Tatton Asset Management plc (LON: TAM), the on-platform discretionary fund management (DFM) and support services business for independent financial advisers (IFAs), has issued its interim results for the six-month period ended 30th September 2019.
- Discretionary assets under management (“AUM”) increased 22.8% to £7.0bn (2018: £5.7bn)
- Average AUM inflows over £73.0m per month
- Group revenue increased 15.2% to £9.73m (2018: £8.45m)
- Adjusted operating profit* up 23.2% to £4.13m (2018: £3.35m)
- Profit before tax increased to £3.61m (2018: £3.08m)
- Return on capital employed increased by 1.1% to 25.2% (2018: 24.1%)
- Adjusted fully diluted EPS* increased 17.9% to 5.39p (2018: 4.57p)
- Proposed interim dividend increased 14.3% to 3.20p (2018: 2.80p)
- Strong financial position, with net cash of £9.2m
- Acquired Sinfonia Asset Management Limited, five Funds with AUM of £135m for a consideration of up to £2.7m
- Tatton Investment Management (Tatton) increased its number of firms to 522 (2018: 405) and number of accounts to 61,250 (2018: 53,500)
- Strong start to Tenet Partnership since June announcement – 40 new firms and £24.5m of AUM
- Paradigm Mortgages Services, the Group’s mortgage and protection distribution business, performed strongly, with gross lending via its channels during the period of £4.8bn (2018: £4.0bn), an increase of 20.0% and with 1,466 mortgage firms using its services (2018: 1,290)
- Amalgamation of Consulting and Mortgages creating a simplified IFA support services business, allowing the Group to better meet the needs of IFAs through an integrated approach
- Alternative performance measures are detailed in note 18 of this interim report
Paul Hogarth, Tatton Asset Management Chief Executive, commented:
“It is particularly pleasing to have reached the important milestone of £7bn of AUM with monthly net flows continuing to perform well from both existing and new IFAs despite an uncertain and volatile market. We have also reorganised our IFA support services businesses under the existing Paradigm brand but with one simplified operational and management structure from which we expect to see improved efficiencies and opportunities in the future. While we are mindful of the current political and macro-economic factors, the Group continues to trade in line with the Board’s full year expectations and the Board remains optimistic regarding the prospects of the Group.”
An analyst briefing is being held at 9.30am on 11 November 2019 at the offices of Zeus Capital, 10 Old Burlington St, London, W1S 3AG.
The Group has delivered a solid first half performance driven by continued growth in Tatton Investment Management (Tatton). We continue to deliver increasing assets under management (AUM) and reached the £7.0bn milestone at the end of September 2019.
Group revenue for the period increased 15.2% to £9.73m (2018: £8.45m). Adjusted operating profit* for the period increased 23.2% to £4.13m (2018: £3.35m) with adjusted operating profit margin* increasing to 42.4% (2018: 39.7%).
Pre-tax profit after exceptional items and share-based payment charges increased 17.1% to £3.61m (2018: £3.08m). Taxation charges for the period were £0.67m (2018: £0.68m). This gives an effective tax rate of 18.5% when measured against profit before tax. Adjusting for exceptional costs and share-based payments the effective tax rate is 19.7%.
The basic earnings per share was 5.26p (2018: 4.30p). When adjusted for exceptional items and share-based payment charges, earnings per share was 5.92p (2018: 4.97p) and earnings per share fully diluted for the impact of share options was 5.39p (2018: 4.57p), an increase of 17.9%.
STRATEGIC PRIORITIES AND BUSINESS OBJECTIVES
TATTON INVESTMENT MANAGEMENT
Against a backdrop of a global economic slowdown and the rising investor hesitance due to Brexit uncertainty, Tatton has made a solid start to the financial year.
Tatton completed its first acquisition, Sinfonia Asset Management Limited (SAM), for a consideration of up to £2.7m. SAM contributed £135m of assets to the total AUM of £7.0bn (2018: £5.7bn). This represents an increase in AUM of 22.8% on the prior year (organic 21.1%) and 14.8% since the last full year results at the end of March 2019. Increasing AUM through new and existing adviser relationships remains at the core of Tatton’s strategy, both organically and through acquisition. We will continue to develop our market leading managed portfolio service and enhance our other products to ensure they remain at the cutting edge of centralised investment propositions (CIP) for financial advisers. We continue to make good progress in adding new firms and associated clients with firm numbers increasing to 522 (2018: 405), an increase of 28.9%, and clients increasing to 61,250 (2018: 53,500), an increase of 14.5%. We are very pleased with the progress we are making with the Tenet Group following the signing of the strategic partnership agreement in June this year. Results are already very positive with 40 new firms (included in the 522 above) and £24.5m of associated AUM added in the period to September 2019. We look forward to making further progress in the year ahead.
Revenue for Tatton (excluding wrap income, as previously presented) grew 35.2% to £5.45m (2018: £4.03m) and adjusted operating profit* grew 42.0% to £2.91m (2018: £2.05m). Margins increased to 53.3% (2018: 50.9%) reflecting the operational gearing of the business. We anticipate that this will continue as the business continues to grow.
Paradigm Mortgages started the year well and continues to deliver good growth through increasing market share despite the headwinds in the mortgage market. New members in the period increased the number of firms by 13.6% to 1,466 (2018: 1,290).
Paradigm Mortgages’ strategy remains to assist Financial Advisers and intermediaries in benefiting from economies of scale in lending and insurance provision through access to lenders covering the whole of market, together with a full range of mortgage-related support services. The increase in new members helps to drive applications which is a key indicator for future performance and also benefits the general drive towards increased customer retention with intermediaries taking an increasing share of the channel which feeds through to increased completions and associated revenue.
Revenue for Paradigm Mortgages grew 11.4% to £1.42m (2018: £1.28m) and adjusted operating profit grew 11.3% to £0.80m (2018: £0.72m) with margins remaining strong at 56.1% (2018: 56.2%).
The business continues to provide regulatory compliance support and bespoke consultancy to IFAs and acts as a channel for intelligence and insight into the IFA community for the wider Group. The number of Paradigm Consulting firms slightly increased to 385 (2018: 382), while the market experiences transactional activity and continues to consolidate. Revenue in the period reduced 9.3% to £2.83m (2018: £3.12m) and adjusted operating profit* reduced 3.8% to £1.48m (2018: £1.54m).
Since the IPO in July 2017 we have operated three distinct businesses, each with its own strategic goals and priorities. As the Group has evolved over the last two years, we have continued to develop our approach to how the Group businesses operate in their respective markets. As such the decision has been made to simplify the business units to better reflect their offerings of investment management and adviser support services. Therefore, the two existing Paradigm businesses will amalgamate to operate under a single operational and reporting control structure, resulting in a change to the operating segment reporting. They will continue to deliver financial adviser support services, consulting, pooled protection and the mortgage club under the existing Paradigm brand. Further, all end client-related investment income to the Group will now be presented under Tatton Investment Management (Tatton), meaning the investment and wrap income of £1.6m including associated costs of £0.3m, which were historically presented under Paradigm Consulting, will now be presented under Tatton to better reflect its nature and the operational activity which supports it. A summary of the segmental results for the period (together with prior period comparatives) for the Tatton and Paradigm businesses, on both the new and old basis of presentation, is set out in the Divisional Results section below and in Note 2.2 to these condensed financial statements.
As we look to the future, we will leverage the closer relationship in the Paradigm businesses through improved cross-fertilisation and co-operation and see this as a logical step to a more cohesive proposition to the markets in which we operate. We have shown both the new and historical presentation for clarity and understanding on the following pages. Any additional costs incurred in the second half of the year in relation to the reorganisation will be separately disclosed in the income statement.
A key part of the Group’s strategy is to make acquisitions that fit the business model and fulfil the key strategic aims of the business. On 30 September 2019 the Group acquired the entire issued share capital of Sinfonia Asset Management Limited (SAM), a wholly owned subsidiary of the Tenet Group for a consideration of up to £2.7m. SAM comprises five risk-targeted funds with a total AUM of £135m. These five additional funds will complement Tatton’s existing fund range and expand the access IFAs’ clients have to a range of diversified investments portfolios on investment platforms that cannot yet accommodate discretionary portfolio services.
Of the consideration of up to £2.7m, £2.0m was payable on completion with the remaining balance becoming payable in two equal instalments subject to meeting specific AUM targets at the end of years one and two post completion as set out in note 16 to these condensed financial statements.
The exceptional items totalling £0.1m in the period relate to the acquisition of Sinfonia Asset Management Limited. Exceptional items along with share-based payment charge are both reported separately to give a better understanding of the Company’s underlying performance.
The balance sheet remains healthy with net assets at 30 September 2019 totalling £15.3m (2018: £13.9m) reflecting the continued growth and profitability of the Group. Property, plant and equipment has increased to £1.1m (2018: £0.3m), with £0.6m of the increase relating to the recognition of right-of-use assets following the adoption of IFRS 16 ‘Leases’ from 1 April 2019. Lease liabilities of £0.7m have also been recognised at the period end resulting in a net decrease to net assets of £0.1m.
Intangible assets of £1.8m have been recognised (2018: £nil), of which £1.5m relates to the preliminary valuation of customer relationship intangibles recognised on the acquisition of SAM. This business combination has also resulted in an increase to goodwill of £1.1m.
The Group continues to generate strong cash flows. Net cash generated from operations was £3.8m, £3.9m before exceptional items (2018: £4.3m) and was 105% of operating profit. The Group remains debt free with closing net cash at the end of the period of £9.2m (2018: £11.6m or £9.4m excluding non-shareholder cash). The cash resources are after the acquisition of Sinfonia of £2.0m, corporation tax of £1.4m and dividend payments of £3.1m relating to the final dividend for the year ended 31 March 2019.
The Board is pleased to recommend an interim dividend of 3.2p per share, an increase of 14.3% 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 3.2p per share, totalling £1.8m, will be paid on 13 December 2019 to shareholders on the register at close of business on 22 November 2019 and will have an ex-dividend date of 21 November 2019. 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 2019 Annual Report and Accounts 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.
The Group has 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 the changes 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. Accordingly, they continue to adopt the going concern basis in preparing these condensed financial statements.
SUMMARY AND OUTLOOK
The Group continues to make good progress against its stated strategy. We continue to see net new inflows supporting an increasing AUM. The Group has delivered a solid first half performance with increasing revenues, profit and margins. As in prior periods we will continue to maintain a disciplined approach to executing our strategy and we remain excited by the opportunities that exist in the markets in which we operate. While we are mindful of the current political and macro-economic factors, the Group continues to trade in line with the Board’s full year expectations and the Board remains optimistic regarding the prospects of the Group.
*Alternative performance measures are detailed in note 18 of this interim report