Tatton Asset Management plc (LON:TAM), the investment management and IFA support services group, has announced its interim results for the six-month period ended 30 September 2020.
– Group revenue increased 12.6% to £10.956m (Sep 2019: £9.729m)
– Adjusted operating profit1 up 21.9% to £5.030m (Sep 2019: £4.126m)
– Adjusted operating profit1 margin 45.9% (Sep 2019: 42.4%)
– Reported profit before tax £3.074m (Sep 2019: £3.610m)
– Adjusted fully diluted EPS2 increased 21.5% to 6.55p (Sep 2019: 5.39p)
– Interim dividend up 9.4% to 3.5p (Sep 2019: 3.2p)
– Strong financial liquidity position, with net cash of £13.328m
– New banking facility, giving access to up to £30 million of funds, to support growth
1. Adjusted for exceptional items, share-based payment costs and amortisation
2. Adjusted for exceptional items, share-based payment costs, amortisation and potentially dilutive shares
– Assets Under Management (AUM) increased 17.4% to £7.811bn (31 March 2020: £6.651bn), an increase of £1.160bn for the six-month period. Latest AUM mid-November 2020 is £8.134bn
– Net inflows for the six months to September 2020 were £328.1 million, an increase of 4.9% of AUM
– Tatton increased the number of firms utilising its Discretionary Fund Management (“DFM”) services by 4.9% to 624 (31 March 2020: 595) and the number of accounts increased 3.6% to 68,500 (31 March 2020: 66,100)
– Tatton’s long-term business partnership with Tenet continues to develop well with 93 IFA firms (31 March 2020: 81 IFA firms) and AUM reaching £376.6m (31 March 2020: £225.9m)
– Paradigm Mortgage Services, the Group’s mortgage distribution and support services business, has seen an increase in member firms for the period of 3.0% to 1,591 members (31 March 2020: 1,544 members)
– Paradigm Consulting, the Group’s IFA support business, increased its members by 2.5% to 404 (31 March 2020: 394)
Paul Hogarth, Chief Executive Officer, commented:
“I am pleased to report our interim results for the first half of this financial year. I am delighted to confirm that despite the exceptional circumstances of the last six months we have delivered a resilient performance with strong growth in revenue, profits and margins and remain on track to meet market expectations in FY 2021.
2020 has been a testing time for all businesses and I would like to thank our colleagues for their incredible dedication and contribution during this time and our IFAs for their continued support and trust. Tatton is a proud advocate of IFAs; we place them at the heart of our value chain and recognise how essential the IFA remains to our distribution strategy. In response to changing conditions, it has been necessary to adapt the way we interact with our firms over the last six months. We have adjusted our approach from a predominantly in-person contact model to include web-based engagement, through a suite of online meetings and interactions led by the IFA’s own business model and capability.
As we move into the second half of the financial year, we recognise that there are headwinds in our industry but we remain enthused by the exciting opportunities that exist for the business and are optimistic regarding the prospects for the Group.”
The Group has delivered a resilient performance in the first half of this financial year, continuing to grow AUM and revenue.
We adapted seamlessly to the new trading environment and have maintained face-to- face engagement with our IFAs where possible. We have also redeployed resources to direct online engagement, running multiple interactive virtual events and frequent video investment updates, which have been well received and have proved to be very successful. We continue to deliver increasing AUM and reached £7.811 billion at the end of September 2020 (31 March 2020: £6.651 billion).
Group revenue for the period increased 12.6% to £10.956 million (2019: £9.729 million). Adjusted operating profit* for the period increased 21.9% to £5.030 million (2019: £4.126 million) with adjusted operating profit margin* increasing to 45.9% (2019: 42.4%).
Pre-tax profit after exceptional items, amortisation of customer relationship intangibles, finance costs and share-based payment charges decreased to £3.074 million (2019: £3.610 million) due to the increase in share-based payment charges in the period following the release of the provision at the March 2020 year end. This release was solely related to the increased level of uncertainty in the market due to the COVID-19 pandemic.
Taxation charges for the period were £0.414 million (2019: £0.667 million). This gives an effective tax rate of 13.5% when measured against profit before tax. This effective tax rate is low due to tax credits on share-based payment charges. Adjusting for exceptional costs and share-based payments the effective tax rate is 19.2%.
The basic earnings per share was 4.77p (2019: 5.26p). When adjusted for exceptional items and share-based payment charges, earnings per share was 7.25p (2019: 5.92p). The decrease in basic and diluted earnings is due to the increase in share-based payment charges from £0.413 million to £1.642 million. Adjusted earnings per share fully diluted for the impact of share options was 6.55p (2019: 5.39p), an increase of 21.5%.
The last six months have been testing times for many businesses and our business model has proved to be resilient and capable of dealing with the challenges presented by the pandemic.
AUM at 30 September 2020 increased 17.4% to £7.811 billion from £6.651 billion at 31 March 2020. New net inflows contributed £328.1 million of the £1.160 billion increase with market returns delivering the balance, driving an increase in AUM of 12.5%.
Tatton is a proud advocate of IFAs – we place them at the heart of our value chain and recognise how essential the IFA remains to our distribution strategy. In response to changing conditions it has been necessary to adapt the way we interact with our firms over the last six months, and we have adjusted our approach from a predominantly in-person contact model to include web- based engagement through a suite of online meetings and interactions led by the IFA’s own business model and capability.
This approach has helped increase our firms to 624 (Sep 2019: 522), an increase of 19.5%, and client accounts – increased to 68,500 (Sep 2019: 61,250), an increase of 11.8%.
Based on adviser feedback we continue to evolve our proposition. The last six months have seen the launch of a suite of new global models following the extension of our already popular Blended fund range – widening access across a broader number of platforms. Looking forward we will seek to enhance the current organic growth of AUM through new and existing adviser relationships as well as through strategically targeted acquisitions. In recent months we have made further investment into our sales support and account management resource – ensuring we are well placed to support our current growth and future ambitions.
A year into our strategic partnership with Tenet Group we are pleased with the progress made and are delighted to be working with 93 firms (Sep 2019: 40 firms) bringing £377 million (Sep 2019: £25 million) of associated AUM. We look forward to continuing this valued partnership.
Tatton’s revenue, which accounts for 79% of Group revenue, grew 21.2% to £8.605 million (2019: £7.102 million) and adjusted operating profit* grew 23.6% to £5.283 million (2019: £4.273 million) increasing the margin to 61.4% (2019: 60.2%).
Paradigm’s revenue, which accounts for 21% of Group revenue, fell by £0.260 million or 10.0% to £2.343 million (2019: £2.603 million) and adjusted operating profit fell by £0.153 million or 16.8% to £0.757 million (2019: £0.910 million).
Paradigm Mortgage Services, the Group’s mortgage distribution and support services business, encountered a very challenging environment, specifically in Q1, as a direct consequence of the coronavirus lockdown halting all on-site survey work. This effectively closed the mortgaged purchase market and impacted valuation income. While mainstream lenders moved quickly to establish robust homeworking support structures, mortgage supply and available products fell dramatically as lenders sought to cope with Government led actions supporting consumer protections. At the same time specialist mortgage funding came under severe pressure, in effect temporarily curtailing special or more complex lending.
During the second quarter, lenders have seen case count and volumes return to more normal levels, however productivity and operational resilience remain weak. Despite the very limited availability of high loan to value products, driven by a combination of those operational constraints and risk concerns, the need for robust financial advice remains strong. While there remains a level of uncertainty, the market continues to adapt to a new normal and is functioning well. Paradigm and its broker members continue to demonstrate considerable resilience and the ability to adapt quickly to change, maximising opportunities, for example in growing their channel share and volume of retention business or exploiting protection cross-sale opportunities.
The Government’s reduction in Stamp Duty rates, available until the end of our financial year, has certainly proved a worthwhile incentive, bolstering the purchase market. While we remain cautious about the sector as a whole, intermediaries now control over 75% of all new mortgage business and as independent advice is increasingly sought we are well positioned to grow this further when the market returns to some level of normality.
Notwithstanding the above, the business has managed to increase its member firms in the period by 3.0% to 1,591 members (31 March 2020: 1,544 members) and lending in the period was £5.00 billion (2019: £4.78 billion).
Paradigm Consulting, the Group’s IFA support business, has been largely unaffected by the ongoing pandemic. It has taken initiatives to market its services more widely and has increased new members by 2.5% to 404 (31 March 2020: 394 members).
Exceptional items, along with share-based payment charges and amortisation of customer relationship intangible assets, are reported separately to give better clarity of the underlying performance of the Group. The alternative performance measures (“APMs”) are consistent with how the business performance is planned and reported within the internal management reporting to the Board. Some of these measures are also used for the purpose of setting remuneration targets.
During the period, the Group pursued a potential acquisition of a business which fitted the strategic direction of the Group and would have been both material and complementary to Tatton’s portfolio of products.
The Group was invited to the final stage of the sale process but was unsuccessful in its bid. Professional fees of £0.2 million were incurred in the process, which have been treated as exceptional items. We were disappointed but remain disciplined in our approach and view of valuation.
To support the Group’s ambition to grow, both organically and through acquisition, the Group has put in place a new facility during the period, giving access to up to £30 million of funds. The new facility is split between a £10 million three-year committed revolving credit facility with an accordion option of £20 million. The accordion feature remains uncommitted at this stage but accessible on short notice and provides financial flexibility for future corporate transactions.
The Group’s balance sheet remains healthy with net assets at 30 September 2020 totalling £20.0 million (2019: £15.3 million) reflecting the continued growth and profitability of the Group. Property, plant and equipment has remained at £1.1 million (2019: £1.1 million). Intangible assets of £1.4 million have been recognised (2019: £1.8 million), of which £1.1 million relates to the customer relationship intangibles acquired on the acquisition of Sinfonia Asset Management on 30 September 2019.
Cash generated from operations was £4.2 million, £4.4 million before exceptional items (2019: £3.9 million) and was 134% of operating profit. The Group remains debt free with closing net cash at the end of the period of £13.3 million (2019: £9.2 million). The cash resources are after the payment of corporation tax of £1.0 million and dividend payments of £3.6 million relating to the final dividend for the year ended 31 March 2020.
NEW SHARES ISSUES
In the period, the Group issued 852,813 shares to employees who have elected to exercise their options pursuant to the Company’s EMI Scheme and Save As You Earn (“SAYE”) employee share scheme.
The Board is pleased to recommend an interim dividend of 3.5p per share, an increase of 9.4% on the prior period interim dividend.
The interim dividend reflects both our cash performance and our underlying confidence in the business. The interim dividend of 3.5p per share, totalling £2.0 million, will be paid on 18 December 2020 to shareholders on the register at close of business on 27 November 2020 and will have an ex-dividend date of 26 November 2020. In accordance with IFRS, the interim dividend has not been included as a liability in this interim statement.
The Board identified principal risks and uncertainties which may have a material impact on the Group’s performance in the Group’s 2020 Annual Report and Accounts (pages 30-31) and believes that the nature of these risks remains largely unchanged at the half year. The Board will continue to monitor and manage identified principal risks throughout the second half of the year.
POST BALANCE SHEET EVENTS
The Group has continued to monitor the impact that the COVID-19 pandemic has on the wider market and on our business. We have also continued to review the implications of the result of the UK referendum to leave the EU on our business model. As the Group has no direct exposure to cross-border trading and has no overseas operations, the direct impact of Brexit will be limited. However, we remain mindful of the uncertainty Brexit has created and its potential to impact markets and the wider consumer sentiment. The Board will continue to assess the implications of these events as they emerge.
As stated in note 2.2 of these condensed financial statements, the Directors are satisfied that the Group has sufficient resources to continue in operation for the foreseeable future, a period not less than 12 months from the date of this report. To form this view, the Directors have also considered the impact of the current COVID-19 pandemic and the resulting economic uncertainty. Accordingly, they continue to adopt the going concern basis in preparing these condensed financial statements.
SUMMARY AND OUTLOOK
The Group has again delivered a solid first half performance with strong growth in revenue, profits and margins, against the backdrop of a challenging trading environment.
The second half of the year brings a second period of lockdown and with it a degree of uncertainty. However, we now have the benefit of the last six months experience, and the operational changes that we made to address the challenges of the first lockdown, and are confident that we will be able to meet the similar challenges implicit in this development.
While we acknowledge that as long as the restrictions remain in place it will be more difficult to engage with our adviser firms, as it will be for firms with their clients, we will respond by remaining accessible, providing practical support and effective communication, based on change and innovation already in place following the previous lockdown. This should better equip our firms to meet their client needs in what is an uncertain period.
As we look forward, we continue to trade in line with the Board’s full year expectations and we remain excited about the opportunities that exist for the business and remain optimistic regarding the prospects of the Group.
*Alternative performance measures are detailed in note 17 of the condensed consolidated interim financial statements.