Chief Executive's Report
I am encouraged by the strong progress we made in 2017 and, driven by the increase in our recurring revenue and our underlying EBITDA margin, the continued achievement of the revenue and profitability targets that we set ourselves.
The year under review produced our fourth consecutive year of growth and improved profitability since joining AIM in 2014. Increased revenues and improved margins have resulted in a 46% increase in Underlying Earnings per Share to 17.0p after taking into account the dilutive impact of our successful fundraising in April 2017.
The success of integrating our acquisitions complimented double-digit organic growth with productivity per adviser reaching record levels. Revenue for the 12 months ended 31 October 2017 of £33.6m was almost 40% above the corresponding period (2016: £24.1m) and continues our progress to our three-to-five-year aspirational target.
The growing requirement of our clients for financial advice generated £12.2m (2016: £7.8m) of new business revenues, while recurring income of £21.4m (2016: £16.3m) continues to strengthen our revenue base, driven by our growing funds under management (“FUM”). During the year over 90% of our organically generated inflow of funds were invested on a discretionary mandate and at the year-end more than £1.3bn of funds were managed on this basis.
In addition to the organic funds invested, an additional £530m of funds was brought under management as the result of acquisitions made during the year.
Gross margins remain strong despite a small decrease to 53% (2016: 55%) as a result of the impact of the lower margin protection business Eunisure that was acquired in June 2017. The gross margin of our core business remained at 55% (2016: 55%) while we were again able to utilise our growing purchasing power for the benefit of our clients and reduce third-party costs for them for a third successive year.
2017 was a year of further investment in our technology and infrastructure, as we continued to seek operational efficiencies and offer a streamlined experience to our clients. While we believe that faceto-face advice is and will continue to be the key to solid client relationships, we are building technology solutions to support our advisers, provide greater flexibility and personalisation in our interaction with existing and potential clients and take on new competitors entering the market focussed on technology solutions. As we moved into 2018 a new cloud-based enterprise management solution was taken live and further cloud-based projects in our
risk and technical advisory areas are expected to be completed within the current financial year.
Our marketing strategy has embraced the digital opportunities and challenges for the sector. In June 2017 the Group undertook a rebranding exercise, not only to create an image more aligned with the business values and approach of today’s AFH 2017 but also to facilitate and promote our business in the new digital environment. During the year we charged through the Statement of Comprehensive Income more than £700k on developing our marketing and brand offering while investing a further £400k in capital expenditure to support our long-term digital aspirations.
The significant growth of the Group has made it possible to finance these marketing and IT projects, which we believe will generate significant shareholder and client value in the future.
During the period we reported a 57% increase in underlying EBITDA and a further improvement to our underlying EBITDA margin, as the efficiencies and economies of scale we have worked towards were reflected in our results. I am particularly pleased by the increased margin to 17% (2016: 15%) as this is one of our key internal metrics and aspirational measures.
Profit after tax for the year of £3.1m represents a 83% increase in the year (2016: £1.7m) and after the dilution created by our successful fund raising in April 2017 has increased reported Earnings Per Share to 11.22p. Underlying Earnings per Share, EBITDA plus non-cash share-based payments as adjusted for tax, is a key measure used by the Board as it reflects the cash earnings per share generated by the business. In 2017 this has increased to 16.97p (2016 11.64p), representing a 46% increase.
During the year considerable investment was made in rebranding the Group to reflect our business vision and to ensure that our values and culture are reflected in all aspects of our business. At the start of the financial year the Board set itself three financial aspirations over a three-to-five-year timeframe:
- Funds under management of £5bn
- Revenues of £75m
- Underlying EBITDA margin of 20% on revenue
At the same time we formalised our vision to be the “FIRST CHOICE FOR WEALTH MANAGEMENT AND ADVICE IN THE UK” and documented our values and “brand pillars” to ensure that we were able to measure and achieve both our vision and financial aspirations.
Central to our strategy is to put clients’ interests first in order to build a sustainable business that reflects our vision, including a drive to reduce the cost of ancillary services for our clients and to embrace them in the AFH community. As noted above, during the year we continued to drive down custody and administration costs and put in place a model to reduce fundmanagement fees while retaining our independent status, providing access for our clients to the whole of market.
The Group came to the market in June 2014 with the strategy of growing both revenue and profitability through a combination of organic and acquisitive growth. The Board remains committed to this strategy, which to date has consistently delivered financial results in line with market expectations. While there have been a number of new entrants, many private equity-backed, who have applied pricing pressure for acquisitions, the Group was able to maintain its previous pricing multiples during the year while
attracting high quality businesses by providing the opportunity for vendors to join the AFH community and enjoy, along with their clients, the benefits of the Group strategy and vision.
The same strategy has enabled the Group to enjoy double-digit organic growth in both funds under management and recurring revenue while maintaining gross margins and generating operating efficiencies to drive growth in earnings per share.
Our focus continues to be to maintain our existing strategy to meet our clients’ ongoing needs in order to fulfil our vision and expand our brand throughout the UK financial services sector.
Financial advisory and investment management
Financial advisory and the subsequent management of client portfolios represents the core business of AFH. Our structure is based on the simple philosophy that the most appropriate way to manage a client’s portfolio is to fully understand their current and future
financial aims, their attitude to risk and their lifestyle requirements before constructing appropriate personal models and finally managing their money to meet their objectives. Our fee income is therefore split between initial financial planning and the ongoing management of a client’s financial affairs and their assets.
During the year our initial financial planning fees totalled £9.5m, an increase of £1.6m (20%) above our 2016 results, reflecting the increasing client requirements for financial planning driven by changing legislation, in particular the changes to the UK pension market, with its associated opportunities and risks as well as developing lifestyle needs.
Ongoing management fees increased to £20.6m (2016: £16.2m) reflecting the increased funds under management which, as noted above, increased to £2.8bn as a result of net organic inflows together with assets attached to acquisitions during the year. This increase was reflected in the ratio of recurring income within this division which rose to 69% (2016: 68%).
Gross margins in our core business remained at 55% reflecting the increased level of business generated centrally relative to that self-generated by our advisers.
The division generated EBITDA of £6.6m (2016: £4.8m) representing a 22% margin on revenue (2016: 20%) and demonstrating the benefits of scale that was targeted in my last report to shareholders.
In June 2017 the Company completed the purchase of Eunisure Limited to open a new business stream focused on life and medical insurance protection cover. This business is more transactional than our core business, with over 90% of revenues generated as new business. The initial results of Eunisure have been positive and ahead of our expectations.
When acquiring Eunisure the Board recognised a commercial opportunity to provide a service to a market sector that has been underserved in recent years, creating a protection gap in the UK estimated by Swiss Re to be in excess of £2.5trn, while forming a potential source of young aspiring advisers for our core business. To date we have identified over 40 Eunisure advisers with the potential and desire to train within AFH in mortgage and other financial products and we will continue to develop this talent within our fledgling in-house academy.
During the five months since acquisition Eunisure generated almost £3m of revenue at a 35% gross margin. The low cost base of the business and the synergies of the group enabled Eunisure to report an EBITDA margin of 22% for the period and further synergies will be sought in the future.
The Group maintains an in-house acquisitions and integration team that allows us to undertake multiple acquisitions and to integrate them fully into the AFH model.
During the year the Group completed 14 acquisitions for a combined maximum cost of £18.7 million. Of this capped value £8.7m was paid in initial consideration with the balance to be paid through our earn-out model over the next four financial years. The Company also paid over £3.2m in deferred consideration for acquisitions made in previous years, representing over 90% of the maximum earn-out agreed at the time of the transactions.
With the exception of the Eunisure protection broking business, all acquisitions were IFA businesses that have been integrated into the AFH model and trade under the AFH brand and regulatory permissions
The Group remains free of secured debt, with the exception of a mortgage held on the freehold property acquired in 2015, and maintains a capital structure that the Board believes provides a conservative level of gearing through Unsecured Corporate Bonds. The Group continues to maintain a net cash position and all regulated subsidiary companies reported significant margins above their regulatory and stresstested capital requirements as at 31 October 2017.
In assessing its appetite for financial gearing the Board considers the deferred consideration outstanding on acquisitions to provide an element of financing structuring and allows an unsecured leveraging for the benefit of our shareholders.
In April we concluded an equity fund raising of £10m and welcomed a number of new institutional investors to our share register. The funds were raised to finance the initial cost of our acquisitions and since that time over 85% of the money raised has been used for the purchase of eight businesses during the second half of the year and a further three since the year end.
In December 2017, the Company raised a further £17.5m in an exercise that was well supported by both existing and new institutions. As a result the Company has cash resources in excess £20m with which to continue its acquisitive activities while remaining free from secured debt.
Current year trading
The current year has started in line with expectations as the buoyant activity levels of 2017 have continued into the new year. The Group has seen further organic growth in new business which in turn has added to our funds under management on which we earn recurring fees. Since the year end we have announced three acquisitions which are expected to be fully integrated during the first half of the year. The successful fundraising in December has provided a strong cash position that will allow AFH to take advantage of the
continuing rate of consolidation within the IFA market during the current year and finance larger acquisition opportunities as they arise. Our increasing adoption of technology to support our advisers and clients is generating new opportunities for organic growth
and supports our strategic model of incremental acquisitive growth on the base of a strong existing client base.
Chief Executive Officer
29 January 2018
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