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RNS
Orchard Funding Group PLC  -  ORCH   

Final Results

Released 07:00 13-Nov-2018

RNS Number : 1163H
Orchard Funding Group PLC
13 November 2018
 

13 November 2018

Orchard Funding Group PLC

('Orchard Funding Group' or the 'company' or the 'group')

 

Full Year Results

For the 12 months ended 31 July 2018

 

 

Orchard Funding Group PLC, the finance company which specialises in insurance premium finance and the professions funding market, announces its audited full year results for the year ended 31 July 2018.

 

Highlights

·      The group continues to be strongly cash generative, with revenues in the period increasing by 13.4% to

£5.17 million for the 12 months to 31 July 2018 (31 July 2017 £4.56 million)

·      The loan book grew by 8.8% year on year to £30.95m as we continue to apply our disciplined approach to lending, with impairments remaining relatively low against our peers

·      Profit after tax rose from £1.34 million to £1.51 million - an increase of 12.7%

•      Earnings Per Share ("EPS") rose in the period by 13.1% to 7.08p (31 July 2017 6.26p)

·      The group lent £68.73 million to clients in the 12 months to 31 July 2018 an increase of 8.5% (31 July 2017

£63.35 million)

·      We are proposing a full year dividend per share of 3.0 pence

•      Barclays Bank has again renewed our facility at £15 million

·      Conister Bank provided us with a new facility this year of £2 million, giving us additional liquidity

·      Application was made to the PRA and FCA for a banking licence in July 2018

·      We have strengthened the board with the appointment of Gary Jennison as Non-Executive Chairman in November 2017

 

 

Ravi Takhar, Chief Executive Officer of Orchard, said: ""I am, again, very pleased with Orchard's performance during the year. We are passionate about our business and continue to grow in a prudent and controlled manner. We will continue to focus on our core markets and as we have already demonstrated this will result in an increased share of those markets. Trading since the period end has continued to be robust and in line with management expectations.

We have a number of strategic avenues available to us to support the group's growth and we look forward to the year ahead with cautious optimism."

 

The board is pleased to propose a final dividend of 2 pence per share to be paid on 21 December 2018 to shareholders on the register on 14 December 2018, with an ex-dividend date of 13 December 2018. The final dividend is subject to shareholder approval at the company's upcoming annual general meeting ("AGM") to be held on 12 December 2018.

 

The AGM is to be held at the company's registered office. The company's annual report and Notice of the AGM will be sent out to shareholders in November 2018.

 

For further information please contact

Orchard Funding Group PLC +44 (0)1582 635 507 Ravi Takhar, Chief Executive Officer

 

finnCap Limited (Nomad and Broker) +44 (0)20 7220 0579 Jonny Franklin-Adams (Corporate Finance)

Emily Watts (Corporate Finance) Jeremy Grime (Research Director)

 

For Investor Relations please go to: www.orchardfundinggroupplc.com

 

 

Group financial highlights

 

 

 

 

2018

2017

2016

Lending volume

£68.73m

£63.35m

£48.56m

Loan book

£30.95m

£28.42m

£21.80m

Revenue

£5.17m

£4.56m

£3.47m

Gross profit

£4.64m

£4.15m

£3.15m

Profit before tax

£1.89m

£1.64m

£1.27m

Profit after tax

£1.51m

£1.34m

£1.00m

EPS (pence)1

7.08

6.26

4.70

DPS (pence)2

3.00

3.00

2.81

Return on capital employed3

6.77%

6.73%

6.41%

Return on equity

10.76%

10.16%

8.14%

 

 

1.     There are no factors which would dilute earnings therefore fully diluted earnings per share are identical.

2.     Dividends per share are based on interim dividends paid in the year and proposed final dividend for the year.

3.     See the Group strategic report for further information on key performance indicators ("KPIs").

 

 

Chairman's statement

Orchard Funding Group plc has had a very satisfactory year. I am pleased to report that this success has been driven by a continued increase in overall lending volumes, which grew by 8.49% to £68.73m. This in turn fed through to an increase in group revenues of 13.46% to £5.17m, a record for the group. The position at the year end showed a 6.70% increase in shareholders' equity from £13.17m to £14.04m.

Investment in staff and systems meant that administrative costs in the business grew by 9.28% to £2.74m. This was lower than growth rates in revenue. These increases in investment are important and necessary to ensure that the business continues to support and delight our customers and continue to provide them with the levels of service that they have, rightly, come to expect of us.

The group's profit before tax rose by 15.36% to £1.89m, in line with market expectations. Group earnings per share rose by 13.10% to 7.08p (2017 6.26p), a more than respectable outcome for the year.

The level and growth of dividends announced by any company is a balance between retention for future investment and rewarding shareholders for the confidence they have shown in the business. It is no different for Orchard Funding Group and we are happy to propose that the annual dividend (including the interim dividend) remains the same as last year at 3.00p.

The group's main focus of operations is the insurance premium finance market, currently an area growing well and showing every sign of continuing to so do. This has always been at our core. Along with the professional fee funding market, the board is actively involved in seeking other profitable funding streams (school fee funding and sports membership funding as examples). These should add to shareholder value over time.

The macro background remains generally favourable for the group. Despite the recent increases in base rate, interest rates in the UK still remain relatively low but should they rise further in the future the group is well placed to react quickly. Loans are generally for a 10-month period and none are longer than 12 months in duration.

However, if conditions are of benefit to the group then they are inevitably also helpful to our competitors. We have seen strong competition in some areas of our focus with pressure being put upon rates. The largest players in the accountancy fee funding market continue to aggressively protect their market positions. The same can be said of the insurance premium finance market. That said, we believe that we are in a strong position to continue to grow our lending volumes at acceptable rates without needing to resort to some of the tactics our competitors have utilised.

The board remains focused on the cost of our own borrowing and continually looks to seek out new ways in which to keep this as low as possible. Potential sources of liquidity for the group are always examined and we continue to keep all our options under review. With this in mind, you will note our CEO's comments on the banking licence application in his "Chief executive's review" below. It is the way forward for the group.

One of our special services for brokers is to help them find their way through the regulation covering lending. Quite rightly, the FCA has been much tougher on lenders in recent years, but this has meant it has been inundated with consumer credit applications. To help brokers avoid these delays, we will allow them to avoid this regulatory burden and use our regulatory permissions, whilst still being able to obtain all the benefits of their own lending operation. Interest from brokers in our innovative approach remains considerable and we believe we are still the only providers of such a service in the UK.

The board is very satisfied with the progress of the group to date. We will continue to examine all appropriate strategic avenues for the group and will also continue to make the investments necessary to ensure continuing success while, at the same time, remaining focused on the cost of our borrowing, the rates returned and the size and quality of the loans we provide.

We look to the future with confidence.

 

 

 

Gary Jennison Chairman

 

12 November 2018

 

 

Chief executive's review

We are pleased to report that we continue to build on the progress we made last year and continue to increase our profits on a year on year basis.

As stated in the "Our business model" section below, and for the reasons given in that section, we no longer separate insurance broking and professional fees and therefore information on individual markets would not be helpful

The lending market is being flooded by liquidity from alternative funding sources, but we continue to sail a focused and steady course. Our key competition is still the largest players in the market, whose multi-billion-pound lending market we continue to target.

We are delighted to confirm that we have now moved all of our business to a newly developed in-house IT platform, therefore removing our reliance on 3rd party IT providers. Our new IT platform uses cutting edge technology, which will significantly improve our offering to our clients and our competitiveness in the future. Our 3rd party IT platform held us back in the past and we will no longer suffer from this constraint on our business. By using our lean approach to the IT project, we have delivered a new IT platform at minimal cost to the company.

We have also entered 2 new and exciting markets; school fee funding and golf fee funding. Whilst we are still in the early stages of penetrating these markets, we are in the process of discussions with a number of schools and golf clubs and believe these will be great asset classes to add to our balance sheet for the future.

We have continued to work on what we believe to be the most significant improvement to our business over the course of the year. We are happy to confirm that our bank licence application has been submitted at the invitation of the Regulator and is progressing towards approval. A bank licence will significantly reduce our costs of liquidity and enable us to add greater leverage to our business, which will over-time drive higher returns to our shareholders. We hope to receive our bank licence in the first quarter of 2019.

We remain a small, lean, hardworking and profitable finance company in a huge financial services market. We are passionate about our business and have now operated in our market for nearly 18 years. We will continue to work as hard as we can and to the best of our abilities. We are confident that this will result in an increased share of our market.

We operate in a multi-billion-pound market, which is dominated by two large and well managed companies. We will continue to work hard to take a very small portion of the market for the group. We have the capital, liquidity and a great team to achieve our conservative plans and projections for the business and are looking forward to our continued growth over the coming years.

We paid a dividend of 2p per share in December 2017 and an interim of 1p per share in April 2018. I am happy to announce that the board has proposed a final dividend of 2p per share to be paid in December 2018, subject to shareholder approval.

 

 

Ravi Takhar

Chief executive officer 12 November 2018

 

Group strategic report

Strategy and objectives

The group's principal objective is to increase our profitability in a prudent, sustainable manner. The reason for this is that our stakeholders (employees, shareholders, partners, other customers, creditors and government) will all benefit from profit growth in the group.

We have two main financial strategies for doing this:

·      to grow our lending book profitably. In the short to medium term, the directors believe that the group's aims will be achieved first by increasing the number of our partners (insurance brokers, professional firms), including taking on new partners (schools and sports clubs) and secondly, by increasing the volume of business from these partners. We have, once again, bolstered our sales team with motivated, competent professionals who are attacking new potential customers and markets and have already achieved sensible growth in a hard economic environment;

·      to give further security to our sources of liquidity. As we mentioned in the half year report, we were confident that the PRA would welcome our application for a banking licence. They have done so and we are now into the process. A banking licence has been a long-standing strategic goal for Orchard. It will enable us to increase our liquidity further and reduce our reliance on commercial lenders as we build our customer deposit base.

Our financial strategy is bolstered by our non-financial strategies. First, we consider those brokers and professional firms with whom we work as our partners. We provide them with the tools they require to run their own finance businesses or we directly provide their customers with finance. We have found that in this way these businesses become supportive participants in our objectives because they see how this will assist them in achieving theirs. Our sales team are given support in meeting the targets set for them by finding partners who fit in with our business ethos, arranging prospect meetings and, where required, making use of senior personnel to help them close the deal. Care of our partners is of paramount importance in our business culture and this aspect is a constant part of training for all staff. Feedback from our partners in this area has been positive. Performance targets set for our staff (for example, answering partner enquiries promptly) have all been met.

The aim going forward is to build strongly on both our core markets and those which assist in achieving our overall objectives.

 

Our business model

The group's main business is providing credit to businesses and consumers to enable them to spread the cost of their insurance premiums or professional fees.

In the past, the group has reported in terms of there being two core areas - insurance premium funding and funding for professionals. The board has reviewed this method of reporting and concluded that the nature of these (and additional products) is so similar that any segregation would not give meaningful information to users of the financial statements. Both areas are managed on a similar basis, carry similar risks and rewards and need to comply with the same regulations. The board, which is considered to be the chief operating decision maker, now receives information on an aggregated basis. For this reason they are not separated this year (except to the extent that regulation requires it).

 

Bexhill borrows up to 75% of the amount advanced to each of its clients (up to a maximum of £15m) from its bankers, Barclays Bank plc. Orchard has in the past borrowed through Orchard Lending Club (a trading style of the group). These loans are still extant. In August 2017 the company arranged a facility of £4m with Conister Bank. This was reduced in July 2018 to £2m, as being all that was required at the time and to keep down costs. The balance of lending is provided by these companies from their own resources. At 31 July 2018 the group had capital and reserves of

£14.04m. Both subsidiaries have operated within a disciplined lending environment since their inception. Barclays performs regular reviews and supplements these with an audit every six months by external independent auditors. Conister requires information on lending to be sent on a regular basis. Lending limits to our supporting partners and to the end borrowers are set by reference to financial and other qualitative information for both. Limits are set based on financial information, credit reports, regulatory requirements and other qualitative factors obtained from our partners and their clients. In addition, an annual review process, including regulatory permissions and credit checks, is conducted and each partner is monitored monthly for the company's financial exposure to that entity.

The group's average cost of finance was approximately 3.44% in the financial year to 31 July 2018 (4.06% in the year to 31 July 2017).

A bank licence will increase our liquidity and reduce reliance on third party financing.

The business environment

The insurance premium finance market in which the group operates is still expected by the board to grow over the next five years in line with the general insurance market. We believe that most of our premium finance growth will come from the direct insurance side rather than from broker premium funding companies, although the premium funding company activities will remain the largest part of the business for the foreseeable future. The market for professional fee finance has slowed this year. This fact, coupled with an aggressive response from our competitors, has meant a lot of hard work to get to where we are. We have been examining new markets which, although at an early stage for us, are already looking very promising. Providing finance for school fees and sports clubs are two of these areas. Needless to say, the same vigorous, disciplined approach will be applied to lending in these sectors.

There is the continuing uncertainty attaching to the UK leaving the European Union, which applies to many businesses. However, the board believes that the direct effect of this on Orchard will not be significant in the short term. Conditions arising from this process (including the recent rises in interest rates) have had little impact on us so far. If rates rise further, the nature of the business will allow fairly quick reaction to this with our average loans being ten months on average and none over twelve. Increases in interest rates will also lead to availability of liquidity becoming more important for businesses and consumers and the board believes that this will bring further opportunities for Orchard.

 

 

Principal risks and uncertainties

The group's activities expose it to a variety of risks;

·      credit risk;

·      liquidity risk;

·      cash flow interest rate risk; and

·      conduct risk.

The group's overall risk management programme focuses on reducing the effect of these risks on the group's financial performance. A regular assessment of the principal risks affecting the group is carried out by the board of directors. It identifies, evaluates and mitigates financial risks and has written policies for credit risk and liquidity risk.

The principal risks, an explanation of what they are, their impact on the group and how they are mitigated, are shown in Table 1 below. Our sole business is lending money and therefore the risks apply to this area.

There are other risks associated with general financial uncertainty in this business (or in any other business), e.g. loss of staff and insurance risk. These have been reviewed but are not considered key or principal risks.

 

Table 1 principal risks

 

 

Risk

 

 

Explanation of risk

 

 

Impact on the group

Assessment of change in risk year-on-

year

 

 

Mitigation of risk

Credit risk

The risk that

A major loss could have a serious

This is an

Money is only lent for

 

debtors will default.

effect on group profit. Although

ongoing

periods up to one year

 

 

loans to insurance broking

situation.

through regulated

 

 

finance companies can be

Despite

introducers who guarantee

 

 

substantial, we have a claim on

mitigation

the loans. Borrowing limits

 

 

the underlying agreements which

there is still

are set based on prudent

 

 

are considerably smaller. For this

risk that bad

underwriting principles.

 

 

reason any losses are likely to

debts may

Impairment reviews are

 

 

come from relatively small debts,

occur. This

regularly conducted to

 

 

therefore these would have little

happened in

identify potential problems

 

 

impact on liquidity or solvency.

2018

early.

Liquidity

A lack of funding to

If our funding had been halved

This is an

Our bankers have

risk

finance our

for the whole of the 2018 year,

ongoing

supported us since 2002

 

business.

and there had been no changes in

situation.

and last year increased our

 

 

overheads, there would still have

There has

funding by 50%. They have

 

 

been a pre-tax profit of

been no

renewed our facility for

 

 

approximately £0.8m. There is no

change in this

another year and have

 

 

threat to solvency or own

risk.

indicated, so far as they are

 

 

liquidity through a reduction in

 

able, that they have no

 

 

funding.

 

wish to withdraw that

 

 

 

 

support. Other lines of

 

 

 

 

credit have since been

 

 

 

 

opened to us. Available

 

 

 

 

credit and our own cash

 

 

 

 

balances amounted to

 

 

 

 

£2.3m at 31 July 2018.

Cash flow

An increase in bank

Loans already made will be

This is an

Management is in regular

interest

rate means that

effectively charged at a lower

ongoing

contact with its bankers

rate risk

loans already made

margin for part of the borrowing

situation.

and routinely reviews the

 

need to be covered

term.

Despite two

financial situation in the

 

by new borrowing

In any realistic scenario, liquidity

increases in

economy. Loans made are

 

at a higher rate.

and solvency would not be

rates this

relatively short term (no

 

 

significantly affected.

year, there

more than twelve months

 

 

 

has been no

with the average at ten) so

 

 

 

significant

any increase is likely to

 

 

 

change in this

have a fairly short-term

 

 

 

risk.

impact.

IT risk

Disruption to or

Persistent failures would have an

This is an

There are in place robust

 

failure of our IT

enormous impact on our business

ongoing

business continuity

 

systems.

and could lead to its collapse.

situation. Our

procedures and security

 

 

Clearly, this

new system

measures in the event of IT

 

 

would affect solvency. However,

will give us

failures or disruption. We

 

 

our controls are such that even a

more control

have developed our own

 

 

minor disruption is very quickly

but will not

system which, although

 

 

picked up and action taken. We

effect any

operational, is consistently

 

 

have never had this type of

change in this

being tested. This will give

 

 

failure.

risk.

more control than we have

 

 

 

 

previously had.

Conduct

Any action that

Failing to bring conduct risk in

This is an

The board sets the

risk

leads to customer

line faces regulatory action, fines,

ongoing risk.

minimum standards

 

detriment or has an

and reputational damage, which

 

required and provides

 

adverse effect on

can harm us for years beyond the

 

oversight to monitor that

 

market stability or

event.

 

these risks

 

effective

 

 

are managed effectively

 

competition.

 

 

and escalated where

 

 

 

 

appropriate.

In summary:

·      credit risk is reduced by a robust system of checks on borrowers and by third party guarantees;

·      liquidity risk has been alleviated by a new source of funding from another bank and should be further eased by obtaining a bank licence;

·      cash flow interest rate risk is mitigated by the fact that loans are short term and by regular interaction with our bankers;

·      risk from disruption of the IT system is avoided by thorough business continuity procedures; and

·      conduct risk is taken very seriously. All our employees are responsible for the management and mitigation of conduct risk, in particular the board.

Our internal control systems ensure that the incidence of fraud or error is kept to a minimum. Much of this process is automated.

The nature of the business is that loans are made either to introducer finance companies or to clients of our introducing partners. Although there is high concentration when lending to finance companies, (at 31 October the largest nominal exposure was 14.78% of our loans), the individual debts making up these loans are assigned to us in the event of default. The reality, therefore, is that our exposure is low. At 31 October 2018, (the latest date of review), total outstanding loans were £31.13m, of which the highest was £0.13m, representing 0.43% of the outstanding amounts. This was the level of our highest exposure at that date. The situation was similar throughout the year and is expected to remain so for the foreseeable future.

We have experienced late payments in the past. The majority of these are through clients of our introducers (or the introducers themselves) changing banking details. Where there are other issues which cause late payment, we investigate these. We review debts for impairment and make provision where necessary. As part of this process, we have provided for £0.29m during the year to 31 July 2018 (£0.05m in the year to 31 July 2017), giving a provision of

£0.34m carried forward at 31 July 2018 (£0.05m at 31 July 2017). This potential bad debt has arisen as a result of a fraud and a major customer of one of our partner brokers going into liquidation. In the previous year one situation arose causing a loss of £0.05m (see note 10). Because of the size of the individual repayments. any impact on our business through late payments would be negligible.

Development and performance of the business

The fundamental function of the business is to lend money safely. To do this the group has relied on obtaining funding to provide loans to clients of its partners. The ability to provide this money is crucial to the business and availability of funds is a key area to enable future growth. This is the major reason for applying for a banking licence.

The ability to find borrowers is also key to the business. This has been discussed at the beginning of the Group strategic report. We have continued with our more formal and extensive marketing plan. This continues to work well (albeit that economic conditions are challenging at present). Our sales team has been further enhanced during the year.

Our margin is another key area. Upward changes in base rate could erode our margins (but only in the short term). Our rates would increase to reflect any further increases in base rate. Our own analysis indicates that the influence on our business would be negligible. Indeed, neither the reduction in bank rate during the previous year nor the increase in this year have had any real impact.

Overheads in this business are relatively stable. We have increases resulting from an increased sales function, increasing our bank borrowings, investment in the banking licence and enhancements to our IT systems. Other overheads have not altered significantly.

The board has identified the following financial KPIs:

·      Lending.

·      Gross rate on loans made.

·      Borrowing and other capital resources.

·      Cost of borrowing.

 

The table below gives a breakdown of our KPIs.

 

 

Actual

 

 

2018

2017

2016

Group

 

 

 

Loans made in the year

£68.73m

£63.35m

£48.56m

Average gross rate on loans made

6.29%

6.06%

6.22%

Level of borrowing

£16.06m

£13.79m

£9.24m

Own capital resources

£14.04m

£13.17m

£12.34m

Cost of borrowing

£0.45m

£0.33m

£0.24m

The increase in loans made in the year and the increase in average rate over the previous year has resulted in increases in reported turnover of £0.61m to £5.17m. As stated earlier the market has been hard.

This increase in lending has led to an increase in borrowing requirement.

This is the first year that we have combined our lending activities (for the reasons disclosed in the section on "Our business model" on page 4 of the statutory accounts). To give a comparison with previous years' reporting we set out below tables showing separate KPIs for insurance premium and professional fee funding.

 

 

Insurance premium funding

2018

2017

2016

Loans made in the year

£51.25m

£43.04m

£32.79m

Average gross rate on loans made

5.68%

5.49%

5.64%

Level of borrowing

£15.01m

£13.54m

£9.22m

Own capital resources

£3.66m

£2.94m

£2.42m

Cost of borrowing

£0.41m

£0.32m

£0.24m

 

 

Professional fee funding

Loans made in the year

 

 

 

£17.48m

 

 

 

£20.31m

 

 

 

£15.77m

Average gross rate on loans made

8.09%

7.27%

7.44%

Level of borrowing

£1.04m

£0.25m

£0.04m

Own capital resources

£0.93m

£0.68m

£0.52m

Cost of borrowing

£0.04m

£0.01m

£0.00m

 

 

In terms of non-financial indicators, the most important of these is quality of management and staff.

Our senior members of staff have a substantial number of years of experience between them working in the business. Because, over the years, they have taken on additional responsibilities, they know each area of the business well.

All our staff are fully trained for the role which they take. Customer care is of paramount importance in our business culture and this aspect is a constant part of training for all staff members. Feedback from our partners in this area has been very positive. Performance targets set for our staff have all been met.

People are happy to contribute towards our success and their views are always listened to by senior management. In many cases ideas which come forward are put into action and in all situations explanations are given when this does not happen.

Going concern

The financial statements have been prepared on a going concern basis which assumes that the group will be able to continue its operations for the foreseeable future.

The directors continually assess the prospects of the group. Forecasts are prepared for a three-year period, on a rolling basis. These are also subject to sensitivity analysis, the main aspect of which is the value of loans made. In all scenarios, there is no indication that there will be a problem in continuing as a going concern. However, it is important to appreciate that the further away in time the estimate, the less reliable it is. The forecasts are prepared on the basis that bank base rate will rise by 0.25% pa over the next three years. This has been intimated by Mark Carney, Governor of the Bank of England. Should this be the case we are in a position to react within a short period of time (as mentioned in the section on cash flow interest rate risk above) and with relatively little impact on our margins.

The key assumptions and bases used in the forecasts are:

·    Loans through our partners will grow from circa £69m in 2018 to circa £120m in 2021;

·    Liquidity will be available to fund those loans;

·    Margins will remain stable on both corporate and direct business;

·    Overhead will increase at the rate of inflation with stepped increases at certain points (when capacity constraints are hit);

·    The funding system will be able to accommodate the increased business.

The consolidated statement of financial position shows the situation at the year end in detail.

The directors have prepared and reviewed financial projections for the 12-month period from the date of signing of these financial statements. Based on the level of existing cash and the projected income and expenditure, the directors have a reasonable expectation that the company and group have adequate resources to continue in business for the foreseeable future. Accordingly, the going concern basis has been used in preparing the financial statements.

 

Environmental, social responsibility, community, human rights issues and gender diversity

The group is a small group. The impact of the group on the environment consists of power used in an office environment and fuel used for getting to and from work. Environmental issues are therefore negligible.

The group operates out of an office in Luton. Most of our employees are based in the local area. We therefore contribute to the economy of the local community. None of our employees earn less than £10 per hour (before any bonuses). We provide health club membership and childcare vouchers for any staff who wish it. We review the background of our suppliers and will not use any supplier which, as far as we are aware, breaches our own high standards as regards human rights.

The main board of directors is currently all male. The main reason for this situation is that the group took in outside board members who were best suited to the positions. The board of the two subsidiaries consist of one male and two females each. Males make up 57.89% of the employees in total (41.67% in 2017).

Approved by the directors and signed by order of the board

 

 

Liam McShane, Company secretary

 

12 November 2018

 

Consolidated income statement

 

 

2018

2017

Notes

£000

£000

Continuing operations

 

 

Revenue                                                                                          4

5,174

4,560

Finance costs                                                                                  6

(452)

(329)

Other operational costs                                                                   5

(83)

(78)

Gross profit

4,639

4,153

Administrative expenses                                                                5

(2,746)

(2,512)

Operating profit and profit before tax

1,893

1,641

Tax                                                                                                 7

(381)

(303)

Profit for the year from continuing operations

1,512

1,338

Other comprehensive income

-

-

 

 

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

 

 

 

1,512

 

 

 

1,338

 

 

 

Earnings per share attributable to the owners of the parent during the year (pence)

Basic and diluted                                                                             8                              7.08                          6.26

 

Consolidated statement of financial position

 

 

 

2018

2017

Notes

£000

£000

Assets

 

 

 

Non-current assets

Property, plant and equipment

 

 

59

 

76

Intangible assets

 

42

75

Trade and other receivables

10

18

23

 

 

119

174

Current assets

Trade and other receivables

 

10

 

31,084

 

28,523

Cash and cash equivalents:

 

 

 

Bank balances and cash in hand                                                                                1,286

1,728

 

 

32,370

30,251

Total assets

 

32,489

30,425

 

Equity and liabilities

 

 

 

Equity attributable to the owners of the parent

Called up share capital

 

 

214

 

214

Share premium

 

8,692

8,692

Merger reserve

 

891

891

Retained earnings

 

4,240

3,369

Total equity

 

14,037

13,166

 

Liabilities

Non-current liabilities

Borrowings

 

 

 

11

 

 

 

49

 

 

 

57

Deferred tax

 

5

7

 

 

54

64

Current liabilities

Trade and other payables

 

12

 

2,051

 

3,182

Borrowings

11

16,008

13,734

Tax payable

 

339

279

 

 

18,398

17,195

Total liabilities

 

18,452

17,259

 

Total equity and liabilities

 

 

32,489

 

30,425

 

Consolidated statement of changes in equity

 

 

 

Called up

share capital

 

Retained earnings

 

Share Premium

 

Merger reserve

 

Total equity

£000

£000

£000

£000

£000

Balance at 1 August 2016

214

2,545

8,692

891

12,342

Changes in equity

Profit and total comprehensive income

 

-

 

1,338

 

-

 

-

 

1,338

Transactions with owners:

Dividends paid

 

-

 

(514)

 

-

 

-

 

(514)

Balance at 31 July 2017

214

3,369

8,692

891

13,166

 

Changes in equity

Profit and total comprehensive income

 

 

-

 

 

1,512

 

 

-

 

 

-

 

 

1,512

Transactions with owners:

Dividends paid

 

-

 

(641)

 

-

 

-

 

(641)

Balance at 31 July 2018

214

4,240

8,692

891

14,037

 

 

Retained earnings consist of accumulated profits and losses of the group. They represent the amounts available for further investment in group activities. Only the element which constitutes profits of the parent company are available for distribution. There are no restrictions on payment of dividends by the subsidiaries to the parent or by the parent to shareholders.

The share premium account arose on the IPO on 1 July 2015 at a premium of 95p per share. Costs of the IPO have been deducted from the account as permitted by IFRS.

The merger reserve arose through the formation of the group on 23 June 2015 using the capital reorganisation method as shown in note 2.4 below.

 

Consolidated statement of cash flows

 

 

2018

2017

 

Cash flows from operating activities:

Notes

£000

£000

Profit before tax

 

1,893

1,641

Adjustment for depreciation and amortisation

 

56

48

Hire purchase interest

 

2

2

 

 

1,951

1,691

(Increase) in trade and other receivables

 

(2,556)

(6,541)

(Decrease)/increase in trade and other payables

 

(1,131)

1,525

 

 

(1,736)

(3,325)

Tax paid

 

(323)

(316)

 

Net cash absorbed by operating activities

 

 

(2,059)

 

(3,641)

 

 

Cash flows from investing activities

Purchases of property, plant and equipment

 

 

 

 

(1)

 

 

 

(2)

Purchase of intangible fixed assets

 

(5)

(59)

 

Net cash absorbed by investing activities

 

 

(6)

 

(61)

 

 

Cash flows from financing activities

Dividends paid

 

 

 

 

(641)

 

 

 

(514)

Net proceeds from borrowings

 

2,276

4,565

Hire purchase repaid

 

(12)

(11)

 

Net cash generated by financing activities

 

11.2

 

1,623

 

4,040

 

Net (decrease)/increase in cash and cash equivalents

 

 

(442)

 

338

Cash and cash equivalents at the beginning of the year

 

1,728

1,390

 

Cash and cash equivalents at the end of year

 

 

1,286

 

1,728

 

Notes to the consolidated financial statements

1.    Preliminary announcement

Orchard Funding Group plc ("Orchard") 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. The registered office is 721 Capability Green, Luton, Bedfordshire LU1 3LU and the principal place of business is the United Kingdom.

The preliminary announcement set out above does not constitute Orchard's statutory financial statements for the years ended 31 July 2018 or 2017 within the meaning of section 434 of the Companies Act 2006 but is

derived from those audited financial statements. The auditor's report on the consolidated financial statements for the years ended 31 July 2018 and 2017 is unqualified and does not contain statements under s498(2) or

(3) of the Companies Act 2006.

The accounting policies used for the year ended 31 July 2018 are unchanged from those used for the statutory financial statements for the year ended 31 July 2017. The 2018 statutory accounts will be delivered to the Registrar of Companies following the Company's Annual General Meeting.

 

 

2.    Compliance with accounting standards

While the financial information included in this preliminary announcement has been computed in accordance with IFRS, this announcement does not itself contain sufficient information to comply with IFRS.

Accounting standards adopted in the year

No new accounting standards that have become effective and adopted in the year have had a significant effect on the Group's Financial Statements.

Accounting standards issued but not yet effective

At the date of authorisation of the Financial Statements, there were a number of other Standards and Interpretations (International Financial Reporting Interpretation Committee - IFRIC) which were in issue but not yet effective, and therefore have not been applied in these Financial Statements. The Directors have not yet assessed the impact of the adoption of these standards and interpretations for future periods, but do not expect them to have any significant impact on the Group's financial statements.

 

3.    Going concern

The financial statements have been prepared on a going concern basis which assumes that the Group will be able to continue its operations for the foreseeable future. The Directors have prepared and reviewed financial projections for the 12 month period from the date of signing of these financial statements. Based on the level of existing cash and the projected income and expenditure, the Directors have a reasonable expectation that the Company and Group have adequate resources to continue in business for the foreseeable future.

Accordingly the going concern basis has been used in preparing the financial statements. This is discussed more fully in the Group strategic report. Orchard Funding Group plc ("the company") and its subsidiaries (together "the group") provide funding and funding support systems to insurance brokers and professional firms through the trading subsidiaries. The group operates in the United Kingdom.

4.    Segment information

The group operates wholly within the United Kingdom therefore there is no meaningful information that could be given on a geographical basis. In previous years the board recognised two discrete operating segments - insurance premium funding and professional fee funding. After a detailed review of this method of analysis, the board has concluded that the nature of these (and additional products) is so similar that any segregation (other than central costs) would not give meaningful information to users of the financial statements. Both areas are managed on a similar basis, carry similar risks and rewards and need to comply with the same regulations. For this reason they are not separated this year (except to the extent that regulation requires it).

The board therefore assesses the entire business based on operating profit (before tax and exceptional items, but after interest which is a cost of sale). The revenues, operating costs and operating profit are shown below.

 

2018

Total

£000

Central

£000

Financing

£000

Revenue

5,174

-

5,174

 

Interest payable

 

(452)

 

-

 

(452)

Operational costs and administrative expenses

(2,829)

(658)

(2,171)

Operating profit/(loss) before tax

1,893

(658)

2,551

Current tax expense

(381)

-

(381)

Profit/(loss) for the year after tax

1,512

(658)

2,170

 

2017

 

Total

£000

 

Central

£000

 

Financing

£000

Revenue

4,560

-

4,560

 

Interest payable

 

(329)

 

-

 

(329)

Operational costs and administrative expenses

(2,584)

(592)

(1,992)

Goodwill on consolidation written off

(6)

-

-

Operating profit/(loss) before tax

1,641

(592)

2,239

Current tax expense

(303)

-

(303)

Profit/(loss) for the period after tax

1,338

(592)

1,936

 

 

 

 

5.    Expenses by nature

 

 

2018

2017

 

£000

£000

Interest payable in cost of sales

452

329

Other operational costs

83

78

Employee costs (including directors)

1,002

1,072

Advertising and selling costs

273

218

Bank fees

553

438

Professional and legal fees

198

228

Impairment provision

290

79

IT costs

66

71

Depreciation and amortisation

56

54

Other expenses

308

352

Total cost of sales, other operational costs and administrative expenses

 

3,281

 

2,919

 

 

6.    Finance income and costs

The group's income comes from making loans.

Interest payable on borrowings to finance these loans is therefore included as a cost of sale. The amount included was £452k (2017 £329k).

 

7.    Tax expense

7.1   Current year tax charge:

 

 

 

2018

2017

£000

£000

Current tax expense

365

331

Adjustment re previous year tax expense

18

(25)

 

Deferred tax expense relating to the origination and reversal of

                                                                                                 (2)                     (3)

 

  temporary differences                                                                                                                                                  

                                                                                                                                           381                     303

 

 

7.2   Tax reconciliation

The tax assessed for the year differs from the main corporation tax rates in the UK (19%, 2017 - 19% and 20%). The differences are explained below.

 

 

2018

2017

£000

£000

Profit before tax for the financial year

1,893

1,641

 

Applicable rate - 19.00% (2017 19.67%)

 

19.00%

 

19.67%

 

Tax at the applicable rate

 

360

 

323

Effects of:

Expenses not deductible for tax

 

3

 

5

Adjustment re previous year tax expense

18

(25)

Tax charge for the period

381

303

 

 

8.      Earnings per share

Earnings per share is based on the profit for the year of £1,512k (2017 £1,338k) and the weighted average number of ordinary shares in issue during the year of 21.35m (2017 21.35m). There are no options or other factors which would dilute these therefore the fully diluted earnings per share is identical.

 

9.      Dividends

 

 

2018

2017

£000

£000

Amounts recognised as distributions to equity holders in the period:

Final dividend for the year ended 31 July 2017 of 2p (2016 1.405p) per share

 

 

427

 

 

300

Interim dividend for the year ended 31 July 2018 of 1p (2017 1p) per share

 

214

 

214

 

641

514

 

Proposed final dividend for the year ended 2018 of 2p (2017 2p) per share

 

 

427

 

 

427

 

 

10. Trade and other receivables

 

 

2018

2017

 

Group

Group

 

£000

£000

Non-current

 

 

Other receivables

18

23

 

18

23

Current

Trade receivables

 

30,945

 

28,413

Intercompany receivables

-

-

Other receivables

111

86

Prepayments

28

24

 

31,084

28,523

Standard credit terms for trade receivables are based on the length of the loan but repayments are due on a monthly basis. As part of the impairment review process (and among other evaluation methods), debts on which no repayment has been received in the last 30 days are assessed. It is not abnormal for borrowers to miss a payment for several reasons (e.g. changing banks) and 30 days gives time for the situation to be rectified. Debts within this 30 day period are not considered past due. Any debts for which repayments are still outstanding after 30 days would be considered overdue and subject to an impairment review. The amount of debts past due but not impaired at the year end was £Nil (2017 £Nil). The directors consider that the carrying amount of trade and other receivables approximates their fair value. There are impaired debts at the year end amounting to £343k (2017 £53k) against which £290k was charged in the year (2017 £53k). Provision has been made in full for these.

 

Trade receivables can be analysed as follows:

 

 

2018

2017

 

Group

Group

 

£000

£000

Amount receivable not past due

30,945

28,3413

Amount receivable past due but not impaired

-

-

Amount receivable impaired (gross)

343

53

Less impairment

(343)

(53)

 

30,945

28,413

 

 

11.   Borrowings

 

 

2018

Group

2017

Group

£000

£000

Non-current:

Other loans

 

41

 

41

Hire purchase contracts

8

16

 

49

57

Current:

Bank loans

 

16,000

 

13,520

Other loans

-

204

Hire purchase contracts

8

10

 

16,008

13,734

 

11.1     Terms and debt repayment schedule:

 

The bank loans are due within one year. The other loans fall due as follows:

 

 

2018

2017

 

Group

Group

 

£000

£000

 

Within 1 year

 

-

 

204

Later than 1 year but no later than 2

41

40

Later than 2 years but no later than 5

-

1

 

41

245

 

The minimum payments under hire purchase contracts are as follows:

 

 

2018

Group

 

Company

2017

Group

 

Company

£000

£000

£000

£000

Within 1 year

8

-

11

-

Later than 1 year but no later than 5

9

-

18

-

 

17

-

29

-

Future finance charges

(1)

-

(3)

-

 

16

-

26

-

 

The present value of hire purchase liabilities are as follows:

 

Within 1 year

8

-                           10

-

Later than 1 year but no later than 5

8

-                           16

-

 

16

-                           26

-

 

Barclays Bank borrowings are secured by a fixed and floating charge over all the assets of Bexhill UK Limited, bear interest at rates of 2.90% above LIBOR plus any associated costs, and are repayable within one year of the advances. The loans are provided on a revolving 12 monthly basis under a facility which is due for renewal on 29 July 2019 at which time it is expected that they will be renewed. The maximum drawdown on the facility is currently £15m all of which was drawn at the year end (2017 £1.4m undrawn). The directors consider that the terms of this facility closely match the maturity dates of the group's receivables.

Conister Bank borrowings are secured over the assets of Orchard Funding Limited, bear interest at a rate of 4.5% pa and are repayable within one year of the advance. The maximum drawdown facility is currently £2m of which £1m was drawn at the year end (2017 £Nil available).

Other borrowings are unsecured and bear interest at varying rates between 4.00% and 6.25%.

Hire purchase liabilities are secured on the assets that they finance and bear interest at varying rates.

 

11.2     Reconciliation of liabilities arising from financing activities

 

 

 

2016

       Cashflows

2017

       Cashflows

2018

£000

£000

£000

£000

£000

Non-current:

Other loans

 

1

 

40

 

41

 

-

 

41

Hire purchase contracts

26

(10)

16

(8)

8

 

27

30

57

(8)

49

Current:

Bank loans

 

9,174

 

4,346

 

13,520

 

2,480

 

16,000

Other loans

25

179

204

(204)

-

Hire purchase contracts

9

1

10

(2)

8

 

9,209

4,526

13,734

2,274

16,008

Total liabilities from financing

9,236

4,556

13,791

2,266

16,057

Hire purchase interest included in operating cashflows

 

 

(2)

 

(2)

 

Cashflows from financing activities

 

4,554

 

2,264

 

Compromising

 

 

 

 

 

Net proceeds from borrowings

 

4,565

 

2,276

 

Borrowings repaid

 

(11)

 

(12)

 

 

 

4,554

 

2,264

 

 

 

 

 

12. Trade and other payables

 

2018

 

2017

 

Group

Group

 

£000

£000

Trade payables

1,710

2,833

Other payables

51

40

Other tax and social security costs

33

43

Accrued expenses

257

266

 

2,051

3,182

 

The directors consider that the carrying value of trade and other payables approximates to their fair value.

 

13.   Financial instruments

The company is exposed to the risks that arise from its use of financial instruments. The objectives, policies and processes of the company for managing those risks and the methods used to measure them are detailed in note 3 below.

 

13.1     Principal financial instruments

The principal financial instruments used by the company, from which financial instrument risk arises, are as follows:

●  Cash and cash equivalents

●  Trade and other receivables

●  Trade and other payables

●  Borrowings

 

13.2     Financial instruments by category

The group held the following financial assets at the reporting date:

 

2018

Group

2017

Group

£000

£000

Loans and receivables:

Trade and other receivables: non-current

 

18

 

23

Trade and other receivables: current

Cash and cash equivalents:

31,056

28,499

Bank balances and cash in hand

1,286

1,728

 

32,360

30,250

 

 

The group held the following financial liabilities at the reporting date:

2018                                                      2017

Group                                                   Group

£000                                                      £000

 

Other financial liabilities at amortised cost:

Interest bearing loans and borrowings:

Borrowings payable: non-current

 

49

 

57

Borrowings payable: current

16,008

13,734

Trade and other payables

2,018

3,139

 

18,075

16,930

 

 

13.3     Fair value of financial instruments

The fair values of the financial assets and liabilities are not materially different to their carrying values due to the short-term nature of the current assets and liabilities.

13.4     Financial risk management

The company's policies for financial risk management are outlined in note 3 above. A sensitivity analysis of the group's exposure to interest rate movements has not been prepared as, in the opinion of the directors, the impact would be immaterial given the short term nature of the group's lending.

 

14.   Treatment of borrowings

The group borrows money from its bankers and lends this on, together with its own funds, to its customers. Any increase in activity leads to an increase in debtors and an associated increase in borrowings. If the company was one which bought and sold goods or services the money borrowed would be similar to the company's stock in trade and the change in creditors would be shown as part of operating cash flows. However, accounting standards require cash flows from financing to be shown separately and this means that there appears to be a large outflow of cash from the company's operations which is then covered by borrowings. For reasons stated above this is not the case.


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