2016 results and divisional summary
Despite the year spanning periods of uncertainty around the EU referendum vote and the US elections, Shore Capital achieved revenue progress in both of the core operating businesses of Capital Markets and Asset Management. In both businesses, management invested to position them for improving market conditions and further expected growth. At the group level the Principal Finance division, lumpy by nature from one period to another in the pursuit of attractive long-term returns on capital invested, creates considerable noise in reported profits. Exhibit 1 shows the adjusted position, before the impact of last year’s radio spectrum realisation (£9.4m) and this year’s asset impairments (£2.7m). On this adjusted basis, group revenues increased 21% on the year and adjusted pre-tax profits rose by 18% from £4.3m to £5.1m. Adjusted earnings per share also increased, by 11% to 13.4p. The smaller increase in EPS compared with adjusted PBT reflects the minority share in both the Spectrum gain and, to a lesser extent, this year’s asset impairments. A dividend of 5p per share (2015 nil) has been declared.
Exhibit 1: Results summary
£000s unless otherwise stated |
2016 |
2015 |
Change |
Revenues |
|
|
|
Capital Markets |
28,286 |
23,350 |
21% |
Asset Management |
10,446 |
9,500 |
10% |
Principal Finance - exc Spectrum |
676 |
(298) |
N/A |
Adjusted revenues |
39,408 |
32,552 |
21% |
Principal Finance - Spectrum |
|
9,400 |
|
Reported total revenues |
39,408 |
41,952 |
-6% |
PBT |
|
|
|
Capital Markets |
6,787 |
4,693 |
45% |
Asset Management |
1,980 |
2,653 |
-25% |
Central costs |
(2,119) |
(788) |
N/A |
Principal Finance - exc Spectrum & impairment |
(1,579) |
(2,261) |
N/A |
Adjusted PBT |
5,069 |
4,297 |
18% |
Principal Finance - Spectrum & impairment |
(2,664) |
7,400 |
|
Reported total PBT |
2,405 |
11,697 |
-79% |
PBT margin % |
|
|
|
Capital Markets |
24.0% |
20.1% |
|
Asset Management |
19.0% |
27.9% |
|
EPS (p) |
|
|
|
Basic |
6.0 |
27.1 |
-78% |
Diluted |
5.8 |
26.1 |
-78% |
Adjusted |
13.4 |
12.1 |
11% |
Source: Shore Capital, Edison Investment Research
Capital Markets grew revenues by 21% and pre-tax profits by 45% with the margin increasing from 20.1% to 24.0%. Given uncertain market conditions during much of the year (reviewed in detail in the following section) this is a very strong performance in a sector context as well as in absolute terms.
Exhibit 2 lists selected transactions and brokership appointments during 2016 and 2017 to date. A total of 11 new retained corporate clients were added during 2016 (including Dairy Crest plc, Chesnara plc, Motorpoint Group plc, Stride Gaming plc, and Earthpoint plc) taking the year-end number to 66. The team was active on a range of capital markets transactions including four IPOs, 20 secondary fund-raisings, and a number of significant transactions including acting as co-lead manager on the £370m placing and open offer equity element of a $1.2bn financing by Sirius Minerals plc, and co-lead manager on a £329m placing by Playtech plc. Advisory work included acting as corporate broker to Poundland Group plc in connection with its £610m takeover by Steinhoff International, and acting as joint financial adviser and joint broker to Market Tech Holdings Ltd in connection with its move from AIM to the Main Market.
Exhibit 2: Corporate finance selected recent transactions and appointments
Company |
Transaction/event |
Value |
Role |
Date |
2017 |
TLOU Energy |
Appointment |
Mkt cap £18.4m |
As joint broker |
Mar-17 |
Ultimate Products |
Main market listing |
Mkt cap £105.2m |
As sponsor, global co-ordinator, joint bookrunner |
Mar-17 |
Union Jack Oil |
Placing |
£1.4m |
Nomad and joint broker |
Feb-17 |
Staunton Holdings Ltd |
Recommended offer |
£37.3m |
Financial adviser |
Feb-17 |
NetPlayTV |
Recommended offer |
£26.4m |
Joint financial adviser |
Feb-17 |
Kennedy Ventures plc |
Placing |
£1.25m |
Sole broker |
Jan-17 |
2016 |
Richland Resources Ltd |
Appointment |
Mkt cap £1m |
Sole broker |
Dec-16 |
Chesnara |
Placing & open offer |
£160m |
Sponsor and joint bookrunner |
Nov-16 |
Sirius |
Placing as part of capital raise |
£370m |
Co-lead manager |
Nov-16 |
Inspired Energy |
Placing |
£5m |
Nomad and joint bookrunner |
Oct-16 |
Ironveld |
Placing |
£1.8m |
Nomad and sole broker |
Oct-16 |
Poundland |
Recommended offer |
£610m |
Broker |
Sep-16 |
Applegreen |
Placing |
£23m |
Joint bookrunner |
Sep-16 |
Victoria Oil & Gas |
Appointment |
Mkt cap £42m |
As joint broker |
Aug-16 |
Stride Gaming |
Placing |
£27m |
Joint bookrunner |
Jul-16 |
Kennedy Ventures |
Placing |
£2m |
Sole bookrunner |
Jul-16 |
SYS Group |
Placing |
£5m |
Nomad and sole bookrunner |
Jul-16 |
NextEnergy Solar Fund |
Placing |
£43m |
Joint bookrunner |
Jul-16 |
Aminex |
Placing |
$22m |
Sole bookrunner |
Jul-16 |
Daily Internet |
Placing/acquisition |
£5m |
Broker |
Jun-16 |
Motorpoint Group |
Main Market IPO/placing |
£100m |
Co-bookrunner |
May-16 |
Canadian Overseas petroleum |
Appointment |
Mkt cap £18.7m |
UK broker |
May-16 |
Chesnara |
Appointment |
Mkt cap £385m |
As joint broker |
May-16 |
Vernalis |
Placing |
£40m |
Joint bookrunner |
Apr-16 |
Stride Gaming |
Appointment |
Mkt cap £120m |
As joint broker |
Apr-16 |
Amryt Pharmaceuticals |
Placing and AIM IPO |
£10m |
Lead manager, Nomad, joint broker |
Apr-16 |
Eden Research |
Placing |
£2.6m |
Lead manager |
Mar-16 |
Yu Energy |
Placing and AIM IPO |
£10m |
Nomad and sole broker |
Mar-16 |
Cerillion |
Placing and AIM IPO |
£10m |
Nomad and sole bookrunner |
Mar-16 |
Daily Internet |
Appointment |
Mkt cap £9m |
Nomad and joint broker |
Feb-16 |
Earthport |
Appointment |
Mkt cap £125m |
As joint broker |
Feb-16 |
Dairy Crest |
Appointment |
Mkt cap £830m |
As joint broker |
Feb-16 |
Market Tech |
Move to Main Market |
Mkt cap £850m |
As joint broker |
Jan-16 |
Source: Shore Capital Group
Additional resources were added to the research and distribution capability, adding stock coverage in building materials, healthcare, industrials, media, and technology. Not directly related to research and sales, but indicative of ongoing investment, the overall Capital Markets headcount increased from an average 83 in 2015 to 88 in 2016. Management anticipates ongoing demand from portfolio managers for good quality research and seeks to position its offering where it can best add value in a post-MiFID II environment.
The fixed income team made a positive contribution in its first full year since joining from Edmond de Rothschild in late 2015.
Figures for the market-making activity within Capital Markets are not broken out, but the company indicates that in an environment marked by periods of considerable market volatility both revenues and profits increased by double-digit percentages. Shore Capital trading volumes increased by 12%, reinforcing its position as the third largest maker on the LSE. Management indicates that prudently positioned inventory enabled Shore to provide significant liquidity at key times such as the immediate aftermath of the EU referendum and the US elections. The year-end balance sheet net bull position increased from £8.4m to £11.5m.
Revenues in the Asset Management division grew by 10% but PBT was 25% lower at £2.0m as a result of investment that included several key hires, particularly in the private client area adding to the growth capacity of the business and investment teams. The average headcount of the division increased from 51 to 58 during the year. Total assets under management (AUM) increased from approximately £770m at 2015 year end to £825m at year end 2016.
On the institutional side of the business, the German advisory business assisted Brandenburg Realty in the completion of a second acquisition, a €32m commercial and residential portfolio in the city of Potsdam near Berlin, and continues to seek and advise on additional acquisition opportunities to the fund. The advisory team also helped Puma Brandenburg to complete a €90m refinancing during the first half of the year and continues to assist in the implementation of its strategic objectives. Advisory work for the Puma Brandenburg portfolio during the year included advice on the sale of a housing estate and development works at its flagship Hyatt Regency Hotel in Cologne. Subsequent to the full year results, Shore Capital has announced the launch of a new joint venture (Puma Social Care Investments Ltd or PSCI) with two family offices in the US to focus on real estate opportunities in the supported living sector. The partners have committed £21 million to the venture and Shore Capital's commitment of £7 million will be partly provided through the injection of £5.8 million of supported living assets already held on the Group's balance sheet (including a £2.9m of investment property acquired before the 2016 year end). PSCI intends to acquire an already identified initial pipeline of property assets with an aggregate value of £50 million but believes that a substantial opportunity exists to grow the asset base further, once the first tranche of purchases have been completed. Shore Capital will provide advisory services to the joint venture through its majority-owned subsidiary Puma Investment Management Ltd (PIML) which will earn an annual advisory fee set at 0.85% of the gross value of properties held by PSCI, and will also receive an acquisition fee on each property purchase of up to 1.0% of the purchase price.
In the private client area, AUM increased to £200m (2015: £155m). Contributing to this increase, the Puma VCT 12 (tax year 2015/16) had raised £31m at closure, accounting for more than half the total funds raised in the limited-life VCT market as a whole. Since 2005 a total of £223m has been raised for Puma VCT funds and £89m returned to investors. The first five funds have been repaid and have each returned the highest total return of their respective peer-groups. A number of changes to VCT rules were introduced with effect from April 2016. VCTs are no longer able to invest in firms that are more than seven years old with potential implications for dividend streams from investee companies; some transactions, like management buy-outs, are no longer permitted; and VCTs can no longer put more than £12m into any one company. The list of excluded activities was also broadened and now includes energy generation. In view of the rule changes, Shore decided to delay the launch of its latest Puma VCT 13 pending clarifications in guidance notes that are yet to be issued by HMRC. Management expects to launch Puma VCT 13 in the 2017/18 tax year and remains positive about market prospects. Changes to pension rules have further reduced the lifetime pension allowance and the annual tax-free contribution allowance for high earners, and seem likely to increase interest in other forms of tax efficient investment such as VCTs.
The Puma Heritage fund, which was launched in June 2013 and is designed to offer full relief from inheritance tax after two years, passed its third anniversary and has seen a notable acceleration in its NAV. Subscriptions from new shareholders combined with investment returns have increased the company’s net assets to £28m as of the 2016 year end. Puma Heritage has participated in 384 loans up to the end of 2016 totalling £162m of which 38 of the loans remained live with the balance having been repaid. The investment team reports a strong pipeline of loans to deploy funds from current and future investors without weakening selection criteria and Puma Heritage expects to be able to show significant further growth.
The Puma EIS service was launched in November 2013 providing the opportunity to invest in asset-backed Enterprise Investment Scheme qualifying companies supported by the expertise, knowledge and skills built up in the management of the Puma VCTs. AUM has now reached £47m, with investments made in seven portfolio companies with a good pipeline of further opportunities. The Puma AIM Inheritance Tax Service, a discretionary portfolio service that seeks to mitigate inheritance tax by investing through AIM-listed shares, passed its two-year anniversary. Management reports a 43.9% return since launch in July 2014 to the end of 2016, outperforming the FTSE AIM All-Share Index by 36.3%.
The reported PBT loss of £4.2m included a £2.7m pre-tax write down (£1.6m after tax and minority interests) relating to various assets held within the division. The balance sheet shows overall Principal Finance investments increasing by £1.9m to £8.2m during the year. Included within these assets, and not affected by the write downs, is the group’s 59.94% holding in Spectrum Investments Limited, the parent company of Deutsche Broadband Dienste (DBD), which in 2015 sold one national and six regional German radio spectrum licences to Deutsche Telecom for €15.45m, generating a gain (revenue) of €12.5m/£9.2m. DBD still owns 32 regional radio spectrum licences in Germany that cover some of Germany’s largest metropolitan centres including Berlin, Leipzig, Dresden, Düsseldorf and Hanover, and give the right to use the 3.5 GHz range of frequencies (which are increasingly being used to supplement data capacity for 4G services) in perpetuity. DBD has recently been given consent by the German telecoms regulator to test the LTE TDD (3.5 GHz) technology with which it seeks to support its plans for the future use of the licences, premised upon a small radio cells network concept, and a pilot scheme in Berlin is underway. Further progress is subject to the technology being incorporated into handsets and negotiation with the German regulator, which has yet to confirm its agreement for further pilot schemes and the potential rollout of services. The group’s investment in Spectrum Investments Limited is recorded in the year-end balance sheet as an intangible asset with a gross value, before minorities, of £2.1m.