As at the half-year stage, SGR’s FY18 results demonstrated the benefit of the diversity of the group’s activities with overall group revenues ahead of the prior year despite the difficult background for the Capital Markets activities. Before looking more closely at the result compared with 2017, we show the average revenue analysis over the five years to 2018 (Exhibit 1) and the segmental evolution of revenues over the same period (Exhibit 2). The first chart makes clear that the Capital Markets business remains the dominant part of the group but Asset Management made a significant and growing contribution, as shown in the second chart; in 2018 Asset Management accounted for 36% of revenue. The other point to note is that while Principal Finance accounts for a relatively small part of revenues (and has recorded a pre-tax loss for the last three years), it has periodically made significant contributions to profits as is evident in 2015 when the £9m revenue contribution related to the profit on sale of German radio spectrum licences owned by an investee company.
Exhibit 1: Revenue analysis – average 2014–18
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Exhibit 2: Five-year revenue evolution
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Source: Shore Capital Group, Edison Investment Research
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Source: Shore Capital Group, Edison Investment Research
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Exhibit 1: Revenue analysis – average 2014–18
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Source: Shore Capital Group, Edison Investment Research
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Exhibit 2: Five-year revenue evolution
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Source: Shore Capital Group, Edison Investment Research
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Our next table sets out the half- and full-year revenue progression for revenue, pre-tax profit and earnings per share for 2017 and 2018.
Exhibit 3: Revenue and profit analysis
£000 unless stated |
H117 |
H217 |
H118 |
H218 |
% change H218/H217 |
FY17 |
FY18 |
% change |
Revenue |
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|
|
|
|
|
|
|
Capital Markets |
14,756 |
12,474 |
13,507 |
11,945 |
-4.2 |
27,230 |
25,452 |
-6.5 |
Asset Management |
4,904 |
8,002 |
7,290 |
8,553 |
6.9 |
12,906 |
15,843 |
22.8 |
Principal Finance |
669 |
1,091 |
844 |
1,195 |
9.5 |
1,760 |
2,039 |
15.9 |
Group |
20,329 |
21,567 |
21,641 |
21,693 |
0.6 |
41,896 |
43,334 |
3.4 |
Profit before tax |
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|
|
|
|
|
|
|
Capital Markets |
3,387 |
1,806 |
2,742 |
1,316 |
-27.1 |
5,193 |
4,058 |
-21.9 |
Asset Management |
408 |
2,593 |
1,292 |
1,874 |
-27.7 |
3,001 |
3,166 |
5.5 |
Principal Finance |
(424) |
(1,542) |
(698) |
(821) |
-46.8 |
(1,966) |
(1,519) |
-22.7 |
Central/other |
(876) |
(775) |
(772) |
(865) |
11.6 |
(1,651) |
(1,637) |
-0.8 |
Group |
2,495 |
2,082 |
2,564 |
1,504 |
-27.8 |
4,577 |
4,068 |
-11.1 |
Pre-tax profit margin (%) |
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|
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|
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Capital Markets |
23.0 |
14.5 |
20.3 |
11.0 |
|
19.1 |
15.9 |
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Asset Management |
8.3 |
32.4 |
17.7 |
21.9 |
|
23.3 |
20.0 |
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Earnings per share |
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|
|
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EPS basic (p) |
6.7 |
6.3 |
7.4 |
5.2 |
-17.6 |
13.1 |
12.6 |
-3.8 |
EPS diluted (p) |
6.6 |
6.2 |
7.3 |
5.2 |
-16.4 |
12.8 |
12.5 |
-2.7 |
Source: Shore Capital, Edison Investment
Key features of the results included the following points with comparisons between FY18 and FY17 unless stated.
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Group revenue was up 3.4% with Capital Markets down 6.5%, a moderate reduction given the market background, particularly in the final quarter. Asset Management revenues were very strong with revenues up 22.8% with AUM up 6.4% to £920m.
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Administrative expenses increased by 8.4% as the group made targeted investment across its main operating divisions.
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As a result, pre-tax profits were down 11.1%. Divisionally, profits were lower in Capital Markets and Principal Finance but Asset Management recorded profit 5.5% higher, despite investment in staff to support further growth in the business.
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The tax charge was lower at 12% versus 20% so the reduction in earnings per share was limited to 3.8% (basic) or 2.7% (diluted).
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The full year dividend is maintained at 10p (final 5p, unchanged).
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The balance sheet remained strong with year-end net cash of £26.7m and £2.8m of gilts and bonds. Additional liquidity is available in the form of a £20m working capital facility.
Capital Markets
Here the most important development has been the acquisition of Stockdale Securities, which was announced in February 2019 and completed at the end of March; we discuss this further in the outlook section. Within Capital Markets the company reported that income from corporate mandates and transactions increased in 2018, demonstrating the development of the franchise that has taken place reflecting investment in the business over a number of years.
During the year Shore Capital advised on five admissions (two IPOs and three reverse takeovers), undertook 18 secondary fundraisings and advised on three public takeovers. Exhibit 4 shows a selection of the transactions together with Shore Capital’s role and the funds raised or value as appropriate. These illustrate diversity within its client base, a feature that should be enhanced following the acquisition of Stockdale Securities.
Exhibit 4: Significant transactions 2018
Company |
Description |
Role |
Funds raised |
Applegreen |
Acquisition of interest in Welcome Break |
Nomad, global co-ordinator and joint bookrunner |
€175m |
Nucleus Financial Group |
IPO |
Nomad, sole bookrunner and broker |
£32.1m |
Playtech |
Placing of shares in GVC |
Joint bookrunner |
£198m |
Dairy Crest |
Placing of shares |
Joint bookrunner |
£70m |
Inspired Energy |
Acquisition of Improva Finance |
Nomad, joint bookrunner |
£19m |
Motorpoint Group |
Placing of shares |
Joint bookrunner |
£22.5m |
Savannah Petroleum |
Placing and readmission to AIM |
Lead manager |
$125m |
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Value |
Produce Investments |
Takeover by Promethean Inv. |
Adviser |
£55.3m |
Zenith Hygiene |
Takeover by Bain & Co |
Adviser |
£100m |
Styles & Wood |
Takeover by Central Square Hdgs. |
Adviser |
£42.5m |
The retained client base has increased with nine new clients added including Marks & Spencer and Sirius Minerals (respectively FTSE 100 and FTSE 250 constituents). The retained corporate client count stands at 75.
On the research and sales side of the division, the group acknowledged the disruptive effect on the industry of MiFID II implementation, but highlighted extensive engagement with investors and has been focusing on extending its coverage, particularly in industrials and providing cross-sector commentary on the impact of digital technology.
The equity market downturn in the final quarter had an adverse impact on the market-making activity, as would be expected, but it remained profitable in this period and for the year as a whole is reported to have achieved a solid, profitable result, albeit on lower revenues.
Asset Management
As highlighted above, the divisional AUM increased by 6.4% to £920m; since 2014 AUM has grown at a compound rate of 7.8%. Divisional activities fall into two areas: Puma Investments, the UK fund management activity and Institutional Asset Management, which primarily comprises the management of Brandenburg Realty and Puma Brandenburg real estate investment companies, both with asset portfolios in Germany.
Puma Investments’ mainly tax-efficient products are managed by teams with expertise in private equity, property finance and listed equities. In the private equity area, Venture Capital Trust (VCT) funds raised have totalled more than £240m with over £140m returned to investors in the form of dividends. The most recent offering was closed early due to strong demand. Enterprise Investment Scheme (EIS) funds under management have reached over £75m in March this year versus c £65m at the same time last year.
The Puma Property Finance activity provides first charge loans of £3m to £30m through three main offerings: pre-development bridging, development finance and development exit loans. By sector, loans are made across residential, commercial and more specialist areas. Individual investors can access the team’s expertise through Puma Heritage, an investment in which is intended to qualify for business property relief from inheritance tax. The NAV of Puma Heritage has grown from over £50m last year to over £75m in March through trading profits and additional subscriptions.
In November 2018 Puma Investments reached a funding agreement with RoundShield Partners for £200m for deployment by Puma Property Finance, effectively endorsing the management credentials of this team and providing an opportunity to meet the demand from borrowers that the business is experiencing. RoundShield has the right to acquire an equity stake of up to 25% in the property finance business as the funding line is deployed, providing it with an interest in the broader development of the activity. Puma Property Finance will earn management and transaction fees on loans executed over a four-year period. As the agreement came towards the end of the year, the impact will only be felt from 2019 onwards.
The listed equities area, which is responsible for the AIM IHT Service, continued to attract assets that stood at £24m at the year end. The team has been enlarged, enabling the business to plan for availability of the service on a wider range of platforms in 2019, broadening the scope for asset gathering.
The group has substantial experience in providing finance for social care property and as a result has built a network of contacts in this area and the ability to offer a service sourcing, structuring and negotiating transactions. This generates fee income without any associated AUM, helping to boost the overall divisional revenue yield on average AUM (for 2018 this was 1.75% compared with 1.56% for 2017). In addition to this advisory role Shore Capital invested £0.8m during 2018 to take a 75% stake in a business (EA Capital) that invests in social care property.
Institutional Asset Management has continued its active management of assets for Puma Brandenburg and Brandenburg Realty. As an illustration, for Brandenburg Realty this included taking possession of new assets, submitting applications for condominium titles for them and planning renovations; a debt financing was also arranged. The team also oversaw the participation of both investment companies in Mixer Global, a Tel Aviv-based provider of co-working spaces that is expanding globally.
Principal Finance
Here the main development took place post year end with an announcement relating to its radio spectrum investment in Germany. A 59.94% interest is held in 32 regional licences via DBD. It has now been concluded that the licences will be reallocated to an adjacent frequency at no cost and will continue be for a perpetual duration. The licences will be more flexible, enabling use of the spectrum for services such as 4G and 5G. There is no indication on the timing of further developments but management is confident on the future of DBD and the potential to generate value from the investment. The investment is held at a gross value of £2.3m, before minority interests.