Unaudited Interim Results for the six months ended 30 June 2023
STM Group Plc (AIM: STM), the multi-jurisdictional financial services group, is pleased to announce its unaudited interim results for the six months ended 30 June 2023.
|Profit before other items*||£1.5m||£1.8m||£1.4m||£1.7m|
|Profit before taxation ("PBT")||£0.1m||£0.4m||£0.5m||£0.8m|
|Profit before other items margin||11%||14%||12%||15%|
|Earnings per share||0.17p||N/A||0.62p||N/A|
|Cash at bank (net of borrowings)||£13.8m||£16.9m|
* defined as revenue from continuing operations less operating expenses i.e. profit from continuing operations before taxation, net finance costs, depreciation, amortization, and non-operating items such as bargain purchase gain and loss on the sale of investments
** Underlying statistics are net of certain transactions which are either non-recurring or exceptional and thus do not form part of the normal course of business.
- Recurring revenue resilient at 95% of total revenues, similar to prior periods
- Successful integration of Mercer SIPP and SSAS businesses acquired in the second half of 2022
- Completion of first part of the strategic review
- The strategic review led in turn to a Group-wide technology review as part of a drive to improve efficiencies and margins
- Significant upfront work completed as part of being Consumer Duty ready
- Appointment of new Head of Business Development, leading to increased volumes of illustrations for our flexible annuity products
- Successful implementation of new client interest sharing policy
- On 11 July 2023, the boards of STM, and PSF Capital GP II Limited as general partner of PSF Capital Reserve LP ("Pension SuperFund Capital"), announced that they had reached agreement in principle on the key terms of a possible cash offer (the "Offer") for the entire issued and to be issued share capital of the Company at a price of 70 pence per share.
- On 5 September 2023, the Company announced revised terms for a possible cash offer at a price of 67 pence per share that would be conditional upon the completion of a disposal of certain parts of the Group that are non-core to the strategy of Pension SuperFund Capital (the "Revised Possible Offer"). It was also announced that Alan Kentish (a director and shareholder of the Company) had signed heads of terms with STM and Pension SuperFund Capital to acquire certain parts of the Group, comprising the UK SIPP businesses and entities connected with the 'funder' of the Master Trust.
- On 27 September 2023, the Company announced it had received a revised proposal, being an offer price of up to 67 pence per share, comprising 60 pence per share payable in cash upon completion of the possible offer and a further 7 pence per share by way of an unsecured loan note, repayable 12 months following the date on which a firm intention to make an offer is announced in accordance with Rule 2.7 of the City Code on Takeovers and Mergers (the "Code"), with repayment contingent on certain conditions that are being discussed between Pension SuperFund Capital and the Company. It also announced discussions with Alan Kentish (a director and shareholder of the Company) with respect to the acquisition of certain parts of the Group had been revised such that it is now proposed that Mr Kentish will only acquire the Group's UK SIPP businesses.
- The Company has also announced in accordance with Rule 2.6(a) of the Code, that a further extension to the date by which Pension SuperFund Capital is required either to announce a firm intention to make an offer in accordance with Rule 2.7 of the Code or to announce that it does not intend to make an offer for the Company had been granted by the Takeover Panel, in order to allow further time for these discussions to be completed. Consequently, Pension SuperFund Capital is required either to announce a firm intention to make an offer in accordance with Rule 2.7 of the Code or to announce that it does not intend to make an offer for the Company by not later than 5.00pm on 11 October 2023.
- There can be no certainty that any offer will ultimately be made for the Company.
Chief Executive’s Review
I am pleased to present the results for the half year ended 30 June 2023. To say it has been a busy period would be an understatement, firstly with the strategic review and more recently in dealing with the possible offer by Pension SuperFund Capital for the entire issued and to be issued share capital of the Company, as first announced on 11 July 2023. During the recent months, the management has been heavily focused on facilitating Pension SuperFund Capital's due diligence workstreams. Despite the exceptional circumstances, all colleagues and teams have worked hard to ensure continued delivery of service to customers and value to shareholders.
In this respect, and as previously announced, certain changes to the policy on interest income were put into effect on 1 July 2023. This allowed for better rate negotiations on client cash balances with banks, and changes were made to how this was shared with customers. Whilst the first half of the year has seen the benefits of increased market interest rates and the income that can be generated from funds held on behalf of clients, the second half of the financial year is particularly expected to see the significant benefits from the change in policy, as well as from the materially rising interest rate environment which the Company has benefited from during 2023. This increased interest income compensated for income from new business generation across the Group being slower than anticipated. With recurring operating revenue continuing to hold up well when compared to the first half of 2022, the overall revenue for the period was 17% higher than the prior period.
Operational expenses for the period were £11.7 million (2022: £10.0 million), broadly in line with management expectations, with overruns in certain expense categories, mainly legal and professional costs, being compensated for by savings in personnel costs. Non-operational expenses, classified as "other items" on the income statement, increased in comparison with the prior period, particularly in relation to finance costs (£302,000, 2022: £99,000) and the non-cash item of amortisation of the client portfolios (£672,000, 2022: £445,000). The increases were expected following the acquisition of the additional SIPP and SSAS portfolios from Mercer Ltd.
Financial performance in the period
The Group delivered total revenue in the six months to 30 June 2023 of £13.2 million (2022: £11.3 million), of which £0.9 million was interest income (2022: £0.08 million). The current period also saw the benefit of £1.4 million of income from the Mercer portfolios which were acquired in September 2022 and which therefore did not contribute to the revenues reported in the prior period.
Recurring revenues at 95% of total revenues for the period remained consistent and in line with the prior period (2022: 94%). Recurring revenues for the current period were £12.6 million, as compared to £10.6 million in the prior period, with £1.4 million being the contribution from the Mercer portfolios.
Profit before other items for the period was £1.5 million (2022: £1.4 million), with reported profit before tax of £0.1 million (2022: £0.5 million). A number of one-off and non-recurring costs, including legal and professional costs associated with a strategic review of the business and other contractual matters, were incurred during the period under review. Adjusting for these non-recurring costs results in underlying profit before other items of £1.8 million (2022: £1.7 million) and underlying profit before tax of £0.4 million (2022: £0.8 million).
The reconciliation of reported measures to underlying measures is made up of items which are either non-recurring or exceptional and thus do not form part of the normal course of business. This reconciliation for all three key financial measures is shown in the table below:
|RECONCILIATION OF REPORTED TO UNDERLYING MEASURES|
|REVENUE||PROFIT BEFORE OTHER ITEMS||PROFIT BEFORE TAX|
|Add: non-recurring costs||-||-||0.3||0.3||0.3||0.3|
Cash and cash equivalents as at 30 June 2023 were £18.9 million (2022: £18.1 million), with cash generated from operating activities being £1.6 million (2022: £1.2 million), thus exceeding the reported profit before tax.
During the period the Group also repaid £0.3 million of the secured bank loan and the outstanding balance as at 30 June 2023 was £5.1 million. As a result, net cash and cash equivalents as at 30 June 2023 amounted to £13.8 million (2022: £16.9 million).
As would be expected for a group which is regulated in several jurisdictions, a significant proportion of the cash balances forms part of the Group's regulatory and solvency requirements. It is not possible to determine the exact amount of cash and cash equivalents required for solvency purposes, as other assets can also be used to support the regulatory solvency requirements. However, the aggregated regulatory capital requirement across the Group as at 30 June 2023 was £15.7 million (2022: £16.9 million) largely due to the increase in market interest rates resulting in a higher discount rate being applied to the life assurance solvency capital requirement.
Accrued income, in the form of work performed for clients but not billed, as at 30 June 2023 amounted to £2.6 million (2022: £1.6 million). This increase was largely because of the accrued income on the Mercer portfolios acquired in September 2022, and which would therefore not have been present at the previous period end, and increased interest income accruals because of market rate movements. This gives some visibility of revenue still to be billed and subsequently collected as cash at bank.
Additionally, deferred income relating to annual fees invoiced but not yet earned at 30 June 2023 amounted to £4.1 million (2022: £3.9 million). This figure also gives good visibility of revenue that is still to be earned through the Income Statement in the coming months.
Trade receivables as at 30 June 2023 were £3.5 million (2022: £3.4 million).
Prepayments increased by £0.6 million to £1.3 million (2022: £0.7 million) as at the period end as compared to prior year largely as a result of legal fees, claims excesses and Financial Ombudsman Services fees incurred but recoverable from other parties.
Other creditors and accruals increased by £2.0 million to £6.7 million (2022 (restated): £4.7 million) as a result of the Mercer portfolios acquisition and incremental movements in operational accruals across the Group.
As more fully explained in Note 12, the comparative figures in the Statement of Financial Position as at 30 June 2022 have been restated to correct allocations previously made in the prior year's interim financial statements in respect of liabilities for current tax, trade and other receivables, and trade and other payables.
The reallocations had no impact on either the net asset position of the Group as at 30 June 2022 or the income statement of the Group for the six months ended on that date, both as previously reported.
Given the ongoing discussions with PSF in respect to a possible offer, the Board has taken the decision not to declare an interim dividend for the current period (2022: interim dividend of 0.6p declared and subsequently paid).
Review of operations
The pensions administration businesses continue to be the cornerstone of our operations.
Pensions revenue for the period was £11.0 million (2022: £9.1 million) representing 83% (2022: 80%) of total Group revenues, with the Mercer portfolios accounting for £1.4 million (£2022: £Nil) of the £1.9 million of increased revenue. Total pensions revenue arose as follows: £4.6 million (2022: £4.9 million) from QROPS, £3.7 million (2022: £1.8 million) from the SIPP and SSAS businesses and a further £2.1 million (2022: £1.8 million) from the workplace pensions business. In addition, the Group also achieved a revenue contribution of £0.6 million (2022: £0.6 million) from third party administration and Group Pension Plans.
The recurring revenue percentage for this operating segment increased to 96% of all pensions revenues (2022: 95%), which, when combined with the relatively low attrition rates, remains a solid predictor of future divisional profitability.
With our new Group Head of Business Development having joined earlier in the year and a new business development team now in place, management believes that the pension businesses are now better positioned to drive organic growth. The independent strategic review commissioned in the period also identified areas for focus in technology and processes, which the Group has continued to explore during this period. Subject to the outcome of the possible Offer and related management buy-out, there will be an ongoing focus on these areas to enhance margins. Internationally, the focus is on increasing revenue through our Malta occupational pension schemes for international businesses.
Revenue for the combined Life Assurance businesses amounted to £1.9 million, which was consistent with the revenue generated in the same period in 2022 (£1.9 million). In a similar manner to the pensions operating segment, the life assurance businesses also had high levels of recurring fees, which remained stable at 94% of total life assurance revenues (2022: 94%).
Our flexible annuity products aimed at the UK market remain the key focus for sustainable organic growth within our life businesses. Conversion times for new business remain slow and unpredictable, albeit with our new Business Development team fully embedded the pipeline based on illustrations issued is now considerably higher. The continuing effort to expand our intermediary base is an important part of improving our new business numbers.
Regulatory Developments and Consumer Duty
Consumer Duty, which is a framework set out by the Financial Conduct Authority ("FCA") for providers and adviser firms of all sizes providing financial products or adviser to consumers to measure whether they are delivering good outcomes for UK consumers, came into force on 31 July 2023. This framework puts greater focus on firms to ensure they are actively assessing, improving and evidencing how they are support UK consumers in making good financial decisions about their future. Consumer duty applies to firms operating in the UK, so it applies both to our UK SIPP companies and to our Gibraltar companies that provide products and service to UK residents and financial advisers.
Across the UK and Gibraltar, we implemented a Consumer Duty working party project to oversee the implementation and review our products and service. Various areas of our businesses, products and services were reviewed with changes made to simplify our product range as well as ensuring documentation, processes, procedures and policies were all updated to reflect the regulatory changes. We are pleased with the progress made and, whilst there are areas for improvement, management are of the view that we are meeting our regulatory requirements and our products and services are designed to deliver good customer outcomes.
Since 30 June 2023 (being the date to which STM's interim results were drawn up), the Group has continued to demonstrate resilience in its underlying business through the continuing high levels of recurring revenues, supplemented by strengthening interest income from its interest sharing model. As a result, the Group expects to be in line with management's internal expectations for the year ending 31 December 2023.
Possible Offer for the Company
The latest update on the possible offer was announced on 27 September 2023, when the Company updated that it had received a revised proposal, being an offer price of up to 67 pence per share, comprising 60 pence per share payable in cash upon completion of the possible offer and a further 7 pence per share by way of an unsecured loan note, repayable 12 months following the date on which a firm intention to make an offer is announced in accordance with Rule 2.7 of the Code, with repayment contingent on certain conditions that being discussed between Pension SuperFund Capital and the Company. It also announced discussions with Alan Kentish (a director and shareholder of the Company) with respect to the acquisition of certain parts of the Group had been revised such that it is now proposed that Mr Kentish will only acquire the Group's UK SIPP businesses.
The Company has also announced in accordance with Rule 2.6(a) of the Code, that a further extension to the date by which Pension SuperFund Capital is required either to announce a firm intention to make an offer in accordance with Rule 2.7 of the Code or to announce that it does not intend to make an offer for the Company had been granted by the Takeover Panel, in order to allow further time for these discussions to be completed. Consequently, Pension SuperFund Capital is required either to announce a firm intention to make an offer in accordance with Rule 2.7 of the Code or to announce that it does not intend to make an offer for the Company by not later than 5.00pm on 11 October 2023. The Board also notes that there can be no certainty that any offer will ultimately be made for the Company.
In the meantime, STM's executive management has continued to focus on developing the underlying businesses of the Group.
Chief Executive Officer
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the period from 1 January 2023 to 30 June 2023
6 months to
6 months to
31 December 2022
|Profit before other items||1,479||1,357||3,321|
|Bargain purchase gain||-||-||327|
|(Loss)/gain on revaluation of financial instruments||(36)||-||11|
|Loss on disposal of subsidiaries||-||-||(162)|
|Depreciation and amortisation||(995)||(778)||(1,597)|
|Profit before taxation||146||480||1,578|
|Profit after taxation||100||369||854|
|OTHER COMPREHENSIVE INCOME|
Items that are or may be reclassified to profit and loss
Foreign currency translation differences for foreign operations
|Total other comprehensive (loss)/income||(11)||13||12|
|Total comprehensive income for the period/year||89||382||866|
Profit attributable to:
Owners of the Company
|Total comprehensive income|
Owners of the Company
|Earnings per share basic (pence)||6||0.17||0.62||1.42|
|Earnings per share diluted (pence)||6||0.17||0.62||1.42|
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
As at 30 June 2023
|Property and office equipment||933||1,317||1,161|
|Deferred tax asset||51||76||58|
|Total non-current assets||24,457||21,711||25,106|
|Trade and other receivables||9||6,901||6,804||8,461|
|Receivables due from insurers||488||24,130||488|
|Cash and cash equivalents||8||18,931||18,118||19,234|
|Total current assets||28,896||50,602||29,043|
|Called up share capital||12||59||59||59|
|Share premium account||22,372||22,372||22,372|
|Equity attributable to owners of the Company||34,591||36,698||34,970|
|Liabilities for current tax||568||-||788|
|Trade and other payables||10||12,813||10,366||12,517|
|Total current liabilities||13,869||34,496||13,793|
|Deferred tax liabilities||327||433||404|
|Total non-current liabilities||4,893||1,507||5,454|
|Total liabilities and equity||53,353||72,313||54,149|
STATEMENT OF CONSOLIDATED CASHFLOW
For the period from 1 January 2023 to 30 June 2023
|Profit for the period/year before tax||146||480||1,578|
|Depreciation of property and office equipment||323||333||673|
|Amortisation of intangible assets||672||445||924|
|Loss on disposal of property and office equipment||50||-||4|
|Unrealised loss/(gain) on financial instruments at FVTPL||36||-||(11)|
|Bargain purchase gain||-||-||(327)|
|Decrease/(increase) in trade and other receivables||1,560||1,150||(1,396)|
|Decrease in receivables due from insurers||-||-||23,642|
|(Increase)/decrease in accrued income||(1,716)||(239)||558|
|Increase in trade and other payables||857||116||2,428|
|Decrease in provisions||-||-||(23,642)|
|Net cash generated from operating activities||1,591||1,248||3,812|
|Purchase of property and office equipment||(143)||(13)||(165)|
|Increase in intangible assets||(292)||(527)||(937)|
|Disposal of investments||-||-||1,477|
|Purchase of financial instrument||-||-||(1,734)|
|Acquisition of non-controlling interests||(400)||-||(120)|
|Consideration paid on acquisition of subsidiaries and portfolio||(220)||-||(3,454)|
|Net cash absorbed by investing activities||(1,055)||(540)||(4,933)|
|Proceeds from bank loan||-||-||4,463|
|Repayment of bank loan||(275)||(275)||(550)|
|Interest paid on bank loan||(190)||(62)||(162)|
|Lease liabilities paid||(363)||(473)||(724)|
|Net cash (absorbed by)/generated from financing activities||(828)||(810)||2,136|
|(Decrease)/increase in cash and cash|
|Reconciliation of net cash flow to movement in net funds|
|Analysis of cash and cash equivalents during the period/year|
|(Decrease)/increase in cash and cash equivalents||(292)||(102)||1,015|
|Effect of movements in exchange rates on cash and cash equivalents||(11)||13||12|
|Balance at start of period/year||8||19,234||18,207||18,207|
|Balance at end of period/year||8||18,931||18,118||19,234|
STATEMENT OF CONSOLIDATED CHANGES IN EQUITY
For the period from 1 January 2023 to 30 June 2023
|Foreign Currency Translation|
|Balance at 1 January 2022||59||22,372||14,429||(549)||(93)||162||-||36,380||(452)||35,928|
|TOTAL COMPREHENSIVE INCOME FOR THE YEAR|
|Profit for the year||-||-||844||-||-||-||-||844||10||854|
|Other comprehensive income|
|Foreign currency translation differences||-||-||-||-||12||-||-||12||-||12|
|Transactions with owners, recorded directly in equity|
|Acquisition of non-controlling interests||-||-||-||-||-||-||(1,375)||(1,375)||374||(1,001)|
|At 31 December 2022 and 1 January 2023||59||22,372||14,382||(549)||(81)||162||(1,375)||34,970||(68)||34,902|
|TOTAL COMPREHENSIVE INCOME FOR THE PERIOD|
|Profit for the period||-||-||100||-||-||-||-||100||-||100|
|Other comprehensive income|
|Foreign currency translation differences||-||-||-||-||(11)||-||-||(11)||-||(11)|
|Transactions with owners, recorded directly in equity|
|Acquisition of non-controlling interests||-||-||-||-||-||-||(468)||(468)||68||(400)|
|At 30 June 2023||59||22,372||14,482||(549)||(92)||162||(1,843)||34,591||-||34,591|