May 2023.  The annual rental is £148,000;

·   Newmarket, Cheveley House, Fordham Road, which expires on 24 December 2023, with next break on 24 December 2018.  The annual rental is £115,500;

·     Preston, Lanson House, Winckley Gardens, Mount Street, which expires on 31 July 2022.  The annual rental is £62,000;

·    Buckingham, Investment House, 22-26 Celtic Court, Ballmoor, which expires on 11 April 2022.  The annual rental is £35,000;

·    Glasgow, 120 West Regent Street, which expires on 31 January 2022.  The annual rental is £48,844 plus £2,500 per annum for car parking;

·     Manchester, Suite 310, 76 King Street, lease term is a rolling 6 months.  The annual rental is £31,800;

·     London, 3rd Floor, 87/89 Baker Street, lease expires on 31 October 2021.  The annual rental is £92,500; and

·     Edinburgh, 8 Coates Crescent, which expires on 14 August 2028, with a break on 14 August 2023.  The annual rental is £101,850.

 

As part of certain acquisitions, the Group acquired operating lease obligations for office equipment.  No restrictions were placed upon the Group by entering into these leases.  Future minimum rentals payable under non-cancellable operating leases as at 31 May are as follows:

 

 

Office equipment

Land and buildings

 

Group

2019

£000

2018

£000

2019

£000

2018

£000

 

 

 

 

 

Not later than one year

196

151

724

845

After one year but not more than five years

506

525

1,903

2,802

More than five years

-

-

646

491

 

 

 

 

 

 

702

676

3,273

4,138

 

 

 

Office equipment

Land and buildings

 

Company

2019

£000

2018

£000

2019

£000

2018

£000

 

 

 

 

 

Not later than one year

196

150

636

1,438

After one year but not more than five years

506

522

1,721

2,610

More than five years

-

-

429

491

 

 

 

 

 

 

702

672

2,786

4,539

 

Group operating lease charges during the year were £861,000 (2018: £939,000) for land and buildings and £193,000 (2018: £91,000) for office equipment. 

 

Capital commitments

 

At 31 May 2019 the Group had no capital commitments (2018: £0.8m).  

 

Sponsorship agreement

 

As part of the Group's strategy to strengthen its brand awareness the Group has a three-year sponsorship agreement with rugby giants Leicester Tigers, which ended on 30 June 2019.  The agreement includes shirt sponsorship on the Tigers' home and away shirts, a dedicated Mattioli Woods stand at the 26,000 capacity Welford Road stadium, corporate hospitality rights and the provision of exclusive content to Tigers fans.  In November 2018 the Group entered in to a new three-year sponsorship agreement with Leicester Tigers, which commenced on 1 July 2019 at a total cost of £1,230,000 over the three years of the agreement. 

 

Client claims

 

The Group operates in a legal and regulatory environment that exposes it to certain litigation risks.  As a result, the Group occasionally receives claims in respect of products and services provided and which arise in the ordinary course of business.  The Group provides for potential losses that may arise out of contingencies. 

 

In-specie pension contributions

 

As has been widely reported in the media, HMRC has challenged all SIPP providers on whether pension contributions could be made in-specie.  As a result there are a number of tax relief claims made on behalf of our clients that have been challenged and we have received or are awaiting assessment notices which are expected to amount to £0.9m.  These assessments have been appealed, with proceedings stayed pending the outcome of HMRC's appeal against the First-Tier Tribunal's ruling in favour of another SIPP operator in a similar case. 

 

Irrespective of the result of HMRC's appeal, the impact on the financial position of the Group is expected to be neutral, with any liability expected to be recovered from the affected clients whose tax liability it is.

 

Transfers from defined benefit schemes

 

The FCA has been conducting an industry wide review of the advice being provided on transfers from defined benefit to defined contribution schemes since October 2015 ("the Review").  

 

As previously reported, following consideration of the increasing costs of professional indemnity insurance, additional regulatory controls and the resources we would have to dedicate to this small part of our business, we have stopped giving pension transfer advice to individuals with safeguarded or defined benefits.  The impact of this decision and the Review on the Group's financial performance is not expected to be material. 

 

 

 

17. Related party disclosures

 

Custodian REIT plc

 

In March 2014 the Company's subsidiary, Custodian Capital, was appointed as the discretionary investment manager of Custodian REIT, a closed-ended property investment company listed on the Main Market of the London Stock Exchange.  The terms of the Investment Management Agreement ("IMA") between Custodian Capital and Custodian REIT were amended on agreement of a further three year term with 12 months' notice to Custodian Capital's ongoing engagement from 1 June 2017, with the fees payable to Custodian Capital under the IMA amended to include:

 

·     A step down in the property management fee from 0.75% to 0.65% of net asset value ("NAV") applied to NAV in excess of £500m; and

·    A step down in the administrative fee from 0.125% to 0.08% of NAV applied to NAV between £200m and £500m and a further step down to 0.05% of NAV applied to NAV in excess of £500m. 

 

All other key terms of the IMA remain unchanged.

 

The Company's Chief Executive Officer, Ian Mattioli, is a non-independent Non-Executive Director of Custodian REIT and the Company's Chief Financial Officer, Nathan Imlach, is Company Secretary of Custodian REIT.  Ian Mattioli received £33,500 (2018: £28,250) of director's fees from Custodian REIT during the year.  Fees for Nathan Imlach's services are charged by Custodian Capital directly to Custodian REIT and are included in the annual management charges noted below. 

 

Ian Mattioli, Nathan Imlach, Richard Shepherd-Cross (the Managing Director of Custodian Capital), Ed Moore (the Finance Director of Custodian Capital) and the private pension schemes of Ian Mattioli, Nathan Imlach, Richard Shepherd-Cross, Murray Smith, Joanne Lake and Carol Duncumb have a beneficial interest in Custodian REIT. 

 

During the year the Group received revenues of £4.0m (2018: £3.8m) in respect of annual management charges, administration and marketing fees from Custodian REIT.  Custodian REIT owed the Group £59,000 at 31 May 2019 (2018: £44,000). 

 

During the year the Group paid rent of £257,000 (2018: £367,000), service charges and other property related costs of £50,000 (2018: £29,000) and dilapidations on exit of £138,000 (2018: £nil) in respect of its former office premises at MW House and Gateway House, Leicester where Custodian REIT was the lessor. 

 

 

 

Amati Global Investors Limited

 

On 6 February 2017 the Company purchased 49% of the issued share capital of Amati.  The Company also entered into an option agreement to acquire the remaining 51% of the issued share capital of Amati in the two years commencing 6 February 2019 for a mixture of cash and Mattioli Woods' ordinary shares.  On 4 January 2019 the Group signed heads of terms agreeing to cancel its option in return for a payment of £0.75m, equivalent to the fair value of the option at 30 November 2018.  This transaction completed following the end of the reporting period (Note 18).  

 

Three of the Company's senior management team were appointed to the board of Amati on the date of investment.  Ian Mattioli is Deputy Chairman, the Group's Chief Investment Officer, Simon Gibson, is a Non-Executive Director and former Chief Operating Officer, Mark Smith was an Executive Director until he resigned on 22 November 2018.  During the year Ian Mattioli and Simon Gibson were paid £5,215 (2018: £5,063) and Mark Smith was paid £2,575 (2018: £5,063) of directors' fees by Amati. 

 

On 14 August 2018 the Group entered into a 10-year agreement to sub-let part of the Group's Edinburgh office to Amati at an annual rent of £48,000.  During the year rent and other property related costs of £39,000 were recharged to Amati (2018: £nil).

 

The Group received revenues of £nil (2018: £1,000) in respect of consultancy services provided to Amati Global Investors Limited during the year. 

 

Gateley (Holdings) Plc

 

The Company's Chairman, Joanne Lake, is a Non-Executive Director of Gateley (Holdings) Plc, which is the holding company of Gateley Plc, a provider of commercial legal services.  During the year, the Group paid Gateley Plc a total of £2,000 (2018: £34,000) in respect of corporate legal services provided to the Group and its subsidiaries.  In addition, the Group received revenues of £34,000 (2018: £29,000) in respect of employee benefits services provided to Gateley Plc during the year. 

 

Worldwide Broker Network Limited

 

The Company's former Managing Director of Employee Benefits, Alan Fergusson, is an executive director of Worldwide Broker Network Limited.  Worldwide Broker Network Limited is the holding company of Worldwide Broker Network (US) Inc., an international network of financial services introducers.  During the year, the Group paid £25,000 (2018: £19,000) to Worldwide Broker Network (US) Inc. in respect network membership fees.   

 

Vista Insurance Brokers Limited

 

Vista Insurance Brokers Limited, a broker of insurance products, is party to a dormant joint venture agreement with the Company.  The Group received revenues of £2,000 (2018: £4,000) in respect of employee benefits services provided to Vista Insurance Brokers Limited during the year.  Fees of £nil (2018: £12,000) were paid to Vista Insurance Brokers Limited in the year under a referral fee share arrangement.

 

Key management compensation

 

Key management personnel, representing those Executive Directors that served throughout the year and 14 (2018: 18) other executives, received compensation in the form of short-term employee benefits and equity compensation benefits which totalled £5.9m for the year ended 31 May 2019 (2018: £7.2m). 

 

Total compensation is included in "employee benefits expense" and analysed as follows:

 

 

2019

£000

2018

£000

 

 

 

Wages and salaries

4,907

6,036

Social security costs

803

993

Pension

86

61

Benefits in kind

96

159

 

 

 

 

5,892

7,249

 

In addition, the cost of share based payments disclosed separately in the statement of comprehensive income was £0.7m (2018: £0.9m). 

 

Transactions with other related parties

 

Following the transfer of Mattioli Woods' property syndicate business to Custodian Capital, the legal structure of the arrangements offered to investors changed to a limited partnership structure, replacing the previous trust-based structure.  Each limited partnership is constituted by its general partner and its limited partners (the investors), with the general partner being a separate limited company owned by Custodian Capital. 

 

The general partner and the initial limited partner enter into a limited partnership agreement, which governs the operation of the partnership and also sets out the rights and obligations of the investors.  The general partners have appointed Custodian Capital as the operator of the partnerships pursuant to an operator agreement between the general partner and Custodian Capital.   

 

FP Mattioli Woods Balanced Fund

 

The Company is the investment manager of the FP Mattioli Woods Balanced Fund, an open ended investment company which aims to achieve long-term growth while managing volatility so that, other than on very short-term measures, outperformance comes with a lower beta than the benchmark.  As at 31 May 2019 the Group held an investment with a market value of £40,000 (2018: £41,000) in the FP Mattioli Woods Balanced Fund. 

 

MW Properties (Huntingdon Non-Geared) Limited

 

The Company holds a 2.04% interest in MW Properties (Huntingdon Non-Geared) Limited, a nominee for a property syndicate.  The Group received dividend income of £nil (2018: £1,000) from MW Properties (Huntingdon Non-Geared) Limited during the year, with the market value of the investment being £14,000 (2018: £14,000) at the year end. 

 

18. Events after the reporting date

 

Cancellation of Amati option

 

On 19 June 2019 the Group signed an agreement to cancel its option to acquire the remaining 51% of Amati in return for a payment of £750,000. 

 

19. Financial information

 

The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 May 2019 or 2018 but is derived from those accounts.  Statutory accounts for 2018 have been delivered to the registrar of companies, and those for 2019 will be delivered in due course.  The auditor has reported on those accounts; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006. 

 

20. Distribution of the annual report and accounts to members

 

The annual report and accounts will be posted to shareholders in due course, and will be available on our website (www.mattioliwoods.com) and for inspection by the public at the Group's registered office address: 1 New Walk Place, Leicester, LE1 6RU during normal business hours on any weekday.  Further copies will be available on request. 

 

 

Alternative performance measure workings

 

Recurring revenue

 

A measure of sustainable revenue, calculated as revenue earned from ongoing services as a percentage of total revenue.

Timing of revenue recognition

2019

£000

2018

£000

 

 

 

At a point in time:

 

 

Investment and asset management

2,873

4,633

Pension consultancy and administration

1,276

2,639

Property management

620

570

Employee benefits

973

1,087

 

 

 

Non recurring revenue

5,742

8,929

 

 

 

Over time:

 

 

Investment and asset management

23,124

20,463

Pension consultancy and administration

19,129

19,183

Property management

5,823

5,348

Employee benefits

4,646

4,746

 

 

 

Recurring revenue

52,722

49,740

 

 

 

Total revenue

58,464

58,669

 

 

 

Recurring revenue

90.2%

84.8%

 

Adjusted EBITDA

 

A measure of the underlying profitability, excluding items that are non-cash or affect comparability between periods, calculated as statutory operating profit before financing income or costs, tax, depreciation, amortisation, impairment, changes in valuation of derivative financial instruments and acquisition related costs, including share of profit from associates (net of tax). 

 

2019

£000

2018

£000

 

 

 

Statutory operating profit before financing

9,791

9,617

Amortisation of acquired intangibles

1,907

1,756

Amortisation of software

1,055

469

Depreciation

1,288

822

 

 

 

EBITDA

14,041

12,664

 

 

 

Share of profit from associates, net of tax

480

240

Acquisition related costs

126

125

Gain on revaluation of derivative financial instrument

(100)

(540)

 

 

 

Adjusted EBITDA

14,547

12,489

 

 

 

Adjusted PBT

 

A measure of profitability before taxation, excluding items that are non-cash or affect comparability between periods, calculated as statutory profit before tax excluding amortisation of acquired intangibles, acquisition related costs, non-cash interest charges on provisions and changes in valuation of derivative financial instruments.

 

2019

£000

2018

£000

 

 

 

Statutory profit before tax

10,245

9,776

Amortisation of acquired intangibles

1,907

1,756

Acquisition related costs

126

125

Non-cash interest charges on provisions

85

166

Gain on revaluation of derivative financial instrument

(100)

(540)

 

 

 

Adjusted PBT

12,263

11,283

 

Adjusted PAT

 

A measure of profitability, net of taxation, excluding items that are non-cash or affect comparability between periods, calculated as statutory profit before tax excluding amortisation of acquired intangibles, acquisition related costs, non-cash interest charges on provisions, changes in valuation of derivative financial instruments and deducting tax at the standard rate of 19%.

 

2019

£000

2018

£000

 

 

 

Adjusted PBT

12,263

11,283

 

 

 

Income tax expense at standard rate of 19%

(2,330)

(2,144)

 

 

 

Adjusted PAT

9,933

9,139

 

Adjusted EPS

 

A measure of total comprehensive income for the year, net of taxation, attributable to equity holders of the Company, adjusted to add back acquisition related costs, changes in valuation of derivative financial instruments, non-cash interest charges on provisions and the amortisation of acquired intangible assets, divided by the weighted average number of ordinary shares in issue. 

 

2019

£000

2018

£000

 

 

 

Adjusted PAT

9,933

9,139

 

 

 

 

 

 

Basic weighted average number of shares (see Note 6)

26,590

26,561

 

 

 

Adjusted EPS

37.3p

34.4p

 

 

1 Annual pension consultancy and administration fees; ongoing adviser charges; level and renewal commissions; banking income; property, discretionary portfolio and other annual management charges. 

2 Earnings before interest, taxation, depreciation, amortisation, impairment, changes in valuation of derivative financial instruments and acquisition-related costs, including share of profit from associates (net of tax). 

3 Adjusted EBITDA divided by revenue. 

4 Before acquisition-related costs, amortisation and impairment of acquired intangibles, changes in valuation of derivative financial instruments and non-cash interest charges on provisions. 

5 Adjusted profit after tax used to derive adjusted EPS is calculated as adjusted profit before tax less income tax at the standard rate of 19.0% (2018: 19.0%). 

6 Cash and short-term deposits less £0.1m (2018: £3.5m) of VAT reclaimed on behalf of and to be repaid to clients. 

7 Includes £409.0m (2018: £286.0m) of funds under management by the Group's associate, Amati Global Investors Limited, excluding £31.9m (2018: £27.0m) of Mattioli Woods' client investment and £11.9m (2018: £12.1m) of cross-holdings between the TB Amati Smaller Companies Fund and the Amati AIM VCT plc. 

8 Includes £452.8m (31 May 2018: £325.1m) of funds under management by Amati Global Investors Limited, including Mattioli Woods' client investment and cross-holdings between TB Amati Smaller Companies Fund and Amati AIM VCT plc.

9 Revenue divided by operating profit before financing. 

10 Revenue for the year ended 31 May 2019 was split 52% (31 May 2018: 58%) fixed, initial or time-based fees and 48% (31 May 2018: 42%) ad valorem fees based on the value of assets under management, advice and administration. 

11 Certain pension scheme assets, including clients' own commercial properties, are only subject to a statutory valuation at a benefit crystallisation event. 

12 Value of funds under trusteeship in SIPP and SSAS schemes administered by Mattioli Woods and its subsidiaries. 

13 Assets under management of £409.0m (2018: £286.0m) excludes £31.9m (2018: £27.0m) of Mattioli Woods' client investment included within SIPP and SSAS, employee benefits and personal wealth and other assets and excludes £11.9m (2018: £12.1m) of cross-holdings between the TB Amati Smaller Companies Fund and the Amati AIM VCT plc.

14 SIPP and SSAS schemes where the Group acts as pension consultant and administrator. 

15 Includes personal wealth clients' with SIPP and SSAS schemes operated by third parties. 

16 Includes Mattioli Woods' client investment and £11.9m (2018: £12.1m) of cross-holdings between the TB Amati Smaller Companies Fund and the Amati AIM VCT plc. 

17 Earnings before interest, taxation, depreciation, amortisation and impairment. 

18 Figures in table may not add due to rounding. 

19 Figures in table may not add due to rounding. 

20 Before acquisition-related costs, amortisation and impairment of acquired intangibles, changes in valuation of derivative financial instruments and non-cash interest charges on provisions. 

21 Comprises £29.7m (2018: £30.4m) invested in Custodian REIT, £76.6m (2018: £69.2m) in MW SPF and £26.0m (2018: £21.4m) in Amati funds. 

22 Cross-holdings between the TB Amati Smaller Companies Fund and the Amati AIM VCT plc. 

23 SIPP and SSAS schemes where Mattioli Woods acts as pension consultant and administrator. 

24 Direct schemes lost to an alternative provider as a percentage of average scheme numbers during the year. 

25 Direct schemes lost as a result of death, annuity purchase, external transfer or cancellation as a percentage of average scheme numbers during the year. 

26 Source: Numis Securities Limited, Investment Companies Datasheet dated 30 August 2019. 


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