Earnings Release • Mar 3, 2016
Earnings Release
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RNS Number : 8491Q
H&T Group PLC
03 March 2016
Preliminary results
for the year ended 31 December 2015
H&T Group ("H&T" or the "Group") is pleased to announce its preliminary results for the year ended
31 December 2015.
John Nichols, chief executive of H&T Group, said:
"H&T has traded well in spite of very difficult conditions. The market remains challenging and as the high street landscape continues to change, businesses which fail to adapt will continue to struggle. We have built a robust infrastructural platform which, when combined with the development of new products and the solid performance of our core businesses, means we are increasingly well placed in this new environment."
"Customers remain at the heart of H&T's business. In 2015 we have stabilised our core pawnbroking business and made good progress in developing our new revenue lines. We will continue to serve the demands of this customer base as their needs evolve and to develop new markets. We are also pleased to confirm that we obtained authorisation from the FCA in February 2016."
| Financial highlights (£m unless stated) | 2015 | 2014 | Change % |
| Gross profit | 47.5 | 45.7 | 3.9% |
| EBITDA | 10.7 | 9.8 | 9.2% |
| Profit before tax | 6.8 | 5.5 | 23.6% |
| Diluted EPS | 14.86p | 11.78p | 26.1% |
| Proposed final dividend | 4.5p | 2.7p | 66.7% |
| Key performance indicators | 2015 | 2014 | Change % |
| Gross pledge book | £39.0m | £38.5m | 1.3% |
| Redemption of annual lending * | 83.0% | 82.0% | 1.2% |
| Retail sales | £29.5m | £30.9m | -4.5% |
| Retail margin | 35% | 34.6% | 1.2% |
| Gold purchase margin | 15.1% | 17.9% | - 15.6% |
| Number of stores | 189 | 191 | -1.0% |
* This is the actual percentage of lending in each year which was redeemed or renewed, the 2015 figure is an estimate based on recent trend and early performance.
Operational highlights:
· Growth in Personal Loans with the loanbook increasing 35.5% from £3.1m to £4.2m
· Buyback volume more than doubled from £2.9m to £6.0m
· FX gross profits increase 75% to £1.4m (2014: £0.8m)
Preliminary results
for the year ended 31 December 2015
Enquiries:
H&T Group plc
Tel: 0870 9022 600
John Nichols, Chief Executive
Steve Fenerty, Finance Director
Numis Securities (Broker and Nominated Adviser)
Tel: 020 7260 1000
Etienne Bottari / Freddie Barnfield - Nominated Adviser
Mark Lander - Corporate Broking
Haggie Partners (Public Relations)
Tel: 020 7562 4444
Damian Beeley
Brian Norris
Chairman's Statement
We have seen a year of steady progress against a backdrop of volatile commodity prices including gold and difficult trading conditions in the sector. We have a robust business that remains resilient and is rigorous in its response to the regulatory environment and changing consumer behaviour.
Introduction
The UK economy has improved over the past year and we have seen a halt in the decline in our pledge book with some worthwhile growth in other product lines, notably Foreign Exchange, Personal Loans and Buyback. A number of initiatives have been launched which are still in the proving period; we will expand and develop those that are successful over coming months.
Financial Performance
The Group delivered profit after tax of £5.4m (2014: £4.3m) and diluted earnings per share of 14.86 pence (2014: 11.78 pence). Subject to shareholder approval a final dividend of 4.5 pence per ordinary share (2014: 2.7 pence) will be paid on 3 June 2016 to those shareholders on the register at the close of business on 6 May 2016. This will bring the full year dividend to 8 pence per ordinary share (2014: 4.8 pence). The Group's plan to improve its balance sheet strength while maintaining the pawnbroking loanbook has been successful with a net debt reduction of 78.4% to £2.1m (31 December 2014: £9.7m).
Regulation
The regulation of Consumer Credit moved from the Office of Fair Trading (OFT) to the Financial Conduct Authority (FCA) on 1 April 2014. The Group obtained authorisation from the FCA on 11 February 2016 and we welcome the higher standards that this change will bring to our sector.
Strategy
We continue to develop our products aimed at those customers who need a simple and straightforward loan, either secured or unsecured. We are introducing a more disciplined approach to the retailing of jewellery, and the ways in which we promote our consumer finance products over mobile applications.
We have reduced further the debt in the business and at the same time increased the potential funding to enable the business to seize the opportunities that will be presented by a changing market.
Prospects
Continuing high levels of consumer debt and the pressures on mainstream lenders create new opportunities in our market. The technologies that are evolving in the retail space will enable us to make better use of our loan centre, jewellery centre, and the store network, alongside the continuing development of our on-line services.
On behalf of the Board and our shareholders I would like to thank everyone at H&T for the hard work and dedication over the last year.
Peter D McNamara
Chairman
Chief Executive's Review
The solid performance of our core products and the successful development of new products demonstrates the ability of the business to adapt to the changing market environment.
INTRODUCTION
H&T have traded well in a challenging market having stabilised our core pawnbroking business whilst also developing our other revenue lines. Profit before tax for the year increased to £6.8m (2014: £5.5m), an increase of 23.6%, principally as a result of growth in Personal Loans and Other Services.
Our store estate of 189 stores comprises 150 H&T Pawnbrokers stores and 39 est1897 second hand jewellery retail stores. During the year we have closed two underperforming H&T Pawnbrokers stores. In light of the current trading environment a small number of stores are expected to close during 2016.
The Group's development of Personal Loans, Buyback and FX supports the evolution of our business model to products with higher growth whilst also reducing our exposure to fluctuations in the gold price. The Group's online development continues with the implementation of a new mobile optimised website, new branding and a simpler customer journey. This activity has resulted in an improvement in website traffic and the online Personal Loans book in H2 2015.
THE MARKET
The high street alternative credit market is changing. We estimate that around one third of outlets operated by the major groups have closed since December 2013 as a result of the lower gold price and the higher standards required by the FCA.
The average gold price in 2015 was £759 per troy oz (2014: £768), a fall of 1.2% although the monthly averages ranged from a high of £825 in January 2015 to a low of £712 in December 2015. This reduction during the course of the year compressed the margins realised from purchasing scrap in particular.
The cost cap on pay day lending was implemented on 2 January 2015 and as expected this led to closures among our high street competitors.
The cost cap has also assisted our online development as the fees paid to brokers have reduced to a level where we can now acquire leads in a more cost effective way. This has helped the development of the online Personal Loan book to £0.3m at 31 December 2015 (2014: £0.1m), with the growth taking place during H2 2015.
The Group has managed external risks effectively and our financial stability, range of products and outstanding service delivery position us to take advantage of these changing market conditions.
Chief Executive's Review (continued)
OUR STRATEGY
The Group's strategy is to serve a customer base whose access to mainstream credit is limited and for whom small sum loans can help get through short term financial challenges. The Group will continue to deliver this strategy by developing a range of lending products, both secured and unsecured, offered in-store and online.
The development of a strong retail proposition supports our lending and purchasing operations, improves returns and reduces the Groups exposure to gold price volatility. The continuing development of the est1897 brand could play an important part of this strategy in the future.
REGULATION
The Financial Conduct Authority
The regulation of Consumer Credit moved from the Office of Fair Trading (OFT) to the Financial Conduct Authority (FCA) on 1 April 2014. The Group obtained authorisation from the FCA on 11 February 2016 and we welcome the higher standards that this change will bring to our sector.
The Group has appointed a head of compliance and established a risk committee comprised of independent non-executive directors to oversee the Group's compliance framework. Our non-executive directors have extensive experience with the regulatory requirements of the FCA and its predecessors and provide the Group with valuable support and insight into the new regime.
High cost short term credit interest rate cap
On 2 January 2015 the cost cap on the interest rate and charges that apply to high-cost short-term credit (HCSTC) came into effect. They are:
· a maximum charge of 0.8% per day on the amount borrowed
· a maximum of £15 fees on default
· a cap on the total costs incurred over the life of the loan of 100% of the amount borrowed
The definition of HCSTC is broad but provides a specific exemption for pawnbroking and certain other credit products at present. We do not expect the cap to apply to pawnbroking in the near term.
The Group is well positioned for the new regulatory environment both in terms of our detailed preparation and the range of products we offer.
REVIEW OF OPERATIONS
The Group's total gross profits increased to £47.5m (2014: £45.7m) principally as a result of the improvements in the Pawnbroking Scrap, Personal Loans and Other Services segments.
The development in Personal Loans and Other Services is encouraging as we establish these high growth products in the store estate, collectively generating an additional £1.8m of gross profits in the year.
Chief Executive's Review (continued)
Pawnbroking
The pledge book has increased 1.3% to £39.0m (2014: £38.5m). During the year the Group has focussed on enabling our staff to make sound lending decisions to maximise the potential in the market whilst managing financial risk.
The Group's Pawn Service Charge was unchanged at £28.4m (2014: £28.4m) and now represents 59.9% of Group gross profit (2014: 62.1%).
The yield on the pledge book has improved to 73.4% (2014: 68.8%) as a result of the improvements in redemption delivered over recent years. The average monthly redemption of loans issued in 2012 was 75.6%, this has increased to 82.0% for loans issued in 2014 as a result of our high quality lending decisions, customer communication and, where appropriate, assisting customers into repayment plans for pawnbroking loans. The early redemption performance of loans issued in 2015 leads us to expect further improvements during the course of the year.
Total lending in 2015 increased 3.9% to £98.2m (2014: £94.5m), the average lending rate per gram being in line with 2014.
The Group implemented a number of initiatives during the year to support the pawnbroking proposition:
1) Continued development of "Expert Eye", a system which enables high definition magnified images to be sent from a store to our centre of excellence at the jewellery centre where the images are assessed and with telephone support the store is able to make a better loan decision
2) Relaunch of the online pawnbroking system to simplify the customer journey via the "We lend on anything" valuation portal and interaction with the Expert Eye valuation service
3) The development of the website to deliver a mobile optimised application process
The Group remains focussed on pawnbroking as the largest contributor to gross profits. Our continued delivery of excellent customer service and high quality lending decisions on a wide range of assets positions us well in this evolving market.
Pawnbroking Scrap
Pawnbroking Scrap produced a profit in the year of £0.1m (2014: £0.2m loss).
This result was expected given the relative stability in average gold prices between 2014 and 2015. We would not expect margins on pawnbroking scrap to return to historical levels as we seek to maintain a competitive proposition on lending and support the pledge book.
Chief Executive's Review (continued)
Retail
Retail sales decreased 4.5% to £29.5m (2014: £30.9m) and gross profit decreased 3.7% to £10.3m (2014: £10.7m). On a like for like basis direct margin from retail improved 1.3% with the growth coming from the est1897 retail focussed stores. Retail sales are stated net of margin scheme VAT payable, the cost of which increased in the year by an estimated £0.7m principally as a result of reduction in retail stocks.
The Group considers a successful retail offering to be a core part of our Group proposition. Pawnbroking and Gold Purchasing generate significant amounts of saleable jewellery which must be sold. While higher historic gold prices provided a reasonable return from scrapping gold, this disposition route is not suitable for gemset items or watches. The ability to sell items rather than scrap them also provides a higher return and reduces the Group's exposure to short term gold price volatility.
The three standalone Discount Secondhand Jewellery stores have provided a useful forum to test and develop new stock lines and display techniques although they have yet to provide a meaningful contribution.
The 36 rebranded Discount Secondhand Jewellery stores have outperformed the core estate, delivering growth in direct retail margin of 5.8% year on year. The Group has completed a number of trials during the year to ascertain the correct balance between lending and retail activities in these stores and we expect further improvement in the future.
Gold Purchasing
During the year the average gold price fell from a high of £825 in January 2015 to a low of £712 in December 2015, the average for the year was £759 (2014: £768), a fall of 1.2%. This reduction during the course of the year reduces the margin realised from purchasing scrap and is the principal reason for the reduction in gross profits from purchasing to £2.3m (2014: £2.4m), a fall of 4.2%.
Following several years of decline the market for gold purchasing is now finding a new level. This stabilisation has allowed a focus on improving margins during H2 2015 which, while improving gross profits, has in turn resulted in a reduction in volumes during H2 2015. We estimate that the weight of fine gold purchased has reduced approximately 7.1% between 2014 and 2015.
Personal Loans
Personal Loans gross profits increased 33.3% to £2.4m (2014: £1.8m); the loanbook net of provisions at 31 December 2015 was £4.2m (31 December 2014: £3.1m), an increase of 35.5%. The yield on the average monthly loanbook was 68.0% (2014: 69.5%), the slight reduction caused by the growth in the new customer numbers and development of the online product.
The Group considers the development of the Personal Loan product in-store and online to be a significant opportunity. H&T's personal loan product allows for loans of up to £2,000 over any term of up to two years based on affordability. Approximately 80% of the loans issued by the Group fell
Chief Executive's Review (continued)
Personal Loans (continued)
under the definition of high-cost short-term credit (HCSTC) during 2015 and as such must comply with additional rules under the new FCA regulatory regime.
The Group has positioned the product to be cheaper and more flexible than most comparable loans in the market and has applied robust affordability assessments including a manual review of each loan application. The Group intends to reduce the proportion of HCSTC loans over time as we develop lower cost, longer term loans for our customers.
We expect the in-store focus, new website, improved search engine optimisation, digital marketing and our presence on price comparison websites to increase volumes during 2016.
Other Services
The Other Services segment has increased 44.4% to £3.9m (2014: £2.7m) principally as a result of the improvements in the recently introduced FX and Buyback products.
Buyback has been a particular success as part of the "We buy anything" proposition as the value purchased increased from £2.9m in 2014 to £6.0m in 2015. This improvement was achieved through simplification of the in-store valuation process using a new computer system and a measured extension to the assets accepted.
FX also continues to grow with gross profits increasing by 75.0% from £0.8m to £1.4m as the product becomes more established in the business.
Our continued investment in systems, training and store level point of sale materials will provide further growth as we establish these rapidly growing products in the business.
PROSPECTS
The demand for small sum, short term cash loans remains strong and by increasing the range of assets it accepts, by expanding Personal Loans and Other Services both in-store and online we are ideally positioned to capitalise on this changing marketplace.
Our continued investment in stores, people and systems has provided a strong platform to support growth. Current trading is in line with management's expectations for 2016.
I would also like to add my great thanks to those of the Chairman, in recognising all our people whose skills, commitment and enthusiasm continue to drive our success, and who give us confidence in the future.
John G Nichols
Chief Executive
Finance Director's Review
FINANCIAL RESULTS
For the year ended 31 December 2015 gross profit increased 3.9% from £45.7m to £47.5m driven by the growth in the Personal Loans and Other Services segments.
Total direct and administrative expenses increased by 1.0% from £39.5m to £39.9m principally as a result of investment in staff to support business volumes and new initiatives. The Board considers the continued investment in people and systems to be vital in repositioning the business to take advantage of the current market conditions.
Finance costs were in line at £0.7m (2014: £0.7m).
Profit before tax increased by £1.3m to £6.8m, up 23.6% from £5.5m in 2014.
CASH FLOW
The Group generated positive cash flow from operating activities of £11.2m (2014: £14.4m). Working capital movements produced an inflow of £2.2m (2014: £6.2m) in the year with the £4.0m reduction in stock being partially offset by the £1.4m growth in the pawnbroking and personal loans loanbooks.
BALANCE SHEET
As at 31 December 2015 the Group had net assets of £94.1m (2014: £90.9m) with period end net debt of £2.1m (2014: £9.7m) delivering a reduction in gearing to 2.2% (2014: 10.6%).
On 12 February 2016 the Group refinanced the existing facility with Lloyds Bank plc allowing for maximum borrowings of £30.0m, subject to covenants, at a margin of between 1.75% and 2.75% above LIBOR. At year end £13.0m was drawn on the facility and the Group was well within the covenants with a net debt to EBITDA ratio of 0.20x and interest to EBITDA ratio of 20.4x. The new facility has a termination date of 30 April 2020.
The combination of low gearing and a secure long term credit facility provides the Group with the ability to make selective investments in the future while maintaining appropriate headroom.
Investments
During the year the Group completed the acquisition of three pawnbroking loan books for a total consideration of £0.1m.
Impairment
The reduced gold price has impacted the earnings of the Group and of the stores that have been acquired historically. The Group performs an annual review of the expected earnings of each acquired store and considers whether the associated goodwill and other property, plant and equipment are impaired. There was no requirement for impairment during 2015 (2014: £0.1m).
Finance Director's Review (continued)
Share Price and EPS
At 31 December 2015 the share price was 197.0p (2014: 160.0p) and market capitalisation was £72.6m (2014: £59.0m). Basic earnings per share was 14.88p (2014: 11.78p), diluted earnings per share was 14.86p (2014: 11.78p) and diluted net assets per share equated to 260p (2014: 247p).
The Group's market capitalisation remained below net asset value during the year as the continued pressure on earnings depressed market confidence. The Board believe that the action taken to stabilise the pledge book, drive alternative earning streams, control costs and de-risk the balance sheet will build confidence.
Stephen A Fenerty
Finance Director
Group statement of comprehensive income
For the year ended 31 December 2015
| Continuing operations: | Note | 2015 £'000 |
2014 £'000 |
|
| Revenue | 2 | 89,244 | 87,696 | |
| Cost of sales | (41,782) | (42,019) | ||
| Gross profit | 2 | 47,462 | 45,677 | |
| Other direct expenses | (31,968) | (31,627) | ||
| Administrative expenses | (7,976) | (7,833) | ||
| Operating profit | 7,518 | 6,217 | ||
| Investment revenues | 1 | 1 | ||
| Finance costs | 3 | (679) | (708) | |
| Profit before taxation | 6,840 | 5,510 | ||
| Tax charge on profit | 4 | (1,462) | (1,255) | |
| Profit for the financial year and total comprehensive income | 5,378 | 4,255 | ||
| Earnings per share | 2015 Pence |
2014 Pence |
||
| Basic | 5 | 14.88 | 11.78 | |
| Diluted | 5 | 14.86 | 11.78 | |
Group statement of changes in equity
For the year ended 31 December 2015
| Share capital £'000 | Share premium account £'000 |
Employee Benefit Trust shares reserve £'000 |
Retained earnings £'000 |
Total £'000 |
||||
| At 1 January 2014 | 1,843 | 25,409 | (38) | 60,914 | 88,128 | |||
| Profit for the financial year | - | - | - | 4,255 | 4,255 | |||
| Total income for the financial year | - | - | - | 4,255 | 4,255 | |||
| Share option movement | - | - | - | 246 | 246 | |||
| Dividends paid | - | - | - | (1,769) | (1,769) | |||
| Employee benefit trust shares | - | - | 3 | - | 3 | |||
| At 1 January 2015 | 1,843 | 25,409 | (35) | 63,646 | 90,863 | |||
| Profit for the financial year | - | - | - | 5,378 | 5,378 | |||
| Total income for the financial year | - | - | - | 5,378 | 5,378 | |||
| Share option movement | - | - | - | 104 | 104 | |||
| Dividends paid | - | - | - | (2,285) | (2,285) | |||
| At 31 December 2015 | 1,843 | 25,409 | (35) | 66,843 | 94,060 | |||
Group balance sheet
As at 31 December 2015
| 31 December 2015 £'000 |
31 December 2014 £'000 |
|||||||||
| Non-current assets | ||||||||||
| Goodwill | 17,707 | 17,707 | ||||||||
| Other intangible assets | 752 | 1,056 | ||||||||
| Property, plant and equipment | 8,138 | 9,954 | ||||||||
| Deferred tax assets | 542 | 527 | ||||||||
| 27,139 | 29,244 | |||||||||
| Current assets | ||||||||||
| Inventories | 24,802 | 29,271 | ||||||||
| Trade and other receivables | 50,893 | 49,423 | ||||||||
| Other current assets | 646 | 229 | ||||||||
| Cash and cash equivalents | 10,923 | 8,250 | ||||||||
| 87,264 | 87,173 | |||||||||
| Total assets | 114,403 | 116,417 | ||||||||
| Current liabilities | ||||||||||
| Borrowings | - | (1,925) | ||||||||
| Trade and other payables | (5,482) | (6,053) | ||||||||
| Current tax liabilities | (645) | (328) | ||||||||
| (6,127) | (8,306) | |||||||||
| Net current assets | 81,137 | 78,867 | ||||||||
| Non-current liabilities | ||||||||||
| Borrowings | (12,911) | (15,758) | ||||||||
| Provisions | (1,305) | (1,490) | ||||||||
| (14,216) | (17,248) | |||||||||
| Total liabilities | (20,343) | (25,554) | ||||||||
| Net assets | 94,060 | 90,863 | ||||||||
| Equity | ||||||||||
| Share capital | 1,843 | 1,843 | ||||||||
| Share premium account | 25,409 | 25,409 | ||||||||
| Employee Benefit Trust shares reserve | (35) | (35) | ||||||||
| Retained earnings | 66,843 | 63,646 | ||||||||
| Total equity attributable to equity holders | 94,060 | 90,863 | ||||||||
Group cash flow statement
For the year ended 31 December 2015
| Note | 2015 £'000 |
2014 £'000 |
||
| Net cash generated from operating activities | 6 | 11,209 | 14,373 | |
| Investing activities | ||||
| Interest received | 1 | 1 | ||
| Proceeds on disposal of property, plant and equipment | - | 52 | ||
| Purchases of property, plant and equipment | (1,207) | (1,117) | ||
| Acquisition of trade and assets of businesses | (120) | (469) | ||
| Net cash used in investing activities | (1,326) | (1,533) | ||
| Financing activities | ||||
| Dividends paid | (2,285) | (1,769) | ||
| Decrease in borrowings | (3,000) | (10,000) | ||
| Decrease in Bank overdraft | (1,925) | (1,075) | ||
| Loan to the Employee Benefit Trust for acquisition of own shares | - | 3 | ||
| Net cash absorbed by financing activities | (7,210) | (12,841) | ||
| Net increase in cash and cash equivalents | 2,673 | (1) | ||
| Cash and cash equivalents at beginning of the year | 8,250 | 8,251 | ||
| Cash and cash equivalents at end of the year | 10,923 | 8,250 | ||
Notes to the preliminary announcement
For the year ended 31 December 2015
1. Finance information and basis of preparation
The financial information has been abridged from the audited financial statements for the year ended 31 December 2015.
The financial information set out above does not constitute the company's statutory accounts for the years ended 31 December 2015 or 2014, but is derived from those accounts. Statutory accounts for 2014 have been delivered to the Registrar of Companies and those for 2015 will be filed with the Registrar in due course. The auditors have reported on those accounts: their reports were unqualified, did not draw attention to any matters by way of emphasis and did not contain statements under s498 (2) or (3) Companies Act 2006 or equivalent preceding legislation.
Whilst the financial information included in this preliminary announcement has been prepared in accordance with International Financial Reporting Standards ('IFRS'), this announcement does not itself contain sufficient information to comply with IFRS. The Group will be publishing full financial statements that comply with IFRS in April 2016.
Revenue recognition
Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services and interest income provided in the normal course of business, net of discounts, VAT and other sales-related taxes.
Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised:
Pawnbroking, or Pawn Service Charge (PSC), comprises interest on pledge book loans, plus auction profit and loss, less any auction commissions payable and less surplus payable to the customer. Interest receivable on loans is recognised as interest accrues by reference to the principal outstanding and the effective interest rate applicable, which is the rate that discounts the estimated future cash receipts through the expected life of the financial asset to that asset's net carrying amount;
Retail comprises revenue from retail jewellery sales, with stock sourced from unredeemed pawn loans, newly purchased stock and stock refurbished from the Group's gold purchasing operation. All revenue is recognised at the point of sale;
Pawnbroking Scrap and Gold Purchasing comprises proceeds from gold scrap sales and is recognised on full receipt of sale proceeds;
Personal Loans comprises income from the Group's unsecured lending products. Interest receivable on unsecured loans is recognised as interest accrues by reference to the principal outstanding and the effective interest rate applicable, which is the rate that discounts the estimated future cash receipts through the expected life of the financial asset to that asset's net carrying amount; and
Notes to the preliminary announcement
For the year ended 31 December 2015
1. Finance information and basis of preparation (continued)
Revenue recognition (continued)
Other financial services comprise revenues from third party cheque cashing, foreign exchange income, Buyback, prepaid card and other income. The commission receivable on cheque cashing is recognised at the time of the transaction. Buyback revenue is recognised at the point of sale of the item back to the customer. Foreign exchange income represents the commission when selling or buying foreign currencies and is recognised at the point of sale. Any other revenues are recognised on an accruals basis.
The Group recognises interest income arising on secured and unsecured lending within trading revenue rather than investment revenue on the basis that this represents most accurately the business activities of the Group.
The Group recognises revenue and bad debt expenses (both impairments and movements on allowance accounts) on pawnbroking, cheque cashing and other financial services on a portfolio approach. The Group considers that the bad debts arising on the loans and receivables balances are a function of the revenue earned due to the nature of the activities, and accordingly records the net amount of interest or commissions due and bad debt expenses within revenue.
2. Business and geographical statements
Business segments
For reporting purposes, the Group is currently organised into six segments - Pawnbroking, Gold purchasing, Retail, Scrap, Personal Loans and Other services.
The principal activities by segment are as follows:
Pawnbroking:
Pawnbroking is a loan secured against a collateral (the pledge). In the case of the Group over 99% of the collateral against which amounts are lent comprises precious metals (predominantly gold), diamonds and watches. The pawnbroking contract is a six month credit agreement bearing a monthly interest rate of between 2% and 9.99%. The contract is governed by the terms of the Consumer Credit Act 2008 (previously the Consumer Credit Act 2002). If the customer does not redeem the goods by repaying the secured loan before the end of the contract, the Group is required to dispose of the goods either through public auctions if the value of the pledge is over £75 (disposal proceeds being reported in this segment) or, if the value of the pledge is £75 or under, through public auctions or the Retail or Pawnbroking Scrap activities of the Group.
Gold Purchasing:
Jewellery is bought direct from customers through all of the Group's stores. The transaction is simple with the store or unit agreeing a price with the customer and purchasing the goods for cash on the spot. Gold Purchasing revenues comprise proceeds from scrap sales on goods sourced from the Group's purchasing operations.
Notes to the preliminary announcement
For the year ended 31 December 2015
2. Business and geographical statements (continued)
Retail:
The Group's retail proposition is primarily gold and jewellery and the majority of the retail sales are forfeited items from the pawnbroking pledge book or refurbished items from the Group's gold purchasing operations. The retail offering is complemented with a small amount of new or second hand jewellery purchased from third parties by the Group.
Pawnbroking Scrap:
Pawnbroking Scrap comprises all other proceeds from gold scrap sales other than those reported within Gold Purchasing. The items are either damaged beyond repair, are slow moving or surplus to the Group's requirements, and are smelted and sold at the current gold spot price less a small commission.
Personal Loans:
Personal Loans comprises income from the Group's unsecured lending activities. Interest receivable on unsecured loans is recognised in turnover on an accruals basis less provision for loans not expected to be repaid. Personal Loans are subject to bad debt risk which is reflected in the interest rate applied.
Other Services:
This segment comprises:
· Third Party Cheque Encashment which is the provision of cash in exchange for a cheque payable to our customer for a commission fee based on the face value of the cheque.
· Buyback which is a service where items are purchased from customers, typically high end electronics, and may be bought back up to 31 days later for a fee.
· The Foreign Exchange currency service where the Group earns a commission when selling or buying foreign currencies.
· Western Union commission earned on the Group's money transfer service.
· The Prepaid debit card product where the Group earns a commission when selling the card or when the customer is topping up their card.
Cheque Cashing is subject to bad debt risk which is reflected in the commissions and fees applied.
Further details on each activity are included in the Chief Executive's Review.
Notes to the preliminary announcement
For the year ended 31 December 2015
2. Business and geographical statements (continued)
Segment information about these businesses is presented below:
| 2015 Revenue |
Pawnbroking £'000 |
Gold Purchasing £'000 |
Retail £'000 |
Pawnbroking Scrap £'000 |
Personal Loans £'000 |
Other Services £'000 |
Consolidated For the year ended 2015 £'000 |
|||
| External sales | 28,437 | 15,260 | 29,543 | 9,718 | 2,389 | 3,897 | 89,244 | |||
| Total revenue | 28,437 | 15,260 | 29,543 | 9,718 | 2,389 | 3,897 | 89,244 | |||
| Segment result - gross profit | 28,437 | 2,297 | 10,326 | 116 | 2,389 | 3,897 | 47,462 | |||
| Other direct expenses | (31,968) | |||||||||
| Administrative expenses | (7,976) | |||||||||
| Operating profit | 7,518 | |||||||||
| Investment revenues | 1 | |||||||||
| Finance costs | (679) | |||||||||
| Profit before taxation | 6,840 | |||||||||
| Tax charge on profit | (1,462) | |||||||||
| Profit for the financial year and total comprehensive income | 5,378 | |||||||||
| 2014 Revenue |
Pawnbroking £'000 |
Gold Purchasing £'000 |
Retail £'000 |
Pawnbroking Scrap £'000 |
Personal Loans £'000 |
Other Services £'000 |
Consolidated For the year ended 2014 £'000 |
|||
| External sales | 28,393 | 13,325 | 30,894 | 10,620 | 1,780 | 2,684 | 87,696 | |||
| Total revenue | 28,393 | 13,325 | 30,894 | 10,620 | 1,780 | 2,684 | 87,696 | |||
| Segment result - gross profit | 28,393 | 2,387 | 10,677 | (244) | 1,780 | 2,684 | 45,677 | |||
| Other direct expenses | (31,627) | |||||||||
| Administrative expenses | (7,833) | |||||||||
| Operating profit | 6,217 | |||||||||
| Investment revenues | 1 | |||||||||
| Finance costs | (708) | |||||||||
| Profit before taxation | 5,510 | |||||||||
| Tax charge on profit | (1,255) | |||||||||
| Profit for the financial year and total comprehensive income | 4,255 | |||||||||
Gross profit is stated after charging bad debt expenses and the direct costs of stock items sold or scrapped in the period. Other operating expenses of the stores are included in other direct expenses. The Group is unable to meaningfully allocate the other direct expenses of operating the stores between segments as the activities are conducted from the same stores, utilising the same assets and staff. The Group is also unable to meaningfully allocate Group administrative expenses, or financing costs or income between the segments. Accordingly, the Group is unable to meaningfully disclose an allocation of items included in the Consolidated Statement of Comprehensive Income below Gross profit, which represents the reported segment results. The Group does not apply any inter-segment charges when items are transferred between the pawnbroking activity and the retail or scrap activities.
Notes to the preliminary announcement
For the year ended 31 December 2015
2. Business and geographical statements (continued)
| 2015 | Pawn-broking 2015 £'000 |
Gold Purchasing 2015 £'000 |
Retail 2015 £'000 |
Pawn-broking Scrap 2015 £'000 |
Personal Loans 2015 £'000 |
Other Services 2015 £'000 |
Unallocated assets/ (liabilities) 2015 £'000 |
Consolidated 2015 £'000 |
||||||||||||
| Other information | ||||||||||||||||||||
| Capital additions (*) | 1,174 | 1,174 | ||||||||||||||||||
| Depreciation and amortisation (*) | 3,218 | 3,218 | ||||||||||||||||||
| Balance sheet | ||||||||||||||||||||
| Assets | ||||||||||||||||||||
| Segment assets | 44,548 | 406 | 24,811 | 231 | 4,152 | - | 74,148 | |||||||||||||
| Unallocated corporate assets | 35,863 | 35,863 | ||||||||||||||||||
| Consolidated total assets | 114,403 | |||||||||||||||||||
| Liabilities | ||||||||||||||||||||
| Segment liabilities | - | - | (634) | - | - | (215) | (849) | |||||||||||||
| Unallocated corporate liabilities | (19,494) | (19,494) | ||||||||||||||||||
| Consolidated total liabilities | (20,343) | |||||||||||||||||||
| 2014 | Pawn-broking 2014 £'000 |
Gold Purchasing 2014 £'000 |
Retail 2014 £'000 |
Pawn-broking Scrap 2014 £'000 |
Personal Loans 2014 £'000 |
Other Services 2014 £'000 |
Unallocated assets/ (liabilities) 2014 £'000 |
Consolidated 2014 £'000 |
||||||||||||
| Other information | ||||||||||||||||||||
| Capital additions (*) | 1,008 | 1,008 | ||||||||||||||||||
| Depreciation and amortisation (*) | 3,569 | 3,569 | ||||||||||||||||||
| Balance sheet | ||||||||||||||||||||
| Assets | ||||||||||||||||||||
| Segment assets | 43,888 | 473 | 28,749 | 278 | 3,129 | - | 76,517 | |||||||||||||
| Unallocated corporate assets | 35,323 | 35,323 | ||||||||||||||||||
| Consolidated total assets | 116,417 | |||||||||||||||||||
| Liabilities | ||||||||||||||||||||
| Segment liabilities | - | - | (640) | - | - | (212) | (852) | |||||||||||||
| Unallocated corporate liabilities | (24,702) | (24,702) | ||||||||||||||||||
| Consolidated total liabilities | (25,554) | |||||||||||||||||||
(*) The Group cannot meaningfully allocate this information by segment due to the fact that all the segments operate from the same stores and the assets in use are common to all segments.
Notes to the preliminary announcement
For the year ended 31 December 2015
2. Business and geographical statements (continued)
Geographical segments
The Group's operations are located entirely in the United Kingdom and all sales are within the United Kingdom. Accordingly, no further geographical segments analysis is presented.
3. Finance costs
| 2015 £'000 |
2014 £'000 |
|||
| Interest on bank loans | 524 | 554 | ||
| Other interest | 2 | 1 | ||
| Amortisation of debt issue costs | 153 | 153 | ||
| Total interest expense | 679 | 708 | ||
Notes to the preliminary announcement
For the year ended 31 December 2015
4. Tax charge on profit
a) Tax on profit on ordinary activities
| Current tax | 2015 £'000 |
2014 £'000 |
||
| United Kingdom corporation tax charge at 20.3% (2014 - 21.5%) based on the profit for the year |
1,549 | 1,070 | ||
| Adjustments in respect of prior years | (72) | (12) | ||
| Total current tax | 1,477 | 1,058 | ||
| Deferred tax | ||||
| Timing differences, origination and reversal | 21 | 88 | ||
| Adjustments in respect of prior years | (36) | 83 | ||
| Effects of change in tax rate | - | 26 | ||
| Total deferred tax | (15) | 197 | ||
| Tax charge on profit | 1,462 | 1,255 | ||
b) Factors affecting the tax charge for the year
The tax assessed for the year is higher than that resulting from applying a blended standard rate of corporation tax in the UK of 20.3% (2014 -21.5%). The differences are explained below:
| 2015 £'000 |
2014 £'000 |
|||
| Profit before taxation | 6,840 | 5,510 | ||
| Tax charge on profit at standard rate | 1,389 | 1,185 | ||
| Effects of: | ||||
| Disallowed expenses and non-taxable income | (49) | (63) | ||
| Non-qualifying depreciation | 117 | 100 | ||
| Effect of change in tax rate | - | 26 | ||
| Movement in short term timing differences | 113 | (64) | ||
| Adjustments to tax charge in respect of previous periods | (108) | 71 | ||
| Total amount of tax charge | 1,462 | 1,255 | ||
In addition to the amount charged to the income statement and in accordance with IAS 12, the excess of current and deferred tax over and above the relative related cumulative remuneration expense under IFRS 2 has been recognised directly in equity. This amounted to a charge to equity in the current period of £nil (2014: £nil).
Notes to the preliminary announcement
For the year ended 31 December 2015
5. Earnings Per Share
Basic earnings per share is calculated by dividing the profit for the year attributable to equity shareholders by the weighted average number of ordinary shares in issue during the year.
For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares. With respect to the Group these represent share options and conditional shares granted to employees where the exercise price is less than the average market price of the Company's ordinary shares during the year.
Reconciliations of the earnings per ordinary share and weighted average number of shares used in the calculations are set out below:
| Year ended 31 December 2015 | Year ended 31 December 2014 | |||||
| Earnings £'000 |
Weighted average number of shares | Per-share amount pence | Earnings £'000 |
Weighted average number of shares | Per-share amount pence | |
| Earnings per share basic | 5,379 | 36,154,799 | 14.88 | 4,255 | 36,124,298 | 11.78 |
| Effect of dilutive securities | ||||||
| Options and conditional shares | - | 34,805 | (0.02) | - | - | - |
| Earnings per share diluted | 5,379 | 36,189,604 | 14.86 | 4,255 | 36,124,298 | 11.78 |
Notes to the preliminary announcement
For the year ended 31 December 2015
6. Notes to the Cash Flow Statement
| 2015 £'000 |
2014 £'000 |
||
| Profit for the financial year | 5,378 | 4,255 | |
| Adjustments for: | |||
| Investment revenues | (1) | (1) | |
| Finance costs | 679 | 708 | |
| Movement in provisions | (216) | 332 | |
| Tax expense - Group Statement of Comprehensive Income | 1,462 | 1,255 | |
| Depreciation of property, plant and equipment | 2,897 | 3,087 | |
| Amortisation of intangible assets | 321 | 383 | |
| Impairment | - | 99 | |
| Share-based payment expense | 104 | 246 | |
| Loss on disposal of property, plant and equipment | 75 | 181 | |
| Operating cash flows before movements in working capital | 10,699 | 10,545 | |
| Decrease in inventories | 4,469 | 530 | |
| Increase in other current assets | (417) | (125) | |
| (Increase) / decrease in receivables | (1,367) | 4,941 | |
| (Decrease) / increase in payables | (507) | 846 | |
| Cash generated from operations | 12,877 | 16,737 | |
| Income taxes paid | (1,160) | (1,806) | |
| Interest paid | (508) | (558) | |
| Net cash generated from operating activities | 11,209 | 14,373 | |
Cash and cash equivalents (which are presented as a single class of assets on the face of the balance sheet) comprise cash at bank and other short-term highly liquid investments with a maturity of three months or less.
Notes to the preliminary announcement
For the year ended 31 December 2015
7. Earnings before Interest, Tax, Depreciation and Amortisation ("EBITDA")
EBITDA
EBITDA is defined as Earnings Before Interest, Taxation, Depreciation and Amortisation. It is calculated by adding back depreciation and amortisation to the operating profit as follows:
| 2015 £'000 |
2014 £'000 |
|||
| Operating profit | 7,518 | 6,217 | ||
| Depreciation and amortisation | 3,218 | 3,470 | ||
| Impairment | - | 99 | ||
| EBITDA | 10,736 | 9,786 | ||
The Board considers EBITDA as a key measure of the Group's financial performance.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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