INVESTOR RELATIONS

Chief Executive’s Review

Overview

The first half of 2022 was slower than anticipated for new business, although both our pensions’ businesses and life assurance businesses are showing an uplift in revenue compared to the previous half year position. Revenues from our businesses in Gibraltar and Malta remain consistent and in line with management expectations, but revenues in the UK SIPP business are behind plan as some strategic partners, whilst onboarded, have yet to fully roll out the product to their distribution network. UK Corporate pensions business revenues continue to grow despite the impact of the “small pots” legislation coming into force. 

Recurring revenue, a cornerstone of our business, continues to hold up well and gives the predictability to build a strategy around organic growth. Like-for-like revenue comparison shows a steady uplift compared to the previous 2021 half year.

Operational expenses for the first six months were £10.8m (2021: £10.6m), broadly in line with management expectations, with overruns in certain businesses being compensated by savings in others. In relation to non-operational expenses, as classified as “other items” on the income statement, the non-cash item of amortisation of the client portfolios and IT development programs are higher than originally anticipated, leading to a reduction in the reported PBT number.

Optimisation of the operating model continues so as to improve efficiency and increase margins.  This is primarily driven by the roll-out of our internal administration system and the automation of processes which will continue into the second half of the year, with margin improvements expected in second half year and into 2023.

Financial review

Financial performance in the period

The Group delivered revenue in the six months to 30 June 2022 of £11.3m (2021: £11.4m). The prior year included revenues from the Corporate Trust Services business of £0.8m which was disposed of in March 2021. Hence, on a like-for-like basis we have seen revenue growth of 7% across the pensions and life businesses.

Recurring revenues for the period have remained consistent whilst organic growth has been achieved in the UK Corporate pensions business and Gibraltar life business.

Profit before other items for the period is £1.4 million (2021: £1.5 million), with reported profit before tax of £0.5 million (2021: £0.9 million). During the period there have been a number of one-off and non-recurring costs such as costs associated with internal restructures. Thus, underlying profit before other items is £1.7 million (2021: £1.6 million) and underlying profit before tax of £0.8 million (2021: £0.7 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:

Cashflows

Cash and cash equivalents at 30 June 2022 were £18.1 million (2020: £18.3 million) with cash generated from operating activities being £1.2 million (2021: £1.2 million) thus exceeding our reported profit before tax.

Whilst cash balances have decreased compared to the same period for the prior year, they have remained fairly consistent since the half-year end.

During the period we also repaid £0.3 million of our bank loan with £1.1 million still outstanding. Net cash and cash equivalents as at 30 June 2022 was therefore £17.0 million (2021: £17.3 million).  Whilst the Group had £4.4 million available in the credit facility as at the balance sheet date, this has been fully drawn down to fund the portfolio acquisition from Mercer that completed on 31 August 2022.

As would be expected for a Group which is regulated in several jurisdictions, a significant proportion of our cash balance forms part of the regulatory and solvency requirements. It is not possible to determine exactly how much of the cash and cash equivalents are required for solvency purposes as other assets can also be used to support the regulatory solvency requirement. However, the total regulatory capital requirement across the Group as at 30 June 2022 was £16.9 million.  

The balance sheet also gives visibility of future revenue and cash generation and, in line with all administration services businesses, the Group had accrued income in the form of work performed for clients but not yet billed of £1.6 million as at the period end (2021: £1.5 million). This gives some visibility of revenue still to be billed and collected as cash at bank.

Additionally, deferred income relating to annual fees invoiced but not yet earned stood at £3.9 million (2021: £4.0 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 2022 were £3.4 million (2021: £3.1 million).

Dividend

I am pleased to announce that the Board has declared an interim dividend of 0.60 pence per share which is in line with the prior year. The interim dividend is expected to be paid on 16 November 2022 to those shareholders on the register on 21 October 2022. The ordinary shares will become ex-dividend on 20 October 2022.

Subject to trading continuing to perform in line with our revised expectations, the Board expects to propose a final dividend for the full year.

Review of operations

Pensions

The pensions administration businesses continue to be the cornerstone of our operations.

Pensions revenue for the period was £9.1 million (2021: £8.7 million) representing 81% (2021: 76%) of total Group revenues. Total revenue is split between £4.9 million for QROPS (2021: £4.9 million), £1.9 million (2021: £1.7 million) for the SIPP and SSAS businesses and a further £1.8 million (2021: £1.5 million) for the workplace pensions business. In addition, this year the Group also has a revenue contribution of £0.6 million (2021: £0.6 million) from third party administration and Group Pension Plans.

The recurring revenue percentage for this operating segment remains at 92%, and when combined with the relatively low attrition rates, remains a solid predictor of future divisional profitability.

Opportunities and challenges around the pensions businesses are focused on improving margins in the UK, as well as capitalising on volumes of new business from our strategic partners. Internationally, the focus is on increasing revenue through our occupational pension schemes for international businesses.

Life Assurance

Revenue for the combined Life Assurance businesses amounted to £1.9 million compared to £1.6 million in 2021.   In a similar manner to the pensions operating segment, our life assurance business also has high levels of recurring fees.  

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, and continued effort to expand our intermediary base is an important part of improving our new business numbers.  In addition, the businesses are in the process of launching a suite of portfolio bonds for the UK market, which will produce a steady flow of new revenue, giving additional predictability to future organic growth. Distribution of these products will be via our strategic partners and thus additional costs for such products will be minimal.

Outlook

In the second half of 2022, we anticipate a healthy uplift in new business flow for our life assurance businesses in relation to certain of our annuity products, as well as increased new business flows for our SIPP business through our strategic partners; such an example being the recent announcement in relation to our partnering with IG Index.

However, a further benefit of our strategic partner program is that we anticipate that some of our other core products will also be made available soon via these platforms.

Having completed the acquisition of the SIPP and SSAS books from Mercer on 31 August, it is paramount that we integrate this business, and the staff, into our UK Options business in an orderly and efficient manner. The acquisition doubles our UK SIPP and SSAS business and will allow us to gain some benefits of scale. The team based in Cardiff is experienced and keen to bring its own new business relationships and opportunities into the STM family.  

As previously announced, we anticipate the acquisition will generate approximately £0.87m in additional EBIT to STM's current UK business, Options, on an annualised basis, after a twelve month phased integration process.  As a result of transaction costs of £0.3 million, and specific integration costs of £0.3 million, it is anticipated for the four months to 31 December 2022 that the acquisition will be a negative contribution of £0.3 million to the Group's result.

As we move forward towards the last quarter of 2022, we have made some significant changes within our board structure, as well as at subsidiary board level both at non-executive, as well as senior management level. All of the above is conducive to accelerating our revenue growth and improving our profit margins.

I look forward to updating the market with our progress in due course.

Alan Kentish

Chief Executive Officer